if not silver, what? by john w. bookwalter springfield, ohio "if you will show me a system which gives absolute permanence, i will take it in preference to any other. but of all conceivable systems of currency, that system is assuredly the worst which gives you a standard steadily, continuously, indefinitely appreciating, and which, by that very fact, throws a burden upon every man of enterprise, upon every man who desires to promote the agricultural or the industrial resources of the country, and benefits no human being whatever but the owner of fixed debts in gold."--_speech of the right hon. a. j. balfour, at manchester, england, october , ._ as a manufacturer and somewhat extensive land owner i have a great personal interest in the money question. as a traveller i have studied the situation in other nations, and thus, i may modestly say, have enjoyed the great advantage of getting a view in no wise disturbed by partisan politics. as one whose prosperity depends almost entirely upon that of the farmers, i have naturally thought most of the effect monometallism has had, and will continue to have, upon them. i have, in a sense, been compelled to think much on this great issue. these facts are my apology, if any apology is needed, for giving my thoughts to the public. but is any apology needed? providence has granted to a few the leisure and the opportunity to study these economic problems, on the correct solution of which the welfare of millions, whose toil leaves them little leisure for study, depends. is it not the supreme moral duty of those few to give their conclusions to the public? i have always thought so, and in that spirit i present this little work, and ask the laboring producers to give a candid consideration to the views herein presented. it may be that some of these views will be successfully controverted, but the duty remains the same. if they should aid in arriving at a correct solution of the great problem, though the solution be different from that i have indicated, i shall be many times repaid for my labor. john w. bookwalter. springfield, ohio, august , . contents. objections to silver, and comments thereon demonetization of gold relative production of gold and silver is bimetallism practicable? bimetallism abroad the "dump" of silver asia's demand for the precious metals if not silver, what? objections to silver, and comments thereon. =silver is too bulky for use in large sums.= that objection is obsolete. we do not now carry coin; we carry its paper representatives, those issued by government being absolutely secured. this combines all the advantage of coin, bank paper, and the proposed fiat money. a silver certificate for $ weighs less than a gold dollar. in that denomination the jay gould estate could be carried by one man. =but silver certificates would not remain at par.= at par with what? everything in the universe is at par with itself. the volume of certificates issued by the government would be exactly the amount of the metal deposited, and that amount could never be suddenly increased or diminished, for the product of the mines in any one year is very seldom more than three per cent. of the stock already on hand, and half of that is used in the arts. it is self-evident, therefore, that such certificates would be many times more stable in value than any form of bank paper yet devised. =gold would go out of circulation.= it has already gone out. under the present policy of the government we have all the disadvantages of both systems and the advantages of neither, with the added element of chronic uncertainty and an artificial scare gotten up for political purposes. =and that very scare shows an important fact which you silverites ought to heed--that nearly all the bankers and heavy moneyed men are opposed to free coinage.= nearly all the slaveholders were opposed to emancipation. all the landlords in great britain were opposed to the abolition of the corn laws, and all the silversmiths of ephesus were violently opposed to the "agitation" started by st. paul. and what of it? the silversmiths were honest enough to admit the cause of their opposition (acts xix. , ), but these fellows are not. the ephesians got up a riot; these fellows get up panics. "have ye not read that when the devil goeth out of a man then it teareth him?" =but are not bankers and other men who handle money as a business better qualified than other people to judge of the proper metal?= certainly not. on the contrary, they are for many reasons much less competent, as experience has repeatedly shown. all students of social science know, indeed all close observers know, that those who do the routine work in any vocation seldom form comprehensive views of it, and those who manage the details of a business are very rarely indeed able to master the higher philosophy thereof. this is a general truth applicable to all vocations except those, like law, in which a mastery of the science is a necessity for conducting the details. experts in details often make the worst blunders in general management. nearly all the inventions of perpetual motion come from practical mechanics. nearly all the crazy designs in motors come from engineers. the educational schemes of truly colossal absurdity come mostly from teachers; all the quack nostrums and elixirs to "restore lost manhood" are invented by doctors, and nearly all the crazy religions are started by preachers. on the other hand, three-fourths of the great inventions have been by men who did not work at the business they improved. the world's great financiers have not been bankers. alexander hamilton was not a banker. neither was albert gallatin, nor robert j. walker, nor james guthrie, nor salmon p. chase. william patterson, who founded the bank of england, was a sailor and trader; and of the british chancellors of the exchequer whose names shine in history, scarcely one was a banker. one of christ's disciples was a banker, and the end of his scientific financiering is reported in acts i. . john law also, whose very name is a synonym for foolish financial schemes, was a banker, and a very successful one. where was there ever a crazier scheme than the so-called "baltimore plan," exclusively the work of bankers? =but as the bankers and great capitalists have no faith in it, the free coinage of silver would certainly precipitate a panic.= the gold basis has already precipitated several panics. even in so conservative a country as england they have, since adopting monometallism, had a severe currency panic every four years, and a great industrial depression on an average once in seven years. the only reason we have not done worse is that the rapid development of the natural resources of the country saves us from the consequences of our folly. we draw on the future, and in no long time it honors our drafts. nevertheless, in the twenty-three years since silver was demonetized we have had two grand panics, several minor currency panics, hundreds of thousands of bankruptcies with liabilities of billions, and five labor wars in which persons were killed and $ , , worth of property destroyed. could a silver basis do worse? =you admit, then, that the immediate adoption of free coinage would, for a while at least, drive gold abroad?= and what then? why do the gold men always stop with that statement and so carefully avoid inquiry into what would follow? let us look into it. we may have in this country $ , , in gold, though no one can tell where it is. assuming that free coinage would send it all abroad, the inevitable result would be a gold inflation in europe, which would cause a rise in prices. i observe that of late the gold organs have been denying this--denying, in fact, the quantitative principle in finance, something never denied before this discussion arose. it is too true, as some philosopher has said, that if a property interest depended on it, there would soon be plenty of able men to deny the law of gravitation. but as the men who deny it in one breath admit it in the next by assuring us that we shall soon have a great increase in the production of gold, and that prices will therefore rise, we may with confidence adhere to the established truth of political economy. sending our gold to europe, then, would raise prices there, which would raise the price of our staple exports, such as wheat, meat, and cotton; the great rise in the price of these would, of course, stimulate exports, and thus aid us in maintaining a favorable balance, would restore to the farmers that income which they have lost by the decline of prices, would thus put into their hands the power to buy manufactured goods and to pay our annual interest debt to europe by commodities instead of gold. in short, if the gold went abroad, it would necessarily be but a short time till much of it would come back to pay for our agricultural exports, and at the same time our farmers would get the benefit of higher prices by both operations. if any man doubts that an increased gold supply in europe would increase the selling price of our farm surplus, i ask him to examine the figures for the twelve years following the discovery of gold in california, or the history of prices in the century following the discovery of america--an era described by all economists as one of inflation. is there any reason why a like cause should not now produce like effects? =in the meantime, however, all the other nations would dump their silver upon us and we should be overloaded with it.= where would the silver come from? the best authorities agree that there is not enough free silver in the world to even fill the place of our gold, which, you say, would be expelled. and right here is where the advocates of the gold standard contradict every well-established principle of political economy, and every lesson of experience, by declaring that the transfer of all our gold to europe would not cheapen it there, and that free coinage would not increase the value of silver. they insist that we should still have " -cent dollars." stripped of all its fine garniture of rhetoric, their proposition simply amounts to this: the sudden addition of per cent. to europe's supply of gold would not cheapen it, and making a market here for all the free silver in the world would not raise its value; laying the burden of sustaining an enormous mass of credit currency on one metal instead of two has added nothing to the value of that metal; a thirty years' war on the other metal was not the cause of its depreciation in terms of gold, and if the conditions were reversed, greatly increasing the demand for silver and decreasing the demand for gold, they would remain in relative values just the same. if those propositions are true, all political economy is false. =government cannot create values, in silver or anything else.= you have seen it done fifty times if you are as old as i. during the war, government once raised the price of horses $ per head in a single day. on a certain day the land in the platte valley, for perhaps one hundred miles west of omaha, was worth preëmption price; the next day it was worth much more, and in a year three or four times as much. government had authorized the construction of the union pacific railroad, and before a single spade of earth was turned, millions of dollars in value had been added to the land. it had created a new use for the land. value inheres in use when the thing used can be bought and sold. whatever creates a use creates value, and a great increase in use forces an increase in value, provided that the supply does not increase equally fast; and with silver that is an impossibility. if you think government cannot add value to a metal, consider this conundrum: what would be the present value of gold if all nations should demonetize it? it can be calculated approximately. there is on hand enough gold to supply the arts for forty years at the present rate of consumption. what, then, is the present value of a commodity of which the world has forty years' supply on hand and all prepared for immediate use? take notice, also, that in the decade - germany, austria, and belgium completely demonetized gold, and holland and portugal partially did so, thus depriving it of its legal tender quality among , , people, and that this added very greatly to its then depression. =free coinage would bring us to a silver basis, and that would take us out of the list of superior nations, and put us on the grade of the low-civilization countries.= that is, i presume, we should become as dirty as the chinese, and as unprogressive as the central americans, agnostics like the japanese, and revolutionary like the peruvians. and, by a parity of reasoning, the gold standard will make us as fanatical as the turks, as superstitious as the spaniards, and as hot-tempered and revengeful as the moors. if not, why not? they all have the gold standard. you may say that this answer is foolish, and i don't think much of it myself, but it is strictly according to scripture (proverbs xxv. ). the retort is on a par with the proposition, and both are claptrap. the progress of nations and their rank in civilization depend on causes quite aside from the metal basis of their money. we must remember that for many years after the establishment of the mint we had in this country little or no coin in circulation except silver, and were just as much on a silver basis then as mexico is now. were our forefathers, then, inferior to us, or on a par with the mexicans and chinamen of the present day? even down to the silver in circulation greatly exceeded the gold in amount. by the way, where do you goldites get the figures to justify you in creating the impression on the public mind that mexico and the central and south american states are overloaded with silver, having a big surplus which we are in danger of having "dumped" on us? didn't you know that they are really suffering from a scarcity of silver? that altogether they have not a sixth of what we have? one who judged from goldite talk only, would conclude that silver is a burden in those countries, that they have to carry it about in hods. now what are the facts? in all the spanish american states there are , , people, and they have a little less than $ , , in silver. not $ per capita! this is a startling statement, i know, but it is official, and you will find it in the last report of the director of the mint ( ). the south american states have but cents per capita in silver, and mexico has but $ . . with a population nearly twice that of great britain, they have much less silver, and less than half of that of germany, though having a much larger population. in fact, to give the spanish american nations as large a silver circulation per capita as the average of england, france and germany, they must needs have nearly $ , , more, or nearly three times as much as they now have. it looks very much as if the "dump" would have to be the other way. from these figures it would seem that the trouble, if monometallists are right in saying there is trouble there, is due not to their having too much silver, but that they do not have enough. not having enough, they have followed the usual course of nations lacking a sufficient coin basis, and have issued a great volume of irredeemable paper money. by reference to the authority above cited, you will find that they have in circulation $ , , in paper money. one fourth of all the uncovered paper in the world is in those countries, though their total population is less than that of the united states. who will say that it will be a calamity to them to coin $ , , more in silver and retire that much of their uncovered paper? =gold ought to be the standard metal, because, apart from its use as money, it has a fixed intrinsic value.= there is no such thing as intrinsic value. qualities are intrinsic; value is a relation between exchangeable commodities, and, in the eternal nature of things, never can be invariable. value is of the mind; it is the estimate placed upon a salable article by those able and willing to buy it. i have seen water sell on the sahara at two francs a bucketful. was that its intrinsic value? if so, what is its intrinsic value on lake superior? =well, if what you say be true, there is no intrinsic value in any of the precious metals, and we cannot have an invariable standard of value at all.= no more than an invariable standard of friendship or love. value is, in fact, a purely ideal relation. all this talk about an invariable dollar which shall be like the bushel measure or the yard stick is the merest claptrap. the fact that gold men stoop to such language goes far to prove that their contention is wrong. the argument violates the very first principle of mental philosophy, in that it applies the fixed relations of space, weight, and time to the operations of the mind. would you say a bushel of discontent or eighteen inches of friendship? men who compare the dollar to the pound weight or yard stick are talking just that unscientifically. invariable value being an impossibility, and an invariable standard of value a correlative impossibility, all we can do is to select those commodities which vary the least and use them as a measure for other things; but you will not find in any economic writer that any metal is a fixed standard. and this brings me to consider that singular piece of folly which furnishes the basis of so much monometallist literature, namely, that gold is less variable in value than silver, and that one metal as a basis varies less than two. some of our statesmen have got themselves into such a condition of mind on this point as to really believe that, while all other products of human labor are changing in value, gold alone is gifted with the great attribute of god--immutability. it is sheer blasphemy. it is conclusively proved, and by many different lines of reasoning, that silver is many times more stable in value than gold. =i never heard such a proposition in my life! how on earth can it be proved that silver, as things now stand, has not changed in value more than gold?= by the simplest of all processes. if we were in a mining country, i could easily prove it to you by the observed facts of geology, mineralogy, and metallurgy; but that is perhaps too remote and scientific, so we will take the range of prices since silver was demonetized. of course you have seen the various tables, such as soetbeer's and mulhall's. take their figures, or, better still, take those of the united states statistical abstract, and you will find the following facts demonstrated: in february, , a ten-ounce bar of uncoined silver sold in new york city for $ in gold, or $ . in greenbacks. to-day the ten-ounce bar sells there for $ . . "awful depreciation," isn't it? "debased money," and all that sort of thing. but hold on. let us see how it is with other things. for prices in the first half of we will take the united states abstract, and for present prices to-day's issue of the new york _tribune_. wheat then was $ . in new york city, so our silver bar would have brought ten and four-sevenths bushels; to-day wheat is "unsteady" in the near neighborhood of cents, and our silver bar would buy ten and five-sixths bushels. no. red is the standard in both cases. going through a long list in the same manner, we find that the ten-ounce bar of uncoined silver would buy in ' , in new york city, twenty-three and a half bushels of corn, to-day twenty-four bushels; of cotton then eighty pounds, to-day eighty-six pounds--and there is "a great speculative boom in cotton," and has been for some time, but on the average price of this year silver would buy much more. of rye, then about fifteen bushels (grading not well settled), to-day thirteen bushels; of bar iron then pounds, to-day pounds, and so on through the market. in the central west in it would have taken ten such silver bars to buy a standard farm horse, clydesdale or percheron-norman. will it take anymore bars to-day at $ . each? there is another way to calculate the decline, and that is by taking the average farm value instead of the export or new york city price, and including all roots and garden products not exported, and this makes the showing far more favorable to silver. the agricultural department at washington has recently issued a pamphlet showing the crops of every year since , and the average home or farm price, together with the total for which the whole crop was sold. send for it and contrast the prices given in it with those known to you to-day, and you will find that in rye, barley, oats, potatoes, and many other things the decline has been very much greater than is given above. in short, it takes more farm produce to buy an ounce of silver than it did in , and twice as much to buy an ounce of gold. of ohio medium scoured wool, for instance--and that is the standard wool of the market--it would have taken in two and a half pounds to have bought an ounce of silver, while to-day it will take considerably over three pounds. the monometallists habitually talk, and have talked it so long that they believe it themselves, as if silver had become so cheap that the farmer ought to rank it with tin, lead, or spelter; but if the farmer will try the experiment he will find that it takes a good deal more of his product to buy a given amount of silver than it did in . the plain truth of the matter is that the time has come for both gold and silver to increase in purchasing power; but by reason of demonetization almost the entire increase has been concentrated in gold, leaving silver almost stationary as to commodities in general, but somewhat enhanced as to farm products. in the name of common, honesty, is it not a high-handed outrage to make the old debts of that period payable in the rapidly appreciating metal, instead of one that has merely retained its value? and is it not hypocrisy to speak of such a system as "honest money," and affect to deplore the dishonesty of those who insist upon their right to pay in the least variable metal, which was constitutional and the unit of our money from the very start? =we certainly do want to pay our debts in honest money.= gospel truth! and there is but one kind of perfectly honest money--that which will give the creditor an equivalent in commodities for what he could have bought with the money he loaned. surely no honest man will pretend that gold to-day does that. at this point we must admit the painful truth that, in that sense, there is no perfectly honest money, that is, no money that does not change somewhat in purchasing power; and how to remedy this has been the great problem with the greatest minds among financiers--with all financiers, in fact, who are more anxious for justice than greedy of gain. but surely there should not be added to an innate variability that much greater variability due to the mischievous interference of interested parties, through the power of the government. and herein is made manifest the reckless folly of the gold men in fighting against the soundest conclusions of science and honesty, in striving for a standard of one metal allowing the greatest variation, instead of two which by varying in different directions might counteract each other. gold alone has varied in production in this century from $ , , to $ , , per year, or tenfold; but gold and silver combined have never varied more than sixfold. it is self evident, therefore, that the two combined form a much more stable mass than gold alone, and it cannot be too often repeated that the great desideratum in money, the one quality more important than all others, is stability in value, to the end that a dollar or pound or franc may command as nearly as possible the same amount of commodities when a contract is completed as when it is made. economists dispute about almost everything else, but they are unanimous in this: that a money which changes rapidly in purchasing power is destructive of all stability and even of commercial morality. will anybody pretend that gold has not changed rapidly in purchasing power within the last twenty years? has not the universal experience shown that the variation has been very much greater in one metal than it ever was when the two metals were treated equally at the mint? the very least that could be asked on the score of honesty would be free coinage of both, with a proviso that debts should be paid with one-half of each. back of all that, however, comes in the great principle of compensatory action, the variation of one metal counteracting that of the other; and from the standpoint of pure science and honesty it is greatly to be regretted that, instead of two precious metals, we have not at least five. =the market reports do indeed show an unprecedented decline in the prices of farm products, except in a few articles such as butter, eggs, and poultry, in places where increased population counteracts the tendency to greater cheapness; but this decline is due to increased invention, and the great cheapening in transportation.= how much of it? the records of the patent office show, and the experience of farmers confirms it, that all the improvements in farm machinery since have not reduced the labor cost of farm produce on the general average more than - / per cent. here is a little paradox for you to study. in the twenty-five years from to the progress of invention in farm machinery was greater than in all the previous history of the world, marvellously rapid, in fact, and during those years the farm price of the produce steadily increased; but in the ensuing twenty-five years to there were very few improvements, and the price has declined with steadily increasing speed. this fact is either ignorantly or skilfully evaded by edward atkinson and david a. wells in their elaborate articles on the subject; so i will present some facts and figures which were obtained early this year in the patent office, and carefully verified by members of congress from every portion of the farming regions. since there have been granted , patents for plows, but since there have been but three really valuable improvements. farmers are divided in opinion as to whether the riding plow reduces the labor cost. the lister, recently patented, throws the earth into a ridge and enables the farmer to plant without previously breaking the soil. it is valuable in the dry regions of the west, but useless where the rainfall is great, as the soil must there be broken up anyhow. there have been corn gatherers patented, of which only one is considered a success, and most farmers reject it on account of the waste. the general verdict is that the labor of producing corn has been reduced very little, if any. in the labor of producing potatoes there has been no reduction whatever, nor in the finer garden products, nor in fruits. it takes the same labor to produce a fat hog or a fat ox, a sheep, horse, or mule, as in . in wool growing many patents have been taken out for shearers, and three of them are said to be savers of labor, provided the wool grower is so situated that he can attach the shearer to a horse or steam power. there have been since the opening of the office , patents for harvesters, of which the only great improvement since is the twine binder, for which over patents have been taken out. the beheader is used in california, as it was before , and in the prairie regions the sheaf-carrier has recently been introduced, holding the sheaves until enough are collected to make a shock. counting the labor of the men who did the binding after the original mccormick reaper at $ per day, the total saving by all these improvements since is estimated at cents per bushel for wheat, rye, and oats. much of this saving in labor is neutralized by cost of machines, interest, and repairs. there have been nearly , patents in fences, over , in the making of boots and shoes, and in stoves and heaters , , none affecting farm labor except the first. in cotton growing exactly the same processes are used, from planting to picking, as in ; but out of many hundred attempts to invent a cotton picker it is now claimed that one is a success, though it has not yet got into use. the cost of ginning the cotton has been reduced about two-fifths of a cent per pound. there have been patents for saw gins, for roller gins, and for feeders to gins, out of all of which there has been a new gin evolved which will be in use hereafter. i might thus go around the list, but enough has been said to show that nearly all our farm machinery was in use before , and that since that date, as i said, the reduction of labor cost has not upon the whole field exceeded - / per cent. the assertion that reduced transportation lowers the farm price is in flat contradiction of political economy, as, according to that, the benefits should be divided between producer and consumer, the farm price rising and the city or export price declining. =the price of what the farmer has to buy has declined in equal if not greater ratio, and so his margin is as great as ever.= it is evident that you are not a practical farmer. however, your non-acquaintance with the figures is not to be wondered at when we consider what has been said by great scholars and statesmen. i recently heard a politician, and one of perfectly himalayan greatness, say in debate that a day's work on an illinois farm would now produce more than twice as much as in , and another clinched it by adding that a man could pay for a good farm by his surplus from five years' crops. now go to some practical farmer and get him to make the calculation, and you will find that what he has saved by reduced prices is less than one-fifth of what he has lost from the same cause. the average farm family in the central west consists of five persons, and their greatest saving has been on clothing. you may set that at $ per year. the next is in sugar, for which they pay but half the price of . there is no other item that will reach $ , not even including all the iron or steel they have to buy in a year. the largest estimate of gains, unless they go into luxuries, does not exceed $ per year. at least a third of this gain is offset by increased taxes. now let us see what this farm family has lost, counting only the price of the surplus it sells and taking our average from the official reports. on bushels of wheat, at least $ ; on bushels of corn, $ ; on ten tons of hay, $ ; on rye, oats, potatoes, and so forth, $ ; on three horses and mules sold per year, $ . total, $ , being more than ten times the net gain over taxes. the agricultural department figures indicate that, taking the united states as a whole, including even the intensive farming near the cities, the reduction of annual income is a few cents over $ per acre. thus something like $ , , , has been taken from the farmers' annual income, and the farmer being just like any other man, in that he cannot spend money that he does not get, this withdraws $ , , , from the manufacturers' and general market. in view of these figures--and if anything i have understated them--what conceivable good would a raise in the tariff do the manufacturers so long as our farmers must sell on a gold basis and be subject at the same time to the rapidly increasing competition of silver basis countries? i have said nothing of fixed charges which do not decline, or of the cost of the federal government, which steadily and rapidly increases. have you heard of any decline in official salaries, taxes, debts, bonds, or mortgages? =that is plausible at first view, but it cannot be true as to the country generally, because wages have risen; or at least they had risen continuously till , as is clearly shown in the aldrich report.= the aldrich report is a miserable fraud. it does not so much as mention farmers and planters or any of the laboring classes immediately dependent on farmers. it gives only the wages of the highest class of skilled laborers and in those trades only where the men are organized in ironbound trades unions which force up the wages of their members. take the lists and census and add the numbers employed in every trade mentioned in that report, and you will find that all together they only amount to one fourth the number of farmers, or about per cent. of the labor of the country. furthermore, it takes no account whatever of the immense percentage of men in each trade who are out of employment. one who didn't know better would conclude from it that our coal miners worked days in the year, and that stone masons, plasterers, and the like worked all the year in the latitude of new york and chicago. and these are but a few of the tricks and absurdities of the report. wages are labor's share of its own product. the claim that wages generally can rise on a declining market involves a flat contradiction of arithmetic; it assumes that the separate factors can increase while the sum total is decreasing, and that the operator can pay more while he is every day getting less. the whole philosophy of the subject was admirably summed up by a southern negro with whom i recently talked. "if wages be up, how come 'em up? we all's gittin' but half what we useter git for our cotton, and how kin five cents a pound pay me like ten cents a pound, and me a pickin' out no mo' cotton?" his philosophy applies to per cent. of all the working people in the united states, for that proportion do not work for money wages. they produce, and what they sell the product for is their wages. viewed in this, the only true light, the wages of per cent. of our laborers have declined nearly one half, making the average decline for all laborers nearly a third. how, indeed, could it be otherwise? will any sensible man believe that a farmer could pay men as much to produce wheat at $. as at $ . ? or take the case of the cotton grower. it takes a talented negro to make and save , pounds of lint cotton; when he sold it at $. he got $ , and when he sells it at $. he gets $ , and all the tricks of all the goldbugs in the world cannot make it otherwise. to tell such men that their wages have increased, in the face of what they know to be the facts, is arrogant and insulting nonsense. =this nation should have the best money in the world.= very true. and the question of what is the best can only be determined by science and experience. it is certain that gold standing alone is not; for its fluctuations in purchasing power have been so tremendous as again and again to throw the commercial world into jimjams. history shows that it has varied per cent. in a century, and we have seen in this country that its value declined about per cent. from to , and that it has increased something like per cent. since . without desiring to be ill-natured, i must say it seems to me that a man has a queerly constituted mind who insists that that is the only "honest money." =but we don't want -cent dollars.= and you can't have 'em, my dear sir. a dollar consists of cents. the phrase " -cent dollar" and that other phrase "honest money" remind me of what i used to hear in my boyhood when the slavery question was debated with such heat: "what! would you want your sister to marry a nigger? whoosh!" it was assumed, if a man denounced slavery, that he wanted the colored man for a brother-in-law. men who employ such phrases show a secret consciousness of having a weak cause. and while i am about it i may as well add that i do not admire the way some of our fellows have of denouncing gold as "british money." great fools, indeed, the british would be if they did not fight for a gold basis, for by reason of it they get twice as much of our wheat, meat, and cotton for the $ , , per year we have to pay them in interest. according to the chancellor of the exchequer, the world owes england $ , , , , on which she realizes a little over four and a half per cent., or pretty nearly $ , , per year. fully that, if we add income from property her citizens own in this and other countries. on the day we demonetized silver, that $ , , could have been paid in gold in the port of new york with , , bushels of wheat; to-day it would take , , bushels. in short, the amount of grain england has made clear because of the rest of the world adopting monometallism would bread all her people, feed all her live stock, and make three gallons of whiskey for every person on the island. why shouldn't they take what the world willingly gives them? i have my opinion, however, of the common sense of a world which does things that way. =we want money that is equally good all over the world.= there is no such money. the coin we send abroad is only bullion when it gets there, and most dealers prefer government bars. the exchange must be calculated exactly the same whether we use gold, silver, or paper in our domestic trade; and this notion that we "should be at a disadvantage in the exchange" is a delusion. the variations in the value of the greenback during our war era were calculated daily, and prices in this country rose or fell to correspond. it must, i say, be calculated just the same in gold or silver, and any smart schoolboy can do it in a minute on any transaction. =what i mean is that the silver dollar is worth only cents in gold.= and by the same token the gold dollar is worth cents in silver. the answer is as logical as the quip, and neither is worth notice. such a process merely assumes an arbitrary standard and measures all other things by it, as the drunkard in a certain stage of intoxication thinks that his company is drunk while he is duly sober. and, by the way, where do you get your moral right to say that a dollar which will buy two bushels of wheat or twenty pounds of cotton is any more honest than one which will buy one bushel or ten pounds? is it because with the dear dollar the farmer must work twice as long to pay off a mortgage, that the interest paid on the great debts of the world will buy twice as much, and the debtor nations are put at a terrible disadvantage as to the creditor nations personally? is that honest? a very safe test of any theory is to follow it to its logical conclusion. take your "honest" money argument, on the basis of twenty years' experience, and see where it will take you in the near future. the dollar which buys two bushels of wheat or sixteen pounds of cotton is "honest," you say, and a dollar which buys but one bushel or eight pounds is not. by and by, if your fallacy prevails, the dollar will buy three bushels of wheat or twenty-five pounds of cotton, and will then, by your reasoning, be much more "honest" than now. is that your idea? how much lower must prices go before you will admit that gold has gained in purchasing power? =but it cannot be that prices have fallen because of the scarcity of money, for the low rate of interest now prevailing proves that money is abundant and cheap.= that is a very old fallacy, and a singularly tenacious one, as it seems that no amount of experience drives it from the minds of men. look over the history of our panics and you will find that after the first convulsion is past the banks are soon crowded with idle money, and the rate of interest falls. take notice, however, that the money lenders always declare that they must have "gilt-edged paper." interest on first-class securities is never lower than in the hardest times which follow a particularly severe panic, and the reason is obvious: all far-seeing business men know that prices are likely to fall, and, consequently, investments become unprofitable: therefore they do not invest; therefore they do not want money; therefore they do not borrow, and idle money accumulates. this is a phenomenon always observed in hard times. in good times, on the contrary, when investments are reasonably sure to be profitable, there is naturally an increased demand for money, and so the rate of interest rises. as a matter of fact, however, interest rates, when properly estimated, have been for several years past very much higher than previously--that is, the borrower has, in actual value, paid very much more; so rapid has been the increase of the purchasing power of money, that the six per cent. now paid on a loan will buy more than the ten per cent. paid a few years ago. in addition to that, the value of the loan has been steadily increasing. make a calculation for either of the years since , and you will find it to be something like this: the six per cent. paid as interest has the purchasing power of at least ten per cent. a few years ago, and the lender has gained at least two per cent. a year, if not twice that, by the increased value of his money; so the borrower will have paid, at the maturity of his obligation, at least twelve per cent. per annum, and probably much more. the silent and insidious increase of their obligations, by reason of the enhanced and steadily enhancing value of gold, has ruined many thousands of business men who are even now unconscious of the real cause or of the power that has destroyed them. i may add in this connection that the three per cent. now paid on a united states bond is worth about as much in commodities as the six per cent. paid previous to , and at the same time the bond has doubled in value for the same reason; thus, calculated on the basis of twenty-five years, the bondholder is really receiving, or has received, the equivalent of ten per cent. interest. demonetization of gold. gold has an intrinsic value, says the monometallist, which makes it the money of the world. it is sound and stable, while silver fluctuates. see how much more silver an ounce of gold will buy than in , but the gold dollar remains the same, worth its face as bullion anywhere in the world. but suppose there had been a general demonetization of gold instead of silver, how would the ratio have stood then? would not the same reasoning prove silver unchangeable, and gold the fluctuating metal? oh, nonsense! it is impossible to demonetize gold, because the civilized world recognizes it as an invariable standard by which all commodities are measured in value. the supposition is absurd. it would be very much like deoxygenizing the air. but, my dear sir, gold has been demonetized, and not very long ago, either, and very extensively, too. it was deprived of its legal tender quality by four great nations, comprising some seventy million people; demonetized because it was cheap and because the world's creditors believed it was going to be cheaper; the demonetization, so far as it went, produced enormous evils, and nothing but the firmness of france and the far-seeing wisdom of her financiers prevented the demonetization becoming general on the continent of europe, which would have reversed the present position of the two metals in the public mind. of the many singular features in the present overheated controversy, probably the most singular is the fact that comparatively few bimetallists know of, or, at any rate, say much about, this demonetization of gold, while the monometallists ignore it entirely, and many of them, who ought to know better, absolutely deny it. so extensive was this demonetization of gold, and so far-reaching were its consequences, that it may easily be believed that it was the beginning of all our misfortunes, and that the crime of the century, instead of being the demonetization of silver in , was really the demonetization of gold in ; for that was the first general or preconcerted international action to destroy the monetary functions of one of the metals and throw the burden upon the other, and it first familiarized the minds of financiers, and especially of the creditor classes, with the fact that the thing might easily be done and that it would work enormously to their advantage. it may also be said that it led logically to the action of , which was but the beginning of a general demonetization of silver. the history of gold demonetization is full of instruction and is here given in detail. in - the world was hungering for gold. all the leading nations had just passed through financial convulsions which shook the very foundations of society. several american states had either repudiated their debts outright or scaled them in ways that to the english mind looked dishonest, and there was a general uneasiness among the creditor classes of the world. a universal fall of prices had produced the same results with which we are now so painfully familiar. in the half century terminating with the world had produced but $ , , in gold, coinage value, and $ , , , in silver, or some forty ounces of silver to one of gold; yet their ratio of values had varied but little, and the variation was not increasing. why? monometallists have raked the world in vain for an answer. bimetallists point to the only one that is satisfactory, namely, the persistence of france in treating both metals equally at her mints. but there were grave apprehensions that france alone could not maintain the parity, and so, as aforesaid, all the world was hungry for gold. and in all the world there was not one observer who dreamed that this hunger would soon be far more than satiated, and the philosopher who should have predicted half of what was soon to come would have been jeered at as a crazy optimist. in gold was discovered in california, and three years later in australia. the supply from africa and the sands of the ural mountains had previously increased, so that in - it was equal to that of silver. but how trifling was this increase to what followed. in there was still a slight excess of silver production, and in the proportion was but $ , , of gold to $ , , in silver. then gold production went forward by great leaps and bounds. how much was produced? well, the estimates vary greatly. soetbeer places the amount at $ , , , by the close of ; but tooke and newmarche have put it about $ , , less. in the same era the production of silver varied but a trifle from $ , , a year. a committee of the united states senate, appointed for investigating the facts, reported that in the twelve years ending with the gold produced was $ , , , ; and in the next thirteen years, ending with , it was $ , , , . thus, in the thirteen years following the california discovery the stock of gold in the world was doubled, and in the twenty-five years ending with it was more than tripled. several economic writers have made the statement very much stronger than this, and m. chevalier, in his famous argument for the demonetization of gold, written in , declares that the production of gold as compared with silver had increased fivefold in six years and fifteenfold in forty years, and that, owing to the export of silver to asia and its use in the arts, there would, in a very little while, be no possible method of maintaining the parity of the two metals in money at any ratio which would be honest and profitable. and what was the real fact? the ratio, which in was - / of silver to of gold in the london market, and the same in , never sank below - / to , and never rose above the ratio of till after silver was demonetized. why this wonderful steadiness? the answer is easy. in the eight years of - france imported gold to the value of , , , f., or $ , , , and exported silver to the value of $ , , ; in short, her bullion operations amounted to $ , , . she stood it without a quiver; she grew and prospered as never before. she resolutely refused to change her ratio. her mints stood open to all the gold and silver of the world, and thus did she save the world from a great calamity. scarcely, however, had the golden flood begun when the moneyed classes and those with fixed incomes raised a loud cry. from the laboring producers no complaint was heard. they never complain of increased coinage. in the united states we knew nothing of this clamor, for we then had no large creditor class, no great amount of bonds, and very few people interested more in the value of money than in the rewards of labor. in europe, however, all the leading writers on finance and industries took part. in m. leon faucher wrote: "every one was frightened ten years ago at the prospect of the depreciation of silver; during the last eighteen months it is the diminution in the price of gold that has been alarming the public." in england, the philosopher dequincey wrote that california and australia might be relied upon to furnish the world $ , , in gold per year for many years, thus rendering the metal practically worthless for monetary purposes, and another englishman, as if resolved to go one better, declared that gold would soon be fit only for the dust pan. m. chevalier took up the task of convincing the nations that gold should be demonetized as too cheap for a currency, and of course the interested classes soon organized for action. holland had already begun the process in , but had managed it so awkwardly that her condition is not easily understood or described as it was in . the estimated amount to be thrown out of use was only half the real amount, and in the attempt to avoid a small evil they produced a very great one. austria was at that time involved in trouble with her paper money system, and thought the cheapening of gold offered a fair opportunity to come to a metallic basis. the reasoning of her statesmen was singularly like that of general grant in , when he pointed to the great silver discoveries in nevada as a providential aid to the restoration of specie payments, being at the time in sublime ignorance that he had long before signed an act demonetizing silver, and thereby depriving this country of the benefit of such providential aid. but the strength of the creditor classes was entirely too much for austria and prussia, and the german states allied with them almost unanimously declared for throwing gold out of circulation. a convention had been held at dresden in , with the view to unifying the coinage, but little had been accomplished, and now a convention was called at vienna, which was attended by authorized representatives of prussia, austria, and the south german states. it was there stated that, besides various minor coins, there were three great competing systems in germany, namely, those of austria, prussia, and bavaria. it is needless to go into details of this once famous convention, but suffice it to say that the following points were agreed upon: ( ) the prussian thaler was to be the standard for prussia and the south german states, and was to be a silver standard exclusively. ( ) the austrian silver standard was to prevail throughout that empire. ( ) the contracting powers could coin trade coins in gold, but none others, except austria, which retained the right of coining ducats, and these gold coins were to have their value fixed entirely by the relation of the supply to the demand. "they were not therefore to be considered as mediums of payments in the same nature as the legal silver currency, and nobody was legally bound to receive them as such;" in short, none of the gold coins permitted by the convention were to be legal tender, but all were to be mere trade coins precisely for the same purpose as the trade dollar once so famous in the united states. the result, of course, was to make silver the standard and gold the fluctuating money or token money. the effects of this convention remained with but little change till . of course, gold at once became "dishonest money." it was worth less than silver, and a regular gold panic set in. holland had already demonetized most of her gold coinage, that is, had deprived it of the legal tender quality, and portugal now practically prohibited any gold from having current value, except english sovereigns. belgium demonetized all its gold at one sweep, and russia prohibited the export of silver. thus, in an alarmingly short space of time five nations had practically demonetized gold, and others were threatening to do so, and the world was rapidly being taught that gold was the discredited metal, while silver was the stable and sound money. some curious and a few amusing results followed. among a certain class in england a regular panic broke out, and in holland and belgium even the masses of the people became suspicious of gold and disliked to take it in payment. in the latter country a few traders hung out signs to attract customers, to this effect, "l'or est recu sans perte," meaning that gold money would be taken there without a discount. it is probably not known to one american in a thousand that the practice of inserting a silver clause in contracts became at that time so common in europe that it was actually transferred to the united states, and in england life insurance companies were established on a silver basis. several american corporations stipulated for payment in silver, especially of rents, and to this day a new england establishment is receiving a certain number of ounces of fine silver yearly under leases then drawn up. it is equally interesting to note in the literature of that period arguments against gold almost word for word like those now used against silver. the financial managers threw gold out of use and then urged its non-use as a reason for its demonetization. "none in circulation," "variation shows impossibility of bimetallism"--such were the phrases then applied to gold, as we now find them applied to silver. an artificial disturbance was created, and then pleaded as a reason for further disturbance. all this while the financiers of england were bombarded with arguments and prophecies of evil, but her geologists pointed out clearly that australian and californian products were almost entirely from the washing of alluvial sands and consequently must be very temporary. her statesmen believed the geologists rather than the panic-stricken financiers, and so she held for gold monometallism. but it is to france that the world is indebted for maintaining the parity through those years of alarm and panic. m. chevalier urged upon french statesmen the importance of returning to the system which had been in force previous to , when silver was the standard and gold was rated to it by a law or proclamation. the proposition was actually brought forward in council and urged upon the emperor that silver should be made the standard and gold re-rated in proportion to it every six months. the net result was, by france taking in gold and letting out silver, that in that country had a larger stock of gold than any other in europe. suffice it to repeat that several nations, including seventy million people, actually demonetized gold, deprived it of its legal tender, and treated it as a ratable commodity; while france, single-handed and alone upon the continent of europe, was able to absorb the enormous surplus of gold and maintain the parity by the simple process of keeping her mints open to both at the ancient ratio. thus ended the scheme to drive gold out of circulation and base the business of the world upon one metal, and that the dearer metal, silver. but suppose the scheme had succeeded; suppose france had been less firm; what a wonderful flood of wisdom on the virtues of silver we should have had from the monometallists! how arrogantly they would have denounced us--who should, i trust, in that case have been laboring to restore gold to free coinage--how arrogantly they would have denounced us as the advocates of cheap money, dishonest tricksters, repudiators! how they would have rung the changes on "dishonest money," "fifty-cent gold dollars!" what long, long columns of figures should we have had to prove the stability of silver, the fluctuating nature of gold! what denunciations, what sneers, what gibes, what slurs would have filled the new york city papers in regard to those western fellows who want to degrade the standard! how glib would have been the tongues of their orators in denouncing all who advocated the remonetization of gold as cranks, socialists, populists, anarchists, ne'er-do-wells, and adullamites, kickers, visionaries, and frauds! is there any practical doubt that we should have witnessed all this? none whatever; in fact, something of the same sort was heard in europe at the time of the demonetization of gold. it all goes to show that self-interest blinds the intellects of the best of men so that they readily believe that which is to their interest is honest, but that the farmer who seeks to raise the price of what he has to sell thereby throws himself down as dishonest. of course, the successful demonetization of gold would have brought about an enormous appreciation of the value of silver, since it would have thrown the whole burden of maintaining the business of the world upon one metal, and equally, of course, we should have had the same attacks upon the owners of gold mines that we now have upon the owners of silver mines. as the withdrawal of silver from its place as primary money and its reduction to the level of token money has thrown the burden of sustaining prices upon gold, so unquestionably would the reverse process have occurred had gold been reduced to token money in place of silver. all this we know would have taken place from what actually did take place, and this makes important the history of the demonetization of gold. relative production of gold and silver. among the many plausible pleas of the monometallists, the most plausible, perhaps, is the plea that the great divergence between the metals since has been due entirely to the increased production of silver. a very brief examination, i think, will show its falsity, and that it is equally false in fact and fallacious in logic; for, first, there has been no great "depreciation" in silver, that metal having almost the same power to command commodities, excepting gold, that it had in ; and, second, the claim that the increased production of ten or twenty years would alone greatly cheapen silver is flatly contradicted by all previous experience. of many statements of the fallacy, i take a recent one from the new york _times_ as the most terse and catchy for popular reading, and likewise most ludicrously absurd: "=why silver is cheap.= "in the total product of silver in the world was , , ounces, and the silver in a dollar was worth $ . in gold. "last year the world's product of silver was , , ounces, and the silver in a dollar was worth only . cents. "in the potato crop of the united states was, in round numbers, , , bushels, and the average price c. "in the estimated potato crop was , , bushels, and the average price was c. "the fall in both cases was due to the same cause." observe the assumptions: . that the output of one year determined the value of silver as the crop of potatoes does their price for that year! the schoolboy who does not know better deserves the rattan. if the theory were correct, gold in should have been worth but a fourth what it was in , whereas the largest estimate of its decline in value puts it at per cent. . that the increased silver production of twenty-two years would reduce its value in the exact mathematical proportions of the increase. this theory ignores the two most important facts determining the value of money: that the silver or gold mined in any one year is added to the existing stock, to which it is but a minute increase; and that wealth, population, and production are also increasing rapidly, relative to which the increase of silver is but a trifle indeed. the yield of the monte real a thousand years ago may have cost five times as much labor per ounce, and that of laurium ten or even twenty times as much; but all of both which is not lost goes with the last ounce mined into the general stock, which is now about $ , , , in coin alone. the greatest annual production has in but a very few cases added so much as per cent. to the stock on hand, and about half of it is consumed in the arts. if the increase of the annual production of silver by - / to in twenty-two years reduced its value one-half, will the _times_ tell us what should have been the reduction in the value of gold when this product increased by fivefold in eight years? it should further be noted that the discovery of a "big bonanza" is an event so rare that it has not happened, on an average, more than once in three centuries since the dawn of history, and that since the growth in the world's production and trade has been, relative to former times, even greater than the increase in the production of silver. consider the following facts, which i have condensed from mulhall: in the total yearly international commerce of the world was estimated at $ , , , . forty years later it had only increased per cent., amounting in to $ , , , , and in that year there were in all the world but , miles of railroad and no electric telegraph. the total horse-power of all the steamships of the world was but , , and the carrying power of all the shipping but , , tons. to-day the international commerce of the world is almost $ , , , , and increasing at the rate of $ , , , per year; there are in the world over , miles of railway and a very much greater mileage of magnetic telegraph, including intercontinental cables; the ocean tonnage of great britain alone is very much greater than was that of the whole world in ; and tremendous as this increase of international trade has been, it is the merest trifle compared with the increase of the internal trade in several of the greater nations. what then has caused the "great depreciation"? nothing has caused it. there has been but a trifling depreciation indeed. it is as clearly proved as anything unseen can be that if the nations had left silver and gold as they were in , both would have gained materially in value, that is, in the power to command commodities, because of the vastly greater relative increase of the latter; but by demonetization all the increase has been concentrated in gold, leaving silver almost exactly as it was. at present, however, i devote myself to the question whether there has been such an increase in the production as would normally cheapen it. on this point we have evidence to convince any unbiased mind, for the relative production of silver and gold has in former ages varied very much more than in the last twenty-three years, and the variation has extended over much longer periods, without causing more than the most trifling divergences in value. and the explanation is simple: the two metals received equal recognition at the mint and in legal tender laws; the greatly increased use of the cheaper maintained its value in coinage, while disuse of the dearer tended equally to check its appreciation. in this sense government can "create value" by creating a use. from to , for instance, the production of silver averaged in value much more than twice that of gold, and in quantity some thirty-three times as much; yet all those years, the highest mint ratio was . to and the lowest . --a variation in money value of but . or . per cent. from to inclusive, the proportion of gold produced gradually rose from a little over a third to per cent. in values, yet the money ratio remained remarkably constant, the highest being . of silver to of gold and the lowest . . in other words, for sixty years there were produced on an average about ounces of silver to of gold, yet the widest variation of their money values in all those years was less than per cent. in the face of such facts as these, we are asked to believe that while an average of over ounces to created an average variation of less than per cent., and a greatest variation of less than per cent., a production of some ounces to since has created a variation of per cent. and that the variation began nine years before the value production of silver exceeded that of gold! it is an affront to our common sense. [illustration: the above diagram shows the relative annual production of gold and silver from to , and also average ratio of values of the two metals.] i should say, at this point, that my figures are taken from the latest, and in my opinion the most scholarly work in favor of monometallism, "the history of currency," by prof. w. a. shaw, fellow of the royal historical and royal statistical societies. as the ratio between silver and gold varied considerably in the different marts of europe, i follow his plan (which is soetbeer's) of taking it as it stood at any particular time in the city which might then be called the greatest commercial centre, whether venice, hamburg, antwerp, or london. his history comprises the entire period from to . it is only fair that i should also give his explanation of the stability of the metals, which is extremely interesting. he begins his second chapter with the statement that the discovery of america was "the monetary salvation and resurrection of the old world"; that it was a time of unexampled increase in the precious metals and equally unexampled rise of prices, but there was also "feverish instability and want of equilibrium in the monetary systems of europe." he shows how the first great import was of gold, which began to affect prices in ; how this was followed by a very much greater increase in silver, and how, while prices were rising so rapidly as to stimulate trade and incidentally do damage by causing great fluctuations, yet there must have been some great regulator preventing the evil which we should _a priori_ have expected. he finds it in the fact that antwerp had taken the place of venice and florence, and conducted a great trade with the far east. his language is: "the centre of european exchanges--antwerp in the sixteenth century as london to-day--has always performed one supremest function, that of regulating the flow of metals from the new world by means of exporting the overplus to the east. the drain of silver to the east, discernible from the very birth of european commerce, has been the salvation of europe, and in providing for it antwerp acted as the safety-valve of the sixteenth century system as london has done since. the importance of the change of the centre of gravity and exchange from venice to antwerp, therefore, lies in this fact. under the old system of overland and limited trade, venice could only provide for such puny exchange and flow as the mediæval system of europe demanded; she would have been unable to cope with such a flood of inflowing metal as the sixteenth century witnessed, and europe would have been overwhelmed." professor shaw argues that without the eastern safety-valve europe would have been ruined by an excess of the precious metals, that india furnished the needed reservoir--did she not take gold as well as silver?--and that venice was so far limited to an overland trade that she could not have performed the function antwerp did. later he sets forth the current monometallist position that the nations are now as one in trade and the interchange of the precious metals, and therefore even the partial equilibrium of the sixteenth and seventeenth centuries could not be maintained. let us, then, bring the figures down to the present, and it will be found, i think, that the farther down we come the weaker does the monometallist contention appear. the improved, more extended, and more intimate intercourse of the nations brought about by the introduction of steam, electricity, and other agencies tends to minimize the fluctuations of the two metals, and indicates that the divergences of the metals in mediæval times was due rather to the want of speedy, easy, and certain intercourse and communication of the nations than to an innate commercial tendency of the two metals to diverge. had the same intimate and speedy commercial relation existed between the nations of the world in those times as now exists, the equalizing tendencies of trade would evidently have prevented not only the ratio of divergence to which the metals attained at different periods, but would have prevented a difference of ratio existing between the different nations at the same period of time. from to , inclusive, the relative production of gold decreased steadily, until it was but . per cent. of the total value, to . per cent. of silver. in other words, there were for many of the later years over ounces of silver produced to of gold, and yet the ratio stood long at . to . this is almost exactly the ratio fixed by hamilton and jefferson, fixed because of its long-continued maintenance in european markets. during these forty years the production of silver in proportion to gold was never for even one year as low as the highest proportion of any year since , and yet the money value only varied from . to . , or a fraction over per cent. in the face of such figures as these, the change in relative production since seems too trifling to be taken into account, especially since in that year and some time after the value production of gold at to was much the greater, nor was it till that the world's silver product exceeded that of gold. in - the annual production of gold was $ , , and of silver almost exactly $ , , , or some ounces to ; yet the highest ratio was . , and the lowest . . this relative production changed very slowly, and in - of the total in values produced . per cent. was gold and . per cent. silver. that is, there were, for ten years, about thirty times as many ounces of silver mined as of gold, and during these years the change in the ratio was so minute that it can only be calculated in small fractions of per cent. in - , for the first time since the middle of the sixteenth century, we find the production of gold the greater, that metal being . per cent. of the total product, and silver but . per cent. during the decade the lowest value ratio of silver to gold was . , and the highest . , a variation of only . per cent. then california and australia poured out their wonderful golden flood, and all the world was changed. in - the gold yield was . per cent. of the total, and the silver yield . , and for the next five years the change was but . of per cent. in other words, during those ten years the average annual yield of silver was less than ounces to of gold; so if the "overproduction theory" laid down by the _times_ were correct, gold should have lost--well, at least per cent. of its value in silver. the actual variation was from a ratio of . to one of . , or a relative depreciation of gold of considerably less than per cent. now, it is alleged by many who have made a study of prices during that period, that in actual value gold depreciated per cent.; so it is plain that it carried down silver with it, and the only logical explanation is that the mints were equally open to both. we have seen that in all the century and a half when the mines were pouring forth silver at the rate of from ounces to of gold up to ounces to , the greatest variation in their value was less than per cent., and in the twenty years when the silver production was to that of gold as less than ounces to , the value of gold produced being more than three times that of silver, their money value varied less than per cent., and yet we are coolly asked to believe that since silver is to be rated among variable commodities like potatoes, the size of the crop each year determining the value. monometallists have had much to say about the relative cheapness of gold during those years, and have laid much stress upon the fact that it was an era of great prosperity and rapid development, with rise of wages and the prices of farm produce. in this argument they admit three things: that we have a moral and constitutional right to use the cheaper metal at any time; that we did use gold for all those years simply because it was easier to pay debts with it, that is, it was cheaper, and that the use of the cheaper metal aided greatly in making prosperity. that is all that any bimetallist claims. as the entire burden was not then thrown upon silver, we claim that it should not now be thrown upon gold, doubling or trebling the rate of its advancing value; and as the privilege to use the cheaper metal then checked the advance of the dearer and enhanced prosperity, we insist that the system of that time shall be restored. the subsequent figures are equally convincing. in - the gold products were . per cent. of the total, the silver . per cent., the variation in ratio from . to . . in - the production stood . to . , the variation in ratio . to . . in - production was still . to . , but the variation in coin value was from . to . . that something had happened quite aside in its effects from relative production was evident, but the people did not find out what it was till late in . at the time the demonetization act was passed, the ratio was still . to , and one of the reasons given for the act of february , , was that the silver dollar was worth $ . in gold; yet before the close of that year, and before it was known that there was to be any great increase in the product of silver, its relative value ran down till it was below that of gold. can any one doubt the cause? surely not if he observes the additional fact that the relative decline of silver continued despite the greater value production of gold, and that , ten years after demonetization, was actually the first year since in which the world's production of silver exceeded that of gold. what one hundred and ninety years of continuous and often enormous relative overproduction of silver had not done, ten years of demonetization had accomplished, and that while the relative supply of gold was still the greater. is it possible to miss the real cause? is there in euclid a demonstration more conclusive? [illustration: the above diagram shows the relative annual production of gold and silver from to , and ratio of values.] monometallists have exhausted the resources of verbal gymnastics to make these figures fit their theories. determined not to admit that demonetization was the cause, they have given so many explanations that, expressed in the briefest words, they would cover many pages like this. the first was that the opening of the "big bonanza" on the comstock lode had given notice that silver was coming in a flood; but that was only for popular use in this country. scientific men knew that to be a rare find indeed, not likely to occur again for centuries. the next explanation was that china and india, so long the reservoir into which the surplus flowed, had ceased to absorb it; and the next, demonetization of silver by germany and her throwing her old silver on the market. and with this the people began to get at the true reason--the general demonetization by so many nations. the following table gives the annual production of gold and silver from the discovery of america to and including the year ; and the highest and lowest ratio of silver to gold from to and including the year in which silver ceased to be in this country primary money: years. gold. silver. ratio. - ........ $ , , $ , , - ........ , , , , - ........ , , , , - ........ , , , , - ........ , , , , - ........ , , , , - ........ , , , , - ........ , , , , - ........ , , , , - ........ , , , , . - . - ........ , , , , . - . - ........ , , , , . - . - ........ , , , , . - . - ........ , , , , . - . - ........ , , , , . - . - ........ , , , , . - . - ........ , , , , . - . - ........ , , , , . - . - ........ , , , , . - . - ........ , , , , . - . - ........ , , , , . - . - ........ , , , , . - . - ........ , , , , . - . - ........ , , , , . - . - ........ , , , , . - . ............. , , , , ............. , , , , ............. , , , , ............. , , , , ............. , , , , ............. , , , , ............. , , , , ............. , , , , ............. , , , , ............. , , , , ............. , , , , ............. , , , , ............. , , , , ............. , , , , ............. , , , , ............. , , , , ............. , , , , ............. , , , , ............. , , , , ............. , , , , thus we see that, for twenty-seven years after the discovery of america, the gold production was double that of silver; for the next eighty years the production of silver was considerably more than double that of gold; for the next one hundred years the production of silver was more than - / times that of gold, and for the next century and a half, to wit, from to , inclusive, despite the fact of the tremendous gain of gold in the last few years, the production of silver fell but little short of twice that of gold. and yet, the variations in coin value were of the trifling character previously stated. when taken by shorter periods, the argument is still more startling. thus in - the production was almost exactly of silver to of gold; for the next twenty years a minute fraction less than of silver to of gold; for the next twenty - / of gold for of silver; and for the next twenty nearly of gold for of silver, while during these awful years since , in which there has been so much said about the "flood of silver," its production has never once been twice that of gold, and for the entire period has exceeded it by the merest trifle. is it any wonder that dr. eduard suess, the great german authority on the metals, and professor of geology at the university of vienna, concluded his recent work with these strong statements: "present legislative institutions are at variance with the conditions established by nature. even now agriculture and in part industry in europe are sorely at a disadvantage against silver countries such as india and mexico. the advantage of this situation accrues in england to the holders of interest-bearing notes, the productive value of which increases with the growing scarcity of gold.... as soon as the figure . shall have been reached, all gold obligations will have increased in value one-half; but nothing prevents that figure from rising to . [it has since risen even above that.] ... you say a regulation cannot be international, but you overlook how long the ratio of to - / was upheld and worked beneficently. we wish, say the london bankers, to receive our interest in gold and not in depreciated silver; but silver would not be depreciated the moment an agreement went into effect. why, you ask, shall we cast such profit into the hands of the owners of silver mines? remember that you are now casting the same profit into the hands of the owners of gold mines and washings. no man would lose by rehabilitation, and the whole world would be richer.... europe is laboring under a grave delusion. the economy of the world cannot be arbitrarily carried on in the hope that somewhere a new california, and at the same time a new australia, will be found whose alluvial lands will give relief for a decade. ... the question is no longer whether silver will again become a full value coinage metal over the whole earth, but what are to be the trials through which europe is to reach that point." at this point it seems to me well to present the figures of relative production for the last century in a more compact shape, with a view to bringing out the contrast: silver produced - ............ $ , , , gold produced........................ , , excess of silver production.......... , , gold produced - ................ $ , , , silver produced...................... , , , excess of gold....................... , , , gold produced - , inclusive..... $ , , , silver produced...................... , , , excess of silver..................... , , gold produced - , inclusive..... $ , , , silver produced...................... , , , excess of gold....................... , , , gold produced - , inclusive... $ , , , silver produced...................... , , , excess of gold....................... , , thus are we confronted with the truly startling paradox that during all the century and a half when the production of silver was nearly twice that of gold, and the two centuries back of that when it was more than twice, the variation in coinage value never rose to per cent., and for many years at a time corresponded with the ratio set by the mint; but at the end of a century during which the gold production was half a billion greater than that of silver, and at the end of half a century when it was nearly a billion and a half greater, the really scarcer metal has declined in terms of the other nearly one-half! and all this, the monometallist tells us, because there has been an excess of silver produced amounting to less than a quarter of a billion in twenty-three years. belief in such a proposition would indeed be a triumph of faith over figures. and to add to the trial of our faith, we find, on bringing the figures down to the close of the year --and we cannot bring them later on account of official slowness--the amounts of silver and gold in the world, as presented in values at our ratio, are almost exactly equal, the greatest divergence claimed by the most extreme monometallist being - / ounces of silver to one of gold! i do not indulge the hope that the figures herein presented will affect the opinion of any pronounced monometallist. there seems to be a mysterious power in gold which blinds the eyes to deductions from statistics and experience; the internal conviction of the monometallist that gold stands still while everything else changes in value resists all logic. in this country, that is. in england, where it has not become a political question, and no one is interested in denying the facts, monometallists almost universally concede the appreciation of gold and defend monometallism on that ground. it is to the laboring producers of the united states, still open to conviction, that i present these figures, which to me seem absolutely conclusive. is bimetallism practicable? can this great nation coin silver and gold on the same terms, at the ratio of to , and maintain a substantial parity? this question, like all others in political economy, may he argued theoretically or on the basis of actual experience. the monometallists say that one metal or the other always has been and always will be the cheaper at any ratio; that if both be freely coined, the dearer will be more valuable as bullion than as money, and will therefore go out of use. they say that, in spite of all devices to the contrary, we must have monometallism any how, and always on the basis of the cheaper metal. the bimetallist replies that such is, in truth, the natural tendency; but when the dearer metal is thrown out of use as money it thereby becomes cheaper, and as the cheaper metal must take its place, a vastly greater demand for it is created, and so it becomes dearer; thus an alternating action keeps the two near a parity, provided that the ratio corresponds nearly with the relative amounts of the two metals in the world's stock. they claim that the world has thus a far less fluctuating standard of value than it ever can have with one metal alone. the monometallist rejoins that this is "all theory." this brings both parties to the test of experience, and by common consent the experience of france in the seventy years from to is taken as the best practical test. at first view, it would seem as if the matter could easily be settled, as the time is so recent that there could be no great obscuration of the history; but on inquiry a determination of the real facts is found to be no such simple matter, and as the disturbance of natural law by war and other causes was almost constant, both sides find enough in the facts to make a basis for their respective contentions. let us then consider this history. napoleon bonaparte became first consul and practically ruler of france in , and at once addressed himself, with his usual energy, to the task of establishing a stable monetary system. he found that in calonne had established the ratio of - / of silver to of gold, and that it had worked reasonably well. he accepted it, therefore, as justified by experience, and his finance minister carried through the council of state an act for the free coinage of both metals at that ratio. for seventy years this law stood practically unchanged, and it is speaking with great moderation to say that in those seventy years there occurred more disturbance of every kind unfavorable to the maintenance of a ratio than in any other seventy years in monetary history. france was twice conquered, her soil overrun, and her capital held by the enemy. she four times changed her form of government. once she was subjected to the payment of enormous war expenditures, and again not only to the payment of still greater expenditures but to a fine exceeding in amount the largest sum of gold ever held in the united states. during a large part of this time the world's production of silver was in excess of that of gold to an extent very much greater than it has been in recent years, and then, after a very brief interval of something like equal production, there was a sudden and tremendous increase in the production of gold until it exceeded that of silver more than to in value. during these years, also, several of the neighboring nations, including seventy million people, demonetized gold and threw the whole burden of sustaining its equality on the continent of europe upon france, and during another portion of the time there were monetary disturbances so far-reaching that they shook the foundations of credit in every civilized country in the world. and yet, through all these convulsions, france for seventy years maintained a substantial parity, by welding the two metals together for monetary purposes. the contrasted figures are simply amazing. in the decade of - there were produced ounces of silver to of gold, and yet the market ratio outside of france never stood higher than . to . in the decade of - the production was ounces to and the average ratio - / to . in - the production was ounces to and the average ratio - / to . in - the production was - / ounces to and the average ratio - / to . the demonstration is as complete as that of any proposition in euclid. in spite of the enormous overproduction of silver, the maintenance of the mint ratio in france held the two so nearly together that in three years out of four the difference in other countries only amounted to the cost of transporting the silver to the french mint and of coinage. [illustration: the above diagram shows the relative annual production of gold and silver during the bimetallic period in france. the ratio given is the commercial ratio, that of the mint being . to . note the marvellous steadiness of the commercial ratio and contrast it with the enormous fluctuation in the relative annual production of the two metals during this period.] to this should also be added the fact that french coins would have a slightly less value in other countries than the coins of those countries, but it is not easy to estimate the sentimental difference this would make. from the enactment of the law of to the limitation of the coinage in france coined , , , francs of silver and , , , francs of gold, or $ , , , of silver and $ , , , of gold, very nearly, or per cent. of the total amount of silver and per cent. of the total amount of gold produced in the world during those years. it is further to be noted that, whether gold or silver was the dearer metal at the ratio of - / to at any given time, france at that time had more of gold and silver per capita than any country in the world, and that, despite the enormous inflow of the cheaper metal, she held the dearer and absorbed what now seems an astonishing amount of the cheaper. thus, in the imports of silver into france exceeded the exports by , , francs, and in the amount had risen to , , francs, and then it fell off and did not reach the latter sum again until . on the other hand, in the eight years - there was a net import into france of gold to the value of , , , francs, or $ , , ; and in the same years a net export of silver to the value of , , , francs, or $ , , . thus in the short space of eight years france had made monetary, or, rather, metallic transfers amounting to $ , , , and that without a quiver of her financial system, and scarcely a perceptible trace of the effects of that financial storm which swept america, england, and central europe with such destructive fury in - . it further appears that, despite the enormous import of gold, the subsequent export was comparatively small, and thus, such was the wonderful absorbing power of the nation under the free coinage law of , that france came out of each successive financial storm with an increased stock of the precious metals, and more than once has the bank of england been compelled to apply to france for the specie to arrest a destructive panic growing out of an insufficient amount of coined money upon a safe basis and an overissue of supplemental or faith money. by the year it was supposed that the danger of the world being "flooded with gold" was substantially over; and during that decade france not only sustained the double standard single-handed and alone, but did it against the tremendous pressure due to the demonetization of gold in austria, germany, and other countries. it is not possible to say with certainty how far gold would have cheapened, or, to speak in the current language, how high the ratio of silver would have become, had france during the decade abandoned her bimetallic system; but it is certain that the disproportion would have been enormous, undoubtedly very much greater than the present disproportion in the market between silver and gold, resulting from the demonetization of silver. m. chevalier gave it as his opinion that the ratio would sink at least as low as to , that is, that gold would be worth but half what it was rated at in relation to silver in the american coinage, and this he believed would certainly happen, despite the power and willingness of france to maintain the old ratio. he did not venture to say how low the ratio would sink if france abandoned her policy, but he evidently looked forward to a time when gold would be practically too cheap for money. years afterward, in writing as a philosopher rather than an advocate, he took more rational ground, and compared the action of france to that of a parachute which retarded the fall of gold. the maximum effect of the enormous gold inflation of - was to create a disturbance of less than five per cent. in value of the metals in countries outside of france. during all the years that the law of was in practical force the variations as shown by a diagram seemed but trifling, despite the enormous over-production of silver for many years and of gold for many other years, and yet, immediately after , although ten years were yet to elapse before the world was to produce silver in excess of gold, almost instantly the diagram shows the downward trend of silver far, far in excess of any previous experience. how was it through all these years with the industrial and financial condition of france? it would indeed be little to the purpose to prove that she had maintained the metals at a parity by free coinage, if, in the meantime, her people had suffered loss. monometallists tell us that not only is bimetallism impossible, but that the attempt to maintain it is in every way hurtful, in fact, disastrous. they point us to the fact that england is the clearing house of the world; that those whose currency is not assimilated to that of england are subjected to enormous losses in the exchange, resulting from fluctuations; that by attempting bimetallism a nation puts itself in the second or third rank, and that the results are in every way bad. well, all those conditions applied to france. she, like the united states, may be considered as regarding england in the light of the world's clearing house, and her currency may be said to have fluctuated, as they declare ours would, with bimetallism. what, then, have been the general results to france? what effect has it had upon her commercial, social, and industrial development? on this point let us return thanks that the testimony is universal. no other nation in the world has made such stupendous progress in the general improvement of her people as france has made since . no civilized country probably had sunk to such depths of popular misery as had france at the beginning of her revolution, and we can hardly believe that the subsequent fourteen years of war and internal turmoil had greatly improved her condition when the policy of was adopted. [illustration: the above diagram shows the course of the commercial ratio of the values of gold and silver during the bimetallic period of france. the upper dotted line (a) shows the extreme high limit of ratio, and the lower dotted line (c) the extreme low limit reached from the years to . the central line (b) is the mint ratio of . to fixed by the french government in . the variable line (d) is the commercial ratio of the values of the two metals during that period. note the slight variation in this ratio from to , during which time the bimetallic action of the french law was operative, and then contrast it with the sudden and swift descent of the ratio after the demonetization of silver by the various nations in and .] bimetallism and a rigid adherence to a specie basis were two of the means adopted by bonaparte to restore france, and during all his wars, with their terrible expenses, he never once departed from the specie standard. after the act of france was still to have twelve years of war and severe trial. she has subsequently had two revolutions and a foreign war, singularly destructive in its course, and ending in her subjugation, the occupation of her territory, and the loss of two of her wealthiest provinces. seventy years of bimetallism had left france saturated with gold and silver when her emperor rashly provoked the war with germany; her expenses were enormously increased, and she had to pay, in addition, a fine of nearly $ , , , . she paid it with a rapidity that amazed the world, but in her hour of weakness she consented to gold monometallism. she had become a creditor nation, and could endure the new system better than any other, except great britain; nevertheless, she has suffered. her exports had steadily increased during all her years of bimetallism, and never so fast as during the very years in which she was exporting silver so heavily because of the influence of cheap gold. the very year of demonetization her exports began to decline, and but once since have they reached the old figures. the statistics are fearfully suggestive. in her exports were valued at $ , , , and her imports at $ , , ; in her exports were $ , , , and her imports $ , , , and in only six of the years after she began to be "flooded with cheap gold" did her imports exceed her exports. in her exports began to decline, and ran rapidly down to $ , , in ; and is the only year since demonetization in which they reached the figures of , being $ , , . on the other hand, her imports have steadily outrun her exports until the excess has been as high as $ , , in one year ( ), and has only once since ( ) been as low as $ , , . here, then, are the points demonstrated by france's official figures: during seventy years of bimetallism she gained steadily and rapidly in wealth, her exports increasing much faster than her population. during the eight years ( - ) in which she was "ruined by cheap gold," importing , , , francs of it and exporting , , , francs of silver, a bullion operation to the amount of $ , , , she increased her exports most rapidly and with no corresponding increase in imports. during the twenty years following demonetization her exports have been stationary or declining, being $ , , less in than in , while her imports have increased. let us turn for a moment and trace the effects of monometallism in england as compared with bimetallism in france during the same period. england had in , when she adopted gold monometallism, about $ , , , in property and had in about $ , , , . in she had about , , people and in about , , ; her per capita wealth, therefore, in was $ , and in $ , , or - / times as much. in the property of france was valued at $ , , , , and in at about $ , , , ; in the former year she had , , people, and in the latter a little over , , . her per capita wealth, therefore, in was $ , and $ , in , or very nearly four times as much. thus, despite the immeasurable advantages which england enjoyed, political, social, and industrial, her great colonial possessions from which she drew enormous wealth, and her exemption from destructive war; despite also the distressing condition of france and her recent enormous losses, we find that in seventy years of bimetallism the working frenchman had gained wealth almost twice as fast as the working englishman had in the same number of years of monometallism. france became a creditor nation, and yielded to the general pressure for a single gold standard; she has lost heavily, as shown in her table of exports, but she still retains a large part of the momentum acquired during seventy years of bimetallism. her wealth is still rated at something over $ , , , ; her people have accumulated stocks of the precious metals far in excess of those of any other country; and their business is so solidly founded that the storm which recently shook the foundations of credit throughout the british empire scarcely produced a quiver in france. they have wisely avoided the excessive issues of faith money (or check money) which are the ever-present danger of england, america, and other monometallic countries; and as a result, they have almost entirely escaped those fearful convulsions have that threatened the political stability of great nations. in fact, it is no exaggeration to say that france has only felt the convulsions of recent years by their reflex action on her from other countries; and twice within very recent years has the bank of england been compelled to go to france for the coin to stay the devastating work of panics resulting from over-expansion of faith money on an insufficient metallic basis. france has an area less than that of texas by some , square miles, yet its aggregate wealth is two-thirds that of the united states; and on the basis of assessed value her agricultural wealth is very much greater than ours. mulhall, the great british statistician, says of france that she is "the best cultivated country in europe." her , , peasant proprietors are the owners of nearly all her cultivatable soil, which is worth, on an average, $ per acre. she has over , miles of the finest common roads in the world, which have cost her, at the ordinary rate of labor, over $ , , , . their benefit goes chiefly to agriculture, binding the farmers of different provinces and farmers and city dwellers together. she has over , miles of canals and canalized rivers; she has , miles of railways, all in the highest state of efficiency. she has, during her bimetallic period, become the second colonial power of the world, and has acquired foreign territory at such a rate as to excite the jealousy of england. she has become the second naval power on the globe, and the second exporting nation, her exports averaging some $ , , per year, an amount larger than the exports from this country, which has a population nearly double that of france, nearly all of it being manufactures; and had the same rate of growth continued as was maintained before france became monometallic, it is fair to presume that her exports at this time would have equalled those of great britain. best of all, the great increase of wealth is in the hands of those who created it. it is the universal testimony of all observers that the condition of the french people and the general aspect of france has steadily improved throughout this century. it is a country in which poor-houses are unknown; in her cities a beggar is a curiosity. in their country's emergency the common people came forward and out of their savings paid $ , , , accumulated during the bimetallic period. despite the loss of $ , , in the panama canal and of $ , , , in the indemnity to germany, as well as two of her richest provinces, france has accumulated hundreds of millions of dollars in the securities of other countries, and has only recently been able to subscribe twenty-five times over the russian loan, and is negotiating a loan to china, the money for which is to be supplied by her working people. be it noted also that the debt of france is held by the people of france, largely by the industrial class, and especially by the agricultural class, and the interest thereon paid, instead of being a foreign drain, is a perpetual renewal of the current circulation. one more brief contrast between france and england. no reader of current literature need be told of the appalling prevalence of poverty in great britain. as france is a country without poor-houses, so it may be said that england is a land of poor rates and poor unions. the latest official announcement is that the agricultural interest is declining more rapidly than ever before; and in regions where only fifteen years ago the land rented readily at several pounds per acre, statesmen and economists are appalled at the sight of that which so alarmed our new england people a few years ago: the phenomenon of abandoned farms. we are told that there is a revival of industry because british capitalists have withdrawn their money from other countries and will put it in anything rather than have it entirely idle; but the condition of agriculture steadily grows worse. and have we anything to boast of in our own happy land in comparison with france? our natural resources so far exceed those of any old country that a comparison would be ridiculous; and the monometallists tell us, when they are trying to prove that gold is not enhanced in value, that, by reason of inventions, a day's labor will produce at least twice as much as in , and in many lines a great deal more than twice as much. why, then, does not the laborer receive twice as much as he did in ? as wages are labor's dividend of its own product, and as capital had its dividend then as now, if a day's labor does not bring the laborer twice what it did, he is wronged; and, considering our resources, if we are not five times as well off as the french people, the only reason can be that we have slighted our opportunities, and blundered most fearfully in our management. the monometallists profess to be great sticklers for experience and demonstrated fact; to have a horror of "theory." we present them the example of france as an unanswerable proof that one great nation can maintain bimetallism, and that by maintaining it she escaped the worst evils that have affected the monometallic countries, and assured for herself an extraordinary progress and prosperity. we present them, in contrast, the example of england, and point them especially to the great difference in the progress of the common people of the two countries. we ask them, with this experience, to consider the present condition of this country, and the evils that have affected it since , and seriously to consider the question as to whether something is not radically wrong; whether some malign influence has not gone between us and the reward of our work, and robbed us of that to which we are honestly entitled. bimetallism abroad. many monometallists start with the assumption that what they call the "silver craze" is a mere fad, temporary and local; that the advocates of bimetallism are confined chiefly to the united states, and to the western part of it, and that, if they are thoroughly defeated at the november election, the discussion will be at an end. "mistaken souls that dream of heaven." they do not realize that, although it has not taken the same popular form, the discussion is quite as serious in monometallic germany and england, and in the latter country opinion has so far advanced that both parties agree on the enormous enhancement in the value of gold. there is now scarcely a difference of opinion in england on this point, but there is as to the effect. british monometallists assert that as england is a great creditor nation, the world owing her, as estimated, $ , , , , every advance in the purchasing power of money is greatly to her advantage. in mr. gladstone's last public speech on the subject he stated that fact with great frankness, claiming that it was to england's interest that money should remain as now in purchasing power, and that if she should abandon the gold basis, because gold is worth far more than it was a few years ago, the world might applaud her generosity, but it would sneer at her wisdom. the bimetallists of england, on the other hand, assert that the enormous losses of traders owing to the dislocation of the par with silver-using countries, of manufacturers by reason of the rapidly increasing competition of the same countries, of home debtors and of many other classes, and especially the loss to agriculture, far outweigh any gain made by the creditors as such. the national debts of europe now amount in round numbers to some $ , , , . including all other countries, the total of national debts exceeds $ , , , , and the growth for many years averaged $ , , per year. the local public debts of england and canada are set at $ , , , . according to the best authorities, the mortgage indebtedness of the principal european nations is as follows: for great britain and ireland........ $ , , , for germany.......................... , , , for france........................... , , , for russia........................... , , , for austria.......................... , , , for italy............................ , , , and for all other european countries. , , , a total of nearly $ , , , . hon. samuel smith, m. p., places the mortgages of england at something over $ , , , , which is more than half the value of the landed property, and those of scotland and ireland (the latter one of the worst mortgaged countries in the world) make up the grand total given above. a highly suggestive fact is that, as experience develops the enormous evils of the monometallic system, the number of conversions among prominent men to bimetallism steadily increases, and they become more outspoken and radical in their views. at the paris monetary conference of , mr. mees, president of the bank of the netherlands, protested against a single gold standard and foretold literally what has followed. two years later baron alphonse de rothschild said: "as a sequel we should have to demonetize silver completely. that would be to destroy an enormous part of the world's capital; that would be ruin." at the conference of , mr. henry hucks gibbs, director and former governor of the bank of england, was an advocate of the single gold standard; but a few years' experience so completely changed his views that he said: "mr. goschen and i were together in the conference in paris; both of us were sturdy defenders of gold monometallism; but i have changed my mind. i do not say mr. goschen has changed his mind, but he has somewhat modified it." in the paris conference of , mr. goschen said: "if other states were to carry on a propaganda in favor of a gold standard and of the demonetization of silver, the indian government would be obliged to reconsider its position, and might be forced by events to take measures similar to those taken elsewhere. in that case the scramble to get rid of silver might provoke one of the gravest crises ever undergone by commerce." as it is the fashion of our monometallists to sneer at the possibility of bimetallism, it may be well to quote here the report of the royal commission on gold and silver, made in . this commission was composed of six monometallists and six bimetallists, but they assented unanimously to this proposition: "section . we think that in any conditions fairly to be contemplated in the future, so far as we can forecast them from the experience of the past, a stable ratio might be maintained if the nations we have alluded to (herein), the united kingdom, the united states, and the latin union, were to accept and strictly adhere to bimetallism at the suggested ratio. we think that if in all these countries gold and silver could be freely coined and thus become exchangeable against commodities at the fixed ratio, the market value of silver as measured by gold would conform to that ratio and not vary to any considerable extent." mr. leonard h. courtney, one of the monometallist members of that commission who signed the report, has since become an avowed bimetallist, as have many other prominent englishmen. among them may be mentioned professor alfred marshall and professor sidgwick, of cambridge university; professor nicholson of edinburgh; professor h. s. foxwell, professor of political economy in university college, london; professor e. g. gonner, of liverpool; professor j. e. munro, of kings college, london; and many others. mr. courtney says, in his article in the _nineteenth century_, april, : "is it true that gold is this stable standard? i was one of the six members of the gold and silver commission who could not see their way clear to recommend bimetallism, and reported: 'when we look at the character and power of the fall in the price of commodities, we think that the sounder view is that the greater part of the fall has resulted from causes touching the commodities rather than from an appreciation or increase in value of the standard,' in the same paragraph we had said: 'we are far from denying that there may have been, and probably has been, some appreciation in gold, though we may hold it impossible to determine its extent.'" now, then, he goes on to say: "let me make a confession. i hesitated a little about this paragraph. i thought there was perhaps more in the suggestion of an appreciation of gold than my colleagues believed; but while i thus doubted it, i did not dissent. i am now satisfied that there has been an appreciation of gold greater than i anticipated when i signed the report, and i should not be able to concur in that same paragraph again. we have been passing through a period of an appreciation of gold, and no one can tell how long it will last. this is a serious matter. the pressure of all debts, private and public, has increased. the situation is serious. it is a dream to suppose that gold is stable in value. it is no more stable than silver. it has undergone a considerable appreciation in recent years, and industry and commerce have been more hampered by this movement than they would have been had silver been our standard. every step taken towards the further demonetization of silver must tend to the enhancement of the value of gold. it is true that much inconvenience is involved in the use of gold as a standard in some countries, and of silver as a standard in others, with no link to check their divergent relations; but the advantage of having the same monetary standard throughout the world would be counterbalanced if we made gold that universal basis and tied all the fortunes of the nations to it." the bimetallic sentiment in england is not confined to the mere theorist and doctrinaire or statesman, but is advocated by some of the ablest journalists in the kingdom. thus, the _statist_, which undoubtedly ranks in that country as the highest authority in financial and economic matters, is quite as pronounced as mr. balfour and others in its views upon the effect the demonetization of silver has had upon the value of gold. in its issue of july , , it says: "the new policy is likely to intensify the appreciation of gold. one consequence of the further appreciation of gold will be to intensify the agricultural depression all over europe. most of the charges upon land having been fixed heretofore, they will weigh more and more heavily upon land-owners as gold rises in value. so, again, rents will become more onerous, and it will be found by and by that the settlement of the last few years was only provisional, and that a further reduction will become necessary. also it is evident that the burden of debt, not only upon individuals, but upon governments, will be much increased. everywhere the burden of debt will necessitate increased taxation, and so will weigh very heavily upon the general population." hon. robert giffen, the well-known chief of the statistical department of the board of trade, london, was long known as the most determined and uncompromising monometallist in england. in he read a paper before the royal statistical society, in which he showed that gold had notably gone up in purchasing power; that the increase was continuous and likely to continue, and that this was the true explanation of the fall in the prices of commodities. in a former paper read in he had predicted the rise in the purchasing power of gold, and in his paper of he said: "if the test of prophecy be the effect, there was never surely a better forecast. the fall of prices in such a general way as to amount to what is known as rise in purchasing power of gold is, i might almost say, universally admitted. measured by any commodity or group of commodities usually taken as the measure for such a purpose, gold is undoubtedly possessed of more purchasing power than was the case fifteen or twenty years ago, and this high purchasing power has been continued over a long enough period to allow for all minor oscillations." in , when the discussion may be said to have begun, the french economist ernest seyd pointed out very plainly that the adoption of the gold standard by europe and the united states would lead to the destruction of the monetary equilibrium hitherto existing, and then added this singular prophecy: "the strong doctrinarianism existing in england as regards the gold valuation is so blind that when the time of depression sets in the economic authorities of that country will refuse to listen to the cause here foreshadowed. every possible attempt will be made to prove that the decline of commerce is due to all sorts of causes and irreconcilable matters. the workman and his strikes will be the first convenient target; then speculating and over-trading will have their turn; many other allegations will be made, totally irrelevant to the real issue, but satisfactory to the moralizing tendency of financial writers." how literally has that been fulfilled in our sight. at this very time, the monometallists of the united states are pointing to all sorts of causes and irreconcilable matters to explain the ruinous fall in prices. they not only allege all the causes here assigned, but many more peculiar to this country; and, after the fashion of all who oppose any reform in the interests of producing labor, they particularly and even savagely deprecate agitation. by the way, does not every clear-headed american, know that any system that cannot stand agitation is totally unfitted to this country? agitation, investigation, public discussion in the papers and on the stump, are the very life-blood of our institutions. and if our finances were as they should be, the more thoroughly they were discussed, the more warmly would the system be approved, and the more would investigation be invited. hon. g. j. goschen, former chancellor of the exchequer, pointed out as early as that the enormous increase in the demand for gold consequent upon the demonetization of silver was liable to create great evil. after elaborating this subject, and saying that the fall in prices had already produced serious evils, he added: "some writers have appeared to show something approaching to irritation at the view of the situation that gold should have largely influenced prices. i scarcely know why, unless through the apprehension that the bimetallists may utilize the argument." a little later he said: "i must repeat that to my mind the connection between the additional demand for gold and the fall of prices seems as sound in principle as i believe it to be sustained by facts." we might multiply at length quotations to show that opinion is unanimous in england, regardless of party, to the effect that there has been a great increase in the purchasing power of gold. as to the effect of this mr. giffen says: "the weight of all permanent burdens is increased.... our people, in paying annuities or old debts, have to give sovereigns, which each represent a greater quantity of the results of human energy. the debtors pay more than they would otherwise, and the creditors receive more. it is a most serious matter to those who have debts to pay." mr. s. dana horton says that on the basis of prices "the national debt, regarded as a principal sum, has increased its weight upon the shoulders of the british taxpayer between and by nearly two hundred millions sterling, an amount nearly equal to the franco-german war fine." this gives us the explanation of the fact that the consols on which the interest was reduced by mr. goschen, when chancellor of the exchequer, to - / per cent., are now selling at a much higher premium than formerly; the smaller amount of money paid in interest will purchase a very much larger amount of commodities than the former larger interest did. the matter is very clearly set forth by hon. samuel smith, m. p.: "if the question of protection is to be introduced into the discussion, then it will be found to tell more forcibly against our opponents. what do they seek for, but the protection of gold as against silver? they wish, as far as lies in their power, to boycott silver and throw the world upon gold alone, even though such a course should change the value of gold. in trying to boycott silver, they are giving protection to the wealthy capital class, just as truly as the old corn laws did to the landed owners of this country. the only difference is that the amounts involved are much larger and the protected class much richer and the confiscation of the fruits of the toiler much greater than under the old system of the corn laws. when the masses of this country awake as those of america have awakened to the magnitude of this question, they will brush away this idle talk that we are trying to restore protection." if mr. smith were in congress instead of parliament, what a howl there would be about him as an anarchist! it being now the unanimous opinion of english statesmen and financiers that gold has greatly appreciated, and that such enhancement has already wrought great evil, the important question arises, will this process continue? in the speech already quoted mr. giffen says: "i am bound to say that all the evidence seems to me to point to a continuance of the appreciation. it is impossible to suppose that the movement will not extend to other countries. all these facts point to a continued pressure on gold. the better probability seems to be, that the increase of the purchasing power of gold will continue from the present time." the right hon. a. j. balfour, now the head of the british cabinet, in a speech delivered at manchester, october , , said: "we want two things of our currency. we require that it shall be a convenient medium of exchange between different countries, and we require of it that it shall be a fair and permanent record of obligation over long periods of time. in both of these great and fundamental requirements of a currency, our existing currency totally and lamentably fails." after showing that within fifteen years the money of great britain and ireland had advanced in purchasing power no less than or per cent., he went on to say that of its further progressive appreciation "no living man can prophesy the limit." a little later he spoke of it as progressing "steadily, continuously, indefinitely," and closed his remarks on that subject in these words: "if you will show me a system which gives absolute permanence, i will take it in preference to any other. but of all conceivable systems of currency, that system is assuredly the worst which gives you a standard steadily, continuously, indefinitely appreciating, and which by that very fact throws a burden on every man of enterprise, upon every man who desires to promote the agricultural or industrial resources of the country, and benefits no human being whatever but the owner of fixed debts in gold." in his work "the bimetallic question" hon. samuel smith, m. p., presents as an evidence of the hardships due to the increasing purchasing power of money these facts: "the english landlords who borrowed £ , , on their property, agreeing to pay, let us say, £ , , a year, interest at per cent., supposing that it represented one-quarter of their rents, now find, owing to the fall of prices, that it represents one-third, or even in some cases one-half of their rent.... the factory owner, the mine owner, the ship owner, who thought it safe twenty years ago to borrow half the value of his plant in order to find capital for his business, now finds that the mortgagee is the virtual owner. nearly all the profits go to pay the mortgagee's claim, and in many cases he has foreclosed, and sold out the unhappy borrower, ruined through no fault of his own, but through the extraordinary sinking of prices. as a matter of fact, i believe that if all the fixed capital engaged in trade in england could be valued to-day at its real selling price, it would be found that it would do little more than pay the mortgages and debts upon it. trade is very greatly and injuriously affected by sudden alterations in the standard of value, especially when the alteration is, as now, towards increased values. it arises in this way: trade is largely carried on by borrowed capital, or, in other words, by the use of credit in some shape or other; the vast banking deposits are mainly loaned to traders; a very great deal of the invested capital of this country is lent upon mortgages upon trading property such as ships, factories, and warehouses. a prudent trader usually considers it safe to draw considerably beyond his floating capital, and to borrow say per cent. upon his plant or a fixed capital. now, the constant decline in prices within the last few years has virtually swept away his own portion of the capital, and only left him enough to pay the loans and mortgages. for instance, a ship or a factory built at a cost of twenty thousand pounds, of which ten thousand were borrowed, is now worth only twelve thousand pounds, or per cent. less; and so the mortgage represents five-sixths of the value instead of one-half, the trader's interest having sunk to two thousand pounds in place of ten thousand. probably, if trade is unprofitable, he fails to pay the interest and the mortgage is foreclosed; the property is forced off at just sufficient to cover the loan and he is ruined. i have no doubt that this exactly describes the condition that confronts numbers of traders in this country and other countries having the gold standard. a great portion of the commercial capital of the country has passed into the hands of the mortgagees and bondholders who have neither toiled or spun. the discouragement this state of things produces is intense. after it has gone on for several years, a kind of hopelessness oppresses the commercial community, all enterprise comes to a standstill, many works are closed, labor is thrown out of employment, and great distress is felt, both among laborers and the humbler middle class. indeed, it strikes higher than this; for multitudes of people who were once prosperous traders have now become dependent on charity. i know many such myself." how fitly that describes the condition of the united states to-day. this was written some years ago, and so rapid has been the subsequent decline in prices that it almost equals the decline he had estimated for the fifteen or twenty years preceding the date of his work. and the end is not yet. in his comments upon mr. goschen's address, delivered in , wherein he pointed out that in the decade from to the annual supply of gold had decreased in a marked degree, and concurrent with this there was a marked increase in the demands upon the world's stock of gold, which was intensified by the substitution of gold for silver as money in germany and other countries, mr. smith makes the following observations: "the gold production, which for some years exceeded £ , , annually, has fallen to , , a year; and the best continental authorities, such as soetbeer and laveleye, reckon that more than half that amount is consumed in the arts. "it may, therefore, be reckoned that since only some , , on the average has been available for currency purposes. "but germany during that period has introduced a gold currency of , , , the united states has used up , , , and italy has drawn some , , for a similar purpose. "so that , , have been drawn for these special purposes, whereas the whole supply of new gold for coinage has not exceeded in that time , , . "the balance must have been drawn out of existing stocks. besides, a steady drain of some , , a year has gone to india, further depleting stock in europe. "while trade and population constantly grow and demand more metallic currency, there is a steadily diminishing quantity to meet it. if you put the present product of gold at £ , , a year, and the requirements of the arts at , , or , , a year, while the india demand is , , , there is only left , , to , , a year for europe, america, and the british colonies. "it will seem to subsequent ages the height of folly that just at this period, when gold was running short, the chief states of the world decided to close their mints against silver, and cut off, so to speak, one-half the money supply of the world from performing its proper functions. "had the world continued to use both metals as freely as before, the painful crisis we have passed through would have been much mitigated. but by a suicidal policy silver was cut off at the very time it was most needed, and a double burden thrown upon gold just when it was able to bear only half of its former burden. "as bismarck has well said, two men were struggling to lie under a blanket only big enough for one." bad as have been the effects of monometallism in england, they have been far worse in ireland; and dark as is the future of the former, it is light itself compared with that evidently in store for the latter. those familiar with irish affairs know that after a long agitation several acts have been passed to enlarge the rights of tenants and to secure them a larger share of what they produce. the act of reduced the rents and fixed the amount to be paid at a specific annual sum in money for a long term of years; and the subsequent ashbourne act (so called from lord ashbourne, who introduced it) gave tenants a chance to buy and pay for lands in fixed yearly installments for forty-nine years. the intent was to create a peasant ownership somewhat like that of france. it was the end of a long fight, and was supposed to be a great victory and the inauguration of a very great reform. scarcely, however, was the great victory won and the great reform inaugurated when it became evident that, owing to the demonetization of silver and increased purchasing power of gold, the tenants were, in reality, bound to much heavier payments than before. whatever may have been the intent, the tenant, who bound himself to pay a fixed annual sum as rent for a long term of years, found himself bound to deliver a much larger share of produce; and the purchaser under the ashbourne act found that what looked so easy in figures soon became impossible in fact, as the prices of his produce fell so rapidly that each successive payment became more oppressive until it finally became impossible. thus it looks now as if by the appreciation of gold all that was gained for the tenant is more than lost, and that in the future his condition may be worse than in the worst days of rack-renting. in recent years this has become plain to those who have the good of ireland at heart; they have taken the alarm, and are outspoken on the threatening evils. among these is the most reverend dr. walsh, archbishop of dublin. in a recent interview he says, referring to the rise in the value of gold: "all this is indisputable; it is now fully in the public view; yet not even an attempt is being made in parliament, or even out of it, to bring about an equitable readjustment of the conditions which are proving so disastrous in other nations, conditions too that are imposed under the provisions of statutes enacted as measures of protection for the tenants. the irish land acts of , , and have, nevertheless--as a result of the increased and increasing value of our present unbalanced and consequently untrustworthy monetary standard of value--become fruitful sources of difficulty, and may very soon become fruitful sources of disaster, to those for whose benefit they were intended." again, referring to the importance of some remedy, possibly that which bimetallism might provide, he says: "the adoption of bimetallism or of some equivalent remedy, if there be any equivalent remedy, is, i am convinced, a matter of imperative necessity; that is, if the agricultural tenants of ireland--and i do not limit this to ireland--are to be saved from otherwise irretrievable ruin. if things go on as they are, even the excellent land purchase scheme, which is associated with the name of lord ashbourne, may become, before many years are over, a source of widespread disaster to the tenants who have purchased under it." again, in view of the steady and dangerous increase in the burdens of the obligations entered into under either of the acts referred to, by reason of the continued enhancement in the price of gold, he says: "the bimetallists may be right or they may be wrong; but, at all events, if they are right, then it is noticeably plain that the irish tenants who have the misfortune to have their rents fixed for terms of ten or fifteen years under the act of , and in much the same way the irish tenant purchasers who have the misfortune to have found themselves saddled with the obligation of making annual payments fixed for forty-nine years, are simply sliding down an inclined plane with bankruptcy awaiting them at the bottom of it." and again: "the point, as i have already stated it, is that so long as our monetary system remains what it is, every one who is placed under an obligation to make yearly payments of a fixed amount of money is thereby placed under a burden which is growing heavier from year to year." in discussing the question of variability in the purchasing power of gold, he says: "the reason of the liability to fluctuation in the purchasing power of the sovereign is plain: when gold rises in value a larger quantity of any other commodity, say of corn, of meat, of butter, or of cloth, will have to be given in exchange for any given quantity of gold, such, for example, as the quantity contained in a sovereign. on the other hand, when gold falls in value a smaller quantity of any other commodity, say of corn, of meat, of butter, or of cloth, will suffice to obtain in exchange any given quantity of gold, such as that which is contained in the sovereign. it is an obvious inference that our gold coinage, however useful as a medium of exchange, does not furnish us with a standard of value fixed and unalterable. it does not furnish us, for example, with such a standard as the yard is of length or as the pound troy is of weight. the popular notion that the pound sterling constitutes a fixed standard of value is merely a popular delusion. the sole foundation for that delusion manifestly is that in these countries the values of all commodities are commonly stated in terms of a pound sterling; in other words, in pounds, shillings, and pence; a shilling being a twentieth part of the pound, and a penny the twelfth part of that again. "the natural result of this method of enhancing the value of commodities other than gold is that when prices rise or fall the impression is conveyed to a superficial observer that it is the value of other things that changes, the value of the sovereign remaining fixed." under this head he says again: "the price of things estimated in gold--their gold price--may change, whilst their price estimated in silver--their silver price--remains unaltered. this will occur if the value or purchasing power of gold goes up or down, while the value or purchasing power of silver remains unaltered. suppose, for instance, that gold is in any way scarce in relation to the demands upon it. then, in any country where gold is the standard metal of the currency, those who wish to obtain, a certain quantity of gold, whether in coin or in bullion, will have to give a larger quantity of other commodities in exchange for it; or, to put the matter in another light, those who have only a definite commodity to part with will receive less gold in return for that; in other words, there is a fall in gold prices. suppose, on the contrary, that gold is abundant in relation to the demands upon it, then those who wish to obtain a certain quantity of gold, whether in currency or in bullion, will not have to give so large a quantity of other commodities to obtain the quantity of gold they require; or, to put the matter as before in another light, those who have a definite quantity of other commodities to dispose of will obtain more gold in return for them; in other words, there is a rise in gold prices. if in either case there is no change in the value of silver, then the price of commodities stated in silver, that is, their silver price, will remain unchanged." in referring to the very prevalent notion, especially among the uneducated classes, that the gold unit of measure of value does not vary, he says: "as for the tenant purchaser, he probably thinks that after the extra pressure of the first few years he may look forward to easy times for the rest of his life. he little knows what is before him. if things go on as they are, it will be harder for him, ten or fifteen years hence, to pay forty pounds a year than it would be to pay fifty pounds a year now; but of all this he knows nothing--how could he? his only idea is that a pound is always a pound, and a sovereign is always a sovereign; so, in the belief that the yearly payment, when it is reduced to forty pounds, will be well within his reach, he puts his head into the halter." the "dump" of silver. all the world will dump its silver on us if we adopt free coinage, says the monometallist. how much, and where will it come from? asks the bimetallist. oh, the world has billions of it ready for us, is the vague general reply; but when we ask for a bill of particulars we get instead a fine confusion of prophecy. one answers that it will come from spanish america. but we have already shown that all nations from the rio grande to cape horn have but $ , , for their , , people. the south americans have but cents apiece. the mexicans have $ . . the central americans have $ . . and the south americans have $ , , in paper money, to bring which to par and maintain it there will require at least $ , , more in silver than they now have. no "dump" from there. from france, says another. well, france has $ , , in silver coin, and some bullion; only $ . per capita in coin, and valued at - / to of gold. at her ratio an ounce is worth $ . ; at ours $ . . will she rob herself of coin, when she has none too much for business, and sell it to us at a loss of cents on the dollar and freight charges? germany has but $ , , in silver coin, less than half as much as france, though having , , more people, and great britain has but half as much as germany. all the other europeans together have much less than these three nations, and used at a higher valuation than ours. how then can they "dump" any on us? from india, say a few. well, india has a deal of silver--$ , , , according to our director of the mint. but she has , , people, so it is but $ . apiece. and the best evidence that she has not too much is found in the fact that she is importing more. china has but $ . per capita; japan has but $ , and is importing heavily; australia but $ . , and the black and brown races still less. in short, all the world outside of the united states has but $ , , , in silver coin, or $ . per capita. it is a plain case that there will be no "dump" from the coined silver. but the bullion, the old silver, the scrap heap, will they not ship that to us by billions? well, how much is there, and where is it? will the nobility and gentry of europe melt down their family plate, the plain people everywhere their silver ornaments, and the hindoos their household gods, to send us the silver? if so, why did they not do it when a cup, a watch, or a silver god would buy twice as much gold as now? but the supposition is absurd. the manufactured articles are worth very much more than the metal in them, to say nothing of the sentimental value. a prize silver cup, for instance, won in a great race or regatta, could not be bought for ten times its weight in gold. there remain, then, only the scrap heap and the stored bullion, and nobody has been able to locate any great mass of it. is it reasonable to suppose that moneyed men have been storing away silver for years, making no profit on it and losing the interest, and doing it in the face of a falling market? no, the timid may be reassured; there will be no "dump." another class threaten us that a great mass of securities will be "unloaded on us." well, great britain, germany, and holland, all gold countries, are the nations which hold practically all the american stock and bonds held abroad. of course they did not invest expecting to be paid principal and interest in coin, for they know that there is not enough in this country to pay it; it is in commodities that we must pay. so far as these securities are bad, as we are sorry to say very many are, foreigners having been badly "plucked" by some of our operators, they will be returned anyhow. in fact, they are coming back now. as to those which are good, being held against property capable of earning a steady and reliable income, they will not be returned. held in gold countries, the interest and dividends on them will be paid in our products measured in the currency of those countries, no matter what our monetary system may be. but suppose the "prophets" of evil are correct to this extent that silver and securities will be "dumped" on us to the amount of a billion or two. will the foreigners give us all these good things? assuredly not. they must all be paid for; and with what? manifestly with agricultural products, for there is little or nothing else. the farmer must furnish the stuff, and he is ready and willing to do it--yes, anxious. at least three-fourths of our exports are agricultural, and of the new exports probably seven-eighths would be. we find, moreover, that in , , bushels of wheat exported brought us $ , , , and in , , , bushels brought us $ , , , while in the , , bushels exported brought us only $ , , , and in , , , bushels brought us but $ , , . similarly it may be shown that our largest cotton exports have brought us the least money; but this is an old story. it goes without saying, that to the farmer there are three great factors in the present situation: a ruinously low price for his products, a tremendous surplus left over from last year, and an immense crop for this year now adding to the surplus, with no possible home consumption to give an adequate outlet. suppose then the "dump" should come and the farm produce go--what then? first of all there must come as a result a rise in prices. farmers receiving much more money would immediately pay their most pressing debts; the release of idle money would break the deadlock which now paralyzes trade, and from the farmer the money would at once be poured into the channels of rural business. the consumptive demands would be tremendous because of the long and forced abstinence, and the farmer would supply himself with those things he has so long wanted. the railroads would have a vastly increased business, and as a result there would be a greatly increased demand for labor. instead of the ruinous "cut in rates" which we read of almost every day, made in order to stimulate the movement of crops, we should soon hear of vastly increased shipments at profitable rates; these of course would soon be followed by increased net earnings, which would in time create increased values of securities, which again would check foreign sales and stimulate purchases. there would be a boom in stocks to dispel the gloom of wall street, and we should do the money-mongers good in spite of themselves. is this all supposition? well, we are proceeding upon the theory of the monometallists, that a billion dollars' worth of silver and securities would be shipped here. we are showing what must inevitably result if their predictions should hold good--more money for the farmers, more business for the merchants, more transportation for the railroads, and more business for their correlated industries; and, as a result, more work, abundant work, for those now idle. and this last would be the greatest blessing of all. the benefit would be to the farmer, the handlers of grain and all who serve them, to the retail tradesmen, the small manufacturers, all the country artisans immediately dependent upon the farmer, and all those who supply all of these classes. in short, there would be a general quickening of all branches of production and trade as a certain result of the transfer of foreign silver and securities for our agricultural surplus. is there anything in all this to alarm americans? asia's demand for the precious metals. among the many errors which distort men's opinions on the so-called "silver question" is the belief that the gold supply of the present and near future need be considered merely as it may affect europe and america. asia and africa are in most men's minds entirely excluded from the calculations. the popular belief in the united states may be briefly stated thus: asia is and is long to be the land of stagnation. asiatics are unprogressive and will remain so. in contact with the higher civilization of europe the yellow and brown races are likely to fade away as did the maori and the american indian; or if they continue to increase, their trade and government will be conducted chiefly by europeans. one finds this belief expressed in many standard works. "the helpless apathy of asiatics" is a favorite phrase of macaulay. "man is but a weed in those vast regions," says dequincey. "in asia there are no questions, only affirmations," says another philosopher. and no amount of experience seems to shake the popular faith in this notion that what asia was she is always to be. and yet enough has occurred within the memory of men still middle-aged to dissipate it. only a few years ago americans looked upon russia as an inert mass, semi-barbarous in large part; and when kennan pictured the horrors of siberia most readers thought the condition only such as might be expected from such a government and such people as they believed the russians to be. but russia is to-day one of the world's greatest powers, with , , of people, building the two longest railways in the world, developing the siberian and transcaspian region with a rapidity only exceeded in our own far west, and drawing gold from this country and western europe at a rate that threatens the stability of our financial system. it is only forty-one years since our commodore perry astonished the world by securing admission to japan and proving to the western people that it was at least worthy of their notice, yet that empire has undergone a most beneficent revolution in which the daimios or local lords consented to a self-sacrifice without a parallel in history, has been the victor in a great war, has adopted the best features of the western civilization while sacrificing none of its own, and is advancing in material development with a rapidity rarely equalled and perhaps never excelled. five years ago the first complete census showed thirty-six cotton factories with , spindles; three years later the number of factories had doubled and that of the spindles had much more than quadrupled, and there is every indication that next year's tabulation will show a still more rapid increase. in there were , people employed in that industry. hon. robert p. porter, who has recently returned from japan, after making a thorough study of her progress and resources, tells us that while her export of textiles of all kinds in was worth but $ , , they were in worth $ , , , the estimate of both years in silver dollars. similarly in the same years the exports of raw silks increased from $ , , to $ , , , of grain and provisions from $ , , to $ , , , of matches from $ , to $ , , , of porcelain, curios, and sundries from $ , , to $ , , , and several other articles in the like proportion, while the commerce for showed an increase of $ , , over , reaching a total of exports and imports of $ , , , or about $ . per capita. the government granted , , yen as a bounty to the first iron works, begun in , and already the products of those iron works in hand-made articles are underselling american products on our pacific coast. in five years, prior to those covered by mr. porter's figures above, japan's exports rose from , , to , , yen, and her imports from , , yen to , , yen. nor does there appear any reason to doubt the confident statement of british experts that development for the coming years will go on much more rapidly. politics in the empire already turns upon fiscal and economic questions; of two bills urged in the imperial parliament by the progressists, one decrees the nationalization of all railways not yet owned by the state, and the other asks for an appropriation of , , yen for the building of a new railroad. while this is going through the press it is announced that japan has established two new steamship lines, one running from yokohama to our own pacific coast, and the other from yokohama to marseilles, stopping at shanghai, hong kong, singapore, and columbo. the western mind has long looked upon china as given over to hopeless inertia and stagnation, but china has awakened at last. in one year the importation of illuminating oil rose per cent., of window glass per cent., of matches per cent., and needles per cent. in six years the tonnage of vessels discharging in chinese ports rose by one-third. while these lines are going through the press li hung chang is in europe negotiating for a loan of , , francs to be expended in internal improvements, and he gives the weight of his very high authority to the statement that china is no longer opposed to the introduction of railways. consul-general jernigan reports to the department of state that the prospectus of a new industry is now before the public at his station, shanghai. it is called the shanghai oil mill company, and purposes to manufacture oil from cotton seed. it is the logical result of the cotton mills at shanghai, and the consequent stimulus given to the cultivation of cotton in china. since there have been forty-five new manufacturing plants established in shanghai. they are all in successful operation, especially the cotton factories, in which large capital is invested. he adds: "the area suitable for cultivation of cotton in china is almost as limitless as the supply of labor, and labor being very cheap, there can be no doubt that china will soon be one of the great cotton-producing countries of the world, and that this product, produced and manufactured in china, will command serious consideration in all calculations with reference to the cotton market. it will not be safe to discount the cotton of china because it now grades low, for it is certain to improve. at present it is estimated there are , , tons of cotton seed, equal to , , gallons of oil, now yearly lost to commerce which would find a ready market. the company will start with a capital of , mexican dollars. one company has already ordered its machinery from the united states." the population of the chinese empire is estimated at , , , but li hung chang declares, and experienced western observers confirm it, that the country with modern improvements could sustain more than twice its present population in a very high state of comfort. of all the popular errors, however, the greatest is that of regarding india as an overpopulated, stagnant, and unprogressive land. suffice it to say here that the population has trebled under british rule, and that the country is abundantly able to sustain in great comfort twice its present numbers by agriculture alone; that the extension of the railway system has recently been rapid, and along with this has gone on a growth of manufactures that is simply amazing. only recently burmah borrowed in london $ , , for railway construction, a sum that was subscribed in that market five times over. in these vast fertile regions, which in comparison with what they are destined to be might be called new and undeveloped, live , , of people, who are increasing at the rate of something like , , per year. and these are but a few of the facts i might present to show that the early development of the orient is the great fact america must take into account, and that it is almost a certainty that the world's greatest possible production of gold in the future may be absorbed in the east, leaving the west to struggle with an increasing scarcity. indeed, prof. eduard suess, the great german authority, after giving reasons for his belief that the larger part of the gold product is used in the arts, and that all of it will soon be, points out that asia will soon, in all probability, absorb almost the entire silver product, and that we shall then have a "crisis" indeed. in my travels through india and the orient generally i took notice of her enormous capacity to export wheat. as a result, i predicted that the export, then but fairly begun, would soon menace our supremacy in the british market. i began at the same time to study the social and industrial condition of russia, and was soon satisfied that she was in the dawn of a great day. i predicted the eastern extension of her enterprises, and increased political influence, especially with china, and the consequent absorption of western gold and capital generally. it appears from the latest summary of the united states bureau of statistics that russia had, on the first of january, , $ , , in gold in her banks, and on the last of last may $ , , . if she carries out her present policy, this is less than half of the amount she will require. on a strictly gold basis we must allow her at least $ per capita, which would make for the empire $ , , , . but if we greatly reduce the per capita, in view of the undeveloped condition of her subjects, the amount still to be required will be enormous. during the same four years and five months the bank of france has increased its holdings of gold from $ , , to $ , , ; the austrian-hungarian bank from $ , , to $ , , , and the bank of england from $ , , to $ , , , while the banks of germany, belgium, spain, italy, and the netherlands have also increased their holdings some $ , , . thus we see that in these few years the leading nations have added nearly $ , , to their previous hoards of gold, which shows too plainly that they are looking forward to a gold famine. how much more will asia demand? in my opinion, india, notwithstanding british rule and influence there, has developed less rapidly than china will when she once comes into as intimate contact with western nations as has india, for the rigid system of caste which prevails in india and which does not exist in china has been and will be the cause of greater immobility. it is not possible to say how long it will operate as an impediment to a high industrial development, but from the lessons taught in other countries where race and religion create similar castes, we may believe in its long continuance. i take pleasure at this point in referring to the late able work of prof. charles h. pierson, of oxford, who passed twenty years in the orient. in his "national life and character" he points out that china in had doubled her population in eighty years, and there since has been a great increase; that russia has doubled since , very largely by natural increase, the russian peasant being the most prolific of human beings; and the hindoos, who had doubled in eighty years, have recently gained , , in ten years. professor pierson also points out the great error of assuming that the black and yellow races will fade away before the white, and shows it to be far more likely that with the increased security afforded by british and russian rule they will increase so rapidly as to industrially force the white race back to the higher latitudes of the north temperate zone. industrial commonwealths will not dispense with great armies--at least not for a long time--but china has passed the militant age, and reached the purely industrial. it may be said that work is a pleasure to the chinese, as active sports are to western people. continuous toil is looked upon as a matter of course. to them it does not seem a hardship that men should work. as a measure of the possibilities of the orient, consider what has been done in the western world within half a century, where the population is much less than one-half of that of the far east. over four hundred thousand miles of railroad have been constructed, together with a vast, almost incalculable system of telegraphs, to say nothing of the great cities and common roads, or the enormous mass of productive machinery, which has even outrun the increase of population. in round numbers, some forty thousand millions in capital have been absorbed in railroads alone. add the amount absorbed in telegraphs, telephones, steamships, and electric plants, and a thousand and one appliances of civilization, and the total is beyond comprehension. and all these things have yet to be created and adopted in the oriental countries. how rapidly the development may go on there, and what an enormous mass of capital will be absorbed, is clearly indicated by what has been done in a very few recent years. and so far we have left africa entirely out of the account, a country with a vast population and richly dowered with natural resources and with a capacity for rapid development. possibly the orientals will not suddenly become progressive to the degree here anticipated, though russia's eastern march has fairly rivalled our western march; and it must be borne in mind that to develop the appliances of western civilization we had all the experiments to make, all the crude preliminary work to do in creating the system, which the orient will receive from us in its present perfected form, and be able to go on without any mistakes, and thus enable them to adopt within a very brief time that which we gave the labors of several generations to discover, develop, and apply. how enormous, then, will be their absorption of western capital and gold. is it still maintained that the orientals lack the capacity for such development? then look at their achievements in every country to which they have emigrated, and especially in this. their progress here in the industrial arts, even while they were but a handful, was so rapid that the government was called on to restrict them. even now the papers contain alarming statements to the effect that japan is invading our markets with those specialties in the making of which we, but a little while ago, considered ourselves superior to all the rest of the world. and no tariff is high enough to keep them out. it is observed by all travellers in china and other oriental countries that there exists in as great a degree as in the west a desire for indulgence in those things classed as mere luxuries which, in all nations, absorb so great a share of its total wealth. every one who travels through the eastern countries marvels at the extraordinary richness and delicacy of those things adopted by them for ornamentation, luxury, and convenience. and they are of such a character as, far more than in the western world, involves the consumption of the precious metals. along with the national desire to adopt that which is useful and ornamental, a highly mimetic nature prompts them to seize upon and adapt with singular readiness that which is brought to their notice as being useful and constituting a salient feature of western civilization. to sum it all up, we have in asia somewhere near , , of people, who are certainly increasing by , , a year, probably many more, and these people pressed on by russia on the north and west, by great britain and france on the south, as well as by the wonderful energy of the japanese on the east. how much gold will all these people absorb in the future? and it should not be forgotten that not only is the present population to be supplied, but an increase of population is to be allowed for, which at ten dollars per capita would alone absorb the entire annual gold production above the amount used in the arts. if any one thinks this forecast fanciful, i only ask him to consider what has been done in the last thirty years, and then make his estimate. for what the possible absorption of the precious metals by the asiatic people may be, we need only to refer to what has been done by india. by reason of the development of her industries and resources caused by her intercourse with western nations she has imported in net excess of exports, from the years to , $ , , of gold and $ , , , of silver, or about one-seventh of the entire world's output of gold and about one-half of the world's output of silver during that time. professor shaw is authority for the statement that her demand for the precious metals is yet unabated and great as ever. when we remember that the average population of india during this time was only about , , , and that there are about three times as many people yet in asia who have even greater latent powers to absorb the precious metals, one can form some feeble estimate of what an exhaustive drain upon the gold and silver supply of the world will ensue when these nations awaken and develop their resources and energies through the stimulating influences of western ideas and example. having considered the possible momentous absorption of the precious metals by the asiatics, it may be well to consider what europe itself is likely soon to do in the same line. england, france, and germany are the three most substantial and commercial nations of europe, and their experience may be taken as an index. we find that these three use on an average $ . per capita of gold. to give the same to the rest of europe, including russia and turkey, will require, in addition to their present stock, $ , , , in gold, or nearly as much as the entire world's present stock of gold coin. if the example of france and the netherlands--two of the soundest and most conservative nations in the world--be similarly taken as an index to the probable use of silver, it appears that these two nations average $ . per capita. to supply the rest of europe to the same extent will require an addition of $ , , , to her present stock of silver, or about three-fourths as much as the present coined silver of the world. in view of these facts, is not the real question, not whether there is gold enough, but whether there is both gold and silver enough for the future monetary requirements of the world? does it not seem that the nations are soon to be confronted with this dilemma: that the product of the precious metals must be greatly increased--and is that possible?--or that for the want of gold and silver there must be a serious check to the progress of civilization? [transcriber's note: every effort has been made to replicate this text as faithfully as possible, including obsolete and variant spellings and other inconsistencies. text that has been changed to correct an obvious error is noted at the end of this ebook.] the new york stock exchange in the crisis of by h. g. s. noble president [illustration] garden city new york the country life press _copyright, _ the country life press introduction the year has no precedent in stock exchange history. at the present time ( ), when the great events that have come to pass are still close to us, even their details are vivid in our minds and we need no one to rehearse them. time, however, is quick to dim even acute memories, and wall street, of all places, is the land of forgetfulness. the new happenings of all the world crowd upon each other so fast in the financial district that even the greatest and most far-reaching of them are soon driven out of sight. this being the case, it has seemed to the writer of these pages that some record should be kept among the brokerage fraternity of what was so great an epoch in their history, and that this record could best be written down by one who happened to be very favorably placed to know the story in its entirety. of course the archives of the exchange will always contain the minutes of committees and other documentary material embodying the story of the past, but this dry chronicle is never likely to see the light except when unearthed by law courts or legislative committees. it seems worth while, therefore, to disentangle the essential thread of the tale of from the mass of unreadable detail in the minute books, and put it in a shape where those who are interested may look it over. this is not an easy task. to differentiate the interesting and the essential from the mass of routine material is, perhaps, not very difficult, but to present this segregated matter in a form that will not be monotonous is much more of a problem. the proceedings of a committee that has been in continuous session must, when written down, partake of the nature of a diary, and to that extent be tiresome reading. we shall, therefore, have to ask the indulgence of any one who happens to look into these pages, and beg him to pass over the form for the sake of the substance. that the substance itself is of deep interest goes without saying. it was given to the stock exchange to play a great part in a momentous world crisis, and it must be of profound interest to know how that part was played. stock exchanges are a relatively recent product of modern civilization, and like new comers in every field they are suspected and misunderstood. the most complex of all problems are economic problems, and the functions of stock exchanges form a most intricate part of political economy. it has, consequently, been a noticeable phenomenon in all contemporary industrial society that the activities of the stock markets have been a constant subject of agitation and legislative meddling. most of this meddling has been based upon ignorance and misunderstanding, but in a broad view this ignorance and misunderstanding are excusable owing to the novelty and above all the great complexity of the factors at work. one of the needs of the time, therefore, is that the public, and their representatives in the legislatures, should be enlightened as fast as possible with regard to the immensely important uses of these institutions, and to the operation of their very delicate machinery. the world crisis of forced upon us an object lesson on the question of speculative exchanges in general which ought to be of lasting profit. for years agitators had been hard at work all over the country urging the suppression of the cotton exchanges, and claiming that they contained gamblers who depressed the price of the cotton growers' product. in the summer of the dreams of these agitators were realized. the cotton exchanges were all closed and the cotton grower was given an opportunity of testing the benefits of a situation where there was no reliable agency to appraise the value of cotton. the result may be summed up in the statement that the reopening of the cotton exchanges met with no opposition. a similar object lesson was furnished in the case of the stock exchanges. they were all closed, and for a few weeks some profound thinkers in the radical press stated that the country was showing its ability to dispense with them. when the time for their reopening came, however, there was no agitation to prevent it. on the contrary it was hailed as a sign of the resumption of normal financial conditions in the united states. this evidence that the experience of has cast a much needed light on the public value of speculative exchanges, gives a further excuse for describing in some detail how the experience was passed through by that greatest of all these institutions, the new york stock exchange. the new york stock exchange in the crisis of the new york stock exchange chapter i the closing of the exchange the stock exchange is in the second century of its existence and in that long period of time (long relatively to the number of years during which stock exchanges have been known to the world) it has been forced to close its doors only twice. the first occasion was the great panic of , the after effect of civil war when trading was suspended for ten days; the second came with the outbreak of the world war in the close of july, . these two remarkable events differ profoundly in the gravity of the circumstances which brought them about. in , although the financial disturbance was one of the greatest the united states has ever experienced, the trouble was mainly local and did not seriously involve the entire world. the exchange was not closed in anticipation of a catastrophe but was obliged to shut down after the crash had taken place, in order to enable wall street to gather up its shattered fragments. the measure of this crisis was the ten days during which trading was suspended. far different from these were the circumstances surrounding july st, . on that eventful date a financial earthquake of a violence absolutely without precedent shook every great center of the civilized world, closing their markets one by one until new york, the last of all, finally suspended in order to forestall what would have surely been a ruinous collapse. the four and a half months during which this suspension continued stand to the ten days closing of in a proportion which fitly illustrates the relative gravity of the two historic upheavals. in the light of these facts we are justified in asserting that the events of are the most momentous that have so far constituted the life and history of the new york stock exchange, and consequently that some record of, and commentary upon, these facts may be of value to the present members of that body and of interest and profit to its future members. it is in the nature of panics to be unforeseen, but the statement may be truly made that some of them can be more unforeseen than others. the panic of was preceded by anxious forebodings in the minds of many well informed people, whereas the venezuela panic in , being due to the sudden act of an individual, came out of a clear sky. to the latter class distinctively belongs the great convulsion of . while the standing armies of europe were a constant reminder of possible war, and the frequent diplomatic tension between the great powers cast repeated war shadows over the financial markets, the american public, at least, was entirely unprepared for a world conflagration. up to the final moment of the launching of ultimata between the european governments no one thought it possible that all our boasted bonds of civilization were to burst over night and plunge us back into mediæval barbarism. wall street was therefore taken unaware, and so terrific was the rapidity with which the world passed, in the period of about a week, from the confidence of long enduring peace to the frightful realization of strife, that no time was given for men to collect their thoughts and decide how to meet the on-rushing disaster. added to the paralyzing effect of this unheard of speed of action, there came the disconcerting thought that the conditions produced were absolutely without precedent. experience, the chart on which we rely to guide ourselves through troubled waters, did not exist. no world war had ever been fought under the complex conditions of modern industry and finance, and no one could, for the moment, form any reliable idea of what would happen or of what immediate action should be taken. these circumstances should be kept clearly in mind by all who wish to form a clear conception of this great emergency, and to estimate fairly the conduct of the financial community in its efforts to save the day. the conditions on the stock exchange, when the storm burst, were in some respects very helpful. speculation for several years had been at a low ebb, so that values were not inflated nor commitments extended. had such a war broken out in , with the level of prices then existing, one recoils at the thought of what might have happened. furthermore, the unsettled business outlook due to new and untried legislation had fostered a heavy short interest in the market, thereby furnishing the best safeguard against a sudden and disastrous drop. this short interest was a leading factor in producing the extraordinary resistance of prices in new york which caused so much favorable comment during the few days before the closing. it were well if ill-informed people who deprecate short selling would note this fact. during the week preceding july st, therefore, in the face of a practical suspension of dealings in the other world markets, the new york market stood its ground wonderfully. the decline in prices, though it became violent on july th, showed no evidence of collapse. there was a continuous market everywhere up to the last moment, and call money was obtainable at reasonable prices. here was a perplexing problem when the closing of foreign bourses raised the question of how long we should strive to keep our own exchange open. to close the recognized public market for securities, the market which is organized and safeguarded and depended upon as a standard of values, is an undertaking of great responsibility in any community. to take this step in new york, which is one of the four preeminent financial centers of the world, involved a responsibility of a magnitude difficult adequately to estimate. upon the continuity of this market rest the vast money loans secured by the pledge of listed securities; numberless individuals depend upon it in times of crisis to enable them to raise money rapidly by realizing on security investments and thus safeguarding other property that may be unsaleable; the possessor of ready money looks to it as the quickest and safest field in which to obtain an interest return on his funds; and the business world as a whole depends upon it as a barometer of general conditions. add to this the fact that speculative commitments by individuals from all over the world, which have been based upon the expectation of an uninterrupted market, are left in hopeless and critical suspense if this market is suddenly removed, and it becomes apparent that to close the exchange is manifestly to inflict far-reaching hardship upon vast numbers of people. it is also sure to be productive of much injustice. in bad times sound and solvent firms are anxious to enforce all their contracts promptly so as to protect themselves against those that are overextended; an obligatory suspension of business compels these solvent firms, in many cases, to help carry the risks of the insecure ones and deprives the provident man of the safety to which he is entitled. when such facts as these are duly weighed by the agencies having the authority to close the stock market, it becomes clear that duty dictates a policy of hands off as long as a continuous market persists and purchasers continue to buy as the decline proceeds. this was well illustrated in the acute panic of when an enormous open market never ceased to furnish the means by which needy sellers constantly liquidated, and the possessors of savings made most profitable investments. to have closed the exchange during that crisis--assuming it to have been possible--would have been an unmixed evil. the violent decline in prices was the natural and only remedy for a long period of over-speculation, and it would have been worse had it been artificially postponed. considerations of this general character, up to july th, caused the authorities of the new york stock exchange to take no action, although the other world markets had all virtually suspended dealings. on july th, the evidences of approaching panic showed themselves. an enormous business was done accompanied by very violent declines in prices, and, although money was still obtainable throughout the day, at the close of business profound uneasiness prevailed. * * * * * on the afternoon of july th, the officers of the stock exchange met in consultation with a number of prominent bankers and bank presidents, and the question of closing the exchange was anxiously discussed. while the news from abroad was most critical, and the day's decline in prices was alarming, it was also true that no collapse had taken place and no money panic had yet appeared. the bankers' opinion was unanimous that while closing was a step that might become necessary at any time, it was not clear that it would be wise to take it that afternoon, and it was agreed to await the events of the following day. meanwhile, several members of the governing committee of the exchange had become convinced that closing was inevitable and, in opposition to the opinion of the bankers, urged that immediate steps be taken to bring it about. it may seem strange to people outside of wall street that the night before the exchange closed such apparent indecision and difference of opinion existed. it was, however, a perfectly natural outcome of an unprecedented situation. the crisis had developed so suddenly, and the conditions were so utterly without historic parallel, that the best informed men found themselves at a loss for guidance. during the evening of july th the conviction that closing was imperative spread with great speed among the large brokerage firms. up to a late hour of the night the president of the exchange was the recipient of many messages and telegrams from houses not only in new york, but all over the country, urging immediate action. the paralysis of the world's stock exchanges had meanwhile become general. the bourses at montreal, toronto and madrid had closed on july th; those at vienna, budapest, brussels, antwerp, berlin, and rome on july th; st. petersburg and all south american countries on july th, and on this same day the paris bourse was likewise forced to suspend dealings, first on the coulisse and then on the bourse itself. on friday morning, july st, the london stock exchange officially closed, so that the resumption of business on that morning would have made new york the only market in which a world panic could vent itself. the governing committee of the exchange were called to meet at nine o'clock (the earliest hour at which they could all be reached, for it was summer and many were out of town) and at that hour they assembled in the secretary's office ready to consider what action should be taken. in addition to the committee many members of prominent firms appeared in the room to report that orders to sell stocks at ruinous prices were pouring in upon them from all over the world and that security holders throughout the country were in a state of panic. it would be hopeless to try to describe the nervous tension and excitement of the group of perhaps fifty men who consulted together under the oppressive consciousness that within forty-five minutes (it was then a quarter past nine) an unheard of disaster might overtake them. it was determined that the governing committee should go into session at once as there was so little time to spare. just as they started for their official meeting room a telephone message was received from a prominent banking house stating that the bankers and bank presidents were holding a consultation and suggesting that the exchange authorities await the conclusion of their deliberations. there is an employee of the exchange whose duty it is to ring a gong upon the floor of the big board room at ten o'clock in the morning. until that gong has rung the market is not open and contracts are not recognized. this employee was instructed not to ring the gong until he had received personal orders to do so from the president; a permanent telephone connection was established with the office in which the bankers were conferring, and amid a horrible suspense the outcome of their conference was awaited. for twenty minutes this strain continued. it was a quarter before ten and only fifteen minutes remained in which to act. meanwhile the brokers were fast assembling upon the board room floor, orders were piling in upon them to sell at panic prices, ten o'clock was approaching, and although all felt that the opening should not be permitted no one had a word from the governing committee as to what was going to be done. * * * * * at a quarter of ten, no word having come from the bankers, the receiver of the telephone which had been connected with their meeting place was hung up, and the governing committee were called in session to take action. as they took their seats two messages reached them. one was brought by a prominent member of their body who had gone to the office of the president of the bank clearing house and had been told by him, after consulting with some of his fellow officers, "we concur; under no circumstances is it our suggestion, but if the exchange desires to close, we concur." the other was sent, through a member of the exchange, from one of the leading bank presidents who stated that closing would be a grave mistake and that he was opposed to it. the roll was called and thirty-six out of the forty-two members answered to their names. the chair having announced the purpose of the meeting, mr. ernest groesbeck moved that the exchange be closed until further notice. this motion was carried, not unanimously but by a large majority. mr. groesbeck then moved that the delivery of securities be suspended until further notice, and, this being carried unanimously, made a third motion that a special committee consisting of four members of the governing committee and the president be appointed to consider all questions relating to the suspension of deliveries and report to the governing committee at the earliest possible moment. the third motion, like the second was carried unanimously and the committee adjourned. it was then four minutes of ten. on the instant that the first motion closing the exchange was passed, word was sent to the ticker operators to publish the news on the tape. in this way the seething crowd of anxious brokers on the floor got word of the decision before ten o'clock struck. immediately upon the adjournment of the committee mr. george w. ely the secretary of the exchange ascended the chairman's desk in the board room and made the formal announcement, which was greeted with cheers of approbation. the president promptly appointed messrs. h. k. pomroy, ernest groesbeck, donald g. geddes, and samuel f. streit to constitute, with himself, the committee of five, and the long suspense and anxiety of four months and a half began. these events, which were crowded into a few feverish hours, and which seemed to those who participated in them more like a nightmare than like a reality, present some aspects that are especially worthy of detailed description. it is noticeable that the vote to close the exchange was not unanimous. this shows the immense complexity of a situation, which, even at the last moment, left some two or three conscientious men undecided. it is a fact of profound importance, and one that never should be forgotten by stock brokers or by the public, that the exchange closed itself on its own responsibility and without either assistance or compulsion from any outside influence. many false assertions by professional enemies of the institution have been made to the effect that the banks forced the closing, or that its members were unwillingly coerced by outside pressure. the facts are that the influential part of the membership, the heads of the big commission houses, made up their minds on the evening of july th that closing was imperative, and that on the morning of july st their representatives in the governing committee took the responsibility into their own hands, the bankers having been unable as yet to reach a conclusion. immediately after the closing the president of the exchange visited the prominent bank president who had served notice at the last moment of his disapproval of this procedure. he was found in his office in consultation with a member of one of the great private banking houses. both the bank president and the private banker agreed that, in their opinion, the closing had been a most unfortunate mistake. it was an opportunity thrown away to make new york the financial center of the world. the damage was done and would have to be made the best of, but had the market been allowed to open the banks would have come to the rescue and all would have gone well. these gentlemen admitted that the exchange was to some extent excusable owing to the negligence of the bankers in not notifying them that they were ready to protect the money market. it may safely be stated that within twenty-four hours after this interview neither the two bankers in question nor any one else in wall street entertained these opinions. the rise of exchange on london to $ --a rate never before witnessed; the marking of the bank of england's official discount rate to %, accompanied by a run on that institution which resulted in a loss of gold in one week of $ , , ; the decline of the bank's ratio of reserve from the low figure of % to the paralyzing figure of - / %; together with the fact that the surplus reserves of our new york clearing house banks fell $ , , below their legal requirements, were reasons enough in themselves to convince the most skeptical of the necessity of what had been done. the frightful gravity of the situation which had arisen became clearer and more defined in people's minds a few days after the first of august than it was on the morning of july st. european selling had been proceeding for some time before the outbreak of war and in the last few days before closing had been temporarily arrested by the prohibitive level of exchange and the risk of shipment at sea. the american public itself, however, was seized with panic on the evening of july th, and on the morning of july st brokers' offices were flooded with orders to sell securities for what they would bring and without reference to values. had the market been permitted to open on that friday morning the familiar wall street tradition of "black friday" would have had a meaning more sinister than ever had been dreamed of before. in all previous american panics the foreign world markets were counted upon to come to the rescue and break the fall. imports of gold, foreign loans, and foreign buying were safeguards which in past crises had been counted upon to prevent utter disaster. on this occasion our market stood by itself unaided; an unthinkable convulsion had seized the world; panic had spread; even the bargain hunter was chilled by the unprecedented conditions; there were practically no buyers. a half hour's session of the exchange that morning would have brought on a complete collapse in prices; a general insolvency of brokerage houses would have forced the suspension of all business; the banks, holding millions of unsaleable collateral, would have become involved; many big institutions would have failed and a run on savings banks would have begun. it is idle to speculate upon what the final outcome might have been. suffice it to say that these grave consequences were prevented in the nick of time by the prompt and determined action of the stock exchange, and by that alone. * * * * * any decisive step whether right or wrong always finds its critics. there were a few people who criticised the exchange for closing too soon and thought that the feeling of panic was increased by this action. these few were mostly converted from their opinions as the situation became clearer. there was a larger number who took the ground that the exchange had not closed soon enough, and urged that had the step been taken a few days sooner a considerable decline in values would have been prevented. it is strange that the latter critics did not stop to reflect on how great an advantage it was, all through the anxious days of august, to have had the new york market liquidated as far as it could be without disaster, and the level of closing prices relatively low. how vastly greater would have been the task of safeguarding the situation in the face of declining prices in the "new street market" had the closing prices on the exchange been ten or fifteen points higher. the truth is that the exchange was closed at the very best possible moment. the market was kept open as long as liquidation could safely be carried on (thus immensely diminishing the pressure to be withstood during the suspension) and it was closed at the very instant that a collapse was threatened. the above facts suggest some reflections with regard to the agitation for governmental interference with or control of the exchange. the act of closing necessitated the prompt decision of men thoroughly familiar with the circumstances in a period of time actually measured by minutes. if it had been necessary to reach government officials unfamiliar with details, convince them of the necessity of action, and overcome the invariable friction of public machinery, the financial world would have been prostrated before the first move had been made. if the exchange had been an incorporated body, and had been closed in the face of the difference of opinion and possible conflict of interests that existed at the time, it would have been possible for a temporary injunction to have been brought against its management restraining its freedom to meet the emergency. long before the merits of such an injunction could have been argued in court the harm would have been done, and ruin would have overtaken many innocent people. the full power of a group of individuals thoroughly familiar with the conditions to act without delay or restraint prevented a calamity which can safely be described as national. it is a fact, which will probably never be appreciated outside of the immediate confines of wall street, that the exchange was unexpectedly thrown into a position where the interests of the whole country were put in its hands, and that through the prompt and energetic action of the thirty-six men who faced the awful responsibility on july st financial america was saved. it is true that in saving the community they saved themselves, but so do the soldiers who win upon the battle-field, and in neither case is the obligation cancelled by the selfish considerations involved. when in future the perennial outcry against the exchange is being fostered by those whose minds are exclusively occupied with the evils that are inseparable from every human institution, let us hope that once in a while some friendly voice may be raised to remind the world of july thirty-first, nineteen hundred and fourteen. chapter ii the period of suspension during the same morning on which the momentous action of closing was taken the committee of five met and elected the president of the exchange as their chairman. the acute crisis was over, the danger of a cataclysm had been averted, but the situation that remained was big with problems full of menace and uncertainty. just what effect the closing of the market would have was a matter of doubt. on all previous occasions when the facilities of the exchange had been inadequate, or had been shut off, an unregulated market had established itself in public places and proceeded uncontrolled. thus during the civil war, when the volume of speculation had completely outgrown the limited machinery of the old board of brokers, a continuous market developed partly in the street and partly in a basement room called the "coal hole" and flourished during the day, while in the evening it was continued in the lobby of the fifth avenue hotel. this market did more business than was done upon the exchange itself, and a few years after the war, many of its members, who had organized into the "open board of brokers," were admitted to the stock exchange in a body. the suspension of business in was too brief to allow of the formation of a market such as the above, but, while it continued, cash transactions for securities were being carried on every day in the financial district. would results such as these obtain on this occasion? much depended upon the length of time before the exchange could re-open, but this in itself was a problem for which no one could venture a solution. again, a vast volume of contracts made on july th had been suspended. how long could the enforcement of these contracts be successfully prohibited, and above all how long would the banks and financial institutions which were lending money on stock exchange collateral refrain from calling loans when they were deprived of any measure of the value of their security? over its own members the new york stock exchange might exercise a rigid control, and it could safely be assumed that the other stock exchanges of the country would coöperate with it, but numberless outside agencies existed such as independent dealers unaffiliated with exchanges, and auctioneers, any of whom might establish a market. if declining prices were made through media of this description, and the press felt called upon to furnish them to the public, the closing of the exchange might not suffice to prevent panic and disaster. oppressed by these considerations, and by an appalling sense of responsibility, the new committee of five began its labors in the morning of july st. the first step decided upon was to communicate with the bank clearing house committee. mr. francis l. hine, president of the clearing house, was invited to meet the committee of five which he did, a little later in the day, and presented to them the following statement of the action taken by the clearing house. "there was a meeting of the clearing house committee this morning in view of the closing of the new york stock exchange. it was the opinion of the committee that the business and financial condition of new york and the entire country was sound but that the situation in europe justified extreme prudence and self-control on the part of the united states; that the closing of the stock exchange was a wise precaution by reason of the disposition of all europe to make it the market for whatever it wished to sell, and that in this country there was no occasion for any serious interruption of the regular course of business, either financial or mercantile." after the retirement of mr. hine, the chairman of the committee on clearing house of the exchange stated that all the checks given to the clearing house had been certified, and a notice was thereupon sent out instructing members to call for their drafts at the usual hour. thus all the differences due on the day's transactions of july th were settled, and a first encouraging step was taken. it was also decided to permit the offering of call money on the floor of the exchange. the committee held its second meeting on august st and the first of the long series of problems growing out of the closing of the market was at once presented to it. a letter from a brokerage house doing business with europe was received in which it was pointed out that "arbitrageurs" who had sold stocks in new york and bought them in london during the previous fortnight had made their deliveries by borrowing stock in new york; that the stock purchased in london was due to arrive on this side, and that the usual process of financing it by returning the previously borrowed stock had been cut off through the suspension of unfulfilled contracts. this was likely to lead to very grave embarrassment because call money had practically disappeared and houses to whom this foreign stock was consigned might not be able to meet their obligation to pay for it as it arrived. there being no arrivals of foreign stock expected that day, the committee deferred action, and thus gained time to think out ways and means of meeting the difficulty. the second problem presented came in the form of a request for permission to sell securities outside of the exchange. the firm of s. h. p. pell & co. had suspended, and a house which had been lending them money wished to be authorized to sell out the collateral. this was the first of many cases brought before the committee, during its long tenure of office, in which individuals sought for a special privilege to sell securities they were anxious to market while trading in general was forbidden. in this case the applicants were referred to that section of the constitution of the exchange in which it is provided that members having contracts with insolvents shall close out these contracts in the exchange when the securities involved are listed. the exchange being closed, this provision answered the question without necessitating any independent action on the part of the committee. * * * * * from the moment of the closing of the exchange a growing pressure arose to determine just when and how it should be re-opened. the desire for information on this point was widespread, and when the gravity of the situation became clearer to the community, a great anxiety developed that the re-opening should, above all, not be premature. realizing that the fear of sudden and ill considered action on this question was becoming dangerous to the restoration of confidence, the committee of five, at its meeting of august rd authorized the following statement. "announcement is made by the president of the stock exchange, in answer to inquiries as to when the exchange will open, that ample notice of such opening will be given." in spite of this notice fear that the stock exchange might act injudiciously lingered for some time longer until the constant reiteration by its officers of their intention to act only in conjunction and in consultation with the banks permanently allayed it. by monday, august rd, a steady stream of letters had begun to pour in upon the committee asking advice and direction upon any number of questions raised by the closing of the market, and offering every kind of suggestion and advice. in addition to this it soon became evident that interviews would have to be held with large numbers of people for the purpose of securing their cooperation, influencing their conduct, and obtaining information. the resolution of the governing committee by virtue of which the committee of five was brought into being merely stated that questions such as these should be considered and reported back "at the earliest possible moment." clearly here was an impossible situation. the immense detail of the work which was beginning to unfold itself could never be handled by so large a body as the governing committee itself. realizing that this difficulty must be met without a moment's delay the committee of five requested the calling of a special meeting of the governors for twelve o'clock the same day and presented to them the following resolution, which was unanimously adopted. "resolved: that the special committee of five, appointed by the governing committee on july st, be, and it hereby is, authorized during the present closing of the exchange, to decide all questions relating to the business of the exchange and its members." this action of the governing committee, while it was rendered necessary by the peculiar requirements of the situation, was unprecedented in the history of the exchange, for never before had such powers and such responsibilities been put in the hands of so few individuals. it was one of a series of "war measures" by means of which ends were achieved that would not have been reached in any other way. clothed with complete authority the committee met again in the afternoon of august rd and was at once confronted with a request for a ruling on the question of how far members were to be restrained from dealing outside of the exchange. after a lengthy discussion the following was approved as their opinion. "it was the intention in closing the stock exchange that trading should be stopped and it is the duty of loyal members to comply. if cases come into your office where it is absolutely necessary to trade, do so as quietly as possible and prevent the quotation from being published." it will be noticed that the policy adopted here was less stringent than what came later when the growth of an outside market increased the dangers of the situation. * * * * * with the question of outside dealings there at once arose the closely connected question of the danger arising from having price quotations of such dealings made public. the quotation machinery of the exchanges had been silenced by the closing of those institutions, but there remained the public auctioneers whose sales, if they took place, would be disseminated by the press and might spread panic among security holders and money lenders. the auctioneers in new york, boston, philadelphia, and chicago were at once approached, not only directly but through their bankers and other advisers. it was a disagreeable task as these auctioneers had to be urged to cease doing business, but it was rendered unexpectedly easy by the courtesy and friendliness with which they coöperated for the general welfare. so loyal were these various agencies that not a single sale, either of listed or unlisted securities, occurred in any auction room of the country until the urgent phases of the crisis had passed. it was not in auction rooms alone, however, that prices might be made; dealings were liable to occur in any unexpected locality, and it was urgent that prices of an alarming character should be kept from the public. for this most important purpose the coöperation of the press was absolutely necessary. to obtain this, at the outset, was no easy matter. the closing of the stock exchange placed the financial news writers of the daily press in a curious position. with them were allied that group of financial writers connected with the various wall street news agencies, the several financial journals that are exclusively devoted to wall street affairs, and the financial correspondents of out of town newspapers. all told there were about one hundred salaried men in these various groups, men experienced in financial affairs, widely known and respected, engaged in a work which had never been interrupted and which, as far as could be foreseen, promised to furnish them with a continuous vocation. the first effect of the war was a general curtailment of newspaper advertising, a rise in the price of paper, and a greatly increased cost of the news of the day owing to excessive cable charges for foreign dispatches. thus the newspapers suffered a rapidly diminishing revenue, and they found it necessary to discharge many of their employees and to reduce the salaries of others. with the stock exchange closed, naturally the salaried financial writers were among the first to feel this hardship. those whose services were retained throughout this crisis were confronted with divided responsibilities. it was their duty to interpret a mass of more or less fantastic rumors at a time when nerves were overwrought and points of view magnified and distorted. they wished to prevent the publication of anything of an incendiary nature, while at the same time a necessity arose for presenting to the public the news to which it was entitled. placed in such a position there was a very natural impatience here and there to have the exchange reopened, while now and then a tendency became manifested to publish certain news of the day which, while interesting to the public, tended to handicap the efforts of those bent only on reassurance and calm counsel. at times it became somewhat difficult to prevent the publication of some of these matters, particularly of the prices made in the so called "gutter" market which sprang up in new street. and yet on the whole nothing could have exceeded the fairness and the spirit of coöperation of these gentlemen in this trying time. one newspaper even went so far as to cease the publication of a remunerative page of small advertisements having to do with dealings in outside securities. this was done at the request of the committee without hesitation. others coöperated in the suppression of advertising on the part of questionable people, while correspondents of out of town newspapers, both foreign and domestic, cheerfully acceded to requests to suppress all disturbing financial reports. in a word, the financial department of the whole newspaper press accepted the situation philosophically, bearing their losses without complaint and supporting without cavil the restrictive measures which it was necessary to employ. this loyal conduct of the press and of the auctioneers was one of the great factors without which the critical days of the suspension of business could not have been successfully surmounted. * * * * * it will be remembered that in the morning of july st, the governing committee not only voted to close the exchange but also declared that the delivery of securities should be suspended until further notice. the motive of this latter action was to prevent the possible insolvencies that were likely to be forced if purchasers were compelled to pay for their securities in the absence of a call money market. at the earliest moment that attention could be given to it the committee of five requested the chairman of the stock exchange clearing house to place before it the exact figures of the outstanding contracts. these figures when presented showed that there were stock balances open on clearing house order amounting to $ , , and ex-clearing house contracts amounting to about $ , , . roughly speaking there had been about $ , , of stock sold in the exchange on july th, the delivery of which to the purchasers had been suspended by the action of the governing committee. obviously a first great step toward clearing up the situation and preparing the ground for the ultimate reopening of the market was to get this great volume of contracts settled, so that if any failures were inevitable they would be disposed of beforehand. it being probable that many of the purchasers of stock on july th were in a position to finance their purchases even in the midst of the crisis the committee deemed it wise to offer every possible facility for the immediate settlement of contracts when the purchaser was in this position. they therefore issued the following notice on august th: "the special committee of five appointed to consider questions connected with the closing of the exchange state that the resolution of the governing committee suspending deliveries until further notice does not mean that settlement may not be made by mutual consent wherever feasible. the clearing house of the exchange is prepared to advise and assist, and inquiries should be made in person there." at the request of the committee of five the committee on clearing house at once undertook the task of assisting members of the exchange in closing up these contracts and used its clerical force for that purpose, thus involving much careful and detailed work. they held daily continuous meetings, giving their personal attention in assisting members, and using a care that involved both tact and arduous labor. through their efforts such extraordinary progress was made, in this complex and difficult task, that by september nd announcement was made that the delivery of all clearing house balances had been completed with the exception of those of the few firms whose affairs were in the hands of receivers. these were settled shortly afterwards and at the same time the great volume of ex-clearing house contracts were also completely fulfilled. this is one of the most extraordinary and gratifying experiences of the great crisis. in about seven weeks, at a time when money was unobtainable and the condition of panic was at its height, this huge volume of unsettled contracts was met and consummated by voluntary coöperation and without compulsion of any kind. in some few cases selfishness or indifference delayed action on the part of individuals, but these were all brought to a final adjustment by the influence and persuasion of the committee. this achievement not only reflects undying credit upon the members of the exchange by showing both the sound condition of their business and their zeal to act for the general welfare, and creates a deep sense of obligation to the clearing house committee who for many long weeks worked unceasingly to overcome the difficulties that beset the path, but it justifies and confirms the wisdom of the new york stock exchange in adhering to the practice of daily settlements. in all the great european centers, where trading on the fortnightly settlement basis is in vogue, the restoration of dealings was terribly complicated by the herculean task of clearing up back contracts that extended over many days. in new york, when conditions so shaped themselves as to warrant reopening the exchange, the back contracts of its members had all been settled up _two months_ before. had our system, like the european, involved "trading for the account," every additional day of back contracts added to the $ , , worth of july th would have stood in the way of a final settlement, and the reopening of the market (which was long postponed as it was) would have been much further delayed. * * * * * on august th, a problem which had loomed upon the horizon the day after the closing of the exchange, was brought squarely before the committee. a delegation of houses dealing in securities for european account appeared and stated that approximately $ , , to $ , , of securities were to arrive "this week, beginning to-morrow, wednesday," and that they would be accompanied by sight drafts which would have to be financed. this alleged great volume of securities had been sold in this market for foreign account and borrowed in new york in order to make the immediate deliveries that our day to day system requires. the suspension of the fulfillment of contracts declared by the exchange made it impossible to return this borrowed stock, and the houses doing this business were therefore obliged either to allow the drafts to go to protest or finance the incoming stock until the free enforcement of contracts was again permitted. with money practically unobtainable, and general panic prevailing, it is needless to say that these statements of the delegation of houses doing foreign business were a severe shock to the committee of five. a remedy proposed by one or two of these banking houses was that the people from whom they were borrowing stock should be required to take it back. this simple expedient, while eminently satisfactory from the standpoint of the borrower of stock, was not very helpful to the committee, as it would merely have shifted the problem of financing the stock from one set of brokers to another, and would have raised the dangerous question of a general enforcement of contracts in borrowed securities. it was an interesting illustration, among some others to be subsequently experienced, of the manner in which certain minds can become entirely absorbed in that aspect of a question which deals solely with personal interest. after careful discussion it was determined that the coöperation of the clearing house banks should be sought in solving the difficulty. the committee of five thereupon sent a communication to the bank clearing house committee setting forth all the circumstances connected with the expected consignment of securities as stated by the delegation of banking houses and requested an appointment to meet them, or a sub-committee of their members, and discuss the matter. the appointment was obtained for the following morning, august th, and the chairman and mr. h. k. pomroy were appointed a sub-committee to confer with the bankers and directed to take mr. richard sutro with them as a representative of the houses doing foreign business. at the meeting with the clearing house bankers it was very properly decided that a solution of the problem could only be reached when an exact knowledge of the amount of money required to pay for the incoming securities had been obtained, the figures stated by the banking houses which were seeking assistance being only estimates. the representatives of the stock exchange agreed to obtain this exact information at once, and having returned and stated the circumstances to the committee of five, it was directed that the following communication be sent to a list of members of the exchange who, it was understood, were to have foreign drafts presented to them:-- "the special committee of five requests that by three o'clock to-day they may have in their possession from you information as to the number and amount of drafts which you expect will be presented to you from europe on any steamers arriving to-day or subsequently. they would particularly like to know how much you expect on each steamer. in case any of these have already been financed please so state in your communication. "the committee would also like to have you tabulate in your reply, so far as you can, the banks, trust companies or bankers from whom you expect drafts to be presented. "this communication is confidential and it is requested that you do not discuss this matter with any one outside your own firm. your answer is expected by bearer, in order that the financing of these drafts may be facilitated." by three o'clock, the same afternoon, replies had been received from thirteen houses that they expected securities on the _olympic_ and _mauretania_, and had also received advices of other securities forwarded but did not know on what steamers; the drafts to be presented they said would be approximately for four and one half millions. replies from twelve other houses stated it as a possibility but not a certainty that securities might reach them on the steamers above mentioned to the amount of about four millions; and, finally, twelve firms sent replies stating that they either expected no securities or had made the necessary arrangements to finance what was coming. these facts--so far below the estimate at first presented to the committee--came as a great relief, and were at once taken before the bank clearing house committee. after a careful discussion with these gentlemen the committee of five again met and sent the following communication to the firms who had reported that securities and drafts were about to be tendered to them. "members of the exchange to whom foreign drafts are presented for payment, are requested to confer with the committee of five at a.m. to-morrow, thursday, the th inst., in the secretary's office, with details of such transactions in hand, when efforts will be made to facilitate the adjustment." the next morning the few firms who had drafts to meet on that day were provided with the necessary loans by two banks and a trust company at per cent. the amount of securities due from europe was undoubtedly large, but the great bulk of it had not been shipped and the shipment of it was postponed for many weeks afterward. the extraordinary statement that $ , , or $ , , were about to be landed in new york is interesting as showing the hysterical state of mind to which many business men had been reduced at that time. the actual amount of stocks sold to arrive, against which borrowings had been effected in new york, was finally shown to amount to $ , , . that this amount was not increased at an embarrassing period in these important negotiations was due in large measure to the action of the committee in calling together the various foreign arbitrage houses, and securing from them an agreement to cable to their correspondents in europe not to make further shipments of securities, because borrowed stocks could not be returned and deliveries effected. this as it turned out was an important step in the right direction. * * * * * owing to the sudden and severe pressure of business to which the committee of five was subjected almost from the moment of its organization, some matters were unavoidably overlooked which should have had immediate attention. conspicuous among these was the question of the rate of interest to be charged upon open contracts which the action of the governing committee had suspended. this matter was not reached until the meeting of august th, when the following ruling was made: "the special committee rules that interest on the delivery at the rate of per cent. shall accrue from august th on all unsettled contracts for delivery of securities, except that interest shall cease when a receiver of securities gives one day's notice to a deliverer that he is ready to receive and pay for same. "the special committee further rules that sales of bonds on july th carry interest at the rate specified in the bond to july st, and that between july st and august th they are 'flat'; interest thereafter to be per cent. on the amount of money involved, subject to the exemption stated in the previous ruling." in view of the fact that no action had been taken up to august th and that a number of private settlements had been arranged in the meantime the committee thought it wise to avoid a retroactive ruling, and imposed the per cent. rate from august th. injustice was done, in some cases, by permitting a lapse of five days when no interest charge was required, but this injustice was cheerfully borne owing to the unusual exigencies of the situation. on this same day the committee received the first communication which indicated that some members of the exchange had not yet appreciated the necessities and dangers of the situation. this came in the form of a letter from the baltimore stock exchange which contained the following passage:-- "a representative new york stock exchange house has been guilty of going directly to one of the trust companies here, and made offerings of bonds dealt in on both your exchange and our own, at a large concession." the committee directed the secretary to make the following reply:-- "in the matter of your letter of august , , i am instructed by the special committee appointed by the governing committee on july , , to inform you that in the opinion of said committee the offering down of securities in places where money is loaned on securities is most reprehensible, and that members of this exchange ought not to engage therein. if possible, i would like the name of the member of the new york stock exchange who made such offer." it may be urged in extenuation of the act of the stock exchange house that, august st being only one day after the closing, a thorough appreciation of the gravity of the situation had not yet become general. * * * * * by august th the work of the committee had assumed the form that was to continue unremittingly until the exchange reopened four and one half months later. a constant stream of communications either by letter or by personal appearance filled the days sometimes from nine o'clock in the morning until six in the afternoon. the communications asked advice and made suggestions of every conceivable kind, but, above all, they were loaded with problems and difficult situations which had grown out of the breakdown of the financial machinery in general. the labors of the committee in striving to straighten out this formidable tangle of business affairs led to their issuing a series of rulings, which were binding upon all members of the exchange. these rulings were sent over the "ticker" whenever they were passed, but on august th it was decided to supplement the "ticker" by distributing the rulings in circular form, and thus insure the possession by every member of a full copy of the entire number. it is a gratifying fact, both from the standpoint of the committee and of the stock exchange, that no one of the very numerous rulings was a failure or had to be rescinded, and that they were all accepted without cavil or serious criticism by the members. in the relatively few cases where an indisposition to live up to these rulings was brought to the attention of the committee, an appeal from them to loyalty and good judgment never failed to bring a recalcitrant member to terms. on this day, august th, a special circular was sent out to answer the constant inquiries as to whether purchases or sales of securities were in any way permissible during the period of closing. it contained the following: "when the governing committee ordered the exchange closed it was their intention that all dealings in securities should cease, pending the adjustment of the financial situation and the reopening of the exchange. "it is possible that cases may occur where an exception would be warranted provided such dealings were for the benefit of the situation, and in no sense of a speculative character, or conducted in public. any member, however, taking part in such transactions must have in mind, his loyalty to the exchange, whether or not he is living up to the spirit of the laws, and that he is not committing an act detrimental to the public welfare." on august th the question of the reopening of the exchange again came to the front. a letter from baltimore was received urging that the exchange reopen for dealings in bonds only, and the newspapers were so urgent for some statement on the subject that the committee authorized the following: "the special committee of five will not recommend to the governing committee the reopening of the exchange until in their judgment the financial situation warrants it, and as before stated, ample notice will be given of the proposed opening." the question of borrowed and loaned stocks came up at this time in two aspects, one the interest rate to be charged, and the other the determination of the market price at which such loans should stand. with regard to the former the committee ruled on august th that "until further notice, from and after this date, the interest rate on all borrowed and loaned stocks shall be %." in the latter case they ruled (august th) that "borrowed and loaned stocks must be marked to the closing prices on thursday, july th, , at the request of either party to the loan." the effect of this second ruling was to establish the policy of regarding the closing prices of july th, as the market for securities, so that all loans, whether cash loans or stock loans, should be figured at this level. the making of any prices below those of july th was to be resisted by every available means, and the money-lending institutions were to be urged to coöperate by recognizing them as a basis for exacting margins. as long as this policy could be successfully carried out the danger of financial collapse would be averted. it having been ruled that a lender of stock, by notifying the borrower of his willingness to take the stock back, could stop the interest charge on the contract, a considerable demand arose for new stock loans to replace those in which this privilege had been exercised. the matter of facilitating these new stock loans was taken up by the stock exchange clearing house, and this together with the negotiations for voluntary settlement of back contracts now brought upon the clearing house committee that great volume of work which increased steadily until the reopening of the exchange. one step tending to increase this work was taken on august th, when the committee ruled as follows: "whenever a loaner of stocks gives one day's notice of willingness to have the same returned and the borrower fails to so return, the interest thereon shall cease. the clearing house of the exchange is prepared to advise and assist in making new stock loans and inquiries should be made in person there." the effect of this ruling was to create a borrowing demand for stocks at current interest rates and the clearing house committee became the agency through which these stock loans were negotiated. a further ruling, on august th, relative to the interest rate was to this effect: "that on all loans of stock made between members after this date the rate of interest is subject to agreement between the parties to the transactions, but should not exceed per cent." by the eleventh of august the question of the growth of an outside unregulated market began to force itself upon the attention of the committee. all the organized stock exchanges of the country were closed, the auctioneers had loyally agreed to abstain from making sales, the "curb" or recognized outside market was faithfully coöperating to prevent dealing, the unaffiliated bankers and money institutions were refraining even from the private sale of bonds in which they were interested, so that for a brief period there was a practically complete embargo on the marketing of securities. naturally enough, so absolute a restraint brought on a pressure which was bound to force a vent somewhere. at first an occasional group of mysterious individuals were seen loitering in new street behind the exchange. a member of the committee of five, who was prone to see the humorous side of things even in those dark days, remarked as he observed them late one afternoon "the outside market seems to consist of four boys and a dog." before long, however, this furtive little group developed into a good sized crowd of men who assembled at ten o'clock in the morning and continued in session until three in the afternoon. at first they met immediately outside of the exchange, but later they took up a position south of exchange place and close to the office of the stock exchange clearing house. their dealings increased gradually as time went on and never ceased entirely until the exchange reopened. in all probability the existence of this market was a safeguard as long as its dimensions could be kept restricted. an absolute prohibition of the sale of securities, if continued too long, might have brought on some kind of an explosion and defeated the very end which it was sought to achieve. this irregular dealing, as long as it remained within narrow limits and was not advertised in the press, furnished a safety valve by permitting very urgent liquidation. it was, however, continually accompanied by the great danger that it might grow to large and threatening proportions. if, in consequence of the facilities which these unattached brokers were offering, responsible interests should begin to take part in and help to create an open air market, the very disasters which the closed exchange was intended to prevent might be brought about. it was necessary, therefore, that the stock exchange authorities should do all in their power to hold the development of this market in check. with this end in view they not only prohibited their own members from resorting to it, but they exerted what influence they could upon others not to lend it their support. the banks and money lenders were urged not to recognize the declining prices which were established there as a basis for margining loans, as such recognition might tend to increase the dealings. one or two large institutions which, at first, were disposed to finance the operations conducted in the street were persuaded to refrain from continuing to do so, and the press, while giving publicity now and then to the very low figures at which some leading stocks were quoted, was induced to avoid the practice of regularly tabulating these prices. it having become apparent that some members of the exchange, while obeying the mandate to do no trading in new street, were indirectly helping the practice along by clearing stocks for the parties who were making the market there, the committee ruled (august th) "that members of the exchange are prohibited from furnishing the facilities of their offices to clear transactions made by non-members while the exchange remains closed." the final outcome was that the new street market did more good than harm. it relieved the situation by facilitating some absolutely necessary liquidation, and never grew to such proportions as to precipitate disaster, but during the long suspense and uncertainty of the closing of the exchange it was a constant and keen source of anxiety to the committee of five. * * * * * toward the end of the first fortnight after the closing of the exchange, the communications received by the committee made it plain that there were quite a large number of purchasers, attracted by the low figures reached in the last day's trading, who were ready and anxious to buy securities at or above the closing prices. obviously purchases of this kind by investors who happened to be in a position to take securities out of the market, promised to bring relief to interests whose position was critical and thus to fortify the general situation. this facility could not be extended in the form of a general permission to the members of the exchange to make transactions privately at or above closing prices. to have permitted as far reaching a relaxation of restraint as this in so critical a time would have entailed too great a risk. if any one of the eleven hundred members had proved disloyal in the exercise of so dangerous a privilege and privately negotiated sales at prices below those of the closing, the whole plan of sustaining values might have been jeopardized. after considering the matter very carefully the committee concluded that the machinery and clerical force of the stock exchange clearing house could be advantageously used to supervise and control transactions of this character, and, on august th, they issued the following ruling: "members of the exchange desiring to buy securities for cash may send a list of same to the committee on clearing house, new street, giving the amounts of securities wanted and the prices they are willing to pay. "no offer to buy at less than the closing prices of thursday, july , , will be considered. "members of the exchange desiring to sell securities, but only in order to relieve the necessities of themselves or their customers, may send a list of same to the committee on clearing house, giving the amounts of securities for sale. "no prices less than the closing prices of thursday, july th, , will be considered." thus was established a market in the stock exchange clearing house which was kept in operation until the complete reopening of the exchange. immense labor and difficulty were brought upon the clearing house committee in order to handle and supervise this unusual method of trading, and the extraordinary success with which it was carried through has entitled them to the lasting gratitude of their fellow members. the business was conducted by having a large clerical force tabulate the orders received and bring purchasers and sellers together who were willing to trade in similar amounts and at similar prices. in order to consummate a trade the clearing house would notify both parties, leaving it to them to carry out the delivery and payment, and requiring them to inform the clearing house when the transaction had been completed. * * * * * the first effect of furnishing this means for establishing a restricted market was very encouraging. a very considerable amount of business began at once to be entered into. many people with ready money, who felt that securities had fallen to bargain prices, appeared as purchasers and relieved the necessities of those who had been embarrassed by the war crisis. a little later, however, when the progress of the war took on a more discouraging aspect, this "clearing house market" fell to the arbitrary minimum of the closing prices with a large excess of selling as compared to buying orders, and the "new street market" grew in proportion. during the darkest days of depression the prices of a few leading stocks such as u. s. steel and amalgamated copper dropped in the street ten points or more below their july th closings, and business in the clearing house almost ceased, but in the later autumn, when the rapid rise in the volume of american exports began to foreshadow a readjustment in foreign exchange, the new street prices rose again to the clearing house level and a relatively small business in the "outlaw" market was transformed into a relatively large business conducted under the supervision of the exchange. it is an interesting detail, worth mentioning, that the ruling of the committee quoted above, which established a market in the clearing house, used the permissive word "may" in stating that orders to buy and sell might be sent to that institution. this was soon taken advantage of by a few individuals who proceeded to conduct private transactions among themselves. their excuse was that if transactions were merely permitted in the clearing house it became optional as to whether they should take place there or elsewhere. within a few days thereafter the committee amended the ruling by substituting the word "must" for the word "may." the great responsibility attached to promulgating rulings, which were to be the law during this critical period, is made more apparent when it is realized that the ill considered use of a single word might bring on unforeseen and perhaps dangerous consequences. during the month of august a constantly increasing pressure from every conceivable direction was exerted to break down the dam with which the committee was striving to hold back the natural flow of dealings in securities. by letter and by personal appearance before the committee individuals, in and out of the exchange, strove to induce them to countenance transactions at prices below the arbitrary level of the closing. in addition to this agitation among individuals and firms, restlessness began to show itself in some of the other exchanges. at one time the stock exchange of a great neighboring city, which had permitted restricted dealings exactly similar to those carried on in new york, wished to have those dealings regularly quoted in the newspapers; at another time a movement developed on the consolidated stock exchange to establish some kind of restricted public dealing on their floor. the committee of five were obliged to labor hard and assiduously to hold this pressure back and keep the dam intact, and its efforts were ably and loyally seconded by the committee of the bank clearing house whose great influence was unremittingly exerted to prevent the danger of premature action of any kind. on september st the clearing house banks were anxious to determine what was the amount, measured in money, of securities sold in new york by europe and not yet received. the object of obtaining this information was to know what demand would be made upon the loan market if, at any time, these securities should be shipped. at the suggestions of the bankers the committee of five summoned before them representatives of all the houses doing a foreign business and requested them to send answers, as promptly as possible, to the following two questions: _first:_ "amount due europe for securities received to date and not yet paid." _second:_ "amount due europe for securities already sold but not received from europe." on the following morning answers were handed in showing that the amount received and not yet paid for was $ , . , and that the amount due europe on securities sold but not yet received was $ , , . . the rapidity and accuracy with which this important information was obtained, without any publicity or disturbance of confidence, is interesting as showing the efficiency of the intimate coöperation between the banks and the stock exchange. * * * * * among the many agencies for dealing in securities, whose activities were suddenly cut off on july st, the first in importance next to the stock exchanges themselves were the so-called bond houses. these firms, which included in their number many prominent private bankers, were dealers on a great scale in investment bonds, and when the thunderbolt of war struck they were carrying large lines of those bonds on borrowed money which, in the ordinary course of events, would have been placed among their numerous clients. when the crisis of early august had developed, all these houses (some of them not being members of the stock exchange) loyally coöperated in closing up the market, and abstained from negotiating their securities even in the most private manner. by the middle of august, however, a number of them began to show decided restlessness over the embargo upon their business. the cutting off of their accustomed income, while expenses continued as usual, was not what influenced them, for this hardship was shared by all wall street, but the enforced carrying of securities in bank loans at so critical a time when they felt that these securities might be disposed of became a grievance. it was urged by many of them that the careful placing of these securities would be a great aid to the situation because every investor who made a purchase would facilitate the liquidation of their loans, ease the strain on the money market, and diminish the volume of securities for sale. there was undoubtedly much to be said in favor of this view when looked at from the standpoint of the effect upon the bond houses themselves or upon the loan market, but there was another aspect of the question which was less reassuring. if these houses started, at this terribly critical time, to place their securities among their clients at declining prices, and if these prices became known, which they certainly would, no one could foretell what the consequences might be. many large institutions, such as insurance companies and savings banks, had funds invested in bonds, and many money lenders held loans upon bonds as security; what would be the effect upon these interests if a declining market even in unlisted bonds should be publicly quoted? influenced by this grave uncertainty the committee of five resisted the pressure brought upon them by certain representatives of the bond dealers who raised this question first on the nineteenth of august. several of these gentlemen represented important firms and institutions which were not members of the exchange, and their freedom from any obligation to be controlled by the committee created a situation which threatened to become strained. in all cases of this kind, where an independent outsider and the committee could not come to an understanding, the practice had become established of appealing to the clearing house bankers to act as a court of last resort. the banks, with their power to call loans, exerted an influence which could reach every nook and corner of the business world, and, at the same time, their immense facilities for feeling the financial pulse made them the best judges of what risks it was as yet safe to take. a series of meetings consequently took place between the bank clearing house committee, the representatives of the bond houses, and the committee of five. at the first of these meetings the bank presidents leaned very decidedly to the views of the stock exchange, and it was decided to postpone any consideration of a departure from the status quo for at least a fortnight. the general situation remaining very critical all through august, no further steps were taken until september th. by that date a new factor had intruded itself into the situation. certain corporate obligations were about to come due and the refunding of these obligations, whether in fresh issues of bonds or in short term notes, was going to make it necessary to withdraw the prohibition against placing investment securities upon the market. when this necessity became clear it was decided that some strict supervision and safeguarding of the sale of bonds and notes was necessary and the so-called "committee of seven," appointed by the bond dealers, were requested to formulate a plan for this purpose. this committee of seven consisted of members of the firms of: brown brothers & co.; guaranty trust co.; harris, forbes & co.; kissel, kinnicutt & co.; wm. a. read & co.; remick, hodges & co., and white, weld & co. on september th, this committee issued the following notice to bond dealers: "your committee is pleased to report that new york city's financial needs have been taken care of satisfactorily, thereby considerably clearing the foreign exchange situation which existed when our communication of september d was sent out. "the committee is therefore of the opinion that the placing of securities owned by dealers with their private customers should be approved where the securities can be sold without disturbing the collateral loan situation and your committee will be glad to continue to advise whenever such opportunities arise. anything tending toward public quotations or the creating of the impression of an active or even semi-active market would unquestionably seriously disturb the loan situation. "transactions with bargain hunters should not be countenanced and your committee will not approve the closing of transactions coming under this head. prices should conform to the spirit which has prevailed during the past few weeks. "recognizing the support which banks and other lenders of money have given to dealers in securities, it should be the policy of such dealers when securities are sold to apply the proceeds toward the liquidation of loans. "the committee has considered questions of maturing obligations of cities and corporations and believes that the present situation does not warrant any attempt to issue long time bonds, but that such refunding should be accomplished through short time financing. "the clearing house committee and the stock exchange committee have expressed appreciation of the coöperation shown by the dealers in listed and unlisted securities and if all will endeavor to live up to the spirit of the policy thus far adhered to we are sure there will be no cause for criticisms on the part of the banks or the stock exchange committee. "your committee of seven will continue to meet in the directors' room of the chase national bank daily, from a.m. to m., for advice on any cases where we can be of any assistance whatever." the practical plan adopted was as follows: bond houses having securities of their own for sale could place them with their clients at prices approved by the committee of seven. all purchasers and sellers of bonds, acting as brokers only, were required to file their orders with the committee of seven when dealing in unlisted bonds, and with the stock exchange clearing house when dealing in listed bonds, and these two agencies were empowered to determine minimum prices below which sales could not be made. it will be seen that a very important step in the direction of relaxation of restraints was here taken. not only was the prohibition of all dealings which had marked the beginning of the crisis withdrawn, but prices below the closing sales of july th were to be permitted subject to the supervision of a committee. * * * * * as has already been stated, the committee on clearing house had their hands full from the time the exchange closed, first with bringing about the settlement of the contracts of july th, and secondly with carrying on the business of making new contracts for members wishing to trade in securities at or above the closing prices. it was impossible, therefore, for the members of that committee to give personal attention to the difficult problem of determining the prices below which listed bonds should not be sold. to meet this difficulty it was decided that a small additional committee of men known to be thoroughly familiar with the bond business should be organized, and that it should be their duty to control the liquidation of listed bonds. the carrying out of this plan at first met with a technical obstacle. the power to appoint a special committee rested exclusively with the governing committee of the exchange; in order to secure action a special meeting of that body would have to be called; in the early weeks of september sentiment was still in so critical a state and every act of the exchange was so keenly watched that it was feared the holding of an extraordinary meeting might start rumors and cause alarm. in view of these considerations the committee of five hit upon the makeshift of inviting three members of the governing committee, who possessed the desired qualifications, to volunteer their services as an advisory body in the matter of fixing prices for listed bonds. the three members selected were messrs. c. m. newcombe, vice president of the exchange, w. h. remick, and w. d. wood. on the th of september these three gentlemen cheerfully undertook the difficult and onerous task urged upon them, and for three months they abandoned their own private interests and devoted their entire time to it. owing to the intelligent and judicious manner in which they handled the delicate problem of conducting a liquidation in listed bonds that should at once be effective and yet not lead to demoralization, they placed themselves among the foremost of those to whom the financial community owes a debt of gratitude. * * * * * by the latter part of september methods, as described above, had been found for facilitating a restricted liquidation of listed stocks, and of listed and unlisted bonds. nothing, however, had been done to make an outlet for unlisted stocks. the "curb" market and certain prominent unaffiliated houses dealing in these securities had loyally played their part in suspending dealings, but symptoms began to show themselves of possible revolt, and the committee of five set to work to find a safety valve for this department also. the device of a supervisory committee had proven so efficacious in other directions, that it was naturally turned to in this instance. the circumstances differed, however, in one particular. the bond dealers had spontaneously created for themselves the very efficient committee of seven who took their affairs in hand, but the interests involved in unlisted stocks did not show the same solidarity, and it was necessary for the committee of five to take a hand in initiating action. with this end in view they consulted mr. herbert b. smithers, of the firm of f. s. smithers & co., concerning the feasibility of having a committee formed to pass upon and control a resumption of dealings in unlisted stocks. mr. smithers was singled out for the reason that he was a member of the stock exchange whose firm was among the most prominent dealers in these securities, and the prompt and energetic way in which he undertook the task proposed to him soon convinced the committee that they had not erred in resorting to him. he set about organizing a committee at once and on september th he appeared before the committee of five accompanied by messrs. a. c. gwynne, f. h. hatch, a. h. lockett, and e. k. mccormick. these gentlemen announced that they were willing to act, with mr. smithers as their chairman, and a plan for the control of the market in unlisted stocks was agreed upon. in order to clothe this committee (which included two stock exchange members, two representatives of prominent outside dealers, and the president of the curb association) with authority, the committee of five directed members of the exchange to submit proposed dealings in unlisted stocks to them and abide by their rulings. the stock exchange committee could, of course, only control its own members, but it being a fact that a very large part of the unlisted business emanated from stock exchange houses, it was probable that their action would determine that of unattached dealers. this expectation was, in the main, borne out, and business in unlisted stocks began to be carried on actively under the jurisdiction above described. it is necessary to record, however, in the interest of preserving a correct picture of the happenings of this momentous time, that the smooth and gratifying operation of the various other committees, which sprang into being to handle the numerous problems presented, was not entirely repeated in this case. the conditions surrounding unlisted stocks seemed on the surface to be identical with those pertaining to unlisted bonds. in both cases a business that was partly in the hands of stock exchange members and partly in those of outside concerns was to be presided over by a mixed committee representing both interests. in the case of the bond committee of seven this supervision was accepted and cheerfully lived up to by practically all concerned. a different situation soon developed in unlisted stocks. almost immediately certain individuals in the business began to assert that the unlisted committee was a self appointed body which did not represent the people most concerned, and that being themselves dealers in the properties the trades in which were under their supervision, these gentlemen could not be trusted to act fairly in making their rulings. after much preliminary growling which vented itself in interviews with the committee of five, this antagonistic sentiment crystallized into a written protest. on october st, the following statement was presented to the committee of five. "gentlemen: "owing to a general feeling of dissatisfaction amongst members and non-members of the new york stock exchange resulting from the formation of a committee of five to supervise dealings in unlisted securities, we, the undersigned, desire to suggest the following recommendations for your consideration: "_first_: the personnel of the committee be changed to the effect that same be composed of parties not identified as dealers. "_second_: that in stocks which have an open or active market, transactions may be made without restriction or necessity of report to the committee, when at or above the closing prices of july , . "_third_: that where securities have not had an active or open market the bid prices as published in the _chronicle_ of august st, be accepted as the closing prices. "_fourth_: that in the case of securities where the committee may deem it possible to trade at prices below those prevailing on july th, they establish minimum prices good for as long a time as the committee deems practical, and that a list of these prices be furnished to those making application for same." "we think that if the above recommendations are put into force, it will do away with the criticism which has been made as to the committee as at present constituted, and by so doing increase the efficiency of this committee on unlisted securities, by securing thorough and hearty coöperation on the part of all brokers and dealers in these issues." in reply to this appeal the committee of five pointed out that whenever, in other cases, the action of a committee had been invoked to supervise the transaction of business, confidence in the integrity of that committee had been general and unquestioned. the committee of seven, the committee on clearing house, the committee of three, and the committee of five themselves had all been vested with dictatorial powers over a business in which their members were personally engaged. in order to render trading in unlisted stocks a possibility, at the time, similar powers must be granted and similar confidence must be given to some one. the unlisted stock committee were not self-appointed because they came into being at the instigation and suggestion of the committee of five, and to disband them after they had started upon their work, substituting other individuals in their places, would merely stimulate fresh antagonism that might wreck the entire project. the fact that these men were dealers in outside properties especially fitted them to pass upon the reasonableness of the prices that were to be made, and there was no more reason to question their integrity of purpose than there would be to doubt that of any individuals who might take their place. a firm stand was thus taken in defence of this new committee, and they succeeded in carrying on their work successfully up to the time when the amelioration of conditions enabled them to disband. it must be regretfully recorded, however, that the petty jealousy and distrust which had appeared in connection with this episode continued to show themselves in a desultory way until the end. a few individuals threw what impediments they could in the path of this committee, and thereby furnished the only exception to the wonderful exhibition of loyalty and self effacement that manifested itself in every other department. * * * * * when the exchange suddenly closed its doors, an immense number of people, consisting of employees of the exchange itself and the clerical forces of all the many brokerage houses, were rendered idle. as soon as it became evident that the suspension of business was going to be indefinitely prolonged, the grave question arose as to the extent to which these people would be thrown out of employment. the stock exchange at once set the generous example of deciding to retain its entire force without reduction of wages, and this decision was carried through for the entire four and one half months of suspension. a more difficult problem, however, confronted the brokerage houses. many of these firms had very heavy office rents and fixed charges of various kinds; their business had been showing meager profits and even losses for some years and, the length of the period of closing being impossible to forecast, they did not dare to undertake burdens that might get them into difficulties. the result was that a few strong houses, with philanthropic proclivities, carried their clerical forces through on full pay, but the majority were obliged to cut them down in various ways. in some cases the full force was retained on greatly reduced salaries, in others salaries were reduced and part of the force discharged, and the net result was that a great number of unfortunates were either thrown into unemployment altogether or placed in very straightened circumstances. it is an interesting fact, bearing on the popular superstition that wall street is peopled by unprincipled worshippers of the dollar who are incapable of those finer qualities of character which are confined exclusively to other walks of life, that there is no region in which a quicker response to the call of the needy can be obtained than on the floor of the stock exchange. even though the brokers were facing an indefinite period of starvation themselves, with expenses running on one side and receipts cut off on the other, the moment it became clear that severe suffering had come upon the clerical forces of the street a movement was at once set on foot to start measures of relief and assistance. perhaps the best way to convey an idea of the form which this assistance took is to quote from a report on the subject made by one of those who generously gave his time to the work. what follows is in his own words. "a phase of the extraordinary and unprecedented conditions prevailing in the financial district, commonly known as 'wall street,' was the necessity for cutting down office expenses, and though many firms carried their salary list intact, a considerable number laid off from one half to two thirds of their employees, and subsequent events developed the fact that some of them discharged practically their entire force. "about the middle of september, the distress said to exist among the wall street employees, who had lost their positions as a result of the war in europe, prompted mr. c. e. knoblauch to suggest that some concerted action be taken to meet this emergency, if only as a temporary expedient. a number of informal discussions of the subject with fellow members of the exchange, and further evidences of the existence of a wider field for the work than was at first realized, culminated in a call for a meeting in the office of tefft & company and immediate organization. "officers having been duly elected, the personnel of the committee was declared to be as follows:--james b. mabon, w. h. remick, graham f. blandy, r. h. thomas, w. w. price, g. v. hollins, c. e. knoblauch, c. j. housman, g. m. sidenberg, townsend lawrence, t. f. wilcox, erastus t. tefft, chairman; charles l. burnham, secretary; edward roesler, treasurer. "the title of the committee was formally agreed upon as 'the wall street employees' relief committee.' "through the courtesy of mr. clarence mackey, the offer of a suite of rooms on the second floor of the commercial cable building, broad street, for the use of the committee, at no charge for rent, was gratefully accepted, and arrangements for occupation were made at once. mr. oswald villard, through a member of the committee, evidenced his interest by offering temporary use of rooms in the _evening post_ building for the purposes of the committee. "it was determined that the principal object of the committee would be to act as an employment bureau, to find positions for unemployed and to relieve distress where it was found to exist. it was understood and arranged for, that any wall street employee who had lost a position as a result of the war was eligible, and that no fees whatever be charged. a circular letter was sent to stock exchange members and firms appealing for subscriptions, and the matter of selection of a depository of the funds was referred to the treasurer with power. the work of receiving and recording registration blanks commenced with a rush, over one hundred and fifty were filed the first day, and in a few weeks they numbered over one thousand. "a very pleasant feature of the work was the cordial coöperation encountered on all sides. helping hands were extended everywhere. the newspapers gave many 'reading notices,' and special advertising rates, and the news bureaus printed any and all notices as and when requested. the stock exchange library committee and the secretary's office placed their typewriting, multigraph and circular printing facilities at the committee's disposal, furnished the rooms with desks, chairs, etc., and supplied all necessary stationery. the stock exchange force of telegraphers and other employees practically in a body volunteered their services, and those selected were of great assistance in preparing the card index system, which was used and found to be practical and eminently satisfactory. appreciated assistance was promptly tendered by the telephone clerks' association, the association of wall street employees, and the wall street telegraphers' association. "several cases of sickness, some very serious, were taken care of by dr. l. a. dessar, who gave free medical service to all applicants recommended by the committee, and provided hospital treatment when required. the declarations made by the applicants demonstrated beyond any question that the number of men, women, girls and boys for whom prompt assistance in procuring employment was imperatively necessary had been greatly under-estimated, and evidenced an absolute argument endorsing the reasons for the committee's existence. "many who applied were not in immediate need of money, but wanted employment, which the members of the committee sought for them by individual solicitation of everyone they knew, or knew of, who were employers, and also by careful, judicious and timely advertising in the daily papers. such satisfactory results were attained, that up to date of this writing, (may , ), of over seventeen hundred applications received, permanent positions were secured for about seven hundred at rates of compensation that were distinctly gratifying, all conditions considered. two hundred and thirty were placed in temporary jobs for periods ranging from a few days to several weeks, a number of them being re-employed two or three times. four hundred and ninety, having been taken back by their former employers, withdrew their applications. "numerous positions obtained for applicants while the exchange was closed were in lines other than stock exchange business, and wall street clerks notwithstanding their recognized efficiency being, so to speak, specially trained, it was often found to be difficult, even impossible to make them fit the kind of work to which they were more or less strangers. in view of the fact that this circumstance made the accomplishment desired necessarily slow, the outcome demonstrated that it was reasonably sure. "the request for subscriptions to the fund met with a hearty and generous response. some apprehension was felt in this regard, but the splendid result proved to be an agreeable surprise. appeals for subscriptions to the fund were made only to stock exchange members and firms, nevertheless, thanks to the general interest manifested, and the widespread advertising consequent thereto, contributions were received from generous friends outside of wall street, to an extent that was simply astonishing. checks for $ , each were not unusual items, and as a rule the request was made, 'please do not publish my name.' a well known artist, in addition to a cash subscription, presented one of his paintings to the committee. through the kind assistance of the chairman of the stock exchange luncheon club, the picture was sold for the substantial sum of $ . "the treasurer, with ample funds at his disposal, was able to meet calls for financial help that were frequent and pressing, and recognizing the desirability of experienced and competent assistance in making the necessarily intimate inquiries, to determine if applicants for relief were worthy, he applied to mr. robert w. deforest, president of the charity organization society, for expert advice in the matter, and was referred by mr. deforest to mr. frank persons, manager of the new york bureau, and miss byington, in charge of the brooklyn branch, who rendered invaluable services in connection with many of the applications, all of which were carefully investigated. much suffering and distress, and some cases of actual destitution were found to exist, and while a detailed statistical statement would seem uncalled for and not desired at this time, the following brief résumé of the committee's 'relief work' will undoubtedly prove to be of interest. "financial assistance was extended to about one hundred individuals and families; rent was paid for thirty-nine; food purchased for forty-six; clothing was furnished in seven instances; five persons were placed in hospitals; there were a considerable number of cases where the committee in whole or in part took care of funeral expenses; old debts for medical attendance and drugs; agency fees and surety bonds; life insurance premiums, board and lodging, etc., etc. many applicants for assistance proved to be merely temporarily embarrassed, they were willing and anxious to be helped but did not want charity, so to meet that emergency a form of voucher was used, which acknowledged the receipt of a 'loan' without interest, to be repaid at the convenience of the 'borrower.' that applied to _cash_ of course, payments for groceries, rent, etc., were simply receipted for. "the results achieved, in the opinion of many, would seem to warrant an amendment to the original idea that a return to normal conditions would involve the dissolution of the committee, and the proposition that it be made a permanent organization is being seriously considered." this record is deeply gratifying to the brokerage fraternity because it discloses the fact that, even in the midst of a calamity so great that no individual could feel himself beyond the reach of insolvency, the impulse to succor the unfortunate remained as strong as ever among them. chapter iii the reopening of the exchange the fact that the stock exchange closed on july st and did not reopen fully until december th, might lead to the supposition that the question of reopening was not taken up before december. far from this being the case, the truth is that reopening began to be discussed immediately after the institution was closed. within twenty-four hours of the closing the minority, who had not been at first convinced of the wisdom of that action, joined with the majority in urgently advising that the exchange be not reopened soon. all through the month of august a growing anxiety over the possibility of some hasty action by the exchange authorities showed itself among brokers, bankers, and even some government officials. for this anxiety there was never any basis, because the officers of the exchange having exceptional means of knowing what the dangers were, had no intention of assuming the immense responsibilities of re-establishing the market without the backing and approval of the entire banking fraternity. gradually the excited solicitude about a premature reopening subsided as the ultra-conservative attitude of the exchange was understood, and this was followed ere long by the first symptoms of agitation for the establishment of some form of restricted market. as we have already shown the restraints of july st were relaxed one by one with the lapse of time. first a market at or above the closing prices was organized under the committee on clearing house; then committees to facilitate trading in listed and unlisted bonds were formed; and finally a market was provided for unlisted stocks. all these devices, however, while they brought about readjustment and diminution of strain, did not constitute a reopening of the stock exchange, and the restoration of that great primary market, in some restricted way, became more and more a subject of public interest and concern. as we have seen, the fundamental reason for closing the exchange was that america, when the war broke out, was in debt to europe, and that europe was sure to enforce the immediate payment of that debt in order to put herself in funds to prosecute this greatest of all wars. to use an illustration popular in wall street at the time, there was to be an unexpected run on uncle sam's bank and the stock exchange was the paying teller's window through which the money was to be drawn out, so the window was closed to gain time. how to reopen this window in such a way as not to pay out any more money to the foreign creditor than would suit our own convenience was the problem which soon began to agitate many ingenious minds. as time went on plans for performing this difficult feat poured in upon the committee of five in constantly increasing volume, and they were frequently accompanied by a request on the part of their authors that, when adopted, the credit for their success be publicly attributed to them. an edifying confidence was thus shown in what were usually the most visionary of these schemes. * * * * * space does not permit the presentation of all these multitudinous suggestions, but as a matter of information we shall quote extracts from some of them. in point of time, the first communication to the committee on this subject came on august th when a prominent banker appeared in person, and gave vent to the following oracular utterance: "when the exchange reopens it should not do business from ten till three, but should open from ten o'clock to one. all transactions should be for cash, and must be delivered and paid for the same day, no contract to be allowed to stand over night." he also made the prediction, which was amply verified, that many weeks would elapse before the exchange could be reopened at all. some little time elapsed before anything further was presented on the subject, but by the end of august the flood of plans began and went on increasing until the exchange resumed business. on august st a communication was received from a well known "statistical organization" for "merchants, bankers and investors" which said, in part: "in behalf of my clients, who are exceedingly interested in making it possible for the stock exchanges to open safely, i am getting the opinion of important bodies relative to the proposed legislation suggested on the enclosed slip, or any other which you think would serve the purpose." on the enclosed slip was the following proposed legislation "to enable the stock exchanges to open." "be it enacted: that until the president considers european conditions fairly normal it shall be a misdemeanor in this country to buy, sell, transfer, give, or accept as collateral, shares of stock or evidences of indebtedness extending over one year, unless accompanied by a certificate showing that the owner is a united states citizen, together with such evidence as the secretary of the treasury may require that the securities have been owned by united states citizens since july th, ." in answer to this proposition the secretary of the stock exchange sent the following reply: "answering your letter of august th, , i am instructed by the special committee of five appointed by the governing committee to say that in its opinion such legislation as referred to would be ruinous to the credit of the united states throughout the world for many years to come." in september a letter was received from a western banker suggesting that the slogan "buy a share of stock" if started "would achieve success, and by so doing would greatly benefit the stock market situation. this movement would have to be started so as not to create the impression among the many thousands of people it would reach, that it was merely a movement for the purpose of benefiting the stock brokers, but that it would be instrumental in relieving the strain on every conceivable business. were such a movement accepted, and should it meet with results worthy of the plan it would be found out when the smoke clears away that american people would own american railway and industrial shares. this could be only for the great benefit of this country but for europe as well, for the reason that if europe knew that there was a good absorbing power here it necessarily would not dump its stocks at frightful sacrifices." in october a junior member of one of the big private banking houses appeared personally and stated that, in his opinion, both domestic and foreign security holders should be treated alike; that sales should be conducted as usual; that on reopening transactions should be restricted and only sales be published and no bids or offers. his idea of restriction at the start was that all stock purchased should be paid for on the basis of % cash and the balance in certificates of deposit for cash, which certificates were to be non-negotiable except between banks. a committee could, from time to time, remove the restrictions from such securities as seemed no longer to require them. the banks should be asked to agree not to call any present loans and to be very sparing in calling for margins. close upon the heels of this plan came a letter signed "a friend of the people" which said "let the stock exchange be opened strictly for the sale of american securities held by foreign stock holders. if they wish to throw their stocks over we can buy them at our own price. after six or eight days' selling from europe the exchange could be open to the world. by that time the market should be on a rising scale and safe for all." this gentleman showed some originality in his view that the foreigner should be invited to sell at once, instead of being legislated out of the market as so many other advisers proposed. he seemed to be quite oblivious of the difficulties, however, that would have been encountered in inducing american security holders to stand by in pensive calm while the foreigners unloaded to their heart's content. early in november a philadelphia banker wrote a long and intricate letter the full details of which we have not space to reproduce, but it contained the following fragment which is interesting in its way: "could not a plan be formulated between the stock exchanges, investment bankers and federal reserve banks, by which the securities could be valued on their intrinsic and market values at such prices that would be considered reasonable to be obtained in the next two or three years; that the lenders be guaranteed against any losses from recession below the stipulated point at which the securities might later be liquidated, say sometime during the year , if it had not been voluntarily liquidated without loss before. loans so insured would have to be in force on securities carried prior to a certain date, probably before the exchange opened, if not last july th, and that an insurance premium would be charged which would be considered slightly more than adequate. any surplus could be eventually pro-rated to the policy holders. there would need to be no obligation to take out such insurance unless the borrowers preferred. the banks might, however, force them to do so in many cases or pay off loans." at about this time many letters and suggestions were received centering round the main idea that the market be opened exclusively for such stocks as were not much held in europe. just as a correspondent cited above seemed to believe that american security holders could be compelled to remain inactive while foreigners sold their holdings, so these people imagined that holders of one class of securities could be kept quiet while the prices of some other class were declining in a free market. with the above came a letter from a correspondent whose thoughts carried him back to the old days of buyers' and sellers' options, when most of the security business was done on or day contracts. he proposed that the exchange be reopened so that "all trades made be 'buyer '. no other bids or offers to be valid." this would postpone for two months the settling day for the expected liquidation, and he felt certain that by that time there could be no trouble in meeting obligations. unfortunately at the time he wrote there was no way of obtaining assurance of this happy outcome. the same idea in a somewhat different form came from another correspondent who, instead of deferring payment by a buyer's option, proposed that stocks and bonds be sold on a per cent. basis "that is, the seller of shares of union pacific at will deliver to buyer per cent. of amount sold, and receive a check for $ , , together with a contract in which the buyer agrees to take per cent. more, or say shares at the end of six months, shares in months, shares in months, shares in months," etc., etc., at the original price of $ per share. this plan seemed to contemplate a bequest of unsettled contracts to future generations of unsuspecting brokers. the author of it was particularly solicitous that, in the event of its adoption, his name should be handed down to posterity along with the unfulfilled contracts. an idea of very wide prevalence, which was touched upon in nearly all communications to the committee and which even some bankers approved, was that a preliminary step to reopening should be an agreement by the banks not to call loans made prior to july st, , for some specified period of time. this idea was very thoroughly discussed and looked into by the committee. it was found to present great practical difficulties, but was never definitely abandoned until the resumption of business was shown to be possible without it. * * * * * the advice which was received by the committee of five with regard to reopening was divided into two classes. there was that large body of suggestions, some of which we have described above, which were volunteered either in letters or in interviews, and there was the advice of well known bankers and men of financial prominence which the committee itself solicited. in the latter class figured a member of one of the largest private banking houses in new york whose opinions and counsel were of inestimable value. this gentleman, gifted with clear insight and a thorough grasp of the situation, and generously anxious to be of service to the committee, pointed out from the start that the reopening of the exchange hung upon a favorable swing in the balance of trade. when the indebtedness of the united states to europe could be offset by our exports the danger of reëstablishing our market would become negligible, and this shrewd adviser predicted that the desired reaction in foreign exchange was much closer at hand than was generally supposed. the most valuable of his admonitions, and the words which did most to strengthen the courage and resolve of the committee were these: "you will be given all kinds of advice by all kinds of people, but remember that in the end the responsibility will fall upon you, therefore listen attentively to everything you are told but act on your own independent judgment." this wise course was successfully followed, and the change in the trend of foreign exchange came, as he predicted, much sooner than was expected. numerous other prominent men who were turned to for assistance showed the greatest willingness to render every service within their power, and placed the committee under heavy obligations. there was one case where the zealous desire to work out a very detailed solution of the reopening problem brought a ray of humor into these otherwise serious and anxious discussions. a certain private banker presented his scheme in approximately the following words: "before you can reopen the exchange you must be in a position to know to what extent europe is going to throw our securities upon this market, and the only way to obtain this information is to send some members of your committee abroad. this delegation should go first to london and settle there for a long enough time to get intimately acquainted with leading persons in the financial world. this could be done by cultivating social intercourse, dining and consorting with these people until a frank statement from them could be obtained concerning the probable volume of american securities for sale." as this statement proceeded visible signs of painful emotions manifested themselves among the committee. the exchange had already been closed three months, and they were being informed that a plan requiring a lapse of some six months more must be carried out before the happy day of resumption would be in sight. the banker having paused for a few minutes' reflection, resumed: "then there is france. many american securities are held there, and as under their system the action of individual investors is largely controlled by the financial institutions, it will be quite feasible to determine the probable selling of french investors when you have got in intimate touch with these institutions." another additional six months' delay loomed to the vision of the demoralized committee, and sad words of reproachful protest were about to burst from some of them when their mentor again broke the chilly silence of the meeting room. "now that i think of it there is switzerland. the swiss are a thrifty and saving people and undoubtedly have much money in our properties. in spite of her neutrality switzerland will feel the economic pinch of this war and her people will have to liquidate many of their foreign holdings. it will be wise, therefore, for you to extend your inquiries from france into switzerland." here the reaction came, the heart-sick feeling which had plunged the respectfully attentive committee into gloom vanished, and mirthful emotions so possessed them that it was a hard task to maintain proper dignity and decorum. the temptation to inquire whether this contemplated trip around the globe was to include an effort to trace some american railroad bond into the sacred precincts of thibet, or a dash to the south pole to search the abandoned luggage of some deceased explorer, was resisted, and the worthy banker whose imagination had taken such distant flights retired unconscious of the very mixed emotions he had aroused. in the light of the actual reopening that took place only six weeks later this interview becomes a curiosity worth preserving. * * * * * along with other prominent men who consented to meet and consult with the committee there came sir george paish and mr. basil g. blackett. these two gentlemen had come over from england to consult our government and our banking fraternity with regard to the abnormal exchange situation created by the outbreak of war. before the committee of five they, of course, dwelt mainly upon the question of reopening the market. sir george paish, being by nature an optimist, took a very roseate view of the outlook, so much so that some members of the committee were at first disposed to fear (his mission being that of a collector of debts who sought prompt payment) that his diagnosis of the situation was prompted more by his hopes than by his convictions. he proceeded to washington, where he spent a considerable time negotiating with the national authorities, and on his way home he again appeared before the committee, on november rd, and stated his belief that the exchange could be reopened at once. in the light of what followed it is plain that sir george paish's views were very nearly correct and not by any means over-optimistic. the rapidity with which the readjustment of exchange solved the problem presented to the american market was entirely in harmony with his predictions and very flattering to his judgment. his companion, mr. basil g. blackett, was a reticent young man who seldom intruded himself into the discussion, but it was noticeable that whenever he was asked for an expression of opinion he showed himself to be thoroughly informed as to facts and sound in judgment. the committee was certainly under an obligation to these gentlemen for the time they were willing to give to its deliberations. in this connection it is a pleasure to record that the authorities of the london stock exchange showed a similarly friendly disposition. all through the period of crisis communications passed between the london and new york exchanges and were accompanied by a most friendly spirit of mutual assistance. * * * * * while plans for reopening the exchange were discussed from an early date, nothing definite took shape up to the end of october, and at that time the committee of five were still in the dark as to how long business would continue to be suspended. whether the new year would find wall street still bound and muzzled was an open question on november st. as the month advanced, however, a very rapid change in conditions began to manifest itself. on november th two significant steps were taken. mr. smithers, chairman of the unlisted stocks committee, appeared and stated that his committee intended making a report recommending their own discontinuance. he was followed, on the same day, by mr. e. r. mccormick, chairman of the board of representatives of the curb market association, who urged that the time for a formal reopening of the curb was at hand. on the following day the committee on unlisted stocks, having submitted a proposed circular which they wished to issue in announcement of their dissolution, the committee of five adopted the following rule: "the special committee of five being of the opinion that the market for unlisted stocks has arrived at a condition that makes supervision of dealings no longer necessary, hereby approve the act of the committee on unlisted stocks in dissolving their organization. "ruling no. , dated september , , is hereby rescinded." it is needless to say that this action, together with its ratification by the committee of five, was first submitted to and approved by the clearing house banks. unlisted stocks comprised a group of properties which were practically not held abroad, and the reason for holding them under close restraint at first was the danger of the sentimental effect on a panicky situation in case their prices should undergo a violent decline. it having been demonstrated that such a decline was not to be feared, the committee in charge were only too glad to relinquish the difficult duty of supervising the trading and open a free market. it was further decided that the restraint upon free quotation and publication of prices be simultaneously removed from the unlisted dealings. as a natural sequence to the above action, on november th, the curb association issued the following notice: "to the members of the new york curb market association: "gentlemen: "it has been decided that the improvement in the general financial situation has removed the necessity for restrictions over trading in unlisted stocks, therefore you are hereby notified that the new york curb market will officially resume business on monday, november th, , at o'clock a.m. "this action on the part of the chairman of the new york curb market association has received the approval and sanction of the committee of five of the new york stock exchange. "e. r. mccormick, "_chairman_." on november th, the committee of five ruled that: "unrestricted trading in listed municipal and state bonds for domestic account may now be resumed, but that all transactions for future delivery must be submitted for approval, as heretofore, to the sub-committee of three on bonds at the clearing house of the new york stock exchange." on november th, mr. frank w. thomas, vice-president of the chicago stock exchange and also chairman of their "trading committee," appeared before the committee of five and stated that it was the intention of the authorities of their exchange to meet on the coming wednesday to discuss the advisability of opening on monday, november rd. he asked for information regarding the attitude of the new york stock exchange in the matter of securities listed on both exchanges. the committee requested him not to permit dealings in chicago, in such securities, at prices below the minimum prices established in new york. thus one after another came the evidences of a sudden transformation in the financial conditions and of a consequent movement toward the resumption of business, all of which rested fundamentally on an immense increase of our exports and the resulting favorable movement of foreign exchange. encouraged by these happenings the committee of five actively took up numerous plans for letting down the bars. there had been for some time considerable pressure exerted by those members of the exchange who were distinctively bond brokers, to have the bond business transferred from the clearing house to the floor of the exchange. they thought that this step would make a wider and more satisfactory market for bonds and that the supervision of the committee of three could be exerted in one locality as well as in the other. in view of the rapid improvement in conditions, and the fact that unlisted bonds had been given an unrestrained market by the dissolution of the committee of seven, it was thought that the moment had come for taking this step in advance. preparations were at once set on foot to restore the restricted bond market to the floor and thereby insure that partial opening of the doors of the exchange which would be the entering wedge to ultimate resumption. * * * * * unfortunately the plans of the committee in this regard were not sufficiently safeguarded. through some unforeseen leak the news of their intentions got abroad, and brought on some awkward consequences. the first of these was the appearance of a private banker, the same one who early in august had predicted a long period of suspension, to protest against greater freedom in bond dealings. he foresaw terrible results if this rash act were permitted and claimed to have information that european holders of bonds were awaiting this chance to swamp the market. the committee were not much alarmed by this gentleman's warnings and were proceeding with their nefarious scheme when a further warning was addressed to them. there was a certain member of a stock exchange firm who was on friendly terms with some of the washington authorities, and who seems to have felt it his duty to see that the exchange did nothing to give offense in these high quarters. when this individual learned what the committee had in mind he sent word that it would be prudent for them to let a particular government officer know their plans before putting them into execution. thinking that this warning must be based on some special information the committee at once authorized this gentleman to inform his friend in the government of their plan. this was on wednesday, november th, and the intention of the committee was to place the bond market upon the floor of the exchange on the following monday. on thursday this well meaning but somewhat misguided go-between reported that he had communicated with washington and that his friend there had expressed the desire to see some member of the committee before any further steps were taken. this news hit the plans of the committee somewhat after the manner of a submarine torpedo. they had everything in readiness for monday, and the newspapers, which had also got wind of their intentions, had already announced to the public unequivocally that a restricted bond market would be started on that day. with such limited time to act in there was nothing to resort to but postponement and a notice was immediately given to the press in the following words: "the special committee of five states that while the plan outlined by the newspapers concerning a further extension of the present method of dealing in bonds was substantially that under consideration by the committee, the magnitude of the interests affected has led to unforeseen difficulties which will necessitate further consideration. when a decision is reached ample notice will be given to the public officially." a letter was at once sent to the government official notifying him of the readiness of the committee to visit him at his convenience, and the following day, saturday, he very courteously sent them a telegram explaining that the suggestion of an interview had in no way emanated from him but that he had misunderstood the intermediary (who had communicated by telephone) and supposed that the interview was being sought by the exchange. so this mighty tempest in a tea pot resulted from the excessive zeal of an outsider who while trying to pilot the committee into safe waters succeeded in running it on a reef of his own creation. immediately on ascertaining the true situation the following notice was sent out on saturday: "the special committee of five announces that having consummated its plan for bond transactions on the exchange under certain specified restrictions, the same will, in accordance with the constitution of the exchange, be submitted to the governing committee at the regular meeting to be held on the th inst. if the recommendations of the special committee are adopted by the governing committee the plan will go into operation at an early date." some of the newspapers having announced positively that this new move with regard to bonds would take place on monday, the rd, they were very indignant that it should be postponed without supplying them with a good and sufficient reason. the committee, on its part, feeling that it was undesirable to publish the details of an awkward misunderstanding with a public official, who would not want his name dragged into a matter that he had in no way concerned himself with, refused to furnish the reason. this at once let loose upon them those vials of reportorial wrath which, up to that time, they had been fortunate in escaping. one journal amicably stated that this incident merely emphasized a fact which had all along been obvious, namely that the committee were, and had been from the start, totally incompetent to perform the task intrusted to them. while a gentle shower of epithets fell upon their devoted heads the committee proceeded with their work and, having obtained the necessary authority from the governing committee, they sent out the following ruling on november th: "that so much of rule no. as applies to dealings in listed bonds through the clearing house be rescinded, to take effect at the close of business on friday, november th, . beginning on saturday, november , , dealings in bonds listed on the exchange will be permitted on the floor of the exchange between the hours of ten and three o'clock each day except saturday, when dealings shall cease at twelve o'clock noon. such dealings to be under the supervision and regulation of the committee, and to be for 'cash' or 'regular way' only and not below the minimum prices as authorized by the committee from time to time. transactions at prices other than those allowed by the committee, or in evasion of the committee's rules, are prohibited. all rules of the exchange governing delivery and default on contracts covered by this resolution shall be in force on and after saturday, november th, , but the closing of contracts 'under the rule' shall be subject to the foregoing provisions." thus on saturday, november th, the doors of the stock exchange were once more thrown open and a restricted market in listed bonds was established on the floor under the watchful eye of the committee of three. there was some hesitancy at first as to whether these bond transactions should be quoted on the ticker in the accustomed way, but before the day of opening came it was decided to report them as usual. by requiring that all trades should be for "cash" or "regular way" and, in a subsequent ruling, by instructing all purchasers of bonds to report to the committee when such bonds were not delivered by . p.m. on the day following the purchase, it was hoped to impede any sudden or violent liquidation of foreign securities. * * * * * the restoration of the bond market to the floor was a complete success, and at about the same time a general revival of public confidence showed itself in a rise in prices first in the street market and then in the stock exchange clearing house itself. encouraged by these symptoms the committee of five at once formulated a plan for carrying the reopening a step farther. a list of stocks which were not international in character was made out and submitted to the bank clearing house committee, and with their concurrence it was decided to place these upon the floor of the exchange to be traded in at or above certain prescribed minimum prices. at a meeting of the governing committee on december th the following resolution was adopted: "that the committee of five is hereby empowered to permit dealings on the floor of the exchange in such stocks as it may designate under restrictions prescribed by it. that the committee of five is hereby authorized to enforce stock loan contracts whenever in its judgment it may deem best so to do, and that the resolution of july st, , be modified in this respect." a list of minimum prices was fixed upon that averaged some two or three points below the closing prices of july st, and on december th the committee issued a ruling prescribing the conditions for the partial resumption of stock dealings on the exchange. we here present it in full: "the special committee of five rules that rule be rescinded, in so far as it applies to stocks admitted to dealings in the exchange from time to time by the committee of five, said rescission to take effect at the close of business on friday, december , . "beginning on saturday, december , , dealings in certain specified stocks listed on the exchange will be permitted on the floor of the exchange between the hours of ten and three o'clock each day except saturday, when dealings shall cease at twelve o'clock noon. "dealings in such stocks as shall be specified by, and be under the supervision and regulation of the committee, shall be for 'cash' or 'regular way' _only_ and not below the minimum prices authorized by the committee from time to time. transactions at prices below those allowed by the committee, or in evasion of its rules are prohibited. "a list of stocks to be admitted to dealings on the exchange accompanies these rulings. minimum prices on same will be announced on december , . "all stocks quoted on july th at or below per cent., or $ per share, may be dealt in without restriction as to price, but are included in the list for your guidance, and will be marked 'free' in the price column. "all stocks admitted to dealings as above, which were being cleared through the stock exchange clearing house at the close of business on july , , will be similarly cleared from the opening of business on the th day of december, . "all stocks admitted to dealings, which were being dealt in 'ex-clearing house' at the close of business on july , , will be similarly dealt in from the opening of business on the th day of december, . "stocks admitted to dealings on the exchange will cease to be dealt in through the stock exchange committee on clearing house. stocks not so admitted will continue to be dealt in through the committee on clearing house until further notice. "all rules of the exchange governing delivery and default on contracts covered by these rules shall be in force on and after the th day of december, , but the closing of contracts 'under the rule' shall be subject to the foregoing provisions. stocks loaned "the loan market for stocks will reopen at ten o'clock, a.m. on the th day of december, , for such stocks _only_ as are admitted to dealings on the exchange, from and after which date all rules of the exchange governing the borrowing and loaning of such stocks shall be in force, but the closing of contracts 'under the rule' shall be subject to the foregoing provisions. "the above rule shall apply to stocks borrowed and loaned prior to and since july , . "borrowed and loaned stocks will be cleared as before july th last, but only in cases where such stocks are admitted to dealings on the exchange. "loans of stocks _not_ admitted to dealings on the exchange will continue to stand until further notice, unless otherwise agreed to by both parties to the contract." on monday, december th, the next business day after the limited list of stocks had been placed upon the floor of the exchange, it was reported to the committee that the volume of transactions taking place in the stock exchange clearing house, in the stocks not yet admitted to the floor, had risen to such proportions as seriously to embarrass that institution. as this activity was taking place on a rising market and signs of increasing confidence were constantly multiplying, the committee quickly resolved, on the same day, to transfer all stocks to the floor on the following morning, and notice to that effect was at once sent out. the unexpected appearance of this notice on the tape was greeted with cheers of approbation in the exchange, and on december th the long hoped for reopening of the entire market had become a reality. * * * * * the committee of five by this act brought their own rule to a close. arbitrary power had been put in their hands to be exercised while the exchange remained closed, but now that it was reopened authority naturally returned to its legitimate channels. the committee therefore presented the following report to the governing committee on december th: "the special committee of five beg leave to report that in as much as the crisis that existed on july st, , has passed, and financial affairs in this country have resumed a practically normal condition, the necessity for the committee's continuance no longer exists and hence they request to be discharged. before being discharged they desire to express their appreciation of the trust and confidence placed in them by the governing committee. they also wish to express to the members of the exchange their appreciation of the manner in which their rulings have been respected, even though in many cases it involved great sacrifices. resolved, that the report of the special committee of five be received, and the committee be discharged." thus, like the sudden and unexpected shifting of a dream, the committee of five who so recently had almost despaired of fixing a date for reopening the exchange, found the exchange open and themselves a memory of the past. the abruptness of their exit was tempered, however, in the following manner. as above described, the reopening was accompanied by the restraint of certain arbitrary minimum prices below which securities could not be sold. it was felt that, owing to the critical and indecisive state of the war, there was a continuing possibility of some news that might renew a crisis in the market. while this possibility lasted the maintenance of minimum prices furnished an automatic check upon sudden panic which would avoid raising the question of a second closing of the exchange. in order to regulate these minimum prices and so change them from time to time as to keep in accord with normal supply and demand, it was necessary to appoint a committee, and the original five were continued in office with this sole regulative power. as bonds were similarly restricted, the committee of three also lingered on the scene for the same purpose. the two committees performed this unusual function up to the first of april, , when the very marked improvement in conditions led to the abandonment of this last vestige of artificial restraint. it is instructive, as showing the workings of some minds, that although the committee of five, in its capacity of regulator of minimum prices, issued a public statement that they were under no circumstances going to valorize or sustain prices but merely expected to maintain a safeguard against some unforeseen shock to confidence, many people wrote them urgent letters asking that in certain properties a minimum should be maintained which would render selling impossible. it was quite futile to try to disabuse some of these correspondents of the idea that no decline should be allowed in properties that they were interested in. * * * * * to one who meditates upon the singular experience which was thus abruptly brought to a close, there are a few features of it which stand out as meriting the especial attention of all members of the stock exchange. first of all it was most impressively shown what apparently hopeless tasks can be accomplished by loyal coöperation. if at any time up to july, , any wall street man had asserted that the stock market could be kept closed continually for four and one-half months he would have been laughed to scorn, and yet this supposed impossibility was performed by the joint and determined action of the financial community. on the other hand, and as a counterpart to this valuable experience, it must never be lost sight of that the extraordinary war measures of may be a danger to the future if they are misinterpreted. there is a possibility (even a probability) that when ordinary crises arise in times to come, people who find themselves financially embarrassed will bring enormous pressure upon the authorities of the exchange to renew the drastic expedients of the famous thirty-first of july. it is to be sincerely hoped that there will always be firmness enough in the governing committee to resist this pressure. the great world war coming, as it did, without warning was a rare and epoch-making event that warranted unheard of action and to indulge in such action for any lesser cause would be utterly disastrous. the committee of five seems to have been brought into existence under a lucky star. that five men called together so suddenly in such an emergency should have worked with absolute harmony for so long a time is quite remarkable. their unanimity was never troubled but once. on one of the first few days of their career a rather positive and aggressive member, arguing with a colleague, said "you must remember that you are only one of this committee." the committeeman thus addressed responded with calm determination "and you must not forget that you are not the other four." this encounter excited much amusement among the remaining members and was the one and only occasion where anything resembling a serious difference appeared. in addition to being blessed with harmony they were very fortunate in having passed rulings for so long a time without giving forth anything that had to be recalled. in view of the complexity of the conditions, fortune must have aided in this as well as judgment. they were, of course, treated to much wisdom (after the event) by their critics. they were told that they might have opened the exchange sooner after the actual opening had proved a success, and they were informed in the editorial columns of a prominent journal that their fear of foreign liquidation had been an "obsession" which lacked justification. these critics never were heard from while the event was in doubt, and consequently the committee did not profit much by their learned sayings. it can be stated with confidence that the intelligent resourcefulness of the stock exchange, in conjunction with the splendid public spirited work of the new york banks and the press, warded off a calamity the possible magnitude of which it would be difficult to measure. the success of this undertaking should be a source of pride and emulation to those future generations of brokers who will have to solve the problems of the great financial market when in the words of tyndall, "you and i, like streaks of morning cloud, shall have melted into the infinite azure of the past." the end [illustration] the country life press garden city, n. y. [transcriber's notes: the transcriber made these changes to the text to correct obvious errors: . p. , from a.m. to m. (note missing "a" or "p"), left as published . p. , "we think that if ... (added opening quote) . p. , rescision --> rescission . p. , unforseen --> unforeseen end of transcriber's notes] plain facts practical education financiering common sense the several short articles herein contained were first written and published twenty-five years ago as an expression of the writer's convictions. having come to the conclusion that conditions, in many respects, have not improved--in fact have become more alarming; and in consequence the future outlook in these most strenuous and extravagant times more uncertain, the writer was prompted to incorporate these ideals in a booklet and dedicate the same to his younger friends. g. a. bauman, quincy, illinois. july, . looked at from a practical standpoint it is the young man and young woman of to-day, with a practical education, who will adorn our best homes of the future. it is the manager and the financier who is the practical one. it is the young man with good habits who has a bank account, who shows evidence of becoming a financier. it is the young woman who trains herself with the duties of home-work, that will become a manager. it is the observing, the prudent, who will be the practical one. the majority of our young friends of to-day are beginning at the wrong end. instead of beginning at the bottom and training themselves for the future, thereby making accumulations by steadily and patiently adhering to one principle, never deviating truthfully and honestly from the one purpose, and in addition establishing a good character, they begin, as it were, at the top, with ideas that are only acquired by lack of proper training, and in course of time find themselves where they should have begun years before. what a young man neglects before his thirtieth birthday, he can never redeem. it is the early dollar saved that is the valuable one in later years, and the earlier one begins, the sooner he will have a financial standing. the dollar judiciously invested at the age of twenty, will have accumulated at the age of sixty, about sixteen dollars, whereas the dollar invested in like manner at the age of thirty will have accumulated at the age of sixty only about eight dollars. the most important thing to be attained, while striving for true and successful aspirations, will be an established record, which is worth far more than wealth. a young man with a record is a graduate of practical training and is sought for everywhere. there is plenty of room at the top. the demand is growing, even in these stringent times. these self-made young men and young women are not as a rule among our so-called society people. society encourages extravagance and dissipation, and that means ruin, more or less, sooner or later, morally, physically and financially. when a young couple start out in life together and they do really love each other sincerely, there is one other thing, next to good health, that is necessary in carrying responsibilities for a continuously happy life, and that is good financiering. without that quality, love will soon fade away and disagreements follow. what causes so many divorce suits? bad financiering. some of bur best and brightest citizens are among our most inefficient managers, and consequently have difficulties to battle with during life. therefore good management and saving qualities, together with good character, are the essential points to be observed by young men and women, equally well by husband and wife, in order to maintain prosperity and contentment. november, . financiering it is a question not so important how to save, as how to promote the growth of your savings. it is sometimes an easy matter to know how to make money, but knowing how to keep it and especially how to place it where it will earn the most, consistent with its safe keeping, is a matter that needs careful consideration. how many a hard-earned dollar finds its way into some visionary scheme; is invested in some fictitious, widely advertised enterprise, with agents on every hand offering glaring profits. beware of such financiering. did you ever hear any of our old successful financiers diverting their idle surplus into those investments where almost unlimited profits are assured? the successful accumulator is not willing to take such chances. they look too flattering. you cannot and should not expect something for nothing. seek the best, and if it sometimes appears costly, it will always prove cheapest in the end. the really judicious investor does not expect the highest rate of interest, as he is aiming to get gilt-edged securities. securities with the largest margins are naturally entitled to consideration and a lower rate. the savings bank should only be the primary department in accumulating. the moment a savings account has grown to a sufficient proportion, the prudent one will seek a larger field in order to reap the benefit of a more profitable and safer investment. but then the question will arise: "what is the course to pursue for one not having had previous experience in such conservative precautions?" as the specialist makes a specialty of a certain kind of practice, so does the expert investor make a specialty of placing money on certain kinds of securities, and as confidence is the most important factor in this commercial world, careful inquiry and investigation as to the reputation and method of such a specialist, should prove relief to this would-be investor of all anxiety and worry in placing his idle money to the best advantage. think prudently, act judiciously, place your confidence accordingly, and your success financially will be assured. november, . common sense common sense is the only true promoter of mankind and yet how few of our present generation strive to obtain the knowledge. our boys and girls may have had their proper beginning at school, in due time successfully passed the usual graduation exercises, and some more may have received a costly course at college, yet those having been deprived of the most important instruction stand before the world as helpless as in their beginning. to learn to work is the foundation in constructing the knowledge of common sense. knowing how to work and especially with those who were taught to do it with pleasure, never faltering nor complaining, simply accomplishing their daily task in a systematic manner will succeed. a successful school or college training should only be considered as a sharpened tool to be better equipped in applying this common sense. at home is the place where the child should be taught to do little things and as it grows older and while attending school, the importance of accomplishing bigger things should be impressed from time to time. every parent who neglects to teach his child to work is robbing it of its birthright. there should be time for work and time for play, but as the former is usually out of the question, that very moment our should-be-home instructors are guilty of moral crime. work strengthens the body as well as the mind and a useful exercise should be the most preferable one. if you wish to rear a good boy, teach him how to work. if you wish your son to become an ideal young man, preach to him that the most valuable time lost, is, when he is neglecting to build up his storage of common sense. plod along quietly, but with determination. promotion will surely follow. we are none of us perfect; try to do right as nearly as you possibly can and you will profit. to neglect means disappointments. if you wish to bring up a good girl, teach her to be useful. if you wish to be the possessor of a model daughter, teach her the value of work; all other accomplishments should be subordinate issues, but are very commendable features if connected with common sense ideas. common sense should be the first principle in the make-up of a young woman, and it is only obtained while learning the rudiments and duties to manage a home; and a home of contentment is only where such a supreme being, commonly called wife, predominates. teach your daughters to be deserving, have them learn to appreciate, to be sincere and you will encourage a better class of young men. let them grow up in idleness, teach them to despise labor, let them depend upon someone for a continuously happy time, and you will cultivate the good-for-nothing young man. do not let them expect to marry a worthy man unless they show themselves to be worthy. the laws of nature will not permit otherwise. honor the man of toil. to snub him shows ignorance and bad breeding. neither good looks nor fortune should figure as a drawing card. nothing but virtues embodied in the knowledge of common sense will conquer. virtue prevails where beauty fails. nor will riches easily won maintain comforts and satisfaction which only true merit will reward. to be occupied encourages health and thrift; with self-denial--self-respect and happiness. to be idle invites ills of many kinds; it breeds discontent, engenders poverty and brings misery--and as the wheels of commerce are continuously turning around, the rich becoming poor and the poor becoming rich, the importance of acquiring the knowledge of common sense should not be so woefully neglected. try not to accumulate wealth, but exert your talents in promoting your children to become self-reliant and you will have endowed a legacy which means more than untold fortunes to them, a consolation to the parent and a blessing to the community at large. the poorest boys and girls in the world are those not taught to work. [illustration: signature of g. a. bauman] october, . +------------------------------------------------------------+ | transcriber's note: | | | | obvious typographical errors have been corrected in | | this text. for a complete list, please see the bottom of | | this document. | +------------------------------------------------------------+ [illustration: thomas w. lawson after twelve months of "frenzied finance"] frenzied finance by thomas w. lawson of boston volume i the crime of amalgamated new york the ridgway-thayer company _copyright, , by_ the ridgway-thayer company _these articles are reprinted from "everybody's magazine"_ copyright, , by the ridgway-thayer company copyright, , by the ridgway-thayer company _all rights reserved_ trow directory printing and bookbinding company new york to penitence and punishment this book is dedicated to penitence: that those whose deviltry is exposed within its pages may see in a true light the wrongs they have wrought--and repent. to punishment: that the unpenalized crimes of which it is the chronicle may appear in such hideousness to the world as forever to disgrace their perpetrators. to penitence: that the transgressors, learning the error of their ways, may reform. to punishment: that the sins of the century crying to heaven for vengeance may on earth be visited with condemnation stern enough to halt greed at the kill. to punishment: that public indignation may be so aroused against the practices of high finance that it shall come to be as culpable to graft and cozen within the law as it is lawless to-day to counterfeit and steal. to penitence: that in the minds of all who read this eventful history there may grow up a knowledge and a conviction that the gaining of vast wealth is not worth the sacrifice of manhood, and that poverty and abstinence with honor are better worth having than millions and luxury at the cost of candor and rectitude. to my audience saints, sinners, and in-betweens before you enter the confines of "frenzied finance," here spread out--for your inspection, at least; enlightenment, perhaps--halt one brief moment. if the men and things to be encountered within are real--did live or live now--you must deal with them one way. if these embodiments are but figments of my mind and pen, you must regard them from a different view-point. therefore, before turning the page, it behooves you to find for yourself an answer to the grave question: is it the truth that is dealt with here? in weighing the evidence remember: my profession is business. my writing is an incident. "frenzied finance" was set down during the twenty-fifth and twenty-sixth hours of busy days. i pass it up as the history of affairs of which i was a part. the men who move within the book's pages are still on the turf. a period of twelve years is covered. so far, eighteen instalments, in all some , words, have been published. the spigot is still running. i have written from memory, necessarily. while it is true that fiction is expressed in the same forms and phrases as truth, no man ever lived who could shape , words into the kinds of pictures i have painted and pass them off for aught but what they were. the character of my palette made it mechanically impossible to shade or temper the pigments, for the story was written in instalments, and circumstances were such that often one month's issue was out to the public before the next instalment was on paper. considering all this, the consistency of the chronicle as it stands is the best evidence of its truth. in submitting it to my readers i desire to reiterate: it _is_ truth--of the kind that carries its own bell and candle. within the narrative itself are the reagents required to test and prove its genuineness. were man endowed with the propensity of a münchhausen, the cunning of a machiavelli, the imagination of scheherezade, the ability of a shakespeare, and the hellishness of his satanic majesty, he could not play upon , words, or one-quarter that number, and make the play peal truth for a single hour to the audience who will read this book, or to one-thousandth part the audience that has already read it in _everybody's magazine_. such as the story is, it is before you. if in its perusal you fathom my intentions, my hopes, my desires, i shall have been repaid for the pain its writing has brought me. at least you will find the history of a colossal business affair involving millions of dollars and manned by the financial leaders of the moment. it is a fair representation of financial methods and commercial morals as they exist in america at the beginning of the twentieth century. as a contemporary document the narrative should have value; as history it is not, i believe, without interest. as a message it has had its influence. indeed, it is not an exaggeration to say that no man in his own generation has seen such a crop come forth from seed of his own sowing since the long bygone days when the wandering king planted dragons' teeth on the phoenician plain and raised up an army of warriors. yours very truly thomas w. lawson foreword there will be set down in this book, in as simple and direct a fashion as i can write it, the story of amalgamated copper and of the "system" of which it is the most flagrant example. this "system" is a process or a device for the incubation of wealth from the people's savings in the banks, trust, and insurance companies, and the public funds. through its workings during the last twenty years there has grown up in this country a set of colossal corporations in which unmeasured success and continued immunity from punishment have bred an insolent disregard of law, of common morality, and of public and private right, together with a grim determination to hold on to, at all hazards, the great possessions they have gulped or captured. it is the same "system" which has taken from the millions of our people billions of dollars, and given them over to a score or two of men with power to use and enjoy them as absolutely as though these billions had been earned dollar by dollar by the labor of their bodies and minds. yet in telling the story of amalgamated, the most brazen and voracious maw of this "system," i desire it understood that i take no issue with men; it is with a principle i am concerned. with the men i have had close and intimate intercourse, and from my knowledge of the means they have used, and the manner in which they have used them, and the causes and effects of their performances, i have no hesitation in stating that the good they have done, the evils they have created, and the indelible imprints they have made on mankind are the products of a condition and not of their individualities, and that if not one of them had ever been born the same good and evil would to-day exist. others would have done what they did, and would have to answer for what has been done, as they must. so i say the men are merely individuals; the "system" is the thing at fault, and it is the "system" that must be rectified. better far for me not to tell the story i am going to tell; better far for the victims of amalgamated not to know who plundered them and how, than to have them know it only to wreak vengeance on individuals and overlook the "system," which, if allowed to continue, surely will in time, a short time, destroy the nation by precipitating fratricidal war. the enormous losses, millions upon millions--to my personal knowledge over a hundred millions of dollars--which were made because of amalgamated; the large number of suicides--to my personal knowledge over thirty--which were directly caused by amalgamated; the large number of previously reputable citizens who were made prison convicts--to my personal knowledge over twenty--directly because of amalgamated, were caused by acts of this "system" of which henry h. rogers and his immediate associates were the direct administrators; and yet mr. rogers and his immediate associates, while these great wrongs were occurring, led social lives which, measured by the most rigid yardstick of mental or moral rectitude, were as near perfect as it is possible for human lives to be. as husbands, fathers, brothers, sons, friends, they were ideal, cleanly of body and of mind, with heads filled with sentiment and hearts filled with sympathies; their personal lives were like their homes and their gardens--revealing only the brightest things of this world, the singing, humming, sweet-smelling things which so strongly speak to us of the other world we are yet to know. as workers in the world's vineyards, they labored six days and rested upon the sabbath, and gave thanks to him from whom all blessings flow that he allowed them, his humble creatures, to have their earthly being. and yet these men, to whose eyes i have seen come the tears for others' sufferings, and whose voices i have heard grow husky in recounting the woes of their less fortunate brothers--these men under the spell of the brutal code of modern dollar-making are converted into beasts of prey, and put to shame the denizens of the deep which devour their kind that they may live. in the harness of the "system" these men knew no sabbath, no him; they had no time to offer thanks, no care for earthly or celestial being; from their eyes no human power could squeeze a tear, no suffering wring a pang from their hearts. they were immune to every feeling known to god or man. they knew only dollars. their relatives of a moment since, their friends of yesterday and long, long ago, they regarded only as lumps of matter with which to feed the whirring, grinding, gnashing mill which poured forth into their bins--dollars. in telling the story of amalgamated i hope to have profited by my long and intimate study of this cruel, tigerishly cruel "system," so as to be able to deaden myself to all those human sympathies which i have heard its votaries so many times subordinate to "it's business." i shall try only to keep before me how the indians of the forest, as our forefathers drove them farther and farther into the unknown west, got bitter consolation out of the oft-chanted precept of their white brethren of civilization, "an eye for an eye, a tooth for a tooth," reminding myself that whatever of misery or unhappiness my story may bring to the few, it will be as nothing to that which they have brought to the many. in asking for the serious, earnest consideration of the public, i shall be honest in giving to it my qualifications, my motives, and my desires for writing this narrative. for thirty-four years i have been actively connected with matters financial. as banker, broker, and corporation man, i have, from the vantage-point of one who actually handled the things he studied, studied the causes which created the conditions which made possible the "system" which produced the amalgamated affair. in my thirty-four years of business experience i have seen the great fortunes, which are the motive power of the "system" referred to, come out of the far west as specks upon the financial horizon and grow and grow as they travelled eastward, until in their length, breadth, and thickness they obscured the rising sun. at short range i have seen the giant money machine put together; i have touched elbows with the men who made it, as they fitted this wheel and adjusted that gear, while at the same time i broke bread and slept with the every-day people who, with the industry of the ant and the patience of the spider, toiled to pile in the pennies, the nickels, and the dimes which have kept the "system's" hopper full. at my first meeting with the creators of amalgamated it was clearly and distinctly understood that under no circumstances would i enlist in that "system's" interests other than for such special services as, after due thought and investigation, i should decide to be such as i could in fairness to myself and my clients work for; and when i give the details of this first meeting in my narrative it will be evident to its readers that in telling the story of amalgamated i am violating no confidence, nor in any way encroaching upon the niceties of that business code which is, and should be, the foundation of all legitimate financial dealings, nor in any way misusing knowledge which, if acquired under other circumstances, might be sacred. amalgamated was one service the "system" asked of me. it was created because of my work. it was largely because of my efforts that its foundation was successfully laid. it was very largely because of what i stood for and because of the public's confidence in the fulfilment of the promises i made that the public invested its savings to an extent of over $ , , ; and it was almost wholly because of the broken promises and trickery of the creators of the "system" that the public lost the enormous sums it did. my motives for writing the story of amalgamated are manifold: i have unwittingly been made the instrument by which thousands upon thousands of investors in america and europe have been plundered. i wish them to know my position as to the past that they may acquit me of intentional wrong-doing; as to the present that they may know that i am using all my powers to right the wrongs that have been committed, and as to the future that they may see how i propose to compel restitution. my desire in writing the story of amalgamated, while tinged perhaps with hatred for and revenge against the "system" as a whole and some of its votaries, is more truly pervaded with a strong conviction that the most effective way to educate the public to realize the evils of which such affairs as the amalgamated are the direct result, is to expose before it the brutal facts as to the conception, birth, and nursery-breeding of this the foremost of all the unsavory offspring of the "system." thus it may learn that it is within its power to destroy the brood already in existence and render impossible similar creations. in the course of my task i shall describe such parts of the general financial structure as will place my readers, especially those unfamiliar with its more complicated conditions, in a mental state to comprehend the methods by which the savings they think are safely guarded in the banks, trust and insurance companies, are so manipulated by the votaries of frenzied finance as to be in constant jeopardy. i shall show them that while the press, the books, the stump, and our halls of statesmanship are full to overflowing with the whys, wherefores, and what-nots of "tariff," "currency," "silver," "gold," and "labor"; while our market systems are perfected educational machines for disseminating accurate statistics about the necessaries and luxuries of life, the water and land carriers, real estate, and other material things which the people have been taught to believe are the only things that vitally affect their savings; that while they imagine they understand the system by which speculation and investments are controlled and worked, and that the causes and effects of this system are at all times get-at-able by them through their bankers and their brokers; there is a tangible, complicated, yet simple trick of financial legerdemain, operated twenty-four hours in each day in the year, and which the press, the books, the politicians, and the statesmen never touch upon--a trick by means of which the savings of the people and the public funds of the government, whether in the national banks, savings-banks, trust or insurance companies, are always at the absolute service and mercy of the votaries of frenzied finance. therefore, in the course of my story of amalgamated will come a few kindergarten pictures of how the necessaries and luxuries of the people are "incorporated"; of how the evidences of corporation ownership are manufactured; of the individuals who "manufacture" them; of the individuals who control and make or unmake their values; of the meeting-place of these individuals, within and without the stock-exchanges; of some of the corporations and of some of the signs and tokens of corporation ownership; of some of their histories; of some of their doings, and of some of their contemplated doings. these kindergarten pictures i will endeavor to paint, not in that "over-the-head" verbosity or "under-the-feet" profundity and intricacy of the political economy pedant, which are as the canvases of the whistler school to the masses; but rather will i use the brush of the artisan who in giving us our white fences, our gray cottages, and our green blinds sets off those things which make up the pictures the people really understand and dearly prize. in the last few years the public has heard many stories of this juggernaut "system," which has grown to be the greatest private power in our land--greater almost than the power which governs the nation, because it is not only great within itself but by its peculiar workings is really a part of the power which governs the people. particularly has it been told the story of standard oil by mr. henry d. lloyd in his able work, "wealth against commonwealth," and by miss ida m. tarbell in her recent historical sketches; but however thorough these writers may have been in gathering the facts, statistics, and evidences, however relentless their pens and vivid their pictures, they dealt but with things that are dead; things that to the present generation are but skeletons whose dry and whitened bones cannot possibly bring to the hearts, minds, and souls of the men and women of to-day that all-consuming passion for revenge, that burning desire for justice, without which no movement to benefit the people can be made successful. in telling my story i shall, for i must, tell it fairly, and to make sure of this i pledge myself to keep to the exact facts as they occurred, not allowing myself to be overawed by their greatness into contracting them, nor to be tempted by their littleness into expanding them. in doing this i know, because of the peculiarity of the subject and my intimate relation to it, no other way than to do it in the first person. as i have already stated, i would prefer to deal with my subject through the principles involved rather than with the men concerned; but as i shall be compelled to call spades spades, i must, of necessity, use the names of men and of institutions fearlessly and without favor. in the beginning it will be necessary, for that clear understanding of the whole subject which is one of my principal objects, to treat at sufficient length the bay state gas intricacies and trickeries, in which in a certain sense amalgamated had its being. this will compel me to devote a chapter to one of the most picturesquely notorious characters of the age, john edward o'sullivan addicks, of delaware, everywhere, and nowhere. the main part of my narrative must of necessity deal with the two real heads of standard oil and amalgamated, mr. henry h. rogers and mr. william rockefeller; and with the biggest financial institution of america, if not of the world, the national city bank of new york, and its head and dominating spirit, mr. james stillman. an important chapter should be that devoted to the conception and formation of the united metals selling company, which was specially organized to control the copper industry of the world without coming within the restrictions of the laws for the prevention or regulation of monopolies. i shall also deal at length with a notorious character, who, like the spot upon the sun, looms up in all american copper affairs whenever they appear in the full vision of the public eye--mr. f. augustus heinze, of montana. there will be a chapter of more or less length devoted to one of the most important episodes in amalgamated affairs, wherein i shall describe one of wall street's most picturesque, able, and intensely interesting men, mr. james r. keene. i shall touch on a bit of the nation's history in which within a few days of the national election of a hurry-up call for additional funds to the extent of $ , , was so promptly met as to overturn the people in five states and thereby preserve the destinies of the republican party, of which i am and have always been a member. i shall draw a picture of two dress-suit cases of money being slipped across the table at the foot of a judge's bench in the court-room, from its custodian to its new owners, upon the rendering of a court decision; and i shall show how the new owners frustrated a plot having for its object their waylaying and the recovery of the bags of money. i shall devote some space to pointing out the evils and dangers of the latter-day methods of corrupting law-makers, and show how one entire massachusetts legislature, with the exception of a few members, was dealt with as openly as the fishmongers procure their stock-in-trade upon the wharves; how upon the last day of the legislature, because their deferred cash payments were not promptly forthcoming, its members turned, and made necessary the hurried departure for foreign shores of a great lawyer and his secretary, with bags of quickly gathered gold, and all evidences of the crimes committed and attempted; how after the ship arrived at an island in foreign seas the great lawyer's dead body received hurried burial, and his secretary's was later dropped, with weights about its feet, to the ocean's depths; and how ever since the natives whisper among themselves their gruesome suspicions. i shall devote a chapter to the doings of certain financial reputation sandbaggers and blackmailers; show how through their agencies they hold up corporations and their managers for large sums, which upon being paid start into motion a perfected system for the false moulding of public opinion for the purpose of making more easy the plundering of the people. i shall photograph the men and draw accurate diagrams of the machinery through which their nefarious trade is carried on. my story will carry me down wall street, into the stock exchange, through its hundred and one or million and one open and hidden passages, and into state street, that ever-hung hammock of financial somnolence, and into the courts of justice of new york, new jersey, pennsylvania, delaware, massachusetts, and montana, and into many other interesting abodes of justice and injustice, of trickery, fraud, and simple, honest trustfulness. when my story is ended and the great american people, whose simple but proud boast is that they cannot be fooled in the same place by the same methods and the same instruments twice, know as much as i now know of amalgamated and its relation to the "system" which has for years as boldly, as coarsely, and as cruelly robbed them as the coolie slaves are robbed by their masters--it will be for them to decide whether my story has been, because of the facts which entered into it, so well told that they will not be satisfied with the restitution of the vast sums which the amalgamated took from them, which united states steel took from them, and which other financial enterprises took in lesser amounts but by equally flagrant methods; but will demand the overthrow of the "system" itself. it will be for them to decide; and if their decision should be for a conclusive revolt, i shall be amply repaid for the pains and the miseries which must necessarily follow in the wake of a task such as the one i undertook when i decided to tell the story of amalgamated. contents page foreword vii part i chapter i. the tortuous course of amalgamated ii. the "system's" method of finance and management iii. the men in power behind the "system" iv. my own responsibility v. the power of dollars vi. construction of "standard oil's" "dollar-making" mill vii. juggling with millions of the people's money viii. "standard oil" invests "made dollars" in gas ix. a votary of the "system" x. addicks comes to boston xi. how addicks captured boston gas xii. stock-brokers not all bad xiii. the "system" versus westinghouse xiv. the alliance with addicks xv. the great bay state gas fight xvi. peace negotiations with rogers xvii. a memorable conference xviii. the duplicity of addicks xix. enter h. m. whitney xx. an awkward attack of appendicitis xxi. bribing a legislature xxii. plundered of the plunder xxiii. two gentlemen of frenzied finance xxiv. buying a bunch of states xxv. athletics of finance xxvi. the circling of the vultures xxvii. court corruption and coin xxviii. peace at last part ii i. the magic world of finance ii. the "system" and the louisiana lottery compared iii. the fundamentals of finance iv. the magic "jimmy" v. how the "system" does business vi. how wall street's manipulations affect the country vii. economics of copper viii. my plan for "coppers" ix. birth of "coppers" x. rogers grasps "coppers" xi. the copper campaign opens xii. the buncoing of the stockholders of utah xiii. the trap in finance xiv. lawyer untermyer discovers the "nigger" xv. degrees in crime xvi. mr. rogers unmasks xvii. "extract every dollar" xviii. the biters bit xix. the despoiling of leonard lewisohn xx. the christening of amalgamated xxi. fixing the responsibility xxii. the responsibility fastened xxiii. the first crime of amalgamated xxiv. the subscription opens xxv. dollar hydrophobia xxvi. deviltry afoot xxvii. the black flag hoisted xxviii. the bogus subscription xxix. the aftermath xxx. the morning after xxxi. i walk the plank xxxii. perfecting the double cross xxxiii. a retrospect and a moral lawson and his critics i. the insurance controversy ii. the enemies i have made iii. explanations frenzied finance the story of amalgamated _part i_ chapter i the tortuous course of amalgamated amalgamated copper was begotten in , born in , and in the first five years of its existence plundered the public to the extent of over one hundred millions of dollars. it was a creature of that incubator of trust and corporation frauds, the state of new jersey, and was organized ostensibly to mine, manufacture, buy, sell, and deal in copper, one of the staples, the necessities, of civilization. it is a corporation with $ , , capital, , , shares of the par value of $ each. its entire stock was sold to the public at an average of $ per share ($ to $ ), and in the price had declined to $ per share. from its inception it was known as a "standard oil" creature, because its birthplace was the national city bank of new york (the "standard oil" bank), and its parents the leading "standard oil" lights, henry h. rogers, william rockefeller, and james stillman. it has from its birth to present writing been responsible for more hell than any other trust or financial thing since the world began. because of it the people have sustained incalculable losses and have suffered untold miseries. but for the existence of the national city bank of new york, the tremendous losses and necessarily corresponding profits could not have been made. i laid out the plans upon which amalgamated was constructed, and, had they been followed, there would have been reared a great financial edifice, immensely profitable, permanently prosperous, one of the world's big institutions. the conditions of which amalgamated was the consequence had their birth in bay state gas. to explain them i must go back a few years. in j. edward addicks, of delaware, everywhere, and nowhere, the boston gas king, invaded the gas preserves of the "standard oil" in brooklyn, n. y., and the "standard oil," to compel him to withdraw, moved on his pre-empted gas domains in boston, mass. late in a fierce battle was raging in boston between gas king addicks and gas king rogers; the very air was filled with denunciation and defiance--bribery and municipal corruption; and king addicks was defeated all along the line and in full retreat, with his ammunition down to the last few rounds. early in i took command of the addicks forces against "standard oil." by the middle of the addicks troopers had the "standard oil" invaders "on the run." in august, , henry h. rogers and myself came together for the first time, at his house in new york, and we practically settled the boston gas war. early in we actually settled the gas war, and "standard oil" transferred all its boston gas properties ($ , , ) to the addicks crowd. in october, , the whole bay state gas outfit passed from the control of addicks and his cohorts into the hands of a receiver, and as a result of this receivership, with its accumulated complications, "standard oil," in november, , regained all its old boston companies, and in addition all the addicks companies, with the exception of the bay state gas company of delaware. in i perfected and formulated the plans for "coppers," a broad and comprehensive project, having for its basis the buying and consolidating of all the best-producing copper properties in europe and america, and the educating of the world up to their great merits as safe and profitable investments. in i laid these plans before "standard oil." in "standard oil" was so far educated up to my plans on "coppers" as to accept them. in amalgamated, intended to be the second or third section of "coppers," was suddenly shifted by "standard oil" into the first section, and with a full head of steam ran out of the "city bank" station, carrying the largest and best train-load of passengers ever sent to destruction on any financial trunk-line. in , after the allotment of the amalgamated public subscription, the public for the first time, in a dazed and benumbed way, realized it had been "taken in" on this subscription, and a shiver went down america's financial spinal column. in , after the price of amalgamated had slumped to instead of advancing to , to , as had been promised, the "standard oil"-amalgamated-city bank fraternity called wall street's king of manipulators, james r. keene, to the rescue, and under his adroit handling of the stock in the market amalgamated was sent soaring over its flotation price of . in boston & montana and butte & boston, after long delay, drew out of the "standard oil" station as the second section of amalgamated, carrying an immense load of investors and speculators to what was at that time confidently believed would be dollar utopia; and the price of the enlarged amalgamated fairly flew to . these were the stocks which i had originally advertised would be part of the first section of the consolidated "coppers," and which, after amalgamated had been run in ahead of them, i advertised would follow in due course. in the latter part of president mckinley was assassinated, and the great panic which might have ensued was averted by the marvellous power of j. pierpont morgan. then the amalgamated dividend, without warning and in open defiance of the absolute pledges of its creators, was cut, and the public, including even james r. keene, found itself on that wild toboggan whirl which landed it battered and sore, at the foot of a financial precipice. this, briefly, is the tortuous course of amalgamated, and it is along this twisting, winding, up-alley-and-down-lane way i must ask my readers to travel if they would know the story as it is. chapter ii the "system's" method of finance and management at the lower end of the greatest thoroughfare in the greatest city of the new world is a huge structure of plain gray-stone. solid as a prison, towering as a steeple, its cold and forbidding façade seems to rebuke the heedless levity of the passing crowd, and frown on the frivolity of the stray sunbeams which in the late afternoon play around its impassive cornices. men point to its stern portals, glance quickly up at the rows of unwinking windows, nudge each other, and hurry onward, as the spaniards used to do when going by the offices of the inquisition. the building is no. broadway. broadway, new york city, is the home of the standard oil. its countless miles of railroads may zigzag in and out of every state and city in america, and its never-ending twistings of snaky pipe-lines burrow into all parts of the north american continent which are lubricated by nature; its mines may be in the west, its manufactories in the east, its colleges in the south, and its churches in the north; its head-quarters may be in the centre of the universe and its branches on every shore washed by the ocean; its untold millions may levy tribute wherever the voice of man is heard, but its home is the tall stone building in old new york, which under the name " broadway" has become almost as well known wherever dollars are juggled as is "standard oil." wall street and the financial world know that there are two "standard oils," but to the public there is no clear distinction between standard oil, the corporation which deals in oil and things which pertain to the manufacture and transportation of oil, and "standard oil," the giant, indefinite system which sometimes embraces all the "standard oil" group of individuals and corporations, and sometimes only certain of the individuals. this giant creature, "standard oil," can best be described so that the average man may understand it as a group of money-owners--some individuals and some corporations--who have a right to use the name "standard oil" in any business undertakings they engage in. the right to use the name is of priceless value, for it carries with it "assured success." standard oil, the seller of oil to the people, transacts its business as does any other corporation. it plays no part in my story and i shall not hereafter touch upon its affairs, but confine my meaning, wherever i use the name "standard oil," to the larger and many times more important "system." there are only three men who can lend the name "standard oil," even in the most remote way to any project, for there is no more heinous crime against the "standard oil" decalogue than using the name "standard oil" unauthorizedly. the three men are henry h. rogers, william rockefeller, and john d. rockefeller. sometimes john d. rockefeller uses the name alone in projects in which henry h. rogers and william rockefeller have no interests. henry h. rogers or william rockefeller seldom, if ever, uses the name in projects with which neither of the other two is associated. sometimes, but not often, john d. and william rockefeller use the name in connection with projects of their own in which henry h. rogers has no interest. henry h. rogers and john d. rockefeller, i believe, never are associated in projects in which william rockefeller has no interest. henry h. rogers and william rockefeller frequently bring to bear the influence of the magic-working syllables in connection with joint affairs in which john d. rockefeller has no interest--in fact, during the past ten years the name "standard oil" has been used more in their combined undertakings than in all others put together. there are eight distinct groups of individuals and corporations which go to make up the big "standard oil": st. the standard oil, seller of oil to the people, which is made up of many sub-corporations either by actual ownership or by ownership of their stock or bonds. probably no person other than henry h. rogers, william rockefeller, and john d. rockefeller knows exactly what the assets of the standard oil corporation are, although john d. rockefeller, jr., son of john d. rockefeller, and william g. rockefeller, that able and excellent business man, son of william rockefeller and the probable future head of "standard oil," are being rapidly educated in this great secret. in this first institution all "standard oil" individuals and estates are direct owners. d. henry h. rogers, william rockefeller, and john d. rockefeller, active heads, and included with them their sons. d. a large group of active captains and first lieutenants, men who conduct the affairs of the different corporations or sections of corporations in which some or all of the "standard oil" are interested. many of these are the sons or the second generation of men who held like positions in standard oil's earlier days. of these daniel o'day and charles pratt are fair examples. th. a large group of captains retired from active service in the standard oil army, who participate only in a general way in the management of its affairs, and whose principal business is looking after their own investments. these men are each worth from $ , , or $ , , to $ , , or $ , , . the paynes and the flaglers are fair illustrations of this group. th. the estates of deceased members of this wonderful "standard oil" family, which are still largely controlled by some or all of the prominent "standard oil" men. th. "standard oil" banks and banking institutions, and the system of national banks, trust companies, and insurance companies, of which "standard oil" has, by ownership and otherwise, practically absolute control. the head of this group is james stillman, and it is when these institutions are called into play in connection with "standard oil" business that he is one of the "standard oil" leaders, second to neither of the rockefellers nor to mr. rogers. th. the "standard oil" army of followers, capitalists, and workers in all parts of the world, men who require nothing more than the order, "go ahead," "pull off," "buy," "sell," or "stand pat," to render as absolute obedience and enthusiastic cooperation as though they knew, to the smallest detail, the purposes which lay behind the giving of the order. th. the countless hordes of politicians, statesmen, law-makers and enforcers, who, at home or as representatives of the nation abroad, go to make up our political structure, and judges and lawyers. to the world at large, which looks on and sees this giant institution move through the ranks of business without noise or dissension and with the ease and smoothness of a creature one-millionth its size, it would seem that there must be some wonderful and complicated code of rules to guide and control the thousands of lieutenants and privates who conduct its affairs. this is partially true, partially false. "standard oil's" governing rules are as rigid as the laws of the medes and persians, yet so simple as to be easily understood by any one. first, there is a fundamental law, from which no one--neither the great nor the small--is exempt. in substance it is: "every 'standard oil' man must wear the 'standard oil' collar." this collar is riveted on to each one as he is taken into "the band," and can only be removed with the head of the wearer. here is the code. the penalty for infringing the following rules is instant "removal." . keep your mouth closed, as silence is gold, and gold is what we exist for. . collect our debts to-day. pay the other fellow's debts to-morrow. to-day is always here, to-morrow may never come. . conduct all our business so that the buyer and the seller must come to us. keep the seller waiting; the longer he waits the less he'll take. hurry the buyer, as his money brings us interest. . make all profitable bargains in the name of "standard oil," chancy ones in the names of dummies. "standard oil" never goes back on a bargain. . never put "standard oil" trades in writing, as your memory and the other fellow's forgetfulness will always be re-enforced with our organization. never forget our legal department is paid by the year, and our land is full of courts and judges. . as competition is the life of trade--our trade, and monopoly the death of trade--our competitor's trade, employ both judiciously. . never enter into a "butting" contest with the government. our government is by the people and for the people, and we are the people, and those people who are not us can be hired by us. . always do "right." right makes might, might makes dollars, dollars make right, and we have the dollars. all business of the gigantic "standard oil" system is dealt with through two great departments. mr. rogers is head of the executive, and william rockefeller the head of the financial department. all new schemes, whether suggested by outsiders or initiated within the institution, go to mr. rogers. regardless of their nature or character, he first takes them under advisement. if a scheme prove good enough to run the gantlet of mr. rogers' tremendously high standard, the promoter, after he has set forth his plans and estimates, hears with astonishment these words: "wait while i go upstairs. i'll say yes or no upon my return." and upon his return it is almost always "yes." if the project, however, does not come up to his exacting requirements, it is turned down without further ado or consultation with any of his associates. those intimate with affairs at broadway have grown curiously familiar with this expression, "i am going upstairs." "upstairs" means two distinct and separate things. when a matter in mr. rogers' department is awaiting his return from "upstairs," it means he has gone to place the scheme before william rockefeller, on the thirteenth floor, and laying a thing before william rockefeller by mr. rogers consists of a brief, vigorous statement of mr. rogers' own conclusions and a request for his associate's judgment of it. william rockefeller's strong quality is his ability to estimate quickly the practical value of a given scheme. his approval means he will finance it, and william rockefeller's "say-so" is as absolute in the financing of things as is mr. rogers' in passing upon their feasibility. it does not matter whether it is an undertaking calling for the employment of $ , capital or $ , , or $ , , , mr. rockefeller's "yes" or "no" is all there is to it. he having passed on it, mr. rogers supervises its execution. the other "upstairs" is one that is heard every week-day of the year except summer saturdays. at broadway, just before eleven o'clock each morning, there is a flutter in the offices of all the leading heads of departments from henry h. rogers down, for going "upstairs" to the eleven o'clock meeting is in the mind of each "standard oil" man the one all-important event of every working day. in the big room, on the fifteenth floor, at broadway, there gather each day, between the hour of eleven and twelve o'clock, all the active men whose efforts make "standard oil" what "standard oil" is; here also come to meet and mingle with the active heads the retired captains when "they are in town." around a large table they sit. reports are presented, views exchanged, policies talked over, republics and empires made and unmade. if the recorders in the next world have kept complete minutes of what has happened "upstairs" at broadway they must have tremendously large fire-proof safes. it is at the meeting "upstairs" that the "melons are cut," and if one of the retired captains were asked why he was in such a rush to be on hand each day when in town, and if he were in a talkative mood--which he would not be--he would answer: "they may be cutting a new melon, and there's nothing like being on hand when the juice runs out." if a new melon has been cut--an amalgamated copper, for instance--it is at one of these meetings that the different "standard oil" men are informed for the first time that the scheme, about which they may have read or heard much outside, is far enough along for them to participate in it. each is told what sized slice he may have if he cares for any. it is a very exceptional thing for any one to ask for more than he has been apportioned, and an unheard-of thing for any one to refuse to take his slice, although there is absolutely no compulsion in the connection. and here, perhaps, may not come amiss an incident which illustrates what may happen in a few minutes "upstairs." before amalgamated was launched, in bringing together the different properties of which it was composed i negotiated for the acquisition of the parrott mine, the majority of whose stock was held by certain old and wealthy brass manufacturers in connecticut. they had never seen any of the rockefellers nor henry h. rogers, but we were several months getting the deal into shape before it was finally arranged, and they became familiar with the great "standard oil" institution. so much so that the chief of the owners--to whom was delegated the duty of turning over the securities to my principals--looked forward with much eagerness to the time when he must necessarily meet the mysterious and important personages who guided broadway's destinies. finally the day came, and at precisely a quarter of eleven i let him into one of the numerous private offices which are a part of mr. rogers' suite. he had under his arm a bundle of papers representing the stocks which he was to exchange for the purchase money, amounting to $ , , , and i think he fully expected that in their examination, in the receipting for so large an amount of money, and in the general talkings over, which he thought must of course be a necessary part of the delivery, the greater part of the day would be taken up. it took me some six or seven minutes to get him located, and it was close on to five minutes of eleven when mr. rogers stepped into the room. i was well into the introduction, when out came mr. rogers' watch, and with what must have appeared to the visitor as astonished consternation. "i do hope you will excuse me," he exclaimed in the middle of a handshake, "but, my gracious, i am overdue upstairs," and he bolted. his place was taken fifty seconds after by mr. rogers' secretary, who in less than five minutes had exchanged a check of $ , , , made out to herself and indorsed in blank, for the bundle of stocks, and in another minute i was ushering the old gentleman into the elevator. when he came to on the sidewalk he got his breath sufficiently to say: "phew! i thought my trade was a big one, but that friend of yours, rogers, must have had some other fellow upstairs who was going to turn in $ , , of stuff, because he did appear dreadfully excited!" the success of "standard oil" is largely due to two things--to the loyalty of its members to each other and to "standard oil," and to the punishment of its enemies. each member before initiation knows its religion to be reward for friends and extermination for foes. once within the magic circle, a man realizes he is getting all that any one else on earth can afford to pay him for like services, and still more thrown in for full measure. moreover, while a "standard oil" man's reward is always ample and satisfactory, he is constantly reminded in a thousand and one ways that punishment for disloyalty is sure and terrible, and that in no corner of the earth can he escape it, nor can any power on earth protect him from it. "standard oil" is never loud in its rewards nor its punishments. it does not care for the public's praise nor for its condemnation, but endeavors to avoid both by keeping its "business" to itself. as an instance, in connection with certain gas settlements i made with "standard oil," it voluntarily paid one of its agents for a few days' work $ , . he had expected at the outside $ , . when i published the fact, as i had a right to, "standard oil" was mad as hornets--as upset, indeed, as though it had been detected in cheating the man out of two-thirds of his just due, instead of having paid him ten times what was coming to him. chapter iii the men in power behind the "system" in the great thing known to the world as "standard oil," the most perfect embodiment of a "system" which i will endeavor to get before my readers in later chapters, there are three heads, henry h. rogers, william rockefeller, and john d. rockefeller. all the other members are distinctively lieutenants, or subordinate workers, unless possibly i except james stillman, who, from his peculiar connection with "standard oil" and his individually independent position, should perhaps be placed in the category of heads. some one has said: "if you would know who is the head of a family, slip into the home." the world, the big, arbitrary, hit-or-miss, too-much-in-a-hurry-to-correct-its-mistakes world, has decided that the master of "standard oil" is john d. rockefeller, and john d. rockefeller it is to all but those who have a pass-key to the "standard oil" home. to those the head of "standard oil"--the "standard oil" the world knows as it knows st. paul, shakespeare, or jack the giant-killer, or any of the things it knows well but not at all--is henry h. rogers. john d. rockefeller may have more money, more actual dollars, than henry h. rogers, or all other members of the "standard oil" family, and in the early days of "standard oil" may have been looked up to as the big gun by his partners, and allowed to take the hugest hunks of the profits, and may have so handled and judiciously invested these as to be at the beginning of the twentieth century the richest man on earth, but none of these things alters the fact that the big brain, the big body, the head of "standard oil," is henry h. rogers. take station at the entrance of broadway and watch the different members of the "standard oil" family as they enter the building: you will exclaim once and only once: "there goes the master!" and the man who calls forth the cry will be henry h. rogers. the big, jovial detective who stands all day long with one foot resting on the sidewalk and one on the first stone step of the home of "standard oil" will make oath he shows no different sign to henry h. rogers than to a rockefeller, a payne, a flagler, a pratt, or an o'day; yet watch him when mr. rogers passes up the steps--an unconscious deference marks his salutation--the tribute of the soldier to the commanding general. follow through the door bearing the sign, "henry h. rogers, president of the national transit co.," on the eleventh floor, and pass from the outer office into the beautiful, spacious mahogany apartment beyond, with its decorations of bronze bulls and bears and yacht-models, its walls covered with neatly framed autograph letters from lincoln, grant, "tom" reed, mark twain, and other real, big men, and it will come over you like a flash that here, unmistakably, is the _sanctum sanctorum_ of the mightiest business institution of modern times. if a single doubt lingers, read what the men in the frames have said to henry h. rogers, and you will have proof positive that these judges of human nature knew this man, not only as the master of "standard oil," but also as a sturdy and resolute friend whose jovial humanity they had recognized and enjoyed. did my readers ever hear of the national transit company? very few have--yet the presidency of it is the modest title of henry h. rogers. when the world is ladling out honors to the "standard oil" kings, and spouting of their wondrous riches, how often is henry h. rogers mentioned? not often, for he is never where the public can get a glimpse of him--he is too busy pulling the wires and playing the buttons in the shadows just behind the throne. had it not been that that divinity which disposes of men's purposes compelled this man, as he neared the end of his remarkable career, to come into the open on amalgamated, he might never have been known as the real master of "standard oil." but if he is missing when the public is hurrahing, he is sufficiently in evidence when clouds lower or when the danger-signal is run to the masthead at broadway. he who reads "standard oil" history will note that, from its first deal until this day, whenever bricks, cabbages, or aged eggs were being presented to "standard oil," always were henry h. rogers' towering form and defiant eye to be seen in the foreground where the missiles flew thickest. during the past twenty years, whenever the great political parties have lined-up for their regular once-in-four-years' tussle, there would be found henry h. rogers, calm as a race-track gambler, "sizing-up" the entries, their weights and handicaps. every twist and turn in the pedigrees and records of republicans and democrats are as familiar to him as the "dope-sheets" are to the gambler, for is he not at the receiving end of the greatest information bureau in the world? a standard oil agent is in every hamlet in the country, and who better than these trained and intelligent observers to interpret the varying trends of feelings in their communities? tabulated and analyzed, these reports enable rogers, the sagacious politician, to diagnose the drift of the country far ahead of the most astute of campaign managers. he is never in doubt about who will win the election. before the contest is under way he has picked his winner and is beside him with generous offers of war expenses. when labor would howl its anathemas at standard oil, and the rockefellers and other stout-hearted generals and captains of this band of merry money-makers would fall to discussing conciliation and retreat, it was always henry h. rogers who fired at his associates his now famous panacea for all standard oil opposition: "we'll see standard oil in hell before we will allow any body of men on earth to dictate how we shall conduct our business!" and the fact that "standard oil" still does its business in the elysian fields of success, where is neither sulphur nor the fumes of sulphur, is additional evidence of whose will it is that sways its destinies. an impression of the despotic character of the man and of his manner of despatching the infinite details of the multitudinous business he must deal with daily may be gained by a glimpse of henry h. rogers at one of the meetings of the long list of giant corporations which number him among their directors. surrounded though he be by the élite of all financialdom, the very flower of the business brains of america, you will surely hear his sharp, incisive, steel-clicking: "gentlemen, are we ready for the vote, for i regret to say, i have another important and unavoidable meeting at ----?" you look at your watch. the time he mentions is twelve, or, at the most, fifteen minutes away. there is no chance for further discussion. cut-and-dried resolutions are promptly put to the vote, and off goes the master to his other engagement which will be disposed of in the same peremptory fashion. at a meeting of the directors of "financed" steel, during the brief reign of its late "vacuumized" president, charlie schwab, an episode occurred which exhibited the danger of interfering with mr. rogers' iron-bound plans. the fact that the steel throne was many sizes too large for schwab had, about this time, become publicly notorious, but carnegie and morgan on the surface, and "standard oil" beneath, were so busy preparing their alibis against the crash which even then was overdue that they had neither time nor desire to adjust themselves on the seat. in advance mr. rogers made his invariable plea for quick action on a matter before the board when schwab, with a tact generated by the wabbling of a misfit wall street crown chafing a generous pair of ears, blurted out: "mr. rogers will vote on this question after we have talked on it." in a voice that those who heard it say sounded like a rattlesnake's hiss in a refrigerator, rogers replied: "all meetings where i sit as director vote first and talk after i am gone." it is said, and from my knowledge of these and after-events i believe with truth, that this occurrence was the spark that started the terrific explosion in united states steel, for not long afterward some unknown and mysterious power began that formidable attack on steel stock which left wall street full of the unattached ears, eyes, noses, breastbones, and scalps of hordes of financial potentates and their flambeau carriers. whether or not mr. rogers was the instigator of this movement no man, of course, can positively state, but i can vouch for the fact that about this time he displayed, when talking "steel" affairs with intimates, a most contemptuous bitterness against "king charlie" and certain of his associates. at sixty-five henry h. rogers is probably one of the most distinguished-looking men of the time; tall and straight, and as well-proportioned and supple as one of the beautiful american elms which line the streets of his native town. he was born in fairhaven, a fishing village just over the bridge from the great whaling port, new bedford. he comes of stalwart new england stock; his father was a sea-captain, and his lot, like that of most of the sons of old new england seaport towns, was cast along those hard, brain-and-body-developing lines which, beginning in the red village school-house, the white meeting-house, and the yellowish-grayish country store, end in unexpected places, often, as in this instance, upon the golden throne of business royalty. mr. rogers' part in the very early days of standard oil was that of clerk and bookkeeper. he makes no secret that when he had risen to the height of $ a week wages he felt as proud and confident as ever in after-life when for the same number of days' labor it was no uncommon occurrence to find himself credited with a hundred thousand times that amount. all able men have some of god's indelible imprints of greatness. this man's every feature bespeaks strength and distinction. when he walks, the active swing of his figure expresses power--realized, confident power. when at rest or in action his square jaw tells of fighting power, bull-dog, hold-on, never-let-go fighting power, and his high, full forehead of intellectual, mightily intellectual power; and they are re-enforced with cheek-bones and nose which suggest that this fighting power has in it something of the grim ruthlessness of the north american indian. the eyes, however, are the crowning characteristic of the man's physical make-up. one must see mr. rogers' eyes in action and in repose to half appreciate their wonders. i can only say they are red, blue, and black, brown, gray, and green; nor do i want my readers to think i put in colors that are not there, for there must be many others than those i have mentioned. i have seen them when they were so restfully blue that i would think they never could be anything but a part of those skies that come with the august and september afternoons when the bees' hum and the locusts' drone blend with the smell of the new-mown hay to help spell the word "rest." i have seen them so green that within their depths i was almost sure the fish were lazily resting in the shadows of those sea-plants which grow only on the ocean's bottom; and i have seen them as black as that thunder-cloud which makes us wonder: "is he angry?" and then again i have watched them when they were of that fiery red and that glinting yellow which one sees only when at night the doors of a great, roaring furnace are opened. there is such a kindly good-will in these eyes when they are at rest that the man does not live who would not consider himself favored to be allowed to turn over to henry h. rogers his pocket-book without receiving a receipt. they are the eyes of the man you would name in your will to care for your wife's and children's welfare. when their animation is friendly one would rather watch their merry twinkle as they keep time to their owner's inimitable stories and non-duplicatable anecdotes, trying to interpret the rapid and incessant telegraphy of their glances, than sit in a theatre or read an interesting book; but it is when they are active in war that the one privileged to observe them gets his real treat, always provided he can dodge the rain of blazing sparks and the withering hail of wrath that pours out on the offender. to watch them then requires real nerve, for it is only a nimble, stout-hearted, mail-covered individual that can sustain the encounter. i have seen many forms of human wrath, many men transformed to terrible things by anger, but i have never seen any that were other than jumping-jack imitations of a jungle tiger compared with henry h. rogers when he "lets 'er go"--when the instant comes that he realizes some one is balking the accomplishment of his will. above all things henry h. rogers is a great actor. had his lot been cast upon the stage, he might easily have eclipsed the fame of booth or salvini. he knows the human animal from the soles of his feet to the part in his hair and from his shoulder-blade to his breastbone, and like all great actors is not above getting down to every part he plays. he is likely also so to lose himself in a rôle that he gives it his own force and identity, and then things happen quite at variance with the lines. the original booth would come upon the stage the cool, calculating, polished actor, but when well into his part was so lost in it that it was often with difficulty he could be brought back to himself when the curtain fell. once while playing richard iii. at the old boston museum, richmond, by whom he was to be slain, made, at the ordained moment, the thrust which should have laid him low, but instead, booth in high frenzy parried it, and with the fiendishness of the original richard, step by step drove richmond off the stage and through the wings, and it was not until the police seized the great tragedian, two blocks away, that the terrified duke, who had dropped his sword and was running for dear life, was sure he would ever act again. when in the midst of his important plays, it is doubtful whether henry h. rogers realizes until the guardians of the peace appear where the acting begins and the reality should end. his intimate associates can recall many times when his determination to make a hit in his part has caused other actors cast with him to throw aside their dummy swords and run for their lives. the entire history of "standard oil" is strewn with court-scenes, civil and criminal, and in all the important ones henry h. rogers, the actor, will be found doing marvellous "stunts." standard oil historians are fond of dwelling on the extraordinary testifying abilities of john d. rockefeller and other members of the band, but the acrobatic feats of ground and lofty tumbling in the way of truth which they have given when before the blinking footlights of the temples of justice are as punch-and-judy shows to a barnum three-ring circus compared to henry h. rogers' exhibitions. his "i will tell the truth, the whole truth, and nothing but the truth, so help me god," sounds absolutely sincere and honest, but as it rings out in the tone of the third solemnest bell in the chime, this is how it is taken down in the unerring short-hand notes of the recording angel and sent by special wireless to the typewriter for his majesty of the sulphur trust: "what i tell _shall_ be the truth and the whole truth, and there _shall be_ no truth but that i tell, and god help the man or woman who tells truth different from my truth." the recording angel never missed catching henry h. rogers' court-oaths in this way, and never missed sending them along to the typewriter at sulphurville, with this postscript: "keep your wire open, for there'll be things doing now!" at the recent but now famous sensational boston "gas trial," henry h. rogers in the rôle of defendant was the principal witness. i was in court five hours and a half each sitting as day after day he testified. i watched, as the brightest lawyers in the land laid their traps for him in direct and cross-examination, to detect a single sign of fiction replacing truth, or going joint-account with her, or where truth parted company with fiction; and i was compelled, when he stepped from the witness-stand, to admit i had not found what i had watched for. this, too, when i was equipped with actual knowledge and black-and-white proofs of the facts. weeks before the trial began attorney sherman l. whipple, one of the great cross-examiners of the time, had made his boast that he would break through the "standard oil" magnate's heretofore impenetrable bulwarks, and when h. h. rogers entered the court-room for the first time and let his eagle eye sweep the lawyers, the laymen, and the judge until it finally rested on whipple, the glance was as absolute a challenge and a defiance as ever knights of old exchanged. i followed mr. rogers on the witness-stand and was compelled to give testimony directly opposite to that which he had given, and at one time, as i glanced at the row of lawyers who were in "standard oil's" hire, i felt a cold perspiration start at every pore at the thought of what would happen if i even in a slight detail got mixed in my facts. then i fully realized the magnificence of mr. rogers' acting, for not once in all the hours i had sat and watched him had i detected a single evidence of cold, hot, or lukewarm perspiration coming from his pores. yet away from the intoxicating spell of dollar-making this remarkable man is one of the most charming and lovable beings i have ever encountered, a man whom any man or woman would be proud to have for a brother; a man whom any mother or father would give thanks for as a son; a man whom any woman would be happy to know as her husband, and a man whom any boy or girl would rejoice to call father. once he passes under the baleful influence of "the machine," however, he becomes a relentless, ravenous creature, pitiless as a shark, knowing no law of god or man in the execution of his purpose. between him and coveted dollars may come no kindly, humane influences--all are thrust aside, their claims disregarded, in ministering to this strange, cannibalistic money-hunger, which, in truth, grows by what it feeds on. in describing one head of "standard oil," i have necessarily used many words because nature cast him in a most uncommon and chameleon-like mould. the other two require less of my space, for neither is unusual nor remarkable. john d. rockefeller, however great his ability or worldly success, can be fully described as a man made in the image of an ideal money-maker and an ideal money-maker made in the image of a man. a foot-note should call attention to the fact that an ideal money-maker is a machine the details of which are diagrammed in the asbestos blue-prints which paper the walls of hell. with william rockefeller it is different. when i read in my bible that god made man in his own image and likeness, i find myself picturing a certain type of individual--a solid, substantial, sturdy gentleman with the broad shoulders and strong frame of an englishman, and a cautious, kindly expression of face. and that is the most fitting description i can give of william rockefeller. a man of few, very few words and most excellent judgment--rather brotherly than friendly, clean of mind and body; and if i have not given you the impression of a good, wholesome man made in the image of his god, i have done william rockefeller a greater wrong than an honest man can afford to do another. chapter iv my own responsibility as to my personal responsibility for the crime of amalgamated, right here, before proceeding further, i shall briefly explain the transaction, state my share in the deal, and point out how completely i was hoodwinked by the "system." the great anaconda mine and affiliated properties, previous to the creation of the amalgamated, were owned by j. b. haggin, lloyd tevis, and marcus daly. the control of the properties and their operations were absolutely vested in marcus daly, and he alone knew where the lean veins ended and the fat ones began. for many years he had kept a close guard over the very fat ones, never letting his right eye know what the left one saw when he was examining them. for deep down in his mind marcus daly cherished a dream--a dream of immense riches, and it was to be realized in a simple enough way. he would get together the millions to buy out his partners on the basis of a valuation of the "ore in sight," then in supreme ownership himself reap untold profits out of the milling of the plethoric veins he had been so careful to leave unworked. the immense natural endowments of the anaconda rendered this easy enough, for even the lean veins "in sight" contained a vast store of copper and gold and silver. just about the time the world awaited the first section of "coppers" which i had advertised should consist of the rich boston & montana, and butte & boston properties, it "happened" that mr. rogers "met" marcus daly. the result of the conjunction of the two personalities--the whole-souled, trusting miner and the fascinating and persuasive master of standard oil--was decisive; the miner confided his dreams and his aspirations to the magnate, who at once magnificently undertook to realize them. the trade was almost instantly made. mr. rogers would buy the properties of daly, haggin, and tevis, at "in-sight" prices, and daly would be his partner, but the partnership must remain secret until the purchase was consummated. the ownership of the anaconda company at the time consisted of , , shares, and the purchase of a few shares over the majority at the "in-sight" lean-vein valuation of $ , , would carry the turnover of the management and the control. it took but a very brief time to get together the other properties which were finally included in the first section of amalgamated. they consisted of the colorado, washoe, and parrott mining companies and timber, coal, and other lands, and mercantile and like properties situated in the state of montana, for which mr. rogers paid in round figures $ , , , _a total of $ , , for what within a few days after purchase was capitalized at $ , , in the amalgamated company_. no one but henry h. rogers, william rockefeller, myself, and one lawyer knew the actual figures of the cost, although a number of the members of the different groups, including marcus daly, the silent partner, were sure they were in the secret. as soon as the properties were secured, they were capitalized for $ , , as the amalgamated copper company and were immediately offered for sale to the public. it will thus be seen that the profit on this section alone was $ , , , probably the largest actual profit ever made by one body of men in a single corporation deal, yet so nicely does "standard oil" discriminate in dispensing its generosity that in this case those who received the $ , , profit refused to deduct from it $ , of expenses connected with the formation of the company, thereby compelling it to start $ , in debt. this was something marcus daly never forgave and to the day of his death he repeatedly referred to the act as the personification of corporation meanness. in the organization of the amalgamated corporation certain individuals and institutions, for various considerations, were entitled to some share in the profits of the deal. first there was marcus daly who knew what the major portion of the property had cost and was a silent partner in the winnings as he knew them. the amalgamated company was organized in and floated on the public from the national city bank, and so james stillman, its president and head, who is also one of the inner circle of "standard oil" chiefs, should participate. something was due also to j. pierpont morgan & co., and to frederick olcott, president of the central trust company of new york, who were on the board of directors. on the board of directors, too, was governor flower, of the banking and brokerage house of flower & co., who had acted as fiscal agents for the corporation at its formation. nor must i forget the lewisohn brothers, who had been compelled to turn in all their copper business at a fraction of its worth--or at just the aggregate of its cost and raw material--to be incorporated in the united metals selling company, a part of the amalgamated scheme, but not included in the corporation. every one of these men had elaborate assurances that he was in on the cellar floor. this is what actually occurred. before mr. rogers and william rockefeller let any one at all in, they built a superbly designed water-, air-, and light-proof structure (particularly light-proof), consisting of five floors, each one being the exact duplicate of the $ , , one upon which they, and they only, stood. marcus daly alone was ushered in on the first floor, elevated just a few million dollars above their own. james stillman and leonard lewisohn, of lewisohn brothers, were admitted to the next one, the $ , , floor. in other words, mr. stillman and mr. lewisohn were given an unnamed percentage, the percentage to be arranged later by mr. rogers, in all profits above actual cost, and such actual cost was called $ , , and was arrived at by adding the $ , , of secret profits to the actual $ , , cost. then j. p. morgan & co., frederick olcott, governor flower, and one or two of the dearest friends and closest associates, were let in on the $ , , floor--were given an unnamed percentage, the percentage to be arranged by mr. rogers, in all profits above actual cost, and such actual cost was called $ , , , and was arrived at by adding $ , , of secret profits to the actual $ , , cost. then selected ones from the eight different groups of "standard oil" were allowed to move in to the fifth, or underwriters' floor, which was affirmed to be $ , , cost; and then, as a solid phalanx, all the different floor-dwellers marched upon the dear public to the tune of $ , , , in the front ranks of which were those of the eight groups of the standard oil army who had not already been admitted to any of the secret floors. right here the crime of amalgamated was born, not so much the legal crime but the great moral crime. in the ethics of wall street the heinousness of the transaction lies not in the fact that the public was compelled to pay $ , , profit to a few men who had invested but $ , , --and, as i shall show when i approach this part of my story, the $ , , did not even belong to them--but in the fact that mr. rogers and mr. rockefeller had given to their associates what, in the vernacular of "the street," is termed "the double cross." the every-day people, the millions who do not know wall street, realm of the royal american dollar; wall street, its sidewalks inlaid with gold coin and paved from curb to curb with solid gold bricks; wall street, lined with huge money-mills where hearts and souls are ground into gold-dust, whose gutters run full to overflowing with strangled, mangled, sand-bagged wrecks of human hopes, to be poured, in a never-ending stream, into the brimming waters of the river at its foot, for deposit at the poor-houses, insane asylums, states' prisons, and suicides' graves, washed daily by that grim flood's ebb and flow--the every-day people, i am sure, will not take in the blackness of this transaction at this stage of my story, but before it is ended i will lay this and many more of an equally hellish nature before them in such a b c simplicity that all can read the portent as clearly as the prophet daniel read the writing on the wall in the banquet-hall of belshazzar. when i consented to allow property which had cost only $ , , to be sold to the public for $ , , , it was under a pressure which it was practically impossible for me to withstand. i do not think i use too strong a word when i say "pressure." for three years i had been advertising to the world the great merits of "coppers," and for over a year i had announced that when the public was given an opportunity to participate in the consolidated "coppers" it would be upon a basis most carefully worked out: that the properties included in the first section would surely be worth more than the price at which they would be offered to the public, and that all the power, capital, and ability of "standard oil" were behind the promises i made. i did this advertising openly and in the frankest possible way, and in all of my announcements, whether printed, oral, or otherwise, used the names of henry h. rogers, william rockefeller, james stillman, the national city bank of new york, and "standard oil" as freely as i did my own, and in many ways led the public to believe that the very rich boston & montana and butte & boston companies were to be included in this section of "coppers." at that time my alliance with "standard oil" was close. a business connection had developed into a strong personal relation between mr. rogers and myself. we were engaged, together with william rockefeller, on a great financial deal which was based on certain conclusions i had worked out in regard to the copper industry. these men were to me the embodiment of success, success won in the fiercest commercial conflict of the age. their position at the helm of the greatest financial institution in the world gave weight and importance to their judgment and opinions. nor had aught occurred between us to suggest they would dare perpetrate the crimes they did. besides all this, indeed an integral part of it, my personal resources were completely involved in the transaction, for the most part pledged with mr. rogers and william rockefeller in stocks of the butte & boston and boston & montana corporations. this was, then, the nature of our connection when mr. rogers, suddenly and without previous intimation of his schemes, notified me of his purchase of the daly-haggin-tevis properties, and practically ordered me to put them upon the tray which i was preparing and take them to the eagerly waiting public, who by this time were fairly howling for the good things we had been promising them. in support of this extraordinary change of plan mr. rogers urged the secret wealth of the anaconda and the great value of the other properties which i myself had helped purchase, but i bitterly opposed the new proposition until there was nothing before me but these alternatives--to accept the change mr. rogers insisted on or break with "standard oil." the latter would mean that i must announce to the public that it was in danger of being tricked, and it was by no means certain that my warning would carry weight against the denials and assurances of "standard oil." however much influence i had obtained through my long years of dealings with the public, independent of "standard oil," i realized that "standard oil's" influence and prestige were much greater, for it must be remembered that at this time the public had not had the evidence since acquired of the "system's" cold-blooded trickery. if i took this course it would mean not only my own ruin financially, for mr. rogers and william rockefeller could call my loans and wipe me out completely, but also the ruin of my friends and allies, who, under my direction, had invested their own millions in the properties concerned. on the other hand, i had the most earnest assurances from mr. rogers and william rockefeller that the new properties were worth much more than the $ , , at which it was proposed to capitalize them. they took me to task for my distrust of them, and went far to demonstrate to me the accuracy of their estimates. they not only gave me marcus daly's minute estimates of the values and legitimate possibilities of anaconda, but consented to have these verified by outside experts in whom i had implicit confidence, and whose personal examination more than bore out daly's appraisal. i have never yet had reason to doubt the correctness of the figures then shown me, although since i began this story "standard oil," in an endeavor to get me to abandon my efforts to secure justice for the thousands i assisted in duping, have stated for the first time that marcus daly deceived them and really, to use the words of their chief counsel, sold them a "gold brick." after this examination i felt convinced that the properties "standard oil" insisted on substituting for those originally intended for the first section of amalgamated were such that the public, if honestly dealt with, could not possibly meet with loss in purchasing. but even then i only consented to go ahead with the flotation under a definite agreement which seemed to me completely to guard against all contingencies of jugglery or deception. this agreement stipulated that all the profits from the transaction should be taken by those to whom they were due in the stock of the amalgamated company, and no part of them in cash--that the public should be sold, at the flotation, only $ , , of the $ , , , and that "standard oil" and all associated with "standard oil" in the profits should retain the remaining $ , , until such time as it had been absolutely demonstrated to the public that the property behind the $ , , of stock was worth more than the amount it had been capitalized for. furthermore, i was also promised that the $ , , cash to be taken from the public should be kept intact, and in my handling of the market it should always be available for the repurchase from the investors of what had been sold to them, at the price which they had paid for it. this was the basis on which i went on with amalgamated. i would not have my readers understand me as asserting it would have been possible for me to have stopped the flotation had i attempted it. but, on the other hand, i would not have them think that i desire to be absolved from the disastrous results of the great mistake i made at this time in not at any cost doing that which after-happenings have shown would have been the most honest course for me to have pursued. nor would i have them think i desire to be absolved from the consequences of many other mistakes which this one led me into--mistakes in temporizing with the situation and postponing action which i should have boldly and fearlessly forced, regardless of all consequences to the public, my friends, and myself. the subsequent proceedings, the manner in which amalgamated was actually sold to the public, the flagrant disregard of the conditions of my agreement with mr. rogers and william rockefeller, will, when fully told in their proper place in my story, show that the "system," by whose methods the public is as ruthlessly plundered as though the fruits of its labors were taken away from it by highwaymen, admits also of its own votaries being tricked and despoiled by their associates. the men who participated in the transaction i have just described are among the most astute financiers in the country and presumably possessed of invincible capacity to protect their own interests. but with all their knowledge of the "system's" tricks they were, in this instance, as shrewdly duped as the veriest tyro in the wall street game. my own experience with the "system" in this deal was different in degree but not in principle from that of these others, and it must be remembered that i was better equipped to protect my interests than any of them. i knew that the actual cost of the properties comprising the first amalgamated was $ , , , and that when sold to the public at $ , , there must be a profit of $ , , . i had every right to think i knew all the other details connected with the transaction, for as organizer and executant of the deal my share in the profits was to be equal to that of henry h. rogers and william rockefeller respectively. we were each to have twenty-five per cent., the remaining twenty-five per cent. going to others. this was no gentleman's "leave-it-to-me-and-i'll-see-you-get-what's-coming-to-you" arrangement either, but a hard, cold, mutually satisfactory and settled-in-advance agreement. but when it came to the final accounting, the "system" had so regulated things that the participants on the various floors, except, of course, mr. rogers and william rockefeller, must each accept without question the share finally handed over to him. having no means of knowing how large the other interests were, or what the "extraordinary expenses" had been, they were in no position to question the payments made them, which represented sums below what they would have had if the business had been conducted as they thought it had been. when my final account was presented to me i was startled. notwithstanding the "cleverness" of the "system," the deception was so obvious, so audacious, that the instant mr. rogers submitted it to me i exploded and denounced the transaction with such vehemence and conviction that within a few minutes there was forthcoming a second statement, revising the account, by which i was given just double the amount first tendered, and the figures in both accounts ran into millions; yet the amount in the second account upon which i settled was only one-half the share received by my equal partners, henry h. rogers and william rockefeller, as i afterward learned.[ ] this is a fair statement of my own share in the first amalgamated transaction. i have no desire to evade the issues suggested and raised by these revelations. my frankness should be absolute proof of that. as i promised, i shall hew to the exact line of fact, letting the chips of responsibility, legal and moral, fall where they may, though many of them stick to my own clothes. my own burden of error i am ready and willing to shoulder, but i decline any longer to take and carry responsibilities which belong absolutely to others. there should be a time-limit on martyrdom, and mine anyhow is up. footnotes: [ ] i know no better spot in my story than right here to set the public right on two vital points concerning amalgamated, upon which they are and always have been greatly at sea: john d. rockefeller did not have before the amalgamated company was organized and floated, nor at its organization and flotation, directly or indirectly, a dollar's interest in its stock nor its affairs, and i have what i consider excellent reasons for believing he has not had any interest up to the time of this writing. the disasters which have come to the amalgamated stockholders did not occur, as has been so industriously and ingeniously advertised throughout the world, because of the inability of the "standard oil"-amalgamated-city bank fraternity to prevent the collapse of the price of copper, the metal, from the high price of seventeen cents to the low one of eleven cents per pound. "cornering" the metal market, forcing the price to an abnormally high figure and maintaining it there had, notwithstanding the many emphatic statements to the contrary, absolutely no part in any of our original plans, and the success or failure of our project was in no way dependent upon any price for copper, the metal, other than the fair and legitimate price caused by legitimate supply and demand. in fact, as i shall demonstrate before my story is ended, forcing the price to extremely high points and the resulting collapse were all a part of the trickery by which the public was plundered. chapter v the power of dollars at no time in the history of the united states has the power of dollars been as great as now. freedom and equity are controlled by dollars. the laws which should preserve and enforce all rights are made and enforced by dollars. it is possible to-day, with dollars, to "steer" the selection of the candidates of both the great parties for the highest office in our republic, that of president of the united states. it is possible to repeat the operation in the selection of candidates for the executive and legislative conduct and control of every state and municipality in the united states, and with a sufficient number of dollars to "steer" the doings of the law-makers and law-enforcers of the national, state, and municipal governments of the people, and to "steer" a sufficient proportion of the court decisions to make absolute any power created by such direction. it is all, broadly speaking, a matter of dollars practically to accomplish these things. i must not be misunderstood as even insinuating that there are not absolutely honest law-makers and law-enforcers, nor that there are not as many of them in proportion to the whole body as there were at the creation of our republic. i believe there is at the present time as large a percentage of honesty among americans as ever there has been, but it is plainly evident to any student of the times that at no other period in the history of the united states has honesty been so completely "steered" by dishonesty as at this, the beginning of the twentieth century. _i shall go further and say that there to-day exists uncontrolled in the hands of a set of men a power to make dollars from nothing._ that function of dollar-making which the people believe is vested in their government alone and only exercised under the law for their benefit, is actually being secretly exercised on an enormous scale by a few private individuals for their own personal benefit. this, i am well aware, is a startling statement, but not more so than the facts which support it. throughout the country we have all grown accustomed to the spectacle of men who, poor yesterday, to-day display more dollars than the kings and queens of olden times controlled. in flaunting this money these men proudly boast: "we made all this yesternight, and are going to multiply it five-or fifty-fold to-morrow night." the fact that there must be in this country some secret method of gaining vast fortunes gradually dawned on the minds of the people. this method, they argued, must be outside the laws of the land which they themselves had made, and they were confronted with the fact that the possessors of these fabulous fortunes were creating a power not recognized by their government and which practically placed the government in the hands of the fortune-owners. they realized that in some way the magic of this fortune-making was connected with, or seemed to be compounded in, institutions called corporations and trusts, and that among these the head and centre was a great affair called "standard oil." wherever this "standard oil" was, all knew that strange wonders were worked. within the sphere of its influence dirt changed to gold, liquids to solids, and what was, was not, and what was not, was. whoever became a part of this mysterious "standard oil," at the same time was rendered "powerful"; as though touched by a fairy's wand, he changed from pauper to millionaire. but what was "standard oil"? the people knew that at the beginning it was only an aggregation of men, private individuals, who had accumulated much money by securing a monopoly of selling oil, and that these men were "rockefellers," and that standard oil and "rockefellers" had been cute and cunning in the conduct of their oil-selling to a degree greater than had been rival sellers of oil or of other necessities. and as time wore on much more was heard of the cleverness of standard oil and "rockefellers," as the victims of the cuteness and the cunning "hollered" in public places, and the newspapers and writers of books exclaimed against their practices and exactions. but many other things were happening simultaneously, and to the great bulk of the people it was interesting rather than portentous that there existed in the country a giant oil-thing whose owners were reputed the richest men in the world. it was not until the beginning of the twentieth century that the monster "standard oil" loomed up before the people as the giant of all corporate things and that its ominous shadow seemed to dwarf all other institutions, public or private. in multitudinous forms it was before the people. in awed whispers men talked of its mysterious doings and canvassed its extraordinary powers as though "standard oil" were a living, breathing entity rather than a mere business institution created by men and existing only by virtue of the laws of the land. about the time that the world had begun mistily to take in the tremendous forces which radiated from "standard oil," there occurred a financial crash, and the people saw their savings, invested in what they supposed were the legal and absolute titles of ownership in the material things of their country, suddenly decline in value and contract to prices representing a loss to them of billions of dollars. throughout the misery and suffering this terrible collapse occasioned, "standard oil" remained undisturbed as before and amid all the confusion kept sternly on its dollar-"making" way. indeed, it seemed to gain in bulk as other institutions diminished or disappeared. then it was that the people first began to demand, what they are still to-day fiercely demanding, "what is this 'standard oil'?" "what is its secret?" "whence came it?" and, "can our republic endure if it, too, endures?" to-day "standard oil," the "private thing," is the greatest power in the land--more powerful than the people individually or as a whole, and its secret is the knowledge of the trick of finance by which dollars are "made" from nothing in unlimited quantities subject to no laws of man nor nature. the dollars that "standard oil" _makes_ are of the same value as the dollars of the people as made by the government, which dollars we know can be coined and put into circulation only in accordance with law and for the benefit of all the people. for the better understanding of those readers not versed in the technical phrases of finance and economics i shall in my narrative make use of certain terms of my own which will convey meanings readily grasped when the sense in which they are used is once comprehended. in speaking of "standard oil," for instance, i will speak of it as a "private thing." by that term i desire to typify the active, private identity of a corporation which comprehends, but exists independently of, its legalized functions. some corporations have a real personality in addition to that which their name and the corporation laws prescribe for them, an inherent power, or individuality, which exists above and apart from their physical functions as sellers of oil, of coal, or of ice. this may be an incarnation of the power developed in the transaction of their legalized occupations, but the "private thing" is uncontrolled by any of the restrictions by which the law defines and curbs the corporation whose name it bears. already i have distinguished between "standard oil" which wields all the powers of its subsidiary companies, and standard oil, the seller of oil. in the same way we have "american sugar refineries" and "united states steel," the "private things" which are not one whit better than nor different from "standard oil," the "private thing." though this narrative will deal only with the "private things," bay state gas and amalgamated copper, i have no hesitancy in saying that the methods employed and the results, good or bad, which accrued in the case of any of the other "private things" with which the public have had to do, differ only in details from those with which i shall deal in my story. in speaking of dollars brought into existence by the trick of finance i have referred to i shall call them henceforth "made dollars," to distinguish them from dollars coined by the government and legitimately acquired by the individual or corporation. these "made dollars," it must be remembered, are really "made" for all purposes of use as surely as if they had the government's stamp, yet they are not made in the sense of the known volume of the people's money being added to. so, however many of these "made dollars" are brought into existence by this trick of finance, only the men who "made" them can know and profit by their existence. the people are no wiser nor can they adjust themselves to the change of conditions brought about by the creation of all this new money; yet if "unmade" or lost, the entire volume of the nation's wealth would be contracted. i can set before my readers better by an illustration than by any process of definition, the trick of finance by which "made dollars" are brought into existence. let us suppose that the united states government at washington, the only power legally entitled to issue money for circulation among the people, puts forth a particular $ , . all the conditions prescribed by law have been followed, and all the people in the country are benefited by the issue and circulation of this particular $ , , each in the proportion the laws prescribe. "b," a western farmer, tills his soil and receives, by the sale of his wheat, the particular $ , , which he then deposits in _the bank_. _the bank_, being a part of the government machinery, only receives, holds, and uses the $ , under safeguards provided for by the laws of the land, so hereafter "b's" material life is conducted on the basis that he is the full and actual possessor of $ , . he knows, further, that his $ , cannot be expanded nor contracted, nor its relation to any of the other money of the people which is in circulation altered without his knowledge, because he knows such changes cannot come about except through the government. i say he knows this--he has every right to believe he knows it--but, in fact, it is not so, because of the working of the secret financial device of the private thing. at this stage enters "c," the private thing. "c" purchases with $ , ("b's" money) which he borrows from _the bank_, a copper-mine, depositing the title which he receives from the seller with _the bank_ as collateral for the $ , . after purchasing he arbitrarily calls the copper-mine worth $ , --arbitrarily because his act is not controlled nor regulated by any of the laws of the land--arbitrarily because the actual cost, $ , , is his secret and his alone. then, arbitrarily, "c" organizes his $ , of copper property into the arbitrary copper company, and issues to himself a piece of paper, which he arbitrarily stamps " , stock dollars." this he takes to _the bank_, and by loan or other device exchanges it for the remaining $ , belonging to "b," and thereafter "c" conducts his affairs on the basis that he is the possessor of $ , , his "made dollars" in the transaction. at this stage there is actually in use among the people $ , where "b," the legitimate factor, and his kind, the people, suppose there is but $ , --$ , which is recorded, known and legal, being used by the legitimate factors, "b" and _the bank_, and $ , which is unrecorded and unknown to any but "c" and _the bank_, being used by the illegitimate private thing "c." right here is the secret device, the financial trick, by which the greatest power in the land has been created, and by which the people can be absolutely plundered of their savings for the benefit of the few. at this stage the two-thirds of "b's" $ , , of which he later is to be plundered, has not been actually taken away, so he cannot possibly have any evidence yet of the process of pillage which has been begun, or that the volume of money which he supposes is all that exists has been tremendously expanded. the next step is where "c" sells his $ , , stamped " , stock dollars" (which, as already shown, he has exchanged with _the bank_ for the $ , deposited by "b"), to "b" for $ , , which $ , "b" withdraws from _the bank_ by simply making out a check in favor of "c." ("b's" inducement to exchange his dollars for the stock dollars of "c" is the high rate of interest that they will return in the form of dividends, which rate is much larger than _the bank_ can afford to pay.) "c" deposits "b's" check with _the bank_ and hereby liquidates his $ , indebtedness to _the bank_. at this stage "b" is still the possessor of $ , , but it is " , stock dollars." "c" is the possessor of $ , , and "d," from whom the copper-mine was purchased, is the possessor of $ , ; but the two latter amounts make up the , real dollars, and _the bank_ remains where it was at the beginning of the transaction. the people, however, are no wiser; but they know, because they have been most carefully educated to such knowledge by "c's" agents, wall street, and the press, that their country is tremendously prosperous--that its great prosperity is evidenced by the $ , added wealth in the form of , new stock dollars. at the next stage the financial trick accomplished by the secret device is complete. "b," the farmer, who has contracted for new machinery and other necessities and luxuries to be paid for "next season," attempts next season to turn his , stock dollars into real dollars, and "c," the private thing, knowing their real value to be but $ , , refuses to make the exchange, but instead, by proclaiming their real value, compels "b," who must have real dollars to meet his debts, to sell them for what "c," the private thing, is willing to pay. "c," the private thing, is willing to pay their worth, which he alone knows is $ , ; he repurchases them at that price from "b," that he may repeat the operation at the return of the next "wave of the country's prosperity." by this operation "b," the farmer, has lost, as absolutely as though they had been taken away from him by a government decree, $ , of his own making, and "c," the private thing, has "made," as absolutely as though the government had allowed him to coin them for his own benefit, , real dollars, and _the bank_, created, regulated, and controlled by law, and existing because of the people's deposits of money, has been the instrument by which "c," the private thing, has deprived "b," the farmer, of his savings, because "c," the private thing, is at one and the same time during the operation i have outlined, himself and _the bank_. a careful study of this illustration, by even laymen unacquainted with financial or corporation affairs, will clearly show that the foundation of this transaction was _the bank's_ putting in jeopardy $ , of "b's" deposited $ , , and that if the $ , , after being put in jeopardy, had been lost, "b" would have been the loser,[ ] which, in turn, means that the compensation for the jeopardy in which the $ , was placed was the possibility of $ , profit; and that, therefore, the $ , profit when made should have gone to the owner of the $ , , "b," instead of to "c," the user of it. it is therefore in this sense that i shall use the term "made dollars"--wherever they are "made" or "unmade" through one set of men using the dollars of another set of men without that other set knowing that their dollars are being so used; and wherever the result of such use is that when dollars are "made," they are "made" by the ones who use others' money, and where dollars are "unmade," they are lost by the ones who own the dollars which they don't know are being used. footnotes: [ ] i say "b" would have been the loser because all money lost by a bank must eventually be lost by the depositors, the people, or the surplus or capital of the bank which belongs to the people, through their ownership of the stock in the bank. of course the loss of individual amounts such as $ , would not come directly on the people. but when the aggregate of the money put in jeopardy by the four classes of institutions i name--national banks, savings-banks, trusts, and insurance companies--runs into billions and is lost, the loss _must_ fall on the people, because the only other ones involved are the managers and controllers of these institutions, who always see to it that when the losses which would wreck the bank are actually made, they, the managers and controllers, have no deposits and none of the stock. chapter vi construction of "standard oil's" "dollar-making" mill i believe "standard oil" was the first to utilize this secret device for circumventing the safeguards which the law has erected to protect the savings of the people. it was the first practically to apprehend that, a large proportion of all the moneys in circulation, which belong to the people or the government, being in the custody of the national and savings-banks and trust and insurance companies, it would only be necessary for a set of men to obtain control of sufficient of the principal national and savings-banks and trust and insurance companies to control practically unlimited amounts of such funds. once in control of these funds dollars could be absolutely "made" at will by the three following steps: st. using the money in these institutions to acquire properties. d. consolidating such properties on an inflated basis, and selling them to the people (who, in fact, already owned them; because they owned the funds with which they had been purchased); and, d, by stock-market trickery scaring their owners into re-selling them at an enormous shrinkage from the price they had paid. to understand a situation with "standard oil" is to act, and twenty years ago it began to weave a net to secure control of the four classes of institutions i have named. its first move was to establish a great corporation, the standard oil company, and make its stock, , , shares, sell at from $ to $ per share, or $ , , to $ , , . it kept its affairs mysteriously secret, it paid enormous dividends, and from time to time it caused to be published broadcast throughout the world the statement that it was held in such value by its creators, the rockefellers, rogers, etc, that they continued to own all but a few shares of the entire capital. to prove that there could be no doubt of such continued ownership, the public's attention was repeatedly called to the fact that the standard oil company was the only great corporation which did not allow its shares to be traded in upon any of the stock-exchanges. as a matter of fact, though they are not traded in on the regular stock-exchanges, they are actively bought and sold daily on the new york "curb." at the height of the recent financial storm word went round that the crafts of three over-night-made multimillionaires, men foremost in the seventh group of "standard oil" votaries, were in the trough of the financial sea and headed for the breakers, which were already strewn with the wrecks of the people's savings. following closely on the heels of these stories came the astounding one that each of these enormously rich men had, in his endeavors to raise large amounts of cash, disclosed among his assets blocks of "standard oil" stock ranging from , to , shares each. hardly had the public heard this before all financialdom knew that the storm-tossed crafts had received succor, and that the crisis had passed. for one brief day the financial press of the country printed the item: "standard oil came to the rescue by buying for cash large blocks of standard oil stock which had long been held by this or that interest for investment," and no more was thought of the incident. even the most alert financiers never suspected that the most important stock secret of the age had been on the verge of becoming public property. planted deep in the minds of the public that watches the comings and goings of the street is the conviction that standard oil is the holy of holies among stocks. the world has been taught to believe that the owners of standard oil regard the shares of the great oil corporation as their most precious, most sacred possessions. yet while "standard oil" has been so scientifically spreading abroad the impression that the public would never be permitted to own standard oil stock, secretly it has been engaged in exchanging that stock for the securities of the people in the form of banks and trust companies, railroads, and other assets of definite value. so completely has "standard oil" pulled the wool over the eyes of the votaries of finance that there cannot be found in or out of wall street a single great financier who would not laugh to scorn the suggestion that "standard oil" is engaged in a campaign for the distribution of its standard oil stock to the public. yet pin your great financier down to the facts, and he'll admit that he himself has quite a block of the stock, and that institutions of which he is a director include among their assets in one form or another good-sized parcels of the inestimable security. but so completely are these very wise men held by the spells woven over them when for this or that special reason they were allowed as a favor to acquire their holdings, and so impressively have they been shown that their ownership in standard oil stock must be kept secret, that no suspicion has ever entered their minds that they were playing the part of lambs in its purchase. nor was the episode i have described above allowed to disturb their serenity. it soon became known to the innermost circle of wall street that the stock the three men had resold to "standard oil" represented the share of each in some of the gigantic deals to which he had been a party during the last ten years, and that with its acquirement had gone a pledge that it would always be kept in the purchaser's "tin box," and whenever inspected by "standard oil" would be free from "pinholes." and so, adroitly, dangerous deductions were prevented. for the uninstructed i may say that a capitalist's "tin box" is the receptacle for the stocks and bonds that largely represent his fortune, and pinholes in a stock certificate are in wall street conclusive evidence that such certificate has, at some period, temporarily passed into other's hands as collateral for loans, for there has been pinned to it a memorandum or note stating the details of the transaction in which its owner parted with it. pinholed securities are looked upon by the upper crust of big financiers with much the same horror as that with which members of the american social upper crust look upon their no. boots and gloves--reminders of their peasant ancestry. but to return to "standard oil's" financial weavings: their next move was to use standard oil stock as the basis for loans, that is, as collateral for money borrowed from the banks, trust and insurance companies, and treasuries of other great corporations and estates. the money thus acquired was paid out to purchase the control of banks and trust and insurance companies in all parts of the united states, the standard oil ownership being represented by dummy directors and officers. the next move represents another of the dazzling devices of finance in which "standard oil" is adept, and brings the process of artificial expansion still further along. control of a certain number of these savings and national banks and trust and insurance companies having been acquired, the funds of each were so manipulated by depositing those of one institution with another, and the latter's in turn with the first, as to swell the deposits of all and create in all of them an apparently legitimate basis for increases of capitalization. at the same time there was shown an apparently legitimate necessity for the establishment of additional banking and trust companies, which were duly organized and their assets juggled around by the same process. the result of all this manipulation defies description. throughout the series of correlated institutions loans and deposits are multiplied in such an intricacy of duplication that only a few able experts, employed by the "system" because of their mathematical genius, are able to unravel the tangle to the extent of approximating the proportion the legitimate funds bear to those which have been created by the financial jugglery i have indicated. when "standard oil" had gathered into its net sufficient of the important private institutions of finance there still remained the federal government, the largest handler of money in the country. it was not hard for "standard oil" to introduce its expert votaries into the united states treasury and thus to steer the millions of the nation into the banks subject to the "system's" control. this accomplished, the structure was complete and the process of "making" dollars proceeded on a magnificent scale. that there may be no possible doubt in the minds of those of my readers who are unacquainted with such matters that i am citing every-day, actual happenings, i will tell just how the daly-haggin-tevis-anaconda-amalgamated transaction was worked out, showing that but for the existence of the national city bank of new york, or a like institution of the people, it could not have been brought about. when mr. rogers and william rockefeller "traded" with messrs. daly, haggin, and tevis for the anaconda stock, and with others for like stock or other properties which i have already named, the price agreed upon was $ , , to daly, haggin, and tevis, and $ , , to the others, or $ , , in all. this was to be paid by "standard oil" and received by daly, haggin, and tevis, and the others, but one of the stipulations in the "trade" was that instead of the money's being paid to daly, haggin, and tevis, and others direct, it was to be credited to them on the books of the national city bank of new york and was to be, by agreement, not withdrawn from the bank before a given time, the bank agreeing that the new owners of this money should receive interest at a low rate upon it while it so remained deposited. at the same time the bank agreed to loan mr. rogers and william rockefeller the $ , , at the same rate of interest upon the collateral which the $ , , was used in purchasing. therefore the first part of the transaction was as follows: the bank, having $ , , on hand belonging to the public in the form of savings deposited, or having a fictitious $ , , in the form of book-keeping accounts made possible by the deposits of the public and the manipulation of the funds in other banks and trust and insurance companies belonging to the public or the government, caused an entry to be made in its books showing that this $ , , had been loaned to mr. rogers and william rockefeller, and that they, having transferred it to daly, haggin, tevis, and others, were, upon the books of the bank, the real owners. the second part was the summoning into the city bank of certain "standard oil" lawyers, office-boys, and clerks, and the organization by them of the amalgamated copper company. the lawyers drew up the papers and the office-boys and clerks signed them. first, the papers certified that "whereas we (the office-boys and clerks) are desirous of taking advantage of the corporation laws of the state of new jersey, we (the said office-boys and clerks) do so take advantage of the said laws and form ourselves into the amalgamated copper company, which will have a capital of $ , , , and which will be allowed by said laws to own copper-mines and other things, to mine copper and other things, to manufacture, buy, sell, and trade in copper and other things, and to do numerous and variegated other things; and that whereas we (the said office-boys and clerks) have now become the amalgamated copper company, one of our number will purchase the entire capital stock of the said amalgamated copper company for $ , , cash, which $ , , cash we herewith certify to have been paid in the form of a check for $ , , , herewith delivered to the treasurer, one of our number, by the clerk who drew it; and the treasurer, herewith certifying that he has received the $ , , , herewith delivers unto said clerk the $ , , capital stock of the amalgamated copper company, and we (the said office-boys and clerks) herewith certify that there is within the treasury of the amalgamated copper company $ , , , and we (the said office-boys and clerks) vote that it, the said $ , , , shall be used in the purchase of certain stocks and properties, and said certain stocks and properties shall be the same stocks and properties previously purchased by mr. rogers and william rockefeller, and now owned by them, and we (the said office-boys and clerks) herewith certify that we have paid from the treasury $ , , , that said $ , , is in the form of a check, and said check is the one previously received, or its equivalent, by our treasurer, from one of our number, to wit, the clerk referred to earlier in these papers, and said $ , , has been paid to henry h. rogers for his and william rockefeller's use." henry h. rogers, now having $ , , , where formerly he had stocks and properties which had cost him $ , , , and being desirous of investing it, purchased from the clerk the $ , , of amalgamated stock which he, the clerk, had previously purchased from the treasury of the amalgamated company, mr. rogers promptly paying for said purchase with the $ , , check or its equivalent, which has already done such yeoman service. the organization of the amalgamated copper company of new jersey now being complete, and the company being in possession of all the property which had formerly belonged to mr. rogers and william rockefeller, and which had cost them $ , , , and the clerk having again come into possession of his $ , , check, and mr. rogers and william rockefeller being the sole owners of the $ , , of amalgamated stock, the second part of this transaction was completed. the third began by the office-boys and clerks resigning from their positions as directors and officers of the amalgamated copper company of new jersey in favor of the more responsible and better known "standard oil" votaries. mr. rogers and william rockefeller then had the national city bank of new york offer for sale to the public the $ , , of stock in such a way that, although it was then the private property of mr. rogers and william rockefeller, the public were led to believe it was the property of the amalgamated copper company. simultaneously, the national city bank of new york offered to loan the public its deposits at the rate of ninety cents on the dollar, on any amount of the amalgamated stock it, the public, purchased; whereupon the public, taking advantage of this offer, agreed to purchase from the national city bank of new york the $ , , of stock for $ , , , thereby enabling it to certify upon its books that the $ , , it had loaned to messrs. rogers and rockefeller had been repaid, and enabling mr. rogers and william rockefeller, after paying said debts to the national city bank of new york, to become the absolute owners of $ , , of money, none of which they had owned before, and which they had "made" as absolutely as though they had coined it by permit from the government of the people who had parted with it.[ ] the fourth part of the transaction began when months afterward the public, who had borrowed their money from the national city bank of new york and other banks and trust and insurance companies to buy amalgamated stock at cents on the dollar, were compelled to repay it, and to do so were obliged to sell the amalgamated stock which they had purchased at $ per share for the best price they could get, which was $ per share; and if we suppose for a moment that the "standard oil," after repurchasing it at $ per share, at a later day repeated the operation of selling it for $ per share, it will be seen that "standard oil," the "private thing," would thereby "make" an additional $ , , , as absolutely as though they had been allowed by the government to coin it.[ ] this explanation is not the creation of an extravagant fancy. it is not romance, but reality. the thing described was a supreme manifestation of the "system," of the perfect working of that tremendous financial machine which reaps, grinds, and harvests for its own benefit, the earned savings of the american people. in showing how these thirty-six millions were made in the brief space of this creature's (amalgamated copper's) life, i deal with reality and not romance; but let my readers for a moment give their imaginations play and picture to themselves one scene in this stupendous drama. a great room in the greatest banking house in america, if not in the world--silent, solemn--an atmosphere of impregnable rectitude--the solid furniture, the heavy carpets, the chill high walls, the massive desks, the impressive chairs, the great majestic table portentously suggestive of power. presto! the dim calm is broken; the air vibrates as when an ancient church is invaded by a swarm of vampire-bats. into the great room enter a group of men and a flock of youths, who settle in the impressive chairs round the majestic table. you wonder what is the motive of the assemblage. these grave lawyers, whose names are weighty in the nation's councils, and these gray-haired, dignified financiers might well be gathered to arbitrate a dispute involving empires; but why these office-boys and clerks, with their restless, surprised eyes and uneasy gestures? the flourishing of papers, the murmuring of voices in a confusion of "seventy-five million," "we buy," "we sell," "we are," "we will"--words, nothing but words; then silence as one reads from a stiff parchment certain resolutions which the suave gentleman with incisive steel-clicking manners, at the head of the table, puts to a vote. then these youths, whose souls are afire with the hope of a director's $ gold fee, timidly sign the record, trembling the while lest a blot call down on them a scolding; a head clerk, whose fondest dream is a raise of salary as the result of coming under the master's eye in a seventy-five-million-dollar deal, affixes a seal, and there is an exchanging of thin slips of paper--checks--dollars--magically "made dollars." exit office-boys and lawyers. the door closes--silence again. then the air vibrates with the sound of a hearty hand-slap and the genial, whole-souled greeting of the "master" to his partner. "william, i feel as though i had done an honest day's labor! thirty-six million dollars 'made' and no hitch, no delay!" then follows the partner's mild answer: "yes, harry, but don't forget james' and the others' shares will shrink it up quite a bit." thirty-six million dollars for _one honest day's labor_! thirty-six million dollars--and alaska cost us but seven millions and spain relinquished to us her claims on the philippines for only twenty millions. thirty-six million dollars!--more than a hundred times as much as george washington, thomas jefferson, and "abe" lincoln together secured for the patriotic labors of their lifetimes. and this vast sum was taken from the people to enrich men whose coffers were already, as the results of similar operations, so full of dollars that neither they nor their children, nor their children's children could count them--as the people count their savings, a dollar at a time--as thoughtlessly taken as are the apples that the school-boy steals after he has eaten so many that he can eat no more. a thousand times have i tried to figure out in my mind what worlds of misery such a sum of millions might allay if issued by a government and intelligently distributed among a people--and do my readers know that never in the world's recorded history has any nation felt itself rich enough to devote thirty-six millions to the cause of charity--even in the midst of the most awful calamities of fire, flood, war, or pestilence? on the other hand, i have had to know about the horrors, the misfortunes, the earthly hell, which were the awful consequences of the appropriation of this vast amount. i have had to know about the convicts, the suicides, the broken hearts, the starvation and wretchedness, the ruined bodies and lost souls which strewed the fields of the "system's" harvest. pondering all these things, i have ceased to wonder at the deep murmurs of discontent that are rising, rising to my ears from all parts of the continent. can it be that a just god suffers the sons and daughters of some of us to eke out a bare existence as the best reward of earnest effort and sterling worth, and at the same time rewards these other men with $ , , for one day's labor? is this the freedom which our fathers and our sons died on many a bloody, hard-fought field to preserve? i am conscious of a haunting fear that these men and women may not always be patient, may not always be put off with skilled evasion or slippery subterfuge, and for one brief moment i see visions of a marching people, bearing aloft grisly heads on gory poles, and hear above the low, bestial murmur of the mob the cry for bread and for revenge. and then i remember that this is _america_, not france; that our laws are strong--if but the people are aroused to see them obeyed; that our prisons are ample, even though they be for the present filled with petty rascals who can do but little harm though turned loose to make room for the real scoundrels who are undermining the foundations of our republic. footnotes: [ ] it must be remembered that the amalgamated company never owned all the capital stock of the anaconda, but, on the contrary, only a few shares over , , which represented the ownership of the haggin-tevis-daly people, and which they had turned in for a lump sum before the market price had advanced. the control of the parrott, owned by the amalgamated company, was purchased for a lump amount from franklin farrell and his associates for the sum of $ , , -odd, not $ , , . the colorado smelting and mining company was also purchased in a lumped batch of senator wolcott, not at $ , , , but for $ , , -odd, while the tremendous advance in the price of anaconda in the market from to was due to the operations of messrs. rogers and rockefeller for their private account, out of which they made a large additional profit. there can be no possibility of mistake or successful misrepresentation of these figures: first, because the anaconda figures are known not only to mr. rogers, william rockefeller, and myself, but to j. b. haggin, and to the estates of tevis and marcus daly; the colorado figures, to associates of senator wolcott and to his estate; and the parrott figures, to mr. farrell who received the money, and to a large number of those to whom he had to account; and, further, these figures will all be demonstrated in open court in suits outside of any with which i have to do, which are now being brought or are pending. [ ] as a matter of fact, the people lost even more than thirty-six millions of dollars on this part of the amalgamated transaction, because "standard oil" did not sell all the , shares at $ per share ($ , , ) at that time. they retained two-thirds of them, which at a later date they fed out to the public at $ per share, and at a still later date they took them back at $ per share. chapter vii juggling with millions of the people's money for the purposes of the transaction i have just described the machinery of a great bank or trust company was essential. the vast profit gained here was absolutely "made" through the instrumentality of the national city bank of new york, but some other tractable institution would have been equally efficient. in order that my readers may focus such great financial concerns as this national city bank, i give right here brief résumés of its career and resources and of those of two of its affiliated institutions: national city bank new york city james stillman, _president_. the "city bank" was chartered by the new york legislature in , and reorganized as a national bank july , . the capital paid in was $ , , . moses taylor held the office of president for thirty-four years, and died in , when percy r. pyne, son-in-law of moses taylor, was elected president and held office until the election of james stillman, of woodward & stillman, cotton merchants, when the capital stock of the bank was increased to $ , , , and again increased to $ , , . the sworn report of the officers and directors filed with the controller of the currency shows that the condition of the bank, january, , was: resources loans and discounts $ , , . overdrafts secured and unsecured . united states bonds to secure circulation , , . united states bonds to secure united states deposits , , . united states bonds on hand , . united states bond account , , . premiums on united states bonds , , . stocks, securities, etc. , , . banking-house furniture and fixtures , . due from national banks (not reserve agents) , , . due from state banks and bankers , . exchange for clearing-house , , . checks and other cash items , . notes of other national banks , . fractional paper currency, nickels, and cents . lawful money reserve in bank, viz.: specie $ , , . legal tender notes , , . , , . redemption fund with u. s. treasurer ( % of circulation) , . due from u. s. treasurer other than % redemption fund , . total $ , , . liabilities capital stock paid in $ , , . surplus fund , , . undivided profits, less expenses and taxes paid , , . _national bank notes outstanding_ , , . _due to other national banks_ $ , , . _due to state banks and bankers_ , , . _due to trust companies and savings-banks_ , , . provident reserve fund , . dividends unpaid . _individual deposits subject to check_ , , . demand certificates of deposit , . _certified checks_ , , . _cashier's checks outstanding_ , , . _united states deposits_ , , . -- , , . united states bonds , , . total $ , , . the new york life insurance company the company was incorporated by special act of the new york legislature in . it is the third largest insurance company in the united states. the assets of the company january , , were $ , , , and income $ , , . in the assets were $ , , ; income, $ , , . the national shawmut bank, of boston this institution was incorporated in with a paid-in capital of $ , , . in its total resources, also liabilities, were $ , , , of the same general character as those of the national city bank of new york. a calm examination of these figures, illuminated by the explanation of the "system's" methods i have previously given, will awaken the american people to a comprehension of what use "high finance" makes of the savings of the public intrusted to it for legitimate investment. nor must it be supposed for one minute that the insurance company and the boston bank which i have used for illustrations differ in any way from scores and scores of their kind which are as absolutely "steered" in their operations by the national city bank of new york as the national city bank of new york is absolutely "steered" by its president, james stillman, or as james stillman is absolutely "steered" by "standard oil," the private thing, or as "standard oil," the private thing, is absolutely "steered" by its supreme heads, henry h. rogers, william rockefeller, and john d. rockefeller. and if any doubt remains in the minds of my readers of the absolute power of "standard oil," the private thing, to "make" dollars at will, or of the dead-sure working of their "heads-i-win-and-tails-you-lose" gambling game, i ask them carefully to analyze the above statements in connection with the facts in the amalgamated transaction which just precede them. fourteen years ago the national city bank passed out of the legitimate management of old-fashioned business men of the moses taylor stamp and into the hands of the "system," the private thing. then its capital was $ , , ; it is to-day $ , , , and after having paid out millions in dividends and other profits it has, in addition, a surplus of $ , , , and it has the absolute power to juggle with a total of $ , , , $ , , of which belong to other national banks, $ , , to state banks and bankers, $ , , to trust companies and savings-banks, $ , , to individual depositors, $ , , to the holders of certified checks, $ , , to the holders of cashiers' checks, $ , , to the government directly, and $ , , in government bonds, to say nothing of scores of hundreds of millions more through its affiliated institutions. and all this juggling is done in such a fearless manner that we find it in the amalgamated deal loaning in one transaction an amount so great that if it had been lost, the bank's entire capital would have been more than completely wiped out. that my readers may not base their conclusions upon this one transaction of this mighty engine of the "system," vicious as it shows on the surface and destructive as it really was to the thousands who were parties to it, _i will later in this story show the national city bank in another section of the amalgamated deal, doing things which in intention and in result were so much bolder and grosser that this transaction will by comparison appear pure and legitimate_. during the past thirty years the american people have become so used to enormous figures in connection with corporations and trusts that they have not stopped to discriminate between different classes of fortunes nor to figure out that fortunes of certain kinds are absolute self-evidence that they were acquired by illegal methods, and that if allowed to multiply the people will surely be enslaved and the republic destroyed. for instance, there are in new york city alone dozens of national and savings-banks and insurance and trust companies which control money enough to make them practically omnipotent in whatever direction their controllers exert their power. i will name but seven, showing what enormous amounts their managers control; and let it be borne in mind that all such institutions are linked together by the "system" as firmly and surely as any human things can be linked. the equitable, mutual, and new york life insurance companies have a combined capital of $ , , , of assets, a yearly income of $ , , , and $ , , , of insurance in force; the national city bank, united states trust, mercantile trust, and union trust companies $ , , capital, and $ , , surplus, and they have the vast sum of $ , , of the people's money to juggle with. chapter viii "standard oil" invests "made dollars" in gas and now i shall have to go back a bit in my story. after "standard oil" had firmly established, through the agency of the curb,[ ] the value of the , , shares of standard oil, the corporation seller of oil, at between $ , , and $ , , , and had used it as collateral in securing control of the four classes of money institutions i have named--the national and savings-banks and trust and insurance companies--it proceeded to use the funds thus controlled to manipulate the stocks of great public corporations for its own profit, forming them into trusts with capitals far beyond their values, represented by new stocks and bonds, which it sold to the public at prices aggregating a hundred to five hundred per cent. over the old capitalization. it then engaged in a wonderfully clever campaign to work off on the people--directly, the very rich people, but indirectly, the people as a whole--through institutions which exist because of the people's savings--the $ , , to $ , , of standard oil stock which had at this stage served the principal use for which it had been created. it must be borne in mind that while "standard oil" is grinding out "made dollars," its owners never for an instant lose sight of that dim, distant day of reckoning when the people will awaken to their losses. the "rogerses" and the "rockefellers" know well that the public cannot always be kept in ignorance of the methods of the "system" by which it has been plundered, and that once it is in possession of the secret of how the savings of the many have become the property of the few, there may be reprisals of such a nature as will compel the "system" to yield up its gains. they know that when that day comes it will not be best for them to have their enormous fortunes in such get-at-able property as real estate, in which so many of the legitimately acquired american fortunes are invested. in a quiet way, therefore, they have put the bulk of their "made dollars" into unrecorded forms, such as government bonds; bonds and preferred stocks of what they consider non-duplicatable franchise corporations such as railroads, which require rights of way; into municipal public service enterprises, such as gas companies, the existence of which depends upon rights of way for pipes; and into the stocks of banks and trust and insurance companies, which they believe the people will never dare attack because their savings are largely deposited in them. i would not have my readers think that the principal motive actuating "standard oil" in parting with its standard oil stock is doubt of its present intrinsic worth, for such is not the case. the masters of "standard oil" are very able, far-seeing men, and they know that so thoroughly have the american people been educated to the crimes which created standard oil, the crimes by which it has existed and does exist, that no passage of time or "pious-ing" of latter-day methods, will ever blind them to its iniquities, and that when reprisal day comes, as come it surely will, the first thing the people in their frenzy will look for will be standard oil. this is the reason which, more than any other, influences them in selling to others an enterprise which has up to the present time not only enjoyed tremendous prosperity, but which has as yet met with no obstacle or hindrance. of all forms of tangible investment "standard oil" has looked most favorably upon gas stocks, and its secret devices have been worked overtime in consolidating gas companies throughout the united states. in a general way, as manufacturers of illuminating oil, "standard oil" had early become familiar with the problems of supplying large communities--cities--with gas light; and with the advent of water-gas, as sellers of petroleum they controlled an important factor in the production of that volatile commodity. all the talent of the "system," trained in "handling" municipal authorities, came into play in this big new business of lighting cities--a business which perforce became a monopoly as soon as the powerful tentacles grasping it were recognized as "standard oil." at the time my story opens ( ) "standard oil" had already captured the gas-lighting corporations of certain of the great cities of the united states, including the immensely rich ones of new york (directly), philadelphia and chicago (indirectly); and for two years previously had been besieging the several independent brooklyn companies for the purpose of consolidating them into a single gigantic corporation. this project it has since accomplished. its intention is to weld this corporation with the great one that already holds the monopoly of manhattan. the task of diagramming a territory for invasion is one after henry h. rogers' own heart. his campaigns are planned with napoleonic power and foresight. when the capture of brooklyn was decided on, the several corporations to be subdued were "sized up" as to their revenues and liabilities; the resources of their stockholders were studied out, and a plan of action organized to separate each one from his shares at "hard-pan" prices. in the "standard oil" armory there are many instruments of "persuasion," and he is indeed a hardy fellow who can resist the various "trying-out" processes to which mutineers are subjected. this obstinate capitalist will be summarily knocked on the head; that other inveigled into a dark corner by a strong-arm man; another group owe money to one of the "system's" banks and a brief spell on the financial rack will weaken their grip. sooner or later all succumb. while such details as these were being attended to, lines were being strung here and there to bring about the passage by the city of brooklyn and the legislature of new york state of ordinances and laws which should allow this and compel that to be done, and so rivet the various links of the great venture. while in the midst of this campaign, to which henry h. rogers' genius, matured in many a hard-fought business battle, foresaw an early and easy triumphal termination, there came athwart his victorious path a financial guerilla, "balloony," mysterious, yet as sticky as a jelly-fish, who was destined to exert a most maleficent influence on his after-life. fate hangs no red lights at the cross-roads of a man's career. no "pricking of his thumbs," no strange portents warned the master of "standard oil" that the impudent philadelphia swashbuckler who dared interfere with the execution of his plan to fetter the "system's" yoke to the necks of the citizens of brooklyn was the factor that destiny had chosen to shape the ends that he had rough-hewn. the financial guerilla was j. edward o'sullivan addicks, votary of rotten finance, perpetual candidate for the united states senate, wholesale debaucher of american citizenship and all-round corrupter of men--j. edward o'sullivan addicks, a corporation political trickster, who has done more to hold up american laws, american elective franchises, and american corporations to the scorn of the civilized world than any other man of this or any previous age. footnotes: [ ] the new york "curb" is the latest invention in finance, coming closely upon the heels of the invention of trusts, and it holds the same relation to the new york stock exchange that private things hold to corporations. before a stock can be bought and sold on the new york stock exchange, there must be submitted to the governors a description of what the stock is, which must be of such tangibility that any one who cares to investigate may find there every detail and particular of the property represented, set forth with the utmost exactitude. but on the "curb" stocks can be traded in without responsible sponsors or descriptions that mean anything. in other words, a stock may be bought and sold there, which is so vague and indefinite as to be little more than a name, and it is through the "curb" that the value of "standard oil" stock is established, for it is daily bought and sold there at the steadily held prices of to , and the press of the world makes daily record of these prices. chapter ix a votary of the "system" the "system" has all sorts of votaries. about j. edward o'sullivan addicks there is nothing that remotely suggests coworkers of the types of mr. rogers and william rockefeller. a description that left him in any part a duplicate of either would do him and them a grievous wrong. henry h. rogers and william rockefeller have two sides, their social side and their business side. socially, they are good men; in business they work evil. j. edward o'sullivan addicks is a bad man, socially, in business, in every way. the term "bad man" is used advisedly. my idea of a "bad man" is that like a bad dollar he is a counterfeit. a counterfeit has all the appearances of reality, and is yet devoid of its properties and virtues. so with addicks. it is easy to find men who will declare by all that is sacred that henry h. rogers is one of the best fellows in the world, though as many more will as earnestly proclaim him the fiend incarnate. about addicks, among those who know the man, there is but one opinion. i have yet to meet the man, woman, or child who would say aught of addicks, after a month's acquaintance, other than, "don't mention him! he is the limit." and it will be said with the calm of dispassionate conviction, as one might speak of a stuffed tiger in a dime-museum jungle. here we have a man without a heart, without a soul, and, i believe, absolutely without conscience--the type of man who even his associates feel is likely to bring in after their deaths queer bills against their estates as an offset for what he owes them; the type of man whose promise is just as good as his bond, and whose bond is so near his promise as to make it absolutely immaterial to him which you take. exhibited in the side show of one of the great circuses some years ago was a strange creature which, for lack of a better name, its owner and the public dubbed, "a what is it?" this freak had the semblance of humanity, and yet was not human. all its functions and feelings reversed the normal. tickle it and it would cry bitterly; pinch or torture it and it would grin rapturously; when starved it repelled food, and when overfed it was ravenous for more. it had heart-beats but no heart. the public gave it up. the public would long ago have given up j. edward o'sullivan addicks if he would have let them. illustration is better than explanation, and perhaps i can more graphically set j. edward o'sullivan addicks before my readers by a few incidents which show his contradictory characteristics in action than by verbal diagrams, however laborious. once upon a time addicks, entering delmonico's for dinner, stumbled on a couple of newsboys at the entrance. one, broken-hearted, was being consoled by the other. addicks, observing the deep sobs, asked: "what's the matter with you, bub?" the consoler explained that his chum had lost $ , his day's earnings and capital, and "his mudder--his fadder's dead--an' de baby'll git trun outter de tenement." addicks, without more ado, slipped the suffering young news-merchant a bill which his friends supposed was $ to replace the lost funds. as they were taking off their coats in the hall, however, the little newsboy pushed his way in with: "say, boss, did yer mean ter guv me de twenty?" addicks nodded a good-natured assent, and his friends registered silently a white mark to his score, and felt that, after all, somewhere beneath the surface he was more of the right sort than they had given him credit for being. after dinner, as they left, the newsboy again approached. "'scuse me, boss, but me chum 'd like ter t'ank yer too. i'm goin' ter give him a v outter it." addicks looked at the boy in his mildly cold way and said: "let me have that bill. i will change it for you." the boy gave it up, and addicks, after methodically placing it in his purse, handed him back a $ bill with: "that's what you lost, isn't it? and you" (to the second little fellow, who by this time had mapped out visions of new duds for the kids and a warm seat in the gallery of a bowery theatre), "you didn't lose anything, did you? well, both of you run along now!" his friends looked at each other, and from their slates wiped away the white mark and replaced it with a deep, broad, black one. and yet addicks had made good the loss--done a good deed, but in an--addicks way. i should perhaps remark that j. edward o'sullivan addicks has never smoked, nor used a swear-word, nor taken liquor in any form. during the addicks gas campaign in boston one of his lieutenants demanded as his share of the deal a large amount of money, which he claimed addicks was withholding from him. addicks refused to pay. friends and associates urged him to settle. while yet refusing, he agreed to meet this man at one of the leading hotels in the presence of counsel and lieutenants. the interview was a hot one. addicks surprised all by his absolute fearlessness in the face of a savage attack, which culminated in the production of a document signed by certain massachusetts legislators, wherein they receipted for the bribe money addicks had paid for their votes. the man who claimed he was being cheated threatened this would be laid before the grand jury the following day. all the witnesses were dumfounded at the situation and in concert begged addicks to hush the matter up by paying what was claimed. "gentlemen," said this great financier, "my honor, my business and my personal honor, has been assailed, and rather than submit to this outrage i would die! i now ask you all to bear witness that under no circumstances will i pay to this man a single dollar!" and he indignantly left the meeting. while his counsel and associates were appalled at what might be the outcome, they admired addicks' manly pluck, and asked themselves if they had not, after all, been mistaken in their estimates of his courage and principle. in the middle of the same night, the man with the document was surprised by a telegram reading: "meet me in jersey city to-morrow sure with paper; keep absolutely secret." next day in jersey they met, and addicks simply said: "there is the full amount. give me the paper. you don't suppose i would compound a felony in the state in which it was committed, and before witnesses, do you?" in the national election of j. edward o'sullivan addicks was a candidate for the united states senate in delaware, and for a variety of reasons was anxious to secure a republican victory. within the state, however, the real contest was not over national issues, but to obtain control of the legislature which in the following january had to elect a united states senator. there were three factions, the democrats and two wings of the republicans, the addicks and anti-addicks parties, the latter calling themselves "regulars." on election day addicks used an even $ , buying votes, and that evening delaware was safe for mckinley--both the "regulars" and the men whom addicks' money bought having voted for a republican president. but it was early bruited around that if the vote of sussex county (there are three counties in delaware--newcastle, kent, and sussex) were allowed to stand as received, all addicks' efforts to control the legislature would have been fruitless and his "made dollars" expended for nothing. the ex-flour dealer of philadelphia was not satisfied to accept the people's sacred verdict. he quickly called his lieutenants together, mapped out a campaign of almost reckless audacity and daring, and assigned his best men to its execution. the ballot-boxes with their contents were in the sheriff's charge and stored under lock and key in the court-house. the sheriff was an addicks tool. at midnight he turned over his charge to one of the would-be statesman's trustiest lieutenants, who, with the aid of a lantern and a slip of paper containing the directions, sorted over the legal ballots, threw some out, and put in new ones. when another sun arose the dastardly outrage upon the american elective franchise had been completed, and addicks was busily scheming to carry out the remainder of the plot. on the declaration which he or one of his associates would make, that there had been fraud in sussex county, the government at washington must send on an investigating committee to whom it would be asserted that the voting lists had been doctored by the democrats. to prove it the boxes would be opened, the ballots counted, and lo! the villany of the democrats would be, beyond contradiction, demonstrated. but the scheme was an addicks scheme. had it been the plot of any other man with the brains, the nerve, and the lack of principle to concoct it and set it in motion, inevitably it would have been carried through to the designed conclusion. as it was, this is what happened: the lieutenant who had charge of the actual commission of the crime thoughtlessly chuckled over the details of it with another, and this other "in the presence of witnesses" laughingly congratulated addicks on his plan's success. what was the astonishment of the group to hear the candidate for the senate say: "gentlemen, i could not countenance such a transaction. this is the first i have heard of it, and it is so outrageously criminal that i refuse to allow it to proceed further. there will be no investigation, and if it is a fact that those ballots have been changed in the box, the ones who changed them shall receive no benefit from their nefarious work. i have spoken." mind you, every member of the group was a party to the scheme and had been carefully rehearsed in the part assigned him by addicks himself, but alone, that is, without witnesses; nevertheless so earnest and apparently honest was the man in his protest that for an instant they doubted their senses--until they remembered it was addicks. the investigation was never held, and to this day addicks' lieutenants, especially he who did the midnight work and who still lives in the peaceful state of delaware, turn with disgust when addicks' daring is mentioned. it should be explained here that, whenever addicks plans an illegal transaction--one for which he might be made civilly or criminally liable--he invariably coaches each of his accomplices alone, "without witnesses." and when it becomes necessary in developing the plot to have a confab, at which the several parties to the proceeding must meet, addicks is most careful to preserve a legal semblance of ignorance of incriminating details. at intervals, when a danger-place in the discussion is approaching, he will get up from his seat and, moving to the door, will say: "gentlemen, halt right there, until i step out of the room; tap at the door when you are over that bad spot, and i will return." addicks' "wait until i step out of the room" is as familiar among his coworkers as the "i am going upstairs" is among the "standard oil" family. try to conjure before your mind's eye a picture of the anomalous character these instances suggest. i'll warrant your mental image as little resembles the original addicks as mr. hyde did dr. jekyll in the story. he does not look the part assigned him here, nor any other part for that matter. i saw him coming toward me on state street one summer day some years ago, a tall, wiry man, in a white-flannel suit, perfect in fit and spotless as snow, wearing a fine panama hat. this was in the period before panamas were commonly worn. he was to the life the elegant and luxurious southern planter of ante-bellum days. six months afterward in about the same place i saw approaching me a splendid person in rich sable outer garments who looked for all the world like an exiled russian grand duke. it was addicks in winter. you will not surprise his secret from that pleasant, rather ambiguous, but square-jawed face, nor from the mouth hidden under a long, drooping, gray, military mustache. his is a good-sized, well-shaped head, you might say, and the gray, shallow eyes that look out at you are almost merry in their glances. but they are inscrutable eyes which seem to have a challenge in their gaze, a sort of "look-me-over-as-long-as-you-like-and-you'll-never-guess-what's-under-the-surface" expression that is baffling and provocative. yet this sybarite, this daring coward, this stingy prodigal, this sincere hypocrite, this extraordinary blending of contradictory qualities, is the man who from to made boston look like the proverbial country gawk at circus-time. power the man certainly has, and of a distinct quality, yet his intimates cannot explain the reason of their obedience to him. after a brief acquaintance he is revealed as the very soul of insincerity--he "works" his friends, he pays toll to his enemies, he frankly shows himself without the sense of moral obligation. i believe his talent resides in his capacity to select the proper type of man to "make rich" in the illicit schemes his abnormal mind conceives. these coworkers of his are of different grades; some have a super-abundance of cash; others a desire to get it--in common are their lack of principle and dearth of brains. addicks cannot do business long with men of real ability, nor does he understand them, whereas he can read the minds of his ordained victims as if they were an open book. the big men who have encountered or been associated with addicks are prone to characterize him as a mountebank, a joker, or a chump. chapter x addicks comes to boston j. edward o'sullivan addicks was born in philadelphia in , and was in the eighties plodding along the ordinary, uneventful path of a seller of flour to the people of that city which since the death of william penn holds the record for the highest and densest percentage of sleep per capita of any english-speaking community. in the eighties two things happened that changed the whole course of j. edward o'sullivan addicks' life. some one invented water-gas and "let in" addicks on the invention; and the philadelphia branch of the "standard oil," represented by widener, elkins, and dolan, "trustified" the gas companies of the city of chicago, which enabled addicks to "hold up" the "trustification" until dolan and dolan's associates paid him the sum of $ , for the instrument with which he had done the holding up, $ , worth of the stock of one of the necessary chicago companies. the law of compensation, which gets in its deadly work on all the prettiest plans of man, but decreed that what goes up must come down when it ceases going up. it has a shrewd trick of grafting sorrows on our joys, and of handicapping success with discomfiting conditions. the favorite of fortune whose feet have fallen in pleasant places sooner or later stubs his toe. addicks' first "made dollars" certainly came easy--so easy, indeed, that those who watched his early career marvelled at his success; but nowhere on god's footstool is there to-day a more terrible illustration of the inevitable workings of the law of compensation than the present standing of j. edward o'sullivan addicks affords. the thief whose first excursion into a wayfarer's pocket is rewarded with the equivalent of days and nights of honest labor will surely be convinced thereafter of the superiority of theft over toil as a means of money-getting. invariably the manufacturer of "made dollars," after his first coup, forsakes forever after the cold arithmetic of commerce for the rule of guess, dream, hope, and "i will," which constitutes the mathematics of high finance. addicks' first "made dollars" came with such magical ease that there awoke in his slumbering substitute for a soul a disgust for those prosaic pursuits at which one could never, try how one might, make more than four by the addition of two and two. he probably argued to himself: "why should i work in the flour business when i know a way of getting overnight more than i can make out of flour in a lifetime? if people are so simple in guarding their savings that i can by a trick take away from them enormous wealth without the slightest danger to my own safety or my profit, even if detected, why should i not devote my life to such healthful and profitable occupation?" the logic of the proposition was convincing. accepting its conclusions, j. edward o'sullivan addicks, of philadelphia, embarked on his career. soon afterward he discovered gas in boston. this was in . equipped with his "made dollars" for capital, his impressive name, sublime effrontery, and a pedigree free from anything suggestive of his new purpose in life, the ex-flour merchant "lit" into our everything-figured-out-ahead-and-every-promise-made-taken-at-par town of boston. to appreciate the lights and shadows of this event, one should know boston and, at the same time, addicks. every country boy will remember tom hood's poem beginning: i remember, i remember the house where i was born, with the little lattice window where the sun came peeping in at morn, and can recall milking-time in july or august when, sitting on the rail-fence surrounding the barn-yard, he watched the pigeons snipping up grain, the old hen scratching up worms for the chicks, the ducks and the drakes and the geese and the ganders proudly waddling back and forth, among and around the fluffy ducklings and goslings, and the bull-pup sound asleep by the side of the tortoise-shell cat. probably he will think of some particular milking-time when the calm, contented serenity of the barn-yard was suddenly disturbed by the unexpected descent in its midst of a neighboring peacock, who, apparently unconscious of the consternation produced by his entry, proceeded proudly to spread his dazzling plumage to convince every one, from uncle cy, on the milking-stool, and mild-eyed bess, down to the white fan-tailed dove, that he was--it. conjure up the picture--the peacock at milking-time in the farm-yard; thus addicks came to boston--though it is far from my intention to identify the bucolic background i have drawn with the hub of the universe. boston, up to this time, had been singularly free from the mushroom variety of millionaire which had sprung up overnight in such numbers in new york and philadelphia. proudly defiant of a product so alien to all her traditions, her citizens would have sworn that no votary of modern high finance could exist over one curfew-toll within her gates. for boston had her own financial eminence, of a character in keeping with the chill conditions of conservatism and rectitude appropriate to the metropolis of the new england conscience. she had her stock exchange, her numerous great corporations, her scores of single and multimillionaires, and it was her boast that her capital had played the greatest legitimate part in the country's growth. she had furnished a large percentage of the money which had created our vast western railway system; she had found and made the superb copper-mines of michigan and montana, and in all parts of the land branches of her sturdy institutions were vitally assisting the miracle of america's development. notwithstanding what these wide-flung enterprises imply of commercial push and audacity, boston, at the time addicks discovered gas there, was one of the most trusting wealth-investing communities in the world. she had her simple rules of business conduct which years of usage had consecrated into all-powerful precedent, but her brokers and capitalists, however fearful of all things quick or tricky, had never previously figured as candidates for what in western parlance are described as "come-ons." chapter xi how addicks captured boston gas at the time addicks "lit" in boston that city numbered among her proudest possessions several extremely rich gas companies, and they were owned by her "best people." to do business with boston's "best people" is no easy task, and up to the advent of addicks, to do business with her "best people" without doing it through others of her "best people" who could absolutely vouch for you was an unheard-of thing. the manner in which the ex-flour merchant of philadelphia managed to slip by the barriers and into the heart of our blue-blooded citadel affords the most unparalleled example of audacity of which i know. in many ways boston is unlike other great american cities. some of her institutions through antiquity or association have acquired a positive sanctity. pedigree is important. the average inhabitant spends much of his time watching the grandson of his neighbor's father, to see the old man's characteristics crop out in him. the boy's failures will be remembered against his own offspring fifty years hence. it is a city of long memories and of traditions. in boston, as now, consisted largely of her traditions, her blue-glass window-panes and her somerset club. now the distinction, sanctity, and antiquity of the somerset club are quite beyond peradventure. since boston has been boston she has had her somerset club, a club distinctively of grandfathers, fathers, and sons. the right to membership in the somerset club is as much the inheritance of a somerset man's son as his name or as the proud title which always will be found affixed to his signature when he reaches man's estate, "of boston." for a man to get into the somerset without long years of waiting and intense scrutiny, not only of his own record but of his parents' before him, is a rare event. yet the name of j. edward o'sullivan addicks was up for full membership, with boston's picked best for his sponsors, a few days after he "lit." how addicks got upon the somerset list boston will never tell, and the mention of the fact nowadays within the club-house will empty its sideboard instanter. the campaign of arrangement for the advent of addicks in boston was more elaborate, more astute and expensive than was ever organized for exploitation of prima donna or great pianist. for months an advance agent had been preparing the way for his chief's arrival in a blaze of glory. there was talk in the papers and among the financiers about the wonderful water-gas process which enormously enhanced the profits of gas-making, and such rumor was always linked with the name of the brilliant philadelphia gas king, for so the press had already dubbed him. a wonder and magic immensely provocative of curiosity were woven about the identity of this j. edward o'sullivan addicks, who it was said might be persuaded to visit boston to work marvels with the stocks that had been "in the family" long before the present generation could remember. when it was sure that the great man was really coming the agent sought the advice of boston's best in selecting quarters for him. in the tudor, a beautiful family hotel adjoining the somerset club on beacon hill, a magnificent suite of apartments was taken, and though the great man could remain in boston but a brief space, the furniture, the hangings, and even the carpets were all changed for him. eminent financial tricksters have various ways of handling their victims. some believe that the most skilful mode of attack is the slow, confident, dignified approach which allays the subject's fears by its solemn display of deliberation. others (and addicks is of this creed) are persuaded of the superior efficacy of the "rush-in-and-drag-out" method. the subject, they say, "gives up" more and quicker when the hurry call is sounded. it was a winter's day when addicks "lit" in boston, and circumstances had arisen, the suave advance agent told various boston's best, with whom he was in consultation, that would make his chief's stay much briefer than either had anticipated. so when the great man arrived at the club just before dinner, quite an array of important people were congregated there. addicks ran the gantlet of the critical glances of as critical a group as you'll find on earth, and the word went round--no one could remember afterward who started it--"typical southern gentleman! breeding sticking out everywhere!" so well had the astute advance agent done his work that a little dinner was arranged on the spot, and addicks made such rapid progress with these reserved and conservative bostonians that, by the time coffee was served, conversation had reached the stage where it was natural for him to send the waiter to the coat-room for his bunch of gas papers. the emissary returned bringing the fur overcoat with which addicks always envelops himself in chilly weather. addicks searched the pockets, and, apparently to his surprise, discovered that they did not contain the required documents, but where they should have been he found a small bale of , -dollar government bonds, containing, one of the party said afterward, at least one hundred certificates. "how careless of my secretary!" said addicks, nonchalantly replacing the packet in the pocket and motioning the waiter to take the overcoat away again. it was, of course, due to the admirable work of his advance agent that these monte cristo effects impressed the cultured little set who would have laughed to scorn such a display on the part of one of their own kind. in addicks it was the dazzling eccentricity of the wonder-worker, and so excusable; and the free, flash, careless exhibit of wealth made the man's conversation and subsequent demands seem natural. next morning, in discussing the work of the previous evening with his lieutenant, addicks delivered himself of the wise remark: "finance, my boy, like theatricals, is dependent for success on the staging, more even than on the actor. my experience has shown me that men the world over are alike--if you properly surround them, they will hiss at hissing time and clap at applauding time; yes, upon the way you stage your finance plays depends their success." the fact is that by no other method could this scenic artist of finance have set his plans moving so rapidly. the man had calculated to a nicety on the romantic cupidity he aroused. after dinner, addicks at once "got down to business": "gentlemen, my project is as simple as it is feasible and conservative, for i will touch nothing but conservative enterprises. gentlemen, you have three great gas companies supplying this great city with light, the boston, roxbury, and south boston. they are worth at the present time about five million dollars. i am going to buy them and spend three or four millions more on a new company; then i shall consolidate the four and turn them from coal into water-gas companies, which will sell gas to your people at less than they now pay, and at the same time make a lot of money for you and for myself. what do you say?" this was certainly quick action. boston's best was breathless for a minute. then some one suggested that in so weighty a matter it would be necessary for solicitors to investigate, for the families owning the stock to be consulted and agree before a proper basis could be arrived at on which to dispose of their holdings. addicks' genius was equal to the occasion. "i regret, gentlemen, any seeming haste, but this is the situation: i am going to invest fifteen or twenty millions, or perhaps thirty or forty, in city gas properties, and as the project will require quite a bit of financiering, i have got to round it up at once, in time to slip over to london to lay it before my associates, ----, ----, and ----" (naming some of the great english lords of finance), "with whom you, gentlemen, are probably well acquainted. i think you will, after you have given the matter a little thought, agree with me that it would be a mistake to postpone the conversion of these magnificent boston plants to the water-gas system until after other cities i have in mind are reconstructed. you see we can turn over but one city at a time, the system being new and competent engineers and builders few." the painful thought took shape in the minds of the distinguished little gathering that if they were not careful, monte cristo might actually slip out of their town without working any of the promised golden marvels. "just what is your idea, mr. addicks, of how this gigantic piece of business could be done?" one asked. "simple, simple"--the great colonel sellers of eye-water fame never looked more cool and unconcerned when calling attention to the facts, " , , of people, two eyes each, a bottle of my patent eye-wash for each at a dollar a bottle, and eye-wash made at a net cost of a dime a barrel"--"simple, simple; you name your price, i pay it, and the thing is done." some one pointed out that the gas properties were valued very high. that in the boston, for instance, the par value of each share was $ --and that it was improbable mr. addicks could buy it for less than--than eight hundred. "of course, of course; i am not buying gas companies that are not well thought of by their present owners," returned addicks. "i think you underestimate the value of the boston company's stock when you say $ . naturally, as a conservative business man i wish to buy as reasonably as possible, but as i know what the future of your company will be under the water-gas change, i consider $ , a share cheap; and if you say so, will take it now--majority, minority and all--at that price." this was strong talk. in spite of their proverbial frigidness under all conditions, boston's best began to get fidgety. "indeed," went on the monte cristo from philadelphia, "i'll do better than that. on second thought i will give you $ , a share. think it over and we'll have another sit-down to-morrow." it took addicks but a few days to trade, for at each sitting the staging was more enticing and the call from his associates in london more insistent. minor difficulties were magnificently waved away. a number of scions of boston's best families had good paying positions in the different companies; what would mr. addicks do with them? "simple, simple," he replied; "double the time of contract and the salary; no favor to them or you; good men are very hard to get, you know." one episode that occurred about this time was allowed to get into print when the stocks and bonds were being floated, by way of showing what a tremendous fellow addicks was. in a hired hack he had driven up to the club from state street. a snow-storm was raging. after addicks had been in the club a few moments word was brought in to him that the driver had found his sable overcoat inside the carriage. addicks stepped into the vestibule to speak to the driver, and next day it was all over the club-house and through the "street" that the prodigal philadelphian, overcome at the thought of the unfortunate driver in his scanty clothing exposed to the cruel storm, had said: "my good man, take that coat as a present from me." for the truth of the story i do not vouch, nor for that other which explains that the door-boy who spread this tale of generosity said afterward, when discharged, that addicks himself had told him what he had done, and at the same time had given him a five-dollar bill. he would have sworn the moment before that he heard addicks tell the driver to take the coat to his apartments. addicks got what he came to boston for--the boston, roxbury, and south boston gas companies. he did what he said he would, built a new one, the bay state of massachusetts, and turned them all into the bay state of delaware, and the bay state of delaware turned them out on the public in exchange for their savings to the extent of $ , , in the form of bonds and stock. addicks, to use his own language, "cleaned up around $ , , ," and turned to new fields, fields suited to his peculiar genius. as he looked over the united states he found but one great city which had not already been captured by "standard oil" or some of its disciples--brooklyn, n. y. to the present day rogers swears addicks' only reason for coming to brooklyn was to hold up the "standard oil" "trustification." addicks retorts with: "i saw it first." whatever the facts, in rogers in the midst of tagging the different companies was surprised and angered to find that addicks had slipped in ahead and had secured one of those necessary to the success of his plan. he quickly served notice on the man from delaware to "git," and addicks, flushed with an unbroken chain of victories, as promptly returned the notice with, scrawled across its face, a variation of rogers' pet phrase--for it must be remembered addicks never "cusses"--"i'll see you in heaven first." if there is any one time when henry h. rogers is quicker of action than any other, it is when his notice to "git" in a stock deal has been returned with "sass." the ink was hardly dry on addicks' answer before the master of "standard oil" and his hosts were upon him, but not where the philadelphian looked for them. while he awaited their attack in brooklyn, n. y., he received a series of hurry-up calls from his lieutenants in boston. rogers had bought the insignificant brookline gas company, which supplied gas to one of the suburbs of boston. it was only a $ , affair, but it possessed charter rights to come into any and all of the streets of boston. this was a characteristic "standard oil" attack. it came out of a clear sky, and before the public had even a warning of it they were witnessing a war which looked as though it had been years in maturing. rogers let it become public knowledge that the entire "standard oil" forces were to be brought to bear to crush addicks and that untold millions would, if necessary, be spent in the effort. in reality he had most carefully mapped out a cyclonic campaign which he believed would not call for an expenditure of over $ , , and which he was sure would in a few months drive addicks out of brooklyn, n. y., and bring him to his knees in boston. his fight began in earnest in . gas in boston was $ . per thousand cubic feet, and the rate yielded a good profit to the addicks companies. rogers served notice that he would parallel with the brookline company every pipe of the different boston companies and would reduce the price of gas to $ . simultaneously he attacked the addicks stocks and bonds in the market, his charters in the legislature, and took away from him the contracts to supply the municipality of boston with gas. for a time addicks struck back savagely. then, as the fight became hotter, he gave it up in brooklyn, and concentrated all his resources on repelling the savage inroads rogers was making in boston. by this time the contest had grown to such proportions and so much bad blood had been engendered that rogers declined to be mollified by addicks' surrender in brooklyn and refused to retire from boston unless addicks repaid "standard oil's" entire outlay and got down on his knees in public--a demand that called forth one of addicks' sardonic smiles. addicks had at this time additional difficulties to face. he had spread out his financial commitments, and now he found his stocks and bonds all declining. it was obvious to state and wall streets that rogers was in a fair way to drive the buccaneer from philadelphia to the wall. it is at this stage that i come into the story. chapter xii stock-brokers not all bad right here, before plunging deeper into the current of events which led to the organization of amalgamated--for what has gone before is only that which i deem necessary setting for the story, necessary in order that my readers may clearly take in its meaning--it is only fair to them and to myself for me to say that my life has been spent in the stock-market for the purpose of gain. i have never in my stock operations set myself up for a philanthropist nor in any way posed as a reformer, nor pretended to be a bit better than the business i had chosen for a livelihood. from the first day until now i have endeavored to keep strictly to the principle that i would never knowingly deceive any man, woman, or child who, out of confidence in me, risked their money in speculation or investment. at the same time it should be remembered that the stock-brokerage business often makes queer bedfellows. moreover, the true stock-operator is sometimes tempted to buckle on his armor and get into an exciting fight solely for the combat's sake, and then he may not be over-concerned about the rights and wrongs of the contention, if upon both sides are lined up professional captains of finance. the minister, the college professor, the dry-goods merchant, may exclaim against this, but they have never known the delicious tingle which, since the abolition of the tournaments of old, can be felt only on the great financial battlefields. if the critics of the stock-gambler could be put through a single minute of a thousand i have known they would be less brash in their denunciations. and let it be remembered that in these terrific dollar-wars there is as much opportunity for heroism, for generosity, for kindly deeds, as ever physical fighting affords. i read here in the papers of the noble act of a captain in the navy who has taken his life in his hands; in another place of a rich man who has given a million to create a charity. on the same page that these men are eulogized i will find references to "jim keene, the stock-gambler," etc., "heartless, soulless stock-sharp," etc. "jim keene, stock-gambler," keeps no press agent to flaunt his kindly acts, but from the noble things i know he has done, and the things others with whom i am personally acquainted know he has done--men, women, and children saved from misery, pain, and death, at the risk of ruin to himself--i'll warrant the celestial scroll shows to his record as many deeds of mercy and noble daring as are credited to any soldier or philanthropist who has achieved worldly fame in recent years. the desire for sudden wealth is strong in all parts of our american community. men want money, and women too, for a score of reasons--some good, some bad--and the stock-market is the magical place where miracles occur and dollars multiply themselves overnight. the agent for all the cupidity of the world is the stock-broker, and he sees life from a strange angle. hundreds of letters come to me daily from all kinds of people, who have no other call upon me than their belief that, having at some previous time profitably followed my advice or advice credited to me, they have a right, when "the papers say" i am doing or going to do this, that, or the other thing in stocks, to come to me with their troubles. in there reached me from a woman a picture of her husband, herself, her three children, and the aged father and mother of her husband. i wish i might print it, but i dare not through fear that they would be recognized. the letter accompanying it was one of the most touchingly pathetic i have ever read. i investigated the case. the statements made were absolutely true. the woman's husband was the cashier of one of the small national banks in one of the old towns in a new england state. his father's brother had been cashier before him. the family's past was thickly strewn with all those simple honors and good things which are so often the heritage of families of the old, self-respecting, god-fearing, middle-class communities of new england and like long-settled sections of the country. on his death-bed the uncle confessed that for years he had carried upon the books of the bank a shortage which had arisen from mistakes. her husband, to keep the family's name from stain, had continued to keep this buried, which was an easy thing to do, as when he was moved up from teller to cashier at his uncle's death the two positions were combined into one. the wife explained that her husband had let her into the fearful secret, and together they had carried it until it had eaten its way into their hearts. at last the man could no longer stand the strain. he had followed my printed sayings about the market, and now had made the fatal plunge. he had bought upon margin , shares of sugar stock to see if it were not possible to make up quickly a shortage of over $ , , because i had said sugar was going right up; and then horror of worse than death had seized the wife and she had given me the awful secret, and a description, a word picture of what would happen if i had made a mistake. she could go no further. she did not need to. i read the letter. i saw the picture, and even i, who believed myself from long years of experience with such affairs immune--i, too, became horror-stricken. it was no affair of mine. i had not said sugar was going up; as is often the case, some newspaper had printed what another operator had said and credited it to me. i was not even operating in sugar, nor at the time particularly interested in it. i could not return the letter nor have any communication with these persons without in a way becoming their accomplice. the woman had said that with the purchase her husband had given orders to sell the stocks at twelve points' rise. try as i might to look at the matter in a cold-blooded business way the picture haunted me--the old gentleman proud of his family's long record of sturdy honesty, the old mother's faith in her boy, the wife seeing on each of her children the brand of a felon father, and the husband watching each day's market prices to see whether they had brought him a verdict which meant state's prison or permanent relief from the haunting fear which had become his never-absent shadow; and i read and reread the closing lines of the faithful wife: "mr. lawson, you will put sugar up?--you surely will, just this once--and we will teach the children to pray for you and yours, and god answers this kind of prayers, you know he does." the picture haunted me; i saw it in the market prices; i heard the story in each tick of the ticker and each rustle of the tape; and every time my eye caught "sug," the stock-exchange abbreviation for sugar, i winced, as one does at the dentist's probe--well, i could not stand it. i determined to put up sugar--that is, i determined to try. little the woman knew what she asked when she wrote: "you will put up sugar?" she had read that a stock operator works magic, but it had never entered her head that his wand was a stick of dynamite a thousand times concentrated--a stick of dynamite that the law of stock-market averages shows goes off in his hand nine out of every ten times it is handled, and that when it goes off there is nothing more for the handler but the minister, the flowers, and the head-stone; indeed, often the explosion leaves nothing with which to buy even a head-stone! little she thought that it might strain the wealth of the bank of england to move sugar up twelve points. i moved it up, and it went so easy--oh, so easy! that--well, i will let the first description i pick from my scrap-book from among a hundred from the daily press tell the story: [from the _boston journal_, march , ] lawson's lump his coffee sweetened with quarter of a million--made it in sugar thursday in two hours' trading a quarter of a million in a day! that was thomas w. lawson's record for march , . the celebrated "unthroned king of state street" was on top of the sugar market; that is the reason of it all. sugar was the big card of stock speculation yesterday. indeed, the stock had one of the wildest days in its history, and its high price--$ --reached amid great excitement--is the highest on record. the speculation was something tremendous, and it has been through the speculation that the people who have been under the impression that the markets were drifting into a dull and uninteresting condition have had a sudden awakening. from the opening it quickly advanced to , receded a point or more, and shortly after noon started sharply upward. the demand for it came so rapidly that the tape could not keep up with it, and the excitement grew as the demand increased. the scenes on the floors of both the new york and local boards were most exciting. blocks of and , shares changed hands frequently, and at one time the quotation in the boston market was fully four points behind that of the new york list. the small army of shorts scrambled to get covered up, and everybody was in a fever of wild excitement over the marvellous movement. before it had culminated the price reached , or a gain of twenty-nine points over the opening--the most remarkable display of strength in so short a period of time that this remarkable stock has ever shown. broker lawson did the buying, and while the excitement was running high he bought freely. he had taken , shares all told before the advance had fairly gotten under way at from - / to . at he gave an order to sell , shares at a limit of , and obtained an average of over , thereby netting an estimated snug profit of $ , or more within two hours. asked as to whether the strength in sugar meant a settlement of the sugar war, mr. lawson smiled and said: "there has never been any sugar war." the conservative people on the street are disposed to regard the whole movement as a piece of clever manipulation. * * * * * [from the _boston herald_, march , ] mr. thomas w. lawson was the mover in the deal, and his orders for , shares early in the day excited other buying, which encompassed the astonishing rise. what point mr. lawson had to trade upon is his own asset, if he had any point, and it would not matter so far as the event was concerned whether he had a point. the market was in a position to respond to orders of these dimensions, and it did respond. * * * * * [from the _new york journal_, march , ] the frenzied brokers fought like madmen around the sugar post. the wildest sort of excitement prevailed throughout the day. the rest of the floor was practically abandoned, and brokers crowded, pushed, elbowed, and yelled frantically in their efforts to fill orders. there was no warning. the sudden jump of the stock almost threw the brokers into a panic. men became ferocious in their efforts to fill orders. those on the outside made wild rushes to get into the whirlpool. men who are generally calm fell over each other in their excitement. scores of arms whipped the air, and men yelled themselves hoarse. so great was the din and so compact the yelling crowd that those on one side of the post did not know the bidding on the other. at one point sugar was going at , and five feet away it was bringing . while almost at arm's-length farther away it was going at , and farther around the post at . the excitement became general among the offices of stock-brokers as the news flew on the ticker. members of firms who were not on the floor gathered about the tickers in excited groups and watched the pyrotechnic fluctuations of sugar to the exclusion of all other stocks. the quotations came out at two and three points apart. one minute the stock was away up, and the next it seemed to fall hopelessly. then it would as suddenly soar upward again. it reached , and in five minutes it was down to . * * * * * [from the _boston post_, march , ] late in the afternoon mr. lawson was induced to give the following explanation of his movements in sugar: "you know it is not conducive to the health of an active operator to talk on what he is doing, for if he expects to retain his hirsute adornment he must either keep jumping so lively that none of the expert scalpers who haunt the jungles of wall street can find him long enough in one spot to cut the floor from under him, or he must envelop himself in mystery so dense that all seeking for him will grow color-blind; but on this particular commodity--sugar--i can depart from the standard formula. "i have been twenty-nine years dodging the scalping-knives of wall street comanches, and, although i am still here, i have many places on my head where the hair refuses to grow, and, strange to tell, almost all the bare spots are labelled 'sugar.' i suppose that i have, during the past ten years, contributed money enough to sugar to endow a fair-sized asylum for tailless bears. it has never seemed to matter whether i bought or sold, went long or short, the dollars which i secured by the employment of pick and shovel, brawn, muscle or gray matter, all seemed to follow one another into the relentless maw of that modern saccharine titanotherium. "way back in i invested the profits of my lamson deal--$ , --in , sugar at , and in a few days, amid brilliant fireworks, i bade it adieu, when it gracefully dropped below . again, four years ago, i decided i could make no better long-time investment of $ , or $ , electric profits than to short sugar from to . in eleven days it took $ , more than my profits to even up my accounts. "thinking these things over of late, i determined to make a final demand on astute and relentless wall street for my accumulated deposits--a kind of please-give-me-back-my-losses demand. i carefully loaded up two weeks ago to the extent of , sugar in the thirties, and feeling the atmosphere was redolent of opportunities, last friday i bought , more, the last , of which in a rather open and frank way that seemed but fair to my scalping new york friends. well, you know the rest. it took fire. i cleaned up something over $ , , and put out a short line of , shares, the last of which i have covered to-day at something over $ , profit. strange as it may seem, i was quit. i have struck a balance with sugar, and it gets no more of my money. "i am one of the few bostonians who are contented to live in the knowledge that wall street is too big and bright and cute a metropolitan centre for country boys to monkey with, and you can say i am so tickled to get back my bait that i will never again, never, wander away from home. there is one moral that may be drawn by wall and state streets from the last few days in sugar. it is this: it is not necessary to-day, any more than it was in old days, to work deals with false stories or fakes. in doing what i did in sugar i depended on no fakes nor stories. i simply followed charley osborne's old admonition: 'if you want to bull stocks, buy 'em. if you want to bear 'em, sell 'em.' i bought 'em and i sold 'em. these are sugar facts as far as my movements have affected them!" for years after, even up to to-day, this yarn turned up in the press in different parts of the world, and every time i read it i chuckled to myself, for i see a big manly fellow, president of a bank now and asking no odds of any, for he can buy , shares of sugar at any time and draw his check to pay for it against a bank account honestly earned since the day his wife wrote that letter. and i see a grateful mother teaching three youths to say a certain prayer, and then i forget the critics' scathing sermons against stock gamblers. it does not pain me when my own children ask, "why do they say such awful things about the stock operator?" i answer: "oh, they mean no harm; they don't know the stock gambler they write about." one of the system's shadows that my readers may not drop this chapter with a false idea of the results of the stock-broker's efforts to "live and let live," i will give them an illustration of one of the counterbalances of the law of compensations. in the same year with the sugar transaction, in an evil moment my mail brought me the following letter: _dear sir_: i have read with interest your proclamations about "coppers." i am not a rich man, but i have about $ , lying idle which i should like to add to, and will put it into anything you advise. the writer received the following answer from my secretary: mr. lawson instructs me to say he received your letter of ---- and he knows no better investment than the stock of the amalgamated copper company, which will be offered for public subscription next week. in the advertising which will accompany the offer you will note that it is to pay per cent., is now earning , and should sell at $ or $ per share. it will be offered at par. not only does mr. lawson personally believe in every word in the advertisements, but they are vouched for by such men and institutions as the national city bank of new york, henry h. rogers, william rockefeller and others, whose names are synonymous with success in business affairs. mr. lawson does not hesitate to advise you to invest your $ , in this stock, provided you are not looking for an investment that is absolutely safe, that is, one that should not, in these times, pay you over - / or per cent.; but if you are looking for a semi-speculative investment, that is, one that will pay you over per cent., and where the chances are good for large profits, he recommends this stock. later i received the following: upon your advice i purchased shares of the amalgamated stock at $ per share. when the stock dropped to , remembering your strong advice i purchased shares more, and after it had advanced to , thinking it was surely going to the or you mentioned, i bought , , putting up my shares as margin. it has now dropped back to , and the many stories i read in the papers are causing me much anxiety. do you still believe as you first wrote me? to which he received the following answer: mr. lawson instructs me to say he received yours of ----. his faith in the amalgamated property, the men who control and manage it, and the stock is the same as it always has been. he, like yourself, added to his holdings at , and as high as , and knowing what he does about the property, and what the men who control and manage it, and with whom he is intimately associated, say to him, he cannot believe the yarns which are appearing in the press are other than the vaporings of those stock-market critics who must write their opinions of prominent stocks even though they have no means of actually knowing anything about them. while mr. lawson regrets that you have spread yourself out, as you say in your letter, he can only answer your question by the above, to wit, his faith in amalgamated is the same as from the beginning. later i received the following from one of the penal institutions of the country: you will observe by the postmark on this letter my present place of residence. you probably knew that before, as the press has had much to say about me of late. i trust you and your associates are satisfied with yourselves when you observe the hell you have caused others. when i first wrote you about the amalgamated stock i was an honest, prosperous man. i had never committed a crime nor done any great wrong to my fellow-beings. relying upon what you said publicly and the well-known record of the rockefellers and their partners, i committed acts which i now know to my everlasting sorrow i should not have committed. i had no intention of doing wrong, but when i saw ruin staring me in the face i used, as i supposed only temporarily, funds intrusted to me to protect my stocks from being slaughtered at declining prices by the sharks of brokers whom i dealt with. the rest is the old story. my wife and children are disgraced and oppressed with poverty, and i am serving a five years' sentence in this institution, buoyed up only with the hope that i may live to face you and your kind, that you may have the pleasure of seeing the wreck you have wrought--in the hope that i may satisfy a desire which night and day gnaws at my very soul, a desire to say to you, face to face: "look upon a man who, although a branded criminal, is as much better than you and your associates as it is possible for one to be," and to ask you how your wife and your children enjoy the luxuries they have when they know at what price they were secured, for i shall surely, if i live, insist upon your wife and children hearing from my lips what agonies a wife and children, who are as dear to me as yours are to you, have suffered because of your baseness. chapter xiii the "system" versus westinghouse in i had just wound up one of the most strenuous and successful financial campaigns i ever engaged in. this was the westinghouse deal, of which the papers were full at the time. george westinghouse, to whom the world owes the air-brake and countless improvements in electrical machinery, having surmounted the difficulties that clog the early steps of the inventor who would be his own master, had taken rank, some years before, among the prominent public figures of the day. the various corporations in america bearing his name had prospered amazingly; his ingenious appliances had displaced home products in the european market; and titles and decorations had been conferred on the inventor, though these last, like the sturdy american he is, westinghouse had put aside. this great success was wholly the fruit of george westinghouse's personal endeavor. it owed nothing to extraneous influences. it had been accomplished along those manly, independent, yankee lines which have made that name synonymous with hustle and success in every part of the civilized world. above all, the man had organized and developed his companies without the aid of the "system" or without truckling to its votaries. in consequence he had incurred the deadly hatred of some of its lords paramount. in the business world westinghouse's great rival was the general electric company. to mention "westinghouse" and "general electric" in the same breath was to speak of a thing and its antithesis. everything george westinghouse was or had been the general electric was not and had never been. the general electric had been and was by leave of the "system"; in fact, was one of the very foremost examples of its methods. its high-priest was j. pierpont morgan; its home, wall street; its owners, the principal votaries of the "system." it had grown because of their favor and by means of the rankest exhibitions of knock-down-and-drag-out methods of consolidation of all competitors but--westinghouse. just previous to westinghouse had rejected a dazzling scheme of uniting the two institutions on an immense capitalization which would have absorbed millions and millions of the people's savings and earned millions in commissions for its projectors. wall street's indignation at his hardihood knew no bounds, and at the time of which i write the yegg-men of the "system" were laying for him with dark-lantern and sand-bag. to appreciate the story of what the "system" tried to do to george westinghouse and what he withstood, one must know the man. he embodies in many ways the conception of what the ideal american should be. his remarkable six feet and odd of physique and his fertile, powerful brain are the admiration of all true men with whom he comes in contact. in spite of his unparalleled success and the accumulation of a great fortune, he retains the same simplicity of manner and conduct that characterized him when working at the bench for weekly wages, and with all his shrewdness and force of character he has preserved a simple, honest, childlike belief in humanity. single-handed he conducted all his great enterprises on a plain, patriarchal basis, using their revenues for extensions, and depending on his faithful and well-satisfied stockholders for such further accessions of capital as the business might in his judgment need. about the time general electric was most anxious to bolster up its jerry-built structure with the solid westinghouse concern, the latter institution had begun the erection of some big new plants which required immediately several millions additional capital. westinghouse prepared to apply to his stockholders for the required funds, and the announcement was to be made at the annual election soon due. suddenly the financial sky became overcast. the stock-market grew panicky and money as scare in wall street as rain in arizona in may. it was just such a situation as the "system" might have brought about to accomplish its fell designs had it possessed the power to work miracles. and the "system" took care of its advantage. at a tense moment in that soul and nerve trying period, with wall and state streets full of talk about general electric's probable absorption of westinghouse, general electric being then at its highest price, $ per share, the westinghouse companies held their annual meetings and the big inventor, confidently facing his stockholders, quite regardless of conditions which he thought could have no possible bearing on his concern's splendid prospects, came forward with his demand for the millions required to complete the projects already under way. this was the signal. from all the stock-market sub-cellars and rat-holes of state, broad, and wall streets crept those wriggling, slimy snakes of bastard rumors which, seemingly fatherless and motherless, have in reality multi-parents who beget them with a deviltry of intention: "george westinghouse had mismanaged his companies"; "george westinghouse, because of gross extravagance, had spread himself and his companies until they were involved beyond extrication unless by consolidation with general electric"; these and many more seeped through the financial haunts of boston, philadelphia, and new york, and kept hot the wires into every financial centre in america and europe, where aid must be sought to relieve the crisis. there came a crash in westinghouse stocks, and their price melted. from amidst the thunder and lowering clouds emerged the "system." "notwithstanding the black eye the name of everything westinghouse had received, it would stand by and consolidate and save the day!" but the "system" and its everything-gauged-by-machinery votaries had reckoned without their host. george westinghouse was too strong a man to be thus easily shaken down. he threw back his mighty shoulders, shook his big head, and flung his great private fortune into the market to stay the falling prices of his securities. the movement was too strong against him at the moment, and his millions were but a temporary help. he got on the firing-line himself and did a thousand and one things that only a brave, honest, and democratic yankee would or could do--everything but accept the cunning aid offered him by the "system" or its votaries. he knew too well that the friendly mask concealed a foe and that the kid-gloved hand extended him had a dagger up its sleeve. these were the conditions when i, as an expert in stock-market affairs, was called in for assistance. here was this sound, sturdy institution standing for everything that was best and self-supporting in american finance adrift on the wall street shoals, and it seemed almost a hopeless task to attempt its rescue. but it was a task eminently worth while, and i undertook it with all the energy i could command. the problem was to restore the westinghouse stocks to their former high price, and, confidence being re-established, to sell the new treasury stock at such a figure as would pay for the plants and other projects the company had under way. the completion of these meant greatly increased earnings and such an advance in facilities and economy of manufacture as would surely seal the fate of general electric if it competed with westinghouse under the new conditions. small wonder "standard oil's" whole strength was bent to force the alliance. my fight had hardly begun when i saw it was to be opposed by all the forces of general electric and the "system," and i concluded defeat was sure unless by a counter movement on their stock i could keep them so busy that they would have no time to interfere with westinghouse. thereupon i laid out that attack on everything connected with general electric which created so much consternation at the time. to this day, if my enemies are asked to name the act which most conclusively justifies their hatred of me, they will point to my terrible general electric raid. they will tell you i broke the stock from to in a day, and thereby caused one of our most disastrous panics; that i continued to hammer it to , that i compelled reorganization, and then did not let up. they will show you that the misery and ruin i wrought were beyond calculation. i will only say that, of any of the things i am proud of having done, i am proudest of what i did in general electric, and, willingly, i would give over five years of my life to go through the experience again. it was a most arduous campaign, and our fate trembled many times in the balance. by dint of hard, overtime work, and what my enemies were pleased to call rank manipulation, we drove westinghouse stock back to its former price, after which a strong syndicate was formed to take the new stock, and the righted institution at once magnificently swept on its international career which to-day is at its height. though i had taken up the westinghouse cause as a business venture and its successful termination was most profitable to me, i had entered into the campaign with the ardor of a lawyer defending a client unjustly accused of a heinous crime. but there was this difference--if in spite of his efforts the lawyer fails to convince the jury of his client's innocence it means no detriment to his fortune or his reputation, whereas all i had and was were involved in this stock-exchange struggle. the great rewards that are the guerdon of success in financial fights are balanced by the terrific consequences of defeat. the broker general engaged in surrounding his enemy requires every dollar he and his principals can pledge or beg, and where great forces are in conflict millions are burnt up to seize any vantage, as kuroki sacrifices a regiment to gain a hill. i had won for myself as well as for westinghouse, but if the fortunes of the war had been on the other side, i must certainly have been wiped out. chapter xiv the alliance with addicks it was part of my method of conducting my stock-brokerage business to expose through the medium of the press or through market letters the stocks of corporations i thought rotten. it was also my way to work up bull campaigns in stocks that seemed to be selling for less than they were worth. with addicks or the "standard oil" i had no connection. i had watched the philadelphian's operations and had my eye marketwise on his bonds and stock, particularly on his stock, which was , shares of the bay state gas company of delaware, of a par value of fifty dollars each, and which became very active in the market shortly after it was created, at just under par. i thought i saw in the scheme the ordinary, cold-blooded, stock-jobbing, unloading-on-the-public affair. i had heard recounted the man's wonderful doings, particularly his recklessness in the purchase of the boston companies; i "sized up" his mighty effort to be the tremendously rich good fellow as inspired by the idea and the purpose of giving his "stuff" in the stock-market a good send-off; and from the start i had put his property on my "to-be-watched memoranda" as one i might at the proper time let daylight into. i was tearing large strips from its values when addicks' bankers, who happened to be business friends of mine, sought to enlist me on their side of the gas war. i remember expressing frankly my opinion about the contestants and their contest at the time, stating that so far as morality, fairness, or justice went i could see little to choose between addicks and "standard oil." i continued to "bear" the stock until one day my banker friends brought me an earnest request from the delaware financier that i go to new york and talk things over with him. on reaching new york--the two bankers and myself--we went directly to addicks' apartments at the imperial hotel. although the fortunes of war were rapidly crumbling this worthy's brilliant financial structure, there were as yet no outward signs of disintegration. his beautiful estate at claymont, del., his stock farm in the same state, his town-house in philadelphia, his $ , apartments in the knickerbocker on fifth avenue in new york, and the superbly furnished suite in the imperial, close by, all seemed to testify to the man's boundless prosperity. memorable though this meeting was destined to be to both of us, my chief sensation in approaching it was a certain curiosity as to the personality of addicks, whom i had seen, but had never spoken to. i knew him to a "t" in my mind, but here was my opportunity to compare my mental "sizing-up" with the real man. the apartment into which we were ushered was of the low-burning-red-light, turkish pattern. addicks rose from a great divan disturbing a pose which his white cricket-cloth suit and the scarlet shadows made so stagy that i guessed it was for my benefit. i looked him over, and he returned the inspection. after the introduction he at once unlimbered his business gun. "let's get right down to business, lawson," he began. "i wanted to meet you to see if we could get together on any satisfactory basis." i told him that that was my understanding of our meeting. then he wanted assurances that i had no connections with "standard oil" and that i was free, sentimentally and commercially, to enlist in his fight. i replied that i was a stock-broker and operator, and was looking for opportunities; no one had strings on me, and provided he made satisfactory terms i was free to join him; further, that when it came to enlisting in a fight between two such financiers as addicks and rogers, sentiment seemed to me out of place. "that's right," he said. "that's what i like to hear. now, lawson, will you take this fight of mine against 'standard oil'?" "if you meet my terms, yes." addicks looked at me. "what do you want?" he asked. "perhaps, though, you'd first like to have me tell you how my affairs stand." "i know sufficiently where you stand," i replied, "to name my terms right now. if they are acceptable, i'll hear you tell where you stand afterward. i'll take your fight for a cash commission of $ , and a cash capital of $ , , , to be used in the market on joint account, we to divide the profits of all operations." addicks smiled. "you are too high," he said. "i'll pay you $ , commission and give you $ , capital, and after i show you in what good shape my fight now is and how near i am to victory, you'll agree that the terms i offer are good pay and fair." "mr. addicks," said i, "i have just time to get dinner, look in at the theatre, and catch the midnight back to boston. it is my business to keep posted on such scrimmages as you are engaged in. if you and your affairs are where i believe they are, the terms i offer are exceptionally low. if your affairs are as you would have me believe, you need no one to captain your fight." addicks asked where i thought his affairs stood, and i answered: "i don't think--i know, or, at least, i feel quite sure i do. you are at the end of your rope and are practically bankrupt." at once addicks grew indignant. "you are absolutely wrong," he asserted. "i'll admit i have had a hard fight, and that it has cost me, so far, considerable money; but i give you my word i'm worth between six and seven millions clear and clean right now." i bade him good-night and left. our interview had consumed not over twenty to twenty-five minutes. i said to his bankers: "addicks is the addicks i have sized him up to be, only worse." we got back to boston next morning, and at the opening of the stock exchange i sailed into the bay state stock in earnest, for i felt surer than before that addicks was nearing his finish. a few minutes after the exchange opened, addicks' banker rushed into my office and said the delaware financier begged that i would return to new york at once, and whispered to me that in a conversation just held on the telephone addicks had stated that he would accept my terms. i informed the banker i was not anxious for the job, but as he urged his own interest, i jumped on the noon train and in the evening was again in new york. it was a warm day and i was pleased to get a wire on the train from addicks asking me to meet him at the pier, as we should hold our conference on his yacht, the _now-then_, at that time one of the fastest steam-yachts afloat. it was a night of memorable beauty. in the golden light of a dazzling sunset we flew up the majestic hudson. from under the awning i watched the serried edges of the palisades as we slipped swiftly by them to the broad reaches of tinted waters above yonkers. every natural influence conspired to make acute to me the warning whisper of my soul, which flashed the caution as i crossed the gang-plank, "watch out!" but, as i said before, fate hangs no red lights at the cross-roads of a man's career, and i plunged recklessly into the toils my mephistophelian companion so artfully wove around me. the _now-then_ was hardly in mid-stream before addicks had got down to business. his demeanor had changed since the previous evening. all his bravado had disappeared; he was simple, frank, direct, and, in the manner of one who has made a mistake and regrets it, he commenced without any delay: "i didn't think last night i'd pay your price, lawson. it staggered me a bit, but i gave it considerable thought after you left, and when this morning's prices showed me you were again on the war-path, i saw my error." "mr. addicks," said i, "let's have no fooling about this matter. if we do business together, it will only be after there is some plain--brutally plain talk between us. it will do no good to trick, because some one will get slaughtered when the trickery is discovered, as it surely would be, after we hitched up together." then, straight from the shoulder, free from all attempt to gloss over the raw truth, i detailed to him the things i knew he had done to his former associates, and it was a tale of unbroken duplicity and double-dealing on his part, loss and misery for his lieutenants, and profits and curses for him. i ended by saying: "if we get together, addicks, it will be upon my terms, and i'll see to it that you never put me in the position in which you have put all the others you've been connected with. i don't trust you and i'll watch you all the time." when i had finished addicks looked at me sadly with a wounded, "how-this-man-has misjudged-me" expression in his eyes. "lawson," he said, "you were never more mistaken in your life, but it's a matter i don't want to argue about. you'll tell me you were all wrong after you know me better. i'll do business with you--yes, and i'll allow you to make your own terms. i'll agree to them whatever they are, and i'll live up to the very letter of them, however hard." i may mention that it is a peculiar characteristic of addicks that one may talk to him as though he were a pick-pocket, and he will not resent it, if it is "business." where h. h. rogers would flash into a vesuvius of wrath, the delaware statesman only smiles. addicks by no means convinced me of his sincerity. i decided i would test him pretty thoroughly before i went further. so i said: "this seems the proper time for a clean statement from you as to just where you and your companies stand." i did not believe this man could make an absolutely truthful statement on any subject of importance, but i knew enough of his real position to protect me from being fooled. what was my surprise, therefore, when in the most open way possible he calmly spread before me a condition of affairs far worse than the worst i knew. he was, indeed, bankrupt and his corporation was in little better shape. as soon as i could catch my breath i said: "no wonder you refused my proposition last night. if your bankers had dreamed of this state of affairs, they would have had a receiver to-day. you cannot meet my terms. you cannot even carry out the ones you yourself offered." addicks leaned back on the cushions of his chair in the easiest, most _insouciant_ way imaginable. he grinned. "that's true," he replied, "but i never give up a ship till i feel her bump the bottom, and i am sure that, bad as things are, you and i can pull them out and whip rogers to a standstill." it was a remarkable situation. here was one of the most ruthless financial schemers of the age cornered for slaughter, and he had put himself absolutely at the mercy of the man who had bitterly fought him and whom he knew hated his kind. yet he was as cool and collected as a bunch of orange blossoms at a winter's wedding. the man's supreme nerve astounded me, yet i could not help admiring him. i saw through his game, yet his assurance fascinated me. i thought a minute. i said to him: "addicks, i'm really sorry for you, and i'll promise you here now to keep what you've told me sacred. what's more, i'll stop fighting you. i'll cover my shares and without doing any one any harm i'll help make prices a bit better for your securities." he smiled, said "thank you!" and continued looking at me as though he awaited something further, a quizzical, expectant smile on his face. there was an interval of silence. finally i said to him--and there were neither red lights nor warning intuitions to signal my peril: "just what do you expect me to do, mr. addicks?" "whatever you think best," he replied in a mild tone. then, rousing himself a bit, he went on: "they say in the market that you like a fight and the harder it is the better. well, i certainly have an uphill fight. do as you would have the other fellow do to you." after that i had no further doubts of addicks' slickness. i said to him: "you are certainly the shrewd man they describe you as. now continue to be frank long enough to answer this one question: did you figure this out as the last card to throw at me, knowing that the very desperation of the case might warm me up and tempt me to tackle it for the sake of the fight there's in it?" instantly addicks knew his game was won. he straightened up and was the able, shrewd, and cunning financier who had tricked conservative boston. his facts chased his figures in marvellously rapid succession, and he showed a knowledge of conditions, relations, and corporation tricks that dazzled me. for an hour he rushed on, and when at last he came to a stop i said to him: "it's unnecessary to say any more. i see the situation as you would have me see it, and it comes to this: if i refuse to link up with you it means another 'standard oil' victory and another wreck for boston. rogers' success means that new england speculators and investors will again, for the three hundred and thirty-third time, be robbed of their savings. if i get in, we may either avert all this or i may be ground up at the same time you are. however, it's too good a fight to miss, and so here goes. i'll link up." at some particularly hazardous halting-place in after-years addicks and myself have often laughed as we have talked over that august evening on the _now-then_. i was easy, he asserts, and i must admit that he is right--i was easy. yet no one knew addicks better than i did then. looking back along his extraordinary career, one is obliged to allow a certain magic as a factor in his men-and-dollar tussles. we had absolutely nothing in common, addicks and i. we thought and felt differently about every relationship of life. a dozen other ventures, sure, easy, and promising infinitely greater profits, were ready at my hand--but he appealed to my sense of adventure, he promised me abundant and glorious fighting, and i forgot everything else and went with him. when the _now-then_ touched her pier and i stepped ashore, it was as captain of addicks' corporation and stock-market forces, with absolute power to wage war, make peace, and use in whatever way i thought best such resources of his as i could lay hands on. i lost no time. within forty-eight hours of my return to boston i had mapped out my campaign, reconstructed addicks' broken lines, and gayly set forth on about as forlorn a hope as ever operator or fighter tackled. nothing more desperate could be imagined than the condition of the delaware financier's affairs when i assumed control. all the resources of his companies were pledged for loans, and the constantly falling prices of his securities, coupled with the discrediting stories rogers' agents kept in circulation, made it difficult to keep these going. to pay would mean ruin, for addicks had no further thing of value to pledge. at the same time, rogers' company, which had now paralleled many of the bay state company's pipes, had secured a large slice of that corporation's business, and had a corps of up-to-date solicitors working overtime to secure the balance. boston, in the meantime, having decided that addicts' star was of the shooting variety, and on its return trip, was throwing up its hat in the wake of the "standard oil" band-wagon. the city government and the massachusetts legislature had awakened to the enormity of addicksism and were boiling over with that brand of virtue which the "system" and "standard oil" know so well how to rouse in american breasts by way of american pockets. by this time rogers' investment in boston had grown from the half-million he had in the beginning estimated as sufficient to annihilate addicks to three and a half millions, a million and a half of which represented real property, and the balance, all kinds of expenditures made in the fight to crush the delaware financier, a large part of it being invested in the votes and favor of state and municipal authorities. chief among the enemies of addicks at this period was the young and brilliant boss of boston, its reform mayor, the hon. nathan matthews, and thereby hangs a swinging tale. when the addicks-rogers gas-fight broke out in boston this nathan matthews was at the zenith of his political career, and was rather a greater man than even reform mayors generally fancy themselves. he was at that state of development in the lives of aspiring persons which compels the average spectator to debate whether the swelling of the cranium should be met by a larger hat-band or by a sweeping haircut. _en passant_, addicks' panama had had its fifth enlargement to accommodate the successive bulges of his brow. now, the city of boston's contract with the bay state company for gas at a dollar and twenty-five cents, which had run a long term of years, was just expiring. one bright june morning the mayor's secretary telephoned the secretary of the mogul from delaware that his honor of boston, desired converse with the gas king. if those who overheard the dialogue can be credited, the parley was of this character: "this is the mayor of boston, the hon. nathan matthews." "this is j. edward o'sullivan addicks, gas king and united states senator-to-be. what would you with me?" "i would hold converse with you in regard to a contract of much moment which will expire in a few days." "well and good. my office is in west street. give your card to my first, second, or third secretary and i will not keep you waiting long." "the office of the mayor of boston is at the city hall and my first or under-secretary will make things agreeable while you wait. when will you call?" "i would have you understand, mr. mayor, that any one to talk gas with j. edward o'sullivan addicks, gas king and united state senator-to-be, comes to his office." "good-day to you, mr. gas king and united states senator-to-be." "good-day to you, mr. mayor." i do not, of course, guarantee that the conversation took exactly the form here given it, but no injustice has been done its substance, nor would it be possible to estimate in miles the breach it created. from that telephonic encounter date the earnest efforts of matthews and addicks to do up each other, in which both were successful to a degree that filled their hearts with indian pleasure. a few days later public announcement was made that the brookline gas company, rogers' corporation, had been awarded the contract for lighting boston, and that henceforth the legal price of gas to the consumer was to be $ per thousand feet. this was due notice to all concerned that "standard oil" had captured city hall, and addicks realized his error. he sought the mayor's office, but the mayor had no time to see him. his companies met the new rate. there was nothing else for them to do. chapter xv the great bay state gas fight it was to this condition that i had to adapt my campaigning plans. i determined first to raise the market price of addicks' securities; to turn the tide against the "standard oil" by that most potent of stock-market weapons, publicity; and then to attack rogers from the rear through the city hall. for addicks to attempt to match pocket-books with rogers and "standard oil" in corrupting city or state officials i knew would be useless; and besides a fundamental stipulation in the agreement with the delaware financier on the _now-then_ had been that under no circumstances should bribery or corruption be allowed to enter into any of our plans while i was connected with the enterprise. i had always held, do now, and always shall hold, that the meanest crime in the calendar of vice is bribery of the servants of the people. i felt pretty sure, moreover, that i could play a card that would more than offset the dollars of "standard oil." nathan matthews was on the high-road to the governor's chair, but i happened to know that, however ambitious he might be for political preferment, his temperament rendered him more avid for distinction in business. addicks had within his gift the richest plum in all the boston commercial world. as controller of the affairs of the bay state company of delaware, which controlled the nomination and consequent election of the officers of the old boston gas companies, he could award to any one he pleased the presidency of these corporations, together with the large salary that went with the office.[ ] my plans in shape, i rushed to the firing-line. i began with a statement to the investors of new england and the gas consumers of boston brimming over with facts and figures. then i fired a volley of candid details as to the manner in which city and state officials had recently betrayed the public's interests. lastly, i discharged at "standard oil" a broadside which my attorneys and friends assured me meant jail on a libel charge. i put my banking-house and my personal guarantee behind the old and new loans, and proceeded to roll up my sleeves in the stock-market. i got results at once. a change became apparent in public sentiment--the rottenness of addicksism was overcome by the stench of "standard oil." the prices of bay state stocks and bonds shot up; loan funds were offered freely and at lower rates of interest. there were, however, reprisals. rogers met my onslaught by a manoeuvre new in "standard oil" tactics. he came into the open, issuing a proclamation over his own signature which gave me the lie, at the same time tearing off a yard or two of my skin and throwing on a bucket of brine to remind me i had lost it. this attack was just off the press when i was out with a rejoinder which he, in after-years, referred to as quite the hottest thing of its kind he had ever read. in it i calmly, but in that "chunk english" which those who really wish to convey the truth naked can always find handy, told him plainly who he was, explicitly what "standard oil" was, and exactly who and what i was. i opine that about either assault there was nothing dignified, generous, or refined, but in stock-exchange battles one has not time to scent shrapnel. the immediate result of this interchange of deckle-edged[ ] insults was to daze the public. "standard oil" attacked and actually replying; rogers assaulting lawson and lawson sending back worse than he got--almost anything might happen next. it was right here i got to rogers' _solar plexus_. i came out with another plain public talk, and gave him the choice of haling me into court--in which event i pledged him my word i would send him and his associates to jail for bribery and other crimes--or of acknowledging to the world he was licked and on the run. he was silent and i loudly claimed victory. the price of addicks stocks quickly emphasized our success by a further advance. thus far the campaign appeared to be working smoothly, and i turned my attention next to my rear attack. i began negotiations with mayor matthews for the withdrawal of his support from rogers. it was a difficult task, but after much manoeuvring i landed my big fish. i promised him the presidency of the boston, south boston, roxbury, and bay state gas companies for the term of three years, at a salary of $ , per annum, with the explicit understanding that he was to allow me, as his vice-president, to see that the bargain between us was lived up to. when the trade was made it was understood that the fact of matthews' change of base should be kept secret, and that he should not assume the office until the end of his term as mayor of boston. with that agreement the deal was clinched, signed, sealed, and delivered. in order that my readers may comprehend the events that follow, it is necessary that they understand something of the complications in which addicks' manipulations had involved that corporation. when addicks purchased the several boston gas properties he organized a company, the bay state of delaware, in which this ownership was vested. in order to facilitate the financing of the new corporation and for other manipulative purposes of his own, addicks created an inner corporation, the bay state of new jersey, owned by the treasury of the bay state of delaware, to which he turned over the stocks of the boston gas companies. these the bay state of new jersey transferred to the mercantile trust company of new york as collateral for the twelve million boston gas bonds which had been sold to the investing public. while to all intents and purposes the bay state of delaware was owner of the subsidiary properties, the contract with the mercantile trust company was made with the bay state of new jersey, and it was to the president of the latter corporation (addicks) that the trust company was bound to deliver the proxies for the gas stocks in its possession, three days before an annual election. knowledge of this subcutaneous corporation was confined to addicks and his immediate associates, and the delaware financier alone quite grasped its potentialities. hitherto addicks had used the proxies to elect himself president of each of the subordinate corporations, drawing the several salaries which went with the offices. to prevail on him to give up these places and their emoluments to a man he hated as bitterly as he did matthews was a difficult task, but his situation was desperate. finally, he agreed. i did not know till long afterward that this reluctant compliance was yielded only after addicks had had a secret session with his bay state directors, at which they voted him, by way of salve for his resignation, a sum equal to three years' salary, $ , . the mayor, who was a lawyer, prided himself on his shrewdness, and was fully alive to the serpent strategy of addicks. he determined that the prize he had secured should not slip through his fingers for lack of precaution. we had many legal pow-wows in which the most astute lawyers at the boston bar were called in, and finally the directors of the bay state made an iron-clad contract with nathan matthews, agreeing to deliver over to him whatever proxies it, the bay state gas of delaware, received from the mercantile trust company of new york, on a given day before the annual election, with which he, of course, could elect himself president. this contract was signed by addicks and his directors and by all the officers of the bay state of delaware corporation, and was passed on and approved by the eminent law sharps both sides had retained. a few days after the document that made nathan matthews supreme boss of boston gas was conveyed to him, there came an explosion. like the premature bursting of a bombshell at a fourth of july celebration, the transaction "leaked," and the press announced in sable head-lines that mayor matthews had sold out, that addicks was on top, and that rogers and "standard oil" would surely be found beneath the _débris_. matthews has always claimed that this "leakage" was a piece of addicks' double dealing; addicks declares it was a part of matthews' and rogers' deep-laid plan to give him the double cross. anyway, as a hurrier-up of coming events the news was most successful, although its effect was somewhat of the nature of that produced by the throwing in of an overdose of soda at a candy pull--the pot boiled over, and the air for a time was permeated with the odor of burned sweets. in spite of all public and private criticism matthews budged not a jot, and confirmed the reports. i made the most of our triumph over "standard oil," and for a few days the public took to it, too. then came one of those return waves of sentiment which may always be counted on in any contest in which "standard oil" is engaged. from mysterious places and in untraceable ways the report became current that victory was really with rogers instead of with our side; that the deal was a smooth piece of machiavelian work; that matthews when he took the helm was to steer our ship alongside one of rogers' forts and perhaps drop anchor under a row of his concealed guns. this rumor alarmed me. i lost no time in running it to earth, and discovered to my consternation that matthews had spent the night before he made the agreement to come over to us in new york, at the home of h. h. rogers. exactly what had occurred there, or what their programme was, i don't know. long after this episode had slipped into gas history, at the time when rogers and myself were doing business together, i asked him to enlighten me on this one point, and he did to the extent of saying, "matthews only did what i approved of." this certainly redeemed matthews in my eyes from the reproach of having sold out his friends. there is nothing more despicable than a man who, after having consented to be "put" will not "stay put"--even though the first "put" be of a questionable character. this new complication demanded immediate action. i called on matthews to make public announcement that i was to be his vice-president, and thus set at rest the reports that were fast destroying the beneficial effects of our coup. i argued that such an announcement would convince the public that victory was with us and not with rogers. my surprise may be grasped when the mayor placed this icicle in my hot palm: "mr. lawson, it has long been my ambition to show the public of boston and gas consumers what i could do with this situation, and now that i am absolutely assured of gas supremacy, i would have you and all others distinctly understand i will run it as i deem best, regardless of the wishes of any one." nathan matthews was destined later to learn that in an addicks edifice there are secret trap-doors and concealed passageways available for quick escape in emergency, and that the term "absolutely assured" is of relative value when used in high finance, with addicks to interpret the relativeness. a few days after the mayor had shown his colors the annual election was "pulled off" in an unexpected manner. the mercantile trust company delivered its proxies to the president of the bay state _of new jersey_, who promptly re-elected himself and his friends to their old offices. next morning the public, the press, and the ex-mayor were alike surprised to learn that j. edward o'sullivan addicks was still president of all the boston gas companies; that general sam thomas, of new york, and thomas w. lawson, of boston, were vice-presidents; and that the expected and widely heralded matthews turnover to matthews had been indefinitely postponed. there was a tremendous "towse" for a few days during which time i tried my hand at public-opinion moulding, and so successfully that all interested saw that the tide had really turned, and was running swiftly against the heretofore invincible "standard oil." rogers tried to stem it by causing it to be known that matthews was to carry the new complication to the courts, but we quickly disposed of this possibility by reaching a settlement with our man. this was brought about by the payment to matthews of a number of thousands of dollars, which addicks afterward informed me he had entered in the gas-books as "balm salary." from this event until august, , it was one continuous running fire with rogers and his crowd, with a constant gain to our side in public opinion, though final victory was still far off because of the unlimited money resources of "standard oil." in fact, it gradually became evident that, though we might hold out, it was impossible to whip "standard oil" to an open acknowledgment of defeat. the phase of the problem that gave me keenest cause for uneasiness was the possibility i recognized of treachery in my own camp. i had become painfully aware that addicks was getting impatient and was ready at any favorable moment to make one of his quick judas turns, which would land him safe with rogers as the price of the slaughter of the rest of us. true, i had taken all possible precautions to safeguard my own and my friends' interests against his craft by securing from him and from the subsidiary companies iron-clad power to act for them without consultation. to get this i had had to use great pressure, for he had balked long and hard against giving it. this was the condition of affairs when i decided to stake everything on one move. * certain of my critics have seized upon the transaction with mayor matthews, narrated in this chapter, to say: "he bribed the mayor and is no better than other bribers." the fact is, that the only thing the mayor of boston could do in the gas war--take sides with rogers, grant a permit to the brookline company to open the streets and come in competition with our companies, thus compelling, in the interests of the people, a reduction in the selling price of gas from $ . to $ . --the mayor had already done. there was nothing more in his power, and the only object we had in securing his services was to put him between our companies and rogers, in the belief that rogers, owing to his former relations, would not dare fire through him. i never, directly or indirectly, bribed mayor matthews; but, on the contrary, only induced him to do what he had a moral right to do and i a moral right to ask him to do. footnotes: [ ] see page . [ ] mr. lawson's proclamations and market communications are invariably printed on the finest grade of deckle-edged paper.--the publisher. chapter xvi peace negotiations with rogers having made up my mind that the time had come for a final engagement, i decided myself to try legitimately to settle with mr. rogers, and prepared two letters which, if he were willing for us to get together, would pave the way for a meeting. these letters i sent by my secretary, mr. vinal, to mr. rogers at fairhaven. my readers, in weighing this odd correspondence, must bear in mind what the relations between mr. rogers and myself had been. we had vilified each other in every imaginable way, and i knew, or at least i thought i did, that the "standard oil" magnate would not hesitate to use any written communication of mine that he could lay hold of to bring about a split between addicks and myself. i had good evidence that he believed that in such a rupture lay his only chance of bringing home the quieting blow he had been trying to inflict on us. letter i. read as follows: henry h. rogers, fairhaven, mass. _dear sir_: my secretary, mr. vinal, will hand you this letter. if after reading it you are desirous of further communication with me, he has instructions, after you have returned this one to him, sealed in the enclosed envelope, to hand you another, which if after reading you return to him in another enclosed envelope, he will bring to me with whatever verbal answer you may care to send. my secretary knows nothing more of his errand or the contents of either letter. he can, therefore, give you no further information. if you do not call for the second letter, i will consider you do not care to pursue the subject further, which will lead me to notify you that the boston gas war will end in a most sensational way next wednesday. believe me, sir, yours respectfully, (signed) thomas w. lawson. upon his return from fairhaven mr. vinal informed me that mr. rogers, after reading this letter twice, folded and placed it in the envelope i had sent and handed it without comment to him, whereupon my secretary delivered to him letter ii., which was a type-written communication on a plain bit of paper, addressed to no one, signed by no one, and bearing no marks to identify the sender: there is a gas war now existing. upon one side is the "standard oil." upon the other the addicks bay state companies. after a fight has been begun there are but four things possible: "standard oil" can sell out to the bay state. the bay state can sell out to the "standard oil." they can come together by consolidation; or they can continue fighting until one or the other has been annihilated. nothing else is possible. therefore, one of these four things is to be the outcome of the present war. if you can be shown now that if one of the first three is not settled upon before next wednesday the fourth will be impossible beyond that date, and that it is absolutely in the power of one man, without consultation with any one, to bring about the accomplishment of any one of the first three, you will meet that man before next wednesday and make your selection. i can absolutely prove to you that this war will not continue after next wednesday, and that it is absolutely in my power, without consulting any one, to do any one of the three things you signify you desire done. mr. vinal reported that mr. rogers also read this letter a second time, but slowly and carefully, as though he were weighing each word, and then, sealing it in the envelope, passed it back to him with: "say to your employer i return to new york to-morrow, sunday night, and shall be at my office, broadway, from . on monday morning till five in the afternoon; that i shall dine at my house, east th street; that i shall be through dinner at eight o'clock, and that i go to bed at . . tell him that any man who has an important communication to make to me affecting a matter in which i have large interests will be welcome to call on me between the hours i have named, provided he notifies me a little while in advance." when my secretary, whose practice it was to give me the minutest details of such affairs as this errand, had reported all that had happened, i at once sent a message to broadway stating that i would be at rogers' house at eight o'clock on monday night, and on the stroke i pushed his electric latchstring. his man had hardly taken my hat when mr. rogers himself came down the hall with outstretched hand. chapter xvii a memorable conference if the years of my life are protracted beyond the psalmist's threescore and ten, even though the events that chance in the comparatively long future seethe and struggle as strenuously as those that befell in the eager, vivid procession of yesterdays which makes up my past, my memory's picture of this meeting will always hang where the lights cast their kindest reflections. i had left boston on the noon train, and got down to my hotel, the brunswick, on fifth avenue, by six o'clock. in those kind days of good memory when new yorkers really lived instead of looping-the-loop through life, the brunswick was head-quarters for southerners and bostonians of the old school. to-day its bricks and mortar and the picturesque iron balconies, from which two generations of america's celebrities reviewed the marching armies of peace and war, are heaps of refuse; for the old brunswick has had to give place to yet one more of the twenty-storied, emblazoned hostelries, whose alabaster halls, frescoed walls, mosaic floors, and onyx and silver bathtubs are designed to minister to the comfort of our great and free people when they needs must wander from the luxury of their homes. when i had dressed i crossed over to the old delmonico's opposite, and, in a secluded corner beside an open window which gave full view of the passing show on gotham's great boulevard, i sat and listened to old "philip," who, time out of mind, had been high-priest of the famous frenchman's temple of appetite, as he posted me on the latest doings of the town where no one remembers further back than yesterday, and to-morrow doesn't count. ordinarily i should have lingered for hours with "philip" and his tidbits, but that night my mind was a mad steeplechase of memories and hopes, all starting and finishing at east th street, and i fear he must have thought he had failed in the plump little duck which i left unpicked, and in the bottle of chianti which i hardly sipped. at . i lit my cigar and started for what i felt was to be the tomb or the forcing-house of all the air-castles i had cherished from boyhood. at last i was to meet the real champion; i was to tussle hand-to-hand with the head of the financial clan, the man of all men best fitted to test to the utmost the skill and quickness which i had picked up in the rough and tumble of a hundred fights on state and wall streets--rogers, wary, intrepid, implacable, the survivor of bloody battles in comparison with which mine were but pink skirmishes. i had carefully put aside that half-hour between dinner and the moment for my appointment to run up and down my mental keyboard under what to me are the most favorable conditions possible--an evening walk through the streets of a great city. some men can invite their souls only in sylvan solitudes, but the flare of light, the clash of traffic, the kaleidoscopic procession of humanity, with its challenging contrasts shifting and seething on great metropolitan highways, breed in my mind a sense of calm, cool remoteness in which all the glitter and excitement of the spectacle suggests only its appalling transiency. from the gay carnival of broadway i cut across through the brownstone gloom of th street into sixth avenue, where the tired men and women of the toiling millions sat in their doorways or at their windows over the shops resting after the heat and travail of the day. some watched the sidewalk antics of their children--perhaps speculating on the possibility that this or the other among that merry throng of urchins might rise to be an alderman or even a city boss--perhaps president of the greatest republic on earth--or--transcendent bliss--a rogers or a rockefeller. from d street i turned up fifth avenue, lifting my hat and exchanging a word with mr. and mrs. russell sage, and for an instant, as i left them, my wandering thoughts took a new twist, for mrs. sage had informed me that "father and i are on the way to prayer-meeting"--early evening prayer-meeting in new york! for an instant i was in one of those tiny new hampshire villages, a forgotten haven of rest and simplicity, innocent as yet of steam, machinery, or trolleys, for the sweet lady and the angular man with the pained gait which spoke in loud tones of the unbroken store-shoe could belong in no other than a rural place. but the image of the new hampshire village only flitted across my mind's film, for my truant senses seized on a message over memory's telephone: "russell sage has $ , , ." one hundred millions, and i was back on earth again, but as i walked the thought was buzzing in my brain: "is it possible that that countryman has made _one hundred million dollars_, when the expert carpenter who started at the birth of christ to trudge the world until from his honest labors he had accumulated $ , , by laying aside each day all the wage he was entitled to, one dollar, had at the end of , years only a little more than half that sum?" at last i turned the corner of th street, and when i looked down mr. rogers' home-like hall and grasped his outstretched hand and heard his "lawson, i'm glad to see you!" i would have sworn it was hours and hours since i left the little table in the corner of delmonico's. * * * * * the chief impression i recall of my experience that night is gratitude for henry h. rogers' unexpected kindness, and admiration for his manliness, ability, and firmness. when this memory rises in my mind i regret "frenzied finance" and all the consequences with which it is fraught for him and his connections. when the american people are aroused, as they surely will be, to demand restitution and are in the act of brushing, with a mighty sweep of indignation, back into the laps of the plundered the billions of which they have been robbed, and "standard oil" and the "system" break and fall like trees before the gale, i doubt, even if henry h. rogers be brought face to face with ruin, that he will feel half the pain i shall, for i know that the picture of that memorable night will surely come back to me with all the vividness of reality. but as my mind harks back, there clashes with this another, a hellish picture, which the same henry h. rogers painted with the brush of amalgamated, and a procession of convicts and suicides trail slowly toward me out of the canvas. then i realize that my pen is but the instrument of a righteous retribution and that no personal feelings, however tender, must be allowed to interfere. "come this way," said my host, striding ahead of me along the hall. "in here we can have our talk and our smoke undisturbed." he led me into the big, empty dining-room and closed the door. "mr. rogers," i began, "it is kind of you to be so friendly after the mean things we have said of each other. am i to understand you don't lay any of all that has passed up against me?" "lay it up against you, my boy? drop that all out of your mind. you probably know i talk to the point and mean what i say. if you had hit below the belt as that--addicks has, i _would_ lay it up against you and a hundred years would not make me forget it. i know what you've done and why you've done it, and it was as much your right to do it as mine to do what i have done. i have nothing against you, and if events place me in a position where i can do anything to make your job easier without hurting my own interests--mind that, without hurting my own interests--i will do it. you have my word for it." we sat within a few feet of each other, and i looked squarely into his eyes as he said, "you have my word for it," and they were honest eyes--honest as the ten-year-old boy's who with legs apart and hands in pockets throws his head back and says: "wait until i am a man, and i will do it if i die for it!" i looked into them and i knew "my word for it" was all gold and a hundred cents to the dollar. for a minute we gazed steadily into--through each other, and i knew he was reading away into the back of my head. inwardly i said: "if i do business with this man for a day or for a lifetime, i will never face him and give him my word for one thing and mean another," and in the years after when we did millions upon millions of business, with only each other's word for a bond of fair treatment, not once did i depart from the letter of my resolution. up to the recent famous "gas trial," where our roads suddenly shot off at right angles, owing to a foul act of perjury, henry h. rogers never tired of meeting all his associates' attacks upon me with: "lawson's word is gospel truth for me." when we dropped our eyes, both evidently satisfied, he said: "now, what have you to say to me?" i spoke my piece rapidly and without interruption: "there are four things possible, as i wrote you--only four. i will take up the fourth first. i have absolute power to speak for all our local companies. if we, you and i, come to no settlement by to-morrow night, i will, without warning to any one, confess a default to the notes of our different companies and have a receiver appointed. as our stocks and bonds are held by our best investors all over new england, and as no such move is suspected, there will be a terrific rumpus. in the crash i shall go down with addicks and the rest, for we have all put our personal resources behind the enterprise. i will see that the howl following the crash shall be such as all must hear, and i will call attention to the illegal acts of every one--your companies, addicks' companies, and the city and state officials that have made such conditions possible. i don't think you will be able to stand against the cyclone this crash will raise; but even if you do, the receiver, having no interest to pay on bonds, will be in a position to smash the price of gas to seventy or seventy-five cents, and make it impossible for you to get possession of our companies for so long a time that the consumers will never allow you to get the price back to a profitable one. have i made it clear that you cannot, as you were counting on doing, continue this fight till you have us tired out and crushed?" his answer came as clear, quick, and sharp as the click of a revolver: "perfectly, provided you can do the thing you say." "i will prove to you i can." "it is not necessary," he clicked back. "do you give me your word that you can?" "absolutely." "i am satisfied. go on." "that leaves only three possibilities," i continued. "you buy us; we buy you; or, we consolidate. i will take the third first. under any circumstances or conditions will you join forces and do business with us?" "under no circumstances nor conditions will i do any business with addicks. he has played me false, broken his word, and lied to me when there was no necessity for doing so, and no man who has done this once can ever do business with me a second time." i once stood by a mechanism through which passed a strip of metal. click! 'twas cut. whir! 'twas a cylinder. click! whir! click! a corner, an edge, an end, and b-r-r-rr! it was dropped, a metallic cartridge, to do its part in peace or war. even more fascinating was it to see this human machine eject the product of its whirring brain. "then we have but two possibilities. will you buy us out at the price we must have?" "what is the price?" "sufficient to make good the promises that i have made to addicks, my friends, and the public since i have been in command," i replied. "pass that by as an impossibility." "then, mr. rogers, we are down to this: you must sell and we must buy you out." "right. now, how do you propose to buy?" for months the ablest financiers and business men of wall street and boston had striven to start up negotiations with mr. rogers with a view to settlement, and all had dropped them without even getting in an opening wedge, and here was i at the end of fifteen minutes of my first meeting, with my task half accomplished. i went on: "there is something more you must do, mr. rogers. you must assist us in buying, which means you must sell at the terms you and i agree are the only ones we can meet. therefore i will run over our situation. you have certain property, consisting of the brookline company and miscellaneous investments in connection with it. what cost does it stand you?" frankly, he went over what his boston gas-war equipment consisted of and what it had cost, which, boiled down, amounted to $ , , . he then said: "let us figure what it will be worth to you when, it being known you have won out, you will have additional prestige and no competition." we agreed upon $ , , as representing the probable appreciation in what we were to acquire from him over and above any increase to our own securities. "i'll take cost, $ , , , if it is cash or the equivalent, or i will take $ , , if it is to be credit of a nature that assures me my money eventually, and i will divide my profit of a million equally with you. this sum will of course be in addition to anything you may be paid by addicks." instantly, as if we had agreed upon it in advance, our eyes met--his cold, clear, and steely business--mine, i hoped, the same. for a second neither of us said a word. then i said: "thank you for the offer of the $ , profit, but we will cut all such offers out. my pay comes from my side. i never yet have known the man who could take pay from both sides and do his work properly." i slowly drew out the word "_properly_," and he in the same tone of voice said: "'properly' is better than 'honestly.' you know, lawson, there is much cant in these times of which 'honesty' is the refrain." "you and i will make no headway discussing moral ethics, mr. rogers, although we may in discussing business practices," i said, and i chalked up on my mental black-board: "test one." then i went on: "i agree that $ , , , in anything we can pay in, is as fair a price as $ , , cash, provided we find a credit guarantee satisfactory to you; unless indeed you are willing to allow us the $ , you just offered me." "what i offered you was part of my profit. i will not allow any of it. my price is the same whether i pay you anything or not." "very well, mr. rogers, then the situation is this: in any trade that is made it will first be necessary for you to turn your property over to us to manage in conjunction with our own. when the public see it in our hands, our securities will advance and we can, by issuing additional bay state stock, sell it and secure whatever sum it will be necessary for us to have beyond what we can borrow on your securities. do you agree with me?" he saw it as i did. "i imagine you will never consent to turn your property over to us on our say-so that we will later pay you for it?" "you are right there. i would not take j. edward addicks' guarantee in any form he could possibly put it. once he got his hands on my company, for even thirty days, he would so far misuse it that he would deliberately default for the purpose of returning it to me in a damaged condition, and, in addition, would play some of those tricks which are second nature to him." "it will be necessary for us then," i went on, "to give you some forfeit bond so large that, even if we misuse your property while it is in our hands, you will be repaid for the damage done, and it must be at the same time something of such value to us that even addicks will be compelled to play fair." "well, what can you put up?" mr. rogers asked. "addicks has a right, through the bay state company of delaware, to issue, through the bay state company of new jersey, a million and a half new bonds for the purpose of acquiring new property. he and i have discussed the scheme as a last resort should any settlement seem possible." "do you mean to tell me there is anything addicks can get his hands on which he has not yet used for his companies nor stolen for himself?" replied mr. rogers incredulously. "yes, he has time and again assured me of this, and he would not dare to lie to me under existing conditions." he arose from his chair and stood directly in front of me and straightened up for what i could see was to be an unusual effort. then with the force and the fire which in all his supreme moments make henry h. rogers wellnigh irresistible he said: "lawson, i have listened to you. now listen to me. i have taken you at your word, and have talked frankly and shown you my hand as i have seldom shown it to a stranger. to do the business i want to do, i see i must talk even more frankly than i already have, and i want you to weigh carefully what i shall say to you, for it may have a great bearing on your after-life. how old are you?" "thirty-seven," i replied. "i thought you were about thirty-seven," he said. "well, i am fifty-six and in experience am old enough to be your grandfather, so you can afford to give weight to what i am about to say, especially as i give you my word that i speak for your benefit first and my own afterward. i watched you before you hitched up with addicks, and always thought that if the opportunity arose, we might do business together. we, or as you and others like to call us, 'standard oil,' have money enough to carry through whatever business we embark on and we know where there is all the business to be had that we care to engage in. we have everything, in fact, but men. we are always short of men to carry out our projects--young men, who are honest, therefore loyal; men to whom work is a pleasure; above all, men who have no price but our price. to such men we can afford to give the only things they have not got, or, if they have already got them, to give them in greater quantities--i mean power and money. you made a great mistake when you joined forces with addicks, because no man can afford to be associated with the kind of a rascal addicks is, the lowest i have yet come across. he is the type of man who cuts his best friend's throat with as much ease and satisfaction as he does his worst enemy's, if not with more. i fully expected that by this time he would have sold you out. if he had, where would you have been? now, here you are from sheer desperation driven to me to avoid utter failure. suppose you can do all you hope to--get the bonds, put them up and secure my property--do you not suppose that by that time addicks will have some mine dug under you which will blow you to destruction? but grant even that he plays fair, and you bring the boston situation up to a paying place, what good will it do you? you surely have more sense than to believe a man of addicks' make-up can be permanently successful?" mr. rogers halted. i had risen, and we stood facing each other. i felt that i was right here playing for that greatest of all stakes, my self-respect, the loss of which to any man, i had long before discovered, means ebon failure. "what do you want me to do?" i asked. "say you'll come with us, and we'll fix up the boston situation in some way that will forever eliminate addicks from our affairs--your and my affairs. i would not insult you by asking you to sell addicks out. it is unnecessary. he has no real rights in boston. you and i can figure out a scheme that will take care of every other interest, and we'll give addicks a lot more money than he can secure in any other way and show him the door. as for you and me, we'll make a lot of money and make it fairly and above board. but i am not thinking so much of the immediate situation as i am of the possibility of you joining us and working on some of the deals we have on hand. i shall put you in a position to make more money and secure more real power than you could possibly obtain in a like time under any other conditions. you know corporations and the stock-market, and you can readily see what the combination of our money and prestige and your knowledge of the market and investors will mean." heaven knows i could see what it all meant. i had even at that time in a chrysalis state those plans for destroying the "system" which now in a rounded out and matured form i intend to be the superstructure of my story of "frenzied finance." i had, a year before in paris, outlined those plans to some of the brightest financial minds of europe, and while they had marvelled at their radicalness, they had pronounced them sound, and had offered to furnish the hundred million of dollars required for their execution. then i realized that to take this money from bankers would hamper me in the execution of my plans, and i postponed putting the project in force until i could furnish the necessary money through my own connections. again, i had big ideas as to the copper situation--ideas that only awaited unlimited capital to be brought before the people, and which, if carried out, would do for them what had as yet never been done--give them tremendous profits upon their savings. and here were the unlimited capital and unlimited business prestige right at hand, but---- "mr. rogers," i said, "don't! please don't! i appreciate your proposition, and i thank you, but i can't accept. i agree with you about addicks, the position i am in, and the mistake or foolish recklessness i was guilty of when i linked up with this boston mess, but that doesn't alter the case an iota. i am enlisted with this man. i knew what he was when i consented to take charge of his affairs, and i should hate myself if i sold him out, even though i knew he would without hesitation sell me out. i must be true to myself." mr. rogers remained silent. i went on: "this, if i accepted your proposal, i could no longer be, even were addicks and boston gas out of it. the man who is 'standard oil' wears a collar, and if i did what you ask i should expect to wear a collar and--and--i can't do it." i stopped; i was not excited; it was impossible to be so with that calm figure, apparently cut from crystal ice, so near me, but i was very much in earnest. i wondered what would come next. mr. rogers raised his hand and held it out to me, mine grasped it, and without a word thus we stood long enough to put that seal on our friendship which none of the many financial hells we jointly passed through in the after-nine years was hot enough to melt. but that friendship is ended now. henry h. rogers' evidence in the boston "gas trial" was the spark that kindled the dead leaves of the past into the conflagration which, now spread beyond the control of man, has brought to light the hidden skeletons of forgotten misdeeds and exposed them for all the world to see. he at last broke the spell. "lawson, you're a queer chap; but we are all queer, for that matter, and we must work along those lines we each think best. i once stood, just as you do now, in front of a man whom i looked up to as all that was wisest and best. he made an earnest effort to induce me to choose the ministry for my life-work, but i chose dollars instead, and i sometimes wonder if i chose wisely; but, as i said, we all must select our pack and, as we are the ones who must carry it, i suppose no one else should complain." after a moment's pause i shot ahead into business again as though we had never left it. it took me but a short time to arrange the details of our trade. the bay state of delaware was to buy all of mr. rogers' boston investments and to pay for the same $ , , --$ , , in six months, $ , , in a year, the balance in a year and a half, with interest at five per cent.; the bay state was to put up, as a pledge of good faith, $ , , new boston bonds; and as soon as such deposit was made, mr. rogers was to transfer his securities and corporation to us. i was to go to philadelphia that night and arrange all details with addicks and report the following day. it was . o'clock when i left east th street. i hurried down to the brunswick, where i had time only to shift my clothes and catch the "midnight" for philadelphia. after breakfast next morning i tackled addicks. it goes without saying that i was a cyclone of enthusiasm as i minutely ran through what i had done, beginning with my letter to rogers and finishing up with my visit of the night before. i omitted not the slightest detail, and when i wound up with my request that addicks get the lawyers together and prepare the necessary documents for the turnover of the bonds and acceptance of rogers' properties, i felt that my share in the boston gas war was almost ended. chapter xviii the duplicity of addicks addicks looked at me in a cool, aggravating way, as though my enthusiasm was a joke. "lawson, you have done a big thing, a big thing, but you put up too many bonds, altogether too many. it looks to me as though that old trickster had got the best of us at last." by this time i had learned all the moods of this man and knew that when he assumed that air of cold, saturnine jocularity it was safe to look for the uncovering of some vaporized trickery. my enthusiasm oozed. i hastened to ask: "what do you mean by 'too many bonds,' addicks? i gave him all we had. sorry it was not more. we are to pay him four and a half million dollars, and the sooner we do it the better. now out with what you've got in your mind; i won't stand any trifling." addicks continued to look at me with the same insolent, critical air. he said slowly: "the reason i say you've given too many bonds is that we haven't a million and a half to put up. where in the world did you get the idea we had?" in an instant i realized that this sharper had tricked me into apparently tricking rogers. i was boiling with rage. "you have told me over and over again that you retained the right to issue a million and a half bonds, that you had never parted with it, and relying on your assurances, i have done business with rogers. let's have the truth now at once." addicks is a master in the management of just such tangles as had developed here. i had expected him to give way before my indignation. he looked me square in the eye and turned the tables on me. he got mad first. "you have taken too much on yourself," he began vehemently. "you had no right to go ahead without consulting me. because i've given you full swing you think you are the whole thing, but you're not. and as for your rushing in on me without warning and expecting me to let you turn all the assets of this corporation over to your new 'standard oil' friend, i won't stand for it. you can't do this corporation's business that way." he poured on for five minutes without giving me a chance to interpose a word. he seemed to be consumed with anger and paced up and down the office. then suddenly he stopped: "we cannot afford to have any trouble, you and i, lawson. i'm sure you did only what you thought best, but the fact is, i pledged some of those bonds for our war supplies a few months ago, and though i'm not going to dispute it with you, i'd swear i told you at the time." as addicks talked i had been mentally reviewing the situation in which i found myself. i saw myself dropped out of rogers' consideration as the same kind of a financial trickster that addicks was. for the moment, i had no fight left; i was knocked out. "don't feel bad, lawson. you got as far with rogers as it is possible to get, and you are dead right when you say that once we get hold of his corporation so that every one knows we've licked him, we can easily sell stock enough to pay him in a few weeks." as he talked he was again the master financial trickster, full of device and strategy. finally i answered: "don't say any more, addicks. words won't help us. i've got to face rogers as soon as a train can take me back to new york, and after that--then i'll have something to say to you." i started to go. "what are you going to say to him?" he asked. "say to him? what can i say to him? at my solicitation he gave me a hearing--at his own home--treated me best in the world. i told him certain things, and pledged my word they were truths, and i've got to go back and tell----" "tell what?" "that i'm either as big a liar as he says you are or a fool--a doddering fool." "you are going to do nothing of the kind," addicks declared peremptorily. "you're going to tell him that you were not posted up to date, and that i, being pressed for money, had pledged some of the million and a half i had told you we had. that's all. he'll see it all right, and he'll trade for--for--what we have left." i suddenly remembered that he had not told me how many bonds he had on hand. just a ray of hope in the fog. "how many free bonds have we to offer, addicks, suppose he is willing to overlook this ugly piece of trickery?" i asked anxiously. "i'm not quite sure," he answered, "but i can find out from the books." he rang for miller, his right-hand man, the dummy treasurer of the bay state company, and said to him: "harry, mr. lawson has got mixed up about the bonds. he thought we had a million and a half. you remember we've pledged some in the loans. just how many have we now on hand?" "harry" looked it up and said: "just $ , worth." "there you are, lawson," cried addicks. "there's plenty to assure rogers we'll do what we agree to." fool that i was, i did not see his game. no one ever does see addicks' game till it is too late, for no one but a moral idiot would play the game addicks plays, and, thank heaven, moral idiots are so rare in life that it is not worth while figuring out the formula from which they work. by one o'clock i was at mr. rogers' office at broadway. he greeted me warmly. "well, lawson, did you get things finished up all right?" "mr. rogers, i have a most humiliating admission to----" "hold up right there. cut out all explanations and excuses. have you brought those bonds as you agreed to, or not?" his eyes were snapping and shifting from one color to another. "no, i have not got them." "why not?" had i been a woman i should have clapped my hands to my ears and screamed, so sudden and bomb-like came those two words. "he had used some of them and has only $ , on hand." "only $ , !" it is impossible to convey the concentrated scorn and sarcasm mr. rogers infused into these words, and he continued to glare at me for fully a minute, his eyes as searching as _x_-rays. when that glare shifted i had a presentiment it would leave me forever a stranger to him, and i made up my mind to turn on my heel and leave his office without a word. i felt that he was in the right, and that if i were in his place i'd glare, too. suddenly the expression changed. he said peremptorily: "lawson, get on the first train for philadelphia and bring back those agreements executed and the $ , instead of the $ , , ." "mr. rogers," i began, but he stopped me with an imperative gesture. "don't say a word, but do as i tell you. i warned you you were dealing with a dog, but you wouldn't have it. now i'm going to put this trade through even if i make a fool of myself thereby. you've done your work and that whelp shall not keep you out of its results. i'm in this now, and we will see if addicks can outplay me as well as you. not another word. i understand the whole thing." i returned to philadelphia deciding once and for all certain things in regard to mr. rogers and others affecting the future of j. edward o'sullivan addicks; and that night addicks and i "had it out." i shall not attempt to reproduce our talk. suffice it to state that when i called for the bonds addicks began to hem and haw, and then i realized that he had a second time lied to me. we were in his philadelphia office, and it was night and we were alone. i demanded the truth, and finally he told me he had no $ , of bonds. as a fact he had not a single bond. he had used them to the last one and had deceived me for months. in regard to this interview addicks has always maintained that i laid hands upon him, and that he was on the verge of doing some awful thing, but this is false. what i did was to turn the key in the door and then, without undue regard to his sensibilities, draw a word-picture of the position he had placed me in. also i said what i thought of him. that is all. the vast profits which the stock operator makes apparently overnight are often subjects for the world's wonder and envy. but if the gains are great, the road is muddy. if those who covet the golden rewards will participate in a deal or two, wallow in the filthy double-dealing which is an inevitable part of the cost price of success, they will quickly realize the dark side of the glittering game, and that the sacrifices are in proportion to the winnings. if i had been asked that night what price would recompense me for the hell addicks' shabby deceit had stirred up in me, i should have said--that night--that no number of millions would pay for the bitterness of the experience. it was after midnight when i left addicks' office, and as i walked to my hotel i was steeped in gloom and bitterness. before me was the most humiliating ordeal with which fate had ever saddled me. i had to confess failure a second time, and under such circumstances that rogers would be justified in believing me either a swindler or a dupe unworthy of respect or consideration. i was at broadway by ten o'clock the same morning. mr. rogers was in his main private office. his secretary was with him. he was full of business, and, i thought, preoccupied. as i entered, and before a word of greeting passed, he gave me one of his keen, appraising glances. "well?" was all he said. "your estimate of addicks was correct. he has no bonds," i said, giving him the worst of it at once. i was desperate and certainly in no mood for apology. rogers looked at me. i thought he gasped. he rushed--whether he pushed or pulled me, or we both slid, or how we got there i don't know--but in an instant after i had said "he has no bonds" we were in one of the number of x glass-sided pens he calls waiting-rooms, but which the clerks have dubbed "visitors' sweatboxes." he put both hands on my shoulders and he yelled--fairly _yelled_: "say that again! i did not get it." in after-years i became on rather playful terms with the extraordinary bursts of wrath to which henry h. rogers occasionally gives way, and which sweep through the "system's" shrine like a tornado; but this was my first experience, and it was a shock and a revelation. just what was going to happen next i could not imagine. i remembered afterward that the most definite of the impressions that chased each other through my mind was that henry h. rogers would surely have a stroke of apoplexy. then that he would "bust." however, i pulled myself together and began: "mr. rogers, what's the use of getting excited?" i got no further. he jumped backward. the next second i was in the storm-centre. the room was small. suddenly it became full of arms and legs and hands waving and gesticulating, and fists banging and brandishing; gnashing teeth and a convulsed face in which the eyes actually burned and rained fire; and the language--such a torrent of vilification and denunciation i have never heard, mingled with oaths so intense, so picturesque, so varied that the assortment would have driven an old-time east indiaman skipper green with jealousy. i was horrified for an instant, then surprised, and after that, if it had not been for my position as the cause of it all, i should have been interested in the exhibition as a performance. i could hear a stirring and a movement outside. the clerks were evidently aware of the scene. forms passed rapidly across the ground-glass walls. after a time rogers controlled himself. then he said to me in a voice still vibrant with passion: "lawson, tell me--put it in short, plain language--do you mean to say that after coming to me of your own accord and agreeing to do certain things, and then returning here to this very office, admitting that you had tricked me; after my overlooking that breach of faith and agreeing to take half the collateral simply because it was all you could raise, and because i desired to assist _you_--do you mean to say you have the audacity to tell me to my face that the whole thing is a lie and you have imposed on me?" "i mean, mr. rogers, to tell you that mr. addicks has just proved to me that he has no bonds; that he is a liar and worse." "oh, he is, is he? but does that justify you in coming?--oh!----" again he was off. when he stopped for breath i raised my voice and made it loud and emphatic enough to convince even a man temporarily insane that my part as audience and victim had ended. i said: "mr. rogers, i can't say more than that i apologize for the part i've been made to play in this transaction, and i'll leave your office prepared to take any kind of medicine, however harsh it may be, that you will deal out on account of all this. not only will i take it, but i'll think you are right in administering it." rogers once more got himself under control. i stepped toward the door. "one minute, lawson--one minute. what are you going to do? go back to your associate, that gentlemanly, square-dealing fellow in philadelphia?" "mr. rogers," i replied, "i ask no mercy at your hands, but there's a limit to the things a man will stand under the mess i'm laboring with. i'm going to do the best i can. what it will be i don't know. there's a deal of money at stake--my friends', the public's, my own--i'm responsible for it. i've made a terrible blunder. i am paying for it, but nothing that has happened has altered my idea of the duty i owe myself and others." he was about to say something sarcastic. then he choked back the words. his manlier nature rose to the surface. "lawson," he said, "i'm sorry for you. upon my soul i am." "you needn't be, mr. rogers. it's all right; it's part of the game, but i'm awfully sorry i came near you." i opened the door. "one second more, lawson," he said, stopping me and putting out his hand. "i'm not only sorry, but i give you my word i have not a doubt--no, not a suspicion of your good faith throughout this business--and if at any time you see your way to open up negotiations, you're welcome. do you understand? you're welcome to come in here or to my house at any time you think you see your way out." i said "good-by" and bolted before my feelings overcame me. chapter xix enter h. m. whitney it is not surprising that there should now have ensued an interval of silence and peace in the boston gas war. disheartened, disgusted, disappointed, i had to take stock of our position. however enraged i might be at the new revelation of addicks' extraordinary veniality, the other elements in the situation remained as before. i could see nothing for me to do but to resume the tactics i had employed previous to the meeting with rogers. my friends' interests had to be protected, and to do that war must be waged until a vulnerable spot in rogers' armor had been found. but it was some days before i could screw my enthusiasm back to fighting-pitch. in the mean time rogers did nothing. he, too, was waiting for new developments. to this extent the situation had altered, however: i knew just where i stood with rogers, and he realized the consequences of pressing us into a corner. i knew he would sell his company and retire from the field if i could find a way to pay him for so doing. he knew that if he turned the screws too hard i would as a last resort turn the tables by throwing bay state gas into bankruptcy. i tried many times and in many ways to find means to bring about a termination of the struggle, but to no purpose. our extremity was such that it was impossible to do more than protect our companies from a receivership. to raise new capital to deposit as collateral with rogers was out of the question, for the public, looking on at what was evidently most disastrous warfare, was in no temper to buy new stock. the lull in our hostilities was only a pause between battles. it suddenly came to an end january, , when a new enemy appeared in the field. henry m. whitney, who had built up boston's electric street-railway system, and who, from his frequent dealings with the massachusetts legislature in obtaining franchises, had the reputation of carrying that body in his waistcoat-pocket, came before this legislature with a proposition for a charter for a new and independent gas company. up to this time whitney had had no relation with the gas public. he based his new departure on the claim that he had come into possession of a patented device through which it became possible to turn the low-grade sulphuric coal of nova scotia into coke without sacrificing either the valuable by-products, such as ammonia, tar, etc., or illuminating gas. this was a very remarkable pretension, for we had long ago eliminated these low-grade coals from consideration as material for gas-making; but if whitney's device actually was what he claimed, undoubtedly he would be a dangerous competitor. whitney's petition set forth further, that because of the exceedingly low price of this province coal and its richness in by-products he could afford to sell gas to consumers at cents per thousand feet (the legal charge was then $ per thousand feet), a price which would enable the great manufacturing institutions and all the steam and heating plants to use gas economically for fuel purposes. the thing was sprung one day and was all over town before night. there were interviews and pamphlets floridly setting forth mr. whitney's good intentions toward gas consumers. mr. whitney was, and is, one of boston's most important citizens, at the present time president of the chamber of commerce, and a brother of the "system's" most machiavelian votary, the late william c. whitney. the application, backed by his prestige, and the roseate dreams of cheap gas it conveyed, created a sensation in boston. evidently he intended to have it seem that the people were in favor of the new charter, for simultaneously there appeared notices in the press calling for three distinct citizens' meetings. there seemed to be general rejoicing that at last the odious standard-oil addicks-bay state gas outfit with all its corruption and unwholesome wrangling was to be deposited outside the city walls. the experience of any man who has had to do with political and financial affairs invariably shows him that nothing ever happens of itself. thunderbolts do descend from clear skies, but an enemy and not nature has hurled them. a clever tactician will always look for his antagonist's hand behind any isolated or detached fluctuation of public feeling which bears in the slightest degree upon his problem. in going over the circumstances, looking for the correct interpretation of the appearance in our field of this second richmond, i took into consideration the fact that h. m. whitney was deep in a speculative venture, dominion coal, which owned vast tracts of these low-grade coal lands in nova scotia, and it was known he had been trying vainly to utilize their products in the locomotives of the boston & maine railroad and several other ventures in which he was a controlling factor. in one way it seemed reasonable that if whitney really had found a way to get something out of his coal, he was justified in making the best possible use of it. on the other hand, i could not but see how the new project brought about the very situation at which rogers had so long been aiming. selling gas at or cents, the new company would absolutely command the business; the old companies must go bankrupt, pass into a receiver's hands, and in due course would be absorbed by the whitney corporation. that would leave but one gas company in complete control of the boston field, and it would not be bound to continue the low prices when competition had disappeared, but would be legally free to go back to the old rates of $ and $ . . in a combination which so completely went rogers' way, surely his fine slim italian hand might be perceived at the throttle. once i had made up my mind by what we were confronted, i lost no time. inquiries revealed that whitney's alleged control of the legislature was not exaggerated. in fact, it seemed eager to do his bidding in any direction. there was no space for negotiation or deliberation, so i returned his bomb with another, which, exploding in his breastworks, created as much of a sensation as his own had done. i did not believe whitney could do with nova scotia coal the things he claimed, but, whether or not, if he got his charter, rogers' object would be accomplished. if he were absolutely bound, however, under heavy bonds to do exactly as he had promised, his proposition would be so loaded that it might go off in his own hands and blow him to pieces. the next day i went personally before the legislature and agreed to pay the state of massachusetts $ , , for the charter whitney had applied for, and offered to give bonds to do all the things whitney would give bonds to do on receipt of it. this proceeding caused a halt. it startled the public and set the whitney forces agape. my proposition was decidedly novel, and on its face absurd--the state could not under the law accept a million dollars or any other sum for its charter--but, on the other hand, it was the quickest-acting horse-sense producer that could possibly have been brought to bear. it was discussed everywhere. men said: "why not? if the state has a valuable thing to give away, why should it not go to the one who will pay the people the most money for it?" i had outflanked the enemy, and if he gave battle it would have to be on my conditions. whitney was furious, and his privately owned legislature cursed me for interfering with its plans; but he and they recognized my advantage, and that night i had a call from mr. whitney and his attorney, george towle. "what are you trying to do, lawson?" whitney asked. "only trying to protect from destruction the boston gas companies of which i am vice-president and general manager," i replied. "but my proposition is a perfectly legitimate one," whitney objected. "i have got hold of this invention, which enables me to utilize my dominion coal in such a way that we can make coke out of it, and at the same time get all the gas. this coal is cheap to produce and costs little per ton to bring in. so i can sell gas cheaper than you can make it." "and we have a plant for the manufacture and distribution of gas which has cost us seventy years and millions of dollars to get together, and we have also the customers to whom you must sell your cheap gas," i returned. "if you can really do what you claim, why not go ahead, make your gas, and sell it to us? we will distribute it to the people and we will divide the profit, and you will make as much as though you did it all, for you will not have a fight on hand nor be obliged to build up a duplicate plant. that's all you can do now; you cannot get a charter to duplicate our plant, because whatever price you offer the legislature for it we will go you a few hundred thousand better." we argued for hours. i showed him that if he finally prevailed and got what he was after, his charter would bind him to the absolute fulfilment of his promise under bonds that would make it unprofitable and dangerous. he finally made up his mind that such a victory was not worth winning, and he said to me: "what kind of a hitch-up can i make with you and your companies?" "any fair one," i replied. "this is the situation as i see it, and i'm going to be frank: you say you have a good scheme, but you certainly have a legislature, and you have evidently entered into a compact with rogers whereby he is to utilize what you have, to knock us on the head. now we have fairly checkmated you, and rogers is out. seems to me you owe it to us and yourself to give us the same chance you offered him. let us utilize your plans to save ourselves and to knock rogers on the head. but first, are you free to go on with us without explaining things to 'standard oil'?" whitney assured me that his arrangement with rogers was tentative, depending on whether he could get the charter and could carry out his other plans. after some further manoeuvring we agreed that we should withdraw our offer from the legislature, that whitney should secure the new charter, and that it should be so worded as expressly to allow his company to lay pipes, manufacture, buy or sell gas, and to consolidate any or all of the existing or new gas companies in the state of massachusetts; and that when the charter was granted it should belong equally to the addicks boston gas companies and to whitney. upon their part the boston gas companies would buy of the new company all the gas it produced at something less than it was costing them to manufacture it under the old process. that bound us to nothing dangerous, and we were not forced to take whitney's gas unless he actually got the results he promised. at this time i knew nothing whatever of the workings or the wire-pullings of state legislatures. my business life had been engaged at the stock end of corporate transactions, and i had not troubled myself about franchises, or how they were obtained, being content to play my part with the manufactured product with which we dealt on the market. in a general way i knew political corruption existed. that rogers had obtained favors for his brookline company through bribing officials i had good grounds to believe; i had read of strange doings in connection with h. m. whitney's west end railway franchise obtained from the massachusetts legislature amid an accompaniment of much public scandal; but being quite without personal experience i had no clear conception of how things were done and, innocently enough, i asked whitney before we parted: "how is it possible for you to get this valuable charter from the legislature, particularly with such a strong and honest man as roger wolcott in the governor's chair, when addicks has been trying continuously for four or five years, regardless of expense, to secure an ordinary one under which he can combine our gas companies?" george towle answered for whitney: "lawson, that part of the transaction is no affair of yours. mr. whitney will absolutely guarantee to deliver all those goods, and should it prove necessary to override the governor in getting them, he will guarantee to do that too. you can call all that done the minute we sign papers." there was no doubt the new combination was a winner for both of us. if whitney got the charter, he would be in a position to make a lot of money out of his dominion coal stock, which would surely go up with a bound in company with bay state gas stock when it became known that our companies were in the new deal. besides, all the talk he would make over the value of the charter would help create a market for new stock which we would issue for the purpose of obtaining funds to buy rogers out. later, if whitney's invention was what he imagined, his own profit would run into millions and our properties, having the sole right to distribution, would be stronger than ever. that meant resuscitation of bay state gas, and that all the stocks and bonds held by my friends and the public would return splendid profits. i tested the scheme in all its aspects and found only one weak spot in it. we, the boston companies, were to "go snags" with whitney in the results of a legislative game in which he was to bear the expense of getting a charter, and as whitney and towle said it was to cost them $ , to $ , to get it, it looked as if there would be some nasty business done at the state house. i do not set up for a saint, nor to possessing exclusive virtues which distinguish me from the ordinary american citizen who does business for gain. in reiterating that the bribery end of our "hitch-up" with whitney did not appeal to me, i am neither pluming nor crowning myself; i am merely stating a fact. this was an emergency, however, i could not regard as a mere personal concern. it was my duty to care for the interests of a great property which must not be endangered by my scruples, and i was willing to be advised by my business friends in the matter. i went round among my most conservative banking, business, and newspaper connections and put hypothetical questions to them bearing on my difficulty. in nearly all instances the replies were the same, and the subject seemed to be regarded as a joke--what were legislatures for, anyway, but to be "fixed"? all who did business with legislatures "fixed" them, and whitney was certainly the star "fixer." i frankly stated that i considered bribing a legislator as a low-down crime and that i did not believe it was done in our strait-laced old commonwealth as freely as they all seemed to imagine. thereupon i was sarcastically referred to my bell telephone, new haven, and boston & maine railroad friends, to the organizers of trust companies, and to many other representative pillars of social and business society who had had occasion to deal with the state. i started at once a round of investigation among men who would talk frankly to me, and discovered that a most iniquitous condition existed. massachusetts senators and representatives were not only bought and sold as sausages or fish are in the markets, but there existed a regular quotation schedule for their votes. many of the prominent lawyers of the state were traffickers in legislation, and earned large fees engineering the repeal of old laws and the passage of new ones. agents of corporations nominated candidates for office, and paid the expenses of their election in return for votes for a favorite measure and promises to "do business." the legislature was organized on the same basis; its executive officers were chosen because of their subservience to certain corporation leaders; committees were rigged to do given things and prevent other things from being done. above all, i learned that the chance of a citizen of massachusetts obtaining a charter from the legislature of his state, unless he had money to put up for it, was about as good as a hobo's of securing a diamond and ruby studded crown at tiffany's by explaining that he wanted it. in fact, the citizen's request would be regarded by senators and representatives very much as tiffany's would regard the hobo's--as a joke first, then as an impertinence. right here i desire to say to my readers and especially to all those hypocritical and ignorant people who, imagining any strong statement must express a strong prejudice and not a fact, will cry, "he overstates! he exaggerates!" that in years after when i had full opportunity to study at close range the massachusetts legislature, its workings and those who worked it, all the impressions i had received at this time were absolutely confirmed. i do not hesitate to state, then, that: _the massachusetts legislature is bought and sold as are sausages and fish at the markets and wharves. that the largest, wealthiest, and most prominent corporations in new england, whose affairs are conducted by our most representative citizens, habitually corrupt the massachusetts legislature, and the man of wealth connected with such corporations who would enter protest against the iniquity would be looked on as a "class anarchist." i will go further and state that if in new england a man of the type of folk, of missouri, can be found who, after giving over six months to turning up the legislative and boston municipal sod of the past ten years, does not expose to the world a condition of rottenness more rotten than was ever before exhibited in any community in the civilized world, it will be because he has been suffocated by the stench of what he exhumes._ to return to my story, after my investigations i again saw whitney and towle, and they, not relishing my remarks on the subject of bribery, told me frankly to attend to my own part of the affair and leave their part to them. at this stage i called in addicks, our corporation counsel, and some of the largest holders of bay state bonds and stock, and put before them the bargain i had arranged with whitney. they all agreed it was an excellent combination, and ratified the terms i had proposed to whitney. it was further agreed that whitney should make over to us one-half ownership in the new company, which we were to transfer to the bay state company after the charter had been granted. there was every reason at this stage in the deal to regard victory as assured, for it did look as though the flapping sails on our much-buffeted and battered craft were at last to be filled with a lusty breeze strong enough to carry us to the harbor we had so long been trying to make. besides what we ourselves could do and had already done, we now had whitney for an ally in the deal, and certainly he was a stock-selling power throughout new england. he had agreed to go before the legislature and the public, and pledge his word that his scheme would do all the wonderful things he had promised for it.[ ] and when amid acclamation the charter was awarded and it became known that we were its beneficiaries, i could see our stock soaring. footnotes: [ ] as a matter of fact, he did, later, in the peroration of an eloquent address before a public legislative hearing, electrify the law-makers with: "i here and now pledge my word, my fortune, and my sacred honor to the fulfilment of these promises." chapter xx an awkward attack of appendicitis in no walk of life is that head-light axiom, "man proposes, god disposes," so often flashed plump in the eyes of enthusiastic travellers for their bewilderment or befuddlement as in finance. at this very moment of success i was, without knowing it, on the brink of ruin, owing to causes and conditions which were beyond human power to calculate or foresee. here is what happened: all the details of our bargain having at last been agreed upon verbally, it was proper the principals should get together and formally execute the documents which should bind the trade. we arranged to meet on a given saturday at the beautiful stock-farm of parker c. chandler, esq., the bay state's general counsel, and as secrecy was important, a special train was to take the party the twenty-five miles out of boston. by an unavoidable accident i missed the train, and in driving over the road in a bleak rain-storm, caught a violent cold. i was about three hours late, but when i arrived we went to work with a will and by seven o'clock, shortly before dinner, our contracts had been dictated to the stenographers and would be typed, ready to sign, by the time we came to our coffee. that dinner was a thing to be remembered. no one in new england understands more admirably the art of dining than does parker chandler, and he gave us a feast worthy to celebrate the brilliant new combination which was to end all our troubles and lead us out of darkness into the light. as the cheese was being served i was seized suddenly with a terrible pain, which was followed by convulsions. they carried me to a bedroom; lawyers and capitalists went scurrying after doctors, and in the confusion the documents which were all ready awaiting execution were put aside. it was obvious that at that moment i could not o.k. them. at last specialists from boston arrived and it was diagnosed that i was suffering from an aggravated attack of appendicitis. at two o'clock in the morning, after a prolonged consultation, the consensus of opinion was that my next field of operations would be in another world. it must have been some time a little later that i, awaking to a brief interval of consciousness, witnessed a tableau, the memory of which invariably rises to my mind's eye whenever i try to mitigate or subdue my feelings of hatred and disgust for addicks. the room was dimly lit; the two doctors were at the foot of the bed; addicks, standing beside them, was looking fixedly at me. i caught his eye; doped as i was with opiates i saw the cold, calculating expression of his face, which told me as plainly as words that he felt it was all up with me, that my usefulness to him was at an end, and that without a thought for my interests or a scintilla of regret, he was calculating how to turn my death to his advantage. an amused conviction of the man's heartlessness crept over me, and then i passed out into the land of dreams. from that night until one bright morning ten days later, i was visiting other worlds than those of finance and gas; but on the tenth day they told me i had eluded the grim ferryman and, barring accident, might get out into the world again in five weeks. a suspicion which owed its origin to that glimpse of addicks on the first night of my illness awakened in my mind, and the following day i sent for my principal attorney and demanded an exact statement of what had happened in the interval of my illness. he had kept close track of all that had occurred, and the facts he revealed, calloused as i was to the thought of addicks' baseness, horrified me by their cold-blooded villany. my associates had gone ahead with a vengeance, without waiting a minute to see whether i should live or die. my offer to the legislature had been withdrawn; addicks had substituted his name for mine in all the documents, and then he had traded with rogers. it had been arranged between them that whitney should go on and get the charter, which was to allow the company to sell gas at any price, for it was not to be under the supervision of the gas commissioners, who had pledged the public that the price of gas in boston should not ever be more than $ per one thousand feet. this obtained, a new corporation was to be organized, into which rogers would merge his companies, and addicks our boston properties, in such a way as to leave bay state stock and bondholders high and dry, while addicks, whitney, and rogers reaped tremendous profits. these amiable plans were being hammered into shape at top speed, and unless i could get into harness at once, my friends and i would most certainly be ground up. head-quarters had been opened at the algonquin club, and there addicks, whitney, towle, and the lawyers and lobbyists were holding day and night sessions. there was but one thing for me to do, and i lost not a moment. i sent for my doctors and said: "i will devote to-day, to-morrow, and next day to getting well; but on the fourth day i will be moved in a special car to boston and then to the algonquin club." i explained the situation and showed them that regardless of all consequences this must be done. i shall never forget the expression on the faces of these loyal associates of mine--addicks, whitney, and the others--when i dropped in upon their deliberations saturday morning, four days later. my doctor, a nurse, and my lawyer accompanied me, and i was swathed in flannels and shawls. i got to a chair, dismissed my attendants, and launched in. what little i had to say would be brief, i told them, but "edgy." it was all that. i insisted that we should go right back to our old bargain exactly at the place we had left it the night i was taken ill. if they did not comply, i would make application for a receiver for the bay state companies and give to the afternoon papers the inside facts of the affair from beginning to end. no one doubted either my ability or my determination to carry out my threat. we sent for the documents that had been prepared at parker chandler's, and inside of three hours these had been substituted and the several agreements entered into with rogers formally renounced. i retired to bed that night with a chuckle of self-satisfaction, and a convincing appreciation of the truth of the axiom i have referred to. the low-down treachery and double-dealing characterizing this transaction, the utter callousness to sacred obligations it exhibits in men of presumed high standing and personal honor, may surprise my readers. i assure them that several such episodes will be told in the forthcoming pages of this history. indeed, among a certain school of eminent financiers, loyalty is no more than devotion to the opportunity of making the highest profit. if circumstances shift this from the side of their enlistment to that of an adversary, their arms and hearts go where their pockets lead. it must be remembered that the hessian who "down-town" is steeped in perfidy, trickery, and fraud, may appear before the "up-town" world as a christian citizen and an example of domestic virtue. the type is not uncommon nowadays of the pleasant and proper gentleman, prompt to knock down any one daring to asperse his veracity after five any evening and all day sunday, but who considers himself free to engage in any dirty juggle or misrepresentation from a.m. to . p.m. in office hours you run no risk in calling him a liar, for then he'll laugh at the joke and tell you business is business. however, the foregoing episode was an experience that left an indelible impression on my mind, and the hatred and disgust it engendered precipitated events out of which in the course of years came the offences and injuries that are responsible for the story of "frenzied finance." the immediate results of my reappearance were not startling. rogers raved at addicks and especially at whitney, but he was too old a student of men, and the monkeys dame fortune makes of them, to sulk over the facts he could not remedy. he soon resumed his former attitude of waiting for something to turn up, which indeed he had maintained ever since my unsuccessful effort to make terms with him. fate had not yet tired, however, of playing shuttlecock with our hopes. the world learned one morning of a new gas called acetylene, clear, brilliant, cheap, and simply made from calcium carbide. it would surely revolutionize gas-making the world over, and the company which could secure the right to it would have those who could not at its mercy. addicks moved like a flash to gather in the advantage, and the announcement that the new gas had been proved a success was coupled in the press with the news that the bay state gas had captured the invention for new england, and was to pay millions for it. this did give a boost to our securities, and for a time it looked as though we had clinched our success with another rivet. what addicks had done was this: he had bought the right, subject to the test of a big public demonstration. for this demonstration a fine flare-up was arranged. eminent mayors, counsellors, and gas magnates were to attend in multitude, and if the invention met its engagements, there would be such a blaze of publicity and congratulations that we felt sure our new stock would go off like hot cakes. the demonstration proved in a most sensational way that acetylene was a failure--a tremendous explosion occurred; three men were killed, many others injured, and next day back went our stock to its old figures. all this time i had sought most diligently for the real solution of our troubles--a method of purchasing rogers' companies. a substantial guarantee there must be, not only for the performance of our financial engagements but to insure to rogers the integrity of his properties while under the domination of addicks. the difficulty was, in the weakened condition of the company, to put together any satisfactory guarantee. others in our group had wrestled with the problem as strenuously as i had. suddenly, a few days before may, , the light came to me. all the time the solution had been in our hands, and, beset as we were, it had never occurred to any of us. we absolutely controlled the old boston gas companies. they were intrinsically among the richest corporations in massachusetts, and although their stocks were pledged for the $ , , of bonds held by the public, they did not owe a dollar. though the terms of the agreement between the bay state company and the mercantile trust, which held their shares, precluded them from contracting any debts, they were empowered, through us, their officials, to buy or sell gas, and all their great wealth was behind such contracts. if, then, we agreed on their behalf to buy gas of the brookline company for a term of years at such a price and in sufficient quantities to give the latter concern a profit equal to ten per cent. dividends on its stock, surely we had complied with the very letter of rogers' exaction. testing the idea in one way and another, i found it sound as a bell. the problem after that was to get into shape for the substantial issue of new stock we must make to pay for our purchase. the banks and trust companies were loaded up with our securities pledged for loans, and before there could be any conviction behind our prosperity it behooved us to get all our valuables out of pawn. i went to mr. rogers and frankly told him i had solved our problem and his by a financial invention of my own. i entered into the details of our plan, explaining it would not even be necessary for us to buy any gas of him, because we would turn over a sufficient number of our own customers to the brookline company to secure to it the required profit. he saw in an instant the scheme with all its far-reaching possibilities, and assented. then i broached the rest of my plan--we would pay him four and a half millions in six months. to do this we must sell stocks and bonds. before we could do that it was necessary that he help us still further--he must buy of us all the bonds now in pledge and the stock of the dorchester gas company, another bay state asset up for security, all for the sum of a million and a half dollars. for this amount these securities would at once be released and turned over to him. then he should resell them to us together with the brookline gas company for six millions of dollars. there would be a formal turning over of the management of his properties so the public should be convinced that we really were the victors in the strife. mr. rogers saw my point, quickly ran over the details in his comprehensive way, and closed the trade without further bargaining. that time, thank heaven, it was not within addicks' power to thwart me. on may st we made our settlement in compliance with the terms i had arranged. the six millions of dollars were to be paid november st. as the necessary options and sales could not legally run to our company, they were made to henry m. whitney, and he simultaneously transferred them to us, and we elected him a director of our different corporations. rogers publicly resigned and turned over to us the control of the brookline company, and we elected our own management. to all intents and purposes we had won. the settlement was the sensation of the day in financial circles, and i was the recipient of many generous congratulations. i had neither time nor inclination to take care of bouquets at that moment, however. i was too keenly aware of the difficulty of raising six millions of dollars in the limited period at our disposal. times have changed since . then six millions was quite a large sum, larger than sixty millions now. that was before the halcyon period of "frenzied finance." chapter xxi bribing a legislature that six months between may st and november st was the most crowded period in all my experience up to that time. events of consequence tumbled over one another in startling succession. we actually lived on sensations. in exercising the historian's right to choose the order of setting down incidents i am puzzled as to which to give precedence. shall i begin with the sensational bribery of the massachusetts legislature which occurred within this period, or with the episode that was the exciting climax of that interval of trial? about this time, too, occurred the laying of the foundation of "coppers" and amalgamated, but that certainly requires a chapter to itself. however, as all are starry examples of what made "frenzied finance" possible, and as any one fits into my story as well ahead as behind the other two, i'll take them in the succession above set down. the whitney machine for the manufacture and moulding of legislation was complex but efficient. it achieved its wonders in broad daylight. considering all it did and how that all was accomplished, the astonishing fact is that no outcry to speak of was ever raised at its performances. it was vastly bolder than tammany and made fewer excuses for its grabbings. it must be remembered, however, that its chief engineer was a leading citizen, and his assistants all gentlemen of great respectability and admirable antecedents, and, in boston, social and civic distinctions are shields behind which much may be concealed. corrupting a legislature is not something a man may do with a fillip of his finger and thumb. however bold the operations, the convenances must be observed. when really large designs are entertained, the manipulator sets to before the preceding election and has his "lawyers" at work throughout the country interviewing candidates and ascertaining their feelings. thus a certain percentage of votes are signed and sealed in advance, ready for delivery at the proper time. but there is always a crowd of new men who must be taken care of on the spot, and these must be approached with tact. some amateurs have fanatical notions of honor which interfere with both their own and the interests of franchise-grabbers. to deal with all contingencies, to take care of captured votes and to shape legislative proceedings along safe lines, requires the services of almost an army of men. at the head of whitney's forces was his lawyer, george h. towle, big of brain, ponderous of frame, and with the strength of an ox. a man of terrific temper, he knew not the meaning of the word fear. nothing aroused him to such frenzy as to have to do with a legislator who unnecessarily haggled over the price of his vote or influence. on occasions when a lieutenant reported that senator this or representative that would not come into camp, towle, with an oath, would say: "take me to him, and i'll have his vote in ten minutes or there'll be occasion for a new election in his district to-morrow!" second in command was mr. patch, towle's secretary and factotum, his exact opposite in every way. where towle was brutally straight to the point, mr. patch was as smooth an intriguer as ever connected himself with secrets by way of keyholes and transoms. it is a beacon hill tradition that for years towle on final-payment day would have the members of the massachusetts legislature march through his private offices one at a time, and, handing each of them their loot, would proclaim: "well, you're settled with in full, aren't you? that represents your vote on ---- and on ----." then he would loudly identify the bill and the particulars of the service, while behind a partition with a stenographer would be mr. patch, who after the notes had been written out would witness the accuracy of the stenographer's report. when the legislature assembled again, old members, the same story goes, would be requested to call on towle to renew acquaintanceship. then he would allow them to look over his memoranda "just to keep them from being too honest," as he gently phrased it. subordinate to towle and patch was a long line of eminently respectable lawyers known over the commonwealth as "whitney's attorneys." these men assisted at nominations, orated at elections, and took care of the finer preliminary details. the first line of attack was composed of practical politicians of various grades--ex-senators or representatives, and local bosses, who were known as "whitney's right-hand men." below these were the ordinary lobbyists, the detectives, and runners, who kept "tabs" on every move and deed, day and night, of the members of the legislature. this was the whitney machine, and it worked together with that fine solidity and evenness which can be attained only by constant practice and much success. in comparison with this competent organization, an average "tammany gang," a "chicago combine," or a "st. louis syndicate" would look like a hay-covered snow-plough in august. it is seldom the public is given an opportunity of seeing a picture, drawn to life, of the legislature of one of the greatest states in the union in the act of being bribed to grant the votaries of "frenzied finance," for nothing, those things which should and do belong to the people, and for which the "system's" votaries would willingly pay millions of dollars if they were compelled to. i shall dwell on the performance that ensued at this juncture of my story long enough to present an outline of such a proceeding. head-quarters for whitney's massachusetts pipe line were opened at young's hotel--parlors , , and , rooms , , , second story front. parlors and were the general reception-room, while was reserved for the commander himself and for important and "touchy" interviews. the rooms , , , , were used for educational purposes. in the morning the place was deserted, but at noon the parlors began to fill up with the different officers of the "machine" and their friends, trustworthy members of the legislature. a little later an elaborate luncheon would be served, the supernumeraries eating in one room, towle and his chiefs and the legislators in the other. at table the gossip of the morning session at the state house was exchanged and the work laid out for the afternoon legislative and committee sessions. another interval of silence and peace until at . the real business of the day began. mr. patch was generally on the ground first, carrying the books in which the bribery records were kept, for be it remembered that the efficiency of the whitney machine was largely due to the thoroughly systematic manner in which its operations were conducted. nothing was left to chance or to any one's memory. in turn, the subordinates presented careful reports of the day's transactions. at . mr. towle would go over these documents, "sizing up" the actual results for submission later to the chief himself. between . and . the "machine" dined; the remains of the feast having been removed, the doors were locked and the books brought out. if an outsider could possibly have obtained the entry to the head-quarters of the whitney massachusetts pipe line, say at nine o'clock any evening during the session, he might easily have imagined himself at the madison square garden or at tattersall's on the evening of the first day of an international horse-sale. this is what he would have seen: in parlor , seated at a long table a dozen of mr. towle's chiefs, all in their shirt-sleeves, smoking voluminously; before each a sheet of paper on which is printed a list of the members of the legislature; against every name a blank space for memoranda; at the head of the table towle himself, frowning severely over a similar sheet having broader memoranda-spaces. one after another the chiefs call off the names of the legislators, reporting as they go along. the outsider would have heard droned monotonously: "..... from ..... not my man; ..... from ..... my man and .....'s man; seen to-day, stood same as yesterday; ..... from ....., raised price $ , making it $ ; agreed; $ paid on account, total of $ due; raised because ..... told him that he had got $ more from ....." as each man reports the other chiefs and towle discuss the details, and when a decision on disputed points is arrived at, towle makes a memorandum on his blank, and the chief concerned records the order in the little note-book which each carries. all reports at last in, towle retires to room and speedily returns with the "stuff," consisting of cash, stocks, puts, calls, or transportation tickets, which he deals out to the chiefs to make good their promises for the day. it would have been obvious to the outsider, as soon as he had learned what was being dealt in, that a large proportion of the members of the great and general court of massachusetts had bargained with the different members of "the machine" to sell their votes not only in committee but in full session of the legislature, and that the price was to be paid when the votes were cast, though something was invariably exacted on account, to tie the bargain. payment was made in cash, calls on bay state gas or dominion coal, or transportation on any of the railroads in the united states or canada. the latter appears to be a class of remuneration towle favored, probably because it cost nothing. the conference seldom closed for the day without towle admonishing his subordinates: "the old man's getting dead sore at the way his leg is being pulled, and if you fellows don't get those countrymen to play a more liberal game, they'll just drive the boss out of the business, and then there'll be a slump in prices that'll make them prefer to stay home and farm." you may ask here, could such things happen without attracting public attention? or are the citizens of boston so habituated to the corruption of their legislature that they could witness unmoved this wholesale bribing campaign conducted in full daylight from young's hotel? thank heaven, this is not so. there are in every american community honest, sturdy souls who can be depended on to come forward in emergencies and cry out aloud against a threatened political crime. above the brute hubbub of a city's roar their voices are heard like the voice of conscience, and the hurrying throng pauses a second in its mad rush after dollars to listen to their tale of the commonwealth's wrong. but what's in the air is not on earth. the practical politicians, whose affair it is to heed and counteract these honorable protests, laugh contemptuously at the vanity of any contest between theories and the "stuff." they know the overpowering logic of gold. there were public meetings in boston; good-government clubs throughout the state met and "resoluted"; citizens' organizations howled robbery and malfeasance. for a few weeks all massachusetts seemed wrought up. from the space the papers gave the protestants one might have imagined that there was a chance for virtue, but the results of the clamor were more apparent than real. day by day, night by night, the "machine" ground away at young's, and as its product fell into the hopper whitney and towle only smiled at the clamor and awaited the moment when, as towle coarsely put it, "the reformers would have yawped themselves to a standstill." that day came at last. one by one, all in a perfectly orderly and methodical manner, the giving-bonds-to-compel-promises clauses, restrictive amendments and other people's safeguards had been voted down and the "are you ready for the main question?" having been put in both houses, the massachusetts pipe line charter was duly passed and sent on to the governor. it required his signature to make the bill a hard-and-fast law, and that once appended, all towle's "promises to pay" became due. as the campaign neared a finish whitney had, a number of times, informed his chiefs, and they the members of the legislature, that the governor had given personal assurance that if the bill passed both houses, he would sign it. on this score all interested had been relieved of doubt, and immediately upon the senate's favorable action bay state and dominion coal shares advanced in price. during the period the governor had the bill under consideration there was an active and rising market and a great volume of transactions on the stock exchange. apparently the day of our peace and prosperity had dawned at last. but we were not yet out of a gnarled fate's clutches. in the midst of a strenuous forenoon of trading, suddenly, without the slightest warning, both stocks began to sink in price like pigs of lead from a capsized boat. at once i was on the defensive. to prevent a wild market panic during the few minutes consumed in getting telephone connection with the state house, i had to purchase thousands of shares. i knew that something disastrous had happened, but was not prepared for the startling information that came over the wire: "the governor has vetoed the whitney bill with a savage message." my informant told me that towle and his men were making for head-quarters on a run. as i hung up the receiver, the bell rang again. in a second my telephone with whitney's office was in the middle of a spasm. "have you got the news, lawson?" "have i got it? the tape is screaming it.[ ] bay state and your stock are racing for the bottom," i replied. "what shall we do? this is a thunderbolt." "do?" i replied. "it's for you to say what to do. that's your end, not mine, but from now until three o'clock one thing you must do, or there'll be no further thinking on the subject--protect dominion coal--have your brokers on the floor every second and tell them to buy all that's offered. beat a slow retreat if you must, but prevent a wild break. things at the exchange are bad now. i'll take care of bay state. look out for dominion at once, and when you are through i must see you--where?" "at young's in ten minutes." "i'll be there." ten minutes later i was in whitney's head-quarters. there pandemonium reigned; all the cocksureness and bluster of the "machine" had vanished, and it was a horde of clamorous and excited men i found struggling round towle and whitney, who vainly sought to stay the panic. it was not disappointment at the governor's message that had so stirred these hardened practitioners of politics, but the terror of impending loss. the majority of the whitney band, lawyers, lieutenants, and water-carriers had bought one stock or both on margin, and had assured their friends it was safe to plunge to the limit. on earth there is no more pitiable sight than the panic of a herd of novice stock-speculators suddenly awakened to a realization of their ruin. the ticker clicks a sort of death-watch as the merciless tape, without hitch or let up, reels off destruction. to such desperate beings the stock operator--the market-maker--is the straw to save them from drowning, and to him they turn as the one possible source of aid and hope. i only knew these men at sight's end, but they knew me and were sure in their abject plight that i could help them--by what wizardry they never stopped to think. they were terribly certain that unless the market turned, their brokers must have additional margin or their stock would be thrown overboard, sinking prices still lower and bringing down their friends' stock, and so on, like a row of falling bricks. from their comfortable viewpoint of out-of-temptation virtue, my readers may regard these lawyers, lieutenants, and water-carriers of whitney as bad men, deserving of no sympathy, meeting here a righteous punishment; but, my word for it--and i know the world and the human ants and spiders who inhabit it--while they bore no marks of immorality, they were the average men one meets in one's journey over the bridge between the two unknowns. my talk with whitney and towle was brief and pointed. it was no time for pow-wow. it was the moment for action. men who do things in stock-markets never waste time over milk that is in the gutter. how to get new milk to replace that spilt is their care. "what are you going to do, mr. whitney?" i asked. george towle started to explain. i stopped him. "the market is bad," i said, talking quickly. "if time is dribbled, it will be worse, and--and boston will be a warm place for you, towle. it would not surprise me if it got warm even for mr. whitney, when the desperate men who are filling the brokerage shops and the corridors outside demand a reason why they were egged on to buy stocks on mr. whitney's word that the governor would sign. no excuses now; i want to know from mr. whitney just what he proposes to do. you both told me the legislative end was none of my business, and, thank heaven, it was not. you said it was your business. now, how about it?" henry m. whitney is a great general. he also can light his cigar, when the battle's on, with the friction of a passing cannon-ball. "i'm going to pass it over the governor's veto," he instantly answered. "can you do it?" i asked. "i can, for i must." he meant it. it needed but one look into his and towle's eyes to see they both had read the message on the back of to-morrow's visiting-card. "all right," i said. "let your people have the word, and it must have no doubtful ring; tell your brokers to buy dominion coal, and don't let them stand on the order of their buying. dominion coal must be put back, regardless of how much it costs or how little you want what you must buy. i will turn bay state before three if it is necessary to trade in the whole capital stock to do it." as i came out of parlor to rush back to my office i said to the despairing men who crowded the corridor outside the head-quarters, and who had in their desperation thrown all caution or thought of concealment to the winds: "coal and gas look to me like good buys." the sudden revulsion of feeling was pathetic. in a minute the news had spread by way of them to their brokers and their suffering friends: "it's all right; whitney and lawson are buying stock." it got to the exchange almost as soon as i did. we turned the market. that night whitney and towle's plans were mapped out to the army and their orders despatched with a vicious snap that plainly said: "whoever attempts to put the whitney machine in a hole will be shown no mercy." the morning papers announced that whitney had picked up the gantlet governor wolcott had thrown at his feet, and--all roads led up beacon hill. it was a quick, sharp set-to. every man was lined up with a jerk, and when the line was tallied up and tallied down and towle had consented to the last raise in price of votes and given away to the final squeeze, the word went up and down the ranks that the whitney bill would, on the approaching last day of the session, go flying through both houses over the governor's veto with a vote or two to spare. again the prices of the two stocks shot upward. then, sharp and quick as a bolt of lightning, fate, who apparently had been camped on the trail of bay state gas and addicks from the first, let fly another of her quiver's contents. on the morning of the closing day of the session (the one selected for the whitney coup), there slipped in and out amongst the whitney legislative ranks a man with a story. as each legislator listened, his brow knitted and he nodded assent. the story was a simple one: in one of whitney's former campaigns, desperate like this one, on payment-day towle had gone back on his promises and forced the acceptance of a fifty-cents-on-the-dollar settlement; and, so the story now went, he, towle, had put the saved fifty cents, a matter altogether of some $ , , in his own pocket. probably he was now going to repeat the operation on an even larger scale. in an hour there came to young's hotel a trusty messenger who delivered to towle himself the ultimatum of the great and general court of the dear old commonwealth: "money in advance or no bill!" consternation reigned. the army was quickly recalled to head-quarters, and despatched back to the state house to put through every manoeuvre known to the two veterans--but to no purpose. the great and general court stood its ground, openly defied the army and hurled back into towle's teeth all his frantic threats. it was the last day, and the great and general court was intrenched inside the protecting walls of the state house, and it knew that before it could be compelled to come forth to face towle he must come to a decision. a terrible dilemma, surely, for the amounts promised had run up to such an enormous aggregate that it was impossible to pay all in so short a time, even if such had been whitney and towle's intention. yet to pay one or a few of the dangerous malcontents meant to pay every one; the gang had firmly banded themselves together. this was the real moment of panic. even whitney and towle were at their wits' end. finally, in desperation, and as a last resort, whitney rushed to the governor, threw up his hands, and asked for mercy. "what would the governor sign?" massachusetts' able and fearless governor wolcott, who seemed to have been expecting some such outcome of the battle, gave his answer clear as an anvil-blow: "you have told the people your company would give them cheap gas. bind yourself to do it by amending the charter so that the highest price your gas can be sold at will be sixty cents. then i will sign." there was nothing else to do.[ ] at the last minute the amendment was inserted. the governor's representative gave the word that it was satisfactory, and it passed. i was in my office taking care of the market. of the stampede i knew nothing. suddenly came the word: "the whitney bill has passed on the governor's recommendation." both stocks started to jump; then a halt, then--i didn't try to stop the decline, for i saw something terrible had happened. in a few minutes the news was on the street: "the charter was not worth the parchment upon which it was engrossed." the biter had been fatally bitten. the market closed with the tape and ticker fiercely, exultingly shouting "ruin!" with each tick and slip: and that night whitney's head-quarters was little better than a mob. frantic men demanded money, money due to them for votes, money they had promised for margins to the brokers before the stock exchange opened the next day, and swearing desperate consequences to whitney and towle regardless of the effect upon themselves. early next morning there came to my office two wild-eyed, desperate creatures, towle and mr. patch. i had spent the night going over my accounts and those of which i had charge, and in addition to a quick, real loss of over a million dollars, i realized that the immediate future was so hung with dark clouds that i dared not anticipate what the coming day might mean to me and mine; but when i looked upon the big, powerful man, who had always seemed in any light in which i had heretofore beheld him to fear neither man nor god--when i looked and saw his plight i pitied him deeply, sincerely. he carried a large travelling-bag, and mr. patch two others. "lawson, for god's sake, don't do what they are all doing--don't upbraid me! i've got to get out into the world and be dead to all i know--family, friends, every one. if i stay, it's state's prison or worse, and whitney says i must go. i've got all the papers together and whitney has given me what cash he had on hand, and this check of $ , . do me one last favor, get me gold for it. i know i have no right to ask any favors of you, but think if you were in my place. i have a wife and children, and--" and the great, strong man wept like a child.[ ] i called my secretary, and in a short time george towle with the $ , in gold and the bags of "evidence" faded out of my life and into the gray mist of eternity. a few days after, a vessel dropped anchor off the island of jamaica; george towle's body was carried ashore and buried, and mr. patch was escorted back to the ship. a few days later, with weights of lead to carry it to its last resting-place at the ocean's bottom, the latter's dead body was dropped over the vessel's side. and somewhere floating the high seas are a venturesome sailor-captain and a crew, who when in their cups tell, 'tis said, strange tales of bags of gold and mysterious documents. as for the members of the great and good court of the old commonwealth of massachusetts for the year of our lord one thousand eight hundred and ninety-six, they received, none of them could tell from where, their promised vote-money in the form of a yarn that the "stuff" belonging to them had been delivered to george towle, but that towle had decamped with it to foreign shores, where he was living in luxury with mr. patch. 'tis writ that some crimes are so black and foul that they will not down, and when i read over what is written here, i wonder if there will not some day be another chapter of "frenzied finance" written by another pen than mine. i sent two police officials to the island of jamaica, and had the contents of the coffin marked "george h. towle" photographed. i could not photograph the contents of the ocean's depths. footnotes: [ ] a stock operator's one reliable source of information is his ticker and tape. for the benefit of those of my readers who are unacquainted with the paraphernalia by which stock-markets and financial operations are conducted, i would say that the ticker is a small printing machine through which passes an endless paper tape. the machine is run by telegraph wires, and it prints upon the tape letters and figures which are abbreviations of the names and prices of all the stocks and commodities dealt in on the stock-exchanges and boards of trade throughout the world. the instant anything of moment happens anywhere, it is reflected by a rise or fall in the price of securities or commodities such as wheat, corn, pork, cotton, etc., that are dealt in in the different stock-exchanges or boards of trade. as soon as a share of stock or bushel of wheat is sold by one operator to another on the floors of the different exchanges, its price is within a second printed on the tapes in the different offices. therefore what the ticker "ticks" out onto the tape is instantly read by operators throughout the world, and as "the tape never lies," operators turn to it for their real information. when the ticker begins to increase its clatter and the tape to travel fast, an operator will tell you its activity means something unusual is happening. the ticker begins to talk at ten o'clock each week-day morning and finishes at p.m., with the exception of saturday, when the hour is noon. these are the hours that the stock-exchanges are in session. [ ] the charter as originally passed had gone through by a fair majority, but to pass it over the governor's veto was another matter. that required a two-thirds majority of both houses, and in the brief time at the disposal of the conspirators the securing of the additional votes was wellnigh impossible. from the necessities of the case such votes must cost much more than those of the original supporters of the bill, for it may be taken for granted that most of the members of the minority had already withstood such temptations as the whitney faction had cared to offer. it was therefore a case of bringing into camp the most honorable and the most expensive members of the legislature, and without opportunity for strategy or manipulation. the sole recourse was rank, flat bribery, and that in full view of a mutinous following ready at the suggestion of the slightest favoritism to the new men to become actively hostile. the task was altogether too fraught with peril, to be undertaken. when they realized how threatening the situation really was, whitney and towle decided to make terms with the governor. the charter once obtained, they calculated that the obnoxious clause might be amended out of it at a subsequent session (as a matter of fact this charter, with its -cent clause, was afterward made the nucleus of the present massachusetts gas companies which has just been floated on a basis of $ , , capital). besides, the state of feeling of the legislators and conditions in the stock-market had both to be taken into consideration. it was not the fault of the legislators who had voted for the charter that the governor had vetoed it, for they had been given to understand by mr. whitney that he would not oppose it. they had delivered their goods, and now, if the governor's sanction could be had under any sort of a compromise, they would certainly hold towle and whitney responsible for failure to make whatever arrangements were necessary. [ ] towle told me, as he waited impatiently in my office for the gold, that in addition to the great losses the drop in price of the two stocks had inflicted on himself and his associates, there were losses on stocks held by legislators, who had plunged on assurances that the charter would go through, and that the amounts he would be called on to pay, if he remained, were far greater than could possibly be met. chapter xxii plundered of the plunder so extraordinary a happening as the disappearance of george h. towle and mr. patch, you think, should have furnished a national sensation. and this is the first you have ever heard of it. bear in mind that here for the first time the facts of this case are set forth in their proper relation to one another, and without the fear or favor that has hitherto prevented them from being understood. in boston after the adjournment of the legislature, however bitter the feeling of the men who had sold themselves, and those others who had lost their all in the crash of stock values that had followed whitney's defeat, their own complicity enforced silence and prevented outcry. it was given out that george h. towle and mr. patch, tired by their labors, had gone to the country for a brief sojourn. on their return there would be a settlement. and with these assurances, both legislators and lieutenants had, perforce, to be satisfied. gradually, betrayers and betrayed drifted back to their own homes and their erstwhile avocations, and when the strange story of the disappearance and death of the chief actors in the whitney drama came from over the seas, it fell on the heedless ears of men who had written off a loss and desired to forget the experience. a conspiracy of silence is easily organized among accomplices. i myself was the greatest sufferer by the disaster. banking on whitney's assurance of success i had loaded up heavily with bay state on my own account; and my customers pinning their faith to my predictions of a rise, had also bought heavily both of the gas stock and dominion coal. in my attempt to support the market when the first decline occurred, i had further increased my holdings, and, at the final break, thousands of shares purchased for my clients were left on my hands. so my loss was very large, many times larger than whitney's. like the others, i said nothing, crediting the expense to education, while whitney silently tucked his emasculated charter into a crypt already furnished with other corporation derelicts, to await some fair opportunity of legislative or other resuscitation; for the instrument, shorn though it had been of its immediate availability, was by no means without real value. probably in view of prospective contingencies, perhaps with a sense of what his error had cost me, he said to me: "lawson, the pipe line charter is worthless now, but if at any time in the future it becomes valuable, you or your company shall have half of it." if henry m. whitney had kept that promise, what a world of disaster and bitterness might have been averted. generated in corruption, perhaps it is not strange that this charter has since been so fertile a breeder of dissension and ruin among all who have attempted to handle it. it may be accepted as an axiom of finance that double-dealing is as dangerous to the dealer as to his victim. the fierce conflicts that at intervals burst out in the financial world and like a cyclone spread dishonor and destruction broadcast, invariably are caused by some one man's treachery. to return to my story. to all appearances, the gas war was over. we bore the palm of victory, but looming up before us was the task of getting together the six millions which rogers must have by november st. that paid, the companies became permanently ours. it was a period of unremitting effort, but the prospects of success were excellent. addicks had got ready a new lot of bay state stock, and i had prepared the public to take it. with the proceeds of this stock and the securities which rogers would turn over to us, we should have money enough to meet our engagement, always provided no slip-up occurred. since the may st settlement our relations with rogers had been satisfactory--i should say, _my_ relations--for he persistently kept addicks and his crowd at a distance, refusing to have anything to do with them. but it's hard to keep a big pot boiling in the open without some intruder smelling the savor of your soup and sneaking up for a mouthful. though secrecy had been solicitously preserved regarding the details of our bargain with the "standard oil" magnates, certain of the camp-followers of "frenzied finance" had nosed out the facts, and at the very moment when our position and prospects seemed most secure a plot was being laid, which, as after-events will show, came close to bringing about the destruction we had thus far managed to escape. as the time of settlement drew near, it became necessary for me to have frequent conferences with addicks and his directors, and we opened head-quarters at the hoffman house in new york. it was my habit to come over for a short time every week, when we got together, reported progress, and discussed future moves. it was at one of these gatherings, on friday, october th, that we had intimation of our peril. i had come down on the midnight train from boston and was brimming over with pleasant news and agreeable anticipations. the day and all other things seemed good to me. the air was crisp and the morning sun gleamed brightly on the red and yellow autumn tints of the trees in madison square. for a moment i stood on the corner beside the naval monument watching the down-townward procession of cabs and coupés in which the spider aristocracy of finance makes its way to its webs in wall street and lower broadway. in the parlor of addicks' suite at the hoffman the directors were gathered when i entered, and with them was parker chandler, the bay state's general counsel. we got down to business at once. i told them how well our affairs were moving in boston and listened to their tidings of progress elsewhere. we were all in the merry mood of success. the past was nothing but a bad dream; our thoughts were on the rich moments beyond november st when we should handle and know the real currency of our victory. the telephone bell rang. some one wanted addicks quick. addicks stepped to the instrument. we all heard him say: "hello." then--"is that you, fred?" (fred keller was his personal secretary.) then--"yes, i hear you plainly. repeat it." then--a minute's wait while we listened. then--"when will they get up there?" then--"send every one home, lock up and go over to the house, and call me on my wire." all this in his ordinary, well-attuned, even voice, without the emphasis of a word to show that the subject was a hair more important than any of the hundred and one ordinary messages which went to make up a large part of his daily life. the talk was so commonplace that we were none of us interested enough to even stop our chatter. addicks stepped from the telephone and in a "bring-me-a-finger-bowl" tone of voice said: "tom, come into the other room for a minute; i want a word with you." he passed ahead of me through a small parlor into his bedroom. i followed. he went straight to the bureau, took something from a drawer, slipped it into his pocket, turned and dropped upon a lounge. but a minute had elapsed since he had gone to the telephone. could this gray ghost be the same man who a short time ago had been smiling so contentedly at parker chandler's last story? his face was the color of a mouldy lead pipe and seared with strange lines and seams. the eyes that met mine were dim and glazed, lustreless and dead as the eyes of a fish dragged from watery depths. courage is not character; it is temperamental. there is an impression that the man truly brave is he who can face sudden, unexpected misfortune or calamity without a tremor or a flicker to suggest his hurt. that is but a single phase and indicative of physical rather than moral qualities; or, perhaps, merely the callousness born of long exposure to danger. one of the bravest men i've ever known stood watching the ticker one day during a downward run. suddenly i heard "my god, i'm ruined!" and he fell in a faint on the floor. and a certain bank officer, whom i knew to be an arrant coward when arrested for stealing a million, smiled at the policeman who had tapped his shoulder and asked him for a light for his cigarette. addicks had not turned a hair as he hung up the telephone receiver, and here he was cowering in a mortal funk, abjectly hopeless. "lawson, the game's up," he said in a trembling voice. "that was fred. he says dwight braman has had himself appointed receiver of bay state; that he raided the wilmington office immediately after he was appointed, broke open desks, and took all the papers he could find, and that in an hour or so he will be in philadelphia and in possession of all my books and papers. he has a court order for the bank accounts and the right to take charge of our funds." "this is a startler," i said; "what are we going to do?" "the trap is perfect, and i'm in it. they've caught me with every bar down. before, when they attempted to get a receivership, things were ready for them--books and papers packed for europe and cash in charge of an unserved officer prepared at the first word to start for canada. but now, a few days before election, when if i don't throw a lot of money into delaware for my followers, they'll turn on me like wolves--they've caught me napping. it's a plot, sure--a receiver in possession, particularly braman, and appointed in a way that shows deliberate calculation, proves it was done by some one who knows our situation to a 't.' it means ruin for me and the company. you know i won't have a friend left on earth, and enemies now will rise up like snakes before a prairie fire." it was indeed a stiff, tough turn, yet i was watching the man rather out of curiosity to note how he could take a reverse than out of sympathy. i don't believe there was another man on earth who, similarly placed, would not have aroused my pity; but addicks--no man or woman has pity for addicks. "well," i repeated, "what are we going to do?" he did not reply for a moment. i continued to look at him. the eyes haunted me. i noted that the lines round the lids had deepened into furrows. he half raised himself from the lounge. "i've said they would never get me, and they won't." instinctively his hand sought the pocket into which he had dropped what he had taken from the dresser's drawer. then i knew. the yellow streak showed plain at last. i had guessed from the start it was there. the stock manipulator in common with the successful general must have the capacity to deal with the unexpected. the faculty to see a situation whole must be his, to focus instantly the lay of the land, the enemy's plans and strength, his own resources, the strategic possibilities of his position; and instantly, if necessity demands it, he must be ready with a new plan of campaign fitted to the first emergency. the more rapidly his mind works the safer are the interests he is guarding. but if he has not this capacity, he can never be a market manipulator. for a moment i could not but pause to admire the devilish ingenuity of the trap that had been sprung on us. the state of affairs that addicks revealed was about the worst imaginable. i had been on this particular war-path so long that my mind instantly grasped the possibilities of destruction that lay in this new attack. i saw november st--no money to pay rogers; everything forfeited; addicks in a nauseating scandal; and all those friends of mine who had put their funds into bay state because of their confidence in my ability to win out slaughtered. no, it should not be if i could prevent it. other storms we had met and weathered, why not this? even if it were a tornado, we would "ride her out." perhaps we should not be afloat when the rollers subsided, but at least we should be at rest--on the bottom. i turned to addicks, who, heaped up on his lounge, was staring into vacancy. "brace up, addicks," i said. "we are not knocked out yet. at least let us find out what has struck us." i was some moments in arousing him from his condition of despair, but finally he pulled himself together, and piece by piece we went over the situation. i had to agree with him that he was in an end-to-end-center-pull trap. the cunning machinery he had set up to meet just such an emergency, now that it was in hostile hands, was rather a source of danger than of safety. there was but one way out of the complication--we must undo this receivership and release our properties and funds before november st. addicks, when he got his thinking loom running, declared the receivership was all a "standard oil" plot to ruin him. i felt sure it was an independent operation, but there was no time for controversy. the telephone bell rang again. it was fred keller, talking from addicks' house. we soon had all the details of the raid. this is what had happened. dwight braman, a former boston broker, now a new york capitalist and promoter, had suddenly appeared in wilmington, del., accompanied by roger foster, a new york attorney representing wm. buchanan, one of the original holders of bay state gas income bonds. he held $ , . they had gone before judge wales, and pleading that the interest on the bonds was in default and that addicks was dissipating the assets of the company, had succeeded in inducing the judge to appoint braman receiver. the whole performance was put through with such marvellous rapidity that not one of addicks' innumerable henchmen had had a hint of it, and so no warning could be given in any direction. braman, an adept in corporation try-outs, lost not a moment, for the instant his receivership appointment was signed he pounced down on the delaware offices of the bay state and seized everything they contained. he was waiting there for the first train to philadelphia for the purpose of capturing the head offices of our corporation, which were located there, adjoining addicks' private offices. it was the moment for rapid action. we had an hour before braman and foster could reach philadelphia, and in finance in that time continents' have been submerged and oceans pumped dry. addicks instructed fred keller to rush the books of the company into a trunk, together with all the private papers in addicks' safe, and to come at once to new york, where he would be beyond the jurisdiction of the delaware court. we returned to the large parlor and hastily explained to the waiting directors what had occurred. addicks instructed the bay state secretary, who was present, to connect with the trunk upon its arrival and disappear. in the meantime the company's counsel advised that addicks and the other directors barricade themselves in their rooms at the hoffman to frustrate any attempt to get legal service on them, for we well knew that braman and foster, as soon as they realized they were balked in philadelphia, would go to the new york courts for additional powers--which afterward they did. this line of defence having been fully organized i hurried down town to broadway. i felt certain that mr. rogers had nothing to do with the braman-foster affair, but to satisfy addicks and make assurance doubly sure i determined to see him. after being with him for five minutes i knew i had not been deceived. rogers agreed with me that the situation looked as though it had been made for his interest, for it threatened to leave us absolutely at his mercy with nothing to prevent his checkmating addicks at his own game. as i pointed out to him, however, there were disadvantages in the position which he must take into consideration. his acceptance of the opportunity would work such losses to the public and to my friends that though the responsibility might be laid to braman and foster, i would fight so viciously that no one would be spared. besides, between the addicks scandal and that other which we agreed must unquestionably lurk in the hasty appointment of the receiver, the whole affair must eventually be ventilated in court. it is always hard for mr. rogers to forego an advantage, but by this time he was tired of the wrangle and wanted peace, and, moreover, he did not relish the thought of court proceedings, so he admitted that my reasoning was good, and promised to do anything in his power to assist us. chapter xxiii two gentlemen of frenzied finance the enemy did not leave us long in suspense. next day braman and foster arrived in new york, bursting with a noble wrath at the failure of their coup in philadelphia. an outrage had been worked upon them, upon the public, upon the majesty of the law. to hear their ravings one might have supposed them the evangelists of justice righteously denouncing a desecration of the sacred altar; or, that we had deprived them of an inalienable right they had possessed to our property. it would have been humorous if the conditions had been less tragic. no defender of property right is so vociferous as the financier who, having appropriated his neighbor's goods, argues that possession constitutes legal ownership. on a country road i once almost rode over two hoboes, who were so busy wrangling with one another that they had not heard my approach. i gathered that one of them, having filched a collection of laundry from a farmer's backyard, had placed it in charge of his mate while he went off for a second helping, and had returned just in time to stop the latter from decamping with the swag. the talk the original purloiner was giving his ungrateful assistant was one of the best expositions of virtue and honesty i've ever listened to. we met the following monday and in reply to my request that we talk things over, foster delivered himself of an exalted exposition of the rights of deluded stockholders, the majesty of the law, and the stern duties of mr. braman, who, for the time being, had departed his private self and, until further notice, existed only as a rigid arm of the court. just as i had arrived at the conclusion that i had got into the wrong shop, braman took up the lecture by informing me of things i already had made myself familiar with, to wit, how he had at different times occupied similar rôles in other corporations' affairs and how relentlessly he had exposed mismanagement and peculation. i suggested to him that in most such cases the receiverships seemed to have been dismissed in favor of the former managers. he waved his hands and replied that in this particular case there was absolutely no chance of control being returned to addicks, who had outrageously abused his trust; "although, of course (this as a sort of second thought) you know, mr. lawson, if mr. foster on behalf of his client should receive the amount of his claim and the proper fee, from whatever source, i should be powerless to prevent the dismissal of the receiver." braman and foster were a delightful combination. as the talented chimmie fadden would say: "dey knew dere biz from de bar to de till an' from de till by de way of de cash register to de wine-cellar, so's dey could do de circuit wid dere lamps blinked and dere hands tied." with their corporation mix-up records i was familiar, and after a few minutes' talk realized that it would be impossible to do anything with them until they had kicked up against one or two of the bricks addicks was now with renewed energy preparing to cast into their pathway. i left with an agreement to see them the following day, and a parting reminder that all natural history showed that unpicked ripe plums were in great danger of being blown from the tree with every passing breeze. i hurried back to addicks. "it's the old game," said i; "they are on the box and have the lines, and know just how badly we need our coach, and it's only a case of how much 'inducement' we can stand." i left him and went down to broadway. i had not wasted time, but they had been there ahead of me. "lawson," said mr. rogers, "this time addicks is up against a real condition, and phenomenal work will have to be done or his race is run. braman and foster have been here and made a strong bid for a partnership with me, but i did as agreed and sent them away with a cold 'i'm in no way interested.'" foster and braman secured an order from the new york courts to take possession of all property, money, papers, and books claimed by the company, and formally laid siege to addicks' quarters in the hoffman. there was considerable excitement for the guests and the newspapers. doors were battered down, but the astute and slippery addicks led them a merry chase until they finally caught him hiding in a freight elevator which he was using for a private staircase, only to find he had no books, papers, or money. the week that ensued was full of trouble and incident for all concerned. addicks led an expedition to wilmington in an effort to get the court to call off the receivership, but had his labor and the expense of his lawyers for his pains. braman and foster dragged us through a weary round of special hearings and demands of various kinds in the different courts, but by tuesday night of the second week their ardor had cooled considerably and they were as puzzled how to let go of the bull they had captured as we were to find a way to make them do so. bright and early wednesday morning braman called on me, and when he threw his coat and hat into a chair he must have dropped his receivership cloak too, for after he had carefully closed the door and made sure we were without witness he said: "if there's any business to be done in this matter it must be done quick." i admitted no one could possibly appreciate this more than i--but what could be done? after bluffing for an hour and exchanging honest views for fifteen minutes we agreed that the situation stood thus: if nothing were done before the coming sunday, the st, the receivership would be permanent; the stock, which had fallen to $ per share, would remain at that figure or go lower; my friends, the public, and myself would be tremendous losers; all the past of bay state, the doings of addicks and rogers, and the appointment of the receiver would come in for thorough investigation; an awful scandal would be aired in public; every one would be covered more or less with mud; and no one could possibly be the gainer but "standard oil," for braman agreed with me that the deal we had made with rogers would probably stand in the courts. on the other hand, if an arrangement could be arrived at by which we could have the receivership discharged, the company returned to its officers, or our equities preserved, all would be gainers by the move, for it would be proof positive that whatever the obstacles, we could overcome them, and the stock would go flying upward again. after we had set out all the advantages, disadvantages, and possibilities of the situation, i bluntly plumped braman with that inevitable question of all such "sit-downs": "what's the price?" and braman as plumply and bluntly answered: "buchanan, foster's client, must have the face of his bonds and interest, $ , , and we must have at least $ , for our trouble and expense." my long experience in corporation affairs, and my intimate knowledge of the practices which the "system" with its votaries has made habitual was such that i was proof against shock from anything that could possibly turn up in even extraordinary financial deals, but i was just a bit staggered by the business-like way braman demanded for himself and foster $ , and the coolness with which he further explained that they must divide their share with certain influential persons without whose hearty cooperation the tangling-up which had been so cleverly accomplished would have been impossible. he made no bones of showing me that once "we gave up" it would only be a matter of the number of minutes required to get details fixed before everything would be as it was before he had interfered. i dwelt upon the possibilities of the judge not following orders to the letter and the minute, but he only smiled and answered: "leave all that to us; if we don't make good as agreed, we get no pay." he was fully alive to the dangers of the game, and he impressed upon me he would take nobody's word for anything. with him and foster nothing but money talked, and it must not be of the marked-bill kind either, meaning he would not take anything which could be tied up by injunctions and lawsuits after the receiver had been dismissed. however, he would play fair. he would not ask us to pay on anything but the actual delivery of the goods. he also frankly told me that he had named the very low figure, $ , , because he expected to invest what he received in bay state gas stock at $ and, upon its jumping to $ or $ , to make half a million. but this is outrageous, you say. you call the performance i have described by hard names! surely our courts are not also the creatures of "frenzied finance"? you ask. i warn my readers that this narrative is no more than a record of events occurring within my own knowledge, and that dark and vicious as the pictures seem they are photographs of actual happenings. nor should the public conclude that the dishonor and dishonesty revealed in connection with bay state gas are exceptional. on the contrary, such doings are the rule in the affairs of great financial corporations. into the rigging and launching of almost every big financial operation in the united states during the last twenty years, double-dealing, sharp practice, and jobbery have entered; and, what is more, the men interested have participated in and profited thereby. to correct a popular fallacy i want to say that i am not referring here simply to moral derelictions but to actual legal crimes. if the details of the great reorganization and trustification deals put through since could be laid bare, eight out of ten of our most successful stock-jobbing financiers would be in a fair way to get into state or federal prisons. they do such things better in england. during the past ten years three "frenzied financiers" have practised their legerdemain in london--ernest hooley, barney barnato, and whitaker wright. the first is bankrupt and discredited; barney barnato jumped into the ocean at the height of his career, and whitaker wright, after numerous attempts to escape, was hauled up before an english judge and jury, promptly convicted and sentenced, and committed suicide by poison before leaving the court-room. i will agree at any time to set down from memory the names of a score of eminent american financiers, at this writing in full enjoyment of the envy and respect of their countrymen and the luxury purchased by their many millions, whose crimes, moral and legal, committed in the accumulation of these millions, would, if fully exposed, make the performances of wright and barnato seem like petty larceny in comparison.[ ] but freedom and equality, as guaranteed us by the declaration of independence, have recently been capitalized, and "freedom" now means immunity from legal interference for financiers, while the latest acceptance of "equality" is that all victims of special privilege are treated alike by those who control and exercise such privilege. if the judges and the public prosecutors of these united states were equal to the sworn duties of their sacred offices, this "freedom" would have been confined long ago, and throughout this broad land there would be jails full of "frenzied financiers" who had imagined themselves licensed to rob the public. but to return to bay state gas: "braman," i said, "we see the situation through the same glasses, but before deciding as to prices let us see where the coin required is to come from. until the receivership is dismissed not a cent can come from the bay state treasury, so that eliminates addicks. i, personally, am in such shape because of this same receivership that i can do nothing. so, as usual, it comes down to the man with unlimited money--rogers. the question is, how to get rogers to advance so large a sum in such a ticklish business? he does not want to get mixed up in a matter in which any one man's treachery might mean state's prison." "somebody's word ought to be good," he commented. "only two men's words would be of any avail," i interrupted--"yours and addicks', and you have just made it clear that in this case neither would be worth the breath expended in pledging it." footnotes: [ ] since the above was published the american people have become aroused, and as this book is going to press, scores of the greatest financiers in america are having under oath confessions squeezed from them in a life-insurance investigation conducted by the state of new york--confessions which reveal such a condition of perjury, bribery, and habitual sequestration of funds, as to make my statement seem mild. chapter xxiv buying a bunch of states i left braman and went down to mr. rogers. after a careful canvas of the situation it was settled that the only way out was for rogers to furnish the money to release the receivership, in consideration of which accommodation addicks should forfeit the old boston companies to him through bay state's failure to comply with the terms of the may contract which matured the following monday. rogers would administer these companies in trust, applying their earnings to the liquidation of the bonds, and after these latter had been paid off, would turn them back to the bay state company for the benefit of its stock; or he would release the companies to us whenever we could raise the money to redeem them. thus rogers would make sure of the amount of his original investment, the million dollars profit the may st deal permitted him, while i should have secured for my friends and the public the amount of their investment in the property and a good profit for the stockholders to boot. to secure addicks' consent to this arrangement would be the difficulty; but there was one consideration that would probably induce him to give way--his terrible plight in case the receivership became permanent. having reached this point, the next problem was how to get the money. rogers refused absolutely to be a party to any payment that could be traced back to him. he pointed out the sources of hazard; first, through treachery on the part of foster, braman, or addicks, he might be accused of bribing a court officer, the receiver; addicks might blackmail him by charging him with conspiracy, or a conspiracy charge might be brought by bay state stockholders, and he be held for tremendous damages. he refused to put himself into any such trap. i put forward a dozen ways to meet the emergency, but he would have none of them. finally he suggested a method which was certainly perfect of its kind. he began by letting me into the secret that the chances of a mckinley victory in the election the following week looked pretty bad, and that the latest canvass of the state showed that unless something radical were done, bryan would surely win. hanna had called into consultation half a dozen of the biggest financiers in wall street, and it was decided to turn at least five of the doubtful states. for this purpose a fund of $ , , had been raised under rogers' direction,[ ] to be turned over to mark hanna and mckinley's cousin, osborne, through john moore, the wall street broker, who was acting as rogers' representative in collecting the money. it would be legitimate for the national committee to pay out money to carry delaware, and he, rogers, would arrange it that the coin to satisfy braman and foster should come through this channel. thus he would be completely protected. "lawson," said mr. rogers, looking at me with intense and deadly seriousness, his voice charged with conviction, "if bryan's elected, there will be such a panic in this country as the world has never seen, and with his money ideas and the crazy-headed radicals he will call to washington to administer the nation's affairs, business will surely be destroyed and the working people will suffer untold misery. you know we all hate to do what uncle mark says is necessary, but it's a case of some of us sacrificing something for the country's good. bryan's election would set our country back a century, and i believe it's the sacred duty of every honest american to do what he can to save his land from such a calamity."[ ] the "system's" conscience has its own quaint logic--the logic of self-interest--and this is how it reasoned: "the election of bryan would disturb our control of american institutions, therefore american institutions would be destroyed by bryan's election. on us, the 'system,' devolves the sacred if expensive duty of saving the nation, and, however abhorrent to our fine moral sense, patriotism compels us to spend millions in bribing and corrupting the electorate so that virtue, 'standard oil,' and j. p. morgan may continue the good work of caring for the public's interests as their own." as i listened to rogers' exordium on the duties of a citizen in an emergency, i remembered the "standard oil" code--"everything for god (our god); god (our god) in everything." it was so essentially "standard oil," this willingness to commit even that greatest wrong, subverting the will of the people in the exercise of their highest function--the election of a president--but only that good (their good) might come of it. it was no more than selfish greed tricked out in the noble trappings of morality, an infamous crime disguised as patriotism. doubtless, the excellent, god-fearing, law-abiding citizens of the doubtful states who read this and learn how the "system" defeated their will at the polls will cry, "monstrous! can such things be in america?" and then will resume their interrupted occupation of "letting well enough alone." however, this is aside from my story. having clearly set forth the political situation through which we should be saved, mr. rogers proceeded to map out my own programme. first, i must perfect an alibi for him by going to foster and braman, and impressing upon them the fact that he was absolutely out of the affair, and must under no circumstances be brought into it; next, i must convince addicks to the same effect, and in addition tell him that mr. rogers had angrily refused to get into the mix-up; i should then hold myself in readiness to meet john moore and hanna or osborne as soon as an appointment could be arranged. that afternoon i got the word and went to broadway, and from there mr. rogers and i went over to john moore's office, slipping in the private door from the rear street. "john," said mr. rogers, "i am going to turn this matter over to you and lawson, and i am to have nothing further to do with it. what you two agree to will be satisfactory to me, and remember, both of you, every dollar that is paid is paid by the national committee, but after it's all settled, and if there is no slip-up, i will look to lawson for whatever is expended. is it understood?" we agreed that it was, and mr. rogers left us. john moore deserves more than a mere passing mention here, for he was at this time a distinguished wall street character and one of the ablest practitioners of finance in the country. during the last fifteen years of his life, john moore was party to more confidential financial jobs and deals than all other contemporaneous financiers, and he handled them with great skill and high art. big, jolly, generous, a royal eater and drinker, an associate of the rich, the friend of the poor, a many-times millionaire, who a few years before had been logging it on the rivers of maine, his native state, john moore well deserved his "street" name, "prince john." his firm, moore & schley, transacted an immense brokerage business, and numbered among its clients great capitalists and bankers all over the country. especially were moore & schley famed for their discretion, and the highest proof of confidence reposed in the firm was the fact that it did the bulk of the stock speculating for what is known as "the washington contingent." this is, perhaps, the most peculiar and delicate business that comes to "the street." a big wall street house opens a washington office and organizes an elaborate system of special wires, wires from which there can be no possibility of leakage. it is then ready for the patronage of members of congress, united states senators and national officials, whose honorable positions make them the custodians of national secrets of great commercial value. if, for instance, a new law is to be passed which must favorably affect a given stock, legislators who are on "the inside" often buy thousands of shares in order to reap the profit of the rise in value incidental to its passage. or perhaps there is in prospect a law which will interfere with the special privilege of some other stock and reduce its price. those in possession of advance information "go short" of that stock (sell for future delivery) to profit by the drop. there are many other opportunities the washington "insider" of speculative turn may use to advantage. for instance, if a high official of the government were about to issue a proclamation against a foreign nation, and should desire secretly to make a million or so out of the panic he knew must follow the announcement, he would cast about him for a broker who would preserve this sacred confidence. it would invariably be through the moore firm that his secretary or confidential man would do the short selling. there are also the operations of lobbyists who, to affect important legislation for this great interest or the other, buy or sell stock for the benefit of legislators whose votes they desire to influence. extreme caution is demanded in the execution of such orders, or all hands might by some slip-up find themselves wearing striped suits.[ ] such a catastrophe seemed imminent some years ago when the sugar trust was before the united states senate for some legislation necessary to bolster up its monopoly. its agents had either been less cautious than usual in disguising the raw bribery they were perpetrating, or this particular senate was too brazen to take the usual precautions to hide its greed from the world. in any case, so great an outcry was made in the press of the country that some sacrifice to the people's wrath was called for--one of those familiar sacrifices which, at intervals of ten or fifteen years in this republic, our rulers make to the great god integrity. an investigation was organized, and a senatorial inquisition had before it eminent sugar capitalists and many other distinguished gentlemen who could by no possibility shed light on the transactions, and then, realizing that a show of earnestness, at least, was demanded, it was agreed that some member of moore & schley's firm must go on the witness-stand, and, on refusing to tell which senators had speculated in sugar, must be sent to jail. this grandstand play, it was calculated, and rightly, would so hold the attention of the american people that when the committee concluded its investigation with the usual loud acclaim of duty well done, its draconian punishment of the unsubmissive broker would act as another ten years' stay against outcry. when this stratagem was decided on, john moore announced that he as head of the firm should be the sacrifice. but the representatives of the "system" and the senate firmly refused to assign him that rôle, and instead, to his grief and anger, nominated for jail the associate member who had charge of moore & schley's washington business, whom they declared the logical victim. during the thirty days that his friend and partner spent behind the bars john moore's hair whitened more than in all the years before, and from that time until his death he refused firmly to take part in his old line of work, or was ever again his old jovial self. footnotes: [ ] over a year after the publication of this statement startled the country, john a. mccall, president of the new york life insurance company, and george w. perkins, vice-president of the same company and partner of j. pierpont morgan, were compelled to confess that they had contributed from their policy-holders' deposits, large amounts of money to a fund to defeat bryan in and to the republican campaign funds of the two following presidential elections, and that they gloried in it. at the same time jacob schiff, director of the equitable life and a partner in the great international banking-house of kuhn, loeb & co., admitted that funds belonging to the policy-holders of the "big three," the new york, the mutual, and the equitable, were used in a joint fund to influence the legislature of every state in the union. [ ] president mccall used almost the same language in september, , in justifying his payment. [ ] the president was notified some few months ago that the cotton report was being juggled by employees of the united states department of agriculture in the interest of certain wall street speculators who were gambling in cotton. investigation proved that it was the practice to falsify the report; and certain government officials and brokers are now under indictment. chapter xxv athletics of finance entirely apart from his relationship with mr. rogers it was a great help in this bay state emergency to have the aid of a man of john moore's wealth of vim and wide knowledge of men and affairs. freely and frankly i explained our situation to him with its innumerable complications until he had mastered its intricacies. a tough job he pronounced our proposition, and he was the authority on the subject. after our talk was ended he called in osborne, who had evidently already been talked to. he said to osborne: "i've been over addicks' affairs with lawson, and there is no question in my mind and that of other friends of the party that he should have what is necessary to carry delaware. you had better have the committee ready to put in between $ , and $ , if we call for it. i will see that it is kept down as low as possible." osborne then spoke his piece and replied that the committee would do whatever was decided best, and asked me to send addicks around next day to explain just how he was pushing things in delaware. all this was play-acting for the benefit of rogers' alibi. the next thing on my programme was to persuade addicks to relinquish his hold on the old boston gas companies, and this was likely to prove my most difficult task. i left john moore, who agreed to hold himself in readiness at any hour to consult on and approve such settlement as i could arrange, and energetically started in on the delaware financier. it was a trying ordeal. as soon as addicks saw i had something to work on he began to demur and object. if he could not have things his way, he would do nothing. he knew that i had joined a conspiracy to ruin him; that i was in league with rogers, who was in league with braman and foster, and that all were banded together to take all he had away from him. in the course of that two hours' wrestle i was tempted several times to throw up the whole affair, and there were some bitter and savage word-passages that left both of us heated. i could do nothing with him; he must hear from rogers personally. finally i got the "standard oil" wire, and rogers talked so plainly and coldly as partially to sober him, but ended by agreeing to have his counsel talk things over with addicks, which was a distinct concession. a little later mr. rogers' representative was at the hoffman and he and addicks had it hot and heavy. after about fifteen minutes of conference they had wellnigh come to blows. however, the hot exchanges had begun to tell. addicks grew saner, but he insisted on seeing foster and braman. i warned him that he was fast getting our affairs into such shape that no one could patch them up, but to no avail. he must meet his enemies face to face if only to ram into their teeth that they were scoundrels. finally, i got braman on the telephone and explained that i was doing my best to quiet a crazy man, who would consent to nothing until after he had seen him and foster and told them what thieves they were. i heard braman chuckle. he said: "bring him along to foster's house at . ," and added: "it wouldn't be a bad idea to have an ambulance along, too." this suggested further complications, for braman has the reputation on "the street" of being more eager to face a wild man on a rampage than a sick one in a plaster cast, while foster, although a little bit of a fellow, was never known to side-step or duck trouble. i slipped word down to moore at the waldorf to follow along to foster's place in a cab. there are several "spite houses" in new york. foster's house was one of them. it is a narrow strip of a brownstone dwelling at west th street, built to express the enmity of one property owner for his neighbor who refused to pay an extortionate price for the land. it is about the width of a front door, and inside there is just about room to move around. it afforded a queer background for the scene enacted there that night. promptly at . addicks and i were at the door, and by . the tunnel-like walls of the "spite house" resounded with as illuminating a verbal interchange of billingsgate biographies as i have ever listened to. at . i covered addicks in a hasty but quite successful retreat which he beat to our cab. thence to the hoffman house, where i summoned parker chandler to aid in the calming of our raving associate. the next two hours were of the pulse-jumping, vein-tearing kind incidental to "frenzied finance," but they were not without avail, for addicks finally agreed that he might consent to "something" provided the bay state equities in the boston companies were so preserved that he could eventually get them back into his hands by repayment to rogers or by the redemption of bonds. having got thus far, i again went after braman and foster, who were at the hotel cambridge. we repaired for further conference to the university club, which was then in the old a. t. stewart marble palace on the corner of thirty-fourth street and fifth avenue. i shall never forget that session. it was past midnight, but the three of us battled with our smoky problem, now good-naturedly, now bitterly. at times it looked hopeless because of this obstinate demand or that steadfast refusal. it must have been three o'clock in the morning when i left them and stepped into the waldorf for a moment to relieve moore's vigil. then back again to the hoffman, where addicks, chandler, and some bay state directors were nodding. by this time i was in no mood to say more than that i would be over in the morning, and that addicks should go early to the national committee's head-quarters and explain the desperation of conditions in delaware to hanna, osborne, and their associates. at last i was free to return to the brunswick for a few hours' rest. in the country, cock-crow is the signal to be up and doing. in the city, the signal to be up and to do is a hoarse, metallic roar that would drown a million country cock-crows if each particular cock were as big as the mythical rooster of antiquity and could crow in proportion to his size. my readers who dwell on the hills and in dales and wheat-fields, and who are unfamiliar with the wild, weird early morning din of the city, may not know that the metropolitan cock-crow is made up of the jingle and jangle of a million tin milk cans jolted over a million blocks of stone to the tune of thousands of steel-shod feet, the shrill cries of an army of butcher and baker boys and the groans and the moans of countless troubled and tortured human souls. cock-crow in the country means "awake to another day of life." cock-crow in the city is a signal for the slaves of mammon to arise to another interval of flight and pursuit. the great city cock was just getting ready to send forth his hoarse cry as i went to bed, and he was still on his roost a few hours later, when i awoke. i looked from my window of the brunswick across the square, now flooded with the pure sunlight of early morning, and all the kinks and quirks and hobgoblins which the rush and irritation of yesterday had generated seemed to have vanished, and i could not suppress a smile at the thought of the night before, when this battle--this puny, insignificant battle for a few dirty dollars--had almost raised feelings i now knew too well should only be aroused by real battles, battles in which noble principles were involved, and i felt better able to fight what i had thought, the night before, was going to be a hard battle. "pshaw!" said i, as i looked away and beyond the park to the grand battlefields of my better imagination, "what will it matter a hundred years hence what name appears against victor or vanquished in the archives of fame or the records of infamy when the student reads, 'a.d. , bay state gas-"standard oil" war,'" for i saw that among the countless real deeds there would be no room for any record to mark the existence of any gas or dollar war. with these thoughts still in mind i sat down to breakfast with parker chandler, and as i listened to his cheerful gossip of yesterday, i inwardly resolved that whatever the result of the day's effort, i would take it with a smile. thursday was another period of strenuous struggle and unceasing effort. i began early, and every moment was taken up with arguments, wrangles, pleadings! chandler had agreed to see that addicks kept his appointment with the national committee and that a quorum of bay state directors should be on hand in the hoffman so that we could get quick action on any proposition that came up. this arranged i hurried over to see john moore, then down for a last word with mr. rogers. addicks came next for a spell; from him to braman and foster; back to john moore; more interviews with lawyers and round the circle again. it seemed as though it were impossible to arrive at any agreement that some one of the principals interested would not kick over. at four o'clock friday morning john moore and myself ceased our labors for the day, both of us wellnigh exhausted. with all our efforts many of the vital points to our agreement were still in the air. a few hours' sleep and we were back at our task, and by six o'clock on friday night the last obstacle had been overcome and the deal was completed. there remained now the tremendous business of putting all the arrangements concluded into execution. a multitude of legal documents had to be drawn up and executed, first by rogers and then by the bay state board of directors and officers. it was a pile of work, but not a second was lost, and by . that night we were ready for the third act, which was to be performed simultaneously by different sets of actors in boston and wilmington. for this our officers were split. with the directors of the boston corporations, chandler, and mr. rogers' attorney to supervise the legal end of next day's transaction, i left on a special car attached to the midnight train for boston; while addicks and the bay state directors set forth on another midnight train for wilmington, del., to be followed in the early morning by my new york partner, john moore's partner, braman, foster, and more counsel representing mr. rogers. this contingent was to carry the money. chapter xxvi the circling of the vultures i don't believe there ever was before or since a financial operation in which so many things, each of vital importance, had to be done at one and the same time. before i took the train for boston, just after the last deed had been signed, braman, foster, and i had come to a complete understanding in regard to the manner in which the court proceedings the following morning should be conducted. it was understood that no one should take another's word for anything, and consequently that no money should pass until specific performance of all the required conditions. immediately on the release of the receivership, foster and braman were to be paid their "fee," and they asked that the $ , cash coming to them should be arranged in separate piles of bills. the two packages containing foster's and part of buchanan's, and braman's $ , were to be in the joint custody of john moore's representative and my partner, who, with rogers' counsel and addicks, had been assigned to represent bay state in the court. what would happen after the transfer of these several amounts was outside my jurisdiction. addicks did not confide to me his own scheme of revenge, but of braman and foster's purposes i had a clear idea. as braman had explained, the great winning of his adventure should be made in the stock plunge he and foster contemplated in bay state gas stock, then selling at - / to ; but lest there be some slip-up in court, "buy" orders to their brokers were contingent on the word "go!" from wilmington. to get this off at the right moment a clerk was taken along, whose only part in the play was to telephone this word "go!" they expected in this way to make at least half a million.[ ] addicks' intentions, as i afterward learned, were less exalted but much more direct. he had conceived a plan whereby without danger to himself he could punish braman and foster for the wrong they had done bay state, and at the same time meet his election expenses at no cost to his own pocket. in the course of his electioneering campaign in delaware, conducted as all the world knows how, addicks had gathered to his cause as tough and rascally a set of "heelers" as ever waylaid aged woman or lame man on the highway. a lieutenant who had been despatched to delaware early friday afternoon, when it had become evident that we should get things settled up, gathered the sturdiest members of this precious troop together and solemnly told them that a serious hitch had occurred in addicks' game and that it looked as though, owing to the receivership, there would be no "stuff" to put in circulation this year. the men responsible for this outrage were to be in wilmington on the following day and from the appearance of things would get the money addicks had destined for his followers. he understood they were to receive it in cash, too--$ , --cash that really belonged to addicks, who had intended it for his good friends in delaware. the thugs, properly indignant at the wrong that had been done "the boss," dispersed rapidly to discuss the information among themselves. that night a group of leaders got together and figured out a little plan of campaign to frustrate the robbery of their beloved master. court proceedings to release the receivership could not take long, and they calculated that the train schedule would detain braman and foster at least two hours in wilmington after the adjournment. what more easy than the organizing of a little scuffle on the station platform or on the street and in the rush--well, many things happen in a rush. this simple procedure commended itself to all concerned, and that night there was much rejoicing among the addicks camp-followers at the pleasant things that should be pulled "off" at the flim-flamming bee next day. all these things were in the air when court opened in wilmington on saturday morning. a special telephone line had been run and arrangements made for a clear wire right into the directors' office in the head-quarters of the gas light company in boston. at the telephone in wilmington sat my partner ready to communicate to me the exact course of the proceedings, so that i might simultaneously make the agreed transfers of our companies to rogers. i knew my partner's voice; he knew mine. we, too, were taking no chances. * new york, february , . _dear mr. lawson_: in your article in _everybody's magazine_ for january, among other misstatements upon which i shall not now comment--since you have committed yourself too far to make it likely that you will withdraw them--you accuse me of having speculated in bay state gas stock with mr. buchanan's money; and of having subsequently been sued by him. i hold mr. buchanan's receipt for the money collected for him, which i paid him the night that i returned from delaware. he has never sued me. please inform me whether you are willing and agree to strike out these statements from your article when published in book form, and also whether you will agree to withdraw the same in your magazine. i tried to call on you and discuss the case when in boston, january st; and i also tried to meet you on the day after last thanksgiving; but apparently you were unwilling to see me. i remain, very truly yours, roger foster. thomas w. lawson, esq., boston, mass. february , . _my dear mr. foster_: i received your letter of the st inst., and in reply will say, if i have done you any wrong in my story, "frenzied finance," or otherwise, it has been unintentional, and i regret it, and i seek this, the first opportunity, to give my regrets the same wide circulation as my original statements. as i wrote you previous to the publication of the magazine containing the parts you refer to, i try to exercise the greatest care in allowing nothing to appear in my story but facts--facts i know to be facts, and in addition only such facts as are absolutely necessary to my work, which is the portrayal of those events of the past essential to a proper understanding by the people of the evils that have been done them, and how they have been done, that they may do what is necessary to undo them and to prevent their repetition in the future, and, in addition, such facts as it is fair for me to use. i repeat what i said to you then: i have absolutely no feeling in regard to you other than an intense desire to do you exact justice. i dealt with you in the entire bay state receivership affair in connection with mr. braman and i thought that i had every reason to believe that his bay state gas purchases were for your joint account; but now that you assure me they were not, i hasten to have such assurances chase my original story with the hope that they may speedily overtake it. my information that you had been sued by mr. buchanan came to me in a way that left no doubt in my mind of its correctness--no doubt until i received your letter. papers were sent to me some time ago by reputable attorneys in a suit of buchanan against braman and, i understood, yourself, along the lines outlined in my story, with the request that i allow my deposition to be taken, so that buchanan could get at the facts in his attempt to recover the moneys claimed. your assurances to the contrary in regard to this matter i also hasten to start on the road you point out, and i will see that both statements are expunged from my book. you are in error in thinking that i did not wish to see you when you were in boston. i did not know in either case of your desires until it was too late to see you. i certainly would have had a "sit-down" with you if it had been possible. again assuring you not only that it is a pleasure to set forth the facts you have called to my attention, but that i am your debtor inasmuch as you have given me an opportunity to perform that duty which i owe to every individual my story treats of--to state facts and only facts with which they have been connected--believe me, yours truly, thomas w. lawson. footnotes: [ ] see foot-note on pages and . chapter xxvii court corruption and coin the closing scene of this most significant drama was enacted on saturday morning in the wilmington circuit court-room. there was nothing in the cold formality of the proceedings to indicate that here was the _dénouement_ of a serio-comedy in which greed and ambition had clashed in a battle for millions; nor in the amiable indifference of the men who got within the enclosed space below the judge's desk to suggest the murderous passions and fierce hatreds raging beneath the surface of the prevailing calm. the _dramatis personæ_ were gathered in little groups representing the separate interests--addicks and some of his lieutenants; my partner at the telephone; john moore's partner and rogers' counsel with their heads together; braman and foster nearer the judge, their eyes wandering toward two dress-suit cases piled before john moore's partner, which, it was understood, contained the money. at a glance it was impossible to tell the one containing buchanan's share from the other laden with the receivership loot, but each was tagged, and it was evident that possibilities of a mix-up had been carefully guarded against. behind braman was his clerk, and in the rear of the court-room sat as many of addicks' thugs as could squeeze into the narrow space reserved for spectators. they, too, eyed the dress-suit cases avidly, for the information had been passed around that these innocent receptacles contained the "stuff," of which the "boss" was about to be robbed. court came to order. foster rose, announced that the claims of his client had been satisfied, and made a formal motion to dismiss the receivership. the court formally consented, and as the clerk was entering the dismissal in his minute-book my partner telephoned the facts to me. i sent back the word that my directors were resigning--had resigned--that rogers' directors were being elected--had been elected--that the boston gas companies were now transferred to rogers. my partner whispered my words to john moore's partner and rogers' counsel. at once the two dress-suit cases, each loaded with currency, were slipped to braman and foster. at the same time the messenger who was to telephone to their broker rose and quickly left the court-room. a brief period was consumed in signing receipts, certificates, and other legal papers, and then the performance was over. addicks rose and went out among his henchmen in the rear, who eagerly surrounded him. in the bustle braman and foster, each with his own booty, fled. let us see what was happening at the boston end of the wire while all this dumb show was being enacted in the wilmington court-house. my directors and officials were lined up against the walls of the directors' room in the boston gas light company's office like so many members of young john d. rockefeller's sunday-school class, inasmuch as they were prepared to listen, sing, or shout "amen!" at any time they received the nod of the class-leader. in an adjoining room rogers' counsel had a similar line-up, with the difference that my men were about to shed the crowns which the others were waiting to receive, and which would transform them from humble business men into royal gas kings. through the open wire i was in such close touch with the scene in the wilmington court-room that i was almost sure i heard the subdued weeping of the blindfolded lady of the scales on the bills which occupied such a prominent part in the disreputable proceedings. nothing now could impede the course of events, so i concluded to take time by the headgear and secure what bay state stock was in the market before braman and foster got in their work. over another wire which was at my elbow i gave the word "go!" to my own brokers in boston and new york, and when a few minutes later they told me they were securing thousands of shares, and that the stock was climbing toward , i could not repress an inward chuckle at the thought that the money we had so reluctantly parted with would spread over only one-half or one-third the surface it was originally intended to cover. it was all over in a few minutes, and when my partner said, "it's done," and "by jove, there go dwight braman and roger foster on the dead run with a dress-suit case apiece!" i held my sides as parker chandler in his inimitable way bawled: "tom, let's leave our straw hats on the pegs, for we'll probably be back next spring figuring out how to pump air enough through the gas-measuring meters to pay for that money we've just loaned braman and foster for a day or two." braman and foster, as i have observed before, knew their business. the danger to which $ , in currency would be exposed, in a territory controlled by addicks, had appealed to their cautious instincts, and once outside the court-room they literally took to their heels and ran for a corner of the railway yard, where awaiting them was a special car and engine. they jumped aboard, yelling to the engineer: "let her go." in the meantime eager-eyed ruffians searched the streets and hung round the hotels, looking for two men with dress-suit cases. a hundred of them were on the station platform, awaiting the departure of the regular train. ten minutes before leaving-time one of the henchmen appeared among the gang, and passed round the word that the gents and the "stuff" had got off by a special, and it was no use waiting any longer. later that afternoon, addicks, to use his own words, in one of his rendezvous, "dealt out his own good money in place of that he had hoped would take care of the people's rights." it was a fierce session of the stock exchange that saturday morning. shortly before closing time a new set of brokers were frantically grabbing for bay state stock round , and monday morning, when all the world knew that the receivership had been lifted and our company was itself again, the same crowd continued to buy fiercely. to these eager purchasers i resold all that i had previously gathered, and enough short besides, to compensate me for some of the losses i had previously suffered, for this latter i was enabled to repurchase at half price, when news came that another suit had begun against bay state. this latter drop in price so shattered the nerves of braman and foster that they retired, having made up their minds that they did not know quite as much about one end of "frenzied finance" as they did about the other. as a matter of fact, nothing came of the suit in question, for it was evident when the transfer of the boston gas companies to rogers' control became known, that bay state gas receiverships had played their last successful engagement. my readers will not object if i again call their attention to the inevitable workings of the law of compensation. the losses occasioned by the market action of bay state stock in these four days so mixed up braman and foster in their financial accounts that later they were sued by their client, buchanan, who in court stated that he in turn was so confused as to what was done in connection with this business that he really knew less after it was over than before the suits were brought. but one thing was indelibly impressed upon his mind--that his bonds had disappeared in the whirl and he had not received anything for them. i think this suit is still pending. chapter xxviii peace at last when the curtain fell on the closing scene of the performance in the delaware court there ensued a brief interval of quiet in the affairs of bay state gas. rejoicing in the temporary diversion of public attention, the chief actors proceeded to assume their former rôles, and soon affairs began to move at their old gait. rogers took possession of all the boston gas companies and patiently awaited the coming down the pike of some traveller with more money than brains. having successfully corrupted the state of delaware, addicks was being measured for the senatorial toga, when accidentally the blind lady dropped her scales on his unprotected head, which catastrophe laid him out long enough to enable another to sneak the prize he had so long striven for. we are not at present concerned with the affairs of delaware, and it suffices to say in passing, that after a heated contest one richard kenney was chosen to the senatorial seat addicks had so long coveted, and that this man, a typical delaware vote-rancher, after being sworn in as united states senator, was brought back to wilmington and tried for robbing a delaware bank, his accomplices being some other heelers of addicks. the disclosures made in the trial showed that the case in all characteristics conformed to the addicks standard of indecency, for the bank officials, not satisfied with "blowing in" every dollar of deposits and capital the institution owned or controlled, had actually "lifted" in addition the building in which the bank was situated. one of the court functionaries who had heard the evidence tersely remarked: "talk about stealing a red-hot stove: this is a case where they took the funnel with it to keep the draught going until they set it up in a new location!" but delaware, as my readers have doubtless gathered long ere this, is its own kind of a country, and rewards and punishments are so perversely adjusted that it seems a sort of topsyturvydom. in this instance certain of addicks' heelers went to state's prison and death; kenney returned to the senate to help make laws for the great free people of america, while the chief conspirator, with a threat to sue the blindfolded lady for damage done, began to set out the pieces on the bay state gas chessboard with a view to trying certain new moves that had occurred to his perpetual-motion mind. the situation of bay state gas stock was fully understood by the public. while rogers had possession of the boston companies, he simply held them in trust, and must give them up whenever the parent corporation had coin enough to redeem them. the securities were still in the hands of the public and my friends, and my own duty to get bay state gas on its feet was plain. it was again a case of raising money, and to do this we had the issue of securities which we were preparing to float just before foster and braman swooped down on us. addicks agreed that if i would undertake the marketing of this stock, he would issue only enough of it to redeem the properties from rogers. his directors met and formally "resoluted" on this point, and i felt satisfied before going ahead that there was no danger of this money being put in jeopardy without actually stealing it. the company, for the nonce, had no other business but to pay office rent and clerk hire, and in spite of addicks' financial immorality, all who knew him were aware he took no chances of ever getting himself sent to jail. so i began to sell the stock in the open market. _part ii_ chapter i the magic world of finance though this is the twentieth century and enlightenment is supposed to prevail throughout this broad land of ours, the majority of people still regard the world of finance as the world of magic. within the fairy realm of finance the laws of nature apparently are suspended, and, overnight, wonders are worked. the ordinary mortal, wise in all other walks of life, sees the man who yesterday stood beside him at the plough or at the bench emerging from the mysterious portals bearing the fruits of the endeavors of a hundred or a thousand lives, although a moment ago he passed through them with nothing. who can deny the magic that thus demonstrates its power, or fail to accord veneration to the magicians that work such marvels? no wonder the ordinary mortal feels that he has no license to enter the world of finance save on his knees, hat in hand, bearing tribute to the divinities enthroned within this enchanted territory. it is my purpose to do away with this extraordinary deception and to show it up as one of the artifices with which tricksters, since the beginning of the world, have imposed upon the people. there should be nothing in finance that any man or woman of ordinary intelligence and experience cannot understand, and i purpose to explain here the machinery of the "system" so that every one will exactly understand it from headlight to rear-end lantern. many intelligent people have no clear idea of what a certificate of stock or a bond really is, and the words "money," "stock-exchange," and "finance" are mere terms which they glibly use without knowledge of their meaning. it is not difficult to understand the grocery or the dry-goods business. standard articles of well-known form are sold by weight or measure over the counters for fair prices. the patrons of such businesses insist on knowing what they are buying--what they are to get in exchange for the money which is the fruit of their labor, and then, after they have been told, and they trade, they require that the goods be as described or they will know why not. the average american would consider it a huge joke should his grocer undertake to induce him to buy one hundred times more sugar than he could use, on the ground that he might find in the sugar bags when he reached home gold and diamonds. but would he not wrathfully seek the police if, after opening his sugar bag, for which he had paid $ , he found it contained only cents' worth of sugar? he would tell you if you met him at this stage: "you can bet that chap on the corner cannot get away with any such trick as that--not in america. he might in zanzibar or in the kingdom of the sultan of sulu, but i will show him he cannot rob americans in these enlightened times." the grocer would be hustled to jail without a "by your leave," and thenceforward his name would be a by-word among all honest tradesmen. and so it goes in every business but finance--finance, the most important of all, the business into which is merged all other businesses, the business of taking and preserving the results of all other businesses, of all other human endeavor. over our land to-day are big, able americans, long-headed and experienced, adept at a jack-knife swap or a horse trade--industrious farmers, hard-handed miners, shrewd manufacturers, each in his own line a good business man, yet these sturdy traders, whom the "gold-brick" artist or the "green-goods" practitioner would never dream of tackling, come weekly into wall street, or into such branch shops as exist in every community on the continent, and are done out of their savings like the veriest "come-ons." humbly they take, in return for the gold earned with the sweat of their brows, a piece of paper of a given value which they return later and exchange for half the amount the paper cost them originally. in the space between purchase and sale fifty per cent. of their investment has disappeared--has been filched away, but yet they have no resentment. they evince none of the feelings of the man whose pocket has been picked or whose till has been robbed. on the contrary, their sentiment is of admiration for the banker, the broker, the financier through whose agency their money has been lost. take, for instance, the prosperous tanner who goes to his banker with $ , , the fruit of ten years' success, and exchanges this sum for , shares of steel preferred. now, if he were to examine this security with half the thought or investigation he gives to a $ car-load of bark, he would learn that there was not cents on the dollar of real value behind it. in six months the eminent tanner is again at the banker's offering for sale his thousand shares of steel. in the meantime it has declined in value and he has to part with it for $ , . but he does not complain; indeed, he bows his way out of the palatial office of the great man and is full of sincere thanks when the banker promises to let him know the next good thing on the market. suppose our tanner had purchased ten cars of tan bark and found that each car-load was short ten per cent. would he not at once go to his attorney and exclaim emphatically that he would spend thousands rather than let the scoundrel who had tricked him get away with his swag? suppose our grocer waxing rich invests his funds in the sugar trust. he thinks he knows all there is to be known about sugar. the business of the trust is to make the sweet commodity and sell it to the people. no mystery or magic, surely, about this simple pursuit. yet when our grocer invests his savings, the sugar stock is many dollars more valuable than when, scared into selling by fluctuations which he cannot see any reason for, he tries to get back his investment. so many times have investors been milked of their savings by this one trust during the past twenty years that in the coffers of its creators and jugglers are hundreds of millions of money that once belonged to the people for which they have received absolutely nothing in return. both the tanner and the grocer must know, when they look up and down wall street at the great office buildings which tower into the sky on either side of the street, that these are huge hives of expensive bees who, from new year's to new year's, do not produce a dollar. they should realize that the hundreds of millions spent each year for the expense of running the "system's" game, and the millions which the game-makers flaunt in their faces, must have been derived from such as they--the men who produce. it is the phenomenon of the age that millions of people throughout this great country of ours come of their own free will to the shearing pens of the "system" each year, voluntarily chloroform themselves, so that the "system" may go through their pockets, and then depart peacefully home to dig and delve for more money that they may have the debasing operation repeated on them twelve months later. you may ask if i desire to convey the idea that the great financial institutions and trusts of this country, which have their head centre in wall street, are all concerned in a conspiracy to rob the people of their savings. you think, doubtless, that so sweeping a statement goes beyond the truth. i desire to go on record right here in declaring that all financial institutions which in any way are engaged in taking from the people the money that is their surplus earnings or their capital, for the ostensible purpose of safeguarding it, or putting it in use for them, or exchanging it for stocks, bonds, policies, or other paper evidences of worth, are a part of the machinery for the plundering of the people. this is a terrible charge, i am well aware, but it is based upon a thorough knowledge of the subject and made with a full appreciation of its gravity. i do not mean to say that all the men who handle and control the different institutions i mentioned have guilty knowledge of the bearing of their actions. many of them are of the purest minds and most honest intentions, and are quite incapable of participating voluntarily in a conspiracy to wrong any one. they do not know, however, that the relation between their own minor institution and the general financial structure constitutes the former an agency for the "system," which controls and has organized the general financial structure into an instrument for converting the money of the public to its own purposes. in fact, the "system" has cunningly possessed itself of the financial mechanism of the country and is running it, not for the object for which the machine was devised, but for the benefit and personal profit of its votaries, and so the vast correlated organization of banks, trust companies, and insurance corporations which were brought into being for the safe handling of the people's savings has become an agency for transferring these savings to the control of unscrupulous manipulators, who take liberal toll of every dollar that passes through their hands. the duty of the american people is to unloosen the thraldom of the "system" on our financial mechanism; to pluck out of their high places the dishonest usurpers who have degraded the purposes of our financial institutions, and to restore those institutions to their legitimate functions. when the people are fully awakened to the condition i describe, surely they will arise in their wrath and sweep the money-changers from the temple. chapter ii the "system" and the louisiana lottery compared years ago one of the greatest evils in this country was the louisiana lottery. through that lottery millions and millions annually were taken from the people and transferred to a few unprincipled schemers, who soon found themselves in possession of enormous fortunes. wise men called for the abatement of this awful drain on the savings of the nation, but the law-abiding, god-fearing people of the country met their plaints with "why should we be bothered about this matter? if fools and knaves elect to gamble in such palpably fraudulent ways, let them gamble, and their losses are no affair of ours. it is none of our business." but presently these honest people had it pounded into their well-meaning heads that the principal instrument by which the swindle was conducted was their own mail service, one of the most important branches of their government; that, in fact, in each and every city, town, village, and cross-road in all our virtuous land, government officials were acting as distributing agents for this huge corrupter and robber. then the people rose in their irresistible might, and between the rising of one day's sun and its setting this powerful machine went as goes the gum-drop on the red-hot stove cover at a pop-corn soirée. it melted, leaving nothing but a faint odor and a thin stain, both of which disappeared in the next morning's scrubbing, and the louisiana lottery was as though it had never been. yet during its reign its insolent votaries could prove to the absolute satisfaction of all intelligent, patriotic men that it was useless for any man or set of men to attempt the lottery's destruction, because they would be met with the accumulated resistance of the reckless spending of the vast amounts of festered dollars which had been stolen from the people. the argument of these comparatively petty thieves was: "no men nor sets of men can hope to 'stack up' against us, for their money comes hard, cents and dollars at a time; they are obliged to earn it, while we get ours in chunks by simply taking it. we can buy lawyers and can hire law-makers, and we can lease government officials, and we can outbid any honest men, who are the only ones who object to our game. in the market for legislative or business talent you cannot get within touching distance of us." yet the people had but to sneeze and this foul parasite was detached from their free and honest structure and was wafted away with the dead leaves and the dust to bottomless nowhere. in the height of its prosperity the louisiana lottery took from the people only a paltry ten or twenty million dollars a year, while to-day there are single groups of banks, trust companies, corporations, and trusts which take from the people by might, by trick, and by theft hundreds of millions each year; and there are scores of such groups. the sugar trust has been the instrument of gathering, in one year, a hundred millions of the people's savings, and the steel trust alone has robbed the people of over five hundred millions of dollars in a single twelve months. to-day the "system" and its methods are as clearly and as sharply defined in the tangibility of their relation to the people as was ever the louisiana lottery. on certain days the louisiana lottery sold its tickets, which the people bought with their savings. on a certain day the drawing took place, at which all those who had parted with their dollars expected to receive them back together with immense profits, and upon that day disappointment was spread broadcast among the many and unhealthy joy among the few. so with the "system." on certain days the public is sold their stock, bond, and insurance policy certificates. upon other days they look for their savings and profits. on the contrary, they learn that their savings have decreased in value or have been wiped out, and that there never was any chance of profit. my critics will say that such a comparison cannot hold, for in the lottery nothing was dealt in but gambling tickets, whereas the stock or bond certificate represents an ownership in the material things of the country. this is the fallacy the "system" spends millions every year to foster and disseminate. between the two the difference is in favor of the louisiana lottery, for both are gambles and the lottery game was square. those who ran it had for their trouble a fixed percentage of the profits, an enormous percentage, it is true, but the general fund was never encroached upon by the controllers. who is to say what percentage the votaries of the "system" take in their game? it depends on how much their victims have to lose. the public have been persuaded, too, that in purchasing stocks they do not gamble, but only invest, or, at the worst, speculate, so they are deceived as well as plundered. a few millions each year satisfied the lottery owners; the votaries of the "system," among whom the "swag" must be divided, demand millions upon millions each. the tickets of the lottery had a definite value at all times until the drawing took place. the stocks and bonds of the "system" have no rigid or unalterable value when issued or at any other time, and do not represent a fixed ownership in all the savings of the people which have been paid for them. morally, legally, or ethically, the louisiana lottery, with all its attendant curses, was a far better institution for the people to bump up against every month than is the "system" against which the whole people are now directly or indirectly dealing every working day of the year. startling this statement may be, but not more startling than the facts. the records of the lottery company will show how many dollars it took in from the public; how many were returned in prizes and expenses; and how many went into the pockets of the owners. the records of the banks, corporations, trusts, and stock-exchanges will exhibit how many dollars were paid into the "system" by the people; how much they received back in return therefor; how much the expense of conducting the business was; and how much profit went to the votaries of the "system." compare the two and it will be found that there is annually taken by the "system" from the people a hundred, yes, a thousand times more than the louisiana lottery ever obtained in the same period. this being the fact, for how long will the people allow such a monstrous wrong to be done? how long will they suffer a few men to siphon automatically the money of the many into their own pockets? it is only a matter of simple mathematics to ascertain the day, and that only a few years away, when ten men will be as absolutely and completely the legal owners of the entire united states and all there is of value in it, as john d. rockefeller is the absolute legal owner of the large section of it of which he is to-day possessed. _when that day is here, the people will legally be the slaves of these ten men._ if this is so--and it is as surely so as it is that the constitution of the united states of america guarantees to every man, woman, and child who is a part of it perpetual freedom--it is so because the legal interest alone to which the ten men will be entitled and which they must receive (or our entire structure will fall) will of itself bring to their coffers all the wealth in existence within a given time. if this is so, then why have the american people allowed themselves to reach this condition? why are they to-day not only resting peacefully under this worse than death-bringing yoke, but assisting in the further riveting of this badge of dishonor and degradation? the reason is simple: they have been lulled to sleep by the "system" and its cunning votaries until they have but a dull appreciation not only of existing conditions but of their coming consequences. it is almost incredible that a people as intelligent as the american people, and as alert to that individual and national honor which they have bought with so much of their blood and their peace of body and mind, can be so deceived and juggled with. when one looks about, however, and notes happenings of which one personally knows, and the degradation and dishonor to which public opinion is seemingly indifferent, nothing is incredible. one sees a certain man openly displaying five hundred millions of dollars, a sum which represents the life earnings of , of our population, and knows that this man has secured this incredible amount during forty years of his life. one sees the second highest and most honorable office in the nation, a united states senatorship, openly bought for a few stolen dollars by a man who up to the very day of its purchase was a watch repairer in a small country town, and who had never done a single meritorious deed or been possessed of worldly goods to the extent of $ , . one sees a wily adventuress secure from the banks, which exist only to safeguard the people's deposited savings, hundreds of thousands of dollars on her bare story that she was the possessor of some mysterious documents. one sees a $ -a-week office-boy of one of the "system's" votaries able to borrow for the "system," on his bare note, four millions of dollars from a new york institution which only exists to safeguard the people's savings--although the law says that such institutions shall not loan to any man on any kind of collateral, even government bonds, one-tenth that sum. one sees two men, drunk with their success, gouging and tearing at each other's hearts in wall street, and sees their gouging and tearing bring about a panic which takes from the people in an hour over a billion dollars and drives scores to suicide, murder, and defalcation--the two men continuing meanwhile as ornamental pillars of society instead of wearing prison stripes. one sees a great railroad corporation, in which are millions of the trust funds of widows, orphans, and charitable institutions, caught "short" (having sold something it did not own) in the stock-gambling game and held up to the tune of ten million dollars by a reckless stock gambler, who says "if you don't settle to-night it will be twenty millions to-morrow"; and the toll is paid, while the great banker who conducts the release of the hold-up charges the further tribute of twelve million dollars for his services. and then one sees this twenty-two millions of "commission" tacked on to the capital stock of the great railroad which is subsequently capitalized into a "bond" and sold to great life-insurance companies as a first-class investment for their trust funds. when one sees these things and a hundred other as rankly fraudulent, one should not wonder at anything american connected with dollars. such things occur because the "system" has so far been able to keep the public in ignorance of its doings. on the surface there is nothing to suggest that a set of vampires have captured the high places of finance and are sucking away the life-blood of the nation. our banks and trust companies all present a fair exterior and apparently are the same safe and honorable institutions they were before the canker fastened on them. only its votaries know what the "system" is, and their way is the way of silence and darkness. a tie, stronger and more effective than the oath of the mafia, binds them to its service, and woe be to him who dares divulge its methods. he who is bold enough to enter upon a recital of these secrets must be strong indeed to withstand the bribes to silence which would be placed in his hands. the "system" can well afford to pay any price rather than be brought face to face with its past, with an enraged people for referee. and even if the being be found who will venture an exposé of the conspiracy, he will find it strangely difficult to get his story past the traps and pitfalls which will be placed between it and the people for whose enlightenment it is intended. chapter iii the fundamentals of finance finance is easy enough to comprehend if it be explained, but so long as an explanation is deadly to the interests of the men who control it, one can be sure none will be offered. there is no term more common to-day than "trusts," and we are surrounded by "trusts," institutions whose workings during the past twenty years have awakened intense public curiosity to know what a "trust" is. yet there is not extant a definition of a "trust" which conveys to the rank and file of the people any real idea of what a "trust" is. so vague is the general understanding of the "trust's" functions and purposes that the most intelligent and honest statesmen struggle and hopelessly flounder when they attempt to define them, and we have at the present time the able chief of our nation talking of regulating them by law, when, as a matter of fact, a "trust" is, top, sides, bottom, outsides, and insides, an absolutely illegal institution, created outside the law, existing outside the law, and having for its purpose the performance of those things and only those things which the law says cannot be performed legally. imagine our law-makers gravely meeting to make laws for the control and regulation of the pick-pocket or burglar or counterfeiting industry, or endeavoring to prescribe legally the times, places, and amounts of national bank defalcations, or the kind of ink, paper, and pens which must be used by forgers in the pursuit of their profession--imagine it! in entering upon an explanation of the workings of the "system," it is necessary to set forth plainly the fundamentals of finance, the few rules and inventions by and through which humanity regulates its affairs. in the beginning, of course, might was right and men supplied their wants by force, trickery, or cunning. in time the disadvantages of this became obvious, for while the stronger could overcome the weaker and satisfy desire, a combination of the weaker units acting together could always wrest the prize from the individual. to equalize things, the people got together and made for themselves rules and regulations governing the conduct of their lives and their relations with one another. this was invention no. : _law_. presently it developed that the physical barter of the commodities of labor was not a satisfactory basis of exchange; so to the statutes already in existence a new one was added providing an interchangeable token of value. this was invention no. : _money_. the statute insisted that the money be of a fair and just standard, by which all the people should receive the equivalent of their labor, and no more. as conditions became more settled, there grew up a realization of the value of a man's life to those dependent on him, and of the fact that when he died his wife and his children were deprived of the livelihood his labor won for them. a new regulation was added to the code, providing that men contributing to a fund during their lifetime should be entitled at death to leave to their heirs a sum in proportion to the amount of their contribution to the fund, less the actual expense of caring therefor. this was _life insurance_--invention no. . but there were other calamities less distant than death to be guarded against, and a common fund, also based on the contributions of individuals, to aid and relieve in case of fire and kindred calamities, was organized. hence invention no. : _fire insurance_. and thus the fabric of civilization grew, each addition to the structure being made to cover a want which experience developed. as time went on, some of the people accumulated the fruits of labor, money, in greater quantity than was requisite for their own needs, but which less thrifty or less fortunate brethren could so profitably employ in their own affairs as to be able to pay for its use a fair proportion of what it could be made to earn. thereupon provision was made for a common place of safety for this surplus money, a place where experts in the handling and putting to use of money could employ their talents, first, safeguarding it and, then, loaning it to others. and the law was made to say that all money put into this common place should be so guarded as to be ready for its owner when he demanded it; that its owner should receive all it earned less the necessary expense of holding it, and that the amount it earned should be only such as those who borrowed it could fairly make it earn. this was invention no. : _the bank_. as the years followed one another, "the bank" became one of the most important of the people's institutions and grew in number and variety. there came to be many different forms of banks. for instance, _national banks_, which, under the control and regulation of the government, became depositories for the circulation of the government's money and were privileged to lend money to individuals or corporations with or without collateral. funds confided by the people to these national banks had always to be ready for their owners. a second form was the _savings-bank_, which grew out of the requirements of small depositors and was governed by the laws of its community. the savings-bank used and safeguarded money confided to it in small sums, and these amounts could be withdrawn only by their owners in person, after an agreed term of notice. the savings-bank was allowed to lend only on real estate or certain other securities, the character of which was rigidly regulated by the law. in consequence, it could use its funds for long-time loans and mortgages, so it earned larger rates of interest than the national banks. the _trust company_ was a third variation, coming somewhere between the national and the savings-bank, and was regulated, as was the latter, by the laws of the community in which it existed. the trust company, too, received deposits from the people, but was allowed a broader latitude in employing them. it was also authorized to engage in certain other business--for example, to act as manager for a deceased person's estate and even to buy and sell securities. because of the extra-hazardous business in which it engaged and from which the other two institutions were legally debarred, the trust company earned and paid larger rates of interest to its depositors, and the men who handled its funds were allowed to take for their own remuneration profits in excess of those derived by the custodians of national and savings-banks. another deficiency in the business structure growing out of the increasing prosperity of the people was next provided for. when an enterprise became so large as to necessitate several owners for its conduct, the prescribing and defining of the relation of these owners to each other and to the common property became a task of increasing difficulty. so the idea arose of welding the enterprise itself into a separate entity which could do all the things the individual might, and yet exist apart from the individual and independent of his personal dealings and comings and goings. his ownership should be an undivided interest in the whole represented by certificates of stock or bonds, which could pass from him to another without interfering with the enterprise. this was invention no. : _the corporation_. the law then provided regulations for the creation and conduct of these corporations which compelled them to keep their affairs in such shape that all could ascertain of what each consisted. when these six organizations had been founded, the machinery for the conduct of the business of a civilized people was almost complete. but still one other want developed: with the multiplication of the corporation tokens of property, it became necessary that there should be some place where the worth of these might be ascertained either by purchase, sale, or loan under the regulation of experts. so there was created a common market-place, to which came all those who had corporation tokens of property to sell and those who desired to purchase them; and the prices these brought were announced to the world and became the measure of the value of the institution they represented. rules for the regulation of the business of the market-place were gradually formulated, and invention no. --the _stock exchange_--came into existence. with this addition, the people's organism for safeguarding and economically handling the funds of their labor to the best advantage of all concerned and without interfering with the rights and privileges of individuals was fully equipped. each separate institution had grown out of an actual necessity and had its own legal organic function, fully understood and defined. and there was no branch of human industry which could not be safeguarded, handled, and perpetuated through this organism, nor could evil come from the existence of any one of these seven components. the robber, the thief, and the pirate, as defences against whom they had been erected, could not seize any of them or the people's savings which they were created to safeguard, because the constitution of each provided adequate penalties for such a seizure. as long as the members of the organism performed their ordained functions the fabric of the people's fortunes was safe from plunder. chapter iv the magic "jimmy" it was at this stage that the class which is now the "system"--of which the mighty robber of barbaric days was the prototype--began to cast envious eyes at the accumulated earnings of a prosperous people locked up and safeguarded against depredation, while the owners (the public) rested easy in the conviction that they had fully protected themselves against the spoilsman. the "system" reasoned: "if only a way could be devised to win control of the seven institutions so that all the benefits the people intend for themselves may revert to me and yet i be exempt from the punishment provided for those who attempt unfairly and dishonestly to secure such benefits, i can get a much easier and surer possession of the results of the labor of the people than i was wont to when i took them by might." a need defined is half relieved. outside the treasure-house was the robber enviously surveying its strong walls and iron doors, its locks and bolts, specially designed to defy the felonious intentions of such as he. how safely to win his way in and possess himself of the piled-up gold was his problem. and as he waited and watched, the lawyer, at his solicitation, invented for him a magic "jimmy"--an instrument with which he could not only break through the outside door, but as easily force his way past the complex locks of the chambers inside. what was still better, this magic "jimmy" was also a license to enter upon and take possession of others' properties and use them for his own benefit. it conferred on its owner a legal privilege to steal. the robber was satisfied. the "jimmy" which the lawyer had brought him was the "trust." all this sounds very hyperbolical and far-fetched, perhaps, but it is exactly what a "trust" is. the "trust" may also be defined as a master key to the people's financial structure, which enables its owner to enter any or all of the separate institutions i have mentioned, and combine any or all of them, without affecting their respective organisms, into a new organization which possesses the potencies and the privileges of each, but is unhampered by the legal restrictions of any one of them. like electricity, the exact nature of a "trust" does not admit of rigid definition, but it is a force which can be exerted only in conjunction with financial organisms, which it joins and yet releases, adds power to, and exempts from consequences. let us suppose that two men are made into a "trust"--this human combine becomes at once free from the bondage of matter and the senses, sees out of the back of its head and passes in and out through solid walls. it has all the combined strength and more that the two men had and all their human privileges and possessions, but it evades nature's laws as to individuals, and the laws of man both as to individuals and other material things. to put the description in still another way, a "trust" is an institution which endows itself with the right to use any or all of the seven institutions of the people as the people use them, but so made that its user derives from the institutions the benefits the people intended for themselves, and yet is immune from the legal consequences of appropriating such benefits. two or more men make a "trust" by combining--acquiring the control of--an insurance company, a trust company, and a savings-bank. the new organization _is_ all of these institutions, performs the functions of all of them, yet can legally do with their incomes, capital, and surpluses things which, from the very nature of each, none of the institutions is allowed to do--the new organization is all of these institutions until the law attempts to bring it to book; then it evades being any one of them. the trust company is empowered to lend money on speculative ventures which the insurance company and savings-bank may not do, so the "trust" lends the insurance company's vast accumulations and the savings-bank's hoard through the trust company with great profit or tremendous loss and enjoys immunity from the consequences which should follow such disobedience of the law. moreover, when the trust company shows a profit the "trust" appropriates it, and when a tremendous loss is sustained the insurance company or the savings-bank must bear it. an illustration: a, b, and c form a "trust." a and b are president and controller of a savings-bank and an insurance company respectively. they organize a trust company with $ , , capital, of which the insurance company furnishes the majority; they then elect c president and controller of the trust company, and make him their associate or a dummy. the trust company receives $ , , of the people's money on deposit. the insurance company deposits $ , , of its surplus funds, and the savings-bank $ , , more. the trust company now has $ , , of the people's savings in its control with which by law it is allowed to do certain things; but what it does with the $ , , of the savings-bank and the $ , , of the insurance company the law specifically says neither one of the institutions can do itself. the "trust" then purchases for $ , , the stock of an industrial corporation. it borrows the $ , , and an additional $ , , , which represents its own first profit, from the trust company through irresponsible dummies, depositing the industrial stock as collateral. the "trust" next causes the trust company to issue bonds for $ , , . these bonds are based upon and secured by nothing of worth but the stock. the trust company offers these bonds for sale. the insurance company buys $ , , of the bonds, and the trust company, through dummies, the other $ , , . by the operation so far the "trust" shows a profit of $ , , . after making this profit and the true worth of the bonds becoming known, these decline back to the original worth of the stock upon which they are based, $ , , , and there is the tremendous loss of $ , , made. the trust company "busts," and there is a loss to its depositors of $ , , . this loss is divided as follows: $ , , to the savings-bank, $ , , to the insurance company, and $ , , directly to the people, less the small amount which will be recovered from the stockholders. (these losses will be affected in an unimportant way by the $ , , original capital.) in this case the "trust" has done nothing for which those responsible for it can be held civilly or criminally liable. neither has the insurance company, the savings-bank, nor the trust company, and yet, if there had been no "trust" and any one of the three institutions had made the loss directly through its own actions, the officers of that institution would have been civilly and perhaps criminally held responsible. the utility and convenience of the "trust" having been demonstrated, it became a popular instrument for financiers desiring to accomplish all manner of illegal purposes. especially was it an apt tool for the "system," which in the meantime was perfecting its control of the people's institutions. the owners of railroads running through the same territory, finding cumbersome and hampering the restrictions with which the community they served had safeguarded its interests, formed "trusts." straightway there were valuable results--the combination was emancipated from the regulations which had bound its individual members; competition was eliminated and rates were raised. as time went on new "trust" possibilities were discovered and other institutions linked up--corporations of all kinds, insurance companies and national banks and savings-banks, were brought together for the benefit of the "system" and the detriment of the public. the end of the trustification of the institutions of the nation is not yet, but the people are to be shown a way by which the plundering process can be reversed and through which they can make their freedom complete and absolute by the complete and absolute enslavement of the "system" itself. chapter v how the "system" does business to follow the various steps in the crimes of amalgamated, my readers should know how the securities of a corporation are manufactured, how "put upon the market," how admitted to the stock exchange, how prices are made in the stock exchange, how fictitious and fraudulent quotations are created and disseminated, until the very shrewdest members of the stock exchange cannot distinguish those which are real from the fictitious in cases outside their own manufacturing. then there is an elaborate and ingenious procedure by which public opinion is moulded, that is, by which people are made to believe that the prices at which they buy and sell the stocks and securities are bona fide; and this is a procedure as compact and as well understood by the "system's" votaries as are the methods of the bank-breaker or burglar--who sends his "pals" ahead to "pipe" the lay of the land--by felony's votaries. when i have shown these things, about which little is known to-day by the public, my readers will have no difficulty in comprehending what i shall lay before them of the actual robberies in the case of amalgamated and other notorious enterprises. the underlying principle of the several organisms through which the commerce of the country is conducted is the protection at once of the interests of the individuals composing them and of the public with which they do business. provided this principle is adhered to, no harm can be wrought to either. most of the contemporaneous swindles through which the people have been plundered were perpetrated through the agency of corporations, and this organism has become a sort of synonym for corrupt practice. yet the original corporation invention as i have described it was devised to meet a real want of the people, and it has merely been diverted from its proper use by the lawless votaries of the "system." consider the institution as we now understand it. certain individuals decide to conduct their business in railroads, mines, manufactories, patents, etc., in the form of a corporation and apply to the community--the state government--asking authorization to do so. they are compelled first to conform to the rules and regulations laid down by the state for the control of corporations, which say in one form or other: "we create you for the purpose of doing those things that are best for the many, not the few, and if we knew you would use our authority to oppress the many in the interest of the few we would not create you." the fundamental privilege of incorporation is the legal authorization to issue paper titles of ownership to the business just incorporated. these are in the form of stocks and bonds. whoever owns these paper titles shall possess the property and the business as the individuals did before they incorporated, and the law presumes that they shall manage and control that business, receive the benefits which come from it, and suffer any loss arising from its conduct, and that all these benefits and responsibilities shall be as laid down in the law. it follows that no harm other than that the law expressly prescribes penalties to prevent can come to any one from corporations thus created, always provided the laws are what they appear and what the people intended them to be, and that they are enforced as the people intended they should be. it is most important to all concerned in a corporation that the paper ownership shall represent the real value of the property on which it is based, and no more. when the people exchange their savings for these authorized paper tokens, they should be able to rest confident in the state's guarantee that they are worth what they purport. there have probably been jailed in the united states during the past twenty years thousands and thousands of american citizens whose aggregate stealings do not amount to one-tenth the total taken from the people by either the amalgamated, the united states steel, the american tobacco company, or a score of other fraudulently organized or fraudulently conducted corporations. there are various ways of organizing corporations and issuing their stocks and bonds. sometimes a company is organized to acquire a property; individuals and institutions set down their names to take and pay for the shares or bonds. with the money thus obtained the property is purchased. _or_ the individuals who own the property which is to be the basis of the corporation exchange it for all or part of the stocks and bonds. in the latter event those original owners usually sell to the public the tokens thus acquired. honest men in forming a corporation make publicly known the character and worth of the properties or enterprises they are organizing, what they have cost, what their profits are, and what may reasonably be expected by investors. the tricksters and the "system," with whom incorporation is generally but the first step in a conspiracy for plunder, surround the proceeding with an air of mystery and refuse information usually with: "we do our business quietly and in silence, and those who do not like our ways may keep out of this scheme." their whole procedure is of that high and mighty order which impresses the ordinary mortal with a sense of confidence in the independence of its users and a conviction that their scheme must be so good that they do not care whether they sell or not. this is just the effect it is intended to produce. the next step is to lead the people toward the shambles. this is done by "moulding public opinion," and for this interesting function the "system" and wall street have an equipment of magical potency. public opinion is made through the daily press, through financial publications of various kinds, and through "news bureaus." every great daily has a financial editor and a corps of experts in finance who spend their days on "the street" cultivating the friendship of the financiers. at night they are round the clubs and hotels where the brokers and promoters congregate, debating the events of the day and organizing those of the morrow. there are also the strictly financial papers--daily, weekly, and monthly--whose corps of editors and news gatherers live on "the street," and know and care for nothing but finance. and lastly, there are the news bureaus, with runners out everywhere to gather in items of news affecting stocks, wall street or finance. these are printed on small square sheets of paper, and delivered by an army of boys at brief intervals while the stock exchange is open at the offices of the bankers, brokers, insurance companies, and hotels; or the same matter is disseminated by means of an automatic printing machine called a news-ticker. for this service the offices pay the bureaus from $ to $ a day. news bureaus form an important cog in the machinery for making stock-markets, as it is through the news they furnish to the stock exchange and to the offices where investors and speculators gather together that the big operators affect the market. a decision to buy, sell, or "stand pat" is often based on the _on dits_ of these printed slips. the first step toward "moulding public opinion" is taken when the "system's" votaries send for the dishonest chief of a news bureau, a man usually up in every trick of the trade. i will later describe one of them, a scoundrel so able and experienced that, to use the vernacular of the gutter of "the street," he can give cards and spades to the frenziedest of frenzied financiers. to this man the "system's" votary will say something like this: "we are going to work off blank millions of blank stock; it costs us thus and so, and we want to sell for so and so many millions." nothing is kept back from this head panderer and procurer, for it would be useless to attempt to deceive him, and, to quote his always picturesque language: "never send a sucker to fish for suckers or he'll lose your bait, so spread out your bricks and i'll get the 'gang' to polish up their gildings." after the quality and amount the "system" intends to work off in exchange for the people's savings are explained, that part of the plunder which is to come to the head news-bureau man is settled upon. the amount varies with the size and quality of the robbery to be perpetrated. in some cases as high as a million dollars in cash or stock or their equivalent has been paid to a "moulder of opinion" for simply so shaping up a game that the people might be deceived into thinking one dollar of worth was four, six, or eight dollars. the head of the news bureau, having taken the contract to lay out and carry through the deceptive part of the scheme by which the people are to be buncoed, now begins operations. first, bargains are made with conscienceless financial editors of the daily and weekly newspapers, whereby for so much stock or for "puts" or "calls" or both,[ ] they agree to insert in their paper's financial column whatever yarns are fed them by the bureau man, regardless of their truth or falsehood. to justify the attention paid the subject by each editor, a certain amount of money is spent in advertising, in the newspaper that employs him, the merits of the enterprise. the financial journals are dealt with about on the same basis. in return for straight advertising or for "puts" or "calls" they agree to insert the manufactured news. the news-bureau man then puts his entire staff to work inventing fairy tales of one kind or another to excite the interest and attention of the people, and these tales must be so concocted that the public is drawn into believing that the statements disseminated represent actual conditions. i shall, later, give real instances of the working of this nefarious game of "moulding public opinion," and present it in the lime-light necessary for its appreciation. to show the extent to which this "moulding" process is carried, i know in one instance of a high-priced financial scribe being sent to live in st. petersburg for no other purpose than to send certain "news items" to a confederate located in germany, who would get these items to a reputable english banking-house through whom they were given out in london as news: the whole object of this complicated system being that the news items might be sent back to new york without wall street suspecting they were bogus. i must not be understood as meaning to say that all financial editors, news gatherers, or news bureaus are engaged in this, one of the lowest forms of swindling, for such is not the case. _on the contrary, there are many of them whom no amount of money or influence could make waver in their allegiance to the truth and to honest dealings._ with some of the others i hope to deal specifically later, and i shall not hesitate to set forth in detail certain transactions in which they have been engaged. footnotes: [ ] a "put" is the right to sell to a certain firm or individual shares of stock at a stated price for a stated period, and a "call" the right to buy under the same conditions. the holder of the "put" or "call" is under no liability, as he can use the "put" as margin to buy stocks, or the "call" as margin to sell stocks, or he can hold them for the profit there may be in selling or buying the stock after it has declined or risen below or above the price named in the "puts" or "calls" he holds. chapter vi how wall street's manipulations affect the country what is the connection between the "system" and the minor financial institutions throughout the country which are owned and controlled by groups of sturdy men who know not wall street and its frenzied votaries, and who are ignorant of "made dollars"? let us see. we will take five national banks in different parts of the country, each having a capital of $ , and deposits of $ , , . one is in the farming district of kansas; another is in louisiana in a cotton district; a third is in the orange groves of california; in the mining district of montana is a fourth; the fifth in the logging and lumber country of maine. these $ , , of deposits represent savings earned by the type of men who have made america what it is, and who laugh when they read in their local papers: "panic in wall street; stocks shrink a billion dollars in a day." "fools and their money are easily parted," they say, "but wall street gets none of our honestly earned money." now the officers of these five banks are honest men and they know nothing of the "system," yet the day of the panic they each telegraph to their illinois correspondent, the big chicago bank, "loan our balance, $ , , at best rate." that day the chicago bank with similar telegrams from forty-five other correspondents in various parts of the country, wires its new york correspondent, the big wall street bank, "loan our balance, $ , , , at best rates." thereupon the great new york bank sends its brokers out upon "the street" to loan on inflated securities of one kind or another which its officers, the votaries of the "system," have purchased in immense quantities at slaughter prices the millions belonging to the chicago bank and to other correspondents of its own in cincinnati and omaha and st. louis and other big cities. the decline is stayed, and then the world learns that the panic is over and that the stocks, of which the people have been "shaken out" to the extent of a billion dollars, have recovered in a day $ , , of it, and that probably in a few days more will recover the other $ , , . who has _recovered_ this vast sum? the people who had been "shaken out"? no, indeed! the votaries of the "system" have made it--they and the frenzied financiers whose haunt is wall street, and whose harvest is in such wreckage. the part that the five little banks innocently played in this terrific robbery was unimportant. what is important is that it was the funds of their depositors and others like them which the "system" used to turn the stock market and make an immense profit out of the recovery of values. it is true the banks received but two and one-half or three per cent. for the use of their balances, and their officers would scorn the suggestion that they had put any of their money in jeopardy in a wall street gamble. but what i have outlined happened, and has happened many a time before and since, and goes to prove my assertion that every financial institution which is taking the money of the people for the ostensible purpose of safeguarding it or putting it to use for them, is a part of the machinery for the plundering of the people. sooner or later, every dollar taken by the "system" through wall street's manipulation of stocks directly affects every man, woman, and child in the united states. let us, for example, see how a stock slump in new york affects the owner of a small life-insurance policy in wyoming. the shares of the american and english ocean steamship companies were bought up by the "system" at double their worth and converted into a "trust." new stocks and bonds to a number of times their value were issued and sold to the public. the great insurance companies bought many millions worth of these securities, using for the purpose the money they had collected from the policy-holders, a dollar at a time. this "investment," at the moment it was made, actually represented a loss to the purchasing insurance companies of millions of money, for millions more than the property was worth or could possibly be made worth had gone to the people who formerly owned the steamship properties, and many millions more to the "system" as its share of the swag. and it should be remembered that the men who organized the steamship trust were the men who invested the insurance company's money in its securities. the policy-holder in wyoming knows about the steamship trust and about the terrible loss sustained by those who invested in its securities. he does not realize, however, that his insurance company has been buying such poor stuff, for he is persuaded it is a great and noble institution, and far above wall street and its rash gamblers. even when he and his kind find their yearly dividends on their policies growing less and less and their premiums rising "because of the tremendous increase in the expense of doing business," they do not dream of connecting these misfortunes with the "system's" trustifications of inflated securities; nor do they associate them with the glowing accounts of the half-million-dollar seaside palace built by the insurance company's officer who entered the employ of the institution a few years before, with his salary for his fortune, and who is now pointed to as an example of thrift, being worth from ten to fifteen millions. chapter vii economics of copper a thorough familiarity with the facts and conditions set forth in the preceding chapters will help my readers to an understanding of the series of complicated transactions through which the snaky course of amalgamated must be pursued. its flotation was the most tremendous and public ever even attempted, much less successfully carried out, and in its market career the full resources of stock jugglery were exercised on its behalf. the crimes of amalgamated are to the delinquencies of bay state gas as the screaming of eagles to the chirping of crickets. from its birth this great enterprise went hand-in-hand with fraud and financial dishonor, and the facts i shall proceed to reveal are so formidable in their indictment as to startle even those calloused to the trickery of modern stock deals. an armistice followed that last desperate battle of the gas fight in the delaware court-house, and gave me time to turn my whole attention to the plans i had long been maturing in my mind in connection with quite another project--"coppers." for sixty years past boston had been the home of the copper industry. from it great fortunes had been derived, and there was in course of development a copper aristocracy which threatened the supremacy of the east india aristocracy that had so long lorded it in boston society. indeed, so far had the rival contingents progressed that there was a serious searching of the pretensions of any new-comer whose origin had to do with other enterprises. "coppers" were respectable, were genteel, and, above all, were not "trade," for the average old-time bostonian affects the anglo-saxon contempt for the traffickings of retail commerce. for the benefit of those in the outer darkness, to whom the ways of boston are strange, it may be explained that the east india trade goes elsewhere under other less euphonious names, and consisted in the swapping of new england rum, made from molasses, water, and other things, for human cotton-pickers. it was a most profitable industry, with a spice of adventure to it, and in which at the time it flourished a gentleman might honorably engage. it may be said that with the paradoxical conscientiousness characteristic of the puritan mind, the first outcry against the personal ownership of human chattels was voiced by new england, and her leading citizens generously devoted the incomes of the fortunes their forefathers had amassed in the slave traffic to releasing their colored fellow-creatures from bondage. that, however, is still another story. to return to "coppers." in my young days in "the street" in the early ' s, the first task i remember performing was making deliveries of copper stocks traded in by "the house" which was entitled to my twelve-year-old services in return for the three large dollars which i received each saturday with far more honest pride than any three millions i have since handled. as i grew up i watched calumet and hecla advance from a dollar to (it afterward sold at ) because of its real worth, and imbibed the conviction, which all true bostonians entertain, that money acquired through copper is at least per cent. better than money from any other source. i sympathized with the state street code which declares, or should: "gold can be found in a day by any one with eyes, silver in a week by any one with hands, and money in a year by any one with sense enough to save it, but no man gets into copper without capital, fortitude, patience, and brains." as a matter of fact, it requires, even to-day, with all of to-day's facilities and rush, $ , , in money and five years of spending it after a copper deposit has been found before it can be made to yield returns. is it surprising that a project requiring so much money for so long a time should appeal to boston's regard for endurance, expensiveness, and exclusiveness? could there be found an enterprise better calculated to discourage the upstart? my daily round of errands led me from broker to broker and from bank to bank, and always i heard talk of copper. it is not remarkable that my youthful mind became impressed with the profound importance of the metal and all pertaining to it. i picked up a great deal of information on the subject, which i fortified later with a careful study of copper the metal, copper the mine, and copper the investment. as i mulled over the immense returns obtained from their ventures by the men i knew had their money in copper, it struck me as extraordinary that this industry should be so much more profitable than others. here was a great staple, a necessity of the people, which had been in use since men began to sit up, and would be needed until father time smashed his glass, that returned per cent. gross profit on the business done in it, while the business done in any other staple did not return, gross, over ten to eighteen per cent.; which gross profit gave to the capital invested in copper a net profit of sixteen to twenty-five per cent., while that invested in the other staples returned a net profit of only three and three-fourths to four and one-fourth per cent.[ ] the value of money had decreased with the world's development; the cost of the great commodities of life had all come down with the decline in interest--all but copper, which kept its old places throughout all the changes that had occurred in the relations of capital to labor and business. i realized that copper, in that year, would afford a gross profit of cents on each $ worth produced; that this great gross profit was legitimate, was not brought about through unfair restrictions or forced combination, or evasion of the country's laws, but was wholly natural, being founded on the fact that the supply was so limited that the demand prevented the price dropping below a certain figure, and that this under ordinary circumstances represented at least per cent. of gross profit to the producer after he had paid for labor and material the highest ruling prices. no better illustration of the main facts about copper can be found than the condition of the industry to-day, in . the metal is now fifteen and a half cents per pound, and the consumption so great that the price still advances, yet if through an agreement among the producing mines this sales-rate should be dropped twenty-five per cent., it would so increase consumption as to force back the price to a point that would again discourage consumption; and yet in the old mines the cost of producing the metal sold at fifteen and a half is but six to seven and a half cents, in some even lower. compare these conditions with those existing in the steel industry. therein unlawful combinations and unnatural restrictions are essential if those engaged would show a gross profit of even fifteen per cent. on their gross output. if more than fair or going returns are earned, then new capital flows into competition and the surplus again shrinks to an uninviting point. the same is true in wheat, corn, and cotton--big prices invite fresh investments and the planting of broader acreage. hence the sorry spectacle of the cotton planter who, in , will receive no more for his twenty per cent. increased crop, coming from over two millions increased acreage planted last year, than for his smaller one of the year before. that my readers may quickly, and once for all, grasp the point i wish to make, i will illustrate: the steel trust in did a gross business of $ , , , upon which they made a profit of $ , , , and yet this vast amount was only five per cent. upon the trust's inflated capital of $ , , , odd; and as the "system," in regulating the capitalization, arranged that the preferred stock (and bonds), which represented the "system's" profit, should receive seven per cent., there was not a dollar in dividends for the $ , , of common stock which had been sold to the people for, in round figures, $ , , . at the same time the calumet & hecla copper company produced and sold over $ , , worth of copper, upon which it earned, net, over $ , , , which enabled it to pay to the people who had invested in its , shares of stock (par value, $ ), per cent., or a total of $ , , , and, at the same time, carry an enormous amount to its surplus. in the commercial world copper occupies an impregnable position. to compete, it is first necessary to find a copper deposit; then to lock up a vast sum of money for a long term of years before returns begin to accrue. and new copper deposits are as rare and few and far between as lincolns and roosevelts in politics or grants and lees in war. in the last eight years, or since the metal has been prominently before the world of capital, but two great producers of copper have been created--the copper range at lake superior, michigan, and the greene consolidated in mexico--and these two mines have only, at the end of six years, after an immense expenditure of millions (copper range, with a capital of $ , , , , shares, par $ , which sold in the open market a few years ago at $ , now selling at $ , and greene consolidated, with a capital of $ , , , , shares, par $ , now selling in the open market at $ ), reached the point of profitable production. their combined output, while reaching the (for young mines) unprecedented amount of one hundred and odd million pounds of metal per annum, constitutes but a fraction of that which mother earth has given up during the period of their development, namely, , , , pounds, all of which has been disposed of and cannot again be used to satisfy a ravenous consumption. it seemed to me, then, a curious anomaly that, while capital was chasing investments which promised but four per cent., it eschewed copper which yielded from sixteen to twenty-five per cent., and my investigations told me that a producing copper-mine is the surest business venture a man engages in, for, by the time it begins to produce profitably, it must be so far developed that its owners are certain of ore to work on for decades ahead. a good copper-mine is really a safe-deposit vault of stored-up dividends, which cannot be stolen nor destroyed by fire, flood, or famine. calumet & hecla, for instance, though it cost its first owners but a dollar a share, has paid out $ , , , or $ per share, or , per cent. on its par value of $ , and while it has been paying dividends over thirty-five years, it paid last year $ per share, and has more in sight than it has yet paid. and copper range, though but six years old, will be producing soon as much as calumet & hecla, and has now in sight ore to keep it going fifty or sixty years. having pieced together all the facts and circumstances in this connection, i was sure that i had grasped a principle of great commercial value, and i set about finding a cause why the world of capital should for so long have overlooked the tremendous potentialities of this industry. i found the cause in boston herself, in the characteristics of the city, which was head-quarters for copper, and which had grown in financial power with the revenues her mines earned for her investors. boston controlled and managed the copper industry, and had since the days when copper-mining was a hazardous pursuit, in which only bold and speculative souls dared engage. in the early days the canny bostonian demanded for the honorable dollar his parent had earned--exchanging five-cent rum for human beings worth $ , apiece--at least twenty per cent. interest, and having acquired this habit, it became a principle, and such principles as these are clung to in boston with the zeal of a miser for his hoard or of a martyr to his faith. looking back over the years, i still recall with chagrin the quiescent hilarity of the scion of a back bay family whose good father had been one of the most successful and most brutal of all the "east india traders," when i suggested to him that he was fortunate in obtaining twenty per cent. on some copper ventures about which he was grumbling. (my readers must not confuse a boston grumble with the ordinary ejaculations of discontent indulged in by the inhabitants of other portions of the world remote from the hub of the universe. a boston grumble consists of an upward movement of the eyebrow, a slight twitch of the mustache and a murmur cross-bred from "deuce take it!" and "scoundrelly!") "young man," he said, "my father said that such a hazardous venture as copper should return at least thirty per cent. to be safe, and i feel if i receive but twenty per cent. that something is radically and unpardonably wrong with the management of the mine." i did not pursue the argument, for i knew he inherited with his fortune a line of boston reasoning, and i remembered once having watched a country boy put his tongue on a frosty iron door-knob. i knew better than to invoke again that wintry boston smile, which in a western or southern community would be used to _frappé_ mint-juleps or cold-storage hogs with. no better illustration of the attitude of the shrewd new york investor to "copper" can possibly be given than to detail my first interview with h. h. rogers and william rockefeller on the subject. to-day mr. rogers is known throughout the world as the leading figure of the copper world--the copper czar, so to speak; yet it was only nine years ago when i said to him at the end of a gas-talk: "mr. rogers, would mr. rockefeller and yourself look into copper?" "copper?" said he in an amused way, "copper? what kind of copper?" "why, copper such as we know in boston--copper the metal, copper the industry, copper stocks." he burst into one of his jolly laughs. "look into it? why, i don't know a thing about copper other than that we had old copper kettles when i was a boy which were used to fry doughnuts in, but i suppose my plumbers would look at anything you wanted, for i remember i get big bills for copper tanks at the house." footnotes: [ ] for those unacquainted with such business terms as "gross" or "net" profit: gross profit on business done is that first profit which remains after deducting the first cost of producing the goods--in this case copper, the metal; and from this gross profit must be deducted other expenses, such as unusual development expenses, the expense of running the executive departments, interest, etc. this leaves the net profit which is available for dividends. chapter viii my plan for "coppers" the plan i had so carefully formulated in connection with "coppers" was simple in application yet vast in scope. it was to buy up all the good producing mines at their market price, or double if necessary, to organize them into a new corporation and offer its stock to the public at a capitalization of double the original cost. by advertising the exceptional merits of the copper industry and the financial power of the men who were backing it, the public would become educated to a knowledge of the values of "coppers." under this education the world of capital would invest in copper shares until the price had advanced, because of so much capital seeking this form of investment, to a point where the net return was brought down to the going rate of, say, four per cent. this would mean that the old going prices of good producing boston copper-mines would advance to per cent., which in turn meant that those who risked their money in the first venture (which i figured would require $ , , ) would make $ , , to $ , , , while at the same time the public would make $ , , to $ , , . this seems like an "aladdin-lamp" story when it is told, but, as a matter of fact, prices afterward did advance in this ratio, and and per cent. beyond, and many of them, notwithstanding the tremendous drops that have taken place since, still show from to per cent. advance over the prices then in vogue. _never in all the history of business was there afforded capitalists so fair an opportunity to make honestly and legitimately so vast a sum of money and at the same time to do so much for the people. nor was there a more honorable undertaking nor one which a man could be more justly proud of carrying to success._ as time went on, this big enterprise was more and more in my thoughts, and i tested it in every way i knew, going over in my mind and trying out each successive step and link until i was certain the whole structure was unassailable. then it became my purpose in life to launch the venture. the difficulties of the task were never for a moment overlooked, for i well knew that much money would be required, but with strong backing success was sure, and such a success was tremendously worth attaining. next to putting in force my financial invention which would remedy the evils of the "system," this great copper project seemed the thing--the dollar thing--best worth doing in all the world. it was to execute this project that i allied myself with the "standard oil" party, for with their money and backing i knew i could carry through my plans on the lines i had so carefully mapped out. the chief indictment my critics brought against me when my series of articles appeared in _everybody's magazine_ was that i had turned "state's evidence." having been "in with" "standard oil" in their robberies of the public, it was not until we disagreed and "split" that i thought of taking the public into my confidence. the truth is, my relation with "standard oil" was different from that any other man ever had with that mysterious and reticent institution, and throughout the copper crusade i insistently blurted out our plans and purposes through every channel of publicity i could command. at no time was there the slightest secrecy. from the very first day of the campaign i told the story as i tell it here, and i told it from the housetops by newspaper interviews and advertisements, market letters and circulars frankly and freely explaining what i was about. the absolute truth of the foregoing is easily proved through existing records, for the press of the country contains an almost continuous story, beginning in and running up to date, wherein i have openly and fairly told what i knew about "coppers" and detailed the progress of our plans. time and again, during this period, financial writers commented on my frankness, quoting brokers and bankers to the effect that "lawson will surely have his head dropped into the 'standard oil' basket if he keeps telling people all he knows in this fashion." for the complete realization of my project the public's interest was essential. the creation of the vast business structure that i had designed required the participation of the great mass of the people, and i was determined that no subservience to the selfish ends of my associates should swerve me from my plan. i saw the enterprise whole; saw that there was great profit for all concerned, for "standard oil," for myself, and for the public; but if the public were not taken care of or were discouraged from participation, then my institution would surely be only another combination of capitalists and i should fail in my ambition. this is why i so persistently kept in the open throughout my "copper" campaign. i fully realized how anomalous my position was and how far i had departed from "standard oil" precedents; but my thought was to protect the integrity of my enterprise, and the best way to do this was to have the people partners in its conception and development. to be perfectly frank, the prospect of millions of profit counted for less in my calculations than the honor and prestige i foresaw in the success of my copper structure. as proof of this, witness how i voluntarily gave back the millions i had secured, to make good. to create a great institution, to erect a new and absolutely staple investment, and in doing so to make millions for one's partners, one's self, and the public, would be to live not in vain. the knowledge of my attitude will perhaps help my readers to comprehend the enthusiasm with which i entered into my "copper" crusade; help them to understand how strongly i resisted, and how deeply resented, the perversion of my fair structure into a pitfall for those i had expected to benefit. my indignation against the "system" is that which any honest man would feel against ruffians who had used his best ideas and his most generous feelings to lure innocent and unoffending people into some den of vice and infamy. if i have not troubled to correct the misstatements of detractors who, in an attempt to discredit my facts, have tried to pillory me as a traitor, it is because i knew that when my complete story reached the public it would make plain how and what i had been doing. the succeeding chapters of this narrative will yield unimpeachable evidence that all my dealing in "coppers" as an associate of "standard oil" were open and as much in the interests of the people as it was possible to have them. chapter ix birth of "coppers" active upon the boston market during my bay state gas operations were two copper-mining companies--the butte & boston and the boston & montana. their properties were in montana and both were large producers of the metal, that is, they were old and equipped mines. these two organizations form to-day the most valuable part of the amalgamated copper company--in fact, more than three-quarters of all the real worth owned by that corporation. butte & boston and boston & montana were essentially boston institutions, and were both officered and directed by the same set of men. it had come to my knowledge, in the course of my stock business, that there had been bought for the butte & boston, with its money, some very valuable mines; instead of transferring these to that corporation, however, its directors at the last minute had turned the titles over to the boston & montana. it is only fair to these men to say that up to the present this alleged fact has not been proven, although set forth in cases still pending in the courts. this curious proceeding was part of a plot the subsequent steps in which would be to run butte & boston through the bankruptcy mill, and, by placing it in the hands of a receiver, to drop the stock to a nominal figure, at which it might all be gathered in from the public. i verified my information sufficiently to decide to act, and swung the red danger-signal in a public statement telling the stockholders and people in general of the coming move. at once there arose a chorus of denials and recriminations from the management, and the cry, "he's short of the stock and is working a fake to scare us into throwing over our holdings that he may buy them," from the stock exchange, stockholders, and the hireling moulders of opinions, the "news bureaus." the rôle of cassandra is not more popular to-day than it was in ancient troy. the swinger of the red danger-signal is seldom heeded, and is invariably suspected of interested motives by the human moths circling round the flickering flames of frenzied finance. when i gave my warning, butte & boston was selling between and . in accordance with their plan the insiders began to sell, and soon the price began to slide downward, for the great majority of the stock was held by the people. there was a halt when the denials of the management were heard, but only for a moment. the decline continued, growing swifter as it got lower until the stock struck $ per share. at this stage, while the stock was on the way to $ , just as i had predicted, the property was cleverly slid into a receiver's hands by the very men who had so indignantly denied my statement that such would be their action. an assessment of $ per share was next levied, and those who held on, hoping against hope, began to throw over their holdings for what they would bring--which was around a dollar. so far the scheme had slipped smoothly along the single-rail track constructed for it by those in the deal, and just as my information had led me to expect. at this juncture, however, the train struck an open switch, and with a painful jolt for the conductor and the engineers it slid out on a siding--it was my siding. from the time the stock struck $ a mysterious purchaser took in all that was offered, and when it struck bottom he was still buying. suddenly the schemers "tumbled" that the plums they were shaking off the tree were dropping into some other bag than their own, and they started into competition for the coveted fruit. next day, and for several days afterward, there were strenuous doings in butte & boston on the boston stock exchange. the trading was heavy and the price pushed up from the bottom to - / . soon, however, it was slammed to - / , then back to again, down to - / , back to - / , and so on, until the middle of the fourth day, when the rival news bureau to the "system's" favorite opinion-moulder sprang the following notice set forth on a double-leaded sheet: "we have just solved the butte & boston conundrum. the enormous blocks of stock purchased during the past few days have come in for transfer, and the management now know who owns the bag into which all the stock they have for months been planning to acquire dropped. we have unmistakable evidence that the bag belonged to lawson, and that he now is in control of the butte & boston company. a hasty investigation amongst the leading floor brokers which we have just made brings out a consensus of opinion that there will now be music in coppers." the announcement was calculated to interest a good many persons, and i was the target of a thousand inquiries. in answer to the innumerable calls for a denial or confirmation of the statement, i issued the following: 'tis true. 'tis my bag, and there are , shares in it. it was not until the following morning that i realized what a rarely presumptuous thing i had done. i had invaded a valuable preserve. i had coarsely "butted into" a private copper domain without a by-your-leave to the natives who thought it belonged to them. i was an interloper, an intruder, an upstart. the prevailing opinion seemed to be that it now devolved on me to present what i had purchased to those who had been a bit late in getting to the bargain-counter, or that i should, at least, turn it over to the conscience fund of the stock exchange. the copper market reflected the indignation of the baffled schemers. it entered for once into an open competition with donnybrook fair, and to judge by the action and feeling developed in both individual and corporation classes, the hub had donnybrook jigged to a wind-up. in my various contests with the "system" i had accumulated a certain hardihood which now stood me in good stead. i had learned before this that breaking into a secluded treasure-trove is about as pleasant as taking the lining out of a steel furnace with the metal sizzling and the blower on. i stood to my guns for the time being and then charged into the ranks of the enemy. i issued the following statement: to my fellow-brokers and the public i have stumbled on the fact that the stock--capital , shares--of the butte & boston copper mining company is a nugget. i bought about , shares of it at an average of something over - / , or, with the assessment paid, - / per share. i am going to hold it until i get over for it. barring accidents, i shall get it. i advise--strongly and unqualifiedly advise--all my friends and the public to load up with it at anything under that price. my friends and the public know whether or not i mean a thing when i say it. i pledge them that i not only mean this but that i shall fight it out, and shall not sell until there is an active and legitimate market for not only my stock, but for what they buy, at over $ per share. all intending purchasers must bear in mind this is not a sure thing, for the men who are opposing, and will oppose me, are not conducting their operations from a graveyard, but are as lively and aggressive as bengal tigers at raw-meat time; but they may rest easy in the knowledge that barring tripping over stumps or into bogs, i'll give whoever buy a run for their investments. buy and watch butte all the time, and, above all, pay no attention to what the fake "news bureau" says. this was the formal declaration of war. state and wall streets, familiar with my style of fighting, at once lined up and took sides. the papers entered the controversy. according to what one read, butte & boston was either the greatest mine in the world or a hole in the ground. feeling intensified; geneva and queensberry conventions were forgotten; it became a go-as-you-please scramble; mud batteries filled the air with liquid dirt, and both sides used gatling guns to fire off their libels. it was altogether a lusty and vociferous contest, which meant destruction and death for the lame, the halt, and the slow-footed who got between the fighting lines. i was naturally the chief mark for the enemy, and was deluged with vilification. in the bay state campaign i had learned the personal cost of antagonizing the "system"; the copper magnates showed me that they had terrors at command which might make even "standard oil" jealous. in those days i don't believe my bank account varied thirty-five cents without the news being passed around before the ink on the bank-book was dry, and my family, down to my ten-year-old, received daily or weekly through the mails pictorial representations of their parent being hustled along to the realms where sulphur is the standard of all values. here is a sample of my usual breakfast-table reading: c. w. barron, the proprietor of the "boston news bureau," feels it his duty to inform his readers, the banks and bankers and brokers and representative investors of new england, that that faking ass of state street, that knave of knaves, tom lawson, is braying again, and such braying!--"butte is to sell at , and going to be worth ." it would be such a joke that this conservative paper would be only too happy to circulate this scoundrel's vaporings, if it were not for the sad part of such schemer's work--if it were not that the poor and ignorant unfortunates who are unacquainted with this knave, may buy butte because of his advertised lies at $ or $ a share and thereby be robbed of what they can ill afford to lose. there is no more chance of butte & boston stock selling at $ , or even $ , than there is of tom lawson telling the truth; and this paper does not hesitate to say that if butte stock ever does sell at , we will upon that day close up our office and forever leave boston and our lucrative business of guarding investors against such knaves as this lying thief; for any man who would do what he is doing to fleece investors is a thief and should wear stripes, and it is surprising to us he has so long escaped. it was not so long after the above appeared that butte & boston stock was selling at $ per share, and that the same mr. barron was using his own and his "news bureau's" best efforts to induce the people whose butte showed them over $ a share profit to exchange it for amalgamated. at this latter time he was acting for "standard oil." it may be added that this same butte & boston stock, which i was such a knave to advise the people to buy at twelve and fifteen, sells to-day in the form of a share of amalgamated, for which it was exchanged at seventy-five to eighty-dollars, not cents. my chief weapon in this butte & boston fight was publicity. every morning while the battle waxed hottest i had huge, striking advertisements in the papers urging the public to buy and to hold on to what they had bought. my opponents responded in kind, and being intrenched in the management, told such alarming stories of the mine that it was often as much as i could do to prevent my followers from being scared into throwing over their holdings. the tremendous expense of this mode of warfare, together with the immense sums my market operations required, kept me hustling, and there were times when things looked distinctly blue. however, the value of victory is measured by the fierceness of the tussle, and far be it from me to complain of my opponents' energy. there was good fighting over butte & boston. the more deeply i became interested in this struggle and the more familiar i grew with "coppers," the more advantageous and profitable seemed the prospects of such a consolidation of copper properties as i had in mind. the large holdings of butte & boston i had accumulated in the battle gave me a practical basis for my structure, for i could now afford to do all my own part of the work of organization for what i would eventually make when the consolidation was brought about, and i could get for my shares what i knew they were worth. it was at this stage i broached the subject of "coppers" to mr. rogers, and discovered to my surprise that he knew nothing about it or its possibilities, notwithstanding that "standard oil" has a department for the sole purpose of keeping the "system" posted about what the world is doing in various directions. indeed, both he and mr. rockefeller laughed when i informed them that we had been trading in copper stocks in boston long before the standard oil company received its birth certificate. before i could get down to business on the subject i had to take advantage of five gas-talks, offering at each a few interesting and striking facts about the metal. one day mr. rogers said to me, laughing pleasantly: "lawson, we're beginning to look for all your talks to taper off with, 'i wish i could get you to listen to coppers!'" "why don't you then?" i said. "it's the biggest opportunity in the world to-day." "i'll tell you what i'll do," replied mr. rogers. "if you will put through for us right away thus and so" (naming quite a difficult little bit of work in connection with the brooklyn gas company), "and do it in good shape, i'll ask john moore to run up to boston next week and listen to your story. if he says it looks anything like good, i'll go over it with you to a finish." the brooklyn job was done on time, and i began on john moore in my office at my hotel in boston just after breakfast one bleak, rainy morning the week following. i talked for five straight-away hours, and he listened. he was a good listener. on all stock things he was admirably posted, and it was not necessary to waste words. i wasted none. i knew my subject from the letter-head to "yours truly," and i was playing for a stake that looked as big to me as the sun does to a solitary-confinement life prisoner. at the end of the five uninterrupted hours i agreed with moore that i had nothing more to produce, and i looked for my verdict. before starting i had felt sure of winning him; when i was half through i knew nothing could stand against my arguments, and when i had said the last word i felt satisfied that, being human and intelligent, he must be convinced. it took him only ten minutes to show me that i had been talking against ten-inch armor-plate, and that he meant it absolutely when he said, "lawson, i want to see it your way, but i can't." it was john moore's turn then, and he showed me the good thing in an industrial scheme he was floating at that time, and as he wound up he said pleasantly: "lawson, we must do something to show for our long talk, so i'll put you down for $ , underwriting." and he did. if john moore had seen "coppers" as i tried to show them to him that wet morning he could not have made for himself less than three to five millions, for in the operation which hung on his decision i had expected to buy stocks that soon after doubled and trebled in value. calumet & hecla then sold at , and later as high as , while boston & montana, then , mounted to . on the other hand, the stock of which he had sold me $ , worth returned at the end of the year but a mere fraction of that amount, and was one of the worst failures of the industrial boom period. it cost john moore not only an enormous amount of money, but also prestige, and its miscarriage was one of the few bad disappointments of his brilliant career. afterward, when "coppers" were the rage and all wall street was green with envy at our success and his enterprise was trying to hide itself behind the garbage barrels, john moore said to me: "lawson, we all think we are the masters of our own fortunes, but we are not. we are only working on a schedule laid out by some one who does not take our desires into consideration." and it is so. the ablest wall street man is only like the burglar who, after working for weeks to loot a second story, is astounded to find, while lugging his swag by the police station, that the bag he thought full of dead sealskins contains a live parrot with a lusty vocabulary, "police! robbers!" chapter x rogers grasps "coppers" the next day our gas business brought me to new york, and after mr. rogers and myself had threshed out the matter i had come about, he said with a smile: "well, i've heard from john moore. are you satisfied now? will you drop that copper will-o'-the-wisp?" "far from it," i replied. "i'm surer than ever of my position. in going over the ground with moore i got the whole business in perspective, and now i know i'm right. all his argument amounted to anyway was that it was impossible for so gigantic a thing to have lain out in the travelled highways all these years." i ran on vigorously for a few moments, in a way i felt might pique his curiosity, if it did not gain my point. finally he said: "well, lawson, what more can i do?" "this," i answered: "go over the matter fully with me yourself. i will surely carry it through one way or another; if not with you, with others, and i cannot drop it with you until i have your personal judgment." instantly came one of those flash decisions for which h. h. rogers is noted among his business associates, the oft-proved correctness of which goes far toward making him the pre-eminent american financier of the day. "lawson," he said, "be in new york next sunday, and i will listen until you have run the subject out." that decision changed the face of the copper world. sunday is mr. rogers' pick of days for a lengthy hearing, and returning from church, he came directly to the "stowaway" rooms at the murray hill hotel, at which we frequently met while the wall street world was trying to trace and keep track of our movements. i had been there for some time awaiting him and was keyed for the struggle. of my ability to land john moore i had felt confident, yet i had failed; but this time in advance i knew success was mine. experience has taught me that in all dollar matters the man to "talk up to" is the actual owner of the dollars you are after, who when he hears your story and weighs your goods can deal out the _yes_ or _no_ which means business. i had discovered some years before that few bull's-eyes are scored shooting at a target by mail or messenger. one's finest word-pictures sound better than they read, and if you would have the next man see them in as vivid colors as they appear on your mind's canvas, you must paint them before his eyes. the enthusiasm of the artist, his love of the subject, the deep or high tones of his voice, the very movements of his hands, are all factors in aiding the other man's vision. when he sees what you do, you have won. nowadays when i have things to sell, i engage the eyes as well as the ears of my purchaser. when the other fellow would make me his customer, he must first sell his goods to my secretary, who may, if he can, sell them to me. thus i am always able to dispose of the only merchandise i keep in stock, honest goods, and i seldom buy chromos for oils. as i waited the coming of my most powerful customer, i could not keep my mind off the momentousness of the interview before me. i knew i was at a fork of the road, at one of those departure points from which coming events must date, and i thought of a dream i had had years before in which i found myself drifting with the grim ferryman across the brimming flood, the far bank of which is eternity. in my hand was a long staff with strange and irregular notches on it. and these represented the actions of my life. some were shallow, others deep and wide, and as i ran my fingers up and down, i seemed to remember what each nick commemorated--the good things and the bad things, here a death, there a disappointment, this a victory, that an error. i wondered, as the circumstances of the dream came to my mind, what kind of marking this day's events would make on my life staff, and i felt a conviction that it would be both deep and wide. then, as i heard mr. rogers' footstep outside my door, i forgot all about dreams and notches and plunged into my argument. "mr. rogers," i began, "you and your associates have unlimited money. you have not always had it. you have obtained it through business projects and you are using it in business projects to get more. there are two ways of adding new dollars to those in your possession: by taking them from others so they are losers and you the gainer, whereby you win at the cost of their happiness; or by expanding the world's wealth so that others gain when you do. you, i know, prefer the latter, that others should make money when you do, rather than that they should lose and suffer when you are benefited." i did not then know "standard oil's" and the "system's" religion as i do now. i had yet to learn the cruelly cynical principles that guide this financial juggernaut in its relation with men and things. i imputed to it the generosity and freedom which seemed to characterize henry h. rogers' personality, ignorant that the man and the machine he served might stand for different things. the "system's" big book says: "a dollar honestly made makes another for some one else; but a dollar taken is two dollars, because it increases our power and diminishes the people's. between the 'system' and the people must be eternal war, and it is the price of the 'system's' existence that all opportunities of weakening the people are sternly utilized." "mr. rogers," i continued, "i have discovered in 'coppers' an opportunity whereby you and your associates can, by the investment of a hundred millions of dollars, obtain these results: _first_, your money will be as safe as in anything you now have it invested in. _second_, by indorsing this form of investment with the seal of your business success, you will make it known to all who have money and there will at once arise a tremendous demand for its securities. this demand will drive prices up until dividend returns are in normal proportion to the legitimate value of the security, namely, four to six per cent., which is, as i can prove to you, a little more than can be got from anything else but 'copper' with the same elements of safety. _third_, when the advance i foresee occurs, your one hundred millions have doubled, and all those who have joined us in the venture or have held on to their stock will gain in the same proportion. as i estimate that we will have but a third interest in all the good american 'coppers,' there should be something like $ , , for the people, while we will have made $ , , . to bring this about i have planned a campaign which will make what you have done known from one end of the world to the other, and will persuade the people at large to look at 'standard oil' in a more favorable light than they do now. and, what is more, all this money can be made and all these benefits rendered without taxing any one a single additional dollar, for there will not be a penny a ton added to the price of copper the metal, nor a reduction of a mill a year taken from the wages of those who mine it or work it." here i halted. i had made a beginning, and i was familiar with mr. rogers' system of diagnosis and treatment. propositions placed on his operating-table are invariably dissected in parts--this is the winner's method; so if, under the probe of his keen mind, one section or limb is found stiff, dead, or unhitchable to that to which it belongs, he at once stops operating and the corpse is removed. "how is it the situation is as you outline it?" i drew the picture of copper boston as i have given it in the early part of this chapter. it astonished him. "how do you prove that safety in this class of investment is more assured than in others?" i reeled off the facts: a copper-mine, from the very nature of the business, must be developed years and years ahead before it entered the ranks as a regular producer. the price of the metal being practically fixed within certain limits, the mine's value, present and future, could always be told to a certainty. he saw it. he put me through a thorough examination about my second claim that the price would advance per cent. i again astonished him by showing him what a market there was and had been for many years for copper stocks, and that it was simply a question of educating investors at large to their merits to advance them to the price my plans called for. when he came to the question of the amount to be invested and the aggregate amount of profit, he did not attempt to disguise his surprise when i showed him there were , shares of boston & montana which had been selling at -odd and were now -odd, and could surely be bought between and ; and , shares of butte & boston, , outside of what i and those who had bought with me owned that could be had at an average of or ; that there were , shares of calumet & hecla, selling at , large quantities of which could be gathered in between that price and , and so on through the list. mine after mine i enumerated to him, all as sure dividend earners in the future as they had been in the past, to an aggregate, without touching any of the uncertain ones, which it would surely take one hundred millions to purchase, and as i called them off, he listened patiently while i gave him a full history of each. then i outlined my sensational but never before attempted plan of campaign for educating the public, he vigorously questioning me as to details and particulars the while. it does not take henry h. rogers months, weeks, nor even days to grasp any plan, however vast, nor many minutes to come to a decision after he has grasped it. i believe he would, if the world were going to be auctioned off next week, be the first man on earth to decide upon a limit price that he would take it at, and three minutes after it was knocked down to him he would be selling stock in it at per cent. profit. just before lunch-time i saw that the effect of my arguments on mr. rogers was the exact opposite to that they had made on john moore. when i had come to a finish, mr. rogers simply said: "it's curious, lawson, why i have not listened to you before. i'll talk with william rockefeller to-morrow. no--i'll make it this afternoon if i can get at him." and his eyes snapped a bit when, as i was helping him on with his coat, he said, "we must not lose a minute in getting to work." as he left the hotel and before i crossed the street to the grand central to take my train back to boston--i suppose i should not say it, but i shook my own hand in self-congratulation. how many times since i have thought that had old dame fate but hung out a danger-signal for this faithful servitor of her behests, or had but given him a glimpse ahead through the years , , , , , and , instead of using his hands in cordial self-clasping he would have employed his feet in the more fitting task of kicking himself. if henry h. rogers had been slow at getting started on "coppers," once in he made up for his early tardiness. after our sunday interview things moved swiftly forward. before noon next day he called me up on the telephone to say that both he and william rockefeller were impatient to have my facts and figures verified, and would i at once send my data to start his experts on? i mailed him a bale of "pointers," and from that hour until the flotation of amalgamated mr. rogers' enthusiasm on "coppers" constantly grew until there actually came a time when it went beyond my own. it took him months to complete that rounding-up of the situation which is the absolutely necessary preliminary to the making of final decisions on any far-reaching and important project to which the magic name of "standard oil" is to be permanently attached. this period of waiting i duly improved by continuing my fight on butte & boston, and by way of intensifying the campaign i included boston & montana in the tussle, and led a fierce attack into the stronghold of my opponents. while this war was at its bitter height i received word from broadway that at last reports were all in, and that they were ready to talk business. next day i was in new york. "lawson," said mr. rogers, "our experts have examined your plans step by step and have verified your conclusions. it is an exceptional situation, and one we are equipped to handle." then and there we had a "to-a-finish-sit-down," and while i had in my time gone pretty thoroughly into the general subject of "coppers," and thought myself well informed thereon, i was surprised at the completeness and detail of the reports that had been prepared for the "system's" master. in beautiful shape, concise, clear, comprehensive, the entire copper industry of the world was spread out before me. every mine had its place and its history--not merely the mines of america, but those of europe as well; and fully set forth were the extent and cost of the product of each, the profit it made, the men who owned it, and--miraculous "standard oil"--the standing, financial and otherwise, of the men who might have to be dealt with in our prospective trades. rogers smiled watching my growing surprise as i ran over the extraordinary budget of facts he had collected. i said to him: "this is wonderful. you have here all there's to be known about the subject, and i marvel how you got hold of so much inside information." "'standard oil' has its own way of doing things," he replied. "you told us your copper plans would mean an investment of $ , , of our money, and now's the time, not after we have parted with it, to find just what we are to get for it." the world has never yet heard of "standard oil" locking its barn door after some one has stolen its mule; for that matter, it is not of record that any one ever locked the gate after his barn had been visited by "standard oil." the reason is that, with the thoroughness characteristic of this great reaping-machine, it never fails to take the barn with the mule. at this meeting it was agreed that henry h. rogers, william rockefeller, and myself should become partners in my plan of "coppers," they to furnish the capital and to have three-quarters of the profit, i to have the remaining quarter. the campaign for the execution of the enterprise i agreed to work out and submit as soon as possible, and we parted. as i bade them good-by mr. rogers said to me: "your baby is born, lawson, and if you put the same kind of work on raising it you have in bringing it into the world, it will be a giant." from that day it was understood that we were together, and that all my dealings in "coppers" outside butte & boston were for the joint account--that is, they were to have the right to come into all my operations. those they did not care to join in i had the right to put through alone. on the other hand, i must not undertake anything on their behalf without a specific understanding with them. thus began amalgamated, that extraordinary dollar-thing which shot up in a night and grew as grows the whirlwind, until even its creators wondered at its mightiness. it waxed greater and stronger while the world watched and waited, until finally there came that tremendous and unprecedented culmination when lines of investors fought round the portals of the greatest money mart in america, the national city bank, for a chance to obtain the $ shares of this $ , , institution. and the world wondered indeed when it was announced that amalgamated had been oversubscribed over $ , , . thus began amalgamated. it might have brought to all the world good-will and happiness, and to the men who made it much glory and the great regard of their fellows. instead, it has wrought havoc and desolation, and its apache-like trail is strewn with the scalped and mutilated corpses of its victims. the very name _amalgamated_ conjures up visions of hatred and betrayal, of ambush, pitfalls, and assassination. it stands forth the judas of corporations, a monument to greed and a warning to rapacity. may the story that i am to tell so set forth its infamies and horrors that never again shall such a monster be suffered to violate and defile our civilization. chapter xi the copper campaign opens my plans for the great copper campaign were most carefully diagrammed, then spread before mr. rogers and mr. rockefeller, who, before approving, tested every detail of them. the formal scope of our action decided on, it was agreed that i should be free to work in my own way, and it was understood that i should, as far as possible, carry the campaign on my own shoulders, using to the limit my personal capital and credit. "coppers" was to be a lawson operation on the face of it, and i was determined, for many reasons, to avail myself of "standard oil's" aid only in taking care of completed transactions and not at all in the preliminary negotiations. this was not always possible, but my attitude in the matter and my desire to make a brilliant showing explain the straits i was sometimes put to in conducting some of my deals. from the start i had a big personal stake in the success of my campaign, for at the time i first showed mr. rogers my hand i had , shares of butte & boston, and my following among the public owned as many more. they had agreed that the profits on this stock, when it was taken into the consolidation, should be mine entirely in payment of my own work and risk. there was another transaction i had in mind which also fairly belonged to me. as i have stated, i had undertaken to dispose of bay state gas stock, and by this time i had succeeded in placing a large number of the shares. the proceeds, $ , , , were in the treasury of the company. now the charter of addicks' company permitted it to buy, sell, and deal in anything and everything, and i saw here a good opportunity to enable bay state to earn the balance of the money necessary to relieve its indebtedness to mr. rogers--between four and six millions of dollars. so i explained to mr. rogers that as soon as our copper deal had progressed to a point where there was absolutely no risk, and a large gain was assured, i would make a bargain with bay state whereby for a part of the profits i would pilot the investment of the company's cash in butte & boston. this proposition he considered fair, and he agreed that neither he nor mr. rockefeller would consider themselves "in" on that bargain, save as indirectly profiting by it through the successful winding up of their boston gas investments. it is impossible for any great move to be begun in the stock-market without some suggestion getting into the air which notifies "the street"[ ] that "something is up." not long after my alliance with rogers had been formally arranged, the atmosphere of state street grew thick with rumors about "coppers." some of these announced that i had hitched up with "standard oil"; others denied it; between them all a movement was created, and the leading stocks became very active and increased rapidly in price. we had agreed that the first companies to go into our consolidation should be butte & boston, boston & montana, calumet & hecla, osceola, quincy, tamarack, and any other of the long-established properties of which we could get hold. it would be difficult, we knew, to purchase the control of the calumet & hecla, for its owners thought too highly of their investment to part with it, but it was safe to buy whatever was offered, and if we accumulated less than a majority of the shares we could easily resell at a large profit. i began my operation with boston & montana stock, buying cautiously and obtaining it at fair prices, and this transaction, though conducted quietly, added fresh fuel to the rumor blaze. finally boston became so excited over the situation that i came out with a public statement in which i frankly showed what i was trying to do. in all such affairs, however, the explanations of any man known in his business as a stock speculator or manipulator are never accepted as true. it is assumed that such announcements are merely blinds to disguise his real purpose; that they are feints or manoeuvres in his campaign. so when i declared that i was working out plans for the consolidation of all good boston "coppers," and that associated with me were the strongest capitalists in the world, a laugh went up from a goodly portion of "the street." the hireling news bureaus shrieked at my presumption and the absurdity of my combination, and when after a hot day's operations i was quoted in the financial press as telling my followers that it was "standard oil" money which was to back "coppers," barron, whose news bureau moulded opinion for the opposing copper magnates, came out with a statement: "lawson is spreading in his peculiar underground ways that the standard oil crowd is looking into coppers. just enough countrymen swallowed his yarns to enable him to boost prices over six points to-day, but by to-morrow, when the rockefellers or rogers of standard oil put their foot down on his transparent lies, those who were foolish enough to listen to his ridiculous fakes will find they must sell at a loss. we can say, on a high authority in standard oil, that they have never bought nor contemplate buying a share of any copper stock." my enemies were numerous and powerful, and there were many other announcements of the same character as barron's tending to cast ridicule on my movement and expose me as a falsifier. indeed, notwithstanding the merits of the plan and the benefit it must confer on all copper properties, i was assailed as fiercely as though i had advocated anarchy or had prepared a scheme of wholesale plundering. in stock affairs innovations are resented and resisted even more fiercely than in other walks of life, and the boston money crowd fought me tooth and nail. the titles i acquired in those days were varied and startling. for one set i was a "charlatan," "wizard," "fakir," an "unprincipled manipulator"; in another i was a "copper king" or a "prince of plungers." feeling ran high, and prices rose and fell in the most erratic and extravagant fashion. certain stocks advanced or receded from five to ten points in as many hours or minutes. fortunes were made and lost daily. many people, confused by the conflict of opinions and announcements, sold their holdings, only to repurchase at higher prices as prices continued to mount. so fiercely was i attacked that it almost seemed at times as if my enemies might prevail in spite of the great powers at my back. indeed, there were tense moments when my fate as well as my plans trembled in the balance. several times i was sent for by rogers and his colleagues for a war council, and sometimes, as i detailed my lines of defence and enumerated my resources, i suspected that even these storm-seasoned warriors were tiring of the fray. the fiercest fighting at that early period centred round butte & boston and boston & montana. many a spirited engagement we fought on the floor of the exchange. perhaps the fiercest of these began when, after a strenuous rush one morning, i rapidly carried the price of butte up. this exploit so enraged my adversaries that they got together and organized a powerful combination against me. this included several of the leading banks and trust companies of boston that held large amounts of stocks as collateral for my loans. at a given moment it was arranged that all these loans, aggregating millions of dollars, should be called; and further to intensify the complication they expected to bring about, a great friend in common attempted to scare mr. rockefeller and mr. rogers by informing them that the titles to the copper properties were defective, and that a man, then unknown, named heinze, who had made himself very strong with the montana courts, was about to make a move to confiscate them. there was a hurry call for me from new york, and this time the explanations had to be very full, for "standard oil" had an impression that while my general plan might be meritorious, it was possible that i had the details "skewed." however, i satisfied them as to the facts and then hurried back to tackle my own problem, for these individual engagements i handled myself, using my own personal resources to take care of them. the emergency that had developed thus suddenly was so serious as to be alarming, and it devolved on me to act, and at once. blows in finance are like those at sea--the most dangerous are the quick-come-quick-go kind. i recalled one i had run into a short time before on my sailing yacht. we were broad-reaching down the new england coast, close in, with a -knot sou'wester blowing. suddenly, without apparent reason, my skipper put the wheel hard down and brought the craft up standing. a second later a "twister" from the hills hit us, and adroitly he headed her into it. "how in the world did you know that was coming?" i asked. "i smelt her, sir," the old sea-dog replied, "just smelt her." for those unacquainted with the freaky ways of our new england coast winds it may be explained that when a "twister" off the hills gets ready to do business in a -knot sou'wester it sends no messenger boys ahead to distribute its itinerary handbills. you hear one shriek and the blow is upon you; and woe betide the unthinking skipper who attempts holding his craft to her course or paying her off till she catches it full. he is likely to have mourners at home if a married man, and "cussing" owners if the craft is not his own. as my old sea-dog afterward wisely observed: "when you smell a land 'twister,' act first and think atterwards, or your widow 'ill get blear-eyed watching for you to make harbor." in the stock-market it was decidedly a case of "act first and think atterwards." the "twister" was a fierce one, for not only were my stocks assailed, but the rumor machines were turning out all sorts of yarns affecting my credit, as the knowledge gradually filtered through the market that my loans had been called. my stocks broke badly, and when the market closed it really seemed as though i might have to verify the report that they would wind me up the next day. it was at this particular stage that the bay state was let into the deal. i had a long consultation with addicks that night and showed him my hand. he agreed that with what i already had of the stock and "standard oil's" backing, the venture came as near being an absolutely sure thing as could ever be found in stocks. my proposition was that i should secure for the bay state company , shares of butte at an average of to , and that i should have half the profits of the venture provided they aggregated over two millions of dollars. coming to addicks in this emergency was cold-blooded business on my part, and, it goes without saying, was frozen-blooded business on his, for he evidently saw then what i did not until later, that there was an excellent opportunity to practise his pet game--make money and double-cross his partner while doing so. we clinched the deal that night, and next day in the market i turned the tables, for i took every share my opponents offered for sale, and the stock, instead of dropping out of sight, became firm, then began to mount, and never after fell again. the bay state's venture showed a profit afterward of four millions of dollars, but of my share of this large sum i was deprived, as i will detail later. at this juncture there occurred one of those strange and sad fatalities which with its attendant circumstances helps to explain why those of us who play with stock-markets grow superstitious. i have spoken of my secretary, mr. vinal, a man of admirable discretion and absolute loyalty, who was my right hand in executing the minutiæ of the various operations i then was engaged in. in such affairs the fidelity of one's aides must be beyond all question, for if the merest detail of one's plans leaks out at the critical moment, one is undone beyond recovery. after my talk with addicks i had laid out the campaign for the next day's engagement and called in vinal to explain to him his own part. he was to attend to taking up and transferring the loans that had been called, and i armed him with my power of attorney and blank checks, instructing him to put these matters through without further consultation with me, for my entire time must belong to my brokers during the battle of prices which i knew must inevitably come with the stroke of the gong that opened the exchange next morning at ten, and which would rage until its close at three. as i had anticipated, the assault was fierce. it was give and take, charge and retreat, all day. a few minutes after twelve, vinal pushed through a crowd of brokers to me and said: "i'm about half through my shifting, but a telephone has just come from mrs. lawson saying that something has happened at the school and will i at once get a carriage and bring your daughters home. it will take half an hour. shall i go?" i replied: "you had better, but get back as quickly as possible." a minute later a thought occurred to me, and i sent a boy to call vinal back. he reported that my secretary had jumped into "ben's" cab ("ben" was a cabman whose stand had been in front of my office, state street, since my boyhood days). i returned to the fray. fifteen minutes later the appalling message that startled all boston at the time came over the ticker tape: "terrible explosion! boston gas company's pipes in the subway have blown scores to death." then there floated in to me a rumor, vague, indefinite, that vinal was a victim. i jumped into a cab and in a few moments was at the undertaker's to whose place the corpses were being removed. the undertaker stepped up to me and said: "poor vinal! don't look at him, for it is frightful. he was on the very apex of the explosion, and he and 'ben' were both instantly killed and are frightfully burned. the only thing recognizable is this envelope, which i found among the rags that were left of his coat." he handed me over the large envelope in which i had seen vinal that very morning depositing the various documents, checks, and securities which he required for his day's operations. it was burned around the edges, but the contents were uninjured, and among the papers was a carefully prepared memorandum showing to a dot where my secretary had left off in his exchanges. he had evidently just finished making notes, for so carefully arranged were the contents of the envelope that all that was necessary to complete the business was to turn it over to vinal's assistant. no further explanation was required. that envelope represented two millions of money and securities. poor vinal! another victim of that soulless corporation hag, boston gas, to prolong whose life he had spent some of the best years of his own. vinal was very dear to me. he had filled my canteen, held my ammunition, and carried my knapsack through many a hard-fought battle, willingly allowing others to do the cheering in victory, but reserving to himself the right to suggest and console when the clouds lowered and we were left alone on the field of defeat or the dusty road of retreat. poor vinal! he was worth a hundred copper deals or corporation hags. between death and life, success and failure, what a hair's-breadth after all. if vinal had stubbed his toe, or had been able to take the first cab he found; if he had heard my call which would have brought him back; if he had tarried a moment longer in the young men's christian association where he had stopped to deliver a message, he would have escaped. the thought did not occur to me at the moment, for vinal's death was too keen a personal sorrow to allow me to estimate my own narrow escape, but if that envelope, so miraculously preserved, had been burned as were the other papers in my secretary's pocket, there might have been no amalgamated. "coppers" must have dropped back to the lowly place from which rogers had lifted them, for i should have been financially ruined. to show the marvelous workings of him who tempers the wind to the shorn lamb: at the same moment that i was called away from my guns, the commanding general of the opposing forces received the same call. the aged mother of the president of the boston & montana and butte & boston, while riding in her carriage, had been a victim of the same explosion. footnotes: [ ] "the street" is a general term used to designate the stock operators, the fraternity in new york being known as wall street, in boston as state street, and in philadelphia as broad street; these streets are the centre of the financial districts of their respective cities, the stock exchanges being situated on them. chapter xii the buncoing of the stockholders of utah this was veritably a period of financial delirium in boston. no one talked or thought of aught but "coppers," at least no one with a spare dollar or good credit. the air was full of mysterious yarns and the stock exchange was hung with aladdin lamps. from every nook and corner of state street, from the chinks between its sedate old cobblestones, came forth copper-mines--mines undreamt of before and unheard of since. innumerable devices were rigged to take advantage of the prevailing intoxication. the prices of the strong properties leaped up with breath-taking rapidity. the copper epidemic spread over new england and began to extend in constantly widening circles through the rest of the country, while from england, france, and germany came daily news of symptoms which proved that the infection had crossed the ocean. i, with my hands full, kept two secretaries busy shooing away industrious promoters who came at me in armies with old and new copper properties, which i might have on my own or any old terms. in the midst of this excitement i had my first real demonstration of the "system's" method of making dollars from nothing. well as i thought i knew the stock game, i'll admit that i looked on open-mouthed, like the veriest novice, at the magic wrought by the simple use of the name "standard oil." even now i can hear myself as i gasped: "heaven help the people if this sort of thing can be done in america, for heaven alone has power to help them." the boston and new york brokerage house of clark, ward & co. had promoted the utah consolidated mining company of utah. it was less than two years old, and its , shares had been kicked from gutter to curb and curb to gutter at from $ to $ per share. samuel untermyer, the astute corporation lawyer who, on his own account and as the representative of a large european clientele, had long been interested in "coppers," had taken hold of utah, and believing it a good thing had bought large quantities of its stock for himself and his european connections. under the stimulus of my campaign the price of this stock had leaped to or , and rumor had it that utah was a prospective factor in my consolidation. one day mr. rogers asked me if i were in any way responsible for these rumors, and i replied that i knew nothing more about them than that they were in circulation. "good," replied rogers. "do this, then--send word that we propose to issue a denial that we are to have anything to do with utah consolidated, and bring me their answer." i carried the message in person. the utah people were absolutely panic-stricken. such an announcement meant destruction to the pretty price-fabric they were rearing, and they begged to be allowed to make a proposition to rogers before he should declare himself. this was their proposal: that mr. rogers should admit their property to the consolidation provided he found it good enough; that every facility should be accorded his experts to examine the mine; and that if the report was favorable, and they were convinced that it would be, and he decided to take hold, he should be given an option on a block of stock way below the market. this offer i took back to mr. rogers, who smiled one of his thin, easy smiles, and questioned me closely about the genuineness of the market for this stock. could , shares be sold readily? i assured him that when it once became known that we were even looking at utah it would be easy to sell , shares and at constantly advancing prices. "all right," said mr. rogers, "if you're sure of this we'll go ahead. tell them we'll take a sixty-day option on , shares, no liability to us, at--well, we'll be liberal, say at , and when you mention the price impress upon them that i know it cost them but $ to $ ." i returned at once and began negotiations, but, as is usually the case, the fact that "standard oil" was nibbling leaked before i had clinched the option, and before we had even begun to examine the property, prices had advanced until there was a profit of $ , for us in the transaction. to look over the utah property mr. rogers sent his son-in-law, broughton, and in a short time i got word to feed out the , shares on the market at the best prices obtainable, and to borrow it for delivery in such ways that the clark-ward-untermyer contingent should suspect nothing about it. no information was given me as to the expert's report, and i was absolutely ignorant whether it was good, bad, or indifferent, though from the fact that we were to sell the stock i inferred that it was unfavorable. the public took the , shares at between and , much as an elephant takes in water after a thirsty tramp across sandy deserts--the shares were just sucked in without a gulp or a gasp. i did not know until long afterward that the purchasers were the english holders who had contributed the greater part of the , shares to meet our option--in other words, were buying back from us their own stock at more than twice the price we were to pay them for it, and that their eagerness was due to confidential information that the expert's examination had disclosed such richness that the price would surely jump to over $ when "standard oil" assumed the management. just where they acquired this information or how it was put in their path was a matter i never found out. as i have previously demonstrated, "standard oil" has its own system of wires and underground passages and rumor bureaus. it works in mysterious ways its wonders to perform. this section of the deal was soon wound up, and the transaction showed us a profit of $ , , . that is, we had sold , shares which we did not possess, but which were ours on demand, for $ , , more than we should have to pay their owners for them. when i reported my success to mr. rogers he expressed complete satisfaction, and ordered me to inform the utah people that another , shares must be added to the option, as he could not think of tacking the great name of "standard oil" to an enterprise in which he had less than a third interest; indeed, he was not sure that he would consider less than a one-half ownership. this second request was a bitter pill to the clark-ward-untermyer crowd, who hated to surrender for such a low figure this tremendous parcel of a stock that was now selling fast at per share. there was no gainsaying the soundness of rogers' reasoning, however: "who made it worth ? who but 'standard oil'? and what will happen if 'standard oil' declares that it will not take utah into the consolidation?" the bare suggestion threw the utah contingent into one of those hundred-in-the-shade, twenty-below-zero sweats, which resemble the moisture upon steam-pipes that pass through cold-storage boxes. they succumbed. at the moment the option was signed over to us it represented a profit of $ , , more, and when we sold it, it netted us $ , , , for the market was still climbing. this latter phenomenon was not surprising, for it should be borne in mind that when our demand for the second , shares was made, the heavy utah stockholders were called together and it was explained to them by their own managers--not by "standard oil" or by mr. rogers mind, for "standard oil" never makes false statements--that the expert's examination had developed such wealth that "standard oil," the mighty of mighties, had insisted on having at least , shares; but that, of course, "standard oil" could not be asked to pay over twenty for stock which had cost its original owners but $ to $ . what was there to do? the stockholders just gave up, and then once more climbed over one another in the market to get back their precious shares as best they could. just to keep the conditions of the transaction at this stage before my reader's mind, i'll repeat that the clark-ward-untermyer people had now given us the right to buy of them , shares of their stock (_at a price $ , , less than we had already sold it for_), with the understanding--not in words or in writing, of course, because "standard oil" never makes a promise in writing, but implied as sacredly as though it had been set down and attested under oath--that we would take and pay for their stock and engage with them in their enterprise, giving them the benefit of our experience, our capital, and our prestige. i say they had every reason to assume that we were acting in absolute good faith, and no ground to suppose that there was any ulterior motive behind our negotiations. it must be remembered that this occurred some years ago, before the "system's" perfidy was a calculated contingency. the knife was now in, but the "system" had still to corkscrew it in the wound. chapter xiii the trap in finance after "pulling off" such a big "trick," as the professional crooks put it, and getting away with such a fat bundle of "swag," you, my good reader, might naturally suppose that this shining light of the "system," contented with his profits, would pass on to new victims; or, if you have a mistaken impression of mr. rogers' sense of humor, for really he has a keen sense of the ridiculous--after five o'clock on week-days and all day sunday--you might think he would take the opportunity to order me to tack up his card on the utah office door, inscribed, "we will return when you recoup," and transfer his milking machine to other udders. no, that is where you, old-fashioned reader that you are, have "sized up" mr. rogers inaccurately. he had not finished. utah was not yet exhausted as a wealth-producer for the "system." after a brief lull, representatives of clark, ward & co. came to me requesting that they be allowed to see "standard oil's" report on their mine. it was most important for their financial arrangements that they be told what was in store for them. that was what they thought. i told mr. rogers. he instructed me to report to the utah people that mr. rogers had looked wise and said nothing. the double-perfected "look-wise-and-say-nothing" is one of "standard oil's" pet business devices. whoever tries to penetrate its secrets is always welcome to his inferences, but no one in "standard oil" is ever on record in case the inquisitive one guesses wrong. "lawson," rogers said, "just tell those people that our way of doing business is to send out reports when we decide it is time for them to be seen." in the meantime utah kept booming. a week before the expiration of our option, the price being then forty-five, i heard from mr. rogers again. he gave me the most mysterious order of all: "sell , more." up to that time i should have declared to any one that i was up in all the quirks and kinks of the stock game, but this move puzzled me. however, i sold, and at the very top. we had now "out" , shares of utah, had sold that number "short," in fact. clark, ward & co. were bound to deliver us , shares when we called for them. these , shares had been contributed by the large stockholders to clark, ward & co. at the price we had agreed to pay. assuming that "standard oil" control of utah would immensely enhance its value, the stockholders naturally desired to replace the holdings of stock they had contributed, and instructed clark, ward & co. and other brokers to buy them back in the market. so clark, ward & co. were carrying all one end and much of the other end of the deal, paying for the actual stock which our option called for as it came in, and carrying their customers for the new stock purchased for them at vastly higher prices. _but_, as we had not taken up our option and paid clark, ward & co. for our stock, the money necessary to finance the whole transaction had to be borrowed from the banks. it is evident that, at this phase of the game, clark, ward & co. must have been, as the phrase goes, "extended." while the operation had been in process, during the life of the option in fact, money at the "banks" became as "easy" as an old haircloth rocker for whoever desired to borrow on utah copper collateral. the fact was much commented on at the time by the "street," and clark, ward & co. often gratefully remarked to their customers: "after all, 'standard oil' is good to its associates." the day before the option matured, mr. rogers briefly said to me: "lawson, i've been thinking that utah matter over and have made up my mind that it is not safe to go ahead unless we have the actual control of the company, , shares. tell them so, and that we must have , shares in addition to our , ." at last his game was plain to me. i gasped as i took in all the features of the new plan. "they'll never stand for it," i cried. "they won't, eh?" he said. "you look it over more carefully and i think you will agree they _must_ stand it even if i make it another , . this is the situation: they are sure we are going to take and pay for , shares, and in anticipation have borrowed millions on call at the banks. for fear they may not see all the nice points of their position you can show them that if they refuse, the banks as well as every one else will know that we not only are not going into utah as investors, but would not--in fact, could not--become connected with the management, because our thorough examination of the property shows that the mines are not as valuable as they affirmed. now, when they grasp the fact that they have all the utah stock they had, to start with, and , more which they have bought since, they must realize that in a slump the price of their shares will go lower than the $ or $ it started from. have no fear. clark, ward, and untermyer will do just what we ask, and, in fact, if it were not for the stir a lot of failures would make and the bad effect these would have on our general plans, i'd refuse to take up that option anyway, for there would be more money in buying back in a smash what we have sold than in taking it from them at our own price," he went on. the implication in my suggestion that he was going too far in the utah deal stung him. he said: "the fact is, lawson, americans who have accumulated great fortunes get no credit; on the contrary, they are unfairly treated. instead of being honored for our splendid efforts as evinced by our wealth, the people howl as though they had not equal chances with us. take this very case: we did not ask these people to give us options; we did not ask them to allow us to become associated with them. we have done nothing but take what they have thrown upon us, and yet if we refuse to exercise the option we did not ask for, and there comes a smash, we should never hear the last of how 'standard oil' robbed them. the more i see of the fool way americans look at such things the less sympathy i have for their losses and what they entail. there was a period when i allowed myself to waste time on such ideas as you seem to entertain, but, thank goodness, i have outlived it." the job cut for me was one i hated to perform. i could refuse, but what then? some one else would carry out rogers' mandate, and where should i and my great copper structure be? if i balked here, they would go no farther with me--and remember, we were just at the beginning of our association. had i foreseen the misery and ruin with which the future was fraught, i should have stopped then and there; but the future was hidden, and i was expectantly revelling in a glorious and delightful period in which i and all who were following me into "coppers" should be gloriously successful and rich. so i looked at the situation in a practical business way, and i said to myself that even if we did insist on having the , shares extra rogers had mentioned instead of the , he had decided to demand, the clark-ward-untermyer combination would still have remaining more of value than their whole property could possibly have been worth without our association. therefore i tumbled into their midst and dropped mr. rogers' bomb--and bomb it was. at once they realized that they were looking into the cold steel muzzles of -calibre revolvers, for there was no concealing the money-or-your-life inference of the message. i had honestly tried to soften the blow as well as i could, but all they could see was , shares more at something like a million dollars less than its market value--or in twenty-four hours a panic and no market for their stock at any price. what could they do? with perspiration streaming in big beads down their foreheads, they declared that even if their people were willing to submit to the knife, it was impossible in the brief time available to get to them. at least would i not beg mr. rogers and mr. rockefeller to take up the , shares pending their negotiations for the balance? would i not, because they had made all their financial arrangements for big payments of loans next day which they could not renew at such short notice--i must!--i must! as i listened to the pleadings of these men there flashed into my mind a conviction of the malignant humor of my situation. here was i, father of a plan in the successful execution of which i had figured myself out as a benefactor to all concerned, turning the torture screws of "standard oil's" new dollar rack--fashioned from my structure--and i was powerless to stop or rescue the screaming victim. "but why," ask my readers, "did you not denounce the men and renounce the work, instead of profiting by it, as you undoubtedly did?" you have never--you who ask that question--sat in at the great game of millions; you know nothing of the excitement of the dollar chase, of the terrible joy of hearing, "a million while you wait." i am not, in telling this story, setting myself up as an angel, nor posing as better than others. my experience of business has demonstrated to me long before this that rapacity rules in the modern dollar game, and that in wholesale dollar making many of the laws of men and more of the laws of god are inevitably violated. but he who cannot or will not play according to the rules of those who are making the game is disqualified. he should go elsewhere. hitherto in my life i had followed the code of a smaller game, in which we seldom pressed an advantage to the limit or cut our pound of flesh from out a vital part. now i had voluntarily associated myself with other men in a venture i believed was big, fair, and square, and i was learning that the rule of their game was thumbs down--give nothing--take everything. i might have retired, but i was already deep in, with resources pledged to the limit; and what would my reluctance to press our advantage with clark, ward & co. be considered but fool sentimentality? if i insisted on my view, what would happen? the people who had followed me so far--and their number was thousands and their quality, measured by any heart and soul standard, more human than any of those whom rogers was thumb-screwing--as well as i myself, would be surely ruined. if i went on, at least i could care for those i had brought along with me. i looked at the complication fairly and squarely, weighed my duty with such powers of judgment as i possessed, and decided, wisely or unwisely, that it was best to go on. wisely or unwisely i made up my mind to accept the responsibility of acting as fireman to the engine--and to bide my time. that time, thank god, is here now. i reported to mr. rogers. his fox-trap jaws, with their bone-and heart-and soul-crushing teeth, came together with a snap, and when they relaxed his lips parted into one of his marrow-chilling smiles. "i thought so," said he. "those able gentlemen are loaded, lawson, loaded, and without a by-your-leave have made up their minds that mr. rockefeller and myself are only in business to draw their load to some convenient safe-deposit vault, from which they can from time to time take it out to pay for palaces, yachts, fast horses, and society crowns. lawson, don't tell me of their plight. don't waste my time with their pleadings." the tiger was awake, his cage rattled; it was raw-meat time. i watched. presently he snapped: "what do you suppose they would answer were they in our position? this: 'give us the additional , shares we have demanded quick, or take the consequences.' they are able business men, so what they would do is just good enough for us to do. take back this answer: 'you have the only proposition we will make; decide at once!'" i looked at him. i said not a word--i could not. perhaps my thoughts were miles and ages away to scenes where cæsars, napoleons, and bismarcks stood gazing over fields strewn with corpses oozing blood. i remembered "to the victor belong the spoils"; but there also wandered into my mind the memory of a good mother's knee on a sunday afternoon, and of a voice which repeated, "for what is a man profited if he shall gain the whole world and lose his own soul?" as i left him mr. rogers said: "you had better sell , shares more of utah. sell them quick and sharp, and perhaps they will read our answer on the tape before you get to them." i sold the , shares. the price dropped two to three points, and, sure enough, by the time i got to clark, ward & co.'s office i found them poring dazedly over the ticker tape. they knew my answer before i stated it, and were trembling with nervous apprehension. i wondered if they, too, saw the tiger, his bloody chops and claws and his piece of raw meat. i said what mr. rogers had told me to say in so many words, and then i talked frankly to them about their situation, and advised that they meet "standard oil's" demands. i called their attention to the tape: "they told me to throw over only , shares," i concluded. "great heavens!" said armstrong, the negotiating partner of clark, ward & co., "they are likely to follow it up with , more. they have it; at least they can demand it of us, and if they do we are ruined. what can we do, lawson? what _can_ we do?" i pointed out that their only possible course was to lay the situation before the large shareholders involved, stating the absolute necessity of coming to "standard oil's" time, and to make their medicine a little more palatable i added: "once you come to time i can induce my people, i believe, to make a public announcement that they will take the open management and control of the utah company, and you know that will surely make the stock jump--enough, perhaps, to offset what you people lose on the extra , shares you yield up." i advised them to the best of my ability as to their only way out. if i had revealed to them that we had sold every share of the stock they were to turn over to us, it would have served no good purpose, for it would have made business impossible between us, and a crash would have occurred which would have ruined utah, inflicted destruction on their price structure, and only enriched "standard oil." when i concluded, they started in to do as i had suggested, and the way they burnt up time and annihilated space was marvellous to behold. though the thing was almost a miracle, they met the condition within the time limit, and we had turned over to us , shares of stock. the moment mr. rogers saw the deal was a "go" all his hardness melted as the snow upon the mountainsides under the april sun. nothing could be softer, kinder, and fairer. the blood had disappeared; the tiger was a great, purring house-cat, intent only on catching naughty rats and mice for the good of the household. why, he would do anything to help out these good gentlemen; certainly, the world should know of his great interest in the utah properties, and as the millions of golden dollars clinked into his golden bucket the next day, the world did learn of the great value of utah, for his private counsel was made president, and certain other gentlemen who bear the uncounterfeitable "standard oil" tag were appointed as directors. there was a general jubilation--i had almost said, a killing of the fatted calf; but that part of the ceremony had been most ably attended to by mr. rogers in the preliminary stages of the entertainment. note.--when this startling and cold-blooded-trick part of my story was published in _everybody's magazine_, it astounded the world, and my enemies took advantage of the fierce anger which was aroused to call attention to my part, which they attempted to show was as bad as that of rogers. right here i wish to go on record: if i had been a human angel instead of a stock-broker, actuated solely by a desire to do just right, to do that which would work least harm to the greatest number of innocents, and least good to the largest number of tricksters, i should have done as i did. author. chapter xiv lawyer untermyer discovers the "nigger" i have dwelt on this utah episode because it shows phases of the "system's" methods never heretofore made public, just as episodes which are to follow in the narrative will develop other startling and ingenious deviltries. but, before going on, the sequel to the utah affair deserves a place in the story. a sequel there was, and my readers will agree, i think, that it has a mordant humor quite its own. to-day, after the years that have gone by, i cannot think of this tremendous bunco game, in spite of its cruel and tragic phases, without a laugh at the manner in which the smart gentlemen who composed the utah consolidated crowd were "outwitted." bear in mind that clark, ward & co. were among the "flyest" operators in wall street's juggle factories. they asked no odds of any one in shuffling and dealing their cards, and with them was the eminent samuel untermyer, surely the head of his class of corporation counsellors, and himself a master in the fine arts of copper financiering. on the conclusion of the deal, these gentlemen and their partners in utah assumed all the airs and graces they conceived proper for associates of "standard oil," and at once enlarged their hatbands and let out their waistcoats. some of them, i believe, went so far as to be measured for copper crowns. the stories they set afloat about the richness of utah, as proved by "standard oil's" determination to have its , shares, would have made the constructor of aladdin's palace look to his laurels as a treasure-house creator, and the stockholders of the corporation felt so good over their prospects that in london and new york two large banquets were simultaneously given at which the prospective millionaires tossed cable congratulations at one another across the atlantic and toasted in vintage champagnes the brilliant promoters who had worked such wonders. at these entertainments there was no question but that utah was destined to be the foundation company in the coming great copper consolidation. with this roseate view mr. rogers did not entirely coincide. his diagnosis of the situation had all that whichever-way-the-cat-jumps frankness i had learned to look upon as characteristic of the man. he said to me: "lawson, this is the situation: we are in absolute control of the utah property. if it were good we could do great things with it, but it's bad, very bad; there is nothing out there but a bunch of ore which is rich enough, but which cannot possibly last longer than six years, and then--then there is nothing but a hole in the ground. of course there is a possibility of our finding other bunches, but with all the machinery in our hands it looks to me as though we could play a very safe game. if we find things that will make the stock valuable, we can keep the good news buried until we shake the price down and get whatever we want. if it is all bad, we can sell the stock and buy it in at big profits. i think, on the whole, it is safe to call this deal completed and mark it a success." with this understanding we left it, and for some little time i paid no attention whatever to utah. one day i was surprised to notice on the tape that the price of the stock was declining. i was puzzling over what could have happened, when i received a sudden call from the machiavelli of the new york bar, samuel untermyer. the set glare of his eyes, the fervor of his hand-shake, told me that i had a volcano to deal with. "lawson," said he, "something came up the other day that led me to investigate, and do you know, i have got to a point already where i can put my fingers on people, outside of any one connected with 'standard oil,' who own over , shares of utah. if this is so, how can rogers and his crowd own the , shares they took away from us at millions below the market? it seems impossible, but it looks as though we had been buncoed--buncoed as no one outside a crazy-house was ever buncoed before." that steely imperturbability which is alternately the pride and pleasure of mr. untermyer's friends, the glittering surface of which it is said no cloud has ever shadowed or no gale disturbed, was fast losing its distinction under the influence of the excitement that welled up in the heaving bosom of the eminent cross-examiner; and excitement and he were so remote, so studiously antagonistic, that i looked on and listened in wonder for the outcome. an interesting situation was evidently fast developing, and to grasp its possibilities one should know the attitude of mr. rogers toward mr. untermyer. for this astute lawyer the "standard oil" magnate has something akin to terrified admiration. mr. rogers has said many times to me and to others among his associates that there is but one lawyer in the united states whose cross-examination on the witness-stand could afford him anything but amusement and recreation; and this extraordinary exception is samuel untermyer. the bare thought of being subjected under oath to the remorseless questioning of this astute dissector and analyst of motives and actions brings him to the verge of rippling chills. and here was this legal nemesis on the war-path and headed directly for broadway. "what does it mean, lawson?" his voice was in a court-and-jury key. the opportunity was too good to miss. i could not help it. i said, "untermyer, you have another guess coming." "do you refuse to tell me anything about it?" he snapped. "tell you about it?" said i. "what could i possibly tell you about your own scheme? you flatter me; you are getting excited. let me ask you a question, what do you say it means?" "i say it means," he fairly yelled, "that we have been buncoed--swindled!" "if that is a fact," i said, "you are the best man on earth to tackle such a proposition. introducing swindlers to justice is your specialty." "lawson," said he, "let's talk it out. i don't see wherein you are in any way to blame, but i tell you if i find true what i now suspect, there will be music in the copper world that will set copper investors by the ears." i saw there was no use trying to dodge the issue, and we entered into executive session. he had gathered most of the facts, he told me, and to ascertain the balance, proposed at once to call a meeting of utah consolidated stockholders. also he had men out examining the transfer agencies to find who got the shares of utah delivered to rogers. i said to him, "what do you think has happened, untermyer?" "i think you people have sold the bulk of that stock," he said. "suppose we have," i said; "there is no crime in that, is there?" "no crime," said he, "but it is a piece of dirty double-dealing." "all right, suppose i admit it," said i, "what of it?" "well, did you do it? did you sell that stock after we delivered it to you?" "not a share," said i. "do you give me your word for it?" "i give you my word, we didn't sell a share of that stock after you delivered it to us." "when did you sell it?" said he. "every share before we secured it of you." at this the distinguished impassivity faded finally away and samuel untermyer was actually and absolutely flabbergasted. the sight of him dumfounded, confused, was too much for me. i laughed. it is seldom one gets the laugh on mr. untermyer. "do you mean to tell me you were short the whole bunch?" "short every share of it, and , besides," said i. "and where do you stand now?" he pursued. "still short of it, and before you can get fairly to work kicking up a rumpus i should not be surprised if we were short the whole capital stock. rogers, as you know, does play a great game, that is, when he has all the cards, owns the table, the room it's in, and has control of the doorkeeper." there was an interval of tense silence. untermyer was making a noble effort to swallow his fury. i began to figure the degree of my responsibility if he should burst a blood-vessel or have an apoplectic stroke. finally he said: "lawson, if i don't blow this thing to pieces and shake broadway to its foundations, i'm not sam untermyer." the time had come to reason with the heated legal gentleman, and in plain language i proceeded to show him where he stood, the position of the property, the public's relation to it, and his own duty to the clients whose money he had invested in it. under the logic of my argument he cooled. he saw the net, and that he and his friends were absolutely enmeshed. he even admitted that he and his friends had unknowingly aided in what had occurred and were mostly to blame for their present position; but while he acknowledged all this, he reiterated over and over again that in all his experience--and in samuel untermyer's professional position he has either prosecuted, defended, or had an inquisitorial finger in every sword-swallowing, dissolving-view, frenzied finance game that has been born or naturalized in wall street within the decade--he had never met the equal in high-handed bunco of this deal in utah. finally he said: "there's one thing i can do, if i cannot get even with rogers; and that is, i can 'fire' the present management of this company, and i'm going to do it now, this very minute, and incidentally i'm going to state what i think of them and the whole dirty business." i called up "standard oil" on the telephone and told what had happened. mr. rogers said: "cool him down at any cost, but particularly try to show him i had little to do with the deal; that it was largely the outgrowth of what the clark-ward people thrust upon us, and that i left the details to you and the lawyers." again i had visions of what would be the cost of making "coppers" a success. within an hour untermyer was back visibly relieved and glowing after his encounter. he had the resignations in his pocket, and he began joyously to detail the specific opprobriums he had cast upon the management. "i shall put in an entirely new management," he proclaimed triumphantly. "you have positively made up your mind to that?" said i. "you bet i have," he answered. "excuse me for a few minutes, then," i said; "i want to give my brokers orders to rip out , or , shares of utah. rogers and rockefeller would take me to task if i wasted a minute." "hold on there, lawson," he said. "not a minute," said i; "you know the game well enough, untermyer, to realize that there are a few millions hanging very low on the boughs at just this second. i want to get my hat under them before you and your friends have an opportunity to roll in your own hogsheads." it was no time for diplomacy, and i set forth in plain, dog-eat-dog terms to mr. untermyer exactly where he was "at," and that no one but himself and his associates would be the sufferers by a public explosion. reluctantly he agreed with me that under no conditions must the "standard oil" management be changed, but he was bound to have one victim to show. "you have the resignations of the present board--why not put in new men, the strongest 'standard oil' men you know?" i suggested. "i'll do it," he said, "but i'll throw out the present president, blame him for all that's happened, but--whom shall i put in to replace him? how about rogers himself?" knowing mr. rogers' cross-purposes i was sure he would never become officially responsible for the company; so i told untermyer this was impossible, but i continued: "the next best man and the closest i know to rogers is broughton, his son-in-law. there's your president." whereupon broughton was elected president of the utah company. the stock has since dropped from to , gone from to - / , dropped to - / , with frequent repetitions, and is now : and all the drops have been preceded by tremendous short selling, followed by stories of the absolute worthlessness of the property; and all the rises, by tremendous buying and stories of the mine's fabulous richness. some one has made millions. "standard oil" is ever ready to forgive and forget those it has injured, but it has power and place for those who have made it tremble. its associates to-day are often yesterday's enemies. as one looks back upon the utah episode from over the divide, it helps accentuate its humor to contrast the present attitudes of the parties engaged with those they then held to one another. we now see the virtuously indignant samuel untermyer shoulder to shoulder with his wicked betrayer, henry h. rogers, whose counsel he is against the original ally of the same henry h. rogers, thomas w. lawson, historian of "frenzied finance." and the talented expert, most trusted of "standard oil" mining emissaries--broughton, whose unfavorable report on utah consolidated was the instrument of the plundering of the clark-ward-untermyer contingent--elected president by samuel untermyer, has remained ever since at the head of the property he had pronounced worthless. chapter xv degrees in crime every profession has its social grades. even crime is not without an aristocracy. there are as many classes of crooks as there are things to steal, and the more dangerous the theft, the more distinguished is the criminal in the eyes of his professional brethren. in the thieving fraternity the burglar and the highwayman figure as important persons, for do they not take their lives in their hands every time they "pull off" a trick? he who signs another man's name to a check requires fine dexterity to be successful and endangers his liberty for a long term, so the forger is of high consequence. pickpockets and sneak-thieves stake freedom on the agility of their fingers and legs, and are the small fry of the fraternity, yet figure as legitimate practitioners. but the confidence man, he who goes forth among rural communities disguised as a clergyman or doctor, and wheedles money out of some unsuspecting fellow-creature by means of the trust he has inspired, ranks low in the estimation of his plucky brethren of the jimmy and the black-jack. force they respect; stealth they despise. the burglar is frankly a burglar; the confidence man conceals his plundering purpose under the aspect of respectability. he is doubly a knave in that he pretends to be honest. the utah trick performed by the "system," as described in my last chapter, was essentially a confidence operation. the men who executed it had the reputation and appearance of honesty, and their victims were hypnotized into security by accepting standing in the community, great business prestige, and enormous wealth as guarantees of individual probity. the only capital employed in capturing three millions of "made dollars" and the control of a great corporation was respectability. i contend, then, that the magnitude and success of the deal do not make it less despicable. some of my readers will doubtless ask me why i so insistently repeat the details of the "system's" criminality, which for all purposes of argument have already been sufficiently established. my answer is that repetition alone will impress people with the real character of the class of individuals with whom i deal. the mass of americans look upon these men as great leaders, and regard their millions as monuments to their commercial genius. i am showing that this commercial genius is no better than a high talent, for financial jugglery, and that its successes are achieved by a calculated disregard of the laws of the game. the "system's" fortunes have been won by means of marked cards and cogged dice, crooked wheels and bribed umpires--in other words, by the corruption of legislatures, the undermining of competitors, the evasion of railway rates, the wrongful manipulation of stocks, the perversion of justice, by intrigue, graft, and four play. once the people realize this, the "system" is doomed; and it is my purpose to demonstrate so clearly and forcibly the crimes of the past that the nation may be aroused not only to prevent their repetition, but to crush their rascally perpetrators as they would so many reptiles. i shall so familiarize the people with the rights to which they are properly entitled and with the outrages committed in violation of them under the guise of legitimate commerce, that they will know them as they do the common facts of their daily lives. let any "system" attempt to interfere between a man and his bible, his meat and bread, and his proper allowance of sleep, and there would occur an explosion fierce enough to wipe the conspirators and their plots off the face of the earth; yet it is absolutely the fact that in the past our people have suffered unwittingly much fiercer wrongs than these would be, and far more vital invasions of their rights. chapter xvi mr. rogers unmasks there was in montana a great copper property known as the daly-haggin-tevis group, the centre of which was the huge anaconda mine with its , , shares. this is the mine that marcus daly induced the late george hearst to buy and develop for the marvellously successful syndicate of california mining operators, composed of j. b. haggin, noted now the world over for his horses; lloyd tevis, an extraordinarily shrewd san francisco financier; and senator george hearst, himself perhaps the greatest mining expert america has ever known. after senator hearst's death his estate sold its holdings to european investors, who with the other three owned the company at the time of which i am writing. i had never in my copper-consolidation plans contemplated including this property, for the reason that the public i was operating among was not familiar with it. i did not care to put in jeopardy the success of our venture by admitting any but mines of such well-known and unquestionable value that there could arise no possible doubt as to the security of the investment. i was well along in my task of gathering in, through public-market manipulation and private negotiation, the shares of the several good boston companies whose merits i myself knew about and had so carefully gone over with mr. rogers and mr. rockefeller, when one day mr. rogers called me up on the telephone and requested that i come to new york to see him. "i have," he said, "a very important matter to go over with you." i took the train and early next morning was at broadway. as soon as we started in i was struck by a certain strangeness in his manner--an unusual impressiveness that indicated to me at once that something was in the wind. this proved to be the case. i was soon in possession of the information that he and mr. rockefeller had been putting in a lot of work on the copper business; that they had evolved some further schemes, and that now the plans were so far along that i could not upset them, therefore they proposed to let me in--all this in the pleasantest manner. in answer to my quick inquiry as to what plans i had ever upset he waved a chilling hand toward me. "don't start in looking for trouble," he said. "there are certain things which cannot be done by a man who works as you do. from the very beginning you have insisted upon taking the public into your confidence, with the result that they get large profits which otherwise would come to us. if you did your business as we do ours--acted first and talked after, or, better still, did not talk at all--there would be no difference of opinion between us. still, we recognize that each man must do business in his own way, and we have let you go ahead where it was possible." after a short pause he continued: "while you were getting the boston companies in shape i unearthed another situation which almost seemed as though it were made to order for us. what do you know of the anaconda company?" the way he asked this question in one of his cross-bred, cat-purring-and-fox-bark tones which i had seen him work on others, and which i had observed always denoted a perfect knowledge of your answer to his question before you had it, did not help my guessing any. i told him i knew nothing more than that there was such a company with stock dealt in on the english and our markets. "nothing more than that?" and he looked at me quizzically. "have you been watching the stock's actions in the market?" in a second it flashed over me that anaconda had been quite active of late, that is, had been largely traded in without attracting much attention, although the price had been steadily advancing. "i thought you boasted you could read the tape, lawson?" he went on, "and that nothing could be happening in a field you were interested in without your smelling it out? when i tell you mr. rockefeller and myself have bought control of the biggest copper property in the world, measured either by the number of shares and their selling price or by production, without your even suspecting it, much less the public's jumping in and running up the price on us, you can see there is something in our quiet way of doing things compared with your public way." "all right, mr. rogers; i have never contended that there were as many dollars in my way of doing things as in yours--as many dollars for _us_." "lawson," said he, "the public are about ready to invest in the first section of our new consolidated company, are they not?" "sitting up nights to see that they get a place in line the minute we scatter our first handbills," i answered. "well, are we ready to put our things together? have we got the necessary companies to meet the ideas you have been educating the public into?" "we have things in such shape that we can whip a $ , , or a $ , , company up for public subscription in a very few days, if you give the word." mr. rogers leaned toward me and said in his most decisive and imperious tones: "very well; i have plans all shaped up which will allow us to offer the first section, but not made up as we first arranged. mr. rockefeller and myself have decided to put entirely new companies in the first section, and to reserve the butte and the montana and other companies you have been working on for the second section." the blow had fallen. my head swam. visions of clark, ward, untermyer, utah, and others i had seen on the rack writhed fearfully across the stage of memory. here i was loaded with butte, montana, and other stocks which i had felt as certain were to go into the first section as one can feel in regard to a thing which seems in one's own control. on my public and private assurances as the accredited agent of mr. rogers and william rockefeller and "standard oil," my friends and following had large amounts of money in the same securities. the market was booming on what i had proclaimed was to happen, and here an absolutely new condition was being imposed, a condition which gave all my assertions the lie, which discredited me, and would, i felt sure, precipitate a terrible disaster. inevitably the copper public would be dazed, would be shaken; a reaction would follow which would bring on a panic and a destruction of values impossible to measure. in it all, i should be left alone to bear the brunt of the storm of ruin, wrath, and denunciation as the result of what must seem base trickery to those who had accepted my representations. i tried to pull myself together, for i felt mr. rogers' keen eyes burning into the back of my head, appraising the effect of his words and measuring the degree of my numb terror. he saw, in spite of all my efforts to appear calm, that i knew i had been given a knock-out blow. as in a dream i inquired what companies it had been decided should go into the first section. "anaconda, washoe, colorado, and all the big timber lands, coal-mines, banks, stores, and other montana properties that go to make up the daly-haggin-tevis properties," he replied crisply. i found my numb inertia melting in a fierce anger. i jumped up. i raised my voice: "mr. rogers, do you mean to tell me that mr. rockefeller and yourself have deliberately decided to take advantage of the situation i have made--the situation i have not only made but put myself into--to try to sell to the investors of this country other property than that i have promised them they were to have? you cannot mean that--you surely cannot, for you and all your 'standard oil,' even though you were many times bigger than you are, would never have dared to tell it to me face to face." i was boiling over--becoming literally frenzied at the picture unrolling before me. now it was mr. rogers' turn to be aroused. his voice quivered with intensity and his fist came down on his desk with a force that shook the inkstand. it flashed into my brain that this anger was assumed to cow me, and i tried to look through his eyes on to his mind tablets back of them, and read what was there recorded. the gaze that met mine was polished steel ice coated, off which my glances slipped and slid. i dropped into my chair. "in the name of all that's sensible, lawson, hear me out and quit acting like a child." he stopped a second and then went on impressively. "in looking over the copper field i discovered a number of things you failed to see. first, that haggin and tevis, who own anaconda with marcus daly, have grown so wealthy that they have left the management of their montana copper and silver properties entirely to daly, and he has been coddling the mines along, saying nothing about their real worth and quietly passing by the richest parts, awaiting the day when he could buy his partners out. shortly after you let it be known that we were to go into 'coppers,' daly came to me to talk things over, and it took me only a short time to get under his waistcoat and find just what he had out there, and it took me still less time to decide that he offered something a little better than anything we had yet turned up. these properties, which we can secure for $ , , , which will carry with them the majority of the , , shares of anaconda, alone are worth $ , , , and with the addition of the colorado, washoe, and parrott, which he recommends that we buy and which he is in a way to secure for us at a bargain, will cost not over $ , , . so it came right down to this: we could trade with daly immediately, while if we waited until the first section was out to the public the inevitable appreciation of anaconda stock in the market would alone make it impossible; for even if daly was willing to go in with us, haggin and tevis would not let him at anything like the prices he now names. it seemed best to take action at once, so we closed with him; and we have also just closed with the washoe and colorado, and we want you to secure the parrott. under these circumstances, could we do otherwise than we have done?" his argument seemed conclusive. it looked so fair and unanswerable that i could not disguise from him that my fears had fled. i was immensely relieved. my fight oozed; i became as pliable as any of the brittle clay which he daily kneaded for each shaping with his applications of oil. "what are your plans, mr. rogers?" i asked quietly. "this is what we thought would be the thing to do if you agreed, lawson, for, of course, you are, after all, the one who must decide. first, you shall go over everything we have done, and if you feel sure we have property worth at least, at the hardest kind of hard-pan prices, $ , , , we want to whoop up the country to the very top notch of expectation, and while doing so begin to hint that there are to be three or four sections, and that the first one will embrace anaconda, colorado, washoe, parrott, and lots of other unnamed things. then our idea was to offer the $ , , by public subscription, and by using every dollar we receive for it to support it in the market, to make it sell afterward under all conditions at a big premium over cost, so that every one would make big profits, and so, consequently, by the time the second section came along, the demand for subscriptions would be unprecedented. we could continue this until all the good 'coppers' were in our company, and then our consolidation would be a prodigious success, just as you outlined at the start. there cannot possibly be any loss to any one; in fact, success is so assured that william rockefeller, daly, stillman, and all the others who will be associated with us, do not propose to sell a share of their stock, but, on the contrary, will go along with us to the finish. so good does it look to us that i feel it will really beat out standard oil itself as a money-maker, and you must remember that whatever else they may say about standard oil, no one who has ever owned a share has lost money; on the contrary, every one has made large profits." chapter xvii "extract every dollar" "standard oil's" arguments always are absolutely flawless, and this was one of their best. i was fast becoming imbued with the wisdom of the plan which mr. rogers was revealing so adroitly, and began secretly to wonder if after all i was not a novice in such business. unerringly mr. rogers followed my thoughts. he piled pelions of better things on ossas of good ones. surely it was after watching some parallel hoodwinking put through by a remote ancestor of "standard oil" that puck enunciated his famous dictum, "what fools these mortals be." i fell in like the veriest tyro--hypnotized and happy. "how much of this first section do you figure, mr. rogers, that we are to give to the public?" i inquired. "we, mr. rockefeller and myself, have carefully considered this phase of it, and as we all want to retain as much as possible of the stock, we would not sell over $ , , to the public." "but can you do this?" i asked. "if the public know 'standard oil' is retaining nearly all the stock they will sour on it." "leave that to us," he said, knowingly. "we can iron this out so easily you need not give it another thought, for no one can have any possible rights in the matter until he has been allotted stock, and as all those who come in are to have big profits from the start, they will raise no objection to anything we do." "all right, if you think it's wise. you know," i responded; "but who will be in this besides ourselves?" "every one of us--stillman, daly, olcott, flower, morgan, all who can be of use to us will have to be let in on some of the ground floors. the foundation profits, as we agreed under the old plan, will be twenty-five per cent. to you, seventy-five per cent. to us. after that we will jointly take care of those we let in. is that all right?" when henry h. rogers sets out to batter down an antagonist he is as fierce as an eagle foraging for her young; victorious, he is as amiable and generous as a salesman who has unloaded on a customer a big cargo of damaged goods. anything the victim wants he can have by simply naming it. fascinated by his mastery of the subject and the obvious completeness of his plans, i could only continue to assent. he went on: "there's another section of the subject we must get at now, lawson, and decide on once and for all. you seem to have made no provisions for the most important end of the whole business, the selling end. what is your idea as to how we shall control the selling end?" "i had given that little thought, mr. rogers," i replied. "i believe that easily takes care of itself. the demand is always greater than the supply. we shall have the metal to sell, the world will be more anxious to buy than we to sell: what more can be necessary?" "lawson," said the master brain of the greatest and most successful commercial enterprise in the world, "you know the stock-market, but you don't know the first principle of working to advantage a great business in which you absolutely control the production. the novice assumes that consumption when it is greater than production makes the price, but this is one of the many time-worn sophistries of business. do you suppose standard oil has built itself up to where it is and made the money it has simply because there were always more lamps than we had oil? if you do, you are in dense ignorance of the foundation requisite for great success. as the world goes to-day, the prices of necessities and luxuries are fixed and should be fixed by the man who controls both the selling and the producing end, for there is a greater profit to be had by supply to regulated demand and demand to regulated supply than from a charge made and regulated by supply and demand. standard oil gets to-day and has always since its birth got its enormous profit from its 'regulation' department. production yields it a proper profit and by supplying legitimate demands it earns other fair profits, but its big gains come from so adjusting one to the other that there can be no such thing as competition. do you see?" "i agree that is not my end, mr. rogers, though in a general way i know about railroad rebates, steamship comebacks, and such things; but i don't see how they are required in our copper business, where the demand is of such proportions that the producer sets the price and makes a profit away above what may be gained in other business enterprises. surely no one would ask larger gains than are naturally made out of copper." "lawson," responded mr. rogers with oracular emphasis, "that is where your business education is flawed. no man has done his business properly who has missed a single dollar he could have secured in the doing of it. i do not think a fair judge would find me guilty of avarice, either in business or in the manner of my living, and yet i am made fairly miserable if i discover that, in any business i do, i have not extracted every dollar possible. it is one of the first principles mr. rockefeller taught me; it is one he has inculcated in every 'standard oil' man, until to-day it is a religion with us all." there you have it--the fundamental precept of the gospel of greed. "what must ye do to be rich? extract every dollar." how the formula explains "standard oil," and how completely it reveals the rockefeller attitude of mind! greed crystallized into a practice, dignified into a principle, consecrated into a religion and become a fanaticism. but, mind you, not the dross, but the rule; not profit, but precedent. money no object, but our laws must be kept. shylock's god is "standard oil's." the ravenous lust for gold that possesses these men is not an appetite, but a fever. in them it is the craving of the tiger for blood. gorged and glutted with riches, their millions piled into the hundreds, masters of the revenues of empires, still they are as the daughters of the horse-leech. once in ogreland there was a giant, larger and fiercer than any of his fellows, and it was the habit of this monster to compel the inhabitants of the territory which he ruled to render him every evening a tribute of human hearts. at sundown he would come out of his castle and seat himself in a great chair in front of the huge iron gate, and his vassals would lay at his feet the dripping sacks of hearts for which they had scoured the land. "how many have you brought me to-day, my merry men?" he would say as he weighed the sacks in his mighty fingers. "are they large and juicy?" how they came or whence, he cared not at all; the screams of the unfortunates whose hearts were torn from their breasts he neither heard nor thought of; hearts he must have, and if people were killed, so much the worse for them. but the ogre _ate_ all the human hearts his vassals gathered for him; he lived on them and grew greater and lustier, for they were the food his great frame required for its sustenance, and he never had all he really wanted. "standard oil" in our life to-day plays the rôle of this mythological giant, forcing its tribute of dollars from the people, indifferent to the blood and tears in which they are soaked, oblivious of the cries of the victims from whom they have been dragged; but, unlike the giant, _"standard oil" does not need this tribute to sustain its life, nor to make richer its blood_. but to return to mr. rogers, who triumphantly proceeded with his plot: "let me show you, lawson, how you have overlooked the best part of the copper business. we have found that for years lewisohn brothers have had a double-clamped and riveted contract with at least half the best producing mines in the country to sell their output, and they have grown very wealthy. as near as we can make it, they have made at least fifty millions in one way or another in the last ten or twelve years. first, they have had a big profit as their commission for selling; next, big interest out of the advances they make to companies while their output is being sold; now, they actually control the copper market of the world. think of it, lawson, for a few seconds, and the possibilities will loom up to you. you can buy or sell any number of millions of pounds in futures or actual deliveries. suppose a man controlling the selling of three or four hundred million pounds a year should knock the price to, say, ten cents, sell to himself the year's output of all the mines he controls and then lift the price to, say, twenty cents. he would have a sure profit, with absolutely no risk, of thirty to forty millions of dollars. if he should sell the next year's output short at twenty and drop the price back to ten, he would have another thirty or forty millions. wouldn't he? then if, before he broke the price, he sold copper mining stocks short, and if, before advancing the price, he covered and loaded up with them, he could easily make an additional thirty or forty millions. think it over, and you will agree with me that the possibilities are far beyond those of oil, and perhaps at the same time you can account for the violent fluctuations in copper stocks and the price of the metal during recent years. a man in such position could absolutely _dictate_ to all new mines whose selling agency he could secure under long-term contracts. when their stocks were up, he could pinch them to the edge of bankruptcy by refusing to sell their metal or advance them the cash they needed for operation. now, don't you agree with me that you overlooked one of the most important branches of the copper business when you made no provision for taking in the selling end?" again it crept into my mind that in comparison with the diabolic astuteness of this man, such knowledge and experience of business as i had gathered were as those of the primary student to the post-graduate scholar's. again, there was no quarreling with his logic or his conclusions. "it is common knowledge in boston," i replied, "that copper commissions on the surface and below constitute as soft graft as any one would ask for, but no one suspected the possibilities you outline. do you actually mean to say that that is the way the business has been conducted in the past?" mr. rogers lowered his voice confidentially: "i can only tell you, lawson, that we have dug up some queer doings during our investigation, and i think i can put my finger on a great many millions of dollars now in the hands of certain mine officers which could be recovered by the different companies they have been acting as trustees of. it would be quite an eye-opener to some of your pious bostonians to know that the controlling officials of several mines are silent partners in some of the big selling agencies." there was a pregnant interval of silence. perhaps the expression of my face suggested the thronging thoughts which seethed through my head as i said: "but surely, mr. rogers, that's off our beat. we shall make money enough along our lines without getting into that kind of a game." mr. rogers swung his chair half round and looked straight at me. for a long second he stared--sitting half upright, his long, fine hands clasping the arms of the chair with a clutch like steel. he said not a word. then he replied: "of course, lawson, we have no need for such methods in our affairs. but it is a duty we owe investors and ourselves not to conduct this business in a way that will encourage others to continue doing it along the old lines." he frowned at me as much as to say (only he never uses such expressions), "oh, but you do make me tired," as he always did when i, with a serious face, would ask him, as i often did: "how is it, mr. rogers, that young john d. can make such a success of his sunday-school-class trust, and at the same time of his father's oil and investment business?" in business hours mr. rogers taboos frivolity. the neophyte in crime, being initiated into the mysteries of the profession by some able fagin, gets his instruction by degrees. great care is taken that he shall not realize too soon the depravity he is to practise, lest, appalled by the hideousness of it, he might jump the track, and along with each advance in knowledge goes a picture representing the ease of the life and the lordly rewards and pleasant adventures of the "industry." from the remote perspective of to-day very similar seems to have been the process in this most momentous conversation between mr. rogers and myself. the apprentice at the knees of the master was being gently and gradually admitted into the secrets of the calling--financial highwaymanry. at the moment, however, it never entered my thoughts to imagine myself other than a favorite lieutenant gathering the garnered wisdom of a great general of commerce. so when mr. rogers shifted bobbins in his shuttle and agreeably and naturally wove fancy patterns into the woof of our conversation, i suspected no sinister motive. indeed, in reply to his kindly queries, i was delighted to tell him how well i was getting along with butte, montana, and the other stocks that i had been dealing in, and how deeply interested all the country was in our plans. we must have been fully half an hour discussing the degree to which the craze for "coppers" had spread over all america and had affected even europe, and it was pleasant to realize his interest in my own personal well-being. then, suddenly, as the thread on a bobbin runs out, he paused and shifted to the old subject--just as if a new phase of it had occurred to him. "to come back, lawson, to lewisohn brothers. we must buy that concern, and at once. had you best do it or we?" our pleasant talk had restored my mind to its normal alertness, and i grasped at once the significance of the switch. "i don't think i could begin to do as well as you on a trade of that kind, mr. rogers," i answered, off the reel, "for i don't suppose they will be anxious to sell, will they?" "anxious?" he replied, as quick as a chipmunk; "about as anxious as apollo to have one of his front teeth pulled! but they will sell, and at my price, too. i think i know just where they stand, and when they know i know it, i don't believe they will be long in seeing it my way, for i shall show them what coming in with us means, and just what refusing my offer means, too!" click! his jaws came together. "these are my plans," he continued. "they have all the money they want, and such a large european and american following that nothing could be accomplished by a financial squeeze, even if we resorted to that form of pressure; and they are very bright men. leonard lewisohn, head of the firm, is second to no man in america as a business man, which means he will not hanker for a fight with us; and when i show him we will buy, if necessary, the control of all the companies they represent, he will see the absolute futility of opposing us. i have it right from the inside of his own concern that lewisohn brothers have on hand a little over five millions cash and its equivalent, and that they consider the good-will and business of the firm worth ten to twelve millions more, which is fair enough, for their direct earnings must be a million and a quarter to a million and a half a year. now here is what i propose offering them, and no more: we will incorporate the firm into a new selling company, which will have irrevocable contracts not only with our consolidated companies but with everything that we can influence, and the capital will be just the cash on hand, say five millions, we to take fifty-one per cent. of the stock and give them forty-nine. i will undertake to show them that their forty-nine will be more valuable under those conditions than the whole is now." this is where i sat up amazed. "but, mr.--," i gasped. i remember reading somewhere that new york's infamous boss tweed, at the zenith of his extraordinary corrupt career, actually began negotiations with a syndicate composed of his friends to sell them the new york city hall on a long-time note. when some curious heelers asked where the city fathers should conduct the affairs of the metropolis, he beamed on them in a paternal way as he explained: "oh, a detail of the sale will be a hundred years' lease back to the city at a rental which will give us enough each five years to pay the purchase price." absurd, you say. not so far-fetched as you may think, if you will remember the conditions under which the national city--the "standard oil" bank--acquired new york's old custom house on wall street. they bought it from the united states government, credited the purchase price to uncle sam on their books, then rented it for a good round price to the government, whose new custom house was not ready for occupancy, and because it remained in uncle sam's possession, evaded municipal taxation on the investment. they got the property absolutely without paying a cent, and have ever since collected a splendid interest on the million they did not invest. but this deal which mr. rogers outlined to me seemed to go both of these transactions a point or two better, inasmuch as neither of the parties were corrupt city or government officials, but merely private citizens in a country where all are free and equal, and where the constitution guarantees that no man's property shall be taken from him without due process of law. before i could get my breath, mr. rogers, as if he divined my thought, quietly said: "one of the inducements i offer will be to allow them to reinvest the money we pay them in the new consolidated company's stock, at a good big advance over what it will cost us." this was too much. i roared and roared, and even he had to laugh as he quietly remarked: "i said you would find we had done better for you than you could do for yourself, lawson, for you must remember you are in on this at actual cost." i stopped laughing. "how is that? i thought you intended the new copper company to have the fifty-one per cent. of the selling company?" he looked at me with something akin to disgust. then his voice changed, and he let me have it straight from the shoulder: "lawson, do you really intend that this whole copper business shall be a charitable affair? if you do, just count us out right here. we are willing to accede to a lot of your ideas, but there is a line we must refuse to cross even to please you. this fifty-one per cent. of the selling company is to be owned by all of our friends, and it is one of the things we must use as a sop to daly, stillman, morgan, and the rest, to make them enthusiastic on our main scheme, and it will not come under our general arrangements of seventy-five and twenty-five per cent. it is one of the things i want you to leave entirely to mr. rockefeller and myself, and you can depend upon it we will do the right thing. all the stock is to be pooled in our hands for a long term of years, so you can say to the public that its operations will be in favor of the consolidated company." there you will note was the second explosive point in our conversation. i was too much concerned at the moment to take in all his words implied or to appreciate the fine dexterity with which a difficult situation was being handled. these decisive sentences were cracked off quick, sharp, emphatic, like the snapping of a bunch of firecrackers. i began a "but, mr. rogers," when he interrupted, and his words came stern, aggressive: "is it satisfactory to you or not? i am half beginning to think you are crowding this good thing we have in copper a bit too much. i simply ask now, is this satisfactory to you? do you leave it to us, or not? but whether you do or not, this particular part does not go to the public in any way." he really showed a heap of irritation, and even now i think a little of it was genuine anger. it came over me that perhaps i _was_ overcrowding it and treating the whole copper enterprise too much as if it were my personal property; for here was something i had had nothing to do with, the setting out, pruning, and gathering the fruit from, this particular plum-tree, and so i answered without any hesitation: "it is you, i think, mr. rogers, who are a little unreasonable in not giving me a chance to tell you how i look at it. yes, it is perfectly satisfactory. i will leave it entirely to you and mr. rockefeller. whatever you do will be all right." at once mr. rogers' expression changed. he looked relieved, making no attempt to disguise the fact that he had discharged a troublesome duty. "that is the way to look at it, lawson," he said. "you'll not suffer, i promise you." meditating over the conversation afterward, i realized how delicate his task really had been, and how well he had performed it. it had been to settle this matter and to rearrange our copper plans that he had summoned me to new york, and if i had proved refractory i can see he would have been badly snagged in his negotiations with the lewisohns. if there had been a trace of dissension in our camp, that firm would never have surrendered their great business on such terms as rogers proposed to exact. this is as good a place as elsewhere to tell exactly how fair and just mr. rogers proved himself in the cutting of this particular melon, and to explain why he had been at such pains to have me leave it entirely to his and mr. rockefeller's generosity. the fifty-one per cent. of the sales company amounted in hundred-dollar shares to , ($ , , ). if i had insisted upon the arrangement then in force my share would have been , shares ($ , ), which to-day are worth a fabulous figure. for some time after this i heard nothing about the matter and was in complete ignorance of what my portion was until one day mr. rogers said in an offhand way: "by the way, lawson, you can send me a check for your allotment of the selling company's stock, shares." before i got a chance to interpose a word he said: "we had to divide that up among a great many, or there would have been a good deal of hard feeling, but, after all, it's only a side-show and does not amount to anything when you consider our real plans." at this moment, carefully chosen for that very reason, our affairs were swimming along so magnificently and my own profits were so great, that i had not the heart to make any serious objection. i let the matter go with an inward resolution that at the first convenient moment i would slip out of the selling company. sure enough, shortly afterward mr. rogers said to me: "lawson, i do wish we could get in that selling company's stock from the different holders." he did not actually say he was buying it in for the amalgamated copper company, but he desired that i infer it. i snapped him up: "all right. you can have mine, mr. rogers," i said. "at what price?" and i think he thought that he would be compelled to do some trading. "oh, about cost and interest," said i; and the thing was done. i afterward learned that he had treated every one in much the same way, and that he and mr. william rockefeller practically had it all. they have it to-day, just as they and john d. rockefeller, and possibly one or two others in "standard oil," have appropriated all the inner companies of "standard oil" where the real melons are cut--the secret rebates and all the other under-the-rose profits--while they are so industrious in their unloading of the stock of the main company, standard oil, that the last annual report showed that the list of outside stockholders numbers , , this too at a time when broadway sits up nights to disseminate the impression that the rockefellers and rogers own it all. chapter xviii the biters bit to see and judge actions aright one must have them in perspective. as the celt remarked, "you can get the best view of your life after you're dead." looking back on the performances of this period, i myself am amazed at their monstrous audacity. remote from common experience, their extravagance suggests unreality. here were the master of the greatest business the world has ever known, and i, a mere captain of his forces, without even a by-your-leave, calmly carving up a big commercial enterprise, the property of other men who had spent the days of their lives in creating it; and these men whose institution was thus being ravished were not children, idiots, or aged dolts, but able merchants renowned the world over for their shrewdness and success. the one phase of the contemplated operation which occurred to neither of us as worth discussing was the possibility of not securing the property. this transaction demonstrates the despotism of the "system," the extent of its rapacity, and its arrogant disregard of all laws and rights, human or divine, in the enforcement of its exactions. and it was but one of a hundred similar transactions. before mr. rogers and myself parted, i had definite instructions: first, to begin to teach the public to look for new things in the first section; second, to overcome the objections of the holders of butte & boston and boston & montana, and other boston stocks to being in the second section of the consolidation; third, to purchase the majority of the parrott company's stock; fourth, to see that the public kept away from anaconda in the market for the time being. while the minor details of these plans were being mapped out, i had let my mind run over the market situation of anaconda stock, and had arrived at certain conclusions which i determined to test forthwith. so i said: "some one, mr. rogers, must have bought lots of anaconda while you have been working this plan out--i mean lots outside of that which is going into the new company--and i should like to know if i'm in on any part of what may have been gathered in?" his eyes focused me with a cold stare which told me even before he spoke that i had better have kept my suspicions to myself. "i have heard of no one putting you in on any anaconda," he said sarcastically. "you have not given any one any orders, have you, nor sent any one your check to pay for any, have you?" i was nettled at his tone. "that is all i wanted to know," i answered. "of course, anaconda will have a still bigger rise, and if we have all we care to buy for the new company, no one will object to my telling the public what a good thing it is and putting them aboard now." i was on perilous ground. he gave me an ugly glare which i knew meant real danger as he slowly said: "i think, lawson, you have done all that is necessary for you to do for the public in letting them in on the things you already have, and for some time any one who interferes with the market on anaconda stock, which i consider fairly belongs to mr. rockefeller and myself, will not find his investment a profitable one." "well and good, mr. rogers," i answered. "if you consider the market yours, i will not interfere, but i wanted to know just how it stood." "you know now, and i shall expect you not only to keep out of it, but to see that it is handled in such a manner that all others stay out--all others except sellers," which meant that not only was no one to get any of the benefits on this stock, but that innocent holders were to be enticed into selling, that "standard oil" might buy before the real rise came. as i write these sentences i marvel at my patience, and my blood tingles with the thought of how, if the opportunity were again mine, i should reply to such an imperious mandate. if men said and did at the crucial moment all the wise, strong things that occur to them afterward, this would be a different world. the brave and scornful words i should have uttered i choked back, and, as countless others had done before me, i bowed my head and--submitted. conscience and honesty slunk sadly into the background as i flaunted off on the arms of policy and discretion, pirouetting to the jingling music of golden shekels. great fortunes are seldom achieved without sacrifice of morals--or at least of pride--and ambition makes meaner cowards of us than conscience. then and there i might have made a martyr of myself by threatening an exposure of the whole bad scheme and defying "standard oil" to do its worst; but martyrs seldom give themselves to the flames, and looking back dispassionately from the vantage-ground of the present, i doubt seriously if by denouncing the conspiracy i should have done more than discredit myself. the interview ended, i returned to boston and at once began the execution of the new plans, the remoulding of the public and the purchase of the parrott mine. parrott was an active mine earning a large revenue and with something over , shares of capital stock. for the purpose of mr. rogers' plan its inclusion was essential, for it was well known and helped cover up the inflation in his consolidation. possession of , shares would give control, and the public would imagine when the announcement of its purchase was made that this meant ownership of most of the entire capital stock. indeed, it afterward developed that this was one of the conditions mr. rogers and william rockefeller relied on to deceive investors, for it was a natural assumption that nearly all of anaconda and parrott were included in the consolidation, and in estimating the value of the properties the public would multiply the market prices of their shares by the total capital stock and assume the result represented the assets of the amalgamation. for instance, the valuation of , , shares of anaconda at $ , and , shares of parrott at $ --the prices at the time amalgamated was floated--would represent respectively $ , , and $ , , ; whereas the company owned only , shares of anaconda and a few shares over , of parrott, selling for in all about $ , , . the control of parrott was in the hands of certain wealthy connecticut brass manufacturers, and, just previous to my receiving orders from mr. rogers to acquire the property, they were so anxious to sell this mine that they had given my brokers, brown, riley & co., of boston, an option on a majority of their shares at $ per share, agreeing to pay a large commission should a good customer be secured. before i could clinch at this figure they took advantage of the excitement in "coppers" to bid up the stock, so that when i began operations parrott was in the market at $ , and i offered $ for the majority of the shares. an intimation of our purpose must have leaked, for other shrewd owners, also connecticut men, bid the price up still higher until i was forced to raise my limit to $ per share--quite an advance on $ . on that figure we all agreed and the papers were prepared, but at the last moment a young man "butted in"--i think he was the son-in-law of one of the owners, who turned up with an option, and declared he could get $ per share for the property. we were trapped, for the alternative presented was to forego the purchase or pay the price demanded. there was a conference, at which i denounced the "hold-up" in strenuous terms; but the son-in-law proved equal to the emergency and stood by his guns, though some of the old gentlemen declared his exaction was unwarrantable. in the discussion there developed a queer fact--the son-in-law told us that the property was a good deal richer than any one thought: he had discovered that a certain section of rich ore in which there were several millions of dollars had been walled up by some designing person for his own purpose and the mine was easily worth $ per share. i had heard stories of this kind before and frankly professed incredulity. the son-in-law agreed to reveal the ore to any one we might send to the mine, and so one of our most trusted engineers was despatched with him to butte on the agreement that if he were convinced that the walled-up values were all that had been indicated, we should pay $ . if not, $ would be the price. the twain started at once; our expert was convinced, and we paid four millions instead of one, two, or three. strange to say, the subsequent operations of the mine have never revealed the walled-up values; instead, there has been developed a queer lot of litigation, the tendency of which suggests strange uses of that extra million. anyway, the trade was made, and the gentleman of the nutmeg state went home chuckling at the thought that though there was a "standard oil," there were others. "standard oil" never forgets. sometimes it may get left at the post, but always it catches up in the running--so as to be in the lead at the tape. when i reported the conclusion of this parrott deal to mr. rogers, he said: "lawson, all's fair in a trade"; but i shall never forget the expression his face wore as he went on. "just give me the name, lawson, again, of that particular individual in this particular trade, that i may remember him hereafter." he spoke in a low, intense tone, and each word was separated from the preceding one by a dwelling stop. i gave him the name and the identification marks to go with it, and felt satisfied that even if the nutmeg financier lived to be a thousand and henry h. rogers kept him company, there would surely come an evening-up which would be the worse for the erstwhile victor. sure enough it came soon afterward, for the able connecticut man, embarrassed at possessing so much uninvested money, came to us to ask advice about reinvesting it. the "standard oil" magnate was most sympathetic and generous, and pointed out the obvious advantages offered by the great new company amalgamated, which would be out in a few days at $ per share, and doubtless would sell soon afterward for $ per share. the nutmegite nibbled and then swallowed bait and hook whole, for when the subscription was announced his agents' names were found opposite a large block. later on he applied to us for consolation and advice, for the stock he had bought at $ and $ was then selling at $ . we figured out for him that after all he had little to complain of; "for you see," we explained, "fair exchange is no robbery, and you have had just a fair exchange. you sold us your property inflated four times, and we sold it back to you under another name at about the same percentage." before the fireworks began, anaconda sold in the market at $ per share, and parrott, as i have shown, at $ , and in addition to the enormous profits which mr. rogers and mr. rockefeller made in the amalgamated company proper, they cleared some $ , , to $ , , on their outside purchases of anaconda, and some $ , , to $ , , more later by selling it short (as i shall show hereafter), at the tremendously high prices which were obtained by leading the public as well as myself to believe that they intended to purchase the entire stocks of both companies for the amalgamated--that is, it was given out that the sections which were to come after were to have these minority holdings included in them. they sold anaconda short in enormous quantities between $ and $ , and parrott between $ and $ ; afterward they bought them at $ and $ respectively, and no one knows how many millions these gentlemen are taking in now, for both stocks are again on the return trip, selling at the present writing at $ and $ respectively. chapter xix the despoiling of leonard lewisohn a few days later there came another summons from new york. realizing that matters of importance were in the balance, i hurried over. nothing could surpass the cordiality of mr. rogers' greeting as i entered his office. "lawson," he said, "we own lewisohn brothers." "you certainly lost no time," i replied. "is it actually fixed up already?" "yes," he said, settling back in his chair. "it was about as i outlined to you the other day. we had a very pleasant sit-down--leonard lewisohn and i--and i frankly told him what i wanted, explained our plans, and gave him twenty-four hours to think things over. next day he was in and we went at it again. he began by talking $ , , , and it did come hard to bring it down to a little less than the actual cash and copper on hand; but when he saw i intended to have things my way or not at all, he meekly surrendered, and the united metals selling company ($ , , capital stock) is now a reality. and, lawson, if i ever had to do with a better scheme i certainly cannot recall it." "did not lewisohn put up any sort of a fight?" i persisted, surprised that so able and forceful a man should succumb so easily. "didn't you have any words about the matter?" "not any but pleasant ones," replied mr. rogers, "although lewisohn did, in an almost pathetic way, gasp when i emphasized that my only terms were $ , , , fifty-one per cent. to us and forty-nine per cent. to his people. he told me how he and his brothers had struggled up to success. they began in a small way as feather merchants, you may remember, and from one thing to another they progressed until the firm is known to-day as one of the greatest copper houses and the greatest coffee house in the world. he explained how he had brought up his three sons and his daughter's husband in the firm until they had become great merchants, too; and his ambition was that their sons and grandchildren should succeed to the institution, enlarging and strengthening it until the house of lewisohn was as famous as the house of rothschild--with which, by the way, he is closely connected. i tell you, lawson, i felt a bit mean when, after he had told me how he had always kept his name's credit as good as any other man's bond, he asked me almost with tears in his eyes to let the name of the new company be lewisohn brothers. indeed, he made a strong argument on the great value of the name to the copper business; but it did not take me long to show him the evils that grow out of letting men's personalities get into the public's mind. i battered down his objections by showing him the wisdom of mr. rockefeller's attitude in this connection. always, from the first, he has taken the stand: 'the business first, the man second': with the result that there has never been jealousy or dissension in standard oil." "too bad," i interrupted. "yes," mr. rogers went on; "i wished i might have done this for him, for he is a splendid fellow; but it would not do, for after the newness wore off he, or more probably his sons, would surely imagine that they, and not we, were the real heads of the business." as i have explained, henry h. rogers, when not working the handle or hopper end of the "system's" grinder, is a warm-hearted and generous man. and now, resting from his labors, he was the genial and kindly gentleman whom his social acquaintances admire so sincerely. i believe he felt almost as badly as i did over the sad picture he had drawn of the proud old merchant yielding up his children's birthright. i felt grieved to the depths of my soul at leonard lewisohn's predicament, for i knew, as did all men connected with wall street or copper, what a stalwart he was. he had the heart of an ox and the pluck of a lion, and his white-man squareness and sense of justice belonged to other periods than that of frenzied finance. no man or woman in distress ever left his house or office without relief, and he gave as generously of his time and advice as of his money. amid the jagged rocks and treacherous cross currents of wall street leonard lewisohn stood as a beacon lighting the way to better things, and men pointed at him and said, "there is still hope." amalgamated may not have broken this man's heart as it did others, but i can imagine the bitterness and distress it caused him, whose proud boast it was that he had never gone back on his word. one of the promoters of the company, his name stood, in the minds of many investors, especially european, for a guarantee of fair play and square dealing. yet the course of amalgamated was one continuous going back on words. he had never allowed an associate of his to lose through his ventures, but in amalgamated there was nothing but loss, and loss by trick and fraud. after the flotation, with its harvest of disgrace and scandal, leonard lewisohn became a changed man. his old-time happy smile was seldom seen, and it is said that before he died he summoned his sons to him and instructed them to destroy the notes and obligations of all his poor debtors and to return to them their collateral, of which there was a safe full. this man employed no press agent, and so his golden deeds were never reported in the papers, nor did he found a college to perpetuate his name; but he left a million of his estate to found a great home for the jewish poor, for he loved and was proud of his race. i have given you a portrait of this man; let me, by way of contrast, present another picture, which will help toward an appreciation of how the votaries of the "system" respond to generosity and chivalrous self-abnegation. before leonard lewisohn died he organized a tremendous deal in coffee, and rogers, rockefeller, and all the other "standard oil" men were in. a fund of $ , , was subscribed, to which all contributed in due proportion, and an immense amount of coffee was bought against a prospective scarcity. the condition mr. lewisohn anticipated did not immediately develop, and instead of rising, coffee dropped down and down until the $ , , and more were all used up. another man would have called on his associates for additional margin, or, at least, closed up the deal. not so leonard lewisohn. though some of the other members of the combination were many times richer than he, he shouldered the burden alone, saying: "it's my scheme, and i'll carry it if it breaks me, or until my judgment is proven sound." still coffee declined until he had sunk $ , , , but never a whimper and not a word of complaint to his partners. things were near the worst when he died, but he had instructed his heirs not to wind the deal up until every cent of his associates' liability was wiped out. there came a time not long ago when leonard lewisohn's foresight was vindicated, and an advance in the price of the commodity relieved the "standard oil" coterie of their responsibility. the sons of the old man then desired to dispose of the great holdings of coffee, and so close the deal and secure the locked-up millions for the estate. they went to the various members of the syndicate and asked them to sign a release simply agreeing to relieve the estate of liability for presumptive profits growing out of further advances in coffee after they had sold out. it was a very ordinary legal precaution, and no great favor to the lewisohns under the circumstances. the members of the syndicate signed the release in due course, until the document finally came to henry h. rogers, and this is the contrasting picture: "coffee is going up, i think," said the "standard oil" magnate, "and now that the lewisohns have extricated themselves from a bad hole, they may as well carry the stuff until i get some profit out of it. neither mr. rockefeller nor i will sign that document." chapter xx the christening of amalgamated my readers may recall the wave of indignation which swept over this country when the news came of the kidnapping of miss stone, the american missionary, by the bandits of bulgaria, and how hot we all felt at the capture of ion perdicaris by raissuli, the morocco rebel. only in remote and barbarous countries, we reflected, could such outrages occur, and we dwelt with high inward satisfaction on our own splendid american institutions and law-abiding civilization. if only these miscreants were on american soil so american justice could lay hands on them--what stern punishment would be meted out to them! yet, under the panoply of these noble institutions and just laws of ours, one citizen of our commonwealth was enabled to seize from another millions of money and the ownership of a great enterprise--literally wrench it from the hands of men who had spent their lives in developing it--and the execution of the deed involved neither financial nor physical risk and carried with it no legal nor social consequences. look on the picture, all ye free americans rejoicing in vaunted liberty and the right to the pursuit of happiness--this able and successful merchant, head of a great business which it has been his life-work to rear, surrendering the splendid structure at the mere nod of one man, whose "i want it" is more potent, more irresistible, than family pride or government decree. if leonard lewisohn, a millionaire many times over, rich in connections with the strongest financial houses of europe, meekly submitted to the behest of "standard oil," what resistance could the average man oppose to such a power? the logic of the situation is inevitable. can you free americans absorb the details of this most extraordinary performance and not see the coming storm as clearly as the mariner does when all along the horizon creep the hosts of boreas and the barometer drops like lead in a shot tower? at last, in april, , the first section of the much-heralded company was ready to step before the footlights to the plaudits of an awaiting financial world, and it was really a great moment when mr. rogers sent me word: "come over, and be prepared to stay until the consolidation is formed and launched." i was at broadway next day, and we entered at once on our council of war. it was a momentous sitting and secret, for, until the entire programme was mapped out and decided upon, no one was a party to it or had knowledge of it but mr. rogers, his counsel, william rockefeller, and myself. after we had finished the final details, mr. rogers said: "this is a job on which we must not lose time, for if we give any one, even those who are to be directors, too long to think things over, there will be counterplots, and a cog may slip or jump and we shall all be crushed. we must all bear in mind that this thing has rolled up and up until it is unprecedented in business affairs, and if we slip up in any of the important details, we shall have a panic on our hands such as wall street has never witnessed." on all sides for weeks there had been accumulating evidence, which we could see pointed to a monumental success or an avalanche failure. the copper market was literally boiling, and investors from one end of america to the other and throughout europe were on the _qui vive_ for the anticipated announcement. at intervals in history great "booms" are started, which bloom into iridescent bubbles, and for a moment dazzle the world with fairy dreams of sudden millions. greatest of all these was the south sea bubble. since then we have had the tulip craze in holland, the hooley excitement, and the barney barnato south african mining furor in england, the secretan copper corner, and the tremendous bonanza delirium in california; but none of these, save the first, is comparable with the magnitude of the copper maelstrom of . the tulip craze could have been thrust in and withdrawn again without diverting one of its currents; the barney barnato affair was little more than an eddy on the surface of english finance in contrast. we were dealing in hundreds and five hundreds of millions; shares rose and fell twenty to fifty points in a day; some had mounted to the giddy height of $ each; thousands of the public had invested their savings in one copper property or another, and all awaited with bated breath and marvelling anticipations the launching of this copper monster with its freight of hopes and visions. the programme as specifically arranged had several important clauses. the first involved the notification of james stillman, president of the national city, the "standard oil" bank, who was to be let into only as much of the secret as was necessary to enable him to handle his important end intelligently. to leonard lewisohn it was decided to intrust the french, english, and german end of the subscription, and he was at once to receive orders to lay his pipes. i may say here that this task was admirably executed through his son-in-law, philip henry, of the english branch of lewisohn brothers. the other directors of the company were then and there selected, but it was agreed that they should not be told of the distinction thrust upon them until the very eve of the company's formation. this decision surprised me at the moment it was concluded, for with my boston ideas i had regarded the gentlemen we had chosen to preside over the destinies of our great company--all men of the highest prestige and standing in american finance--as so powerful and so independent in their own fields as to be beyond either the coercion or the cajolery of "standard oil." it was because of this reputation for integrity and the confidence their names would inspire in the public mind that we had selected them; yet here was mr. rogers irreverently using them as the veriest pawns in his game, and taking absolutely for granted their immediate consent to the loan of their reputations and honor for any scheme he might put up. the possibility of one of these eminent financiers objecting to be used in any way "standard oil" might desire was a contingency evidently so remote as to be unworthy of consideration. the legal aspects of the problem were considered, but as we felt sure of our ground it was agreed to avoid all delays in this direction. as a matter of form and habit, however, mr. rogers said that at the last moment, when the papers were ready to issue, he would have the wise lawyers in charge of the legal department of broadway run over them, but whether they approved or not, he would allow no technicalities to hold up the flotation. this was certainly a departure from the well-ordered rule of "standard oil," but the urgency of the situation seemed to require it. after our council adjourned, not a moment was lost. the organization was quickly shaped up and got ready, and the time was ripe to broach to mr. stillman the part that he and the funds deposited in the national city bank were to play in the forthcoming engagement. this was a crucial point, and i saw that mr. rogers approached the task with no gusto. before he went off that night he spoke about the interview which was to occur after dinner, and he said: "i don't mind giving fewer or olcott or even morgan but a minute's notice, for every one of them will do about what i ask him to, but i shall feel better when i get through with stillman." "but mr. stillman would never dare to refuse what you and mr. william rockefeller asked, any more than he would the request of john d., would he?" i asked. "i don't know about that," mr. rogers replied. "stillman has been growing fast of late, and it is not nearly so easy to get him to consent to run deals blindly as it was formerly. of course, if he were in on the bottom floor with us, it would be different. all i fear is, he may ask questions, and if he does, it will not do for me to refuse an answer. and too many answers may be dangerous to our plans." "why not take him in with us--you, mr. rockefeller, and myself?" i suggested. "the profits will stand it, and as far as my share goes i am willing." "not by a jugful, lawson," said mr. rogers emphatically. "stillman will only get what fairly belongs to him. he has had none of the risk or work, and we do not need him in any way except through the bank, and the bank is 'standard oil's,' not his. he is lucky to get what i am going to give him." it is interesting to note in passing the authoritative manner in which broadway speaks of the so-called institutions of the people that it controls--the banks, trust companies, and insurance companies, having deposits of hundreds of millions of the public's money. familiarly they are alluded to as "_our_ bank" or "_our_ insurance company," as the case may be. we are all apt to feel we own the things we use, and that mr. rogers should speak of the millions of the national city bank as "our funds" is not surprising when he possesses the power and the privileges of doing with them as he pleases. i was too fascinated at that time by the ready magic of "standard oil" to observe all the anomalous conditions my relation with it revealed. such things all seemed a natural attribute of the despotic and all-powerful institution that i served. i was vastly relieved when mr. rogers reported, the following morning, that at the dinner with stillman everything had slipped through very smoothly. not only would the national city bank take charge of the subscription, but through the institution mr. stillman would furnish the millions necessary to form the company. this meant supplying the paraphernalia in loans, checks, and cash necessary to pay in the seventy-five millions capital, thirty-nine millions of which must at once be "book-keepingly" available to pay for the property bought from daly, haggin, and tevis, and purchased by the company. "it couldn't have gone through easier, lawson," mr. rogers said quietly, "for the fact is, stillman seems to have got the copper fever as badly as any one else and is as anxious to take a hand as we are to have him. it will be plain sailing now unless we strike some snag with sterling or elliott"--referring to the principal "standard oil" lawyers. by this time such substantial progress had been made with the plans that they were formulated on paper and the time had come when it seemed advisable to try them on the "standard oil" law-department. we arranged that night that next morning mr. rogers should himself go over the matter with mr. sterling. i was waiting in his office when he returned from this consultation, and the expression of his face as he entered indicated plainly that a real snag had been struck. his jaw and the droop of the upper corners of his eyelids gave a curiously sinister aspect to his face. "well," said he, "sterling says if we carry out that plan there may be h--l to pay some day." "wherein does he say it is wrong?" i asked, not over-surprised. "everywhere. he says if there is any slip-up in the future mr. rockefeller and myself may have to pay back a lot of money." "well, what are you going to do?" i said. "just what we started to do." no lawyer's warnings could hold him back from the bursting barrels now in sight. he went on: "i told sterling to forget i had asked him to pass on the matter, and that i would have my own counsel take the responsibility. so we go right ahead, and nothing is to be said to any one, not even to william rockefeller. i have always argued that it is fool business to go to a lawyer with a scheme that depends entirely on how it is carried through as to whether it is perilous or not. i could have told sterling there is apt to be more danger in a deal in which one makes thirty-five to forty million dollars without turning a hair, than in furnishing staid advice from an office-chair for a fixed sum per diem." the concentrated incisiveness of these sentences! opposition, the mere suggestion of danger, had stimulated his determination to proceed rather than enjoined caution. himself convinced of the expediency of our deal, no power on earth could make him deviate or face about. truly a man of blood and iron, as bismarck or moltke was, his erected will is a sword and a vise. to gain a predetermined goal henry h. rogers will go through hell, fire, and water, swing about and make the return trip, and then repeat, until death interferes or his object is attained. such men as he in other days subjugated kingdoms or made deserts where they operated; in religion they became st. pauls or savonarolas. it may occur to my readers that in depicting henry h. rogers i use more whitewash than tar, and that if he is half as determined and relentless as my characterization of him, he will surely exact a terrible reprisal for what i have written here. in describing the man i adhere to the facts, and before i began this crusade i weighed well the consequences. from the implacable wrath of henry h. rogers and his associates, from a thirst for vengeance which grows more bitter as it is deferred, nothing can save me, nothing but--myself. and now events flew. mr. rogers took the forenoon to notify governor flower, president frederic p. olcott, of the central trust company; marcus daly, and j. p. morgan, that they, in connection with william rockefeller, himself, his counsel, and james stillman, were to constitute the directors of the new company. "there, lawson," he said, when he returned to broadway, "that job is done, and i am glad it's off my hands. it was all pleasant enough but the morgan part. i wish it were possible for us to get along without having his assistance, but it isn't. leaving him out would create comment, from which it would be only a short step to wall street's nosing around and manufacturing something uncomfortable, even if they didn't discover it. i don't like morgan a bit, and he likes us less. it won't be long before one or the other of us will be able to do business without knowing what the other's about, much less consulting him--not very long." as the "not very long" shot out from between his lips much as the tail-end of an up-chimney wind switches itself around the angle of the fireplace, i felt there was little doubt in his mind who would be left to do business after the final drag-out and clean-up. at the same time it did not dissipate a sort of come-and-go confidence i had that the old terrapin around whom so many of wall street's eddies have swirled would cause the -broadway crowd many a broken knife-blade before crawling or being pushed into his shell. turtles are not much good as sprinters, but they're blue-ribbon winners when it comes to the staying class. "you didn't meet with any set-back with morgan, did you?" i asked. "oh, no," mr. rogers replied; "he simply said it would be best, everything considered, for us to put in his right-hand man, robert bacon, instead of himself, and i agreed with him; in fact, i think it much better, as bacon is a rattling good fellow who takes no interest in the other fellow's business, even when he does happen to be a director in the other fellow's company, and he will recognize that this copper affair is mine, not morgan's." he stopped abruptly. "now, lawson, let us settle upon what in this case is an important point, the name of the company." he had asked me the day before to think of a suitable title for our organization, and i had put in some time with a pad and pencil experimenting. i had several names ready for him, but after i had run over them and given my reasons, he said: "there is nothing more important than to have just the right name for a company which is going to make history, is there?" i agreed; in fact, even more than he i was impressed with the desirability of a suitable name for a corporation whose stock was bound to become a great market star, and i was not satisfied with any i had dug up. give a stock or a book a good name, and it is sure to be numbered among the best sellers. mr. rogers continued: "lawson, we want something as good as 'standard oil,' if it is possible to find it. now"--and he drew over one of his little writing-pads and taking a slim gold pencil from his pocket slowly wrote something and handed it to me--"how do you like this?" i read "'amalgamated copper company.' perfect!" i exclaimed. "i thought you would say so"; and he reached over and wrote underneath the name, "a second standard oil." it was an impressive moment for both of us. i folded the slip, and putting it in my pocket said: "you will see this again, mr. rogers, when its stock sells for as much as standard oil." surely an adder crawled from that tiny golden cylinder and upon the smooth white paper distilled its subtle venom. i, poor fool, exulting in the splendid throes of accomplishment, never dreamed that the real christening of my bantling was the toast the master of hell drank as the name "amalgamated" was slowly traced upon the pad before my eyes; never dreamed that this cherished offspring on whose rearing i had lavished all i possessed of dollars, of ideals, of generous hopes and high expectations--whose growth i had literally watered with my sweat--was an imp of darkness. my fool's paradise i had planted with all manner of fair flowers and lordly trees, and in my folly believed that those who had been my friends were forever after assured of pleasant places, lovely perfumes, and grateful shade; but like the grecian in the ancient fable, i found i had sown dragon's teeth, and the crop i reaped was of hatred and envy, passion and revenge. chapter xxi fixing the responsibility on the day before amalgamated's incorporation, mr. rogers and i conferred long and earnestly upon the plan of campaign for the company's organization. it was very necessary to avoid all errors, and to have everything cut and dried in advance. we were obliged to railroad things through, once started, a hitch or a side-track might be fatal, and i desired to have mr. rogers pass upon the programme i had drawn up. therein was set down the work of each captain, lieutenant, and water-carrier who was to take part, and we discussed every detail to a finish. when he had approved everything up to the point where formation ended and the flotation began, i said: "now comes the most important part of all--the offer to the public; for a slip-up, the misuse of a single phrase, or even of a word, at this point might destroy our whole structure." "quite true, lawson," he answered, "but i have no fear of you there. let me have your idea." "first," i replied, "there should be an advertisement of the national city bank, and one of the amalgamated company, and in this advertisement the story of the good things we have collected must be told in strong terms." i am now about to explain exactly of what the first crime of amalgamated consisted, and it behooves my readers to weigh carefully the details, for i make the claim here that without further proof they will be able to realize not only my own position and purpose at this, the crucial, stage of the amalgamated enterprise, but to grasp the cold-blooded villany of the men i am exposing. at this time i was in a most uncomfortable and uncertain position. each day that i did business with mr. rogers and his associates increased my knowledge of their heartless brutality in dollar-making. i knew i was on dangerous ground; but to retreat meant not only my own destruction but terrible losses to my friends who had followed me and to the public which had come in on my advice. so i had made up my mind to go on but to keep my eyelids pinned back, my tongue anchored, and what gray matter i possessed oscillating. remember, i was in no way sure that mr. rogers intended to misuse the public, but i suspected that his coat-sleeves contained more things than his shirt-cuffs, and that he was playing a game other than the one he let me see. up to now mr. rogers and william rockefeller had kept me between the people and their legal responsibility by having all public statements made over my signature. i had half-way concluded that this was done to avoid future accounting, but there might be other reasons. i determined when it came to the flotation, which would be the first time they took openly the public's money, to connect them publicly with my statements. it is next to impossible for any man to sit in front of henry h. rogers and give one reason for his actions and have another about his person; but this was a desperate situation and i resolved at any cost to carry my point. how difficult a task i had undertaken i did not realize until i was well into it. when i had stated the form i thought amalgamated's first announcement should have, mr. rogers paused. he repeated: "the city bank--that's a question. now, how do you propose to go about that advertisement?" "simply this way," i replied. "i will draw up a memorandum of the main strong points about the amalgamated company, and you will ask mr. stillman to have some of his people write them into a good, clear statement. this we will publish as an advertisement over the bank's signature, and have the amalgamated company indorse it, showing that it is joined with the bank in responsibility for the truth of the announcement." mr. rogers said nothing, but continued to gaze inquiringly at me. i went on: "or, the amalgamated company can be the principal and the bank the indorser." "just what is the bank to say in this statement?" he asked very seriously. "the big things about our enterprise that i have been telling the public. we will put them forward in an old-fashioned, unequivocal way--that should accomplish what we want," i replied. he was looking at me in a curiously searching manner as i spoke. he said: "let us have the strongest one or two as an illustration." "well, for instance, what i have advertised so often, that this stock is so good the 'standard oil' people who formerly owned the property behind it would prefer to own all the stock and hold it as a permanent investment, but that the enterprise is so large their interests will be better served by letting the public in than going it alone. you and i know that's true. also that the company is earning sixteen per cent. and will always pay eight per cent. or over. something to that effect." "do you suppose, lawson," said mr. rogers, straightening up and speaking very impatiently, "that the public will swallow any statement of that kind? just think it over--william rockefeller, james stillman, and myself, to say nothing of others, openly spending our money for advertisements to induce tom, dick, and harry to buy stock at par which we know is earning sixteen per cent. and will always pay eight!" "why not?" i responded. "i have practically stated the same thing scores of times as your agent, until, so far as the public is concerned, my telling it is the same as though 'standard oil' had said it." "well and good," mr. rogers went on dryly. "but, lawson, you know there's a heap of real difference between your telling it and our putting it over our signature." i well knew the difference, but i had my point to make; so i said: "all right. let the city bank and mr. stillman put it their own way." "lawson, that's foolish," mr. rogers returned. "they must not be allowed to have anything to do with it save to o. k. what we are to advertise over their signature. stillman would never agree to our using the city bank to hawk any stock but a gilt-edged one." "isn't this a gilt-edged one?" mr. rogers glared at me. "why waste time and words over a matter that you know as well as i must be handled very, very gingerly? it is not because it is not gilt-edged, but because of the peculiar situation of it. the public thinks this stock which is to be offered to it belongs to the amalgamated company, and that the city bank is selling it for the amalgamated treasury just as in any of the ordinary first-class issues they offer for subscription; whereas we know that the stock belongs to us and the bank is selling it for our profit. if the public suspected that this stock was ours, and that we were not going to subscribe on the same basis as themselves, it would demand to know what we paid for it, and if we didn't tell, it would be figured out as a clear case of false representation. where would that leave us? mr. rockefeller, myself, the bank, and stillman would be held for every cent of the capital forever. we cannot put our heads into any such halter." "i cannot see why not," i expostulated. "you and i know there is no more chance of loss than if we were dealing in the city bank's own stock, because of the way we are handling the deal, selling only $ , , to the public, and standing behind every dollar of that, all possible risk is eliminated." "call all that true," angrily replied mr. rogers, "and you don't alter the fact that such a scheme as you map out _is impossible_. you must get to work and figure out some plan which is practical." "i knew that we should find this a difficult matter to get right," i said. "now, what is your idea of how it should be gone about?" this time the burden of explanation was fairly upon mr. rogers, and i waited his answer expectantly. he replied, in much milder tones: "there is no real difference between us, lawson, except that you don't seem to realize the actual position we are in. we are going to do what is fair and right in this enterprise--indeed, there is no necessity for anything else--but we must not put the bank or ourselves in such a place that either or both of us can be held legally responsible for anything that happens in connection with this company. you must keep in mind sterling's words, that the thing is risky enough anyway, and that even under the best circumstances and conditions we may find ourselves in a hole. exactly how to do it i have not figured out, but the city bank must appear as offering the subscriptions, and the amalgamated company as owning the stock, and simultaneously some one else must tell all about the advantages. unless this latter is very fully done, the public will not only refuse to subscribe, but will get suspicious, and there might be a big scandal. it seems to me as though this part of the job is yours to do, and to do just right." so far in our argument we were even. we eyed each other as fighters do in a ring--looking for an opening. both sparred for an idea. mr. rogers' reluctance to shoulder any legal responsibility deepened my suspicions, and inwardly i sweated blood at the thought of the deviltry that might be piled up around the affair. however, there was nothing for it but to square away and keep sparring, for if i lost my temper and exploded, it meant that i should be ground up or disappear in the hopper, and then, good-by to independence. it was the first time i had ever sat in a finish game with the master of "standard oil," and i trembled at the possible outcome. yet this duel--for it was as clearly a fight for life on my side as though we both were armed with deadly weapons--was but one of a thousand similar encounters the rogerses and rockefellers had had with other adversaries as fearless and as honest as i, and out of these heart-breaking and soul-crushing sit-downs they had always emerged survivors, while behind the "standard oil" juggernaut, defeated and submissive, trudged the men who had dared oppose them. should the fate of these others be also mine? across my mind flitted "not while my brain retains its fly-wheels and my hands their power"; and i found myself wondering if there were not some stage at which a man cornered by arbitrary conditions and legal observances was justified in bursting all such trammels and meeting artifice with physical violence. murder is a crime against society and against nature, and we must all observe the canons of god and the regulations of the law; but at least a dozen times in my wrestles with the exasperating, grinding, hell-generating machine, it was only my inborn reverence for god's law and man's that prevented me from--well, shall i say, strangling the fox? all this, however, was between me and my mind. i showed not a vestige of it on the surface, but went on with much earnestness: "mr. rogers, i think i understand the situation perfectly, but let us see if i do. we have reached a point where we are out in the open, and the whole world is in position to pass judgment on us and our venture. there must be between us unanimity of purpose, for the time is past when i can say one thing, you another, and stillman and his bank confuse all concerned by agreeing with one story and denying the second. it is essential that we all pull together, yet conditions are such--and no one's to blame for them, for they have so developed--that we cannot have a general pow-wow to organize a programme. we, you and i, must formulate a plan which can be sent out to the public with the approval of all concerned, all the parties to it being sure they understand absolutely its meaning, while in reality it means something different to each of them. isn't that about it?" "you have covered the situation fully, lawson," approved mr. rogers. "you must understand that this tie-up is due to our having departed from our usual way of doing business. 'standard oil' never goes to the public direct for money, but works up its projects through some of our"--he almost said "dummies," but caught himself--"our lieutenants. you have worked up this affair in our name instead of your own, as would have been the safer way." i thought to myself, "you cannot, whatever you do, evade responsibility for the millions you are to take this time"; but i went on smoothly: "this, then, is how i see our procedure: we will write out an advertisement for the city bank. you will have mr. stillman pass it for the bank, by authorizing me to publish it. you will then authorize me to publish a second advertisement on behalf of the amalgamated company. if there is any slip-up, i, as the agent of both, will have to become responsible instead of you. is that right?" he nodded. i went on: "besides these, there must be a third advertisement, in which some one will tell the strong facts about amalgamated, and it will be so worded as to bring the public with its money into the city bank just the same as though it were signed by the bank, stillman, the amalgamated company, and you and mr. rockefeller. what's the use of beating round the bush any longer? the one to sign that story and stand behind it is myself, because, owing to conditions, no one else will." i had said it. mr. rogers' eyes snapped just once. only on two other occasions in all my long and intimate acquaintance with this wonderful man have i seen him lose his self-control. to anger he will give way frankly if the occasion justifies it or he desires to intimidate or impress an individual; but his face, mobile though it is, presents a calm and impassive mask. i caught the snap, and i think he caught me catching it. it meant much to me--more even than if he had said in so many words "i've got him." in such encounters one cannot see into one's adversary's mind nor know what he is trying to do, and any indication is like the sight of a buoy in a fog to a mariner. i gathered that the snap indicated relief at my compliance, and that he had been afraid i might balk. that showed me that consent on my part was important--which meant that he saw no possible way of carrying the enterprise to the end we had mapped out unless i stepped into the gap. then i knew that he would have to agree to my terms, provided they were not too harsh and that i did not too vehemently insist upon them. it is a cardinal principle of "standard oil" never to do anything they decide they won't do, and that which they decide they won't do is what any man on earth says they must do. you may lead "standard oil," but you cannot drive it. if at that critical moment i had foreseen all that subsequently occurred, or realized that this copper affair, which was to me a matter of life and death, was to henry h. rogers only another device to extort dollars from the public, i should then and there have thrown down the gauntlet and demanded that "standard oil" step out into the open and assume all legal responsibility, or have exposed the whole scheme. but my suspicions were suspicions only, and i could not be sure that mr. rogers was doing other than discretion warranted, when he desired to have things done in such a way as to allow me to continue to conjure with the magic name "standard oil." in other words, wasn't he doing exactly what i myself was engaged upon? i was planning to have him consent to things he was otherwise unwilling to allow, and he, in his turn, was scheming to have the bank and his "standard oil" associates pass over things they would be sure to question if presented less adroitly, or if they came from some other quarter. yet all i was trying to accomplish was honest and best for all. why might not his intentions be as fair as mine? however, the eye-snap determined me to steer nearer the wind. "well and good, mr. rogers," i went on. "i will tell the story i know is true and that you know is true, and that you have repeatedly given me your word you would stand by me in telling, but i will only do so in a way i deem safe and fair to myself. is that agreed?" he winced a bit. "what do you mean by that?" he said. "what do you mean by a 'way safe and fair' to yourself? you are not suspicious of any of us, are you?" "suspicious is not the word, mr. rogers. i brought you and mr. rockefeller this copper enterprise. we have gone ahead with it upon clearly laid down lines. i have done to the letter all i agreed, and, so far, the enterprise has more than fulfilled my promises. i realize that our success has largely come from our going to the public and openly telling it what we were doing and what we intended to do. until now, i am the one who has made all the promises, and, legally, up to this point, i am the only one who can be called to account, but it is the fact that for any statement i have made, you and mr. rockefeller have been as much responsible as myself, and you as much or more than i have had the benefit which has come from what i have promised. now we are ready for business with the public, and there must be a clear and distinct understanding with it or it will not part with its money. this understanding can have but one bearing--_that what the public read, we must all be responsible for legally and morally, not some of us, but all of us, you, mr. rockefeller, the city bank, james stillman, and myself_. for bear in mind it was you and mr. rockefeller who changed my plans by substituting companies and properties of which i knew nothing but what you told me. all the things we ought to tell, you say cannot be put into words, because if they are powers beyond us will refuse to allow the enterprise to go through as it must go through. then the condition must be implied, must be between the lines. you say this is my task, and that i alone can perform it properly. all right--but i will perform it in a way that will hold every one concerned to his legal as well as to his moral responsibility just as it will me who sign it. to save our enterprise i will concede just this much: the advertisements will be so worded as not apparently legally to involve stillman, william rockefeller, or the bank but in reality they will be bound to as strict responsibility as though their signatures were in the place of mine. in doing this i compromise with my conscience, mr. rogers, because it is now of paramount importance that our consolidation go through--as important to the thousands of others who have followed us as to ourselves." "you mean this, lawson, that you will insist upon having this done in a way that will make every one legally responsible?" "i mean just that, mr. rogers. in what other way can it be done?" "as all such affairs are arranged--by allowing the public to think for themselves--but steering our end clear of all possible legal entanglements," he replied in a voice half choked with suppressed rage. now we were both thoroughly aroused, he fairly seething with fury at my rebellion, and i boiling over at his willingness to sacrifice me to his own safety. by this time he was on his feet facing me, and it was evident the tussle would be serious. still i slowly and coldly asked: "how can that be done?" "by _your_ taking the responsibility," he as slowly and freezingly answered. "you mean that _i_ shall go ahead and make glowing and generous promises, on the strength of which the public will put up its money, and that if these promises for any reason are not carried out, i alone shall be the one to face the music? is that what you mean, mr. rogers?" i held myself together, with closed hands and clinched teeth. "just that," he returned. "you are making millions out of this enterprise, and i consider this is one of the places where you earn them." "not if every one of the millions you mention were multiplied a thousand times, mr. rogers, do i say one word to the public to induce it to part with its money--not a word that will not hold you and mr. rockefeller, stillman, and the city bank to a full responsibility--not if, on the other hand, i become a pauper." it was out. i know that the deadly earnestness i felt was in my voice, for though i spoke in a low tone i thought my head would burst until the last word was spoken. we looked at each other--glared is not the word to define that white-hot yet frozen, "another-step-and-i-shoot" look which of all expressions of which the human face is capable is most intense and dangerous. i did not flinch. i did not know what he would do, but i saw my words impressing on his mind the absolute conviction that for once he was face to face with a resolution no power of his could alter. slowly his anger, his will, seemed to subside, but as they did i was aware intuitively that he had changed tactics and was coming at me from another direction. in an instant his whole being seemed to relax and he dropped into a chair with a sigh of relief as he said: "all right, lawson. you've thought it out, i see. you are making a bad mistake, but as your mind is made up, i can do the only thing left to do--call the whole business off for the time being." i had not served as mr. rogers' pike-carrier in vain. superb actor though he is, i saw his bluff, and quick as a hair-trigger called it. "is that your decision, mr. rogers?" i asked, almost before the last word was out of his mouth. i did not attempt to shade the "if-it-is-i'm-off" tone of my voice. he replied slowly and naturally, as though he were taking his decision right off the scales: "yes, i think so." "then we will call it off for good. i've hung so long by the heels on this whole matter that anything is better than a further wait. i'm for boston on the next train, and by to-morrow i'll have figured out where we stand." i started for the door. "just a minute." his voice was as indifferent as though no tremendous issue were at stake, for henry h. rogers is of the iron-willed breed whom peril never betrays into trepidation. he would throw dice for his life as casually as one of your wall street tipsters would for a cigar, and here reputation and millions were in the balance. i knew as well as though i had seen the message telegraphed across his mind that he had said to himself, "it didn't work, i must round to," but i knew my man well enough to realize that a false move now would tip victory back into defeat. i halted. as naturally as though there had been no calculation in the tone of resigned despair which tinged my voice, i said: "mr. rogers, don't let us prolong this talk. you well know what this decision of yours means to me, so let me go where i can think it to a finish." in an instant henry h. rogers was again his virile and commanding self. he jumped to his feet. his words came round and tense, passionately convincing and persuasive. "lawson, are you crazy? would you go back to boston and smash this business that we have spent years on? would you sacrifice the millions that are in your grasp? would you? would you, i say? you know i would not threaten you, but i ask, would you do this, and at a time when you are all tied and tangled up with us in such a way that you would be bankrupt, literally be a pauper, and all because i insist upon things that conditions over which i have no control compel me to demand?" whether he intended to halt or not i never knew, for i let him have my pent-up feelings in eleven words that gave me as much relief as any thousand i could have selected had i a day to do it in: "as true as there is a god above us, i would!" chapter xxii the responsibility fastened life's alternatives are seldom labelled. right is not always white, nor wrong, black. the parting of the ways is oftentimes to the eye no more than the forking of main-travelled roads, and good intentions are no sure guide to the straight path. this, however, was one of those rare crossings at which fate's red light swung full in view, and in its warning glow i seemed to read the sign: "settle right or forever regret." well it was for me and for those thousands who were victimized and robbed later that i heeded the monition, for if in the interests of peace i had allowed myself to be overwhelmed by the imperious will of henry h. rogers, i should to-day be as helpless as those others who, coming forward to accuse, are met with "standard oil's" crushing rejoinder, "it's a lie--you can't prove it." i have wondered since if the master of "standard oil" also saw the red signal or interpreted its prophetic message. his eyes still met mine in the same deadly, intense stare, but the anger had passed out. then in an instant the battle was mine. henry h. rogers came out of the clouds and with a gesture of his hand waved away all that had passed, and said: "d--n it, lawson, you are a most impractical man to do business with, but i suppose you must have your way. now just tell me--and put it in few and plain words--what is it you intend to do to get this affair through, for we must carry it to a finish at once, although it does seem hard that i must do things i don't want to and which may put me in a bad hole; but let us hope the future will only show that all these precautions were a waste of energies. bear in mind, though, that whatever is done, must be so arranged that no one but me will know the real condition, for though i have given way, william rockefeller and stillman, to say nothing of the others, would throw up the whole affair rather than incur the danger of future litigation and trouble." at that moment mr. rogers had, i believe, made up his mind to play so fair with the public that there should never arise dissatisfaction with the course of amalgamated, that is, he had determined to be content with a half brick of gold without retribution or restitution in place of the whole fraught with penalties of exposure and reprobation. at that period his cupidity had not flared into the towers of fire it afterward became, in the smoke and flame of which all undefined dangers were obscured. "as you will, mr. rogers," i assented; "that part is not my hunt. i should prefer that our associates knew things as _we_ do, but as it seems that is impossible, i must be satisfied with knowing that you thoroughly understand the conditions i am going ahead on. here they are: first, all public notices must bear the names not only of the amalgamated company and the city bank, but of the individuals, rockefeller, rogers, and stillman. as the real story is to be told by me alone, these names will prevent any suspicion the public, particularly wall street, would have that there was any lukewarmness or dodging. this means that you and mr. rockefeller must be known as officers of the company as well as directors." "now, lawson, right there, that is impossible--absolutely out of the question. william rockefeller will under no circumstances take on additional duties of this kind, and whatever the consequences, i cannot persuade him to." i saw he meant this, and that we must get around it. "let us begin at the beginning, then--the president. you should be president--over the flotation, at least." "that is impossible, too, for you know it is settled that marcus daly is president. i promised the position to him as a part of the trade. it would be ridiculous for me, who it is known am not a copper expert, to be president of a new copper company in which marcus daly is a large owner and is supposed to have a prominent hand. besides, in certain parts of the country his name will stand much better than mine, and it means much to all miners the world over." "all right for president," i answered. "that settles, then, where you would naturally come in--vice-president; and as vice-president it will be proper to print your name in the advertisement below that of the president." he demurred at first, but finally acquiesced, for he had now made up his mind to play out the string. for treasurer and secretary he suggested a brother of governor flower's, but i knew that this was now the only place left where the magic name of rockefeller could be used and i drew his attention to the fact. "how can we do it, lawson, when i have told you it is impossible?" "william rockefeller has a son, william g. rockefeller. he's our man for treasurer and secretary. not one in ten thousand but will think william g. is the senior rockefeller, so the name is as good for the country as his father's, and in state and wall streets it is better, for among financiers it is known that william rockefeller would hesitate longer about putting his son out in the open in an enterprise he did not approve than about getting in himself. so william g. rockefeller it must be." mr. rogers did not take kindly to the idea, and i could see it would be quite a task for him to arrange the matter. however, it was necessary, and he undertook the contract. i went on: "that covers the company. second, we will print three advertisements--a plain notice of the city bank, which must be signed not only with the usual 'national city bank,' but 'james stillman, president.' this will immediately follow the company's advertisement, which i shall so word that the enormous properties composing the consolidation will be set forth, yet without details of the extent of our holdings in any of them. in its own advertisement offering the stock the city bank will refer to the advertisement of the amalgamated as though all particulars had there been given, and i will see that it reads openly and frankly and yet contains nothing that need scare stillman. then there will be a third advertisement, signed by myself, in which, in the plainest and strongest terms at my command, i shall tell just what the company is and what it proposes to do." "so far all right," assented mr. rogers. "there is one more thing," i went on. "it cannot openly be put forward that i am the authorized agent of the amalgamated company and the city bank--well, i must have the equivalent of this. it must be shown by inference. if i insert these three advertisements in the papers and pay for them, and the company pays me for them, it will be proof positive for all time that i acted as the authorized agent of not only the company and the city bank, but of marcus daly, yourself, william rockefeller's son, and james stillman, and therefore that whatever my advertisement says is binding upon them. remember, though, it will be your affair whether you tell them of it or not." "you persist, lawson, that this is necessary?" mr. rogers interrogated. "you seem to lose sight of the position i shall be in should anything happen later to reveal to these men with whom i am so closely associated in business that they were binding themselves without their knowledge, and that i was fully aware of the fact." [illustration: lawson's advertisement which appeared in conjunction with amalgamated's. =coppers.= =amalgamated subscription.= owing to the very large number of inquiries (over , the first day), received and anticipated, as to the best means of securing an allotment of the first issue of the consolidated stock, it is necessary to reply collectively by this advertisement. i advise the purchase of amalgamated by subscription, because it is, in my opinion, the best opportunity ever offered the public for safe and profitable investment. it is probably the first time in the history of public subscriptions that a stock is worth and can be sold for to per cent. more than the subscription price, and yet will be allotted to each and every subscriber in proportion to his application. this means that every one who makes a bona-fide subscription, large or small, will receive shares at one hundred dollars each that can be sold at once at a large profit. in my opinion the entire $ , , is worth and can be sold to-day for from to per cent. more than the subscription price. first--because the assets now owned by the amalgamated company are worth from $ , , to $ , , . second--because the amalgamated company is now earning at the rate of to per cent. per annum. third--because it will, from the start and always after, pay per cent. dividends annually. fourth--because the interests actively engaged in its management will make and keep it one of the most conservative and sought-for investments. fifth--because there will be rights attaching to it almost at its beginning that will give to it large profits independent of those accruing from its dividends. the fact that the above values are now known to some, and will be in the next few days recognized by all, will cause the stock to be largely oversubscribed, but this should deter no one from subscribing, for the reason that, notwithstanding this certainty, those who are engaged in perfecting this great enterprise have decided that instead of a favored few being allotted the entire amount, all shall be treated alike. captious critics of "coppers" will probably again cry their sarcastic "philanthropy," but to the legion of broad-minded investors who have followed and profited by this great industrial revolution, the policy of this liberal treatment will be obvious--the consolidated company is to be many times larger than its present capital indicates; it, in my opinion, will from time to time offer to the investing public large amounts of increased stock for the purpose of obtaining hundreds of millions of cash with which to pay for all the producing copper mines, as it is now obvious to students of affairs financial that this company must in time become the owner of all good mines, because all such mines can be run to better advantage to the consumer of copper, the investor in copper stocks and the present owners, by the amalgamated company than by others. this being so it requires no supernaturally bright mind to see the wisdom of a policy that insures a constantly increasing premium for every new issue of stock. i advise all intending subscribers to send their subscriptions personally or through their banking or brokerage house direct to the national city bank of new york. while my firm will, for the convenience of its clients, forward subscriptions, i would have it understood that such subscribers will receive the same treatment if they send their applications direct. my firm will also furnish subscription blanks to those who, through lack of time or otherwise, cannot secure them elsewhere. all subscribers should bear in mind, if on receiving their allotment they are disappointed with the amount, that their subscription is only reduced in the same ratio as all others, and that they have the pledge from a board of directors whose personnel means good faith. in again advising the purchase of "amalgamated" i call attention to the names of the men who are to conduct it to a future, and to the fact that from its inception it will surely give a return of over per cent. per annum on its par. thomas w. lawson.] "absolutely necessary, mr. rogers," i returned without an instant's hesitation. "now let us run over the situation finally, for i want to relieve your mind of the idea that i am doing anything selfish in insisting on these conditions. when the public subscription is offered, there must be a story of facts to go with it. some one must make it. the men who should, will not, although they are prepared to reap all the benefits of what the man who will, says. it seems i am that man, and what i say must be what i understand is the exact truth about the enterprise. well and good. it is essential for the one who assumes this responsibility to do it in such a way that he can for all time show that the men who benefited and upon whose say-so he acted were in every way responsible for what he did. all this is undeniable. there are only two possible considerations that enter into the problem: first, that the facts i am to state are not true; second, that it devolves on me to accept a risk those associated with me will not take. if the first can be maintained, farewell to our enterprise, and get ready for the worst financial scandal wall street ever faced. if it's the last--mr. rogers, the 'standard oil' people are all very strong, but i don't believe any of them would have the nerve to ask me to accept a risk they dared not themselves undertake." there was no escaping my conclusion, and unwelcome as the fact was, he saw no further talk would avail, so he snapped: "draw up the advertisements you think proper. have them ready in an hour, and i will in the meantime see william rockefeller and stillman and do what is necessary." i noted the set of henry h. rogers' jaw and the down slant of his eyelid as he uttered these words, and i had no doubt of the compliance of james stillman and william rockefeller with whatever demands he chose to propose that day. "cyclones and thunderbolts! heaven help these or any others who venture to resist him in this mood," i inwardly commented, "especially if they are of those with whom he has travelled the 'standard oil' blood-trail." my imagination showed me a picture of broadway and the national city bank swaying and shaking like full-blown hollyhocks in a gale. i had my advertisements ready and was waiting when he returned. "lawson," said he peremptorily, "if your work will pass me you may go ahead with it." "you mean you have obtained all the consents necessary?" [illustration: initial advertisement of amalgamated copper company. =amalgamated copper co.= =capital................$ , , = this company is organized under the laws of the state of new jersey for the purpose of purchasing and operating copper-producing properties. its capital is $ , , , divided into , shares of common stock, of the par value of $ each. it has no bonds or mortgage debt. this company has already purchased large interests in anaconda copper company, parrott silver and copper company, washoe copper company, colorado smelting and mining company, and other companies and properties. marcus daly, pres., h. h. rogers, vice-pres., wm. g. rockefeller, sec'y and treas. new york, april , . =offer for public subscriptions.= referring to the foregoing statement of the amalgamated copper company of new jersey, notice is hereby given that offers for subscription to , shares of the par value of $ each of the stock of the said copper company will be received at the national city bank of new york, until o'clock noon, thursday, may , , at the rate of $ per share. subscriptions must be addressed to the said bank and accompanied by a certified check to its order for per cent. of the amount of such subscription, the balance to be payable within days after date of notice of allotment. temporary negotiable receipts on payment of sums due on allotment will be issued exchangeable for certificates of stock, as soon as same can be engraved. in case of oversubscription, allotment will be made pro rata. the right is reserved, however, to reject any subscription. new york, april , . national city bank of new york, james stillman, president. = wall street, new york.=] "i mean that we will waste no more words on this matter. the advertisements you can convince me are right you may have inserted in the papers, and no one will say a word publicly or otherwise. neither william rockefeller, his son, stillman, the bank nor any officer or director of the amalgamated company will talk until after the subscriptions have been closed and the allotments made; not one word but what you say or print will be uttered. can you ask anything more than that?" "not a thing more." i then laid out the rough copies of what afterward appeared in the papers throughout the country (reproduced on pages and ). chapter xxiii the first crime of amalgamated that those of my readers who are not versed in stock affairs may appreciate the unusual character of these announcements, it is proper for me to explain their divergence from the form of the average financial advertisement. it is the invariable custom in all stock subscriptions for the corporation which is being offered for sale, or the bank or bankers assuming responsibility for the proposition, to set forth at length the facts essential to a proper understanding of the enterprise: if a new corporation, its reason for existence and the security offered; if old, its history and the immediate purposes for which additional funds are asked. it is the same in finance as in ordinary business. if you are offering for sale goods which cannot speak for themselves, it is necessary that some one talk for them so those who purchase may know what they are receiving for their money. under normal circumstances the initial advertisement of the amalgamated company would have stated the amount of its capital, its organization, and that the proceeds of the $ , , of stock offered for sale were to go into its treasury to purchase designated properties. it will be seen from the amalgamated's advertisement reproduced herewith, that all the information vouchsafed intending investors is mention of its $ , , capital, that it has no bonds or mortgage debt, and that it has already purchased large interests in the anaconda and other copper properties. not a word about indebtedness, equally vital, nor in definition of the extent of the interests owned. it is quite the briefest, most meagre notice of subscription ever placed before the public. indeed, it is informative and specific only in regard to the officers, who are given extraordinary prominence. such announcements are usually signed by the president and the secretary and treasurer, or else the names of all the officers and directors are stated, so it is obvious here that the prominent insertion of the vice-president's name is for a purpose. and all wall street as well as the general public gathered that "standard oil" was so sure of this enterprise that its principal men were anxious to be known as being behind it. the offer of the national city bank begins with a reference to "the foregoing statement," as though that really showed the purpose of the sale of stock--leaving the inference that the beneficiary was the amalgamated company. other details--the designation of conditions of subscription, terms, etc., follow the ordinary form. in the matter of oversubscription the offer diverges vitally. usually it is prescribed that "in case of oversubscription stock will be allotted pro rata and the right is reserved to reject any subscription in whole _or in part_." in preparing the advertisement i purposely left out the "or in part," thereby making it impossible to reject any part of any subscription--in other words, rejection had to be without compromise, so that every subscriber whose subscription was not wholly rejected would stand on equal terms with every other subscriber, as he would receive his exact proportion. the terms of these advertisements prescribed the conditions under which subscriptions for the stock of the amalgamated copper company must be made to the national city bank, and bound the bank to accept subscriptions presented in compliance therewith. in fact they constituted a legal contract binding the national city bank, an institution doing business under the national banking laws of the united states, to allot to every subscriber whose subscription was not rejected in full, his proportionate part of the entire , shares of the capital stock of the corporation, his proportionate part being the ratio his subscription bore to the entire subscription received at the national city bank before twelve noon of thursday, may , . on receipt of official notification from the national city bank that he had been allotted twenty per cent. of his subscription, or one share in every five subscribed for, the subscriber had a right to think he knew that the total subscription to the stock had been five times $ , , --$ , , --or five times , shares-- , , shares; and that before noon, may th, the national city bank had in hand certified checks to the amount of $ , , . the public, including the shrewdest wall streeters, has, since the subscription closed, believed that the subscription totalled the figures given above. indeed no one has ever suspected anything to the contrary, because it was clear that if the allotment was conducted under conditions other than those contracted for in the advertisement, the national city bank had laid itself open to a charge of fraud and was liable to each subscriber for the proportion of shares of which he had been deprived. _the actual amount of the subscriptions received on or before noon, may , , at the national city bank was but $ , , , and the amount of the five per cent. certified checks received in the institution up to noon was only $ , , , or $ per share on a total of , , shares._ the meaning of this is that every legitimate subscriber--and i except the millions of subscriptions which the bank decided were illegitimate and rejected, as they had a perfect right to do under their contract with the public--was defrauded of two shares of each three to which he was entitled. before me as i write is the original allotment of the national city bank to the subscribers, which i propose to print in my second volume as part of this indictment, showing that the figures are exactly as i have stated. from the beginning of my narrative i have claimed that the frauds committed in connection with amalgamated could be completely demonstrated from records outside any evidence of mine. the list of subscribers and the most cursory examination by the government national bank authorities at washington will furnish all the proof necessary to substantiate the accuracy of my statement here. at this juncture i shall not attempt to sum up the bearing or the consequences of this illegal and dishonest act, but it was one of the main cogs in bringing about the disaster that ensued. the conditions which led to its perpetration are narrated later. in passing i may say that while the formation of the amalgamated company by the clerks and office boys (as i have already described it) and the means by which mr. rogers and mr. rockefeller let in their friends to their appointed "floors" were deceptive and outrageous in their double-dealing, and should be prohibited by law, i knew them to be so commonly practised throughout our american financial centres that it never entered my mind to suggest that they were criminal. the infraction i have just explained, however, is a tangible fraud and a very different proposition. the two announcements alone would have had but little efficacy in persuading the public to part with its money for amalgamated stock, but in conjunction with the third advertisement--mine--they proved irresistible. there was nothing equivocal in my announcement. i not only advised the purchase of the stock by subscription on the ground that it was the best opportunity for safe and profitable investment ever offered the people, but asserted that the shares could afterward be sold for fifty to seventy-five per cent. advance on the subscription price, so that every one who obtained a share of amalgamated for $ was buying something which would subsequently be worth $ to $ . further i promised that all the subscribers should be treated alike and gave it as my opinion that the whole , shares could at the time the public was reading my statement be sold for thirty to sixty per cent. more than the subscription price, and declared unqualifiedly that the assets owned by the amalgamated company were worth from one hundred to one hundred and twenty-five millions; that the company was then earning from twelve to sixteen per cent. per annum, and that from the start and ever afterward it would pay eight per cent. dividends annually. as i have previously stated, i had no personal knowledge of the conditions in the several properties comprising the first section of amalgamated, but the facts and figures which were put forward in this advertisement were supplied me by henry h. rogers and through him by marcus daly, who vouched for them, and furthermore the three advertisements were carefully read and scanned by mr. rogers himself. if i had not believed them to be true i should not have put them forward nor allowed them to be published, but i accepted them as the public and the financiers did when they read them over the signature of the known agent and mouthpiece for amalgamated and "standard oil," myself. i showed that i believed them by putting my signature to them. i was and am personally responsible for the truth of these statements, but more so are h. h. rogers, william g. rockefeller, the national city bank, and the amalgamated company. even if it had not been a matter of public knowledge that i was the agent of the city bank and the amalgamated company and the "standard oil" party; if it had not been a fact, as it was, that i inserted these three advertisements by agreement with those who were responsible for them and who were doing business directly with the public; if it had not been a fact that these people through me paid for these advertisements, thereby directly showing i was their authorized agent; if i had not taken the precaution to see that such payment was made by a check signed by william g. rockefeller, treasurer of the amalgamated company, and yet made to the order of the newspaper people and handed by me to them, thereby clinching my agency, nevertheless the advertisement itself would have made it clear that i was the full and authorized agent, or it would have been stopped there and then and the bank and the company would have refused to proceed further, for i say: "i advise all intending subscribers to send their subscriptions personally or through their banking or brokerage house direct to the national city bank of new york. while my firm will, for the convenience of its clients, forward subscriptions, i would have it understood that such subscribers will receive the same treatment if they send their applications direct. "my firm will also furnish subscription blanks to those who, through lack of time or otherwise, cannot secure them elsewhere." i think i have made clear so far the conditions under which these vital statements were put forward and have lodged the legal responsibility for them where it belongs. the national city bank is plainly liable for violation of the published stipulations under which subscriptions were allotted, and it is common knowledge that the stock was allotted one share in five subscribed for, while the original list of subscriptions shows that the total allotment was less than twenty-seven millions and the full subscription less than double the amount to be allotted. it is common knowledge that the dividends were cut to two per cent., and are at the present time, the best ever known in the copper business, only four per cent., and that they have been cut under eight per cent., so they either could not have been twelve to sixteen per cent. at the time it was stated they were, or there has been great fraud committed since. as we are dealing with the greatest national bank in the country, it will be simple for the government and banking officials at washington instantly to disprove my statements if they are false; otherwise they must take action, civil and criminal, against the national city bank. chapter xxiv the subscription opens when mr. rogers on returning from his conference with james stillman and william rockefeller had given the word that the course was clear, i was conscious of the necessity of clinching the decision so that there could be no further backing and filling. i told mr. rogers so and suggested that we insert at once the advertisement of the city bank and the amalgamated company in the new york papers, and that the following day i have arrangements concluded with my advertising agents for their publication throughout the country. the announcements appeared in new york and the following day they were spread before the public in the great papers of this country and england. thus was amalgamated launched. with the appearance of these long anticipated announcements the pent-up copper excitement burst forth, and an avalanche of queries began to pour in upon us all. the interest was tremendous, and i felt certain we were to reap a greater success than i had dared dream of. the days preceding the opening of the subscription were taken up in answering a thousand questions regarding conditions, in supervising the advertising, and steering "coppers" in the market. on the eve of the opening day mr. rogers said to me: "lawson, at last we are to know how well your work has been done. the time of talk ends to-night and after that we'll have facts to go upon. what do you place the subscription at?" "i'll stake my prospective profits that when the books close there will be from forty to fifty millions subscribed and that when your 'standard oil' experts have analyzed the subscriptions they will tell you that three-quarters of all have come from the country--from my campaign--and not over a quarter from the 'standard oil's' following and wall street," i answered. "then you and mr. rockefeller will admit i was right when i told you that the public will respond to open and fair treatment when it is deaf and blind to stock trickery and manipulation." "i do hope you are right," returned mr. rogers, in a quiet, earnest, i-pray-it-may-really-be-so tone, "but if it is from six to ten millions we will all take off our hats to you." this defined the expectation of the man who above all others knew most of what had been done to mature and perfect the venture. i realized that none of the parties to the enterprise anticipated an extraordinary success, and though i felt more confident than the others, i was far from cognizant of the actual feeling abroad among the people. monday morning i got an inkling of what was coming. my office in boston was the centre of a dense mass of people from morning until night, and round the national city bank in new york crowds were gathered watching the throng fight its way through the doors. inside, a long line of men and women headed for the subscription desk stood laden with checks and currency, patiently awaiting their turn, and every mail brought sacks of orders. the big banking and brokerage offices in the financial districts of boston, philadelphia, and new york were packed with customers asking to be shown the way to secure as much as possible of this easy money, while the wires buzzed with messages and bids from the far west and from europe. the excitement knew no bounds. in my rooms at the waldorf i sat beside the telephone getting rapid reports from my lieutenants. from broadway i learned of the progress of events at the bank, and was impressed with the fact that the prevailing excitement and the strain were beginning to affect even the nickel-steel equilibrium of mr. rogers himself. indeed, he made no attempt to disguise his uneasiness, and told me that william rockefeller was in much the same condition. it was the first venture of size these two strong wheelmen of "standard oil" had undertaken without the co-operation of john d. rockefeller, and it appeared that he was considerably worked up over the public hubbub, and so opposed to the whole amalgamated affair that nothing short of a great success could justify his subordinates' temerity. however one looked at the situation, it was evident that henry h. rogers and william rockefeller were playing for the stake of their lives, though how great the stake was no one at that time guessed. since then they have steadily forged ahead, both in riches and in influence, until to-day they have actually supplanted john d. rockefeller in the kingship of finance. at that day, though his had always been the master-mind of "standard oil," i don't believe mr. rogers was worth, all told, over twelve to fifteen millions, while to-day he is probably a hundred and fifty times a millionnaire. it must be remembered that there was good cause for trepidation over this venture, for though the stock markets buzzed with "coppers" it was all guesswork as to how far the public would go with us. the question was, what would they do now that our stock was within their reach? it was a tremendous proposition we had put forth, for remember this was before the period of the great trustifications, and ten to twenty millions figured as the limit of large flotations. even these were of well-known properties and invariably were offered below par. to come into the open, offering at $ a share a brand-new stock capitalized at $ , , , was breaking the record, and we might well wonder what was before us. so far as man could do i had safeguarded the public and my own reputation, and believed that the assurances i had secured eliminated all opportunities of fleecing investors. mr. rogers and mr. rockefeller had each pledged me his solemn word, under no circumstances to sell to subscribers over five million dollars of the stock, and to place at my disposal the five millions cash received, to use in the open market for the purpose of protecting the stock so that it should never decline below par. that this promise should be kept was of the utmost consequence. while "standard oil" held the large majority of the amalgamated stock and the public but a small minority, there was no danger of the latter being slaughtered, whereas if the public was loaded up with stock at $ per share, it would be profitable for rogers, rockefeller, and stillman to practise the method i was fast beginning to see was their favorite device for accumulating wealth--selling stock and then dropping its price and taking it away from its holders at twenty-five to fifty per cent. below what they had purchased it at. if my plan of guarding against this possibility were adhered to, i knew that there would be such a demand for the shares in the open market after the allotment that when the second section of seventy-five or one hundred millions came to be offered, it would be even more eagerly sought than the first. so with the third and other sections contemplated, until in time the whole stock would be distributed among the investors of the world, and assuming that part of our enormous profits would always be used to keep up its market price, there could be no possible decline. thus amalgamated, like "standard oil" or a government bond, must always be worth more than par, first because there would be value to justify it, and second because its holders would have absolute confidence that the security could always be sold for as much or more than they had paid for it. so far, i had carefully refrained from discussing with mr. rogers how we should go about securing our part of the subscription. i had not forgotten it. indeed, i had it well in mind and was ready to enter upon the matter when it came up. an iron-bound contract held the amalgamated company and the national city bank over the signatures of a rogers, a rockefeller, and a stillman to allow the public to subscribe for $ , , of stock, and the terms were that every subscription must be in the bank at noon, may th, and that each subscription must be accompanied by a certified check of $ for every share applied for. _as we had agreed that the public should be sold but five millions of the stock, that meant that we proposed to retain seventy millions of it ourselves, but to obtain this allotment legally, we must comply with the conditions of the advertisement exactly as outsiders had. so it was necessary that we have a bid in before noon on thursday for our seventy millions, accompanied by a check for_ $ , , , _which would secure us our quota provided the public subscription was no more than five millions._ if the public subscription ran over five millions, then the bank must throw out all additional subscriptions over that amount, for the advertised contract specifically declared that all accepted subscriptions would be allowed pro rata. by my suppression of the usual condition that the bank reserve the right to reject any part of any subscription, it was absolutely precluded from the common method of dealing with such an emergency and so could not reject _parts_ of subscriptions. there was a way out--without practising fraud. if at noon on thursday the public had subscribed ten or fifteen millions then the insiders must put in bids of $ , , to $ , , , in which event the entire subscription would be divided by allotting each subscriber one share for every two or three subscribed. i presumed then that some such method would be followed. it surprised me at the time that mr. rogers should have given so little attention to so vital a part of our programme, for he is in the habit of thoughtfully thumbing over just such details to avoid slip-ups, but the idea that our subscription would run into unwieldy amounts never occurred to him, and he let things go, trusting to luck and "standard oil's" motto "to hell with the people anyway," to adjust the matter at the last moment. to-day henry h. rogers, william rockefeller, and james stillman would each give five millions from his private fortune if this seemingly unimportant detail had then been provided for. its neglect is the bloody finger-print on the knife-handle of the murderer, it is the burglar's footprint in the snow. in this case it furnishes the evidence of the crime of amalgamated. chapter xxv dollar hydrophobia our first fears of failure were soon succeeded by apprehensions of a different nature. by tuesday noon it was evident that the flotation would far exceed the low expectations of rogers and rockefeller, and i knew that if the people's interest continued to develop at the rate the subscriptions indicated, the totals would be far ahead of my own most sanguine anticipations. every hour the excitement intensified. the crowds on the street and in the brokers' offices; the rush of investors to the city bank--all demonstrated a feverish condition of the public mind, a state of unrest that fills the conservative banker with dread lest something happen to precipitate a disorder and a panic. the acute sensitiveness of a body of investors to extraneous influence, however slight, is familiar to any one who has had to do with market manipulation. in a theatre or church one strenuous spirit can quell a tumult with some ringing assurance, but long before the leader of a financial movement has got word to his following, wide-spread over the country, it has taken alarm, the rout has begun, and the field is strewn with corpses. a great financial excitement, like a rocket, should soar triumphantly into the air, leaving behind it a comet-like trail of glory, climaxing in a shower of gold; diverted from its course, it runs a mad, brief, tragic career along the earth, spreading ruin and disaster in its path. there comes a time when all great enterprises must emerge from the nursery and be exposed to the sunlight and the breezes of every day. we were crossing the ominous tract which divides the trenches of preparation from the sheltering fortress of attainment, and the hosts of failure were rallied to dispute our passage. at this juncture any accident to our venture might affect the whole american business fabric, and no one realized the danger of the situation better than mr. rogers and myself. during the anxious days that were passing we canvassed the dire possibilities that the situation contained, just as children tell each other ghost stories when left alone in the darkness of the night. the great catastrophes of finance, we remembered, had all been born of the unexpected--of unforeseen contingencies--far beyond the range of human foresight. who knew but that the hours were pregnant with some terrible potentiality--the assassination of a king or president, a chicago or boston fire, an epidemic of cholera, a belligerent message from the president, such as cleveland's venezuela ultimatum, a great bank defalcation, the suicide of an important operator, the death of an eminent capitalist--a breath of one of these world cyclones would crumble our structure into the dust and take along with it the neighboring edifices on both sides of the street. there were also the hidden possibilities of betrayal, of treachery, for we knew that scores of wall street's most ingenious minds were bent on unravelling and exposing the secret threads of our enterprise. on wednesday morning soon after ten o'clock mr. rogers, on his way downtown, came to the waldorf. he was plainly excited. "lawson," he said, "this is something unheard of, unprecedented. the bank is being buried under subscriptions. stillman says he is adding scores of clerks, but that he cannot possibly keep pace with the subscriptions. mr. rockefeller is very nervous, and i must confess to feeling a bit of 'rattle' myself. it now looks as though the total would run into fabulous figures. the lewisohns are being swamped with orders from europe. they alone will probably put in more than ten millions. wall street has lost its head entirely, and our people at broadway are coming in asking advice and doubling and trebling their subscriptions. if we don't keep our heads something bad may happen, for it looks now as though the cash the subscription is tying up would make a money-pinch. this affair must not be allowed to run away with us. what do your reports from boston and the country show?" "the same as yours. the people have simply gone wild. calls come in ceaselessly to me from wall street men. the hotel is so full of brokers from out of town that they are placing cots in the big rooms. i went down into the office just now to talk to them and was nearly mobbed. already they are talking of a premium of $ to $ per share, but if we keep to the line we have laid down, i don't think we need fear bad consequences." we discussed other aspects of the affair, the intense interest developed in europe, and the effect of the excitement on the price of the metal. as he started to go down to his office, mr. rogers said, as though by way of an after-thought: "lawson, if the people are so hungry, why should we not take some advantage of it?" the suggestion, with all it implied, stunned me for a second. "what do you mean, mr. rogers? take advantage--how?" "would it not be well to let the subscribers have more than the amount we agreed? why not take more of this money than five millions?" this was out of a clear sky, for there had not been the slightest suggestion of a change of programme and i had rested in the certainty that our plan insured the safety of all who had gone in on my say-so. i choked down my excitement. "good god, mr. rogers, are you mad?" i exclaimed. "don't let us depart a hair from what we all in our cool moments decided was best. we are in the field now. it would be sure ruin to try any new schemes at this moment." "you are rattled yourself, lawson. there's no need for excitement. i merely offered the suggestion. everything is going well," he reassured me, but the picture his words conjured before my mind disturbed me all day. that he would dare do what he had suggested i did not credit, for the assurances i had were too solemn to allow me to believe such treachery could be meditated. nevertheless i brooded over the matter, and late in the afternoon ran down to broadway, ostensibly to hear the latest news from the bank, but really to try if i could not look into mr. rogers' head and see if the imps i had sighted early in the day were still there. mr. rogers was over with stillman at the bank. in half an hour he came in, and the excitement he labored under was plainly evident in his face. "lawson," he said, "no one has ever seen anything like this before. stillman is bewildered. he says it looks as though by to-morrow there will be a mob around the bank doors, and if between now and then anything unusual should happen, there'll be the devil to pay sure. i tell you i'm so tired out that i'm going home now to rest up." together we went uptown on the elevated, and when i left him at thirty-third street to cross over to my hotel, somehow the dark forebodings of the morning had been lulled by his frank geniality and carried away by his enthusiastic rejoicings in the success of our enterprise. the picture of that soft spring evening hangs in my memory's gallery--the declining sun seen through a long perspective of gilded brick and brownstone façades, the heavy rumble of trains, the clamor of newsboys crying last editions, the packed cable-cars slowly threading their way amid the hurrying crowds of clerks and shop girls streaming homeward, the cabs swinging in and out of the throng, through whose windows i caught glimpses of jewels on bare shoulders, light silks, and sweeping plumes--the butterflies of fashion or folly hurrying out on their evening trysts. broadway, with its hundreds of sights and sounds, was before me in the hour of its transformation, the street lamps breaking into incandescence, and the huge electric signs beginning to glare above the theatre entrances. by the time i reached the waldorf, that high abode of yankee royalty, the kinks and curlicues were so far ironed from my nerves and brain that i had little doubt of my ability to take a fall out of fate in whatever sort of collar-and-elbow tussle she might designate. in this mood i swung into the huge hotel through the carriage entrance on thirty-fourth street, eager to forget myself amid the rapt concourse of dollar worshippers, preening themselves against the plush, onyx, and gildings of the astor caravansary. i seemed to see in the mirrors, on the walls, on the buttons of the lackeys' livery, in the patterns of the rugs, inscribed on the tessellated floors and painted on the lofty ceilings, dazzling and glittering, the universal crest of the twisted s with its two upright bars. _dollars, dollars, dollars._ through the office i pushed, my path disputed by the hosts of croesus in ambush for market information. colonels and generals of the almighty-dollar army were on either flank of me, and the air was thick with the echo and the rumor of millions. at last i found myself in the high and splendid room, with its tall windows elaborately curtained with velvet, its floor space studded with small tables, where after four o'clock any afternoon, the year round, you will find the active wall street contingent busily discussing the day's doings and plotting good or evil for the morrow. there they all were, that eventful evening, in parties of seven or eight clustered at the little tables, and as i entered a vigorous hail caught my ear and again i found myself surrounded. "sit down a minute, lawson," said ex-congressman jefferson m. levy--"jeff levy" in wall street--"and tell us about amalgamated. i suppose there's not a chance to get what one wants unless one subscribes for five or ten times more than one needs, but if you say that's straight, i'll put in another subscription for ----." in the group were sitting "harry" weil, who time and again has tied tin cans to wall street's tail; big, bluff, honest "billy" oliver, whose "i'll take ten thousand more" is as familiar to stock exchange members as the sound of the gong; and little "jakey" field, most audacious and resourceful of floor operators, graduated but a few years ago from the ranks of wall street's errand boys--"jakey" field, who is able single-handed to turn a "bear" market in a rout by "bidding 'em up all round the room five thousand at a crack"--which means he dares buy one hundred thousand shares off the reel in a demoralized market when every one is selling, thus standing to make or lose a million or two on his judgment. they listened, breathless, while i poured out the story of the terrific rush of amalgamated subscribers. another group hailed me and i recounted the same story. so it went all over the busy assemblage--"_dollars, dollars, dollars_," how to get them, how to get them quick. the money talk ebbed and flowed; the chink of dollars echoed in the rattle of china, in the tinkling of glasses, in the laughs and salutations, in the shuffle of feet. it was the one word, the single theme, the alpha and omega of all these men of talent and virility who accorded me recognition as one of themselves and assumed that i, too, was crucified to the two bars on the snaky s; the whole thing was so interesting that i lost sight of the terrible seriousness of it, and i chuckled as one does when one sits on the cool grass under the apple-trees in summer and watches myriads of ants hustling and jostling and bumping over each other to get away with what to humans is but a tiny grain of dirt. as i arose to go at last, the head waiter came forward and led me into a corner, where his assistant and the chef awaited me. all with tremendous earnestness asked, "is it safe, mr. lawson, for us to put our savings in amalgamated?" they took my breath away by telling me they proposed to subscribe for one thousand, five hundred, and two hundred shares each, $ , , $ , , and $ , worth, if i but said the word. "_dollars, dollars, dollars_" beat a tattoo on my ear-drums as the rain used to on the roof at the old farmhouse. a moment later manager thomas of the great hotel slipped up to me. "i'm in for a thousand or two, if you say the word," he whispered. at dinner my old waiter, who i would have sworn did not know a stock certificate from a dog license, bent over respectfully to tell me that twenty of the boys had chipped in and desired me to take their thousand dollars and put it up for two hundred shares--$ , worth more. room clerk palmer called over to me as i went by his desk a moment later to say he was going in for three hundred shares if it broke him. and so it went--bell-boys, chambermaids, valets, elevator men, all begging an interview, and all with the same request--"would i not put their savings into this magic money-maker?" all were friends or protégés of mine, these managers, clerks, stewards, and waiters. their money was more sacred to me than my own. i had been instrumental in bringing many of them up to the palace of american dollar royalty from the old brunswick, and i would rather have lost a finger any day than have jeopardized their savings. for all of them i had but one answer: "go your limit." i looked over the memoranda and telegrams piled high on the table in my room, all recording the whirlwind sweep of this tremendous copper movement that i had set a-booming. "_dollars, dollars, dollars._" requests from friends for some of the easy money i was dispensing to the public, appeals from old associates for special allotments of the subscription, urgent petitions from capitalists and bankers with whom i had business relations that their bids for shares should have preference, perfumed notes on tinted paper in feminine handwriting begging aid, advice, my influence, on a hundred specious pleas. it seemed to me that all the world was in a conspiracy of dollars and i the one object of its plotting. for a moment there overcame me a sickening disgust at this universal greed, at this all-absorbing passion for gold which my momentary pre-eminence revealed to my view. then sanity asserted itself, and i remembered that if there was a conspiracy i was its ringleader, that i myself for months past had thought intensely of nothing but dollars. why, then, should i resent the eager desires of others to attach to their own bank accounts some of the money which i was proclaiming from the housetops any one who desired might have for the asking? many of these men, moreover, who sought my assurance of the safety of their little ventures, had earned the private word by thoughtful service and friendly attentions. dollars were food and drink and fine raiment; were music, pictures, and theatres; were horses and dogs; were green fields, blossoming trees, and the open air of heaven; were liberty, release from sordid cares, from servitude--and why should i, who had helped myself in bountiful measure to the good things in life's cornucopia, feel superior when confronted by the lusts i myself had been instrumental in arousing? i laughed at my egregious virtue and dropped off to sleep. chapter xxvi deviltry afoot thursday, may , , dawned as fair a spring morning as ever set off sacrificial rite or triumphal jubilee--a day of buoyant, delicious airs which set the blood throbbing in the veins and ambition thrilling in the heart--a day for action, achievement, for wild gallops along country lanes, for swift motion on land or water. i looked out of my lofty parlor window far up fifth avenue's long vista of mansions and palaces to where the sunlight glittered on the tender verdancy of central park. a trickle of cabs and carriages headed southward already had begun the descent to wall street. almost the first call over the telephone came from mr. rogers, asking for the morning's news. i told him there was not a cloud on our sky, not a single breeze but blew from the right quarter to fill our sails. "and what were my movements?" to stick to my rooms right handy for anything. was there a sinister thought, i wonder, behind the "good, i agree with you," that came back from him in his heartiest tones? "i will look after things down-town and we can keep each other posted at near intervals." it was as busy a forenoon as man ever lived through. my boston wire kept up a constant ringing; chicago, philadelphia, and other long distance points showered in messages. a direct wire to wall street informed me of the progress of events in the financial maelstrom. all went merrily and well. it was nearing noon when a lull came; i was sitting back in my chair enjoying the sudden cessation of clatter and buzzing, thinking that after all my forebodings our ship was headed right for harbor and in a few moments would be across the bar and into smooth water, when a sharp ring at the telephone summoned me back to attention. 'twas from broadway, from whom it doesn't matter for the purpose of this story. suffice it to say that it was from one who, because of past acts of mine, would make any sacrifice to warn me of danger. only a few words, for he who sends secret messages from the mysterious depths of broadway, even to dwellers on its threshold, is wise in remembering that brevity is the essence of safety--but were few words ever charged with such damnable import? this is what i heard: "mr. stillman has just left mr. rogers and there is deviltry afoot. you cannot get to him any too quick." "one word of its nature?" i whispered back. "they are going to grab more than five millions of the subscription money." i hung up the receiver. the face of my world had changed. to choke back the passion of fury that rose in my throat i went over to the open window and looked out at the brilliant world below, at the procession of pleasure carriages rolling up and down the avenue, the sunlight flashing from gold-mounted harness and shining on the sleek, polished flanks of splendid horses. a gay rumble of traffic, the murmur of voices, the clangor of street-car bells were borne in to me on the mellow air. but for me the light had fled and the may world was black and freezing cold. the grim agony of that moment's silence i shall never forget. i jumped for the door; a second's delay to tell my secretary to catch me with any important messages at mr. rogers' office, and i was flying down fifth avenue through washington square, and down the back streets my cabby knew so well how to make time on. when the recording angel calls off page after page of my life-book and comes to the black one covering that ride, i fear 'twill be no easy task excusing the murderous passion that filled my heart and the poison-steeped curses my lips involuntarily formed. after an eternity i was at broadway. i flew to the elevator, was on the eleventh floor in an instant, bolted by fred, the colored usher who guards mr. rogers' sanctum, and strode, without knock or announcement, into the large private office beyond. mr. rogers was alone with his secretary, who at my first words shot out of the room. he was bending over a stack of papers, and as i landed at his desk he looked up quickly, and in a surprised way asked: "what does this mean, lawson?" no one ever enters mr. rogers' room without his permission. "it means that i have just learned that you and stillman have decided to break your solemn promise to me." i tried to control myself, but the seethe of rage almost choked me. "it means that you have decided to take more of that subscription money than the five millions we agreed upon, and that means hell." mr. rogers stood up, his jaws set as in their last hold, and, recognizing the crisis, he met me, not with the fierce anger i half expected and hoped he would show, but with quiet earnestness. "stop just there, lawson--remember you are in my office. who gave you this tale?" "never mind. is it true? are you going to break your promise to me? do you intend to allot the public more than five millions?" he hesitated only a second. just a second, but it seemed an age; then slowly and calmly: "yes, it has been decided that considering the tremendous number and amounts of the subscription it will be best to give them more." "how much more?" i shouted, for i was beside myself. "ten millions in all," he slowly answered. "who has decided?" "every one, mr. rockefeller, stillman, all of us." "all of us? have _i_ been consulted? have _i_ decided? have _i_ consented to the breaking of your word, mr. rockefeller's word? what have stillman and the rest to say about this? what have they to do with the promises i have made the people? i have been trapped just as all the others you and i have dealt with have been trapped. i see it all now. trapped, trapped until now it is too late for me even to save my reputation. to think i should have been fool enough to allow myself to be made a stool-pigeon for 'standard oil,' and all because i took your word." my rage was exhausted, and then, heartbroken, i turned and plead, plead for fair treatment, for an honest deal for my friends and associates--plead for my good name in his keeping--plead as i never before plead to any man. i had lost control of myself--begged as no man should beg another even for life, though the things i sought were more than life. he calmly awaited the end of my feverish, broken petition; then he went to work as the expert diamond cutter goes at a crystal. he focussed my position, twisted and turned my arguments, chipped and split my reasoning, smoothed off the corners, and then polished up the subject so that it might retain its old-time lustre for the bedazzlement of the customer whose favorable decision he meant to have. as ever, mr. rogers' arguments were plausible and intelligent. the subscriptions were coming in at such a rate it would be dangerous to allot as little as five millions; there might be talk, and an investigation which would so affect the market later that we could have no second section. then where should we be with our millions of butte, montana, and other boston stocks? and where would our friends be--and the public? on and on he spun, lulling my fagged brain with his specious arguments until the change of plan seemed robbed of its poison and i swallowed it. "lawson," he concluded, "every dollar of the additional five millions will be kept intact and, with the first five millions, will be at all times behind the price, and as you are going to have the handling of it how can there be any wrong or any more danger because of it than if it were only five millions?" i gave in, agreed to go back to the waldorf and take hold of the lever again. i left him, driving uptown by way of broad and wall streets so i might see the crowds outside the stock exchange and in front of james stillman's money trap. by the time i reached the hotel i had recovered some of my optimism, and went to work to catch up with the mail and messages accumulated in my absence. at three o'clock i called up mr. rogers. he was very jubilant. at the stroke of twelve, he told me, it required four big policemen to close the bank doors in the faces of hundreds of belated subscribers; that it had been decided that those inside the building were legally entitled to pass in their subscriptions and at that moment they were still doing so. sacks of mail still awaited opening; it would be well toward midnight before the last of the subscriptions were tabulated. stillman was making a tremendous effort to get at an approximate statement in time for me to deal it out to the newspapers before they went to press at midnight. "how does it look to stillman now?" i asked. "he cannot tell much about it yet," mr. rogers replied, "although he can see far enough ahead to be sure even your estimate was too low. it will be at least fifty millions." "and about our big subscription--have you and mr. rockefeller put it in yet?" i asked, and how i strained for his answer! i well knew they had not done so, knew they would think it safe to wait until the final tally to see just how much they must put in to get their $ , , , which would thus leave the public $ , , . "not yet," he returned. "it's all right, but we can do nothing till stillman gives us the total. he says there are millions and millions of such a nature that he can easily throw them out. at four o'clock we will have a meeting and figure out the best way to fix this matter up." he saw no danger spot. i felt anyway his error was beyond correction now. i told him i would be at his office by five, so that we could arrange how much the press should have of our affair. chapter xxvii the black flag hoisted it was a little after five when i reached broadway--my second visit that day. mr. rogers was still at the bank. half an hour later he entered and threw himself wearily into a chair. "lawson, this is a fitting climax for all the stories you have been telling mr. rockefeller and myself and the public for the past year about 'coppers.' i have talked with the lewisohns, governor flower, morgan, and many others, and i have just come from an hour with stillman and we are all agreed this amalgamated subscription is the greatest accomplishment in finance. it is truly marvellous. the bank is literally buried in money, and as near as we can make it out, the stock to be delivered when allotted is actually selling at forty to fifty dollars over the subscription price. the job is done, and you and i have good reason to congratulate each other." "i am not so sure, mr. rogers, that we should, right now. there's lots of work ahead, and we may strike big snags yet," i began. he interrupted impatiently: "oh, no, you're wrong, lawson! we have the money safely housed at the bank. nothing can now turn it into failure." there was a new note in his voice as he spoke. tired though he was, i detected a sharpness that seemed to indicate at once a relief and an indifference which said plainer than words: "i am now beyond all your power to hurt or harm me." i went on: "i don't want to bring up any new things to-day, for you must be tired out, mr. rogers, but surely you are taking into consideration that unless everything is steered carefully to-morrow and for some time to come, we may have a crash in the market which will throw back on our hands the ten millions of stock, and it might take us years to bring out the other section. don't lose sight of the fact that the people are all expecting to see fifty or one hundred points profit to-morrow on whatever stock they secure." as i talked i saw that he was getting impatient, irritated, angry, that he wanted to hear of no more unfavorable things. "good lord, lawson, it is about time for you to let up on your croaking about what may happen. you have done a big thing and you have been paid handsomely; you have made millions, and we have just now decided that you are entitled to a good rest. governor flower has agreed to take charge of the market end and he is amply able to keep us out of all trouble in that direction." a cold chill struck into my heart and crept over my whole being. i looked straight at him and he gave me back the look with a defiance which plainly said that we might as well have it out now as any other time. "mr. rockefeller and myself have tried to play fair with you, lawson, and we think we have been generous, but at times you have been almost intolerable. the only way you know how to do things is to do them your own way, and we cannot do business except in our way. this morning you kicked up a disturbance because we decided to adjust ourselves to conditions as they arose. i did tell you five millions would be all we would sell, but when we agreed to that we had no idea the subscription would be so large. since then we have got far enough to see that the subscription will run even beyond fifty millions, and you may as well hear now that in consequence it has been decided by every one interested with the exception of yourself to raise it still another five millions, that is, fifteen millions instead of ten, and i don't want to go through any more scenes about broken promises and what the people will think, either. the people have gone into this thing with their eyes wide open; we are giving them good value; you are in no way their guardian, and you are not going to run this affair any more than others who are interested. you may as well make up your mind to it right now." he let himself go as he talked, breathing fire and defiance, but i cared nothing for all the terrors of his anger. a blind fury seized me--i don't believe there was ever such a scene before at broadway, and i think it has had but one parallel since, when mr. rogers and myself again had it out over another matter. this time there were no pleas or petitions. i denounced, demanded, threatened. he had straight and strong my version of the vampire history of "standard oil," and also in rough, crude terms my opinion of his trickery and double-dealing. my voice was raised. i had lost all thought of what his people in the outer office would think. as i went on he wilted and tried to stop me, for i had shown him, until he knew it was so, that nothing but my death before i left the building would prevent me from taking the whole miserable affair, first to the newspapers, and then to the courts. i proved to him that i would have injunctions against stillman, the national city bank, and every one in interest, before the allotment could be made. gradually his rage subsided and he broke down--not as other men break down, but as much as it is possible for his stern nature to give way. we remained there until seven o'clock. the building was as still as a set mouse-trap, and he strove with me. such action, he demonstrated, would precipitate a panic. his argument was perfect in its logic. "not one man in a million, lawson, will agree with you that you are justified in bringing about all this disaster simply because you think that we are taking too much of the cash that has been voluntarily paid in by people well able to attend to their own affairs. you must remember once this scandal and trouble are public they never can be smothered. there can be no more consolidation, no more copper boom in your lifetime and mine, and when the collapse comes every one will look for the victim, and that victim will be you. even your best friend will say if you were going to turn informer you should have been smart enough to have discovered your mare's nest before you let it grow so big. look at it, lawson, look at it, and in the name of everything that is reasonable get back your senses." my readers must remember that the henry h. rogers i am portraying here is no ordinary man, but the strongest, most acute, and most persuasive human being that in the thirty-five active years of my life i have encountered. and on me all the magic of his wonderful individuality, all the resources of his fertile mind, all the histrionic power of his dramatic personality were concentrated. his logic was resistless. as he spun the web of his argument my position seemed hopeless; even more forcible than his reasoning was the graphic recital of how both increases had been made. his eyes watered as he spoke. they were not his proposals, but stillman's and the others' who had been let in on the several floors, but to whom he had never explained my rights nor my position in the enterprise. "the truth is, lawson," he said--"and i'll not mince matters further: from the beginning i have done business with you on a basis entirely different from that on which it is our rule to deal with agents or associates. at the start i expected that you would, as all others have done, fall into our ways. instead, you have grown more stubborn, and the result is, i have been forced into all kinds of holes, some of which i have not even let william rockefeller know about. here at last i am in between the grinders. i cannot go to such men as stillman and morgan and admit that you are the one who has been doing this copper business that i have had them think i was doing myself. you would not ask me to put myself in such a humiliating position. think what john d. rockefeller would say of such a confession. it's impossible. and when these associates of mine get down to this matter and all agree upon the way it should be closed up, what can i do but go with them? if they knew the facts it would be easy to run you in between us, and then you would either have to convince them or give way yourself, but this is not possible here." the straight and narrow way is easy to follow, but once lost is hard to find. the defaulting bank president who overnight "borrows" a few thousands from his institution, fully intends to return the "loan" next day, but repairing an error is even more difficult than resisting a temptation, and when a man is in crime's net, his struggles to escape seem only to tighten around him its meshes. when the incidents of his downfall are before the jury or the coroner, there will always appear a dozen places where the unfortunate might have cut his way out of the strangling coils, but he who surveys such situations from the outside has a clearer vision than the blinded and desperate wretch in the trap. he who enlists with the brigands of "frenzied finance" and takes the oath of addition, division, and silence cannot discharge himself because his comrades are needlessly harsh to their victims. eventually he may decide on desertion as preferable to throat-cutting, but to suggest resignation is to invite destruction, for it is a tradition of the fraternity that the best cure for repentance is a knife-thrust. mr. rogers and myself wrestled with the situation until both were fairly exhausted. finally we went uptown together; he home, to return later to the bank, i to the waldorf to meet the newspaper men who were there awaiting the news of the subscription. i left him at thirty-third street, the question between us still unsolved. in the years that have passed since that ill-starred night, over and over again i have sifted and pounded the talk that then passed between us, and never have i been able to decide how much of what mr. rogers said to me was true and how much cunning argument to make me accede to his wishes. i hope none of my readers will ever find themselves so caught between the high cliffs and the deep water as i was that night. i recalled the old story of the sea-captain whose ship was captured by pirates and who was offered the alternative of hoisting the black flag and joining the band with his crew, or walking the plank. if he became a pirate, at least he saved the lives of his men, for their fate hung on his decision. if he refused--well, he retained his own virtue and kept intact that of his crew. the captain in my story had preferred propriety to piracy, and fifteen men lost their lives to no purpose, whereas the part of wisdom would have been to submit, with reservations, on the chance of throwing the pirates to the sharks at the first opportunity. if i should throw the bomb that i had threatened rogers with, i felt sure it would put an end to all his evil machinations, but i could not limit the area of destruction to the guilty. i let my mind dwell on mr. rogers' words: "lawson, no harm can come to your people, for the fifteen millions will be used in the market to protect the stock, just as i promised you." if this promise were kept, what was there to fear? but would it be kept? in the face of the evidence of broken pledges already crowded on me, and the bitter knowledge i had acquired of the wolfish greed of this man and his associates, it would be paltering with facts to say that even then i felt certain the money would be so used. yet "standard oil" avoids such direct illegality as might bring it within the law's clutches, and i knew that already a fraud had been committed. i might hold that over them and compel them to go straight. then i recalled the passion that possessed them to grab at real money when it came within their clutches, and the "governor flower to handle the market in such a way that no harm can come to us." i carried my heart-tearing perplexities to dinner, cogitated over the arguments pro and con, and finally made up my mind that the percentage of wisdom was in favor of sticking by the ship. on board i was in better shape to protect my friends and followers than if i jumped into the ocean. time has shown since that it would have been far better for all concerned for me to have touched off the powder magazine that night, had one grand and glorious explosion, and gone down with the wreckage, than to have sailed through the hell of after years. i am not the first man who has balked at amputation and got blood-poisoning. chapter xxviii the bogus subscription later, on his way downtown, mr. rogers came to my rooms. "are you ready for the finals, lawson?" he said cordially. he, too, had dined, and doubtless philosophized; his whole air showed me he had satisfied himself that i would submit to the logic of conditions. no man knows the human animal from his heart's seed to its bloom better than henry h. rogers--and i was human. i told him i would hold the reporters until i got the word from him, and that it must not be later than midnight. no questions were asked nor assurances given. he left in a moment for the national city bank, and there in its solemn chambers he and james stillman perpetrated the act which is the crime of amalgamated, in itself a stark and palpable fraud, but aggravated by the standing of the men concerned in it, and the pledges that were slaughtered, into as arrant and damnable piece of financial villany as was ever committed. about eleven o'clock my telephone rang. i heard mr. rogers' voice. "lawson, stillman's tally is so far completed that we know about where we are. give out to the press that the subscription runs between four hundred and four hundred and twenty-five millions, call it four hundred and twelve millions, after throwing out one hundred and seventy millions from speculators, and sixty-two millions as defective, and after shutting out fifty millions more which were received too late. each subscriber will be allotted fifteen to twenty per cent. of his subscription--call it eighteen per cent." the figures were paralyzing. i made no attempt to analyze them. they came so late that as soon as the newspaper-men with me got them they flew to their offices and thus i escaped a strenuous ordeal of interviewing. our arrangements for distributing the facts throughout the country were made through the _boston financial news_, to which we had given the exclusive right to send out the details, and its special wires were soon clicking the news to all the world. the next morning the press contained the particulars. i reproduce from the papers of may th the tale. * * * * * =$ , , for amalgamated coppers= =$ , , subscribed more than five times over= =financial world copper mad= subscriptions of $ , , --the largest in any financial deal in the world's history--are reported by the _boston financial news_ to have been received toward the amalgamated company. "the world has gone copper mad" in truth. subscribers can be allotted only eighteen one-hundredths, or less than one share in five of the amount applied for. one week ago, says the report, it was announced that the standard oil magnates, rogers, rockefeller, and their associates, had begun their conquering march upon copperdom--that the much heralded copper consolidation was a thing of fact--that the amalgamated company had been incorporated, and that its first capital, $ , , , would be offered to the public by subscription through the national city bank of new york at $ per share--$ per share, without a discount, a commission, or profit to any one. never before since the first dollar of civilization was invented to take the place of the stone tokens of barbarism had such a thing been heard of--$ , , of stock to be sold to investors at $ per share, and in one week after the birth of the corporation upon which it was based. the financial world held its breath, and from that time up to the closing of the books of subscription, at twelve o'clock noon yesterday, the financial world, english, german, and french, have awaited with bated breath the outcome of this great feat of modern financiering. during the entire week from all parts of the world have poured into the national city bank applications, accompanied by checks for the first payment--one continuous stream of entreaties--for some of the shares of this great enterprise. nothing in history tells of such a movement. early in the week it became evident to the managers of the great industrial revolution that something must be done to stop the movement or it would run to such an extent as to cause serious trouble in the money markets of the world. since monday most strenuous efforts have been made to discourage the taking of large subscriptions. to that end the powerful financiers interested have begged all who contemplated subscribing for over $ , , to keep their applications down to that figure, and their efforts met with complete success. again, all those who were connected with the enterprise and who had intended subscribing on the same basis as outsiders for very large amounts, agreed that if the subscription ran over $ , , they would refrain from subscribing that those who had subscribed would not become dissatisfied with the smallness of their allotment. still the rush continued. from all financial centres of the world came the unbroken chain of applications, until those most interested in the success of the undertaking were appalled at the magnitude of the interest aroused. for the past forty-eight hours the national city bank has had employed, night and day, a corps of forty-odd extra clerks calculating and arranging the applications and checks. at exactly twelve o'clock noon four uniformed watchmen closed the doors of the subscription department of the city bank in the face of over three hundred intending subscribers, who were frantic at their vain efforts to get in their subscriptions before the appointed hour arrived. up to eleven o'clock to-night the entire bank force, regular and extra, have been at work, and at this hour the figures were announced which make the subscription of the amalgamated copper the greatest event in finance since the world began. after throwing out bids that were, on examination, proved to be the efforts of speculators to take advantage of the great interest to make money with no risk, and after throwing out bids unaccompanied by checks, or checks that were not satisfactory, the first class amounting to over $ , , , and the last to over $ , , , the total cash subscription was found to have reached the gigantic sum of $ , , , which gave to each and every subscriber eighteen per cent. of his subscription. it is not known how much was represented in the subscribers who were too late, but it is estimated at $ , , --five of the had single subscriptions of $ , , each. it is estimated that the sum total of the subscriptions that were thrown out or that arrived by messenger or mail--for the mail is still pouring into the bank--was between $ , , and $ , , , which, added to what insiders had intended to secure for themselves, would have carried the total to over $ , , , . it is estimated also that there are a great many who, anticipating the enormous over-subscriptions, have refrained from subscribing and will purchase in the open market. immediately after the subscription closed, , or forty per cent. premium, was bid for the stock secured by the lucky bidders. it is said the company will issue the next $ , , at once, as those insiders who refrained from subscribing were practically promised that they would at once be given an equal opportunity to subscribe if they would hold back on this issue. it is apparent that the next subscription will be even greater and cause more excitement than the first one, particularly as it is agreed by all that the price of the stock will quickly mount to $ per share, as it is to be put upon the english, german, french, new york, and boston stock exchanges, and will undoubtedly become one of the greatest investments sought for by the wealthy classes. england sent in subscriptions for $ , , ; germany and france, $ , , each; boston and new england showed their steadfast faith in copper by subscribing for over $ , , . there is great excitement at the clubs and meeting-places of investors and brokers to-night. * * * * * here is what mr. rogers and mr. stillman did. after discarding all unsatisfactory and imperfect subscriptions, there remained subscriptions of between $ , , and $ , , which had complied with all legal conditions, and accompanying these were checks aggregating between $ , , and $ , , . this was real money, in the bank and within reach, and the two great financiers, hungering for every dollar of it, determined to possess themselves of this great sum and use it as surety to compel the payment of the balance. first, they agreed that not a dollar of the five per cent. subscription should be returned; next, to so use this amount that no one to whom stock was allotted would back out, but, on the contrary, promptly take his whole allotment and pay up the balance. to effect this they decided to allot each subscriber just the number of shares of amalgamated necessary to render the amount of money accompanying his subscription equal to about a twenty-five or thirty per cent. payment on his whole allotment. this would constitute such a large margin as to assure the payment of the other seventy or seventy-five per cent. due. for instance, a man who applied for a hundred shares accompanied his subscription with a check for $ . he was allotted twenty shares, value $ , , on which his $ check represented a payment of twenty-five per cent. if the conditions of the national city bank's advertisement had been complied with, he was absolutely entitled to three shares of every five subscribed for, or sixty in all. to bring about the proportion which mr. rogers wanted, a bogus subscription of five or six times the unallotted balance was put in by him, and this is where the fraud was committed. the national city bank was in duty bound to protect the public from any such bogus subscription, and to see that fair treatment was accorded to all subscribers. yet, unfaithful to the trust, it permitted this bogus subscription to be put in, many hours after the bids had been opened. it utterly failed to comply with the conditions of its advertisement, and was thus a direct party to the fraud perpetrated by its president and mr. rogers. the exact amount of the bogus subscription could not be decided until the exact figures of the subscriptions had been compiled, so the figures i gave out that night were only estimates. within the next few days it was ascertained that the genuine subscriptions totalled $ , , , upon which an allotment of one share in five, or $ , , of stock altogether, was made to the public. in this way the conspirators secured from the public $ , , of the original cost, $ , , , and yet retained over $ , , of the authorized stock of $ , , . in other words the public paid two-thirds of the purchase price, and the conspirators retained nearly two-thirds of the property. the fraud thus perpetrated amounts to this: every subscriber legally entitled to three shares of amalgamated stock was deprived of two of them by the national city bank, and the proof is to be found in the books of said national city bank. my readers may say here that this constitutes a fortunate condition rather than a crime to be punished, for the less amalgamated a man had, the better he was off, as the stock afterward declined. this conclusion is a false one, however. here, in simple terms, is an illustration of what was done in amalgamated and of what the wrong was. b had a valuable race-horse and decided to dispose of him in five shares. he offered these five shares for public subscription and advertised that if over five were subscribed for he would split up the shares and allot them pro rata. there were on the final day seven subscriptions. instead of turning over the horse to the seven subscribers to own and race in their own way, b notified them that twenty-one subscriptions had been received, and that for their seven he had allotted them a one-third ownership, while the other subscribers would retain two-thirds. in the two-thirds resided the right to manage and race the horse, and the seven had no say whatever in this direction. the seven honest subscribers, not suspecting that b had simply sold them one-third of his horse for nearly his whole cost, and that he still retained a two-thirds ownership in him, supposed that fourteen others had subscribed on the same terms as themselves. if the horse were really able to race and thereby earn large sums of money, it was by this fraud in b's power to make him appear so worthless that the seven bona-fide subscribers would be inclined to turn over their ownerships to b at his own figure. contrariwise, b could so dose the horse as to make him appear more valuable than he really was, and use the advantage to dispose of his fourteen shares for fictitiously high prices. the world assumes an attitude of horror and amazement at the mention of crime, and thousands of words are written to describe what led up to and away from any given overt deed; but the deed itself, however grave, shameful, or portentous, seems strangely barren and bloodless set down in naked words. yet the mountain peak that tops the great ranges is but a shoulder over its neighbor, though it may be the apex of a continent. a misconstrued word has caused the spilling of the blood of millions; the needle-point of a stiletto has severed kingdoms. between temptation and consequence there is but little space, yet it is deep and wide enough for all the poison in the tongues of all the world's serpents. to-day, a simple peasant, humble, gentle, is an insignificant atom in the great russian empire, and nicholas is the supreme ruler of rulers. to-morrow, by a simple swing of an arm a bomb is thrown, and the peasant is the one human being in all the world; the face of russia is changed, and nicholas--is not. the first crime of amalgamated is a matter of mathematics. it involved plain fraud and misrepresentation, the insertion of a bogus subscription and the disruption of solemn pledges, but the commission of it was nothing more than a matter of arrangement between two men, one the master of the greatest of all business organizations, and the other the head of the strongest bank in the united states. the consequences were world-wide. that night no bomb was thrown, but a seed was sown for the cruelest harvest of crime, dishonor, unhappiness, and desolation ever reaped within the confines of our republic. note.--the above statement has now been in the hands of the public, has been printed and commented on in thousands of the leading journals of the world for twelve months, and no government official has taken cognizance of it. the charges i make constitute one of the gravest business crimes ever committed by any national bank. if they are true, the government at washington has no more important duty than to punish the criminals. if they are false, i should be sent to prison. what a commentary on our boasted freedom and equality! the national city bank does business at the old stand. rogers, rockefeller and stillman walk the streets; so do i, and since i published the above statement and submitted the above proof, at least half a dozen poor national bank clerks and officials who have stolen a few hundreds or thousands have been sent to prison, or have committed suicide to avoid being sent there. chapter xxix the aftermath it was just past the midnight of may th. the last newspaper-man had taken his departure, my friends had all retired, and i was alone for the first moment since the news had come from the city bank. i had not then stopped to analyze its character, for there had been only time to announce it. now, however, i sat down at my desk and with a pencil and a piece of paper began to cipher out what the " millions" meant. as i figured, cold sweat began to gather on my forehead, and the further i figured the colder the sweat, until at last in an agony of perplexity i again called up mr. rogers. my agitation must have betrayed itself in my voice, though i tried to assume a tone of calm inquiry. "mr. rogers," i said, "i've been vainly trying to figure out the meaning of the subscription figures you gave me and i cannot make head or tail of them. you said ' to millions'; of course that means you have put in our dummy subscription, but what was the real subscription? it is absolutely essential that i know to-night, for in the morning i shall be besieged for information, and ignorance on my part may get all hands into trouble." "lawson," he replied, "you must not talk such things over the wire--you don't know who is listening. you must not." "i can't help it," i replied determinedly. "i positively must have the real figures, for even you and mr. stillman may have made a slip-up and i want to work the thing out so that i may have it clear in my head for the morning. it is essential." he realized that it was useless to try to escape my insistence, and he snapped out: "all i can say now is, it is between and millions real, solid subscriptions, backed with actual money. we haven't got it figured out within some millions, and won't before to-morrow, when we will put in our subscription for the right amount, but we know it is surely between these two figures, and that each subscriber will have about one share in five, so we shall have a good, strong twenty-five per cent. margin. that is all i will or can say to-night." i heard the sharp click as he hung up the receiver. i went back to my pencil and pad and began again the interminable figuring. my head throbbed and my senses reeled. in those still, dark hours of the early morning i covered sheet after sheet with figures, all of which had for a basis to millions, to millions, one in five, and twenty-five per cent. margin, and these figures i turned and twisted in a vain, vain effort to bring out something with fifteen millions for an answer. "no, it will not come," i said to myself at last in hopeless despair. numb and dull, i leaned back in my chair with half-closed eyes, while night, that master phantom maker, played upon my harried nerves and distraught mind. stealthily out of his murky caldron the ghosts and goblins crept. i saw the spectres of all my dearest dreams trail slouching by, jostled and driven by sneering bullies. i saw a great company of scowling men, wailing women, and little children, with drawn, pinched faces, and they seemed to point at me as they plodded past, muttering, "but for you." then, to the clanking of chains, hoarse curses, and the sharp whip-snap, lines upon lines of men in striped suits, with cropped heads, and faces branded by despair, filed up. faintly a mutter of sobs and groans echoed, "but for you." the clanking ceased; there came the slow shuffling of many feet, and a procession of men, bearing stretchers on which lay shrouded figures, advanced into view. like a solemn knell upon my ear smote the reproach, "suicides because of you." and now out of the caldron sprang a mob of goblin dollar-signs compounded of blood-red snakes and copper bars, that danced a mad saraband around my chair to a weird chorus of, "but for you." transfixed and aghast i stared at the train of awful forms. so real were they, they seemed almost to touch me as they swept onward. at last, with a convulsive effort, i threw off the spell, banished the phantasms of my frightened brain, and shook myself together with a: "you have work ahead and dreaming will not do it for you." back into my mind trooped the unanswerable, cold realities. there could be no doubt that the announcements in the morning papers would surprise those who had been led to expect an allotment of one share in twenty or thirty and had subscribed accordingly, and likewise those who had expected to get all, or at least one out of two. there might be murmurs of foul play and a general suspicion that trickery had been practised. looking at the situation, i saw that upon me the chief blame must fall, and that it behooved me to think soundly and quickly over what had best be done to protect from the impending massacre those whom i had lured into the ambush. the smoke-wreaths had all gone out of my brain now, and as the known factors began to group themselves symmetrically before my mind i forced myself to face certain all-too-evident facts: rogers and stillman had plainly hoisted the black flag; they had broken all their promises to me and assuredly had no intention of carrying out to the public the pledges i had made on their behalf; they would handle this affair as they had others i knew about--only to extract the greatest number of dollars from it--and in the course of their operations i and my friends would probably be sent through the crusher with the rest. all this being true, i could do little by denunciation or exposure, for these men, caring nothing for the sufferings of others, would not fear the consequences of their own acts; my only hope was to meet them on their own ground and outplay them at their own game. then and there i determined on my course--to compel them to undo the wrongs they had committed and, if so great an achievement were possible, put the people in position to do to them what they had done to the people. an almost hopeless resolution at that juncture, it would seem, but, as results have shown, by no means out of the power of man's accomplishment. this is what i reasoned out before i retired to bed: if the actual subscription were to millions, then six to eight millions of real cash had been paid into the national city bank. on an allotment of one share in five, these six to eight millions represented a margin of about twenty-five per cent.--big enough to cover any ordinary drop in the price of the stock, and big enough also to lead those to whom shares had been assigned to make good the balance. but to meet this allotment, a very large bogus subscription had been necessary, and therein i saw the weakness of rogers and rockefeller and the weapon that providence had intrusted to my hands. mr. rogers' uncertainty as to the totals of the subscription made it evident that the bogus subscription was not in the bank even yet, and as it must be for a definite amount and backed up by a five-per-cent. check, it could not be put in until james stillman's clerks had computed to the last cent the public's applications, and that enormous piece of work would not be completed on the next day nor even the day following. this bogus subscription was already outlawed--its insertion even at the present moment would have been criminal; how much worse the criminality if days were allowed to elapse between the legally fixed last moment for bids and the actual time at which this outlawed subscription was admitted. and as the transaction involved the making of a large check and other formalities, it was obvious it was not one that could be easily concealed. it must be a part of the bank's records. if i but played aright the cards dame fate had put into my hands, i might yet redeem myself and save the public i had led into the trap. but as clear as the new moon against a november sky stood forth the warning that if i attempted to cut into a "standard oil" game, i must play cards their way--dispassionately, scientifically, with no sentiment nor consideration for adversary or partner. with this conviction i went to bed. it was quite early on the following morning that i met mr. rogers, and without giving him time to begin the conversation, for i was determined he should have no provocation for the break with me that i guessed he had on his programme, i started in: "i have been figuring this thing out, mr. rogers, and i think i see things as they are, and although i might not have handled it as you and stillman did, it is done, and the only thing to do now is to make some arrangements to keep the subscribers feeling good until the stock gets to a round premium. of course it would not do to have any slump below par until after the receipts are issued and the whole amount of the subscriptions paid up." mr. rogers looked me over, very suspiciously at first, then brightened up, and it did not require an extra eye to see he was agreeably surprised at my cheerful attitude. doubtless he explained to himself the change on the ground that "he at last sees the dollars he is to have." "what suggestion have you, lawson, as to what should be done this morning?" "only that all hands look happy, talk big, and do all possible to keep a good premium on the stock to be delivered when issued. by the way, have you and stillman changed the scheme about putting all the cash received behind the stock?" this i asked in as mild a tone as possible, and tried to convey by my voice the suggestion, "because you may have had good reason to, and if you have i will not kick over the traces." it took every ounce of will-power in my armament to keep from grating my teeth as i so spoke. again his eyes bored piercingly into mine, and i felt as though all the man's mental faculties were ranged to assail me, but i guess i ran the gauntlet. "yes," he said slowly, "we have changed it some. the fact is, lawson, i have agreed to leave that part wholly to flower and stillman, while i run out of town for a few days." i had steeled myself to play the game and said not a word, but silence was a mighty effort. "and," he went on, "if i were you, lawson, i should just dig out too for a while." "what a heartless rascal!" was on my lips, but i gripped myself hard and pushed the insult clear way back, and made never a protest by word or look. "i am afraid that won't be best," i said in an every-day, pondering tone. "there are lots of sharp chaps on 'the street' who will insist on asking questions, questions flower cannot possibly answer, and in a jiff they might start in to offer the subscriptions down, and before one could whistle a bar from 'wait till the clouds roll by' the air might be full of falling stars." this seemed to strike home. "well, what have you to propose?" he asked. "some one should be ready in the market to take any amount of stock--" i argued. he interrupted in his old aggressive way before the sentence was half out of my mouth: "cut that line out, lawson; i told you flower has that end of the affair entirely in his hands." and at this point my resolution to keep quiet and play the game did almost go by the board. for a second i literally boiled. then there flashed before my mind's mirror the dreadful procession of the night before, and i once more held tight and, oh, so deferentially and politely, like a chastened school-boy, went on: "oh, that will be all right. i was not going to suggest that you let me interfere with flower's plans, for i can gather, mr. rogers, that you and the others have decided on doing things your own way, and you can rest easy i shall not interfere." "that's something like, lawson," he said, with a heartiness i could see was from the lower hold. "that's the way to look at a big thing of this kind, and if we all just pull together for a while we shall have your old plans going like oil again." yes, mr. rogers was plainly pleased at my complaisance and the prospect of using me to gather in another harvest of dollars later. playing my game, i pursued: "is it fair, mr. rogers, to ask what arrangements stillman has made for loaning money to those who may want to borrow on their subscriptions? you know we gave out before the subscription was opened that the city bank would loan on the stock?" "that is one of the things i was going to tell you, lawson. flower is going to let it be known that any one and every one who cares to, can borrow the remaining seventy-five per cent. at the city at going rates, so there will be no excuse for any one selling." there it was as plain as a haystack: it was the old trap, the old ambush; within were the victims lured there by the cupidity which i had played upon; the bars were up now and "standard oil" was ready to begin its familiar trick of going through their clothes. already "standard oil" had laid its hands on the amount each subscriber had paid in, which represented twenty-five per cent. of the total value of the shares allotted. the national city bank would generously loan the balance. a little later an accomplice would cause a flurry in the market. the loans would be called and, automatically, the stock, together with the money that had been paid for it, would fall into the greedy maws of rockefeller and rogers. no fluttering fly was ever so surely enmeshed and at the mercy of weaving spider as the unfortunates whom i had so decoyed to the "standard oil" web. with the most valiant assumption of indifference, i continued: "that being the case, it cannot possibly interfere with flower's set-out for me to spread the news, too, that any one who wants to borrow the balance of his subscription can get it from stillman's bank?" "you can do better than that, lawson," said mr. rogers with an air of real cordiality. "you can let it be known to the brokers and the wall street men that any good house can borrow all it wants on amalgamated to the extent of ninety cents on the dollar. of course, this won't be for irresponsible outsiders, for the stock might break below ninety, but give the word that any responsible broker can always borrow as high as ninety dollars a share for those who want the stock on margin." "that will help things," i answered. "now, mr. rogers, let me tell you what i have decided to do on my own hook. don't misunderstand me; it has nothing to do with you or the rest, and, of course, none of you will object to my doing all i care to on my own account. as you said yesterday, one portion of our job is finished, and we have thirty-six millions' profit. this means either cash or its equivalent, stock, which at par or over is as good as cash, at least as good as ninety, which i can have my brokers borrow at the city. i calculate that my share is nine millions less whatever you have given away in the handling of the enterprise." i paused as i saw a black cloud gathering on his face at my mention of nine millions of dollars, but before he could object i went on: "i understand, of course, that the expense and the shares you have had to give to others represent a huge total. at the same time there have been huge profits on the side. there is no necessity to enter upon what is coming to me just now, but what i intended to say was this: i have millions with you and mr. rockefeller--millions more than i owe you on account of butte and other boston stocks of the second section. now, i propose to take a million or two of that and start in on my account to support the market right from this morning; independent of flower or your other operations, i will see if i cannot get up a good feeling." at once the frown relaxed and his set features broke into a smile of gratification. "that's something like it, lawson," he said. "when you get down to real business we never have differences. it is only when you start up that confounded croaking about what we must do for the people, that i get angry." "all right, mr. rogers," i answered. "let those things drop and, as you say, we'll keep down to business. how much can i depend upon drawing from my account this morning, provided i want it?" "how will two millions do?" he answered cheerily. "plenty," i said. "all right; i will notify stillman that you or your brokers may want to borrow up to that, and if you need the amalgamated stock, you can have it at any time. i will leave word to that effect with curtis." curtis was william rockefeller's secretary and right-hand man, who then handled the details of all their financial matters. before leaving i indicated to mr. rogers the details of my proposed actions, and explained that i had sent for my principal boston brokers who would be with me on wall street to help steer the craft. evidently my plans met his personal approval. indeed, from the change that had come over his manner i realized that he felt he had been spared a disagreeable task and that my shift had been a pleasant surprise to him. it was plain that he and stillman had decided that i must be thrown to the sharks if i kept on my old tack, and were therefore gratified to find that i was not only ready to assist in steering the ship their way, but also willing to feed the engines coal at my own expense to keep up her speed. in spite of mr. rogers' confidence in governor flower's ability to take care of the market, it was a great relief to his mind to know that i should be there, for he realized that no one, however able and popular--and governor flower was both to an unusual degree--could possibly take up such an intricate bunch of lines as those with which we had been driving, without a lot of feeling-out practice. there was another aspect of the situation that had been suggested to me by a certain passing twitch of his lip that i had noted when i had said i proposed putting some of my own millions behind the market. it was as though the tongue had involuntarily started to lap the chops for blood, and i scribbled a memo on my mind's black-board, "think over whether he does not intend to set traps for your share of the spoils." chapter xxx the morning after it was with a feeling of intense relief that i left mr. rogers and returned to the waldorf. at last i knew where i "was at": i was to play a lone hand; my enemies were in front; there were no partners from whose treacherous knife-blades i should have to protect my back. the path was clear, and as i examined my position, i felt my old self again. promptly i called up my boston brokers, who were at the holland house, to say i would drop in for them on my way downtown, and with a clear plan of campaign in my mind, i determined to face the breakfasting crowd in the big café downstairs. almost immediately i found myself in the centre of a knot of men who began eagerly to press me for further particulars of the amalgamated subscriptions. we all know the story of the comedian informed in the midst of a performance of his beloved wife's death, who yet must laugh and antic to the end of the play. i appreciated the heavy-hearted actor's plight as i surveyed the little throng so vitally interested in their dollar affairs. i longed to mount a chair and tell them how they had been duped, but my rôle called for different lines. it was my part to feign satisfaction and my duty to keep every cent invested in our enterprise from shrinking a mill. i pumped as much enthusiasm into my speech as possible. "you see what the papers say," i said. "that gives you all the information i have, for although you may not think it, i have been spending the night just as the rest of you have--in lands where all flotations sell away over par. i'm going down to wall street just now. after a while i'll have more to tell you." the flutter of an eyelash, a hair-breadth of hesitation, a mumbled word and there may be born in the mind of the investor that instinctive distrust which is the beginning of panic. in a stock market as in a powder magazine there are always dread possibilities of explosion, and he who would survive must have incombustible nerves and an ice-packed brain; asbestos assurances and an unblushing swagger have averted many money conflagrations and set prices hill-climbing. my little congregation had all the fluttering fugitiveness of the investor-out-for-quick profits, and after a few generalities, i got down to the one question they all longed to ask but none dared to voice--"what can i sell my subscription for if i want to part with it?" raising my voice a trifle and looking straight at them: "don't get excited about what you read in print these next few days," i said, as though some one had asked me the question, "for there will be hogsheads of rumors unhooped, and remember that rumor prices are never real money. the papers this morning say that any one can sell at to per cent. profit, but that hardly seems reasonable to me; in fact, if i were any of you who have been allotted stock and could get such profit as that overnight, i'd take it. all i'll do just now is this: i will give for any amount any of you want to sell, provided you sell right now--and per cent. profit is not so bad when you come to think it's per cent. on what actual money you have put up." in the vernacular of stocks this process i used is called "moulding public opinion" and "making a market," and it had the expected effect on that bright may morning which followed the closing day of the amalgamated flotation. i was not offered a share; in fact, there was a loud guffaw, and it was a hundred to one wager that as i passed on to another group each listener tumbled over his neighbor to get in first. " ! that's a good joke! i wonder if he takes us for children! evidently he is out early this morning to catch any stray worms napping! for something worth !" inside of ten minutes it was all over the waldorf and on the wires, "look out for lawson! he's trying to get amalgamated at ." and by the time i got to the holland, a block down the avenue, the brokers and investors gathered there were ready to give me the laugh with "you're out early, we see, to pick up a bundle of easy money." my first task had been accomplished to my own satisfaction. inside of an hour it would be flashed over the world that there was a firm reliable market at bid and almost any price asked for amalgamated, and while was not anything like the wild to that rumor gossiped of, it represented such a good profit that it was sure to set the market off with an all-round chipperness. my readers must bear in mind that as yet there was no real amalgamated stock which could be sold, and no place to sell it if there had been, for until each subscriber received official notice no one really knew for certain that he had been allotted any stock, and until the amalgamated shares were listed on the stock exchange, there could be no reliable market, although they could be traded in on the curb. at the holland house, i quickly outlined to my chief brokers my plans for the day. then together we started for wall street. the hours that followed were busy ones, and confusing as well. wall street was a-buzz with curiosity and from all sides poured questions. "the street," it was evident, had awakened to the fact that the situation in amalgamated disclosed a different line-up of conditions from that which it had anticipated. as to whether the change was good or bad no one dared hazard a guess. for the first time in my experience, wall street was completely at sea. the shrewdest plungers and manipulators, men to whom the tape yields up its secrets as the penitent to the priest; to whom the ticker babbles the inner mysteries of directors' meetings and deep-down deals--these men whose eyes, ears, and noses decades of stock-play had trained to supernatural acuteness were as impotent to track the truth as the veriest tyro. all admitted that the conditions were unusual, that the subscriptions had far exceeded expectation, that time would be required to get them straightened out. because of this it was natural that the market should be slow and in the absence of definite facts it might easily look one price and be another. if the subscription really were millions and if each subscriber would have a fifth of his allotment, then there was the usual chance for trick playing and "standard oil" might be scheming to gather in this valuable stock at when its proper price mayhap was to or more. in wall street the best brains of all the western world centre. fortunes are there waiting for brains to carve and take; stacked up there are millions which he who has brains can pocket without a "by-your-leave." wall street is the millionnaire's checker-board, but brains direct the moves and make the plays. and with all its mordant wisdom, cynical cunning, cold suspicion, wall street was baffled. there was nothing to do but to continue my campaign of smiles and cheerfulness, repeat my bid in every quarter possible, and so keep up the delusion. late that afternoon i saw mr. rogers, who eagerly interrogated me. "well, lawson, what do you make out?" "it is the most mixed-up mess 'the street' has ever wrestled with," i replied, "but one thing is clear: no one will dare to sell much until he receives notice of just what he has been allotted, and then most will be timid about selling until they have received the receipts. i don't see how, if nothing definite leaks out, there can be much danger until after they get their hands on the receipts, and by that time, of course, you will have a fine market organized to take care of any offerings." he flinched. i saw again that i had touched his sore spot, for at every faintest suggestion that our profits should be used to protect the market, he became as shy as a pick-pocket at a police parade. chapter xxxi i walk the plank have you ever seen a bunch of school-boys who, having sneaked under a corner of the circus tent, are prowling furtively round the show in holy terror lest some one who has seen their entry may be awaiting a chance to nab them? one minute they are tasting the raptures of being under the canvas; the next, longing to be safely outside. that is about how wall street felt on the memorable friday after the amalgamated flotation. the same feeling prevailed generally on saturday, though i was obliged to buy a few blocks of the stock at from wall street men whose sharp noses had sniffed a carrion scent in the air. sunday was uncomfortable, for i realized that i might have to face bad conditions on the morrow. on monday an ominous feeling began to rise and pervade "the street" like a miasma mist in a tropical swamp. the bacillus of distrust had started its infection. i had to buy quite a lot of subscriptions and was now varying the price from , for it seemed possible any moment that something would break loose. these were the conditions when on tuesday a telephone call came from mr. rogers asking me to drop round to broadway, as he had an important matter to talk over with me. i reported at the appointed time. mr. rogers was evidently full of business. "lawson," he said, "we have figured everything up and balanced accounts, and each member of the different syndicates is to be given his share, cash and stock, at once." "all right," i answered. "that suits me." "i thought so," he continued pleasantly. "mr. rockefeller has had curtis figure up your account, and while in the rush he may not have got everything in, he's fairly accurate. from what you said about getting your affairs into shape to help the market, it occurred to me you might like to have your balance of this section in hand ready for use. i have the statement here, and if you find it all right i'll go upstairs and get all it calls for fixed up at once." we were in the little glass pen where most of our conferences took place. i, with my elbows on the small mahogany table, sat looking across at him leaning back in his chair. without knowing what was to happen, but from a certain suppressed eagerness i had detected under his frigid composure, i had a strong conviction that he was nerving himself for a coup of some kind. i realized that he and mr. rockefeller had talked me over pretty thoroughly and had decided that they had best run this gauntlet as soon as possible. since mr. rogers had broached the substitution of anaconda for the properties originally intended for the first section of amalgamated, i had felt that this balancing of accounts would be a crucial affair, and after the recent turn of the screw, i hardly knew what to expect, but was ready for the worst. now a swift thrill of apprehension suggested i'd better look for real deviltry. there was perhaps a minute's delay while he fumbled in his pocket and drew out letters and papers. my blood steeplechased in my veins as i waited for him to deal me the hand that might decide my fate. in such tense moments thoughts flash in and out of the mind like lightning, and as i watched him rise, the fateful paper in his hand, it came over me with a sharp exultation that however the trumps fell it was a great game--great even for this king of gamesters who was about to play his hand. henry h. rogers looked piercingly into my eyes and said: "there's the account, lawson." he laid on the table in front of me an oblong piece of paper. on it were some lines of words followed by other lines of figures. that was all. i spread it out carefully between my two hands and bent over it. then i looked up. before i allowed the significance of the figures to penetrate my mind, i wished to know exactly what they represented. "if i understand aright, mr. rogers," i asked, "this statement does not take in our boston deals nor my loans on the butte and other affairs, but is a settlement of this first section only--a final clearing-up showing just what my twenty-five per cent. of the amalgamated and the things connected with it amount to? am i right?" my voice was even and calmly business-like, and he answered in exactly the same tone. "it shows where you stand on this particular affair, and gives your balance of stock and cash, which we are ready to pay over in whole or in part, in case you may want to leave some of it against the loans on the other section." i turned to the paper; i leaned over it, letting my two hands with the elbows resting on the table support my head. mr. rogers could see only the back and top of my head, no part of my face. at the first glance i caught the balance--it was a little less than two millions and a half. at once the other lines upon the sheet became a crimson blur. into my mind rushed an avalanche of figures and facts which seemed to prove irresistibly that i should have read nine millions in place of the numbers that were burning themselves into my brain. but what if it were rightly but two and a half millions, and the great sum on which all my market movements had been predicated was a hideous miscalculation on my part? then inevitably was i hopelessly bankrupt, or saved from that only to find my neck irrevocably caught in the "standard oil" noose. i strove fiercely to steady my nerves, to arrest the stampeding terrors that had broken loose in my brain. there came to me a feverish memory of the hideous procession of thursday's midnight vigil. i desperately asseverated to myself, "i must be cool, i must, i must." but all my resolutions went as goes the powder when touched by the match. in an instant more nothing in the world mattered; i sprang to my feet, kicked over the chair, and with an exclamation which was half yell, half imprecation, i stuck the paper under mr. rogers' eyes. on the balance line i beat a tattoo with my trembling forefinger. heaven knows what i said, for all barriers were down and a flood-tide of rage, overwhelming, terrific, swept my being. there was no chance for mr. rogers to answer or to interrupt me. suddenly i became conscious that i was asking, "am i to understand that this is final? is this what i get for all i have stood for?" my voice as i heard it was strange--a hoarse hiss--and the words fell on my ear like a death sentence. "no, by god, no!" i sprang between him and the door. "lawson, in the name of heaven, stop for a second; there is some mistake; i see there is some mistake, some terrible blunder that they have made upstairs. don't say another word. give me that paper and i'll take it to mr. rockefeller. he will see what is wrong; he and i'll go over it together and you shall have what's right. i will be back in a few minutes and i swear to you you shall have your full share. yes, i swear to you you shall have what you say is right, even if it takes every dollar of the profits, every dollar." i handed him the paper without a word and he was out of the room. i heard gates bang and knew he had, as he promised, "gone upstairs." i locked the door and waited. i shall never forget the racking torture of that period of inaction. to make real all the terrors i was suffering it would be necessary for me to enter into elaborate details of the wide-spread financial commitment into which i had been led by my relationship with the consolidation. i was staggering under immense lines of boston "coppers," which were to be included in the second section of amalgamated, but had been purchased to make part of the first section. some of these mr. rockefeller was carrying for me; the rest were portioned among two dozen banks, trust companies, and brokers. with a portion of the profits i had legitimately calculated upon, i had proposed to lighten my burden and to devote the balance to carrying through the contract i had taken on my shoulders of protecting amalgamated stock in the market. to do so on this showing would be out of the question; more than ever should i be at "standard oil's" mercy. the dangers that threatened me assumed cyclopean proportions as i marshalled them. suddenly another possibility flashed across my brain, "what if they should tell you that having refused what was fair, you should have nothing--that you could go to the devil and fight? then where would you be?" that meant ruin, crushing, irrevocable, complete; a series of disasters, so portentously realistic, began a cinematographic procession across my disordered brain, that i found myself shivering in anticipation, when suddenly the door-knob clicked and i jumped to my feet to admit mr. rogers. in his hand was the paper. i had eyes for it alone. i took it from his outstretched fingers and devoured its contents. it was the same sheet, the same word "balance," but underneath the old figures was a line below which appeared a new set of ciphers, showing just a fraction under five millions of dollars. in the brief interval of minutes my balance had doubled. before i could utter a word, with his hand on my arm to arrest my attention, mr. rogers was exclaiming: "lawson, one word before you open your mouth. remember i said you should be satisfied. mr. rockefeller agrees with me. he is convinced these figures now are right, but wants me to tell you if you believe they are not, to make your own and you'll have what they call for." as i said before, henry h. rogers knows the human animal, and in the intimate intercourse of preceding years he had had ample opportunity to learn those very human characteristics which go to the blending of my individuality. it is a weakness of which i am intensely conscious, yet cannot altogether regret, to be easily moved by any show of generosity and fairness, however specious. when i saw the new figures and realized that all the hell i had conjured up was no more than a nightmare, a very rapture of gratitude and relief seized me. it was not that i lost sight of the fact that this new balance was far below what i knew was my right, for according to the lowest computation my proper share was nine millions; nor that i failed to realize that i was in the power of this man whose greed, callousness, and brutal obstinacy in the face of opposition no one knew better than i. still, though his unusual deference convinced me that by continued, fiery insistence i could force from him the remaining four millions (for the one thing standard oil never lets get into court is a dispute over a division of profits on a joint stock deal), the first shock had been so awful, and the reaction was so sudden, that my whole being revolted at the idea of further wrangle. indeed, i was in the same condition as the man whose runaway horse suddenly stops just as the children in the roadway seemed doomed to be crushed and beaten to death beneath its iron heels. he condones the running away in gratitude for the timely halt. a glad voice within me seemed to be saying, "it's all right, all right--that's money enough to fight him out with--that's ammunition for victory--victory for yourself, for the friends who have banked on your ability to protect them." i said to mr. rogers: "tell mr. rockefeller i thank him for his fairness. i thank you both. i'm satisfied and this is settled." i put my finger on the account which lay on the table. yes, i positively thanked these men who had tried to rob me of seventy-five per cent. of all the millions that i had earned by all the laws _of the game_, and that i so urgently needed to protect those whom i had lured to probable destruction; needed as a mother in the desert needs milk to keep life in her babe. i thanked these men in heartfelt terms because they had returned me an additional third of my own money. idiot, you say. i went further; i shook mr. rogers by the hand, and as the tears gathered in his eyes i said, and it was from the heart, too: "don't think, mr. rogers, that i shall ever lay up this day against you and mr. rockefeller, or that i shall resent not getting all i believed i should have had. i want you both to understand that i do know i am entitled to more, but it ends here. i will cherish no ill-feeling, for this balance is amply sufficient to enable me to do what i intended to do, and--there is more on earth than millions." we were both emotionally excited; i from relief at escaping the clutches of that dread hell of which for certain moments i had felt the flaming grasp; he because of a sudden degrading realization that he had attempted to practise on a faithful comrade in arms a cowardly and contemptible piece of treachery. my impulsive gratitude for the measure of justice granted me made his avaricious greed seem even to him despicable, and for an instant henry h. rogers was honestly ashamed. some years have elapsed since this episode, but a thousand times i suppose the scene has arisen to rack henry h. rogers with bitter memories of his baseness. the severest punishments are not those that we mortals inflict on our fellows whom for violations of our little earthly laws we clap in striped suits and shackle with steel bracelets. what are striped suits which imprint no mark on the body of the wearer, or handcuffs that any blacksmith can strike off at a blow, in comparison with the ever-recurring torture of the white-hot iron with which god sears the hearts and brains of those sinners whose wrong-doing is beyond human retribution? what memories of prison and disgrace are comparable with the exquisite suffering of the undetected criminal who in the dark watches of the night pores over the bitter scroll of his delinquencies? when henry h. rogers reads the record set down here of this faithless and degrading action, he will suffer infinitely more than ever i did for the loss of the gold he and his associates so meanly filched. nor will the knowledge of the seven and a half score of millions marshalled ready at his nod, abate one jot or tittle of the measure of his humiliation and shame. peace having been established, mr. rogers sent "upstairs" for the checks and stocks to complete the settlement, and while we waited we talked, and, as was inevitable after so strenuous a session, we found ourselves back on the sincere and frankly friendly footing of our earlier intercourse. a knock-down and attempted drag-out which at the end is declared a draw invariably promotes cordiality between the principals, and ours was no exception to the rule. evidently mr. rogers had been doing considerable thinking since our last conversation and had accumulated troublesome ideas which had to be worked off. my mood at the moment seemed made to order for the purpose, and he ran over our affairs, one after another, until he thought it safe to explode his bomb. he rang for a clerk, and instructed that mr. stillman be called up and asked to send over "that paper if it was ready." soon afterward the messenger returned with a big, square package. mr. rogers opened it. "lawson," he said, "here's the whole story. stillman has been steadily at work and has just finished two copies of the entire subscription. i think you ought to look it over." "look it over," i repeated. "why, it is of the utmost importance to the whole enterprise that i study every name. i alone can tell just what that list means. after i've been over it i'll know pretty thoroughly who will hold, who will want to sell, who must sell, and who will need encouragement." "that's just what i thought," he answered, with an air of high approval. then, dropping to his most friendly and confidential key, the tone of voice that never fails to persuade an associate that he is in on the bottom floor and that all others are outsiders, he went on: "and more than that, lawson, why cannot you get in touch with all those subscribers who are disappointed at the amounts they received and sell them what they want?" mr. rogers leaned back to appraise the effect of this startling proposition on me. at any other moment i should inevitably have broken loose again, but the fascination of his personality was upon me and i let him spin his webs. any man, and there are scores adrift, who falls under the spell of henry h. rogers, invariably, as did the suitors of circe, pays the penalty of his indiscretion. some he uses and contemptuously casts aside useless; others he works, plays, and pensions; still others serve as jackals or servitors and proudly flaunt his livery; a few, the strong, independent souls, tempted with great rewards and beguiled by the man's baleful, intellectual charm into his clutches, preserve a semblance of freedom; but let the boldest of these turn restive--he is maimed or garroted with sickening promptitude. chapter xxxii perfecting the double cross to get back to my story. i realized that though one disaster had been averted, i was far from any haven of rest. remembering my cue, however, i asked innocently: "have you all decided to sell more of the stock, mr. rogers?" "all? why no," he said. "just let me show you where we stand now. all the unsold stock, roughly forty-eight millions, has been divided up and each man has to carry his own. that's easy, because stillman will carry them all at the bank, for they are all good, lewisohn, morgan, olcott, flower, daly, and the others. the only loose stock will be mr. rockefeller's, yours, and mine, and that we must turn into money before we can bring out the second section. you have been losing sight of the fact, lawson, that we have millions upon millions tied up here, and mr. rockefeller has decided he will not go ahead until we have turned this venture into money." marvellous, marvellous man! he unrolled the new scheme as openly and as freely as though he were a world's philanthropist explaining a new benefaction and i an enthusiastic minister employed to carry the glad tidings to the people. the plot was obvious. in spite of flower and stillman and all the talk of our taking a rest he was back on his black courser again, in a new saddle, with a freshly lighted lantern, and the old blackjack newly leaded. and i was the only one who could stalk the game. i listened. "now let me show you, lawson, what a pretty campaign i have laid out," he went on. "i've pledged all the others to hold their stock and i've got it rigged in such a way they can't let go a share without my knowing of it. then i've got them all enthusiastic and have formed a pool at flower's office which, if necessary, can buy , shares, and what with the money they have made and the promise that they will be let in on the second section if they're good, we ought to have things pretty much our own way." the scheme seemed to be perfect for robbing every one in sight, and here was i being taken right in--i who had but one thought: to get those i had mired on to firm soil and myself outside the breastworks of this pirate stronghold. "it looks perfect, mr. rogers," i said. "now where do i come in on all this?" he shrugged his shoulders impatiently. "you see as well as i can tell you," he replied evasively. "i take it that you want me to unload our stock on to the pool and the other members of the syndicate?" i asked with a brutal frankness that i realized, after i heard the words, was almost indecent. "what is the use of putting it that way, lawson?" he replied angrily. "you know i mean nothing of the sort. you know i want you to keep every one you can from selling, and simply supply the legitimate demand that can be worked up among the subscribers all over the country. if worked as you can work it, this ought to clean up our stock without any one's being hurt." i understood perfectly. if mr. rogers and i had been on terms of flippancy instead of dignity, at this stage we should have given each other the wink. just what he wanted done i knew. he knew i knew what he wanted, and i knew he knew i knew, and yet we were pretending not only that we knew nothing but that there was really nothing to know. fortunately, at this stage of the duel mr. rogers' secretary arrived with my checks and stock, and while we were verifying these, i had time to study my mental chess-board for the next move. the papers were all passed at last and then i entered into some explanation of my own intentions. i told mr. rogers that for the time being i would hold all my stock, but that i intended to borrow a stack of money on it from stillman through my brokers, for i fully intended to support the market, as my belief in the stock was absolute. i could have sworn mr. rogers inwardly chuckled at my fatuity, but i went right on: "if mr. rockefeller has decided that your share and his of the allotment must, in whole or in part, be turned into money before the second section is tackled, there's nothing for it but to go ahead, and i will put in great work for you (i didn't add, "my work, if i can make it, will keep you in as long as the public have a share"), because," said i, "my one ambition now is to complete the second section and get things in such shape that those people i have had locked-in so long can get out, if they care to." it was an intricate problem that was thus settled, for mr. rogers well knew that it would be useless to attempt to sell big quantities of amalgamated without my detecting it, and he dared not ask me to have a hand in his plot without including my own stock. when he saw i intended to stand by my baby, and yet was so anxious to get to the second section that i would accede to mr. rockefeller's wishes, he perceived that the situation was ideal for his purposes. "let me glance over that subscription list," i said; and i opened up the book, for book it really was. my readers may surmise how intense was my interest in scanning the results of my work. this great stack of bank sheets before me was the official list of the subscription, stitched together in seventeen sections of twenty pages each; twenty-eight names, with city, state, street number addresses, and amounts subscribed to a page, all in ink in longhand. "better take them with you to the hotel and go carefully over the names and amounts," put in mr. rogers. "it certainly is a long job, but one that you must tackle some time, and the sooner the better." here was the missing link in my chain of evidence, delivered directly into my hands without a word of persuasion or cajolery. providence played that hand for me surely. i concealed my jubilance by rattling along vociferously: "i shall have to work over this a heap, sending out circulars and what not. it would have been better to have had it in typewriting, but i suppose stillman didn't dare intrust it to the machine people. however, i can divide up the seventeen sections among different people and none will know the whole story. i will keep it in boston with the other papers, and--gracious! what's this?" "what is it?" he asked, smiling at my excitement. in front of me was the section beginning with the "mc's," and the largest subscription on the page was , shares-- , allotment. i followed the line back to the name. it was that of hugh mclaughlin, then the big "boss" of brooklyn, who, like all the other big bosses of new york state, was a trusted lieutenant of "standard oil." i put my finger on the amount and said: "you have taken care of your friend across the river, i see. no wonder all the politicians were so anxious to get in, for they know you would not put this old gentleman into anything that is not pretty sure." mr. rogers nodded wisely: "yes, i told the old stalwart he had better have about half a million, but he went $ , better, i see. i sent the word around to the others, too, but have not had a chance to go over the list carefully. have they all gone in under their own names?" i ran over page after page, looking for names as he called them off, but most of them had disguised their ventures through dummies. we had no trouble in putting our fingers on their allotments, however; mr. rogers commenting in his sage and caustic way on men and politics. it was growing late, and at a natural stopping-place in our talk i sent for paper and string, with my own hands tied up the book, and--with all the airs of extreme leisureliness--literally bolted. no school-boy with a three-pound trout caught in a deep hole under a big willow bearing the sign, "any one fishing here will be prosecuted," no burglar with an unexpected fat swag, was ever in such a fever to lug his booty to a concealed place as i to get that infinitely precious bundle to the waldorf. at last i landed it in my room and began to scan the interesting pages. my first thought was to look for our own big dummy subscription. as i supposed, it was not there. _roughly i added the totals of the different sheets and compared them, with the millions we had given the public, which was now indelibly, the world over, a matter of record._ again i stopped to congratulate myself on my good fortune in securing this first-hand evidence of the fraud that had been practised on the people. i leaned over the thick pages with their various inscriptions. the names and addresses carried me into every corner of the united states and into the great cities of europe as well. set down there were towns and villages i had never heard of, and my mind made pictures for me of fathers, mothers, and children, beguiled by my pledges and promises, embracing the opportunity to add to their scanty hordes. but it was not a moment to indulge in scares, so i slipped over the people's mites and fixed my mind on the millions. the lewisohns were down for eleven millions, and mr. rogers' old cronies, john moore's firm, were represented by a subscription of between six and seven millions. as i ran over the names i found million after million down to mr. rogers' friends, which told me that he had spared no one. all the lieutenants and the queer people who do the confidential business of the "system," and invariably turn up at melon-cutting time, were down for round amounts. conspicuous among the rest was the name of that rising votary of the "system" who won notoriety, while comptroller of the currency under president cleveland, as manipulator of the slick bond deal which has gone into american history as among the queerest performances of its period. loaded up with government banking secrets, this young man subsequently became a prize for whom the various organizations of the "system" competed valorously. there he was, in three places--james h. eckels, president of the commercial bank of chicago, , , , , and , shares--or a million dollars altogether. another name caught my eye: "bay state gas co., j. edward addicks, , shares"--two millions of dollars. i leaned back and laughed as i thought of this wary old fox, with the bruises and scars of the "system's" hopper thick all over his body, dutifully bringing his contribution to his old enemy, rogers. and rogers, disdainful and contemptuous of the man, found his $ , good. this, i said to myself, is a case of spider eat spider with a vengeance; and i wondered if experience is really as good a teacher as the text-book says. hour after hour i pondered over that list, "sizing up" each subscriber and questioning what his financial condition might be. at last i dropped it, swearing to myself to use every effort to protect these thousands of people who had ventured so much money on the strength of my pledges. two days later the allotments were officially announced; in a few days more the receipts were issued and amalgamated was fairly out in the world on its own feet. it was not listed on any of the exchanges yet, but it was very much in the mouths of people, and in the papers. and every day grew the ominous feeling that something was wrong. it was a contradictory situation and no one could put a finger on the trouble. rumors one heard, but no definite derogatory statements. the truth was that those who knew what was wrong had good reasons for saying nothing, while all who had to do with stock affairs and surmised the evil, were themselves loaded up with the stock and hoping against hope that our promises of great profits would yet be fulfilled. it was my part to keep up these anticipations and by hook or crook prevent rogers and rockefeller from unloading. i bought and bought to steady the market when no one else apparently would buy; and when i found others whom i could induce to venture, i had them relieve those who were faltering and who must sell. when mr. rogers took me to task, i invented all manner of excuses to account for my tardiness in creating a market on which he could unload his holdings. he listened impatiently and incredulously, and i felt that sooner or later he would take the bit in his teeth. in spite of my efforts the price of amalgamated dropped and dropped and it was all i could do to prevent a quick crash. my profits--the immense sum of money i had obtained at the settlement--had been used up, together with the great sums i had borrowed on my own allotment of shares. at intervals i stopped long enough to make brief excursions into sugar or other stocks, out of which i captured additional hundreds of thousands, but every cent of such gains went toward staying the avalanche. these indeed were days of desperation and black despair, all the more trying because i had to look happy and talk hopefully; all the more difficult because my enemies came out of their holes and did their share to balk my efforts; all the more painful because the public were beginning to doubt whether the second section was coming--and whether it had best come--and our boston "coppers" had begun to drop in value. during all this time i had troubled myself but little about the flower pool, which had been set going soon after the conversation in which mr. rogers had told me that he and mr. rockefeller intended to unload their stock. i concluded that the pool would surely get a share of what they had to sell, and showed no inclination to join in with it. but at last mr. rogers said to me: "as every one is going into the pool, lawson, it will seem strange if you are missing, so you had better send flower your check and i will see you get it back later." "for how much?" i asked him. "a hundred thousand will be about right," he answered, and i sent it, and that was all i had heard of the subject until one day after the stock had been weaker than usual i received by mail a brusk notice from flower & co. to mail them another hundred thousand dollars. immediately i called up the banking-house, and learned to my horror and astonishment that the pool had accumulated over , shares. i went at once to mr. rogers with flower's call and said: "i know nothing whatever of this affair, mr. rogers, and as i have not been unloading any of my stock and have all i can do to keep up my end anyway, you will look after it, of course." he took the notice and said: "i will attend to it." remembering his intentions to unload, after what i had heard of the pool's accumulations i was not surprised at mr. rogers' willingness to take care of this matter of mine. it is of interest now, in looking back over our affairs, to recall that though there were several periods later when the sledding was hard, and i needed all the money i could lay hands on, he never offered to return me that hundred thousand, not even after the pool had liquidated, as will be shown later. in spite of this fact, in his readiness to hurl any charge or insult at me, he had his hireling, denis donohoe, recently make the accusation that i alone of all its members refused to keep up my payments to the flower pool. chapter xxxiii a retrospect and a moral the crime of amalgamated and its immediate consequences are before my readers. i have fulfilled the promise made in my foreword to expose to the people of america the manner in which they have been plundered and the methods by which the "system" habitually cheats them out of their savings. robbery conducted on so gigantic a scale as i have pictured must necessarily simulate the natural processes of finance, and to understand the deep devices of the schemers requires a knowledge of banking and commercial practices which the average man has no chance to attain. if i had begun my story by stating exactly what constituted the crime of amalgamated, my readers would not have grasped its heinousness. in the chapters that i have devoted to leading up to it they have been educated in the piratical practices of finance and financiers, and have acquired familiarity with the jugglery of corporations and the multiplication and division of stock certificates through which most of the great american fortunes have been created. depending still on the ignorance of its blinded dupes, the "system" again raises its brazen face from among the poison rushes of wall street and hisses, "listen to what he calls a great crime--a simple business transaction. it is no crime, but a common practice of modern finance and by no means unusual or extraordinary." no crime to take by a trick from thousands of the people thirty-six millions of the results of our great country's prosperity? think of what this vast sum represents--the revenues of a year's work of , men earning each $ , . think of it, ye millions who dig and delve and bear heavy burdens that your mothers, wives, and children may in exchange have a bite to eat and a couch to sleep upon! the crime of amalgamated, as i have explained it, constitutes a specific breach of the banking laws of the state and nation. but the legal aspects of the offence are trivial in comparison with the great moral crime which was consummated by henry h. rogers and james stillman, in the national city bank on that night in may, . through false representations and specious pledges and the credit of the names of "standard oil" and the national city bank, thousands of people were beguiled into investing their savings in this amalgamated copper company. because of the promise of great gains other thousands mortgaged their homes, appropriated their wives' savings, even their employers' funds, and embarked in this fair-seeming enterprise. the greatest bank in america aided and abetted the conspiracy by the loan of its funds to lure the victims deeper into the toils. all in, the trap is sprung; the thousands are despoiled of their savings by familiar devices of finance, and throughout the land is spread a wave of misery, madness, and despair. the crime of amalgamated, a critical correspondent writes me, is purely a wall street offence, important to bankers and capitalists but of no consequence to the working men, the farmers, or the toiling millions who have no savings to invest in stocks. "of what concern is it to us," says this writer, "how one section of the rich robs another of its hoardings?" poor fool! a few men cannot deprive even a few thousands of so great a sum as $ , , without working untold injury upon the entire body of the people. such a stupendous sum looted from the coffers of the many and piled in the vaults of three or four men unbalances the whole economic structure of the nation. the consequences of that act do not end in the series of defalcations and bankruptcies, imprisonments and suicides, in the ruined homes and wrecked careers that follow in its immediate wake. in the grip of these plunderers intrenched in the stronghold of finance each of these filched millions becomes a new weapon of oppression. because of the crime of amalgamated every pound of food that goes to sustain life in the american people, every shingle on every roof that shelters the american people, every mile of transportation for man or freight in america; in fact, every necessity and every luxury of the american people has had added to its cost some fractional increase, representing in the aggregate tens and tens of millions annually, which, flowing into the coffers of the "system," strengthen and extend its stupendous grip on the property of the nation. our country for a generation has been prosperous beyond the dreams of man, yet what have the masses of our people to show for it? a better, a higher, and a more expensive standard of living--that is all. that this prosperity which is our national boast will last forever is incredible. sooner or later will come one of the times when nature frowns and sends her floods, her droughts, and her epidemics of disease. is the american people prepared by its long-sustained prosperity to bridge over that period of want and suffering? the truth is that the mass of our population has not sufficient surplus laid by to last over thirty days of such a calamitous interval. all the unearned increment of national prosperity the "system" has captured and capitalized. not only have the people been deprived of the profits of their labor, but this capitalized prosperity is the stern instrument by which new burdens are laid on their shoulders and new tithes are exacted from their wages. but for the plundering "system" the great mass of our people would be able to sit in their tents in the shade of their husbanded harvests and laugh to scorn the frowns of fortune. now, i say, god help the nation when nature, tired from her great work, rests, and the people, too, are compelled to rest--for then will come an awful awakening. when the millions face famine and realize for the first time that their gigantic storehouses, filled to bursting with the surplus of the past, are the property of the few who cannot even count the contents, much less use them--when they realize that these hoarded treasures are as far beyond their starved reach as are the violets and daisies beyond the picking of the galley-slave, then they will appreciate how much deeper and more damnable are the crimes of the "system," such crimes as amalgamated and its like, than even such national tragedies as the assassinations of lincoln, garfield, and mckinley, at each of which all the people held aloft their hands in horror. why is it that the millions of intelligent, able-bodied americans, who could crush the tribe of rockefeller as elephants crush snakes, rise with each sun and dig and delve and suffer that a rogers may wallow in wealth and an armour gain a greater income than the rothschilds? why are they so easily hoodwinked into imagining that the elaborate reports detailing the immense and growing wealth of the country represent their own well-being and affluence? because the wise men of the "system" know human nature, know that most men and women accept unquestioningly the conditions they find surrounding them. each day it is pounded into the heads of the people through a hundred agencies that it is the greatest and most flourishing of peoples and that the laws and customs which regulate its lives and rights are the best in all the world. how shall the people know that these glowing rumors, these propitious tidings, are but the siren songs of the "system" under the spell of which it is despoiled of its savings? ask yourselves, my friends, how much you know about those familiar things which are part of your lives as are the sunshine, the grass, and the flowers--your bible, your money, your playing-cards. each is an institution so consecrated by custom that you accept it exactly for what it meant to your father just as he took it from his own father a generation before. that the holy book is god's message to his children, the human race, we know because we have the words of our ancestors therefor; the stamped silver and gold we take for granted as we do shoes and clothes, because money is an essential factor in the social fabric and the form in which it comes to us seems as inevitable as the moon or our ten fingers; humanity has gone on for hundreds of years considering the knave of greater value than the ten-spot and the ace of higher worth than all the rest of the pack, because it is content to believe that the rules that have been handed down apportioning these values are the best that could be devised. with a hundred other elements and details of our daily life, it is the same--we accept unreasoningly what we are told or what is given us, with no look forward or back, and, engaged with the thousand new toys and problems which fate, the conjurer, shakes out of his hat, we become bound by habit and blinded by precedent. the love men have for the formulas and conventions of their daily lives is the "system's" opportunity for plunder, and it is this fundamental principle of humanity that makes my work so difficult. it would be as easy to convince the masses that their playing-cards are all wrong and that the ace is really of lower value than the two-spot as it is to awaken them to the terrors of the conditions that are confronting them; to compel them to realize that a despotism of dollars is being organized among them; that the cherished institutions of generations are the instruments by which a few daring schemers are concentrating into their own hands the money of the nation, and that this concentration can have no other result than the abject slavery of the american people. end of volume lawson and his critics i the insurance controversy in the july, , number of _everybody's magazine_ i announced that i proposed to give to the world a story concerned with events which had taken place in real life--a true story. i outlined it, giving the names of the persons and events it would deal with. these things happened: the edition of the magazine was sold out in three days; my chapter was printed in part or in full in nearly all the papers and periodicals of the united states and canada; many of the representative journals, even in england, published long editorials on the subject, and with but few exceptions, editorials and news comments were favorable. i was urged to continue. my second chapter appeared. the magazine, with an additional , copies, was sold out in two days. the press took hold of the matter with even greater interest than it had accorded my first chapter. the third chapter met with a still more cordial reception. the edition of the magazine, although increased another , , sold out as before, and my mail expanded to a degree that surprised me. in addition to thousands of press notices and criticisms, i received ever so many letters from all classes of americans and canadians--teachers of the word of god, and members of the flocks who are taught, earnest statesmen and insincere politicians, millionnaires and paupers, anarchists, socialists, municipal-ownershipists, and the hundred and one travelers on the beaten highways and lowways of life, who, spurred by ambition or unrest, pantingly seek a chance to blaze a way for the trudging millions of the future to that goal of all ambitious and restless dreamers--a people's utopia. nearly all appealed to me to give them the word as to the ultimate intention of "frenzied finance"--"is it only to point to the sores, or will it prick them with its long sharp point and will its double edge cut the flesh in which they are rooted?" others required further information or explanation about the subjects i had treated; another section questioned my statements and found fault with my disclosures. the volume of these communications and criticisms finally became so large and they were so urgent in tone that i made up my mind it was necessary to devise some fair and intelligent way to remove the writers' difficulties and resolve their doubts. the modern surgeon finds the preparation of a patient who is to go under the knife as important as the operation itself. my readers, unacquainted with the intricate details of finance and confused by the angry outcries and denials of those i had attacked, required education _en route_ to be able to absorb and digest the hard facts and strong statements i was dealing out to them in monthly instalments. my publishers agreed with me as to the necessity of dealing in some radical way with the emergency, and devoted to my service additional pages in the back of _everybody's magazine_. here i decided to begin a department to be called "lawson and his critics" in which i would solve the knotty problems my correspondents presented to me, set right their misunderstandings, and reply fully to those critics who had aspersed my motives or were attempting to discredit my message. i began the department in october, , and though i have been most seriously pressed for time, and in many instances have dealt imperfectly with the problems treated, i must say that the task i set myself has proved interesting and agreeable, and the letters the department evoked have been a tremendous source of inspiration and encouragement to me along the hail-stony road i had set myself to travel. the bulk of the department during the months of was devoted to the subject of insurance. in an early chapter of my story i said that the three great insurance corporations, the new york life, the equitable, and the mutual life of new york, were an integral part of the "system," and especially instanced the new york life as one of the most pliable tools of the "made dollar" makers. this statement, so mild and so vague in view of subsequent developments, was the first move in the historic controversy that has resulted in the extraordinary exposures that are being made as this book goes to press. when that first pebble was thrown, the surface of the insurance pond was as placid as a mountain lake, unruffled by a ripple, and in it were reflected the benignant faces of the noble philanthropists who consented to spend their days conserving the interests of the widows and the orphans of america. the people had grown so accustomed to regarding the mccalls, the perkinses, the hydes, the mccurdys, and the alexanders, whose eminent physiognomies looked out at them from their insurance policies, as lofty and generous souls far removed from thoughts of pelf or self-aggrandizement, that my assertion caused consternation such as would occur in a chinese temple if some rough intruder struck the idol, before whom a congregation was worshipping, with a stone. at once an avalanche of letters--protests, demands for further facts, anxious appeals from policy-holders--poured in upon me, and frankly i took up the subject, giving my readers exactly what they desired. new hampshire traction in order that the controversy may be unfolded in the manner in which it was first given to the public, i give here the first letter of the series, and then follow directly along with those passages from succeeding numbers that are devoted to the subject: buffalo, n. y., august , . mr. thomas w. lawson, boston, mass. _dear sir_: i have been astounded beyond measure at the revelations you make in your second article regarding the new york life insurance company, because i have two policies in that concern which i am keeping up for the protection of my family. my confidence in the company has been shaken by your revelations, and i wonder if much more can be said. perhaps it is best for clean life insurance to tell all now--the rest will be the better for it. do you really believe the officers of the company personally profited from using the "cash on hand" of the company? go on in your exposure; you are doing a meritorious work, and we poor devils, plodders, will never cease to thank you for your work. should like to have you intimate if anything more about new york life is coming. yours truly, ---- ---- to this i replied: i desire to emphasize that the new york life insurance company, which i cited, is no different from the equitable and the mutual life, or many of the other large companies. they are links in the chain of the "system"--necessary links in the device by which dollars are "made," by which the savings of the people are sucked from the people to the "system," the "private things." i will, later in my story, dwell upon this tremendous phase of this stupendous question, and will only say at the present time, as an answer to such questions as "buffalo's": the insurance companies use the billions the people have placed with them to buy or create banks and trust companies, the stocks of which are a large part of their assets. they then use these banks and trust companies, which exist because of the people's savings, in stock gambling enterprises, speculations as unsafe and as frenzied as those of the wildest plunger of wall street. i will give one illustration: the new york life insurance company's directors and managers created the new york security and trust company. $ , , capital; $ , surplus--in all, $ , , . $ per share, of which the insurance company held about two-thirds. the trust company soon secured deposits to the extent of about $ , , , and these it loaned out by "financing" new and old enterprises. among them was the new hampshire traction. the trust company flourished. its stock advanced in price to over $ , per share, or over $ , , , and its different speculative ventures prospered exceedingly. new hampshire traction kept pace with the rest and simultaneously with them bounded upward in value until the amount of this stock owned by the trust company represented a value of between $ , , and $ , , . there came a time when the directors of the new york life insurance company decided to dispose of their stock in the trust company, and did so to a syndicate composed of their own members, headed by john d. rockefeller, at $ per share. afterward the stock disposed of at $ per share advanced to over $ , , or, with the third which had not been owned by the insurance company but by the "insiders" and their friends, to a total of over $ , , . then came the slump, and the price of the new hampshire traction fell to twenty-five cents on the dollar, and the trust company's stock to less than $ . if in all the histories of the wildcats of the wild catteries of wall street a wilder case of "frenzied finance" can be discovered, i don't know it, and yet this is only one of many i could quote, selected at random. boiled down, it means that what was bought at $ went to $ , and back to $ , and that it changed hands at $ before it got to $ , , and that the plunger in this transaction, which made this plunging possible, was one of the most conservative life insurance companies in america. i will answer "buffalo's" question by asking another: suppose all the insurance companies have been doing business on the same scale, and have tied up billions of the people's money in such schemes as new hampshire traction, and the people, learning these facts, should demand their savings to the extent of the $ , , , which they have deposited in banks and trust companies, what would happen? what would happen to the undigested securities, the insurance companies, the people's savings, and the policies such as "buffalo" says he has purchased for the benefit of his family? * * * * * this statement precipitated a perfect flood of letters and queries, growing more urgent as the month wore on. it was impossible to answer all of them. i contented myself with replying to the letter of a prominent philadelphia church-man, a policy-holder in the new york life, who wrote as follows: philadelphia, september , . mr. thomas w. lawson, boston, mass. _my dear sir_: i have just finished reading the current article on "frenzied finance," and like "buffalo" i am astounded at your statements regarding the "new york life." i, too, have a policy in that company and have been led to believe that i was not only insured in the best and most conservative company, but that i had a first-class and perfectly _safe_ investment as well. this particular company claims that not a dollar of its assets is invested in stocks of any kind, and yet, to quote from your article: "the insurance companies use the billions the people have placed with them to buy or create banks and trust companies, the stocks of which are a large part of their assets." either you are manifestly unfair or else the company is guilty of deliberate falsehood for the purpose of deceiving the public. as a policy-holder and prospective sharer in the surplus of the "new york life," i am much interested in knowing whether its statements in regard to its investments are to be relied upon. will you take just a moment to answer the following question? is the "new york life" telling a falsehood when it states that not a dollar of its assets is invested in stocks of any kind? very respectfully yours, ---- ---- i replied: the transaction in regard to the new york security company and the new hampshire traction stocks was exactly as i set it forth. i can imagine no one but an absolute idiot who would dare to set it forth unless he knew he was dealing with facts. your high position in the church should, in my opinion, peculiarly fit you to answer fairly your question, "is the new york life telling a falsehood when it states that not a dollar of its assets is in stocks of any kind?" when i unqualifiedly state the fact that the new york life owned the millions of the new york security company's stock; that it paid $ a share for them and sold them to a syndicate of its own directors at $ per share, and that the stock afterward sold at over $ , per share, and still afterward dropped to less than $ per share. i did not wish to be unfair to the new york life, or i should have stated, what i shall endeavor to show before my story is ended, that at the time the new york life parted with these shares to their own directors at $ per share they were actually worth and could have been sold for hundreds of dollars per share more. the honesty of the one man at this the big insurance companies uncovered their guns, and soon the air, the newspapers, and my mail were full of underwriting explosions. it was necessary then to line up my forces and to go at the attack seriously. so, having carefully thought out a campaign which my knowledge of the men whom i was antagonizing taught me would bring results, i began, in december, as follows: when i began to write "frenzied finance" i specifically stated that i should not concern myself with men, but with principles. i held that to put an end to the plundering of the people required more than the denunciation of individual criminals; that the real peril lay in the financial device through which the plundering was done and the "machine" developed for their operation. the "machine" is the tremendous correlation of financial institutions and forces that i call the "system," and the most potent factor in the "system" is the life insurance combine--the three great insurance companies, the new york life, mutual life, and equitable, with their billion of assets and the brimming stream of gold flowing daily into their coffers. that i should have to discuss the relation between the "system" and these great institutions was inevitable; but, knowing how vitally interested the public is in the preservation of the gigantic structures its savings have erected, i had thought to treat this phase of my subject later on, when my readers should be absolutely convinced by what had preceded it of the honesty and fairness of my purpose. moreover, it did not seem possible to touch on life insurance conditions without involving the men who direct the three great companies, and whom policy-holders and the people at large have been taught to regard as men of wellnigh miraculous sagacity, integrity, and beneficence. with these men i have had none but the pleasantest relations, and determined as i am on the performance of my task, i go about it with the reluctance a surgeon feels when, in order to save a friend's life, he must amputate his limb. a contingency has now arisen which compels me to depart from my rule and to discuss much more frankly than i had purposed at this juncture, the new york life insurance company, the system which controls it, and its president, john a. mccall, the "system's" representative. in reply to the inquiries of an anxious policy-holder, who had taken alarm at my statement that the funds of these great corporations were under the control of the "system," i stated in the october issue of _everybody's magazine_ that the new york life was, as well as its so-called competitors, the equitable and the mutual, as much a participant in the frenzied speculation of the period as were the plunging wall street stock gamblers; but in giving an illustration of its methods (the new york security and trust company and the new hampshire traction company) i selected a case which would not unnecessarily alarm nervous people, for the transaction showed an enormous profit as the result of a wild stock plunge, instead of an enormous loss--some of the new york life's other deals were much less fortunate. when i stated that the new york life disposed of its interest in the security trust company to its directors for four millions of dollars, which represented a gain of over $ , , on its original investment, i was careful not to state that the shares for which they paid $ each were worth at the time $ , each, or $ , , for what was sold for $ , , --particularly careful to state that they were afterward worth this additional amount. policy-holders in the three great life-insurance companies may argue: "the man who is known to us policy-holders as the real head of the new york life is john a. mccall, its president. all that you may say about the 'system's' votaries being in control may be so, but we depend on the integrity and the character of this one man to protect our interests. he is our representative, not the 'system's,' and our savings are surely safe in his strong hands." there is the point. in the great insurance corporations that are "one-man run," the hundreds of thousands of policy-holders have but one protection. this, notwithstanding the protection of the state laws, the guardianship of the insurance department of the various states, and the provisions of the company's charter and by-laws. however impregnable may seem the safeguards which the law has built round the administration of our great insurance companies, the fact absolutely is that the honesty of "the one man" is the one potent protection policy-holders may depend on. the others may be juggled with as are the rules of the stock exchange, which say in thunder tones, "all within our sacred walls is honest and honorable," when in reality if the microbes of dishonor and dishonesty generated within stock-exchange walls each busy week of every year should be collected and disseminated throughout the land, they would give typhoid of the soul to our eighty millions of americans. so it becomes the duty of every policy-holder to find out by such tests as he can apply, "is 'the one man' who runs our company an honest man or is he a dishonest man?" if "the one man" stands their tests, if he emerges from their ordeal clean, strong, honest, as they believed, then they may rest awhile in patience. but if he is revealed as dishonest, then it behooves the policy-holders of that company to take measures for the protection of their interests. the welfare and happiness, perhaps the very lives of their mothers, their wives, and their children depend on their action. i was recently waited upon by an important man. "lawson, what are you doing in life insurance?" he asked. "giving facts about the life-insurance branch of a 'system' which is foully plundering the people," i answered. "what are you trying to do?" "educate the millions of life-insurance policy-holders to their present peril; after they are educated, arouse them to quick, radical action." "what are you going to do?" he asked. "i am going to cause a life-insurance blaze that will make the life-insurance policy-holders' world so light that every scoundrel with a mask, dark-lantern, and suspicious-looking bag will stand out so clearly that he cannot escape the consequences of his past deeds, nor commit new ones." "have you figured the consequences to yourself?" "having no interest in what the consequences may be to myself in performing what i have decided is a sacred duty, i have not." "let me show them to you. first let me ask, do you intend to confine your criticisms to the new york life insurance company?" "i intend to bring out the facts, particularly as to the new york life, the mutual life, and the equitable life; and, so far as in my power lies, as to every other life-insurance company in america that is connected with the 'system.'" "are you actuated by any selfish motives--gain, revenge, or friendly interest in certain life-insurance companies or banks or trust companies?" "my only interest is to perform a duty in righting a startling wrong, and i would not undertake the terrible task if i could possibly avoid it." "i am sent to ask you these questions, to find out whether, if you are only seeking to serve the policy-holders, and the insurance companies can absolutely prove to you that your making public your facts will cause terrible destruction to policy-holders' interests, you will consent to forego the life-insurance branch of your story?" "i know the facts. i have calmly, and i believe intelligently, reviewed the effects of their being given to the world, and have concluded that the damage to policy-holders and the people would, in any circumstances or conditions, be greater because of my not doing what i have decided to do than by my doing it. therefore i will not in any circumstances consent to stop until i have laid before the world those things i consider it should know." "well and good. let me show you what you are up against. the equitable, the new york life, and mutual life insurance companies, and their affiliated institutions and individuals, are to-day by all odds the greatest power in the world, greater by all odds than any power that can possibly be gathered together from those outside themselves, a power so great that the effort of no man nor party of men outside themselves can possibly prevail against their wishes." "stop where you are for a minute," i answered, "and let me run over to you what i know i am up against, and then you can judge whether i appreciate the difficulties of my task: "first, the three companies i have named have absolute possession of property and money in the form of assets of over $ , , , --more than half the combined assets of all the insurance companies of america--and indirectly, through their affiliated institutions, of an additional sum, the aggregate of which is much greater than the assets of all the national banks of america and the great financial institutions of europe, such as the banks of england, france, and germany. the three have a ready cash surplus of almost $ , , , which is greater than the combined capital of the four greatest institutions of europe--the banks of england, russia, france, and germany. the income of these three companies is, each year, $ , , greater than the combined capitals of the banks of england, russia, france, and germany--or about $ , , , $ , , of which is taken each year from their policy-holders in the form of premiums. yet from out of this income there is returned to their policy-holders each year in dividends less than $ , , , and in total payments of all kinds not over $ , , . and yet these three companies pay out each year in what they call expenses to keep the concerns running $ , , , paying to the officers of the companies $ , , in salaries, almost $ , , to their lawyers, and a number of millions in various forms of advertising. "second, the three companies are absolutely steered and controlled from a common centre, and the men who do the steering and controlling are the 'system's' foremost votaries, henry h. rogers, william rockefeller, james stillman, and j. pierpont morgan through george w. perkins, a partner in j. pierpont morgan & co. mr. rogers, vice-president of the standard oil company, is a trustee of the mutual life and a director in one of the largest trust companies owned by the three great insurance companies, the guaranty trust company of new york. william rockefeller, vice-president of the standard oil company, is a trustee of the mutual life and director in the national city--the 'standard oil'--bank. james stillman is a trustee of the new york life, and president of the national city--the 'standard oil'--bank of new york. george w. perkins, partner of j. pierpont morgan & co., is vice-president and trustee of the new york life and a director in the national city--the 'standard oil'--bank; while john a. mccall, the president of the new york life, is a director in the national city--the 'standard oil'--bank. "these great institutions own a majority of the capital stock or have absolute control of a number of the leading banks and trust companies of new york and elsewhere; and such ownership shows conclusively the linking together of the three great insurance companies. for instance, the equitable owns more than a majority of the stock of the mercantile trust company of new york, of a book value of about $ , , and a market value of almost $ , , ; and of the equitable trust of new york, of a book value of $ , , and a market value of $ , , ; and of the bank of commerce of new york, of a book value of about $ , , and a market value of over $ , , ; and in the directory of the mercantile trust of new york and equitable trust is e. h. harriman, one of the leading 'standard oil' men and one of the active votaries of the 'system,' while in the directory of the bank of commerce are the president of the mutual life and seven other trustees of the mutual life and three of the trustees of the new york life. "the mutual life owns stock of the bank of commerce, of a book value of $ , , and a market value of $ , , ; of the united states mortgage & trust company, of a book value of $ , , and a market value of $ , , ; and of the guaranty trust company of new york, of a book value of $ , , and a market value of $ , , . the directors of the united states mortgage & trust company consist of eight trustees of the mutual life, including its president, and two trustees of the equitable life, while in the guaranty trust directory is the president of the mutual life, henry h. rogers, and e. h. harriman, 'standard oil' votary and director in the equitable. "in addition to these financial institutions, the mutual life has about $ , , of its funds invested in the stock of twenty-five other trust companies and national banks, while the equitable has about $ , , invested in some fifteen other trust and banking institutions. "third, the absolute control of the three great companies, and through them of their subsidiary financial institutions, while supposed to be in the hands of the policy-holders, is entirely beyond their regulation, as all policy-holders of the three companies give over complete control of their companies to the 'system' through the following machinery: the control of the new york life rests absolutely in president mccall, that of the mutual life with president mccurdy. originally these men were elected to office by policy-holders' proxies, voted by the great general agents; but so immeasurable has been the growth of these corporations that only rebellion among policy-holders on an international scale could oust from power the mccalls and the mccurdys. the control of the equitable life rests in the $ , of capital stock which is almost entirely owned by the men who elect themselves to manage the company. "therefore you will see that i fully comprehend that this power, which you claim to be, and which undoubtedly is, the greatest on earth, is absolutely, for all practical purposes, in the hands of three men, and that any one who attempts to do anything contrary to what this power allows will find himself opposed by practically unlimited money, which can be used first to corrupt all sources of help, including state insurance-law enforcers, and then to keep such corruptions from the policy-holders by subsidizing the press. in other words, you see that i fully comprehend that i, or any man or any body of men, would be absolutely helpless in an attempt to correct present evils unless we could do two things: first, show to the policy-holders of the great insurance companies that they are absolutely in the hands and at the mercy of 'one man,' and next, that this 'one man' is unscrupulous." in other and different ways i had it forcibly impressed upon me that i must go no further in connecting the life-insurance companies with "frenzied financiering"; that while the "standard oil"-amalgamated-city bank crowd might bide their time for reprisal and vengeance, the great insurance companies must at any cost instantly squelch those rash souls who dared to cross their paths. to all such warnings i replied that a life-insurance company, especially great institutions with hundreds of thousands of policy-holders, must be as far above suspicion as cæsar's wife; that the security of the immense funds in their possession must be as unassailable as the united states constitution; but that immunity from criticism could be secured only by honesty of purpose, honesty of method, and honesty of results; and that i would follow "frenzied finance" wherever it might lead, even if the exposure brought every life-insurance concern in the country down to the ring-bolt of making public confession of complicity. but with all my knowledge of the "system's" weakness, i never dreamed of the condition of fatuity into which the past few years of unbridled "frenzied finance" have plunged its votaries. if the correspondence that follows here correctly represents the purposes and the methods of great american life-insurance companies, i ask my readers what quick, sharp, effective means should be taken to call a halt and rescue the billions of the people's savings before it is too late. and i ask all policy-holders in the great insurance companies to weigh carefully what follows, that from it they may decide the question. as soon as it became fixed in the minds of the different interested parties who had communicated with me that my purpose was unalterable, queer things happened: first, there appeared in the press of the country, under large, black headlines, the startling confession of the editor of a new york financial paper, who, conscience-stricken, admitted that he had been engaged in the systematic blackmail of insurance companies and officials and wall street institutions such as banks and trust companies. it was a curious document, and even the casual reader must have wondered at the mysterious lack of detail. the paper, i found out later, was one of the innumerable swarm of journalistic insects generated, like mosquitoes, in the financial swamps of wall street, destined to live a day and die as they deliver their sting, and the attention given it was curiously out of proportion to its importance. among other queer things, the editor announced that after printing his confession he would disappear; no names were mentioned nor a fact printed which identified any one or anything. all this could not happen without a motive, and i said to myself, "the 'system' is planting a mine for some one." not another word appeared. i awaited developments. on october th i received the following letters, which tell their own story: fremont, ohio, october , . mr. thomas w. lawson, boston, mass. _my dear sir_: i have followed with intensest interest your discussion of "frenzied finance." the _exposé_ of the "system," and its machiavellian performances, was highly interesting to me. i was associated with attorney-general monnett in his effort to get testimony and the inside facts concerning the trust and its operations in his prosecution against that corporation for violating the ohio anti-trust law. at that time the books of the company were burned in cleveland, and, as stated in your article, the company now relies upon the superior memory of standard oil. i was well aware of the connection of certain life-insurance companies with morgan and the rockefellers, but until your public charge, was not familiar with the details. as i had considerable money invested myself in new york life insurance i wrote john a. mccall a bitter letter. in this age of commercialism sentimental benevolence gets little place. the common sentiments of humanity and appreciation of responsibility admonish one in moderate circumstances or even in affluence to invite the co-operation of others in providing for those dependent upon the individual hazard of life and fortune. life insurance has come to be a sacred thing. it is the substantial token and expression of responsibility which a reasonable man dying leaves to those dependent upon him. i so wrote mr. mccall, and told him that if the head of a great institution like the new york life insurance company would be guilty of such perfidy as charged by you, the organization which would retain him in a position of responsibility was undeserving of confidence or patronage. [illustration: photograph of john a. mccall's reply to h. c. deran, the policyholder who had asked for a denial of mr. lawson's charges.] i enclose for your inspection mr. mccall's reply. this is doubtless a sample of the sort of campaign waged throughout the country by the "system." i enclose stamped envelope for the return of the mccall letter, as i purpose continuing the correspondence until i force him to an issue. you will observe the very palpable evasion of the issue. i asked him if the details of the transaction described in _everybody's_, in which the new york life insurance figured conspicuously, were true. he answered by saying that he made money out of the trust company venture and retired. the fact that new york life money is so deposited as to suit the convenience of the "system" in its heads--i win, tails--you lose, operation, is a matter which has escaped the attention of the astute financier. i have written him further, calling his attention to the fact that his letter conveys no information not heretofore made public in circular but that my inquiry was directed to the particular transaction alluded to in _everybody's_, and requesting a flat affirmation or denial. trusting that these facts may be of assistance to you, i am, yours very truly, (signed) h. c. deran. i shall spare my readers the enclosures. they were newspaper slips, printed on fairly thick paper, reproduced from unknown publications, and obviously put forth to discredit me by implication. one, headed "a frenzied financial blackmailer," from the _vigilant_, new york city, september , , presented the confession, previously referred to, made by the editor of the _united states investors' guardian_, and an editorial denouncing the blackmail of financial corporations. another slip was "stamp out the fake financial newspaper publisher" from the _fourth estate_, new york city, october , , in which the wickedness of the aforesaid editor came in for further moral castigation. at once, as i read these letters and ran over the printed slips pinned to mr. mccall's, i realized the purpose of the blackmail editor's confession and just how so much space came to be given it in the daily papers. insurance corporations are large advertisers[ ] and enjoy great popularity in the business offices of great newspapers. it is not said in these clippings that either mr. lawson or _everybody's magazine_ belongs to that lowest order of criminal, the self-confessed black-mailer, but the suggestion is obvious. every policy-holder throughout the world who received these enclosures attached to letters from the greatest insurance president in america would instantly supply the connection--"'frenzied finance black-mailer'--that's intended for lawson, surely; 'frenzied financial journal'--_everybody's magazine_, beyond question." will my readers weigh carefully this awful charge: "thomas w. lawson, in addition to being a frenzied financial black-mailer, is attacking the new york life insurance company because he tried to secure insurance from that company, and that company would not give it to him. his attack is made in the interest of some competing company." again, i ask that it be kept in mind that all this is not said by an insignificant and irresponsible trickster, but is deliberately put forth by the greatest insurance president in america, over his signature, to his policy-holder no. , and , . soon afterward, in its issue of october th, a well-known organ of the insurance companies, _the spectator_, published in new york, had a long article dealing with malicious attacks on our great insurance corporations, specifically mentioning my accusation against the new york life. "mr. lawson was actuated by the meanest motives," says _the spectator_. extract from _the spectator_, october , : mr. lawson, in the hypocritical rôle of a would-be-reformed-speculator, is a figure calculated to stir the risibilities of all who have watched his antics and read his articles, _especially when each one of the companies he mentions has repeatedly rejected him for insurance_. letters to policy-holders from the new york life insurance officers poured in on me from different parts of the country, all containing the same defence and the same accusations as the one above, and signed by vice-presidents of the company as well as president mccall, showing conclusively that this great corporation as a corporation had deliberately adopted this method of meeting my serious yet conservatively put business accusations. president mccall's defence of the new york life insurance company and his reply to my accusations are now completely before my readers. let us see if there is not a chance here to determine the grave question, "is '_the one man_' who runs each of our great insurance companies honest?" the facts are: during the past twenty years i have been importuned, begged, and hounded by the several great insurance companies of the united states to take out policies with them almost upon any terms i might name. of this statement i could present more photographic proof than would fit in any one issue of this magazine, but most of it would have no bearing on the point at issue. in the present year ( )--to go no further back--john a. mccall has repeatedly urged me to come into the new york life insurance company. absolute evidence of the truth of this assertion is presented below. mr. mccall's letter reproduced here would be accepted as complete proof in any court of justice. in the correspondence that follows this first letter it will be seen that mr. mccall left no stone unturned in his effort to get me into the new york life insurance company. a duplicate of the communication sent to my residence went on the same date to my office. to quote his own words, "i hope you may" and "i may have the pleasure of welcoming you either to new or increased membership in this great mutual insurance investment." then, his anxiety being so great, after waiting four days for a reply he sent his special agent to argue with me, and, on the following day, his boston manager to urge me further. [illustration: photograph of letter from john a. mccall soliciting insurance, sent to mr. lawson's house.] [illustration: photograph of heading and signature of john a. mccall's letter of january d, sent in duplicate to mr. lawson's office; of special agent gillespie's letter of january th; of manager hayes's letter of january th. these three letters soliciting insurance, followed each other within a period of six days.] is it any wonder that i called the history i am writing "frenzied finance"? the man who wrote the letter practically saying that i was a black-mailer and that my reason for attacking the new york life was my anger because he would not take me into his company, and the man who wrote the ones begging me to come in, are one and the same; and he absolutely controls directly $ , , of the people's savings in the new york life, and indirectly unnumbered millions in affiliated institutions! i think the case is complete. the policy-holders of the new york life have an opportunity to decide whether the "one man" who runs the great institution in which their savings are invested is honest. in making up their minds, i implore them not at the present time, or at least until the question has been more fully ventilated, to allow their policies to lapse. under any and all circumstances they should keep up the payment of their premiums, for the one thing especially desired and schemed for by some of the "frenzied finance" insurance companies is a wholesale lapse of policies. some few years ago the financial world learned with great interest of a new and very useful invention in finance. a group of individuals who had been buying large quantities of a certain stock at a low price, found they could not, on account of the fact of its overcapitalization having become known to the public, resell it; and they were, to use the stock-gambling term, "hung up" with it because it was too water-logged to float. it became necessary to disguise its identity. here's how they did it: they formed a "syndicate," to which they "turned over" their stock at a good profit; the "syndicate" in its turn put it "in trust" by simply depositing the stock certificate with a trust company, which in its turn issued against the stocks thus held a new security, which it called a "bond." for these a ready market was found, for the word "bond" is still a term to conjure with in the world of finance. this seemed such a serviceable arrangement that the originators soon had many imitators. many "syndicates" were formed, and many so-called "bonds" were put on the market. in most cases the stocks were purchased at a low price, turned into "trusts" at double their cost, and then paid for by means of these certificates, dubbed "bonds." as one stock after another was converted into syndicate certificates--"bonds"--the familiarity of the procedure robbed it of its novelty and these "bonds" were quoted and dealt in much as other and more tangible securities bearing the same name. perhaps this is why the startling announcement of the new york life insurance company made about this time, that it proposed to sell all its stocks and thereafter hold nothing but bonds, created so much less of a sensation than was anticipated. the term "bond" had become vulgarized. this excellent example would undoubtedly have had many followers but for the humor of the tobacco trust. this robust institution, with an immense amount of watered stock, audaciously poured it all but a small amount into bonds, $ , , of them, and with a fine trumpet-blast proclaimed these "bonds" safe investments for widows, orphans, and insurance companies. even wall street, with its frenzied votaries and its frenzied environment, was staggered. the culmination of these conversion performances was the brilliant plan evolved by george w. perkins, the junior partner in the firm of j. pierpont morgan & co., vice-president of the new york life insurance company and expert investor of its vast surplus, to have the united states steel trust purchase some $ , , worth of its own water-logged stock and convert the same into more "absolutely safe bonds"; for its most valuable services in the turning-over process the morgan firm was to have a commission of some forty millions of dollars. at this juncture "frenzied finance" became gagged with its own froth, and i have not space here to go further into the subject. the new york life insurance company declares to its agents, policy-holders, and prospective policy-holders that it no longer holds stock securities. in its last report to the insurance commissioners there are set forth stock securities of the kind i have described above, to the amount of fifty millions of dollars. i will give one illustration: "northern pacific--great northern--c., b. & q. collateral s, book value--$ , , . , market value--$ , , ."--(from the official report to insurance commissioners.) now, these bonds are nothing more nor less than chicago, burlington and quincy stock of a par value of $ per share, which shares were purchased by individuals, and had "bonds" issued against them at $ per share. (northern pacific and great northern stock in about the same proportion.) in the sense in which the public look upon the old bonds of railroads this "bond" is no more a bond than it is a government bond. it is nothing more nor less than a stock security, _and yet president mccall says in his letter printed above and sent by him to policy-holder deran that the new york life does not and cannot invest its surplus in stock securities_. the true story of how i was "black-listed" the publication of president mccall's letter and the charges which accompanied it attracted so much attention that the "big three" were flooded with letters from policy-holders demanding information. in the january, , issue of _everybody's magazine_, i continued the controversy. after reviewing the conditions of the previous month's argument, i went on: in entering upon the exposure of the most powerful body of men in the world, i knew quite well what i was "up against," and deliberately decided that in the conduct of my fight i would use such strategy as i believed proper to outwit so strong and so unscrupulous an adversary. one can hang a dog as well with a cord as with a hawser, and in proving my assertions i am quite willing that the insurance companies should believe each play is my best card. i decline, however, to show my hand. in reply to the charge that i was attacking the new york life because i had been refused insurance by that company, as positively stated in mr. mccall's letter, i reproduced a letter written and signed by president john a. mccall, dated , soliciting me to take out insurance in his company. i printed parts of three other letters, one directed to my office, also signed by mr. mccall, another from the special agent, and a third from the boston agent of the new york life, supplementing mr. mccall's letter and requesting the privilege of an interview. this correspondence was put forth with a thorough understanding of its nature. the publishers of _everybody's magazine_ and my own lawyers, to whom i submitted it, both pointed out that the insurance companies would undoubtedly take the ground that the mccall letter was no more than a circular that had been sent out to a number of capitalists and had gone to me by mistake. i replied that such a rejoinder would practically amount to an admission that the statement and signature of the highest officials of the new york life were valueless and without significance, which would place president mccall in an untenable position. if his signature were valueless and without significance when appended to a letter addressed to me, why not in other instances if the interests of his corporation seemed to require such a disclaimer? considering my argument, would not such a confession have a pregnant bearing on the proposition--is the "one man" honest, especially as i was equipped with additional documents to offset further attempts on the part of the insurance companies to show me up as a disappointed seeker after their policies? here, specifically, are the details of my encounter with the life-insurance institutions, and i pledge my word to my readers that they constitute all the facts in this connection. they are well known to the prominent men associated with the great companies whose duty it is to keep track of just such transactions. whoever knows by experience of the incessant pursuit of business by the important insurance corporations need not be told that a man in my position has had his share of importuning by agents great and small. i have never sought life insurance, for it has not appealed to me as an investment, but on three separate occasions i have yielded to the persuasions of a friend connected with one of the big institutions and have considered the subject. the first time was in , following a breakdown from overwork. this illness my friend used as an argument to induce me to take out insurance, and i went so far as to agree to submit to a private medical examination by the leading physicians of his company for the purpose of ascertaining if my breakdown, which for a brief time had left a trace of paralysis in my left side, would bar me. this examination was at my own expense, and it was expressly understood that, being private, it should not constitute a record. the physician pronounced me a perfect risk, but advised against going further inasmuch as a rigid rule of the company precluded them from granting insurance to any one who had suffered from this form of illness until seven years after the attack. i was not disappointed except on account of my friend. five years later his solicitation was renewed and i was assured that the officials of his company were so eager to have me that they would waive the seven-year rule, which still had two years to run. this time i went up before another medical examiner, and after the usual tests, was asked the stereotyped question if i had ever previously been rejected for life insurance. my friend replied for me--no. i, however, in spite of his protests stated fully the conditions of my previous examination, which the doctor assured me did not constitute an official rejection, and the application was filled out. in the conversation that ensued, the doctor said that it was safer to await the expiration of the seven years, and i being still indifferent, except to my friend's interest, accepted the apologies of the several people concerned for the trouble i had taken and let it go at that. four years later, in , after the attack of appendicitis which i described in the december, , instalment of "frenzied finance," again my good friend the agent came to me and used the incident of my narrow escape from death to impress upon me once more the desirability of having a large policy of life insurance. those who have read the "system's" disclaimer, will remember that i had been blacklisted since . there were the usual consultations with high officials of the corporation, and when all preliminary bargains had been arranged, i underwent a thorough examination in new york. this time, the seven-year term having expired, i was pronounced a perfect risk. but my latest illness had brought me up against another waiting rule, and once more the subject was abandoned after the usual expressions of regret and good-will. since my connection with life-insurance companies has been about the same as that of a molasses barrel with the industrious flies in summer. the interviews of and are both matters of record. my position in each instance was well understood, and several insurance officials who know the facts as well as i do have, since the publication of the company's statement, come to me and offered to back up my assertions with their own. american manhood is certainly not extinct when men are willing to sacrifice their careers to set a wrong right. the manner in which the great companies have met my rejoinder to president mccall will afford my readers an excellent illustration of how the "system" goes after a man who has excited its antagonism. a few days after the publication of the december issue of _everybody's magazine_, containing my fac-simile of president mccall's letter to policy-holder deran and his two letters to me, the life insurance underwriters met and "resoluted" that i had applied for insurance in the new york life insurance company in , and being asked if i had ever been refused insurance, had replied in the negative. investigation showed that i had been refused four years before by two other companies, whereupon my application was rejected and i was practically black-listed, and so could not secure life insurance in any american company. by way of corroborating this plausible story two letters, purporting to have been written by agents of the two companies to their head officers without my knowledge, were incorporated in the resolution. the letters stated that the writers could secure me for a large amount of insurance if the companies would accept the risk. the virtuous corporations were alleged to have replied that mr. lawson had been refused life insurance before, and for good reasons was not desired as a risk. this resolution was then published throughout the press of america in the news columns, and to all but those initiated in the desperate practices of the "system" and its votaries, it was conclusive evidence that an unprincipled man had been convicted, red-handed, of fraud. you who read this statement of mine doubtless found the resolutions in your own paper, and thought it ordinary news-matter printed because of its public interest. this notice was an advertisement disguised as news, and inserted through the "system's" professional character assassinator, whose head-quarters are in boston, a person who will occupy a prominent part in the chapters of my story wherein i treat of the crimes of amalgamated. the publication cost the insurance companies $ . per line of the policy-holders' money, while advertisements that i insert in the course of my private business cost me but cents per line. how the "system" makes its profits it appeared that i had sinned still further, for had i not questioned the virtue and integrity of the new york life's securities? to policy-holder deran, mr. mccall had stated, over his own signature, that the new york life did not and could not own stock securities. (see the deran letter on page .) i proved from the regular insurance reports that millions of the new york life's bonds were no more than disguised stock securities, created by the new device of depositing stocks with a trust company at an inflated price and issuing against them a receipt which is arbitrarily called a "bond." i mentioned, as an illustration, the northern pacific-great northern-c., b. & q. collateral s, created out of the stock of the chicago, burlington & quincy and other railroads. i could have selected a much worse type of security, just as, instead of the typewritten letter of mr. mccall, i might have published others of a more personal nature. against me out sallied d vice-president perkins, brother of george w. perkins, st vice-president of the new york life (j. pierpont morgan's partner), and at a banquet in philadelphia boldly answered my aspersions by declaring that the bonds i named "are printed in the list of holdings which the company publishes in detail, and has published for the last five years, in order that its policy-holders may be informed of its affairs in the minutest detail." the convincing logic of this rejoinder the dullest will appreciate, but for a moment i must stop to remind mr. perkins that the publicity on which he plumes himself is really not an expression of the new york life's individual frankness, but merely an observance compelled by the law. all this recapitulation has been for a purpose. my readers will bear in mind before taking hold of my next exhibit that the great insurance companies have published me as a falsifier, who since has been refused insurance and black-listed for good reasons, and have claimed that mr. mccall's letters were circulars sent me by mistake. we are still considering the problem--_are the men who run our great insurance companies honest?_ well, look at the reproduction on page of a document that is now in my possession and has always been since the date when it was delivered to me by one of the three great representatives of the "system," the equitable life insurance company. this document speaks for itself. my readers are aware of the negotiations and investigations which precede the making of an insurance contract. to them and to the "system's" votaries i recommend the exhibit and the underwriters' resolutions as a simple lesson in frenzied finance. my charge that the directors of the great life-insurance corporations of america use the funds of the companies they control in stock speculation for their personal benefit is but one contention in my argument against the character of their management. here i formally add another charge: it is that in the placing of loans, in the purchase of properties and securities, and in the underwriting of enterprises, there are enormous profits made, directly and indirectly, which are pocketed by individuals and are never shown on the books of the corporation. the basis of life insurance is security. a policy-holder pays his premium to enable the corporation accepting it to make good its contract with him when death or time matures it. the vast sums in the possession of the three great companies are accumulated to safeguard their policy-holders, and should be invested only in securities of tried and solid worth, which will bring in no more nor less than the going rate of interest. there must be no experiments and, above all, no speculation. but what do we find? the positions of managers and manipulators of these huge hoards of the people's money have become the greatest financial prizes of the day. new and ingenious methods of graft have been devised in connection with them. the vast revenues of the insurance companies have become the "system's" most potent instrument in working its will in the stock world. [illustration] [illustration] their investments, largely in the securities of properties or corporations in which the "system's" votaries have large interests, are fertile sources of profit to the "insiders." the groups of banks and trust companies affiliated with them are the medium through which access to the coveted insurance funds is obtained, for these institutions are allowed by law to use money for speculative purposes, which the insurance concerns are prohibited from doing. the immense opportunities for profit afforded by the control of these great money hoards are taken advantage of in various ways. let me illustrate one or two of them. rogers, rockefeller, stillman, and morgan buy the capital stock of three railways at a fair valuation, say, $ , , apiece, $ , , for the three. owning all, or nearly all, the stock, they can put its price on the stock-exchanges to any figure they desire, say, $ , , for each railway, or $ , , in all. they proceed to deposit the stocks of the three roads in a trust company, issuing against them $ , , of what they call "bonds." an "underwriting" syndicate is then organized. this is composed of certain individuals and corporations who agree that when these bonds are offered to the public at $ , , , the portion the public does not buy, they (the "underwriters") will purchase on the basis of $ , , ; in other words, they guarantee the sale of the bonds at $ , , . in return they "make" on all the bonds sold the difference between the price to them, $ , , , and the price the public pays, $ , , . let us assume that the public takes up the issue greedily and the full price, $ , , , has been secured. the original owners, rogers, rockefeller, etc., have made $ , , , the difference between the first cost and $ , , , the cost to the "underwriters," while the "underwriters" have made $ , , , the difference between $ , , and the $ , , , the cost to the people. in looking over the list of subscribers to these bonds, you will note that the largest purchases have been made for the great insurance corporations and the banks and trust companies owned or controlled by them and "the system." if, in the instance i am using for illustration, a president or vice-president of one of the great insurance companies is known to be willing to subscribe for, say, $ , , for his insurance company; $ , , for his principal trust company, which is owned by the insurance company; $ , , apiece for five other banks and trust companies, also owned or controlled by the insurance company; and can influence five other affiliated institutions to subscribe for $ , , apiece, he controls, as will readily be seen, a purchasing power of $ , , , and is sought for as an underwriter, if he is not already an owner. for this $ , , which his institutions buy he "draws down," as his personal profit, - / per cent. "underwriters'" commission, or over eight millions of dollars. in taking this amount, he is not _robbing_ his insurance company, in the common acceptance of the term in this era of "frenzied finance," though he has absolutely appropriated to himself a profit which belongs to it and not to him. it must not be supposed that such transactions as this i have outlined are conducted in the simple abc fashion i have set down here for purpose of illustration. no "one man" appears through any deal. the purchases and sales are usually made through dummies, and the final recipient of the "made millions" carefully conceals all the phases of his participation. let us take another type of transaction. an insurance company owns two adjoining pieces of unimproved city real estate, for which it paid $ , apiece, but which are now worth $ , each. the directors of the corporation formally decide to dispose of these holdings, and sell the first piece to a trust company, which is owned or controlled by the insurance company. one of the "system's" dummies or an officer or director of the corporation agrees to take the other at the same price. this is a perfectly legitimate transaction, and the insurance company shows a half-million profit on its investment. the next step is this. on its piece the trust company erects a two-million-dollar building, procuring the money from the insurance company at a low rate of interest. thereupon the value of the adjoining piece bought by the "system's" votary jumps fifty per cent., so he has made $ , without risking a dollar. at the same time there have been several other profitable transactions between institutions and individuals. the agent who disposed of the two pieces of real estate and who is "in" the transaction receives a generous commission for making the sales; the trust company's representative has his own "draw-down," and there are further commissions to the agents who borrow and loan the money and control the erection of the building. my readers may well ask, are these merely illustrations, or do such things really take place? i unqualifiedly reply that deals similar to these have occurred repeatedly and that the principle and procedure set forth are the rule and not exceptional. here is a minor episode of which i have personal knowledge. a well-known man made direct application to the mutual life insurance company for a loan of $ , on a valuable city business block which he owned. he was told that the corporation had no funds available for that purpose. the refusal was authoritative and definite. a few days later a lawyer and real-estate agent came to his office and said to him: "i'm informed that you want $ , on your property. i can let you have it, or $ , if you need that much." "good," said the would-be borrower, "i will take it. whose money is it?" "the mutual's." "my dear fellow," said the would-be borrower, "how can that be? i was there at the office a few days ago and was assured i could not have the money." "that's all right," was the answer. "of course you could not get the money. the right party did not see the right party. d'ye understand?" he understood. a recent issue of the _insurance register_, of philadelphia, in criticizing my comments on president mccall and life insurance, makes the following significant admissions in regard to the conduct of these great corporations: while riding on the train on my way to my office this morning a lawyer told me the following story: a client of his, a real-estate agent, represented a corporation owning and wishing to sell a valuable chestnut street property. the price asked was $ , . a representative of a new york corporation called upon him and agreed to take the property, but stipulated that the price named in the deed and receipted for should be $ , , the difference covering his commission of $ , . the philadelphian, finding it impossible to induce his clients to make this concession, and the new york agent insisting upon it as indispensable to the purchase, made a trip to new york to see the principal, acquaint it with the facts, and find out whether or not some arrangement could be made by which the buyer could take care of its agent's commission. he was received by the manager of the new york corporation, but when he stated that he represented the owner of the philadelphia property he was instantly bowed out of the office, with the assurance: "we never interfere with business in the hands of our agent." the outcome was that the sale was not consummated, because the officers of the philadelphia corporation would not receipt for $ , when they were to receive only $ , , for the reason that they could not square the transaction with their stockholders, and the buyer's agent would not consummate the deal without such a receipt, because he could not square with his client and its stockholders the payment of $ , with the consideration of $ , mentioned in the deed. this story was told to illustrate the proposition that every action has its prompting motive, and my fellow-passenger imparted to me his conclusion that the motive of the manager of the new york corporation for refusing to listen to his client was that "the scoundrel was in cohoots with the agents to share in the commission and cheat his own company." the public will in time come to look for motives, and we, fellow-editors, and the managers of mutual life-insurance companies, will be judged by what seems the most apparent motive for our actions.... any alliance between life insurance and this modern speculative frenzy cannot be too deeply deprecated, nor too strongly reprobated. every true friend of honest life insurance among insurance journals will demand that this great business, of all businesses, must be kept free from the contagion of corruption that has shamed finance, is covering commerce with a blighting mildew, and threatens our whole land with disaster as well as dishonor. all this is preliminary to treating the case of the prudential insurance company. i want to say here that i do not know the corporation, any of its officers, nor any one interested in the control or management of it, and personally have never had the slightest connection with its officers. i desire to prove through an outsider, some one of unquestioned authority, that the great insurance companies are part of the "system" and are engaged in manipulating the stock-market with the funds their policy-holders put in their hands as a sacred trust. in so far as the prudential is concerned, rank and unsound as are the transactions i am about to speak of, my investigations have proved to me that this insurance corporation is only as a baby-carriage to a runaway automobile compared with the three great representatives of the "system," the new york life, the mutual, and the equitable. certain critics have accused me of being unduly emphatic in my strictures on the doings of the corporations of which i am treating. i will confess to a secret amusement at being able, in this instance, to quote the language of one of the most conservative insurance officials in america, frederick l. cutting, for many years insurance commissioner for the state of massachusetts. the prudential life insurance company has $ , , capital stock. the stock is owned and the company absolutely controlled by a few men. this capital of $ , , represents only $ , paid in in cash; the balance has been derived from stock dividends; that is, profits that have been made out of policy-holders. in addition to this enormous amount, there has been paid ten per cent. in cash dividends annually, so that for every thousand dollars paid in the stockholders hold $ , of stock, upon which they receive annually $ , , or, as commissioner cutting puts it, "each year for ten years the stockholders have received in cash dividends more than twice the original investment." i commend to the policy-holders of the prudential and other insurance corporations, and to other honest men, these tremendous figures: every $ , invested turned into $ , , not in a gold or diamond mine, but in a life-insurance company where every dollar comes from the policy-holder who is supposed to pay in only enough to insure a promised payment plus provision for honest expense. the prudential company owned the stock of the fidelity trust company, the capital of which was $ , , , and the directors came before commissioner cutting and informed him that they proposed to double up the stock of the fidelity trust company to $ , , ; that the new $ , , at a par value of $ was to be sold for $ per share; that the new stock was to be bought by the prudential company and the equitable company; and that with the proceeds of the sale, the trust company was to buy a control of the prudential company from its directors. the motive of this transaction was as follows: the set of men who absolutely controlled the prudential, with its sixty millions of assets belonging to its policy-holders, proposed to control it for all time, but without tying up $ , , of their own money in the business. in other words, they desired to eat their pudding and yet have it for continuous re-eating, and had found a way to accomplish this heretofore impossible feat. by this plan the men who controlled the prudential company, and thereby the trust company, at the time the plan went into force, would forever continue to manage and control both institutions, although not one of them held a policy or any investment in the insurance company beyond the one share of stock required by law to qualify as director. if this scheme had been consummated it would have borne to "frenzied finance" the same relationship that perpetual motion does to mechanics. by it a few men could gamble forever with the entire assets of the policy-holders of this corporation for their own personal benefit. if my readers will imagine the same scheme applied to several other great insurance companies and the men controlling them, the "system's" votaries, they will recognize the "system's" ideal world, with all the people in a condition of ideal servitude. however, this ingenious plan was forestalled because there happened to be in control of the life-insurance affairs of massachusetts one of those old-fashioned relics of american honesty--a man who thought more of the interests of the people intrusted to his care than of the prospect of innumerable "made dollars" which might have been his had he proved more amenable. it is regrettable that he was not able to deprive the conspirators of their power to juggle with the property of the corporation, for only two weeks later they developed and executed an alternative device which practically accomplished the result which the massachusetts authorities had declared illegal and the courts of new jersey had enjoined. there is food for thought here for the policy-holders of american insurance corporations who have intrusted to the "system" and its upholders the billions of their savings, to which they are adding every year hundreds of millions. to them i recommend a reading of the forty-eighth annual report of the massachusetts insurance commissioner, dated january , , and the decision of the new jersey judge who passed on the case. these men are surely not to be accused of exploiting my story. under the head of "control of life insurance companies" in the massachusetts report will be found the following: the insurance commissioner had the honor of addressing the insurance committee of the general court relative to the control of life-insurance companies by other corporations or by syndicates. for some years it has seemed to impartial observers who are conversant with life-insurance matters, and have also seen the eager quest by promoters for funds to finance all kinds of enterprises, and the determined struggle to grasp every opportunity for speculation, that there would be no cause for wonder if covetous glances should be turned toward the massive accumulations of life-insurance companies. it is well, therefore, to pause and ask what would be the chances for obtaining control of them, and what might be the result of such control, and in general whether the funds of such companies are imperilled by modern methods. insurance corporations on a capital stock basis, on the other hand, give their policy-holders no voice in their management. to obtain control of such a company it is necessary only to control by purchase or otherwise a majority of its capital stock. if a "king of finance" should start out with the determination to secure a majority of the stock of such corporations, the chances are that in some cases at least he would be successful. he might, it is true, be obliged to pay more than the "book value" of the shares; but perhaps _control_ of a company's assets would well be worth twice or thrice or even more than what could be figured out as the value of the stock on the books of the company. on no other theory can the figure offered for life-insurance company stock in some cases be accounted for, since these offers are not warranted by the surplus nor by the dividends paid, nor by both combined. is there aught to prevent a bold manipulator from entering this inviting field and purchasing a controlling interest in the stock of enough such life-insurance companies to make their combined assets aggregate one hundred million dollars of the more than six hundred millions of assets of stock life-insurance companies doing business in massachusetts? this accomplished, he transfers his rights to a "trust," or an association, or trust company, which is not only a bank of deposit, but is also engaged in brokerage schemes, in financing large enterprises and promoting all kinds of corporate consolidations, and underwriting their stock for a consideration. the central controlling trust company, or whatever it may be, becomes a medium through which the investments of the controlled insurance companies are made; all sales of their securities pay tribute to its treasury; all funds awaiting investment are deposited in its keeping; the most valuable of their securities are turned into cash, and then used by the controlling power for such purpose as it sees fit. all these things are conceivable, and their accomplishment would be a no greater task, seemingly, than some of the gigantic "operations in finance" of the last few years. judged by what has happened in other fields, this trust would not only control these vast assets, if the plan should be executed, but would control them without individual liability on the part of its managers. the prudential merger case is there really any danger, it may be asked, that any trust or syndicate will attempt to control the stock and assets of life insurance in this way, or is this simply the presentation of possibilities? as an answer to that question here follows a plain, unvarnished story of what has been attempted and what has taken place within the past year between one of the life-insurance companies doing business in massachusetts and a trust company with which it has close relations. in october, , the insurance commissioner received from the president of the prudential insurance company of america a letter, transmitting a copy of a circular letter addressed "to the field and home office staff" of the company. that circular letter disclosed a plan of mutual control between the insurance company and the fidelity trust company, a corporation organized under the laws of new jersey. it stated that: "the capital of the fidelity trust company is about to be increased from $ , , to $ , , , the new stock being sold at $ per share. this will result in giving the fidelity trust company a capital of $ , , , a surplus of $ , , , and a considerable amount of undivided profits, making this company, from the standpoint of capital and surplus, as large if not larger than any similar institution in the country. sufficient of this stock will be taken by the prudential insurance company to give it, together with its present very large holdings of fidelity stock, absolute control of that company. a very large portion of the balance of said stock is to be taken by the equitable life assurance society of new york, which will give to that company a very substantial interest in the fidelity company, and therefore justify it in materially increasing its business with the fidelity. the bulk of the new money thus to be received by the fidelity trust company is to be used by it in the acquisition of a controlling interest in the entire capital stock of the prudential insurance company.... a contract has been entered into between the fidelity trust company and a large majority of stockholders in interest of the prudential, in which the latter have contracted to sell their holdings of prudential stock, or as much as may be necessary, to the fidelity trust company on or before may st next, at $ for every $ of par value.... while by this arrangement the prudential company will control the fidelity, and, on the other hand, the fidelity will own a majority of the capital stock of the prudential, the annual meetings of the two companies will be so arranged and other arrangements be so made that the prudential will forever be the dominant factor, as of course it should be. the officers of the prudential are united in their belief that this move is of the greatest possible interest to its stockholders, as well as to all of its policy-holders and its great army of employees. the consummation of this arrangement insures the continuance of the present management of the prudential, both in its home office and in the field. the advantages of the plans of the trust company are too obvious to need comment. it is expected to consummate this entire transaction between the two companies on or about february , ." the insurance commissioner of massachusetts, on receipt of this circular, wrote united states senator john h. dryden, president of the prudential insurance company of america, declining to approve of the proposed exchange of stock on the ground that the merger was antagonistic to the interests of policy-holders, inasmuch as it forever deprived them of the power to dislodge the management from the control of the institution. the minority stockholders petitioned the new jersey courts for an injunction to restrain the prudential and the trust company's directors from carrying out the proceeding for mutual control, and vice-chancellor stevenson enjoined the corporation from executing its project. however, the reciprocal control was effected by the sale of enough prudential stock to the fidelity, whose capital was increased for the purpose of purchasing it, so that the fidelity lacks but eight shares to control absolutely the prudential. as the situation stands now, the prudential directors control the fidelity, and the fidelity holdings, with eight shares more, control the prudential. practically the ring is about as hard to break into as the plan enjoined. those who control the fidelity can always "dominate" the insurance company. minority stockholders and policy-holders alike are practically in the hands of the trust company for all time, and the insurance company's assets can be managed as the majority of the trust company's directors dictate. the director goes on to explain the relations between a life-insurance company and a trust company, which, in the light of recent exposures, seems prophetic. "the money value of intimate relations between a majority of the directors of a life-insurance company and a trust company may be easily comprehended. these relations are at the beginning based on the needs of the insurance company, which needs it is hard to define and limit, and accordingly hard to say just where the provision for them becomes more of an advantage to the trust company than to the insurance company. standards will differ, and change, too. but here, let us say, is a great insurance company with over $ , , of assets which it has collected from its policy-holders, and which are needed for carrying out their contracts, and which safety requires shall be held in sound investments. such an insurance company has to have a large and active bank account. it must deposit checks and all forms of paper promises or orders for collection, and for the payment of expenses and claims must have a large sum of ready money. this is the absolute need; but the directors are not bound by any legal requirements to limit their deposits to just what will reasonably suffice as a margin to pay current claims and expenses, nor are they required to patronize any particular banks. they conclude, let us say, that 'it will be safer' to take some banking institution for such depository which they 'know about,' and of which, perchance, some of them are directors, or in which, at all events, they are stockholders. if no such trust company is at hand, it is very easy to start one, and easy for the directors of the insurance company to be in 'on the ground floor.' the insurance company then begins to bestow its patronage. the trust company, which is thus supplied with funds, begins to feel the effects of this attention; by the use of its big deposits large dividends are earned. a 'boom' begins, and the director who 'had the sagacity' to invest in the stock of the trust company when it was around about par, sees his holdings advance by rapid strides until he is offered perhaps ten times as much for his stock as its par value. he has seen this stock advance in value in proportion to the amount of funds of the insurance company which the trust company had at its command. it has been worth much to him 'to be on the inside,' and will be worth much in the future for him to be on the inside if any new trust company is to be a depository; the bigger the deposit, the more it will be worth to him." all thinking people, after reading these extracts from insurance commissioner cutting's report, will ask: "why have we never heard of this before?" i can only answer that he found it impossible to get any part of the warning contained in it before the people. it should be remembered that the insurance companies annually spend millions of dollars with the daily, weekly, and monthly press--and it is unnecessary for me to say more. my own advertisement calling attention to the life-insurance chapters in the last issue of _everybody's magazine_ was refused by some of the leading dailies of new york, boston, cleveland, and pittsburg. when i called on the managing editor of one of pittsburg's leading dailies for an explanation of the publication's declination, he said: "don't mention me or you'll get me into trouble. our copy for the advertisement was a day late and the insurance combine had time to get in its work. the local managers sent a representative to all the papers warning them not to run your stuff, under penalty of losing the big full-page annual from each of the three big companies, as well as the numerous fliers through the year." one hears of the sagacious ostrich which, when pursued by an enemy, hides its head in the sand. the ostrich is wise in comparison with the "system's" votaries in the year . the vultures feeding owing to the claims of other subjects on my space, i left the subject of life insurance for a few months. in the meantime president alexander began his grapple with president jimmy hyde for the control of the millions of the equitable life--the historic entanglement which has had such dire consequences for all concerned. in the april, , issue of the critics i wrote as follows: when first i touched on the subject of life insurance and called attention to the manner in which the three great companies were juggling with the immense funds entrusted to them by their policy-holders, the "system" raised a great outcry, declaring that i was unsettling the confidence of the people in a sacred institution. at this moment we have the chief officials of one of these huge organizations engaged in a desperate and disgraceful struggle among themselves for its control. all thought of the widow and the orphan, against whom they declared my hand had been raised, has been forgotten in the mad fight for supremacy over the accumulated millions in stocks, bonds, and in trust companies, from the secret manipulation of which the great private fortunes of successful underwriters are derived. before definitely grappling with the evils of the insurance trust, i hesitated a long time. i realized my words would cause terror or distrust among policy-holders and perhaps induce some misguided ones to abandon their insurance. after long consideration, however, i became convinced that what i had to say would in the long run benefit all policy-holders, insure the greater safety of their funds, reduce their annual premium-payments, and perhaps bring about the restitution of the vast amounts which in the past had been diverted from them to private individuals. the response to my criticism was a flood of abuse. instead of meeting my charges, the big companies denounced me for a liar and a misrepresenter, and the insurance journals and subsidized press declared that the things i had charged were impossible. now, the president of the equitable life insurance company is openly accusing a leading member of his board of trustees, who is one of the foremost votaries of the "system," of loading the company with twenty-two millions of securities, which, as a member of the finance committee of the corporation, he had purchased for himself in his capacity as head of a great banking-house. on the other hand, the president and his associates, who have hitherto swayed the destinies of the institution, are accused by the other party of conspiring to mutualize the institution, not for the benefit of the policy-holders, but to conceal the traces of past misdeeds. before this chapter is in the hands of my readers the officers and directors of this great insurance company may be before the courts and a condition of affairs spread out for the public's gaze such as will make my charges seem, in comparison with the actual truth, as chestnut-burrs to porcupines' quills. one result achieved so far is an awakening of the people's attention to the evils of present conditions; but let them beware of the remedies suggested. the "system" is quick to adjust itself to storms it cannot control, and there are many signs abroad that it is trimming its sails to fly before the present blow, ready when it shall abate to switch back to its old course, and, under fresh canvas, make up for lost time. already we have senator dryden, representing new jersey and the prudential life insurance company in the united states senate, introducing a bill for federal supervision of life insurance, and the "system's" hirelings throughout the land are clamorously agitating the passage of some such measure. it behooves the public to scrutinize carefully the form of reform which these patriots approve. it may be taken for granted that they will initiate nothing that will interfere with their grip on the millions of the policy-holders or will divert fat pickings and commissions from their own pockets. once i asked a leading votary of the "system": "what would you do if by any chance the government decided to get into the railway business, and took a railway or so to see how government control would work?" "oh," was the reply, "we'd manage that all right! as soon as we saw it coming, the stocks and bonds of the roads wanted would go up, so that by the time uncle sam got ready to buy, it would be the fattest sale we could possibly make. after that it would not be difficult to disgust the government with its bargain, and before long the people would be glad to sell the property back to us, and we'd find a way to get it at slaughter prices." the reformation of the big insurance companies is sadly needed, but reformation of a more drastic kind than they'll be willing to administer to themselves. to begin with, there should be a relentless probing of their stock transactions of the last fifteen years, followed by the passage of some simple laws regulating their investments. the relationship between these institutions and the "system" would then at once of necessity terminate, and we could say good-by to the _régime_ under which the expenses of the big three have enormously increased and their dividends to policy-holders have steadily declined while during the same period the private fortunes of their officers and controllers have flourished amazingly. i have been repeatedly asked to define the conditions that make it possible for these immense private fortunes to be gathered, within the law. an examination of the figures that follow will reveal the far-reaching possibilities that reside in the direction of the billion of assets of the great insurance companies. the last issued new york report ( ) shows that the three leading companies had in uninvested funds, all told, $ , , . of this sum total there was "deposited in trust companies and banks drawing interest"--at the _close_ of the year: equitable $ , , mutual , , new york , , ----------- $ , , the balance, $ , , , being on deposit without interest. the above aggregate represents . per cent. of the uninvested interest-bearing funds of twenty-eight companies--leaving but . per cent. for the remaining twenty-five (in which, by the way, is included $ , , of the prudential, as large in proportion as the funds of the big three, with which it is associated). this sum, at the two-per-cent. interest allowed by the trust companies, returned to the insurance companies $ , , , while it earned for the trust companies in the different speculations in which they were engaged, from five to twenty per cent., or an annual profit of $ , , to $ , , , over and above the interest paid the insurance companies for its use. but who owns the trust companies? you ask. some are owned jointly by the three great insurance corporations and their directors, others by the directors alone. the men who control the big three organize these flexible depositary institutions, allotting half or more of their stocks to themselves, the balance to the insurance companies, or keeping all the stock themselves, for the purpose of manipulating the stupendous sums in the treasuries of the insurance companies. the trust company is the irrigating canal of wall street, the insurance company the reservoir. for the development of the various schemes of consolidation, trustification, and amalgamation in which wall street profits are made, money is required in large quantities. when the soil is ready for the seed, when negotiations have been sufficiently matured, the trust company's sluice is tapped and the gold flows out. and gold which makes a $ crop sprout, where previously only a $ crop grew, is a valuable commodity, for the use of which large compensation is given the engineers. thus the men who hold the treasury-keys of the big three, and who decide how the accumulated premiums of the policy-holders shall be used and where deposited, are actually the owners of these trust companies and of other corporations and trusts which borrow the money the trust companies have on deposit from the insurance companies. the hackneyed defence of the insurance companies to this accusation is that great corporations, such as they are, must keep on hand, ready for emergencies, enormous amounts of cash. this is a futile argument, for in the nature of things the daily receipts of each of the big three are larger than the expenditures. we are also told "we keep large amounts, ready to take advantage of a sudden smash in the market." this sounds well, but cloaks one of the most vicious practices of these great institutions, and another of the insider's opportunities for private graft. it means that the officers of the great insurance corporations are ever ready for a stock gamble with the sacred funds of their policy-holders; that is, they admit their willingness to use the people's savings to make sure-thing gambling-profits from those unfortunates who must throw over their stocks and bonds because of the "system's" manipulations. imagine, my honest, old-fashioned reader, the millions of insurance funds used in this way! let me give you a picture of how it is done. i have seen it worked a score of times. the stock-market is crashing, dropping tens of millions a minute, and business men are saying: "oh, if we only had cash to buy, but we can not get it! the banks will not loan at any price. rates have gone up to to per cent. and no cash is in sight." no one has money but the big insurance companies and the "system's" votaries. suddenly mysterious buying appears--hundreds of thousands of shares of stock, and bonds in million blocks. the crash has been stayed; the panic is over; stocks are bounding upward again; millions are being made by the mysterious buyers with each tick of the clock, and presently it is common knowledge that all the insurance insiders have cleaned up millions, and--of course, the company has made something, but the biggest profits have been won by the men who, having previously personally loaded up, were able to throw the unlimited buying power of the policy-holders' millions into the gap. talk of loaded dice, or any of the sure-thing gambling devices! they are lily-white business schemes compared with this method of plundering the people. again we are authoritatively informed that the great companies have so much cash on hand that it is impossible to find investments for it save at a low rate of interest. the fallacy here is obvious. if these institutions have grown so unwieldy that they cannot conduct their business as ably as the smaller companies, the latter are the ones to insure with, because, right along, they are deriving larger returns from their invested funds than the big companies. there are scores of ways, however, by which the sixty-five millions could be made to earn even larger dividends than do the funds in stocks and bonds. let the big three offer the use of their big cash balances by public competition--under the most conservative conditions that can be prescribed. instantly the net returns will double. all insurance policy-holders are familiar with the specious circulars and letters presenting statements of business done and investments made, which are sent out from the head offices of the great companies at odd intervals on the plea: "we want our policy-holders to know everything we are doing at all times." the public is assured at other intervals that there can be no secret or inside deals in the affairs of insurance companies because of the close examinations they are subjected to by the insurance departments of the various states. the insurance officials say: "all our facts and figures are vouched for by so many different sets of auditors and state departments that they must be exact truths." to what extent is the public actually safeguarded by these investigations? some months ago i called attention to the fact that the directors of the new york life insurance company had sold to themselves the stock of the new york security & trust company at from three to four millions less than the property would have commanded from outsiders. here is another transaction which requires explanation: in , ostensibly in order to maintain its position in the german states--i will explain later on what i mean by "ostensibly"--the insurance company disposed of its remaining holdings of stocks, the same having a book value of $ , , and a market value of $ , , , as per report of . these stocks, with possibly sales of some other securities, realized an actual profit of $ , , instead of $ , , as per the company's _sworn_ report to the several state insurance departments. rather a queer proceeding, you say. why should it do such a thing? had some one stolen the extra profit? or what? this is what was done: the company had simply availed itself of the opportunity to conceal an actual cash profit of $ , , in order that it might sequestrate assets to that amount unnoticed by its policy-holders or the departments. the sum so sequestrated was made up of balances due from agents--presumed, as in all such cases, to be amply secured by pledge of renewal contracts--to the amount of $ , , , and $ , charged off depreciation of real estate. (see massachusetts report, , pages - .) this illegal suppression of most important transactions, directly affecting, as will be seen later, the interests of policy-holders, would have remained a sealed book but for the careful audit of the massachusetts department, which revealed the fact, unnoticed by that of any other state (note in this one instance the boasted careful supervision and boasted double and triple auditing of all accounts before publication!), that the item "agents' balances," amounting in the preceding year to $ , , , had disappeared altogether from assets. this led to a prompt request from the massachusetts department for explanation. the honorable business men of the new york life, who pay out so many hundreds of thousands of dollars each year advertising the fact that they are sitting up o' nights to find new ways to acquaint the policy-holders with the innermost secrets of the company, finding there was no avenue of escape from their dilemma, quickly realized that the massachusetts department meant to have the facts, and publish them, too. their own "faked" report was already before the public in the published reports of two departments, those of connecticut and new york. there was but one course open to avert the terrific scandal that was inevitable upon publication of the massachusetts report, and that was to head off and forestall adverse comment and criticism, as far as possible, by making a clean breast of it. no time was lost in preparing a letter of explanation to the department. this answered the purpose of the department, which did not care to press the matter, having accomplished its main object. now for the moral, or the iniquity, rather, of the preceding, the wrong to policy-holders, which has been so completely ignored and passed over by the insurance press and all hands: either the company had, as at least supposedly it has in all such cases, ample security for its advances to agents in the pledges of their renewal contracts, or it had not. on the former hypothesis, that $ , , -odd was a sound and valid asset, earning a good rate of interest. on the latter, the company simply squandered this amount of trust funds belonging to its trusting policy-holders in its mad rush for business at whatever cost; or--in either case the money has gone from sight so far as any sign or indication appears to the contrary since. and before leaving this point, it may be well to ask, "has the new york life insurance company altogether discontinued these advances to agents?" if not, how and where are they accounted for? an answer may be found, possibly, in the comparatively meagre underwriting profits of the company, growing relatively smaller and beautifully less with each succeeding year. i say it may possibly be found here, because this is the only place the item could be buried; but i am reasonably sure that it is not buried here, and that these advances to agents are being continued on a scale as large as, or larger than ever, for the agents could not have been shut off and the business increased at one and the same time. again, during the last two months of , or at a time when my story, "frenzied finance," began to get in its work all over the world, i received from many quarters information that the big three had instructed their leading agents to get in a great lot of new risks "at any cost," so that the total business for the year would show such increase as to discredit my claim that the policy-holders were getting "scared." i watched the game with much interest, knowing that bunco would out in time, by whomever worked. during these months i read from week to week of this great policy, or that record-breaking risk just landed by this or that agent. one in particular made me chuckle at its transparency. a certain friend of the new york life, a wall street man, "has just taken out a $ , , policy." about the same time i began to receive information of the remarkable offers that were being made to prospective customers, offers which probably meant an indirect rebate of perhaps the full first year's premium; and i got to thinking and reaching back into my memory-box, and i raked out a number of instances of the same kind of offers which had been made to me in the past, and i ruminated to myself how all this was possible; for even if the big three were bold enough to get around the law against such practices, it puzzled me how they could pay to their agent the big cash commissions that new business called for. presently as i waited i read, as did the rest of the world, the big january full-page advertisements of the new york life to its policy-holders, calling their attention to the increase of $ , , new business over the year before. then i took another think and did a little work, with the following result: a jolt for the new york life the "brown book of life insurance economics" shows that the sum laid by annually for future tontine or other dividends ranged in the ten years ending with from $ , , to a minimum of $ , , these amounts being savings after payment of dividends. in , however, for the first time in the tontine history of the company--also the first year of maturity of non-forfeitable tontine contracts with their largely reduced dividends--the dividends paid and credited, $ , , , actually exceeded the year's earnings, as shown by the company's sworn statement, by $ , . i want to call policy-holders' attention right here to what this means to those who are now being beguiled into taking policies on the strength of "adjusted" estimates placed by the company in its agents' hands, showing dividend results ranging from fifteen to fifty per cent. higher than those of , with, however, the saving (?) clause that, depending upon future unforeseeable conditions, the same "may be higher or may be lower." it may be added that, but for a profit realized from sale of securities, the company's gross surplus would have shown shrinkage. in order to realize what such a showing means, let us make a comparison, using the figures of a well-known western company (partly tontine, but operated on diametrically opposite lines from the new york life), for the three years - , this company being barely four-tenths the size of the new york life as regards outstanding business: comparison of totals, three years, - dividend laid by for future earnings. dividends. dividends. new york life $ , , $ , , $ , , western company , , , , , , ----------- ----------- ---------- -$ , +$ , -$ , , after mulling these over, i dug further in regard to the "prosperity" as shown by the business of . the company boasts of its enormous volume of new business, $ , , , which is $ , , in excess of the business. here is the story: while this new business was being secured, the total terminations were $ , , less those inevitable terminations by death or maturity of endowments , , ------------ waste by lapse, surrender, etc. $ , , and when we add the lapsed policies which continued in force, under the "extended-insurance" provision , , ------------ we have the total waste of $ , , and this, reduced to its actual significance, means that of the total actual terminations, . per cent. was _actual waste_ and only . per cent. legitimate terminations, while the great bulk of the last item of $ , , , upon which premium payments have ceased, must run off the books in the near future; and this is what goes on from year to year, more than keeping pace with the boasted increase in volume of new business. the public never sees this side of the question. when i got to this point in my deductions, i was brought face to face with the tremendous expense of acquiring new business. then i saw the light--why it was necessary to wipe off the books nearly two millions of what were considered good assets, that is, pledges from agents of their renewal commissions against which advances had been made, and where the new business came from, and how it was possible to make rebates when the law says they shall not be made. an agent induces a friend to have a policy written, for which the agent practically pays the premium out of his commission, and thereupon has advanced to him large sums against the future premiums which are to be paid by the policy-holder, who has no intention of paying them, and allows his policy to lapse. heavens! what a vista of plundering opportunities the bare thought opens up! somebody has to pay. the million-dollar policy in the may number i inserted the following letter: fort worth, texas, february , . thomas w. lawson, esq., boston, mass. _dear sir_: i have read and will continue to read your articles on "frenzied finance," published in _everybody's magazine_, with a great deal of interest. i have noted especially your statements in reference to the big life-insurance companies, as i am a policy-holder in both the new york life and the equitable. under the heading of "lawson and his critics," in _everybody's_ for january, you give your side as to the assertion on the part of the insurance companies that you have been refused life insurance, among other things publishing a fac-simile of a contract of life insurance between yourself and the equitable life assurance society for $ , , . on my first reading of your article, i was certainly impressed with the fact that you had $ , , of insurance with this company. on a second reading, i note that you do not say in so many words that this is a policy in force, but you say: "well, look at this reproduction of the document that is now in my possession and always has been since the date when it was delivered to me by one of the great representatives of the 'system,' the equitable life assurance society." this statement taken in connection with others, conveys the idea that you are insured in the company named. in conversation with a gentleman a few days since, who claims to know whereof he speaks, having gotten his information direct from new york, he stated that you had no policy in the equitable life assurance society for $ , , , or any other amount, and that the reproduction referred to above, was of a _sample copy_ of a policy, and not a real contract. as your editor states that you will answer any pertinent question, i will ask the following, trusting that you may consider it pertinent: have you a valid subsisting policy in the equitable life assurance society for $ , , , the fac-simile of which appears in _everybody's magazine_ for january, ? trusting you will favor me with a reply, i am, very truly, ---- i answered: since the chapter which contained the fac-simile of the million-dollar policy was published i have received many letters similar to the above, but have not answered any because i wished to see how far the insurance people would go in this matter. finding i did not reply to the different attempts they made in their subsidized journals to draw me out, they grew bolder, until the use of this million-dollar policy has become the chief defence of the big three companies. i want my readers to think this point over and weigh its significance carefully. in a previous chapter i called attention to the fact that there is nothing to protect the policy-holder from being robbed of the amounts he has invested to insure his family from poverty after his death but the honesty of the men who really control the big insurance companies as absolutely as any of their policy-holders do their personal affairs. if these men are honest, policy-holders in their companies may rest easy for the time being; but if they are dishonest, the policy-holders should call them to account, for these men have it absolutely in their power to make way with the funds of the companies they manage until there will not be a dollar left for policy-holders. therefore the one thing for policy-holders to settle, the one vital thing is, are these men honest, or are they tricksters and liars? to settle this point they must be weighed in the same way that all other men and women in this world are weighed--by the simple, ordinary standards: do they lie? do they trick? do they cheat? when i made my charges in my first chapters against the votaries of the "system" who controlled the insurance companies, they met my specific charges as dishonest men would meet them, not as honest men would. they impugned my motives, and specifically charged that my reason for attacking them was that i had been blacklisted by all insurance companies and could not get insurance from any of them. while it was immaterial so far as my specific charges went whether this was so or not, it had a most decided bearing upon the question whether the officers and controllers of the big three insurance companies were honest or dishonest men. therefore i picked up their accusation and began a line of argument to prove they were tricksters and absolutely devoid of honor. i showed, by reproducing the personal letters of president mccall, of the new york life, to my office and to my house, reënforced by his special agent's letter, and these reënforced by his boston agent's letter, that i had been continuously and urgently importuned to take insurance during the time he said i was blacklisted. the insurance people met this by the excuse that these were not personal letters, but mere advertisements. i then reproduced the million-dollar policy, hoping to drag from the big three a specific charge that this, too, was an advertisement. of course, i did not pretend that the policy in question was in force, that is, that i was insured in the equitable life assurance society for one million dollars. this would have been too childish; first, because every insurance policy, particularly the very large ones, is as much a matter of record, to be got at by any one in the insurance business, as are real-estate records; and, next, because that which i printed had the signature punched out, which made it obvious that it was not in force. my object was to lead the equitable into the positive statement that it was an ordinary advertisement, when i would have reproduced the proposition that accompanied it and which the equitable made in probably the most elaborate set of documents ever assembled by an insurance company for the purpose of inducing one of the "best risks" in america to take out a "great big policy." these constitute the complete argument which was made by the equitable life assurance society to persuade me to take a million dollars' worth of insurance. they are engrossed upon parchment and bound in a specially gotten-up morocco cover, and, i was told, cost the insurance company between four and five hundred dollars. they were presented to me as the result of my demanding that all the inducements they offered to come into their company should be put down on paper, so that there could be no mistaking them. the documents as engrossed and the terms of the contract were carefully copyrighted by the equitable, and are now on my table before me as i write. the question which the publication of the million-dollar policy was to settle was whether or not i had been importuned to take out great sums of insurance in the leading insurance company of america, and it proved exactly what i had contended--that i had been so importuned. up to and including my april, , instalment i have made specific charges against the great insurance companies, the mutual, the new york life, and the equitable: st. that the control of the officers of these great corporations over the billion dollars of their policy-holders' funds is as absolute and unrestricted for all practical purposes, as is their control of their own personal affairs, and is largely exercised for their personal enrichment. d. that the policy-holders have absolutely no voice in the management of these companies or the control of their funds, because of the manipulation of proxies in the new york life and the mutual and the control of the stock of the equitable. d. that those who do control the big companies are votaries of the "system," and as such are subject to the "system's" orders as absolutely as is james stillman, president of the "standard oil" national city bank. th. that the insiders of these insurance companies, not one but several of them, have accumulated fortunes in the past few years, of from one to twenty millions, while at the same time premium-rates have advanced and dividends decreased. th. that under the present methods of conducting these great companies it is as inevitable as it was in the case of -per-cent. miller or mrs. howe's woman's bank, that as soon as they can get no more insurance, the funds behind the old insurance will be dissipated and a crash take place such as the world has never known before. th. that the companies are "milked" in every direction, through the purchase and sale of real estate, through the loaning of their millions, and through the manipulation and investment of their funds. th. that they acquire new business at an expense and by methods which alone will in time wreck the companies. th. that in a single instance the new york life sold securities for $ , , , but its statement under oath to the state insurance departments showed receipts of only $ , , . th. that the new york life sold the stock of the new york security & trust company, which it held, to its insiders for over $ , , less then they could have secured for it from others. i have specifically charged other things, and will, as my story proceeds, make many more specific charges of as serious a nature; but the above suffice for my present argument, which is, that up to and including the april number i have made these accusations and that the only way they have been met is by underhand mud-slinging and by alleging that the incentive for my attack was that i could not secure insurance from any of the american companies; and i have met this with absolute proof, which must stand until it is disproved, that i have been during the past ten years importuned and urged by the large insurance companies of america to take out insurance. therefore i will leave the question of this million-dollar policy and other forms of importuning until the insurance companies offer something in rebuttal. the way out the overhauling of the equitable life exposed conditions far worse than i had indicated to the public, and it seemed probable that the usual whitewashing process would be utilized to conceal the guilt of the rapacious criminals who had been untrue to the most sacred trust that can be imposed on man. since that time, however, the governor of the state of new york has appointed a committee to investigate the affairs of the big three corporations, and the resulting disclosures are the sensation of the hour as this book goes to press. in order to protect the interests of policy-holders, in case the authorities declined to act, i issued the following address in the july, , number of _everybody's_: to the policy-holders of the new york life, mutual, and equitable insurance companies the time has come for you to act. when, less than a year ago, i began my story, "frenzied finance," i exposed the function of the three great life-insurance companies in the structure of the "system." i explained that they were controlled in the interests of great financiers and that their funds were juggled with to compass the huge plundering operations of wall street. at that time the new york life, the equitable, and the mutual life loomed before the american people as the greatest, most respected, and most venerable institutions in our broad land. to-day they stand for all that is tricky, fraudulent, and oppressive. a great change to have been accomplished in less than twelve months! my readers are by this time familiar with the condition of affairs in the equitable. the greed, juggling, and grafting practised by its officers and controllers have been fully exposed through the press. i hope none of those who have followed the terrific arraignment of rottenness and rascality made through the frick report are so foolish as to imagine that the evils described are confined to the equitable. in my own opinion the equitable is much less reprehensible than the new york life, and when that institution and the mutual are thoroughly shaken up, as they will be in the future, indubitable evidence of the same fashion of extravagance, trickery, and fraud will be found in plenty. conditions in the three institutions are the same; though of late the new york life has altered the character of most of its securities. each has piled up an immense surplus which has been used through allied trust companies for stock juggling; each has paid extravagant commissions to agents; the funds of each have been managed to afford to high officials plentiful opportunities of graft; each has its real estate, fire insurance, low rent and loan favor graft; in each will be found the same type of syndicates as president alexander and vice-president hyde used for their personal enrichment in the equitable. to-day president john a. mccall of the new york life is credited with possessing a fortune of between ten and fifteen millions--a few brief years ago he was state superintendent of insurance in albany. the chief associate in the management of the same corporation, george w. perkins, j. pierpont morgan's partner, is another very rich man, whose wealth has been accumulated in a few short years. do you imagine for a moment that such transactions as i set forth last year in connection with the new york security and trust company, in which the interest of the new york life was sold to a syndicate of its own directors for a sum far below the market value of the shares, were put through without the connivance of president mccall and vice-president perkins? even if the new york life, as its president explains, did make a large profit on the sale of the trust company's stock, he cannot deny that the syndicate paid far less than the then market value of the shares for the insurance company's holdings. there is something particularly vile about the crimes of these high officials and distinguished gentlemen who have been waxing fat and luxurious on life-insurance graft. in a recent number of this magazine i drew a parallel between the confidence operator and the burglar to show that the latter despises the former for a sneak thief who takes no chances in his thieving operations. infinitely more depraved than the sneak thief is the high-placed functionary, presiding over a great institution built up out of the savings of millions of people, paid an immense salary for his important services, trusted with vast funds because of his reputation for integrity and business sagacity--who yet uses his splendid place to line his own pocket. of all fiduciary institutions, life insurance should be the most sacred. its chief function is to care for the widow, the orphan, and the helpless. the millions of revenue paid annually into the life-insurance companies of this country represent the blood and tears and sweat of millions of americans who thus provide for the care of their dear ones for the time when death shall have put an end to their own income-earning abilities. the administrator of a trust so solemn and exalted should devote himself to its safeguarding as a priest dedicates himself to the service of his maker. the responsibility conferred on him is the highest and holiest man can repose in his fellow-man. remembering all this, consider again the revelations of greed and plunder in the equitable; consider that millions upon millions of dollars have been filched and wasted; analyze the frick report and the letter of president alexander to the directors of the society, calling for vice-president hyde's removal from office. think, ye farmers and laborers, of personal traveling expenses of $ , in a brief period, of salaries of $ , annually paid for a few hours of work per day; think of vast sums of your money used to provide expensive safe-deposit institutions with low-priced quarters so that the personal income of men already multimillionaires may wax still greater. think of the great institution to whose hundreds of millions' income you contribute your hard-earned dollars, being farmed, milked, and squeezed by a pack of dissolute and greedy schemers and robbers more conscienceless and oppressive than any band of thugs in the country. when i began to discuss in _everybody's magazine_ the subject of the three great life-insurance companies, i stated that there is actually nothing between the two million-odd policy-holders and the possibility of their being robbed of the billions of dollars of their accumulated savings but the devotion and the honesty of the men who are in control of these institutions. you know what happened when i said this to you the first time--less than a year ago. the officers, trustees, and hirelings of these great companies laughed to scorn my statements and called me a liar and a scoundrel. they drew the attention of the whole world to the standing and wealth and honesty of the men who managed these great corporations, and proved by the most positive asseverations that nothing could be more preposterous than that any one of them could do wrong. but the great god, who seldom allows his children to remain long deceived to their undoing, heard these loud-mouthed protestations, and to-day the world is listening to exposures of low, mean thefts and contemptible crimes far worse than any to which i had pointed. and from whom comes the proof of the treacheries and rascalities perpetrated within the equitable? from the men who control and manage this great institution and its hundreds of millions of accumulations. when my accusations first appeared, these men saw the handwriting on the wall and some of them, bolder than others, determined to seize these vast hoards of the public's money and at the same time get possession of all evidence of past crimes so that they might be immune forever after from punishment and the necessity of making restitution. in the act of grabbing, however, the robbers fell out with one another, and, presto! they are in the public square where all men, women, and children, cats, dogs, and asses may see and hear as they gouge, bite, and accuse each other of the vilest crimes. these are the men in whose custody even now are the accumulations on which you, mr. policy-holder, are depending to take care of your wife and little ones, should you die. on the honor and responsibility of men who in the past five years have "saved" out of salaries of $ , to $ , , private fortunes of millions, you must absolutely rely for the safety of the billions of dollars of your savings. the future of the helpless beings whom your hard daily labors provide with a livelihood is in the hands of men who admit having expended $ , of your money to provide a lordly and regal entertainment for a set of extravagantly paid agents and solicitors who, spurred on by prodigal inducements, have piled up huge amounts of new business on the company's books. i have explained to you before what such business is worth, that the agent gets so large a commission that he is practically in a position to accept risks at far below their cost to the company, and that such business as this is seldom renewed. the same men have been paying personal secretaries, gardeners, and flunkies out of your earnings; they have been feasting and traveling in private cars with large parties of the new york flubstocracy at your expense; every possible extravagance they have been guilty of by means of the revenues some of you have worked fourteen to eighteen hours a day to gather in. shame, i say, on such contemptible thievery. i cannot resist the temptation to pull back the slide from one episode of the past. when my strictures on the three great life-insurance companies first appeared, one of the vice-presidents of the equitable, gage e. tarbell, in writing to an inquiring policy-holder, said: "pay no attention to lawson; he is only a reckless stock gambler, and every sensible person knows that any man, no matter what his position might be, who would do anything to cause loss to the class of people we insure, must be a rascal." and this is the same man tarbell, it is now admitted by all the equitable officers and investigating committees, who, as soon as he saw the crisis coming in the affairs of the equitable, had his pal, president alexander, pay to him $ , , which he claimed was due him for commission renewals, even though he was then in receipt of a salary of $ , per annum for his services. it is through the operations of this same tarbell that the vast system of rebates, one of the chief evils of the present system of life insurance, came into being, and through his prodigality that the immense sum of $ , , stands on the books of the company, representing advance commissions to the pampered agents. the time has come for all you policy-holders to act, and there is but one way to act. a thousand and one schemes are afloat to confuse and trick you at this period. the cry is--anything to hush things, to confine the fire to the equitable, at any cost, even though it totally consumes the $ , , of the people's savings in that institution. i told you at the beginning that the new york life was worse, if anything, than the equitable, and the mutual life just as bad. therefore i unqualifiedly advise policy-holders to: . pay up this year's premium--it will be the last to these plunderers. . have nothing to do with any committee or scheme. . write me, at once, your name, address, and the amount and character of your policy. i want nothing more from you, and under no consideration will i divulge your name without your further consent in writing. i already have the names of thousands of policy-holders, but to make my plan instantly effective i must have scores of thousands. my plan has for its aim and end, this and only this: the absolute preservation of the face value of your policy. the reduction of future premium payments to forty cents on the dollar on what you now pay. the restitution of millions upon millions looted from the three great companies, or as much as can be collected after a careful examination of the books--and the punishment of the thieves. bear in mind _that i will not have any money connection with you in the working out of my plan. i pay my own expenses. i will not ask any reward or profit, money, office, or otherwise, nor will i under any circumstances accept any._ [illustration: policy-holders reply coupon.] in response to this appeal i received over sixteen thousand proxies, representing over fifty-four millions of insurance. the investigations made by the legislative committee of the state of new york are unearthing in a most thorough manner the iniquities of the directors and managers of the big three, and before proceeding further i shall await the results of its work. if there is any way short of criminal proceedings to compel the restitution of the millions diverted or stolen from policy-holders, i shall begin suits which i am satisfied can be fought to a successful conclusion. the call to arms the extraordinary disclosures made before the investigating committee of the new york legislature, which is now conducting inquiries into the methods of the great insurance companies, led me finally to issue the following open letter to john a. mccall, in which i review the controversy between us and contrast his disclosures of corruption and mismanagement with his brazen professions of virtue and probity made last year. in order to wrest the two great mutual companies from the control of men who are obviously unworthy to direct them and with whom the policy-holders' funds are plainly unsafe, i asked for proxies which would make it possible for me to bring about a change in the control of these two great corporations. this letter and call appeared in the november, , issue of _everybody's magazine_. an open letter to john a. mccall, president new york life insurance company _sir_: it is time your attention was called to the moral sense of the american people. it is time some one dragged you out of the wall street conservatory and set you in the plain white light of daily life. it is time you were shown yourself as you are to-day seen by the millions of your countrymen who, a month ago, believed you to be a great and honorable man. in spite of the terrible exposures of the past few weeks, in spite of the pitiless revealment of yourself and your directors as tricksters, in spite of the unveiling of the jugglery, grafting, and corruption of your administration of the most sacred trust that can be confided to man, you remain unconvinced of your fall and unpenetrated by your shame. fortified by the sympathy of your fellow-sinners, you imagine your audacious bluster and your sly evasions before the investigating committee of the state of new york represented shrewd generalship and able strategy, forgetting that the enemy against whom your manoeuvres were directed was the american people and that, in this inquisition, your character and reputation were as absolutely before the bar as though you had been indicted for sequestration of the funds of some dead friend's wife. throughout this broad country of ours are good americans who have slaved and toiled to gather up the hundreds of dollars which you have exacted from them yearly as the price of the future livelihood of their wives and children, or as the provision for their own old age. you have made yourself the custodian of these funds under sacred pledge of square dealing and safe and honest administration. you have made yourself the national executor, the great depositary of the moneys of the widow and the orphan. you have cried your virtue and honorableness from the housetops, and, under the stress of your pleadings, hundreds of millions of dollars have been confided to you annually--half the savings of the nation have been turned into your coffers, all because you insisted that you were honest beyond all other men, and that the dear ones left behind might rely on your generosity and integrity for their support. and it is with the moneys that might at any time have been claimed by these widows and orphans that you have been rigging syndicates, debauching legislatures, juggling judges, manipulating stock-markets, and doing other things which will be proven later. instead of employing the vast power and the immense wealth intrusted to you to conserve the interests of your policy-holders, you have made yourself a part of the cruel robbing machine which the "system" has created to deprive the american people of their savings. under the pretence of seeking profitable investment, your corporation has been perverted into a vast stock-gambling agency. you have filled the high places in your corporation with your own children and relatives and their relatives, and conferred on them great salaries out of which they have grown rich. you have paid out to friends and associates, on various pleas, millions that rightly belonged to your policy-holders. you have done all these things habitually, yet to-day you describe the investigation being conducted into your operations as an impertinence, and secretly you regard this inquisition and all that pertains to it as a waste of time and energy. you are unrepentant, unashamed, and defiant. i shall take this opportunity, sir, of reviewing our own relations during the past year and contrasting your position to-day with that you boasted twelve months ago. one year ago, in _everybody's magazine_, i said: "the officers, trustees, and officials of the 'big three' life-insurance companies have been and are systematically robbing their policy-holders. they are grafters--mean, contemptible grafters." i gave specific instances of their thieveries. you replied, not by haling me to court, but by: circulating throughout the world documents by the millions, disparaging my reputation by advertisements and "news" and "editorial" statements from your subsidized insurance press, denying my charges and attacking my character, all at the expense of your policy-holders. you libelled me in thousands of private letters to policy-holders, many of which came back to me. you employed james m. beck, ex-assistant attorney-general of the united states, then and now chief attorney for henry h. rogers, the standard oil company, the "system," and the mutual life insurance company, to ridicule my utterances and asperse my honor in addresses in the cities of philadelphia and boston. you employed james h. eckels, ex-comptroller of the currency of the united states, now president of the commercial bank and representative of the "system" in the west, to attack my arguments and distort my motives in chicago. you ordered vice-president perkins, of the new york life insurance company, to perform similar service in philadelphia; and the burden of all these documents, advertisements, and disguised advertisements and addresses was: "lawson is an unmitigated liar and scoundrel, whose sole reason for attacking the insurance companies is that we refused him insurance." i replied by printing your personal letter to me, wherein you importuned me to accept insurance in your company. again you gave me the lie, and pronounced your letter spurious. i replied to you and your followers by instancing cases of perjury, bribery, and false statements. i stated that your claim that your company did not own, nor loan upon, stocks was false, and that it was made for the purpose of misleading and imposing upon your policy-holders, banks, trust companies, government officials, and investors. you answered this by writing a letter to one of the great churchmen of america, and in it you said: "i pledge you my word of honor this company has never, since , had a dollar's interest, directly or indirectly, in any stock. lawson knows this, and deliberately, for his own base purposes, makes charges to the contrary which he knows to be false." to-day you and your fellow-plunderers stand convicted in the eyes of the whole world not only of juggling the moneys of the widow and the orphan in the stock-market, but of manipulating these trust funds for the benefit of your own pockets. to-day the world is aghast at your perfidy and amazed at your temerity. notwithstanding the turpitude already exposed to the people, you still imagine you can so conduct yourself as to prevent the investigators from fastening on you and your associates the more desperate crimes that have been committed in the past--the to millions stolen and diverted or used in corruption. you know as i do that only the very edges of this national cesspool have yet been uncovered. you know that not only have the ballot-box and the legislature at albany been tampered with, but the law-making and administering machinery of other states corrupted, the federal government surrounded, and certain of the judiciary of america "educated." you believe you can keep the evidence of these crimes from the american people by the same kind of bluff and effrontery with which you met my first charges. but you have mistaken the tempers of your countrymen. i have been authorized in writing by over , policy-holders, carrying over fifty-four millions of insurance, to act for them. i had intended to await the finish of the new york investigation before proceeding, but as i have had placed in my hands during the past few days evidences of the determination of yourself and your accomplices and fellow-conspirators to face it out regardless of consequences, and as i believe men capable of committing the acts that have been proved during the past few days are fully capable of taking the transportable part of the billion and a quarter funds to foreign countries, and of using them to keep themselves from their justly deserved punishments, i have decided to act now. in sending you this open letter, i am actuated only by a desire to bring you and your associates to such a sense of the seriousness of your position that you will see it is useless longer to attempt to defy the american people. yours, for the exposure of corporation sneak thieves, thomas w. lawson. to life-insurance policy-holders at the beginning of my story, in , i made certain accusations against the management of the three big life-insurance companies. i knew, when i began my story, that the big life-insurance companies were in the hands of grafters and thieves, just as are the great banks, trust companies, railroad companies, and big corporations and trusts. _this i knew_ and, in plain language, said it. the big insurance companies, through their officers and trustees, replied by declaring: "he's an unmitigated liar." i kept at my knitting, for i knew the crimes of these insurance grafters were such that, sooner or later, the world would have an opportunity to judge fairly who were the unmitigated liars and thieves. the opportunity is at hand. to-day the press of the world is devoting its space, news and editorial, to a recital of the contemptible and heinous crimes of the new york life and the mutual life insurance companies--not as i relate them, but as their own officers and trustees publicly confess them. in the july instalment of my story i called upon policy-holders to sign a coupon blank inserted in _everybody's magazine_, and send same to me that i might speak for them in a plan to further their interests. in response to my call i have received up to october , , , answers, representing $ , , . i think my readers, when they analyze the following list and take into consideration the character of the senders, many of whom are men of the highest standing--bishops, ministers, governors, mayors, judges, senators, members of congress, railroad, bank, and trust company presidents--will agree with me that it is the most remarkable collection ever made by one interest since life insurance began. insurance coupons _received from june th to october , _ new york life $ , , equitable , , mutual , , miscellaneous , , ----------- $ , , alabama montana arizona nebraska arkansas nevada california new hampshire colorado new jersey connecticut new mexico delaware new york , district of columbia north carolina florida north dakota georgia ohio idaho oklahoma illinois , oregon indiana pennsylvania , indian territory rhode island iowa south carolina kansas south dakota kentucky tennessee louisiana texas maine utah maryland vermont massachusetts virginia michigan washington minnesota west virginia mississippi wisconsin missouri wyoming alaska corea argentina mexico bermuda newfoundland canada new zealand chili panama china philippines colombia porto rico costa rica santo domingo cuba straits settlements england sweden france trinidad hawaii uruguay honduras yukon territory japan ------ grand total , as soon as i received a number of signatures sufficiently large to warrant it, i quietly began operations. the first direct result is the investigation now being held. this investigation has proceeded far enough to put before the public absolute proof of all the crimes i have charged, and three to thirty times as many more. it is now evident to all that: st. the policy-holders in the great companies have yearly paid into their company scores of millions more than necessary. d. the policy-holders have been robbed of scores of millions. d. the vast funds now on hand have been habitually used by the grafters now in control of them in the rankest kind of stock-gambling. th. these funds have been used to corrupt the ballot-box and the law-makers of the country. i repeat, absolute proof of all this has been made public. it should now be evident to all that: st. the funds now on hand are in actual jeopardy, because they are in the absolute control of unprincipled scoundrels. d. unless something is done, and done at once, by the policy-holders, each and every one of the largest companies may become insolvent; that is, they may not be able to meet the engagements of their policies, because of waste of funds, tremendous falling off of new business, tremendous cost of new business, and the nature of the new business--so-called "graveyard business"; for i am credibly informed that they are now seeking to insure those who formerly have been refused insurance because of physical infirmities. it should also be plainly evident that, if the policy-holders move, and move quickly, they can be absolutely assured that: st. the funds as they are to-day will remain intact. d. they will be added to by the restitution of from $ , , to $ , , . d. a score of the thieves who have plundered policy-holders in the past will be sent to prison. th. the future payments of policy-holders will be largely cut down. th. the present swollen surpluses will be returned in large part to policy-holders. th. in the future policy-holders will actually run the company. th. all policy-holders can be assured that in the future they will receive the actual worth of their policy at surrender. all this being so, it is most eminently desirable for policy-holders to act, and at once. the time will never again be so opportune, for if nothing definite is done now, policy-holders will be discouraged for all time. i have given the subject the closest and most earnest study, assisted by the best insurance experts and lawyers procurable, and guided by the suggestions of over , policy-holders, for in addition to the , mentioned, i have received over , letters. i have come to the conclusion that the one thing for policy-holders to do now is: to authorize some one in whom they have confidence to select a committee to take their proxies and at once seize possession of the two great mutual companies, the new york life and the mutual. i omit the equitable at this stage, because litigation may be necessary before the equitable, being a stock company, can come into the policy-holders' hands. but in the other two, no obstacles can be placed in the way of the policy-holders' taking control. to empower this committee to bring action at once to compel full restitution and enforce full punishment, and then to change the present method of conducting the insurance business. the vital question is: whom can the policy-holders trust to do this? the "big three" are at present spending vast sums of the policy-holders' money to prevent some such action as this, in the following ways: first, by moulding public opinion through paid news and editorial items; next, by the collection of proxies; and third, by the inauguration of different moves and dummy suits and investigations. there are already three of these affairs under way. almost any way the policy-holders turn for relief they are confronted with traps which, if they fall into them, will make relief and rescue impossible. any man or body of men who go to the great expense necessary to collect proxies must have some hidden scheme for reimbursing themselves, or they must be working in the interests of the thieves now in control. i therefore make bold to say: i am the natural one to make this move. just a minute before you pass judgment. let us see if i am: st. i have already spent in my work over a million dollars of my own money. d. i am willing to spend, if necessary, two millions more. d. i will absolutely prove i want nothing in return. th. i will absolutely prove on the face of my plans that i cannot in any way benefit beyond the satisfaction i shall derive from putting another spike in the "system's" coffin. i ask of the policy-holders simply this: fill out the following form of proxy; sign and seal it, and send it to me. quick action is most desirable in view of contingencies. [illustration] footnotes: [ ] in the course of the legislative investigation of the great insurance companies in new york, it developed that the mutual life insurance company conducts a publicity bureau, organized to discredit any one who dares criticise its methods. this bureau is conducted by one charles j. smith, on a salary of $ , per annum, and he works through allan forman, editor of the _journalist_. forman maintains a "telegraphic news bureau" and secures publication in various newspapers or periodicals of matter sent him for dissemination by the mutual life, and he is paid $ . per line of the policy-holders' money on all matter for which he obtains publicity. the whitewash paragraphs recently published throughout the country in regard to president mccurdy and the mutual life were all paid for on this basis. ii the enemies i have made when a man discovers that a public building full of men, women, and children is infested with rats and that these vicious rodents have undermined its foundations and honeycombed its structure, it becomes his duty, first, to warn the occupants of the presence of the rats, next, to show them the damage that has been wrought and how the rats can be trapped and killed--and then he may take a hand in the rat-hunt himself. that is about what i have been doing, and if proof were needed that the "system" suffered under my exposure of its villainies, i should have it in plenty in the showers of mud bullets it has fired at me. from scores of quarters these volleys came. a regular army of the "system's" votaries must have been out working like trojans to stop my work, to discredit me, to bespatter me with its dirt. the manner in which the "system" writhed under my attacks showed how seriously it was hurt. what surprises me was that so little intelligence was exhibited in defaming me. such wanton, foolish attacks those that were made on me personally! as though it mattered who or what i am in comparison with the accusations i have made. americans are not fools. to say that lawson is this or that does not minimize or detract from his charge of robbery and conspiracy. every morning after i began to write "frenzied finance" i found a new budget of personalities in my mail, in the newspapers, in pamphlets. learned lawyers traveled about the country slinging mud at me at banquets and society gatherings; scores of hireling weekly and monthly papers devoted pages to vilifying me; the insurance press was laden with assaults, and for fear the public should miss the brickbats, the insurance companies carefully mailed them to their policy-holders. all these tirades were in one key--that of crude abuse. the statements about myself and my career were nothing but lies. they were not even cleverly imagined. upon entering on this crusade against "frenzied finance" i expected attack. reforms are not matured to accompaniments of incense and rose-water, and i had made up my mind to disregard the mud and its slingers. afterward, if there were any "system" left, i rather looked forward to smothering it beneath the foulness of its own generating. there came a time during the year, however, when i deemed it proper to depart from this resolution and nail some of the lies my enemies were circulating about me. i debated the subject thoroughly, for the rancor of these assaults was evident and i could not help feeling that the general run of my readers would be impatient of the space given these gutter rakers. the determination to go at them was clinched by a letter which came to me, with a number of others from clergymen of various denominations, from a learned catholic priest, who put the case for a reply most earnestly. he said: you owe it, my son, to yourself to clear away, for once and all, the charges your enemies have made against you. i have faith you mean all that you say, but there are many, many sons and daughters who are troubled in heart and harassed in mind with doubt whether your motives be pure, and if your deeds in the past have been along the ways of the good. it is my advice, if you will accept it, that you put aside your pride and your dignity and frankly and openly tell us whether these charges that we read are true or false. beck vs. lawson i shall deal with the subject as fairly as possible, reminding my readers, however, that i am at a disadvantage in having to use pen and ink instead of the implement appropriate for the purpose, a hose connected with a disinfectant barrel. to begin with, i reproduce the following from the toledo _blade_, december , . (i have similar paragraphs clipped from one hundred other papers.) james m. beck flays lawson calls boston author-broker a frenzied fakir. defines moneyphobia declares he is victim of new disease--compares his actions to "crazed malay running amuck." philadelphia, december th.--ex-assistant attorney-general james m. beck talked on "moneyphobia" at the thirty-ninth annual commencement exercises of the peirce business college. he paid his respects to thomas w. lawson in such terms as "frenzied fakir" and "crazed malay running amuck." ... "there are abundant indications that this epidemic is now rife in the community. the extraordinary vote polled by a socialistic candidate for president, in a time of general prosperity, seems to evidence this, as does the avidity with which many intelligent people read in a cheap 'penny dreadful' magazine the incoherent, self-contradictory, and self-incriminating articles of a notorious frenzied fakir, who, like a crazed malay, is wildly running amuck, and, without rhyme or reason, slashing at the reputations of judges, senators, and financiers." the following is from a chicago insurance paper, and comes to me with the marginal inscription, "puncture this bladder when convenient." i may say that i receive hundreds of clippings every day from various parts of the country, sent me by correspondents who are determined i shall be apprised of what my antagonists are trying to do against me. banker eckels and broker lawson the splendid tribute to our country's greatness, resources, and possibilities given by president james h. eckels, of the commercial national bank, of chicago, and ex-comptroller of currency of the united states, before the chicago life underwriters' association, was listened to with earnest attention. the brilliant young financier ... believes in life insurance for the people. it creates the valuable habit of saving. he deprecates the malicious attacks on companies by men of mysterious motives, and feels it will be a sorry day if they ever become objects of prey for political thieves. the banker paid his respects to thomas w. lawson, of boston, whom he characterized as a notoriety seeker and branded as a "discredited, disreputable, despised stock-jobber who glories in his infamy." mr. eckels lashed lawson with caustic language, and stated the american people of judgment are not misled by his diatribes. mr. eckels believes that life-insurance presidents reach their high stations by their own ability and grasping of opportunities. because a man is elevated to a position of eminence and responsibility does not mean he is dishonest. he arrives there because he cannot be held down and remains as long as he proves his worth. the banker declared that life companies, with their vast funds, were being safely guided by men of superior mental mould. mr. eckels referred to president mccall, of the new york life, as being a clerk in a state bureau office when he first made his acquaintance. he said president mccall had advanced, like other company executives, owing to his own ability and genius for management. in an early article in this series i stated that one of the favorite operations of the "system" is to pick off those officials who have exhibited unusual talent or energy in protecting the interests of the national government. in this way they secure the services of men who know the secret workings of the people's institutions and how best to guard the corporations against the consequences of their misdeeds. during the cleveland administration there developed a "financial phenomenon," james h. eckels, comptroller of the currency. it did not take long for the astute rogers-morgan-mccall clique to see that this young man's knowledge of finance in connection with his governmental position might prove a dangerous obstacle to their machine if he were not captured. it was not long before he was captured. i met mr. eckels during the cleveland bond performance. i need not enter into the details of that extraordinary affair here, for it is one of the sore spots in recent american history. briefly, the administration at washington attempted to issue $ , , government bonds and deliver them in a snap sale to the "system." the new york _world_ began a crusade against the transaction, and was so successful that the administration was compelled to offer the issue to the public through competitive bids. the result--the bonds fetched many more millions for the government than if the deal had been allowed to slip along the ways the "system" had greased for it. i remember well the scene at the opening of the bids. it was in the united states treasury at washington. with many others who desired an allotment of the bonds, i was present. we were crowded into a small room, and following the direction of young mr. eckels, who handled the transaction, we gave him our bids, which, according to the advertised programme, were in sealed envelopes. after all the bids were submitted--mine was for a number of millions--the envelopes were taken by mr. eckels into a rear room. then a few of the leading financiers present, among them john a. mccall, of the new york life, j. pierpont morgan, and one or two others of the "system's" foremost representatives, got their heads together and began an earnest conference. certain of them went out of the room and after awhile returned for a further conference. there were several such confabulations and comings and goings, until finally, after a monotonous delay, the bids were opened and the bonds awarded. morgan, mccall, _et al._, had secured the bulk of the issue at a price many points above what any one had been led to believe the bonds would sell for, and many points higher than the "system" and the government had proclaimed to the people they could possibly sell for, yet at a price which showed millions of profit a few hours after the bids were opened. i do not charge that the public's envelopes were opened and "peeked" into before the "system's" bids were sealed. such a charge is not necessary. it has been made many times by the press. mr. eckels, to the minds of such of us as could see through cracks in a floor wide enough to drive a four-in-hand coach into without unhooking the leaders, had lived up to his rôle as a financial phenomenon, and when some time afterward it was bruited abroad that this able young man was to have the presidency of the city bank, or any other large bank belonging to the "system" that he might select, there was no surprise, although much comment, in wall street. mr. eckels finally accepted the presidency of the commercial bank of chicago, where he now is one of the important cogs in the "system's" machine. the case of james m. beck has points of similarity. mr. beck, a young philadelphia lawyer, obtained a valuable knowledge of the secrets of the department of justice in washington as assistant united states attorney-general, and in the prosecution of the northern securities suit got an insight into the "system's" methods. it will be remembered that at the trial of the suit he made a great appearance and became famous as the young champion of the people who had succeeded in "busting" this notorious trust. the victory was hardly announced before it became known that the brilliant assistant attorney-general had renounced the cause of the public and had been engaged at a large salary as chief counsel for henry h. rogers, of standard oil. mr. beck has proved a most available and flexible servant in the cause of his master. he has done mr. rogers's bidding in a manner befitting the best traditions of "standard oil." almost his first work was the trial of the famous boston gas suit, in which for weeks he "steered" henry h. rogers while on the witness-stand in the massachusetts supreme court. the very night before this case was to be called for trial, the eminent young "trust buster" and people's champion called on my attorney and made him a proposition. it was that i should meet mr. beck and agree upon the details of certain testimony that mr. rogers and kidder, peabody & co. (the "system's" boston representatives), and myself would be called upon to give upon the witness-stand next day. my attorney brought the proposition to me. "great heavens!" i said, "is it possible that this man has the audacity to come to boston and ask me to commit perjury?" "he does not put it in just those words," my attorney answered. "no, but he says he wishes to _match up_ testimony with me so that we may all testify alike." "that is it," my attorney answered. "but," said i, "i have got to state the facts, and the facts are diametrically opposed to the testimony mr. rogers and the others are to give. this looks to me like subornation of perjury." my lawyer would not have it that way, and i instructed him to secure from mr. beck a writing as to just what he wished me to do, and that writing i have at the present time. in it he states that if i do not see him and agree upon the testimony to be submitted in the supreme court of massachusetts the following day, there may be developments which will be decidedly uncomfortable for mr. rogers and perhaps for the rest of us. i did not meet mr. beck, and henry h. rogers and kidder, peabody & co. told one story and i another. bald perjury was committed by some one. however, i will give all the facts, including the "match up" letter, when i come to them in my story. mr. beck and mr. eckels are the two men designated by the "system" to attend public gatherings and vilify thomas w. lawson. they are at it, industriously. the donohoe episode as soon as the first chapter of "frenzied finance" appeared, henry h. rogers turned loose on me one denis donohoe, a character thug whom he had imported from california for just such emergencies. donohoe's first service for mr. rogers was a vicious onslaught on heinze, of montana, in the new york _commercial_. this was an attack of such unusual vulgarity and malignity that it won donohoe his spurs, for soon afterward, when by a characteristic trick mr. rogers obtained possession of the new york _commercial_, he made donohoe its editor. i may mention that heinze sued the _commercial_ for $ , damages, and apropos of the suit an interesting complication occurred which seriously interfered with mr. rogers's plans. the night before the old owners, from whom mr. rogers had grabbed the _commercial_, were to be thrown into the street, they threatened, by way of reprisal for the mean trick that had been served on them, to confess judgment to heinze. one was president and the other secretary of the company, and this action would have settled the proposition. rogers, treated to a dose of his own medicine, had to make a compromise, and the men are still on the paper. the details of this good story are to be found in the detroit _journal_. it was fitting that when i began my exposures of the "system" this thug should be ordered to do his worst by me, and he began the series of virulent assaults that the _commercial_ published and advertised all over the country. the first of these was devoted to proving me crazy, and it was carefully circulated by my friends the insurance companies by way of offsetting the effects of my revelations of their jugglery of the people's funds. later i showed up the fellow so vigorously that john d. rockefeller ordered mr. rogers to muzzle him in his own paper, whereupon arrangements were made with a new york weekly to act as the sewer-conduit for the lies and abuse this thug was warranted to turn out. i should not dream of dealing with this man or his fatuous attacks in a respectable publication save that he has been appointed the "system's" chief defender. it really seems as though the game were too small to take time for its killing, but as these weak and febrile maunderings really represent the "system's" reply to my charges, it may be worth while to show, once and for all, what idiotic lies they put forth and what a silly and ineffective falsifier it is that they have made their champion. i shall take the second article of the series and contrast donohoe's statements with the actual facts. incidents in mr. lawson's versatile career which even those who are not censorious might well deem shameful. if in my career i have done anything of which i or any honorable man should be ashamed, then i am willing to stand convicted of all that this character thug charges against me--of being a stock-jobber, fakir, liar. he claims, if the writer understands him aright, that he is _animated solely_ by a keen regard for the public weal in performing what he describes as a public duty. i stated positively in the foreword of my story, and have reiterated many times since, that in making these revelations i am actuated first and mainly by a desire to benefit the people of this country, not only by informing them how they are being plundered, but how they can in the future guard themselves, and that if it were necessary to accomplish my purpose i would spend every dollar i possess; but mixed with this desire is a hatred of the "system" as deadly as a man can have for anything human. i have also reiterated that at such stage of this revelation as is possible i shall secure from the "system" every dollar i can wring from it to be used in my fight against it, provided always i can get its dollars in legal, fair, and above-board fighting ways--i mean, in the open market. mr. lawson appears before the bar of public opinion as a volunteer witness for the commonwealth--"state's evidence"--as the lawyers phrase it--and hence his reputation, his motives, his character, his every act, become at once fit subjects for the closest scrutiny and examination. whoever says that in telling my story i am revealing anything which it is not fair or just to tell, or that i have not a perfect right to state, says that which is false. i am confining myself to explaining how the "system" gets its money. i do not touch upon how it spends it. if in an honorable way i could write the things that have come to me confidentially, the "system" might well tremble. i confess that at times i have been tempted to depart from my code--when, for instance, soon after the first donohoe chapter, a man came to me and showed that he had been offered $ , to vouch for the statement--which denis donohoe, h. h. rogers's right-hand man, had printed, and the insurance companies had spread broadcast--that the first ten years of thomas w. lawson's business life were spent as an employee of richard canfield, the providence and new york gambler, and afterward as his partner. "give us an affidavit to that effect and we will pay you $ , ." to this man i said: "i have never in my life been connected with any gambling-place in any way, nor had to do with gambling in any form, and only once in my life have i set eyes on richard canfield. he was in the waldorf café one day when i was passing through. however, if i did know him i should not be ashamed to admit it, for i consider canfield, from what i have read of him, an angel of purity compared with any one of a score of the 'system's' votaries i could name." the man left me, but soon after returned. he said: "it makes no difference whether what you say is true or not, i can now secure $ , for the affidavit." when this kind of fighting is brought to my attention, i am strongly tempted to let down the bars. he relates, with all the graphic art of a novelist, a wellnigh incredible story. chicanery, fraud, blackmail, bribery of a legislature and of a judge, systematic pillage of investors and of the american public. the details i have narrated are facts, and i will prove them to be facts so all may know them. in delving into lawson's career--a most unwelcome task--the writer has detected a continuity of purpose, a fixity of design, a uniformity of method pervading his every public act. what he is doing now, _i.e._, exposing somebody or something, he has repeatedly done on a lesser scale in the past; not from worthy motives, but for the sole purpose of illegitimate pecuniary gain. yes, throughout my entire life i have pursued with a continuity of purpose that class i am pursuing to-day--the class that has taken from the people their earnings by fraud or trick. if other proof were needed that the men i am after have lost the discretion which made them great in the world, these foolish yarns supply it. it is well known that no man ever gets near to "standard oil" in business or socially until their detectives have dissected his career from the cradle up. i spent years in close business relations with these men, so close that, as i will show later, i acted as the agent not only of rogers and rockefeller, but of the amalgamated company and the city bank. he is at present engaged in attacking the "system," as he calls it, and the banks and the insurance companies and wall street and american finance, by circulars, by advertisements, and through the stock-market, as in the past he has repeatedly attacked other corporations and individuals until he obtained what he was seeking, and in every recorded instance that thing was unearned dollars. in the past i have repeatedly attacked individuals and corporations until i obtained what i sought in every case--justice for the defrauded and punishment for those who had cheated them, and in no case dollars or their equivalent. in the gilded biographies of himself which, from time to time, mr. lawson has caused to be written and published in newspapers and magazines. my history is well enough known. i have always lived in the open. it has not been necessary to press-agent myself. a good deal has been printed about me in the newspapers during the last twenty-five years, but if i have ever sought to exploit myself before the public by means of autobiographies or journalistic puffs, and it is so proved by any reputable newspaper, may i be shown up to public scorn. it was mr. stevens who defrayed the expense of a six months' course at a boston business college for his protégé. i have never had such a course of six months, nor of any length, nor have i ever been inside a business college. mr. stevens, who was a kindly, philanthropic man, known and beloved by all his fellow-citizens, died years ago, therefore he cannot dispute what lawson tells. the late horace h. stevens died not years ago, but on march , . old residents of new york will recall that long before the days of canfield's gilded palace, and long before the era of the present district attorney, mr. jerome, there was a gambling-house known to the commercial traveller and man-about-town as " broadway," and that one of the backers of the game was william f. waldron, or "billy waldron," as he was usually called. waldron retired nearly thirty years ago from the syndicate that controlled this house and moved to providence, where he interested himself in gambling and what, for lack of a better term, may be called the cognate industries. one of these latter was a bucket-shop of the ordinary country town type. this bucket-shop was confined to the tender mercies of one "jo" lumpkin as manager. lumpkin failed to make the business profitable, and waldron, after attaching $ . that lumpkin had on deposit in a bank in new york, turned him out. in his place he installed the present loquacious reformer of american finance, thomas w. lawson, or "billy" lawson as he was then known to the gamblers, race-track touts, and confidence men who made providence their head-quarters. my readers will agree with me that such weak and feeble rot is beneath any man's attention, for even if what is here charged were true, namely, that a young man of twenty-one had been so employed, it would have no bearing on his work twenty-six years afterward; but as i have decided to take cognizance of this stuff, here are the facts: what to-day is known as the bucket-shop evil--that is, the speculation in stocks over the counter at offices conducted by brokers outside the pale of the law or the stock exchange--did not exist at the period mentioned. this method of conducting speculation, however, had just been invented, and many of the legitimate brokers, stock-exchange members, utilized the new form in their ventures. indeed, the number of brokers and brokerage shops outside the stock exchange was as large, if not larger, than that of the regular houses. at the time donohoe treats of i was doing considerable business for a young man, as will be evidenced by my business card of that period: +----------------------------------------------------------------+ | thomas w. lawson & co., | | | | bankers and brokers. | | | | dealers in first-class investment bonds and stocks. | | offices: boston, providence, new york, and chicago. | | | | president of the lawson manufacturing company. | | president of the mcdonald-lawson manufacturing company. | | vice-president of the briggs printing machine company. | +----------------------------------------------------------------+ i regularly visited every week my offices in boston, providence, and new york. at one time i had a providence office in the building marked in the cut in the donohoe story, and the sign over the door was "thomas w. lawson & co." it was in providence, during the heyday of the waldron-lawson enterprise, that lawson ... first met "jack" roach, whose apparent employment now is selling diamonds on commission to the so-called "sporting element" of new york, but who is acknowledged to be lawson's personal representative in this city. it was there, too, that he made the acquaintance of herbert gray, who subsequently conducted a gambling-house in boston, and who recently served as one of lawson's captains and managed his trotting stable. ben palmer, a well-known character in state street, who is one of the main cog-wheels of lawson's machine, first made lawson's acquaintance during this period of his career. i do know the waldron brothers, of providence, who are among the oldest residents of rhode island, and who, with the present united states senator nelson a. aldrich, composed the great wholesale grocery house of waldron, wightman & co. they did not graduate from a gambling-house on broadway. i knew the brother referred to familiarly throughout rhode island as "honest bill," and a royal old fellow he was. i did business with him in those days, and to any connection i ever had with him i look back with pleasure. he was then conducting a farm in the suburbs of providence, and in a straightforward, old-fashioned way supplying that city with produce and poultry, and had, to the best of my knowledge, the respect and confidence of all who knew him. i never knew of his having been a gambler, and had no means of knowing, as such matters were then an unknown world to me. i never, up to reading it in donohoe's story the other day, heard of broadway, curious as it may seem for a man of my experience. my knowledge of gambling has always been confined to that kind which comes under the head of stock gambling. i had not met my present friend, john j. roche, of new york, at the time mentioned. i never heard of herbert gray, of boston, until i employed him to manage my stable in . i have known j. benjamin palmer all my life. we were boys together on state street. afterward he was the stock-exchange member of one of the oldest banking-houses in boston. he is still a broker on state street. nothing of certainty can be learned of his career during this period. that he sold "base-ball" cards (a unique kind of playing-cards) at the providence railroad station is stated on credible authority; that he "worked the trains" between new york and providence; that he sold books; that he was a hanger-on at race-tracks, has been alleged. any or all of these rumors may be true--or false--for whatever may be said of lawson, his career has undoubtedly been one of marvellous activity in many diversified lines. i have never sold baseball playing-cards at the providence station, nor anywhere, at this time nor any time, but i did invent the lawson baseball playing-cards, and was president of the lawson playing-card company. i never sold books at this time nor any time, and never "worked trains" at this time nor any time, although i fail to see any disgrace in such honest employment; nor had anything to do with trains in any way whatever at this time nor any time except to ride in them. i have never been a hanger-on at race-tracks, and have never had anything to do with a race-track of any kind other than visiting one for the first time in to see my own horse, boralma, race, and four or five times since to see my own horses run. i desire to dwell on this especial accusation because these character thugs have caused it to be published throughout the country that i am and have always been a _habitué_ of race-tracks and a plunging bettor upon races. i regret that it is my misfortune never to have seen a horse-race until , but if it can be shown that i was ever upon a race-track before that time, i will agree to stop writing this story of "frenzied finance." in , a concern known as the briggs printing machine company was incorporated in rhode island ... to manufacture a machine that was advertised to "print, cut, pack, and fasten with twine , tags per hour." thomas w. lawson secured the job of selling agent of this company, and he proved so successful and the advertising matter which he wrote brought such handsome returns, that we find him in promoted to the position of manager and enjoying a salary of $ per month. later he became the secretary of the company, and very shortly thereafter, in , the enterprise collapsed, was sold out by the sheriff, and realized little or nothing for the numerous creditors.... it is true that i was the vice-president of the briggs printing machine company, which was organized and owned by others before i had aught to do with it. i was induced to invest considerable money in it and to take charge of its affairs. the briggs company was a close corporation. its stock was never sold to the public, and after i left it it met with failure. in december, , the lamson consolidated store-service company was incorporated at boston. its purpose was to exploit an invention of w. s. lamson ... the overhead trolley system used in department-stores for carrying cash and parcels.... the capital stock at the beginning was $ , --par value of shares, $ . the company was doing business and declaring two and a half per cent. dividends quarterly, when mr. lawson stepped in and began to manipulate the stock. the price of shares rose steadily to . under the influence of speculative excitement the directors increased the capital stock to $ , , , then to $ , , . mr. lawson boomed the stock on the basis of a report, totally destitute of truth, that an english syndicate was about to purchase a controlling interest in the company. having unloaded all the shares at his disposal on the uproad to , mr. lawson suddenly one morning awoke to a realization of the fact that lamson store-service shares possessed absolutely no value, and he at once took the public, as is his custom, into his confidence. in circulars, by advertisements, and by cunningly contrived "news" items he insistently dinned into the public ear that lamson shares were valueless. the result was as well might be imagined. the stock declined to , whereupon lawson bought it back and then and there made his first grand _coup_. it is said that first and last he realized $ , from the lamson shareholders. i did "lawsonize" the lamson store-service company, just as i am at the present time "lawsonizing" the "standard-oil"-amalgamated-city-bank crowd. the lamson store-service company, with $ , , capital, was blunderbussing all who dared oppose it--all who refused to be bulldozed into consolidating with it. it was the most vicious exponent of the "trust" methods i had ever met up to that time. its arrogance, audacity, and crimes were the themes of the newspapers and courts of the day. a most casual investigation of the newspaper files, particularly in osgood _vs._ lamson, and the new york store-service company _vs._ lamson, will show a state of corporation assassination equal to that of the "standard oil," only on a smaller scale, of course. perjury, bribery, and even murder will be found openly charged and in some cases proved. at the height of the sensational career of the lamson company it ran into one of my corporations, the lawson manufacturing company, and started in to "do me up" or compel a consolidation, and--well, i gave it battle. the following circular to the stockholders will show how the battle started: _dear sir_: i deem it my duty to say to you, as a shareholder of the lamson store-service company, that your mr. lamson and his agents have opened up on my company, and with their usual criminal methods are endeavoring to ruin us. this circular is to inform you that i have this day given notice to each of your officers and directors that, in three days from to-day, if they have not stopped their dirty work and taken their hands off my company, they will take the consequences. i do not pretend to be able to meet them on the fighting grounds of the courts, for i know too well their power of corruption and jury-buying, but i assure you i have other ways by which i can stop them, etc., etc. if donohoe had desired to deal with facts, he could not have missed the details of this story, of which the papers at the time were full. it was a fight which would have warmed the heart-cockles of an embalmed warrior of the catacombs. lamson stock was selling at , the highest price it ever attained, not , as this numskull states. when i began operations i slaughtered it and the reputation of lamson and his associates; and in the midst of the fight, when the shares were down to , or perhaps , a great public meeting of stockholders--there were a whole lot of them--was called in the city of lowell, and, amid fiery speeches, lamson was told to choose between refuting my charges of fraud and being deposed from the presidency of the institution. lamson attempted explanations, but the hard-headed stockholders did what the amalgamated stockholders will some time do, passed resolutions that lamson must punish me for libel or that they would punish him. the gathering then adjourned to a future date, at which lamson was to report what action he had taken to punish me for my crimes. the next step was interesting, and bears on an accusation i have seen mentioned frequently of late. i had, when i began my fight, laid before mr. joseph pulitzer, of the new york _world_, the dastardly crimes of which the company had been guilty, and was even then engaged in committing, and he had said: "damnable! i will aid you in exposing them." and he did. day after day there were broadsides in the _world_ relentlessly denouncing the rascalities of the lamson outfit. these finally stirred them to action. one day i received word that some trickery was being put up in the district attorney's office in new york. a few days later there appeared at my office in boston a police officer from new york and three of our head boston police officers. they said to me: "we regret, mr. lawson, but we must take your secretary, mr. william l. vinal, back to new york, as he has been indicted for spreading false reports." "has any one else been indicted?" i asked. "oh, yes," they replied, "you and some of the _world_ people." "mr. vinal has done nothing but obey my orders," i said. "why don't you take me?" "we have no orders to," was the reply. i saw the game and sent word to the governor of massachusetts, who promptly told the combination: "go slow, gentlemen. remember you are not in new york now, but in massachusetts." he ordered a public trial. within two hours from the time they laid hands on my secretary i brought suit in his name for false arrest against the officers who were trying to arrest him, and grabbed the new york official before he could skip out of town. then i went to see the lamson crowd and we had it out. they begged that i allow vinal to go to new york, just to vindicate them, in which circumstances he would be allowed to return on the next train, and the case would never be heard of again. if i would consent, they would agree to a reorganization of the company and the dropping out of lamson. i showed them that they had gone too far, that i had damaging information as to how they had secured the indictment, and that now they must take the consequences. i took the "midnight" for new york, and in the morning was at district-attorney fellows's office. i dared him to arrest me or the officers of the _world_. he replied: "i don't want you, lawson. i cannot and won't help you advertise your fight." it proving impossible to get up any excitement in new york, i returned to boston, and the extradition proceedings furnished a most sensational trial. the cause was bitterly fought. the lawyers even came to blows in the governor's chamber. finally, when governor brackett had all the facts before him, he said: "you cannot work your dirty tricks on me," and he entered a vigorous refusal of the application for mr. vinal's extradition. this case established precedents for all such proceedings since. the fight won, pressure was brought to bear on me to let up on the lamson outfit and call off further proceedings. for some time i persistently refused to do so, as i was determined to contest the constitutionality of the law. finally, however, on condition that lamson should be thrown out, the management of the company reorganized, its criminal methods abandoned, and all records and trace of the indictment against myself and the others removed from the district attorney's books, i consented. this is the history of how i "lawsonized" the lamson store-service company, and if there is anything i have ever done that was good to do and well worth doing, this was it. i am just as proud of my work here as of what i did in the general electric fight upon which i have already touched. in the lamson reorganization i was offered all sorts of good things, but i refused, as i always have in such affairs, to benefit in any way but the open and fair one where i go into the open market and stake my money against that of my opponents on my ability to prove i am right. the facts here are of legal record. following is the donohoe-rogers version. the mendacity is obvious: among the unfortunate lamson-service stockholders were numbered several aggressive people of the old-fashioned kind, who resented mr. lawson's peculiar way of doing things. these submitted, in , to the grand jury of the city of new york a sheaf of lawsonian literature, comprising his scandalous attacks on the company's securities. the grand jury indicted thomas w. lawson, and colonel john r. fellows, the district attorney, and his assistants, francis l. wellman and mr. lindsay, went to boston to try to have lawson extradited. the governor of massachusetts came to lawson's rescue in the nick of time and declined to honor the request of the governor of new york for his extradition; but for years thereafter the future author of "frenzied finance" made his trips to this money-centre incognito. the grand rivers enterprise in the entire country rang with the fame of grand rivers, and it was thomas w. lawson, of boston, who pulled the bell-rope.... the scheme, as may be deduced herefrom, was a most comprehensive one. the development of the "marvellous deposit of coal and iron," which had been discovered upon the property by mr. lawson, one day while seated in his revolving chair in his state street office, furnished the basis for the incorporation of the furnaces company. after $ , , had been "expended," the clamor of the stockholders caused the company actually to build several furnaces. they were erected and stood idle, with nothing to feed them. the whole scheme collapsed in . the stockholders lost every dollar of their investment.... in this, his fourth financial venture, mr. lawson did but repeat his former experiences--except, in this case, the loss sustained by those who reposed confidence in his promises was heavier than in any of his prior undertakings. the kentucky experience is one of the pleasantest memories of my life. measured by dollars and cents it was expensive but was well worth it, as the young man remarked who broke his arm by being thrown from his horse into the lap of his future wife. it makes a long story, and i shall only touch on the leading facts concerning it by way of showing the desperate straits my enemies are put to in their efforts to discredit my career. my present brokers, messrs. brown, riley & co., one of the oldest and largest boston and new york stock exchange houses, had floated the grand rivers enterprise for some of their wealthy clients. it was an iron, coal, and furnace proposition, and before i ever heard of it, it had been bought and paid for, and enormous furnaces were under way. it was a close corporation. after a very large amount of money--in the millions--had gone into the property, i was induced to take the executive management, and also i put in a very large amount of my own money. my work was to be that of business director, for i did not know an iron or a coal mine from an alabaster ledge in the lunar spheres, and not half as much about an iron smelter as i did about converting whiskers into mermaid's tresses. however, one of the greatest iron men in new england, aretas blood, president of the manchester locomotive works, and of the nashua steel and iron company, was at the head of the enterprise, which apparently safeguarded it. well, it turned out that there was no iron in the mines--at least not enough to pay for extraction, and the investment simply disappeared. i lost a very large amount--at least, a very large amount for me--but i had to show for it the love and friendship and respect of the inhabitants of one of the fairest places on the earth--a place where brave men and lovely women live in peace and comfort in the knowledge of their own fearless, simple honesty, and their hatred of shams and trickery--in absolute ignorance of frenzied financiers and the "system's" votaries. the history of grand rivers is an open book. there is no secret about my connection with the enterprise. it was a straight and proper venture. the men who are my brokers of to-day fathered it, and they are men of honor, probity, and responsibility, who since my first year in business in have been my close business associates and personal friends. why do not donohoe and his breed of gutter-rooters, when seeking information about me, ask such men as these for facts about my life?--they know what every hour of it has been. strange as it may seem to such vampires, the men i began to do business with when i was a boy i am doing business with to-day, and they are my associates and friends. i postponed until the last moment writing this article in order that i might be able to diagnose the "system's" attack on me. the first of the widely advertised series was such a foolish and asinine thing as to be unworthy of notice, and i desired to see how much further the second would go. in the former it was charged that i was writing my articles solely for the purpose of securing stock-market profits and compelling the "system" to settle; in other words, that i was attempting to blackmail them; that i had no honorable motives in writing my story, and had no remedy of any kind in mind; that in the recent panic i had made a million and a quarter of dollars; that i had secured president roosevelt's message eight days before it was published; that i had advertised on november th, unqualifiedly advising all to purchase amalgamated, and that on december th i had advertised advising all to sell. it is true that i did advise the public to sell, but that in my advertisement of november th i advised the people to buy amalgamated i positively deny. i carefully avoided doing so. the other statements are equally false, and were made with a full knowledge of their falsity. the incidents in my career about which i have here set forth the facts are not secret. all the things i have stated are fully susceptible of proof. for another instant let me take the assertion that my motive in this crusade is personal gain through stock-jobbery, and that i have no aim or end in view other than that. well, i can to-day show the remedy to which i have alluded so often, and which when i worked it out in i had printed with full detail. it is in my vault now under lock and key. in the year , in london, i laid a copy of this document before joseph pulitzer of the new york _world_. remember, this was a year before i met h. h. rogers or any of the "standard oil" party. since donohoe began his latest series of attacks i have had scores of letters commenting on them. a significant verdict on what the man is accomplishing is the following: buffalo, n. y., january , . _dear sir_: i herewith enclose you copy of a letter just sent to mr. donohoe, also to the editor of ---- yours respectfully, ---- (copy) january , . mr. denis donohoe, financial editor, new york _commercial_, new york city. _dear sir_: with considerable pleasure, satisfaction, and conviction, i have carefully read all the articles on "frenzied finance," by mr. lawson, and from my limited knowledge of affairs, gained by fifteen years of active life, am of the opinion that he has been telling facts, although at times they are clothed in the language of a writer of fiction. i have been waiting and confidently expecting, during the past six months, that some able, honest, unbiassed, and free-handed man would take up the discussion against mr. lawson, and in this way aid the people in viewing the entire subject with all possible side-lights, so that when public opinion shall be finally formed, as surely it will be in the future, it may be as nearly right as possible and only the guilty suffer. it was, therefore, with a high degree of exultation that i purchased ---- of january th, upon the first page of which in bold type appears: "lawson answered--the truth about frenzied finance." at the sight of these words i said in almost audible tones: "now we shall hear the other side, or at least learn what mr. lawson has omitted, if anything." i have just finished reading your article in said issue of ----, and as you now pose as a public writer and benefactor, you of course will welcome frank, honest criticism. after reading and rereading your said article, i am, against my desire, forced to the following conclusions: . you are either one of the "system" or are hired by it. . this article of yours was prepared for the purposes of making two points: (a) working on the sentiment and passions of the weak, and the women; and (b) diverting public attention and opinion from the real facts at issue, by attacking mr. lawson's personal character, which is not up for discussion. . your article is full of high-sounding declarations, and void of either logic or common sense. . in your endeavor to express the wishes of the prejudiced and biassed, you are undoubtedly dishonest with yourself without deceiving the public. . your article lacks the ring that carries conviction, either as to your sincerity or the truthfulness of the statements you make. . the article indicates that you are vainly trying to ape mr. lawson's style. yours respectfully, e. g. mansfield, attorney-at-law. following the donohoe outburst there came innumerable letters, of which this is a good sample: tacoma, wash., february , . _dear sir_: it would be greatly appreciated by at least one of your readers if you would furnish the great and only donohoe the details of some really scandalous epoch of your past. it has been stated many times that one man cannot make a million dollars and do it honestly, so we must assume you have done some "things" in your past. we have a very high regard out west for the works of mr. dooley and mark twain, and also are regular subscribers of _puck_ and _judge_, and we don't want to see these noted writers and periodicals unseated, even for the time being, by mr. donohoe. therefore we ask you to give him some tip from which he can work out something serious, so he can make a statement that is not "reported," or the deduction of which does not require sherlock holmes. his work of "dissecting" so far reminds us of the work of a six months' student of a medical college on a tom cat (no pun meant). yours very truly, l. h. m. i answered as follows: _my dear sir_: your request is similar to that of a hundred other correspondents. i regret i can do nothing to help out. donohoe's trouble is, he is short of facts, so "short" that he seems to me completely "cornered." i am "long of" them, as you and all my other readers will admit before i am through my story, but my facts are not the kind donohoe can use, or i would willingly let him have a few to assist him out of his present predicament. donohoe's employers, rogers and the "standard oil," knew before they put him on to his present "job" that my life was a peculiarly and unusually open one--one that had absolutely no dark or covered corner in it; they knew it not only because all men in my walks of life know it, but because they had investigated it with their unerring search-light. most men who have ever been on the inside of "standard oil" know that no man with a bad record could do business, much less have an intimate relation, with rogers and rockefeller for nine seconds; and my connection extended over nine years. the tone of my correspondence during the year was not by any means altogether friendly. the writer of the following letter presented his conclusions straight from the shoulder and i was equally direct in my reply: personal. gainesville, fla., february , . mr. thomas w. lawson, boston, mass. _dear sir_: pardon my "buttin' in"--seems i must say something. if what donohoe says about your trinity copper company is true, it would seem you ought to stop throwing mud at the standard oil crowd, for you are no better than are they, and they are known thieves and robbers. while you may be telling the truth about the other fellow, yet the fact of your telling it does not set well on the stomach of those who read both sides of the story. seems to me it's "dog eat dog" until every one is disgusted. why don't you come down to business and give the readers of _everybody's_ something wholesome to digest and plenty of it? the way it comes now, we are over our hunger before the next issue shows up, and, in the meantime, your friend has converted many to the thought that you are worse than the standard oil crowd. won't you please answer, in the next issue of _everybody's_, if you made your money--your fortune, honestly, or did you "do others" for fear they would "do you"? i am inclined to think you are as big a "grafter" as ever came down the pike, even though you may be telling on the other fellow--turning state's evidence. yours truly, ---- you ask why i do not get down to business. you won't mind my telling you the principal reason is that it is _i_ who am writing "frenzied finance," not you nor any of your kind, and that i propose to decide when it is time to get down to business. if in the meantime there is any one else who can do the job i have cut out better than i, why, none will be better pleased than myself. indeed, i will gladly contribute as a reward to my successor double the many thousands of dollars i am paying each month to get this work of mine properly before the people. what donohoe says of my trinity copper is not only absolutely false, but has over and over again been demonstrated to be so. the actual facts regarding that property have been printed time and again in reputable boston newspapers, and casual inquiry will obtain you the full details. in addition, practically everything which donohoe, the hired mouthpiece of "standard oil" and the "system," has said is absolutely untrue and made from whole cloth. when i say this i cover all criticism which has been made upon me or my work by "standard oil" or the "system," for this character thug has utilized every dirty slander which my enemies ever invented and put into circulation. did i make my fortune honestly, you ask? and i answer: in thirty-six years of active business life, very active, embracing transactions through which i have passed from poverty to wealth and back again from riches to poverty, and in which i might easily have retained the riches by sacrificing a principle, i have never once in all these years and in all these transactions done a wrong to man, woman, or child, nor taken from man, woman, or child a dollar unfairly, much less dishonestly. rather a remarkable record, you will say, for one who has made millions in the stock business. but i should not be broadly honest if i did not add the modification that these millions of dollars were made in the open stock-market, by methods which in the open stock-market are called fair and honest; that is, i have played the game according to the rules, and the "other fellow" has had equal chance with me and might have done anything i ever did. if, however, business were conducted as it should be and as it will be after my "remedy" has reformed present conditions, such methods will net those using them only thousands where i have gained millions. you add that you are inclined to think i am a "grafter." in reply i can only say you would not dare--and i don't know your size, color, or length of trigger-finger--to say it in my presence, though of course, it is absolutely immaterial what you or your kind think of me or my work. the lawson panic during the eighteen months in which "frenzied finance" has been before the public, history has been made at a stiff pace. next to the insurance revelations which are still in process of deliverance, the most striking demonstration of the period has been the flurry in stocks which was spoken of as the lawson panic. in the february, , issue of _everybody's magazine_ i dealt with the performance and its attendant phenomena. without undue vaunting, i may say that my explanation of the mysteries of modern finance has not been without immediate profit to the public. the people, accustomed to invest their money in the legitimate securities of the country, had time and again lost hundreds of millions without dreaming that they had been as ruthlessly robbed as though held up at a pistol-point by a highwayman. they imagined that the great capitalists whose names were emblazoned in the press throughout the land, and who managed the banks and trust companies and insurance corporations to which their savings were intrusted, were noble and public-spirited gentlemen of the highest moral principles and of absolute integrity. they know to-day that many of them are reckless and greedy stock gamblers, incessantly dickering with the machinery of finance for their own private enrichment. i have stripped the veil from these hypocrites and exposed to all the world their soulless rapacity. i have let the light of heaven into the dim recesses of wall street in which these buccaneers of commerce concocted their plots. i have done more than this: i have nipped in the bud the newest conspiracy for the entanglement of the public--the great "bull" market which was organized late in by the chief votaries of the "system," to harvest a new crop of profits on the securities they had laid in during their last raid. in other words, i have treated wall street to a dose of its own medicine. during the month of december the newspapers devoted considerable space to the doings of the stock-market in connection with the episode to which i refer. i use the word "episode" purposely, for i warn my readers that it was but one of a series of disturbances which must occur before the grasp of the pirates on the great financial interests of this country can be shaken off. david slew goliath with one pebble from his sling, but the giant "system," intrenched in the stoutest citadel ever constructed, and armored in gold and riven steel, will yield to no mere call for surrender. my own part i have cheerfully taken with no delusions as to the difficulties of the contest. he who interferes between the lamb and the wolf is likely to provoke the wrath of the wolf, and i have done worse, for have i not come between the lions of finance and their willing prey? it is worth while here to rehearse the steps of this first disturbance, because it constitutes part of a movement destined to wield a tremendous influence in this country's history. while my revelations of the methods of the "system" were circulating throughout these united states, the "system" was engaged at its old trick of inflating the prices of its favorite stocks and bonds and spreading its nets for another gigantic plundering of the people. in the stock-market and in the highways and by-ways and resting-places of finance nothing was heard for months but fairy tales of great earnings of railroads and industrials, fairy tales of new ore in old mines, fairy tales of great financial forces converging toward colossal combinations. these are the lures of the "system's" hirelings, the decoy calls of the market tout and the financial tipster whose part it is to mould opinion and urge the people to the shambles. before my eyes, with a blind and audacious defiance of my warnings, the old, old game was rigged in full view of the audience and the old players began their venerable antics. in the meantime the "system" attended to its own rôle in the conspiracy--supplying out of its banks and trust companies the public's money for the gamblers to make the game with. then began the artful process of working up the market; stocks gradually climbed higher and higher. amalgamated ascended from the forties into the fifties and the sixties and even into the eighties; steel assumed the appearance of life and grew from ten slowly upward into the twenties and thirties. every day in the stock exchange hundreds of thousands of shares changed hands back and forth among the professionals who lustily played their parts in this financial melodrama. the good old myths of great fortunes made by lucky investors began to reappear in the papers. sales increased; values jumped rather than climbed. the trap was set; the market made. the wily manipulators rubbed their hands gleefully. the public began to bite, to buy. it was then only a matter of sizing up the wool crop before beginning the shearing. before i detail the steps i took to spring its own trap on the "system," i should explain that this market was purely an artificial one. the immense advance of prices was not brought about by any honest methods or legitimate causes. the "system's" votaries had enormous quantities of stocks--millions upon millions of shares, bought when the people during the past two years were compelled to throw them overboard at slaughter prices. by employing one of the oldest swindling devices known to finance,[ ] they could bid prices to any figure they desired. honest financial writers called attention each week to the tactics of the manipulators and declared the high quotations unjustifiable and unreasonable. at the stage of the game that i felt sure immediately preceded the unloading signal, i determined to test whether the people had really digested as well as absorbed the cold facts i had been ladling out to them in my story of "frenzied finance"--whether they had grown wise enough to heed a warning. so on monday, december th, i carefully prepared the following advertisement, which was published tuesday morning in the great papers of the great cities of this country and later in europe. amalgamated stockholders--warning from the creation of amalgamated i have continuously believed in its worth and constantly advocated the purchase of its stock. henry h. rogers personally negotiated with marcus daly for the properties which went to make up the amalgamated company. henry h. rogers alone knew absolutely their values. henry h. rogers's associates took his word for them. while they cost messrs. rogers, rockefeller, and associates only $ , , , we all believed they were worth more than the $ , , at which they were sold to the public. shortly after the public flotation at $ per share, the stock dropped to . i did all in my power to prevent the decline, losing millions in the effort, but i retained my faith in the real worth of the property. some of the insiders made millions; the public was fleeced of millions. i still refused to be discouraged. i urged messrs. rogers and rockefeller to make good their promises made through me to the public. finally they consented. the stock advanced until it sold at . at the highest price i was still buying and advising its purchase. then there came the awful slump which slid the stock down to . i lost enormously; insiders made vast profits. the public was again fleeced. at i began a new campaign to induce my followers and the public to buy. as a result there were purchased by hundreds of people all over the country directly and indirectly through me, rising , shares, at an average of to , and probably hundreds of thousands more which i could not trace. this campaign i have prosecuted incessantly up to the present time, until now i estimate the public holds , , shares, , of which show at to-day's price, , a profit of $ , , . when my story, "frenzied finance," began, i advertised that it could do no damage to amalgamated stock, but would help it. hoping to divert the dangerous disclosures i threatened, the leading attorney of messrs. rogers and rockefeller asked for a conference. at it he demanded of me what i expected to accomplish. i replied: "one thing, at least--to put the price of amalgamated back to , that those unfortunates who still retain their stock may recover their money." then the secret was revealed to me that amalgamated was not worth anything like the price at which it had been sold to the public. i said: "how can this be?" he answered: "mr. rogers knows for a certainty that marcus daly deceived him about the worth of the properties." i had great faith in this attorney. he was sincere in what he said; his knowledge and relations were such he could not have been deceived, and his special information about this property was such that he could speak in the first person. i believed him. soon afterward another official of amalgamated confirmed his statements. when i received this information my dilemma was a terrible one. if i gave it to my following they would at once throw over their stock, probably at a great loss. i waited. sooner or later i knew these men would get behind the market, push up the prices of the stocks they had gathered in at bottom figures, and, when the moment was ripe, again unload on the public. the market "came in." i did all in my power to assist in raising the price of amalgamated. to-day's situation is the same as that of . "frenzied finance" stock gamblers have accumulated immense lines of amalgamated. the same sensational rumors of a great rise to come flood wall and state streets as in . they have asked me to join in creating a wild market upon which all the amalgamated taken in at lower prices may be turned out upon the public. it would be millions in my pocket to assist, but---- i see the handwriting on the wall which the "frenzied financiers" of wall street do not yet see. it reads: "the people will not stand plundering any longer." and i have decided. i advise every stockholder of amalgamated stock to sell his holdings at once before another crash comes. another slump may carry it to again, or lower. it may go higher, but this is no affair of mine. from the moment of the publication of this notice all those who have looked to me for advice must relieve me of further responsibility. as the people who look to me for advice are scattered all over this country, i know of no other way than this to simultaneously notify them of what i have learned. if the powerful people who manage and control amalgamated, and who, after selling it to the public at $ a share, allowed it to sink to $ , and after it had advanced to , smashed it to , regardless of their sacred promise to me and the public through me, now reveal to me that it is not worth over , it is inevitable that if they are honest in what they say, the stock must go there of its own weight. if they are not honest, they will put it there anyway, and lower still. i would have waited until the reckless speculators who are now manipulating the market had put the stock higher, but i did not dare. during the past two days i have detected unmistakable signs that the vultures are gathering for the feast. in the past i have told what i thought i knew about amalgamated; from to-day i shall tell what the men who control and manage amalgamated say they have found out about it. no stockholder should, after this fair notice, object or accuse me of trying to injure the property, even though i be compelled to begin court proceedings based on this information so lately revealed to me. this advertisement and my mailed notices will appear in new york and boston, tuesday, december th; in the eastern and middle portions of the united states wednesday, and the balance of the country, canada and europe thursday, and i shall wait until friday, that all may have ample time to dispose of their stock, if they care to, before making my next move. every holder of amalgamated must keep before his eyes this one tremendous fact: his property is now absolutely at the mercy of men who have the market in the hollow of their hands, and who in the past have raised this stock to the highest and then dropped it to the lowest without heed or concern but for their own pockets. copper range since copper range consolidated sold at i have advised its purchase. to-day it sells at . all who have followed my advice have made immense profits. copper range has , shares; amalgamated , , . copper range is a new property at lake superior, consisting of three immense mines and a railroad, with the latest and most complete plant in the world, including its own smelters. it is the largest and richest copper mine discovered and developed in the past twenty years. it is producing now , , pounds of copper annually, and will in the near future become the largest producer in the world. amalgamated pays per cent. in dividends. copper range will pay per cent. in the coming year, and continue to increase, to what limit no man can tell. if the present market for copper, the metal, holds at cents, and the best judges think it will probably go higher, amalgamated should increase its dividends to or , but with -cent metal copper range will earn and pay , , and per cent., and upward. the curse of amalgamated has been "standard oil" management. copper range has been, and is, directed and controlled by representative boston copper men, who seek their profits in the mine and not in the stock-market. thomas w. lawson. boston, december , . the result of this announcement proved that my message had not fallen on stony places, but had been accepted by the public in the spirit of its giving. all tuesday, wednesday, and thursday the people sold their stocks to the "system's" votaries at the falsely inflated prices these gentry had forced for their own plundering purposes. instead of gathering in the savings of the toilers, the "system" had to part with some of its wad. for once the people got the money and the "system" had the stocks. under the stress of tremendous selling the price of "amalgamated" was shattered. other frenzied finance stocks declined in sympathy. the power of publicity had been triumphantly vindicated and the cries of frenzied financiers, their mouths full of their own fish-hooks, resounded through the land. that this condition would be allowed to prevail long, i knew was improbable. the "system's" leading votaries got together and organized to stop the frightful decline in prices. the old cuttle-fish methods were at once resorted to--a campaign of falsehood, deception, and trickery began. lest the people should realize that it was their power which had wrought such havoc, the touts and tipsters shouted in chorus that the slaughter of prices was the work of the "system" itself, and that i was secretly in league with the "system" against the public; that, the public having been robbed of its stocks, prices would advance with an extra bound. scores of millions were drawn from the banks and trust companies to stay the slump. under the influence of all this industry and clamor the market began to boil again; prices recovered, and the people, confused and bewildered, were once more about to be entrapped. a sharp advance was followed by a cry from the votaries that i was a trickster and that what had been in reality the most notable demonstration of "the people's strength" ever given was only another evidence of the "system's" infallibility. if this deceit had prevailed, the task i have undertaken of enlightening the public would have had a setback. relying on my previous work, i put forth the following announcement monday morning, december th, and confidently awaited results: investors and speculators--warning! for six months through my story, "frenzied finance," in _everybody's magazine_, i have been educating the people to the terrible condition existing to-day in america--the people are plundered of their savings by a few men through the working of the "system." after a close study for six months i concluded that the people were awakening to the truth. i decided to make a test. i advertised certain truths. that was all. for three days wall street and the "system" were panic-stricken--paper values melted to the extent of hundreds of millions. the laws of the land are strict about panic-breeding by public statements. if any of the terrible statements i have made had been false, i should to-day be in prison or my body suspended from a lamp-post. i could not possibly have escaped. what i have stated is truth. no one dares gainsay it. wall street and the "system" for the first time were compelled to come to the rescue and put in jeopardy their own money by buying stocks from the people at inflated prices. for the first time a break came while the manufacturers of stock still held them. the people sold them. to-day every scheme known to frenzied financiering is being worked to make the world believe last week's panic was the result of stock speculators, bears, "standard oil," and the "system." throughout this country and europe is being spread the story that i was in league with "standard oil" and the "system," that they had sold out their stocks and got me to raid the market to shake out the public. that another great rise is coming. * * * * * this is clever, smart, the only thing possible under the circumstances. but it is a lie. i ask the people to watch the desperate efforts that are being made to get this lie to pass for a truth. the "system" must unload on the public, but above all else the "system" must convince the people that the awful destruction of last week could not have been brought about merely by the people's own doings. if the people are not so convinced they will know their power, and that they have in their own hands, to use at any time, a weapon which can stand the "system" on its head. there is no reason why the people cannot reverse the old process and always sell at the top to the frenzied financiers and buy from them at the bottom. * * * * * this is my warning: i ask the people and wall street and the "system" to give it weight or their loss will be on their own heads. i am going to strike again, suddenly, sharply, sensationally, and in a way that will produce effects upon prices and upon markets, so much more destructive, that the effects and the destruction of last week will appear by comparison as milk to vitriol. every owner of an active stock in which the "system" has any interest owes it to himself to weigh my warning. the result must be terrible for wall street and the "system," and nothing can avert it. it matters not how much preparation is made, as it will come in a way not possible to guard against. i want all to know now, so they will not blame me when the slaughter is on. my first and only warning will come in the form of a public notice that certain named stocks should be sold the day my advertisement appears. three days afterward i will publish why, but with the why it will be too late for holders of stock to save themselves. i now say to all, if you decide after reading this that i am only talking, well and good, but when it is too late, remember what i did say. while waiting for me to speak, again think it over. * * * * * when "frenzied finance" first appeared, only six months ago, the wise heads of the "system" said: "the public will tire of it in sixty days." at the end of six months the people, the press, and the pulpit are lashing themselves into a fury over its revelations, and it is impossible to print magazines enough to meet the demand. when i first touched on the life-insurance companies they laughed. to-day policy-holders are panic-stricken, and the big companies are falling behind millions a week. when i said my story would affect wall street, wall street laughed; last week it yelled, cursed, and begged. and i am only in the mild, preliminary stages yet. while waiting for the next move, make no mistake. when real work begins wall street and the "system" will look like a last year's straw hat in the swirls of niagara. amalgamated last tuesday morning i publicly said: "the men who control amalgamated told me it is not worth half the price it was floated at. if they told the truth it will go back to . if they have lied they will smash it back to as they did before. sell it." all that day (tuesday) holders could have sold at an average of . holders of over , shares did. the following day all holders could have sold at an average of -- , did. the third day all holders could have sold at an average of -- , did. then the wall street powers got desperate and stopped the decline. during these days i did not sell a share nor do anything in the market to assist the decline, but did buy enormous amounts to prevent it from breaking below . every scheme known to frenzied financiers is being worked to make it appear now that this stock is going to sell much higher. it is advertised broadcast that i was working with the bear raiders and "standard oil." this is a lie. my brokers were requested by another client to publish a statement that a prominent copper company president stated there was $ in the amalgamated treasury. instantly the rumors were sent broadcast that i had settled with "standard oil" and was bulling the stock. this, too. i know the man who made the statement and the high officer of the amalgamated who got him to make it. and it shows the desperate position of the amalgamated "insiders." they are loaded with the stock. i dare any officer of the amalgamated company to publish the above statement over his signature. if he does court proceedings will be begun at once. i also dare mr. rogers or mr. rockefeller to deny the statement made by me that they have said the stock is not worth , and that marcus daly deceived them. i dare them. i repeat what i have said to holders of amalgamated: sell your stock now, before it is too late. bear in mind when amalgamated sells at that i have warned you. and in the meantime watch for sharp breaks in amalgamated. i will give no further warning on this stock, and under no circumstances will change my now advertised position on it. thomas w. lawson.</sc> boston, december , . the second test brought a stronger demonstration than the first. this time the "system's" votaries were drawn up in solid phalanx; behind them uncounted millions and unmeasured power braced to meet attack. all day monday the people hurled their securities at the gamesters, and with every onslaught prices crumbled until, when the stock exchange closed, the "system's" losses were represented by hundreds of millions of dollars. the people had learned a lesson, and a hundred years more of the "system's" trickery and falsehood will not efface its impression. vilification no reply to facts the attacks i made on the "system" were frank and direct statements of facts. the destruction they wrought upon the cherished plans of the gamesters was due to their truth. if the things i stated about amalgamated were not true, how easy to prove them false, and how completely then should i have been discredited. but what has the "system" in its blind rage done? well may the american people who read what is printed below say to themselves, "'whom the gods would slay, they first make mad.' what is thomas w. lawson in this transaction that his personality need enter into a controversy wherein the issue is of facts alone?" suppose i were all that my enemies say of me, the question is not of my guilt, but of the truth of my charges. i was not surprised to read on the morning of tuesday, the th of december, the diatribe printed below. it was published in the leading papers of the country in the form of an advertisement, in great type covering half a page. thomas w. lawson--read this picture new york, december , . thomas w. lawson, boston, mass. for six months i have read with close attention your story of "frenzied finance," in _everybody's magazine_, and have paid close attention to the manner in which, by pandering to the worst prejudices of the american people, you have endeavored by misstatement of facts to distort the conditions actually existing through what you call the workings of the "system." what is the conclusion to be deducted from your own statements? what is the "system" to which you have so often referred? from the standpoint of honest, unprejudiced men no other conclusion can be derived but from your own statements you have endeavored personally and through subornation of others to debauch legislation, to distort facts, to create in the minds of investors a lack of confidence in men whom the public for many years have looked up to as the leaders in the industrial world. by every foul vilification and every statement which distorted imagination is capable of producing, you have endeavored to show that the so-called leaders of finance of the united states are in league to rob and defraud the investing public. taking all your statements and analyzing them, what do they amount to? that certain men, amongst whom you yourself was one of the leaders, have bought out certain corporations which were capitalized at a price which you state was far above their cost. not one single new fact has been brought to the attention of the public. if men, by their brains, their capital, and their energy, acquire properties that have not been appreciated by the public, put them forth under whatsoever name, so that the statements made in connection with those properties are true, and capable of verification, what is it but a business proposition that cannot be criticised? what is the "system" which you denounce as the very personification of evil? is it not the "system" of which you have been the leading advocate, votary, and exponent for many years? is not the "system," when analyzed and reduced to its root, a stock-brokerage of which you are and have been for many years one of the shining lights; not the system of honest, legitimate brokerage, but the system of endeavoring by false statements and by exciting the fears of the multitude to depress and destroy values in order that its votaries may reap their ill-gotten gains? is there one thing in connection with all that you have written in your articles on "frenzied finance" in which you have not been from start to finish one of the prime movers? who is the man that, from the inception of the enterprise which you most severely criticise, has been most prominently before the public? who is the man that, from your own words, originated the idea and carried it to its completion? is it not thomas w. lawson? who is the man that, in the various schemes which you hold up to the condemnation of the public, has taken from start to finish the leading part? is it not thomas w. lawson? is there one honest man in the united states who to-night believes that, in spending the thousands and thousands of dollars that you have spent in advocating your views and in posing as the friend of the people, that you have not acted for your own selfish ends? do you believe that there is one man in all this wide world to-day who honestly believes one single statement that you have made, or who believes that you have ever turned your hand to, or aided in the slightest degree in, any honest enterprise? you criticise the copper corporations who have placed their stock before the public as a legitimate investment. can you point to one single instance in which a misrepresentation of fact or figure has ever been made in anything connected with the amalgamated company? who are you, who should say in relation to a copper mine whether it is good or bad? did you ever see a copper mine? did you ever put a pick into ore? did you ever reduce one ton of metal so that it would yield up its wealth for the benefit of mankind. have you ever done anything excepting to act as a parasite upon honest labor and, by chicanery and by misrepresentation, endeavor to rob the people of their hard earnings? i speak to you plainly, knowing you yourself for what you are. can you show one man that can point to any honest industry in which you ever took part; to one single act of yourself that ever contributed to the welfare or the advancement of the working people? can you point to one single act in your career that was ever based on any other motive than absolute egotism and selfishness; to one single utterance, act, word, or deed of yourself that was not based on selfishness and a desire to rob or misrepresent or, in some other manner, attach the earnings of the people to your coffers without effort on your part? i address this communication to you knowing you for what you are; as a man who, throughout his many years of active life on the stock exchange, came to be generally considered as the synonym of chicanery and of misrepresentation. to-day, through your perversion of truth and partial misstatement of fact, which, through many years in pursuance of your calling, you have become an adept in, you can destroy the confidence of the people who make the money and the wealth of the country. do you for one moment suppose that there is one honest person in this country to-day who believes that you are actuated by a sincere desire to aid them? do you not know that your only motive is, by destroying confidence, to endeavor to make a large profit for yourself, by the methods which you have pursued of advertising to the public? the men who do things, the men who created wealth, the men who are known throughout the world for integrity and for their business qualifications, will unanimously say that your motive is selfish from start to finish. do you remember the dealings that you had with me, how they were based on falsehood and misrepresentation from start to finish? how, by the use of names that are well known in the financial and business world, you endeavored to rob and convert to your own use what you thought was one of the greatest properties in the world? what has been the result of your advertisements of the last few days? has it not been to destroy confidence, to create a panic among people who had invested their earnings in what they have considered as legitimate propositions? have you ever paused and thought for one moment about what the results of your selfish and distorted statements might be? in your articles you have spoken of the loss that has been entailed upon widows and orphans, of disgrace and suicide and other ills that have come through what you are pleased to call the workings of the "system," the "system" of which you have been and are to-day the exponent, the system of misrepresentation and of spreading false statements; in other words, of stealing heaven's livery to serve the devil in. millions of dollars of legitimate investments have been lost to the people who have made them. why? because you, in your selfish egotism, have looked to nothing but your personal gain, thinking nothing, caring less for the woe that you might work to thousands, pandering to the worst prejudices, and by means of such words as "standard oil," "amalgamated," "frenzied finance," etc., and making statements which investors have not the means or the time to dispute, you have endeavored to destroy values that have been created by the works of a lifetime. to-morrow, in boston, i shall call upon you. i for many years have stood as a worker, as a man who has built up and who has created, and i know that the savings of a lifetime of many honest investors have been swept away by the falsehoods that you have spread abroad through the public press. to-morrow, at your office, i shall denounce you for what you are. the master long ago said: "by your works ye shall be judged." personally i shall call upon you for your answer to-morrow. w. c. greene. this is the rejoinder of the "system." no denial of my facts. no defence against my charges, but a volley of mud and a threat of assassination. i had dared tell the people how they had been robbed. all remember the panic of , the famous northern pacific corner, in which values shrank hundreds of millions in a few hours and tens of thousands of the people lost their entire savings. who precipitated that terrific slaughter? certain great railroad magnates and bankers were at each other's throats; two greedy corporations had quarrelled ferociously over the control of a railway line. no man in all our broad land dared to hint at the assassination of a morgan or a perkins or a harriman or any of the "standard oil" votaries who were parties to the bitter contest that left wall street strewn with the mangled and bleeding carcasses of the ruined and bankrupt. that time, however, the "system" had both money and stocks--the people had lost both. i am not going to enter into a defence of myself against colonel greene's charges. in the newspapers of the country that matter was fully ventilated at the time. i simply republish his vituperation to show how the "system" sets about silencing those who dare protest against its villainous methods. in the first six months of the publication of my story the sole defence the "system" entered against my specific and terrible charges of plunder and debauching of the people was to attack me personally. it inaugurated a war of mud-slinging and vilification directed by the new york _commercial_, henry h. rogers's own paper, which printed the ridiculous statement that i was crazy. this editorial made splendid ammunition for the big insurance corporations, which caused it to be distributed among their policy-holders, and for the yelping pack of insurance papers which may be depended on to bark, and bite the legs of any one who dares attack their master, the "system's," most profitable institutions. i find i have not space here to reproduce these several mud broadsides, which really are more valuable as evidence of the doddering imbecility and fatuous weakness of the so-called great men of finance than interesting or informative. since my personality is the issue, i propose to give my readers some testimony of a different character, gathered by experts[ ] in the heat of battle. thomas w. lawson at close range an intimate talk with the financier and fighter by arthur mcewen from the _new york american_, november , . thomas w. lawson of boston, who is making it so interesting for standard oil financiers and other able gentlemen that add your money to their corpulent millions while you wait, is himself an interesting man and a very puzzling one to a great many people. one day last week i spent several hours with him at his rooms in young's hotel, and it surely was a stimulating and enjoyable time. everybody now knows how exceedingly well mr. lawson can write, and he talks as he writes--boldly, vividly, audaciously. he thinks out loud, pouring forth a flood of speech, breaking off in the middle of sentences, going into long parentheses, touching on a dozen incidental things by way of illustration as he goes, but always coming back to the main point. he may confuse you, but he does not confuse himself. and notwithstanding the rapidity of his utterance and his copiousness he is not carried away into saying what he would rather not have said. he is handsome--tall, broad-shouldered, strong, well-knit, and graceful--still almost youthful physically, despite his forty-five years and the beginning of grayness in the dark, wavy hair which covers his large, finely arched, and well-proportioned head. his forehead is high and broad, his gray eyes deep set under brows that come together and give intentness and fierceness to his gaze when he is aroused. and when lawson is aroused you see a fighter with all his wits about him and of utter fearlessness. he would have made a first-class soldier, with his quickness and dash and the pluck that was born in him, and has not to be summoned by thinking and resolving. the boston view of lawson the boston view of lawson is illuminating. they are afraid of him on state street. he thinks so rapidly and does things with such instant decision that he bewilders the conventional plodders. they admit that he is brilliant, that he has a genius for gathering in the dollars, but he shocks the financial mrs. grundy. they tell you that he is "irregular," "sensational," "bizarre," and the rest of it--all of which means simply that he is a man of original mind, who follows his own methods, succeeds with them, and doesn't care a snap of his fingers about being out of the fashion. he has a hundred ideas and impulses where the "safe and steady-going" business man has one--and as the safe and steady-going state-streeter doesn't understand the ninety-nine lawson ideas and impulses which do not come to him, he charges them up to "eccentricity" and "charlatanism." boston says lawson is vain. he certainly does hold a good opinion of himself, and he has a right to. a boy who goes into a bank at twelve as he did and before he is seventeen cleans up $ , is hardly to be rebuked for considering that he is better fitted for the financial game than most. he knows life, he knows men. he has made and lost fortunes and is not afraid of being "broke." that experience has been his repeatedly, but always he rose again. his brains, energy, and daring would cause him to rise anywhere. had he been given birth in a south american republic, the dictatorship would have been his inevitably. lawson was born a money-maker, but he is a great deal more than that. he is a many-sided man, interested ardently in lots of things to which the ordinary money-maker is oblivious. he is very, very human. he has a soul. although he is raining blows on important men, who are not accustomed to being treated with disrespect--although he is charging them with crimes, and hopes, i should say, to drive them out of the country or into the penitentiary, he speaks of some of them with the greatest kindness, thoroughly understanding their good personal qualities. the wonderful rogers he denounces h. h. rogers, for example, as a robber, a criminal, and he said to me: "rogers is a marvellously able man and one of the best fellows living. if you knew him only on the social side, and knew him for years, you couldn't help loving him. he is considerate, kindly, generous, helpful, and everything a man should be to his friends. but when it comes to business--his kind of business--when he turns away from his better self and goes aboard his pirate brig and hoists the _jolly rover_, god help you! and, then, as a buccaneer you have to admire him, for he is a master among pirates, and you have to salute him, even when he has the point of his cutlass at the small of your back and you're walking the plank at his order. rogers is wonderful. he is one of the most prolific human creatures i have ever met; prolific in thought, in devices--and i've been at the game a long time now and ought to know. "don't think me egotistical, but i can't help looking under the surface and going to the bottom of things. so i learn more about men in wall street and what they are at than most. this is my thirty-fourth year of sixteen and seventeen hours a day and three hundred and sixty-five days in the year, and i have seen them all come and go. i _am_ with the third generation of my time now. in such matters i feel somehow that i'm about three hundred years old. "men like rogers are all very good fellows. they are genial and tolerant in their judgment of others. yes, they are mighty good fellows, until you turn them around and look at their other side. rogers is lovable enough until he touches the other button. then he goes with perfect ruthlessness for what he wants. and yet, though you are his victim, you can't bring yourself to hate him. after he has thrown you down and taken all you have and you turn yourself over and find the dark lantern has disappeared, and you hear him going up the lane, you pick yourself out of the gutter and admire the skill with which he did the job. if you could stand it, you would almost whistle to have him come back and do it over." "it is easy to see," i said, "by what you write of mr. rogers in your magazine story, that you were fond of him and gave him the highest rank for ability, but just the same you said you had to go on the stand in the gas suit and swear exactly opposite to his testimony. do you charge him flatly with perjury?" "i have put it fifty times in black and white," answered mr. lawson, "that he committed perjury. there isn't any question about it. i produced my secretary's minutes, delivered over the telephone, received by his secretary and afterward confirmed. he confirmed the message to me, called me up and talked it over and did business on that agreement. two men, rogers and myself, followed each other on the stand and made diametrically opposite statements; and neither one of them reserved himself in stating that it was knowledge at first hand. therefore there was perjury." legislative corruption "mr. lawson, the whole country is familiar enough with legislative corruption, so there's nothing new in your charge that the legislature of massachusetts was bought up. but what will attract national notice is the definiteness of your accusation. you charge h.m. whitney, brother of the late w. c. whitney, and one of the foremost business men of your state, with having done the corrupting in order to get through a complete charter for a gas company. now, when you pillory a person of whitney's standing and prominence, as you have done, he has got to do one of two things--either force you to come to the front and compel you to prove the truth of what you say or stand before the public morally convicted." "that's right," agreed lawson heartily. "do you stand ready to prove your charge if he challenges you to do it?" "what else can i do? of course i can prove it. i'm sorry for whitney. he is a good fellow on his personal side, like rogers, but truth is truth." "however used we may have become to buying legislatures, however commonplace it may be, still, when a financially responsible man like yourself gives concrete instance, and is prepared with proofs, the fact is horribly startling to everybody that cares for his country. what is to be the end of this sort of thing--the purchase of the people's representatives by the criminal rich?" "well, you can ask me a question even broader than that. what is going to be the end, not only of such things as i have stated in regard to the corruption of the legislature of massachusetts--and we all admit that the same thing is being done in other states--what is going to be the outcome of this rottenness in connection with the practices in wall street that i am telling about in my magazine narrative in 'frenzied finance'? to answer would be to disclose my remedy--the climax to my whole story. at present i can only say that i make no charges loosely, on insufficient evidence. i state only what i know. i have seen the iniquities worked out. i know that these crimes are being committed every day; that these great financial schemes are carried through, not only by the commission of moral crimes, but legal crimes--crimes for which those participating in them can be held responsible if they are gone after in the right way, and i am going to show the right way. the remedy "i believe that i have a remedy. that, of course, is a tremendous thing to say. i have spent my life on it. i have been waiting for the opportunity." "i may not ask you what your remedy is?" "no, i shall propose that myself when i have laid all my facts about these crimes before the people. i am going to tell them about some startling crimes. all that i have told so far, including the systematic corruption of the massachusetts legislature, relates to the past. that is, the deeds are dead, so to speak. but the crimes of amalgamated, though in one sense they are now past, are yet connected with the present, because amalgamated is alive. the man who was robbed in , in , and has his claim unsettled. that man is alive and amalgamated is a big, living corporation. when i get to that i shall be talking in the present and something is going to be done. "i have the remedy for the whole thing. you will appreciate the largeness of that statement, but i have thought and advised and worked it out. my remedy is based on common sense." "does it aim at any real change in our political system? is it socialistic?" "oh, no; it doesn't mean a turning over in politics. you and i know that the dollar is what is running things in this country to-day, and if you come along with an ideal proposition--a proposition that carries with it a change in our laws or a proposition to have some new laws passed--you might as well say good-by to it, because the fellow whose hundred millions you want to take away is going to say: 'how many dollars does it need to turn that upside down?' and he is going to supply the dollars." lawson's versatility mr. lawson gave me nearly three hours of his time, and during those three hours he was interrupted every five minutes or so by telephone calls. he conducted his business right along, ordering the selling and buying of stocks, making or declining appointments, talking with his publishers, his lawyers, his family, his friends. it would have goaded almost any man into excitement and irritability, but it was all in a day's work with lawson. yet he is not phlegmatic; indeed, he is extraordinarily animated. but it is animation with composure. in a business way there is not a busier man in the country, but he finds leisure for other interests--books, pictures, bronzes, horses. he has a beautiful country home, where he goes daily by special train, and then puts up the bars against business, bores, and all intruders. in his talk with me he ran a remarkable gamut. he spoke of business like the shrewdest and readiest of practical men. then in the midst of some story of stock-market guile, such as he is exposing in _everybody's magazine_, his face, voice, and hands conveyed amusement, anger, disgust. with his good looks and gift of expression he would have made his way to the top of the stage. i do not know if he has done any public speaking. but when he got into the full tide of denunciation of the crimes of amalgamated i regretted that he was not addressing a great audience, for it was real oratory--strong talk, ardent, electric, manly. his eyes flashed, his teeth came together with a snap and he shook both fists under my nose. he has enthusiasm, capacity for righteous wrath, and the spirit of battle. but he doesn't lose poise for a moment. his confidence in himself cheerfulness, gay confidence in his own powers, is his predominant trait. "you are firing hot shot into these people," i said. "they have endless money, and you are in the stock-market, taking chances every day. aren't you afraid they will dig pits for you?" "well, what can they do to any of us in this world except to send us to the poor-house or the grave? i don't fear them. i know them and all about them. you must remember this is not a new occupation with me. for twenty-five years or more i have been in the habit of picking up a brick without looking to see how many corners it had or whether it was round or square and hitting the first head i thought i had a good reason to hit. i have been doing these things regardless of how they liked it. it's upward of a quarter of a century since i had my first wrestle with a corporation in the newspapers. i have tried not to be a common scold and avoided being vicious when i could. i have only attacked when i thought some fellow had done me a deliberate wrong. and when i have felt that way i have started after him. then it has been vicious, hard fighting, you know; vicious, but not malicious. "with the 'standard oil' crowd i have this big advantage--i am only one man, a small target, and it needs a mighty good aim to hit me, whereas they present a large surface and i have only to heave a brick in any direction to break a window. the contest is unequal. everything favors me. my ammunition is the truth." there is cheerful courage for you--more particularly in the case of a man who proclaims from the housetop that there is no limit to the villainy of his adversaries. "mr. lawson," i said, "there are few who would care to be in your shoes--a rich man waging a war of this sort. the chances are altogether in favor of their smashing you financially." "let them, if they can. there are worse things in this life than being smashed financially." mr. lawson's smile was sunny and confident. he is fearless. * * * * * lawson, the man by james creelman from the new york _world_, december , . boston, december th. all through the critical business hours of friday, when thomas w. lawson, master spirit in the present extraordinary war against standard oil finance in wall street, was reported to be locked up with h. h. rogers, generalissimo of standard oil, perfecting the details of a settlement for $ , , --all through that anxious time, when the stock-tickers and newspapers of the country were trying to guess the meaning of mr. lawson's sudden silence and inaccessibility, he was standing in his quiet room in young's hotel, explaining the situation to the public through the _world_. although i sat in the room with him almost from the time that the stock-market opened until long after it closed, not once did mr. lawson show the slightest sign of excitement over market affairs. strong as an ox, clear-eyed, tranquil, smiling, the man who had moved the financial market downward against the will of the greatest combination of capital the world has ever seen, bore himself like one absolutely confident of success. the bunch of blue corn-flowers in his button-hole was not fresher than he, although on the previous day he had fought through one of the greatest battles in the history of speculation, had made an hour-and-a-half speech at a night banquet, had gone to bed after midnight, and risen before five in the morning. in that one day he had forced nearly , , shares of stock into the market in new york. "my one instrument is publicity," he said. "it is the most powerful weapon in the world. with it i have been able to strike with some of the power which eighty millions of americans possess when they are wide-awake and in earnest. "this week's work is only the beginning of a demonstration that the secrecy of the frenzied finance system--under the cover of which the savings of the people gathered into banks, trust institutions, and insurance companies, have been used by the standard oil crowd to rob the people through the stock-market--cannot succeed against publicity. the people only need light to save themselves. "at the beginning of the week i advised the people of the united states to sell amalgamated copper and the other pool stocks. it was the first step in the final realization of plans i had been maturing for ten years. since then, against the whole force of the billions and billions commanded by the standard oil system, amalgamated has dropped from into the 's. i give the people my word, which i have never yet broken, that not once in that time have i sold a share of amalgamated stock. not only that, but i have actually bought large blocks of amalgamated in order to steady the market and prevent too great and too sudden a panic, so that my friends everywhere might be able to get out without complete ruin. but for that i believe we would have had a panic greater than the northern pacific crash. "i simply went out into the public square and told the people the truth. i was in a position to tell the truth. i knew the methods by which they had been robbed. i knew that ruin was staring them in the face unless they acted quickly. spent $ , advertising "i advertised the fact over my signature in the newspapers of new york, boston, chicago, los angeles. i cabled the advertisement to london. all this cost, with incidental expenses, something like $ , . "the frightened leaders and agents of the 'system' spread reports that i was in league with the leading plungers and manipulators of wall street, that i was making a mere stock raid, that i was trying to 'shake down' mr. rogers. the truth is that i have no partners. not a soul knew my plans until my first advertisement appeared. i have no price, for there can be no peace now until the whole rotten scheme of frenzied finance is smashed and things are brought back to their natural honest level. i am in deadly earnest. no man knows better than i do how great a service i am rendering to the american people." mr. lawson stood squarely upon his heels, the incarnation of strength and courage. the square head, high and wide at the top, the long line of the jaw and broad, fighting chin, big, blue-gray eyes, the big, flat teeth, the strong nose, large firm mouth, sinewy neck, hairy hands, broad, deep chest, powerfully curved thighs, and the steady voice--these were eloquent of strength, determination, and concentration. there was a black pearl in his cravat and an almost priceless canary-colored diamond sparkling on his little finger. he wore gray, striped trousers and a black coat and vest, across which was a beaded gold watch-chain. everywhere in his room were flowers, roses, lilies, and bunches of the famous lawson pink, the flower for which he once paid $ , . the man whom i had expected to find haggard, pale, wild-eyed, and excited, in the centre of a nervous hurricane, was rosy-cheeked, cheerful, and apparently as free from care as though he had never heard of wall street. he spoke rapidly but in an even voice, occasionally pacing the floor and sometimes gesturing or setting his hands firmly on his hips. he answered questions promptly and with an almost boyish appearance of frankness. it would be hard to imagine a more masculine, compact, and concentrated personality. this is the man who left school in cambridge at the age of twelve, walked into boston with his books under his arm, and secured a three-dollar-a-week position as an office-boy almost on the very spot where, after thirty-six years, he has worked himself up into a position from which he feels able to captain the fight against standard oil and its allies. he owns a palace in boston filled with works of art; he has a six-hundred acre farm on cape cod, with seven miles of fences, three hundred horses, each one of whom he can call by name; a hundred and fifty dogs, and a building for training his animals larger than madison square garden. some of his horses are worth many thousands of dollars apiece. even the experts of the german government who examined dreamwold the other day were amazed at its costliness and perfection. within forty-eight hours mr. lawson wrote and published a large illustrated book analyzing his farm and gave it to his german visitors as a souvenir, after organizing for them a horse show that overwhelmed them with surprise. he built the yacht _independence_ at a cost of $ , , and when it was shut out from the america's cup race smilingly threw it on the scrap heap. he established a great racing stable, and when tired of playing with it, broke it up. he went to kentucky, and the day before a great trotting race bought boralma for $ , . his pride was aroused by the fact that the betting was against his trotter. he gave $ , to a friend to sustain boralma's reputation in the betting and won $ , . and yet he claims that he has never been seriously interested in betting, and that his winnings on boralma were simply an accident. that $ , pink but it was the purchase of a pink carnation, wonderful in color and vigor, which had been named by a boston experimental florist after mrs. lawson, that made mr. lawson's name known all over the world. thirty thousand dollars for a pink! the news was spread broadcast, and printed in the newspapers of all countries as an illustration of the vulgar extravagance and folly of an american millionaire. mr. lawson explained that incident while i was with him, and his explanation threw a new light upon his character. he bought the flower originally as a matter of sentiment, but the sum he offered was comparatively small. mr. higginbotham, of chicago, bid $ , for the lawson pink. when he heard this news, mr. lawson sat down with a florist friend and figured out the possibility of the new flower as a business investment. he closed the matter in a few minutes by paying $ , . some time later on the florist bought back the right to the lawson pink for $ , , and gave mr. lawson, in addition, $ , profit, according to agreement. a curious evidence of this man's astonishing coolness is the fact that, at the very time when the market was closing on friday, when it was whispered all over the country that he was arranging terms of peace for the standard oil with mr. rogers, mr. lawson was actually explaining the peculiar and beautiful qualities of his favorite flower. a reason for his last attack "but if amalgamated copper shares were worth $ when you were market manager for mr. rogers and his friends, how is it that they are not worth that price now?" i asked. mr. lawson leaned against the edge of an open door and thrust his hands deeply into his pockets. "i have tried to make that plain to the public," he said quietly. "the other day mr. rogers's lawyer was trying to get me to stop. i told him that i intended to force the standard oil crowd to put the price of amalgamated copper back to $ , at which i advised my friends to buy it. he said that the stock was not worth $ . i asked him how he knew. he answered that mr. rogers, mr. stillman, mr. rockefeller, and the other fellows in control had discovered that they had been deceived when the property was bought. they did not consider it worth more than $ a share. "that settled it in my mind. i appealed to the public to test the situation. i advised them to sell amalgamated at once and keep on selling. if it was worth $ , the men in the 'system,' having billions of dollars behind them, would buy it. if it was worth only $ a share, then the price must fall to that point in the end. it was simply a question whether the public could unload on the standard oil crowd before the 'system' could unload on the public." "then you caught the leaders of standard oil at the psychological moment." mr. lawson's smile was beyond words to describe. "that partly explains the crash," he said. "they were ready to unload on the public, but the public moved too quickly. publicity destroyed the one great weapon of the standard oil men, which is secrecy. i had been tricked and deceived, and those who were responsible had used my name to deceive and trick the public. i got out into the open and laid the plot bare. i had been working up to that point for many years, always waiting, waiting, waiting for the day when i could begin a work of reformation in behalf of , , of people. "i know my game. i have stood here in boston for thirty-six years studying man and his ways. i have no false conceptions of my own strength. i know, and i have known all along, that to win against a system backed by billions of dollars working in the dark and controlling largely the law-making powers of the nation, i must have the people with me. my articles in _everybody's magazine_ were simply in preparation of the public mind for the practical demonstration which i have made this week, that the whispering manipulators of wall street will not buy at $ a share stock which they were selling to the public at $ a share. "the standard oil interests came into my world simply because they entered boston to control gas affairs. they wanted to run their automobile down a particular road, but they found a fellow standing in the middle of the road. they did not dare to run over that fellow, as little as he was, because he warned them that he had in his pocket a stick of dynamite that would blow the machine up if it passed over him. mr. rogers is a really big and brainy man. he saw and understood the situation. he offered to take me inside of his secret lines. his independence "it is said by my enemies, and they are many--and some of them are crackajacks, i admit--that i am a squealer, that i have peached on my pals. that is absolutely untrue. from my boyhood up i have always insisted on being free and independent. i have punched a head when i thought it needed punching, without asking whose it was or what the consequences would be. but i have never consciously told a lie or violated a confidence. the newspaper files will show that when i made my deal with the standard oil people, i publicly announced that i had entered into a secret agreement with them. that brought a hurried call from mr. rogers, who wanted to know what i meant. i told him, as i had told him before, that i had to work in my own way, that my methods were open and above board, and that i could not work successfully unless i was free to do things as i thought they should be done. "that was my arrangement with standard oil. they had a great chest, and the whole method of the 'system' was to prevent any one from getting a peep at that chest save as one of them and on their own terms. i refused to be bound by their code. i told mr. rogers again and again that everything i learned as the market manager of the standard oil interests i felt free to use publicly at any time. mr. rogers again and again assured me that this was fully understood. the remedy "all through that time i had, deep down in my heart, the plan which i am carrying out now. each day brought me nearer to the day when i would expose the whole system of fraud to the public. having that idea always present with me, i was careful to avoid deals or partnerships which involved any loss of independence to act when the day for action came. i have been worth as much as $ , , , and i have lost as much as $ , , . but never have i altered my purpose to awaken the public to a realization of the great crimes committed against them in the name of finance. "if the people will stand by me, and i have always been open and honest with them, america will witness a great transformation. with an honest and courageous president in the white house we shall see whether the 'system' will be able to use the fiduciary institutions of the country for piratical purposes. the fall in the price of amalgamated and other pool stocks is only a bubble on the surface. the final revelation, and the final solution, are yet to come into sight." just then the telephone bell rang and mr. lawson put the receiver to his ear and laughed as he listened. "no," he answered softly, through the instrument, "i am not locked up with mr. rogers, but with a man who has more power." then he turned to me, rocking back strongly on his heels and clasping his hands behind his square head. "i meant that," he said; "there is more power in the pen of one honest writer in the service of an honest, fearless newspaper than in all the wealth and cunning of the 'system.'" the munroe & munroe episode there came a time in the first twelve months of my "frenzied finance" crusade when people rather took the attitude that i was exaggerating conditions and that neither wall street nor the "system" was so bad as i had depicted them. about this time, following the so-called lawson panic, occurred the munroe & munroe _esclandre_, the details of which plainly showed eminent financiers in the vulgar business of stock-washing. i frankly treated the subject in _everybody's_, and as it is part of the history of the movement, i reproduce the passage: the average man is prone to lose sight of perfidy in magnitude and to say, when he hears all the facts: "at least these rascals hunt big game." i wish to say here that such distinction is undeserved. the "system" is omnivorous. its insatiable maw yawns as greedily for the ten-cent pieces of the people as for the thousands of the larger investor. it is as avid and relentless in devising ant-traps as elephant-snares. there fell into my hands recently certain valuable documents in the meanest of contemporary swindles, which reveal the connection of the national city bank, certain of its officers and other important financial interests, with a plot to fleece the fag ends of the public. the details of the munroe & munroe-montreal & boston conspiracy have been widely published, and the world is well acquainted now with the two munroes, graduates of a "gents' furnishing-goods" shop in montreal, introduced into high finance in new york, organizing with the assistance of the great rockefeller-stillman-rogers bank a copper corporation with shares at a par value of five dollars. there never was such barefaced exploitation as was used on behalf of this proposition. it was advertised as a bonanza; investors were guaranteed against loss by an assurance that their stock would double and treble in price, and that the company would stand ready at all times to buy back shares at cost. the intention was plainly to entice into the montreal & boston people of very limited means, who could ill afford to lose their savings. the sudden panic, brought about by the warning to the people of the traps that were being set for them, caught napping many of the "system's" votaries, large and small, and before they could get their different devices even-keeled from the shock caused by that single blast of truth, the public got a peep 'tween decks into the machinery. among those whose port-holes were blown wide open was the munroe & munroe-city bank-montreal & boston outfit, whose scheme went down like a card-house in the blow. a receiver was at once appointed to take care of the débris. this mishap revealed an amazing condition of affairs. with only $ , capital, munroe & munroe had arranged with the great national city bank to honor their checks for immense sums every day, the proceeds being used to carry on a series of fictitious transactions in montreal & boston stock for the purpose of beguiling the public into purchasing it. the affair was a ten-days' wonder, and was finally squelched by the great bank's throwing over its vice-president, archibald g. loomis, who had bravely shouldered the responsibility for the transaction. at writing, two professional gamblers, who seem to have been the principal victims of the underwriting end of the swindle, are being settled with, and the whole affair will soon be buried from public gaze. the episode was, on the whole, so foul in its revelation of greed that even wall street was horrified--not at the arrant double-dealing exposed, but that the "system" should descend to such vulgar malpractice. the documents now in my possession, which i shall publish later in my story, include the original underwriters' agreement, which, at great cost of time and money, has so far been kept from the public, and they show some of the greatest bankers in the land deliberately planning, by the use of fraudulent papers and bogus agreements, to beguile investors to adventure their money in a scheme the sole purpose of which was the enrichment of its organizers. the whole performance reveals a depravity so profound and a greed so heartless that the people may well tremble for the safety of their savings intrusted to the custody of men of this type. it also proves my contention that the "system," while depending on burglary for its largest returns, does not despise the small profits of the pick-pocket. footnotes: [ ] groups of stock-exchange members each day appear to buy from other groups great quantities of shares of different stocks at advancing prices. in reality all the brokers--the ones appearing to buy and those who sell to them--are in league with each other, and none of the transactions is actual. the performance bears the same relation to legitimate stock-exchange trading that the purchase and sale of a gold brick among confederates at a circus do to the genuine work of the gamblers and pick-pockets who are really attending to business around them. on certain days in the months i refer to, when the official records of the stock exchange told that one and a half million shares had been bought and sold, and prices had advanced until the aggregate increase in the worth of the stocks dealt in amounted to hundreds of millions of dollars, not more than a few thousand shares of real stock changed hands. the rest was barefaced fraud for the purpose of deceiving the millions of investors and speculators throughout the country who are dependent upon the daily press and "market letters" for information in regard to investments for their savings. [ ] arthur mcewen and james creelman are among the strongest and ablest of american newspaper writers. their names are not as familiar to the readers of magazines as some others, but they are, perhaps, the most highly paid men in journalism to-day, and they have a well-earned reputation for independence and personal integrity. mr. mcewen, who is now one of the editors of the new york _american_, is known throughout the country as a fearless exponent of corporate villainies. mr. creelman is a distinguished member of the new york _world's_ editorial staff, and has interviewed more of the world's great men than any other journalist living. from their standing in their profession, their well-known hatred of hypocrisies and shams, their wide experience in estimating men of all degrees--the verdict of mr. creelman and mr. mcewen, as set forth in their papers, should be conclusive. iii explanations the revelations i delivered to the public in my story of "frenzied finance," together with the accompanying expositions of insurance and other rottenness in the "critics" department, were not accepted without protest from my correspondents. though the majority of the letters that came to me in shoals from all parts of the country have been generous in their appreciation of my work, many have seriously taken my methods to task and dubiously questioned my motives. the most salient and satisfactory expression of these doubters was a letter that came to me from a new york banker, to which i replied at length, for it afforded me the opportunity to get before my readers in general many matters about which explanations seemed due them. the letter was as follows: new york. _dear sir_: i have read all that you have written in _everybody's magazine_, and have been unusually interested. if you will consult the amalgamated subscription list you will see my house is down for quite a large amount. for this reason and others, and as an old member of our stock exchange, i naturally follow such writings as yours. at the beginning i agreed with most bankers in believing that you were actuated by a desire to get even with mr. rogers, mr. rockefeller, or mr. addicks; but as your tale progressed i thought i perceived a sincere desire to carry out some genuine work of reform in the system of conducting the stock business; then when you began your advertising work last december, i shifted again and felt that your efforts were probably for personal gain. since then i have noted your every move with an acute interest, for i became convinced that you were going to work considerable mischief before you got through. of late you have been so bold--and i believe i voice the opinions of the large majority of men connected with financial affairs when i say _dangerous_--that i cannot resist writing you as i do herewith. you advertise through the daily press and in your "critics" pages that you are doing all in your power to create unrest and fear among the people for the purpose of frightening them into selling their stocks and bonds, and you go further and openly make the most astounding of statements, the most dangerous and vicious--that you will endeavor to have all the people owning deposits in banks, trusts, and insurance companies withdraw them in concert. i will be frank and state that if i did not know your business career, and had not read your writings, i should dismiss this latter statement of yours by calling on the proper authorities to take cognizance of you as a most dangerous lunatic, but as your business career and your writings show you to be an able financier, a successful business man, an advanced thinker and brilliant writer, i feel that mental derangement cannot be the cause of this remarkable proceeding. therefore i challenge you, as one who professes to be an honest man, to answer at once the inclosed list of questions fully and unqualifiedly in your magazine before you make any more extraordinary and, i believe, perilous public requests; and i warn you that if you do not do so, i shall consider it my duty to make public through the press of this country, and in other places where you have been advertising your vicious theories, that you have not dared to make answer. in other words, i shall, after the next issue of _everybody's magazine_, if it does not contain your answers, publish broadcast a copy of this letter, and in all fairness and sincerity, i warn you i shall not be deterred from doing this by any excuse you may make that my letter was received too late for the july number of the magazine, or that more important matters take up your space. i have, by diligent research, ascertained that you will have at least forty-eight hours from the time this letter is placed in your hands before the section containing your "lawson and his critics" pages is sent to press; or, to be plainer, i can have advertisements inserted in the same section as that containing your "critics" pages if i hand in my copy forty-eight hours after you will have received my letter. therefore you have sufficient time to formulate your answer, and you know as well as i that, in the present excited condition of the public mind, which has been created largely by your public statements, there can be nothing more deserving of space in _everybody's magazine_ than the answers to my questions. you must realize, sir, that in all sections of the country small holders of stocks are not only selling their holdings, but that small depositors in banks and trust companies are already beginning to withdraw their deposits, that already many small banks have failed because of this feeling of apprehension. so far as wall street is concerned, legitimate business is practically dead, and you have, for the time being at least, killed it. i will not add what ill your attacks have worked in the large insurance companies, for it is, i am sorry to say, patent to all that there is but little life-insurance business being done at present by the very large companies, and at best it will require years to live down the unsettlement you have wrought in the people's confidence in this worthy and time-proven institution. these are the questions i want answers to, and answers in keeping with those broad professions of honesty and keen regard for the best interests of the people which you have been making. earnestly and respectfully yours, ---- . do you know economics and finance, money, banking, credits, corporations, and business in their broad relations to the people, the american government, and natural law, and the relation each holds to the other, or is your knowledge confined to the skimming and smattering such as any alert and bright stock speculator would naturally pick up in years of experience as a broker and manipulator? . do you not know that in all times there have been, and must naturally be, very rich men, and that necessarily there can be but very few of these, and that where they are there must be very many times as many poorer ones, very poor ones? . do you not know that there must be billions of dollars' worth of stocks and bonds in america, and that they must not only increase but increase very rapidly, and that their existence instead of being evidence of great evil is proof positive of the great prosperity of the whole country and the whole people, and that it is the sacred duty of all the people down to the very poorest, who own none of these, to guard, protect, and maintain their price, and not the duty of any honest man to destroy or shrink the value of this evidence of real wealth? . do you not know that a large portion of all these stocks and bonds is owned by the masses of the people; that if they should be frightened into selling them there would be no place to put the vast sums they would receive for them, as the banks could not profitably use this cash if it were added to what is deposited now, and that the only sufferers by this frightened and forced selling would be the people whom you profess to be working for? . do you not know that if the people should start on a given day to withdraw their money from the banks and trust companies throughout this country, there would be the worst calamity in this country that the world has ever witnessed; that all lines of business would be disorganized; that the country would be set back a very long time, and that the principal sufferers would be the working people and the farmers, and, in fact, all those classes you profess to be working for; and do you not know that in the middle of this calamity you would probably be lynched and perhaps torn limb from limb by the crazed and deluded people, who would then see the danger of your teachings? . do you not know that the result of the people's selling their stocks and bonds in concert would be a great drop in their price, and that the people's raiding the banks and trust companies of their deposits would also bring about a tremendous drop in the price of stocks and bonds; that the only ones who can possibly benefit are the bears who sell short; that these bears have no legitimate standing in the business world, and should have none, and that in the broadest sense of the term they are not honest men? . do you not know that the greatest institution in this country to-day is life insurance, and that if you disturb the confidence of the people in life insurance their families will be deprived of the greatest source of income at a time when most in need of it? . do you not know that there can be no new remedy for the present condition of affairs, even if it is really as bad as you picture it, and that the only remedy or cure possible is a more honest enforcement of our present laws, a more honest conduct of our present enormous business, and a more intelligent recognition by the working people and farmers of the inevitable natural laws? also that there can be nothing more pernicious than this constant teaching them that their interests are opposed to the interests of the very rich class? . did you not write your story to advertise yourself for the purpose of making money out of the following your disclosures would bring you and for the purpose of making money for _everybody's magazine_? . do you not own the largest part of _everybody's magazine_, and has not your part of the profits received from that source since you began your story been very large? . do you not sell stocks short before each of your advertisements, and are not the press stories and the one now current in wall street that you made over a million dollars in the decline which preceded the appearance of the june _everybody's_, true? . are you going to commit the crime of calling out bank and trust company deposits? . if you make such a call, and it is answered, and there is a destructive panic and a number of the big new york banks and trust companies fail, what will you do? . if the masses should sell their stocks and bonds and get their money, what would then happen? . do you dare say to your readers now and unqualifiedly, that you have a real remedy for the present financial evils, and that it will show when it is given that it is anything more than some new scheme by which you personally are to get the people's money? . do you dare to say now to your readers unqualifiedly that this remedy will show conclusively that it has not been invented since you began your story of "frenzied finance"? . do you dare tell your readers now and unqualifiedly that you personally did not make money out of what you call the "amalgamated swindle"? . do you dare tell your readers now and unqualifiedly that you have not made money, and an enormous amount of it--very much more than all you have spent in connection with your work of "frenzied finance"--out of the people since your story began? i will state in fairness to you before you make answer to the above questions that it is now my intention to take your answers into court in a suit which will be brought, and that if you have made answers different from those you make under oath you will be held up to the scorn of the whole american people. i replied: i admire your smartness. of the thousands of letters i have recently received yours is the cunningest. if i do not answer your shrewd and adroitly put questions in the brief space at my disposal, you will discredit my work. if i take offence at your way of putting your questions, you will have the pretext you are evidently looking for. then, your closing warning is so manly and generous! i must not lie, because, if i do, you will expose me in court! you thought that would make good reading after i had refused to make reply in this issue, and you had advertised your letter. again, you probably figured that as my june chapter was all taken up with my story and there was no room for the insurance article i had promised, i should need all my "critics" space this month for it; so, all in all, i guess you were pretty sure i could not answer your apparently fair and honest questions. i'll disappoint you. if my "critics" pages had actually been on the press at the moment your questions came in, i should have telegraphed the publishers to yank off the plates and hold up the edition at my own expense until i should have had time to polish off your interrogations. before starting in let me say to you that if you will find a way of getting my answers out into the open under oath, i shall consider that you have done me and my work a good turn. question . i _know_ economics and finance, money, banking, credits, corporations, and business in their broad relations to the people, the american government, and natural laws, and the relation each holds to the other--not so well as i should like to know them, but as well as any member of the "standard oil," of the "system," or any one of their hirelings knows them. you have been brutally blunt in putting your questions, so don't accuse me of egotism if i bluntly answer: i know them all, top, sides, and bottom, from thirty-six years' book study of them and thirty-six years' actual experience in the nine-pin alleys where they are daily and nightly set up for the express purpose of being knocked down. i know the relation of each of these important life factors to each of the now-you-see-it-and-now-you-don't jokers of the "system." make no mistake, mr. banker, my knowledge is not "a skimming and smattering such as any alert and bright stock speculator would naturally pick up in years of experience as a broker and manipulator," but the straight brand which the "standard oil" and the "system" so like to impress into their service when they run up against it in their continuous robbing excursions. you may judge that my knowledge is not of the smattering kind when i say that for years, in spite of my refusal to join the band and wear the collar, whenever rogers and rockefeller had a particularly hard nut to crack they called me in to try it on my "_knows_." . yes, i am aware that there have always been, and that there will always continue to be, very rich men, and that there cannot be many of them, and that where they are there must be very poor ones. and i also know that no honest man, rich or poor, objects to the necessarily few very rich ones who have honestly acquired great fortunes as the reward of their own or their ancestors' labors of body or brain in the interest of all the people. don't misunderstand me--no honest man or woman can object to the _necessary_ great fortunes, but all honest american men and women do object, and are getting ready to make their objection heard, to all unnecessary great fortunes, "made dollar" fortunes gained by trick of finance or evasion of law, or the brutal and ruthless stock manipulation of recent years. the sooner the "system" and the other possessors of these "unnecessaries" realize that their doom is sealed and dig for the cyclone cellars, the quicker the american people will get through with the strenuous house-cleaning job for which they are just rolling up their sleeves. . i do know there must be billions of dollars' worth of stocks and bonds in america. i also know that among these legitimate billions of dollars are now mixed other billions of dollars that have no proper title to being, save the greed of the "system." that while the existence of certain billions of dollars' worth of stocks and bonds is proof positive of the great prosperity of the whole country and the whole people, it does not follow that their existence is proof that the hands they are found in are the hands they should rest in. further, i assert that the existence of other billions of dollars' worth of stocks and bonds is proof positive that the laws have been violated and that the great prosperity of the whole country has been used as the excuse and motive of this violation, and declare that, in my opinion, it is the duty of honest men and women to do all in their power to shrink fictitious securities and to destroy them; and, further, that it is the duty of all honest men to lend a hand so that the legitimate billions of dollars of stocks and bonds may be returned to the hands of those who are legally entitled to them. . i am aware that the people owned billions of these stocks and bonds three years ago, and also that if they had then sold them back to the "system," even at the price they had paid for them, and had kept their money in the banks without interest, or had even buried it in the ground or kept it in their stockings for a year, they would have been able to buy back for fifty cents on the dollar what they had sold the "system," thereby making for themselves billions of dollars and impoverishing the "system" by just as many billions as they had made. you know that the "system," after it had loaded up the people with its stocks, "shook them out," and thereby gathered in half the billions of money the people had paid for what they bought. let me illustrate. the people bought of the "system" for millions of dollars the steel trust stocks and bonds, and after the people had the "system's" chromos and the "system" had the people's millions of savings, the "system" caused the price to be cut in two. then it bought back the steel trust's chromos for millions, thereby transferring from the people to the "system," in this one instance alone, millions. and, further, after the people had been shaken out of their stocks and bonds and the millions of their savings--in the steel trust alone millions--the "system," having these securities in its possession, began to inflate prices for the purpose of again selling to the people; in december last they had inflated the prices of billions of stocks and bonds to their old false figures, and were then preparing to unload them on to the people; in the case of the steel trust stocks and bonds the price had again mounted to millions. in compliance with my warnings the people began in december last to unload upon the "system" the billions they then held at these inflated prices, and they have continued to do so ever since, and have suffered no hardship by the forced selling into which i have frightened them. i further know that they will find good use for this money at a later period in buying back from the "system" these same securities at their true worth; in other words, that before i am through with my work they will be able to repurchase from the "system" for millions or less the steel stocks and bonds now selling for millions. . i do know that one of the most colossal impositions ever perpetrated on the whole people of any nation is that formula which the "system" has so insidiously instilled into the minds of the american people during the last century, to wit: that they must do nothing which might disturb the "system" in its use at two to four per cent. per annum of all the people's savings, deposited in banks and trust companies throughout the country; that if they do, there will be a wall street panic, and thereby all the people will be made to suffer great hardships. on the contrary, i know that if the people do what is necessary to shake off the "system's" strangling grip upon their savings, the "system" will suffer death, and everlasting profit and advantage will accrue to the nation. though it be necessary for the people to withdraw from the banks and trust and insurance companies their billions of savings, and even though such withdrawal must cause a temporary business crash and the failure of many of the financial institutions of the country, the sacrifice would be many thousand times compensated for by the benefits that would follow in its train. i will go further and state that if such radical action should become necessary, the people should willingly face the failure and destruction of one-half the banking institutions of new york if by doing so they could absolutely destroy the "system." but do not misunderstand me--the simultaneous withdrawal of the people's savings from the banks and trust companies throughout the united states would be such a terrible temporary hardship that nothing could justify it but the absolute necessity for uprooting and eradicating the "system"; i should not hesitate, however, to face the full responsibility for such a move if the "system" cannot be destroyed in any other way, even though i were sure i should be lynched or torn limb from limb by those people who have been crazed and deluded, not by my teachings, but by the damnable doctrines and acts of the "system" and its votaries. . i am well aware that the result of the people's selling their stocks and bonds in concert and the withdrawal of their savings would bring a tremendous drop in the price of stocks and bonds. _this is what i am working for_, but i am proceeding in such a way that i believe when the crash comes the people will be free from their stocks and bonds. your proposition that the bears will be the only beneficiaries i regard as rot; on the contrary, i know that the people will benefit a dollar where the combined bears will benefit a cent. pardon my giving you here an a b c lesson in finance--i know a bear is no more dishonest than a bull. when a man tries to put up the price of stocks and bonds, he is a bull. when he tries to put them down, he is a bear. if a bull tries to put prices to a point of fair worth, he is an honest bull. when he tries to put them any higher than fair worth, he is a dishonest bull, for he does so for the purpose of obtaining from the one to whom the stocks are sold a greater gain than he is entitled to, and always by false pretences. when a bear tries to put stocks from an artificially high price to their fair worth, he is an honest bear. when he tries to put them any lower, he is a dishonest bear, because he does so for the purpose of purchasing from their owners stocks or bonds at less than their fair price, that he may pocket the difference between the artificially low price he makes and the higher price at which he has sold, and this profit is procured by false pretence. you, and thousands like you, should get out of your heads the false notion that a bear is necessarily less honest than a bull. . life insurance is a great institution, and should be a sacred institution--_provided_ it is honest life insurance. he who would, for any dishonest reason, disturb the people's confidence in honest life insurance i consider a criminal; but i am sure that one who, having the power to awaken the people to their peril, yet stands silently by and suffers them to be bled and plundered in the name of life insurance is even a greater scoundrel. _what is life insurance--honest life insurance?_ a contract between two parties by which the first agrees, in return for a certain fixed charge per year, to pay to the family or other beneficiary of the second party a stipulated sum in case of said second party's death; but it is plainly understood between them that the annual charge exacted by the first party shall be only such an amount as will insure the carrying out of the contract, plus whatever is the legitimate expense of conducting the business connected therewith. under no circumstances would i say aught in disparagement of such a contract, but if i did not lift my voice against such life insurance as is carried on by the mutual, new york life, and equitable companies, knowing what i do know, i should be a deep-dyed scoundrel. life insurance as it has been conducted in the past and as it is being conducted at present by these three companies, i regard as the most damnable imposition ever practised upon the people of any nation. under the pretence that it is necessary to enable life-insurance companies to carry out their contracts, two million policy-holders are annually tricked into contributing from their savings sums which not only insure the performance of these contracts but enable the officers and trustees--mere servants of the policy-holders--to maintain the most gigantic stock-gambling machine the world has ever known. through its operation the companies themselves not only make and lose millions at single throws of the dice, but the bands of schemers whose services it is pretended are essential for the transaction of the life-insurance business filch for themselves huge individual fortunes. piled on to these excessive charges are additional amounts which enable these tricksters to maintain palaces, hotels, bars, and every conceivable kind of business, to pay for armies of lackeys and employees and private servants of officers and trustees, and for debauches and banquets which vie with any given by the kings and queens of the most extravagant and profligate nations on earth; in addition, enough more to accumulate huge and unnecessary funds--which are juggled with for the enrichment of individuals. such wicked exactions and shameful extravagances constitute an imposition of the most wanton and criminal character, and those responsible should be sent to state prison for life, as too vicious and dangerous to be allowed freedom among an honest people. i would say further that the trickery and frauds that have been practised by the new york life and the mutual companies are fully as bad as, if not worse than, those of the equitable, now publicly confessed. . it is difficult for me to answer such a question--just as difficult as it is for the mature man to answer the question of the child, "if the moon is made of green cheese, what kind of rat-traps do they use in heaven?" the "system" for forty years has taught the people that it is impossible for them to improve upon the conditions which the "system" has moulded for its own plundering purposes, yet i have a simple remedy, readily understood, which i believe the people will eagerly embrace as soon as it is given them. this remedy is adjusted to laws now in force; and when it is put into operation those who have acquired enormous fortunes by trickery and fraud will find themselves deprived of their ill-gotten gains by the simple application of natural laws to which the said remedy affords leverage and action. all honest people, the richest as well as the poorest, will be benefited in fair and just proportion. once the remedy is in force, it will be out of the power of the trickster and the thief to accumulate overnight scores of millions, although the edisons, the stephensons, the morses, or any man who by brain or body does those things for his fellows which they cannot do for themselves, will continue to receive that great reward which the whole people in their wisdom and generosity decide is fair for exceptional services; the common miner, too, when he discovers the hidden gold, silver, or copper in the earth will obtain the same return that he is entitled to under to-day's laws, or even better. . this story is written, as i have explained so many times before, simply and solely in performance of my duty toward my country and its people and without hope or desire for reward of any kind. . i do not own any part of _everybody's magazine_, nor have i any money interest in it, directly or indirectly. i have not made a dollar from _everybody's magazine_ directly or indirectly, but, on the contrary, have spent hundreds of thousands of dollars to assist in getting my story into the hands of the people. . before my first advertisement in december, at a time when i did not know how the people would take it, and when i did not know whether stocks would go up or down, i took my chance in the open of making loss or profit and did sell large amounts of stock short, making some hundreds of thousands of dollars profit; but when in the middle of the disturbance i saw how seriously the people took my message and that there might be a great panic, i began to buy, and thereby sacrificed a million of profits. and, since then, that is, after i realized that the people would respond to my warnings, i have refrained from going short in advance of these advertisements, because i desire to keep strictly apart transactions conducted for my own personal account and operations i am directing for the benefit and safeguarding of the public. i am determined to use every means in my power to keep the people out of a dangerous market and to concentrate the billions of stocks in the hands of the "system," and am not actuated by any desire or necessity for gain. already the "system's" votaries are tottering under their load and it is certain that in the coming months they will employ every possible means to persuade the public back into their trap. more than ever, then, is it necessary to be firm against their blandishments, for when the crash comes it will be a terrific one, and those who have great holdings of speculative securities will surely find their values cut in half. since my first public announcement i have not made enough out of market operations to pay even the expenses of any particular advertisement. . i shall not commit any crime; i have too much veneration for the laws of our country; although let it be understood that i may, at any time, commit what some hireling judge of the "system" may call a crime, _for i am going to call upon the american people to withdraw their deposited savings at the proper time; and the proper time will be that time when i am absolutely sure they will withdraw them. but i shall not resort to this last move unless it is certain that the "system" cannot be crushed in any other way_. . i will first thank god and then proceed to assist in burying the corpse of the "system." . the "system" will be brought to its knees; stocks will fall to figures representing their legitimate values and the public will reinvest its money therein, and thus regain control of the great transportation and industrial interests of the country which the "system" has filched from them. . i say unqualifiedly to the american people that this remedy of mine will, when adopted, correct the greatest evil in the financial system of this country. that while it is simple it is absolutely new, and that neither i nor any one else can possibly benefit moneywise from it except in the some proportion as all other people in the country benefit. . my remedy was worked out before , and in that year, one year before i had met any of the "standard oil" people, it was so far perfected that in london i laid before joseph pulitzer, then and now owner of the new york _world_, the identical first printed plan that i will print in _everybody's magazine_ when i judge the people are ready to receive it. . i unqualifiedly say to you and to the american people that i lost millions of dollars more in what you call the amalgamated swindle than i made, and that i lost trying to make good my word to the amalgamated subscribers. . i have spent much more money, hundreds of thousands of dollars more, in getting this work, "frenzied finance," into the hands of the people than i have made through anything in any way connected with it. the crime of amalgamated many of my readers had difficulty in following the intricacies of the great crime of amalgamated and i had many letters desiring further explanation of that act. peake's island, me., may , . t. w. lawson, esq. _dear sir_: have just finished june number of "frenzied finance." you are running a "primary class" of high finance for millions; have been able to follow you up to this number, and my apology in writing to you is to state that i don't understand this lesson and i believe i am of the average intelligence of your readers. i am not clear on the following points, and if you can take the time and have the desire to do so, i should be glad to have you set my gray matter moving in the right direction. . why should subscribers think that a company, who had as good a thing as advertised, would sell the entire stock, thus giving an opportunity to any financier to gather in fifty-one per cent. and practically take away its good thing? . how would it have been possible for you with the $ , , from the shares it was originally the plan to sell to protect those , shares on a bear market with , shares in messrs. rogers and rockefeller's possession? . why would it not have been a crime to dispose of only , shares when the whole , were advertised? . messrs. rogers and rockefeller were the amalgamated company after purchasing the capital stock from the office-boys, were they not? . if rogers and rockefeller paid for their shares, what became of the amalgamated company's $ , , secured by sale of stock? these may sound foolish to you, but i'm interested and should like to understand. permit me to state that i admire your pluck and ability and wish you success in your remedy, whatever it may be. respectfully yours, (signed) ---- i replied: your first question is a hard one to answer, as it goes to the very foundation of "the stock-market." in the ideal operation of stock-markets, owners of valuable properties should always allow the public to join in their "good things" at fair prices, because all who thus participated would make money and would be ready for the next "good thing," and so on to the end. on the other hand, if the public were only invited into the "bad things," in time they would not come in on anything, good or bad, and there would be no stock-market. the foundation of stock-markets, like all other kinds of markets, is the public interest therein--for it is the people who own the great bulk of the money in the country, and its aggregate is far beyond the amount that the very few rich men possess. stock-markets are no different, at least should be no different, from horse-markets, boot and shoe markets, or mowing-machine markets. the horse-markets whose dealers sell to their patrons good horses at fair prices, succeed; those whose dealers offer only the "culls" and "no goods," fail. . had i been able to keep , shares in the hands of rogers and rockefeller with but , in the hands of the public, rogers and rockefeller would never have permitted the stock to go down, because they would have lost $ , at every point drop and by "bearing" they could make only $ , a point drop. stock schemers never "bear" a stock of which they own a large majority and the public a small minority. . it would have been no crime if rogers and rockefeller had subscribed honestly--that is, according to the advertised terms--for enough to secure the stipulated , shares, because there was nothing in the conditions which excluded them or any one from subscribing. the crime was in the way they obtained the amount thus retained and in their "intentions" subsequently executed, also in the selling of $ , , worth of the stock when they had pledged their word solemnly to me in my capacity as protector of the people that they would sell but $ , , . . yes. . the office-boys, equipped with the check of $ , , provided by the national city bank, were organized into a corporation and turned over to the treasurer of the new corporation the $ , , check in payment for the capital stock of the company. the company then turned this same check over to rogers and rockefeller for the mining properties comprising the consolidation, for which rogers and rockefeller had paid thirty-nine millions of dollars; then rogers and rockefeller paid back to the office-boys the seventy-five-million check and received from them the seventy-five-million stock. the check was returned to the bank by the office-boys, who stood where they stood at the beginning of the transaction, and canceled. thus rogers and rockefeller at the close of the transaction had in their possession the entire capital stock of the amalgamated company. * * * * * another correspondent had even greater difficulties with the problem: may , . mr. thomas w. lawson, boston, mass. _dear sir_: the writer of this letter has had much experience in literary matters, but does not remember ever reading after any one who could hold his interest as you can. he is an author himself (though not so well known as you), and feels some little ability to measure and appreciate not only literary worth, but the intentions of the author in hand. from the "internal evidences" alone he has a settled conviction that you are perfectly honest in this crusade, and from the bottom of his heart wishes you godspeed. a few points are certainly not clear to the ordinary reader. closely as i have followed you i cannot see some things as you think they should be seen. for instance: . just why were you so fearfully wrought up at the thought of the public's getting ten millions instead of five? if you had such confidence in the gigantic possibilities of amalgamated, why should you not have been glad to let the poor suffering public have ten millions, or twenty millions, instead of a paltry five millions? was this hydrophobia of yours at the mere suggestion prompted by a perfectly pure or by a selfish motive? at the first did _you_ not plan to let the public have very much more than this? was it not your thought, i mean, that the public should be in the thing about equally with you promoters? then why not welcome the suggestion of rogers? i do not understand this at all. . about that "bogus subscription." did you not all plan to do about the same thing? did you not intend to have rogers put in a towering subscription, large enough to cover the situation, and to permit the bank to reject all above the five millions to be allowed the public? i believe _you_ expected rogers to make it "genuine" by really putting it in in time, and by laying down his check for the five per cent.; but, as you fully expected to realize on the thing so quickly, did you not understand that the whole of this "subscription" would not have to be paid at all, and that your "check" was after all only technical? if i am right, how did this differ so greatly from what rogers did? was not your avowed object to cheat the public into thinking they were to be allowed to subscribe to seventy-five millions, when actually you were only going to let them subscribe to five? and if, on that last day, you knew the subscriptions were pouring in in such a flood, and knew that offers of a big premium were then being made, how in the world did the idea of letting the outside public have twenty millions or so (on which to immediately realize this premium) seem so abhorrent to you, when you professed to be looking after their interests? the more i think of these points, the more mixed i become, and i think many, very many of your readers are in the same boat. your illustration of the horse-race does not clear the matter a particle. it certainly does appear on the face of the facts you present that the people who did not get any stock were the lucky ones, whether rogers's precise action was criminal or not. you say yourself that it would have been good all round if you had pricked the bubble that night--that is, if you had then and there prevented anybody from getting any premiums, from buying or selling a share. then in the name of reason, why was it not really good for those who were rejected, that they were left out? . now, in plain language, brief and straight, what would you have deemed the right thing, that night at the bank? with hundreds of millions subscribed, how many shares would you have thought the public should have? how many do you think now? and how should the balance have been kept for you promoters? perhaps in answering this you will make it plain. sincerely yours, (signed) ---- in answer to question , i said: all my dealings had been conducted on the basis of selling to the public a fair amount of the first section of the consolidation and i had no tremors as to consequences. i knew that whatever allotment was made them would be worth all they were to pay for it, for i was personally familiar with the value of the properties of which the section was to be composed. when mr. rogers, as i have explained in my story, substituted, under circumstances that rendered me defenceless, an entirely new set of mines for those programmed for the first section--properties about which i knew only what he told me--from that time on my only guarantee against the jugglery and fraud i feared was to keep in the hands of rogers and rockefeller so large a part of this stock that they could play no tricks on the public without themselves suffering much more severely. if they regarded the stock as so valuable a possession that it was a security to be held as "standard oil," then their attitude to it guaranteed its value, and no harm could come to any one. when, however, they showed a readiness to part with more shares than the number they had promised me they would not go beyond, my fears were aroused, for all the contingencies i dreaded at once became imminent. besides, such action was proof positive that in their opinion the mines were not worth the price at which they were selling them. later on, when i had practical evidence that they were unloading and proof positive that they were juggling the stock, i felt certain that these facts constituted proof positive that they had lied to me about the cost and worth of the amalgamated mines. my answer to question practically disposes of part of question , and my replies to the other inquiries above take care of another part. i did expect mr. rogers to make an honest subscription for that part of the stock which we were to retain and which i was doing all in my power to have him retain, not because i desired to hold all of the good thing and so cheat the public, but because i did not think it safe for the public to hold so many shares that it would be to rogers's and rockefeller's interest to "bear" prices later and take shares away from the holders at slaughter prices. in one sense it was not fair to lead people to imagine that they were being offered $ , , of an issue when as a matter of fact they were really offered only $ , , , but if only $ , , were offered no harm could come to them, because every one who got some of it would make a profit, and those who received none would not suffer. steel common and preferred a definite accusation of misrepresentation was presented in a letter that came to me early in the year in criticism of steel facts and figures i had used in illustrating the artificial advance and depression of stocks: cincinnati, o., january , . thomas w. lawson. _sir_: lawson, you are both a fakir and a fool. a fakir because you misrepresent, and a fool because you do not begin to understand the people. when you said the stockholders of the steel corporation lost $ , , , you knew that you lied. because the difference in price of the stock to-day and when it was quoted on the new york stock exchange for the first time in does not approach that amount. i say that you knew this when you made that statement, but you thought and hoped that the general public would not be posted in the matter. the whole substance of your magazine articles has been nothing but half-truths, and a half-truth is worse than a lie. you know that it is to gratify your personal spite, and not to help the general public, that you have engaged in your frenzied writings. the public is wiser than you think, although your conceit has blinded you to that fact. respectfully, f. f. methven. this frenzied nincompoop is evidently ignorant of the fact that , , shares of steel preferred were sold to the public at over $ per share, and that , , shares of steel common were sold at over $ per share, or nearly $ , , , and that months later, when the people were compelled to resell to the "system," they could get only $ for this preferred stock and $ for the common, while the $ , , of bonds depreciated in value over $ , , more. what this critic desired to say was that, at the present price of steel stocks, no such loss as $ , , is shown, which proves my oft-repeated contention--the "system," having "shaken out" the public and acquired their holdings at fifty and ten respectively, is now engaged in putting the price back to the old figure, intending to repeat the robbery process later. a votary of the "system," whom i know quite well, said to me a few weeks ago: "lawson, you keep chasing 'frenzied finance' will-o'-the-wisps while the rest of us are pulling in the dollars, and see where you will come out in the end. look what i've done: i sold , shares of steel common for $ , , . it cost me $ , , . i made $ , , . i then 'shorted' , at $ and bought it back at $ . i made $ , , . i then bought , at . it's now . when i sell out at , i shall have $ , , more, making $ , , , without turning a hair or risking a dollar. with prizes such as these a man can stand a lot of frenzied hard names, can't he?" the remedy as i have explained on another page of the "critics," my remedy cannot be dealt with save at considerable length and with living, tangible illustrations. i have purposely abstained from starting it until i have the american public educated to the point of comprehending its value and appreciating its practicability so far as to be ready to put it into operation. during the year i have had thousands of letters in regard to it, the following being a fair example: topeka, kan., january , . _dear sirs_: i have followed mr. lawson's article very closely and, as i understand it, he intimates that he has a remedy for the rotten condition of affairs now prevailing. what i, and many more of your readers, would like to know is, whether mr. lawson, in offering a remedy, is taking into consideration the , , people of the country who neither invest in stocks nor hold any amount of insurance, or is his remedy meant merely to protect the four million small capitalists from being eaten up by what he terms the "system." it is very evident to some of us that if he cannot show us how to protect the great majority of the people who, although they are not even small capitalists, are the ones who are really footing the bills, his remedy will not be the grand success he anticipates. j. p. ferriter. my remedy will benefit the whole american people. it will help most the man who nowadays in america deserves most to be helped--the producer, who to-day is exchanging the efforts of all his working hours for the bare necessities of himself and family; not those bare necessities which the white slaves of europe are ground down to believe are their only requirements, but those which the free and enlightened american believes, and has taught his family to believe, should be his necessities. it is intended to benefit most the man who has nothing left over after paying his bills saturday night but the terrors of not being able to meet them the coming week. it would indeed be a parody on a remedy if it did not bring relief to this class. next, my remedy will benefit that great middle class whose savings go to make up the billions in the savings-banks, national banks, trust and insurance companies, which are used by the "system" to secure for themselves a hundred, a thousand, and ten thousand per cent. interest on _their_ capital, while the owners of these billions must be content with two and a half to four per cent. per annum; and next, it will benefit that class which possesses large fortunes honestly acquired, inasmuch as it will enable them to know what there is behind their investments. none but those who have plundered the people--acquired overnight fortunes many times larger than any honest lifetime efforts could possibly bring--can possibly be hurt by the application of my remedy. you are right--any remedy which would do other than what mine proposes to do would be a farce. +--------------------------------------------------------------+ | transcriber's notes: | | | | page vi: scheheherezade _sic_ | | page : missing "l" added to "loser" in footnote | | page : guerilla _sic_ | | page : dumfounded _sic_ | | page : villany _sic_ | | page : gayly _sic_ | | page : machiavelian _sic_ | | page : machiavelian _sic_ | | page : "slighest" amended to "slightest" | | page : comma added after "perjury" in footnote | | page : "metres" amended to "meters" | | page : dumfounded _sic_ | | page : opening quotes added to "every one of us...." | | page : millionnaire _sic_ | | page : comma added after "defalcation" | | page : milllionnaire's _sic_ | | page : cohoots _sic_ | | page : "very rich men" amended to "very rich man" | | page : haling _sic_ | | page : corea and porto rico _sic_ | | page : "managment" amended to "management" | | page : "insuarnce" amended to "insurance" | | | | hyphenation has generally been standardized. however, when | | hyphenated and unhyphenated versions of a word each occur | | an equal number of times, both versions have been retained | | (baseball/base-ball; blackjack/black-jack; blacklisted/ | | black-listed; chessboard/chess-board; cooperation/ | | co-operation; downtown/down-town; handshake/hand-shake; | | headlight/head-light; headlines/head-lines; setback/ | | set-back; typewritten/type-written; uptown/up-town; | | viewpoint/view-point). | +--------------------------------------------------------------+ international finance by hartley withers _by the same author_. our money and the state, second impression. s. net. stocks and shares. fifth impression. s. net. money changing: an introduction to foreign exchange, third edition. s. net. the meaning of money. fifteenth impression. s. net. poverty and waste. s. net. war and lombard street. third edition. s. d. net. international finance. s, net. international finance by hartley withers "while man cannot live by bread alone. he cannot go on living, even a good life if he really falls short of bread." prof. j.l. myers. _first edition_ _may_, . _reprinted_ _june_, . preface responsibility for the appearance of this book--but not for its contents--lies with the council for the study of international relations, which asked me to write one "explaining what the city really does, why it is the centre of the world's money market," etc. in trying to do so, i had to go over a good deal of ground that i had covered in earlier efforts to throw light on the machinery of money and the stock exchange; and the task was done amid many distractions, for which readers must make as kindly allowance as they can. hartley withers. , linden gardens, w. _march_, . contents chapter i capital and its reward finance the machinery of money-dealing--lenders and borrowers--capital and its claim to reward--stored-up work--inherited wealth--the reward of services--questionable services--charles the second's dukedoms--modern equivalents--workers and savers chapter ii banking machinery money at a bank--bills of exchange--finance and industry--supremacy of bill on london--london's freedom--the bank of england--the great joint stock banks--the discount market--bills and trade chapter iii investments and securities stock exchange securities--government and municipal loans--machinery of loan issue--underwriting--the prospectus--sinking fund--bonds and coupons--registered stocks--companies' securities--stock exchange dealings chapter iv finance and trade why money goes abroad--trade before finance--prejudice in favour of home investments--prejudice against them--the reaction--mexico and brazil--neutral moneylenders and the war--goods and services lent and borrowed--the trade balance chapter v the benefits of international finance international finance and trade--opening up the world--exchange of products--finance as peacemaker--popular delusions concerning financiers--financiers and the present war--the cases of egypt and the transvaal--diplomacy and finance chapter vi the evils of international finance anti-semitic prejudice--the story of the honduras loans--the problem to be faced by issuing houses--their moral obligations, responsibilities, and difficulties--bad finance and big profits--the public's responsibility chapter vii nationalism and finance dangers of over-specialization--analogy between state and individual--versatility of the savage--specialization and peace--specialization and war--should the export of capital be regulated? chapter viii remedies and regulations regulation of issues by stock exchange committee--danger arising therefrom--difficulty of controlling capital--best remedy is keener appreciation by issuing houses, borrowers, and investors of evils of bad finance--candour in prospectuses--war as financial schoolmaster--war as destroyer of capital--war as stimulator of productive activity index international finance chapter i capital and its reward finance, in the sense in which it will be used in this book, means the machinery of money dealing. that is, the machinery by which money which you and i save is put together and lent out to people who want to borrow it. finance becomes international when our money is lent to borrowers in other countries, or when people in england, who want to start an enterprise, get some or all of the money that they need, in order to do so, from lenders oversea. the biggest borrowers of money, in most countries, are the governments, and so international finance is largely concerned with lending by the citizens of one country to the governments of others, for the purpose of developing their wealth, building railways and harbours or otherwise increasing their power to produce. money thus saved and lent is capital. so finance is the machinery that handles capital, collects it from those who save it and lends it to those who want to use it and will pay a price for the loan of it. this price is called the rate of interest, or profit. the borrower offers this price because he hopes to be able, after paying it, to benefit himself out of what he is going to make or grow or get with its help, or if it is a government because it hopes to improve the country's wealth by its use. sometimes borrowers want money because they have been spending more than they have been getting, and try to tide over a difficulty by paying one set of creditors with the help of another, instead of cutting down their spending. this path, if followed far enough, leads to bankruptcy for the borrower and loss to the lender. if no price were offered for capital, we should none of us save, or if we saved we should not risk our money by lending it, but hide it in a hole, or lock it up in a strong room, and so there could be no new industry. since capital thus seems to be the subject-matter of finance and it is the object of this book to make plain what finance does, and how, it will be better to begin with clear understanding of the function of capital. all the more because capital is nowadays the object of a good deal of abuse, which it only deserves when it is misused. when it is misused, let us abuse it as heartily as we like, and take any possible measures to punish it. but let us recognize that capital, when well and fairly used, is far from being a sinister and suspicious weapon in the hands of those who have somehow managed to seize it; but is in fact so necessary to all kinds of industry, that those who have amassed it, and placed it at the disposal of industry render a service to society without which society could not be kept alive. for capital, as has been said, is money saved and lent to, or employed in, industry. by being lent to, or employed in, industry it earns its rate of interest or profit. there are nowadays many wise and earnest people who think that this interest or profit taken by capital is not earned at all but is wrung out of the workers by a process of extortion. if this view is correct then all finance, international and other, is organized robbery, and instead of writing and reading books about it, we ought to be putting financiers into prison and making a bonfire of their bonds and shares and stock certificates. but, with all deference to those who hold this view, it is based on a complete misapprehension of the nature and origin of capital. capital has been described above as money put to certain purposes. this was done for the sake of clearness and because this definition fits in with the facts as they usually happen in these days. economists define capital as wealth reserved for production, and we must always remember that money is only a claim for, or a right to, a certain amount of goods or a certain amount of other people's work. money is only a title to wealth, because if i have a sovereign or a one-pound note in my pocket, i thereby have the power of buying a pound's worth of goods or of hiring a doctor to cure me or a parson to bury me or anybody else to do anything that i want, up to the buying power of that sovereign. this is the power that money carries with it. when the owner of this power, instead of exercising it in providing himself with luxuries or amusements, uses it by lending it to someone who wants to build a factory, and employ workers, then, because the owner of the money receives his rate of interest he is said to be exploiting labour, because, so it is alleged, the workers work and he, the capitalist, sits in idleness and lives on their labour. and so, in fact, he does. but we have not yet found out how he got the money that he lent. that money can only have been got by work done or services rendered, for which other people were ready to pay. capital, looked at from this point of view, is simply stored up work, and entitled to its reward just as much as the work done yesterday. the capitalist lives on the work of others, but he can only do so because he has wrought himself in days gone by or because someone else has wrought and handed on to him the fruits of his labour. let us take the case of a shopkeeper who has saved a hundred pounds. this is his pay for work done and risk taken (that the goods which he buys may not appeal to his customers) during the years in which he has saved it. he might spend his hundred pounds on a motor cycle and a side-car, or on furniture, or a piano, and nobody would deny his right to do so. on the contrary he would probably be applauded for giving employment to makers of the articles that he bought. instead of thus consuming the fruit of his work on his own amusement, and the embellishment of his home, he prefers to make provision for his old age. he invests his hundred pounds in the per cent. debenture stock of a company being formed to extend a boot factory. thereby he gives employment to the people who build the extension and provide the machinery, and thereafter to the men and women who work in the factory, and moreover he is helping to supply other people with boots. he sets people to work to supply other people's wants instead of his own, and he receives as the price, of his service five pounds a year. but it is his work, that he did in the years in which he was saving, that is earning him this reward. an interesting book has lately appeared in america, called "income," in which the writer, dr. scott nearing, of the university of pennsylvania, draws a very sharp distinction between service income and property income, implying, if i read him aright, that property income is an unjust extortion. this is how he states his case:--[ ] "the individual whose effort creates values for which society pays receives service income. his reward is a reward for his personality, his time, his strength. railroad president and roadmender devote themselves to activities which satisfy the wants of their fellows. their service is direct. in return for their hours of time and their calories of energy, they receive a share of the product which they have helped to produce. "the individual who receives a return because of his property ownership, receives a property income. this man has a title deed to a piece of unimproved land lying in the centre of a newly developing town. a storekeeper offers him a thousand dollars a year for the privilege of placing a store on the land. the owner of the land need make no exertion. he simply holds his title. here a man has labored for twenty years and saved ten thousand dollars by denying himself the necessaries of life. he invests the money in railroad bonds, and someone insists he thereby serves society. in one sense he does serve. in another, and a larger sense, he expects the products of his past service (the twenty years of labor), to yield him an income. from the day when he makes his investment he need never lift a finger to serve his fellows. because he has the investment, he has income. the same would hold true if the ten thousand dollars had been left him by his father or given to him by his uncle.... the fact of possession is sufficient to yield him an income." now, in all these cases of property income which dr. nearing seems to regard as examples of income received in return for no effort, there must have been an effort once, on the part of somebody, which put the maker of it in possession of the property which now yields an income to himself, or those to whom he has left or given it. first there is the case of the man who has a title deed to a piece of land. how did he get it? either he was a pioneer who came and cleared it and settled on it, or he had worked and saved and with the product of his work had bought this piece of land, or he had inherited it from the man who had cleared or bought the land. the ownership of the land implies work and saving and so is entitled to its reward. then there is the case of the man who has saved ten thousand dollars by labouring for twenty years and denying himself the necessaries of life. dr. nearing admits that this man has worked in order to get his dollars; he even goes so far as to add that he had denied himself the necessaries of life in order to save. incidentally one may wonder how a man who has denied himself the necessaries of life for twenty years can be alive at the end of them. this man has worked for his dollars, and, instead of spending them on immediate enjoyment, lends them to people who are building a railway, and so is quickening and cheapening intercourse and trade. dr. nearing seems to admit grudgingly that in a sense he thereby renders a service, but he complains because his imaginary investor expects without further exertion to get an income from the product of his past service. if he could not get an income from it, why should he save? and if he and millions of others did not save how could railways or factories be built? and if there were no railways or factories how could workers find employment? if every capitalist only got income from the product of his own work in the past, which he had spent, as in this case, on developing industry, his claim to a return on it would hardly need stating. he would have saved his ten thousand dollars or two thousand pounds, and instead of spending it on two thousand pounds' worth of amusement or pleasure for himself he would have preferred to put it at the disposal of those who are in need of capital for industry and promise to pay him per cent. or £ a year for the use of it. by so doing he increases the demand for labour, not momentarily as he would have done if he had spent his money on goods and services immediately consumed, but for all time, as long as the railway that he helps to build is running and earning an income by rendering services. he is a benefactor to humanity as long as his capital is invested in a really useful enterprise, and especially to the workers who cannot get work unless the organizers of industry are supplied with plenty of cheap capital. in fact, the more plentiful and cheap is capital, the keener will be the demand for the labour of the workers. but when dr. nearing points out that the income of the ten thousand dollars would be equally secure if the owner of them had them left him by his father or given him by his uncle, then at last he smites capital on a weak point in its armour. there, is, without question, much to be said for the view that it is unfair that a man who has worked and saved should thereby be able to hand over to his son or nephew, who has never worked or saved, this right to an income which is derived from work done by somebody else. it seems unfair to all of us, who were not blessed with equally industrious and provident fathers and uncles, and it is often bad for the man who gets the income as a reward for no effort of his own, because it gives him a false start in life and sometimes tends to make him a futile waster, who can only justify his existence and his command over other people's work, by pointing to the efforts of his deceased sire or uncle. further, unless he is very lucky, he is likely to grow up with the notion that, just because he has been left or given a certain income, he is somehow a superior person, and that it is part of the scheme of the universe that others should work for his benefit, and that any attempt on the part of other people to get a larger share, at his expense, of the good things of the earth is an attempt at robbery. he is, by being born to a competence, out of touch with the law of nature, which says that all living things must work for their living, or die, and his whole point of view is likely to be warped and narrowed by his unfortunate good fortune. these evils that spring from hereditary property are obvious. but it may be questioned whether they outweigh the advantages that arise from it. the desire to possess is a strong stimulus to activity in production, because possession is the mark of success in it, and all healthy-minded men like to feel that they have succeeded; and almost equally strong is the desire to hand on to children or heirs the possessions that the worker's energy has got for him. in fact it may almost be said that in most men's minds the motive of possession implies that of being able to hand on; they would not feel that they owned property which they were bound to surrender to the state at their deaths. if and when society is ever so organized that it can produce what it needs without spurring the citizen to work with the inducement supplied by possession, and the power to hand on property, then it may be possible to abolish the inequities that hereditary property carries with it. as things are at present arranged it seems that we are bound to put up with them if the community is to be fed and kept alive. at least we can console ourselves with the thought that property does not come into existence by magic. except in the case of the owners of land who may be enriched without any effort by the discovery of minerals or by the growth of a city, capital can only have been created by services rendered; and even in the case of owners of land, they, and those from whom they derived it, must have done something in order to get the land. it is, of course, quite possible that the something which was done was a service which would not now be looked on as meriting reward. in the medieval days mailclad robbers used to get (quite honestly and rightly according to the notions then current) large grants of land because they had ridden by the side of their feudal chiefs when they went on marauding forays. in later times, as in the days of our merry monarch, attractive ladies were able to found ducal families by placing their charms at the service of a royal debauchee. but the rewards of the freebooters have in almost all cases long ago passed into the hands of those who purchased them with the proceeds of effort with some approach to economic justification; and though some of charles the second's dukedoms are still extant, it will hardly be contended that it is possible to trace the origin of everybody's property and confiscate any that cannot show a reasonable title, granted for some true economic service. what we can do, and ought to do, if economic progress is to move along right lines, is to try to make sure that we are not, in these days of alleged enlightenment, committing out of mere stupidity and thoughtlessness, the crime which charles the second perpetrated for his own amusement. he gave large tracts of england to his mistresses because they pleased his roving fancy. now the power to dispense wealth has passed into the hands of the people, who buy the goods and services produced, and so decide what goods and services will find a market, and so will enrich their producers. are we making much better use of it? on the whole, much better; but we still make far too many mistakes. the people to whom nowadays we give big fortunes, though they include a large number of organizers of useful industry, also number within their ranks a crowd of hangers on such as bookmakers, sharepushers, and vendors of patent pills or bad stuff to read. these folk, and others, live on our vices and stupidities, and it is our fault that they can do so. because a large section of the public likes to gamble away its money on the stock exchange, substantial fortunes have been founded by those who have provided the public with this means of amusement. because the public likes to be persuaded by the clamour of cheapjack advertisement that its inside wants certain medicines, and that these medicines are worth buying at a price that makes the vendor a millionaire, there he is with his million. some people say that he has swindled the public. the public has swindled itself by allowing him to foist stuff down its throat on terms which give him, and his heirs and assigns after him, all the control over the work and wealth of the world that is implied by the possession of a million. when we buy rubbish we do not only waste our money to our own harm, but, under the conditions of modern society, we put the sellers of rubbish in command of the world, as far as the money power commands it, which is a good deal further than is pleasing. hence it is that when some of those who question the right of capital to its reward, do so on the ground that capital is often acquired by questionable means, they are barking up the wrong tree. capital can only be acquired by selling something to you and me. if you and i had more sense in the matter of what we buy, capital could not be acquired by questionable means. by our greed and wastefulness we give fortunes to bookmakers, market-riggers and money-lenders. by our preference for "brilliant" investments, with a high rate of interest and bad security, we invite the floating of rotten companies and waterlogged loans. by our readiness to be deafened by the clamour of the advertiser into buying things that we do not want, we hand industry over to the hands of the loudest shouter, and by our half-educated laziness in our selection of what we read and of the entertainments that we frequent, we open the way to opulence through the debauching of our taste and opinions. it is our fault and ours only. as soon as we have learnt and resolved to buy and enjoy only what is worth having, the sellers of rubbish may put up their shutters and burn their wares. capital, then, is stored up work, work that has been paid for by society. those who did the work and took its reward, turned the proceeds of it into making something more instead of into pleasure and gratification for themselves. by a striking metaphor capital is often described as the seed corn of industry. seed corn is the grain that the farmer, instead of making it into bread for his own table, or selling it to turn it into picture-palace tickets, or beer, or other forms of short-lived comfort, keeps to sow in the earth so that he may reap his harvest next year. if the whole world's crop were eaten, there would be no seed corn and no harvest. so it is with industry. if its whole product were turned into goods for immediate consumption, there could be no further development of industry, and no maintenance of its existing plant, which would soon wear out and perish. the man who spends less than he earns and puts his margin into industry, keeps industry alive. from the point of view of the worker--by whom i mean the man who has little or no capital of his own, and has only, or chiefly, his skill, of head or of hand, to earn his living with--those who are prepared to save and put capital at the disposal of industry ought to be given every possible encouragement to do so. for since capital is essential to industry, all those who want to earn a living in the workshops or in the countinghouse, or in the manager's office, will most of all, if they are well advised, want to see as much capital saved as possible. the more there is of it, the more demand there will be for the brains and muscles of the workers, and the better the bargain these latter will be able to make for the use of their brains and muscles. if capital is so scarce and timid that it can only be tempted by the offer of high rates for its use, organizers of industry will think twice about expanding works or opening new ones, and there will be a check to the demand for workers. if so many people are saving that capital is a drug in the market, anyone who has an enterprise in his head will put it in hand, and workers will be wanted, first for construction then for operation. it is to the interest of workers that there should be as many capitalists as possible offering as much capital as possible to industry, so that industry shall be in a state of chronic glut of capital and scarcity of workers. roughly, it is true that the product of industry is divided between the workers who carry it on, and the savers who, out of the product of past work, have built the workshop, put in the plant and advanced the money to pay the workers until the new product is marketed. the workers and the savers are at once partners and rivals. they are partners because one cannot do without the other; rivals because they compete continually concerning their share of the profit realized. if the workers are to succeed in this competition and secure for themselves an ever-increasing share of the profit of industry--and from the point of view of humanity, civilization, nationality, and common sense it is most desirable that this should be so--then this is most likely to happen if the savers are so numerous that they will be weak in bargaining and unable to stand out against the demands of the workers. if there were innumerable millions of workers and only one saver with money enough to start one factory, the one saver would be able to name his own terms in arranging his wages bill, and the salaries of his managers and clerks. if the wind were on the other cheek, and a crowd of capitalists with countless millions of money were eager to set the wheels of industry going, and could not find enough workers to man and organize and manage their workshops, then the workers would have the whip hand. to bring this state of things about it would seem to be good policy not to damn the capitalist with bell and with book and frighten him till he is so scarce that he is master of the situation, but to give him every encouragement to save his money and put it into industry. for the more plentiful he is, the stronger is the position of the workers. in fact the saver is so essential that it is nowadays fashionable to contend that the saving business ought not to be left to the whims of private individuals, but should be carried out by the state in the public interest; and there are some innocent folk who imagine that, if this were done, the fee that is now paid to the saver for the use of the capital that he has saved, would somehow or other be avoided. in fact the government would have to tax the community to produce the capital required. capital would be still, as before, the proceeds of work done. and the result would be that the taxpayers as a whole would have to pay for capital by providing it. this might be a more equitable arrangement, but as capital can only be produced by work, the taxpayers would have to do a certain amount of work with the prospect of not being allowed to keep the proceeds, but of being forced to hand it over to government. whether such a plan would be likely to be effective in keeping industry supplied with capital is a question which need not be debated until the possibility of such a system becomes a matter of practical politics. for our present purpose it is enough to have shown that the capital, which is the stock-in-trade of finance, is not a fraudulent claim to take toll of the product of industry, but an essential part of the foundation on which industry is built. a man can only become a capitalist by rendering services for which he receives payment, and spending part of his pay not on his immediate enjoyment, but in establishing industry either on his own account or through the agency of someone else to whom be lends the necessary capital. before any industry can start there must be tools and a fund out of which the workers can be paid until the work that they do begins to bring in its returns. the fund to buy these tools and pay the workers can only be found out of the proceeds of work done or services rendered. moreover, there is always a risk to be run. as soon as the primitive savage left off making everything for himself and took to doing some special work, such as arrow making, in the hope that his skill, got from concentration on one particular employment, would be rewarded by the rest of the tribe who took his arrows and gave him food and clothes in return, he began to run the risk that his customers might not want his product, if they happened to take to fishing for their food instead of shooting it. this risk is still present with the organizers of industry and it falls first on the capitalist. if an industry fails the workers cease to be employed by it; but as long as they work for it their wages are a first charge which has to be paid before capital gets a penny of interest or profit, and if the failure of the industry is complete the capital sunk in it will be gone. footnotes: [footnote : pages , .] chapter ii banking machinery capital, then, is wealth invested in industry, finance is the machinery by which this process of investment is carried out, and international finance is the machinery by which the wealth of one country is invested in another. let us consider the case of a doctor in a provincial town who is making an annual income of about £ a year, living on £ of it and saving £ . instead of spending this quarter of his income on immediate enjoyments, such as wine and cigars, and journeys to london, he invests it in different parts of the world through the mechanism of international finance, because he has been attracted by the advantages of a system of investment which was fashionable some years ago, which worked by what was called geographical distribution.[ ] this meant to say that the investors who practised it put their money into as many different countries as possible, so that the risk of loss owing to climatic or other disturbances might be spread as widely as possible. so here we have this quiet country doctor spreading all over the world the money that he gets for dosing and poulticing and dieting his patients, stimulating industry in many climates and bringing some part of its proceeds to be added to his store. let us see how the process works. first of all he has a bank, into which he pays day by day the fees that he receives in coin or notes and the cheques that he gets, each half year, from those of his patients who have an account with him. as long as his money is in the bank, the bank has the use of it, and not much of it is likely to go abroad. for the banks use most of the funds entrusted to them in investments in home securities, or in loans and advances to home customers. part of them they use in buying bills of exchange drawn on london houses by merchants and financiers all over the world, so that even when he pays money into his bank it is possible that our doctor is already forming part of the machinery of international finance and involving us in the need for an explanation of one of its mysteries. a bill of exchange is an order to pay. when a merchant in argentina sells wheat to an english buyer, he draws a bill on the buyer (or some bank or firm in england whom the buyer instructs him to draw on), saying, "pay to me" (or anybody else whom he may name) "the sum of so many pounds." this bill, if it is drawn on a firm or company of well known standing, the seller of the wheat can immediately dispose of, and so has got payment for his goods. usually the bill is made payable two or three, or sometimes six months after sight, that is after it has been received by the firm on which it is drawn, and "accepted" by it, that is signed across the front to show that the firm drawn on will pay the bill when it falls due. these bills of exchange, when thus accepted, are promises to pay entered into by firms of first-rate standing, and are held as investments by english banks. bills of exchange are also drawn on english houses to finance trade transactions between foreign countries, and also as a means of borrowing money from england. when they are drawn on behalf of english customers, the credit given is given at home, but as it is (almost always) given in connection with international trade, the transaction may be considered as part of international finance. when they are drawn on behalf of foreign countries, trading with other foreigners, or using the credit to lend to other foreigners, the connection with international finance is obvious. they are readily taken all over the world, because all over the world there are people who have payments to make to england owing to the wide distribution of our trade, and it has long been england's boast that bills of exchange drawn on london firms are the currency of international commerce and finance. some people tell us that this commanding position of the english bill in the world's markets is in danger of being lost owing to the present war: in the first place because america is gaining wealth rapidly, while we are shooting away our savings, and also because the germans will make every endeavour to free themselves from dependence on english credit for the conduct of their trade. certainly this danger is a real one, but it does not follow that we shall not be able to meet it and defeat it. if the war teaches us to work hard and consume little, so that when peace comes we shall have a great volume of goods to export, there is no reason why the bill on london should not retain much if not all of its old prestige and supremacy in the marts of the world. for we must always remember that finance is only the handmaid of industry. she is often a pert handmaid who steals her mistress's clothes and tries to flaunt before the world as the mistress, and so she sometimes imposes on many people who ought to know better, who think that finance is an all-powerful influence. finance is a mighty influence, but it is a mere piece of machinery which assists, quickens, and lives on production. the men who make and grow things, and carry them from the place where they are made and grown to the place where they are wanted, these are the men who furnish the raw material of finance, without which it would have to shut up its shop. if they and their work ceased, we should all starve, and the financiers would have nothing behind the pieces of paper that they handle. if finance and the financiers were suddenly to cease, there would be a very awkward jar and jolt in our commercial machinery, but as long as the stuff and the means of carrying it were available, we should very soon patch up some other method for exchanging it between one nation and another and one citizen and another. the supremacy of the london bill of exchange was created only to a small extent by any supremacy in london's financial machinery; it was based chiefly on the supremacy of england's world-wide trade, and on our readiness to take goods from all nations. the consequence of this was that traders of all nations sold goods to us, and so had claims on us and drew bills on us, and bought goods from us, and so owed us money and wanted to buy bills drawn on us to pay their debts with. so everywhere the bill on london was known and familiar and welcome. if the americans are able and willing to develop such a world-wide trade as ours, then the bill on new york will have a vogue all over the world just as is enjoyed by the bill on london. then london and new york will have to fight the matter out by seeing which will provide the best and cheapest machinery for discounting the bill, that is, turning it into cash on arrival, so that the holder of it shall get the best possible price at the present moment, for a bill due two or three months hence. in this matter of machinery london has certain advantages which ought, if well used and applied, to stand her in good stead in any struggle that lies ahead of her. london's credit machinery has grown up in almost complete freedom from legislation, and it has consequently been able to grow, without let or hindrance, along the lines that expediency and convenience have shown to be most practical and useful. it has been too busy to be logical or theoretical, and consequently it is full of absurdities and anomalies, but it works with marvellous ease and elasticity. in its centre is the bank of england, with the prestige of antiquity and of official dignity derived from acting as banker to the british government, and with still more practical strength derived from acting as banker to all the other great banks, several of them much bigger, in certain respects, than it. the bank of england is very severely and strictly restricted by law in the matter of its note issue, but it luckily happened, when parliament was imposing these restrictions on the bank's business, that note issuing was already becoming a comparatively unimportant part of banking, owing to the development of the use of cheques. nowadays, when borrowers go to the bank of england for loans, they do not want to take them out in notes; all they want is a credit in the bank's books against which they can draw cheques. a credit in the bank of england's books is regarded by the financial community as "cash," and this pleasant fiction has given the bank the power of creating cash by a stroke of its pen and to any extent that it pleases, subject only to its own view as to what is prudent and sound business. on p. ("a bank return", below) is a specimen of a return that is published each week by the bank of england, showing its position in two separate accounts with regard to its note issuing business and its banking business: the return taken is an old one, published before the war, so as to show how the machine worked in normal times before war's demands had blown out the balloon of credit to many times its former size. if the commercial and financial community is short of cash, all that it has to do is to go to the bank of england and borrow a few millions, and the only effect on the bank's position is an addition of so many millions to its holding of securities and a similar addition to its deposits. it may sometimes happen that the borrowers may require the use of actual currency, and in that case part of the advances made will be taken out in the form of notes and gold, but as a general rule the bank is able to perform its function of providing emergency credit by merely making entries in its books. a bank return issue department. notes issued £ , , government debt £ , , other securities , , gold coin and bullion , , silver bullion --- ----------- ----------- £ , , £ , , ----------- ----------- banking department. proprietors' capital £ , , government securities £ , , rest , , other securities , , public deposits , , notes , , other deposits , , gold and silver coin , , seven day and other bills , ----------- ----------- £ , , £ , , ----------- ----------- with the bank of england thus acting as a centre to the system, there has grown up around it a circle of the great joint stock banks, which provide credit and currency for commerce and finance by lending money and taking it on deposit, or on current account. these banks work under practically no legal restrictions of any kind with regard to the amount of cash that they hold, or the use that they make of the money that is entrusted to their keeping. they are not allowed, if they have an office in london, to issue notes at all, but in all other respects they are left free to conduct their business along the lines that experience has shown them to be most profitable to themselves, and most convenient for their customers. being joint stock companies they have to publish periodically, for the information of their shareholders, a balance sheet showing their position. before the war most of them published a monthly statement of their position, but this habit has lately been given up. no legal regulations guide them in the form or extent of the information that they give in their balance sheets, and their great success and solidity is a triumph of unfettered business freedom. this absence of restriction gives great elasticity and adaptability to the credit machinery of london. here is a specimen of one of their balance sheets, slightly simplified, and dating from the days before the war:-- liabilities. capital (subscribed) £ , , ---------- paid up , , reserve , , deposits , , circular notes, etc. , , acceptances , , profit and loss , ----------- £ , , ----------- assets cash in hand and at bank of england £ , , cash at call and short notice , , bills discounted , , govt. securities , , other investments , , advances and loans , , liability of customers on account of acceptances , , promises , , ----------- £ , , ----------- on one side are the sums that the bank has received, in the shape of capital subscribed, from its shareholders, and in the shape of deposits from its customers, including dr. pillman and thousands like him; on the other the cash that it holds, in coin, notes and credit at the bank of england, its cash lent at call or short notice to bill brokers (of whom more anon) and the stock exchange, the bills of exchange that it holds, its investments in british government and other stocks, and the big item of loans and advances, through which it finances industry and commerce at home. it should be noted that the entry on the left side of the balance sheet, "acceptances," refers to bills of exchange which the bank has accepted for merchants and manufacturers who are importing goods and raw material, and have instructed the foreign exporters to draw bills on their bankers. as these merchants and manufacturers are responsible to the bank for meeting the bills when they fall due, the acceptance item is balanced by an exactly equivalent entry on the other side, showing this liability of customers as an asset in the bank's favour. this business of acceptance is done not only by the great banks, but also by a number of private firms with connections in foreign countries, and at home, through which they place their names and credit at the disposal of people less eminent for wealth and position, who pay them a commission for the use of them. other wheels in london's credit machinery are the london offices of colonial and foreign banks, and the bill brokers or discount houses which deal in bills of exchange and constitute the discount market. thus we see that there is in london a highly specialized and elaborate machinery for making and dealing in these bills, which are the currency of international trade. let us recapitulate the history of the bill and see the part contributed to its career by each wheel in the machine. we imagined a bill drawn by an argentine seller against a cargo of wheat shipped to an english merchant. the bill will be drawn on a london accepting house, to whom the english merchant is liable for its due payment. the argentine merchant, having drawn the bill, sells it to the buenos ayres branch of a south american bank, formed with english capital, and having its head office in london. it is shipped to london, to the head office of the south american bank, which presents it for acceptance to the accepting house on which it is drawn, and then sells it to a bill broker at the market rate of discount. if the bill is due three months after sight, and is for £ , and the market rate of discount is per cent. for three months' bills, the present value of the bill is obviously £ . the bill broker, either at once or later, probably sells the bill to a bank, which holds it as an investment until its due date, by which time the importer having sold the wheat at a profit, pays the money required to meet the bill to his banker and the transaction is closed. thus by means of the bill the exporter has received immediate payment for his wheat, the importing merchant has been supplied with credit for three months in which to bring home his profit, and the bank which bought the bill has provided itself with an investment such as bankers love, because it has to be met within a short period by a house of first-rate standing. all this elaborate, but easily working machinery has grown up for the service of commerce. it is true that bills of exchange are often drawn by moneylenders abroad on moneylenders in england merely in order to raise credit, that is to say, to borrow money by means of the london discount market. sometimes these credits are used for merely speculative purposes, but in the great majority of cases they are wanted for the furtherance of production in the borrowing country. the justification of the english accepting houses, and bill brokers, and banks (in so far as they engage in this business), is the fact that they are assisting trade, and could not live without trade, and that trade if deprived of their services would be gravely inconvenienced and could only resume its present activity by making a new machinery more or less on the same lines. the bill whose imaginary history has been traced, came into being because the drawer had a claim on england through a trade transaction. he was able to sell it to the south american bank only because the bank knew that many other people in argentina would have to make payments to england and would come to it and ask it for drafts on london, which, by remitting this bill to be sold in london, it would be able to supply. international finance is so often regarded as a machinery by which paper wealth is manufactured out of nothing, that it is very important to remember that all this paper wealth only acquires value by being ultimately based on something that is grown or made and wanted to keep people alive or comfortable, or at least happy in the belief that they have got something that they thought they wanted, or which habit or convention obliged them to possess. footnotes: [footnote : all this imaginary picture is of events before the war. at present dr. pillman, being a patriotic citizen, is saving much faster than before, and putting every pound that he can save into the hands of the british government by subscribing to war loans and buying exchequer bonds. he is too old to go and do medical work at the front, so he does the next best thing by cutting down his expenses and finding money for the war.] chapter iii investments and securities so far we have only considered what happens to the money of those who save as long as it is left in the hands of their bankers, and we have seen that it is only likely to be employed internationally, if invested by bankers in bills of exchange which form a comparatively small part of their assets. it is true that bankers also invest money in securities, and that some of these are foreign, but here again the proportion invested abroad is so small that we may be reasonably sure that any money left by us in the hands of our bankers will be employed at home. but in actual practice those who save do not pile up a large balance at their banks. they keep what is called a current account, consisting of amounts paid in in cash or in cheques on other banks or their own bank, and against this account they draw what is needed for their weekly and monthly payments; sometimes, also, they keep a certain amount on deposit account, that is an account on which they can only draw after giving a week's notice or more. on their deposit account they receive interest, on their current account they may in some parts of the country receive interest on the average balance kept. but the deposit account is most often kept by people who have to have a reserve of cash quickly available for business purposes. the ordinary private investor, when he has got a balance at his bank big enough to make him feel comfortable about being able to meet all probable outgoings, puts any money that he may have to spare into some security dealt in on the stock exchange, and so securities and the stock exchange have to be described and examined next. they are very much to the point, because it is through them that international finance has done most of its work. securities, then, are the stocks, shares and bonds which are given to those who put money into companies, or into loans issued by governments, municipalities and other public bodies. let us take the governments and public bodies first, because the securities issued by them are in some ways simpler than those created by companies. when a government wants to borrow, it does so because it needs money. the purpose for which it needs it may be to build a railway or canal, or make a harbour, or carry out a land improvement or irrigation scheme, or otherwise work some enterprise by which the power of the country to grow and make things may be increased. enterprises of this kind are usually called reproductive, and in many cases the actual return from them in cash more than suffices to meet the interest on the debt raised to carry them out, to say nothing of the direct benefit to the country in increasing its output of wealth. in england the government has practically no debt that is represented by reproductive assets. our government has left the development of the country's resources to private enterprise, and the only assets from which it derives a revenue are the post office buildings, the crown lands and some shares in the suez canal which were bought for a political purpose. governments also borrow money because their revenue from taxes is less than the sums that they are spending. this happens most often and most markedly when they are carrying on war, or when nations are engaged in a competition in armaments, building navies or raising armies against one another so as to be ready for war if it happens. this kind of debt is called dead-weight debt, because there is no direct or indirect increase, in consequence of it, in the country's power to produce things that are wanted. this kind of borrowing is generally excused on the ground that provision for the national safety is a matter which concerns posterity quite as much as the present generation, and that it is, therefore, fair to leave posterity to pay part of the bill. municipalities likewise borrow both for reproductive purposes and for objects from which no direct revenue can be expected. they may invest money lent them in gas or electric works or water supply or tramways, and get an income from them which will more than pay the interest on the money borrowed. or they may put it into public parks and recreation grounds or municipal buildings, or improvements in sanitation, thereby beautifying and cleansing the town. if they do these things in such a way as to make the town a pleasanter and healthier place to live in, they may indirectly increase their revenue; but if they do them extravagantly and badly, they run the risk of putting a burden on the ratepayers that will make people shy of living within their borders. whatever be the object for which the loan is issued, the procedure is the same by which the money is raised. the government or municipality invites subscriptions through a bank or through some great financial house, which publishes what is called a prospectus by circular, and in the papers, giving the terms and details of the loan. people who have money to spare, or are able to borrow money from their bankers, and are attracted by the terms of the loan, sign an application form which is issued with the prospectus, and send a cheque for the sum, usually per cent. of the amount that they apply for, which is payable on application. if the loan is over-subscribed, the applicants will only receive part of the sums for which they apply. if it is not fully subscribed, they will get all that they have asked for, and the balance left over will be taken up in most cases by a syndicate formed by the bank or firm that issued the loan, to "underwrite" it. underwriting means guaranteeing the success of a loan, and those who do so receive a commission of anything from to per cent.; if the loan is popular and goes well the underwriters take their commission and are quit; if the loan is what the city genially describes as a "frost," the underwriters may find themselves saddled with the greater part of it, and will have the pleasure of nursing it until such time as the investing public will take it off their hands. underwriting is thus a profitable business when times are good, and the public is feeding freely, but it can only be indulged in by folk with plenty of capital or credit, and so able to carry large blocks of stock if they find themselves left with them. to take a practical example, let us suppose that the king of ruritania is informed by his minister of marine that a battleship must at once be added to its fleet because his next door neighbour is thought to be thinking of making himself stronger on the water, while his minister of finance protests that it is impossible, without the risk of serious trouble, to add anything further to the burdens of the taxpayers. a loan is the easy and obvious way out. london and paris between them will find two or three millions with pleasure. that will be enough for a battleship and something over in the way of new artillery for the army which can be ordered in france so as to secure the consent of the french government, which was wont to insist that a certain proportion of any loan raised in paris must be spent in the country. (it need hardly be said that all these events are supposed to be happening in the years before the war.) negotiations are entered into with a group of french banks and an english issuing house. the french banks take over their share, and sell it to their customers who are, or were, in the habit of following the lead of their bankers in investment with a blind confidence, that gave the french banks enormous power in the international money market. the english issuing house sends round a stockbroker to underwrite the loan. if the issuing house is one that is usually successful in its issues, the privilege of underwriting anything that it brings out is eagerly sought for. banks, financial firms, insurance companies, trust companies and stockbrokers with big investment connections will take as much underwriting as they are offered, in many cases without making very searching inquiry into the terms of the security offered. the name of the issuing house and the amount of the underwriting commission --which we will suppose in this case to be per cent.--is enough for them. they know that if they refuse any chance of underwriting that is offered, they are not likely to get a chance when the next loan comes out, and since underwriting is a profitable business for those who can afford to run its risks, many firms put their names down for anything that is put before them, as long as they have confidence in the firm that is handling the loan. this power in the hands of the big issuing houses, to get any loan that they choose to father underwritten in a few hours by a crowd of eager followers, gives them, of course, enormous strength and lays a heavy responsibility on them. they only preserve it by being careful in the use of it, and exercising great discrimination in the class of securities that they handle. while the underwriting is going on the prospectus is being prepared by which the subscriptions of the public are invited, and in the meantime it will probably happen that the newspapers have had a hint that a ruritanian loan is on the anvil, so that preliminary paragraphs may prepare an atmosphere of expectancy. news of a forthcoming new issue is always a welcome item in the dull routine of a city article, and the journalists are only serving their public and their papers in being eager to chronicle it. lurid stories are still handed down by city tradition of how great city journalists acquired fortunes in days gone by, by being allotted blocks of new loans so that they might expand on their merits and then sell them at a big profit when they had created a public demand for them. there seems to be no doubt that this kind of thing used to happen in the dark ages when finance and city journalism did a good deal of dirty business between them. now, the city columns of the great daily papers have for a very long time been free from any taint of this kind, and on the whole it may be said that finance is a very much cleaner affair than either law or politics. it is true that swindles still happen in the city, but their number is trivial compared with the volume of the public's money that is handled and invested. it is only in the by-ways of finance and in the gutters of city journalism that the traps are laid for the greedy and gullible public, and if the public walks in, it has itself to blame. a genuine investor who wants security and a safe return on his money can always get it. unfortunately the investor is almost always at the same time a speculator, and is apt to forget the distinction; and those who ask for a high rate of interest, absolute safety and a big rise in the prices of securities that they buy are only inviting disaster by the greed that wants the unattainable and the gullibility that deludes them into thinking they can have it. to return to our ruritanian loan, which we left being underwritten. the prospectus duly comes out and is advertised in the papers and sown broadcast over the country through the post. it offers £ , , (part of £ , , of which half is reserved for issue in paris), - / per cent. bonds of the kingdom of ruritania, with interest payable on april st and october st, redeemable by a cumulative sinking fund of per cent., operating by annual drawings at par, the price of issue being , payable as to per cent. on application, per cent. on allotment and the balance in instalments extending over four months. coupons and drawn bonds are payable in sterling at the countinghouse of the issuing firm. the extent of the other information given varies considerably. some firms rely so far on their own prestige and the credit of those on whose account they offer loans, that they state little more than the bare terms of the issue as given above. others deign to give details concerning the financial position of the borrowing government, such as its revenue and expenditure for a term of years, the amount of its outstanding debt, and of its assets if any. if the credit of the kingdom of ruritania is good, such a loan as here described would be, or would have been before the war, an attractive issue, since the investor would get a good rate of interest for his money, and would be certain of getting par or £ , some day, for each bond for which he now pays £ . this is ensured by the action of the sinking fund of per cent. cumulative, which works as follows. each year, as long as the loan is outstanding the kingdom of ruritania will have to put £ , in the hands of the issuing houses, to be applied to interest and sinking fund. in the first year interest at - / per cent. will take £ , and sinking fund ( per cent. of £ , , ) £ , ; this £ , will be applied to the redemption of bonds to that value, which are drawn by lot; so that next year the interest charge will be less and the amount available for sinking fund will be greater; and each year the comfortable effect of this process continues, until at last the whole loan is redeemed and every investor will have got his money back and something over. the effect of this obligation to redeem, of course, makes the market in the loan very steady, because the chance of being drawn at par in any year, and the certainty of being drawn if the investor holds it long enough, ensures that the market price will be strengthened by this consideration. such being the terms of the loan we may be justified in supposing--if ruritania has a clean record in its treatment of its creditors, and if the issuing firm is one that can be relied on to do all that can be done to safeguard their interests, that the loan is a complete success and is fully subscribed for by the public. the underwriters will consequently be relieved of all liability and will pocket their per cent., which they have earned by guaranteeing the success of the issue. if some financial or political shock had occurred which made investors reluctant to put money into anything at the time when the prospectus appeared or suggested the likelihood that ruritania might be involved in war, then the underwriters would have had to take up the greater part of the loan and pay for it out of their own pockets; and this is the risk for which they are given their commission. ruritania will have got its money less the cost of underwriting, advertising, commissions, per cent. stamp payable to the british government, and the profit of the issuing firm. some shipyard in the north will lay down a battleship and english shareholders and workmen will benefit by the contract, and the investors will have got well secured bonds paying them a good rate of interest and likely to be easily saleable in the market if the holders want to turn them into cash. the bonds will be large pieces of paper stating that they are - / per cent, bonds of the kingdom of ruritania for £ , £ , £ or £ as the case may be, and they will each have a sheet of coupons attached, that is, small pieces to be cut off and presented at the date of each interest payment; each one states the amount due each half year and the date when it will have to be met. bonds are called bearer securities, that is to say, possession of them entitles the bearer to receive payment of them when drawn and to collect the coupons at their several dates. they are the usual form for the debts of foreign governments and municipalities, and of foreign railway and industrial companies. in england we chiefly affect what are called registered and inscribed stocks--that is, if our government or one of our municipalities issues a loan, the subscribers have their names registered in a book by the debtor, or its banker, and merely hold a certificate which is a receipt, but the possession of which is not in itself evidence of ownership. there are no coupons, and the half-yearly interest is posted to stockholders, or to their bankers or to any one else to whom they may direct it to be sent. consequently when the holder sells it is not enough for him to hand over his certificate, as is the case with a bearer security, but the stock has to be transferred into the name of the buyer in the register kept by the debtor, or by the bank which manages the business for it. when the securities offered are not loans by public bodies, but represent an interest in a company formed to build a railway or carry on any industrial or agricultural or mining enterprise, the procedure will be on the same lines, except that the whole affair will be on a less exalted plane. such an issue would not, save in exceptional circumstances, as when a great railway is offering bonds or debenture stock, be fathered by one of the leading financial firms. industrial ventures are associated with so many risks that they are usually left to the smaller fry, and those who underwrite them expect higher rates of commission, while subscribers can only be tempted by anticipations of more mouth-filling rates of interest or profit. this distinction between interest and profit brings us to a further difference between the securities of companies and public bodies. public bodies do not offer profit, but interest, and the distinction is very important. a government asks for your money and promises to pay a rate for it, whether the object on which the money is spent be profit-earning or no, and, if it is, whether a profit be earned or no. a company asks subscribers to buy it up and become owners of it, taking its profits, that it expects to earn, and getting no return at all on their money if its business is unfortunate and the profits never make their appearance. consequently the shareholders in a company run all the risks that industrial enterprise is heir to, and the return, if any, that comes into their pockets depends on the ability of the enterprise to earn profits over and above all that it has to pay for raw material, wages and other working expenses, all of which have to be met before the shareholder gets a penny. in order to meet the objections of steady-going investors to the risks involved by thus becoming industrial adventurers, a system has grown up by which the capital of companies is subdivided into securities that rank ahead of one another. companies issue debts, like public bodies, in the shape of bonds or debenture stocks, which entitle the holders of them to a stated rate of interest, and no more, and are often repayable at a due date, by drawings or otherwise. these are the first charge on the concern after wages and other working expenses have been paid, and the shareholders do not get any profit until the interest on the company's debt has been met. further, the actual capital held by the shareholders is generally divided into two classes, preference and ordinary, of which the preference take a fixed rate before the ordinary shareholders get anything, and the ordinary shareholders take the whole of any balance left over. sometimes, the preference holders have a right to further participation after the ordinary have received a certain amount of dividend, or share of profit, and there are almost endless variations of the manner in which the different classes of holders may claim to divide the profits, by means of preference, preferred, ordinary, preferred ordinary, deferred ordinary, founders' shares, management shares, etc., etc. all these variations in the position of the shareholder, however, do not alter the great essential difference between him and the creditor, the man who lends money to a government or enterprise with a fixed rate of interest, and, in most cases, a claim for repayment sooner or later. the shareholder, whether preference or ordinary, puts his money into a venture with no claim for repayment, unless the company is wound up, in which case his claim ranks, of course, after that of every creditor. if he wants to get his money out again he can only do so by selling his stock or shares at any price that they will fetch in the stock market. thus, if we take as an example a brewery company with a total debt and capital of three millions, we may suppose that it will have a million - / per cent, debenture stock, entitling the creditors who own it to interest at that rate, and repayment in , a million of per cent. cumulative preference stock, giving holders a fixed dividend, if earned, of per cent, which dividend and all arrears have to be paid before the ordinary shareholders get anything, and a million in ordinary shares of £ each, whose holders take any balance that may be left. this is the total of the money that has been received from the public when the company was floated and put into the brewery plant, tied houses, or other assets out of which the company makes its revenue. these bonds and stocks and shares are the machinery of international finance, by which moneylenders of one nation provide borrowers in others with the wherewithal to carry out enterprises, or make payments for which they have not cash available at home. it was shown in a previous chapter that bills of exchange are a means by which the movements of commodities from market to market are financed, and the gap in time is bridged between production and consumption. stock exchange securities are more permanent investments, put into industry for longer periods or for all time. midway between them are securities such as treasury bills with which governments raise the wind for a time, pending the collection of revenue, and the one or two years' notes with which american railroads lately financed themselves for short periods, in the hope that the conditions for an issue of bonds with longer periods to run, might become more favourable. so far we have only considered the machinery by which these securities are created and issued to the public, but it must not be supposed that investment is only possible when new securities are being offered. many investors have a prejudice against ever buying a new security, preferring those which have a record and a history behind them, and buying them in the market whenever they have money to invest. this market is the stock exchange in which securities of all kinds and of all countries are dealt in. following the history of the ruritanian loan, we may suppose that it will be dealt in regularly in that section of the stock exchange in which the loans of foreign governments are marketed. any original subscriber who wants to turn his bonds into money can do so by instructing his broker to sell them; anyone who wants to do so can acquire a holding in them by a purchase. the terms on which they will be bought or sold will depend on the variations in the demand for, and supply of, them. if a number of holders want to sell, either because they want cash for other purposes, or because they are nervous about the political outlook, or because they think that money is going to be scarce and so there will be better opportunities for investment later on, then the price will droop. but if the political sky is serene and people are saving money fast and investing it in stock exchange securities, then the price will go up and those who want to buy it will pay more. the price of all securities, as of everything else, depends on the extent to which people who have not got them demand them, in relation to the extent to which those who have got them are ready to part with them. price is ultimately a question of what people think about things, and this is why the fluctuations in the price of stock exchange securities are so incalculable and often so irrational. if a sufficient number of misguided people with money in their pockets think that a bad security is worth buying they will put the price of it up in the face of the logic of facts and all the arguments of reason. these wild fluctuations, of course, take place chiefly in the more speculative securities. shares in a gold mine can go to any price that the credulity of buyers dictates, since there is no limit to the amount of gold that people can imagine to be under the ground in its territory. all the stock exchanges of the world are in communication with one another by telegraph, or telephone, and so their feelings about prices react on one another's nerves and imaginations, and the stock exchange price list may be said to be the language of international finance, as the bill of exchange is its currency. chapter iv. finance and trade we have seen that finance becomes international when capital goes abroad, by being lent by investors in one country to borrowers in another, or by being invested in enterprises formed to carry on some kind of business abroad. we have next to consider why capital goes abroad and whether it is a good or a bad thing, for it to do so. capital goes abroad because it is more wanted in other countries than in the country of its origin, and consequently those who invest abroad are able to do so to greater advantage. in countries like england and france, where there have been for many centuries thrifty folk who have saved part of their income, and placed their savings at the disposal of industry, it is clear that industry is likely to be better supplied with capital than in the new countries which have been more lately peopled, and in which the store of accumulated goods is less adequate to the industrial needs of the community. for we must always remember that though we usually speak and think of capital as so much money it is really goods and property. in england money consists chiefly of credit in the books of banks, which can only be created because there is property on which the banks can make advances, or because there is property expressed in securities in which the banks can invest or against which they can lend. because our forefathers did not spend all their incomes on their own personal comfort and amusement but put a large part of them into railways and factories, and shipbuilding yards, our country is now reasonably well supplied with the machinery of production and the means of transport. whether it might not be much better so equipped is a question with which we are not at present concerned. at least it may be said that it is more fully provided in these respects than new countries like our colonies, america and argentina, or old countries like russia and china in which industrial development is a comparatively late growth, so that there has been less time for the storing up, by saving, of the necessary machinery. so it comes about that new countries are in greater need of capital than old ones and consequently are ready to pay a higher rate of interest for it to lenders or to tempt shareholders with a higher rate of profit. and so the opportunity is given to investors in england to develop the agricultural or industrial resources of all the countries under the sun to their own profit and to that of the countries that it supplies. when, for example, the government of one of the australian colonies came to london to borrow money for a railway, it said in effect to english investors, "your railways at home have covered your country with such a network that there are no more profitable lines to be built. the return that you get from investing in them is not too attractive in view of all the trade risks to which they are subject. do not put your money into them, but lend it to us. we will take it and build a railway in a country which wants them, and, whether the railway pays or no, you will be creditors of a colonial government with the whole wealth of the colony pledged to pay you interest and pay back your money when the loan falls due for repayment." for in australia the railways have all been built by the colonial governments, partly because they wished, by pledging their collective credit, to get the money as cheaply as possible, and keep the profits from them in their own hands, and partly probably because they did not wish the management of their railways to be in the hands of london boards. in argentina, on the other hand, the chief railways have been built, not by the government but by english companies, shareholders in which have taken all the risks of the enterprise, and have thereby secured handsome profits to themselves, tempered with periods of bad traffic and poor returns. for many years there was a good deal of prejudice in england against investing abroad, especially among the more sleepy classes of investors who had made their money in home trade, and liked to keep it there when they invested it. as traders, we learnt a world-wide outlook many centuries before we did so as investors. to send a ship with a cargo of english goods to a far off country to be exchanged into its products was a risk that our enterprising forefathers took readily. the ship took in its return cargo and came home, bringing its sheaves with it in a reasonable time, though the antonios of the period sometimes had awkward moments if their ships were delayed by bad weather, and they were liable on a bond to shylock. but it was quite another matter to lend money in a distant country when communication was slow and difficult, and social and political conditions had not gained the stability that is needed before contracts can be entered into extending over many years. international moneylending took place, of course, in the middle ages, and everybody knows motley's great description of the consternation that shook europe when philip the second repudiated his debts "to put an end to such financiering and unhallowed practices with bills of exchange."[ ] but though there were moneylenders in those days who obliged foreign potentates with loans, the business was in the hands of expert professional specialists, and there was no medieval counterpart of the country doctor whom we have imagined to be developing industry all over the world by placing his savings in foreign countries. there could be no investing public until there were large classes that had accumulated wealth by saving, and until the discovery of the principle of limited liability enabled adventurers to put their savings into industry without running the risk of losing not only what they put in, but all else that they possessed. by means of this system, the risk of a shareholder in a company is limited to a definite amount, usually the amount that has been paid up on his shares or stock, though in some cases, such as bank and insurance shares, there is a further reserve liability which is left for the protection of the companies' customers. in the eighteenth century a great outburst of gambling in the east indian and south sea companies, and a horde of less notorious concerns was a short-lived episode which must have helped for a very long time to strengthen the natural prejudice that investors feel in favour of putting their money into enterprise at home; and it was still further strengthened by the disastrous results of another great plague of bad foreign securities that smote london just after the war that ended at waterloo. this prejudice survived up to within living memory, and i have heard myself old-fashioned stockbrokers maintain that, after all, there was no investment like home rails, because investors could always go and look at their property, which could not run away. gradually, however, the habit of foreign investment grew, under the influence of the higher rates of interest and profit offered by new countries, the greater political stability that was developed in them, and political apprehensions at home. in fact it grew so fast and so lustily that there came a time, not many years ago, when investments at home were under a cloud, and many clients, when asking their brokers where and how to place their savings, stipulated that they must be put somewhere abroad. this was at a time when mr. lloyd george's financial measures were arousing resentment and fear among the investing classes, and when preachers of the tariff reform creed were laying so much stress on our "dying industries" that they were frightening those who trusted them into the belief that the sun was setting on our industrial greatness. the effect of this belief was to bring down the prices of home securities, and to raise those of other countries, as investors changed from the former into the latter. so the theory that we were industrially and financially doomed got another argument from its own effects, and its missionaries were able to point to the fall in consols and the relative steadiness of foreign and colonial securities which their own preaching had brought about, as fresh evidence of its truth. at the same time fear of socialistic legislation at home had the humorous result of making british investors fear to touch consols, but rush eagerly to buy the securities of colonial governments which had gone much further in the direction of socialism than we had. those were great days for all who handled the machinery of oversea investment and in the last few years before the war it is estimated that england was placing some millions a year in her colonies and dependencies and in foreign countries. old-fashioned folk who still believed in the industrial strength and financial stability of their native land waited for the reaction which was bound to follow when some of the countries into which we poured capital so freely, began to find a difficulty in paying the interest; and just before the war this reaction began to happen, in consequence of the default in mexico and the financial embarrassments of brazil. mexico had shown that the political stability which investors had believed it to have achieved was a very thin veneer and a series of revolutions had plunged that hapless land into anarchy. brazil was suffering from a heavy fall in the price of one of her chief staple products, rubber, owing to the competition of plantations in ceylon, straits settlements and elsewhere, and was finding difficulty in meeting the interest on the big load of debt that the free facilities given by english and french investors had encouraged her to pile up. she had promised retrenchment at home, and another big loan was being hatched to tide her over her difficulties--or perhaps increase them--when the war cloud began to gather and she has had to resort for the second time in her history to the indignity of a funding scheme. by this "new way of paying old debts" she does not pay interest to her bondholders in cash, but gives them promises to pay instead, and so increases the burden of her debt, which she hopes some day to be able to shoulder again, by resuming payments in cash. mexico and brazil were not the only countries that were showing signs, in , of having indulged too freely in the opportunities given them by the eagerness of english and french investors to place money abroad. it looked as if in many parts of the earth a time of financial disillusionment was dawning, the probable result of which would have been a strong reaction in favour of investment at home. then came the war with a short sharp spell of financial chaos followed by a halcyon period for young countries, which enabled them to sell their products at greatly increased prices to the warring powers and so to meet their debt charges with an ease that they had never dreamt of, and even to find themselves lending, out of the abundance of their war profits, money to their creditors. america has led the way with a loan of £ millions to france and england, and canada has placed millions of credit at the disposal of the mother country. there can be little doubt that if the war goes on, and the neutral countries continue to pile up profits by selling food and war materials to the belligerents, many of them will find it convenient to lend some of their gains to their customers. america has also been taking the place of france and england as international moneylenders by financing argentina; and a great company has been formed in new york to promote international activity, on the part of americans, in foreign countries. "and thus the whirligig of time," assisted by the eclipse of civilization in europe, "brings in his revenges" and turns debtors into creditors. in the meantime it need hardly be said that investment at home has become for the time being a matter of patriotic duty for every englishman, since the financing of the war has the first and last claim on his savings. our present concern, however, is not with the war problems of to-day, but with the processes of international finance in the past, and perhaps, before we get to the end, with some attempt to hazard a glimpse into its arrangements in the future. what was the effect on england, and on the countries to whom she lent, of her moneylending activity in the past? as soon as we begin to look into this question we see once more how close is the connection between finance and trade, and that finance is powerless unless it is supported and in fact made possible by industrial or commercial activity behind it. england's international trade made her international finance possible and necessary. a country can only lend money to others if it has goods and services to supply, for in fact it lends not money but goods and services. in the beginnings of international trade the older countries exchange their products for the raw materials and food produced by the new ones. then, as emigrants from the old countries go out into the new ones, they want to be supplied with the comforts and appliances of the older civilizations, such as, to take an obvious example, railways. but as the productions of the new countries, at their early stage of development, do not suffice to pay for all the material and machinery needed for building railways, they borrow, in effect, these materials, in the expectation that the railways will open out their resources, enable them to put more land under the plough and bring more stuff to the seaboard, to be exchanged for the products of europe. the new country, new zealand or japan, or whichever it may be, raises a loan in england for the purpose of building a railway, but it does not take the money raised by the loan in the form of money, but in the form of goods needed for the railway, and sometimes in the form of the services of those who plan and build it. it does not follow that all the stuff and services needed for the enterprise are necessarily bought in the country that lends the money; for instance, if japan borrows money from us for a railway, she may buy some of the steel rails and locomotives in belgium, and instruct us to pay belgium for her purchases. if so, instead of sending goods to japan we shall have to send goods or services to belgium, or pay belgium with the claim on some other country that we have established by sending goods or services to it. but, however long the chain may be, the practical fact is that when we lend money we lend somebody the right to claim goods or services from us, whether they are taken from us by the borrower, or by somebody to whom the borrower gives a claim on us. if, whenever we made a loan, we had to send the money to the borrower in the form of gold, our gold store would soon be used up, and we should have to leave off lending. in other words, our financiers would have to retire from business very quickly if it were not that our manufacturers and shipowners and all the rest of our industrial army produced the goods and services to meet the claims on our industry given, or rather lent, to other countries by the machinery of finance. this obvious truism is often forgotten by those who look on finance as an independent influence that can make money power out of nothing; and those who forget it are very likely to find themselves entangled in a maze of error. we can make the matter a little clearer if we go back to the original saver, whose money, or claims on industry, is handled by the professional financier. those who save do so by going without things. instead of spending their earnings on immediate enjoyment they spend part of them in providing somebody else with goods that they need, and taking from that somebody else an annual payment for the use of these goods for a certain period, after which, if it is a case of a loan, the transaction is closed by repayment of the advance, which again is effected by a transfer of goods. when our country doctor subscribes to an australian loan raised by a colony for building a railway, he hands over to the colony money which a less thrifty citizen would have spent on pleasures and amusements, and the colony uses it to buy railway material. thus in effect the doctor is spending his money in making a railway in australia. he is induced to do so by the promise of the colony to give him £ every year for each £ that he lends. if there were not enough people like him to put money into industry instead of spending it on themselves, there could be no railway building or any other form of industrial growth. it is often contended that a reconstruction of society on a socialistic basis would abolish the capitalist; but in fact it would make everybody a capitalist because the state would have to make the citizens as a whole go without certain immediate enjoyments and work on the production of the machinery of industry. instead of saving being left to the individual and rewarded by a rate of interest, it would be imposed on all and rewarded by a greater productive power, and consequent increase in commodities, enjoyed by the community and distributed among all its members. the advantages, on paper, of such an arrangement over the present system are obvious. whether they would be equally obvious in practice would depend on the discretion with which the government handled the enormous responsibility placed in its hands. but the essential fact that capital can only be got by being saved, and earns the reward that it gets, would remain as strongly in force as ever, and will do so until we have learnt to make goods out of nothing and without effort. going back to our doctor, who lends railway material to an australian colony, we see that every year for each £ lent the colony has to send him £ . this it can only do if its mines and fields and factories can turn out metals or wheat or wool, or other goods which can be shipped to england or elsewhere and be sold, so that the doctor's £ is provided. and so though on both sides the transaction is expressed in money it is in fact carried out in goods, both when the loan is made and the interest is paid. and finally when the loan is paid back again, the colony must have sold goods to provide repayment, unless it meets its debts by raising another. but when a loan is well spent on a railway that is needed for the development of a fertile or productive district, it justifies itself by cheapening transport and quickening the output of wealth in such a manner, that the increased volume of goods that it has helped to create easily meets the interest due to lenders, provides a fund for its redemption at maturity, and leaves the borrower better off, with a more fully equipped productive system. since, then, there is this close and obvious connection between finance and trade, it is inevitable that all who partake in the activities of international finance should find their trade quickened by it. england has lent money abroad because she is a great producer, and certain classes of englishmen are savers, so that there was a balance of goods available for export, to be lent to other countries. in the early years of the nineteenth century, when our industrial power was first beginning to gather strength, we used regularly to export goods to a greater value than we imported. these were the goods that we were lending abroad, clearly showing themselves in our trade ledger. since then the account has been complicated by the growth of the amount that our debtors owe us every year for interest, and by the huge earnings of our merchant navy, which other countries pay by shipping goods to us, so that, by the growth of these items, the trade balance sheet has been turned in the other direction, and in spite of our lending larger and larger amounts all over the world we now have a balance of goods coming in. interest due to us and shipping freights and the commissions earned by our bankers and insurance companies were estimated before the war to amount to something like millions a year, so that we were able to lend other countries some millions or more in a year and still take from them a very large balance in goods. after the war this comfortable state of affairs will have been modified by the sales that we are making now in new york of the american railroad bonds and shares that represented the savings that we had put into america in former years, and by the extent of our war borrowings in america, and elsewhere, if we widen the circle of our creditors. the effect of this will be that we shall owe america for interest on the money that it is lending us, and that it will owe us less interest, owing to the blocks of its securities that it is buying back. against this we shall be able to set debts due to us from our allies, but if our borrowings and sales of securities exceed our lendings as the war goes on, we shall thereby be poorer. our power as a creditor country will be less, until by hard work and strict saving we have restored it. this we can very quickly do, if we remember and apply the lessons that war is teaching us about the number of people able to work, whose capacity was hitherto left fallow, that this country contained, and also about the ease with which we can dispense, when a great crisis makes us sensible, with many of the absurdities and futilities on which much of our money, and productive capacity, used to be wasted. footnotes: [footnote : "united netherlands," chap. xxxii.] chapter v the benefits of international finance when once we have recognized how close is the connection between finance and trade, we have gone a long way towards seeing the greatness of the service that finance renders to mankind, whether it works at home or abroad. at home we owe our factories and our railways and all the marvellous equipment of our power to make things that are wanted, to the quiet, prosaic, and often rather mean and timorous people who have saved money for a rainy day, and put it into industry instead of into satisfying their immediate wants and cravings for comfort and enjoyment it is equally, perhaps still more, true, that we owe them to the brains and energy of those who have planned and organized the equipment of industry, and the thews and sinews of those who have done the heavy work. but brain and muscle would have been alike powerless if there had not been saving folk who lent them raw material, and provided them with the means of livelihood in the interval between the beginning of an industry and the day when its product is sold and paid for. abroad, the work of finance has been even more advantageous to mankind, for since it has been shown that international finance is a necessary part of the machinery of international trade, it follows that all the benefits, economic and other, which international trade has wrought for us, are inseparably and inevitably bound up with the progress of international finance. if we had never fertilized the uttermost parts of the earth by lending them money and sending them goods in payment of the sums lent, we never could have enjoyed the stream that pours in from them of raw material and cheap food which has sustained our industry, fed our population, and given us a standard of general comfort such as our forefathers could never have imagined. it is true that at the same time we have benefited others, besides our own customers and debtors. we have opened up the world to trade and other countries reap an advantage by being able to use the openings that we have made. it is sometimes argued that we have in fact merely made the paths of our competitors straight, and that by covering argentina with a network of railways and so enormously increasing its power to grow things and so to buy things, we have been making an opportunity for german shipbuilders to send liners to the plate and for german manufacturers to undersell ours with cheap hardware and cotton goods. this is, undoubtedly, true. the great industrial expansion of germany between and , has certainly been helped by the paths opened for it all over the world by english trade and finance; and america, our lusty young rival, that is gaining so much strength from the war in which europe is weakening itself industrially and financially, will owe much of the ease of her prospective expansion to spade-work done by the sleepy britishers. it may almost be said that we and france as the great providers of capital to other countries have made a world-wide trade possible on its present scale. the work we have done for our own benefit has certainly helped others, but it does not, therefore, follow that it has damaged us. looking at the matter from a purely business point of view, we see that the great forward movement in trade and finance that we have led and fostered, has helped us even by helping our rivals. in the first place, it gives us a direct benefit as the owners of the mightiest fleet of merchant ships that the world has seen. we do nearly half the world's carrying trade, and so have reason to rejoice when other nations send goods to the ports that we have opened. by our eminence in finance and the prestige of a bill of exchange drawn on london, we have also supplied the credit by which goods have been paid for in the country of their origin, and nursed until they have come to the land in which they are wanted, and even until the day when they have been turned into a finished product and passed into the hands of the final consumer. but there is also the indirect advantage that we gain, as a nation of producers and financiers, from the growing wealth of other nations. the more wealthy they grow, the more goods they produce want to sell to us, and they cannot sell to us unless they likewise buy from us. if we helped germany to grow rich, we also helped her to become one of our best customers and so to help us to grow rich. trade is nothing but an exchange of goods and services. other countries are not so philanthropic as to kill our trade by making us presents of their products and from the strictly economic point of view, it pays us to see all the world, which is our market, a thriving hive of industry eager to sell us as as it can. it may be that as other countries, with the help of our capital and example, develop industries in which we have been pre-eminent, they may force us to supply them with services of which we are less proud to be the producers. if, for example, the americans were to drive us out of the neutral markets with their cotton goods, and then spent their profits by revelling in our hotels and thronging out theatres and shooting in highland deer forests, and buying positions in english society for their daughters we should feel that the course of industry might still be profitable to us, but that it was less satisfactory. on the other hand, it would be absurd for us to expect the rest of the world to stand still industrially in order that we may make profits from producing things for it that it is quite able to make for itself. for the present we are concerned with the benefits of international finance, which have been shown to begin with its enormous importance as the handmaid of international trade. trade between nations is desirable for exactly the same reason as trade between one man and another, namely, that each is, naturally or otherwise, better fitted to grow or make certain things, and so an exchange is to their mutual advantage. if this is so, as it clearly is, in the case of two men living in the same street, it is evidently very much more so in the case of two peoples living in different climates and on different soils, and so each of them, by the nature of their surroundings, able to make and grow things that are impossible to the other. english investors, by developing the resources of other countries, through the machinery of international finance, enable us to sit at home in this inclement isle, and enjoy the fruits of tropical skies and soils. it may be true that if they had not done so we should have developed the resources of our own country more thoroughly, using it less as a pleasure ground, and more as a farm and kitchen garden, and that we should have had a larger number of our own folk working for us under our own sky. instead of thriving on the produce of foreign climes and foreign labour that comes to us to pay interest, we should have lived more on home-made stuff and had more healthy citizens at work on our soil. on the other hand, we should have been hit hard by bad seasons and we should have enjoyed a much less diversified diet. as it is, we take our tea and tobacco and coffee and sugar and wine and oranges and bananas and cheap bread and meat, all as a matter of course, but we could never have enjoyed them if international trade had not brought them to our shores, and if international finance had not quickened and cheapened their growth and transport and marketing. international trade and finance, if given a free hand, may be trusted to bring about, between them, the utmost possible development of the power of the world to grow and make things in the places where they can be grown and made most cheaply and abundantly, in other words, to secure for human effort, working on the available raw material, the greatest possible harvest as the reward of its exertions. all this is very obvious and very material, but international finance does much more, for it is a great educator and a mighty missionary of peace and goodwill between nations. this also is obvious on a moment's reflection, but it will be rejected as a flat mis-statement by many whose opinion is entitled to respect, and who regard international finance as a bloated spider which sits in the middle of a web of intrigue and chicanery, enticing hapless mankind into its toils and battening on bloodshed and war. so clear-headed a thinker as mr. philip snowden publicly expressed the view not long ago that "the war was the result of secret diplomacy carried on by diplomatists who had conducted foreign policy in the interests of militarists and financiers,"[ ] now mr. snowden may possibly be right in his view that the war was produced by diplomacy of the kind that he describes, but with all deference i submit that he is wholly wrong if he thinks that the financiers, as financiers, wanted war either here or in germany or anywhere else. if they wanted war it was because they believed, rightly or wrongly, that their country had to fight for its existence, or for something equally well worth fighting for, and so as patriotic citizens, they accepted or even welcomed a calamity that could only cause them, as financiers, the greatest embarrassment and the chance of ruin. war has benefited the working classes, and enabled them to take a long stride forward, which we must all hope they will maintain, towards the improvement in their lot which is so long overdue. it has helped the farmers, put fortunes in the pockets of the shipowners, and swollen the profits of any manufacturers who have been able to turn out stuff wanted for war or for the indirect needs of war. the industrial centres are bursting with money, and the greater spending power that has been diffused by war expenditure has made the cheap jewellery trade a thriving industry and increased the consumption of beer and spirits in spite of restrictions and the absence of men at the front. picture palaces are crammed nightly, furs and finery have had a wonderful season, any one who has a motor car to sell finds plenty of ready buyers, and second-hand pianos are an article that can almost be "sold on a sunday." but in the midst of this roar of humming trade, finance, and especially international finance, lies stricken and still gasping from the shock of war. when war comes, the price of all property shrivels. this was well known to falstaff, who, when he brought the news of hotspur's rebellion, said "you may buy land now as cheap as stinking mackerel," to most financial institutions, this shrivelling process in the price of their securities and other assets, brings serious embarrassment, for there is no corresponding decline in their liabilities, and if they have not founded themselves on the rock of severest prudence in the past, their solvency is likely to be imperilled. finance knew that it must suffer. the story has often been told, and though never officially confirmed, it has at least the merit of great probability, that in when the morocco crisis made a european war probable, the german government was held back by the warning of its financiers that war would mean germany's ruin. it is more than likely that a similar warning was given in july, , but that the war party brushed it aside. and now that war is upon us, we are being warned that high finance is intriguing for peace. mr. edgar crammond, a distinguished economist and statistician, published an article in the _nineteenth century_ of september, , entitled "high finance and a premature peace," calling attention to this danger and urging the need for guarding against it. first too bellicose and now too pacific, high finance is buffeted and spat upon by men of peace and men of war with a unanimity that must puzzle it. it can hardly err on both sides, but of the two accusers i think that mr. crammond is much more likely to be right. but my own personal opinion is that both these accusers are mistaken, that the financiers never wanted war, that if (which i beg to doubt) diplomacy conducted in their interests produced the war, that was because diplomacy misunderstood and bungled their interests, and that now that the war is upon us, the financiers, though all their interests urge them to want peace, would never be parties to intrigues for a peace that was premature or ill-judged. perhaps i have a weakness for financiers, but if so it is entitled to some respect, because it is based on closer knowledge of them than is owned by most of their critics. for years it was my business as a city journalist, to see them day by day; and this daily intercourse with financiers has taught me that the popular delusion that depicts them as hard, cruel, ruthless men, living on the blood and sweat of humanity, and engulfed to their eyebrows in their own sordid interests, is about as absurd a hallucination as the stage irishman. financiers are quite human--quiet, mild, good-natured people as a rule, many of them spending much time and trouble on good works in their leisure hours. what they want as financiers is plenty of good business and as little as possible disturbance in the orderly course of affairs. such a cataclysm as the present war could only terrify them, especially those with interests in every country of the world. when war comes, especially such a war as this, financing in its ordinary and most profitable sense has to put up its shutters. nobody can come to london now for loans except the british, or french, governments, or, occasionally, one of our colonies. any other borrower is warned off the field by a ruthless committee whose leave has to be granted before dealings in new securities are allowed on the stock exchange. but when the british government borrows, there are no profits for the rank and file of financiers. no underwriting is necessary, and the business is carried out by the bank of england. the commissions earned by brokers are smaller, and the whole city feels that this is no time for profit-making, but for hard and ill-paid work, with depleted staffs, to help the great task of financing a great war. the stock exchange is half empty and nearly idle. it is tied and bound by all sorts of regulations in its dealings, and its members have probably suffered as severely from the war as any section of the community. the first interest of the city is unquestionably peace; and the fact that the city is nevertheless full of fine, full-flavoured patriotic fervour only shows that it is ready and eager to sink its interests in favour of those of its country. every knot that international finance ties between one country and another makes people in those two countries interested in their mutual good relations. the thing is so obvious, that, when one considers the number of these knots that have been tied since international finance first began to gather capital from one country's investors and place it at the disposal of others for the development of their resources, one can only marvel that the course of international goodwill has not made further progress. the fact that it is still a remarkably tender plant, likely to be crushed and withered by any breath of popular prejudice, is rather a comforting evidence of the slight importance that mankind attaches to the question of its bread and butter. it is clear that a purely material consideration, such as the interests of international finance, and the desire of those who have invested abroad to receive their dividends, weighs very little in the balance when the nations think that their honour or their national interests are at stake. since the gilded cords of trade and finance have knit all the world into one great market, the proposition that war does not pay has become self-evident to any one who will give the question a few minutes' thought. international finance is a peacemaker every time it sends a british pound into a foreign country. but its influence as a peacemaker is astonishingly feeble just for this reason, that its appeal is to an interest which mankind very rightly disregards whenever it feels that more weighty matters are in question. the fact that war does not pay is an argument that is listened to as little by a nation when its blood is up, as the fact that being in love does not pay would be heeded by an amorous undergraduate. if, then, the voice of international finance is so feeble when it is raised against the terrible scourge of war, can it have much force on the rare occasions when it speaks in its favour? for there is no inconsistency with the view that finance is a peacemaker, if we now acknowledge that finance may sometimes ask for the exertion of force on its behalf. as private citizens we all of us want to live at peace with our neighbours, but if one of them steals our property or makes a public nuisance of himself, we sometimes want to invoke the aid of the strong arm of the law in dealing with him. consequently, although it cannot be true that finance wanted war such as this one, it cannot be denied that wars have happened in the past, which have been furthered by financiers who believed that they suffered wrongs which only war could put right. the egyptian war of is a case in point, and the south african war of is another. in egypt international finance had lent money to a potentate ruling an economically backward people, without taking much trouble to consider how the money was to be spent, or whether the country could stand the charge on its revenues that the loans would involve. the fact that it did so was from one point of view a blunder and from another a crime, but this habit of committing blunders and crimes, which is sometimes indulged in by finance as by all other forms of human activity, will have to be dealt with in our next chapter, when we deal with the evils of international finance. the consequence of this blunder was that egypt went into default, and england's might was used on behalf of the bondholders who had made a bad investment. this fact has been put forward by mr. brailsford, in his very interesting book on "the war of steel and gold," and by other writers, to show that our diplomacy is the tool of international finance, and that the forces created by british taxpayers for the defence of their country's honour, are used for the sordid purpose of wringing interest for a set of money-grubbers in the city, out of a poor and down-trodden peasantry overburdened by the exactions and extortions of their rulers. mr. brailsford, of course, puts his case much better than i can, in any brief summary of his views. he has earned and won the highest respect by his power as a brilliant writer, and by his disinterested and consistent championship of the cause of honesty and justice, wherever and whenever he thinks it to be in danger. nevertheless, in this matter of the egyptian war i venture to think that he is mistaking the tail for the dog. diplomacy, i fancy, was not wagged by finance, but used finance as a very opportune pretext. if egypt had been brazil, it is not very likely that the british fleet would have shelled rio de janeiro. the bondholders would have been reminded of the sound doctrine, _caveat emptor_, which signifies that those who make a bad bargain have only themselves to blame, and must pocket their loss with the best grace that they can muster. as it was, egypt had long ago been marked out as a place that england wanted, because of its vitally important position on the way to india. kinglake, the historian, writing some three-quarters of a century ago, long before the suez canal was built, prophesied that egypt would some day be ours. in chapter xx. of "eothen," comes this well known passage on the sphynx (he spelt it thus):-- "and we, we shall die, and islam will wither away, and the englishman, leaning far over to hold his loved india, will plant a firm foot on the banks of the nile, and sit in the seats of the faithful, and still that sleepless rock will lie watching, and watching the works of the new, busy race, with those same sad, earnest eyes, and the same tranquil mien everlasting." after the building of the canal, the command of this short cut to india made egypt still more important. england bought shares in the canal, so using finance as a means to a political object; and it did so still more effectively when it used the egyptian default and the claims of english bondholders as an excuse for taking its seat in egypt and sitting there ever since. the bondholders were certainly benefited, but it is my belief that they might have whistled for their money until the crack of doom if it had not been that their claims chimed in with imperial policy. it may have been wicked of us to take egypt, but if so let us lay the blame on the right doorstep and not abuse the poor bondholder and financier who only wanted their money and were used as a stalking horse by the machiavellis of downing street. mr brailsford's own account of the matter, indeed, shows very clearly that policy, and not finance, ruled the whole transaction. in south africa there was no question of default, or of suffering bondholders. there was a highly prosperous mining industry in a country that had formerly belonged to us, and had been given back to its dutch inhabitants under circumstances which the majority of people in this country regarded as humiliating. on this occasion even the pretext was political. it may have been that the english mine-owners thought they could earn better profits under the british flag than under the rule of mr. kruger, though i am inclined to believe that even in their case their incentive was chiefly a patriotic desire to repaint in red that part of the map in which they carried on their business. certainly their grievance, as it was put before us at home, was frankly and purely political. they said they wanted a vote and that mr. kruger would not give them one. that acute political thinker, mr. dooley of chicago, pointed out at the time that if mr. kruger "had spint his life in a rale raypublic where they burn gas," he would have given them the votes, but done the counting himself. but mr. kruger did not adopt this cynical expedient, and public opinion here, though a considerable minority detested the war, endorsed the determination of the government to restore the disputed british suzerainty over the transvaal into actual sovereignty. subsequent events, largely owing to the ample self-government given to the transvaal immediately after its conquest, have shown that the war did more good than harm; and the splendid defeat of the germans by the south african forces under general botha--our most skilful opponent fifteen years ago--has, we may hope, wiped out all traces of the former conflict. but what we are now concerned with is the fact, which will be endorsed by all whose memory goes back to those days, that the south african war, though instigated and furthered by financial interests, would never have happened if public opinion had not been in favour of it on grounds which were quite other than financial--the desire to bring back the transvaal into the british empire and to wipe out the memory of the surrender after majuba, and humanitarian feeling which believed, rightly or wrongly, that the natives would be treated better under our rule. these may or may not have been good reasons for going to war, but at least they were not financial. summing up the results of this rather discursive chapter we see that the chief benefit conferred on mankind by international finance is a quickening of the pace at which the wealth of the world is increased and multiplied, by using the capital saved by old countries for fostering the productive power of new ones. this is surely something solid on the credit side of the balance sheet, though it would be a good deal more so if mankind had made better progress with the much more difficult problem of using and distributing its wealth. if the rapid increase of wealth merely means that honest citizens, who find it as hard as ever to earn a living, are to be splashed with more mud from more motor-cars full of more road hogs, then there is little wonder if the results of international finance produce a feeling of disillusionment. but at least it must be admitted that the stuff has to be grown and made before it can be shared, and that a great advance has been made even in the general distribution of comfort. if we still find it hard to make a living, that is partly because we have very considerably expanded, during the course of the last generation or two, our notion of what we mean by a living. as to the sinister influence alleged to be wielded by international finance in the councils of diplomacy, it has been shown that war on a great scale terrifies finance and inflicts great distress on it. to suppose, therefore, that finance is interested in the promotion of such wars is to suppose that it is a power shortsighted to the point of imbecility. in the case of wars which finance is believed with some truth to have helped to instigate, we have seen that it could not have done so if other influences had not helped it. in short, both the occurrence of the present war, and the circumstances that led up to war in egypt and south africa, have shown how little power finance wields in the realm of foreign politics. in the city if one suggests that our foreign office is swayed by financial influences one is met by incredulous mockery, probably accompanied by assertions that the foreign office is, in fact, neglectful, to a fault, of british financial interests abroad, and that when it does, as in china, interfere with financial matters, it is apt to tie the hands of finance, in order to further what it believes to be the political interests of the country. the formation of the six power group in china meant that the financial strength of england and france had to be shared, for political reasons, with powers which had, on purely financial grounds, no claim whatever to participate in the business of furnishing capital to china. the introduction to the edition of "fenn on the funds," expresses the view that our government is ready to protect our traders abroad, but only helps investors when it suits it to do so. "if," it says, "a barbarian potentate's subjects rob a british trader we never hesitate to insist upon the payment of liberal compensation, which we enforce if necessary by a 'punitive expedition,' but if a civilized government robs a large number of british investors, the government does not even, so far as we know, enlist the help of its diplomatic service. only when, as in the case of egypt, there are important political objects in view, does the state protect those citizens who are creditors of foreign nations. one or two other countries, notably germany, set us a good example, with the best results as far as their investors are concerned." germany is often thus taken as the example of the state which gives its financiers the most efficient backing abroad; but even in germany finance is, like everything else, the obedient servant of the military and political authorities. for several years before the present war, the financiers of berlin were forbidden to engage in moneylending operations abroad. no doubt the government saw that the present war was coming, and so it preferred to keep german money at home. it is true that germany once shook its mailed fist with some vigour on behalf of its financial interest when it made, with us, a demonstration against venezuela. but it is at least possible that it did so chiefly with a view to the promotion of the popularity of its navy at home, and to making it easier to get the money for its upkeep and increase from the taxpayers, already oppressed by their military burden. in morocco questions of trade and finance were at the back of the quarrel, but it would not have become acute if it had not been for the expected political consequences that were feared from the financial penetration that was being attempted; and as has been already pointed out, the financiers are generally credited with having persuaded germany to agree to a settlement on that occasion. in short, finance, if left to itself, is international and peace-loving. many financiers are at the same time ardent patriots, and see in their efforts to enrich themselves and their own country a means for furthering its political greatness and diplomatic prestige. man is a jumble of contradictory crotchets, and it would be difficult to find anywhere a financier who lived, as they are all commonly supposed to do, purely for the pleasure of amassing wealth. if such a being could be discovered he would probably be a lavish subscriber to peace societies, and would show a deep mistrust of diplomatists and politicians. footnotes: [footnote : quoted by the _financial news_ of september , .] chapter vi the evils of international finance no one who writes of the evils of international finance runs any risk of being "gravelled for lack of matter." the theme is one that has been copiously developed, in a variety of keys by all sorts and conditions of composers. since philip the second of spain published his views on "financiering and unhallowed practices with bills of exchange," and illustrated them by repudiating his debts, there has been a chorus of opinion singing the same tune with variations, and describing the financier as a bloodsucker who makes nothing, and consumes an inordinate amount of the good things that are made by other people. it has already been shown that capital, saved by thrifty folk, is essential to industry as society is at present built and worked; and the financiers are the people who see to the management of these savings, their collection into the great reservoir of the money market, and their placing at the disposal of industry. it seems, therefore, that, though not immediately concerned with the making of anything, the financiers actually do work which is now necessary to the making of almost everything. railway managers do not make anything that can be touched or seen, but the power to move things from the place where they are grown or made, to the place where they are eaten or otherwise consumed or enjoyed, is so important that industry could not be carried on on its present scale without them; and that is only another way of saying that, if it had not been for the railway managers, a large number of us who at present do our best to enjoy life, could never have been born. financiers are, if possible, even more necessary, to the present structure of industry than railway men. if, then, there is this general prejudice against people who turn an all important wheel in the machinery of modern production, it must either be based on some popular delusion, or if there is any truth behind it, it must be due to the fact that the financiers do their work ill, or charge the community too much for it, or both. before we can examine this interesting problem on its merits, we have to get over one nasty puddle that lies at the beginning of it. much of the prejudice against financiers is based on, or connected with, anti-semitic feeling, that miserable relic of medieval barbarism. no candid examination of the views current about finance and financiers can shirk the fact that the common prejudice against jews is at the back of them; and the absurdity of this prejudice is a very fair measure of the validity of other current notions on the subject of financiers. the jews are, chiefly, and in general, what they have been made by the alleged christianity of the so-called christians among whom they have dwelt. an obvious example of their treatment in the good old days, is given by antonio's behaviour to shylock. antonio, of whom another character in the _merchant of venice_ says that-- "a kinder gentleman treads not the earth," not only makes no attempt to deny that he has spat on the wicked shylock, and called him cut-throat dog, but remarks that he is quite likely to do so again. such was the behaviour towards jews of the princely venetian merchant, whom shakespeare was portraying as a model of all the virtues.[ ] compare also, for a more modern example, kinglake in a note to chapter v of "eothen." "the jews of smyrna are poor, and having little merchandize of their own to dispose of, they are sadly importunate in offering their services as intermediaries; their troublesome conduct had led to the custom of beating them in the open streets. it is usual for europeans to carry long sticks with them, for the express purpose of keeping off the chosen people. i always felt ashamed to strike the poor fellows myself, but i confess to the amusement with which i witnessed the observance of this custom by other people." originally, as we see from the hebrew scriptures, a hardy race of shepherds, farmers, and warriors, they were forced into the business of finance by the canonical law which forbade christians to lend money at interest, and also by the persecution, robbery and risk of banishment to which christian prejudice made them always liable. for these reasons they had to have their belongings in a form in which they could at any moment be concealed from robbers, or packed up and carried off if their owners suddenly found themselves told to quit their homes. so they were practically compelled to traffic in coins and precious metals and jewellery, and in many places all other trades and professions were expressly forbidden to them. this traffic in coins and metals naturally led to the business of moneylending and finance, and the centuries of practice, imposed on them by christianity, have given them a skill in this trade, which is now the envy of christians who have in the meantime found out that there is nothing wicked about moneylending, when it is honestly done. at the same time these centuries of persecution have given the jews other qualities which we have more reason to envy than their skill in finance, such as their strong family affection and the steadfastness with which they stand by one another in all countries of the world. the fact of their being scattered over the face of the earth has given them added strength since finance became international. the great jew houses have relations and connections in every business centre, and so their power has been welded, by centuries of racial prejudice, into a weapon the strength of which it is easy for popular imagination to exaggerate. christendom forced the money power into the hands of this persecuted race, and now feels sorry when it sees that in an ordered and civilized society, in which it is no longer possible to roast an awkward creditor alive, money power is a formidable force. that a large part of this power is in the hands of a family party, scattered over all lands in which finance is possible, is another reason why, as i have already shown, international finance works for peace. the fact of the existence of the present war, however, shows that the limits of its power are soon reached, at times when the nations believe that their honour and safety can only be assured by bloodshed. a large part of the popular prejudice against financiers may thus be ascribed to anti-semitic feeling. we are still like the sailor who was found beating a jew as a protest against the crucifixion, and, when told that it had happened nearly two thousand years ago, said that he had only heard of it that morning. but, when we have purged our minds of this stupid prejudice, we are still faced by the fact that international finance is often an unclean business, bad both for the borrower and for the lender and profitable only to a horde of parasites in the borrowing country, and to those who handle the loan in the lending country, and get subscriptions to it from investors who are subsequently sorry that they put their eggs into a basket with no bottom to it. under ideal conditions our money is lent by us, through a first-rate and honourable finance house, to a country which makes honest use of it in developing its resources and increasing its power to make and grow things. the loan is taken out from england in the shape of goods and services required for the equipment of a young country, and the interest comes in every year in the shape of food and raw material that feeds us and helps our industry. such, it may be asserted with confidence, is the usual course of events, and must have been so, or england could not have been so greatly enriched by her moneylending operations abroad, and the productive power of the world could not have grown as it has, under the top-dressing that our finance and trade have given it. but though it is thus clear enough that the business must have been on the whole honestly and soundly worked, there have been some ugly stains on its past, and its recent history has not been quite free from unsavoury features. in public opinion was so deeply stirred by the manner in which english investors and borrowing states had suffered from the system by which the business of international finance was handled, that a select committee of the house of commons was "appointed to inquire into the circumstances attending the making of contracts for loans with certain foreign states and also the causes which have led to the non-payment of the principal moneys and interest due in respect of such loans." its report is a very interesting document, well worth the attention of those interested in the vagaries of human folly. it will astound the reader by reason of the wickedness of the waste of good capital involved, and at the same time it is a very pleasant proof of the progress that has been made in finance during the last half century. it is almost incredible that such things should have happened so lately. it is quite impossible that they could happen now. in the republic of honduras had been for forty years in default on its portion, amounting to £ , , of a loan issued in london in , for the federal states of central america. nevertheless it contracted with messrs. b---- and g---- for a loan of £ , , to be issued in paris and london. the loan was to be secured on a railway, to be built, or begun, out of its proceeds, and by a first mortgage on all the domains and forests of the state. the government undertook to pay £ , annually for fifteen years, to meet interest on and redemption of the loan. as it had been forty years in default on a loan which only involved a charge of £ , it is hard to imagine how the state could have entered into such a liability, or how any issuing house could have had the temerity to put it before the public. the public was the only party to the proceedings which showed any sense. don c---- g----, representative of the honduras government in london, relates in the record of these events that he put before the committee, that "the first honduras loan in spite of all the advantages which it offered to subscribers" [issue price, , interest per cent., sinking fund of per cent, which would redeem the whole loan at par within years] "and the high respectability of the house which managed the operation, was received by the public with perfect indifference, with profound contempt; and according to the deficient and vague information which reached the legation, there were hardly any other subscriptions than one of about £ , made by the firm of b----itself," don g----, however, seems to have slightly exaggerated the wisdom of the public; in any case the committee found that by june , , by some means £ , of the loan was held by the public, and £ , was in possession of the representatives of the honduras government. on that day a mr. l---- undertook to take over the government's holding at £ s. per bond, and pay current interest. a market was made, brokers were prevailed on to interest their friends in the security, and in two years' time the bonds were disposed of. the quotation was skilfully kept above the issue price and in november, , it reached . the story of this loan is complicated by the fact that half of it was at the time alleged to have been placed in paris, but it appears, as far as one can disentangle fact from the twisted skein of the report, that the paris placing must have resulted much as did the first effort made in london, and that practically the whole of the bonds there issued came back into the hands of the representatives of honduras. at the end of the proceedings the whole amount of the loan seemed to have been disposed of in london, £ , having been sold to mr. l---- and passed on by him by the means described above, £ , having been issued to railway contractors, £ , having been "drawn before issue and cancelled," while £ , was "issued in exchange for scrip," and £ , was taken on account of commission and expenses. the actual cash received on account of this loan appears, though the committee's figures are difficult to follow, to have come to just over half a million. out of the half million £ , went in cash commission, and £ , in interest and sinking fund, leaving about £ , for the railway contractors and the government. on this loan the committee observes that the commission paid, of £ , bonds, and £ , in cash was "greatly in excess of what is usually charged by contractors for loans." so far it was only a case of a thoroughly speculative transaction carried through by means of the usual accompaniments. a defaulting state believed to be possessed of great potential wealth, thought, or was induced to think, that by building a railway it could tap that wealth. the whole thing was a pure possibility. if the loan had been successfully placed at the issue price it would have sufficed to build the first section (fifty-three miles) of railway, and to leave something over for work in the mahogany forests. it is barely possible that in time the railway might have enabled the government to produce enough stuff out of its forests to meet the charges of the loan. but the possibility was so remote that the terms offered had to be so liberal that they frightened the public, which happened to be in a sensible mood, until it was induced to buy by the creation of a market on the stock exchange; the employment of intermediaries on disastrous terms, and finally default, as soon as the loan charge could no longer be paid out of the proceeds of the loan, completed the tale. in may, , the minister for honduras in paris, m. h----, "took steps" to issue a loan for , , francs, or £ , , . out of it a small sum (about £ , ) was paid to the railway contractors in london, but little of it seems to have been genuinely placed, since, when the franco-german war broke out in july, , m. h---- sent , , francs in cash (£ , ), and , , francs in bonds, to messrs. b---- and g---- in london. messrs. b---- and others made an agreement with mr. c. l----, presumably the gentleman who had taken over and dealt with the unplaced balance of the first london loan. by its terms the net price to be paid by him for each francs (£ ) bond issued originally at francs (£ ), was francs (not quite £ ). he succeeded in selling bonds enough to realize £ , , and he, together with messrs. b---- and g----, received £ , in commission for so doing. in the spring of , the honduras government, still hankering after its railway and the wealth that it was to open up, determined to try again with another loan. something had to be done to encourage investors to take it. a few days before the prospectus appeared a statement was published in a london newspaper to the effect that two ships had arrived in the west india docks from truxillo (honduras) with cargoes of mahogany and fustic consigned to messrs. b---- and g----on account of the honduras railway loan, and that two others were loading at truxillo with similar cargoes on the same account. these cargoes had not been cut by the honduras government. it had bought them from timber merchants, and they were found to be of most inferior quality. in the opinion of the committee "the purchase of these cargoes and the announcement of their arrival in the form above referred to, were intended to induce, and did induce, the public to believe that the hypothecated forests were providing means for paying the interest upon the loan." with the help of this fraud, and with a free and extensive market made on the stock exchange, the honduras per cent. loan for £ , , nominal was successfully issued at . it also had a sinking fund of per cent., which was to pay it off in fifteen years. mr. l---- again handled the operation, having taken over the contract from messrs. b---- and g----. but the success of the issue was more than hollow. it was empty. for mr. l----, in the process of making the market to promote it, had bought nearly the whole loan. applicants had evidently sold nearly as fast as they applied; for on the th december, when the last instalment was to be paid, less than £ , bonds remained in the hands of the public. nevertheless by october, , nearly the whole of the loan had been somehow disposed of to investors or speculators. one of the means taken to stimulate the demand for them was the announcement of extra drawings of bonds at par, over and above the operation of the per cent, sinking fund, provided by the prospectus. there is no need to linger over the complicated details of this sordid story. the committee's report sums up, as follows, the net results of the and loans of honduras:-- "in tracing the disposal of the proceeds of the and loans, it must be remembered that your committee had no evidence before them relating to the funds resulting from three-fifths of the loan of ; only two-fifths of the loan was realized in this country, the remainder was disposed of in paris before august, , and no account of the application of the funds resulting from such portion of the loan could be obtained. "the two-fifths of the loan, and the whole of the loan of , produced net £ , , ; out of this sum only £ , has been paid to the railway contractors; a sum of £ , would have been sufficient to discharge the interest and sinking fund in respect of the issued bonds of the three loans, yet the trustees ... paid to mr. l----£ , , or £ , beyond the sum so required to be paid upon the issued bonds of the loans. "there was paid to him for commissions (apart from expenses) on the three loans, out of the above proceeds, the sum of £ , . he also received out of the same proceeds £ , , being the difference between £ , cash paid to him by the trustees and £ , scrip returned by him to them. this £ , probably represents the premiums paid on the purchase of the scrip before or immediately after the allotment of the loan, and was certainly a misapplication of the proceeds of the loan. "mr. l---- was also paid, out of these proceeds, a further sum of £ , , nearly the whole of which seems to be a payment in discharge of an allowance of £ per bond in respect of the dealings in the loan.... in addition ... it will be remembered that mr. l---- received £ , 'to maintain the credit of honduras.' "he also on the th of june, , obtained £ , by delivering to the trustees ... bonds of the loan, at £ per bond and , bonds of the loan at francs per bond, and retaking them at the same time from the trustees at £ and francs per bond respectively. mr. l---- had contracted to pay for these bonds and they had been issued to him at the prices of £ and francs respectively, and the remission in the price therefore amounted to a gift to him of £ , ... out of this portion of the loan of , and the loan of , mr. l----has received in cash, or by the remission of his contracts, £ , ." it is little wonder that honduras has been in default on these loans ever since. in its report the committee commented severely on the action of don c---- g----, the london representative of the republic. "he sanctioned," it says, "stock exchange dealings and speculations in the loans which no minister should have sanctioned. he was a party to the purchase of the mahogany cargoes, and permitted the public to be misled by the announcements in relation to them. by express contract he authorized the 'additional drawings.' he assisted mr. l---- to appropriate to himself large sums out of the proceeds of the loans to which he was not entitled." very likely he had not a notion as to what the whole thing meant, and only thought that he was doing his best to finance his country along the road to wealth. but the fact remains that by these actions he made his government a party to the proceedings that were so unfortunate for it and so ruinous to the holders of its bonds. after its examination of these and other less sensational but equally disastrous issues the committee made various recommendations, chiefly in the direction of greater publicity in prospectuses, and ended by expressing their conviction that "the best security against the recurrence of such evils as they have above described will be found, not so much in legislative enactments, as in the enlightenment of the public as to their real nature and origin." if the scandals and losses involved by loan issues were always on this gargantuan scale, there would be little difficulty about disposing of them, both on economic and moral grounds, and showing that there is, and can be, only one side to the problem. but when it is only a question, not of fraud on a great scale but of a certain amount of underhand business, such as is quite usual in some latitudes, and a certain amount of doubt as to the use that is likely to be made by the borrower of the money placed at its disposal, it is not so easy to feel sure about the duty of an issuing house in handling foreign loans. at a point, in fact, the question becomes full of subtleties and casuistical difficulties. for instance, let us suppose that an emissary of the republic of barataria approaches a london issuing house and intimates that it wants a loan for millions sterling, to be spent half in increasing the republic's navy, and half in covering a deficit in its budget, and that he, the said emissary, has full power to treat for the loan, and that a commission of per cent. is to be paid to him by the issuing house, which can have the loan at a price that will easily enable it to pay this commission. that is to say, we will suppose that the republic will take for the price of its bonds, which are to carry per cent. interest, to be secured by a lien on the customs receipts, and to be redeemed in thirty years' time by a cumulative sinking fund working by annual drawings at par, or by purchase in the market if the bonds can be bought below par. if the republic's existing per cent. bonds stand, let us say, at in the market, this gives the issuing house a good prospect of being able to sell the new ones easily at , and so it has a per cent. margin out of which to pay stamps, underwriting and other expenses, and commission to the intermediary who brought the proposal, and to keep a big profit to themselves. from the point of view of their own immediate interest there is every reason why they should close with the bargain, especially if we assume that the republic is fairly rich and prosperous, and that there is little fear that its creditors will be left in the lurch by default. from the point of view of national interest there is also much to be said for concluding the transaction. we may, with very good ground, assume that it would also be intimated to the issuing house that a group of continental financiers was very willing to take the business up, that it had only been offered to it owing to old standing relations between it and the republic, and that, if it did not wish to do the business, the loan would readily be raised in paris or berlin. by refusing, the london firm would thus prevent all the profit made by the operation from coming to england instead of to a foreign centre. but there is much more behind. for we have seen that finance and trade go hand-in-hand, and that when loan-houses in the city make advances to foreign countries, the hives of industry in the north are likely to be busy. it has not been usual here to make any express stipulation to the effect that the money, or part of it, raised by a loan is to be spent in england, but it is clear that when a nation borrows in england it is thereby predisposed to giving orders to english industry for goods that it proposes to buy. and even if it does not do so, the mere fact that england promises, by making the loan, to hand over so much money, in effect obliges her to sell goods or services valued at that amount as was shown on an earlier page.[ ] on the continent, this stipulation is usual. so that the issuing house would know that, if they make the loan, it is likely that english shipbuilders will get the orders on which part of it is to be spent, and that in any case english industry in one form or another will be drawn on to supply goods or services to somebody; whereas if they refuse the business it is certain that the industrial work involved will be lost to england. on the other side of the account there are plenty of good reasons against the business. in the first place the terms offered are so onerous to the borrower that it may safely be said that no respectable issuing house in london would look at them. in effect the republic would be paying nearly per cent, on the money, if it sold its per cent. bonds at , and the state of its credit, as expressed by the price of its bonds in the market, would not justify such a rate. the profit offered to the issuing house is too big, and the commission demanded by the intermediary is so large that it plainly points to evil practices in barataria. it means that interested parties have made underhand arrangements with the finance minister, and that the republic is going to be plundered, not in the fine full-flavoured style that ruled in earlier generations, but to an extent that makes the business too disreputable to handle. any honourable english house would consider that the terms offered to itself and the conditions proposed by the emissary were such that the operation was suspicious, and that being mixed up with suspicious business was a luxury that it preferred to leave alone. on other grounds the loan, well secured as it seems to be, is not of a kind to be encouraged. we have supposed its purpose to be, firstly, to meet a deficit in a budget, and secondly, to pay for naval expansion. neither of these objects is going to improve the financial position of the republic. covering a deficit by loan is bad finance in any case, but especially so when the loan is raised abroad. in the latter case it is most likely that the borrowing state is outrunning the constable, by importing more goods than it can pay for out of current production. if it imports for the purpose of increasing its productive power by buying such things as railway material, then it is making a perfectly legitimate use of its credit, as long as the money is well spent, and the railways are honestly built, with a prospect of opening up good country, and are not put into the wrong place for political or other reasons. but if this were so, the money would not be wanted to balance a budget, but on railway capital account. when a balance has to be filled by borrowing it can only mean that the state has spent more than its revenue from taxes permits, and that it is afraid to cut down its expenses by retrenchment or to increase its revenue by taxing more highly. and so it chooses the primrose path of dalliance with a moneylender. as to naval expenditure, here again we have bad finance writ large over the proposal. it is not good business for countries to borrow in order to increase their armies and navies in time of peace, and the practice is especially objectionable when the loan is raised abroad. in time of war, when expenditure has to be so great and so rapid, that the taxpayers could not be expected to have it all taken out of their pockets by the tax-gatherer, there is some excuse for borrowing for naval and military needs; though even in time of war, if we could imagine an ideal state, with every citizen truly patriotic, and properly educated in economics and finance, and with wealth so fairly distributed and taxation so fairly imposed that there would be no possibility of any feeling of grievance and irritation among any class of taxpayers, it would probably decide that the simplest and most honest way of financing war is to do so wholly out of taxation. in time of peace, borrowing for expenditure on defence simply means that the cost of a need of to-day is met by someone who is hired to meet it, by a promise of interest and repayment, the provision of which is passed on to the citizens of to-morrow. it is always urged, of course, that the citizens of to-morrow are as deeply interested in the defence of the realm that they are to inherit as those of to-day, but that argument ignores the obvious fact that to-morrow will bring its own problems of defence with it, which seem likely to be at least as costly as those of the present day. another objection to lending economically backward countries money to be invested in ships, is that we thereby encourage them to engage in shipbuilding rivalry, and to join in that race for aggressive power which has laid so sore a burden on the older peoples. the business is also complicated by the unpleasant activities of the armament firms of all countries, which are said to expend much ingenuity in inducing the governments of the backward peoples to indulge in the luxury of battleships. here, again, there is no need to paint too lurid a picture. the armament firms are manufacturers with an article to sell, which is important to the existence of any nation with a seaboard; and they are entirely justified in legitimate endeavours to push their wares. the fact that the armament firms of england, germany, and france had certain interests in common, is often used as a text for sermons on the subject of the unpatriotic cynicism of international finance. it is easy to paint them as a ring of cold-blooded devils trying to stimulate bloodthirsty feeling between the nations so that there may be a good market for weapons of destruction. from their point of view, they are providers of engines of defence which they make, in the first place, for the use of their own country, and are ready to supply also, in time of peace, to other nations in order that their plant may be kept running, and the cost of production may be kept low. this is one of the matters on which public opinion may have something to say when the war is over. in the meantime it may be noted that unsavoury scandals have occasionally arisen in connection with the placing of battleship orders, and that this is another reason why a loan to finance them is likely to have an unpleasant flavour in the nostrils of the fastidious. but if we admit the very worst that the most searching critic of international finance can allege against the proposal that we imagine to be put forward by the republic of barataria--if we admit that a loan to balance a deficit and pay for ships probably implies wastefulness, corruption, political rottenness, impecunious chauvinism and all the rest of it, the question still arises whether it is the business of an issuing house to refuse the chance of doing good business for itself and for the london money-market, because it has reason to believe that the money lent will not be well spent. in the case supposed, we have seen that the terms offered and the commission to be made by the intermediary were such that the latter would have been shown the door. but if these matters had been satisfactory, ought the proposal to have been rejected because the loan was to be raised for unproductive purposes? in other words, is it the business of an issuing house to take care of the economic morals of its clients, or is it merely concerned to see that the securities which it offers to the public are well secured? in ordinary life, and in the relations between moneylender and borrower at home, no such question could be asked. if i went to my banker and asked for a loan and gave him security that he thought good enough, it would not occur to him to ask what i was going to do with the money--whether i was going to use it in a way that would increase my earning capacity, or on building myself a billiard room and a conservatory, or on a visit to monte carlo. he would only be concerned with making sure that any of his depositors' money that he lent to me would be repaid in due course, and the manner in which i used or abused the funds lent to me would be a question in which i only was concerned. if it is the business of an international finance house to be more careful about the use to which money that it lends on behalf of clients is put, why should this be so? there are several reasons. first, because if the borrower does not see fit to pay interest on the loan or repay it when it falls due, there is no process of law by which the lender can recover. if i borrow from my banker and then default on my debt, he can put me in the bankruptcy court, and sell me up. probably he will have protected himself by making me pledge securities that he can seize if i do not pay, a safeguard which cannot be had in the case of international borrowing; but if these securities are found to be of too little value to make the debt good, everything else that i own can be attached by him. the international moneylender, on the other hand, if his debtor defaults may, if he is lucky, induce his government to bring diplomatic pressure to bear, for whatever that may be worth. if there is a political purpose to be served, as in egypt, he may even find himself used as an excuse for armed intervention, in the course of which his claims will be supported, and made good. in many cases, however, he and the bondholders who subscribed to his issue simply have to say goodbye to their money, with the best grace that they can muster, in the absence of any law by which a lender can recover moneys advanced to a sovereign state. with this essential difference in the conditions under which a banker lends his depositors' money to a local customer, and those under which an international house lends its clients' money to a borrowing country, it follows that the responsible party in the latter case ought to exercise very much more care to see that the money is well spent. in the second place, the customers to whom bankers, in economically civilized lands, lend the money entrusted to them, may fairly be presumed to know something about the use and abuse of money and to be able to take care of themselves. if they borrow money, and then waste it or spend it in riotous living, they know that they will presently impoverish themselves, and that they will be the sufferers. but in the case of a young country, with all its financial experience yet unbought, there is little or no reason for supposing that its rulers are aware that they cannot eat their cake and have it. they probably think that by borrowing to meet a deficit or to build a dreadnought they are doing something quite clever, dipping their hands into a horn of plenty that a kindly providence has designed for their behoof, and that the loan will somehow, some day, get itself paid without any trouble to anybody. moreover, if they are troubled with any forebodings, the voice of common sense is likely to be hushed by the reflection that they personally will not be the sufferers, but the great body of taxpayers, or in the case of actual default, the deluded bondholders; and that in any case, the trouble caused by over-borrowing and bad spending is not likely to come to a head for some years. its first effect is a flush of fictitious prosperity which makes everybody happy and enhances the reputation of the ministers who have arranged it. when, years after, the evil seed sown has brought to light its crops of tares, it is very unlikely that the chain of cause and effect will be recognized by its victims, who are much more likely to lay the bad harvest to the door not of the bad financier who sowed it, but of some innocent and perhaps wholly virtuous successor, merely because it was during his term of office that the crop was garnered. so many are the inducements offered to young states, with ignorant or evil (or both) rulers at their head, to abuse the facilities given them by international finance, that there is all the more reason why those who hold the strings of its purse should exercise very great caution in allowing them to dip into it. there is yet another reason why the attitude of an issuing house, to a borrowing state, should be paternal or even grand-motherly, as compared with the purely business-like attitude of a banker to a local borrower. if the bank makes a bad debt, it has to make it good to its depositors at the expense of its shareholders. it diminishes the amount that can be paid in dividends and so the bank is actually out of pocket. the international financier is in quite a different position. if he arranges a loan for barataria, he takes his profit on the transaction, sells the bonds to investors, or to the underwriters if investors do not apply, and is, from the purely business point of view, quit of the whole operation. he still remains responsible for receiving from the state, and paying to the bondholders, the sum due each half year in interest, and for seeing to the redemption of the bonds by the operation of the sinking fund, if any. but if anything goes wrong with the interest or sinking fund he is not liable to the bondholders, as the bank is liable to its depositors. they have got their bonds, and if the bonds are in default they have made a bad debt and not the issuing house, unless, as is unlikely, it has kept any of them in its own hands. but this absence of any legal liability on the part of the issuing house imposes on it a very strong moral obligation, which is fully recognized by the best of them. just because the bondholders have no right of action against it, unless it can be shown that it issued a prospectus containing incorrect statements, it is all the more bound to see that their money shall not be imperilled by any action of its own. it knows that a firm with a good reputation as an international finance house has only to put its name to an issue, and a large number of investors, who have neither the education nor the knowledge required to form a judgment on its merits, will send in subscriptions for the bonds on the strength of the name of the issuing house. this fact makes it an obvious duty on the part of the latter to see that this trust is deserved. moreover, it would obviously be bad business on their part to neglect this duty. for a good reputation as an issuing house takes years to build up, and is very easily shaken by any mistake, or even by any accident, which could not have been foreseen but yet brings a loan that it has handled into the list of doubtful payers. mr. brailsford, indeed, asserts that it may be to the advantage of bondholders to be faced by default on the part of their debtors. it may be so in those rare cases in which they can get reparation and increased security, as in the case of our seizure of egypt. but in nine cases out of ten, as is shown by the plaintive story told by the yearly reports of the council of foreign bondholders, default means loss and a shock to confidence, even if only temporary, and is generally followed by a composition involving a permanent reduction in debt and interest. investors who have suffered these unpleasantnesses are likely to remember them for many a long year, and to remember also the name of the issuing house which fathered the loan that was the cause of the trouble. there are thus many good reasons why it is the business of a careful issuing firm to see not only that any loan that it offers is well secured, but also that it is to be spent on objects that will not impair the productive capacity of the borrowing country by leading it down the path of extravagance, but will improve it by developing its resources or increasing its power to move its products. on the other hand, the temptation to undertake bad business on behalf of an importunate borrower is great. the profits are considerable for the issuing house and for all their followers in the city. the indirect advantages, in the way of trade orders, conferred on the lending country, are also profitable, and there is always the fear that if london firms take too austere a view of what is good business for them and the borrowing countries, the more accommodating loan-mongers of foreign centres may reap the benefit, and leave them with empty pockets and the somewhat chilly comfort conferred by the consciousness of a high ideal in finance. one of the most unsatisfactory features about the monetary arrangements of society, as at present constituted, is the fact that the reward of effort is so often greater with every degree of evil involved by the effort. and to some extent this is true in finance. just as big fortunes are made by the cheap-jacks who stuff the stomachs of an ignorant public with patent medicines, while doctors slave patiently for a pittance on the unsavoury task of keeping overfed people in health; just as milton got £ for "paradise lost," while certain modern novelists are rewarded with thousands of pounds for writing romances which would never be printed in a really educated community; so in finance the more questionable--up to a certain point--be the security to be handled, the greater are the profits of the issuing house, the larger the commissions of the underwriters and brokers, and the larger are the amounts paid to the newspapers for advertising. as has already been observed, that part of the city that lives on handling new issues has been half starved since the war began, because its activities have been practically confined to loans issued by the british government. these loans have been huge in amount but there has been no underwriting, and brokerages are cut to the bone. advertising for the second war loan was on a great scale, but in proportion to the amount subscribed the cost of it was probably small, according to the ideals that ruled before the war. a colonial loan, or a first-class american railroad bond, almost places itself, and the profits on the issue to all who handle it are proportionately low. the more questionable the security, the more it has to pay for its footing, and the higher are the profits of those who father it and assist the process of delivery, as long, that is, as the birth is successfully accomplished. if there is failure, partial or complete, then the task of holding the baby is longer and more uncomfortable, the more puny and unattractive it is. if, owing to some accident in the monetary atmosphere, a colonial loan does not go off well, the underwriters who find themselves saddled with it, can easily borrow on it, in normal times, and know that sooner or later trustees and other real investors will take it off their hands. but if it is an issue of some minor european power, or of some not too opulent south american state, that is coldly received by the investing public, bankers will want a big margin before they accept it as security for an advance, and it may take years to find a home for it in the strong boxes of real investors, and then perhaps only at a price that will leave the underwriters, like sir andrew aguecheek, "a foul way out." there is thus a logical reason for the higher profits attached to the more questionable issues, and this reason is found in the greater risk attached, if failure should ensue. thus we arrive at the reply to those who criticize international finance on the ground that it puts too big profits into the pockets of those who handle it. if the profits are big, it is only in the case of loan issues which carry with them a considerable risk to the reputation of the fathering firm, and to the pockets of the underwriters, and involve a responsibility, and in the case of default, an amount of wholly unpaid work and anxiety for which the big profits made on the opening proceedings do not nearly compensate. as in the case of the big gains made by patent pill merchants, and bad novelists, it is the public, which is so fond of grumbling because other people make fortunes out of it, that is really responsible for their doing so, by reason of its own greed and stupidity. because it will not take the trouble to find out how to spend or invest its money, it asks those who are clever enough to batten on its foibles, to sell it bad stuff and bad securities, and then feels hurt because it has a pain in its inside, or a worthless bond at its banker's, while the producers thereof are founding county families. if the public would learn the a b c of investment, and also learn that there is an essential difference between investment and speculation, that they will not blend easily but are likely to spoil one another if one tries to mix them, then the whole business of loan issuing and company promotion would be on a sounder basis, with less risk to those who handle it, and less temptation to them to try for big profits out of bad ventures. but as long as "the fool multitude that choose by show" give more attention to the size of an advertisement than to the merits of the security that it offers, the profits of those who cater for its weaknesses will wax fat. when all has been said that can be urged against the record of international finance, the fact remains that from the purely material point of view it has done a great work in increasing the wealth of mankind. it is true that capital has often been wasted by being lent to corrupt or improvident borrowers for purposes which were either objectionable in themselves, or which ought to have been financed, if at all, out of current revenue. it is true, also, that crimes have been committed, as in the case of the putumayo horrors, when the money of english shareholders has been invested in the exploitation of helpless natives, accompanied by circumstances of atrocious barbarity. nevertheless if we compare the record of finance with that of religion or international politics, it stands out as by far the cleanest of the influences that have worked upon the mutual relations of the various groups of mankind. international finance makes a series of bargains between one nation and another, for the mutual benefit of each, complicated by occasional blunders, some robbery, and, in exceptional cases, horrible brutality. religion has stained history with the most ruthless massacres, and the most unspeakable ingenuity in torture, all devised for the glory of god, and the furtherance of what its devotees believed to be his word. international politics have plunged mankind into a series of bloody and destructive wars, culminating in the present cataclysm. finance can only prosper through production; its efforts are inevitably failures, if they do not tend to the growing and making of things, or the production of services, that are wanted. destruction, reduced to a fine art and embellished by the nicest ingenuities of the most carefully applied science, is the weapon of international politics. _note_.--the names of the actors in the honduras drama were printed in blank because it seemed unfair to do otherwise, in revising fifty years' old scandals, as an example of what international finance can do at its worst. footnotes: [footnote : _merchant of venice_, i, .] [footnote : pages , . (note: see chapter iv, "in the beginnings of international trade...")] chapter vii nationalism and finance so far we have considered the working of international finance chiefly from the point of view of its effects upon the prosperity and comfort of mankind as a whole and on this country, as the greatest trader, carrier, and financier of the world. we have seen that the benefit that it works is wrought chiefly through specialization, that is, through the production of the good things of the earth in the lands best fitted, by climate or otherwise, to grow and make them. by lending money to other lands, and the goods and service that they have bought with it, we have helped them to produce things for us to consume, or to work up into other things for our consumption or that of other peoples. thereby we have enriched ourselves and the rest of mankind. but the question still arises whether this process is one that should be left altogether unchecked, or whether it involves evils which go far to modify its benefits. in other words is it a good thing for us, socially and politically, to enrich ourselves beyond a certain point by a process which involves our dependence on other countries for food and raw material? analogy between a state and a man is often useful, if not pushed too far. the original man in a primitive state is always assumed to have been bound to find or make everything that he wanted by his own exertions. he was hut builder, hunter, cultivator, bow-maker, arrow-maker, trapper, fisherman, boat-builder, leather-dresser, tailor, fighter--a wonderfully versatile and self-sufficient person. as the process grew up of specialization, and the exchange of goods and services, all the things that were needed by man were made much better and more cheaply, but this was only brought about at the expense of each man's versatility. nowadays we can all of us do something very much better than the primitive savage, but we cannot do everything nearly as well. we have become little insignificant wheels in a mighty great machine that feeds us and clothes us and provides us with comforts and luxuries of which he could never have dreamt. he was the whole of his machine, and was thereby a far more completely developed man. the modern millionaire, in spite of his enormous indirect power over the forces of nature, is a puny and ineffective being by the side of his savage ancestor, in the matter of power to take care of himself with his own hands and feet and eyes, and with weapons made by his own ingenuity and cunning. moreover, though in the case of the millionaire and of all the comparatively well-to-do classes we can point to great intellectual and artistic advantages, and many pleasant amenities of life now enjoyed by them, thanks to the process of specialization, these advantages can only be enjoyed to the full by comparatively few. to the majority specialization has brought a life of mechanical and monotonous toil, with little or none of the pride in a job well done, such as was enjoyed by the savage when he had made his bow or caught his fish; those who work all day on some minute process necessary, among many others, to the turning out of a pin, can never feel the full joy of achievement such as is gained by a man who has made the whole of anything. pins are made much faster, but some of the men who make them remain machines, and never become men at all in the real sense of the word. and when at the same time the circumstances of their lives, apart from their work, are all that they should not be--bad food, bad clothes, bad education, bad houses, foul atmosphere and dingy and sordid surroundings, it is very obvious that to a large part of working mankind, the benefits of the much vaunted division of labour have been accompanied by very serious drawbacks. the best that can be said is that if it had not been for the division of labour a large number of them could never have come into existence at all; and the question remains whether any sort of existence is better than none. in the case of a nation the process of specialization has not, for obvious reasons, gone nearly so far. every country does a certain amount of farming and of seafaring (if it has a seaboard), and of manufacturing. but the tendency has been towards increasing specialization, and the last results of specialization, if carried to its logical end, are not nice to forecast. "it is not pleasant," wrote a distinguished statistician, "to contemplate england as one vast factory, an enlarged manchester, manufacturing in semi-darkness, continual uproar and at an intense pressure for the rest of the world. nor would the continent of america, divided into square, numbered fields, and cultivated from a central station by electricity, be an ennobling spectacle."[ ] it need not be said that the horrible consequences of specialization depicted by dr. bowley need not necessarily have happened, even if its effects has been given free play. but the interesting point about his picture, at the present moment, is the fact that it was drawn from the purely economic and social point of view. he questioned whether it was really to the advantage of a nation, regarding only its own comfort and well-being, to allow specialization to go beyond a certain point. it had already arrived at a point at which land was going out of cultivation in england, and was being more and more regarded as a park, pleasure ground and sporting place for people who made, or whose forbears had made, fortunes out of commerce and finance, and less and less as a means for supplying food for our workers, and raw material for our industries. the country workers were going to the new countries that our capital was opening up, or into the towns to learn industrial crafts, or taking services as gamekeepers, grooms or chauffeurs, with the well-to-do classes who earned their profits from industry or business. even before the war there was a growing scarcity of labour to grow, and harvest, even the lessened volume of our agricultural output. dr. bowley's picture was far from being realized and even if the process of specialization had gone on, it may be hoped that we should have had sense enough to avoid the blackest of its horrors. then came the war, which went far to undermine the great underlying assumption on which the free interchange of capital among nations and the consequent specialization that proceeded from it, was taken to be a safe and sound policy. this assumption was in effect, that the world was civilized to a point at which there was no need to fear that its whole economic arrangements would be upset by war. we now know that the world was not civilized to this point, and is a very long way from being so, that the ultimate appeal is still to "arms and the man," and that we have still to be careful to see that our trade and industry are carried on in such a way as to be least likely to be hurt if ploughshares have suddenly to be beaten into swords. at first sight, this is a somewhat tragical discovery, but it carries with it certain consolations. if the apparent civilization evolved by the nineteenth century had been good and wholesome, it might have been really sad to find that it was only a thin veneer laid over a structure that man's primitive passions might at any moment overturn. in fact, the apparently achieved civilization was so grossly material in its successes, so forcibly feeble in its failures, so beset with vulgarity at its summit and undermined by destitution at its base, that even the horrors of the present war, with its appalling loss of the best lives of the chief nations of the earth, may be a blessing to mankind in the long run if they purge its notions about the things that are worth trying for. at least the war is teaching us that the wealth of a nation is not a pile of commodities to be frittered away in vulgar ostentation and stupid self-indulgence, but the number of its citizens who are able and ready to play the man as workers or fighters when a time of trial comes. "national prosperity," says cobbett, "shows itself ... in the plentiful meal, the comfortable dwelling, the decent furniture and dress, the healthy and happy countenances, and the good morals of the labouring classes of the people." so he wrote, in newgate gaol, in .[ ] since then many reformers have preached the same sound doctrine, but its application has made poor progress, in relation to the growth of our riches in the same period. if we now decide to put it into practice, we shall not long tolerate the existence in our midst of disease and destitution, and a system of distribution of the world's goods which gives millions of our population no chance of full development. we need not, then, stay to shed tears over the civilization, such as it was, which we thought we had and had not. its good points will endure, for evil has a comfortable habit of killing itself and those who work it. all that we are concerned with at this moment is the fact that its downfall has shaken an article in our economic faith which taught us that specialization was a cause of so much more good than evil, that its development by the free spreading of our capital all over the world, wherever the demand for it gave most profit to the owner, was a tendency to be encouraged, or at least to be left free to work out its will. this was true enough to be a platitude as long as we could rely on peace. our capital went forth and fertilized the world, and out of its growing produce the world enriched us. as the world developed its productive power, its goods poured into us, as the great free mart where all men were welcome to sell their wares. these goods came in exchange for our goods and services, and the more we bought the more we sold. when other nations took to dealing direct with one another, they wanted our capital to finance the business, and our ships to carry the goods. the world as a whole could not grow in wealth without enriching the people that was the greatest buyer and seller, the greatest moneylender and the greatest carrier. it was all quite sound, apart from the danger depicted by dr. bowley, as long as we had peace, or as long as the wars that happened were sufficiently restricted in their area and effect. but now we have seen that war may happen on such a scale as to make the interchange of products between nations a source of grave weakness to those who practise it, if it means that they are thereby in danger of finding themselves at war with the providers of things that they need for subsistence or for defence. another lesson that the war has taught us is that modern warfare enormously increases the cost of carriage by sea, because it shuts up in neutral harbours the merchant ships of the powers that are weaker on the sea, and makes huge calls, for transport purposes, on those of the powers which are in the ascendant on the water. this increase in the cost of sea carriage adds to the cost of all goods that come by sea, and is a particularly important item in the bill that we, as an island people, have to pay for the luxury of war. it is true that much of the high price of freight goes into the pockets of our shipowners, but they, being busy with transport work for the government, cannot take nearly so much advantage of it as the shipmasters of neutral countries. the economic argument, then, that it pays best to make and grow things where they can best be made and grown remains just as true as ever it was, but it has been complicated by a political objection that if one happens to go to war with a nation that has supplied raw material, or half-raw material, for industries that are essential to our commercial if not to our actual existence, the good profits made in time of peace are likely to be wiped out, or worse, by the extent of the inconvenience and paralysis that this dependence brings with it in time of war. and even if we are not at war with our providers, the greater danger and cost of carriage by sea, when war is afoot, makes us question the advantage of the process, for example, by which we have developed a foreign dairying industry with our capital, and learnt to depend on it for a large part of our supply of eggs and butter, while at home we have seen a great magnate lay waste farms in order to make fruitful land into a wilderness for himself and his deer. it may have paid us to let this be done if we were sure of peace, but now that we have seen what modern warfare means, when it breaks out on a big scale, we may surely begin to think that people who make bracken grow in place of wheat, in order to improve what auctioneers call the amenities of their rural residences, are putting their personal gratification first in a question which is of national importance. we may seem to have strayed far from the problems of international finance and the free interchange of capital between countries, but in fact we are in the very middle of them, because they are so complicated and diverse that they affect nearly every aspect of our national lives. by sending capital abroad we make other countries produce for us and so we help a tendency by which we grow less at home, and export coupons, or demands for interest, instead of the present produce of our brains and muscles; and we do much more than that, for we thereby encourage the best of our workers to leave our shores and seek their fortunes in the new lands which our capital opens up. when we export capital it goes in the shape of goods and services, and it is followed by an export of men, who go to lands where land is plentiful and cheap, and men are scarce and well paid. this process again was sound enough from the purely economic point of view. it quickened the growth of the world's wealth by putting men of enterprise in places where their work was most handsomely rewarded, and their lives were unhampered by the many bars to success that remnants of feudalism and social restrictions put in their way in old countries; and it cleared the home labour market and so helped the workers in their uphill struggle for better conditions and a chance of a real life. but when the guns begin to shoot, the question must arise whether we were wise in leaving the export of capital, which has such great and complicated effects, entirely to the influence of the higgling of the market, and the price offered by the highest bidder. much will evidently depend on the way in which the present war ends. if it should prove to be, as so many hoped at its beginning, a "war to end war," and should be followed by a peace so well and truly founded that we need have no fear for its destruction, then there will be much to be said for leaving economic forces to work themselves out by economic means, subject to any checks that their social effects may make necessary. but if, as seems to be probable, the war ends in a way that makes other such wars quite possible, when we have all recovered from the exhaustion and disgust produced by the present one, then political expediency may overrule economic advantage, and we may find it necessary to consider the policy of restricting the export of british capital to countries with which there is no chance of our ever being at war, and especially to our own dominions oversea, not necessarily by prohibitions and hard and fast rules, but rather by seeing that the countries to which it is desirable for our capital to go may have some advantage when they appeal for it. this advantage our own colonial dominions already possess, both from the sentiment of investors, which is a strong influence in their favour, and will be stronger than ever after the war, and from legal enactment which allows trustees to invest trust funds in their loans. probably the safest course would be to leave sentiment to settle the matter, and pray to providence to give us sensible sentiments. actual restraints on the export of capital would be very difficult to enforce, for capital is an elusive commodity that cannot be stopped at the customs houses. if we lent money to a friendly nation, and our friend was thereby enabled to lend to a likely foe, we should not have mended matters. the time is not yet ripe for a full discussion of this difficult and complicated question, and it is above all important that we should not jump to hasty conclusions about it while under the influence of the feverish state of mind produced by war. the war has shown us that our wealth was a sure and trusty weapon, and much of the strength of this weapon we owe to our activity in international finance. footnotes: [footnote : "england's foreign trade in the nineteenth century," p, , by dr. a.l. bowley.] [footnote : "paper against gold," letter iii.] chapter viii remedies and regulations apart from the political measures which may be found necessary for the regulation, after the war, of international finance, it remains to consider what can be done to amend the evils from which it suffers, and likewise what, if anything, can be done to strengthen our financial weapon, and sharpen its edge to help us in the difficult fight that will follow the present war, however it may end. it has been shown in a previous chapter that the real weaknesses in the system of international finance arise from the bad use made of its facilities by improvident and corrupt borrowers, and from the bigger profits attached, in the case of success, to the more questionable kinds of issues. with regard to the latter point it was also shown that these bigger profits may be, to a great extent, justified by the fact that the risk involved is much greater; since in the case of failure a weak security is much more difficult to finance and find a home for than a good one. it may further be asked why weak securities should be brought out at all and whether it is not the business of financial experts to see that nothing but the most water-tight issues are offered to the public. such a question evidently answers itself, for if only those borrowers were allowed to come into the market whose credit was beyond doubt, the growth of young communities and of budding enterprises would be strangled and the forward movement of material progress would be seriously checked. it is sometimes contended that much more might be done by the stock exchange committee in taking measures to see that the securities to which it grants quotations and settlements are soundly based. if this view is to prevail, its victory has been greatly helped by the events of the war, during which the stock exchange has seen itself regulated and controlled by outside authority to such an extent that it would be much readier than it was two years ago to submit to regulations imposed on it by its own committee at the bidding of the government. nevertheless, there is this great difficulty, that as soon as the stock exchange begins to impose other than merely formal rules upon the issue of securities under its authority, the public very naturally comes to the conclusion that all securities brought out under its sanction may be relied on as absolutely secure; and since it is wholly impossible that the committee's regulations could be so strict as to ensure this result without imposing limits that would have the effect of smothering enterprise, the effect of any such attempt would be to encourage the public to pursue a happy-go-lucky system of investing, and then to blame the stock exchange if ever it found that it had made a mistake and had indulged in speculation when it flattered itself that it was investing. the whole question bristles with difficulties, but it seems hardly likely that after the war the stock exchange and the business of dealing in securities will ever be quite on the old basis again. in any attempt that is made to regulate them, however, it will be very necessary to remember that capital is an extremely elusive thing, and that if too strict rules are laid down for it, it very easily evades them by transferring itself to other centres. if the authorities decide that only such and such issues are to be made, or such and such securities are to be dealt in in london, they will be inviting those who consider such regulations unfair or unwise to buy a draft on paris or new york, and invest their money in a foreign centre. capital is easily scared, and is very difficult to bottle up and control, and if any guidance of it in a certain direction is needed, the object would probably be much more easily achieved by suggestion than by any attempt at hard and fast restriction, such as worked well enough under the stress of war. any real improvement to be achieved in the system by which we have hitherto supplied other nations with capital will ultimately have to be brought about by a keener appreciation, both by issuing houses and investors, of the kind of business that is truly legitimate and profitable. it does not pay in the long run to supply young communities with opportunities for outrunning the constable, and it is possible that when this wholesome platitude is more clearly grasped by the public, no issuing house will be found to bring out a loan that is not going to be used for some definite reproductive purpose, or to float a company, even of the semi-speculative kind, the prospects of which have not been so well tested that the shareholders are at least bound to have a fair chance of success. the ideals of the issuing houses have so far advanced since the days of the honduras scandal, that in the time of the late war in the balkans none could be found to father any financial operation in london on behalf of any of the warring peoples. it only remains for the education of the investor to continue the progress that it has lately made, for the waste of capital by bad investment to be greatly curtailed. probably there will always, as long as the present financial basis of society lasts, be outbursts of speculation in which a greedy public will rush madly after certain classes of stocks and shares, with the result that a few cool-headed or lucky gamblers will be able to live happily ever after as country gentlemen, and transmit comfortable fortunes to their descendants for all time. this is the debt that society pays for its occasional lapses in finance, just as its lapses in matters of taste are paid for by the enriching of those who provide it with rubbishy stuff to read, or rubbishy shows in picture palaces. the education of the individual in the matter of spending or investing his or her money is one of the most pressing needs of the future, and only by its progress can the evils which are usually laid to the door of finance be cured by being attacked in their real home. in the meantime much might be done by more candid publicity and clearer statements in prospectuses of the objects for which money lent is to be used and of the terms on which loan issues have been arranged. any reasonable attempts that may be made to improve the working of international finance are certain to have the support of the best elements in the city. at the same time we may hope that as economic progress goes slowly ahead over the stepping stones of uncomfortable experience, borrowing countries will see that it really pays them to pay their yearly bills out of yearly taxes, and that they are only hurting themselves when they mortgage their future revenue for loans, the spending of which is not going to help them to produce more goods and so raise more revenue without effort. war is the only possible excuse for asking foreign nations to find money for other than reproductive purposes. in time of war it can be justified, even as an individual can be justified for drawing on his capital in order to pay for an operation that will save his life. but in both cases it leaves both the nation and the individual permanently poorer and with a continuous burden to meet in the shape of interest and sinking fund, until the loan has been redeemed. loans raised at home have an essentially different effect. the interest on them is raised from the taxpayers and paid back to the taxpayers, and the nation, as a whole, is none the poorer. but when one nation borrows from another it takes the loan in the form of goods or services, and unless these goods and services are used in such a way as to enrich it and help it to produce goods and services itself, it is bound to be a loser by the bargain; because it has to pay interest on the loan in goods and services and to redeem the loan by the same process, and if the loan has not been used to increase its power of turning out goods and services, it is inevitably in the same position as a spendthrift individual who has pledged his income for an advance and spent it on riotous living. one of the great benefits that the present war is working is that it is teaching young countries to do without continual drafts of fresh capital from the older ones. instead of being able to finance themselves by fresh borrowing, they have had to close their capital accounts for the time being, and develop themselves out of their own resources. it is a very useful experience for them, and is teaching them lessons that will stand them in good stead for some time to come. for the old countries, when the war is over, will have problems of their own to face at home, and will not be able at once to go back to the old system of placing money abroad, even if they should decide that the experiences of war have raised no objections to their doing so with the old indiscriminate freedom. it is easy, however, to exaggerate the effect of the war on our power to finance other peoples. pessimistic observers, with a pacifist turn of mind, who regard all war as a hideous barbarism and refuse to see that anything good can come out of it, are apt in these days to make our flesh creep by telling us that war will inevitably leave europe so exhausted and impoverished that its financial future is a prospect of unmitigated gloom. they talk of the whole cost of the war as so much destruction of capital, and maintain that by this destruction we shall be for some generations in a state of comparative destitution. these gloomy forecasts may be right, but i hope and believe that they will be found to have been nightmares, evolved by depressed and prejudiced imaginations. war destroys capital when and where actual destruction of property takes place, as now in belgium, northern france, and other scenes of actual warfare, and on the sea, where a large number of ships, though small in relation to the total tale of the merchant navies of the world, have been sunk and destroyed. destruction in this sense has only been wrought, so far, in limited areas. in so far as agricultural land has been wasted, kindly nature, aided by industry and science, will soon restore its productive power. in so far as factories, railways, houses and ships have been shattered, man's power to make, increased to a marvellous extent by modern mechanical skill, will repair the damage with an ease and rapidity such as no previous age has witnessed. in another sense it may be argued that war destroys capital in that it prevents its being accumulated, but this is a distortion of the meaning of the word destroy. if it had not been for the war, we in england should have been saving our usual three to four hundred millions a year and putting the money to productive uses, in so far as we did not lend it to spendthrift nations or throw it away on unprofitable ventures. if we had invested it well, it would have made us and the rest of the world richer. instead of doing so we are spending our savings on war and consequently we are not growing richer. but when the war is over our material productive power will be as great as ever, except for the small number of our ships that have been sunk or the small amount of damage done to us by enemy aircraft. our railways and factories may be somewhat behindhand in upkeep, but that will soon be made good, and against that item on the debit side, we may set the great new organization for munition works, part of which, we may hope, will be available for peaceful production when the time for peace is ripe. it is a complete mistake to suppose that war can be carried on out of accumulated capital, which is thereby destroyed. all the things and services needed for war have to be produced as the war goes on. the warring nations start with a stock of ships and guns and military and naval stores, but the wastage of them can only be made good by the production of new stuff and new clothes and food for the soldiers and new services rendered as the war goes on. this new production may be done either by the warring powers or by neutrals, and if it is done by neutrals, the warring powers can pay for it out of capital by selling their securities or by pledging their wealth. in so far as this is done the warring powers impoverish themselves and the neutrals are enriched, but the world's capital as a whole is not impaired. if we sell our pennsylvania railroad bonds to americans, and buy shells with the proceeds, we are thereby poorer and americans are richer, but the earning power of the pennsylvania railroad is not altered. it may be, if we conduct the war wastefully, and refuse to meet its cost by our own self-denial--going without things ourselves so that we can save, money to lend to the government for the war--that we shall pledge our property and sell what of it we can sell to neutrals, to such an extent that we shall be seriously poorer at the end of it. at present[ ] we are not selling and pledging our capital wealth any faster than we are lending to our allies; and if we pull ourselves up short, and exercise the necessary self-denial, seeing that we must pay for the war in the long run out of our own pockets, and that far the cheapest and cleanest policy is to do so now, and if the war does not last too long, there is no reason why it should impoverish us to an extent that will cripple us seriously. it is true that we shall have lost an appalling number of the best of our manhood, and this is a loss that is irreparable in many of its aspects. but from the purely material point of view we may set against it the great increase in the productive power of those that are left behind, through the lessons that the war has taught us in using the store of available energy that was idle among us before. we shall have learnt to work as we never worked before, and we shall have learnt that many of the things on which we used to waste our money and energy were unworthy of us at all times and especially at a time of national crisis. if we can only recognize that the national crisis will go on after the war, and will go on until we have made this old country civilized in the real sense of the word, that is, free from destitution and the vice and dirt and degradation and disease that go with it, then our power of recovery after the war will be illimitable, and we shall go forward to a new standard of wealth and national duty that will leave the dingy ideals of the nineteenth century behind us like a bad dream. this may seem somewhat irrelevant to the question of international finance, but it is not so. we led the way in spreading our capital over the world, with little or no regard for the consequences of this policy on the condition of our population at home. we have now, in the great regeneration that this war has brought, and will bring in still greater measure, to show that we can still make and save capital faster than ever, by working harder and spending our money on improving our heritage, instead of on frivolity and self-indulgence. then we shall still be free to lend money to borrowers who will use it well, and at the same time have plenty to spare for wise use at home in clearing the blots off our civilization. footnotes: [footnote : written on new year's eve, .] index acceptances, of banks and firms. , america, as international financier, ; trade expansion of, helped by england, armament firms and bad finance, , bank of england, position of, . ; weekly return of, banks, bills of exchange held by, _seq_.; functions of, _seq_.; money deposited with, _seq_.; specimen balance sheet of, bearer securities, bill-brokers, , bills of exchange, meaning of, _seq_.; on london, popularity of, , ; uses of, , bonds, description of, bowley, dr., on specialization, brailsford, mr., on egypt and finance, brazil, financial embarrassments of. ; funding scheme for, canada lends to england, capital, bad effects of export of, ; difficulty of controlling, , ; definition of, , ; function of, _seq_.; how acquired, ; plenty of, advantageous to workers, , ; reward of, _seq_. charles ii, dukedoms founded by. , china and international finance, cobbett on national prosperity, colonial investments, advantages possessed by, companies' securities, classes of, ; issue of, coupons, description of, crammond, mr., on financiers and peace, cumulative, preference, ; sinking fund, debenture stocks, discount, market rate of, egypt and finance, _seq_. "fenn on the funds," on diplomacy and finance, finance and industry, , , ; as peace-missionary, _seq_.; benefits of, _seq_.; defined, ; dependent on industry, , , ; effects of war on, , foreign office and finance, , _seq_. france, loan issuing in, freights, effect of war on, geographical distribution, investment by, , german finance and diplomacy, german industry helped by english finance, governments, borrowing by, _seq_. honduras loans, select committee's report on, _seq_. "income," dr. nearing on, industry the foundation of finance, , inherited wealth, _seq_. interest, the price of capital, , interest claims, as article of export, , issuing houses, responsibilities of, _seq_. jews and finance, _seq_. journalism in the city, , kinglake on egypt, ; on jews of smyrna, limited liability, system of, loans, issue of, _seq_. london, strength of, in credit matters, mexico, revolution and default in, morocco crisis and financiers, municipalities, borrowing by, nearing, dr., on capital's reward, , new york as financial centre, philip ii repudiates debts, preference securities, , profit, distinguished from interest, ; the reward of capital, , prospectuses, fuller statement desirable in, ; terms of, _seq_., public, the, the modern dispenser of wealth, _seq_. registered stocks, risk, inseparable from industry, sinking fund, working of, snowden, mr. philip, on finance and diplomacy, , south african war and finance, , specialization, dangers and evils of, _seq_. state, as saver of capital, stock exchange, as regulator of new issues, , ; effect of war on, ; securities dealt in on, _seq_. stock markets, fluctuations of, , ; international relations of, trade balance, , underwriting of loans, , ; risk involved by, venezuela and german diplomacy, war, effects of, on finance, , ; lessons taught by, _seq_., _seq_. the end generously made available by the internet archive/american libraries.) high finance otto h. kahn address delivered at annual dinner american newspaper publishers association april , , waldorf-astoria, new york high finance i the term "high finance" derives its origin from the french "haute finance," which in france as elsewhere in europe designates the most eminently respectable, the most unqualifiedly trustworthy amongst financial houses. why has that term, in becoming acclimated in this country, gradually come to suggest a rather different meaning? why does there exist in the united states, alone amongst the great nations, a widespread attitude of suspicion, indeed in many quarters, of virtual hostility, toward the financial community and especially toward the financial activities which focus in new york, the country's financial capital? there are a number of causes and for some of them finance cannot be absolved from responsibility. but the primary underlying and continuing cause is lack of clear appreciation of what finance means and stands for and is needed for. and from this there has sprung a veritable host of misconceptions, prejudices, superstitions and catch-phrases. never was it of more importance than in the present emergency that the people should have a clear and correct understanding of the meaning and significance of finance, indeed of "high finance," and that they should approach the subject calmly and dispassionately and with untroubled vision, for when the european war is over and the period of reconstruction sets in, one of the most vital questions of the day will be that of finance and financing. the handling and adjustment of that question, although it primarily concerns europe, cannot fail to affect america favorably or unfavorably, according to the wisdom or lack of wisdom of our own attitude and actions. a great many things are being and have been charged in the popular view against finance, with which finance, properly understood, has nothing to do. the possession of wealth does not make a man a financier--just as little as the possession of a chest of tools makes a man a carpenter. finance does not mean speculation--although speculation when it does not degenerate into mere gambling has a proper and legitimate place in the scheme of things economic. finance most emphatically does not mean fleecing the public, nor fattening parasitically off the industry and commerce of the country. finance cannot properly be held responsible for the exploits, good, bad or indifferent, of the man who, having made money at manufacturing, or mining, or in other commercial pursuits, blows into town, either physically or by telephone or telegraph, and goes on a financial spree, more or less prolonged. finance means constructive work. it means mobilizing and organizing the wealth of the country so that the scattered monetary resources of the individuals may be united and guided into a mighty current of fruitful co-operation--a hundredfold, nay ten-thousandfold as potent as they would or could be in individual hands. finance means promoting and facilitating the country's trade at home and abroad, creating new wealth, making new jobs for workmen. it means continuous study of the conditions prevailing throughout the world. it means daring and imagination combined with care and foresight and integrity, and hard, wearing work--much of it not compensated, because of every ten propositions submitted to the scrutiny or evolved by the brain of the financier who is duly careful of his reputation and conscious of his responsibility to the public, it is safe to say that not more than three materialize. for the financial offspring of which he acknowledges parentage, or merely godfathership, he is held responsible by the public for better or for worse, and will continue to be held responsible notwithstanding certain ill-advised provisions of the recently enacted clayton anti-trust act which are bound to make it more difficult for him to discharge that responsibility. amongst other functions and duties, it is "up to him" to look ahead, so that such offspring may always be provided with nouriture, _i.e._, with funds to conduct their business. if for one reason or another they find themselves short of means in difficult times, it is his task and care to find ways and means to obtain what is needed, sometimes at great financial risk to himself. it is perhaps significant that almost all the railroad companies now in receivers' hands were among those for whose financial policy no one amongst the leading banking houses had a continuous and recognized responsibility, though i must not be understood as meaning to suggest that there were not other contributory causes for such receivership, involving responsibility and blame, amongst others, also on members of the banking fraternity. ii without going into shades of encyclopedic meaning, i would define, for the purpose of this discussion, a financier as a man who has some recognized relation and responsibility toward the larger monetary affairs of the public, either by administering deposits and loaning funds or by being a wholesale or retail distributor of securities. to all such the confidence of the financial community, which naturally knows them best, and of the investing public is absolutely vital. without it, they simply cannot live. to provide for the thousands of millions of dollars annually needed by our railroads and other industries, would vastly overtax the resources of all the greatest financial houses and groups taken together, and therefore the financier or group of financiers undertaking such transactions _must_ depend in the first instance upon the co-operation of the financial community at large. for this purpose such houses or groups associate with themselves for every transaction of considerable size, a large number of other houses, thus forming so-called syndicates. but even the resources thus combined of the entire financial community would fall far short of being sufficient to supply the needed funds for more than a very limited time, and appeal must therefore be made to the absorbing power of the country as a whole represented by the ultimate investor. now, let a financial house, either through lack of a high standard of integrity in dealing with the public, or through lack of thoroughness and care, or through bad judgment, forfeit the confidence of its neighbors or of the investing public, and the very roots of its being are cut. i do not mean to claim that high finance has not in some instances strayed from the highest standard, that it has not made mistakes, that it has not at times yielded to temptation--and the temptations which beset its path are indeed many--that there have not been some occurrences which every right thinking man must deplore and condemn. but i do say and claim that practically all such instances have occurred during what may be termed the country's industrial and economic pioneer period, a period of vast and unparalleled concentration of national energy and effort upon material achievement, of tremendous and turbulent surging towards tangible accomplishment, of sheer individualism, a period of lax enforcement of the laws by those in authority, of uncertainty regarding the meaning of the statutes relating to business and, consequently, of impatience at restraint and a weakened sense of the fear, respect and obedience due to the law. in the mighty and blinding rush of that whirlwind of enterprise and achievement things were done--generally without any attempt at concealment, in the open light of day for everyone to behold--which would not accord with our present ethical and legal standards, and public opinion permitted them to be done. to quote one instance out of many: campaign contributions by corporations were a recognized and almost universal practice. the acceptance of such contributions did not shock the most tender political conscience. now they are rightly forbidden, and what up to a few short years ago was not only not prohibited but sanctioned by the custom of a generation and more, is now made and considered a crime. then suddenly a mirror was held up by influences sufficiently powerful to cause the mad race to halt for a moment and to compel the concentrated attention of all the people. and that mirror clearly showed, perhaps it even magnified, the blemishes on that which it reflected. with their recognition came stern insistence upon change, and very quickly the realization of that demand. that is the normal process of civilization in its march forward and upward. and i claim that finance has been as quick and willing as any other element in the community to discern the moral obligations of the new era brought about within the last ten years and to align itself on their side. as soon as the meaning of the laws under which business was to be conducted had come to be reasonably defined, as soon as it became apparent that the latitude tacitly permitted during the pioneer period must end, finance fell into line with the new spirit and has kept in line. i say this notwithstanding the various investigations that have since taken place, nearly all of which have dealt with incidents that occurred several years ago. and in this connection i would add that it is difficult to imagine anything more unfair than the theory and method of these investigations as all too frequently conducted. the appeal all too often is to the gallery, hungry for sensation; the method--to wash as much soiled linen as possible in public (even, if necessary, to make clean linen appear soiled), and to use a profusion of soap and water quite out of proportion to the actual cleaning to be done. to innocent transactions it is sought to give a sinister meaning; what lapses, faults or wrongs may be discovered are given exaggerated portent and significance. the chairman is out to make a record, or to fortify a preconceived notion or accomplish a preconceived purpose. counsel is out to make a record. the principal witnesses are placed in the position of defendants at the bar without being protected by any of the safeguards which are thrown around defendants in a court of law. to complete the picture, i must--saving your presence--add this other patch of black: the reporting is very frequently, if not generally, done by young men not very familiar with matters of finance and in search of incident and of high light rather than of the neutral tints of a sober and even record; and the job of headlining seems somehow to be entrusted always to a mortal enemy of the particular witnesses of each session, selected with great care for his ingenuity in compressing the maximum of poison gases into a few explosive words. it may all be legitimate, according to political standards, but it is not justice, and what of benefit is accomplished could equally well be obtained, whatever of guilt is to be revealed could equally well and probably better be disclosed, without resorting to inflammatory appeal and without, by assault or innuendo, recklessly and often indiscriminately besmirching reputations and hurting before the whole world the good name of american business. i do not know of any similar method and practice and spirit of conducting investigations in any other country. by all means let us delve deep wherever we have reason to suspect that guilt lies buried. let us take short cuts to arrive at the truth, but let us be sure that it is the truth that we shall meet at the end of our road, and not a mongrel thing wearing some of the garments of truth, but some others, too, belonging to that trinity of unlovely sisters, passion, prejudice and self-seeking. iii in many ways, in many instances, wrong impressions about finance have been given to the public, sometimes from ignorance, sometimes with malice aforethought, sometimes for political purposes. the fact is that the men in charge of our financial affairs are, and to be successful, must be every whit as honorable, as patriotic, as right thinking, as anxious for the good opinions of their fellowmen as those in other walks of life. in every time of crisis or difficulty in the nation's history, from the war of independence to the present european war, financiers have given striking proof of their devotion of the public weal, and they may be depended upon to do so whenever and howsoever called upon. american finance has rendered immense services to the country, and its record--considering especially the gross faultiness of the laws under which it had to work before the passage of the federal reserve act, and in some respects still has to work--compares by no means unfavorably with that of finance in europe. there has been no gambling frenzy in the financial markets of america within the memory of this generation equalling the recklessness and magnitude of england's south african mining craze with its record of questionable episodes, some of them involving great names; no scandal comparable to the panama scandal, the copper collapse, the cronier failure, and similar events in france; no bank failure as disgraceful and ruinous as that of the leipziger bank and two or three others within the last dozen years in germany. no combination exists in this country remotely approaching the monopolistic control exercised by several of the so-called cartels and syndicates of europe. one of the reasons why finance so frequently has been the target for popular attack is that it deals with the tangible expression of wealth, and in the popular mind pre-eminently personifies wealth, and is widely looked upon as an easy way to acquire wealth without adequate service. yet it is a fact that there are very few financial houses of great wealth. all of the very greatest fortunes of the country, and in fact most of the great fortunes, have been made, not in finance, but in trade, industries and inventions. a similar exaggerated view prevails as to the power of finance. it is true there have been men in finance from time to time, though very rarely indeed, who did exercise exceedingly great power, such as, in our generation, the late j. p. morgan and e. h. harriman. but the power of those men rested not in their being financiers, but in the compelling force of their unique personalities. they were born leaders of men and they would have been acknowledged leaders and exercised the power of such leadership in whatever walk of life they might have selected as theirs. as i have said before, the capacity of the financier is dependent upon the confidence of the financial community and the investing public, just as the capacity of the banks is dependent upon the confidence of the depositing public. take away confidence and what remains is only that limited degree of power or influence which mere wealth may give. confidence cannot be compelled; it cannot be bequeathed--or, at most, only to a very limited extent. it is and always is bound to be voluntary and personal. i know of no other centre where the label counts for less, where the shine and potency of a great name is more quickly rubbed off if the bearer does not prove his worth, than in the great mart of finance. mere wealth indeed can be bequeathed, but the power of mere wealth--to paraphrase a famous dictum--has decreased, is decreasing and ought to be, and will be, further diminished. iv what, then, can and should finance do on its own part in order to gain and preserve for itself that repute and status with the public to which it is entitled, and which in the interest of the country, as well as itself, it ought to have? . conform to public opinion it must not only _do_ right, but it must also be particularly careful concerning the _appearance_ of its actions. finance should "omit no word or deed" to place itself in the right light before the people. it must carefully study and in good faith conform to public opinion. . publicity one of the characteristics of finance heretofore has been the cult of silence, some of its rites have been almost those of an occult science. to meet attacks with dignified silence, to maintain an austere demeanor, to cultivate an etiquette of reticence, has been one of its traditions. nothing could have been more calculated to irritate democracy, which dislikes and suspects secrecy and resents aloofness. and the instinct of democracy is right. men occupying conspicuous and leading places in finance as in every other calling touching the people's interests, are legitimate objects for public scrutiny in the exercise of their functions. if opportunity for such scrutiny is denied, if the people's legitimate desire for information is met with silence, secrecy, impatience and resentment, the public mind very naturally becomes infected with suspicion and lends a willing ear to all sorts of gossip and rumors. the people properly and justly insist that the same "fierce light that beats upon a throne" should also beat upon the high places of finance and commerce. it is for those occupying such places to show cause why they should be considered fit persons to be entrusted with them, the test being not merely ability, but just as much, if not more, character, self-restraint, fair-mindedness and due sense of duty towards the public. finance, instead of avoiding publicity in all of its aspects, should welcome it and seek it. publicity won't hurt its dignity. a dignity which can be preserved only by seclusion, which cannot hold its own in the market place, is neither merited nor worth having. we must more and more get out of the seclusion of our offices, out into the rough and tumble of democracy, out--to get to know the people and get known by them. not to know one another means but too frequently to misunderstand one another, and there is no more fruitful source of trouble than to misunderstand one another's kind and ways and motives. . service every man who by eminent success in commerce or finance raises himself beyond his peers is in the nature of things more or less of an "irritant" (i use the word in its technical meaning) to the community. it behooves him, therefore, to make his position as little jarring as possible upon that immense majority whose existence is spent in the lowlands of life so far as material circumstances are concerned. it behooves him to exercise self-restraint and to make ample allowance for the point of view and the feelings of others, to be patient, helpful, conciliatory. it behooves him to remember that many other men are working, and have worked all their lives, with probably as much effort and assiduous application, as much self-abnegation as he, but have not succeeded in raising themselves above mediocre stations in life, because to them has not been granted the possession of those peculiar gifts which beget conspicuous success, and to which, because they are very rare and because they are needed for the world's work, is given the incentive of liberal reward. he should beware of that insidious tendency of wealth to chill and isolate; he should be careful not to let his feelings, aspirations and sympathies become hardened or narrowed; lest he become estranged from his fellow men; and with this in view he should not only be approachable but should seek and welcome contact with the work-a-day world so as to remain part and parcel of it, to maintain and prove his homogeneity with his fellow men. and he should never forget that the advantages and powers which he enjoys are his on suffrance, so to speak, during good behavior, the basis of their conferment being the consideration that the community wants his talents and his work, and grants him generous compensation--including the privilege of passing it on to his children--in order to stimulate him to the effort of using his capacities, since it is in the public interest that they should be used to their fullest extent. he should never forget that the social edifice in which he occupies so desirable quarters, has been erected by human hands, the result of infinite effort, of sacrifice and compromise, the aim being the greatest good of society; and that if that aim is clearly shown to be no longer served by the present structure, if the successful man arrogates to himself too large or too choice a part, if, selfishly, he crowds out others, then, what human hands have built up by the patient work of many centuries, human hands can pull down in one hour of passion. the undisturbed possession of the material rewards now given to success, because success presupposes service, can be perpetuated only if its beneficiaries exercise moderation, self-restraint, and consideration for others in the use of their opportunities, and if their ability is exerted, not merely for their own advantage, but also for the public good and the weal of their fellow men. . stand up for convictions and organize in the political field, the ways not only of finance but of business in general have been often unfortunate and still more often ineffective. it is in conformity with the nature of things that the average man of business, responsible not only for his own affairs, but often trustee for the welfare of others, should lean towards that which has withstood the acid test of experience and should be somewhat diffident towards experiment and novel theory. but, making full allowance for this natural and proper disposition, it must, i believe, be admitted that business, and especially the representatives of large business, including high finance, have too often failed to recognize in time the need and to heed the call for changes from methods and conceptions which had become unsuitable to the time and out of keeping with rationally, progressive development; that they have too often permitted themselves to be guided by a tendency toward unyielding or at any rate apparently unyielding bourbonism instead of giving timely aid in a constructive way toward realizing just and wise modifications of the existing order of things. apart from these considerations and leaving aside practices formerly not uncommon, but which modern laws and modern standards of morality have made impossible, it may be said generally that business is doing too much kicking and not enough fighting. in fact, almost the only instance which i can remember of business asserting itself effectively on a large scale and by a genuine effort for its rights, its legitimate interests and its convictions was during the mckinley-bryan campaign, in saying which i do not mean to endorse some of the methods used in that campaign. and yet, the latent political power of business is enormous. wisely organized for proper and right purposes it would be irresistible. no political party could succeed against it. if this country is to take full advantage of the unparalleled opportunities which the developments of the last two years have opened up to it, if, in the severe competition which sooner or later after the close of the war is bound to set in for the world's trade, it is to hold its own, it must not only not be hampered by unwise and antiquated laws, as it now is, in certain respects, but it must be intelligently aided and fostered by the legislative and administrative powers. business in the leading european countries has been backed up by the respective governments in the past and will be backed up, more than ever, in the post-bellum period. everywhere else through the civilized world in matters of national policies as they affect business, the representatives of business are consulted and listened to with the respect which is due to expert knowledge. it is only in america that the views of business men in general (as distinct from the agitation of particular business men or organizations having a special object to serve, such as on the occasion of tariff making in former days) are ignored, their advice brushed aside or even resented, their representatives treated as interlopers. it is only in america that the exigencies of politics not infrequently, i might almost say habitually, are given precedence over the exigencies of business. objectionable methods and practices sometimes resorted to in the past by corporate interests in endeavoring to influence legislation and public opinion have been abandoned beyond resurrection. it is only fair that with them should be abandoned the habit of politicians, sometimes politicians in very high places, to denounce as "lobbying" every organized effort of large business to oppose tendencies and propositions of legislation deemed by it inimical to the best interests of business and of the country. it is only fair that there should be abandoned the habit of sneering at and suspecting organized efforts by business men to educate public opinion on questions affecting business and finance as improper attempts to "manufacture" or "accelerate" public opinion. v the people are fair-minded and when fully informed, almost invariably wise and right in their judgment, which cannot always be said of their representatives. when scolded, browbeaten, maligned and harassed, finance may well turn upon its professional fault-finders and challenge comparison. finance and financiers have had no mean share in creating organizations and institutions in this country which are models of efficiency and which men from all quarters of the globe come here to study and to admire. it is the critics of finance and business who--to mention but a few instances--have given to the army aeroplanes that are grossly defective, to the navy submarines that are in constant trouble, who have passed laws which have driven our ships off the seas in the world's trade, and other laws which have mainly brought it about that in the year less railroad mileage has been constructed in the united states than within any one year since the civil war. just as congress, by a series of laws, has imposed burdens and costs upon ships operating under the american flag which made it impossible for capital to invest in american ships for use in the world's trade and earn a fair return in normal times, so the federal and state legislatures, during the past ten years, have imposed upon the railroads all kinds of exactions, restrictions and increasing costs which have had the result of arresting progress, and which threaten, after the cessation of the present period of abnormal earnings, to seriously lame that vastly important industry. congress has done little to indicate that it recognizes the urgency and bigness and significance of the momentous situation which confronts the country. nor does it seem inclined to pay serious heed to the views of business--and by that i do not mean the views of business "magnates," but the consensus of opinion of business men in general. nor does past experience encourage us to believe that it will pay such heed unless impelled by the instinct of self-preservation. amongst the powers for which our friends of both political parties have a wholesome respect, one of the most potent is organization. let business then become militant, not to secure special privileges--it does not want any and does not need any--but to secure due regard for its views and its rights and its conceptions as to what measures will serve the best interests of the country, and what measures will harm and jeopardize such interests. without wishing to hold up the labor unions as offering a model for the spirit which should actuate us or the methods we should follow--because their class-consciousness and the resulting conduct are sometimes extreme and often shortsighted, i would urge upon business men to cultivate and demonstrate but a little of that cohesion and discipline and subordination of self in the furtherance of the common cause, that readiness to back up their spokesmen, that loyalty to their calling and to one another which working men practice and demonstrate daily, and which have secured for their representatives the respect and fear of political parties. let business men range themselves behind their spokesmen, such as the united states chamber of commerce in washington and the chambers of commerce and kindred associations in states and cities. let them get together now and in the future through a properly constituted permanent organization, and guided by practical knowledge, broad vision and patriotism, agree upon the essentials of legislation affecting affairs, which the situation calls for from time to time. let them pledge themselves to use their legitimate influence and their votes to realize such legislation and to oppose actively what they believe to be harmful lawmaking. let them strive, patiently and persistently, to gain the confidence of the people for their methods and their aims. let them meet false or irresponsible or ignorant assertion with plain and truthful explanation. let them take their case directly to the people--as the railroads have been doing of late with very encouraging results--and inaugurate a campaign of education in sound economics, sound finance and sound national business principles. let business men do these things, not sporadically, under the spur of some imminent menace, but systematically and persistently. let them be mindful that just as the price of liberty is eternal vigilance, so eternal effort in resisting fallacies and in disseminating true and tested doctrine is the price of right lawmaking in a democracy. geo. w. brooks, secretary and treasurer, founder of the company as reorganized in the year the spirit of by george w. brooks founder of the california insurance company (as reorganized in the year ) and who has continuously occupied the position of secretary and managing underwriter with the corporation since that date. published by the california insurance company of san francisco copyright by geo. w. brooks dedicated to the directors and shareholders of the california insurance company in who so nobly, at their own financial cost, did their "big bit." "on fame's eternall beadroll worthie to be fyled."--spenser foreword whatever of effort has been given in the pleasant pastime of writing these rambling and sketchy pages of reminiscences is dedicated to those who in the hours of trial and tribulation felt with sir philip sidney, "honor is the idol of man's mind" and determined to do that which honor demanded knowing that if they lost their honor they lost their all. reading between these lines, it is hoped there will be found some intimation, some outline, of the character of the men who composed the directors and stockholders of the california insurance company, who acted well their part, who fought the good fight and held the faith, whose stern sense of duty and heroic courage led them to lay upon the altar of their idealism the financial sacrifices which they made. theirs is the honor achieved. they neither faltered nor hesitated in upholding and protecting their own individual good name, the fair name of the company nor the integrity of the financial institutions of california, and they, like bacon "may leave their name and memory to man's charitable speeches, to the next age and foreign nations." the spirit of the california insurance company having played one of the leading parts in the reconstruction of san francisco following the disaster of and there being no record of its activities, i have, after insistent and repeated requests from directors, stockholders and others, finally yielded to their importunities to preserve for reference my impressions and memories of that most important crisis ever known to fire insurance. from the time when nero played the violin accompaniment to the burning of rome, down, through the ages, to : a. m., april , , and up to the present date, the san francisco disaster is the most prominent recorded in history. it was the greatest spectacular drama ever staged and produced the biggest heap of the "damn'dest, finest ruins" the world has ever seen. in transferring the records from the tablets of my memory to the printed page, i am dealing with accurate historical facts of the california insurance company together with my own impressions. the facts and figures regarding the company are incontrovertible. my own impressions are but those which were felt by thousands of other san franciscans in a greater or lesser or more varying degree. these may be taken as merely the local color, the object being to set forth for enduring vision, the splendid performances of honorably disposed fire insurance companies amongst which none discharged to policyholders the liabilities under their contracts with any greater sense of equity, honor and liberality than did the california insurance company. the morning of april th in common with the other half million citizens of san francisco on that fateful morning, i was awakened from a sound sleep by a continuous and violent shaking and oscillation of my bed. i was bewildered, dazed, and only awakened fully when my wife suddenly screamed, "earthquake!" it was a whopper, bringing with it a ghastly sensation of utter and absolute helplessness and an involuntary prayer that the vibrations might cease. short as was the period of the earth's rocking, it seemed interminable, and the fear that the end would never come dominated the prayer and brought home with tremendous import the realization of our insignificance, of what mere atoms we become when turned on the wheel of destiny in the midst of such abnormal phenomena of nature's forces. it was : , broad daylight, and as i glanced at my watch those figures were indelibly fixed in my memory for the rest of my existence. the terror and horror which suddenly sprang like a beast of prey out of the gray dawn and grasped our heart strings, came unheralded from a day that otherwise promised all that should make life worth living. the night had been particularly warm and inviting. so vivid was this impression of the glory of the morning that i was possessed by a feeling of irony that such a beginning should herald the inception of so bitter a calamity. fascinated, i stood gazing at a weathervane on the top of a house across the street. it swayed to and fro like the light branch of a tree in a heavy gale. i was jarred out of my inanition by a terrific shock. the house lurched and trembled and i felt that now was the end. it was afterward discovered that this crash and jar was caused by the falling of a heavy outside chimney, attached to the adjoining house. it had broken and struck our dwelling at about the first floor level and torn away about twenty feet of the sheathing, some of the studding and left a big hole through which the dust and sound poured in volumes, adding to the already almost unbearable confusion. the first natural impulse of a human being in an earthquake is to get out into the open, and as i and those who were with me were at that particular moment decidedly human in both mold and temperament, we dressed hastily and joined the group of excited neighbors gathered on the street. pale faced, nervous and excited, we chattered like daws until the next happening intervened, which was the approach of a man on horseback who shouted as he "revere-d" past us the startling news that numerous fires had started in various parts of the city, that the spring valley water company's feed main had been broken by the quake, that there was no water and that the city was doomed. this was the spur i needed. fires and no water! it was a call to duty. the urge to get downtown and to the office of the "california" enveloped me to such an extent that my terror left me. activity dominated all other sensations and i started for the office. as all street car lines and methods of transportation had ceased to operate it meant a hike of about two miles. my course was down vallejo street to van ness avenue, thence over pacific street to montgomery. when i reached the top of the hill at pacific street where it descends to the business section, a vision of tremendous destruction, like a painted picture, opened before my eyes. i saw fires on the water front, fires in the commercial district and also portentous columns of smoke hovering over the southern part of the city. then like a blow in the face came the realization that all fire fighting facilities were nil owing to the lack of water. one short hour previous, san francisco was sleeping peacefully in its prosperity, and now the sight was appalling. devastation, far as the eye could see, was spelling death and destruction. my route was down clay street from montgomery to sacramento. in that one block i counted twenty-one dead horses, killed by falling walls. they had belonged to the corps of men who bring in to the market with the dawn the city's supplies. when i reached the corner of california and sansome streets (the california office being one block away on california and battery) i found a rope stretched across from the mutual life insurance company building to the site where the alaska commercial company building now stands. all beyond was policed. a soldier of the regular army was on guard and no one was permitted to pass. arguments and beseechments to get to the office were of no avail. the necessity and the emergency, however, stimulated my determination and aroused my ingenuity. suddenly, i ducked under the rope and ran a marathon which was not only a surprise to myself but also to the officers and the crowd who yelled after me. i am sure that in this one block my speed record for a flat run still stands unequaled. i reached the office and there found every intimation of a hasty departure on the part of the janitor. the front door of the building stood wide open. i rushed in, threw open my desk and hastily gathered an armful of what i deemed were the more important books and papers. glancing around to see if there was any way of saving anything else i again received a jolt by noticing that the fire was coming down a light shaft from an adjoining building and through an open window into the rear office of the "california's" office. in fact, furniture was already burning in the president's room. this was no place for me. the only avenue of escape was the way i had come, since so rapid was the spread of the conflagration that north, south and east were already in flames. upon reaching california street i rushed and headed west, and the instant i had passed, the entire four-story outer wall of the building located on the southwest corner of california and battery streets (then known as the "insurance building"), fell with a roar, completely blocking the street over which i had just made my escape. realizing that my safety was measured by a matter of seconds, i was for a moment unnerved. my legs trembled, my heart pounded and my breath came quickly, and only by a great exertion of will induced by the thought that it was time to do and not to hesitate, i made the effort and arrived safely at the rope from which i had started. i shook as if with the ague. sweat and grime poured from me, but the shout that went up from the watching crowd and the many friendly hands that sought mine, gave me my second wind. i had already made up my mind that possibly the liverpool and london and globe insurance company and colonel c. mason kinne would allow me to store within their vaults whatever salvage i had taken from my desk. my trust in their courtesy was justified. i was made welcome and the colonel, in the name of the company, placed anything and everything that it had in the shape of assistance at my disposal. as we stood talking on the corner of california and leidesdorff streets, a friend still living in san francisco who had an office in the liverpool and london and globe building suggested to me that i had better take an option on some of that company's vacant rooms. i spoke to colonel kinne, a verbal agreement to that effect was made, and i turned and smilingly remarked, little knowing what the future had in store, that the california insurance company would resume business in the liverpool and london and globe building "tomorrow morning." i then stood and watched the firemen lower a suction pipe through a manhole in the middle of the street and pump sewerage on to the old wells fargo building. it had about as much effect as a garden hose and the supply was soon exhausted. the firemen stood perfectly helpless, like soldiers without ammunition, in front of the enemy. the fire had now about everything east of sansome street and in the absence of water it was only a question of one or two days at most when the entire city would be in ashes. this was not alone my impression but the same ghastly prospect impressed itself upon all those who were gathered in the vicinity. the minutes had ticked off until it was now about a. m., when another violent shock occurred--a sort of postscript to the original : trembler. it was of short duration but while it lasted it was decidedly impressive. the crowd scattered and i with them, for we suddenly realized that another wall might fall with a crash and that we might be caught. this is the only reason i can assign for our agility in getting away, unless it might be that we simply followed the first and natural impulse of our overwrought nerves. the dominant thought as the various impressions and shocks succeeded one another, there always came in the interim the dominant thought of the california insurance company. this thought again became uppermost and i concluded to at once get in touch with the president. i proceeded by devious ways over bricks, past wreck and ruin, through the stunned and gaping crowds, until i reached the st. francis hotel where he resided, and finally found him in the lobby, which was packed by an excited throng of humanity. if ever the st. francis needed the s. o. s. sign, it was the morning of this day. everybody in the hotel must have been, with others, in the lobby. the president was in his usual hopeful and optimistic frame of mind. he had no fear whatever but that the fire would be shortly under control. how this was to be brought about, he could not tell, but he was perfectly satisfied that it would be done. i looked at the man in wonder and admiration. such colossal optimism was superb. to expect from fate what appeared to me to be the impossible was indicative of a hope sublime. i envied such a nature. it was not only a great asset but was also a great solace in the face of an unprecedented disaster. but he had not been where i had been nor had he seen what i had seen. then my thoughts turned toward home and my depression increased almost to despair as i walked past the wreck and ruin and through the crowds who themselves were fleeing in indescribable habiliments and with all sorts of futile treasures grasped in their hands. no water! little, if any, police protection! in fact, nothing, apparently, except divinity itself, to prevent the conflagration from finally burning to the ocean. a most sublime tragedy! it meant the impoverishment and lack of homes to thousands; it meant the sweeping away of accumulations of years of endeavor; it might mean starvation; it meant beginning again to climb the uphill trail to success; and last, but worst, it meant the tremendous death toll either from immediate causes or from after effects. even today, years after the conflagration, many men and women live in san francisco in a greater or less degree of ill health, the seeds of which were planted by the terror and mental strain which they endured on the morning of that day. progress of the fire the day passed. neither i nor any other can remember all the details which marked the hours of suspense. it is to be presumed that others like myself found various, and what then appeared to them to be tremendous, things to claim their attention and then--the second day! the fire had now reached van ness avenue and again came the messengers on horseback who shouted in passing that everyone must move. my home was on vallejo street about five blocks beyond van ness and it was generally believed that inasmuch as that street was one hundred and twenty feet wide that it would form a fire break which could not be crossed. backfiring had already been started to meet the oncoming conflagration, but everything, including the elements, seemed to favor destruction and, as time passed, the worry and fear increased. owing to inability to combat the fire, through the lack of water, doubt began to creep in as to whether the width of van ness avenue and the puny attempts at fire fighting would check the march of the flames. about this time the question dawned upon myself and neighbors as to what we should do with the more precious of our personal belongings. mr. joseph weisbein, a friendly neighbor, since dead, and myself evolved a scheme to bury our belongings in the garden at the rear of my house. we assembled four trunks, packed these with silverware and wearing apparel, and some of the hardest physical work i have ever done was in burying these trunks, digging the hole with a worn out shovel and a broken spade. then, with the help of our chinese cook, i brought out of the cellar a baby's buggy which had lain forgotten and unused for several years. we loaded it with bedding and other things and trundled it down the hill to lobos park near the bay shore. trip after trip we made before we decided that we had all that was necessary or, rather, absolutely needful for a camp existence. the next question was shelter. after prowling around the partially quake-wrecked gas works, i found some pieces of timber out of which i constructed a sort of framework for a large a tent. i borrowed a hatchet from another refugee, a stranger in adversity. the disaster had broken down the barriers of formality and we all lent a willing hand each to the other. i secured some spare rope and got up my framework. this was covered to windward with some indian blankets sewn together by those we were trying to make comfortable. under that hastily erected rude shelter nineteen people slept on mattresses that night. i did not have the good fortune to sleep. sleep would not come to "knit up the ravelled sleeve of care," and through the long hours i watched the intermittent flashes, heard the noises and in the darkness went through the added suffering of overstrained nerves. a neighbor, j. f. d. curtis, since dead, but at that time and for years after the manager of the "providence washington insurance company," passed the silent watches of the night with me, each of us smoking ourselves blind and watching--talking but little, although thinking and feeling a whole lot. we were a mile from the fire, nevertheless it was so light that a newspaper could easily have been read by its glow from the time when the sun set on the ruins to the hour when it rose on the next day of horror. curtis, turning and pointing to the flaming city, inquired in quiet tones if the california insurance company could pay the bill. i replied that as a stockholder in the company, i felt that i was ruined and i feared that the company would "go broke." he stated that he believed the providence washington would weather the storm and if the worst came to the worst with me, he would like to have me join him in the management of the company he represented. it was a ray of sunshine. it was a beacon of hope. it was like a life buoy thrown to a drowning man, and i shall never forget the encouragement that came with his offer nor the gratitude i felt, and, although subsequent events have shown that my first fears were wrong, my gratitude endures to this day. the night passed and while we were eating a cold breakfast, principally composed of sandwiches, the man on horseback arrived again; this time, however, with the glad tidings that the fire had been stopped at van ness avenue and we could return to our homes. it was afterward learned that the salvaging of the section of the city beyond van ness avenue was due to the excellent work done by two salt water streams pumped from the bay by tugs stationed at the foot of van ness avenue and carried along by relays of fire engines. so intense and so furious was the fire that while one set of firemen, their heads covered with blankets, held the hose, the second stream was used to drench them, also the engine. further proof of the fierce and terrific heat was shown in the circumstance that houses one hundred and twenty-five to one hundred and thirty-five feet across the avenue had windows cracked and paint blistered. the last grand heroic stand of the fire fighters was made at the corner of van ness avenue and vallejo streets. a man was found with a wagon to cart our things back to the house and, while we did not have much worldly wealth in our clothes, we were prepared to pay liberally. under the circumstances, when his modest charge of two dollars was met we felt that he had earned it many times and in addition, our gratitude. arriving at the residence, we found the sidewalks and the street in front of it three inches thick with ashes and cinders. now came the task of unearthing the trunks and with it came the thought that had this section been entirely burned how difficult it might have been to locate the place where they had been buried. necessity for action and to be up and doing was too strong, however, to allow time for any such conjectures. there was too much going on to dwell on post-mortems. that night the streets were patrolled by marines from united states warships in the harbor, whom the government had hurried to the scene of action with all promptness possible. no lights nor fires were permitted in houses. it was either retire at sundown or retire in the dark. whatever water was needed had to be carried from the nearest well and even after the mains had been restored to normal efficiency this practice was continued for fear that the possibly broken sewers might contaminate or pollute the water. no fires nor cooking were permitted in any building until every chimney and flue had been passed upon by the authorities. in order to obtain water it was necessary first to procure buckets, then carry it from an old well in lafayette square, some dozen blocks away. baths were forgotten and shaving was a luxury. it entailed severe labor to secure water with which to prepare the necessities of life and to maintain a reasonable degree of personal cleanliness. in common with every other citizen our stove was placed on the curb and this was our kitchen and dining room for over six weeks. as there was no oven, baking and roasting had to be dispensed with, boiling and frying being the established fashion. the second day after the fire, a food station was opened across the street in an old carriage house which belonged to mr. j. l. flood. here lines would form to receive rations, the millionaire rubbing shoulders with the laborer. the panhandler got as much as the plutocrat. the disaster leveled all classes. a million dollars in one's pocket would have been of little use. nothing could be bought with it and it could not serve as either food or drink. getting back to work betweenwhiles, as one crisis after another came and went, i was still constant to the idea and still felt my responsibility to the california, and from time to time as circumstances permitted, was strenuously endeavoring to reach the directors and stockholders. the president, in spite of his optimism, had fled from the hotel st. francis and gone to the home of his mother on clay and larkin streets. for the same reason he left there and went to the yards of the fulton iron works where his yacht "lady ada" was laid up, got her off the ways and tacked over to tiburon where he remained for some time. finally word was received from him that the directors of the company would hold a meeting at the blake and moffitt building on the corner of eighth and broadway, oakland, on may , . who really located them, scattered as they were, and finally got them together, has remained an unexplained mystery. it must have been either the president or chief clerk shallenberger. the late mr. james moffitt, a stockholder in the company and the owner of the building named, kindly secured for us two rooms in that building for an office. they were on the third floor facing broadway and the location and the habitat of the company was disclosed by a canvas sign which, banner-like, hung upon the outer wall proclaiming this to be the office of the california insurance company. for furniture, there was a flat top desk and a typewriter (both secondhand) and the balance of the equipment was handmade, of ordinary lumber, by a local carpenter. there was not very much cash among those thus assembled, but, fortunately, the company had maintained a deposit in an oakland bank and this was immediately available for checking purposes. first meeting of the board of directors quietly and almost silently the directors gathered. the only emotion apparent was that of the usual caution shown by men of large affairs who meet to face a crisis. the president called the meeting to order and stated that the object of the gathering was to inform the directors that the company was heavily involved in the conflagration which visited san francisco on april , and , , that the amount of which obligations was at present unknown, that they overshadowed the resources of the company and that ways and means would have to be devised to finance the california through this crisis. the fire maps of the company were entirely destroyed and it was not advisable to open the safe in which the records of the company were kept until it was sufficiently cool to prevent danger of combustion. in light of these facts, it was impossible to immediately ascertain the actual amount of the company's obligations. in response to an inquiry as to the probable extent of our liabilities, i, as secretary of the company, ventured the statement that i believed they would reach a total of $ , , net, explaining that i based this estimate upon the company's income and the average rate. i also knew that the larger part of the entire liabilities in san francisco were in the burned area and that if the safe did not afford protection it would mean the loss of the company's records, leaving it without means of ascertaining the amount of the loss until claims were filed. this would cause a delay of several months before the exact total could be developed. i explained that the policy contract allowed sixty days for filing claims and expressed the thought that this limit would undoubtedly be extended by legislative action in view of the magnitude of the disaster. in the meantime, in the april edition of the examiner, on the first page, extending over its entire width, had appeared the following statement: "the california insurance company will pay in full." this was discussed and the meeting began to assume a more lively interest and the members to more actively participate. director w. e. dean offered a resolution that has passed into history as being, possibly, the most noticeable ever adopted by the directors of a fire insurance company. it is a question whether a motion under like conditions had ever before been put or carried or ever will be in the future. this motion was seconded by director mark l. gerstle. it was as follows: that the action of the president of this corporation in publicly announcing that the california insurance company would pay all its losses in full as ascertained and adjusted, be, and the same is hereby confirmed and ratified, provided that each of the directors of the corporation affixes his signature to the matters of this meeting. unless such ratification be unanimous and evidenced by the signature of each director to the matters of this meeting, the above action of the board be null and void. the signature of each and every director was subsequently affixed to this resolution and it then remained a matter of detail to find how funds were to be procured to make this resolution possible of fulfillment and something more than a mere matter of words. in the absence of any specific or definite information as to the amount of the company's indebtedness this action of the directors was a most magnificent exemplification of nerve and integrity and a superb testimony reinforcing the axiom that a california man's word is as good as his bond. the board might have instructed its secretary to make the best compromise settlements possible and have wound up the affairs of the corporation. the public mind was in a receptive mood to accept such compromise settlements and such action would have resulted in extreme financial advantage to the stockholders at the time when the resolution was passed. no one at that time believed that the california would discharge its obligations on a parity with the largest and strongest insurance companies in the world. indeed the public announcement that the company would pay in full was regarded as ridiculous and unbelievable and was generally considered in the light of an extremely sagacious bluff. the directors of the company were not bluffers; they were made of different stuff. they did not hesitate. they were in deadly earnest and absolutely meant to live up to their spoken word and the world knows how they redeemed their promises. my original estimate of $ , , fell far short of the final net payment which amounted to $ , , , but long before this had developed the stockholders were too deeply involved to think of turning back even had they desired to do so. staunchly and loyally they stayed and paid to the end, building a monument to their good name that turned the sneers of welshing competitors into envy and admiration. second meeting of the board of directors in the advance of the company, the next historical date of importance was may , , when the succeeding meeting of the board of directors was held at the home of director mark l. gerstle, washington street, san francisco. again, i was called upon to bring bad news. i was compelled to inform the board of directors that all the records of the company had been destroyed as the safe which contained them had been smashed by falling walls and the contents absolutely obliterated. the only thing recovered was some rolls of silver coins melted together by the intense heat. i also reported that three hundred and fifty claims had been filed for an amount totaling over $ , . the loss of the records was a very serious matter and complicated proceedings to a degree apparently almost insurmountable. lost in the destruction of the safe were some $ , in re-insurance policies. this meant restoration of this data from the records of the re-insuring companies and at that time this looked like a superhuman undertaking. however, i immediately detailed two employes with instructions to devote their entire time to this angle of affairs. the companies met the situation with every courtesy and finally after several months' exertion all of the reinsurance was located, with the exception of about $ , . i do not like to harbor the thought, but nevertheless i feel that some company or companies, possibly still doing business, know that they owe the california some part of this re-insurance, which goes to show that in the insurance business, as in other enterprises, there are those who cannot bear the light of day. about twelve months after the "big fire" i remember having received a re-insurance claim from a company whose home office is in new york. as this particular company was one of the very few that declined to respond to the request to assist us in restoring the lost data, i thought it the better part of wisdom to ask it to furnish the information previously requested, holding up their claim in the meantime while awaiting their reply. it never came, and their claim against the california still remains unpaid. the conclusion is too glaring to need further comment. a few similar instances might be recorded but they are best forgotten. this meeting also made history. it levied the first assessment of $ per share on the six thousand shares of capital stock of the corporation. this would bring in $ , and was subsequently followed, month by month, by seven others, until the total assessment had reached $ per share, amounting in all to $ , , , of which $ , , , or per cent, to the everlasting glory of the stockholders of the california, be it said, was paid. the resolution bringing this about was as follows: "notice is hereby given that at a meeting of the directors held on the th day of may, , an assessment of forty ( ) dollars per share was levied upon the capital stock of the corporation payable on or before the th day of june, , to mark l. gerstle, assistant secretary, at the principal place of business of the corporation, no. washington street, san francisco, cal. any stock upon which this assessment shall remain unpaid on the th day of june, , will be delinquent and will be advertised for sale at public auction, and unless payment is made before will be sold on the d day of july, , at o'clock p. m. to pay the delinquent assessment, together with cost of advertising and expenses of sale." the "'dollar for dollar" resolution it became my duty to inform the directors that a meeting of the representatives of all the fire insurance companies interested in the conflagration was called for an early date at reed's hall, oakland, and that i understood the principal object of this meeting was to secure an expression of opinion as to the method to be adopted in settling san francisco losses, whether seventy-five cents on the dollar should be paid or settlement on a per cent basis be made, and i requested instructions. this was merely pro forma as the company had already announced its position publicly as being in favor and promising to pay cent for cent the full obligation of its contracts. the board gave me the instructions i had expected. the meeting at reed's hall was a most memorable one. the late geo. w. spencer, at that time manager of the aetna insurance company, presided, and to his fair and impartial rulings and usual courtesy and dignity of manner, is attributable the fact that there was not considerably more friction than developed. even as it was, the discussions were acrid and verged at times close to personalities and the oratory, especially on the part of those who advocated the "six-bit" policy, was both perfervid and vociferous. however, the representatives of the companies that had made up their minds that their honor and contracts were worth dollar for dollar had little to say and were not influenced by the alleged arguments of the "six-bit-ers." they felt that in the last analysis there was no logical, honest argument for the discounting of payments unless it were a case of absolute insolvency with individual companies. it was maintained by the opponents to the "six-bit" policy that the insuring public had paid for what it assumed to be valid contracts and was entitled to just indemnity and payment in full. finally, the roll call came to ascertain the sense of the meeting--seventy-five cents or one dollar. the roll call was thrilling in the intensity of feeling it developed and in the position in which it revealed each company's standing, whether for an honorable fulfillment on the one hand or a dishonorable scaling of losses on the other. alphabetically, the california insurance company came early in the list and i voted with those who felt their obligation to be one hundred cents on the dollar. the position which the california would take had been awaited with considerable interest. the public announcement that the company would pay dollar for dollar was still recent and this announcement had appealed to nearly every person at that gathering as a promise which the company was absolutely and physically unable to perform. the registering of the vote called forth quite a demonstration. laughter, smiles and sarcasm predominated in the part of the hall where i was located. for a moment i was the center of attraction. despite the embarrassment and annoyance under which i labored, i felt that i was called upon to defend the good name of the company and, gaining recognition from the chairman, i said that the manner in which the "california" voted seemed to cause some of those present considerable amusement and that, individually, i didn't see anything in it that was funny; that it was more of a tragedy than a comedy, and that it was a solemn and serious matter for the company of which i was the representative to go on record for the second time, publicly, as pledging itself to pay so tremendous an amount of money out of the pockets of its stockholders; that i was present at the meeting to carry out the expressed instructions and wishes of these same stockholders and that they intended to be scrupulously careful in keeping their promises, backing their words with their deeds and dollars. this statement brought from the dollar-for-dollar companies a gratifying amount of applause and the "six-bit-ers" sank into silence. as the days passed and the "tumult and shouting" died, it gave a certain amount of satisfaction to find that amongst the jeerers and sneerers at the memorable reed's hall meeting, those who had battled most vigorously for the horizontal cut of twenty-five cents were those who afterward developed into the worst welshers and shavers in the entire history of the loss settlements of the san francisco or any other conflagration. the "sparkling" rhine, the "still" moselle, the far-famed "dutchess," the german of freeport, the traders of chicago, the austrian phoenix, the calumet, the american of boston and others soon after sought the seclusion which a receiver or cessation of business in california grants, and like the arab, they folded their tents and silently stole away. at the termination of the meeting, president chase of the hartford, president damon of the springfield, chairman spencer and several others, all leaders in dollar-for-dollar ranks, some of whom are alive and some of whom are gone, gathered around and congratulated the california upon its attitude. individually, it gave me a feeling of pride and satisfaction to be the representative of a company which manfully stood up to the rack with the best traditions of american fire insurance. it may be well to recall to mind as a historical fact that it was at this meeting the term "dollar-for-dollar" companies was born. coming back to san francisco early in june we made arrangements to vacate our quarters in oakland in the blake and moffitt building, and on the th of that month the california was moved to an office in san francisco. this was a temporary frame structure erected on identically the same site which the company had occupied prior to the fire, and where the magnificent new skyscraper known as the "newhall" building now stands. as things go now, it was not much of an office either as to style or appearance, but it was roomy, light, well ventilated and comfortable and in every respect preferable to the two crowded rooms that had so hospitably housed us in oakland. the return to san francisco heartened us. the daily trip from the city to oakland and return had been a hardship, in addition to the time lost when every minute was too precious to be wasted. less time was lost in crossing the bay than in getting to and from the ferry. the street cars were not in operation and i was compelled daily to make the walk over the hills and through the ruins threading my way through the ashes and over brick piles a distance of quite two miles, from my home to the water front. this twice a day for six days a week, and often seven, was exhausting in the extreme, so the wear was not altogether mental. the thought was very often in my mind that i had about the most trying job of anyone in the business. other managers seemed to me to be paying very little attention, if any, to the detail of settling claims and, of course, had nothing whatever to do with providing the sinews of war. they were fortunate in being able to pursue the even tenor of their way, their entire business and time being occupied with current routine, just as if nothing of an extraordinary nature had happened. this condition arose from the fact that the companies in the east hurried to san francisco and oakland all the adjusters, both near and alleged, that they could obtain from any portion of the united states and a few from abroad, in order that the losses might be promptly taken care of. the home offices saw to it that the funds were provided. the special agents and field men of these offices were not disturbed in their usual work and were rarely, if ever, made use of at headquarters to make adjustments. with the california it was quite different. our entire field force was called in and promptly clothed with authority to adjust. this left our agency plant entirely unprotected as to cultivation. financially, we were in such a crippled condition that we felt we could not afford the expense of employing independent adjusters. these were a luxury in any event and some of them, alas, would have been dear at any price. the thought often comes that perhaps this policy was poor economics. this was a golden opportunity for representatives of the "dollar-for-dollar" companies to secure valuable agents, as carrying capacity was in large demand to replace those companies that had either failed or made unsatisfactory loss settlements. that there was an abundance of the latter admits of no dispute. possibly, we might not at that time have been able to secure many of these valuable connections, even if we had had the field force requisite for the required technical work, for the reason that doubts were still expressed as to our ability to fulfill our promises. duties of the secretary in the california insurance company office, the position of secretary was closely akin to that of the celebrated "pooh-bah." attached to the office was the duty of collecting the assessments on the capital stock, adjuster in chief, the underwriting, a court of appeal on technical points in disputed settlements, a diplomatic agency and encouragement dispensatory with and for the stockholders. the latter item took considerable time. singly and in groups they fired their questions: "how many assessments will there be?" "how much do you think the losses will total?" "how soon will you know the amount?" "when we do get out of this shall we be as big as any other fire company or bigger?" this was the daily grind. but since it was their money and they were laymen, their anxiety was as pardonable as their courage was commendable. the president occupied an office on the other side of the hail, directly opposite mine. the one door was lettered "president" and the other "secretary." one of the stockholders cornered me and demanded a full and explicit statement of conditions. i gave him the facts and frankly confessed that the prospect was not alluring. he bade me goodbye with a long face and went directly across the hall into the office of the president. in a brief while, he returned, his face wreathed in smiles, and quietly said 'that the president's office was "heaven" and my office was "hell"; that i was a "gloomy gus" anyway, but i couldn't help it and he pitied me, but as for the president, he was the right man in the right place, and he knew our exact position.' i did not make any reply. the optimism of the president was a very great asset and in those days optimism and hope were at a premium. turning of the tide finally the tide turned. several months had elapsed, however, before it became generally known and admitted and the insurance world had hammered into it the conviction that the california was truly "californian." at this time our field men were again in the saddle and the agency of the california was not only readily accepted whenever offered, but eagerly pleaded for by connections which materially contributed to subsequent success. adjustments there are millions of stories with regard to the adjustment and settlement of claims during this period. all kinds of pressure, all kinds of seduction and all kinds of bribes were offered the adjusters. there appeared to be in the minds of many a conviction that this was the time to make a claim against the insurance companies; that everything was burned and that with the upset conditions any old claim could get by. stevedores, laborers and others not generally credited with an excess amount of worldly wealth gayly and festively swore to proofs showing the loss of family plate, ancestral pictures, silk underwear, ball gowns, evening clothes and jewels. there was no possibility of disciplining these perjurors and it was up to the expertness of the adjusters to defend their companies from being looted. there were all kinds of attempts to defraud on the part of other policyholders. one instance in which the california was interested was a proof for a $ , loss on a policy covering on stock of dry and fancy goods located in a building on market street. i received a visit from the policyholder who made a request for prompt payment. i explained that our funds were being raised by assessments which were levied once a month and that, if agreeable, we would pay him sixty per cent of his claim and the balance in sixty days. this appeared to be satisfactory and he left in a happy frame of mind. thirteen thousand dollars of the risk in question was ceded to other companies and we naturally filed claims with the reinsurers for their proportion. the following day a friend who was acting as chief adjuster for another office which was one of the re-insurers on this risk, called upon me regarding this particular claim. he laid upon my desk a photographic album and called my attention to a large photograph of the building wherein the stock was located. it was a two-story brick and the picture showed that the entire front of the second story had, as the result of the earthquake, been thrown into the street. this was taken before the fire had reached the property. he stated that the authenticity of the photograph was absolutely guaranteed and that in event of litigation, the testimony of the photographer was available. he further stated that acting for the re-insuring company, he would not follow the california for more than sixty-five cents on the dollar. i borrowed the photograph and at once sent for the claimant. he called the next day. it was found on examination that he had made the statement to the general adjustment committee that the property was not damaged prior to the fire. unfortunately, no affidavit was taken from him to that effect. with the photograph before me, i realized at once that the claim was not an honest one. i explained that the larger part of our policy had been ceded to other companies and that some of them demanded, earthquake affidavits with every claim; that while i regretted to put him to any inconvenience, it would be necessary for him to produce this testimony. he looked me squarely in the eye and said, "i'll sign it and swear to it. not a brick in the whole building was disturbed." he attached his signature to the affidavit. i showed him the photograph and then stated that we should be compelled to penalize him to the extent of thirty-five cents on the dollar. as a matter of equity, there was little, if any, liability under the policy. he shouted, "fake!" "no," i replied, "simply a matter of contractural rights and of justice. the picture is absolutely bona fide." he left, emphatically stating that he would at once "go to the bat." i suggested that he submit the matter to his attorney. fortunately for him, he had a wise one who promptly advised that he accept the terms offered. this is another angle of the settlement of the san francisco losses--no more nor less in fact, methods, and manner, than that with which other legitimate companies had to contend. another instance is recalled of a claim for a thousand dollars covering on lodging house furniture in a building on sixth street, with the loss made payable to the owner of the building. i supposed that the policy was collateral for payment of rent. it developed that the claimant was a widow with one child. she was without a cent in the world, and called to request payment. by this time the company was running short of ready funds to such an extent that instructions had been issued to adjusters that all claims hereafter would take the customary sixty days before payment. she stated that the fire had canceled her lease, that she had seen the payees and that they would waive the claim and that she was absolutely destitute and would be willing to take whatever we would offer, if she could get the cash. the position of the company was explained to her with the result that she felt that we were working for a discount. but it was not the intention of the california to take advantage of people's necessities and we informed her that such was the case. her claim was a just one. i accepted her proofs, paid her twenty-five per cent cash and the balance at the end of thirty days. these are but isolated instances among many. special meeting of stockholders another historical meeting was held august th. this time at the office of the company. it was a special meeting of the stockholders. three assessments had been levied of forty dollars each, amounting in all to $ , . this money had been paid out in settlement of claims. this was the first meeting of the stockholders proper since the fire. the directors realized that in response to inquiries from the stockholders who were principally interested that they were entitled to a report as to the progress made and the policy to be adopted for the future. over ninety individual stockholders were present and in order to accommodate the crowd, the employes removed their desks and chairs, and during the time of the meeting adjusted losses and discharged their duties on the sidewalk in front of the building. the early-comers had seats. the late-comers stood, but so interesting was the meeting that discomforts were forgotten. the president made a very full and analytical report, finishing with the announcement that another million dollars would be needed to continue the splendid work and accomplish the final result of bringing the california through the disaster with justice, equity and fairness to all its contract-holders. the atmosphere was charged with optimism and enthusiasm and amongst all the speeches made, and they were many, not one bore any intimation of regret or of any desire to do other than march steadily ahead. mr. ignatz steinhart, at the time manager of the anglo-californian bank, careful, cautious, shrewd and a hard-headed financier, in his speech practically struck the keynote of the whole meeting. he said in substance: "i have lived here many years and i expect to die here. i love san francisco and i know you all feel the same and it is my honest conviction that the directors of the california have adopted the proper and only course and that its stockholders will stand behind them, and that, the company will pay its losses at the rate of one hundred cents on the dollar without discount. i now present a motion that it is the sense of this meeting that the board of directors be given all that they request and that all their actions are hereby heartily ratified, approved and confirmed." there was not a single dissenting vote. at this time a stockholder enthusiastically jumped on his chair and proposed three cheers for the company and the management. the clerks on the sidewalk and some of the passers by rushed into the crowd to see what was the cause of the commotion. when the meeting adjourned, the confidence of all was renewed. the barometer of their enthusiasm and determination had risen and smiles and handshakes put the period to the gathering. seldom, if ever, has an irish dividend meeting been held and disbursed with such a wholesome feeling of satisfaction. it was more like a "melon cutting" than a preparation to excavate to still lower depths their pocketbooks. never was the true california spirit more faithfully portrayed. the final supreme effort the annual statement of the company at the end of the year showed beyond the peradventure of a doubt that the company had kept the faith, but it was left with a very attenuated surplus. then business began to grow by leaps and bounds. the bread which had been cast upon the waters was returning and another problem now confronted the company--to protect the reserves on the rapidly increasing income. this required a working surplus and meant more assessments which seemed to be adding insult to injury. the stockholders had already provided the funds to pay losses and to now ask for more money for any other than loss-paying purposes, gallant as was the spirit of those directly interested, seemed dangerous. the directors and some of the more prominent stockholders met informally and discussed the situation and the concensus of opinion was that the honor of the company demanded that it continue to the end to accomplish to the fullest that for which so many financial sacrifices had been made--to take any other course, to discontinue, to fall down, or to break faith with those who had given us their confidence would be suicidal. in this deduction proof was given of the sound judgment and business acumen of those who bore the brunt of the burden in those hot days of battle. they took the position that the reputation which the company had already builded was an asset of almost unlimited value and realized that the peak of the mountain was just a few steps further on--that summit from which the company could look out upon the valley of success and reap the full reward for all the sacrifices its stockholders had made. plan after plan was submitted for financing, change after change was suggested, but for a time concerted action seemed almost impossible of attainment. finally, i called upon the largest stockholder and treasurer of the company, mr. geo. l. payne, in his office at the payne bolt works. i laid before him the plan of increasing the capital stock from six thousand shares to ten thousand shares by the sale of four thousand shares at sixty dollars per share which would realize for the company a total amount of $ , of which $ , could be applied to capital, bringing that item up to $ , , and $ , to surplus. while this did not make the surplus as much as was desirable, we were used to economies, to making every dollar count. this has always been a feature of the management of the company. with this sum and by a continuance of conservative methods and proper management we believed it possible to provide for all contingencies. mr. payne listened quietly, a pad of paper before him and a pencil in his hand. when i had exhausted every argument and made the best possible statement of the exact conditions, he stated that he realized fully the gravity of the position and then came the flood. he said that, if it became necessary, he, as the largest stockholder in the company, would endorse the proposition to the extent of taking the entire issue. the balance of the consummation of the idea was merely a matter of detail. another meeting of the stockholders was called and of the many meetings that we had gone through, this stands out brightest of all. the plan was presented and as might naturally be expected invoked little enthusiasm and did not appear to interest anybody. mr. payne quietly rose to his feet, explained the position of the company as he saw it and then shocked the assemblage into activity by making public the announcement of his willingness to take the entire issue of additional stock. that was a flash of optimistic lightning the bolt of which apparently struck every man in the room. they sat up, took notice, and awoke to the fact that they were possibly missing something worth while. the outcome was that mr. payne was only able to secure his pro rata as the entire issue was promptly over subscribed by the stockholders, it being understood that the right of subscription should be confined rigidly to stockholders of record. never in my business career have i seen the value or virtue of a leader expressed in so forceful a manner as in the effect of mr. payne's offer upon that meeting. it was the greatest evidence of applied psychology that ever it has been my good fortune to experience. recapitulation these memoranda i have written years after the happenings which they sketch. they are drawn from the records of the company and from the tablets of my memory. those upon which i have touched were amongst the higher lights, they are vivid in recollection and as well remembered as if they had taken place at a recent date. those were strenuous times. times that not alone tested the dignity and honor of men, but rocked them to their very foundations. only the admittedly honest and honorable men survived the experiences of those days without blotch upon their escutcheons. it is naturally to be presumed that the minds of those who passed through those days of reconstruction recall many deeds of heroism, of sacrifices made upon the altar of duty. each has the surmounting of his individual trials to remember, but amongst all that was done as the result of the san francisco conflagration there is, in my opinion, nothing carrying greater, honor or higher integrity than the work and sacrifice of that gallant band of men who were directors and shareholders of the california insurance company. they were the pioneers and the sons of pioneers who braved the hardships and terrors of desert and sea--the founders of this great commonwealth. incidents and happenings which have passed from public record will still live in the memory of those who played a part. the wonderful rehabilitation period, with all that it meant of physical and mental suffering, but typifies today in concrete, stone and brick the sturdy and stalwart spirit of those men who were made absolute pioneers by the ash heap of . some of these have gone to their last accounting, but for those who are still serving, and still tugging at the oar, there remains but to guard the heritage which they bequeathed--to bring upon the results of their work a continuation of their ideals. the spirit of , glorified by san franciscans, which alone made possible the resurrection from the ashes of that "city loved around the world," sitting serenely upon its seven hills by the portals of the golden gate and whose destiny is oblivious of fire and earthquake, is worthy of more than a passing tribute. its example should thrill and encourage those who are inclined to falter. it is a beacon light to those who are to continue the struggle with the petty details and the larger duties of everyday life. and among the contributors none are more to be admired or borne in reverent respect than the directors, those men who held either large or small investments in the "california" and were true to their trust. conclusion whether the end justifies the means depends upon the judgment of the critic. it is possible that there is too much of personality herein, but in justice to the writer, it must be borne in mind that no attempt has been made for literary style; that the task imposed upon him was attempted solely to comply with the insistence of others and that the use of the first personal pronoun is the readiest vehicle of expression. no special mantle of credit rests upon his shoulders. if there be any such garment it drapes the shoulders of every man connected with the company from the humblest employee up through the heaviest stockholders to the highest official. it overlaps and falls with becoming dignity on the shoulders of those who are fellow citizens and fellow californians, who shared with us as we shared with them the heat and burden of the days succeeding the never-to-be-forgotten disaster of april , . the spirit of is a book of the primo press, san francisco, printed in april, the history of currency to by w.a. shaw [ ] reprints of economic classics augustus m. kelley publishers new york first edition (london: wilsons & milne, paternoster row, ) reprinted by augustus m. kelley publishers from second edition of library of congress catalogue card number - printed in the united states of america by sentry press, new york, n.y. the history of currency to being an account of the gold and silver moneys and monetary standards of europe and america, together with an examination of the effects of currency and exchange phenomena on commercial and national progress and well-being by w.a. shaw, m.a. late berkeley fellow of the owens college fellow of the royal historical and royal statistical societies second edition new york: g.p. putnam's sons london: wilsons & milne to richard copley christie this book is respectfully dedicated in memory of a friendship of peculiar grace and inspiration preface the purpose of this book is twofold--first and foremost, to illustrate a question of principle by the aid of historic test and application; secondly, to furnish for the use of historical students an elementary handbook of the currencies of the more important european states from the thirteenth century downwards. little need be said as to this latter purpose. the total omission of the historic, reasoned, and consecutive study of currency history--the most important domain of practical economics--from the curriculum of every university in the land is matter for surprise and regret, and can only be attributed to the lack of an initiative and of a handbook. as to the former purpose, there is no field of history so strewn with scientific (i.e. comparative and prophetic) possibilities as economic history; and in economic history there is no department in which the study of the experience of other times and nations is more necessary and resultful, lesson-full, wisdom-full, than the domain of currency. the verdict of history on the great problem of the nineteenth century--bimetallism--is clear and crushing and final, and against the evidence of history no gainsaying of theory ought for a moment to stand. throughout mediæval europe and up to the close of the eighteenth century the currency of europe was practically bimetallic--practically, because actually so without the prescription of a law of tender, and without the allowance of any theoretic grasp or conception of the practice as distinctively what nowadays we understand as bimetallic. the conception of a law of tender is quite modern. and the evolution of the idea of such a law has gone hand in hand with the evolution of a conception of monetary theory on the part of the legislator--that is, with the bitter experience which for want of such a conception europe endured for centuries. in all systems of jurisprudence money and minting appertains to the kingly office, and the development of the law of tender is to be traced in royal proclamations of the king in council for long before it became the subject of parliamentary legislation. for centuries, such proclamations were issued, referring to a prohibition of export of the precious metals, banishing foreign coins from the land, or, again, permitting their circulation, and, in that case, prescribing the rough tariff or rate according to which (foreign) coin for (native) coin they should be current. in such proclamations there is no idea of separating the two metals, gold and silver; there is no idea of a law of tender; there is no intention to declare a ratio; there is no conception of _bullion_ apart from coin. the two metals had grown to be the circulating and exchange medium; they were actually there, and all that had to be done was to keep them there. the advantage which was to be derived from a trade in bullion, and from an understanding of the effects of differently-prevailing ratios in different countries, was known only to the jew and the italian. they plied their trade in secret, and the legislator was only apprised of the result by suddenly finding a slipping away and dearth of coinage. then the legislator altered the tariff, and gradually rose to the conception of the ratio as underlying this process of seduction. then, as a further defence of a particular class of coins, he imposed a limitation on the tender of such, so as to prevent bullion operations on it. this limitation was the first development of a law of tender. throughout, from the thirteenth to the eighteenth century, both gold and silver had been actually employed in european commerce without any idea either of declaring or of restricting the tender, whether of the one or the other. the final outcome of the application of the law of tender was the development of the modern monometallic system--a system in which alone lay the safeguard against the operation of the bullionist. it was only at the close of the eighteenth century that england evolved this system and flung away the last remains of that mediæval ignorance which had brought with it such a dower of mishap. france has taken almost a century of further experience before arriving at the same point of development. another point. at the time that england was shaking off the mediæval system france, too, was accomplishing a reform of her money system. it stopped half-way. the old kingly prerogative of altering the coinage was taken away, the unit of the currency was declared definite and unchangeable, and the seigniorage on minting was abolished. so much was accomplished by her law of . but no further application was made of the law of tender than to throw the sanction of legal enactment over that mediæval system which had been the bane of france since first two metals found circulation in her bounds. as far as tender is concerned, there is no difference between the practice of the french monetary system in and that of . the system was bimetallic in both cases--in the first case, legally by recognition and as resting on the royal jurisdiction; in the second case, legally by direct legislative or parliamentary enactment. the idea that the law of created a new system and a new heaven for france is doubly absurd. it was a continuation of a very old and a very danger-fraught system, with its roots deep in mediæval ignorance and practice. in addition to this--and quite as demonstrably--there was no conception of a theory of bimetallism in , nor any conception of a bimetallic function to be performed for the good of the human race by bimetallic france. this is a conception of the schools, and bred of later needs and hopes and fears. the modern theory of bimetallism is almost the only instance in history of a theory growing not out of practice, but of the failure of practice; resting not on data verified, but on data falsified and censure-marked. no words can be too strong of condemnation for the theorising of the bimetallist who, by sheer imaginings, tries to justify theoretically what has failed in five centuries of history, and to expound theoretically what has proved itself incapable of solution save by cutting and casting away. such a verdict as this of history, negative as it is, must strike many a serious mind with dismay. the following of bimetallism would not be what it is were it not for the despair of any other remedy for the situation at the moment. we are thereby left apparently hopeless and remediless. but the first step to the discovery of a true and possible remedy, if any exists, can only be the casting away of the false and impossible. the difference between the monetary problem of the seventeenth century and that of to-day lies in this, that while there has been continuity of history and development there has been a change of needs and circumstance. the danger of arbitrage transactions to the mediæval legislator lay in the fact that they stripped the country, which suffered from them, not, or not merely, of a bullion reserve, but of her actual currency, and rendered even internal trade impossible. he accordingly tried to arrest the drain by threatening imprisonment and death. to-day the safety and supply of the internal currency of the various states is provided for by a monometallic system or by note issue, while, conversely, trade in the precious metals has become free, and bullion flows automatically from land to land in accordance with the dictates of a now rightly-conceived theory of international trade. just so far the monetary problem has changed--becoming a question of the evolution of a stable international exchange system. the theoretic pretensions of bimetallism have correspondingly widened, but on any ground, wide or narrow, the only material for the study, comprehension, and judgment of such pretensions lies in the actual experience of europe during the past five centuries. a few words of more particular explanation are necessary. . to the student of money and monetary standards the perpetually recurring phenomena of reductions of the unit and standard weights and contents of coins will present no difficulty. three causes underlay the process--( ) the practice of alloying, ( ) the competitive and dishonest action of governments, ( ) the ideal nature of the unit itself, which permitted, literally, anything in the way of arbitrary manipulation (compare, e.g., the very different depreciations of the english shilling and the french sou, being both descendants of the solidus; or again, of the french livre and the italian lire, being both descendants of the libra). . a second and much greater difficulty is presented by the confusion of nomenclature. it is often difficult to determine what particular piece is meant by a given name, or, if the identity of the piece can be fixed, its period may still be uncertain. in french numismatic history, for instance, the term florin d'or or denier d'or is used in documents quite generically for the more specific florins d'or à l'agnel, à l'écu, aux fleurs de lis, à la masse, moutons d'or, etc. this quite indeterminate use of the word "florin" (= denier = "piece," or generally, "coin") may possibly explain the crux to be found on pages , , , and of the text (infra.), where florins d'or are mentioned in french history more than seventy years before the first authentic minting of the gold florin at florence. . with regard to the figures of the ratios there is great difference and divergence among the various authorities. the declared ratio may be of a double nature--( ) mercantile, as calculated on the purchase price of gold and silver in the open market; ( ) legal, as settled by law in the terms prescribed for mint purchase and issue. the former is comparatively simple, but it is not until a quite recent date, the opening of the eighteenth century, that it is statistically determinable. the table of the commercial ratio (pp. - infra.) is taken from soetbeer, and was by him calculated on the hamburg exchange and london market rates. the competing figures of the commercial ratio drawn up by ingham in his report to the senate of the united states ( th may ), and by john white, of the same date (see _united states report of the international monetary conference of _, pp. , ), i regard as comparatively untrustworthy. with regard to the legal or mint ratio (see infra., tables, pp. , - , ) there is the greatest discrepancy, and i print the figures with much trepidation and every mental reserve. the differences in the results arrived at by the various authorities are due to the difference in method of calculation, according as the issue price or the purchase price at the mint is taken (i.e. with or without allowance of seigniorage and remedy), or according as the pure or gross content of the piece is calculated from (i.e. with or without allowance for alloy). as a matter of fact, hardly any two authorities or sets of calculations agree. see, for instance, duplicate sets of figures for holland in appendix . to schimmel's _geschiedkundig overzicht_; or again, compare soetbeer's figures with those deduced by köhler in his _grundliche nachricht_; or by dr. arnold luschin, in the _proceedings of the congrés international de numismatique_, , p. ; or with those deducible from le blanc's tables (infra., appendix vi.). it is to this difference that must be attributed the discrepancy in the statement of the ratio by the french mint authorities in (see text, infra., p. and note, ibid.). the difficulty of calculating the european mint ratio at any moment can be judged from the experience and statements of persons so widely apart as sir isaac newton in england, mirabeau and calonne in france, and morris and hamilton in the united states (see infra., pp. - , - , and ). with regard to the scope of the present work, it is confined entirely to the history of metallic currency and standard. there is no reference to the paper-money experience of any country, not even america or austria. such a subject must form matter for a separate treatment. the account of austrian money is, therefore, to be found in appendix v., under germany, and on the effects of the latest austrian reform (as also of the latest development in india and the united states) no opinion whatever is expressed. i content myself with the simple statement of fact and event. in appending a list of the authorities used, it is difficult to overcome the feeling of humiliation which has come to me from the contrast of the ephemeral, slight, and unworthy treatment of monetary history to-day, with the grand, solid, scholarly works which the eighteenth century produced. with the exception of soetbeer's magnificent labours, without which the present work would have been simply impossible as far as the statements of production and relativity of the precious metals are concerned, and of the similar historic work of m. ottomar haupt, the literature of this subject to-day is light and polemic and transitory to a nauseating degree. general _authorities._ j.d. köhler grundliche nachricht von dem münzwesen insgemein. helmstadt, and . third edition (leipzig, ), enlarged and attributed to von praun. budelius de monetis et re numaria (with twenty-four other treatises). coloniæ agrippinæ, . melchior goldast catholicon rei monetariæ sive leges monarchichæ generales de rebus numariis, etc. frankfort, . almanach des monnaies. paris, . münze und münzwissenschaft (oec. techn. encyc. xcvii.). nicole oresme traité de la première invention des monnaies, and-- copernicus traité de la monnaie, both re-edited by wolowski. paris, . jean bodin descours sur le rehaussement et diminution tant d'or que d'argent et le moyen d'y remedier [en reponse] aux paradoxes du sieur de malestroict (appended to bodin's six livres de la republique. lyons, ). h.c. dittmer geschichte der ersten gold-ausmünzungen zu lübeck im jahrhundert (zeitschrift der vereins für lübeckische geschichte), heft. i. . j.g. hall on european mediæval gold coins (numismatic chronicle). third series, vol. ii. pp. - . p. joseph historisch-kritische beschreibung des bretzheimer goldguldenfundes vergraben um , nebst einem verzeichniss der bisher bekannten goldgulden vom florentiner gepräge. mainz, . k.t. eheberg Über das ältere deutsche münzwesen und die hausgenossenschaften. leipzig, . neueste münzkunde leipzig, . a.h. smith encyclopædia of gold and silver coins of the world. philadelphia, . a. soetbeer edelmetall--produktion und werthverhältniss zwischen gold und silber, seit der entdeckung amerika's bis zur gegenwart. gotha, . " materialien zur erklärung und beurtheilung der wirthschaftlichen edelmetallverhaltnisse und der währungsfrage. berlin. a. soetbeer litteraturnachweis über geld--und münzwesen. berlin, . f. altés traité comparatif des monnaies, poids et mésures. . g.k. chelins mass and gewichtsbuch. . gerhardt tafeln, etc. berlin, . doederlein commentatio historica de nummis. . c.c. schmiede handworterbuch der münzkunde. . j. leitzmann abriss einer geschichte der gesammten münzkunde ... aller völker fursten und städte der ältern, mittlern, und neuern zeit. erfurt, . germany _authorities._ j.p. ludewig einleitung zu dem teutschen müntwesen mittler zeiten, etc. . j.f. klotzsch versuch einer chur sächischen münzgeschichte. . d.e. beyschlag versuch einer münzgeschichte augsburgs in dem mittelalter. . c. binder württembergische münz und medaillenkunde. . c.p.c. schönemann zur vaterländischen münzkunde vom - jahrhundert. . j.d. köhler historische münz belustigungen, vols. - . h. pauli tableaux des monnaies de l'allemagne, etc. frankfort, . j.g. hirsch das teutschen reichs münz archiv, etc., vols. folio. - (absolutely unequalled and indispensable). j. leitzmann wegweiser auf dem gebiete den deutschen münzkunde. weissensen, . euler verzeichniss und beschreibung der frankfurter goldmünzen mit einer geschichtlichen einleitung etc. (archiv fur frankfurts geschichte und kunst), heft iv. . e.l. jäger das geld nebst einer kurzem geschichte des deutschen geldes. stuttgart, . geschichtliche darstellung des alten und neuen teutschen münzwesens. weimar, . j.f. hauschild zur geschichte des deutschen mass und münzwesens. frankfort, . a. soetbeer denkschrift über hamburgs münzverhältnisse. hamburg, . h.p. cappe die münzen der deutschen kaiser und könige das mettelalters. . c.p.c. schoenemann zur vaterländischen münzkunde. . j.p. graumann gesammelte briefe vom dem gelde, von dem wechsel, etc. . j.g. hoffmann die lehre von gelde. . " die zeichen der zeit. . j. albrecht munzgeschichte der hauses hohenlohe, vom - jahrhundert. grote and hölzermann lippische geld und münzgeschichte, . (nachtrage by weingaertner. ). e.j. bergius das geld und bank wesen in preussen. . a. von berstett munzgeschichte des zähringen badischen fürstenhauses. . d. braun bericht von pohlnisch und preussischen münzwesen. . e. bahrfeldt das münzwesen der mark brandenburg bis zum anfange der hohenzollern. . köhne das münzwesen der stadt berlin, . f.h. grautoff historische schriften, vols. (for lübeck mint). c.f. eheberg Über das ältere deutsche münzwesen. . j. newald beitrag zur geschichte des Österreichischen münzwesen im ersten viertel des jahrhunderts. vienna, . max wirth geschichte der handelskrisen. frankfort, . " das geld, geschichte der umlaufmittel von der altesten zeit bis an die gegenwart. leipzig, . france _authorities._ f. de saulcy recueil de documents relatifs à l'histoire des monnaies frappées par les rois de france depuis philippe ii., jusqu' à françois i., vols. to. paris, . (the unique value of this work is sadly impaired by the cutting out of the preambles of the various proclamations, etc.). le blanc traité historique des monnaies de france. paris, . du cange glossarium mediæ et infimæ latinitatis (art. moneta). j. adrien blanchet documents pour servir à l'histoire monétaire de la navarre et du béarn, de - . macon, . hubert de martigny de la disparition de la monnaie d'argent et de son remplacement par la monnaie d'or (ou situation monetaire de la france en ). paris, . h. costes les institutions monétaires de la france avant et depuis, . paris, . " notes et tableaux pour servir à l'étude de la question monétaire. paris, . hippolyte berry Études et recherches historiques sur les monnaies de france. . natalis de wailly mémoire sur les variations de la livre tournois depuis s. louis à la monnaie decimale. c. bouterouë recherches curieuses des monnayes de france depuis le commencement de la monarchie. paris, . l. faucher recherches sur l'or and l'argent. . dupré de st. maur essai sur les monnaies ou réflexions sur le rapport entre l'argent et les denrées. paris, . abot de bazinghen traité des monnaies et de la jurisdiction de la cour des monnaies. paris, . le vicomte g. d'avenel histoire économique de la propriété, des salaires, des denrées, etc., - . paris, · for a bibliography of the works treating of the provincial monies of france, see vicomte d'avenel, _ubi supra_, i. pp. - . italy _authorities._ ignazio orsini storia delle monete della repubblica fiorentina. firenze, . " storia delle monete de' granduchi di toscana. firenze, . zanetti nuova raccotta delle monete e zecche d'italia, vols. folio. - . custodi scrittori italiani d'economia politica, vol. xiv. f. schweizer serie delle monete aquileia. . ph. argelatus di monetis italiæ varior. illustr. virorum dissertationes, vols. - . a. cinagli le monete de' pape, folio. . [fr. vettori] il fiorino d'oro antico illustrato. . menizzi delle monete de' veneziani dal principio al fine della loro repubblica. venezia, . vincenzo padovan la numografia veneziana sommario documentato. venezia, . fr. ed. ercole gnecchi le monete di milano. catalog einer sammlung italienischer munzen aller zeiten. munich, . nicolo papadopoli sulle origini della veneta zecca, etc. venezia, . " sul valore della moneta veneziana. venezia, . " monete inedite della zecca veneziana. venezia, . g. carli-rubbi delle monete e dell' instituzione delle zecche d'italia. l'aja, vols. . netherlands _authorities._ w.f. schimmel geschiedkundig overzicht van het muntwezen in nederland. amsterdam, . [groebe] handleiding tot de kennis der nederlandsche munten. amsterdam, . [warin] bijdragen tot de kennis van het muntwezen ('s. gravenhage). . p.o. van der chijs beknopte verhandeling over het nut der beoefening van de algemeene, dat is oude, meddeleeuwsche en heden daagsche munt en penningkunde. leiden, . v. gaillard recherches sur les monnaies de flandres. . groot plakkaat boek (can & schelten). mieris beschrijving der munten van utrecht. . a. vrolik verslag van al het verrigte tot herstel van het nederlandsche muntwezen van - . l. deschamps de pas essai sur l'histoire monétaire des comtes de flandres de la maison de bourgogne. . f. hénaux essai sur l'histoire monétaire du pays de liege. . w.c. mees proeve eener geschiedenis van het bankwezen en nederland. rotterdam, . kornelis van alkemade de goude en zilvere gangbaare penningen der graaven en gravinnen van holland. delft, . w.j. de voogt bijdragen tot de numismatiek van gelderland. arnhem, . r. serrure elements de l'histoire monétaire de flandres. gand, . f. verachter documents pour servir a l'histoire monétaire des pays-bas. anvers, . " histoire monétaire de la ville de bois le duc. anvers, . revue numismatique belge. d. groebe beantwoording der prijswerk over de munten en hetgeen daartoe betrekking-- - (koninklijke akademie van wetenschappen. ). inleiding tot de heedendaagsche penningkunde ofte verhandeling van der oorsprong van't geld, etc. amsterdam, . fr. van mieris beschrijving van der bisschoplijke munten en zegelen van utrecht, etc. leyden, . fr. van houwelingen penninck-boeck enhondende alle figuren van silbere und goude penningen gheslaghen bij de graven van hollandt. leyden, . j. ackersdijck nederlands muntwezen, etc. utrecht, . ghesquière memoire sur trois points interessant de l'histoire monétaire des pays bas, etc. bruxelles, . f. den duyts notice sur les anciennes monnaies des comtes de flandres, etc. . r.h. chalon recherches sur les monnaies des comtes de hainault. . p.o. van der chijs de munten der voormalige hertogdommen braband en limburg (in vol. xxvi. of tayler's tweede genootschap. haarlem. ). van den berg introductory chapter to "the silver question." . spain _authorities._ breve reseña historico-critica de la moneda española y reduccion de sus valores a los del sistema metrico vigente (a government report of ). juan de dios de la rada y delgado bibliografia numismatica española madrid, . (a work of unequalled merit.) vicente argüello memoria sobre el valor de las monedas de d'alfonso el sabio (memorias de la real academia de la historia). edward clarke letters concerning the spanish nation. london, . j. salat tratado de las monedas de cataluñia. barcelona, . andrea merim escuela paleographica, folio. . cascales discursos historicos de murcia, folio. . a. heiss descripcion general de las monedas hispaño-cristianas, - . vols. (a model work of immense labour.) liciniano saez demostracion historica del verdadero valor de las monedas, etc. (real acad. de la historia). dr. clemencin on the ratio in spain (in memorias de la real academia de la historia, vol. vi. p. ). england and america r. ruding annals of the coinage of britain. hawkins silver coins of england. kenyon gold coins of england. numismatic chronicle. lord liverpool treatise on the coins of the realm. sir james stewart works. s.m. leake a historical account of english money. h.n. sealey coins, currency, and banking. macpherson anderson's history of commerce. bishop fleetwood chronicon preciosum, or an account of english money, etc. etc. london, bishop nicolson english, scotch, and irish historical libraries. thorold rogers history of prices. tooke and newmarch history of prices. sir dudley north discourses upon trade. . sir walter raleigh works (oxford edition). sir robert cotton _posthuma._ harris an essay upon money and coins. london, . state papers foreign (record office). (absolutely invaluable.) close rolls and patent rolls (record office). state papers domestic (record office). treasury papers (record office). reports of the deputy-master of the mint, - . united states reports of the international monetary conference. . (embodying an invaluable series of reprints.) j. laurence laughlin the history of bimetallism in the united states. new york, . dunbar laws of the united states on currency and banking, etc. of the almost endless series of government reports, a full bibliography will be found in soetbeer's litteraturnachweis. the american mint reports, and the austrian _statistische tabellen zur wahrungs-frage der osterreichisch-ungarischen monarchie_ (vienna, ), deserve separate and special mention for their unequalled usefulness. i am deeply indebted to h.c. maxwell lyte, c.b., deputy keeper of the records, for references to the patent and close rolls, the exchequer records, and other sources, which i have attempted to work into the tables of the french coins (appendix vi.). the index of coins at the end of the present volume is intended mainly for the purposes of historical research. it has been compiled, along with the general index, entirely by my sister, miss edna shaw, to whom my warmest thanks are due. contents chapter i from the commencement of gold coinages to the discovery of america, - recommencement of gold coinages in europe, ; in italy, ; germany, ; france, ; flanders, ; holland, spain, and england, ; characteristics of the first period, ; general depreciation of the standard, ; monetary experience of italy, ; the florentine troubles, ; monetary experience of spain, ; the cortes of valladolid, ; monetary experience of germany, ; the mint conventions, ; tables of the groschen and gulden, , ; monetary experience of france, ; arbitrary debasements, ; course of the monies under philippe de valois, ; the states-general of france, , ; charles vii., ; louis xi. and charles viii., ; general statement of the ratio, ; monetary experience of england, ; edward iii.'s issues of gold, ; the measures of, , ; complaints of , and the monetary investigation, ; recoinage of , ; recoinage of henry vi., . chapter ii from the discovery of america to the end of the first cycle of the influence of the metals of the new world on european currencies, - general characteristics: first movement of metals from the new world, ; mercantile importance of the netherlands, ; statistics of the production of the precious metals, ; statement of the mint ratio, ; operation of the netherlands plakkaats, ; list of ditto, ; tables of ditto, ; monetary experience of france, ; course of the monies under henry ii. and charles ix., ; the states-general of , ; henry iii.'s reform of , ; checked by henry iv., , ; the monetary experience of , and reform of , ; recoinage of , ; florence, ; germany, ; table of the groschen and gulden, ; imperial mint ordinances of , , and , , ; mint disorders, ; _kipper und wipper zeit_, ; imperial basis of , ; spain, ; her function as a distributor, ; england ; tables of gold and silver coins, ; recoinage of , ; export of , ; measures of , ; the tudor debasement, ; elizabeth's recoinage, , ; the mistake of , remedied by james i., ; export of and , sir walter raleigh's opinions, ; crisis of - , ; the state prosecutions of , ; the troubles of and , . chapter iii from the end of the first cycle of american influences to the present day, - statistics of the production of the precious metals, ; statement of the ratio, ; development of theory of international trade, ; free trade in the precious metals, ; place of discount and interest rates in the modern system, ; monetary experience of france, ; recoinages of , , and , ; calonne's ratio, ; monetary action of republican france, ; the law of , ; bimetallic experiences, - , ; movements and mintings of the metals, ; measures of , ; french monetary commissions, ; formation of the latin union, ; its history, ; germany, ; zinnaische standard, ; leipzig standard, , ; austrian or convention standard, ; south german standard, ; prussian standard, ; conference of munich, , ; mint conventions of dresden, , and of vienna, , - ; agitation of - , ; new imperial system, ; england, ; recoinage of , ; newton's report, , ; recoinage of , ; silver legislation, ; bank restriction and the act of , ; movements and mintings of the metals, ; united states, ; beginnings of a national system, ; reports of morris and hamilton, - ; act of , ; gold export and the law of , ; silver export and the law of and , ; acts of , , and , ; movements and mintings of the metals, ; netherlands, ; portugal, ; the international conferences, ; paris conferences of , , and , - ; brussels conference of , ; india, ; her historic function, ; movements and mintings of the metals, . appendices page appendix i. the monetary system of florence, - " ii. " " venice, - " iii. " " spain, - " iv. " " the netherlands, - " v. " " germany, austria, and prussia, - " vi. " " france, - the history of currency chapter i from the commencement of gold coinages to the discovery of america, - the monetary history of europe begins in the thirteenth century, and in the italian peninsula. its starting-point is the era of the reintroduction of gold into the coinages of the western nations, and is definitely marked for us by the minting of the gold florin of florence in . for all practical purposes gold had gone out of use since the seventh century, and after the submersion of the roman empire; and the currencies of the nations of mediæval europe rested on a silver basis entirely. there are limitations to the truth of this statement, but they are of such a nature as not materially to affect it. in spain, for instance, the moors kept up a tradition of gold coinage similar to that of rome, from the eighth to the middle of the thirteenth century. but its influence on the monetary system of christian spain is not even a matter of question. at the other extremity of the mediterranean, at byzantium, seat of the eastern empire, the best traditions of the coinage system of rome were preserved for centuries after the imperial city had fallen before the invasions of the northern barbarians. indeed, the monetary system of the eastern empire, by becoming, as it did, the model which charlemagne copied in his currency enactments, became the basis of all the modern european systems. further than this, the presence of gold _byzants_ can be traced here and there, at isolated points and dates, all over the darkness of those early centuries of the middle ages, when all coining art seemed forgotten among the races of central europe. notwithstanding such limitations, however, it still remains true that the monetary history of the modern world dates from the thirteenth and not the seventh century, and from the little commercial states of italy rather than from byzantium. previous to the minting of the gold florin of florence there is no trace of any independent minting of gold coins on a commercial scale by any state of mediæval central europe. the currency system of england, for instance, from the time of the saxons to the days of henry iii. was based entirely on silver. in endless variety and under a diversity of names the silver penny was the unit coin current of the realm. its equivalent in the frankish empire was the silver denarius, which charlemagne had made the unit of his system, and which so continued for both the kingdom of france and the holy roman empire till the fourteenth century. finally, among the numerous states of italy, with each their little independent mint, there is no trace of the coinage of gold until the days of the commercial greatness of florence and venice. for eight centuries or more those races of europe, which were to turn the course of the modern world and build its civilisation anew, were ignorant of the commercial use of what has been through all history the most potent factor in civilisation--gold. [sidenote: the gold florin of florence] the explanation of the reintroduction and recoinage of gold is to be found in the history of the crusades and of the commercial growth of the petty independent states which sprang from the political confusion of italy. no sooner had they achieved each their little autonomous existence than they threw themselves with feverish energy into the development of the trade with the east. florence and venice, pisa and genoa, led the way and reaped the fruits; and it was in her most flourishing time, when she had conquered her rivals, pisa and siena, and was enjoying a prosperous peace and active trade, that florence, at the instance of the chief of her merchants, resolved on the coining of the gold florin ( ).[ ] the mere idea of such a gold coinage could only be derived from the east--from byzantium. but it is a curious fact that the importation of it should be due in the first place to the crusades. frederick ii. of sicily was elected emperor of the holy roman empire in . sixteen years later he headed the fifth crusade, and the gold coin (_augustale_) which he issued some time between his return from that crusade and his death, probably commemorates his wish to rival the appearance of opulence of the eastern court. this sicilian coin is the direct ancestor of the florin of florence, and to it would fitly belong the honour of leading in a new era, were it not that the superior beauty of the florentine coin gave it universal currency and reputation, and extinguished the memory of its predecessor. the gold coin of genoa (_genoviva_) is supposed to have issued in the same year as the florin ( ). five years later ( ) henry iii. of england imitated the florin in his gold _pennies_, and more than thirty years ( st october ) later venice followed the lead of florence and instituted a coinage of gold _zecchinos_, under the dogeship of giovanni dandolo. two conditions were essential to the bringing about so momentous a revolution as this, however little the mind of contemporaries may have known it as such. in the first place, the foreign trade of the italian republics must have become so extensive as to demand a currency medium of higher denomination than silver; and, secondly, that trade must have developed in such directions as to tap gold-using or gold-bearing regions in order to supply the italian mints. it is a curious fact that both these conditions were realised through the instrumentality of the crusades. the quickening effect of these vast movements on the trade of the mediterranean is well known, but their influence in the second direction has not hitherto been pointed out. in the fourth crusade venice lent the force which captured byzantium ( ), and when, by her arms, baldwin, count of flanders, had been seated on the eastern throne, venice reaped her reward in three-eighths of the territories of the eastern empire. she received peloponnesus and a chain of islands in the Ægean, and by the hold she had on constantinople secured the virtual control of the black sea. in its turn the control of the black sea brought with it the monopoly of the overland trade with india. [sidenote: the trade of venice] at one and the same moment, therefore, venice acquired possession of a huge treasure of gold wrested from the conquered city, and of the then only gold-yielding districts--the crimea--and of an intercolonial trade, demanding a more enhanced currency medium. the result of such a combination of circumstances was irresistible. during the continuance of the "latin empire" at byzantium, venice and her sister state were practically the only merchants of europe. the institution of a gold coinage among the italian republics, therefore, marks for us an era of commercial expansion which is only fitly to be compared with that of holland in the seventeenth century, or of our own country in modern times. we are not concerned with tracing the effects of this extraordinary movement further than as they bore in their train the dower of a currency of gold. in the european system, venice was the intermediary between the spice-laden east and the wool-bearing north. england, the wool-growing country of fourteenth-century europe; flanders, the home of the weaving industry; the hanse towns of germany and the gradually forming kingdom of france were successively brought face to face with the new medium of currency; and if the story of the gradual adoption of that new medium could be written, it would form one of the most instructive of all chapters of currency and commercial history. as it is, we have only uncertain and scattered data. in the case of germany--of chief importance in the process by reason of her geographical position midway between the mediterranean and the north--the first minting of gold in imitation of the italian states fell in the second quarter of the fourteenth century. of the two types of gold monies issued by the emperor louis iv., surnamed "bavarian," the first, struck some short time before , was in direct imitation of the florin of florence. the second, struck some little time later, was a copy of the _écu d'or_ of philip vi. of france. in our own king edward was made vicar-general and lieutenant to the emperor, with powers to coin monies of gold and silver. he accordingly kept his winter at the castle of louvain, and caused great sums of money both of gold and silver to be coined at antwerp. two years later, this same emperor louis, the bavarian, granted to the duke rainhold of gueldres the right to mint gold coins, "after the valuation of the gold monies of the archbishop of cologne, the duke of brabant, and the counts of hainault and holland." in the following year he granted to the free state of lübeck a similar right--the patent expressly stipulating that their gold coins should not exceed in weight or value the gold florin of florence. [sidenote: beginnings of a gold coinage in germany] sixteen years later ( ) the general liberty of coining gold was conceded to the seven electoral princes by the golden bull of the emperor charles iv., and subsequently state after state and free town after free town purchased or were granted the right. even as late as , in the patent granting to frederick of nürnberg this so eagerly solicited liberty, the stipulation is made that the gold gulden to be coined should be of as good gold and weight as "the gulden or florin of florence." in the case of lübeck direct documentary evidence of transactions relating to the introduction of a gold coinage has survived among the archives of that state. the privilege of a mint and of coining (of silver) was first granted to lübeck by frederick ii. in . but it was not until a century and more later that louis the bavarian, by his bull of th november , conceded the right of coining gold "in pieces which were to be neither heavier nor of higher worth than the florin of florence." on the th september in the following year the lübeck mint made its first purchase of gold from a certain jacob grell of zütphen in holland. the purchase consisted of marks loth pfen. weight of gold (lübeck weight), and the price paid was solidi the carat. in other parcels, up to michaelmas of , the authorities remitted to the mint a total weight of metal of marks oz. - / ang., varying in fineness from to carats. the consignment yielded in the pot marks oz. ang. of pure metal, and was coined into pieces of a total weight of marks oz. ang., being . gold pieces to the lübeck mark. the coins were issued on the th february , and bore on the one side the lily of florence and on the other the figure of john the baptist--all in direct imitation of the florin. the total issues made in the immediately succeeding years from the lübeck mint were:-- , florins . to the mark. " , " . " " , " " " " , " " " " with more or less irregularity the earliest german guldens imitated the florin, and maintained something like a steady and uniform denomination quite up to the beginning of the last quarter of the fourteenth century. [sidenote: gold coinage in france] in france, as in germany, the first coining of gold can only be dated approximately, but for all practical purposes quite safely. the generally accepted view is that the french series of gold coins was initiated in by louis ix., "st. louis," and that the issue was connected with the sixth crusade which he had headed five years before. there is documentary evidence extant to disprove this. _florins d'or appelez florences_ are mentioned as early as , not vaguely but quite definitely with an exact statement of weight standard and equivalence. unless the record of the first minting of the gold florin at florence is untrustworthy the coin here referred to can only be an imitation in gold of the silver florin of florence. the same document which contains this reference (de saulcy, i. ) also specifies _petits royaux d'or_ as minted not only in by philip augustus, but also in the days of his father, louis vii. similar mention of at least two gold coins of louis ix. occurs as early as , one evidently of the florin type, the other a _pavillon d'or_. it is quite safe to assert, however, that these coins were for show merely, due to an emulation of byzantine and italian opulence, and indicate no wide or commercial employment of gold. of the gold florins of , for instance, thirteen pieces were struck, twelve for twelve peers of france as a gift, the thirteenth for the king himself, "and know you that this is the most beautiful money that can be found, and the finest and best engraved." the interest of such issues is entirely numismatic and not commercial or monetary.[ ] it is not until late in the reign of st. louis--until or thereabouts--that there is mention in france of any such gold coinage as could have this commercial rather than merely numismatic importance. for the purposes of metallic or currency history proper the real starting-point for france is marked rather by the _gros royaux d'or_, coined in by philip le bel, than by the more meagre coinage of st. louis and his predecessors. the _gros royaux_ of philip were double the value of the _petits royaux_ of st. louis, of which latter philip le bel speaks thus in his proclamation. "we have commanded to be made in our name money of gold after the _petits royaux d'or_, which shall be to the paris mark and cut as the _petits royaux_ have been used to be, being issued at an equivalence of sols parisi." from this date ( ) onward the gold coinage of the french mint became one of the most important factors in the monetary history of europe. in flanders the first gold coins were struck in , under the rule of count louis ii.[ ] both the coins issued by him are copied directly from french types----his _real au lion_ from the french _écu_ of philip iv., and his _mouton d'or_ from the french coin of the same name. and it was the same french original which furnished the types to william v., count of holland ( - ), when he followed the fashion and coined gold. of the six types minted by count william during his reign, two are an imitation of the french _mouton_, and the last is derived from the universally prevailing type, the florin. [sidenote: gold coinage in spain and england] in spain the first coining of gold by the christian powers fell in the same epoch and derived from the same source. alfonso xi. ( - ), surnamed the "noble," was the first king of castille who coined the _oro gran modulo_ (_doblas de oro_), while in aragon pedro iv. ( - ), "the ceremonious," in his _oro florines_ directly imitated the florentine type, though his later pieces are more original in design. finally, with regard to england,--to whose monetary history a central importance attaches,--the course of events was most evidently controlled by the revolution in the continental currencies. it is, at the same time, comparatively easy to ascertain. the first of our kings to issue gold coins was henry iii., who in coined a penny of fine gold, of the weight of two silver pennies of the time, and ordered it to be current for twenty pence. there can be no doubt that the idea of such a coinage was derived from that of st. louis of france; and, just as in france, the issue seems to have been premature. probably neither in the one country nor the other did there exist a sufficient store of the precious metal itself, nor sufficient activity of trade to attract such a store, or indeed to make a gold coinage at all a matter of mercantile advantage. it is only a developed and active or considerable trade that demands so enhanced a medium of exchange. accordingly, just as in france, there is a noticeable gap between the first actual minting of gold by the predecessors of st. louis, and the minting of it in such quantities as to make a factor in commercial and monetary history, in the days of philip le bel ( ); so, in england, the first issue of henry iii. was followed by an interval of nearly ninety years, during which no coinage of gold by our kings took place. the real introducer of this metal into english currency and commerce was edward iii., and the first practical issue of it is to be dated in , rather than . it will be seen at a glance what this statement implies. the issue of henry iii. in had been premature--an act of kingly rivalry and show, rather than of commercial necessity. but the succeeding century saw a rapid development in the commerce of northern europe, and a gold coinage had gradually become both a possibility and a necessity. one after the other--in the order of time just detailed--the various commercial states with which england had intercourse had adopted it and profited by it. that england should follow in the movement scarcely more than sixteen years later than germany, and a year or two before flanders, is some evidence of the organisation of her trade, as well as of the intimacy of inter-commercial relationships. so purely a matter of trade and natural growth was this vast movement of the adoption of a gold coinage--a revolution indeed as it proved, though yet unwritten, more momentous in its influence on european civilisation than either the renaissance or the reformation. [sidenote: characteristics of the first period] approximately, therefore, the fourteenth century may be taken as the starting-point for a history of european bimetallism. the first period of that history embraces all the movements of the previous metals, from such starting-point up to the discovery of america in --a matter of two centuries, roughly speaking. the characteristics of this period are perfectly well defined, and repeat themselves with almost faithful and exact similarity of recurrence in the several states comprising the europe of that date. in brief, such characteristics were those of--( ) a period of commercial expanse, necessitating an increasing currency and advancing prices; ( ) a period of stationary production of the precious metals, necessitating a struggle among the various states for the possession of those metals; ( ) a period of endless change in the ratio between gold and silver, necessitating continual revision of the rate of exchange. broadly speaking, those characteristics fall into two classes, accordingly as they relate to--( ) the natural movement of prices i.e. having regard merely to the supply of the precious metals; ( ) to the unnatural struggle for the metals themselves--for the material for currency--due to international rivalry and bad or crafty legislation. with regard to the former of these, the period was distinctly one of insufficient and relatively diminishing production of the metals. during these two centuries, - , the main sources of the derivation of gold were the eastern trade and the finds on the eastern shores and northern interior of africa. the chief supply of silver came from the mines in germany. these latter--in hungary, transylvania, saxony, and bohemia--were of such importance and activity, in the fifteenth century and towards the time of the discovery of america, as partially to keep pace with the general trade expanse of the time, thereby helping to arrest a fall of prices that would have been absolutely disastrous to the civilisation of europe. the combined production during this period cannot even be conjectured. at the close of it--during the reign of henry vii.--the total coinage of england, both silver and gold, did not probably exceed £ , , , while the total stock of both metals in europe in has been estimated at no more than £ , , . these figures stand alone, for we have no idea of the extent of the commerce which was worked on so small a monetary basis, and very little idea of the amount of aid which was extended to metallic money by such expedients as bills of exchange. to estimate, therefore, whether the period was one of depreciating, stationary, or appreciating currency, we are reduced to the testimony of prices and the mint records. [sidenote: course of monetary depreciation] in france, at the beginning of the period (in ), the mark of gold was coined into livres, and the mark of silver into livres sols. at the close of the period, or towards it, in , the mark of gold was coined into livres sols, and that of silver into livres. in germany the mark of gold was coined into gulden of carats in , and into - / gulden of - / carats in --a depreciation of . per cent. in spain the mark of silver was coined into maravedis in the year , and into maravedis in . this latter case is, however, so inextricably complicated with considerations of mere, i.e. arbitrary, debasement, as to render it useless for any estimation of the natural appreciation of the metals. in england our earliest gold coin weighed - / grains, and was tariffed at s. d. in , grains of gold were equivalent to the same, s. d.--a reduction of . per cent. within the same period the weight of the silver penny sank from to troy grains, a reduction of . per cent. eliminating cases of arbitrary debasement, a rough average for the period might fairly give per cent. of depreciation through the two centuries. the case need hardly be laboured statistically, for the legislative history of all the countries forming the circle of commercial europe in the fourteenth and fifteenth centuries witnesses this general downward movement--this appreciation and restriction of currency--in grim and unmistakable manner; and it is the expression of this general movement in their legislations that gives the test and measure of the earliest bimetallic troubles of europe. in many ways the problem before the various governments was a more difficult one than that which besets the modern world. there was, for instance, nothing like an equal and generally recognised ratio of value between gold and silver prevailing at any one single point of time. at one and the same date a ratio of or to prevailed in the moorish parts of spain, and to in the christian parts (the kingdom of castile). similarly, at a later period, in , the ratio in england was . , in germany . , and in france . , in italy . , and in spain . . the natural result of such a state of chaos, if it had been permitted to work itself out unhindered, would have been arbitrage transactions of such a nature--a flux and reflux of the european currencies so perpetual--as would have induced a yearly and universal bankruptcy. in spite of frantic efforts on the part of ruler after ruler, such results did partially come about, and they sufficiently account both for the distraction of governments and the hatred universally visited upon the jew in the middle ages. the measures which were adopted by the various states to counteract this invisible, insidious, and wasting process, partake of the roughness and unscientific character of the age. the export of gold and silver was forbidden on pain of death; and it was no mere paper threat, for prominent london merchants were drawn and quartered for the offence. the rates of exchange of foreign coins were fixed by proclamation, and the office of exchanger limited to a particular place. when all this proved ineffectual, the coins were cried down, and violent and sudden changes in the ratio enacted. what made the jerk and friction of such a process worse was that such measures were not merely defensive, but intentionally offensive. the wish of the fourteenth and fifteenth century ruler was not merely to defend his own stock of precious metals from depletion, but--having gained the conviction of the insufficiency of the production of those metals for the needs of europe--to attract to himself the stock of his neighbours by whatever craft. there was a general struggle for the coverlid of gold, and the methods of that struggle were almost barbaric in their rudeness, violence, craft, and dishonourableness. italy. on account of their knowledge and practice of the science of exchanges and finance, the metallic history of the italian states is of chief importance for this earliest period. at a time when the northern nations show signs of an infancy of commerce merely, italy was advanced in the art and practice of a most highly developed commercial and financial state. it is to her that we owe our system of book-keeping and the use of bills of exchange, not to speak of the pawnbroking and funding systems; and it is permissible to conjecture that italy, keeping her finger as she did on the monetary pulsations of europe, reaped her harvest, and far the largest harvest, from the bimetallic fluctuations of the fourteenth and fifteenth centuries. in their turn those fluctuations acted on herself, and occasionally disastrously. on account of their pre-eminence as the commercial states of the peninsula, florence and venice are chosen to illustrate in brief the monetary history of italy. the account of the general course of depreciation in both these states, and of the fluctuations of mint rates is given in the appendix (nos. i. and ii.). as regards the bimetallic influence of these changes of rates, there is one telling record in the history of florence. [sidenote: the florentine troubles of ] the second quarter of the fourteenth century witnessed a decided rise in the value of silver as against gold. it told immediately upon florence, on account of her mint rates. by the regulation of the ratio in florence was . , whereas in france the ratio was approximately . , and twenty years later, , hardly more than in both france and england. the result on florence was immediate, and silver disappeared from circulation. in , says her historian, villani, there was great scarcity. there was no silver money with the exception of the _quattrini_. it was all melted down and transported. silver of the alloy of - / oz. fine was worth in other parts out of florence more than _lire a fiorino_, whence arose great discontent to the woollen merchants, who feared that the gold florin, in which they received their foreign payments, should fall too much. being a powerful factor in the little state, they agitated, and the recoinage of was the result. the precedent evil and the remedy applied by this recoinage may be thus illustrated:-- by law-- fiorino d'oro = soldi. of these soldi = la lira a fiorino. therefore lire a fiorino (the price of the libbra of silver as above, purchased abroad) = fiorini soldi. = lire soldi di piccioli. one fiorino d'oro being then current for about lire soldi piccioli. the silver species current in florence in were _quattrini_ and _guelfi del fiore_. these coins were of the same standard as above ( - / oz.), were coined at a tale of to the libbra, and issued at an equivalence of piccioli. the libbra of this silver, therefore, by florentine mint rate was valued at _lire_ _soldi_ _denari di piccioli_. abroad, therefore, the price of silver was a matter of slightly more than lire higher than in florence. the same result could be got by taking the billon money of florence and calculating from its silver contents. the natural result was a disappearance of silver. the only remedy was a recoinage, and this was applied by the law of th august . by this law the standard of - / oz. was retained, the tale of the _grossi_ was increased to pieces to the libbra ( being rendered to the merchant, and retained for mint expenses), and each piece issued at an equivalence of soldi. x = soldi. (= lire soldi di piccioli.) it will be seen at a glance that this equalised the internal and external price of silver. rather strangely this enactment of the th of august was followed by another no more than four days later ( rd august ), by which a slight reactionary change was made in favour of silver. the tale was decreased from to pieces, to be struck from the libbra of the same standard, and issuable at the same equivalence. slight as the backward change was, it was sufficient to leave the monetary system exposed to the same influence of differential exchanging, and within two months it had to be repealed by the law of october . under the name of _nuovi guelfi_ a fresh coin was thereby instituted of the same standard and equivalence as above, but at a tale of per libbra ( being rendered back to the merchant, and retained for expenses of coinage). x = piccioli. (= lire di piccioli.) this established a considerable advantage, and turned the flow of silver back again to florence. [sidenote: florence in ] the process might in many respects be compared to our raising of the bank rate, were it not that the two operations represent quite different and separated financial epochs. it is noteworthy, too, because the process will be found immediately imitated in both france and england, that these laws of represent preponderatingly the sense of the class of exchangers of florence,--i.e. the financiers professed,--men who would profit individually in their exchange operations as much as the state would in its restored currency of silver. "the above lords," says the preamble to the first-cited act, "considering the numerous petitions made to them by many artificers, merchants, and honourable citizens, of the incredible lack of silver money in the state of florence, on account of which the citizens of the said state suffer many inconveniences and wants, have determined to have and have had counsel of the twenty-one guilds of the city, who have [by a roundabout method] chosen eight men, skilled and prudent in the aforesaid, who have had counsel with the officers of our mint and with certain others of the trade of exchangers," etc., with such result as above. yet even so, the effort was only temporarily successful. before two years was out the price of silver abroad, outside of florence, had advanced to _lire_ _soldi a fiorino_ = _lire_ _soldi di piccioli_, whereas the price fixed by a fresh mint law of had been again reduced to under _lire_ _soldi di piccioli_. the result was a second melting down and disappearance of the silver coins of the state, a second agitation on the part of the florentine woollen merchants, and renewed legislation. by the mint regulation of , a new-named money was introduced called _guelfi grossi_, coined at a tale of to the libbra ( - / being rendered cash to the merchants, and - / retained by the mint for the state), at the same standard as before ( - / oz.), but at an equivalence of instead of, as previously, piccioli per piece. x = piccioli. (= lire soldi di piccioli); a figure which is considerably above the _lire_ _soldi piccioli_, which villani gives as the price of foreign silver at the time. even taking the lower tale of - / pieces, which the importer of silver to the mint got for his bullion, there is a distinct margin of profit. - / = piccioli. (= lire soldi di piccioli.) indeed, in its entirety, this operation of has a sinister look. at home the woollen merchants of florence were obliged to pay wages in silver, abroad to receive payment in gold. it was to their interest to cry down the equivalence of silver; they paid less and received more. the means by which they brought the state to put upon silver a price so far removed from the market price could only be the bribe contained in the relinquishing of - / pieces in each libbra. but such a process is in reality the beginning of debasement. if this is not the true import of the act of , it testifies all the more to the only other possible motive--the monetary straits of florence, her want of silver for currency, and the violent effort she was prepared to make to get it. whether by way of effect or cause it is hard to say, but certainly silver in the middle of the succeeding century had so far disappeared in the italian peninsula, or gold so far increased during the fifteenth century, that the commercial ratio remained persistently low-- : . , both in milan and florence; and the mint regulations of adopted by the latter state (see under table of florentine silver coins, appendix), can only be looked upon as a simple repetition of the measures of and . spain. the currency history of spain up to the conquest of america is one long list of alterations in the coinage, and of petitions from merchants and various cortes for or against changes in the rating of the coins. the _oro gran modulo_ was rated at pesetas, under alfonso xi. of castile, - , and at under his successor, peter the cruel, - . the _oro dobla castellana_ was rated at pesetas under henry ii., - ; at under henry the crafty, - ; and at under john ii., - . in the case of this country the troubles in the fourteenth century arose from the proximity of france, the circulation of lower-rated french coins, and the consequent depletion of the treasure of the kingdom. in aragon, for instance, the charter of peter iv. in had ordered the coining of gold after the same weight and fineness as of the florin of florence. it was found too high, and three years later he was obliged to cancel it by another proclamation, ordering his own gold coins to be made of the same weight and fineness as the _écus_ of the french kings. the close of his reign and the early part of that of his successor witnessed acute crisis and distress, which led to henry ii.'s celebrated reduction of the coinage at the cortes of medina del campo in . in - another general proclamation was issued, ordering a reduction of the value of the monies and fixing new rules of exchange, and this was followed by one in , prohibiting the circulation of foreign coins in spain, except at bullion value. this latter was a common device, as will be seen in the case of our own country. it proved ineffectual to prevent the outflow of the metals, and when re-enacted in was found to be of as little avail. the cortes of (valladolid) complained bitterly, in a petition, of the money drawn away from the realm by foreign merchants, and in the same year a fresh ordinance was issued to readjust the values of the native monies to the foreign coins. in this schedule, _doblas de la banda_ were rated at _maravedis_, and the _florin d'oro d'aragon_ at _maravedis_. in , only thirty or so years later, by the charter of henry iv., issued at segovia, these coins were rated at and _maravedis_ respectively. it was only with the advent of the catholic sovereigns that the internal disorder and want of unity of the spanish system was effectually remedied, in the very hour of that discovery of a new world which was to put upon spain the vital function of distributing the new stores of precious metals (see account of spanish monies, appendix iii.). germany. the movements of the precious metals in germany--which, as far as the ratio of the two metals is concerned, may be held to include the netherlands up to , when flanders withdrew from the monetary system of the holy roman empire--is a record of exactly the same process of natural and gradual appreciation of the _metal_ (i.e. depreciation of the weight and fineness of the _coin_) as in spain, france, and england. in the accompanying tables the movement of silver is illustrated by means of the groschen, and that of gold by the rhenish gulden. these coins, it need hardly be said, were not unit coins, nor sole prevailing. they are chosen from the bewildering variety with which the numerous independent mints of germany have succeeded in perplexing posterity, as being of relatively greater repute and wider acceptance, and because it is a simply impossible task to combine all the denominations of these coins, in order to deduce an average. up to the german gold coin was minted in close imitation of the florentine florin. the weight was grs., as was that of the florentine piece; and the lily and st. john, the guardian saint of florence, were both employed in the two coins, the german piece being indeed issued at first under the denomination, _florin d'or_. from the above-named date, however, and onwards, each succeeding and various power altered type, weight, or alloy, with more or less arbitrariness, but always to the increasing of the confusion of the system as a whole. and it was to remedy this confusion, or to reduce it somewhat, that the monetary union of the four electoral princes of the rhine was established ( th june ), under the lead of the three towns, frankfort, speyer, and worms; under which the four princes, frederick, archbishop of cologne, carl, archbishop of treves, adolf, archbishop of mainz, and rupert, count palatine of the rhine, agreed upon a common minting of gold gulden. according to the treaty, such gulden were to be minted from the cologne mark of gold, each of the alloy of carats grs. gold, and carat grs. silver. in this coinage was confirmed at mainz by the mint edict of rupert ii.[ ] seven years later, , the three spiritual electors, frederick, archbishop of cologne, john, archbishop of mainz, and werner, archbishop of treves, made a new and slightly different treaty, for the purpose of again reducing the alloy of the gulden from - / to carats. at this rate the system was, in the same year, at speyer, formally accepted for themselves by the netherlands, and at cologne also, in , by the empire generally. the detailed and various changes which the independent princes and powers of germany subsequently made, it is out of the question to follow. to instance only in brief. in frederick of brandenburg ordered the coining of gulden for his own states, at the rate of - / to the cologne mark, and of the fineness of carats--a very considerable reduction in the metal value of the coin. in , only three years later, sigismund was coining gulden - / to the mark and carats grs. fine--a value somewhat higher than that accepted for the empire in . in - , accordingly, the emperor sigismund issued an imperial order, which was formally adopted by the reichstag meeting at eger ( ) and nürnberg ( ), by which the cologne mark was to be coined into gulden and the fineness reduced to carats. four years later, , the emperor frederick iv. projected a further reform and reduction, proposing to coin pieces of carats fine, but this was not carried into effect, probably as exaggerating the average depreciation of the content of the coin (or appreciation of the metal). the rate, therefore, established by sigismund practically remained in force for a matter of sixty years. in the diet of - (at worms), however, a further slight reduction in weight and fineness took place, - / pieces being struck out of the cologne mark, and the fineness lowered to carats grs. on the whole, therefore, the movement of gold during these two centuries is remarkably sluggish in germany, putting aside, i.e., the internal variations between state and state; and remarkably corresponding to, and confirmatory of, that in england. and in all probability the mean of the quantities in the two countries would aptly measure the perfectly natural or normal appreciation of gold (depreciation of the content of fine metal in the current gold coin) throughout the period. the movement of silver during the same two hundred years, - , is much more excited, but shows an average or mean appreciation that tallies remarkably with that of gold just described, as also with that of silver in england. the various denominations of silver coins which arose in germany, in those years, make it a work of extreme difficulty even to attempt averages. in the accompanying tables, therefore, the groschen is taken as most fairly averaging and widely current in the empire. in its first form, the _gros tournois_, struck at tours, in france, this coin contained - / parts of a cologne mark, and was of the fineness of loth grs. in , when it was first adopted in germany (in bohemia, and meissen), - / pieces were struck from the mark, and the fineness had been reduced to loth. its subsequent variations, up to the time of the discovery of america, are detailed in the accompanying table and in appendix no. v., the principal points in which are marked by the years , (a notable attempt at reformation by charles iv. and wenceslaus), , , and (marking also an attempt at reformation by treaty between the duke of saxony and the margrave of meissen). movements of silver in germany, - , as illustrated by the groschen. +----------+-----------+---------+--------------------+ | |the cologne| of alloy| equivalent value | | | mark | |(as expressed in the| | date. |coined into| | -florin standard).| | +-----------+---------+----------+---------+ | | pieces. |loth. qr.|kreutzers.|pfennige.| +----------+-----------+---------+----------+---------+ | | - / | | | - / | | (gros | | | | | | tournois | | | | | |of france)| | | | | | | - / | | | - / | | | - / | | | - / | | | - / | | | - / | |(meissen) | | | | | | | | | | - / | | | | | | - / | | | - / | | | - / | | | | | | - / | | | | | | - / | | -- | | | | - / | |(meissen) | | | | | | | | | | - / | | -- | | | | | |(meissen) | | | | | | | - / | | | - / | | | | | | - / | | | | | | - / | | -- | | | | | | | | | | - / | | | - / | | | - / | | | | | | - / | +----------+-----------+---------+----------+---------+ [illustration: table of the movement of gold & silver in germany - .] the movement of gold in germany, - , illustrated by the movement of the gold gulden (rheinische gulden). +-----------+------------+----------------+-----------------------------------+ | | cologne | | equivalent value | | | mark | alloy. | (as expressed in the | | |coined into | | -florin standard). | | date. | | | | | +------------+-------+--------+---------+-----------+-------------+ | | pieces. |carats.| grains.| florins.| kreutzers.| pfennige. | +-----------+------------+-------+--------+---------+-----------+-------------+ | | - / | | | | | - / | |(florentine| | | | | | | | florin). | | | | | | | | | | | | | | - / | | | | | | | | - / | | | | | | | | - / | | | - / | | | | | - / | | | | | | | | - / | | | | | | | | - / | | | - / | | | | | - / | +-----------+------------+-------+--------+---------+-----------+-------------+ france. in france during this same period the ratio of gold to silver was changed in a single century more than a hundred and fifty times, and with a roughness that is quite inconceivable to the modern mind. to take a period of ten years for example:-- in the ratio was . " " . " " . " " . " " . " " . france presents the utmost difficulty to the student of metallic money during this earliest period, by reason of these violent and arbitrary alterations of the coinage. the extreme diversity of the coins, and the perpetual changing of the composition or alloy, make it almost impossible to estimate the fluctuations in the value of money in relation to goods, or gold in relation to silver. apart from the international struggle for the precious metals, france was torn and ruined by the english invasions, and debasement after debasement of the coinage was resorted to as a means of raising money to continue the struggle. such debasements mark the reign of philip le bel, - , and of each succeeding king, from his days to the final ejection of the english invaders, and after. a single instance will serve to show their nature. in the mark of gold, which in a normal time just preceding was valued at livres sols, was proclaimed equal to livres, and in the mark of silver, valued normally at livres, rose to livres.[ ] it stands to reason that such abnormal movements must be neglected in any attempt to determine the course of such fluctuations in value of the metals, and the ratio of gold and silver, as arose naturally from the metallic and currency history of the time. eliminating, therefore, this element of forced and accidental debasements, due to political circumstance, the natural history, if it may be so styled, of the french coinage displays the same tendency to an appreciation of money metal which marks the history of the other european countries. [illustration: table of the movement of gold & silver in france, - .] table of the movements of the coinage of france, - .[ ] +----------+--------------------+-------------------------------+ | | the mark of silver | the mark of gold | | | coined into | coined into | | date. | | | | +-----------+--------+-----------+--------+----------+ | | livres | sols. | livres | sols. | deniers. | | |(tournois).| |(tournois).| | | +----------+-----------+--------+-----------+--------+----------+ | | | | | | | | (philp | | | | | | | le bel.)| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | +----------+-----------+--------+-----------+--------+----------+ in this table each of the points or dates taken marks a period of return to good money after a period of debasement, and in the mind of the legislator such return to good money (_monnaie forte_) can only be construed as based on an estimated general or normal rate of monetary values, for each particular succeeding point of time. at every return to good money a proclamation was issued, expressing the determination of the administration to adhere to good money, as in the halcyon days of st. louis, etc. etc., and fixing the rate at which the monies should be coined and current. by taking these points or dates of return to good money, therefore, we eliminate the arbitrary action of the government in periods of debasement, and arrive at a net result showing the _natural_ movement of the metals. the general trend of the table--or of the metals whose movements it portrays--is perceptible at a glance, and will, moreover, be found exactly similar to that of the cases of england and germany below. on account of the arbitrary debasements by the kings and of the numerous feudal coinages struck independently by the bishops and subsidiary lords, the question of the friction with which this process of metallic appreciation worked itself out cannot be so well illustrated in the case of france as in that of england. but so much as this may be briefly indicated. in the scarcity of silver coinage was so great that a proclamation was put forth ordering silver to be brought to the mint, and forbidding the export of the metals. in consequence of the futility of this ordinance, a further proclamation was issued in , forbidding the circulation in france of english silver sterlings and gold florins of florence, and crying down the exchange denomination of all other foreign coins. similar proclamations were issued again and again--notably in . but the complaints as to the depletion of the coin of the realm became much more serious in france after edward iii. had instituted his gold coin in . there was henceforth a process of double friction--( ) as arising from the difference of the declared value of the french king's coin, as compared with foreign tariffs of coins; ( ) as arising from the difference between the ratio of gold to silver in france and that prevailing in other countries. [sidenote: alteration in silver rate] in philippe de valois had fixed the ratio at : , "the cause which moved us to this being that so our people who were in great privations and straits for money may more abundantly and quickly be filled again with money new and current." this was re-enacted in , but proved quite inoperative to rule the market rate, and in philippe found himself obliged to tolerate the advance which had been put upon the good monies in the market, by allowing provisionally the _chaise d'or_ to be current for sols tournois. four years later the silver rate was altered by a proclamation conceived in these terms: "as the changers and merchants who are accustomed to bring bullion to our mint have ceased, and do daily cease to do so, so that the working of our mint is greatly impeded, to the great prejudice of our people if no remedy is applied, we therefore order that for each mark of silver brought to the mint there shall be delivered out by the mint another sols tournois in addition to the sols tournois fixed by law." the immediate consequence was a hoarding and disappearance of the gold coins, and in the following year, , the tale of the _denier d'or aux fleurs de lis_ was altered from to to the mark. there is here no question of an arbitrary debasement. it was simply an attempt to preserve the currency from the action of a changing market ratio, which led to the withdrawal now of the one, now of the other coins, and to the circulation meanwhile of foreign coins at a rate apparently disproportioned to the metallic content.[ ] in evidence was given before the mint authorities that "in payments the people do by abuse give foreign monies at a higher rate than they are worth, viz. the _moutons_ of flanders and brabant at a higher rate than the _franc d'or_, of which said _moutons_ the best specimens are worth denars less than the said _franc d'or_; a silver piece called _chartain_ for and even denars, which is worth no more than ," and so on. two years later it was declared that the mint at tournay was on the point of stopping work, "the people having been accustomed for a long time to give a higher price for the mark of gold than in the case of other monies of this kingdom, and this by reason of the foreign merchants." towards the close of his reign charles v., finding his kingdom filled with depreciated imported specie, while all the good native pieces had been drawn out of the land, sought and obtained from the pope, , a bull of excommunication against neighbour powers who should counterfeit his monies. it was not until that the proper defensive measure of a change of ratio was resorted to, and by that time the conditions of the mint rates in surrounding nations had so altered as to render the change partially inoperative. in , accordingly, there was a great lack of the smaller silver coin, which led to a proclamation by charles vi. on the nd april of that year for encouraging the minting of _petiz deniers tournois_. the same complaint was, however, re-echoed in and , but, as it appears, quite futilely, for nine years after another proclamation had to be issued against the currency of foreign coins of scotland, navarre, the rhenish and netherland provinces, etc., "which have course in our kingdom for a greater value than they are worth, by which means our monies are arrested in their course and greatly withdrawn; the gold and silver _deniers a l'écu_ which we have minted having been melted down." [sidenote: action of the states-general in ] when the states-general met at paris in the depreciated state of the coinage was laid before the assembly as of prime concernment, and it was by its advice that the proclamation of the following year was issued fixing the _écu d'or_ at a tale of to the mark and of the _gros d'argent_ at - / , "it being come to our knowledge that for some time past the money in our kingdom is so diminished and enfeebled that by this means the gold and silver which abounded is in very great measure drawn away and transported, and the traffic of strangers here almost ceased, and all necessaries of life put at a great height," etc. the result of this reformation of was that during some portion of the succeeding years of charles vii.'s reign silver came from all parts in great abundance, although in complaints were again heard that money was not being coined and did not suffice for the public needs. at this point, however, the complaints apparently ceased, and it was not till twenty years later that the step was again taken of decrying and forbidding the circulation of foreign specie. the ceasing of the disorders in the french money is attributed to the expulsion of the english invaders, but there can be little doubt that much more simple and natural laws were at work. from the reign of louis xi. onwards these natural laws had freer play as against the disturbing influence of mere arbitrary debasements, and it is easier to analyse their influence. [sidenote: france in ] from his accession in onwards the monetary history of france displays many analogies with that of the netherlands (see chapter ii.). thus in , finding the market rate of foreign coins driven above the home mint rate by the licence of the people (i.e. by normal market action), louis issued a tariff to regulate the exchange rate in which the prevailing prices of the foreign specie were tolerated as an interim for a period of three months. at the end of that time it was manifestly impossible to secure a permanent reduction, and in order to prevent the transport of specie it was found necessary, th january , to raise the value of the home coin both gold and silver (see account of french monies in appendix no. vi.). still the export continued, and in the process of enhancement had to be repeated as a measure of defence for the gold specie. thirteen years later similar precautions were taken for the silver specie by charles viii.'s proclamation of th april . this is the last defensive measure of the first period of the monetary history of france, and no further act is on record previous to the great change in the relative values of the precious metals which ensued upon the discovery of the new world. the ratio between gold and silver in europe, - . +-----+------------------------+-------+--------+----------------+------+---------+-----+ |date.| italy. |france.|england.| germany. |spain.|burgundy.|date.| | +---------+-------+------+ | +-----+----------+ | | | | |florence.|venice.|milan.| | | a. | b. | | | | +-----+---------+-------+------+-------+--------+-----+----------+------+---------+-----+ | | . | .. | .. | .. | .. | .. | .. | .. | .. | | | | .. | .. | .. | .. | . | .. | .. | .. | .. | | | | .. | . | .. | .. | .. | .. | .. | .. | .. | | | | . | .. | .. | .. | .. | .. | .. | .. | .. | | | | .. | .. | .. | .. | .. | .. | .. | .. | . | | | | . | .. | .. | .. | .. | .. | .. | .. | .. | | | | .. | .. | .. | .. | .. | .. | .. | .. | .. | | | | .. | .. | .. | .. | .. | .. | .. | .. | .. | | | | . | . | .. | .. | .. | .. | .. | .. | .. | | | | .. | .. | .. | . | .. | .. | .. | .. | .. | | | | .. | .. | .. | .. | .. | .. | .. | .. | .. | | | | .. | .. | .. | .. | . | .. | .. | .. | .. | | | | .. | .. | .. | .. | . | .. | .. | .. | .. | | | | . | .. | .. | .. | .. | .. | .. | .. | .. | | | | .. | .. | .. | . | . | . | .. | .. | .. | | | | . | .. | .. | .. | .. | .. | .. | .. | .. | | | | .. | .. | .. | .. | .. | .. | .. | .. | . | | | | .. | . | . | .. | .. | .. | .. | .. | .. | | | | .. | .. | .. | .. | .. | .. | . | .. | .. | | | | | | | | | | (lübeck) | | | | | | .. | .. | .. | .. | . | .. | .. | .. | .. | | | | .. | .. | .. | . | .. | .. | .. | .. | .. | | | | .. | .. | .. | .. | .. | . | .. | .. | .. | | | | . | .. | .. | .. | .. | .. | . | .. | .. | | | | | | | | | | (lübeck) | | | | | | .. | . | .. | .. | .. | .. | .. | .. | .. | | | | .. | .. | .. | .. | .. | .. | .. | .. | .. | | | | .. | .. | .. | .. | .. | .. | . | .. | .. | | | | | | | | | | (rhine | | | | | | | | | | | |provinces)| | | | | | .. | .. | .. | . | .. | .. | .. | .. | .. | | | | .. | . | .. | .. | .. | .. | . | .. | .. | | | | | | | | | | (rhine | | | | | | | | | | | |provinces)| | | | | | .. | .. | . | .. | .. | .. | .. | .. | .. | | | | . | .. | .. | .. | .. | .. | .. | .. | .. | | | | .. | .. | .. | .. | .. | .. | . | .. | .. | | | | | | | | | | (rhine | | | | | | | | | | | |provinces)| | | | | | .. | .. | .. | .. | .. | .. | . | .. | .. | | | | | | | | | | (lübeck) | | | | | | .. | .. | .. | .. | . | .. | .. | .. | .. | | | | .. | . | .. | . | .. | .. | .. | .. | .. | | | | .. | .. | .. | . | .. | .. | .. | .. | .. | | | | . | .. | .. | .. | .. | .. | .. | .. | .. | | | | .. | .. | .. | . | .. | .. | .. | .. | .. | | | | .. | . | .. | .. | .. | .. | .. | .. | .. | | | | .. | .. | .. | . | .. | .. | .. | . | .. | | | | .. | .. | .. | . | .. | .. | .. | .. | .. | | | | .. | .. | .. | .. | .. | . | .. | .. | .. | | | | .. | . | .. | .. | .. | .. | .. | .. | .. | | | | .. | .. | .. | .. | .. | .. | .. | .. | .. | | | | .. | .. | .. | . | .. | .. | .. | .. | .. | | | | .. | .. | . | .. | .. | .. | .. | .. | .. | | | | .. | .. | .. | .. | .. | .. | . | .. | .. | | | | | | | | | | (lübeck) | | | | | | .. | .. | .. | . | .. | .. | .. | .. | .. | | | | . | .. | .. | .. | .. | .. | .. | .. | .. | | | | . | .. | .. | .. | .. | .. | .. | .. | .. | | | | . | .. | .. | .. | . | .. | .. | . | .. | | | | . | .. | .. | .. | .. | .. | .. | .. | .. | | | | .. | . | .. | .. | .. | .. | .. | .. | .. | | | | .. | . | .. | . | .. | .. | .. | .. | .. | | | | .. | .. | .. | .. | .. | .. | .. | . | .. | | | | . | .. | .. | .. | .. | .. | .. | . | .. | | | | . | .. | .. | .. | .. | .. | .. | .. | .. | | | | .. | .. | .. | .. | .. | .. | .. | . | .. | | | | .. | .. | .. | . | .. | .. | .. | .. | .. | | | | . | .. | .. | .. | .. | .. | .. | .. | .. | | | | .. | .. | .. | .. | .. | .. | .. | . | .. | | | | .. | .. | . | .. | .. | .. | .. | .. | .. | | | | .. | .. | .. | .. | .. | .. | .. | . | .. | | +-----+---------+-------+------+-------+--------+-----+----------+------+---------+-----+ germany--_a_, as determined by the purchase prices of the two metals in the lübeck mint. _b_, as determined by the mint ordinances. [sidenote: england: coinage of ] england. even before the adoption of a gold coinage by edward iii., england had felt the effect of loss by exchange, owing to the introduction of gold florins by means of the flemish trade. in the parliament of , at westminster, complaint was made of the want of coinage. it was proposed as a remedy--( ) that every merchant should bring in s. or more for every sack of wool that he should import, and ( ) that it should be considered by the king and his council whether it might not be advantageous to permit _florins de écu_ (of france), and florins of florence (i.e. gold), and other good florins to be current with the _esterlings_ (i.e. the silver penny), "but only esterlings to be compulsory for under s. value." in less than four years good money was being carried out of the realm, and false money brought in at such a rate that parliament was seriously perplexed. in its debate on the matter at westminster, , the result is thus stated: "all orders of persons in the realm had loss for a long time, on account of the florins which were delivered in payment in flanders, bearing so high a value there as to occasion a loss of one-third on all merchandise imported thence." certain goldsmiths of london were therefore ordered to be called in to advise and to refine one or two of each kind of florin, so as to rate the fine gold in them according to the true value. and it was proposed that of this fine gold one kind of money should be made in england and flanders, provided the flemings were willing, to be current in both countries at such an alloy and value as should be determined by the king and council, and all other gold money to be taken at bullion value, and all silver money to be reckoned thereby ("other sufficient money to be received according to the value of the fine gold"). the result was the first practical issue of english gold. in an indenture was made between the king on the one part and george kirkyn and lotte nicholyn of florence, goldmasters and workers, on the other, for the coining of three monies of gold, one to be current at s., and to be equal in weight to _petits florins_ of florence of good weight, of these being coined out of the pound tower of london. in this indenture edward copied the ratio prevailing in the french kingdom, viz. that of . to between gold and silver. that ratio was considerably too high, and he quickly experienced the same effects which were felt by the french king from it. during his reign ( - ) philip of valois coined more species of new money than all his predecessors put together, but owing to the adoption of this too high a ratio the country was gradually depleted of good money. in order to induce people to bring bullion to the mint he offered to coin free of cost, but found nothing of avail until he followed the example of england and altered the ratio. in our own country the same truth had been quickly grasped. it was found that the new gold money was rated too high, i.e. overvalued in relation to silver, and was therefore refused. by a proclamation of the same year, therefore, th july, it was withdrawn and ordered to be taken only as bullion, and a new indenture was made for the coining of gold nobles-- - / out of the pound tower, and at the value of s. d. the nobles were at once made current and tenderable along with silver, by proclamation; gold being ordered to be received in payment of s. and upwards. [sidenote: gold nobles coined] by this indenture the ratio was at once dropped from . : to . : . this attempt to determine the rate of exchange is a common feature in the legislation of france and spain as well as of england. it stands to sense, and is apparent on every page of the monetary history of the period, that it was absolutely imperative. the friction which accompanied the process can now only faintly be imagined, but that is a secondary consideration. the essential point was, that such changes were normal and inevitable, forced by sheer necessity upon governments, such an one even as our own, which has always been most jealously conservative in matters of coinage. table of the variations of the gold and silver coins of england, - . +----------------------+---------------------------------------------------+ | silver. | gold. | +-------+--------------+-------+--------+----------+-----------+-----------+ | | weight of | | | weight | | price in | | date. | the silver | date. | coin. | in | value | pence per | | | penny in | | | grains. | declared.| grain of | | | troy grains. | | | | | gold. | +-------+--------------+-------+--------+----------+-----------+-----------+ | | | | | | _s._ _d._ | | | | | | florin | | | . | | | - / | | noble | - / | | . | | | | | ... | - / | | . | | | | | ... | | | . | | | | | ... | | | . | | | | | ... | | | . | | | | | angel | | | . | +-------+--------------+-------+--------+----------+-----------+-----------+ in the first issue of edward iii. the troy grain of gold had been valued at . of a penny. at such rate it was overvalued and refused, and in the second issue of the same year the value was dropped to . of a penny. gradually, as the ratio on the continent changed, and came to bear on the english rate, this was in its turn found an under-valuation, and only two years later, , the value was raised to . , making a ratio of . to . the change was made in consequence of loud and serious complaints of the scarcity of coin, good money being carried out and false "lusshebournes" (luxembourgs), worth only s. in the pound, being brought in. the grievance was so great that parliament petitioned edward most urgently to interfere, instancing in special the lombards, "that they purchased english florins at a lower rate than that which was appointed," and praying "that such persons should not buy or sell the said money, nor make any agreement, in the sale of their merchandise, what money they would receive in rejection of english money." to this it was answered, that it should be commanded throughout england that all persons should receive for their merchandise gold, according to the currency ordained, without any agreement to be made, under pain of imprisonment and heavy ransom, and when any agreement had been made it should be at the will of the purchaser to pay money of gold or silver as he should think fit. at the same time, an ordinance was issued forbidding any person to carry out the king's good money or to bring in counterfeit. [sidenote: edward iii.'s changes of ratio] [illustration: table of the movement of gold & silver in england - .] the effect of edward's change of ratio--from . (the same as the french rate) in to . in --told immediately on the french currency, and at the first return to good money in the first year of king john ( - ) the ratio in that country was changed at a stroke from . to . . this in its turn acted upon precious metals in england, and for three years the english king found himself futilely struggling against an outflow of silver, by such measures as the hanging and drawing of merchants, before he discovered that it was due to an overvaluation of gold. in , accordingly, he lowered the weight of the gold nobles from - / grs. to . at the same time, the contents of the silver penny were reduced in a greater proportion (from grs. to ). by this means the ratio of . , which had prevailed since , was lowered to . . that this ratio achieved its purpose, as far as england was concerned, is apparent from the simple fact that it remained unaltered for over sixty years until ; that it acted adversely upon and drained france of her gold is apparent from the change of the ratio there at her first immediately succeeding return to good money. two periods of debasement had marked the short reign of john of france ( - ), and the effect of these and of the influence of the english ratio was such that in there was no gold in his kingdom. towards the end of that year, and in the beginning of , john promulgated a reformation of the coinage--a return to good or "forte" money, and in this reformation he adopted a ratio which would act on the english stock of precious metals. in england, edward's action in in lowering the contents of both silver and gold coins, and altering the ratio, had given rise to great discontent, to an extent which proved how wiser and truer to the nation's interest was the king than his people. this diminution of the value of these coins, says the chronicle, made all things dearer, so that the workmen and servants became assuming and demanded greater wages. there is as little foundation for such an innuendo as there is for the view which regards this depreciation as an issue of base money. it was simply a measure of precaution, as stopping an invisible and insidious outflow of the currency. [sidenote: england and france in ] looked at historically, and not at all controversially, such results as have been just described can only be attributed to the european monetary system of the time. apart altogether from the arbitrary debasement of the coin, as, e.g., in france--apart even from changes of the ratio enacted with the mere crafty design of inducing a flow of gold, the monetary system of the time was so rough, so unscientific; the tariffing of the coins of different nations against each other was so inexact, so much a matter of rule-of-thumb, of hasty average, that it was simply impossible to issue such general tables of equivalents of coins and such a ratio as would have given stability to the various coinages of europe. if the currency system of england had been of silver alone, a single enactment lessening the content of the unit coin, or crying up its denomination, would have stopped any outflow caused by under-valuation as compared with foreign money value. the same if it had been only gold. but being combined of the two, being, as it was, both gold and silver, it was necessary, in the case of such outflow, not merely to call down one or both of them below the value of foreign gold or silver, but also and at the same time to establish such a ratio between the two metals for _internal_ circulation as would give no advantage to exchangers acquainted with a different ratio prevailing in some particular part of the continent. and just the same for the other european money systems. if, for instance, the english sterling had been called down to a value which would of itself have forbidden export to the continent, but at the same time such a ratio had been left standing between these sterlings and the gold nobles (say : ) as was so far in excess of the ratio prevailing in some parts of europe (say : ) as to overlap the amount by which the sterling had been called down, then the result could, and doubtless would, be an outflow of silver, in face and spite of the apparent higher tariff of the english sterling, as against the continental silver coins. this is the historic, patent, undeniable defect and weakness in the bimetallic system of the europe of that day. it must be borne well in mind how different the problem then was from that which now besets the monetary world. to-day the flow of the precious metals is natural, the indicator, facilitator, and safety-valve of international trade. such a conception was an utter impossibility to the fourteenth century. the rulers of that age had only one idea, the maintenance or increase of the treasure of the realm, first for military purposes, and then for trade; and their mental horizon was limited by the boundaries of each their little dominion. they could not grasp the idea of europe as a monetary whole, each fought for his own head or land, and each found a ready weapon to hand in the monetary confusion of the time. in any system so rough and so non-uniform as that of europe in the fourteenth century, any variation of one metal served as a vantage-point against the other, as a lever to press upon and force it out. one metal would have been safe (so long as no partial depreciation was allowed), two metals served simply as fulcra to each other's oscillations, to the undoing of both. the mediæval legislator could not grasp that there was a double train of principle and event transacting itself under his very eyes--the one, changes of denomination of coins; the other, changes of ratio. in less than thirty years after edward iii. had cried down the english coins to below the competing denominations of the continent, the changes of the european ratio had produced their effect, and richard ii. found the realm denuded of its treasure and currency. [sidenote: england in ] from the ratio on the continent gradually sank from : till towards the end of the first quarter of the fifteenth century, when it stood in france as low as : . that france experienced the process, which must have been perfectly natural and due simply to relatively diminishing production of silver in those years, - , is seen in her alteration of the ratio from to . in and to . in . in england the same train of events made itself felt at almost the same moment. in great complaints were made of the export of gold and silver, and of the enfeebled state of the money which remained in the realm, "so that if a remedy be not speedily applied, the king will receive no more than s. where he should receive s." [sidenote: the monetary inquiry of ] three years later--one year after the french king had lowered his ratio from . to . --the commons presented a petition to the king during the sitting of parliament, , complaining of the wretched want of the kingdom, which was devoid of treasure, monies of gold and silver being carried out of the realm, and those remaining being clipped to one-third their nominal value. no money at all was being minted in the tower, and a heavy export of our metals to scotland and ireland was taking place. simultaneously the officers of the mint presented a petition to the king and his council in parliament, complaining that no money was being coined. the causes of this, in their opinion, were-- . that the monies of gold and silver beyond the seas were more feeble than the monies of england, on which account the merchants could not bring bullion into england for their profit nor for the king's advantage. but if any manner of bullion of gold were brought into the kingdom, by persons travelling, it was sold to those who conveyed it out of england, to their great gain and to the injury of the whole realm. . that the silver of england which [i.e. when it] was found to be good and heavy, was taken into scotland, because the money of that country was so light. . that the gold of england being so good and heavy, and that beyond sea so light, the _nobles_ which came from calais were gone into flanders, and the english _nobles_ were carried beyond the sea, to the great profit of those who exported them, etc. etc. . that the money of gold and silver of england was commonly clipped, so that they who thought they should have £ would have no more than £ , unless a remedy were speedily applied. the officers of the mint were accordingly ordered to be called before the lords of the parliament for examination, and they were succeeded by others, private persons but mostly goldsmiths, who were called upon as experts. in the case of these latter the various statements of opinion are preserved for us in the rolls of parliament, and they possess a peculiar interest. richard leye thought that the reason why no gold or silver was brought into england, but, on the contrary, that which had been in the kingdom was exported, was this, that the realm expended too much on merchandise, such as grocery, mercery, furs, etc. he therefore proposed that every merchant who imported goods into england should export an equal quantity of the produce of the realm, and that no one should take out gold or silver, contrary to the statutes. as to the gold not agreeing with the silver (which was article iv. of the inquiry), he thought that could not be remedied, unless the money were changed, and to change it in any manner would be productive of universal injury to lords, commons, etc. to article v. he advised that, whereas new money had been made in flanders and in scotland, proclamation be made that all manner of coins of flanders, scotland, and of all other places beyond the seas, should be no longer current in england, and that no one should receive them in payment except as bullion to be carried to the king's mint. lincoln, a goldsmith, gave his opinion similarly against the permission to export gold and silver, and proposed that the gold noble should remain of the same weight as it had been, but at a greater value. to the first article cranten said, that no more in value of foreign merchandise should be consumed within the realm than should be exported of commodities, the growth of england; and then, whether the money were enhanced or debased, it would hereafter remain within the realm. also, that exchanges or other payments by letters should not be made out of flanders, or other parts beyond the seas, to pay in england for any merchandise. john hoo advised a proclamation against the carrying out of gold or silver, and that the money should be received by weight. the statement of opinion of the succeeding and last witness is extremely valuable and interesting. richard aylesbury opined that, provided the merchandise exported from england was properly regulated,--that is, if no more of foreign commodities were allowed to be imported than the value of the native products which should be taken out,--the money then in england would remain, and great plenty would come from beyond the seas. he also conceived it to be expedient that the pope's collector [of peter's pence] should be an englishman, and that the pope's money should be sent to him in merchandise and not in coin, and that the journeys of clerks should be entirely forbidden, on pain, etc. for the feebleness of the gold, which was occasioned by clipping, he conceived there was no other remedy but that it should be universally weighed by those who received it, and that the proclamation should be made accordingly. _the agreement of the gold with the silver he believed could not be effected unless the money were changed, but that he dared not to propose on account of the general damage which would ensue._ on account of the new money which had been made in flanders and scotland, he advised that all scottish monies should be forbidden by proclamation, and also all other monies from beyond the sea, so that they should have no currency in england; and that no one should take them in payment, except at their value as bullion and for the king's coinage; that no one should export gold or silver, according to the statute in that case made, etc. and, further, he suggested, by way of information, that the pound of gold which was there made into the sum of nobles (but which pound, by reason of clipping and otherwise impairing, was then valued at - / nobles) should be made into nobles, to be current at the same value as before. this last proposition would have reduced the ratio to a fraction over : --something higher than the ratio prevalent in france. instead of acting on evidence such as this, however, and so changing the ratio, richard's government contented itself with the perfectly useless prohibition of export of gold or silver (statute rich. ii. cap. ). four years later, accordingly, the matter was again pressed upon the attention of parliament, and even by the chancellor of the realm, michael de la pole himself, in his opening speech. the english money, he said, was in greater estimation and of higher value in all other places than in england. it was therefore sought out and craftily withdrawn, and the chief or greatest remedy was to increase the value or price of the said money. in spite of such recommendation as this the measure was not adopted, and richard fell back on his previous expedients, crying down by proclamation the value of the scotch coins, , and of the gold coins of flanders and brabant, , and ordaining by enactment that exporters of goods should bring in oz. of gold for every sack of wool which they sold. such an ordinance as this last is of the commonest and most frequent occurrence in the enactments of fifteenth-century england, but always unworkable as warring against the most elementary principles of international trade. on his accession, therefore, henry iv. found himself heir to an accumulation of monetary evil, through the impolicy and want of courage of richard. [sidenote: the recoinage of ] he was obliged, at the request of the mayors and merchants of the staple of calais, to abolish the last unworkable ordinance just referred to, and attempted at the same time to provide a positive remedy by reviving a proclamation against the currency of silver halfpennies brought from venice, of which three or four only were equal to one sterling in value. in the commons complained in parliament that nobles of flanders were so common in england that a man could not receive a sum of shillings without taking three or four such nobles, each of them more feeble than the english noble by two-pence. a statute was accordingly passed, enacting that all money of gold and silver of the coin of flanders and all other lands, and of scotland, should be voided out of the land, or put to coin to the bullion. it was all in vain. two years later, , the commons again complained of the depletion of gold, and again a statute was passed, and so on. this futile process actually reproduces itself yearly up to , when at last the question of a recoinage was fairly faced. by the ordinance for, and regulation of, the money of the realm, of that year, it was provided that, "because of the great scarcity of money at the time," the master of the mint should make of every pound of gold nobles, and of silver shillings of esterlings of old alloy. this recoinage was carried out and finished in the third year of henry v., . under it the contents of the silver penny sank from to grs., and of the gold noble from to grs., the consequent change in the ratio being from . , which had prevailed since to . . at this latter rate the monetary system of england remained for almost fifty years, viz. up to . but, though the rate endured so long, it is not for a moment to be supposed that the ensuing period was one of repose. within eight years of the accomplishment of the reform in the english coinage, the ratio in france was lowered to a point somewhat below the established rate in england, and with considerable variation remained lower through all the years in question, - . in it was changed to . , in to , in to . , and in to . . the effect on england, as recorded in the complaints in parliament, was almost parallel with that in the days of richard. in complaints were made against the circulation of galley halfpence by the merchants of venice. three years later proclamation was made against the circulation of the gold monies of flanders, called _burgundy nobles_, which were of less value than the english nobles. in it was found that money was being exported "more largely, and in many other manners, than had been accustomed, to the great mischief and impoverishment of the whole realm." and in the following year the usual statute was enacted, on the petition of the commons, commanding foreign money to be taken as bullion. again, two years later, , the enfeebled and depreciated state of the coinage was so apparent that the collectors of the subsidy granted in that year by parliament were instructed to accept nobles as of the denominational value of s. d. (i.e. the full value), "provided they stretched verily to the value of s. d. by weight." at the same time silver money was so scarce that "though [i.e. even if] a noble were so good of gold and weight as s. d., yet men could get no white money for it." in the commons complained of the want of silver coins in the realm, "to the great unease and harm of the poorer people of this land," "because [says the statute, which was accordingly enacted], that silver is bought and sold uncoined at s. the pound of troy, whereas the same pound is no more of value at the coin than s., with an abatement of dens. for the coinage." [sidenote: the monetary troubles of henry vi] from the twenty-fourth chapter of the statute of it appears, quite consonantly, "that the merchant aliens had of late introduced a custom of refusing to take silver, as they were wont, for their merchandises, and of taking only gold nobles, half-nobles, and farthings, which, from time to time, they carried out of the realm into other foreign countries, where they were changed to their increase and forged into other coins, so that they gained in the alloy of every noble twenty pence, against the tenor of the statutes, etc., and to the prejudice of the king and realm. therefore the king, willing to provide a remedy, ordained that no merchant alien should constrain nor bind any of his liege people by promise covenant or liege, to make him payment in gold for any manner of debt due to him, nor refuse to receive payment in silver for any manner of such duty or debt, upon the pain of the double value of the same." in provision was again ordered to prevent exportation of money by merchant aliens. it was renewed in , and five years later the commons petitioned that the silver mines of devon and cornwall, which had not been worked for a long time, might be again opened, on account of the great scarcity of money. the confusion of the wars of the roses, however, renders it slightly problematical how far the two successive lowerings of the coinage, which took place in and or , are to be attributed to arbitrary action or to a natural process. by the recoinage of the noble was increased in weight from grs. to grs., and the value from s. d. to s. d., being a real appreciation of the grain of gold from . to . of a penny. at approximately the same date, , the weight of the silver penny was lowered from to grs. in the succeeding recoinage of and these rates were again altered. a new gold coin, the _angel_, was instituted, weighing grs., and valued at s. d., while the weight of the silver penny was left unaltered. the ratio was accordingly changed to . . this was the last change of the coinage made in england before the era of the discovery of america. the internal effects which the changes had on the commerce of the time are hidden from us by the disturbing influences of the wars of the roses. [sidenote: conclusion of the first period] but it is, probably, in connection with this change of the english ratio--or with some wider, general movement, acting on both countries alike--that the last monetary ordinances of louis xi. of france, referred to above, are to be understood. these acts of conflicting policies mark the conclusion of the first period of european metallic monetary history, for no further changes were enacted previous to the close of the century and the discovery of america. as far as england was concerned, the monetary system remained comparatively unchanged till the days of henry vii. on a review of the whole period two simple facts emerge with unmistakable plainness and import. . it was a period in which the commercial expanse outstripped the reinforcing supply of the precious metals, and therefore in which a real decline of prices[ ] prevails. . the evil effects of such decline were enormously increased by shortsighted, crafty manipulation of the currency by the european rulers, and by the rough, unscientific system of the prevailing coinage and exchange rates, and by the inability of the age to understand, or even to perceive, the hidden working of two metals see-sawing against each other--acting as levers against each other--cutting each other's throats. the discovery of america corrected the fall of prices and saved europe, but it left her rulers as deadly ignorant as before of the workings of bimetallism--to give a name to what they had not even perceived as a phenomenon, much less as a system. footnotes: [footnote : this is the date accepted by the numismatic authorities. it is adopted by orsini (_storia delle monete della repubblica fiorentina_, p. xxiv, where he states the authority for it). it is nevertheless open to serious doubt. see in de saulcy, documents i. pp. - , references to florins d'or from onwards. on the other hand, as to the nature of the florin de compte and its distinction from the florin d'or, see m.l. blancard, _revue numismatique_, , pp. , , and , p. ; and vicomte d'avenel, _histoire de la propriété, etc._, i. p. .] [footnote : est a notter que le roi en fit forger aulcune quantité (some slight quantity) d'or du poids de den. gr. chacune pièce laguelle auvrage il dedia seullement pour sou aulmosne aux pauvres ausquels souvent il lavait les piedz par humilité. et en fut jamais inventée ladite pièce d'or pour aultre cause que dessus et non pour monnaie uzuelle et publicque." (de saulcy, _documents, i._ , , ).] [footnote : see, however, in de saulcy, i. , a mention of _manteletz d'or de flandre_ in .] [footnote : soetbeer considers the standard in as fine, and asserts that, by the mint edict of , it was lowered to - / carats.] [footnote : for an estimation of the _commercial_ effect of these debasements, see vicomte d'avenel, _histoire de la propriété, etc._, i. - ] [footnote : for a similar table calculated in francs, see vicomte d'avenel, _histoire de la propriété, etc._, i. , , where the figures are very different. on le vicomte d'avenel's method of calculation, see the _english historical review_.] [footnote : see note on p. , infra..] [footnote : by prices here, and subsequently throughout this volume, is meant the price or tariff and mint rate of the coins. there is no reference whatever to general prices.] chapter ii from the discovery of america to the end of the first cycle of the influence of the metals of the new world on european currencies, - the last decade of the fifteenth century witnessed the discovery of america, and therein the monetary salvation and resurrection of the old world. the end of the second quarter of the seventeenth century in its turn witnessed the end of the first phase, and the most important, of the new world upon the destinies of europe. practically and historically the century and a half intervening between and may be treated as a single cycle with a single aspect. it was a time of unexampled increase in the imports of the precious metals, of equally unexampled rise of prices, and at the same time of feverish instability and want of equilibrium in the monetary systems of europe. two general statements may be premised. . broadly speaking--of prices, i.e.--no movement of any note is perceptible, or records itself in legislative enactment until about , so gradual and at first unimportant was the flow of metal from america. what did come at first was not silver so much as gold, and represents the puny and blood-stained plunder of ornaments from the natives. if this import tended to turn the balance in any way, it was in the direction of depreciation of gold as compared with silver. but during this first quarter of the sixteenth century, possibly more influence on the maintaining of equilibrium is to be attributed to the largely increased home production of silver. the silver mining in the saxon harz, in bohemia, and the tyrol, had received a strong impulse towards the close of the fifteenth century, while gold was obtained during the same period in appreciably greater quantities in the archbishopric of salzburg, and in hungary, as well as from africa. [sidenote: general statement] . in this second period of european bimetallic history, the centre of european monetary exchanges passes from italy to the netherlands. antwerp takes the place of venice and florence. there is a double and deep significance in the fact. it is not merely that the trade route had changed in such a way as to lay the foundation for that development of european commerce, of which england is the highest expression in our own days; it is that by the change was provided a more effective safeguard against precipitate and overwhelming depreciation. the centre of european exchanges--antwerp in the sixteenth, as london to-day--has always performed one supremest function--that of regulating the flow of metals from the new world by means of exporting the overplus to the east. the drain of silver to the east, discernible from the very birth of european commerce, has been the salvation of europe, and in providing for it antwerp acted as the safety-valve of the sixteenth-century system, as london has done since. the importance of the change of the centre of gravity and exchange from venice to antwerp lies therefore in this fact. under the old system of overland and limited trade, venice could only provide for such puny exchange and flow as the mediæval system of europe demanded. she would have been unable to cope with such a flood of inflowing metal as the sixteenth century witnessed, and europe would have been overwhelmed. but the foundations of the commerce of the netherlands were laid wider. together with portugal she opened an extensive empire along the coasts of africa and in the indian east; and the very time which gave birth to the revolution in the production of the precious metals in america saw provision made for the regulation of its outflow through the commerce and exchanges of antwerp to india. in the modern system this would be a theoretically perfect world-mechanism, and its working would be normal and healthy, and the safest indicator of commerce. that it was not so to seventeenth-century europe was simply due to the existence of a disordered, understood bimetallic system, and the crisis to which the working of this mechanism brought her has perhaps not been since equalled at any point of time. the underlying causes of this crisis have been already described. the currencies of the trading nations of europe were all unconsciously bimetallic. throughout, there was in existence one class who grasped the _fact_ without any knowledge of the _theory_, and profited by it--the merchant exchangers. there was constant oscillation--change of ratio, and the least alteration of the condition of one metal made it a lever for operations upon the other. these operations were arbitrage merely. they had no relation to the ebb and flow of commerce as modern arbitrage transactions have. it was a financier's opportunity of _private_ gain, and for _private_ gain the system was worked. the ebb and flow of european currencies, which the sixteenth and seventeenth centuries witnessed, were as unnecessary (i.e. for the purposes of her commerce) as they were disastrous. it is sufficient to indicate the tendency of this argument, and to leave the illustration of it to the following pages. to return to the yield of precious metals during the years under discussion. any estimate must be conjectural, in the absence of the accounts of the spanish mints.[ ] this understood, it may be thus tabularly represented. [sidenote: production of the precious metals] +-----------+-------------+-------------+--------------+--------------+ | | annual | annual | proportion | proportion | | date. | average | average | of gold | of silver | | | production | production | in total. | in total. | | | of gold. | of silver. | | | +-----------+-------------+-------------+--------------+--------------+ | - | £ , | £ , | % | % | | - | , , | , , | % | % | | - | , , | , , | . | . | | - | , | , , | . | . | | - | , , | , , | . | . | | - | , , | , , | . | . | | - | , , | , , | . | . | | - | , , | , , | . | . | +-----------+-------------+-------------+--------------+--------------+ the general tendency of the first years of this period ( - ), if discernible at all, seems rather in favour of silver, and to the depreciation of gold. the average ratio was . , speaking very generally, and with every mental reservation as to its applicability at any particular time and place. an equally rough average for the preceding time (see chapter i.) would give a ratio of . , showing apparently a movement in favour of silver owing to the increased production of gold. the succeeding quarter of a century, - , covers the time from the conquest of mexico to the commencement of the exploitation of the silver mines of potosi. looked at from the point of view of prices in europe,--as evidenced most circumstantially in the _plakkaats_ of the netherlands, to which reference will be immediately made,--these years display stability--i.e. a steady maintaining of the advance gradually and already made between the years and , and chronicled for us in the prices of --rather than any further great and readily perceptible rise. for example in brief. in the flemish _plakkaats_ the french crown is quoted at an equivalent of florin - / stivers in , and of florin stivers in , when an attempt was made to reduce it to florin - / stivers again. from to no further advance, but retrogression rather is quoted thus:-- +-------+-----------------------------------+---------+-----------+ | date. | | florin. | stivers. | |-------+-----------------------------------+---------+-----------| | | french crown quoted at | | - / | | | " " | | | | | " " {(real) | | | | | " " {(attempted) | | - / | | | " " {(real) | | | | | " " {(attempted) | | | | | " " | | | | | " " | | | +-------+-----------------------------------+---------+-----------+ this general conclusion will be found quite invariably illustrated in the tables of netherland coins (below). [sidenote: characteristics of the period, - ] with regard to the annual average production of the metal, there is perceptible a slight movement towards the depreciation of silver or in favour of gold. this might naturally be expected to express itself in a somewhat higher ratio. but the differentiation is so slight as hardly thus to indicate itself, and certainly not consistently, so far as the ratio is capable of ascertainment. in france the ratio in { was . { " . in the netherlands the ratio in { " . { " . in england { " . { " . in germany { " . { " . broadly speaking, therefore, there is a certain homogeneity about the first two periods, - and - , of the new era. these fifty-five years mark a time of general advance on prices achieved by and maintained unequally up to , but an advance which was steadily and almost fairly level on the two lines of gold and silver, so that the perfectly well-established advance of prices generally is accompanied with no great disturbance of the ratio in itself. in contrast with this all the succeeding periods have, up to , a distinct character and statistical bearing. an enormous and ever-increasing advance in general prices occurs, but it is no longer, as before, on level lines of the two metals equally. the proportion of the production of the two metals changes, so rich was the yield of the silver mines of potosi. from being the same with that of gold, the value of silver produced suddenly rises to three times and then to four times that of its rival; and at once the ratio changes, bringing with it all its accompaniment of feverish instability and flux. [sidenote: statement of the ratio, - ] the average result in the ratio was as follows:-- - . - . - . - . - . - . . as far as can be ascertained the detailed statement of the ratio during the whole period, - , is as follows:-- +------+------+------+-------+------+---------+------------+-------+------+ | | | n | | | | | | | | | | e | | | | | | | | | e | t | | | germany |s.w. germany| | | | date.| n | h |france.|spain.|(imperial|(wurtemburg,|venice.| date.| | | g | e | | | system).| strasburg, | | | | | l | r | | | | colmar). | | | | | a | l | | | | | | | | | n | a | | | | | | | | | d | n | | | | | | | | | . | d | | | | | | | | | | s | | | | | | | | | | . | | | | | | | +------+------+------+-------+------+---------+------------+-------+------+ | | | | | . | | | | | | | | | | . | | | | | | | | | | . | | | | | | | | | | . | | | | | | | | | | | . | | | | | | | . | | | . | | | | | | | | . | . | | | | | | | | | | . | | | | | | | | | | | | | | | | | | | | | . | | . | | | | | | | | (erfürt)| | | | | | | . | . | | | | . | | | | | | | | . | | | | | | . | | | | | | . | | | | | | | | | | . | | | | | | | . | | | | | | | | | . | | | | | | | | | . | . | | | | | | | | | | | | | . | | | | | | . | | | | | | | | | | | . | | | | | | | | | | . | | | | | | | | | | . | | . | | | | | | . | | | |(imperial| | | | | | | | | | edict) | | | | | | . | | | | | | | | | | | . | | | | | | | | | . | | | | . | . | | | | | | | . | |(imperial| | | | | | | | | | edict) | | | | | | | | | | | | . | | | | | | | | | . | . | | | | | | | . | . | | | | | | | . | | | | | | | | | | | . | | | | . | | | | | | . | | | . | | | | | | . | | | | | | | | | | | | | | | . | | | | | . | | | | | | | | | | | | | | . | | | | | | | | | | . | | | | | | | | | . | | | | | | | . | | | | | | | | | | | | | | . | | | | | | . | | | | | | | | | | | | | | . | | | | | | | | | | . | | | | | | | | | | . | | | | | | | | | | . | | | | | | | | | | . | . | | | | | . | | | . | | | | | | | | | | | . | | | | | | | | | | . | | | | | | . | | | | | | | | | | | | | | . | | | | | . | | | | | . | | | | | | | . | | | . | | | | | | . | | | | . | | | | | . | | | | | . | | | | | | | | | | . | | | | | | . | | | | | | | | | | | | | | . | | | | | | | | | | . | . | | | | | | | | | . | | | | | | . | | | . | | | | | | . | | | | | . | | | | | | | | . | | . | | | | | | | | | | . | | | | | | | | | | . | | | | | | . | . | | | . | | | | | | | | | | . | | | | | | | | | | . | | | | | | . | | | | | | | | | . | | | | | | | | | | | . | | | | | | | | | | . | | | | | | | | | | | | | . | . | | | | | | | | | | . | | | | | | | | | | . | | | | | | . | | | | | | | | | | | | | | | . | | | | | | | | | . | | | | | | . | | | | | | | | | | | | | | . | | | | | | | | | | . | | | | | | | . | | | | | | | | | | | | | . | | | | | | . | | | | | . | | | | | | . | | | | | | | | | | . | | | | . | | | | | . | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | . | | | | | | | | | | . | | | | | | | | | | | . | | | | | | | | | | | | | | | | | | | . | | | | | | | | | | | | . | | | . | | | | | | | | . | | | | | | . | | | | . | | | | | | | | . | | | | | | | | | | | | . | | | | +------+------+------+-------+------+---------+------------+-------+------+ to treat of these countries in detail. [sidenote: the netherlands in sixteenth century] netherlands. during the period under consideration, the seventeenth century especially, the monetary history of the netherlands supplies the key to that of the surrounding nations. the history of her monetary exchanges has yet to be written, and of her mint ordinances very little is accessible, as compared, e.g., with france. but this is more than compensated by the numerous "plakkaats" or proclamations of the tariff of coins, which are to us practical indicators of the rates of exchange. the netherlands, as has been already said, were the centre of european commerce in the sixteenth and seventeenth centuries, as the italian states had been in the fourteenth and fifteenth; and every change in the precious metals or in the coins showed itself in the antwerp bourse as surely and swiftly as to-day in london. as prompt to take knowledge of these changes as florence had been two centuries earlier, the authorities tabulated the various coinages which were current in the low countries,--and practically that meant the coinage of commercial europe,--tariffed them against their own by proclamation, and instantly accommodated themselves to each new change or variation of value by a new proclamation and a new tariff. these proclamations, therefore, give us the measure and course of the monetary movements of the time in fullest and most welcome details. it has been already shown that this action of the government of the netherlands has a twofold aspect. from one side it expresses and regulates the natural flow and ebb of commerce, just as exchange rates and bullion remittances do to-day. and in this sense it was perfectly normal, healthy, and sound, more especially in so far as it provided for the gradual drawing away overplus metal to the east. but the governments of europe were yet under the spell of the delusion as to a balance of trade payable in gold--that delusion which was, later, dignified in history by the name of the mercantile theory. nor had they yet lost the traces of that mediæval craft and lawlessness which rose from, and prompted to, the mere desire of robbing or pilfering their neighbour's store of precious metal as the first act of self-defence. further than this the monetary system of europe--unconsciously bimetallic and with an appalling variety of ratio prevalent at the same moment in different places--lay open, helpless and defenceless, and inviting to the bullionist, financier, or arbitragist. in so far as this element of national greed and dishonesty, or private and unprincipled gain, entered into the legislative enactments of the netherlands, it condemns them as mercenary, and the monetary straits or tightness, not to say crisis and panic which ensued, as unnecessary and therefore in the highest degree lamentable. [sidenote: sixteenth-century arbitrage] in a blind way the age saw what was going on behind the financier's screen, however little it understood the theory of it. in many a sixteenth-century document, preserved among the state papers in the record office at london, abuse is piled on the netherlands for their practices in enticing away the coin of the realm. one of the correspondents of the privy council in the days of elizabeth, , writes thus from the netherlands: "the low country merchants return great stores of money hither by exchanges, and by the proceeds, as the exchange may serve for their purposes, they send away her majesty's coin and bullion into the low countries in great quantities, and the rather by reason of the hollanders trading with the east, by which means the realm will be secretly robbed, if it be not prevented." twenty years later the whole subject was again gone into, for the fiftieth time, for the advice of the english privy council, and it was shown how "foreign exchangers contrived, by arranging a rise or fall in particular monies, to undervalue english monies, and draw them out of the kingdom. prevention has been vainly attempted by acts of parliament, by sending over sir thomas gresham to the low countries to complain, and by establishing the office of exchanger, which was discontinued as injurious to the state. a bank was proposed, but the queen had not to spare the £ , needed to start it. it is now proposed to settle the exchange at or per cent., to be fixed yearly, according to the state of affairs, per cent. or more being sometimes paid now." the _naïveté_ and helplessness of the suggestions contained in these concluding words need not blind us to the real and pressing gravity of the monetary situation to which they relate, and which periodically beset each and every european government throughout the centuries under consideration. such, therefore, is the aspect of these monetary ordinances or plakkaats of the netherlands in the sixteenth and seventeenth centuries. to speak of them in detail. the first of the low country proclamations, containing an _evaluatie_, or tariff, is dated nd january , and it marks the commencement of the influence of the american discoveries. (see table below.) by the succeeding proclamation of th february , golden reals were substituted for the golden florin. its provisions remained nominally in force for twenty years or so, but almost immediately the movement towards higher prices made itself felt, and it was in consequence of this, and after fruitless negotiations with the merchants of antwerp, that charles v. issued a series of four closely consecutive proclamations ( , march , th june , th november ). the first three concern gold, the last only bears witness to the rise of silver by attempting to check it and call it down. similarly, in his ordinance of th december , he enacted that the price ruling on the th february should be again used, and should be reached at two drops or intervals, so as to create the less disturbance between debtor and creditor. the ordinance proved fruitless, and was twice renewed, in and . in spite of them all, the rise in prices against which the authorities tried to fight, continued and had to be recognised. by the ordinance of th july a higher limit of values was permitted. then, for a dozen years or so, attempts were made, by the proclamations of rd march and th october , to make those prices of the basis, and to compel a return to it in the future, while recognising temporarily the higher prices ruling at the moment. and so the process repeats itself continually--a further rise of prices, complaints of the disorder in the currency and exchanges, and a new _evaluatie_ issued, regulating the exchanges at the higher rate for the moment, and providing for the reduction of prices to previous limits, from and after such and such a date. [sidenote: the netherland plakkaats] in the accompanying table wherever two figures are coupled together thus, } } the higher figure represents the price ruling at the date of the ordinance, the lower figure is the price to which return was to be made from and after some date fixed thereby. a simple glance at the tables will show how futile and foredoomed was every such attempt to rule and compel the exchanges. for the explanation of these tables it will be sufficient to give the dates of the netherlands ordinances, premising that up to the series was applicable to the whole netherlands, but that from that date there is a separate series for the seven united provinces, and for the spanish netherlands. netherlands plakkaats. th july . th february . nd june (countenances the rise of prices over those of only until the end of the year). rd december . th april (for holland and zealand, and to continue for only six months, when, by the ordinance of th october of the same year, a considerably lower limit was prescribed). . in this year no less than four plakkaats were issued, with the object of enforcing a reduction of prices, but in vain, and the last of the four, issued on the th december, was obliged to recognise some portion of the rise of prices which it was attempted to counteract. th october . in less than a year the effect of the strenuous attempt in had been completely swept away, and a further advance had to be recognised. from the series of proclamations divides into two, as has been said, owing to the revolt and establishment of the united netherlands. the one set, relating to the spanish netherlands, includes proclamations of th april , again recognising provisionally a further advance, and renewed on th december , st october , th november , rd june (with some slight alterations), th december , attempting to restrain a farther advance, th june , th may , th september , nd march , again recognising the inevitable advance. the last named remained in force until st may , with the exception of not being applicable in volkenburg, dalen, and limburg, where the abnormal height to which monies had risen necessitated a special ordinance ( th march ), lowering the price to the limit of nd march , by five separate three-monthly steps or intervals. [sidenote: the plakkaats of the united provinces] the second and separate series of monetary ordinances issuing from their high mightinesses, the states-general of the united provinces, is remarkably parallel to the above. it begins with the ordinance of nd september : "in view of the rising price of gold and silver," it says, a "lessening of that price to the limit of is ordered at three intervals, th september , th november, th january ." like the contemporary enactment of the spanish netherlands, it proved ineffectual, and a further rise had to be recognised in the ordinance of nd march , and again of nd april . the preambles of these ordinances, which are preserved in the huge collections of can and scheltus, generally recite their purpose of providing against the disorders in the coinage, caused by the daily rise in price, by the greed and licence of the times, and by the inrush of the silver coins of other states. such is specially the tenor of that of st march , one of the most famous of these ordinances. two years later an attempt was made to reduce prices to the limit of . it proved ineffectual, and by the proclamations of st july , th september , and th february , further advances were recorded. by the last-named, renewed on th june , an attempt was made to re-establish the prices of . so much for the ordinances themselves. it is only necessary to add, for their general elucidation, that they generally contain and prescribe in detail the value of each separate coin circulating in the low countries at the particular time, coupled with an engraving of the coin, as an assistance to the people in recognising them. indeed, some of the ordinances, that of for instance, contain engravings of upwards of different pieces--a significant witness to the international welter of coins in the netherlands exchange. dissected in detail, with regard to only a few of these coins, the tabular result is as follows:-- the netherland plakkaats +---------------------------------++----------------------------------+ | german gold guldens. || spanish ducats. | |( to a mark of gold, carats || ( to a mark of gold, carats | | grs. fine.) || - / grs. fine.) | +-----------+---------------------++-----------+----------------------+ | | declared value || | declared value | | | in netherlands || | in netherlands | | date. | currency as by the || date. | currency as by the | | | plakkaats. || | plakkaats. | | +----------+----------++ +----------+-----------+ | | florins. | stivers. || | florins. | stivers. | +-----------+----------+----------++-----------+----------+-----------+ | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | - / || | | | | - / || united netherlands. | | || | | | | united netherlands. || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | - / | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | & | | || | | | | onwards | | || | | | | | | || | | | +-----------+----------+----------++-----------+----------+-----------+ +---------------------------------++----------------------------------+ | spanish pistoles. || french crowns. | |( to a mark of gold, carats || (old, i.e. not "of the sun," | | grs. fine.) || to a mark of gold, carats | | || - / grs. fine) | +-----------+---------------------++-----------+----------------------+ | | declared value || | declared value | | | in netherlands || | in netherlands | | date. | currency as by the || date. | currency as by the | | | plakkaats. || | plakkaats. | | +----------+----------+| +----------+-----------+ | | florins. | stivers. || | florins. | stivers. | +-----------+----------+----------++-----------+----------+-----------+ | | | || | | - / | | | | || | | | | | | || | | | | | | || | | - / | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | - / | | | | || | | | | | | || | | | | | | || | | | | || | | | | || | | | | || | | | | || | | - / | | united netherlands. || | | | | | | || united netherlands. | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | +-----------+----------+----------++-----------+----------+-----------+ +---------------------------------++--------------------------------+ | english rose nobles. || english sovereigns. | | ( to a mark of gold, || ( to a mark of gold.) | | carats - / grs. fine.) || | +-----------+---------------------++----------+---------------------+ | | declared value || | declared value | | | in netherlands || | in netherlands | | date. |currency as by the || date. | currency as by the | | | plakkaats. || | plakkaats. | | +----------+----------++ +----------+----------+ | | florins. | stivers. || | florins. | stivers. | +-----------+----------+----------++----------+----------+----------+ | | | || | | | | | | - / || | | | | | | - / || | | | | | | - / || | | | | | | - / || | | | | | | || | | | | | | - / || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | || | | | | || | | | | || | | | | || | | | | || | | | | || | | | | || united netherlands. | | | | || | | | | || | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | || | | | | united netherlands. || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | +-----------+----------+----------++----------+----------+----------+ +-------------------------------------++-----------------------------------+ | || burgundian gulden (or | | philippus rijder. || gulden andries). | |( - / and subsequently to a mark|| ( to a mark of gold, carats | | of gold, carats - / grs. fine.)|| fine, from to ; later, | | || to a mark, carats grs. fine.)| +----------+--------------------------++-----------+-----------------------+ | | declared value || | declared value | | | in netherlands || | in netherlands | | date. | currency as by the || date. | currency as by the | | | plakkaats. || | plakkaats. | | +-------------+------------++ +----------+------------+ | | florins. | stivers. || | florins. | stivers. | +----------+-------------+------------++-----------+----------+------------+ | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | - / | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | - / | | | | || | | | | | | - / || | | | | | | || | | | | | | || | | - / | | | | - / || | | | | | | || | | | | | | || | | | | || | | | | || | | | | || | | | | united netherlands. || | | || united netherlands. | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | +----------+-------------+------------++-----------+----------+------------+ +--------------------------------++---------------------------------+ | german thaler || netherland rijksdaalder | | (silver). || (silver). | +----------+---------------------++----------+----------------------+ | | declared value || | declared value | | | in netherlands || | in netherlands | | date. | currency as by the || date. | currency as by the | | | plakkaats. || | plakkaats. | | +----------+----------++ +----------+-----------+ | | florins. | stivers. || | florins. | stivers. | +----------+----------+----------++----------+----------+-----------+ | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | || | | united netherlands. || | | | | || united netherlands. | | | | || | | | | || | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | | | | || | | | +----------+----------+----------++----------+----------+-----------+ france. in france the result of the american influx of metals did not make itself felt until the time of francis i. during his reign the value of the mark of gold increased livres sols. dens., and that of silver livre sols. the main reduction took place at two periods, and , and with a consequent change in the ratio slightly in favour of silver. the earliest find in america was gold, and at first this metal shows a tendency to depreciate. concurrently silver, as the overvalued metal, commenced to disappear from circulation. it was to prevent this export that in the _écu au soleil_ was advanced to sols., and again in to sols.--an advance of - / per cent. the silver _testoon_ was advanced at the same time from sols. to sols. dens., an advance of per cent. even so equilibrium was not produced, and disorders in the currency continued, along with the prevalence of lower-rated coins. the town of marseilles complained of it in a petition to the king ( th may ), and the important edict of blois, , which left the _écus au soleil_ untouched at sols., while advancing the _testoon_ to sols. dens., was professedly and purposely issued "to more equalise the silver with the value of the gold, and consequently to make the value of our monies, both red and white, corresponding." two years later the states-general when they met complained of the lack of currency, and demanded the opening of the mint at aix. the request was granted, but without visible result. the same process of advance, unequally maintained, continued under henry ii. and charles ix. (see accompanying tables). [illustration: table of the movement of gold & silver in france - .] table of the movement of gold and silver in france, - . +----------+--------------------------+-----------------------------+ | |price of the mark of gold.|price of the mark of silver. | | date. +---------+-------+--------+---------+---------+---------+ | | livres. | sols. | dens. | livres. | sols. | dens. | +----------+---------+-------+--------+---------+---------+---------+ | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ... | ... | ... | | | | | | | | | | th may | | | | | | | | | | | | | | | | nd sept.| | | | | | | | | ... | ... | ... | | | | | | | | | ... | ... | ... | +----------+---------+-------+--------+---------+---------+---------+ [sidenote: france: the mint inquiry of ] in the case of the latter monarch it is expressly stated that the change, which was effected in , when the ratio was established at . , had been preceded by a period during which "the people" had of themselves augmented the value of the _écu d'or_ to sols. at this limit the government was obliged to fix it, but by the year it had risen successively to , , and sols. the evil, as it was thought to be, of the advance of the monies was attributed to the caprice and unscrupulousness of "the people," and the king called several councils of experts to discuss the matter. still the process continued unabated, and on the th december , henry iii. assembled the states-general. the _cour des monnaies_--the officials of the mint--at once approached him with a petition. their representation is of peculiar significance:-- "in spite of the bad police prevailing, we draw in times of peace twice as much silver from abroad as the foreigners draw from us. if the reform we advocate were adopted we should double this net gain.... between us and the netherlands and germany, where we generally trade, there is this difference, that _écus_, at the price at which they are exposed here, only come to in the said places, which has induced a sudden and enormous dearness in the merchandise which we export from there, and besides has caused us a great disorder--to wit, that the merchants have transported all our _douzains_ and other billon money, to save themselves from the loss they would have had to incur in settling in _écus_ or in any foreign species of gold or silver on which, at the price they are current at by the caprice of the people, there would be a loss in settlement of , , and per cent.... the cause of the enhancement of prices proceeds from the malice of several who turn into bullion the best of your coins in order to fill the kingdom with others of less goodness, enriching themselves thus with the blood and misery of the people.... [sidenote: france: the reform of ] "the remedy is to lower the rate of the monies.... the _écus_ ought to come down to sols., but for the present we would consent to it being put at , awaiting a further reduction. the currency of all foreign coins ought to be prohibited as the chief cause of these evils. for although by all your ordinances they have been valued according to the price of the _écu_, yet the people have always increased them more than they have your own monies, so that the _écu_ at this moment, to be in accordance, ought to pass for sols. this arises from the craft of the foreigner, and the only exceptions of importance are the _reals_ and _pistoles_ of spain, which are of known goodness and profit to the melter. they have never brought us harm, but, on the other hand, they are being melted down all over france, and at the present rate the foreigner gets a profit of about livres on the mark of them, so that we advise prohibition of their circulation. finally, we advise to do away with the old reckoning by livres and sols, and substitute for it the reckoning by écus." the states-general, adopting in part the weakest suggestion of this remarkable paper, fixed the écus at sols. the mint officials at once represented that this only increased the evil. henry accordingly assembled at pontoise a conference of experts, and as the outcome of their deliberations decided on the adoption of the chief recommendation of the mint officials' representation. by his proclamation of th november , the reckoning by livres was abolished and that of gold _écus_ substituted, values of under écu or sols. to be settled in divisional coinage, and circulation of all foreign coins prohibited, with the exception of spanish and portuguese gold ducats. it was forbidden to constrain payment of any sum above sols. in billon money, and in sums below that amount to present more than the third of the total sum in such billon money. [sidenote: france: failure of the reform of ] this extraordinary and, on the whole, admirably planned reformation merits so much detail because of the intense importance of its bearing. it in effect anticipated the reformation which was only accomplished in england in our own century. so far as it was actually put in practice it made france monometallic. the instinct of the time had found its way to a comprehension of the evil before it, and of the remedy. the evil was due to a badly-regulated, weltering, bimetallic system; the remedy was a monometallic system. it matters little that such terms were not in use and that the theory of the matter was not enunciated. the essential point was that the _fact_, the _situation_, was grasped in practice for a moment, dimly it may be, yet sufficiently to illustrate the whole antecedent and succeeding event. as a matter of fact the ordinance remained practically in great part a dead letter. that it did so--that it did not accomplish its purpose--has been attributed to the _malheur_, the unhappiness, of the time. it was due to no such thing. it was due to the simple fact that in the ordinance two quite distinct, and one of them impossible, reforms were projected. the attempt to tie down the _écu_ to sols. was foredoomed to failure, and as the eye of contemporaries was fixed more entirely on prices rather than on method of tender, the most significant part of the ordinance passed out of mind; already by the time of the death of henry iii., "the people," it is again said, had increased the _écu_ to sols. on the th march a proclamation was issued to call it down to the value prescribed by the celebrated declaration of , i.e. sols. but, finding it impossible, the whole system created by that declaration was abolished (september ); the reckoning by _écus_ was done away with, and the old system of reckoning by livres returned to; the gold _écu_ was tariffed at sols., and the circulation of foreign monies was again permitted. henry iv., in his proclamation abolishing the almost invulnerable system established by henry iii., attributes to the attempts at working that system "the present dearness of everything." it is almost impossible fully to represent the unwisdom of this counter-reformation. to the eye of the then legislator there was only one evil--the rising of prices. if levelly effected it was, as a matter of fact, no evil at all--far the reverse indeed, and he did not need to concern himself about it at all. besides, it was irresistible. the evil that escaped his eye, or to which he was blind, was that unceasing process of flux which was caused by the different ratios prevailing in different parts of europe. the scheme of henry iii. would have proved effective, where no other measure or scheme of the time was or could be, and its abrogation in by henry iv. removed a bulwark and a barrier, and made way for catastrophe. le blanc considers that this repeal of the system established in , itself failed of its purpose, _because the increase of prices still continued_. "in the seven years of peace which followed the ordinance of , the depreciation of the gold _écu_ was as much as it had been in the preceding sixty-five years of war and trouble." the simple truth was, that it was much more likely to increase in time of peace and trade activity than in time of war. the point to notice was not at all how much the _écu_ did depreciate, but the relativity of such its depreciation with that of the standard currency of other countries, and the monetary disorder which the inequality of ratio and of rate of depreciation induced. alarmed beyond measure at the evident failure of his plans, henry iv. summoned monetary conferences of his wisest and best, and they were not even suspended by his assassination. the complaint again was, that the permission to circulate foreign monies had led to the transport of all the good coinage, to the ruin of commerce and great general disorder. assemblies were held all over france in the trading towns, and the result of the advice of their delegates was the proclamation of th december (issued early in ). by this proclamation silver monies were left untouched, the tariff of the gold _écu_ was increased from to sols., and the value of the mark of gold proportionally increased. the ratio was thereby altered from . to . . it is hardly too much to say that this step and alteration in the ratio saved france from the catastrophe which befell england and germany in and . the arrangement established in endured unaltered until , when a slight reduction in the ratio was made to . (on the th may). two months later it was found that so serious an export of good coinage was ensuing that "our kingdom would be entirely stripped of good currency, to our great damage, etc." a proclamation was accordingly issued ( th june ) attempting to regulate the course of exchange. the effort was vain, and on the following nd september the ratio was suddenly and violently altered to . .[ ] [sidenote: france: the reform of ] a glance at the ratio prevalent in other countries will show how masterful was this act of france, but it carried with it the seeds of its own punishment. such is the nature of the bimetallic law that any overshooting of the ratio, on no matter which side,--in favour of silver or in favour of gold,--establishes a differentiation, and the differentiation at once gives to the one metal a fulcrum or lever point--a purchasing power--against the other, and the undervalued metal, whichever it is, at once tends to disappear. four years after this autocratic measure of france, it was found that her currency was in so depreciated a state, through exchange, that the only pieces current were lacking one-third of their full weight. the recoinage established by her proclamation of st march , which established the new _louis d'or_, was intended as a complete and permanent remedy, and it may reasonably claim the praise of having effected so much. the alteration of the ratio established in - by this recoinage (from . to . ) was only made after most serious deliberation. monetary conferences of experts were held at paris; and it was found, after careful assays of all the monies of the surrounding nations, that the prevailing ratios ( - ) were at one and the same time-- germany : milan : flanders and netherlands . : england . it was therefore decided to adopt a higher ratio than all these, viz. . .[ ] the history of the few years succeeding this measure is most instructive. the depreciation of monies continued, and on the th april a proclamation was issued, forbidding the currency of certain old monies of france, and again attempting to restrain the course of the exchanges; and three years later, , under pretext that false moneyers were imitating the _louis d'or_ and the silver _écus_, the minting of _lis d'argent_ (lilies of gold and silver) was resolved upon. "but," says le blanc, "everybody knows that the true motive was the same as when a little later they resolved on the minting of -sol. pieces. under the above pretext, the ratio basis of was broken. remonstrances were vain until experience proved their weight, and the minting of the _lis d'or_ had to be discontinued. the pieces already minted received a value of livres, and to correspond the _louis d'or_ was increased to livres, by proclamation th march ." as silver was left untouched, the resulting alteration of the ratio was from - / to - / . florence. with the advance of antwerp as the centre of european exchanges in the fifteenth century, the mercantile pre-eminence of florence and venice decayed, and their monetary history loses its former prime importance. but they by no means thereby lose their interest for us. instead of profiting as of yore by every veer in the winds of exchanges, they are at the mercy of them, as was every other country outside the charmed circle of the netherlands. the influence of the changed conditions in the production of the precious metals, due to the discovery of america, does not show itself in florence before , when ( th august) the price was by law advanced. three years later, th march , it was found that the state was receiving damage from the foreign monies circulating, and that the only native coin circulating was in a worn and depreciated state. a recoinage was accordingly ordered, circulation of all foreign monies of silver was forbidden, and all payments and contracts were commanded to be made in gold _scudi_ of the state. in order to inform the commercial element, the mint masters were further ordered to make trial every fifteen days of the value of any foreign _scudi_, and to publish the result. there is a wonderful simplicity about this enactment. in order to defend themselves from a flood of cheap and cheapening silver, the florentine authorities adopted a virtual gold monometallism. that the enactment was not permanently regarded and kept can only be attributed to the strength of commercial custom, and to a true perception in the mercantile community at large of the essential difficulty of the problem and its remedy. the florentines were simply obliged to circulate all coins, gold as well as silver, because such was the universal custom of mediæval europe. by silver foreign monies were again current in florence, in such quantities and with such effects on the native gold currency, that they had to be again prohibited and banished (by law of th may ); renewed three years later ( th february ), and again in ( th april). indeed, within the period here treated of, up to, i.e., , there is a series of thirteen or fourteen separate re-enactments of the prohibition relating to these monies and the depreciated florentine billon money ("_quattrini neri_"). if, during this period, florence had occupied the commanding position that antwerp did, quite unique interest would attach to the record of this monetary policy or experiment. but not being in that position, and being, too, quite apparently unable to enforce her own enactments in her own territory, even this merely depressive policy was partially broken down. in so far as it was broken down she lay at the mercy of the monetary changes around her, and of the netherland financiers, as did every other country of europe. by the law of th april , all species of foreign ducatoons were prohibited, "in consideration that, within the short time they have been introduced, so great a quantity, and of such differing standards, has been imported from the various foreign mints." five years later the gold coin was in so depreciated a state as to call for legislative interference ( th february , renewed on th february ); and again in ( rd february) it was found necessary to prohibit the circulation of the silver _reals_ of peru and every other kind of spanish silver, except at bullion value. these are only a few from a long list of similar enactments, but they serve adequately to show the trend of events on small as well as large fields of operations. what an amount of commercial disturbance and disaster lies behind the dry details of these legal enactments, the case of england will serve to show. germany. the monetary history of germany is one of extreme confusion and intricacy. the lack of coercive power in the central authority--in the emperor himself--was as conspicuously displayed in the monetary ordinances of the empire as in the political sphere. the imperial edicts were disregarded, and each separate circle of the empire, or each separate prince or union of princes, left to shift or act for themselves. amid all the confusion of such a disorganised and reeling system sufficient is perceptible to indicate the broad tendency of events, and to show how closely analogous was her experience to that of europe generally within the same period. in germany, as in the netherlands, france, and england, the influence of the discovery of america only begins to express itself about , and in the usual way--influx, movements and disorders in the currency and ratio, and general complaints. in a monetary convention was summoned to meet at forchheim. this was followed by the debate in the reichstag at nürnberg ( ), where great complaints were made of the unusable, false, and depreciated coinage, "due to the stealing away and exchanging abroad of the gold _gulden_ and silver coins." it was in consequence of the representations of this reichstag that the first of the series of three imperial mint ordinances was issued by charles v. (at esslingen, ). the main details of this ordinance will be found in the accompanying tables and in appendix v. the effect of the first imperial ordinance was to change the ratio from something between and to . . the _gulden_ was raised from s. pf. to s. pf. all foreign gold was to be taken at equivalent rates, and whoever gave more for foreign coins of gold was to suffer a heavy penalty. further, the export of gold and silver was forbidden, on pain of life and goods. the ordinance remained a dead letter, and the monetary disorder of the country only increased. the movement of silver in germany, - , illustrated by the movement of the silver groschen, according to imperial and other mint regulations. (_see preceding table on p. ._) +------+---------+------------+---------------------+-----------------------+ |date. | cologne | | equivalent value | | | | mark | alloy. | in convention | treaty | | | coined | | money. | or | | | into +------------+-----------+---------+ ordinance. | | | pieces. |loths. |grs.| krtzrs. | pfnge. | | +------+---------+-------+----+-----------+---------+-----------------------+ | | | | | | - / |treaty of dukes henry | | | | | | | | and erick of brunswick| | | | | | | | and bishop barthold | | | | | | | | of hildesheim, with | | | | | | | | the states of | | | | | | | | brunswick, hildesheim,| | | | | | | | hanover, lübeck, | | | | | | | | and göttingen. | | | | | | | - / |göttingen. | | | | | | | - / |first imperial mint | | | | | | | - / | edict of charles v. | | | | | |( / groat)| | at esslingen. | | | | | | | - / |augsburg mint edict. | | | - / | | | | - / |mint treaty between | | | | | | | | ferdinand and the | | | | | | | | counts palatine of | | | | | | | | the rhine and the | | | | | | | | states of augsburg | | | | | | | | and ulm. | | | - / | | | | - / |second imperial mint | | | | | | | | edict of charles v. | | | | | | | | at augsburg. (remained| | | | | | | | inoperative like that | | | | | | | | of , _supra_.) | | | | | | | - / |saxony mint ordinances.| | | - / | | | | - / |mint ordinance of | | | | | | | | ferdinand i. | | | " | " | | " | " |edict of the lower | | | | | | | | saxony circle. | | | | | | | - / |edict of the lower | | | | | | | | saxony circle. | | | | | | | - / |edict of the lower | | | | | | | | saxony circle. | | | - / | | | | - / |edict of the upper | | | | | | | | and lower saxony | | | | | | | | circle. | +------+---------+-------+----+-----------+---------+-----------------------+ the movement of gold in germany, - , illustrated by the movement of the gold gulden (rhenische gulden), according to imperial and other mint regulations. (_see preceding table on p. ._) +-----+-------+---------------+-------------------------+---------------+ | |cologne| | equivalent value | | | | mark | alloy. | in convention money. | treaty | |date.|coined +-----+---------+------+------+-----------+ or ordinance. | | | into | | | | | | | | |pieces.|crts.|grains. |flrns.|krtzs.| pfnge. | | +-----+-------+-----+---------+------+------+-----------+---------------+ | | - / | | gold | | | - / |treaty between | | | | | silver | | | | bamberg, | | | | | | | | | würzburg, and | | | | | | | | | brandenburg. | | | - / | | gold | | | - / |frankfort mint | | | | | silver | | | | ordinance. | | | | | ... | | | - / |imperial mint | | | | | | | | | edict of | | | | | | | | | charles v. at | | | | | | | | | esslingen. | | | - / | | gold | | | - / |imperial mint | | | | | silver | | | | edict of | | | | | | | | | of charles v. | | | | | | | | | at augsburg. | | | | | gold | | | - / |imperial mint | | | | | silver | | | | ordinance of | | | | | | | | | ferdinand i. | +-----+-------+-----+---------+------+------+-----------+---------------+ [sidenote: germany: the three imperial edicts] in the reichstag of augsburg demanded the holding of a council, in order to enforce the late edict, and for a due consideration of the monetary situation. several attempts were made with this object, but fruitlessly, and the princes of the empire fell back on the only feasible but fatal plan of smaller mint conventions between contiguous states. there is an endless series of these, and they render the history of german currency a perfect jungle of intricacies. nine years later ( ), a monetary convention was summoned to meet at augsburg by ferdinand, heir to the empire. it proved fruitless. again, in , after the expiry of a similar period, the reichstag at augsburg declared for another monetary convention to relieve the disorder. the opinions of certain deputies to this convention, which met on the th october , were as follows: "for fifty or even eighty years and more the ratio between gold and silver has been between and . but in a gulden of those days there was an equivalence of more silver than in seventy-six of our kreutzers. since then we apprise the rhenish gold gulden and kreutzers less than foreign nations. therefore france and england seek them."[ ] a thorough inquest into the subject, or evaluation, was therefore ordered, and it was in accordance with the advice of the convention and with the report of the evaluation that the second imperial mint edict was issued at augsburg, . this edict was drawn up on a ratio of . as a basis, and, as might be reasonably expected from the different ratios ruling abroad at the time, it proved as inoperative as its predecessor. the succeeding ten years witnessed a rise in the relative value of gold, or depreciation in that of silver, and the third and last of these imperial mint edicts, that of the emperor ferdinand, issued at augsburg, th august , fixed a higher ratio, viz. . . the rhenish _gulden_ was raised from to kreutzers. the increasing production of silver indicated by this change is still more clearly marked in the resumption of the coining of the imperial thalers, at the instigation of the reichstag at augsburg, th may . the advice of this reichstag was the outcome of the monetary convention held at nördlingen two years earlier, at which strong complaints were appointed to be made before the reichstag of the weak state of the coin, and of its under-valuation. in matter of fact, the mint edict of remained a dead letter; nominally, however, it continued in force up to , although no less than seven attempts were made at succeeding diets, from to , to enforce it and bring it up to date. in the reichstag of speyer, , complaints were made of the universal loss arising from the non-observance of the edict. in place of an imperial coinage, nothing circulated but foreign and counterfeit coins, and the necessaries of life had risen to a prohibitive height. similar were the complaints at the succeeding diets at frankfort, , and at regensburg, th october , at which last ferdinand's edict was again re-enacted, with a command that the burgundian circle and the swiss should conform themselves to it. bitter complaints were made of the bad state of the gold and silver coinage, and of the enrichment of the exchangers on the rhine. the circulation of dutch and swiss thalers was forbidden because of the loss by exchange, and the export of all gold and silver again forbidden. as an instance of the depreciation prevalent in the coinage, it was noted that the silver _albus_ had lost one-third of its weight, so that thirty-six were needed to purchase one gold gulden, whereas formerly twenty-six were equivalent. [sidenote: germany: disorders of ] four years later, , ferdinand, as archduke of austria, issued a fresh tariff, with the object of checking exports, and in the states, having consulted as to the condition of the coinage, strongly advised a renewal of the prohibition of the export of coin, especially by the italians. this advice was adopted in the reichstag of augsburg, which met seventeen days later, th september . the preamble of the act then and there passed speaks of the export of a good portion of the native currency, and of the unmeasured rise of prices, coupled with the circulation of forbidden foreign specie, large and small. this resolution of the reichstag was followed by the enacting of the mint edict of th december . it proved as futile as any of the others; and two years later, july , the deputies of the three circles of franconia, swabia, and bavaria complained that within the four years immediately preceding several millions had left the country by way of the rhine provinces for the netherlands, very little going to italy by comparison. on this representation another useless edict was issued by the emperor rudolph ii., and in the following year the merchants at frankfort fair found themselves obliged to agree upon a tariff of _ducats_ and _reichs-thalers_. the _philipps-thaler_ was put at eighty-two kreutzers, and the _reichs-thaler_, which, by the imperial mint edict still nominally in force, should have been at sixty-eight kreutzers, was put at seventy-four. this arrangement of the merchants established a ratio between gold and silver of . . certain of these same merchants, examined as to their opinion of the method of the export in january , explained that it went by way of nürnberg, and that the arbitrage was attended with or per cent. profit. [sidenote: germany: the kipper und wipper zeit] nominally, however--or in theory--the arrangement of continued the unenforced law of the land up to , underneath all these attempts at revision and underneath the different regulations of the various monetary unions of contiguous circles or states. with the latter date commences that extraordinary movement of monetary depreciation and panic which is known as the "_kipper und wipper_" period. in great part the extraordinary acuteness of the panic which ensued was due to internal monetary confusion of germany, but that internal confusion simply ministered to the export of all good specie and metal, and in the end it became simply a money corner. the movement began by a coining of the lower denominations of monies on a different and depreciated footing or basis. the _specie_ thaler began to part company from the current thaler, and to rise to more than the silver groschen or marien groschen, to which by the mint edict of it was declared equivalent. by it had risen to thaler silver groschen (= marien groschen), by to current thaler, by to between and current thaler, while the ducat had risen to florins kreutzers. tabularly the statement of the movement of the _reichs-thaler_ is this:-- +--------------+--------+---------++--------------+--------+---------+ | date. | florin.| krtzers.|| date. | florin.| krtzers.| +--------------+--------+---------++--------------+--------+---------+ | | | || jan. | | | | | | || feb. | | | | | | || march | | | | | | || april | | | | | | || may | | | | | | || may | | | | | | || june | | | | | | || july | | | | | | || aug. | | | | | | || aug. | | [a] | | june | | || sept. | | [a] | | july | | || oct. | | [a] | | dec. | | || nov. | | [a] | | | | || dec. | | [a] | | sept. | | || dec. | | | | aug. | | || jan. | | [b] | | march | | || jan. | | | | nov. | | || feb. | | [c] | | nov. | | || mar. | | [c] | | | | || mar. | | | | | | || june | | [a] | | | | || oct. | | [b] | | oct. | | || nov. | | [b] | | dec. | | || april | | | | june | | || and at this last figure | | nov. | | || standing up to . | +--------------+--------+---------++--------------+--------+---------+ [footnote a: nürnberg.] [footnote b: augsburg.] [footnote c: vienna.] the course of the _gold gulden_ which could be given is exactly parallel. this table speaks volumes. it marks the acuteness of the monetary panic and crisis of - --the central time of the commercial ruin induced by the disorder of the _kipper und wipper zeit_. the pamphleteer and polemic literature of this crisis is as rich and instructive as any which has accompanied the bimetallic agitation and silver question of our later days. at hamburg the _thaler_, which had gradually risen from an equivalence of schillingen to schillingen in , had a correspondingly excited course during these years. +-----------+------------+----------++-----------+------------+---------+ | |schillingen.|pfennige. || |schillingen.|pfennige.| +-----------+------------+----------++-----------+------------+---------+ |oct. | | ||july | | | | - | | ||sept. | | | |dec. | | ||nov. | | | |aug. | | ||sept. | | | |jan. | | ||oct. | | | |aug. | | ||aug. | | | |april | | ||feb. | | | |aug. | | ||mar. | | | |sept. | | ||may | | | |nov. | | ||may | | | +-----------+------------+----------++-----------+------------+---------+ it was in anticipation of the approaching disorder that on the rd of march a mint treaty had been made between mecklenburg, schleswig-holstein, lübeck, and hamburg, "for protection against the mint disorder, which is most disastrous to land and people, and to take precaution against the advance of the larger silver specie." seven years later, on the th january , the merchants and financiers of hamburg drew up a petition complaining that, through the monetary disorder, trade and exchange was being driven from the city, as within a short period the exchange with frankfort had fallen from kreutzer (= schillingen lübeck) to kreutzer (= schillingen lübeck), and the exchange with amsterdam from stivers (= schillingen lübeck) to stivers. to the senate's proposal for the erection of an exchange bank, the merchants would, however, have nothing to say, considering it unnecessary and dangerous, and called for the suppression of the notes which the merchants had brought into use to facilitate their settlements. three years later, however, the senate declared more strongly for the establishment of a bank, premising in the preamble of their resolution that "it is many ways known and plain how disastrous a disorder has hitherto been in the currency, both from the rise of the larger silver species and from the excessive importation of smaller depreciated specie, whereby not only private individuals but also common interests, as churches, hospitals, widows, and orphans are greatly pinched in their incomes." [sidenote: germany: hamburg in ] it was as the outcome of this resolution that the celebrated hamburg bank was instituted in , the later life of which was to become of so much importance for the monetary and commercial history of north germany. the curious point to observe is the short time--a few months merely--by which the crisis in germany preceded that in england, and the analogy of some of the manifestations, although there were no such mint and coinage disorders in england as had aggravated and in the first place partly induced the movement in germany. in a great mint deputation from all the circles was held, and in accordance with its representations the new imperial basis was established, which remained in force until the conclusion of the period of which we here treat. by that basis the mark of silver was coined into _reichs thalers_ _groschen_. the _thaler_ was fixed at kreutzers, the gold _gulden_ at florin kreutzers, and the _ducat_ at florins kreutzers. this disposition remained the mint law over all the weary, disastrous period of the thirty years' war, which is practically a blank for the monetary history of germany. it is not until --the opening of a fresh period--that complaints of the state of the lower denominations of the coinage are again heard. but how far this quiescence is to be attributed to the economic wisdom of the settlement of , or to the mute, dumb, inarticulate agony of germany during that strife when her commerce, much more even than her national life, was suspended, is hidden from us in almost complete darkness. [sidenote: spain: function in seventeenth century] spain. during the sixteenth and seventeenth centuries the function of spain was a very simple one in the european system. she was the receiver and distributor of the metallic wealth and finds of the new world, and accomplished her task perfectly naturally and efficiently. but it was at the cost of her political and commercial future and greatness. if spain had been a commercially independent nation, growing for herself and supplying herself with her own manufactures, the metallic wealth of the new world would have stayed much longer in her lap, and europe would have starved. but she was not. she produced little, and manufactured less, and the ill-gotten, blood-stained gain, which flowed to her shores from america, served only to feed an impractical vanity and to further unfit the nation for manufacturing and commercial life. the, to her, disastrous influence of spain's shortlived empire endure to-day, for she is still as unfitted as ever by temperament and natural training for mercantile life. such is the penalty her dower of new world gold and silver brought her. finding she could purchase anything and everything with this gold and silver, she threw herself into her work of conquest, and let commerce go. her manufactures came to her from england and the netherlands--countries she sought to conquer and enslave; and thither her gold went in exchange, and before the century was out those countries had risen exulting over her. but the point to notice is this. assuming this distributing function as her own and proper one, the only condition essential to its proper fulfilment was the maintaining of an absolutely unimpeachable coinage. the rapidity with which the precious metals left her possession was simply due to the fact that spain did so maintain her coinage and for a sufficiently lengthened period. the goodness of her coins exalted them above the prevailing rates in france and the netherlands, and they were eagerly sought in consequence. the monies that did not, and could not, normally leave her possession by ordinary way of trade left her by means of arbitrages working on the system of bimetallism, which existed unacknowledged.[ ] it was this commanding quality of the spanish coins that led to the adoption of their system by france in . that in the case of spain we hear no complaints of depletion of coinage and commercial disturbance resulting therefrom, such as mark the history of the other countries of europe, is simply due to the fact that her stock of metals was continually being replenished, and that she had no commerce to be disturbed. the gold and silver of america came to her in a steady stream and left her for the netherlands and elsewhere in a stream as steady; and so long as that flow was turned through her dominion, so long as the main sources of precious metal-mining were american, and the product a monopoly-possession of spain, she stood above, and felt no immediate harm from, the bimetallic law which insatiably sucked away her wealth. until the time came, therefore, when she lost her monopolist position in this matter the monetary history of spain is free from those features of disturbance, commercial agitation, monetary conferences and edicts, which are common to the rest of europe, and consist merely of a record of mint ordinances regulating the fineness of her coins and slowly adjusting them to the general movements of the century. only in the case of the first of these--the edict of juan and don carlos, , by which the standard of _coronas_ and _escudos_ was fixed at quilates, "which is the standard of the greater escudos of france and italy"--has the enactment any comparative or international bearing. for sixty-one years after the settlement of there had been no alteration of the monetary system. in the cortes of valladolid had petitioned the king, charles i., to lower the standard and content of the gold coin, "so that in weight and value they may pass equal with the _crowns of the sun_ which are made in france, so that by these means they will no longer draw our gold from the kingdom." in its ignorance this cortes also demanded that the silver monies should be reduced and issued on a relatively depreciated footing. it was a matter of thirteen years before charles yielded and adopted the measure suggested, in the edict of , already referred to, and it may be safely said that by the time of its adoption the need for the measure had passed away. any disturbance and loss of her stock of precious metals caused by the general movement which marks itself in european history about - , and which shows itself in spain in the petition of the cortes of , was quickly redressed by the inrush of metals from america. finding gold and silver come to her easily, spain cared little how they went. after the edict of there is only one complaint of the export of coin recorded in the legislative enactments of the country, viz. in , when it was decided to alter the alloy of the billon money in order to avoid its exportation, "as we are given to understand that its intrinsic value is greater in other countries than here." [sidenote: spain: passive attitude] the mint edicts of spain during the years - simply follow in the wake of the general movements of prices in europe generally. the authorities were perfectly passive to the export of the precious metals, and no attempt was made to manipulate the ratio in such a way as to arrest the outflow. the conduct of philip ii., in , in still further raising the denomination of the gold coins by one-seventh has the same passive aspect, although it has been attributed to a mere base desire on the part of philip to fill his depleted treasury by a partial debasement. a comparison of the movements of metals and prices in france and spain will show that the advance was only normal and general, and the further changes which were made in and have this same normal character, and call for no comment. at the points enumerated it is quite evident that spain merely and mechanically followed the general trend of the precious metals and prices through the century. there is no expression of aggrievement, either slight or acute, at the precious metals leaving her. while every other country was occupied seriously, sometimes desperately, with the question of how to guard their stocks of them, the eyes of the spanish government and the nation's mind were fixed only on conquest and imperial growth. the cost of her empire was such that at the accession of philip iii., , the national debt was over a hundred million ducats, an absolutely unparalleled sum for the time. when, therefore, the spanish government began the enormous issues of base billon money which mark the reign of philip iv., it is to be looked upon as a financial, or treasury, or budget expedient, and totally unconnected with any currency movement, pure and simple. these issues were so great that, in , the premium on gold and silver, as compared with billon monies, was fixed at per cent.; in , at and per cent.; and, in september , at per cent. (see account of spanish monies, appendix iii.) such base monies always tend to become the only _visible_ currency of a land. but, save as thereby facilitating the denudation of spain's store of precious metals, this matter of the depreciation of her billon money has practically little or no relation to the general movements of the two precious metals which we are investigating. it has more resemblance to an over-issued and depreciated paper currency. of that ebb and flow, that oscillation and instability in the metals, which make the study of the other currency histories of europe during this period so instructive an object-lesson of the effect and influence of a bimetallic law and system, spain shows not a trace. she received the metals in a steady stream, and emitted them in a steady stream. they poured _through_ her. her function was that of distributor, and she performed it. when the time came that her monopoly of the metals ceased, her remedy against the ruin of a bimetallic law was removed, and she became as signal an instance of its malignant operation as any--france, england, or germany. until that time came she had her remedy against immediate ruin in her yearly argosy, with its blood- and toil-stained tribute. england. to come to england. the following tables give a succinct synopsis of the general course of her gold and silver coinage during this period:-- [sidenote: england, - ] table of english silver coins, - . +------+--------------+------------++------+--------------+------------+ |date. |denomination. | weight in ||date. |denomination. | weight in | | | |troy grains.|| | |troy grains.| +------+--------------+------------++------+--------------+------------+ | | penny, | || | penny, | | | | groat, | || | shilling, | | | | shilling, | || | | | | | | || | penny, | | | | penny, | - / || | groat, | | | | groat, | - / || | shilling, | | | | | || | | | | | penny, | || | penny, | | | | groat, | || | groat, | | | | shilling, | || | | | | | | || | penny, | - / | | | shilling, | || | shilling, | - / | +------+--------------+------------++------+--------------+------------+ table of the english gold coins, - . +----------------------+--------------+---------+---------------+---------+ | |denomination. |weight | fineness. | | | date. | |in troy +-------+-------+ equiv- | | | |grains. |carats.|grains.| alents. | +----------------------+--------------+---------+-------+-------+---------+ |henry vii., |sovereign, | | | - / |£ | | | | | | | | |henry viii., |rose nobel | | | - / | | | |or rial, | | | | | | |sovereign, | | | - / | | | |angel, | | | | | | |crown, | - / | | | | | |pound, | | | | | | |crown, | | | | | | |pound, | | | | | | | | | | | | |edward vi., |pound, | - / | | | | | |angel, | | | - / | | | |sovereign, | | | - / | | | |pound, | - / | | | | | | | | | | | |mary, |angel, | | | - / | | | | | | | | | |elizabeth, |angel, | | | - / | | | |sovereign, | | | - / | | | |pound, | - / | | | | | |angel, | - / | | | | | |pound, | - / | | | | | | | | | | | |james i., |pound, | - / | | | | | |unit and its | - / | | | | | |fractions, | | | | | | |the double | | | | | | |cr., brit- | | | | | | |ish crown, | | | | | | |and thistle | | | | | | |crown, | | | | | | |angel, | - / | | - / | | | |angel, | - / | | - / | | | | | | | | | |gold raised p. ct. |unit, | - / | | | | | |angel, | - / | | - / | | | | | | | | | |charles i. |angel, | - / | | - / | | | |unit, | - / | | | | +----------------------+--------------+---------+-------+-------+---------+ table of the value in pence of the grain of gold ( c. - / gr. fine) in the various gold coinages of england, - . +-------------------+--------++------------------+--------+ | | pence || | pence | | date. | per || date. | per | | | grain. || | grain. | +-------------------+--------++------------------+--------+ | | . || | . | | ( carats) | . || ( carats) | . | | ( carats) | . || | . | | ( carats) | . || | . | | | . || | . | | ( carats) | . || | . | | | . || | . | | | . || ( carats) | . | | ( carats) | . || | | +-------------------+--------++------------------+--------+ [illustration: table of the movement of gold & silver in england - ] the testimony of these tables is perfectly general. they establish, roughly speaking, just such an advance of price as befell the whole of europe. they do not witness the oscillation in the coinage, and the commercial disaster due to the action of bimetallic law. for the evidence of this latter, however, there is ample store of material in the state papers of england throughout the period. the moment prices began to rise on the continent good english gold tended to disappear and flow away, being replaced by continental coins of lower contents (or higher denomination). the stress of this practical diminution of the currency was made all the greater by the simple fact that the increasing trade which accompanied such rise of prices demanded an expanding rather than a contracting currency. [sidenote: wolsey's administration of the mint] the very year, therefore, , which marks the commencement of the rise for the continent generally, marks the commencement also of agitation in england with regard to the supply of the precious metals. there is preserved among the state papers at the english record office a paper of advice from a german of the name of herman king to wolsey, dating in june , "how to provide bullion from germany for this realm with the greatest profit." he advises contracting for a fixed supply of metal at a certain price, which he puts down, and adds: "if wolsey will appoint a person to receive the money, i will engage to deliver or marks weight yearly at this price, but it must be secretly, as, if the purveyor were discovered, he would be in great danger, and the (german) princes would not suffer any silver to depart because of their own mints." four years later the effects of the exchange had made themselves so felt that henry was obliged to make a treaty with the emperor, charles v., "for the reformation of old and new money," . an attempt was made to tie down the chief coins in exchange--the gold _real_ of flanders, the gold _carolus_ and the _double carolus_ of spain--and it was further agreed (article iv.) that no new money of germany, italy, spain, france, or elsewhere, should be given in payment to english merchants, unless it had a fixed value in sterling money by consent of both princes. in december of the following year wolsey was meditating sending commissioners to the low countries to require that all monies valued too high should be reduced to their normal rate, but he was informed by knight, resident at mechlyn, that, "having spoken with several who hear daily the council's opinion, they think it is not likely to be done while the war continues, as the chief merchandise now is finances; and, besides, as their 'goldes' are highly esteemed in france, if they lower them they will all be carried thither." any such method of procedure as this of wolsey's was bound to be futile, and henry's government fell back on the much wiser plan of altering the denomination of the coins. on the th july , a commission was issued to wolsey "for increasing the sterling value of the coinage to an equality with the rates of foreign currency." the reciting information contained in the commission itself is perfectly succinct and clear in its bearing--"one pound weight of angel gold (i.e. carats - / grs. fine) is worth, in current money, £ ; by alloy of / it is worth £ , s., of which s. is allowed the mint master for coining. in return he gives the merchants crowns of the rose, at s., really worth but s. - / d., which makes £ , s. d. so that there is a clear gain of s. d." the investigations of the commission were followed by a proclamation on the nd august , fixing an altered tariff of exchange. _crowns of the sun_ were put at s. d., which only four years before had been at s. d., while the _ducat_ was raised from s. d. to s. d. finding the enhancing of the gold and the export of specie still continue, an inquest was held, on the th october , into the fineness and value of the coins. as a result of the verdict of the jury, a second proclamation was issued in the same year, dated november th, "to check the exportation of specie arising from the increased value of currency on the continent." the sovereign was put at s. d. (having previously been rated at s. d.), and other gold coins in proportion. silver coinage was to pass at previous rates, but a new issue was to be made, in which the ounce troy was to be coined into s. d. finally, foreign _ducats_ were to be taken as bullion, no rate of exchange being even fixed. at the same time wolsey was attempting to negotiate for a supply of gold from antwerp to replenish the currency. on this subject there exists a curious letter from his agent in antwerp, dated st november . "these two days," says hacket, "i have been trying to agree with the principal merchants about the exchange, but none would make any bargain, as you (wolsey) have limited me to s. d. for the _ducat_, and as a ducat of such gold as they would be bound to pay would be worth s. d. in the mint. they must receive either _ducats_, or a _crown of the sun_ and a _groat_, for every ducat, or the same in _angellets_. the best thing would be for one or two of their factors to see you (wolsey). the gold can be kept at home for or more per cent., for they would be glad to give that to take it out of the realm." the new coinage of was in complete accordance with the proclamation of the preceding november. as far as the tariff or absolute exchange was concerned, it served to redress the balance, and thus to bring the english coin abreast of the continental. in the matter of the ratio, however, hardly any change was made. in the coins of the old standard (i.e. carats - / grs.) the ratio remained as before, : - / ; in those of the new standard (i.e. carats) it was raised slightly (to : - / ). neither in the appointment of the exchange, however, nor in the matter of the ratio, could the measure be more than temporarily successful under the conditions. the necessity remained as constantly as ever to watch the changing continental tariff, and to accommodate the english system to it. one state paper, dating apparently in , thus pictures the situation at the time:-- "disputes in london between english, italian, flemish, and spanish merchants, as to the exchange, because of the last edict about gold. the writer knows of the importation of , _crowns_ and £ , in gold, which will be exported again unless care is taken. in flanders, directly after this proclamation, gold was publicly put at a higher price than before--a noble at _groats_," and so on. the writer, therefore, recommends that the searchers at the various ports should be warned to attend to their duty and see that no gold was carried away from the realm. [sidenote: england and the netherlands in ] no recoinage, however, or change in the mint rates, occurred for some years, and it must be taken as _primâ facie_ evidence that the basis of continued for some years efficient, and witnessed a steady growth in the circulation, accompanying a steady expanse of trade and prices. in , however, complaints were again heard of the conveyance of coins out of the realm, and on the th july a proclamation was issued against it. this movement is perfectly well authenticated. on the th of may , hutton, writing from brussels to thomas cromwell, says: "_gold_ was formerly carried out of the realm [i.e. of england] for gain; now great sums are sent hither [i.e. to the netherlands] in sterling groats [i.e. in silver]. this will both diminish the coin at home [i.e. in england] and injure the sale of cloth, for here are but three sorts of money current--_crowns of the sun_, sterling _groats_, and '_riders gelderus_' coined in guelderland." on the th of august the same hand writes, again from brussels: "exchange is stopped, and much money like to be conveyed over [i.e. hither], though all coins should be called down here.... the act made for money will stop the [english] trade in kerseys, and great sums will be conveyed out of the realm [of england to the netherlands]." that the flow-out of gold in should change into a flow-out of silver in was simply due to the alteration of the continental ratio. the relatively great depreciation of silver only begins in . up to that time the general trend of the two metals was on level lines, but with occasional traces or evidence of an appreciation of silver or relative depreciation of gold. at such a moment the lower-rated, i.e. cheaper, english silver inevitably tended to flow out in the very teeth of searchers and legislators. at almost the same time--and as showing at once how international this trade in money or "finances" was, and how confused, and conflicting the monetary system of europe was, with a flow-out in one direction and a flow-in from another--the english merchants at their calais fair reported great gain of the precious metals. "we have very good sale of clothes," writes a merchant to the king on the th august ; "here is great plenty of money, which causes all wares to be dear. your subjects will bring back above £ sterling in _angels_ and _ducats_. we seek all the _angels_ here and give a penny in the piece to have them to carry home, so that i trust there will be few left here in a short time." [sidenote: the currency measures of ] the threatened rise of monetary denomination on the part of the netherlands was accomplished by their ordinance of th april , and almost immediately henry found himself necessitated to change the basis of his currency from that established in . in the silver penny was reduced from - / to grains, and shortly after the angel was advanced from s. d. to s. the proclamation which enforced the change is dated th may . gold was raised from s. to s. the oz., and silver from s. d. to s. in the purchase price of the two metals, therefore, there was no change in the ratio, but calculating on the basis of the issue price, i.e. the pieces issued from the mint, the alteration of ratio was from - / to - / . in the proclamation the change was attributed to "the enhancement of the prices of these metals beyond the sea, as well in flanders as in france, which would have drawn all the coins out of the realm if a remedy had not been applied. and although the customers of the ports of the kingdom had been ordered to put in execution the statutes for the conservation of the coins, yet for the great gain they were still secretly carried abroad." the coinage measures, therefore, of the year , when justly considered, do not possess the aspect which has been generally attributed to them. it is incorrect to look upon them as the tentative beginning of that debasement of the coinage which disgraced the later years of the reign of henry viii. and the days of his son edward vi. the measures of were simply acts of justifiable self-defence and currency safeguard. the real debasement began two years later, in - , when, by indenture, the silver coins (_testoons_) were reduced from oz. to oz. fine silver, the oz. of alloy in the former case being increased to oz. in the latter. in the content of fine silver in the testoon was further reduced to oz. the plan of this history makes it incumbent to treat questions of debasement as standing apart from the subject-matter of the book, which is restricted to the natural and normal ebb and flow of the precious metals, due to the action of bimetallic law. the operation of debasing a coinage--of lowering it, that is, so far and so arbitrarily as to remove it at once from the action of natural law of prices ruling around--means an arrestation of natural economic processes and laws, and the events which follow thereupon stand apart from such laws and ought to be treated as so separate. in reality, debasements always favoured the action of this malignant bimetallic law, and the fact might possibly lead one to attribute to the normal action of a natural law what is in three-fourths of it due to arbitrary action of government. it would be, therefore, unfair to treat of debasements in a history of bimetallism. given, however, the above standpoint, and mental reservation of deduction and innuendo, it is permissible to treat of this debasement as showing _how_ or _in what way_ a debasement _does actually_ facilitate the malignant action of bimetallic law.[ ] further, the present instance of debasement is the only one on record in english currency history, and the testimonies regarding it are of extreme interest. [sidenote: the tudor debasement] for the purpose of external or foreign trade, a debasement of currency is fatuous and pernicious. the coins are estimated at their content of pure metal, and the international exchange is so rated. the consequence is an apparent rise of foreign prices proportioned to the extent of the debasement. this at once unsettles internal or home trade prices, and they rise to the same level, but with such inequality of motion as may happen to follow from friction, local ignorance, want of communication, or from the intricacies of trade. the inequality of exchange-coinage rates which results from this is the bullionist's or the financier's opportunity, and swiftly and invisibly the good species--or any, bad or good, upon which any differential profit can be had--disappear from circulation. the consequence is that the rising prices which instituted the process are no longer accompanied by an expanding or increasing volume of currency, but, on the contrary, with an enormous decrease in the total of acceptable or efficient currency. hence come decay of trade, and ruin of town and country. this is no paper, _a priori_ argument. it is the patent unmistakable statement of history and fact. the staple trade of england in the sixteenth and seventeenth centuries was woollen. coventry was one of the considerable seats of the industry, and known as a flourishing and wealthy town. in the third year of edward vi.--the time when this debasement of our coinage reached the lowest point--its trade was gone, and its population had sunk to , "whereas within memory there had been , ." in the extraordinary "_dialogue concerning the common weal of this realm of england_," the scene of which was probably laid in this very decayed town of coventry, the advance of prices, and the general tendency of the above argument, is more than amply borne out. "i have well experience thereof," says the "cappe" or hat manufacturer, "for i am fain to give my journeymen d. a day more than i was wont to do, and yet they say they cannot sufficiently live thereon. the city which was heretofore well inhabited and wealthy (as ye know every one of you) is fallen for lack of occupiers to great desolation and poverty." "so the most part of all the towns of england," quoth the merchant, "london excepted; and not only the good towns are decayed sore in their houses, streets, and other buildings, but also the country in their highways and bridges; for such poverty reigneth everywhere that few men have so much to spare as they may give anything to the reparation of such ways, bridges, and common easements. there is such a general dearth of all things as i never knew the like, not only of things growing within this realm, but also of all other merchandise that we bye beyond the seas, as silks, wines, oils, etc. i wot well all these do cost me more now by the third part well than they did but seven years ago." "such of us," says the knight, "as do abide in the country still can not with £ a year keep that house that we might have done with marks but sixteen years ago." the course of the enhancement of foreign prices is thus argued between the merchant and the doctor. _merchant._--"we that be merchants pay dearer for everything that cometh over the sea, even by the third part well. and because they of beyond the sea will not receive our money for their wares, as they were glad in past times to do, we are fain to buy english wares for them, and that doth cost us dearer by the third part, yea almost the one-half, dearer than they did before time, for we pay s. for a yard of cloth that within these ten years we might have bought for s. d. when we have thus dear bought outlandish ware, then we have not so good vent of them again as we have had before time, by reason there be not so many buyers, for lack of power, though indeed in such things as we sell we consider the price we bought them at." _doctor._--"i doubt not if any men have licked themselves whole [i.e. recovered the loss] you be the same, for what odds soever there happen to be in exchange of things, you that be merchants can espy it anon. _ye lurched some of the coin as soon as ever ye perceived the price of that to be enhanced. ye, by and by perceiving what was to be won thereon beyond the sea, raked all the old coin for the most part in this realm and found the means to have it carried over, so as little was left behind within this realm of such old coin [i.e., good undebased coin], at this day, which in my opinion is a great cause of this dearth that we have now of all things._" "thereby" he adds again, speaking of this "basing or rather corrupting of our coin and treasure, we have devised a way for the strangers, not only to buy our gold and silver for brass, and not only to exhaust this realm of treasure, but also to buy our chief commodities in manner for nothing. _it was thought it should have been a means not only to bring our treasure home, but to bring much of others, but the experience hath so plainly declared the contrary, so as it were a very dullards part to be in doubt thereof,..._ do you not see that our coin is discredited already among strangers, which evermore desired to serve us before all other nations at all our needs for the goodness of our coins; and now they let us have nothing from them, but only for our commodities, as wool, felt, tallow, butter, cheese, tin, and lead. and whereas before time they were wont to bring us for the same either good gold or silver, or else equally necessary commodities again, now they send us other trifles as i spake of before, as glasses, gelly pots, tennis balls, papers, girdles, brooches, etc.... as i told you in your ear before, they send us brass for our treasure of gold and silver, and for our said commodities i warrant you you see neither gold nor silver brought over unto us as it was here before used, and no marvel. to what purpose should they bring silver or gold hither, where the same is not esteemed. therefore i have heard say of a truth, and i believe it the rather to be true, because it is likely that since our coin hath been debased and altered, strangers have counterfeited our coin, and found the means to have great masses transported hither, and here uttered it as well for our gold and silver as for our chief commodity; which thing i report me to you what inconvenience it may bring the king's highness, and this realm, if it be suffered, and that in brief time.... and besides this, have you not made proclamations that our old coin specially of gold, that it should not be current here above such a price? is not that the readiest way to drive away our gold from us, as everything will go where it is most esteemed? and therefore our treasure goeth over in ships.... i hear say that in france and flanders, there goeth abroad such [brass and billon] coin at these days, but that doth not exile all other good coin, but they be current withal, and plenty thereof, howsoever they use it. _therefore i think it wisdom we did learn of them how we might use the one and the other keeping either of them of like rate as they do so, that they should never desire any of our coin for any greater value than they be esteemed at with them nor we theirs for any greater estimate with us than with them, and then we should be sure to keep our treasure at a stay._ and as for recovering of old treasure that is already gone, there might be order that some commodity of ours were so restrained from them that it should not be sold but for silver or gold, or for the third-part or half in such coins as is universally current, and thus chiefly our treasure might be recovered by the use of means." when pressed by the knight to show how this merchandise in coins was actually initiated and worked the doctor thus replies: "well, then, when goldsmiths, merchants, and other skilled persons in metal, perceived that the one groat is better than the other, and yet that he shall have as much for the worse groat as for the better, will not he lap up the better groat always and turn it to some other use, and put forth the worse, being like current abroad? _yea, no doubt, even as they have done of late with the new gold. for they apperceiving the new coin of gold to be better than the new coin of silver that was made to counter value it, picked out all the gold as fast as it came forth of the mint and laid that aside for other uses, so that now ye have but a little more than the old current, and so both the king's highness is deceived of his treasures, and the thing intended never the more brought to pass, and all is because there is no due proportion kept between the coins, while the one is better than the other in his degree._" "but how," asks the knight, "do they do in france and flanders, where they have both brass coin, mixed coin, pure silver, and pure gold current together?" "i warrant you," is the doctor's reply, 'by keeping of due proportion every metal towards other, as of brass towards silver to , of silver towards gold to . for the proportion of silver towards gold, i think, cannot be altered by the authority of any prince, for if it might have been, it should have been ere this, by some one needy prince or other within years." so much in brief for this depreciation of henry viii., and for this extraordinary dialogue. the doctor's remedy was a recoinage, such as was later effected. the extent of the knowledge of economic laws displayed by this figure throughout the dialogue is astonishing. the divine was the better merchant, and if he had lived--for miss lamond's masterly identification of this character with latimer hardly admits of question--and ruled in later counsels, he might have shown himself the better legislator. [sidenote: elizabeth's recoinage] the recoinage which he advocated was not effectually completed till the second year of elizabeth's reign, . the basis on which it was then accomplished was that of a ratio of . , as nearly as possible that adopted in the same or the following year, , by france, and slightly higher than that which was established in germany by the imperial edict of . the coincidence in these rates is remarkable, and it is quite apparent that the action of elizabeth dictated that of france, as also that this her action secured for england a steady supply of the precious metals during a period in which france was violently agitated by currency crises. in the first year of her reign, st may, elizabeth issued a proclamation against the export of bullion. this was followed by one in the second year, th september, against the melting of monies, and by two others, of the th october and rd december of the same year, "for the valuation of certain base monies called _testoons_ ... finding that the ancient good gold and silver is daily transported," etc. finally, on the th november ( eliz.), a proclamation was issued forbidding the circulation of french _crowns_ and flemish or burgundian _crowns_. this series of proclamations is to be regarded as one measure with, and as fortifying, the recoinage and the new ratio established. and the efficiency of the system thus instituted is to be judged by the fact that, with the exception of two unimportant proclamations of th october ( eliz.), and st december ( eliz.), no further legislation or privy council proclamation was needed for a matter of fifteen years. [sidenote: elizabeth's final revision] from - , however, as has been seen already, the netherlands issued a closely consecutive series of plakkaats which altered the situation for the whole of europe, and england, equally with the rest, felt the drain. contemporary evidence as to this fact has been already quoted (p. ). accordingly, on the th september ( eliz.), elizabeth issued a proclamation "for the ordering the exchange of monies by enactment, according to laws of the realm, ... because of disorders, ... decay of merchandise, ... and value of monies." again, in , inquiries were made respecting the export of gold, and one of the london aldermen wrote to secretary walsingham, advising the appointment of four skilful merchants as an advisory body. finding the drain continue, on the th october ( eliz.) the queen issued a proclamation "for reforming of the deceits in diminishing the value of coins of gold current in our dominion, and for remedying the losses which might grow by receiving thereof being diminished." according to the express testimony of this proclamation the gold coins were _exported_, _diminished_, and _returned_, and it accordingly enacted that no coins should be taken as current when beneath such and such a weight, or lacking such and such a remedy. for a dozen years or so after this no further complaints of a gold drainage are heard, but in they recommence. "if good provision be not foreseen the coins of gold and silver of england will flow over to the low countries as fast as they can be coined," is the testimony of a document of april in that year, "for the _angel_ and _sovereign_ of england are current in holland and zealand at s. the piece of flemish money, and our silver much after the same rate." and the writer adds: "i see no harm to this realm, if the french gold coin was permitted to be current for s. d., the spanish gold _pistole_ for s., and the silver _real of eight_ for s." it was under the influence of this movement, of which more complaints exist among the domestic state papers, that the final elizabethan revision of the mint prices of the metals took place. on the th march she issued a proclamation "concerning coin, plate, and bullion of gold and silver," reciting that "bullion of gold and silver, etc., for these later years, have been much more abundantly transported and conveyed away than in any former times," and commanding the observance of the statutes against such transport. finding her proclamation mere waste paper, elizabeth resorted to the only safe and possible expedient, a change in the issue rate of the coinage. but for once her instinct, or the wisdom of her councillors, failed her. instead of raising the ratio of gold to silver, she lowered it from : - / to : - / . it is inconceivable that such a blunder should have been committed at a time when the production of silver had advanced and was advancing by leaps and bounds beyond that of gold, and when the currency of every european country of commercial note was being accommodated to the depreciation of silver with unerring instinct. but so it was, and the blunder only served to accelerate and intensify the catastrophe under james i. [sidenote: economics of the puritan revolution] in matters of currency history it is impossible to separate the tudor from the stuart period, and this last and sole blunder of elizabeth's administration only serves to show the continuity of principle or event, and how little of moral censure attaches in this matter to abused james any more than to lauded elizabeth. but it is instructive and curious to note that the currency history of england during all the reign of elizabeth shows such remarkable quiescence. from to the fatal blunder of there was no change in her mint rates. the complaints of exports of coins, and the evidence of the action of bimetallic law, appears only at three isolated and widely separated periods. the inference can only be--and it is more than an inference--that her reign, besides being a period of currency expansion, was one in which the ratio existing in england facilitated the flow of metals from the continent, and secured the permanence of that currency expansion. on this increased basis of currency was built that commercial and national, yea even literary, growth and expansion, which have made the elizabethan age the glory of our history. similarly, the unrest and commercial credit crises under james i. and charles i., which resulted from the same wide causes and principles, underlay and played a vitally determining part in the agitation and revolution-sowing of their reigns, and that, too, in a manner which has never yet been appreciated. the uprisal of england, which resulted in the first dethronement of the stuarts, was as widely and vitally based upon economic causes as upon legal or religious,--possibly, indeed, much more so, if we only knew it. at first james was determined to proceed with the monies which were being wrought by elizabeth's warrant. but on the th november, in the first year of his reign, a new indenture was made for the coining of a new piece called the unite, to commemorate the union of the two crowns of england and scotland. while preserving the same value as the pound sovereign of elizabeth's issue of (viz. s.), its weight was only - / grains, while that of elizabeth's was - / . in the following year the angel was reduced from - / grains to - / . the combined effect was to raise the ratio from . (as in ) to . . elizabeth's blunder was thereby effectually remedied, but it was not before an outcry had been made about the decay in shipping, and in the export of english cloth. even this higher ratio did not remain permanently, or for long, effective. in the transportation of specie rose to such a height that a proclamation had to be issued against it, th july, and there was again talk of establishing "a true and perfect way to keep the money within the kingdom by instituting a register for all payments made by way of exchange." again, two years later ( th august and th may ), the proclamation had to be twice renewed; no less a person than sir francis bacon drafting the clause in the first case. the anxiety which the subject caused to the privy council is quite apparent in the state papers, and much division of opinion prevailed before the only possible remedy--a raising of the denomination of the coinage--was adopted. salisbury was at first adverse to the measure, but set himself carefully to study the question. the slow working of his mind is still traceable in the paper of notes he drew up for his own guidance. "all the proportions of bullion ought to be xij for one between the gold and silver unmixed. our sterling standard is wrought with a mixture of dwt. in every lb. weight, which is oz.; so as every dwt. is s. d., and therefore that is wanting. [sidenote: salisbury on currency] "now, two things are in question, one the inconvenience of general transportation, the other of the particular, viz. scotland. in the general this is the mischief, that our gold is not so much alloyed as our silver, and therefore being more worth than silver is bought and carried away. the particular, of scotland, is more notorious, because it is not forbidden.... "the gold ought to be caretts. "now oure angell is not so much but neare it, about caretts grains and / . " grains makes a caret. caretts an oz. "in silver every pound lacks s. d. "a pound is ^{li} in tale. "in angells wch is in tale ^{li}, and in weight one ounce, there is not such an alloy, for in silver we want s. d., and in gold but--" the notes end thus imperfectly, but what salisbury was toilfully figuring for himself lay ready to his hand in the opinions of experts and of the officials of the mint. immediately succeeding these broken notes of his in the state papers, there exists a series of documents which he doubtless had under his eye, and which exposed the situation with a clearness that was more than convincing. "statement of the loss sustained by england in the exchange of coin." ... "statement by the officers of the mint that the raising the value of the english silver coins by making a pound troy of silver worth £ , s. d. only equalises the value of english money with those of foreign countries, and that to prevent the export of gold its price must be raised in proportion." and so on. as the result of such representations, and after ten months of wavering salisbury gave way, and on the nd november he consented to the issuing of a proclamation raising the denominational value of all gold coins per cent. this proclamation was issued on the following day, and the ratio was thereby at a blow raised from . to . . among the many alternative schemes proposed before the adoption of this measure, had been one for "raising £ , on loan to the king, by coining brass money to that amount, and compelling their acceptance in certain proportions by the people, on promise to repay within seven years in full value silver." it was fondly asserted that this would be a "means of preventing the export of coin and bullion, caused by the rise and value of foreign coin." another project brought forward was "for meeting the increase of value laid upon the coins of the low countries by issuing a copper coinage, corresponding thereto, and by raising the value of english silver and gold coins in order to prevent losses of merchants in foreign trade, etc." [sidenote: england: the agitation of ] a year later a third scheme was proposed to remedy the under-valuation of english monies, "by the coinage of small silver monies of coarser silver, so as to raise the value of the larger money in proportion; the old standard to be observed in payments of rents, the new in ordinary bargains." the step actually and finally adopted, however, by the proclamation of , did not equalise the exchange for more than a twelvemonth. the rise on the continent continued, and the outflow recommenced. in the council took note of the persons concerned in this trade of transporting, with a view to proceeding against them, while on their side the general commercial public, or such of them as did not share the secret and the gain of bullion-broking, demanded that the under-valuation of english monies should be redeemed by further raising the value of the coins one penny in the shilling. on the th may a proclamation was issued forbidding merchants to exceed mint prices in buying bullion. a year later ( th july ) we are told that the privy council had sat twelve or thirteen hours on the sunday, and "have been forced to dismiss the gold and silver business, and also that of the fishing, as involving many points in the treaties with burgundy and holland." the state papers of this year contain quite numerous references to the subject: "statement of the undervalue set upon english money in foreign countries, as proved by the last placard of the low countries"; "notes of the advantage arising to the crown of england from raising the shilling to - / pence, and the proportion of gold from - / to "; "suggestions as to the means of preventing foreign nations from taking advantage of the english in the exchange of monies, viz., raising english coins in nominal value," etc. on the rd march a further proclamation was issued against the export of gold and silver coin, and in the following year the exports of the east india company were limited to £ in bullion or specie. the mint officials proposed a raising of the denomination, and again the matter was hotly debated in and out of the council. but a different race of men from raleigh had succeeded, and, on the st december , the privy council determined that "silver shall not be raised in value at present, and uniformity in the weight of the coin is to be observed; the melting of gold for braid or plate forbidden, but further regulations postponed till the committee for exchanges bring their report." [sidenote: england: the measures of ] as it happened, owing to the necessity of replenishing the king's finances, the question had become complicated, and some of the measures proposed for staying the coin had a more sinister bearing, as is apparent in one of the schemes referred to (_supra_, p. ), being, in short, cloaked proposals of debasement. in setting its face against such proposals of debasement the council was right, but such proposals had relation only to the king's finances, and not to the currency crux, and in delaying the proper tariffing of the english against the continental coins the council did wrong. by the evil had risen to so great a height that the council determined to act upon its own proclamations. eighteen merchants were sentenced in the star chamber for exporting gold ( th december ), five being acquitted. the total of the fines imposed on the sentenced men reached £ , , and it was stated that since the beginning of the reign a matter of £ , , of gold had been surreptitiously exported. on the st july proclamation was issued for a new coinage. the gold _angel_ was reduced in weight from - / grs. to - / , being equivalent to an increase of an eleventh in its denominational value: and in january , following the convictions of the merchants referred to, the council busily debated "the erecting an exchange for monies, to prevent the export of silver by the goldsmiths who have been the offenders." all these steps were taken too late, and the currency crisis which shook germany ran its full course, too, in england. in there was a great scarcity of silver in the country, and the trade of the eastland merchant was gone--a scarcity and decay which they attributed "to the rise of foreign coin, especially that of poland and holland, during the last four years in which the hollanders have farmed the king of poland's mint." the export of cloth had sunk to one-third the output of the previous year. by may the situation had become pressing. the secret export of money still continued, and it was again proposed to register bills of exchange, and also to make spanish and french coins current in the country. in june the privy council issued circulars to the east india, turkey, french, eastland, and spanish companies, and the company of merchant-adventurers--practically the whole mercantile corporation of london--desiring them to choose experienced persons from each of these companies, to consult upon the best means of managing the exchange of monies, so as to encourage the import of silver, and prevent its export. their statement on the th june was simply that the export was due to the under-valuation of the english monies. the council considered their report on the following day, and ordered it to be further considered, "but the lords think it best for some agreement to be made with neighbouring states for a due correspondence in the value of the coins now used." [sidenote: england: the crisis of ] but while the lords of the council talked of treaties the crisis came. by the end of the year there was no money in the country, and trade was at a standstill. in february , locke informs carleton "money is very scarce. in the clothing counties the poor have assembled in troops of forty or fifty, and gone to houses of the rich and demanded meat and money, which has been given through fear. the lords ordered the clothiers to keep their people at work, but as they complained that they cannot sell their cloth, usurers and monied men though not in the trade are ordered to buy it." in march the justices write from gloucestershire: "the people begin to steal, and many are starving; all trades are decayed; money very scarce." stocks of cloth accumulated in the london "halls" or warehouses of the various districts, and notes of them were submitted to the privy council. pieces unsold. gloucester, worcester, reading, somerset, and suffolk hall, and blackwell hall, manchester hall ("besides many in the country which are not sent off for want of a market.") storehouse for gloucester, worcester, kent, somerset (mostly belonging to kent.) wiltshire hall northern hall leadenhall (cloths from suffolk and essex.) devonshire kerseys the merchant-adventurers were appealed to, to buy up these stocks, but they were unable. the ordinary taxes of the country could not be levied, or, when levied, proved only a fraction of the estimated amount, and invariably the commissioner attributed the deficiency to the want of money and the general decay of trade. "wools and cloth are grown almost valueless," write the justices of somerset, on the th of may , "and the people desperate for want of work." the expectations of outbreaks were great, and in nottingham musters were held, and the trained bands ordered to be ready for instant service, to suppress riots, if any occurred (july ). meanwhile the council was busy conferring with merchant delegates from every part of the country. a new proclamation against exporting coin was talked of ( th june ), and a declaration issued (same day), that the king purposed to establish a royal exchange, to regulate all exchanges. "treatises on exchanges," "statements of the disadvantages of a low exchange," and similar documents crowd the state papers; and on the th july a proclamation was issued ordering nothing to be worn at funerals but english-made cloth, forbidding the export of raw wool or yarn, and declaring the establishing of a standing commission on matters of trade. on the th of august the goldsmiths' company returned their answers to the council's queries with regard to the comparative weight and value of spanish _reals_ and english shillings, and suggested that the pound of silver should be cut into s. instead of s. the officers of the mint followed up this advice by confirmatory testimony. "the business is weighty," wrote sir robert heath to secretary calvert, in enclosing him the above reports. "for we are drawn dry. coin must be brought in from elsewhere [i.e. abroad], which can only be by assurance of gain to the merchants in equalling our coin to that of other states." as a corollary it was proposed on the following day, august , to encourage the bringing in of money by making the spanish _real_ pass current at s. d., its true value in english coin. "the merchants will bring them in at this profit, though they can gain more for them in holland, and they press for an immediate reply, as the spanish fleet is coming in, and the money will be brought hither if the merchant can make a reasonable profit." in september the clothworkers and dyers of london complained in a petition of their want of employment, and that many thousands of them were in the greatest distress. so great was the want in the country districts that a proclamation was issued ordering all persons of quality in london and westminster to go to the country, and reside on their estates, for the relief of the poor in the dearth. in january fears of disturbance in essex were rife, "because of poor clothworkers, the masters being unable to employ the men, and many who were thought the wealthiest were likely to become bankrupt." on the th of february the officers of the mint reported to the council that they found the value of the spanish _real of eight_ to be equal to s. - / d., as compared with the new shilling coin; and on the th of march following a proclamation was issued to make these spanish _reals_ current at s. d., "in hopes of bringing some of that coin to the mint." from this time onwards no further references, save one laconic remark in may , "the poor do not complain much," occur in the state papers to this, one of the acutest currency crises in our history; and we are left to follow the process of recovery and the dumb, inarticulate agony of the widespread ruin in sympathy and imagination merely. the details here given are taken entirely from the state papers, stolid and ungarnished, but the tale they tell is momentous and dire in its importance. when consulted by the privy council, the various committees and delegates of the merchants attributed the crisis to the deceits practised in the manufacture of cloth, to the embargo on its sale, and other such causes, as well as to the scarcity of money, and the loss in exchange. the first suggestion is hardly worth a moment's consideration. every testimony points to the fact that the crisis was as purely a monetary or currency crisis, as later crises have been distinguishedly credit crises. between and hardly any silver monies were coined in the english mint; for example, between and the total silver coinage was only £ , whereas in the four succeeding years the silver coinage at the tower mint amounted to £ , . [sidenote: england: james i.] "from the year ," says one of the informers of , to whose petition reference will be shortly made, "many goldsmiths and cashiers of london culled the weighty shillings and sixpences to make into plate, silver wire, and to other manufactures; for most of that time, we having wars with spain, little or no silver came from thence; so likewise hath little or no silver from france in that time, and no silver could be brought out of holland by reason it went so high by the placard. for sterling silver passed in holland for d. per ounce higher than it was made in our mint, sterling being in holland at s. d. per ounce, so that no silver could be imported from holland to supply our mint, which the goldsmiths and others perceiving presently fell a-culling the silver monies current, and the money being coined in the mint at s. d., the goldsmiths, finers, and wire-drawers did raise it up to s. d. per ounce, and melted down into the weight of shillings and sixpences, and left none to pass betwixt man and man but light monies and clipped, and did exceed the rate of the mint by giving for sterling s. d. per ounce, and s. - / d., and sometimes more; by which means there was no silver brought into the mint for ten years to speak of but the silver which came from wales. this will appear by the mint books." the testimony only confirms the previous inference. the whole reign of james i. was a period of inefficient attempts to rate the english coinage to the incessant rise in the continental coinages, of consequent drain of specie to the netherlands, and of practical closing of the mints at home. the cause, opportunity, channel, or machinery of the drain was the incessantly shifting, badly tariffed, imperfectly understood bimetallic system of the times; and the crisis of was only the most patent expression of its malignant action. it is doubtful whether the political effect of that crisis has been properly estimated by the constitutional student of the popular revolution under the stuarts. its commercial, currency, and economic and theoretic influence has certainly, and much more, been hitherto overlooked. [sidenote: england: charles i.] the reign of charles i., and the period of the commonwealth, display similar characteristics to that of james i., but in a more modified and less malignant measure. putting aside, after one nearly fatal slip in august , the various propositions for a debasement which were made early in his reign, charles made, throughout, no change in the denomination or value of his coins, and no change in the ratio. in the export of coinage became again perceptible, and a warrant was issued for erecting a royal exchange between england and scotland, september , and for a proclamation forbidding all indirect practices of merchants, and underhand buying of uncurrent coin and foreign bullion. in the following march, , a committee was appointed to advise his majesty concerning the coins, and to observe from time to time all accidents at home and abroad touching coins. numerous schemes were proposed for the arresting of the process of export. they bear generally two characters--( ) as proposing a change of the ratio; ( ) as proposing a differential issue of the silver issue coinage, i.e. coining d., d., and d. silver pieces at a different and higher rate than the larger silver pieces. such schemes have no importance at the present day, save as foreshadowing the mechanism by which england finally evolved a monometallic system which permitted of the fullest retention of silver. the flow of coinage which these proposals were intended to meet was not now to the netherlands but to france, and it must be attributed to the course of the french currency already indicated. in the names of certain merchants engaged in the transport of gold and silver were reported to the council, together with the names of the french merchants who received the same in france. in june certain of these were arrested, and in not less than thirty-seven of them were prosecuted in the star chamber for this unlawful transportation. the drain went steadily on during the whole of the decade. on january , - , a proclamation was issued for restraint of the consumption of coin and bullion. in the following march an order of the king in council was issued against the exportation of english and scotch coin, and by gentlemen crossing the sea, and forbidding the wearing of jewels, etc., "because of the great quantity of money exported." any such enactments were doomed to be futile. the true remedy, or rather the keynote of the situation, was contained in a proposition submitted to the privy council for the making current of certain foreign coins. "the forbidding of spanish money in england," says the author barrett, "was to enrich the mint, which brought forth contrary effects, for the french, dutch, and other nations, by advancing spanish coins, received the greatest profit." he accordingly proposed that the king should raise the spanish money to be current in england by proclamation. the double _pistolets_ weighing s. to be raised to s.; the _piece of eight_ weighing s. to be raised to s. d., "and when there is store brought into the kingdom, then have a new proclamation to call in these coins to be stamped with a mark and apprised to the intrinsic value." the step was not adopted, and by his majesty's declaration of in the star chamber, gold and silver were to be considered commodities of merchandise. "by there was not in the kingdom a million of silver," says sir ralph maddison in a memorial. "gold and silver," said sir thomas roe in his speech on trade in the commons, "are very scarce, and the kingdom is impoverished. money has been drawn away into other kingdoms, especially into france and holland, where it is worth more." one of the informants, who had been employed by the government in the prosecutions of , thus gave his testimony in a petition which he subsequently drew up: "divers goldsmiths of london are become exchangers of bullion of gold and silver, and buy it of merchants and others, pretending to carry it to the mint. but indeed they are the greatest instruments for transporting that are, and in a manner they are only those who furnish transporters with english and foreign gold, spanish money, _rixdollars_, _pistolets_, _cardacues_, etc. some of the goldsmiths make it their use and practice to buy light english gold of shopkeepers and others, which, by the laws of this kingdom, wanting beyond remedy, ought to be bought as bullion, and upon the sale ought to be defaced and new-coined in the mint. but they take another way, for they sell all this gold to transport, though it want four, five, or six grains above the allowance, and that a s.-piece will not make s. to be coined in the mint. yet the goldsmiths will not abate above d. or d., and sometimes but d. in the piece, let the gold want what it will, by which means they outgive the mint, and the gold which the goldsmiths buy of the subjects, thinking it is to carry to the mint to be new-coined, to pass in current payment, they put it into a dead sea, never to be made coin of in our commonwealth. for, weekly, french and english have bought up this gold, let it be as light as it will, at s. d., s. d., s. d., and so after that rate for all other gold, to the value of many hundred thousand pounds. many thousands of _dollars_ and spanish money they furnish yearly to merchants that trade for norway and denmark, to transport silver for those parts." [sidenote: england: the situation in ] the drain of coinage to france he distinctly attributes to the raising of the french coins. "at this present in france the native merchants there match us with such a point of policy that it would be hard for our merchants to be master of.... since the raising of our s.-piece to s. there ... they have advanced the price of their commodities according to their advanced monies, to the full sum of s. in the pound more than they were before." [sidenote: england: sir robert stone on the mint] during the civil wars there is a remarkable paucity of reference to the subject, doubtless owing to the supreme importance of the war itself. on the th august , and on the th february - , the long parliament issued orders, on the petition of merchant strangers who were prevented from importing bullion by the rigours of the search of their vessels, for their due encouragement. the petitions would argue a tendency towards an importation of specie, but in this was again changed, and a heavy export became perceptible. there can be little doubt that the initial impulse came from the new coinage which was instituted by the act of th july , and by the table of weights for the commonwealth coins which that act adopted. for two years and more both council and parliament were exercised in mind with regard to this export of specie and the consequent decay of trade, and draft acts to prevent the export, as well as many other propositions, were had under long consideration. no measures were adopted, and an amsterdam correspondent of sir robert stone, in may , thus gave his opinion of the wisdom of the mint officials and the government in this process of drift: "experience has taught me that when the state does not keep extraordinary watch, and the laws are not put into execution against culling and sorting out the heaviest coins to be transported, and the light and clipped left behind, it is a great debasing of the current value of coin. all your silver money (i.e. in england) is thus abused by goldsmiths and others. and when the state does not employ such as can discover those offenders, but puts persons into the mint who have had no experience, great damage must follow. for there are bankers and exchangers in holland who know the ignorance of all your present mint men that have any place of trust, and laugh at them. they say when the mint in the tower flourished, old andrew palmer, mr. rogers, and one cojan were there, who were all subtle mint men, and held correspondence here (i.e. in amsterdam), and knew what to do to advance the mint, and would always find a way to bring grist to the mill. but now your mint comes to be neglected and money adulterated. many of our bankers here have a great trade with your goldsmiths and merchants in london for english gold and heavy english silver. your mint will never go until this be discovered, for these men are the sluices that drain all your money. i believe there is at this day forty times more gold and silver in the low countries than in england. about twelve years since the french were forced to call in all their money, it being so clipped that their commerce ran into confusion, and you have almost brought yourself to the same point, the coin in ireland being per cent. less value since the war. in england almost all your gold is transported, and the little that is left is in hucksters' hands, that go to an exchange in lombard street, and you must pay from £ to £ , and sometimes more, to have £ in gold for silver. for who will take gold to the tower to be coined, and lose s. in s. of what they can make by transporting it? we have more english gold in amsterdam than you have (in england), all sent within those twenty years, and great quantities of english silver have weekly come over in pinks and dutch men-of-war for years, to the value of many hundred thousands of pounds, in return for coin. i wondered at first how the merchants transported all the weighty and culled english money into holland, until one of the bankers told me. i would have you inquire it and prevent it, for it is a most pernicious thing. it is the goldsmiths, especially those in lombard street, which are the greatest merchants, and london cashiers, and who will receive any man's money for nothing, and pay it for them the same or next day, and meantime keep people in their upper rooms to cull and weigh all they receive, and melt down the weighty, and transport it to foreign parts, sometimes without melting, and keep banks for all the principal coin in christendom in their shops." the succeeding years of the commonwealth saw little change in the situation. in and the council was still anxiously debating the question of the transport of bullion and coin. but this chain of phenomena refers to the third period in this history, and are to be treated of in that connection. [sidenote: close of the second period: rÉsumÉ] in broadest and hastiest résumé, and this by way of justification of the length to which this chapter has been drawn out, the influence of american gold and silver makes itself perceptible in . for forty years a level and equal advance in each of the precious metals and in prices records itself, then the relative and absolute production of silver increases enormously over that of gold, and the ratio is disturbed. the inequality of the rate at which this change of ratio spreads to successive countries, and is adopted in their various mint regulations, is the bullionist's or exchanger's opportunity, and the disastrous effect of their activity results in the crisis of in france, and in england and germany. properly speaking there has been no subsequent crisis in european history fitly comparable with the latter of these. if at all, there is only one comparison possible, and that is the currency situation in which the monetary world is at this moment, or which has come upon it since --a period of bullion inflation in which silver has, finally as yet, outweighed gold, to the violent disturbance of the ratio. but, as will be seen, the other conditions of the comparison are not reducible to, or expressible in, similar terms, and so far the legitimate deduction fails. none the less, the currency history of europe during the sixteenth and seventeenth centuries has a vital didactic importance. footnotes: [footnote : the only accounts accessible are in cabrera (see philippson's "estimate of the revenues of spain," in his _henrich iv. and philipp iii._, vol. ii. p. ), and relate only to the years - . the amounts given are not the total yield of the american mines, which is out of the question, but the amount of metal brought yearly to spain by the silver fleet. the amounts (without distinction of the metals) were as follow:-- , , ducats. , , " , , " , , " , , " , , " , , " , , ducats. , , " , , pesos. , , ducats. , , " , , " ] [footnote : for further details of the troubles of - , see vicomte d'avenel, _histoire de la propriété, etc._, i. , .] [footnote : such is the statement of the proclamation itself. the difference between the ratios as there proclaimed and the ratios given in the table, pp. and , is presumably due to the calculation being made on the mark of pure metal. for the character of these figures of ratios see the preface.] [footnote : see hirsch, i. .] [footnote : "the second (cause for the decay of the trade of spain) is the residence of many genoa merchants amongst them, who are found in good numbers to abide in every good city, especially on the sea coasts, whose skill and acuteness in trade far surpassing the native spaniards and portuguese, and who, by means of their wealth and continual practice of exchanges, are found to devour that bread which the inhabitants might otherwise be sufficiently fed with; and by reason that the king of spain is ever engaged to their commonwealth for great and vast sums at interest, he is their debtor, not only for their moneys, but also for their favour, which by many immunities throughout his kingdom he is found continually to requite them, and amongst the rest it is observed that there is no genoa merchant resident in spain, or any part, but has a particular licence to transport the _rials_ and _plate_ of this kingdom to a certain round sum yearly, which they seldom use really to do, but sell the same to other nations that are constrained to make their returns in plate for want of other more beneficial commodities, which, for the certain profit it is found ever to yield in other countries, is often preferred before all the other commodities of the kingdom."--_lewis robert's map of commerce_, p. .] [footnote : by the action of bimetallic law is meant any action of bad money on good--of worn money on new--of higher rated (or lower valuable) money on lower rated (or higher valuable) money. it does not at all matter, especially in cases of debasement, whether there are two metals in the process or only one or even three. if a currency is silver, and part of it is debased and part left good there is bimetallic action, and the good disappears. of course, the case is argumentatively and for deduction's sake much clearer if a currency is truly bimetallic in the ordinary sense.] chapter iii from the end of the first cycle of american influences to the present day, - up to the close of the eighteenth century the production of silver shows a remarkable steadiness and uniformity--the decrease on the yield of the potosi mines being compensated by the increased output of mexican silver. in the condition of the output of gold, however, there is a perceptible alteration, due to the increasing imports of that metal from brazil. the change in the relative production of the two metals appears from the table on p. . the effect on the ratio of this increased relative and absolute amount of gold was, however, considerably diminished by the increasing favour with which gold came to be regarded for currency purposes, from the end of the seventeenth century onwards. in general terms this process or tendency in favour of gold continued through the first sixty years of the eighteenth century, at which time the proportion of gold to the production of the two metals had risen as high as per cent., whereas in it had only formed . per cent. of the total. [sidenote: production of the precious metals, - ] from , however, such relative preponderance of gold was not maintained. it gradually sank back until, by the beginning of the present century, it had come to form only a little over per cent. of the total. from to a recovery took place, but it was not until the californian gold discoveries that the second great disturbance in the relative production of gold and silver took place; such a disturbance, i.e., as can be fitly compared with that which the sixteenth century witnessed. +-----------+--------------+---------------+-----------+--------------+ | | annual | annual |percentage | percentage | | period. | production | production |of gold to | of silver to | | | of gold. | of silver. | total. | total. | +-----------+--------------+---------------+-----------+--------------+ | - | £ , , | £ , , | . | . | | - | , , | , , | . | . | | - | , , | , , | . | . | | - | , , | , , | . | . | | - | , , | , , | . | . | | - | , , | , , | . | . | | - | , , | , , | . | . | | - | , , | , , | . | . | | - | , , | , , | . | . | | - | , | , , | . | . | | - | , , | , , | . | . | | - | , , | , , | . | . | | - | , , | , , | . | . | | - | , , | , , | . | . | | - | , , | , , | . | . | | - | , , | , , | . | . | | - | , , | , , | . | . | | | , , | , , | . | . | | | , , | , , | . | . | | | , , | , , | . | . | | | , , | , , | . | . | | | , , | , , | . | . | | | , , | , , | . | . | | | , , | , , | . | . | | | , , | , , | . | . | | | , , | , , | . | . | | | , , | , , | . | . | | | , , | , , | . | . | | | , , | , , | . | . | | | , , | , , | . | . | | | , , | , , | . | . | | | , , | , , | . | . | | | , , | , , | . | . | | | , , | , , | . | . | | | , , | , , | . | . [d] | +-----------+--------------+---------------+-----------+--------------+ [footnote d: the figures for the last three years are taken from the report of the hon. r.e. preston, director of the united states mint, (_report on the production of the precious metals_, pp. - ). see _ibid_. for a most carefully compiled table of the production of the precious metals from to , differing from the above in material details.] as far as this _relative_ production is concerned, the period, - , is one of gradual and not abnormal variation, neither small nor inconsiderable in effect, but certainly not revolution-working, as had been the case in the sixteenth century with american silver, and as was to be in the nineteenth century with californian and australian gold, and in our own days with american silver for the second time. with regard to the _absolute_ production--gold shows a rise up to , then a steady decline to , followed by a second rise up to . in the case of silver the decline in the absolute amount was steady from to , then ensued a steady and strong rise to , followed by an abrupt drop in the second decade of the present century, and then by a strong and steady recovery, commencing from and continuing until the present. [sidenote: wide effect of mint laws] the larger question of the relative distribution of this mass of precious metals depends for its determination upon a full understanding of the law of the various mints. speaking in large, during the eighteenth century the mint ratio was in favour of silver in france, and her currency was almost entirely silver throughout the century; conversely the mints favoured gold in england and spain, and gold was almost the only constituent of the currency of either country for the greater part of the century. there can be little doubt that these simple facts had a great influence in actually determining the great currency legislation which closed the century and finally decided england in favour of gold, and france and the united states in favour of a bimetallism strongly favouring silver. the statement of the ratio is as follows:-- south-west germany. - . netherlands. . england. . . . france. . commercial statement of the ratio (from - , from the hamburg exchange ratio; from onwards, from the london bullion brokers' ratio). +----------+---------+ | - | . | | - | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | - | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | - | . | | | . | | | . | | - | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | - | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | - | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | - | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | | . | | - | . | | | . | | | . | | | . | +----------+---------+ [sidenote: statement of the ratio, - ] +---------+------------+--------++---------+------------+--------+ | | price of | || | price of | | | year. |silver pence| ratio. || year. |silver pence| ratio. | | | per oz. | || | per oz. | | +---------+------------+--------++---------+------------+--------+ | | - / | . || | - / | . | | | - / | . || | - / | . | | | - / | . || | - / | . | | | | . || | - / | . | | | - / | . || | - / | . | | | - / | . || | - / | . | | - | - / | . || | - / | . | | | - / | . || | - / | . | | | - / | . || | - / | . | | | - / | . || | - / | . | | | - / | . || | - / | . | | | - / | . || | - / | . | | | - / | . || | - / | . | | | - / | . || | - / | . | | | - / | . || | - / | . | | | - / | . || | - / | . | | | - / | . || | - / | . | | | | . || | - / | . | | | - / | . || | - / | . | | | - / | . || | - / | . | | | - / | . || | - / | . | | | - / | . || | - / | . | | | - / | . || | - / | . | | | - / | . || | - / | . | | | - / | . || | - / | . | | | - / | . || | - / | . | | | - / | . || | - / | . | | | - / | . || | - / | . | | | - / | . || | - / | . | | | - / | . || | - / | . | +---------+------------+--------++---------+------------+--------+ | | | up to this table is derived from soetbeer, | | _edelmetall-produktion_, pp. - . | | from - i have calculated simply in accordance with | | soetbeer's method. | | | | the figures for - are taken from the united states mint | | report, , already referred to, p. . in the table there | | printed the director of the mint gives slightly different | | figures for several years from onwards. | +----------------------------------------------------------------+ as far as the conditions of production of the precious metals are concerned, and the connection between those conditions and the ratio, there is historic and understandable continuity between the period already passed in review and modern times. in the method of expressing that ratio, however, there is a remarkable difference. [sidenote: evolution of the modern system] with the close of the seventeenth century the advantage of the process of altering the denomination of the coinage, of diminishing the content and reducing the standard of fineness, began to be impugned on theoretic grounds, and in the course of the eighteenth century that process itself fell into disuse. since that time no mint or legislative change such as we have hitherto described was made on the expressed value or content of any european coinage. bearing in mind the twofold importance which was attached to that process of legislative guarding of the currency, this change must be regarded as of vital import. the legislator, from the middle of the fourteenth century, had attempted two things by this mechanism--( ) to follow the general rise of prices, and meet it by reducing the contents of the coins in such proportion as he thought fit; ( ) to prevent any disastrous outflow of the precious metals by altering the ratio. the control of the mint rates of metal-purchase and metal-coinage was, therefore, a matter of importance financially and politically to the nation, and economically to international commerce. in just such measure, therefore, was the entire ceasing of this state control of the mechanism of international exchange and currency a matter of almost incalculable significance in the history of the european monetary system. in the domain of finance it effected a revolution as signal as that produced in the relations of labour to capital by the disuse of the old labour laws. the ceasing of the artificial arbitrary mint rates made way for a naturally determined or _commercial_ ratio, and the regulation of the international flow of the precious metals was left to the oscillation of trade balances, and to the action of interest rates and discount. the change is one from a mediæval, state-bound, merely legislative system to the modern system, in which the flow of precious metals is determined by the perfectly natural and automatic action of international trade--is indeed the index and safety-valve of it, and of the whole present commercial world-circle. this was not merely a change of fact and practice, it was a revolution of theory. for before the old state belief in the necessity of safeguarding the supply of precious metals at any cost and consideration could go by the board, the whole mercantile theory must have lost its force in men's minds. in the domain of theory the transition from the mercantile to the modern system was gradual, through the various intermediate steps of physiocratic and smithian economics, and the complete abandonment of that system for our own can only be put very late, if indeed its period can at all yet be written, for modern protectionist ideas are only a lusty survival of it. in the domain of financial practice, however, it--the mercantile system--ceased from the moment that the governments of europe left their mint rates stationary, and gave the flow of the precious metals and the declaration of the ratio to the free unhampered natural action of international trade. the steps of the completed process can hardly be detailed, for there was much fear attending it, and the various governments frequently retraced their steps in uncertainty. the earliest direct enactment was made by england. by the act of charles ii., chap. , sect. ( ), the statutes forbidding the exportation of bullion were removed at one blow of astounding boldness. "forasmuch," says this act, "as several considerable and advantageous trades cannot be conveniently driven and carried on without the species of money or bullion, _and that it is found by experience that they are carried in greatest abundance (as to a common market) to such places as give free liberty for exporting the same_, and the better to keep in and increase the current coin of this kingdom, be it enacted that from and after the st day of august it shall and may be lawful to and for any person or persons whatsoever to export out of any port of england and wales in which there is a customer or collector, or out of the town of berwick, all sorts of foreign coin or bullion of gold or silver, first making an entry thereof in such customhouse respectively, without paying any duty, custom, poundage, or fee for the same, any law, statute, or usage to the contrary notwithstanding." [sidenote: free trade in the precious metals] standing so early and so almost completely alone as it does, this act evinces an unexampled prescience and boldness. it doubtless reflects the commercial traditions of holland, but that it should have been at a single stroke transferred to england at a time when she was so economically different and distant from holland, needs make us pause in admiration. the only parallel to it, if any, would arise if france should suddenly, and by a single enactment, adopt to the full the free trade policy of england. as a matter of fact this act of proved itself for a long time, and through many oscillations, impossible of execution, and far into the eighteenth century the british government meddled, by legislation and proclamation, with the export of the precious metals, and with the tariff of the coins, as will be seen immediately. it was not till that a similar act was passed for ireland. in the lords of the treasury were by statute authorised to grant licences for the exportation of silver bullion without any such certificate or document whatsoever as had been required by the statute of and wm. iii. c. , sect. . it was almost a century after this action of england that france followed in the same path. by a proclamation of th october , permission was given to the free commerce in precious metals and in foreign monies. but in the case of france, as in that of england, the enactment was not immediately nor fully realisable. the exportation of the national specie was still forbidden, and more than once the state found itself obliged to return to the question of the tariffing of its coinage. it is this vacillation--a vacillation, however, which must in every instance be attributed to sheer state necessity--which makes it impossible to trace in detail and point by point the fall of so much of the mercantile system as concerned the regulating of international movements of metals. the _practice_ of the commercial world was doubtless in advance of the legislator's standpoint, as indicated by such detached references, and was effectual in completing the revolution silently and under the surface, whether by the aid or in spite of laws and proclamations. the same had been the case, e.g., with the old usury laws. when effected there are two highly important results which stand as the outcome of this change in the theory of international commerce. . the perception of a right theory of international balances opened the way to the separation of finance or currency phenomena pure and simple, and so prepared the ground for a scientific conception and treatment of them. in one direction this treatment resulted in the evolution of a theory and practice of a monometallic system--one, i.e., in which a single metal was made the legal tender, and a second or third metal bound to it in a hard-and-fast, subordinate relationship, so that they could not by their oscillations injuriously affect the tenderable metal. in another direction the same scientific conception and treatment resulted in the evolution (and after a time the practice) of a bimetallic theory. modern currency history hinges on the antagonism of these two systems. [sidenote: function of discounts in modern system] this statement of the case will serve to show the enormous difference between nineteenth-century currency situations and problems and those of mediæval and seventeenth-century europe. to-day the point at issue is between definitely and scientifically conceived rival theories, and the _practical_ difficulty before the world is how to provide, not so much a permanent ratio, as a permanent rate of international settlement between countries using different monetary systems, between silver-using and gold-using countries. in the seventeenth century there was no conception of theory at all, and the practical difficulty was how to frustrate the operations of the bullionist and arbitragist and politicians, and the depletion of national treasure due to their activity, and based on a difference of ratio prevailing in different countries. . the second practical outcome of the revolution was the development of the modern system of control of the flow of gold balances, viz. by means of the bank rate and the arbitrage transactions depending thereon, and on interest and discount rates generally. the modern theory of international trade does not say that between two particular countries, or at any one particular point of time there is an equivalence of exchange, but that between a circle of commercially interconnected countries, and over a certain cycle of time or operations, there is an equivalence of exchange of goods and services. movements of currency in the most elementary form assist the process, as far as immediate settlements are concerned; bills of exchange assist it when there is need of deferred payments, as, for instance, when a country imports steadily all the year round, but has only one export time, say after harvest; and, finally, bank and discount rates assist the process by providing currency media at times and places which would otherwise be unable to attract a supply. over the whole circle of completed operations there is equilibrium of exchange, and the machinery by which that equilibrium is accomplished is currency in the widest sense. the index or indicator and safety-valve of the whole is the rate of interest. on these bank rates are based the operations of the modern bullion dealers or arbitragists, which serve to equalise or economise the distribution of the precious metals all over the world. it will be seen at a glance, therefore, that they fulfil, in an automatic and perfectly natural manner, all that was vainly attempted to be accomplished by the repressive savage action of the state, and the interfering unscientific handling of the mint and coinage rates. it is in this feature that the great distinction between the modern and the seventeenth-century world consists. such a difference can only be based upon, and have arisen from, a true theory of international trade. but the process of development which alone made it possible--the development of modern banking, the invention of paper currency media, the breaking down of international trade restrictions, all the mechanical and scientific inventions which have resulted in the binding of the world together in one whole as far as commerce is concerned,--all this would comprise in brief the essential features of the complete commercial development of two centuries or more, and how far they are related as cause or effect it would be hard to say. in this secondary period, therefore, the separate history of each individual state gradually loses its distinct or isolated importance, as far as mere mint edicts are concerned. as a consequence the bimetallic action which we have hitherto sought in the history of each individual currency must now increasingly be sought in the wider field of the world currency, that congeries or completed whole of currency of which each national system now forms only a part, and that not an independent part. france. in this third period the first change which france made in her silver monies was in , when she for a time coined -sol. pieces of a quality below that of the _écus blancs_ by more than a fifth. a great outcry was made by the mint officers and mercantile community against this money as implying a debasement. in there was a noticeable quantity of spanish _pistoles_ and large _écus d'or_ in circulation, and as a remedy it was ordered that they should be recoined into _louis d'or_ and _louis d'argent,_ the king offering to forego the seignorage as an inducement to bring them to the mint. in , however, the louis d'or itself was raised from livres to livres sols., and the ratio thus changed to - / . this being found greatly in excess, in the following year it was lowered to livres sols. (a ratio of - / ). in both silver and gold were again raised, the _louis d'or_ to livres sols. and the _louis d'argent_ to livres sols., but almost immediately a general recoinage was resolved upon. in this great operation, effected towards the close of , the weight and standard of the previous coinage was exactly retained, but the louis d'or was issued at livres sols. and the louis d'argent at livres sols. only two years later again the standard had to be altered, and the value of somewhat raised. it will give some slight idea of the sapping of the coinage that the pieces which in were minted at livres sols. were, in , called in at a valuation of livres sols. the new species of were issued at livres and livres sols. respectively. [sidenote: france: the reform of ] ten years later a third recoinage was ordered, the louis d'or being issued at livres, and the louis d'argent at livres. by these species had sunk in equivalence to livres sols. and livres sols. respectively. in that same year, however, their issue value was raised to livres and livres. this extraordinary and arbitrary action was greatly to the detriment of french commerce, and the idea was entertained of gradually reinducing the standard of livres and livres sols. this was ordered by proclamation of th september , which was to continue in force till . in the latter year a reformation of the coinage was again undertaken, the reformed species rising to livres and livres, and the worn species remaining at livres and livres. from this latter date up to the operations of the financier john law wrought great disasters in the monies. at the time of the erection of the bank, nd may , there were four species of _louis d'or_ and three of _louis d'argent_. by the former had grown to forty in number and the latter to ten. (for the disorders of the period of john law, see the account of french monetary system, appendix vi.) it was to remedy this disorder that the great edict of was enacted. this edict, which formed the basis of the french currency system almost up to the days of the revolution, prescribed the minting of louis d'or at a tale of to the mark, and issued at a value of livres; and of silver écus at - / to the mark and issued at livres--divisional coins in proportion. the legal ratio was therefore - / . all foreign coins and the ancient species of gold and silver were decried, and ordered to be brought in for reminting. all the prohibitive regulations of an old régime against cutting and export, etc., were re-enacted with severest penalties. but as the rate at which the mint was ordered to take in the old coinage did not represent the commercial value at the moment, the old coins were not brought in, and up to as late as the recoinage had not been accomplished, although the mint prices had been at different times advanced on the whole a matter of per cent. or more. in the want of currency had become so great that the king sent his plate to the mint, and numbers of private individuals followed his example, receiving in reimbursement part payment at the rate of livres sols. den. for the mark of fine gold, and of livres sols. den. for the mark of fine silver. this latter tariff underwent no change until , when, under the pretext of the changes which foreign coinage tariffs had undergone, those terms were fixed respectively at livres and livres sols. in this résumé the mention of billon money has been generally avoided, as unduly complicating the subject. but in the legislative action of france in the eighteenth century there is one act which necessitates a momentary departure from this standpoint. in the government of the united provinces diminished the value of their _sols._ by one-half. the french government fearing that this diminution would lead to an immense influx of such sols. decided to follow suit. by a decree of august st of the same year, , it was ordered that the _douzains_ and pieces of thirty deniers should have course only for eighteen deniers. the important point to notice in connection with this is that, in order to mitigate the effect of this reduction, the same decree limited the tender of such billon money. it was ordered that in payments up to livres not more than livres should be tenderable in billon, and for payments of more than livres not more than / of the total. the restriction was ineffectual in preventing either the import of foreign billon specie or the operations of billonage or arbitrage, based on the differentiated value of the various kinds of billon circulating. this is quite evident from the preamble of the edict of the following october, , which attempted the calling in of the -denier pieces, in order to put a stop to the process. [sidenote: france: the reform of ] such a failure is quite in keeping with all previous experience as recorded in these pages, and deserves no special reference. the point to note is rather the gradual evolution and adoption of the idea of limiting the tender of the lower species, so as to contract their action on the main species of the currency. this idea forms the complement of the idea of an agio, involved in the issue of fractional coins on a lower standard or basis than that of the greater specie. the one idea was--in long, over-long, periods i.e.--impracticable without the other; but together, when finally evolved, thoroughly seized and put in practice, they formed the main basis of the truest modern currency system. to return to the pure gold and silver species. the basis of remained at law unaltered until . the edict of the th october of that year commanded a recoinage; no change was made in the silver coinage, which remained according to the tariff of may , namely, livres sols. den. to the mark fine. by the alteration of the tariff of gold, however, to livres sols. to the mark fine, the ratio of - / , which had nominally prevailed since , was altered to the memorable - / . the reason was explicitly stated to be the increase in the value of gold during several preceding years--an increase which had banished or detained gold from the french mint and even from france. writing in , the minister, calonne, who proposed and executed the recoinage in that year, spoke thus:-- "in the legal ratio was fixed in france at marks oz. of silver, to a mark of gold, and that which proves with how much sagacity this point was seized is the fact that during a long course of years france retained in her circulating medium a sufficiently large proportion of each metal. nevertheless, her gold gradually became less common, and for some years this scarcity has rapidly increased, and this precisely because its legal value has always remained the same, while its metallic value has increased from year to year." he estimated the amount of livres in _louis d'or_ existing in the country at the time of the recoinage, , as million livres, which amounted to only a half of the total coinage ( million livres) of the period - . what seems to have determined calonne to adopt - / was the fact that spain had the legal ratio of , and that there was a probability that, in future, gold would rise in value. as for the market price, he admits that it was only . - . in . the recoinage, therefore, brought a profit of , , livres to the king's purse, and a profit of , , livres to the holders of the old _louis d'or_. [sidenote: france: calonne's policy in ] his policy was severely criticised in a report made in to the national assembly, which proposed a silver standard, with an authorised circulation of gold coins at the ratio of - / and the abolition of seigniorage. it is well known that this was nearer to the market rate. calonne's ratio, therefore, must be regarded as arbitrary and designing. practically, the latter recommendation of the committee's paper of had been conceded in the decree of th october , as the seigniorage was by it allowed to be no more than the net cost of reminting. by this celebrated edict of calonne's, which also enacted a recoinage, the right of seigniorage was practically finally relinquished for france. fixity was given to silver as the principal money, and a definite ratio was established at which gold was to circulate by its side. in these, its chief points or characteristics, it formed the exact model for the later act of republican france, which is ignorantly looked upon as having created the bimetallic system. the act of germinal an xi. did but re-enact and perpetuate the edict of . it is important to reaffirm and emphasise this point, as quite wild and blind estimates have been formed of the later action of republican france. in merest fact, that later action created no new order, it instituted no new idea, it did not even promulgate its own theory. [sidenote: france: currency legislation at revolution] republican france began her reform of the currency in a very temporary and opportunist manner by issuing a mass of inferior monies of and sous pieces to form the basis of the assignats, and to replace the gold and silver which had almost entirely disappeared from circulation. in the decree of vendémière an ii. ( th october ), however, the question of standard was approached, and decided in a remarkable manner. the monetary unit was decreed to consist of the hundredth part of a kilogram, named _grave_, represented ( ) by a piece of silver / fine and weighing grms., ( ) by a piece of gold of the same weight and standard, to be current at times the value of the silver piece. this decree remained a dead letter, and two years later the _franc_ was definitively adopted as the base of the french system. as determined by the two laws of thermidor an iii. ( th august ), that system was based upon the silver franc (weighing grms. / fine). a gold coinage was ordained, of the same fineness, in a piece of grms. weight, but the ratio of value of the gold to the unit franc was not fixed. this was exactly the monetary system which mirabeau had counselled in his memoirs to the assembly in . the silver _ -franc_ pieces prescribed under this system found acceptance, the bronze pieces were refused and had to be withdrawn, and as to the gold piece, its issue was not even attempted. two years later the "directoire" pronounced in favour of maintaining the -grm. piece of gold, but demanded the fixation of its value, proposing a ratio of : . in opposition to this scheme, prieur submitted to the "council of the five hundred" a project adopting the silver and gold coinage, as already determined as above, but leaving the value of the gold piece to fluctuate according to the market, its value being declared twice annually by public announcement. after being materially altered in the "council of the five hundred," this scheme was definitively rejected by the "council of senators," and for several years the question of the monetary system of the republic was allowed to slumber. when, in the year x., the consideration of the subject was resumed, it was at the instigation of the consuls. at their desire the minister of finance, gaudin, laid before the council of state a scheme in which he proposed the issue of and -franc gold pieces, of a value based on the ratio enunciated in the edict of , namely, - / . he was, at the same time, careful to explain that silver remained the basis of the currency, and that the gold money could be reissued if a different market compelled a change in the ratio. in his report to the consuls, gaudin admits that the commercial ratio had for a long time been under . the decisive point which led him to maintain the ratio established in was, that to change the _status quo_ by the adoption of as a ratio would occasion great loss to the holder of gold coins, and that there was no sufficient reason for so great a change. the financial committee of the council of state at first rejected the scheme, preferring that of prieur, already described, but on an inquest, ordered by the first consul, who insisted on pressing the matter to a conclusion, m. gaudin carried his propositions through the council of state, but with the important difference that the reference to any future change in the ratio of gold to the basis of silver was tacitly dropped. these propositions became the foundation of the law of - germinal an xi. ( th march ), on which the monetary system of republican france was finally built. the _exposé des motifs_ of this law speaks of the gold coins in these words:-- "the gold pieces up to the present in circulation are the pieces of and livres tournois. article of this law substitutes in their place pieces of and francs. the adoption of the decimal system necessitates this change, which brings all parts of the system into accord. it is on the same consideration that the standard is fixed at / , like that of silver." not a word is said as to the ratio, and much more stress is laid upon the suppression of billon money and on the abolition of seigniorage, as of greater importance and benefit to the nation's interests. by this law of germinal xi. the monetary unit of the french system was declared to be the silver franc, weighing grms. of / standard. by the side of this franc and its multiples, were to be issued gold pieces of and francs, valued on a basis ratio of - / to the silver. [sidenote: france: the reform of ] it will be seen at a glance from the course of this previous history that this law instituted no new principle, or theory, or system in french currency. the decimal system was adopted in place of the old system of livres tournois, seigniorage was abolished, and fixation of value given to the unit money, and billon money discontinued. but in matter of standard and system there was not even innovation. the system of republican france, as established by this law, was no more and no less bimetallic than in , or than in , or in the days of francis i. theories as such did not occupy the mind of the legislator, and of any conception of a bimetallic theory or system such as we have learned to know there is no trace. the first consul found at hand the two metals which had formed the currency of his country for centuries. the problem of their regulation was the same which had been faced by his predecessors for centuries, and he settled it in the same practical untheoretic way. it was only gradually that in its totality of coins the french monetary system was made to conform to the metric system thus established. the old gold coins of , , and livres were not suppressed until june , the actual extinction of billon money was only accomplished in , and the recoinage of the inferior monies in - . but such are mere matters of detail and apart from the subject. the experience of france under this new régime is, therefore, in no wise different _in kind_ from such experience as has been described for the preceding centuries. it is not until the broaching of a bimetallic theory as such, and until the expression of that theory, as a theory, in the formation of the latin union, that anything like a special significance attaches to the monetary system and experience of france in the nineteenth century, any more, e.g., than in the seventeenth. the main difference in the situation was not that france had changed her system, and that her experience was henceforth different and of different signification, but that england had changed hers, and that the brunt of the fluctuations of the precious metals about a fixed ratio was left to be borne by a smaller area. the influence and the instance is, therefore, more telling in degree, but in no way different in kind. the second idea which is commonly entertained with regard to the action of france during this later period, viz. that her action secured for the world at large a fixed and steady ratio, is equally--indeed, still more--fallacious. at no point of time during the present century has the actual market ratio, dependent on the commercial value of silver, corresponded with the french ratio of - / , and at no point of time has france been free from the disastrous influence of that want of correspondence between the legal and the commercial ratio. the opposite notion, which prevails and finds expression in the ephemeral bimetallic literature of to-day, is simply due to ignorance. from england has been withdrawn from this action of a bimetallic law, and the modern insular pamphleteer has before his eyes no sign of its workings in his own country. he therefore assumes an universality of such experience, and attributes it to the french legislative ratio. it is in no polemic spirit, but simply in the interest of science that this particular misapplication of history to the squaring of a theory is to be branded. the plainest facts of history are thereby absolutely misrepresented, and the assumption of cause and effect is so far from being true that the repose of the english currency history in the nineteenth century is to be attributed to the _absence_ of a bimetallic system; to its despite rather than its presence and influence. to instance only by france for the moment. [sidenote: france: course of the ratio] the course of the actual or market ratio has been already stated in the table (_supra_, pp. - ). in the graphic representation of this (_opposite_) the legal ratio of - / is represented by the fixed line _x.y._, the actual ratio by the fluctuating black line _z_. at no point do these lines coincide. after three years of fluctuations, - , now above and now below, the ratio sinks persistently below for seven years, - , touching the lowest point (a ratio of . ) in . for the succeeding five or six years, - , the ratio was as consistently above the legal rate, though with less violence and width of divergence. from the latter year, , up to , its course was undeviatingly below - / , then from - --the period, i.e., of the great gold outputs of australia and america--as undeviatingly above. from the last-named date until the close of the bimetallic system in france, and, indeed, up to our own days, the course of the commercial ratio has been again unbrokenly below the - / ratio, and, as is too well known, with an ever-increasing enormity of divergence. so much for the claim that the french law has dowered the world with a steady ratio. _secondly_, what has been the influence of this divergence of the commercial from the legal ratio upon france's store of precious metals? it has been exactly similar in effect and force with that wielded by similar trains of event and circumstance, in the monetary history of france during the four preceding centuries. the exact official figures of the import and export of gold and silver are not obtainable before , and in a continuous stream not before (separably for the two metals, that is to say).[ ] [sidenote: france: bimetallic experience, - ] from the latter date, however, the testimony of the figures is as explicit as it is forceful. from to , while the ratio remained continually below the legal - / , there was a profit on the import of silver, and a persistent and heavy import took place. in the (balance of the) silver imported amounted to a matter of millions sterling, in to - / millions, in to millions, in to over - / millions, in to nearly millions, in to nearly millions, in over millions, in to over - / millions, and in to nearly millions. there was not a single year that was not accompanied by this import, and over the whole twenty-two years the total of importations reached the enormous figure of, approximately, millions sterling. it must be clearly understood that this sum represents not the gross but the net importation or balance of imports over exports, and that the money passed into the currency of the country, taking its place as such and displacing gold _pari passu_. the movement of gold in the same time is represented by the red line in the accompanying diagram. within the limits of very considerable exceptions, the correspondence of its fluctuations with those of gold is clearly perceptible. the silver, on whose coinage a profit or premium was offered by the existing french law to individuals, could only be bought or paid for by the export of gold or services and goods. during these years, - , it was quite apparently by the latter method, namely, by remittance of goods, as on the whole period there is a slight gain of gold, nearly millions, contrary to what bimetallic law would have led to expect. the correspondence, however--a simultaneity--of the two movements, of import of silver and export of gold, is strongly marked in the years - and - , and the failure of correspondence of the totals is to be explained by the statistics of french foreign trade balances during the years named. with the year , the decisive change in the ratio sets in with the new gold influx. the ratio rises above the . of the french law, and the profit on the importation and coining of silver vanishes. its place is taken by a corresponding profit on the importation and coinage of gold. the fourteen years during which the ratio remained above the legal - / witnessed the importation into france of a total net (or balance) of gold to the amount of millions sterling, and a total net or balance of exportation of silver of - / millions sterling. the coincidence of actual fluctuation will best be seen by the graphic representation of it in the table. with the final and, so far as the nineteenth century is concerned, the fatal change of the commercial ratio sets in. it sinks persistently and increasingly below the legal - / , in face and spite of the united mintings of the latin union, and at once the premium on the importation and coinage of gold changes into one on silver. from to , one year before the abandonment of the coinage of the -franc piece and the consequent relinquishment by france of the bimetallic system, her net imports of silver amounted to millions sterling. as far as these figures of import and export are concerned, they show only the _final_ results of the action of bimetallic law. the metal on whose importation and minting a premium was obtainable _was_ imported, and in large quantities. that is the single fact standing out in large. the reciprocal fact--of a corresponding export of the metal over whose head the premium offered--does not emerge so distinctly, simply by reason of the complication of the subject of exports of metals with the wider general movement of trade balances. it also is, however, distinctly perceptible and demonstrable. but this is to speak only in large and of final results. what the intermediate course of events--of see-saw and flux, was, can only be adequately grasped from the records of the mintings, conjoined with the records of net import or export of the two metals. table of the net imports or exports of gold in france under the bimetallic law, - . +------+------------+------------++------+-------------+-------------+ | | net | net || | net | net | | year.| import | export || year.| import | export | | | (francs). | (francs). || | (francs). | (francs). | +------+------------+------------++------+-------------+-------------+ | | , , | ... || | , , | ... | | | ... | , , || | , , | ... | | | , , | ... || | , , | ... | | | , , | ... || | , , | ... | | | , , | ... || | , , | ... | | | ... | , , || | , , | ... | | | , , | ... || | , , | ... | | | ... | , , || | , , | ... | | | ... | , , || | , , | ... | | | ... | , , || | ... | , , | | | ... | , , || | , , | ... | | | ... | , , || | , , | ... | | | , , | ... || | , , | ... | | | , , | ... || | , , | ... | | | ... | , , || | , , | ... | | | ... | , , || | , , | ... | | | ... | , , || | , , | ... | | | ... | , , || | , , | ... | | | ... | , , || | , , | ... | | | ... | , , || | ... | , , | | | ... | , , || | ... | , , | | | , , | ... || | ... | , , | | | , , | ... || | , , | ... | | | , , | ... || | , , | ... | | | , , | ... || | ... | ... | +------+------------+------------++------+-------------+-------------+ table of the movement of silver during the same period. +------+-------------+-----------++------+-------------+-------------+ | | net | net || | net | net | | year.| import | export || year.| import | export | | | (francs). | (francs). || | (francs). | (francs). | +------+-------------+-----------++------+-------------+-------------+ | | , , | ... || | ... | , , | | | , , | ... || | ... | , , | | | , , | ... || | ... | , , | | | , , | ... || | ... | , , | | | , , | ... || | ... | , , | | | , , | ... || | ... | , , | | | , , | ... || | ... | , , | | | , , | ... || | ... | , , | | | , , | ... || | ... | , , | | | , , | ... || | ... | , , | | | , , | ... || | ... | , , | | | , , | ... || | ... | , , | | | , , | ... || | ... | , , | | | , , | ... || | , , | ... | | | , , | ... || | , , | ... | | | , , | ... || | , , | ... | | | , , | ... || | , , | ... | | | , , | ... || | , , | ... | | | , , | ... || | , , | ... | | | , , | ... || | , , | ... | | | , , | ... || | , , | ... | | | , , | ... || | , , | ... | | | , , | ... || | , , | ... | | | , , | ... || | , , | ... | | | , , | ... || | | | +------+-------------+-----------++------+-------------+-------------+ table of the coinage of gold in france, - , during the bimetallic rÉgime. +------+-------------+-------------++------+-------------+-------------+ | | | || | | | | year.| gold | silver || year.| gold | silver | | | (francs). | (francs). || | (francs). | (francs). | +------+-------------+-------------++------+-------------+-------------+ | | , , | , , || | , , | , , | | | , , | , , || | , , | , , | | | , , | , , || | , , | , , | | | , , | , , || | , , | , , | | | , , | , , || | , , | , , | | | , , | , , || | , , | , , | | | , , | , , || | , , | , , | +------+-------------+-------------++------+-------------+-------------+ table of the coinage of gold in france, - , during the bimetallic rÉgime--_continued_. +------+-------------+-------------++------+-------------+-------------+ | | | || | | | | year.| gold | silver || year.| gold | silver | | | (francs). | (francs). || | (francs). | (francs). | +------+-------------+-------------++------+-------------+-------------+ | | , , | , , || | , , | , , | | | , , | , , || | , , | , , | | | , , | , , || | , , | , , | | | , , | , , || | , , | , , | | | , | , , || | , , | , , | | | , , | , , || | , , | , , | | | , | , , || | , , | , , | | | , , | , , || | , , | , , | | | , , | , , || | , , | , , | | | , | , , || | , , | , , | | | , , | , , || | , , | , , | | | , , | , , || | , , | , , | | | , , | , , || | , , | , , | | | , , | , , || | , , | , , | | | , , | , , || | , , | , , | | | , , | , , || | , , | , , | | | , , | , , || | , , | , | | | , , | , , || | , , | , , | | | , , | , , || | , , | , , | | | , , | , , || | , , | , , | | | , , | , , || | , , | , , | | | , , | , , || | , , | , , | | | , , | , , || | , , | , , | | | , , | , , || | , , | , , | | | , , | , , || | , , | , , | | | , , | , , || | -- | , , | | | , , | , , || | -- | , , | | | , , | , , || | , , | , , | | | , | , , || | , , | , , | | | , , | , , || | | | +------+-------------+-------------++------+-------------+-------------+ during the years - , when the ratio remained below the legal - / and there was a profit on the import of silver, the total silver coinage of the french mint amounted to £ , , , while that of gold reached only £ , , . in the succeeding period, - , when the ratio changed and remained for fifteen or sixteen years in favour of gold, the total gold coinage reached £ , , , while the total silver coinage was scarcely more than - / millions (£ , , ). at the beginning of this second period, , the bank of france held in its reserves approximately only - / millions sterling of gold, whereas its silver amounted to more than millions. at the close of the period indicated, , the bank was holding millions sterling of gold against nearly - / millions of silver. in the former case the proportion of silver formed per cent. of the total, in the latter only per cent. table of the reserves of the bank of france, - . +------+--------+--------+-----------++------+--------+--------+-----------+ | | gold | silver | percent || | gold | silver | percent | | year.|(million|(million| of silver || year.|(million|(million| of silver | | |francs).|francs).| to total. || |francs).|francs).| to total. | +------+--------+--------+-----------++------+--------+--------+-----------+ | | | | || | | | | | | | | || | | | | | | | | || | | | | | | | | || | | | | | | | | || | | | | | | | | || | | | | | | | | || | | | | | | | | || | | | | | | | | || | | | | | | | | || | | | | | | | | || | | | | | | | | || | | | | | | | | || | | | - / | +------+--------+--------+-----------++------+--------+--------+-----------+ the statistics of the latin union, up to the suspension of the bimetallic system will be separately dealt with. speaking only of the experience of france during these years of bimetallic régime, the ebbing and flowing experience which has throughout been instanced as the chief characteristic of such régime is most strongly marked. the legal ratio did not give the market ratio, and so far was it from giving france a stable currency, it was the one thing which unsettled it and made a stable currency impossible. the _exposé des motifs_ of the law of , which will be referred to in another connection below, puts the matter with official brevity. "the variations of the commercial from legal - / ratio remained normal during the years - . all the same they sufficed to modify greatly the composition of the french circulation. after the predominance of silver, which became marked in , the ratio from - introduced gold in a large proportion, and measures had to be taken to retain in france the smaller silver coinage. our silver _monnaie d'appoint_ of . fine was created for this purpose." to regard this question from a theoretic and international point of view, to the exclusion of any regard for the separate national interests of france, is a sheer absurdity. it mattered little or nothing to france that by unloading the stores of silver she happened to possess at the time of the gold discoveries of the fifties she helped to steady the ratio for the world at large. it did however matter, and very much, that this process of exchange from the one metal to the other was attended with public loss, balanced only by illicit private gain, and with a disturbance of trade in every town of france through the disappearance of the smaller silver specie. whether or not france or any other country is called upon to sacrifice herself thus--not once but every time the ratio fluctuates from below to above the legal ratio or _vice versa_--for the sake of an ideal, bimetallic, regulating, function, let common sense decide. the french monetary commission of speaks thus of the situation-- "it is well known by all that this ratio [of ] by the simple reason of its being fixed could not remain correct. there was quickly a premium on gold, and silver remained almost alone in circulation until near . the discovery of the mines of california and australia suddenly changed this situation by throwing into the european market a very considerable quantity of gold. by the side of this force, which tended to create a divergence from the legal ratio by lowering gold, there was another which occasioned a rise of silver. under the influence of various circumstances, too long to enumerate, the needs of the extreme east had grown in unusual proportions, and as silver is alone in favour there, it was exported in enormous masses. there was a premium on silver to the extent of per mille, and it disappeared almost completely from circulation, yielding place to gold. "preoccupied by the situation the government charged a commission to study the measures to be taken. its labours are summed up in the report of m. de bosredon ( ). after examining the system tending to preserve silver money intact by lowering the value of gold money, and conversely the system tending to the adoption of the gold standard by reducing the silver money to the state of billon, the commission did not decide between them. it confined itself, in fact, to counselling the government to a transitory step--the raising of the export duties on silver.... the exportation of silver, therefore, continued; and if the disappearance of -franc pieces was not remarked, because they were replaced by gold, it was not the same with the scarcity of pieces of a smaller value employed in petty payments. "being informed of the obstruction to retail commerce by complaints carried before the senate, and instructed by the example of switzerland, which had in reduced the standard of its divisional money, the minister of finance appointed a commission, , to study the remedy to be applied to the evil. this commission counselled the reduction of the standard of pieces of less than -francs to . fine. it did this in complete knowledge of the cause, fully recognising that in so doing the monetary unity of silver, characteristic of our system, would be thereby broken, at anyrate for its circulating form; for while the franc no longer existed in law, the -franc was disappearing in fact, so that the change was equivalent to the establishment of a gold standard." this advice of the commission was however, by the law of , applied only to pieces of or centimes. the next step in the process was the formation of the latin union in the year following. the above-quoted commission speaks of the intentional aspect of this union in these words: "this convention places in the front rank gold money, and reduces the pieces of silver of francs and less to the _rôle_ of token money. it therefore definitely determines [_consacre_] the ascendency of the gold francs, and solves practical difficulties arising from the double standard." this was written in , less than two years after the formation of the latin union. it is not the view which prevails among bimetallists to-day as to the purpose and intentional bearing of that union; but it is the historic truth none the less, and it was only the complete revolution in the conditions of production of the precious metals which made itself felt from , which has given the latin union the aspect of a theoretic concert for the maintenance of, rather than as a defence against, a bimetallic system. if silver had not fallen in the latin union would still be the bulwark of defence of bimetallic france against the action of bimetallic law. [sidenote: the latin union] the formation of the latin union, therefore, was a measure of defence against the action of the bimetallic system in those countries which had adopted the monetary system of france, and lay exposed to all its disastrous fluctuations. the first and moving factor in its formation was belgium. so far as related to silver, belgium had adopted the french system by her monetary law of th june . by the first article of this law the monetary unit was fixed at the silver franc of grms. weight, and fineness. for years belgium endeavoured to maintain this law in its integrity. public opinion, however, demanded the admission of french gold at its normal value, and this was conceded and decreed by the law of th june . from that moment she felt all the oscillating movement which france was experiencing. the declaration of article . of the law of became a dead letter; the gold standard took the place of the silver standard, and equally with france, italy, and switzerland, belgium had to witness the disappearance of her small silver coins. to the previous abundance there succeeded a penury of small change, although the drain was not so immediately felt because of large reserve of silver -franc pieces (amounting to millions of francs) held by the national bank. in slightly over a year, st june to th november , this stock of , , francs had sunk to , , francs, and in alarm the national bank ceased, on the latter date, all payments in -franc pieces. concurrently with this drain of the -franc pieces, the reserve of silver coins of less value began to be seriously affected by the sapping influence. during the two following years, - , there was little commerce in the precious metals owing to the american war. but in the movement of drain recommenced. the reserve of -franc pieces and the stock of divisional coins of lower denomination fell rapidly, to so low a point indeed as to become quite insufficient for the ordinary trade and small change demanded of the country. after a slight recovery in september , the same downward course continued. the smaller coins, of -franc piece, and centimes became so scarce that the bank could not supply the demands of manufacturers for the payment of wages, and the government had to have resort to the coinage of nickel for small divisional money. the simultaneous experience of switzerland and italy is not so capable of statement and exact expression. but it was similar in kind. previous to a net balance of over millions sterling (consisting almost if not entirely of silver) had left italy, and it was known to be the danger of entirely losing her silver which led italy to the suspension of cash payments on th april , and to her acquiescence in the latin union. it was not, however, italy, but belgium who first raised the note of alarm. conscious that her monetary community with france made any independent efforts quite futile, the belgium government proposed to france a monetary union for all the countries which had adopted the franc as the basis of their currency. taking up the proposition france invited italy and switzerland, together with belgium, to send delegates to a monetary conference at paris. at this conference belgium proposed the adoption of the single gold standard--the silver pieces including the -franc pieces to be lowered by an agio, and made divisional money. italy and switzerland were of the same opinion, but their scheme failed before the opposition of france, and the final outcome of the conference was the establishment of the convention of rd december . this convention, which instituted the latin union, came into force on the th of august ; and under it one slight change was made in the internal currency system of france. the hitherto full-valued silver coinage from francs downwards was changed into token money (being reduced to . fine), the -franc piece remaining as full legal tender. the union was to last for fifteen years. it established an identity in the monetary system of the four powers, as far as weight and standard were concerned, and prescribed free coinage for any individuals bringing metals to the mints--of gold into any form, and of silver into -franc pieces; and reciprocal acceptance of those pieces in any of the states of the union. finally the minting of each state for national or currency purposes was limited to francs per head. this limitation, together with the regulation adopted, that the divisional coins should be issued at a rate inferior to that of the monetary standard, must be regarded as a measure of mutual defence against the sapping of the small coinage which had previously been experienced. according to this clause the maximum of mintings for national or currency purposes was presented thus-- francs. for belgium , , france , , italy , , switzerland , , for a time everything bloomed, the minting went merrily on, and private individuals (foreigners) reaped a profit at the expense of france. with the heavy fall in the ratio which made itself marked in , however, events became too strong even for the union, and belgium took the initiative by passing a law enabling her government to suspend or limit the coinage of the -franc piece. this principle was subsequently adopted by all the states of the latin union. during the years, - , three annual conferences of the union were held at paris, with the result that the limitation of the coinage of the -franc piece was fixed thus-- . . . belgium , , , , , , france , , , , , , italy , , , , , , switzerland , , , , , , greece (which had acceded to the union in ) , , of these states switzerland alone did not coin up to her total, and at the conference in february her delegates pressed strongly for the entire cessation of the coinage of the -franc piece, and for the adoption of a gold standard. in this she was strongly opposed by italy. the latter state, on account of the disappearance of her metallic currency before the inconvertible paper, had no interest in the limitation of the mintings of the union. in the conference of she even sought and was authorised to coin beyond the quota accorded her, by a sum of not less than £ , in -franc pieces, on condition that such amount should be deposited as a metallic reserve of the bank of italy. the force of circumstances, however, soon broke down even this policy of limitation. in the course of the fall of silver became more disastrously pronounced. in addition, it was no secret that the amounts accorded by the conferences of - - for the mintings of each state, had been assigned as maximum, not minimum limits, under the latin union.[ ] the next mint convention of november would determine the latin union on the st december , if not prolonged by further treaty. as the time approached the smaller states, such as belgium, which had committed themselves to a large minting and thereby to the liability of having to liquidate or take back its own mintings--such -franc pieces as happened to be beyond its frontiers--at full value, in the face of a greatly fallen silver market, shrank from the responsibility, and sought and obtained a prolongation of the _status quo_ until the end of , and thenceforward by yearly agreement. finding that individuals treated the agreed amounts of mintings as a minimum limit, the french government resolved to suspend the minting of the -franc pieces entirely. accordingly, on the st march , m. léon say, minister of finance, submitted to the senate a bill to that effect. it was followed, eight days later, by a proposition of a law suspending the emission of "_bons_" for the coining of silver money / fine. the _exposé des motifs_ of this act is most remarkable:-- "the events which have happened for some time past in the relations of the precious metals have brought to a head the monetary question amongst us, although from great britain has laid down principles which have attracted round her an ever-increasing circle of nations. "the theory of the double standard, on which our monetary law of the year xi. reposes, has been called in question ever since its origin. "it is, to our conception, less a theory than the result of the primitive inability of the legislators to combine together the two precious metals otherwise than by way of an unlimited concurrence--metals, both of which are destined to enter into the monetary system, but which recent legislators have learned to co-ordinate by leaving the unlimited function to gold alone and reducing silver to the rôle of divisional money. from the french government has studied the question, and it may be stated that since that date the principle of the gold standard has won increasing favour through our several administrations." then follows an account of the monetary history of france during the period, as in brief résumé already given. "if," the preamble continues, "from , certain precautions had not been taken to arrest the effects of that grave perturbation in the ratio, france and her monetary allies would have seen their monetary circulation invaded by silver and correspondingly drained of gold." hence the conventions of - - , limiting the mintings of the members of the latin union, although, "according to us, the fall of silver in prescribed a complete cessation even for that year rather than a simple limitation." germany. until the unification of germany in our own days, and the adoption of the present imperial currency system, german monetary history reproduces perpetually all the elements of that mediæval system, bimetallic in fact though not theoretically so conceived, which england flung away in , and from the toils of which france has not as yet completely emerged. as safeguards against the evils of that system which she had felt with such bitter experience, and which had culminated in the crisis closing the thirty years' war, germany could only feebly employ the mechanism of ineffectual mint conventions. for a century she persevered in the effort to establish a common standard and mint system, but in vain. the attempt had to be abandoned, and the reeling system left to its own process of disintegration; and when at last the events of came to give her unity in her coinage, as well as political life, there were not less than nine distinct and independent coinage systems in existence. hardly had the crisis of the thirty years' war passed out of mind before again the currency system had begun to work its baneful effects. [sidenote: germany: the zinnaische standard] in complaints were loudly made of the corrupt and debased state of the coin, due to export and culling. there is, indeed, quite a literature of these same complaints. the language of the _reichstattisches conclusum_ (ratisbon, th september ) expressly attributes this export to the higher value set upon the gold in foreign countries, especially venice. and the statement of the warden of the mint of the three corresponding circles--franconia, bavaria, and swabia--delivered in his _gutachten_ of the preceding may, was that the place of these good german ducats had been taken by very depreciated coins of italy, france, england, and holland. the three higher circles, accordingly--franconia, bavaria, and swabia--met in conference and determined on a thorough investigation. the advice submitted to them was to raise the thaler from to -kreutzer (see account of german coinage, appendix v.), implying a lowering of the ratio from to - / . this proposed scheme was accepted, _in comitia_, in , the fifth article of the resolution specially mentioning the infliction of numerous intruding base foreign divisional money. from this scheme brandenburg and saxony held off, maintaining that the ratio had not been sufficiently lowered, considering the condition of the production of gold; and, in the same year, by a mint treaty between frederick william of brandenburg and the elector of saxony, the so-called _zinnaische_ standard was adopted for those two states. according to this standard, the reichs thaler was raised to -kreutzer ( florin kreutzers) and a ratio of - / was established. the result of this action of saxony and brandenburg was to strip the three higher circles of their silver, and in two years ( ) they anxiously met again to consider the question, not only of the foreign base coin everywhere prevalent, but also of the damaging exchange "and ceaseless melting down and exchange of proper coin from the circles." by a strenuous effort the three circles carried through the reichstag of their resolution to reduce the reichs thaler to kreutzer (ratio - / ). from this decision the emperor stood apart, with bavaria and salzburg, in putting the reichs thaler at kreutzer. in view of such contrariety the impossibility of any general régime for the empire became apparent, and further attempts at it were practically abandoned. it was the perception by the mercantile community, as well as by the various governments, of the consequences of such disorder, that led to the establishment of the so-called leipzig standard in . this standard was promoted by john george iii. of saxony, and established by treaty between saxony, brandenburg, and brunswick-luneburg. according to it the reichs thaler was raised to kreutzers, or florins, the mark being minted into thalers or guldens. the result of the introduction of this standard was that in a few years the raising of the reichs thaler to kreutzers prevailed all over the empire. sweden accepted it in the same year, , and three years later the three upper circles acquiesced. at the same time the gold gulden was advanced to florins kreutzers. the previous ratio of was thereby advanced to . ( - / ). in the reichstag determined on the adoption of the leipzig standard for the whole empire; no alteration was made in the reichs thaler, which was still retained at florins and minted at to the mark fine; but a graduated scale of agio was adopted for the divisional coins, which were minted at an equivalence of from - / to - / thalers to the mark fine. the difference (varying from / to - / thalers) represented the agio. [sidenote: germany: the convention standard] from the first, however, the leipzig standard had no more real success than any of its predecessors. although theoretically accepted by all north germany, and adopted in the reichstag in , it could obtain no actual general adoption through the empire. even from the moment of the inception of the system in , the process of competitively raising the course of the coinage had still continued, and pieces of , , , and -kreutzers were struck on a basis of from to - / gulden to the mark. the result was to put upon the _carolus_, which from onwards was minted in great quantities in south-west germany, an agio of per cent., a differentiation which was much increased by the disorders of the war of the austrian succession. such an agio swiftly drove the larger, full-valued specie out of currency, and during the continuance of that war the currency of austria and south germany was almost entirely reduced to depreciated fractional pieces, while the exchangers reaped untold advantage. it was on the close of this war, in , that, with characteristic austrian selfishness, though also with a boldness none of his predecessors had approached, the emperor, francis i., determined on the erection of the -gulden standard as a separate austrian independent system, minting the mark of fine silver into - / reichs thalers, or guldens. this latter system, after the accession to it of bavaria, obtained the name of the convention standard, and the -gulden pieces minted under it are styled the species or convention thaler. the convention system remained in force in austria until the vienna coinage convention of , a period during which the _convention thaler_ found wide circulation through south germany. the currency was eked out by the austrian gold ducats and by vast quantities of foreign silver, french _ -livre thalers_ (current for florins kreutzers) and the _crown_ or _brabant thaler_ (current for florins kreutzers). from onwards this latter coin was imitated by the south german states, bavaria especially, in their _crown thaler_, minted on a fresh basis of - / guldens to the mark of fine silver. the selfish initiative of austria was followed by prussia and the south german states. the latter, the rhenish and south german states, adopted in - the -gulden; subsequently changed into the - / -gulden standard (see appendix vi.). the overvaluation of the _kronthaler_, which led to that latest development from a to a - / -gulden standard, was the result of the immense circulation of french -livre pieces (known in germany as _laubthalers_) in south-west germany. graumann quite discredits the theory that the overswimming of south germany by these french pieces, with all the confusion in the currency which resulted, was due to the wars and the progress of french arms, and directly attributes it to the depreciation of the french specie, and to their quite deliberate departure from the standard of french coinage as fixed in . [sidenote: south german and prussian systems] in prussia the reform of the coinage system was undertaken by her first king, frederick i., father of frederick the great. in the latter adopted the -thaler or -gulden standard, subdividing the thaler into groschens of pfennige each. the measure was undertaken expressly to stop the export of gold which was going on. the adoption of a standard lower than the convention standard effectually prevented the outflow of prussian money, and it was not until the beginning of the present century, through the new mint confusion which arose from the french revolution, that prussian money spread into saxony, hanover, hesse, and even into the south-west. the second idea of frederick's reform was to buy gold cheap, but in this it did not succeed. the intention was to obtain for five prussian thalers the gold _pistoles_, which were purchasable for five convention thalers. this rate, however, never prevailed in the market, as from the first the _pistole_ was valued at - / prussian thalers. during the seven years war, when frederick was driven to a depreciation of his coinage, his system went to pieces. but an active reform was undertaken upon the conclusion of the peace of hubertsburg, . the -thaler system was re-established, although, as far as the smaller divisional silver coinage was concerned, the depreciation, in which frederick had been imitated by the pettier states round him, continued into the present century. in a minor alteration was made in the prussian system, by subdividing the thaler into instead of as previously groschen, the former being distinguished from the latter by the title of _silver groschen_. to this prussian or -thaler system saxony acceded, as did also, in , mecklenburg and oldenburg, with many minor differences of detail,--saxony, for example, dividing the silver groschen into pfennige; mecklenburg dividing the thaler into schillings of pfennige each; and oldenburg dividing it into grotens of schwarens each. the gold coin was supplied by the prussian and hanoverian and -thaler pieces, the friedrichs _d'or_, a favourite trade coin even in south germany, and by spanish _pistoles_ circulating at an equivalence of -livre thalers. [sidenote: conference of munich, ] the confusion of these various german systems was further increased by the uncertainty and difference which had come to prevail in the unit of weight. in austria alone there were marks in use, the vienna mark (= . grs.), and the cologne mark (= . grs.). while in north germany, and subsequently in the south-west, the prussian mark (= . grs.) prevailed. it was as the outcome of a desire to remedy at once the evil condition and confusion of the currency, and the uncertainty as to weight standard, which led to the conference of munich on th august . at that conference, bavaria, würtemberg, baden, hesse, darmstadt, and the free state of frankfort, adopted the - / -gulden standard as the standard for their several states. at the same time the prussian mark ( . grms. = half the prussian pound), was established as the mint mark for the contracting members. for the divisional coinage ( and -kreutzer pieces) a standard of guldens to the mark was adopted, the details of the various fractional pieces being left to the different states. to this convention hesse, hamburg, and the two hohenzollerns acceded in the following years. this movement of south germany gave a new impetus to the idea of mint unification, and led to the general mint convention of the states of the zollverein, agreed upon in full assembly of delegates at dresden, th july , and ratified also at dresden on the th january . the dresden convention was practically the first renewed attempt at mint unification which germany had seen since . the contracting members to this general mint convention were prussia, bavaria, saxony, würtemburg, baden, hesse, saxe-weimar, eisenach, saxe-meiningen, saxe-altenburg, saxe-coburg and gotha, nassau, schwarzburg-rudolstadt, schwarzburg-sondershausen, reuss, reuss-schleiz, reuss-lobenstein, ebersdorf, and frankfurt. briefly, the articles of the convention were as follow:---- " . the mint mark of all these contracting states of the customs union shall be the prussian mint mark = . grms. " . on this common weight standard the coinages of the contracting states shall be in accordance with the two systems in existence among the said states, viz. by thalers and groschen, according to the -thaler (or prussian) system; or by gulden and kreutzer, according to the - / -gulden (or south german) standard. for the purpose of assimilation or equivalating, the thaler to be reckoned = - / -gulden, and the gulden = / -thaler. " . the -thaler system to be that of prussian saxony, hesse, saxony, and saxe-altenburg, saxe-coburg and gotha (gotha), schwarzburg-rudolstadt (unterherrschaft), schwarzburg-sondershausen, and reuss; the - / -gulden system to prevail in bavaria, würtemberg, baden, hesse, saxe-meiningen, saxe-coburg and gotha (coburg), nassau, schwarzburg-rudolstadt (oberherrschaft), and the free state of frankfurt. " . each state will confine its mintings to such pieces as prevail in the system of which it forms part. " . in larger specie, and also in divisional coin, each state to bind itself to exercise the greatest care to preserve the standard and weight. " . for the purpose of the commerce of the contracting states _union_ or _convention_ coins (_vereinsmünze_) shall be minted seven to the mark of fine silver, at an equivalence of thalers or - / guldens, fully tenderable throughout the union. " . alloy to be . silver, . copper; so that - / pieces = mint mark in weight; remedy = . . [sidenote: the dresden convention, ] " . from st january to , at least , , of these _vereinsmünze_ to be coined, one-third part each year, and by the various states _pro rata_ of their population. from onwards, in case of no new treaty, the rate of minting to be two millions _vereinsmünze_ every four years, _pro rata_ as before; each state to give an account of its mintings. " . also of their separate trials of standard and weight. " , . none of the contracting states to set its particular internal specie at any different value except on a three months' notice, and to renew its currency at face value in case of depreciation. " . the states bind themselves not to issue divisional coins in excess of such _pro rata_ requirements as above. " . for the divisional coinage the standard of the convention of munich, (viz. gulden), is adopted. " . the treaty to endure till the end of . states intending to retire then to give two years' notice. from that date, if not discarded, the treaty to be periodically renewed (five-yearly)." this treaty continued in force nominally until the later and still more famous convention of vienna in , before which date hanover, brunswick, and oldenburg had also given in their adherence to it. at the time of the mint conference and convention of vienna, therefore, there were, broadly speaking, three competing systems in germany, viz. of austria, prussia, and south germany or bavaria. one aspect of this latter conference of , viz. its deliberations with regard to gold coinage, will be referred to separately. as far as relates to its attempted systematisation of these three german currencies the agreement took the following form:-- . the pound of grammes decimally subdivided, to be used as the basis of the coinage. . the competing systems to be assimilated to this basis by the following regulation:-- the thaler (or prussian) standard of thalers to the pound of silver to take the place of the -thaler standard, and to prevail in prussia, saxony, hanover, hesse, and a string of minor states. the austrian standard to be on the basis of guldens out of a pound of fine silver, and to prevail in the empire of austria and the principality of lichtenstein. the south german standard to be on the basis of - / -gulden to the pound of silver (instead of the - / -florin standard formerly used), and to prevail in bavaria, würtemburg, baden, hesse, frankfurt, and a few other places of south germany. the equivalence of the systems was to be-- one-thaler convention piece ( / pound) = - / florins in austrian currency = - / florin in south german currency. all the coins to be of unlimited validity in all the states, divisional coinage to be of a lighter standard than the coinage standard of the country, but lighter only within limits fixed. the tender of these latter to be limited to -thaler or -gulden. [sidenote: the vienna conference, ] the regulations adopted by this vienna convention as to the gold coinage are very significant, and deserve special note. the advance in the gold price of silver, due to the californian and san franciscan gold finds, acted on the silver-using countries. as soon as the price of bar silver exceeded - / -pence per standard oz., there resulted a melting down and export of the silver, in the countries which had adopted bimetallism at the - / -ratio. it was this experience in france, and the allied group of countries, which led to the formation of the latin union in . in mere point of date, that union had been preceded by the vienna conference and convention by a matter of eight years. and as far as the regulations of this latter relating to gold coinage are concerned, there is evidence that the bimetallic action of france had driven germany to her union of , as a mere matter of self-defence, just as it later drove the latin states to their union of . in both cases the underlying motive was a wish to protect that part of their currency system which was threatened by bimetallic law. the premium on gold, on its minting, i.e. the profit to be made on minting it at - / in france, while its market value was considerably less in germany and elsewhere, drew the gold to france. it is a mistake to think that france attracted gold simply from california and australia. she attracted it by the action of bimetallic law from her neighbour germany, and replaced it by -franc silver mintings. the circulation of french -franc pieces was so extensive in south germany, in the period preceding the vienna convention, that the cash reserve of the frankfort bank was at one moment composed almost entirely of them. the manner in which the vienna convention met the difficulty has the appearance of plausibility, though it proved in the end ineffectual. it determined not to establish a fixed ratio but to follow the market price of gold, apparently in the hope of attracting a natural or market supply. "for the purpose of further facilitating mutual transactions, and for the promotion of trade with neighbouring countries, the contracting powers may coin convention trade coins in gold, under the names _crown_, and _half-crown_. " . the crown = / of a pound of fine silver. " . the half-crown = / . "the contracting powers may not coin any other gold piece, except austria, which retains the right of coining _ducats_ of the present value, to the end of . "the silver value of the convention gold coins in ordinary intercourse is entirely fixed by the relation of the supply to the demand. they must not, therefore, be considered as a medium of payment of the same nature as the legal silver currency of the country, and no one is legally bound to receive them as such. [sidenote: the vienna convention, ] "each state is at liberty to permit convention gold coins to be paid into their offices instead of silver, according to a previously settled fixed rate, and to extend this permission either to all transactions and offices, or only to some. such previous settlement of the rate is, however, never to last more than six months, and must at the expiration of the last month always be renewed for the following official treasury period of exchange. the rate cannot be fixed at a higher value than that given to such coinage by the average of the official commercial rate of exchange during the previous six months. each government also reserves to itself the right to alter the rate at any time within the period fixed, and to suspend it when it thinks proper. "a treasury rate of exchange shall henceforth only be fixed for convention gold coins, and not for other kinds of coined gold. "the widest circulation to be given to the notices by which the official rate of exchange is fixed. they must be published beforehand, even when a change in rate for the next fixed period is not intended, and must contain-- " . the statement of the average trade exchange at the principal places of exchange, during the six months immediately preceding. " . the treasury rate fixed accordingly. " . the duration of the value of the same. " . the reservation to alter or recall this rate of exchange if necessary, even before the expiration of the term named. " . the declaration that such rate of exchange only affects payments to be made into offices of the state. "in the countries of the contracting powers pay-offices of the state, as well as public institutions, banks, etc., shall not be allowed in future, in payments to be made by them, to make any proviso with regard to the medium of payment in silver or gold, in such a way that for the latter a certain fixed relative value should be expressed beforehand in silver money." from the point of view of austria, this convention had been entered upon with the desire of effecting a gradual adoption of gold coinage, together with a concurrent ceasing of the compulsory note circulation. the outcome of the conference was, however, in quite distinct opposition to this desire, as the agreement which was finally arrived at established the maintenance of a pure silver currency. the continuance of the gold _crown_ of -grs. fine gold was recognised only as a trade medium. this experiment of a trade gold coin failed completely, though it is none the less interesting intrinsically, as well as for its reflex bearing on the similar schemes which were proposed in the early years of the french revolution. the premium on the minting of gold drew it to france, in preference to any other place where a simple market price prevailed. and the -franc gold pieces of france overflowed, while the german crowns could not struggle into existence. [sidenote: germany: attempts at reform, - ] the attempt which was made by a commercial conference at hamburg, at the time of the meeting of the vienna conference, to secure the introduction by the hamburg bank of a gold instead of a silver _valuta_, remained equally ineffectual. as far as concerns the establishment of a simple and single monetary system for germany was concerned, this vienna convention, the last great convention which germany saw previous to the reconstruction of her system in , was as futile as that of dresden in , or as all the conventions of the seventeenth and eighteenth centuries previously. the consciousness of the need of such simplification and unification, however, became thereby only the more apparent. four years later the first german handelstag, which met in may at heidelberg, turned its first and special attention to the erection of some common currency system. the recommendation which it finally concluded upon was the adoption of the _drittelthaler_ as the unit mark, with a decimal subdivision. four years later the third handelstag, which met at frankfort (september ), confirmed the resolution, with the additional proposition of the minting of a gold piece identical with the -franc piece, the value of which should be regulated from time to time; the scheme being, therefore, as before, that of a silver standard, with gold as trade money. the fourth handelstag met at berlin in october , and again the matter was most seriously discussed. with the single exception of the berlin members, all the deputies declared for the adoption of the gold standard. as, in the preceding year, austria had withdrawn from the german monetary union of , she no longer stood in the way of this proposition, and the erection of the north german union distinctly favoured the project. in june the bundesrath of the north german union resolved upon a reform and unification of the paper money, as preparatory to a complete currency reform, and in the same month the chancellor of the north german union had decided to call a mint convention. the outbreak of the franco-german war immediately afterwards put a short stop to the proposal. a long train of preparation had thus been laid, and there can be little doubt as to what the ultimate direction of german monetary legislation would have been, even without the war, and the consequent erection of the empire. that the latter event, however, enormously facilitated the process cannot for a moment be questioned. [sidenote: germany: new imperial system, ] when the subject was taken up after the franco-german war, the determination to adopt a gold coinage was only gradually arrived at. in the original plan, as drafted soon after the conclusion of peace, the new gold coinage proposed was intended not to be tenderable, for the meantime, in private commerce. such a provision roused all the opposition of the mercantile community, and in consequence of the agitation the scheme, as finally submitted to the reichstag, was for a gold monometallic system. the law passed on the th december , and the great operation of recoinage and conversion was immediately entered upon. it was greatly favoured by the ratio existing at the moment, and by the metallic condition of the world. the ratio taken as the basis of the computation was the french . , accepted because of its long and present wide employment. the previous silver standard thalers were taken as equivalent to marks. thaler = mark = pound fine silver. × . = marks. the gold piece of marks was therefore coined at a tale of - / to the pound of fine gold. propositions were made to the reichstag that the -franc piece should be made equivalent to the english sovereign, or to the -franc piece, giving respectively a ratio of . or . , but at the moment the price of silver in the london market ruled between - / and - / pence per ounce, i.e. at a mercantile ratio of . - . . it was this fact which decided the adoption of the french ratio. the chief acts which have accomplished the reform are of dates th december and th july , the first declaring the monetary system and the latter the law of tender. the unit of the system is the mark, which is the / . part of a pound of gold of grammes at / fine, and is coined into pieces of and marks. the gold crown is a -mark piece, is / fine, and struck at a tale of - / pieces to the german pound; charge for coinage, marks per pound of fine gold. the pound of fine silver is struck into marks, / fine. the total amount of silver coin not to exceed marks per head of population. no individual need accept more than marks of imperial silver coin in payments. they are accepted in any amount by the empire and by the federal states. all other german coins are no longer legal tender, and have been withdrawn, with the single exception of the thaler pieces. whatever pieces of this kind still exist are legal tender to any amount, like the imperial gold coins, each being equal to marks. an act of th april provides that _vereinsthalers_ coined in austria before should also be full legal tender. an act of th january has authorised the bundesrath to put the thaler pieces and the austrian _vereinsthalers_ on the same footing as imperial silver coins, i.e. to make them legal tender only up to marks, the thaler being still reckoned at marks. since the suspension of silver sales and of the withdrawal of the silver thalers (may ) there is no likelihood that the bundesrath will make use of this authority conferred upon it. in briefest résumé, the course of the silver coinage during the preceding century may be presented thus:-- germany--course of the -thaler pieces. thalers. total minted during - , , withdrawn by the government of the states , , " under the new imperial system, - , , " " , , " " , , " " , , " " , , " " , ---------- , , ----------- leaving a balance not accounted for of , , =========== thalers. total minted during - , , withdrawn under the new imperial system, - , , " " , , " " , , " " , , " " , , " " , ---------- , , ----------- leaving a balance not accounted for of , , =========== thalers. total minted during - , , withdrawn under the new imperial system, , " " , " " , , " " , , " " , , ---------- , , ----------- leaving a balance not accounted for of , , =========== thalers. total minted during - , , withdrawn by the government of the states , " under the new imperial system, , " " , " " , , " " , , ---------- , , ----------- leaving a balance not accounted for of , , =========== thalers. on the whole period, - , the total minted -thaler pieces amounted to , , total withdrawn , , ----------- leaving a balance not accounted for of , , =========== allowing , , thalers as a rough equivalent for the loss by attrition, there is still a deficit of , , thalers, or about £ , , sterling to be accounted for (and laid to the account of remintings and loss by arbitrage). account of the minting of the reconstructed german empire--gold--from to dec. +--------------------------------+--------------------+----------------------+ | | supplied for the | supplied for private | | | empire. | accounts. | | origin of the bullion supplied +--------------------+----------------------+ | to the mint. | pounds weight fine | pounds weight fine | | | gold. | gold. | +--------------------------------+--------------------+----------------------+ | german gold coin of the old | | | | type | , . | . | | bars | , . | , . | | austrian gold coins | . | . | | francs and napoleons | , . | . | | sovereigns | , . | . | | russian gold coins | , . | , . | | isabellas | , . | ... | | dollars and eagles | , . | , . | | turkish gold coins | . | , . | | +--------------------+----------------------+ | | , . | | +--------------------------------+--------------------+----------------------+ making a complete total, with odd amounts from various sources, and including imperial gold coins minted in - but now no longer current, of , , lbs. weight = £ , , . sales of silver by the german government from to the suspension of the sales in may +-------+----------------+----------------+---------------+ | | pounds of fine | product. | price per oz. | | date. | silver. +----------------+---------------+ | | | marks. | pence. | +-------+----------------+----------------+---------------+ | | , . | , , . | - / | | | , . | , , . | - / | | | , . | , , . | - / | | | , , . | , , . | - / | | | , , . | , , . | - / | | | , , . | , , . | - / | | | , . | , , . | | +-------+----------------+----------------+---------------+ | | , , . | , , . | | +-------+----------------+----------------+---------------+ the total silver withdrawn from circulation up to the close of was , , , marks. of this amount , , marks were delivered to the mint for coinage into the new imperial silver coins. the remaining , , marks were melted into silver and produced , , pounds of fine silver. of this quantity , , were sold up to may . the balance of unsold silver still in the hands of the imperial government is , pounds of fine silver. england. charles ii. began his regulation of the currency by the proclamation of th january , fixing the coins to be current and their tariff. this proclamation was followed by another, of th june , against the export of gold or silver, and against buying or selling the metals at higher rates than were given at the mint, a practice to which the proclamation attributed the scarcity of money. this edict proved of no avail, for, in spite of it, the gold coins were exported in such quantities that they were current more abundantly in foreign parts than in england. as the result of deliberation of the privy council, assisted by the commissioners of trade and officers of the mint, who all attributed the export to the higher price of gold abroad, it was determined to raise the price of the gold coins to or near the value which they had on the continent at the moment. accordingly, by proclamation of the th august , the value of the gold _unite_ was raised from s. to s. d., and other gold coins in proportion, the silver currency being left unaltered. in referring to the act for the free trade in gold and silver (_supra_, p. ), mention has already been made of the motive of the legislator, namely, to increase the importation of the metals to the mint. exactly similar was the intention, as expressed in the preamble of the succeeding act of ( charles ii. c. ), which abolished the right of seigniorage, thereby establishing free and gratuitous coinage in england--the principle of minting still in force in this country.[ ] [sidenote: england: charles ii] the testimony of both act and declaration as to the scarcity of money is confirmed by actual record. in the following year, , there was a great scarcity of money, and _dollars_ and _pieces of eight_ were bought up by the goldsmiths and bankers for s. d. each, and instead of being brought to the mint were at once exported to france for s. d. and to ireland and scotland for s. according to the new indenture for the coinage of , a slight reduction in the standard of the gold took place, the pound of crown gold ( carats fine) being to be minted at a tale of £ , s. the scarcity of money still continued, however, and the separate experience of ireland only corroborated that of england. the general statement of the case as to the fate of the coined money since the act of car ii., which instituted free coinage, is thus put by sir dudley north, in his _discourses upon trade_: "i call to witness the vast sums that have been coined in england since the free coinage was set up. what is become of it all? nobody believes it to be in the nation, and it cannot well be all transported, the penalties for so doing being so great. the case is plain--the melting-pot devours it all; and i know no intelligent man who doubts but the new money goes this way. silver and gold, like other commodities, have their ebbings and flowings; upon the arrival of quantities from spain, the mint commonly gives the best price, i.e. coined silver for uncoined silver, weight for weight. wherefore it is carried into the tower and coined. not long after there will come a demand for bullion to be exported again. if there is none, but all happens to be in coin, what then? melt it down again; there's no loss in it, for the coining costs the coiners nothing. thus the nation hath been abused and made to pay for the twisting of straw for asses to eat." by the time of the accession of william iii. the scarcity of silver had become so great as to cause a petition from divers working goldsmiths in and about the city of london to the house of commons ( th april ). it stated "that upon search at the customs they found that since last october entries had been made of , oz. of silver in bullion, and , _dollars_ and _pieces of eight_ for exportation by divers private persons, and they doubted not but it would appear that not only the east india company, but also divers jews and merchants, had of late bought up great quantities of silver to carry out of the kingdom, and had given - / d. per oz. above the value, which had encouraged the melting down of much plate and milled monies; whereby for six months past, not only the petitioners in their trade, but the mint itself had been stopped from coining." [sidenote: england: the export in ] the petition was referred to a committee of the lower house, which reported on the th may that great quantities of silver had been exported, of which seven-eighths had been shipped off by the jews, who would do anything for their profit. the reason for the exportation, too, was plain, for the french king, of late finding his money very scarce, had raised his coin per cent., which was an encouragement to send silver to fill his coffers, and therefore the jews exported it daily in very great quantities. the melting down of £ of milled money for exportation was attended with a profit of £ ready money and upwards, silver being coined at the mint at s. d. per oz., but at the time of exportation sold generally at s. - / d. the remedies proposed to the committee were either a prohibition of export or the enhancing of the english monies. not less than three measures were presented to the house for the prohibition of export--one of them by sir richard temple--but were all lost; and, meanwhile, the exports to holland and france continued. in november it was calculated that during the preceding sixteen months about , oz. had been exported. in addition to this actual drain of coinage, the processes of culling, clipping, and counterfeiting, which had been going on through the reigns of charles ii. and james ii., had resulted in an unexampled depreciation of so much of the coinage as remained. a large portion of the currency consisted of iron, brass, or copper-pieces plated, and such coins as were of good silver were worth scarcely one-half their current value. this statement is more than borne out by quite reliable computations which were made in the process of the recoinage five years later. a medium lot of - / bags, containing in tale £ , of the called-in currency, and which should have weighed , oz. dwt. grs., was found to weigh only , oz. dwt. according to the accounts of neale, then master and warden of the mint, , , dwt. oz. grs. of the clipped silver money produced only , lbs. oz. grs., implying a depreciation in weight alone of over . per cent. the process of stripping the country of currency was increased by the continual pouring out of money in aid of william's wars, and the loss in exchange on such large remittances made the evil only too apparent. the one or two millions yearly remitted to the continent for the british armies were negotiated in holland in a thousand ways to england's prejudice. partisan statements were made that whereas in the beginning of the war the dutch allowed schillings for an english pound they gradually lowered the exchange to schillings. guineas, which were equal in value to s. d. in silver, rose to s.; and they would have risen to a still higher rate if the officers of the exchequer and the receivers of public revenue had not refused to receive them in payment at the increased value. in the matter was taken up in the house of commons, and a committee appointed. the report of this committee, which was never passed, was based on the proposition of a reduction of standard. by montague's influence the proposals were dropped, and it was not till the nd november that the act for remedying the ill state of the coins passed. it is well known that the unwise determination of the government of william iii. to adhere to the pre-existing standard was due to the action and contrivance of montague as chancellor of the exchequer, and to the influence of locke's writings. by a subsequent series of acts, based on the complaints of merchants representing the evils resulting from the unsettled price of gold, the price of the guinea was ordered to be gradually reduced from s. to s., s., and finally s., before th april . [sidenote: england: recoinage of ] this great recoinage scheme was only completely accomplished in , having occupied the greater part of four years, and after a long series of acts and proclamations of, occasionally, very doubtful wisdom. according to the accounts of the officers of the mint, the new silver coin amounted in tale to £ , , , s. d. the worn and clipped money called in was estimated roughly at £ , , , on which the loss was about £ , , ; the whole charge and loss being stated at not less than £ , , . it is significantly affirmed that, in a manner, all the called-in silver was found to consist only of pieces coined between the days of edward vi. and , a sure indication of the fate which had befallen the coinage issued since the restoration. before the transaction was finally complete the last safeguard and complement of the system had been adopted, in fixing the relation of the gold coinage to the new silver issue. on the nd september , a report was given in to the house of commons, signed by four names, including that of john locke, stating that the value of gold in holland and the neighbouring countries was, as near as could be computed upon a medium, : in silver; and that, according to this value, the currency of the guinea at s. was too high, and occasioned a disproportionate importation of gold and an exportation of silver. the bringing down of the guinea to s. d. would make the value of english gold and coin very near - / : to silver, which, though not so low as the rate in holland, would in their opinion be sufficient to correct the error. in consequence of this report the commons resolved that, under the act and william iii. chap. , no person was obliged to take guineas at s. a piece. the price then fell to s. d., at which rate they were received by the officers of the revenue. with the exception of this merely declaratory tariffing of the guinea, it is to be borne in mind that this recoinage of william's reign was carried out on the principle enunciated by montague, and backed by the authority of locke, namely, that of a retention of the old standard, although in the face of a clearly established advance in the value of silver, and in face of quite irrefutable answers to all locke's arguments. momentarily the scheme succeeded; the adverse exchange was instantly redressed, while the renewal of the coinage and the ratio of was sufficiently above the continual ratio to turn the flow of gold, as doubtless was the (unexpressed) design in adopting it. according to burnet the packet-boat from france seldom came over during the following winter without bringing , _louis d'or_, and often more. "the nation was indeed filled with them, and in six months a million of guineas was coined out of them. the merchants in fact said that the balance of trade was then so much turned to our side that whereas we were wont to carry over a million of our money in specie, we then sent no money to france, and had at least half that sum sent over to balance the trade." [sidenote: england: effects of the ratio of ] the circulation of french and other foreign gold became so great that on the th february the council issued a proclamation that the _louis d'or_ and spanish _pistole_ should not pass for above s. such action at once brought those coins to the mint, and nearly - / millions were coined out of them. it was not seen at the moment that the establishment of this ratio so favourable to gold was _pari passu_ unfavourable to silver. the idea was entertained that the french gold came over to bribe english members, i.e., on mere political causes. the hypothesis was needless as it was incorrect. gold came over because it was higher priced in england than abroad through the ratio of , and for the same reason silver left the country to pay for the gold. the one movement was the essential counterpart of the other, and made itself at last only too visible. as early as the seventh year of anne's reign--only nine years after the completion of this great recoinage, it was found necessary to give further encouragement to the coinage of silver by offering a premium on every ounce of foreign coins which should be brought to the mint within a limited time. the premium was not to exceed - / d. per oz., and the time limited was from the th april to the st december . such a measure has been already noticed in the history of france; it was indeed a design frequently employed there under the title of _surachat_, and it always proved as futile as the government of anne found it to be. as the drain continued, representations were made by the officers of the mint to the treasury, and in the house of commons requested these representations to be laid before it (december th). on the same and following day a remarkable speech was made by a member, mr. aislabie, who took notice of the great scarcity of the silver species, and proposed the remedy of lowering the gold species. on the second day he was seconded by mr. caswall, who suggested that the overvaluation of gold in the current coins of great britain had caused the export of great quantities of silver species, "and to that purpose [i.e. the purpose of his argument] laid open a clandestine trade, which of late years had been carried on by the dutch, hamburgers and other foreigners, in concert with the jews and other traders here, which consisted in exporting silver coins and importing gold in lieu thereof; which being coined into guineas at the tower, near pence was got by every guinea, which amounted to about per cent.; and as these returns might be made five or six times in a year considerable sums were got by it, to the prejudice of great britain, which thereby was drained of silver and overstocked with gold." he concluded by proposing to lower the price of guineas and all other gold specie. [sidenote: england: sir isaac newton's report, ] his speech was received with applause, and the house unanimously petitioned the king to call the guinea down to s., and other gold species in proportion. to this george i. immediately acceded, and the proclamation to that effect _verbatim_ was issued on the following day, nd december . the report for which the house had called two days earlier, and which was produced on the st december, was the celebrated report made some months before by sir isaac newton as master of the mint, at the demand of the commissioners of the treasury. it is a document deserving the careful attention of every student of currency history. newton reviews the ratio in each of the then commercial nations, and shows the effect of difference of ratio in producing export and disturbance of one or other metal. "gold in spain and portugal is of sixteen times more value than silver of equal weight and alloy; at which rate a guinea is worth s. d. net; this high price keeps their gold at home in good plenty, and carries away the spanish silver into all europe. so that at home they make their payments in gold, and will not pay in silver without a premium. upon the coming in of a plate [silver] fleet the premium ceases or is but small, but as their silver goes away and becomes scarce the premium increases and is most commonly about six per cent." in france the ratio was : , and the guinea therefore worth s. - / d. in holland it was worth s. - / d., in italy, germany, poland, denmark and sweden, from s. d. to s. d. "in china and japan the pound weight of fine gold is worth but or lbs. weight of fine silver, and in east india it may be worth lbs., and the low price of gold in proportion to silver carries away the silver from all europe." "if gold were lowered only so as to have the same proportion to the silver money in england, which it hath in the rest of europe, there would be no temptation to export silver rather than gold to any part of europe, and to compass this last there seems nothing more requisite than to take off about d. or d. from the guinea." [sidenote: england: the state of coinage in ] in a subsequent report of the st september , newton stated that, since the beginning of to september , the gold coined at the mint amounted to £ , , , while the silver within the same period only amounted to £ , , of which £ , had been brought to the mint in response to the premium offered; in and , of their own free will, the goldsmiths had only brought a matter of £ , to the mint. in the house of lords, early in the following year, it was proved that during the year the east india company had exported nearly , , oz. of silver. the immediate purpose of the above proclamation of nd december was for a time thwarted by a speculative hoarding of silver in expectation of a further calling down of the gold species; and it was to cut the ground from under this speculation that in january both houses declared their determination not to alter the standard of gold and silver coins in the kingdom, and proceeded in place of such alteration to prepare a bill for preventing the melting down of the coins of the kingdom. it is demonstrable, even from sir isaac newton's own figures, that the calling down of the guinea to s., though largely, was not completely effective in destroying the profit of arbitrage transactions with holland. with the guinea at s., the ratio was still - / while in france and holland the ratio was or under. that the process of culling and exporting the heaviest silver specie still continued is proved by the state of silver coinage twenty years later, when shillings were found to be deficient in weight, by between and per cent., and sixpences between and per cent., and all species so scarce as to threaten greatest confusion in every branch of trade. at the accession of george iii., , the silver coinage was found in so imperfect a state that the crown pieces had almost entirely disappeared, though minted since to the amount of over a million and a half sterling. of half-crowns, likewise minted to the value of £ , , , only defaced and impaired specimens remained current, while shillings and sixpences had lost every sign of impression. up to only a matter of £ in silver had issued from the mint--practically no coinage at all. gradually however, owing to the force of wider principles at work, the matter of the ratio righted itself. ever since the value of gold had been rising all over europe. in the continental ratio was still calculated at - / , as compared with - / in england; but by the continental ratio had overtaken the english, and the market price of standard silver had risen to s. d. per oz.--the english mint rate. in the greatly depreciated state of the silver coinage--three-fourths of it was said to be base--even the approach of a fair ratio acted prejudicially on gold. already, in , the export of gold to holland had become noticed, and it was asserted that the gold coins had never before been so deficient. they were sent over to holland, and there filed and returned and put into circulation--a bimetallic phenomenon that always recurs in a currency containing two differently depreciated elements. [sidenote: england: state of the coinage in ] the idea that bimetallic action replaces one good metal by another, an equal weight of one metal for that of the other, a good undepreciated coinage of silver for a good undepreciated coinage of gold, or _vice versâ_, is not borne out by a single instance in history. bimetallic action always substitutes the less for the greater, whether weight or value, the more depreciated for the less, or the depreciated for the perfect standard coin. in this particular instance, , the depreciation of silver had been the result of the action of a too high ratio from onwards; the depreciation of gold was effected in a much less time between and , simply because the already depreciated state of the silver causing that differentiation of value, which is the bullionist's opportunity, happened to coincide with a natural rise of the value of gold all over the continent. the result, therefore, of fifty years of bimetallic régime left england with a currency depreciated in both its limbs, in both gold and silver, and as deficient in the quantity current as in the weight of the individual pieces. this is not in keeping with the theory of bimetallism as developed to-day, according to which the transition from one coin to the other would only be made at the point of equation, and the substituted metal would equalise that displaced. this is theory. the facts of the situation in are not theory but history, and tell a different tale. "the evil was so great," says lord liverpool, "that the government found it necessary to take this difficult subject into their immediate consideration. on this occasion i addressed a letter to a noble lord, who was then chancellor of the exchequer, suggesting what appeared to me the proper remedy for this evil. i proposed that, with a view to the general reform of the coins of the realm, all the deficient gold coins should in the first place be called in and recoined, and that in future the currency of the gold coin should be regulated by weight as well as by tale, and that the several pieces should not be legal tender if diminished below a certain weight. your majesty was pleased to approve of this advice and to propose to your parliament, on th january , the calling in and recoining of all the deficient gold coins; and the chancellor of your exchequer opened the whole of this plan to the house of commons, who approved of the measure, which was carried into immediate execution without any complaint and with great success. the defects which had previously existed in this species of coins were thereby removed, and the regulation, then established, of weighing the gold coin has been the means of preserving it at nearly the state of perfection to which it was then brought." [sidenote: england: recoinage of ] the resolutions of the house of commons on which this recoinage depended were passed on the th may . after stating the depreciation existing in the gold coinage the house asserted--( ) that it has been a practice to export and melt down the new and perfect gold coin soon after it is issued for private advantage, to the great detriment of england; ( ) that while pieces of gold coin, differing so greatly in weight, are allowed to be current under the same denomination and at the same rate and value, great quantities of the new and perfect pieces will continue to be exported and melted down, and, there is reason to apprehend, will be recoined into pieces the most deficient that are allowed to be current." the house then goes on to adopt the principle of limiting the depreciation to be allowed on any single coin, i.e. of making the coins current by weight as well as tale within the limits allowed. the house next turned its attention to the silver element of the currency. at the outset it was met by the patent fact that the depreciated silver coinage had been made the handle or lever, or _point d'avantage_, in all the operations against gold. "whereas," is the recital of the act of george iii. c. , "considerable quantities of old silver coin of this realm, or coin purporting to be such, greatly below the standard of the mint in weight, have been lately imported into this kingdom, and it is expedient that some provision should be made to prevent the practice," etc. the act therefore decrees the prohibition of importation of light silver coinage into the kingdom, and its confiscation in case of discovery as such. "and be it further enacted ... that no tender in the payment of money made in the silver coin of the realm, of any sum exceeding the sum of £ at any one time, shall be reputed in law or allowed to be a legal tender within great britain or ireland for more than according to its value by weight, after the rate of s. d. per oz. of silver, and no person to whom such tender shall be made shall be any way bound thereby or obliged to receive the same in payment in any manner than as aforesaid; any law, statute, or usage to the contrary notwithstanding." the importance of this latter epoch-making clause is vital. it is the first enactment of a law of tender in the history of english monetary legislation, and it was the first step towards the shaking off the incubus of that mediæval currency system which was even then only coming to be understood in all its fatal perniciousness. for statesmanship, the only parallel to it is that act of henry iii. of france, which proved so shortlived in its adoption (see _supra_, pp. - ). it was the first step in the evolution of that system of a safeguarded currency which was finally constructed in . this act prohibiting the importation of light silver was renewed in for a further two years, and was again, in , continued until the st day of may , and from thence to the end of the next session of parliament. on the st june the act, being then expired, was revived and further continued to the st day of june by a new statute, and on the th july the act was made perpetual by statute of geo. iii. c. . the later legislative action with regard to silver belongs to the final construction of the english currency system. in the main, the recoinage of gold was accomplished in the year , though it lingered over the three succeeding years as appears by the items in the appropriation acts. the accounts of grants for recoinage were as follows:-- . the first grant £ , . to the bank for receiving the deficient gold coin , for extraordinary charges of the mint , . further grant , - / . " " , ------------------ £ , - / ================== the scope of this series of acts of will be seen at a glance; as well as the tendency in policy, namely, in favour of gold, which it indicated. the gold coinage was renewed, and as a safeguard against its future depreciation the existing depreciated coin was cut off from any sapping action upon it by the above restriction as to tender by weight. for the renewal of the silver coinage itself no actual measures were taken save the prohibition of the import of light coins. for more than twenty years the defective state of the silver coin continued quite unheeded; evidently as no longer causing international embarrassment, now that its function and differentiating action upon the companion metal had been partially tied down and limited. in the depreciation of the silver coinage was ascertained experimentally, when it was found that half-crowns were defective by over per cent., shillings by over per cent., and sixpences by more than per cent. of their proper weight. to this depreciation was added an exterior cause of drain by the action of france, who in increased the scarcity of silver coins and bullion by the issue of her assignats. in that year not less than , , oz. of silver were purchased with assignats and sent into france. five years later an attempt was made to supply the deficiency of the silver coins by the issue of spanish _dollars_, countermarked with the hall mark of the king's head. this was after the bank of england had, in accordance with the minute of the privy council of th february , suspended cash payments. [sidenote: england: act of ] on the th of february of the following year, , the subsisting committee of council for coins was dissolved, and a new committee appointed to consider the state of the coins and mint. during its deliberations, and until it established the new rule, the further coining of silver was suspended by the act already spoken of, which ( st june ) revived the old law against importation of light silver. this suspension of silver coinage was simply a temporary precaution. "whereas," says the act, "his majesty has appointed a committee of his privy council to take into consideration the state of the coins of this kingdom, and the present establishment and constitution of his majesty's mint, and inconvenience may arise from any coinage of silver until such regulations may be framed as shall appear necessary; and whereas from the present low price of silver bullion, owing to temporary circumstances, a small quantity of silver bullion has been brought to the mint to be coined, and there is reason to suppose that a still further quantity may be brought, and it is therefore necessary to suspend the coining of silver for the present, be it therefore enacted that no silver bullion shall be coined at the mint, nor shall any silver coin that may have been coined there be delivered." there can be little doubt that this enactment was due to lord liverpool, and if so that it was intended as an arrest, with a particular intent or bearing; for liverpool had formed his conception of a monetary theory as early as . none the less it is quite inadmissible to state, as has been done, that this restriction, so evidently and expressly only a temporary or interim measure of self-defence, was equivalent to a placing upon the statute-book of lord liverpool's gold monometallical theory. there was as yet no restriction on the legal tender of silver. it was still legal tender to any amount,--it was indeed the standard coin of the realm,--only, in order to avoid the effects of depreciation, and to prevent further depreciation, it was now the law of the land that payments of silver of sums over £ should be made by weight, and the further coinage of silver was temporarily stopped. this was not a gold monometallic system, and the act which established that system was passed eight years after the death of lord liverpool, and six years after the bullion report of had been printed. [sidenote: england: the bank restriction] further than incidentally it is inconsistent with the design of this book to refer to the period of suspension of cash payments and the bullion report. these latter are banking phenomena, and will find their place in a treatise of currency in the fuller acceptance of the term, rather than in a treatise definitely restricted to the subject of the metallic currencies. the events of which led to the suspension,--the remittances to the continent for war purposes, a failure of credit, a run on the country banks, and then upon the london banks,--had been experienced in as acutely as in ; and, according to the express statement of the report itself, even in the years and , when the country bankers were making great demands in order to increase their deposits, the market price of gold never rose above the mint price. these events were therefore one phase of the internal experiences of the country, and have no relation to an international outflow of gold, caused by the heightened ratio which definitely set in in . on the mere ground of first principles, therefore, it is inadmissible to make argumentative use of this event, known as the bank restriction, for judgment and illustration in the wider question of bimetallism. further, the argumentative use that has been made of it--viz. that if from to england had possessed a true rather than a halting bimetallic régime, she would have been supplied by its means with an amount of silver that would have increased the metallic reserve and strength of the country, and enabled it to avoid suspension--is inadmissible: and the argument itself is untenable. such bimetallic action supplying silver could only have begun to operate in , three years before the suspension. it could only have operated by substituting one metal for the other, not by adding silver to gold, but by taking away higher valued gold, and furnishing lower valued silver, i.e. by actually decreasing the metallic strength and reserve of the kingdom. and, lastly, there is the peculiar fact still requiring explaining, that the years of the bank restriction, until, that is, the new mint law of , saw the heaviest export of silver probably that england has ever experienced. during the ten years, - , nearly millions sterling of silver was exported from england (over , , oz.), while the gold exports amounted only to £ , , , so that, of the total export, silver formed per cent. (net amounts used in both cases). it is still well known to what straits this export of silver put the country. in almost every town where there was any employment of labour the tradesmen were obliged to issue token money of their own--shilling tokens, sixpenny tokens, half-crown and five-shilling promissory-notes. every conceivable form of hand-to-mouth unauthorised currency was resorted to, in order to relieve the needs of the situation caused by the want of silver coins. and stories are still remembered of the straits to which the working classes were driven in order to make their purchases at the week end with one pound notes, for which they could get no change. the explanation of such a phenomenon can only be that the one pound notes having driven gold out of circulation, by a law which is merely another form of the bimetallic law, left only silver available for remittance to the continent for loans and war purpose. but, whatever the explanation, the fact cuts the ground from under the argument that bimetallism would have saved england from the bank restriction. if silver had not been legal tender to any amount (up to £ by tale, and beyond that by weight), or again if it had been protected by an agio in as it was in , it could not have left the country. the straits of the poorer classes in those years of hardship were _due_ to the existing bimetallic system, and to it must, therefore, be attributed the aggravation rather than alleviation of the bank restriction. if anything is required to confirm such view it can be found in the very terms of that statute of ( geo. iii. c. ), which established the gold standard in england. they reveal the fact that the act was not so much a philosophical or theoretical declaration of monometallism, such as might have been expected if lord liverpool had still lived to dictate it, but a measure for the protection of and relating almost entirely to silver. [sidenote: england: the act of ] "whereas the silver coins of the realm have, by long use and other circumstances, become greatly diminished in number and deteriorated in value, so as not to be sufficient for the payments required in dealings under the value of the current gold coins, by reason whereof a great quantity of light and counterfeit silver coin and foreign coin has been introduced into circulation within this realm, and the evils resulting therefrom can only be remedied by a new coinage of silver money...." the act therefore prescribes the coining of silver, oz. dwts. fine, at a tale after the rate of s. per troy pound, whether the same be coined in crowns, half-crowns, shillings, or sixpences, or pieces of a lower denomination, but to be issued to the importer of the silver, or to the public, after a rate of s. per pound troy. "and whereas at various times heretofore the coins of this realm of gold and silver have been usually a legal tender for payments to any amount, and great inconvenience has arisen from both these precious metals being concurrently the standard measure of value and equivalent of property, it is expedient that the gold coin made according to the indentures of the mint should henceforth be the sole standard measure of value and legal tender for payment, without any limitation of amount, and that the silver coin should be a legal tender to a limited amount only, for the facility of exchange and commerce." the act therefore prescribes the limit of s. for the tender of silver. this act was repealed, but in substance re-enacted by the coinage act of , and is still in principle and fact the law of the land and the basis of our monometallic system. from the date of its enactment england has been withdrawn from that action of bimetallic law which had been her bane for centuries. the flow of gold in or out became automatic, representing the natural flow of world-balances, and therefore proving the greatest trade help and indicator; and such commercial crises as have come upon her have arisen from the peculiarly sensitive organisation of credit which distinguishes the modern system, and are to be classed with banking rather than metallic currency phenomena. the total coinage in england from to inclusive was £ , , gold and £ , , silver. [sidenote: england: - ] +-------+-------------+-------------------+-------------------+ | | coinage of | imports of gold | exports of gold | | year. | gold. | bullion and | bullion and | | | | specie. | specie. | +-------+-------------+-------------------+-------------------+ | | , , | ? | , , | | | , , | ? | , , | | | , | ? | , , | | | , , | , , | , , | | | , , | , , | , , | | | , , | , , | , , | | | , , | , , | , , | | | , , | , , | , , | | | , , | , , | , , | | | , , | , , | , , | | | , , | , , | , , | | | , , | , , | , , | | | , | , , | , , | | | , , | , , | , , | | | , , | , , | , , | | | , , | , , | , , | | | , , | , , | , , | | | , , | , , | , , | | | , , | , , | , , | | | , , | , , | , , | | | , | , , | , , | | | , , | , , | , , | | | , | , , | , , | | | , , | , , | , , | | | , | , , | , , | | | , , | , , | , , | | | ... | , , | , , | | | ... | , , | , , | | | , , | , , | , , | | | , , | , , | , , | | | , , | , , | , , | | | ... | , , | , , | | | , , | , , | , , | | | , , | , , | , , | | | , , | , , | , , | | | , , | , , | , , | | | , , | , , | , , | | | , , | , , | , , | | | , , | , , | , , | +-------+-------------+-------------------+-------------------+ +-------+-------------+-------------------+-------------------+ | | coinage of | imports of silver | exports of silver | | year. | silver. | bullion and | bullion and | | | | specie. | specie. | +-------+-------------+-------------------+-------------------+ | | , | ? | , , | | | , | ? | , , | | | , | ? | , , | | | , | , , | , , | | | , | , , | , , | | | , | , , | , , | | | , | , , | , , | | | , | , , | , , | | | , | , , | , , | | | , | , , | , , | | | , | , , | , , | | | , | , , | , , | | | , | , , | , , | | | , | , , | , , | | | , | , , | , , | | | , | , , | , , | | | , | , , | , , | | | , , | , , | , , | | | | , , | , , | | | , | , , | , , | | | , | , , | , , | | | , | , , | , , | | | , | , , | , , | | | , | , , | , , | | | , | , , | , , | | | , | , , | , , | | | , | , , | , , | | | , | , , | , , | | | , , | , , | , , | | | , | , , | , , | | | , | , , | , , | | | , | , , | , , | | | , | , , | , , | | | , | , , | , , | | | , , | , , | , , | | | , , | , , | , , | | | , , | , , | , , | | | , | , , | , , | | | , , | , , | , , | +-------+-------------+-------------------+-------------------+ united states under british dominion the american colonies retained the silver standard, as did their mother country, with such variation of actual coins and of their tariff as the situation of the country and the immense variety of metallic values prevailing in the different colonies gave rise to. the coin most commonly current was the spanish _piece of eight_, but the system of weights and measures was the english system, and reckoning was by pounds, shillings, and pence. the method by which such a composite system was regulated consisted in those coinage tariffs with which early european monetary history is so well acquainted. according to a tariff issued in , the ounce of silver was declared worth s. d. the spanish milled _piece of eight_ was to be equal to s.; and "whereas there is great reason to apprehend that many and great inconveniences may arise in case any coined silver or gold or english halfpence and farthings should pass at any higher rate than in a just proportion to spanish pieces of eight, or coined silver at the ratio aforesaid," a tariff list was appended according to which the guinea was s., the _english crown_ s. d., and so on for other european coins. [sidenote: united states: morris's scheme, ] in accordance with this system the earliest financial steps of the continental congress in --its issues of bills of credit--were based upon, and the bills were declared payable in, the spanish _dollar_ or _piece of eight_, to which, on the report of a special commission, appointed on th april , the various gold and silver coins circulating by different standards in different colonies were rated by a tariff. according to this tariff the guinea weighing dwts. grs. was to be equivalent to - / dollars, and the english crown equal to - / dollar. gold bullion was rated dollars per oz. troy weight; sterling silver at - / dollar per oz. assuming the coins to be of full weight, the ratio here established is nearly the english ratio of . . the ratio for bullion is slightly different, but hardly materially. six years later, at the request of a committee of congress, the superintendent of finance, robert morris, submitted a scheme for a national coinage ( th january ). this scheme is remarkable for its clear-sightedness and grasp, as well as the testimony it bore to the european monetary system of the time. after deciding on silver as a necessary unit, the report thus proceeds:-- "the various coins which have circulated in america have undergone different changes in their value, so that there is hardly any which can be considered as a general standard unless it be spanish dollars. these pass in georgia at s., in north carolina and new york at s., in virginia and the four eastern states at s., in all the other states except south carolina at s. d., and in south carolina at s. d." as a common denominator, calculated from part of these figures, morris proposed a monetary unit of / -grain in fine silver, the multiples to be by the decimal system, the dollar containing units, and the mint price of fine silver being , units per pound. on the following st february congress approved of the establishment of a mint, and directed morris to prepare and report a plan for conducting it. in a concurrent paper of notes on the establishment of a money unit, and of a coinage for the united states, jefferson proposed, in opposition to morris's scheme, a decimal system resting on the dollar, and with a ratio of : . [sidenote: united states: report of ] "just principles," he says, after stating the legal ratio in the chief european countries, "will lead us to disregard legal proportions altogether, to inquire into the market price of gold in the several countries with which we shall be principally connected in commerce, and to take an average from them. perhaps we might well safely lean to a proportion somewhat above par for gold, considering our neighbourhood and commerce with the sources of the coins, and the tendency which the high price of gold in spain has to draw thither all that of their mines, leaving silver principally for our and other markets." the settlement of the matter was, however, delayed, although in the course of the year morris declared that "all our dollars are rapidly going to the enemy in exchange for light gold, which must eventually cause a considerable loss and a scarcity of silver which will be seriously felt." in this undetermined state the matter rested till th may , when the grand committee on the money unit made its report. the proposed ratio was justified thus: "in france grain of pure gold is counted worth grs. of silver. in spain grs. of silver are exchanged for of gold, and in england - / . in both england and spain gold is the prevailing money, because silver is undervalued. in france silver prevails. sundry advantages would arise to us from a system by which silver might become the prevailing money. this would operate as a bounty to draw it from our neighbours, by whom it is not sufficiently esteemed. silver is not exported so easily as gold, and it is a more useful metal. certainly our exchange should not be more than grs. of silver for of gold." the charge for coinage was to be - / per cent. for gold, and slightly over per cent. for silver. the unit was to be a dollar of grs. of pure silver, with a multiple gold piece ( dollars) and decimal aliquot pieces. on the th july following, , the congress by vote adopted the silver dollar as the basis of the currency on a decimal system, but the resolution was not followed by the establishment of a mint, although the states were experiencing great loss by the circulation of base copper coins made in birmingham. on the th april , a report was made in triplicate by the board of treasury to the president of congress, the first of the three forms of the report advocating a silver dollar of . grs. fine and a ratio of . . these proposals were adopted by resolution on the th august following, and on the th october of the same year, , the ordinance for the establishment of the mint of the united states of america, and for regulating the value and alloy of coin, finally passed congress. in accordance with the resolutions of th august, the mint price of the pound troy of gold ( parts fine) was fixed at dols. dimes, cents, and of silver at dols. dimes, cents, and mills. the mint charge here comprised is about per cent. on both silver and gold, "bringing the ratio of bullion at the mint to . , a little below the ratio in the coin." [sidenote: united states: hamilton's report, ] for several years all these regulations of congress were not put in force, and it was not until th may that the matter was again brought before the senate by the report of the secretary of the treasury, alexander hamilton. hamilton's scheme, as contained in his most remarkable paper, was for a silver unit or dollar of - / grs. of pure silver and a ratio of , and instead of the allowance of per cent. for waste and coinage the principle was adopted of free coinage--of delivering at the mint the same weight of pure metal coined as should be brought to it in bullion or foreign coin. hamilton justifies his ratio thus: "the difference established by custom in the united states between coined gold and coined silver has been stated to be nearly : . . this, if truly the case, would imply that gold was extremely overvalued in the united states, for the _highest actual_ proportion in any part of europe very little, if at all, exceeds : , and the average proportion throughout europe is probably not more than : . ." he also deduces his ratio of as a mean between the two lately preceding issues of dollars. "taking the rate of the late dollar of grs., the proportion would be as : . . taking the rate of the newest dollar of grs., the proportion would be as : . . the mean of the two would give the proportion of : very nearly, less than the legal proportion in the coins of great britain, which is as : . , but somewhat more than the actual or market proportion, which is not quite : ." as to the express selection of one or other metal for the unit, hamilton makes a departure which marks clearly that he was creating and not continuing a system, and that if bimetallism is a feature of modern conception that conception is due to american rather than french statesmanship:[ ]--"contrary to the ideas which have heretofore prevailed in the suggestions concerning a coinage for the united states, though not without much hesitation arising from a deference for those ideas, the secretary is, upon the whole, strongly inclined to the opinion that a preference ought to be given to neither of the metals for the monetary unit ... because this cannot be done effectually without destroying the office and character of one of them as money and reducing it to the situation of mere merchandise, which, accordingly, at different times, has been proposed from different and very reputable quarters, but which would probably be a greater evil than occasional variations in the unit, from the fluctuations in the relative value of the metals, especially if care be taken to regulate the proportion between them, with an eye to their average commercial value. to annul the use of either of the metals as money is to abridge the quantity of circulating medium." [sidenote: united states: scheme of ] this scheme was accepted in its entirety by the act of nd april , with the slight change that the standard of silver was changed from / to / fine. the silver dollar, therefore, weighed grs. gross ( - / grs. pure silver); on this basis, at a ratio of , the equivalent gold piece would contain . grs. ( - / / = - / ). this was accordingly established as the basis of the gold _eagle_ or ten-dollar piece, which was to contain grs. gross ( . grs. pure gold).[ ] the act was followed by another on the th february , for regulating the rate of foreign coins. the gold coins of great britain and portugal of their then standard were made a legal tender for the payment of all debts and demands, at the rate of cents for every grs. of their actual weight, those of france and spain at the rate of cents for every - / grains. for a period the system established in went on, although the ratio established was prejudicial to gold. but, twenty years after, the natural result arrived in america, as in england, and the circulation of gold was completely extinguished in the states by the unseen withdrawal of the metal. in obedience to a resolution of the senate of rd march , john quincy adams, secretary of state, produced a report on weights and measures, in which he impugned the correctness of the data on which hamilton had based his reckoning in . two years later, th january , a committee of the house reported an ill-considered scheme, recommending a change in the ratio in favour of gold, and the imposition of a heavy seigniorage on silver. on the st of march following, the house of representatives directed the secretary to report such measures as might be expedient to procure and retain a sufficient quantity of gold and silver coin in the united states. in this report, in referring to one feature in the previous crisis, namely, the necessity in for the suspension of specie payments, secretary crawford stated that, from the commencement of the war until that event of , a large amount of specie was taken out of the united states by the sale of english government bills, at a discount frequently of to per cent. he concluded by suggesting a raising of the value of gold in relation to silver, per cent., implying a ratio of . . in the report to the house of representatives, dated th march , quite a different statement was made, namely, that there was no export of gold from the united states from to , and that "there were certainly no indications that gold was rated too low in our standard of : earlier than , when the english demand commenced." [sidenote: united states: gold export of ] the terms of the report of the committee on the currency, which was communicated to the house of representatives on the nd february , must be contrasted with this statement. "the committee are of opinion that the value of american gold compared with silver ought to be somewhat higher than by law at present established. on inquiry they find that gold coins, both foreign and of the united states, have in a great measure disappeared, and from the best calculation that can be made there is reason to apprehend they will be wholly banished from circulation, and it ought not to be a matter of surprise, under our present regulations, that this should be the case.... there have been coined at the mint of the united states millions of dollars in gold. it is doubtful whether any considerable portion of it can at this time be found within the united states.... it is ascertained that the gold coin, in an office of discount and deposit of the bank of the united states in november , amounted to , dollars and the silver coin to , ; that since that time the silver coin has increased to , dollars, while the gold coin has diminished to dollars, only of which is american."[ ] the committee proposed a bill in the sense of their report, but for seven years--years of acute commercial crises and distress--no actual step was taken. in november of the following year the subject of the disappearance of gold from the currency was brought before the lower house of congress by mr. lowndes. in december , however, the senate required the secretary of the treasury to ascertain the ratio and to state such alterations in the gold coins as might be necessary to conform those coins to the silver coins in their true relative value. in his report secretary ingham insisted on the advantage of a single standard, but, in case of a determination to maintain both gold and silver, he proposed to approximate as near as could be to the french system by establishing a ratio of . . in case of no change of the ratio he proposed to discontinue the gold coinage, whenever the premium for gold should exceed per cent. no action was taken on these reports, nor on the similar proceedings in the two following years, nor very little more on the report which in june the select committee on coins produced. part of the instructions given to this committee were "to inquire into the expediency of making silver the only legal tender, and of coining and issuing gold coins of a fixed weight and fineness, which shall be received in payment of all debts to the united states, at such ratio as may be fixed from time to time but shall not otherwise be a legal tender." in the house of representatives the converse proposition of a gold standard with a restricted legal tender had been made by m. wilde, th march , but when the report appeared it advocated a silver standard. [sidenote: united states: the act of ] while congress was thus delaying over a vital question the new york bankers, may , pressed for the regulation of the gold coins, so as to retain them in the country. two months later, st july , the long-sought measure passed, but in an extraordinary form. at a blow the ratio was changed from : to : ( . ), by the reduction of the weight of the fine gold in the gold coins to . troy grains, soon afterwards, by an act of th july , changed to . grains, the standard being changed at the same time from / to / fine. the motives and amount of wisdom which underlay this sudden close of a long period of agitation can be measured from benton's own words, in his _thirty years' view_:-- "a measure of relief was now at hand, before which the machinery of distress was to balk and cease its long and cruel labours--it was the passage of the bill for equalising the value of gold and silver and legalising the tender of foreign coins of both metals. the bills were brought forward in the house by mr. campbell h. white of new york, and passed after an animated contest in which the chief question was as to the true relative value of the two metals, varied by some into a preference for national bank paper; - / was the ratio of nearly all who seemed best calculated from their pursuits to understand the subject. the thick array of speakers was on that side, and the eighteen banks of the city of new york, with mr. gallatin at their head, favoured that proportion. the difficulty of adjusting this value, so that neither metal should expel the other had been the stumblingblock for a great many years, and now this seemed to be as formidable as ever. refined calculations were gone into, scientific light was sought, history was rummaged back to the times of the roman empire; and there seemed to be no way of getting to a concord of opinion either from the light of science, the voice of history, or the result of calculations. the author of this _view_ had, in his speeches on the subject, taken up the question in a practical point of view, regardless of history and calculations and the opinions of bank officers; and looking to the actual and equal circulation of the two metals in different countries he saw that this equality and actuality of circulation had existed for above three hundred years in the spanish dominions of mexico and south america, where the proportion was : . taking his stand upon this single fact, as the practical test which solved the question, all the real friends of the gold currency soon rallied to it. mr. white gave up the bill which he had first introduced, and adopted the spanish ratio. mr. clowney of south carolina, mr. gillet, and mr. cambreleng of new york, mr. ewing of indiana, mr. mckim of maryland, and other speakers gave it a warm support. mr. john quincy adams would vote for it, though he thought the gold was overvalued, but if found to be so the difference could be corrected hereafter. the principal speakers against it and in favour of a lower rate were messrs. gorham of massachusetts, selden of new york, binney of pennsylvania, and wilde of georgia, and eventually the bill was passed by a large majority, to . in the senate it had an easy passage. messrs. calhoun and webster supported it, mr. clay opposed it; and on the final vote there were but seven negatives--messrs. chambers of maryland, clay, knight of rhode island, alexander porter of louisiana, silsbee of massachusetts, southard of new jersey, sprague of maine. the good effects of the bill were immediately seen. gold began to flow into the country through all the channels of commerce, old chests gave up their hordes, the mint was busy; and in a few months, as if by magic, a currency banished from the country for thirty years overspread the land and gave joy and confidence to all the pursuits of industry." the panacea thus magnificently lauded soon proved itself worse than inefficient. the ratio was too high, and the silver dollars could not be maintained. they were unduly exported, especially between the years and . and in order to retain within the country a sufficient amount of small coin the amount of silver in the small coins, from the half-dollar downwards, was reduced by an act of th february . it was at the same time provided that they should be coined only on government account, and they were made legal tender only up to the sum of five-dollars. the direction of this step will be seen at a glance--it was in the direction of the gold valuation. this is as plainly the case as it was in the latin union, already exemplified (p. ). further, it was so conceived and explicitly stated by dunham, who piloted the bill through the house. "we have had," he said, "but a single standard for the last three or four years. that has been and now is gold. we propose to let it remain so, and to adapt silver to it, to regulate it by it." legally, the old silver dollar was left untouched, and the gold and silver valuation was not expressly abolished. no reference whatever was made to the silver dollar in the act, for the simple reason that for years nothing had been seen of them. they did not and could not circulate. there was plenty of gold, and the absence of silver with the change in standard therein practically implied was either unnoticed, or regarded, if at all, only with indifference. the final step in the simplification and unification of this system was commenced in , when a bill was prepared for a revised coinage law with a pure gold standard, silver being demonetised as a legal tender money. the bill did not become law till th april . and no opposition was expressed in either the house of representatives or the senate to the abolition of the double standard. the silver dollars previously coined (of which, however, but few were in existence) maintained their quality as legal tender; but the coining of new dollars, whether on government or private account, was forbidden. [sidenote: united states: the legislation of - ] this act was therefore simply the complement of the preceding legislation of . the completion of this system thus established was provided in section of the revised statutes of , by which the silver coins of the united states were declared legal tender only up to five dollars, thus completing, from december onwards, the demonetisation of silver, and the establishment of gold monometallism on the english plan. as an effective scheme it meant little because of the prevalence of paper. within a very short time of the passing of this bill, however, began the great change in the relative value of the precious metals which has continued since. the silver-producing interest, at that moment on the eve of receiving an enormous accession of strength by the nevada finds, made itself heard. at the same time the prospect of the resumption of cash payments brought an additional incentive and interest. a commission to investigate the question of standard was therefore appointed, th august , and a majority of this commission recommended the establishment of the double standard. thereupon bland, one of the members of the commission, proposed in the house of representatives the re-establishment of the double standard, at the old ratio of : . , with free coinage of silver. the question of resumption was pressing near. on the st january the states were to return to cash payments. on what basis should that return be effected? should the act of be maintained, or should a return be made to the bimetallic system which had prevailed before then? the government was of the former opinion; the majority of congress of the latter. the silver party, finding the measure could not be carried over the veto of the president, agreed to a compromise, under which the free coinage clause was dropped, and it was as a compromise that the bland act so-called, the "act to authorise the coinage of the standard silver dollar, and to restore its legal tender character," passed on the th february . to the favourers of a gold system it was conceded that in the maintenance of the previous legal ratio of . , the silver dollar should be reserved for treasury reckonings, and a maximum minting limit of million dollars monthly should be fixed. the bimetallists gained the fixing of a minimum limit of million dollars monthly of silver coinage, and the clause enjoining the president of the united states to take steps for the meeting of an international conference. [sidenote: united states: bland and sherman acts] this scheme became law immediately, and on the st january the united states resumed specie payment. as far as the actual circulation of the country is concerned this return is only nominally effective. the habit of employing redeemable paper had grown too strong and continuous, and even the rule of the new york banking-houses, to employ only gold in clearing-house settlements, has been formally, though not absolutely, abolished by the act of congress of th july , which provided that no national bank should be a member of a clearing-house at which gold and silver certificates were not accepted in payment of balances. the bland bill deceived the hope of both parties, as such a compromise might be expected to do. it remained in force, notwithstanding, till august , and during the twelve years, - , the united states coined a matter of million silver dollars, employing therein million kilogrammes of silver--a third of the total contemporary production. almost yearly, up to , the repeal of the silver purchase clauses of the bland bill and the suspension of the silver coinage was recommended to congress by presidential message, and in the reports of the secretary of the treasury. in december president harrison and secretary windam definitely proposed to cease the coining of silver, and to limit the issues of silver certificates to the value of the silver bullion as deposited, reckoning that value at its then market price. from these proposals sprang, by the same peculiar process of committee gestation which had produced the bland act, the compromise which passed on the th july , under the title of the sherman act. this act represents a compromise not of principles but of self-seeking interests. the main regulations of the law, which came into force on the th august , were:-- . the secretary of the treasury is to purchase silver to not more than the monthly amount of , , oz. at the market price, so long as that price is below . cents per oz. , . to issue treasury notes against the purchases, the said notes to be full legal tender, and capable of forming part of bank reserves. . up to st july , million oz. monthly of this silver to be coined into dollars. that coinage to cease after the date specified, except so far as necessary to secure the treasury notes. at the same time the act declares the intention of the american government to preserve the parity of gold and silver. the fillip given by this legislation to the price of silver was over in a moment, and almost immediately the question recurred for pressing consideration, on the strong demand of the silver party for free coinage in place of these as yet ineffectual purchase schemes. the impotent close of the international monetary conference at brussels, in february , was followed by the act of the governor-general of india in council of june th closing the indian mint to the free coinage of silver. left practically alone in her stand in defence of silver, america, in the simple interest of her gold reserve, was obliged to abandon the field, and after a bitter fight the repeal of the clauses of the sherman act, which had enacted the compulsory purchase of silver, was carried in november . [sidenote: united states: coinage - ] we are too near the event to estimate these later developments of the situation, but as yet two remarkable facts have hinged upon this report--( ) the immediate depreciation of the value of silver and the effect on the export of silver to india were not such as might _a priori_ have been conjectured; ( ) the ceasing of the silver purchase deprived the currency of the united states of its only remaining element capable of expansion, and of all the countries of the world the united states stands most in need of an expanding and expansible currency. coinage of the mints of the united states.[ ] +--------+---------------+--------------++--------+---------------+---------------+ | years. | gold | silver || years. | gold | silver | | | (dollars). | (dollars). || | (dollars). | (dollars). | |--------+---------------+--------------++--------+---------------+---------------+ | - | , . | , . || | , . | , . | | | , . | , . || | , . | , . | | | , . | , . || | , . | , . | | | , . | , . || | ... | , . | | | , . | , . || | ... | , . | | | , . | , . || | , . | , , . | | | , . | , . || | , . | , , . | | | , . | , . || | , , . | , . | | | , . | , . || | , . | , . | | | , . | , . || | , . | , . | | | , . | , . || | , . | , . | | | , . | , . || | , . | , , . | | | , . | , . || | , . | , , . | | | , . | , . || | , . | , , . | | | , . | , . || | , . | , , . | | | , . | , . || | , . | , , . | | | , . | , . || | , . | , , . | | | , . | , . || | , . | , , . | +--------+---------------+--------------++--------+---------------+---------------+ +--------+---------------+--------------++--------+---------------+---------------+ | years. | gold | silver || years. | gold | silver | | | (dollars). | (dollars). || | (dollars). | (dollars). | |--------+---------------+--------------++--------+---------------+---------------+ | | , . | , , . || | , , . | , . | | | , . | , , . || | , , . | , . | | | , . | , , . || | , , . | , . | | | , , . | , , . || | , , . | , . | | | , , . | , , . || | , , . | , . | | | , , . | , , . || | , , . | , , . | | | , , . | , , . || | , , . | , , . | | | , , . | , , . || | , , . | , , . | | | , , . | , , . || | , , . | , , . | | | , , . | , , . || | , , . | , , . | | | , , . | , , . || | , , . | , , . | | | , , . | , , . || | , , . | , , . | | | , , . | , , . || | , , . | , , . | | | , , . | , , . || | , , . | , , . | | | , , . | , , . || | , , . | , , . | | | , , . | , , . || | , , . | , , . | | | , , . | , , . || | , , . | , , . | | | , , . | , , . || | , , . | , , . | | | , , . | , , . || | , , . | , , . | | | , , . | , , . || | , , . | , , . | | | , , . | , . || | , , . | , , . | | | , , . | , . || | , , . | , , . | | | , , . | , , . || | , , . | , , . | | | , , . | , , . || | , , . | , , . | | | , , . | , , . || | , , . | , , . | | | , , . | , , . || | , , . | , , . | | | , , . | , , . || | , , . | , , . | | | , , . | , , . || | , , . | , , . | | | , , . | , , . || | , , . | , , . | | | , , . | , , . || | , , . | , , . | | | , , . | , , . || | , , . | , , . | | | , , . | , , . || | | | +--------+---------------+--------------++--------+---------------+---------------+ [sidenote: united states: movements of metals, - ] import and export of the precious metals into and from the united states. +------------------------------------------------------------------+ | gold and silver. | +--------------------------+-------------------+-------------------+ | | import (dollars). | export (dollars). | +--------------------------+-------------------+-------------------+ | yearly average, - | , , | , , | | " - | , , | , , | | " - | , , | , , | +--------------------------+-------------------+-------------------+ +-----------------------------------------------------------------+ | gold. | +-------------------------+---------------------------------------+ | | import (dollars). | export (dollars). | +-------------------------+-------------------+-------------------+ | yearly average, - | , , | , , | | " | , , | , , | | " | , , | , , | | " | , , | , , | | " | , , | , , | | " | , , | , , | | " | , , | , , | | " | , , | , , | | " | , , | , , | | " | , , | , , | | " | , , | , , | | " | , , | , , | | " | , , | , , | | " | , , | , , | | " | , , | , , | | " | , , | , , | | " | , , | , , | | " | , , | , , | | " | , , | , , | | " | , , | , , | | " | , , | , , | | " | , , | , , | | " | , , | , , | | " | , , | , , | +-------------------------+-------------------+-------------------+ | silver. | +-------------------------+-------------------+-------------------+ | yearly average, - | , , | , , | | " | , , | , , | | " | , , | , , | | " | , , | , , | | " | , , | , , | | " | , , | , , | | " | , , | , , | | " | , , | , , | | " | , , | , , | | " | , , | , , | | " | , , | , , | | " | , , | , , | | " | , , | , , | | " | , , | , , | | " | , , | , , | | " | , , | , , | | " | , , | , , | | " | , , | , , | | " | , , | , , | | " | , , | , , | | " | , , | , , | | " | , , | , , | | " | , , | , , | | " | , , | , , | +-------------------------+-------------------+-------------------+ in the currency total of america was thus composed:-- +-------------------------------+---------------+---------------+ | | . | . | +-------------------------------+---------------+---------------+ | gold (dollars), | , , | , , | | silver (dollars), | ... | , , | | silver (small coin), | , , | , , | | gold certificates, | , , | , , | | silver certificates, | ... | , , | | state notes, | , , | , , | | notes of the national banks, | , , | , , | | +---------------+---------------+ | totals, | , , | , , | +-------------------------------+---------------+---------------+ in -- metallic. . dollars. gold bullion, , , silver bullion, , , gold coin, , , silver dollars, , , subsidiary silver coins, , , ------------- , , , ============= paper. legal tender notes (old issue), , , legal tender notes act, th july , , , gold certificates, , , silver certificates, , , national bank notes, , , currency certificates, , , ------------- , , , ============= of the total of silver dollars in the above, only a matter of , , are in circulation. the balance, , , , are in the treasury vaults. [sidenote: the netherlands in ] netherlands. during the eighteenth century the monetary history of the netherlands loses its central and determining importance. the details of the mint laws, which precede the later developments of the nineteenth century, are therefore relegated to the appendix (no. iv. holland). when the united provinces of the netherlands and belgium were united under a single sceptre, both countries had an immense variety of coins, for formerly nearly every province claimed a right of coining money. to meet the desire for a simple and single system, a monetary law was passed in under king william i. its object was to arrive at a currency having the old florin, called the florin of _as_, as the unit. but at the same time a gold piece of florins was allowed. the florin contained . grms. of silver and the -florin piece . grms. of gold. the ratio was therefore . , whilst in france it was - / . moreover, to respond to the desire of the inhabitants of belgium, the franc was accepted in the public treasuries, but at too high a rate, viz. at - / cents, whereas it was worth only . cents. the result was that the new -florin pieces on leaving the brussels mint went to the lille mint, to come back in the shape of -franc pieces. the law was languidly carried out. gold pieces were principally coined, and in proportion as gold was coined it became more and more difficult to coin silver. in belgium was separated from holland, and it was not till that the recoining of the old money was seriously undertaken. the monetary law had been already altered in . side by side with the worn silver coins there were issued or -florin gold pieces, which had been coined to the amount of - / millions of florins. the worn and clipped silver coins not being available for international transactions, gold formed the basis of exchange. this was regulated not by the florin but by / of the -florin gold piece. all difficulties it was thought could be obviated by adopting a florin of exactly grms. weight, corresponding to the decimal metric system, and . fine. as long as the gold coins remained in circulation, and they were of great use while the recoinage was going on, there was thus a bimetallism with a ratio of : . . from - more than - / millions of florins in nominal value were called in and were recoined in new silver pieces. the operation cost the state millions of florins, millions being the loss on the old coins. before actually commencing the recoinage, the question of standard had been carefully considered. silver was resolved on. for more than a century and a half the florin had been the unit of all transactions. as the recoinage advanced, further attention was devoted to the necessity of instituting the single standard. by the law of th september , the system of single silver standard was adopted. in june the gold coins were called in. a total of millions, not one-third of what had been coined, was offered by the public. it was sold in - by the government, which thereby lost rather more than million. [sidenote: holland in ] there is a very noticeable point connected with this reform. the law of september admitted trade coins in gold by the side of the legal silver coins and fractional money. besides the ducats, which are still in demand from time to time, there were _guillaumes d'or_, _double-_ and _half-guillaumes_. these pieces were inscribed only with the weight and fineness. this system failed completely. though the gold guillaume was coined of the same weight and fineness as the old -florin piece, which was much in request, people would not have it. the uncertainty of its value made it unpopular. between the years and only , guillaumes, , half-guillaumes, and double-guillaumes were coined, and since not a single one has been coined. all through the californian and australian gold finds and until , the price of silver remained stationary for large transactions. only in small transactions did it exhibit from time to time some slight fluctuations. from - everybody was invariably able to sell his silver to the netherlands bank at fl. cents. bank retained for recoinage, etc fl. cents. ------------------- fl. cents. which, equal to value of kilogramme of silver, . , was as by the netherlands standard. at amsterdam also the price of silver did not change. with the change in this repose was disturbed. a commission was thereupon appointed, in october , to consider the situation, which reported in the following december. it proposed to prohibit the free minting of silver, and this was enacted by the law of st may . as long as there was still a hope of germany continuing her old system, the commission merely proposed to coin a gold piece side by side with the silver money. when, however, germany adopted the gold standard, the commission, in its additional report of th june , proposed to do the same by the introduction of a legal tender currency of - and -florin pieces in gold, and the withdrawal of the silver standard coins issued under the law of . this measure did not meet the approval of the states-general. for the moment holland had therefore no standard of value, the mint being closed to silver, and gold being unrecognised. the consequent heavy fall in the exchange led to an agitation which resulted in the enactment of the law of th june , which opened the mint to the public for the coining of golden -guilder pieces of . fine, to be legal tender concurrently with the silver florins at the ratio of to . (calculated on a quotation of . price per oz. of silver). the law was only enacted for a year, and in the following may an attempt was made to pass a bill for the introduction of an exclusive gold standard, and for the demonetisation of silver. the bill was rejected by the first chamber, and the law of renewed for another year, and then (by the law of th december ) renewed "until otherwise determined upon by law." the result was the permanence of the limping standard--a gold piece with free minting, side by side with silver pieces whose minting is restricted, but gold and silver pieces being alike of unlimited legal tender. on the th march the states-general passed a law establishing, in the dutch east indies, the double standard on the same basis as in holland, i.e. with the formal suspension of the further coinage of silver. this law was promulgated in java on the th june . [sidenote: portugal in ] portugal. the first law respecting gold in portugal is dated th august . by that law the price to be paid in the lisbon and oporto mints for a mark of gold ( carats) was , reis ( fr. cents). this same gold was valued at , reis ( fr. cents). for a mark of silver of dinheiros (i.e. / fine) the value was fixed at reis ( fr. cents), producing, when minted, reis ( francs). the legal ratio at that date ( ) was : (for purchase price of the metal), : . (for the mint issue rate). in the value of a mark of coined silver was changed, and rose from francs to francs cents ( reis), an enactment which changed the ratio at a blow to . . this ratio remained until the beginning of the present century, and led in short to the expulsion of gold from the monetary circulation. the law of the th march gave to a mark of coined gold a fixed value of milreis ( francs cents), and the gold piece, whose value was reis ( francs cents), had a value of francs cents ( reis). this law was repealed shortly afterwards, together with those passed in the cortes of , but was restored and ratified by another law of the th november , and by a special charter of th june . the preamble of the law of had declared that the equivalence of . between gold and silver was very far from expressing the proportion of their mercantile value, and that gold did not practically come into circulation on account of the legal value of such money being below its corresponding value in bullion, the legal ratio was therefore raised to in . in a new law, of the th april, gave the coined silver mark the value of reis ( francs cents), which brought the equivalence to about . , a figure which was considered the average rate of exchange of money, whether national or foreign. on the rd march a new law was passed raising the value of the gold mark to , reis ( francs cents), and the gold piece, whose value had been fixed in at francs cents ( reis), rose to francs cents ( reis). after this law other legal measures were taken which established the legal ratio of . . it was these incessant alterations of ratio which led portugal to abandon bimetallism. the preamble of the law of , which instituted the gold single standard, expresses this, attesting that the circulation felt the lack of harmony and the disorder produced by alterations in the ratios, that the legal ratio being higher than the commercial ratio hampered the transmission of money and burdened all transactions. the law was adopted unanimously by the portuguese chambers. the international conferences. the chief feature of the modern monetary agitation--the international conferences and the attempt at international system--is due to the rapid development of bimetallic theory in france, and to the initiative of the united states, as well as to the universal or world-embracing needs of the situation, and the extension of the domain of international law or morality. it is a mistake to suppose that this new era dates from , from the change in the german monetary system and the commencement of the wide divergence between the two metals. the formation of the latin union was the initial step in the process, although, in a smaller sphere, german monetary history for centuries had been acquainted with mint conventions between very divergent systems, and had shortly before furnished another illustration in the conference of vienna in . the first widely-embracing international conference proper, however, was the outcome of an expression of opinion in the conclave of the latin union. it was called at the invitation of france, and met at paris on the th june . the states represented were austria, baden, bavaria, belgium, denmark, spain, the united states, france, great britain, greece, italy, the netherlands, portugal, prussia, russia, sweden and norway, switzerland, turkey, and würtemberg. the eight sessions of the conference occupied till the th july . all the states except holland declared in favour of a gold standard. it closed without arriving at any actual or practical conclusions, but the president, de parieu, in his concluding oration, considered himself justified in asserting that the sense of the conference was in favour of a gold monometallic standard, approximating, as near as the occasions of future mint change in the various states would permit, to a unit based on the -franc piece ( tale to a kilogramme of gold). [sidenote: the conference of ] though without immediate practical result, the conference initiated a wide movement. in england it was followed by the appointment of a commission, th february , "to consider and report upon the proceeding of the said international monetary conference, ... and to examine and report upon the recommendations of the conference, and their adaptability to the circumstances of the united kingdom, and whether it would be desirable to make any and what changes in the coinage of the united kingdom, in order to establish, either wholly or partially, such uniformity as the conference had held in contemplation." the commission sat from the th march to the th july , but closed without practical decision, in regard of the difficulties lying in the way of an international coinage. in particular, the proposition of a reduction of the pound sterling to the -franc piece was rejected. in france the whole course of public opinion, both before and after the conference of , and in the concluding examination of the _enquête_ of - , ran strongly in favour of gold monometallism, and the opinion has been unflinchingly held and expressed that only the breaking out of the franco-german war prevented the adoption of that system in france and in the states of the latin union. it is hardly too much to say that the conclusion of the war, with the heavy war indemnity which she thereby suffered, took the initiative in monetary legislation out of the hands of france. along with the latest reconstruction of her hoary imperial scheme, germany effected her great and greatly-needed monetary unification and reform. she accomplished it on the basis of the old or french ratio of : , and for two years after the reception of the scheme the price of silver maintained itself moderately. on the th july , however, she completed the system by the legal tender law, which demonetised the silver currency, and gradually more than two-thirds of the total old german silver money was called in, melted into bullion, and flung on the market. concurrently, other changes were at work on the continent. in the scandinavian states followed the example of germany and adopted a gold in place of a former silver standard. by the treaty of th december a common system was established between sweden, norway, and denmark. for sweden the conversion of the silver currency was based on a ratio of . , for denmark . , and for norway . . three years later the netherlands followed suit. by their law of th june and th may they adopted a gold in place of their previous silver standard at a basis ratio of . . before the completion of these widespread changes, the great fall in the gold price of silver had begun, and the united states in her silver-producing interests, great britain in the interests of her indian dependency and in those of her trade with silver-using countries, and the whole commercial world generally in the dislocation of international exchange, found themselves menaced by gravest danger. [sidenote: the depreciation of silver] before the inrush of silver to the mint, caused by such a fall, the latin union first limited and then abandoned its coining of the -franc piece. the fall of silver became thereby only the more acute and confirmed. by july it had sunk to - / per oz. apprehension was universally felt, and in both england and the united states fresh commissions were appointed to consider the question. the english commission on the depreciation of silver was appointed in march , and sat from the th march to the th may, under the presidency of mr. goschen. the investigation turned upon the causes of the prevailing situation, without any attempt at the suggestion of a remedial positive system. later, in the same year ( th august), the american congress voted the appointment of a like commission, to inquire into the causes of the depreciation of silver and into the feasibility of a reconstruction of a bimetallic system, as well as to devise a ratio and measures for the facilitation of a return to cash payments in the united states. this commission resulted in a double report, the 'majority' and the 'minority' report. the majority, comprising messrs. jones, bogy, willard, groesbeck, and bland, recommended the remonetisation of silver and the recourse to a fresh international conference. this latter proposition was expressed in the compromise known as the bland bill, the "act to authorise the coinage of the standard silver dollar, and to restore its legal tender character, th february ." section of this law imposed it upon the president of the united states to invite the members of the latin union and the other interested nations to an international conference. on the invitation of france this conference met in paris on th august . the american delegates proposed the free coinage of silver in an international agreement and its unrestricted employ on a full equality of tender with gold. the delegates of belgium, switzerland, and norway combated the proposals, and, on the part of england, mr. goschen declared that while the complete demonetisation of silver portended a commercial crisis to which no parallel could be found, england could consent to no serious modification of her currency system. germany was not represented, and in her absence france adopted a waiting policy, and the conference closed with an impotent expression of opinion that, in view of the difference of opinion, it was useless to discuss an international ratio, and that, while it was necessary for the world to maintain the currency of silver, the choice and treatment of each or either metal must be left to the particular monetary situation and needs of each separate state. it was not to be expected that so lame a conclusion could stand before the needs of the situation. on the th may the landed interest in germany succeeded in driving the chancellor of the empire to suspend the further sale of silver. the circumstance gave fresh hope to the bimetallists, and a busy propaganda was carried on throughout europe and the states. the renewed international conference of is to be regarded as an outcome of this movement. [sidenote: the conference of ] on the invitation of the united states and france the third international conference met in paris on the th april . all the european states, canada, india, and the united states were represented. france, through her delegates, magnin, the president of the conference, and henri cernuschi, at once and boldly declared for bimetallism. the united states, italy, austria, the netherlands, and british india followed suit. on behalf of their states the british and german delegates declared that no change in the currency systems of their countries could be entertained, but in case of an agreement among the chief nations certain regulations to increase the monetary employment of silver might be devised. belgium, switzerland, greece, and the scandinavian kingdoms declared against bimetallism. after a recess from the th june to the th may the conference closed on the th july with a nominal adjournment to the th april , so as to give room for possible currency legislation in the meantime. on the day fixed, however, the conference, as need hardly be said, did not reassemble. practically, in the interval between the second and third of these international delegations, the monetary situation had not perceptibly altered. the price of silver in had been - / , in it was - / : the general level of prices had, if anything, slightly improved, while the production of silver had not materially increased (from , , kilogrammes in to , , kilogrammes in ), though that of gold had certainly decreased. the close of the conference was, however, followed by a strong bimetallic agitation in england and germany, which found united expression in the bimetallic congress at cologne in october . this congress unanimously adopted the following resolutions:-- "that in order to the establishment of a firm ratio between gold and silver, it is desirable for england and germany-- " . to increase the employment of silver by minting full tender silver by the side of the divisional restricted tender silver. " . that germany should withdraw all gold and paper below the value of marks [and replace it by silver]. " . that germany should sell no more silver. " . that the bank of england should put in practice the clause of her charter which allowed her to employ silver as part of the bank reserve." the conclusions of this congress had, however, no practical influence on the course of policy of either nation. in the united states a parallel though more interested agitation was conducted, centring round the yearly proposed repeal of the compulsory minting clauses of the bland bill. [sidenote: the english gold and silver commission] in england the commercial depression, consequent upon falling prices and the dislocation of exchanges with india and the east, ran its full course, and gave fresh ground for activity to the then recently formed bimetallic league. in the course of silver had sunk to d. per oz., and when the royal commission on the depression of trade and industry closed its investigations, with the expression of a desire for an inquiry into the state of the precious metals, the british government only too gladly acceded. on the th september the royal commission "to inquire into the present changes in the relative values of the precious metals" was appointed. its final report was made in october , and, as is well remembered, was of a divided nature. all the members of the commission agreed that the action of the latin union in broke the link between gold and silver, which had kept the price of silver, as measured by gold, constant at about the legal ratio, and thereby left silver exposed to the influence of all the factors which go to determine the price of a commodity. on the question of bimetallism, in reference to the actual and to any possible currency system, the commissioners disagreed, and made separate reports. lord herschell, sir c.w. fremantle, sir john lubbock, sir thomas henry farrer, j.w. birch, and leonard h. courtney expressed themselves adversely. "though unable to recommend the adoption of what is commonly known as bimetallism, we desire it to be understood that we are quite alive to the imperfections of standards of value, which not only fluctuate but fluctuate independently of each other, and we do not shut our eyes to the possibility of future arrangements between nations which may reduce these fluctuations. one uniform standard of value for all commercial nations would, no doubt, be a great advantage. but we think that any premature and doubtful step might, in addition to its other dangers and inconveniences, prejudice and retard progress to this end. "we think also that many of the evils and dangers which arise from the present condition of the currencies of different nations have been exaggerated, and that some of the expectations of benefit to be derived from the changes which have been proposed would, if such changes were adopted, be doomed to disappointment. "under these circumstances we have felt that the wiser course is to abstain from recommending any fundamental change in the system of currency under which the commerce of great britain has attained its present development." from these opinions dissent was directly expressed in part iii. of the report by the remaining members--sir louis malet, a.j. balfour, henry chaplin, sir d. barbour, sir w.h. houldsworth, and sir samuel montague. [sidenote: dissent from report of commission] "we cannot doubt that if the system which prevailed before were replaced in its integrity most of the evils which we have above described would be removed; and the remedy which we have to suggest is simply the reversion to a system which existed before the changes above referred to were brought about--a system, namely, under which both metals were freely coined into legal tender money at a fixed ratio over a sufficiently large area. "the remedy which we suggest is essentially international in its character, and its details must be settled in concert with the other powers concerned. "it will be sufficient for us to indicate the essential features of the agreement to be arrived at, viz.:-- " . free coinage of both metals into legal tender money. " . the fixing of a ratio at which the coins of either metal shall be available for the payment of all debts at the option of the debtor. "we submit, therefore, that the chief commercial nations of the world, such as the united states, germany, and the states forming the latin union, should, in the first place, be consulted as to their readiness to join with the united kingdom in a conference, at which india and any of the british colonies which may desire to attend shall be represented, with a view to arrive, if possible, at a common agreement on the basis above indicated." such a report was claimed as a victory for either side, but its doubtful tenor only confirmed the rooted suspicion of the english administration as regards any change of the currency system. and when, on the occasion of the paris exhibition in , a free international monetary congress was held, as one of the numerous special congresses connected with the celebration, great britain was not represented among the members who attended on the invitation of the organising committee. m. magnin, governor of the bank of france, presided at the sittings, which covered from the th to the th september. like its predecessor, the international conference, this congress closed without direct or practical resolution. putting out of view this congress as of a more informal nature, a period of eleven years elapsed between the still only prorogued conference of paris of and the conference of brussels in . this--as yet the last--conference was summoned on the initiative of the united states, but from the commencement a distinct difference of tone and method made itself felt; the government of the united states recognising that some european countries might not be willing to adopt the remedy which they would prefer, namely, "the establishment of some fixity of value between gold and silver, and the free use of silver as a coin metal, upon a ratio to gold to be fixed by an agreement between the great commercial peoples of the world." the invitation to and purpose of the conference were conveyed in quite general terms, namely thus, "for the purpose of considering what measures, if any, could be taken to increase the use of silver in the currency systems of nations." [sidenote: the brussels conference] the invitation was accepted by all the most important states, and at the first meeting, on th november , the delegates of twenty governments were present, namely, austria, hungary, belgium, denmark, france, germany, great britain, british india, greece, italy, mexico, the netherlands, norway, portugal, roumania, russia, spain, sweden, switzerland, turkey, and the united states. the proceedings were opened by m. beernaert, president of the council and finance minister of belgium. m. montefiore levi, senator, and delegate of belgium, was chosen as president, and his excellency, m. edwin h. terrell, minister of the united states at brussels, and one of the delegates of the united states, was chosen vice-president. at the second meeting the american delegates submitted a scheme for international bimetallism, but, in conformity with the terms of the invitation, at the same time expressed a hope that the powers represented would consider and submit other plans for the enlarged use of silver. two such proposals they themselves suggested for discussion--( ) the plan of m. moritz levy, proposed at the conference of , and ( ) the plan proposed by the late dr. a. soetbeer. the main design of both these proposals was to increase the use of silver, by substituting silver coins or notes based on silver, for such small gold coins and small notes based on gold as are at present in circulation. at the same session the delegates of germany, austria, and russia explained that they were instructed not to express an opinion or to vote upon any resolution. roumania, portugal, turkey, and greece not having special instructions, felt themselves compelled to take up a similar attitude. finding that france and the states of the latin union were apparently more disposed to criticism of, rather than to cordial co-operation with, the objects of the conference, the delegates of the united states did not press for a resolution on the wider question of bimetallism, and the attention of the conference was accordingly fixed on the subsidiary suggestions. to these latter, as above, was added on the same day a third, made by mr. alfred de rothschild, to the effect that on condition of the united states continuing her purchases of million oz. of silver yearly the different european powers should combine to make certain yearly purchases, say to the extent of £ , , yearly; these purchases to be continued over a period of five years, at a price not exceeding pence per oz. on a rise of silver above that price the purchases for the time being to be immediately suspended. in committee this latter proposal was thus modified-- . the european states which agree, upon the basis of this proposal, will buy in each year million oz. of silver, on condition that the united states agree to continue their present purchases, and that unlimited free coinage be maintained in british india and mexico. . the proportion of the purchases to be made by each country will be determined by agreement. . the purchases will be made at the discretion of and in the manner preferred by each government. . these amounts of silver will be devoted in each country to the monetary uses authorised by the legislation of that state, and the silver will be either coined or made the guarantee for an issue of ordinary or special notes, as government may think fit. . the arrangement will be made for five years. the obligatory purchase of silver will be suspended should the metal reach in the london market a price determined by agreement between the governments. the purchases may be renewed, if the delegates of the different countries interested should agree upon the fixing of a new limit of price. they should be renewed in any case if the price falls below the original limit. with regard to the soetbeer plan it was abandoned in committee, while the levy plan was drawn up in the following terms:-- " . the withdrawal from circulation within a period of ... of gold coins containing a weight of less than . grms. of fine gold ( -franc pieces). " . the withdrawal of notes of a less value than the coin of francs or its equivalent, an exception being made of notes representing a deposit of silver." the manner of adopting and recommending these schemes to the conference from the committee was peculiar. the british delegate, sir c. fremantle, declared that he could not entertain the "levy" except in conjunction with the "rothschild" scheme, and while recommending the latter to the conference for discussion, the states of the latin union declared that even if passed, they could not recommend the plan to their governments. at the fourth session m. boissevain declared that there were insurmountable obstacles to its adoption by the government of the netherlands. general strachey said that unless it received more favour than was indicated by the report, he would be unable to support it. mr. allard, one of the belgian delegates, declared that it was insufficient, and sir rivers wilson declared, on behalf of himself and sir charles fremantle, that recognising that this want of support would prevent them from recommending the plan to their government, they would refrain from taking part in a detailed discussion of it, although they did not consider it inconsistent with the monometallist opinions which they held. mr. m'creary (delegate for the united states), then stated that he did not consider m. de rothschild's proposal, as it stood, equitable to the united states, and therefore that he would be unable to support it. [sidenote: close of the brussels conference] in view of the various declarations, m. de rothschild withdrew his plan, and there was left before the conference only the levy plan. this latter was favourably regarded, but was radically insufficient for the situation, and not considered important enough to receive really vigorous support. the course of the conference thereupon returned to the general discussion of the bimetallic proposal of the united states. in this discussion the attitude of reserve which the french delegates had maintained was abandoned, and m. tirard declared with the greatest clearness that he could not advise his government to open the french mints to the free coinage of silver, unless there was a general agreement on the part of other nations to open their mints also. until, therefore, there should be a decided change of opinion on the part of great britain, germany, austria, the scandinavian states, and other monometallic states, the question of returning to the free coinage of silver must be looked upon as settled. in view of such declarations the delegates of the united states declared that they would not press for a vote upon the question of bimetallism. and the conference closed with a formal adjournment, should the governments approve, to the th may . the close of the conference was a heavy blow to the bimetallic cause, as illustrating so fully the impossibility of any arrangement. germany, denmark, sweden, and norway, declared clearly that no change would be made on the gold basis of their currency. the delegate of austria hungary was equally explicit in his statement that his government had every intention of abiding by the gold standard they were in the course of adopting. the decided lead of france was followed punctually by switzerland, italy, belgium, and greece. the netherlands were prepared to join a bimetallic union, provided that great britain formed a part of it; and spain and mexico were willing to adopt bimetallism, or other measures which would have the effect of raising the price of silver. no declaration was made on the behalf of russia, though one of the delegates, speaking personally, was an active supporter of the gold standard. the roumanian government did not consider bimetallism a practical possibility, and turkey and portugal expressed no opinion. practically, the united states stood alone in advocacy of bimetallism. in addition to this fact, the situation was rendered much more trying for her delegates by the fact that since their appointment the presidential election had placed the democratic party in power, and great uncertainty prevailed as to the attitude and intentions of a new president and congress. "in these circumstances it soon became evident that the delegates were anxious for an adjournment of the question to give the new government the opportunity of expressing their views, and that the conference would adjourn without any practical result. but, nevertheless, some very important statements and declarations were elicited in the course of the debates. in the first place, in addition to the distinct declarations on the part of some of the most important european powers that they would not entertain bimetallism, the representatives of the united states announced in very clear language that at any moment their government might be disinclined to continue their purchases of silver, and that they were determined to protect their stock of gold. the indian delegates alluded to the possibility of their government finding itself under the necessity of closing its mint to the free coinage of silver." [sidenote: gold standard for india] already, before the calling of the brussels conference, it had been recognised that, in case of failure to arrive at a bimetallic agreement, it would be essential thus far to close the indian mint, and to attempt the establishment of a gold standard in india. this impression, together with a draft scheme for a gold currency, was conveyed in a minute of sir david barbour's, addressed to the secretary of state, st june . as the result of correspondence between the secretary of state for india in council and the government of india the british government, on the st october , i.e. a month before the meeting of the brussels conference, nominated a committee to consider the proposals submitted by the indian government for stopping the free coinage of silver in india, with a view to the introduction of a gold standard. the committee consisted of--the lord high chancellor; the right hon. leonard h. courtney, m.p.; sir thomas henry farrer, bart.; sir reginald earle welby, g.c.b.; arthur godley, esq., c.b.; lieutenant-general richard strachey, c.s.i.; bertram wodehouse currie, esq. a hope was at first expressed that the committee would be able to make its report before the meeting of the conference at brussels. but it was not actually made until the st may . india. the part which india has played in the currency history of the world has been characteristic and uniform from the first. india is, and has been, from the birth of international commerce, the receptacle or sink for the precious metals of the civilised western world. the fact that in so being she has constituted herself the safety-valve of the world's currencies is not confined to the present day merely. it is peculiarly applicable to the present day, with our organisation of banking and credit, which has concentrated the metallic reserves in certain burning central spots, and built thereon a superstructure of credit transactions so vast and in so delicately poised a manner that any undue addition to the metallic reserve sends a shudder of excitement and speculation through the whole, inducing over-trading and over-funding, and in the end a crisis. such is the structure of the world's commerce that india provides an outlet or drain for any sudden crisis-bringing inflow of precious metal, and preserves the equilibrium of our system. the fact is patent to-day, because the nature of our credit and banking system is understood. but in reality this function india has performed through ages. the influence she now exerts through impact with a highly delicate credit system, she formerly exerted on a less uniform and delicate system by the rougher influence of prices generally. the gain attending the eastern trade in the sixteenth and seventeenth centuries was not measured by modern conceptions of dividends or trading margins. to the european trader the intercourse was attended with a double gain, commercial and financial--the latter really bimetallic in nature from the higher ratio then prevailing between silver and gold in india. to india it meant a perpetual balance of trade in her favour, if such a phrase can be used of such a situation,--a continual inflow of precious metal. her capacity of absorption of metal seems as large and unsatisfied as ever, and, on the assumption of an unaltered situation in europe and america, her function in the world's currency system still remains--feasible and beneficent. it is the most difficult question attending the modern currency crisis, whether such assumption of an unaltered situation is permissible. further than this, as a simple matter of fact, the currency difficulty with india at the present moment is purely governmental and commercial. the indian government has yearly to remit a very large sum to this country in discharge of its gold obligations. in - , before the great fall in silver commenced, the amount remitted was £ , , , which, at the rate of exchange of rupee = s. . d., meant , , rupees. during the year - the amount remitted was £ , , , which, at the average rate of exchange in that year, s. . d., required a payment of , , rupees. if this could have been remitted at the exchange of - , it would only have needed , , rupees, making a difference of , , rupees. the result of this is to turn what would be a surplus of revenue into a large deficit. at an estimated exchange of s. d. per rupee for the past year, a surplus of revenue over expenditure was shown of , , rupees. the exchange having fallen to an average of rather less than s. d., this surplus has been converted into an estimated deficit of , , rupees. notwithstanding the improvement of the revenue by , , rupees over the budget estimate, the situation at the close of was fraught with a double danger to the indian government. the fall of silver--which had been such that during the year exchange could scarcely be maintained at s. - / d. for the rupee by the refusal to sell bills in india below that rate--might still proceed. and, secondly, in case of failure attending the brussels conference, the united states would be inevitably driven to abandon her single-handed attempt to keep up the price of silver by her silver purchases. in that case an unexampled fall of silver might be expected. the only practical solution of the difficulty was the adoption of a gold standard for india, and in order to do so at a workable rate for the rupee it would be necessary to anticipate such further fall. so much, in very brief, for the government situation. for the commercial,--the harassment of trade by fluctuations of exchange, the check to investments, the handicapping of the lancashire manufactures, and so on,--all this ground is still strewn with the débris of debate and difference. as far as the currency question, pure and simple, is concerned--such, that is, as is conceived of throughout this book, viz. metallic--it is almost incapable of presentation or realisation. through the extraordinary preference of the indian for the precious metals as metals or as a commodity, quite apart from currency use, the ordinary action of such monetary laws as have been at work in europe for centuries is nullified--to how great an extent it is quite impossible to estimate. the minting of silver has been such as might be expected under the conditions of free minting of a cheapening metal--i.e. it has risen on an average to the full amount of the net imports of silver. but, conversely, there has been no such reactionary influence of such mintings on the gold store of the country as would have taken place in europe. the importations of silver have gone hand in hand with a net importation, not exportation, of gold, with no traceable evidence of bimetallic action. the establishment of the gold standard for india is, therefore, primarily and in greatest part a governmental measure. as far as relates to such purely scientific phenomena and considerations, as have governed the european currencies for centuries, india still presents field for little or for very questionable observation.[ ] table of the surplus or net imports of the precious metals into india +---------+-----------+---------------+----------------+ | year. | gold. | silver. | council bills. | +---------+-----------+---------------+----------------+ | - | £ , | £ , , | £ , , | | - | , | , , | , , | | - | , | , , | , , | | - | , | , , | , , | | - | , | , , | , , | | - | , | , , | , , | | - | , | , , | , , | | - | , | , , | , , | | - | , | , , | , , | | - | , | , , | , , | | - | , | , | , , | | - | , | , , | , , | | - | , , | (_- , _) | , , | | - | , , | , | , , | | - | , , | , , | , , | | - | , , | , , | , , | | - | , , | , , | , , | | - | , , | , , | , , | | - | , , | , , | , , | | - | , | , | , , | | - | , , | , , | , , | | - | , , | , , | , , | | - | , , | , , | , | | - | , , | , , | , | | - | , , | , , | , | | - | , , | , , | | | - | , , | , , | , , | | - | , , | , , | , , | | - | , , | , , | , , | | - | , , | , , | , , | | - | , , | , , | , , | | - | , , | , , | , , | | - | , , | , , | , , | | - | , , | , , | , , | | - | , , | , , | , , | | - | , , | , | , , | | - | , , | , , | , , | | - | , , | , | , , | | - | , , | , , | , , | | - | , , | , , | , , | +---------+-----------+---------------+----------------+ _net_ import of silver and minting of _new_ silver, - +-----------+---------------+---------------+ | | net | new | | year. | imports | coinage | | | (rupees). | (rupees). | +-----------+---------------+---------------+ | - | , , | , , | | - | , , | , , | | - | , , | , , | | - | , , | , , | | - | , , | , , | | - | , , | , , | | - | , , | , , | | - | , , | , , | | - | , , | , , | | - | , , | , , | | - | , , | , , | | - | , , | , , | | - | , , | , , | | - | , , | , , | | - | , , | , , | | - | , , | , , | | - | , , | , , | | - | , , | , , | | - | , , | , , | | - | , , | , , | | - | , , | , , | | - | , , | , , | | - | , , | , , | | +---------------+---------------+ | total of} | | | | years} | , , , | , , , | +-----------+---------------+---------------+ net import and minting of gold +---------+--------------------------+---------+ | year. | rupees. | rupees. | +---------+--------------------------+---------+ | - | , , | , | | - | , , | nil | | - | , , | , | | - | (_export of , , _) | | | - | , , | , | | - | , , | , | | - | , , | , | | - | , , | , | | - | , , | nil | | - | , , | , | | - | , , | , | | - | , , | nil | | - | , , | nil | | - | , , | , | | - | , , | , | | - | , , | nil | | - | , , | , | | - | (_export of , , _) | ... | +---------+--------------------------+---------+ footnotes: [footnote : the returns for the years - give no separate figures for gold and for silver, but give only the total of the two together.] [footnote : from - -- france minted , , francs. belgium " , , " italy " , , " switzerland " , , " ------------- , , , " ------------- ] [footnote : as far, that is, as relates to gold. so far as silver is concerned, it was practically abrogated by the clauses for the prohibition of silver coinage in geo. iii. c. ( ), and finally repealed by the act of geo. iii. c. ( ). see _postea_.] [footnote : professor laughlin brings out very strongly that even in such action hamilton shows no trace of the modern conception of bimetallism, that his report expresses an emphatic preference for gold over silver, and that his object in adopting bimetallism was, while retaining silver, to leave a door open, if possible, for the introduction of gold.--_history of bimetallism in the united states_, pp. , .] [footnote : by the law of the alloy for both gold and silver coins was fixed at / . the pure gold in the eagle, which by the act of was fixed at grs. ( grs. gross for the piece), was thereby changed to . grs. at the same time the pure metal content of the silver dollar was maintained at - / grs., the (gross) weight per piece being changed to - / grs.] [footnote : see the case more fully established in laughlin's _bimetallism in the united states_, pp. , .] [footnote : viz. of philadelphia, new orleans, dahlonega, charlotte, san francisco, and carson city.] [footnote : on the subject of the history of the indian currency system under the east india co., in the eighteenth and early nineteenth centuries, see a very interesting communication made in the pages of the _nineteenth century_ by mr. h.d. macleod (_nineteenth century_, november , p. ). the question of the system established by the order in council of january (authorising officers in charge of public treasuries to freely receive gold coins struck in conformity with the provisions of act xvii. of , establishing the -rupee pieces), which continued till its rescinding in december , is discussed in the evidence of mr. t. comber before the royal commission on gold and silver (_second report of the commission on changes in the relative values of the precious metals_, , p. ). for an excellent and succinct history of the indian currency system from the end of the th century, see robert chalmers' _history of currency and the british colonies_, p. .] appendix i the monetary system of florence during the days of her commercial activity and independence throughout the history of independent florence her gold coin type is always the florin. in its first beginning her monetary system had relation to that of the restored empire. the _silver fiorino_ of which the first mention occurs was equivalent to denari, as in the charlemagne system. presumably this would be equal to some hypothecated _soldo_, and the multiple of it a hypothecated fiorino d'oro, gold florin (= soldi), would be equal to the lira or libra, or unit of weight. this will explain how it is possible to have mention of gold florins almost a century before the actual issuing of a real coin so named. such mention occurs in the monetary ordinances and schedules of france as early as . (see preface, _supra_, p. xiii, also de saulcy, _documents_, i. . le blanc was unable to explain this apparent contradiction of history.) what the particular florentine weight unit or lira (libbra) was, however, is uncertain. according to the researches of neri (in _argelatus_, i. ) the scheme of weights was-- denari. grani. silver florin = ... lira (or popolini) = when it actually emerges, the gold florin has a weight of (english) grs., or florentine; which would give a mark of grs. its standard was of absolute fineness, carats, a standard which was never departed from through the whole of its history. very little change, too, was made in the weight, hardly more than - / grs. in all (or - / per cent.). it was issued at an equivalence of soldi, which were represented by silver florins, already known. the variation of this coin with regard to the unit coin of lower denomination will be found in the table below. there is a second variation of the gold florin, _apparently_ with regard to itself, which has given rise to much misunderstanding, and requires explanation. as the process of wear and tear and abrasion went on in the coins, with lapse of time the custom grew of subdividing or hypothecating a gold florin of ideally perfect weight and condition as the standard for transactions. this became book or bank money, and the actually circulating medium was rated to it at a certain discount. this ideal florin is known as _fiorini di suggello_ or _sigillo_, florin of the public seal, and there is a series of such denominations. the first apparent adoption of such a method--which also emerges in the currency history of hamburg and amsterdam--was in , and the florins of that date are styled "of the first sigello"; the second was in , the third in , and so on. between the years and there was a series of eight, as follows:-- per cent. advantage. " " " " " " - / " " " " " " subsequently, by law of th may , this various advantage was transferred from the _fiorini di suggello_ to a new denomination, _fiorini d'oro larghi_, with an advantage of per cent. above the _fiorini di suggello_; and once again, by the law of th october , the process was repeated. an advantage of per cent. over the _fiorini d'oro larghi_ was announced in favour of the newest denomination, _fiorini d'oro larghi in oro_. the advantage of these last, therefore, over the _fiorini di suggello_ of amounted to per cent. it appears quite clear that this advantage represents a differentiation, not of good bank abstract florins from worn current gold florins, but of the former from the actual current medium of payment, and that this latter was _silver_. the cause of the advantage was the depreciation of the silver denomination, from the aggregate of which was formed the lira, in which was expressed the value of the gold florin.[ ] for illustration:-- in -- fiorini di suggello = fiorini d'oro larghi at lire sol. den. each = lire. therefore each fiorino d'oro largo ought to = lire sol., which by the tables of the time it actually did. similarly, in -- fiorini larghi d'oro in oro = larghi di grossi at lire sol. den. = lire. therefore fiorino largo d'oro in oro should = lire sol. which it actually did. the silver monies of florence were based on the silver florin = / of gold florin (= - / grains). from the time of the mint law of , these silver coins are styled _grossi_, and subsequently _soldi_, _grossi_, _guelfi_, etc. etc. the alloy gradually sank-- onza. denaro. ( ) ( ) remaining at the last-named figure until the reopening of the pisan mint in . as the gold rose in value by the process already indicated, and the idea of the lira as soldi = gold florin, became inapplicable, the lira came to be looked on as a fractional part of the gold piece or florin. this usage grew up in florence from the beginning of the twelfth century, and so continued till the days of cosimo i., who in coined the first lira, i.e. an actual silver coin. this imaginary lira of mediæval florence was itself divided, like the florin, into soldi and denari, similar aliquot parts. hence the custom of keeping florentine accounts, ( ) _a oro_, or ( ) _a moneta di piccioli_, the one in terms of the florin of gold, the other in terms of the imaginary lira. the confusion to which this led was due to the unstable nature of the imaginary money, which from continually depreciates in value, as compared with the actual hard florin money. in , as some measure of reform, it was ordained that the florin of gold should not equal more nor less than of the soldi of this lira, and that it should never change from such course--the distinction of _moneta bianca_ and _nera_ being introduced for the purpose. the ceasing of the observation of this regulation in the sixteenth century made way for every kind of confusion. for the explanation of the text in part i., pp. - , it need only be added that of these imaginary soldi formed the _lira a fiorino_ spoken of. table of the silver coins struck in florence, - . +---------+-----------------+---------------------+-----------+-------------+----------+--------------+------------+ | | | standard. | weight | fine silver | tale per | tale per | value at | | year. | denomination. +----------+----------+ of each | in each | mark |mark issued to| which | | | | silver. | alloy. | piece. | piece. | minted. |the merchant. |circulated. | +---------+-----------------+----------+----------+-----------+-------------+----------+--------------+------------+ | | | oz. gr. | oz. gr. | grains. | grains. | | |soldi. den. | | |fiorino d'argento| --- | --- | - / | --- | | --- | | | | | | | | | | |(of the gold| | | | | | | | | | florin.) | | | do. | | | - / | - / | | --- | | | |soldi grossi | | | - / | - / | | | | | |grossi popolini | | | - / | - / | | --- | | | | |(= argento popolino.)| | | | | | | |guelfi del fiore | | | - / | - / | | | | | |(half and quarter| | | | | | | | | | of same.) | | | | | | | | | |nuovi guelfi | | | - / | - / | | | | |(aug. )| | | | | | | |(of the | | | | | | | | | | piccioli.)| | |grossi guelfi | | | - / | - / | | --- | | |(aug. )| | | | | | | | | | |grossi guelfi | | | - / | - / | | | | |(oct. )| | | | | | | | | | |guelfi grossi | | | - / | - / | | - / | | | |popolini | | | - / | - / | | | | | |grossi | | | - / | - / | | | | | | | | | | | | |(piccioli.) | | |grossi | | | - / | - / | | | | | |grossi | | | | | | | | | |grossoni | | | | - / | | - / | | | |grossi | | | - / | - / | | | | | |grossoni | | | - / | - / | | | | | |grossi | | | - / | - / | | | | | |grossoni | | | - / | - / | - / | - / | | | |grossoni | | | - / | - / | - / | - / |{ | | | | | | | | | |{(bianchi.) | | | | | | | | | |{ | | | | | | | | | |{(neri.) | | |carolino or | | | - / | - / | - / | - / | | | | barile | | | | | | | (bianchi.) | | |grossoni | | | - / | - / | | | | | |grossoni | | | - / | - / | - / | | | | |grossetti | | | - / | - / | - / | - / |{ | | | | | | | | | |{(bianchi.) | | | | | | | | | |{ | | | | | | | | | |{(neri.) | | |barili | | | - / | - / | - / | | | | |(the half-barile and the teston (= barili) in proportion.) | | | | | |grossi | | | | - / | - / | --- | | | |barili | | | | - / | - / | --- |{ | | | | | | | | | |{(bianchi.) | | | | | | | | | |{ | | | | | | | | | |{(neri.) | | |quinto di ducato | | | | - / | - / | --- | | | | | | | | | | |(piccioli.) | +---------+-----------------+----------+----------+-----------+-------------+----------+--------------+------------+ table of the gold coins of florence, - . (from _zanetti_, i. .) +------+----------------------------+---------+---------+----------+-----------+ | | | | | tale | value | |year. | denomination. |standard.| weight. | per | at which | | | | | | mark. |circulated.| +------+----------------------------+---------+---------+----------+-----------+ | | | karati. | grains. | |soldi. den.| | | fiorino d'oro | | | | | | | do. | | | | | | | do. | | | | | | | do. | | | | | | | do. | | | | | | | do. | | | | | | | fiorino of the first | | | | | | | suggello ( per cent. | | | | | | | advantage) | | | | ... | | | fiorino of the second | | | | | | | surgely | | - / | - / | | | | fiorino stretti | | - / | - / | | | | do. | | - / | - / | | | | fiorini of the third | | | | | | | surgely ( per cent. | | | | | | | advantage) | | - / | - / | | | | do. do. | | - / | - / | | | | do. do. | ... | ... | ... | | | | do. do. | ... | ... | ... | | | | do. do. | ... | ... | ... | | | | fiorino nuovo | | - / | - / | | | | do. | ... | ... | ... | | | | fiorino nuovastro | ... | ... | ... | | | | fiorino nuovo of the fifth | | | | | | | suggello ( - / per cent.| | | | | | | advantage) | | | - / | | | | fiorino nuovissimo or | | | | | | | largo di galea | | - / | - / | | | | fiorino largo | | | | ... | | | fiorino of the sixth | | | | | | | suggello ( per cent. | | | | | | | advantage) | | | | ... | | | fiorino stretto di camera | | | | | | | of the seventh suggello | | | | | | | ( per cent. advantage) | | - / | | ... | | | fiorino of the eighth | | | | | | | suggello ( per cent. | | | | | | | advantage) | | ... | ... | | | | fiorino of the ninth | | | | | | | suggello ( per cent. | | | | | | | advantage) | | - / | - / | | | | fiorino (of pisan weight) | | - / | - / | | | | fiorino largo ( per | | | | | | | cent. better than the | | | | | | | fiorino di suggello) | | | | | | | do. do. | | | | | | | do. do. | | | | | | | do. do. | | | | | | | fiorino d'oro largo in oro | | | | | | | ( per cent. advantage | | | | (neri.) | | | on the fiorino largo) | | | | | | | | | | | (grossi.) | | | do. do. | | | | | | | | | | | (neri.) | | }| ducato d'oro | | | | | | }| | | | |(piccioli.)| +------+----------------------------+---------+---------+----------+-----------+ table of the billon money (moneta nera or erosa) struck in florence, - . +-----------+-------------+---------------------+-----------+--------------+------------+-----------+--------------+ | | | standard. |weight of |fine silver | tale per |tale per | value | | year. |denomination.| |each piece.|in each piece.| mark coined|mark issued| at which | | | +---------------------+ | | | to the | circulated. | | | | silver. | copper. | | | | merchant | | +-----------+-------------+----------+----------+-----------+--------------+------------+-----------+--------------+ | | |oz. gr. |oz. gr. | grains. | grains. | | | denari | | | | | | | | | | | | |fiorin da sei| | | --- | --- | --- | --- | | | [e] |fiorini neri | | | - / | - / | | --- | | | |piccioli | | | - / | - / | | | | | |quattrini | | | - / | - / | | | | | | lanajuoli | | | | | | | | | |quattrini | | | - / | - / | | | | |(july ) | | | | | | | | | | | do. | | | - / | - / | | | | |(july ) | | | | | | | | | | |piccioli neri| | | - / | / | | | | | | do. | - / | - / | | / | | | | | | quattrini | | | - / | - / | | | | | |piccioli neri| | | - / | / | | --- | | | | quattrini | | | - / | - / | | --- | | | | soldini | | | | - / | | | | | | quattrini | | | - / | - / | | | | | | soldini | | | - / | - / | | | | | |piccioli neri| | | --- | --- | --- | --- | | | | quattrini | | | - / | - / | | | | | | piccioli | | | | / | | | | | | quattrini | | | | - / | | --- | | | | bianchi[f] | | | | | | | | | | quattrini | | | - / | - / | | --- | | | | do. | | | - / | - / | | --- | | | | crazie | --- | --- | --- | --- | --- | --- | | +-----------+-------------+----------+----------+-----------+--------------+------------+-----------+--------------+ footnotes: [footnote : for a corroboration of this, see the texts of the laws of and . . "veduta una legge del anno , che provide che in qualunque pagamento si avesse a fare, si potisse pagare, e cosi fosse accettato, per ogni fiorino di suggello lire soldi delle monete di grossi d'ariento, per la quel cosa e seguito che i grossi sono scemati tanto di peso che i fiorini larghi per ragguaglio di quelli, dove solevano essere meglio comuneménte da fiorini in per cent., che i fiorini di suggello sono iti a fiorini per cent--" . "che i fiorini di suggello in moneta bianca o nera non abbiano pregio firmo nè a grossoni, nè a quattrini ma vagliano quello e quanto sara la sua commune valuta dì per dì e secondo saranno alla camera e all' arte del comtis--"] [footnote e: beginning of the distinction of white and dark monies (moneta bianca and la nera).] [footnote f: three of which equal one quattro de'ner.] appendix ii the monetary system of venice the venetian monetary system of history employed a double basis or unit:-- . the _lira di piccioli_, the principal system, and the one which endured through the whole life of the republic, from the tenth century to the introduction of the decimal system in . . the _lira di grossi_--an ideal system, i.e. money of accompt only, and of importance for a much less extensive period. it originated in the thirteenth century, and was abandoned by the end of the sixteenth. the "lira" of the first of these systems is derived from the "libra" of charlemagne, and, like it, was divided into soldi, each soldo being subdivided into denari. for long the only coin actually minted was this denaro (_parvus_, _parvulus_, _piccolo_ or _minuto_), a silver coin. the first of these thus issued appertain entirely to the system of the empire of charlemagne. they bear the name of louis the pious ( - ), and approximate in weight to his pieces. the dismemberment of charlemagne's empire is followed by a gap in the venetian coinage, and the series only recommences in the eleventh century. these latter still appertain to the system of the revived roman (germanic) empire, and bear the names of henry ii. ( - ), conrad ii. ( - ), and henry iv. ( - ). from this latter date onwards the imperial monies cease at venice, and the series of ducal monies--the monies of the republic of venice--begin with the dogeship of vitale ii. ( - ). from the same period there is noticeable that deterioration in weight which marks all the systems of mediæval europe. the denari of doge sebastiano ziani ( - ) and of the two succeeding doges are scarcely one-quarter the weight of the charlemagne denarius. this depreciation led, in the year , to the issue of a piece of higher denomination, namely, the _grosso_--still a silver coin, but valued at piccioli or denari; and for about seventy years the grosso displaced the picciolo. about , however, the coining of the picciolo recommenced under doge lorenzo tiepolo, but at a slightly reduced value, piccioli being rated to the grosso, instead of as in the year . up to the great recoinage of the grosso remains the main coin of reference. its gradual but incessant depreciation can be traced in the table of silver coins given on p. . under the eleventh doge, giovanni dandolo ( - ), the coining of gold began in venice. in , the date of the first issue, the gold ducat or sequin (zecchino) of venice was valued at grossi, giving a ratio of gold to silver of . . the subsequent changes of the ratio have already been stated (see text, _supra_, p. ). from , ducats were coined from the venetian mark. this number was increased in to - / , and in to - / . the course of the sequin throughout is given in the table on p. . it was the monetary trouble which they produced that led to the great recoinage accomplished under doge nicolo tron ( - ) and his successors, nicolo marcello ( - ) and pietro mocenigo ( - ). from the date of this recoinage onwards the silver grosso was abolished _as a coin_, and a new silver coin, the lira, valued at soldi, was instituted. this is the first appearance of a real and effective lira as a coin. hitherto the name had only been that of a weight. by the decree of , of these lira were to be coined out of the mark of silver. on account of the name of the doge this coin was known as the _lira tron_ for centuries. in its turn it underwent a ceaseless depreciation (see table on p. ). in the middle of the sixteenth century there was so much silver in the venetian mint waiting to be coined for the merchants that the state, finding it could only issue , pieces a month, which, in small pieces of soldi, would take a year to exhaust the stock, determined for the ease and encouragement of the merchants to issue a large silver piece, the _ducato d'argento_, - / to the mark of silver by tale, and rated at soldi. under doge nicoló da ponte ( - ) this piece becomes the _scudo d'argento_, which begins in with an equivalence of lira. in the scudo was rated at lira soldi. " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " on this basis the monetary system of venice continued till the seizing of the mint by the democrats in . for several years, during which they held possession, they issued a coin called _tollero_, of the nominal value of venetian lire, i.e. . italian lire, but really only equal to . of the latter. in the italian republic was erected by buonaparte. the monetary law of the republic, dated th april , provided for the coining of a national money on a unit or basis of the silver lira, of the weight established by the law of th october , namely, deniers, and of . standard. the unit gold coin to be / of the new established livre in weight (= deniers), and of . standard, to equal lire. in napoleon declared himself king of italy, but the change was not followed by any radical revolution of the coinage system. from the decimal system was introduced into italy, and on the reduction of the numerous independent monetary systems the venetian lira was computed at . of the italian, i.e. . centesimi. as a matter of fact, however, the venetian lira did not totally thereupon disappear from use. by decree of december , , the ducat (zecchino) of - / venetian grs. was rated at . lire italiane. under the lombardo-venetian kingdom, which succeeded, the main italian monies were assimilated to those of austria. the money of account was, at milan, the austrian lira (= centesimi = austrian soldi at centesimi each). there remains to be described the second and less important basis of the venetian system, that of the lira di grossi. it was throughout--i.e. from the thirteenth century, when it originated, to the close of the sixteenth, when it disappeared--an ideal system, i.e. of account only. a supposititious lira di grossi was taken and divided into soldi, each soldo was subdivided into denari, and each one of these denari was equivalent to the grosso, the actual coin existing in the system--already described. the lira di grossi therefore maintained at first the same relativity to the lira di piccioli that the actual grosso did to the actual picciolo, namely, : . this relation, however changed subsequently with the depreciation of the actual grosso (the lira). in the ratio of the two was : " " " : " " " : " , onwards to the discontinuance of the system : a curious feature about this system was that in its turn it subdivides. in a double (hypothetical) grosso was adopted; one of piccioli, the other of , both of them subdivided into thirty-two parts as, again, an ideal system. in , therefore, the venetian silver system consisted of-- . _lira di piccioli_, an actual coin represented by the troni, and containing grs. of silver, . fine. . the ideal _lira di grossi_, then equivalent to ducats, divided into ideal soldi, each equivalent to / -ducat, each soldo again subdivided in grossi, the grosso being now no longer the actual coin of that name but ideal, like the above multiples; and each grosso in its turn subdivided into parts, to which the name of _piccioli_ was given, though as ideal as its multiple the grosso. for distinction's sake probably, these ideal grossi and piccioli occur in history as _grossi a oro_ and _piccioli a oro_. table of the gold ducat or sequin of venice. (according to nicolo papadopoli, _sul valore delia moneta veneziana_, p. .) +------+----------------------+----------------------+---------------------+ | | | declared or deduced | value in modern | | date.| coin. | value in venetian | italian lire of the | | | | lira of history. | venetian lira | | | | | of history. | +------+----------------------+----------------------+---------------------+ | | | lire. soldi. | lire. centesimi. | | | ducat = grossi of | | | | | piccioli | | | | | each | | | | | " = grossi. | | | | | " = soldi. | | | | | " = " | | | | | " = " | | | | | ... | | | | | ... | | | | | ... | | | | | ... | | | | | ... | | | | | ... | | | | | ... | | | | | ... | | | | | ... | | | | | ... | | | | | ... | | | | | ... | | | | | ... | | | | | ... | | | +------+----------------------+----------------------+---------------------+ table of the gold ducat or sequin of venice. (according to vincenzo padovan, _la nummografia venziana documentato_, pp. , .) +-----------------+--------------++-----------------+-------------+ | | value of || | value of | | date. | ducat in || date. | ducat in | |-----------------+--------------++-----------------+-------------+ | |lire. soldi. || |lire. soldi.| | | || (october )| | | | || | | | | || | | | | || | | | | || | | | | || | | | | || , november | | | | || | | | | || | | | | || | | | | || | | | | || | | | , october | || | | | | || | | | , november | || | | | | || | | | , july | || | | | | || | | | , january | || | | | , march | || | | | , october | || | | | | || | | | | || | | | | || | | | | || | | | | || | | | | ||thenceforward to | | | | ||the fall of the | | | | ||republic | | | | || | | | | || | | +-----------------+--------------++-----------------+-------------+ table of the silver coinage of venice. (from papadopoli, _ubi supra_, with additions.) +----+-------------------------+------------+-----------+------+--------------+ | | | value in | | | value of the | | | | lire of | weight of | |venetian lira | |year| coin. | venice |the lira in|stand-|in lira of the| | | |declared or | venetian | ard. |modern italian| | | |calculated. | grains. | |decimal system| |----+-------------------------+------------+-----------+------+--------------| | | |lire. soldi.| | | | | |grosso instituted by | | | | | | | enrico dandolo; weight | | | | | | | in venetian grains, | | | | | | | . ; value= piccioli;| | | | | | | - / grossi to a lira | | . | . | . | | | | | | | | | |grosso = piccioli; | | | | | | | - / grossi to a lira| | . | ... | . | | | | | | | | | |grosso = piccioli; | | | | | | | - / grossi to a lira | | . | ... | . | | | | | | | | | |grosso = piccioli; | | | | | | | grossi to a lira | | . | ... | . | | | | | | | | | |weight of the grosso | | | | | | | reduced to . venetian| | | | | | | grains; of these | | | | | | | grossi to a lira | ... | . | ... | . | | | | | | | | | |weight of grosso reduced | | | | | | | to . venetian grains| ... | . | ... | . | | | | | | | | | |new regulation; the | | | | | | | mark of silver to yield | | | | | | | lire of money | | . | ... | . | | | | | | | | | |lira (tron), to mark | ... | . | ... | . | | | | | | | | | |lira (mocenigo) | | . | . | . | | | | | | | | | |institution of the silver| | | | | | | ducat; weight= . | | | | | | | venetian grains; | | | | | | | - / to a mark | | . | ... | . | | | | | | | | | |institution of the scudo | | . | ... | . | | | | | | | | | |scudo raised to | | . | ... | . | | | | | | | | | | " " | | . | ... | . | | | | | | | | | | " " | | . | ... | . | | | | | | | | | | " " | | . | ... | . | | | | | | | | | | " " | | . | ... | . | | | | | | | | | | " " | | . | ... | . | | | | | | | | | |tollero of the democrats;| | | | | | | weight = | | | | | | | venetian grains | | . | ... | . | +----+-------------------------+------------+-----------+------+--------------+ appendix iii the monetary system of spain the monetary system of christian spain dates from the gothic invasions, and differs from that of germany, italy, and france in being derived in the first place from the roman system without the intermediation of that of charlemagne. under the goths the monetary basis was the roman libra, subdivided thus-- libra = onzas = grs. onza = ochavas = grs. ochava = tomines = grs. tomin = quilates or siliqua = grs. the unit denomination was the sueldo de oro (gold sueldo) = / onza of the fineness of - / quilates (=. fine), corresponding exactly to the roman _aureus_ of the times of julian. the unit denomination of the silver money was twofold--( ) the silver _sueldo_ (= / onza like the gold), and ( ) the _denario_ ( / onza or ochava). the silver coins were at first of dineros fine, but subsequently only _ . _ (=. fine). of these two units, the latter, the silver denario was far the more usual and frequent in use. with one important change of name, and infinite change of incident and detail, it was this system which obtained till the great reform of the spanish monetary system under ferdinand and isabella. the change of name consists in the introduction of that of the _maravedi_, which was adopted from the conquered moors, and applied to designate the sueldo d'oro from the time of the conquest of toledo. in a comprehensive way it may be said that the history of this word or name, maravedi, sums up the monetary history of spain. from being the original gold coin of highest denomination, it came to be a silver coin, then a billon coin of the very lowest denomination, as it is to-day. the process of its degeneration is quite unexampled even in europe. in addition, also, to the confusion of idea produced by this depreciation there is a further uncertainty, caused by the quite general use of the word or name, i.e. not as the name of a particular coin or money series, but perfectly generally for almost any and every coin--as synonymous, in fact, with the simple word money itself. neglecting this latter question, however, as one of nomenclature merely, the course of depreciation of the maravedi may be thus illustrated:-- maravedi (moorish coin), fine gold, about grs. by the time of james i. of aragon, the contents in fine gold had sunk to grs. having been still further reduced to grs. under alfonso the wise, it was made into a silver coin, as being too small to be expressed in gold. its depreciation in this latter form and through its third form of billon money was as follows:-- +-------+---------------------+--------------+ | | number of maravedis | contents of | | date. | to the | fine silver, | | | cologne mark. | grains. | +-------+---------------------+--------------+ | | | . | | | | . | | | | . | | | | . | | | | . | | | | . | | | | . | | | | . | | | | . | +-------+---------------------+--------------+ to return. at the time of its adoption by the christian powers of spain, the maravedi (or sueldo de oro) was equal to / onza of gold. to this maravedi de oro was subsequently given the name of _alfonsi_, supposititiously from alfonso vi., the first to issue them. the first important change in this monetary system of gothic spain--though one of detail rather than system--was effected by ferdinand ii. of leon, who, in , coined the silver _leones_ of the value of half the silver sueldo (= dineros). in s. ferdinand introduced the _sueldo pepiones_. sueldo de oro = metales or mitgales, metale = pepiones. but both these importations were suppressed by alfonso x., the wise, of castile. in he coined his _maravedis blancos_, or _burgaleses_, to replace the sueldos pepiones. dineros = sueldo, sueldos = maravedi burgalese. this maravedi bore the ratio of : to the old maravedi de oro. this money (burgalese) was subsequently known as _moneda viejo_, _maravedis viejos_, or _moneda blanca_. six years after its introduction, however, alfonso demonetised his own burgaleses to make room for his _maravedises negros_, or _prietos_, a money of billon which lasted till the days of ferdinand and isabella. twenty-three years later alfonso issued a second "white money" ( ), so called as distinguished from the burgaleses, mention of which recur. to the "second white" (_blanco segundo_) was also given the (commoner) name of new (_novenes_). it was issued at one-fourth the value of the _prietos_. the relationship of the novenes to the prietos and to the standard (now supposititious) gold maravedi is thus expressed:-- dineros prietos = maravedi, old maravedi = sueldos, [therefore] prieto = sueldos. old maravedi = maravedis novenes, [therefore] prieto = maravedis novenes. under alfonso the wise, therefore, the system was as follows:-- dineros = noveno, novenes = maravedi de los prietos (= sueldos of dineros each). novenes = maravedi de los burgaleses. " = old maravedi. these _novenes_, or _maravedis blancos segundos_, continued current through the fourteenth century, and in the laws of john iii. are spoken of as "maravedises of our present currency," and as still = / of the maravedises burgaleses, which latter are spoken of as "maravedises of good currency" (_maravedis de los buenos_). but by the close of the fourteenth century, owing to the depreciation of the currency, the novenes had come to be looked upon as of better denomination than the then current coin, and are accordingly spoken of as "old" (_viejos_) for distinction's sake. the only material additions to this system of alfonso the wise were briefly-- . the _coronados_, an innovation of his successor, sancho iv. ( - ), who, in , introduced them as = old dinero. they subsequently appear as _cornados_. in the cortes of toledo their relation to the novenes was thus determined:-- coronados = novenes = maravedi de moneda vieja (= burgaleses). . the series of gold coins initiated by alfonso xi. ( - ). it was in the reign of this latter king that the general movement of adoption of gold coinage first touched spain. the earliest gold coins were alfonso's _doblas_, subsequently known as _castellanos_. the weight of this coin has been variously assigned as to a mark or or . taking the tale of to the mark, the weight per piece would be - / grms. (= . grms.) of - / quilates fine (= . fine). pedro i. made gold doblas of the weight of grs., and this endured till the days of john i., - , who preserved the same weight but lowered the standard. under henry iii. the standard of - / quilates was again restored. for the movement of the gold coins subsequent to ferdinand and isabella, see the table. . the silver _real_ first appears under pedro i., - . it was issued at a tale of to a mark, and dineros grs. fine. under henry ii. of castile, - , these reals undergo extraordinary debasement, the standard being reduced to . , . , . , and so on; but a recovery took place under his successor, john i., - , who returned to the standard of pedro i., substituting for the debased real his own vellon money, under the titles of _blancos_ and _agnus dei_, a money known later as _blancas_ and _maravedises de moneda blanca_. the restorer of the spanish coinage was, however, not john so much as his son, henry iii., - . by his ordinance of st january , issued at the instance of the cortes of madrid, , the blancos of john i. were reduced in equivalence to coronado. gold coins were restored to the tale and standard of alfonso xi., and the silver real to those of pedro i. the vellon money, however, of this reign--the blancos in particular--present a confusion which has hitherto baffled the most learned. it has been computed that one hundred and thirty-two monies of various denominations circulated in castile under this king. in brief, the system from his day till the time of ferdinand and isabella may be thus tabularly expressed:-- +-----------+----------------+------------+--------++---------------------+-----------+--------++----------------+------------------+--------+ | | gold | value as |value in|| silver | value as |value in|| billon | value as |value in| | reign. | denomination. | issued. |reals. || denomination. | issued. | reals.|| denomination. | issued. |reals. | +-----------+----------------+------------+--------++---------------------+-----------+--------++----------------+------------------+--------+ | | | | || | | || | | | |henry iii.}|florin of | maravedis| reals ||silver real | maravedis| reals ||meaja vieja | / of the | reals | | }| aragon | viejos | . ||half, } in | viejos | . || (ideal money) | maravedi viejo | . | | - | " | " | . ||quarter,} proportion | | ||meaja nueva | / of maravedi | . | | | | | ||fifth, } | | || (ideal money) | nuevo | | | | | | ||in the course of | | ||dinero viejo | / of maravedi | . | | | | | || | | || | viejo | | | |lower and higher denominations occur ||this reign the real | | || " nuevo | / of maravedi | . | | | | | || | | || | nuevo | | | | separately in , , and ||of silver was rated | | ||coronados viejos| / of maravedi | . | | | | | || | | || | nuevo | | | | | | ||rated variously at | | || " nuevos| / of maravedi | . | | | | | || | | || | nuevo | | | | | | || , - / , and of | | ||agnus dei | coronado viejo | . | | | | | || the maravedis nuevos| | ||blanca (occurs }| / maravedi viejo| . | | | | | || | | || after ) }| | | | |ducados | viejos | . || | | ||cinquen | / real | . | | | (in the kingdom| | || | | ||maravedi viejo | / real | . | | | of navarre) |many other and || | | || " nuevo | / maravedi viejo| . | | | | different || | | || | | | | | | denominations || | | || | | | | | | | || | | || | | | | | doblas | viejos | . || | | || | | | | | castellanos | | || | | || | | | | |(doblas castellanos | || | | || | | | | | de la banda | || | | || | | | | | cruzados | || | | || | | | | | cruzados de la | || | | || | | | | | banda | || | | || | | | | | doblas) | || | | || | | | | | || | | || | | | | | many different denominations || | | || | | | | | | | || | | || | | | +-----------+----------------+------------+--------++---------------------+-----------+--------++----------------+------------------+--------+ | | | | || | | || | | | |john iii. }|florin | - / | . ||reals, dineros | as above |as above|| as above with addition of | | - }| | maravedis| || grs. fine, to | | ||sueldos | / maravedi (ideal money) | | }| | viejos | || a mark | | ||ovulo | / sueldo (ideal money) | | | | | || | | || | | | | many other different denominations || | | || | | +-----------+----------------+------------+--------++---------------------+-----------+--------++----------------+------------------+--------+ |john iii. }|doblas and | maravedis| reals || | | || blanca vieja |(as blanca above) | reals | | - }| coronas | viejos | . || | | || " nueva | / maravedi viejo| . | | | | | || | | || cornado | / blanca nueva | . | | |many other and different denominations|| | | || | | | | | | | || | | || | | | | |dobla de la | nuevos | . || | | || | | | | | banda | " | . || | | || | | | | | " | | || | | || | | | | |( quilates | | || | | || | | | | | fine, to | | || | | || | | | | | a mark) | | || | | || | | | +-----------+----------------+------------+--------++---------------------+-----------+--------++----------------+------------------+--------+ |henry iv. }|florin of aragon| maravedis| . ||real of silver | maravedis| . || meaja vieja | / of maravedi | | | - }|( quilates | viejos | || | viejos | || | viejo | . | | | fine) | | || |(numerous | || meaja nueva | / of viejo | | | | other species| | || | multiples| || dinero viejo | / of maravedi | | | | of same, and | | || | of it) | || | | | | | of other, and | | || | | || | viejo | . | | | different | | || | | || dinero nuevo | / of viejo | | | | denominations | | || | | || | | | | | | | || | | || agnus dei }| | | | |ducado | " | . || | | || blanca }| / of maravedi | . | | |( - / quilates| | || | | || cornado viejo }| viejo | | | | fine, - / | | || | | || cornado nuevo | / of viejo | | | | to a mark), | | || | | || cincuen }| / maravedi vieja| . | | | other | | || | | || blanca }| | | | | species of | | || | | || maravedi viejo | / of real | . | | | same, and of | | || | | || | | | | | other and | | || | | || | | | | | different | | || | | || | | | | | denominations | | || | | || | | | | | | | || | | || | | | | |doblas | " | . || | | || | | | | |castellanos | " | . || | | || | | | | |enriquez | " | . || | | || | | | +-----------+----------------+------------+--------++---------------------+-----------+--------++----------------+------------------+--------+ the reign of john ii. ( - ) marks a period of exceeding confusion, coupled with inefficient attempts at legislative remedy. the disorder of his reign was further increased under his successor, henry iv. ( - ), years which represent the apogee of spanish depreciation. by grants of the right of private minting the six official spanish mints were increased to not less than , with a resulting monetary disorder, dearness of necessaries, and commercial panic which it would be difficult to estimate. the gold monies varied in fineness from - / , , , , and so on, even to quilates, and the same extraordinary variations marked the silver monies. of billon monies there were eight distinct classes, representing a succession of fractional parts of the silver real, / , / , / , / , / , / , / , / . taking, for the mere purpose of generalisation or average, the gold _enrique_ of this reign at a tale of to a mark, - / quilates fine, and the silver real (= maravedis de blancas) at a tale of to a mark, and standard of . fine, the ratio of gold to silver for the reign would be . : . the monetary situation which the advent of the catholic kings, ferdinand and isabella ( - ), was to alleviate and reform was the most deplorable that spain has ever seen. not less than eleven ordinances of reform were issued before the close of the century. for practical purposes only the first and last of these require notice. by the mint indenture, issued on the th june to the mint master of seville, the gold coinage was ordered on the following basis:-- excellentes (at a tale of to a mark, - / quilates fine, in value = to castellanos). and silver on the following basis:-- silver reals (at a tale of to a mark, din. grs. fine, in value equal to maravedis). first and chiefest importance, however, attaches to the ordinance of , issued at medino del campo, and so named. by this ordinance all the previous existing systems and monies were abrogated, and a new system instituted which forms the starting-point for the monetary history of that spain which was to be the receiver and distributor of the gold and silver of the new world. the standard of gold was fixed at - / quilates. the basis of the gold coins was to be the _excellente de la granada_, issued at an equivalence of two of the antecedent excellentes, and at a tale of - / to the mark. the system of the silver real was as in , but it was issued at an equivalence of maravedis, at which it ever after remained. the billon money was to consist of _blancas_ ( grs. fine, and at a tale of to a mark). one excellente = reals maravedi = maravedis. real " maravedis. the changes subsequently effected in this system may be presented in skeleton form (see also accompanying tables). in the cortes of valladolid presented a petition referring to the changed relation of the two metals, and asking for a recoining on a different ratio. its proposals were incorporated in the ordinance of , when the scheme was as follows:-- gold standard, quilates. " tale, to a mark. value, maravedis. silver left untouched. billon standard increased to - / granos. under philip ii., by the ordinance of rd november , the equivalence of the gold coins was increased a seventh, the silver monies being again left untouched. the increase was partly arbitrary and unprincipled, partly due to the normally prevailing depreciation of silver. under philip iii. the intrinsic value or content of the gold monies was decreased / , silver being again left intact. the innumerable calamities which overtook spain under philip iv. ( - ) and charles ii. ( - ) led to an immense introduction of billon money, to so great an extent, indeed, that it fell to one-eighth its previous value, thereby only complicating and increasing the evils. the result was an increasing premium on good monies, coupled with the usual disappearance of them. by the proclamation of th march it was prohibited, on severest penalties, to carry such premium above per cent.; by the succeeding proclamations of th april and th september this limit was raised respectively to per cent, and per cent. philip iv. also instituted the first change in the silver system which it underwent since the great reform of . the tale was increased from to - / per mark, the _real of eight_ being henceforth issued at an equivalence of reals. this change was equivalent to a reduction of per cent. in the silver monies. under charles ii. this corruption proceeded in an ascending scale until , when the gold _doblon_ had arrived at an equivalence of reals of billon, and the _real of eight_ to reals of billon. by the law of th october an attempt was made to re-create and reform the tottering system. the mark of silver ( din. grs. fine) was to be coined at a tale of pieces. the real of eight received a new name, _escudo de plata_, and was to issue at an equivalence of reals of the new silver. the effect of this apparent reform was to lower the weight of the silver money per cent., to incorporate the premium of per cent. on the billon money, and to institute or sanction a matter of four separate monetary units:-- . the real of old silver = / mark. . the real of new silver = / mark. . the real of billon = / mark. . the real of billon = / of the double escudo. at the close of the reign the monetary system was as follows:-- silver reals. mark of fine gold, . of intrinsic value of . the seigniorage being . mark of fine silver, . of intrinsic value of . the seigniorage being . maravedis. mark of copper, of intrinsic value of the seigniorage being philip v. was for many years prevented by the enormous expenditure caused by the revolt of don carlos from reform of this system, which he ultimately undertook and carried out. in he reduced the standard of silver to dineros, of a tale of reals to the mark, creating the money which is distinguished thenceforward by the name of _plata provincial_. by the regulation of th june the series of _plata nacional_ was lowered to dineros fine (= . ) and a tale of reals. of more importance was the mint regulation of th july , by which-- reales de plata provincial. mark of gold of quilates fine was coined into delivered to the importer ---- seigniorage = . per cent. mark of silver of dineros fine coined into delivered to the importer ---- seigniorage = . per cent. this ideal system could not be retained, as the billon money fell within a short time a matter of - / per cent. in relation to it. the latter change was incorporated by the proclamation of th may , which fixed the silver _escudo_ of reals (the old piece of reals) at cuartos, equivalent to the reals of billon at which it continued to be valued. by the subsequent mint order of nd june the attempt was made to bring the billon money into exact relationship with the gold by the coining of gold pieces equal to reals billon (_veintenes_) struck at a tale of per mark, and fineness of - / quilates, in place of the previously existing standard of quilates. these veintenes correspond to the escudos of - / reals still to be found in circulation. no change of any importance was effected under the short reign of ferdinand vi. ( - ), under whom the custom inaugurated by philip v. of expressing values in reals of billon rather than of silver (_plata provincial_) still continued. his successor, however, charles iii. ( - ) effected profound reforms. by the ordinance of th may he accomplished a complete recoinage of the spanish money. the standards he established were-- quilates. granos. of gold escudos (oro nacional) - / " veintenes (oro provincial) - / dineros. granos. of silver (plata nacional or gruesa) " (plata provincial or menuda) being a lowering per cent, of standard as follows:-- oro nacional . " provincial . plata nacional . " provincial . the bearing of this change on the question of the ratio at large in europe has been already referred to. it was again and still further for the protection of gold that the seigniorage was increased to . per cent. by the law of th july . the later system established in (see tables _postea_) has a similar bearing. his son, charles iv. ( - ), made no alteration in this latter system of charles iii. under ferdinand vii. ( - ) currency was given ( - ) to french gold and silver monies on a certain footing, and the seigniorage on the coins was reduced. both under ferdinand, however, and under his successor, isabella ii. ( - ), this latter regulation proved ineffectual in attracting merchants to bring the metals to the mint to be coined; and under the circumstances the circulation of french napoleons was considered a benefit. a profound alteration was projected by the two laws of ; the first of which proposed to lower the equivalence of the _real_ to from maravedis, and the standard of silver to dineros granos (=. ), and the second, to prevent the circulation of french money. this scheme was intentionally bimetallic. it failed, however, of accomplishment, and the monetary system remained as before up to . by the decree of st may --( ) the decimal division of the real was adopted; ( ) the weight of the real was established at granos and standard at . ; ( ) a new gold coin of reals of the weight of - / granos of the same alloy was introduced. this system was of course a reproduction of that of france; but in the following year it underwent slight alteration, as already related. by the law of st january the french metrical system was adopted in its entirety by spain, and since st january spain reckons in pesetas (representing the french franc) and centesimos (representing the french centime)-- centesimos = peseta. the new gold coins are pieces of , , , and other multiples of the peseta. the peseta ( grms. silver, . fine) is token money, but the -peseta pieces ( grms. silver, . fine) are legal tender. pesetas = duro ("hard dollar," "spanish dollar," or piastre). duro = escudos. escudo = reals. real = maravedis. table of the gold coins of spain from the reformation of the coinage in . (from _breve reseña historica critica de la moneda española_, p. .) +-----------+--------------------+-------+---------+------------------+-------+-----------+----------+ | reign. | coins and |tale |standard.| mint value |value | value of |value of | | | ordinances. |or | | per mark. |of each| each |each such | | | |number | +--------+---------+old | successive|successive| | | |of | | bullion|ordinance|real | particular|particular| | | |pieces | | value. |value in |in the | money |old money | | | |per | | |coin as |modern | named, |in reals | | | |mark. | | |issued. |money. | in reals |of to-day.| | | | | | | | | of the | | | | | | | | | | date of | | | | | | | | | | issue. | | +-----------+--------------------+-------+---------+--------+---------+-------+-----------+----------+ |ferdinand | mint ordinance of | |quilates.| reals. | reals. | |reals.mvds.|reals | |and |feb. , , | | | | | | | (vellon)| |isabella. |june , -- | | granos. | | | | | | | | excellentes | }| | | | | | . | | | majores | }| | | | | | | | | | }| | | | | | | | | medios excellenes }| }| | | | | | | | | }| }| | | | | | | | | doblas }| }| | | | | | . | | | }| }| | | | | | | | | castellanos }| }| | | | | | | | | | }| | | | | | | | | excellentes de la }| }| | | | | | | | | granada }| - / }| | . | . | . | | . | | | }| }| | | | | | | | | ducados }| }| (= . )| | | | | | | | | }| | | | | | | | | aguilas }| }| | | | | | . | | | florines }| }| | | | | | | | | | }| | | | | | | | | escudos }| }| | | | | | | | | }| }| | | | | | . | | | coronas }| }| | | | | | | +-----------+--------------------+-------+---------+--------+---------+-------+-----------+----------+ |charles v. | -- | | | | | | | | | | new coining of | | | . | . | . | | . | | | escudos | | (= . )| | | | | | +-----------+--------------------+-------+---------+--------+---------+-------+-----------+----------+ |philip ii. |nov. , -- | | | | | | | | | | the escudo | | | | | | | | | | increased to | | | | | | | | | | maravedis. | | | . | . | . | | . | | | | | (=. ) | | | | | | +-----------+--------------------+-------+---------+--------+---------+-------+-----------+----------+ |philip iii.| -- }| | | | | | | | | | the escudo }| | | | | | | | | | increased to }| | | | | | | | | | maravedis }| | | | | | | | | | }| | | . | . | . | | . | | |dec. , -- }| | (=. ) | | | | | | | | castellanos of }| | | | | | | | | | quilates at }| | | | | | | | | | maravedis }| | | | | | | | +-----------+--------------------+-------+---------+--------+---------+-------+-----------+----------+ |philip iv. |dec. , -- | | | | | | | | | | escudo increased | | | | | | | | | | to maravedis | | | . | . | . | | . | | | | | (=. ) | | | | | | | |jan. , -- | | | | | | | | | | escudo increased | | | | | | | | | | to maravedis | | | . | . | . | | . | | | | | (=. ) | | | | | | +-----------+--------------------+-------+---------+--------+---------+-------+-----------+----------+ |charles ii.|oct. and nov. | | | | | | | | | | , -- | | | | | | | | | | escudo increased | | | | | | | | | | to maravedis,| | | | | | | | | | and castellano to| | | | | | | | | | maravedis of | | | | | | | | | | the new silver | | | . | . | . | | . | | | | | (=. ) | | | | | | +-----------+--------------------+-------+---------+--------+---------+-------+-----------+----------+ |philip v. |march , -- | | | | | | | | | | castellanos | | | | | | | | | | reduced to | | | | | | | | | | maravedis | | | . | . | . | | . | | | | | (=. ) | | | | | | | | | | | | | | | | | |jan. and , and | | | | | | | | | | feb. , -- | | | | | | | | | | escudo increased | | | | | | | | | | from to | | | | | | | | | | maravedis | | | . | . | . | | . | | | | | (=. ) | | | | | | | | | | | | | | | | | |sept. , -- | | | | | | | | | | escudo increased | | | | | | | | | | to maravedis | | | . | . | . | | . | | | | | (=. ) | | | | | | | | | | | | | | | | | |july , -- | | | | | | | | | | new monetary scheme| | | . | . | . | | . | | | | | (=. ) | | | | | | | | | | | reals | | | | | | | | | |(vellon)| | | | | | |june and , | | | | | | | | | | -- | | | | | | | | | | creation of | | | | | | | | | | veintenes de oro | - | | . | . | . | | . | | | | / | (=. ) | | | | | | +-----------+--------------------+-------+---------+--------+---------+-------+-----------+----------+ |ferdinand |aug. and sept. | | | | | | | | | vi. | , -- | | | | | | | | | | increase of the | | | | | | | | | | pastas de oro | | | | | | | | | | from to | | | | | | | | | | reales las tres | | | | | | | | | | ochavas. | | | | | | | | | | | | | | | | | | | | escudos | | | | | | | | | | (oro nacional) | | o | . | . | . | | . | | | | | (=. ) | | | | | | | | veintenes | | | | | | | | | | (oro provincial) | - | | . | . | . | | . | | | | / | (=. ) | | | | | | +-----------+--------------------+-------+---------+--------+---------+-------+-----------+----------+ |charles |may and , | | | | | | | | | iii. | -- | | | | | | | | | | general reformation| | | | | | | | | | and lowering of | | | | | | | | | | the standard. | | | | | | | | | | | | | | | | | | | | escudos | | | | | | | | | | (oro nacional) | | - / | . | . | . | | . | | | | | (=. ) | | | | | | | | veintenes | | | | | | | | | | (oro provincial) | - | - / | . | . | . | | . | | | | / | (=. ) | | | | | | | |july , and | | | | | | | | | | aug. , -- | | | | | | | | | | the doblon of | | - / | . | . | . | | . | | | escudos reduced | | (=. ) | | | | | | | | to reals | | | | | | | | | | (oro nacional) | | | | | | | | | | | | | | | | | | | | the doblon of | | | | | | | | | | escudos reduced| - | | | | | | | | | to reals | / | - / | . | | | | | | | (oro provincial) | | (=. ) | | . | . | | . | | | | | | | | | | | | |march , -- | | | | | | | | | | oz. of bullion | | | | | | | | | | increased to | | - / | . | . | . | | . | | | reals | | (=. ) | | | | | | | | | | | | | | | | | |feb. & june , | | | | | | | | | | -- | | | . | . | . | | . | | | lowering of | | (=. ) | | | | | | | | standard. | | | | | | | | | | | | | | | | | | | | oro nacional. | | | | | | | | | | | | | | | | | | | | oro provincial | - | - / | . | . | . | | . | | | | / | (=. ) | | | | | | +-----------+--------------------+-------+---------+--------+---------+-------+-----------+----------+ |fernando |oct. , -- | | | | | | | | | vii. | reform of the | | | | | | | | | | rating. | | | | | | | | | | | | | | | | | | | | oro nacional | | | . | . | . | | . | | | | | (=. ) | | | | | | | | oro provincial | - | - / | . | . | . | | . | | | | / | (=. ) | | | | | | | |aug. , -- | | | | | | | | | | similar reform. | | | | | | | | | | | | | | | | | | | | oro nacional | | | . | . | . | | . | | | | | (=. ) | | | | | | | | oro provincial | - | - / | . | . | . | | . | | | | / | (=. ) | | | | | | +-----------+--------------------+-------+---------+--------+---------+-------+-----------+----------+ |isabel ii. |april , -- | | | | | | | | | | reform of the | | | | | | | | | | monetary system. | | | | | | | | | | | | | | | | | | | | centenes | - / | - / | . | . | . | | . | | | | | (=. ) | | | | | | | |may , -- | | | | | | | | | | augmentation of | | | | | | | | | | the tale | | - / | . | . | . | | . | | | | | (=. ) | | | | | | | |feb. , -- | | | | | | | | | | reform of the | | | | | | | | | | monetary system | - | - / | . | . | . | | . | | | | / | (=. ) | | | | | | | |jan. , -- | | | | | | | | | | reform of the | | | | | | | | | | tariff | - | - / | . | . | . | | . | | | | / | (=. ) | | | | | | +-----------+--------------------+-------+---------+--------+---------+-------+-----------+----------+ table of the silver coins of spain from the reformation of the coinage in . +---------+------------------+------+---------+--------+--------+------------+-----------+ | | | | |value of|value of|value of the|equivalence| | reign. | denomination. |tale |standard.|the mark|the mark|real as |of the old | | | |(per | |by mint |by mint |issued in |real with | | | |mark).| |regula- |regula- |billon reals|the modern | | | | | |tions in|tions in|of the time.|real. | | | | | |bullion.|coin as | | | | | | | | |issued. | | | +---------+------------------+------+---------+--------+--------+------------+-----------+ | | |silver|dineros. | silver | silver |reals. mvds.| reals. | | | |reals.| granos.| reals. | reals. | | | | | | | | | | | | |ferdinand|june , -- | | | | | | | |and | general reform of| . | | . | . | | . | |isabella | the monies | | (=. ) | | | | | | | | | | | | | | +---------+------------------+------+---------+--------+--------+------------+-----------+ |philip |december , }| | | | | | | | iv. | -- }| | | | | | | | |january , }| | | | | | | | | -- }| . | | . | . | | . | | | recoinage | | (= . )| | | | | +---------+------------------+------+---------+--------+--------+------------+-----------+ |charles |october , --| . | | . | . | | . | | ii. | recoinage | | (=. ) | | | | | +---------+------------------+------+---------+--------+--------+------------+-----------+ |philip v.| -- | | | | | | | | | reales sencillos | . | | . | . | | . | | | of , , and | | (=. ) | | | | | | | | | | | | | | | | -- | | | | | | | | | reales sencillos | | | | | | | | | of , , and | | | | | | | | | (and parts and | . | | . | . | | . | | | multiples) | | (=. ) | | | | | | | | | | | | | | | |july , -- | . | | . | . | | . | | | reals of and | | (=. ) | | | | | | | | | | | | | | | |february , --| | | | | | | | | decrease of the | | | | | | | | | reals of to | . | | . | . | | . | | | - / | | (=. ) | | | | | | | | | | | | | | | |august , -- | | | | | | | | | reals (and parts)| | | | | | | | | plata | . | | . | . | | . | | | provincial | | (=. ) | | | | | | | | | | | | | | | |september , | | | | | | | | | -- | | | | | | | | | decrease of the | . | | . | . | | . | | | real of to | | (=. ) | | | | | | | | | | | | | | | |july , -- | | | | | | | | | new monetary | | | | | | | | | regulation | | | | | | | | | (plata | . | | . | . | | . | | | nacional) | | (=. ) | | | | | | | | | | | | | | | |may , -- |reals | | | | | | | | decrease of the | of | | | | | | | | real of to |billon| | | | | | | | reals ( real | | | | | | | | | of silver = | | | | | | | | | real | | | | | | | | | maravedis of | . | | . | . | | . | | | billon) | | (=. ) | | | | | +---------+------------------+------+---------+--------+--------+------------+-----------+ | same | decrease of the | | | | | | | | date. | real of to | | | | | | | | | reals (plata | . | | . | . | | . | | | provincial) | | (=. ) | | | | | +---------+------------------+------+---------+--------+--------+------------+-----------+ |charles |may , -- | | | | | | | | iii. | general reduction| | | | | | | | | of the standard| . | | . | . | | . | | | (plata | | (=. ) | | | | | | | nacional) | | | | | | | | | | | | | | | | | | general reduction| | | | | | | | | of the standard| | | | | | | | | (plata | . | | . | . | | . | | | provincial) | | (=. ) | | | | | +---------+------------------+------+---------+--------+--------+------------+-----------+ |ferdinand|october , --| | | | | | | | vii. | reform (plata | . | | . | . | | . | | | nacional) | | (=. ) | | | | | | | | | | | | | | | | reform (plata | | | | | | | | | provincial) | . | | . | . | | . | | | | | (=. ) | | | | | | |august , -- | | | | | | | | | reform (plata | . | | . | . | | . | | | nacional) | | (=. ) | | | | | | | | | | | | | | | | reform (plata | . | | . | . | | . | | | provincial) | | (=. ) | | | | | +---------+------------------+------+---------+--------+--------+------------+-----------+ |isabel |april , -- | | | | | | | | ii. | general reform | | | | | | | | | of the monetary| . | | . | . | cents. | . | | | system | | (=. ) | | | | | | | | | | | | | | | |october , --| | | | | | | | | reduction | | | | | | | | | of the tale of | . | | . | . | | . | | | silver | | (=. ) | | | | | | | | | | | | | | | |february , --| | | | | | | | | general reform | | | | | | | | | of the monetary| . | | . | . | | . | | | system | | (=. ) | | | | | | | | | | | | | | | |january , --| | | | | | | | | reform of the | . | | . | . | | . | | | tariff | | (=. ) | | | | | +---------+------------------+------+---------+--------+--------+------------+-----------+ table of the billon money of spain from the reformation of the coinage in . +-----------+---------------------+-----------------------------+------+-----------+----------------+------------+-------------+ | | | |tale | | |mint value |bullion value| |reign. |denomination. |representative value of |(per |weight of |standard. |of each |of each | | | | each money. |mark.)|each piece.| |piece. |piece. | +-----------+---------------------+-----------------------------+------+-----------+----------------+------------+-------------+ |ferdinand |june , -- | | | granos. |dineros. granos.|reals. mdvs.|reals. mdvs. | |and | coining of blancas |half maravedi | | . | | | | |isabella. | | | | | (=. ) | | | +-----------+---------------------+-----------------------------+------+-----------+----------------+------------+-------------+ |charles v. |may , -- | | | | | | | | | lowering of the | | | | | | | | | standard of billon|half maravedi | | . | - / | | - / | | | | | | | (=. ) | | | +-----------+---------------------+-----------------------------+------+-----------+----------------+------------+-------------+ |philip ii. |december , -- | | | | | | | | | {|cuartillos of - / maravedis| | . |} | | | | | vellon rico {|cuartos of maravedis | | . |} | | | | | {|medios of maravedis | | . |} (=. ) | | | | | blancos |medio maravedi | | . | | | - / | | | | | | | (=. ) | | | | | -- | | | | | | | | | (pure copper) |cuartos of maravedis | | . |} | | | | | |ochavas of maravedis | | . |} pure copper | | | +-----------+---------------------+-----------------------------+------+-----------+----------------+------------+-------------+ |philip iv. |december , -- | | | | | | | | | {|cuartillos of - / maravedis| | . |} | | | | | vellon rico {|cuartos of maravedis | | . |} - / | | | | | {|medios of maravedis | | . |} (=. ) | | | | |october , -- | | | | | | | | | issue of "molino" |pieces of maravedis | | | | | | | | | ( , and in proportion) | | . | | | | | | | | | | (=. ) | | | +-----------+---------------------+-----------------------------+------+-----------+----------------+------------+-------------+ |charles ii.|may , -- | | | | | | | | | (this and succeeding| | | | | | | | | issues are of pure| | | | | | | | | copper) | | | | | | | +-----------+---------------------+-----------------------------+------+-----------+----------------+------------+-------------+ appendix iv the monetary system of the netherlands in its earliest known form the netherlands monetary system reproduces those features of the carlovingian system which reappear alike in italy, france, and england. the ideal flemish pound was divided into schellingen, the schelling into grooten. this was entirely an ideal system; the actual coins being, at first, the silver denarius, divided into obols. this ideal system of pounds, schellings, and groots survived in flanders and the southern netherlands (now the kingdom of belgium) long after it had been superseded in the northern provinces (the united netherlands) by another equally ideal system, that of the gulden and stiver. according to this latter system the flemish pound was divided into gulden, the gulden into stivers. as between the two systems, therefore, the northern gulden was equal to - / southern schellings, and the northern stiver to southern groots. the earliest mention of the stivers occurs in , but it was a considerable time before the new system displaced the old one in the northern provinces, and the reckoning by schellings and groots as well as, or alongside of, that by gulden and stivers occurs in holland even as late as the sixteenth and seventeenth centuries. the weight system employed for the precious metals was as follows:-- pound troy = marks. mark = oz. oz. = engels. engel = azen. so that engels or azen made up the mark. in reckoning the standard or alloy, the weight system was-- for silver-- mark = pfennige or deniers. " = grs. ( x ). for gold-- mark = carats. " = grs. ( x ). although forming part of the holy roman empire (being included in the burgundian circle), the mint system of the empire has apparently never obtained in the netherlands. the counts of holland, from the days of floris ii. and jan i. (i.e. from onwards) have minted on their own account, as have also the counts of flanders from a much more remote date. the silver _deniers_ of the counts of flanders date from at least the days of count arnold ii. ( - ). the introduction of "la grosse monnaie" (whence gros and groots), in imitation of the french money, dates from the reign of marguerite, countess of flanders ( - ), or possibly earlier; and the gold coinage (_royaux_, in imitation of those of philip the long of france, and _florins_, in imitation of those of florence) dates from count louis de crécy ( - ). the interest, however, attaching to the monies of the counts of flanders and holland up to the close of the fifteenth century is prevailingly numismatic, as, in the absence of a continuous series of mint indentures, it is a matter of almost insuperable difficulty to construct tables of the coins. the chief indications are contained in the tariffs already referred to (_supra_, text, pp. - ), but their testimony bears more expressly on exchange rates rather than upon mint rate and standard. the table of the groot, according to this source, is as follows:-- engel. azen. . -pfennige weight, . . " . " . " . " . " the foundations of a national mint, or monetary system for the netherlands, were first laid by the ordinance issued by the emperor maximilian at breda on the th december . according to this ordinance the gold _double florin_ was to be struck at a tale of - / to the mark troy, of a fineness of - / carats, and issued at an equivalence of gros. the remaining gold coins were to comprise the _st. andries florin_ = groschen (and its half); while the silver coins were to comprise-- gros = gros. pattart = " double pattart = " grand double = " in great part this is to be regarded as an ideal or unrealised system. the first effectual regulation of the silver coinage was made in the ordinance of charles v. of nd february . this ordinance prescribed the minting of the silver _carolus_, in imitation of the dutch thaler. weight to be engels, azen. standard to be pfennige (= . fine). equivalence to be stivers. the practical effect of this measure, therefore, was to introduce a coin equal to, and therefore representative of, the hitherto fictitious or merely ideal _gulden_. the remaining tariffs of the succeeding hundred years or so, together with the bimetallic experience of the netherlands, have been already briefly described in the text (_supra_, pp. , ). on the declaration of independence by the northern provinces, and the separation of the united netherlands from the southern or spanish netherlands, which succeeded, the monetary history of these two portions of the low countries bifurcates. we are here concerned only with that of the northern or united or dutch provinces, as being of more commercial interest in european history of the seventeenth and eighteenth centuries. by article of the union, each of the seven united provinces was bound to conformity in the course or tariffing of its money, while left free to determine the species and mere numismatic detail of the coins. the various tariffs therefore, already described, contain the mint law as applied to the united provinces; but it was not until that a serious attempt at systematisation was made. by the great plakkaat of st march , completed by that of th july , a new and very full tariff was imposed; an important regulation was made, declaring all coins which lacked more than - / engels over and above the remedy, to be taken as bullion and not current as coin, and the indenture details of the gold coins were fixed, as it proved, throughout the life of the republic. the gold rijder and the gold ducat were prescribed as follows:-- gold rijder. weight (gross), . azen (= . grs.). " (of fine gold), . azen (= . grs.). standard, carat (= . ). (equivalence = fl. st.). gold ducat. weight (gross), - / azen (= . grs.). " (of fine gold), . azen (= . grs.). standard = carat grs. (= . ). (equivalence = fl. st.). by article of this same ordinance of , the further minting of billon money was forbidden, and at the same time it was enacted, with regard to the lower denominations of silver coins (schillings and smaller pieces), that not more than one-tenth of any total settlement should be tenderable in them, in case of sums exceeding guldens. the succeeding experience of the effect of these tariffs, involving, as they did, the almost total disappearance of the great silver coins, even already by the year , led in to the institution of two new silver coins--( ) the silver ducat, . fine, and containing azen fine silver; and ( ) the silver rijder, . fine; and containing . azen fine silver. by the plakkaat of th december , the states of holland and west friezland prescribed the minting of the gulden piece, thus at last making the gulden, so long simply an ideal money or money of account, a real coin, and laying the basis of a truer national currency system. by subsequent proclamations and resolutions of the states-general of the th march , and st december , this was adopted for all the united provinces. the single gulden piece was to be of the standard of pf. - / grs., and to contain azen fine silver. this coin remained the mint coin of the dutch system, without any further alteration of tariff, or any need of it till . with regard to the development of a specific law of tender, the legislation of the united provinces was peculiarly involved. the first declaration of a wide nature was that of the th september , which reduced certain coins,--the silver ducat and two others--to the position of trade money merely. this was repeated in the declaration of the states-general of the th august . the declaration of the st august ascribed a similarly restricted character, of trade money merely, to all gold coins except the gold rijder and its half. these latter were fixed at an equivalence of and -florin respectively. the gold ducats were not fixed, their course as trade money might fluctuate daily. they might be taken freely by weight, and at values determined by the course of trade. the meaning of this provision can only be read in the light of the experience of the preceding half century. up to this date ( ) there had existed, in theory, a silver standard with gold rated to it by each succeeding tariff. the fall of silver throughout the seventeenth century had acted adversely on gold, and for long the currency had consisted almost entirely of silver. this fall received some slight check in the earlier part of the eighteenth century, and the result was a reverse tendency. gold came back into circulation, and the full weighted silver coins began to flow out and away. a bitter cry was accordingly raised in by the commercial community, and already in the mint authorities had proposed the adoption of the gold rijder as standard, in order to stop the drain. in , however, the mint officials felicitated themselves on the non-adoption of this proposal, and prayed that the ducat should be merely declared trade money ( th march ); and it was on this advice that the plakkaat of st march passed. it proved insufficient to prevent the export of silver, and on the st august following, the states-general issued an order creating the gold rijder provisionally the standard. the right of coining it was reserved to the state, so that there was no standard in the modern sense. the influence of this measure proved to be very slight, and merchants of amsterdam petitioned the states-general to declare the tenderableness of the ducat again. the result of a further communication from the mint officials was the proclamation and ordinance of st may , according to which only the gold rijder and half-rijder were declared standard, and all other gold species only trade money. gradually, however, what the government had been unable to effect by legislation was accomplished by the mere force of a rise in gold or fall in silver. the gold rijders began to disappear, the complaints as to the disappearance of silver ceased, and the regulations of and were superseded. at the time of the french revolution, therefore, the silver standard was actually in force. nominally the gold rijder was still legal tender at florins, but actually few specimens of it were in circulation. in the establishment of the batavian republic necessitated the creation of a batavian mint, and on the th february the first chamber was called upon to consider the coins. it was not, however, until the year , after the republic had been superseded by the imposition of louis napoleon as king of holland, that an effectual system was enunciated. by the resolution of th december , a double standard was adopted. gold standard coins. _gold penning_ of francs, to the mark. alloy, carats gold, grs. silver. weight, engels - / azen. content of fine gold, - / azen. standard silver coins. _fifty-stuiver piece_-- - / to the mark. weight, engels - / azens. standard, pen. - / grs. _gulden_-- - / to the mark. weight, engels - / azens. with the annihilation of the napoleonic structure this scheme perished, and the law of th september erected a system in which elements of both those previously existing were combined. the coinage was prescribed to consist of gold and silver standard pieces, and gold and silver trade pieces. the standard coins were-- . _the silver gulden_-- weight = engels (= . grms.). content of fine silver = azen (= . grms.). standard = . . this was to be the unit, and divided decimally. . the gold piece of _gulden_ . fine. weight azen ( . grms.). trade coins. . _silver dukaat_-- weight engels - / azen ( . grs.). standard, pen. grs. (= . ). . _silver rijder_-- weight, engels - / azen (= . grs.). standard, pen. - / grs. (= . ). . _gold dukaat_-- weight, engels - / azen (= . grs.). standard, kr. grs. (= . ). the trade money was only minted for private accompt. the unit gulden and the -gulden piece were also minted for private accompt, but the divisional silver money, the copper money, and the gold standard -gulden piece were only to be minted on government account. by article of this law the franc was adopted in the southern provinces on a footing of franc = - / carats. gulden = francs - / centimes. finally, by article , the tender of copper was limited to gulden, and that of the smaller silver denomination to one-fifth of the amount of settlement. by the succeeding law of nd march , the silver netherland gulden was prescribed to be of the weight of wigtje's or grms., and . fine. this prescription was retained as to the gulden in the more important act of th november . this act definitely established the silver standard. the standard coins were declared to be the gulden (and its half) and the rijksdaalder (= - / guldens). the gold _william_ and the gold _dukaat_ were declared to be trade money, and the minor or divisional silver coins ( cents and under) were fixed at a fineness of . . the gold william was to weigh . grms., . fine (content of pure gold, therefore, to be . grms.). the gold dukaat was to weigh . grms., . fine (therefore to contain . grms. fine gold). the coinage of standard silver coins, and of gold trade coins, was left free to individuals (article ). the trade money was expressly declared to be no legal tender (_geen wettig betaalmiddel_, article ). the tender of silver divisional coins was limited to guldens, and that of copper coins to gulden. this silver standard continued in force until . in that year, however, in consequence of the fall of silver, a bill was passed to suspend the coining of silver for private accompt. the mint was closed to its coinage, and for a time holland had no metallic standard at all, as gold was only merchandise or trade money. this state of things led to the enactment of the law of th june , which introduced the gold standard, but under peculiar arrangements. the standard coins were declared to be--_beside_, or in addition to, the silver standard coins minted previously to the new law--the gold -gulden piece, . fine, containing . grs. fine gold (weight, therefore, . grms.). the minting of these latter was declared free to the individual, and the minting of the gold williams ordered to cease (articles and ). no further declaration was made as to tender, so that the standard is to be regarded as a limping rather than a gold standard proper. table of the silver coins of the netherlands. from mees, '_geschiedenis van het bankwezen in nederland,'_ with additions from . +-------------+--------------------+------------+---------------+-----------+-------------+---------------+ | | | | | | | | | date of | | | | | | weight of | | law. | name of species. | weight. | standard. | weight of | equivalence.| metal fine in | | | | | | metal | | the gulden. | | | | | | fine. | | | +-------------+--------------------+------------+---------------+-----------+-------------+---------------+ | | | eng. az. | penn. grein. | az. | guil. st. | az. | |feb. , |karolus gulden | . | | . | | . | |june , |bourgondrische or | | | | | | | | kruisdaalder | . | | . | | . | |feb. , |staten daalder | . | | . | | . | |apr. , |nederland | | | | | | | | rijksdaalder | . | | . | | . | |aug. , |nederland reaal | . | | . | | . | |mar. , |nederland | | | | | | | | rijksdaalder | . | | . | | . | | '' |leeuwendaalder | . | | . | | . | | '' | -stuiver piece | . | | . | | . | |tolerantie,} | | | | | | | | june , } |nederland | | | | | | | } | rijksdaalder | . | | . | | . | | tariff, } |leeuwendaalder | . | | . | | . | | july , } | -stuiver piece | . | | . | | . | | } | | | | | | | |sep. , |nederland | | | | | | | | rijksdaalder | . | | . | | . | | '' |leeuwendaalder | . | | . | | . | |feb. , |leeuwendaalder | . | | . | | . | |july , |nederland | | | | | | | | rijksdaalder | . | | . | | . | |tolerantie, |leeuwendaalder | . | | . | | . | |oct. , |nederland | | | | | | | | rijksdaalder | . | | . | | . | |mar. , |dakaton of brabant | . | - / | . | | . | | " |patacon (or | | | | | | | | kruisdaalder or | | | | | | | | kruisrijksdaalder)| . | | . | | . | |aug. , |nederland silver | | | | | | | | rijder | . . | | . | | . | | " |nederland silver | | | | | | | | dukaat | . . | | . | | . | |sept. ,} | | | | | | | | } | | | | | | | |dec. , } | | | | | | | | } | -gulden piece | . - / | | . | | . | |aug. , } |gulden | . - / | - / | . | | . | | } | | | | | | | |march ,} | | | | | | | | } | | | | | | | +-------------+--------------------+------------+---------------+-----------+-------------+---------------+ | (louis} |gulden | . - / | . - / | ... | ... | ... | | napoleon) } | -stuiver piece | . - / | . - / | ... | ... | ... | |sep. , |gulden | . | . fine | azen | ... | ... | |nov. , |gulden | grms. | . fine | .- / | ... | ... | | | | | | grms. | | | +-------------+--------------------+------------+---------------+-----------+-------------+---------------+ table of the gold coins of the netherlands. (from mees, as above, with additions.) +-------------+----------------+----------+-----------+---------+------------+-------------+ | date of | | | |weight of| |weight of | | law. |name of species.| weight. |standard. | metal |equivalence.|metal fine in| | | | | | fine. | | the gulden. | +-------------+----------------+----------+-----------+---------+------------+-------------+ | | |eng. az. |kar. grein.| az. | guil. st. | az. | |dec. , | hungary dukaat | . - / | | . | | . | | | | | | | | | |feb. , | " " | . - / | | . | | . | | | | | | | | | |july , | " " | . - / | | . | | . | | | | | | | | | |feb. , | " " | . - / | | . | | . | | | | | | | | | |dec. , | " " | . - / | | . | | . | | | | | | | | | |may and | | | | | | | | , | holland dukaat | . - / | | . | | . | | | | | | | | | |aug. , |nederland dukaat| . - / | | . | | . | | | | | | | | | |april , | " " | . - / | | . | | . | | | | | | | | | |mar. , |nederland rijder| . | | . | | . | | | " dukaat| . - / | | . | | . | | | | | | | | | |july , |nederland rijder| . | | . | | . | | | " dukaat| . - / | | . | | . | | | | | | | | | |sept. , | " rijder| . | | . | | . | | | " dukaat| . - / | | . | | . | | | | | | | | | |feb. , | " rijder| . | | . | | . | | | " dukaat| . - / | | . | | . | | | | | | | | | |july , | " rijder| . | | . | | . | | | " dukaat| . - / | | . | | . | | | | | | | | | |tolerantie, }| " rijder| . | | . | | . | |oct. , }| " dukaat| . - / | | . | | . | | | | | | | | | |march , }| | | | | | | | and }| " rijder| . | | . | | . | |jan. , }| " dukaat| . - / | | . | | . | | }| | | | | | | | | | | | | | | |march , | | | | | | | | | " rijder| . | | . | | . | | | | | | | | | +-------------+----------------+----------+-----------+---------+------------+-------------+ | | | | | | | | | (louis }| | |{ carat }| . - / | francs | ... | | napoleon) }| | |{ gold }| | | | | | gold penning | . - / |{ grs. }| | | | | | | |{ silver }| | | | | | | | | | | | | | -gulden piece| . | . fine| ... | ... | ... | | | " " | - / | . fine| . | ... | ... | | | | grms. | |fine gold| | | +-------------+----------------+----------+-----------+---------+------------+-------------+ appendix v the monetary system of germany the german mint system inherited from that of charlemagne the common features noticed already in the case of florence, the netherlands, and other countries, namely, the division of the silver libra into solidi (_schillingen_), and of the solidus into denarii (_pfennige_), so that denarii = libra. the solidus occurs (theoretically or in accompt) in both gold and silver. the gold solidus of the german system originally weighed less than the frankish, which was to the libra, while the german was to the libra. the ratio of gold to silver was : , so that theoretically pound silver = oz. gold = - / gold schilling. in actual coins, gold schilling = silver schillingen = pfennige. gradually this system was superseded by that of reckoning by the mark. the particular mark which obtained widest acceptance was the cologne mark, which was thus subdivided-- cologne mark = oz. = loth. = quintlein. = pfennige. = heller. = eschen or grain. for the purpose of standard of alloy the mark was differently subdivided. thus-- gold alloy weight-- mark = carats = grs. ( x ). silver alloy weight-- mark = loth = grs. ( x ). subsequently, when the gold gulden began to be minted, and to displace in reckoning the gold solidi ( - / to the oz.), a third system of reckoning by gulden, schillingen, and pfennige was adopted. but long before this had become general, the downward course of the pfennige had proceeded apace. in , in swabia, the silver mark was minted into pfennige; and in , in magdeburg, the mark of silver ( loth fine) into pfennige. originally heller and kreutzer were only alternative forms of the pfennige, not subdivisions of it (heller = hällische pfennige); but the irregular course of depreciation established a difference in character.[ ] in , in the bishopric of würzburg, pfennige were minted at a tale of to the mark and loth fine; heller to the mark and loth fine. fifty years later, at nürnberg, pfennige were being minted to the mark and - / loth fine (= - / to the mark of fine silver), and heller at to the mark and - / loth fine (= - / to the mark fine). the course of depreciation proceeded from the unregulated, irresponsible mintings of the small states, and from base financier craft. during the fourteenth century it proceeded apace, in spite of the attempts at a reform made by the emperor charles iv. in he prescribed the minting of the mark of silver into schillingen heller (or hellers), but the ordinance remained ineffectual. the depreciation against which it vainly strove was not confined to the lower species, such as pfennige and heller. the close of the thirteenth century had witnessed the introduction of a new large silver money, which for a time stood by the side of the schilling, and then gradually displaced it. the new coin--the _groschen_, minted in imitation of the gros tournois of france--made its first appearance in bohemia in , when its tale was - / to the mark, loth fine. the same process of depreciation at once began to affect it, and during the fourteenth century the downward course of the coin was very rapid, especially in saxony (see tables infra., and pp. , ). with the commencement of a gold coinage in the middle of the same century, a third element of confusion was introduced, and quickly the same diversity of weight, alloy, and type began to prevail as in the silver coinage (see table of the depreciation of the gold gulden, infra., and pp. , ). the reichstag, which met at nürnberg in , found itself driven to record, in simple terms, the right of everybody who could mint to do so according to what standard of fineness and weight he pleased, "seeing the impossibility of a common standard and weight." the close of the century witnessed the introduction of the last of these numerous confusing elements, but one which was to become of prime importance in the history of german currency, namely, the _thaler_. in its first form it was intended as the silver equivalent of the _gold gulden_, being minted to the mark (i.e. oz. weight per piece), and of fine (or loth) silver. it received the name _gulden groschen_ when first coined by archduke sigismund of austria in ; but in the sixteenth century, on account of its great manufacture in bohemia, it became known as the _joachims thaler_ (or _schlicken thaler_, or _löwen thaler_). the subsequent depreciation of the thaler, which came as a matter of course, was very unequal in the different circles, being most strongly marked in saxony. by the first of the imperial mint ordinances, which will be spoken of immediately, the weight of this piece was still retained at oz., but the standard was reduced to loth fine. in the elector maurice fixed the standard at loth grs. fine, while still retaining the tale of to the mark. the second imperial mint ordinance of was constructed as a double basis-- . of the gulden groschen (i.e. thaler) = gold gulden = kr. . of the gulden groschen (i.e. thaler) = gold gulden = kr. the tale was altered from to - / to the mark, but the standard was lowered still further to loth grs. fine (= - / to the mark of fine silver). but in the accompanying tariff the actual specie thaler-piece was set at groschen, or kreutzers. the third imperial mint ordinance established an important difference from this system. the actual thaler or silver gulden (= kreutzers) was ordered to be discontinued, and no more minted, and a different basis adopted of silver reichs guldens = kreutzers, at a tale of - / to the mark, loth grs. fine. this intended exclusion of the thaler, however, proved quite ineffectual. protestations were raised against it, and in the reichstag at augsburg the minting of the thaler was again authorised-- to the mark, loth grs. fine. the immediately succeeding movement of the thaler is given in the text (see table, p. ). further than, as above, it is out of the question in so brief a résumé to specify the minuter confusions and conflicting variations of the german monetary system at the opening of the sixteenth century. during the course of that century three separate attempts were made to establish an imperial system that should displace all minor ones, and thus remedy the confusion. the first attempt was made by charles v. in his imperial mint ordinance issued at esslingen on the th november . the basis of this ordinance was the mark of silver = florins schillings heller, and the pieces ordained were-- . a silver piece = rhenish gold gulden, to the mark, loth fine (see the account of the thaler above). . _orth_, to mark, loth fine. . _zähender_ = / rhenish gold gulden, to mark, loth fine. . _groschen_ = / rhenish gold gulden, loth fine, to mark. besides these coins, the ordinance recognised temporarily a whole series of then-current pfennige. thus-- strasburg pfennige, · to the gulden. würtemberg " · " rappen " · - / " rhenish " · " saxon " · " räder " · " as explained in the text (p. ), this ordinance came nowhere into observance, and twenty-nine years later charles v. issued his second imperial ordinance at the reichstag of augsburg ( ). the system then attempted to be instituted was based on a mark of fine silver = florins - / kreutzers but in denomination a double system was employed-- . gold gulden = kr. . {gold gulden } = " {gulden groschen} . the reichs gulden (= gold gulden = kreutzers) was prescribed thus-- - / to the mark, loth grs. fine (see account of thaler, _supra_). . the kreutzer-piece was prescribed-- to the mark, loth gr. fine (= - / to the mark of fine silver). . the groschen (= / reichs gulden)-- - / to the mark, loth grs. fine (= - / to the mark of fine silver). accompanying these regulations, however, there was a tariff as before, but more comprehensive, for the temporary recognition of a miscellaneous mass of coins of the rhine, the netherlands, lower saxony, higher saxony, franconia, and the mark of brandenburg. thus-- groschen. reichs groschen, at pfennige, = gulden, at kreutzers. groschen of misnia and franconia, at pfennige, - / = " " rhenish _albi_ and netherland stuyvers, at pfennige, = " " lübeck schellingen, at pfennige, - / = " " groschen of the mark, at pfennige, - / = " " pfennige. of the tyrol, = gulden, at kreutzers. of lübeck, = " " of the mark of brandenburg, = " " of saxony and franconia, = " " of austria, loth fine, to the mark, = " " of bavaria, = " " of the rhine, - / = " " of swabia, = " " of würtemberg, = " " rappen, = " " of strasburg, = " " this ordinance obtained no more vogue than its predecessor, the main cause of its slighting being the dissatisfaction of the powers of upper and lower saxony at the tariffing of the thaler, which they declared to be too low, and accordingly advanced ( ) to groschen (= marien groschen = kreutzers). the third imperial ordinance was issued at augsburg on the th august . practically the same standard and basis was maintained as in the preceding ordinance, the mark of fine silver being coined into florins - / kreutzers in the larger species. but in the detail of these larger species an important difference was established. the silver gulden had hitherto been equal to the gold gulden. the actual specie silver gulden in pieces of the time was nominally equivalent to kreutzers. but since there had been minted a reichs gulden in specie equal to kreutzers. in order to mark the difference it was determined to coin in future only silver gulden = kreutzers, while the gold gulden was put at kreutzers. the specie authorised by this third imperial ordinance therefore were-- . gold gulden, to mark, - / -carat fine, to equal kreutzers. . silver reichs gulden, - / to the mark, loth grs. fine, to equal kreutzers. . thaler, or kreutzers silver gulden, to be discontinued. . kreutzer, to equal / gulden, - / to the mark, loth grs. fine (= - / to the mark fine). . reichs groschen, to equal / gulden, loth fine, - / to the mark; and a few other species. the lower denominations (pfennige and heller) were minted on the basis of the mark = florins kreutzers. almost immediately, protestations were raised against this ordinance, especially by the lower westphalian circle, and it remained quite inoperative. the succeeding reichstag at augsburg again authorised the issue of the thaler ( to the mark, loth grs. fine, so that the fine mark = florins kreutzers). as late as the reichstag of regensburg ( ) desultory attempts were made to establish a uniform system, but all practical idea of it had long ceased, and the regulation of mint matters henceforth fell into the separate jurisdiction of the various circles. the lower circles went their own way at their meetings at cologne ( , , and ), as did the upper circles in their separate meetings in and at nördlingen and nürnberg. at its meeting at lüneburg in the lower saxon circle adopted a system not far removed from that of the third imperial mint ordinance of . the mark of fine silver was to be coined into florins - / kreutzers, and the thaler was fixed at groschen (= kreutzers). underneath this separately concerted action of the circles, however, licence and disorder prevailed in the issue of smaller pieces of a grossly depreciated nature, before which the good heavy silver species disappeared, leaving the greatest confusion, together with a continual rise in prices or fall in the standard. the imperial proclamations of th january and th september were of no avail against this process, and by the mercantile rate had risen, thus-- philipps thaler = kr. reichs thaler = " gulden groschen = " in the imperial commissioners at frankfort provisionally recognised as a tariff-- gold gulden = kr. reichs thaler = " gulden groschen or thaler = " but later in the same year these authorities at strasburg set the reichs thaler at kreutzers (mark of fine silver = fl. kr.). as the disorder of the _kipper und wipper zeit_ broke over the empire, in consequence of the process of wilful depreciation, the emperor made several public attempts at its arrestation by letters addressed to the various circles separately ( , , and ). meanwhile, the reichs thaler had risen to kreutzers (mark of fine silver = - / florins). according to this valuation the gulden of of kreutzers was set at kreutzers, and the gulden of of kreutzers was set at kreutzers. it was on this latter basis (of the -kreutzer reichs gulden of = kreutzers) that was founded the later misnian, franconian, and kammer-gerichts currencies of the eighteenth century, which did not materially differ amongst themselves, thus-- misnian gulden @ groschen (= - / kr.) franconian gulden @ batzen (= kr.) kammer-gerichts gulden = kr. - / thalers. in the higher circles adopted by their mint determination the following system:-- thaler = kr. gold gulden = fl. kr. ducat = fl. " in the smaller pieces the basis was the mark of fine silver = -florin = - / thaler. for example-- / -batzen, loth fine, to the mark. kreutzer, " " -heller piece, - / " " pfennige, " " to this system the lower circles acceded, in the same year , after an ineffectual attempt to enforce the interim standard of , which had set the reichs thaler at batzen or kreutzers. from this united action of the upper and lower circles saxony stood apart, following quite a different course. while elsewhere the thaler was raised, here they lowered it to its old equivalence of groschen. in actual practice, however, the step proved only half effective, as the depreciated thaler was persistently minted. there resulted accordingly, in saxony, a double system of "good" and "bad" money, with a difference of something like per cent. between them. to increase the confusion there was for a time a difference between the practice of lower saxony and electoral saxony. the former, lower saxony, had in adopted the following system:-- reichs thaler = groschen. reichs gulden thaler of = " philipps thaler = - / " silver groschen, = to the mark, loth, grs. fine. " schillingen, " (so that the mark of fine silver = fl. kr.) finding it impossible to maintain this system, they altered it in , and finally in conformed with higher saxony, setting the reichs thaler at silver groschens. as settled in this and the following year, the system of electoral and lower saxony was as follows:-- reichs thaler = gulden groschen. gulden thaler of = " philipps thaler and gold gulden = " ducat = " contemporaneously ( ), the brandenburg system was as follows:-- reichs thaler = good groschen. gold gulden = " ducat = " through the remaining period of the thirty years' war very little is on record with regard to the german mint system. the closing period of the strife was marked by such complaints as to excess of depreciated small specie as had prevailed in , bringing with it a further enhancement of the price of the larger silver specie. in , accordingly, the three higher circles, franconia, bavaria, and swabia met together. they found on a trial that the mark of fine silver was selling commercially at from florins kreutzers to florins kreutzers, and that it was impossible to mint the larger silver specie unless the reichs thaler were set at kreutzers. this would raise the mark of fine silver to florins kreutzers. at the same time it was resolved to declare the ducat at florins (mark of fine gold = florins kreutzers, - / pfennige), the ratio being accordingly changed from to - / . in this scheme was provisionally adopted _in comitiis_. from this scheme saxony and brandenburg held off, maintaining that the advance of the reichs thaler was not sufficient. they accordingly, in the same year, adopted the so-called _zinnaische_ standard, setting the reichs thaler at florin kreutzers ( kreutzers), equal to good groschens (mark of fine silver = - / thalers, or florins kreutzers). the enactment of this system gave rise to a new species of heavy silver coins:-- guldener = / thaler. " = kr. " = good groschen. " = schillingen. two years later, , the three higher circles determined, as a measure of protection to their gold, to alter the ratio, and for that purpose to reduce the thaler from to kreutzers again, while leaving the ducat = florins, and the gold gulden = florins kreutzers. the mark of fine silver was thus = fl. kr. " gold " = " (ratio = - / .) the divisional coins were to be minted on a graduated and enhanced standard. thus-- -kr. and -kr. pieces (batzen), at fl. kr. to the mark fine. groschen ( kr.) at fl. " " kreutzer at fl. " " pfennige ( to the mark fine), at fl. " " there were thus three contemporary systems in germany in -- . reichs thaler, at kr., mark of fine silver at fl. kr. . " at " " at fl. " . " at " " at fl. " the three upper circles, however, could not maintain their last enacted order. in spite of its enactment, the reichs thaler rose again to kreutzers, and the ducat to florins kreutzers. the confusion and general harm which resulted has been referred to in the text (p. ), and it is to be regarded simply as a stop-gap at any cost that the measure proposed by the three circles of fixing the thaler at kreutzers was carried through the reichstag of . from this system, however, the emperor, with bavaria and salzburg, stood apart, putting the reichs thaler at kreutzers; and ten years later, , saxony, brandenburg, and brunswick and lüneburg established again a distinct system--the well-known leipzig standard. by this system the reichs thaler was set at kreutzers or florins (mark of fine silver = thalers gulden). in a few years this valuation of the thaler prevailed all over the empire. sweden acceded to it in , with bremen and pomerania, mainz, treves, the palatinate, and frankfort, and three years later the higher circles followed suite. contemporaneously the gold gulden was advanced to florins kreutzers. although the emperor subsequently joined in the recognition of the leipzig standard, it did not remain effective in actual practice, and while no further advance of the thaler was officially recognised, the lower denominations were again depreciated by the mint competition of the various states, -kreutzer pieces being minted on a standard of - / to - / gulden to the mark fine. in the question of a standard was again brought before the reichstag; and on the th september it was resolved to adopt the leipzig standard for the empire, with the reichs thaler = florins, ducat = florins, gold gulden = florins; while, for the divisional coins, a basis of fine mark silver = - / thaler was enacted. this system, if it endured at all, did so only for a couple of years. the outbreak of the war of the austrian succession brought with it a new period of conflicting depreciations, and at the close austria took a decisive step. without taking any measure to secure the co-operation of the circles, or any part of the empire, the emperor francis i. adopted the -gulden standard (the mark of fine silver = - / reichs thalers = guldens). it was at once adopted in hungary and bohemia, the territories of maria theresa. frederick augustus, elector of saxony and king of poland, was the first to adopt this austrian standard, at dresden in , though with a very slight variation (putting the mark of fine silver at - / reichs thalers instead of - / ). in bavaria also acceded to the -gulden standard, after a brief attempt ( - ) at the erection of a -gulden standard, and in the following year the austrian system was adopted by brandenburg-anspach, bayreuth, würzburg, and nürnberg. the convention of vienna ( st september ) which formally established this austrian or convention standard ( -gulden system), prescribed as follows:-- . gold-- mark of fine gold = fl. kr. - / pf. chief coin = reichs ducat, to the mark (cologne mark), kr. grs. fine (= - / to the mark of fine gold), to = fl. kr.; the holland and other ducats then current in germany being tariffed at fl. - / kr. . silver-- mark of fine silver = guldens for all manner of silver coins down to the groschen or -kreutzer piece (ratio of silver to gold : - / ). the silver coins authorised were-- . thaler (specie or convention thaler = fl.), to the mark, - / loth fine. . gulden (or / -specie thaler), to the mark, - / loth fine. . -kreutzer piece ( / -gulden or / -specie thaler), to the mark, - / loth fine. . -kreutzer piece, - / to the mark, - / loth fine (only for austria). . -kreutzer piece, - / to the mark, - / loth fine (only for austria). . -kreutzer piece, to the mark, - / loth fine. . -kreutzer piece, to the mark, loth fine. . groschen or -kreutzer piece, to the mark, - / loth fine. for the lowest denomination of divisional coins, half-groschen, kreutzer, and pfennige, quite varying standards were permitted, according to the piece or locality, namely, from - / to guldens to the koln mark. for tolerated coin the following tariff was fixed:-- gold bavarian maxd'or and double gold gulden = fl. kr. bavarian carolus or -gold gulden piece = fl. kr. kremnitz ducat } florentine gigliati} = fl. kr. venetian zecchino } all other gold coins to be taken as bullion at a value of fl. for the cologne mark of fine gold. all silver species of other states below the value of / florin forbidden. such was the convention system or standard, which, by the accession of the electoral palatinate, and of salzburg might be practically regarded as the imperial system. this convention system, and these convention or specie thaler and other coins, remained the mint system of austria until modern times. the changes which were made in the austrian system by the vienna convention of have been already detailed (see text, pp. - ). ten years later austria withdrew from this monetary treaty (in accordance with the terms of the treaty of berlin, th june ), with the intention of acceding to the contemplated french currency treaty of st july . she ceased the coining of german gold crowns and half-crowns, and instead minted and -ducat pieces. from onwards she coined, in conjunction with hungary, and -florin gold pieces, the former - / to the pound, . fine. by a decree of th november , the -florin gold piece was tariffed at . florin. at this it was made legal tender, on the basis of the french ratio of - / ; but it was practically nothing more than commercial money, like the preceding _crowns_ and _half-crowns_ of the convention of . the standard of austria remained nominally the silver florin of the convention of , although in actual practice the currency was paper. in march the austrian and hungarian mints were closed to the coinage of silver on private account, preparatory to a reorganisation of the austrian monetary system on a gold basis. this reform was decided on in , and briefly prescribed as follows:-- the monetary unit is the krone or crown = florins; but to be minted in and -crown pieces, kilogramme pure gold = crowns, . fine. the crown is divided into hellers. for the purpose of basing the new system on gold, a ratio between the old silver and the new gold standard of : . was adopted, the existing florin being declared = francs cents. silver is fractional money only, the old florins passing as crowns. south germany. from the convention or -gulden system (the old austrian system) sprang the accompanying system, the -gulden standard, which was nothing but the -gulden or austrian standard under another name. very soon after the establishment of the convention standard, the elector of bavaria perceived or concluded that the continuance of that standard in his dominions would produce disorders so long as the other circles did not accede to the convention. he accordingly arrested the execution of the convention in his territories, and adopted a provisional arrangement. at the end, however, of a long correspondence with the austrian state (maria theresa), an agreement was made that he should conform his coins in standard and weight to the convention system, but should be permitted to tariff them at one-fifth higher rate, putting i.e. the specie thaler not at florins but at florins kr., and so on (the mark of silver being consequently worth guldens, instead of, as in the austrian or convention system, guldens). this was the origin of the -gulden standard, which gradually spread over the whole of south germany, with the exception of austria. the three upper circles acceded in , salzburg in , and in the following year the rhenish powers, mainz, treves, the palatinate, hesse-darmstadt, and frankfort. from this -gulden standard sprang towards the close of the eighteenth century a later development, due to the circulation of the kronen thaler or brabant thaler, which, from onwards, austria minted for her netherland possessions. the rhenish provinces drove this piece above its mint rate, setting it at florins kreutzers, although in the -gulden standard its value was only florins - / kreutzers. this implied a standard of - / guldens to the mark of fine silver, and gradually, about the beginning of the present century, bavaria, würtemberg, and nassau minted convention thalers on the same footing. baden, hesse, and saxe-coburg followed suit in their minting of kronen thalers until, by the mint convention of the south german states in , the new standard (the - / -gulden standard) was formally recognised as the south german standard. in this convention austria had no part. the standard here detailed, the - / -gulden or south german standard, was assimilated to the prussian system in the dresden convention, (see text, p. ), and in that connection remained intact until the developments of modern times detailed in the text, p. . prussia. the prussian monetary system, as a separate identity, took its rise in that same period which witnessed the independent action of austria, above detailed. its builder was frederick the great, who, for this purpose, called in the advice of a dutch merchant, philip graumann. it is to this latter that is due the introduction in of the -gulden or -thaler standard, otherwise known as the graumann standard. thaler = - / to the mark, loth fine (mark of fine silver therefore = thalers or guldens). thaler = groschens = pfennige ( × ). groschen and / -groschen minted as divisional coins (= / and / thaler) of billon. after the temporary debasement during the seven years' war, the graumann standard was re-established in , but with two differences. . the minting of / and / -thaler pieces of loth silver was ordered to cease from , and to be replaced from by-- / thaler, - / loth, to the mark } / " - / " - / " } -thaler standard. / " " " } . the billon divisional money (minted primarily for the provincial states of prussia) was greatly increased in the amount of its issue, but depreciated in standard on a varying scale according to the districts intended, silesia, cleves, etc., reaching in some cases even to an -thaler standard. up to there was issued in these depreciated single and double-groschen pieces an amount equal to , , thalers. subsequently, the standard of divisional money was reduced to thalers, and at this rate, up to the death of frederick in , there were issued in -pfennige and other pieces , , thalers' worth. from this time onward, up to the decrying of this depreciated divisional money at the peace of tilsit, there was minted a matter of , , thaler worth. the total, therefore, was , , thalers; the pure silver content of which was only , , thalers. by the publicandum of th may , and the edict of th december , the value of this mass was reduced, the coins being set at from two-thirds to four-sevenths of their normal value, so that-- groschens } } = good thaler. - / " (bohemia) } but it was not till the law of th september that a recoinage could be accomplished. the provisions of this law of were as follows:-- . gold-- friedrichs d'or as hitherto, viz. to the mark = thalers. . silver-- prussian thaler as before, - / to the mark gross (= to the mark fine). . thaler to be subdivided into groschens pfennige; the latter tenderable only up to / thaler. . silver groschen = - / to the mark, / silver (= thalers to the mark fine). by the law of , this standard came into operation in , and it remained the standard for prussia and her provinces until the developments in modern times, specified in the text, p. . at the convention of dresden, th july , the prussian -thaler or -gulden standard was adopted, along with the south german or - / -gulden standard as the standard of the german zollverein. subsequent to that date the prussian system was adopted by hanover, brunswick, oldenburg, mecklenburg, waldeck, lippe, etc. prussian mintings from the reform of to the end of . thaler pieces , , / " " , , ---------- , , full-weighted silver previously in currency , , ----------- total of full-weighted silver , , =========== one-third pieces, minted - , billon divisional money, minted - , , ----------- thalers , , withdrawn since - -- / -thaler pieces , thalers / " " , " / " " , " ------- , ----------- , , =========== the gold coinage had, in prussia, little relativity to the silver. from this state minted double, single, and half-pistoles, under the name, friedrichs d'or, on the basis of to the mark, - / carats fine, for the single piece. from the standard was lowered to - / carats, and at this it was confirmed by the law of september . the ascertained mintings of these were as follows:-- - , , - / thalers. - , , " - , , " but long before almost the whole of this amount had disappeared or been melted down. in state payments the friedrich d'or was taken at thalers, but in ordinary commerce up to they were taken at - / thalers, a tariff which gradually rose to - / and - / thalers. the purchases of gold which the bank of england made in , in order to its resumption of cash payments, drove the pistole or friedrich d'or up to - / thalers, and it was not for ten years that it fell back to - / thalers. although paid by government at this latter, and so continued till the mint convention of , it was only as a mercantile commodity. the only legal standard and tender in prussia was silver (the silver thaler), to which gold was varyingly ratable, according to market fluctuations. the prussian system thus described remained in force until the vienna coinage treaty of th january , the details of which have been already stated in the text. the resolutions of that treaty were adopted by the prussian mint law of th may , as follows:-- . the prussian pound of grms., decimally divided, is substituted for the previous standard of . grms. - . the thaler continues the regular silver coin of the country-- thirty thalers to the pound of pure silver, . fine. thus the -thaler standard to take the place of the old -thaler standard, but the two to be treated as the same. the thaler to be coinable as a convention thaler or vereins thaler; thaler to be subdivided into groschens, at pfennige. - . divisional coin limited in tender to / thaler as before, and both minted on a - / -thaler standard. . gold commercial coins shall be coined under the names of "crown" and "half-crown," in the form and with the attribution of confederation coins, viz.-- . crown, / of a pound of fine gold (. fine). . half-crown, / " " these coins shall be the special gold coins of the country, and other gold pieces shall not henceforth be coined. . the silver value of the gold coinage shall be entirely fixed by the relation of the supply to the demand, and no one is bound to take gold in the place of the legal silver value of the country. . our finance minister is empowered to settle the price at which the crown and the half-crown shall be taken into our pay offices. the established rate, as well as the permission to receive crowns and half-crowns instead of silver coins in our offices, may at any time be revoked or restricted by the publication of a proclamation by our finance minister. . our minister of state is also authorised to fix the value above which foreign gold and silver coins must not be offered or given in payment in ordinary transactions. the subsequent course of events and the existing prussian (imperial german) system have been already specified (see text, p. ). hamburg. the origin of the common mint standard of lübeck and hamburg was the division of the mark into schillingen, and each schilling into pfennige. the metal mark and the mint mark soon parted company, and by the time of the treaty of the two states agreed to mint the mark of fine silver into schillingen pfennige (= marks schillingen pfennige). the wendish standard was established by the adoption in of the hamburg-lübeck treaty by wismar and lüneburg. in this wendish standard adopted the cologne mark as its weight basis. course of depreciation of the standard. mks. sch. pf. --the mark of fine silver coined into " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " the mint union of the wendish states continued until the beginning of the seventeenth century, when it expired unperceived. the experience of hamburg in the _kipper und wipper zeit_, with its resultant establishment of the hamburg bank, has been already referred to. in hamburg freely joined the _zinnaische_ standard, according to which the mark of fine silver was coined into - / thalers (= marks schillingen, _hamburger courant_). she, however, hesitated to follow the german system in its change over to the leipzig standard in , and after an interim period of weltering disorder, during which the standard varied from marks to marks schillingen per mark fine of silver, the state adopted in the so-called lübeck standard ( mark fine = marks), as the hamburger courant. this standard had existed in holstein from . in and long and serious debates were held in hamburg on the question of the substitution of a lighter (or lower) standard. and seventy years later a change in such direction had practically effected itself, although not legislatively recognised. by the actual currency of the state consisted mostly of silver coins of the prussian (or -thaler) standard, circulating at an equivalence of thaler = - / marks hamburger courant (= schillingen), an equivalence implying a standard of marks courant to the mark of fine silver. legally, however, the -marks standard remained in force until the coalescence of the free state of hamburg with the new imperial german system in our own days. the question of the agio of the _hamburg banco_ system belongs rather to the history of banking. german standards: silver. in brief résumé, the historic standards of the german monetary system have been as follows:--nos. , , , , , , representing the systems in existence at the time of the projection of the great currency reform of :-- . old imperial standard of , based on the reichs münz ordnung of ferdinand i., mark of fine silver = thalers. altered in , so that thalers grs. = mark fine silver. . the _zinnaische_ standard, agreed upon by saxony and brandenburg at zinna, , mark fine silver = - / thaler = - / guldens. . leipzig standard or torgau standard (see text, p. ), mark fine silver = gulden. . the prussian standard, thalers or guldens = mark fine silver (see above, p. ). . convention standard or austrian standard, mark fine silver = gulden (see above, p. ). . the -gulden standard or new imperial standard of (see above, p. ), mark fine silver = guldens. . the - / , or south german standard (see above, p. ), mark fine silver = - / guldens. . the kronen-thaler standard, existing more or less between and in such of the states of the south as had adopted the minting of the brabant or crown thaler-piece, . to a mark fine, and issued at guldens kreutzers, representing a - / -gulden standard. it was this system which called into being the - / -gulden standard, by the evolution of which it was itself completely superseded. . wechselzahlung, or wechselgeld, the bank reckoning system of frankfort-on-the-maine, - / guldens = - / thalers = mark fine silver. the standard was, therefore, / lighter than the -gulden or convention standard. . the augsburg girogeld, a system which existed till st july , and in which the exchange with amsterdam and hamburg was expressed. mark of fine silver = - / gulden giro ( gulden giro = gulden of the convention standard). this system was displaced by the introduction of the - / -gulden standard. . the lübeck courant (or hamburg courant, as described above), the mark of fine silver = - / thaler, or marks. . hamburg banco, the system of reckoning of the hamburg bank. from the bank reckoned the mark of fine silver = - / thaler-banco, or - / mark-banco. the issue rate was, however, - / thaler, or - / mark-banco, the slight premium simply covering the expenses of the bank. in this difference was abolished, the mark of fine silver both for receipt and disbursement being reckoned at - / marks ( marks schillings). the hamburg banco was, therefore, appreciated above the hamburg courant by a matter of . per cent. . the schleswig-holstein courant, mark of fine silver = - / thaler, or - / marks. gold standards. . imperial or ducat standard. the imperial mint ordinance of contains the first mention of the ducat in german legislation, prescribing it to the mark, - / -carat fine. subsequently the standard varied slightly. austria minted them carat grs. for herself (_kaiserlichen_), at carat grs. for hungary (_kremnitzer_). the other german states approximated between a -carat grs. and a -carat grs. standard. baden struck ducats carat grs. fine, . to the mark. . the _pistole_ standard (_friedrichs d'or_, _august d'or_, _wilhelms d'or_, _carls d'or_, or generally, _louis d'or_), mostly in the northern states of denmark, mostly - / to the mark, - / carats fine, though with considerable variations (e.g. the saxon _august d'or_, to the mark, carats grs. fine. in bremen this was the legal currency, the _louis d'or_ being taken at thalers at groot, each groot at schwaren). for a considerable period, far into the present century, the merchants of mecklenburg, hanover, and brunswick kept their accounts in gold pistoles (= thalers). prussia (as above, p. ) fixed the pistole at - / thalers, but elsewhere it had a varying (mercantile) equivalence. . the gold gulden standard. the last of the three imperial mint ordinances ( ) prescribed gold gulden to the mark, - / carat fine. they continued to be coined in southern german states and in hanover up to the middle of the eighteenth century. table of the gold coins of germany--gulden, ducat, and friedrichs d'or. +--------------------+---------+---------------------+---------------------+ | | tale | | value of the piece | | | to the | | as expressed in | | year. | cologne | standard. | coin of the | | | mark. | | -florin standard. | +--------------------+---------+---------------------+---------------------+ | | | kar. grs. | fl. kr. pfge. | | -- | | | | | florentine florin | | | | | or gold gulden | | | | | ( to the | | | | | florence mark) | - / | | - / | | | | | | | -- | | | | | gold gulden of | | | | | cune, archbishop | | | | | of treves, | | | | | wenceslaus of | | | | | bohemia | | | - / | | | |(and of silver)| | | | | | | | and -- | | | | | gold gulden of the | | | | | rhenish princes. | | | | | adopted by rupert | | | | | ii. in | | | - / | | | |(and of silver)| | | -- | | | | | the gulden of the | | | | | three spiritual | | | | | electors (adopted | | | | | in the same year | | | | | by the netherlands| | | | | at speyer, and by | | | | | the states of the | | | | | empire at cologne)| | | - / | | | | | | | -- | | | | | gold gulden of | | | | | elector frederick | | | | | of brandenburg ( | | | | | to the nürnberg | | | | | mark) | - / | | - / | | | | | | | -- | | | | | gold gulden of | | | | | king sigismund ( | | | | | to the nürnberg | | | | | mark) | - / | | - / | | | | | | | and -- | | | | | gold gulden of | | | | | emperor sigismund | | | | | (confirmed at | | | | | frankfort and | | | | | nürnberg, , | | | | | , and ) | | | - / | | | | | | | -- | | | | | gold gulden of the | | | | | elector of mainz, | | | - / | | | | | | | -- | | | | | gold gulden of | | | | | emperor frederick | | | | | iv. | | | - / | | | | | | | -- | | | | | gold gulden as | | | | | adopted by | | | | | agreement of | | | | | several electoral | | | | | princes at | { - / | | - / | | frankfort | { - / | | - / | | | | | | | and -- | | | | | gold gulden as | | | | | adopted at worms, | | | | | and in at | | | | | lindau and | | | | | freiburg | - / | | - / | | | | | | | -- | | | | | gold gulden as by | | | | | treaty between | | | | | bamberg, würzburg,| | | | | and brandenburg | - / | | - / | | | |(and of silver)| | | | | | | | -- | | | | | gold gulden | | | | | adopted by the | | | | | reichstag at | | | | | frankfort | - / | | - / | | | |(and of silver)| | | | | | | | -- | | | | | gold gulden as | | | | | determined by the | | | | | imperial mint | | | | | ordinance of | | | | | charles v. at | | | | | esslingen | | | - / | | | | | | | -- | | | | | gold gulden as | | | | | determined by the | | | | | imperial mint | | | | | ordinance of | | | | | charles v. at | | | | | augsburg | - / | | - / | | | |(and of silver)| | | | | | | | -- | | | | | gold gulden as | | | | | determined by the | | | | | imperial mint | | | | | ordinance of | | | | | ferdinand i. | | | - / | | | |(and of silver)| | | | | | | |gold ducat (ibid.) | | - / | ( = fl. kr.) | +--------------------+---------+---------------------+---------------------+ table of the gold gulden and ducat--_continued._ from the tale and standard remained legally unaltered; the only variations being thenceforward in equivalence or tariff, thus-- fair of set the rhenish gold gulden and philipps thaler at kr. imperial commissioners at frankfort set the gold gulden at kr. about gulden of , of kr., set at kr. " " , " " " " , april brandenburg ducat set at fl. " philipps thaler and reichs gold gulden set at batzen. {franconia} and {bavaria } ducat, to cologne mark, carats grs. {swabia } _ibid._ (_münz probations tag_), gold gulden, to cologne mark, carats grs. fine. , july mint edict of john george, duke of saxony, rhenish gold gulden set at gulden good groschen. higher circles gold gulden = fl. kr. " " ducat = " " " august würtemberg gold gulden = fl. kr. " " " ducat = " " " " archduke leopold of austria set the gold gulden at fl. kr. " " " " " ducat " " " october strasburg gold gulden = fl. kr. " " " ducat = " " " electoral saxony, philipps or gold gulden = groschen. " " ducat = " " brandenburg gold gulden = groschen. " " ducat = " " october frankfort gold gulden = fl. kr. " " " ducat = " " " lower saxony gold gulden = - / groschen (= fl. kr.). three circles (franconia, bavaria, swabia) gold gulden = fl. kr. " " " " ducat = " " " " " gold gulden tolerated at fl. " " " " ducat " " (but to be reduced respectively to - / fl. and fl. kr.) three circles gold gulden = fl. kr. " " ducat = " " (franconia, bavaria, swabia) ducat = fl. three circles ducat = fl. " " gold gulden = fl. kr. in consequence of leipzig standard, gold gulden = fl. kr. " " " " ducat = fl. austrian ducat = fl. } " gold gulden = " } " ducat = " (but circulating at fl. kr.). " ducat = fl. kr. , may " imperial ducat = fl. kr. " " " kremnitz " = " " " " " other " = " - / " , march , austria (imperial patent) kremnitz ducat = gulden kr. " " imperial, bavaria, salzburg " = " " " " holland and others " = " " , sept. , kremnitz ducat and zecchini = " " " " imperial " = " " " " holland " = " " , jan. , imperial ducat = " " " " kremnitz bavarian salzburg " = " " " " holland " = " " (this equivalence of fl. kr. remained till the vienna convention (at to the koln mark, - / fine = - / gulden, ratio = : - / ( . )), the ratio prescribed by the edict of the emperor joseph ii., of th january .) souverain, or souverain d'or (originally netherlands), minted in vienna mint, carat / gr., . to mark gross ( . fine) = gulden kr. pf. , jan. , souverain, or souverain d'or = gulden, kr. (makes a ratio of . ). prussian friedrichs d'or, to mark, - / carat fine (= grs. of fine gold to the piece). prussian friedrichs d'or, to mark, - / carat fine (= grs. fine gold to the piece). (confirmed by law of th sept. .) vienna convention trade money (see p. ). -mark piece, - / to the german pound, . fine. table of the thaler. , brunswick, luneberg, hanover, etc.--thaler = marien groschen = silver groschen. , saxony mint ordinance (renewing previous ordinances in spite of the imperial ordinance)--thaler or gulden thaler, loth grs. fine, to mark (= - / to mark fine) = to groschen: mark fine therefore equal to fl. kr. , imperial ordinance--forbidden. , reichstag of augsburg--again authorised; loth grs., to the mark fine; equal kr.; mark fine therefore = thalers kr. ( fl. kr.). , frankfort fair--philipps thaler = kr. , imperial commissioners at frankfort--philipps thaler provisionally set at kr. same year, december , imperial commissioners at strasburg--reichs thaler = kr. (or batzen), according to which mark of fine silver = fl. kr. beginning of seventeenth century (imperial letters)--reichs thaler recognised at kr. as highest limit. (higher circles)--reichs thaler recognised at kr. electoral saxony--reichs thaler = good groschen. , lower saxony--reichs thaler = good groschen; philipps thaler, - / good groschen (mark fine silver = fl. kr.). , lower saxony--reichs thaler = silver groschen. (three circles, _in comitiis_)--reichs thaler = kr. (fine mark = fl. kr.). , saxony and brandenburg (zinnaische fuss)--reichs thaler = fl. kr. = good groschen (fine mark = - / fl.). (three circles)--reichs thaler reduced to kr. (fine mark = fl. kr.). (the three circles carried it _in comitiis_)--reichs thaler reduced to kr. (fine mark = fl. kr.). , emperor at salzburg set the reichs thaler = kr. (leipzig mint, for saxony, brandenburg, brunswick, luneburg)--mark fine = thalers = fl.; reichs thaler = fl. ( kr.). , rejected by hamburg, lübeck, and bremen, who stuck to reichs thaler = groschen, or schillingen, or kreutzers, or marks (to be reduced to this by three drops). , prussia--frederick v. -thaler, or -gulden fuss ( thalers to the mark fine), thaler = groschen, groschen = pfennige. , thaler = groschen. , " = to the pound of pure silver, . fine. , " = marks (see p. ). table of the groschen. +---------------------------------+---------------+---------------+ | | tale to the | standard. | | | cologne mark. | | +---------------------------------+---------------+---------------+ | | | loth. grs. | | -- | | | | the gros tournois minted at | | | | tours in france ( to the | | | | troy mark) | - / | | | | | | | -- | | | | groschen of bohemia and meissen | - / | | | | | | | -- | | | | groschen of meissen | - / | | | | | | | -- | | | | groschen of bohemia | | | | | | | | -- | | | | meissen | | | | | | | | -- | | | | bohemia | - / | | | | | | | -- | | | | bohemian groschen, as by the | | | | constitution of charles iv. | | | | and wenceslaus | | | | | | | | -- | | | | meissen | | | | | | | | -- | | | | würzburg ( to the würzburg | | | | mark) | - / | | | | | | | -- | | | | saxony and meissen | | | | | | | | -- | { | | | frederick ii. of saxony (four | { | | | kinds of groschen) | { | | | | | | | -- | | | | archduke sigismund of austria | | | | ( gulden groschen to the | | | | vienna mark) | - / | | | | | | | -- | | | | schwart groschen | | | | large groschen of hesse | | | | hamburg | | | | lübeck | | | | bohemia | | | | ( other species concurrent.) | | | | | | | | -- | | | | imperial mint ordinance of | | | | charles v. | | | | | | | | -- | | | | imperial mint ordinance of | | | | charles v. ( contemporary | { - / | | | species.) | { | | | | | | | -- | | | | imperial mint ordinance of | | | | ferdinand i.--reichs groschen | - / | | | | | | | -- | | | | lower saxony--silver groschen | - / | | | " marien groschen | - / | | | | | | | -- | | | | brandenburg | | - / | | | | | | -- | | | | lower saxony | | | | | | | | -- | | | | lower saxony | | | | | | | | -- | | | | higher and lower saxony | - / | | | | | | | -- | | | | brunswick and luneberg-- | | | | good groschen | | | | marien groschen | | | | | | | | -- | | | | the three circles (franconia, | | | | bavaria, and swabia) | - / | | | | | | | -- | | | | the three circles (franconia, | | | | bavaria, and swabia) | | | | | | | | -- | | | | leipzig standard--good groschen | | | | " marien groschen | - / | | | | | | | -- | | | | as adopted _in comitiis_-- | | | | groschen | | | | imperial groschen | - / | - / | | marien groschen | | | +---------------------------------+---------------+---------------+ footnotes: [footnote : heller were first minted in at halle, but by the year they had sunk to the equivalence of a half-pfennige. of the origin of the kreutzer less is known, as few, if any, records of it occur before its minting in the tyrol in . its subsequent variation in different parts of germany, and at different times, it is almost impossible to give account of.] appendix vi the monetary system of france the metric system on which the french mint was worked throughout the period treated of in this work up to the revolution was as follows:-- mark = oz. " = gros. ( × ). " = dens. ( × ). " = grs. ( × ). an alternative subdivision of the ounce was as follows:-- oz. = esterlings. " = mailles ( × ). " = felins ( × ). for the alloy or standard the mark was thus subdivided:-- for gold mark = carats each subdivided into parts. " silver " = dens. each subdivided into grms. in france fine gold was only refined to - / carats, and fine silver deniers grs. in calculation the absolute fineness of carats and deniers must be used. the system of reckoning was as follows:-- livre = sols. sol. = den. den. = oboles. obole = pites. pite = semipites. the reckoning by livres, sols., deniers was derived from the frankish kings. for a time the system of reckoning by the mark threatened to replace it, but in it was again authorised by philippe le bel. the origin of the difference between the livres tournois and the livres parisis is to be sought in the feudal mint franchises of the barons. at one time there was a difference between the two systems of per cent., the barons who had the right of minting preferring to do so at tours, or according to the tours weight, which was the more depreciated of the two, while at paris the french kings attempted to keep up a tradition of a better weight standard.[ ] the distinction of livres tournois and livres parisis was maintained until the days of louis xiv., when ( ) it was abolished, and the reckoning by a single livre, sol., denier, was established. (for the intermediate experiment of henry iii. see text p. .)[ ] the monetary system of charlemagne was the precursor and source of the chief currency systems of mediæval and modern europe, with the exception of spain. it was itself an imitation of the system of the eastern empire. its basis was the _libra_ or pound, which occurs in two forms--( ) the gold pound, ( ) the silver pound. under the first race of the french kings the monetary divisions of the former were-- . the gold solidus, a name which gave birth to the spanish and italian soldo and the french sol. (_sou_). . the third of the gold solidus (triens or tremissis). of the latter the aliquot parts were-- . the silver solidus. . / " (tremissis). . the denarius. gold solidus = - / silver solidi = denarii. " = " under the system of the eastern empire the gold solidus had weighed - / grs. and under the merovingian kings - / grs. under the rule of the second house a considerable alteration took place. charlemagne adopted for the basis of his system the east frank or rhenish libra, which was one-fourth heavier than the roman libra adopted by the merovings. his denarius accordingly weighed grs. if ideally constructed the system, as far as silver is concerned, would be this-- denarii = solidus. solidi = libra. × × = grs. = libra. as far as the more precious metal is concerned, the gold solidus was, as a matter of fact, hardly to be met with under the second race. but, theoretically, it was still considered equal to denarii. × = grs. / = . grs. for the gold solidus. but there are some actually met with containing grs. _sols d'or_ as a reminiscence of the first and second race are said to have still lingered in use at the commencement of the third race of kings. under philip i. they occur as _francs d'or_ and _florins d'or_. in speaking of this latter term in the account of florentine money (appendix i. _supra_, p. ), it has been pointed out as possible that it is merely the name for an ideal money, not an actual coin. (see however, preface, p. xiii.) the actual reinstitution of gold monies in france has been already dealt with (text, p. ). of the species of the gold monies it would be almost an impossibility to speak. putting aside the disputed florin d'or, the first authenticated type of the gold monies was the _aignel d'or_ or _denier d'or a l'aignel_, so called from the lamb (agneau = aignel), stamped on it. under st. louis, to whom it is first assigned, it weighed deniers grs., was of fine gold and worth sols. deniers tournois. philippe le bel, louis huttin, philippe le long, and charles le bel maintained this coin at the same weight and standard. those of king john were of the same standard or fineness, but were slightly heavier, weighing deniers grs. under charles vi. and charles vii. both weight and fineness were considerably reduced. under the various names of _agnels d'or_, _moutons d'or à la grande laine_, _moutons d'or à la petite laine_, this species had currency in france for nearly two hundred years. the imitations of it in surrounding countries were almost numberless. _royal_ (for the origin of the piece, see text, p. ). philippe le bel minted _petits royaux d'or fin_, to the mark and with an equivalence of sols. parisis. gros royaux were the double of the petits royaux. charles le bel and philippe de valois struck royaux to the mark. king john struck royaux or _deniers d'or au roial_ and to the mark, charles v. to the mark, and charles vi. and to the mark. _masses_ or _chaises_ (_cadieres_, _royaux durs_), were coined by philippe le bel, -carat fine and deniers grs. the piece. the _chaises d'or_ of his successor varied greatly from these. philippe de valois coined them of fine gold, and deniers grs. the piece, and charles vi. of fine gold deniers grs. the piece. under charles vii. the standard was reduced to carats and the weight to deniers grs. of other early gold species it is sufficient to mention-- _reines_, coined by philippe le bel. _florin george_, " philippe de valois. _parisis d'or_, - / to mark = sols. parisis. _lion_ to the mark. _pavillon_ " _couronne_ " _ange or angelot_ - / " _denier d'or à l'écu_ " the last of these species (_deniers d'or à l'écu_) continued to be minted, and had wide currency through the reign of john up to their cessation in . there was, however, great variation in the standard from fine gold to , - / , , and even carats. the reign of john was marked, , by the commencement of the coining of the important _franc d'or_ of fine gold, to the mark = sols. or livre. its standard (of fine gold) was maintained under charles v. and until charles vii., but under the latter monarch the weight was reduced (to a tale of to the mark). _fleurs de lis d'or_ (or _florins d'or aux fleurs de lis_) were first minted in by charles v. they were of fine gold, and weighed exactly gros. being equivalent to the franc (i.e. equal to livre or sols.), it received the same name, being styled _franc à pied_ to distinguish it from the _franc d'or_ proper, which was styled _franc à cheval_. _saluts_ were first minted by charles vi. in of fine gold, and of the same weight as the _francs à cheval_, but equal to sols. _couronnes_ or _écus à la couronne_ were first coined by charles vi. in of fine gold, weighing deniers grs. (i.e. to the mark), and equal sols. this was the most celebrated gold coin of mediæval france. it lasted down to the time of the louis d'or, and was in high repute all over europe. under charles vi. and charles vii. numerous changes were made in this piece both in weight and standard. at one time, under charles vi., the standard fell as low as carats. in , however, they were again made of fine gold, but to the mark, and issued at an equivalence of sols. in they were issued - / carats fine, to the mark, and = sols. the piece. in louis xi. issued them to the mark; but two years later he began the issue of _écus d'or au soleil_ (_crowns of the sun_), of the same fineness as the couronne, but slightly heavier ( to the mark). from the days of charles viii. the _crown of the sun_ (_écus d'or au soleil_, also called _écus au porc-epi_) took the place of older crowns. under francis i. they were generally carats fine and - / to the mark, under charles ix. carats fine and - / to the mark. at this latter they remained till the days of louis xiv. the change of equivalence must be followed in the accompanying tables. from the old _écus à la couronne_ must be distinguished the _écus heaumes_, which were issued in small quantities under charles vi., generally to the mark and carats fine. _henris d'or_ occur only under henry ii., carats fine, deniers grs. weight, and issued at an equivalence of sols. _louis d'or_ (see text, p. ), first issued in under louis xiii. in imitation of the spanish standard; carats fine, - / to the mark, and = livres. standard and weight remained unchanged until . see tables below for subsequent change. _lis d'or_ have merely a transitory importance. they were issued in and shortly after, but almost immediately discontinued; - / carats fine, deniers - / grs. the piece ( - / to the mark) = livres (to be distinguished as a third type from the _fleurs de lys d'or_ of king john, and the separate _fleur de lys d'or_ of charles v.). silver coins. the silver deniers of the first royal race of france averaged grs. in weight. under the second race a much heavier system was adopted, those of charlemagne weighing grs., and those of charles the bold grs. at the commencement of the third race they were still of fine silver, and weighed about or grs. the process of diminution by alloy and in weight began under philippe i. for the question of the existence of a silver solidus, see le blanc, introduction, p. xii. if they ever existed their place as a large silver specie was at an early date taken by that of the _gros tournois_ (called also _gros deniers d'argent_, _gros deniers blancs_, and _sols d'argent_), attributed to s. louis; deniers grs. fine, grs. weight ( to the mark), and issued at an equivalence of deniers or sol. in the commencement, therefore, of this piece the gros tournois was synonymous with the sol. tournois. with the degeneration of the standard, however, the coin (the gros) parted company from the sol., which remained as a system of reckoning. up to the time of philippe de valois this money continued of undiminished weight and standard, and of the greatest celebrity. when that prince, in , returned to good money after a period of debasement, he coined the gros tournois to a mark, of fine silver, and at an equivalence of deniers tournois. for its subsequent course, see tables infra.. it is noticeable that while in weight and value the gros tournois was frequently changed, in fineness no diminution was made. _parisis d'argent_, issued only by philippe de valois (of fine silver, deniers in weight = deniers tournois or sol. parisis). _testoons_ are to be regarded as the successors of the gros tournois. they were first issued by louis xii. in ; deniers grs. fine, deniers - / grs. weight, and = sols. this species continued until its interdiction by henry iii. in , who replaced them in that year by. _francs d'argent_, deniers - / grs. fine, deniers grain weight (or - / to the mark), and = sols. this piece continued until the days of louis xiii. _quart d'écus_, also issued by henry iii., deniers fine, deniers - / grs. weight, and = sols. (i.e. a quarter the value of the écu d'or, then set at sols.). this piece endured till . _louis d'argent_, issued by louis xiii. (see p. , _louis d'or_), deniers fine, deniers grs. weight for the écus blancs. this money continued till the revolution. _lis d'argent_, issued for a few months in , deniers grs. fine, deniers grs. weight, and = sols. _franc_, modern (see text, p. ). the history of the french monetary system has been briefly told in the text, pp. , - , - , - . the tables of the present appendix afford particular information as to the course of the above-mentioned coins, down to the last great change in the french system. they bring out also, in strong relief, the numerous and arbitrary and excessive debasements which that system underwent in the middle ages. the particular episode of the eighteenth-century depreciation, which followed upon the erection of the system of john law, may be, in brief, more appropriately sketched here than in the text. the third of the three great recoinages of , , and had left the louis d'or tariffed at an equivalence of livres, and the louis d'argent at livres. by the end of these figures had sunk to livres sols. and livres sols. respectively. by the decree of april quite a different standard was adopted. the louis d'or was minted to the mark, carats fine, and = livres sols., while the louis d'argent was minted to the mark, deniers fine, and = livres sols. in the month of may a second edict raised these equivalences to livres and livres respectively. the sufferings of french commerce under this extraordinary tariff led to its annulling by the decree of th september , by which a reduction of equivalence was made to livres and livres sols. respectively. in december of the same year a reformation was again attempted. the new species were of the same content and fineness as the old, but were tariffed at livres for the louis d'or, and livres for the louis d'argent, while the unreformed specie were tariffed at livres and livres respectively. three years later began the period of the monetary disorder of the minority of louis xv. in november a new louis d'or was issued, to the mark, carats fine. in may again a new issue took place--louis d'or to the mark, carats; louis d'argent to the mark, deniers fine. there were thus, at the time, four different louis d'or in existence, namely:-- the old louis d'or - / to the mark. the old louis d'or of } " " " " } " " " " " " " " and similarly three kinds of louis d'argents or écus:-- the old louis d'argent to the mark. the old louis d'argent of } " " " } " " " " " " " on the th july the compagnie des indes obtained the profit and farm of the french mint for a term of nine years. the first outcome of their activity was the issue of the following tariff:-- livres. sols. deniers. Écu of louis d'argent of old louis d'or old louis d'or of in the same year ( , the first of their lease) this corporation further issued quite new species, namely, quinzains d'or = livres, and livres d'argent = / -écu (both being cut at a tale of - / to the mark). on the th march all the species were raised - / per cent., the louis d'or of thus rising to an equivalence of livres, and the louis d'argent of the same issue to livres. on the th march the use of the gold specie was forbidden, and a recoinage determined on. these regulations, however, were not carried out, and by july the louis d'or had risen to livres (= - / livres to the mark of fine gold), and the louis d'argent to livres (= - / livres to the mark of fine silver). the same enhancement prevailed in the divisional coin, and the confusion endured till the end of . in september the louis d'or had fallen to livres (= - / livres to the mark of fine gold), and the louis d'argent to livres sols. (= - / livres to the mark of fine silver). at the same time (september) a new fabrication of species, according to the standard of , was undertaken. louis d'or, to the mark, to issue at livres; louis d'argent (or / -écu), to the mark, to issue at livres. but from the th october a gradual diminution in this tariff was prescribed, and from the st of january these coins were to circulate respectively at livres and livres sols. from the same date the louis d'or of was to circulate for livres sols., and the louis d'argent of for livres sols. deniers. on the th january the contract for coinage held by the compagnie des indes was annulled, and an intermediate attempt at reform was made in , when the louis d'or was minted at - / to the mark = livres, and the louis d'argent at - / to the mark = livres sols. the downward course of the specie set strongly in, and by they had fallen to livres and livres respectively. this facilitated the great reform and recoinage of (see text, p. ). this recoinage was carried out on the basis of the edict of -- louis d'or, to the mark = livres. louis d'argent, to the mark = livres. by the edict of may of the same year their equivalence was raised per cent.--the louis d'or to livres, the louis d'argent to livres. table of the french gold coins. (_up to , from le blanc; onwards, continued from various sources._) +----------------------+-------------+--------------+------------+------+----------+ | |price of mark| | | tale | | | date. |of gold. | species. | standard. | per | value. | | +-------------+ | | mark.+----------+ | |(l=liv. | | | | (s=sol. | | | s=sol. | | | | d=den.) | | | d=den.) | | | | | +----------------------+-------------+--------------+------------+------+----------+ | |liv.sol. den.| | | | s. d. | | (s. louis) | ... | agnel |fine gold | - / | | | (philippe le bel)| ... | gros royal | ... | ... | | | | | petit royal |fine gold[g]| | | | , april | | chaise | ... | ... | | | , august | | masse | carat | - / | | | , january | | agnelet | fine gold | - / | | | , august | | ... | ... | ... | | | (louis huttin), | | | | | | | august | ... | ... | ... | ... | | | , november | | ... | ... | ... | ... | | , may | ... | agnelet | fine gold | - / | | | " january | | ... | ... | ... | | | (philippe le | | | | | | | le long), easter | | ... | ... | ... | | | december | | agnelet | fine gold | - / | | | (charles le bel),| | | | | | | february | | agnel[h] | " | - / | | | , october | | ... | ... | ... | | | , february | | royal double | fine gold | | | | (philippe | | | | | | | de valois), | | | | | | | dec. | ... | parisis | " | - / | | | ... | ... | royal double | " | | | | , april (poste | | | | | | | monnaie) | | parisis | " | - / | | | | ... | royal double | ... | ... | | | | ... | agnel | ... | ... | | | , january | | royal | ... | ... | | | , april | ... | ... | ... | ... | | | | | | | |(tournois)| | , february | | Écu | fine gold | | | | , november | | lion | " | | | | , may | | ... | ... | ... | ... | | " june | | pavillon | fine gold | | | | " august | | ... | ... | ... | ... | | " june | | ... | ... | ... | ... | | " february | | couronne | fine gold | | | | " february | | ... | ... | ... | ... | | , april | | double | fine gold | | | | ... | ... | simple | " | | | | " may | | doubles | carat | | | | " october | | ... | ... | ... | ... | | " january | | ... | ... | ... | ... | | " february | | anges |fine gold | - / | | | ... | ... | demi anges | ... | - / | ... | | , august | | anges |fine gold | - / | | | , january | | ... | ... | ... | ... | | , june | | ... | ... | | | | , september | | ... | ... | ... | ... | | , april | | Écu |fine gold | | ... | | , september | ... | ... | ... | ... | | | (forte monnaie) | | ... | ... | ... | | | , march | | ... | ... | ... | ... | | , july | | chaises |fine gold | | | | , february | | ... | ... | ... | ... | | , march | ... | ... | ... | ... | | | , april | | ... | ... | ... | ... | | , april | | Écu |fine gold | | | | , september | | chaises |fine gold | | | | , january | | Écu | carat | | | | , august | ... | ... | - / carat| ... | | | , march | | ... | carat | ... | | | , may | | ... | carat | ... | | | , december | | ... | ... | ... | ... | | , april | | | | | | | (forte monnaie) | ... | ... | ... | ... | | | , september | | | | | | | (john i.) | | Écu | carat | | | | , june | | ... | - / carat| ... | ... | | , july | ... | ... | carat | ... | ... | | , august | | ... | ... | ... | ... | | , august | ... | fleur de lys |fine gold | | | | , september | | Écu | carat | | | | , september | | ... | carat | ... | ... | | , november | | ... | ... | ... | ... | | , february | | | | | | | (forte monnaie) | ... | ... | ... | ... | | | , april | | ... | ... | ... | ... | | , may | ... | ... | ... | ... | | | , january | | ... | ... | ... | ... | | , february | ... | ... | ... | ... | | | , may | ... | ... | ... | ... | | | , october | | | | | | | (forte monnaie) | | ... | ... | ... | | | , november | | moutons |fine gold | | | | , june | | ... | ... | ... | ... | | , june | | ... | ... | ... | ... | | , january | | | | | | | (forte monnaie) | ... | moutons | ... | ... | | | , november | ... | moutons | ... | ... | | | " january | | " | ... | ... | | | , june | ... |petits moutons|fine gold | | | | , august | | royal | " | | | | " april | | " | " | | | | , march | | | | | | | (forte monnaie) | ... | " | ... | ... | | | , january | | | | | | | (forte monnaie) | | franc |fine gold | | | | , april | | ... | ... | ... | ... | | , july | | ... | ... | ... | ... | | (charles v.), | | | | | | | may | | ... | ... | ... | ... | | , august | ... | royal |fine gold | | | | " september | ... | franc | " | | | | , may | | fleur de lis | " | | | | , (charles vi.), | | | | | | | april | | " | " | | | | , march | | Écu à la | ... | | | | | | couronne | | | | | , august | | ... | ... | ... | ... | | , february | | ... | ... | - / | | | , april | | ... | ... | ... | ... | | , " | | ... | ... | ... | ... | | , september | | ... | ... | | | | , august | | ... | ... | ... | ... | | , february | | ... | ... | ... | ... | | , november | | ... | ... | | | | " february | ... | ... | - / | ... | ... | | | | | carat | | | | " march | | ... | ... | ... | ... | | , september | | ... | ... | ... | ... | | , may | | moutons | carat | | | | " october | | ... | ... | ... | ... | | " " | ... | ... | carat | | | | " december | | Écu heaume | " | | | | , july | | ... | ... | ... | ... | | " march | | Écu à la | carat | | | | | | couronne | | | | | , june | | moutons | ... | | | | " october | ... | chaises |fine gold | | | | | | or doubles | | | | | " february | | Écu à la | ... | | | | | | couronne | | | | | ... | ... | moutons | ... | ... | | | | | | | | par. | | , october | ... | doubles | - / carat| | | | (forte monnaie), | | | | | | | april | | Écu à la |fine gold | | | | | | couronne | | | | | " november | | saluts | " | | | | (charles vii.), | | | | | | | january | ... | Écu à la | | | | | | | couronne | - / carat| | | | , may | | ... |fine gold | | | | " january | ... | moutons | carat | | | | " february | ... | franc à | | | | | | | cheval |fine gold | | | | " july | | ... | ... | ... | ... | | , august | ... | Écu à la | | | | | | | couronne | carat | | | | " september | | ... | ... | | | | " november | ... | moutons | carat | | | | , october | ... | Écu à la | | | | | | | couronne | " | | | | " january | | ... | ... | | ... | | , august | | ... | ... | ... | ... | | " september | | ... | carat | | | | " october | ... | ... | ... | | ... | | " january | | ... | ... | ... | ... | | " january | ... | ... | carat | | | | " march | ... | ... | ... | ... | | | , may | | ... | ... | ... | | | " july | ... | ... | carat | | | | " august | | ... | " | | | | " october | ... | moutons | " | | | | " november | | Écu à la | | | | | | | couronne | " | | | | " february | | ... | " | ... | | | , july | | ... | " | ... | | | " october | ... | moutons | " | | | | " april | | Écu à la | | | | | | | couronne | " | | | | " march | | ... | ... | ... | ... | | , june | ... | ... | carat | ... | | | " november | | | | | | | (forte monnaie) | | royal |fine gold | | | | , december | ... | Écu à la | | | | | | | couronne | carat | - / | | | , july | | chaises | " | | | | " november | ... | Écu à la | | | | | | | couronne | " | | | | , may | | royal |fine gold | | | | " september | | ... | ... | | | | " february | ... | ... | ... | | | | " march | | Écu à la | | | | | | | couronne | carat | - / | | | , january | | ... | ... | ... | ... | | " december | ... | royal |fine gold | | | | , october | | Écu à la | " | | | | | | couronne | | | | | " february | | ... | ... | ... | | | , september | | ... | ... | ... | ... | | " november | | ... | carat | | | | , april | | ... |fine gold | | | | , november | | ... | ... | ... | ... | | , december | | ... | - / carat| | | | , september | | ... | ... | ... | ... | | , june | | Écu à la | - / carat| - / | | | | | couronne | | | | | " january | | ... | - / " | ... | | | , july | - / | ... | - / " | ... | ... | | " october | | ... | - / " | ... | ... | | , june | | ... | - / " | ... | ... | | " february | | ... | ... | ... | ... | | , may | | ... | ... | ... | ... | | , june | | ... | ... | | ... | | (louis xi.), | | | | | | | march | ... | ... | ... | ... | | | , june | | ... | ... | ... | ... | | " january | | ... | ... | | | | , november | | Écu au soleil| - / carat| | | | (charles vii.), | ... | Écu à la | ... | ... | | | july | | couronne | | | | | ... | ... | Écu au soleil| ... | ... | | | , april | | ... | ... | ... | ... | | (louis xii.), | | | | | | | april | | Écu au soleil| ... | ... | | | , november | ... | Écu au porc | ... | ... | | | | | épi | | | | | (francis i.), | | | | | | | january | ... | Écu au soleil| ... | ... | | | , november | ... | " | ... | ... | | | ... | ... | Écu à la | ... | ... | | | | | couronne | | | | | , may | ... | Écu au soleil| ... | ... | | | , june | | ... | - / carat| - / | | | " august | ... | ... | " | - / | | | , march | ... | ... | ... | ... | | | , february | ... | Écu à la | carat | - / | | | | | salemand | | | | | , may | | Écu à la | ... | ... | | | | | croisette | | | | | (henry ii.), | | | | | | | january | | henris | carat | | | | , (charles ix.), | | | | | | | august | | Écu au soleil| carat | - / | | | , november | ... | ... | ... | ... | | | , august | ... | ... | ... | ... | | | , july | ... | ... | ... | ... | | | , june | | ... | ... | ... | | | (henry iii.) | | | | | | | september | ... | ... | ... | ... | | | , june | ... | ... | ... | ... | | | " may | | ... | ... | ... | | | " june | | Écu au soleil| carat | - / | | | " november | ... | ... | ... | ... | | | (henry iv.), | | | | | | | september | | ... | ... | ... | | | (louis xiii.), | | | | | | | february | | ... | ... | ... | | | , february | ... | ... | ... | ... | | | , august | ... | ... | ... | ... | | | , july | ... | ... | ... | ... | | | , march | ... | ... | ... | ... | | | " may | | ... | ... | ... | ... | | " june | ... | ... | ... | ... | | | " september | | ... | ... | ... | ... | | , april | ... | louis d'or | carat | - / | | | (louis xiv.), | | | | | | | april | ... | ... | ... | ... | | | , december | ... | louis d'or | - / carat| - / | | | , july | | ... | ... | ... | ... | | , april | - / | ... | ... | ... | ... | | , july | | louis d'or | ... | ... | | | , october | | ... | ... | ... | | | | (pite) | | | | | | , december | ... | ... | ... | ... | | | | ... | Écu d'or | ... | ... | | | | - / | louis d'or | ... | ... | | | | - / | " | ... | ... | | | | ... | " | ... | ... | | | , april | | " | carat | | | | " may | - / | " | ... | | | | , september | ... | " | ... | ... | | | " december | ... | " | ... | ... | | | , november | ... | ... | carat | | ... | | , may | ... | louis d'or | " | | ... | | , july | - / | " | ... | ... | | | ... | |quinzains d'or| ... | ... | | | , march | ... | louis d'or | ... | ... | | | | | (of ) | | | | | , march | - / | louis d'or | ... | ... | | | " september | - / | " | ... | ... | | | ... | ... | " | ... | | | | , january | ... | " | ... | ... | | | | ... | " | ... | - / | | | | ... | " | ... | ... | | | " (recoinage) | | " | carat | | | | " may | | " |raised | ... | | | | | | per cent | | | | ... | ... | Écu | ... | ... | | | , october | | | | | | | (recoinage) | | louis d'or | carat | | | | , march | - / | and |issue price | ... | ... | | | francs per | -franc | being | | | | | kilog. | pieces | - / | | | | | fine = | | per kilog.| | | | | fcs. per | | and | | | | | kilog. | | per kilog.| | | | | / fine. | | / fine.| | | | november | ... | and | ... | ... | ... | | | | -franc | | | | | | | pieces | | | | | | ... | -franc piece| ... | ... | ... | | , february |mint change | ... | ... | ... | ... | | | = francs | | | | | | | per kilog. | | | | | | " june |issue price | ... | ... | ... | ... | | |of kilog. of | | | | | | |fine gold | | | | | | |altered from | | | | | | | - / fcs.| | | | | | |to - / | | | | | | |fcs. | | | | | +----------------------+-------------+--------------+------------+------+----------+ [footnote g: see de saulcy, _documents_, i. , where it is stated that the fineness of these pieces was occasionally below carats.] [footnote h: edward iii. florins of the lamb worth s. - / d. a piece = £ , s. sterling (exchequer q.r. ancient miscellanea, / . expenses of adam, bishop of worcester, going to rome).] table of french silver coins. (_from the same sources, extended as above, p. ._) +----------------------+----------+---------------+-----------+---------+---------+ |date. |price of | name of | alloy. | tale | value. | | |mark of | species. | |per mark.| | | |silver. | | | | | +----------------------+----------+---------------+-----------+---------+---------+ | |liv. den.| | den. grs.| |sol. den.| | | sol. | | | | | | | | ... | ... | ... | ... | | | | ... | ... | ... | ... | | | | ... | ... | ... | ... | | | | ... | ... | ... | ... | | | |gros tournois | | | | | | | ... | ... | ... | ... | | | | ... | ... | ... | ... | | | | ... | ... | ... | ... | | | ... |petits tournois| | | | | , may | | ... | ... | ... | ... | | , july | | ... | ... | ... | ... | | , may | | ... | ... | ... | ... | | , june | | ... | ... | ... | ... | | , april | | ... | ... | ... | ... | | " february | | ... | ... | ... | ... | | , august | | ... | ... | ... | ... | | , may | | ... | ... | ... | ... | | " june | | ... | ... | ... | ... | | " september | | ... | ... | ... | ... | | " december | | ... | ... | ... | ... | | " march | | ... | ... | ... | ... | | , april | | ... | ... | ... | ... | | , october | | ... | ... | ... | ... | | (forte monnaie) | | | | | | | , april | |gros tournois | | | | | , january | |bourgeois forte| | | | | | | | | | (par.)| | , july | - / |bourgeois | | | | | | | singles | | | (par.)| | , june | ... | ... | ... | ... | | | | | | | | (tour.)| | " september | |gros tournois | | | | | | | | | | | | ... | ... |denier tournois| | | | | | | | | | | | ... | ... |denier parisis | | | | | | | | | | (par.)| | , november | | ... | ... | ... | ... | | , may | ... |denier parisis | | | | | | | | | | (par.)| | " january | |denier tournois| | | | | | | | | | (tour.)| | , march | |gros tournois | | - / | | | ... | ... |denier parisis | | | | | , february | |gros tournois | | - / | | | , october | |denier parisis | | | ... | | " march | |obole blanche | | | | | | | | | | (par.)| | , july | | ... | | | | | | | | | | (tour.)| | " january | | ... | ... | ... | ... | | , " | | ... | ... | ... | ... | | , november | | ... | ... | ... | ... | | , december | |gros tournois | ... | ... | | | | | | | | (tour.)| | , april | | " | | | | | (forte monnaie) | | | | | (tour.)| | ... | ... |gros parisis | | | | | | | | | | (par.)| | , january | | ... | ... | ... | ... | | , june | |denier parisis | | - / | ... | | , february | |gros à la | | | | | | | couronne | | | (tour.)| | , november | | " | | | | | " january | | ... | ... | ... | ... | | , august | | ... | ... | ... | ... | | " february | | ... | | | | | " april | ... | ... | | | | | , august | | ... | ... | ... | ... | | " december | | ... | ... | ... | ... | | " january | |gros à la fleur| | | | | | | de lis | | | | | " february | | ... | ... | ... | ... | | " " | | ... | | | | | , june | | ... | | | | | " september | | ... | ... | ... | ... | | , april | | ... | ... | ... | ... | | " september | | ... | ... | ... | ... | | ... | ... |gros tournois | | | | | " october | | ... | ... | ... | | | (forte monnaie) | | | | | | | , february | | ... | ... | ... | ... | | , april | | ... | ... | ... | ... | | , july | |double parisis | | | | | | | | | | (par.)| | , january | | ... | ... | ... | ... | | " february | | ... | ... | ... | ... | | " march | ... | ... | | | | | | | | | | (par.)| | , july | | ... | ... | ... | ... | | " january | |double tournois| | - / | | | | | | | | (tour.)| | , august | | ... | - / | - / | | | | | | | | (tour.)| | " december | | ... | | | | | | | | | | (tour.)| | , may | | ... | ... | ... | ... | | " august | | ... | ... | ... | ... | | " december | | ... | ... | ... | ... | | " january | | ... | ... | ... | ... | | , april | |double parisis | | | | | (forte monnaie) | | | | | (par.)| | " august | | " | | | | | | | | | | (par.)| | " october | | ... | ... | ... | ... | | " february | | ... | ... | ... | ... | | " march | | ... | ... | ... | ... | | , may | |blancs | | | | | | | | | | (par.)| | " june | | ... | ... | ... | ... | | " august | | ... | ... | ... | ... | | " september | |blancs | | | | | | | | | | (par.)| | " october | | ... | ... | ... | ... | | " december | | ... | ... | ... | ... | | " january | | ... | ... | ... | ... | | " february | |gros tour. | | - / | | | | | blancs | | | (tour.)| | " march | | ... | ... | ... | ... | | (forte monnaie) | | | | | | | , june | ... | ... | ... | ... | ... | | " july | | ... | | | | | | | | | | (tour.)| | " august | | ... | ... | ... | ... | | " october | | ... | ... | ... | ... | | " november | | ... | | | | | | | | | | (tour.)| | " december | | ... | ... | ... | ... | | " february | | ... | ... | ... | ... | | , april | | ... | | | | | | | | | | (tour.)| | " july | | ... | ... | ... | ... | | , august | | ... | ... | ... | ... | | " october | | ... | ... | ... | ... | | (forte monnaie) | | | | | | | " november | ... | ... | - / | | | | | | | | | (tour.)| | " february | | ... | ... | ... | ... | | " " | | ... | ... | ... | ... | | , april | | ... | ... | | | | | | | | | (tour.)| | " may | | ... | | | | | | | | | | (tour.)| | " july | | ... | ... | ... | ... | | " september | | ... | ... | ... | ... | | " november | |blanc à la | | | | | (forte monnaie) | | couronne | | | (tour.)| | " january | | ... | | ... | ... | | " april | | ... | | | ... | | , may | | ... | | ... | ... | | " july | | ... | ... | ... | ... | | " " | |blancs à la | | | | | | | couronne | | | (tour.)| | " august | ... | ... | | ... | ... | | " august | | ... | ... | ... | ... | | " september | | ... | | | ... | | " october | | ... | | | ... | | " november | | ... | | | ... | | " december | | ... | ... | ... | ... | | " january | | ... | ... | ... | ... | | (forte monnaie) | | | | | | | " january | ... |blanc à la | | | | | | | couronne | | | | | " " | ... |blanc à la | | | | | | | fleur de lis | | | | | , august | | ... | | | ... | | " september | | ... | | - / | ... | | " october | | ... | ... | ... | ... | | " november | |gros | | | | | " " | |gros blancs | | | | | " february | ... | ... | | - / | | | " march | |gros à la | | | | | | | couronne | | | | | , january | |blanc à la | | | | | | | fleur de lis | | | | | , may | | ... | | ... | ... | | " july | | ... | | | ... | | " august | | ... | | | ... | | , august | |blancs à la | | - / | | | | | couronne | | | | | " november | | | | | | | " " | | | | | | | " december | | | | | | | " " | | | | | | | " february | | | | | | | " " | | | | | | | , april | | | | | | | " may | | | | | | | | |gros blancs | | | | | " june | |blancs aux | | | | | | | trois fleurs | | | | | | | de lis | | | | | " june | | | | | | | " july | | | | | | | " " | | | | | | | " " | | | | | | | " september | | | | | | | " october | | | | - / | | | " " | | | | | | | " november | |gros à | | | | | | | l'estoile | | | | | " december | | | | | | | " " | | | | | | | " " | | | | | | | " january | | | | | | | " " | | | | | | | " february | | | | | | | " " | | | | | | | " march | | | | | | | " " | | | | | | | " " | |gros | | | | | | |blancs | | | | | (forte monnaie) | | | | | | | , april | | | | | | | " may | | | | | | | " " | | | | | | | " june | |blancs à la | | | | | | | fleur de lis | | | | | " " | | | | | - / | | " " | | | | | | | " " | | | | | | | " august | | | | | | | " " | | | | | | | " " | | | | | | | " september | |blanc à la | | | | | | | couronne | | | | | , october | ... | ... | | ... | ... | | " november | | ... | ... | ... | ... | | " " | | ... | ... | ... | ... | | " january | |blanc à la | | | | | | | fleur de lis | | | | | , april | |gros tournois | | | | | (forte monnaie) | | | | | | | , may | |gros d'argent | | | | | , may | |blanc | | | | | , june | |gros d'argent | - / | | | | , august | | ... | | ... | ... | | , " | ... | ... | | ... | ... | | , " | ... | ... | | ... | ... | | , april | |gros d'argent | | | | | " august | | ... | ... | ... | ... | | , march | ... |blanc à l'écu | | | | | , october | ... | ... | | - / | ... | | , " | | ... | | ... | ... | | " july | | ... | | ... | | | , april | | ... | ... | ... | ... | | , november | | ... | ... | ... | ... | | , july | ... |gros | | | | | , " | |blanc à l'écu | | - / | | | , november | | ... | | | ... | | , july | |gros d'argent | | - / | | | , june | |blanc à l'écu | | | | | , may | |gros | | | | | " october | | ... | | ... | ... | | , may | | ... | ... | ... | ... | | " january | | ... | ... | ... | ... | | " march | | ... | ... | ... | ... | | " " | | ... | | ... | ... | | , february | ... |blanc | | | | | , april | | ... | ... | ... | ... | | " may | |gros | | | | | " february | ... | ... | ... | ... | ... | | , april | |gros d'argent | | - / | | | , october | |blanc | | | | | , december | | ... | | | ... | | " march | ... | ... | | | ... | | , " | ... |blanc | | | | | , june | |gros | | | | | , august | | blanc | | | | | " january | | grand blanc | | | | | " march | | blanc | | | | | , may | | ... | | ... | ... | | " august | | ... | | ... | ... | | " november | | ... | | | ... | | " january | | ... | | | ... | | , august | | ... | | | ... | | " october | | ... | ... | ... | ... | | , july | | ... | | | ... | | " january | | ... | | | ... | | " march | | ... | | ... | ... | | , may | ... | ... | | ... | ... | | " june | | ... | | ... | ... | | " november | | ... | | | | | (forte monnaie) | | | | | | | " january | | ... | | | | | , december | | gros | | - / | | | , january | | blancs | | | | | , april | | ... | ... | ... | ... | | " august | | gros | | | | | " september | | ... | ... | ... | ... | | " january | | ... | ... | ... | ... | | , may | ... | petit blanc | | | | | , september | | blanc | | | | | " february | | ... | | ... | ... | | , may | ... | blanc à l'écu | | ... | ... | | " april | | ... | ... | ... | ... | | , november | | ... | | ... | ... | | " april | | ... | ... | ... | ... | | | | ... | ... | ... | ... | | | | ... | ... | ... | ... | | , july | | blanc à l'écu | | - / | | | " " | | gros d'argent | | | | | ... | | blanc | | | | | , june | | " | | | | | ... | | gros d'argent | | | | | , july | ... | ... | ... | - / | | | ... | | blanc | | | | | , january | | ... | ... | | | | ... | ... | gros d'argent | | | | | , november | ... |blanc au soleil| | - / | | | , april | |blanc au soleil| | - / | | | , " | |blanc à la | | | | | | | couronne | | | | | , " | |testoons | | - / | | | , january | |blancs | | | | | " february | |testoons | | - / | | | , june | |blancs à la | | - / | | | | | couronne | | | | | , september | |testoons | | - / | | | , march | ... | ... | ... | ... | | | , february | |blanc à la | | - / | | | | | salemand | | | | | , may | |testoons | ... | ... | | | , " | ... |douzains à | | - / | | | | | la croisette | | | | | , march | ... |douzains | ... | - / | | | , october | |testoons | ... | ... | | | " january | | ... | ... | ... | | | , april | |douzains | | - / | | | , august | |testoons | - / | - / | | | , june | ... |douzains | | | | | , " | |testoons | ... | ... | | | , " | ... | " | ... | ... | | | " may | |francs | - / | - / | | | " " | |douzains | | | | | , june | ... |testoons | ... | ... | | | " november | ... | " | ... | ... | | | , october | |quart d'écu | | - / | | | , september | | " | ... | ... | | | " " | ... |franc | ... | ... | | | " " | ... |testoons | ... | ... | | | , may | | ... | ... | ... | ... | | " june | ... |franc | ... | ... | | | " september | | ... | ... | ... | ... | | , november | |louis | | - / | | | | | d'argent | | | | | , april | ... | " | ... | ... | | | , december | ... | " | | - / | | | , april | | " | ... | ... | | | , december | ... | " | ... | ... | | | " " | ... |recoinage | ... | ... | | | | | new species | | | | | | | of louis | | | | | | | d'argent | | | | | , " | |louis | ... | ... | | | | | d'argent | | | | | , december | - / | | | | | | | |louis d'argent | ... | ... | | | , april | | " | | | | | " may | - / | | | | | | | | " | ... | | | | , september | ... | " | ... | | | | , may | ... |louis d'argent | | | | | | | or écu | | | | | , july | - / | | | | | | | | ... | ... | ... | | | " | - / | | | | | | | |livres d'argent| ... | - / | ... | | , september | - / | | | | | | | |louis d'argent | ... | ... | | | ... | ... | " |(= / écu) | | | | , january | ... | " |( " ") | ... | | | , | ... | " | ... | - / | | | , | | " | ... | | | | , may | | " | ... | ... | | | |silver | | | | | | | coins | | | | | | | unaltered| ... | ... | ... | ... | | |kilog. | franc | . | | ... | | | fine | | | grms. | | | | silver | | | wght. | | | | = - / | | | | | | | francs | | | | | | | ( - / | | | | | | | francs | | | | | | | being | | | | | | | returned | | | | | | | to the | | | | | | | importer)| | | | | | , june |kilog. | " | " | ... | ... | | | fine | | | | | | | silver | | | | | | | = - / | | | | | | | francs | | | | | | | ( | | | | | | | francs | | | | | | | being | | | | | | | returned | | | | | | | to the | | | | | | |importer.)| | | | | | , latin union | ... | ... |pieces | | | | | | | under | | | | | | | francs | | | | | | | reduced to| | | | | | | . fine | | | +----------------------+----------+---------------+-----------+---------+---------+ footnotes: [footnote : "en année de grandes secousses dans le prix du marc d'argent le public adopte comme unité l'écu d'or qui n'a pas varié." vicomte d'avenel, _histoire de la propriété, etc._, i. p. .] [footnote : for an account of the remaining species of _livres_, all differing in value, and amounting to at least twenty in number, _la livre de provins_, _du mans_, _de bretagne_, _languedoc_, _dauphiné_, _bourgogne_, _la livre augevin_, etc. etc., see vicomte d'avenel, _histoire de la propriété, etc._, i. - , - .] general index a. act of george iii., . " , united states, . adams, john quincy, , . aislabie, mr., . alfonso x., the wise, . allard, mr., . anne, queen, . antwerp, position of, in the th century, . arbitrage, th century, . augsburg girogeld, . austria, monetary system of, . austrian standard, or convention standard, , . b. bacon, sir francis, . balfour, right hon. a.j., . bank of france, table of reserves, . batavian republic, . barbour, sir d., , . barrett, mr., . bavaria, . bavarian, louis the, . bayreuth, . beernaert, m., . bel, charles le, . " philippe le, , , . binney, mr., . birch, j.w., . bland, mr., , . bland, bill, , . bogy, mr., . boissevain, m., . bold, charles the, . brandenburg-anspach, . " frederick william of, . bremen, . brunswick, . brussels conference, . byzantium, monetary system of, . c. calhoun, mr., . calonne, xv., . calvert, . cambreleng, mr., . carleton, mr., . caswall, mr., . chambers, mr., . chaplin, h., . charlemagne, monetary system of, , . charles i. of spain, . " i. of england, , . " ii. of england, , . " ii. of spain, . " iii. of spain, . " iv. of spain, . " v. of germany, , . " vi. of france, , , , . " vii. of france, , , . " viii. of france, , . " ix. of france, , . clay, mr., . clowney, mr., . cologne, bimetallic conference of, . commission on the depreciation of silver, , . compagnie des indes, . conference (see international) of ; of , . convention of dresden, . " " vienna, . " standard, or austrian standard, . courtney, leon. h., , . course of monetary depreciation, - , . crawford, secretary, . crusades, effect of, on currency, , . currie, bertram wodehouse, . d. dandolo, giovanni, . denmark, . depreciation of standard, general causes of, preface xii. discounts in modern system, function of, . ducat, or imperial standard, . dunham, mr., . e. edward iii.'s changes of ratio, . " vi., , . elizabeth, , , . emperor sigismund, . england, act of , . " " , . " agitation of , . " bank restriction, . " coinage of , . " " act of , . " crisis of , . " currency measures of , . " effects of the ratio of , . " elizabeth's final revision, . " " recoinage, . " export in , . " first coining of gold in, . " indenture of , . " " , . " " , . " " , . " " - , . " " , . " in , . " measures of , . " mintings and movements of metals, - , . " monetary history of, - , ; - , ; - , . " monetary inquiry of , . " " troubles of henry vi., . " proclamation of , . " recoinage of, , ; , ; , . " sir isaac newton's report, , . " sir robert stone on the mint, . " situation in , . " state of the coinage in , . " tudor debasement, . ewing, mr., . f. farrer, lord, , . ferdinand, , . " and isabella, , , . " ii., . " vi., . " vii., . flanders, commencement of gold coinage, . florence, monetary history of, in the th century, ; - , . " monetary system of, . france, action of the states general in , . " commencement of gold coinage in, . " course of ratio, - , . " currency debasement in, . " mint inquiry of , . " monetary history of, - , ; - , ; - , . " monetary system of, . " recoinage of, , . " " , . " " , . " reform of, , . " " , . " " , . " " , . " " , . francis i., , . franconian currency, . frankfort, , . frederick augustus, . " i., . " iv., . " the great, . free trade in the precious metals, . fremantle, sir c.w., , . g. gallatin, . gaudin, m., . george iii., . germany, attempts at reform, - , . " commencement of gold coinage in, . " conference of munich, , . " gold standards, . " leipzig standard, . " monetary history, th and th centuries, ; - , ; - , , . " new imperial system, , . " standards, silver, . " the convention standard, . " " dresden convention, , . " " vienna conference, , . " " zinnaische standard, . " -gulden standard, . " - / -gulden standard, . gillet, mr., . godley, arthur, c.b., . gold gulden standard, . " reintroduction of coinage of, . gorham, mr., . goschen, rt. hon. j.g., , . graumann, philip, . " standard, . gresham, sir thomas, . grell, jacob, . groesbeck, . h. hacket, mr., . hamburg banco, . " bank, establishment of, . " monetary history of, . hamilton, alexander, xv. . hanover, . harrison, president, . heath, sir robert, . henry ii. of castile, , . " iii. of england, , . " iii. of france, , , , , . " iii. of spain, . " iv. of france, , . " vii. of england, . " viii. of england, , . herschell, lord, , . hesse-darmstadt, . higher circles (germany), . holland in , . houldsworth. sir w.h., . i. imperial, or ducat standard, . india, . " closing of the mints, . " statistics of metals and minting, . ingham, secretary, . international conferences (see conferences), . " monetary congress, . isabella and ferdinand, , , . italian republics (see florence and venice), gold coinage of, - . " " trade of, . j. james i. of england, , . " ii. of england, . jefferson, . john, king of france, , . john ii. of spain, . " iii. of spain, . jones, mr., . k. kammer-gerichts currencies, . "kipper und wipper zeit," , . knight, mr., . kronen-thaler standard, . l. lamond, miss, . latin union, the, . law, john, . " system of, . le blanc, , . legal tender, law of, . legislation of - , united states, . leipzig standard, , . levi, m. montefiore, . levy, moritz, . lippe, . liverpool, lord, , , . locke, john, , , . louis vii. of france, . " ix. of france, . " xi. of france, . " xii. of france, . " xiii. of france, . " xv. of france, . louis huttin, . lowndes, mr., . lübeck, . " courant, . " mint, . lubbock, sir john, . lüneburg, . m. maddison, sir ralph, . magnin, m., . mainz, , . malet, lord, . marcello, nicolo, . maria theresa, . maurice, elector, . maximilian, emperor, . mckim, mr., . m'creary, mr., . mecklenburg, . mint laws, wide effect of, . mirabeau, preface xv. misnian currency, . mocenigo, pietro, . modern monetary system, evolution of the, . montague, sir samuel, . moors, . morris, robert, preface xv. . n. netherlands in , . " the monetary system of the, , , , . see "plakkaats." newton, sir isaac, preface xv. , . norway, . nürnberg, , . o. oldenburg, . old imperial standard of , . ordinances, first imperial mint, , . " second imperial mint, , . " third imperial mint, , , . p. palatinate, , , . palmer, andrew, . parieu, de., . paris, conference of, , . " " , . " " , . " congress of, , . philip augustus of france, . " i. of france, . " ii. of spain, , . " iii. of spain, , . " iv. of spain, , . " v. of spain, . philippe le long, . pistole standard, . "plakkaats" of the netherlands, , , . pomerania, . ponte, nicolo da, . porter, alexander, . portugal, monetary history of, - , . precious metals, production of, - , ; - , . prussian monetary system, , . " standard, . r. ratio between gold and silver in europe, - , ; - , ; - , . ratio, different rate of, coexisting, . " hamilton's statement of , . " in , . " methods of calculation of, preface xiv. reichstag of augsburg, , . " " regensburg, . rogers, mr., . rothschild, lord alfred de, , . royal commission of , . " commission on the precious metals, . rupert of germany, , . s. salisbury, earl of, , . salzburg, , . scandinavian states, . schleswig-holstein courant, . seigniorage in france and england abolished, , , . selden, mr., . silsbee, mr., . silver, course of modern depreciation, . " sources of supply of - , . soetbeer dr. a., xiv. xv. , . southard, mr., . south german system, , , . spain, first coinage of gold in, . " monetary history of, , . " monetary system of, . spanish netherlands, . sprague, mr., . strachey, lieut.-gen. richard, c.s.i., . sweden, , . t. terrell, e.h., . tirard, m., . treves, . tron, nicolo, . twenty-four-gulden standard, , . " and half-gulden standard, , . u. united provinces, . " states bland and sherman acts, . " " currency, history of, . " " gold export of , . " " hamilton's report, , . " " mint coinages, . " " morris's scheme, , . " " movement of the precious metals, . " " ordinances of , . " " report of , . " " " , . " " scheme of , . upper circles (germany), . v. valois, philippe de, , . venice, gold coinage of, . " the monetary system of, . vienna, convention of , . " first international conference of , . w. waldeck, . webster, m., . wechselgeld, or wechselzahlung, . welby, sir r. earle, g.c.b., . wendish states, . white, c.h., , . wilde, mr., . willard, mr., . william i. of holland and belgium, . " iii. of england, , . wilson, sir rivers, . windam, secretary, . wismar, . wolsey's mint policy, . würzburg, . z. zinnaische standard, , . index of coins a. agnelet, . agnels d'or, . agnus dei, , , . aguilas, . aignel d'or, or denier d'or a l'aignel, . albus, . (see rhenish.) andries florin, . ange or angelot, , . angel, , , , , , . angellets, . angelot or ange, . aragon. (see florin.) augustale, . august d'or, . b. barile (or carolino), . batzen, , . bavarian carolus or -gulden piece, (gold) . " max d'or, . blanc, , . (see grand, gros, obole, petit.) blanc à la couronne, , , , . " à la fleur de lis, , , . " à la galema, . " à l'écu, . " au soleil, , . " aux trois fleurs de lis, . blanca, , , , . " vieja, . blanco segundo, . blancos, , . bourgeois, . brabant thaler or kronen thaler, , . burgaleses, or maravedis blancos, . burgundian gulden, . burgundy nobles, . byzants, . c. cadières, . cardacues (see quart d'écu), . carls d'or or louis d'or, . carolino (or barile), . carolus, , , , . castellanos, , , , , . (see doblas, oro.) centenes, . chaise d'or, . chaises or masses, , , , , . (see double.) convention thaler, , . cornado, . " viejo, , . " nuevo, , . coronados, . coronas, , , . couronne, , , . (see blanc, Écu, crown, gros.) crazie, . croiseth. (see douzains, Écu.) crown (see french crowns), , , , , . " of the rose, . " of the sun, , , , , . " or brabant thaler, . " thaler, . cruzados, . " de la banda, . d. denarii (pfennige), . denarius, . denaro, . denier d'or à l'aignel or aignel d'or, . " d'or à l'écu, . " d'or aux fleurs de lis, . " parisis, , , . " tournois, . deniers (silver), . (see gros.) dinero nuevo, , . " viejo, , . doblas, , , , . " (castellanos) de la banda, , , . doblon, , . dollar (see piece of eight, rixdollar, daalder, spanish, staten), , , , , , , , , , , . double (see grand) carolus, . " florin, . " gold gulden, . " parisis, . " pattart, . " tournois, . doubles or chaises, . douzains, , , . " à la croisette, . drittelthaler, . ducados, , , . ducat (see hungary, holland, nederland, imperial, silver, spanish), , , , , , , , , , , , , , , , . " (kremnitz), . " (see zecchino, or sequin), , , . " (silver) . ducato d'argento, . " d'oro, . dukaat, , , . dukaton of brabant, . duro, . e. eagle, . Écu (see blanc, escudos, scudo, florin), , , , , , , , , . " à la couronne, , , , , . " à la croisette, . " au porc-épi, , . " au soleil, , , . " blancs, . " heaumes, , . " (silver), . Écu d'or, , , . (see denier.) " au soleil, , . eight-florin (gold), . english crown, . " rose nobles, . " sovereigns, . enrique, , . escudos, , , , , , , . " de plata, . (see scudo, Écu.) esterlings, . excellentes, . (see medios.) " de la granada, , . " majores, . fifty-stuiver piece, , . fiorino d'argento, . (see florin, lira, silver.) " da sei, . " d'oro, . " d'oro largo, , . " d'oro largo in oro, , , . " di suggello, , . " neri, . " nuovastro, . " nuovissimo or largo di galea, . " nuovo, . " of the first suggello, . " of the second suggello, . " of the fifth suggello, . " of the sixth suggello, . " of the eighth suggello, . " of the ninth suggello, . " of the pisan weight, . " stretto, . " stretto di camera of the seventh suggello, . five-franc (silver), , , , . " thaler pieces, . fleur de lys, or florins d'or aux fleurs de lis, , , . (see blanc, denier, gros.) " de lys of charles v., . " de lys of king john, . florences, . (see florin.) florentine florin, . (see florin.) " gigliati, . florin (see double, petit, fiorino, oro, s. andries, florences), , , , , , , . " d'aragon, , . " de écu, . " d'or, , , . " " aux fleur de lis, or fleurs de lis d'or, . " george, . " of eight. (see eight-florin.) forty-franc (gold), , . four-florin gold pieces, . " penny piece (silver), . franc (see five-franc), , , , , , , , , , , . " à cheval, , . " à pied, . " d'argent, . " d'oro, , , , . french crowns, , . friedrichs d'or, , , , , , . g. galema (see blanc), . genoviva, . george. (see florin.) german gold guldens, . gigliati, . (see florentine.) gold crowns, . " ducat, , . " dukaat, . " florin, . " gulden (rheinische gulden), , , , , , , , , , , . (see gulden.) " penning, . grand blanc, . " double, . groat, , , , . groots, , . gros (see royal, blanc, deniers, couronne, groschen, groat, grossi), , , , . " à la couronne, , . " à la fleur de lis, . " à la l'estoile, . " blancs, , . " d'argent, , , . " deniers blancs, . " deniers d'argent, . " royaux, , . " royaux d'or, . " tournois, , , , , , . groschen (see gros, gulden, marien, reichs, silver), , , , , , , , , , , , , . " of the mark, . " of misnia and franconia, . grosseti, . grossi, , , , , , , . (see lira, gros.) " à oro, . " popolini, . grossoni, , . gueldres. (see riders.) guelfi, . " del fiore, , . " grossi, , . " nuovi, , . guillaumes d'or, . guinea, , , . gulden (see burgundian, double, gold gulden, karolus, misnia, reichs, rhenish, silver, three-gulden), , , , , , , , , , , , , , , , , , , . " groschen, , , . guldener, . h. half-crown, , , . " dollar, . hard dollar, . heaumes. (see Écu.) heller, , . henris, . " d'or, . holland dukaat, , . hungary ducat, . i. imperial ducat, . j. joachims thaler or schlicken or löwen thaler, . k. kammer gerichts gulden, . karolus gulden, . kremnitz ducat, , , . kreutzers, , , , , , , , . kronen thaler or brabant thaler, . kruisdaalder or patacon, , . l. laubthalers, . leeuwendaalder, , . leones, . l'estoile. (see gros.) lion, . lira, , , , , , , . " à fiorino, . " di grossi, , . " di piccioli, . " (florentine), . " tron, . lis d'argent, , . " d'or, , . livres d'argent, , . louis d'argent, , , , , , , , . " d'or, , , , , , , , , , , , , , . " d'or or carls d'or, . löwen thaler or joachims thaler or schlicken thaler, . luxembourgs, . m. maravedis, , , . " blancos or burgaleses, . " blancos segundos, . " de los buenos, . " de moneda blanca, . " negros or prietos, . " nuevo, . " viejos or moneda blanca, , , . marien groschen, , . max d'or, . masses or chaises, , . meaja. (see moneda.) medios excellentes, . metales or mitgales, . milreis, . minuto, . misnian gulden, . mitgales or metales, . molino, . moneda blanca or maravedis blancas viejos, . (see blanca.) " meaja nueva, , . " vieja, , , . moneta bianca nera, . " nera, . mouton, , , , . (see petit.) " d'or, . " d'or à la grand laine, . " d'or à la petite laine, . n. nederland dukaat, , , . " reaal, . " rijder, , , . " rijksdaalder, , . netherland stuyvers, . nobles, , , , . (see rose nobels, burgundian.) novenes, , . nuovi guelfi, , . o. obole blanche, . oro dobla castellana, . " florines, . " gran modulo, . orth, . p. parisis, , . (see denier, double.) " d'argent, . parvulus, . parvus, . pastas de oro, . patacon or kruisdaalder, . pattart, . (see double.) pavilion, , . penny, , , . penning (gold), , . pesetas, . petit blanc, . " deniers tournois, . " florins, . " moutons, . " royaux, , , . " royaux d'or, . " royaux d'or fin, . " tournois, . pfennige, , , , , , . philipps thaler, , , . philippus rijder, . piastre, . piccioli, , , , . (see lira.) " à oro, . " neri, . piece of eight (see real and dollar), , , , . pistole, , , , , , , . (see spanish, louis d'or, friedrichs d'or.) pistolets, . popolini, . (see grossi.) porc-épi. (see Écu.) pound, , . prietos or maravedises negros, . prussian thaler, , . q. quart d'écu, , . (see cardacues.) quattrini, . " bianchi. . " lanajuoli, . " neri, . quinto di ducato, . quinzains, . " d'or, . r. real (see nederland, royal, ryal), , , , , , , . " au lion, . " of eight, , , , , , . (see piece of eight.) " sencillo, , . " (silver), , . reichs gulden, . (see gulden.) " gulden thaler, . " groschen (see groschen), , , . " thaler (see thaler), , , , , , , , , , . reines, . rhenish gulden (see gold gulden), . rhenish albi, . riders gelderns, . (see rijder.) rijder, , . (see nederland, philippus, rider, silver.) rijksdaalder, , . (see nederland.) rixdollars, . (see rijksdaalder.) rose nobel, . (see nobel.) royal, , , , . (see gros, petit, reines, real, ryal.) " double, . royaux durs, . " or denier d'or au roiel, , . rupee, . ryals, , . (see real.) s. saint andries florin, . saluts, , . schellings, . schlicken thaler or joachim thaler or löwen thaler, . schillingen (solidi), , , . (see silver.) scudo, . (see Écu.) " d'argento, . sequin (see ducat, zecchino), , , , . seven-kreutzer piece, . seventeen-kreutzer piece, . shilling, , , , , , , . " of esterlings, . sigillo. (see fiorino.) silver dukaat, . " fiorino, , . " groschen, , . " gulden or thaler, . " rijder, . " schillingen, six-livre thalers, . sixpence, , , , . soldi, , . (see solidi.) " grossi, . " (schillingen), . soleil. (see Écu, couronne.) solidus, . (see soldi, schelling sol, sueldo.) sols, . (see solidi, sueldo.) " d'argent, . " d'or, . souverain, . sovereign, , , . spanish dollar, . " ducats, . " pistole, . specie or convention thaler, , . staten daalder, . sterlings, . stiver, . (see nederland.) stretti. (see fiorino.) sueldo, . (see solidus.) " de oro, . " pepiones, , . suggello. (see fiorino.) t. ten-gulden piece, , , . ten-stiver piece, . ten-thaler piece, . testoons, , , , , , . thaler (see silver gulden, joachims thaler, kronen thaler, laubthalers, prussian, philipps, reichs thaler, silver, six-livre, vereins thaler), , , , , , , , , , , , , , , . three-gulden piece or bavarian carolus, , . three-heller piece, . threepenny piece (silver), . thirty-deniers, . thirty-kreutzer piece, . tollero, , . tournois, . (see denier, double, gros, petit.) tremissis or triens, . tron. (see lira.) twenty-franc (gold), , . twenty-kreutzer piece, . twenty-shilling piece, . two-franc, . twopenny piece (silver), . u. unite, , . v. veintenes, . " de oro, . vellon rico, . vereinsmunze, . vereins thaler, , . viejos, . (see maravedi.) w. wilhelms d'or, . william, . z. zähender, . zecchino (see ducat, sequin), , , , . [transcriber's notes: there are many possible inaccuracies in the non-english references in this book. the non-english portions are left as printed, unless noted below. the following errors in the original text were corrected: some fractions, such as - / on page have a numerator larger than the denominator. even though these are most likely incorrect, they are left as in the original as there is no way to confirm what they should be. page xix, preface: "dei münzen der deutschen" corrected to "die münzen der deutschen" page xxx, table of contents, chapter iii: "recoinage of, , ;" corrected to "recoinage of , ;" page , chapter : "in order to the supply of the italian mints" corrected to "in order to supply the italian mints" page , chapter : "the archbishop of cologne the duke of brabant" corrected to "the archbishop of cologne, the duke of brabant" page , chapter : " marks oz. - / aug." corrected to " marks oz. - / ang." page , chapter , in the table "german gold guldens:" " " corrected to " " to match right hand column and date sequence. page , chapter : "spanish and portugese gold ducats" corrected to "spanish and portuguese gold ducats" page , chapter : "the celebrated declaration of , i.e sols." corrected to "the celebrated declaration of , i.e. sols." page , chapter : "the merchant-adventurers were appealed to to buy up these stocks, but they were unable." corrected to "the merchant-adventurers were appealed to, to buy up these stocks, but they were unable." page , chapter , in untitled table: second occurrence of " - " corrected to " - " to match sequence in table. page , chapter : "a value of livres; and of silver ecus at - / to the" corrected to "a value of livres; and of silver écus at - / to the" as écus has the accent on every other occurrence. page , chapter : "it is on the same conideration" corrected to "it is on the same consideration" page , chapter : table header "silver. (francs)." corrected to "silver (francs)." to match format in other headers and other tables. page , chapter : "--franconia, bavaria, and suabia--" corrected to "--franconia, bavaria, and swabia--" page , chapter : "schwanzburg-rudolstadt (unterherrschaft)" corrected to "schwarzburg-rudolstadt (unterherrschaft)" page , chapter : "each state to give an account of its mintings," corrected to "each state to give an account of its mintings." page , chapter : heading "england" corrected to "england." to match other headers. page , chapter : "on this occassion i addressed a letter to a noble lord," corrected to "on this occasion i addressed a letter to a noble lord," page , chapter : "the ounce of silver was declared worth s. d" corrected to "the ounce of silver was declared worth s. d." page , chapter : "that gold was extremely over-valued in the united" corrected to "that gold was extremely overvalued in the united" as all other occurrences of overvalued are not hyphenated. page , chapter : "by substituting silver coin or notes based on silver" corrected to "by substituting silver coins or notes based on silver" page , chapter : "history of the world has been characterstic and uniform" corrected to "history of the world has been characteristic and uniform" pages appears to be a continuation of the table on page . these pages reversed by transcriber. page , appendix iii: "cornados viejos" corrected to "coronados viejos" page , appendix iv: " gulden francs - / centimes." corrected to " gulden = francs - / centimes." page , appendix v: "the third imperial mint ordinance established an important difference from this system," corrected to "the third imperial mint ordinance established an important difference from this system." page , appendix v: "pfennige " "" corrected to "pfennige, " "" page , appendix v: the following dates were a best guess based on the text. the dates were obviously incorrect. " , frankfort fair--philipps thaler = kr." corrected to " , frankfort fair--philipps thaler = kr." " (higher circles)--reichs thaler recognised at kr." corrected to " (higher circles)--reichs thaler recognised at kr." page , appendix vi: " sols (i.e. a quarter the value of the écu d'or, then set at sols)" corrected to " sols. (i.e. a quarter the value of the écu d'or, then set at sols.)" page , appendix vi: " they had fallen to livres and livres respectively." corrected to " they had fallen to livres and livres respectively." page , appendix vi: " (philipp de valois), dec. " corrected to " (philippe de valois), dec. " page , appendix vi: "Écu á la" corrected to "Écu à la" under and page , appendix vi: " (charles vii.)" corrected to " (charles vii.)," page , general index: "calonne xv., ." corrected to "calonne, xv., ." "chambers, mr., ." corrected to "chambres, mr., ." page , general index: "freemantle, sir c.w., , ." corrected to "fremantle, sir c.w., , ." page , index of coins: "angelets, ." corrected to "angellets, ." "à l'ecu, ." corrected to "à l'écu, ." as l'écu is accented on page . page , index of coins: "dukaton of brabant, " spelled "dakaton of brabant" on page . don't know which is correct. both left as printed. header starting f was added. "di sugello, , ." corrected to "di suggello, , ." page , index of coins: "florens d'or aux fleurs de lis" corrected to "florins d'or aux fleurs de lis" "gigliali, . (see florentine.)" corrected to "gigliati, . (see florentine.)" "grosseti, ." spelled as "grossetti" on page . don't know which is correct, both left as printed. page , index of coins: "joachims thaler or schlicken o löwen thaler, ." correct to "joachims thaler or schlicken or löwen thaler, ." page , index of coins: "nobles, , , , . (see rose nobels, burgundian.)" corrected to "nobles, , , , . (see rose nobles, burgundian.)" page , index of coins: "riders gelderns, . (see rijder.)" gelderns spelled as "gelderus" on page . don't know which is correct, both left as printed. "of esterlings, ." ditto mark added to represent shilling ] +-----------------------------------------------+ | | | bolded text has been marked =like so=. | | | +-----------------------------------------------+ london school of economics and political science an example of communal currency by j. theodore harris, b.a. with a preface by sidney webb, ll.b. /- net london p. s. king & son orchard house, westminster people's banks a record of social and economic success by h. w. wolff _third edition, newly revised and enlarged_ _demy vo, cloth, pp._ = s.= _net_ contents--introduction, the general idea, the two problems, the two aspects of the question, credit to agriculture, the "credit associations" of schulze-delitzsch, raiffeisen village banks, adaptations, "assisted" co-operative credit, co-operative credit in austria and hungary, the "banche popolari" italy, the "casse rurali" of italy, co-operative credit in belgium, co-operative credit in switzerland, co-operative credit in france, offshoots and congeners, co-operative credit in india, conclusion. "we may confidently refer those who desire information on the point to the book with which mr. wolff has provided us. it will be a most useful thing if it is widely read, and the lessons which it contains are put in practice."--_athenæum._ "the book is the most systematic and intelligent account of these institutions which has been published."--_banker's magazine (new york)._ "it is the most complete book on the subject."--_mr. g. n. pierson, late dutch prime minister and minister of finance._ "there was manifest need of just such a book.... a mine of valuable information."--_review of reviews._ "this is an excellent book in every way, and thoroughly deserves the careful attention of all who are concerned for the welfare of the people."--_economic review._ london: p. s. king & son orchard house, westminster studies in economics and political science edited by the hon. w. pember reeves, director of the london school of economics no. in the series of monographs by writers connected with the london school of economics and political science an example of communal currency an example of communal currency: the facts about the guernsey market house compiled from original documents by j. theodore harris, b.a. with a preface by sidney webb, ll.b. london p. s. king & son orchard house, westminster contents page preface vii introduction chap. i. constitution of guernsey ii. the security of the notes iii. municipal enterprise--the issue of the notes iv. the utility of the notes v. first rumblings of opposition vi. the reply of the states vii. the crisis viii. the end conclusion appendix preface those who during the past thirty or forty years have frequented working men's clubs or other centres of discussion in which, here and there, an owenite survivor or a chartist veteran was to be found, will often have heard of the guernsey market house. here, it would be explained, was a building provided by the guernsey community for its own uses, without borrowing, without any toll of interest, and, indeed, without cost. to many a humble disputant the guernsey market house seemed, in some mysterious way, to have been exempt from that servitude to previously accumulated capital in which the whole creation groaneth and travaileth. by the simple expedient of paying for the work in government notes--issued to the purveyors of material, the master-workmen and the operatives, accepted as currency throughout the island, and eventually redeemed out of the annual market revenues--all tribute to the capitalist was avoided. in face of this successful experiment, the fact that we, in england, continued to raise loans and subject ourselves to "drag at each remove a lengthening chain" of interest on public debt, often seemed so perplexingly foolish as to be inexplicable, except as the outcome of some deep-laid plot of "the money power." when first i heard of this guernsey market house, as in some mysterious way exempted from the common lot, i was curious to enquire what transaction had, in fact, taken place in an island which was, after all, not so far removed in space or time from the lombard street that i knew. in all the writings of the economists (for which my estimate was at that time, as indeed it is now, such as i could not easily put into appropriate words), i found no mention of this phoenix among market-houses. i fear that, too hastily, i dismissed the story as mythical. now mr. j. theodore harris--having, i suspect, a warmer feeling for the incident than he has allowed to appear in these scientific pages--has done what perhaps i or some other economic student of the eighties or nineties ought to have done, namely, gone to guernsey to dig up, out of the official records, the incident as it actually occurred. what is interesting is that he has found that the myth of the veteran owenite or chartist is, in all essentials, confirmed by the documents. the story is true. the guernsey market house was built without a loan and without the payment of interest. it does not follow, however, that it was any more built without the aid of capital, than was st. paul's cathedral or the manchester ship canal. mr. harris, contenting himself with the austerely exact record drawn from the documents, does not indulge in any speculative hypothesis as to who provided the capital, or who bore the burden that would otherwise have been interest. let me use the fuller privilege of the preface-writer, and supply some hypothetical elucidations. what the guernsey community did was that which nearly every community has done at one time or another, namely, issue paper money. the part of the story that we do not know is (_a_) what thereupon happened to the aggregate amount of "currency" of all kinds then in circulation within the island, in relation to the work which that currency had to do; (_b_) what happened to the prices of commodities. it may well have been that the issue of paper money was promptly followed by some shipments of metallic money to england or france--perhaps even in payment for imported materials for the market house--so that the aggregate amount of "currency" in the island was not in fact increased. accordingly, no change of prices may have taken place. in such a case, guernsey would merely have substituted paper for gold in its currency. the gold-capital heretofore in use as currency, and there, of course, yielding no capitalist any toll of interest, would, in effect, have been borrowed to expend upon the building of the market house. and, as paper money probably served the purposes of the island every bit as well as gold, nobody was any the worse. by giving up the needless extravagance of using gold coins as counters, and by taking to paper counters instead, guernsey really got its market house without cost. the same resource is open to any community already possessing a gold currency, and becoming civilised and self-restrained and sensible enough to arrange to do without gold counters in its internal trade. but guernsey could not have gone on equipping itself with endless municipal buildings as out of a bottomless purse. the resource is a limited one. this is a trick which can only be played once. when the gold has once been withdrawn from the currency, and diverted to another use, there is no more left with which to repeat the apparent miracle. on the other hand, there may easily have been no special shipments of metallic money from the island, and the aggregate "currency" may have been increased, in relation to the work that it had to do, by the amount of the note issue. in that case, the economist would, for reasons into which i have no space to go on the present occasion, expect to see a gradual and silent rise of prices. such a rise would seem, to the ordinary guernsey housekeeper and shopkeeper, as inevitable, and at the same time as annoying as any other of those mysterious increases in the cost of eggs and meat that anthony trollope described with such uneconomic charm in _why frau frohmann raised her prices_--a work which i do not find prescribed, as it might well be, for undergraduate reading. there is even a third hypothesis, to which mr. harris has directed my attention. there may have been, before the note issue, an actual dearth of currency, or a growing disproportion between the amount of the currency and the work that it had to do. mr. harris infers from his reading that such a stringency had been actually experienced in guernsey, and that it was for this reason that successive attempts were made to prevent foreign coins from being gradually withdrawn from the island. such a stringency, the economist would infer, would produce a progressive fall of prices, leading, by the silent operations of external trade, to a gradual readjustment of the amount of currency in circulation, by influx of gold from outside, until a new equilibrium had been reached. if the guernsey government's note issue happened to be made at such a moment, it may well have taken the place of the hypothetical inflow of gold, so far as the island currency was concerned. it may even have averted a fall in prices that would otherwise have taken place, the economic effect on the consumer's pockets being in that case much the same as if an actual rise had occurred. but the guernsey government, on this hypothesis, would, by substituting paper for gold, have gained for the community the equivalent of the cost of the addition to the gold currency which expanding population and trade were making necessary; and this gain was expended in building the market house. unfortunately we do not know how prices behaved to the guernsey housekeeper between and . perhaps another student will look this up. what is interesting to us in this argument is the fact that, _if prices generally did rise_, in consequence of the issue of the paper money, even by only one half-penny in the shilling--if eggs, for instance, sold twenty-four for a shilling, instead of twenty-five--this represented a burden laid on the guernsey people as consumers, exactly analogous to a tax (say an octroi duty) of four per cent. on all their purchases. on this hypothesis, which i carefully abstain from presenting as anything but hypothetical, because we are unable to verify it by comparison with the facts, the economist would say that this burden or tax was what they imposed on themselves, and notably upon the poor, by increasing the currency, instead of borrowing the capital from elsewhere. instead of paying interest on a loan (to be levied, perhaps, as an income tax on incomes over a certain minimum) they unwittingly chose to pay more for their bread and butter. the seriousness of this possible result lies in the definitely ascertained fact that salaries and wages rise more slowly, and usually to a smaller extent, than the prices of commodities. now, which of these speculative explanations is the true one does not greatly matter to-day when all the consumers, rich and poor, are dead and gone. what does concern us is that we should not misconstrue the guernsey example. we already use paper money in this country to a small extent. we could certainly with economic advantage save a great part of the cost (three or four millions sterling a year) that we now pay for the luxury of having so many gold sovereigns wandering about in our pockets. we may one day find the uncounted reserve of capital that in our gold currency we already possess, virtually in common ownership, come in very usefully on an emergency (which is, perhaps, what happened at guernsey). but we must beware of thinking that the issue of paper money offers some magical way of getting things without having to use capital, or we may find ourselves one day, to the unmeasured hardship of the poor among us, stupidly burdening ourselves as consumers with higher prices and increased cost of living all round. there are, of course, other reasons in favour (_a_) of paper money being issued by the government, instead of this valuable and responsible prerogative being abandoned to individual bankers or joint stock companies, to the great financial loss of the community as a whole; and (_b_) of the whole business of banking--which means the organising of credit and the custody of savings--being conducted by the government itself, in order that the power which banking gives may be exercised exclusively under public control, and for corporate instead of for individual ends, and in order that the profit which banking yields may accrue to the benefit of the community as a whole, instead of to particular capitalists. but that is another story. the guernsey government stopped short at the issue of paper money--which is not banking--and even gave up this right at the bidding of private banking companies. sidney webb. , grosvenor road, westminster. _december, ._ an example of communal currency introduction there are many persons who have heard from one source or another of the way in which the states of guernsey built their market house by means of non-interest-bearing notes. some of these--enthusiasts for the reform of the currency--can dilate for hours on the wisdom of the financial policy of daniel de lisle brock, can tell how, at the opening of the market he "sprinkled the packages (of redeemed notes) with perfume, and while the band was playing a dirge he laid them on the fire, where they were quickly consumed," and can even quote from his famous speech on that occasion. a few years ago some members of the co-operative brotherhood trust, which is a society that has among its objects a desire to revive the principles of robert owen's labour exchange, thought it worth while to make enquiries as to the guernsey scheme. they realised that an ounce of fact was worth a ton of theory. but what were the facts? were these notes circulated in the island as a medium of exchange? how were they redeemed? could a citizen demand gold for them? when the above mentioned enthusiasts were tackled with these practical questions, there was suddenly noticed a certain hesitancy; and when asked point blank what was the year in which this famous market house was built, no one could say. enquiries were then made from inhabitants of the island itself. the information gathered was vague and not much to the point. with a few notable exceptions, the average guernseyman seems to know or care little of the financial policy of the island at the beginning of the nineteenth century. even from those interested nothing very definite was to be learned. the enquirers at last came near to doubting whether the non-interest-bearing notes had ever existed except in the imagination of the enthusiasts. only first-hand enquiry on the spot would suffice. one guernseyman, a teacher, kindly encouraged the writer to visit the island himself, promising him introductions and access to all the official documents and newspapers of the time. through the courtesy of the greffier and the librarian of the guille-allés library every facility was granted to the writer and his wife to carry out their research. the politeness and kindness of these officials and other inhabitants of guernsey are hereby most cordially acknowledged. in the following pages it is the writer's desire to place the facts before the public as he has gleaned them from the official records of the states and the newspapers of the time. he feels tempted to discuss the _pros_ and _cons_ of the system adopted by the states of guernsey for over twenty years; but this little treatise will probably be of most use if it is confined to a mere narration of facts. incidentally, however, it will be seen that some of the queries which led to the research have been answered. from the nature of the case this narration will consist largely of quotations. it must inevitably fail to convey to the reader the thrilling interest aroused as the story, exceeding all the romance of the enthusiasts, led its slow but fascinating course through many volumes, and the quaint old french documents gave up their secrets in the modern well-equipped record office. chapter i constitution of guernsey. guernsey is the second in size of the four channel isles, jersey, guernsey, alderney and sark, which one used to repeat with such gusto in one's schoolboy days. the channel isles are the last remnant of our french possessions. or rather, as the islanders might claim--and as it is reported some do--england belongs by right of conquest to the channel isles. however that may be, for all practical purposes, the government of guernsey is autonomous--and very jealously does the guernseyman guard this autonomy. it has its own parliament, "the states" (les États), consisting to-day of members. at the time of which we write there were members, as follows:-- the bailiff, who, as at the present time, acted as president. the procureur du roi, corresponding to our attorney-general. jurats or magistrates, appointed for life by the "states of election." rectors. connétables or parishioners. the rectors as spiritual leaders and the connétables as civil functionaries represented the ten parishes of the island, and though the latter were elected to office they were always from the leading families, which formed an extremely close oligarchy. bailiff, jurats and rectors still sit in this undifferentiated parliament, to which has been added a slightly more democratic element however, nine deputies being elected by the ratepayers of the whole island. it was, and still is, the bailiff's duty to summon this "states of deliberation," formerly at his own discretion, now at regular intervals. he does this by means of issuing a _billet d'etat_, in which he comments on the business to come before the states and in which he formulates certain resolutions. on these resolutions the states only vote _for_ or _against_. this billet d'etat is in french, still the official language--the only one used in the deliberations in former days. the whole takes us back in thought to norman or early english times. probably even the norman patois of the modern rural deputies is the speech of the present time nearest to that in which our ancestors transacted their business. this legislative body represents the king's council, in the same way that the supreme judicial body, still bearing the name of la cour royale, represents the king's court. the decisions of the states are subject to the approval of the privy council, to whom there is a right of appeal. chapter ii the security of the notes guernsey, like other places, fell on evil days early in the nineteenth century, the period of history with which we have to deal; and the islanders suffered from the burden of a heavy debt and from the depression and want of employment which followed the close of the napoleonic wars. its condition at this time is graphically described in the following extracts taken from a document presented by the states to the privy council in . "in this island, eminently favoured by nature, antecedently to the new roads first projected by sir john doyle, bart., nothing had been done by art or science towards the least improvement; nothing for the display or enjoyment of local beauties and advantages; not a road, not even an approach to town, where a horse and cart could pass abreast; the deep roads only four feet six inches wide, with a footway of two to three feet, from which nothing but the steep banks on each side could be seen, appeared solely calculated for drains to the waters, which running over them rendered them every year deeper and narrower. not a vehicle, hardly a horse kept for hire; no four-wheeled carriage existed of any kind, and the traveller landing in a town of lofty houses, confined and miserably paved streets, from which he could only penetrate into the country by worse roads, left the island in haste and under the most unfavourable impressions. "in the sea, which had in former times swallowed up large tracts, threatened, from the defective state of its banks, to overflow a great extent of land. the sum required to avert the danger was estimated at more than £ , , which the adjoining parishes subject to this charge were not in a condition to raise. the state of the finance was not more consolatory with a debt of £ , , and an annual charge for interest and ordinary expenses of £ , , the revenue of £ , left only £ for unforeseen expenses and improvements. "thus at the peace, this island found itself with little or no trade; little or no disposable revenue, no attraction for visitors, no inducement for the affluent to continue their abode, and no prospect of employment for the poor." after considering various means of raising a revenue, the states asked the privy council for permission to levy a duty on spirituous liquors. notwithstanding some opposition by the inhabitants, permission was granted by an order in council of the rd july, , to raise s. per gallon on spirituous liquors consumed in the island. this was granted for a period of five years. a second order in council, dated th june, , renewed the duty for ten years. again there was opposition from a section of the inhabitants. this made itself felt by the insertion in the order of the following words:--"that one thousand pounds per annum of the produce of the said duty be applied solely to the liquidation of the present debt, together with such surplus as shall remain out of the produce of the tax in any year after defraying the expenses of roads and embankments and unforeseen contingencies. and that the states of the said island do not exceed in any case the amount of their annual income without the consent previously obtained of his royal highness in council. and the said states are hereby directed to return annually to the privy council an account of the produce and application of the said tax." in the lieutenant-governor, sir john colborne, desired to erect a new college and to carry on other important works. but these plans could not be accomplished without the assurance of the renewal of the duty. a third order in council of th september, , gave this permission for a period of fifteen years, that is to say, from to . on this occasion there was no opposition from any of the inhabitants. as will be seen in the next chapter, it was this duty on spirituous liquors that formed the security on which the notes were issued. chapter iii municipal enterprise--the issue of notes "_guernsey should make up only one great family whose interests are common. only by union and concord can she enjoy firm and lasting prosperity._" although, as we shall see, the first notes that were issued were not for the market, it is interesting to find that there is some foundation for the tradition identifying them with it. the plan was first suggested in connection with a scheme for the enlarging of the market. this was a much needed improvement. "humanity cries out, every saturday," reports a states committee, "against the crush, which it is difficult to get out of; and every day of the week against the lack of shelter for the people who, often arriving wet or heated, remain exposed for whole hours to wind and rain, to the severity of cold and to the heat of the sun." a committee, appointed th april, , to consider the question, having brought in a scheme for enlarging the market, recommended the issue of state notes. the bailiff submitted the following resolution for the consideration of the states at their meeting on th march, :--"whether in order to meet the expenditure it would not be desirable to issue state notes of one pound each (_billets des États d'une livre sterling_) up to £ , , the states undertaking not to issue any, under any pretext whatever, beyond the said sum before having previously cancelled the said £ , ." notwithstanding the committee's opinion that the enlargement of the market could not be recommended without this issue, and the precautions suggested for the issue of the notes, the states rejected the proposition. however, the promoters of the idea appear to have been nothing daunted, and to have met with success on their second attempt. for we find that on the th october of the same year the finance committee reported that £ , was wanted for roads, and a monument to the late governor, while only £ , was in hand. they recommended that the remaining £ , should be raised by state notes of £ , , of which should be payable on th april, , or any saturday after by the receiver of the duty, , on th october, , and , on th april, . "in this manner, without increasing the debt of the states, we can easily succeed in finishing the works undertaken, leaving moreover in the coffers sufficient money for the other needs of the states." the states agreed to this and appointed a committee of three (nicolas maingy, senior, jean lukis and daniel de lisle), who were exclusively charged with the duty of issuing the notes, taking all the precautions they thought necessary. they were to pay them out on the order of m. le superviseur (jean guille), and to receive them back from the receiver of the duty when paid in, in order to cancel them. these notes seem to have served their purpose; for in the record of the decisions of the states on the th june, , is found the following entry:--"the said states unanimously authorise the issue of new notes up to £ , , to be put at the disposal of jean guille, esq., jurat, for the needs of the state; and they ask the said gentlemen, daniel de lisle, nicolas maingy and jean lukis, kindly to help in the matter. which notes shall be payable at a fixed time to be determined by the states' committee named for this purpose at the time of the last issue of notes." the need for enlarging and covering the market was meanwhile being more and more pressed, the site and certain buildings having been purchased on th april, , for £ , , which was borrowed at -½ per cent.[ ] a committee reported on this subject to the meeting of the states on th october, . in their recommendation they proposed "the issue of notes of £ sterling, payable at different times on the receipt of the part of the duty left at the disposal of the states." notwithstanding the pathetic appeal already recorded, the proposal of the committee to enlarge and to cover the market was lost by a majority of one. the advocates for improving the market, however, persevered, and presented to the states meeting of th may, , five plans. the plan of john savery brock at a cost of £ , was agreed to by a majority of to . the following quotation from the committee's report shows the benefits which they considered would arise from their scheme for raising the £ , required. "the means of meeting this would be to apply to it the sums now in litigation with the town £ , twenty-shilling notes put at the disposal of the committee , ------- £ , but provision must be made for the repayment of the notes issued, and the means recommended by your committee are as follows-- "the shops, built for butchers according to the plan recommended, would produce at £ sterling per annum £ from this must be deducted £ for hiring the house at the corner and £ for repairs ------ £ the states should grant for years after the first year ------ this would give an income of £ this sum would be spent each year in paying off and cancelling as many notes. "thus, at the end of ten years, all the notes would be cancelled and the states would be in possession of an income of £ per annum, which would be a return for the £ , spent by them. "looked at from all sides the scheme shows nothing but the greatest advantage for the public and for the states. it should please those who have at heart the diminution of the debt, since the states in addition to the £ , set aside for this purpose, take a further £ out of their treasury in order to increase their income (_en prenant l. de plus sur leurs épargnes pour accroître leur revenu_)." thus it appears that the money for building the meat market, still standing, was raised without a loan, the states paying off the notes at the rate of £ a year as the duty on spirits and the rents came in. the market is described in jacob's _annals of the british norman isles_, part i., published in , as a handsome new building, "one of the most convenient, both for the buyers and sellers, that can be found in any part of the world." "for the mode of raising the funds for its erection and support (well worth the attention of all corporate bodies)" we are referred to an appendix iv. which was to appear at the end of part ii., to be published in december, .[ ] diligent search in contemporary records showed no trace of the elaborate ceremony described in the tradition current among enthusiasts, though the _mercury_ of the th october, , announced in its advertisement column that the opening would take place on saturday, th october, . the following week the _mercury_ chronicles the handing over by the committee of the keys of the new market to the butchers. "a large crowd gathered in the square, of whom only a few succeeded in entering the enclosure. a speech was made by one of the committee, to which one of the butchers made a reply. the band of the east regiment took part and the church bells rang till five in the evening." the next issue of notes seems to have been to pay off the floating debt. on th june, , the states authorised the issue of , £ notes for this purpose. in recommending this course the finance committee makes some interesting reflections. "respecting the floating debt, which consists of sums payable at times more or less distant, it would be easy to discharge it by £ notes put into circulation as need requires. the extinction of the whole of the floating debt could thus be brought about without the necessity of new loans. if loans should be raised it would be necessary to provide for payment both of the principal and of the interest. if, on the contrary, recourse is had to £ notes, the interest alone which would have been paid will suffice." on rd june, , the states authorise the issue of £ notes to buy a house whose site is wanted for the new market. on th september of the same year the issue is authorised of , £ notes to diminish the interest-bearing debt of the states. in recommending this, the finance committee remarks:--"the states could increase the number [of notes in circulation] without danger up to , in payment of the debt, and the committee recommends this course as most advantageous to the states' finance, as well as to the public, who, far from making the slightest difficulty in taking them, look for them with eagerness." on th june, , on the united recommendation of the market and finance committees, , £ notes are issued to pay off the £ , originally paid for the market in (see p. ). "by this means the interest of £ (_sic_) a year will be saved and applied moreover every year to withdraw from circulation £ notes issued for the construction of the market." on th march, , a further issue is authorised for the purpose of elizabeth college and parochial schools, provided that the total number of notes in circulation shall not exceed £ , . in summoning the states on this occasion, the bailiff, daniel de lisle brock,[ ] expresses the opinion that paper money is of great use to the states. there is no inconvenience because the notes are issued with great care. this statement as to great care is borne out by the words of the resolution passed th may, , authorising the issue of £ notes, not exceeding £ , worth, voted for the isle of sark and other purposes. after asking nicolas maingy, jean lukis and daniel de lisle "to sign the said notes in the name and under the guarantee of the states," it goes on to say, "and in default of one or other of these gentlemen through absence or illness, the states authorise the remainder of the three, the finance committee and m. le superviseur to choose conjointly another reputable person for the signature of the said notes. which said finance committee supervisor and those authorised to sign are charged and requested to watch over and be present at (_veiller et assister à_) the destruction of the said notes at the times fixed for their repayment." extra precautions seem to have been taken th june, , when another issue, not exceeding £ , worth of £ notes was authorised. for we find that "the states appoint josias le marchant, pierre le cocq, jurats, and the rev. thomas grut, a special committee, whose duty it is to see to the liquidation of all the anticipations at the times fixed by the states, and where these anticipations consist in notes of one or five pounds to see to the destruction of the very notes or of earlier notes to the same amount. which committee is commanded to make a report to the states at least once each year certifying the liquidation and destruction of the said anticipations and of the said notes." further care is shown by the fact that on th march, , the states appointed the finance committee "to replace the used and worn-out notes by new notes, payable at the same time as the destroyed notes would have been." testimony is borne by this wear and tear to the extent to which the notes circulated. plans for the improvements in rue de la fontaine, a street adjoining the markets, being adopted on th november, , an issue of £ notes up to £ , was authorised to be cancelled by the proceeds of rents. in and issues of notes were authorised for various purposes, including £ , for the college and £ , in connection with the rue de la fontaine scheme. at one of the sittings of the states in the year , william collings, a member of the finance committee, stated that there were , notes in circulation. on th march, , £ , was voted for cholera precautions, to be raised either at per cent. interest or in £ notes. the latter course seems to have been adopted. from the foregoing it will be noticed that during the years over £ , worth of notes were authorised by the states to be issued. these were mostly of the value of £ , though some £ notes were authorised. in there were still in circulation , , which in that year were reduced, as will be seen in a subsequent chapter, by , . it may be asked whether there is any evidence that the notes were destroyed as directed. from various sources we found records of at least , being destroyed. for instance, in the _gazette_ of rd march, , there is the following:-- "market accounts for . notes to bearer of £ destroyed. march, £ november, £ march, £ ----- £ total of notes issued for the market, £ , " " destroyed " " , ------- leaving in circulation £ , ." footnotes: [ ] this purchase was in itself an interesting piece of municipal history. "by an order in council," says jacob in his _annals of british norman isles_, p. , "the meat market company were to be allowed by the states, certain duties on all the cattle killed, so long as they remained proprietors of the market; but the states were allowed at any future time to take the same into their own possession on the payment of what the proprietors had advanced. the states did this on the th april, , at an expense of £ , ." (see p. .) [ ] we have been unsuccessful in our efforts to obtain part ii. either in guernsey or in london, and wonder whether it was ever published. [ ] daniel de lisle brock was bailiff from th may, , to th january, . chapter iv the utility of the notes there is abundant evidence throughout the records that the system was appreciated. jacob's _annals_ ( ), in a chapter on currency, mentions the notes incidentally. "all these, with the one pound guernsey states' notes, are in much request, being very commodious for the internal affairs of the island." the bailiff, daniel de lisle brock, who seems undoubtedly to have been the inspiring genius of the scheme, says in his _billet d'etat_, th november, -- "an individual with an income of £ , , who spends only half of it wishes to build a house at a cost of £ , . he therefore makes an arrangement with his timber merchant, his mason, his carpenter and others to pay them out of his savings, so that they shall receive a part each year for five years. can it be said that he is contracting debts? will he not have at the end of the five years both his house and his original income of £ , ? "the states are precisely in the same position as regards the £ , which they have to pay out of their income during the five years included in the said table. this sum will be paid in instalments of £ , per annum, with as much ease as were much heavier engagements in and . "the time has passed when the public could be frightened by exaggerated reports about the debt; most complete publicity keeps everyone acquainted with the real state of affairs; my greatest wish is that nothing should be hidden." frequent references to the saving of interest are to be found, and to the fact that improvements in the island could not have been carried out but for this system. wm. collings, speaking at the states meeting, th march, , on a financial proposition, gives it as his opinion that interest now paid might be spared if the states issued more notes. the rev. t. brock at the same meeting supports the contention, as notes can be issued without inconvenience. in the _billet d'etat_ for st september, , in a long discourse on the circulation, daniel de lisle brock says, "to bring about the improvements, which are the admiration of visitors and which contribute so much to the joy, the health and the well-being of the inhabitants, the states have been obliged to issue notes amounting to £ , . if it had been necessary, and if it were still necessary to pay interest on this sum, it would be so much taken from the fund ear-marked to pay for the improvements made and to carry out new ones. this fund belongs especially to the industrious poor who execute the works and generally to the whole island which enjoys them. it ought to be sacred to all." mr. john hubert, in the debate at this meeting, is reported by the _comet_ to have referred to the fact that "the roads and other works had been constructed for the public good," and to have said that "without issuing notes for the payment of those works it would have been impossible to have executed them." mr. h. o. carré, in the same debate, said, "the states, by having notes to the amount of £ , in circulation, effected a saving of £ , per annum. here, then, was a revenue of £ , raised without causing a farthing's expense to any individual of the public generally, for not one could urge that he suffered a farthing's loss by it. it was therefore the interest of every one to support, not the credit, but the interest of the states. those who wished to traffic on the public property were in fact laying a tax on that public, for they were diminishing, by so much as they forced states' notes out of circulation, the public revenue, for if the states, in consequence of a diminished revenue by the effect of bank paper, have to make loans, those loans must in the end be repaid by the public--which would be a taxing of the public for the benefit of private individuals." further contemporary testimony to the estimation in which the notes were held may be gleaned from the papers of the time, of which there were three, issued at least once a week. in these occur letters from publicola, verax, vindex, un ami de son pays, un habitant, campagnard, etc. some of these were probably inspired, and sometimes they show a partisan bias. the references of most value are the incidental ones occurring in discussions on the improvements or in the criticisms of _ordonnances_ on the currency. the coinage at this time was in a confused state, there being both english and french money, some of it of very poor quality, in circulation. the _gazette_ of nd july, , refers to allegations made by the jersey authorities as a reason for their refusing to register an act authorising the issue of £ , in notes. the opponents of the measure had alluded to supposed evils arising therefrom in guernsey. but the _gazette_ emphatically declares that "these notes have neither directly nor indirectly burdened commerce in any way, nor contributed to the rise in exchange that is experienced." a letter in the _gazette_ of th april, , on the subject of "monnaie," written at the request of sir j. colborne, the lieutenant-governor, suggests that people in authority in jersey interested in banks oppose state notes, lest these should be preferred to theirs. the leader of the same issue of the _gazette_ states that "the generality of the inhabitants have confidence in the states' notes (it being always understood that the issue of notes shall be kept within just limits) because they know that the whole property of the island forms the guarantee for their payment." "campagnard" in the _gazette_ of th february, , suggests the need of some other currency than states' notes for trade in france or with london and paris, but feels alarm at anything that might stop the public works in the island. the difficulty of getting cash for notes is alluded to only when the period of controversy referred to in the next chapter is reached. but for about the first ten years of their issue it would appear that no exception was taken to the notes nor difficulty experienced in their use. external exchange seems to have flourished side by side with this internal currency. chapter v first rumblings of opposition the feeling in favour of the system was not however entirely unanimous. in we find the first trace of opposition which gradually grew and grew until, as we shall see later, it was decided in that the states should not issue any more notes. whether the opposition was entirely due to this financial system as such is open to question. errors of judgment with reference to the fountain street improvement may have been made. self-interest on the part of some may have been one of the factors. into these questions the writer cannot enter here. all that he wishes to point out is that it seems to him from studying the records that there were various currents of opposition which centred round the issue of paper money by the states. in september, , three members of the states, josias le marchant, james carey and jean le marchant, the two latter being members of the finance committee, thought that the king's consent should be obtained for works to be undertaken in fountain street. they considered that the anticipations of future revenues were "not only fatal to their credit but contrary to the order of his majesty in council, th june, , viz., 'that the states of the said island do not exceed in any case the amount of their annual income without the consent previously obtained of his royal highness in council.'" daniel de lisle brock, after consulting la cour royale (the supreme court of judicature), writes his views in a _billet d'etat_, and summons the states to meet nd november, . in his words, which we quote at some length, are seen both his enthusiasm and his caution. "it was not possible, as every one must admit, to do without anticipations; but these differ from a debt in that a certain clear and definite income is appropriated for meeting them, at certain fixed times. they are only assignations on assured funds ear-marked for their payment. watch must be kept, it is true, that they are paid from these same funds. for by letting the period during which they should end pass, and by spending on anything else the income appropriated to them, they would become a permanent debt. the experience of several years has shown us that these assignations may be used without danger, and that they have been fully paid off as they fell due. "the advantage which has resulted is manifest. if we had had to wait till funds were in hand to set to work at fountain street, who could have foreseen when, if ever, this moment would arrive. is it nothing, in the midst of this short life, when it is a question of an object of the first necessity among the wants of the community, to have anticipated by sixteen or seventeen years the enjoyment of this object? doubtless evil is close to good: the abuse of the best things is always possible. is this a reason for forbidding the use of what is good and profitable? is it not better to procure it as soon as possible whilst availing ourselves of the means at our disposal to avoid its abuse? whilst these means are employed, and so long as the income is sufficient, there is only one possible danger--that of allowing the time for meeting these anticipations to pass without paying them, and thus of seeing the debt increased by the amount of the non-cancelled obligations. this danger is seen to vanish when we consider the precaution taken by the states, the watchfulness of all their members, the committee which they have appointed specially for this purpose, when we think of the publicity, of the exact acquaintance from year to year which all the inhabitants have of the liabilities, the receipts and expenditure of the states. all this watchfulness and all this publicity are the strongest safeguard that could be given against any danger in this respect." the resolution to refer the matter to the king was lost, only five voting for it; and a resolution was carried expressing confidence in the present method. in the following year, , the guernsey banking company, now known as the old bank, was founded from the firm of priaulx, le marchant, rougier & company. jean le marchant was vice-president of this bank. it is said that at the states meeting on th november, when objections were raised lest the states' notes should suffer, the bailiff seemed to foresee no danger. "good bills are better than bad coin." notwithstanding the decision of the states in , the three jurats, josias le marchant, james carey and jean le marchant were still uneasy, and on th april, , complained direct to whitehall that "the states had exceeded their annual revenues for works of public utility without the express sanction of the superior authority, and had for these same works contracted liabilities which exceeded the means of the states." the privy council on the th june forwarded the complaint to the states and asked for an explanation. the states, at their meeting, th august, , instructed a committee to examine the charges, draw up a report and answer, and submit the same to the states. the committee selected was the finance committee, which was revised at this time, the chief change being the omission of the two complainants, james carey and jean le marchant. a guess may be hazarded that this committee appointed daniel de lisle brock to draft the reply. this interesting document fortunately exists not only in french but in english (doubtless for the benefit of the privy council). in characteristic language, enthusiastic and patriotic, while clear and matter of fact, it sets out the present situation and sketches the history of the island since the close of the war. the greater part of it appears in the next chapter. chapter vi the reply of the states with a few slight omissions the following is the official translation of "the answer of the states of guernsey to the complaint of three of their members dated the th april, and transmitted by their lordships's order of th june, . "my lords, discarding from their minds allusions and topics of a personal nature and every sentiment of recrimination, the states of guernsey are desirous of vindicating themselves in the manner most becoming the respect due to your lordships, and the consciousness of right, by setting facts against errors, reason against fears, 'honest deeds against faltering words.' "to judge of the states by any particular act or period would be to dismiss all consideration of previous motives and future benefits, of connecting causes and effects. comprehensive views of the general policy of the states can alone enable them to prove, and your lordships to judge, of the wisdom and propriety of their measures. taking, therefore, a retrospect of the period which immediately preceded the grant of the duty on spirituous liquors first graciously conceded in ; they deem it necessary to lay before your lordships a summary account of the state of this island, at, and from that period. "the steps taken during the war for the prevention of smuggling had deprived this island of the trade which the supply of that traffic occasioned, and a great portion of the inhabitants of their usual occupation, consisting not in smuggling themselves, but in importing the goods and making the small packages in which those goods were sold in the island; privateering, adventurous speculations, and the great expenditure of fleets and garrisons compensated in some measure for the loss of this occupation, but when the war ceased also, a general want of employment and consequent distress ensued. * * * * * "in the sea which had in former times swallowed up large tracts, threatened from the defective state of its banks to overflow a great extent of land. the sum required to avert the danger was estimated at more than £ , , which the adjoining parishes subject to this charge were not in a condition to raise. the state of the finance was not more consolatory, with a debt of £ , , and an annual charge for interest and ordinary expenses of £ , , the revenue of £ , left only £ for unforeseen expenses and improvements. "thus at the peace, this island found itself with little or no trade; little or no disposable revenue; no attraction for visitors, no inducement for the affluent to continue their abode, and no prospect of employment for the poor. no wonder, therefore, if emigration became the object of the rich in search of those good roads, carriages and other comforts which they could not find at home, and the only resource of the other classes, whose distress was likely to be aggravated by the non-residence of the former. misery and depopulation appeared inevitable, from the peace to the year inclusive, more than five hundred native and other british subjects embarked for the united states, and more prepared to follow. "it is said, the powers of the human mind in society lie at times torpid for ages; at others, are roused into action by the urgency of great occasions, and astonish the world by their effects. this has, in some measure, been verified in this island, for though nothing done in so small a community can cause a general sensation, its exertions may yet produce wonderful results, within its own sphere. it is the duty of the states to show that, roused by the deplorable situation above described, they took, and have since pursued the steps best adapted to meet the exigency of the case, and that those steps have been attended with complete success. "to increase the revenue was an indispensable preliminary, but to do so, no other means lay within the power of the states than a tax on the several parishes according to the rates at which they were respectively assessed, and to this tax there were insuperable objections.... "under these circumstances was the application made for the duty on spirituous liquors: and notwithstanding the opposition of many of the inhabitants his royal highness the prince regent, was graciously pleased by an order in council of rd july, to authorise the states to raise s. per gallon on all such liquors consumed in this island for the term of years. the same duty was renewed for years by virtue of a second order in council of th june, after similar opposition. and on the declaration at your lordships' bar of the advocate deputed by the opponents that a clause to the following effect would reconcile them to the measure, and no objection being made to it on the part of the states, these words were inserted in the gracious order in question: viz.:--'that one thousand pounds per annum of the produce of the said duty be applied solely to the liquidation of the present debt, together with such surplus as shall remain out of the produce of the tax in any year after defraying the expenses of roads and embankments and unforeseen contingencies. and that the states of the said island do not exceed in any case the amount of their annual income without the consent previously obtained of his royal highness in council: and the said states are hereby directed to return annually to the privy council an account of the produce and application of the said tax.' "in the lt. governor sir john colborne, and the states, having extended their views to the erection of a new college and other important works which could not be undertaken without the assurance of a renewal of the duty, constituting the chief part of the revenue, a third order in council of the th september, , conceded to the states the right of levying the same for years, beginning on the st september, , and this without the smallest opposition from any of the inhabitants, and without the conditions annexed to the second order. "with gratitude for the means placed at their disposal the states feel an honest pride in the recital of the manner in which those means have been applied. first, considering the danger arising from the bad state of the sea embankments, and the hardship of subjecting particular parishes to a charge for the general safety to which they were unequal, the states took on themselves the present repairs, and future maintenance of those embankments. this essential object connected with the paved slips or avenues to the beach, has been attended with an expence of £ , s., without including five or six thousand for a breakwater to defend the line of houses at glatney, on the north side of the town. "independently of the sums contributed by government towards the military roads, from twenty-nine to thirty thousand pounds have been expended by the island on the roads, so that in lieu of those before described, there are now fifty-one miles of roads of the first class, as good as those of any country, with excellent footways on all of them, and miles of the second class. "not only the main harbour, piers, quays, buoys and sea marks have been attended to, and at a great expense, but, in order to facilitate the exportation of the granite from the north of the island, the harbour of st. sampson has been rendered secure and convenient by a new breakwater and quay. "the situation and state of the town were thought to preclude all hopes of much amelioration, but the widening of high street, and other streets, the reducing the precipitous ascent to the government and court house, the clearing away of the unsightly buildings that obstructed the view and approach to those public edifices, the new sewers, pavements, and, above all, the public markets and new fountain street, attest the solicitude of the states towards the town, and surprise those who return to it after a few years absence. add to these the enlarging and improving of the court house and record office, where the public have daily access, and where are kept the contracts and registry of all the real property (of) the island. add also the new college, which, with the laying out of its grounds and the roads round its precincts, contributes to the embellishment of the town, induces families from other places to settle in the island, on account of their children, and affords to the inhabitants the ready means of a good education. "the advantage resulting from all these improvements has not been confined to their utility, or to the increased activity given to industry, and the circulation of money by the public expenditure: they have excited in all classes a similar spirit of improvement, which displays itself in the embellishment of the premises already built upon, and above all in the number of handsome dwellings since erected. in the town parish alone houses have been built since the year at an expense of upwards of £ , , and few towns do now present a more animated scenery around them, or one where ornament and comfort are more generally united; the same comfort and improvement are witnessed in every direction, and at the greatest distances from town. and thus it is, that the public works have not only given life and activity to every species of industry by the immediate effects of their utility, as for example to the building of a number of mills in the island, before supplied with most of its flour from abroad, and now enabled to manufacture it for exportation, but and still more by the consequent impulse communicated on all sides, prompting the wealthy to lay out for private mansions greater sums than were expended for public works and creating a permanent source of employment, by the future expenses which the repairs and occupations of those mansions will require. "the extent of benefits conferred is sufficiently attested by the concurrent testimony of inhabitants and strangers. the sole objects of his majesty and of his most honorable privy council are the public good and general happiness; the states might therefore, confidently look for indulgence, even if, in promoting those objects, they had fallen into some little deviation from the strict letter of any particular order. but implicit obedience to the royal authority in council being their paramount duty, they cannot rest satisfied under the imputation of having, even unintentionally, derogated from that duty. "the words of the second order in council have already been cited. the right of levying the duty on spirituous liquors is granted for ten years: a condition is annexed purporting that the states shall not exceed their annual income, and on the contrary that out of the produce of the duty, one thousand pounds shall be applied annually to the extinction of the debt; that condition is naturally in force for the same period, and for the same period only, as the grant to which it is annexed; it is necessarily so limited, because the means by which it is to be fulfilled, the produce of the duty, ceases at the end of the ten years for which the duty is granted. "the states are bound to prove that they have complied with the conditions of that order; they did so comply, when wishing to erect a new market, they applied for and obtained the order of th october, , which imposed on them, at their own request, the further obligation of an annual payment of £ for years; this sum began to be paid in , and has been paid for years, during which the obligation amount to £ , the former obligation amounts, for the years now elapsed to £ , ------------- total amount of the two obligations imposed £ , the debt at the commencement of the years elapsed amounted in rents and money, including the cost of the market, to £ , the debt, rents and market included, has been reduced to £ , ------------- total amount of the sums actually applied to the payment of the debt £ , "the conditions of the second order in council have thus been more than fulfilled, by the application of £ , s. d. to the payment of the debt over and above the obligations imposed. those conditions, incidentally introduced in the second order, do not in any way form a part of the third order now in force. "though released from the positive conditions of the former order, the states have shown no intention, and do by no means desire to depart from its general spirit; graciously offered by the third order in council to continue their improvements, they came to the following resolution on nd november, : 'that far from entertaining any wish of augmenting the debt the states recognise the principle that it should not exceed, at the end of the years for which the duty is further granted, the sum to which the debt shall amount at the end of the years present duty: they impose on themselves that obligation anew, and bind themselves by the most solemn engagement not to increase the debt.' * * * * * "what cause of alarm can there then possibly exist? what prospect, on the contrary, the states humbly ask, can be more gratifying than that of remaining with our new college, new harbours built and to be built, new markets of every description, new roads in every direction, new streets, one of thirty feet instead of seven in the greatest thoroughfare between town and country, in short, with nearly all the greatest improvements that can be desired, paid for to the last shilling; and all this according to the statement of the plaintiffs themselves, with the debt reduced to £ , , and the revenue augmented £ , per annum, by those very improvements. * * * * * "in the markets and fountain street, the states have undertaken works essentially necessary. the cost might be supposed to exceed the means of the states, if credit did not in the first instance furnish the chief expense without the charge of interest, and if the works themselves did not provide for the extinction of the engagements incurred. "the views of the states are to render these public improvements a source of future revenue, which shall again afford the means of further and greater improvements. "the same plan has been acted upon with success in several places, and particularly at bath and liverpool,[ ] to the permanent increase of their revenues, and to the general benefit of those places, and of the country at large. it is difficult indeed to conceive whence can arise the objections to measures, which without laying the least burthen on anyone, surely and quietly operate to the general good, except it be from the disinclinations of most persons to enter into that close examination of figures necessary to a right understanding, and the distrust consequent on the need of that examination and comprehension. in our case, it may be added, that accustomed, on the subject of improvement, to a long apathy confirmed by the state of a revenue inadequate to the least undertaking, works of magnitude when first proposed created the greatest alarm. the new roads were opposed by the far greater number of those who were to derive the most benefit from their use, and who from experience are now clamorous for more. the market was only voted the third time it was offered to the consideration of the states, although it was represented that independently of its various advantages, it would in a short time permanently add to the revenue. experience has proved the correctness of that view of the question, and opening the eyes of the public, has turned their sentiments of fear and distrust to one of perfect confidence. hence it was that the public voice called on the states to realise the benefits likely to result from the substitution of a street thirty feet wide, in lieu of one of seven feet, in the heart, and connecting the two extremities of the town, and forming the principal avenue from the country to the harbour; twenty to thirty carts frequently waited at one end until those from the other had passed. such a thoroughfare in the most populous quarter could not but be fraught with danger, and the accidents that occurred were numerous, while the closeness of the street, height of the houses, and filth collected at the back of them were a constant source of nuisance and disease. never was a measure voted with so much unanimity and general satisfaction as the removal of this public nuisance, and rebuilding fountain street, notwithstanding it to be now the ground of the complaint before your lordships. * * * * * "relatively to so small a section of the empire, great things have been done with slender means; that so much has been done may with truth be ascribed to the fairness and disinterestedness which have marked every resolution of the states, and its execution; to the vigilant and gratuitous superintendence of their committees, and to the public spirit of the inhabitants. "devoted to the good of his majesty's service, and not resting on isolated facts, the states have laid open the whole of their conduct and views, and beg leave to refer to their worthy and highly respected lieutenant-governor major general ross for the correctness of their statement, and for the situation of the island. they have the approval of their fellow-subjects and of their conscience, but they would feel deeply humiliated if they did not merit and obtain the commendation of your lordships." the reply is accompanied by five appendices giving detailed figures to substantiate the argument and point out errors in the figures of the complainants. it is not necessary to weary the reader with these. appendix i., however, is interesting, as it shows that more than half the debt of the states consisted of these notes on which no interest was paid. "appendix i. debt of the states:-- to the savings bank at per cent. first vote £ , to individuals ------- at per cent. interest £ , in notes of s. each , quarters bushels denerels, and sous deniers rents equal to , ------- £ , deduct from this the balance still due by the market, and carried to the joint account of the market and fountain street , ------- £ , [ ]" the scope of the remaining appendices is shown by their titles:-- appendix ii.: plan of finance adopted by the states and to be pursued during the fifteen years from this date, ending in inclusive. appendix iii.: remarks on the statement of account making part of the complaint presented against the states. appendix iv.: joint account of fountain street and the market. appendix v.: amount of the produce on the duty of s. per gal. on all spirits consumed in the island of guernsey, and the manner in which it has been expended during the ten years for which the said duty was granted, beginning september st, . in obedience to order of h.m. in council of june, . this reply was very favourably received by the states at their meeting rd december and adopted almost unanimously. one of the rectors spoke of it as "most judicious and consolatory, especially considering that room had been given for the exercise of opposite feelings." the leader writer in the _gazette_ recommended the reply to "the particular attention of every true guernseyman." improvements in the island were due to m. le bailiff, against whom and whom alone the complaint is directed. "as a wise administrator he has known how to contrive the means of effecting this great good without imposing the least tax or inconveniencing his fellow citizens." footnotes: [ ] see appendix. [ ] market. the cost was £ , paid off since , ------- balance due on market , chapter viii the crisis no trace was found of any reply or acknowledgment by the privy council. presumably they were satisfied with the answer submitted by the states. but not so the opponents. in addition to the old bank already mentioned, another bank, the commercial bank, had been started in . both of these appear to have issued notes at their own discretion. consequently the island seems to have been flooded with paper money, and an awkward situation had arisen. the commercial bank claimed an equal right with the old bank and even with the states to issue notes. the finance committee, it was stated, had refused to confer with the commercial bank. so long as the banks had a right to issue notes they appear to have had it in their power to put pressure on the states. for they could thus put into circulation a currency beyond that required for the internal needs of the island. daniel de lisle brock summoned the states to consider the matter, evidently with the intention of obtaining an injunction against the issue of notes by the banks. his message to the states meeting, held st september, , is very spirited and defends the rights of the states as against private individuals, as will be seen from the following lengthy quotation. "if there is one incontestable principle it is that all matters relating to the current coin of any country have their source in the supreme prerogative, and that no one has the right to arrogate to himself the power of circulating a private coinage on which he imprints for his own profit an arbitrary value. if this is true for metal coins still more so is it for paper money which in itself has no value whatever. "has not experience shown us the danger of private paper money? can we have forgotten the disastrous period when payment of one hundred thousand one-pound notes put into circulation by two banks enjoying good credit was suddenly stopped? have we forgotten the ruin of some, the distress of others, the embarrassment of all? have we not quite recently seen a bank established by people considered immensely rich, advancing large sums for distilleries, steam boats and other projects, and coming to an end in less than two years with a composition with its creditors who thought themselves lucky to get a few shillings in the pound? "with these facts before our eyes we must realise the necessity of limiting the issue of paper money to the needs, the custom, and the benefit of the community in general. permission cannot be granted to certain individuals to play with the wealth and prosperity of society, to take from it its hard cash and to give it in exchange rags of paper. what incentive can they offer to persuade the public to give up to them valuable bills for worthless ones, certainty for uncertainty? what advantage can they pretend will accrue to the public from the loss of its currency and the possible depreciation of their paper? these general reflections will find their application. let no one exclaim against the possibility of the supposed danger. the wealth of the present stockholders of our banks is well known, their names suffice to inspire the greatest confidence; but apart from extraordinary events, the ordinary casualties of life may bring about in a short time the change of all these names, and there may remain in their place only men of straw. * * * * * "the states are met in order to take counsel together on measures for its defence. for an object so important they ought to count on the help of all friends of their country. "speaking of the present banks, and it is necessary to refer to them, no one desires more than i do to see them flourish, provided that it is not at the expense of the public interest. several of the stockholders seem to rely for success on the issue of paper-money, as if this were the principal aim of the business of banking. this aim, on the contrary, is quite foreign to real bankers--one finds them in all the great towns of europe enjoying colossal fortunes--they never dream of paper-money; their functions are confined to discounting bills, furnishing bills on all countries, taking money on deposit at low interest to lend it again at the legal rate on landed estates, or property of assured value, and to a number of other services required by commerce: each transaction yields a profit which should suffice. a bank of this kind was wanting in the island. the first of the two existing ones was formed under the most favourable auspices, nothing could exceed its credit: although it issued paper money it did not seem inclined to push this circulation to the point of annoyance to the states. it even made common cause with them when it was a question of replacing the old coins with new, and contributed half the expense. if it had shown itself more obliging and ready at any time to supply bills for those who, money in hand, wanted them to meet engagements in london or paris, it would have continued the only bank for all business. but as it would not put itself out in any way, the second bank was started by merchants in order to escape from the domination and caprice of the first. "the second bank should have kept, and still ought to keep, to the legitimate business of banking transactions. it appeared to have for its principal object the issue of paper money; even on its origin it suggested that the states and the two banks should weekly make a mutual exchange of their respective notes, each party paying interest for the balance of notes remaining against it; in this way all the notes of the states would have found themselves in the coffers of the banks and paying interest to them. though this proposition was not accepted, the states were not the less troubled with requests for cash in payment of their notes, and these requests are daily--not only for the ordinary household needs, as might have been expected, but for sending abroad, for if there are drafts to be cashed by the bank for anyone who wishes for money to send to france or to jersey, the drafts are paid in states notes, in order that the money shall ultimately come from this last named source. the bank makes no secret of its pretensions: there are, it says, three parties for issuing paper money; this issue cannot rise above £ , since the circulation in the country does not allow for more, the states ought to have only one-third of the issue, the two banks the two remaining thirds. this is a fine way of making the division, and very convenient certainly for the commercial bank. it would even have some show of justice if the parties had equal rights, and if the public had no interest in the matter; but the rights are not equal--the bank has none to put forward, that of the states is incontestable: they exercise it for the welfare and advantage of the whole island which they represent. consequently the public has the greatest interest in preserving for the states the power of issuing paper-money without interruption. let the bank reply to the questions already put; let it say what inducement it can offer the public to drive out of circulation the states notes, the profit on which benefits all, especially the productive classes, and substitute for it bank notes, the profit on which benefits only individuals of the unproductive classes? now is the time to ask the proprietors themselves and ascertain whether in starting a bank they ever had the intention of letting it work to the detriment of their country? the public treasury is the heart of the state--did they ever wish, do they to-day wish to strike it with a dagger? i know that we live in a financial age, that it is reproached with indifference to every generous sentiment, and that the love of money and the lust for gain absorb all other passions. in spite of that i have not lost all confidence in the patriotism of the members of the bank, they have the greatest personal interest in supporting the states in their efforts for the improvement of their country, efforts which contribute so greatly to the prosperity of internal commerce, to the residence of inhabitants of means, and to the wealth of strangers. finance is the pivot on which turns the administration of affairs. the least disturbance imposes on me the duty of sounding the alarm and summoning the states. what i have said will be sufficient, i hope, to persuade the bank to maintain a friendly course. the bank should feel that it is not enough to intend not to injure, but that it is necessary to abandon any step which, even without its wish, would be prejudicial to the interests of the country. it should recognise that, as regards the circulation of paper-money, the states have, for a long time and for the common good, been in possession of the ground which it seems to wish to invade, which, however, it cannot occupy without injustice. "every war, it is said, ends where it should have begun--in peace. i am firmly convinced of this truth; and experience has shown me that in civil life as in political, war might almost always be avoided to the great advantage of both parties, and that lawsuits, like wars, have for end rather the injury of the adverse party than good to oneself. the states are on the defensive, and such war is just and inevitable if any war is. it is, moreover, a war in which all the inhabitants who are the friends of their country will eagerly unite for the defence of the states in their just rights--thus united they will defend them with complete success. for this purpose the states will doubtless appoint a committee with the fullest powers to propose, in case of need, measures which may ultimately become necessary. "i do not forsee that the case will require it, and i should wish to avoid, as far as possible, any foreign intervention--but if the efforts of the states were not sufficient to defend their rights there would be no alternative, they would find themselves obliged to petition his majesty in council to consent to restrict the issue of one pound notes, and only to permit the putting into circulation of the number absolutely required by the states. under the present circumstances this would be an indispensable measure, and it can scarcely be doubted that a humble request to this effect would be graciously received." the debate, reported at length in the local papers, was a heated one. it first raged round the third proposition, which appealed in general terms to the islanders to rally round the states. the following is the proposition as translated by the _comet_ of nd september, :--"that in execution of the numerous ameliorations that have taken place during the last or years, the states having put into circulation about , one pound notes, as a financial measure in favour of the public generally, if they are of opinion to defend the rights of the states against those who wish, for the advantage of a few individuals only, to hinder the circulation of the states notes, for the purpose of substituting those of private individuals in lieu thereof; and whether it would not be proper to make an appeal to all the inhabitants, who are the friends of their country, to invite them to afford their assistance in supporting with all their might the notes belonging to the states." this was carried by votes to . the minority represented chiefly town rather than country parishes, the jurats being equally divided, and included at least two persons closely connected with the banks. the victory of states notes seemed complete, and the fourth proposition appointing a committee to give effect to the decision was carried by a large majority. it is as follows:-- "if they are of opinion to name a committee that shall be authorised in a special manner to defend the rights and interests of the states, and of the public:--to do their utmost by every conciliatory measure in their power, and above all, to agree to an arrangement that shall screen the states from all interruption in the circulation of their notes, which have been issued for the benefit and advantage of the public, with the design of gradually diminishing the number annually. and in the event of such an arrangement not taking place, to adopt every measure, and make every necessary sacrifice for supporting the circulation of the states notes. and finally, should the case require it, to propose to the states the adoption of those ulterior measures deemed requisite by the committee, for the general interests of the island." the meeting ended with a fine fighting speech from the bailiff. he reiterated the principle of the states being the sovereign power in issuing currency, claimed that the cour royale had the right of stopping the private issue of notes, and pointed to the example of england, where only £ notes were permitted in the country, and these under a heavy tax, while only the bank of england might issue notes in and around london. he showed that it was a choice between notes issued for the benefit of individuals and notes issued for the public good. he defended the improvements carried out by the states, and once again declared that they had been advantageous in giving employment to the poor, security to the rich and encouragement to commerce. chapter viii the end one can imagine the enthusiasm and the satisfaction with which the majority returned home. one anticipates a triumphant report in the bailiff's best vein; and expects that the banks will in future have to confine themselves to the operations permitted to english banks, while the states restore equilibrium by causing the withdrawal of superfluous notes and confining future issues, once again entirely in their own hands, to quantities proportioned to the needs of the island. with surprise, the subsequent proceedings are found to be on quite different lines. truth is stranger than fiction. the prosaic facts are as follows:-- the bailiff in presenting his _billet d'etat_ to the states meeting, th march, , reported on the arrangement made by the committee with the two banks. he brought forward no proposition on the matter on which the states should deliberate. he simply states that:-- "after some preliminary conferences the committee received the following letter:-- 'to d. de lisle brock, esq., bailiff, etc., etc., etc., guernsey, th oct., . sir, to settle the differences now existing between the states and the banks, and to promote an amicable adjustment between them, we propose: that the states should withdraw immediately £ , of their notes, nor have at any time more than £ , in circulation, give up all banking transactions, and cease to collect the notes of the banks. in consideration thereof the banks engage whenever they draw bills either on london or paris, to take states' notes for one half at least of their amount and to pass them to the public as their own. the banks further engage to supply the states annually with £ , in cash, each bank to provide for one half, by payments of £ at a time, and this free of expence and in exchange for states' notes. the above agreement to remain in force until three months notice be given by either party to the others to annul the same. we remain respectfully, sir, _signed_ for priaulx, le marchant & co. thomas d. utermarck, abraham j. le mesurier. for the commercial banking co., h. d. g. agnew } t. de putron } managers.' "and asked m. le bailiff to reply as follows:-- 'court house, guernsey, oct., . gentlemen, the committee named by the states on the st september for the purpose of conferring with the banks which you represent, on the subject of the one pound notes current in this island, have taken into consideration the proposals which you have transmitted to them, under yesterday's date, th oct. the committee adopt those proposals as the basis of the arrangement so desirable to be entered into, and from this day to be in force between the states and the banks.--they do so, because the states may at any time, within months, release themselves from the obligations which that arrangement imposes; and above all, because the sacrifice of pecuniary gain on the part of the states which it may deem to occasion, will be more than compensated by the harmony and good feeling which it will tend to promote among the inhabitants, and which constituting the chief happiness of a well regulated community, can hardly be too highly estimated. with sentiments of a like friendly nature, sincerely entertained by the committee towards yourselves, and the rest of their fellow citizens, i have the honour to be, gentlemen, your obedient humble servant daniel de lisle brock, president of the states' committee.' "in consequence of this arrangement the committee decided that £ , sterling of the total one pound notes in circulation on account of fountain street should be withdrawn as a savings bank loan at an interest of per cent. per annum. also that five thousand of those forming part of the old debt, called the permanent debt, should be withdrawn to be converted into obligations at per cent. per annum." in the discussion at the states meeting on a proposition to authorise the payment of a sum spent on repairs to the coasts, there were references by three members of the states to the fact that the expenditure of the states would be increased by having to pay interest on the , £ notes withdrawn from circulation. the same fact is alluded to in a few words by daniel de lisle brock himself in his _billet d'etat_ to the states, th september, . commenting on the finance committee's report, he tabulates five items of annual loss, among which is found the terse remark, "the founding of the commercial banks causes an annual loss of £ ." although the states thus agreed not to issue any more notes, to complete the history it should be recorded that these £ , --to be perfectly accurate the total amount in was £ , --are still in circulation in the island. conclusion as stated in the introduction, the writer has determined, though somewhat tempted, not to discuss the interesting and debatable points that arise from a consideration of this subject. he is satisfied, for the present, with placing the facts before the public. he leaves those facts for abler minds than his to make such use of as they may desire. great care has been taken to record only that for which there is chapter and verse. but he would like, in conclusion, to remark that it seems to him that the states, even to-day, still derive some little benefit from having a portion of their "debt" on which they pay no interest. this may be gathered from the following table made up from facts taken from the _billet d'etat_ presented to the states nd august, , at which meeting the writer was an interested spectator. summary of the indebtedness of the states of guernsey:-- ------------------------------------+------------------+--------------- | balance dec., | interest paid | . | during . ------------------------------------+------------------+--------------- | £ | £ states general account obligations | , | , special loan obligations | , | , notes of _ s._ each payable to | | bearer | , | nil "rentes" estimated capitalised | | indebtedness thereon | , | nil departmental borrowings | , | | | paid by depts. | | to general | | account. +------------------+--------------- total indebtedness | £ , | ---- ------------------------------------+------------------+--------------- the circulation of these notes in the island to-day is, if nothing more, an interesting relic of an interesting financial policy which certainly was in vogue in guernsey for over years ( - ). the mystery surrounding the abrupt catastrophe is yet undeciphered and is likely to remain so, as there seems no material from which to glean what took place during those few but momentous days between the st september and th october. was there treachery? was it but the inevitable fate of the "best-laid schemes o' mice and men"? or was it a unique and deplorable economic tragedy? appendix we have not yet discovered anything with reference to a successful plan at bath to which daniel de lisle brock here alludes (see page ). we assume the reference to liverpool is to the fact that during a time of financial panic the liverpool corporation was empowered by statute , geo. iii., c. ( th may, ), to issue notes of £ , £ , £ and £ for value received or other due security. this act entitled "an act to enable the common council of the town of liverpool in the county of lancaster on behalf of and on account of the corporation of the said town to issue negotiable notes for a limited time and to a limited amount," was passed after the corporation of liverpool had failed to obtain a loan of £ , from the bank of england. the £ and £ notes bore interest not exceeding the lawful rate and at months' date. the £ and £ notes were payable to bearer on demand without interest. the total issue was at no time to exceed £ , . returns had to be forwarded to the house of commons from time to time. from one of these returns we learn that the notes issued to th february, , amounted to £ , , based on security valued at £ , s. d. in a report forwarded rd april, , it was stated that £ , worth of notes were in circulation at that date. great care was taken in the issue of the notes. the committee of the corporation that was responsible for the same met daily. in order to give a wider utility to the notes, london correspondents were appointed and a large number were made payable in london. this made it possible for the corporation itself to apply to the committee for a large loan of £ , . the security on which advances were made were very various. it included cotton, timber, iron, hops, whale oil, bills of exchange, ships on the stocks and the alt rates. * * * * * for further particulars of this interesting incident, the reader is referred to sidney and beatrice webb's _english local government_: "the manor and the borough," p. , and to e. c. k. gonner's article, "municipal bank notes in liverpool, - ," which appeared in the _economic journal_, vol. vi., , pp. - , to whom the writer is largely indebted for the above facts. studies in economics and political science _a series of monographs by lecturers and students connected with the london school of economics and political science_ edited by the director of the london school of economics and political science = . the history of local rates in england.= the substance of five lectures given at the school in november and december, . by edwin cannan, m.a., ll.d. ; pp., cr. vo, cloth, s. d. _p. s. king & son._ = . select documents illustrating the history of trade unionism.= i.--the tailoring trade. by f. w. galton. with a preface by sidney webb, ll.b. ; pp., cr. vo, cloth. s. _p. s. king & son._ = . german social democracy.= six lectures delivered at the school in february and march, . by the hon. bertrand russell, b.a., late fellow of trinity college, cambridge. with an appendix on social democracy and the woman question in germany. by alys russell, b.a. ; pp., cr. vo, cloth. s. d. _p. s. king & son._ = . the referendum in switzerland.= by m. simon deploige, university of louvain. with a letter on the referendum in belgium by m. j. van den heuvel, professor of international law in the university of louvain. translated by c. p. trevelyan, m.a., trinity college. cambridge, and edited with notes, introduction, bibliography, and appendices, by lilian tomn (mrs. knowles), of girton college, cambridge, research student at the school. ; x. and pp., cr. vo, cloth. s. d. _p. s. king & son._ = . the economic policy of colbert.= by a. j. sargent, m.a., senior hulme exhibitioner, brasenose college, oxford; and whately prizeman, , trinity college, dublin. ; viii. and pp., cr. vo, cloth. s. d. _p. s. king & son._ = . local variations in wages.= (the adam smith prize, cambridge university, .) by f. w. lawrence, m.a., fellow of trinity college, cambridge. ; viii. and pp., with index and maps and diagrams. quarto, in. by -½ in., cloth. s. d. _longmans, green & co._ = . the receipt roll of the exchequer for michaelmas term of the thirty-first year of henry ii. ( ).= a unique fragment transcribed and edited by the class in palæography and diplomatic, under the supervision of the lecturer, hubert hall, f.s.a., of h.m. public record office. with thirty-one facsimile plates in collotype and parallel readings from the contemporary pipe roll. ; vii. and pp.; folio, -½ in. by -½ in., in green cloth; copies left. apply to the director of the london school of economics. = . elements of statistics.= by arthur l. bowley, m.a., f.s.s., cobden and adam smith prizeman, cambridge; guy silver medallist of the royal statistical society; newmarch lecturer, - . ; _third edition_, ; viii. and pp. demy vo, cloth, diagrams. s. d. net. _p. s. king & son._ = . the place of compensation in temperance reform.= by c. p. sanger, m.a., late fellow of trinity college, cambridge; barrister-at-law. ; viii. and pp., cr. vo, cloth. s. d. _p. s. king & son._ (_out of print._) = . a history of factory legislation, - .= by b. l. hutchins and a. harrison (mrs. spencer), b.a., d.sc. (econ.), london. second edition. with a preface by sidney webb, ll.b. ; xviii. and pp., demy vo, cloth. s. net. _p. s. king & son._ = . the pipe roll of the exchequer of the see of winchester for the fourth year of the episcopate of peter des roches ( ).= transcribed and edited from the original roll in the possession of the ecclesiastical commissioners by the class in palæography and diplomatic, under the supervision of the lecturer, hubert hall, f.s.a., of h.m. public record office. with a frontispiece giving a facsimile of the roll. ; xlviii. and pp., folio, -½ in. by -½ in., green cloth. s. net. _p. s. king & son._ = . self-government in canada and how it was achieved: the story of lord durham's report.= by f. bradshaw, m.a., senior hulme exhibitioner, brasenose college, oxford. ; pp., demy vo, cloth. s. d. net. _p. s. king & son._ = . history of the commercial and financial relations between england and ireland from the period of the restoration.= by alice effie murray (mrs. radice), d.sc. (econ.), former student at girton college, cambridge; research student of the london school of economics and political science. ; pp., demy vo, cloth. s. d. net. _p. s. king & son._ = . the english peasantry and the enclosure of common fields.= by gilbert slater, m.a., st. john's college, cambridge; d.sc. (econ.), london. ; pp., demy vo, cloth. s. d. net. _constable & co., ltd._ = . a history of the english agricultural labourer.= by dr. w. hasbach, professor of economics in the university of kiel. with a preface by sidney webb, ll.b. translated from the second edition ( ), by ruth kenyon. cloth, s. d. net. _p. s. king & son._ = . a colonial autocracy: new south wales under governor macquarie, - .= by marion phillips, b.a., melbourne, d.sc. (econ.), london. ; xxiii., pp., demy vo, cloth, s d. net. _p. s. king & son._ = . india and the tariff problem.= by professor h. b. lees smith, m.a., m.p. ; pp., crown vo, cloth. s. d. net. _constable & co., ltd._ = . practical notes on the management of elections.= three lectures delivered at the school in november, , by ellis t. powell, ll.b., b.sc. (econ.), fellow of the royal historical and royal economic societies, of the inner temple, barrister-at-law. ; pp., vo, paper, s. d. net. _p. s. king & son._ = . the political development of japan.= by g. e. uyehara, b.a., washington, d.sc. (econ.) london. xxiv., pp., demy vo, cloth. s. d. net. _constable & co., ltd._ = . national and local finance.= by j. watson grice, b.sc. (econ.), london. with a preface by sidney webb, ll.b. ; pp., demy vo, cloth. s. d. net. _p. s. king & son._ = . an example of communal currency.= by j. theodore harris, b.a. with a preface by sidney webb, ll.b. crown vo. s. net. _p. s. king & son._ _series of bibliographies by students of the school._ = . a bibliography of unemployment and the unemployed.= by f. isabel taylor, b.sc. (econ.), london. with a preface by sidney webb, ll.b. ; xix., pp., demy vo, cloth, s. net; paper, s. d. net. _p. s. king & son._ _series of geographical studies._ = . the reigate sheet of the one-inch ordnance survey.= a study in the geography of the surrey hills. by ellen smith. introduction by h. j. mackinder, m.a., m.p. ; xix., pp., maps, illustrations, crown vo, cloth. s. d. net. _a. & c. black._ years ago guernsey experimented successfully with communal currency, to-day the co-operative brotherhood trust, ltd., is experimenting with co-operative currency. it has a small circle of manufacturers, merchants and private individuals using and circulating its currency. if you believe in its practicability, join it and help to ensure its success. if you want to know more about it, write for full information to-- the secretary, , newington green road, london, n. works by henry w. wolff co-operative banking its principles and its practice, with a chapter on co-operative mortgage credit _demy vo, cloth_, = s. d.= _net_ "mr. wolff is the author of a successful work."--_times._ a co-operative credit handbook demy vo, pages. s. net contents--preface, general remarks, banks based upon shares (limited liability societies), model rules for such (with annotations), village banks (unlimited liability societies), model rules for such (with annotations). appendix: form of application, forms of bond for borrower, form of fortnightly balance sheet, model cash book. co-operative credit banks a help for the labouring and cultivating classes. d. village banks how to start them--how to work them--what the rich may do to help them, etc. d. london: p. s. king & son orchard house, westminster +-----------------------------------------------+ | transcriber's note: | | | | inconsistent hyphenation and spelling in the | | original document have been preserved. | | | | typographical errors corrected in the text: | | | | page isue changed to issue | | page viii changed to vii | +-----------------------------------------------+ * * * * * a new banking system: the needful capital for rebuilding the burnt district. by lysander spooner. boston: sold by a. williams & co. washington street. . entered according to act of congress, in the year . by lysander spooner, in the office of the librarian of congress, at washington. printed by warren richardson, washington st contents. page chapter i.--a new banking system, chapter ii.--specie payments, chapter iii.--no inflation of prices, chapter iv.--security of the system, chapter v.--the system as a credit system, chapter vi.--amount of currency needed, chapter vii.--importance of the system to massachusetts, chapter viii.--the true character of the "national" system, chapter ix.--amasa walker's opinion of the author's system, the reader will understand that the ideas presented in the following pages admit of a much more thorough demonstration than can be given in so small a space. such demonstration, if it should be necessary, the author hopes to give at a future time. _boston, march, ._ chapter i. a new banking system. under the banking system--an outline of which is hereafter given--the real estate of boston alone--taken at only three-fourths its value, as estimated by the state valuation[a]--is capable of furnishing three hundred millions of dollars of loanable capital. [a] by the state valuation of may, , the real estate of boston is estimated at $ , , . under the same system, the real estate of massachusetts--taken at only three-fourths its estimated value[b]--is capable of furnishing seven hundred and fifty millions of loanable capital. [b] by the state valuation of may, , the real estate of the commonwealth is estimated at $ , , . the real estate of the commonwealth, therefore, is capable of furnishing an amount of loanable capital more than twelve times as great as that of all the "_national_" banks in the state[c]; more than twice as great as that of all the "national" banks of the whole united states ($ , , ); and equal to the entire amount ($ , , , or thereabouts) both of greenback and "national" bank currency of the united states. [c] the amount of circulation now authorized by the present "national" banks of massachusetts, is $ , , , as appears by the recent report of the comptroller of the currency. it is capable of furnishing loanable capital equal to one thousand dollars for every male and female person, of sixteen years of age and upwards, within the commonwealth; or two thousand five hundred dollars for every male adult. it would scarcely be extravagant to say that it is capable of furnishing ample capital for every deserving enterprise, and every deserving man and woman, within the state; and also for all such other enterprises in other parts of the united states, and in foreign commerce, as massachusetts men might desire to engage in. unless the same system, or some equivalent one, should be adopted in other states, the capital thus furnished in this state, could be loaned at high interest at the west and the south. if adopted here earlier than in other states, it would enable the citizens of this state to act as pioneers in the most lucrative enterprises that are to be found in other parts of the country. all this capital is now lying dead, so far as being loaned is concerned. all this capital can be loaned in the form of currency, if so much can be used. all the profits of banking, under this system, would be clear profits, inasmuch as the use of the real estate as banking capital, would not interfere at all with its use for other purposes. the use of this real estate as banking capital would break up all monopolies in banking, and in all other business depending upon bank loans. it would diffuse credit much more widely than it has ever been diffused. it would reduce interest to the lowest rates to which free competition could reduce it. it would give immense activity and power to industrial and commercial enterprise. it would multiply machinery, and do far more to increase production than any other system of credit and currency that has ever been invented. and being furnished at low rates of interest, would secure to producers a much larger share of the proceeds of their labor, than they now receive. all this capital can be brought into use as fast as the titles to real estate can be ascertained, and the necessary papers be printed. legally, the system (as the author claims, and is prepared to establish) stands upon the same principle as a patented machine; and is, therefore, already legalized by congress; and cannot, unless by a breach of the public faith, any more be prohibited, _or taxed_, either by congress or this state, than can the use of a patented machine. every dollar of the currency furnished by this system would have the same value in the market as a dollar of gold; or so nearly the same value that the difference would be a matter of no appreciable importance. the system would, therefore, restore specie payments at once, by furnishing a great amount of currency, that would be equal in value to specie. the system would not inflate prices above their true and natural value, relatively to specie; for no possible amount of paper currency, every dollar of which is equal in value to specie, _can_ inflate prices above their true and natural value, relatively to specie. whenever, if ever, the paper should not buy as much in the market as specie, it would be returned to the banks for redemption, and thus taken out of circulation. so that no more could be kept in circulation than should be necessary for the purchase and sale of property at specie prices. the system would not tend to drive specie out of the country; although very little of it would be needed by the banks. it would rather tend to bring specie into the country, because it would immensely increase our production. we should, therefore, have much more to sell, and much less to buy. this would always give a balance in our favor, which would have to be paid in specie. it is, however, a matter of no practical importance whether the system would bring specie into the country, or drive it out; for the volume and value of the currency would be substantially unaffected either by the influx or efflux of specie. consequently industry, trade, and prices would be undisturbed either by the presence or absence of specie. the currency would represent property that could not be exported; that would always be here; that would always have a value as fixed and well known as that of specie; that would always be many times more abundant than specie can ever be; and that could always be delivered (in the absence of specie) in redemption of the currency. these attributes of the currency would render all financial contractions, revulsions, and disorders forever impossible. the following is an outline of the system. the principle of the system is that the currency shall represent an _invested_ dollar, instead of a specie dollar. the currency will, therefore, be redeemable by an _invested_ dollar, except when redeemed by specie, or by being received in payment of debts due the banks. the best capital will probably be mortgages and railroads; and these will very likely be the only capital which it will ever be expedient to use. inasmuch as railroads could not be used as capital, without a modification of their present charters, mortgages are probably the best capital that is immediately available. supposing mortgages to be the capital, they will be put into joint stock, held by trustees, and divided into shares of one hundred dollars each. this stock may be called the productive stock, and will be entitled to the dividends. the dividends will consist of the interest on the mortgages, and the profits of banking. the interest on the mortgages should be so high--say six or seven per cent--as to make the productive stock worth ordinarily par of specie in the market, _independently of the profits of banking_. another kind of stock, which may be called _circulating stock_, will be created, _precisely equal in amount to the_ productive stock, and divided into shares of _one dollar each_. this _circulating stock_ will be represented by certificates, scrip, or bills, of various denominations, like our present bank bills--that is, _representing one, two, three, five, ten, or more shares, of one dollar each_. these certificates, scrip, or bills of the _circulating stock_, will be issued for circulation as currency, as our bank bills are now. in law, this _circulating stock_ will be in the nature of a lien on the productive stock. it will be entitled to no dividends. its value will consist, _first_, in its title to be received in payment of all dues to the bank; _second_, in its title to be redeemed, either in specie on demand, or in specie, with interest from the time of demand, before any dividends can be made to the bankers; and, _third_, in its title, when not redeemed with specie, to be redeemed (in sums of one hundred dollars each) by a transfer of a corresponding amount of the capital itself; that is, of the productive stock. the holders of the _circulating stock_ are, therefore, sure, _first_, to be able to use it (if they have occasion to do so) in payment of their dues to the bank; _second_, to get, in exchange for it, either specie on demand, or specie, with interest from the time of demand; or, _third_, a share of the capital itself, the productive stock; a stock worth par of specie in the market, and as merchantable as a share of railroad stock, or government stock, or any other stock whatever is now. whenever productive stock shall have been transferred in redemption of _circulating stock_, it (the productive stock) may be itself redeemed, or bought back, at pleasure, by the bankers, on their paying its face in specie, with interest (or dividends) from the time of the transfer; and _must_ be so bought back, before any dividends can be paid to the original bankers. the fulfilment of all these obligations, on the part of the bank, is secured by the fact that the capital and all the resources of the bank are in the hands of trustees, who are legally bound--before making any dividends to the bankers--to redeem all paper in the manner mentioned; and also to buy back all productive stock that shall have been transferred in redemption of the circulation. such are the general principles of the system. the details are too numerous to be given here. they will be found in the "_articles of association of a mortgage stock banking company_," which the author has drawn up and copyrighted. chapter ii. specie payments. although the banks, under this system, make no absolute promise to pay specie _on demand_, the system nevertheless affords a much better _practical_ guaranty for specie payments, than the old specie paying system (so called); and for these reasons, viz: . the banks would be so universally solvent, and so universally known to be solvent, that no runs would ever be made upon them for specie, through fear of their insolvency. they could, therefore, maintain specie payments with much less amounts of specie, than the old specie paying banks (so called) could do. . as there would be no fears of the insolvency of the banks, and as the paper would be more convenient than specie for purposes of trade, bills would rarely be presented for redemption--otherwise than in payment of debts due the banks--except in those cases where the holders desired to invest their money; and would therefore _prefer_ a transfer of productive stock, to a payment in specie. if they wanted specie for exportation, they would buy it in the market (with the bills), as they would any other commodities for export.[d] it would, therefore, usually be only when they wanted an investment, and could find none so good as the productive stock, that they would return their bills for redemption. and then they would return them, not really for the purpose of having them redeemed with specie, but in the hope of getting a transfer of productive stock, and holding it awhile, and drawing interest on it. [d] there would always be a plenty of specie for sale, in the seaports, as merchandise. . the banks would probably find it for their interest, as promoting the circulation of their bills, to pay, at all times, such _small_ amounts of specie, as the public convenience might require. . if there should be any suspensions of specie payments, they would be only temporary ones, by here and there a bank separately, and not by all the banks simultaneously, as under the so called specie paying system. no general public inconvenience would therefore ever be felt from that cause. . if the banks should rarely, or never, pay specie _on demand_, that fact would bring no discredit upon their bills, and be no obstacle to their circulation at par with specie. it would be known that--unless bad notes had been discounted--all the bills issued by the banks, would be wanted to pay the debts due the banks. this would ordinarily be sufficient, of itself, to keep the bills at par with specie. it would also be known that, if specie were not paid _on demand_, it would either be paid afterwards, with interest from the time of demand; or productive stock, equal in value to specie in the market, would be transferred in redemption of the bills. the bills, therefore, would never depreciate in consequence of specie not being paid _on demand_; nor would any contraction of the currency ever be occasioned on that account. for the reasons now given, the system is practically the best specie paying system that was ever invented. that is to say, it would require less specie to work it; and also less to keep its bills always at par with specie. in proportion to the amount of currency it would furnish, it would not require so much as one dollar in specie, where the so called specie paying system would require a hundred. it would also, by immensely increasing our production and exports, do far more than any other system, towards bringing specie into the country, and preventing its exportation. if it should be charged that the system supplies no specie for _exportation_; the answer is, that it is really no part of the legitimate business of a bank to furnish specie for exportation. its legitimate business is simply to furnish credit and currency for home industry and trade. and it can never furnish these constantly, and in adequate amounts, unless it can be freed from the obligation to supply specie on demand for exportation. specie should, therefore, always be merely an article of merchandise in the market, like any other; and should have no special--or, at least, no important--connection with the business of banking, except as furnishing the measure of value. if a paper currency is made payable in specie, _on demand_, very little of it can ever be issued, or kept in circulation; and that little will be so irregular and inconstant in amount as to cause continual and irremediable derangements. but if a paper currency, instead of promising to pay specie _on demand_, promises only an alternative redemption, viz: specie on demand, or specie with interest from the time of demand, or other merchantable property of equal market value with specie--it can then be issued to an amount equal to such property; and yet keep its promises to the letter. it can, therefore, furnish all the credit and currency that can be needed; or at least many times more than the so called specie paying system ever did, or ever can, furnish. and then the interest, industry and trade of a nation will never be disturbed by the exportation of specie. and yet the standard of value will always be maintained. the difference between the system here proposed, and the so called specie paying system--in respect to their respective capacities for furnishing credit and currency, and at the same time fulfilling their contracts to the letter--is as fifty to one, at the least, in favor of the former; probably much more than that. thus under the system now proposed, the real estate and railroads of the united states, at their present values, are capable of furnishing twenty thousand millions ($ , , , ) of paper currency; and furnishing it constantly, and without fluctuation, and every dollar of it will have an equal market value with gold. the contracts or certificates comprising it, can always be fulfilled to the letter; that is, the capital itself, (the productive stock,) represented by these certificates, can always be delivered, _on demand_, in redemption of the certificates, if the banks should be unable to redeem in specie. on the other hand, it would be impossible to have so much as four hundred millions, ($ , , )--one fiftieth of the amount before mentioned--of so called specie paying paper currency; that is, a paper promising to pay specie _on demand_; _and constantly able to fulfil its obligations_. it is of no appreciable importance that a paper currency should be payable _on demand_ with specie. it is sufficient, if it be payable _according to its terms, if only those terms are convenient and acceptable_. for then the value of the currency will be known, _and its contracts will be fulfilled to the letter_. and when these contracts are fulfilled to the letter, then, _to all practical purposes, specie payments are maintained_. when, for example, a man promises to pay wheat, either on demand, or at a time specified, and he fulfils that contract to the letter, _that, to all practical purposes, is specie payments_; as much so as if the promise and payment had been made in coin. it is, therefore, the specific and literal fulfilment of contracts, that constitutes specie payments; and not the particular kind of property that is promised and paid. the great secret, then, of having an abundant paper currency, and yet maintaining all the while specie payments, consists in having the paper represent property--like real estate, for example--that exists in large amounts, and can always be delivered, on demand, in redemption of the paper; and also in having this paper issued by the persons who actually own the property represented by it, and who can be compelled by law to deliver it in redemption of the paper. and the great secret--if it be a secret--of having only a scanty currency, and of _not_ having specie payments, consists in having the paper issued by a government that cannot fulfil its contracts, and has no intention of fulfilling them; and by banks that are not even required to fulfil them. it is somewhat remarkable that after ten years experiment, we have not yet learned these apparently self-evident truths. the palpable fact is that the advocates of the present "national" currency system,--that is, the stockholders in the present "national" banks,--_do not wish for specie payments_. they wish only to maintain, in their own hands, a monopoly of banking, and, as far as possible also, a monopoly of all business depending upon bank loans. they wish, therefore, to keep the volume of the currency down to its present amount. as an excuse for this, they profess a great desire for specie payments; and at the same time practice the imposture of declaring that specie payments will be impossible, if the amount of the currency be increased. but all this is sheer falsehood and fraud. it is, of course, impossible to have specie payments, so long as the only currency issued is issued by a government that has nothing to redeem with, and has no intention of redeeming; and by banks that are not even required to redeem. but there is no obstacle to our having twenty times as much currency as we now have, and yet having specie payments--or the literal fulfilment of contracts--if we will but suffer the business of banking to go into the hands of those who have property with which to redeem, and can be compelled by law to redeem. it is with government paper, and bank paper, as it is with the paper of private persons; that is, it is worth just what can be delivered in redemption of it, and no more. we all understand that the notes of the astors, and stewarts, and vanderbilts, though issued by millions, and tens of millions, are really worth their nominal values. and why? solely because the makers of them have the property with which to redeem them in full, and can be made to redeem them in full. we also all understand that the notes of sam jones, and jim smith, and bill nokes, though issued for only five dollars, are not worth two cents on the dollar. and why? solely because they have nothing to pay with; and cannot be made to pay. suppose, now, that these notes of sam jones, and jim smith, and bill nokes, for five dollars, were the only currency allowed by law; and that they were worth in the market but two cents on the dollar. and suppose that the few holders of these notes, wishing to make the most of them, at the expense of the rights of everybody else, should keep up a constant howl for specie payments; and should protest against any issue of the notes of the astors, the stewarts, and the vanderbilts, upon the ground that such issue would inflate the currency, and postpone specie payments! what would we think of men capable of uttering such absurdities? would we in charity to their weakness, call them idiots? or would we in justice to their villainy, denounce them as impostors and cheats of the most transcendent and amazing impudence? and what would we think of the wits of forty millions of people, who could be duped by such preposterous falsehoods? and yet this is scarcely an exaggerated picture of the fraud that has been practiced upon the people for the last ten years. a few men have secured to themselves the monopoly of a few irredeemable notes; and not wishing to have any competition, either in the business of banking, or in any business depending upon bank loans, they cry out for specie payments; and declare that no _solvent_ or _redeemable_ notes must be put into circulation, in competition with their _insolvent_ and _irredeemable_ ones, lest the currency be inflated, and specie payments be postponed! and this imposture is likely to be palmed off upon the people in the future, as it has been in the past, if they are such dunces as to permit it to be done. it is perfectly evident, then, that specie payments--or the literal fulfilment of contracts--does not depend at all upon the amount of paper in circulation as currency; but solely upon the fact whether, on the one hand, it be issued by those who have property with which to redeem it, and can be made to redeem it; or whether, on the other hand, it be issued by those who cannot redeem it, and cannot be made to redeem it. when the people shall understand these simple, manifest truths, they will soon put an end to the monopoly, extortion, fraud, and tyranny of the existing "national" system. the "national" system, so called, is, in reality, no national system at all; except in the mere facts that it is called the national system, and was established by the national government. it is, in truth, only a private system; a mere privilege conferred upon a few, to enable them to control prices, property, and labor; and thus to swindle, plunder, and oppress all the rest of the people. chapter iii. no inflation of prices. section . in reality there is no such thing as an inflation of prices, relatively to gold. there is such a thing as a depreciated paper currency. that is to say, there is such a thing as a paper currency, that is called by the same names as gold--to wit, money, dollars, &c.--but that cannot be redeemed in full; and therefore has not the same value as gold. such a currency does not circulate at its nominal, but only at its real, value. and when such a currency is in circulation, and prices are measured by it, instead of gold, they are said to be inflated, relatively to gold. but, in reality, the prices of property are not thereby inflated at all relatively to gold. it is only the measuring of prices by a currency, that is called by the same names as gold, but that is really inferior in value to gold, that causes the _apparent_, not _real_, inflation of prices, relatively to gold. to measure prices by a currency that is called by the same names as gold, but that is really inferior in value to gold, and then--because those prices are nominally higher than gold prices--to say that they are inflated, relatively to gold, is a perfect absurdity. if we were to call a foot measure a yard, and were then to say that all cloth measured by it became thereby stretched to three times its length, relatively to a true yard-stick, we should simply make ourselves ridiculous. we should not thereby prove that the foot measure had really stretched the cloth, but only that it had taxed our brains beyond their capacity. it is only irredeemable paper--irredeemable in whole or in part,--that ever _appears_ to inflate prices, relatively to gold. but that it really causes no inflation of prices, relatively to gold, is proved by the fact that it no more inflates the prices of other property, than it does the price of gold itself. thus we say that irredeemable paper, that is worth but fifty cents on the dollar, inflates the prices of commodities in general to twice their real value. by this we mean, that they are inflated to twice their value relatively to gold. and why do we say this? solely because it takes twice as many of these irredeemable paper dollars to buy any commodity,--a barrel of flour for example,--as it would if the paper were equal in value to gold. but it also takes twice as many of these irredeemable paper dollars to buy gold itself, as it would if the paper were equal in value to gold. there is, therefore, just as much reason for saying that the paper inflates the price of gold, as there is for saying that it inflates the price of flour. it inflates neither. it is, itself, worth but fifty cents on the dollar; and it, therefore, takes twice as much of it to buy either flour or gold, as it would if the paper were of equal value with gold. the value of the coins--in any nation that is open to free commerce with the rest of the world--is fixed by their value in the markets of the world; and can neither be reduced below that value, in that nation, by any possible amount of paper currency, nor raised above that value, by the entire disuse of a paper currency. any increase of the currency, therefore, by means of paper representing other property than the coins--but having an equal value with the coins--is an absolute _bona fide_ increase of the currency to that extent; and not a mere depreciation of it, as so many are in the habit of asserting. practically and commercially speaking, a dollar is not necessarily a specific thing, made of silver, or gold, or any other single metal, or substance. _it is only such a quantum of market value as exists in a given piece of silver or gold._ and it is the same quantum of value, whether it exist in gold, silver, houses, lands, cattle, horses, wool, cotton, wheat, iron, coal, or any other commodity that men desire for use, and buy and sell in the market. every dollar's worth of vendible property in the world is equal in value to a dollar in gold. and if it were possible that every dollar's worth of such property, in the world, could be represented, in the market, by a contract on paper, promising to deliver it on demand; and if every dollar's worth could be delivered on demand, in redemption of the paper that represented it, the world could then have an amount of currency equal to the entire property of the world. and yet clearly every dollar of paper would be equal in value to a dollar of gold; specie payments--or the literal fulfilment of contracts--could forever be maintained; and yet there could be no inflation of prices, relatively to gold. such a currency would no more inflate the price of one thing, than of another. it would as much inflate the price of gold, as of any thing else. gold would stand at its true and natural value as a metal; and all other things would also stand at their true and natural values, for their respective uses. on this principle, if every dollar's worth of vendible property in the united states could be represented by a paper currency; and if the property could all be delivered on demand, in redemption of the paper, such a currency would not inflate the prices of property at all, relatively to gold. gold would still stand at its true and natural value as a metal, or at its value in the markets of the world. and all the property represented by the paper, would simply be measured by the gold, and would stand at its true and natural value, relatively to the gold. we could then have some thirty thousand millions ($ , , ,) of paper currency,--taking our property at its present valuation. and yet every dollar of it would be equal to a dollar of gold; and there could evidently be no inflation of prices, relatively to gold. no more of the currency could be kept in circulation, than should be necessary or convenient for the purchase and sale of property at specie prices. it is probably not practicable to represent the entire property of the country by such contracts on paper as would be convenient and acceptable as a currency. this is especially true of the _personal_ property; although large portions even of this are being constantly represented by such contracts as bank notes, private promissory notes, checks, drafts, and bills of exchange; all of which are in the nature of currency; that is, they serve for the time as a substitute for specie; although some of them do not acquire any extensive, or even general, circulation. but that it is perfectly practicable to represent nearly all the _real estate_ of the country--including the railroads--by such contracts on paper as will be perfectly convenient and acceptable as a currency; and that every dollar of it can be kept always at par with specie throughout the entire country--that all this is perfectly practicable, the author offers the system already presented in proof. section . to sustain their theory, that an abundant paper currency--though equal in value to gold--inflates prices, relatively to gold, its advocates assert that, _for the time being_, the paper depreciates the gold itself below its true value; or at least below that value which it had before the paper was introduced. but this is an impossibility; for in a country open to free commerce with the rest of the world, gold must always have the same value that it has in the markets of the world; neither more, nor less. no possible amount of paper can reduce it below that value; as has been abundantly demonstrated in this country for the last ten years. neither can any possible amount of paper currency reduce gold below its only true and natural value, viz.: its value as a metal, for uses in the arts. the paper cannot reduce the gold below this value, because the paper does not come at all in competition with it for those uses. we cannot make a watch, a spoon, or a necklace, out of the paper; and therefore the paper cannot compete with the gold for these uses. that gold and silver now have, and can be made to have, no higher value, as a currency, than they have as metals for uses in the arts, is proved by the fact that doubtless not more than one tenth, and very likely not more than a twentieth, of all the gold and silver in the world (out of the mines), is in circulation as currency. in asia, where these metals have been accumulating from time immemorial, and whither all the gold and silver of europe and america--except what is caught up, and converted into plate, jewelry, &c.--is now going, and has been going for the last two thousand years, very little is in circulation as money. for the common traffic of the people, coins made of coarser metals, shells, and other things of little value, are the only currency. it is only for the larger commercial transactions, that gold and silver are used at all as a currency. the great bulk of these metals are used for plate, jewelry, for embellishing temples and palaces. large amounts are also hoarded. but that gold and silver coins now stand, and that they can be made to stand, as currency, only at their true and natural values as metals, for uses in the arts; and that neither the use, nor disuse, of any possible amount of paper currency, in any one country--the united states, for example--can sensibly affect their values in that country, or raise them above, or reduce them below, their values in the markets of the world, the author hopes to demonstrate more fully at a future time, if it should be necessary to do so. section . another argument--or rather assertion--of those who say that any increase of the currency, by means of paper--though the paper be equal in value to gold--depreciates the value of the gold, or inflates prices relatively to gold, is this: they assert that, where no other circumstances intervene to affect the prices of particular commodities, such increase of the currency raises the prices of _all_ kinds of property--relatively to gold--in a degree precisely corresponding with the increase of the currency. this is the universal assertion of those who oppose a _solvent_ paper currency; or a paper currency that is equal in value to gold. but the assertion itself is wholly _untrue_. it is wholly _untrue_ that an abundant paper currency--that is equal in value to gold--raises the prices of _all_ commodities--relatively to gold--in a proportion corresponding to the increase of the currency. _instead of doing so, it causes a rise only in agricultural commodities, and real estate; while it causes a great fall in the prices of manufactures generally._ thus the increased currency produces _a directly opposite effect_ upon the prices of agricultural commodities and real estate, on the one hand, and upon manufactures, on the other. the reasons are these: agriculture requires but very few exchanges, and can, therefore, be carried on with very little money. manufactures, on the other hand, require a great many exchanges, and can, therefore, be carried on (except in a very feeble way), only by the aid of a great deal of money. the consequence is, that the people of all those nations, that have but little money, are engaged mostly in agriculture. very few of them are manufacturers. being mostly engaged in agriculture, each one producing the same commodities with nearly all the others; and each one producing all he wants for his own consumption, there is no market, or very little market, for agricultural commodities; and such commodities, consequently, bear only a very small price. manufactured commodities, on the other hand, are very scarce and dear, for the sole reason that so few persons are engaged in producing them. but let there be an increase of currency, and laborers at once leave agriculture, and become manufacturers. as manufactured commodities usually bring much higher prices than agricultural, in proportion to the labor it costs to produce them, men usually leave agriculture, and go into manufacturing, to the full extent the increased currency will allow. the consequence is that, under an abundant currency, manufactures become various, abundant, and cheap; where before they were scarce and dear. but while, on the one hand, manufactures are thus becoming various, abundant, and cheap, agricultural commodities, on the other hand, are rising: and why? not because the currency is depreciated, but simply because so many persons, who before--under a scanty currency--were engaged in agriculture, and produced all the agricultural commodities they needed, and perhaps more than they needed, for their own consumption, having now left agriculture, and become manufacturers, have become purchasers and consumers, instead of producers, of agricultural commodities. here the same cause--abundant currency--that has occasioned a _rise_ in the prices of agricultural commodities, has produced a _directly opposite effect_ upon manufactures. it has made the latter various, abundant, and cheap; where before they were scarce and dear. on the other hand, when the currency contracts, manufacturing industry is in a great degree stopped; and the persons engaged in it are driven to agriculture as their only means of sustaining life. the consequence is, that manufactured commodities become scarce and dear, from non-production. at the same time, agricultural commodities become superabundant and cheap, from over-production and want of a market. thus an abundant currency, and a scanty currency, produce directly opposite effects upon the prices of agricultural commodities, on the one hand, and manufactures, on the other. the _abundant_ currency makes manufactures various, abundant, and cheap, from increased production; while it raises the prices of agricultural commodities, by withdrawing laborers from the production of them, and also by creating a body of purchasers and consumers, to wit, the manufacturers. on the other hand, a _scanty_ currency drives men from manufactures into agriculture, and thus causes manufactures to become scarce and dear, from non-production; and, at the same time, causes agricultural commodities to fall in price, from over-production, and want of a market. but whether, on the one hand, agricultural commodities are rising, and manufactured commodities are falling, under an abundant currency; or whether, on the other hand, manufactured commodities are rising, and agricultural commodities are falling, under a scanty currency, the value of the currency itself, dollar for dollar, remains the same in both cases. the value of the currency, in either of these cases; is fixed, not at all by the amount in circulation, but by its value relatively to gold. and the value of gold, in any particular country, is fixed by its value as a metal, and its value in the markets of the world; and not at all by any greater or less quantity of paper that may be in circulation in that country. section . but it is not alone agricultural _products_ that rise in price under an abundant currency. real estate also, of all kinds--agricultural, manufacturing, and commercial--rises under an abundant currency, and falls under a scanty currency. the reasons are these: _agricultural_ real estate rises under an abundant currency, because agricultural products rise under such a currency, as already explained. _manufacturing_ real estate rises under an abundant currency, simply because--money being the great instrumentality of manufacturing industry--that industry is active and profitable under an abundant currency. _commercial_ real estate rises under an abundant currency, because, under such a currency, commerce, the exchange and distribution of agricultural and manufactured commodities, is active and profitable. _railroads_, also, rise under an abundant currency, because, under such a currency, the transportation of freight and passengers is increased. on the other hand, all kinds of real estate fall in price under a scanty currency, for these reasons, to wit: agricultural real estate falls, because, manufactures having been in a great measure stopped, and the manufacturers driven into agriculture, there is little market for agricultural products, and those products bring only a small price. manufacturing real estate falls, because, manufacturing industry having become impossible for lack of money, manufacturing real estate is lying dead, or unproductive. commercial real estate falls, because commerce, the exchange and distribution of agricultural and manufactured commodities, has ceased. railroads fall in price, because, owing to the suspension of manufactures and commerce, there is little transportation of either freight or passengers. thus it will be seen that an abundant currency creates a great rise in agricultural products, and in all kinds of real estate--agricultural, manufacturing, and commercial, (including railroads); and, at the same time, causes manufactured commodities to become various, abundant, and cheap. while, on the other hand, a scanty currency causes agricultural commodities, and all kinds of real estate, to fall in price; and, at the same time, makes manufactured commodities scarce and dear. it is a particularly noticeable fact, that those who claim that an abundant paper currency inflates the prices of _all_ commodities, relatively to gold, never find it convenient to speak of the variety, abundance, and cheapness of manufactures, that exist under an abundant currency; but only of the high prices of agricultural commodities, and real estate. the whole subject of prices--a subject that is very little understood, and that has been forever misrepresented, in order to justify restraints upon the currency, and keep it in a few hands--deserves a more extensive discussion; but the special purposes of this pamphlet do not admit of it here. but enough has probably now been said, to show that the great changes that take place in prices, under an abundant currency, on the one hand, and a scanty currency, on the other, are not occasioned at all by any change in the value of the currency itself--dollar for dollar--provided the currency be equal in value to coin. enough, also, it is hoped, has been said, to show to all holders of either agricultural, manufacturing, or commercial real estate (including railroads), that the greater or less value of their property depends almost wholly upon the abundance or scarcity of currency; and that, inasmuch as, under the system proposed, they have the power, in their own hands, of creating probably all the currency that can possibly be used in manufactures and commerce, they have no one but themselves to blame, if they suffer the value of their property to be destroyed by any such narrow and tyrannical systems of currency and credit as those that now prevail, or those that have always heretofore prevailed. by using their real estate as banking capital, they can not only get an income from it, in the shape of interest on money, but by supplying capital to mechanics and merchants, they create a large class who will pay high prices for agricultural products, and high prices and rents for manufacturing and commercial real estate; and who will also supply them, in return, with manufactured commodities of the greatest variety, abundance, and cheapness. it is, therefore, mere suicide for the holders of real estate, who have the power of supplying an indefinite amount of capital for mechanics and merchants--and who can make themselves and everybody else rich by supplying it--to suffer that power to be usurped by any such small body of men as those who now monopolize it, through mere favoritism, corruption, and tyranny, on the part of the government, and not because they have any claim to it. chapter iv. security of the system. supposing the property mortgaged to be ample, the system, as a system, is absolutely secure. the currency would be absolutely incapable of insolvency; for there could never be a dollar of the currency in circulation, without a dollar of capital (productive stock) in bank, which _must_ be transferred in redemption of it, unless redemption be made in specie. the capital _alone_, be it observed--independently of the notes discounted--must always be sufficient to redeem the entire circulation; for the circulation can never exceed the capital (productive stock). but the notes discounted are also holden by the trustees, and the proceeds of them must be applied to the redemption of the circulation. supposing, therefore, the capital to be sufficient, and the notes discounted to be solvent, the redemption of the circulation is doubly secured. what guarantee, then, have the public, for the sufficiency of the mortgages? they have these, viz.: . the mortgages, composing the capital of a bank, will be matters of public record, and everybody, _in the neighborhood_, will have the means of judging for himself of the sufficiency of the property holden. if the property should be insufficient, the bank would be discredited at once; for the abundance of solvent currency would be so great, that no one would have any inducement to take that which was insolvent or doubtful. . by the articles of association, all the mortgages that make up the capital of a bank, are made mutually responsible for each other; because, if any one mortgage proves insufficient, no dividend can afterwards be paid to any of the bankers (mortgagors), until that deficiency shall have been made good by the company. the effect of this provision will be, to make all the founders of a bank look carefully to the sufficiency of each other's mortgages; because no man will be willing to put in a good mortgage of his own, on equal terms with a bad mortgage of another man's, when he knows that his own mortgage will have to contribute to making good any deficiency of the other. the result will be, that the mortgages, that go to make up the capital of any one bank, _will be either all good, or all bad_. if they are _all good_, the solvency of the bank will be apparent to all _in the vicinity_; and the credit of the bank will at once be established _at home_. if the mortgages are _all bad_, that fact, also, will be apparent to everybody _in the vicinity_, and the bank is at once discredited _at home_. from the foregoing considerations, it is evident that nothing is easier than for a _good_ bank to establish its credit, _at home_; and that nothing is more certain than that a _bad_ bank would be discredited, _at home_, from the outset, and could get no circulation at all. it is also evident that a bank, that has no credit at home, could get none abroad. there is, therefore, no danger of the public being swindled by bad banks. a bank that is well founded, and that has established its credit at home, has so many ways of establishing its credit abroad, that there is no need that they be all specified here. the mode that seems most likely to be adopted, is the following, viz.: when the capital shall consist of mortgages, it will be very easy for all the banks, in any one state, to make their solvency known _to each other_. there would be so many banks, that some _system_ would naturally be adopted for this purpose. perhaps this system would be, that a standing committee, appointed by the banks, would be established in each state, to whom each bank in the state would be required to produce satisfactory evidence of its solvency, before its bills should be received by the other banks of the state. when the banks, or any considerable number of the banks, of any particular state--massachusetts, for instance,--shall have made themselves so far acquainted with each other's solvency, as to be ready to receive each other's bills, they will be ready to make a still further arrangement for their mutual benefit, viz: to unite in establishing one general agency in boston, another in new york, and others in philadelphia, baltimore, cincinnati, chicago, st. louis, new orleans, san francisco, &c., &c., where the bills of all these massachusetts banks would be redeemed, either from a common fund contributed for the purpose, or in such other way as might be found best. and thus the bills of all the massachusetts banks would be placed at par at all the great commercial points. each bank, belonging to the association, might print on the back of its bills, "_redeemable at the massachusetts agencies in boston, new york, philadelphia, &c._" in this way, all the banks of each state might unite to establish a joint agency in every large city, throughout the country, for the redemption of all their bills. in doing so, they would not only certify, but make themselves responsible for, the solvency of each other's bills. the banks might safely make _permanent_ arrangements of this kind with each other; because the _permanent_ solvency of all the banks might be relied on. the permanent solvency of all the banks might be relied on, because, under this system, a bank (whose capital consists of mortgages), once solvent, is necessarily forever solvent, unless in contingencies so utterly improbable as not to need to be taken into account. in fact, in the ordinary course of things, every bank would be growing more and more solvent; because, in the ordinary course of things, the mortgaged property would be constantly rising in value, as the wealth and population of the country should increase. the exceptions to this rule would be so rare as to be unworthy of notice. there is, therefore, no difficulty in putting the currency, furnished by each state, at par throughout the united states. at the general agencies, in the great cities, the redemption would, doubtless, _so far as necessary_, be made in specie, _on demand_; because, at such points, especially in cities on the sea-board, there would always be an abundance of specie in the market as merchandise; and it would, therefore, be both for the convenience and interest of the banks to redeem in specie, on demand, rather than transfer a portion of their capital, and then pay interest on that capital until it should be redeemed, or bought back, with specie. often, however, and very likely even in the great majority of cases, a man from one state--as california, for example,--presenting massachusetts bills for redemption at a massachusetts agency--either in boston, new york, or elsewhere--would prefer to have them redeemed with bills from his own state, california, rather than with specie. if the system were adopted throughout the united states, the banks of each state would be likely to have agencies of this kind in all the great cities. each of these agencies would exchange the bills of every other state for the bills of its own state; and thus the bills of each state would find their way home, without any demand for their redemption in specie having ever been made. where railroads were used as capital, all the banks in the united states could form one association, of the kind just mentioned, to establish agencies at all the great commercial points, for the redemption of their bills. of course each railroad would receive the bills of all other roads, for fare and freight. thus all railroad currency, under this system, would be put at par throughout the united states. chapter v. the system as a credit system. section . perhaps the merits of the system, as a credit system, cannot be better illustrated than by comparing the amount of loanable capital it is capable of supplying, with the amount which the present "national" banks (so called) are capable of supplying. if we thus compare the two systems, we shall find that the former is capable of supplying more than fifty times as much credit as the latter. thus the entire circulation authorized by all the "national" banks,[e] is but three hundred and fifty-four millions of dollars ($ , , ). [e] exclusive of the so-called "gold" banks, which are too few to be worthy of notice. but the real estate and railroads of the country are probably worth twenty thousand millions of dollars ($ , , , ). this latter sum is fifty-six times greater than the former; and is all capable of being loaned in the form of currency. calling the population of the country forty millions ( , , ), the "national" system is capable of supplying not quite _nine_ dollars ($ ) of loanable capital to each individual of the whole population. the system proposed is capable of supplying five hundred dollars ($ ) of loanable capital to each individual of the whole population. supposing one half the population (male and female) to be sixteen years of age and upwards, and to be capable of producing wealth, and to need capital for their industry, the "national" system would furnish not quite eighteen dollars ($ ) for each one of them, on an average. the other system is capable of furnishing one thousand dollars ($ , ) for each one of them, on an average. supposing the adults (both male and female) of the country to be sixteen millions ( , , ), the "national" system is capable of furnishing only twenty-two dollars and twelve and a half cents ($ . - / ) to each one of these persons, on an average. the system proposed is capable of furnishing twelve hundred and fifty dollars ($ , ) to each one, on an average. supposing the number of _male_ adults in the whole country to be eight millions ( , , ), the "national" system is capable of furnishing only forty-four dollars and twenty-five cents ($ . ) to each one. the other system is capable of furnishing twenty-five hundred dollars ($ , ) to each one. the present number of "national" banks is little less than two thousand ( , ). calling the number two thousand ( , ), and supposing the $ , , of circulation to be equally divided between them, each bank would be authorized to issue $ , . under the proposed system, the real estate and railroads of the country are capable of furnishing one hundred thousand ( , ) banks, having each a capital of two hundred thousand dollars ($ , ); or it is capable of furnishing one hundred and twelve thousand nine hundred and ninety-four ( , ) banks, having each a capital ($ , ), equal, on an average, to the capital of the present "national" banks. that is, this system is capable of furnishing fifty-six times as many banks as the "national" system, having each the same capital, on an average, as the "national" banks. calling the number of the present "national" banks two thousand ( , ), and the population of the country forty millions ( , , ), there is only one bank to , people, on an average; each bank being authorized to issue, on an average, a circulation of $ , . under the proposed system, we could have one bank for every five hundred ( ) persons; each bank being authorized to issue $ , ; or $ , each more than the "national" banks. these figures give some idea of the comparative capacity of the two systems to furnish credit. under which of these two systems, now, would everybody, who needs credit, and deserves it, be most likely to get it? and to get all he needs to make his industry most productive? and to get it at the lowest rates of interest? the proposed system is as much superior to the old specie paying system (so called)--in respect to the amount of loanable capital it is capable of supplying--as it is to the present "national" system. section . but the proposed system has one other feature, which is likely to be of great practical importance, and which gives it a still further superiority--as a credit system--over the so-called specie paying system. it is this: the old specie paying system (so called) could add to the loanable capital of the country, _only by so much currency as it could keep in circulation, over and above the amount of specie that it was necessary to keep on hand for its redemption_. but the amount of loanable capital which the proposed system can supply, hardly depends at all upon the amount of its currency that can be kept in circulation. it can supply about the same amount of loanable capital, even though its currency should be returned for redemption immediately after it is issued. it can do this, because the banks, _by paying interest on the currency returned for redemption_--or, what is the same thing, by paying dividends on the productive stock transferred in redemption of the currency--can postpone the payment of specie to such time as it shall be convenient for them to pay it. all that would be necessary to make loans practicable on this basis, would be, that the banks should receive a higher rate of interest on their loans than they would have to pay on the currency returned for redemption; that is, on the productive stock transferred in redemption of the currency. the rate of interest _received_ by the banks, on the loans made by them, would need to be so much higher than that _paid_ by them, on currency returned for redemption, as to make it an object for them to loan more of their currency than could be kept in circulation. subject to this condition, the banks could loan their entire capitals, whether much or little of it could be kept in circulation. for example, suppose the banks should pay _six_ per cent. interest on currency returned for redemption--(or as dividends on the productive stock transferred in redemption of such currency)--they could then loan their currency at _nine_ per cent. and still make _three_ per cent. profits, even though the currency loaned should come back for redemption immediately after it was issued. but this is not all. even though the banks should _pay_, on currency returned for redemption, precisely the same rate of interest they _received_ on loans--say _six_ per cent.--they could still do business, if their currency should, on an average, continue in circulation _one half the time for which it was loaned_; for then the banks would get three per cent. net on their loans, and this would make their business a paying one. but the banks would probably do much better than this; for bank credits would supersede all private credits; and the diversity and amount of production would be so great that an immense amount of currency would be constantly required to make the necessary exchanges. and whatever amount should be necessary for making these exchanges, would, of course, remain in circulation. however much currency, therefore, should be issued, it is probable that, on an average, it would remain in circulation more than half the time for which it was loaned. or if the banks should pay _six_ per cent. interest on currency returned for redemption; and should then loan money, for _six_ months, at _eight_ per cent. interest; and this currency should remain in circulation but one month; the banks would then get eight per cent. for the one month, and two per cent. net for the other five months; which would be equal to three per cent. for the whole six months. or if the currency should remain in circulation two months, the banks would then get eight per cent. for the two months, and two per cent. net for the other four months; which would be equal to four per cent. for the whole six months. or if the currency should remain in circulation three months, the banks would then get eight per cent. for three months, and two per cent. net for the other three months; which would be equal to five per cent. for the whole six months. or if the currency should remain in circulation four months, the banks would then get eight per cent. for the four months, and two per cent. net for the other two months; which would be equal to six per cent. for the whole six months. or if the currency should remain in circulation five months, the banks would then get eight per cent. for the five months, and two per cent. net for the other month; which would be equal to seven per cent. for the whole six months. the banks would soon ascertain, by experiment, how long their currency was likely to remain in circulation; and what rate of interest it was therefore necessary for them to charge to make their business a paying one. and that rate, whatever it might be, the borrowers would have to pay. subject to this condition, the banks could always loan their entire capitals. chapter vi. amount of currency needed. it is of no use to say that we do not need so much currency as the proposed system would supply; because, first, if we should not need it, we shall not use it. every dollar of paper will represent specific property that can be delivered on demand in redemption of it, and that will have the same market value as gold. the paper dollar, therefore, will have the same market value as the gold dollar, or as a dollar's worth of any other property; and no one will part with it, unless he gets in exchange for it something that will serve his particular wants better; and no one will accept it, unless it will serve his particular wants better than the thing he parts with. no more paper, therefore, can circulate, than is wanted for the purchase and sale of commodities at their true and natural values, as measured by gold. secondly, we do not know at all how much currency we do need. that is something that can be determined only by experiment. we know that, heretofore, whenever currency has been increased, industry and traffic have increased to a corresponding extent. and they would unquestionably increase to an extent far beyond any thing the world has ever seen, if only they were aided and permitted by an adequate currency. we, as yet, know very little what wealth mankind are capable of creating. it is only within a hundred years, or a little more, that any considerable portion of them have really begun to invent machinery, and learned that it is only by machinery that they can create any considerable wealth. but they have not yet learned--at least, they profess not to have learned--that money is indispensable to the practical employment of machinery; that it is as impossible to operate machinery without money, as it is to operate it without wind, water, or steam. when they shall have learned, and practically accepted, this great fact, and shall have provided themselves with money, wealth will speedily become universal. and it is only those who would deplore such a result, or those who are too stupid to see the palpable and necessary connection between money and manufacturing industry, who resist the indefinite increase of money. it is scarcely a more patent fact that land is the indispensable capital for agricultural industry, than it is that money is the indispensable capital for manufacturing industry. practically, everybody recognizes this fact, and virtually acknowledges it; although, in words, so many deny it. men as deliberately and accurately calculate the amount of machinery that a hundred dollars in money will operate, as they do the amount of machinery that a ton of coal, or a given amount of water, will operate. they calculate much more accurately the amount of manufactured goods a hundred dollars will produce, than they do the amount of grain, grass, or vegetables an acre of land will produce. they no more expect to see mechanics carrying on business for themselves without money, than they do to see agricultural laborers carrying on farming without land, or than they do to see sailors going to sea without ships. they know that all mechanical, as well as agricultural, laborers, who have not the appropriate capital for their special business, must necessarily stand idle, or become mere wage-laborers for others, at such particular employments as the latter may dictate, and at such prices as the latter may see fit to pay. all these things attest the perfect knowledge that men have, that a money capital is indispensable to manufacturing industry; whatever assertions they may make to the contrary. they know, therefore, that prohibitions upon money are prohibitions upon industry itself; that there can be no such thing as freedom of industry, where there is not freedom to lend and hire capital for such industry. every one knows, too--who knows any thing at all on such a subject--that it is, intrinsically, as flagrant a tyranny, as flagrant a violation of men's natural rights, for a government to forbid the lending and hiring of money for manufacturing industry, as it is to forbid the lending and hiring of land, or agricultural implements, for agricultural industry, or the lending and hiring of ships for maritime industry. they know that it is as flagrant a tyranny, as flagrant a violation of men's natural rights, to forbid one man to lend another money for mechanical industry, as it would be to forbid the former to lend the latter a house to live in, a shop to work in, or tools to work with. it is, therefore, a flagrant, manifest tyranny, a flagrant, manifest violation of men's natural rights, to lay any conditions or restrictions whatever upon the business of banking--that is, upon the lending and hiring of money--except such as are laid upon all other transactions between man and man, viz.: the fulfilment of contracts, and restraints upon force and fraud. a man who is without capital, and who, by prohibitions upon banking, is practically forbidden to hire any, is in a condition elevated but one degree above that of a chattel slave. he may live; but he can live only as the servant of others; compelled to perform such labor, and to perform it at such prices, as they may see fit to dictate. and a government, which, at this day, subjects the great body of the people--or even any portion of them--to this condition, is as fit an object of popular retribution as any tyranny that ever existed. to deprive mankind of their natural right and power of creating wealth for themselves, is as great a tyranny as it is to rob them of it after they have created it. and this is done by all laws against honest banking. all these things are so self-evident, so universally known, that no man, of ordinary mental capacity, can claim to be ignorant of them. and any legislator, who disregards them, should be taught, by a discipline short, sharp, and decisive, that his power is wholly subordinate to the natural rights of mankind. it is, then, one of man's indisputable, natural rights to lend and hire capital in any and every form and manner that is intrinsically honest. and as money, or currency, is the great, the indispensable instrumentality in the production and distribution of wealth; as it is the capital, the motive power, that sets all other instrumentalities in motion; as it is the one thing, without which all the other great agencies of production--such as science, skill, and machinery--are practically paralyzed; to say that we need no more of it, and shall have no more of it, than we now have, is to say that we need no more wealth, and shall have no more wealth, and no more equal or equitable distribution of wealth, than we now have. it is to say that the mass of mankind--the laborers, the producers of wealth--need not to produce, and shall not be permitted to produce, wealth for themselves, but only for others. for a government to limit the currency of a people, and to designate the individuals (or corporations) who shall have the control of that currency, is, manifestly, equivalent to saying there shall be but so much industry and wealth in the nation, and that these shall be under the special control, and for the special enjoyment, of the individuals designated; and, of course, that all other persons shall be simply their dependants and servants; receiving only such prices for their property, and such compensation for their labor, as these few holders of the currency shall see fit to give for them. the effect of these prohibitions upon money, and consequently upon industry, are everywhere apparent in the poverty of the great body of the people. at the present time, the people of this country certainly do not produce one third, very likely not one fifth, of the wealth they might produce. and the little they do produce is all in the hands of a few. all this is attributable to the want of currency and credit, and to the consequent want of science, skill, machinery, and working capital. of the twenty million persons, male and female, of sixteen years of age and upwards--capable of producing wealth--certainly not one in five has the science, skill, implements, machinery, and capital necessary to make his or her industry most effective; or to secure to himself or herself the greatest share in the products of his or her own industry. a very large proportion of these persons--nearly all the females, and a great majority of the males--persons capable of running machinery, and of producing each three, five, or ten dollars of wealth per day, are now without science, skill, machinery, or capital, and are either producing nothing, or working only with such inferior means, and at such inferior employments, as to make their industry of scarcely any value at all, either to themselves or others, beyond the provision of the coarsest necessaries of a hard and coarse existence. and this is all owing to the lack of money; or rather to the lack of money and credit. there are, doubtless, in the country, ten million ( , , ) persons, male and female--sixteen years of age and upwards--who are naturally capable of creating from three to five dollars of wealth per day, if they had the science, skill, machinery, and capital which they ought to have, and might have; but who, from the want of these, are now creating not more than one dollar each per day, on an average; thus occasioning a loss, to themselves and the country of from twenty to forty millions of dollars per day, for three hundred days in a year; a sum equal to from six to twelve thousand millions per annum; or three to six times the amount of our entire national debt. and there are another ten million of persons--better supplied, indeed, with capital, machinery, &c., than the ten million before mentioned--but who, nevertheless, from the same causes, are producing far less than they might. the aggregate loss to the country, from these causes, is, doubtless, equal to from ten to fifteen thousand millions per year; or five, six, or seven times the amount of the entire national debt. in this estimate no account is taken of the loss suffered from our inability--owing simply to a want of money--to bring to this country, and give employment to, the millions of laborers, in europe and asia, who desire to come here, and add the products of their labor to our national wealth. it is, probably, no more than a reasonable estimate to suppose that the nation, as a nation, is losing twenty thousand millions of dollars ($ , , , ) per annum--about ten times the amount of our national debt--solely for the want of money to give such employment as they need, to the population we now have, and to those who desire to come here from other countries. among the losses we suffer, from the causes mentioned, the non-production of new inventions is by no means the least. as a general rule, new inventions are made only where money and machinery prevail. and they are generally produced in a ratio corresponding with the amount of money and machinery. in no part of the country are the new inventions equal in number to what they ought to be, and might be. in three fourths of the country very few are produced. in some, almost none at all. the losses from this cause cannot be estimated in money. the government, in its ignorance, arrogance, and tyranny, either does not see all this, or, seeing it, does not regard it. while these thousands of millions are being lost annually, from the suppression of money, and consequently of industry, and while three fourths of the laborers of the country are either standing idle, or, for the want of capital, are producing only a mere fraction of what they might produce, a two-pence-ha'-penny secretary of the treasury can find no better employment for his faculties, than in trying, first, to reduce the rate of interest on the public debt one per cent.--thereby saving twenty millions a year, _or fifty cents for each person, on an average_! and, secondly, in paying one hundred millions per annum of the principal; that is, _two and a half dollars for each person, on an average_! and he insists that the only way to achieve these astounding results, is to deprive the people at large of money! to destroy, as far as possible, their industry! to deprive them, as far as possible, of all power to manufacture for themselves! and to compel them to pay, to the few manufacturers it has under its protection, fifty or one hundred per cent. more for their manufactures than they are worth! he has been tugging at this tremendous task four years, or thereabouts. and he confidently believes that if he can be permitted to enforce this plan for a sufficient period of years, in the future, he will ultimately be able to save the people, annually, _fifty cents each, on an average, in interest_! and also continue to pay, annually, _two dollars and a half for each person, on an average_, of the principal, of the national debt! he apparently does not know, or, if he knows, it is, in his eyes, a matter of comparatively small moment, that this saving of $ , , per annum in interest, and this payment of $ , , per annum of principal, which he proposes to make on behalf of the people, are not equal to what _two days_--or perhaps even _one day_--of their industry would amount to, if they were permitted to enjoy their natural rights of lending and hiring capital, and producing such wealth as they please for themselves. he apparently does not know, or, if he knows, it is with him a small matter, that if the people were permitted to enjoy their natural freedom in currency and credit, and consequently their natural freedom in industry, they could pay the entire national debt three, four, or a half dozen times over _every year_, more easily than they can save the $ , , , and pay the $ , , , annually, by the process that he adopts for saving and paying them. and yet this man, and his policy, represent the government and its policy. the president keeps him in office, and congress sustain him in his measures. in short, the government not only does not offer, but is apparently determined not to suffer, any such thing as freedom in currency and credit, or, consequently, in industry. it is, apparently, so bent upon compelling the people to give more for its few irredeemable notes than they are worth; and so bent upon keeping all wealth, and all means of wealth, in the hands of the few--upon whose money and frauds it relies for support--that it is determined, if possible, to perpetuate this state of things indefinitely. and it will probably succeed in perpetuating it indefinitely--under cover of such false pretences as those of specie payments, inflation of prices, reducing the interest, and paying the principal, of the national debt, &c.--unless the people at large shall open their eyes to the deceit and robbery that are practised upon them; and, by establishing freedom in currency and credit--and thereby freedom in industry and commerce--end at once and forever the tyranny that impoverishes and enslaves them. chapter vii. importance of the system to massachusetts. section . the tariffs, by means of which a few monied men of massachusetts have so long plundered the rest of the country, and on which they have so largely relied for their prosperity, will not much longer be endured. the nation at large has no need of tariffs. money is the great instrumentality for manufacturing. and the nation needs nothing but an ample supply of money--in addition to its natural advantages--to enable our people to manufacture for themselves much more cheaply than any other people can manufacture for us. to say nothing of the many millions who, if we had the money necessary to give them employment, might be brought here from europe and asia, and employed in manufactures, more than half the productive power of our present population--in the south and west much more than half--is utterly lost for the want of money, and the consequent want of science, skill, and machinery. and yet those few, who monopolize the present stock of money, insist that they must have tariffs to enable them to manufacture at all. and the nation is duped by these false pretences. to give bounties to encourage manufactures, and at the same time forbid all but a favored few to have money to manufacture with, is just as absurd as it would be to give bounties to encourage manufactures, and at the same time forbid all but a favored few to have machinery of any kind to manufacture with. it is just as absurd as it would be to give bounties to encourage agriculture, and at the same time forbid all but a favored few to own land, or have cattle, horses, seed corn, seed wheat, or agricultural implements. it is just as absurd as it would be to give bounties to encourage navigation, and at the same time forbid all but a favored few to have ships. the whole object of such absurdities and tyrannies is to commit the double wrong of depriving the mass of the people of all power to manufacture for themselves, and at the same time compel them to pay extortionate prices to the favored few who are permitted to manufacture. when tariffs shall be abolished, massachusetts will have no means of increasing her prosperity, nor even of perpetuating such poor prosperity as she now has,[f] except by a great increase of money; such an increase of money as will enable her skilled laborers and enterprising young men to get capital for such industries and enterprises as they may prefer to engage in here, rather than go elsewhere. [f] i say "poor prosperity," because the present prosperity of massachusetts is not only a dishonest prosperity, but is also only the prosperity of the few, and not of the many. even if massachusetts were willing to manufacture for the south and west, _without a tariff_, she could hope to do so only until the south and west should supply themselves with money. so soon as they shall supply themselves with money, they will be able to manufacture for themselves more cheaply than massachusetts can manufacture for them. their natural advantages for manufacturing are greatly superior to those of massachusetts. they have the cheap food, coal, iron, lead, copper, wool, cotton, hides, &c., &c. they lack only money to avail themselves of these advantages. and, under the system proposed, their lands and railroads are capable of supplying all the money they need. and they will soon adopt that, or some other system. and they will then not only be independent of massachusetts, but will be able to draw away from her her skilled laborers, and enterprising young men, unless she shall first supply them with the money capital necessary for such industries and enterprises as may induce them to remain. they will, of course, go where they can get capital, instead of staying where they can get none. so great are the natural advantages of the south and west over those of massachusetts, that it is doubtful how many of these men can be persuaded to remain, by all the inducements that capital can offer. but without such inducements it is certain they will all go. and massachusetts has no means of supplying this needed money, except by using her real estate as banking capital. it is, therefore, plainly a matter of life or death to the holders of real estate in massachusetts to use it for that purpose; for their real estate will be worth nothing when the skilled labor and the enterprising young men of massachusetts shall have deserted her. all this is so manifest as to need no further demonstration. and massachusetts will do well to look the facts in the face before it is too late. section . what prospect has massachusetts under the present "national" system? the comptroller of the currency, in his last annual report, says, that of the $ , , of circulation authorized by law, massachusetts has now $ , , . he says, further, that this is more than four times as much as she would be entitled to, if the currency were apportioned equally among the states, according to population; more than twice as much as she would be entitled to, if the circulation were apportioned among the states, according to their wealth; and three times as much as she is entitled to upon an apportionment made--as apportionments are now professedly made--half upon population, and half upon wealth. the comptroller further says, that a law of congress, passed july , , requiring him to withdraw circulation from those states having more than their just proportion, and to distribute it among those now having less than their just proportion, will require him to withdraw "from thirty-six banks in the city of boston, $ , , ; [and] from fifty-three country banks of massachusetts, $ , , ." thus the law requires $ , , to be withdrawn from the present banks of massachusetts. when this shall have been done, she will have but $ , , left. and as this will be more than three times her just proportion on a basis of population, and nearly twice her just share on a basis of wealth, there is no knowing how soon the remaining excess over her just share may be withdrawn.[g] [g] if the excess mentioned in the text should not be withdrawn, it will be only because the system is so villainous in itself, that other parts of the country will not accept the shares to which they are entitled. by the census of , massachusetts had a population of , , . she has now, doubtless, a population of , , . calling her population , , , the $ , , of circulation which she now has, is equal to $ for each person, on an average. when $ , , of this amount shall have been withdrawn, as the law now requires it to be, the circulation will be reduced to less than $ for each person, on an average. if the circulation should be reduced to the proportion to which massachusetts is entitled, on the basis of wealth--that is, to $ , , --she will then have less than $ for each person, on an average. if the circulation should be reduced to the proportion to which massachusetts is entitled on a basis of population--that is to $ , , --she will then have a trifle less than $ for each person, on an average. for years the industry of massachusetts has been greatly crippled for the want of bank credits, although her banks have been authorized to issue their notes to the amount of $ , , ; or $ to each person, on an average. what will her industry be when her banks shall be authorized to issue only $ , , , or $ for each person, on an average? what will it be, if her bank issues shall be reduced to her proportion on a basis of wealth, to wit, $ , , ; or less than $ for each person, on an average? or what will it be, if her bank circulation shall be reduced to her proportion on a basis of population, to wit, to $ , , ; or less than $ for each person, on an average? in contrast with such contemptible sums as these, massachusetts, under the system proposed, could have nine hundred millions ($ , , ) of bank loans;[h] that is, $ for every man, woman, and child, on an average; or $ , to each adult, male and female, on an average; or $ , to each _male_ adult, on an average. [h] since the notes on page fifth were printed, the _boston journal_, of jan. , , says that, by the valuation of , the real estate of massachusetts is $ , , , . which, now, of these two systems is most likely to secure and increase the prosperity of massachusetts? which is most likely to give to every deserving man and woman in the state, the capital necessary to make their industry most productive to themselves individually, and to the state? which system is most likely to induce the skilled laborers and enterprising young men of massachusetts to remain here? and which is most likely to drive them away? section . but the whole is not yet told. the present "national" system is so burdened with taxes and other onerous conditions, that no banking at all can be done under it, except at rates of interest that are two or three times as high as they ought to be; or as they would be under the system proposed. the burdens imposed on the present banks are probably equal to from six to eight per cent. _upon the amount of their own notes that they are permitted to issue_. in the first place, they are required, for every $ of circulation, to invest $ in five or six per cent. government bonds.[i] this alone is a great burden to all that class of persons who want their capital for active business. it amounts to actual prohibition upon all whose property is in real estate, and therefore not convertible into bonds. and this is a purely tyrannical provision, inasmuch as real estate is a much safer and better capital than the bonds. let us call this a burden of _two per cent. on their circulation_. [i] at first they were required to invest only in _six_ per cent. bonds. but more recently they have been coerced or "persuaded" to invest sixty-five millions ($ , , ) in _five_ per cent. bonds. and very lately it has been announced that "the comptroller of the currency will not hereafter change united states bonds, deposited as security for circulating notes of national banks, except upon condition of substituting the new five per cents. of the loan of july , , and january , ."--_boston daily advertiser of february , ._ from this it is evident that all the banks are to be "persuaded" into investing their capitals in _five_ per cent. bonds. next, is the risk as to the permanent value of the bonds. any war, civil or foreign, would cause them to drop in value, as the frost causes the mercury to drop in the thermometer. even any danger of war would at once reduce them in value. let us call this risk another burden of _one per cent. on the circulation_. next, every bank in seventeen or eighteen of the largest cities--boston among the number--are required to keep on hand, at all times, a reserve--_in dead capital_ (legal tenders)--"equal to at least twenty-five per centum," and all other banks a similar reserve "equal to at least fifteen per centum," "of the aggregate amount of their _notes in circulation, and of their deposits_." doubtless, two thirds--very likely three fourths--of all the bank circulation and deposits are in the seventeen cities named. and as these city banks are required to keep a reserve of dead capital equal to twenty-five per cent., and all others a similar reserve equal to fifteen per cent., _both on their circulation and deposits_, this average burden on all the banks is, doubtless, equal to _two per cent. on their circulation_. next, the banks are required to pay to the united states an annual tax of one per cent. on their average circulation, and half of one per cent. on the amount of their deposits. here is another burden equal to at least _one and a half per cent. on their circulation_. then the capitals of the banks--the united states bonds--are made liable to state taxes to any extent, "not at a greater rate than is assessed upon the monied capital in the hands of individual citizens of such state." this tax is probably equal to _one per cent. on their circulation_. here, then, are taxes and burdens equal to _seven and a half per cent. on their circulation_. next, the banks are required to make at least _five_ reports annually, to the comptroller of the currency, of their "resources and liabilities." also reports of "the amount of each dividend declared by the association." then, too, the banks are restricted as to the rates of interest they are permitted to take. then "congress may at any time alter, amend, or repeal this act;" and thus impose upon the banks still further taxes, conditions, restrictions, returns, and reports. or it may at pleasure abolish the banks altogether. all these taxes, burdens, and liabilities, cannot be reckoned at less than _eight or nine per cent. on the circulation of the banks_; a sum two or three times as great as the rate of interest ought to be; and two or three times as great as it would be under the system proposed. and yet the banks must submit to all these burdens as a condition of being permitted to loan money at all. and they must make up--in their rates of interest--for all these burdens. under this system, therefore, the rate of interest must always be two or three times as high as it ought to be. the objections to the system, then, are, first, that it furnishes very little loanable capital; and, second, that it necessarily raises the interest on that little to two or three times what it ought to be. such a system, obviously, could not be endured at all, but for these reasons, viz.: first, that, being a monopoly, those holding it are enabled to make enormous extortions upon borrowers; and, secondly, that these borrowers--most of whom are the bankers themselves--employ the money in the manufacture and sale of goods that are protected, by tariffs, from foreign competition, and for which they are thus enabled to get, say, fifty per cent. more than they are worth. in this way, these bank extortions and tariff extortions are thrown ultimately upon the people who consume the goods which the bank capital is employed in producing and selling. thus the joint effect of the bank system and the tariff is, first, to deprive the mass of the people of the money capital that would enable them to manufacture for themselves; and, secondly, to compel them to pay extortionate prices for the few manufactures that are produced. under the system proposed, all these things would be done away. the west and the south, that are now relied on to pay all these extortions, would manufacture for themselves. their lands and railroads would enable them to supply all the manufacturing capital that could be used. and they could supply it at one half, or one third, the rates now required by the "national" banks. of course, massachusetts could not--under the "national" system--manufacture a dollar's worth for the south and west. she could not keep her manufacturing laborers. they would all go where they could get cheap capital, cheap supplies, and good markets. and then the manufacturing industry of massachusetts, and with it the value of her real estate, will have perished from the natural and legitimate effect of her meanness, extortion, and tyranny. looking to the future, then, there is no state in the union--certainly none outside of new england--that has a greater interest in supplying her mechanics with the greatest possible amount of capital; or in supplying it at the lowest possible rates of interest. and this can be done only by using her real estate as banking capital. chapter viii. the true character of the "national" system. section . under the "national" system there are less than , banks. but let us call them , . calling the population of the country forty millions, there is but one bank to , people. and this one bank is, _in law_, a person; and only a single person. in lending money, it acts, and can act, only as a unit. its several stockholders cannot act separately, as so many individuals, in lending money. so far, therefore, as this system is concerned, _there is but one money lender for twenty thousand people_! of these , people, ten thousand (male and female) are sixteen years of age and upwards, capable of creating wealth, and requiring capital to make their labor most productive. yet, so far as this system is concerned, there is but one person authorized to lend money to, or for, these ten thousand, who wish to borrow. and this one money lender is one who, proverbially "has no soul." it is not a natural human being. it is a legal, an artificial, and not a natural, person. it is neither masculine nor feminine. it has not the ordinary human sympathies, and is not influenced by the ordinary human motives of action. it is no father, who might wish to lend money to his children, to start them in life. it is no neighbor, who might wish to assist his neighbor. it is no citizen, who might wish to promote the public welfare. it is simply a nondescript, created by law, that wants money, and nothing else. moreover, it has only $ , to lend to these , borrowers; _that is, a fraction less than $ , on an average, for each one_! what chance of borrowing capital have these ten thousand persons, who are forbidden to borrow, except from this one soulless person, who has so little to lend? if money lenders must be soulless--as, perhaps, to some extent, they must be--it is certainly of the utmost importance that there be so many of them, and that they may have so much money to lend, as that they may be necessitated, by their own selfishness, to compete with each other, and thus save the borrowers from their extortions. but the "national" system says, not only that the money lender shall be a soulless person, and one having only a little money to lend, but that he shall also have the whole field--a field of , borrowers--entirely to himself! it says that this soulless person shall have this whole field to himself, notwithstanding he has so little money to lend, and notwithstanding there are many other persons standing by, having, in the aggregate, fifty times as much money to lend as he; and desiring to lend it at one half, or one third, the rates he is demanding, and extorting! it says, too, that he shall have this whole field to himself, notwithstanding that ninety-nine one-hundredths of those who desire to borrow, are sent away empty! and are thereby condemned--so far as such a system can condemn them--to inevitable poverty! section . but further. each one of these , legal, or artificial, persons, who alone are permitted to _lend_ money, is made up of, say, fifty actual, or natural, persons, to whom alone, it is well known, that this legal person will lend it! these , legal persons, then, who alone are permitted to lend money, are made up of , actual persons, who alone are to borrow it. these , actual persons, who compose the legal persons, do not, then, become bankers because they have money to lend to others, but only because they themselves want to borrow! thus when the system says that they alone shall lend, it virtually says that they alone shall borrow; because it is well known that, in practice, they _will_ lend only to themselves. in short, it says that only these , men--or one in four hundred of the population--shall have liberty either to lend, or borrow, capital! such capital as is indispensable to every producer of wealth, if he would control his own industry, or make his labor most productive. consequently, it says, practically--so far as it is in its power to say--that only one person in four hundred of the population shall be permitted to have capital; or, consequently, to labor directly for himself; and that all the rest of the four hundred shall be compelled to labor for this one, at such occupations, and for such wages, as he shall see fit to dictate. in short, the system says--as far as it can say--that only , persons--only one person in four hundred of the population--_shall be suffered to have any money_! and, consequently, that all the property and labor of the thirty-nine million nine hundred thousand ( , , ) persons shall be under the practical, and nearly absolute, control of these , persons! it says that thirty-nine million nine hundred thousand ( , , ) persons shall be in a state of industrial and commercial servitude (to the , ), elevated but one degree above that of chattel slavery. and this scheme is substantially carried out in practice. these , men call themselves "_the business men_" of the country. by this it is meant, not that they are the producers of wealth, but only that they alone handle the money! other persons are permitted to sell only to them! to buy only of them! to labor only for them! and to sell to, buy of, and labor for, them, only at such prices as these , shall dictate. these , so called "_business men_," not only own the government, but they _are_ the government. congress is made up of them, and their tools. and they hold all the other departments of the government in their hands. their sole purpose is power and plunder; and they suffer no constitutional or natural law to stand in the way of their rapacity. how many times, during the last presidential canvass, were we told that "_the business men_" of the country wished things to remain as they were? having gathered all power into their own hands, having subjected all the property and all the labor of the country to their service and control, who can wonder that they were content with things as they were? that they did not desire any change? and their money and their frauds being omnipotent in carrying elections, there was no change. these , "business men," having secured to themselves the control of all bank credits, and thereby the control of all business depending on bank loans; having also obtained control of the government, enact that foreigners shall not be permitted to compete with them, by selling goods in our markets, except under a disadvantage of fifty to one hundred per cent. and this is the industrial and financial system which the "national" bank system establishes--so far as it can establish it. and this is the scheme by means of which these , men cripple, and more than half paralyze, the industry of forty millions of people, and secure to themselves so large a portion of the proceeds of such industry as they see fit to permit. chapter ix. amasa walker's opinion of the author's system. as mr. amasa walker is considered the highest authority in the country, in opposition to all paper currency that does not represent gold or silver actually on hand, it will not be impertinent to give his opinion of the system now proposed. he reviewed it in a somewhat elaborate article, entitled "_modern alchemy_," published in the _bankers magazine (n. y.)_ for december, . that he had no disposition to do any thing but condemn the system to the best of his ability, may be inferred from the following facts. after describing the efforts of the old alchemists to transmute the baser metals into gold, he represents all attempts to make a useful paper currency as attempts "_to transmute paper into gold_." he says that the idea that paper can be made to serve the purposes of money is "_a perfectly cognate idea_" with that of the old alchemists, that the baser metals can be transmuted into gold. (p. .) he also informs us that-- "it is perfectly impracticable _to transmute paper into gold_ to any extent or degree whatever, and that all attempts to do so (beneficially to the trade and commerce of the world) are as absurd and futile as the efforts of the old alchemists to change the baser metals into the most precious." (p. ). these extracts are given to show the spirit and principle of his article, and the kind of arguments he employs against all paper that represents other property than coin; even though that property have equal value with coin in the market. yet he says:-- "one thing we cheerfully accord to mr. spooner's system--_it is an honest one_. here is no fraud, no deception. _it makes no promise that it cannot fulfil._ it does not profess to be convertible into specie [on demand]. it is the best transmutation project we have seen." (p. ). when he says that "it is the best _transmutation_ project he has seen," the context shows that he means to say that it _comes nearer to transmuting paper into gold_, than any other system he has seen. this admission, coming from so violent an opponent of paper currency, may reasonably be set down as the highest commendation that _he_ could be expected to pay to any _paper_ system. he also says:-- "many schemes of the same kind have, at different times, been presented to the world; but none of them have been more complete in detail, or more systematically arranged, than that of mr. spooner. (p. ). but by way of condemning the system as far as possible, he says:-- "mr. spooner, however, can, we think, make no claim to originality, so far as the general principle is concerned. the famous bank of john law, in france, was essentially of the same character." (p. .) no, it was _not_ essentially of the same character. one difference--to say nothing of twenty others--between the two systems was this: that law's bank issued notes that it had no means to redeem; whereas mr. walker himself admits that "mr. spooner's _system makes no promises that it cannot fulfil_." that is to say, it purports to represent nothing except what it actually represents, viz.: property that is actually on hand, and can always be delivered, _on demand_, in redemption of the paper. is not this difference an "essential" one? if mr. walker thinks it is not, he differs "essentially" from the rest of mankind. what fault was ever found with john law's bank, except that it could not redeem its paper? will mr. walker inform us? successful stock speculation _by_ j. j. butler _written april _ _published december _ _published by_ national bureau of financial information broadway, new york city _this book is not copyrighted_ we believe the principles expounded in this book are of immense value to everyone who buys speculative securities, and we do not object to anyone reproducing any part of it, whether or not we are given credit for it. national bureau of financial information transcriber's note: minor typographical errors have been corrected without note. variant spellings have been retained. bold text has been indicated as +bold+. contents part introductory chapters chapter page i. the purpose of this book ii. what is speculation iii. some terms explained iv. a correct basis for speculating part what and when to buy and sell v. what stocks to buy vi. what stocks not to buy vii. when to buy stocks viii. when not to buy stocks ix. when to sell stocks part influences affecting stock prices x. movements in stock prices xi. major movements in prices xii. the money market and stock prices xiii. minor movements in prices xiv. technical conditions xv. manipulations part topics of interest to speculators xvi. marginal trading xvii. short selling xviii. bucket shops xix. choosing a broker xx. puts and calls xxi. stop loss orders part concluding chapters xxii. the desire to speculate xxiii. two kinds of traders xxiv. possibilities of profit xxv. market information xxvi. successful speculation _part one_ introductory chapters chapter i. the purpose of this book this book is written for the purpose of giving our clients some ideas of the fundamental principles that guide us when we select stocks for them to buy, but these principles are valuable to every person who trades in listed stocks or in any other kind of speculative stocks. first of all, we want you to get a clear conception of the meaning of the word speculation, which is explained in the next chapter. our purpose is to protect you against losses as well as to enable you to make profits, and it is very important that you understand how to provide for safety in your speculating. it is a well known fact that there are tremendous losses in stock speculation, but we claim that almost all of these losses would be avoided if all speculators were guided by the principles expounded in this book. "what" and "when" are two very important words in stock speculation, and we cannot urge upon you too strongly to study carefully chapters v. to ix. chapters x. to xv. tell you much about the influences that affect the prices of stocks, a knowledge of which should also be a guide to you in making your selections. perhaps the most important chapter in the entire book is xxv., on market information. a careful reading of this chapter should convince you that much of the prevailing information about the stock market is misleading. that fact alone accounts for many of the losses in stock speculation. it has been our aim to state all facts briefly. the entire book is not long, and it will not require much of your time to read it through carefully. we are sure you will get many ideas from it that will help you. chapter ii. what is speculation? to speculate is to theorize about something that is uncertain. we can speculate about anything that is uncertain, but we use the word "speculation" in this book with particular reference to the buying and selling of stocks and bonds for the purpose of making a profit. when people buy stocks and bonds for the income they get from them and the amount of that income is fixed, they are said to invest and not to speculate. in nearly all investments there is also an element of speculation, because the market price of investments is subject to change. "investment" also conveys the idea of holding for some time whatever you have purchased, while speculation conveys the idea of selling for a quick profit rather than holding for income. to the minds of most people, the word "speculation" conveys the thought of risk, and many people think it means great risk. the dictionary gives for one of the meanings of speculation, "a risky investment for large profit," but speculation need not necessarily be risky at all. the author of this book once used the expression, "stock speculating with safety," and he was severely criticized by a certain financial magazine. evidently the editor of that magazine thought that "speculating" and "safety" were contradictory terms, but the expression is perfectly correct. stock speculating with safety is possible. of course, we all know that the word "safety" is seldom used in an absolute sense. we frequently read such expressions as: "the elevators in modern office buildings are run with safety." "it is possible to cross the ocean with safety." "you can travel from new york to san francisco in a railroad train with safety." and yet accidents do occur and people do lose their lives in elevators, steamships, and railroad trains. because serious accidents are comparatively rare, we use the word "safety." in like manner it is possible to purchase stocks sometimes when it is almost certain that the purchaser will make a profit, and that is "stock speculating with safety." when liberty bonds were selling in the 's, many people bought them for speculation. they were not taking any risk, except the slight risk that the market price might go still lower before it would go higher, and that did not involve any risk for those who knew they could hold them. the fact that the market prices of liberty bonds would advance was based upon an economic law that never fails. that law is that when interest rates go up, the market prices of bonds go down, and when interest rates go down, the market prices of bonds go up. when liberty bonds were selling in the 's, interest rates were so very high, it was certain that they would come down. that the market prices of liberty bonds would go up was also certain, but nobody could tell how much they would go up in a given time. it was that element of uncertainty that made them speculative, and not that there was any doubt about the fact that the market prices of them would go up. buying liberty bonds at that time was speculating with safety. if you read this book with understanding, you will know much about speculating with safety. chapter iii. some terms explained there are certain terms used in connection with stock speculation that are very familiar to those who come in contact with stock brokers, and yet are not always familiar to those who do business by mail. undoubtedly the majority of our readers are familiar with these terms, but we give these definitions for the benefit of the few who are not familiar with them. trader: a person who buys and sells stocks is usually referred to as a trader. the word probably originated when it was customary to trade one stock for another and later was used to refer to a person who sold one stock and bought another. he was a trader; but the person who buys stocks for a profit and sells them and takes his profit when he gets an opportunity, may not be a trader in the strict sense of the word. however, for convenience, we use the word "trader" in this book to refer to any one who buys or sells stocks. speculator: this word refers to a person who buys stocks for profit, with the expectation of selling at a higher price, without reference to the earnings of the stock. he may sell first, with the expectation of buying at a lower price, as explained in chapter xvii. on "short selling." in many cases where we use the word "trader," it would be more correct to use the word "speculator." investor: an investor differs from a speculator in the fact that he buys stocks or bonds with the expectation of holding them for some time for the income to be derived from them, without reference to their speculative possibilities. we believe that investors always should give some consideration to the speculative possibilities of their purchases. it frequently is possible to get speculative profits without increase of risk or loss of income. bull: one who believes that the market price of stocks will advance is called a bull. of course, it is possible to be a bull in one stock and a bear in another. the word is used very frequently with reference to the market, a bull market meaning a rising market. bear: the opposite of a bull is a bear. it refers to a person who believes that the market value of stocks will decline, and a bear market is a declining market. lambs: "lambs" refers to that part of the public that knows so little about stock speculating that they lose all their money sooner or later. the bulls and bears get them going and coming. if the lambs would read this book carefully, they would discover reasons why they lose their money. long and short: those who +own+ stocks are said to be long, and those who +owe+ stocks are said to be short. short selling is explained in chapter xvii. odd lot: stocks on exchanges are sold in certain lots. on the new york stock exchange, shares is a lot; and on the consolidated stock exchange, shares is a lot. less than these amounts is an odd lot. when you sell an odd lot you usually get / less than the market price; and when you buy an odd lot, you usually pay / more than the market price; that is, / of a dollar on each share where prices are quoted in dollars. point: it is a common expression to say that a stock went up or down a point, which means a dollar in a stock that is quoted in dollars, but a cent in a stock that is quoted in cents, as many of the stocks are on the new york curb. in cotton quotations, a point is / part of a cent. for instance, if cotton is quoted at . , it means cents and / of a cent per pound, and if it went up points the quotation would be . . reaction: every person who has traded in listed stocks probably is familiar with this word. it means to act in an opposite direction, but it is used especially to refer to a decline in the price of a stock that has been going up. rally: "rally" is the opposite of the sense in which "reaction" usually is used. when a stock is going down and it turns and goes up, it is called a rally. commitment: this term is used referring to a purchase of stock. it is more commonly used by investment bankers when they contract to buy an issue, but the term sometimes is used by traders. floating supply: the stock of a company that is in the hands of that part of the public who is likely to sell, is referred to as floating supply. chapter iv. a correct basis for speculating we maintain that there is only one basis upon which successful speculation can be carried on continually; that is, never to buy a security unless it is selling at a price below that which is warranted by assets, earning power, and prospective future earning power. there are many influences that affect the movements of stock prices, which are referred to in subsequent chapters. all of these should be studied and understood, but they should be used as secondary factors in relation to the value of the stock in which you are trading. if the market price of any stock is far below its intrinsic value and there is no reason why the future should bring about a change in this value that will decrease it, then you may be certain that important influences are working against the market price of the stock for the time being. in the course of time the market price will go up towards the real value. this matter will be more fully explained in subsequent chapters. you always should keep in mind the fact that when you buy a stock at a higher price than its intrinsic value, you are taking a risk. the stock may have great future possibilities, but it is risky to buy stocks when present assets and earnings do not warrant their market prices, no matter how attractive prospective future earnings may appear. however, the possibilities of profit sometimes are so great that one is justified in taking this risk. it is our belief that the majority of traders buy stocks because they are active in the market and somebody said they were a good buy, even though the real values may not be nearly as much as the market prices. as an example of this kind of trading, we want to call your attention to a news item that appeared in a new york paper. it stated that on april st, some brokers in detroit, as an april fool joke, gave out a tip to buy a. f. p., meaning april fool preferred, but when asked what it meant, replied "american fire protection." of course, there was no such stock, but there was active trading in it until the joke was discovered. evidently it is not necessary to list a stock on the detroit stock exchange in order to trade in it. this story may or may not be true, but we believe the statement that people trade in stocks they do not know anything about is true. you should be careful not to buy a stock merely because somebody says it is a good thing to buy, unless the person making the statement is in the business of giving information on stocks, because it may be only a rumor with no substantial basis. of course, if many people act on the rumor, there will be active trading in the stock, and it is frequently for that purpose that such rumors are started. _part two_ what and when to buy and sell chapter v. what stocks to buy in deciding what stocks to buy, it is well to consider first the classes of stocks, and then what particular stocks you should buy in the classes you select. we would first of all divide all stocks into two classes, those listed on the new york stock exchange and those not listed on the new york stock exchange. as a rule, it is better to buy stocks listed on the new york stock exchange, although there are frequent exceptions to this rule. then, the stocks listed on the new york stock exchange may be divided into classes, such as railroad stocks, public utility stocks, motor stocks, tire stocks, oil stocks, copper stocks, gold stocks, and so forth. at certain times certain stocks are in a much more favorable condition than at other times. in , when the industrial stocks were selling at a very high price, the public utility stocks and gold stocks were selling low, because it was impossible to increase incomes in proportion to the increase in operating costs. but since the beginning of , the condition of these two classes of stocks has been improving and the market has reflected that improvement. at the time of this writing (early in april, ) we are recommending the stocks of only a very few manufacturing companies; but we are recommending a number (not all) of the railroad and public utility stocks, and a few specially selected stocks among the other classes. in every instance, when you make a selection, you should consider the company's assets, present earnings, and prospective future earnings, and then take into consideration all the influences that affect price movements, as explained in subsequent chapters. chapter vi. what stocks not to buy a great deal more can be said about stocks you should not buy than about stocks you should buy, because the list is very much larger. stocks not listed on the new york stock exchange, as a rule, should not be bought by a careful speculator, but as stated in the previous chapter, there are exceptions to that rule. billions of dollars have been lost in the past by buying stocks that have become worthless. a few years ago a list of defunct securities was compiled, and it took two large volumes in which to enumerate them. new ones have been added to them every year. therefore, it is very important that you should give careful thought to the subject of what stocks +not+ to buy. nearly all promotion stocks (stocks in new companies) are a failure. an extremely small percentage of them are very successful, and the successful ones are referred to in the advertising of the new ones; but, on the basis of average, the chances are you will lose your money entirely in promotion stocks. we believe that most of the promotion companies are started in perfectly good faith, although some of them are swindles from the beginning; but no matter how honest and well meaning the organizers are, the chances of success are against them. therefore, we say that promotion stocks should not be bought by the ordinary man who is looking for a good speculation, because his chances of making a large profit with a minimum risk are very much better when he buys stocks listed on the new york stock exchange and uses good judgment in doing so. among the listed stocks there are many you should not buy. first of all, eliminate them by classes. do not buy the classes of stocks that are selling too high now. you may say that there are some exceptions in all classes. that may or may not be so, but in any event, you have a better chance of profiting by confining most of your purchases to the classes of stocks that are in the most favorable position. as a rule, when stocks are first listed, they sell much higher than they do a short time afterwards. of course, that is not always true. it is more likely to be true when a stock is listed during a very active market, when prices are more easily influenced by publicity. the high price of it is usually due to the fact that publicity is given to it, and as soon as the effect of this publicity wears off, the market price of the stock declines. it is a good rule never to buy stocks that brokers urge you to buy. your own common sense ought to tell you that a stock that is advertised extensively by brokers is likely to sell up in price while the advertising is going on and will drop in price just as soon as the advertising stops. many people notice that and they think they can profit by buying when the advertising starts and sell out when they get a good profit, but the majority of them lose money. the stock may not respond to the advertising, or if it does go up, they may wait too long before selling. those who do sell and make % or % profit in a very short time are almost sure to lose it all in an effort to repeat the transaction. many of those who read this know it is true from their own experience. you should leave such stocks strictly alone. you may win once or twice, but you are sure to lose if you keep it up. as a rule stocks of this kind have very little value and the brokers who boost them make their own money from the losses of their foolish followers. chapter vii. when to buy stocks stocks should be bought when they are cheap. by being cheap, we mean that the market price is much less than the intrinsic value. in chapters x. to xv. we talk about influences that affect the price movements of stocks. by studying these carefully you should be able to decide when stocks generally are cheap. of course, not all stocks are cheap at the same time, but the majority of listed stocks do go up and down at the same time, as a rule. at the time of this writing (in the early part of april, ) there are a great many stocks listed on the new york stock exchange that are selling at prices much less than their intrinsic values, but there are some stocks that should not be bought now, nor at any other time. there are some stocks listed on the new york stock exchange now that perhaps have no intrinsic value and never will have any. nevertheless we consider that right now[ ] is one of the times for buying stocks. there are unusual bargains to be had, although keen discrimination is necessary in order to be able to pick out the bargains. as a usual thing, it is a good time to buy stocks when nearly everybody wants to sell them. when general business conditions are bad, trading on the stock exchanges very light, and everybody you meet appears to be pessimistic, then we advise you to look for bargains in stocks. the last six months of was an unusually good time for buying stocks. it is well known that the large interests accumulate stocks at such times. they buy only when the stocks are offered at a low price and try not to buy enough at any one time to give an appearance of activity in the market, but they buy continually when the market is very dull. it seems to be characteristic of human nature to think that business conditions are going to continue just as they are. when business is bad, nearly everybody thinks business will be bad for a long time, and when business is good, nearly everybody thinks business will be good almost indefinitely. as a matter of fact, conditions are always changing. it never is possible for either extremely good times nor for extremely bad times to continue indefinitely. you can buy stocks cheaper when there is very little demand for them, and you should arrange your affairs so as to be prepared to buy at such times. footnotes: [ ] in our advisory letter of april , , we advised our clients to refrain from margin buying for a while, because the market was advancing too rapidly. shortly after that there was a decided reaction in the market. chapter viii. when not to buy stocks there are times when stocks should not be bought, and that is when nearly all stocks have advanced beyond their real values. it is doubtful if there ever is a time when all stocks have advanced beyond their real values, but when the great majority of stocks have so advanced, there is likely to be a general decline in all stock prices. the stocks that are not selling too high will decline some in sympathy with the others. therefore, there are times when we advise our clients not to buy any stocks. some organizations giving advice in regard to the buying of stocks, advise their clients to refrain entirely from buying for periods of a year or longer, but we think it is seldom advisable to refrain entirely from buying for any great length of time. there usually are some good opportunities if you watch carefully for them. it is our business to watch for these opportunities and tell our clients about them. there are also times when the technical condition of the market is such that we advise our clients to refrain from buying for a while. see chapter xiv. chapter ix. when to sell stocks you should sell stocks when the market price is too high. that is a general rule, but it is necessary for you to study all the influences affecting stock prices to be able to decide more accurately when you should sell your stocks. we give you, in future chapters, much more information on judging the markets. another general rule, is to sell stocks when nearly everybody is buying them. it is a well known fact that the great majority of people buy stocks near the top and sell near the bottom. naturally when everybody is optimistic, stocks will sell up high, but sooner or later they will come down again, and when everything looks very promising is a good time to sell. it is better to lose a little of the profit that you might have made by holding on longer than not to be on the safe side. the man who tries to sell at the top nearly always loses, because stocks seldom sell as high as it is predicted they will, or, in other words, the prediction of higher prices is advanced more rapidly than the prices. we remember reading in , when u. s. steel sold up around $ a share, a prediction that it was going to sell up to $ a share. probably many people who read such news items consider them seriously. of course, that was a most exaggerated prediction, but during the extreme activity of a bull market, it seems that nearly everybody is talking in exaggerated terms of optimism. that is why most traders seldom ever take their profits in a bull market. they wait until stock prices start to come down, and then they are likely to think there will be rallies, and keep on waiting until they lose all their profits. on the other hand, some people make the mistake of selling too soon. just because your purchase shows a liberal profit is no reason why you should sell. the stock may have been very cheap when you bought it. in , peoples gas sold below $ . those who bought it then were able to double their money by the close of , and many sold out and took their profits. of course, if they invested the proceeds in other stocks that were just starting upward, they may not have lost anything, but there was no particular reason for selling peoples gas at that time. the public utilities generally were coming into their own, and nearly all of them were regarded by economic students as having unusual opportunities for profit. then again, it is not always a mistake to sell a stock in order to get funds to put into something else that seems more promising, even though the stock you sell is likely to go much higher. it is very important that you should try to sell your stocks at the right time. that is the main thing to keep in mind and it is better to sell too soon than too late. don't be too greedy and hold on for a big profit. read chapter xxiv. on the "possibilities of profit." _part three_ influences affecting stock prices chapter x. movements in stock prices it is due to the fact that stock prices constantly move up or down that speculation is possible. sometimes certain stocks remain almost at a standstill for a long period of time, but at least a part of the stocks listed on the exchanges move either up or down. if one always could tell just what way they were going to move, it would be comparatively easy to make a fortune within a short time. in the last twenty years, a great deal of time and money has been spent by statistical organizations in checking up statistics for the purpose of ascertaining a definite basis upon which to predict future movements in stock prices. several of these organizations use very different statistics upon which to base their conclusions, and yet their conclusions are very similar. they have proved beyond any question of doubt that some of these movements are clearly indicated by laws that never fail. we do not attempt in this book to explain the fundamental statistics upon which the predictions of business cycles are based, but in the next five chapters we explain some of the influences that affect the movements in stock prices. read these chapters very carefully, for your success in stock speculation will depend very largely upon your correct prediction of these movements. chapter xi. major movements in prices stock prices move up and down in cycles. these are the major movements in prices, but there may be many minor movements up and down within the major movements. these stock price movements nearly always precede a change in business conditions; that is, an upward movement in stock prices is an indication that business conditions are going to improve, and a downward movement in stock prices is an indication that business conditions are going to get worse. at the present writing, we are in a period of improvement. stock prices began to go up in august, . the upward movement has been slow, but gradual. in a period of seven months, forty representative stocks show an upward movement of about points, although business has not shown much improvement. a steady upward movement in stock prices is a sure sign that business conditions are beginning to improve, even though that improvement is not noticeable. these major stock movements are not an exact duplicate of any previous ones, and it is impossible to tell how long they will last or just what course they will take. certain influences could change a period of improvement into a period of prosperity very quickly. a period of prosperity is noted for high prices, high wages, and increasing production in all lines. everybody is optimistic. most people spend their money freely, and that makes times better. as prices go up and business increases, more money is required in business and interest rates go up. as a consequence, when interest rates go up, bond prices go down. during this period, speculative stocks are selling at their highest prices; and under the influence of this movement, many stocks that have no actual value sell up at high prices. of course, wise speculators sell all their stocks during this period. following a period of prosperity comes a period of decline. the first sign of it usually is a severe break in the stock market. at that time general business is running along at top speed and there is no sign of a let-up, but this break in the stock market should be a warning. most people think the break is merely a temporary reaction--they may refer to it as a healthy reaction--and they start buying stocks again, and put the market up, but it does not go up as high as it was before the break occurred. when stock prices do not rally beyond the prices at which they were before the break occurred, it is a sign that the turning point has been reached and that the bear market has started, although the majority of people do not realize this until a long time afterwards. next comes a period of depression, when we have low prices, low wages, hard times, tight money, and many commercial failures. many people who lost all their money during the speculation period, become thrifty and economize during the period of depression, and start in to save again. nearly everybody is pessimistic during this period. trading on the stock exchange is irregular and as a rule very light. this is the time to get stock bargains, but the general public as a rule doesn't take advantage of it. people are scared and think prices will go still lower. the big interests accumulate stocks during this period, and sell them during the period of prosperity. chapter xii. the money market and stock prices perhaps no other one thing influences the movement of stock prices so much, in a large way, as money conditions. it is impossible to have a big bull market without plenty of money. during a bull market nearly all stocks are bought on margin, which is explained in chapter xvi. this makes it necessary for brokers to borrow large sums of money. when money is tight, it is impossible to get enough to carry on a large movement in stocks. you will see, therefore, that the federal reserve bank has it in its power to regulate the stock market to some extent. in speculation was carried very much further than it should have been, but undoubtedly it would have been much worse had the federal reserve bank not raised interest rates and urged member banks to withdraw money from wall street. while there was considerable criticism of that action, it certainly was a good thing for the entire country. in a period of depression, the banks accumulate money, and there always is an abundance of money at the beginning of a bull market. during a period of prosperity the banks' reserves decrease and their loans increase. when you see these reserves go down to a very low point, it is usually time for you to sell your stocks. chapter xiii. minor movements in prices within the major movements of stock prices, there always are several minor movements, which are caused by various influences. one of the important causes is the technical condition of the market. another cause might be called a psychological one. when stocks are moving up steadily in a bull market, people closely connected with the market expect a reaction and watch for it. the newspapers predict it. consequently, there is sufficient let-up in buying to allow the pressure of selling by the bears to bring it about. however, the desire to buy during reactions is so general, many people rush in to buy and this buying, in addition to the covering by the shorts, puts the market up again; and if conditions are favorable for a bull market, prices will go up much higher than they were before. in like manner, we have rallies in bear markets. of course the professional bears sell during these rallies, with the expectation of buying later at a cheaper price. these minor price changes mean more to the majority of traders than the major movements. the major movements are so slow that people get out of patience, and yet those who are guided only by the major movements are operating on a much safer basis. we believe that a greater amount of money can be made, with a minimum risk, by being guided principally by the major movements, while taking advantage of the minor movements in a minor way. however, stocks do not move uniformly and there frequently is an opportunity to buy some particular stock at a bargain when nearly all stocks are selling too high. we try to pick out these opportunities for our clients. reports of earnings by various companies influence stock prices, as does also the paying of extra dividends or the passing up of dividends. a peculiar psychological influence is noticed when a company declares an extra dividend. the price of the stock usually goes up, while as a matter of fact the intrinsic value of the stock is decreased by the amount of this dividend; and sometimes it is advisable to sell a stock shortly after an advance in its dividend rate. chapter xiv. technical conditions technical conditions refer to the conditions that usually affect the supply and demand, such as short interests, floating supply, and stop loss orders. it is sometimes said that supply and demand must be equal or else there could not be any sales, but that is not so. there are always some people who are willing to sell at some price above the market who will not sell at the market; and when the demand for stock is greater than the supply, it goes up until it is supplied by some of these people who are holding it at a higher price. it works the same way when the supply is greater than the demand. there are always some people who will buy at some price below the market. therefore, when the supply is greater than the demand prices must go down. a stock may have an intrinsic value of $ a share and yet be selling at $ a share, and it can never sell higher than $ until all stock that is offered at that price is bought. however, you should keep this in mind: if the real value is $ a share, sooner or later the market price will approach that figure. that is why we so strongly urge our clients to buy stocks that have actual values, or at least prospective values far greater than their market prices, and either to buy them outright or margin them very heavily, and then hold them until the prices do go up. of course, when one finds that a mistake has been made, the sooner one sells and takes a loss the better. chapter xv. manipulations stock prices are influenced largely by manipulation. years ago when the volume of trading on the new york stock exchange was small compared with what it is today, it was possible to influence the entire market by manipulation, but it would be very difficult to do that today. it is only certain stocks that are manipulated; but if conditions are favorable, many other stocks may be influenced by them. there are different kinds of manipulation. one is for the insiders of a company to give out unfavorable news about their company if they want the price of the stock to go down, so that they can buy it in; or to give out very favorable news if they want the price to go up, so that they can sell out. this method is not practiced now to the extent that it was years ago. public opinion is strongly opposed to it, and we believe business men are acquiring a higher standard of business ethics. methods of this kind are legal but they are morally reprehensible. another method of manipulation is the forming of pools to buy in the stock of a company and force it up. if the market price of a stock is far below its real value, we believe it is justifiable for a pool to force it up, but the ordinary pool is merely a scheme to rob the public. there are four periods to the operation of such pools. first is the period of accumulation. a number of large holders of stock in a certain company will pool their stock, all agreeing not to sell except from the pool, in which all benefit proportionately. then they give out bad news about the company. that is very easy to do, because financial writers usually accept the news that is given to them without much investigation, especially writers on daily papers, because they have not the time to investigate. their copy must be ready in a few hours after they get the information. see chapter xxv. on "market information" for fuller explanation of the reason why financial news usually is misleading. the manipulators of stock prices can have financial news "made to order." when the general public reads this news and sees the stock going down, many of them get discouraged and sell. it is just the time they should not sell, but it is a well known fact that the majority of people do in the stock market just what they should not do. the more they sell the more the price goes down, and the pool operators accumulate the stock. having secured all the stock they want, they give out good news and continue to buy the stock until it starts to go up. the public reads this favorable news, and seeing the stock go up, will go into the market and buy, which puts it up higher. all the time financial writers are supplying good news about the stock and the public buys it. after they have sold all of it, the public may still be anxious for more, and the pool operators may go short of the stock. then they will begin giving out bad news, so that they can buy in stock at a lower price to cover their short interests. after that they have very little interest in the market. if it is declining too fast, they may support it occasionally by buying some stock and giving out some favorable news. that will make the market rally and they will sell out the newly acquired stock near the top of the rally. manipulations of this kind appear to be going on nearly all the time, and there does not seem to be any limit to the number of suckers who fall for them. but then, one can't blame the public when you realize how thoroughly unreliable is most of the market information given to them. still another kind of manipulation is "one-man" manipulation, where one man controls companies, which are known as "one-man" companies. usually the directors of these companies are friends or employees of his, and in many instances he has their resignations in his possession, so that they must do whatever he wants them to do. owing to the strict rules of the new york stock exchange, it is rather difficult for such manipulations to be carried on there. but there have been many of them on the new york curb. when the curb was operating on the street and was not under very much control, manipulations of this kind were very frequent. as an example, suppose a man of this kind has a mining company. when he wants the stock to go up, he sends the stockholders a great deal of information about the work at the mine, and perhaps sends them a telegram when a new vein of rich ore is found. the stockholders rush in to buy more stock, and that puts the price up. then he unloads stock on them to the extent that they will buy it. in a day or two, the stock may drop back to less than one half of what it was selling at. if this "one-man" manipulator wants to buy any stock, he will give out a little unfavorable news, and he can get stock at his own price. after that the news is good or bad according to whether the manipulator wants to buy or sell, but as a rule he has an abundance of stock that he wants to sell, and is continually giving out good news. a few years ago there was a man operating in new york who promoted several companies and manipulated them in a large way. he is out of business now, but the same thing is still done in a smaller way. it is our opinion that more money is lost by the public in manipulated stocks than in promotion stocks, and we read a great deal about the enormous losses in them. promotions that are failures may be perfectly legitimate and conducted in the utmost good faith, but manipulations are nearly always for the purpose of swindling the public. however, the lure of them is so great many people cannot withstand the temptations of them even after they have been "trimmed" several times. _part four_ topics of interest to speculators chapter xvi. marginal trading most people who trade in stocks buy on margin. the ordinary minimum margin is about % of the purchase price, because banks usually lend about % of the market value of stocks. if you put up % of the purchase price of your stocks with your broker, he has to pay the other %, but he can do that by borrowing that amount from his bank, and putting up the stock as security. in this way brokers are able to handle all the margin business that comes to them, as long as money can be borrowed. of course, there are some stocks that are not accepted by banks as collateral for loans, and you should not expect your broker to sell such stocks on margin. in fact, if he offers to do so, it looks as though he were running a bucket shop. see chapter xviii. many people think that buying stocks on margin is gambling and that people should not do it for that reason, but buying on margin is done in all lines of business, although it may not be known under that name. if you bought stock outright, but borrowed % of the purchase price from your banker to complete your payment for it and put up the stock with him as security, you would be buying on margin just the same. in like manner, if you bought a home and paid % with money you had and borrowed the other % of the purchase price, you would be buying a home on margin. the principal difference is that when you buy from a broker on margin, one of the conditions of his contract is that he has the right to sell your stock provided the market price drops down to the amount that you owe on the stock, whereas if you borrow money on a home, it is usually for a certain specified time and the lender cannot sell you out until that time expires. however, in principle, there is very little difference between the two transactions. most margin traders do not put up sufficient margin. if you put up only the minimum margin, your broker has the right to call on you for more margin if the price of the stock declines at all. unless you are fully prepared at all times to put up an additional margin when called upon, you should make smaller purchases and put up a heavy margin when you buy. the amount of margin depends upon the transaction, but we advise from % to %, and at times we advise not less than % margin on any purchase. in fact there are times when we advise not to buy stocks on margin at all. those who wish to be entirely free from worry should buy stocks when the prices are very low, pay for them in full, get their certificates, and put them away in a safe deposit box. however, when stocks are low the risk in buying on a liberal margin is very small, and the possibilities of profit are so much greater, we do not see any objection to taking advantage of this method of trading. chapter xvii. short selling by short selling, we mean selling a stock that you do not possess, with the intention of buying it later. short selling in general business is very common, and we think nothing of it. manufacturers frequently sell goods that are not yet made, to be delivered at some future time. selling stocks short is a similar transaction, except that in a majority of cases delivery of the stock must be made immediately. however, your broker can attend to that by borrowing the stock. as explained in the preceding chapter, when the market is active most of the trading is done on margin. your broker buys a stock for you, but as he has to pay for it in full, it is customary for him to take it to his bank and borrow money on it. a bank usually lends about % of the market value, but if some other broker wants to borrow this stock, he will lend the full value of it. if that particular stock is very scarce and hard to get, the lender of the stock may get the use of the money without any interest. therefore, there is an advantage to the broker in lending stock, and for that reason it is nearly always possible for a broker to arrange delivery of stock for you if you wish to sell short. when you instruct him later on to buy the stock for you, he will do so and deliver it to the broker from whom he borrowed it, who will return the money he received for it. when you sell stock short and the price goes up, you will have to pay a higher price for it. therefore, to protect himself against the possibility of losing, your broker demands a payment from you just the same as you pay margin when you buy stock. short selling is something that we do not recommend very much to our clients. we think it is not advisable to do any short selling as long as there are good opportunities to make money by buying; but when all bargains disappear, as they do sometimes, you must either sell short or else keep out of the market entirely. at such times, there may be many opportunities to make money by short selling, and we do not consider that there is any reason why our clients should not take advantage of them. of course, great care must be exercised in selling stocks short. you might sell a stock short because you know the market price is % greater than its real value, but it is possible for manipulators to force it up a great deal higher; and if you are not able to put up sufficient money with your broker to protect him, he will buy at a high price and you will lose the money you have put up with him. in some instances, stocks are cornered and the short interests are forced to buy the stocks at prices that represent enormous losses. it is a common thing to read about the short interests in certain stocks. all stocks that are sold short must be bought sooner or later, and when that buying takes place, it may affect the market very much. therefore, if it is known that there is a big short interest in a certain stock, we should expect the stock to sell at a higher price; but sometimes the short interests break the market and force the price down, especially when general conditions are in their favor. chapter xviii. bucket shops there has been so much publicity given to bucket shops, nearly everybody is familiar with the term. a broker runs a bucket shop when he sells stock to his clients on margin and either never buys the stock for their accounts, or else sells it immediately after buying it. the bucket shop simply gets your money on the supposition that you are more likely to be wrong than to be right. of course, if you take the bucket shop's advice you surely are likely to be wrong. bucket shops get their clients into the very speculative stocks, where there is likely to be a great deal of fluctuation in the price of the stocks, which gives them frequent opportunities to sell out their clients. when the market is going down or when there are many movements up and down in the price of stocks, the bucket shops make money rapidly, but occasionally there is a long period when the market is working against the bucket shops, and unless they have a great deal of money they must fail. in august, , stock exchange stocks started to go up. the upward movement was very slow but it was continual. up to the time of this writing, there has not been a three-point reaction, except in a few stocks, in all of that time. without a fluctuating market, the bucket shop has no chance to clean out its customers. as a consequence, the bucket shops began to fail in the early part of , and up to the present writing (april, ) there have been more than fifty of these failures. however, it is not likely that all the bucket shops will be put out of business. the more successful ones are likely to "weather the storm." many laws have been enacted against bucket shops, and we believe some way will be found to get rid of them at some future time; but we do not expect that to happen soon, and we warn our readers not to get into their hands, because if they do not get your money away from you one way they are likely to get it some other way. the man who runs a bucket shop usually has no conscience, and it certainly is an unfortunate thing for anyone to get mixed up with such a man. chapter xix. choosing a broker it is very important that you choose a good broker. no matter how careful you are, it is possible to make a mistake. however, if you choose a broker who is a member of the new york stock exchange, you have eliminated a very large percentage of your chances of getting a wrong broker. occasionally a member of the stock exchange fails and once in a while one is suspended for running a bucket shop or being connected with one, but these instances are very rare compared with the number of brokers who get into trouble who are not members of the new york stock exchange. the rules and regulations of the stock exchange protect you to a great extent. when you buy stock on margin, you leave your money in the hands of a broker, and you should know that he is responsible. no matter who your broker is, you should get a report on him. if you are a subscriber to bradstreet's or dun's agencies, get a report from them. if you are not a subscriber to any mercantile agency, you perhaps have a friend who can get a report for you, or your bank may get one for you. banks make a practice of getting reports of this kind for their clients. when asked to do so, we send our clients the names of brokers who are members of the new york stock exchange, but we prefer not to recommend any broker. of course, we cannot guarantee that a broker is all right. we simply use our best judgment, but, as we said before, you eliminate a large percentage of your chances of going wrong when you trade with a broker who is a member of the new york stock exchange. chapter xx. puts and calls a "put" is a negotiable contract giving the holder the privilege to sell a specified number of shares of a certain stock to the maker at a fixed price, within a specified time. a "call" is the exact reverse. it is a negotiable contract giving the holder the privilege to buy a specified number of shares of a certain stock from the maker at a fixed price, within a specified time. the price fixed in a put or call is set away from the market price a certain number of points, depending upon the stock and the condition of the market. when the market is steady and not fluctuating, the price fixed is frequently only two points away, but in a more active market it is considerably more. for instance, at the present time, u. s. steel is selling at about , and you can buy a call on it at or a put at . that is by paying a certain amount, which at present is $ . , you can have the privilege of buying shares of u. s. steel at , within thirty days of the date of the purchase of your call. if steel should go up to you could have your broker buy it at and sell it at the market, and you would make a profit of four points, less the cost of your call and commissions. as a method of operating in the stock market, we do not recommend the buying of puts and calls. professional speculators may be able to use them to advantage sometimes, but for the outsider, who is not in close touch with the market, there is nothing about them to recommend. here is one point: the people who sell puts and calls fix the terms. if the market is irregular, they will set the point of buying or selling far away from the market price. these people are shrewd traders and they make the terms in their own favor. it is generally said that nearly all the buyers of puts and calls lose, and that is our opinion. therefore, we advise you to leave them alone. chapter xxi. stop loss orders a "stop-loss" is an order to your broker to sell you out if the market sells down a certain number of points. many speculators place stop loss orders only two points from the market price. the idea is that when the market starts to go down it is likely to continue going down, and by taking a two-point loss you may save a much greater loss. it also can be applied to a short sale, when you give your broker instructions to buy in the stock for you if it goes up a certain number of points. we read so much in the financial news about stop-loss orders or merely stop orders, which is the same thing, the average reader is likely to get the idea that it is something he must use for his own protection, but it is our opinion that it is something that should be used very seldom by those who trade along the broad lines recommended by us. if your purchases were made in stocks that were very cheap, you should continue to hold them in case of a reaction. if you bought them outright or on a substantial margin, you are not in danger, and you should look upon your loss merely as a paper loss. in the great majority of cases, you will be a great deal better off to hold on to your stocks than you would be if you had a stop-loss order. a large number of stop-loss orders is a good thing for the short interests. let us take u. s. steel again, as an example. suppose it is selling at and it is believed that there are a large number of stop-loss orders at . the short interests may sell the stock heavily and force it down to . then the brokers with stop-loss orders would begin to sell; that would force the price down still lower, and the short interests could buy in to cover at this lower price. therefore, we believe that stop-loss orders are a bad thing and, as a rule, do not recommend them. there is one instance where a stop-loss order can be used to advantage, and that is near the top of a bull market. it is impossible to tell when the market has reached the top. if you sell out too soon, you may lose a profit of several points. of course, it is better to do that than to take a chance of a large loss. in that case, you might instruct your broker to place a stop-loss order at two or more points below the market, and keep moving it up as the market price moves up. then when the reaction does come, he will sell you out and prevent you from losing a large part of your profit. that is about the only instance where we recommend a stop-loss order, but we do recommend it to our clients sometimes, although seldom. if the stock you own is selling at more than we would suggest that you make the stop loss order at least three points from the market, but for stocks selling below , a two-point stop-loss order might be used. however, the number of points should be decided upon in each particular case. in the special instructions to our clients, we tell them when we think they can use a stop-loss order to advantage. _part five_ concluding chapters chapter xxii. the desire to speculate it is said that the desire to speculate is very strong in the american people. that is why our country has made greater progress than any other country in the world, because progress is the result of speculation. we are not referring merely to stock speculations, but to the word in its broadest sense. every new undertaking is a speculation. an inventor speculates on what he is going to invent. often such speculations result in losses, because many inventors, or would-be-inventors, never accomplish very much. they spend their money, time, and efforts, and probably live years in poverty, and then if the invention is not profitable, they are heavy losers. many inventors spend the best years of their lives in poverty and never succeed. we hear a great deal about some of those who do succeed, but very little about those who fail--those whose speculations were unsuccessful--except when somebody accuses them of being crooks because they solicited money for the promotion of their inventions and did not succeed. it is the same thing with every new business. it is purely a speculation. it is a common saying that % of commercial undertakings fail. we do not know that that statement is correct, but there is no question but that the number of failures is very great, which shows the great risk in going into a new undertaking. it is far greater than the risk involved in stock speculating when it is done in accordance with the advice given in this book. yet, there would be no progress without speculating of this kind. if those entering a new business would make a careful study of the venture before entering it, and would exercise greater care and judgment in conducting it, the number of failures would be very much less. the same thing is true of stock speculating. the failures in stock speculating are caused mainly by ignorance and greediness. many people who would be satisfied with a fair return on their money in a business enterprise, think they ought to make a % profit in a few weeks in stock speculation. there is something about stock speculation that appeals to the greediness and pure gambling instincts of people. in the chapter on manipulation, we have told you how stock prices are put up and down. some outsider accidentally buys one of these stocks just before the price starts up. in thirty days he has made several hundred per cent profit. he does not realize that it was purely accidental as far as he was concerned, and he tries to do the same thing again, and loses all of his profits and probably all of his capital as well. a stock gambler (we use the word "gambler" to refer to a man who operates ignorantly) is watching a large number of extremely speculative stocks and suddenly notices one that takes a big jump in price. then he says to himself, "if i only had bought that stock on a ten-point margin, i would have made several hundred per cent profit." he picks out another stock that some one tells him is going to do equally as well. he buys as much of it as he can and puts up all the money he has as a margin, but the price doesn't go up. perhaps the price goes down and he loses his margin; but, it may remain almost stationary for a long period, sometimes for a year or more, and during all of this time, this man is worrying for fear he will lose his money. if he does not lose his money, it is tied up for a long time where he cannot use it to take advantage of real opportunities that come his way. it does not pay to take big risks. that is true in stock speculating the same as in any other undertaking. most speculators are keeping their minds all the time on the possibilities of profit and not thinking about the possibilities of losing. if you want to be successful in stock speculating, there is one thing you must learn to do, and that is never to think about the big profits you might have made if you had bought such and such a stock, because the probabilities are you could not have afforded to take the necessary risk in buying that stock. of course, after it is all over, it may look to you as though the buying of that stock was a sure thing, but the buying of such stocks is never a sure thing. the risk always exists. there is an old saying, and we believe a very true one, that a man who speculates with the idea of getting rich quickly loses all his money quickly, but that the man who speculates with the idea of making a fair return on his money usually gets rich. in our advice to our clients, we seldom recommend highly speculative stocks, because we consider the avoidance of loss more important than the making of profits. you may object to that statement, because you speculate to make profits, and not for the purpose of avoiding losses. nevertheless, if you are careful in keeping your losses down to a minimum, your profits are likely to be very liberal. any trader who trades for any great length of time is likely to make large profits sometimes, and yet the majority of them have greater losses than profits. it is said that more than % of all margin traders lose; but we do not consider that an argument against trading on margin, because these losses are mostly due to ignorance, greediness, and the taking of too great chances. do not suppress your desire to speculate. all progress would stop if people did not speculate. but do not speculate in stocks nor in anything else without any knowledge of what you are doing, and try to use as much good judgment and care as possible in all of your transactions. if you do not know what to do, get advice from someone who is supposed to know and who is not interested in having you buy or sell. stock speculating with safety is possible for those who make the effort to be guided by correct principles. chapter xxiii. two kinds of traders there are two kinds of stock traders. one kind nearly always makes a profit, and the other wins sometimes and loses other times, but eventually loses all if he does not change his methods. the first kind buys stocks on liberal margin or outright and is not worried when the market goes against him, because he has good reasons for believing that prices eventually will go up. if he does have to take a loss occasionally, it is likely to be small compared with his profits. the second kind wants to make a big profit quickly, and he buys stocks that he thinks are going to make big gains in the near future, but his selections are not based upon good judgment. we might designate these two traders as the careful trader and the reckless trader. the careful trader tries to get good advice on the markets and the values of stocks. if the advice appears to him to be conservative, he is guided by it; but if the reckless trader gets advice on stocks, he is not guided by it if it is of a conservative nature. if he does take advice, it is likely to be from one of those unreliable market tipsters who is very emphatic in his statements about what the market is going to do. the reckless trader lets his greed and desire for large and quick profits influence his judgment. once in a while one of these reckless traders realizes that he has made a great mistake, and he wants to change his attitude. usually he is holding several stocks that show a big loss and he does not know what to do with them. he reasons that they are selling so low now they surely will sell higher some time. perhaps his reasoning is good and perhaps it is not. the stocks may have no chance of going up for a very long time, if at all, but even though they have a good chance to go up later, it is better for him to sell them now if he can put the money derived from the sale into something else that has a better chance to make a profit. our advice is never to hesitate to sell and take a loss if you can put the proceeds from the sale into something better rather than leave it in the stock in which it is now. it is not so much a question whether or not the stock you are holding will go up, as it is whether or not you would buy that particular stock if you were just coming into the market to make a purchase. of course there is a loss of commissions when you sell a stock and buy something else, and for that reason we sometimes recommend holding a stock when we would not recommend buying it. if you have been a reckless trader in the past, the only thing for you to do is to change your methods and try to become a careful trader. it is much better to go to the extreme in carefulness and be satisfied with very small profits than to take great risks. chapter xxiv. possibilities of profit what are the possibilities of profit in stock speculation? that question is frequently asked but it is difficult to answer. james r. keene is quoted as having said: "many men come to wall street to get rich; they always go broke. others come to wall street to operate intelligently for fair returns; they usually get rich." while it is true that nearly all stock traders who try to make unusually large profits in a very short time in stock trading lose, yet unusual profits can be made if you exercise good judgment and have patience. roger w. babson, in his book entitled, "business barometers," speaks of the possibilities of profit in language that would be considered greatly exaggerated if used by a promoter, and yet he is extremely conservative in his advice to traders. he advises never to buy on margin, never to sell short, and staying out of the market entirely, neither buying or selling, for a great part of the time. here is a quotation from his book, which follows a detailed statement of an investment of $ , over a period of fifty years: "the preceding example shows that $ , conservatively invested in a few standard stocks about fifty years ago would today amount to over $ , , . these are not only strictly investment stocks, but are also stocks which have fluctuated comparatively little in price. this, moreover was possible by giving orders to buy or sell only once in every three or four years. "if other stocks which were not dividend payers and which have shown greater fluctuations were purchased, and advantage had been taken of the intermediate fluctuations, the $ , would have amounted to much larger figures. by intermediate movements is not meant the weekly movements which the ordinary professional operator notes, but the broader movements extending over many months and possibly a year or more. nevertheless, these broader intermediate movements should not be noticed by a conservative investor, as it is possible to correctly diagnose only the movements extending over longer periods. many brokers believe that it is possible to discern also these intermediate movements of six or eight months; and if so, the following results would have been possible. "$ , invested in 'st. paul' in would amount to over $ , , today. "$ , invested in 'union pacific' in would amount to over $ , , today. "$ , invested in 'central of new jersey' would amount to over $ , , today. "$ , invested in 'northern pacific' would amount to over $ , , today. "these figures are not based on the supposition that the investor was selling at the top of every rise or buying at the bottom of every decline, but that the transactions were made at average 'high' and average 'low' prices based upon the study of technical conditions." if such large profits can be made by following babson's advice, of course larger profits can be made by buying on conservative margin and by selling short when all the conditions are in favor of it. while there are possibilities of making extremely large profits without taking great risks, by those who are patient and exercise good judgment, one should be satisfied with a small profit, if it is the result of great care, in an effort to eliminate risk. of course, you can afford to take a much greater risk with a small part of your speculative fund than you can with all of it. the less money you have with which to speculate, the more careful you should be. some people cannot afford to speculate at all. they should invest their funds in good, safe investments, but this book is written for speculators. careful stock speculation carried on regularly over a period of years, we believe brings larger returns than almost anything else, and in the next chapter we tell you something about where to get information to guide you. chapter xxv. market information where do you get your market information? perhaps most people get it from the daily papers. when you look over the financial news of one of the leading metropolitan papers and see how much there is of it, you can get some idea of the enormous volume of work necessary to get this matter ready for the press in a few hours. there is no time to confirm reports. it is necessary that many of the articles be written from pure imagination, based on rumors. weekly and monthly periodicals can be more accurate in their information, but even they are not always dependable. much of the financial news published comes from agencies that are not reliable. read what henry clews says about them: "principally among these caterers are the financial news agencies and the morning wall street news sheet, both specially devoted to the speculative interests that centre at the stock exchange. the object of these agencies is a useful one; but the public have a right to expect that when they subscribe for information upon which immense transactions may be undertaken, the utmost caution, scrutiny and fidelity should be exercised in the procurement and publication of the news. anything that falls short of this is something worse than bad service and bad faith with subscribers; it is dishonest and mischievous. and yet it cannot be denied that much of the so-called news that reaches the public through these instrumentalities must come under this condemnation. the 'points,' the 'puffs,' the alarms and the canards, put out expressly to deceive and mislead, find a wide circulation through these mediums, with an ease which admits of no possible justification. how far these lapses are due to the haste inseparable from the compilation of news of such a character, how far to a lack of proper sifting and caution, how far to less culpable reasons i do not pretend to decide; but this will be admitted by every observer, that the circulation of pseudo news is the frequent cause of incalculable losses. nor is it alone in the matter of circulating false information that these news venders are at fault. the habit of retailing 'points' in the interest of cliques, the volunteering of advice as to what people should buy and what they should sell, the strong speculative bias that runs through their editorial opinions, these things appear to most people a revolting abuse of the true functions of journalism." of course, every trader gets market letters from one or more brokers. these are many and varied in character. some of them are prepared with great care and give reliable information, but you must remember that a broker's market letter is published for the purpose of getting business, and business is created only by the customers' trading. therefore it is to the broker's interest to have his customers make many trades instead of a few trades. in his book "business barometers," roger w. babson reproduces a letter written to him by the manager of the customers' room of a stock exchange house. we consider this letter so important to all traders, we are taking the liberty to reproduce it here: "hearing on every hand about the fortunes made in wall street, i decided, upon being graduated from college, to devote myself to finance. with this end in view, i secured a position with a first-class new york stock exchange house, finally becoming the 'handshaker' for the firm; that is, 'manager' of the customers' room. so i had an exceptional opportunity to size up the stock business. the chief duties of the manager are to meet customers when they visit the office, tell them how the market is acting, the latest news from the news-tickers and the gossip of the street. but the real duties are to get business for the house. once a most peculiar man came to the office. he was about forty-five years of age, dressed in a faded cutaway coat, high-water trousers, and an east side low-crown derby hat. in a high squeaky voice he said that he knew our milwaukee house and would like to open an account. of course, we were all smiles, for here was a new 'customer.' "one day while in boston he called us up on the long-distance telephone to make an inquiry about the grain market. one of my assistants, desiring to get a commission out of him, said 'we hear that southern pacific is going up; you had better get aboard.' he said 'all right; buy me a hundred at the market.' the stock was bought, but he never saw daylight on his purchase, for the market declined steadily afterward and by the time he got back from boston it showed a heavy loss. the man who advised its purchase had no special knowledge about the stock, but simply took a chance, knowing that the market had only two ways to go, and it might go up, in which case, besides making twenty-five dollars in commissions for the house, he would be patted on the back for his good judgment. if the market went down, as it did, he would still make twenty-five dollars. "i venture to say that % of the speculations on the new york stock exchange are based on such so-called 'tips'. the manager has got to get the business to keep his position and salary, and this can only be done by 'touting' people into the market. so he draws on the 'dope' sheets of the professional tipsters and his own feelings, and gives positive information to the bleating lamb that the standard oil is putting up st. paul, or that certain influential bankers are 'bulling' union pacific. the lamb buys the stock, the broker gets the commission, and then the lamb worries his heart out as he sees his one-thousand-dollar margin jumping around in value. now it has increased to eleven hundred dollars, then declined to nine hundred and fifty dollars, then nine hundred dollars, eight hundred dollars, then back to eight hundred and fifty dollars and then it takes the 'toboggan' to three hundred dollars upon which the broker calls for margins, and sells the customer out if they are not forthcoming, the whole speculation being based on the manager's 'feeling' that stocks ought to go up. "men of affairs who will not play poker at home, and are shocked at the mention of faro and roulette, which any old-timer will tell you are easier to beat than the stock market, think they are using business judgment when they try to make money on stock market 'tips'. anyone with common sense can see that a % margin has no more chance in an active market than a brush dam in a johnstown flood. one of the causes for this kind of speculating on a margin is that a broker's commission is only - / cents per share and it does not pay to do small-lot business. the one-thousand-dollar margin would only buy ten shares outright and net the broker but $ . for buying and $ . for selling, whereas that same amount as margin on one hundred shares yields the broker $ . each way besides interest on the balance, the net result being that for any given amount of money a speculator on % margin multiplies his profits by ten and his losses by ten over those that would occur were he to buy the stock outright and take it home. the broker on his side multiplies his commission by ten over what he would receive were he to do an investment business." from the above letter you get an idea of the attitude of an employee of the average broker's office. he would not be considered loyal to his employer if he had a different attitude. when an attitude like this influences the broker's market letters, they are not reliable. you may ask whether there is any reliable information about the market. yes, there is. there are several large organizations that make a study of fundamental statistics and statistics of different companies and give information to their subscribers based upon this knowledge. we believe that is the only kind of information that is worth very much to a trader, except the statistical information--the number of shares sold and the prices at which they are sold--he gets from his daily or weekly papers. some of the principal organizations of this kind are as follows: _standard statistics company, inc. babson's statistical organization. the brookmire economic service. harvard economic service. poor's investment service. moody's investors service. richard d. wyckoff analytical staff._ the above are the principal organizations of this kind. subscriptions to their service cost from $ to $ a year. in addition to these there are a few other organizations besides our own and individuals giving a somewhat similar service, but we know of none that gives such a service at as low a price as ours. you should not confuse the service given by the above organizations with that given by many organizations and individuals who attempt to tell you what the market is going to do from day to day. in other words, they give 'tips' on the market. there are a number who issue daily market letters of this kind and charge from $ to $ a month for their service, but it is a line of service that we do not recommend at all, because we consider that you would be taking a very great risk if you followed advice of that kind. you might make enormously large profits occasionally, but you would also have frequent losses, and when the losses did come they might be greater than all the previous profits. we want you to understand that that kind of advice is entirely different from what we are recommending. chapter xxvi. successful speculation success in stock speculation depends upon a few things that are very simple. if you know what to buy, when to buy, and when to sell, and will act in accordance with that knowledge, your success is assured. you may think it is impossible to know these things, but it is not so difficult as it is supposed to be. many people buy stocks at the wrong time, and most of those who do buy them at the right time, buy the wrong stocks. right now (early in april, ) is buying time in the stock market, and it is possible that this buying time may continue--with some interruptions--for another year or two, or even longer. it is more difficult, however, to tell you what stocks to buy. first of all, we advise you against buying stocks that are put up to high prices by manipulation. of course, if you get in one of those stocks right and get out right, your profits are very large, but you take a great risk, and those who win once or twice by this method are almost sure to lose everything sooner or later in an effort to do the same thing again. your chances are not much better than if you gambled at monte carlo. the chances in buying manipulated stocks are invariably against the outsider. there always is so much publicity about these very active speculative stocks that the public is attracted towards them. newspapers and brokers' market letters give altogether too much space to them. such stocks sell far too high, and when the break comes, it brings ruinous losses to many people. on the other hand, by following a conservative course, you really have a chance to make large profits with a minimum risk. we are giving below sixteen stocks that we recommended in our advisory letter of february th, , with the approximate prices of them then and the approximate prices on march st.[ ] in arriving at these prices, we took the closing prices on february th and on march st, and omitted the fractions. we recommended only sixteen stocks on that date, and you will see that every one of them made substantial gains. approximate approximate price price stock feb. , mar. , profit c. r. i. & p. pfd ( ) c. r. i. & p. pfd ( ) new york central pacific gas & electric consolidated gas american telephone & telegraph general motors deb. ( ) general motors deb. ( ) u. s. steel dome mines laclede gas missouri pacific pfd c. r. i. & p. common am. smel. & refining anaconda erie common ---- ---- --- total let us suppose you bought ten shares of each of these stocks on february th. they would have cost you $ , . we recommended % margin on the first ten, all of which were dividend payers; and % margin on the last six, because they were more speculative and would have been more affected by a reaction in the market. to buy ten shares of each on that margin basis would have required a little less than $ , , but let us suppose you put up $ , . after allowing for buying and selling commissions and interest on the balance of $ , , but crediting you with dividends paid, your profit would be about % or at the rate of about % per annum. of course, we do not claim that by following the conservative course we advise, you always will make such large profits, although you might do just as well as that if you took advantage of some of the opportunities so frequently to be found in the market; but keen discrimination in what you buy always is necessary. however, let us suppose you made annual profits of one-fifth the above amount, or %, which is easily possible without taking the risks that are usually taken in stock speculating. if you invested $ and made % profit per annum, reinvesting your profit at the same rate each year for twenty years, you would have more than three million dollars. when there is a possibility of making such enormous profits as that by following careful methods, surely there is no argument in favor of taking the extreme risks that people do take in buying the highly speculative stocks, the prices of which are put up for the purpose of unloading them on the public. ten of the stocks we selected in the above list were dividend payers, and while the other six were not, they were considered worth much more than their market prices, and the list as a whole was conceded by conservative people as a safe one to buy. very frequently we are able to recommend a list of stocks that we believe will yield equally large profits, but the stocks you should buy are not the ones that are the most active nor the ones that are mentioned most frequently in the financial news and brokers' market letters. the stocks that most people buy are usually the very stocks that should be left alone. the stocks you should buy are usually the ones you hear very little about. there is only one safe way to speculate, and that is to be guided by a knowledge of the fundamental conditions of each stock and also of the industries they represent. there are several large organizations giving information of this kind, and those who have been guided by the fundamental statistics issued by them, almost invariably have made money in stock speculating. the value of that kind of service has been thoroughly demonstrated beyond any question. however, a subscription for the service of most of these organizations costs more than the average person can afford to pay. usually it is anywhere from $ to $ , a year. we are giving a service for the purpose of guiding our clients to successful speculation for a fee of only $ a year, $ for six months, or $ for three months. for this fee we tell you what stocks to buy, when to buy, and when to sell. we send you our recommendations at least twice a month, but send you additional advisory letters and lists oftener if conditions make it necessary. you also have the privilege of unlimited personal correspondence regarding your market problems. the cost of our service is very small, compared with what other reliable organizations charge. our service is based on the principles expounded in this book. we try to select stocks having the greatest possibilities of profit with minimum risk, and the sample of our service given in this chapter is proof of our success. national bureau of financial information broadway, new york city footnotes: [ ] we did not advise the sale of these stocks on march st, but the author figured profits to that date because this book was written shortly after that. if these stocks had been bought on or about february th, on the margin basis suggested by us, and sold six months later, the profit would have been more than %, or % yearly. how to invest money by george garr henry _vice-president guaranty trust company, of new york_ [illustration] funk & wagnalls company new york and london copyright, , by funk & wagnalls company [_printed in the united states of america_] published april, contents page preface i. general principles of investment ii. railroad mortgage bonds iii. railroad equipment bonds iv. real-estate mortgages v. industrial bonds vi. public-utility bonds vii. municipal bonds viii. stocks ix. market movements of securities preface the aim of this book is to present in clear form the simple principles of investment, and to afford the reader a working knowledge of the various classes of securities which are available as investments and their relative adaptability to different needs. the book is an outgrowth of the writer's personal experience as an investment banker. most of the matter which is presented has appeared in the pages of "system" magazine, through the courtesy of whose editors it is now rearranged and consolidated for publication in book form. g. g. h. how to invest money i general principles of investment with the immense increase in wealth in the united states during the last decade and its more general distribution, the problem of investment has assumed correspondingly greater importance. as long as the average business man was an habitual borrower of money and possest no private fortune outside of his interest in his business, he was not greatly concerned with investment problems. the surplus wealth of the country for a long time was in the hands of financial institutions and a few wealthy capitalists. these men, the officers and directors of banks, savings-banks, and insurance companies, and the possessors of hereditary wealth, were thoroughly equipped by training and experience for the solving of investment problems and needed no help in the disposition of the funds under their control. during the last ten years, however, these conditions have been greatly altered. the number of business men to-day in possession of funds in excess of their private wants and business requirements is far greater than it was ten years ago, and is constantly increasing. these men are confronted with a real investment problem. while they have not always recognized it, the problem which they are called upon to solve is really twofold--it concerns the safeguarding of their private fortune and the wise disposition of their business surplus. they have usually seen the first part of this problem, but not all have succeeded in clearly understanding the second. when the treatment of a man's business surplus is spoken of as an investment problem, it is meant, of course, not his working capital, which should be kept in liquid form for immediate needs, but that portion of his surplus which is set aside for emergencies. it is coming to be a recognized principle that every business enterprise of whatever kind or size should establish a reserve fund. it is felt that the possession of a reserve fund puts the business upon a secure foundation, adds to its financial strength and reputation, and greatly increases its credit and borrowing capacity. the recognition of this fact, combined with the ability to set aside a reserve fund, has brought many men to a consideration of the best way in which to dispose of it. it is obviously a waste of income to have the surplus in bank-accounts; more than that, there would be a constant temptation to use it and to confuse it with working capital. its best disposition is plainly in some safe interest-bearing security, which can be readily sold, so that it will be available for use if necessity demands. confronted with the double problem thus outlined, what measure of success has attended the average business man in its solution? it is safe to say that the average man has found it easier to make money than to take care of it. money-making, for him, is the result of successful activity in his own line of business, with which he is thoroughly familiar; while the investment of money is a thing apart from his business, with which he is not familiar, and of which he may have had little practical experience. his failure to invest money wisely is not due to any want of intelligence or of proper care and foresight on his part, as he sometimes seems to believe, but simply because he is ignorant of the principles of a business which differs radically from his own. the investment of money is a banker's business. when the average man has funds to invest, whether he be a business man or a pure investor, he should consult some experienced and reliable investment banker just as he would consult a doctor or a lawyer if he were in need of medical or legal advice. this book is not intended to take the place of consultation with a banker, but to supplement it. the advantage of such consultation is shown by the fact that if a man attempts to rely on his own judgment, he is almost certain not to do the best thing, even if his business instinct leads him to avoid those enterprises which are more plainly unpromising or fraudulent. it should be remembered, however, that widows and orphans are not the only ones ensnared by attractive advertisements and the promise of brilliant returns. in most cases, widows' and orphans' funds are protected by conscientious and conservative trustees, and it is the average business man who furnishes the money which is ultimately lost in all propositions which violate the fundamental laws of investment. the average man is led into these unwise investments through a very natural error of judgment. accustomed to take reasonable chances and to make large returns in his own business, he fails to detect anything fundamentally wrong in a proposition simply because it promises to pay well. he forgets that the rate of interest on _invested money_, or pure interest, is very small, and that anything above that can only come as payment for management, as he makes in his own business, or at the sacrifice of some essential factor of safety which will usually lead to disaster. for the successful investment of money, however, a good deal more is required than the mere ability to select a safe security. that is only one phase of the problem. scientific investment demands a clear understanding of the fundamental distinctions between different classes of securities and strict adherence to the two cardinal principles, distribution of risk and selection of securities in accordance with real requirements. one of the most important distinctions is that between _promises to pay_ and _equities_. bonds, real-estate mortgages, and loans on collateral represent somebody's promise to pay a certain sum of money at a future date; and if the promise be good and the security ample, the holder of the promise will be paid the money at the time due. on the other hand, _equities_, such as the capital stocks of banking, railway, and industrial corporations, represent only a certain residuary share in the assets and profits of a working concern, after payment of its obligations and fixt charges. the value of this residuary share may be large or small, may increase or diminish, but in no case can the holder of such a share require any one, least of all the company itself, to redeem the certificate representing his interest at the price he paid for it, nor indeed at any price. if a man buys a $ , railroad bond, he knows that the railroad, if solvent, will pay him $ , in cash when the bond is due. but if he buys a share of railroad stock, his only chance of getting his money back, if he should wish it, is that some one else will want to buy his share for what he paid for it, or more. in one case he has bought a _promise to pay_, and in the other an _equity_. it is not the intention, from the foregoing, to draw the conclusion that _equities_ under no circumstances are to be regarded as investments, because many of our bank and railroad stocks, and even some of our public-utility and industrial stocks, have attained a stability and permanence of value and possess sufficiently long dividend records to justify their consideration when investments are contemplated; but it is essential that the investor should have a thorough understanding of the distinction involved. the principle of distribution of risk is a simple one. it involves no more than obedience to the old rule which forbids putting all one's eggs in the same basket. the number of men who carry out this principle with any thoroughness, however, is very small. proper distribution means not only the division of property among the various forms of investment, as railroad bonds, municipals, mortgages, public-utility bonds, etc., but also the preservation of proper geographical proportions within each form. adherence to this principle is perhaps not so important for private investors as for institutions. a striking instance of the need for insistence upon its observance in the institutional field was furnished by one of the fire-insurance companies of san francisco after the earthquake. it appeared that the company's assets were largely invested in san francisco real estate and in local enterprises generally, where the bulk of its fire risks were concentrated. as a result, the very catastrophe which converted its risks into actual liabilities deprived its assets of all immediate value. this instance serves to show the importance of the principle and the necessity for its observance. the principle of selection in accordance with real requirements is more complex. it involves a thorough understanding of the chief points which must be considered in the selection of all investments. these are five in number: ( ) _safety of principal and interest_, or the assurance of receiving the principal and interest on the dates due; ( ) _rate of income_, or the net return which is realized on the actual amount of money invested; ( ) _convertibility into cash_, or the readiness with which it is possible to realize on the investment; ( ) _prospect of appreciation in value_, or that growth in intrinsic value which tends to advance market price; and ( ) _stability of market price_, or the likelihood of maintaining the integrity of the principal invested. the five qualities above enumerated are present in different degrees in every investment, and the scientific investor naturally selects those securities which possess in a high degree the qualities upon which he wishes to place emphasis. a large part of the problem of investment lies in the careful selection of securities to meet one's actual requirements. the average investor does not thoroughly understand this point. he does not realize that a high degree of one quality involves a lower degree of other qualities. he may have a general impression that a high rate of income is apt to indicate less assurance of safety, but he rarely applies the same reasoning to other qualities. when he buys securities, he is quite likely to pay for qualities which he does not need. it is very common, for example, when he wishes to make a permanent investment and has no thought of reselling, to find him purchasing securities which possess in a high degree the quality of convertibility. from his point of view, this is pure waste. a high degree of convertibility is only obtained at the sacrifice of some other quality--usually rate of income. if he were to use more care in his selections, he could probably find some other security possessing equal safety, equal stability, and equal promise of appreciation in value, which would yield considerably greater revenue, lacking only ready convertibility. thus he would satisfy his real requirements and obtain a greater income, at the expense only of a quality which he does not need. the quality of convertibility divides investors into classes more sharply than any other quality. for some investors convertibility is a matter of small importance; for others it is the paramount consideration. generally speaking, the private investor does not need to place much emphasis upon the quality of convertibility, at least for the larger part of his estate. on the other hand, for a business surplus, ready convertibility is an absolute necessity, and in order to secure it, something in the way of income must usually be sacrificed. again, some investors are so situated that they can insist strongly upon promise of appreciation in value, while others can not afford to do so. rich men whose income is in excess of their wants, can afford to forego something in the way of yearly return for the sake of a strong prospect of appreciation in value. such men naturally buy bank and trust-company stocks, whose general characteristic is a small return upon the money invested, but a strong likelihood of appreciation in value. this is owing to the general practise of well-regulated banks to distribute only about half their earnings in dividends and to credit the rest to surplus, thus insuring a steady rise in the book value of the stock. rich men, again, can afford to take chances with the quality of safety, for the sake of greater income, in a way which poor men should never do. in practise, however, if the writer's observation can be depended upon, it is usually the poor men who take the chances--and lose their money. in the quality of safety, there is a marked difference between safety of principal and safety of interest. with some investments the principal is much safer than the interest, and _vice versa_. this can best be illustrated by examples. the bonds of terminal companies, which are guaranteed as to interest, under the terms of a lease, by the railroads which use the terminal, are usually far safer as to interest than as to principal. while the lease lasts, the interest is probably perfectly secure, but when the lease expires and the bonds mature, the railroads may see fit to abandon the terminal and build one elsewhere, if the city has grown in another direction, and the terminal may cease to have any value except as real estate. on the other hand, a new railroad, built in a thinly settled but rapidly growing part of the country, may have difficulty in bad years in meeting its interest charges, and may even go into temporary default, but if the bonds are issued at a low rate per mile and the management of the road is honest and capable, the safety of the principal can scarcely be questioned. stability of market price is frequently a consideration of great importance. this quality should never be confused with the quality of safety. safety means the assurance that the maker of the obligation will pay principal and interest when due; stability of market price means that the investment shall not shrink in quoted value. these are very different things, tho frequently identified in people's minds. an investment may possess assured safety of principal and interest and yet suffer a violent decline in quoted price, owing to a change in general business and financial conditions. in times of continued business prosperity very high rates are demanded for the use of money, because the liquid capital of the country, to a large extent, has been converted into fixt forms, in the development of new mines, the building of new factories and railroads, and in the improvement and extension of existing properties. these high rates have the effect of reducing the price level of investment securities because people having such securities are apt to sell them in order to lend the money so released, thus maintaining the parity between the yields upon free and invested capital. as an illustration of this tendency, within the last few years new york city - / -per-cent bonds have declined from to , without the slightest suspicion of their safety. their inherent qualities have changed in no respect except that their prospect of appreciation in quoted price has become decidedly brighter. their fall in price has been due to two factors, one general and the other special--first, the absorption of liquid capital and consequent rise in interest rates, occasioned by the unprecedented business activity of the country, and, second, to the unfavorable technical position of the bonds, due to an increased supply in the face of a decreased demand. it will be seen that the question of maintaining the integrity of the money invested is a matter of great importance and deserves to rank as a fifth factor in determining the selection of investments, altho it is not an inherent quality of each investment, but is dependent for its effect upon general conditions. if it is essential to the investor that his security should not shrink in quoted price, his best investment is a real-estate mortgage, which is not quoted and consequently does not fluctate. for the investment of a business surplus, however, where a high degree of convertibility is required, real-estate mortgages will not answer, and the best way to guard against shrinkage is to purchase a short-term security, whose approach to maturity will maintain the price close to par. the foregoing comments, in a brief and imperfect way, serve to indicate the main points which should be considered in the selection of securities for investment. the considerations advanced will be amplified as occasion demands in the following pages. for the present, the main lesson which it is sought to draw is the necessity that a man should have a thorough understanding of his real requirements before he attempts to make investments. for a private investor to go to a banker and ask him to suggest a security to him without telling him the exact nature of his wants is about as foolish as it would be for a patient to go to a physician and ask him to give him some medicine without telling him the symptoms of the trouble which he wished cured. in neither case can the adviser act intelligently unless he knows what end he is seeking to accomplish. it is plainly impossible within the limits of a small volume to consider the needs of all classes of investors. special attention will be paid to the requirements of a business surplus and of the private investor. in the field of private investment two distinct classes can be recognized--those who are dependent upon income from investments and those who are not. both classes will be considered. for the investment of a business surplus, safety, convertibility, and stability of price are the qualities to be emphasized; for investors dependent upon income, safety and a high return; and for those not dependent upon income, a high return and prospect of appreciation in value. in the following chapters railroad bonds, real-estate mortgages, industrial, public-utility, and municipal bonds and stocks will be considered in turn; their advantages and disadvantages will be analyzed in accordance with the determining qualities above enumerated, and their adaptability to the requirements of a business surplus and of private investment will be discust. ii railroad mortgage bonds a railroad bond is an obligation of a railroad company (usually secured by mortgage upon railroad property) which runs for a certain length of time at a certain rate of interest. it is apparent, from this definition, that the price of a railroad bond, as distinct from its value, is affected by two _accidental conditions_ quite apart from the five determining qualities described in the preceding chapter. these accidental conditions are the length of time that the bond has to run and the rate of interest that it bears. to understand clearly the influence of these accidental conditions is a matter of the utmost importance. it is evident, for instance, that a -per-cent fifty-year bond, based on a given security, will sell at a widely different price from a - / -per-cent twenty-year bond, based on the same security; yet the only difference is in the accidental conditions which are under the control of the board of directors. in order to eliminate these accidental features from the situation, it is customary for bond-dealers to classify bonds purely on the basis of their yield, or net income return. as a thorough understanding of this point is essential to an accurate judgment of bond values, whether railroad bonds or otherwise, it must be developed in detail, even at the risk of carrying the reader over familiar ground. if a bond sells above par, it does not yield its purchaser a net return as great as the rate of interest which the bond bears, for two reasons: first, because the loss in principal, represented by the premium which the purchaser pays, must be distributed over the number of years which the bond has to run, and operates to reduce the rate of interest which the holder receives; and, secondly, because the rate is paid only on the par value of the bond instead of on the actual money invested. thus, if a -percent bond with eight years to run sells at - / , it will yield only . per cent, which means that if the holder spends more than $ . ( . per cent of $ , . ) out of the $ which he receives annually, he is spending the excess out of principal, and not out of income. conversely, if a bond sells below par, it yields more than the rate of interest which the bond bears. these yields have been calculated with the utmost exactness for all bonds paying from per cent to per cent and running from six months to one hundred years, so that it is only necessary to turn to the tables to discover what will be the net return upon a given bond at a given price. this net return is generally known as the "basis," and bonds are spoken of as selling upon a . per cent basis or a . per cent basis or whatever the figure may be, with no reference whatever to the price or to the rate of interest which the bond bears. indeed, so exclusively is the basis considered by bond-dealers that very often bonds are bought and sold upon a basis price, and the actual figures at which the bonds change hands are not determined until after the transaction is concluded. it is not expected, of course, that the average business man will purchase bonds in quite as scientific a way as this, but it is essential that he should understand that while the intrinsic value of a bond is determined only by the five general factors described, its money value, or price, is affected also by these two accidental conditions. exprest in other words, he must realize that the general factor described as _rate of income_ does not mean the coupon rate of interest which the bond bears, but the scientific "basis," derived by elimination of the accidental features. within the past year there has been a good deal of uninformed comment about the safety of railroad bonds. before the era of popular agitation and governmental antagonism, railroad bonds enjoyed a large measure of public confidence; but it can not be denied that some part of this confidence has been shaken as a result of the recent exposures. even clearheaded men have exaggerated the importance of the developments; and too often railroad officials, who should have insisted upon the soundness and stability of their properties, when they elected to talk for publication, have given way instead to dismal and unwarranted forebodings. there is no mystery involved in determining the safety of railroad bonds. any man of business experience, keeping in mind the general principle which measures the value of all obligations, can easily determine, with the aid of two documents, the degree of safety which attaches to any particular railroad bond. the general principle to be observed is that the safety of any obligation depends upon the margin of security in excess of the amount of the loan; and the two documents to be consulted are the mortgage or trust indenture securing the bonds, which describes the property mortgaged, and the last annual report of the railroad, which shows its financial condition. confining the analysis, for the present, to mortgage bonds upon the general mileage of a railroad, the following points should be considered: ( ) _rate per mile at which the bond is issued._ applying the general principle indicated above, it must be learned what proportion the bonded debt of a railroad bears to the total market value of the property. it is much easier to make this comparison on a per-mile basis. in determining whether the rate per mile is excessive, reference must be made not so much to the particular bond in question as to the total bonded debt per mile of the railroad, and to the relation which that figure bears to the total market value of the property per mile. the total market value per mile is obtained by adding the market value of the stock per mile to the par value of the bonded debt per mile. a single issue of bonds varies all the way from $ , to $ , per mile, according to the location of the railroad. total capitalization per mile--stocks and bonds at par--varies in about the same proportion, from $ , to $ , . the average for all the railroads of the united states is $ , per mile. the actual cost of the railroad, as shown by the balance-sheet, must be taken into consideration, and also the estimated cost of duplicating the property. physical difficulties of construction must be weighed, for a railroad through a flat, sandy country should not be bonded for as much, other things being equal, as a railroad through a mountainous country, where much cutting, filling, and bridging are required. the section of country in which the railroad is located must be considered, for $ , per mile on a single-track line in a poor country may be higher than $ , per mile on a four-track trunk line which owns valuable terminals and rights of way through several large cities. ( ) _amount of prior lien bonds outstanding per mile._ the amount of bonds which come ahead of the bond in question on the same mileage is a matter of great importance and works directly against the security of the bond. purchasing a bond which is preceded by a prior line bond is like taking a real-estate mortgage on property already encumbered. if the bond is not followed by other bonds, then the margin of security in the property is represented wholly by the market value of the stock per mile, and the investor must figure carefully the value of this equity. ( ) _amount of junior lien bonds outstanding per mile._ the amount of bonds which come after the bond in question, on the other hand, works directly in favor of the bond, for it increases the margin of security. it shows also that other people have had sufficient confidence in the property to invest their money in obligations subject to the one in question. in the event of a receivership this is often a matter of great importance; for if a foreclosure sale is ordered the junior bondholders, in order to protect their own interest, must buy in the property for an amount at least equal to the par value of the prior lien bonds. the foregoing considerations apply particularly to the safety of the principal invested in railroad bonds; the following points affect the safety of interest: ( ) _gross earnings per mile._ the gross earnings of a railroad must be compared with those of other roads occupying the same field, and the returns for a number of years must be examined to determine whether such earnings have increased or decreased. the position in which the railroad stands for obtaining new traffic must be noted. this is dependent somewhat upon the railroad's ability to take traffic from other railroads, but more upon the probable growth and development of the territory which the railroad serves, and the increased traffic which will probably be offered. in this connection the rate of increase in population in the road's territory is important. the proportion between passenger and freight earnings, the diversity and density of freight traffic, and passenger and freight rates should be examined. the reputation of the management for ability and integrity should be considered. gross earnings run from about $ , to $ , per mile with the average $ , . ( ) _net income per mile._ net income is obtained by subtracting from gross earnings operating expenses (and sometimes taxes) and adding to the net earnings so obtained whatever income from other sources the railroad may derive. this is a very important figure. as with gross earnings, the reports should be examined to determine whether net income is on the increase or the decrease, and it should be compared with the net income of other railroads occupying the same field. it involves a criticism of operating expenses. the payments of the railroad must be analyzed to determine whether the proper sums have been expended for maintenance of way, replenishment of rolling stock, and other improvements sufficient to keep the road in good physical condition. normally speaking, operating expenses should absorb about per cent of gross earnings. if it is found that a railroad operates for per cent, however, it does not always follow that its operating officials are exceptionally efficient, so that the cost of conducting transportation is relatively small; it may mean that the physical condition of the property is being neglected, or that ordinary improvements, which should be charged to maintenance, are being paid for by increase in capitalization. it is very important for the investor to find out which is the case. if analysis leads to the suspicion that the earnings result from neglecting the property or capitalizing every trivial improvement, the railroad's bonds should be rejected. net income varies from $ , to $ , per mile, with an average of $ , . ( ) _fixt charges per mile._ the fixt charges of a railroad include interest on its bonds, rentals, and taxes (when the last-named are not reported with operating expenses). the importance of this figure lies in its relation to net income. if a railroad does not earn well over double its fixt charges, its obligations can not be regarded as in the first investment rank. of course, when a railroad earns more than twice the interest requirement upon its entire bonded debt, it is probable that some of the underlying bonds are protected by three, four, or five times the interest requirement upon them, and their position is correspondingly strengthened. the foregoing analysis applies particularly to mortgage bonds upon the general mileage of a railroad and not to such special issues as collateral trust, terminal, bridge, or guaranteed bonds. it will not be necessary, however, to lay down any rules as to these classes of bonds, for the general principles outlined above, with slight modifications of detail, will be found equally applicable to a judgment of their value. equipment bonds, on the other hand, owing to their want of similarity to any other railroad issues, will receive separate treatment later. it is of interest, in view of the present diminished confidence in railroad securities, to advance certain considerations touching upon the safety of railroad bonds in general. the last published report of the inter-state commerce commission, year , furnishes interesting testimony on this subject. a table on page shows that the total railroad capital of the united states for that year was $ , , , , of which $ , , , , or . per cent, was in the form of bonded debt, and the rest in capital stock. these figures indicate a substantial equity, but are somewhat misleading because they refer to par value. a fair estimate of the market value of this stock equity, which is the margin of security in the properties from the bondholder's point of view, can be obtained from a table on page , which shows a balance available for dividends, after paying all operating expenses and fixt charges, of all the railroads of the united states for the year ended june , , of $ , , . this amount is equivalent to nearly per cent upon the total par value of the stocks. estimating that a railroad stock should earn per cent upon its market price--and even the most prejudiced will admit that a stock earning per cent is worth par--the total market value of american railroad stocks would be $ , , , , or more than half the par value of the bonds. in other words, the bonded debt would represent something less than per cent of the total market value of the property. this compares favorably with the security of first mortgages upon real estate. when the safety of interest is considered, the showing made is equally strong. page of the report above quoted shows that the net income of the railroads of the united states for the year ended june , , after payment of all operating expenses, was $ , , , and the total fixt charges, including interest on bonds, interest on current liabilities, and taxes, amounted to $ , , , leaving a balance available for dividends of $ , , . it is apparent, therefore, that the net earnings of the railroads of the united states, considered as one system, could be cut in half without affecting the payment of interest upon the railroad's obligations. this affords a large measure of protection. the following analysis shows that the actual market value of the railroads is probably greater than the estimate made above. the table shows the percentage of bonded debt to total market value of some of the more important railroad systems. two trunk lines in the east, a north and south line in the middle west, and two transcontinental have been chosen. no attempt has been made to select railroads which would make a favorable showing. indeed pennsylvania, and union pacific, by reason of their recent heavy bond issues, probably compare unfavorably with others which might have been chosen. the figures showing the par value of bonds outstanding have been taken from last annual reports, with additions made for recent issues. the figures showing the market value of stocks are based on the amounts outstanding april st, , at the market price. par value of approx. market per cent bonds outstanding value of stock of bonds outstanding to total value pennsylvania $ , , $ , , . new york central , , , , . illinois central , , , , . great northern , , , , . union pacific , , , , . in view of the enormous decline which has occurred in railroad stocks during the past eighteen months, the showing above is truly remarkable. it is plain that the entire bonded debt of any of these standard railroads is less than per cent of the total market value of the property, while in the cases of the pennsylvania, great northern, and union pacific, _more than half of the present market value of the property could be erased before the lien of the bonds least well secured would be impaired_. of course, where the entire bonded debt is protected by such a margin, it is evident that the underlying bonds (the prior liens and first mortgages) are protected by several times as great a margin and their position is correspondingly strengthened. the foregoing analysis, in the judgment of the writer, affords convincing proof not only that the prevailing want of confidence in railroad obligations is without foundation, but that railroad bonds compare favorably in point of safety with any other form of investment. it remains to point out the amount of income and degree of convertibility which they afford and the extent of appreciation in value which they promise. it is impossible to do more than indicate the general characteristics of railroad bonds in these particulars. railroad bonds cover a wide range of income return. they yield all the way from - / per cent to per cent, the general average being from per cent to per cent. as a class they yield more than government or municipal bonds, and less than public-utility or industrial bonds. with equal security they probably yield less than real-estate mortgages. compared with stocks they return more than bank stocks, average about the same as railroad stocks, and yield less than public-utility, industrial, or mining stocks. these comparisons are intended to apply to the classes as a whole, and remain generally true in spite of specific cases to the contrary. convertibility is the distinguishing mark of railroad bonds. generally speaking they may be more easily marketed than any other class of bonds. compared with stocks they exceed public-utility, mining, and bank stocks in point of convertibility, and yield only to railroad stocks. it is hard to say whether or not they possess greater convertibility than industrial stocks, but it is probable that they do, allowing for the fact that an undue impression is created by the activity of certain prominent shares. railroad bonds as a class possess great promise of appreciation in value. american railroads, generally speaking, have adopted the conservative policy of putting a considerable part of their annual earnings back into the property in the form of improvements. to the extent to which this policy is followed, an equity is created back of the bonds which raises their intrinsic value. this policy contrasts favorably with the general practise of english roads to pay out all their earnings in dividends, and to capitalize their improvements. in addition, new capital for american railroads is largely raised by stock issues, which further increases the margin of security for the bondholders. taken together these facts insure a steady enhancement in the intrinsic value of railroad bonds, which is bound to be reflected, other things being equal, in higher prices. we shall not attempt to discuss at this time the degree of stability of market price which railroad bonds enjoy. as explained in the first chapter, stability of market price is dependent upon general financial and business conditions. it is sufficient to point out here that the maintenance intact of the principal sum invested can only be rendered certain by the purchase of short-time securities whose near approach to maturity will keep their price close to par. in a later chapter the general principles which determine this question will be elucidated. the ideal investment may be defined as one combining ample security of principal and interest, a good rate of income, ready convertibility into cash, and reasonable promise of appreciation in value. measured by the requirements of this definition, the conclusion seems justified that well-selected railroad bonds, if purchased under favorable money-market conditions, afford a highly desirable form of investment. iii railroad equipment bonds as its name implies, an equipment bond is one issued by a railroad to provide funds with which to pay for new rolling stock--cars and locomotives. the issues are variously described as car trust certificates, equipment bonds, or equipment notes. they conform in general to one of two standard forms: ( ) the conditional sale plan: in accordance with specifications furnished by the railroad, the trustee selected (usually a trust company) contracts with the builders for the purchase of the equipment. from to per cent of the cost of the equipment is paid in cash by the railroad and the rest is represented by the equipment bonds. the bonds are the direct obligation of the railroad company. they are secured by a first lien upon the entire equipment purchased. the title to the equipment remains in the trustee for the benefit of the bondholders until the last bond has been paid, so that under no circumstances can the general mortgages of the railroad attach as a first lien on the equipment ahead of the car trust obligations. after the final payment, the trustee assigns title to the railroad company, which thereupon becomes the owner in fee of the equipment. under the terms of the deed of trust the railroad is always obliged to keep the equipment fully insured, in good order and complete repair, and to replace any equipment which may become worn out, lost, or destroyed. the bonds are usually issued in coupon form, $ , each, bearing semiannual interest, with provision for registration. they are generally paid off in semiannual or annual instalments of substantially equal amounts, the last instalment usually falling due in ten years, a period well within the life of the equipment as estimated under the master car builder's rules. occasionally this method of payment is altered by the substitution of a sinking fund, the bonds having a uniform fixt maturity, but subject to the operation of a sinking fund which is sufficient to retire the entire issue well within the life of the equipment. in either case the security, ample at the outset, increases proportionally with the reduction in obligations outstanding against it. ( ) the so-called "philadelphia plan." under this plan the equipment is purchased by an individual, association, or corporation which leases the equipment to the railroad for a term of years at a rental equivalent to the interest and maturing instalments of the bonds. the contract of lease is then assigned to a trust company as trustee, which thereupon issues its certificates in substantially the form described in the plan above, these representing a beneficial interest in the equipment, which are usually guaranteed both principal and interest by the railroad. the lease runs until the last bond has been paid, after which the trustee assigns title to the railroad as above. the chief advantage of this plan over the other is that in some states, notably pennsylvania, certificates issued in accordance with its terms are exempt from taxation, whereas under the conditional sale plan, as the direct obligation of the railroad, the bonds would be taxable. it is evident from the foregoing description that equipment bonds differ in two important respects from all other classes of railroad issues. first, the title to the property which secures the bonds does not vest in the railroad; and, secondly, the property is movable and not fixt in any one locality. by virtue of these two points, the holders of equipment bonds possess a great advantage over the holders of mortgage bonds in the event of a railroad's becoming bankrupt. if a railroad is unable to meet its interest charges, the mortgage bondholders can rarely do better than have a receiver appointed who will operate the railroad in their interest; but if, with honest and efficient management, the railroad can not be made to earn its interest charges, the mortgage bondholders usually have to consent to the scaling of their bonds to a point where the railroad can operate upon a paying basis. with the holders of equipment bonds the case is quite different. if the receiver defaults upon their bonds they have only to direct the trustee to enter upon possession of the equipment and sell it or lease it to some other railroad. the knowledge that they possess this power renders its exercise generally unnecessary. the equipment of a railroad is essential to its operation. it is the tool with which the railroad handles its business. if the receiver were deprived of the equipment it would be impossible for him to operate the road, and so he could never satisfy its creditors. consequently the courts, both state and federal, have ruled that the necessary equipment of a bankrupt railroad must be preserved, and have placed the charges for principal and interest of equipment obligations upon an equality with charges for wages, materials, and other operating expenses, and in priority to interest of even first-mortgage bonds. these points sufficiently explain the remarkable record which equipment bonds have made during reorganizations. careful investigation has been made of the various railroads which were reorganized, either with or without foreclosure, between the years and . this covers the chief period of railroad receivership. it was discovered that sixteen different railroads, aggregating nearly one hundred thousand miles and located in widely different parts of the country, had outstanding equipment bonds at the time of default. in every case the principal and interest of equipment bonds were paid in full, while all other securities, with a few exceptions, were reduced in rate or amount or both. two of these railroads offered to the holders of equipment bonds the option of an advantageous exchange of securities, which amounted to more than payment in full. the foregoing facts justify the conclusion that equipment bonds possess security equal or superior to that of any other form of railroad bonds. let us now consider their remaining characteristics--their rate of income, convertibility, prospect of appreciation in value, and stability of market price. one of the strongest features of equipment bonds is the relatively high rate of income which they yield. the amount realized varies in accordance with the financial strength and credit of the issuing railroad, and the margin of security in the equipment itself. as a general rule, the net return on the equipment bonds of a given railroad is usually from / per cent to / per cent greater than on the first-mortgage bonds of the same railroad. this is owing to the fact that while banks and scientific investors have bought equipment bonds for many years, the general public is not sufficiently familiar with the inherent strength of these issues to create much of a demand for them. this insures a good return. equipment bonds vary in point of convertibility. the reader will remember from the description above that equipment bonds are usually issued in serial form, with instalments maturing semiannually from six months to ten years. by confining purchases to the shorter maturities, say within two or three years, a high degree of convertibility may usually be obtained because the short maturities are greatly sought by banks and other financial institutions which regard equipment bonds in much the same light as merchant's paper or time loans secured by collateral. at a price equivalent to the rate which the best commercial paper commands, there is always a good demand from the banks. many banks prefer equipment bonds to loans or paper on account of their greater convertibility. as the length of maturity increases, the degree of convertibility generally decreases, because the chief demand for the longer dates comes from insurance companies, which do not, in the aggregate, constitute as great a demand as the banks. when the demand from private investors increases, as it undoubtedly will when they become more familiar with the desirable points of these issues, all maturities will probably possess ready convertibility. in the same way, equipment bonds vary as to stability of market price. compared with other classes of railroad issues, equipment bonds are all relatively stable, but the stability is especially marked in the shorter maturities. equipment bonds possess little prospect of appreciation in value. the attentive reader who has carefully followed the foregoing description of equipment bonds, may have noticed a special adaptability on their part to the requirements of a business surplus. broadly speaking, for such investment, a security is required which will combine perfect safety of principal and interest, a good rate of income, ready convertibility into cash, and unyielding stability of market price. the necessity for insistence upon these requirements in the investment of a business surplus will appear upon a moment's reflection. safety is required in all forms of investment, but is particularly important in the handling of business funds; a good rate of income is always desirable; convertibility is necessary for a business surplus so that the reserve funds may be converted into cash at any time; and it is of the utmost importance that the security should not shrink materially in quoted price, no matter what changes may take place in financial and business conditions, so that if the need should arise for realizing on the reserve fund, it would be found unimpaired in amount. as explained in a former chapter, this point can not be covered by the selection of securities perfectly safe as to principal and interest, but only by the purchase of short-term obligations. the point may be illustrated as follows: let it be supposed that a firm or company has decided to invest $ , in the -per-cent equipment bonds of a good railroad maturing in three years, which can be obtained at par, merchant's paper then commanding about - / per cent. after two years it becomes necessary for the firm to realize on its investment at a time when commercial paper is floated with difficulty on a - / -per-cent or -per-cent basis. under such money conditions the equipment bonds could be sold on about a -per-cent basis, which would mean a price of for a -per-cent bond with one year to run. the firm, in liquidating its investment, would therefore lose per cent in principal, but would have received per cent interest for two years, making the net return - / per cent. compare this showing with the result if the bonds when originally bought had had ten years to run instead of three. after two years, when the firm wished to dispose of its bonds it might experience some difficulty in doing so in the stringent money market which has been supposed, but even if it succeeded in selling them upon a -per-cent basis, that would mean a price of only - / and would represent - / -per-cent loss in principal. if it were necessary to sell the bonds upon a higher basis or if the firm had purchased a bond with more than ten years to run, the relative disadvantage of the longer bond would be still more apparent. these points sufficiently demonstrate the importance of buying only short-term securities for the investment of a business surplus. of course, if money conditions improve instead of becoming worse between the dates of purchase and sale, then a greater profit would be made with the longer-term bond. this, however, should not be allowed to influence the choice, first because it is not the object of a reserve fund to make a speculative profit, and secondly because a firm or corporation is only likely to want to realize upon its reserve fund when money is hard to obtain otherwise, and that is precisely the time when any long-term bond would be apt to show considerable depreciation. the foregoing considerations indicate a special adaptability on the part of equipment bonds to the usual requirements of a business surplus. the points have been brought out at some length because of the importance of the subject to the average business man. the purpose in concentrating attention upon a single instance has been to illustrate more clearly the principles involved and at the same time to acquaint the business man with details of a highly desirable and somewhat unfamiliar form of security. iv real-estate mortgages in the preceding chapter the discussion of railroad bonds was brought to a close. before passing to the consideration of real-estate mortgages, which is the next form of investment to be taken up, it may be well to review briefly the general principles advanced in the first chapter of this book, in order that the reader may have clearly in mind the main points upon which judgment of the value of investments should be based. there are five chief points to be considered in the selection of all forms of investment. these are: ( ) safety of principal and interest; ( ) rate of income; ( ) convertibility into cash; ( ) prospect of appreciation in intrinsic value; ( ) stability of market price. keeping these five general factors in mind, the present chapter will discuss real-estate mortgages as a form of investment, both as adapted to the requirements of private funds and of a business surplus. the average american business man is so familiar with real-estate mortgages that the details may be passed over briefly. a real-estate mortgage, or a bond and mortgage, as it is sometimes called, consists essentially of two parts, a bond or promise to pay a certain sum of money at a future date with interest at a certain rate per annum, and a mortgage or trust deed transferring title and ownership in a piece of real estate, with the provision that the transfer shall be void if the interest is regularly paid and the bond redeemed at maturity. before advancing money on the security of a mortgage it is necessary to determine whether the title to the property legally vests in the maker of the mortgage; and during the continuance of the mortgage it is necessary to have proof that the taxes and assessments are being regularly paid, and, in the case of improved property, the fire-insurance as well. the safety of real-estate mortgages, in common with the safety of all obligations, depends upon the margin of security in excess of the amount of the loan. in the case of real-estate mortgages the amount of this margin may be determined without great difficulty. it is only necessary to have the property carefully appraised by an expert in real-estate values. it does not follow, however, because a mortgage has been shown to possess substantial equity, that it is perfectly safe as an investment, unless it satisfies also another condition of great importance. a mortgage may not exceed per cent of the selling value of the real estate pledged, and yet be a poor investment. this point involves a serious objection to real-estate mortgages which sometimes escapes notice. the holder of a mortgage is at a great disadvantage in regard to the changing value of real estate. if the value of the property upon which he holds a mortgage increases, the additional value enhances the security of the loan, but does not add to the principal which he has invested, while if the value of the property diminishes, not only is the security proportionately lessened, but if the impairment be great, the holder is frequently compelled to take over the property and may suffer loss of principal. in other words, he receives no direct benefit from an increase in the value of the property, but has to stand the larger part of the risk of a decline in its value. this is not the case with investments represented by negotiable securities subject to changing market quotations. all such securities, railroad bonds for example, are acted on equally by changes in the value of the property which secures them. except for the influences of money-market conditions, railroad bonds advance with an increase in the value of the property and decline with a decrease in its value. well-selected bonds usually increase in value with time, and all such increase goes directly to the benefit of the holder. the failure of real-estate mortgages to respond similarly to changes in the value of property places the holder of a mortgage at a great disadvantage. owing to this characteristic, real-estate mortgages should be purchased only when general conditions in the real-estate market are distinctly favorable. not only should the purchaser of a mortgage have sufficient margin of security in the particular piece of property upon which he is loaning money, but he should also be satisfied that general real-estate values are relatively low, that there has been no undue speculation, and that conditions favor an advance rather than a decline in real-estate prices. no class of property is subject to more rapid changes in value than real estate. after an extensive advance the holder of a mortgage may be insufficiently protected by the equity in the property, even if his mortgage represents only per cent of the current appraised value of the real estate pledged. it may be that the per cent which he has loaned represents the total value or more than the total value a few years before. when a rapid advance in values occurs, tho it may be largely justified by the growth and development of the territory, there is sure to be present an element of speculation which is likely to carry prices beyond the point of reason. when the turn comes and a severe collapse takes place, its effects are extremely disastrous, because, unlike speculation in stocks or commodities, no short selling exists in real estate to temper the fall, and the immobile form of capital makes liquidation impossible. these considerations serve to show the need for great prudence in the purchase of real-estate mortgages. if the investor exercises due care in these particulars, he is reasonably sure of obtaining a very high-grade security; if he neglects these precautions, he may suffer severe loss of principal. no general figures are available which would indicate the degree of certainty attaching to the payment of interest upon real-estate mortgages. certain classes of mortgages, such as those secured by unimproved real estate or dwellings, afford no direct security of interest payment other than the threat of foreclosure. other classes, such as mortgages upon stores, hotels, or office-buildings, are often protected by a large income from the direct operation of the mortgaged premises, thus furnishing a security for the annual interest payment. the margin of protection in these cases varies greatly, so that no general conclusion can be drawn. the other characteristics of real-estate mortgages may be passed over more briefly. it is generally conceded that mortgages return a higher rate of income than can be obtained upon any other form of investment which affords equal security. this constitutes their chief advantage. their chief disadvantage, on the other hand, lies in their entire want of convertibility. there is no market for real-estate mortgages, and except in special instances they can not be readily sold. the fact that they are not subject to quotation prevents them also from holding out any prospect of appreciation in value. their very deficiency in this respect, however, constitutes an important advantage from another point of view. since they are not quoted they can not shrink in market price in obedience to changes in financial and business conditions. the buyer of a mortgage is assured that he can carry his mortgage at par through periods when it may be necessary to mark down all negotiable securities subject to changing market quotations. this is frequently a matter of great importance. the general characteristics of real-estate mortgages may be summarized as follows: ( ) when carefully selected and purchased under favorable conditions, great safety of principal and interest; ( ) a relatively high return; ( ) a low degree of convertibility; ( ) no prospect of appreciation in value; and ( ) the practical certainty of maintaining the integrity of the principal invested. is a security possessing these characteristics a suitable investment for a business surplus? only to a limited extent. the safety, high return, and assurance against loss in quoted value of principal are all highly desirable qualities for this purpose, but the lack of convertibility is a fatal defect. no consideration is of greater importance in the investment of a business surplus than a high degree of convertibility, so that if the need should arise the investment may be instantly liquidated. the fact that real-estate mortgages can not be readily disposed of makes it practically impossible to employ them for the investment of a business surplus. where convertibility is not an essential requirement, and where the want of promise of appreciation in value is not a serious matter, mortgages afford a very desirable form of investment. the characteristics which they possess in an eminent degree--safety, high return, and assurance against loss in quoted value of principal--are exactly suited to the ordinary requirements of savings-banks. generally speaking, only a small proportion of a savings-bank's assets need be kept in liquid form or readily convertible, and accordingly they find mortgages highly desirable. for the purpose of private investment the attractiveness of mortgages is not so easy to determine. ordinarily, fluctations in quoted values are of no great importance to the private investor, so that the absence of quotation which mortgages enjoy is not especially valuable. their safety and high return are attractive qualities, but their want of convertibility and of prospect of appreciation in value are drawbacks. on the whole, the private investor may probably employ with advantage a certain part, but not too much of his estate in mortgage investments. as part of a scientific and comprehensive scheme of investment, the special advantages of real-estate mortgages appear most prominently in the years following a business depression. during such a period real-estate values are usually relatively low, but beginning to advance, so that mortgages present their maximum margin of security. at such a time they compare most favorably with bonds and other investment securities which are subject to changing quotations, because such securities are then apt to be at their highest point under the combined influence of restored confidence and the low money rates which usually prevail. after several years of continued and increasing business prosperity the positions are just reversed. no discussion of real-estate mortgages would be complete without allusion to the guaranteed mortgages which have been placed upon the market in great quantities within the past few years. guaranteed mortgages are real-estate mortgages guaranteed as to principal and interest by substantial companies having large capital and surplus. in addition to the guaranty, the companies usually search and guarantee the title, see to it that the taxes, assessments, and insurance are paid, and perform the other services of a real-estate broker. their compensation varies somewhat, but probably averages / per cent--that is, for example, they loan at per cent and sell guaranteed mortgages to the investor at - / . the value of the guaranty may be considered from two points of view--first, in the event of a general decline in real-estate values, and, secondly, when a fall occurs in a particular piece of property or in a particular locality. if a severe decline in real-estate values takes place, affecting all localities, it might become necessary for the holders of guaranteed mortgages to test the value of their guaranties. in such a case the question would arise how far the capital and surplus of the guaranteeing companies would extend in liquidating the mortgages which they had guaranteed. this would depend entirely upon the proportion between the capital and surplus of the companies and the total amount of outstanding mortgages guaranteed. ordinarily the capital and surplus do not exceed per cent of the mortgages, so that the average guaranty is good for about per cent additional equity. on a piece of property worth $ , , upon which a guaranteed mortgage of $ , exists, the guaranty would be worth $ , , and would margin the property down to $ , . this additional equity is of little value. it is probably unlikely that a -per-cent depreciation in value will take place, but the guaranty is not needed unless it does, and if it should occur, the depreciation is quite as likely to go to per cent or more as to stop at . from the second point of view the value of the guaranty is much greater. the distribution of risk, as in the case of fire-insurance, protects the holder against loss in the event of a fall in the particular piece of property upon which he holds a mortgage, or even in a particular locality. it can not be said, however, that the records are yet sufficiently complete to form a conclusion as to what is a safe proportion between capital and surplus and outstanding mortgages. further than that the guaranteeing companies, generally speaking, have been operating since their inception upon a rising market, so that their success hitherto has not been remarkable. allowing for these drawbacks, however, the private investor, unless so situated as to give personal attention to the details of his investments, will probably do well to purchase his mortgages in guaranteed form. v industrial bonds industrial bonds include the obligations of all manufacturing and mercantile companies, and miscellaneous companies of a private character. they form a class quite distinct from railroad bonds or public-utility bonds. i. _safety of principal and interest._ the safety of industrial bonds, in common with the safety of all forms of investment, depends upon the margin of security in excess of the amount of the obligation. in the case of industrial bonds the amount of this margin is not always easy to determine. even when determined, the rule is difficult of application because a margin which may seem insufficient from the point of view of physical valuation may be satisfactory when considered as the equity of a working concern. the indications most to be relied upon in estimating the safety of industrial bonds are as follows: (_a_) _value of real estate._ the first point to be determined in considering the purchase of an industrial bond is the value of the real estate upon which it is a first mortgage. if the appraised value of the ground, irrespective of the buildings and machinery upon it, is greater by a substantial sum than the amount of the bond issue, the obligation is practically a real-estate mortgage. in such a case, while possibly "slow," _i.e._, secured by an assets difficult to realize upon--the safety of the bond can hardly be questioned. in judging a bond upon its real-estate value, it is not always safe to take the cost price of the land as shown by the company's books, because frequently the cost upon the books is artificially raised by payment having been made in securities whose market value is less than par, or in other ways. as stated above, judgment should be based upon the _appraised_ value of the land. if the bond meets this test satisfactorily, the prospective investor may feel reasonably sure that the safety of his principal is not in question, and may buy the bond without anxiety if it satisfies his other requirements. on the other hand, if the bond only partially meets this test, and it appears that some part of its value comes from plant and equipment and from the strength of the company as a working concern, then it is necessary for the investor to consider carefully several other factors. (_b_) _net quick assets._ the balance-sheet of every industrial company can be divided horizontally into two parts. its assets are of two kinds--property assets, which are fixt, and current assets, which are fluid. similarly, its liabilities are of two kinds--capital liabilities and current liabilities. it requires no very extended business experience to pick out the items which make up these totals. plant and property assets are usually lumped together under the head, "cost of property." current assets include inventories, bills and accounts receivable, agents' balances, marketable securities, and cash on hand and in banks--everything, in short, which can be quickly converted into cash. on the other side of the balance-sheet, capital liabilities are easily determined. they consist of the par amounts of bonds and stocks outstanding. current liabilities comprise bills and accounts payable, including borrowed money, pay-rolls, and interest and taxes accrued but not due. the real strength of every industrial concern is to be learned from the figures relating to its current accounts. property assets and capital liabilities are not of the same significance. if the cost of plant and equipment as shown by the books exceeds its real value, the market usually makes the necessary adjustment by putting a price less than par upon the bonds and stocks. no such process is possible in the case of the current accounts. if the current liabilities exceed the current assets the company shows a deficit, whatever its surplus may show on the books. on the other hand, if the current assets are greater than the current liabilities, the company possesses a working capital, represented by the difference between the two, and known as net quick assets. there are three things to consider in connection with net quick assets: first, the proportion between current assets and current liabilities. to put a company in good shape its current assets should be at least twice as great as its current liabilities. two for one is a fair proportion, tho some companies show as much as six to one. the stronger a company is in this proportion the better. secondly, the proportion between net quick assets and bonded debt. the bonded debt should never exceed net quick assets, except when the company possesses real estate, in which case two-thirds of the real-estate value plus the net quick assets should cover the bonds. some companies do much better than that. one prominent company in this country, altho it possesses real estate of considerable value, has agreed in the indenture securing its bonds to keep net quick assets at all times greater by a substantial margin than the amount of bonds outstanding. thirdly, the proportion between net quick assets and the surplus as shown in the balance-sheet. if the capital liabilities exactly balance the property assets, it is plain that the surplus will exactly balance the net quick assets. if the surplus is smaller than net quick assets, it is usually a sign that capital liabilities have been created to provide working capital. opinions differ as to the wisdom of this course. generally speaking, it is better to provide working capital by means of a stock issue than to depend upon the banks for accommodation. the exception to this rule occurs in the case of companies that require a great deal of working capital for part of the year and only a little at other times. if they have the best banking connections, such companies may be safe in depending upon their banks to carry them, but if they do so, they should have no bonded or other fixt indebtedness which would prevent their paper from being a first lien upon their entire assets. if working capital is to be created by the issue of capital liabilities, it is much better that it should be done by stocks than by bonds. the ideal method, however, is to provide only such an amount of working capital at the organization of a company as is necessary for the conduct of its business, and then, as the volume of its business grows, to accumulate the additional amount necessary out of earnings, refraining from the payment of dividends until the fund is complete. before leaving the subject of net quick assets, it is well to note the importance of the figure showing the actual amount of current liabilities. if a company has outstanding large amounts of bills and notes payable, it occupies a vulnerable position. inability to renew maturing notes was the cause of most of the industrial failures of last year. (_c_) _net earnings._ the amount of net earnings is of great importance in estimating the strength of an industrial company. the figures for a number of years should be examined to determine whether the earnings are increasing or decreasing, and to discover whether or not the earning power of the company is stable. this will depend largely upon the nature of the article which the company produces or trades in. if its product enjoys a steady demand at a fairly uniform price, it is justifiable that some of its capital should be in the form of bonds; but if its earnings are subject to violent fluctations due to rapid changes in the price of its product, there is little justification for conducting the business on borrowed money. in this connection it should always be considered how greatly a falling off in gross earnings will affect net earnings; and the proportion between net earnings and fixt charges should be carefully noted. in order for an industrial bond to receive favorable consideration, the average yearly net earnings of the company should amount to about three times the annual bond interest, taxes, and sinking funds. the greater the protection is in this respect the better. (_d_) _form of issue._ the form in which an industrial bond is issued is a matter of some importance. if the principal of the bond does not become due for a number of years, there is danger that the property will depreciate so far in value as to leave the bond without sufficient margin of protection. there are two ways to overcome this difficulty. one way is to establish a sinking-fund which will retire a certain proportion of the bonds by lot each year. another way is to issue the bonds in serial form, with a definite instalment maturing every year. in either case the annual sinking-fund or annual instalment should be greater than the probable depreciation so that the margin of security will be constantly increasing. (_e_) _management and control._ no question is of greater importance in estimating the strength of an industrial company than the reputation of the men in charge. the ability and integrity of the men who control the policy of the company and the efficiency of the operating officials are the principal factors in the success of an industrial undertaking. vacillating policies, weakly executed, will ruin the most promising enterprise. this is particularly true in the case of small companies. every man of business experience will understand the importance of this factor and be guided by it in the selection of industrial securities. based upon the foregoing considerations it is of interest to inquire what degree of safety really attaches to the average industrial bond? how far does it meet the foregoing requirements? the question is difficult to answer. industrial bonds vary greatly in point of safety, some issues possessing great strength and others being highly speculative. no general conclusions can be depended upon, and the investor is forced to consider each issue upon its own merits. ii. _rate of income._ the average net return upon industrial bonds is probably higher than upon any other form of funded corporate obligation. this constitutes one of the chief advantages of industrial bonds. iii. _convertibility._ it is impossible to make any general statement in regard to the convertibility of industrial bonds. some industrial bonds, notably the larger issues of well-known trusts, command a broad and active market. such bonds can be sold in large amounts at almost any time without seriously affecting the price. on the other hand, small underlying issues of such companies, usually high-grade in point of security, or the obligations of smaller companies, are almost as unmarketable as real-estate mortgages. between these two extremes all varieties of industrial bonds are to be found. the degree of convertibility which a security possesses is usually a matter of some importance, and the investor should make a careful examination of each bond in this respect. iv. _prospect of appreciation in value._ to what extent a bond may improve in security during the time that an investor holds it is of little importance unless the improvement be reflected in the market price of the bond. only so can the investor take advantage of its appreciation in value. in order for the improvement in security to be reflected in market price and thus add to the principal invested, it is necessary that a bond should possess a fairly active market. for this reason the industrial bonds which hold out the greatest promise of appreciation in value are the larger, more speculative issues, which possess the greatest convertibility. the purchase of such bonds frequently results in substantial profits. v. _stability of market price._ the four points above touched upon--safety, rate of income, convertibility, and likelihood of improvement in intrinsic value--are all inherent characteristics of every bond. the likelihood of favorable or unfavorable fluctation in market price is largely external in its nature and depends upon general financial and business conditions. as a class, industrial bonds can not be said to possess much stability of market price. some of the smaller issues enjoy a fictitious stability because of their inactivity, but generally speaking industrial bonds are subject to wide fluctations in accordance with changes in the business outlook. the foregoing is a summary, necessarily brief and imperfect, of the main points to be considered in judging the value of industrial bonds. the question remains whether such securities are desirable for the investment of a business surplus and of private funds. except in special cases industrial bonds are not suitable for a business surplus. it is impossible to find an industrial bond which combines all the characteristics necessary for that purpose. the requirements are great safety of principal and interest, a relatively high return, ready convertibility, and stability of market price. many industrial bonds can be found which combine two of these requirements, some even which combine three, but the full combination, if it exists at all, is unknown to the writer. in addition, the principle of distribution of risk should prevent one industrial company from investing its reserve funds in the securities of another industrial company. for private investment the case is somewhat different. a man of good business judgment, who desires to obtain a high yield for which he is prepared to sacrifice something in the way of convertibility and prospect of appreciation in value, may buy the underlying issues of strong companies with every confidence in the safety of his principal. again, the investor who wants a high yield and quick convertibility, who is prepared to take a business man's risk and to sacrifice stability of market price, may make a large profit by buying second-grade industrial bonds. no investor, however, should deceive himself with the idea that any industrial bond will satisfy all the requirements of the ideal investment. vi public-utility bonds it was a common saying among bond-dealers a few years ago that the day of the municipal bond had passed, the day of the railroad bond was passing, and the day of the public-utility bond was to be. municipal bonds were selling at fancy prices in consequence of the low rates for money which then prevailed, and railroad bonds appeared to be following in their wake. public-utility bonds alone afforded a satisfactory yield, and it was felt that the investing public would be forced to turn to them. this prediction, like many others which were based upon the assumption of continued ease in money, was destined to be unfulfilled. almost immediately there appeared an added demand for capital, and in the face of this demand, supplies of capital which had before seemed ample became suddenly scarce. money rates rose rapidly and as a necessary consequence municipal and railroad bonds fell in price to a point where their net return was commensurate with that obtained from the loaning of free capital. the investment situation was thus completely reversed. it was no longer a question as to what form of security investors must seek in order to obtain a satisfactory yield, but rather could the highest grade of municipal and railroad bonds be floated at any price. under these circumstances the contemplated necessity of turning to public-utility bonds never arose, and the general investing public remains for the most part unfamiliar with their elements of strength and of weakness. the term "public-utility company" denotes a private corporation supplying public needs under authority of a public franchise. the franchise may be of definite date or perpetual, and may be partial or exclusive. public-utility companies include street-railway, gas, electric-light and power, and water companies. properly speaking, telephone companies should also be included, but they are not usually regarded as belonging to the class of public-service corporations. it is impossible, within the limits of a single chapter, to discuss each kind of company separately. the investment value of street-railway bonds will be here considered, and it is felt that the general principles advanced, with slight modifications of detail, will be found equally applicable to a judgment of other forms of public-service securities. i. _safety of principal and interest._ in order to determine the safety of a street-railway company's bonds, the company must be subjected to a threefold examination, physical, financial, and political. an examination must be made into the extent and condition of the physical property in order to ascertain whether the bonded debt is secured by property having a real market value in excess of the face amount of bonds issued. the first point to be determined is the extent and valuation of the company's real estate. if the appraised value of the land upon which power-houses and car-barns have been erected is alone greater than the amount of bonds outstanding, the investigation need go no further, for the bonds, in such a case, would be practically a real-estate mortgage. in most instances, however, this is very far from being the case; and after careful appraisal of the real estate it is then necessary to make a careful valuation of the other physical property; namely, power-plants, depots, car-sheds, roadway, and equipment. it is usually impossible for the average investor to make such an examination himself, nor is it likely that he would possess sufficient technical knowledge to render his investigation of much value. for an accurate estimate of the value of a street-railway's physical property, it is usually necessary to depend upon the expert opinion of a trained engineer. it is a matter of regret that the average street-railway report can not be relied upon to furnish an accurate valuation of the physical property; and it is accordingly customary for careful bond-dealers, when they contemplate taking an issue of street-railway bonds for distribution among their clients, to have the property examined by a competent engineer, whose report then determines for them the question of taking the issue. disregarding the figures which show the cost of property and equipment upon the company's books, the engineer proceeds to make a careful estimate of the replacement value of the property, including real estate. if the result of the examination shows that the property could not be duplicated for the amount of the bond issue, the company occupies an unusually strong position--altho even in such a case some part of the value of the bonds comes from the strength of the company as a going concern. in most cases, however, it is probably found that the bond issue is in excess of the value of real estate and the replacement value of the physical property, the balance representing a capitalization of the franchise. to determine the real value of the franchise or franchises is a difficult matter and involves the whole question of the company's relations with the community which it serves and with the local lawmaking bodies. the first question which arises is whether the franchise is perpetual or for a definite time, and the second whether it is partial or exclusive. franchises vary greatly in these respects. sometimes a franchise, apparently partial, is practically exclusive, owing to the fact that all the available space in the streets is already occupied by the company's own tracks. if the franchises of a company are limited as to time, it is expedient, if not imperative, that the bonds should mature before the expiration of the franchises. if the company whose bonds are under examination satisfactorily passes this physical test--if it possesses real estate of considerable value, if the replacement value of the property is as great or nearly as great as the amount of the bonds, and if the franchises, while perhaps not perpetual or exclusive, are yet of longer duration than the bonds and render successful competition unlikely--the next step may then be taken; that is to say, an examination of the company's financial condition and earning capacity may be made. the amount of its gross earnings should be examined and the figures scrutinized for a number of years back to discover whether its earnings are increasing or decreasing. the position in which the company stands for obtaining new traffic must be noted, and some estimate must be made of the stability of its earning power. in this connection the relations of the company to the public are of great importance. it must be learned whether the company follows the policy of conciliating or ignoring public sentiment. the net earnings of the company must then be examined. this involves a criticism of operating expenses. the payments of the road must be analyzed to determine whether the proper amounts have been expended for renewal of track, replenishment of rolling stock, and other improvement sufficient to keep the property in good physical condition. this is the most intricate subject in the investigation of a street-railway property. unless proper allowance be made for depreciation, in addition to the expenses of direct operation, it is only a question of time before the strongest company will become bankrupt. deterioration of plant and equipment, which goes on constantly, can only be offset in two ways: one is out of earnings and the other is out of the security-holders--that is, by decreases in the market value of the securities. the first takes prosperity or courage; the second leads to bankruptcy. it is difficult to measure depreciation accurately, but a safe rule is to write off ten per cent of gross earnings each month for depreciation. in this way the charge for depreciation will be proportionate to the traffic, which provides automatic adjustment. if the net earnings, after making this allowance for depreciation, and after providing all expenses of operation including ordinary repairs, amount to as much as twice the interest charges upon the bonds outstanding, it is probable that the bonds may be taken with safety. before finally determining the question, however, certain political factors must be taken into consideration. the relations of the company to the leaders of the dominant political party must be investigated. the likelihood of agitation looking toward a reduction of fares must be considered and the possibility of increase in taxes (if below the legal limit) must be weighed. the probable attitude of the legislature on the question of renewing the franchises when they expire must be considered. in general, it must be learned whether any real ground of contention exists between the company on the one hand and the public and its representatives on the other, because it is inevitable that the company will weaken its independence of position by too close a connection with politics, and that the physical property will suffer if there is any lack of uninterrupted attention to it. finally one other thing should be investigated--the amount of the accident account and its proportion to the net earnings of the company. on small lines a single case of heavy damages will sometimes make serious inroads upon the earnings. the foregoing is a summary, necessarily brief and imperfect, but true in its essential outlines, of the main points which should be considered in judging the safety of street-railway bonds. the question remains, how far does the average street-railway company satisfy these requirements? broadly speaking, street-railway bonds are not yet to be classed in the first rank of investment securities. the troubles which have come to a head in the financial operations of the traction systems in new york and chicago are typical of troubles which are likely to occur elsewhere from the same general causes--overcapitalization in the first place and insufficient allowance for depreciation in the second place. in both new york and chicago the crisis was hastened by open and obvious overcapitalization, which is almost inevitable when many independent lines are merged into one system. the same trouble, however, is apt to occur in other traction systems where this evil appeared less flagrant at the outset. the advantages of electricity over horsepower naturally led to the multiplication of electric street lines, as the system ten or fifteen years ago passed beyond the experimental stage. as in all new enterprises, speculation ran ahead of the reality and financing built upon oversanguine calculations has too often had difficulty in squaring accounts when brought face to face with facts. in most of the calculations insufficient allowance was made for the wear and tear of service; in other words, for renewal of road and equipment. after a few years' test of earnings against expenses, it became evident that a proper allowance for depreciation of plant would show a heavy deficit in the income account. in most cases therefore no allowance or only a meager one was made. for a time this method of bookkeeping proved less disastrous than might have been expected owing to the rapid growth of population and business in american cities. it was possible in many cases to consider the enhanced value given to the franchise by growth of business as an offset to the depreciation of tracks and equipment. in so far also as the plant was kept up to a high degree of efficiency by charging the expense of repairs to operating expenses, the absence of a depreciation account was partially offset. with the progress of recent years, however, a new factor has been entering into the problem which promises to make the situation still more serious for the traction systems. this new factor is the rise in prices and wages. temporarily the influence of this factor may be checked by diminished business activity, but when normal conditions are restored, it will commence to act again upon the railways with accumulated effect. in most cases a proposition to increase the standard street-railway fare above five cents as an offset to the increased operating expenses would be so revolutionary a proposal that it could hardly be carried through. with the line of cost converging upon the line of receipts and with no proper allowance made for depreciation, the traction systems of the country seem to be facing a difficult problem. in the long run it can not be doubted that the problem will be met and solved in a way to afford justice alike to the public who use the cars and to the capitalists who have made street traction on a large scale possible, but in the meantime the investor who desires perfect safety should exercise great care and discrimination in his purchases of street-railway obligations. ii. _rate of income._ as a general rule, street-railway bonds in common with the obligations of all public-service corporations sell upon about the same income basis as high-grade industrial bonds--that is to say, under normal conditions they return considerably more than railroad or municipal bonds. iii. _convertibility._ it is difficult to speak of the convertibility of public-utility bonds as a class for the reason that they differ widely from one another in this respect. in general, it is certainly more difficult to dispose of public-utility bonds than railroad bonds. they do not possess sufficient convertibility to justify their purchase by any one who may need to realize quickly on his holdings. iv. _prospect of appreciation in value._ public-utility bonds, except such issues as are convertible into stock, possess little prospect of appreciation in value. it was pointed out above that depreciation is not properly allowed for, and it is very difficult for the securities to advance in the face of this obstacle. v. _stability of market price._ the bonds of public-service corporations are relatively more stable than railroad bonds because their earnings are not subject to the fluctations which occur in railroad properties between years of prosperity and years of depression. at the same time, it should be pointed out that their stability of price is largely fictitious, owing to the comparative inactivity of the issues. in other words, while the quotation may be maintained, it is usually difficult to sell any large quantity of a public-service corporation's bonds in a period of financial disturbance, while railroad bonds are more easily liquidated even if at a sacrifice. the question remains, do public-utility bonds afford a desirable security for the investment of a business surplus and of private funds? in regard to the former, it may be said at once that public-utility bonds do not meet the necessary conditions. the security is too doubtful, the convertibility is too small, and the stability of price too uncertain. for private investment the case is somewhat different. keeping in mind the desirability of diversifying investments and admitting the attractiveness of investing in a class of property whose earnings are comparatively stable, it seems clear that public-utility bonds can not be dismissed without consideration. when a company is found whose property is substantially equal in real value to its bonded debt, whose allowance for depreciation is ample, whose franchises are satisfactory, whose earning capacity is large, and whose management is capable and upright, the investor is justified in giving careful consideration to its issues. unless all these points are found to be satisfactory, however, the investor should content himself with some other form of security. for some years to come it is to be feared that many of our public-service corporations will suffer from the war of discordant elements--disregard of the rights of the public on the part of the management and socialistic agitation for control on the part of the community. until these warring factions are reconciled and the questions at issue adjusted with fairness to the security-holders and the public, the investor should be most prudent in his purchases of public-utility obligations. vii municipal bonds the previous chapters have considered, in turn, the investment value of railroad bonds, real-estate mortgages, industrial bonds, and public-utility bonds. the desirability of each of these different classes of security has been judged in accordance with the general principles laid down in the introductory chapter; that is to say, each class has been analyzed in relation to safety, rate of income, convertibility, prospect of appreciation in value and stability of market price. the same determining factors must now be applied to a judgment of government, state, and municipal bonds. bonds issued by a national government, by a state, or by a municipality are based primarily on some form of the power of taxation, tho the bonds are usually tax exempt within the political unit which creates them. when the power of taxation is unlimited, as in the case of the national government and the sovereign states, there can be no question as to the ability of the political unit to meet its obligation, and the question becomes entirely one of good faith. it is probable that the obligations of the united states government, by reason of the fact that the per-capita debt of the country is so small, the wealth of the country so great, and the good faith of the american people so clearly established, represent the highest type of security to be found in the world. it is quite possible, therefore, that the -per-cent united states consols would sell in any case at a relatively higher price than the obligations of any other country, but it can not be denied that the chief reason which causes them to sell at the remarkably high price which they have attained is the fact that they are required by national banks as security for circulation. this fact is doubtless the controlling element in their market position, and at once accounts for their special strength and removes them from the field of private investment. only less secure than united states bonds are the obligations of the sovereign states of the union. state bonds usually sell upon a basis which may be taken as the equivalent of pure interest, with no element of risk or speculation involved. the obligations of different states sell at different prices, in accordance with market conditions and the relations of supply and demand, but there can be no question of the equal ability of all states to pay their obligations. repudiation of state debts has occurred in our history, but only in cases where an overwhelming majority of the citizens were opposed to the creation of the debt at the time of its issue, but lacked the means to control the situation. such instances are chiefly to be found in the case of the so-called carpet-bag governments of the southern states after the civil war. municipal bonds--_i.e._, the bonds of cities, counties, and townships--are indirectly a first lien upon all taxable property in the municipality, and take precedence of every form of mortgage or judgment lien. this lien is enforced through a tax levy to meet interest and principal, and this tax levy the courts will compel in the rare cases in which a municipality attempts to repudiate a valid bond. this priority of the tax lien is the foundation of the prime position of municipal bonds. the case rarely occurs where a bond held valid by the courts proves uncollectable if sufficient taxing power existed when the bond was issued to provide for its redemption. it is only when the municipality itself diminishes in population and taxable property to the vanishing-point that such a default can occur. an investor can judge for himself as to the likelihood of such a catastrophe in any particular community, and can feel sure that his bond, if valid and protected by a sufficient taxing power, is as secure in its principal and interest as the municipality which issues it is secure in its continued existence. the following are the chief points which should be considered in the investigation of a municipal bond: ( ) the proportion which the total debt of the municipality bears to the assessed valuation of the property subject to taxation. usually a maximum rate is fixt by constitutional provision which rarely exceeds per cent. ( ) the purpose of issue. this must be a proper and suitable one. ( ) the proceedings under which the bonds were issued. these proceedings, the form of bonds, their execution, and their legal details must be in full compliance with the law. if these points are found to be satisfactory, the investor may rest content that no other form of security is so greatly safeguarded and that his bond ranks upon a substantial equality with government and state obligations. the rate of income to be derived from investment in municipal bonds varies in accordance with the obligations selected. like other forms of security, municipal bonds are controlled by market conditions, and their price is determined by the relations of supply and demand, and by adjustment to prevailing money rates. while differing only moderately from one another in point of safety and income return, municipal bonds may be divided into two distinct classes in accordance with the degree of convertibility which they possess. some municipal bonds possess great convertibility; others almost none. the feature which chiefly determines the activity or inactivity of a municipal issue is the size and importance of the municipality, together with the amount of bonds which it has outstanding. the bonds of large and important cities, whose outstanding debt reaches considerable proportions, usually possess great activity. they are constantly traded in and command a broad market because dealers are willing to buy or sell them in blocks at prices within a fraction of per cent apart. on the other hand, the bonds of counties, townships, and small cities are usually quite inactive. transactions rarely occur in them, dealers do not make a market in them, and they can be sold only to genuine investors. it is often impossible to have them even quoted. at first sight, it would appear that active municipal bonds would be much more desirable, but inactive municipals possess a special advantage which the active ones do not enjoy. they possess more stability of market price. it is true that their stability of value is due to the fact that they are not traded in or quoted and is, therefore, largely fictitious, but nevertheless it accomplished a useful purpose. it enables the investor to carry inactive municipals at cost price upon his books through periods in which active market bonds would require to be marked down in conformity with prevailing market prices. no other class of investment except real-estate mortgages possesses to the same degree this quality of price stability. for many classes of buyers--savings-banks, for example--stability of price is a consideration of prime importance. the preservation of the savings-bank's surplus and, indeed, the continued solvency of the institution depend upon maintaining the integrity of the principal which it has invested. a savings-bank requires, also, great safety of principal and interest; _i.e._, the certainty that principal and interest instalments will be paid at maturity. it needs only a fair but not high yield, and it does not need to place emphasis upon convertibility or prospect of appreciation in value. comparison of these requirements with the characteristics of inactive municipal bonds discloses a striking adaptability on their part to the real needs of the case. as a consequence, it is not surprizing to discover that inactive municipals are greatly sought by savings-banks. the desirability of inactive municipals for savings-bank investment was never more forcibly illustrated than on the first of last january, when the savings-banks came to make up their annual statements. broadly speaking, there can be no doubt that they were saved by the large quantity of inactive municipals and real-estate mortgages which they carried. had any considerable portion of their assets consisted of railroad bonds and active municipals, upon which they should have had to write off a loss of ten to fifteen points, their solvency would almost certainly have been impaired. but we are chiefly concerned in these pages with the advantages and disadvantages of different forms of investment from the point of view of a business man, both for the investment of his business surplus and of his private funds. do municipal bonds, either active or inactive, conform to the requirements of the business surplus? it can not be said that they do. municipal bonds possess either convertibility without stability of price or stability of price without convertibility. both qualities are necessary for a business surplus. the only form of municipal security which is at all adapted for the investment of a business surplus is a short-term issue of an active municipal bond. if it has only a very few years to run, its constant approach to maturity will invest it with the necessary stability of price. but even in this case equal safety and equal stability of price combined with a higher yield can probably be found in some high-grade railroad issue--either a short-term mortgage or equipment bond. for private investment the case is somewhat different. enough has been said in the preceding chapters to impress upon the reader the importance of buying securities only in accordance with his real requirements. if any investor, after careful comparison of the characteristics of municipal bonds, either active or inactive, with his necessities, decides that he can more closely satisfy his requirements with municipals than with any other form of security, he should not hesitate to purchase them. it is the opinion of the writer, however, that a thorough survey of the field of investment will generally disclose to the investor some security in either the railroad or corporation field which will suit his requirements as well as the municipal bond and at the same time provide him with a greater income. viii stocks passing to the consideration of stocks as investments, it is necessary at the outset that the reader should have clearly in mind the fundamental difference between stocks and bonds. this distinction was drawn in the introductory chapter, but it will be well to amplify it here, even at the risk of carrying the reader over familiar ground. the distinction between bonds and stocks is that between _promises to pay_ and _equities_. bonds, loans on collateral, and real-estate mortgages represent some one's promise to pay a sum of money at a future date; and if the promise be valid and the security ample, the holder of the promise will be paid the money on the date due. stocks, on the other hand, represent only a beneficial interest or residuary share in the assets and profits of a working concern after payment of its obligations and fixt charges. the value of the residuary share may be large or small, may increase or diminish, but in no case can the holder of such a share require any one, least of all the company itself, to take his share off his hands at the price he paid for it, or, indeed, at any price. if a man buys a $ , railroad bond, he knows that the railroad, if solvent, will pay him $ , in cash when the bond matures, but if he buys a share of railroad stock his only chance of getting his money back, if he should wish it, is that some one else will want to buy his share from him at the price he paid for it or more. if he buys a bond he becomes a creditor of the company, without voice in its management, but entitled to receive his principal and interest when due under pain of forfeiture of the security which the company made over to the trustee to insure payment. if he buys stock, he becomes a partner in a business enterprise, exercising his proportionate share in the direction of the company's affairs, and sharing ratably in its profits and losses. in the one case he buys a promise to pay and in the other an equity. this distinction, which appears plainly marked in theory, has been much obscured in recent years by the influence of two factors. as the country grew in size, the large corporations--the railroads, for example--required greater capital in order to provide facilities for the handling of their growing business. it was impossible to provide this capital wholly by means of bond issues without destroying the proportion between bonds and stocks, which alone could give to the bondholders the protection of a substantial equity. it was therefore necessary to obtain a large part of the capital required in the form of stock. the railway-managers were thus confronted with a difficult problem. it was imperative that they should obtain more capital, and it was impossible to dispose of sufficient stock on the basis of a speculative risk in a business venture. it was therefore necessary for the railway-managers to emphasize, as far as possible, the investment character of their stock, and various expedients were adopted to accomplish this purpose. in some cases preferred stocks were created or resulted from reorganizations, which possest a first lien upon the assets after payment of the obligations, and which were entitled to a certain stipulated dividend before the common stock obtained any distribution from the earnings. in this way the railway-managers created a compromise security which could be regarded as a stock, and would thus provide equity from the bondholders' point of view, and, at the same time, one which could be disposed of to investors. in other cases, which were probably more numerous, railway-managers attempted to give their stock an investment value through stability of income return. in good years when the company earned or per cent on its stock, their policy was to pay only or per cent in dividends, and hold the rest in their surplus fund in order to have the means of paying the same dividends the next year if only or per cent should be earned. by giving their stock stability of income return they hoped and expected to give it some stability of market price, and thus make it attractive to genuine investors. the effect of this policy was unquestionably successful, and one after another the stocks of our more important transportation systems and other large undertakings passed into the hands of investors. the successful adoption of this policy on the part of the railway-managers and other captains of industry has had one curious effect which was not contemplated by the originators of the movement, and which brings us to the second influence mentioned above as having tended to obscure the distinction between bonds and stocks. when a case has been brought before the courts in which the contention was advanced that the charges of the railway or public-service corporation were too high, the courts appear to have taken the ground that stocks and bonds should be classed together in order to determine the aggregate capitalization of the company, and that the justice or injustice of the contention that the charges are too high should be determined by ascertaining whether if the charges were made lower the net earnings would still be sufficient to pay a fair return on the total capital invested. this is the general line of reasoning pursued by the courts, both in the case of the consolidated gas company in new york and the pennsylvania railroad in pennsylvania. the effect of this attitude on the part of the courts has been to obscure still more greatly the real distinction between bonds and stocks. it is too early as yet to judge what will be the final outcome of the changed attitude toward stocks, but it can not be doubted that the present tendency of opinion on the subject, so far as large corporations are concerned, is to limit the return on stocks to a strictly investment basis, instead of leaving the stockholders free to reap all possible profit from their business venture subject to the restraints of competition. the adoption of this attitude by the courts should be a matter for serious consideration on the part of present and prospective stockholders. if the maximum return on stock is to be limited to per cent, or any fair investment basis, and charges reduced to consumers so that they obtain the benefit of any greater earning power, it would appear that the stockholders occupy an undesirable position. with their possible profits limited, but with no fixt return insured to them and no guaranty against possible loss, it can not be held that the purchase of stock seems attractive. these questions, however, will doubtless be settled in the long run in justice both to the public and to the stockholders, and in the meantime the stocks of our large and successful railway and industrial corporations, which have attained a certain stability and permanence of value, are entitled to consideration when investments are contemplated. it is not worth while to lay down rules for judging the investment value of such stocks, because the general principles advanced in the preceding chapters will be found sufficient for a judgment of their values. one class of stocks, however, deserves special mention. bank and trust-company stocks possess one characteristic in higher degree than other classes of stock. owing to the general practise of self-regulated banking institutions to distribute only about one-half their earnings in dividends and to credit the rest to surplus account, a steady rise is assured in the book value of the stock. no other class of stock possesses quite the same promise of appreciation in value. bank and trust-company stocks are especially sought by wealthy men, who can forego something in the way of income return for the sake of increasing the amount of their principal. the general characteristics of bank stocks are great safety, a low rate of income, limited convertibility, and practical certainty of appreciation in value. with the present chapter the discussion of specific forms of investments has come to an end. the next and concluding chapter will explain the general principles which control the market movements of all negotiable securities, and will endeavor to point out the indications which may be relied upon in determining whether or not given conditions are favorable for the purchase of securities. ix market movements of securities there is no question connected with the investment of money more important than the ability to judge whether general market conditions are favorable for the purchase of securities. after learning how to judge the value of every form of investment, a man may still be unsuccessful in the investment of money unless he acquires also a firm grasp upon the general principles which control the price movements of securities. by this it is not meant that a man needs to have an intimate knowledge of technical market conditions whereby to estimate temporary fluctations of minor importance, but rather that he should have clearly in mind the causes which operate to produce the larger swings of prices. if an investor acquires such a knowledge, he is enabled to take advantage of large price movements in such a way as materially to increase his income, and, at the same time, avoid carrying upon his books securities which may have cost much more than their current market quotations. if he can recognize the indications which point to the beginning of a pronounced upward swing in securities, and if he can equally recognize the signs which indicate that the movement has culminated, he can liquidate the securities which he bought at the inception of the rise or transfer them to some short-term issues whose near approach to maturity will render them stable in price, allowing the downward swing to proceed without disturbing him. it is not expected, of course, that the average business man will be able to realize completely this ideal of investment, but it is hoped that the following analysis will give him a clearer conception of the principles involved. broadly speaking, the market movements of all negotiable securities are controlled by two influences, sometimes acting in opposition to each other and sometimes in concert. one of these influences is the loaning rate of free capital; the other is the general condition of business. a low rate of interest or the likelihood of low rates has the effect of stimulating security prices, because banks and other money-lending institutions are forced into the investment market when they can not loan money to advantage. conversely, a high rate of interest or the prospect of high rates has the effect of depressing prices, because banking institutions sell their securities in order to lend the money so released. the automatic working of this process tends to produce a constant adjustment between the yields upon free and invested capital. when money rates are low, securities tend to advance to the point where the return upon them is no greater than that derived from the loaning of free capital. when rates are high, securities tend to decline to a point where the return is as great. this explains the influence of the first factor. the other factor is the general condition of business. good business conditions, or the promise of good conditions, tend to advance security prices, because they indicate larger earnings and a stronger financial condition. poor business conditions, or an unpromising outlook, have the reverse effect. the larger movements of security prices are always the resultant of the interaction of these two forces. when they work together the effect is irresistible, as when low interest rates and the prospect of good business conditions occur together, or when high money rates occur in the face of an indicated falling off in business activity. at such times all classes of securities swing together. for the most part, however, money rates and business conditions are opposed in their influence, rates being low when business is bad and high when business is good. usually the worse business conditions become, the easier money grows; while the more active business becomes, the higher money rates rise. the effect of this antagonism between the controlling causes is to produce movements of different proportions and sometimes in different directions in different classes of securities. high-grade bonds may be declining, middle-grade bonds remaining stationary, and poor bonds advancing, all at the same time. this serves to give a very irregular appearance to the security markets, and appears to justify the widely held opinion that security prices are a pure matter of guesswork, and that they are controlled only by manipulation and special influences. a clear conception of the nature of the influences which are always silently at work reconciles these apparent inconsistencies and makes it plain that general price movements are determined by laws as certain in their operation as the laws of nature. this may be illustrated by a single example. let us assume that interest rates are low and business conditions bad with prospect of still lower interest rates and still more unpromising business conditions. what will be the effect upon different classes of securities? high-grade bonds, such as choice municipals, whose safety can not be impaired by any extent of depression in business, will advance because their market price is influenced almost wholly by money rates. if their interest is certain to be paid, no matter what business conditions may become, they can not be greatly affected by a reduction of earnings, and consequently the influence of low money rates is left to act practically alone. middle-grade bonds, such as second-class railroad issues, will remain almost stationary, low money rates tending to advance their price and the fear of decreased earnings tending to depress them. the lowest grade of bonds and stocks, whose margin of security even in good times is not very great, will probably suffer in price because the fear of default in interest and of reduction in dividends will operate much more strongly than the mere stimulus of low interest rates. of course, securities can not be clearly separated into these three classes, but shade imperceptibly into one another. the classification is adopted only for purposes of illustration. up to this point we have been concerned merely in showing that the market movements of negotiable securities are controlled by the influence of certain factors. a more important question now remains to be considered, viz.: whether the effect of these two influences is to produce general swings in prices which may be depended upon with comparative certainty, and, if so, what indications are afforded to the investor of the commencement or culmination of such a movement. the answer must be that the combined effect of the two influences described is to produce definite and regular swings in prices, and that the indications which define the movements are not difficult to follow. a general survey of the history of every industrial nation reveals the fact that business conditions undergo alternate periods of prosperity and depression extending in clearly defined cycles of substantially uniform length. by tracing the usual course of interest rates and of business conditions throughout one of these cycles, a general idea can be formed of the way in which the joint influences operate to produce price movements. to what extent the course of interest rates is a cause as well as a result of changing business conditions, we shall not attempt here to estimate, but will be content to note carefully the general course which rates for money pursue throughout the cycles. immediately after a financial crisis, which usually closes an era of great business prosperity, money rates become abnormally easy. within a few months from the climax of the crisis, money accumulates in enormous volume in financial centers. this is caused by the great diminution of business activity which renders unnecessary a large part of the circulating medium that was formerly required to transact the greater volume of business. to the extent to which this accumulation of money merely reflects a redundancy of currency as distinguished from real liquid capital, it can have little effect in encouraging the resumption of business activity. as time passes, however, and economies in operation commence to make themselves manifest, and especially as waste and extravagance are curtailed, the country as a whole commences to accumulate real liquid capital; that is to say, its total production leaves a surplus over the amount of consumption. in the state of business feeling which has been pictured, the undertaking of new business ventures or additions to existing properties would not be approved, so that the surplus wealth created finds its way into bank deposits as liquid capital. the competitive attempt to loan this capital at a time when borrowers are few produces merely nominal interest rates. this continues for some time. it is only gradually as confidence returns and as the spirit of initiative begins to reassert itself that some part of the liquid capital created each year is diverted into fixt forms. here and there some enterprising group of men will develop a mine, lay a new piece of railway, or make some addition to an existing undertaking. for some length of time, however, the liquid capital of the country not only remains unimpaired, but is continually increasing. after a time a change comes. the annual surplus of production, tho larger than before, is only sufficient to provide for the new undertakings which the growing optimism demands. interest rates rise moderately in response to the added demand for capital. a few years further along, as business activity increases and success appears plainly to wait upon new ventures, the demand for new capital with which to develop increased facilities and new enterprises exceeds the annual supply of wealth created. prosperity having increased, another factor commences to assert itself. the spirit of economy and thrift which had prevailed throughout the years of depression gives place to extravagance, the demand for luxuries, and other unproductive forms of expenditure. while the total production is much greater than in the lean years, the margin of production is not proportionately as great, and this amount is insufficient to meet the demands upon it. the supplies of liquid capital stored up during the years of depression are resorted to, and they serve to provide the new capital for a few additional years. interest rates at once reflect the encroachment upon stored-up capital, and their rise gives the first real warning of the country's true position. the optimistic business men do not heed the warning. after exhausting all the real capital available in the country, they proceed to borrow extensively from foreigners or from government banks--in this country from the national government through bank deposits. every step which can be taken to induce foreigners to part with their capital is resorted to. if foreigners will not buy long-term bonds, short-term notes are created. if the foreigners refuse these, they are asked to make loans secured by the new bonds and notes. the rates of interest offered are so attractive that considerable sums are usually obtained, and the pressure of business activity continues further. finally the day of reckoning arrives when some incident, usually unimportant in itself, first suggests to the lenders of money that their debtors whom they know to be overextended may not be able to pay their loans. the attempt to collect their loans produces a financial crisis which brings to an end the period of prosperity. the foregoing is a description of the more important stages through which business conditions pass from crisis to crisis. different cycles vary in particular details, but all agree in essential outlines. sometimes special influences are at work which operate to shorten or prolong the cycle. the approach of a crisis will be retarded by inflation of the currency, for the excess finds its way into bank vaults and increases the volume of loanable credit. the effect of such inflation, however, is wholly disastrous, because the addition to the supply of capital is fictitious, not real, and only defers the day of reckoning for a greater catastrophe. on the other hand, the approach of a crisis can be greatly hastened by wars, conflagrations, and other agencies which destroy capital, and by attacks upon capital and the conduct of corporate business, for such attacks tend to render capital timid and produce the same effect as a violent curtailment of the supply. these are only some of the many influences which might become operative, but they serve to show the necessity for careful consideration of all the factors at work if a true conception of the condition and tendencies of business is to be formed. from the general account given above of the successive phases of a credit cycle, it is possible to summarize the course of interest rates and the course of business conditions. money rates become suddenly easy after a crisis, remain low or grow easier for a period of several years, and then rise continuously until the next crisis, advancing with great rapidity toward the close of the cycle. business conditions remain poor or grow worse a few years after a crisis. liquidation is taking place, prices are going down, and the uncertainty of the outlook causes diminished activity. thereafter, however, conditions improve and activity increases with fair uniformity until it reaches the high tension of the period immediately preceding the crisis. the course of interest rates and the course of business conditions may both be deflected by the operation of special influences, but the general tendencies are substantially as outlined. the result of the operation of these joint factors may be traced in the market movements of any class of security desired. for the sake of simplicity, let us consider their effect in producing the market swings of the highest grade of investment issues and of the lowest grade, those which are affected only by money rates and those which are affected almost wholly by business conditions. emerging from the strain of the crisis at their lowest point, high-grade bonds, such as the best municipal and railroad issues, advance rapidly as interest rates decline, continuing their advancing tendency throughout the period of business depression which follows upon the heels of the crisis. as business conditions improve, their position, while perfectly secure before, is further strengthened and an added stimulus is given to their rise. about the middle of the cycle when the business outlook is very promising, and before interest rates have sustained any material advance, the prices of high-grade bonds are usually at their highest point. from that time forward they commence to decline, in spite of the increasing prosperity of the country, under the influence of rising money rates. they make their lowest prices in the midst of the crisis, when the strain upon capital is greatest and the outlook for business most unpromising. the lowest grade of bonds, on the other hand (whose margin of security is least), do not commence to recover materially in price, in spite of the influence of low money rates during the hard times which follow the crisis, the influence of reduced earnings and the fear of default of interest holding them in check. as the outlook becomes brighter, they advance rapidly and continue to improve in price so long as they yield more than current money rates. at some point, difficult to determine in advance but usually well along toward the end of the cycle, they reach their high point and thereafter decline under the influence of the growing stringency in money. between these two extremes, every class of security is to be found. the better ones will tend to resemble, in their market movements, the course pursued by the choicest bonds; the poorer ones will approximate the lowest class. in every case, however, unless special influences operate to produce variations, the market swing of a given security should be easily conjectured by an investor who gives careful attention to the relative weight which is likely to attach to each determining influence. * * * * * transcriber's note: spelling remains as in the original except "qualities to be emphasied; for investors" has been changed to "emphasized". produced from scanned images of public domain material from the google print project.) harvard college library from the quarterly journal of economics the macmillan company new york · boston · chicago · dallas atlanta · san francisco macmillan & co., limited london · bombay · calcutta melbourne the macmillan co. of canada, ltd. toronto the value of money by b. m. anderson, jr., ph. d. assistant professor of economics, harvard university author of "social value" new york the macmillan company _all rights reserved_ copyright, by the macmillan company set up and electrotyped. published may, . to b. m. a., iii and j. c. a. who often interrupted the work but none the less inspired it preface the following pages have as their central problem the value of money. but the value of money cannot be studied successfully as an isolated problem, and in order to reach conclusions upon this topic, it has been necessary to consider virtually the whole range of economic theory; the general theory of value; the rôle of money in economic theory and the functions of money in economic life; the theory of the values of stocks and bonds, of "good will," established trade connections, trade-marks, and other "intangibles"; the theory of credit; the causes governing the volume of trade, and particularly the place of speculation in the volume of trade; the relation of "static" economic theory to "dynamic" economic theory. "dynamic economics" is concerned with change and readjustment in economic life. a distinctive doctrine of the present book is that the great bulk of exchanging grows out of dynamic change, and that speculation, in particular, constitutes by far the major part of all trade. from this it follows that the main work of money and credit, as instruments of exchange, is done in the process of dynamic readjustment, and, consequently, that the theory of money and credit _must be a dynamic theory_. it follows, further, that a theory like the "quantity theory of money," which rests in the notions of "static equilibrium" and "normal adjustment," abstracting from the "transitional process of readjustment," touches the real problems of money and credit not at all. this thesis has seemed to require statistical verification, and the effort has been made to measure the elements in trade, to assign proportions for retail trade and for wholesale trade, to obtain _indicia_ of the extent and variation of speculation in securities, grain, and other things on the organized exchanges, and to indicate something of the extent of less organized speculation running through the whole of business. the ratio of foreign to domestic trade has been studied, for the years, - . the effort has also been made to determine the magnitudes of banking transactions, and the relation of banking transactions to the volume of trade. the conclusion has been reached that the overwhelming bulk of banking transactions occur in connection with speculation. the effort has been made to interpret bank clearings, both in new york and in the country outside, with a view to determining quantitatively the major factors that give rise to them. in general, the inductive study would show that modern business and banking centre about the stock market to a much greater degree than most students have recognized. the analysis of banking assets would go to show that the main function of modern bank credit is in the direct or indirect financing of corporate and unincorporated _industry_. "commercial paper" is no longer the chief banking asset. it is not concluded from this, however, that commerce in the ordinary sense is being robbed by modern tendencies of its proper banking accommodation, or that the banks are engaged in dangerous practices. on the contrary it is maintained that the ability of the banks to aid ordinary commerce is increased by the intimate connection of the banks with the stock market. the thesis is advanced--though with a recognition of the political difficulties involved--that the federal reserve banks should not be forbidden to rediscount loans on stock exchange collateral, if they are to perform their best services for the country. the quantity theory of money is examined in detail, in various formulations, and the conclusion is reached that the quantity theory is utterly invalid. the theory of value set forth in chapter i, and presupposed in the positive argument of the book, is that first set forth in an earlier book by the present writer, _social value_, published in . that book grew out of earlier studies in the theory of money, in the course of which the writer reached the conclusion that the problem of money could not be solved until an adequate general theory of value should be developed. the present book thus represents investigations which run through a good many years, and to which the major part of the past six years has been given. on the basis of this general theory of value, and a dynamic theory of money and exchange, our positive conclusions regarding the value of money are reached. on the same basis, a psychological theory of credit is developed, in which the laws of credit are assimilated to the general laws of value. in a final section, the constructive theory of the book is made the basis for a "reconciliation" of "statics" and "dynamics" in economic theory--an effort to bring together the abstract theory of price (_i. e._, "statics") which has hitherto chiefly busied economists, and the more realistic studies of economic change (_i. e._ "dynamics") to which a smaller number of economists have given their attention. these two bodies of doctrine have hitherto had little connection, and the science of economics has suffered as a consequence. this book was not written with the college student primarily in mind. none the less, i incline to the view that the book, with the exception of the chapter on "marginal utility," is suitable for use as a text with juniors and seniors in money and banking, if supplemented by some general descriptive and historical book on the subject, and that the whole book may very well be used with such students in advanced courses in economic theory. i think that bankers, brokers, and other business men who are interested in the general problems of money, trade, speculation and credit, will find the book of use. naturally, however, it is my hope that the special student of money and banking, and the special student of economic theory will find the book of interest. the book may interest also certain students of philosophy and sociology, who are concerned with the applications of philosophy and social philosophy to concrete problems. my obligations to others, running through a good many years, are very great. with professor e. e. agger, i talked over very many of the problems here discussed, in the course of two years of close association at columbia university, and gained very much from his suggestions and criticisms. professor e. r. a. seligman has read portions of the manuscript, and given valuable advice. professor h. j. davenport has given the first draft an exceedingly careful reading, and his criticisms have been especially helpful. professor jesse e. pope supervised my investigations in the quantity theory of money in - , in his seminar at the university of missouri, and gave me invaluable guidance in the general theory of money and credit then. more recently, his intimate first hand knowledge of european and american conditions, both in agricultural credit and in general banking, has been of great service to me. mr. n. j. silberling, of the department of economics at harvard university, has been helpful in various ways, particularly by making certain statistical investigations, to which reference will be made in the text, at my request. various bankers, brokers, and others closely in touch with the subjects here discussed have been more than generous in supplying needed information. among these may be especially mentioned mr. byron w. holt, of new york, mr. osmund phillips, editor of the _annalist_ and financial editor of the _new york times_, messrs. l. h. parkhurst and w. b. donham, of the old colony trust company in boston, various gentlemen in the offices of charles head & co., and pearmain and brooks, in boston, mr. b. f. smith, of the cambridge trust company, mr. w. h. aborn, coffee broker, new york, mr. burton thompson, real estate broker, new york, mr. jas. h. taylor, treasurer of the new york coffee exchange, mr. j. c. t. merrill, secretary of the chicago board of trade, decoppet and doremus, new york, and mr. f. i. kent, vice president of the bankers trust company, new york. my greatest obligations are to two colleagues at harvard university. professor f. w. taussig has given the manuscript very careful consideration, from the standpoint of style as well as of doctrine, and has discussed many problems with me in detail. professor o. m. w. sprague has placed freely at my service his rich store of practical knowledge of virtually every phase of modern money and banking, and has read critically every page of the manuscript. none of these gentlemen, of course, is to be held responsible for my mistakes. i also make grateful acknowledgment of the aid and sympathy of my wife. in the course of the discussion, frequent criticisms are directed against the doctrines of professors e. w. kemmerer and irving fisher, particularly the latter, as the chief representatives of the present day formulation of the quantity theory. both their theories and their statistics are fundamentally criticised. i find myself in radical dissent on all the main theses of professor fisher's _purchasing power of money_, and at very many points of detail. to a less degree, i find myself unable to concur with professor kemmerer. but i should be sorry if the reader should feel that i fail to recognize the distinguished services which both of these writers have performed for the scientific study of money and banking, or should feel that dissent precludes admiration. i acknowledge my own indebtedness to both, not alone for the gain which comes from having an opposing view clearly defined and ably presented, but also for much information and many new ideas. my general doctrinal obligations in the theory of money and credit are far too numerous to mention in a preface. my greatest debt in general economic theory is to professor j. b. clark. b. m. anderson, jr. harvard university, march , . analytical table of contents _part i. the value of money and the general theory of value_ chapter i economic value page problem of value of money special case of general theory of value; present chapter concerned with general theory formal and logical aspects of value: value as quality; value as quantity; value and wealth - absolute _vs._ relative conceptions of value: value of money _vs._ "reciprocal of price-level"; value prior to exchange; value and exchangeability; do prices correctly express values? - doctrine so far in accord with main current of economic opinion - causal theory of value new: marginal utility, labor theory, etc., rejected - social explanation required: "individual" a social product, both in history of individual and in history of race - and above individual impersonal psychic forces, law, public opinion, morality, economic values - three types of theory have dealt with these: theory of extra-human objective forces; extreme individualism; social value theory - illustrated in jurisprudence, ethics, and economic theory - law, morals, and economic values generically alike, but have _differentiæ_ - but not differentiated on basis of states of consciousness of individual immediately moved by them, because many minds in organic interplay involved - economic social value (a) of consumers' goods and services: "utility" and scarcity; "marginal utility"; social explanation of marginal utility; marginal utilities the conscious _focus_ of economic values of consumers' goods; but only minor part of these values; individuals, classes and institutions heavily weighted by legal, moral, and other social values, in power over economic values of consumers' goods - economic social value (b) of labor, land, stocks, bonds, "good will," etc.; based only in part on values of consumers' goods; partially independent, directly influenced by contagion, and centers of power and prestige - pragmatic character of theory - relation of social values to individual values - chapter ii supply and demand, and the value of money _hiatus_ between general theory of value and theory of value of money - partly because former has been developed by different writers from those who have developed latter - but chiefly because supply and demand, cost of production, etc., _assume_ fixed value of money, and are theories of _price_, rather than _value_ supply and demand useful but superficial formula, common property of many value theories - crude and unanalyzed in smith and ricardo; first made precise by j. s. mill, who gives essentials of modern doctrine - böhm-bawerk's pseudo-psychology spoils mill's clean-cut doctrine - supply and demand assumes fixed _value_ of money-unit, and hence inapplicable to money itself - but supply and demand does _not_ assume fixed _price-level_ - cairnes _vs._ mill - mill's unsuccessful effort to apply supply and demand to money - walker's attempt supply and demand in the "money market" - chapter iii cost of production and the value of money types of cost theory: modern cost doctrine is "money costs" doctrine, and inapplicable to value of money labor cost: smith; ricardo; ricardo's confession of failure; "real costs" in senior and cairnes; mill's "money-outlay" cost doctrine, and cairnes' criticism; but "money-cost" has survived - because "real cost" doctrine does not square with facts - "money-cost" of producing money-metal - austrian cost doctrine runs still in money terms, assuming value, money, and fixed value of money - "negative social values" as "real costs" note, chapter iv the capitalization theory and the value of money money as "capital good," and "money-rates" as rentals - capitalization theory; formula; capital value passive resultant of annual income and rate of discount - but in case of money, rental and rate of discount not independent variables - and in case of money, capital value not passive shadow, but active cause of income capitalization theory assumes money, and fixed value of money - assumed fixed value of money absolute, and not relative - capitalization theory, in current formulation, inapplicable to value of money - chapter v marginal utility and the value of money marginal utility theory usually thinly disguised version of supply and demand, and hence inapplicable to money view that money is unique in having no utility _per se_ - marginal utility and "commodity theory" of money-value - quantity theorists and marginal utility of money - money an instrumental good, and marginal utility no less applicable here than elsewhere; marginal utility invalid as general theory of value, hence invalid when applied to money - wieser's theory of value of money - a circle in reasoning - schumpeter's similar circle but schumpeter's general utility theory, though inapplicable to value of money, in form avoids a causal circle - schumpeter's _conspectus_; different from böhm-bawerk and most utility theorists - , - defects and limitations of schumpeter's general theory - schumpeter's substitutes for social value concept - von mises sees circle of wieser and schumpeter seeks to avoid it by construing utility theory as historical, instead of static, theory but this departs from fundamentals of utility theory; other difficulties - kinley's doctrine - general criticism of utility theory - davenport, wicksteed, fisher, perry - _part ii. the quantity theory_ chapter vi the quantity theory of prices. introduction preliminary statement of quantity theory, and of critical theses to be developed in following chapters. virtually every contention and every assumption of quantity theory to be challenged - chapter vii dodo-bones quantity theory doctrine that valueless objects can serve as money; nicholson's assumption: money made of dodo-bones - fisher's view also and ricardo's - will dodo-bones circulate? dodo-bones and poker chips; circular reasoning both medium of exchange and standard of value must be valuable is inconvertible paper an exception? - doctrine that money gives legal claim to things in general kemmerer's assumptions; money made of commodity, once valuable, now used only as money commodity theory requires present commodity value historical _vs._ cross-section view: possibility that such money would circulate - value not tied up with marginal utility or commodities: social value theory; derived values often become independent of original presuppositions, in economic as well as legal and moral spheres - but this no basis for quantity theory: social psychology, not mechanics "banker's psychology" _vs._ psychology of blind habit: india, austria, united states; monetary phenomena of war times; "credit theory" of greenbacks - question-begging definitions - assumptions of quantity theory: blind habit and fluid prices - extreme commodity theory denies that money-use adds to value of money; usually not true; analysis of money-functions - hypothetical case in which whole value of money comes from commodity value - money must have value apart from monetary employments, but, in general, gains additional value from employment as money - chapter viii the "equation of exchange" fisher leading, most consistent, most uncompromising quantity theorist: wide acceptance of his views taussig _vs._ fisher fisher and dodo-bone doctrine: logical part of quantity theory; fisher's value concept - "equation of exchange": analysis of fisher's version, typical of all - in what sense equality between two sides of equation? meaning of "t" - no "goods side" to equation; both sides sums of money; equal because identical; equation meaningless - all factors in equation highly abstract - "p" and "t" cannot both be given independent definitions: p defined as _weighted_ average, with t in denominator; and must be changed from year to year, as elements in t change, even though no prices change - this makes circular theory: _problem_ defined in terms of _explanation_ - causal theory associated with equation of exchange equation amplified to include credit; not acceptable to nicholson or walker, and caricature of conditions in germany and france - book-credit, bills of exchange, etc., excluded - why a one-year period? - chapter ix the volume of money and the volume of credit mill thought credit acts on prices like money, and that this reduces quantity theory tendency to indeterminate degree; fisher holds volume of money _in circulation_ governs volume of credit, so that quantity theory stands fisher's arguments for fixed ratio, _money_ to bank-deposits - argument a _non-sequitur_, even if contentions true - contentions untrue: no fixed ratio between _reserves_ and deposits, or reserves and demand liabilities, either in america or europe - taussig's views; virtually surrender of quantity theory in modern conditions - bulk of quantity theorists in between fisher and taussig, but nearer to fisher's view than to taussig's chapter x "normal" vs. "transitional" tendencies quantity theory qualified by distinction between "normal" and "transitional" effects of change in quantity of money, etc. meaning of distinction, and extent of qualification hard to determine: is "normal period" real period in time? how long is "transitional period"? is it realistic, or hypothetical? is equation of exchange realistic? concrete _vs._ hypothetical price-levels - legitimate and illegitimate abstraction - causation and temporal order - fisher admits very slight qualification of "normal theory" mill's quantity theory "short run" theory; taussig's "long run" theory; radically different logic in the two - fisher's theory sometimes "long run" and sometimes "short run" - chapter xi barter quantity theory spoiled if resort to barter possible and important extent of barter and other flexible substitutes for money and bank-credit; simple barter; different methods of corporate consolidations; flexibility, with state of money-market; clearing-house arrangements in speculative exchanges; offsetting book-credits - barter made easier under money economy, by measure of value function of money bills of exchange; foreign trade chapter xii velocity of circulation velocity conceived by quantity theory as causal entity, independent of quantity of money and prices; necessary assumption for law of proportionality "coin-transfer" _vs._ "person-turnover" concepts - velocity really non-essential by-product, meaningless average - doctrine that velocity independent of money; habit and convenience; hoarding; hoarding by banks - velocity and volume of trade; vary together - value of money causally governs velocity - chapter xiii. the volume of money and the volume of trade--trade and speculation quantity theory doctrine that volume of trade, and volume of money (and credit), are independent; trade governed by physical and technical conditions, not money - view that quantity of money vitally affects production and trade walker, sombart, withers, price, holt - increase of money increases trade, even on static theory: increase of money increase of capital; lowered margin in exchanges; money-rates and interest; money tool of exchange; elasticity of demand for money-service; in arizona and new york city - _trade_ distinguished from _production_ and from _stock_ - trade chiefly speculation; fisher's $ , , , of trade in u. s. in analyzed; index of variation in trade; figure based on kinley's returns from , banks; double-counting - figure largely represents speculation; statistics of total wealth of u. s.; small rôle of wholesale and retail deposits; "all other deposits" bunched in speculative centers, especially new york; trifling "deposits" in country banks; evidence of bank-clearings: clearings and stock speculation; clearings and ordinary business - measurement of "ordinary trade" - volume of stock speculation - commodity speculation - unorganized speculation - bill and note speculation fisher's and kemmerer's indicia of trade variation wholly misleading - production waits on trade; selling costs _vs._ "cost of production"; "good will"; are banks useless? - "normal _vs._ transitional": statics _vs._ dynamics; money and credit make static assumptions possible; very little trade in "normal equilibrium" or static state; volume of trade depends on transitions and dynamic changes; functional theory of money and credit must be dynamic theory; abstraction from money by static theory; no static theory of money and credit possible; quantity theory misses whole point of money-functions - appendix to chapter xiii the relation of foreign to domestic trade in the united states ambiguity of "domestic trade": figures comparable with export and import figures cannot include turnovers; net income of united states, minus imports on retail basis, counted as domestic trade; exports on retail basis counted as foreign trade; net income for ; index of variation for other years; cautions and qualifications; ratio of foreign to domestic trade, - - chapter xiv the volume of trade and the volume of money and credit interdependence of trade, and money (and credit); increasing trade causes increase of money and credit - quantity theory doctrine: fisher _vs._ laughlin - quantity theory has no explanation of elastic bank credit: "currency theory" of deposits - loans and deposits - bills of exchange - summary of quantity theory doctrine - chapter xv the quantity theory: the "passiveness of prices" heart of quantity theory: price-level cannot change without prior change in money, deposits, trade, or velocities: independently rising price-level, unable to alter trade or velocities, would drive money away, and so be unable to sustain itself; individual prices can rise independently, but other prices must fall to compensate - criticism: argument impressive only because it assumes an _uncaused_ rise in general price-level; when causes assigned, prices can independently rise, compelling modification in other factors in "equation of exchange"; "transitional" and "normal" effects: instances - quantity theory conflicts with supply and demand: supply and demand holds good: particular prices and price-level - generalization of conflict to include cost of production, capitalization theory, imputation theory capitalization theory _vs._ quantity theory; different psychological assumptions of the two theories - cost of production _vs._ quantity theory; money-_income_ _vs._ quantity of money - quantity theory false, granting all its assumptions - doctrine that price-level independent of particular prices, and presupposed by them, false; absolute value of money, not price-level, presupposed; price-level may change with value of money constant, through changes in absolute values of goods - chapter xvi the quantity theory and international gold movements quantity theory holds that gold movements depend on price-_levels_; but price-level mere average, cause of nothing - some prices, rising, tend to repel gold, but most prices have no such effect - some prices, rising, bring in gold - gold movements and money-rates - chapter xvii the quantity theory _vs._ gresham's law - chapter xviii the quantity theory and "world prices" types of quantity theory: world's volume of _gold vs._ quantity of _money_ in given country; standard _vs._ token money; abandonment of dodo-bone theory and "equation of exchange" - credit does not rest on money: measure of values _vs._ reserves; loans and wealth; value of money _vs._ price-level - loose relation of reserves and credit in world as whole; no proportionality of quantity of gold to value of gold; no quantity theory needed to assert that value of gold related to its quantity - chapter xix statistical demonstrations of the quantity theory--the rediscovery of a buried city criticism of quantity theory statistics yields constructive conclusions; mitchell and greenbacks; kemmerer's and fisher's statistics of "equation of exchange"; kemmerer's criticism of earlier statistics - kemmerer's and fisher's figures all wrong except for volume of money and deposits, and prices in base year; if correct, would not prove quantity theory - fisher's statistics, resting on kemmerer's, chiefly studied: their relation to kinley's "deposits" figures - m´v´ calculated: errors in calculation; new york very incomplete in kinley's figures; private banks and trust companies; clearings and "deposits," in new york and outside; "total transactions" and clearings; fisher exaggerates country checks by at least billions, for ; major part of all "check deposits" in new york city - new york as "clearing house" for united states: extent of, and influence of on new york clearings, much overestimated; bulk of new york clearings and new york "deposits" grow out of new york business - index of variation for m´v´ wrongly weighted; v´ wrongly calculated for all years; which upsets calculation of v - volume of trade: greatly exaggerated by bank transactions, which include vast deal of duplications in checks, loans and repayments, etc. - fisher's reply; _under_counting offsets _over_counting - main items of undercounting in clearing houses of speculative exchanges; measurement of, in new york stock exchange, and chicago board of trade; swamped by call loan transactions, which exceed security sales - price-indexes of kemmerer and fisher, dominated by wholesale prices, have no relevance to their "equations of exchange" - in general, their figures bury speculation and new york city part iii. the value of money chapter xx recapitulation of positive doctrine recapitulation of constructive theses of parts i and ii, and program of parts iii and iv - chapter xxi the origin of money, and the value of gold problem stated - value _vs. saleability_: degrees of saleability; theory of saleability; "buying price" _vs._ "selling price"; indirect exchange in barter economy; development of commodity of superior saleability into money - money never unique - origin of gold money: ornament; store of value; social prestige of prodigality and of ornament; love of approbation, sex-impulse, and competitive display; elastic value-curve of gold; industrial employments of gold - distribution of wealth and power, and value of gold - chapter xxii the functions of money and the value of money classification - measure of values (standard of value) distinguished from medium of exchange; former does not add value to money metal, latter does - reserve function money as "bearer of options"; distinguished from store of value; the _dynamic_ function of money _par excellence_; explanation of low rates on call loans, and short loans, and low yield of high grade bonds, which share "bearer of options" function; "pure rate" of interest _vs._ "money rates": austria; the new york money market - legal tender; the _staatliche theorie_ - standard of deferred payments; which functions add to value of money metal? relation of money rates to capital value of money - agio when coinage is restricted: india _vs._ western world - equilibrium of gold in arts and gold as money: difficulties of marginal analysis; the money-market phenomena - chapter xxiii credit analysis rather than definition: "futurity" not essence of credit; credit part of general value system; stocks as credit instruments; juridical and accounting phases - confidence; involved in general value phenomena as well as credit; social psychology of confidence; contagions; influence of centers of prestige; nothing unique in credit; selling _vs._ borrowing - definition of credit; credit _vs._ credit transaction; credit and exchange; bulk of credit grows out of dynamic conditions - functions of credit; increasing saleability of non-pecuniary wealth; corporate organization; limits of credit expansion - consideration of objections: that personal loans do not rest on wealth; public loans; that value behind loan would not exist if loan were not made - schumpeter's "heresies"; his view of the function of the banker: "dynamic credit"; america _vs._ continental europe - peculiarities and functions of bank credit; technique of banking: capital; assets; reserves; "liquidity"; money market - chapter xxiv credit--bank assets and bank reserves traditional view that liquid commercial loans normal and dominant type of bank asset disproved; cannot exceed - / per cent of assets of american banks; analysis of bank assets: "other loans and discounts"; stock collateral loans; loans on "other collateral security"; stocks and bonds held by banks; classes of banks; various combinations; excluding real estate loans, more than half of credit extended by state and national banks and trust companies is to stock market; rapid development of stock collateral loans: new york; europe - activity of different types of loans: banking assets get liquidity chiefly from stock market, and from produce speculators - credit extended to wall street not at expense of ordinary commerce; country banks and wall street - federal reserve banks should rediscount stock collateral loans; "money trust" a trust in financing corporations, not ordinary commerce; panics and federal reserve system quantity theory, putting all exchanges on a par, grotesque: volume of trade and prices in the stock market - direct and indirect financing of corporations by banks; "margin dealer" as "banker" - adam smith's view of banker's functions, and of safe bank loans correct on basis of facts of his day, but corporate organization and organized stock market have made smelting house as liquid as consumers' goods division of labor in banking: america _vs._ germany - agriculture in money market - reserve problem: special case of problem of liquid assets; many flexible substitutes for cash - causal relation runs from deposits to reserves; gold production and reserve-ratio - no static law or "normal ratio" possible; reserve function entirely dynamic function; reserve not needed in "static state"; illustrated by london money market; "ideal credit economy" - _part iv. the reconciliation of statics and dynamics_ chapter xxv the reconciliation of statics and dynamics theory of money as focus of general economic theory, exhibiting interdependence of doctrines; basis of further unification of statics and dynamics in higher synthesis - statics _vs._ dynamics, normal _vs._ transitional, and related contrasts; illustrations; divergent lines of doctrine: tariffs, wars, overproduction, extravagance, etc. - statics quantitative; dynamics qualitative - statics and dynamics both abstract - dynamics and "friction" - "theory of prosperity" and dynamics - statics and cross-section analysis; statics as price-theory; dynamics as value-theory - generalization of statics: price-theory applied to dynamic phenomena: capitalization; costs; "taxonomy;" "discounting" dynamic changes; money the static measuring-rod: wide scope of money-measure; measurement of non-economic values - generalization of dynamics: all values, whether of wheat or "good will," have social psychological explanation; technological and biological factors, and the static equilibrium; business cycles - business man _vs._ economic theorist, and value-theory; manipulation of values and prices - statics and time - immaterial capital - statics and dynamics have not different subject-matter - equilibrium of all social values: statics and dynamics of the law: social forces and social control - summary of part iv - part i. the value of money and the general theory of value the value of money chapter i economic value the problem of the value of money is a special case of the general problem of economic value. the present chapter is concerned with the general theory of value, while the rest of the book will consider the numerous peculiarities and complications which make money a special case. the main proof of the theory here presented is to be found in a previous book[ ] by the present writer. a number of periodical articles by several writers which have since appeared, in criticism or in further development of the theory, have at various points led to shifting emphasis and clearer understanding on the author's part, and the present exposition, without seeking explicitly to meet many of these criticisms, or to embody the new developments, will none the less be different because of them. to one writer in particular, professor c. h. cooley, the theory is indebted for restatement, amplification, and important additions.[ ] on the whole, however, the theory presented in this chapter is substantially the theory presented in the earlier book. the theory is set forth in the present chapter with sufficient fullness to make the present volume independent of the earlier book. value has long been recognized as the fundamental economic concept. there have been many and divergent definitions of value, and many different theories as to its origin. it is the belief of the present writer--not shared by all his critics!--that the definition of value which follows, and the conception of the function of value in economic theory involved in it, conform to the actual use of the term in the main body of economic literature. the theory of the _causes_ of value here advanced is new, but the definition of value, and the conception of the relation of value to wealth, to price, to exchange, and to other economic ideas, seem to the present writer to conform to what is implied, and often expressed, in the general usage of economists.[ ] it is important to separate sharply two questions: one, the theory of the causes of value, and the other, the definition of value, or the question of the formal and logical aspects of the value concept. the two questions cannot be wholly divorced, but clarity is promoted by considering them separately. we shall take up the formal and logical aspects of the matter first. value is the common quality of wealth. wealth in most of its aspects is highly heterogeneous: hay and milk, iron and corn-land, cows and calico, human services and gold watches, dollars and doughnuts, pig-pens and pearls--all these things, diverse though they be in their physical attributes, have one quality in common: economic value.[ ] by virtue of this common or generic quality, it is possible to add wealth together to get a sum, to compare items of wealth with one another, to see which is greater, to get ratios of exchange between items of wealth, to speak of one item of wealth, say a crop of wheat, as being a percentage of another, say the land which produced it, etc. this common quality, value, is also a _quantity_. it belongs to that class of qualities which can be greater or less, can mount or descend a scale, without ceasing to be the same quality,--like heat or weight or length. such qualities are _quantities_. there is nothing novel in the statement that a quality is also a quantity. it is implied in every day speech. we say that a man is tall, or heavy, or that the room is hot--qualitative statements; or we may say exactly how tall, or how heavy, or how hot--quantitative statements. the distinction between qualitative analysis and quantitative analysis in chemistry implies the same idea. thus we may speak of a piece of wealth as having a definite quantity of value, or say that the value of the piece of wealth is a definite quantity. we may then work out mathematical relations among the different quantities of value, sums, ratios, percentages, etc. ratios of exchange are ratios between two quantities of value, the values of the units of the two kinds of wealth exchanged.[ ] a good many economists, particularly in their chapters on definition, have defined value as a ratio of exchange. this is inaccurate. the ratio of exchange presupposes _two_ values, which are the terms of the ratio. the ratio is not between milk and wheat in all their attributes. it is between milk and wheat with respect to one particular attribute. compare them on the basis of weight, or cubic contents, and you would get ratios quite different from the ratio which actually is the ratio of exchange. the ratio is between their values. [illustration: ratio of exchange milk ------------------------- wheat \ / \ / \ value value / \ / \ / \ / \ / social mind ] in the diagram above, something of what is to follow is anticipated, since the cause of value is indicated. wheat is shown to be exerting an influence on milk, and milk exerts an influence on wheat. the comparative strength of these two influences determines the ratio of exchange between them. but these two influences are not ultimate. the ratio of exchange is a relation, a _reciprocal_ relation. it works both ways. but behind this relativity, this scheme of relations between values, there lie two values which are absolute. these values rest in the pull exerted on wheat and on milk by the human factor which is fundamental, which in our diagram we have called the "social mind." values lie behind ratios of exchange, and causally determine them. the important thing for present purposes is merely to note that value is prior to exchange relations, that it is an absolute quantity, and not, as many economists have put it, purely relative. the ratio of exchange is relative, but there must be absolutes behind relations. a _price_ is merely one particular kind of ratio of exchange, namely, a ratio of exchange in which one of the terms is the value of the money unit.[ ] in modern life, prices are the chief form of ratio of exchange, but it is important for some purposes to remember that they are not the only form. values may simultaneously rise and fall. there may be an increase or decrease in the sum total of values. ratios of exchange cannot all rise or fall. a rise in the ratio of the value of wheat to the value of milk means a fall in the ratio of the value of milk to the value of wheat. both may have fallen in absolute value, but both cannot simultaneously rise or fall with reference to one another. this is the truism regarding ratios of exchange which many economists have inaccurately applied to value itself in the doctrine that there cannot be a simultaneous rise or fall of values. there can be a simultaneous rise or fall of values, but not a simultaneous rise or fall of ratios of exchange. there can be a general rise or fall of prices. goods in general, other than money, may rise in value, while money remains constant in value. this would mean a rise in prices. or, money may fall in value while goods in general are stationary in value. this would also mean a rise in prices. in either case, more money would be given for other goods, and the ratio between the value of the money unit and the value of other goods would have altered adversely to money. there are writers to whom the term, value of money, means merely the average of prices (or the reciprocal of the average of prices). for them, a rise in the average of prices is, _ipso facto_, a fall in the value of money. this view will receive repeated attention in later chapters. the view maintained in the present book is that the value of money is a quality of money, that quality which money shares with other forms of wealth, which lies behind, and causally explains, the exchange relations into which money enters. every price implies _two_ values, the value of the money-unit and the value of the unit of the good in question. value is prior to _exchange_. value is not to be defined as "power in exchange." certain writers[ ] who see the need of a quantitative value, which can be attributed to goods as a quality, still cling to the notion that value is relative, that two goods must exist before one value can exist, and that value is "power in exchange," or "purchasing power." the power is conceived of as something more than the fact of exchange, and as a cause of the exchange relations, but is, none the less, defined in terms of exchange. this position, however, does not really advance the analysis. it is a verbal solution of difficulties merely. to say that goods command a price because they have power in exchange is like saying that opium puts men to sleep because it has a dormitive power. physicians now recognize that this is no solution of difficulties, that it is merely a repetition of the problem in other words. if we wish to explain exchange, we must seek the explanation in something anterior to exchange. if value is to be distinguished from ratio of exchange at all, it cannot be defined as "power in exchange." to seek to confine value to exchange relations, moreover, makes it impossible to speak of the value of such things as the capitol at washington city, or the value of an entailed estate, or of values as existing _between_ exchanges. nor can we make the price which a good would command at a given moment the test of its value, except in the case of the highly organized, fluid market. land, at forced sale, notoriously often brings prices which do not correctly express its value. moreover, even for wheat in the grain pit, the exchange test is valid only on the assumption that a comparatively small amount is to be sold. if very much is put on the market, the situation is changed, and the value falls. in other words, if "bulls" cease to be "bulls," and shift to the other side of the market, the very elements which were sustaining the value of the wheat have been weakened, and of course its value falls. "power in exchange" is a function of two factors, ( ) value and ( ) saleability. a copper cent has high saleability, with little value, while land has high value with little saleability.[ ] some things have value with no saleability at all. in a socialistic community, where all lands, houses, tools, machines, etc., are owned by the state, and where such "prices" as exist are authoritatively prescribed, value and exchange would have no necessary connection. values would remain, however, guiding the economic activity of the socialistic community, directing labor now here, now there, determining the employment of lands now in this sort of production, now in that. exchange is only one of the manifestations of value. more fundamental, and more general, including "power in exchange," but not exhausted by it, is the power which objects of value have over the economic activities of men. this is the fundamental function of values. the entailed estate, which cannot be sold, still has power over the actions of men. the care which is taken of it, the amount of insurance which an insurance company will write on it, etc., are manifestations and measures of its value. the same may be said of the capitol at washington.[ ] in the fluid market, prices correctly express values. assuming that the money-unit is fixed in value, variations in prices in the fluid market correctly indicate variations in values. the great bulk of our economic theory, the laws of supply and demand, cost of production, the capitalization theory, etc., do assume the fluid market, and a fixed value of the dollar.[ ] our economic theory is static theory, in general, and abstracts from the time factor and from "friction." in fact, values change first, and then, more or less rapidly, and more or less completely, prices respond. in the active wholesale and speculative markets, where the overwhelming bulk of exchanging takes place, the prices respond quickly. static theory is thus adequate for the explanation of these prices, for most practical purposes, so long as the changes in prices are due to changing values of goods, rather than to changing value of the money-unit. moreover, the distinction between value and price is, in a fluid market, where the value of money is changing slowly, often not important. in the assumption of money, and of a fixed value of money, the absolute value concept is already assumed. no harm is done, however, if the economist does not explicitly refer to this, but goes on merely talking about money-prices. very many economic problems indeed may be solved that way. this is why the inadequate character of the conceptions of value as "ratio of exchange" or "purchasing power" has not prevented these notions from being serviceable tools in the hands of many writers. but there are many problems for which these conceptions are not adequate, because the implicit assumption of a fixed value of money cannot be made. among these problems is the problem of the value of money itself, which constitutes the subject of this book. for that problem, an absolute value concept is vital. if, in our diagram above, we substitute for "social mind" the more general expression, "human factor," we should find that our value concept is the common property of many writers. we should find it fitting in with the absolute value notion of adam smith and of ricardo.[ ] the "human factor" which _explains_ the absolute value is, for them, labor. we should find it fitting in with the "socially necessary labor time" of marx: the value of a bushel of wheat is the amount of labor time which, on the _average_, is required to produce a bushel of wheat. it is an absolute value. it is a causal coefficient with the absolute value, similarly explained, of the bushel of corn, in explaining the wheat-price of corn. our concept will fit in exactly with the "social use-value" of carl knies, according to whom the economic value of a good in society is an _average_ of its varying use-values to different individuals in the market. this average is an absolute quantity. the absolute values of units of two goods, thus explained, causally fix the exchange ratio between the goods. knies' value-theory, it may be noticed, is explicitly modeled on that of marx, to whom he refers, the difference being that knies takes an average of individual use-values, while marx takes an average of individual labor-times, as the causal explanation.[ ] our value concept will fit perfectly with professor j. b. clark's "social marginal utility" theory of value. indeed, the present writer gratefully acknowledges that the concept is professor clark's rather than his own, and that all that is necessary for its explanation has been set forth by professor clark.[ ] professor clark's _causal_ theory of value, his explanation of this absolute quantity of value as a _sum_ of individual marginal utilities, we have elsewhere[ ] criticised as involving circular reasoning, like all marginal utility theories, in so far as they offer causal explanations. but his statement of the logical character of value, of the relation of value to wealth, of value to price, of value to exchange, of the functions of the value concept in economic theory, and of the functions of value in economic life,--clark's doctrines on these points we have accepted bodily, and in so far as the present writer has added anything to them it has been by way of elaboration and defence. the concept of value here developed is explicitly adopted by t. s. adams, david kinley, w. a. scott, w. g. l. taylor, l. s. merriam, and a. s. johnson, among american writers, to name no others. all of these writers would concur in the formal and logical considerations[ ] as to the nature of value here presented, whatever differences might appear among them as to the causal explanation of value. the value concept here presented performs the same logical functions as the "inner objective value" of karl menger, ludwig von mises, and karl helfferich, discussed in our chapter on "marginal utility," below, and is, in its formal and logical aspects, to be identified with that notion. it is essentially like wieser's "public economic value," discussed in the same chapter.[ ] that there should remain critics[ ] who consider the present writer a daring innovator, who is thrusting a personal idiosyncracy in terminology upon economic theory, is striking evidence that men often talk about books which they have not read! the reader who accepts, provisionally, the doctrine so far presented, as a tool of thought which will aid us in the further progress of the argument, may do so with the full assurance that he is accepting a tried and tested concept, which has seemed necessary to very many indeed of the great masters of the science.[ ] so far, the writer feels himself in accord with the main current of economic thought. when we come to a causal explanation of the value quantity, however, earlier theories appear unsatisfactory. the labor theory of value has long since broken down, and has been generally abandoned. the reasons for this will appear in the chapter on "cost of production." the effort to explain value by marginal utility, by the satisfactions which individuals derive from the last increment consumed of a commodity, has likewise broken down, as will appear in the chapter on "marginal utility." in general, it may be said that the effort to pick out feeling magnitudes,[ ] either of pleasure or pain, in the minds of individuals, and combine them into a social quantity, leads to circular reasoning. thus, the utility theory: it is not alone the intensity of a man's marginal desire for a good which determines his influence on the market. if he has no money, he may desire a thing ever so intensely without giving it value. if he is rich, a slight desire counts for a great deal. in other words, utility, backed by _value_, gives a commodity value. but this is to explain value by value, which is circular. so with the theory of average labor _time_. how shall we average labor time? the problem is easy if we confine ourselves, say, to wheat. if one bushel of wheat is produced with ten hours' labor, a second with eight hours' labor and a third with six hours' labor, the average is eight hours, and we may fix the value of the bushel of wheat according. but suppose we wish to compare the labor engaged in making _hats_ with the labor engaged in raising wheat. how can such labor be compared? hats are, in their physical aspects, incommensurable with wheat. the one quality which they have in common, relevant to the present interest, is _value_. given the value of the wheat and the value of the hats, you may compare and average out the labor engaged in producing them. but if value must be employed as a means of averaging labor, it is clear that average labor can be no explanation of value. this is not the only flaw in the labor-time theory, but it illustrates a vice which it has in common with all those theories which start with individual elements, and seek to combine them into a social quantity. the whole method of approach is wrong. it makes two abstractions, neither of which is legitimate: first, it abstracts the individual from his vital and organic connections with his fellows, and then, second, it takes from the individual, thus abstracted, only a small part, that part immediately concerned with the consumption or production of wealth. in this process of abstraction, very much of the explanation of value is left out. the _whole_ man, in his _social_ relations, must be taken into account before we can get an adequate theory of value. we turn, then, to a brief discussion of society and the individual, and to a discussion of those individual activities and social relations which are most significant in the explanation of economic value. * * * * * all mental processes are in the minds of individual men. there is no social "oversoul" which transcends individual minds, and there is no social "consciousness" which stands outside of and above the consciousnesses of individuals. so much by way of emphatic concurrence with those critics of the social value theory[ ] who persist in foisting upon the theory the notion that there is a social oversoul, or that the "social organism" is some so far unclassified biological specimen. to say that economic value is a social value, the product of many minds in organic interplay, is not to say that economic value is independent of processes in the minds of individual men, or that it results from any mysterious behavior of a social oversoul. the human animal is born with certain innate instincts and capacities. human animals of different races and different strains are in highly important points different in their instincts and capacities. but the human animal is not born with a _human mind_. nor could the human animal, apart from association with his fellows, ever develop a human mind. "the human mind is what happens to the human animal in a social situation."[ ] of course, without the care of adults, the infant would, in general, promptly perish. but, more fundamental for our purposes, is the fact that all the important stimuli which play upon the child during his first two years, when the human mind is being developed, are social stimuli. so true is this, that the child's commerce with physical things runs in social terms. the child interprets the physical objects about him _personally_, attributes life and human attributes to them, holds conversation with them, praises and blames them, makes companions of them. this _animism_ of the child, so puzzling to an old-fashioned psychology, is readily explained by social psychology. it is a social interpretation of the universe. it follows naturally from the principle of apperception: the interpretation of the unknown in terms of the known; the extension of accumulated experience to the interpretation of new experiences. the first experiences of the human animal are social experiences. in the history of human society, a similar generalization is possible. the human _individual_ is found, not in primitive life, but late in the scale of social evolution. individuality is a social product. the savage is not a free, self-conscious person, who can set himself off against the group, and feel himself an isolated centre of power. his life is wrapped up in the group life. in the great barbarian states like ancient egypt or china, the life of the individual was so controlled by social tradition, and innovation was so ruthlessly crushed out that individuality had little scope. greece and judea gave larger scope to individual variation, but the individual still felt himself bound up with his group, and was stoned, given hemlock, or crucified if he challenged the existing social order too seriously. the break-up of the greek city states, as independent sovereignties, and their subjection to the universal sway of rome, made it possible for the cultured greek to set himself up in opposition to the state; the coming of christianity, substituting personal relations with deity, for the communal worship which had preceded it, gave the individual a vital interest apart from the life of the group about him, so that he could still further feel independent of his immediate social environment. the development by the roman lawyers of the _jus gentium_, the law which is common to all nations as distinguished from the particular law of a given group, emphasized the doctrine of the christian religion and of the stoic philosophy of a humanity which transcends the limits of a given state,[ ]--a notion which tended to free the individual from dependence on his immediate associates. but note that in all this we have merely a widening and multiplying of social relationships, and that the individual gains freedom from one set of social relationships only by coming into others. the christian gains freedom from his immediate surroundings because he feels himself in communion with "angels and archangels and all the glorious company of heaven." francis bacon could survive his degradation in the england of his day because he could leave his "name and memory ... to foreign nations and to the next age." bagehot, in his _physics and politics_, tarde, and baldwin, to name no others,[ ] have shown how tremendously responsive human beings are to suggestion, how wide is the sway of imitation in human life, how fashion, mode, custom, etc., make and mold the individual. cooley,[ ] with an improved psychology, has amplified the analysis, tracing the development of the individual mind in interaction with the minds of those about him, making still clearer the sweep and pervasiveness of social factors in framing the very self of the individual. in what follows, i assume the results of these investigations. they constitute the starting point from which we set out on the quest of a theory of economic value. so much for the individual. he is a social product. but what of society? objective, external, constraining and impelling forces, which are not physical, which are seemingly not the products of the will of other individuals with whom the individual holds converse, meet the individual on every hand. there is the moral law, sacred and majestic, which stands above him, demanding the sacrifice of many of his impulses and desires. there is the law, external to him and to his fellows, in seeming, failure to obey which may ruin his life. there is public opinion, which presents itself to him as an opaque, impersonal force, before which he must bow, and which he feels quite powerless to change. there are economic values ruling in the market place, directing industry in its changing from one sort of production to another, bringing prosperity to one individual and bankruptcy to another, not with the caprice of an individual will, but with the remorseless impersonality of wind and tide. he who conforms to them, who anticipates their mutations, gains great wealth--but no business man dare set his personal values against them. there are great institutions, church and state and courts and professions and giant corporations and political parties, and multitudinous other less formal or smaller institutions, which go on in continuous life, though the men who act within them pass and change. their life seems an independent life, and the individual who tries to change their course finds that his efforts mean little indeed, as a rule. there is a realm of social objectivity, a realm of organization, activity, purpose and power, not physical in character, not mechanical in nature, which is set in opposition to individual will, purpose, power, and activity. how is the individual related to this objective social world? three main types of theory have sought to answer this question. on the one hand, there is a type of theory, doubtless the oldest type, a type which arises easily in a period when social changes are slow, which sees in the objective social world something really separate and distinct from individual life, having a non-human origin, and deriving its power from something other than the human will. on the other hand, there is an extreme individualism, which emphasizes individual separateness, which posits as a _datum_ the individuality which we have seen to be a social product, and thinks of the objective social realm as a mere mechanical, mathematical summing up of individual factors, or as a something which individuals have consciously made, by contract or agreement, or what not. finally, there is a type of theory, to which the present writer would adhere, which finds a false antithesis in the contrast thus sharply made between society and individual, which holds that the individual is not, in his psychological activity, so much set off from the activities of his fellows as the contrast would indicate, but rather shares in the give and take of a larger mental life. this larger mental life is completely accounted for when all the individuals are completely accounted for, but it cannot be accounted for by considering the individuals _separately_. no individual is completely, or primarily, accounted for until his _relations_ to the rest of the group are analyzed. thinkers who start out with the individuals separately conceived, and then seek to combine them in some arithmetical way, abstract from those organic social relations which constitute the very heart of the phenomenon we are seeking to explain. the parts are in the whole, but the whole is not the _sum_ of the parts. the relationships are not arithmetical, additive, mechanical, but are vital and organic. men's minds _function_ together, in an organic unity.[ ] the first two of these types of theory (perhaps because individuals are _physically_ sharply marked off from one another, and go on in _biological_ functioning in obvious separateness) have falsely accentuated the self-dependence and separateness of individual _minds_. the second type of theory, which has sought to work out the whole thing on the basis of this false conception of the individual, has largely failed to see the objective social realities, or has, with methodological rigor, denied their existence. this second type of thinking has especially characterized a good deal of economic theory, which rests on the philosophy and psychology of david hume.[ ] we will set our doctrine in clearer light if we contrast three parallel types of theory which have appeared with reference to the nature of morality, of law, and of economic value. for each of these phenomena, we have theories which represent all three of the types of social thinking to which we have referred. in the theory of morals, we have, at one extreme, doctrines like those of kant and fichte, according to whom morality is a matter of obligation, independent of the human will, independent of consequences, inherent in the nature of things. man's mind can find out what the moral law is, but man's mind has nothing to do with the making of the moral law. the same notion is involved in the ideas of "natural rights," "justice though the heavens fall," and the like. the conception is strikingly brought out in the question about which old theologians sometimes debated: is right right because god enjoins it, or does god enjoin right because it is right? whether or not right is supreme over god, these old theologians never questioned that right is supreme over all human wishes and desires, and in no sense an outcome of them. at the other extreme, we have the moral doctrine of the sophists, for whom each man's _will_ was right for him--a doctrine which reappears in every individualistic and anarchistic age. for this doctrine, there are no valid social standards of right and wrong. there is nothing binding on the moral agent but his own will. in between, is the moral doctrine of such thinkers as friedrich paulsen, or john dewey, who represent the reigning type of moral theory to-day. for them, morality is a purely human matter. it grows out of the needs and interests of men. what is good at one time and place is not necessarily good at another time and place. there are no immutable moral principles, valid throughout the ages. none the less, morality is not a private matter, about which men may do as they please. morality is the product of an organic society, the product of the interplay of many minds. to a given individual, the moral law is, indeed, an external constraining and impelling force. it is the will of the rest of the group. it may be his own will too, but if it is not, it overrides his personal preference, he, on the other hand, is part of the group which constrains and guides every other individual. there are, in fact, many sets of moral values: on the one hand, the social moral values _par excellence_, which the group will _enforce_ in various ways; and then, for each individual, his own moral values, which may correspond qualitatively more or less with the group values, or may antagonize them. but the moral law is the will of the group. it is no simple composite of the moral values of individuals. it has its organic interrelations with all phases of social life. economic changes modify it, legal changes modify it, religious values modify it, all phases of social life are expressed in it. in legal theory, we find these three types of doctrine also. the first type is clearly indicated in the general attitude of american and english courts, especially toward the common law, though it influences their interpretation of all law. the law is something which the mind of man may find out, but may not make. if a new situation arises, the court "finds" the law--in theory the principle "discovered" by the court was in the common law at the beginning. of course, we know that the judge invents the rule he makes, to fit a novel case, but the judge himself will not admit it. the theory of the law and the theory of morality have developed in close connection, and the notion of "natural right" is a juristic as well as a moral idea. at the other extreme, we have from certain recent students of law the doctrine that "the law" is a myth, that there is nothing but the particular opinion of a particular judge at a particular time. individualism cannot go so far in legal theory as to give every individual in society a chance to put his oar in, and have a separate law for himself! the social and institutional character of law is too obvious to permit that. but individualism has gone so far in legal theory as to deny all objectivity to law except in a given decision in a particular case. in between these two extreme views, appear the views of writers like savigny, or professor munroe smith, for whom the law is a changing product of social psychology, volitional[ ] rather than intellectual in character, objective enough to the individual who violates it, or the judge who seeks to pervert it, but none the less not outside the minds and interests of men. in professor munroe smith's phrase, law is "that part of the social order which by virtue of the social will may be supported by physical force."[ ] i venture to describe this type of legal theory as the "social value" theory of the law. in the chapter on "the reconciliation of statics and dynamics," _infra_, i have cited certain opinions of mr. justice holmes which apply it, and even bring into it the notions of the marginal analysis. there are, similarly, three types of economic theory. at the one extreme we have theories of "intrinsic" value, which would place economic value outside the wills of men. the mediæval discussions of "just price" often illustrate this notion. it creeps not infrequently into judicial opinions,--to which such notions are essentially congenial! the working economist of our own day has found little use for it, but in periods when economic change was slow it suggested itself not unnaturally to men, as an explanation of the seeming impersonality of market phenomena, and as a practical idea for combatting extortion and injustice. something of the idea is involved in a sentence of shakspere's:[ ] "but value dwells not in particular will; it holds his estimate and dignity as well wherein 'tis precious of itself as in the prizer." at the opposite extreme would be those economists, as professor davenport and jevons, who find no value for a good except in the minds of individual men, so that there may be as many different values as there are different men. that something social and objective exists in the market place can hardly be denied, but when pressed for an account of it, these writers reduce it to a bare, abstract, mathematical ratio.[ ] each individual mind is shut up within its own limits, inscrutable to other minds, and there can be no psychological phenomena which include activities in many minds, for this view. in between these two extremes, is the social value theory of the present writer. economic value is not intrinsic in goods, independent of the minds of men. but it is a fact which is in large degree independent of the mind of any given man. to a given individual in the market, the economic value of a good is a fact as external, as objective, as opaque and stubborn, as is the weight of the object, or the law against murder. there are individual values, marginal utilities, of goods which may differ in magnitude and in quality from man to man, but there is, over and above these, influenced by them in part, influencing them much more than they influence it, a social value for each commodity, a product of a complex social psychology, which includes the individual values, but includes very much more as well. our theory puts law, moral values, and economic values in the same general class, _species_ of the _genus_, social value, alike in their psychological "stuff" and character, to be explained by the same general principles, even though differentiated in their functions, and in the extent to which they depend on various factors in the social situation. they are parts of a social system of motivation and control. they are the _social forces_, which govern, in a social scheme, the actions of men. it may be well to suggest rough _differentiæ_ which mark off these values from one another. legal values are social values which will be enforced, if need be, by the organized _physical_ force of the group, through the government. moral values are social values which the group enforces by approbation and disapprobation, by cold shoulders and ostracism or by honor and praise. economic values are values which the group enforces under a system of free enterprise, by means of profits and losses, by riches or bankruptcy. the group may, under a communistic or socialistic system, rely in whole or in part upon the machinery of the law; in which case economic values appear not in their own form as immediately guiding production, but as "presuppositions" of some of the legal values. the differentiation of these types of social value may also run in terms of their _functions_,[ ] though it is not so easy to mark them off here, since their functions overlap. the function of economic values is to guide and control the economic activities of men, to send labor from one industry to another, to cause one sort of thing to be produced or another, to supply the motive force which _impels_ industry. legal and moral values also directly affect industry, often working to check the results which the economic values alone would lead to--as when the law forbids the production and sale of liquor, or checks child labor, etc. the law, on the other hand, does not, primarily, in its influence on industry, seek _positively_ to determine its direction. the law forbids the production of liquor, but does not decree the production of bread. the law may seek to affect industry positively, by protective tariffs, for example, which aim at the building up of certain industries, but its effects are here indirect, reached through modifications in the economic values. economic values, on the other hand, do not primarily aim at the regulation of the conduct of men outside the market place, or the shop or the farm, etc. economic values are not primarily concerned with making men be good husbands or good neighbors, or brave soldiers. economic values may be used, in part, for these purposes, as when a father-in-law uses his wealth as a lever to make his son-in-law behave--or, indeed, as a bait to get a son-in-law! it is hard to find a phase of social life which is not touched by all types of social values, but it is possible, roughly, to mark off those phases of social life which are subject to primary regulation by one or the other sort of social value. the differentiation is easier when we look at the social _institutions_ which have to do primarily with the one or the other sort of value. courts and legislatures are easily marked off from stock exchanges and banking houses. there is not so clearly an institutional nucleus for moral values, since the church has lost its control over the moral situation. when we view the matter from the standpoint of the _objects_ of value, _differentiæ_ also appear. the main type of object of moral value is modes of conduct; the "type object" of economic value is physical things which men eat, wear, drink, etc., even though _quantitatively_ the major part of the sum total of economic values attach to other things, instrumental goods, lands, labor, and social relations, like franchise rights, good will, which in the main reflect the values of consumers' goods;[ ] objects of legal value are in large degree the same as objects of moral value, namely, modes of conduct, but moral values attach to a wider group of objects, and legal values attach to certain forms of conduct which are morally indifferent. it is not so easy to make the differentiation when we view the thing from the standpoint of the consciousness of men who are at the centre of the situation, to whose consciousness the social values are presented. we may put at the very forefront of the economic value of oranges the gustatory feelings or desires of those who consume them; at the forefront of the moral value of a heroic rescue by a fireman the thrill that runs through the onlookers. qualitatively, these psychological states are different, as those who have experienced both will know. but it is difficult indeed to put the difference into words. when it comes to a legal value, say the legal value of a given contract right which a man seeks to enforce in court, it is not easy to find any particular emotion or state of consciousness which is peculiar or appropriate to it. the value is so highly institutionalized and impersonal, that it seems to the court and lawyers and even the litigants to be merely a question of fact to be intellectually analyzed. its roots are deep in human emotions, but not in the emotions, primarily, of those who are handling the transaction. perhaps the jurist has states of consciousness we know not of. there may be a distinctively legal emotion. it seems to crop out at times when one questions, in conversation with a judge or lawyer, the infallibility of the courts. but the law does not derive its power therefrom! rather, the law derives its power from the general consent and acquiescence and support of the mass of men, who turn over to experts the details of administering it, and who support the law in general, rather than the rule of the _corpus delicti_, with their emotional sanction. i think that we have here a clue to a vital point for our theory. we need not expect to find the major part of the explanation of any of these social values in the conscious emotions of those who are moved by them. in the case of the orange or the heroic act, we are, indeed, close to pretty simple human feelings and desires. in general, in the case of moral values, the individual emotion and the social value are _qualitatively_ comparable, since moral values rarely take on a highly institutional character. they are more free from class or institutional control than other social values. this need not be true. thus, the plantation negro need not feel any personal shame in the moral delinquency which he none the less hides from the "white folks" whose values he must more or less conform to. but, on the whole, moral values are much more "participation values,"[ ] shared by the whole group in common, than are economic values or legal values. when we pass beyond the simple case of a consumption good, and get into the realm of the more institutional economic values, we lose all guidance from the clue of satisfactions in consumption. just what emotion, for example, is appropriate in the presence of the four and a half per cent convertible bond of the chesapeake and ohio railway co.? if it be answered that ultimately that bond represents satisfactions in consumption, since the owner of it may spend the income for consumers' goods, or since the railroad in question carries coal which goes to italy to be used in a cruiser which will sink an austrian warship, thereby giving consumers' satisfactions to individuals in italy, so that the value of the bond is ultimately reducible to specific satisfactions of given individuals, we may still hold that those satisfactions do not constitute the value of the bond, as such. moreover, the same is true of the legal values. ultimately, very specific human emotions are affected by the rule of the _corpus delicti_, or the rule governing pleas in _estoppel_. both in legal and in economic values we have an elaborate and complex system of social psychological character, which can by no means be reduced to elementary desires or feelings of individuals, even though when the whole story is told, no part of the system will be found outside the minds of individual men. the point has been well put by professor c. h. cooley: "it would be as reasonable to attempt to explain the theology of st. thomas aquinas, or the _institutes_ of calvin, by the immediate working of religious instinct as to explain the market values of the present time by the immediate working of natural wants."[ ] i think that any attempt to differentiate the various kinds of social value on the basis of the type of emotion in the minds of those who have most immediately to do with them, or to explain them primarily by those emotions, is foredoomed. the law does not get its power from the emotion of the judge who gives a decision, nor does the value of a rare painting rest chiefly in the intensity of desire of the few rich connoisseurs who compete for it. back of the judge, giving _validity_ to his decision, stands the will of the group; back of the rich connoisseurs stand the legal and other social values concerned with the distribution of wealth, by virtue of which they are able to make their wants felt in the market. both judge and connoisseur are focal points, through which stream the social forces affecting the values in question. both are important. but the emotions and ideas of neither exhaust the psychological causation involved in the values. this is very much more apparent when we consider the values that arise in the great speculative markets, say in the wheat pit, or the stock exchange. those who buy and sell are primarily interpreters, students, of impersonal, social forces, seeking to adjust themselves to them, to forecast them, in such a way as to derive profit from them. their choices and decisions are also factors. indeed, it is possible to view the matter in such a way as to make their decisions the whole story. in the same way, it is possible to make the mind of the judge the final explanation of the legal value. but the speculators themselves are under no such illusion. they know very well that if they run counter to the facts they will lose money. and the judge knows very well that the range of arbitrary choice which he can exercise without impeachment, or at least without reversal by a higher court, is very limited. nor is even a supreme court of the united states free to do its arbitrary will. just because it is so conspicuous, and because its doings are so important, it has manifested more respect for judicial tradition, and more responsiveness to the tides of public sentiment, than any other court in the federal judiciary.[ ] the head of a great banking house makes a decision regarding an underwriting operation. on his decision depends the question of whether or not the securities are issued. on the issue of the new securities depends, in part, the values of the existing securities of the corporation in question, and the nature of the future employment of thousands of men and great quantities of land and capital. tremendous power is concentrated in the hands of this banker. but it is not _his_ power! he cannot exercise it in an arbitrary or capricious way. he approaches his problem in much the same spirit that the judge approaches a disputed question of law. he analyzes the factors involved. he considers the condition of the money-market, the question of the probable ease or difficulty of marketing the new securities to investors, the prospects of the business of the corporation in question, the probable future demand for its products, the stability of that demand, the personnel of the management of the corporation, the attitude of the government toward it, the nature of its other outstanding securities, with special reference to the proportion of bonds to stocks, and the amount of "fixed charges" against its earnings. he may also take into account other enterprises of similar character which he has connections with, and the question of whether or not building up the corporation in question may injure other corporations to which he has responsibilities. he looks far into the future, seeking to conserve his prestige, and unwilling to assume responsibility for an issue which investors will later lose faith in. proximately, his decision is tremendously important, and his thoughts and feelings are of immense significance, but ultimately, _they_ are determined by all manner of social considerations, and _always_, _the degree to which they count_ in determining values depends on his weight in the economic situation, which rests ( ) on his _prestige_, _i. e._, the massing of beliefs and hopes of many men, ( ) on his _wealth_, which rests in the legal and moral values governing distribution, and ( ) on his institutional relationships, which again are psychological facts, partly legal in character. he is as much a social instrument as is the judge. both may abuse their power. both do at times abuse their power. but the significant point is that the power both have is social power, and is in no sense proportional to the intensity of their own emotions. it arises from the emotional power in the minds of many men. it would be easy to elaborate the points in which morals, laws, and economic values are alike, and to show in detail that the theory of economic value is merely a special case of the general theory of social value. for our present purposes, however, it is enough to have illustrated the general doctrine, and to have set up the economic values as true social forces. it may be noticed that the effort to differentiate the different kinds of value is not altogether successful. they are not in watertight compartments in social life. it is a commonplace among students of ethics that moral values grow, in greater or less degree, out of economic factors. indeed, the "economic interpretation of history" has as its central theme the doctrine that morality, law, and ideal values in general are governed by the economic situation. this is a one-sided view. moral and legal values are influenced and modified by economic forces. legal and moral values do, in part, derive their power from economic values. but on the other hand, economic values likewise derive part of their power from legal and moral values. the "social mind" is an organic whole, in which no factors exist "pure," and in which there is constant give and take. the effort to explain moral values by a single principle, as sympathy, legal values by another simple principle, as fear, and economic values by a different simple principle, as utility, is foredoomed. it has been given up by the students of law and morals, and should be abandoned by the students of economics. let us consider more narrowly the main factors affecting and explaining economic social values. let us take, first, the simplest case, that of goods and services which minister directly to human wants, goods and services "of the first order." goods of this sort would be oranges, bread, clothing, jewels. services of this sort would be the services of the barber, the valet, the physician, the preacher, the teacher, the actor. i abstract, in discussing these values, from the complications that grow out of the friction in retail trade, and the existence of many customary prices, and prices fixed by other than economic values, in the case of teachers, or preachers. i shall concentrate attention upon such things as oranges, bread, clothing, and jewels. the _focus_ of the values of these things, and an essential condition of their existence, is their utility, that is to say, their power to satisfy human wants. utility as used in economics does not mean usefulness in any moral sense. from the standpoint of the economist, whiskey and opium are as useful as bread, if they satisfy wants equally intense. and the economist is not concerned with the general utility of things considered in their totality. air is more useful than jewels, but a carat of air is not as useful as a one-carat diamond. air exists in such abundance that it does not need to be economized. scarcity with reference to the extent of the wants involved is also essential to economic value. a combination of the ideas of utility and scarcity gives us the simple notion for which the formidable name of "marginal utility" has been devised. the marginal utility of a good to a man is the power the last, or "marginal," unit of the good which the man consumes has to give him satisfaction, or, viewed from the standpoint of the man, is the intensity of his desire[ ] for, or of his satisfaction in, the final unit consumed. so far, our account of the value of the orange will seem perfectly acceptable to those accustomed to traditional discussions of the problem in the text-books. the difference is that many text-books stop at this point, leaving the impression that with the definition of marginal utility the whole value problem has been solved. for the social value theory, the conception of marginal utility is barely a starting point. indeed, it is not even a starting point. we shall have to look both in front of it and _behind it_. recognizing that marginal utilities to individuals are essential to economic values of consumption goods, we shall have to point out other things which are also essential, and we shall have to explain the factors determining these marginal utilities themselves. the last point may be considered first. men's desires are socially determined. even the simplest, most instinctive, wants of human nature are, in their concrete manifestations, the product of social culture in overwhelming degree. consider sex and hunger. we do not enjoy our food when our neighbors pick their teeth with their forks. this would not trouble a chimpanzee, whose _instinctive_ equipment in the matter of hunger is vastly more like that of a man than is the _actual_ hunger impulse of a highly civilized man like that of a savage. civilized men will often starve rather than eat human flesh. even when moral scruples are overcome, actual physical revulsion may prevent it. men of different times and places wish food of special sorts, served in special ways. they wish to eat in the company of their fellows, but only of those fellows who can know and obey the ritual that is appropriate to the time and place. this is true of humble folk as of those who "dress for dinner." the ritual differs for the two sorts of people. but there is a spirit, a type of conversation, a code of etiquette, which prevails at the mealtime of virtually all men, and too serious digressions therefrom will take away the appetites of all. about the mealtime and the festal board have gathered a great host of traditions, ideals, and social activities, till they have become in verity an institution, and not the least important, by any means, of social institutions. out of the simple instinct of sex, we have evolved many of the most precious things of our civilization, and between the sex impulse of the animal and the sex impulse of the gentleman who is seeking to marry the one woman in all the world, there is a difference so great that comparison between the two is difficult. here we have wants which grow out of the most elementary things in human nature, wants which are intense and universal, but which vary, in their concrete manifestations, enormously from age to age and from place to place. when we come to the wants which change more quickly, the fact that social factors dominate needs no arguing. fashion, mode, custom, obviously account for the concrete wants that exist in clothing, ornamentation, amusement, housing, etc. if we wish to know what women will be wanting to wear six months hence, we do not go to women individually and ask them. we could not find out that way. they would not know. we go rather to the theatre, and study the stage and the boxes, to the famous designers of women's dress, to the metropolitan centres of various sorts, to the "radiant points of social control"[ ] from which emanate the suggestions which pass in imitative waves through the women of the country in the next few months. the laws of imitation have been elaborately developed by bagehot, tarde, baldwin, ross, lebon, cooley, and others, and i content myself here with referring to their writings. the wants of women--and men--are socially given, grow out of a give and take, a social process. and in this social process, it is not true that each man counts one! rather, a few lead, and many follow. there are centres of prestige which count overwhelmingly. certain wants are competitive.[ ] where social status depends on having as good a house as one's neighbors, and where social leadership depends on having a better house than one's neighbors, there is no limit to men's desires for better houses. with each improvement which one introduces, each feels the desire to improve, however contented he might have been had the other not made the improvement. to this we shall recur in our discussion of the origin of money, in explaining the value of gold. so much for the human wants which stand as the focus of economic values in the case of articles of immediate consumption. but, given these wants, and given their marginal intensities, we are only at the beginning of our explanation of the economic values of the consumption goods. it is again not a case of each want counting one, to the extent of its intensity. there are again, by virtue of the legal and moral values governing the distribution of wealth, _centres_ of power. the wants of some men count for nothing, however intense they may be. the pauper, the prisoner, the beggar--popular proverb about "beggars and horses" understands them, however much the "marginal utilitarian" may forget that their wants count for nothing.[ ] the slightest whim, on the other hand, of the man who has inherited millions may count heavily in giving values to goods. for the explanation of the values of consumption goods, then, we need both the socially determined marginal utilities of individuals, and the socially determined _weight_ which these individuals have in our economic system. this _weight_ would involve a very elaborate explanation. many factors affect it. we call attention here, however, especially to the fact that it rests in large part on the legal and moral values and institutions concerned with the distribution of wealth. changes in the distribution of wealth are as important as changes in the wants themselves in giving the explanation of changes in values. the economic social values of consumption goods include not merely the values of those goods _to_ the individuals who consume them, but also the values _of_ the individuals themselves in the social scheme of things. what of the values of instrumental goods, of goods of "higher orders," of labor, of stocks and bonds, of lands, of franchise rights and good will? it is the one great contribution of the austrian economists to have shown that the causation in value runs, primarily, from consumption goods to the goods of higher "orders" which are concerned with their production, and that these values of instrumental goods, etc., are derived and secondary values. the value of wheat is based on the value of bread, the value of land on the value of wheat. the value of the stock of united states steel rests in part on the value of iron lands, which rests on the value of ore, which rests on the value of pig iron, which rests on the value of steel rails, which rests on the value of the service of transporting building materials, which rests on the value of a building, which rests on the value of the services which a dentist performs in an office in the building. this is the main line of causation. this is the first approximation which gives us a clue, without which we should find problems insoluble. but is it not clear that this cannot be the whole story? at every step complications enter. the whole thing cannot be got out of the value of the dentist's services, and the other consumers' goods and services, which are indirectly aided by the property to which title is given by ownership of u.s. steel stock; nor is the value of the stock to be fully explained by the value of the property to which it gives title. at every step, we meet the complication that men must estimate and calculate, for one thing. and rarely indeed can men see all the steps, the end from the beginning. take first a very simple case, wheat land. the value of the wheat land of to-day rests on the value of wheat, but it is the wheat of to-morrow and for many years to come; the wheat of to-morrow rests for its value on the value of the bread of the day after to-morrow. sometimes the differential between goods at two consecutive steps in the productive process is pretty constant. wheat and flour vary pretty closely together. the differential is not strictly fixed even there. but bread and wheat land have a much looser connection in their variations. if land could produce no wheat or corn or other good that would satisfy human wants, and if it could not itself satisfy human wants, it would ordinarily have no value.[ ] but the connection between the value of the bread and the value of the land is loose and uncertain, while the connection between the value of the land and the intensity of the wants actually satisfied by the bread produced from it, is absolutely _nil_. whether the bread saves a starving man or feeds the pet pigeons of a millionaire, is a matter of indifference so far as the value of the land (or of the bread) is concerned. we take the values of consumption goods, and break them up, attributing part to the labor that immediately produced them, part to the raw materials that entered into them, part to the machine that fashioned them, and so on. we then break up the value attributed to the raw material, attributing part to the labor that worked in producing it immediately, part to the machine that fashioned it, part to the rawer material of which it was made. and so with the values of the machines. ultimately we get back to the values of labor, or of land, or of securities giving title to complexes of lands, machines, etc.--values which we do not further break up. but at every step, we find additional factors. we find these derived values becoming independent, substantial, standing in their own right. moral and legal values affect them directly, as in the case of patriotic support of government securities, moral antagonism to the securities of the distillers' securities corporation, or the influence of court decisions, legislation and elections on security values. such values rest, in large degree, on the massing of _beliefs_ and hopes, not concerned with specific satisfactions of wants, but with the existence of _future_ economic values. these beliefs and hopes again have their social explanation. it is not a case where each man counts one. there are centres of prestige and power, bankers and financial magnates, whose opinions and decisions count heavily, and waves of optimism and pessimism, which affect the whole group. we shall discuss these matters more fully in connection with the analysis of credit, at a later point of our study. for the present, it is enough to point out that the whole thing cannot be explained on the basis of the values of consumers' goods, and that the values of consumers' goods are only in small part explained by the intensities of the wants they serve. in summary: economic value is the common quality of wealth, by virtue of which it is possible to compare divers kinds of wealth, and treat wealth quantitatively, getting ratios of exchange, sums of wealth, etc. value is a quantity, _i. e._, a quality which has degrees of intensity. ratios of exchange are ratios between values. price is a particular sort of ratio of exchange, namely, a ratio in which one of the terms is the value of the money-unit. prices correctly express values on the assumption of the fluid market, and on the assumption that the value of the money-unit does not vary. the value quality is psychological in character. it rests in human minds. but not in the minds of individuals thought of separately. it is a complex of many individual mental activities, highly institutionalized, and including legal and moral values, hopes and beliefs and expectations, as well as the immediate intensities of men's wants for consumption goods. the ultimate test of scientific theory must be practice. if a theory aids in manipulating facts, if it leads to the discovery of ways of doing things which are better than old ways, if it solves problems which have hitherto remained unsolved, or carries the solution of problems farther than has hitherto been the case, it is a good theory. it need not be the best possible theory. it need not be a final theory. the chief claim for the present theory of value is that it not only unlocks all the doors that earlier theories have unlocked, but also others which have resisted the old keys. the man who goes into the modern stock market armed with marginal utility and the quantity theory is like the man who would fight hindenburg with bows and arrows. bows and arrows are effective in the hands of expert archers, and the great figures in the history of economics have done wonderful things with marginal utility, "real costs," and the quantity theory. but the social value theory is offered as a better weapon. the writer believes that the problem of the value of money has not been solved by the older theories of value. he believes that the social value theory will solve it. he proposes on the basis of the social value theory to make clearer the nature of credit phenomena, and to assimilate the laws of credit to the general laws of value. he proposes with the social value theory to bring together in a higher synthesis two divergent types of economic theory, the "static" and the "dynamic." he thinks that a rigorous and consistent application of the absolute concept of value will clarify confusions at various points in the general body of price theory, as the laws of supply and demand, etc. he offers the social value theory as the only way of giving a _psychological_ explanation to the demand-curve, and a marginal _value_ explanation of marginal demand-_price_. demand-curves are social value curves, on the assumption of the fixed social value of the dollar. the utility theory, as will appear in the chapter on "marginal utility," has failed to give psychological magnitudes corresponding to _any_ point on the demand-curve. in general, he offers the social value notion as the justification for the assumption of a quantitative value which, as we shall see, underlies the whole of our current price analysis. the theory here outlined has been, as stated, developed and defended more fully in a previous book. for the rest, the author would have it judged by its usefulness or failure as a tool of thought in the investigations which follow. note. it has seemed best not to break the main course of the argument of this chapter for the elaboration of one point on which there has appeared to some critics to be vagueness in the exposition of the social value theory in my earlier volume, namely, the relation of social values to the individual values of those who are moved by the social values. social values have as their function the guidance and control of the activities of men. but men are also moved by their own individual feelings, interests, and desires. what is the relation between these two sets of factors? in what has gone before, it has been made clear that social values present themselves to the individual as opaque, objective facts, largely beyond his control, to which he must adjust himself. they represent the minds of other men, acting in corporate and organic ways, putting pressure on him, or offering him lures. now the individual reckons with these social values in the same way that he reckons with any other of the facts affecting the economy of his life. he must adjust himself to them in the same way that he must, if he is a blacksmith, adjust himself to the technical qualities of the iron he is manipulating. this does not mean that he is passive before them, any more than he is passive before the iron. he rather seeks to carry out his personal purposes and desires by actively adapting himself to objective facts, whatever they be. this means that different individuals will react in different ways to the same social value. the fear of the law will keep one man from burning dead leaves in the street where it will not keep another man from murder. a given degree of social pressure will make one man crease his trousers, while another man will not even know that the pressure to crease one's trousers exists! there are great individual variations in responsiveness and sensitiveness to social pressure. in part, these variations are due to inborn qualities. in larger part, they are due to social education, and to social status. thus, the fact that one man will work all day in a ditch in response to the lure of a dollar and a half, while another will not work in the ditch for a hundred dollars a day, may rest in slight degree on the greater inborn sensitiveness of the latter to the physical pain of labor, but rests primarily on the fact that the latter doesn't need the money, and has a social standard, growing out of his class-associations and education, which would make him ashamed to be seen in the ditch. indeed, we may think of the social standard in question as a social value acting _on_ him, rather than _in_ him. he fears ridicule. the same degree of social power, luring men toward the ditch, exists in the dollar in each case, but the response is very different in the two cases. later formulations of the utility theory and the labor cost theory, as represented by the theory of schumpeter, which we shall discuss in the chapter on "marginal utility," give us, in a scheme of purely static equilibrium, a picture of the adjustment of the individual values to the social values. as we shall see, they give us no account whatever of the social values. they do not explain causation at all. but they do show that there is a tendency for the individual marginal utilities of consumption to become proportional to the social values of the goods consumed by each individual; and for the individual marginal disutilities in production to become proportional to the social values of the rewards that come to producers. the scheme is highly unrealistic. it has been emphatically repudiated by böhm-bawerk, so far as the disutility equilibrium is concerned. ("ultimate standard of value," _annals of the american academy_, vol. v, pp. - .) but it is worth something, not as explaining social values or market prices, but rather, as showing how individuals _conform_ to social values and market prices. _cf. social value_, pp. - , n. , and . the theory that individual marginal utilities and disutilities are proportional to market values is unrealistic enough, in the light of the analysis of individual utilities which we have given, even for the utilities. it is quite impossible to make anything of importance of it from the side of individual disutilities. the length of the working day is not fixed for each worker by a comparison of his own labor pain with the satisfactions he expects from his wages. it is fixed by conditions largely external to him, and the whole group works the same number of hours, with the machine. the law may limit the working day. trades-union effort may do it. opportunities for alternative employment may do it, for the labor force of a factory as a whole. but the theory, which really must rest in the notion that each individual has many options, and that the working period is flexible, cannot mean much. the prosperity of the laborer does more to limit the working day than does his suffering! the reactions of individuals as consumers or producers on the social values modify the social values. but, as we have shown, the primary explanation of the social values is not to be found in the individual utilities and disutilities of those who react to them. utilities and labor pains are parts, but minor parts, in the explanation of social values. chapter ii supply and demand, and the value of money the theory of the value of money is a special case of the general theory of economic value. to the layman, this would seem to go without saying. to the student of the literature of the subject, however, who has noticed the wide divergence between the method of approach to the general problem of value and the method of approach to the problem of the value of money, in most treatises which include both these topics, the proposition will sound unusual if not heretical. most text-books in english to-day will offer the marginal utility theory as the general theory of value. the same books commonly present the quantity theory of the value of money. whether or not the two theories are consistent may wait for later discussion, but that the quantity theory of money is a _deduction from_ the utility theory of value, and a _special case_ of the utility theory of value, will not, i believe, be contended by anyone. certainly in its origin, the quantity theory is much the older theory. the same is true for those writers who seek to explain value in general on the basis of cost of production, and who at the same time offer the quantity theory to explain the value of money. the two theories may or may not be consistent, but in any case, they are logically and historically independent, neither being a deduction from the other. older writers (as walker and mill), whose treatment of the general theory of value runs in terms of "supply and demand," have stated that the quantity theory is merely a special case of the law of supply and demand, and the statement is occasionally met in present-day writings, though one of the most recent and best known of the expositions of the quantity theory, professor fisher's _purchasing power of money_, very explicitly repudiates this doctrine.[ ] but it may be easily shown, and will be shown later, that the quantity theory, and the present-day formulation of the law of supply and demand, are in no way logically dependent upon each other. this lack of connection between two bodies of doctrine which should be in a most intimate and essential way related to each other, may well throw suspicion on the current treatments of both topics. in any case the lack of connection raises a problem, and calls for explanation. part of the explanation may be sought in the fact that the writers who have developed the general theory of value have not been, in general, the writers who have most elaborated the theory of the value of money. the theory of money has been for a long time a more or less isolated discipline. in ricardo, we have an elaboration of the labor theory of value, and we also have the quantity theory of money. but it is not clear that ricardo added anything to the quantity theory. he found it, in much the form in which he used it, in the writings of predecessors, among them locke and hume. ricardo makes large use of the quantity theory as a premise, but apparently feels the theory to be so self-evident that it needs little exposition or defence at his hands. john stuart mill is a clear exception to the general statement. cairnes, likewise, did treat both topics in considerable detail, but while his interest in the general theory of value was that of the theorist, his treatment of money was primarily in the spirit of the publicist, and his interest was less in the justification of the theory--which he again seems to feel needs little defence--as in its application. a similar statement may be made with reference to jevons. he worked out his general theory of value for its own sake; his utterances on the theory of the value of money must be sought scattered through his practical writings on money. alfred marshall's _principles_ (vol. i) says almost nothing about the theory of money; his opinions on that subject are to be found in some _ex cathedra_ replies to questions from a parliamentary commission. the most important discussions in england of the value of money are to be found in the long polemic between the currency and the banking schools, by writers who would not be listed among the makers of the general theory of value. in the united states to-day, with the exceptions of professors fisher and taussig, the writers who have been interested in the general field of economic theory have done comparatively little with the value of money (_e. g._, professors clark and fetter), and the writers who have been most interested in the value of money have usually not written largely on the general theory of value (_e. g._, professors laughlin, scott, kinley). professor kemmerer might well be included as an illustration of this last statement. his primary interest is in money, rather than general theory, even though he does precede his theory of the value of money with an exposition of the utility theory of value. in german, a similar situation obtains. böhm-bawerk has touched the theory of money scarcely at all. menger has written an important article on "geld" in the _handwörterbuch der staatswissenschaften_, but the important thing about this article is the theory of the origin of money, and the reader will find little on the problem of the value of money. wieser has recently taken up the value of money (in articles published in and ), but no trace of his views has as yet manifested itself in the english literature on money, and the writer may here express the opinion that wieser's contributions to the theory of money are not likely to be very influential, or to add to his reputation.[ ] austrian writers on the value of money, as wieser and von mises, have recognized more clearly than anyone in america or england, the essential dependence of the theory of the value of money on the general theory of value. the german writer on money who has attracted most attention recently, however, g. f. knapp, troubles himself about the general theory of value not at all. but the main explanation of the hiatus between the two bodies of literature and doctrine is to be sought in something more fundamental. neither utility nor costs nor supply and demand furnishes an adequate basis from which the quantity theory, or any other theory of the value of money can be deduced. the cost theory, and the supply and demand theory, in their present-day formulation, are really not theories of value at all, but are theories of _prices_, theories which presuppose _value_, and _money_, and a _fixed value of money_. and the utility theory, as usually presented, is either a theory of barter relations, or else (more commonly) speedily settles down into the grooves of supply and demand, leaping by means of a confusion of utility curves and demand-curves (or sometimes by a deliberate identification of them, _e. g._, flux and taussig[ ]) to the treatment of market prices. i shall take up these points in order. a historical summary of the development of the notions of supply and demand will aid the exposition. it may be noticed, first of all, that supply and demand is really a very superficial formula even though an exceedingly useful one. by virtue of its superficial character, it antagonizes few other theories, and it has been the common property of almost all schools of value theory. cost theories and utility theories, labor theories, or social value theories, all find use for it, in one form or another. it is really quite neutral and colorless, so far as the ultimate questions of value-causation are concerned. the more fundamental causal factors offered by one theory or another are commonly supposed to operate _through_ supply or demand, in price-determination. adam smith seems to see this more clearly than does ricardo. ricardo, indeed, sometimes thought of demand and supply as forces antithetical to the forces of labor-costs which he was considering. in ch. xxx of his _principles of political economy and taxation_ (ed. mcculloch, pp. ff.) he holds that his natural value ultimately rules, except (p. ) in the case of monopolized articles. supply and demand govern the prices of monopolized articles and of all articles in the short run. i do not find in ricardo any clear statement to the effect that cost of production operates _through_ influence on supply. neither adam smith nor ricardo felt the need of very much precision in the definition of supply and demand. smith does, indeed, distinguish "effectual" from "absolute" demand, in a well-known passage (ed. cannan, i, p. ), defining effectual demand as the demand of the effectual demanders, _i. e._, these who are willing to pay the "natural price" of the commodity. the term "supply" he does not use in this passage, but speaks of the "quantity which is actually brought to market," and gives as the law of market price that it is determined by the "proportion" between this quantity and the effectual demand. that much is wanting in this analysis will be sufficiently clear when the views of j. s. mill and cairnes are considered. ricardo offers even less than smith in the way of definition. the reader may compare the pages in _ricardo's works_ cited above, and the discussion of the demand for labor on p. in the same volume. in j.s. mill, a clean-cut notion first appears. the doctrine that price is determined by a ratio between effectual demand (_i. e._, the wish to possess combined with the power to purchase) and supply (_i. e._, the quantity available in the market), is sharply criticised. how have a ratio between two things not of the same denomination? "what ratio can there be between a quantity and a desire, or even a desire combined with a power?" to make supply and demand comparable, demand must be defined as "quantity demanded," and then the difficulty arises that the quantity demanded will vary with the price, which seems to present a case of circular reasoning if demand is to be a determinant of price. the solution which mill develops for this difficulty really gives us our modern conception, virtually complete except that mill does not present it in the useful diagrammatic form and does not whisper the magic word, "margin." there is a demand-schedule, which, plotted, would give a demand-curve. at such and such prices, such and such quantities are demanded, or will be purchased. there is a supply schedule, presenting a supply situation of similar character (though not so clearly indicated). the price reached is that price which _equalizes_ amount demanded and amount supplied. a higher price will lead to competition among sellers, forcing down the price, a lower price will lead to competition among buyers, forcing up the price. the notion of a _ratio_ between supply and demand is replaced by the notion of an _equation_ between them. the present writer wishes to remark, in this connection, that böhm-bawerk's elaborate analysis, with his "marginal pairs," etc., has not advanced one step beyond this conception of mill's, that it is really less satisfactory than mill's analysis, because of the impedimenta of pseudo-psychology it has to carry, and because of its confusion of utility schedules with demand schedules.[ ] in our present-day expositions, as presented in the diagrams, we are accustomed to say that price is fixed when marginal supply-price and marginal demand-price are equal, putting the stress on the ordinate, rather than on the abscissa, on the identity of the dollars paid or received, rather than on the identity of the goods given or received. but this is merely another way of stating the same equilibrium which mill perceived--when marginal demand and supply prices are equal, amount supplied and amount demanded will be equal, and conversely. one point is to be added, making explicit what is implicit in the modern theory of supply and demand. supply and demand doctrine assumes _money_, and a _fixed value_ of money. that there should be a given schedule of money-prices for varying quantities of a good, is possible only if there be a given value of the money-unit. that the modern doctrine of supply and demand necessarily involves the assumptions of value, of money, and of a fixed value of money, may be proved by the following considerations: supply-situation, represented by the supply-curve, and demand-situation, represented by the demand-curve, are conceived of as antithetical and independent causal forces, whose equilibrium determines both "supply and demand" (in the sense of quantities supplied and demanded) and price. mill's doctrine that supply and demand determine price gets out of the circle that demand (amount demanded) is itself dependent on price, only by making both demand in this sense and price _results_, rather than causes, and by putting the causation back into the more complex factors which i call "supply-situation" and "demand-situation." the two independent causes, then, are summed up in the supply-curve and the demand-curve. but, first, these curves are expressed in money. and second, a change in the value of money would affect _both_ of them proportionately. but a theory which is concerned with supply and demand as independent and antithetical must abstract from factors which give them a _common_ movement, without modifying their _relation_ to each other. a change in the value of money would lead the supply-curve to move to the right, and the demand-curve to move to the left, the change in each being proportionate, and the amount supplied, and amount demanded, would remain unchanged. changes in the value of money must, therefore, be abstracted from. again, we must precise the notion of an _increase_ in demand, or of supply. increase in demand may mean mere increase in amount demanded, consequent upon a lower price, consequent, _i. e._, upon a lowering of the supply schedule. in this sense, increase in demand is a passive fact, a result rather than a cause. on the other hand, if the increase in demand is an increase in the amount demanded at the _same_ price, if it means a change in the demand-situation, represented by the moving to the right of the demand-curve, we have a causal factor in increase in demand, a factor which raises the price and compels new supply to come into the market. we may distinguish these two meanings as increase in demand in the active and in the passive senses. _mutatis mutandis_, we may speak of increase of supply in the active and passive senses. these distinctions have been made before, but it has not been clearly seen that these distinctions, and the connected doctrines, involve the assumption of a fixed value of money. but consider: it is the current doctrine that increase in demand in the active sense, the demanding of a greater amount at the same price, the moving of the demand-curve to the right, not only raises the price, but also tends to _increase the supply_. but this is true only if the _cause_ of the increase in demand is not a cause which simultaneously works on supply, neutralizing that tendency. if the increase in amount demanded at a given price be due to a lowered value of money, then the same lowered value of money will reduce the supply available at that price _pro tanto_, and the new equilibrium, _cæteris paribus_, will be at a higher price, to be sure, but with the same amount supplied and demanded. "demand" is a term which carries the connotation of motivating power in economic theory. through demand run the forces which regulate production and supply. the function of increased demand is to induce increased supply. but the value concept, and the assumption of a fixed value of money, are needed to preserve this part of the doctrine. without them we have no way of distinguishing a _real_ increase in demand in the active sense, which does modify the adjustments in production, and alter the proportions of different supplies, from a _nominal_ increase in demand in the active sense, which merely raises a money-price, without affecting supply.[ ] another approach will lead to the same conclusion. demand and supply-curves are not to be understood merely in terms of brute, physical quantities. they are rather curves expressing economic _significances_, manifesting _psychological_ forces which lie behind them. no considerations of mere physical quantity will explain why one demand-curve should be "elastic" and another inelastic,--each curve has its own peculiarities, which are not mechanical in their nature. demand-curves express the diminishing economic significance of goods as their quantity is increased. how economic significance is to be interpreted need not be argued here. i have elsewhere undertaken to show that the utility theory of value does not explain the economic significance which demand-curves express--that demand-curves are not utility curves. my own theory is that demand-curves are to be explained only in terms of a social psychology, that demand-curves are social-value curves. but my argument at this point does not rest on the particular type of causal theory of value one chooses. it is enough that the demand-curve be recognized as expressing economic significance, and diminishing economic significance.[ ] but for the demand-curve to express variation in economic significance of a good, there is need for a unit in which to express that variation. that unit is the economic significance of the dollar, itself assumed to be invariable--as all measures must be assumed to be invariable if measurement is to mean anything. if the unit chosen vary in the course of a given investigation, the curve tells you nothing at all. another way of reaching the same conclusion is to say that an increase in demand in the active sense will lead to an increase in supply only if there be no corresponding increase in demand for the alternative employments of the sources of that supply, that, _e. g._, an increased demand for wheat will lead to increased production of wheat only if there be not a corresponding increase in the demands for corn and other crops which can be raised on land and with labor and capital that would otherwise produce wheat. this is only another phase of the argument that went before, that an increase in demand due to a falling value of money would lead to a corresponding shift in the supply-curve. it is not quite the same argument, however, because that was an argument concerned with short run tendencies, resting on the assumption that the holders of supply would immediately react to a change in the value of money, whereas the argument just presented rests on the longer adjustments, based on the law of costs, as worked out by the austrians. this point will be made clearer in the next chapter. yet another, and perhaps simpler, approach to the same conclusion is by pointing out that an individual, deciding to buy, must take account of the prices of other things in his budget--that individual demand-schedules would be different if market prices of other things--which depend on the value of money--were different. the doctrine that supply and demand (and cost of production, the capitalization theory, and other elements in the current price-analysis) presuppose a fixed value of money, must be sharply distinguished from the doctrine of professor fisher (_purchasing power of money_, ch. ), and others, that a fixed _general price level_ is assumed by supply and demand, etc. i should deny that a fixed general price level is assumed. the point rests in the distinction between value as _absolute_ and value as _relative_. for my theory, it is perfectly possible for the general price level to rise, with the value of money constant, because of a rise in the values of _goods_. in a later chapter, on "the passiveness of prices," i shall examine the doctrine of professor fisher more closely, and set these two views in clearer contrast. for the present, it is enough to point out one vital difference between a rise in prices due to a fall in the value of money and a rise in prices due to a rise in the values of goods, with the absolute value of money unchanged: in the latter case, there is an increase in the psychological stimulus to industry, an increase in economic power in motivation, which energizes and increases production. in the latter case, especially when the fall in the value of money is rapid, and the rise in prices is clearly due to that cause (as in the case of confederate paper, or the french _assignats_), we find a reverse effect on industry. intermediate cases, where money is falling in value, but where goods are also rising, give us intermediate results. in what follows, i shall from time to time refer to this distinction. in my own exposition, i shall always use "value of money" in the absolute sense, as distinguished from the mere "reciprocal of the price level,"--a practice which i have sought to justify in the chapter on "value," and in other places there referred to.[ ] the modern theory of supply and demand, then, assumes money, and a fixed value of money. it is, therefore, obviously unfitted as an instrument to solve the problem of the value of money. if supply and demand concepts are to be applied to this problem, they must be of a different sort. this was pointed out by cairnes[ ] who criticised mill's formulation, and pointed out that mill departed from it in three capital doctrines: in the theory of the value of money, in the theory of wages, and in the theory of international values. by the demand for money, mill means, not the amount of _money_ demanded, but the quantity of goods offered against money--a very different conception. (mill, _principles_, bk. iii, ch. viii, par. .) in what sense a quantity of goods can equal a quantity of money, or in what sense there can be a ratio between goods and money, (to recur to mill's former problem as to the ratio between things not of the same denomination) mill does not make clear, nor is it defensible to speak of either a ratio or an equation on the basis of mill's system, since mill had no absolute value concept. cairnes seeks to reconstruct the notion of supply and demand, in such fashion as to make it possible to apply it universally, and takes up the question of the comparability of supply conceived as a quantity of goods, and demand, conceived, not as a quantity of goods, but as desire combined with the ability to pay. he concludes that in both supply and demand there is a physical, as well as a mental, element. demand he defines as the desire for a commodity backed by general purchasing power; supply as the desire for general purchasing power, backed by the offer of a commodity. thus he thinks he has made the two of the same denomination, so that comparison may be instituted between them, and the ideas of equation, ratio, and proportion made legitimate. by "general purchasing power," cairnes seems to mean money and the representatives of money. it is not an abstract power, since it is the "physical" element in demand, comparable with, and of the same denomination with, the physical element in supply, a commodity. cairnes' solution of mill's difficulty seems to me to be merely verbal, however. first, in what way is the desire for general purchasing power in the mind of one man comparable with the desire for a commodity in the mind of another man? i pass over the supposed difficulty that knowledge of other men's emotions is impossible,[ ] and emphasize simply the point that price offer, either by demander or supplier, is no test of the intensity of desire where there are inequalities in the distribution of wealth. but second: in what sense is general purchasing power, money and money-funds, of the same denomination as a commodity? cairnes emphasizes the physical character of both. but surely they are not comparable on the basis of any physical attributes--weight, bulk, etc. certainly if we look at the concept of demand here given, the physical aspect is simply irrelevant--gold money goes by weight, but what of paper money and credit instruments? and in what sense is even gold money physically of the same denomination with, say, wheat, or hay or base-ball tickets? not physical quantities, but economic quantities, are relevant here; not weight or bulk, but _value_. by means of a concept of value, as the homogeneous quality of wealth, present in each piece of wealth in definite, quantitative degree, could cairnes bring about comparability between the "physical" elements in supply and demand. but not otherwise. only significances, values, are relevant here. supply and demand presuppose value. it will be interesting to consider the effort to solve the problem of the value of money by means of supply and demand on the lines employed by mill, where demand for money is defined as quantity of goods to be exchanged, and supply of money as quantity of money times rapidity of circulation, and where physical quantities are treated as the relevant factor, no value concept of the sort here contended for being presupposed. this is, essentially, mill's method. there is, in this conception, first the difficulty that "quantity of goods to be exchanged" is not a true quantity at all, but is a mere collection of things of different denominations, dozens of eggs, pounds of butter, gallons of milk, etc., incapable of being funded into a quantity.[ ] there is, second, the difficulty that increasing the amount of any one of the items in this heterogeneous composite need not increase the "demand" for money, in the sense that it increases the "pull" on money, or tends to increase the supply of money. yet, under the general doctrine of supply and demand, an increase in demand should be a stimulus to increase in supply. indeed, it is easy to construct a case where an increase in the quantity of one of the items in this composite, the others remaining unchanged, would actually tend to _repel_ money, to reduce the _supply_ of money. suppose that one item in america's stock of goods, say cotton, is much increased in quantity, and suppose that cotton has a highly inelastic demand-curve, so that the increased quantity sells for less money than the original quantity.[ ] suppose, too, that cotton is our chief article of export, and that the bulk of our cotton is exported. would not the "balance of trade" tend to turn against us, so that gold would tend to leave the country, and the supply of money be reduced? there is nothing in the situation assumed to raise the prices of other goods,[ ] so that they could exert a counteracting "pull" on money. europeans, to be sure, having less to pay for cotton, could demand more of other things, and americans paying less for cotton could demand more of other things. but, on the other hand, american producers of cotton, receiving less for their cotton--receiving precisely as much less as the others had more--could then demand less of other things, exactly as much less as the others are able to demand more. the original tendency for gold to leave the country, and the tendency for gold to leave the money-form and be used in the arts, would remain unneutralized. an "increase of demand for money," in mill's sense, would in this case present the remarkable phenomenon of driving money away. physical quantities are irrelevant. psychological significances are what count. it is interesting to note, in this connection, that some striking contradictions in quantity theory reasoning on any formulation, whether connected with the notions of supply and demand or not, are involved in this hypothesis. the illustration above gives a case where a lowered price level leads money to flow away from your country. but, on the quantity theory explanation of foreign exchange, it is _rising_ price levels which drive gold away, and _falling_ price levels which attract gold![ ] mill's effort to apply the notion of demand and supply to the value of money is, then, ( ) not an application of his formal doctrine of supply and demand, and ( ), is a failure, leads to results contradictory to the general law of supply and demand, as soon as we take account of the peculiarities of individual commodities, and cease to look at commodities in one huge lump. psychological forces, rather than physical quantities, are what count. whether or not the supply and demand notion of cairnes, reinterpreted by putting a quantitative value concept into it, could serve as a means of approach to the value of money, i shall not here argue. no one so far as i know has attempted to do the thing that way, and my own theory is best developed by another method. it is interesting to note, however, another somewhat different effort to apply the supply and demand formula. general walker does so, including among the factors determining the demand for money, not only the quantity of goods to be exchanged, but also the _prices_[ ] prevailing. since by value of money walker means merely the reciprocal of the price-level, this is the clearest possible case of a vicious circle. it would be a circle even if he were trying to explain the absolute value of money, as distinguished from the reciprocal of the price-level, since the former is one of the determinants of the latter. value of money and values of goods determine prices; prices and quantity of goods determine demand for money; demand and supply of money determine value of money,--a hopeless circle. i know no sense in which the terms, demand and supply of money, can have relevance to the problem of the value of money. there is one sense in which the terms can be used which fits in with the modern supply and demand-curves, and that is the sense in which they are used in the money market. demand for money comes from borrowers; supply of money from lenders. the price paid is a money-price, the curves express the short time money-rates, the rental of money, in terms of money, for stated periods of time. there is a relation, later to be investigated, between the rental of money, the money-rate, and the value of money, but the two are in no sense the same. it should be noted, too, that we are here concerned with "money-funds" rather than with money in the strict sense,--distinctions and relations in this connection properly belong at another stage of our inquiry. whenever the terms, demand and supply of money, appear in the following pages, they will be used in the sense developed in this paragraph. demand and supply are superficial formulæ. they cannot touch a problem so fundamental as that of the value of money. chapter iii cost of production and the value of money when the cost theory was a labor theory, as with ricardo, the expression, cost of production of money, could have a definite meaning. it meant the labor-cost of producing the money metal. even in this form, it is recognized that cost of production has a looser connection with value in the case of money than in the case of most commodities, because the supply of money metal is large and durable, and the annual production affects it slowly. but cost of production theories, in the form of labor theories, or labor-abstinence-risk theories, have little standing in modern economic theory. ricardo himself saw the break-down of the pure labor theory; and cairnes, ultimus romanorum, so limited and modified the "real costs" doctrine as to leave little validity in it, even on his own showing. the prevalent doctrine of cost of production runs in terms of "money-costs"--and hence is of no use when the problem of the value of money itself is to be solved. a brief historical sketch of the cost theory will be helpful. costs are sometimes conceived as a cause of value, and sometimes as a measure of value. often these two aspects are mixed, and writers shift from one notion to the other. this is particularly true of the labor theory. in adam smith the contention sometimes is that labor is unvarying in value, hence an admirable measure of values, and an excellent standard of long-time deferred payments. smith compares wheat and silver from the standpoint of the constancy of their relation to labor, and concludes that wheat is the better standard in the long run, because it remains more nearly fixed with reference to labor than does silver. sometimes smith thinks of labor as a cause of value, and thinks of the labor that enters into the production of a good as the significant thing. at other times, the labor that goods will command or purchase is the significant thing--and here one is not clear whether he thinks of labor as a cause or as a measure. whether labor is to be funded as labor-pain, or as labor-time, smith does not state. sometimes labor seems to be considered as homogeneous in its efficiency. at other times, he makes comparison between different kinds of labor as to their efficiency, and compares the efficiency of labor in different occupations. one can find nearly anything one pleases in adam smith on these points. at times he speaks of "labor and expense," rather than labor alone, as governing prices. labor-cost to the laborer would take the form of labor-pain or labor-time. to the employer, it would take the form of outlay in wages. adam smith never makes any definite statement of point of view here, and shifts back and forth from one to the other. he recognizes variations in labor-pain, in danger, etc., in different kinds of labor when discussing wages. ricardo elaborated the labor theory of value, and tried to think it through. he was too keen a logician to shift view-points with smith's facility, and he tried to make a completed system.[ ] there is some shifting from the theory of labor as a cause of value to labor as a measure of value, as in the following passage: "if the state charges a seigniorage for coinage, the coined piece of money will generally exceed the value of the uncoined piece of metal by the whole seigniorage charged, because it will require a greater quantity of labour, or, which is the same thing, the value of the produce of a greater quantity of labour, to procure it." (_works_, mcculloch ed., .) in general, however, ricardo developed a causal theory of value, quantity of labor being the basis of the absolute values of goods, their _relative_ values depending on the relative amounts of labor involved in the production of each. i shall not go into the matter fully, but shall call attention to the rock on which the system split, as ricardo himself admits. a greater or less proportion of capital works with labor in producing different things, and the value of product, in that case, varies not merely with the labor, but also with the amount of capital, and the length of time the capital is employed. how say, then, that labor alone governs value? how reduce labor-cost and capital-cost to homogeneous terms? james mill tried to do it for him by making capital merely stored up or petrified labor, which gives up its value again in production. but this doesn't meet the difficulty, because there is a _surplus_ value, over and above that explained by all the labor, including the labor which produced the machine, and the labor which produced the raw materials which entered into the machine, etc. the case of wine is a particularly obstinate case. wine increases in value merely with the passage of time, at a rate which corresponds to the profit on capital. ricardo finally, in correspondence with mcculloch, definitely abandons the case, stating that there are many exceptions to the proportionality between exchange value and labor-cost. "i sometimes think that if i were to write the chapter on value again which is in my book, i should acknowledge that the relative value of commodities was regulated by two causes instead of one, namely, by the relative quantity of labor necessary to produce the commodities in question, and by the rate of profit for the time that the capital remained dormant." (davenport, _value and distribution_, p. .) but this is a "dualistic" rather than a "monistic" explanation--one element is a money-expense, or at all events a pecuniary item, while the other is a "real cost" item. the two are incommensurate and incommensurable. senior seeks to supply the unifying principle. "abstinence" and labor have pain as a common element, and so are commensurable. costs, reduced to labor and abstinence, become homogeneous again. monism is restored. cairnes completes the doctrine by adding risk to the real cost elements: a triune cost concept, sacrifice being the generic fact in the three manifestations. with john stuart mill, in general, we have an entrepreneur view-point. money-expenses of production, entrepreneur outlay, plus wages of management, or including wages of management, are the factors with which mill reckons. he is no longer concerned with psychological ultimates, or real costs. cairnes criticised mill sharply for this. no distinction is more fundamental he holds, than that between costs or sacrifice on the one hand, and rewards on the other. labor, abstinence and risk are sacrifices; wages, interest, profits are rewards. none the less, in cost doctrine, as in supply and demand doctrine, it is mill's view which has prevailed. cost as conceived by mill is a superficial, pecuniary notion. it tells little as to ultimate causation. but it is virtually only as a pecuniary doctrine, costs from the entrepreneur view-point, that the cost doctrine is met in modern theory. why is this? well, first, the real-cost doctrine simply does not square with the facts. the hardest labor does not produce the most valuable goods. value in fact does not vary either with labor-pain or labor-time. in fact, whatever the explanation, it would seem to be truer that the relation is an inverse relation. nor does the abstinence that pinches hardest produce the largest amount of capital. and while there is some correlation between risks and profits, the correlation is at best low and is not a correlation between psychological sacrifice and profits. even "marginal abstinence" for a rothschild or a rockefeller causes no pain. it is absurd to seek to find a common element in the "abstinence" of a rich man and the pain of a poor and aged laborer. i pass over the supposed difficulty that abstinence is, in general, suffered by one set of minds, and labor-pain by a different set of minds, and hence, since men cannot compare their own emotions with the emotions of other men, there is no comparability. this subjectivistic psychology would, of course, make it equally impossible to fund labor-pains of different laborers, or to get any common denominator at all.[ ] it is enough to point out that differences between rich and poor, between successful and unsuccessful, between efficient and inefficient, (apart from acquired differences which may be smoothed out by the "stored up labor-of-training" principle) make labor-pain, and marginal labor-pain, vary greatly from value, and make labor-pain, abstinence and risk quite incommensurable, and quite without fixed relation to value. cairnes saw this in part, and developed his doctrine of non-competing groups to deal with it. labor-pain and value vary together only when we are comparing goods produced by laborers within a competing group. laborers in one group do not compete with laborers in another group. there is perfect competition in the capital market, however, and so capital costs ("abstinence") are perfectly correlated with value, to the extent that capital enters. cairnes seems to think that the whole difficulty with his real cost doctrine comes from the failure of competition. in fact, however, it comes also from the inequalities in wealth. and even in his highly competitive capital market it is equally true that abstinence, or even marginal abstinence (a term which cairnes does not use) has no constant relation to amount of capital accumulated, value produced, or interest received. the cost theory breaks down at every point when it runs in labor-abstinence-risk terms. so generally has this been recognized, that the cost theory has generally given way to the utility theory, and cost doctrine when it appears in modern economics is either the very superficial money-outlay notion of mill, or else the austrian cost doctrine, later to be discussed, which is still a pecuniary concept. i have elsewhere undertaken to show (_social value_, chs. - , and the ch. on "marginal utility," _infra_) that these defects of the "real-cost" theory, are just as much in evidence in the utility theory. the failure of the real cost theory of value is by no means a vindication of the utility theory. both have the same vice--the effort to combine into a homogeneous sum a lot of individual psychological magnitudes measured in money, when the money-measure has a different psychological significance for each individual, and so comparison and addition are impossible. but in any case, the real cost doctrine of the classical school has failed, and so cannot serve as the basis of the theory of the value of money. obviously the money-outlay cost theory of mill cannot explain the value of money itself. the marginal cost of producing twenty-three and twenty-two hundredths grains of gold will always be a dollar, however the dollar may vary in value. indeed, in general, the assumption of a constant value of the money-unit is implied in the monetary cost concept. cost curves are _supply_-curves and the reasoning already given as to the need for assuming constant value for money in the supply and demand concept will apply here. costs function in value-determination only by checking supply. rising costs tend to mean a lessened supply. but if the cost-curve is rising _because_ of a fall in the value of money, then the demand-curve will be rising also, and production will not be checked. the general law as to the relation of cost to demand and supply assumes a fixed value of the unit of cost, the dollar. to the austrian economists we owe a rational theory of costs which gives the money-outlay concept more than a merely empirical basis. first, they see in costs not causes, but results. value causation comes ultimately, not from the side of supply, but from the side of demand. i shall not now undertake a criticism of their explanation of demand. i have elsewhere criticised their confusion of demand-curves and utility-curves, and pointed out that marginal utility gives no explanation of demand. i shall recur to the utility theory of value at a later point. for the present, it is enough to point out that the austrian theory of costs is independent of their utility vagaries, and rests best on the notion of supply and demand, as expressed in the modern curves, with the assumption of a fixed value of the money-unit. costs consists of entrepreneur money outlay of various kinds, chiefly wages, interest, and rent. rent is, for the austrians, as much a cost as any other item of entrepreneur outlay. but these items of cost are not ultimate data. they are rather reflections of the positive values of the products. value runs from finished product to agents of production, labor, and instrumental goods, and land. avoiding needless complications from a discussion of interest as a factor in cost--a doctrine on which the austrians, say wieser and böhm-bawerk, are not agreed,--it is enough to point out that high wages or high rents, which limit production in any given industry or establishment, are high _because_ the land and labor in question have _alternative_ uses, because other industries, or other competitors in the same industry, bid for them. cost-curves, then, are reflections of demand-curves. the cost-curve of wheat, _e. g._, is what it is because of the demand-curve for corn, for cattle, and for every other commodity that could be produced with the same labor and land. cost doctrine thus becomes part of the general doctrine of supply and demand, and runs in pecuniary terms, assuming money, and a fixed value of money, and hence is incapable of serving as a theory of the value of money itself. that some vaguer form of cost doctrine, where the unit of cost is, not money, but some composite commodity of things used in the production of the standard money metal, or a unit of abstract value, might be worked out, is doubtless true. gold production, like other industry, is part of the general economic scheme, and there is some sort of equilibrium reached which draws labor and capital now away from, and now back to, the gold mine. to bring this equilibrium into the general scheme of the modern theory of costs, however, in terms precise enough to make a satisfactory theory of the value of money, is a thing which has not so far been done, and i do not have high hopes of its early accomplishment. in any case, such a theory must rest upon a positive theory of value. cost doctrine is negative, and can never be fundamental.[ ] chapter iv the capitalization theory and the value of money money is capital. a dollar is a capital-good. money is, moreover, a durable form of capital, which gives forth its services bit by bit, and indeed, in a community where the state bears the burden of wear and tear, never ceases to give forth those services. in any case, from the standpoint of a given individual, so long as there is a limit of tolerance prescribed for legal tender, it is a matter of accident if he ever incurs a loss from the wastage of the capital instrument, money, through wear and tear. moreover, the fact that money is "fungible," and that its use is to be found in a process which commonly returns to the owner, not the same coin, but a different coin, we may, in general, abstract from the wear and tear of the dollar, and look upon the dollar as a capital instrument which promises its owner, if he chooses to use it as capital, a perpetual annuity. the nature of this money service will be more fully described later. for the present it is sufficient to say that exchange is a productive process, that exchange creates values, in as true a sense as manufacturing does, and that money facilitates exchange in as true a sense as coal facilitates manufacturing. there is, at any given time, a demand-curve for this money service, manifesting itself in the money market, a demand for the short time use of money as a tool of exchange, and the "prices" which come out of the interaction of demand and supply in the money market are the short time "money rates" including the "call rates." these are properly to be conceived, not as pure interest on abstract capital, but as rents[ ] which are to be attributed to money as a concrete tool. now, in general, when such rents appear, they may be capitalized. and the price of the instrument of production that bears these rents, will be the sum of the rents, discounted at the prevailing rate of interest, with considerations of risk, etc., allowed for. the reasoning of the capitalization theory is really quite simple. take, for example, a piece of urban site land, which is expected to bring a perpetual annuity of one hundred dollars. the whole economic significance of the land is contained in its services, present and prospective. the possession of land under certain circumstances brings other services, as social prestige, than the services which can be alienated to a lessee. but in this case i am abstracting from considerations of that sort, and also from the factor of risk. the whole value of the piece of land under consideration comes from the value of the one hundred dollars a year. but these annual incomes are not all equally valuable, even though all expressed as one hundred dollars. the first one hundred dollars is due one year hence, the tenth ten years hence, the thousandth, a thousand years hence. the principle of perspective comes in--i abstain from any detailed discussion of the theory of interest, simply stating that in a general way i agree with the contention that _time_ constitutes the essence of the phenomenon, or rather, the tendency to discount the future. the capital price of the land is the sum of an infinite convergent series of the "present worths" of the incomes. the formula is as follows: capital price of land = $ / . + $ /( . )^ + $ /( . )^ ... + $ /( . )^n when the rate of interest is %. the limit of this series, assuming the series to be infinite, is $ , and a simple formula for calculating it under the assumptions, is to divide $ , the annual income, by . , the rate of interest. given the annual income, given the prevailing rate of interest, the capital price is determined. the relation may be illustrated, roughly, by the figure of a candle, a disk, and the shadow of the disk on the wall. the disk represents the annual income, the shadow on the wall the capital value, and the distance between the flame and the disk the rate of interest. increase the distance between the flame and the disk, the rate of interest, and the shadow becomes smaller; shorten the distance, and the shadow is increased. similarly, enlarge the disk, and the shadow is enlarged. the capital value varies directly with the annual income, and inversely with the rate of discount. now my purpose here does not involve a detailed examination of the validity or limitations of the capitalization theory. for the present, the only question is, has this theory any application at all to the problem of the value of money? it offers itself as a general theory of the values of durable bearers of income. money is a durable bearer of income. the capitalization theory, however, is of no use for the purpose in hand. money does not obey the general law in the relation which the magnitude of the income bears to the rate of interest. in general, the income and the rate of discount are independent variables. their influence, operating in opposite directions, fixes the capital value, increasing income increasing the capital value, increasing discount rate reducing it. in the case of money, however, the two factors are not independent. the short time money rate is not, to be sure, identical with the long time rate of interest, which is the rate of discount for the purpose in hand. but the two tend to vary together in the long run average in fact, and they are related in the _expectation_ of those who are concerned in the capitalization process. in our chapter on the "functions of money," in part iii, it will be shown that normally there tends to be a difference between the money rates and the long time interest rates, the long time rates tending to be higher than the rates on short loans, the rate on very short loans being lower than the rate on somewhat longer short time loans, and the call loan rate being lowest of all. the explanation of this must be deferred till we have analyzed the functions of money. but the important thing, for present purposes, is that the money rates, though lower than the "pure rate" of interest, tend to vary, in long time averages, with that "pure rate,"[ ] and that, consequently, the income from renting money, and the discount rate to be applied in capitalizing that income, are not independent magnitudes, but tend to vary together. they thus tend to neutralize one another. if money rates go up, and if they are expected to stay up long enough to justify (on the ordinary capitalization theory) a rise in the capital value of money, we have a counteracting influence in the long time interest rate, which also rises, and tends to pull down the capital value of money. to recur to our illustration of the candle and the disk, as the disk increases in diameter, the distance between the candle and the disk grows greater, and so the _shadow_ tends to remain the same. there is a further difficulty, to which attention will be called more fully in later chapters, particularly the chapter on "dodo bones," and the chapter on the "functions of money." in other cases, in general, the capital value is, as the capitalization theory requires it to be, a true shadow, a passive function of the income and the discount, of the disk and the distance between the candle and the disk. in the case of money, however, the income is causally dependent, in part, upon the capital value. money can function as money only by virtue of having value. the shadow becomes substance in the case of money. it is the _value of money_ which makes possible the _money work_. the capitalization theory, thus, if applicable at all, must be radically modified before being applied. we shall subsequently, in the chapters above referred to, take account of this fundamental complication. for the present, we can state it merely as a problem: how can we construe the interaction of the income value of money and the capital value of money in such a way as to avoid a circular theory? but further, the capitalization theory, as heretofore formulated, like the doctrines of supply and demand and cost of production, assumes _money_, and a _fixed absolute value_ of money. this assumption must be made if we are to be able to predict, on the basis of the capitalization theory, that a given annual income, at a given rate of discount, will give a specified capital value. this may be shown by the following considerations: if men anticipate that the value of the income, which is a fixed sum of dollars, is to grow less in the future, then the present worth of the bearer of that income will shrink to an extent greater than the "pure rate" of interest would call for. the principle of "appreciation and interest" comes in. the nominal interest, in times of falling value of money, tends to exceed the pure rate by an amount which compensates for the loss in value of future income as the dollar falls in value. we have here, however, a principle different from the principle of time discount. it is not the influence of time, which makes a _given_ value appear smaller as it is further removed in time, but it is an anticipated lessening in the value of the income itself, that counts. in terms of our candle and disk illustration, it is a factor affecting the size of the disk, rather than a factor affecting the distance between the disk and the candle. for the purposes of calculation, the two elements in the nominal rate of interest may be lumped together, and the nominal rate, rather than the pure rate, may be taken as the rate of discount for capitalization purposes. but for theoretical purposes, the two must be kept distinct. the capitalization theory rests on the assumption of a fixed value of the money unit. that the fixed value of the money unit assumed is an absolute value, and not a mere "reciprocal of the price level," may be proved by some further considerations regarding relations among these same factors. assume a fall in the rate of interest. then, on the capitalization theory, prices of lands, stocks and bonds, houses, horses, and all items of wealth which give forth their services through an appreciable period of time, will rise, and with them the average of prices, or the general price level, will rise.[ ] if one hold the _relative_ conception of value, according to which the value of money necessarily falls when prices rise, because the two are merely obverse phases of the same thing, then this rise in the price level is, _ipso facto_, a fall in the value of money. but we have seen that a fall in the value of money means, on the "principle of appreciation and interest," a rise in the interest rate! hence, we would have proved that a fall in the interest rate causes a rise in the interest rate--which is absurd. if, however, we recognize that prices can rise without a fall in the value of money, if, _i. e._, we use the absolute conception of value, this difficulty disappears. the capitalization theory and the theory of appreciation and interest can be reconciled only on the basis of the absolute conception of value. the capitalization theory, then, in its present formulation, assumes money, and a fixed absolute value of money. it is, therefore, inapplicable to the problem of the value of money itself. in general, none of the polished tools of the economic analysis,--neither cost of production, the capitalization theory,[ ] nor the law of supply and demand,--is applicable to the problem of the value of money. the reason is that they get their edge from money itself. the razor does not easily cut the hone. it is to this fact, i think, that we owe the widespread and long continued vogue of a theory so crude and mechanical as the quantity theory. in the next chapter we shall show that the utility theory of value--which we shall not recognize as a polished tool!--has also failed to give us help in explaining the value of money. chapter v marginal utility and the value of money a good many writers have attempted to apply the marginal utility theory to the value of money. among these, i may particularly mention friedrich wieser, ludwig von mises, joseph schumpeter, and, in america, david kinley, and h. j. davenport. the marginal utility theory is ordinarily merely a thinly disguised version of supply and demand doctrine. as usually presented in the text-books, we have an analysis of the phenomenon of diminishing utility of a given commodity to a given individual, illustrated by a diagram, in which the ordinates represent diminishing psychological intensities. often a money measure is given to these diminishing intensities, and the curve is presented as the demand schedule of a given individual. then, with little further analysis, a leap is made to the market, and it is assumed that the market demand-curve, of many individuals, differing in wealth and character, is a utility-curve, and value in the market is "explained" by means of marginal utility. i need not here repeat my criticisms of this procedure.[ ] it gives simply a confused statement of the doctrine of supply and demand. the analysis of utility which precedes the discussion of market demand is wholly irrelevant, and merely mixes things up. that such a conception is of no use in solving the problem of the value of money has been sufficiently indicated in the chapter on supply and demand. sometimes the contention is made that money is unique among goods in having "no power to satisfy human wants except a power _to purchase_ things which do have such power."[ ] this contention, in professor fisher's view, precludes the application of the marginal utility theory to the problem of the value of money, and he makes no use of marginal utility in his explanation. indeed, in the passage from which this quotation is taken, professor fisher says that the quantity theory of money rests on just this peculiarity of money. not all writers who contend that money has no utility _per se_, however, have felt it necessary to give up the marginal utility theory as a theory of money, as we shall later see. on the other hand, writers of the "commodity school" (or "metallist school"), writers who see the source of the value of money in the metal of which it is made, can apply the utility theory readily to the value of money, making the value of money depend on the marginal utility of gold, or the standard metal, whatever it is. to the writers of this school, it is incredible that anything which has no utility should become money. money must be either valuable itself, or else a representative of some valuable thing. the value of money comes from the value of the standard of value, and that value may, so far as the logic of the situation is concerned, be as well explained by marginal utility as the value of anything else. typical of this view is professor w. a. scott's discussion in his _money and banking_[ ], though the emphasis there is not on marginal utility as the explanation of the value of the standard, but on the value (conceived of as an absolute quantity) of the standard as essential to the existence of money, and the performance of the money functions. professor scott attacks vigorously and effectively nicholson's exposition of the quantity theory,[ ] where the assumption is made that money consists of dodo-bones (the most useless thing nicholson could think of). most quantity theorists would share nicholson's view that dodo-bones would serve as well as anything else for money--or, to put the thing less fantastically, that the substance of which money is made is irrelevant, that the only question is as to the quantity, rather than the quality, of the money-units, and the quantity of the money-units, not in pounds or bushels or yards, but in abstract number merely. for writers who seek the whole explanation of the value of money in its monetary application, and who see that money, _qua_ money, cannot administer directly to human wants, the view that professor fisher expresses, namely, that money has no utility, and is unique among goods in this respect, seems on the surface, to have justification. on the surface merely, however. money is not unique among goods in being wanted only for what it can be traded for. wheat and corn and stocks and bonds and everything else that is speculated in is wanted, by the speculators, only as a means of getting a profit[ ]--they are remoter from the wants of the man who purchases them than the money profit he anticipates. ginsing, in america, has value, though consumed only in china. and there are people, particularly jewelers, who often want money as a raw material for consumption goods. the difference is at most a difference of degree--and of slight degree indeed in the case of such things as bonds, which count on the "goods" side of the quantity theory price equation, but which really are in all cases remoter than money itself from human wants. money really stands, for the purpose in hand, on the same level as any other instrumental good.[ ] it does not give forth services directly, as a rule. neither does a machine, or an acre of wheat land, or goods in a wholesaler's warehouse. exchange is a productive process, an essential part of the present process of production. money is a tool which enormously facilitates this process. it has its peculiarities, no doubt. one of them is--and money is not unique in this as will later appear--that it must have _value_ from non-monetary sources[ ] before it can perform its own special functions, from some of which it draws an increased value. but there seems to me to be nothing in the contention quoted from professor fisher, to justify setting money sharply off from all other things, or to justify the view that marginal utility is inapplicable to the value of money, if it be applicable to the value of anything at all that is not destined for immediate consumption. i do not believe that the marginal utility theory is valid for any class of goods, not even those for immediate consumption. where marginal utility theory is,--as in the conventional text-book expositions--merely another name for supply and demand theory, it is, as already shown, not applicable to the value of money, and it is useful in the surface explanation of market-prices of goods. but where marginal utility theory really seeks to get at value fundamentals, it is precisely as valid for money as for goods of other sorts--invalid, in my judgment, in both places, and for the same reasons in both. among the writers who would apply the utility theory to money, while still insisting that money, as such, has no utility, are wieser, schumpeter--who accepts wieser's theory in its main outlines--and von mises, who develops a notion very different from that of the other two. wieser's doctrines are set forth in two expositions, separated by five years, the second representing a considerable development in his thought, though resting in part on the first. the first is an address upon the occasion of his accession to the professorship at the university of vienna, in , and is published in the _zeitschrift für volkswirtschaft, sozialpolitik und verwaltung_, vol. entitled, "der geldwert und seine geschichtlichen veränderungen." the second is a discussion, partly written and partly spoken, "der geldwert und seine veränderungen" (written), and "ueber die messung der veränderungen des geldwertes" (spoken), in _schriften des vereins für sozialpolitik, referate zur tagung_, no. , . for the purpose in hand, a brief statement of one or two points would suffice to show the futility of wieser's effort to get an explanation of the value of money _via_ marginal utility, but i think that readers may be interested in a fuller account of wieser's doctrine, just because it is wieser's, and so shall undertake to give a more systematic account of it. for brevity, in the exposition which follows, i shall refer to the first article as "i," and to the second as "ii."[ ] wieser holds that it is possible to have money wholly apart from a commodity basis (i, p. ), citing the austrian _staatsnoten_ as a case in point. the reason for giving them up is that they do not circulate in foreign trade. gold fulfills its international money-functions the more easily because of its various employments, but, after it is thoroughly historically introduced, as money, it could fulfill its money functions even if all these employments be thought away ( ). wieser gives no argument for this contention, and its validity will be examined later.[ ] there are, he says, two sources for the value of gold, the money use and the arts use, interacting. money is further removed from wants, not only than consumption goods, but also than production goods, which are but consumption goods in the seed. the latter are technically destined for definite goods. but money may be used to procure whatever good you please, in exchange. (the absoluteness of this distinction, also, may be questioned. pig iron is almost as unspecialized as money in its relation to wants, since tools enter into the production of almost every service that human wants require, from surgical operations, through instrumental music, to wheat and horse-shoes. on the other hand, money is not the only thing by means of which other things are purchased. the extent of barter in modern life will wait for later discussion.[ ] i do not think that _any_ sharp distinction between money and all other things is valid.) wieser complains of the older economics which treats money as a commodity. and he contends that as money and commodities show a contrast in their essence (_wesen_), they should also manifest a contrast in the laws of their values, even though the fundamental general theory of value applies to both (i, ). he finds in representatives of money (_geldsurrogate_) and in velocity of circulation of money, factors which are lacking in commodities. (again a question must be interjected by the writer. are not corporation securities essentially like _geldsurrogate_ from this angle? and do not goods vary greatly in the number of times they are exchanged? what of the speculative markets, where more sales are made in an active market, at times, than there are commodities or securities of the type dealt in in existence?) the value of money is essentially bound up with the money-service. wieser indicates that he is not talking about the subjective value of money, but its objective value, using the popular meaning of the term, which, he says, is not strictly logical, but is useful: the relation of money to all other goods which are exchanged, the purchasing power of money. this depends on goods as well as on money. in the second article, wieser refines and elaborates his conception of the objective value of money, seeking to get away from the notion of relativity which is involved in the conception of purchasing power, and to get an absolute conception, which shall be a causal factor in the determination of general prices, rather than a mere reflection of them. it is to be a coefficient with the objective values of goods in determining prices. a change in general prices may be caused by a change in the value of money, and may be caused by a change in the values of goods (ii, p. ). in explaining this objective value concept (which, in its formal and logical aspects, is in many ways similar to the absolute social value concept maintained by the present writer, though, in the present writer's judgment, inadequately accounted for by wieser, so far as a psychological causal theory is concerned) wieser objects to the term, "objective value" which he had used in the earlier article. he prefers "volkswirtschaftlicher wert." (this term is perhaps best rendered "public economic value," for present purposes, to distinguish it, on the one hand, from individual or personal value, and, on the other, from the social economic value concept of the present writer. at the same time, the connotation of a communistic or authoritive value must not be read into the term. it is, in its formal and logical aspects, really the most common of all the value notions, and may, best of all perhaps, be translated simply "value," or "economic value," or "absolute value." but for the present discussion, we shall call it "public economic value.") this public economic value, in the case of goods, is not a mere objective relation between a good and its price-equivalent. it is a subjective (psychological) value, like personal value. if one wishes to call it objective value, one is using objective in the sense of the general subjective as distinguished from the personal individual idiosyncracy (ii, p. ). the objective exchange value of goods (here wieser uses "objektiver tauschwert" as the equivalent of his "volkswirtschaftlicher wert" above mentioned) is the common subjective part of the individual valuations leaving out the remainder of individual peculiarities ("der allgemein subjective teil der persönlichen wertschätzungen mit verschweigung des individual eigenartig empfundenen restes").[ ] wieser does not seem to me to think out clearly the distinction between absolute and relative value in this connection. he wishes to get something more fundamental than a mere relation between goods and money; he wishes a psychological phenomenon. he wishes to have a value of goods which can be set over against the value of money, the two, in combination, determining prices. and yet, he wishes somehow to get these out of the prices themselves. "we must seek a concept of the public economic value of money which, to be sure, proceeds from the general price-level (_preisstand_), but which excludes from its content everything that comes purely from the value of goods" (ii, ). to the public economic value of money, however, wieser gives no independent definition. the definition runs in terms of the values of the goods. "the value of money rises when the same inner values (_innere werte_) of commodities are expressed in lower prices; it falls, when they are expressed in higher prices" (ii, - ). "inner value" of goods is not defined, but i take it that wieser uses it as meaning essentially the same thing as the public economic value already described--an absolute value. (_cf._ the usage of menger and von mises, _infra_, in this chapter, with respect to the terms, "inner" and "outer" value.) the definition is not strictly circular, perhaps, but at least it is pretty empty. nothing appears to give the value of money, as distinct from its purchasing power, an independent standing. the reason for this will later appear. it should be noted, however, that the definition is not in terms of prices or purchasing power. prices might remain unchanged, in wieser's scheme, and yet the value of money sink, if the inner values of goods should sink. the value of money, thus defined, is to be explained by marginal utility. but money has no marginal utility of its own, it has no subjective use-value, but only a subjective exchange value,--derived from the use-value (marginal utility) of the commodity purchased with the marginal dollar (ii, - ). this subjective-exchange value of money is the personal value of money, as distinguished from its public economic value, and is the cause of the public economic value. the personal value of money changes ( ) with the volume of one's personal income, ( ) with the intensity of one's need for money, and ( ) with market prices. the personal value of money is directly influenced and measured only in exchanges for consumption goods. expenditures of other kinds affect it only indirectly by leaving less for consumption expenditures. the laborer always reckons with the personal value of money, but not the business man, in his business calculations. as in the case of goods, we pass from personal to public economic value (ii, ). the personal value of money depends on the relation between an individual's money income, and his real income, in terms of goods. the public economic value of money depends on the money income of the community as a whole, and its real income. (ii, - ). money income grows faster than real income, through the extension of the money economy. money income is not, like real income, dependent on quantity. the mere extension of the money economy increases the volume of money income, lowers the personal value of money, lowers its public economic value, and raises prices. witness the effect on a rural community of bringing it into the great market, where all costs are reckoned in money and rising costs compel rising prices. hence, there is a tendency for the public economic value of money to sink, and this has been the historical fact (i, ii, - .) criticism of this theory is almost superfluous. there are elements in wieser's discussion, not here presented, which have very considerable importance, and which will be presented in a later chapter when the criticism of the quantity theory is taken up. wieser deals some heavy blows to the quantity theory. but his constructive doctrine presents the clearest possible case of the austrian circle. the value of money depends, not on its subjective use-value, its own marginal utility--it has none. the value of money depends on its subjective value in exchange, the marginal utility of the goods which are exchanged for it. but these depend on prices. and prices depend, in part, on the value of money itself! this circle, present in every form of the austrian theory which seeks a causal explanation of value and prices by means of marginal utility,[ ] though often less obviously present, is here quite glaring. the distinction between volume of money income and quantity of money is, on the other hand, an important one, and will be emphasized when the quantity theory is taken up.[ ] one further point in wieser's doctrine calls for comment. it is strange indeed to find an austrian seeing in a rise in money costs a _cause_ of a general rise in prices. the austrian doctrine is rather that rising money costs are _reflections_ of rising general prices. wieser's doctrine that the extension of the money economy to rural regions, compelling the farmer to reckon all his costs in money and so to raise his prices, has been adequately criticised by von mises, who points out that wieser sees only half the phenomenon; that eggs and butter are, indeed, higher in price in the rural region when it comes into contact with the city, but that they are correspondingly lower in the city from the same cause. on the other hand, the doctrine of costs is not the whole point in wieser's notion of the extension of the money economy as a cause of higher prices, and we shall deal with the doctrine again, in a different connection. by devitalizing the marginal utility theory, by stating it in such a way that it makes no causal assertions, and in such a way that it leaves the real value problem untouched, it is possible to free it from the circle just pointed out. schumpeter does so state it. schumpeter's theory of value,[ ] though he attributes it to böhm-bawerk, seems to the present writer to be essentially different. böhm-bawerk undertakes to explain the value (objective value in exchange) of each good by its _own_ marginal utility to different individuals, buyers and sellers of the good--indeed, by its marginal utility to _four_ individuals, the two "marginal pairs."[ ] he sees at points that the prices of other goods are sometimes factors, making marginal utility give way to "subjective value in exchange," as the determinant of an individual's behavior toward a given good in the market--as in his much discussed overcoat illustration.[ ] but böhm-bawerk never gets out of the circle which this reaction of the market-prices on the individual subjective values involves. schumpeter seems to rise to a higher conspectus picture, which, in form, avoids the circle. his picture is that of a vast equilibrium, in which, instead of attributing the market value of each good to its own marginal utility, you explain the exchange ratios[ ] of every good to every other good, all at once, by reference to a total situation: _given_ the number of goods of each class, given the number of individuals in the market, given the _distribution_ of each class of goods among the individuals, given the utility-_curves_ (not marginal utilities) of each good to each individual, an equilibrium will be reached, through trading, in which ratios between marginal utilities of each kind of good to each individual are inversely proportional to the abstract ratios (ratios of exchange) between the same goods, each measured in its own unit. the ratios are abstract ratios, between pure numbers, so far as the market ratios are concerned; the ratios in the mind of each individual are concrete ratios, between marginal utilities. the scheme, thus stated, says nothing as to the _causal_ relation between marginal utility and market ratios; it merely states certain _mathematical_ relations between each individual system of marginal utilities on the one hand, and the abstract market ratios on the other. by avoiding _assertions_ as to causation, it avoids a causal circle. in such a situation, marginal utilities and market ratios are, in reality, alike resultants, _effects_, of the given quantities of goods, distribution of goods, numbers of buyers and sellers, and individual utility-_curves_--not _marginal_ utilities. to this picture, one may add--what schumpeter does not add--the curves showing time-preferences of each individual for each sort of good, and (an element which schumpeter does include) the curves of _dis_-utility for the individuals who produce each kind of good. the system, it may be noted, is as good a proof of _real cost_ doctrine as it is of utility doctrine. such a picture, i submit, avoids the circle which is presented in all other formulations of the austrian theory of value. i wish, however, to indicate its limitations as a theory of value, and the impossibility of any application of it to the problem of the value of money. ( ) its data are inaccessible: nobody could possibly know all the utility-curves and all the time-preference curves (and disutility of labor-curves, etc.) of all goods to all individuals in, say, the united states. to explain market ratios by utility-curves is a case of _ignotum per ignotius_, so far as practical application is concerned. moreover, the scheme is so difficult to visualize that it is useless as a tool of thought--as one will find who tries to think it through, without the aid of higher mathematics, for ten goods, and ten persons, with unequal distribution of wealth, and different utility curves, time-preference curves, and disutility-curves for each kind of good to each individual. ( ) the scheme must assume smooth curves and infinitesimal increments in consumption, which is a fiction so far as the individual psychology is concerned. without this assumption, the point-for-point correspondence between individual and market ratios does not exist. it is only in social-value curves, or in demand-curves in the big market (which are social-value curves, expressed in money),[ ] that you have, as a matter of fact, the right to smooth out your curves. ( ) the theory must assume the frictionless static state, in which marginal adjustments are perfectly accomplished, and equilibrium really reached. without this assumption, again the point-for-point inverse correspondence of market ratios and individual ratios fails. but this makes it quite impossible to apply the doctrine to any functional theory of the value of money, or to bring money in any realistic way into the scheme. as will be shown more fully in later chapters, money functions in bringing about just the absence of friction which static theory assumes. that is what money is _for_. the functional theory of money, therefore, cannot abstract from friction and dynamic change.[ ] it is, of course, possible, on this scheme to pick out any one of the goods in the system, say the - th part of a horse, call it the "money-unit," and determine a set of money-prices. these "money-prices" are already given in the scheme in the ratios between the abstract numbers of this unit and the abstract numbers of the units of all other goods. but this is meaningless, so far as a theory of money is concerned. it abstracts entirely from the _differences_ in _salability_[ ] of goods, on which the theory of money must rest. it gives us no clue to that part of the value of the money-article which comes from its money-functions. ( ) the theory has no bearing on the problems of supply and demand. demand-curves are curves, not of utility, but of money-prices. they are concerned, not with a _system_ of ratios among goods in general, but with the absolute money-prices of particular goods, one at a time. the modern demand-curves and supply-curves, representing the demand and supply doctrine first made precise by j. s. mill,[ ] are concerned with the money-prices of particular goods, and the "equation of supply and demand"--amount supplied and amount demanded--gives an equilibrium in which only one price is determined. austrian theory, in böhm-bawerk's hands, and in the hands of practically all adherents of the austrian school, including davenport,[ ] has been offered as really bearing on the explanation of demand, and as giving a psychological account and explanation of the demand-curve. the scheme of schumpeter has simply no bearing at all on this vital point. the equilibrium picture in which _all_ goods are involved supplies no data from which to construct any of the magnitudes above or below the margin of the demand and supply-curves of any given good. one reason why this is so will appear from the point made with reference to "money-prices" in the preceding paragraph. for schumpeter's scheme, the significance of the article chosen as "money" would be as much a problem as anything else, when the conditions are laid down. it would vary in the process of reaching the equilibrium. its ratios with all other things would, thus, fluctuate until the equilibrium was reached. but, as we have seen, in the chapter on "supply and demand," curves of supply and demand must assume a fixed significance of the money-unit. it may be further noticed, as marking off schumpeter's scheme from supply and demand analysis, that in schumpeter's scheme, the individual is the centre of interest, and his reactions _toward all kinds of goods_ is emphasized; whereas in supply and demand analysis, the _good_--one good--is the centre of interest, and the price-offers streaming toward it from all kinds of individuals is emphasized. the two bodies of doctrine are quite distinct. ( ) the theory has no bearing on the explanation of entrepreneur cost--money-outlay, "opportunity cost," alternative positive values, or what not. it finds no place for the modern cost doctrine. it does not in any way open the path to the austrian theory of costs. costs, for austrian theory, as, in general, for modern theory, are reflections of _demand_ for the employment of the agents of production in alternative uses. thus, it costs a great deal to raise wheat in illinois, because of the rival demand for the land to produce corn. labor costs are high in ordinary manufacturing, because of the rival demand for labor in the munitions factories, etc. as schumpeter's theory can give no account of the _demand_ for labor in the munitions factories, it follows that it can give no account of the _cost_ of labor in the other factories. instead, indeed, of giving us the modern cost doctrine, we see schumpeter's scheme reviving the old _real cost_ doctrine, running in terms of sacrifices in production.[ ] ( ) the foregoing paragraph gives emphasis to the point with which we started, namely, that schumpeter's theory is not a _causal_ theory, but merely a theory which gives mathematical relations in a static picture. for the general theory of the austrians, this real cost doctrine is anathema. values are positive. the emphasis is put on positive wants, as _causes_ which guide and motivate industry. the _clue_ to all values is in the values of _consumption_ goods, which are in direct contact with the utilities which are the source of value. from the values of consumption goods, we _derive_ the values of production goods, labor, etc., which are goods of "second, third and fourth _ranks_" and whose values are merely reflected from the causal marginal utilities of the consumption goods they are destined to create. none of this causation is brought into schumpeter's conspectus picture. on the contrary, with the bringing in of disutility of production, we have the doctrine of the earlier english school revived. the equilibrium picture is as good a proof of the one theory as of the other. if we assume the utility-curves constant, and allow the cost-curves to vary, then causation would be initiated by the cost-curves.[ ] ( ) such an equilibrium picture leaves untouched the vital question which any theory must answer which means to be of practical use in concrete situations: what are the real _variables_ in the situation, and what factors are constant? what causes are _likely_ to produce changes in market prices? the individual-utility curves, which in austrian theory are commonly treated as the only variables, except quantities of goods,--in the strict static picture there are no variables at all!--are really, when conceived of as individual, as growing out of the mental processes of each individual separately, the most _constant_ factor in the situation. for, on the principle of the inertia of large numbers, each unit of which is moved by its own peculiar causes, changes in the utility-curves of one man will be offset by opposite changes in the utility-curves of another, and so the general system will remain much where it was. of course, if a rich man changes his curve, a poor man's change will not offset it in the market, but this is to emphasize the _distribution of wealth_ rather than the utility-curves. it is only when you get changes of a sort that the individualistic psychology, and the "pure economic" explanation factors, of the austrians find no place for, that you can predict a change in the general price-system. it is only changes in fashion or mode, in general business confidence,[ ] in moral attitude toward this or the other sort of consumption or production, in the distribution of wealth, changes in taxes and other laws--causes of a general social character--that you can count on to produce important changes in values. of course, changes in the adequacies of supplies would be taken account of on either interpretation. ( ) the scheme under consideration gives no value concept which the economist can make any particular use of. it gives only ratios between marginal utilities in the mind of the same individual, and abstract market ratios. it gives no _quantitative_ value, which can be attributed to goods as a quality,[ ] a homogeneous quality of wealth by means of which diverse sorts of wealth may be compared, funded, etc. such a concept is, however, necessary for the economic analysis, and schumpeter is driven to creating substitutes for it of various sorts, notably _kaufkraft_ and _kapital_. _kaufkraft_, as schumpeter uses the term, is not derived from marginal utility, but is an abstraction from the idea of money. it is not a quantity of money alone, nor even of money and credit, but is a fund of "abstract power," which depends not alone on the quantity of money and credit in which it is embodied, but also on the prices of goods.[ ] this _kaufkraft_ is needed to give the causal "steam," the "motivating power," which the social value concept connotes, but which ratios in the market lack. similarly, _kapital_ is conceived of as an agent, a dynamic force, distinguished from accumulations of concrete productive instruments, by means of which the entrepreneur gets control of land, labor and instrumental goods.[ ] other functions of the quantitative value are shouldered on a hard-worked and unusually defined concept, _kredit_, which leads schumpeter into certain "heresies"[ ] regarding credit, which are mostly harmless in themselves, but which will arouse misunderstanding and opposition. "_præter necessitatem entia non multiplicanda sunt_," and the social value concept, which covers by inclusion the notion of market ratio--market ratios being ratios between social values--and which does all the work that schumpeter attributes to _kapital_ and _kaufkraft_, and most of the new work which he attributes to _kredit_, is to be preferred,[ ] if only on grounds of intellectual economy. "capital" is then saved for more usual meanings, and economy in terminology is also effected. schumpeter also departs, as shown, from the abstract market ratio notion in erecting a causal theory of value, in which "marginal utility" is used as the equivalent of a quantitative value, and is traced by the austrian imputation process back to the original factors of production. he even speaks of labor as having "utility," whereas labor,[ ] unless used in domestic service, has, not utility, but only value. in the marginal utility scheme above outlined there is no place for money, on the assumptions laid down. it is a scheme of barter relations. the utilities which come into equilibrium are not subjective-exchange-values, which, as schumpeter, with wieser, contends, are the only subjective values money has, but are real subjective use values--marginal utilities. the scheme, assuming as it does, perfect exchangeability of all goods, with infinitesimal increments in consumption, has no place for money. there really is no money service to be performed. schumpeter, indeed, speaks of money as a mere "schleier," which does not touch the essence of the phenomena, and such it is on his assumptions. in a similar situation, professor irving fisher gives up the effort to find a psychological explanation of the value of money,[ ] and offers the quantity theory as a mechanical principle, additional to the psychological barter scheme. schumpeter, however, does lip service still to the need for a psychological explanation. his answer runs in wieser's terms--indeed, he attributes it to wieser. the _preis_ of money[ ]--schumpeter does not use wieser's absolute value concept, but lets his value of money run in purely relative terms--the price of money in goods depends on the subjective value of money. this subjective value of money rests on the experience of each individual in making purchases--rests on the prices of consumption goods, determined by the relation between real income and money income. the circle is as clear as day. ludwig von mises sees this circle, and tries to avoid it. in von mises there seem to me to be very noteworthy clarity and power. his _theorie des geldes und der umlaufsmittel_ is an exceptionally excellent book. von mises has a very wide knowledge of the literature of the theory of money. he has a keen insight into the difficulties involved. he recognizes fully that, so far, the utility school has failed to solve the problem ( - ). his theory is as follows: individual valuations ( ) constitute the basis of the objective exchange value of money. but while for other goods, subjective use-value and subjective exchange-value are different concepts, for money the two coincide, and both rest on the objective value of money ( ). this seems to be our old circle in unmistakable form, but mises thinks he has an escape, as will later appear. no function of money is thinkable which does not rest on its objective exchange value. the subjective value of money rests on the subjective use-values of the goods for which it can be exchanged ( ). money, at the beginning of its money-functioning, must have objective exchange value from other causes than its money-function, but it can remain valuable, even though these causes fall away, exclusively through its function as general instrument of exchange ( ). he gives no argument in support of this contention, but refers with approval to wieser (_loc. cit._), and to simmel (_philosophie des geldes_, ff.). hence, the important consequence that in the value of money of to-day a historical component is contained. herein is to be found a fundamental contrast between the value of money and the values of other goods ( - .). the individual valuation of money rests on the objective exchange value of money of _yesterday_. this individual value of money is the explanation, on the money side, of the objective value of money of to-day. going back, step by step, you come ultimately to the subjective use-value of the money-stuff in its non-monetary employment--a temporal _regressus_. this opens the way to a theory of the value of money based on marginal utility. this avoids the circle of explaining the objective value of money of to-day by the subjective exchange value of money of to-day, which in turn rests on the contemporary objective value of money. i find this particularly interesting, since it employs a device which had once suggested itself to me as a means of escape from the austrian circle, but which reflection led me to abandon. i have discussed the whole matter in my _social value_, and therefore venture a quotation from that book.[ ] "how are we to get out of our circle:[ ] the value of a good, a, depends, in part, upon the value embodied in the goods, b, c, and d, possessed by the persons for whom good a has 'utility,' and whose 'effective demand' is a _sine qua non_ of a's value? the most convenient point of departure seems to be the simple situation which wieser has assumed in his _natural value._[ ] here the 'artificial' complications due to private property and to the difference between rich and poor are gone, and only 'marginal utility' is left as a regulator of values. but what about value in a situation where there are differences in 'purchasing power'? how assimilate the one situation to the other? "a _temporal regressus_, back to the first piece of wealth, which, we might assume, depended for its value solely upon the facts of utility and scarcity, and the existence of which furnished the first 'purchasing power' that upset the order of 'natural value,' might be interesting, but certainly would not be convincing. in the first place, there is no unbroken sequence of uninterrupted economic causation from that far away hypothetical day to the present, in the course of which that original quantity of value has exerted its influence. the present situation does not differ from wieser's situation simply in the fact that some, more provident than others, have saved where others have consumed, have been industrious where others have been idle, and so have accumulated a surplus of value, which, used to back their desires, makes the wants of the industrious and provident count for more than the wants of others. and even if these were the only differences, it is to be noted that private property has somehow crept in in the interval, for wieser's was a communistic society. and further, an emotion felt ten thousand years ago could scarcely have any very direct or certain quantitative connection with value in the market to-day. even if there had been no 'disturbing factors' of a non-economic sort, the process of 'economic causation' could not have carried a value so far. it is the living emotion that counts! values depend every moment upon the force of live minds, and need to be constantly renewed. and there would have been, of course, many 'non-economic' disturbances, wars and robberies, frauds and benevolences, political and religious changes--a host of historical occurrences affecting the weight of different elements in society in a way that, by historical methods, it is impossible to treat quantitatively.[ ] "what is called for is, not a temporal _regressus_, which, starting with an hypothesis, picks up abstractions by the way, and tries to synthesize them into a concrete reality of to-day, but rather, a _logical analysis_ of existing psychic forces, which shall abstract from the concrete social situation the phases that are most significant. this method will not give us the whole story either. value will not be completely explained by the phases we pick out. but then, we shall be aware of the fact, and we shall know that the other phases are there, ready to be picked out as they are needed for further refinement of the theory, as new problems call for further refinement. and, indeed, we shall include them in our theory, under a lump name, namely, the rest of the 'presuppositions' of value. "our reason for choosing a logical analysis of existing psychic forces instead of a temporal _regressus_--instead, even, of an accurate historical study of the past--is a two-fold one: first, we wish to coördinate the new factors we are to emphasize with factors already recognized, and to emerge with a value concept which shall serve the economists in the accustomed way--it is illogical to mix a logical analysis with a temporal _regressus_. but, more fundamental than this logical point, is this: the forces which have historically _begot_ a social situation are not, necessarily, the forces which _sustain_ it. the rule doubtless is that new institutions have to win their way against an opposition which grows simply out of the fact that we are, through mental inertia, wedded to what is old and familiar. we resist the new _as_ the new. even those who are most disposed to innovate are still conservative, with reference to propaganda that they themselves are not concerned with. the great mass of activities of all men, even the most progressive, are rooted in habit, and resist change. when, however, a new value has won its way, has become familiar and established, the very forces which once opposed it now become its surest support. or, waiving this unreflecting inertia of society, as things become actualized they are seen in new relations. what, prior to experiment, we thought might harm us, we find beneficial after it has been tried, and so support it--or the reverse may be true. the psychic forces maintaining and controlling a social situation, therefore, are not necessarily the ones which historically brought it into being."[ ] since the foregoing was written, i have found that another theorist, professor alvin s. johnson, had also given consideration to the same idea, as a means of escape from the austrian circle. professor johnson refers to the notion briefly in his review of _social value_ (_am. econ. rev._, june, , p. ), holding that the doctrine is logically tenable, though rejecting it on psychological grounds. "the value of a thing newly created can be explained only with reference to values antecedently existing." that there is a continuity in the value system, as in the whole social-mental life of men, i should be the last to deny. but it is not the antecedently existing values, _as_ antecedently existing, that give value to the new piece of wealth. the antecedent values function only as _persisting_, as _contemporary_ social forces. we do not find the motivating power of existing values in the ashes of burnt out desire! it seems to me very essential to distinguish the two methods of approach to the problem. it is possible to state a historical sequence--if you know it,--showing how values have historically come and gone. but for an equilibrium picture, of the sort that our price theory demands, where there is a mechanical balancing of contemporary factors (as in marshall's balls in the bowl illustration), such an account is of no use. existing social forces have their history. but, at a given moment, they are what they are, and what they _were_ at a different time adds no ounce of weight to the power they now exert. if a quantitative account of value is called for--and price-theory is essentially concerned with the measurement of values--we must bring measure and measured into contemporary balance. the historical account is one thing; the cross-section analysis is another. "static theory" is a mechanical abstraction from the organic cross-section picture, which, by making it superficial, is able to make it exact. it seems to me that this distinction must be kept clear if progress in the science is to be made. at every point, divergent conclusions are reached if the two view-points are merged. the distinction between statics and dynamics is, in a general way, the same as the distinction here made between the historical and the cross-section view. it is no answer to the ricardian theory of land-rent for carey to point out that historically, in new countries, the uplands are cultivated first, and the more fertile river-valleys later. ricardo is talking about statics, and carey about dynamics. carey does not answer ricardo, because he is talking about a different problem. the utility theorist especially has no right to leave the static view-point. all the elementary laws on which the utility theory is based are static laws. the law of satiety, of diminishing utility, is a static law, and the utility theorists are careful to point out that it holds only for an individual at a given time. it rests on nerve fatigue. give the nerve time to rest, and utility does not sink. on the contrary, the dynamic law of wants is that wants expand. as old wants are satisfied, new wants arise, so that, in the course of time, _marginal_ utilities do not sink--the competition of new wants forces up the margins of the old wants. moreover, with time, tastes change, habits are formed, and the same wants may grow more intense--as in the case of olives or whiskey. all this has been seen by the creators of the utility theory. thus, wieser: "the want as a whole of course retains its strength so long as a man retains his health; satisfaction does not weaken but rather stimulates it, by constantly contributing to its development, and, particularly, by giving rise to a desire for variety. it is otherwise with the separate sensations of the want. these are narrowly limited both in point of time and in point of matter. anyone who has just taken a certain quantity of food of a certain kind will not immediately have the same strength of desire for a similar quantity. within any single period of want every additional act of satisfaction will be estimated less highly than a preceding one obtained from a quantity of goods equal in kind and amount." (_natural value_, p. .) a similar statement is in taussig's _principles_ (i, ), "in such cases, however, the tastes of the purchasers may be said to have changed in the interval. at any given stage of taste and popularity, the principle of diminishing utility will apply." illustrations could be multiplied. it is true that _future_ marginal utilities come into the utility theory scheme, but they come in, not as future utilities, but as "_present worths_" of future utilities, or as "present anticipated feelings" in jevons' phrase[ ] suffering a discount, usually, in the process. but i am not aware of any writer among the founders of the utility school, who has sought to bring past utilities into the scheme. the past is dead. its effects persist in the present only in present processes. a _memory_ is a _present_ psychological fact. consider further. is it the prices of yesterday that determine the subjective value of money to an individual, if the prices of yesterday are different from the prices of to-day, _and the individual knows it_? in so far as we have the clear, intelligent economic mind, seeking its interests--and the marginal utility theory assumes this type of mind--the tendency is to bring all the factors in the problem into the present. if prices change slowly, so that the individual can count on essentially the same situation to-day that he had yesterday, doubtless he will not take the trouble to recast his value system. there is a tremendous lot of trouble in bringing about, in the individual's mind, the rational equilibration of values--trouble which the austrian theory commonly abstracts from, but which should be recognized in the analysis, and accorded its own marginal significance in the scale. to throw the emphasis on inertia, however, and to assume that men do not readjust their margins to meet changed conditions, is to depart from the fundamentals of the austrian theory. if the price-situation is a rapidly changing one, men do rapidly readjust their estimates of money. if money is fluctuating rapidly in value--as, say, during a time when there is depreciated paper money, whose future depends on military events, the adjustments may be very rapid indeed. i quote the following from the news columns of the _new york times_, of april , , p. : "jaurez, mexico, apr. .--after the hysterical outbursts last night that greeted the news of the fall of torreon, this city was preternaturally calm to-day.... the silent gentleman with the dyed mustache who spins the marble at the roulette wheel in the jaurez monte carlo, conducted by villa's officers for the benefit of the rebel treasury, seemed the only person who was not excited. when the crowd of players suddenly deserted him on the sound of the bugle call of victory, he gave the marble another whirl from sheer force of habit, but none returned.... in an hour, however, play was faster and more furious than ever, for holders of constitutionalist money early realized that their currency had suddenly increased in value, and that they were somewhat richer than before." i do not question the fact, however, that men are slow in making calculations, and that society is often unconscious of changed conditions, and often readjusts less rapidly than occasion requires. there is a vast deal of inertia, of blind habit, of custom, etc. but emphasis on these factors is not marginal utility theory! factors like these are emphasized by a functional psychology, and by a social psychology--not by an individualistic psychology which rests on the assumption of rational calculation. it is not _past_ utilities that explain present subjective values of money when these subjective values are out of harmony with the present market facts, but rather _present_ habits, present customs, present disinclination to readjust, etc. there is a big difference, psychologically, between the mental processes through which one arrived at one's present state of mind, and the present state of mind itself. the original "commodity utility" of the money metal, in the far away time before the money use affected its value, is surely no longer a factor. certainly not on the basis of an individualistic psychology of the austrian type. all the individuals who experienced that original utility are long since dead! not even memories of the original utilities persist. when writing the passage in _social value_, quoted above, i did not suppose that i was dealing with a notion that anyone else would ever take seriously. my purpose in discussing it was chiefly to throw into sharp relief the contrast between the historical and the cross-section viewpoints, and to make clear that my own theory was based on analysis of existing psychological forces. since finding, however, that two writers for whose views i have so much respect have independently developed the same idea, and have taken it seriously, i have felt it worth while to give it this extended consideration. von mises, like wieser, needs an absolute value of money in his thinking. he does not call the concept by that name, but, following menger[ ] speaks of the "inner objective value of money" and the "outer objective value of money." (mises, p. .) the latter is the purchasing power of money, a relative concept, exactly expressed in the price-level. the inner objective value of money is designed to cover the causes of changes in prices which originate on the money-side of the price relation alone.[ ] this inner objective value of money performs the same logical function in the theory of money that the absolute social value concept of the present writer does, even though the psychological explanation lying behind it is very different. von mises considers the quantity theory at length, noting a number of defects in it, chief of which is the fact that it has no psychological theory of value behind it, that it does not account for the _existence_ of the value of money, and at most gives a law for _changes_ in a value whose existence is taken for granted. the details of this criticism, however, need not be here presented. the quantity theory is to be treated in detail at a later point of our study. the writer who has most definitely stated the relation of utility to the functions of money, is david kinley (_money_, ch. viii). he would explain the value of money, by (a) its utility as a commodity, and (b) its utility in the money-employment, the employments reaching a marginal equilibrium. the utility of the money metal in its commodity use calls for no analysis. but what is meant by the utility of money as money? where the writers so far discussed have denied that money as money has any utility, dean kinley finds a utility in the money-function itself: money facilitates exchange, and exchange, by transferring goods from those who do not need them to those who do need them, increases the utility of those goods. money, as money, thus produces utility.[ ] the utility of money is the extra utility which comes into being by virtue of its use, as compared with what would exist in a state of barter. the marginal utility of money is the utility of money in the marginal exchange--the exchange which would be effected by means of barter if money were any more difficult to procure. the marginal utility of money, then, is not the whole of the marginal utility of the good for which it is exchanged, but rather is the differential part of that utility which is created by means of the use of money in exchange. the marginal utility of money, thus, appears in separate services of money. money is a durable good, which gives forth its services bit by bit. the value of money is based on these separate services, it is "the capitalized value of the service rendered in the marginal exchange." this conception is, it seems to me, much truer to the spirit of the general marginal utility theory than the theories of wieser, schumpeter, or von mises. if the utility theory at large were valid, the application here would be valid. to dean kinley's conception of a marginal utility of the money service, i offer simply the objections which i offer to the utility theory at large--objections indicated in what has gone before, and in my _social value_. the application of the capitalization theory to the value of money i have already discussed in a previous chapter, and shall again consider in the chapter on "the functions of money." i conclude that the marginal utility theory has not solved the problem of the value of money. the reason, however, is simply that it has not solved the general problem of value. the marginal utility theory, in so far as it seeks to make marginal utility the _cause_ of value, is circular. the effect of a given man's wants upon the value of the goods he wants depends, not on the marginal intensity of those wants alone--a penniless prisoner may desire a marble palace ever so intensely without affecting its value--but also upon the value of the wealth possessed by the individual who experiences the wants. but this is to explain value, not by marginal utility alone, but by value as well--a circle. or, if we leave the standpoint of absolute values, and look at the matter in terms of prices, the same situation presents itself. the price which an individual is willing to pay for a good depends on his income,--which commonly rests on prices--and on the prices he has to pay for other goods which enter into his budget. his price-offer, expressive of the marginal utility of a horse to him, is made with consideration of the price of a buggy, of harness, of feed, of the wages of the servant who cares for the horse, the price of a barn, and of the other things that the possession of the horse involves. and not these alone: less immediately, but still vitally, his whole budget enters. higher prices for theatre tickets or for food or for clothing will reduce his price-offer for a horse. further, his price-offer for the horse will be tremendously influenced by his opinion as to the permanent market price of horses. he will not be willing to pay a price for the horse which he cannot expect to get back if he should decide later to sell the horse. the direct influence of market price on individual demand-price is very great indeed. marginal utility (subjective use-value) very frequently gives place to subjective value-in-exchange in the determination of an individual's marginal demand-price--which means that the market controls the individual instead of the individual controlling the market. with sellers, it is _generally_ subjective-exchange-value, rather than marginal utility, that determines supply-price-offer. the sellers, in so far as they are producers, have little need for the great mass of their stocks. they will sell them, rather than keep them, at almost any price. the reason they ask high prices is simply that they think the market will give them the high prices. the individual price-offers, in the aggregate therefore, presuppose the whole market situation--presuppose a general value and price system already fixed and determined. each individual price offer presupposes many other prices, though not, of course, the whole market. since, then, much of the market situation is assumed in the determination of each particular price, by the austrian method, it is obviously circular reasoning to think that the determination of each price separately by this method will supply data for a summary of the market situation as a whole. in the one form in which the utility theory avoids a circle,--that presented by schumpeter, and discussed in an earlier part of this chapter--it is not a causal theory. marginal utility is not a cause of market prices, but rather, marginal utilities and market prices are alike resultants, effects, of more fundamental factors. no writer[ ] who has presented the utility theory in this form has tried to apply it to the value of money, and even if it could be so applied, it would not give a causal explanation of the value of money in terms of marginal utility. in most of the efforts to apply the utility theory to money, the circle becomes so obvious that one marvels that able theorists should for a moment fail to see it. part ii. the quantity theory chapter vi the quantity theory of prices. introduction the quantity theory, in its usual formulations, is a theory, not of the value of money, in the absolute sense of value, but of the general price-level, the average price of goods exchanged for money. it is not a psychological theory. it does not deal with psychological quantities, or psychological forces. it is a mechanical theory, concerned simply with quantities, and the relations between them. the essence of the quantity theory comes out in the following brief statement: given a number of units of money; given a number of units of goods to be exchanged; assume these two numbers to be independent[ ] of each other; assume all the goods to be exchanged for all the money; then the average price will be a simple function of the quantities of goods and of money respectively, such that an increase in the amount of money will increase the average price per unit of goods proportionately, if goods remain unchanged in amount, or an increase in goods will lower the price per unit proportionately, money being assumed to remain unchanged in amount. the qualification is commonly added that if goods have to be exchanged more than once, the effect is the same on prices as if there were an added number of goods equal to the added number of exchanges, and that if money is used more than once in exchanging a given number of goods, the effect is the same as if there were proportionately more money. both quantity of goods and quantity of money are commonly defined as actual quantity multiplied by "rapidity of circulation." rapidity of circulation, however, for both money and goods, is commonly thought of as a constant, so that the original formula remains unaffected by the qualification, so far as a prediction as to the effect of increase or decrease of money or goods on prices is concerned. involved in the quantity theory, and explicitly stated by many writers, is the doctrine that the substance of which money is made is irrelevant, that it is the number, and not the quality or size of the money-units that counts. "in short, the quantity theory asserts that (provided velocity of circulation and volume of trade are unchanged) if we increase the _number_ of dollars, whether by renaming coins, or by debasing coins, or by increasing coinage, or by any other means, prices will be increased in the same proportion. it is the number, and not the weight, that is essential. this fact needs great emphasis. it is a fact which differentiates money from all other goods and explains the peculiar manner in which its purchasing power is related to other goods. sugar, for instance, has a specific desirability dependent on its quantity in pounds. money has no such quality. the value of sugar depends on its _actual quantity_. if the quantity of sugar is changed from , , pounds to , , hundredweight, it does not follow that a hundredweight will have the value previously possessed by a pound. but if money in circulation is changed from , , units of one weight to , , units of another weight, the value of each unit will remain unchanged." (irving fisher, _purchasing power of money_, pp. - .) to the same effect is nicholson's exposition, in which the money is assumed to consist of dodo-bones, the most useless substance that nicholson could think of. for the quantity theory, prices are determined by the _numbers_ of goods and dollars that are to be exchanged for one another, and not by the _values_ of the goods and dollars;--indeed, for the quantity theory, "value" commonly has no meaning apart from the prices which are supposed to be adequately explained by the mechanical relations of numbers. in the critical study which follows, virtually every doctrine and every assumption of this preliminary statement will be challenged. i shall deny, first, that the quantity of goods to be exchanged and the quantity of money to be exchanged for the goods, are independent quantities, maintaining, rather, that an increase in either of them tends normally to be accompanied by an increase in the other. quantity of goods and quantity of money _exchanged_ are not simple physical stocks, given data. rather, they are consequences of human choices and human relationships, and vary from a large number of highly complex psychological causes, many of which are common to both. i shall deny, second, that "rapidity of circulation," either of goods or of money, is a simple constant, independent of quantity of goods or of quantity of money. i shall maintain, rather, that rapidity of circulation of money is a phenomenon which calls for psychological explanation: that the rapidity of money really means the _activities of men_; that these activities are complex, and obey no simple law; that instead of being an independent factor, constant, in the situation, the rapidity of circulation of money is bound up with the quantity of money, the quantity of goods to be exchanged, the rapidity of circulation of goods, and the prices of the goods, and that the rapidity of circulation of goods is likewise causally dependent on the factors named--or better, on the causes which control them; that rapidity of circulation, whether of money or of goods, is not a causal factor independent of prices, but rather in part depends on prices. in the third place, i deny the doctrine that the question as to _what_ the money-unit is made of is irrelevant. on the contrary, i shall maintain that the _quality_ of money, rather than its quantity, is the determining factor. i shall not maintain that only money made of or redeemable in valuable bullion can circulate, nor shall i maintain that the value of money depends wholly on the value of its bullion content when money is made of valuable metal. i recognize that value can come from other sources. but i shall maintain that value from some source other than the monetary employment is an essential precondition of the monetary employment, even though recognizing that that monetary employment may, in a way later to be analyzed, add to the original value of the money. the doctrine that only physical quantities, or abstract numbers, of goods are relevant i shall challenge especially, maintaining, on the contrary, that the psychological significances, the values, of goods are the really important thing, so that an increase in the number of one sort of goods may have a very different effect on the average of prices from an increase of the same number of units of some other good, and so that an increase in the number of goods exchanged under one set of conditions may have a very different effect on prices--or may be accompanied by a very different movement in prices, for the question of causal relations is a complicated one--from the change in prices that might accompany the same increase in the amount exchanged of same goods under other circumstances. finally, the doctrine of the quantity theory that the price-level is a passive result of the other factors named: quantities of goods and money, and their respective velocities; that prices cannot initiate a change in the situation, will also be challenged. i shall undertake to show that the first change in the situation may appear in prices themselves, and that the quantities of goods exchanged, and of money, and their velocities, may then be altered to correspond with the change in prices. i shall further maintain, as against the whole spirit of the quantity theory, that it does not seize hold of essentials in the causes lying behind prices. i shall contend that the factors with which it deals, instead of being independent _foci_ to which converge the causes governing the price-level, and through which causation flows in one direction, are really not true "factors" at all, but rather are blanket names for highly complex and heterogeneous groups of facts concerning which few general statements are possible. quantity of goods exchanged, for example, may be in some of its parts caused by rising prices, in others of its parts may be causing falling prices and is chiefly caused by _fluctuating_ prices. the net change in prices in this case is not the result of any one movement from "quantity of goods" as a whole. changes in the price-level are not one result, but rather, are the mathematician's average of many changes, due to a host of causes, in many individual prices. the quantity theory is an effort to simplify phenomena highly complex. of course, the simplification of complex phenomena in thought is a laudable scientific goal, but when the simplification goes so far as to group things only superficially related, and to leave out the really vital elements, it is worthless. value theory, with all the value left out, is like hamlet with no actor for the title rôle. simplification in the explanation of general prices has gone as far as we can legitimately take it when we seek to summarize all the factors involved in the _foci_ of, on the one hand, the value of money, and, on the other hand, the values of the particular goods. the general price-level is an average of many concrete prices. each of these individual prices has a concrete causal explanation. the _general_ price-level has, not a few simple causes, but an infinite host of causes. indeed, the general price-level has no real existence. it is a convenient mathematical concept, by means of which we may summarize the multitude of concrete facts. it is useful as a device for measuring changes in the value of money, on the assumption that changes in the values of goods neutralize one another. this assumption is never strictly true, and often is demonstrably false. the general price-level is neither a cause nor a result. particular prices, in general, are results of two causes, namely, the value of money and the value of the good in question, and particular prices may then become causes, changing the quantity of money involved in a given set of exchanges. neither quantity of money, nor quantity of goods exchanged, nor rapidity of circulation, nor general price-level is a simple, homogeneous quantity, obeying definite laws. i shall also undertake to show that in many important cases the quantity theory leads to conclusions regarding the price-level which contradict other laws of prices, notably the capitalization theory, the cost of production doctrine, and the law of supply and demand. i have previously pointed out that these three doctrines are inapplicable to the problem of the value of money itself. on the assumption of a value of money, however,--using value in the absolute sense--they are applicable to the problem of prices, and, since the price-level is merely an average of particular prices, they should be applicable to the problem of the price-level also. it will be shown, in the course of the criticism which follows, first that the quantity theory contradicts each of these doctrines, in certain situations, and second, that in these cases, the conclusions based on the cost theory, the supply and demand theory, and the capitalization theory are right, and the conclusions based on the quantity theory are wrong. it has been maintained by certain writers, as knut wicksell[ ] and irving fisher,[ ] that cost of production and supply and demand are inapplicable to the problem of the general price-level. i shall maintain the contrary, holding that while these doctrines are inapplicable to the problem of the _value_ of money, they _are_ applicable to the problem of general prices, on the assumption of a fixed value of money. by the value of money i mean its absolute[ ] value, and not--what the quantity theorists commonly mean--its "purchasing power," or the "reciprocal of the price-level." i shall undertake to show that no sound conclusion reached on the basis of quantity theory reasoning is the peculiar property of the quantity theory school; that every valid conclusion which may be based on the quantity theory may also be deduced from the theory maintained in this book, and, indeed, that most of them may be deduced from several other theories of money, notably the commodity or bullionist theory. i shall show a number of false and misleading doctrines which logically spring from the quantity theory, and shall undertake to show that the quantity theory fails to give an adequate basis for several important parts of the theory of money, among them gresham's law, the theory of international gold movements, and the theory of elastic bank-notes and deposit-currency. so much for the theses to be maintained. the detailed proof of these contentions will best be given in connection with a critical account of various versions of quantity theory doctrine. attention will be given in this summary to the expositions of nicholson, mill, taussig, and kemmerer, and very special attention to i. fisher, though some other writers will also be taken into account. chapter vii dodo-bones must money have value from some source outside its money-functions? it is a part of the quantity theory that this is unnecessary. i have cited, in the preceding chapter, irving fisher and j. s. nicholson to this effect. nicholson's statement is interesting and picturesque, exhibiting the quantity theory in all the nakedness of its poverty, and i shall present it at some length. "for simplicity," to isolate his phenomenon, he assumes a hypothetical market, in which the following conditions obtain: ( ) no exchanges are to be made unless money (which he assumes to consist of counters of a certain size made of dodo-bones) actually passes from hand to hand. no credit or barter. ( ) the money is to be regarded as of no use whatever except to effect exchanges, so that it will not be withheld for hoarding, _i. e._, will be actually in circulation. ( ) there are ten traders in the market, each with one kind of commodity and no money, and one trader with all the money (one hundred pieces), and no commodities. further, let this moneyed man put an equal estimation on all the commodities. now let the market be opened according to the rules laid down; then all the money will be offered against all the goods, and, every article being assumed of equal value, the price given for each article will be ten pieces, and the general level of prices will be ten. it is perfectly clear that, under these suppositions, if the amount of money had been one thousand pieces, the price-level would have been one hundred per article, etc. under these very rigid assumptions, then, it is obvious that the value of money varies exactly and inversely with the amount put into circulation.--the rapidity of circulation he regards as coördinate, in fixing the price-level, with the volume of money. to illustrate this, he assumes again his hypothetical market, and "dodo-bones," assuming as before that one merchant has all the money (one hundred pieces), and that ten have commodities of equal value. instead, however, of the merchant with the money desiring all the commodities equally, he is made to desire only the whole of that of trader one, who in turn desires the whole of number two's stock; and so on to the ninth merchant, who wants the commodity of number ten, _who wants the dodo-bones_. in this case, each article will be exchanged only once, as formerly, but the money will change hands ten times, and the price of each article will be one hundred instead of ten. "we now see that, under these circumstances, with the same quantity of money, and the same volume of transactions, the level of prices is ten times as great as before, and the reason is that every piece of money is used ten times instead of once." whence he concludes: "the effect on prices must be the same when, in effecting transactions, one piece of money is used ten times as when ten pieces of money are used once."[ ] ricardo, too, expresses the dodo-bone theory very explicitly. "if the state charges a seigniorage for coinage, the coined piece will generally exceed the value of the uncoined piece of metal by the whole seigniorage, because it will require a greater quantity of labour, or, which is the same thing, the value of the produce of a greater quantity of labour, to procure it. "while the state alone coins, there can be no limit to this charge of seigniorage; for, by limiting the quantity of the coin, it can be raised to any conceivable value. it is on this principle that paper money circulates; the whole charge for paper money may be considered a seigniorage. though it has no intrinsic value, yet, by limiting its quantity, its value is as great as an equal denomination of coin, or of bullion in that coin."[ ] would the dodo-bones circulate? nicholson chose the illustration to throw into the sharpest relief the absence of any value from a non-monetary employment. nobody has any use for them as dodo-bones. what economic force is there, then, to make them circulate? nicholson says nothing about an _agreement_ among the traders, _assigning_ a significance[ ] to the dodo-bones, so that they might function in the same way that poker chips do--indeed, any such notion would vitiate his illustration, for he proposes to explain an adjustment of prices by natural economic laws. why then, will any of the traders give up his valuable commodities for the worthless dodo-bones? will you say that he will take them, not because he wants them himself, but because he knows that others will take them from him? but why would the others want them? because they in turn can unload them on still others? but this seems a plain case of the vicious circle. it is, in effect, saying that the dodo-bones will circulate because they will circulate. a will take them because b will take them; b will take them because c will take them, c because ... n will take them; n takes them because a will take them.[ ] i do not deny that if the traders used the dodo-bones as counters, agreeing that such dodo-bones should represent some other commodity chosen as a standard of values, that the dodo-bones would circulate. but, in that case, they would be, not primary, self-sustaining money, but merely representative, or token money. and just here let me lay down two general propositions[ ] respecting the two main functions of money: to serve as a standard, or common measure, of values, the article chosen must, as such, be valuable. the thing measured must be either a fraction or a multiple of the unit of measurement. but this quantitative relation can exist only between _homogeneous_ things. the standard, or measure, of values, then, must be like the commodities whose values it is to measure, at least to the extent of having _value_.[ ] the second proposition is respecting the medium of exchange. the medium of exchange must also have value, or else be a representative of something which has value. there can be no exchange, in the economic sense--i abstract from disguised benevolences, accidents, and frauds--without a _quid pro quo_, without value balancing value, at least roughly, in the process. now when it is remembered that the intervention of the medium of exchange, taking the place of barter, really breaks up a single exchange under the barter system into two or more independent exchanges, and that the medium of exchange is actually received in exchange for valuable commodities, it follows clearly that the medium of exchange must either have value itself, or else represent that which has value. these two propositions seem almost too obvious to require the statement, but they contradict the quantity theory, and they are not, on the surface, reconcilable with certain facts in the history of inconvertible paper money. it is necessary, therefore, to state them, and to examine further some of the phenomena which seem to contradict them. if they are true, nicholson's dodo-bones will perform neither of the primary functions of money. they have no value, _per se_--they cannot, then, measure values; they are neither valuable nor titles to valuable things--they are not _quid pro quo_ in exchange, and will not circulate. i shall not pause long to discuss the doctrine that money needs no value itself, because it is really a sort of title to, or claim on, or representative of, goods in general. the notion, first, would not pass a lawyer's scrutiny. there are no such indefinite legal rights. a system of legally fixed prices, with a socialistic organization of society, would be necessary to give it definiteness--and in such a situation there would be no room for a quantity theory of prices! economic goods, as distinct from money, are not generally "fungible" to the extent that would make them indifferent objects of legal rights. besides, whether or not the thing is logically thinkable, it is legally false. legal factors enter into the economic value of money, as will later be shown, but it is economic, and not legal, value, which makes money circulate. helfferich has taken the trouble to give the notion of money as a mere title to things in general a somewhat more fundamental analysis, and i would refer the reader who is not satisfied by the foregoing on this point to his discussion.[ ] i wish to make very clear precisely how much i mean by the foregoing argument that circular reasoning is involved in saying that a will take the dodo-bones because b will take them. the same question arises for b, and for the others. the real question is as to the cause for any general practice of the sort. why should a _suppose_ that b will take them? what could bring about such a system of social relations that a general expectation of this sort could arise? kemmerer undertakes to give an answer in a hypothetical case by the following ingenious assumption (_money and credit instruments_, p. ): the money consists of an article which formerly had a high commodity value, which has lately entirely disappeared, but the money continues to circulate, through the influence of custom, and because of the demand for a medium of exchange. in this illustration kemmerer recognizes the historical fact that money has originated from some commodity which had value because of its significance as a commodity. historically, a great many different commodities have served, and gold and silver finally emerged victors for reasons which need not just now concern us. these historical facts, coupled with the idea that value is, essentially, "something physical,"[ ] or coupled with the notion that value arises only from marginal utility, or from labor, have been accepted by the commodity or metallist school as sufficient proof that standard money is only possible when made of some valuable commodity. professor laughlin seems to think of the whole thing as depending on the value of gold bullion, and to recognize the money-employment as a factor in affecting the value of money only in so far as it draws gold away from the arts, and so raises its value there by lessening the supply.[ ] if money originated in a commodity, how is it possible for the commodity value to be withdrawn, and for money still to retain its value? this brings us to a question i have raised before, namely, whether the genetic, or historical account of a social situation, and the cross-section analysis of the same situation, necessarily agree.[ ] is it possible that when a commodity basis was necessary to start the thing, and when even in the modern world gold bullion, interconvertible with gold coin, remains the ultimate basis of the money-systems of all great commercial peoples, that you could withdraw the commodity support and keep money unchanged in value? or could you even have any value left at all? now in answer, i propose to admit the possibility of so doing. the forces which a cross-section analysis reveals are not necessarily identical with those which a theory of origins sets forth. once the thing is set going, the forces of inertia favor it. a new theory, fixed in the minds of the people, say the quantity theory itself, might give them such confidence in their money that its value might be maintained. a fiat of the government, making the money legal tender, supplemented by the loyalty of the people, might keep up its value. i think there is reason to believe that this is a source of no little importance of value for the german paper money to-day, and, to a less extent, of the notes of the _banque de france_. all these possibilities i admit. value is not physical, but psychological. and the form of value with which we are here concerned, economic value _par excellence_, is a phenomenon of social, rather than individual psychology. many and complex are the psychical factors lying behind it. belief, custom, law, patriotism, particularly a network of legal relationships growing out of contracts expressed in terms of the money in question, the policy of the state as to receiving the money for public dues, the influence of a set of customary or legally prescribed prices, which tie the value of money to a certain extent to the values of goods--factors of this character can add to the value of money, and can, conceivably, even sustain it when the original source of value is gone. social economic value does not rest on marginal utility. in general, utility is essential, as one of many conditions, before value can exist, even though the intensity of the marginal want served by a good bears no definite relation to its value. but in the case of the value of a money of the sort here considered, marginal utility is in no sense a cause of the value. rather, the marginal utility[ ] of such money to an individual is wholly a reflection of its social value, and changes when that social value changes. it is quite consistent with the general theory of economic value which i have set forth in _social value_, for me to admit possibilities of this kind. the value of money in such a case has become divorced from its original presuppositions. the paper, originally resting on a commodity basis, or the coins originally valued because they could be transformed into non-monetary objects of value, have become objects of value in themselves. analogous phenomena are common enough in the general field of values, and are less common in the field of economic values proper than one might suppose. thus, most moral values tend to become independent of their presuppositions. moral values of modes of conduct have commonly arisen because those modes of conduct were, or were supposed to be, advantageous in furthering other ends. morality, in its essence, is _teleogical_. yet so far have the moral ideals become ends in themselves that it is possible to have great thinkers, like kant and fichte, setting them up as eternal and unchangeable categorical imperatives, regardless of consequences. thus fichte declares, "i would not tell a lie to save the universe from destruction." older still is the dictum, "_fiat justitia, ruat coelum._" yet truth and justice, in the history of morals, and, in the view of most moral thinkers to-day, are of value primarily because they tend to preserve the universe from destruction, and would never have become morally valuable had they had the other tendency! legal values manifest this tendency even more--one needs only to point to our vast body of technical rules of procedure in criminal cases, which persist long after their original function is gone, and after they have become highly pernicious from the standpoint of the ends originally aimed at. in the sphere of the individual psychology the phenomenon is very common. the miser's love for money is a classical example. the housewife who so exalts the cleanliness of her home that the home becomes an unhappy place in which to live, is an often-described type. the man who retires from business that he may enjoy the gains for the sake of which he entered business often finds that the business has become a thing of value in itself, and longs to be back in the harness, while many men, long after economic activity is no longer necessary, continue the struggle for its own sake. activities arise to realize values. the value of the activity is derived from the value aimed at. but consciousness is economical, and memory is short. the activities become habits. the habits gather about themselves new psychological reactions. the interruption of habitual activities is distasteful. life in all its phases tends to go on of its own momentum. the activities tend to become objects of value in themselves, whether or not their original _raison d'être_ persist. in both the social and the individual sphere, apart from blind inertia and mechanical habit, active interests tend to perpetuate the old activities, whose _raison d'être_ is gone. the judge who continues to apply the outgrown absurdities of adjective law may do it from timidity or from being too lazy to think out the new problems whose solution must precede readjustment to present social needs, but the criminal lawyer who can free his guilty client by means of these technicalities has an active interest in their perpetuation. the individual who would readjust his conduct in the light of changed interests finds that active opposition is met in the emotional accompaniment of the old habits. the economic society may wish to be free from a money whose original value is gone, but there is a powerful debtor interest which approves of that money, and whose support tends to maintain its value. all these possibilities i admit. my own theory of value, which finds the roots of economic value ramifying through the total social psychological situation, rather than in utility or labor-pain alone, involves possibilities like these. but--and this is a point i wish especially to stress--we are out of the field of mechanics, and in the field of social psychology, when we undertake to explain the value of money that way. no longer is there any mathematical necessity about the matter. there is no such _a priori_ simplicity as the quantity theory deals with. factors like these might maintain the value of money for a time, and then wane. these factors might vary in intensity from day to day, with changing political or other events, leading the value of money to change from day to day, quite irrespective of changes in its quantity.[ ] in so far as you have a people ignorant of the nature of money and of monetary problems, a people in the bonds of custom, with slightly developed commercial life, whose economic activities run in familiar grooves unreflectively, you will most nearly approximate a situation like that which professor kemmerer assumes. but that means that what might be true in india, or to a less degree in austria--countries to which the quantity theorists are accustomed to refer--need not at all be true in the united states. here everybody was talking about the theory of money in --not necessarily very intelligently!--and here, moreover, such phrases as "good as gold," and propositions like that which came from mr. j. p. morgan in his testimony before the pujo committee that "gold is money, and nothing else," would seem to indicate that a very great part of our people might utterly distrust such a money as professor kemmerer describes. the banker's tendency to look behind for the security, to test things out, to seek to get to bed-rock in business affairs, holds with a great many people. an overemphasis on this is responsible for the doctrine of scott[ ] and laughlin[ ] that the sole source of the value of inconvertible paper money is the prospect of redemption, and that inconvertible paper money differs from gold in value by an amount which exactly equals the discount at the prevailing rate of interest, with allowance for risk, for the period during which people expect the paper money to remain unredeemed. we have not the banker's psychology to any such extent as that. apart from the fact that the money function adds to the value of money, under certain circumstances,--a point to be elaborated shortly--other, non-rational factors, contagions of depression and enthusiasm, patriotic support, "gold market" manipulations, etc., entered to break the working of the credit theory of paper money as applied to the american greenbacks. i may here express the opinion that the credit theory is the fundamental principle in the explanation of the value of the greenbacks, however. but we have not the banker's psychology to any such extent as the extreme forms of that theory would assume. "uncle sam's money is good enough for me," is a phrase i have heard from the populists,--who, by the way, were pretty good quantity theorists! "the government is behind it." there are plenty of men for whom that assurance would be enough. indeed, the general notion that in some way, not specified, perhaps not yet known to anybody, the government will do what is necessary to maintain the value of its money is a ground which might well influence even the most sophisticated banker. i think such a general confidence in the english government has clearly been a factor in the price of sterling exchange since the balance of trade turned so overwhelmingly against england in the present war.[ ] our monetary history, i may add, has been in considerable measure a struggle between these two opposing psychological reactions on that point. the utter breakdown of the _fiat_ theory came in rhode island, and in connection with the continental currency, in the days before the constitution was adopted. on the other hand, i do not believe that those who put a banker inside every one of us can prove that their principle has been a complete explanation at any stage of our monetary history. but clearly considerations like these take away all mathematical certainty from the matter. the foregoing analysis makes clear, i trust, that the notion that the money function alone can make an otherwise valueless money circulate is untenable. there must be value from other sources as well. all that is conceded is that there need not be a physical commodity as the basis of the money. value is not necessarily connected with a physical commodity. there is a disposition on the part of many quantity theorists to beg the question at the outset, to assume money as circulating, without realizing how much this assumption involves. the assumption involves the further assumption that there are _causes_ for the circulation of money. but the same causes which make money circulate will also be factors in the determination of the _terms_ on which it circulates, _i. e._, the prices. to seek then, by a new principle, the quantity theory, to explain these prices without reference to these causes, is a remarkable procedure. there is sometimes a disposition to do the thing quite simply indeed: define money as the circulating medium, and, _by definition_, you have it circulating! a rather striking case of this, which is either tautology or circular reasoning, appears in fisher's _purchasing power of money_ (p. ): "take the case, for instance, of paper money. so long as it has the _distinctive characteristic of money,--general acceptability at its legal value_,--and is limited in quantity, its value will ordinarily be equal to that of its legal equivalent in gold." (italics mine.) it is not quite easy to construct, even ideally, a social psychology which would perfectly fit the quantity theory. one would have to assume that money circulates purely from habit, without any present _reason_ at all. the assumption must be that the economic life runs in steady grooves, so that quantity of goods exchanged will always be the same, or at least, that it will always be the same proportion of the goods produced--there must be no option of speculative holding out of the market allowed the holder of exchangeable goods. the individuals must have constant habits as to the _proportions_ of the money they receive to be spent and to be held for emergencies. all the factors affecting "velocity" of both money and goods must be constant--professor fisher maintains very explicitly that velocities, both of money and of bank-deposits are fixed by habit (_loc. cit._, p. ),--and, in any case, the assumption is necessary. a thoroughly mechanical situation must be assumed, where there is the rule of blind habit. given such a mechanism, you pour in money at one end, and it grinds out prices at the other end, automatically. but, strangely enough, in this social situation where blind habit rules, prices are perfectly fluid! in india, or in other countries where the assumptions of the quantity theorist come most nearly to realization, so far as the general rule of habit is concerned, one finds also many customary prices. in a country completely under the rule of habit, the prices would, as a matter of _psychological_ necessity, be also fixed. what might then be expected to happen in such a country, if an economic experimenter should disturb them in their habitual quantity of money? which habits would give way, those relating to prices, or those to velocities, or those relating to quantities of goods exchanged?[ ] i shall not trouble to solve this problem, as it seems to me not the most useful way to approach the problem of the value of money, but i submit it to the consideration of advocates of the quantity theory. my present purpose is accomplished in pointing out the psychological assumptions which the quantity theory makes: a psychology of blind habit, in a situation where the price-level is free from control by customary prices. now at another point i wish to mediate between the quantity theorists and their extreme opponents. representatives of the metallist of commodity school--like professor laughlin, and professor scott in his earlier writings--seem to deny that the money-employment has any direct effect in increasing the value of money. the money-employment affects the value of money only indirectly, by withdrawing the money metal from the arts, so raising the value of the money metal, and consequently raising the value of the coined metal. the quantity theory, on the other hand, would utterly divorce the value of money from causal dependence on the stuff of which the money is made. both these views seem to me extreme. unless money has value from some source other than the money employment, it cannot be used as money at all. nobody will want it. on the other hand, the money use is a valuable use. exchange is a productive process. money, as a tool of exchange, enables men to create values. and you can measure the value of the money service very easily at a given time if you look at the short time "money-rates," _i. e._, rates of discount on prime short term paper. these are properly to be considered, not interest on abstract capital, but the rent of a particular capital-good, namely, money. the money is hired for a specific service, namely, to enable a man to get a specific profit in a commercial transaction. money is not the only good which can be thus employed, and which is paid for for this purpose. ordinarily a man will pay for money for this purpose. sometimes, however, one needs the temporary use of something else more than one needs money, and the holder of money pays a premium for the privilege of temporarily holding the other thing. i refer especially here to the practice of "borrowing and carrying" on the stock exchange. the "bear" sells stock which he does not possess, and must deliver the stock before he is ready to close his transaction by buying to "cover." he goes to a "bull" who has more stock than he can easily "carry," and who is glad to "lend" the stock in return for a "loan" of its equivalent in money. ordinarily the bull is glad to pay a price for the money, as it is of service to him. sometimes, however, the situation is reversed, and the service which the temporary loan of the stock performs for the hard-pressed bears is greater than the service which the money performs for the bulls, and the payment is reversed. when the bull pays a premium to the bear, for the use of the money, the amount paid is called "carrying charge," "interest charge for carrying," "contango," (london) or (in germany) "_report_." this is the usual case. but sometimes the bear pays the bull a premium for the use of the stock, and the charge is then called "premium for use," "backwardation," (london) or "_deport_" (germany).[ ] money is, thus, not the only thing which has a "use" in addition to the ordinary "uses" which are the primary source of its value.[ ] in the case of other things, however, this kind of "use" is unusual. in the case of money it is the primary use. the essence of this use is to be found in the employment of a quantum of _value_ in highly saleable form in facilitating commercial transactions. commercial transactions, in this sense, are not limited to ordinary buying and selling. i think it best to defer further analysis of the money service to a later chapter, on the functions of money, which will best be preceded by a consideration of the origin of money. for the present, it is enough to note that money has certain characteristics which enable it to facilitate exchanges, and to pay debts, better than anything else, and that this fact makes an addition to its value. it is possible, i think, to measure this addition to value rather precisely in certain cases. thus, in the case of the american greenbacks, we find them at a discount, say from the beginning of on, as compared with the gold dollar in which they were to be redeemed in jan. . i think it safe to contend that the country was practically free from doubt as to their redemption after the early part of . the discount steadily diminished as the time of redemption approached. laughlin's theory is thus far beautifully vindicated. the central fact governing the value of the greenbacks during this period was the prospect of redemption. but, and here i think we see the influence of the money-use, the discount was not as great as would have been called for by the prevailing rate of interest, as measured by the yield on other obligations of the federal government, at this time. and the discount completely disappeared some little time before the actual redemption. i see no cause for the absence of a discount in the later months of except the additional value which came from the money use. this additional value is, ordinarily, not very great. and money is not alone in possessing it. in extraordinary circumstances it may become quite large. thus, in , in the midst of the panic, the gold premium fell sharply. at this time the significance of the greenbacks as a legal tender, a means of final payment of obligations (_zahlungs_- or _solutions-mittel_), as distinguished from medium of exchange (_tauschmittel_), attained an unusual significance. in ordinary times, the marginal value of this function of money sinks to zero, but in emergencies it may become very great. in ordinary times, during the greenback period, uncoined gold bullion, or gold coin used, not as money, but simply by weight in exchanges, played an important rôle, competing with the greenbacks in various employments, particularly as bank reserves, and as secondary bank reserves, and so reducing the marginal value of the money-employment of the greenbacks themselves. gold bullion is not the only thing which can thus serve, however. to-day, and generally, securities with a wide market, capable of being turned quickly into cash, without loss, or capable of serving as the basis of collateral loans, up to a high percentage of their value, have a much higher value, for a given yield, than have other securities, equally safe, but less well-known and less easily saleable. the "one-house bond" (_i. e._, the bond for which only one banking house offers a ready market) must yield a great deal more to sell at a given price than the bond of equal security which is listed on the exchanges, and has a wide market. part of this is in illustration of another function of money, the "bearer of options" function, which enables the holder to preserve his wealth, and at the same time keep options for increasing its amount when bargains appear in the market. foreign exchange performs many of these functions of money in european countries, particularly austria-hungary.[ ] the notion that the whole value of gold coin rests on its bullion content arises most easily in a situation where free coinage has long been practiced, and where there are no legal obstacles to the melting down of coin for other uses. where free coinage is suspended, the peculiar services which only money can perform--or rather, the services which money has a differential advantage in performing--may easily lead to an agio for coined over uncoined metal. the mere fact that coined metal is of a definite fineness well known and attested is often of some consequence, though the attestation of well-known jewelers may give this advantage to metal bars as well, for large transactions. but for smaller transactions, nothing can easily take the place of money. a high premium on small coins, apart from redemption in standard money, may easily arise from the money-use alone. and standard coin may well attain, in greater or less degree, a premium. if it is scarce, as compared with the amount of business to be done, this premium may well be greater than if it is abundant. but that an indefinite premium is possible, or that this premium varies exactly and inversely with the quantity, i see no reason at all for supposing. if the premium be great enough, men, especially in large transactions, will make use of the uncoined metal--just as they did use gold in this country during the greenback period. the advantages of money are not absolute. money is simply more convenient for many purposes than other things. the possibility of a premium is limited by the possibility of substitutes. it is further limited by the fact that a high premium would awaken a distrust which would bring the premium to destruction, by destroying trade, and so destroying the money-use on which the premium is based. a detailed discussion of the indian rupee since lies outside the scope of this chapter. i think it may be well, however, to recognize at this point that the limitation in the quantity of the rupee, through abrogation of free coinage, was a factor in the subsequent rise in its value. it was not the only factor, by any means. but it was a factor. it may be also recognized as a factor in the value of austrian paper money. the doctrine just laid down, as to the influence of the money-use in adding to the value of money, is in no sense the same as the quantity theory. for one thing, it is easily demonstrated that the value-curve for the uses of money is not described by the equation, _xy_ = _c_. this curve expresses, in terms of value, the idea of proportionality which is an essential part of the quantity theory. put in terms of the money market, we have a demand-curve for money, not for the long-time possession of money, but for its temporary use--a rental, rather than a capital value, is expressed in the price which this curve helps to determine. this curve is highly elastic. when money-rates are low, transactions will be undertaken which will not be undertaken when the rate is a little higher. in the second place, the method of approach is very different. it is not the whole volume of transactions which must employ money, but only a flexible part. in the third place, the money-use is here conceived of as a source, not of the whole value of money, but only of a differential portion of that value. in the fourth place, the argument runs in terms of the absolute value of money, and not in terms of the level of prices. it is not the legal peculiarity of money, as legal tender, which is necessarily responsible for this agio when it appears. in the first place, not all money is legal tender. in the second place, we find the same phenomenon in connection with "bank-money" at times--i would refer especially to the premium on the _marc banko_ of the hamburg girobank. (_cf._ knapp, _staatliche theorie des geldes_, p. .) the legal tender peculiarity may, however, in special circumstances be a source of a very considerable temporary agio. it is possible, however, to frame a hypothetical case in which, barring temporary emergencies, the money-use will add nothing to the value of money, and in which the whole value of money will come from the value of the commodity chosen as the standard of values. assume that the standard of value is defined as a dollar, which is further defined as . grains of pure gold. assume, however, that no gold is coined. let the circulating money be made of paper. let this paper be redeemable, not in gold, but in silver, at the market ratio, on the day of redemption, of silver to gold. this will mean that varying quantities of silver will be given by the redeeming agencies for paper, but always just that amount required to procure . grains of gold. let us assume, further, that the government issues paper money freely on receipt of the same amount of silver. assume, further, that the government bears the charges which the friction of such a system would entail, by opening numerous centres of issue and redemption, by providing insurance against fluctuations in the ratio of silver to gold for a reasonable time before issue and after redemption, meeting transportation charges, brokerage fees, etc. in such a case, the standard of value would not be used as money at all. it would have no greater value than it would if it were not the standard of value--abstracting from the fact that in the one case it might be used in its uncoined form as a substitute for money more freely than in the other. in any case, it would form no part of the quantity of money. its whole value would come from its commodity significance. the value of the paper money, however, would be tied absolutely to the value of gold. as gold rose in value, the paper money would rise in value, and vice versa. the quantity of money would be absolutely irrelevant as affecting its value. the quantity of silver would be likewise irrelevant. the causation as between quantity of money and value of money would be exactly the reverse of that asserted by the quantity theory. a high value of money would mean lower prices. with lower prices, less money would be needed to carry on the business of the country. paper would then be superabundant. but in that case, paper would rapidly be sent in for redemption, and the quantity of money would be reduced.[ ] the value of money would control the quantity of money. the standard of value, which was not the medium of exchange, would control the value of money, and so the level of prices, in so far as the level of prices is controlled from the money side. in this hypothetical illustration, we have the extreme case of what the commodity or metallist school seems to assert. in this case, barring temporary emergencies too acute to admit of increasing the money-supply by the method described, their theory that the value of money comes wholly from the commodity value of the standard, would offer a complete explanation. i offer this illustration as the antithesis of the dodo-bone illustration of nicholson. that illustration sets forth the extreme claims of the quantity theory, and purports to be a case in which the quantity theory would work perfectly. the case illustrative of the commodity theory clearly brings out the fact that that theory rests on exclusive attention to the standard of value function of money. the dodo-bone theory gives exclusive attention to, but very imperfect analysis of, the medium of exchange function. but i submit that the extreme case of the commodity theory, in the illustration i have given, is a thinkable and consistent system. it would work--even though not conveniently. indeed, it resembles in essentials the plan actually proposed by aneurin williams, and later by professor irving fisher[ ] for stabilizing the value of money. substitute a composite commodity for gold, and gold for silver, in the illustration, and you have the essentials of that plan. the dodo-bone hypothesis, however, as i have been at elaborate pains to show in the foregoing, is unthinkable. it would not work. it is, thus, possible to construct a system for which the commodity theory would offer a complete explanation. it is not possible to do this for the quantity theory. but the limiting case for the commodity theory is not the actual case. standard money is also commonly a medium of exchange. standard money is particularly desirable in bank and government reserves. its employment in these and other ways is a valuable employment, and adds directly to its value both as money and in the arts. there is a marginal equilibrium between its values in the two employments. the notion that the only way in which the money employment adds to the value of money is an indirect one, by withdrawing gold from the arts, so lessening its supply and raising its value there, may be proved erroneous by this consideration: what, in that case, would determine the margin between the two employments? what force would there be to withdraw gold from the arts at all? why should more rather than less be withdrawn? there must be ascending curves on both sides of the margin. gold money in small amount has a high significance per unit in the money employment. a greater amount has a smaller significance per unit. the marginal amount of gold put to work as money has a comparatively low significance in that employment--a significance just great enough to secure it from the competing employments in the arts. * * * * * we conclude, then, that money must have value to start with, from some source other than the money function, and that there must always be some source of value apart from the money function, if money is to circulate, or to serve as money in other ways. but this is not to assert the doctrine of the commodity school, that its value must arise from the metal of which it is made, or in which it is expected to be redeemed. nor is it to deny that the money function may add to the original value. on the contrary, the services which money performs are valuable services, and add directly, under conditions which we shall analyze more fully in a later chapter on the functions of money, to the value derived from non-pecuniary sources. value is not physical, but psychical. and value is not bound up inseparably with labor-pain or marginal utility. chapter viii the "equation of exchange" in professor irving fisher's _purchasing power of money_[ ] we have the most uncompromising and rigorous statement of the quantity theory to be found in modern economic literature. we have, too, a book which follows the logic of the quantity theory more consistently than any other work with which i am acquainted. the book deals with the theory more elaborately and with more detail than any other single volume, and sums up most of what other writers have had to say in defence of the quantity theory. professor fisher's book has, moreover, received such enthusiastic recognition from reviewers and others as to justify one in treating it as the "official" exposition of the quantity theory. thus, sir david barbour cites professor fisher as the authority on whom he relies for such justification of the theory as may be needed,[ ] while professor a. c. whitaker declares that he adopts "without qualification the whole body of general monetary theory" for which professor fisher stands.[ ] professor j. h. hollander has recently referred to professor fisher's work on money and prices as a model of that combination of theory and inductive verification which constitutes real science.[ ] the _american economic review_ presents as an annual feature professor fisher's "equation of exchange." not all, by any means, of those who would call themselves quantity theorists would concur in professor fisher's version of the doctrine--professor taussig, notably, introduces so many qualifications, and admits so many exceptions, that his doctrine seems to the present writer like professor fisher's chiefly in name. but there is no other one book which could be chosen which would serve nearly as well for the "platform" of present-day quantity theorists as _the purchasing power of money_. partly for that reason, and partly because the book lends itself well to critical analysis, i shall follow the outline of the book in my further statement and criticism of the quantity theory, indicating professor fisher's views, and indicating the points at which other expositions of the quantity theory diverge from his, setting his views in contrast with those of other writers. we shall find that this method of discussion will furnish a convenient outline on which to present our final criticisms of the quantity theory, and parts of the constructive doctrine of the present book. first, professor fisher presents in the baldest possible form the dodo-bone doctrine. the quality of money is irrelevant. the sole question of importance is as to its quantity--the number of money-units.[ ] i shall not here discuss this point, as a previous chapter has given it extended analysis, except to repeat that it is in fact an essential part of the quantity theory. if the _quality_ of money is a factor, a necessary factor, to consider, then obviously we have something which will disturb the mechanical certainty of the quantity theory. professor fisher is thoroughly consistent with the spirit of his general doctrine on this point. second, professor fisher has no absolute value in his scheme. by the value of money he means merely its purchasing power, and by its purchasing power he means nothing more than the fact that it does purchase: the purchasing power of money is defined as the reciprocal of the level of prices, "so that the study of the purchasing power of money is identical with the study of price levels." (_loc. cit._, p. .) in this, again, professor fisher is absolutely true to the spirit and logic of the quantity theory doctrine. the equilibration of numbers of goods, and numbers of dollars, in a mechanical scheme, gives prices--an average of prices, and nothing else. any psychological values of goods or of dollars would upset the mechanism, and mess things up. they are properly left out, if one is to be happy with the quantity theory. fisher, in discussion of kemmerer's _money and credit instruments_, has criticised the exposition of the utility theory of value with which kemmerer prefaces his exposition of the quantity theory, as "fifth wheel." i agree thoroughly with fisher's view in this, and would add that the only reason that it has made kemmerer little trouble in the development of his quantity theory is that he has made virtually no use of it there! the two bodies of doctrine, in kemmerer's exposition, are kept, on the whole, in separate chapters, well insulated. coupled with this purely relative conception of the value of money, however, there is, in fisher's scheme, an effort to get an absolute out of it: the general price-level is declared to be independent of, and causally prior to,[ ] the particular prices of which it is an average. i mention this remarkable doctrine here, reserving its discussion for a later chapter.[ ] a further feature of professor fisher's system, to which especial attention must be given, is the large rôle played in it by the "equation of exchange." this device has been used by other writers before him, notably by newcomb, hadley, and kemmerer, receiving at the hands of the last named an elaborate analysis. but fisher, basing his work on kemmerer's, has made even more extensive use of the "equation of exchange," and has given it a form which calls for special consideration.[ ] the "equation of exchange," on the face of it, makes an exceedingly simple and obvious statement. properly interpreted, it is a perfectly harmless--and, in the present writer's opinion, useless--statement. it gives rise to complications, however, as to the meaning of the algebraic terms employed, which we shall have to study with care. the starting point is a single exchange: a person buys pounds of sugar at seven cents a pound. "this is an exchange transaction in which pounds of sugar have been regarded as equal to cents, and this fact may be expressed thus: cents = pounds of sugar multiplied by cents a pound. every other sale and purchase may be expressed similarly, and by adding them all together we get the equation of exchange _for a certain period in a given community_."[ ] the money employed in these transactions usually serves several times, and hence the money side of the equation is greater than the total amount of money in circulation. in the preliminary statement of the equation of exchange, foreign trade, and the use of anything but money in exchanges are ignored, but later formulations of the equations are made to allow for them. "the equation of exchange is simply the sum of the equations involved in all individual exchanges in a year.... and in the grand total of all exchanges for a year, the total money paid is equal in value to the total value of the goods bought. the equation thus has a money side and a goods side. the money side is the total money paid, and may be considered as the product of the quantity of money multiplied by its rapidity of circulation. the goods side is made up of the products of quantities of goods exchanged multiplied by their respective prices." letting m represent quantity of money, and v its velocity or rapidity of circulation, p, p´, p´´, etc., the average prices for the period of different kinds of goods, and q, q´, q´´, etc., the quantities of different kinds of goods, we get the following equation: mv = pq + p´q´ + p´´q´´ + etc.[ ] "the right-hand side of this equation is the sum of terms of the form pq--a price multiplied by the quantity bought."[ ] the equation may then be written, mv = [greek: s] pq (sigma being the symbol of summation). the equation is further simplified[ ] by rewriting the right-hand side as pt, where p is the weighted _average_ of all the p's, and t is the _sum_ of all the q's. "p then represents in one magnitude the level of prices, and t represents in one magnitude the volume of trade." it may seem like captious triviality to raise questions and objections thus early in the exposition of professor fisher's doctrine. and yet, serious questions are to be raised. first, in what sense is there an equality between the ten pounds of sugar and the seventy cents? equality exists only between _homogeneous_ things. in what sense are money and sugar homogeneous? from my own standpoint, the answer is easy: money and sugar are alike in that both are _valuable_, both possess the attribute of economic social value, an absolute quality and quantity. the degree in which each possesses this quality determines the exchange relation between them. and the degree in which each other good possesses this quality, taken in conjunction with the value of money, determines every other particular price. finally, an average of these particular prices, each determined in this way, gives us the general price-level. the value of the money, on the one hand, and the values of the goods on the other hand, are both to be explained as complex social psychological forces. but when this method of approach is used, when prices are conceived of as the results of organic social psychological forces, there is no room for, or occasion for, a further explanation in terms of the mechanical equilibration of goods and money. professor fisher, as just shown, very carefully excludes this and all other psychological approaches to his problem of general prices, and has no place in his system for an absolute value. in what sense, then, are the sugar and the money equal? professor fisher says (p. ), that the equation is an equation of values. but what does he mean by values in this connection? perhaps a further question may show what he _must_ mean, if his equation is to be intelligible. that question is regarding the meaning of t. t, in professor fisher's equation, is defined as the sum of all the q's. but how does one sum up _pounds_ of _sugar_, _loaves_ of _bread_, _tons_ of _coal_, _yards_ of _cloth_, etc.? i find at only one place in professor fisher's book an effort to answer that question, and there it is not clear that he means to give a general answer. he needs units of q which shall be homogeneous when he undertakes to put concrete figures into his equation for the purpose of comparing index numbers and equations for successive years. "if we now add together these tons, pounds, bushels, etc., and call this grand total so many 'units' of commodity, we shall have a very arbitrary summation. it will make a difference, for instance, whether we measure coal by tons or hundred-weights. the system becomes less arbitrary if we use, as the unit for measuring any goods, not the unit in which it is commonly sold, but the amount which constitutes a 'dollar's worth' at some particular year called the base year" (p. ). if this be merely a device for the purpose of handling index numbers, a convention to aid mensuration, we need not, perhaps, challenge it. the unit chosen is, in that case, after all a fixed physical quantity of goods, the amount bought with a dollar in a given year, and remains fixed as the prices vary in subsequent years. that it is more "philosophical" or less "arbitrary" than the more common units is not clear, but, if it be an answer, designed merely for the particular purpose, and not a general answer, it is aside from my purpose to criticise it here. if, however, this is professor fisher's _general_ answer to the question of the method of summing up t, if it is to be employed in his equation when the question of _causation_, as distinguished from _mensuration_, is involved, then it represents a vicious circle. if t involves the price-level in its definition, then t cannot be used as a causal factor to explain the price-level. i shall not undertake to give an answer, where professor fisher himself fails to give one, as to his meaning. i simply point out that he himself recognizes that the summation of the q's is arbitrary without a common unit, and that the only common unit suggested in his book, if applied generally, involves a vicious circle. what, then, is t? perhaps another question will aid us in answering this. what does it mean to _multiply_ ten pounds of sugar by seven cents? what sort of product results? is the answer seventy pounds of sugar, or seventy cents, or some new two-dimensional hybrid? one multiplies feet by feet to get _square_ feet, and square feet by feet to get cubic feet. but in general, the multiplication of _concrete_ quantities by _concrete_ quantities is meaningless.[ ] one of the generalizations of elementary arithmetic is that concrete quantities may usually be multiplied, not by other concrete quantities, but rather by _abstract_ quantities, pure numbers. then the product has meaning: it is a concrete quantity of the same denomination as the multiplicand. if the q's, then, are to be multiplied by their respective p's, the q's must be interpreted, not as bushels or pounds or yards of concrete goods, but merely as abstract numbers. and t must be, not a sum of concrete goods, but a sum of abstract numbers, and so itself an abstract number. thus interpreted, t is equally increased by adding a hundred papers of pins,[ ] a hundred diamonds, a hundred tons of copper, or a hundred newspapers. this is not professor fisher's rendering of t, but it is the only rendering which makes an intelligible equation. we return, then, to the question with which we set out: in what sense is there an equality between the two sides of professor fisher's equation? the answer is as follows: on one side of the equation we have m, a quantity of money, multiplied by v, an abstract number; on the other side of the equation, we have p, a quantity of money, multiplied by t, an abstract number. the product, on each side, is a _sum of money_. these sums are equal. they are equal because they are _identical_. the equation asserts merely that what is _paid_ is equal to what is _received_. this proposition may require algebraic formulation, but to the present writer it does not seem to require any formulation at all. the contrast between the "money side" and the "goods side" of the equation is a false one. there is no goods side. both sides of the equation are money sides. i repeat that this is not professor fisher's interpretation of his equation. but it seems the only interpretation which is defensible. a further point must be made: sigma pq, where the q's are interpreted as abstract numbers, is a summary of concrete money payments, each of which has a causal explanation, and each of which has effected a concrete exchange. mathematically, pt is equal to [greek: s] pq, just as times is equal to times . but from the standpoint of the theory of causation, a vast difference is made. three children four feet high equal in aggregate height two men six feet high. but the assertion of equality between the three children and the two men represents a high degree of abstraction, and need not be significant for any given purpose. similarly, the restatement of [greek: s] pq as pt. one might restate [greek: s] pq as pt, defining p as the _sum_ (instead of the average) of the p's, and t as the weighted average (instead of the sum) of the q's. such a substitution would be equally legitimate, mathematically, and the equation, mv = pt equally true. [greek: s] pq might be factorized in an indefinite number of ways. but it is important to note that in pt, as defined by professor fisher,[ ] we are at three removes from the concrete exchanges in which actual concrete causation is focused: we have first taken, for each commodity, an average, for a period, say a year, of the concrete prices paid for a unit of that commodity, and multiplied that average by the abstract number of units of that commodity sold in that year; we have then summed up all these products into a giant aggregate, in which we have mingled hopelessly a mass of concrete causes which actually affected the particular prices; then, finally, we have factorized this giant composite into two numbers which have no concrete reality, namely, an average of the averages of the prices, and a sum of the abstract numbers of the sums of the goods of each kind sold in a given year--a sum which exists only as a pure number, and which, consequently, is unlikely to be a causal factor! it may turn out that there is reason for all this, but if a _causal_ theory is the object for which the equation of exchange is designed, a strong presumption against its usefulness is raised. both p and t are so highly abstract that it is improbable that any significant statements can be made of either of them. as concepts gain in generality and abstractness, they lose in content; as they gain in "extension" they lose (as a rule) in "intension." on the other side of the equation, we also look in vain for a truly concrete factor. v, the average velocity of money for the year, is highly abstract. it is a mathematical summary of a host of complex activities of men. professor fisher thinks that v obeys fairly simple laws, as we shall later see, but at least that point must be demonstrated. even m is not concrete. at a given moment, the money in circulation is a concrete quantity, but the average for the year is abstract, and cannot claim to be a direct causal factor, with one uniform tendency. of course professor fisher himself recognizes that his central problem is, not to state and justify, mathematically, his equation[ ]--that is a work of supererogation, and the statistical chapters devoted to it seem to me to be largely wasted labor. professor fisher recognizes that his central problem is to establish _causal_ relations among the factors in his equation of exchange. it is from the standpoint of its adaptability as a tool in a theory of causation that i have been considering it. it should be noted that "volume of trade," as frequently used, means not numbers of goods sold, but the money-price of all the goods exchanged, or pt. it is in this sense of "trade" that bank-clearings are supposed to be an index of volume of trade. the sundering of the p's and q's really is a big assumption of many of the points at issue. indeed, it is absolutely impossible to sunder pt. it is always the p aspect of the thing that is significant, fisher himself finally interprets t, statistically, as billions of _dollars_.[ ] as a matter of mathematical necessity, either p must be defined in terms of t or t defined in terms of p. the v's and m and m´ may be independently defined, and arbitrary numbers may be assigned for them limited only by the necessity that mv + m´v´ be a fixed sum.[ ] but p and t cannot, with respect to each other, be thus independently defined. the highly artificial character of t has been pointed out by professor e. b. wilson, of the massachusetts institute of technology, in his review of fisher's _purchasing power of money_ in the _bulletin of the american mathematical society_, april, , pp. - . "various consequences are readily obtained from the equation of exchange, but the determination of the equation itself is not so easy as it might look to a careless thinker. the difficulties lie in the fact that p and t individually are quite indeterminate. an average price-level p means nothing till the rules for obtaining the average are specified, and independent rules for evaluating p and t may not satisfy [the equation.] for instance, suppose sugar is c. a pound, bacon c. a pound, coffee c. a pound. the average price is c. if a person buys lbs. of sugar, lbs. of bacon, and lb. of coffee, the total trading is in lbs. of goods. the total expenditure is $ . ; the product of the average price by the total trade is $ . ; the equation is very far from satisfied." wilson thinks it necessary, to make the matter straight, to define t, arbitrarily as (mv + m´v´)/p in which case, the equation is true, but so obviously a truism that no one would see any point in stating it. t no longer has any independent standing. fisher has, however, an escape from this status for t, but only by reducing p to the same position. he defines p as the _weighted_ average of the p's ( ), and fails, i think, to see how completely this ties it up with t. the only method of weighting the p's that will leave the equation straight is to weight the different prices by the number of units of each kind of good sold, namely, t. thus, in wilson's illustration, we would define p as [( c.× ) + ( c.× ) + ( c.× )]/ p is then - / c., while t is . pt is, then, equal to $ . , which is the total expenditure, or mv + m´v´. be it noted, here, that p is defined in terms of t, _i. e._, p is defined as a fraction, the denominator of which is t. no other definition of p will serve, if t is to be defined independently. but notice the corollary. p must be differently defined each year, for each new equation, as t changes in total magnitude, and as the elements in t are changed. the equation cannot be kept straight otherwise. suppose that the prices remain unchanged in the next year, but that one more pound of coffee, and two less pounds of sugar are sold. p, as defined for the equation of the preceding year would no longer fit the equation. p, as previously defined, would be unaltered, since none of the prices in it had changed. p, defined as a weighted average with the weights of the first year, would, then, still be - / cents. the t in the new equation is . the product of p and t is $ . - / . but the total expenditure, (mv + m´v´) is $ . . the equation is not fulfilled. to fulfill the equation, it is necessary to get a new set of weights for p, in terms of the new t of the new equation. from the standpoint of a _causal_ theory, this is delightful. p is the _problem_. but you are not allowed to _define_ the problem until you know what the _explanation_ is! then you define the problem as that which the explanation will explain! fisher, however, appears unaware of this. at all events, he does not mention it. and he ignores it in filling out his equation statistically, for he assigns one set of weights to the particular prices in his p throughout.[ ] the causal theory with which the equation of exchange is associated is as follows: p is passive. a change in the equation cannot be initiated by p. if p should change without a prior change in one of the other factors, forces would be set in operation which would force it back to its original magnitude. m and t are independent magnitudes. a change in one does not occasion a change in the other. an increase or decrease in m will not cause a change in v. therefore, an increase in m must lead to a proportionate increase in p, and a decrease in m to a proportionate decrease in p, if the equation is to be kept straight. changes in t have opposite proportional effects on p. before examining the validity of the causal theory, and the arguments by which it is supported, it will be best to state the more complex formula which professor fisher advances as expressing the facts of to-day. the original formula ignored credit, and ignored the possibility of resort to barter. it also failed to reckon with certain complications which fisher deals with as "transitional" rather than "normal." the formula which includes credit is as follows: mv + m´v´ = pt here, mv and pt have the same significance as before. m´ is the average amount of bank-deposits in the given region for the given period, and v´ is the velocity of circulation of those deposits. m, money, consists of all the media of exchange in circulation which are _generally_ acceptable, as distinguished from those which are acceptable under particular conditions, as by endorsement. m excludes money in bank reserves and government vaults. money, specifically, includes gold and silver coin, minor coins, government paper money, and bank-notes; m´ consists of deposits transferable by check. this version would not satisfy such a writer as nicholson,[ ] who would limit money to gold coin, and would include in m´ not only deposits, but also bank-notes, and other credit instruments. i may suggest here, what i shall later emphasize, that fisher's "money," though he doubtless is using the most common definition of money, is really a pretty heterogeneous group of things, concerning which it is possible to make few general statements safely. in economic essence, _e. g._, bank-notes are much more like deposits than like gold, and if one wishes to separate money and credit, bank-notes belong with m´ rather than with m. but we must take the theory as we find it! again, credit is by no means exhausted when bank-deposits are named. why should not book-credits, and bills of exchange be included? why not postal money-orders, why not deposits subject to transfer by the giro-system? m´ is defined[ ] as "the total deposits subject to transfer by check," and would, thus, exclude the giro-system of germany. it is surely a very provincial equation of exchange, with which fisher and kemmerer seek to set forth the universal laws of money! fisher's reason for excluding book-credits is that book-credits merely postpone, and do not dispense with, the use of money and checks.[ ] book-credits, unlike deposits, have no _direct_ effect on prices (_ibid._, , n.; ), but only an indirect effect, by increasing the velocity of money. (_ibid._, - ; - .) book-credit, indeed "time-credit" in general thus has no direct effect on prices, and is properly excluded from the equation of exchange. these distinctions seem to me highly artificial. in the first place, the use of checks, in part, merely postpones the use of money: money is moved back and forth from one part of the country to another, and from one bank to another, to the extent that checks fail to offset one another, and in the case of book-credit, while there is less of this offsetting, there is a good deal of it, especially between stockbrokers in different cities, and in small towns and at country stores, and particularly in the south, where the country storekeeper and "factor" are also dealers in cotton, etc., and where they advance provisions during the year to the small farmers, receiving their pay, in considerable degree, not in money, but in cotton, which they credit on the books in terms of money to the customer--a point which fisher mentions in an appendix. (_ibid._, p. .) the difference on this point is a difference in degree merely.[ ] further, fisher makes the same point with reference to deposits subject to check that he makes with reference to book-credits, namely, that their use increases the velocity of money. to say that one has a _direct_ effect on prices, and the other only an indirect effect is absolutely arbitrary. if buying and selling are what count, if prices are forced up by the offer of money or credit for goods, and forced down as the amount of money and credit offered for goods is reduced, then one exchange must count for as much as any other of like magnitude in fixing prices. the same is true of transactions in which bills of exchange or other credit devices serve as media of exchange. of course these considerations do not render the equation of exchange, as presented by fisher, untrue. the equation simply states that the money and bank-deposits used in paying for goods in a given period are equal to the amount paid for those goods in a given period. it makes no assertion concerning payments for other goods, and makes no assertion as to the amount of other transactions which are paid for in other ways. general walker, presented with the problem of credit phenomena, simplifies the thing even more.[ ] he rules out all exchanges which are effected by credit devices, counting only those performed by coin, bank-notes and government paper money, and insists that the general price-level is determined in those exchanges in which money alone (as thus defined) is employed. his equation--if he had considered it worth while to use one--would then have been simply mv = pt where t would be merely the number of goods exchanged by means of money. one could make a similar equation, equally true, by defining money as gold coin, and reducing t correspondingly. is there any reason for limiting the equation at all?[ ] is there any reason for supposing that any one set of exchanges is more significant for the determination of the price-level than any other set of exchanges? does not the logic of the quantity theory require us to include all exchanges which run in terms of money?--if one wishes a complete picture of the exchanges, some such equation as this would be necessary: mv + m´v´ + bv´´ + ev´´´ + ov´´´´ = pt, where b represents book-credit, v´´ the number of times a given average amount of book-credit is used in the period, e bills of exchange, and v´´´ their velocity of circulation, and o all other substitutes for money, with v´´´´ as their velocity of circulation. even then we have not a complete picture, if direct barter or the equivalents of barter can be shown to be important. for the present, i waive a discussion of the comparative importance of these different methods of conducting exchanges. the situation varies greatly with different countries. fisher's and kemmerer's equations are at best plausible when presented as describing american conditions, are much less plausible when applied to canada and england, and are caricatures when applied to germany and france. so much for the statement of the equation of exchange, except that it is important to add that the period of time chosen for the equation is one year. just why a year, rather than a month or two years or a decade should be chosen, may await full discussion till later. i shall venture here the opinion that the yearly period is not the period that should have been chosen from the standpoint of fisher's causal theory, and that it probably was chosen, if for any conscious reason at all, because of the fact that statistical data which fisher wished to put into it are commonly presented as annual averages. the question now is, however, as to the use to be made of the equation in the development of a causal theory. chapter ix the volume of money and the volume of credit john stuart mill, who first among the great figures in economics gives a realistic analysis of modern credit phenomena, thought that credit acts on prices in the same way that money itself does[ ] and that this reduces the significance of the quantity theory tendency greatly, and to an indeterminate degree. the quantity theory is largely whittled away in mill's exposition of the influence of credit. in fisher we have a much more rigorous doctrine. the quantity of money still governs the price-level, because m governs m´. the volume of bank-deposits depends on the volume of money, and bears a pretty definitely fixed ratio to it. just how close the relation is, professor fisher does not say, but the greater part of his argument, especially in ch. ,[ ] rests on the assumption that the ratio is very constant and definite indeed. at all events, the importance of the theory, as an explanation of concrete price-levels, will vary with the closeness of this connection, and the invariability of this ratio. it is not too much to say _that the book falls with this proposition_, to wit, that m controls m´, and that there is a fixed ratio between them. we would expect, therefore, a very careful and full demonstration of the proposition, a care and fullness commensurate with its importance in the scheme. but the reader will search in vain for any proof, and will find only two propositions which purport to be proof. these are: ( ) that bank reserves are kept in a more or less definite ratio to bank deposits; ( ) that individuals, firms and corporations preserve more or less definite ratios between their cash transactions and their check transactions, and between their cash on hand and their deposit balances.[ ] if these be granted, what follows: the money in bank-_reserves_ is no part of m! m is the money in circulation, being exchanged against goods, not the money lying in bank-vaults![ ] the money in bank-vaults does not figure in the equation of exchange. as to the second part of the argument, if it be granted, it proves nothing. the money in the hands of individual and corporate depositors is by no means all of m. it is not necessarily the greatest part. the money in circulation is largely used in small retail trade, by those who have no bank-accounts. a good many of the smallest merchants in a city like new york have no bank-accounts, since banks require larger balances there than they can maintain. enormous quantities of money are carried in this country by laborers, particularly foreign laborers. "the chief of the department of mines of a western state points out that when an italian, hungarian, slav or pole is injured, a large sum of money, ranging from fifty dollars to five hundred or one thousand, is almost always to be found on his person. a prominent italian banker says that the average italian workman saves two hundred dollars a year, and that there are enough italian workmen in this country, without considering other nationalities, to account for three hundred million dollars of hoarded money."[ ] i do not wish to attach too great importance to these figures, taken from a popular article in a popular periodical. it is proper to point out, too, that these figures relate to hoarded money, rather than to m, the money in circulation. but in part these figures represent, not money absolutely out of circulation, but rather, money with a sluggish circulation. and they are figures of the money in the hands of poor and ignorant elements of the population. outside that portion of the population--larger in this country than in any other by far[ ]--which keeps checking accounts, are a large body of people, the masses of the big cities, the bulk of rural laborers, especially negroes, the majority of tenant farmers, a large proportion of small farm owners, especially nominal owners, and not a few small merchants in the largest cities, who have no checking accounts at all. a very high percentage of their buying and selling is by means of money. kinley's results[ ] show that % of the wages in the united states are paid in cash, and, of course, the laborers who receive cash pay cash for what they buy. (not necessarily at the _time_ they buy!) money for payrolls is one of the serious problems in times of financial panics.[ ] to fix the proportion between money in the hands of bank depositors and non-depositors is not necessary for my purposes--_a priori_ i should anticipate that there is no fixed proportion. but it is enough to point out that money in the hands of depositors is not the whole of fisher's m. of what relevance is it, then, to point out, even if it were true, that an unascertainable portion of m tends to keep a definite ratio to m´, when the thing to be proved is that the _whole_ of m tends to keep a definite ratio to m´? fisher's argument is a clear _non-sequitur_. if it proves anything, it proves that a sum of money,[ ] not part of m, and another sum of money, an unknown fraction of m, each independently, for reasons peculiar to each sum, tends to keep a constant ratio to m´. this gives us _l'embarras des richesses_ from the standpoint of a theory of causation! two independent factors, bank-reserves and money in the hands of depositors, each tending to hold bank-deposits in a fixed ratio, and yet each moved by independent causes! by what happy coincidence will these two tendencies work together? or what is the causal relation between them? and if, for some yet to be discovered reason, professor fisher should prove to be right, and there should be a fixed ratio between m as a whole and bank-deposits, would it not indeed be a miracle if all three "fixed ratios" kept together? bank-deposits, indissolubly wedded to three independent variables[ ] (independent, at least, so far as anything professor fisher has said would show, and independent in large degree, certainly, so far as any reason the present writer can discover), must find their treble life extremely perplexing. may it not be that professor fisher has pointed the way to the real fact, namely, that bank-deposits are subjected to a multitude of influences, no one of which is dominant, which prevent any fixed ratio between bank-deposits and any other one thing? at a later point, i shall maintain that this is, indeed, the case. be it noted further, however, that even if we grant a fixed ratio, on the basis of fisher's argument, between m and m´, fisher has offered no jot of proof that the causation runs from m to m´. he simply assumes that point outright. "any change in m, the quantity of money in circulation, _requiring as it normally does a proportional change in m´_, the volume of deposits subject to check." (_ibid._, p. , italics mine.) for this, no argument at all is offered. a fixed ratio, so far as causation is concerned, might mean any one of three things: (a) that m controls m´; (b) that m´ controls m; (c) that a common cause controls both. fisher does not at all consider these alternative possibilities. i shall myself avoid a sweeping statement as to the causal relations among the factors in the equation, because i do not think that any of the factors is homogenous enough, as an aggregate, to be either cause or effect of anything. but if a generalization concerning these magnitudes were required, i should be disposed to assert that the third alternative is the most defensible, and that to the extent that m and m´ vary together it is under the influence of a common cause, namely, pt! that is to say, that the volume of bank-deposits and the volume of money tend to increase or decrease in a given market--and fisher's theory is a theory of the market even of a single city[ ]--_because of_ increases or decreases in pt (considered as a unitary cause rather than as two separate factors) in that market. but i shall not put my proposition in quite that form, as i find the factors in the equation of exchange too indefinite for satisfactory causal theory. so much for the validity of fisher's argument, assuming the facts to be as he states them. are the statements correct? do banks tend to keep fixed ratios between deposits and reserves? do individuals, firms, and corporations tend to keep fixed ratios between their cash on hand and their balances in bank? regarding this last tendency, professor fisher says in a footnote on p. , "this fact is apparently overlooked by laughlin." i think it has been generally overlooked. i have found no one who has discovered it except professor fisher. certainly no depositor whom i have consulted can find it in his own practice--and i have put the question to "individuals, firms, and corporations." the further statement which professor fisher adduces in its support does not prove it, namely, that cash is used for small payments, and checks for large payments.[ ] it would be necessary to go further and prove that large and small payments bear a constant ratio to one another, and further, that velocities of money and of bank-deposits employed in these ways bear a constant relation. if fisher has any concrete data, of a statistical nature, to support the doctrine of a constant ratio between bank-balance and cash on hand in the case of individual depositors, he has failed to put them into his book. nor is there any statistical evidence offered in the case of banks. it should be noted here that finding a general average for a whole country or community would not prove fisher's point. general averages give no concrete causal relations. fisher's argument, moreover, starts with individual banks and individual deposit-accounts (pp. and ) and generalizes the individual practice into a community practice. he would have to offer data as to individual cases. while general averages could not _prove_ the contention of a constant ratio between reserves and deposits for individual banks, general averages can _disprove_ the contention. a constant general average would be consistent with wide variation in individual practices, on the principle of the "inertia of large numbers." but if the general average is _inconstant_, it is impossible that the individual factors making it up should be constant. this disproof is readily at hand, both for the ratio of deposits to reserves in the united states, and for the ratio of demand obligations to reserves among european banks (most of which do not make large use of the check and deposit system). for the united states, from to , taking yearly averages, we have a variation in the ratio of reserves to deposits of over % of the minimum ratio. the ratio was % in , and % in . "the juxtaposition of these extreme variations shows how inaccurate is the assumption that the deposit currency may be treated as a substantially constant multiple of the quantity of money in banks."[ ] for new york city, the annual average percentage of reserves of clearing house banks to net deposits varies from . % in to . % in .[ ] the extreme variations[ ] in weekly averages are (for the sixteen years, - ) . % in august, and . % in february, . these figures are extreme, since the number of occurrences is small for them, but there are numerous occurrences of deviations from the mean as wide apart as % and %.[ ] the yearly fluctuation in all these ratios is very great. the ratio of money held by the banks and money held by the people also shows wide variation, and considerable yearly fluctuation. there is a further complication, for the united states, of varying proportions of the total monetary stock held by the federal treasury. as between the banks and the public, the banks held about a third in (average for the year), and nearly half in .[ ] whatever may be the relations between money in the hands of the people, money in banks, and volume of deposits, in "the static state," there is no statistical evidence whatever to justify the notion of fixed relations among them in real life.[ ] we shall later show that there can be no static laws whatever governing the relations of credit and reserves.[ ] for european banks, the case is equally clear. european bankers deny any intention of keeping any definite reserve ratio. this appeared very clearly in the "interviews" obtained for the monetary commission with leading european bankers.[ ] the banque de france increased its gold reserves, between and , by %, but increased its discounts and advances during the same period by only %.[ ] j. m. keynes[ ] points out that the reserves of the great banks of the world, and of treasuries which act as central banks, have absorbed an enormous part of the gold produced in the fifteen years before the war, increasing their holdings from about five hundred million pounds sterling in to one billion pounds sterling at the outbreak of the war. "the object of these accumulations has been only dimly conceived by the owners of them. they have been piled up partly as the result of blind fashion, partly as the almost _automatic consequence_, in an era of abundant gold supply, of the particular currency arrangements which it has been orthodox to introduce.... the ratios of gold to liabilities vary very extremely from one country to another, without always being explicable by reference to the varying circumstances of those countries.... the contingencies, against which a gold reserve is held, are necessarily so vague that the problem of assessing the proper ratio must be, within wide limits, indeterminate. it is natural, therefore, that bankers, who must act one way or the other, should often fall back on mere usage or accept _that amount of gold as sufficient_ which, _if they are chiefly passive, the tides of gold bring them_. [italics mine.] at any rate, the management of gold reserves is not yet a science in most countries. there is no ideal virtue in the present level of these reserves. countries have got on in the past with much less, and under force of circumstances could do so again." it will be noticed that keynes, in the passage cited, is speaking of _gold_ reserves, while fisher's contention relates to all kinds of money available for reserves, which in this country would include gold, silver dollars, greenbacks, and, for many state banks, the notes of national banks. he is also talking of the relation of reserves to demand _liabilities_, which for most great european banks are primarily notes, rather than of reserves to deposits. but as an exposition of the theory of the ratio of reserves to deposits (the chief liability of american banks), it is applicable to american conditions, and as a statement of the facts, it of course gives a basis for testing fisher's doctrine generally. i do not think that fisher's fixed ratio, as between reserves and deposits, or even the ratio which more moderate quantity theorists might seek to find between gold and demand liabilities, will find any justification in the facts of banking history.[ ] a factor which has developed on a grand scale in recent years has tended still further to weaken any tendency that may be supposed to exist toward a fixed ratio between money-reserves and demand-liabilities. i refer to the gold exchange-standard, in india, the philippines, and elsewhere, and to the practice of the great banks of the continental countries of europe, particularly the bank of austria-hungary, of holding foreign gold bills, rather than gold exclusively, as reserve to cover note issue. in the case of the austro-hungarian bank, which has carried this practice to the extreme, all possibility of a fixed ratio between gold reserves and demand-liabilities has vanished. the ratio is highly flexible. when bills are cheap, _i. e._, when the exchange is "in favor" of austria-hungary, the bank buys bills with gold; when bills are high, when the exchanges have turned "against" austria-hungary, the bank sells bills for gold. commonly, the holder of a note of the austro-hungarian bank does not ask for it to be redeemed in gold, but in foreign exchange. the reason for this practice on the part of the bank is primarily economy. a large holding of gold would represent idle capital--a heavy burden for the bank of a debt-ridden and poorly developed country. foreign bills, however, serve equally well for maintaining the value of the bank-notes, and at the same time bear interest.[ ] a similar practice has been employed by the reichsbank, by the national bank of belgium,[ ] by virtually all the debtor countries of europe, and the great trading countries of asia. confidence in these conclusions is much increased by a study of the views of professor taussig.[ ] professor taussig is, in his initial formulations of his doctrine, a quantity theorist. in a situation where only money is used, credit being excluded, in effecting exchanges, he would hold that the quantity theory correctly accounts for prices. he is fond of the old formulation, as a first approximation, even in dealing with the complex facts of modern banking. but he does not dodge the complex facts, and his theory becomes, substantially, first, a general formula, and second, an elaborate body of qualifications and exceptions, the latter making up the major part of the theory. his doctrine regarding the relation of money and credit is as follows: there is, in the long run, a real _limitation_ on elastic credit instruments in the quantity of _specie_. (this is very different from the assertion that there is a _fixed_ ratio between _deposits_ and _money_ in circulation, including paper, bank-notes, etc., in money. the present writer has no quarrel with the doctrine that the gold supply of the _world_ imposes _outside_ limitations on the _possible_ expansion of credit.) the limitation, taussig holds, comes in two ways: ( ), in the connection between prices in any one country, and prices in the world at large; ( ), in various links of connection between the volume of deposits (and of notes elastic like deposits) and the quantity of specie. i shall consider at a later point the relation between prices in different countries.[ ] i shall there maintain that the quantity theory, which explains gold movements on the basis of price-_levels_ in different countries, is inadequate; that not price-levels, but particular prices, of goods most available for international trade, are of primary importance, and that of these particular prices, one, namely the "price of money," or the short time money-rate, is most significant of all. for the present, i wish to analyze the linkages which taussig finds between elastic credit instruments and specie, and to see how far they would go, not in proving taussig's point (with which i have little quarrel) but in proving fisher's contentions. the points involved are: (a) _direct necessity_ constrains the bankers to keep _some_ cash on hand.[ ] this fixes a _minimum limit_ (taussig's contention), but does not at all suggest a "normal ratio" (fisher's contention). (b) _binding custom_, as to the proper amount of reserve that banks should carry, particularly important in connection with the bank of england, but also in evidence in the banque de france and the reichsbank. here again, however, minimal, rather than fixed, ratios are suggested. limitations on the _expansion_ of credit these customs may impose, but they by no means determine a normal, or average amount of credit expansion--in england least of all, since there is so large a flexible element in the deposits of the joint stock banks, whose reserves are largely secret. the statement _supra_ quoted from keynes, together with the testimony of european bankers, may be considered in connection with this point, also, as to the factors determining the reserve policies of the great european banks. the extent to which custom really binds is doubtful. (c) _direct regulation by law_, peculiar to the united states. here again, a minimum, rather than a fixed ratio, is indicated. some _limitation_ on credit expansion by the banks is caused by this at times, but fisher's argument would require vastly more. (d) _the interaction in the use of deposits, notes, and other constituents in the circulating medium._ the point involved here is that different kinds of business call for different kind of media. small retail business is not done with hundred dollar bills, nor are stocks and bonds bought with pennies. limiting the size of bank-notes to five pounds in england compels the use of a large amount of gold for smaller transactions, and keeps a larger amount of gold in use than would otherwise be the case. expanding business draws cash from the banks for circulation, trenching on reserves. that professor taussig has a point here is not to be doubted, but how closely it limits the expansion of credit will depend on the degree to which different kinds of media of exchange really _are_ thus specialized. in a country like the united states, where checks may be used for virtually any transaction of over a dollar, and where small change for less than a dollar will be increased by the government to meet the demands of trade, the point would not seem to involve a practically serious limitation. finally, professor taussig recognizes a coefficient with the quantity of specie in the _temper of the business community_. whether or not deposits are to expand, depends not only on reserves, but also on the attitude of borrowers. taussig concludes: "thus there is only a rough and uncertain correspondence of bank expansion with bank reserves; much play for ups and downs which have no close relation to the amount of cash in bank vaults, _and still less direct relation to the amount of money afloat in the community at large_. where bank media, whether in the form of deposits or notes, are an important part of total purchasing power, the connection between general prices and quantity of 'money' is irregular and uncertain." (italics mine.) this conclusion would be of little service in supporting fisher's rigorous contentions! our constructive theory concerning the relations of reserves and deposits, or reserves and demand liabilities, must wait for later discussion, in the chapter on "bank assets and bank reserves" in part iii. it will there be maintained that there are no "normal" or "static" laws governing the percentage of reserves to demand liabilities, or to deposits, that the reserve function of money is a _dynamic_ function, and that its whole explanation must be found in dynamic considerations. for the present, i am content to have analyzed two widely divergent views, one the extreme view of professor fisher, representing the quantity theory in its utmost rigor, and the other, the view of professor taussig, who virtually surrenders the quantity theory in complex modern conditions. in between these two writers, verging more toward fisher than toward taussig, will be found, with great individual variation, the rest of the quantity theorists. the quantity theory, as an instrument of prediction, becomes important only to the extent that fisher's view is maintained. chapter x "normal" vs. "transitional" tendencies the quantity theory, as a causal theory, is, then, little altered by the passage from a hypothetical, creditless economy to the actual world, where a vast deal of credit is used,--particularly in professor fisher's hands. of the different kinds of credit, only deposits subject to check are recognized as directly influencing prices, and deposits subject to check are controlled by the volume of money. the causal theory[ ] remains, then, as follows: if m be increased, it will increase m´ proportionately; it will not change the v's; it cannot increase t; to keep the equation straight, therefore, p must rise in proportion to the rise in m. a decrease of m, reducing m´ proportionately, leaving v's and t unchanged, must proportionately reduce p. p is passive. a change in p cannot sustain itself, unless it be due to a prior change in t, the v's, m or m´. this theory is set forth with the qualification that these effects are the "normal" effects of the changes in question. the proportion between quantity of money and price-level is not strictly maintained during "transition periods." i now approach the most difficult question which i shall have to answer as to the meaning of fisher's terms. the same problem arises for all quantity theorists. precisely what is the distinction between "transition periods" and "normal periods"? what limitations and qualifications does he admit to the rigorous statement of his theory so far given? i may first express the opinion that the line shifts greatly in his own mind, or at least shifts greatly in the exposition. i do not find an explicit statement in which definitions are given. the matter is chiefly discussed by fisher in ch. ,[ ] which is called "disturbance of equation and of purchasing power during transition periods." there we find, as i have stated, no definitions, but the initial statements would suggest the following: a transition period is the period following a change in any one of the factors in the equation during which a readjustment among all the others is taking place; the normal period is the period preceding such a change, or following the transition after such a change, and is characterized by the fact that all the factors are at rest, in stable equilibrium. equilibria during transition periods are unstable. during the transition, the relations among the factors vary: m and m´ need not keep their fixed ratio; p need not be wholly passive; m and p need not keep the same proportion. but until m and m´ get back into the normal ratio, until p becomes proportional to m (in the proportion prior to the initial disturbance), there is no rest; the equilibrium is unstable. how long is a transition period? how realistic is the notion of a transition period? is the transition period a theoretical device, to aid in isolating causes, or is it supposed to be a real period in time? is the normal period a real period in time, or is it merely a theoretical hypothesis? it is not easy to answer these questions. thus (p. ) the seasonal fluctuations are declared to be "normal and expected," and, at the same time, one gets the impression that fisher considers them illustrations of his "transitions," in which the normal theory does not strictly hold (pp. , ). what is described chiefly in the chapter on transition periods is the business cycle--a theory of the business cycle, based primarily on the notion that the failure of interest to rise as fast as prices rise causes the "boom," and that the draining of bank reserves precipitates the crisis. i shall not discuss this theory, as a theory of business cycles, further than to say that wesley mitchell's study would indicate that the interest rate is a minor factor, and that, while as a theoretical possibility, the drains on bank reserves may check prosperity if something else doesn't do it first, practically something else always does come in ahead, so far as his studies have gone.[ ] my interest here is primarily in seeing the limitations fisher imposes on his theory, and the qualifications he admits. if the business cycle is the typical transition period, during which his normal theory doesn't hold, when does the normal theory hold? when are the "normal periods"? there is no concrete period during which prices are neither rising nor falling, during which no important changes are taking place among the factors.[ ] at times, fisher seems to indicate that the normal period is imaginary (pp. , ). is, then, the contrast between a realistic "transition period" and a hypothetical "normal period" or are both hypothetical? is the equation of exchange, too, a mere hypothesis? it should be, if it is to set forth a merely hypothetical theory. but no, fisher insists on putting concrete data into it, and, indeed, gives an elaborate statistical "proof" of the equation. it, at least, is realistic. i confess that my certainty as to fisher's meaning grows less, as i study his book with greater care. if the typical transition period be the business cycle, then the normal period could come only once, say, in ten years--or whatever period, regular, or irregular, one chooses to assign to the business cycle. the concrete price-levels for the greater part of the time are then surrendered to other causes. and the one-year cycle described in the equation of exchange is quite irrelevant. the equation of exchange should cover the whole business cycle, to fit in with the theory. indeed, a realistic equation of exchange would then have no meaning at all, as the average price-level during the business cycle, played upon by a host of causes other than the factors described in the quantity theory, would not be the same as the average price-level which _would have_ obtained had only the "normal" causes been in operation.[ ] the distinction between "normal" and "transition" _periods_ suggests a dangerous fallacy: namely, that during one period one sort of causation is working, with the other in abeyance. in fact, whatever causes there are are working all the time. the only legitimate thing is to abstract from one set of causes, and see what the other set, if left to themselves, will bring about. but this sort of abstraction has many dangers, one of which is that the causes abstracted from are frequently thought of as non-existent. the chemist, in his laboratory, can in actual physical fact abstract impurities from his chemicals, and see what they will do. he can even perform experiments in what is practically a vacuum. but the economist has no right to _think in vacuo_! all that he has a right to do is to assume the factors which he does not wish to study _constant_. and even that he must not do if ( ) changes in the factors which he wishes to study do in fact lead to changes in the factors abstracted from, or ( ) if the factors which he wishes to study can only change _because_ of prior or concomitant changes in the factors from which he is abstracting. is it, for example, legitimate to assume an increase in m´ apart from its usual accompaniment, an increase in pt? the notion, too, that causation can be seen in a state of stable equilibrium should be critically analyzed. causation is only _revealed_ by a _course of events_, when mechanical causation is involved. the relation of cause and effect may be a contemporaneous relation in fact, and it is possible, where conscious, psychological phenomena are involved, to discern causal relations among the elements in a mental state by direct introspection. it is the not uncommon practice, also, in the theory of mechanics, or in theoretical economics, where the method of investigation is deductive rather than inductive, to abstract from the temporal sequence, and to construe causal relations as timeless, logical relations. but even here, the cause of a _change_ in the general situation precedes the change in time, and it is only by abstraction that the time element is left out. if there is no question as to the causal relations, this abstraction is legitimate, but if all that one knows about the situation be that in a stable equilibrium certain constant ratios obtain, then the question as to which term in the ratio is cause and which is effect remains unanswered. in fisher's situation, then, assuming that it be true--which i shall deny--that the only stable equilibrium is that which the normal theory requires, it still remains true that the causal relations among the factors can only be revealed by a study of the transitions, by seeing the temporal sequence of changes in the factors of the equation. even if it be granted that m, m´ and p tend to keep a constant relation to one another, the quantity theory falls if, for instance, it can be shown that a change may first occur in p, spread to m´, and finally reach m last of all, leading to a new normal equilibrium which is stable. i shall later show cases of this sort.[ ] the abstract formulation of fisher's contrast will not, i believe, give us an answer as to the extent to which he thinks his quantity theory realistic. i find myself particularly in genuine uncertainty as to the point mentioned above: would an actual equation of exchange for the whole business cycle, made up of the averages of m, m´, v, v´, p and t for the whole period, exhibit the "normal" relations among these factors? or would this "normal" relation only emerge concretely at some moment of time in the course of the cycle when the abnormal causes affecting the price-level happened to offset one another? or is it true that no actual figures which might be found, either for a moment of time, or as averages for any given period, will exhibit the relations required, and that only a hypothetical equation, based on the figures for m, m´, v, v´, p and t that _would have been realized_ had there been no "disturbing" causes, will show these "normal" relations? if, as fisher at times indicates--as in his reference to boyle's law (p. )--he is stating only an abstract tendency, which may be neutralized by other tendencies in the situation, so far as concrete results are concerned, then it is this last doctrine which we must take, and the concrete equation of exchange has little if any relevance. if, moreover, this last interpretation be given, then the whole of fisher's elaborate statistical "proof" is pointless. the only sort of statistical proof which would be relevant would be of a much subtler sort, not a mere filling out of the equation of exchange by means of annual figures, but an effort to disentangle and measure the _importance_ of his tendency, as compared with other tendencies. but we have the other tendencies merely mentioned in qualitative terms, and we never find any definite statement, of mathematical character, as to how important they are. it seems pretty clear, however, that on the whole, despite occasional suggestions that his theory is abstract, fisher means his theory to be the overwhelmingly important point in the explanation of actual price-levels. he is particularly insistent on the high degree of the generality of his contention that p is passive. thus: "so far as i can discover, _except to a_ limited _extent during transition periods, or during a passing season_, (_e. g._, _the fall_) (capitals mine, italics fisher's), there is no truth whatever in the idea that the price-level is an independent cause of changes in any of the other magnitudes, m, m´, v, v´, or the q's."[ ] on p. he enumerates in a series of propositions his general normal theory, and adds, as the first sentence of proposition : "some of the foregoing propositions _are subject to_ slight _modification during transition periods_." (italics and capitals mine.) and the general drift of the argument, particularly in chapter , where the heart of fisher's causal theory is presented, would indicate that the concessions he is disposed to make are very slight, indeed. the question as to how long a _time_ is required, in fisher's view, for a transition to occur, and for his normal tendencies to dominate, is nowhere made clear. the quantity theory, in the hands of some writers, is a very long run theory, for others, it is a short run theory. thus, taussig would make the "run" exceedingly long.[ ] mill makes it a short run theory. "it is not, however, with ultimate or average, but with immediate and temporary prices, that we are now concerned. these, as we have seen, may deviate widely from the standard of cost of production. among other causes of fluctuation, one we have found to be, the quantity of money in circulation. other things being the same, an increase of the money in circulation raises prices, a diminution lowers them. if more money is thrown into circulation than the quantity which can circulate at a value conformable to its cost of production, the value of money, so long as the excess lasts, will remain below the standard of cost of production, and general prices will be sustained above the natural rate."[ ] i pause to note that it is really strange that a single name should describe theories so different, resting on such essentially different logic. long run or short run theories, all are "quantity theories," whether "money" be defined as gold, or as all manner of media of exchange, or as only those media of exchange which pass from hand to hand without endorsement. fisher would doubtless call his theory a long run theory. from the standpoint of the notion that "prices ... lag behind their full adjustment and have to be pushed up, so to speak, by increased purchases,"[ ] however, we get a short run quantity theory doctrine. the logic of these two is very different. the short run doctrine seeks to explain the actual process of price-making in the market. money is offered against goods, and the actual quantities on each side determine the momentary price-level, concretely. or, when credit is considered, money and credit offered against goods, at a given time, or in a given short period, determine the actual price-level reached. this is the logic of the equation of exchange--actual money paid is necessarily equal to actual money received. the long run doctrine is fundamentally based on a different notion. surrendering the actual or average of price-levels to other causes, in part, it still asserts that, given time enough, and barring new disturbing tendencies, a price-level will ultimately be reached which will bear it out. i find no recognition, on fisher's part, of the fact that these two doctrines are different, and, in fact, i find them blended and confused in the course of his argument. he would doubtless maintain that his is a long run doctrine. but how long is the "run"? sometimes it seems to be, as already shown, a whole business cycle. sometimes a passing season, as the fall. when he undertakes to apply his theory to a practical proposal for regulating the value of money, he relies on the quantity theory tendency to bring about adjustments so quickly that it is worth while to make _monthly_ adjustments in anticipation of it.[ ] when discussing the changes in gold premium on the greenbacks during the exciting times of the civil war, he relies so thoroughly on his theory that he will not allow even the rapid change of four per cent in a single day following chickamauga to occur except in conformity with the quantity theory. this last statement is so remarkable that i must quote fisher himself: "it would be a grave mistake to reason, because the losses at chickamauga caused greenbacks to fall % in a single day, that their value had no relation to their volume. this fall indicated a slight acceleration in the velocity of circulation, and a slight retardation in the volume of trade" ( ). it would be indeed remarkable if the changes in the gold market, which got war news before the newspapers got it, and where changes in gold premium occurred before the rest of the country could possibly react to the war news, should be controlled by v and t! i had not supposed that the most rigorous of short run quantity theorists would make any such demands on his theory as that. indeed, i had not supposed that the quantity theory would feel called on to explain the gold premium, as such, except in so far as the gold premium is an index of general prices. finding it impossible to limit fisher to any single statement of the quantitative importance of his normal theory as compared with the other tendencies at work, but concluding that, on the whole, he considers it of high importance, i shall now proceed to an analysis of the reasoning by which he seeks to justify it as a _qualitative_ tendency. i shall maintain that, however long or short the period required, however strong or weak the tendency he defends, the reasoning by which he seeks to justify it is unsound, and that even as a qualitative tendency, the quantity theory is invalid. at a later part of the book, as in an earlier part,[ ] i shall undertake to find the modicum of truth which the quantity theory contains, and shall show that no quantity theory is needed to exhibit this modicum of truth. chapter xi barter in the statement of the quantity theory, the proviso is commonly made that all exchanges must be made by means of money, or of money and bank-credit. barter is excluded by hypothesis. if resort to barter were possible, then people might avert the fall in prices due to scarcity of money, or increase in trade, by dispensing with money in part of their transactions, and the proportional decrease in prices which the quantity theory calls for would be lacking. is this assumption true? is barter banished from the modern world, or does it remain reasonably possible, and, to a considerable degree, actual? fisher maintains the thesis--the failure of which he admits would spoil the quantity theory[ ]--that barter is practically impossible, and negligible in modern business life. "practically, however, in the world to-day, even such temporary resort to barter is trifling. the convenience of exchange by money is so much greater than the convenience of barter, that the price adjustment would be made almost at once. if barter needs to be seriously considered as a relief from money stringency, we shall be doing it full justice if we picture it as a safety valve, working against a resistance so great as almost never to come into operation, and then only for brief transition intervals. for all practical purposes and all normal cases, we may assume that money and checks are necessities for modern trade."[ ] this contention seems to me untenable. i think it can easily be shown that barter remains an important factor in modern business life, especially if one extends the term barter, a little, to cover various flexible substitutes for the use of money and checks in effecting exchanges. clearly from the standpoint of the present issue, such an extension of the meaning of barter is legitimate, as any such substitutes would equally spoil the proportionality in the supposed relation between prices and money, or prices and trade. where does one find barter? well, not to be ignored would be the advertisements which fill many columns of such a paper as the new york _telegram_ in the course of a week; "wanted: to trade a well-trained parrot for a violin"--a trade that might, or might not, be a wise one! there is a good deal of such simple barter among the people. then, perhaps more important, is the regular practice of sewing machine, piano, automobile, and other similar companies of taking part of the payment for a new machine, piano,[ ] or automobile in the similar thing which the owner is discarding. the old machine, piano, etc., are then repaired, repainted, and sold again. this is a very extensive practice. again, there are companies which combine the business of wrecking old houses and building new ones, who regularly take the old materials as part of their pay. this is a highly important feature of the organized building trade in great cities, and is frequently done in small towns. the building trade is no negligible matter. the "horse-trade" still thrives in rural regions, and barter of various kinds, of live stock, of grain and hay, of fresh and cured meat, and of labor, is an important feature in rural life in many sections. much of agricultural rent in the south is still paid in kind, under the "share system." much labor, especially farm and domestic labor, is still paid for partly in kind. where payments for labor are made in orders on company stores, we have again what is virtually barter, from the standpoint of the point at issue. _real estate_ transactions make large use of barter. farms are exchanged for one another, with some cash (or more usually, a promissory note) "to boot." the writer has repeatedly heard real estate men say to customers: "i can't sell it for you very easily, but i can trade it off, and maybe you can sell what you trade it for." this is perhaps more frequent in rural real estate transactions, and in the smaller cities, than in large cities, but it is very extensive in new york city.[ ] again, when corporations are to be combined, various plans are possible. there may be a merger; there may be a holding corporation; there may be a lease. if the money market is easy, one of the former methods will be used,--most frequently, for legal reasons, the holding corporation, if there are any valuable franchises involved. but mergers and holding corporations commonly involve buying out the interests which are to be absorbed, and call for the use of checks. if the money market is tight, therefore, the promoter of the combination may frequently find the lease the more advantageous form of consolidation.[ ] the great advantage of the lease is that, when the money market is tight, it involves no _financial plan_, no underwriting, no outlay of "cash." this is, therefore, an equivalent of barter, so far as the point at issue is concerned. even where a holding corporation is formed, however, there may be considerable barter: the stockholders of the corporation which is absorbed may receive payment for their stocks, in whole or in part, in the securities of the holding company, rather than in checks. an era of financial consolidation, such as we have been passing through, and through which we have not by any means gone, though the movement toward _monopoly_ has been in great degree checked, presents a great deal of this sort of barter, or equivalents of barter.[ ] a striking thing to notice here, moreover, is the flexible margin between use of bank-credit and barter, a margin depending primarily upon the condition of the money market, and particularly upon the money-rates. not yet has the most important element in modern barter been mentioned. i refer to the "clearing-house" arrangements of the stock and produce exchanges. under these arrangements, brokers who have sold ten thousand shares of westinghouse el. and m. common during the day, and bought seven thousand shares, buying and selling being in smaller lots, with a number of different houses, no longer are obliged to deliver ten thousand shares, receiving therefor $ , , and to receive seven thousand shares, paying therefor $ , . instead, they deliver three thousand shares only to the clearing house, and receive from the clearing house only $ , when the transaction is, from the standpoint of the particular broker involved, completed. this is a far remove, in technical perfection, from primitive barter, but it is barter, and it saves the using of a vast deal of bank-credit as between brokers. how important it is, from the standpoint of the stock exchange, may be judged from the following statement in sprague's _crises under the national banking system_: "a much more fundamental change in the organization in the new york money market came with the establishment of the stock exchange clearing house in may, . it led to a very considerable reduction in the _clearing-house exchanges of the banks_ and also, and more important, in the volume of certified checks. [italics mine.] overcertification of checks ceased to be a factor of the first magnitude in the banking methods of the city. had not this arrangement for stock-exchange dealings been set up, it is probable that it would have been necessary to close the stock exchange in and in , and it is also probable that the volume of business transacted in the years after could not have been handled." (p. .) the same arrangements have been widely introduced in other stock exchanges, and in the produce exchanges.[ ] in general, with reference to barter, this point is significant. the money economy has made barter _easier_ rather than harder. it has made possible a host of refinements in barter, which make it at many points more convenient and cheaper than check or money exchanges. it is common to find our present methods of conducting foreign trade described as a "system of refined barter," which indeed, from the standpoint of the present issue, it is: bills of exchange are neither money nor bank-credit! where bills of exchange are used in internal trade extensively--as in germany, where they pass from hand to hand in several transactions before being discounted at banks[ ]--we have a highly important substitute for money and deposits, which functions as barter,--flexibility of substitutes for money and deposits is strikingly evident. the feature of the money economy which has thus refined and improved barter is the _standard of value_ (_common measure of value_) function of money.[ ] this standard of value function, be it noted, makes no call on money itself, necessarily. the _medium of exchange_ and "_bearer of options_" functions of money are the chief sources of such additions to the value of money as come from the money-use. but the fact that goods have money-prices, which can be compared with one another easily, in objective terms, makes barter, and barter-equivalents, a highly convenient and very important feature of the most developed commercial system. and so we reject another essential assumption of the quantity theory.[ ] chapter xii velocity of circulation for the quantity theory, it is important to treat velocity of circulation of money and of deposits, as self-contained entities, really independent factors. this is true of fisher's theory. it is particularly necessary that v and v´ should vary from causes unconnected with m and m´. the v's are to be a sort of inflexible channel, through which m and m´ run in their influence on the passive p, which is to rise or fall proportionately with them. if an increase of m or m´ should lead to a reduction in the v's, if people, having more money available, should be less assiduous in using every bit of it in effecting exchanges, then p would not rise in proportion to the increase in m. complete demonstration of fisher's thesis, therefore, requires the proof of the negative proposition that v does not change as a consequence of changes in m or m´. this proof fisher finds in the contention that the v's are fixed by the habits and conveniences of individuals, whence they are not influenced by such a cause as a change in the amount of money.[ ] v is defined,[ ] not as the number of times a given dollar is exchanged in a given year (the "coin-transfer" notion), but as a social average based on the average number of coins which pass through _each man's_ hands, divided by the average amount held by him (the "person-turnover" concept of velocity.) v´ is similarly defined. fisher asserts that both concepts, if correctly employed, lead to the same result. i would point out one important difference between them here: if money is _short-circuited_, if, _i. e._, a part of the economic community loses its incomes, or finds its incomes reduced, then the "velocity of money," on the "coin-transfer" basis is reduced, provided the "person-turnover" average remains the same, while on the "person-turnover" basis the velocity will remain unchanged. it is clearly the "coin-transfer" concept which is fundamental, from the standpoint of the equation of exchange, and fisher feels justified in using the other method only because he considers it an equivalent of the "coin-transfer" concept. i shall later show cases where the distinction between the two concepts is all-important, particularly in the case where t is reduced by the elimination of _middlemen_.[ ] the conception of velocity of circulation as a real, unitary entity, a _cause_, in the process of price-determination, is, i suppose, almost as old as the quantity theory itself. it is an essential part of the quantity theory. to me "velocity of circulation" seems to be a mere name, denoting, not any simple cause or small set of causes, which can exert a specific influence, but rather a meaningless abstract number, which is the non-essential by-product of a highly heterogeneous lot of _activities of men_, some of which work one way, and others of which work in another way, in affecting prices. it is at best a passive _resultant_ of conflicting and divergent tendencies, and has, to my mind, no more _causal_ significance than the average of the abstract numbers of yards gained by both sides, heights and weights of players, kick-offs, and minutes taken out for injuries, would have on the result of the yale-harvard game. the real causes of changes in prices lie deeper! i should expect v and v´ to be the most highly flexible factors in the equation of exchange, and should expect to be able to keep the equation straight, in a great variety of situations, by allowing the v's to vary. before undertaking detailed analysis of the causes governing v, i shall discuss fisher's specific argument, typical of the quantity theory, that an increase of money cannot change the v's. "as a matter of fact, the velocities of circulation of money and deposits depend, as we have seen, on technical conditions, and bear no discoverable relation to the quantity of money in circulation. velocity of circulation is the average rate of 'turnover,' and depends on countless individual rates of turnover. these, as we have seen, depend on individual _habits_. each person regulates his turnover to suit his individual _convenience_.... in the long run, and for a large number of people, the average rate of turnover, or what amounts to the same thing, the average time money remains in the same hands, will be closely determined. it will depend on density of population, commercial _customs_, rapidity of transport, and other technical conditions, but not on the quantity of money and deposits nor on the price-level." (italics mine.[ ]) he proceeds to assume that money is doubled with a _halving_ of the v's, instead of a _doubling_ of p. everybody now has on hand twice as much money _and deposits_ as his convenience has taught him to keep on hand. he will then try to get rid of this surplus, and he can only do it by buying goods. but this will increase somebody else's surplus, and he will likewise try to get rid of it. this will raise prices. "_obviously_ this tendency will continue until there if found another adjustment of quantities to expenditures, and the _v's are the same as originally_."[ ] the foregoing argument rests in part, it will be seen, on the assumption that a fixed ratio between m and m´ obtains, else the increase of _money_ in everybody's hands would not mean a corresponding increase in their _deposits_. i have already criticised this doctrine. for the contention that the v's will finally be _just the same_ as before, i find no specific argument at all--"_obviously_" presumably making that unnecessary. as the point immediately at issue is that v's will be _unchanged_ by the increase in m (otherwise p would not increase _proportionately_--let us see if considerations can be adduced which will make this a little less "obvious." first, it will be noticed that fisher, in the foregoing, in one sentence speaks of the matter as resting on _habit_, and in the next sentence, on _convenience_. he speaks, also, of business _custom_. now it is important to note that habit and custom, on the one hand, and considerations of convenience on the other, do not necessarily coincide. many habits and customs are highly inconvenient. and it is not at all likely that habit and custom should govern so highly complex a thing as the ratio between cash on hand and the price-level. rather, in so far as custom and habit rule, one would expect them to relate to a simpler matter, namely, the _amount of cash on hand_. if the amount of cash kept on hand should remain controlled by habit, while the amount of money is increased, then v, instead of remaining unchanged, would actually be increased, unless the habits should be broken in on. i shall show in a moment that considerations of convenience would probably lead to a reduced v, in so far as individual turnover is concerned. but which tendency will prevail? well, that will depend on the degree to which custom and habit rule as compared with considerations of convenience--_i. e_., there would be no rule valid for all communities. that convenience would lead to a larger amount of money on hand--and i am following fisher's temporary hypothesis that there has been no rise in prices prior to the movement to restore the v's to their old magnitudes--will appear from considerations like these. few men have as much on hand as they would like to have, including both their cash in hand and their deposit balances. most people have the tendency to hoard, though it is usually held in check by necessity. if money on hand be increased suddenly, without prices being increased, and without any prospect of increased incomes in the future--and there is nothing in fisher's provisional hypothesis to call for increased incomes, as they could, in fact, come only from an increase in prices--why might not there be a considerable saving of money, with a corresponding reduction in v? if it be objected that people, in saving their money, will in considerable degree put it into the banks, and that the banks, with larger reserves, will increase loans and deposits, i would urge, that it is on the part of banks that this tendency to increase hoards in times of abundant money is particularly marked, and for proof would point to the figures quoted from keynes[ ] for the great banks and treasuries of europe in the last fifteen years. it is not necessary for my purpose at this point to do more than show that there is reason to expect an increase in money to _change_ the v's. fisher's argument rests on the contention that the v's will be neither increased or reduced--otherwise an increase in money will not _proportionately_ raise prices. the appeal to habit and custom in the matter is particularly unsatisfactory. custom and habit could not possibly regulate things so complex as velocities of money and bank-deposits. whatever be the ultimate effect of an increase in money, the immediate effect is commonly to reduce the money-rates. banks have less inducement to pay interest on deposits, and charge lower rates for loans. now merchants, especially small merchants, are often embarrassed in making change for customers. the man who has tried to make payment with a ten dollar bill in a country store has not infrequently put the storekeeper to much inconvenience. to offer a ten dollar bill, or even a five dollar bill, to a storekeeper on amsterdam avenue in new york city may well mean that the one clerk in the establishment, or the proprietor's wife will run out with the bill to three or four neighboring stores before finding change with which to break it. if money is more abundant, if money-rates are easier, for a time, it may easily happen that many small merchants will experience the superior convenience of having a more adequate amount of change in the till, and will, even after the money-rates have risen--if they do rise again to the old figure--find a new reason for keeping more cash on hand. there is a marginal equilibrium between the interest on the capital invested in cash in the till, and the wages of the clerk,[ ] whose active legs assist the velocity of money. not only banks and small dealers, however, find it advantageous to increase their supply of ready funds, held idle for special occasions. the united states steel corporation has kept as much as $ , , . to $ , , . in idle cash or idle deposits, as a means of being independent of banks in times of emergency.[ ] the motive for accumulating reserves and hoards, either of cash or deposit accounts, is at all times strong. in times of financial ease, it may easily find the difficulties which ordinarily repress it give way, and, by being gratified, grow stronger. i conclude that there is positive reason for expecting an increase of money to reduce the velocity of money. horace white, in his _money and banking_, in the earlier editions, speaks of the velocity of money, "_alias_ the state of trade." is not this the truth? is not money circulating rapidly, when business is active, and slowly when business is dull? is not the velocity of circulation a highly flexible and variable average, a _cause_ of nothing, and an index of business activity? or, better, perhaps, are not the v's and t both governed, in large degree, by more fundamental causes which are largely the same for both? fisher would admit something of this for transition periods. even for normal adjustments, he admits that an increase in t, unaccompanied by an increase in m, leads to some increase in the v's, though he doesn't say how much.[ ] he denies, however, that an increase in the v's will increase t.[ ] in general, it is clear that he regards the v's and t as governed by different causes. the control of the v's by t is not the only or the chief control of the v's. the v's can increase greatly without an increase of t, in his scheme. that this is so, will appear from a comparison of the list of causes which he gives as governing the v's and t respectively: causes governing v's: . habits of the individual. (a) as to thrift and hoarding. (b) as to book credit. (c) as to use of checks. . systems of payments in the community. (a) as to frequency of receipts and disbursements. (b) as to regularity of receipts and disbursements. (c) as to correspondence between times and amounts of receipts and disbursements. . general causes. (a) density of population. (b) rapidity of transportation. compare this list with the causes governing t:[ ] . conditions affecting producers: geographical differences in natural resources; the division of labor; knowledge of technique of production; accumulation of capital. . conditions affecting consumers: the extent and variety of human wants. . conditions connecting consumers and producers: (a) facilities for transportation. (b) relative freedom of trade. (c) _character_ of monetary and banking systems. (not their _extent_.) (d) business confidence. these two lists are quite different, and indicate that in fisher's mind the magnitudes, t and the v's, in general obey different laws. the only factor in both lists is facilities for transportation ("rapidity of transportation," in the first list). strangely enough, t, though later recognized as having influence on the v's[ ] is not included in these lists in ch. . the "character of the monetary and banking systems" in the second list is evidently not the same as "use of checks" in the second list, though it will doubtless affect that factor, as also the "habits as to thrift and hoarding," in some degree. "business confidence," which is, in the view i am maintaining, as in the view, i should take it, of horace white, the great variable affecting both t and the v's, does not appear in the first list. indeed, one wonders why business confidence appears in either list, if only "normal," and not merely "transitional" causes are to be considered, but it appears from the fuller discussion on p. that fisher is not thinking of business confidence as a _variable_ at all--his normal theory has nothing to do with _variables_--but as a thing which either is or is not present, a sort of mendelian unit, not a thing of degrees.[ ] it will be noted, further, that most of the causes which fisher lists as affecting t are really causes affecting _production_--they would be just as important under a socialistic as under an exchange economy. now i propose to show, on the basis of fisher's own list of causes, that most, if not all, of the factors affecting the v's, will also affect t, _and in the same direction_. he admits this as to transportation facilities. it is surely true of thrift and hoarding. the miser neither circulates money nor buys goods. it is emphatically true--though fisher's theory, as will later appear, is obliged to deny it,--of both book credit and banking facilities. without the use of credit, much of the business now done simply would not be done at all. for fisher, and the quantity theory in general, the contention would be simply that the same business would be done _on a lower price-level_. i reserve a full discussion of this fundamental point till later, noting here, in passing, that the function of banks is to assist in effecting transfers, that that is why, from the social standpoint, banks are encouraged, and that the extension of banking would be folly if they did not, in fact, do this. as to book credit, let us suppose that, for example, in the great cotton section of the south the stores should cease to give advances of supplies on credit to negroes and small white farmers, pending the "making" of the crop. the outcome would be starvation for many of them, and no cotton crop at all. under a system of private enterprise, the very division of labor itself, including the specialization of the capitalist, involves credit, and it is difficult to conceive a form of credit which does not either dispense with the use of money, or increase its "velocity." admittedly, the division of labor increases trade. the three factors listed under "systems of payment in the community" also affect trade. to the extent that receipts are frequent, regular, and synchronous with outgo, we have a smoothly working economic system, which facilitates commerce. finally, density of population enormously increases trade. the concentration of men in cities is essential for modern factory production, and the great cities have necessarily grown up about good harbors, or at strategic points for connecting lines of railroads. it seems almost trivial to insist on so obvious a point, but fisher seems totally to ignore it, for he says: "we conclude, then, that density of population and rapidity of transportation have tended to increase prices by raising velocities. _historically this concentration of population in cities has been an important factor in raising prices in the united states._"[ ] (p. . italics mine.) this is an astounding proposition. it is not merely that the concentration of population in cities has _tended_ to raise prices through raising velocities. it is a statement that this has been an important historical cause of the actual increase in prices. for fisher's own theory, if the same cause had tended to increase t,[ ] that would have offset the rising v's on the other side of the equation, and left prices little affected. but he sees in the v's an independent cause here, divorces them from their connection with t, and follows his logic fearlessly where it leads. i do not see how one could more strikingly illustrate the essential vice of erecting the v's into causal entities. in concluding the discussion of the rôle of velocity of circulation, i think it worth while to mention fisher's own efforts to measure them. i examine his statistics in a later chapter. i do not regard the points at issue as points which can properly be handled by inductive methods, primarily. i do not accept his conclusions with reference to the magnitudes of v, the velocity of money, partly because i do not accept his doctrine that "banks are the home of money" (p. ).[ ] he finds for v a fairly constant magnitude during the thirteen years from to , the range being from to , the figures for all the years except and being interpolations.[ ] for v, however, which is much the more important magnitude, from the standpoint of his equation of exchange for the united states, since deposits do so much more exchanging than does money, he finds a wide range of variation, from to , and he states: "we note that the velocity of circulation has increased % in thirteen years and that it has been subject to great variation from year to year. in and it reached maxima, immediately preceding crises" ( ). i think fisher's own statistical results show that v´, at least, is a child of the "state of trade."[ ] critical analysis of these statistics show that they greatly underestimate the variability of the v's.[ ] in summary: v and v´ are not, as fisher contends, independent of the quantity of money. instead of resting on "technical conditions," and having large elements of constancy and rigidity, they are highly flexible, and vary, on the whole, with the same highly complex and divergent sets of causes which govern the volume of trade. the biggest factor affecting the variations of the v's on the one hand, and volume of trade on the other is business confidence--a factor which fisher's normal theory is not concerned with, so far as it is considered as a variable, but which, more than anything else, does affect the concrete figures which go into the equation of exchange, either for a single year, or for an average of a good many years. the v's are not true causal entities, but merely abstract summaries of a host of heterogeneous facts. i have indicated before, and shall later demonstrate more fully, that the same is true of t. even the "normal" causes governing the v's, however, are factors which likewise affect t, and in the same direction. among the factors affecting both v and t, there is one which sometimes makes them move in opposite directions, and that is the _value of money_ itself. this is so well stated in wicksteed's interesting criticism of the quantity theory that i content myself with a quotation:[ ] "again, the history of paper money abounds in instances of sudden changes, within the country itself, in the value of paper currency, caused by reports unfavorable to the country's credit. the value of the currency was lowered in these cases by a doubt as to whether the government would be permanently stable and would be in a position to honor its drafts, that is to say, whether this day three months, the persons who have the power to take my goods for public purposes will accept a draft of the present government in lieu of payment. it is not easy to see how, on the theory of the quantity law, such a report could affect very rapidly the magnitudes on which the value of the note is supposed to depend, viz., the quantity of business to be transacted, and the amount of the currency. nor is it easy to see why we should suppose that the frequency with which the notes pass from hand to hand, is independently fixed. on the other hand, the quantity of business done by the notes, as distinct from the quantity of business done altogether, and the rapidity of the circulation of the notes may obviously be affected by sinister rumors. two of the quantities, then, supposed to determine the value of the unit of circulation, are themselves liable to be determined by it." chapter xiii the volume of money and the volume of trade--trade and speculation in proving that an increase of money must proportionately increase prices, it is necessary to prove that the volume of trade is independent of the quantity of money and credit instruments by means of which trade is carried on. money on the one hand, and quantity of goods to be exchanged on the other, are the two great independent magnitudes, whose equilibration mechanically fixes the average of prices. this notion, as to the essence of the quantity theory, finds expression in taussig,[ ] "the statement of a quantity theory in relation to prices assumes two independent variables: total money or purchasing power on the one hand, total supply of goods or volume of transactions on the other." taussig, though he would maintain that this independence holds, so far as money and trade are concerned, admits that it breaks down so far as trade and elastic bank credit, bank-notes and deposits, are concerned. trade and elastic bank-credit are largely _inter_dependent.[ ] this concession on taussig's part means virtually giving up the quantity theory for western europe and the united states and canada, though taussig still sees something left of the quantity theory tendency in view of the "irregular and uncertain" connection which he finds between money and bank-credit.[ ] fisher, however, makes no such surrender. he is quite as uncompromising as to the independence of _deposits_ and trade as he is with reference to the independence of _money_ and trade. he does, indeed, make the concession that increasing trade tends to increase deposits _indirectly_, by increasing the ratio of m´ to m, by modifying the habits of the people as to the use of checks as compared with cash (p. ),[ ] but he denies stoutly that there is any _direct_ relation between them. (p. .) trade acts only _via_ a modification of the ratio between m and m´, and m still remains controlled, not by trade, but by quantity of money. as to any control over t by m´, he repudiates it explicitly, (p. .) increasing m´, either through an increase of m, or through an increase in the normal ratio between m and m´, will have no effect on t,--or, for that matter, on the v's. the introduction of credit, therefore, leaves the quantity theory intact: an increase of m, increasing m´ proportionately, leaving the v's unchanged, and having no effect on t, must exhaust its influence on p, raising p proportionately, if the equation of exchange is to remain valid. the argument set forth to prove that t is not influenced by m or m´ is as follows: "an inflation of the currency cannot increase the products of farms or factories, nor the speed of freight trains or ships. the stream of business depends on natural resources and technical conditions, not on the quantity of money. the whole machinery of production, transportation and sale is a matter of _physical capacities and technique_, none of which depend on the quantity of money. the only way in which quantities of trade appear to be affected by the quantity of money is by influencing trades accessory to the creation of money and to the money metal.... from a practical or statistical point of view they amount to nothing, for they could not add to nor subtract one-tenth of % from the general aggregate of trade." (_loc. cit._ p. . italics mine.) something similar is said on p. , where "transitional" influences of m on t are being discussed: "but the amount of trade is dependent, _almost entirely_, on other things than the quantity of currency, so that an increase of currency cannot, _even temporarily_, very greatly increase trade. in ordinarily good times practically the whole community is engaged in labor, producing, transporting, and exchanging goods. the increase of currency of a "boom" period cannot, of itself, increase the population, extend invention, or increase the efficiency of labor.[ ] these factors pretty definitely limit the amount of trade that can reasonably be carried on. so, although the gains of the enterpriser-borrower may exert a psychological stimulus on trade, though a few unemployed may be employed, and some others in a few lines induced to work overtime, and although there may be some additional buying and selling which is speculative, _yet almost the entire effect_ of an increase in deposits must be seen in a change in prices. normally the _entire_ effect would so express itself, but transitionally there will be also _some_ increase in the q's." (pp. - . italics mine.) fisher is here exceedingly uncompromising, even where transitional periods are concerned, and it is not necessary, in order to do his position full justice, to make much distinction between "normal" and "transitional" effects in my counter-argument. i shall, however, take account of the distinction as i proceed, in justice to other, more moderate, quantity theorists. it is a familiar doctrine that the quantity of money is irrelevant, that things go on in much the same way whether money is abundant or scarce, the only difference being that in the one case prices are high and in the other, low; that, in particular, it is a gross fallacy to connect the rate of interest with the amount of money, since (as many writers would put it) the rate of interest depends on the amount of _capital_ rather than _money_. at the opposite extreme, we have writers like brooks adams (_law of civilization and decay_), who see the fate of nations and the progress of civilization resting on the abundance or scarcity of money. fisher takes the first position in its extremest form.[ ] the truth, i think, is intermediate. the effects of the new world discoveries of gold and silver after the voyage of columbus on trade and industry were tremendous. trade was enormously increased. walker, in his _inter__national bimetallism_,[ ] asking, from the standpoint of a quantity theorist, why prices only increased % while money increased %, admits that the chief reason was the increase in trade, due in large part to the very increase in money itself. sombart, in his _der moderne kapitalismus_,[ ] finds in this influx of money a tremendous source of capitalistic accumulations, (a) for the conquistadores, (b) for the handicraftsmen whose prices rose faster than their costs, (c) for tenants whose rents were fixed in money, (d) for landowners, whose rents were fixed in kind [a point not obviously true], and (e) for bankers, as the fugger. an increase of capital, savings that would otherwise not have been made, must have profoundly modified the whole industrial system, and greatly increased both industry and commerce. if it be objected that effects of this sort are not usual, that they came in a world which had been starved for money, and which, by means of the enormous increase in money was able to pass from a "natural" to a money economy, i reply that the difference between such a case and the usual effects of an increase of money are in degree rather than in kind. the world of columbus' day was in part on a money economy, and the world to-day, despite professor fisher's emphatic denial,[ ] still employs a great deal of barter, or equivalents of barter. i shall revert to this point later. but even this consideration would not rob sombart's points of their significance for modern conditions. further, we have an even more striking case, on walker's own showing, in the effects of the californian and australian[ ] gold discoveries in the th century on trade, industry, and speculation.[ ] nor is the tremendous agitation over bimetallism, involving a literature so great that no man could dream of reading it all, involving great political movements, presidential campaigns, great congressional debates, repeated legislation, international conferences, etc., for twenty years, to be explained on any other ground than that the world felt practical, important, and unpleasant effects on industry and trade from the inadequacy of the money supply. the view of hartley withers[ ] is interesting here. he says: "any such great addition to currency and credit would have a great effect in stimulating production, and so would lead to a great addition to the number of real goods which humanity desires and consumes when it can get them.... trade would be more active." on p. he speaks of the enormous expansion of trade made possible by paper representatives of gold. on p. he speaks of the attitude of the money-market toward gold, which the orthodox economist is apt to think of as a survival of mercantilism. withers thinks that the money market is right in a large degree. as illustrating withers' statement about the views of "practical men" on this point, the following extract from a recent address by theodore price, quoted with approval in a "market letter," written by byron w. holt,[ ] is interesting: "the fact seems to be that the exigencies of war in europe are leading to an extension of credit such as would not have been possible in peace, because the hesitant conservatism of bankers would have then prevented it, and we are finding that instead of working harm it is doing good, because huge masses of fixed capital are thereby made productive, and are circulating with the increased velocity that always quickens enterprise and accelerates the wheels of industry.... all the precedents of history indicate that accelerated activity will come with peace and continue until the exuberance of success has led men to build faster than the world has grown and to demand credit upon the basis of future rather than of present values." what is the essential causation in the matter? well, viewed merely as a matter of mechanical equilibration, the quantity theory view is not strictly true, by any means. for a given country--and fisher's quantity theory is always a theory for a given country, and, indeed, for any separate market, even a single city[ ]--an increase of banking credit means an increase in non-monetary capital, because, to a greater or less extent it dispenses with the use of gold, which goes abroad, bringing back wealth in other forms in exchange. adam smith saw this clearly, and phrased it strikingly, likening gold and silver coins to the wagon-roads of scotland, which are necessary for transportation, but which none the less prevent the use of the roadways for raising grain; whereas bank credit is like a wagon-road through the air, which restores the roadbeds to cultivation. increased non-monetary capital, other things equal, should mean increased trade. but, more fundamentally, an increase in gold itself within the country, if not bought by the export of an equivalent amount of other goods, _is an increase of capital_. not all capital is money, but standard coin is capital. money is a tool of exchange, and exchange is part of the productive process. more money means more exchanging. that is what money is for. part of the mechanism is in the money rates, which go down as money becomes more abundant, making it profitable to effect exchanges which would not have been profitable had the money rates been higher. granted that the money-rates and the general rate of interest tend, in the long run, to keep--i will not say at the same figure[ ]--a certain fairly definite relation to one another, it still does not follow that the new "normal" equilibrium will give us an interest rate which is the same as the general rate of interest was before the influx of gold. on the strictest static theory, this is not to be expected. because the total amount of capital in the country is increased, and this means a lowered interest rate all around, in the marginal employment of capital. the margin of the use of capital will be lowered everywhere, including the margin for the use of money. this means permanently lowered money rates in the country, even though the permanent level be higher than the initial money rates immediately following the access of new gold. i have put the argument in terms that suggest the productivity theory of interest, because it is more simply stated that way. i do not accept the productivity theory, as a fundamental explanation of interest, but for many purposes, the results to be obtained by it coincide with the psychological time theories,--which also, in their present form, seem to me imperfectly developed. i need not try to construct a theory of interest here, however, as the familiar theories lead to no trouble at this point. it is enough to point out that the increased amount of capital, meaning better provision for present wants--wants concerned with gold in the arts and with money for productive exchanges, as well as goods generally since part of the new gold will be exported for other things--will lessen the pressure of present as compared with future wants, and so lessen the rate of interest on the time-preference theory. the final outcome will be an extension of the marginal use of money, and a greater volume of exchanges. of course, the increase in the supply of any kind of capital good, apart from a prior increase in the demand for its services, will, on the mechanical view of economic causation, necessarily lead to some fall in its capital value. gold money will be no exception to this rule. as to how much the increase in its quantity will lead its capital value to fall, however, we are unable to say. for the quantity theory, the fall will be in proportion to the increase. for the theory just outlined, the fall will depend on the elasticity of demand for gold in the arts, and on the elasticity of "demand" for money, meaning by demand for money simply the demand for the short-time use of money as a tool of exchange, a demand which governs _directly_, not the capital value of money, but rather the "money-rates." the relation between the money rates and the capital value of money will best be discussed at another point.[ ] we have no reason at all to suppose that either of these demands[ ] exhibits the tendency to obey the law of proportional variation which the quantity theory requires of money. it is further important to note that as a country gets more abundant capital, there seems to be a tendency to extend the use of money rather more than the use of many other capital goods. where the interest rate is and %, as in arizona and new mexico, money, even when brought in, tends to leave in large degree to bring in other forms of capital which the situation calls for more imperatively. the early american colonies, needing money pressingly, and making shift with a great variety of substitutes for good metallic money, thoroughly acquainted with the advantages of a money-economy from their european experience, and having "habits" as to the carrying and using of money which they had brought with them from europe, still found it impossible to keep a great deal of metallic money, in view of the still greater importance of other forms of capital. it is in the most highly developed commercial communities, commercial centres, and _par excellence_, in the speculative centres, that the demand for the money-service is most elastic.[ ] a country where the rate of interest is low, loses other forms of capital, and gains money, in the process of reëquilibration, as compared with a new and undeveloped section, although the new section also extends the margin of the money service, in effecting a greater number of exchanges, when money is increased. and this leads to a vital distinction, which quantity theorists almost always lose: the distinction between the volume of _production_, and the volume of _trade_. even in the mechanical system of causation which they describe, it is true only of production and transportation that _technical_ and _physical_[ ] factors are of primary significance, and that money is of minor significance. for trade and commerce, money is always highly important. to the extent that a region is primarily given over to the primary productive activities, mining, and agriculture, such trading as is necessary can be done by means of a small amount of money, supplemented by barter and long-time book-credit. a region or a city whose chief business is _commerce_, however, needs a large part of its capital in the form of money, and of banking capital, which is largely invested in money for banking reserves. _trade_, as distinguished from industry (and it is after all trade that is under discussion), is helped or hindered as its tools are more or less abundant. these considerations would suggest that the elasticity of the demand for the use of money is greater than the elasticity of demand for the use of capital in almost any other form. production is, indeed, limited by labor supply and natural resources, in considerable degree. _trade_,[ ] however, even from the standpoint of mechanical causation, is limited chiefly by the relation between the profits to be made in commercial transactions, and the "price" that must be paid for the money and credit that are required to put them through. there are enormous numbers of transfers that could be made to advantage if there were no cost at all involved. they are not made, because exchanging requires pecuniary capital. let the pecuniary capital increase, however, and sub-marginal exchanges become worth while, the general margin is lowered. commerce is the most highly flexible and elastic portion of the whole productive process. the elasticity of demand for commercial capital is, thus, greater than the elasticity of demand for any other form of capital. how widely the volume of trade differs from the volume of production, and how great is the element of speculative transactions in trade, will best appear, i think, from an analysis of the figures which fisher gives[ ] for the volume of trade in the united states. his figure for the volume of trade in the year is $ , , , . , three hundred and eighty-seven billions of dollars! this figure is reached by equating the figures he has reached for mv plus m´v´ to pt, and assuming p to be one dollar, by making the "unit" of t, arbitrarily, a dollar's worth of each sort of commodity, at the prices of . i have already commented on the legitimacy of this method of summarizing t,[ ] and need not say more here, beyond calling attention to the fact that "volume of trade," as commonly used, does in fact mean, not t alone, but pt. fisher for years other than , however, makes use of a different method of getting at t: he takes certain indicia of _relative_ amounts of trade, compares them with the same indicia for , and estimates the trade for other years as being such a percentage of the trade for as their indicia are of the indicia of . the indicia chosen are: ( ) quantities of certain commodities, cotton, fruit, cattle, etc., _received at_ principal cities of the united states, taken as typical of the variations of the internal _commerce_ of the united states; ( ) quantities of articles of import and articles of export, for each year, taken as typical of variations in the foreign trade of the united states; ( ) sales of stocks. these three indicia, weighted in a manner to be described in a moment, are then averaged. there is a second element in the index, made up by taking the figures for railroad _tonnage_, and the figures for _receipts on first class mail_, which are averaged. the first average and the second average are then combined into a third average, which is the final index. the relation between this index for every year other than and the same index for the year determines the amount of t for each year--the two indicia, together with the figure, $ , , , . , giving the required amount by the "rule of three." i shall not go into details with the method of constructing these averages, but i wish to make clear the comparative _weight_ given to each element in the final index: the first three elements count _twice_ as heavily as the last two, and so constitute the biggest factor. in the first average, based on the first three elements, the item taken as typical of internal trade is _weighted by _, the item taken as typical of foreign trade is _weighted by _, and sale of stocks _by _. it appears from fisher's figures (p. ), that the one really big _variable_ among all the indicia is the sale of stocks, but the weight given it is so small that it makes virtually no difference in the final result. thus, as between and , stock sales increased over %, but total trade, as shown by fisher, increased only %. in the following year, stock sales _decreased_ over %, but total trade, on fisher's figures, _increased_. the following year, , stock sales virtually doubled, but fisher's final figure shows only an increase around %. two years later, in , stock sales fell off about %, from the figures for , but again, as compared with , total trade on fisher's figures shows an appreciable gain. the influence of stock sales on fisher's index is, virtually, negligible. the dominating factor is the _receipts_ of selected staples, cattle, cotton, rice, pig iron, etc., in the principal cities of the united states. there is not a _single year_ in which his final figure for t does not move in harmony with this factor (p. ). he gets, thus, for the volume of trade through the fourteen years under consideration, a surprising steadiness, and a pretty uniform progressive development. in defence[ ] of his method of weighting, fisher says, simply: "these weights are, of course, merely matters of opinion, but, as is well known, _wide differences in systems of weighting make only slight differences in the final averages_." (italics mine.)[ ] are these figures valid? well, first one is struck with the absolute magnitude assigned to t. the figures seem vastly greater than would have been anticipated. the method of calculating it, for , i shall discuss in detail in the chapter on "statistical demonstrations of the quantity theory." for the present, it is enough to note that the absolute magnitude is derived from figures collected by dean david kinley for the national monetary commission,[ ] of deposits, exclusive of deposits made by one bank in another, made in about , banks (out of , ) on march , . these deposits were classified as ( ) money (with subdivisions) and ( ) checks and other credit instruments. a cross-classification divided them into ( ) retail deposits; ( ) wholesale deposits; ( ) all other deposits. kinley's object was to determine the extent to which checks are used, as compared with money, in payments, particularly in wholesale and retail business. fisher's total, briefly, was obtained as follows: kinley's figures, for the one day, were increased to make an allowance for the non-reporting banks; they were further increased on the assumption that march was below the average for the year; the figure finally obtained for the day was then multiplied by , assumed as the number of banking days in the year, and the product, billions, was taken as representing the total circulation of money and checks in trade. for some reason not made clear, this total was subsequently reduced to billions. counting the average price, p, as $ , t was considered to be billions.[ ] in the statistical chapter to follow, it will be shown that this estimate is a very decided exaggeration. deposits made in banks greatly overcount trade. very many payments represent duplications, loans and repayments, taxes, etc., and are in no sense trade. this is true of all classes of deposits, wholesale and retail, as well as "all other." but for the present, i am concerned with the question, not of the absolute magnitude of the volume of trade, but rather, the questions of its character, of the elements that enter into it, and, above all, of the extent to which it is physically determined by technical conditions of production, and the extent to which it is flexible, a matter of speculation, etc. we may approach this question from the angle of several bodies of statistical information. first, the question may be raised: what is there in the country which could be bought and sold enough in the course of a year to give us anything like so great a total? the subtractions which we shall find it necessary to make will still leave us an enormous total. the united states census bureau[ ] in reached the conclusion that the _total wealth_ of the country was only $ , , , . of this, over $ , , , was in real estate; $ , , , in railroads; street railways, over $ , , , ; telephone, telegraph, water and light, and similar enterprises total nearly $ , , , more. none of these things enter into ordinary wholesale and retail trade. the items that one would ordinarily think of are agricultural products, $ , , , ; manufactured products, $ , , , ; mining products, $ , , . can these things be exchanged often enough in the course of a year to account for $ , , , ! these figures are for ,[ ] whereas fisher's figures are for . if the census bureau had taken an inventory in , the figures would doubtless be larger. the inventory for made by the census bureau does show a very considerable increase, the largest item being due to a rise in real estate values. the figures for agricultural, manufacturing, and mining products are, also, figures for a given time rather than for total production through the year. but, making all the allowance one pleases, it is quite incredible that one should reach a figure of $ , , , by taking only the exchanges necessary to bring raw materials through the various stages of production to the consumer. the greater part of the $ , , , is to be explained in another way! a detailed analysis of kinley's figures, on which the estimate of total trade is based, leads clearly to the same conclusion. kinley's figures for the banks that reported on march , , are as follows: retail deposits millions wholesale deposits millions "all other" deposits millions the "all other deposits" are vastly greater than retail and wholesale deposits combined! notice, too, with reference to the question as to how often goods need to be turned over in getting to the consumer: wholesale trade uses only about twice as much money and checks as does retail trade. goods are not, if these figures are in any way typical of actual trade, turned over many times in the process of reaching the consumer. the "necessary," or "physically determined" number of exchanges, in the routine of trade, is small, per item. retail deposits of millions make up less than one-eleventh of the total. retail and wholesale deposits together make up about three-elevenths. what is the other eight-elevenths, represented by the "all other deposits"? it will help if we see where these "all other" deposits are located. if we find them scattered evenly throughout the country, in rural regions as well as in cities, we might be at a loss. if, however, we find them bunched in the big speculative centres, we may conclude that speculation accounts for a large part of them. we do in fact find this. the following figures show the different classes of deposits ( ) in the south atlantic states; ( ) in reserve cities; ( ) in new york city alone: _south atlantic states:_ _per cent._ retail deposits $ , , . wholesale deposits , , . "all other" deposits , , . _reserve cities (including new york city):_ retail deposits $ , , . wholesale deposits , , . "all other" deposits , , . _new york city:_ retail deposits , , . wholesale deposits , , . "all other" deposits , , . it is difficult, with kinley's figures, to get figures which exclude returns from cities of substantial size, except for a state like nevada, where the mining and divorce industries complicate the figures. as near an approach as can be made, perhaps, is to take the state of louisiana, excluding new orleans from the totals. even here, however, we include five cities of over ten thousand, among them shrevesport, with , people. the following figures are for the state and national banks in louisiana, exclusive of new orleans: retail deposits $ , . wholesale deposits , . "all other" deposits , . we cannot tell, in these figures for louisiana, how many banks are represented, or what the average figures per bank are. for the whole state of arkansas, however, including five cities of over , , with two over , , and one of , , we can get an average for ninety reporting banks. even here we do not know where these banks are located within the state; though it is probable that they are in the larger places, and so exceed the average deposits for the banks in the state as a whole, to say nothing of the average for the smaller places. the ninety banks are almost wholly state and national banks. _arkansas:_ _per cent._ retail deposits $ , + wholesale deposits , + "all other" deposits , + the average for all deposits, per bank, in arkansas is $ , ; the average for all the , banks reporting for the whole country is, approximately, $ , ; the average for the banks reporting from new york state is $ , ; the average for the banks in new york city alone is doubtless much higher, but cannot be stated, as kinley's figures do not tell how many banks reported by cities.[ ] the "all other deposits" in arkansas are . % cash, and . % checks; the "all other" deposits in the country as a whole are only . % cash, with . % checks; the "all other deposits" of new york city are only % cash, with . % checks. several facts are very clear from these comparisons: ( ) the proportion of "all other deposits" increases very rapidly as we get closer to the great centres of speculation, and is lowest in rural regions; ( ) the great bulk of all the deposits is in the cities. the average for arkansas banks, for example, is only one-sixth the average of the whole country, and is only one-fiftieth the average for the banks of new york state. it is a much smaller fraction of the average for new york city, but we cannot give an exact figure. the totals reported from the rural regions are trifling, as compared with the totals reported from the big cities. this, as will be made clear in the chapter on "statistical demonstrations of the quantity theory," is not because the country reports were less complete that the city reports. new york was probably less complete than the country as a whole. it is simply because the activity of country accounts is small, the amount of trading in the country districts small, and (as shown) the _average_ for country banks is small. ( ) the character of the "all other" deposits in arkansas differs substantially from that of the "all other" deposits in new york city, as indicated by the fact that the proportion of cash is high in arkansas--substantially higher, in fact, for the "all other" deposits in arkansas than for all deposits, or even for retail deposits, in the country as a whole. the percentage of checks in total retail deposits in the united states, in kinley's figures, was . ; the percentage of checks in the "all other" deposits in arkansas was . . we may count these arkansas "all other" deposits as, in considerable degree, deposits made by farmers. what were the "all other deposits" made in new york city? dean kinley's list of the miscellaneous elements that enter into the "all other deposits," given on p. , contains only two that might be expected to bulk large in new york without appearing in arkansas. these are: _brokers_, _and stock and bond financial corporations_. of course, theatres, hotels, publishing houses, railroads, public funds, "those who have no specific business," and rich churches, will all be absolutely much larger in new york city than in arkansas. but these things may be found in many places, scattered throughout the cities of the country, without making anything like such "all other" deposits as new york shows. it is not new york's foreign commerce that does it, because that is represented in new york's "wholesale deposits," which make up only % of new york city's total deposits for the day. it cannot be the supposed "clearing house" function of new york city,[ ] whereby banks in different parts of the country pay their balances due one another in new york exchange, because such transactions would appear in new york chiefly in the figures for deposits made by one bank in another, and these figures are excluded from kinley's totals. it cannot be the deposits of the "idle rich" for current expenses that swell new york's "all other deposits" so greatly--these could not equal the total retail deposits of the city, which are only . % of the total in new york. moreover, similar deposits are made in many other cities, without, in proportion to population, making any such totals. figures, moreover, for the aggregate yearly income of the united states, and for the distribution of that income between rich and poor, make it clear that any such items must be bagatelles in comparison with these enormous figures. the only explanation that will really explain is the speculative and investment and financial transactions that centre in new york, and, in less degree, in the other great financial cities of the country. this is dean kinley's opinion. in the "all other" deposits he makes a % allowance for speculative transactions. "a large proportion of deposits in this 'all others' class undoubtedly represents speculative transactions, all of which, or practically all of which, are settled with credit paper."[ ] it is also the opinion of general francis a. walker, expressed concerning similar figures from earlier inquiries.[ ] various kinds of evidence converge toward this conclusion. thus, the evidence of clearings, total items presented by banks to the clearing houses of the country. new york clearings are usually nearly twice as great as total clearings for the rest of the country. new york clearings fluctuate in general harmony with transactions on the new york stock exchange. this has been commented on many times. the extent to which it holds has recently been carefully measured by mr. n. j. silberling, whose results appear in the _annalist_ for august , , under the title, "the mystery of clearings." mr. silberling applies the "coefficient of correlation" to the problem, getting in one significant figure a measure of the extent to which two variables, as share sales on the new york stock exchange and new york clearings, vary together. this coefficient has been used enough by economists not to require detailed explanation here. it is a figure always between + and - . + indicates that the two variables in question are perfectly correlated, whereas indicates no correlation whatever. - indicates an inverse correlation, such that two variables vary exactly and inversely with reference to one another.[ ] mr. silberling's studies show the following correlations: new york share sales (numbers of shares, not values) to new york clearings, using weekly figures, for the years - , r = . . this is a high correlation. limiting the observations to the middle weeks of the month for the same period, he gets r = . ( ). the reason for taking only middle weeks in the month is that thereby the disturbing factor of monthly settlements is avoided. the monthly settlements may be for stock transactions, or may be for other things, but as they are not dependent on the stock transactions _of the week_ in which they occur, their effect is to lessen the evident degree of connection between stock sales and clearings. thus the middle weeks show a closer correlation between the two variables than do all the weeks taken as they come. if figures for the month were taken, this complication would be smoothed out, and a fairer result might be expected to appear. the middle weeks, eliminating monthly settlements, probably eliminate more other things than they do share sales (which are in large degree paid for in hours[ ]), and so exaggerate somewhat the relation between shares and clearings. monthly figures avoid both complications, though they lose something of the concrete causation. an intermediate figure might be expected for the monthly correlation, and this we find: r = . ( ). a striking single fact in connection with these figures, giving them point as less extreme variations could not do, is found in the behavior of clearings when the stock exchange was closed, during the crisis of . at that time, new york clearings, which had been about twice as great as country clearings, fell suddenly _below_ country clearings. when the stock exchange was opened, the old proportions suddenly reappeared. that speculation spreads far beyond new york, new york being the centre for dealings in securities, etc., which involve the whole country, is, of course, well known. the extent of this mr. silberling seeks to measure by correlating clearings outside new york with new york share sales. his weekly correlation for these two variables for - gives r = . ( ), and the correlation for the mid-weeks gives a higher figure, r = . ( ). the monthly correlation shows r = . ( ), a lower figure, "which is perhaps due in part to the fact that the bulk of the outside monthly clearings show relatively moderate fluctuations, because of their diverse composition, and are less sensitive than the periods of shorter length." seeking an index of the variations of that trade which is, in professor fisher's phrase, governed by "physical capacities and technique"--a law which professor fisher,[ ] as we have seen, would apply to the great total of billions which he has constructed--mr. silberling chooses the gross earnings of the principal railways as the best available test. railways deal with all manner of other enterprises. he correlates this with clearings outside new york. "the question might arise at once whether changes in traffic are strictly concomitant with changes in payments involved by it, and therefore with the clearings resulting. the preliminary hypothesis that a 'lag' ensued between traffic and the bulk of the payments was first tested by correlating the railway figures with clearings of one month[ ] and two months later, but no correlation was obtained. the direct month-to-month correlation yielded, however, a result r = . ( )." this suggests that outside clearings are, in substantial degree, an index of physical trade, but mr. silberling calls attention to certain chance agreements between railway traffic and speculation in cotton and produce and grain, speculation in the crops which are in current movement, and regularly recurring concomitances between traffic and speculation in march, when the railway traffic revives after the february lull, and when there is a large mass of dealing in spring deliveries in chicago. in view of the facts later to be developed, with reference to the small actual value of the necessary physical exchanges (partially covered already) as compared with clearings, this query is well put. we may easily have here a "spurious" correlation. taking it at its face value, however, and taking the correlation as indicating the influence of physical trade on bank transactions, we get the following results, when _total clearings for the country_ are compared with (a) new york share sales, and (b) with railway gross earnings: (a) r = . ( ); (b) r = . ( ). "physically determined trade" is at best a minor factor in that total "trade" represented by bank transactions! mr. silberling has buttressed his results with a consideration of various alternative possibilities which might give them a different interpretation. i need not, for present purposes, go further into his figures.[ ] taken in conjunction with the other data presented, and to be presented, together with the theoretical discussion of the nature of trade, and its relations to money and credit, which the present volume contains, they give the present writer abundant confidence in the thesis that the great bulk of trade in the united states is speculation, rather than that sort of trade which is determined "by physical capacities and technique." the figures given above, of the inventory of wealth at a given moment of time, by the bureau of the census, show only trifling magnitudes, as compared with the estimated billions of deposits made in , of items which could enter into ordinary trade, as distinguished from speculation and dynamic readjustments. an effort to calculate ordinary trade on the basis of figures running through the year may throw further light on the problem. railway, gross receipts for the year ending june , , were less than two and a half billions. this is six-tenths of % of the total. receipts of the western union telegraph company were $ , , --less than one-hundredth of %. the post office in the fiscal year ending in took in $ , , . this is something over one twentieth of %. these are gigantic sums. but they are insignificant indeed in this computation. millions of smaller items simply do not count at all--ten million items of $ each would give only %. the total net income of the united states, as estimated by w. i. king for , including all forms of income, dividends, interest, wages, rents, profits, salaries, etc., is $ , , , [ ]--around % of the billions. let us sum up the major items of ordinary trade. from kinley's figures, we may get some idea of the proportions of wholesale and retail trade to the total for , assuming that the deposit figures indicate that total. retail deposits make up less than one-eleventh of the total, and wholesale deposits about two-elevenths. the figures were: retail, millions, wholesale, millions, and "all other," millions. but the "all other" deposits were lower than normal. new york city was, in the first place, probably less complete than the rest of the country, in the figures returned, and, in the second place, new york city, as shown by the clearings of march (the next day, when checks deposited in new york would get into the clearings) was % below normal. the rest of the country was within % of normal.[ ] not to refine matters too much, we shall, on the assumption that the variable element in new york deposits is connected with the stock exchange (as shown by mr. silberling's correlations and other considerations), and on the assumption that deposits connected with the stock market appear in the "all other" deposits, add a little over % of new york's total of millions, or millions, to the "all other" deposits for the country, leaving the wholesale and retail deposits unchanged. what error there is in this is favorable to the wholesale and retail deposits. our proportions, then, are: retail, , wholesale, , "all other," , total, . if the retail deposits correctly represented retail trade, we could then say that retail trade was a little less than one-twelfth of the whole, and wholesale trade about one-sixth. but there are many speculative transactions engaged in by wholesalers, and a good many by retailers. the writer knows a small delicatessen dealer on amsterdam avenue, in new york, who frequently speculates in eggs and canned goods. a colleague in the harvard graduate school of business administration is authority for the statement that speculation in canned goods and some other things is quite common among retailers, particularly "hedging" by the use of "futures," in canned goods. speculation among wholesalers is very extensive. the same is true of manufacturers. the same authority cited some cotton manufacturers whose profits from cotton speculation are greater than their profits from manufacturing. we shall see reason to suppose that a very substantial part of manufacturers' deposits were included in the wholesale deposits. that the figures for retailers' deposits exaggerate the retail trade may appear from several considerations: ( ) the proportion of checks to cash reported is too high: . %. dean kinley allows % of the checks deposited to be "accommodation checks,"[ ] cashed for customers, rather than taken in in trade. ( ) if retail deposits are taken as exactly representative of retail trade, we should get a retail trade for the year of over billions ( / of billions), which would exceed the total income of the country as calculated by king for . dean kinley reached the conclusion that the retail deposits reported in also exceeded the probable retail expenditures.[ ] of course, not all of retail trade is in consumption goods. hardware stores, lumber stores, and some other retail establishments sell, not only to householders for domestic use, but also things which enter into further production, and so do not come out of annual income. if we include in retail trade various items which were not included there in kinley's figures, such as hotels, theatres, newspaper receipts from subscription and street sales, physicians' fees, etc.--all those items which enter into the domestic budget, including domestic service, we should still not be justified in reaching a total as great as the total income of society, since there would then be no allowance for savings, which we should not count in trade, or for life insurance, which we shall count separately. the items sold at retail which enter into further production cannot make a great total, since large producers buy such things at wholesale. total retail trade, therefore, and, in addition all the other items in the domestic budget, must be held below the figure for total national income. suppose, to be very liberal, we allow billions[ ] for all these items, under the general head of "retail trade." for wholesale trade, if we take the figures at face value, the estimate would be - / billions ( / of billions, or % of billions). but we have seen that there is a great deal of speculation among wholesalers. not all of their deposits, by any means, represent receipts from ordinary business. moreover, there is much overcounting here, several checks being used for one transaction, especially where wholesalers have branch houses, and checks connected with loans and repayments, and transfers of funds from one bank to another. how much we should subtract for this there is no way to tell. in the case of retail figures, we have the additional check of the figures for total net income, but there is no such check here. we shall, therefore, make no subtraction, but shall content ourselves with pointing out that we are allowing many billions[ ] to "ordinary trade" to which it is not entitled, which will much more than offset errors in the opposite direction which the reader may find in our computations. do manufacturers' receipts from first sales belong in the wholesale deposits, or must they be counted as a separate item? dean kinley does not say. in his list of items, as reported by banks, that go in the "all other" deposits,[ ] he does not mention manufacturers, and the item is far too important not to have been mentioned by so careful a writer had he supposed that it belonged there. if manufacturers' first receipts belong, not in the wholesale deposits, but in the "all other" deposits, then we should expect manufacturing cities to show a high percentage of "all other" deposits as compared with wholesale deposits. the city of pittsburg should be a good test case. the figures there, for state and national banks and trust companies, are: _per cent._ retail deposits $ , , . wholesale deposits , , . "all other" deposits , , . for pittsburg, the percentage of "all other" deposits is lower decidedly than the percentage for the country as a whole (about %), much lower than for cities where there is active speculation, as chicago and st. louis, to say nothing of new york, and is closer to the percentage of the south atlantic states, %, than to the average for the country. the wholesale deposits of pittsburg, however, rise to . %, as against an average for the country of %. there is nothing in these figures to suggest that manufacturers' first receipts are exclusively in the "all other" deposits. i should think it safe to hold that a substantial part of them were included in wholesale deposits, and so already accounted for in our estimate. the total value of products manufactured in was $ , , , . i shall allow $ , , , of this to have been already accounted for in our estimate of wholesale trade, and count billions of it as a separate item. if there is an error here, it is very much more than offset by our failure to subtract anything from the wholesale figures for speculation. i think it probable that much more of the figures for manufactures should be assigned to the wholesale figures than i have assigned. to these figures, we may add a number of other items, absolutely great, but insignificant, in comparison with the billions not only, but also with the figures for retail and wholesale trade already reached. these are: total farm value of farm products (not nearly all of which is sold off the farm) $ , , , ; total mineral products, $ , , , ; total mill value of lumber, $ , , ; total life insurance premiums (much of which is savings, and in no proper sense trade), $ , , ; total fire, marine, casualty and miscellaneous insurance, $ , , ; total wages and salaries, $ , , , ; total land rent, $ , , , ;[ ] and the items for railway gross receipts, post office, telegraph, already mentioned. the total of these items, together with retail and wholesale trade and manufactures, is $ , , , . this is only . % of the total of billions. it leaves over billions unexplained. what can the billions represent? there is really no way in which ordinary trade can make up more than a very few more billions, so far as i can see. there remain no items as big as % of the total, and, as we have seen, small items, of hundreds of dollars each, are like "infinitesimals of the second order"--they simply do not count at all when such staggering figures are involved.[ ] there remains, then, a total of billions of check and money payments which are for something other than the ordinary trade of the country. what do these payments represent? much of this total represents overcounting and duplications of various kinds, which we shall consider in a later chapter. much of it also represents speculation and dealings other than speculative in securities. when we seek to find actual figures of transactions in any field, retail, wholesale, or speculative markets, or anything else, it is exceedingly difficult to find anything that approaches the amounts indicated by the banking transactions connected. i do not think that a record of all sales would show retail sales or wholesale sales anything like so great as the figures as we have allowed for them on the basis of the retail and wholesale deposits. when we look at the recorded figures of transactions on the speculative exchanges (or at estimates which competent observers make when records are not available), the figures, though very large, do not begin to equal the banking figures with which we have to deal. the new york stock exchange in showed sales, recorded on the ticker, of nearly million shares of stock, with an approximate value of over billions[ ] of dollars. this was not an extraordinary year. in nearly million shares were sold, in , over millions, in , over millions. a number of other years have approached the figures for . if stock sales be a good index of general speculation, is a very satisfactory year from which to have got figures, as showing neither extreme speculation, nor extreme dullness--which latter was the case in when kinley's other big investigation was made. the figures for shares sold, however, do not exhaust the business done at the new york stock exchange. "odd lots," _i. e._, sales of less than shares, are not recorded on the ticker. mr. byron w. holt estimates that from to % would be added if they were counted. decoppet and doremus, of new york, who handle at least as much of the "odd lot" business as any other new york house, have given me the following information about the "odd lot" business: ( ) the volume of odd lot sales is, roughly, from to % of the volume of hundred share sales; ( ) the odd lot business fluctuates in conformity to the hundred share market; ( ) the odd lot speculator is just as likely to be a "bear" as is the hundred share speculator, and, in general, odd lot business is like the hundred share business. if we take the figure on which these two estimates agree, %, we may add - / million shares to our , getting - / million shares for , with a value of about billions. bond sales recorded would add about billion more. there are, further, some unrecorded sales, indeterminate in amount, but sometimes very substantial, when brokers have a number of "stop loss" orders. they match these before the market opens, and, if the prices are reached in the actual trading, these sales become effective automatically, without getting on the ticker. how extensive this is cannot be stated. it may sometimes add very substantially.[ ] thus, on the floor of the new york stock exchange we have dealings in excess of billions for . this is nearly as large as the figure we have assigned, on the basis of the bank figures, to total retail trade of the country, and it may well exceed the retail trade in fact. recorded sales on other stock exchanges do not, in the aggregate for the country, bulk very large. for , when new york shares reached millions, the total for boston, philadelphia, chicago, and baltimore was something over million shares.[ ] the new york curb has had "million share" days, but the average value of shares is low. but the dealings on the floors on the exchanges and "curbs" are far from all of the dealings in securities! only securities which have been admitted by the authorities are dealt in on the exchanges. the volume of unlisted securities is enormous. moreover, not all, by any means, of the sales of listed securities take place on the floors of the exchanges. the bond expert of a large banking house in boston informs me that the "over-the-counter" business in boston, both for stocks and for bonds, much exceeds the business in the boston stock exchange, and others among boston brokers have expressed the same opinion. the statement has been repeatedly made in the financial press that of the bonds listed on the new york stock exchange, ten are sold over the counter for one sold on the floor. evidence on this point is not to be had in definite figures, of course, but i have found no one in wall street who regards it as extravagant. a single big bank in new york sold $ , , in bonds in --more than half the recorded bond sales on the stock exchange.[ ] i should not know how to estimate the volume of outside dealings within many billions of "probable error." if ten billions of listed bonds are sold over the counter in new york alone, we may well suppose that the volume of over-the-counter sales of listed and unlisted securities at least is not smaller than the recorded sales on the floors of the exchanges. but this is all guess work. there are no definite data. for produce, cotton, and grain speculation we have, in general, estimates rather than records. for the board of trade, in chicago, there is one quite striking piece of information. that is that the federal war tax of cent per hundred dollars on grain and provision futures on the exchanges produced $ , , in chicago alone in .[ ] for the purposes of the tax, deliveries within thirty days were counted, not as futures, but as "spot" transactions. the tax was collected almost wholly on grain. if the above figure is correct, then it is clear that dealings in these futures of over thirty days aggregated billions of dollars worth. this gives no estimate of spot transactions, which are, however, very great. all this trading involved less than , , bushels of grain received at chicago--a little over a billion bushels were received at all primary markets. the grain received at chicago was, thus, (at c. per bushel), sold sixty-two times over in these futures, and an unknown number of times in spot transactions. there are further enormous spot transactions in provisions of various kinds at chicago. chicago is the great centre, of course, for this kind of speculation in the united states. it may well be the world's chief market, so far as futures are concerned, though evidence to establish such a thesis is not at hand. london and liverpool are gigantic centres of commodity speculation. but we have numerous cities in the united states where such speculation is very great. st. louis, kansas city, minneapolis, new orleans, and other cities are active speculative centres. new york, while small in its volume of grain and produce speculation as compared with chicago, is the world's centre for cotton speculation, and the world's centre for futures in coffee, though yielding precedence to havre, santos and hamburg,[ ] ordinarily, in the volume of spot coffee transactions, and though handling only a very small amount of spot cotton. the volume of cotton sold in an ordinary year in new york is , , bales,[ ] though only about , bales are ordinarily received there, in a year.[ ] in the five years preceding , the sales on the new york coffee exchange averaged over million bags of pounds each.[ ] in , million dollars were deposited as margins in connection with this speculation in coffee, and in ordinary years this runs from to millions, according to the treasurer of the exchange. the relation between the margins put up and the total pecuniary volume of trading is not indicated, but in most exchanges the actual depositing of margins is a small fraction of the pecuniary magnitude of the turnovers. both the cotton and the coffee exchanges are international centres. the coffee exchange now handles large transactions in sugar, also. contacts between the organized exchanges and ordinary business are very numerous. producers in every line who can do so protect themselves by "hedging" in the exchanges which deal in their raw materials. this is a commonplace, so far as millers are concerned. the writer has found millers in a town off the main lines of the railroads in missouri who regularly sell short a bushel of wheat on the st. louis merchants' exchange for every bushel they buy to grind. the business man who does not sometime take a "flier" in the market for other than hedging purposes is rare! but, apart from the organized markets there is an immense volume of speculation. if a wholesaler buys only what he can sell to retailers, it is not speculation. but if he buys in excess of the anticipated demands of his retailers, expecting to sell the excess at an advance to other wholesalers, he is speculating. if a farmer buys cattle to feed, he is not speculating, but if he buys them thinking to sell them at an advance in a short time, and does so, the transactions are speculative. the line is not easy to draw, in practice. intention is shifting and uncertain. there is chance in every industrial, commercial, and agricultural operation. but for the point at hand, the test is simple: do more exchanges take place than are necessary, under the existing division of labor, to advance the materials of industry through the stages of production, and get things finally to the consumer? if so, the excess of exchanges is speculative. trading between men in the same stage of production is speculation. it represents trading to smooth out dynamic changes, to bring about readjustments which would have been unnecessary had conditions really been static, and had the initial plans of enterprisers been adequate. trading in anticipation of further trading with men in the same stage of production is speculative. this sort of thing, in the wholesale business, especially, is exceedingly common. this has been noted by professor taussig, and made by him an important point in the theory of crises. dean kinley[ ] called attention to it as a matter of importance in connection with his investigation in . the coming of cold storage, and the development of the canning industry have, i am informed by a colleague in the harvard business school, enormously increased this speculation among both wholesalers and retailers, and it is very important in most wholesale lines. there is short-selling in materials for construction purposes, and in metals, apart from organized exchanges, and, where possible, contractors in the building trade often protect themselves by means of future contracts with speculators who are selling short. land speculation, in varying volume, is found in every part of the country. there is speculation in leases, in options on real estate, and in options on leases.[ ] it may be noticed, too, that sales of "rights," of puts and calls and straddles, and other contract rights, are regular factors in the organized exchanges. wherever profits are to be made by leveling values as between different places or different times, speculation arises, and, with dynamic change, this means everywhere, in every business, and all the time! the shifting of labor and capital from industry to industry, leveling returns to capital and labor, involves an enormous amount of trading that would not occur in a "normal equilibrium." much of this the stock exchange does. that is what it is for. but much of it has to do with unincorporated industry, and a vast deal of speculative exchanging takes place to this end apart from the organized exchanges. speculation in bills and notes, by note-brokers and particularly by dealers in foreign exchange, occurs on a large scale, and accounts for a great deal of the banking figures. this has nothing to do with physically determined trade. from the standpoint of professor fisher's "equation of exchange," it must be barred, if the contention that "trade" is determined by "physical capacities and technique" is to be adhered to. speculation in demand finance bills is barred in any case, since "money against checks," and "checks against checks," are excluded by his definition.[ ] but as an explanation of no small part of our unexplained billions of dollars, these items must be brought in. they are "double counting" from the standpoint of professor fisher's equation. they are, however, speculation. an official in a great new york banking house, in charge of the foreign exchange department, writes that in times when exchange rates are fluctuating, enormous quantities of drafts on europe will be bought and sold, during a period of a couple of weeks or months, whereas under other conditions such transactions might amount to little with the same volume of imports and exports. the part of this which is between banks, a very big item, would not count in the billions, but to the extent that foreign exchange brokers outside the banks participate, their activity helps to explain our billions. if it be true that speculation, including all manner of readjustment to dynamic changes, makes up the overwhelming bulk of trade in the country, then fisher's _indicia_ of variation in trade, weighted as they are, are totally misleading. the same is true of kemmerer's _indicia_ of "growth of business."[ ] these are: population, tonnage entered and cleared, exports and imports of merchandise, postal revenues, gross earnings of railways, freights carried by railways, receipts of the western union co., consumption of pig iron, bituminous coal retained for consumption, consumption of wheat, consumption of corn, consumption of cotton, consumption of wool, consumption of wines and liquors, market values of reported sales on the new york stock exchange. only the last of these is in any sense an index of speculation. it is swallowed up by being put on a par with the other fourteen items. its influence on the final index, made by averaging the others is, as inspection shows, virtually _nil_. out of the twenty-six years his figures cover, the general index moves counter to the share sales times! utterly random figures would have come nearer to the facts in the case. it is particularly striking that professor kemmerer, whose total figures, as professor fisher's, rest for their absolute magnitude on kinley's investigation,[ ] should assign % of his estimated trade ( billions in ) to wholesale commodities,[ ] (with % to wages, and % to securities), when kinley's figures show that wholesale deposits are a minor fraction of the total! the constancy in the figures of these two writers for trade from year to year, a general steady, upward growth, does indeed suggest that trade is determined "by physical capacities and technique," and that it does stand as a great, independent, inflexible factor, independent of money and deposits, constituting a real causal coefficient with them in determining prices. if, however, speculation is as big a factor as our analysis would indicate, then trade is a highly flexible thing, varying enormously from year to year, moved by a multiplicity of causes, among them _fluctuations_ in particular prices, and the ease and tightness in the money market--the quantity of money and deposits. but quite apart from speculation, it is not true that trade is a mere matter of physical capacities and technique, a passive function of production. rather, one would almost have to reverse the relation. production waits on trade! production, as now carried on, is primarily conducted in the expectation of _sale_, and of profitable sale. trade does not go of itself, automatically. rather, it is a highly difficult matter, calling for the highest order of ability, and the labor of innumerable men. in general, i think it safe to say that in ordinary times, the manufacturer loses vastly more sleep over the question of how he shall market his output, than he does over the question of how he shall produce it. a clerk in the westinghouse air brake company, engaged in the accounting department, spoke recently to the writer of the "productive end" of the business. on inquiry, it developed that he meant the selling department! he stated that the manufacturing department also, in the language of the employees, in that corporation, would also be termed "productive," but that the selling department was _the_ productive department. if one reflects a little as to the proportion of "costs" that go into selling, as compared with technical "production," i think my point will be clearer. advertising has developed so enormously that it needs little discussion. it has been stated that the "sapolio" people once tried, after their reputation seemed thoroughly established, to stop advertising, with such disastrous results that very extraordinary efforts were required to reëstablish the brand. number wheat is not advertised, in the great magazines, but innumerable brands of flour get newspaper and magazine advertising,--some of them in such a periodical as the _saturday evening post_, and even those which are locally consumed are commonly advertised in the local press. nor is it only finished products, of the sort that must be sold to the fickle public, that involve these heavy selling costs. the writer has in mind a corporation producing a high-grade type of glazed retort, in the production of which it has virtually a monopoly, since the clay with which it is made does not coexist with the skill to make it in any other place. the particular product is an indispensable part of many important technical processes. substitutes made of other clays, and by other companies, are known by the trade to be unsatisfactory. the buyers are all highly trained business men. here, if anywhere, selling costs should be slight. but the chief selling agent of the corporation has found it necessary, in order to keep the business going, to incur huge expenses for entertaining his customers, finds it necessary to incur great travelling expenses, to use only the most expensive hotels, and, incidentally, to drink a great deal more than his personal inclinations would call for, in keeping the business for his house. i waive discussion of the extraordinary fees which a trust promotor makes, in effecting a consolidation of big business units,--a process of exchange. i am speaking now of the ordinary costs involved in ordinary trade. the army of travelling salesmen, the body of stenographers, who write letters, with various "follow-ups," in the effort to get more business, the growing complexities of such letter writing, in which all suspicion of "circularizing" must be allayed, one-cent stamps being absolutely taboo!--these things are the commonplaces of business. they are in the primers in the "commercial colleges" and "schools of commerce." only the orthodox economist, with his doctrine of the impossibility of general overproduction, is ignorant of them! this feature of modern business has been much elaborated in a recent book which has not received the attention it merits--though its strength is rather in criticism than in constructive doctrine. i refer to dibblee, _the laws of supply and demand_.[ ] dibblee makes an interesting contrast between commercial and manufacturing cities, maintaining that the former necessarily outgrow the latter--a contention which london, new york, chicago and other places strikingly illustrate. he presents a truly remarkable fact about london:[ ] a recent report of the commission on london traffic states that there were in london factories registered as coming under the factory acts, with an average horse-power of . the total power employed within the london area under the factory acts, chiefly used in newspaper printing, was , horse-power--just one-half of what is required for the steamship, mauretania! this is the greatest city in the world. what do its millions do for a living?[ ] the town of oldham,[ ] he asserts, with , inhabitants, has spindle capacity enough to supply more than the regular needs of the whole of europe in the common counts of yarn. to _market_ the output of lancashire, "the merchants and warehousemen of manchester and liverpool, not to mention the marketing organization contained in other lancashire towns, have a greater capital employed than that required in all the manufacturing industries of the cotton trade." accurate estimates of the proportion of "selling costs" to costs of technical production are doubtless impossible, for the general field of trade, and precision is unnecessary for my purposes. dibblee's conclusion, after contrasting retail and wholesale prices, and analyzing the expenses incurred in selling prior to the wholesale stage, is that the cost of marketing is at least equal to "real cost of production," occasionally only slightly below it, and often far above it ( ).[ ] if one considers how large the item of "good will" often bulks in the value of "going concerns"[ ]--good will being in large degree often just a capitalization of prior costs of this nature--dibblee's estimate need not be exaggerated. trade connections, trade-marks that have reputation, etc., often represent enormous output in thought, work, and expense. selling costs may, like other costs, be divided into "prime" and "overhead" costs. some of the latter lead to long-time consequences, pay for themselves only in the long run. these may be "capitalized" in "good will."[ ] of course, not all good will is got at a cost. much of it is adventitious. in the light of the doctrine that trade is independent of money and credit, one wonders why it should be thought necessary to extend branches of american banks to the south american markets which we are now reaching out toward. and why have americans, from the beginning, been constantly increasing commercial banks?[ ] it is easy to sneer at the efforts of the successive frontiers in our history to provide themselves with banks of issue as based on a delusion, the delusion that bank-notes are "capital," and to say that their real need was, not more bank-credit, but more real capital. they needed more tools and live-stock, doubtless, but is that the whole story? and were their banks of no assistance in getting the additional capital of various sorts? and was it a matter of no consequence that they had an abundant medium of exchange? it seems almost childish to put such questions, but the quantity theory has as its logical corollary that to multiply banks is quite useless and wasteful, since the only result is to raise prices. if increasing bank-credit cannot increase trade or production, this corollary is inevitable. indeed, the case may be more strongly stated. quite apart from the wasted labor of bank-clerks and the waste of banking capital, the effect of increasing bank-development, on quantity theory reasoning, is harmful. if increasing bank-credit is to raise prices without increasing trade, then, on quantity theory reasoning, it must _depress_ business. the reason is that rising prices in a given region make that region a bad place to buy in, and so curtail its exports. this is, indeed, the quantity theory explanation of international trade, to which attention is later to be given. the country which is expanding its banking facilities most rapidly will suffer most in competition in the world markets. this is why the united states have so little foreign trade! it also explains the rapid strides that china and central africa have recently made in capturing the world's markets. i submit that there is no flaw in this argument, if the premise of the independence of volume of trade and volume of bank-credit be granted. it follows from the quantity theory. that it is no caricature of fisher's argument will appear, i think, from the following quotation,[ ] which very nearly states what i have just been saying, though it does not draw the conclusion that banking is a bad thing: "the invention of banking has made deposit currency possible, and its adoption has undoubtedly led to a great increase in deposits and consequent rise in prices. even in the last decade the extension in the united states of deposit banking has been an exceedingly powerful influence in that direction. in europe deposit banking is in its infancy."[ ] happy europe, troubled only by war! it is greatly to be hoped, in the interests of american agriculture, that the efforts to increase agricultural credit facilities will fail! we are driven to one of the most fundamental contrasts in economic theory, which appears under various guises and in different forms: statics _vs._ dynamics; transition _vs._ equilibrium, theory of prosperity _vs._ theory of goods; normal tendency _vs._ "friction."[ ] perhaps professor fisher, and the quantity theorist in general, would dismiss many of these considerations as not applicable to the general principle, which is a "normal" or "static" or "long run" law, not subject to considerations of this sort. it is scarcely open to fisher to defend himself this way, because of his exceedingly uncompromising statement regarding even "transitional" relations between volume of trade and money and credit. i shall not reply to anyone who offers such an objection by a general tirade against "static economics." i believe thoroughly in the method of economic abstraction, and in reaching general principles by ignoring, provisionally, in thought the "friction" and "disturbing tendencies" which often make the first approximations look somewhat unreal. but i raise this question: to what feature of our economic order do we chiefly owe it that we can make such abstractions? by virtue of what does friction disappear? what is it that makes our abstract picture of economic life, as a fluid equilibrium, with its nice marginal adjustments, its timeless logical relations, correspond as closely as it does to reality? the answer is: money and credit.[ ] it is the _business_, the _function_, of money and credit, as instruments of exchange, to bring about the fluid market, to overcome friction, to effect rapid readjustments, to give verisimilitude to the static theory, to make the assumptions of the static theory come true. where exchange is easy and friction slight, there will not be two prices for the same good in the same market. speculators, seeking profits of fractions of a point, will prevent that. by multiplying exchanges, they will level off values and prices. because money and credit have done their work so thoroughly in the "great market," it is possible for men to talk about static theory, and to work out economic laws in abstraction from friction, transitions, and the like. in the static state, all speculation is banished. there are no price-fluctuations to be smoothed out, no new prospects to be "discounted," no uncertainties to be guarded against by "hedging." seasonal goods will, of course, have to be carried over from one season to the next, but this will involve merely warehousing and the use of capital--"time speculation," involving many sales, does not come in. one sale to the capitalist who carries the seasonal goods, with a sale by him to the man who means to use them, will suffice. it has been shown before that the great bulk of trade is speculation. but speculation is banished from the static state. speculation is a function of dynamic change, waxing and waning with the degree of uncertainty that exists, the new conditions to which readjustments have to be made, the "transitions" that have to be effected. in other words, the laws governing the volume of trade are dynamic laws, laws of "transition periods," and so the whole notion which underlies the quantity theory, of "normal periods," "static" relations, etc., is here irrelevant. volume of _trade_, as distinguished from volume of _production_, is controlled by the number and extent of the "transitions" that have to be made. the chief work of money and credit is done _in_, and _because of_, "transition periods." assume a normal equilibrium accomplished, and you have little trading left to do. it will still be necessary, if you have the division of labor, and private enterprise, for goods to pass through as many different hands as there are different independent enterprisers in the stages of production, and on, through merchants, to the consumer. it will still be necessary to pay wages, rents, dividends and interest. but there will be no selling of lands, of houses, of factories, of railroads, or of securities representing these. by hypothesis these are already in the hands best qualified to hold them. the "static equilibrium" presents "mobility without motion, fluidity without flow."[ ] the static picture is a picture of completed adjustment, where no one has an incentive to change his work, or his investments, because he has already done the best that he can for himself. it is, therefore, a picture of a situation where there is little incentive for those exchanges which make up the great bulk of the volume of trade in real life. hence the curious phenomenon that very much of static theory has been developed in abstraction from _money_ and _credit_. mill's theory of international values, for example, abstracts from money. "since all trade is in reality barter, money being a mere instrument for exchanging things against one another, we will, for simplicity, begin by supposing the international trade to be in form, what it is in reality, an actual trucking of one commodity against another. so far as we have hitherto proceeded, we have found the laws of interchange to be essentially the same, whether money is used or not; money never governing, but always obeying, those general laws."[ ] other writers have similarly held that money is a mere cloak, covering up the reality of the economic process. schumpeter, for example, holds that money is, in the static analysis, merely a "schleier," and that "man nichts wesentliches übersicht, wenn man davon abstrahiert."[ ] _on the static assumptions_, of the fluid market, with friction, etc., banished, money is, indeed, anomalous and inexplicable. it is a cloak, a complication, a vexatious "epi-phenomenon." there is nothing for it to do, and there can be, consequently, no "functional theory" developed for it. static theory may be ungracious in ignoring its own foundation. but static theory is grotesque when it seeks to support its own foundation! static theory is possible only on the assumption that the work of money and credit has been done. what, then, shall we say of static theory which seeks to explain the work of money and credit? yet precisely this is what is undertaken by the quantity theory, with its "normal" or "static" laws of money and credit. a functional theory of money and credit must be a dynamic theory. to talk about the laws of money, "after the transition is completed" is to talk about the work money will do after it has finished working. for a functional theory of money and credit, we must study the obstacles that exist to prevent the fluid market. we must study friction, transitions, dynamic phenomena. to this problem we shall come in part iii. for the present, i am content to have disproved the quantity theory contention that the volume of trade is independent of the quantity of money and credit. appendix to chapter xiii the relation of foreign to domestic trade in the united states[ ] the word, "trade," as used in connection with statistics of foreign and domestic trade has been irritatingly ambiguous. few writers, in speaking of domestic trade, have meant the same thing by trade that they have meant by the word when speaking of foreign trade, and hence we have had many pointless efforts to institute comparisons between the two, and some very misleading statements about the matter. thus, figures have been offered which would show that the foreign trade of the united states is only a fraction of % of the domestic trade. this conclusion is reached by taking the figures for banking transactions discussed in chapters xiii and xix as representative of domestic trade, and comparing them with the annual figures for exports and imports. this procedure is fallacious for several reasons:[ ] the figures thus reached for domestic trade exceed even the total trading within the country, as shown in chapter xix. in the second place, as shown in chapter xiii, the bulk even of these deposits which do represent real trading grow chiefly out of speculation. even in ordinary trade, goods are counted several times before reaching the final consumer. it is clear, therefore, that even an accurate figure for total trading within the country would have little relevance when we are seeking a figure to compare with exports and imports. nor, if a comparison of the actual trading in which foreigners participate with the trading exclusively between americans is sought, can we take the export and import figures as representative of the foreign trading--they do not include a multitude of highly important transactions in which foreigners participate. very much of the business of the new york cotton exchange, the new york stock exchange, the chicago board of trade, and other speculative markets represents foreign buying and selling, especially arbitraging transactions, and the other "invisible items" of foreign trade need merely to be mentioned for the economist to recognize the fallacy of a comparison which omits them. what figures are relevant when we wish to compare foreign and domestic trade? first we must make clear the purpose for which the comparison is to be made. if we are concerned with the calls made by foreign and domestic trade on the money market, we should make use of a different method of comparison than that which will be here employed. the purpose of the comparison here undertaken is to determine how much of our american labor, land and capital is at work producing for the foreign consumer, as compared with the land, labor and capital in america producing for the american consumer. the comparison here undertaken is concerned with the question which is usually uppermost in the minds of those who undertake such a comparison, namely, _how important_ is our foreign market to us? obviously, for such a comparison as this, we should not count a given case of eggs twelve times merely because it changed ownership twelve times in getting from farm to breakfast table. items of export and import count only _once_ in the figures for export and import. we must find a figure for domestic "trade" in which items count only once, allowing no turnovers of the same goods to swell the total, if we wish to make our figures comparable. the method proposed for making this comparison, for a long series of years, is a modification of the method used by the writer in an article in the _annalist_ of feb. , . a figure based on the bank deposits of _retail merchants_ in kinley's investigation was there taken as properly comparable with the export and import figures. the final sale to consumer by retailer is "the one far off divine event" toward which the whole productive process moves. everything else in production and exchange looks forward to this. ultimately, from the demand of the final consumer comes all the demand that is directed toward the agencies of production, even though the laborer sees his immediate market in the person of the employer, and the capitalist or landlord sees his immediate market in the person of the active business man. the figure reached for retail trade by the method then employed was $ , , , for . this figure was too high, as shown in chapter xiii above, and the figure reached now for retail _deposits_ by the same method is $ , , , . even this figure is too high, however, as i there concluded, to represent retail _trade_, and i shall use it only as a check on king's figure for _the total income of the united states in _, which i shall use as a base figure instead of my own. king's figure for the total income of the united states in is $ , , , .[ ] i take this figure as including all that the american people spend for consumption, with retailers, physicians, hotels, theatres, etc., and also their net savings for the year. part of this they spent for foreign products. the rest they spent at home. this residue spent at home gives us a figure which we may properly compare with the amount the foreigner spends in america, as indicating the ratio of foreign to domestic trade for the purpose in hand. we subtract, in other words, from the figure for total income the figure for _imports_. then we compare the residue with the figure for _exports_, and get our ratio of foreign to domestic trade. the export and import figures must first, however, be reduced to a _retail_ basis. that is, assuming that wholesale prices are two-thirds of retail prices, we add % to the figures for exports and imports (which are wholesale figures) before making the subtraction and the comparison. the ultimate consumer, both in europe and america, pays for imports and exports on a _retail_ basis.[ ] this method, applied to the figures for , gives us a ratio of about : for domestic to foreign trade--the lowest percentage for foreign trade which we shall find for any year in the period investigated, - . this comparison is still unfavorable to foreign trade. domestic trade, in our figures, includes savings and investments, including investments made by americans abroad. import figures are marred by undervaluations, exports are not all counted, and the figures for exports and imports do not include foreign investments in america. american investments abroad should not be counted as part of domestic trade. moreover, our figures take no account of travellers' expenditures, or of services performed by professional men of one country for men in another, or of certain other "invisible items." but while this makes our percentage for foreign trade too low for all years, it probably does not greatly upset the results for yearly variations in the ratio except for the year , when the figure for domestic trade is left decidedly too high, and the ratio for foreign trade is too low, as compared with previous years. for years other than , indirect calculations must be resorted to for domestic trade. i have substantial confidence in the rough accuracy of the figure chosen for in view of the convergence of two widely different sets of data. my figure for retail deposits in is $ , , , . king's figure for total income is $ , , , for . king's figure seems to me a better figure to use for the purpose in hand. i use my own merely as a rough check on his. for years other than , the figure for net income is calculated as a percentage of king's figure for , by means of an "index of variation." it is assumed that the net income of , for example, bears the same relation to the index for that the absolute figure for net income of bears to the index for , and net income for is then computed by "the rule of three." the index of variation chosen is _railway gross receipts_ weighted by _wholesale prices_. i think that railway gross receipts are, on the whole, the most dependable and easily manageable index of physical volume of production that we have, though recognizing difficulties, later to be discussed, in using them for the purpose in hand. railroads touch virtually every kind of business in the country. variations in the _pecuniary_ volume of production and consumption, however, if due to rising or falling _prices_, rather than to changing physical volume, would not be indicated by changes in railway gross receipts. the same volume of transportation might represent widely varying pecuniary values of goods transported. railway rates do not vary from year to year with prices of goods, even though high-priced goods are normally charged higher rates than low-priced goods. the index, therefore, must include _prices_ as well as physical volume of transportation. for , therefore, railway gross receipts and an index of prices are multiplied together, and counted as %. the same thing is done for railway gross receipts and prices for other years, and the results reduced to percentages of the result for . the figure for net income in any other year is then readily computed as a percentage of the figure for . the results, for the years - , appear in the tables below.[ ] it may be noticed that my figures for net income in and do not correspond very closely with the figures for the same years as independently estimated by king. my figure for is $ , , , , where his is $ , , , ; for , my figure is $ , , , , where his is $ , , , . i am inclined to the view that the figures in my tables come closer to the facts for these years than do his figures, assuming that _his figure_ for is correct. it will be noticed that on his figures there was an increase of about % from to , and an increase of only about % in the decade following. this seems to be an unlikely relation. one would expect a much greater rate of increase for the decade - , as compared with the preceding decade, than king's figures show. the period from to included the terrible panic of and the prolonged depression ensuing. the panic in was trifling in comparison, and recovery, as shown by our index numbers in the tables below, was very much quicker. moreover, falling prices characterized much of the earlier decade. the highest prices of the whole ten years were in . the period from to is a period of rapidly rising prices, on the whole. on the basis of our general knowledge of the two periods, one would expect a greater percentage gain by far for the second decade, and i therefore trust the results of the index of variation here chosen, which show that. similar results are obtained by applying to the base figure for an index of variation derived from kemmerer's and fisher's figures for trade[ ] and prices. my figure for may, moreover, be checked by comparison with the figure given by c. b. spahr in _the present distribution of wealth in the united states_ (p. ) for the net income of the country for that year: $ , , , . it may be that my figure for is too low, but i have not sought to "doctor" it by an arbitrary "correction factor" to make it correspond more closely than it does with the other estimates. it is striking enough that a figure derived from an index of variation, twenty years away from its base, should come as close as this to figures calculated from wholly different data. one brief comment may be made on the significance of these figures. it may be questioned if figures showing the proportions of our industry devoted to supplying goods for the foreign market correctly indicate the importance of the foreign market to us. it may be urged that if we should lose our foreign market, we should merely turn to producing more for the domestic market, and that the loss would not be the whole of our receipts from foreign trade, but merely the cost of transition, and the loss that comes from shifting to production to which we are less suited. this is, doubtless, true. but the loss reckoned this way may well be greater than the loss reckoned on the basis of my figures! it is equally true, moreover, that our domestic trade is not important to the extent indicated by my figures, since if we lose part of our domestic trade, our producers will turn to supplying more for the foreign market. but one must not regard the cost of transition as a negligible matter! the cost may easily be prolonged depression. certain parts of our foreign trade are really vital to us, both on the import and (to a less degree) on the export side. the most important practical use to which the figures here given may be put are in connection with short-run problems. foreign trade is so important to us that any sudden alteration in its amount may bring great adversity or great prosperity--as the course of the present war abundantly testifies.[ ] an application of our method to the years and gives a percentage for foreign trade of . in , and . in .[ ] certain other cautions are needed in presenting these figures. for one thing, variations in railway rates will make a given volume of gross earnings mean different things in different years as to the physical volume of traffic. in the writer's opinion, which is confirmed by professor w. z. ripley, there is no possible way of making allowance for this, as the cross-currents affecting railway rates are altogether too numerous and obscure. nor has any effort been made to allow for variations in the proportions of freight and passenger receipts, or of different classes of freight traffic. again, the proportions of railway traffic connected with foreign trade may vary greatly, and it may happen that a big increase in railway gross receipts is due to increasing foreign trade, primarily. there is reason to suppose that much of the increase of is to be explained that way. this makes our comparison for particularly adverse to foreign trade, since we count as domestic trade what is really foreign trade. the figures, however, are presented as they stand. moreover, for , the great increase in foreign trade is in _exports_. merchandise imports are not much greater than in previous years.[ ] our exports have been chiefly paid for by "invisible items," gold and securities, and short term credits. these do not appear anywhere in our figures. a substantial source of error appears from this cause in our figure. i should think it safe to put the ratio for foreign trade to domestic trade for at above %, instead of the . % our table shows. the reader will wish to know for a given year how much of the increase or decrease is due to physical growth of business, as represented by railway gross receipts, and how much is due to changes in prices. to give this information, and to make it easy for a critic to check the results, a table showing the index numbers from which the figures for net income are computed is subjoined.[ ] table i[ ] ratio of domestic trade of foreign trade of foreign calendar net income united states = united states = to years of the net income minus exports at retail domestic united imports at retail prices trade states prices $ , , , $ , , , $ , , , . % , , , , , , , , , . % , , , , , , , , , . % , , , , , , , , , . % , , , , , , , , , . % , , , , , , , , , . % , , , , , , , , , . % , , , , , , , , , . % , , , , , , , , , . % , , , , , , , , , . % , , , , , , , , , . % , , , , , , , , , . % , , , , , , , , , . % , , , , , , , , , . % , , , , , , , , , . % , , , , , , , , , . % , , , , , , , , , . % , , , , , , , , , . % , , , , , , , , , . % , , , , , , , , , . % , , , , , , , , , . % , , , , , , , , , . % , , , , , , , , , . % , , , , , , , , , . % , , , , , , , , , . % , , , , , , , , , . % , , , , , , , , , . % table ii. index numbers from which the figures for net income are derived composite net income[ ] dun's prices r. r. gross index, r. r. gr. of the united calendar with base receipts, rcts. multiplied states in years in reduced to by prices. billions of base of (column × dollars: column .) : . ::( ):$ . . . $ . billions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . chapter xiv the volume of trade and the volume of money and credit in the argument so far i have said nothing of the reverse relationship, the dependence of the volume of money and the volume of credit on trade. the two are indeed _inter_dependent. interdependence suggests circular theory, and is often a phrase to cover circular reasoning.[ ] in the case of the relation under discussion, however, i have, i trust, already abundantly protected myself against the charge of circular reasoning by _denying_ that either volume of money and credit on the one hand, or volume of trade on the other hand, is a true cause at all. both are mere abstract names, designating highly heterogeneous individual occurrences, which, _individually_ are cause or effect. in general, both volume of money and credit, on the one hand, and volume of trade on the other hand, are results of common causes, which are the _veræ causæ_ of economic phenomena--values, psychological phenomena. the whole thing is to be explained immediately and primarily in terms of social relationships and mental processes,--in terms of social values. to show that increasing trade tends to increase money and credit is not difficult. if one may venture a hypothetical illustration--and the sort of hypothetical illustrations, like the dodo-bone case, of which quantity theorists are fond make one hesitate to do so--let us assume a communistic community, isolated from other markets, with a developed system of production, including an extensive use of gold in the arts. let the communistic régime gradually pass over to an individualistic régime. assume that the inhabitants are acquainted with the use of gold as money, and that their government is willing to coin it freely. as individualism spreads, and trade grows, will not more and more gold be taken to the mints? i am not here concerned with the principles determining the apportionment of gold between the money employment and the arts. it is enough to show that expanding trade tends to increase the volume of money. assume that the money supply meets difficulties in its expansion. is there not at once an incentive to extend credit? the seller finds his customers unwilling to buy for cash, in amounts as great as before. in order to sell as much as before (assuming that the use of credit is known, to avoid trouble with historical origins), he extends credit,--which, when practiced generally, lightens the strain on the money supply. i have so far said nothing of the case where there are stocks of the money metal to be got from outside markets. but if a country is expanding its trade, does not money come in? the quantity theorists would, indeed, admit this, in general, though their reason is a bad one, namely: that expanding trade lowers prices, and lower prices make the market attractive to foreign buyers, who then send in money for the goods. i shall later discuss this aspect of the theory.[ ] for the present, i merely interject the question as to the probability of an expansion of trade when prices are falling. increasing _stocks_ of particular goods may well mean lower prices for these goods and if they be articles of export the lower prices may well increase the export trade, and bring money in. but this increase in _stocks_ of articles of _export_ is very different from total _trade_ within the country; and lower prices in articles of export are very different from a generally lower price-level.[ ] will expanding trade in a country increase credit? i come here to one of the striking features of fisher's doctrine--a feature in which i think he is fundamentally true to the quantity theory. he finds no way in which expanding trade can directly increase credit. expanding trade can increase credit, (a) only by changing the habits of the people, so as to alter the ratio, m to m´, or (b) by reducing the price-level, and so bringing in money from abroad, whence, as m is now increased, m´ rises proportionately. "an increase in the volume of trade in any one country, say the united states, ultimately increases the money in circulation (m). in no other way could there be avoided a depression in the price-level in the united states as compared with foreign countries. [he should say, from the standpoint of his theory, that increasing trade will cause a fall in the price-level, and so bring in more money.] _the increase in m brings about a proportionate increase in m´._[ ] besides this effect, the increase in trade undoubtedly has some effect in modifying the habits of the community with regard to the _proportion_ of check and cash transactions, and so tends somewhat to increase m´ relatively to m; as a country grows more commercial the need for the use of checks is more strikingly felt."[ ] in a footnote to this paragraph, he defines the issue still more sharply. "this is very far from asserting as laughlin does that 'the limit to the increase in legitimate credit operations is always expansible with the increase in the actual movement of goods'; see _principles of money_,[ ] new york (scribner), , p. . we have seen, in chapter iv, that deposit currency is proportional to the amount of money; a change in trade may indirectly, _i. e._, by changing the _habits_ of the community, influence the proportion, but, except for transition periods, it cannot influence it directly."[ ] my own explanation of the causal sequence whereby expanding trade brings money into a country would be radically different from that given by fisher in the first quotation. i should expect, first, that rising _prices_ would encourage rising trade; i should then expect the rising volume of trade, with higher prices, to lead borrowers to need, and secure, larger loans from the banks, with, as loans and deposits rise in proportion to reserves, some slight increase in "money-rates," just enough to draw to the country the extra gold which bankers felt desirable to add to their reserves. i should expect the causal sequence to be the exact reverse of that which fisher indicates. with falling prices, or waning volume of trade--which would usually come together,[ ]--i should expect loans to be reduced, deposits to be reduced, money-rates to fall, and gold then to leave the country again. i should expect this sort of thing to happen normally, and not infrequently, and i should expect gold to come in and go out many times in the course of a business cycle. this would seem to be the sort of explanation which our modern theory of _elastic_ bank-credit would give in connection with this problem. i shall not here go into details with the theory of elastic bank-credit. the theory has been too well established in the debates between the "currency school" and the "banking school"[ ] in regard to bank-notes to need elaboration and defence here, and the essential identity of deposits and elastic bank-notes from this angle is one of the commonplaces of the literature of banking. what i am here concerned with is the highly significant fact that fisher's "normal" theory finds no place for this highly important phenomenon. the quantity theory has no explanation of elasticity to give. on the basis of the quantity theory, and for all that the quantity theory can say, the currency school was right! fisher offers us, virtually, a "currency theory" of deposits. "suppose, as has actually been the case in recent years, that the ratio of m´ to m increases in the united states. if the magnitudes in the equations of exchange in other countries with which the united states is connected by trade are constant, the ultimate effect on m is to make it less than what it would otherwise have been, by increasing the exports of gold from the united states or reducing the imports. in no other way can the price-level of the united states be prevented from rising above that of other nations in which we have assumed this level and the other magnitudes in the equation of exchange to be quiescent." (p. .) if "bank-notes" be substituted for "m´", in this quotation, we have here a perfect statement of the position of the "currency school" in that great debate. must this old issue be fought all over again? and yet, i defy any consistent quantity theorist to find any flaw in fisher's argument on this point. there is no place for a theory of elastic bank-credit within the confines of the quantity theory. fisher's recognition of this seems full and complete. he relegates all mention of elastic bank-credit to "transitions." the footnote quoted above, in which laughlin's (somewhat extreme) doctrine based on the theory of elasticity is stated, denies categorically that there is any validity in it, except for transition periods. there is nowhere in the book any explanation of the theory of elasticity.[ ] the references to it are few and grudging, and _always_ in connection with the notion of transitions. the most important statement regarding elasticity (less than a page long) is on page , where again transitional influences are under discussion. what is a theory of money worth which can offer no explanation of so fundamental, important, and notorious a feature of modern money and banking? there is a further, related, feature of banking for which the quantity theory can find no explanation. among the items in a bank's balance sheet, the quantity theorist seizes upon reserves on the assets side, and deposits on the liability side, and builds his theory on the supposed close relation between them. we have seen that this close relation does not, in fact, exist. the range of variation is enormous.[ ] but there is one close relation in the balance sheet of the bank concerning which the quantity theory is silent, and that is the relation between deposits and _loans_. for individual banks and for banks in the aggregate, for long run periods and for short run periods, for reasons that are clear and inevitable, these two magnitudes (or for banks of issue on the continent of europe, _notes_ and loans), vary closely together. the relationship between them is the only relationship which does stand out as clearly beyond dispute, among all the items in the banking balance sheet. no assumptions of a "static state" are needed for its demonstration! the relation varies, of course. as banks increase or reduce their capital, as their reserve-percentages rise or fall, as they increase or decrease their holdings of bonds, we find reasons which alter the proportion between deposits and loans. but, despite this, the variation, as shown by figures for the united states, is slight. assume, for example, a statement showing "loans and discounts" of $ , , , deposits, $ , , , cash reserve, $ , . reserves are then % of deposits, and loans are % of deposits. if reserves be increased by $ , and loans and discounts reduced, to compensate, by $ , , we have a % variation in the ratio of reserves to deposits, with only a % variation in the ratio of loans and discounts to deposits. since cash reserve is much the smaller item, almost always, the same absolute variation in it will affect it, in percentage, vastly more than it will affect loans and discounts. it is strange that a theory should seize on this highly variable ratio of reserves to deposits, and ignore the much more constant ratio[ ] of loans and discounts to deposits. that this close relation between deposits and loans should obtain follows naturally from the theory of elastic bank-credit. the two are built up together. when there are expanding business and rising prices, men borrow more from the banks; as they borrow, they receive deposit credits; the individual who receives the deposit credit may check against it, but it is redeposited by another man, and so, while the deposits of one bank need not grow out of its loans, still, for banks in general, deposits are large because loans are large. for a given bank, the relation holds closely, because the bank lends, in general, to active business men, who will have income as well as outgo, and whose income will, on the average, at least balance their outgo. thus, _through loans_, deposits are linked with volume of trade and prices. trade and deposits wax and wane together.[ ] on the other hand, in the absence of rising prices and increasing trade, reserves may increase greatly without forcing an increase in deposits. loans cannot increase without an increase in deposits. the linkage between deposits and trade is definite, causal, positive, statistically demonstrable. the linkage between reserves and deposits is, at most, negative--if reserves get too low, deposits and loans may be checked in their expansion. but this--to the extent that it is true, which we leave, for detailed analysis, for part iii--gives a very much looser relation indeed than the direct relation between loans and deposits. the quantity theory has offered no explanation of this relation between loans and deposits. what explanation could a theory offer, which rests in the notion that volume of trade on the one hand, and volume of money and bank-credit on the other hand, are independent magnitudes?[ ] i do not mean that quantity _theorists_ are silent regarding the relation of loans and deposits. i mean that they do not attempt, in any discussion i have found, to apply the quantity _theory_ to the explanation of that relation. what shall we say of a theory which, ignoring these easily proved, easily explained, and vital facts regarding bank-credit, offers as its sole explanation of volume of bank-credit a theory so untenable as that of a fixed ratio between volume of bank-credit and volume of money _in circulation_, with causation running from money to deposits? professor fisher says little about bills of exchange. here, surely, we have a credit instrument which grows directly out of trade, in general, and whose volume expands and contracts with trade. when banks discount bills of exchange, and issue notes, or grant deposit credits, against such discounted bills, the connection of bank-credit and volume of trade is obvious. the same thing holds largely, however, when promissory notes are discounted. such notes are usually given by those who plan to use the credits granted in commercial or speculative transactions. the bill of exchange differs from the promissory note in practice, however, in that it itself is often a medium of exchange, without going into the bank's portfolio. "the bill of exchange, therefore, before it gets to the bank _usually_[ ] performs a series of monetary transfers, for the small dealer naturally prefers to pass on the bill, if possible, in making a payment, instead of handing it over to his bank, which would either deduct a certain percentage in the way of discount, or else accept the bill at its face value, crediting the customer with the amount on the date of maturity, while business men (other than bankers) are in the habit of taking bills of exchange as they would cash."[ ] this quotation describes conditions in germany. the same authorities (p. ) give figures showing a rapid development in the volume of bills of exchange, rising from about billions of marks in to about billions in . these figures show that bills of exchange are a big factor in german business life,--a conclusion that is strengthened when they are compared with the figures for giro-transfers on pp. - of the same article, or with the figures for note issue on p. .[ ] in the united states, of course, the use of bills of exchange has become comparatively unimportant in domestic commerce,[ ] though there is a movement to revive them, since the new federal reserve system has come in. their chief importance is in connection with foreign trade. is it possible that professor fisher's reason for wishing to minimize foreign trade[ ] is the unconscious desire to get rid of the annoying bills of exchange, which so obviously tend to make bank-credit and volume of trade interdependent, and which further spoil the quantity theory by serving as a flexible substitute for both money and deposits? i regret the necessity for this elementary exposition of familiar things. but fisher's theory has no place for these familiar things--and fisher has merely made very explicit the logic of the quantity theory! as applied to modern conditions, the quantity theory is obliged to assert--and fisher does assert: (a) that there is a causal dependence of bank-credit on money, and "normally" a fixed ratio between them; (b) that velocity of circulation of money and credit instruments are independent of quantity of money and credit instruments; (c) that, in general, money and volume of credit (taken together), velocities, and trade, are independent magnitudes, each governed by separate laws, though fisher concedes _some_ reaction of trade on velocities; (d) in particular, that volume of money and credit has no influence on trade, and that trade has no direct influence on volume of credit. all these doctrines are necessary if the contention that an increase of money will proportionately raise prices is to be maintained, or if it is to be maintained that a decrease in trade will proportionately raise prices. i have analyzed each of these contentions, and i find justification for none of them. not yet, however, have we reached the least tenable aspect of the quantity theory. there remains the contention that prices are passive, that a change, _originating_ in prices, and involving a change in the average price, or the general price-level, cannot maintain itself--that p is a passive function of the other five magnitudes of the equation of exchange. to this central fortress of the quantity theory we shall devote the next chapter. chapter xv the quantity theory: the "passiveness of prices" is the price-level passive? is it true that while change may occur from causes outside the equation of exchange in volume of money, volume of trade, and velocities of circulation, a change in the price-level from causes outside the equation is impossible? must the average of prices be a passive function of m, the v's, m´ and t? such is the general contention of the quantity theory, and such, very explicitly, is fisher's contention. the price-level is always effect, and never cause (with slight modifications of the doctrine for transition periods) in its relations to the other magnitudes in the equation of exchange. now in one sense, it is my own contention that the price-_level_ can never be a _cause_ of anything. the price-level is an _average_. averages may be _indicia_ of causation, but they are not themselves causes. they are not, in reality, anything _at all_. causation is a matter which pertains to the particulars of which the average is made. but this is not the doctrine of the quantity theory. the quantity theory does, in certain connections, assign causal influence to the level of prices, particularly in the theory of foreign exchange, where the explanation of international gold movements rests on the doctrine that a price-level in one country, higher than the price-level of another country, drives money away.[ ] it will be seen, in a moment, that fisher relies on this principle to prove that the price-level of a country cannot rise without an increase of money--if it did so rise, it would drive out the money, and so be forced down again. the point at issue may be stated in terms of particular prices. the quantity theory is that, while particular prices may rise from causes affecting them, as compared with other prices, without a change in money, velocities, etc., still there cannot be a rise in the general average, because other prices will be obliged to go down to compensate. the issue is as to the possibility of a rise in particular prices, uncompensated by a corresponding fall in other particular prices, without a _prior_ increase in money, or velocities, or decrease in trade. i take up the issue in this form. i shall maintain that particular prices can, and do, rise, without a _prior_ increase in money or bank-deposits, or change in the volume of trade, or in velocity of money or deposits and also without compensating fall in other particular prices. putting it in terms of fisher's equation, i shall maintain, as against fisher, that p can rise through the direct action of factors _outside_ the equation of exchange, that as a _consequence of such rise_ the other factors readjust themselves, and that a new equilibrium is reached which, in the absence of new disturbances from causes outside the equation, tends to be as permanent and stable as the old equilibrium was. in the argument which follows, i shall respect thoroughly the distinction between "normal" and "transitional" effects. i do not think that this distinction is properly drawn by fisher. in my discussion of the relation between the volume of bank-credit and the volume of trade, and in other connections, i have shown that fisher leaves out of his normal theory most of the concrete factors which do affect both the concrete magnitudes, and the long run _averages_, of the factors in his own equation. but for the present, i shall meet him on his own ground, give his distinctions their fullest weight, and carry my argument through the "transition" to a point where no further change among the factors in the equation can be expected as a consequence of the initial change assumed. fisher's argument to show the passiveness of prices takes the form of a _reductio ad absurdum_. "to show the untenability of such an idea let us grant for the sake of argument that--in some other way than as effect of changes in m, m´, v, v´, and the q's--the prices in (say) the united states are changed to (say) double the original level, and let us see what effect this will produce on the other magnitudes in the equation."[ ] then, if the equation of exchange is to be maintained, either m or m´ or their velocities must be increased, or trade must be reduced. but he holds that none of these is possible. ( ) money will be reduced. high prices drive money away to other countries. nor can gold come in via the mints. "no one will take bullion to the mints when he thereby loses half its value."[ ] on the contrary, men will melt down coin. nor will high prices stimulate mining. rather, by raising the expenses of mining, they will discourage mining. ( ) bank-deposits cannot increase. bank-deposits depend on the amount of money, and as that is reduced, they must be reduced, to keep their normal ratio to the volume of money. ( ) the appeal to velocities is no more satisfactory. these have been already adjusted to individual convenience.[ ] ( ) nor can trade be decreased. since the average person will not only pay, but also receive, high prices, there is no reason why he should reduce his purchases. "_the price-level is normally the one absolutely passive element in the equation of exchange._"[ ] "but though it is a fallacy to think that the price-level in one community can, in the long run, affect the money in _that_ community, it is true that the price-level in one community may affect the money in _another_ community. this proposition has been repeatedly made use of in our discussion, and should be clearly distinguished from the fallacy above mentioned. the price-level in an outside community is an influence outside the equation of exchange of that community, and operates by affecting its money in circulation and not by directly affecting its price-level. _the price-level outside new york city, for instance, affects the price-level in new york city only_ via _changes in the money in new york city_."[ ]... "were it not for the fanatical refusal of some economists to admit that the price-level is in ultimate analysis effect and not cause, we should not be at so great pains to prove it beyond cavil." to explain this "fanatical refusal," fisher alludes to the "fallacious idea" that the equation of exchange cannot determine the price-level, because the price-level has already been determined by other causes, usually alluded to as "supply and demand." he urges, however, that supply and demand, cost of production, etc., relate, not to the price-level, but only to particular prices: that the price-level is a factor prior to, and independent of, the particular prices, and is presupposed by theories like supply and demand, cost of production, etc.[ ] the _reductio ad absurdum_, at first blush, looks impressive. one obvious criticism suggests itself, however, and it will be found to give a clue to a much more fundamental criticism: is it reasonable to assume a doubling of _all_ prices? above all, must the assumption involve the doubling of the price of gold bullion? part of the argument to show that gold bullion would not be minted rests on that assumption. but, more fundamental, for such an all round doubling of prices, no _cause_ could be assigned. of course the hypothesis of an increase in prices without any cause is absurd, and fisher easily disposes of it. but suppose we assign some _concrete causes_, outside the equation of exchange, which might affect prices, and see how the thing works then! fisher states on p. that "other elements in the equation of exchange than money and commodities[ ] cannot be transported from one place to another." and in the passage quoted above he maintains that price-levels in one country can influence price-levels in another country, or even price-levels in one city can influence price-levels in another city, only _via_ changes in money, in the second country or city. but other elements in the equation are _directly_ transferable, in fact. _deposits_, _e. g._, in london, to the credit of new york bankers, may be transferred to paris, directly, by _cable_ or by _letter_, and _prices_ are constantly being directly passed from one country or market to another by the same media. let us suppose a strong case, to put our principle in relief. assume an island, which produces a staple widely used, whose chief centre of production is outside the island. assume that this staple, an agricultural product, rises greatly in price, owing to a blight, which promises to be permanent, in the main producing region. the blight does not affect the island, however. let this product be the main product of our island, which we shall assume to be small. let the island have communication with the outside world by boat only once in three months. let it be, however, in constant communication by cable. word comes by cable of the rise in the price in the staple. the staple at once rises in the island. no new money has come in to cause it. will this be a rise in the price-level? will there be compensating reductions in the prices of other things to leave the price-level unchanged? what prices can fall? not the prices of goods that have been imported to the island, surely. they will rather tend to rise, because everybody on the island will feel richer than before, and will be disposed to buy more freely. meanwhile, merchants and bankers on the island will be more ready to extend credit than before, so that they will be able to buy more freely. what else can fall? not the prices of the land! rather, the land will rise in price greatly, because the increased price of the staple, expected to be permanent, will promise bigger rents, and the price of the land, being a _capitalization_ of the annual rental, will rise very much more than anything else--it will rise to the extent of the capitalized price of the increase in the rents. wages, likewise, will rise, since the price of the product of labor has risen. and the capital instruments in use in producing the staple will also rise, though not so much as land and wages, inasmuch as they can be brought in from outside at the end of three months. what is there that can fall--except, perhaps, such goods as are exclusively designed for the construction of poorhouses! a significant particular price rises--that is the first step; then, from causes familiar to all students of economics, other related prices rise; there is a general _sympathetic_ rise in prices, the _price-level_ has risen independently, from causes _outside the equation of exchange_. but now, can this rise sustain itself? well, what can bring it down? when the ship comes, at the end of three months, it will bring in additional supplies of the articles of import, and they will go down to their old level. will they go any lower than the old level? what is there to cause them to do so? the outside price-level should be higher now, rather than lower, since the _stock_ of the staple in question is reduced, and nothing else increased to compensate. nor can any reason be assigned why other prices on the island: the staple in question, lands, wages, etc., should fall at all from the level they reached when the news first came. incidentally, our ship may also bring in more gold. the bankers, finding their deposits expanding, may feel it well to cable orders for more gold to increase their reserves, especially as they have been subject to somewhat unusual calls for cash for hand to hand circulation--though this last need they might well have been meeting by expanding their note issue. is there anything else to be said? is not the new equilibrium stable? and is not the causal sequence precisely the reverse of that assigned by the quantity theory? _first_. a rise in prices; _second_, an expansion of credit, book-credit, notes and deposits; _third_, money comes in. if anyone is particularly anxious about the equation of exchange in this process, he may add to my expansion of credit an increase in velocities to keep it straight! i may add that i see nothing in the "transition" i have described to cause trade to be reduced. rather, i should expect the rising prices to make trade more active--or better, i should expect the rising _values_ of goods, etc., of which rising prices are the symptom, to make trade more active, particularly as there would be an increase in speculation to bring about readjustments, and to "discount" the prosperity. nor can i find any reason why trade should be reduced below the old level in the new normal equilibrium. it would make no difference, however, if trade were reduced either transitionally or normally, since the point at issue is the possibility of a rise in prices originating from causes outside the equation of exchange, and compelling a readjustment of a permanent character in the other factors of the equation. the quantity theorist is at liberty to make this readjustment in any way he pleases. my point is made if he has to make the readjustment, and if the price-level stays up! i have put my illustration in an extreme form to throw the whole thing in relief, and to make the demonstration free from a host of complexities. but is not the causal process essentially the same if we substitute, say, the southern states for our island, and cotton for our staple? so long as the telegraph bringing news of the ruin of cotton production in india and egypt, with the higher price of cotton, can come in ahead of the money that the quantity theorist might imagine rushing in a race with it on the train to be offered for the cotton, my point is made. in point of fact, there would be a general rise in prices and wages in the south, which, leading to an expansion of credit, would only gradually and in no definite ratio lead to an increase in money drawn from outside. buyers outside would pay, not with money, but with checks drawn on new york, and southern bankers would use their discretion as to how much actual cash they would bring in. with the elastic note issue of our federal reserve system, i see no reason to anticipate that money would be drawn to the south in an amount proportionate to the increase in prices. even if it were, the causation would not run from money to prices, and that is the point at issue. if _rising_ prices can cause increasing money, the whole quantity theory is upset, whatever the proportions involved. it will be noted that my illustration might be put partly in the form of the supply and demand argument. increasing demand for cotton in the south leads to higher price of cotton; higher price of cotton makes cotton-growers richer, and enables them to increase their demand for imported goods, for land, and for labor. supply and demand comes into conflict with the quantity theory, and does not suffer in the conflict! supply and demand determine particular prices, and particular prices determine the price-level! now i wish to generalize this point. i shall show that the quantity theory conflicts with most of our doctrines of prices, as worked out in our systems of economics. i shall show that, in important cases, the quantity theory conflicts with the law of supply and demand, with the doctrine of cost of production, with the capitalization theory, and with the doctrine of imputation as worked out by the austrians, whereby the prices of labor, land, and other agents of production rise or fall with the prices of the consumption goods which they produce. i shall show the conflict in important cases, and shall show also, in those cases, that it is not the quantity theory which can be sustained. the general form of the conflict may be stated for all these theories. they are theories of the _relations_ of particular prices, concerned with showing that individual prices are so related that they tend to _vary together_. a rise in one price, according to these theories, tends to bring about _rises_ in others, and _vice versa_. the quantity theory, on the other hand, asserts a relation among individual prices such that a rise in one tends to bring about a _fall_ in others--it requires a _compensatory_ fall at one point, if there has been a rise somewhere else. let us take some cases. i shall take, first, the conflict between the quantity theory and the capitalization theory, as i can use the illustration just given in connection with it. i have, in a preceding chapter, given a statement of the capitalization theory. it is a theory concerned with the prices of long-time goods and income-bearers, as lands, houses, capital goods of various sorts that give forth their services through a series of years, stocks, bonds, etc. the prices of things of this sort, according to the capitalization[ ] theory, depend on two factors: one, the money income expected from the income-bearer, the other, the prevailing rate of interest. this money income, except in the case of bonds, commonly depends on the prices of the products of the income-bearer, or (in the case of stocks) of the products of the concrete capital-goods to which the income-bearer gives title. if we may follow the austrian division of goods into higher and lower "orders," or "ranks," we may say that the prices of the goods of higher ranks are the capitalizations of the prices of the goods of lower ranks specifically produced by them. thus, concretely, if the price of wheat rises, we may expect the prices of land to rise, if the rate of interest remains the same. if the price of steel rises, we may expect the stocks of the u. s. steel corporation to rise, also. if the prices of smokeless powder, and other war munitions soar, we may expect the prices of the stocks of the corporations involved to do precisely what they have done in the recent course of the stock market. all this, on the assumption that the rate of interest does not change, and that the risk factor remains constant. if these factors vary, the results will not present the mathematical exactitude that the formula calls for, but the general tendency will remain the same. on the other hand, if the incomes remain unchanged, but the rate of interest rises, then we may expect the capitalized prices to fall, and if the rate of interest falls, we may expect the capitalized prices to rise. from the standpoint of the present discussion, i suppose it might be fairest and best to state the capitalization theory on this point as fisher himself states it. in his _elementary principles of economics_ (ed. ) after giving a table showing in figures the difference made in different capital prices by different rates of interest (p. ) he states ( ): "if the value of the benefits derivable from these various articles continues in each case uniform, but the rate of interest is suddenly cut down from % to - / %, there will result a general increase in the capital values, but a very different increase for the different articles. the more enduring ones will be affected the most." and in his book, _the rate of interest_: "the orchard whose yield of apples should increase from $ , worth to $ , worth would itself correspondingly increase in value from, say, $ , to something like $ , and the ratio of the income to the capital value, would remain about as before, namely, %." (p. .) on the next page, he generalizes his notion: "one cannot escape this conclusion (as has sometimes been attempted) by supposing the increasing productivity to be universal. it has been asserted, in substance, that though an increase in the productivity of one orchard would not affect the total productivity of capital, and hence would not appreciably affect the rate of interest, yet, if the productivity of all the capital in the world could be doubled, the rate of interest would be doubled. it is true that doubling the productivity of the world's capital would not be entirely without effect upon the rate of interest; but this effect would not be in the simple direct ratio supposed. indeed, an increase of the productivity of capital would probably result in a decrease, instead of an increase, of the rate of interest. _to double the productivity of capital might more than double the value of the capital._" (_rate of interest_, p. .)[ ] fisher reiterates this doctrine in his reply to seager, in the _american economic review_, sept. , pp. - . now my concern here is not with the points at issue as between fisher and seager: the "impatience" vs. the "productivity" theories of interest. for the present, i shall accept fisher's doctrine on that point as true.[ ] i am here interested in fisher's doctrine that a doubling of the general productivity of capital would double, or more than double, the prices of capital instruments, including land. how is such a general rise in prices possible, if the quantity theory be true? is not this a rise in general prices from causes outside the equation of exchange? that fisher means the _money-prices_ of capital goods when he speaks of capital-values is perfectly clear. in the second quotation, he speaks of "capital-value of $ , ", and in general, his definition of value runs in terms of _price_ (_e. g., purchasing power of money,_ pp. - , and _elementary principles_, p. ). fisher has no absolute value concept in his system. we have in the passages cited two doctrines, both of which contradict the quantity theory: ( ) that a reduction in the rate of interest will raise capital-prices (which are the largest factor by far in the price-level), and ( ) that an increase in the product of capital goods means, not only more money paid for the products, but also more money paid for the production-goods. incidentally, the general imputation theory would call for more money paid to laborers as well. how can all this be, on the quantity theory? and what can the poor equation of exchange do in such a case, if money does not increase, if bank-credit is limited by money, if velocities of circulation are fixed by individual habits and convenience, if trade _increases_ as a consequence of the increased number of goods produced, and if prices rise? it will not help much to assume that the productivity of gold mines is doubled also. the quantity of money does not depend very much on the annual production of gold. besides, money need not, from the standpoint of the quantity theory, be made of gold. it might be irredeemable greenbacks, fixed in quantity by law, or even dodo-bones! would not the capitalization theory apply in the greenback period? i shall not try to solve the riddle. i am not responsible for it! the conflict between the capitalization theory and the quantity theory may be more simply stated. assume that the prices of consumers' goods and services rise, quantity of money and volume of exchanges remaining unchanged. on the quantity theory, other prices, the prices of producers' goods and services, lands, and securities, would have to come down enough to compensate, in order that the price-level might remain unchanged. for the capitalization theory, however, the prices of lands, securities, and long time capital goods in general would have to rise, since the incomes on which they are based have risen. wages of labor engaged in making consumers' goods would also have to rise, on the general imputation theory. the quantity theory conflicts with the capitalization theory. the quantity theory as presented by fisher conflicts with the capitalization theory as presented by fisher. which theory is true? would prices rise thus, or would they be held down in some way by the limitations on the quantity of money? i hold that i have already proved, in the reasoning given in connection with my hypothetical island, and in the case of the south with its cotton, that the capitalization theory tendency would prevail. the prices of products rise, and then the prices of the labor, land, and other capital goods which have produced them, rise, the rise in the prices of the capital goods behaving in accordance with the laws of the capitalization theory, and all of the rises after the initial rise in products being in accordance with the imputation theory of the austrians. this conflict suggests an interesting point. various elements in our economic theory, added from time to time by different writers, have necessarily come from different philosophical and sociological view-points, and have behind them different philosophical, psychological, and sociological assumptions. the quantity theory, developing, as shown in the chapter on "supply and demand and the value of money," largely in isolation from the general body of economic theory, has a background of psychological and sociological assumptions quite different from that of many other doctrines. in the chapter on "dodo-bones," i stated these assumptions. the quantity theory rests in a psychology of blind habit. it assumes a rigidity in the social system such that it might be likened to a machine, with a hopper into which money is poured, which grinds out prices at the other end. i set this in contrast with the psychological assumptions underlying the commodity theory of money. that theory rests on the "banker's psychology." it assumes a highly reflective and calculating attitude on the part of economic men, with the disposition to look behind appearances for the security, to test things out, to get to bedrock in business affairs. now the capitalization theory likewise assumes this banker's psychology. in its refinements, as represented by the mathematical formulæ in the appendices of fisher's _rate of interest_, it assumes a degree of precision in business calculation which few experts in bond departments apply, and which the highly fluid and alert dealers in wall street certainly have not time for, even if they had that degree of mathematical knowledge! in practice, it need not be said, particularly in the case of the prices of lands, the capitalization theory finds its predictions very imperfectly realized! but the two theories, resting in such divergent psychological assumptions, may be expected, _a priori_, to conflict. that they do conflict is not remarkable. i shall show a similar conflict between the quantity theory and the law of costs. in general, the quantity theorist thinks that he has reconciled his theory with cost theory by pointing out that reduced costs manifest themselves in increasing production, which means increasing trade, which should, on the quantity theory, mean lower prices.[ ] i need not, for my purposes, analyze this doctrine in detail, though i am disposed to consider it an accident that the two theories converge at this point. for the present, i shall analyze a case where reducing costs actually come as a consequence of the _reduction_ in the volume of trade, and inquire whether such a case will lead, as the cost theory would assert, to lowered general prices, or, as the quantity theory would assert, to _higher_ general prices. the case is that where by improved methods of handling goods, it is possible to dispense with middlemen. concretely, assume that retailers of milk get in direct touch with dairymen, so that middlemen are eliminated, and that as a consequence the price of milk is reduced two cents a quart. what of the general price-level? t (trade) is reduced. there are less exchanges. volume of trade does not mean volume of goods _produced_, but volume of _exchanges_. with a reduced trade, the quantity theory must assert that prices of commodities other than milk must, on the average, rise, not merely enough to compensate for the fall in milk, but more than that, enough to compensate for the reduced trade as well. but how can the other prices rise? well, a point comes up obviously: the buyers of milk save two cents a quart. they can spend it for something else. this will raise the prices of other things. but, on the other hand, the middlemen now have less to spend. they have _exactly as much less_ as the others have _more_, the extra money that milk buyers have being, in fact, the money that the middlemen would otherwise have had. the one offsets the other. there is, then, no reason for the average of other prices to rise. suppose we carry the process one step further. after a while, the middleman will find other work to do. then they will have incomes again to spend. but in going to work again, they will be engaged in production, and so will, in general, be increasing the volume of trade. the quantity theorist could not expect a rise in prices from this! and here we are given a clue to a fundamental confusion in the quantity theory, a confusion which, accepted by the reader, gives the quantity theory much of its plausibility. i refer to the confusion between _volume of money_, and volume of _money-income_.[ ] the two need not be the same. the two generally are not the same. in the case i have described, the one has changed without a change in the other. now if one wishes to view the process of price-causation from the standpoint of money offered for goods,--an essentially superficial,[ ] but frequently useful, view-point--it is clearly money-_income_, rather than mere quantity of money in the country that is important. into the determination of volume of money-income, however, come factors of a high degree of complexity, among them, prices for which there is no possible place within the confines of so simple and mechanical a doctrine as the quantity theory. in passing, i notice a point to which i called attention in discussing fisher's factors in the equation of exchange. i refer to his definition of velocity of circulation as the average of "person-turnovers" of money.[ ] in the illustration given, there is no reason to suppose that this average is changed. the middlemen simply drop out of the average. they have no money to turn over! but velocity of circulation, defined as "coin-transfer," (_cf._ _supra_, p. ) has clearly changed. the course of money has been short-circuited. it goes through fewer hands in the course of a given period. this last concept of velocity of circulation is clearly the one that must be used, if the equation of exchange is to be kept straight. but this fact should make it clear that velocity of circulation, instead of being the inflexible thing that fisher has described, resting in individual habits and practices, a true causal factor in the price making process, is really a highly flexible thing, in large degree a passive function of trade and prices. with this distinction between volume of money and volume of money-income[ ] clearly held, we are prepared to go further in our attack on the quantity theory, granting the quantity theorist all his most rigorous assumptions, and still demonstrating that prices can vary independently, without prior change in quantity of money, volume of trade, or velocity of money. let us assume the extreme case of the quantity theory: a closed market; no credit; no barter; a fixed supply of money; a fixed volume of trade; a fixed set of habits affecting velocity, namely, that everyone spends, in the course of the month, all that he has accumulated by the first of the month. the quantity theorist could not ask a more iron-clad set of assumptions than this! if the quantity theory is not valid here, if the price-level is not absolutely fixed, helpless to change, with these assumptions, then the quantity theory, even as a minor tendency, must be surrendered, and the quantity theorist must admit that the whole line of thought has been fallacious. but is the price-level passive? suppose we assume a combination of employers of maid-servants, which forces down the wages of maid-servants from $ to $ per month. assume further that there is no alternative employment for the maid-servants, so that they all remain at work.[ ] so far, we have made a change in _one_ price, the price of domestic service. what of the general average of prices, the price-_level_? well, so far, the price-level is down. if nothing else takes place, we have reduced the price-level by reducing one price. what else can take place? two things: ( ) the masters now have $ per month each more to spend for other things than before. that tends to raise prices in their other channels of expenditure. ( ) the maid-servants now have $ each less to spend,--the same ten dollars! that lessens prices in the lines of their expenditure. these last two changes exactly neutralize one another. the first change, in the price of domestic service, remains unneutralized. the general price-level is, then, lowered--by a cause acting from outside the equation of exchange, directly on prices. the first change comes in one price. in the final adjustment, that change remains unneutralized. how is this possible? is the equation of exchange still valid? as a mathematical formula, yes. as expressing a causal theory, in which prices are effect, and money, trade, and velocity causes, no. the equation is kept straight by a reduction in velocity. _because_ the wages of maid-servants are reduced, _less_ money goes through their _hands_; $ per month per maid are short-circuited. but the _cause_ is with the _prices_. the price-level, even under these absolutely rigorous assumptions, is not passive. in general, i conclude that the price-level, under the laws governing particular prices, supply and demand, cost of production, the capitalization theory, the imputation theory, etc., can vary of its own initiative, independently of prior changes in the quantity of money, or of volume of trade, or other factors that the quantity theory stresses; and that these changes in the price-level (or in the particular prices which govern the price-level) can maintain themselves, and compel a readjustment in trade, credit, money and velocities, to correspond. this conclusion strikes at the very heart of the quantity theory, and, if valid, leaves the quantity theory disproved. more fundamentally, i should put it, prices can change because of changes in the psychological values of goods. these values are _social_ values, and are to be explained only by a social psychology. but for the present it has seemed best to me, as a means of attracting sympathetic attention from a wider circle of economists, to make use of the less debated doctrines of the science in attacking the quantity theory. it is not necessary to rest the case on my own special theory of value. supply and demand, cost of production, the capitalization theory, the imputation theory--the general laws of the concatenations and interrelations of prices--are quite adequate for the confutation of the quantity theory. they are laws concerned with particular prices, and the price-level is nothing but the average of particular prices. whatever explains, really explains, the particular prices, also explains the price-level. fisher, as we have seen, is not of this opinion. although he has defined the price-level as an average of particular prices[ ] he none the less exalts this average into a causal entity, prior to and master of the particular prices out of which it is derived, of which it is a mere average.[ ] this average, he maintains, is presupposed in the determination of all particular prices.[ ] this seems to me a wholly untenable position. _ex nihilo nihil fit._ there cannot be _more_ in the average than there is in the particulars from which it is derived. in point of fact, there is necessarily vastly less. all the concrete causation is lost. the average, in itself, is nothing but a _statement_, a summary of _results_. i know nothing more metaphysical in the history of economic theory than this hypostasis of an average.[ ] i reject fisher's notion that the average of prices is an independent entity. but i do not consider that the idea lying behind this untenable doctrine is absurd. cost of production, supply and demand, and the other price theories _do_ presuppose something more fundamental. they do presuppose _money_, and the _value_ of money, as has been shown at length in part i. the trouble with fisher's notion comes in his definition of the value of money in purely relative terms as the _reciprocal of the price-level_, and his contention that the study of the value of money is identical with the study of price-levels.[ ] value is not a mere exchange relation.[ ] rather, every exchange relation involves _two_ values, the values of the two objects exchanged. these two values _causally_ determine that exchange relation. in the case of particular prices, then, we must consider not only the value of goods, but also the value of money. and the causes determining the general price-level will therefore include not alone the values of goods, but also the value of money. in the foregoing arguments by which i have shown that the price-level can vary independently of the other factors in the quantity theory scheme, i have been concerned only with changes in the values of goods, measured by a constant unit of value. if the value of money should also be varying, the concrete results on the price-level would have been different. on the face of things, there was nothing in the cases i discussed to require us to suppose that the value of money would also vary. the argument ran on the assumption of a fixed value of money. i have shown, in earlier chapters, that the assumption of a fixed value of money is fundamental to the laws of supply and demand, cost of production, and the capitalization theory. in point of fact, this assumption is rarely true--never strictly true. for causes which are in considerable degree independent of the causes governing the values of goods (as the causes governing their values are in considerable degree independent of one another), the value of money varies, now in the same direction as the values of goods in general, now in an opposite direction. further, money itself does not escape the general laws of concatenation of values. the value of money has causes which are bound up with the values of other goods. thus, when prices are rising and trade expanding, there is a tendency--commonly a minor tendency--for money also to rise in value, and so prices do not go quite as high as they would have gone had money remained constant. this tendency arises from the fact that there is more work for money to do in a period of active trade and rising prices. gold also tends to rise in value in the arts, with prosperity. the reverse tendency manifests itself when prices are falling: money tends, in some measure, to fall in value with the goods,[ ] and so prices do not fall as far as they would fall if money remained constant. but in general, the causes governing the values of goods, and the causes governing the value of money, are sufficiently independent to justify us in studying each separately, in abstraction, on the assumption that the other is unchanged. hence, supply and demand, cost of production, and the other price theories, which assume a fixed value of money, are proper tools of thought for the study of the prices of goods. chapter xvi the quantity theory and international gold movements the quantity theory explanation of international gold movements is as follows: if money comes into a country, it raises prices. if the price-level of the country is raised more rapidly than the price-levels of other countries are rising, then the country becomes a bad place in which to buy and a good place in which to sell; its exports fall off, its imports increase, and finally the inflow of money is checked, and, perhaps, money flows out again. the equilibrium of the gold supplies of different countries is thus dependent on the price-levels of the countries involved. the quantity of gold in a country determines its price-level, and no more gold can stay in a country, on this theory, than that amount which keeps its price-level in proper relation to the price-levels of other countries. it is not necessarily asserted that the price-levels of all countries must be equal--the facts too obviously contradict that. but when this precise statement is not made, the substitute statement of some "normal" relation between the price-level of one country and that of another becomes a very vague one, and the theory becomes pretty indefinite. i am here concerned chiefly with one contention: the price-_level_, the average of prices, is not a _cause_ of anything--not of gold movements or anything else. it is a mere summary of many concrete prices. some of these concrete prices have highly important influence on international gold movements, tending, if they are low, to bring gold in, and if they are high, to repel gold. others work in the opposite direction, tending if they are low to attract less gold than if they are high. finally, among all the prices affecting international gold movements, the one which is most significant is commonly not included in the price-level at all: i refer to the "price of money," the short-time interest rate. let me elaborate each point. first, it is true that high prices of articles which enter easily into international trade tend to repel gold from the country--meaning by "high prices" prices that are higher than the prices of the same goods abroad. this relates, however, not to the general price-level, but only to a comparatively small set of prices. most prices in a country are not prices of articles of international trade. high wages may, indeed, draw in immigrants. but high land rents, and high prices of land cannot bring in land. nor do high land prices send away much gold to other countries for the purchase of land there. indeed, within a single country, the differences in the relation between land yield and capital value of land are enormous. the following figures are taken from an article by j. e. pope:[ ] in yazoo co., mississippi, farm lands are sold at $ to $ per acre. the average gross income per acre is $ . in cass co., iowa, the land prices are from $ to $ per acre while the gross income amounts to only $ per acre, if only crops and dairy products are taken into account, and to $ if the sales of live stock are included. in oglethorpe co., georgia, the average price is from $ to $ per acre, and the average income $ . in paulding co., ohio, land is sold at from $ to $ per acre, and the average income per acre, including returns from live stock sold, is $ . why should not landowners in cass county, iowa, sell their comparatively unproductive land, at a high price, and go, with their money, to yazoo county, mississippi? the answer is simply, that they would have to go _with_ their money, and they prefer to stay at home! absentee landlordism is not generally popular with men who are seeking paying investments. land stands at one extreme. but then land is the very biggest item in an inventory of wealth, and, while not _as land_, actively bought and sold,[ ] it is a big element in the values of many active securities. the principle holds in less degree of many other things, however. the securities of a local corporation, say a gas plant, find their best market at home, as a rule, unless the city be large. if they are held by foreign capitalists, they still find a very restricted market in the foreign country. only those who have investigated at first hand will feel free in buying them--unless, indeed, they are guaranteed in some way by a big and well-known house. prices of personal and professional services vary enormously in different sections of the same country, to say nothing of variations between different countries, and there is a very slow movement indeed toward bringing about higher salaries for rural preachers in kansas because the salaries of london preachers have risen, or because of increased demand for preachers in germany. great numbers of commodities are too bulky to move far. their prices vary with little relation to similar prices elsewhere. but the principle needs no more elaboration. if the reasoning be simply that men tend to buy where things are cheap, and to sell where things are dear, it is clear that that establishes a very loose relation indeed between the price-levels of different countries. the second point is that some prices, by rising, actually bring in gold from abroad, while by falling they tend to release gold. i am not here referring to the case discussed in the chapter on "supply and demand," where a commodity, cotton, with an inelastic demand, is doubled, the doubled quantity selling for a less aggregate price, and so bringing in less money from abroad. that case would bear considerable generalization. i am referring here to the case where _credit_ is built on the value of long time goods, as lands, or railroads. concretely, let us suppose an increase in railroad rates allowed by the public service commission of missouri. this is, in itself a rise in prices. it will, further, on the capitalization theory, make the prices of stocks of the roads operating in the state rise also, and give a margin of additional security for bond-issues. this will make it possible for these roads to float foreign loans (or would have done so before the war), and so will tend to turn the exchanges in our favor. gold will tend to come in, not to go out. similarly if the prices of dairy products, or truck gardens, or orchards, or orange groves rise, leading to a rise in the prices of the lands involved, foreign capital will tend to come in as loans--_i. e._, the exchanges will turn more favorable to us, and the gold movement tend to turn our way. i suppose, by the way, that something of a point could be made against the single tax at this point: destroying land values would lessen the security which a community could offer outside lenders. the single tax would, thus, hamper the development of countries which need capital from outside. men who wish to use their own capital, under their own management, might, as the single taxers claim, be tempted to come in, if they could be free from taxation on the capital they bring with them; but _lenders_, who wish a good margin of security, would find less inducement to lend.[ ] this is a digression, but one feature of it is pertinent: though the foreigner does not care to migrate from his high-priced land to _low_-priced land elsewhere, he is often willing to trust a _loan_ to the owner of _high_-priced land elsewhere. i will not venture the generalization that high-priced land necessarily attracts loans, and tends to turn the gold movements in favor of the country where prices are high. the point has been made that if lands are being exchanged frequently, the new buyer tends to exhaust his credit resources in paying for the land: _i. e._, puts so large a mortgage on it that he has little margin of security to offer for working capital.[ ] i shall not here undertake to determine how far as a matter of fact, in different places, the one tendency outweighs the other. it is enough to point out that in many cases, where this factor is absent (as in the case of the railroads cited), rising prices attract, and do not repel, foreign gold, and that for none of these cases is the consequence of rising prices for the gold movements to be explained in the simple way that the quantity theory doctrine would require. finally, the international movements of gold[ ] are enormously moved by the short-time rate of interest. the raising of the bank rate in england, supplemented, when necessary, by "borrowing from the market" by the bank of england, as a means of making the bank rate effective, quickly turns the course of the exchanges. this is, as has been pointed out, a more effective device when used by the english money-market than when used by borrowing countries, since the borrower, by offering higher rates, is not always able to borrow more, whereas the lender, by demanding higher rates, is usually able to reduce his loans. but the difference is one of degree, and in point of fact a rise in the short time rates in new york city is commonly an effective means of bringing in gold from abroad. it is true that this is not the only factor. i have been at pains to point out how other factors work. i am as far as possible from denying the powerful influence of the "balance of trade" as treated by the older economists on international gold movements, when both visible and invisible items are included. but my point is, first, that these invisible items are numerous and flexible, and that a big factor in their determination is the short time rate of interest; and second, that the balance of physical items, even, depends, not on the price-level as a whole, but merely on the prices of those particular goods which enter into foreign trade. it is perfectly possible, and, indeed, is very common, for rising prices in a country to lead to expanding trade and expanding bank-credit, which causes bankers to wish to expand their reserves, which leads them to raise their rates on short time loans, which leads gold to come in from abroad. more simply still, the bankers may merely offer an attractive rate to the foreign bankers, and establish credits abroad, against which they draw "finance bills," which influence the gold movements in the desired manner. chapter xvii the quantity theory _vs._ gresham's law there is a pretty obvious conflict between the quantity theory and gresham's law. the latter is, essentially, a "_quality_" theory of money. for the quantity theory, dodo-bones, or anything else will do. "it is the number, and not the weight, that is essential"![ ] for gresham's law, the weight makes all the difference in the world, if it is a question as between full weight and light weight coins, and, in general, the _value_ of the thing of which money is made, considered in its commodity aspect, is the starting point of that doctrine. the quantity theorist seeks, indeed, to harmonize the two. his theory is that gresham's law manifests itself only when there is a _redundancy_ of the currency due to the issue of paper money, or overvalued metal. in such a case, prices rise, he holds, and then the undervalued metal, or the metallic currency, which count no more than the paper or the overvalued metal in circulation, tend to leave the country, to another country where prices are lower, or tend to leave the money use for the arts. but the quantity theorist must maintain that it is only _via_ increased issue, with consequent rising prices, that gresham's law comes into operation. if there are a million dollars of gold in circulation, and a half million of irredeemable paper is added, then only half a million of the gold (or rather a little less than half) will leave. if more than that left, prices would fall, because of the scarcity of money, and then the gold would come back, because it would be worth more in concurrent circulation with the paper than it would be worth as money abroad, or in the arts. on the quantity theory, there can be no difference in the value of gold and paper, in such a case, after enough gold has left to balance the paper that has been issued. falling prices would prevent it. but gresham's law is not held by any such fetters! and the facts of monetary history, in important cases, show gresham's law controlling, despite the quantity theory. i will refer briefly to two such cases. the first centres about the suspension of specie payments by the northern banks and the federal treasury on january , . this suspension was not accompanied by any increase of money. rather, there was a _decrease_,[ ] shortly following, in the amount of paper money. the banks in new york, and certain other states, were bound so strictly by their charters, and by the state laws, that they dared not leave their notes unredeemed. speculators, buying notes at a discount--for virtually all bank-notes fell to a discount--were able to present them to the banks in these states and demand gold, which led to a very profitable business. the banks protected their gold by ceasing to issue notes, or by reducing the volume of note issue. certified checks were used to a considerable extent instead. there was certainly no increase, and probably a reduction, a considerable reduction, in the volume of bank-notes in circulation. the only other paper money in circulation was the demand notes of the federal government, which were not increased after the date of the suspension, and which were in any case small in volume as compared with the total amount of money. on the quantity theory version of gresham's law, there was nothing to drive gold out. gold was _not pushed out_ by redundant currency. rather, it _left_, leaving a monetary vacuum behind. coincidently, strangely enough, prices _rose_. the vacuum in the money supply was so serious, that the subsequent first issue of the greenbacks brought a welcome relief. throughout the whole of the first year of the suspension, the volume of money was less than it had been in the preceding year. none the less, the gold stayed out of general circulation. it did not come back from abroad. and prices _rose_.[ ] a similar episode, the obverse of this, occurred when the bank of england _resumed_ specie payments in the early ' 's. then gold came back, the currency was increased, and, coincidently, _prices fell_.[ ] i conclude that the conflict between gresham's law and the quantity theory is real and fundamental, and that in cases where different _qualities_ of money are in concurrent circulation, the undervalued money will leave, regardless of the question of quantity. chapter xvii the quantity theory and "world prices" some writers, who would call themselves quantity theorists, would repudiate many of the doctrines for which fisher stands, and which the historical quantity theory involves. the recognition which fisher's book has received from quantity theorists generally, justifies me in treating his book as the "official" exposition of the modern quantity theory, and, indeed, it is easy to show that fisher is fundamentally true to the quantity theory tradition. with many writers, the disagreement with fisher would be a mere matter of degree; they would hold that fisher has set forth the central principle, that his qualitative reasoning is correct, but that the relations among the factors in his equation are less rigid than he maintains. as i reject even the qualitative reasoning by which fisher defends his doctrine, and reject even the qualitative tendency which he maintains, my criticisms will apply as well to the position of this group of writers, though i should have less practical differences with them, to the extent that they admit qualifications and exceptions to fisher's doctrine. there is, however, a group of writers who seem to feel that the quantity theory remains sufficiently vindicated if it can be shown that an increase in _gold production_ tends to raise prices throughout the world, while a check on gold production tends to lower prices, and who rest their case on the necessity which bankers find of keeping reserves in some sort of relation to the expansions of bank-credit. a view of this sort is presented by j. s. nicholson, whose statement of the application of the quantity theory to the modern world differs almost _toto coelo_ from his original statement in the dodo-bone illustration already discussed. nicholson[ ] declares that in our modern society "the quantity of _standard_ money, other things remaining the same, determines the general level of prices, whilst, on the other hand, the quantity of _token_ money is determined by the general level of prices." nicholson's reasoning is, substantially, as follows: although the bulk of exchanging is carried on by means of credit devices, there is still a certain part of exchanging, especially in the matter of paying balances, for which standard money only can be used. he regards the whole credit system as based on standard money, and says that for any given level of prices there is a minimum amount of standard money, absolutely demanded. if the volume of standard money falls below this minimum, the price-level will fall to such a point that the volume of standard money is again adequate. he takes, moreover, a world-wide view, declaring that it is the relation between the volume of gold money throughout the world and the demand for standard money throughout the world which determines the relative values of money and commodities. "the measure of values or the general level of prices throughout the world will be so adjusted that the metals used as currency, or as the basis of substitutes for currency, will be just sufficient for the purpose. we see then, that the value of gold is determined in precisely the same manner as that of any other commodity, according to the equation between supply and demand." in the consideration of this doctrine, let us note several points in which it differs fundamentally from the quantity theory proper, and from the situation assumed in the dodo-bone illustration. first, it is not a quantity theory of _money_. money is not regarded as a homogeneous thing, each element having the same influence on prices. rather, _token_ money is the child of prices. this doctrine would in no way fit in with the logic of the equation of exchange, as presented by fisher. further, the dodo-bone idea is entirely gone. _gold_, a commodity with value in non-monetary employments, is under discussion, and it is the quantity of gold that is counted significant. this recognizes, if not the need, at least the _existence_, of a commodity standard. nicholson definitely avows the necessity for the _redemption_ of representative money, even going so far as to say that "all credit rests on a gold basis,"[ ] that all instruments of exchange derive their value from the volume of standard money which supports them, and that if this basis were cut away the whole structure would fall. nicholson recognizes, further, that gold has value independent of its use as money.[ ] in evaluating nicholson's doctrine, i wish to point out, first, the inaccuracy of the statement that all credit rests on a gold basis. it is true that credit instruments are commonly drawn in terms of standard money, which is commonly gold. international credit instruments may even specify gold, and the same thing happens at times within a country. but commonly, in this connection, gold functions, not as the value basis lying behind the credit instrument, the existence of which justifies the extension of the credit, but rather as the _standard of deferred payments_, by means of which the credit instrument may be made definite. the real basis of the value of a mortgage is not a particular sum of gold, but rather the value of the farm, expressed in terms of gold. the basis of a bill of exchange is not a particular sum of gold, but rather is the value of the goods which changed hands when the bill of exchange was drawn,[ ] supplemented by the other possessions of drawer, drawee, and the endorsers through whose hands it has gone. even a note unsecured by a mortgage, or not given in payment for a particular purchase, is based, in general, on the value of the general property of the man who gives it, and on the value of his anticipated income.[ ] so throughout. credit transactions, for the most part, originate in exchanges, and carry their own basis of security in the goods and securities which change hands, not in that small fraction of the world's wealth, the stock of gold, which could, coin harvey asserted in the middle ' 's, be put in the chicago grain-pit! and now let me extend this idea. although coin made from the standard of value is a great convenience, there is yet no vital need, in theory, for a single dollar, pound or franc made from the standard of value. if gold should cease entirely to be used as a medium of exchange, or in bank or government reserves, if the gold dollar should become a mere formula, so many grains of gold, without there being any coins made of it, still, so long as that number of grains had a definite, ascertainable value, commensurate with the value of some other commodity which could be used as a means of paying balances and redeeming representative money, the gold dollar could still serve as a measure and standard of values. in the situation i have assumed, silver bullion, at the market ratio, could perform all the exchange and reserve functions now performed by gold, even though not so conveniently.[ ] nicholson's description of the use of gold as a reserve, while calling attention to an important fact, has led him into the error of supposing that what may be true of gold, the _medium of exchange_, and _reserve for credit operations_ is necessarily true of the _standard of value as such_. nicholson is correct, however, in looking to the standard of value for part of the explanation of changes in prices. and, _since it so happens_ that a considerable part of the value of the standard of value comes from its employment as medium of exchange and reserve, he is correct in looking to its use as money as part of the explanation of its value. his error comes, however, in failing to see that independent changes in the values of goods may also change the price-level, and that variations in the demand for gold as a commodity may also change the value of gold, and so change the price-level. further, in so far as nicholson clings to the notion of prices as depending on a mechanical equilibration of physical quantities, he is subject to the criticisms given before of the general quantity theory, and in so far as he clings to the identity of the value of gold with the reciprocal of the price-level,--the relative conception of value--he is subject to the criticisms already urged. again, even for a single country, the connection between volume of reserves and volume of credit is very loose and shifting. a thousand factors besides volume of standard money in a country determine the expansions and contractions of credit, and the long run average of credit. for the whole world, this connection is even looser. to assume a fixed ratio between them for the whole world, one would have to assume that all the world was simultaneously, and normally, straining its possibility of credit expansion to the utmost, so that the minimum ratio--a notion which is far from precise[ ]--should also be the normal maximum, and so that no country, in expanding its credit, could draw in new reserves from other countries which had more quiescent business conditions. nicholson's notion of the world price-level, moreover, is subject to the criticisms i have made in the chapter on "the quantity theory and international gold movements." how can the world level have a close connection with the volume of gold, if different elements in the world price-level, the price-levels of different countries, can vary so widely and divergently as compared with one another? even granting--which i do not grant, and which i maintain i have disproved--that the price-level in one country has a close connection with its stock of gold, would it not be true that the average price-level for the world would vary greatly, with the same world stock of gold, depending on which countries had the gold? there is nothing in nicholson's doctrine which seems to me to justify in any degree the doctrine that prices, in a single country, or in the world at large, show any tendency to _proportional_ variation with the quantity of money, or with the world's stock of gold. is it not true, then, that there is _some_ sort of relation between gold production and world prices? it is. gold is like other commodities. its value tends to sink as its quantity is increased. as its value sinks, prices tend to rise. as to the elasticity in the value-curve for gold, i think it will be best to reserve discussion till a later chapter,[ ] in part iii. we shall there find reason for thinking that gold has much greater elasticity in this respect than most other commodities. that its value should fall _proportionately_ with an increase in its quantity, i should not at all conclude. even if its value did sink proportionately with an increase, prices would rise proportionately only if the values of goods remained unchanged. but why do we need a _quantity theory_ of _money_, with all its artificial assumptions, and its law of strict proportionality, to enable us to assert the simple fact that gold, like other commodities, has a value not independent of its quantity? what theory of money would deny it? surely not the commodity or bullionist theory. for that theory, which seeks the explanation of the value of money in the value of gold in the arts, it would go without saying that an increase in the supply of gold for the arts would lower its value there and consequently, its value as money. surely the theory which i shall maintain in part iii of this book will not deny that increased gold production tends to lower the value of money, and consequently to raise prices. with the "quantity theorist" who is content with this conclusion, i have no quarrel--unless he claims this obvious truth as the unique possession of the quantity theory! chapter xix statistical demonstrations of the quantity theory--the rediscovery of a buried city in the following chapter, as in most of the preceding chapters, constructive doctrine is aimed at, even though the discussion takes, in considerable part, the form of critical analysis of opposing views. we shall seek to set forth the facts, as far as may be, regarding the relations of banking transactions to trade, the relations of clearings to amounts deposited in banks, the relation of new york city clearings to country clearings, and of new york bank transactions to bank transactions in the rest of the country. we shall seek to ascertain the extent of variability in that highly elusive magnitude, "velocity of circulation," particularly "v´." we shall indicate something of the bearing of index numbers of prices on the theory of the value of money as here presented. in reaching conclusions on these and related matters, we shall build on the investigations of dean kinley, on the very interesting statistical studies of kemmerer and fisher based on kinley's figures, on investigations more recently made by the american bankers' association regarding the relation of bank transactions and bank clearings, on figures from reports by the comptroller of the currency, as well as on other sources. one purpose of the chapter is to criticise the statistics which purport to prove the quantity theory. the bulk of the chapter is given to this. but the work of fisher and kemmerer thus criticised yields rich rewards for the study. the conclusions they have drawn from their figures are, in the judgment of the writer, untenable, but the figures themselves are of immense interest and importance. the controversy over the quantity theory has been waged with many weapons. theory, history, and statistics--to say nothing of invective!--have been freely employed. in large measure, the statistical studies have been concerned with the direct comparison of quantity of money and prices, in their variations from year to year. one of the best of these studies, that of professor wesley c. mitchell, in his _history of the greenbacks_ (followed by his _gold, prices and wages under the greenback standard_), has, to the minds of many students, including the present writer, put it beyond the pale of controversy that the fluctuations in the gold premium, and in the level of prices, in the united states during the greenback period, both for long periods and for daily changes, were not occasioned by changes in the quantity of money,[ ] but rather, primarily, by military and political events, and other things affecting the credit of the federal government, together with changes affecting the values of gold and of goods. professor mitchell's discussion is so detailed and thorough, that what controversy remains relates, not to his facts, but rather to the possibility of interpreting those facts in harmony with the quantity theory, by repudiating the notion that the direct comparison of gold premiums or of prices with quantity of money gives a valid test.[ ] recent defenders of the quantity theory have undertaken the examination of more complex statistics than those concerned with the simple concomitance of quantity of money and prices. two of these studies, the first by professor kemmerer[ ] and the second by professor fisher, are so elaborate, have commanded such general attention, and have been accepted by so many students as conclusive demonstrations, that i feel it proper to give them detailed examination. i do this especially because highly important facts for our construction argument emerge from this critical examination. kemmerer's and fisher's studies reach high-water mark in the effort to give statistical demonstrations of the quantity theory. if they are invalid, then i know no other attempts which many students would suppose to be possible substitutes. the theory involved in both these studies is clearly stated by professor kemmerer: "a study of this kind, to be of any value, must cover the monetary demand as well as the monetary supply. any test of the validity of the quantity theory consisting merely of a comparison of the amount of money in circulation with the general price-level is as worthless as would be a test of the power of a locomotive by a simple reference to its speed without taking into account the load it was carrying or the grade it was moving over." this criticism of many previous studies is, in general, i think, valid, though i should except from this list such detailed studies as that of w. c. mitchell, who takes account, as far as may be, of all the variables involved, and who considers day by day and week by week changes. i think the older studies of tooke,[ ] may also be excepted. in point of fact, if one wishes to know how much reliance may be placed in the quantity theory as a basis for prediction, when one knows that money is increasing, the simple comparison of money and prices is a fair test. if the "other things" which must be "equal" are so numerous and complex that the quantity theory cannot manifest itself in a direct comparison, much of its significance _as a basis of prediction_ is gone. it is perfectly true, however, that studies running through long periods, which give simply figures for general prices and figures for quantity of money, omitting volume of trade, are not very relevant either for proof or disproof.[ ] and the conception underlying the studies of kemmerer and fisher, that not merely money and prices, but also volume of bank-credit, volume of trade, velocity of monetary circulation, and velocity of bank-credit, must be measured, undoubtedly represents a big advance in the conception of the statistical problem involved. the mere stating of the problem is an intellectual achievement of no mean order, and the ingenuity and scholarship involved in seeking data for concrete measurement of these highly elusive elements must command the admiration of every student of monetary problems. volume of trade, velocity of money and velocity of bank-credit had been generally supposed, until these studies were undertaken, to be beyond the reach of the statistician. there can be no doubt at all that the efforts to measure them, or to measure variations in them, by kemmerer and fisher, have greatly advanced our general knowledge of the phenomena of money and credit. with great admiration for the magnificence of the problem undertaken, and for the industry, ingenuity and scholarship which have been devoted to its solution, i have nevertheless reached the conclusion that the figures assigned by these writers to the magnitudes of their "equations of exchange" are, with the exceptions of the figures for money and deposits, widely at variance from the real facts in the case, and second, that if they were correct, they could in no sense be said to constitute proof of the quantity theory. in the critical analysis which follows, chief attention will be devoted to fisher's statistics. his is the later study, and it follows, in main outlines, the methods laid down by kemmerer. he has employed kemmerer's statistics in considerable part, amplifying them for later years, using some data not available when kemmerer wrote, and undertaking a fuller solution of certain problems than kemmerer did. i shall, however, from time to time make reference to kemmerer's figures, and show points of difference between the two studies. let me first briefly state the second point of my criticism of these studies: namely, that even if the statistics are correct, they do not constitute proof of the quantity theory. the statistics purport to be concrete data filling out for different years the equation of exchange.[ ] but the equation of exchange, as we have seen, does not prove the quantity theory. the quantity theory is a _causal_ theory, and causation involves an order _in time_. the concrete figures for the equation do not prove that. even kemmerer's concluding chart on p. , showing a rough concomitance between "relative circulation" and general prices does not show that changes in relative circulation are _causes_ of changes in general prices. the causation might be the reverse for anything his figures tell us. fisher himself recognizes this, in considerable degree: "as previously remarked, to establish the equation of exchange is not completely to establish the quantity theory of money, for the equation does not reveal which factors are causes and which are effects."[ ] again: "but, to a candid mind, the quantity theory, in the sense in which we have taken it, ought to appear sufficiently secure without such checking. its best proof must be _a priori_."[ ] the main criticism here, however, relates to the figures themselves, rather than to their meaning. the figures given by professor fisher are concrete magnitudes to fill out his equation of exchange, mv + m´v´ = pt[ ] for the years since . thus, for , the figures are: m = . billions; m´ = . billions; v = . ; v´ = . ; p = $ ; t = billions.[ ] now in what follows, i shall challenge all these estimates except p for , v for and , and m and m´ for all years. the figures for m and m´, being the results of fairly simple computations based on governmental statistics, need not be questioned. p for is arbitrarily placed at $ . . v for and , for reasons which will later appear, is better based than for other years, though kemmerer and fisher have differed greatly in their estimates for v, the former placing it at and the latter at or .[ ] my criticisms with reference to v, however, will relate to the years other than and . the sources from which these absolute magnitudes are drawn are, primarily, two investigations by dean david kinley, one in and the other in , in coöperation with the comptroller of the currency.[ ] the purpose of these investigations was to ascertain the proportions of checks and money in payments in the united states. banks of all kinds, national and state banks, trust companies, private banks, etc., were requested by the comptroller to supply data for a given day (march in ) showing what their customers deposited on that day. they were asked to classify these deposits as cash, on the one hand, and as checks, drafts, etc. on the other. they were also asked to give a cross classification of the same deposits, as "retail deposits," "wholesale deposits," and "all other deposits." in , over , banks of all kinds, out of about , banks, replied, and of these replies , were in available form. these replies showed a total of deposits of over millions of dollars. of this total, millions were in checks, so that checks made up . % of the whole. about millions of this total were retail deposits, about millions were wholesale deposits, and the rest, about millions, were classed in the "all other" category. kinley's use of these figures, _for his purpose_, seems to me in every way conclusive and safe. he was interested merely in the question of the _proportions_ of checks and money in _payments_, retail, wholesale, and "_all other_." the absolute magnitudes of the elements in the equation of exchange he was not trying to measure. professor fisher's use of the figures presents a different problem.[ ] let us consider, first, professor fisher's estimate of m´v´, taken together. m´v´ is considered to be equal to the total amount (in dollars) of checks deposited during the year.[ ] to get this, for , kinley's figure, above, for checks deposited in , banks on march , , is used. this figure is millions. as half the banks had not reported, an estimate for the non-reporting banks was obtained from professor weston, who had aided dean kinley in the investigation, and who had access to the original data. professor weston estimated the total checks deposited during the day at . billions.[ ] the question then arose as to whether this day was typical for the year. professor fisher found new york city bank clearings of march (the day after, on which these checks would get into the clearings) to be % below the average for the year. he assumed the rest of the country to be half as abnormal as new york city, and increased the . billions to . billions, getting what he conceived to be the daily average of checks deposited in the united states in . multiplying this figure by , the number of banking days in new york city (and so, presumably, a fair average for the number of banking days in the country), he obtained billions for the checks deposited in . this figure he considered to be m´v´, the volume of bank deposits,[ ] multiplied by its velocity of circulation. to obtain v´, therefore, his problem was simple: he divided the figure for m´v´ by the figure for m´ previously obtained from government statistics, and obtained v´. now i wish to call attention to three important errors involved in this calculation of m´v´ for . ( ) the assumption that the total check circulation is the same as the volume of checks actually used in _trade_ is a violent one. _payments_ may be tax payments, loans and repayments, gifts, what not. many checks may be used in a single transaction. surely not all of this is properly to be counted in the m´v´ of the equation of exchange. but this topic is better discussed in connection with the estimate for t, and i reserve its fuller discussion till then. ( ) the assumption that the rest of the country was abnormal in its clearings on march , , is a pure assumption, which investigation does not verify. the rest of the country was, in fact, nearly normal! the error that comes for the year from increasing the total on this assumption amounts to at least billions! the total for the year, on professor fisher's method of computation, with the correction to make the assumption regarding outside clearings correspond with the facts, is billions, instead of billions! as the figure for is a basic figure, on which figures for other years are calculated, this error is extremely significant.[ ] ( ) a yet more serious error in this computation is the assumption that new york city was complete in kinley's figures, while the rest of the country was incomplete. this error, as we shall see, largely neutralizes the error above, so far as the "finally adjusted" figure for is concerned, but it makes a vital difference in the figures for other years, as will appear, since it affects the "weighting" of new york clearings and outside clearings in the index of variation by means of which m´v´ for years other than is determined. the assumption that new york is complete, in kinley's figures, and that all of the extra hundreds of millions added by professor weston in his estimate for the non-reporting banks belongs to the country outside new york, is made by professor fisher both on pp. - , in estimating m´v´ for , and on p. , in finding an index of variation for m´v´. the only reason given, so far as i can find, is the following: "this figure, _being for new york_, [italics mine], is probably nearly complete." (_loc. cit._, p. .) with this as a basis, professor fisher proceeds in his calculations to treat the figure for new york, millions, as absolutely complete, and gives the rest of professor weston's . billions for the day, or millions, to the country outside. the error above mentioned, of assuming the rest of the country to be abnormally low on march in its clearings, still further increases the amount assigned to the rest of the country in the total figures for the year.[ ] the conclusion finally is that new york had deposits of billions in checks for the year, while the rest of the country had deposits of billions in checks. as new york clearings for the year were billions, while clearings for the rest of the country were only billions, professor fisher concludes that new york clearings overcount new york check deposits, and outside clearings greatly undercount outside check deposits, so that, in the index of variation of check deposits, for years other than and , new york clearings should be given a weight of only , while outside clearings should be weighted by . "that is, on the basis of figures, five times the outside clearings plus once the new york clearings should be a good barometer of check transactions." (p. .) all this rests on the assumption that new york figures for march , , were complete, and the only reason assigned is, "being from new york!" now the figures from new york were not complete. and new york clearings do not overcount new york check deposits. outside clearings do not undercount outside check deposits nearly to the extent that professor fisher assumes. for each of these three statements i shall offer what would seem to be conclusive evidence, and i shall attempt to get an estimate of the real relation between new york check transactions and check transactions for the rest of the country. first, the figures for new york were far from complete. it may be noted that dean kinley, in his volume for ,[ ] is very careful to repudiate the assumption that the cities were complete more than the country: "moreover, it is a mere assumption that the non-reporting banks are mainly the small banks in the country districts. _a great many city banks also did not report._" (italics mine.) that this is true for new york is abundantly evident from figures there given for the private banks and the trust companies, not to consider at all the state and national banks. new york shows only $ , in checks deposited in the "all other deposits" in private banks! this is a city which includes among its private bankers j. p. morgan & co., kuhn, loeb and co., j. & w. seligman & co., and others! figures from these banks appear nowhere in kinley's totals, since deposits made _by_ these banks in other banks are also excluded from kinley's figures.[ ] of course, exact figures cannot be given to show how much new york would be increased had the private banks made full reports. we have no reports of any kind from these institutions. every feature of their business is kept from the lime light, as far as possible--a practice which is much to be regretted, since it arouses hostility and suspicion, where a statement of the facts in the case would frequently entirely dispel them. we have, however, some information regarding the magnitude of their deposits, meaning by deposits, not what kinley means in this investigation, namely, checks, etc., _deposited_ on a given day, but rather, deposits in the balance sheet sense of demand obligations to depositors. in nov. , j. p. morgan and co. held deposits of $ , , , exclusive of millions on deposit with their philadelphia branch of drexel & co. about half of these were deposits of interstate corporations. kuhn-loeb held, on the average, for the six years preceding over millions of deposits of interstate corporations. what their aggregate deposits were, we do not know. these figures are obtained from the report of the pujo committee.[ ] morgan's deposits were equalled by only three banks and two trust companies in new york (as of april , ), and kuhn-loeb's deposits for interstate corporations alone exceeded the total deposits of any one of the great majority of the new york clearing house banks and trust companies. of course, large deposits in the balance sheet sense need not mean large deposits made on a given day. private bankers' deposits may be inactive. but we know, first, that half of these figures for morgan, and the whole of the figures given for kuhn-loeb, represent the deposits of active business corporations, engaged in interstate business. they are not mere trust funds lying idle, or awaiting investment in securities. what the rest are we can only conjecture. that they are deposits of men and firms connected with the stock exchange in some way is highly probable. the whole drift of the statistics presented in this book, and of the argument developed in this book, would serve to show that such deposits are likely to be more than ordinarily active.[ ] i refrain from assigning any figures as to the amount of checks deposited in private banks in new york on march , . it must have run high into the millions.[ ] it certainly exceeded the two thousands, or less, reported to kinley! the figures for new york were, thus, incomplete. but the trust companies were also incomplete. the national banks in new york reported checks totaling . millions, for all three classes of deposits; the state banks reported only . millions; the trust companies only . millions. with aggregate deposits, as shown by their balance sheets, exceeding the deposits of national banks[ ] the new york city trust companies reported, as deposited on march , , less than half as much as the state banks, less than a tenth as much as the national banks, and only . % of the two combined-- . % of the total from all three classes of institutions! these figures are hard to reconcile with the assumption that the trust companies in new york were complete on that date. it is, of course, possible that the trust companies, though having large deposits, have inactive deposits. this is sometimes held to be the case. but that the difference is so great in activity of deposit accounts between banks and trust companies is hardly credible. i have looked into this matter with considerable care, and have secured information and opinions from men intimately acquainted with the trust companies of new york from the inside. the only available quantitative measure of the activity of deposits would seem to be the volume of a bank's clearings. this is not perfectly accurate, by any means, but it is the best available test. through the courtesy of a vice president of one of the largest new york trust companies, i have obtained figures from an official of the clearing house, which show that in new york trust company clearings run from to % of the whole. on this basis, the trust company figures for were incomplete to the extent of from millions to millions, on the day in question. these clearings figures, however, are for the year, , and not for the period before may, , when the trust companies were admitted to the clearing house. prior to that time they did not deal directly with the clearing house, but _through_ the member banks. do these figures, therefore, represent the situation as it existed in ? the possibility was entertained that entering the clearing house had made a difference in the reserve policy of the trust companies, and so had made them change the character of their business, in such a way as to bring about greater activity of accounts. this question was put to the official of the trust company before mentioned, and his reply is that the state law regarding reserves (passed after the panic of ) had already brought about this change in reserve policy, and so no difference was made upon entering the clearing house. the same gentleman, by the way, replying to a question regarding the deposits in private banks in new york, and the influence of such deposits on clearings, writes: "the actual figures could not be obtained from the clearing house..., consequently can only say that deposits made with these houses add to the clearing house totals very large sums." there is one piece of evidence which would seem to negative these conclusions regarding the trust companies. in the report of the new york state superintendent of banks, for dec. , , p. xxxv, is a statement that during the two years, - , the trust companies of new york cleared only % as much as the banks. the statement relates, however, to a period during which the trust companies not only had no clearing house membership, which of course was true up to , but also had largely withdrawn from the privilege of clearing _through_ member banks.[ ] under these circumstances, even % would seem quite high. inquiry was made of the honorable clark williams, who was state superintendent of banks at the time the report was made, as to the source of the figures.[ ] mr. williams, in reply, defends the figures as correct for that period, but authorizes the writer to quote him as in no way surprised at the percentages given above, to % of the total clearings, in view of developments and changes in trust company business. i conclude that the trust company figures for march , , were exceedingly incomplete. the national bank figures were probably more nearly complete than any others, first because they are large, and second, because national banks would feel more obligation than other banks to reply to questions from the comptroller. the state bank figures, . millions, as against national bank figures of . millions, were probably incomplete also, to a considerable extent, though state banks are not dominating factors in new york city. that they should exceed the figures for trust companies is surely evidence of the incompleteness of the trust company figures. the private banks are incomplete, with absolute certainty, since they are virtually not represented at all. further evidence that the new york figures were incomplete, however, will appear in the data regarding our second thesis, namely, that new york clearings do not overcount new york check deposits. the aggregate check deposits reported from new york, on the date in question, is millions. clearings for that day were millions,[ ] substantially exceeding the reported check deposits. now do clearings exceed check deposits in new york city? evidence with reference to outside clearings, in connection with bank transactions, we now have in very definite and abundant form, and it will be convenient to approach the question of new york clearings, first, indirectly, _via_ country clearings. we shall, therefore, take up first the thesis that clearings outside new york do not undercount bank deposits outside new york nearly as much as professor fisher thinks. according to his estimate, checks deposited during the year in banks outside new york (exclusive of checks deposited by one bank in another) were billions. (_loc. cit._, .) outside clearings were only billions, and his conclusion is that the ratio of deposits to clearings is . to , or, in other words, that outside clearings amount to less than . % of outside check deposits. now an extensive investigation, covering the period from june, , to oct. , inclusive, has been made by the american bankers' association, through mr. o. howard wolfe, secretary of the clearing house section. this investigation covered cities of various sizes, in various parts of the country. its results are immensely more trustworthy than any results based on a single day, as professor fisher's results are, could be, even had professor fisher's method been otherwise correct. an account of this investigation is to be found in the _annalist_ of dec. , .[ ] this investigation involves, for the period in question, a comparison of "total bank transactions" in each city with the clearings of that city, together with a summary covering all the cities. "total bank transactions" consist of all debits against deposit liabilities of each member of the clearing house, whether they come through the clearing house or over the counter. they include payrolls, for example, which, of course, never get into clearings. they include drafts on deposits of one bank in another. in a letter to the editor of the _annalist_, mr. wolfe states that "total bank transactions include all debits against deposit liabilities, whether by check, draft or charge ticket. the only exceptions are certified checks and certain cashier's checks, both of which to an extent represent a duplication." for the period in question, clearings amounted, on the average, for all cities, to % of "total transactions." the cities did not include new york city, as stated. now we cannot apply this % at once to the question in hand. professor fisher's . % relates to the relation between clearings and checks and drafts _deposited_, _excluding_ items deposited by banks, and excluding, of course, cash deposited. what is the relation between kinley's "deposits" and wolfe's "total transactions"? it is clear that "total transactions" must, in a period of time, _exceed_ kinley's "deposits" very considerably. in a general way, what goes out of a bank, and what comes into a bank, must approximately equal one another in a period of time. in a general way, a depositor finds his income and his outgo balancing. of course, some accumulate, paying in more than they withdrew, but in general such accounts are made with savings banks. the business man borrows from his bank, getting a "deposit credit" (without "depositing" in kinley's sense), then checks against his "deposit," then receives checks in payments to himself, "deposits" them, building up his deposit balance again, and then checks against his deposit balance, in favor of the bank, to pay off his loan. what comes in and what goes out--abstracting from the growth of a rapidly expanding bank--balance. but notice, in the case cited above, that "total transactions" include more items than kinley's "deposits" show. when the bank makes a loan, and gives a deposit credit, this does not, usually, show in kinley's deposits. when, however, the loan is paid off by a check to the bank, it does show in "total transactions." moreover, when a man deposits cash in the bank, it does not show in kinley's figures for checks deposited. when, however, he withdraws cash from the bank, or his check to another is "cashed," it does appear in "total transactions." further, checks deposited to the credit of one bank in another do not appear in kinley's figures. checks drawn, however, by one bank on another do appear in total transactions. how great the difference is between "total transactions" and "deposits" in the banks outside new york we cannot say precisely. the cash items alone, on the basis of kinley's figures, would make a difference of about %.[ ] to allow % excess to "total transactions" over "deposits" for the other reasons listed, is surely not to make an exaggerated allowance. we thus count "deposits" in kinley's sense, for the banks outside new york city, as % of "total transactions." since, then, clearings are % of "total transactions," they will be % of "deposits." this figure is more than twice as great as professor fisher's figure of . %. even if we counted deposits as equalling total transactions, professor fisher's estimate would be clearly very much too low. how, then, do we stand? on professor fisher's showing, the overwhelming bulk of checks deposited were in the country outside new york-- billions for the year, outside, as against billions in new york city. if the ratio ( %) for outside clearings to deposits was the same for that it was in - for the outside banks, we shall have to revise this radically. we have billions of country clearings in ; we would have, then, billions[ ] of country check deposits! if fisher's total figure for the country is correct, billions as "finally adjusted," the balance, or billions, would belong to new york! new york clearings, billions, would thus be less than half of new york deposits! if we count outside clearings for as only % of outside check deposits, outside deposits would be, for , only billions, as against professor fisher's billions, _a difference of billions_! i am sure that his error in estimating outside check deposits is at least as great as that, and that we cannot assign to new york city less than a major part of the total check deposits of the whole country. this result fits in with the figures actually reported to dean kinley, corrected to fit the known facts about march clearings, better than professor fisher's estimate, by a good margin. according to professor fisher's estimate, new york city checks deposited are only . % of the total. kinley's actual figures give millions to new york city, and millions to the country outside. but new york clearings were % below normal on march , while country clearings were only . % below normal. adding % to the figure for new york checks, we get millions. adding . % to the outside checks, we get millions. of the total, millions, new york checks would be, then, . %. we have shown reasons for considering new york deposits to be very incomplete for march , particularly as regards the private banks and trust companies. comparison of the new york figures with the results indicated by the ratio of country clearings to country deposits would thus indicate that new york was much less complete than the country as a whole. even so, i need to add but . % of the total to kinley's actual figures for new york, corrected in the light of next day clearings, to give new york half of the check deposits. professor fisher must subtract . % of the total from the actual figures for new york, as corrected in the light of next day's clearings, in order to get his figure of . %. to vary as widely from the actually reported figures as professor fisher does, i should have to assign . % of total check deposits to new york city. i refrain from making an exact estimate. i am content with the conclusion that something more than half of the checks deposited in were in new york. this seems to be too clear for serious controversy. the indirect approach to the relation between new york clearings and new york deposits, _via_ the study of outside clearings in and , taken in conjunction with the figures for check deposits in , would seem to make it quite clear that new york clearings do not exceed new york deposits, or, indeed, constitute a substantially higher percentage of them than is the case with country clearings and deposits.[ ] logically, assuming the correctness of the estimate for checks deposited, the case is complete: we have a simple problem in arithmetic: given country clearings for , billions; given the ratio of country clearings to country deposits (and a minimum for this ratio is clearly given, in the % which country clearings are of "total transactions"), we can fix a maximum for country deposits, which is billions. then, given our estimate of billions for total check deposits, we subtract the maximum possible for country deposits from it, and get a minimum possible for new york city of billions of check deposits. comparing this with the known clearings of billions in new york, we find that new york clearings constitute, as a maximum possible, . % of new york check deposits. if the reasons given for holding check deposits in the country to be less than total transactions are accepted, the ratio of clearings to deposits in new york city is lower. indirect calculations, however, even when logically complete, ought to be checked up by other methods, when possible. we have some further data, drawn from an earlier period, - - , which suggest the same conclusion. the reason commonly offered for holding that new york clearings exaggerate local new york transactions, as compared with country clearings and country transactions, is that new york is the clearing house for the country. country banks send their idle cash there; country banks pay other banks by drafts on their new york balances; country banks send out of town checks to new york for collection; business men in st. louis pay business men in chicago with new york exchange, etc. these items are supposed greatly to swell new york clearings. now several of these reasons are not at all valid. cash shipped back and forth between new york and the interior does not get into clearings. secondly, new york, because of the charges made for collecting out of town checks, has tended to lose much of the collection business. chicago probably does a great deal more of it than new york does.[ ] however, even if checks on out of town banks were sent largely to new york for collection, they would not get into the clearings. new york banks send checks on country banks directly to country correspondents. checks on out of town banks sent in for collection do swell clearings in boston and kansas city, where arrangements have been made, to the advantage of all concerned, to have the clearing houses handle this business. but new york has not made provision for it.[ ] the only checks that get into new york clearings will be checks drawn on new york banks.[ ] these checks will be of two kinds: ( ) checks drawn by individuals and firms on new york banks. these checks will commonly be drawn by people in new york, and, in so far as they come from out of town, will represent business between new york and other places, hence, new york business. ( ) drafts by banks on their new york balances. these will be of three kinds: (a) drafts sold, especially by country banks, to their customers who need to make payments in other cities. many of these will represent payments to new yorkers for transactions between new york and the country, hence new york business, and will appear in the check deposits of individuals, firms, and corporations in new york, (b) there will also be drafts from one country bank, on new york, to another country bank, in which new york is truly being used as a clearing house, new york exchange taking the place of an intercity shipment of cash.[ ] (c) drafts by new york banks on new york banks, to avoid deficits at the clearing house, or--especially in the case of private bankers, between whom and brokers the line is hard to draw,--for general purposes. now, fortunately, we have some data, trustworthy, even though old, for the volume of bank-drafts on new york, and, more important, for the proportion of drafts on new york to drafts on banks in other cities. these figures are, as stated, from the three years, , , and . for the purpose in hand, however, they are relevant, since then, as now, new york clearings were nearly twice as great, on the whole, as country clearings, and if this excess of new york clearings is due to that cause, it should have manifested itself in these figures. if the proportion of these drafts on new york to the total of bank-drafts was greater than the proportion of new york clearings of total clearings, we might find reason for supposing that new york clearings were unduly swelled by this fact. but in fact, drafts on new york are not out of proportion. the figures are virtually complete for drafts drawn by all the national banks on national and other banks for the years in question. they will be found in the comptroller's _reports_ for the three years, under the caption, "domestic exchanges." for the figures are: drafts on ( , omitted) new york $ , ( . %) chicago , ( . %) st. louis ( . %) other reserve cities , ( . %) other cities ( . %) total , ( %) the comptroller (_report_ of , p. ) gives an estimate for drafts drawn by state and private banks of an additional , millions. he does not try to apportion these among new york and the other cities. there is no reason to suppose that the percentage for these banks of drafts drawn on new york would be higher than for national banks, and there is some reason for supposing that they would be lower: namely, that these institutions would lack the incentive supplied by the national bank act for depositing reserves in a central reserve city. the comptroller's figures probably do not include the great private banks in new york, which deposit in new york commercial banks, and draw huge checks against their deposits. these checks, probably, however, chiefly represent stock exchange collateral loans to brokers, and so appear in brokers' deposits as well as in new york clearings--represent new york deposits. i do not use this estimate in my computations. if i did, the results, so far as proportions are concerned, would be the same, since i could do nothing but assign the same proportions to them. it will be seen that my argument rests on the proportions, chiefly. now what difference would be made if we wiped out all these draft transactions, and reduced clearings to correspond? new york clearings in were , millions; country clearings were , millions. let us subtract the drafts on new york from new york clearings, and the drafts on other places from the country clearings. the result is: new york clearings, , millions; country clearings, , millions. new york clearings still retain their former status! new york clearings are still nearly twice as great as country clearings! it is not the bank drafts used in making new york the "clearing house" for the country that swell new york clearings as compared with the rest of the country! it is something else! the main explanation, as we have in part seen, and shall further see, is a mass of speculative transactions, chiefly stock exchange transactions, and loan transactions connected therewith! new york clearings grow out of new york business, primarily. the figures for the other two years vary little from those of . what variation there is shows a growth of drafts on interior cities, and a decline of drafts on new york. new york showed . % of these drafts in , % in , and . % in .[ ] as we have seen, the only checks or drafts that get into new york clearings are those drawn on new york banks. the checks on new york banks probably almost all represent business in which one party is a new york individual, firm, or corporation. the drafts by out-of-town banks will contain all the items, virtually, that represent "clearings" through new york. not all of these, by any means, will represent such clearings. a very substantial part of them will represent exchange sold to customers to make payments in new york. we exaggerate the "clearing through new york" when we subtract all these drafts from new york clearings. since, however, we treat country clearings in the same way, no error results, so far as the proportions between them are concerned. the two sets of data converge. both from the figures of - , in conjunction with estimated check circulation in , and from the figures of - , can we conclude that new york clearings do not overcount new york transactions. the conclusion would seem to be inevitable that new york is really as important in our volume of banking transactions as its clearings would indicate. this may be qualified by a recognition of the possibility that new york clearings are more efficient in handling check deposits than are clearings in other cities. some scattering data from national banks for single days at a time indicate that a higher percentage of checks is cleared in new york than elsewhere in the country,[ ] and one observation for five national banks for a ten-day period shows % of checks deposited cleared.[ ] these checks include deposits made by other banks, as do the figures of kemmerer's observations. but there are no direct observations covering new york for a long enough period, or for enough institutions, to warrant any definite conclusions.[ ] the error of assuming clearings of march in the country outside new york to be abnormally low, swelled professor fisher's total figure for check circulation by billions, as we have seen. on the other hand, the error of assuming new york city to be complete in kinley's figures tended to make the total smaller than it would have been, since new york city was % below normal, and an increase of % applied to half of professor weston's figure of . billions, gives about millions more for the day, or billions more for the year, than when the % increase is applied to only a quarter of professor weston's figure. these two errors roughly neutralize one another, and we may accept professor fisher's "finally adjusted" estimate of billions[ ] for the year as roughly approximating the amount of checks deposited.[ ] how "rough" an estimate one gets by taking a single day as the basis for a year need not be here discussed. i should be disposed to think that an indirect calculation, _via_ clearings, in view of our more extensive knowledge of the relation of clearings to "total transactions," might well be worth more, so far as deposits outside new york are concerned. since, however, we lack any extended figures for the relation of transactions and clearings in new york, and since even for the country we are obliged to make guesses as to the relation of "checks deposited" to "total transactions," i refrain from trying to improve further on professor fisher's estimate for checks deposited in --even though questioning that "check deposits" and m´v´ are identical. what, however, shall we say of m´v´ for other years? in the calculation of this, professor fisher relies on the absolute figures for (and , similarly calculated), together with an "index" based on new york and country clearings. in this index he weights country clearings by ,[ ] and new york clearings by . the result is, of course, that country clearings dominate the index. but new york clearings are much more variable than country clearings. the range of variation in new york clearings for the years to , inclusive, is from . billions in , to . billions, in ; the latter figure being more than three times as great as the former. the range in country clearings is from . billions, in , to . billions, in , the latter figure being - / as great as the former. but more significant is the degree of _year by year_ variability. the country clearings, with the exception of , always rise,--a steady, if not quite symmetrical, increase. new york clearings, however, go up and down, billions in , . billions in , . billions in , . billions in , . billions in , . billions in , . billions in , . billions in . new york clearings are highly variable in both directions, while country clearings vary almost wholly in one direction, with a maximum difference of . billions between any two consecutive years, and with an average yearly variation of only . billions.[ ] when country clearings are weighted by , almost all of the high degree of variability of new york clearings is covered up, and volume of checks deposited for years other than and is thrown hopelessly away from the facts. it is too large by far in most years. in , and probably it is too small. it does not vary nearly enough. as v´ for years other than and is determined, for professor fisher's equation, by dividing the m´v´ thus estimated by the m´ for the year, it is clear that v´ as estimated by professor fisher is very much less variable than it is in fact. it is pretty variable even in his figures, but his figures do not nearly show how variable it is.[ ] again, this undue weighting of country clearings, swallowing up new york, vitiates professor fisher's estimates for v, the velocity of money, for years other than and . one of the elements in the calculation of v is the estimated v´.[ ] since v´ is wrong, v will also be wrong. v is probably much more variable than professor fisher's figures would indicate. with great admiration for the ingenuity of professor fisher's speculations regarding v, i find too many elements of conjecture, and too many arbitrary assumptions, to give me confidence in the figure for any year. i refrain from going into any general criticism of his method of calculating v, however, contenting myself with the one clear point that, to the extent that the values of v for years other than and depend on the estimated m´v´ for those years, they are less variable than they ought to be.[ ] the same conclusion regarding professor fisher's estimates for v´ have been reached, by a different method, by professor wesley c. mitchell. he, too, concludes that v´ is, in fact, more variable than professor fisher would indicate.[ ] i conclude, therefore, that neither v´ nor v has been correctly calculated, for years other than and . i pass now to a consideration of t, the volume of trade, after which i shall consider p, the price-level, in the equation of exchange. let us first recall the point made in the chapter on "the equation of exchange," that p and t, the price-level and the volume of trade, are not independent even in idea. if one is given an independent definition, the other cannot be given an independent definition. if the equation is to be true, then p must be weighted by the numbers of each item (as hats) exchanged. p is not a mere average, but is a _weighted_ average, and t is always the denominator in the formula for p. in developing statistics for p and t, therefore, this fact must be kept in mind, and the elements entering into each must coincide, and vary together year by year. in our chapter on "the volume of money and the volume of trade," we showed that the great bulk of trade is speculation. we showed that the _indicia_ of variation which fisher[ ] and kemmerer have constructed for trade, dominated by inflexible physical items of consumption and production, give wholly misleading results for every year except the base year. they give a steadily growing, inflexible figure, with little variation from its steady path. trade, if chiefly speculation, is highly flexible, varies enormously from year to year, waxes and wanes. this point need not be further developed. at best fisher's figure for trade can be accepted only for one year, . is, however, the figure for , billions, an acceptable figure? is it not decidedly too large? it is made up, it will be recalled, by taking the figures for mv and m´v´, adding them together to get one side of the equation, and declaring them equal to pt. p is then declared to be $ , by the arbitrary device of taking as the unit of t one dollar's worth of every sort of good at the prices of . t is, then, billions, since mv plus m´v´ equals billions. the theory underlying this is that deposits made in banks correctly represent trade.[ ] our criticisms as to the absolute magnitude assigned to t (and hence to mv plus m´v´) will rest in large measure in challenging this assumption. it is our contention[ ] that deposits made in banks very greatly overcount trade. deposits made in banks include taxes and other public revenues; they include loans and repayments, and interest-payments; they include gifts and benevolences, money sent by parents to children away from home, pensions, payments of insurance losses, annuities, dividends on stocks, payments to and from savings and loan associations, fines, contributions to churches, and other non-commercial organizations, etc., etc. none of this represents trade. but further, whether payments are in trade or not, many times indeed does it happen that several checks are drawn in connection with the same transaction. professor kemmerer, entertaining this possibility, thought it might be neutralized by cases where the same check passes through several hands, making payments in several different transactions. he calls this, however, a "gratuitous assumption of unverifiable accuracy,"[ ] and makes no claim to have given the matter careful study. in general, i think it safe to hold that the case where a single check passes through several hands is not important.[ ] it will happen chiefly with small checks in small places, or with small checks paid to laborers. it is the pecuniary magnitude of checks, rather than their number, that counts here. i am informed by several bankers that large checks are almost universally deposited at once. this is for several reasons: ( ) the recipient of the check wishes to make sure that it is good. ( ) it is unlikely that the check is of the right size for another transaction, unless the recipient is a mere agent for a third party, in which case he should (but commonly does not) pass it on to his principal, if double counting is to be avoided. ( ) every person who handles sums of any size wishes a record of the transaction, and his own canceled check is a receipt which he would not have if he passed on the check of another. this last point will go far toward explaining why bank transactions may multiply without a corresponding multiplication of trade. the banks do the bookkeeping for modern business in increasing degree. checks are records, of high legal value. a colleague recently told me that he, in his own capacity, had just drawn a check to himself, as trustee, transferring a sum from one account to another. another colleague, with eight different bank accounts, estimates that over % of the deposits in three of them represent transfers from other accounts. this kind of duplication, where trust relations are involved, is enormous. intercorporate relations and separate bank accounts within a corporation complicate it still further. a check is drawn by a subsidiary corporation to its dividend account, and deposited; a check on this dividend account[ ] is then deposited in the general account of the parent corporation; a third deposit, of the same funds, is then made in the dividend account of the parent corporation; a fourth deposit of the same funds is made in a trust fund which holds stock in the parent corporation; a fifth deposit in the personal account of the beneficiary of the trust fund; a sixth deposit may be made of a check on this fund in the personal account of the beneficiary's wife. the first three of these deposits, at least, will be made of the total dividend of the subsidiary corporation. _not one_ of these six deposits represents _trade_. payments of wages and rents should count as trade, but payments of interest and dividends stand on a separate footing. when a man has bought a stock or a bond, he has already bought all the income which is to come from them, and to count the interest and dividends as separate items is double counting. they are _payments_, but not _trade_. even if the dividend payment be counted as trade, however, it is counted _six_ times. there is enormous overcounting as a consequence of the combinations of corporations, each of which retains its own numerous bank accounts. the interstate commerce commission calls attention to great duplications from this cause in connection with railway income accounts.[ ] even within single corporations the duplications[ ] are very great. thus, the local agent of a railroad deposits his receipts in a local bank. his check, or, more usually, the draft of the bank, is subsequently deposited in a bank at headquarters. subsequent disbursements, in places away from headquarters, particularly of wages, will frequently be preceded by deposits in other local banks. this duplication will be true of telegraph, telephone, insurance and other companies which have scattered agencies, including the wholesale trade. advertising agencies will illustrate it. _all_ checks between agent and principal, customer and broker, etc., will illustrate it. there is a great deal of double counting in stock transactions from this source. thus, a boston broker takes orders, with a check for margin, for execution in new york. the order is executed by a new york broker, who deals with another new york broker, who represents a louisville broker, who represents a louisville client. now to the extent that any checks at all pass between the boston broker and his client, the boston broker and the new york broker, the other new york broker and the louisville broker, or the louisville broker and his client, we have overcounting. only the check between the two new york brokers is properly counted. it is, of course, well known that a small percentage of the dealings of a customer of a brokerage house is represented by checks between broker and customer. professor fisher states this to be about %.[ ] it is, however, % of overcounting! moreover, through keeping "open accounts," with irregular settlements of "margins" only, the boston broker and the new york broker reduce markedly the checks passing between them. there is a back and forth flow of items which in large degree cancel one another, since the boston broker sells in new york as well as buys there, and the new york broker, to a less degree, both buys and sells boston securities, through his boston correspondent. but not all by any means is canceled, and _all_ the checks that pass in this way represent double counting. the total is large. _public funds_ are included in the deposits reported to kinley. taxes are not _trade_. double, triple and multiple counting comes as revenues are received by local authorities, transferred to state accounts, subsequently redistributed to local accounts, or to the treasurers of state institutions, transferred from one bank to another, etc. the state of massachusetts scatters its deposits in banks all over the state, and makes transfers from one account to another. the city of boston has many bank accounts. the federal treasury deals largely with banks over the country. whenever a retail store has branches, duplications are likely to occur. "chain stores" make great overcounting. "kiting" swells bank deposits. replying to these contentions, professor fisher has urged that there is large _undercounting_, also, and that the undercounting balances the overcounting. i have myself called attention to a good deal of undercounting in the chapter on "barter." a substantial amount of ordinary trade is carried on by means of partially offsetting book-credit, time bills of exchange, simple barter, etc. the amount might even run high, as compared with ordinary trade, when the clearing arrangements in the stock and produce exchanges are taken into account. but it is impossible to figure out anything at all in this line which is to be compared with the great gap between the billions of trade we were able to find,[ ] and the billions professor fisher assigns to trade. the gap of over billions is much too great. besides, in our billions, we have counted barter items, book-credit items, time-bill of exchange items, etc., already. the main item of undercounting must be in connection with the clearing arrangements in the speculative exchanges. this would seem to be professor fisher's view, as well.[ ] data are at hand for the two great exchanges of the country which enable us to measure, with some precision, the amount of the undercounting--_i. e._, to tell the extent to which checks are dispensed with in the trading of these two great exchanges. the two exchanges are the chicago board of trade and the new york stock exchange. for the new york stock exchange, figures are taken from pratt's _work of wall street_, ed., pp. - , , . the figures are for the big year, , when million shares were sold, more than in by millions of shares, and when the stock exchange clearing house should have done better, in the magnitude of the undercounting, than it did in . figures since are, pratt states,[ ] not available. pratt also gives figures for , but does not give data as to the percentage of stocks handled by the clearing house, so that comparison with the figures cannot be made. in , , , shares were sold. of these, % were "x-clearing house," _i. e._, not on the list of stocks handled through the stock exchange clearing house. this % was paid for in full by check. the bond sales are not cleared, and so another billion dollars of checks is required for this item.[ ] if we assume (on the basis of the estimates given to the writer by decoppet & doremus, and mr. byron w. holt, for recent years) that % of the share sales would be added if "odd lots" were counted, we have another large item that does not go to the clearing house. "private clearings" reduce the number of checks in connection with odd lots, but not so effectively as is the case with hundred share sales put through the clearing house. so far the clearing house has done nothing. what did it do with the % of the stocks in hundred share lots offered for clearing? the figures are perfectly definite. the % of the million shares sold was million shares. the "share balance" remaining after the clearing house had done its best was million shares.[ ] the number of shares sold, then, for which checks did not have to pass as a result of the clearing process was millions. in terms of dollars, we may put the same figures. the estimated money-value of the million shares sold was . billions;[ ] % of this is , millions. the certifications required to pay for the million share balance was , millions. the saving in checks was, thus, , millions of dollars. this is the full extent to which the stock exchange clearing house undercounts recorded share sales. this is less than . % of professor fisher's billions! to offset this, however, we have _over_counting in the % of checks for all dealings on the exchange which pass between brokers and customers, as shown, and all the checks between brokers and out-of-town brokers. we shall also find items of _over_counting which vastly more than offset this undercounting, in _loan_ transactions between brokers, and between banks and brokers, to which we shall shortly give attention. this six and a half billions in checks saved on account of sales of stocks is no small matter, absolutely. but this, though measuring the extent of undercounted _sales_, by no means measures the services of the clearing house to the stock exchange. not merely stocks _sold_ have to be cleared. stocks _borrowed_ are also cleared. borrowing of stocks is not _trade_, but borrowing of stocks requires the passage of money and checks. when stocks are borrowed, money is _loaned_. a bear sells short. he has to deliver next day. he accomplishes this by having his broker "borrow" the stock he needs from a broker representing a bull, who is long on the stocks, and who needs money to "carry" them. the bull, who lends the stock, receives dividends from the bear, as they accrue, and pays the bear interest on the money lent. an enormous lot of this takes place. moreover, to some extent, these transactions are increased artificially, in order that the broker may make his "clearing sheet" misleading, and avoid revealing his position with reference to the market.[ ] loans of stock and sales of stock appear alike in the transactions of the clearing house. moreover, apart from the necessities of the bears for stocks to deliver, we have the necessities of the bulls for money to carry their stocks. if a broker who has borrowed largely from the banks finds his customers turning to the bear side of the market, he has an excess of funds. he may repay his loans, but they may be, in part, time loans, and in any case, he may find it just as well, if he can make a small fraction of % in interest, to lend to another broker, among whose customers the bulls are increasing. a vast deal of money is thus transferred, on collateral security, by means of "loaning stocks." brokers prefer to borrow money from one another in this manner, since no margins are required, in general, whereas banks would require margins. these various reasons make a vast deal of "borrowing and carrying" transactions, and a regular place is set aside for them on the floor--post , commonly called the "money post." at this post, also, the banks, through brokers, lend on call, and the published call rates are established there. of this, however, we shall have more to say later. the extent to which this loaning of stocks takes place at the "money post," as compared with the loaning done privately, varies. it makes no difference, however, from the standpoint of the volume of these transactions that go to the clearing house whether they are put through at the "money post" or outside. the loans made by the _banks_ at the "money post" do not affect the stock exchange clearing house totals.[ ] formerly the "money post" was a place where the position of the bears could be gauged in a given stock. if the demand for a stock was great, the bulls could take heart, and increase the pressure. to avoid giving away this information, however, borrowing is done on a large scale privately, at present.[ ] of course, if the pressure gets too strong, it will manifest itself at the money post anyhow, since bears borrowing particular stocks will forego all or part of the interest, or even pay a premium for the stock.[ ] now it is possible, from the figures given for the total clearings of the stock exchange clearing house, in conjunction with the figures of recorded sales, and the percentage of "x-clearing house" sales, to get a fairly accurate idea of the magnitude of these stock borrowing operations between brokers. the total number of shares offered for clearing by "both sides" in was , , ! this is double the actual amount, since both buyer and seller report the same transaction to the clearing house, the former with a "receive from" sheet, and the latter with a "deliver to" sheet. half this amount, or , , shares, represents the actual number of shares to be handled. as we have seen, millions of this ( % of the recorded sales of millions) represents sales. the rest, or , , , represents borrowing of stocks.[ ] borrowing exceeds actual sales, if the figures for --a year of enormous sales--are representative. we have, now, an explanation of the prevailing opinion among brokers that the stock exchange clearing house dispenses with the major part of the checks that would otherwise be required. _for their purposes_, it does make a vast difference. pratt's figures[ ] show that, without the clearing house, certifications of $ , , , would have been required; that certifications of $ , , , were obviated[ ] by the clearing house, leaving the balance of $ , , , of certifications which had to be used. this balance, as we have seen, is the major portion of what would have had to be paid anyhow for the stocks actually sold and offered for clearing. the saving on the actual sales is only . billions. but the saving to the brokers was, of course, much greater. even six and a half billions is no slight matter for any purpose except the explanation of our surplus billions! pratt gives an estimate at another place of the certifications required by the stock exchange sales, reaching virtually the same conclusion that we have reached by a somewhat different combination of his figures. he indicates that billions of certifications were required, counting in the bonds, in .[ ] this compares with the . billions estimated value of stocks sold, and approximately one billion of bonds. this leaves . billions of certifications obviated on sales. this takes no account of the "odd lots." if they run to an additional %, we have five billions more which are not put through the clearing house. my information is, however, that "private clearings" reduce the checks in connection with these, though not so efficiently as is the case with the big clearing house. do the figures that get into the "all other" deposits from those connected with the stock exchange undercount sales made there? not yet have we taken account of an item which swamps all that we have considered. i refer to loan transactions by the banks, particularly call loans. the volume of these is enormous. at the "money post" alone, the figures average between millions and millions a day.[ ] the range is from to millions. the major part of these loans are not made on the floor of the exchange, however, but privately, between banks and brokers. even on the floor, no records of the loans are kept, and only estimates are available. for the loans made privately, no figures are attainable at all. the total must be enormous. one authority writes, in a letter, "the total amount of money loaned at the post varies considerably, depending upon the rate. for instance, when money is under %, loans are largely made directly between the banks and the brokers, but when it gets over % and gets strong, more loans are made at the post. some national banks make all their loans there right along, so i understand." my information from an officer of the national city bank is that it lends the major part of its demand money on the floor of the exchange. the other chief lenders, according to the pujo report,[ ] are the national bank of commerce, the chase national, the hanover national, j. p. morgan and co., and kuhn-loeb. the same report states that the bulk of such loans are made directly between banks and brokers, and not at the "money post." how do these transactions affect kinley's figures for deposits, and so fisher's total of billions? the small dealer deals, usually, with one bank. when he borrows, he gets a "credit" on his deposit account, but makes no "deposit" that would get into kinley's figures. but stockbrokers deal with many banks. they have one bank which "certifies" for them, and with which they regularly keep a "balance." but for their loans, they deal with whatever bank gives them the best rate, or has the funds to spare. in time of tight money, they shift their loans with great frequency. they borrow also from one another. "money" is "worth money" in new york, and idle funds will be lent by whomever has them for whatever the market will pay, on collateral security on call. when a broker deposits money in his bank borrowed from another bank or another broker, he gets a deposit credit which does get into kinley's figures--he deposits a certified check, or a bank draft. the following has been described as a typical transaction by the bond expert of a boston banking house, and has been amplified by several wall street men with whom i have discussed it. a, whose home bank is bank w, has borrowed, on call, $ , from bank x. bank x calls the loan. a finds bank y willing to lend him enough to pay it off. before he can get the new loan from bank y, however, he must get his collateral released by bank x. before he can do that, he must pay off the loan at bank x. his recourse, then, is to bank w, his regular bank, which certifies for him, and with which he keeps his balance. bank w gives him a certified check (either an overcertification, or a "morning loan" transaction), for $ , , with which he pays off the loan at bank x. he then takes the collateral from bank x to bank y, and makes a new loan. he gets a draft from bank y, which he deposits with bank w, and then draws another check against his deposit with bank w to pay off the "morning loan," in case the transaction took that form. here are three checks for this loan transaction, two of which get into clearings, and one of which gets into "all other deposits." but the checks may be multiplied. a, instead of getting a new loan at bank y, may call a loan from broker b, who may then call a loan from broker c, who may go to bank y to get the funds he needs to pay b. here are two new checks in the series, both of which get into the "all other" deposits. checks fly about recklessly in wall street, and men will turn over money many times, if an eighth of %, or less, can stick by the way, on a good sum, for a few days! this is strikingly illustrated by a fact which caught my attention in the monthly bank statement of a brokerage house which i was allowed to examine. the deposits made during the month, and the checks drawn during the month, balanced to within five hundred and fifty dollars out of several millions. the broker said of this: "it would be true even for a single day, and it would be true for a year. the bank requires us to keep a minimum balance; it is to our interest not to keep more than that. if we have more at the end of the day, we lend it out; if we have less, we borrow to make up the deficiency. we try to have just that balance, and no more, to our credit at the bank at the end of every day." the handling of funds by a brokerage house is a fine art, involving both technical skill and a philosophic grasp of the factors of the "money market." are rates going up? then it is well to reduce call loans, and borrow more on time. if lower rates are anticipated, more call money will be employed--with the possibility of a "squeeze" if too much is taken that way. hidden dangers must be foreseen. the sums borrowed are enormous, and brokers' profits depend in very substantial degree on their skill in borrowing as cheaply as possible, and in utilizing their funds to the utmost. it is here, i think, in loan transactions between banks and brokers and between brokers, that we have a major part of the explanation of the huge deposit figures for new york city, and for the tremendous influence of stock sales on clearings, which mr. silberling's[ ] figures show. this is the opinion of professor o. m. w. sprague, who first called my attention to the volume of call loans, and rapid shifting of call loans, in new york, and it is the opinion of every wall street man with whom i have discussed the matter. the actual pecuniary magnitude of the share sales and bond sales is not enough to do it. the mass of connected loan transactions, however, substantially greater in volume than the actual sales of securities, is, with the security sales, enough to do it. when the call rate is high, which will particularly happen when bank reserves are low, the shifting in loans will be much increased. one bank will have money to lend one day, but the next day will have to call it, to meet heavy demands at the clearing house, while some other bank will have the surplus funds to lend. the brokers, by bidding up the rate, will tempt the temporary lending even of small surpluses, if their necessities are great. the volume of "all other deposits" and of bank clearings will be swelled by this much beyond ordinary. that this should not be revealed to ordinary statistical tests is due to the fact that speculation tends to fall off at such a time, so that the other factors in the stock exchange operations tend to reduce daily deposits and bank clearings. mr. silberling has applied to this problem the technique of a refinement of the correlation method, the method of partial correlation, with the result of confirming this view.[ ] i conclude, therefore, that stock exchange transactions, instead of being undercounted in bank deposits, are very greatly overcounted.[ ] the big item that does it is loan transactions between brokers and brokers and between brokers and banks. the evidence from the chicago board of trade, with reference to the extent of clearings within the exchange there, comes in a letter from the secretary of the board of trade to professor taussig. the only clearing house transactions are in connection with "futures." all "spot" transactions are paid in full by check. all futures other than those offset by clearing are paid in full by check. the total amount put through the clearing house in was millions, of which the balances paid were millions (saving checks to the extent of millions). this millions is a trifle indeed as compared with the gap of billions we are trying to fill! it is a trifle also as compared with the business done on the board of trade. the secretary estimates that commodities to the value of $ , , actually arrived on the exchange in . on the average, the figure would be $ , , . for the stock yards "it is approximately the same--last year was $ , , . of fruits, vegetables, poultry, butter, eggs, etc., sold in south water street, it is claimed by their statisticians, the value is $ , , , or a total of about eleven hundred millions _arriving_ [italics mine] yearly at this great market place, all of which is paid for by checks, and when the ownership changes, the change of ownership is always paid by check." how many times the goods change hands, cannot be stated on the basis of records of the board of trade. the secretary contents himself with saying that they are "sold and resold many times." we have discussed this, on the basis of reputed figures of the federal tax on grain futures in , in our chapter on "volume of money and volume of trade." in any case, it is clear that the millions of checks economized, though absolutely great, is relatively a bagatelle. it is, moreover, more than compensated for by loan transactions. the secretary estimates that for a sixty-day period, when grain is coming in, from two to four millions will be lent by the banks daily on _arriving_ grain. how great the loan transactions on subsequent sales will be we can only conjecture. while able to find, then, important cases of trade and speculation which dispense with the use of checks, i cannot find anything of magnitude sufficient to aid professor fisher's case, and i find, on the other hand, enormous overcounting in every field where business and banks meet, as well as in the relations of banks to non-commercial depositors. i conclude, therefore, with reference to the figures of fisher and kemmerer[ ] for volume of trade, that they are much exaggerated for the base year, and that for every other year they are wholly wrong, both because of their excessive magnitude, and because the index of variation has been wrongly chosen. the discussion of p, the price-level, in the statistics of kemmerer and fisher need not be extended. p, for the equation of exchange, and for the quantity theory, is a _weighted_ average, each price that goes into it being weighted by the number of exchanges involving the commodity of which it is the price. the weighting of p should correspond to the elements in t, the volume of trade, and should vary from year to year, as the elements in t change.[ ] now kemmerer's p is weighted as follows: wages, , security prices, , wholesale prices, .[ ] if our conclusions with reference to the composition of the volume of trade, as developed in the chapter on "volume of money and volume of trade," are valid, this weighting gives us a p which has no relevance to the equation of exchange. the wholesale items should have a weight of not more than one-sixth of the total for . certain commodities, as wheat and cotton, in which there is heavy speculation, should be given great weight, and securities should have, probably, the greatest weight of all. if "trade" is to be extended to cover transactions in bills of exchange and loan transactions (as it is by kemmerer),[ ] then p should contain these things, weighted more than all else put together, particularly if call loans are included. the weights should be radically altered from year to year. we should then get a p which would fit the "equation of exchange"--though what else it would be good for is hard to say! the same criticism applies to fisher's p. it is dominated by wholesale prices.[ ] it therefore has no relevance to an equation of exchange in which only one-sixth at the very most of the items are wholesale items. neither fisher nor kemmerer alter their weights in p at all, to correspond to yearly alterations in the composition of t. as _indicia_ of changes in the _absolute value_ of money, kemmerer's and fisher's index numbers, or other index numbers of numerous wholesale prices, with a substantial weighting of wages, are probably better than an index dominated by stocks. stocks fluctuate more widely than wholesale prices and wages, their values are more affected by variations in business confidence, and by variations in the rate of interest. for measuring _the value of money_, the index numbers here criticised are very good. but for the purpose for which they are chosen, namely, to fill the equation of exchange, and to measure variations in a _price-level_ of the sort the quantity theory and the equation of exchange are concerned with, they are simply irrelevant. if it were really true that such an index number varied with the quantity of money, then the quantity theory would be effectively disproved! now, in general summary of our criticisms of the figures of kemmerer and fisher: they have systematically buried new york city, and systematically covered up speculation. all the errors converge in this direction. the _indicia_ of trade cover up speculation and the other things that go on in new york, and other financial centers. the _indicia_ of prices do likewise. fisher weights new york clearings only , while weighting country clearings , in his index of variation of check transactions. he also counts new york returns for march , , as complete, and gives all of his estimate for non-reporting banks to the country. kemmerer does not do this, but he does exaggerate the importance of money, as compared with checks, and does not allow the velocity of money to vary at all in his figures, thus getting a much greater constancy in the figure for total circulation of money and checks than is proper, and covering up the flexibility and variability which new york gives to our system.[ ] in general, our task in this chapter has been an archæological excavation--we have rediscovered a buried city. part iii. the value of money chapter xx recapitulation of positive doctrine the chapters which have gone before have been, in considerable degree, concerned with the analysis of unsuccessful efforts to solve the problem of the value of money, as the quantity theory, or the attempts to apply the notions of supply and demand, marginal utility, and cost of production, to the problem. not all that has gone before has been, even in form, primarily critical. the chapter on "economic value" lays the foundation for the main constructive theory of the book, and in virtually every chapter some portion of our positive doctrine has been developed. in the doctrines criticised, elements of truth have been noted, and in showing the errors of the doctrines considered, constructive doctrine has been presented by way of contrast. the theories criticised, moreover, even where they have gone astray in solving problems, have at least the merit of _stating_ problems, and so have aided in clearing the way for theories better based. it is the task of the present chapter to present, in a series of theses, the main constructive results so far attained. no effort will be made to follow the order of the exposition which has preceded. a summary of that will be found in the detailed analytical table of contents. rather, we shall seek to draw from what has preceded the positive doctrine which is scattered through the preceding chapters, and to present it by itself, as a basis for the more systematic formulation of constructive theory which the following chapters are to contain. . the theory of the value of money is a special case of the general theory of value. . value is a phenomenon of psychological nature. not physical quantities, but psychological significances, are relevant when the problem of value and price causation is involved. . value is not a ratio of exchange, or "purchasing power," but is an absolute quantity, prior to exchange. it is the fundamental and essential attribute or quality of wealth, the common or homogeneous element present amidst the diversities of the physical forms of wealth, by virtue of which comparisons may be instituted among different kinds of wealth, and different items of wealth may be added to make a sum, put into ratios of exchange, and so on. . economic value is a _species_ of the _genus_, _social value_, coördinate with legal value, and moral value. it is part of a system of social motivation and control.[ ] psychological in character, it none the less presents itself to an individual as an objective, external force, to which he must adapt himself. . individual prices have two coöperating causes: (a) the social economic value of the money-unit, and (b) the social economic value of the unit of the good in question. . the average of prices, or the "price-level," is a mere mathematical summary of the particular prices. the causation involved in the average of prices is nothing more than the causation involved in the particular prices. . the value of money is to be distinguished from the "reciprocal of the price-level," or the "purchasing power of money." the value of money is an absolute quantity, one of the factors, determining each particular price. particular prices and general prices may change because of changes in the values of goods, with no change in the value of money. or, particular prices and general prices may change because of changes in the value of money, with goods remaining constant in value. . the absolute value of money, assumed constant, is presupposed by the great body of present day price theory, as supply and demand, cost of production, and the capitalization theory. these theories are, therefore, inapplicable to the problem of the value of money. . but supply and demand, cost of production, the capitalization theory, and other laws concerned with the concatenation and interrelations of prices, being applicable to the problem of particular prices, are also applicable to the problem of general prices. (chapter on "the passiveness of prices.") . the general price-level, as a consequence of changes in particular prices, growing out of changes in the values of goods, may rise or fall, without antecedent changes in the value of money, or the quantity of money, or the volume of credit, or the volume of trade, or in the "velocities of circulation" of money or credit. (chapter on "the passiveness of prices.") . the general laws of prices, supply and demand, cost of production, the capitalization doctrine, the imputation doctrine, etc., conflict with the quantity theory. in the cases where they conflict, the first named doctrines are correct, and the quantity theory is wrong. (chapter on "the passiveness of prices.") . the value of money, being a special case of economic value, is subject to the same general laws. this means, from the standpoint of my theory, that the theory of social value is applicable to the problem of the value of money. . this is not the same as saying that the whole value of money is to be explained by the social value of gold bullion, conceived of as a mere commodity. a hypothetical case was constructed in the chapter on "dodo-bones," in which gold is the standard of value, but is not employed as a medium of exchange or in reserves, where the whole value of money is to be explained by the value of gold bullion, conceived of as a commodity. . but, in general, money gets part of its value from its monetary employments. (chapter on "dodo-bones.") . the additional value which comes to gold bullion as a consequence of its employment as money, is itself to be explained on social value principles. it grows out of the social value of the services which money performs. . the functions of money remain to be examined in detail. and the relation between the value of particular services of money and the capital value of money, has not yet been analyzed. there is a relation between the two--a relation which varies under different conditions--even though it has been shown in the chapter on the "capitalization theory" that the relation is not the simple one which holds between the values of services and the capital value of ordinary income-bearers. there must be an increment to the value of gold bullion as a consequence of its being coined, however, since otherwise there would be no force leading it to be coined. . this increment in value to bullion, as a consequence of coinage, becomes evident when free coinage is suspended. an agio of coin over uncoined bullion may easily appear. . but this is not to assert the doctrine of the quantity theory. because . the money service presupposes the existence of value for money from some source other than the monetary employment (chapter on "dodo-bones"); and . hence the monetary employment can explain only a differential portion of the value of money. . the proposition that money must have value from some source other than the monetary employment does not mean, necessarily, that money must be made of precious metals, or be convertible into precious metals. the value of money is, indeed, most stable and best sustained when such is the case. but it is possible for money made of paper to have value apart from the prospect of redemption--though no clear case has been made, in the writer's opinion, for the view that this has historically occurred. but as a hypothetical possibility, my theory holds that paper money may attain a value of its own, growing out of various factors which a social psychology can explain, including law, patriotism, and custom. social values in every sphere are imperfectly rationalized. values which in their origin are secondary and derived may become substantial and independent of their "presuppositions." this is true of legal and moral values. it is true of the capital value of land. it may be true of paper money. this matter has been discussed in the chapters on "economic value" and on "dodo-bones." the social value theory has not the limitations of the utility theory in dealing with such cases, nor is it tied to a metallist or bullionist interpretation. legal, moral, and patriotic factors, and the influence of social custom, all fall readily into the social value doctrine. . the "measure of values" function, and the "standard of deferred payments" function, need not require the actual use of money, and need not add to the value of money. the function of "medium of exchange," and other functions to be analyzed in a later chapter on that topic, do involve the actual employment of money, and are sources of value for money. . the quantity of money and credit are matters of high importance in economic life. they affect vitally the smooth functioning of production and exchange. while not accepting the extreme view of those writers who see in scarcity or abundance of money the primary cause of the ebb and flow of civilization, i maintain that the quantity of money and credit does make a vast difference, and that the quantity theory contention that, after a transition is effected, the only consequence of a change in the quantity of money is a proportional change in the price-level, is wholly indefensible. (chapter on "volume of money and volume of trade.") . very much of economic theory has been developed in abstraction from money. for economic statics, with its delicate marginal adjustments, on the assumption that friction is banished, that the market is fluid, that labor and capital and goods are mobile, etc., money does appear a needless complication. but the static assumptions are only possible because money and credit have smoothed the way. it is the business, the function, of money and credit to overcome "friction," to effect "transitions," to make it possible for "normal" tendencies to manifest themselves. (chapter on "volume of money and volume of trade.") . the main work of money and credit is in effecting "transitions," bringing about readjustments, enabling society, with little shock, to adapt itself to dynamic change. the great bulk of the actual exchanging that takes place is speculation, and would not occur if economic life were in static equilibrium. this is true both as a matter of theory and as a matter of statistics. more than half of the checks deposited in the united states are deposited in new york city, where "wholesale" and "retail" deposits are a small factor. bank clearings fluctuate in close conformity with stock exchange transactions. great banks, and the bulk of banking transactions, are everywhere found in the speculative centres. (chapters on "volume of money and volume of trade," and "the rediscovery of a buried city.") . hence a functional theory of money must be essentially a dynamic theory: must rest in a study of "friction," "transitions," and the like. and, . hence a theory of money like the quantity theory, concerned with "long run tendencies" and "normal equilibria" and "static adjustments" touches the real problem of the value of money not at all. . an increase of money tends to increase trade. (chapter on "volume of money and volume of trade.") . an increase of credit tends to increase trade. (same chapter.) . an increase of trade tends to increase the volume of credit, and, where the money supply is flexible, tends to increase the money supply also. (chapter on the "volume of trade and the volume of money and credit.") . production waits on trade. the problem of marketing in the modern world is often more important than the problems of production in the narrower sense. selling costs are probably greater than strict "costs of production." "volume of trade," far from being dependent on "physical capacities and technique," is almost indefinitely flexible, with changing tone of the market, with changing values, and with other changes, including changes in the volume of money and credit. (chapter on "volume of money and volume of trade.") . the relation between the volume of money and the volume of credit is exceedingly flexible. the relation between the world's volume of credit and the world's volume of gold is likewise exceedingly loose, uncertain, and flexible. (chapters on "volume of money and volume of credit," and "the quantity theory and world prices.") . "velocity of circulation" is a blanket name for a complex and heterogenous set of activities of men. it is a passive resultant of many causes, and is itself a cause of nothing. the safest generalization possible concerning it is that it varies with the volume of trade and with prices. . barter remains an important factor in modern economic life, and is a flexible substitute for the use of checks and money, increasing when the money market "tightens." it is greatly facilitated by the "common measure of values" function of money. . the general criticism of the mechanistic scheme of causation involved in the quantity theory has, as its positive corollary, the doctrine that psychological explanations must be given--that the phenomena are intricate and complex, as intricate and complex as the play of human ideas and emotions, and the network of social relationships. . this means that the theory of value, and of the value of money, as here presented, cannot assume the simple form, or the mathematical precision, which have made the quantity theory so alluring. it means, further, that the present study, as in part pioneer work, will lack finish and definiteness in many places, will contain errors and gaps, and will leave many problems unsolved, and many distinctions undrawn. at many points, the analysis is confessedly incomplete, and the problems imperfectly thought through--often inadequately _stated_, if seen at all. in what follows, these theses, with doctrines yet to be developed, will be woven together into a systematic theory of money and credit. the study of the functions of money, in relation to its value, will best be approached, i think, through a study of the origin of money. in this, i shall base my conclusions chiefly on the work of karl menger and w. w. carlile, who seem to me to have done most in this field. on the basis of the general theory of value developed in the first chapter, and the results of the two chapters which are to follow on the origin and functions of money, i shall reach my main conclusions as to the laws of the value of money. on the basis of this theory of value, and of the theory of the functions of money, i shall also try to develop a psychological theory of credit, and to assimilate credit phenomena to the general phenomena of value. the development which the theory of credit has had, at the hands of men whose chief interest was that of the jurist or accountant, is valuable and important. i do not wish to discredit what has been done. many important doctrines concerning credit have been developed. the general theory of elastic bank-credit, worked out in the controversy between the "currency" and the "banking" schools, is of the highest importance. this theory i have discussed in the chapter on "the volume of trade and the volume of money and credit." i still feel, however, that there are gaps in the prevailing ideas on credit which only a social psychology can fill. i shall undertake to construe credit as a part of the social system of motivation and control, and to differentiate it from other parts of that system by an analysis of its functions. i think, too, that the theory of the relation of credit and money is in especially unsatisfactory shape, particularly with reference to the factors governing reserves. a final chapter, in part iv, will undertake to bring together the various points in our discussion which deal with the theory of prosperity, and will seek to bring the notions of "theory of prosperity _vs._ theory of wealth," "statics _vs._ dynamics," "normal _vs._ transitional tendencies," and certain other similar contrasts, into a higher synthesis, which will, to be sure, not rob these contrasts of their significance, but will rather find certain generic principles which they share, and so make it possible to measure considerations in one sphere in terms of considerations in the other sphere. in very large degree, students of dynamics and students of statics have been talking at cross-purposes, missing the force of one another's arguments, and have been quite unable, even when understanding one another, to come to agreement, precisely because they have lacked principles by means of which they could compare in any quantitative way the forces which each studies. a higher synthesis, which would give static and dynamic theories common ground, would seem to be a desideratum of high importance. such a synthesis would go far toward unifying the science of economics. i believe that the theory of money and credit, approached from the angle of the social value theory, will meet this need. chapter xxi the origin of money, and the value of gold this chapter is not concerned with history or anthropology for their own sake. the present writer has made no independent historical or anthropological researches, in connection with the question of the origin of money. the chapter is primarily concerned with giving an exposition of the theories of two writers, karl menger and w. w. carlile.[ ] it is not important, for my purposes, whether either writer has presented a theory which anthropology will accept as a correct account of actual origins. the theories do throw light on present functioning, and seem to me to be correct as analytical theories, whether historically adequate or not. there are two main questions with which the chapter is concerned: ( ) how did money come to be? ( ) why should gold and silver have passed all rival commodities in the competition for employment as money? viewing these questions from the standpoint of present functioning, rather than from the standpoint of historical origins, we may restate them as follows: ( ) why should men accept small disks of metal, or paper representatives of these metal disks, for which, _as_ metal, they have no use, or at all events far in excess of the amount which they can make use of as metal, in return for economic commodities which they can use? the social utility of a money economy may well be granted, without giving an answer to this question. granting that social economic life works better by far when men do accept these disks of metal in payments, the question still remains not merely as to why the practice started, but also as to why it continues. granted that it is to the individual, as well as to the social advantage, that each individual should accept these metal disks in excess of his personal need for the metal, _if he is assured that he can pass them on to others at will_ in return for the goods he wishes to consume, the question still remains as to why the individual should have this assurance, as to why the general practice should continue. menger quotes savigny as holding that the thing is downright "mysterious," and the aristotelian answer of social convention (sometimes interpreted as "social contract") is, in effect, a confession that the thing does baffle explanation on the ordinarily understood laws of exchange. the convergence of individual and social advantage, which english economic theory has done so much to emphasize, is less clear by far in connection with money than with the case where a trades a sheep (of which he has a surplus) to b for a quantity of grain (of which b has a surplus), while a has not enough grain, and b has not enough sheep. this exchange is clearly to the advantage of both a and b, and the practice of making such exchanges is clearly to the general advantage. but in the case of money, a trades sheep (of which he may not have an excess, so far as his capacity to consume is concerned) for disks of metal which he probably does not intend to consume at all. the social advantage of a general practice of the sort is easily established, but it is not clear that it is to a's advantage, _unless we assume the practice general_. but there are many practices which could be shown to be socially advantageous if all men practiced them, and, indeed, individually advantageous, if generally practiced, which can, none the less, not be made a general practice. if thieves would cease stealing, we could dispense with a vast expense now incurred in police and safe deposit vaults and heavy locks, etc., and with a small fraction of the savings could give pensions to the thieves which would surpass by far their present incomes! individual and social advantage would converge. but for many reasons the practice could not be instituted, and would break down quickly if instituted. very powerful social pressure indeed is needed to make an advantageous social institution--like morality--work, so long as individuals sometimes find advantage in breaking the general practice, even though the general practice, _on the part of other people_, is of advantage to every individual. now it is clear that the institution of money is to the social advantage. it is clear that it is to the advantage of every individual who has money that everyone else should be ready to accept it in unlimited amount, in return for his goods and services. but it is not clear, on the surface, why everyone should be ready to take metal disks in unlimited amount in return for goods and services. people will not take coal or horses or hay or land or white elephants in unlimited amount in return for goods and services. why should there be such a general practice regarding metal disks or pieces of paper? this question, to one who has always lived in a money economy, may seem childish. such questions regarding anything to which we have grown accustomed seem childish to those who have not been used to raising them. why does the sun rise? why does seed-corn sprout? but these also are proper scientific questions, the answer to which is of high practical importance! the answer to the question just raised regarding money will go far toward explaining the functions of money, and the theory of the functions of money, together with the general theory of social value, will give an answer to the question as to _how the money function adds to the value of money_. the answer which i shall give on the first question will in large measure follow the lines laid down by menger. ( ) the second question needs little revision, when stated from the standpoint of present functioning, rather than of historical origin. we have more recent history to deal with in connection with this question, and carlile, in his answer, offers substantial historical and anthropological proofs. it is still, however, present functioning that is important, and the question may be restated thus: why are gold and silver, and particularly gold, the standard money of the great part of the world to-day? the principles of social psychology which carlile employs in explaining the historical development, are also important in explaining the present attitude of mankind toward gold and silver, and will serve, together with the general theory of social value, to answer the question as to the value which money receives from the employment of the money metal _as a commodity_. it is worthy of note that neither of these questions has been seriously raised or discussed by most recent writers of the quantity theory type. professors kemmerer[ ] and fisher give no attention to them at all. both assume money as circulating, as the starting point of the argument, without noticing how much is involved in the assumption. neither, moreover, gives an _analysis_ of the functions of money. considerations drawn from the question as to the origin and functions of money are hard to bring into the quantity theory scheme. if money circulates, there are causes for it. fully to understand those causes, would be to understand also the _terms_ on which money circulates, that is to say, the _prices_. but then a quantity theory would be superfluous! and if the quantity theory answer should not be obviously in harmony with the answer already given by the theory of origin and functions, then doubt would be cast on the quantity theory explanation. the quantity theorists do well to avoid mixing up with their discussion considerations drawn from the general theory of value, and from the theory of the origin and functions of money. the answer to the first question rests primarily in the fact that there are differences in the _saleability_ of goods. value and saleability are not the same thing. a copper cent has high saleability; a farm has low saleability.[ ] some valuable things cannot be exchanged at all. the capitol at washington cannot be exchanged, yet has value. under a communistic or socialistic régime, exchange, as we now know it, would largely or wholly cease. an entailed estate cannot be sold, yet has value. if society should really come to the stable equilibrium of the "static state," most of the exchanges of lands,[ ] securities, and other long-time income-bearers would cease, but they would still be valuable. i have developed these notions in my article on "value" in the _quarterly journal of economics_, aug. , and have referred to them again in the chapter on "value" in the present book, and so need not expand the discussion here. exchangeability and value are different characteristics of goods. value is an essential precondition of exchangeability, but can exist without it. value is, however, commonly increased by exchangeability. but the theory of exchangeability is a separate matter, and cannot be deduced from the theory of value alone. menger points out the difference between "buying price" and "selling price." you can buy a piano for $ . if you try the next minute to sell it for $ you will probably fail. you may pay ten thousand dollars for a farm. the income of the farm may increase. the tax assessment may increase. the capital value of the farm may increase. and yet, you may have to wait for a long time before you find a buyer who will pay you ten thousand dollars for it. one buys pianos or farms, as a rule, only when one wishes to use them, or when one has such special knowledge of the market that one knows pretty definitely where purchasers can be found for a resale, at a profit. even in such highly organized markets as the stock and produce exchanges, one cannot usually buy in quantity and sell immediately without some loss. "buying price" and "selling price" of such a stock as industrial alcohol preferred are sometimes five points apart, at a given time. the forced sale of land in bankruptcies, or for taxes, notoriously often bring prices far below the price which would correctly express the value of the land. it is only in the ideal fluid market assumed by static theory, where adjustments are instantaneous, where causal-temporal relations have become timeless logical relations, that values are perfectly expressed in prices.[ ] all these difficulties were enormously greater in days of primitive barter, before money and organized markets had been evolved. the difficulties of barter have been much elaborated in the literature of money. i shall recur to the topic in my chapter on the "functions of money." part of the trouble arises from the "want of coincidence" in barter--the failure to find the man who has what you want, and who at the same time wants what you have. goods have high or low saleability, depending, in considerable degree, on the _universality_ of the desire for them. they may have high _value_ if only a few rich men desire them, provided they be scarce. the paintings of old masters would be a case in point. incidentally, the difference between buying price and selling price is often enormous in this case, and the making of a sale may well involve long and expensive negotiations. the difficulties of exchange here arise not alone from the limited market, however, but also from the fact that each painting is a unique, and a unique of high value. a good might have high saleability despite the fact that the ultimate demand for it comes from only a few rich men, if it could be easily subdivided and standardized. menger enumerates a number of circumstances connected with a good which increase its saleability. among them are the following: . widespread and intense desire for the thing (to which should be added, adequate wealth on the part of those who desire it). . scarcity of the commodity in question. . divisibility of the commodity. . considerable development of the market. . that the demand for the article should be more than local. . that it be cheaply transportable. . that commerce between localities in the article be unrestricted. . that demand for the article be constant, not fluctuating, in time. . that the article be durable. . that it be uniform in quality, so that standardization is easy. in general, menger's list meets the requirements often laid down for a good _medium of exchange_. in general, to the extent that any commodity meets these tests, it will be _saleable_. commodities will vary indefinitely in the extent of their saleability. starting with the distinction between value and saleability, and with the analysis of the circumstances affecting saleability, we may now undertake to see how money tends to develop out of a barter economy. suppose that a man, in a barter economy, has a good of low saleability, which he wishes to trade for some other specified commodity. he finds no one who possesses the commodity he wants who is willing to trade with him. but if he can trade his article of low saleability for some other commodity of higher saleability, _still not the thing he wants_, he has yet made progress, he has got _one step nearer_ the object which he does want. it will be possible now, perhaps, to trade the new article, of higher saleability, for the commodity he wants. if not, he can trade it for some article of still higher saleability, which he can finally trade for the article he wants. by several indirect exchanges, he finally reaches his object. incidentally, it is erroneous to distinguish money and barter economies as economies based on direct and indirect exchange. the barter economy may well involve much more indirection than the money economy, in many cases. if there be in the market some one commodity which has a conspicuously higher degree of saleability than any other, the more sagacious men in the market will make it a point to get hold of it and accumulate it in excess of their anticipated consumption of it. they will do this, because they will see that they can thereby get other things which they do need more easily than in other ways. with the accumulation of a given kind of highly saleable goods, in excess, by a few men in the group, in the expectation that the surplus will subsequently be used to buy other goods,--as yet perhaps not specifically determined--we have, not money, but a big step toward money. at first only a few grasp the great idea. they succeed and become wealthy. then others see the advantage of the thing, and imitate them. the prestige of the wealthy and successful men would induce imitation even if the advantage were not clearly seen. then a tradition and a custom grows up. with the growth of tradition and custom, picking out one or a small number of things as particularly desirable objects to accumulate because of their saleability, with the practice of accumulating these articles in excess of intended consumption, money becomes an accomplished fact. there is no need for agreement or legislation. money is not, in its origin, certainly, a matter of law or conscious public planning. with the development of a highly saleable article into money, moreover, we have further a great increase in that saleability itself. the quality which made the practice possible becomes greatly enhanced by the practice. menger thinks that this leads to an absolute difference between money and goods, the money article, which formerly was merely superior to other goods in saleability, now becomes absolutely saleable. the absoluteness of this distinction, which would make it a distinction in kind, rather than in degree, seems to me not to be sound. i think that the distinction remains a distinction of degree. for one thing, the development of money, while it adds to the saleability of the money-commodity, _also adds to the saleability of other goods_. _two_ things must be exchanged, in order that _one_ may be! it is the business of money to facilitate exchange, to overcome the difficulties of barter, to bring about the fluid market. and it does this not merely by acting as a medium of exchange. the fact that goods can be _priced_ in terms of money, can have a common measure of value, makes barter itself easier, as i have shown in my chapter on "barter" in part ii. there are many articles in trade at the present time whose saleability is not much less than that of money, in ordinary times. wheat in the grain pit is surely highly saleable. stocks and bonds are. if it be objected that in the wheat market there is always some difference between buying price and selling price, if considerable quantities are involved, it may be answered that the same is true in the "money market" the man who has just negotiated a three months' loan of five hundred thousand dollars at - / % may well have trouble in turning that loan over to someone else immediately without shaving / % from the money-rate! besides, it is not true that values remain unchanged when a big buyer shifts from the bull to the bear side of the market. buying price is higher than selling price in that case partly because _his economic power_ has ceased to sustain the value of the wheat, and the price would not correctly express the value if it remained uninfluenced by that fact. further, as we shall see when we come to the analysis of credit, one chief function of modern credit is to increase the _saleability of goods_, and to enable men to use the value of their goods in effecting exchanges without actually alienating their property in the goods. it seems to me that the drift of modern systems of exchange is toward closing up the gap between money and goods, in respect of saleability, rather than to widen it.[ ] but this is to anticipate later discussion. it is not necessary, in answering our second question, as to the reasons why gold and silver have become the standard money of the world, to go far in the study of primitive moneys. wheat has almost never been money. the value of wheat sinks rapidly with increase in supply, and is very unstable. wheat meets some other tests that fit it for money, as easy divisibility, ease in standardization, and even has some degree of durability, though subject to deterioration and waste with keeping, and involving expense in keeping. carlile and ridgeway think that wheat was used to some extent among the greeks in southern italy as money, at one time.[ ] but this was possible because there was a regular export trade in wheat--the same thing that made tobacco available as money in virginia. in general, however, commodities which minister to easily satiable wants are ill-adapted for money. and that is especially true of current stocks of goods currently consumed. the accumulation of money, moreover, implies a stage of human development where the accumulation of _capital_ is possible. it implies foresight, the suppression of present wants in the interest of future wants, and almost always money has been a commodity well suited to serve as provision against future contingencies. cattle, slaves, knives, fish-hooks, cooking implements, and similar things have been money. the "store of value" function manifests itself early. but very early a different sort of commodity comes in. articles of _ornament_ early begin to take the place of articles that minister to more animal wants. it seems strange that articles meeting wants which are commonly counted frivolous and fanciful should distance those obviously necessary in the race for a place as money. it seems strange that the nations now at war should seem more concerned about their gold supplies than about their wheat supplies.[ ] but it is none the less a fact that men in all ages have been enormously concerned about ornament. in warm regions, ornament has commonly preceded clothing. very early, necklaces, bracelets, rings, earrings, nose-pendants, etc., became objects of exceedingly great desire. and very early, gold and silver were used for such purposes, and men made long expeditions for them and fought wars for them in very early times, before the money economy was developed far. other ornaments than those made of gold and silver have also become money. wampum, polished shells, iron ornaments, etc., have all been money. the karoks of california were accustomed to use strings of shell ornaments as money. when this was supplanted by american silver, they used strings of silver coins as ornaments, dressing their women lavishly with rows of silver dimes, quarters, and half-dollars! ornament and money are freely _inter_changeable in primitive life. to-day, in the western world, the thing is more specialized and differentiated, and the interchange of money and ornament is largely confined to jewelers, bankers, especially international bankers, gold brokers, and the mints, _through_ whom the rest of society make the interchange. in india, however, the peasant's hoard takes the form of bracelets, bangles, and earrings for his wife and daughters, and the peasant himself seems to regard them in the double light of provision for future needs, and as conferring social distinction. they are both ornament and savings bank, and are superior to a savings bank from the standpoint of effective saving, since the natives would spend what they put in the bank, but only famine can make them dispose of the ornaments of their women.[ ] saving is a practice not easily started. there are powerful motives in human life making for prodigality. social prestige comes to the man whose hospitality is lavish. social expectation, which is the most powerful steady motive power in human life, makes powerfully for prodigality. thrift is a virtue little esteemed among primitive men, and none too highly esteemed among the masses in most countries. the grudging person, the tightwad, the man who fails to do his share of the treating, the woman who entertains her guests with inadequate fare--none of these enjoy high social esteem. to offset this, a motive equally powerful must manifest itself. it would be considered mean and contemptible for the hindu to put money away instead of spending it on feasts at marriages and funerals, and in hospitality on other festive occasions. but he gains, instead of losing, in social esteem and prestige, if he decorates his women with gold and silver. later, the advantage of such a practice as a matter of provision against future wants would get into men's minds, and would become an added incentive to maintain and increase the practice. thus the frivolous and fanciful side of men's nature furnishes a powerful lever for the development of both money and capital. in the store of value function we find one of the earliest and most significant functions of money. carlile offers a wealth of evidence to show this interchangeability of money and ornament among many peoples, at different stages of culture. three powerful elements of human nature work together in sustaining the value of the metals which become widely used as ornament: ( ) love of approbation; ( ) the sex impulse; ( ) the spirit of rivalry, or competition. in these three we have, perhaps, the firmest basis which it is possible to construct for the value of anything! when religion is added, as has often been the case with the precious metals, the basis becomes solid indeed! modern social psychology has increasingly made clear the power of the first. social expectation can take the raw stuff of human nature, and mold it into almost any form it pleases. original, hereditary differences remain. some raw stuff is so inferior that no high social organization can be built out of it. some stuff cannot respond very effectively to the social stimuli. but _qualitatively_, the tendency is for men to become what society expects. individuals succeed more or less in meeting social expectation. but the very elements of individual aspiration and ambition, the very self of the individual, are molded to the social pattern, and, with the same racial stock, vary almost indefinitely from time to time and from place to place, with the _mores_. if ornament confers distinction,--and almost everywhere it does--men will seek to possess ornaments. commonly it is for the sake of the other sex that men seek ornaments. ornaments are an aid in wooing! men gain wives by being able to give them ornaments.--not that this is the whole story!--and social expectation, almost everywhere, requires that men decorate the wives that they have won. wives usually reinforce social expectation in this matter. further, the desire for ornament is competitive. one's women must be _better_ ornamented than the women of one's neighbors, if _distinction_ is to be gained thereby. but this sets a faster pace for the neighbors, and the standard of social expectation is raised as to the necessary amount of ornament. it is the same sort of competition that arises among armed nations. a new battle-ship for one requires that all increase their naval strength. new armies in germany call for new armies in france. a vicious circle is created. the desire for ornament, unlike the desire for food, becomes insatiable. and hence, the value-curve for the metal used as ornament sinks very slowly, being reduced, not by satiation of want, but by limitation of economic resources. i need not elaborate these notions further. they are of the same sort that veblen has developed in his _theory of the leisure class_. they rest on fundamentals in human nature, however much they differ from the psychology of the "economic man." they give assurance, i think, that, unless radical change in tastes and fashions come in, which displace gold and silver from their position as ornaments and as means of display, we may expect the value of gold to maintain itself at a high level regardless of great increase in quantity. i do not share the view which carlile himself seems, at times, to express[ ] that gold does not sink in value with the increase in quantity. it seems to me easily demonstrable that it has sunk, and does sink. but i should expect the value of gold to survive the shock that might come if gold were entirely displaced from monetary use vastly better than any commodity which serves wants of a different character could stand a similar shock. the demonetization of silver has, of course, not entirely displaced silver from the monetary employment. it has, however, made it necessary for the arts to absorb a greatly increased proportion of the new silver,[ ] and not a little of the old silver. the demonetization of silver, moreover, was accompanied and followed by a great increase in silver production. but silver has stood the shock amazingly well.[ ] it is, of course, thinkable that the attitude of mankind, under new social conditions, and with new tastes and fashions, may change, with reference to gold and silver. love of approbation and distinction, the sex impulse, and the spirit of rivalry, are eternal elements in human nature. but their manifestations may change. there have been times when love of distinction gratified itself in poverty and filth and asceticism. almost anything may be exalted into a social ideal. society may even reach ideals of such a sort that a man may gain social approval and the love of woman in high competition with his fellows in the service of mankind! but even here gold and silver may have a place. they are beautiful, as we now see beauty, and beauty itself is good! the world is better if it has beauty in it. it is just as well to conclude at this point what i shall have to say regarding the value of gold as a commodity.[ ] the same quantity of gold and silver may have widely varying values, depending on the distribution of wealth and power. it is not alone intensity of individual desire that controls values, but also the social weight of those who manifest the desire. and this depends on the legal and other institutional values concerned with social organization. the point is strikingly illustrated by walker's[ ] account--designed for another purpose--of the effect on the values of gold and silver of the conquests of the great eastern empires by alexander the great and the romans. the production of gold and silver, for the great eastern empires, was like the rearing of the pyramids in egypt. all power was centered in the hands of a few despots. control of vast masses of laborers was in their hands. the social values--it is difficult to classify them as legal, economic and religious, since all three are blended--gave little weight indeed to the desires of the masses, and tremendous weight to the slightest whims of the despot. thus, since the love of gold and silver was intense in these despots, and since religious considerations also called for the accumulation of great treasuries of gold and silver, enormous numbers of laborers, living miserably, toiled in the mines to produce them, and amazing stores of gold and silver were accumulated. the precious metals had, in these eastern empires, a high value per unit, since so large a portion of the social energy of motivation attached itself to them. with the conquests by greeks and romans, however, a great change came. the old, gold-loving despots lost their power. the conquerors had vastly less love for gold and silver for their own sake. moreover, the leaders among the conquerors had very much less power in their own social systems than had the oriental despots. their soldiers were in considerable degree free mercenaries, who had a right to a share in the spoils, and who cared much less for hoards of precious metals than for many other things. in the new régime, the social centre of gravity was changed. there remained few who loved great stores of precious metals who had power enough to accumulate them. mining on the old basis was impossible. though slavery persisted, more and more of the labor of slaves went into the production of things that the masses of men could consume. gold and silver sank enormously in value. radical readjustments in the distribution of wealth in our own day, might well make substantial changes in the value of gold, without any change in its quantity. that a more equal distribution of wealth and power, however, would lower the value of gold now, as in the case just discussed, is not so clear. the masses in the western countries are already fed and clothed, as a rule, even in times of adversity, and usually increasing income for them means increasing expenditure to satisfy less pressing wants, and particularly to satisfy wants connected with social esteem. the laborer's wife gets an expensive cab for her baby when she can afford it. the negroes have gold fillings put in their front teeth--sometimes when the teeth are sound! the practice of giving wedding rings, and even engagement rings, is spreading among the poor. our american rural poor, of pioneer stock, have had less concern for gold and silver ornament than the masses of the asiatics and recent european immigrants. but among the rural poor in america, as city standards spread, the tendency to use gold and silver ornaments seems to be increasing, while we may with considerable confidence expect, i think, that the rise of the immigrant to better economic conditions will mean a larger use of gold and silver on his part. gold leaf on ceilings and radiators would cease, doubtless, except for public buildings, if great fortunes disappeared, and the use of gold, at least, for plate, would be impossible in an economic democracy.[ ] silver might well gain in value at the expense of gold if there were radical changes in the distribution of wealth. it is notorious that prosperity among the agricultural masses of india is promptly followed by absorption of gold in that country. i venture no concrete conclusions on this point, beyond the general conclusion that a redistribution of wealth, with no change in the quantity of gold, might well be expected to alter the value of gold. it may be added that the general impoverishment of europe, growing out of the present world war, will probably lower the marginal value of gold in the arts (and hence as money) in considerable degree. from this cause alone, to say nothing of causes growing out of the money-employment of gold, and growing out of the values of goods other than gold, we might expect higher prices after the war than before the war, for articles of consumption.[ ] chapter xxii the functions of money and the value of money in preceding chapters, i have spoken of the "money-service" as a source of additional value of money, under certain conditions. before money can function as money at all, it must have value from some non-monetary source.[ ] but, given this prior value, money performs valuable services. these valuable services, in certain cases, add to the value of money. moreover, the fact that money, when made of a metal used in the arts, lessens the amount available for use in the arts, raises the marginal value of that metal there, and consequently raises its value in monetary form as well. it is now necessary to analyze the money-service, and to see in precisely what ways it does affect the value of money. and first, we must notice that the money-service is not simple, but compound; that in fact there are several services of money, in many ways distinct from one another; that not all money can perform all of these services; that most of them may be performed by things other than money, that these services are not all equally important as sources of the value of money, and that the same service varies, from time to time and from place to place, in its significance from this angle; and finally, that one of these services which is of the greatest social importance, namely, the "common measure of values" function, does not add to the value of money at all. i shall not now undertake a history of theories of the functions of money. many of the points which follow are common property of many writers.[ ] the nature of some functions has been more clearly explained than that of others. i have not found in the literature of the subject any very clear statements, moreover, as to the relations of different functions to the value of money. i shall try in what follows, by a series of hypothetical cases, to isolate each function of money, as far as may be, and shall try, by varying my hypotheses, to indicate variations in the influence of the different functions on the value of money. the functions of money have been variously described and named. the following list seems most satisfactory to me: . common measure of values (standard of value). . medium of exchange. . legal tender for debts (_zahlungs-_ or _solutions-mittel_). . standard of deferred payments. . reserve for credit instruments, including reserve for government paper money. . store of value. . bearer of options. the common measure of value function rests in the intellectual needs of man. it grows out of the necessity for calculation, for bookkeeping, for understanding what is going on. any object of value may be used to measure the value of anything else, just as any object of weight--say an irregular mass of iron--may be put in the balance against some other object, and the relation between the absolute weights of the two objects thus more or less definitely ascertained.[ ] but it helps little, in getting at the aggregate weight of a collection of objects, to know that a among them is heavier than b, while d is lighter than f. to get a knowledge of the situation adequate for quantitative manipulation, it is best to compare all of the objects with some _one_ object, chosen as the standard of weight, or common measure of weights. thought is thus immensely simplified. if we may imagine the calculations of a dealer in a rural region, where no common measure of values is used, it will help to make clear the nature of this function. let us suppose that he deals in nails, wire, cotton cloth, eggs, butter, hams, sugar, and moonshine whiskey, and that his customers also make and use most of these things, using him as a central clearing house in their rude division of labor. without a common measure of values, it is necessary for him to keep in mind the price of every commodity in terms of every other commodity. if there are twelve commodities, this means ratios which he must remember, according to the formula for permutations and combinations. in general, in such a situation, there would be the following ratios: (n - ) + (n - ) + (n - ) + ... (n - (n - )). let him choose, however, one of his commodities, say eggs, as the common measure of values, and he needs to bear in mind only eleven prices, namely, the prices of each of the other eleven articles in eggs. thinking is immensely simplified. in general, with a common measure of values, dealers need bear in mind only (n - ) prices. suppose that at the end of the day, after considerable trading, our dealer finds the following changes in his stock: _he has gained_ _he has lost_ doz. eggs lbs. nails gallons whiskey lbs. wire hams lbs. butter yards cloth lbs. sugar has his trading been profitable? how can he tell? reduce all the items in both columns to their equivalents in eggs, however, and the answer is very easy. no complicated business is possible without this common measure, and common language, of values. be it noted that this common measure of values does not necessarily involve the use of a medium of exchange. the practice of _thinking_ in a common measure is what is involved. if the article chosen be eggs, which all are accustomed to use, the service of a common measure might easily be performed without the practice of indirect exchange, assuming that other physical difficulties of barter to which i shall shortly refer, were absent. indeed, as i have pointed out in the chapter on "barter" in part ii, a great deal of barter goes on in modern life, made very much easier by the fact that we have a common language of values, a common measure of values. for the easy working of the system, it is important that the common measure of value be an article with whose value the group is well acquainted. the frequent testing of this value in actual exchanges vastly facilitates this. but actual exchange is not necessary for the performance of the measure of value function. we have cases where the measure of values and the medium of exchange are different. thus, in the homeric poems, we find indications that cattle served as a measure of values, even though payments were made in gold. the virginians commonly _thought_ in pounds, shillings and pence, even when using tobacco as a medium of exchange. the need for a common measure of values would manifest itself in any complex socialistic society, even though exchange were largely dispensed with. no systematic plans for utilizing the resources of such a society would be possible, no bookkeeping would be possible, without some such device. for this function, i prefer the term, "common measure of values," to the term often used instead, "standard of values." the latter term, as used in connection with the expression "standard money," sometimes carries the connotation of "money of ultimate redemption," and its main function is thought of as serving in reserves. the reserve function is a separate function, however. it is common to have money made of the standard metal in reserves. but this need not be the case. i would refer once more to the hypothetical illustration developed in the chapter on "dodo-bones": gold, not coined, as the "standard of value"; paper as the medium of exchange; silver bullion, at the market ratio with gold, as the reserve for redemption of the paper. this may suggest that a distinction may properly be drawn between measure of values, and ultimate standard money. the paper money, in this case, would be the thing of which the masses would ordinarily _think_, so long as the system worked smoothly. and the paper could serve as a measure of values. the case is not unlike the case where a "standard yard," or "standard pound" is kept for ultimate reference in a government bureau, while yardsticks or pound weights in the shops and warehouses do the actual measuring. the cases do not, indeed, run on all fours. the measurement of weights and lengths involves physical manipulation; the measurement of values is an intellectual operation, made by comparing two objects of value. the comparison may be made in actual exchanges; it may be made by an accountant's estimate; it may be made by comparing the results of several exchanges, in sorites form, only one of which involves the ultimate standard measure. the yardsticks actually used may vary more or less, by accident or design, by variations of temperature, etc., from the standard yard. the paper dollars, under a smooth working of the system described, would be held closely to the ultimate standard, and would, in any case, not vary as compared with one another at the same time and place. when the medium of exchange diverges in value from the ultimate standard, as in the case of the american greenbacks during the period from to , we have, sometimes, shifting relations among the functions. the greenbacks were the measure of value most commonly in use. they were legal tender for debts, except where gold was specified in the contract. they were commonly the standard of deferred payments. to a considerable extent, however, gold was used in reserves, and even as a medium of exchange. people _thought_ in both standards. and finally, gold remained an ultimate standard to which the greenbacks were referred, and by which variations in their value were measured. the terms, "primary standard" (gold) and "secondary standard" (greenbacks), have been employed to aid in straightening out this confusion.[ ] i think, on the whole, that the term, "common measure of values" describes the function which i wish to emphasize more clearly than the term, standard of values, and i shall, in general, employ it for that purpose.[ ] the medium of exchange function grows out of the physical difficulties of barter, rather than out of intellectual needs. the discussion in the preceding chapter of the origin of money has emphasized the nature of the difficulties which a medium of exchange meets. a has an ox, which he wishes to trade for shoes, sugar, and a coat. neither shoe-maker, tailor nor grocer cares to take the ox, however, and, besides, no one of them could supply a with all three of the things he wishes to get. moreover, even if a should meet a man who had all three things, he would not care to give up the ox for them, since the ox is worth more than all three. if there be a medium of exchange, however, a may sell his ox to the butcher, and take his pay in that medium, which will be something easily and minutely divisible, buy coat and sugar and shoes, and take the surplus of his medium of exchange home, waiting for another occasion. the medium of exchange function overcomes the difficulties arising from low saleability of many goods, due to limited number of possible buyers, lack of divisibility, etc., etc. the common measure of values aids greatly in determining the prices, the terms, at which exchanges may be made; the medium of exchange makes possible exchanges which could not be made at all in its absence. the measure of value function does not add to the value of money. the medium of exchange function is commonly a cause of additional value for money. the source of this extra value is the gains that come from exchange. exchange is an essential part of the productive process, where you have division of labor with private ownership of the instruments of production, and private enterprise. values[ ] may be created by changing the forms, the time, the place, or the ownership of goods. all these operations are necessary in an economic system like our own. those who possess money are in a position to take toll, in values, from those who wish to get rid of the goods which they have produced, and to get hold of the goods which they wish to consume. the holders of money do this by means of the money, and under the laws of economic imputation, these gains are attributed to the money itself, first in the form of a rental value, and sometimes, under conditions later to be discussed, as increments to capital value. before giving full discussion to this topic, it will be well to consider certain other functions, which are, or may be, sources of value for money. the reserve for credit instruments function cannot be fully discussed till we take up credit. provisionally, it may be said that it is a source of absolute value for money, _per se_, even though the effect on prices may be that, owing to a rise in the values of goods, the prices rise. the fact of credit may even tend to lessen the absolute value of money itself, by lessening the value that comes to money from the medium of exchange function. on the other hand, credit increases exchanges, making possible a vast mass of transactions which without it would not occur at all. of course, in our hypothetical case above, where the reserve for credit instruments is silver bullion, the reserve for credit instruments function does not add to the value of money at all. the "bearer of options" function of money is also a source of value for money. it is a valuable service. the man who holds money, waiting his chance in a fluctuating market, anticipates a gain which justifies him in holding his capital without return upon it. money is not alone in performing this service. high grade bonds also perform it. they bear a lower yield per annum to compensate. the service of bearing options is itself a part of the yield, and is itself capitalized, in their case. two % bonds, each equally secure, but one of which has a wide market, while the other has a restricted market, will have a very unequal value. this "bearer of options" function is often identified with the "store of value" function. the two are properly distinguished. if a man has in mind a definite contingency, at a definite future time, for which he wishes to hold a store of value, he may well find that a high yield bond, or a loan upon real estate, or many other productive investments, will serve him better than money or bonds with wide market. so far as money is concerned, the "bearer of options" function is much more important than the "store of value" function to-day. the reserve of value in liquid form, for undated emergencies (like the war chest at spandau, or the big reserve accumulated between and by the _banque de france_), would, from the point of view of this distinction, come under the "bearer of option" function, rather than the "store of value" function. the important thing about the distinction is that for one purpose a high degree of saleability in the thing chosen is necessary, while in the other, such is not the case. the most common case of the "bearer of options" function arises when men hold money, liquid securities of low yield and stable value, short loans, call loans, or bank-deposits, waiting for special opportunities in the market. the medium of exchange function would exist in a society where business goes always in accustomed grooves, where uncertainty is banished, and where most of the assumptions of static economic theory are realized. if we push static assumptions to the limit, and assume "friction" of all sort gone, assume that all goods can flow without trouble or expense to the places and persons where their values are highest, etc., even the medium of exchange function would disappear. but if we make our static assumptions a bit more realistic, leaving the "friction" of barter, but banishing the need for readjustment, and the uncertainties that grow out of dynamic changes (whether caused by growth of population, or changes in laws and morals, or in fashions and tastes, or in technical methods, or by accidents of various kinds), then the medium of exchange function will still remain. given dynamic changes, we have need for a vast deal more of readjustment, and a vast deal more of speculation. i have shown in the chapter on "the volume of money and the volume of trade" that the great bulk of trading in the united states to-day is speculation, which increases or decreases with the amount of dynamic change, with its accompanying uncertainty and need for readjustment. the major part of the medium of exchange function arises from this. the whole of it arises from factors which purest static theory is accustomed to abstract from. the _whole_ of the "bearer of options" functions arises from dynamic change. _this is the dynamic function_ of money _par excellence_. it is commonly treated by economists as an unusual and unimportant function. merged with the store of value function, it is frequently treated as of historical, rather than present, importance. in my own view, it is of high present importance.[ ] i should count it as in considerable degree a _function_ (using function in the mathematician's sense) of "business distrust"[ ] waxing and waning in importance as business distrust increases and decreases. in past ages, this function was primarily concerned with consumption, money and other goods being held, at the loss of interest, as a safeguard against personal danger and as a means of subsistence in emergency. increasingly to-day, it is concerned with _acquisition_ of wealth in _commercial_ transactions. when war and domestic violence were the main cause of social disturbance, the consumption aspect was most prominent. that aspect came strongly to the fore at the outbreak of the present war. the heavy selling of securities, which closed the bourses of the world, grew out of men's efforts to get money and bank-credit as a "bearer of options" for the old reasons. the old reasons explain in large measure the accumulation of gold by the _banque de france_, and by the german government, referred to above. but to-day, in general, the main purpose of those who use money, or other things, as a "bearer of options" is to make gains, or avoid losses, in industry and trade. the man who, in a given state of the market, is afraid to lend, or afraid to invest, foregoes the income which lending and investing promise, and holds his money. the man who sees uncertainty and fluctuation in the market, and expects them to give him bargains in time, foregoes income for a time, and holds his money. the man who has investments of whose future he is uncertain, and who fears to try any other investment for a time, sells what he has, foregoes income, and holds his money. it is not always possible, in discussing the money functions, to preserve the distinctions between money and credit, or money and "money" in the money-market sense. how much difference is made by these distinctions will best be discussed in our chapter on "credit." the significance of the "bearer of options" function is especially manifest, i think, in connection with call loans. the "call rate" is commonly well below the regular "discount rate," or rate for thirty-day, sixty-day, or ninety-day paper. the explanation is to be found, i think, in the fact that the lender of call money does not entirely dispense with its service. he reserves a part of the "bearer of options" function. to be sure, he will, in practice, have to wait an hour or two, or even more for it,[ ] and this may well mean that he cannot take full advantage of an option. but the right to demand money on even twenty-four hours' notice is more available than a high-grade bond, as a means of meeting rapidly changing situations. this principle will explain, too, i think, why money-rates in general, including even ninety-day paper, are usually lower than the long-time interest rate on safe farm mortgages, or on real estate mortgages in a city. the thirty-day rate will commonly be lower than the sixty- or ninety-day rate--though exceptions can easily be found, if the thirty-day period is to cover a time of active business, which is expected to grow less active during the second or third month. the influence of the bearer of options functions is not the only influence at work on the rates. if it be objected that the long-time interest rate on high grade railroad bonds or government securities is sometimes lower than current money-rates, or just as low, the answer is that these bonds also share the "bearer of options" function, and that the interest rate on them is, like the money-rate, lower than the "pure rate" of interest. writers[ ] have been accustomed to look for the "pure rate" of interest, _i. e._, an interest unmixed with insurance for risk, in the highest grade of government securities. i think that this is a mistake. i think that the "pure rate" should be sought in long-time loans, of assured safety, which lack a general market. such loans, _at the time they are made_, should represent the "pure rate" _for that time_.[ ] i shall recur to the question of the money-rates, and the question of the relation of the money-rates to the general rate of interest, in the chapter on "credit." for the present i would call attention to the interesting case of austria, where the money-rates are normally very low, because the volume of commerce and speculation is small, and the volume of banking capital, politically fostered, is large; and where, on the other hand, the general rate of interest on long-time loans is high, owing to the scarcity of capital in industry and agriculture, as distinguished from commerce.[ ] this case may illustrate, incidentally, that even as a "long run" or "normal" tendency, an excess of currency in a country may lead, not, as the quantity theorists contend, to high prices, but rather to low money-rates. austria presents simply a striking case of what i should regard as the general tendency. the money-rates and the interest-rates tend to approach one another to the extent that paper representatives of many different industries get into the "money market"--to the extent that industrial investments in general become saleable enough for it to be safe to finance them by means of short-time banking credit. when banks lend on collateral security of corporation stocks to the buyers of those stocks, they are, in effect, financing the corporation itself.[ ] industries differ widely in the extent to which they depend on the money market for their finances. the difference depends often less on the nature of the industry than on the type of the industrial organization. an individual farmer cannot get the bulk of his credit that way! but there is no reason why a well-organized corporation, assuming it successful in agriculture, might not draw on the money market, even if not so freely as a manufacturing corporation does. for the contention that the money-rates for short periods are lower on the average than the rates on longer loans, and that the call rates are, on the average, well below all time rates, there is abundant statistical evidence. from to in new york city, the average rate on - to -month paper was . %; the average rate on - to -day paper was . %; the average call rate was . %. in the same city, for the period from to , the averages were: - to -month paper, . %; - to -day paper, . %; call rate, . %.[ ] this last figure for call loans represents an average of quotations at the "money post" at the stock exchange. while normally the call rates are well below this, occasional high figures, like those in , pull this average up. the high rates at the "money post," however, are not always representative. banks frequently do not charge their regular customers as much as the quoted rates. even more detailed evidence for our thesis is to be found in w. a. scott's investigation of new york money-rates, for the period, - .[ ] he studies _two_ sets of quotations for call loans, those at the stock exchange "money post" and those at the banks and trust companies; _seven_ sets of quotations (five of which appear regularly) under the head of "time loans," namely, -, -, -day, and -, -, -, and -month; and _three_ under the head of "commercial paper," namely, double name choice - to -days, and two varieties of single name paper. he finds a clear tendency for the rate to vary with the length of the loan, although noting many exceptions. "the difference between these quotations rarely exceeds one-half of one percent, and the general rule seems to be that the influence of time in raising the rate grows less as the length of the loan increases. for example, there is apt to be a greater difference between the quotations of -and -day paper than between -day and four months. likewise there is a greater difference between -day and four months than between -months and -months paper." the call rate, though much more variable than all time rates, and sometimes high above them, is, on the average, well below them. for the period, - , the averages are: call loans, . %; time loans, . %. the declining influence of differences in time as the length of the loans increases, is what our theory would require. if the "bearer of options" functions of short loans is the explanation of the lower rate on them, it is a factor which would count for less and less as the length of the loan increases. a month's difference is all-important, when the month involved is proximate, say the difference between and days. but it is of virtually no importance, from the standpoint of the man who wishes to meet sudden and indeterminate emergencies, whether the note he holds matures in eleven months or twelve months. the difference between a one-year loan and a five-year loan might, on the other hand, still be important from the angle of bearing options. the factor should cease to have any meaning at all, or at least any appreciable meaning, when the difference is between, say, twenty and twenty-five years. i have no statistical evidence that the one-year loan can normally expect a lower rate than the five-year loan. at times, short time financing may be even more expensive than long time financing. but such study as i have given to quotations of short-term notes of corporations, as compared with the longer term bonds of the same corporations, would leave the distinct impression that short-term notes fare better in the security market, and yield less return. a complication arises, here, of course, that the short-term note may often lack the safety which a first mortgage bond of the same corporation would have. the legal tender for debts function calls for a brief discussion. whatever gives legal quittance from contract obligation, or from legal obligation as for taxes, performs this function. "legal tender" money, in the strict sense, is not alone in performing this function. usually a government will by law or administrative practice with the force of law, bind itself to accept forms of money which it will not compel other creditors to accept. thus, silver certificates, without being "legal tender," are a means of legal quittance from obligations to the federal government. sometimes governments will receive only gold at the customs house. this was true in the greenback period, when greenbacks were "legal tender," but not good for payments of customs duties. the reader who is interested in refinements of the legal distinctions among different kinds of money will find the thing elaborately worked out by g. f. knapp, in his _staatliche theorie des geldes_.[ ] but "legal tender" money is not always an adequate means of quittance. if the contract calls for corn, or wheat, or northern pacific stock, the best legal tender money is a poor substitute! witness the "corner" in northern pacific in . it is doubtless true, as davenport[ ] points out, that all contracts, whatever they call for, may be ultimately met, under the common law, by money damages, but that does not mean that a man can maintain his solvency or position in business by offering money when northern pacific is designated in his contract. doubtless even there money will free him, _at a price_, but northern pacific stock is at least more convenient for the purpose! a man does not need money to get free from debts, even when money is required by the contract. he can turn in whatever he has in an assignment for the benefit of his creditors, and get free _via_ the bankruptcy court. in other words, the legal tender function of money, while it does distinguish money from other goods as a matter of _degree_, does not erect an absolute difference of _kind_. under a smoothly working monetary system, where all forms of money are kept at a parity by constant and ready redemption, and where people have no doubt that this redemption will occur, the legal tender quality which attaches to part of the money is a matter of no consequence. it adds nothing to the value of the money. in times of stress, the legal tender quality may be a source of a considerable temporary value. this is especially likely to be true of an inconvertible money. the legal tender quality of the greenbacks led to a very considerable fall in the gold premium in the panic of . i have mentioned this point in the chapter on "dodo-bones," where part of this discussion has been anticipated. in general, the legal tender quality may be recognized as a factor in sustaining the value of money, if as a consequence of this quality men take the money when they would not otherwise take it, or take it on terms which they would otherwise not agree to. where, however, the money is money which they are glad to get in any case, the legal tender quality is a matter of supererogation. the standard of deferred payments function, as distinguished from the legal tender function and the medium of exchange function, does not add to the value of money. of course, if the standard of deferred payments is actually used in making the deferred payment, then it finally becomes assimilated to the other two functions. but it is quite possible to divorce them completely. suppose, for example, that the standard named in a contract in the greenback period was gold, but that payment was made in greenbacks at the market ratio. or, suppose that the standard of deferred payments should be a composite of commodities, the tabular standard, with the understanding that the index number on the day of payment should determine the amount of money to be paid. in neither of these cases does the standard of deferred payments function supply any reason for an increase in the value of the thing which serves as the standard. in general, the standard of deferred payments and the measure of value functions do not, _per se_, add to the value of money. the legal tender function may or may not do so. the medium of exchange function, the store of value function, the reserve for credit function, and the bearer of options function, normally do occasion an added value which is to be attributed to money, either as a capital increment, or as a rental. the question remains, however, as to the relation of the rental value, and the capital value, of money. this question is not easy to answer. as i have already shown, in the chapter on "capitalization" and elsewhere, various complications present themselves in the case of money. ( ) in the case of money, the rental, and the prevailing rate of interest at which rentals are discounted to make a capital value, are not independent variables, but tend to vary together. thus, whereas increased rentals would in the case of most income-bearers tend to give a higher capital value, this is offset, in the case of money, by the fact that rentals are subject to a higher discount. ( ) in the case of income-bearers generally, the magnitude of the income, or rental, is causally prior to the capital value. the capital value, in our illustration of the candle, the disk and the shadow on the wall, is the shadow, while the rental is the disk. this is the general relation insisted upon by the böhm-bawerk-fetter-fisher line of capital and interest theory. productivity theories of capital have been criticised on the ground that capital value is not productive, that only concrete capital-instruments are productive, and that they produce, not value, but goods, that these goods receive value from the market, which is reflected back, but discounted, to the capital instruments which produced them, so that, in value-causation the line of causation is precisely the reverse of the line of technological causation. capital instruments produce consumption goods, but the value of the consumption goods is the cause of the value of the capital instruments. in the case of money, however, this is not true. it is the _value_ of the money, the capital value, which does the work that makes a rental value. the value of the money is a precondition of the money-function. so far as money is concerned, both "productivity theories" and "use theories" seem vindicated. there is a "use," an "enduring use" in addition to the "uses."[ ] ( ) the capitalization theory, as hitherto formulated, assumes money and a value of money. it is a part of the general body of price theory for which this assumption has been shown to be needed. with reference to the second, at least of these points, however, it has been shown that money is not unique. diamonds, and all other goods which have as part of their function the conspicuous display of wealth, likewise perform this function _because_ they have value. this gives them an additional value. diamonds are bought for this purpose, when they would not otherwise be bought, or when they would not otherwise be bought in such quantity. this additional value makes diamonds still more effective as a means of displaying wealth, with a further increment in their value, etc. we seem, here, to have an endless, and vicious, circle in value causation, the value mounting indefinitely, building upon itself, a sort of "pyramiding" process. but the limitation comes from several angles. in the first place, _as_ diamonds rise in value, from whatever cause, a smaller and smaller number of diamonds is required to display a given amount of wealth! the increase in the value makes each diamond so much more effective for the purpose in hand that it tends to cut under the cause of the increase. these two tendencies come into some sort of equilibrium. i suppose that by making strict enough assumptions, and limiting the problem rigidly, it would be possible for the mathematician to work out a formula for this equilibrium, letting the increment in value grow feebler with each rebound, till at last it is dissipated in infinitesimals. in the second place, diamonds are not alone in performing this service. they must compete with other precious stones, with the precious metals, with limousines and turkish rugs, with servants and livery, with houses and lots in restricted neighborhoods, with opera boxes and memberships in clubs which confer prestige, with a very wide range of goods, for the detailed discussion of which i would refer again to veblen's _theory of the leisure class_. the _differential_ advantage of diamonds, when it is borne in mind that the conspicuous display of wealth is not the _only_ purpose, as a rule, for which any of these things are bought, that the concrete diamond, or other good bought, is a _bundle_ of valuable services,[ ] of which the displaying of wealth is only one, is not, necessarily very great. for many people, other forms of wealth do better. and, as a rule, diamonds would not perform that service satisfactorily alone. a large number of diamonds, without proper "setting," in clothing, servants, house, opera box, etc., would excite ridicule, and fail[ ] in their purpose of gaining social prestige. they must be part of a complex of goods of the same sort, to accomplish their purpose. now it is the _differential_ advantage of diamonds which makes possible the extra value, in this use. if all wealth were equally serviceable in conspicuous display, if cattle and barns and shares in a coal mine or slaughter-house or glue factory could display themselves as well as diamonds can, and if possession of these things conferred prestige as much as possession of diamonds does, this differential advantage of diamonds would disappear, and with it all extra value from that cause. diamonds are members of a _class_ of goods, a restricted, but still large class, which possess this advantage. we may apply the old ricardian rent analysis here, arranging goods in a series from the standpoint of their capacity to perform this additional service. bread would, for the purpose in hand, be a "no-rent" good. ford automobiles are probably nearly no-rent goods now! that the differential factor is a _cause_ of value in land, as the ricardian doctrine seems to hold, is not, i think, true. if all land were of equal quality, and of equal accessibility to the market, all land would still bear a rent, if it produced goods which had value, and if the land were sufficiently restricted in quantity.[ ] but here is a case where the differential factor is an actual _cause_ of value. if all wealth were equally effective in displaying itself, no form of wealth could gain in value as a means of display. this proposition calls for one important qualification. the fact that wealth, in general, confers prestige is, undoubtedly, a source of stimulus in wealth creation and acquisition, and a big source of the value[ ] of total wealth. it is probable, however, that it is so great a stimulus to production that it defeats itself so far as the values of _units_ of goods are concerned. it stimulates production, which reduces the marginal values that arise from other causes. thus, while a source of additional value to the _aggregate_ of wealth, it probably reduces the values of given items. i have dwelt at length on the case of diamonds, because principles applying there will give us important clues to the case of the value of money. money, by being valuable, is so far equipped to perform the money service. but its _differential_ advantage over other valuable things comes from its superior _saleability_. its original value comes from non-monetary causes, and has been sufficiently explained in the chapter on "dodo-bones" and in the chapter on the "origin of money." the extra value which comes from the money functions rests chiefly in its superior _saleability_. saleability is itself a cause of additional value. but here again we may arrange goods in a series, starting with the least saleable, and ending in money. money has an advantage, but its advantage is not absolute. under a system of free coinage, gold bullion is virtually on a par with coin, and even without free coinage, bullion is for many purposes as good, and for foreign exchange may be better. modern credit, moreover, as has been indicated before, tends to add to the saleability of all goods, and so to lessen the differential advantage of money. here, again we may see the principle that the extra value that comes from the differential advantage tends to limit itself. as the money-use adds to the value of money, a smaller amount of money is required to do the money work, and hence the source of the increment of value is cut under. this principle will partly explain why the rental of money cannot be capitalized in the same way that the rental of land can be. increasing the capital value of land is not the same as increasing the productive power of land. but increasing the capital value of money does mean an addition to the power of a dollar to do money work. it tends, moreover, to lessen the work that there is for money to do, both by reducing the total amount of trading, and by increasing the incentive to the use of substitutes for money. only a part of the value of the services of money, thus, can be added to the capital value of money. there is a further point which is important, as differentiating money from diamonds: much more of the value of the services resting on the value of diamonds can be added to the capital value of the diamonds than is the case with money. the reason is that diamonds may give forth a continuous flow, _in the same hands_, of the service of conspicuous display of wealth. money, however, can perform most of its services for a given owner _only once_. for a given owner, it can serve only once as a medium of exchange. for one owner, it can serve only once as legal tender for debts. it can serve indefinitely as a store of value, or as "bearer of options." in these cases, however, the relation between value of service and capital value does work out in accordance with the capitalization theory. the money thus held brings in no money income. it is held thus only if the services which it performs are equivalent to the income which would come if it were alienated, and something which would bring in a money income were purchased in its place. money may have added to its capital value the value that is created by _one_ marginal exchange, but the whole series of values which a dollar may create in exchanges cannot be capitalized, if only because the same owner cannot get them all. this holds strictly true only so long as no credit arrangements exist. if loans of money can be made, then the lender can take toll on successive exchanges, and get an income which may be capitalized in part, subject to the limitation already discussed, that increasing capital value of money cuts into the rental, and so, in large measure, destroys its own source. where money is not freely coined, there may be an increment, growing out of the capitalization of the money-services, in the value of the coin. the coin may be worth more than the uncoined bullion. this need not be true. if the amount of money work to be done is not increasing, it will not be true, unless the value of the bullion declines, and need not be true then. but an agio on coined over uncoined metal is quite possible, and has frequently occurred. such an agio has limits, however. in the first place, the bullion may be used as a substitute for coin, so lessening the amount of work there is for coin to do, and lessening the source of the agio. bullion would tend to rise in value from being thus employed, and coined money would lose in value from a reduction in the services it performed. further, _anything_ which has more than ordinary saleability may be used as a substitute, in one or another capacity. again, the agio, if it appeared in a country where men are accustomed to thinking about money, might well arouse distrust, lessen the scope of the coin still further, and so cut into its own source. but such agios have appeared, and while a pure case, where the sole source of the agio is the values created in the money-functioning, is hard to find, i think it is not to be questioned that cases where this is part of the explanation have arisen. i should be disposed to find part of the explanation of the rise of the rupee in india after the closing of the mints in in this factor. there seems to be evidence, however, that laughlin is right, in part, in ascribing the rise to an expectation of the adoption of the gold standard.[ ] modern money, in general, however, rests on a system of free, even where not strictly gratuitous, coinage. coined metal thus rarely gets, save to a limited extent or temporarily, an agio over uncoined bullion. uncoined bullion is acceptable in a host of places where coin would otherwise be used, particularly in reserves for credit instruments. bullion is even superior in international trade as a medium of exchange. credit paper (particularly bills of exchange), is superior to both in international exchange, as a medium of exchange, because of various reasons of economy. such paper is even used in reserves in many places, particularly by the austro-hungarian bank. the fact of free coinage means, substantially, that the state has made the money form a free good. how much value is thereby destroyed we may best see if we ask precisely how much the money form could mean _at the limit_. initially, the money form means simply the certification of weight and fineness by a trusted authority. it saves, therefore, the delay and expense of testing the weight and fineness by assay, etc. it saves the trouble and delay of subdivision of a formless metal. it averts many difficulties. for small retail transactions, indeed for retail transactions in general, the conveniences of coined over uncoined metal are very great. small transactions do not justify the trouble and expense of assaying and weighing and subdividing gold! in a country, therefore, where the bulk of the money work is in effecting small transactions, we might expect a considerable agio for coined over uncoined metal. this would be especially true if that country had few facilities for credit substitutes for the coin, particularly for small transactions. in a country like the united states, however, where checks are often drawn for amounts less than a dollar, and where the bulk of the gold, or standard money, is to be found, not in circulation but in reserves, one need not anticipate that the medium of exchange function would give a big agio to gold coin, even if free coinage ceased. so long as coinage means merely a certification of weight and fineness, this conclusion will hold. for purposes of large transactions, the item of weighing and assaying would not be serious. indeed, american banks are accustomed to weigh even gold coin, in quantity. it goes by weight, rather than by tale, and if light-weight, it counts for less than its nominal value. the writer knows a bank which has a considerable store of light-weight gold coin that has been in its vaults for over twenty years. such coin may be counted at par in reports by the bank to the government.[ ] it might be paid out through the window to customers, who would not weigh it, in case of a "run" on the bank. but it cannot be used in dealings with other banks without loss. does the legal tender aspect of coin count for more? under a smoothly working system of free coinage, where moreover, all forms of money are kept at a parity by ready redemption, we have seen that the legal tender feature makes no difference. would it make a difference where coinage is restricted? if we assume that the use of checks for small payments, and the use of bullion in reserves, in a given case, prevents the existence of an agio growing out of the other functions of money, i think it clear that the legal tender feature alone will not create one. but suppose that there is an agio from other causes, will not the legal tender aspect of money tend to increase it? will not men demand coin, which bears an agio, rather than bullion, when they have the right to demand either? and will not the agio then, in a way, grow out of itself, a bigger agio appearing, because an agio has already appeared? it does not seem to me that this need follow. if there be an agio, then creditors will demand either coin, or bullion _on a different basis from coin_. but so long as they get the benefit of the agio, either in the form of coin, or of a larger amount of bullion, particular circumstances, rather than a general rule, will determine which they will demand. the banker might well prefer bullion. the international banker would prefer bullion. the man who wishes money for retail transactions will take coin. men will use the legal tender quality of money as a means of getting the benefit of what agio there is (though contract right, where the contract calls for coin, would accomplish all that a legal tender law would accomplish), but whether they take . grains of coined gold, or . grains of gold bullion, will depend on which they prefer in the circumstances. i do not see that the legal tender feature adds anything to the case of restricted coinage that it does not add to the case of free coinage.[ ] in either case, there will be temporary emergencies, when panics arise, when legal tender money gets an agio over any possible substitute. solvency may depend on it. this might arise under free coinage, if the panic were acute, and if settlements had to be made immediately. but as long as there is time for men to work things out, i should not expect the legal tender feature, _per se_, to add to the agio of coined metal even under restricted coinage. in general, the possibility of an agio for coined metal, under restricted coinage, rests on the extent to which coin has a unique function. in so far as substitution is possible, there is no room for an agio. for many purposes, bullion may be substituted. to the extent that credit is developed, and is flexible, various other substitutes are possible. to the extent that barter can be used, still other substitutes are possible. among an ignorant people, little accustomed to developing new expedients, having an economic life that is not flexible, having an economy based on petty economic units, having little development of credit, accustomed to the use of money in most transactions, money might well be, in many connections, highly important if not indispensable. in england, before the war, where no bank-notes under five pounds were in circulation, and where small checks were little used, an agio on coin might appear if coin got so scarce as to be inadequate for retail trade, but for bank reserves bullion would have served virtually as well as coin, and with the stock of coin she had at the time england could have gone on for a long time indeed with no more agio than just enough to prevent the melting down of the coin. in the united states, where checks can be used for very small transactions, and where a high percentage (very conservatively estimated by kinley at from to %) of retail business is done with checks, the agio on coins of a dollar or over growing out of retail trade might be expected to be very slight. on the other hand, the legal requirements for reserves in specified types[ ] of money might, in time, lead to some agio. i do not think that the reserve function in england would ever do so. if we could combine our use of checks in retail trade with england's absence of legal reserve requirements, i should think that the agio would have little chance indeed of growing great! if to this could be added canada's extensive use of small elastic bank-notes, the chance would be still less. if bank-notes of one dollar could be issued, the agio would be less still. it is in the case of coins of very small denomination that the agio might appear most readily. such coins, if limited in amount, and if given the usual restricted legal tender,[ ] do not need redemption to circulate at face value, even when made of baser metals. it is quite thinkable that such coins should, even when redeemable, circulate at an agio over the redemption money. in small retail transactions the need for money to do business is most imperative. even here, however, there is large flexibility. the present writer, during the period of money stringency in the panic of , made much larger use of checks in very small payments than was his usual practice, and the same was true of various of his acquaintances. i think that the quantity theorist, with his doctrine of an unlimited agio through the restriction of coinage proportionate to the restriction, is best understood if we say that he has taken an exaggerated estimate of the imperativeness of the need for formed money in the smallest retail transactions as typical of the whole situation.[ ] i have elsewhere shown, however, that, in so far as kinley's figures for give us a clue,[ ] the total retail trade of the united states is less than one-eleventh of the total of all transactions calling for the use of money and checks. of that total retail trade, the part in which money is actually used is, on kinley's high estimate, between and %,[ ] and the part in which money is imperative is much lower still. small retail transactions do not give the type for the pecuniary transactions in the united states! they more nearly do so in india, and the possibility of agio is, doubtless, greater there. for our larger transactions, there is an almost indefinite possibility of substitutes for coined money, if profits can be made by making the substitutions. beating the agio would be a source of profits. i repeat what was said in the chapter on "dodo-bones" differentiating this doctrine of the agio from the quantity theory doctrine: ( ) this doctrine presupposes value for the money article from some non-monetary source. it relates only to a differential portion of the value of money. ( ) this doctrine denies the law of proportionality even for this differential portion. ( ) this doctrine is concerned, not with the general level of prices, but with the absolute value of money measured in the ratio of coin to bullion. under the system of free and gratuitous coinage, no agio of coined over uncoined bullion is possible. where small brassage charges are made, as in france (or as in england, where the interest lost during the period of coinage is charged to the man who exchanges bullion for coin at the bank of england) there may be an agio of this amount, though it often happens that this agio disappears, particularly in england. so perfectly is bullion a substitute for coin in england, that the bank of england will often forego its privilege of taking the slight toll in interest, and will credit men depositing bullion with as much as if they had deposited coin. from what has gone before, as to the possibility of an agio, i conclude that the united states, england, canada, and possibly france, would be unable to make large brassage charges. if the brassage charge were much larger than the charges made by reputable and well-known jewelers for assaying and weighing, etc., there would be a large substitution of bars for coins, and the mints would have little to do. however, it needs no arguing that with free coinage, and either very low or no brassage charges, the value of bullion and of coin will, quality for quality and weight for weight, be virtually identical, within a narrow range of variation. what, then, shall we say of the way in which the forces drawing gold from the arts into money manifest themselves? how describe the equilibrium between the value of gold as money and the value of gold in the arts? how construct intersecting curves, presenting a marginal equilibrium? the problem is baffling, and i frankly confess that what i shall have to say does not satisfy me. i hope that some critic may solve the problem better. i can point out the difficulties of the situation, and can indicate reasons why the sort of solution which the economist's training in marginal analysis leads him to desire are not easily found. but i fear that i shall fail to satisfy the demand for an application of curves to the problem! the first difficulty is that we are barred from the use of our yardstick. money is the measure of all things in economic theory--except money and gold bullion! of course there are economic values other than those of gold which do not actually come into the market, but even there we can commonly, by the accountant's methods, make use of the money measure. in very high degree, our conventional curves of all sorts run in money terms, and assume a fixed value of money. clearly the money curve of diminishing value for gold would tell us nothing. the value of gold might sink as its quantity increased, but then the value of the money-unit would sink _pari passu_, and so the curve, with ordinates expressed in numbers of dollars per ounce, would not sink. the value-curve of gold, expressed in money, is a straight line, parallel to the x axis. possible substitutes in the form of abstract units of value,[ ] or of composite units of goods, of an assumed fixed value, will have to be used if anything is used, but they are less satisfactory in the application, and leave the analysis a good deal less realistic. if this were all, the problem would be easy! but there is a second difficulty. we find the factors requiring gold as money, if summed up in a curve, presenting themselves as a call for the temporary rental of the gold. the money functions are performed, in general, not by keeping gold, and getting an endless series of uses from it, as in the arts, but by passing it on, sooner or later. even in the case of the reserve function, the bearer of options function, and the store of value functions, it is not expected to hold the gold indefinitely--always there is the anticipation of some time when it will be passed on again. a curve for gold in the monetary employments, therefore, would be a curve showing the diminishing values of rents, or particular services rather than a curve for capital values. the curve for gold in the arts, however, would be a curve showing the diminishing _capital values_ of units of gold, as the supply in the arts is increased. the two curves do not run in common terms. but another and more fundamental difficulty. in the case of wheat, we may construct our curve free from complications, in idea, at least. on the base line, we lay out quantities of wheat. for each quantity of wheat, we erect an ordinate, a sum of money, or a number of abstract units of value, as the case may be. connecting these ordinates, we have a curve, showing how the value (or the money-price) of wheat descends as the quantity of wheat increases. given the shape of the curve, and given the number of bushels of wheat, the marginal value of the wheat is given. in idea, at least, it does not matter, for the shape of the curve, whether the amount of the wheat is great or small, whether the marginal value of the wheat is low or high. if there are ten thousand bushels only in the market, wheat will be worth $ per bushel. with , bushels, it is worth c. the fact that there are , bushels does not lessen the magnitudes on the higher portions of the curve. the nature of the services which wheat performs is not affected by its value. this is _not true of gold_, either in the arts or as money. in the arts, i have already shown that one function of gold is as a means of conspicuously displaying wealth. gold is like diamonds in this. _because gold is a valuable_, it gets an additional valuable service. this additional valuable service enhances its value. the thing is checked, however, before an endless circle is created, by the fact that as gold rises in value a smaller amount of gold will display a given amount of wealth. the value-curve for gold in the arts, therefore, is not a simple thing like the curve for wheat. it turns upon itself, in ways that i see no graphic device for presenting. this is even truer for money. men wish to have, when they seek money, a quantum of _value_ in highly saleable form.[ ] the curve for the value of the services of money presupposes a fixed capital value of money. it is the capital value of money which does the money work. given a value of money, and given the values of goods, we may see how much money is required to effect a given exchange or perform some other money service. then, knowing how much value will be created by each exchange, or other money service, we may arrange the services in a series, a scale of descending importance, and get a curve. this curve is, in fact, the curve which presents itself in the money market. there we find a curve, running in terms of money itself, so much money for the use of money for such a length of time. but this is a curve of demand for money funds, rather than for gold as such. the "supply" that corresponds to this "demand" is, not gold, but all manner of credit instruments, chiefly bank-deposits, expressed in terms of gold. such a curve is clearly not to be put into equilibrium with the value-curve for gold in the arts, ( ) because it assumes a fixed value for money ( ) because it is concerned with temporary rentals, and not capital values, and ( ) because the demand it expresses is not for the use of gold alone. we may get some aid in reducing these complexities to familiar terms if we employ the device of assuming an equilibrium between gold in money and gold in the arts, without trying to explain in quantitative terms how that equilibrium is arrived at, and then see what causes will lead that equilibrium to shift. in getting the laws of _change_, we may get closer to the causes of the phenomenon itself. the effort to reduce the thing to precise mathematical form requires a degree of simplification which seems to me likely to rob an answer of much significance. assuming that the equilibrium is reached, we may see what factors would tend to cause gold to go into the money-use, and what factors would tend to draw gold into the arts use. we may also see how these changes from one side or the other would modify the value of gold. assume that a manufacturing jeweler has extra demand for his products. his products, of course, are composites of gold, labor, and other raw materials, etc., but part of the extra value that comes to his products attaches itself to the gold that is in them. he now has an incentive, which was lacking before, to melt down full weight gold coin in his possession, or to buy gold bars which might otherwise have been coined. to buy the gold bars, however, probably means that he must have accommodation at the bank. he borrows from the bank the amount he needs, giving a short-time note, since he expects to make up his gold and market it in a fairly short time. the paper of manufacturers of gold will commonly stand well in the "money market," and this is especially true of those in whose hands the gold is not worked up into such specialized forms that the value of the bullion is a minor matter. (i find it necessary to refer frequently to the money market, though a full analysis of money-market phenomena cannot come till after our discussion of credit.) if he must borrow to get the gold, _then the money-rates will come into comparison with the profits he expects to make from working up the gold_. this will usually be true even if he melts down gold coin already in his possession. he might deposit that gold, and so reduce his expenses at the bank, either buying back his own discounted paper, or getting interest on daily checking account. if he has to borrow to get the gold, he may get it either by drawing gold from the bank directly, or by giving a check on the bank to a bullion dealer, which may ultimately lead to a diminution in the bank's supply of gold. however he gets the gold, there is bound to be some reaction, ( ) on the bank's supply of gold, ( ) on the supply of loanable funds in the money market, and hence ( ) on the money-rates themselves. if he borrows from the money market, he affects the money-rates directly (even though probably, in a given case, not noticeably); if he melts down coin, instead of depositing it (or paying it out to others who may ultimately deposit it) there tends also to be less gold in the bank's vaults; if he buys gold with his own funds in the bullion market, the supply of current bullion for which the banks also compete is reduced. in any of these cases, the banks have less gold than would otherwise be the case. the relation between gold reserves and the supply of money-funds has been partly discussed already. we have seen that there is no proportional relation, as fisher, and other quantity theorists contend. loanable funds, on a given gold reserve, are highly elastic. but the elasticity calls for higher money-rates, and higher money-rates tend to reduce the volume of trading, and check the demand. borrowings from the money market by workers in gold, therefore, are much more significant than borrowings by other manufacturers or merchants, because the latter are content with credit devices, for the most part, while the workers in gold withdraw gold itself from the money market. it is, moreover, harder for the money market to resist extra demand from the jewelers than from many other interests. the assets of the jewelers, especially from those who do not work the gold up in highly specialized forms, are exceedingly liquid. their paper, therefore, is exceptionally good in the discount market. usually, too, the larger jewelry houses have specially good general credit and high reputation. there is, then, less disposition for the market to look askance at an unusual supply of their paper than would be the case with many other sorts of paper. they tend to get about as low rates as anyone else in the market. a money market under centralized control seeking to protect its gold, might tend to raise discount rates on jewelers' paper, but a competitive money market is very unlikely to do so. an increase in the value of gold in the arts would, thus, reflect itself pretty quickly in the money market, first in the form of added value for the services of money, and then, secondly, in an increase in the capital value of money. indeed, an increase in the value of a single rental is an increase in the capital value also, since the value of the single rental is one portion of the capital value. not only does it mean a higher capital value for gold, but it consequently tends to mean a higher "price." it does mean a higher "price" for present money as compared with future money. it tends, also, to mean a higher "price" of money in terms of other goods. meeting higher money-rates, all borrowers tend to borrow less, and to buy less, to offer less money for goods. it need not follow, however, that the rising value of gold reduces prices. the rise in the value of gold in the arts may well be a manifestation of a general rise of values. general prosperity, rather than causes affecting the value of gold in the arts alone, may have occasioned the increasing demand for gold in the arts. this would mean rising values for goods at large. it might well be, therefore, that the rise in the values of goods would offset the rise in the value of money, and that prices of goods would rise at the same time that gold is being withdrawn from the money market to the arts. business in general, as well as the jewelers, may be making increased demands on the money market. this would tend still further to raise the money-rates. it would also, however, tend to increase the supply of money-funds. commercial and industrial paper, in a time of buoyancy and expansion, is particularly acceptable to the banks, and they are likely to expand their loans despite the failure of gold reserves to keep pace. they simply get along with smaller reserves. higher money-rates in such a case tend to reduce the volume of business, but need not actually reduce it, if there are bigger profits than before anticipated in business transactions. not absolute money-rates, but money-rates in relation to anticipated profits from the use of money, are significant. there is large room here for flexibility, elasticity, etc. there is much slack to be taken up by the money-rates, much slack in the fluid substitutes for money in various functions, and much slack to be taken up by the volume of trade. but all this will best appear after our discussion of the money market. i have said enough to indicate the character of the factors immediately determining the equilibrium between gold in the arts and gold in the money employments. in the preceding discussion, also, i have discussed the more fundamental factors governing the value of gold in both employments. the problem of translating the fundamental theory of value into money market terms, and of translating the phenomena of the money market into terms of fundamental values is not easy. most of our value theory in the past has been concerned with individual psychology, crusoe economics, trading in small markets with a few buyers, barter transactions, etc. it has been abstract and unrealistic. the practical students of the money market, who are immersed in the facts of modern money, have got little help from it, and have often been scornful of it. i hope to be able to contribute something to bringing the two methods of approach to common terms. they are correlative aspects of the same problem. each gives highly important clues to the understanding of the other. neither can be understood without some understanding of the other. a theory of value which cannot be applied in the money market, the stock exchange, and the great field of modern business generally, has small _raison d'être_. in the next chapter i shall take up the problems of credit, and the money market. chapter xxiii credit analysis and description are much more important than definition. definition at the beginning of a study is frequently a fetter, rather than an aid to thought. this is especially true in a field where phenomena overlap and interlace, and where the "pure principle," "essence" or "_wesen_" of the thing defined never presents itself, but is only to be reached by violent abstraction. to pick out one element--as "futurity"[ ]--as marking off credit from other things would be an illustration of this. or to take the notion of _promise_, or contract obligation, in connection with futurity, is likewise to limit the field unduly, on the one hand, and to include things which do not belong there on the other. thus, a contract whereby a is to build a house for b by the end of a year, receiving at that time, or in instalments as the work proceeds, a sum of money, is not a credit transaction. we have, however, promise, futurity, and a future payment of money all called for in the contract. on the other hand, if a sends b a telegraphic order for money, which b receives three minutes after the money is entrusted by a to the telegraph company, we have a credit transaction, with no element of futurity in it. certainly there is less of futurity there than in the case where a laborer, working all day, is paid only at night for work done in the morning. futurity enters into the values of all goods which are not destined for immediate consumption--capital values of long-time goods are discounted present worths of _future_ values. contracts, promises, and beliefs in promises run through the whole range of economic life,--the domestic servant, paid weekly, illustrates all three. yet only a special class of these economic activities are commonly counted as credit transactions. credit is really a part of the system of economic value relations not easily marked off in economic nature from the rest. its clearest _differentiæ_ are juridical rather than economic. it will be the purpose of the present chapter, in part, to blur, rather than to make precise, the line between credit and non-credit in economic phenomena, and to assimilate the laws of credit to the general laws of value. this will involve, however, a careful analysis and precisioning of certain phenomena commonly counted as credit phenomena. buying and selling on the one hand; borrowing and lending on the other: the distinction seems clear. it is in law. but what is it in economic nature? when a merchant discounts his own note at the bank, it is borrowing. when he discounts the note of another, his debtor, it is selling. if he writes before his endorsement of the note, "without recourse," (unusual at a bank, but common enough with real estate mortgage-notes) he has made a perfect sale, and is entirely out of the transaction. is it, however, in economic nature a different transaction from the original one in which he got the note from a borrower? legally bonds are credit instruments, and stocks are not. stocks represent _ownership_. but practically, as an economic matter, both represent the alienation of control, on faith, to a small group of men, and practically, too, the difference between preferred stocks and bonds is often very slight. whatever the legal rights of a bondholder, under the terms of his contract, the legal fact itself often is, under the growing practice of receiverships, that he cannot exercise his right to foreclose without such difficulty that it doesn't pay to do it. very frequently indeed the junior bondholder will come out of a reorganization as simply a preferred stockholder--which is what he practically was all the time. he couldn't vote as a bondholder, but his voting rights as a stockholder commonly mean little! as a bondholder, if he held enough bonds, he might even have more influence on the affairs of the corporation than as a stockholder. the market is moved by other forces than the legal distinctions in corporate contracts! and market facts are not necessarily correctly told by the accountant's categories either. i shall trouble myself little, in what follows, with the juridical and accountancy problems of credit, save in so far as these bear directly on the more pertinent economic aspects of the matter. i am interested in the question of credit as a part of the problem of value and prices--and particularly from the standpoint of the problem of the value of money. what difference is made in values and prices by lending and borrowing? what kinds of lending and borrowing are there? what shall we say of bank-notes, of bank-deposits, of bills of exchange? what difference is made by the money market? behind the legal forms and the technical methods, what are the psychological forces at work? how are these psychological forces modified by the technical forms and methods? what are the economic differences between long and short time loans? how shall we draw the distinction between the "money-rates" and the long time interest rate on "capital?" why can some things serve as collateral in the money market when others cannot? what sorts of credit are appropriate to commerce, to manufacturing, to agriculture? is credit capital? is an increase in credit an increase in values? the last two of these questions imply that we have a definition of credit. perhaps the answers to some of the other questions may have given us such a definition. but analysis and description will precede definition. the etymology of "credit" has sometimes been taken as the clue to the meaning of the word for economics, and the idea of confidence, or belief, has been made the heart of the matter. a man has good credit when others have confidence in his integrity, etc. men lend to others when they can trust them to repay. doubtless something of this sort was responsible for the original choice of the word. but when loans are made on good mortgage security, or on collateral security, the personality of the borrower may count for little or nothing. confidence there is, but not confidence in the intentions of the borrower. the confidence is in the "goodness" (_i. e._, the value and marketability) of the collateral. the same questions are raised by the lender here which he would raise if he were going to buy the thing, instead of lending with it as security. none the less, i think that in the etymology of the word we have an important clue. we must generalize the notion, however, beyond the limits of confidence in personal intentions. it involves confidence in the general economic situation, in the future of business, in the permanence of values, in the certainty of future incomes, etc. thus viewed, the element of confidence, though important in highest degree, is not peculiar to the phenomena which we call credit phenomena in economics. it appears wherever there are values which depend on future events. one does not need much confidence in buying potatoes or apples or meat--though in the case of meat quite a lot of confidence may be involved--and misplaced! but whenever the future is involved, whenever capital values of any kind are involved--lands, stocks, bonds, houses, horses, manufacturing equipment, etc.--the element of belief, confidence, hopeful attitude toward the future, is quite as much present as in the case of a loan. nor is the element of personal confidence less present, often, in these things than in the case of a loan. very often the value of a horse may depend in considerable degree on the integrity of the man who offers it for sale; the value of a piece of land may be much enhanced if a trustworthy owner makes certain statements as to the yields he has got from it; the values of stocks (really credit instruments, from the angle of economic analysis) may depend very much on the personality of the organizers and managers of a corporation. personal prestiges may count for much more in these cases than in the case of a collateral loan. further, in connection with the element of belief, or confidence. borrowing is expensive, and men do not borrow for amusement. that borrowing and lending may increase, it is not enough that lenders have confidence in the ability of borrowers to repay. borrowers must also have confidence in the future of their businesses, in their ability to make enough out of the loan to pay the expense involved, and have a surplus left over. i abstract here from consumption loans. they play a very minor rôle.[ ] the analysis in an earlier chapter, based on kinley's figures, showing that retail trade is less than one-eleventh of the total pecuniary transactions in , and that the percentage of credit instruments used in retail trade is much lower than in other transactions, will justify us, when quantitative questions are involved, in abstracting from consumption loans. since such loans will be chiefly employed in retail buying, and since we know that most retail buying does not result from loans for consumption purposes, we may conclude that modern credit is overwhelmingly of a different sort. most of it arises from business activities of one kind or another, and rests on expectation of profit and loss.[ ] such loans are not made when borrowers, as well as lenders, have not confidence in the transactions they mean to put through. so far the thing has run in terms of individual calculation of profit and loss. but even the most sagacious business men do not play a lone hand. no one is uninfluenced by the expectations and feelings of others. in general, business confidence is in large degree a matter of social psychology, resting on suggestion, contagion, etc., as well as on cool calculation of profit and loss. even where men are able in considerable degree to free themselves from the prevailing optimism or pessimism, they must take it into account. the man who extends his business when nobody is in the mood to buy, when no one will make contracts with him, runs a very fair chance of bankruptcy, even though there be, in the technical facts of industry, no reason for the prevailing pessimism. a man with large resources, which are not fully employed, seeing that the prevailing "bad business" is "largely psychological" may, indeed, take advantage of the fact, get his labor and raw materials cheaply, and produce some staple in advance of his market. if he can afford to hold his surplus, he may make large profits by so doing. but usually business men will not, in such a situation, have the surplus resources to enable them to put through such an undertaking, and hence, even though they may recognize that the rest of the business world is irrational, they must, perforce, conform to its irrationality, and their sober estimate of the prospects of a given undertaking may be just as much adverse as if they shared the feeling of gloom which all about them feel. they meet it from the banker from whom they wish to borrow. even if able to borrow, they meet it from the dealers to whom they are accustomed to sell their products. the prevailing gloom is as much a fact with which they must reckon as is the price of their raw materials, or the technical qualities of those raw materials. further, business confidence is not a matter in which each man counts one! there are centers of prestige, men and institutions whose attitude toward the future counts heavily indeed in determining the attitudes of others. these prestiges may arise from various causes. recognized wisdom and probity may give a man great prestige in economic matters. there are financial writers and students of the market, not necessarily men of great wealth, whose opinions are exceedingly influential in making business confidence. the wisdom without the probity is not enough. some men, known to be sagacious students of the market, have been known to succeed in their plans by telling the truth, with the result that everybody else did the wrong thing! they made business confidence, but not the sort that was complimentary to them. other men have prestige, influence in making business confidence, by virtue of possession of large wealth. they are, first, in position to lend largely. their decisions count directly for more than the decisions of thousands of other men. the very fact that they have confidence in the future, apart from anything else, means a tremendous increase in _effective_ business confidence--which we are here concerned with. the optimism of a man who can neither buy nor sell nor borrow nor lend, because he himself has no economic resources, and no prestige, is like the desire of a penniless beggar for an economic good--its effect on the market is not great! but further, the fact that a rich man is lending makes possible activities which would not otherwise be possible, and so justifies confidence on the part of those who wish to deal with those to whom he lends. such a man may, on the other hand, borrow. his borrowing, for business activity, justifies confidence on the part of those who would deal with him. quite apart, therefore, from any influence on the opinions of others growing out of respect for his judgment, or less rational reaction to him, he can do much to make or unmake business confidence. but commonly, also, such a man is a center of prestige, as well as a controller of economic power by virtue of his wealth. men look to him for their cue. if _he_ has confidence enough in the future to risk his great wealth, surely smaller men with smaller interests need not be afraid. vitally important centres for the making and controlling of business confidence are the banks. having intimate knowledge of the affairs of many business men, of business men in many different lines, they are in a position to judge wisely of business prospects. having great power to make or refuse loans, they can encourage or chill the enthusiasm which business men may independently develop. the whispered word of a banker may well count for more than the half-page advertisement of a promoter. but the banker is not all powerful. his influence is much greater, often, in restraining than in evoking business confidence. bankers may during long periods be quite unable to increase their loans, though they tempt borrowing by easy rates. business confidence is a fact of social psychology. it is an organic phenomenon, with radiant points of control. it is a matter of inter-mental activity, rather than a thing in which each man makes an independent choice. but this is to say nothing of credit phenomena that is not true of all value phenomena. all economic values are social values. the values of wheat or sugar or bicycles are social values. there are centers of power and prestige, growing out of the distribution of wealth, or various other social factors, which have a dominating influence on economic values, as a rule. credit phenomena are merely part and parcel of the general system of economic motivation and control. in _social value_ (pp. - ) i have denied the doctrine of meinong and tarde that explicit belief, existential judgments, are essential to the existence of values, taking value in the generic sense, which includes æsthetic value, religious and patriotic value, legal, moral, and other values. i have pointed out that we do, at times, value ideal objects, the creatures of our imaginations. the dead sweetheart, or the beatrice that never was (or that never was what she was imagined to be) may have tremendous value. not merely things hoped for, but things hopelessly gone, as "the lost cause" to the southerner, may be objects of value so high that other things, known to be real, may sink into insignificance beside them. even in these cases, however, there must be a "reality-_feeling_" an unconscious presumption or assumption that the object valued is real. indeed, belief, as distinguished from mere ideation, is an emotional "tang," an essentially emotional, rather than intellectual, fact. if it be present, the ideation and explicit judgment may be dispensed with. it is, however, characteristic of economic values, particularly of the values of instrumental goods and of the goods with which business men make profits, that the tendency to raise the question of reality, to require explicit judgment, is strong. the successful business man is necessarily the man who does this, who does not too highly value the creatures of his imagination, when he imagines a vain thing. one need not, perhaps, seriously raise the question as to the reality of the loaf of bread he buys. explicit judgment there would be superfluous. but very serious questionings come in whenever lands or houses or securities or bills of exchange come in. one needs to know what the facts are, and to make judgments based upon them. hence, for all values of capital goods and income-bearers, for the values which pass in wholesale and speculative trading in general, the matter of _belief_ is vitally important. here, again, then, we have nothing in the psychological principles underlying credit phenomena to mark them off from the general field of value phenomena. the general laws of value, then, apply in the case of credit phenomena. we find nothing unique in essence in them. the juridical relations, also, in so far as they have economic significance, shade into one another. to buy a bond from a bondholder is purchase and sale. to pay a borrower money for his personal note is lending. but from the standpoint of the theory of value and prices this distinction may be ignored. we may extend the idea of buying, selling, and price to cover all contracts where values are balanced against values, and expressed in terms of each other. future money has its price in present money, just as much as present wheat has its price in present money. really it is not future money against present money. it is a case of _rights_, which involve the payment of money in the future, sold for money, and priced in money. in general, it is _rights_, rather than _things_, which pass in economic exchange. physical delivery does not constitute selling. delivering a load of wheat to a railroad does not constitute sale of the wheat to the railroad; selling a farm does not involve any physical moving of the farm. rights, _in personam_ or _in rem_, are objects of economic value, and the exchange of these rights makes up the bulk, if not the whole, of economic exchange. (exchange may be limited to the transfers of juristic rights, without value being so limited. i have discussed the relations of value and exchange in the chapter on "value," above.) property rights are commonly conceived of as the proper objects of buying and sale. contracts involving the future services of free men stand legally on a different footing from contracts regarding physical goods. but economic analysis is not greatly concerned with these distinctions, except in so far as they affect the values of the things exchanged, and so the terms of the exchanges. i do not believe that the legal distinctions can be made to run on all fours with any significant economic distinctions, and shall not undertake to make them do so. in the phenomena we have simply cases of buying and selling (in a generalized sense of those terms) of _rights_, at _prices_ (by a very slight extension of the term, price, to which the market is well accustomed). the terms of these exchanges, the prices, are governed by values, social economic values, in no wise different from the values which govern the prices in exchanges which we do not class as credit transactions. i say that credit phenomena are exchanges of rights. this is true of all exchanges. we do not exchange rights for money. we exchange rights to other things for rights to money. the mere physical transfer, even of money, does not give rights to the money. i may merely be giving you the money for safe keeping, or for use for my purposes. while the law makes the rights to money that has left the hands of its owner less lasting, as against innocent third parties, than in the case of other objects, and while the right to money is always, or almost always, met by returning other money of equal amount, even in the case of money it is a right, and not a mere physical transfer, that is significant. our problem regarding credit is, then, much simplified. we have simply to pick out certain economic exchanges to which the name of credit transactions has been applied,--a various and heterogeneous set of exchanges, in many ways--and study them, to find their peculiarities. these peculiarities will not make them exceptions to the general laws of value. they will make them merely special cases. to find essential principles marking off credit transactions, at large, from non-credit transactions is an exceedingly difficult thing. there are more differences among credit transactions themselves, than there are between the genus, credit transactions, and the class of things not called by that name. thus, monthly payments of rent, of wages, of college professors' salaries, are not commonly called credit transactions. the monthly payment of grocery bills, or of telephone bills, involves credit. where is a real difference to be found? on the other hand, between book credit between grocer and patron on the one hand, and a bank-note or deposit credit on the other, the difference is large, in many practically important ways. between a call loan and a ten year agricultural mortgage-note, the differences are even greater. one may be disposed to find the differences between credit transactions and non-credit transactions in the fact that the former stipulate a definite sum of money, due at definite times. this would partly differentiate a bond, say, from a stock. the bond not merely calls for stipulated yearly payments, but also calls for a definite payment at the end. this would, however, exclude british consols from the list of credit instruments! british consols differ from safe preferred stocks in legal, rather than in economic, ways. legally they are alike in that no terminal payment is called for. practically they are alike in that annual regular sums may be expected. it may at least be said of credit transactions that stipulated money payments, either at a different time or a different _place_, are called for. this would include the telegraphic transfers of funds, and would exclude the case where a, a farmer, does a day's work for b, a neighbor, for the promise of a day's work in return at a later season. the latter transaction involves many of the elements that definitions of credit have included, but i think that we may at least limit our conception of credit transactions to transactions within a money economy, where money, as a measure of values, functions in the calculations. shall we, however, limit credit transactions to cases where a stipulated _amount_ of money is named in the contract, for a stipulated time? shall we exclude contracts where the payment of money is made contingent on anything? by contingency here i mean legal contingency. this test would exclude the highest grade preferred stock. it would include the shakiest bonds that contained, in the terms of the contract, no contingency. but where, then, would one place such an instrument as the seaboard airline adjustment % bonds, which may default in a given year half of the interest, if it is not earned,[ ] and which yet call for the payment of the principal at a stipulated time? what shall we say of "borrowing and carrying" transactions on the stock exchange? is not the loan of stocks a real credit transaction? ordinarily, when stocks are put up as collateral, one thinks of the money as being lent, and the stock merely as a pledge. but in the case of borrowing stocks by a bear to deliver next day, the transaction is definitely thought of as a loan of stock. it is sometimes paid for, the bear paying the bull a premium, instead of receiving interest on the money he has turned over to the bull as a "pledge." the more usual thing, is, of course, for the bull to pay the bear interest. but in a contract like this, there are many contingencies. as the stock rises in value, the bear must lend more money to the bull; if the stock falls, the bull must return part of the money to the bear. both times and amounts are here contingent, even though in the end the amounts lent and repaid balance. call loans, of course, do not call for payment at a stipulated time, and the same is true of bank-deposits and bank-notes, and of many other forms of credit. interest on deposits in mutual savings banks is contingent, legally, as to amount. are insurance policies credit instruments? what of endowment policies? it is easy to draw legal distinctions in all these cases, but to show that definite and uniform economic consequences flow from these legal distinctions is quite impossible. rather, it is easily possible to show that uniform or certain economic consequences do not, in general, flow from them. i shall refrain from the effort to give a general, fundamental definition of credit. i shall rather discuss certain of the more important types of what have been called credit, with a view to seeing what bearing they have on the problems with which this book is concerned; the value of money, and prices. the general class of transactions to which the name, credit transactions, has been applied may be roughly designated as transactions in which the consideration on one side, at least, is the assumption of a debt, running in terms of money (though not necessarily to be paid in actual money), payable either at a future time or at another place. objections can be found to this definition. it does not meet the fundamental test of a definition that, for the purpose in hand, it should seize upon the essential and unique characteristic of the things marked off. i am not sure that it meets the tests of inclusiveness and exclusiveness even for those transactions which we call credit transactions. thus, if a and b go to the bank together, and a there buys b's horse, standing in front of the bank, giving b in return a check, which b immediately cashes in the same room where the check is drawn, the idea of different time or different place is not realized in any but a technical sense. a, in drawing the check is, of course, assuming a debt. the check, if repudiated by the bank, becomes a note, which a must pay. a, moreover, is paying b, not with money, but with the transfer of a claim on the bank, and the fact that his check, if unpaid, becomes a note is not the main fact about the check. understanding our definition of credit to cover this case also, however, and attaching no fundamental importance to the definition save as a means of marking off a class of more or less related phenomena which we mean to discuss, the definition will serve. thus defined, we have in credit a concept susceptible to quantitative treatment. debts, in terms of money, can be summed up, and we may have the concept of the "volume of credit" as the sum of such debts at a given time, or through a given period of time, or as an average through a period of time. we may distinguish credit transactions from credit, defining credit as the volume of debts, and credit transactions as transactions in which the debts are passed in exchange. this would be to broaden the notion of credit transactions beyond the usual conception, since it would include transactions in which a sells ("without recourse") b's note to c. it would also include cases where bonds are sold. it would exclude cases where stocks are sold, since they are not legally debts. some would prefer to limit the notion of credit transaction to transactions in which there remains some contingent responsibility on the part of the one who uses the credit instrument, but this would be to deny the name, credit transaction, to cases where bank-notes or government paper are used in payments, as well as to deny it to the case where bonds are sold. it is not important, for my purposes, to draw a sharp line about the concept, credit transaction, however. and about the concept credit itself i have drawn a line resting on a legal, rather than an economic, distinction. within the field of credit, thus defined, we may single out for especial consideration certain forms of demand or short time credit, particularly bills of exchange, bank-notes and bank-deposits, and merchants' book-credit. we shall also have something to say regarding long-time credit, including bonds, and mortgage-notes that have no general market. all these debts in terms of money, to which, in the aggregate, we have given the name, volume of credit, have grown out of _exchanges_. exchange is here used in a wide sense, and is not confined to the case where goods or services are bought and sold. it is an exchange, if a man gives his note to a banker in return for a deposit credit. but, on the assumption that exchanges are made only when gains are to be realized, it follows that all debts, and so all credit, have been created in view of anticipated gains (or to avert anticipated losses). in a society where everything is in equilibrium, a "static state," where there are no "transitions" to be effected, where there is no occasion for speculation, and where exchanges of lands, etc., are negligible, the volume of all exchanges, including those where debts are passed in exchange, would be small. the occasion for the creation of the debts which make up the volume of credit would not be nearly so numerous as under dynamic conditions. the _volume_ of credit, in other words, is largely a function of dynamic conditions, even though credit would exist in a static condition of economic life. the bulk of credit, as the bulk of exchanging, grows out of dynamic conditions, transitional changes, and the like. this will be clearer when we raise the question as to _why_ debts are created, as to what function debts perform in economic life. why should a man borrow? let us suppose that a farmer has acres of land. he wishes to sell acres, and use the proceeds in buying equipment for his farm. but he finds it difficult to sell the acres. there is no ready market. he can sell it immediately only at a great sacrifice. by waiting, and looking industriously for a customer, or by engaging a real estate dealer to do so, he could finally find a buyer, but the thing is slow and uncertain, and he wishes to get the equipment at once. he borrows, therefore, giving his farm as security, or a part of the farm as security. he exchanges a claim on the future income of the farm for present money, and with this he can buy the equipment he needs. the net result has been that the credit transaction has transformed his unmarketable quantum of value into a marketable form of value. he has been able, by an indirect step, to do what he could not do directly--to trade a part of the farm (which in its economic essence is a prospect of future income) for the equipment. in this illustration, _credit has functioned as a means of increasing the marketability or saleability of non-pecuniary forms of wealth_. credit is primarily a device for effecting exchanges that could not otherwise be effected, or for effecting exchanges more easily than they could otherwise be effected. this means that credit transactions are a part of the productive process, and that they increase values. it is the function of credit to universalize the characteristic of money, high saleability. it is the function of credit to "coin," so to speak, rights to goods on shelves, lands, etc., etc., into liquid rights, bearing the dollar mark, which are much more highly saleable than the rights in their original form were, and which often become as saleable as money itself, functioning perfectly as money. credit thus tends to universalize that characteristic which menger[ ] considers the unique characteristic of money. by means of credit transactions, a man borrows up to % of the value of the farm, makes his farm in effect, % saleable or fluid. the man who owns livestock may not be able, on a given day, to market them without loss, but he can use their value in the market, up, say, to %, by a loan. the man who owns a hundred shares of united states steel may not be able, at a given time, to market them to his satisfaction--though in the case of articles and stocks dealt in the speculative markets saleability is very high indeed, and in the case of united states steel, in particular, the "spread" between "buying price" and "selling price" is very narrow--but he can borrow, with the stock as security, up to % of its value. on a bond of the united states government, he may borrow up to %.[ ] the process of creating credit is a process of transforming rights from unsaleable to saleable form. often this means the subdivision of rights, preferential rights to a _portion_ of the value of a piece of wealth being more saleable, because of greater certainty, than the total right to the whole. another reason why partial rights may be more saleable is that the value represented by each partial right is smaller. it is easier to market things worth a thousand dollars than things worth fifty thousand, as a rule. in any case, a chief economic function of credit is,--_the_ chief function for our purposes--to make fluid and saleable articles of wealth other than money; to universalize the quality of saleability. this justifies us in our contention made before that _all_ corporate securities, whether stocks or bonds,[ ] are, in economic nature, alike. driven to a legal concept for a definition of credit, we were obliged to exclude stocks from our rough definition. but corporate organization does precisely what the various other transactions that we have called credit transactions do. lands and buildings and machinery, or the roadbed and rolling stock of a railroad, are highly specialized, often unfit for use in any form other than that in which they now appear. as concrete instruments of production, they would be highly unsaleable. in their totality, as a going concern, they are highly unsaleable, because in the aggregate so very valuable. grouped together, however, but still subdivided, the objects of many thousands of partial rights, represented by stocks and bonds, they become saleable in high degree. as objects other than money gain in saleability, they tend to gain in value, also. this is not necessarily true, always. if wealth is already in the best place, at the proper time, and in the proper hands, no point is involved in further exchanges. additional saleability--or an increase in the qualities that make for saleability--could make no difference. but when objects could be employed to greater advantage if in different hands, if, in other words, there is occasion for exchange, then whatever adds to the saleability of a good adds to its value. what would otherwise have gone into the trouble and expense of marketing now is saved. in general, items of wealth tend to gain in value as they gain in saleability--though not in any definite proportion. further, as objects of value other than money gain in saleability, money tends to lose its _differential advantage_ in this respect, and so tends to lose that part of its value which comes from the money-uses. if all things, including gold, were equally saleable, there would be no _raison d'être_ for money, and gold would have only the value that comes from its commodity functions. in so far as credit-arrangements give to partial rights to wealth the capacity to serve as a medium of exchange or for other money purposes--and this is true to a high degree of bank-credit--this tends to cut under the sources of value of money. credit thus, from two angles, tends to raise prices; it raises the values of goods; and it tends to lower the value of money. the limits on this, however, are reached when gold ceases entirely to function as money, and when all items of value are perfectly saleable. then credit has done its perfect work for prices, and can do no more. no incentive remains for further borrowing, if all items of value that need to be exchanged are perfectly saleable. these theses will meet objection, particularly from those who are accustomed to quantity theory reasoning, and who look upon the volume of credit as something independent of the volume of trade. on the logic of the quantity theory there is no reason why prices might not mount indefinitely, if only credit could increase indefinitely. the causes controlling the volume of credit are, on this view, quite independent of the volume of trade. i have given this line of thought sufficient criticism, perhaps, in part ii, but shall find occasion to recur to it at a later point in this chapter. however, writers not bound by quantity theory ideas, may still find reason to question these theses, and it is necessary that i should take account of various complications, and make what may well be called substantial qualifications and modifications, before the theses are acceptable. first, objection will be offered to the doctrine that all credit is merely rights to wealth, that credit rests on wealth. it will be urged that many loans are made without collateral, or mortgage security, that the "personal credit" of the borrower is the only security, and the only basis of the loan. this objection is not serious. there are, doubtless, loans which are disguised benevolences, where the lender gets nothing good in return for his loan. i abstract from such cases. quantitatively they are not important, and qualitatively they are not really commercial transactions. in general, when a good merchant borrows at the bank on his personal note, the bank knows very well what goods he has in stock, what prospects he has for marketing them, what other debts he has, what his "net worth" is. and the bank knows that it has legal claims, even though not preferred claims, on his wealth. when a young business man borrows capital from a neighbor, giving no security because he has no marketable wealth which would serve as security, he is, none the less, exchanging a valuable right for the loan. he is giving the lender a right to a preferential share in his future income. the lender has considered the young man's abilities as sources of income, in conjunction with the capital lent. incidentally, the lender retains rights, preferential rights as against the young man himself, in the quantum of value he has turned over to him. if a young man borrows the resources with which he buys a farm, the lender takes a mortgage on the farm itself. transactions of this sort frequently have in them the element of benevolence, and the considerations are not always strictly commercial. in the case of a young man of unusual ability, however, who insures his life for the benefit of the lender, such transactions may be perfectly good commercial transactions, value balancing value in the exchange. the thing traded is commonly present money (or its equivalent) for rights to future money income. public loans present no exception to our rule. they represent the transfer of present wealth for the future income which the government, by virtue of its public domain, or, more commonly, its taxing power, may expect to receive. with a strong government, this future income may be a very substantial part of the total income of the people. public loans may often be for commercial purposes, as when municipalities borrow to build or extend municipal enterprises. in cases of this sort, the market frequently will consider the prospects of commercial success of the enterprises in fixing the value of the municipal bonds. where the proceeds of the loan are for non-commercial purposes, as war, the question of the future income of the government will still, ordinarily, be a dominant factor in determining the value of the securities. often, however, there is the direct action of patriotic fervor, etc., enhancing the values of government securities. we have seen this in the case of government money. it is no part of our theory to maintain that men's calculations are always rational, or that the whole of the value of a long-time income-bearer rests on the anticipated income. but this is no peculiarity of credit phenomena. the same thing is true of lands, for example. capital values often get independent in part of their "presuppositions," as we have seen in the chapter, _supra_, on "economic value." war security issues often represent the effort of the government--as at the present time--to bring into the present every possible bit of future values, as a means of increasing their power in a desperate struggle. the high prices of goods in such a situation represent the concentration of future values into the present, an increase in the motivating power which stimulates the people to unwonted exertions. in war time, moreover, many _ideal_ values,--those whose fate is dependent on the outcome of the war--enter into and increase the values of those goods which are needed for carrying on the war. this leads to larger sacrifices of future income than would ordinarily be tolerated. it is not so much a case of present goods rising because of extra credit, as of extra credit because present goods are more valuable. a second objection would be raised that in many cases, the values pledged by the borrower could not exist if the lender did not make the loan. this would be particularly the case with credit granted for the starting of a new or novel enterprise, which as yet exists only in idea. the established merchant, with goods on his shelves, or with a bill of lading for goods which he has sold, has a very tangible, concrete basis for a loan, whose value is independent of the decision of any given banker. if my doctrine is to be taken as holding that all credit rests on concrete physical goods, very many exceptions indeed could be found. but this is not my doctrine. it is that credit rests on valuable _rights_. these rights may be rights to existing concrete goods; they may be rights to future incomes. in any case, it is the values, rather than the physical quantities, that are significant. witness cotton before and after the outbreak of the world war. ultimately, in general,[ ] economic values come from the "primary values" or "first order" values of consumption goods and services. these values are reflected back, by the imputation processes, to the various "factors of production" which have made the existence of the goods and services possible, in accordance with well-known laws which need not be here elaborated. but the category of "factors of production" is far from exhausted when we have named land, labor, and produced instruments of production! some writers have rejected the notion of "factors of production" largely or altogether, and prefer such a term as "agents of acquisition."[ ] i certainly have no intention to give to the term, factor of production, any ethical connotation. even though a factor of production be, like land or labor, a _sine qua non_ of production, it does not follow that the owner of that factor gets his proper, or ethically just share, under the laws of economic imputation. many of the "factors of production," in the sense of factor which derives a value from the economic laws of imputation, may well be parasitic from the angle of ultimate social welfare. the only test is as to whether, under existing social arrangements, a portion of the income _of a given establishment_ would cease to exist if that factor should disappear, or be reduced. from the angle of this test, monopoly power, trade-marks, established trade connections, the big idea of an entrepreneur, a dynamic personality, capacity for winning other men's confidence and good will, and sometimes that brutal selfishness which makes other men shrink from conflict, or the reputation of being a dangerous and vindictive man, may be equally "factors of production" with land, labor, and produced instruments of production. in part iv of this book, "the reconciliation of statics and dynamics," we have discussed the "intangible capital items" of this class, and have indicated that many of them perform really important and necessary social functions. others are doubtless pernicious. production involves leadership, organization, the making and maintaining of "interstitial connections," as well as the technology of muscle and machine. but credit is based on values, rather than on concrete goods as such, and if these "intangibles" have value, they may have credits based upon them.[ ] that some of these values exist only by virtue of the fact that credit is granted is no marked peculiarity. the granting of credit is an exchange of the rights of the creditor for rights to the future income of the borrower. if the exchange were not made, in certain cases, the borrower would have no future income to which he could give rights. the entrepreneur with a big idea cannot actualize that big idea unless he can bring it into conjunction with land, labor, capital, and a market for the products. the exchange of rights to the value of the products for the banker's deposit-currency, or the private lender's money is merely one of many necessary exchanges required to bring about the combination which will create the products. if there were no possibility of marketing the products, he would be equally helpless, and his idea be equally valueless. the general range of values, under our present system of division of labor, private property, private enterprise, etc., depend on the possibility of exchange. men produce for the market, rather than for their own consumption, or for the consumption of a communist society. without exchange, many values would persist, but most values would at least be diminished. exchange is part of the productive process. the only peculiarity in the case under discussion is that the man getting credit for the exploitation of a big new idea commonly has a very limited market--is dependent on the decision of one bank or lender, or at most of one out of a few possibilities. the narrower the market, the more dependent are the values of things that must be exchanged upon the decisions of a few men. wheat is free, virtually, from individual caprices, though even there a big operator may organize a pool and temporarily affect the value very greatly. but the immediate power of a few men on values is increasingly great as we get closer to those things which are unique, which are capable of only specialized employment, and which call for the coöperation of elaborate and expensive systems. and, of course, the influence of individual caprice, or individual decisions, on all values grows greater as wealth and power are concentrated. economic social value is an institutional value, specially weighted and controlled by individuals, classes and institutions.[ ] joseph schumpeter, in his _theorie der wirtschaftlichen entwicklung_, has made much of the rôle of the banker in economic evolution. he sees in the banker a creator of "_kaufkraft_," by means of which an entrepreneur, a dynamic man who has a new idea which he wishes to actualize, is able to wrest from the unwilling "static economic subjects" their land, labor and instrumental goods for the purpose of putting his new plan through. this new _kaufkraft_ is the true _kapital_ which the new enterprise requires. capital, thus defined, is not an accumulation of goods, is not embodied in goods. it is an _agent_, a _power_, which the banker creates. it makes dynamic change possible. schumpeter is particularly anxious, in clearing the way for his new theory of interest, to get rid of all the notions of saving, accumulations of stocks of goods, etc., which have commonly been made prominent in the discussion of capital and interest. we need not here discuss his theory of interest.[ ] he maintains that the new dynamic credit, credit granted by a banker for a really new enterprise, as yet not concretely in existence, represents something new in the world, anomolous from the angle of static values, and static credit. indeed, he regards credit as unessential for the static analysis, and banishes it from the "_wesen_" of his static state. but this new credit is different from such credit as there may be in the static state, because, he holds, the new credit does not rest on goods, and has no _deckung_. schumpeter himself calls these doctrines "heresies." they become less dangerous, however, when we learn that by "saving" schumpeter means mere trenching upon accustomed expenditure, so that the entrepreneur who saves part of unusual profits is really not saving at all, and when one discovers that his contention that there need be no accumulation of goods prior to the starting of a new enterprise means merely that there need be no special accumulation of goods _ad hoc_. of course if saving means trenching upon accustomed expenditure, it is banished by hypothesis from the static state, but there may still be plenty of capital (in the ordinary sense of accumulated produced means of production) for schumpeter's entrepreneur to get hold of by means of his new _kapital_. his contentions that the new credit does not rest on goods, that it has no _deckung_, and that we have a new thing in the world since in dynamic credit we have a case of temporal discrepancy between the making of obligations and the ability to pay them, calls for further analysis. it is true that there is a time during which the new credit has no basis in concrete goods. very speedily, however, the new credit is exchanged for concrete goods, and the enterprise is started. further, the banker commonly insists on a margin at the start. further, the claims of the borrower on the banker are themselves, prior to their expenditure for the things needed in the enterprise, assets to which the banker may look as a basis for his confidence in the goodness of the entrepreneur's promise to pay him. there is never a moment when the new credit does not rest on _values_. the loan by the banker to the borrower is, essentially, like the case of the purchase of any bearer of future incomes, say a machine, or a factory. the machine is, after all, in economic nature, merely a "promise" of future goods and future values, as an austrian economist should be quick to recognize, and machines are almost as frequently poor performers as borrowers--indeed, most commonly, the borrower's inability to repay comes from the failure in the value of the goods which his physical equipment produces. the _raison d'être_ of the new credit is the new values which have come into existence: the new plan of the entrepreneur, _validated by the banker_, attains a value equal to the present worth of the extra products which it promises. i repeat that it is values which are significant as the basis of loans, that values are not all embodied in physical goods, and that value is essentially a psychological thing. the banker's validation of the plan may be an essential factor in its value. _belief_ is often an essential factor in values. the new value, and the new credit, have a large element of belief in them. the value of the new plan rests proximately in the belief of the banker, manifested by his granting of credit. but the value of the _bank-credit_ rests ultimately in the _prestige_ of the banker, which is a fact of social psychology, resting in a massing of belief on the part of the public in him, in the validity of his bank-notes and deposit-currency, coupled with support from legal and other institutions. but this is to anticipate the discussion of the nature of bank-credit. the point involved is sufficiently illustrated by the case where a man who is not a banker lends his money to an entrepreneur of a new undertaking. here again the enterprise is impossible without the loan. here the loan is made on the basis of an anticipated income. here again the anticipated income is made possible only by the loan; one of the values that enters into the exchange exists only because the exchange is possible. none the less, the credit rests on value. it is a right to an anticipated income. the man who has made the loan has his security in the value which he has lent, plus the present worth of the extra income which the new idea is expected to create. now a great practical difference is made in the course of economic life by the decisions of lenders to lend to men who plan new things, instead of to men who plan old things. it makes an enormous difference whether or not new plans appeal to the imaginations of those who control the economic resources of society. it makes a great difference whether static values (the capital values of incomes to be created in familiar ways) or dynamic values (capital values of incomes to be created in novel ways) win out in the competition for loans from those who have loans to make. but _as values_, the two are of the same psychological stuff and substance: futurity and belief are essential elements in both of them. stable belief, and strong belief, are easier to evoke in the case of the established and the familiar. new ways of creating wealth must promise larger returns, and make more dramatic appeals to the imagination, than old ways. schumpeter indicates that it is the essential function of the banker to give preference to the new ways, that the mass of men are "static" in their attitude, and that, for some reason which he does not clearly indicate, the banker is not. this has not been our american experience, on the whole. the contrast which schumpeter makes between the timid, static masses, and the few highly important dynamic entrepreneurs, holds very much less true in america than in continental europe. there it is doubtless true that new industrial enterprises have had their main encouragement from bankers. here, such enterprises have appealed largely to the mass of men, to the investing and speculative public. our commercial banks have lent largely upon stock exchange collateral, which means that, indirectly, bank-loans have gone to finance industry. the extent of this is enormous, as will later appear. however, the banks, as banks, have not been large _buyers_ of stocks. they have guarded themselves by requiring "margins" from those to whom they have lent on such collateral. seasoned bonds have been bought in great volume by our commercial banks, but few stocks. even the underwriters and investment bankers have been primarily intermediaries, expecting to pass on to private buyers the securities they hold temporarily. my point here is, merely, that there is nothing in the distinction between static and dynamic credit, when by that is meant the distinction between credit for new enterprises and credit for old enterprises, to mark off a peculiar or essential province for bank-credit. the need for bank-credit does arise out of dynamic conditions, primarily, but it is not the need for credit to _start_ dynamic changes, even though bank-credit may do, and does do, that. the chief reason for bank-credit is to enable economic society to readjust itself quickly and readily to dynamic changes, by putting through without friction the necessary exchanges that such readjustment requires, and by holding in liquid form a fund of rights which can meet the emergencies and unexpected occurrences which dynamic conditions involve. to this we now turn. bank-credit is the debt of responsible institutions, payable on demand in money. it may take the form of notes, or of the right to draw checks. long evolution has begot a system of legal relationships, and of banking technique which makes these promises easily performed. the same process of development has led to social reactions toward banks and bankers which give them enormous prestige. legal regulation, in the case of many banks, requiring adequate capital, and, in this country, requiring minimum cash reserves, have added to that prestige. the promise of the bank is commonly so liquid and saleable that the banks are not called upon to fulfill it by the actual payment of money--the promise alone is an object of value which is perfectly saleable, which runs in terms of money, and which functions as a perfect substitute for money in almost every use except for very small retail transactions. even there, it is very much used. among the features of banking technique to which we must give especial attention are the following: ( ) the banker has substantial resources of his own, his "capital," which constitutes the "margin" of protection which he offers to those who give him valuable things in return for his promises to pay money on demand; ( ) the banker exchanges his promises to pay on demand, as far as possible, for those things which have a high degree of "liquidity," _i. e._, for those things which he can quickly dispose of for cash, or for the promises of other bankers which are the equivalent of cash. farm mortgages are not good assets for a banker to hold in large amount. they are long-term obligations, with a very limited market, and they will not help him in emergencies to meet his obligations to pay on demand. agricultural loans, and other mortgage loans are made in considerable volume by our state banks and trust companies. all classes of commercial banks make many non-liquid loans, as we shall later see. but all of them get as high a proportion of liquid loans as they can. bills of exchange, running ten, thirty, sixty or ninety days, growing out of commercial transactions which automatically terminate themselves in the payment of cash or the promises of other bankers, constitute admirable assets. in return for these, the banker may give his promises freely. this is especially true where there is, in the banking practice, a wide "rediscount market," in which he can sell these bills before maturity if he wishes to get even more liquid assets. promissory notes, for short periods, thirty, sixty, or ninety days, growing again out of commercial transactions, which, like those for which the bills of exchange were drawn, automatically bring in cash or the promises of other banks, are in many respects like the bills of exchange, even though the rediscount market for such notes has not been so highly developed as the market for bills of exchange in europe. whether such notes are as available for rediscount as bills of exchange is a question of technical banking which we need not here discuss in detail, though i venture the opinion that bills of exchange are superior decidedly for this purpose, especially "documentary" bills. the element of personal credit is commonly larger in the promissory note, and that limits the market. banking organization, and particularly our new federal reserve system, may greatly reduce the disadvantages of the promissory note from this angle, but it seems not unlikely that the bill of exchange may be a factor of increasing importance in our internal banking arrangements. the general test, however, of what is available for a banker's assets depends on varying conditions, and is not to be answered by a simple formula. a bank in a rural region which loads up heavily with the safest local bonds is little better off than with farm mortgages. for neither is there a quick market in an emergency. a city bank, near the stock exchange, may very safely buy in large amounts highly saleable as a profitable substitute for part of its cash reserve. even country banks may, and do, safely own such bonds. short loans on stock and bond security, constitute the most important single type of bank-loan in the united states, as we shall later see. ( ) the third feature of banking technique to which attention must be given is the reserve policy. the banker must keep some actual money on hand (how much we have in part considered in part ii, and shall again discuss). i shall give attention to these points in what follows. the first point needs little discussion. large "capital" for a bank gives prestige and security. some capital is a _sine qua non_ for a bank which expects its notes or deposit currency to have general acceptability. it will be well to consider further the circumstances determining the form which a bank's assets shall take. though commercial banks own enormous quantities of high grade bonds, it is rare for commercial banks in america to buy stocks of corporations.[ ] they will often lend to owners of such stocks with the stocks as collateral, up to a high percentage of the value of the stocks, but they will rarely trade their demand obligations for the stocks directly. in general, a bank wishes to have its assets in the form of obligations of other people, expressed in terms of dollars, and having a definite term to run (or callable on demand). one reason for this is a bookkeeping reason. "par value" of stocks has little meaning any more. market-prices of stocks, even the best stocks, are not absolutely fixed. they fluctuate, even though within narrow limits. this fact presents complications to the bookkeeper! of course, the bank's buildings and fixtures, listed among its assets, fluctuate also, in value, and in the price that could be obtained on a given day, but the bookkeeper can abstract from that, since the bank has no intention of selling its buildings and fixtures. the notes and bills held in the bank's portfolios also in fact fluctuate in value, and in the price at which they might be sold on a given day, but they are expressed in terms of dollars, and the bookkeeper commonly has no need to look beyond the figures written on them. at irregular intervals, a small percentage of them may be marked off the books as "bad," but usually the minor fluctuations are abstracted from. the bank does not like to have assets whose published prices fluctuate. but this is, i suppose, not the main objection which banks have to stocks as assets since it does not prevent their buying bonds. i abstract from the legal restrictions that prevent many banks from buying stocks. the fundamental reason is to be found elsewhere. the point is to be found here: the transaction whereby property rights in roadbed, rolling stock, etc., were collected into property rights in a going, organic whole increased the saleability of all these rights; the further subdivision of these rights into many thousands of equal parts enormously increased the saleability of these rights, especially when coupled with listing in an organized market; the further transaction, by which a preferential claim upon these subdivisions of rights is embodied in a collateral note still further increases the saleability of the value of these rights. the whole of the value embodied in a share of stock has not the certainty and saleability which a banker wishes for his assets. it might not be possible to market the stock on a given day without loss. but a collateral note, embodying % of that value, with provision for additional collateral in case the margin is reduced, is highly liquid and the banker has no doubt that, with watchfulness, he can always realize the full face value of such a note. it becomes saleable enough for his purposes. the transaction by which this note is exchanged for the banker's demand obligation gives the drawer of the collateral note a perfectly saleable form of value with an almost universal market, which he can convert without loss into practically anything that money can buy. we have here a series, a scale, saleability of rights growing steadily greater, through a series of transformations and exchanges, till at last the virtually perfect saleability is reached. again we are reminded of menger's analysis[ ] of the methods of primitive barter, whereby the man who possesses a good of low saleability, through successive exchanges, gradually gets goods of higher and higher saleability, until he finally reaches his goal. bank-credit, this most highly saleable of all forms of rights except the rights to actual money in hand, and in general not inferior to money, cannot usually be had by direct offer to the bank of crude property rights. these must be refined and distilled, till a central core of highly saleable value emerges, and then they may enter the bank's assets in return for bank-credit. the best bonds likewise offer such a central core of highly saleable value. a further point is to be noticed about this scale of saleabilities. at each stage of the exchanges of less saleable for more saleable rights, the holder of the less saleable rights must make concessions to the holder of the more saleable rights. and the degree of his concession is, in general, correlated with the lack of saleability of what he offers. commonly this takes the form of giving up a right which has a higher yield for one which has a lower yield. or, viewed more fundamentally, from the angle of the capitalization theory, income-bearers of low saleability are capitalized at a higher discount rate than income-bearers of higher saleability, with the same yield. farm lands may be capitalized on a % basis. (there will be great differences between regions in this, depending in considerable measure, often, on the activity of farm sales. i would refer here to the facts mentioned in my chapter on "the quantity theory and international gold movements," contrasting cass co., iowa, with yazoo co., mississippi. of course, the risks of agriculture count heavily, also, and the prestige of owning land as compared with other forms of property.) the farmer's mortgage note may bear %. a merchant who holds that note may use it as collateral, with a margin, backing his own note, and get accommodation for three months at %. the bank may rediscount the note of the merchant, giving it its own endorsement, on a - / % basis. the coal mine owned by a small company may yield %; sold to a large iron company, which combines mining and smelting and manufacturing, that mine may be represented by % stock; a collateral loan, for sixty days, based on % of the value of the stock may be had for %; the demand liability of the bank given in exchange for the collateral note will either yield nothing at all, or else yield a low per cent, one, one and a half, or %, on large checking accounts. if the collateral note be a call note, the rate will be lower, in general, than on a time note. i here refer to what was said in the chapter on the functions of money with reference to the relation of short loans, especially call loans, to the "bearer of options" function of money. part of the yields of these loans is in the bearing of options. this function grows out of the uncertainties of a dynamic market. it would disappear if uncertainties, "friction," and dangers disappeared. the importance of liquidity and saleability in the assets of a banker needs little discussion. it has been reiterated by virtually every writer on the subject. its connection with the need for meeting demand obligations is obvious. the point that i would here emphasize is, however, that this, too, grows out of dynamic changes, uncertainties, etc. an economic life in "normal equilibrium," in static balance, with all things going smoothly, in anticipated ways, could dispense in large measure, or wholly, with such liquidity. obligations which matured at the time that the holders of the obligations had maturing obligations, would serve their purpose perfectly. again i would emphasize the fact that the theory of money and bank-credit is essentially a dynamic theory, and that the notion of "normal equilibrium" which underlies the quantity theory has no bearing whatever on these fundamental matters. the market where fluid bank-credit is exchanged for less fluid rights has been given the name, "the money market." the prices fixed in this market are "money-rates," figured as percentages on the amounts of bank-credit exchanged for the less fluid rights. it is, of course, strictly speaking, not a money market. money, as the term has been used in this book, has been taken to mean gold coin, subsidiary coin, government paper, and for the united states, bank-notes. in a country where much bank-credit is elastic bank-notes, it is better to distinguish money from bank-notes. the term, money, is not one easily defined in a logical manner. a good logical definition should seize on some essential characteristic of the object defined, should include all the objects of that class, and should exclude all others. we can meet the tests of inclusiveness and exclusiveness in a definition of money, but we can hardly meet the first test. the differences between gold money, for example, and gold bullion are less than the differences between gold money and government paper. the differences between bank-notes and bank-deposits are less than the differences between bank-notes and government paper, or bank-notes and gold. the term, money, covers a group of more or less miscellaneous things, concerning all of which few general laws are possible. gold, or other standard money, in particular, may obey different laws from other forms of money. i have been careful, in the foregoing, to avoid the danger of letting the argument rest on any ambiguity in the meaning of the term, however, and for the present shall not attempt further definition. for the present, we shall use the term, "money market," in its familiar sense, as meaning that market in which bank-credit is exchanged for less fluid rights. an organized money market commonly appears only in larger cities. in smaller places, relationships between banks and customers are much more personal, and indeed, even in larger cities, regular business houses have particularly intimate relations with special banks. a fluid, impersonal market, to which men may repair without reference to anything but the marketability of the collateral they have to offer, is a distinctively metropolitan affair. only large dealers commonly have relations with more than one or two banks. larger houses in the big cities often do sell their "commercial paper" through brokers, and some of the big new york mercantile houses have had their paper scattered a good deal throughout the country. the lack of protection which houses which sought such credit faced during the panic of tended to check the practice in some measure, but it has revived, and even increased.[ ] in the matter of a wide market for commercial paper, however, an impersonal market, with great fluidity, we are well behind not only england, but also continental europe. the london acceptance house has especially contributed to an impersonal market. the american money market is _par excellence_ a new york market, and the primary type of paper discounted in the american money market is stock exchange paper, and foreign bills of exchange. for commercial paper, however, there are innumerable more personal, more restricted, markets, and commercial paper constitutes a very considerable part of banking assets, though much less than is often supposed. but this we shall discuss in the next chapter. chapter xxiv credit--bank assets and bank reserves in traditional discussions of banking, the impression is given that commercial paper is the normal and dominant type of banking assets.[ ] to one accustomed to this view, the figures of the comptroller of the currency for banking investments in the united states for , banks of all kinds (state, national, private, and savings banks, and trust companies) in ,[ ] will occasion dismay: ( , omitted) loans on real estate $ , loans on other collateral security , other loans and discounts , overdrafts united states bonds state, county and municipal bonds , railroad bonds and stocks , bonds of other public service corporations other stocks, bonds, etc due from other banks and bankers , real estate, furniture, etc checks and other cash items cash on hand , other resources -------- total resources $ , these figures, however, call for further analysis. they include figures from institutions which should not be counted with commercial banks. the percentage of real estate loans, especially, is too high to represent the workings of commercial banks, a very high percentage of real estate loans being held by stock and mutual savings banks. the other items, however, are not much changed by the inclusion of savings banks and private banks. it will be well to draw some conclusions from these aggregate figures for all classes of institutions, before taking up a more detailed analysis of state and national banks, and trust companies. where, among these items, does one find "commercial paper"? in the reports of the metropolitan papers, giving daily variations in interest rates, it is usual to find "commercial paper" listed as a separate category, coördinate with "sixty day paper," "ninety day paper," etc. recent periodical discussion has gone elaborately into the question as to what should be called "commercial paper," from the standpoint of the policy of the federal reserve banks. i think it safe to say that no two markets, at present, in the united states will use the term in precisely the same way, and that all would restrict the term to a small portion of the "other loans and discounts" listed above. the most general definition of "commercial paper" would be paper bought through note-brokers. despite the decided increase in loans and discounts which our war prosperity has involved, there has been very frequent complaint of the scarcity of "commercial paper." i shall use the term, "commercial paper" in a much more liberal sense than the american money market does, and shall mean by it all loans of a really liquid character, made by banks to merchants and others to pay for the purchase of goods in anticipation of a resale within the term of the loan which will enable the loan to be repaid at maturity. from this should be excluded, however, loans made to speculators. with this liberal, and not very precise, definition of commercial paper, we raise again the question as to where it may be found in the items above given. virtually all of it, i think, must be found in the item, "other loans and discounts"--an item which, in all, is slightly less than % of total banking assets.[ ] but not all of this "other loans and discounts" is commercial paper. very much indeed represents loans of a non-liquid character, regularly renewed, which manufacturers and others have put, not into moveable goods, but into fixed forms of capital-goods, as machinery, and even buildings. one case in new york, which the writer is informed by a business man well acquainted with both banking and business in many sections of the country is typical of many cases, is as follows: a new york bank is at present lending to a small manufacturer of automobile supplies about $ , . of this, about $ , is liquid, periodically covered by "bills receivable," and if the bills receivable should fail, in the period in question, to cover the $ , , the bank would insist on a reduction of the loan. the remaining $ , , however, is not liquid. it was spent for non-moveable equipment; the bank expects to renew the notes for this loan periodically, and is well aware that it could not force collection without bringing the business to a close--or else forcing the factory to get accommodation elsewhere. the $ , that is liquid is by no means all spent for goods, but is spent, in part, for wages. _none_ of the $ , is spent for goods which are to be resold without being transformed by manufacture. none of the $ , , therefore, is, in the strict sense, "commercial paper." it is manufacturer's paper. part of it is virtually as liquid as commercial paper; two-thirds of it is not liquid. a very large part indeed of bank-loans are of this character. a large part of the loans made to farmers are in no sense liquid: when the loan is made, for, say, six months,[ ] it is perfectly understood by both bank and borrower that a renewal will be asked for and granted. it is impossible to say what fraction of this $ , , , of "other loans and discounts" is really liquid commercial paper, or liquid paper of any kind, in the sense that it can be automatically paid off at maturity. i venture the statement with entire confidence, however, that the proportion of liquid paper is not one-half of the amount. i should question if more than one-fourth of it is truly liquid, in the sense in which that term is commonly used: meaning that the loan is made to put through a transaction which will be completed during the term of the loan, and permit the loan automatically to be paid off. i do not mean by this merely that the banks could not reduce this item by one-fourth suddenly. even in a market made up wholly of highly liquid paper, an arbitrary refusal to renew one-fourth of the loans, with the effort to reduce loans and discounts by one-fourth, would occasion great embarrassment and even disaster. the test of liquidity here applied relates to the items separately, on the assumption that other things are not radically changed. even in this sense, however, viewing each loan transaction separately, it may well be questioned if the banks in the united states could find among their "other loans and discounts" items exceeding a fourth of the total (in value) which they could refuse to renew, at least in large part, without disappointing reasonable expectations, and embarrassing good business men.[ ] of this paper, not truly liquid, no doubt a good deal is advanced to wholesale and retail merchants, and is, in this sense, commercial paper. the terms, "liquid paper" and "commercial paper" by no means run on all fours! as will later appear, the bulk of liquid banking assets are not commercial paper at all. and only that part of a bank's loans to a merchant may be called "liquid" which can be paid off by the merchant without disappointing his reasonable expectations,--causing him to seek other banking connections. there is, however, another item in which we may find some commercial paper, and this is the item, "loans on other collateral security." this has commonly been supposed to be virtually all stock exchange loans. thus, conant[ ] cites the growth in this item in new york as evidence of the growth of loans on stocks and bonds. for new york, loans on stocks and bonds do make up the great bulk of this item. even in new york, however, there are other factors in it, absolutely, even though not relatively, important, and in the country outside, the other elements are not at all negligible, even though for the outside country the part secured by stocks and bonds is the major part, and even though the growth of this item in our total banking assets is, in general, fairly indicative of the growth of loans secured by stocks and bonds. figures for the other items are not available for state banks, trust companies or savings and private banks. they are not till very recently available for national banks. in ,[ ] however, the comptroller separates the item, "loans on other collateral security," for national banks, into two parts, ( ) loans "secured by stocks and bonds" ($ , , , ), and ( ) loans "secured by other personal securities, including merchandise, warehouse receipts, etc." ($ , , ). is there any commercial paper in this last, not inconsiderable, item? let us locate the item, in the effort to find out. the percentage runs highest in chicago, where this class of collateral loan exceeds the loans on stocks and bonds. the inference is strongly suggested, therefore, that much of it, there, at least, represents advances to live-stock, grain and produce traders and speculators on the board of trade, at the stock yards, etc. the inference is strengthened by the fact that st. louis, where there is a good deal of grain and commodity speculation, shows more than twice as much of this kind of paper as does boston, where this kind of speculation is unimportant--despite the fact that boston's aggregate collateral loans of all kinds greatly exceed such loans in st. louis. in new york, where there is a great deal of coffee and cotton speculation, and some other commodity speculation, the amount of this paper, though relatively small, is absolutely greater than in any other city. no doubt, in new york, which is the country's centre for foreign commerce, a fair amount of the paper secured by "other personal securities, including merchandise, warehouse receipts, etc.," is really commercial paper, representing advances to importers and exporters--though the difficulties of giving this kind of security where goods are in transit would prevent most of our foreign trade being financed in this manner. the total of this kind of paper in new york--all these figures are for national banks alone--was only millions on june , .[ ] it may be doubted if very much of this paper, in the great cities, represents goods in transit. with the caution that the view here expressed is based on inference, and not on actual knowledge of what the large city banks are doing, the writer concludes that probably the bulk of this paper, in large cities, represents loans to speculators rather than to merchants. it is liquid, but it is not commercial paper. what of such paper in the country districts? nearly one-half--$ , , out of $ , , --of these national bank-loans on "other personal security, including merchandise, warehouse receipts, etc.," are in the country, outside the reserve and central reserve cities. much of it is in the south. much of it in the grain and live-stock producing regions. what do such loans mean?[ ] much of it is loans to farmers and planters. in the south, much of it is on crop liens. the loans on cotton warehouse receipts, at least in the country parts of the south, are not as great as is commonly supposed. in the north and west, there are a great mass of farmers' chattel mortgage loans, including loans on horses, grain in cribs, hogs, sheep, cattle, mules, etc. the use of this type of paper for financing the breeding and feeding of live-stock, particularly hogs, cattle and sheep, is very extensive. virtually all loans to farmers and feeders for these purposes are secured by such chattel mortgages. it seems improbable that a great deal of this paper could represent ordinary commerce. neither wholesalers nor retailers can easily handle merchandise on which chattel mortgages have been given. the usual method of granting credit to them is to advance loans on one and two name paper, unsecured. not many loans to retailers and wholesalers will fall in the category under discussion. to what extent are the loans of this type to farmers liquid? well, the crop lien loans in the south have a natural term, and, though commonly longer loans than bankers have in mind when speaking of liquid paper, are liquid in the sense that they are automatically paid off at maturity. loans on work-animals need not have a natural term. loans on animals being fed for the market have such a natural term, and are truly liquid. loans, however, on breeding animals are not thus liquid, such loans are commonly regularly renewed at maturity, and the banks do not count on them in emergencies. it is the opinion of dr. j. e. pope that fully two-thirds of the aggregate loans on live-stock chattel mortgage security are to breeders rather than to feeders, and hence are not liquid. of course, none of these loans are commercial paper. i conclude, therefore, that the thesis with which we started that the overwhelming bulk of commercial paper is to be found in the item, "other loans and discounts" is correct. i see no reason to suppose that an analysis of the loans of state banks and trust companies would show a different conclusion. we lack the figures for breaking up the collateral loans of state banks and trust companies into the two classes, "secured by stocks and bonds" and "secured by other personal securities, including warehouse receipts, merchandise, etc." we have merely the gross figures for collateral loans. as the state banks are in large degree country banks, it is probable that the percentage of commodity collateral as compared with stock exchange collateral for state banks would be larger than for national banks. however, the total of collateral loans for state banks is relatively small-- millions, for , as against "other loans and discounts" for state banks in that year of , millions, and as against a total of collateral loans of all banks reporting in that year of , millions. on the other hand, the collateral loans of the trust companies are very large: , millions for , as against "other loans and discounts" for the trust companies in the same year of millions. as the trust companies are chiefly city institutions, and as the concentration of trust company loans and capital in new york city is relatively very great, it would seem pretty clear that taking both state banks and trust companies into account would substantially lessen the percentage of loans "secured by other personal security, including merchandise, warehouse receipts, etc.," to total collateral loans. as the amount of commercial paper in this class of loans for national banks is probably small, it may be expected to be still smaller in the aggregate of collateral loans. the following figures, for state and national banks, and trust companies, only, will, in the light of the foregoing, give us basis for some further conclusions regarding the character of banking assets in the united states. as before, the year is chosen: ( , omitted)[ ] _state _national _trust _aggre- _resources_ banks_ banks_ companies_ gate_ real estate loans collateral loans , , , all other loans , , , u. s. bonds state, county and municipal bonds railway stocks and bonds bonds of other public service corporations other bonds, stocks, etc , total of items here listed , , , , ----- ----- ----- ------ total resources , , , , this table makes clear that the figures for real estate loans given in the table for all banks, a few pages preceding, were much too high. it leaves the relations among the other items, however, not greatly changed. "all other loans" increase from slightly less than % of total assets to %. if we concede that one-half of the "all other loans" represents liquid "commercial paper"--a very liberal estimate, as we have previously concluded--we get about - / % of the assets of these institutions in the form of "commercial paper," an increase over the - / % to be assigned on the basis of the other table. the figure is the roughest sort of approximation. i attach little importance to the exact percentage, and the argument which follows is not dependent on any exact figure here. the proportion of collateral loans to total resources is changed also, and even more: collateral loans are % of total bank resources when all kinds of banks are included, and are over % of total bank resources when only state and national banks and trust companies are counted. if the foregoing is correct within very wide limits of error as to the amount of commercial paper, collateral loans very substantially exceed commercial paper. if all the "all other loans" should be counted as commercial paper, collateral loans are still not far behind them-- % as against - / %. what is the significance of this? we have seen that for national banks, the great bulk (over %) of the collateral loans were secured by stocks and bonds in june, . we saw reasons for supposing that a higher percentage of stock exchange collateral would be found when state banks and trust companies are included. suppose we assume that % of the collateral loans of all three classes of institutions here in question are based on stock exchange collateral.[ ] this would mean - / % of the total resources of these institutions in stock exchange loans--still well above the - / % we have assigned to "commercial paper." in any case, it is at least justifiable to contend that loans on stock exchange collateral are as great in volume as commercial loans. i think that they very substantially exceed them. but further, we have another large percentage of bank resources invested in stock exchange securities outright--chiefly in bonds. the aggregate for those investments in the institutions under consideration is , millions. this is something over % of the total assets of these institutions. combining this with the loans on stock exchange collateral, we get nearly % of bank and trust company assets invested, directly or indirectly, in stock exchange securities, as against an assumed - / % in commercial paper. conceding that all the "all other loans" are commercial loans, the stock exchange assets still exceed them in the ratio of to - / . in our second table, we have listed items which aggregate only , millions of the total resources for these institutions of , millions. the items listed, however, represent virtually all the credit extended by banks to industry, commerce, agriculture, the stock market, other speculation, and the state. the excluded items of main importance are: due from other banks and bankers, , millions; checks and other cash items, millions; and cash on hand, , millions--the three items aggregating , millions, which virtually closes the gap. these three items are of immense importance as making for liquidity in banking assets, and as making possible extensions of credit to the business world, but it is not proper to count them when an estimate of the extent of bank-credits is in question. our second table contains, for the three classes of institutions, all the items properly counted there, except overdrafts (small in amount) and one other big item which does not get into bank statements at all, namely, _overcertifications_ and "_morning loans_." of this last item, more later. we may, then, recalculate our percentages on the basis of the credit extended by the three classes of institutions, instead of on the basis of total resources. on this basis, the percentages are: real estate loans, . %; collateral loans, %, of which we assign to stock exchange collateral, - / %, and to other collateral, - / %; all other loans, . %, of which we assign to "commercial paper" . %; total stocks and bonds, %. adding the percentages for stock exchange collateral loans and for stocks and bonds owned, we get - / % of all extensions of bank-credit for these three classes of institutions in the form of credits extended to the security market. if everything else except the real estate loans should be counted as "commercial loans" the stock exchange credit would still exceed the commercial credit. if my estimate of . % of bank-credit based on commercial paper is high enough,[ ] the banks and trust companies have extended over two and a half times as much credit, at a given time, to the security market as they have to commerce. this on the face of the record. but there is, as above indicated, a further item which does not get into the record, namely, overcertifications and "morning loans." every day in the great speculative centres, and very especially in wall street, enormous advances are made to brokers, which are canceled during the day, but which, during their short life, are a real addition to bank-credit. to attempt to estimate this with any accuracy is hopeless, but the total on any ordinary day is enormous, and most of it is extended in connection with stock market transactions. a final comparison,[ ] which will conclude this perhaps too wearisome analysis of these figures, will consider the loans alone, neglecting the securities owned: of total loans: real estate loans, . %; collateral loans, . %, of which we assign to stock exchange collateral, . %, and to other collateral, . %; all other loans, . %, of which we assign to "commercial paper," . %. the development of bank loans on stock exchange collateral is a remarkable feature of the three or four decades preceding . the following figures, of national bank loans in new york city,[ ] illustrate the tendency: ( , omitted) _loans on _advances on _date_ commercial paper_[ ] securities_ the tendency is not peculiar to america, however. the following table gives a classification of the loans and discounts of all the great european banks[ ] in selected years from to : (figures in francs, , omitted) _note _commercial _advances on _date_ circulation_ loans_ securities_ , , , , , , , , , , , , , , , , , , , , , , , , , , we conclude, therefore, that the great bulk of banking credit in the united states, even of "commercial banks," is not commercial credit. much of it, in the smaller places, especially, represents in fact, whatever the form, long time advances to agriculture and industry. most of it, in the great cities, and to a large extent in even the smaller places, represents advances to the permanent financing of corporate industry. excluding real estate loans, more than half of bank-credit represents either ownership of bonds (with some stocks) or else advances on stocks and bonds. another important part of bank-credit, which i shall not even attempt to measure, is employed in financing commodity speculation. it is worth while to compare our figures concerning bank loans with kinley's figures, which we have previously considered, for deposits made on march of , the year we have chosen for the bank loans figures. it is important to remember that "deposits," as used by kinley in this investigation, does not mean what the term means in a bank balance sheet. kinley's figures relate to the actual items deposited on the day in question, and not to the net balance after deposits and withdrawals have been compared when the bank has closed for the day. a large deposit in the balance sheet sense might show no "deposits" in kinley's sense, in a given day; while enormous "deposits" in kinley's sense might be so offset by incoming checks that virtually nothing is left on the balance sheet at the end of the day, for a given depositor. kinley's figures thus give us a means of getting at the degree of _activity_ of different classes of deposits in the balance sheet sense, and so, indirectly, of different classes of _loans_. loans and deposits (in the balance sheet sense) are, as we know, closely correlated. this is true for banks in the aggregate, and for banks individually at a moment of time. it is not generally true of a given individual deposit account at a moment of time, but through a period of time, for business deposits, it tends to be true that the items deposited offset the amounts borrowed.[ ] if the items deposited are numerous, if the depositor has an "active" deposit account, receiving a large flow of banking funds, as compared with his net deposit balances, we may infer that his loans are also active, that he pays off loans frequently, that his paper, in the assets of the bank, is "liquid." i need not give the details of kinley's figures again, as they have been elaborately analyzed in connection with the estimate of the "volume of trade."[ ] the figures show that retail and wholesale deposits between them make up about % of the total deposits. this would serve to show that "commercial paper," which we have allowed to be about . of total loans, is slightly more active (and hence "liquid") than the average of loans.[ ] it will also suggest, however, that our figure for "commercial paper," truly liquid, is too high, since we should expect this kind of paper to be more active than the average--unless, indeed, stock exchange collateral loans are so exceedingly active as to make a tremendously high average. i refrain from trying to get a definite answer on this point, since there are many indeterminate elements: among others, uncertainty as to the extent to which wholesale deposits and retail deposits _include_ all commercial deposits, and uncertainty as to the extent to which they _exclude_ manufacturer's deposits. the great bulk of kinley's deposits, however, fall into the "all other" class, and the great bulk of the "all other deposits" are located in the great financial and speculative centres, particularly new york. we have concluded that they represent chiefly (a) transactions in securities; (b) other speculation; (c) loan and other financial transactions, particularly the shifting of call loans on stock exchange collateral. it is, then, the deposits of those connected with the great financial and speculative markets, particularly the stock market, whose deposits are most active, and whose loans are most liquid. stock market collateral loans thus constitute the most perfectly satisfactory sort of bank loan, from the standpoint of liquidity. though such loans do not make up the bulk of bank loans (we have concluded that they constitute . % of the loans of state and national banks and trust companies in ), they do account for the bulk of banking activity, and supply the greatest part of the liquidity of total bank loans. when we consider further the item of securities (chiefly bonds) in banking assets, we find another highly important source of liquidity. the sales of bonds in the great banking centres are enormous. the figures of bond sales on the exchanges do not begin to tell the story. one big bank in new york in sold more than half as many bonds as were sold in that year on the floor of the stock exchange.[ ] it has been frequently stated that ten bonds, of those listed on the exchange are sold over the counter for one on the floor. this is truer of boston than new york. the "outside market" for unlisted bonds is a very important matter. dealings among banks in these items and in foreign exchange are exceedingly important. this is especially true of the business of the great private bankers, as morgan, kuhn-loeb and others. much of this does not appear in kinley's figures, since neither the deposits of the great private banks in other banks, nor the deposits made in the private banks themselves (so far as new york city is concerned) figure in his totals.[ ] had they been included, the percentage of the "all other deposits" would have grown, and we should have had still more impressive evidence of the fact that modern banking in the united states is largely bound up with the security market, and that modern bank-credit gets its liquidity chiefly from that source. the story is even more impressively told by the figures for bank clearings, which include the transactions between banks, and the transactions of the private bankers. in new york, in , total clearings for the year were billions, as against billions for the whole country outside new york.[ ] that bank clearings are closely correlated with stock exchange transactions, has been demonstrated fully by n. j. silberling, who has shown the following correlations: new york stock exchange share sales with new york clearings, r = . ; total clearings for the country with new york share sales, r = . ; total clearings for the country with railway gross receipts (as representative of ordinary trade), r = . .[ ] the active deposits and the liquid loans are chiefly connected with activities in finance and speculation. now two important practical conclusions are suggested by this analysis. the first is that the complaint of many farmers, merchants, politicians, and even scientific writers that too much money and bank-credit are at the disposal of wall street and other speculators rests on a misunderstanding of causal relations. wall street does not, by using a large amount of bank-credit, take just that much away from ordinary business. rather, it increases the amount available for ordinary business! wall street, and the other financial and speculative centres, supply the _liquidity_ for bank assets, and so make possible loans on non-liquid paper. banks do not need to have all their assets liquid. if they did, american banks would have long since gone under! the foregoing discussion of loans to farmers, and manufacturers and even merchants should have made that clear. but banks do need a substantial margin of liquidity, to protect the rest. they get it from stock exchange collateral loans, and from ownership of listed and easily marketable bonds, primarily. they get part of it from true commercial paper. thus, the director of a country bank in iowa told the writer that banks in his section--where banks owned in large measure by farmers, and dealing largely with farmers, are very numerous and important--make a regular practice of buying, through brokers, a considerable amount of notes of outside merchants. they do this to protect themselves. their other loans, to farmers, while good, are slow. if pressed themselves, they cannot press their depositors. these notes bought through note-brokers, however, are impersonal. they can refuse to renew them. they can sell them again. they thus buttress the rest of their assets. they can thus lend more, rather than less, to local customers. they can safely get along with much smaller cash reserves. similarly with the practice of country banks of sending a large part of their cash to wall street banks to be lent on call, for which the country banks get, say, % from the wall street banks. their country customers would pay % or more for that money in some cases, but the banks dare not tie up more of their assets in non-liquid local paper. they lend more, rather than less, at home, because they send part away. wall street is not "draining our commerce of its life blood"![ ] wall street is rather preventing that life blood from coagulating! a second important practical conclusion relates to the provision in the federal reserve act which forbids federal reserve banks to rediscount stock exchange paper. this provision was intended to keep funds from being diverted from commerce to stock speculation, and doubtless met the approval of many very good students of the subject. if the foregoing be true, however, that provision is a mistake. it is a mistake, first, because it will lessen, rather than increase, the power of the reserve banks to provide relief to commerce through aiding in making bank assets liquid _via_ the stock market. it will limit the liquid assets of the federal reserve banks in too great a degree to gold. it is a mistake, in the second place, because it prevents the reserve banks, particularly in new york and boston, from making satisfactory profits--which is one important purpose of a bank! even more important, however, is the third objection: it prevents, in large degree, the federal reserve banks from being effective weapons against the "money trust." how far we have a "money trust" need not be here argued. the pujo committee, relying in considerable degree on admissions of prominent financiers that "concentration had gone far enough," and on the inability of mr. baker to find more than one issue of securities of over $ , , within ten years, without the coöperation or participation of one of the members of a small group, concluded that we have a "money trust" in the sense that there is "an established and well-defined identity and community of interests between a few leaders of finance ... which has resulted in a vast and growing concentration of control of money and credit in the hands of a comparatively few men."[ ] how far this conclusion is justified is, of course, a matter that would require elaborate discussion. there seems to be evidence that there is, since the death of the elder morgan, a decided loosening of ties. one feels the need, moreover, of discounting very considerably many of the conclusions of the pujo committee. the present writer feels that the case has been made, however, that there has been, and probably continues, a much greater concentration of such control than is desirable. whether or not there is at present such a "money trust," it seems pretty clear that temporary, if not permanent, alignments, may give effective monopoly control when the issue of very big blocks of securities is involved. for present purposes, however, it is enough to note that _if_ there is, or should come to be, a "money trust," it is a trust concerned with _financing industry, through handling security issues_, and not a trust _in the granting of ordinary commercial credit._[ ] if, therefore, the federal reserve banks are to compete with it, and break its monopoly, they must do it by entering the market with funds for the financing of corporate industry. power to rediscount commercial paper seems a feeble and hardly relevant weapon against a combination concerned with purchasing securities, and making collateral loans! no doubt, this power is worth something. if an independent investment banker wishes to compete with a "money trust" in financing a new enterprise, he can go to his commercial banker, and offer collateral security for a loan; if the commercial banker wishes to aid him, but is short of lending power, he may, if he has plenty of commercial paper available for rediscount, rediscount it with the federal reserve bank, and so get the additional funds. but a new york bank, or trust company, with the bulk of its assets in stock exchange investments, may well not have enough commercial paper eligible for rediscount, and the federal reserve bank could help very much more effectively if it could take collateral loans directly. a fourth, and even more important objection to the restriction on stock exchange collateral loans for federal reserve banks relates to the power of these banks to aid in a crisis. crises first hit the stock market. financial panics are most acute there. the need for immediate and drastic relief is greatest there. if stock exchange loans lose their liquidity, what of the rest of bank loans? power to lend on stock exchange collateral, in the hands of the federal reserve banks, may well prove, in crises, an essential, if we wish to make our system definitely "panic proof."[ ] and now for a vital theoretical conclusion from this lengthy analysis of bank loans. for the quantity theory, and the "equation of exchange," all exchanges stand on a par. if one exchange takes place, that lessens the money and credit available for another exchange. the more exchanges there are, the less money and credit there are per exchange, and the lower prices must be, as a consequence. nothing could be more false. exchanges are not on a par.[ ] some classes of exchanges increase, rather than decrease the funds available for handling others. the activity of the speculative markets, making loans fluid, enormously increases the lending power of the banks for all purposes. exchanges of securities, especially, instead of lowering prices, make it easier for prices to rise.[ ] the years of extraordinary stock sales have always been "bull" years. there have been big "bear" days,[ ] but never big bear years, in the record of new york stock exchange share sales. the selling and reselling of speculative goods of securities, and of notes and bills are especially important as making it easier for banks to expand loans. to list all manner of items, as professor fisher does,[ ] "real estate, commodities, stocks, bonds, mortgages, private notes, time bills of exchange, rented real estate, rented commodities, hired workers," and count them all as "actual sales," all part of the "goods"[ ] which make up the "volume of trade," is to put the theory utterly beyond the pale. seasonal calls on an inelastic money supply for actual cash to move crops and pay agricultural wages may make a real difference in the value of money; scarcity of money of the right denominations for retail trade may give an agio to such money,[ ] but the money and credit used by speculators, bill brokers, dealers in foreign exchange, investment bankers, etc., increases, rather than decreases, the funds available for ordinary industry and commerce. i have made clear the distinction between the direct and indirect financing of industry by banks. great banks in continental europe often _buy_ the stocks of new corporations, hold them permanently, put bank officers on the boards of directors, and supervise closely the operations of the companies. in america, while officers of commercial[ ] banks often are members of boards of directors of the companies which borrow heavily from the banks, the practice is to make short-time loans to such companies (in form, if not in fact), and to lend on their securities, rather than to buy them. our banks own securities in enormous amount, but they are chiefly seasoned bonds, rather than stocks of new or even well-proved, enterprises. it is commonly supposed, too, that collateral loans are chiefly or almost wholly made to speculators, who buy securities in the expectation of holding them only till investors take them off their hands, and that investors buy them, not with bank-credit derived from loans, but with money or bank-credit which they accumulate by saving out of current income. it is particularly true of the higher grade securities, which savings banks and insurance companies can buy, that this is the case. the bank-credit thus serves for temporary, rather than for permanent financing, to the extent that this is true. i think, however, that the extent to which bank-credit serves for permanently financing industry is underrated. a good many investors have learned that the short-time money-rates are, on the long time average, lower than the yield on long-time securities.[ ] they have learned, too, that high-yield securities--securities high in yield as compared with the long-time average of money-rates--can be obtained which can safely be carried on margins of thirty, forty and fifty points, without danger that even such catastrophes as the slump in security prices at the outbreak of the war will wipe the margins out. the old distinction between investors and speculators, the former those who buy for the yield, and the latter those who buy for an anticipated rise in capital value, no longer corresponds to the distinction between those who buy outright and those who buy on a margin. the investor, buying a or % preferred stock, carrying it on a forty point margin, with money from his bank or broker at or %, is making or % on his own forty dollars, and is making the difference between or % and or % on the sixty dollars lent him by his banker or broker. he substantially increases his yield thereby, and his risks, if he chooses his stocks carefully, and scatters them among a number of issues, are not great. for the banker or broker, such a loan is perfectly satisfactory. the margin of security is wider than that demanded on more speculative securities. such a borrower will receive consideration when more speculative loans are being called, or not renewed. the investor of this type is, in effect, engaging in a form of banking business. he is lending to the corporation funds which he has borrowed from others; he has put up his own capital for the same purpose that the bank uses its capital--to supply a margin of safety to those who have taken his short-term promises to pay. like the bank, too, he converts rights to payments at a later date into rights to payment at an earlier date. he is one of the links in the chain whereby the wealth of low saleability employed in industry becomes distilled and refined till it enters the money market. his profits come in the difference in the yield as between more saleable and less saleable forms of rights. the extent of this practice cannot be stated, so far as any data to which the present writer has access are concerned. the writer has met the practice in a good many cases. one brokerage house, with whose operations the writer has considerable acquaintance, makes a practice of advising its more conservative customers to do this. a good many brokerage houses sell investment securities on the "instalment plan," which often means, in practice, that the initial margin put up by the investor is his only payment, and that the security is gradually paid for by letting the yield increase the margin. during the extremely easy money of the present war period, occasional reference has been made in the financial papers to the practice of buying even the highest grade bonds on this basis--the yield of the bonds being very substantially higher than the money-rates, giving a comfortable profit to those who hold the bonds on a margin. that the practice is not wider spread is due primarily, probably, to the temperamental qualities required. the investor, proper, is commonly a very conservative person, who has an unreasoning distrust of speculation, and to whom the word, "margin," necessarily suggests speculation. that buying a stock on a margin is the same sort of thing as buying the equity in a mortgaged farm, does not occur to him. on the other hand, the man who knows the market well enough to be willing to deal on margins, frequently is not content with the slow process of accumulation which comes from annual yields, and prefers to take larger chances in speculation on capital values. but there is an intermediate class, who buy investment securities, with narrow range of fluctuation in capital values, for the sake of the yield, and who buy them on margins, margins ample to enable them to sleep at night, and to neglect the daily market reports. i think that there are indications that this class is growing larger, and more important. doubtless much more important than individual "bankers" of this sort, however, is the enormous number of houses dealing in securities, "wholesalers" and "retailers," who find profit on their "wares" even while on their "shelves," through the differential between the yield and the charge made by commercial banks on collateral loans. a very large percentage of collateral loans is made to institutions of this type. as this practice becomes more important, the result must be to widen the money market, to increase the proportion of banking capital that goes permanently into financing industry, and to reduce the difference in yield between short-time paper and long-time securities--in other words, to bring the "money-rates" closer and closer to the long-time interest rates. this would have seemed very strange and weird to adam smith. it means, in effect, that the bulk of our banking credit is, directly or indirectly, financing our industry rather than our commerce. adam smith thought that a bank could safely lend to its customers only so much as they would otherwise keep by them in the form of money. perhaps this notion, as growing out of some speculations regarding the general theory of money, should not be taken as the statement of smith's practical attitude on the matter, but that practical attitude, as clearly expressed in the paragraph[ ] following, is that a bank can afford to lend only for mercantile operations that are carried through in a very moderate time, that the bank can afford to supply only the minor part of the circulating capital, and no part of the fixed capital, of a merchant, or manufacturer, no part of his forge and smelting house, etc. such loans lack the liquidity which the bank must insist upon. only those persons who have withdrawn from active business, and are content with the income upon their capital, can afford to lend for such purposes. the theory is sound, on the basis of the facts as smith knew them. but modern corporate organization and modern stock markets have changed all that. anything that is highly saleable can come into the money market, and the modern corporation organization of business, coupled with organized stock exchanges and a large and active body of speculators, has made the forge and the smelting house as saleable as the finished product. this is not to accept schumpeter's doctrine,[ ] so far as the united states are concerned, that it is primarily the bankers, the manufacturers of bank-credit, who make the decisions that turn industry from old to new lines. they do not, on the whole. in continental europe, particularly germany, they do to a much greater extent. criticism has been made of our american commercial bankers, as contrasted with german bankers, that the former are parasites, who insist on sure things, and refuse to take chances with other business men in the development of industry. to the present writer, our banking system seems to be rather a more developed system than that of germany, in that the "division of labor" has gone further with us, and risk-bearing and the manufacturing of bank-credit have been more sharply differentiated. we have bankers enough who are "risk-bearers." but they are, on the whole, "private bankers," "investment bankers," and the like, who do not manufacture a great deal of deposit credit, but rather borrow heavily from the commercial banks, which are the great manufacturers of bank-credit. under our system, the decisions which divert industry from old to new lines are more democratically made, by speculators and investors under the leadership of private bankers, and sometimes without that leadership. these constitute the important intermediary which transforms stock exchange securities into the basis of bank-loans. the commercial banker buys, in general, not the stocks, but the note of the private banker, broker, speculator, or investor, with the stocks as collateral. if investment bankers, speculators and investors decide to support old ways of doing things, the banks lend on the securities of the old kinds of businesses; if investment bankers, speculators and investors turn to new things, the commercial banks follow suit. commercial banks can and do discourage certain types of enterprises by refusing loans with their securities as collateral, or by requiring very heavy margins with such loans, but even these may be developed, and are with us on a large scale developed, on banking credit, advanced by the speculators and private bankers who borrowed it from the commercial banks with other securities as collateral. the commercial banks of the united states may to a very considerable degree check dynamic tendencies, but in general, they do not lead and direct them. bank-credit, directed by others than commercial bankers, does, however, enormously facilitate both the starting of new enterprises and social readjustment to them. how far can the total wealth of the country, agricultural as well as industrial, be brought into the circle of the money market? the full answer to the question would go far beyond the limits of this book. if agriculture can be brought under the control of large corporations, there is little reason for supposing that it, too, might not come in. there are some peculiarities of agriculture, special dangers of drought and flood, dangers of over-production and low prices, wide seasonal fluctuations in conditions, which make it hard to standardize in any case. but mining and even the manufacturing of such things as primary steel products have wide variations in prosperity too. so long, however, as agriculture remains a matter of families on a homestead--and for social and political reasons, we may hope that this will always be the case--it is difficult to bring it in. bonds of agricultural associations or of agricultural banks have had limited sale on the bourses of europe. the present writer, for example, found it impossible to find in four great libraries in new york and boston any quotation of the bonds of the _bayerische landwirtschaftsbank_. apparently, in general, such securities have not high saleability. while this remains true, agriculture may expect to remain under a handicap of higher interest rates than industry and commerce. if, however, all forms of wealth could be made equally saleable, we should find interest rates rising for those loans and securities which now have the highest saleability. they would lose the peculiarity which now enables them to perform a service as bearer of options. money-rates and long-time rates of interest would tend to come together. long-time rates on formerly unsaleable loans would fall, and rates on highly saleable loans would rise. the present low rates in the "money market" grow out of _differential_ advantages. we turn now to the third important aspect of the technique of banking, namely, the matter of cash reserves. first i would point out that this is merely a part of the more general problem of liquid assets. the difference between cash and liquid paper is a matter of degree. there is large possibility of substitution of the one for the other, as it becomes more profitable to use one or the other. when money-rates are low, it may well be worth while to carry large reserves; when money-rates are higher, the gains to be made by substituting paper for cash in the bank's assets are much greater. i have pointed out the use which great european banks, notably the austro-hungarian bank, make of foreign bills of exchange as "reserve," selling bills when money is "easy," and the yield on bills is small, buying bills when money is "tight," and the yield on bills is large.[ ] the great joint stock banks of england, the chief sources of bank-credit in the great banking country of the world, also make use chiefly of deposits with the bank of england as their "reserves." some cash they keep, but it is "till money," rather than reserve. they carry, also, "secondary reserves" in highly liquid paper, stock exchange loans and commercial bills. the differences are differences in degree. the bank of england does keep a large reserve in cash (including notes of the issue department and gold bullion) but it denies that it has any definite ratio in mind,[ ] and it protects its reserves, when they are low, not by ceasing to loan, but by raising its discount-rate. the whole thing is highly flexible. this is, in general, true throughout the world,[ ] where banking is highly developed. a country which has expanding business, based on rising values of goods and rising capital values of anticipated incomes, which in turn grow out of increasing business confidence, etc., and out of the development of new enterprises which make readjustment necessary, expands its bank-credit to meet the situation. expanding bank-credits in time grow so large that bankers feel larger cash reserves to be desirable. their reserves may be also, in some measure, drawn upon by the growing retail trade and wage-payments, which call for more money in circulation. they meet the situation by raising money-rates. this tends to prevent the exportation of gold, and tends to encourage the importation of gold, which finds its way into bank reserves. banks may even borrow directly from banks in other countries, to get the gold they need, or to prevent the exportation of the gold they have. the higher money-rates, also, tend to check marginal borrowing--the borrowing by those who see only very small profits to be made by the use of the bank-credit they borrow. if the rising values of goods, however, and the profits to be made by effecting exchanges, speculative and other, are large, the volume of bank-credit will, none the less, grow. if the tide of rising business confidence is strong, the banks will be disposed to accept securities and rights as collateral which they would distrust at other times. a very big difference indeed may appear between bank reserves in active times and bank reserves in dull times. the banks need less reserves in proportion to deposits in active times, because the very activity itself increases the liquidity, the saleability, of their paper assets, and so makes actual cash less necessary. even in this country, the practice of counting deposits in other banks as reserve is well developed. this is not only true of country banks, or banks outside the reserve cities. it has been, in considerable degree, the practice of the big trust companies in new york city. it is the practice of private bankers connected with the stock exchanges, and the practice of brokers, who are, for many purposes, bankers, especially those who allow their customers to check on their accounts. such houses may carry no cash at all. one, with whose workings the writer is somewhat familiar, makes the rule--"we pay by check and receive only checks." none the less, this house allows its customers to check upon it, and checks drawn on it perform all the functions of checks drawn on banks which keep a cash reserve. of course, our new federal reserve system is built, in part, on the principle of collecting reserves in central reservoirs, and our banks will doubtless increase the practice of counting deposits with other banks as reserve.[ ] they will feel the need for less reserves, also, with a wider rediscount market. _within a given country_, i think that we may safely generalize the doctrine that the causal relation between reserves and deposits is exactly the reverse of that asserted by the quantity theory, within very wide limits indeed. that is to say, increasing reserves are a _result_, and not a _cause_, of increasing loans and deposits. we shall further hold that the relation between them instead of being definite, is highly flexible. this is not to assert that reserves may not increase without a prior increase in loans and deposits. that has happened in the united states during the present war. it does mean, however, that increasing loans and deposits will pull gold into a country, and that increasing reserves do not force increasing deposits and loans.[ ] if a country's business is growing, if that business is soundly based, so that expectations are being met, obligations being paid out of the income which arrives, on schedule time, to meet anticipations, there need be no effective check to the amount of gold that will come into the country to serve as reserves, within limits that are rarely reached. it is miscalculation, maladjustment of costs and prices in particular enterprises, failure of "interstitial adjustments," especially failure of particular crucial links in the business chain, as the businesses engaged in producing iron and steel, to respond to the needs of other expanding businesses, that check movements of expansion in business, not inadequacies of bank reserves.[ ] as long as only wise plans are made, as long as they meet no mishaps, as long as the carrying out of the new plans does not itself so change the facts on which the calculations of business men have been based as to cut under anticipated profits, so long may business, within a given country, expand without danger from inadequate reserves. of course, if the whole world is simultaneously expanding, the competition for gold in the international money markets may be so severe that all may be hampered. that reserves will increase, as expanding credit, due to increasing business or rising prices, requires increased reserves, can hardly be disputed, i think, if we look at a country of small size, or (what is the same thing from the angle of economic analysis, so far as the present problem is concerned) if we take a particular part of a country. seasonal movements of cash for reserves in this country have been obviously determined by the movements of credit, rather than the reverse. expanding business at crop moving seasons, requiring advances of credit by country banks, and an unusual drain on the cash resources of the country banks, has regularly meant that the country banks draw cash from the new york banks. when the need for such cash in the country banks passes, when they can no longer employ it to advantage at home, they send it back to new york. new york, to meet the emergency caused by the withdrawal of cash, draws to a considerable extent on europe for gold. it is not as easy for new york to get gold quickly from europe as it is for france to get gold in an emergency from england. more time is required. inelasticity, too, in the forms of currency most needed for small transactions, has made very real difficulties for us. but that, within the country, the sections whose business and credit were expanding take cash reserves from those sections where credit is less urgently demanded, needs no debating. this is seasonal. but the same thing is true in the long run. as business and bank-credit have expanded, year by year, in oklahoma, oklahoma's cash reserves have grown. bank-credit in a country cannot go on indefinitely mounting, if bankers are making unsound loans, if the values on which the loans rest are based on vain imaginings, if anticipated profits are not realized. but if a country have rich resources and intelligent entrepreneurs, with sagacious bankers who can discriminate between sound and unsound business, it may, within very wide limits indeed, expand its bank-credit without check from inadequate reserves, as its business expands, and as prices, particularly prices of lands and securities, rise.[ ] if the country in question be a very large country, however,--large in the sense that its business and volume of bank-credit are very large, and particularly in the sense that bankers' assets are of such character that a large volume of reserves is desirable--restraints on the process of expansion may come. reserves will come in, but the resistance in stiffer money-rates will be felt. bankers in other countries will compete with the bankers in the country in question for reserves. rising money-rates will put an end to many marginal exchanges. they will lessen the saleability of many rights which might otherwise be available as banking collateral. the extension of bank-credit will feel a drag. there is large flexibility here. but, in a long run period of many years, the volume of gold in the world will impose a maximum limit upon the possibility of expansion of bank-credit in the world as a whole. this limit is doubtless never reached. within the limit, the variations in the volume of the world's credit are primarily determined by the other concrete factors we have been discussing. proportionality between the world's gold and the world's volume of credit does not at all obtain. under certain conditions, much higher proportions of reserves to bank-credit will be found in a given country than at other times, and the same will be true in the world at large. i would refer again to the discussion by j. m. keynes, quoted in part ii.[ ] reserves have absorbed enormous quantities of gold, easily obtained as a consequence of abundant gold production, in the past fifteen years. proportions of gold reserves to bank-credit have grown. in the preceding period, when gold production went on less rapidly than business development, percentages of reserves were lower. most bankers feel better with large reserves. when they can get gold, they prefer gold to other substitutes. when they cannot easily get gold, they use other substitutes, of the various kinds of paper, particularly, which have been described. gold differs from other things, in bankers' assets, in degree, rather than in kind. instead, therefore, of the law of the proportionality of reserves to volume of bank-credit, i venture the generalization[ ] that, as gold production increases rapidly, the tendency is for the proportion of gold reserves to volume of bank-credit to rise; with diminished gold production, the tendency is for the proportion of reserves to fall, assuming that the factors other than volume of gold production which make for expansion of business maintain themselves. increasing volume of gold tends to increase the volume of trade. but there are other causes for the increase or decrease of trade as well. these causes, working in harmony with rapidly expanding volume of gold, lead to a very rapid growth of trade.[ ] working in the face of a drag from less rapidly growing gold supply, they strain the possibilities of bank-credit expansion. various substitutes for gold in bank reserves are employed. substitutes in the form of other forms of credit are employed. barter is resorted to increasingly. methods of employing other things than gold in the retail trade of a country are resorted to. "gold-exchange" standards are devised. countries "wait their turns " to come on the gold standard. coöperation, not only within countries, but among countries, seeks to economize the scanty stock of the precious metal. very large slack is thus revealed. but the expansion of business is checked, the volume of business confidence is reduced, the values of future incomes in enterprises is lowered, production is checked, and prices are reduced, (a) because the value of money rises; and (b) because the values of goods and income-bearers is reduced. the exchange side of production is hampered. substitutes for gold, through increased activities of bankers and other agents of exchange, are costly. greater tolls on values are taken by those who handle the mechanism of exchange. it does make a difference whether or not the world's gold is abundant! but the difference is not made solely, or even mainly, in the price-level.[ ] the reserve function of money is essentially a _dynamic_ function. the reserve function is merely a phase of the bearer of options function.[ ] it is the practice of quantity theorists to speak of "normal" ratios between reserves and deposits (or reserves and demand liabilities), and to speak of the "static" laws governing this relation. this in true of kemmerer, of fisher, of a. p. andrew, and, in general, of contemporary quantity theorists. kemmerer very explicitly puts it as a matter of static theory, "if we divide the money of the country into two parts; one, that used directly in daily cash transactions, and the other, that kept in banks as reserves, it may be said that, _under perfectly static conditions_ [italics mine], the proportion of the total represented by each of these parts would be constant. each banker would find from experience what proportion of reserve to liabilities it was advisable for him to maintain, and would order his business, as far as possible, so that his reserve would neither exceed nor fall below that most desirable proportion."[ ] kemmerer quotes the following passage from a. p. andrew: "in the long run, _as apart from cyclic oscillations_, the quantity of bank-credit is governed by the quantity of money."[ ] fisher's view we have considered at length in part ii. it is essentially the same. he is working with the statics of the problem of money and credit. these different writers differ greatly in the extent to which they would insist on the validity of their static tendency in real life. professor fisher, as we have seen, is exceedingly uncompromising, holding tenaciously to his principle as subject only to slight modification during transition periods. professor kemmerer, in the chapter from which the quotation just given is taken, gives an important realistic analysis of dynamic conditions and makes liberal concessions to the view that the ratio is no constant in real life.[ ] professor taussig, whose view was summarized at length in chapter ix, finds, in real life, so many exceptions to the doctrine of proportionality of reserves and deposits that he virtually abandons that doctrine. what i wish to insist on here, however, is that there are no static laws _possible_ in this connection. the reserve function is a dynamic function. the theory of reserves must rest in an analysis of friction, of transitions, of dynamic uncertainty and dynamic change. it is a part of the general theory of liquidity of bank assets, of saleability of rights, and the like. if one can find a "normal" amount of dynamic change, a "normal" amount of uncertainty, a norm for the coming of technical inventions, a normal prospect of war, a normal rate of gold production, a normal rate of growth for population, a normal amount of jew-baiting in russia, with a norm for migration, and if one can hold these norms, and a multitude of similar norms, in fixed relation to one another, one might have justification for speaking of a "normal ratio" of bank reserves to bank demand liabilities! apart from dynamic changes, from frictional elements which create uncertainties, in general, apart from uncertainty and irregularity and lack of "normality," there would be no occasion for bank reserves at all! to the extent that static conditions are realized, bank cash reserves may be, and _are_, dispensed with. it is well known that england gets along with surprisingly little gold. the total stock in the country has been smaller than the gold reserve of the banque de france, and much of the gold in england was in use among the people, since small paper money (before the war) was not in use in england. the gold reserve of the bank of england has been usually only a fraction of that of the banque de france. some years since, the distribution of gold as between england and the united states, was, roughly, england six hundred million dollars, the united states, one billion, six hundred million. a larger proportion of gold was in reserves in the united states than in england. yet england was doing the banking business of the world, while we had trouble in doing our own! the bank of england carries virtually the only reserve in the country. the joint stock banks, with demand liabilities vastly in excess of the demand liabilities of the bank of england, carry only "till money" in cash or bank of england notes, and for the rest, carry as their "reserve" their deposit credits with the bank. a great deal of criticism, from bagehot down (to go no further back) has been directed at the "inadequacy" of english banking reserves, and many dire predictions have been made as to the dangers that impended unless the reserves were increased. we shall probably hear less of this after the war! the bank of england still stands! it has never failed to pay out gold over its counters, even though it has, with the aid of the government, doubtless restricted and controlled foreign shipments of gold. but it has met the unprecedented emergency better than any other bank in europe, and to-day (sept. ) is in exceedingly good shape. sterling exchange at new york seems "pegged" at the "lower gold point," and apprehensions regarding the stability of the english financial system seem definitely allayed. it is aside from our present purpose to discuss war time conditions. i am rather interested in analyzing the features of the english money market which have made it possible, in the period preceding the war, for english bankers to get on with so little gold. as will appear, it is because english business and financial affairs have been more nearly "static," have come nearer to realizing the assumptions of static economic theory, than is true of any other country on earth. the very fact, for one thing, that england is the great _international_ banker has meant a scattering of risks. acute panics do not come in all countries on the same date. bad business in one country may be offset by good business in another; drains of gold to one country may be met with gold flowing in from others. the same considerations which tend to stabilize the railroad business, as compared with, say, cotton-growing, apply to the international banker as compared with the banks of a single country or section. but further, the london market has developed coöperating agencies for smoothing out friction and eliminating uncertainties to a degree unknown anywhere else. an anonymous writer in _the americas_ for april, ,[ ] has given an exceedingly interesting account of this organization of the london market,--the product of the development of generations. let us enumerate some of the points: there is nowhere in the world so much expert judgment in the grading and evaluating of hundreds of commodities from all parts of the world. there is, coupled with this, a worldwide reputation for the experts of absolute integrity, so that producers in remote countries regularly ship ("consign") to london cargoes without definite arrangements, knowing that there are in london organized facilities by which the commodities are warehoused, expertly and fairly judged, and either sold at once or else made the basis of a collateral loan against which they can draw immediately. the institutions which make this possible are (a) the system of warehousing, with its certificates or warrants which give absolute title to the goods, and which are easily negotiable; (b) the organized arrangements in connection with the warehouses by which commodities are received and either graded as they are, or separated and mixed with others to form standard blends readily marketable--this with rigid integrity and expertness which the whole world trusts; (c) a speculative community which has unlimited banking credit, ready to buy at a concession in price virtually any commodity--honey in the comb, sealing wax, pianos, farm machinery, what not; (d) the organized markets or periodical auctions which speculation and final purchase together support; (e) the banks, which, relying on the standardization of the commodities and the readiness of the speculative community, can without hesitation lend the money on which the distant shipper is relying to conduct his business. what comes to london is fluid. everything comes to london! the multiplicity of items dealt in gives stability to that business which deals with all--the banking business. the london stock exchange is no provincial affair, easily demoralized by an adverse rate decision! securities of every country on earth are listed there, and speculated in. it must be a world catastrophe which really demoralizes the london stock market! it will doubtless seem strange to many to say that new york cannot displace london as the centre of world finance, that the dollar cannot displace the pound sterling in financing international trade, because new yorkers do not speculate enough! they do speculate enormously, but not in many things. a restricted list of stock exchange securities--almost wholly american; cotton--in which new york is the world centre; coffee, in which new york has the largest volume of speculative futures, though yielding precedence, ordinarily, to havre, hamburg and santos[ ] in spot transactions. there is extensive sugar speculation at the new york coffee exchange, which has, indeed, recently changed its name to indicate the fact. there is a produce exchange in new york, but it is a very small affair as compared with the chicago board of trade, and its operations and scope are infinitesimal when compared with the produce speculation in london. of course, there is a vast deal of _unorganized_ speculation in many things in new york, as in business everywhere, particularly in america. but, while the pecuniary magnitudes of organized speculation in new york are very great, the range of items dealt in is restricted. new york banks cannot possibly get such a variety of collateral, based on standardized and readily marketable goods and securities, as can london. new york, consequently, cannot finance international trade, save as an auxiliary to london--and new york banks must have vastly more gold in their vaults than london bankers need! as goods and securities become _more_ marketable, gold--whose services are needed because of its _superior_ marketability--becomes _less_ necessary. the whole story of london's organization would be a long one. london financial institutions have a degree of expertness, growing out of specialization, in large part, which makes all manner of paper fluid in the london money market which would lack fluidity in new york. the acceptance houses are a sort of international bradstreet and dun. they know intimately the standing and business of houses all over the world. they do not give out their information, but they do put their stamp on the paper of business houses, thus standardizing it, lending, not money, but "pure credit," while the other banks, relieved of the necessity of investigating the paper, can buy it as a miller might buy no. wheat. there is the extraordinary extension of insurance, so that virtually any kind of risk may be shifted to those well able to bear it. all this makes for liquidity, for "static" conditions in the money market, and dispenses with the need for gold. as we approach static conditions, we need less and less gold reserve behind bank demand liabilities. _the static law of bank reserves is that none are needed!_ i think we have here the real reason why writers who have sought to give us the law for a "normal" ratio have given us such vague phrases as "shown by experience to be necessary," and the like. when irregularity of income and outgo in a bank's business, non-liquid assets, business cycles, uncertainties, legislative changes affecting business, crop failures, changes in demand, new inventions, wars, are abstracted from, no reason can be given why a banker should keep any reserve at all! but these things are dynamic things. and it is characteristic of irregularities that they are irregular. to get a "normal" ratio out of them is not easy. on the static assumptions, an "ideal credit economy" is perfectly possible. if everything that needs to be marketed is perfectly marketable, if the stream of business flows regularly and without friction in the same channels, if all contingencies are foreseen and dated in advance, a bank needs no cash reserve. all payments can be made by bank-credit. banks bookkeeping becomes merely a refinement of barter, with _money_ remaining as a measure of values, a unit for reckoning, but not being used as a medium of exchange, or as a bearer of options, or in reserves. the measure of values function is the great static function of money. to the extent that static assumptions are not realized, we need money in bank reserves. this extent is a thing that varies from time to time, and from place to place. it is not the same for a given place from time to time, nor is it the same at all places at a given time. it is not the same for the whole world from time to time. since friction, preventing the free marketing of goods and securities and services, exists, since there are dynamic changes which require readjustments through exchanges, we need the work of the banker and he needs cash. but there are other things than money which make for the "statification" of the market. the speculator does it. and the other agencies of the sort represented in the london market do it. they are substitutes for gold. gold has no monopoly. the services performed by gold can be performed in many other ways, and by many other agencies. there is enormous flexibility in the matter. part iv. the reconciliation of statics and dynamics chapter xxv the reconciliation of statics and dynamics in the foregoing discussion of the value of money it has appeared that the value of money is not an isolated problem! not only have we found it necessary to consider it as part of the general theory of value, but it has been advisable to bring it into relation with a large number of the special theorems of economics, including the law of supply and demand, cost of production, the capitalization theory, the doctrine of appreciation and interest, the theory of international gold movements, gresham's law, the theory of elastic bank-credit, and the general theory of prosperity. the book has thus become a book on general economic theory, viewed from the standpoint of the theory of money. it has been as contributing to the problem of the value of money that these other doctrines have been discussed, but i trust that they, too, have gained something of clarification from being considered in this relation, and that the emphasis on the rôle of money in general economic theory has helped in bringing the various elements in our current theory into a closer-knit interdependence. the present chapter seeks to carry the conclusions so far reached toward a further unification of economic doctrine, by finding for certain contrasts, like that between statics and dynamics, a higher synthesis, so that it may be possible for students of dynamics and students of statics to speak a common language, to use common measures, to find that their phenomena are not, after all, of essentially different nature, and to come to agreement as to the relative importance of "static" and "dynamic" tendencies. it will appear that the theory of money and exchange plays an important rôle in effecting that higher synthesis, and is itself clarified by it. the "theory of goods vs. the theory of prosperity," "statics vs. dynamics," "normal vs. transitional tendencies," "long run vs. short run" laws, "market vs. normal price," "abstract theory vs. concrete description," "historical or evolutionary study vs. cross-section analysis," "temporal vs. logical priority," "causation as a temporal sequence vs. causation as timeless logical relationships"--these, and similar contrasts have appeared frequently in the history of social thought, and have been especially refined and elaborated in the history of economics. we have even compounding of the notions into more complicated distinctions, as by seligman,[ ] in his two statements of the law of costs: in the short run, normal price tends to be the maximum cost of production; in the long run, normal price tends to be minimum cost of production. seligman has illustrated his notion by an adaptation of the familiar figure of the sea-level and the waves: for short-run purposes, we may contrast the surface waves, the market prices, with the sea-level, the normal price; for longer run purposes we may see the level of the sea itself changing, under the influence of the tide, and may have a dynamic normal, which is still to be distinguished from the fluctuations due to the play of winds on the surface. we have further an increasing recognition of the up and down play of forces accelerating and retarding the processes of industry and trade. for earlier writers, panics and crises were anomalies; since mill's _principles of economics_, to go back no further, we have had increasing recognition of such occurrences as more or less periodic and inevitable, bound up in the very nature of economic life itself, and of late there has been a fairly general acceptance of the notion of the business cycle, of an alternating rhythm of prosperity and depression. the explanation of this alternation has been attempted by numerous theories, one of which, that of joseph schumpeter,[ ] rests the whole case definitely in the distinction between static and dynamic tendencies, and in the conflict between the opposing sets of forces which statics and dynamics undertake to describe. we are told by the orthodox economist that war is wasteful, destroying laborers and goods, and lessening the wealth and productive power of society. we are told that it diverts labor from productive employments, that it turns huge masses of capital and labor to the production of goods which men cannot enjoy, that it burdens the people with taxes, etc. static theory can see nothing but evil in war, from the standpoint of minimizing human sacrifices, and maximizing human enjoyments. none the less we see many war periods--notably that of our spanish-american war, and the present world war, so far as the united states are concerned--periods of marked prosperity, growing out of the new expenditures which war itself involves. mules and other farm products rose in price with the spanish-american war, as the federal government bought them for the army; various factories concerned particularly with war munitions increased their activity, the gains of factory owners and farmers led them to increase their purchases, wages rose, and rose in part because part of the labor force was in the army. the civil war did spell demoralization and economic ruin for the south, but for the north it gave a great dynamic impetus to trade, transportation and industry--an impetus, strangely enough, that was so great that the new industries and enterprises which had grown up were able to absorb with little shock the million men set free from the northern armies when the great struggle was over.[ ] for static theory, scarcity is an evil. a general overproduction is impossible. for the practical business man, confronted with the momentous problem of marketing his output, overproduction is a vital reality, and there are few times indeed when much more could not be produced if only a satisfactory market could be found for it. static theory would see the whole explanation of this in maladjustment, too much of some things being produced, too little of others. this simple statement does explain much of the phenomenon, but it is far from telling the whole story, and even if it were a complete explanation, it would by no means dispose of the reality of overproduction as a constant menace, even when not a dire reality, facing almost every business man. static theory at best tells what a completed adjustment would be; it does not touch the problem of how adjustment is brought about, and maladjustment overcome. yet just that problem is the vital concern of the business man. for static theory, high or low prices are matters of no concern. and abundance or scarcity of money and credit make no real difference in the economic process. abundant money and credit exhaust themselves in raising prices, and the rest of economic life goes on unchanged. this doctrine of the quantity theory is, as i have undertaken to show in part ii, bad even as a matter of static theory. but it is only as a matter of static theory that it is even thinkable. the economic theory of the th century, following the lead of adam smith and ricardo, has been accustomed to dismiss as utter folly the notions of the mercantilists as to the balance of trade, and the importance of an inflow of gold, and has conclusively proved that protective tariffs tend to divert the labor, capital and land of a country from those lines of production they are best adapted to to lines for which they are less well suited. critics have pointed out, as in the "infant industries" argument, that we cannot treat the labor capacity and technical knowledge of a country as constants, that the temporary encouragement of one line of industry by a tariff may so modify the data of the situation that the country may in time become better adapted to the protected industry than to other lines. and i think that we may well go further, and make substantial concessions to the doctrines of the mercantilists as they themselves stated them, seeing in a favorable balance of trade, and in expanding exports and diminishing imports sources of impetus which are not subsequently neutralized by the static process of equilibration. i do not conclude from this that protective tariffs are commendable, any more than i conclude that war is commendable. both may give dynamic impetus, and lead to economic development. both may lead to political corruption, to iniquities in the distribution of wealth, to waste and suffering of various kinds, in which honest and patriotic men suffer, and cunning and unworthy men gain. the point here is simply that static theory does not tell the whole story regarding either tariffs or wars. it may well be true--i think it is true--that static theory offers the more important principles for judging the results of wars and tariffs.[ ] it is the central problem which i have set myself at the outset of this discussion to find a way to bring static and dynamic considerations _under a common measure_, to reduce them to homogeneity so that comparisons may be instituted, and so that the student of statics and the student of dynamics need not talk merely at cross-purposes. but we do not achieve this result by ignoring considerations in either sphere. bastiat, with a fine show of logic, has sought to rule out of court the doctrines that extravagance and tariffs, etc., are sources of prosperity by his emphasis on the "unseen," as opposed to the "seen." the prosperity growing out of the extravagant expenditures of one brother is open to all eyes. the consequences of the savings of the frugal brother men do not see so easily, and do not attribute to his frugality. doubtless bastiat is right in his main theses. but one point needs emphasis: that which is "seen" stirs the imagination of men. and imagination energizes human activity. the motivation of economic life is a psychological matter. and so at a host of points the contrast may be drawn, in one or another form. the pure, abstract, static theory gives one conclusion; the other approach suggests one different.[ ] how is it possible to give proper weight to considerations drawn from such divergent spheres of thought? indeed, how shall we weigh the dynamic considerations at all? static theory presents itself in quasi-mathematical form. at times, it parades itself in equations, and it readily enough, without arousing a feeling of incongruity, expresses itself in mathematical curves, with ordinates and abscissæ. one static tendency finds itself in marginal equilibrium with another, and the margin is expressed in quantitative units, commonly sums of money. static doctrine does, indeed, lay claim to precision and exactness, and static tendencies may be weighed against one another. but how shall one undertake to give quantitative measure to such a thing as the educational influence of a tariff on silk manufacture? how measure the dynamic impetus of a new chain of banks on the industry and trade of the region affected? how gauge the importance of a new advertising scheme, or a new invention? dynamic considerations are commonly presented in vaguer, looser form than static theories. usually we have merely a statement of a qualitative tendency, without effort to make the importance of the tendency quantitative. indeed, i think it safe to say that one chief difference between statics and dynamics is that those tendencies which can be most easily formulated have been recognized by statics, while those which are less understood, and less precisely formulated, are left to dynamics! a big part of the difference is methodological, rather than inherent in the nature of the phenomena themselves. i think that it needs little argument to show that all the contrasts listed at the beginning of this chapter do not run on all fours. compare, let us say, the contrast between "statics and dynamics" with that between "historical and cross-section" study. concrete, realistic history is not dynamic theory. a realistic description of society viewed at a given short period of time is not static theory. both statics and dynamics are _abstract_. _laws_ are not the same thing as description and narration. the assertions of both statics and dynamics are commonly made on the assumption, "_cæteris paribus_." a new bank will stimulate business in a western town if bank-robberies do not come into fashion! a tariff on wool will tend to educate the farmers in sheep-raising if the habit of relying on governmental assistance does not develop, and make them more, rather than less, inert,--or sharpen their political rather than their economic acumen. concrete history need not always verify dynamic laws![ ] it is, above all, important to insist that the distinction between statics and dynamics is not the same as the distinction between theory and description, or between the abstract and the concrete. evolutionary study may result either in concrete history, or generalized laws; cross-section study may be either concrete description or abstract formulæ concerning forces in equilibrium. and there may be varying degrees of abstractness in both cases. the contrast between long-run and short-run tendencies is not necessarily the same as that between statics and dynamics. this former distinction does recognize one factor which is sometimes classed as "dynamic," namely, "friction."--"friction," by the way, is a blanket term which covers a multitude of sins of imperfect analysis and lazy thinking! it is far from a simple, unitary thing. sometimes it seems to mean the action of the whole social order, other than the economic values!--but dynamic, as used by the two writers who have used the term most precisely, j. b. clark[ ] and j. schumpeter,[ ] is reserved for those factors in economic life which make for constructive _change_. neither writer would call mere habit and inertia, which make readjustments slow, or the necessities of physical nature, which retard readjustment, by the name, "dynamic." it may be noted, in passing, that both writers limit the term quite strictly to changes _in_ economic life growing _out of_[ ] economic causes. schumpeter narrows the dynamic factors to one, namely, _enterprise_, while clark gives five general classes of dynamic factors, all of which are primarily economic in character. neither extends his study to cover forces which are not primarily economic in character, but which none the less lead to economic changes. again, the "theory of prosperity" is not identical with "economic dynamics," though the two in large measure overlap. for one thing, while some writers, as schumpeter, find the business cycle to be a necessary consequence of dynamic changes, and would maintain that no business cycle, no up and down of tempo in production, no panics or crises, are necessary if changed methods of industry, etc., did not come in, not all writers would so explain the business cycle. some writers would find the explanation in the inherent instability of a money and credit economy, some in the inherent weakness of a capitalistic system, quite apart from necessary dynamic change. irving fisher makes no use of changed methods of production in his explanation of business cycles, though he does mention invention as one possible cause of a disturbance in normal equilibrium.[ ] but further, dynamics is largely concerned with problems, like invention, changes in the economic habits of a people, methods of organizing industry, etc., which, while they may well bear on the problems of prosperity and depression, yet have interest for their own sake, and would be studied if there were no business cycles. further, the notion of statics, the other term in the static-dynamic contrast, is not identical with the "theory of wealth," or "theory of goods," or "theory of the wealth of nations" which such a writer as veblen[ ] would put in contrast with his "theory of prosperity." there is a normative, or practical, and polemical coloring in the body of doctrine growing out of adam smith, which veblen would term, the "theory of the wealth of nations," which is lacking in the more colorless "statics" of to-day. i do not find any of the contrasts thus far discussed quite satisfactory. i have been using the terms, statics and dynamics, as general terms to cover all these contrasts. i shall try to formulate a general contrast which includes most of the ideas passed in review, from a somewhat different angle, and then try to show that the contrast, while useful, is not absolute, and that it is possible to measure considerations drawn from one viewpoint in terms of considerations drawn from the other. let us take as our starting point the notion of a cross-section picture of society. i have set forth this notion in ch. of my _social value_, and have elaborated it in the discussion of von mises' theory in the chapter on "marginal utility" in this book. a cross-section picture may be made more or less concrete and descriptive, or abstract and analytical. if one looks at the picture of society in cross-section as given by giddings in his _principles of sociology_ (bk. ii, chapters on "the social population," "the social mind," "the social composition," and "the social constitution"), one finds a picture in which organization and system are made clear, but in which vivid description of concrete social facts is the primary concern. the account given is largely qualitative rather than quantitative. it is a picture of flesh and blood, as well as an account of functioning. it is, perhaps, not easy to realize that giddings is doing the same general sort of thing that the pure economic theorist is doing, with his picture of a static equilibrium of economic values. but what economic theory is concerned with is, after all, to be found in giddings' scheme. the pure theorist takes for granted the physiographic environment, whose influence giddings takes into account. the theorist abstracts from biological and racial factors. he assumes a social population, a social order, a political system. he has not taken into his purview the social mind as a whole, in his static theory. rather, he has been concerned with only one part of the social mind, namely, the economic values. economic values, and the objects of economic value, have been the data of the static theorist. given scales of economic value, such that for one quantity of goods of a given kind, a given value per unit will obtain, given all of these value-scales, and given the quantities of goods and services whose values are in question, and static theory will furnish an equilibrium picture, in which the price relations of different kinds of goods are made clear, and their values are measured. the value-scales, and the absolute magnitudes of value at different points on the scale, are assumed, are data. further, in order that the notions may be made mathematically precise, a unit of value is needed, and this is commonly the value of the money-unit, which is assumed to be constant. the picture then becomes systematic. there is a system of values, expressed in prices, which is stable, so long as the data do not change. it is mechanically conceived, and illustrated by various mechanical symbols, as balls in a bowl, or connecting reservoirs, or, best of all, by intersecting curves. it is an abstraction from the living, pulsing, organic whole of the social mind--the inter-mental life of men in society. it squeezes much of the life out of the phenomena it describes. it makes them exact, only by making them mechanical. it thus becomes exact by becoming, in considerable degree, superficial and abstract.[ ] this is not to condemn static theory. static theory has proved its usefulness by solving too many problems for such a statement of its limitations to involve a condemnation. but the statement of its limitations will aid us in seeing its relation to that vaguer body of doctrine which we call dynamics, or the theory of prosperity, etc. now this means that static theory is not _value_ theory. it assumes a theory of value. it assumes the value-scales as data. it assumes the value of money as a datum. static theories of supply and demand, cost of production, capitalization, etc., assume the value of money, as has been shown in part i, and static theory, resting in the notion of accomplished transition, normal equilibrium, abstracting from the difficulties of readjustment, abstracting from friction, etc., misses the whole point as to the functions of money, as shown in part ii. static theory proceeds by assuming a change in one of the elements of its situation, say one of the value-scales, and then tells what the new equilibrium will be after readjustment takes place, assuming that other value-scales remain constant, and that quantities of the objects of value do not change. or, it assumes a change in the quantity of one of the objects of value, and then predicts the new equilibrium. the new equilibrium will often involve changed values and prices all around, and will often involve altered quantities of other objects of value. but the initial change comes from an alteration _from outside_ the system in one or more of the data of the system.[ ] now dynamics, theory of prosperity, etc., are concerned with the causes of changes in the data with which statics works, in large measure. among the problems with which statics has not adequately dealt, and in large measure cannot deal, are ( ) the nature of value itself, and the laws governing changes in the value-scales; ( ) the problems of readjustment, including the problems of money, credit and exchange; ( ) the psychology of invention, of enterprise, and the like. ( ) the reactions of economic values and economic organization on the non-economic phases of social life. ( ) the reaction of the non-economic factors, as law, morals, art, religion, etc., on economic life. ( ) the problem of prosperity and depression. i say that statics has not dealt adequately with these problems. statics in its present narrow form cannot deal with them. but in considerable degree, i am convinced, statics can be made to deal more adequately with them, if its scope be broadened, and its limitations be made less rigid. schematically, at least, the central ideas of statics can be applied to a large part of these problems. i may add that my list of six classes of problems with which statics has not adequately dealt is not meant as a system of categories. the list is incomplete, and the classes are not mutually exclusive. rather, they overlap in large measure. in a large way, it might be said that statics is concerned with the laws of the equilibration of values, and that dynamics, theory of prosperity, etc., are concerned with the nature and causes of variations in the values themselves. the contrast may be put, in general, as the contrast between the _theory of value_, and the _theory of price_, statics being price-theory, and dynamics being value-theory. but this is a thesis which calls for much elaboration and qualification before its significance is made clear, to say nothing of its justification being established. * * * * * we may approach the problem of bringing the two terms of the contrast together from either of two angles: ( ) we may show that dynamic factors tend, in large degree, to submit themselves to measurement in terms of money-prices, which obey the laws of static marginal equilibrium. ( ) we may show that all static prices presuppose values whose explanation is in terms of the same phenomena with which dynamics, the theory of prosperity, etc., have busied themselves, namely, considerations drawn from the study of social psychology, including the psychology of suggestion, imitation, mob-mind, the functional organization of minds into a social mind, social beliefs, social values of other than economic nature, and social institutions. ( ) the evidence on the first point is already in considerable measure worked out, particularly by veblen, in his _theory of business enterprise_, and in his other writings on the nature of capital, etc. something more in this direction i have done in my _social value_, and other writers have elaborated the notion. ( ) the case for the second contention has been made in detail in my _social value_, and in what follows i shall rely chiefly on the discussion presented there, and in the chapter on "value" in this book. i take up first the thesis that dynamic factors may come under the static measure. veblen has made much of the contention that modern "capital" is not, as smith thought, and as orthodox economists in general have contended, a matter of physical accumulations of goods. the volume of business capital is a pecuniary concept, and may wax and wane with little variation in the physical stocks. "under modern conditions the magnitude of the business capital and its mutations from day to day are in great measure a question of folk psychology rather than of material fact." (_theory of business enterprise_, p. .) and in large measure veblen's work is given to showing how factors of legal and social psychological nature get a money-measure. the actual capital of a business enterprise does not rest chiefly on the physical equipment, stocks of raw materials, etc., etc., which it possesses. to be added is "good will," and this includes (p. ) established customary business relations, reputation for fair dealing, franchises, privileges, trade-marks, brands, patent rights, copyrights, exclusive use of processes guarded by law or secrecy, exclusive control of particular sources of materials, etc. veblen contrasts things of this nature sharply with the concrete equipment, saying that the former are serviceable only to the owners, while the latter are serviceable to the community at large as well. the physical, tangible, and ethically commendable character of the physical equipment is everywhere stressed, while the pathological, anomolous, and sinister character of the less tangible and more recent "capital items" is always set before us--all the more effectively because veblen maintains a satirical attitude of moral indifference, and presents the case with olympian aloofness. i am not here concerned with the social welfare aspect of the matter, though i shall later speak of that. my present purpose is to make clear two points in veblen's doctrine: ( ) that he does bring these intangible things, which are the variables involved in his theory of prosperity, under the price measure; and ( ) that he considers these prices as anomalies from the standpoint of the general laws governing the values and prices of concrete goods. to this last point i shall later take sharp exception. for the present, i wish to develop further the extent to which such factors may be brought under the general static measure. the feature of static theory which veblen chiefly employs in giving a money-measure to his "intangible capital" is the capitalization theory.[ ] the capital magnitude of the items of good will previously mentioned is a capitalization of the _income_ which they are expected to bring in. and it may be said that a large part of veblen's doctrine of the causes of the ups and downs of business rests on the complaint that this capitalization process is not rationally carried through--that incomes are overestimated, and that business men are tenacious of capital magnitudes once built up, and refuse to mark them down properly when the facts in the situation have changed. his theory of prosperity thus rests on non-rational enthusiasm on the one hand, and a certain kind of "friction" on the other hand, and apparently the difficulties in the situation as he sees it would largely disappear if these two elements could be rationalized, and the static theory work more perfectly. the elements involved in the capitalization theory, as shown in the chapter on that topic, are three: the anticipated income, the prevailing rate of discount, and the capital value, the last named being the child of the first two. the capital magnitude is a shadow, where the income is the substance. veblen seems to find the trouble arising in that the capital magnitude takes on a substantial character, and refuses to play the passive rôle of shadow. it is interesting, in passing, to compare this theory of veblen's with the theory of crises developed by irving fisher, from the standpoint of a body of doctrine which is purely static, and which veblen has criticised as "taxonomic" in a high degree. for fisher[ ] the trouble arises from friction in connection with another element in the capitalization problem, namely, the interest rate. business men think that "a dollar's a dollar," and refuse to let the interest rate be marked up in accordance with the doctrine of "appreciation and interest." this, likewise, leads to overcapitalization, leaves the passive shadow too big. i must confess that it seems to me that one theory is about as "taxonomic" as the other--that both rest on pointing out divergences from a static, "taxonomic" norm. in general, veblen's work in this field consists in assimilating the "intangible" capital to the class of land, and other long time concrete income-bearers, but that is after all classification, systematization, "taxonomy." in saying all this, i am as far as possible from questioning the value of veblen's work. rather i rate it as of extreme significance. "taxonomy" does not appear to me so dreadful a word as it does to veblen. i should rather say that some taxonomy is good and some is bad, depending on whether or not it leads to fruitful generalizations, and deeper insights. it is, as i have said, chiefly the capitalization theory which veblen applies to these newly important intangible "capital-items." the phenomena of the stock-market, where such things are most actively bought and sold, and where they appear as differential portions of the capital values of securities, doubtless first called attention to them--though the item of "good will" as a business asset, for which a money-price is paid when businesses change hands, is doubtless older and wider than modern corporation finance. the capitalization theory applies to them most readily and obviously, as compared with other elements in the static theory of prices. but as we become better used to the large rôle which these phenomena play,--not that the phenomena are new, but that their present importance is new, and hence our serious study of them is new--we are increasingly able to see that other elements of static theory also apply. _static theory applies increasingly as understanding increases!_ the vaguely discerned, the novel, the imperfectly analyzed, can be stated only in qualitative terms. as things are better understood, the mind seeks system, taxonomy, quantitative measurement. business men to-day are well accustomed to applying _cost_ concepts to many of these intangible magnitudes. advertising, for example, is being worked out with increasing exactness, and business men are increasingly applying accounting processes to the determination of the question of _how much_ advertising "pays." well-known brands are capital items. well-known brands have cost money! business men contemplating the marketing problem may well balance the cost of creating a new brand against the cost of buying an old one, and may balance the cost of creating a new brand against the profit to be made from allowing an old one to deteriorate, through cheapening its process of manufacture. trade-connections are capital items. they are also items which have been created by patient thought and labor and expense. franchises, since the days when the public awoke to their value, have cost money to the corporations that possess them, and figure in corporate bookkeeping often. even in the old days, they often had a cost, which commonly stayed _out_ of the corporations' books, at least in that form,--bribes, entertainments to legislators and members of councils, and so on. in part ii of this book,[ ] i have discussed "selling costs" as contrasted with costs of production in the narrow sense, and have pointed out how high a proportion of total costs these selling costs are. i have also indicated how many of these costs tend to be "capitalized." these selling costs are static measures of the elements of "friction" which interfere with the smooth working of static laws! an extension of statics, however, can in considerable degree take account of them. it is, of course, far from true that cost doctrine will explain all of these intangible capital magnitudes. but this is likewise true of the prices of many tangible items. cost doctrine does not hold universal sway even in the confines of the strictest static theory. i have said that dynamic factors tend to come under the rules of static taxonomy to the extent that they become more accurately understood. the understanding here referred to is not merely on the part of the scientific theorist! the subject-matter of economic science is itself psychological. it includes the psychology of the business man, as well as the psychology of purchasers and laborers, and the general field of social-mental life that bears on economic processes. it includes the theories of the business men, as well as their aspirations and "motives." it includes their methods of computation, and the accuracy or inaccuracy of their prognostications. it has been pointed out recently that at the current price of copper ( c. per pound in jan. ) the prices of copper stocks are very much lower than they were when copper reached the same price some years ago. calumet and hecla stands some two or three hundred points lower than it did then, and the same percentage difference is manifest in the case of many other stocks. but the explanation which the broker and market writer offer is that people have awakened to the fact that mining stocks are stocks with wasting assets, that the incomes from copper stocks cannot, therefore, be capitalized on so high a basis as similar incomes from other securities; that people to-day realize this fact as they did not some years ago; that the earlier capital-prices of copper stocks were vastly exaggerated on the basis of a careful estimate of probable total future income, etc. japan, little used to the great prosperity growing out of sudden great increases of special kinds of business, found herself in such an orgy of war stock speculation that it was necessary to close the stock exchange in . the united states, better familiar with the phenomena of boom and depression, seasoned by many experiences of similar nature, have found that on the whole,--at least in the opinion of many competent judges in january of ,--war stock speculation has been kept in reasonable bounds, thanks in large part to the conservatism and caution of bankers and brokers, and that the general economic situation is in fairly stable equilibrium, with most of the probable sources of disaster foreseen and "discounted." to "discount" is to make "static"![ ] whatever the business man can reduce to bookkeeping terms, and whatever he can measure by money in the market, the economist should be able to bring within the "orderly sequences of economic law." in _social value_, i have pointed out how wide is the scope of the money measure. waves of public opinion, of waning or waxing hope and belief, of patriotic fervor, of religious exaltation, of political movements of one or another kind--all these find some sort of money measure in the market. in the gold market in the early ' 's in new york, the "bulls" sang "dixie," and the bears sang "john brown's body"! it was patriotic to be a bear, and unpatriotic to be a bull. these considerations affected the prices very appreciably, at times, especially at the beginning of the speculation in greenbacks. waning and waxing belief in the triumph of the northern armies manifested itself very strikingly in the prices in the gold market, as w. c. mitchell has conclusively proved, with a wealth of detailed evidence, in his _history of the greenbacks_. but in less systematic markets, in less organized and regular ways, many things besides are given a money measure: "against what, indeed, shall wealth be measured? where are the markets which measure its fluctuations? "but such markets exist, always have existed. are there not streets where woman's virtue is sold? are there not commonwealths where there is a ruling price for votes? do not the comparative rewards of occupations indicate what inducements will overcome the love of independence, of safety, of good repute? we see men sacrificing health, or leisure, or family life, or offspring, or friends, or liberty, or honor, or truth, for gain. the volume of such spiritual goods mammon can lure into the market measures the power of money.... when gold cannot shake the nobleman's pride of caste, the statesman's patriotism, the soldier's honor, the wife's fidelity, the official's sense of duty, or the artist's devotion to his ideal, wealth is cheap. but when maidens yield themselves to senile moneybags, youths swarm about the unattractive heiress, judges take bribes, experts sell their opinions to the highest bidder, and genius champions the cause it does not believe in, wealth is rated high." (ross, _foundations of sociology_, pp. - .) ross is here interested chiefly in the problem of measuring the varying significance of wealth, symbolized by money, in terms of other and non-economic, goods. but it is equally true that money measures these goods. the range of the money measure is very wide. nor is it confined to the exchanging process. gabriel tarde[ ] has pointed out that money may function as a measure of non-material goods through gifts, public subscriptions, etc. it is surely no extravagant claim to make that the methods of static economics may be extended at least as far as the money measure goes! we shall later see reason for believing that fruitful results may come from an even wider extension of the static notion, at least as a schematic device. in reducing static and dynamic considerations to common terms, we have now gone far. we have shown that a wide range indeed of the phenomena deemed dynamic, and largely ignored by current static theory, left to the discussion of such innovating students of the "theory of prosperity" as veblen, are really in the actual practice of the business world treated in the same way as are the "static" phenomena of the values of physical goods and concrete services. and we have further shown how wide indeed is the scope of the static yardstick, the dollar. but this is only a part of the story. we have generalized statics. can we similarly generalize dynamics? or has our generalization of statics merely narrowed the field of dynamic considerations? to this i reply that we may view the whole field likewise from the angle of what we have called dynamics, or theory of prosperity, or similar name. these terms are not satisfactory, in my view, and i have already used terms that appear to me better. my exposition on this point will be briefer than in the generalization of statics, since i may refer to what i have said elsewhere. in stating veblen's contrast between "business capital" and "the wealth of nations," i quoted him as follows: "under modern conditions the magnitude of the business capital and its mutations from day to day are in great measure a question of folk psychology rather than of material fact." the capital, or the wealth in general, of older and simpler days was a material matter, concrete goods and services, in his view. the newer items of capital are anomalies, presenting something strange and novel, and sinister. i should maintain that, whether sinister or no, they are in principle at least not _novel_ or _anomalous_. _all economic values are matters of folk-psychology!_ all economic values are social values. all are to be explained on the same general principles that explain the values of the most complicated stock-market phenomena--except of course, that the application of the principles involves less complication in the case of such values as that of a loaf of bread. but value is always a matter of psychological significance, and never a matter of mere material fact. and these psychological significances are not explained by such simple individual phenomena as labor-pain, or marginal utility, but always by reference to the total social-mental system, including its laws, its mores, its institutions, its centres of power and prestige, its modes and fashions, etc. if veblen has in mind the contrast between goods whose values rest in labor-pain or marginal utility, on the one hand, and values which rest in a folk-psychology on the other hand, the contrast is a false one. the first class does not exist. i shall not elaborate this point. i have developed it at length in _social value_, and in the chapter on "economic value" in this book. i should make the contrast, then, which seems to me to gather up the central significance of most of the contrasts we have been discussing, as follows: on the one hand, we may view the matter mechanically and abstractly, in terms of the equilibration of values conceived of like physical forces, expressed in prices; on the other hand, we may view the economic situation more fundamentally and realistically, seeing the interplay of men's minds, viewing economic values as parts of a social mind, a functional unity of many minds. we may treat society as a mechanism, or we may treat it as a living, pulsing, psychological organization. in short terms, our contrast may be between the theory of value, and the theory of price. and here we are back to our thesis set forth on p. of this chapter. the theory of value, as thus marked out, is still an abstraction from the totality of our cross-section picture of social, or even of economic, life. the essence of society is indeed psychological. but men have bodies, and live in a material world, and have an elaborate technology. many of the factors which students of dynamics are concerned with grow out of biological and technological relationships, and are connected with physiographic influences. can we bring all these into our scheme? giddings and spencer would answer affirmatively. for giddings (_principles of sociology_, ed. , p. ): "all social energy is transmuted physical energy." giddings guards himself (pp. - ) against a thoroughgoing monism, which would leave no distinction between mind and matter, but in general he would hold to the scientific goal of reducing the physical and psychical phenomena in society to a parallelism, so that concomitant percentage variation could be predicated of them, and so that considerations in one sphere could be expressed by considerations in the other. in the hands of giddings and spencer, such notions are handled with caution and discrimination, and command respectful consideration. one feels, however, that the starting point is a monistic metaphysics, and that the philosophical doctrine does not justify itself in its scientific application. in the hands of such a writer as winiarski, however (_rev. philosophique_, vol. xlv, pp. - ; vol. xlix, pp. - ; summarized by ross, _foundations of sociology_, pp. - ), who makes all mental states mere forms of physical energy, and applies to mental processes the laws of mechanics, the doctrine becomes merely bad poetry! from the standpoint of the needs of social science, and from the standpoint of our present knowledge of social facts--to say nothing of general philosophical considerations--it seems clearly best to me to assume the common-sense doctrine of dualism as a premise: mind and matter are two different things; mind acts on matter, and matter acts on mind. we are then at this position, when it comes to bringing technological and physiographic factors into our scheme: on the one hand, the values control technological applications, and control the course of industry. new technological devices will be employed when the present worth of their anticipated products is great enough to overcome the values that compete with them. land will be employed on that crop which gives the largest rent, etc. men's physical activities, and their employment of their physical resources, are _motivated_ by values. that is the _function_ of values. on the other hand, physiographic and technological factors modify the lives and characters of men and peoples. _values_ are in part controlled by physiographic and technological conditions of life. but these technological and physiographic factors, in order to influence economic _conduct_, must first influence the value system. this they do, ( ) by affecting the quantities of _objects_ of value, and so modifying the marginal relations among the value-scales and the marginal values; ( ) by affecting the lives of the people directly, and so modifying the value-scales themselves. similarly i see no way of bringing the vitally important factor of heredity into our scheme in a direct manner, _in propriore persona_, but only mediately, as it ( ) affects the character of the society, and so changes its value-system or its technological activity and volume of products, or ( ) as heredity becomes a matter of concern to the society, and so an object of value, with its own place in the value-system. there remains, therefore, in the field of technological, biological, and physiographic features affecting economic life a considerable residuum of economic problems for which, so far as i can see, no extension of the static method can be devised. i propose no scheme of static price analysis for balancing the effects of poor land and good heredity on the character of a society.[ ] the problem must be approached by other methods specially suited to it, which we need not here discuss. but, given the values that rule in that society, we may be sure that our static picture of that value system will sum up much of the influence of the bad land and the good heredity, mingled with the other factors which have determined that set of values. once a factor has been introduced into the value system, once it has modified the value-scales, we may treat it by the methods of static price theory. the analysis of the factors controlling the value-scales is the problem of value theory. and here is, indeed, the central problem of the "theory of prosperity." what are the causes controlling the _mutations_ of values? what factors cause values to rise, intensifying economic activity, stimulating trade, spreading prosperity? what brings about the crash in economic values (and consequently in prices), in panics and crises? why the low values of the period of depression, giving slight stimulus to industry and trade, leaving economic life lethargic, inert? increasingly it is recognized that the problems are problems of values and prices. it is no part of my plan to give answers in specific terms to these questions. that were the task of a large book! and very much of it has already been done. it is my purpose here, simply, to show that price theory, as developed on the basis of static notions, may be extended, and has in considerable measure been extended, to cover these problems, and that for the same reason that price theory is unable to give really fundamental answers to them, often, it is likewise unable to give fundamental answers to the value problem anywhere--that the phenomena of value are of the same stuff and substance as the phenomena treated by "dynamics" and "the theory of prosperity," and that static theory has been busied chiefly with a limited portion of the field only because the problems were easier there. much has been made, especially in such a book as w. c. mitchell's _business cycles_, of technological factors, and of factors in the psychology of the business man and of the laborer in the ups and downs of business, and particularly of certain elements of scarcity or overabundance of productive resources at critical parts of the economic system, which raise values and prices unduly at certain points, compelling radical readjustments of values and prices elsewhere. virtually all of these considerations will fit into the scheme here outlined. they work _through_ modifications of the system of values and prices. h. l. moore's recent _economic cycles_ lays heavy emphasis on physiographic factors, particularly variations in rainfall. but these, too, act on the economic situation through affecting the quantities of objects of value, and so through modification of the marginal values of goods. the psychological theory of economic value by no means excludes any amount of influence one can find in physiographic or technological factors. one of the most important factors in the minds of many writers who would treat business cycles, and a factor to which virtually all writers give attention, is the waxing and waning of business confidence, and of the volume of credit. i have given an extended analysis of the psychology of confidence, and of the psychological nature of credit, in my chapters on that topic. it is enough to say here that we have in credit phenomena things which are of the very stuff of economic values in general. beliefs and hopes are factors in economic values, and values wax and wane with them. there is little indeed in the psychological and institutional aspects of the theory of prosperity which an adequate theory of value would not contain. the theory of _prices_, as an abstract formula of description, is of primary interest to the scientist, who has nothing to do with the manipulation of concrete values, and who has no interests at stake in the behavior of particular values at a particular time. his purposes are ultimately practical, no doubt, but the practical ends he has in view are, after all, only to lay down general rules of public policy, of a high degree of generality, and he consequently may abstract from a great deal of the concrete causal process. the theory of _value_, in its concrete fulness, is the special interest of the active business man, and especially of the business man who wishes, not merely to _adapt himself_ to changes in values, but also in part, to _control_ and _manipulate_ those values. _he_ must study every factor which does, in fact, bring about changes in the value system. we do not find the market-letter of a brokerage house, or the calculations of a captain of industry, or trust promoter, troubling themselves about marginal utilities or labor-pains! notions of supply and demand, and the relations of the prevailing interest rate to the capital values of securities, they do employ. notions of money-costs of production they make use of. but they also give very close attention to questions of governmental policy, to court decisions, to movements in the field of labor organization, to money-market phenomena, and particularly to gold movements and the state of the exchanges, to political campaigns, to the strength of the prohibition movement, to changing fashions and modes, and, above all, to the general _tone_, the _consensus_, so far as it is ascertainable, as to whether business is good or bad, whether men are buoyant or depressed, to the ups and downs of business confidence. they pay marked attention to the opinions expressed by certain men, great bankers or industrial leaders, not merely because they think these men good judges, but also, and in part primarily, because these men are centres of power, "radiant points of social control," whose opinions make the opinions of others, and whose statements that times are good tend to make them good, and that times are bad tend to make them bad. for static theory, nothing is more contemptible than the view which "demagogues" often express in congress that great men in wall street make and unmake prosperity, bring about and check panics. for static theory, the only way that big men can lower prices is by selling, and the only way they can raise prices is by buying.[ ] their power to raise and lower prices is thus limited by the amount of their wealth which they are willing to employ in this way. as it is not likely to be profitable to be a bull when the general condition of the "fundamentals" calls for falling prices, and as bear operations, contrary to the fundamentals, are likewise usually costly, the inference would be that the big men will not, even if they could, alter the course of the market. their wealth is, after all, not so tremendous, as compared with the aggregate wealth of the rest of the community. but the market takes the big men more seriously! when they are selling heavily, other men are often _afraid_ to buy, such is their prestige. when they give out opinions, these opinions _become_ the opinions of a host of others, almost automatically. when morgan stepped into the breach in the panic of with $ , , , it was quite as much the fact that _morgan_ had acted, as it was the millions themselves, which relieved the situation. indeed, it was in no small degree the prestige of morgan which relieved the _disorganization_, which restored the discipline, and made it possible for the elements in the market to work in harmony and coöperation again. society is a functional unity, and the "tone of business," the ups and downs of prosperity, depend in large measure indeed on the degree to which the lines of communication between the different parts are kept open, on the question of whether each part does its expected task at the right time and in the right way, on the all-together-functioning, the _integration_, of the elements. these are phases of the matter from which static theory abstracts. they are organic problems, not mechanistic problems. of course, mechanisms get out of order too. but tightening a bolt is a very different thing from restoring confidence and discipline to a market! those who wish to control values have their own technology. there is a technology of industry, a mechanical technology, running in terms of pistons and levers and soil-fertility-equivalents, and butter-fat-content, and ton-miles, which is governed by the values. but there is also a technology of _controlling_ values which involves advertising, making sentiment, keeping up social discipline, effecting the equilibration of values by exchange, keeping "interstitial" adjustments smooth, which involves a different kind of activity, thought, and ability, and which employs different instrumentalities. its problems are problems of human nature and social relationships, its laws are psychological laws, particularly the laws of suggestion, imitation, and the like, its tools are the newspaper, the sign-board, the whispered word, the cigar and the dinner with wine, sound logic, money and credit instruments, the prestiges of men and institutions. for men whose work lies in controlling and making values, rather than in making passive technical adjustments to existing values, the theory of value, as i have defined it, is of supreme importance. this, i may say for the critic who may consider the social value theory a highly speculative and theoretical notion, does not mean that the active business man or the advertising writer, has formulated the social value theory in terms of a social mind, conceived of, in the light of modern functional psychology, as a functional unity of individual minds! the advertising writer is a student of modern psychology, and reads books on the psychology of advertising, which discuss the psychology of suggestion, and the like. but long before such books were written for him, he studied the phenomena involved in his own way. it is not his business to construct a theoretical economics! it is his business to make a market for his wares. he is interested in the scientific theories of modern social psychology only in so far as they help him in that task. he has no occasion to construct a vast conspectus, which shall summarize the whole economic situation, in its social setting. but my point is, simply, that the kind of phenomena which he does study are indicated and stressed and brought into a system in the theory of social value which i have tried to elaborate. as his purposes are different from those of the economist, his method of approach, and his range of investigation, will necessarily be different. the notion of dynamics has been in a way connected with the idea of evolution, of historical process in time, while the notion of statics has been essentially connected with the notion of a cross-section, a stage, an equilibrium of contemporary forces. how, then, bring the two together? of course, we may conceive the evolutionary process itself as a series of stages, and the mind does tend almost inevitably to do that. the fact is, of course, a perpetual flow, with unceasing change. the mind grasps such a notion with difficulty, if at all. logic is mechanical and mathematical, and mathematics and mechanics are static.[ ] but further, we may in large measure bring the historical considerations into a cross-section picture, when it is a value system that is involved. _past_ facts exert their influence through _present_ values; and _future_ facts, which may be expected to modify future values, come into the present equilibrium as discounted _present_ worths. when we view the situation realistically, moreover,--which means, when we view it as a living organic, psychological process,--our cross-section does not need to be narrowed to a moment of time. we may see the values not yet in stable equilibrium, but in process of equilibration, with marginal values and prices fluctuating, tending toward a static goal, but hindered by various cross-currents, of "friction," of uncertainty, of momentary values which rest on beliefs regarding the process of transition itself--as when a "bull" on the war-stocks turns bear temporarily, because he thinks that prices may fall before recovering themselves, and going higher. we may see obstacles in the way of readjustment whose importance is itself subject to static measure--labor temporarily out of work, and labor-time lost, at so much per day; uncertainties which give rise to speculation, which calls for the employment of extra banking credit, at such and such per cent; capital-instruments which have to be "scrapped," representing the loss of so many dollars. we may see the process of building up new trade connections, at such and such a cost, to replace others which formerly functioned, but which no longer serve, which were once worth so much, and which now are valueless. watching the realistic process of transition, through a period of time, we may still apply our static yardstick to many of its features. above all, do we get in this connection a realization of the fact that the "immaterial capital" of which veblen speaks is true social wealth.[ ] whatever is necessary for the carrying on of economic life, whatever, if destroyed, must be replaced, before the economic process can go on, and will be replaced by the expenditure of labor and thought and money, is capital. the sales-force is as truly a part of the labor-force of a corporation as are the mechanics. the trade connections which the sales-force has built up is as truly a part of the capital of the business as the machines which the mechanics have made. the static theory which abstracts from this easily leads to dangerous conclusions. removing a tariff may well, _after the transition is completed_, give a greater productive efficiency to a country. but what of the cost of transition? may not the values destroyed, and to be recreated, in the form of trade connections, social organization, accomplished adjustments, and the like, be greater than the new values to be gained by better adaptation of industry to the physical resources or the capacities of the labor supply, of the country? in large measure, this question, in a given case, is susceptible to a quantitative answer. the statesman who reckons only the gains which the final static adjustment will bring, and neglects the costs of reaching it, costs not alone in "scrapped" machines, but also, in "scrapped" social organization, has missed a substantial part of his problem. the theory of prosperity, and the theory of value, are largely concerned with just this system of social control, by means of which value scales are altered, and by means of which altered values are brought into a new equilibrium. it is a complicated fabric of psychological relationships, partly institutionalized, partly non-institutional. the institutions--as banks, big corporations, speculative exchanges, and the like, are the nuclei, about which centre much that is temporary, shifting, and flexible. given time, the whole system is highly flexible--it is organic, and not mechanical. the serious injury of this system in a country may well be a greater disaster than the destruction of physical items. let unscrupulous men--or misguided men--bring about a legal repudiation of debts, and the disaster may be greater than the destruction of a city by an earthquake. that creditors have been robbed is a minor matter, but that credit has been shaken, so that men will fear to lend again or to sell except for cash, may well mean industrial paralysis. considerations like these enable us, in substantial degree, to reduce "transitional" considerations to common terms with "normal" considerations. we can apply the static measure to the "transitional considerations," and we find the values which come into equilibrium in the "normal" period to be generically like those whose variations interest us in the period of transition. indeed, the "normal equilibrium," if it were ever reached, would also contain these intangible capital items, though many of them would be much reduced, since the work that they have to do would be largely gone, if the normal equilibrium were persistent. it does not follow from the foregoing that many of the elements in "modern business capital" are not, as veblen's analysis suggests, sinister and anti-social. to say that their values are true social economic values, generically the same as the values of wheat or corn or whiskey or opium or sanatogen or milk or tickets to burlesque shows, or silver sacramental sets, or ford automobiles, is not necessarily to give them a good moral character! some of these intangible capital goods are thoroughly anti-social, and should be destroyed. this is particularly true of monopoly power, and of popular brands whose value rests in popular delusion. but even here, caution is needed. is it socially wise to destroy a wine cellar, containing an hundred thousand dollars worth of fine wines, even assuming that demon rum is as black as he is painted, and that veuve cliquot is his favorite daughter? will not the economic values which have been destroyed in this moral fervor be recreated? and will not this tend to divert labor and capital from the creation of a corresponding amount of more wholesome economic goods? might it not be wiser from the standpoint of the temperance movement itself, to sell the wine cellar--at private sale, of course!--and use the proceeds in the campaign fund of the prohibition party? of course, there is more still to the story. the destruction of the wine cellar may be done so dramatically, and may be so well advertised, that it will arrest public attention, and tend to create new social values, of a moral and legal sort, which will prevent the recreating of that wine, by changing the direction of demand, and by lessening the sources of supply. similarly with trade connections, and other intangible capital items. if destroying one means merely that labor and capital will be employed in making others no better, the social gain is very doubtful. and some sort of system of control of interstitial adjustment, of overcoming friction, etc., there must be. i wish to contrast the view i have been here presenting with that developed by schumpeter, in his _theorie der wirtschaftlichen entwicklung_. in schumpeter's view, the division between statics and dynamics is much more than methodological. the phenomena of statics and dynamics are different phenomena. statics is concerned with the influence of individual utility-scales, or utility-scales and psychic cost-scales, hedonistic phenomena. dynamics is concerned with the influence of "_energisch_" (as distinguished from "_hedonisch_") factors. (_loc. cit._, .) most men are moved by hedonic considerations. their economic activity tends toward the equilibrium described in static theory. seeking to maximize satisfactions, and to minimize pains, they tend to get into the "best-possible" situation ("best-possible" under the "given conditions") and stay there. the "energetic" type of men, moved by motives like love of activity for its own sake, love of creative activity, love of distinction, love of victory over others, love of the game, etc., undertake activities which tend to alter the "given conditions" themselves, to alter the structure and technique of economic society, to introduce new ways of doing things, and so to break the static equilibrium. this last type of men is small in number, but tremendously important. schumpeter's theory of value rests solely in an analysis of the hedonic factors mentioned, conceived of as individual psychological magnitudes. i have discussed his theory of value in the chapter on "marginal utility" in this book, and would refer to that discussion here. he makes virtually no use of the value concept there developed in explaining the causation of dynamic change, but instead, as i have pointed out in that chapter, invents new concepts, which do the work of the value concept, which he calls "_kaufkraft_," "_kapital_," and "_kredit_," which do not rest on marginal utility, but rather on the activities of certain centres of economic power, particularly of banks.[ ] his picture of economic evolution is that of a conflict between these static and dynamic forces, between "utility-curves" and the psychological factors of the "energetic" type, the former represented in a set of static price-ratios, the latter in a set of dynamic "powers," conceived of, not as sums of money (even though expressed in money-terms), but as "abstract power," which grows, not merely out of the individual psychologies of the entrepreneurs, but also, and primarily, out of the social influence centered in the banker. this power which the banker to-day supplies was in earlier periods supplied by the political power of the despot, and is distinctly a matter of social organization, and social control, an over-individual, social phenomenon, analogous to the "social value" which i have sought to put behind all prices, whether "static" or "dynamic." the dynamic man needs "power," either political or financial, to "force" the "static" men out of their accustomed ways of activity. they fear and resist him. he must coerce them. the contrast is thus sharply made between abstract price-ratios, resting on individual feeling-scales, and quantitative "powers," measured in money, resting on a social basis. between the factors underlying static prices, and those underlying dynamic prices there is, thus, nothing in common. statics and dynamics are concerned with fundamentally different phenomena.[ ] if my criticisms of the utility theory of value are sound, and if what has gone before in this chapter holds good, we must restate schumpeter's contrast.[ ] the static tendencies do not rest on any peculiarities of the psychological "stuff" from which static values are derived. they rest rather in the universal tendencies of all values, whatever the psychological factors behind them, to come to an equilibrium. the reason that values, whether they be the values of new and novel things, or the values of old and familiar things, tend to come to an equilibrium is that gains come from equilibrating them. when some values are too low, and some are too high, the opportunities for speculative gain are evident. arbitraging transactions, as between different places, time-speculation, transferring labor and capital from one enterprise to another, increasing the supplies of some goods and reducing the supplies of other, changing land from wheat to corn, etc., etc.,--all these things are sources of gain, and they will be done, whatever the origin of the values involved. the new, dynamic enterprise, before it becomes actualized in concrete machinery, factory building, etc., and long before its income is actualized in money-receipts from the goods it is destined to produce, becomes an _object of value_. the value is a _future_ value. but it comes into the present as a discounted present worth. as such it functions like any other value, tending to attract in its own direction the land, labor and capital necessary for its realization. it does not differ in its functioning from the present worths of future goods of familiar sorts.[ ] it tends, after a process of reëquilibration--which schumpeter, with his theory of crises, has done much to elucidate--to come into equilibrium with the older, "static" values, becomes itself a static value. indeed, from its inception, it comes under the static, money measure. it enters at once into the scheme of static values and prices, even though it causes readjustment there. the preëxisting static values are themselves to be explained, not as growing out of individual feeling-scales, but as growing out of a complex social psychology, in which some men and groups of men have vastly greater social "power" than others. the preëxisting static values are of the same stuff as the dynamic values. but this has already been made clear. * * * * * the possibility of presenting an equilibrium picture of social forces, to the extent that those social forces submit themselves to the money measure, the possibility of applying the methods of static price-theory wherever pecuniary concepts may be carried, does not exhaust the possibilities of the static notion, at least as a schematic device. there are many social values, particularly in the legal and moral sphere, which do not readily come under the money measure, and where such measurements as may be made in money terms seem obviously inadequate. of these values, as of all values, however, the law of equilibration holds. _all_ tend to come into adjustment of a sort that will allow the maximum of values to be realized. something of the exactness of the static method has recently appeared in a decision by a famous jurist, confronted with the fact of the conflict of two legal principles. most judges would go on the legal theory that there can be no conflict in the laws of a single sovereign. of course, we have courses in "conflicts of laws" in our law schools, but the subjects treated in such courses relate to conflicts, say, between the laws of new york and the laws of new jersey. when a judge is presented with a case of conflict between two laws of new york, he will commonly feel it to be his duty to "remove" the conflict, by making distinctions, till the conflict is whittled away. not a little bad law has thus originated! the law is "absolute." it knows no exceptions. it does not obey the law of diminishing significance. of course, "_de minimis non curat lex_," but that means, not that there is a delicate margin, where the law ceases to apply, but merely that the law disregards trifles too insignificant to attract its attention at all. they are, in mathematical phrase, "infinitesimals of the second order," discontinuous with the interests of magnitude great enough to attract the attention of the law. there is little room in such a legal theory for notions of the sort discussed in this chapter to find place! but a different theory of the law is implied, and partly expressed, in a recent decision by mr. justice holmes: "all rights tend to declare themselves absolute to their logical extreme. yet all in fact are limited by the neighborhood of principles of policy which are other than those on which the particular right is founded, and which become strong enough to hold their own when a certain point is reached. the limits set to property by other public interests present themselves as a branch of what is called the police power of the state. the boundary at which the conflicting interests balance cannot be determined by any general formula in advance, but points along the line, or helping to establish it, are fixed by decisions that this or that concrete case falls on the nearer or farther side.... it constantly is necessary to reconcile and adjust different constitutional principles, each of which would be entitled to possession of the disputed ground but for the presence of the others." (hudson county water co. vs. mccarter, u. s., , .) here we have a scheme very like that of static economic theory! "the boundary at which the conflicting interests balance"--the _margin_ where the curves of diminishing value of the two legal principles intersect! a plurality of legal values, in marginal equilibrium! lacking a tool of thought so convenient as money has proved for the economist, the jurist finds trouble in making his margins precise. he is dealing with quantities for which he has found no common measure. there is no "standard or common measure" of legal values. hence, most lawyers content themselves with qualitative reasoning, seeking to avoid the necessity of quantitative weighing and comparison of the factors in their problem by making distinctions of _kind_. mr. justice holmes recognizes the necessity and the existence of legal _quantities_, and of making quantitative distinctions, _i. e._, distinctions of _degree_. he sees a generic essence common to the whole body of laws, such that marginal equilibria are possible and actual. so far we have a static system of laws. but the same writer, in a later decision, has said: "and yet again the extent to which legislation may modify and restrict the uses of property consistently with the constitution is not a question for pure abstract theory alone. tradition and the habits of a community count for more than logic." (laurel hill cemetery _vs._ san francisco, u. s. , .) as these traditions and habits of a community may change, so may the legal values change, and new equilibria need to be reached in a process of readjustment. but further, in this view, and in the view of the best students of jurisprudence in general, the legal values are not an insulated, self-contained system. in the sentence last quoted, justice holmes sees their root in a total social situation. and it is easy to show that economic values, in particular, are part of that social situation out of which legal values derive their power. legal values enter into economic values. economic values enter into legal values. and between legal values and economic values are marginal equilibria. there is a vast social system of values, legal, economic, moral, religious, etc., in constant dynamic change, but tending also to static equilibrium. changes at any part of the system compel readjustments throughout. the process of equilibration is often slow, but slow or rapid, smooth or violent, it is in constant process. for the further elaboration of notions like these, i refer again to my _social value_. here, as in the narrower economic sphere, we have men and institutions whose chief activity is concerned with the manipulation and control of these values, with effecting the readjustments, and bringing about the reëquilibrations. they have their appropriate tools and technology. money and credit are merely part of a much wider system concerned with social control and social adjustment! * * * * * to summarize: the problem of this chapter has been to harmonize statics and dynamics, the "theory of wealth" and the "theory of prosperity," "normal" and "transitional," and similar notions, commonly held to belong to different spheres, and to be incapable of reduction to common terms. a number of such contrasts have been passed in review, and numerous illustrations of the various types of contrast have been given. it is the contention of the present chapter that the most fundamental of these contrasts, and the one which gathers up the meaning of most of them, is that between the theory of value, and the theory of price. the theory of value is dynamic, is concerned with the phenomena of prosperity and depression, is realistic enough to deal with transitions and readjustments; the theory of price is static, and rests in the notion of accomplished equilibrium, abstracting from the problems of friction and transition. the reconciliation comes from two angles: on the one hand we have generalized price theory, showing that in large measure the phenomena with which value theory, theory of prosperity, dynamics, deal come under the money measure, are made "static" by "discounting," and by the application of accounting principles; that this tends to be more and more true as knowledge grows more accurate; that "statics" means especially quantitative, as opposed to merely qualitative, thinking. we have shown further that the static schema is applicable even where the money measure is inapplicable, and even beyond the economic sphere, as illustrated by a recent decision of justice holmes. the other angle of approach was to universalize value theory, dynamics, theory of prosperity, by showing that all prices, whether "static" or "dynamic" have the same fundamental sort of explanation, that value is always a matter of social psychology, and never a matter of mere individual psychical magnitudes, or of "material fact." this is not to deny that physical facts have their bearing in the scheme: (a) they are among the objects of value, even though not the only objects, and (b) material facts, technological, physiographic, and biological, are the basis on which human nature rests, out of which it has developed, even though human culture including social values has increasingly emancipated itself from immediate dependence on them, and has acquired a partially independent movement of its own. the effort was not made to reduce mind and matter to common terms, but the case was rested in an irreducible dualism, and the causal influence of non-mental factors on the value-scales themselves cannot be measured by the static scheme. the static scheme, assuming the value-scales, gives a precise answer as to the influence of the quantities of physical objects on the marginal values. the significant fact about the values with which dynamics, theory of prosperity, etc., deal is that they are the values of immaterial social relationships and institutions, in large part, which are concerned with the problems of social adjustment and control, with affecting equilibria in the economic sphere, with overcoming the friction and effecting the transitions from which static theory abstracts. this is a phase of production quite as important as the physical activities of laborers or machines. it has its own technology, appropriate to its problems. in particular, money and credit are part of its tools. since its problems are to control men's minds, it uses psychological forces. where the mechanic uses a storage battery, charged with electricity, to move material things, the technologist of economic readjustment employs a dollar, charged with social value, which is power over the action of men. it is as a bearer of value, in form adapted to the problem, that is in highly saleable form, that the dollar functions. it is the psychological significance of the dollar, and not its physical qualities _per se_, that enables it to do its work. the physical weight in gold, which itself is an object of social value, is commonly the immediate basis of the value of the dollar to-day, but money may get its primary value from other sources than valuable bullion. given this primary value, the dollar may get an enhancement in that value from the services which it performs in the social technology of adjustment. * * * * * index a aborn, w. h., , n. absolute _vs._ relative conceptions of value. see value, absolute _vs._ relative. abstinence, ff., - . see cost of production, interest. abstraction, legitimate and illegitimate, - , - . acceptance house, , . acquisition _vs._ production, . adams, brooks, . adams, t. s., . "adaptation," , n. advertising, - , , . agger, e. e., , n. agio, - , , - . see premium. agricultural credit, , - , , , - , - . "all other deposits," see "deposits" in kinley's figures. _americas, the_, . analytical _vs._ historical theories, - . see also historical _vs._ cross-section viewpoints, statics, dynamics, etc. andrew, a. p., , n., , n., . animism, social explanation of, - . ansiaux, m., , n. "appreciation and interest," ff., , n. see interest. aquinas, thomas, . arbitrage, , . aristotle, , n. ashley, w. j., , n. assets of banks, , - , ch. xxiv; bonds in, , , , , , ; stocks in, - , , , ; stock exchange items chief factor in, ch. xxiv, especially ff. see loans, "commercial paper," collateral loans, reserves, etc. atwood, a. w., , n. auspitz and lieben, , n. austrian school, , , , , , , n. austria, paper money in, , , n.; foreign exchange policy of, - , , n., , ; money rates and interest rates in, . averages, meaning of, , , - , . see causation. weighted. see weighting. b babson and may, , n. backwardation, . bagehot, w., , , , n., . baker, g. f., , , n. balances, required by banks, , . balance of trade, , . baldwin, j. m., , . balkan crisis, hoarding of bank-notes in austria in, , n. banks. see england, bank of, state banks, private banks, etc. as book-keepers for business, ; correspondent relations of, , n.; bank capital, , , ; bank-credit, ch. ix, , ff., - , ch. xxiv; elasticity of, , , , - , , ; relation of, to trade, ff., . see trade. functions of, - , - . see credit, functions of. technique of, - , ch. xxiv; bank-drafts, - , ; on new york and other centers, - ; bank-notes, , , n., , - , , , , , , , , , , ; as "capital," , - ; elasticity of, , , . banking school, ff., . see currency school. banker as centre of power, , , ff., , . banker's psychology, , . barbour, david, , , n. barnett, g. e., , n. barter, , , , , ch. xi, , , , , , - , - , , ; highly important in modern life, ch. xi, ; made easier by money as a measure of values, , , ; intellectual difficulties of, - ; physical difficulties of, . bastiat, f., . bears. see bulls and bears. "bearer of options" function of money, , , , n., , - , , , , , , ; distinguished from store of value, ; dynamic function of money _par excellence_, , , ; reserve function a special case of, , n., ff. belgium, national bank of, . belief, as element in values, , , - , ff., - ; relation of, to credit, , n., - , ff., . see credit. bendixen, f., , n. bergson, h., , n. bilgram, h., , n. bills of exchange, , - , , - , - , , , - , ; speculation in, - , , , n.; as reserves, - , , . see also foreign bills, and gold movements, international. bimetallism, , n., ; not logically related to quantity theory, , n. biological factors in social life, - , . böhm-bawerk, e. von, , n., , , , , , n., , , , n., , n., , n., , n., , n., , , n. bonds, as bearers of options, - , , ; listed, sold "over the counter," , ; bonds sold on stock exchange, not "cleared," ; held by banks. see assets of banks. "one house bond," . book-credit see credit. "borrowing and carrying," see stocks. bosanquet, b., , n. boston, , n., , , n., . brassage, . brokers, , , , , n., - , , , - , , - , , n., , n., , . brown, h. g., , n. business, speculation in, ff. "business capital" vs. capital-goods, , ff., - , , - . see also "good will," statics, dynamics, friction, etc. business confidence, - , , , , - , , - , - , , - , . business cycle, - , , - , , - . "business distrust," , , n. business man _vs._ economist, as value theorist, - . bulls and bears, , - , , - , , , . "buying price" _vs._ "selling price," - , - , . c cairnes, j. e., , , , n., - , , , - , , n., , n. call loans, , n., - , , , ff.; as "bearers of options," , ff. call rates, why low, ff. see money rates, interest. canada, , , n., , . cannon, j. g., , n. capital, ch. iv, - , , - , , , , , , ff., , , n, - , - , - , - ; circulating _vs._ fixed, . capital goods. see goods, instrumental. capitalist, . capitalization theory, ch. iv, , , ff., , , , , n., - , - , , - , ; assumes "banker's psychology," - ; assumes fixed absolute value of money, ff., - , , ; limitations of, - , - , , n., , n.; applied to value of money, ch. iv, , , - , ; conflicts with quantity theory, ff., - , . see also interest, capital, rent. capital value, ch. iv, , , - , , , ff., , . carey, h. c., . carlile, w. w., , n., , , , , n. carver, t. n., , n., , n., , n., , n. causation, - , , , , , , , , , , , n., , , , ; exhibited by _change_, , - . causal theory of value, ff., ff., , , n., , - , - , , , , , ch. xv, , , - , , n, - . cause, a definition as, , - . checks, , , , , ff., ff., - , ; "accommodation checks," ; certified, , , , , ; cashier's, ; collection of, ff.; proportions of checks and money in payments, , , , , . checking accounts, - . see deposits. chen-huang-chang, , n. chicago, , , , n., , - , , ; chief centre for check collections, ; board of trade, - , , , - , , ; board of trade clearing house, , - . circular reasoning in value theory, , , , , - , , , , , , , , , , , . clark, j. b., - , , , n., , n., , n., , n., - . clark's law, . clark, j. m., , n., , n., , n., , n., , n. classical school, . see cost of production, cairnes, senior, ricardo, jas. mill, j. s. mill, labor theory of value, etc. clearing houses in speculative exchanges. see stock exchange. clearing houses, bank. see clearings. new york clearing house, , ; new york clearing house banks, , . clearings, , - , - , , ; as index of "ordinary trade," - , ; as index of speculation, ff., , , ; in new york city, - , , - , - , - , , ; of new york city trust companies, - ; outside new york city, - , , , , - , - , , n.; ratio of, to "deposits," - , - , , n.; ratio of, to "total transactions," - , , , n. clow, f. r., , n., , n. coin, , n., , - ; coinage, - ; statistics of, , n. collateral loans, , , , , , , - , , - ; percentages of, on stocks and bonds, and on "other collateral security," - ; on "other collateral security" analyzed, ff. collection of out of town checks, - . see checks. commerce. see trade. commercial banks, , , , - , - , - ; financing commerce no longer the chief function of, ch. xxiv, esp. ff. commercial cities, outgrow manufacturing cities, . "commercial paper," , , , - , - . _commercial and financial chronicle_, . commodity theory (metallist theory, bullionist theory), , , , , , - , , , , , n.; hypothetical case illustrating, - , - , , ; contrasted with quantity theory, - . competitive display, relation of, to value, - , - , . conant, c. a., , n., , n., , n., , n., , n., , n., , n., , , n., , n., , n. conant, l. jr., , n. concatenation of values and prices. see values, prices. consols, . contango, . cooley, c. h., , , n., , , n., , , , n. corporations. see stocks, bonds, stock exchange. consolidations of, - , - ; lead to duplications of "deposits," - ; corporation finance, - , , n. , , - , - ; corporation securities as credit instruments, - , - , - , . correlation, coefficient of, , , n. cost of production, ch. iii, , , n., ff., , , - , , n., , , n., - ; inapplicable to value of money, ch. iii, , ; relation of, to supply and demand, , ch. iii; not related to quantity theory, ff.; conflicts with quantity theory, , - , - , ; assumes fixed absolute value of money, ch. iii, - , , ; "real costs," - , ff., , , n. see labor theory of value. money costs, ch. iii, , ; austrian cost theory, , ch. iii, , , , n. see also selling costs. cotton speculation. see new york cotton exchange, and speculation. credit, , - , , - , ff., ch. ix, ch. xiii, ch. xiv, , ch. xviii, - , , , , , ch. xxiii, ch. xxiv, ; not based on money, - ; based on values, - , - , - , - ; part of general system of values, - , , - , , ff., - ; definition of, - , - , ; distinguished from credit transaction, ; juridical aspects of, , - , - ; relation of, to belief. see belief. functions of, - , - , , , , - , ff., - , - ; relation of, to money, ch. ix, ch. xviii, , . see also reserves. relation of, to trade, ch. xiii, ch. xiv, - , ; volume of, a function of dynamic change, ; elastic. see bank credit. as "capital," , , ff.; in "equation of exchange," ff.; book-credit, ff., , ; time-credit, . see loans, interest. see also bank-credit, deposits, loans, collateral loans, call loans, assets of banks, belief, business confidence, etc. _crédit lyonnais_, , n. credit theory of paper money. see paper money and greenbacks. crises, , , , - , . see panics, business cycles, business confidence, theory of prosperity. cross-section analysis. see historical _vs._ cross-section viewpoints. curb, . currency school, ff., ; "currency theory of deposits," . curves applied to money, - . see marginal analysis. custom, , , , , - , ff., , , , n., . see habit. d davenport, h. j., , n., , n., , n., , , n., , , n., , , n., , , n., - , n., , n., , , n., , n., , n., , n., , , n., , n. davidson, t., , n. dean, rodney, , n. debtor class, . debts, , n. ff., - , ; repudiation of, . decoppet and doremus, , . definition, a, as cause for the circulation of money, , - . delaunay, l., , n., , n. demand. see supply and demand. increase of, ; nominal increase of, ; elasticity of, , - , - ; for money, in what sense used, ; elasticity of, - ; demand curves, ; applied to gold, ff.; social value explanation of, , ch. ii, ; distinguished from utility curves, , , , , , n., , n., . "demand notes," , , n. deposits, , , ch. ix, , , , - , , , ; by one bank in another, , n., , , n., , , n., , n., , n., , , n., - ; relations of, to "money in circulation," ch. ix, , ; relation of, to reserves, ch. ix, - , - ; activity of, - , - ; in europe . see giro-system. deposits as "bearers of options," ; relation of, to loans, ff., ; relation of, to trade and prices, ch. xiii, ch. xiv, ; of private banks, ; deposits distinguished from "deposits," , n., - , ; relation of, to "deposits," ff. "deposits" in kinley's studies of payments, , - , - , ff., , - ; retail "deposits," , , , , , n., , , ; wholesale "deposits," , , , , ; "all other deposits," , - , , , ; relation of, to trade, , - , , - . see overcounting and undercounting. new york city, , , , , ff.; country, ; in pittsburg, - ; check "deposits," volume of, , - , . _deutsche bank_, , n. dewey, john, , n., , , n. dibblee, g. b., - . differential principle, and theory of rent, - ; applied to money, - , . director of the mint, statistics of gold consumption, , n. discount. see time-discount and capitalization theory; rate of, see interest; rate of, _vs._ money rates, see interest; on greenbacks, see greenbacks, premium, agio. "discounting," , . distribution of wealth, , , , , , , - , , , n., - , - . see also interest, capital, capitalization theory, rent, imputation theory. division of labor in banking, america and germany contrasted, ; extent of in england, , - , . dodo-bones, , cl vii, , , , , . "dollar exchange," . "domestic trade" _vs._ foreign trade, appendix to ch. xiii. see trade. double counting in estimating volume of trade. see overcounting. dualism, most useful metaphysics for social sciences, - . _dun's review_, , n., , n. dynamics, , , , n., ch. x, , - , - , - , , , - , , - , ch. xxv; dynamics and statics, reconciliation of, , - , ch. xxv; "dynamic credit," - . see transition periods, prosperity, theory of, statics, "normal," friction, fluidity, liquidity, saleability, equilibrium, business capital, intangible capital, etc. e elasticity. see demand, elasticity of, and bank-credit, elasticity of. ellwood, c. a., , n., , n. emery, h. c, , n., , n., , n. england, , , - , , , , - . see london, and liverpool. bank of england, , , , , ff.; "bank restriction" in, , n. english school, . see classical school. entrepreneur, , ff., , - . "epi-phenomenon," money as, . "equation of exchange," ch. viii, , , , , , ch. xv, , , - , , n., , n.; as equation of "values," ; mathematical analysis of, - ; factors in, highly abstract, - , - ; "equation of exchange" _vs._ causal theory, , - , , , n. see causal theory of value. statistics of, ch. xix. see quantity theory, deposits, velocity, trade, volume of, price-level, etc. equation of supply and demand, . see supply and demand. equilibrium, ff., , , n., , , , , , , , , , - , , - , , , n., - , , - , , - , , - . european banking, , , , , , . see england, germany, france, austria-hungary, belgium, etc. exchange, - , , ff., ff., - , - ; creates _values_, not _utilities_, , n., , - , , n.; in static state, - , - ; relation of, to value, - , ff., - . see trade, gold movements, international, etc. exchangeability. see saleability. f fashion. see suggestion. federal government, , , , , , , ; federal war tax as index of grain speculation, . federal reserve system, , , , - ; should rediscount stock collateral loans, - ; "money trust" and, - . fetter, f. a., , n., , , n., , n., , n., , , n., , n. fiat theory, , . see also legal theory, _staatliche theorie_. fichte, j. g., , . fisher, i., , , , , n., , , n., , , , , , ff., ff., ff., , , n., ff., ff., ff., , - , , , , , n., , , , , , ff., ff., , n., - , , , , , , , , , n., ff., - , - , ff., , , - , , , , , , , , . fite, w., , n. fluidity, , , , , , , n. see also liquidity, saleability, static theory, etc. flux, w. a., . foreign bills of exchange, in reserves, - . see bills of exchange and gold movements, international. foreign trade, , , ; ratio of, to "domestic trade," appendix to ch. xiii. see trade, bills of exchange, gold movements, international. france, , , n., , , n., ; _banque de_, , , , - . friction, , , - , , , - , - , . see also statics, dynamics, saleability. functions of money, , , , - , - , - , - , , - , - , - , - , , , ch. xxii, ff., ; in relation to value of money, ff., - , - , ch. xxii. functions of value. see value, functions of. "futures," , . see stocks, "borrowing and carrying" of. future values, , , - , , , . see credit, part of general system of values. futurity, not peculiar to credit, - , . g george, henry, , n., , n. germany, , , n., - , , , , n., , n., , , n.; giro-system in, , , ; great use of domestic bills of exchange in, - ; limited division of labor in banking in, ; reichsbank, , . giddings, f. h., , n., - , , , n. giro-system. see germany. gold, , , ch. xxi, , , , - , - , n., , - , - , , ; in arts, , , - , , , , , , ch. xxi, - ; as money, , , , , , , - , , - , - , , - , - , , - , - ; value of, , ch. xxi, esp. - , - ; in reserves, , - , - . gold mining camps, high prices in, , n. gold movements, international, - , , , - , , , , , ch. xvi, , n., , - . gold production and prices, ch. xviii, - ; new world discoveries, ff.; californian and australian discoveries, - , , n. goods, consumers', ff., , , ; ranks or orders of. see ranks. instrumental, , , , , , , , . "goods side" of "equation of exchange," no, . "good will," , - , , . see business capital, intangible capital, selling costs, etc. grain speculation. see speculation, commodity. greenbacks, , , , , , - , - , , , , , - . gresham's law, , , n., ch. xvii; conflicts with quantity theory, ch. xvii; quantity theory version of, - . h habit, , , , , - , . see also custom. hadley, a. t., . haig, r. m., , n. hamburg, coffee speculation in, ; giro-bank, . haney, l. h., , n. harvey, "coin," . havre, coffee speculation in, . "hedging," , , . hegel, g. w. f., , n. helfferich, karl, , , n., , n., , , n., , n. heredity, - . hermann, f. b. w. von, , n. history, economic interpretation of, . historical vs. cross-section viewpoints, ff., - , - , - , , - , - . see also statics, dynamics. hoarding, , n., , , , , , n. hobson, j. a., , n., , n. hollander, j. h., , , n. holmes, justice o. w., , - . holt, byron w., , , . hubbard, guy c., , n. hughes commission, , n. hume, david, , . i ideal credit economy, . ideal values, , . imitation. see suggestion. imputation theory, , - , , , , , ; conflicts with quantity theory, , - , - , . income, money. see money income. income, net, of the united states, appendix to ch. xiii. index numbers, of check circulation, - , ; of net income of the united states, ; of prices, , - , , ; of railway gross receipts, ; of trade, - , - , , , , . see statistics. india, , , , , , , n., ; a liability, rather than an asset, to quantity theory, , n. individual interest and social advantage, - . individual values, , - . see also value, subjective, personal, subjective exchange. individualistic theories, - , , , ff. individuality, a social product, - . industry, rather than commerce, chiefly financed by modern banks, ch. xxiv, esp. - . see assets of banks, bank credit, functions of. inertia. see habit, custom. institutional values, - , , . institutions, , , , , , n., . insurance policies as credit instruments, . intangible "capital" _vs._ capital goods, - , ch. xxv. see also good will, business capital, etc. interest, , , - , , ff., , n., , n., - , , , ; "appreciation and," - ; productivity theory of, , - , ; "use" theory of, , , n.; "pure rate" of, , , , - ; _vs._ "money rates," ch. iv, , - , , , n., - , , . see also money rates, call rates, capitalization, time discount. international banker, , , ff. see gold movements, international. international trade. see foreign trade. investment, , ff., ; _vs._ speculation, , n., - ; banker, , , , n., - . "invisible items" in foreign trade, , , . j james, william, , n. jenks, j. w., , n. jevons, w. s., , , , n., , , n. jewelers, , - ; paper of, in the money market, - . johnson, a. s., , n., , , , n., , n., , n., , n., , n. johnson, j. f., , n., , n., , n. joint stock banks, , , . see london, england. jurisprudence, - , . see law, legal values. juristic thinking, - , , , n., - ; contrasted with economic thinking, , n. k kant, i., , . kemmerer, e. w., , , , , , , , , , , n., , n., , , n., , , , , n., , - , , n., , n., - , - , , , n., , n., , n., , n., , , n. keynes, j. m., , , , n., , , , n., . king, w. i., , , , n., , n., , n., , - , , n. kinley, d., , , , n., , - , , , n., , - , , n., - , , , , , , - , , - , , , n., , , , n., , n., , , , , n., - . kirkbride and sterret, , n. "kiting," . knapp, g. f., , , , n., - , n. knies, carl, , , , n., , n., , n. kuhn, loeb & co., - , , , n. l labor theory of value, , - , ff., , . see value, cost of production, adam smith, ricardo, marx, cairnes. land speculation, , , . see speculation. laughlin, j. l., , , , , , , , n., , , n., , n., , , n., , n., , n., , n., , n., , n., , n., . law, theories of, ff., - ; statics and dynamics of, - . lebon, g., . legal tender, , , , - , , - , , n. see functions of money. legal theory of money, , , , n., ff. see _staatliche theorie_. legal thinking. see juristic thinking. legal values, - , , - , , , , n., , n., - . lewes, g. h., , n. liabilities of banks, ; relation of, to loans, . see deposits, bank-notes, etc. liquid paper, , - , ff., - . liquidity, , , , , ff., , - , - , - . see saleability, statics, friction. liverpool, , . loans, on call. see call loans. on cotton, , , , n.; on grain, , , , n.; to stock market, ff., , n., , , - , - , - , - ; to wholesalers and retailers, - ; consumption, ; war, see war loans. collateral, see collateral loans. activity of, - ; relation of, to deposits, ff.; relation of to "deposits," - , - ; relation of, to trade, , , n.; relation of, to international gold movements, - ; short loans as bearers of options, , - . see also assets of banks, "commercial paper," "morning loans," "overcertifications." locke, john, . london, , , , , n., , , n., ff.; stock exchange, ; money market, illustrates assumptions of static theory, ff. m "manipulation," of values and prices, ff., . manufacturers' "paper," , , , , n. "margins," , , , , , n., - , ; "margin operator" as "banker," - . marginal analysis, , , , ch. xxv; applied to law, - ; applied to money, - , , , , , - , . marginal utility, , - , , - , , , , , , , ch. v, , , n., , n., , - ; applied to value of money, ch. v, ; essentially static theory, ff.; schumpeter's version of, , ff., , n., ff., - ; limitations of, ff.; "relative marginal utility," - , n., , n., , n.; quantity theory and, . "market letter," , . marshall, a., , , , n. marx, karl, . mathematical economics, , n., , , , ch. viii, , , . mcculloch, j. r., . mead, g. h., , n. meade, e. s., , n., , n., , n. measure of values, , - , , , n., , - , , , - , , , , - , ; must have value, , ; relation of, to commodity theory, - ; applied to non-economic values, - . see also functions of money. medium of exchange, , , - , , , , - , - , , n., , n., , , ; must have value, . see functions of money. meinong, a., . menger, karl, , , , n., , , n., , , , , , n., - , , , n., , , . mercantilism, , . merriam, l. s., , , n. metallist theory. see commodity theory. middlemen, effect of eliminating, on price level, - . mill, james, . mill, j. s., , , - , , n., , , , , , , , , , n., , , , n., , , n., , n., , n., . minneapolis, bills of exchange in, , n. mises, l. von, , , , , , , , - , , n., , n., , n., , n., , n., . mitchell, w. c., , n., , n., , , n., , n., , n., , n., , n., - , , , n., , n., , n., , n., , n., , , , . mode. see suggestion. money, abstracted from by static theory, , - , ; definitions of, , , - , - ; functions of, see functions of money; must have value from non-pecuniary source, ch. vii, , - , , , , ; origin of, , ch. xxi; money not unique, - , , , , , , , - , , - , , , - , - , , , ; peculiarities of, , - , , , , ff., - , - , , , , , , ch. vii, , n., , - , , - , ch. xxi, ch. xxii, , ff.; tool or instrumental good, ch. iv, - , , ch. xxii, ; theory of, developed in isolation, ff.; theory of, must be dynamic, - , . see also statics, dynamics. value of, _vs._ "reciprocal of price-level," , - , , , , - , - , - , , - , , n., . see value, absolute _vs._ relative. relation of, to credit. see credit, reserves, ratio, fixed, m:m´. relation of, to trade, ch. xiii, ch. xiv. see trade. see analytical table of contents. "money in circulation," ch. viii, , , n., , . money economy, , , , , n., , , ch. xxi, ch. xxii, . "money-funds," distinguished from money, , , , - . money income, distinguished from real income, ; distinguished from quantity of money, , - . money market, , , , , , , , , - , , - , - , , n., , - , - . "money post," on new york stock exchange, , , - . money rates, ch. v, , , , , - , , - , , , - , - , , , - , , - , ; _vs._ interest rates. see interest. relation of, to bank reserves, ; to clearings, ; to international gold movements, , - ; to dividend and interest payments, , n.; to plans for corporate consolidations, ; to jewelers' profits, ; to trade, , , ; to volume of speculation, , , n. "money trust," - . monism, unsatisfactory metaphysics for social sciences, - . moore, h. l., , n., , n., . morality, theories of, - . moral values, - , , - , , , n., - , , . morgan, j. p., , , n., ; j. p. morgan & co., - , , , n. "morning loans," , , , . see "overcertifications." n national banks, , , , n., , , , , n., , , - , - . national city bank, , , n., , n. negative values, as "real costs," , n. new york city, - , , , n., ff., , , - , , n., , , , , - , , - ; as "clearing house" for country, , ff.; contrasted with london, - ; "deposits" in, , ff., , ; "all other deposits" in, - ; cotton exchange, , , ; coffee exchange, , , , ; stock exchange. see stock exchange. money market. see money market. clearings. see clearings. newcomb, simon, . nicholson, j. s., - , , - , , , , - . "nominalism" in monetary theory, , n., ff. see _staatliche theorie_. "normal tendency," , , , - , , - , , - , , ff.; "normal _vs._ transitional." see "transition periods," statics, dynamics. norton, j. p., , n., , n. note-brokers, - , . o "odd lot" dealings in securities, , . "one house bonds," . origin of money, , ch. xxi. ornament, and origin of money, ff. orthodox economist, , , . "other collateral security," analyzed, ff. "other loans and discounts," analyzed, ff. "overcertification," , , , . see "morning loans." overcounting in estimates of volume of trade, , n., , n., , - , , n., , - , - . see undercounting. overproduction, , . "over the counter" dealings in securities, , . p panics, , , , , , , - , . see crises, business cycles. paper money, , , , , , , , , ; inconvertible, , , , , , , , n., , - , ; credit theory of, , . see greenbacks, austria. parasitic occupations, ; gold mining as, , n.; american banking as, . patten, s. n., , n. paulsen, f., . payments, - , , , n.; proportions of money and checks in, , , , , , ; wage, , ; relation of, to volume of trade. see overcounting, undercounting, barter. pay rolls, money for, , . pearson, karl, , n. perry, r. b., , n., , n., , n., , n., , n., , n., , n., , n. persons, w. m., , n., , n. phillips, c. a., , n. phillips, osmund, , n., , n., , n. physiographic factors in social life, - , , . pierson, n. g., , n. pittsburg, "deposits" in, - . "platform" of quantity theorists, . poker chips, . pope, j. e., , , , n., , n., , n., . populists, and quantity theory, . positive doctrine, in parts i and ii, summarized, ch. xx. "power in exchange," - , . pragmatism in economic theory, - , , - , - , , - . pratt, s. s., , n., , n., , n., , , , , n. premium, , , , , , - , . see agio. gold, _vs._ general price level as index of value of money, . prestige as economic power, , , , , , , - , , - , , , ; prestige values. see values. price, theodore, . price, ff., , , n.; and value, ff., . see value. "buying price" _vs._ "selling price," - , - , ; "just price," . price level, , , , ch. vi, ch. viii, - , ch. xv, - , , - , - , , , n., , - ; relation of, to particular prices, , , , - , - , - ; _weighted_ average, tied to t, ff., , - ; supposed "passiveness" of, , , , , , ch. xv, ; "reciprocal of," _vs._ value of money. see money, value of. price-theory _vs._ value-theory, , , , - , - , - . see supply and demand, cost of production, capitalization theory, imputation theory. prices, concatenations of, - , , , - ; customary, ; fluid, ; world prices, and gold production, ch. xviii. private banks, , - , , , n., , , - , - , - , ; deposits in, in new york city, , ; "deposits" in, in new york city, - , - . produce exchanges, , ff., , . see speculation, commodity, chicago board of trade, london money market, new york cotton exchange, etc. production, confused with trade. see trade. relation of, to trade, ff., , ; exchange as. see exchange. factors of, , - ; index of, ; money as instrument of. see money. "productive," meaning of, , . prosperity, theory of, , , , , , , ff. see statics, dynamics. protective tariffs, - , , - . pujo committee, , , n., , , n., , n., - . "purchasing power," - , , - , ; of money, , , - , , - . q qualitative _vs._ quantitative thinking, - , , , , n., , - , . see juristic _vs._ economic thinking. quantity theory, , , , , , pt. ii, esp. ch. xv, , n., , n., - , , - , ff., , , n.; modicum of truth in, , , - ; as basis of prediction, - ; doctrine of, that quantity of money is of no importance, , , n., ch. xiii, _passim_, , - ; conflicts with other theories, see supply and demand, cost of production, capitalization theory, imputation theory, gresham's law. "long run" _vs._ "short run" versions of, - , - , ff., , ; not a functional theory, - , - ; not logically related to bimetallism, , n.; applied to international trade, , , , - , , ch. xvi; not related to general theory of value, ff., ; psychological assumptions of, - , , ; relation to medium of exchange function, , ; contrasted with commodity theory, ch. vii, esp. - ; types of, ch. vii, ch. viii, , , n., - , - , , n., - , , n., , n., , ch. xviii, , n., , n., , , n. see ricardo, mill, j. s., taussig, nicholson, fisher, walker, f. a., johnson, j. f., jevons, barbour, andrew, davenport (p. , n.), kemmerer. r railway gross receipts, - , , ; relation of, to clearings, - . "ranks" or "orders" of goods, , , , , , n. see imputation theory, austrian school, capitalization theory. ratio of exchange, ff., , , , ; abstract, as value, , . see value, absolute _vs._ relative, price, "purchasing power." ratio, fixed, m:m´, ch. ix, , , , , , , - , - . see reserves, deposits, "money in circulation." real estate trade. see trade. rediscounting, , , - . _reichsbank._ see germany. religious values, . rent, , - ; as cost, ; of money, as "money rates," ch. iv, , , , - , - ; capitalization of. see capitalization. reserve cities, , , n., , , n. reserve function of money, ch. xviii, , , , , - ; special case of "bearer of options" function, , n., ff. see functions of money. reserves, ch. ix, ch. xviii, , , , , , , - ; bills of exchange as, - , ; legal reserve requirements, , n., , , , ; ratio of, to deposits, , n., , - , , ff., - ; ratio of, to "money in circulation," , n.; relation of, to money rates, ; "secondary reserves," . resumption of specie payments, , . retail "deposits," see "deposits." retail trade. see trade. ricardo, david, , , , , , , , , . ridgeway, w., , n. ripley, w. z., . risk, , , - . see dynamics, "bearer of options." ross, e. a., , , . royce, j., , n. rupee. see india. rural banks, - , , - ; "all other deposits" in, - ; loans by, in wall street, - ; small volume of transactions of, , , n. s saleability, , , , - , , - , , - , , ff., - , - , , ff., . santos, coffee speculation in, . savings banks, , n., , , - , . savigny, f. c., von, , . schumpeter, j., , , n., , , - , , , n., ff., , n., , , , n., - , , , , - , , n., - . scott, dr, , n. scott, w. a., , , , , , , , n., , n., , n., , n., , n., , n., , n. seager, h. r., , n., . sea board air line adjustment 's, . seasonal changes, , , . seignorage, . self, the, . seligman, e. r. a., , n., , n., , n., . selling costs, ff., , . "selling price" _vs._ "buying price." see "buying price." senior, n. w., , n., . sex, social transformation of, - ; rôle of, in origin of money, - . shakspere, . share sales. see stock exchange, clearings. shaw, a. w., , n. silver, , n., , , , , , n., , , , , , , ; certificates, . simmel, g., , , n. single tax, - , , n. smith, adam, , , , , , - , , . smith, b. f., , n. smith, munroe, . social control, ch. i, , , . n., , ; technology of, ff., , ; "radiant points of," , . social psychology, , - , - , , - , - , . social value theory, ch. i, , n., - , ff., , , - , ch. xx, , n., - , , n., , n., - , - , , , , - , - ; pragmatic character of, - ; applied to law, , - ; applied to morals, - , . social advantage, relation of, to individual interest, - . social "consciousness," ; social expectation, ; social forces, ; "social marginal utility," ; social mind, , , , , n., , , , ; social objectivity, theories of, ff.; social organism, , ; social "oversoul," ; "social use-value," ; social _vs._ individual values, - . "socially necessary labor-time," , . society and individual, - , . soetbeer, a., , n. sombart, w., . south atlantic states, "deposits" in, , . spahr, c. b., . specie, . speculation, , n., , , ch. xiii, , , , - , ff., , , - , , , , - , ff., - , , ; by manufacturers, wholesalers, and retailers, - , - ; commodity, ff., - , , , - ; influence of, on bank clearings, - ; land, ; in london, ff.; "odd lot," , . speculators, , , , , , , - , , ; _vs._ investors. see investment. spencer, herbert, . "spot" transactions, . sprague, o. m. w., , n., , , n., , , n. _staatliche theorie_, , n., ff. stabilizing the value of money, , . standard, of deferred payments, , , , ; of value, , , , - . see measure of values. money, , - , , ; "primary" and "secondary," ; tabular, , . state banks, , , , , n., , , , - , - ; collateral loans in, - , . static theory, , , , ff., , n., , n., ch. x, , n., , , - , - , - , , , , n., , , n., , , , - , ch. xxv; abstracts from money, , - , ; relation of, to speculation, ff., , ; dynamics and, reconciliation of, ch. xxv. see also, saleability, liquidity, fluidity, "normal tendency," equilibrium, "wealth of nations, theory of," dynamics, transition period, prosperity, theory of, good will, "business capital," friction, historical _vs._ cross-section viewpoints. statistics, , n., , n., ch. xix; of banking assets, , - , , - ; of bank-drafts on new york and other centres, ; of "equation of exchange," , , ch. xix; of foreign and domestic trade, appendix to ch. xiii; of gold consumption, , n.; of money in banks, _vs._ money in circulation, ; of money-rates, - ; of net income of the united states, , , n., ; of prices, ; of quantity theory, , n., ch. xix; ratio, loans to deposits, - , n.; reserves, - , - , n.; of speculation, ff.; of trade, ff., ch. xiii, - ; "ordinary trade," - ; of velocity, , - . see weighting in statistics. stevens, w. s., , n. st. louis, , , , n., ; merchants' exchange, . stock exchange, , , , , n., ff., , , , , - , , , ; new york stock exchange, , ff., , , - , , - , ; clearing house in, - , - ; share sales on, volume of, ff., , n., , n., ; share sales on, correlated with bank clearings, ff., ; bond sales on, , ; "odd lot" dealings on, , , ; security dealings outside, - , ; compared with other exchanges, , . stocks and bonds, essential identity of, - , - ; "borrowing" of, - , - , - ; value of. see value. "stop loss" orders, , , n. store of value, , n., , , , , . sec functions of money. substitutes for money. see money, not unique. suess, eduard, , n. suggestion, , - , , , , , , - , , , - . supply and demand, ch. ii, , , - , , n., , ; applicable to general price level, - , ; assumes fixed absolute value of money, ff., - , ; conflicts with quantity theory, - , - , ; not related to quantity theory, - , - , ; inapplicable to money, ch. ii, ; applied to money, - , , , n.; in "money market," - , , ; relation of, to cost of production, , - ; relation of, to marginal utility, ch. ii, ch. v, esp. - , and , n. t tabular standard, , , . tarde, g., , , , . tariff. see protective tariff. taussig, f. w., , , , , n., , , n., , - , , , , , n., , , n., . "taxonomy" in economic theory, - , , . taylor, jas. h., , n. taylor, w. g. l., . technology, - , , - ; "technology of social control." see social control. temporal _regressus_. see historical _vs._ cross-section viewpoints. thompson, burton, on barter in new york city real estate dealings, , n. ticker, - , , n. "till money," , , . time credit. see credit, futurity, book-credit, bills of exchange. time discount, ch. iv, , , . see interest, capitalization. time, influence of, of money-rates, - . timeless-logical _vs._ causal-temporal, relationships, , . see causation, statics. token money, , . touzet, a., , n. trade, various meanings of, ff.; "domestic" _vs._ foreign, appendix to ch. xiii; "ordinary," volume of, - , . trade, volume of, - , , ch. vi, , , ff., , , ch. xiii, , n., - , - , - ; an abstract number, distinguished from concrete goods, ; a pecuniary magnitude, - , , - ; confusions of, with production, or with stock, ff., , , n., - , , n., , n.; governed by dynamic causes, - , , ; quantity theory doctrine of causes governing, - , , n., , , , , , , n.; real estate trade in, , , , ; relation of, to money and credit, ch. xii, ch. xiv, - , - ; relation of, to price level, - , , - , ; retail trade in, , , , - , , n., - , , - , , , ; speculation chief factor in, ch. xiii. see speculation. wholesale trade in, , , - , - , , n., . see also barter, transactions, payments, overcounting, undercounting. "transactions, total," relation of, to bank clearings, - , , , n., ; relation of, to "deposits," - , . "transition periods," ch. x, , , - , , - , - , ff., , - , . see "normal tendency," statics, dynamics. trosien, , n. trust companies, , , n., , - , - , - , , n.; new york city, "deposits" in, - ; clearings of, - ; deposits of, , , n.; collateral loans of, - ; reserves of, - , turgot, , n., , n. u undercounting in estimates of volume of trade, , n., , n., , n., - , - . see overcounting, barter. underwriters, , , , n. urban, w. m., , n. "use theory." see interest. utility. see marginal utility. v vacuum, monetary, . value, part i, - and _passim_; absolute _vs._ relative, ff., - , - , , ff., - , , , - , , , , - , , n., , n., ; abstract units of, ; exchange and, - , ff., - ; wealth and, , , ; as generic, , , ; _differentiæ_ of species of, ff.; as quality, , , - , ; as quantity, , , , , ; control over, ff.; causal theory of. see causal theory. definition of, - , ; derived, becomes independent, , ff., , , , n., , n., , n. see also imputation theory, capitalization theory, ranks or orders of goods. formal and logical aspects of, ff., , , , - , - , n.; functions of, , , , , , n., , , , , , n., , - ; "human nature," , n.; "inner objective," , , , , n.; institutional. see institutional values. "intrinsic," ; "intrinsic causes of," , n.; objective, , , ; of consumers' goods, ff., ; of diamonds, - ; of gold. see gold. of instrumental goods, ff., , ff., , ; of money. see money and analytical table of contents. of stocks and bonds, - , , - , ff., ; "participation," , , n.; "personal," , , , ; "prestige," - , - , - ; "public economic," , , , ; "something physical," ; subjective, , , , , , - , n.; subjective, in exchange, , , , , , , - , , n. see money, value of, social value, price, ratio of exchange, "purchasing power," "power in exchange," marginal utility, cost of production, supply and demand, etc. value theory _vs._ price theory. see price theory. values, concatenation of, - ; simultaneous rise or fall of, . van antwerp, w. c., , n., , n. van hise, c. r., , n. variables and constants, , , - , - , - . veblen, t. b., , n., , , , n., , - , , , , , . velocity of circulation, , ch. vi, , , , , ch. xii, , , , , , , n., , - , ; "coin transfer" _vs._ "person-turnover" concepts of, - , ; as causal entity, , , - , ; quantity theory analysis of causes governing, , , ff., ; most highly flexible factor in "equation of exchange," ; varies with trade, ff., - , ; varies with prices, - , ; varies with value of money, ; meaningless abstract number, . w wagner, a., , n. walker, amasa, , n. walker, f. a., , , , , n., , , n., , , n., , n., , n. wall street. see new york city, stock exchange, new york city clearing house, speculation, money market, "money trust," etc. walras, l., , n. walsh, c. m., , n. wants, social nature of, ff.; competitive. see competitive display. war, , , n., , , - ; world war, , , n., , , , , , , , n.; american securities returned during, , n. war loans, , n., , n., - . wealth, ; definitions of, , n.; relation of, to value, ; distribution of. see distribution of wealth. "wealth of nations," theory of, , , , . weighting, in statistics, ff., , , n., , n., , , . weston, n. a., , , , n., . wheat as money, . whitaker, a. c., , , , n. white, horace, , , , n., , n. wholesale "deposits." see "deposits." trade. see trade, volume of. wicksell, knut, . wicksteed, p. a., , n., , n., , , . wieser, f. von, , , , , , - , , , , , , , , , n. williams, a., . williams, clark, . willoughby, w. w., , n. wilson, e. b., , . withers, hartley, , , , n. wittner, max, , n. wolfe, o. howard, , , n., , n. wolff, s., , n. x _xy = c_, . y yule, g. u., , n. printed in the united states of america * * * * * footnotes [ ] _social value_, houghton mifflin, boston, . [ ] cooley, c. h., "valuation as a social process," _psych. bull._, dec. , ; "the institutional character of pecuniary valuation," _american journal of sociology_, jan. ; "the sphere of pecuniary valuation," _ibid._, sept. ; "the progress of pecuniary valuation," _quart. jour. of econ._, nov. . clark, j. m., "the concept of value," and "a rejoinder," _quart. jour. of econ._, aug. . anderson, b. m., jr., "the concept of value further considered," _ibid._; "schumpeter's dynamic economics," _pol. sci. quart._, dec. . perry, r. b., "economic value and moral value," _quart. jour. of econ._, may, . bilgram, hugo, "the equivalent concept of value," _ibid._, nov. . haney, l. h., "the social point of view in economics," _ibid._, nov. and feb. . johnson, a. s., in _american economic review_, june, , pp. _et seq._ carver, t. n., in _jour. of pol. econ._, june, . mead, g. h., in _psych. bull._, dec. . ellwood, c. a., in _american jour. of sociology_, . ansiaux, m., in _archives sociologiques, bulletin de l'institut de sociologie solvay_, may , , pp. - . professor cooley's articles, which i have listed first in this note, have in certain important particulars shifted the emphasis and changed the method of approach. he is more interested in the general sociological aspects of the value problem than in the technical economic aspects. in considering economic value, he is more interested in its general social functions than in its function as a tool of thought for the economic theorist. he has, therefore, been less bound by schemata than i have in the discussion. this different method of approach, coupled with a singular charm in exposition which characterizes everything professor cooley writes, makes it seem probable to me that readers who may find the doctrine as i set it forth unconvincing, will be convinced by professor cooley's exposition. i hope, too, that professor cooley's articles, which have been scattered among three periodicals, may soon appear together under one cover. [ ] including many whose formal definitions are quite different, and who would repudiate the contentions here advanced! _cf._ my article, "the concept of value further considered," _quarterly journal of economics_, aug. , and _social value_, chs. and . [ ] definitions of wealth differ, and there are few if any definitions of wealth broad enough to make it true that only items of wealth have value. all wealth has value, but not all value is embodied in wealth. thus, stocks and bonds, and "good will" have value. few writers would classify them as wealth. the distinction between wealth and property is employed by many writers to meet the difficulty here presented, and it is held that these intangibles have only the value of the wealth to which they give title. in a logical schema, on the assumption of a fluid, static equilibrium, this may serve. it is true in fact, however, that many of these intangibles have value apart from the wealth to which they give title. but these are complications which i reserve for a later part of this chapter, for the chapter on "statics and dynamics," and (in the case of irredeemable paper money) for the chapter on "dodo bones." [ ] the notion of ratio of exchange as a ratio between values is strictly accurate only under static assumptions. goods, in actual life, are not always exchanged strictly in accordance with their values. _cf._ my article, "the concept of value further considered," _q. j. e._, aug. , pp. - . in cases where prices, or exchange relations, are not in accord with values, the term "ratio of exchange" is inapplicable, since there are no quantities to be terms of the ratio--except the pure abstract numbers of the commodities, each measured in its own unit, exchanged. [ ] in chapter of _social value_, i have followed the german usage in broadening the term, price, to cover all exchange relations. this has led to misunderstanding on the part of some readers, and it has seemed best to me to return to what appears to be the more familiar usage. it is purely a question of convenience. practically, ratios of exchange which are not money-prices rarely come in for discussion, outside the preliminary chapter on definition! professor fetter, in his article on the "definition of price," in the _american economic review_, dec. , proposes to broaden the term price in the manner which i am here abandoning, and his count of economists would seem to leave usage about equally divided between the broader and narrower uses of the term. it does not seem to me to be a point worth arguing about, however, and since i am practically convinced that cause of misunderstanding will be removed by using price to mean "money-price," i shall so use the term in this book, using ratio of exchange, or exchange relation, to express the broader concept. [ ] e. g., böhm-bawerk, _grundzüge der theorie des wirtschaftlichen güterwerts_, conrad's _jahrbücher_, , p. , n.; carver, "concept of an economic quantity," _quarterly journal of economics_, . [ ] this distinction is elaborated _infra_, in the chapter on the "origin of money." [ ] it is a matter of high importance that the value notion should be extended beyond exchange, if the economist is to be able to apply his theory to such highly important economic problems as socialism. _cf._ schäffle, _quintessence of socialism_, and clark, j. m., _quart. jour. of econ._, aug. , p. . [ ] as shown, _infra_, in the chapters on "supply and demand," "cost of production," "capitalization theory," etc. [ ] _vide social value_, p. , n. _cf._ davenport, _value and distribution_, chapter on "ricardo." [ ] knies, _das geld_, vol. i of _geld und credit_, berlin, , pp. - , esp. . [ ] chapter on "value" in the _philosophy of wealth_, and ch. of the _distribution of wealth_. [ ] _social value_, ch. . [ ] t. s. adams, "index numbers and the standard of value," _jour. of pol. econ._, vol. x, - , pp. and - ; kinley, "money", p. ; w. g. l. taylor, "values, relative and positive," _annals of the amer. acad._, vol. ix; merriam, l. s., "the theory of final utility in its relation to money and the standard of deferred payments," _annals of the american acad._, vol. iii. and "money as a measure of value," _ibid._, vol. iv; scott, w. a., "money and banking", ed., ch. iii. professor scott, in a letter to the writer, expresses the opinion that a value concept which makes the value of a good a quantity, socially valid, regardless of the particular holder of the coin or commodity in question, and regardless of the particular exchange ratio into which the value quantity enters as a term, "is absolutely essential to the working out of economic problems." johnson, a. s., "davenport's economics and the present problems of theory," _quarterly journal of economics_, may, , and _american econ. rev._, june, , p. . [ ] cf. also wieser's _natural value_, p. , n. senior's "intrinsic causes of value" comes to the same thing. [ ] cf. _quarterly journal of economics_, aug. , pp. - , esp. , n. [ ] among the leading figures in economics to whom this doctrine is unacceptable, i would mention especially professor h. j. davenport, _value and distribution_ and _the economics of enterprise_. a writer who seeks to minimize the importance of the issue between the relative and the absolute conceptions of value is professor j. m. clark, in _quarterly journal of economics_, aug. . professor clark seems to agree with much of what has been said here, and the present writer would agree with professor clark, as indicated above, that for many purposes we do not need to look behind prices--entering a _caveat_ that this is true only so long as we can assume a fixed absolute value of money. [ ] the psychology of this statement, which involves hedonism, needs improvement, but the issue need not be discussed here. _cf. social value_, ch. . [ ] as professor r. b. perry, _quart. jour. of econ._, may, . [ ] in this i am following a line of thought developed by professor john dewey in a lecture delivered before the harvard philosophical club in - . [ ] for the elaboration of these ideas, cf. hegel, _philosophy of history_, _passim_; willoughby, _the nature of the state_, _passim;_ davidson, t., _history of education_, new york, , _passim_; bosanquet, b., _philosophical theory of the state_; royce, j., _the world and the individual_. [ ] tarde, _laws of imitation_; baldwin, _social and ethical interpretations_. [ ] _human nature and the social order._ [ ] _cf._ ellwood, c. h., _some prolegomena to social psychology_, chicago, , and cooley, c. h., _social organization_, new york, . see also _social value_, ch. . [ ] _cf. social value_, ch. . h. j. davenport is the best modern representative of this extreme individualism in economics. individualism is nearly dead in modern political, ethical, and sociological theory. revivals of it appear, however, in w. fite, _individualism_, and in a recent article by r. b. perry, "economic value and moral value," _quart. journal of economics_, may, . (i have discussed professor fite's views in the _pol. sci. quart._ of june, .) professor perry would there appear to reduce ethical value to a purely individual phenomenon. but he really brings in a "categorical imperative," not derived from the values of the individual, by the "back door." "now our general moral law prescribes that an agent shall take account of all the interests which his conduct affects, or shall judge his conduct by its consequences all round." (_loc. cit._, p. .) just how this "general moral law" is to be derived from individual values, is not made clear. that the wants of every man should count equally with the wants of the agent is a principle which one would expect from kant or fichte, but hardly one which individualism can expect to maintain. [ ] i use "volition" here in that wide sense which makes it cover both the motor and the affective phases of mind. munroe smith would emphasize the motor aspect, where savigny stresses feeling and sentiment. [ ] "jurisprudence," a lecture delivered before the faculty of columbia university, feb. , new york, the columbia university press, , p. . [ ] i ran across this in wagner's _grundlegung_. wagner had found it in raul. it is from _troilus and cressida_, act ii, scene ii. [ ] davenport, _value and distribution_, pp. , n., and - , n.; jevons, _theory of political economy_, pp. , - , esp. . _cf. social value_, ch. . this seems to be the position of professor r. b. perry, also, though he is not so extreme as davenport. _loc. cit._ [ ] this term carries no connotation of teleology, as here used. i am merely trying to state what the different kinds of value _do_, as a matter of fact. [ ] the _extent_ to which the values of consumption goods and services are reflected in other economic values will receive attention below, in the present chapter. [ ] _cf. social value_, p. , and urban, _valuation, passim_. urban's idea of "participation values" is better expressed by cooley's phrase, "human nature values," while cooley's excellent phrase, "institutional values" characterizes the more complex values in which classes and institutions are specially _weighted_. _cf._ cooley's articles referred to above, and _social value_, chs. - , inclusive. [ ] "the institutional character of pecuniary valuation," _american journal of sociology_, jan. , p. . [ ] this, unfortunately, is not high praise, as the federal judiciary in general sets a lamentably low standard in these matters. [ ] neither "desire" nor "satisfaction" is really accurate here, but i do not wish to digress for a discussion of the psychology of value in the individual mind. the present argument can be developed without it. the matter is discussed in detail in ch. of _social value_. [ ] ross, e. a., _social psychology, passim_. [ ] _cf._ veblen, t. b., _theory of the leisure class_, and carlile, w. w., _evolution of modern money_. [ ] _social value_, chs. - , esp. ch. . [ ] but land does often have value which it is impossible to explain on the basis of any income which may reasonably be expected from it, even in the remote future. [ ] p. . [ ] _cf._ the discussion of wieser, schumpeter and von mises in the chapter on "marginal utility," _infra_. [ ] flux, w. a., _economic principles_, london, , pp. , , ; taussig, f. w., _principles of economics_, new york, , vol. i, pp. - . _cf._ my _social value_, ch. . [ ] _cf._ the present writer's _social value_, chs. - , inclusive. [ ] i am here abstracting from an important factor, namely, that not all prices are affected equally by changes in the value of money. some prices are fixed by law and custom, and some incomes are tied by long time contracts. thus, it will happen, in many cases, that supply and demand for a given good will be unequally affected by a change in the value of money. this means that certain values are _tied_ to the value of money, rising and falling with it, so that the amount of _power_ which some elements in the economic situation are able to exert through supply-price-offer and demand-price-offer are at the mercy of changes in the value of money. but this is an element which is incalculable, on the basis of the supply and demand concepts, and must be abstracted from if we are to make any definite assertions as to the effect of increase or decrease of demand in the active sense on supply in the passive sense, or vice versa. unless we make this abstraction, and unless we assume a fixed value of money, we might find increase of demand in the active sense (nominal) leading sometimes to an increase, and sometimes to a decrease of supply in the passive sense, or rather, being accompanied by either increase or decrease of supply in the passive sense. no law would be possible. in practice, both of these abstractions are more or less consciously assumed. [ ] i think that it is a feeling that mill has left out the psychological factors in supply and demand which led cairnes to the effort to give definiteness to other and vaguer notions on the subject. [ ] _cf. social value_, ch. ; "the concept of value further considered," _quart. jour. of economics_, aug. . for the doctrine that supply and demand, and other elements of current price theory, assume a fixed absolute value of money, see _social value_, p. , n., and ch. . [ ] _leading principles_, ch. on "supply and demand." [ ] _cf. social value_, pp. - , and - . [ ] _cf._ the discussion, _infra_, of "t" in the "equation of exchange." [ ] cotton is chosen for this illustration because it has actually happened, more than once, that a large crop has sold for a smaller aggregate price than a smaller one. thus, not to take an extreme illustration, the crop of - was , , bales. that of - was , , bales. the average price of spot cotton at new york from oct. to june, , inclusive, was almost c. per lb.; the average price of spot cotton in new york during the same months in - was not quite cents per lb. on this basis, the eleven million odd bales of - sold for substantially more than the fifteen million odd bales of - . [ ] nor is there anything in the hypothesis to reduce the number of times any good needs to be exchanged against money. rather there would be an increase of exchanging, as speculation took place to bring about the needed readjustments. for the present, i abstract from this. _cf. infra_, the chapter on "volume of money and volume of trade." [ ] i shall recur to this point in the chapter on "the quantity theory and international gold movements." [ ] _quart. jour. of economics_, - , p. . [ ] _cf._ davenport, _value and distribution_, and whitaker, _labor theory of value_. [ ] _cf. social value_, pp. - ; - . [ ] i incline to the view that the explanation of costs by foregone positive values needs supplementing by a recognition of the rôle of _negative social values_, and that thus interpreted, "real costs" have a minor part to play. but i have not thought the matter through satisfactorily, and shall find no occasion to use the doctrine in the present volume. [ ] this doctrine as applied to rates on call loans appears in seligman's _principles of economics_, ed., p. . the peculiarities of call loans have also been discussed by c. a. conant, _principles of money and banking_, i, p. . conant there refers to a discussion by joseph f. johnson, in _pol. sci. quarterly_, sept. , p. . there are some very interesting distinctions between the "hire price" and the "purchase price" of money developed by j. a. hobson, in his _gold, prices and wages_, pp. _et. seq._ [ ] one "pure rate" of interest, for loans of all periods over, say, three years, is doubtless, a myth, or better, a methodological device for simplifying thinking in connection with the theory of interest, and the capitalization theory. it is not necessary for our purposes, however, to give detailed analysis to the notion. we shall discuss the capitalization theory as we find it, assuming that, as a matter of fact, the difference between loans of years and loans of years, or in perpetuity, of equal quality in other respects, may be abstracted from, with safety. [ ] the price-level is a _weighted_ average. these elements dominate it. _cf._ our discussion, in the chapter on the "volume of money and the volume of trade," _infra_, of the elements entering into trade. we shall make use of the capitalization theory at various points in our discussion of general prices. _cf._ the chapter on "the passiveness of prices," where it is shown that the capitalization theory and the quantity theory are irreconcilable. [ ] there is an extensive body of controversial literature connected with the capitalization theory, which it is unnecessary, for present purposes, to consider. one interesting line of doctrine is that developed by dr scott (_jour. of pol. econ._, mar. ) and h. j. davenport (_yale review_, aug. ), in which ordinary formulations are criticised as assuming a "social rate" of interest, and in which the effort is made to work the thing out on the basis of extreme individualization, each man having a rate of discount of his own. i have accepted the doctrine in the general form in which it has been developed by böhm-bawerk (in criticism of turgot and henry george in his _capital and interest_), by fetter, in his _principles of economics_, and by fisher in his _rate of interest_, abstracting from points on which these writers disagree. my criticism of their doctrines, were it necessary here to develop it, would rest on the ground that their treatment of the general interest problem is too individualistic, and i should side with them as against scott and davenport. but these matters are aside from our present problem. in our chapter on "marginal utility" we shall meet the capitalization theory again, as applied to the value of money by david kinley. we shall also take it up in the chapters on "dodo bones," and "the functions of money." [ ] _social value_, chs. - . the point is discussed _infra_ in the present chapter. [ ] fisher, i, _purchasing power of money_, p. . [ ] edition of . [ ] _cf._ the chapter on "dodo bones," _infra_. [ ] _cf._ menger's art. "geld," conrad's _handwörterbuch_, , rd ed., vol iv, p. . [ ] _cf._ helfferich, _das geld_, ed. , p. . [ ] discussed more fully _infra_, chapter on "dodo bones." [ ] i make virtually no reference to the "spoken" part, which is chiefly concerned with index numbers. [ ] chapter on "dodo bones." [ ] chapter on "barter." [ ] in its psychological explanation, this bears somewhat the same relation to the social value concept of the present writer that the social mind concept of giddings and lewes bears to the social mind concept of the present writer. _cf._ _social value_, ch. . wieser's concept excludes individual peculiarities. it is an abstraction from individual values, a distillation of their common essence. the social value concept of the present writer is a focal point in which are summarized all the individual values, whether alike or divergent, and not merely the individual marginal utilities of the goods in question (wieser's only factors) but also the individual emotions which affect the distribution of wealth. wieser's concept is based on a study of individual marginal utilities considered as atomic elements; that of the present writer looks on the social mind as an organic whole, in which individual mental processes are phases, and does not try to synthesize a social value out of elements, but rather, to analyze it into elements. in the function in economic theory for which they are destined, however, the two concepts have much in common. both seek to be the fundamental economic quantity. both seek to be causal forces, lying behind prices, even though expressed in prices; both oppose the conception of value as merely relative. [ ] _social value_, chs. , , , and . _infra_ in the present chapter. [ ] see especially the chapter on "the passiveness of prices." [ ] _cf._ the writer's "schumpeter's dynamic economics," _political science quarterly_, dec. . schumpeter's theory, as there presented, is based on the brief discussion in his _theorie der wirtschaftlichen entwicklung_ (leipzig, ), pp. et seq., , - , , , and on schumpeter's verbal expositions of the theory during his american trip. since that account was published, professor w. c. mitchell has given an account of schumpeter's doctrine, based on the fuller discussion in schumpeter's _wesen und hauptinhalt der theoretischen nationalökonomie_, which is in accord with the account here given. (mitchell, in _papers and proceedings_, supplement to march, , _american econ. rev._, p. .) mitchell attributes the essential elements of schumpeter's theory to walras. the first exposition in english of the conception, so far as the present writer is aware, is in irving fisher's _mathematical investigations in the theory of value and prices_, _trans. conn. acad. of arts and sciences_, . professor fisher, in his preface, accords priority to jevons, auspitz and lieben, and to walras. the conception is not to be found in jevons, though many of the ideas involved in it are. the first non-mathematical exposition of the doctrine, so far as i know, is by schumpeter. as will be made clear in a footnote at the end of the present chapter, neither wicksteed nor davenport has really forced the problem through, to the full equilibrium picture, and neither has escaped the austrian circle. i do not concur with professor mitchell's interpretation of wicksteed on this point. it may well be that mathematical method, with a system of simultaneous equations, was necessary for the development of the idea. if so, it illustrates both the strength and the weakness of mathematical economic theory: it clarifies thinking, but it gets no causal theory! at all events, no causal theory emerges in this case. [ ] _positive theory of capital_, bk. iv, and _grundzüge der theorie des wirtschaftlichen güterwerts_, in conrad's _jahrbücher_, . the writer who would adhere to schumpeter's doctrine must give up all notion that any individual occupies a critical "marginal" position. all men are equally marginal in schumpeter's scheme. [ ] _positive theory of capital_, p. . [ ] schumpeter's scheme gives no money-prices. no form of this scheme gives any quantitative values. nothing but ratios can come from it. [ ] _supra_, chs. on "value" and "supply and demand." [ ] see, _infra_, the chapters on "volume of money and volume of trade," and "the functions of money." [ ] _infra_, chs. on "origin of money," "functions of money," and "credit." [ ] _supra_, ch. on "supply and demand." [ ] see note at the end of this chapter. [ ] _supra_, chapter on "cost of production." [ ] that this is wholly alien to böhm-bawerk's thought is sufficiently indicated by böhm-bawerk's vigorous criticism of professor j. b. clark, in "the ultimate standard of value," _annals of the american academy_, vol. v, pp. - . it may be noticed that schumpeter makes use of menger's and böhm-bawerk's general doctrine of imputation of the value of goods of the first order to goods of higher orders, without seeing that his equilibrium picture gives no basis for such a procedure. [ ] _cf._ comments on professor r. b. perry's view, in the long note at the end of this chapter. [ ] _cf._ böhm-bawerk, _grundzüge_, etc. (_loc. cit._), pp. , , n.; _social value_, chs. and ; j. m. clark and b. m. anderson, jr., in _quarterly journal of economics_, --"the concept of value." i may add that this equilibrium scheme is, in my judgment, equally useless as the basis of a hedonistic theory of _welfare_, since it is _absolute_ amounts of utility that are significant there. [ ] _theorie der wirtschaftlichen entwicklung_, pp. - . [ ] _loc. cit._, ch. , part ii. [ ] _ibid._, p. . [ ] for the assimilation of credit phenomena to the general phenomena of value, by means of the social value doctrine, see _infra_ our section on "credit." the social value doctrine is still further generalized in the chapter on "the reconciliation of statics and dynamics." [ ] _ibid._ p. . [ ] _vide mathematical investigations_, _loc. cit._, p. , where fisher assumes _one_ price to be unity, "to determine a standard of value." _purchasing power of money_, pp. - . [ ] _loc. cit._, pp. _et seq._ [ ] pp. - . [ ] see _social value_, chs. vi and vii. [ ] bk. ii, ch. vi. [ ] "_cf._ davenport, _value and distribution_, . 'for, in truth, not merely the distribution of the landed and other instrumental, income-commanding wealth in society, but also the distribution of general purchasing power ... are, at any moment in society, to be explained only by appeal to a _long and complex history_ [italics mine], a distribution resting, no doubt, in part upon technological value productivity, past or present, but in part also tracing back to bad institutions of property rights and inheritance, to bad taxation, to class privileges, to stock-exchange manipulation ... and, as well, to every sort of vested right in iniquity.... _but there being no apparent method of bringing this class of facts within the orderly sequences of economic law, we shall--perhaps--do well to dismiss them from our discussion_....' [italics are mine.] it may be questioned if the 'orderly sequence' is worth very much if it ignore facts so decisive as these! it is precisely this sort of abstractionism which has vitiated so much of value theory. most economists slur over the omissions; professor davenport, seeing clearly and speaking frankly, makes the extent of the abstraction clear. we venture to suggest that the reason he can find no place for facts like these within the orderly sequence of his economic theory is that he lacks an adequate sociological theory at the basis of his economic theory. a historical _regressus_ will not, of course, fit in in any logical manner with a synthetic theory which tries to construct an existing situation out of existing elements. our plan of a _logical_ analysis of existing psychic forces makes it possible to treat these facts which have come to us from the past, not as facts of different nature from the 'utilities' with which the value theorists have dealt, but rather as fluid psychic forces, of the same nature, and in the same system, as those 'utilities.'" [ ] of course, we do not mean to question the immense light which history throws upon the nature of existing social forces. [ ] _theory of political economy_, th ed., p. . [ ] art. "geld," in _handwörterbuch der staatswissenschaften_. [ ] _cf._ helfferich, _das geld_, leipzig, , for the same terminology, pp. - . [ ] exchange creates _values_. it does not necessarily create _utilities_. wheat going from a famine-stricken part of india to a place where it will sell for higher prices does not gain in utility thereby. [ ] a possible exception to this general statement might be made for professor h. j. davenport, who would insist that his version of the utility theory is based on "relative marginal utility," rather than on marginal utility in böhm-bawerk's fashion. no critic has been more merciless than he in the criticism of the austrian confusions of demand-curves with utility-curves, etc. but it is not clear to me that professor davenport has freed himself from the general doctrine that he criticises. i am not sure that he would accept schumpeter's version of the austrian theory as correct. it may be possible to _read_ schumpeter's doctrine _into_ chapter of davenport's admirable _economics of enterprise_, but it is not clear that one could read it _in_ the chapter! that individual price-offer depends on the marginal utilities of alternative goods, in comparison with the marginal utility of the good in question, davenport does emphasize. but the complication that not merely the utilities of alternative goods, but also their _prices_, have to be taken into account, and that this involves circular reasoning when an effort is made to give a summary of the whole system of prices by means of individual utility calculations, he does not, so far as i can see, grapple with. he summarizes the thing on p. : "the steps, then, are from ( ) utility to ( ) marginal utility, thence to ( ) the comparison of marginal utilities, and finally to ( ) price-offer." he takes no account here of the complication that the third step is in large degree a comparison, not of marginal utilities proper, but rather, of "subjective values in exchange." yet just in this lies a vital difficulty of utility theory, in so far as it attempts to explain causation. moreover, professor davenport is seeking to explain the _causal_ relation of utility to _demand_, the old austrian problem. the explanation of demand is, indeed, the problem with which all theories of value must come to terms, if they are to be of any use. as we have seen, schumpeter's schema has no bearing whatever on the explanation of demand, or on _causation_ of any sort. schumpeter's scheme leaves money out, and demand-curves run in money terms. davenport's scheme assumes money--and "purchasing power." (_loc. cit._, .) we have seen in the chapter on "supply and demand" that the notion of demand and supply involves money and a fixed absolute value of money. professor davenport is thus doubly assuming value, the thing to be explained! laws of "relative marginal utility" developed on the assumption of money, and in abstraction from changes in the value of money, are not likely to be of service when the problem of the value of money itself is taken up. on pp. - , davenport comes closest to schumpeter's doctrine, saying that "the total situation is directive of each individual in it," and that there are "mutual reactions," such that particular facts are both effects and causes, illustrated by the last person who jumps on a crowded raft--does he sink the others, or do they sink him? this recognizes the complexity of the problem, but it is not clear that it even purports to do more than that. what is called for is a _definition_ of the essential elements in that "total situation," with precise statement as to what is assumed constant and what is allowed to vary, and an analysis of the "mutual reactions," with a starting point and a _terminus ad quem_,--an equilibrium in which "mutual reactions" cease to trouble with their endless circle! schumpeter's schema, though meeting criticism on other scores, does meet this logical test, but davenport's does not appear to do so. it is interesting to note that professor alvin s. johnson, in his review of the _economics of enterprise_, concludes that professor davenport, instead of meaning by "relative marginal utility" anything of the sort that schumpeter has in mind in his equilibrium picture of all utilities to all individuals, really has an absolute value in mind. (_quarterly journal of economics_, may, , pp. - .) there is much in professor davenport's book to justify this interpretation. professor davenport's application of "utility" to the problem of the value of money will be found on pp. - of the _economics of enterprise_. the general discussion of money and credit in the _economics of enterprise_ has been exceedingly illuminating to me, and my indebtedness to it will appear in the present book. much of what has been said of davenport's "relative utility" theory may also be said of wicksteed's. (_common sense of political economy_, london, .) this is in many ways a remarkable book, characterized by excellencies of many different sorts. but it fails to present the utility theory in such a way as to avoid circular reasoning. wicksteed sees the confusion of utility-curves with demand-curves, and protests vigorously and at length against it. (_e. g._, pp. - .) he starts out by assuming money and a set of market prices. his earlier chapters are given to showing how the individual adjusts himself to the market, bringing his "marginal utilities" of various goods into harmony with the market prices. he recognizes that he has made these assumptions (pp. - ), and that he cannot use the results thus achieved as an explanation of the market prices. they are "our goal, not our starting point." but by pp. - he finds himself with the "suspicion" that nothing special or peculiar is to be found in the laws of "market or current prices--a phenomenon which it is obviously impossible to regard as ultimate, which demands explanation, and which we have not yet explained.... much remains to be done, but we can already see that the preferences of each individual help to determine the terms or conditions under which the choice of other members of the community must be exercised. if you take the individuals of the community two and two it is clear that the marginal preferences of each determine the limits within which direct exchanges with the other can be entertained, and we must already have at least a presentiment that the collective scale is the register of the final and precise 'resultant' of all these mutually determining conditions and forces." this seems to forecast schumpeter's doctrine, but in the development which follows, we do not find it. the heart of his analysis of the causation of prices is in ch. vi, on "markets." the "summary" which precedes that chapter again suggests schumpeter's analysis--the notion of an all-embracing equilibrium. but when we get into the detailed analyses of the chapter we find nothing more than an exceedingly good account of the process by which supply and demand of particular goods, considered separately, become equated, through two-sided competition, and under conditions of monopoly. instead of "relative marginal utilities," we see customers coming into the market with various money-prices in mind, and sellers trying out various money-prices--not marginal utilities, nor yet two or more marginal utilities in comparison with one another, but rather, money-prices, which, in the minds of the buyers may be supposed to represent "subjective values in exchange," based on both marginal utilities _and_ objective prices of other things that enter into the budget, and which, in the minds of sellers, represent estimates of the prices which buyers may be induced to pay. wicksteed does not transcend the circle. finally, despite his caution to avoid the more glaring forms of the circle, and the confounding of demand-curves with utility-curves, and of utility with value, he does lapse into it in its completest form in expounding the austrian doctrine of cost of production. "the only sense, then, in which cost of production can affect the value of one thing is the sense in which it is itself the value of another thing. thus what has been variously termed utility, ophelemity, or desiredness, is the sole and ultimate determinant of all exchange values." (p. .) here is the illicit leap from marginal demand price to marginal utility which all utility theorists make, sooner or later! it is true that costs in one place are reflections of _demand_ elsewhere. but it is not true that costs in one place have any definite quantitative relation to _utilities_ in another place! when wicksteed comes to discuss the value of money, he makes slight use of the notion of abstract ratios among relative utilities, and employs a concept which he has nowhere vindicated or explained: the _value_ of money, as distinct from the reciprocal of the price-level, treating the value of money as something which can be directly influenced by sinister rumors affecting the credit of the government, and which can be an independent cause affecting velocity of circulation, and the amount of trade done by means of money. _loc. cit._, p. . see _infra_, our chapter on "velocity of circulation." the only writers i know at first hand who have really thought the thing through, and avoided the circle in form, are schumpeter and irving fisher. (_mathematical investigations in the theory of value and prices_, _trans. conn. acad. of arts and sciences_, . see bibliographical note, _supra_, in this chapter.) i have given an exposition of schumpeter, rather than fisher, because the former has put the doctrine in non-mathematical form. in the text i have indicated the limitations of their doctrine. fisher definitely avows the impossibility of applying the doctrine to the problem of the value of money. _purchasing power of money_, p. . schumpeter doesn't apply it to money, and when he tries to work out a utility doctrine of money, he lapses into the austrian circle in a very obvious form. in later writings, fisher also seems to forget the limitations imposed on utility theory in his earlier essay. in his _elementary principles_, ed. , fisher lists (pp. - ) a great multitude of factors that might affect the price of pig iron, and then says: "back of these causes lie other causes, multiplying endlessly as we proceed backward. but if we trace back all these causes to their utmost limits, they will all resolve themselves into changes in the marginal desirability or undesirability of satisfactions and of efforts, respectively, at different points of time, and in the marginal rate of impatience as between any one year and the next." here these marginal psychic magnitudes, which in the earlier essay appeared merely as surface phenomena, resultants of a total situation, proportional to prices, causes of nothing, merely symptoms of a completed equilibrium, are erected into atomic _veræ causæ_, the ultimate ultimates! it is interesting to contrast this with a yet more recent statement by a philosopher who has undertaken a defence of the utility theory of economic value, professor r. b. perry, in the _quarterly journal of economics_, for may, . considering the contentions of the present writer that many general social causes, in addition to the individual utilities concerned with consumption, are needed to explain changes in the values of goods, such as changes in fashion, mode, in general business confidence, in moral attitude toward different sorts of consumption, in the distribution of wealth, in taxes and other laws, professor perry says: "if the austrian school has neglected this, then it needs to be corrected. but the essential contention of that school remains, so far as i can see, unaltered; _in that these changes work through individuals_ and have their _point of application_ in a more or less rational _comparison of needs_ made by the _individual buyer or seller_. whatever affects these _individual schedules_ on a sufficiently large scale will affect prices. but to ignore the individual channels through which these forces pass, is elliptical." (pp. - . italics mine.) now i call attention to several points in the foregoing. first, i would contrast it with the doctrine quoted from professor fisher's _elementary principles_. where fisher puts the utilities far back in the realm of ultimate causation, making them the source from which spring all the proximate social causes which might affect the price of pig iron (such as "a trade war," "a change in fashion," a "change in incomes," "decreasing foresight," etc., _loc. cit._, p. ), professor perry would make individual utility schedules the final focal point, toward which converge, and through which pass, all the causal forces, however richly explained by antecedent social factors, which affect prices. the utility theory of value means all things to all men! but a second point with reference to professor perry's doctrine. it is perfectly true that _all_ social activities are the work of _individuals_. society is nothing apart from the individuals who make it up. to think of society and the individual as separate and antithetical is a fallacy which i have criticised in detail in part iii of _social value_. the social value theory does not mean that there are social forces which do not run through individual channels. this is not to accept the notion that individuals are really, in their psychical nature, isolated monads, however. there is a functional unity of individual minds, and no individual can be understood in abstraction from society. but this view is as old as aristotle. i have not contended that prices can change apart from the mental activities of individual men, working upon one another. so far there _may_ be no issue with professor perry. but there is a big issue when he contends that all the causation is focussed in _individual utility schedules_, and in a more or less rational comparison of needs made by the _individual buyer and seller_. this is _demonstrably erroneous_. let us assume, for example, that utility schedules of every individual new yorker remain unchanged, but that, through a change in the law (the work of individual men, under the influence of their own individual emotions and ideas, of, say, ethical character), incomes in new york city are _equalized_. hold rigidly to the assumption that there are no changes in utility schedules. will there not be, none the less, a radical readjustment of prices? will not the prices of riverside palaces and steam yachts sink and the prices of things which the poor esteem rise? the utility-curves of the erstwhile rich, assumed to remain unchanged, no longer count for so much as before in the market. the rich cannot go so far down their curves in the consumption process as before. the poor, or those who had been poorest, now count for more in the market. they can lower their margins. in other words, the forces affecting the distribution of wealth, in so far as they are legal and moral in character, at least, may affect the price-situation, _without_ altering _utility schedules_. some social factors, as changes in mode and fashion, will work _through_ the utility schedules, but others will not. one big _variable_ affecting prices which need not, in idea, at least, affect utility schedules at all, and whose main influence is anyhow not directed through them, is the volume of business confidence. this factor we shall analyze in our discussion of credit, _infra_. professor perry thus escapes only part of the criticism which we have made (_social value_, pp. and ) of the austrian theory: ( ) that it abstracts the individual from his vital contacts with other individuals, and ( ) that, within the individual mind thus abstracted, the austrians make a further abstraction, taking as relevant only the interests concerned with _consumption of economic goods_, summed up in the utility schedules. the second criticism applies to professor perry as well. men's total interests are not summed up in utility schedules, and do not affect prices exclusively _via_ utility schedules. it may be noticed, also, with reference to professor perry's discussion that he has misconstrued the austrian theory in conceiving it as an analysis of an historical _process_, with a beginning and an end, instead of a static picture, in which preëxisting individual factors come into equilibrium. (_loc. cit._, .) he seeks thus to avoid the austrian circle, but as we have shown in the discussion of von mises in the text, this way is not open to the austrians. able and penetrating though professor perry's discussion is, on the psychological side, it fails, i think, to take adequate account of the complexities with which the economist and sociologist must deal. in general, i find no version of the utility theory of value which is defensible, and, above all, no effort to apply it to the value of money which has met with success. [ ] _vide_ taussig, _principles_, i, . [ ] "der bankzins als regulator der waarenpreise," conrad's _jahrbücher_, . [ ] _loc. cit._, ch. . [ ] _cf._ ch. on "economic value." [ ] nicholson, j. s., _money and monetary problems_, pp. - ; - . [ ] _works_, mcculloch ed. , p. . [ ] _cf._ the criticism of nicholson by w. a. scott, _money and banking_, ed., ch. . [ ] _cf._ mill, _principles_, bk. iii, ch. xiii, par. . "nothing more is needful to make a person accept anything as money, and even at any arbitrary value, than the persuasion that it will be taken from him on the same terms by others." it is not quite fair to identify mill's doctrine with the circle stated above, however, since mill couples it with a reference to convention, resting on the influence of government--a mention, without analysis, of some of the factors to be discussed shortly. [ ] _cf._ knies, _das geld_, i, p. . [ ] _cf. social value_, ch. . _infra_, our chapter on "the functions of money." [ ] _das geld_, leipzig, , p. . [ ] laughlin, rejoinder to clow, "the quantity theory and its critics," in _jour. of pol. econ._, . [ ] _principles of money_, _passim_. [ ] _cf. social value_, pp. - , and _supra_, ch. on "marginal utility and value of money." [ ] strictly speaking, there is no marginal utility, but only a "subjective value in exchange," for money of the sort here discussed. see _supra_, the chapter on "marginal utility." [ ] the psychological reactions of the people in times of stress and uncertainty toward different kinds of money cannot be predicted with any certainty, and there seems to be absolutely no definite or universal law governing the matter. the present writer collected a lot of newspaper clippings at the outbreak of the present world war. from these it appears that in both paris and berlin there was a very great distrust of bank-notes, and an insistence by retailers, restaurants, landladies, etc., on _coin_. but _silver_, which was not standard money, seems to have been accepted without question. when hoarding is referred to in these clippings, it is invariably gold that is mentioned. a similar hoarding of gold took place during the balkan crisis at the time of the outbreak of the war between the balkan allies and turkey. professor e. e. agger informs me, however, that he has found some evidence that bank-notes as well as gold were hoarded in austria, at this time. sometimes we have a suspension of gresham's law, and an acceptance of all kinds of money at varying ratios. the following clipping from the _boston herald_ of march , , illustrates this: "douglas, ariz., march .--four kinds of money are now circulating in the mexican territory controlled by the constitutionalists. these are united states currency, the first issues of the constitutionalist government and of sonora state, and 'villa money,' or that issued by chihuahua at the instance of the rebel military commander. united states takes precedence. merchants in sonora, in order to protect themselves and at the same time observe the laws requiring acceptance of the rebel currency issues, have established a sliding scale of prices. this was discovered when five merchants were arrested at cananea by constitutionalist secret service men, who found that for american money they could buy goods for less than half the amount exacted when payment was offered in mexican currency. the uncertainty of the rebel campaign against torreon is reflected in the money market. to-day constitutionalist sold for and cents american on the peso. mexican federal currency commanded from to cents." in the experience of travellers who have discussed the matter with the writer, there was little of this flexibility of relation between paper money and coin in berlin, or paris at the outbreak of the present war. where paper was refused, it was absolutely refused, and where it was accepted, it seems to have been accepted without discount. no doubt, a fuller investigation would reveal all manner of variation in the behavior of different people in different centres, and at the same centres, at the outbreak of the war. [ ] _money and banking_, ed., pp. - ; - . [ ] _principles of money_, p. . [ ] written in december, . [ ] _cf._ clow, f. r., "the quantity theory and its critics," _jour. of pol. econ._, , p. . [ ] _cf._ emery, _speculation_, pp. - . [ ] _cf._ böhm-bawerk's criticisms of the "use" theory of interest. (_capital and interest_, _passim_.) both use theories and productivity theories are probably suggested, in part, by peculiarities which money possesses in pre-eminent degree. see _infra_, the chapter on the "functions of money." [ ] a more precise analysis of all these points will be given in the chapter on "the functions of money." [ ] _cf._ professor taussig's account of expansions and contractions of the silver currency in his _silver situation_, _passim_. [ ] for bibliography, see _am. econ. rev._, dec., , pp. - . [ ] new york, . all references to this book in the present volume are to the edition, which contains some new matter. [ ] _standard of value_, london, , p. , n. [ ] _papers and proceedings_, supplement to march, , number of _american econ. review_, p. . [ ] _american econ. rev._, supplement to march, , number, p. . [ ] _loc. cit._, pp. - . [ ] _loc. cit._, pp. ff. [ ] "the passiveness of prices," _infra_. [ ] particularly in view of the elaborate statistics, to be considered below, with which it is sought to make the equation realistic. [ ] _loc. cit._, p. ff. [ ] _loc. cit._ p. . [ ] _ibid._, p. . [ ] _ibid._, p. . [ ] where it is not meaningless, as at various points in the theory of mechanics, the product is always of a different denomination from either factor. [ ] _vide_ our ch. on "supply and demand," _supra_, for a discussion of mill's doctrine as to the "demand" for money. [ ] what is here said of fisher's equation of exchange applies, for the most part, to all versions of it. [ ] _loc. cit._, p. . _cf._ our chapter, _infra_, on "statistical demonstrations of the quantity theory." [ ] _purchasing power of money_, p. . [ ] the amplified equation is mv + m´v´ = pt, which takes account of bank-credit. this is explained, _infra_. [ ] _loc. cit._, p. . i recur to this point in discussing the statistics of the "equation of exchange" in ch. . [ ] _infra_, ch. on "quantity theory and world prices." [ ] _loc. cit._, p. . [ ] _loc. cit._, p. . the same position is taken by kemmerer, _money and credit instruments_, pp. _et seq._ mill denies the validity of these distinctions. see _principles_, bk. iii, ch. , par. . [ ] the above was written before the discussion in the _annalist_ (feb. , feb. , march , march , march , ) in which the present writer urged that professor fisher had greatly exaggerated the volume of trade in the united states by taking banking transactions as representative of trade. in reply (see especially the number for feb. , pp. _et seq._) professor fisher maintains that the overcounting to which i call attention is offset by undercounting, and considers offsetting book-credits, which actually dispense with the use of money and checks, an important element in the undercounting. i am unable to reconcile this position with the reasons given for excluding book-credits from the "equation of exchange." a detailed discussion of the points at issue appears in later chapters, particularly in the chapter on "statistical demonstrations of the quantity theory." [ ] _quarterly journal of economics_, vols. and ; _political economy_, pp. - ; _money_, chs. - . [ ] in our analysis of bank-loans, _infra_, we shall find reason to hold that walker, though false to the logic of the quantity theory, comes nearer to a tenable doctrine than do kemmerer, fisher, andrew, and most other quantity theorists. [ ] _principles_, bk. iii, chs. and . [ ] _purchasing power of money._ [ ] _loc. cit._, pp. - . [ ] _loc. cit._, p. . [ ] a. w. atwood, "hoarded gold," _saturday evening post_, dec. , , p. . [ ] _cf._ kinley, d., _the use of credit instruments_, senate document , , pp. - . [ ] _ibid._, pp. - . in the same volume, on p. , the figures are given _incorrectly_, as % checks and % cash. c. a. phillips, _readings in money and banking_, , p. , repeats this erroneous statement. [ ] _cf._ sprague, _crises under the national banking system_, nat. monetary commission report, pp. - ; , . [ ] _cf._ also p. of fisher's _purchasing power of money_. [ ] kemmerer (_money and credit instruments_, p. ) maintains that, "under perfectly static conditions," money in circulation and money in bank reserves will keep a fixed relation to one another. he offers no argument to support this view. of course, "under perfectly static conditions," everything keeps in fixed relation to everything else. the volume of credit will keep a fixed relation to the number of laborers and to the supply of clocks. but this would hardly establish causal connections! fisher multiplies "fixed relations" of various kinds, without, so far as very diligent search can tell, offering any argument to support them. thus, we have on p. the statement, "we have seen that normally the quantities of other currency are proportional to the quantity of primary money, which we are supposing to be gold." where this thesis has been demonstrated, he does not indicate. in view of the fact that gold has been the one really flexible element in our money supply, the thesis is hardly credible. on pp. - , facing this difficulty, fisher says: "since, however, almost all the money can be used as bank reserves, even national bank-notes being so used by state banks and trust companies, the proportionate relations between money in circulation, money in reserves, and bank-deposits will hold approximately true as the normal condition of affairs. the legal requirements as to reserves strengthen the tendency." here is a very substantial growth in the doctrine, with only one new argument, namely, that concerning legal reserve requirements--which gives minimal ratios, not _fixed_ ratios. in what way the fact that most kinds of money can serve as legal reserves gives reason for the doctrine of fixed proportions is not made clear. for professor fisher, however, it seems quite enough, for on p. , in the heart of his causal theory, he boldly announces: "there must be some relation between the amount of money in circulation, the amount of reserves, and the amount of deposits. normally _we have seen_ that the three remain in given ratios to each other." (italics mine.) it is doubtless somewhat dangerous to make a confident negative statement concerning a book which has no index. but careful reading of all that has preceded this statement reveals no references to this topic except those quoted above. "we have seen" is not a legitimate premise when so important an issue is involved. in our discussion of reserves in the section on credit, as well as in the discussion of the volume of trade, it will appear that no "normal" or "static" relations of this kind are possible. [ ] "the price-level outside of new york city, for instance, affects the price-level in new york city only _via_ changes in the money in new york city. within new york city it is the money which influences the price-level, and not the price-level which influences the money. the price-level is effect and not cause." (_loc. cit._, p. .) [ ] _loc. cit._, p. . [ ] w. c. mitchell, _business cycles_, p. . [ ] _ibid._, p. . [ ] j. p. norton, _statistical studies in the new york money market_, p. , and chart opposite p. . [ ] _ibid._, chart facing p. . [ ] _cf._ mitchell, _loc. cit._, chart, p. , and text, p. . as the ratio of _reserves_ to _money in circulation_ was greater in than in , and as the ratio of _deposits to reserves_ was also higher, we have a still wider variation in the ratio of money in _circulation to deposits_--m:m´. [ ] see the striking figures collected by a. p. andrew for . _quart. jour. of econ._, feb. , p. . [ ] _infra_, our discussions of the relations of volume of money and credit to volume of trade, and our discussion of credit in the constructive part of the book. the theory of money and credit must be a dynamic theory. [ ] senate document, no. , . for the bank of england, see p. ; for the crédit lyonnais, pp. - ; for the deutsche bank, pp. - . [ ] _statist_, , p. . [ ] "the prospects of money," british _economic journal_, dec. . [ ] _cf._ ashley, w. j., _gold and prices_, n. y., , pp. _et seq._ [ ] _cf._ von mises, "the foreign exchange policy of the austro-hungarian bank," british _econ. jour._, , vol. . _cf._ keynes, _indian currency and finance_. [ ] conant, _principles of money and banking_, vol. ii, p. . in , the reserve of the bank of belgium consisted of millions (francs) in specie, and millions in foreign bills. [ ] _principles of economics_, vol. i, pp. _et seq._ [ ] in the chapter on "quantity theory and international gold movements," _infra_. [ ] the joint stock banks in england keep "till money" in cash, even though their "reserves" are chiefly deposits at the bank of england. [ ] fisher, _loc. cit. passim_. _vide_ especially ch. . [ ] _purchasing power of money_. [ ] _business cycles_, pp. , - . [ ] _cf._ c. m. walsh, _the measurement of general exchange value_, pp. - . [ ] on pp. - , and elsewhere, fisher indicates that _all_ the causes affecting prices operate _through_ the factors in the equation of exchange. _cf._ p. . this would require a concrete equation of exchange throughout. [ ] chapter on "passiveness of prices." [ ] _loc. cit._, p. . [ ] _cf._ his _silver situation_. to do not give time enough for quantity of money to dominate volume of credit, in his exposition! [ ] mill, _principles_, bk. iii, ch. , par. . [ ] fisher, _loc. cit._, p. . [ ] "a compensated dollar," _quart. jour. of econ._, feb. . [ ] the chapter on "dodo-bones," _supra_, and the chapter on "the quantity theory and world prices," _infra_. [ ] _loc. cit._, p. . [ ] _ibid._, p. . [ ] or organs for pianos, etc. a common practice--less common in the north than formerly--is the payment of bills at country stores in produce. there is not a little barter at secondhand stores in new york city. [ ] mr. burton thompson, of no. wall st., who knows the real estate situation there intimately, states that while dealers do not like to "swap" real estate, and do little of it when business is good, they are forced to do it extensively when business is sluggish, "as has been the case for the past four or five years." [ ] _cf._ e. s. meade, _corporation finance_, p. , and _passim_. [ ] the same thing often happens when a bond issue is paid off--bond-holders may take their pay in new bonds. "conversions" of bonds into stocks, or of preferred into common stock, are also barter transactions. $ , , of the $ , , which mr. carnegie and his associates received from the steel trust for their plants, etc., was paid, not with money and checks, but with bonds. _vide_ stevens, _industrial combinations and trusts_, p. . [ ] the foregoing had been written before the discussion in the _annalist_ of feb. and march, (pp. - , - , - , , ), in which professor fisher and the present writer joined issue with reference to professor fisher's estimate, billions, for the volume of trade in the united states in . the present writer contended that the banking transactions which professor fisher took as representative of trade greatly overcounted trade, since they included loans and repayments, taxes, several checks in one transaction, gifts, etc., etc. professor fisher contended that the overcounting was offset by undercounting, and instanced particularly the clearing-house arrangements in the speculative exchanges, where checks are in part dispensed with, and the offsetting in "running accounts" through book-credit. this indicates a substantial change in professor fisher's view as compared with that set forth in the _purchasing power of money_, where he maintains, as shown above, that barter is virtually non-existent, that money and checks are "for all practical purposes and all normal cases," "necessities of modern trade," (p. ), and that book-credit merely postpones, and does not dispense with, the use of money and checks (p. ). the extent of the offsetting by barter, clearing-houses in the exchanges, and book-credit, though very great, is quite small as compared with professor fisher's billions, and does not nearly offset the overcounting. the writer has obtained some fairly definite data on this point, which will be presented in the chapter on "statistical demonstrations of the quantity theory," in discussing the volume of trade. [ ] _miscellaneous articles on german banking_, report of national monetary commission, p. . _cf. infra_, pp. - . [ ] _cf._ our chapter on "the functions of money," _infra_. [ ] one familiar feature of corporation finance makes barter much preferable to money transactions, in one connection, which involves very many corporations indeed, at their inception. stock, in order to be marketable, must be "full-paid and non-assessable." if the corporation sells its stock to the first stockholders, this means that money must be paid for it to the full par value, dollar for dollar. this is usually not easy. an especial difficulty would then present itself that the promotor would have trouble in getting any pay for his work. (meade, _corporation finance_, _passim_; sullivan, _american corporations_, _passim_.) if, however, the stocks are paid for in _goods and services_, the courts are much less exacting in looking to see if full value has been received. barring obvious fraud, the courts will usually count the stock full paid and non-assessable even though the value of the goods and services received is not very great. the first sale of the stocks of a new corporation, therefore (if it is important enough to wish to have a public market for its stocks), is a _barter_ transaction, as a rule. [ ] _purchasing power of money_, p. . [ ] _ibid._, pp. _et seq._ [ ] _infra_, ch. on "passiveness of prices." _weighted_ averages of "person-turnovers" will not save the situation here, if incomes stop entirely, since the persons involved then drop out altogether. moreover, _weighted_ averages would clearly depend on _incomes_, and hence on _prices_, and hence could not depend on _habits_ exclusively, or _causally explain_ prices. [ ] _loc. cit._, pp. - . [ ] _ibid._, p. . italics mine. [ ] _supra_, ch. on "volume of money and volume of credit." _infra_, ch. on "bank assets and bank reserves." [ ] _cf._ kinley, _money_, pp. and - , for the discussion of various moveable margins of this sort. [ ] van hise, _concentration and control_, p. . the tendency to accumulate hoards when money is plentiful is notoriously strong in countries like india. [ ] _loc. cit._, pp. - . [ ] _ibid._, p. . [ ] _cf._ davenport's analysis of the causes governing volume of trade, _economics of enterprise_, p. . [ ] _loc. cit._, p. . [ ] perhaps not quite correct, since he does recognize differences in degree as between different places, though, perhaps properly, from the standpoint of his normal theory, saying nothing about differences in degree as between different times in the same place. [ ] _cf._ also p. , _loc. cit._, where this is placed as one of three main causes of the historical rise in prices. [ ] that the overwhelming bulk of trade is in the cities will appear in our chapter, _infra_, on "volume of money and volume of trades." [ ] on the average, in the united states, the banks have less money than the people have. _vide_ mitchell, _business cycles_, pp. and . [ ] based on arbitrary assumptions as to variability. _cf._ his p. . _cf._ our chapter, _infra_, on "statistics of the quantity theory." [ ] other passages might be cited to show that fisher thinks that t and the v's are fundamentally governed by different causes. for example, he says "an increased trade in the southern states, where the velocity of circulation of money is presumably slow, would tend to lower the average velocity in the united states, simply by giving more weight to the velocity in the slower portions of the country." _loc. cit._, p. . [ ] _cf._, _infra_, our chapter on "statistical demonstrations of the quantity theory." [ ] _common sense of political economy_, p. . [ ] _principles_, i, . [ ] _loc. cit._, pp. , - . [ ] _ibid._, p. . _cf._ our chapter, _supra_, on "volume of money and volume of credit," where taussig's view as to the relation of money and bank-credit is analyzed. [ ] _loc. cit._ [ ] virtually the same expression is to be found in barbour, david, _the standard of value_, london, , p. . barbour denies vigorously that more money can increase business, since it cannot increase the number of laborers, or of machines, or the amount of food, etc. the doctrine that volume of trade is fixed by ( ) volume of products, and ( ) degree of specialization of production, and hence is independent of volume of money, appears in davenport, _econ. of enterprise_, - . [ ] in this view, fisher typifies the general position of the quantity theory, and, indeed, in part even of those who do not agree with the quantity theory, but who, with the quantity theorists, view the problems of money and banking as matters of static theory. high or low prices, once the transition is made, exhaust the effects of increasing or decreasing the money supply. during the period of transition, certain readjustments in relations between creditors and debtors arise, which lead to either temporary prosperity or temporary distress, but after the transition, it is a matter of indifference whether or not money is abundant. though the view is, logically, an essential part of quantity theory reasoning, we find much of it vigorously maintained by laughlin, _principles of money_, ch. on "amount of money needed by a country." laughlin and fisher would seem to be at one in maintaining that the quantity of money in a country is a matter of indifference, and from the views of both would follow a condemnation of the idea that any long run consequences for volume of trade, efficiency of production, etc., could follow from increasing or decreasing the volume of money. it may be just as well here to indicate the conviction of the present writer that the relation between the quantity theory and the bimetallic movement is historical rather than logical. indeed, in laying the stress they did on the importance of an inadequate stock of money in accounting for the depression of the latter part of the th century, the bimetallists were out of harmony with the quantity theory. [ ] p. . [ ] pp. - , vol. i. [ ] _loc. cit._, p. . _cf._ our chapter on "barter." [ ] the fact that prices are often high in gold mining regions, as compared with prices in the general world markets, has been taken by many writers as proof of the quantity theory. _cf._ kemmerer, _money and credit instruments_, pp. - , ; cairnes, j. e., _essays in political economy_, particularly the discussion of the australian episode. it seems to me that this is particularly inconclusive. high prices characterize remote mining regions of all kinds, whether gold, silver, copper, diamonds, tin or what not be the quest. prices are not lower in the tin and copper region in the northern part of the seward peninsula in alaska than they are in the gold region about nome in the southern part of that peninsula. they are high in both places, not because of the abundance of gold or of money, but because of the great value of goods, which have to be brought with great trouble and expense from the united states. they are higher in the region of the saw tooth mountains, in the centre of this peninsula, where hydro-electric power for the use of the gold miners about nome, and for the copper and tin mines further north, is being developed, than they are at nome itself, on the coast, where the gold is being mined. they were high in australia because the discovery of gold led everybody to abandon everything but gold mining, and to bring in virtually everything from a distance. wooden beams were imported to australia from sweden! (pierson, n. g., _principles of economics_, i, p. .) one would expect prices in gold money to be higher in a silver or copper mining region, which is prospering, than in a gold mining region, equally remote, where a great deal of gold is being mined, but at a cost too great to make the region prosperous. [ ] _loc. cit._, p. . [ ] _meaning of money_, p. . [ ] price's address before western econ. asso'n, nov. , ; holt's letter; dec. . [ ] _loc. cit._, p. . [ ] see our discussion of "money rates" and "interest rates," _supra_, in the chapter on "capitalization," and _infra_, in the chapters on "the functions of money," and on "credit." [ ] _infra_, chapter on "functions of money," and _supra_, chapters on "capitalization" and "dodo-bones." [ ] _cf._ our chapters on "supply and demand," and "the origin of money." [ ] new york city can always use idle funds, "at a price." [ ] kemmerer, as well as fisher, allows physical production and consumption to dominate his "index" of trade variation. _loc. cit._, pp. - ; fisher, _loc. cit._, p. . _cf._ our discussion of their statistics, _infra_. [ ] this confusion of volume of trade and volume of production is a companion of the confusion discussed on p. , _infra_, of quantity of money with volume of money-_income_. the two confusions, found in virtually all expositions of the quantity theory, give it most of its plausibility. [ ] _loc. cit._, ch. , and appendix to ch. . [ ] _supra_, ch. on "equation of exchange." [ ] in a letter to the writer, professor fisher states that the figures for the physical receipts at the cities, which dominate his index for t, have not been available for recent years, and that since they were discontinued, he has relied chiefly on the indirect calculation of t _via_ the other factors in the equation. these figures were discontinued in . in the _american economic review_ for june, (p. , n.) professor fisher states that the indirect calculation of t has always had more weight in his figures than the direct calculation. this would serve in some degree to lessen the errors of his index of variation. the extent to which he has allowed his t as directly calculated on the basis of the index to be modified by the indirect calculation, is indicated on p. of the _purchasing power of money_, as follows: "the alterations in t, as shown in figure , though still greater than the preceding, are nevertheless so small and uniform as to preserve an almost perfect parallelism between the original and the altered curve. the differences rarely exceed %." even an indirect calculation of t, however, would not avoid the criticisms here urged, since the other factors, mv, m´v´, and p are all, as we shall see in the chapter on "statistical demonstrations of the quantity theory," calculated by methods which give very excessive weight to trade outside new york city and to non-speculative transactions. [ ] _loc. cit._, p. . [ ] _the use of credit instruments in payments_, senate document no. , st congress, nd session. [ ] this brief account will be amplified for critical discussion in the statistical chapter below. fisher in fact calculated mv and m´v´ separately. the account above given is strictly accurate only for that part of t, billions, which is carried on by means of checks. the calculation of mv, however, is also based on kinley's figures. my account here is adequate for the question at issue, which is, not as to the absolute magnitude of trade, but rather, as to the _proportions_ of speculation and other elements in trade. [ ] the substance of the argument here presented first appeared in articles in the _annalist_, to which i am indebted for permission to use it here. see the numbers of feb. , march , and march , . professor fisher's replies, directed wholly against the charge of double counting, appeared in the _annalist_ of feb. and march , . professor fisher does not question my contention that speculation makes up the overwhelming bulk of trade, in these replies. he rather seeks to meet the charge of overcounting by holding that bank-transactions do not fully count speculation! this he thinks particularly true of stock exchange transactions. _cf._ his article of feb. , . [ ] the census bureau figures have been subject to a good deal of criticism, and i therefore refrain from trying to draw precise conclusions from them. [ ] the figures showing the number of banks reporting from each state, together with the number of reports rejected, will be found on pp. - of his monograph. the figures above are combinations of figures from his various tables. these tables are so carefully indexed in dean kinley's monograph that detailed page references are unnecessary here. [ ] _cf._ our discussion of this topic in the statistical chapter, _infra_. [ ] _loc. cit._, pp. - . [ ] _discussions in economics and statistics_, i, . quoted by kinley, _loc. cit._, . [ ] the coefficient of correlation has been developed by the biologists, chiefly karl pearson, but has been applied to problems in many fields, especially economics, sociology, psychology, and education. a good source is yule's _introduction to the theory of statistics_. professor h. l. moore has made extensive use of the method in his _laws of wages_, and his _economic cycles_. connected with the coefficient of correlation, usually, is a figure for "probable error," which depends, primarily, on the square root of the number of observations. when the probable error is low, and the coefficient of correlation high (as . ), it is commonly supposed that a very high degree of causal connection is established. i shall not go into detail in discussion of the method. my personal judgment is that it is overrated, that "spurious" correlations, leading to quite erroneous conclusions, have frequently resulted from it, and that the labor involved in calculating coefficients of correlation is frequently too great for the results obtained. i should never be disposed to accept conclusions based on a "correlation coefficient" unless there were other converging evidence to support it. in effect we have, in the coefficient of correlation, nothing more than a refinement of the method of comparing two curves on a graph. the curves tell the story, in a general way, whereas the coefficient of correlation sums up all the comcomitant variations (and disagreements) in one figure. the eye does not readily compare the degree of relation between two curves with the degree of relation between two others. when it is desired to know which, of several relationships, is closest, the graphic method, or the method of comparing series of figures, burdens the attention. the coefficient of correlation condenses the information to such a degree as to make comparison easy. it is, then, merely a refinement of familiar statistical methods. used wisely, guided by sound theory, it aids in presenting facts. it enables us to state quantitatively things we already know qualitatively. but there is no magic in it! as i have mentioned both mr. silberling and professor moore in this connection, it is proper to say that both of them are fully alive to the dangers and limitations of the method, and that professor moore emphasises strongly the need for sound _a priori_ testing of hypotheses before submitting them to the test of correlation. one danger, that of getting a high correlation merely because both of the variables compared are _growing rapidly_, has been avoided by mr. silberling by the use of successive _percentage_ deviations, instead of absolute figures. for reasons explained by mr. silberling in a footnote, he uses, instead of the "probable error," a statement of the number of observations. thus, "r = . ( )" means that the coefficient of correlation is . , and that there are observations for each of the two variables compared. [ ] they get into clearings, however, _two_ days after. [ ] professor kemmerer, also. see his index of variation of trade, _op. cit._, pp. - . [ ] it is unfortunate that weekly figures from railways do not exist in such number, or for roads of sufficient importance, to justify correlations of the weekly figures with clearings. [ ] professor w. m. persons informs me that mr. silberling's results are in accord with calculations which he has made. _vide_ his article in the _am. econ. rev._ of dec. . [ ] _the wealth and income of the people of the united states_, new york, . [ ] see our chapter, "statistical demonstrations of the quantity theory." [ ] _loc. cit._, pp. - . [ ] _jour. of polit. econ._, vol. v, p. . [ ] even this is too high, for , on the basis of our estimate for net income in , in the appendix to this chapter. [ ] the extent of speculation in wholesale trade is discussed in this chapter, _infra_. "double counting" is discussed in the chapter on "statistical demonstrations of the quantity theory." [ ] _the use of credit instruments_, p. . [ ] the figures for rent and wages are from w. i. king, _op. cit._ the other figures are from the _statistical abstract of the united states_, unless otherwise stated. king's estimates are for . the other figures are for . compare this list with my discussion in the _annalist_, march , , p. , where i made computations purposely much too large. in that computation i clearly greatly exaggerated salaries and professional incomes, and rent as well as retail and wholesale trade. my figure there included the rent of houses as well as the rent of land. king's figure is only for land rent. however, in view of the fact that a high percentage of real estate is used by the owner, with the result that no rent-payments are required, i think king's figure high enough for the whole item. [ ] professor fisher has estimated total real estate exchanges in the country at less than % of the total billions (_op. cit._, p. ), and a colleague of the harvard business school has given me an estimate of $ , , , for total advertising in the united states. neither of these items is properly counted part of the "static" trade that would occur were things in "normal equilibrium." if, however, we counted them, we should add only %, say, of the total. when it is seen how insignificant, in comparison with the billions indicated by deposits, the figures for total manufactures, total farm products, and total wages, are, there really is little need to argue the case. it is impossible to find, in the "ordinary trade" we have not mentioned, items whose total will equal the least of these three. moreover, we have allowed for a multitude of these items in permitting the figure for retail trade to be as high as it is, and have left large leeway in making no deduction for the speculation in wholesale trade, and in counting farm products in full. interest and dividends i have not counted. they are not "trade." when we have counted stock sales, we have already counted the exchanges in which dividends were sold. the man who buys the stocks has already bought the dividends. to count the dividends in addition would be a case of that double counting of capital and income against which professor fisher has warned us in his _nature of capital and income_. rents and wages represent payment for current services, and are properly items of trade. interest and dividends are one-sided money payments, completing transactions for which money has already passed, and in which a man is merely getting a delivery of something he has already bought. in general, loans and repayments are not properly counted as part of ordinary, or physical trade. if, however, we counted total corporate dividends and interest we should get only $ , , , (king's estimate, _loc. cit._, p. ). this is a little over %. what else is there? in his article of march , , in the _annalist_, professor fisher failed to meet my suggestion that a bill of particulars was called for! [ ] see the table of shares and approximate values in pratt's _work of wall street_, ed., p. . this table covers the years, - . [ ] boston _transcript_, "tape record of sales incomplete," may , , pt. i, p. . the _transcript_ quotes as authority the new york _commercial_. following the extraordinary market of sept. , , when the ticker recorded , , shares sold on the new york stock exchange, the newspapers estimated that missed sales, odd lots, and unrecorded sales on stop loss orders, would bring the total above , , shares. there was an unusual number of stop orders caught that day. there will be very few other sales of shares missed by the ticker, except in times of extraordinary pressure. see _boston herald_, sept. , , p. . [ ] hollander, j. h., _bank loans and stock exchange speculation_, senate document , st congress, nd session, p. . [ ] pratt, _work of wall street_, ed., p. . [ ] _annalist_, dec. , , p. --"selling phantom grain." [ ] my information regarding the coffee exchange in new york comes from the treasurer of the exchange, mr. jas. h. taylor, through the courtesy of mr. w. h. aborn, of aborn and cushman, new york. [ ] report of the hughes commission, in appendix to pratt's _work of wall street_, rev. ed., p. . this report gives information regarding all the organized exchanges in new york. [ ] l. conant, jr., "the united states cotton futures act," _american economic review_, march, , p. . [ ] hughes commission, _loc. cit._, p. . [ ] taussig, _principles of economics_, i, p. ; kinley, _report of the comptroller_ for , p. . [ ] this is probably more extensive in london than in the united states. [ ] _loc. cit._, p. . [ ] _loc. cit._, pp. - . the very title, "_growth_ of business," suggests the fallacy to which we refer in the text, namely, that we have a steady upward movement, with little variation. this is largely true of production and consumption. it is in no sense true of "trade," as distinguished from production. [ ] kemmerer relied on the investigation of , whereas fisher used more the figures of . kemmerer does not, in general, assign an absolute magnitude for "trade," but for he gives a figure. _loc. cit._, p. . _d._ [ ] _loc. cit._, p. , _d._ [ ] a recent discussion of these problems is to be found in shaw, a. w., _some problems in market distribution_, harvard univ. press, . [ ] _op. cit._, pp. - . [ ] london, paris, and new york all do a great deal of manufacturing, particularly of finer things, whose value is high, and which require a high proportion of labor, as compared with machinery. _cf._ our discussion of the london "money market," _infra_, in part iii. [ ] _ibid._, p. . [ ] _cf._ jenks, _the trust problem_, rev. ed., p. . the doctrine that these costs are net social loss is challenged by the present writer in an article, "competition _vs._ monopoly," in the new york _independent_, of oct., . [ ] "royal" has been estimated at $ , , ; "spearmint" at $ , , . mr. guy c. hubbard, of the _dry goods economist_, new york, has given the writer some exceedingly interesting data regarding the value, as bankable collateral, of various trade-marks and firm names. [ ] _cf._ our discussion of "the reconciliation of statics and dynamics," _infra._ [ ] significant in this connection, is the contention of recent students of american agriculture, that the great need is better organization and credit, facilities for _marketing_. [ ] _loc. cit._, p. . though fisher does not conclude that banking is bad, he does conclude that gold mining is a parasitic and socially injurious industry, like the making of burglars' "jimmies." see his _elementary principles of economics_, n. y., , pp. - . [ ] fisher does admit that the _character_ of the banking system, and of the money system, will affect the volume of trade. "there have been times in the history of the world when money was in so uncertain a state that people hesitated to make many contracts because of the lack of knowledge of what would be required of them when the contract should be fulfilled. in the same way, when people cannot depend on the good faith or stability of banks, they will hesitate to use deposits and checks" ( ). but there is nowhere an admission that the _amount_ of bank-credit has any influence on the volume of trade, and there are repeated assertions, as already instanced in the text, that the volume of trade is quite independent of the volume of money and bank-credit. [ ] part iv of this book gives a detailed analysis to the problems involved in these contrasts. [ ] this thesis was set forth by the present writer at the meeting of the american economic association. see _papers and proceedings_, supplement to march, , _amer. econ. rev._, pp. - . [ ] _cf._ j. b. clark, _distribution of wealth_, _passim_, and j. schumpeter, _theorie der wirtschaftlichen entwicklung_, pp. - . see also the present writer's "schumpeter's dynamic economics," _pol. sci. quart._, dec, , and a. s. johnson, in _quart. jour. of econ._, may, . [ ] _principles_, bk. iii, ch. xviii, par. . [ ] _theorie der wirtschaftlichen entwicklung_, p. . since the foregoing was written, professor w. c. mitchell has presented an admirable historical paper on "the rôle of money in economic theory," in which he has multiplied instances, in the history of the science, of this contempt for money, or abstraction from money, in economic theory. he finds that marshall, and some other later writers, have given much fuller recognition to the rôle of money, which he conceives of primarily as an institution which has rationalized economic behavior, by forcing upon the individual bookkeeping habits of thought. this still leaves it legitimate to abstract from money, however, for "pure theory." highly important as is the "measure of values" function, it does not explain the main work which money, as money, actually _does_ in economic life, nor need it be a source of value for money. _cf._, _infra_, our chapter on "the functions of money." professor mitchell's paper will be found in "papers and proceedings," supplement to the march, , number of the _am. econ. rev._ [ ] the materials in this appendix are taken from an article published in the _annalist_ of jan. , , pp. , - , and the new york _times_ annual financial review of dec. , , and are reprinted by the courtesy of the new york times company. [ ] _vide annalist_, feb. , , pp. - , and feb. , , p. . [ ] _wealth and income of the people of the united states_, p. . [ ] the justification of this procedure is argued more fully in my article in the _annalist_ of feb. , , above referred to. [ ] the figures for railway gross receipts are taken from the _commercial and financial chronicle_, rather than from government reports, in order to get figures for calendar rather than fiscal years, and in order to get the latest possible figures. as the absolute figures are not strictly comparable throughout, the method employed has been to calculate _percentage_ gains or losses for the _same roads_ for successive years. this would lead to a cumulative error, if large new roads had been built during the period, and had retained their independence. in point of fact, however, the curves for the absolute figures and for the percentage changes run pretty closely parallel down to , at which time a large number of small roads, not previously counted, are brought into the figures. as the number of roads reported varies, the percentage changes on the same roads give us the more accurate measure of year by year variation. it is, at the date of writing (december, ), the only possible method for , since the _chronicle_ figures which come to the end of november are based on only roads, with a mileage of , out of over , miles usually reported. for these roads, a gain of . %, for the first eleven months of over the same months in , is reported, and our figures for rest on the assumption that the gain for the whole year over is . %. (the greatest gains are for the earlier months, as the end of was a period of great activity.) much fuller figures supplied me by mr. osmund phillips, of the _new york times_, for the first _ten_ months of and serve to justify this estimate for the gain of over . for the _chronicle_ data, see vol. , p. , vol. , p. , and _passim_. the index of prices chosen is dun's. (see especially _dun's review_ of may , , jan. , , and later months, and the discussion of dun's index number in the _bulletin of the united states bureau of labor statistics_, whole number , july, , pp. _et seq._) dun's index number is chosen partly because it is complete for , and partly because it is weighted in accordance with the consumption of different classes of goods, and so particularly suited to this inquiry. i venture to express strong preference for rationally weighted index numbers, and for the use of different index numbers for different purposes. (_vide_ the discussion of index numbers in ch. .) our price index for each year is an average of the twelve monthly figures given by dun from to . for the years - , our price index is an average of the figures for january and july. this average is lower, in most years, than the average for the whole year, and may well be lower than the average for these years, but no attempt has been made to rectify this possible source of error. the index is recalculated from dun's figures (where it is not a percentage, but a sum of prices), and made a true percentage index, with a base in . the figures for exports and imports are for _calendar_ years. they were obtained, for the years - , from _statistics of the united states, - _ (national monetary commission report), and, for the years since from the _commercial and financial chronicle_. for , november and december are estimated. [ ] their indicia of variation for "trade," though failing to meet the problems for which they were designed, as shown in chs. and , are good indicia of variation for physical production and consumption. [ ] that this should have been seriously denied during the recent presidential campaign, on the basis of the estimate that foreign trade is minute as compared with domestic trade, gives special point to the present discussion. [ ] king's figures, for which he estimates a margin of error of % are used for these years. (_loc. cit._, p. .) the export and import figures used are for fiscal years. [ ] probably the apparent moderate increase in imports is due wholly to higher prices. the actual physical volume has possibly been reduced, as compared with the period before the war. [ ] i am indebted to several colleagues for advice and criticism in connection with these tables, particularly professors taussig and w. m. persons. mr. n. j. silberling has been particularly helpful, aiding in the choice of the statistical sources, suggesting methods of handling and interpreting them, and making virtually all the computations in the tables. [ ] retail prices of exports and imports are obtained by adding % to the wholesale figures reported, on the assumption that wholesale prices are two-thirds of retail prices. the percentages in the final column are obtained by dividing the figures for foreign trade by the figures for domestic trade. the percentage would reach when foreign trade becomes equal to domestic trade. [ ] the figures in column are obtained for any year, say , by taking the index in column for , the index in column for , and the absolute figure in column for , and solving by the "rule of three." [ ] the notion of interdependence need not involve circular reasoning, if the facts really justify it. the whole cosmos is, doubtless, interdependent. often certain systems within the cosmos manifest enough _in_dependence of the rest of the universe to justify us, for some purposes, in thinking only of _inter_relations within the systems. the important thing is to make the circle in theory as big as the circle in fact. _cf. social value_, p. , n. [ ] in chapter xvi. [ ] _cf._ our chapter, _infra_, on "the quantity theory and international gold movements." [ ] italics mine. [ ] _loc. cit._, p. . [ ] the resemblance of the view here maintained to that of professor laughlin is at many points close. i am indebted to his _principles of money_ for many suggestions. [ ] _loc. cit._, p. , n. the doctrine is reiterated on p. . [ ] this is strikingly true in the stock market--the place where more trade takes place than in any other market. see the figures in the preceding chapter with reference to stock transactions, and the chapter on "bank assets and bank reserves." [ ] for a history of this debate, with bibliography, see laughlin's _principles of money_, ch. , on the "history and literature of the quantity theory," esp. pp. and - . laughlin shows the connection of the currency principle and the quantity theory. [ ] it may be that in the brief discussion of elastic bank-notes on p. (_loc. cit._), fisher means to given an explanation of the theory of elasticity from a quantity theory standpoint. the statement there is that money not only tends to flow away from _places_ where prices are high, but also from _times_ when money is high. "if the price-level is high in january as compared with the rest of the year, bank-notes will not tend to be issued in large quantities then. on the contrary, people will seek to avoid paying money at high prices and wait till prices are lower. when that time comes they may need more currency; bank-notes and deposits may then expand to meet the excessive demand for loans which may ensue. thus currency expands when prices are low and contracts when prices are high, and such expansions and contractions tend to lower the high prices and to raise the low prices, thus working toward mutual equality." if this be the quantity theory account of elasticity--and it would seem to be about the only thing the quantity theory could say--it is about as far from giving an account of the real facts as any theory could be! something of this sort is suggested, perhaps, by the behavior of canadian bank-notes, which do expand in the fall, when prices of wheat are lowest, and contract in january, when wheat prices are higher. this grows, however, out of the peculiarities of an agricultural country, and does not at all illustrate the general doctrine maintained. first, wheat prices in the fall are low because wheat is most abundant then. wheat prices in january, under the influence of speculation, commonly differ from wheat prices in the fall by an amount about equal to the elevator charges, rattage, insurance, interest, and other carrying charges involved. second, wheat prices are only one element in the general price-level. low wheat does not prove that the level is necessarily low. a good wheat crop may mean increases in general prices, and often does. third, and more important, the real reason for an expansion in canadian notes at such a time is that the wheat _has to be moved_. the farmers do not want to carry it; the speculators are ready to carry it; and it must be sold. expanding _trade_, at the season, is the cause of expanding bank-notes. the influence of the _price_ of wheat is exactly the reverse of that which fisher assigns. if the price of wheat is low in the crop-moving season, _less_ notes will be issued than if the price is high. in other words, the greater the increase in pt, not p or t alone, the greater will be the expansion of bank-notes. decrease either p or t, and less notes will be issued. in general, the phenomenon of elastic bank-credit is the phenomenon of an expanding bank-note or deposit issue accompanied by rising prices and volume of trade, and a decrease when trade and prices decrease. this is all commonplace, but i feel it best to refer to familiar sources to show how old and well recognized my statement of the case is. the following is from mill's _principles of economics_, bk. iii, ch. , par. : "not only has this fixed idea of the currency as the prime agent in the fluctuations of price made them shut their eyes to the multitude of circumstances which, by influencing the expectations of supply, are the true causes of almost all speculations and of almost all fluctuations of price; but in order to bring about the chronological agreement required by their theory, between the variations of bank issues and those of prices, they have played such fantastic tricks with facts and dates as would be thought incredible, if an eminent practical authority had not taken the trouble of meeting them, on the ground of mere history, with an elaborate exposure. i refer, as all conversant with the subject must be aware, to mr. tooke's _history of prices_. the result of mr. tooke's investigations was thus stated by himself, in his examination before the commons committee on the bank charter question in ; and the evidences of it stand recorded in his book: 'in point of fact, and historically, as far as my researches have gone, in every signal instance of a rise or fall of prices, the rise or fall has preceded, and therefore could not be the effect of, an enlargement or contraction of the bank circulation.'" i see nothing in fisher's discussion of credit to differentiate it from the position of the old currency school. and the reason is a very simple one: fisher has followed the quantity theory to its logical conclusions! [ ] see our chapter on the "volume of money and the volume of credit." [ ] how close the relation between loans and deposits is may be seen from professor mitchell's chart, _business cycles_, p. . the same chart exhibits the variations in the reserve percentage, which is very much greater. the new york clearing house banks, which we have seen (_supra_, "volume of money and volume of credit") have a spread of from . % to . % in the yearly average of percentage of reserves to deposits--a spread of over %--show a variation in yearly average for the percentage of loans to deposits of only . %--the range being from % to %. _ibid._, pp. and . for a partially different series of years, see the chart of j. p. norton, _statistical studies in the new york money market_, facing p. . [ ] neither deposits nor loans vary _proportionately_ with trade. very active trade may merely increase the activity of loans and deposits, causing both to be shifted more rapidly--larger outgo, larger income, loans more frequently contracted and paid off, larger amounts "deposited" on a given day, but balances, both of loans and deposits, at the end of the day not increased proportionately with the activity. this is strikingly illustrated in the business of the stockbroker. [ ] _supra_, p. . [ ] italics mine. [ ] "miscellaneous articles on german banking," in _report of nat. mon. commission_, p. . art. by max wittner and siegfried wolff. [ ] the figures are not easily compared, as the figures for giro-_transfers_ do not indicate the volume of giro-_accounts_, which is doubtless much smaller. i know no estimates for the turnover either of notes or of bills of exchange. to determine what _proportion_ of business is done by each would, thus, not be easy. the volume of bills of exchange for the year is three times as great, for , as the figures for note issue. the giro-system, as is well known, is relatively unimportant as compared with notes. but i do not undertake to assign figures showing proportions of business done. [ ] inland bills of exchanges in connection with the grain trade are still very important, especially at chicago and minneapolis. the writer has met frequent reference to cotton bills at st. louis. wool bills are frequent in boston. [ ] _vide_ my criticism of his statistical fallacy in this connection, in the _annalist_ of feb. , . he rules out foreign trade from his "equation of exchange" by the device of assuming that imports and exports cancel one another. this, however, to the extent that it is true, makes the bill of exchange more, rather than less, important as a substitute for money and deposits. fisher, _loc. cit._, pp. , and - . see appendix to chapter xiii of the present book. [ ] _vide_ ch. for a more precise statement of this part of quantity theory doctrine. [ ] _purchasing power of money_, pp. - . [ ] _ibid._, p. . [ ] _ibid._, p. . [ ] _ibid._, p. . [ ] _ibid._, p. . italics mine. [ ] _ibid._, pp. - . [ ] i call attention, in passing, to fisher's confusion, in this sentence, of "commodities" with "trade." this occurs frequently in his argument. _cf._ pp. - , _supra_. [ ] the capitalization theory is briefly outlined by böhm-bawerk, in the critical and historical volume of his _kapital und kapitalzins_ (english title of the volume, _capital and interest_), in his criticisms of the theories of henry george and turgot. it has subsequently been elaborated, and much improved, by fetter, in his _principles of economics_, and, more recently, has been restated, with mathematical formulæ, by fisher, in his _rate of interest_. a good brief statement will be found in seligman, _principles of economics_, ch. on "the capitalization of value." extensive use has been made of it by veblen. more recently, it has been elaborated in the controversy over the theory of interest participated in by seager, fisher, brown and fetter, in the _american economic review_, - - , and the _quarterly journal of economics_, . [ ] italics mine. [ ] the criticisms i should make of the present formulations of the time-preference theory of interest, as presented by böhm-bawerk, fetter and fisher, rest on the individualistic method of approach, and are at many points analogous to the criticisms i have made of the utility theory of value. these criticisms need not affect the points at issue here. on the particular point involved, i agree with fisher that the productivity theory gives a wrong answer. [ ] _e. g._, fisher, _purchasing power of money_, p. . [ ] this confusion is a companion of the confusion between volume of _goods in existence_, or volume of _production_, and volume of goods _exchanged_. the errors growing out of this confusion have been dealt with in ch. , especially pp. - . virtually all quantity theorists make both these mistakes. [ ] the fundamental causation is psychological, and calls for a theory of _value_, as distinguished from exchange-relations. [ ] _supra_, chapter on "velocity of circulation." [ ] this distinction is clearly made and developed by von wieser, in the two articles referred to in our chapter on "marginal utility." it is used by him in criticisms of the quantity theory. "der geldwert und seine geschichtlichen veränderungen," _zeitsch. für volkswirtschaft, sozialpolitik und verwaltung_, xiii, ; discussions in _schriften des vereins für sozialpolitik_, , no. . a similar distinction runs through j. a. hobson's _gold, prices and wages_, london, . the present writer had worked out the line of argument here presented before reading either of these discussions. [ ] i have chosen maid-servants, to avoid complications of costs of production in the reasoning that might come if other labor, engaged in producing goods for the market, were selected. to tighten the argument a tittle further, i assume that the masters receive their monthly incomes on the first day of the month; that they pay the maids on the same day; that the rest of the expenditures, both of masters and maids, are strung out through the rest of the month. [ ] _op. cit._, p. . [ ] a possible alternative interpretation of professor fisher's conception is suggested in two or three sentences in the passage of the _purchasing power of money_ i have been discussing. on p. he makes a distinction between individual prices _relatively to each other_ and the price-level. but the distinction which he _discusses_ in the passage as a whole is between the price-level and individual prices _not_ considered in relation to each other. comparison, moreover, with his original enunciation of the notion (papers and discussions, d annual meeting of the american economic association, pp. - ), would serve to justify the interpretation i give, as nothing at all is said there about super-ratios between individual prices. but the internal evidence is even more convincing. demand and supply, and cost of production, find their problem, not in the relation between the money price of aspirin and the money price of caviar, but in the money-price of aspirin or the money-price of caviar considered separately. professor fisher thus conceives supply and demand in his _elementary principles_ (p. ). this interpretation is especially necessary, since professor fisher is joining issue with writers who surely use demand and supply and cost of production as means of explaining money-prices, and not super-ratios between them. further, the price-level is _not_, on professor fisher's own scheme, a factor in determining the relations of the prices of sugar and of wheat _inter se_. with a given price-level, wheat might be worth a dollar and sugar nine cents, and the ratio of their money equivalents would be : ; with a price-level twice as high, wheat would be worth two dollars, and sugar eighteen cents, but the ratio between their money equivalents would be still : . the whole discussion is quite meaningless unless the contrast be between concrete money-prices of particular goods, and their average. on either interpretation, moreover, my criticism of the exalting of the average into an entity would stand. [ ] _purchasing power of money_, pp. - . [ ] i am glad to find myself in agreement with professors laughlin and kemmerer in holding that this notion of professor fisher's is untenable. "the distinction professor fisher draws between the prices of individual commodities and the general price-level appears to me, as to professor laughlin, to be untenable. it is, moreover, contradictory to his general philosophy of money. his index numbers recognize no general price-level distinct from individual prices.... professor fisher's illustration of the ocean would be more apposite if he called it a lake whose level was continually changing, and if he considered each particular wave as extending to the bottom." kemmerer, _papers and discussions_, d annual meeting of the american economic association, p. . at the same time, i agree with professor fisher that there must be something more fundamental than the particular prices to make the scheme work. this something i find in the absolute value of money. [ ] _loc. cit._, p. . [ ] _cf. social value_, chs. and , and "the concept of value further considered," _quart. jour. of econ._, aug., . see also, _supra_, the chs. on "value," "supply and demand," "cost of production," and "capitalization." [ ] this tendency may be more than offset by the increasing significance of money as a "bearer of options" or "store of value" in periods of panic and depression. see, _infra_, the chapter on "the functions of money," and davenport, _economics of enterprise_, pp. - . [ ] "agricultural credit in the united states," _quart. jour. of econ._, aug., , p. , n. [ ] iowa farm lands are exceedingly active, % of the farms being sold annually. the mississippi lands are much less active. i am indebted to dr. pope for information regarding iowa on this point. [ ] the single taxer could at least retort that this need not protect landlords in countries, like england, which lend surplus capital abroad. [ ] _cf._ trosien, _der landwirtschaftliche kredit und seine durchgreifende verbesserung_, p. , cited by j. e. pope, _loc. cit._, p. , n. [ ] this was seen by mill, (_principles_, bk. iii, ch. viii, par. ), and has been especially emphasized by laughlin, _principles of money_, ch. . _cf._ a. c. whitaker's discussion in the _quart. jour. of econ._, feb. . [ ] _supra_, p. , and ch. on "dodo-bones." [ ] comptroller of the currency estimates the state bank-notes in at millions; in , at millions. _report of the comptroller of the currency_, , vol. ii, p. . [ ] w. c. mitchell, _history of the greenbacks_, ch. on "the circulating medium," and _passim_. [ ] see conant, _modern banks of issue_, new york, , p. . an interesting analysis of the course of the gold premium and of prices during the period of the bank restriction in england, and of the controversies relating thereto, will be found in knies, _der credit_ (vol. ii of _geld und credit_), pp. _et seq._ the same period is studied in detail by thos. tooke in his _history of prices_. [ ] _money and monetary problems_, p. , and preceding. [ ] nicholson, _loc. cit._, ff. [ ] _ibid._, ff. [ ] _cf._ laughlin, j. l., _principles of money_, and scott, w. a., _money and banking_. [ ] _cf._ _infra_, our discussion of credit. it is not maintained that credit needs to be based on _physical_ goods, but it is maintained that credit is based on _values_, which are generally not the value of a sum of gold. [ ] i have elaborated this notion in a hypothetical case in the chapter on "dodo-bones," to which i would now refer. see also the analysis of an "ideal credit economy" in the discussion of reserves in the section on credit, in part iii. [ ] _infra_, the discussion of reserves in part iii. [ ] _cf._ the chapter on "the origin of money," _infra_. [ ] see especially _history of the greenbacks_, pp. ff.; - ; - . [ ] various efforts have been made by adherents of the quantity theory to meet the facts developed by mitchell with reference to the greenbacks. thus, it has been suggested that the coming to par of the greenbacks shortly before the resumption of specie payments was an accidental coincidence, due to the fact that the volume of trade in the united states just happened to grow to the right amount to bring the greenbacks to par at that time. no statistical evidence has been offered for this thesis, i believe. it is, indeed, the only logical thing which a quantity theorist could say on the matter, except one alternative, (f. r. clow, _j. p. e._, vol. ii, p. ) namely, that if the greenbacks should exist in such quantity that, under the quantity theory, their value ought to fall below the discounted future value of the gold in which they were to be redeemed, speculators would take them out of circulation, holding them for the interest, and so reduce their quantity that the value would rise to that discounted future value. the first thesis, that based on putative changes in the volume of trade, though highly improbable in fact, is logically possible. the second thesis, however (_purchasing power of money_, p. ) meets serious difficulties. what motive would a speculator have for taking the greenbacks out of circulation, and hoarding them? the answer is, he gets thereby the "interest," as the greenbacks approach the date for redemption in gold. if this were the only way in which he could get this gain, the answer would be good. but there is another way in which he can get it, and something more besides, namely, by _lending out_ his greenbacks. in that case, since the creditor gets the full benefit of an appreciating standard of deferred payments, he would get all the "interest" which he could get by hoarding, and, in addition, he would get contract interest on his loan. of course, if the principle of "appreciation and interest" worked out with perfect smoothness, he would find his contract interest reduced as the other rose, and one might even expect, if the greenbacks were very redundant, that contract interest would disappear. there is no evidence that this did happen, however! and so long as any contract interest existed, we have a thoroughly valid reason why a holder of greenbacks would lend them rather than hoard them. another effort to harmonize the facts with the theory consists in the contention that _anticipated_ future increases in the greenbacks would work in the same way as actual increases. but this is to shift the whole basis of the quantity theory, which rests in the notion of a mechanical and--in the mass--unconscious equilibration of quantity of money and number of exchanges. the quantity of money is not increased until it is increased! _cf._ mill, _principles_, bk. iii, ch. , par. , and jos. f. johnson, _money and currency_, rev. ed., p. . professor fisher has another way to meet the facts of the greenback régime, and that is by holding that they prove his case! i do not think that anyone, however, who examines the figures he offers on p. (_loc. cit._) will be impressed by the degree of concomitance between money and prices which they exhibit, especially after mitchell's careful analysis of changes in detail. at another point, professor fisher maintains (p. ) that the rapid changes in gold premium which came with news from the military operations (_e. g._, the % drop in greenbacks after chickamauga), were due to alterations in velocity of circulation and in volume of trade! as the gold market usually got the news by wire, before the newspapers got it, however, this thesis is not very convincing. [ ] kemmerer, e. w., _money and credit instruments in their relation to general prices_, new york, ; fisher, _purchasing power of money_, new york, ; subsequent yearly continuations of "the equation of exchange" in the _american economic review_. the references here, as throughout, are to the edition of professor fisher's book. [ ] _history of prices._ [ ] to this type would belong professor fisher's figures with reference to the years, - on p. of his _purchasing power of money_. [ ] this relates particularly to fisher's figures. [ ] _loc. cit._, p. . [ ] _ibid._, p. . [ ] _cf._ our chapter, _supra_, on the "equation of exchange." [ ] these are the "finally adjusted" figures. _loc. cit._, . [ ] _ibid._, p. . fisher's estimate for v, as corresponding more closely to kinley's figures for the proportions of money and checks in trade, is to be preferred to kemmerer's. _cf._ our comments on this point, _infra_, in this chapter. even the figures for m´ are not correct, since they do not include deposits growing out of "morning loans," cancelled during the day. _infra_, ch. . [ ] _report of the comptroller_, ; _the use of credit instruments in payments in the united states_, national monetary commission report, washington, . [ ] i am indebted to the _annalist_ for permission to use here materials first published in the _annalist_ in articles by the present writer: "home vs. foreign trade," feb. , ; "tests of home trade volume--a rejoinder," march , ; "home trade volume," march , , p. . to these articles professor fisher replied: "a multi-billion dollar nation," _annalist_ feb. , ; and "over and under counting," _ibid._, march , . [ ] except checks deposited by one bank in another. kinley's figures exclude these in , but not in . [ ] the methods and data employed by professor fisher are described at length in his _purchasing power of money_, ch. xii, and appendix to ch. xii. [ ] m´ is the _average_ of bank deposits, as shown by the balance sheets, for all banks in the country for the year. throughout, the reader must distinguish this from the "deposits" of kinley's figures--amounts "deposited" on march . [ ] it is easier, sometimes, to make an assumption regarding a set of facts than to find out what they are! in this case, some work was involved. old newspapers had to be hunted up for various cities, and letters had to be written, to find out, for various cities, (a) clearings for march , , and (b) the number of banking days in the year . this work was done by mr. n. j. silberling, who got figures from cities which had % of all clearings outside new york. these cities are: chicago, philadelphia, boston, st. louis, pittsburg, san francisco, baltimore, new orleans, atlanta, providence, st. paul, and seattle. the daily average of clearings for these cities in was $ , , ; the actual clearings for march , , was $ , , . the ratio of average daily clearings to actual clearings on march was . : . the increase needed in the figure for deposits outside new york, then, was only . %. mr. silberling, wishing to be conservative in view of the % of outside clearings not investigated, allows outside clearings to be % below normal. on this basis, following professor fisher's method of computation, he multiplies the deposits assigned by professor fisher to new york by . , and the deposits assigned to the country outside by . , getting total deposits for the day of . billions, as against professor fisher's figure of . billions, and a total for the year of billions, as against a total obtained by professor fisher of billions. [ ] to this millions is added all that comes from the erroneous assumption regarding outside clearings, when figures for the whole year are obtained. country deposits, for the year, are thus still further exaggerated by billions! [ ] _the use of credit instruments_, etc., p. . there is abundant evidence in dean kinley's figures that only a decidedly minor part of the amount ( millions) of checks allowed by professor weston for the non-reporting banks could have been outside the larger cities. the amount deposited in a day in a country bank is so small that a great multitude of these banks would be required to show as much as a single new york city institution. thus, ninety banks ( national banks, state banks, private banks, stock savings bank, trust company) in arkansas, report only $ , in checks, an average of $ , per bank. if all the , non-reporting banks were country banks, and if this ratio held, we should have millions more for the day (instead of professor weston's millions), or billions more for the year. this average is based chiefly on state and national banks. the average is too high for the private banks (whose daily average as reported is $ , ), and for the mutual savings banks (whose daily average is $ , ). it is well above the daily average of the stock savings banks, which are, in many states, practically commercial banks ($ , ). in the non-reporting banks there are comparatively few national banks, and about , private banks and savings banks, of these the great majority being private banks. we cannot make up the millions in the country districts. nor can we make up the millions by taking in all the reserve and central reserve cities, exclusive of new york. chicago, in the returns, shows . millions in checks; st. louis, millions; boston, . millions; philadelphia, . millions; the other reserve cities show . millions--a total of millions. if we doubled the returns for these cities, we should still be millions short of the millions added by professor weston to the total! neither in the country districts, nor in the major cities outside new york can we find enough to make up that addition. very much of the amount added for non-reporting banks must be found in new york city itself. [ ] dean kinley's questionnaire asked the banks reporting their deposits for the day to exclude deposits made by other banks. these deposits were not excluded in the investigation. [ ] house committee on "money trust." feb. , . pp. , , . [ ] _cf._ _supra_, and _infra_ our discussion of the volume of trade, and _infra_, our discussion of credit, particularly the analysis of bank-loans. [ ] _vide_ the opinion expressed by an official of a new york trust company, quoted below, on p. . [ ] _cf._ horace white, _money and banking_, th ed., p. . [ ] kirkbride and sterret, _the modern trust co._, new york, , pp. - ; cannon, _clearing houses_, _nat. mon. com. report_, p. ; conant, _principles of money and banking_, ii, p. . [ ] inquiry was also made of professor george e. barnett, who had cited the figures given by the new york supt. of banks at p. of his _state banks and trust companies_. professor barnett writes, in part, as follows: "i made no independent inquiry at the time, and accepted the statement of the superintendent of banks without critical examination of its basis. from what you say, it appears highly probable that he was mistaken in his conclusions. the only question in which i was interested was whether the reserves of the trust companies could be reasonably lower than those of the national banks. i did not care so much about the exact ratio of clearings and only quoted that incidentally." for the purposes which both professor barnett and mr. williams had in view, the exact ratio was unimportant. the higher figures which i have given above would support the thesis in which both were interested, namely, that trust company accounts are less active than bank accounts, and so lower reserves may be safely held by trust companies than by national banks. [ ] fisher, _loc. cit._, p. . [ ] p. . other discussions of this investigation are in the _journal of the american bankers' association_, jan. , p. ; _ibid._, feb. , p. ; _national banker_, march, . [ ] none of the cities covered in the figures given in the _annalist_ were in new york state. kinley's figures show that the percentage of checks received in deposits of march , , in banks outside new york state was %. _loc. cit._, p. . [ ] multiplying the millions of checks deposited outside new york on march , by , the assumed number of banking days, gives . billions. probably, therefore, billions is too small a figure. but we should be slow in modifying a figure based on months' observations because of the figures from one day's observations. [ ] i have greater confidence in this conclusion, since seeing a letter from mr. howard wolfe, who made the investigation of outside clearings and "total transactions" for the american bankers' association, to mr. osmund phillips, editor of the _annalist_. mr. wolfe writes: "i do not believe that the experience of the new york banks would differ from that of other institutions which now supply [these figures]." [ ] my information on this point comes from professor o. m. w. sprague. it is corroborated by an official of the bankers trust company in new york. [ ] _vide_ rodney dean, of the fifth avenue bank, new york, "the problem of collecting transit items," _journal of the american bankers' association_, jan. , p. . boston inaugurated the system in - ; kansas city five years later. since the above was written, i have learned that new york, in recent months, has introduced the new system. this does not affect our argument regarding the figures for . [ ] since the foregoing was written, my attention has been called by mr. osmund phillips, financial editor of the new york _times_, and editor of the _annalist_, to indirect ways in which items on out of town banks sent to new york for collection will affect new york clearings. country correspondent banks to which new york banks send these items for collection, may remit for them in four ways: ( ) by sending cash; ( ) by sending items on out-of-town banks, which the new york bank will send on to some other correspondent for collection; ( ) by draft on the new york bank which has sent the items to be collected; ( ) by draft on some other new york bank. in the last case, new york clearings are affected. the first case is not, quantitatively, important. the second and third cases would seem to be the normal types, assuming correspondent relations between new york banks and country banks to be _reciprocal_, since the new york bank would be disposed, as far as possible, to turn over its collection business to its own depositors among the country banks. mr. phillips says, however, that the fourth case is important. to the extent that this is true, our conclusion that out of town collection items do not affect new york clearings must be modified, and it becomes a matter of importance whether these items are large or small. my information, as stated above, is that chicago exceeds new york city in this. if, however, the kansas city and boston arrangements held in new york, these collection items would be represented _twice_ in new york clearings. the fact that the items do not themselves get into the clearings remains. direct information regarding new york clearings is very desirable. our indirect approach must be considered inconclusive until more detailed figures for new york city are at hand. we need figures covering all types of banks in new york, for a period of, say, a year (to allow for seasonal changes), in which deposits made by one bank in another are separated from other deposits. national banks alone would exaggerate the item of deposits by one bank in another, especially as they are the depositories of the great private banks. [ ] or, in some cases, taking the place of cash dealings between banks and a local clearing house. on the face of it, it is incredible that _balances_ between cities, or _within_ cities, after the country clearing houses have done their work, should be so great as to account for a very great part of new york clearings. these balances between cities other than new york, and balances within country clearing houses, must be a minor fraction of _country_ clearings, and country clearings are little more than half of new york clearings. ordinary commerce, as shown in chapter xiii, cannot give rise to great sums in the aggregate, to say nothing of giving rise to great _balances_. [ ] the whole thing is summed up on p. of the comptroller's _report_ for . [ ] _cf._ kemmerer, _money and credit instruments_, p. . [ ] _annalist_, july , , p. . the editor of the _annalist_ gives me the following information: data for twenty banks, six in new york and fourteen in chicago, philadelphia, boston, and st. louis, for the week, aug. -sept. , , show that clearings are % of "total transactions" in new york, and about % in the other cities. these figures are all for national banks, except for one bank in st. louis. [ ] there is one further generalization developed in connection with mr. wolfe's investigation of the ratio of clearings to "total transactions" which seems to have relevance here, though i am not sure how it should be interpreted. the average ratio, as stated, is about %. this varies, however, for different cities. "the rule seems to be that the larger the proportion of bank deposits to individual deposits, the smaller will be the figure representing this ratio. in cincinnati, for example, it is . % while in los angeles it is . %." (_jour. of american bankers' ass'n_, jan. , p. .) how safely based this generalization is cannot be told from the context, as no further facts are offered. nor is its bearing on the question at issue, as to whether or not new york clearings bear a higher ratio to new york deposits than country clearings do to country deposits, entirely clear. it would seem to indicate that deposits made by outside bankers in the banks of reserve cities make smaller contributions to clearings than individual deposits do, and this would fit in with the fact that checks on outside banks, deposited for collection by one bank in another, do not get into clearings. what further explanation or significance it has i leave to the reader. it is possible that there are a number of important relevant facts missing regarding new york clearings, and that the conclusions here reached may require later revision. [ ] _loc. cit._, p. . [ ] but not as a correct estimate of m´v´ for the equation of exchange! we do not know what part of these checks were used in "trade." _cf._ our discussion of the estimate of t, _infra_. [ ] kemmerer does not do this, but takes total clearings for the country as his index of variation. _loc. cit._, - . his figures for "check circulation" are, thus, more variable than fisher's. in this, kemmerer's results are much to be preferred. [ ] i have taken the figures for clearings from professor fisher's table, _loc. cit._, p. . [ ] _loc. cit._, p. . _cf._ our chapter on "velocity of circulation," _supra_. [ ] _loc. cit._, pp. - . [ ] there is, of course, the further point, to be emphasized in the discussion of t, _infra_, that mv (and hence v), assuming the calculation otherwise correct, is too large, to the extent that it includes tax payments, loans and repayments, dealings between agent and principal, etc. but this criticism does not so clearly apply to mv as it does to m´v´. [ ] _business cycles_, p. . [ ] that volume of trade and volume of physical goods are virtually interchangeable in fisher's thought is strikingly illustrated on p. of the _purchasing power of money_: "a doubling in the quantities of all commodities _sold_, or (_what is almost the same thing_) a doubling of the quantities _consumed_." italics are mine. [ ] this is strictly true only of the part of t which comes from the figure for m´v´, billions. in calculating mv, professor fisher introduces more complexities, into which we shall not enter, as the absolute amount is small--only billions!--and the possible error from this source not great enough to affect a calculation where billions one way or the other is within the "margin of error." [ ] _vide_ _annalist_, feb. , feb. , march , march , and march , , for a discussion of this point by professor fisher and the present writer. [ ] _op. cit._, pp. - . it is interesting to note that kemmerer's argument takes the form of proving, not that bank transactions do not overcount trade, but merely that they do not _undercount_ trade. with this contention i am in hearty agreement! the overcounting is worse in kemmerer's figures for than for fisher's in , since the figures included deposits made by one bank in another, while the figures do not. _cf._ kemmerer, p. , and kinley, in _report of the comptroller_ for and in the monograph, _passim._ [ ] _vide_ the present writer's discussion in the _annalist_, march , , p. . [ ] i am informed by mr. b. f. smith, treasurer of the cambridge trust company, that the practice of having separate dividend accounts is a very widespread one, especially with the larger corporations. [ ] _statistics of railways_, , p. . [ ] professor fisher, in his _annalist_ article of feb. , , quotes dean kinley (_the use of credit instruments_, p. ), as holding that duplications have largely been eliminated from his figures. professor fisher overlooks the fact that dean kinley is here referring, not to money value of trade, but merely to volume of checks. dean kinley merely indicates that by eliminating deposits made by one bank in another, he has avoided having the same check counted in deposits made in two or more banks on the same day. even this is not wholly avoided. (_ibid._, pp. - .) it was extensive in the figures. dean kinley thinks, properly enough, that he has a sufficiently close approximation to the volume of checks, for the reporting banks, but what the checks were drawn for he does not undertake to say. his problem was _payments_, not _trade_. from the angle of volume of trade, he finds duplications even in the retail deposits (_jour. of polit. econ._, vol. , p. ). [ ] _annalist_, march , , p. . [ ] chapter on "volume of money and volume of trade," pp. - . we really did not "find" nearly that much. the figures assigned to retail and wholesale trade rest on figures for retail and wholesale bank "deposits," and are, especially the wholesale figures, much too large. [ ] _annalist_, feb. and march , . [ ] _loc. cit._, p. . [ ] _ibid._, pp. - ; ; . [ ] pratt, _loc. cit._, p. . [ ] _ibid._, p. . [ ] emery, _speculation on the stock and produce exchanges_, pp. ; - . a boston broker expresses the opinion that the magnitude of artificial borrowing to make the clearance sheet misleading is not great, so far as boston is concerned. i have got no estimates for new york. [ ] the banks, of course, are not borrowing stocks. [ ] van antwerp, _the stock exchange from within_, new york, , p. [ ] it recently happened that alaska gold was being "loaned flat" on the boston stock exchange, which was a prelude for a six point advance in the next two or three days, as the bears were driven to cover. [ ] one factor complicates this. are all the hundred share sales recorded? in our chapter on "volume of money and volume of trade," we called attention to a statement to the effect that brokers get together before the market opens, and compare "stop loss" orders, matching these with other orders, with the understanding that they automatically go into effect if the "market" reaches the prices indicated. the statement indicated that this substantially increases sales beyond the recorded totals, as such sales do not get on the ticker. i think, however, that this cannot throw our reckoning out greatly. the great majority of sales are not on "stop loss" orders. none of the sales of "floor traders," who average a third of the total trading (_pujo committee report_, feb. , , p. ), would be on "stop loss" orders. the bulk of the rest is not. moreover, not all stop loss orders, by any means, would be executed in this manner. it is not easy to see how, under the rules and practices of the exchange, many other sales could go unrecorded, except on days of greatest stress. on september , , when over , , shares were sold, the daily paper spoke of sales missed by the ticker, which was swamped with sales to be recorded, as an item of some magnitude. but the ticker is wonderfully efficient. it sometimes gets behind the market by several minutes, but it rarely misses anything, under ordinary conditions. [ ] _ibid._, p. . [ ] this explains the estimates of wall street men that the clearing house reduces checks by two-thirds. for _their purposes_, the saving is almost that much, of the items offered for clearings. _cf._ van antwerp, _the stock exchange from within_, pp. - . [ ] _ibid._, p. . there is one billion difference between pratt's estimate and mine. i incline to the view that mine is correct, the more as he puts his figure, billions, as a safe lower limit. but a billion one way or the other is trifling! [ ] an official of the bankers trust company has secured for me from a broker at the "money post" an estimate of to millions as an average, with millions as a maximum, for . the pujo committee, in its report in , p. , gives a similar estimate. [ ] p. . [ ] _annalist_, aug. , . [ ] n. j. silberling, "the mystery of clearings," _annalist_, aug. , , p. . [ ] there is one further piece of evidence which has been obtained through the courtesy of a new york brokerage house. at the request of the gentleman who has supplied the figures, i have altered them by a constant percentage, to prevent possible identification, but the proportions among them hold as they were given. the figures show the business of the house for the month of march, . the figures show: market value of stocks and bonds bought, , , total deposits made during month, , , average borrowed from banks, , for this house, then, for this month, the deposits were less than the value of securities sold, by . %. the month, however, was unusual. it was a month of reduced activity, following large activity. this is strikingly shown by the figure for the _average_ bank loans for the month--over two-thirds of the _total_ deposits for the month. the house had a large bull _clientèle_, which was holding its stocks, and not selling on a bear market. the turnover was very slow, as wall street goes. it was a time of extraordinarily easy money when banks called few if any loans. the broker, in explanation of his figures, says: "the most of our checks were to other brokers. checks to banks about equaled checks to customers. your assumption that we did not pay off many loans in march is, i think, right." the same broker states in another letter that he thinks that, in general, the bulk of checks to and from brokers are in dealings with banks. in this month, then, with this factor reduced to a minimum, we still have deposits undercounting sales by only . %. the figures do not prove my thesis that brokers' deposits greatly overcount their sales, but they at least show that they do not greatly undercount them. in view of the peculiarities of the month chosen, with transactions between banks and brokers cut to the minimum, they are quite consistent with the contention that normally the brokers' deposits will much exceed their sales. [ ] kemmerer's main figures are merely _indicia_ of variation, rather than absolute magnitudes, for trade. on p. , _d._ (_loc. cit._), however, he indicates that his figures for "total monetary and check circulation" is also a figure for "total business transactions"--and counts % of it as wholesale trade. [ ] _cf._ the discussion of the relation of p and t in the chapter on "the equation of exchange." [ ] _op. cit._, p. . [ ] _ibid._, pp. - . [ ] _loc. cit._, p. . [ ] kemmerer does not accept kinley's estimate of % for checks as compared with money in payments as a "sure minimum" for , but rather counts it as a "fair maximum." (_loc. cit._, p. .) using this as a basis, he gets a monetary circulation for of . billions, and a "velocity of money" (since the monetary stock in circulation in was a little over billion) of . (_loc. cit._, p. .) kinley's fuller investigation in has made it clear that his conclusions understated, rather than overstated, the proportion of checks to money. his "sure minimum" was needlessly low. he concludes in that to % for checks is safe. (_op. cit._, p. .) _cf._ fisher's comments, _loc. cit._, pp. ; _et seq._ fisher's v is about half as great as kemmerer's, and varies to some extent. i think fisher, since his results are closer to kinley's later figures, has made much the better estimate here. [ ] since i have already compressed the contents of a book of pages into chapter i of the present book, it seems undesirable to attempt here a further compression of that chapter. these theses, therefore, do not give the substance of the social value theory. [ ] menger, "geld," _handwörterbuch der staatswissenschaften_; carlile, _evolution of modern money_. [ ] we should make a slight and unimportant qualification as to kemmerer. _cf._ our chapter on "dodo-bones," _supra_. [ ] it seems necessary to point out this essential lack of correlation between value and exchangeability, since mr. horace white, in his _money and banking_ ( th ed., p. ), identifies value and exchangeability: "value is an ideal thing in the same sense that weight is. the former means exchangeability; the latter means force of gravity. a dollar is a definite amount of exchangeability." _cf._ also amasa walker's contention that "exchangeable value" is tautology, equivalent to "exchangeable exchangeability!" _science of wealth_, th ed., p. . _cf._ my article "the concept of value further considered," _quart. jour. of econ._, aug. , pp. _et seq._ [ ] this is stated by schumpeter, so far as land is concerned. _vide quarterly journal of economics_, aug. , p. . it is due menger to point out that he does not make the distinction between value and exchangeability which i have just made. his theory rests in an analysis of the saleability or exchangeability of goods. but menger's conception of value is essentially different from my own. he commonly means by "_wert_" merely subjective value, or marginal utility. he objects to the notion that one good measures the value of another, or that goods, when exchanged, are equivalent in value, on the ground that there must be a surplus in value (subjective value) for each exchanger, or exchange would not take place. he has, as a primary concept, no absolute social value. "_tauschwert_" is for him a relative value, though he is finally driven to constructing what is virtually an absolute value notion, by distinguishing "_äusserer tauschwert_" from "_innerer tauschwert_" in the case of money, the latter being concerned exclusively with the causes affecting prices _from the side_ of money, ignoring changes in prices due to causes affecting goods. (_cf._ art. "geld," in _handwörterbuch der staatswissenschaften_, d ed., pp. - . he does not make this distinction in developing the theory of saleability of goods, however. _cf._ the chapter, _supra_, on "marginal utility and the value of money." it is absolute social value which i am here distinguishing from exchangeability. it is equally true, however, that subjective value and exchangeability have no necessary correlation.) [ ] _cf._ a. s. johnson, "davenport's competitive economics," _quart. jour. of econ._, may, , p. . [ ] the man who wishes to "break" a twenty dollar bill may well have to go through menger's process, getting two tens from one man, breaking one of these into two fives with another, and so on. or he may have to buy something which he does not want to get "change." [ ] ridgeway, _origin of metallic currency_, p. ; carlile, _evolution of modern money_, p. . grain is said to have been used in ancient china as money,--not as a standard of value, but as a medium of exchange. chen huan chang, _economic principles of confucius and his school_, vol. ii, p. . [ ] written in . [ ] the hindu law of inheritance is a factor here. the hindu woman may retain, after the death of her husband, father or brother, the ornaments he has given her during his lifetime. but all of the rest of the family property must go to male heirs, even remote male heirs coming in before the closest female relatives. [ ] _cf._ carlile, _monetary economics_, introductory chapter. the whole question may hinge on terminology, so far as carlile is concerned. it is not clear what he means by "value of gold." [ ] _cf._ conant, _principles of money and banking_, i, ch. , esp. p. . [ ] i do not believe that we have sufficient agreement among the best students of the statistics of the precious metals to justify any statistical conclusions regarding the laws governing the industrial consumption of gold and silver. even the facts as to the proportions of annual production of gold in recent years going to money and to the arts are in dispute. thus, delaunay (_the world's gold_, new york, , p. ), divides the annual output as follows: exportation to the east, and loss, %; coinage, %; industry, %. the industrial employments are divided as follows: jewelry, % (of total annual gold production); watch cases, %; gold leaf, . %; watch chains, . %; plate, . %; various uses, as pens, dentistry, chemical works, etc., . %. delaunay's competence as an authority is attested by various writers, among them w. c. mitchell (_business cycles_, p. ). mitchell, comparing delaunay's estimates with divergent estimates of other authorities, concludes that there is not sufficient evidence to justify definite conclusions. i do not think that anyone who has read the criticisms which touzet has brought together (_emplois industriels des métaux précieux_, paris, , pp. - ) of the methods employed in the investigations by the director of the united states mint in , , , , and , will have large confidence in the exactness of the results reached in those investigations. (see annual reports of the director of the mint for the years in question.) touzet's careful and elaborate study employs the figures of these investigations as the best available, but with substantial misgivings. there are many indeterminate elements in the problem, as shown by both touzet and delaunay, among them, the extent to which coin is melted down for industrial purposes. the director of the mint would assign a much higher proportion of the annual output to coinage than would delaunay. earlier studies, by soetbeer and suess, seem quite out of harmony with these conclusions. (suess, eduard, _the future of silver_, washington, government printing office, , pp. - .) suess thinks that virtually as much gold was going into the arts uses as was being produced, in , and quotes soetbeer (_litteraturnachweis_, p. ) as admitting that such a contention may not be demonstrable, but at the same time holding that it cannot be disproved. in the face of what seems to be a really indeterminate statistical problem, i content myself with the theoretical conclusions in the text. because i cannot find adequate grounds for confidence in the main source from which he has drawn his statistics, i refrain from a criticism of the theory and method underlying professor j. m. clark's ingenious effort to derive statistical laws for the elasticity of the arts demand for gold. (_american economic review_, sept. .) [ ] _cf._ our chapter on "economic value," _supra_, and "social value," _passim_. [ ] f. a. walker, _international bimet_. [ ] see delaunay, _the world's gold_, new york, , p. . delaunay's figures indicate that the use of gold for gold leaf and plate is quantitatively a minor factor in the industrial consumption of gold. jewelry and watch cases are the most important items. [ ] capital prices of lands and securities might well be lower, if interest rates are markedly higher, and if land rents and "quasi-rents" suffer from higher wages and higher interest. [ ] _cf._ chapter on "dodo-bones," _supra_. [ ] among the writers who have treated this topic, i would mention especially menger, "geld," in _handwörterbuch der staatswissenschaften_; laughlin, _principles of money_; scott, w. a., _money and banking_; knies, _das geld_; walker, f. a., _money and political economy_; conant, _principles of money and banking_; seligman, _principles of economics_; johnson, j. f., _money and currency_; von mises, l., _theorie des geldes und der umlaufsmittel_; helfferich, k., _das geld_; simmel, _philosophie des geldes_; davenport, h. j., _economics of enterprise_. the difference between the standard of value (common measure of values) function, and the medium of exchange function is particularly well illustrated by scott, _loc. cit._, ch. . the legal functions of money are especially treated by knapp, _staatliche theorie des geldes_. [ ] for discussions of the idea of measuring values, and the dependence of this on the conception of value as an absolute quantity, a common or generic quality of wealth, see knies, _das geld_, i, ff.; kinley, _money_, - ; merriam, l. s., "money as a measure of value," _annals of the american academy_, vol. iv; carver, "the concept of an economic quantity," _quart. jour. of econ._, ; laughlin, _principles of money_, , pp. - ; davenport, _value and distribution_, p. , n.; anderson, _social value_, chs. and , and "the concept of value further considered," _quart. journal of econ._, ; helfferich, _das geld_, ed., pp. - ; scott, _money and banking_, ch. . [ ] see scott, _money and banking_, ch. . [ ] a further reason for preferring "common measure of values" is that expression carries dearly the connotation of absolute values. "relative values" cannot be "measured," _social value_, pp. - . [ ] current text-books, following the austrian doctrine, define production as the creation of "utilities." this is incorrect. production is the creation of _values_. _cf. social value_, pp. and . [ ] this is the view of h. j. davenport (_economics of enterprise_, pp. - ). [ ] kemmerer has shown this to be true of bank reserves. as we shall see, the reserve function is merely a special case of the "bearer of options" function. for kemmerer's discussion of business distrust, see _money and credit instruments_, pp. - , and . [ ] "in new york, for instance, loans by banks 'on call' are subject to repayment within an hour or two after notice is given that repayment is desired." conant, _principles of money and banking_, vol. ii, p. . in general, the banks are content if the loan is repaid by o'clock on the day it is called. [ ] _e. g._, cairnes, j. e., _leading principles of political economy_. [ ] _one_ "pure rate" is a myth, but the notion has some significance, as setting off a body of causes distinct from the money-market factors under consideration. _cf. supra_, the ch. on "the capitalization theory." [ ] see von mises, "the foreign exchange policy of the austro-hungarian bank," british _economic journal_, , pp. - . an able boston broker, in feb. , calls attention to the growing difficulty of placing long-time bonds, without very high yield, in view of the scarcity of real capital, despite the exceedingly low "money-rates." i venture to predict an increasing "spread" between "money-rates" and the yield on long-time investments, the longer the war lasts. the view of davenport and schumpeter (_annalist_, feb. , , and _theorie der wirtschaftlichen entwicklung_), which would deny the validity of the distinction between money-rates and interest rates, and would make the money-market phenomena the primary cause of all interest phenomena, seems to me indefensible, alike in theory and in fact. [ ] _cf._ the analysis of bank-loans in the united states, _infra_. [ ] mitchell, _business cycles_, p. . [ ] _journal of political economy_, xvi, may, , pp. - . [ ] leipzig, . this book has had wide influence on german thinking on money. it is typical of the tendency in german thought to make the state the centre of everything. recognizing the historical fact that money has originated in a commodity, it holds that the commodity basis is a phenomenon of historical significance only, that modern money is a creature of the state. the money-unit is not definable as a quantity of metal, of given fineness, but rather is a "nominal" thing, present monetary standards being defined by legal proclamation in terms of past standards. the necessity for this reference to past standards grows out of the existence of past _debts_. the state must preserve the continuity of juristic relations, between debtors and creditors as elsewhere. knapp holds that the _zahlungsmittel_ (legal means of quittance, legal tender) function is the primary function of money, and that it is not a concept subordinate to _tauschmittel_ (medium of exchange). it is not necessary for our purposes to take account of knapp's theory in detail. he really has little to say about the value of money. indeed, he confesses, in a later discussion, that his theory is not concerned with that subject! (_schriften des vereins für sozialpolitik_, no. , , pp. - .) the amount of economic analysis in the book is not great. it is a striking illustration of the fact that legal thinking is largely concerned with _qualitative distinctions_, rather than with quantitative causal conceptions. (_cf._ my discussion in the chapter on "the reconciliation of statics and dynamics," _infra_, of the "statics" of the law.) knapp's book has a forbidding appearance, because of the large number of new terms, based on greek roots, which he has coined. the german language is inadequate to express his ideas! the germans themselves have complained much of this. careful reading of the book discloses, however, that the new terms are admirably adapted to express the distinctions he draws. i think, too, that english readers of the book, who remember enough of their greek to recognize an occasional greek root as vaguely familiar, will find less difficulty in giving fixed meanings to his new terms than would be the case with new german compounds. one who takes the trouble to master knapp's vocabulary will find the effort worth while. knapp has a high order of dialectical acumen. but the main part of the book has little direct bearing on the problem of the value of money, whether one understand by "value of money" the absolute social value of money, or the reciprocal of the price-level. the main points to be drawn from his discussion are ( ) the fact that past debts may tend to sustain the value of an otherwise worthless money; and ( ) that the state's willingness to accept money for taxes, etc., may also contribute to its value. knapp lays heaviest stress on this last point. he seems to concede, however, that the rôle of the state here is not different from that of any other big factor in the market, and that the state's power in this particular is a function of the magnitude of its fiscal operations. both of these doctrines fit readily into my social value theory. knapp's discussion of methods of regulating the international exchanges by methods other than gold shipments is interesting, and might well be studied by those who are concerned with the exchange situation in the present war. his thesis that the value of silver depended on the course of the exchanges between gold and silver countries, instead of the course of the exchanges depending on the values of gold and silver, seems to me an absurd exaggeration of a minor qualification into a main theory. his doctrine that international relations alone make the purely legal money, without commodity basis, unsatisfactory, i do not accept. i have discussed this general topic in my chapter on "dodo-bones," however, and may content myself with now referring to that chapter. it is not true, as a matter of fact, moreover, that the money-unit is no longer defined as a quantity of metal. our own american practice is sufficient evidence on this point. knapp has sought to generalize his own interpretation of the history of austrian paper into universal laws of money! that his interpretations meet authoritative dissent in austria is sufficiently evidenced by von mises' discussion, in his _theorie des geldes_ (ch. on "das geld und der staat"), and in his english article on "the foreign exchange policy of the austro-hungarian bank," british _economic journal_, . the notion that the legal tender function is prior to the medium of exchange function i regard as quite indefensible. it is doubtless true, in certain cases, that a government may debase its money, defining the new debased money in terms of the old, and that people who have debts to pay may, for a time, accept the debased money as a medium of exchange. but the limit of this is reached when the old debts have been paid. unless other factors (not necessarily redemption), then come in to sustain the value, the value will sink, to a level commensurate with the debasement. the value would generally sink to a considerable degree, in any case, if only the legal factors worked to sustain it. i have gone over this in the chapter on "dodo-bones," _supra_. it was only by being a valuable object, and commonly only by being a medium of exchange, that the money could have become a means of legal quittance in the first place. men would not have made contracts in terms of it, otherwise. and men would cease making contracts in it as soon as it (or other things tied to it in value) ceased to be an acceptable medium of exchange. knapp finds a good many phenomena in the history of money for which the quantity theory, and the metallist theory, can give no explanation. he has an exceedingly poor opinion of both theories, and makes many telling points against both. in so far as his doctrine asserts that the phenomena of money are matters of social organization, psychological in nature, i find myself in harmony with it. my dissent comes when he seeks to erect the abstractions of the jurist into a complete social philosophy! law is only a part of the system of social control, and economic values, while influenced by legal values, are far from being explained when legal factors only are taken into account. legal factors often play a more direct part in connection with the value of money than in connection with other values, but they do not dominate the value of money. recent german literature on money (_e. g._, fr. bendixsen, _geld und kapital_, leipzig, ) has been a good deal influenced by knapp, and there is a fair chance that american students may have to read his book if they wish to understand the next decade of german monetary history. it will be well for germany if this is not the case! [ ] _economics of enterprise_, p. . [ ] _cf._ böhm-bawerk's _capital and interest_, _passim_, particularly his discussion of hermann, for an exposition and criticism of the "use" theory of interest. [ ] _cf._ clark, j. b., _the distribution of wealth_, pp. - . [ ] this is not necessarily true among asiatics, or on the east side in new york city. [ ] the adherent of the ricardian analysis who would deny this may fight it out with clark, fetter, and a. s. johnson! [ ] a friendly critic--with a radically different theoretical point of view--feels that i am here playing fast and loose with the word, "value," meaning sometimes "total utility," sometimes "marginal utility," sometimes "relative marginal utility," and sometimes "price." i _never_ mean any of these things by "value," when used without qualification, in this book. i mean always _social economic value_, conceived of as _absolute_. [ ] i have been unable to satisfy myself that anyone has made a sufficiently thorough study of the course of the gold premium on the rupee, the agio of the rupee over its bullion content, or the course of prices in india, during the period from to , to justify confident statements as to the comparative strength of different elements in the explanation of that history. kemmerer states (_money and credit instruments_, p. ) that he can find no evidence at all to support laughlin's view of the matter. (see laughlin, _principles of money_, pp. et seq.) j. m. keynes, however, in his _indian currency and finance_, p. , says: "the committee of did not commit themselves; but the system which their recommendations established was _generally supposed_ [italics mine.] to be transitional and a first step toward the _introduction of gold_ [italics mine.]." in the arrangements of , moreover, a ratio between english gold and the rupee was established, of d. to the rupee, even though provisions for holding the rupee to this ratio were left till the establishment of the "gold exchange standard," several years later. keynes, on p. , discusses the arguments of the silver party against the introduction of gold, which is further evidence that the action of the committee was understood as looking toward a gold standard. there is _some_ evidence at least for laughlin's view. that his view offers a complete explanation, i think unlikely. kemmerer's admirable _modern currency reforms_ (macmillan, ), is at hand while the proof sheets are being revised. it is interesting to note that he finds the statistical evidence regarding indian prices, trade, etc., far too scanty to justify positive conclusions as to the causes governing the course of the rupee. he prefers, rather, to rest the case for the quantity theory on _a priori_ reasoning and statistics for the united states. _loc. cit._, pp. - . in the chapter on "dodo-bones," i have suggested that india might come nearer than other countries to actualizing the assumptions of the quantity theory. on kemmerer's showing, however, it appears to be a liability, rather than an asset! [ ] this is a national bank. in the same community, the writer asked the president of a state bank about his gold reserve, and was told that light-weight gold coin could not be used, since the state bank examiner made a practice of _weighing_ the gold of state banks. [ ] legal tender can add to value of money only when it confers an option on the _debtor_. in the case discussed, it is the _creditor_ who has the option. but options are not necessarily valuable. [ ] as davenport has pointed out, money is really moneys--there is a hierarchy. _cf. economics of enterprise_, pp. - . [ ] the restricted legal tender of small coins, where the coins are limited in amount to the needs of retail trade, is virtually an unrestricted legal tender, in practice, and amounts, in fact, to redemption. the coins are capable of being used where large coins, of standard metal, would otherwise be used, or where checks, redeemable in standard coin, would be used. legal tender is vastly more effective with reference to a small part of the money system than it would be with the whole of the money supply. the same is true of the privilege of using a particular form of money in paying taxes. _cf._ w. c. mitchell's discussion of the "demand notes," _history of greenbacks_, _passim_. [ ] _cf._ mitchell's account, (_ibid._, pp. - ), of the premium on minor currency, during the civil war. pennies were used in rolls of as a substitute for silver quarters, which had left the country under gresham's law. the premium was due primarily to the need for small change, rather than to bullion content, though the latter was a factor even for coins made of baser metals, in . [ ] _cf._ my article in the _annalist_, feb. , , "the ratio of foreign to domestic trade," and the chapter, _supra_, on "the quantity of money and the volume of trade." [ ] kinley's figures show a much lower percentage of money than this. he is anxious not to overestimate the extent to which checks are used, however, and so gives the figures of to % of checks as a safe lower limit. [ ] _cf. social value_, - . [ ] _cf._ carver's contention that "the demand for money is a demand for value." "concept of an economic quantity," _quart. jour. of econ._, . [ ] _cf._ laughlin's _principles of money_, p. . [ ] the main modern type of loan for non-business purposes is the public loan for war purposes, or to meet fiscal deficits. in the case of war loans, the emergencies are often so great that the rate of interest makes little difference. [ ] no longer true of europe, probably, since the huge war debts have been incurred. [ ] the interest so defaulted is cumulative, like a preferred dividend, for years after . wall street speaks of this issue as a "half-bond." [ ] _supra_, chapter on "origin of money." [ ] "it is needless to say that government bonds always rank as the very highest class of collateral, and the banks require no margin on such security." pratt, _work of wall street_, ed., p. . this, it need not be said, is not always true! [ ] veblen has elaborated the doctrine that stocks and bonds are much the same. _cf._ the discussion in meade's _corporation finance_ of the relation of junior bonds and preferred stocks in reorganizations. [ ] i do not accept the imputation theory, or the capitalization theory, without qualification, except as static first approximations. values of "factors of production" may easily become, and do become, in large part independent of their "presuppositions," _cf._ the chapter on "dodo-bones", _supra_, and the chapter on "economic value." [ ] this would seem to be davenport's view. see his article in the _quarterly journal of economics_, nov. . [ ] to a high degree, "good will," trade-marks, etc., are bankable assets. [ ] _social value_, , _passim_, especially ch. xiii. cooley, c. h., "institutional character of pecuniary valuation," _am. jour. of sociology_, jan. . [ ] _cf._ my article, "schumpeter's dynamic economics," _political science quarterly_, dec. , and the chapter on "marginal utility," _supra_. that the new bank-credit, without the painful _preliminary_ "abstinence" which the classical economics has stressed, is enough to provide capital for a new enterprise is, as schumpeter insists, true. schumpeter has made an important contribution in his emphasis on this too much neglected point. but it should be noted that this does not dispense with curtailing of consumption, and "abstinence." it merely shifts the necessity for curtailing consumption to some one else. the new plan of the dynamic entrepreneur, by means of bank credit, draws labor and capital away from the existing static enterprises. that curtails their output. that leaves less goods of the old kinds for people to consume. that means higher prices for consumption goods, in the interval between the starting of the new enterprise and the time when its finished products are added to the "real income" of the community. extensions of bank credit, there, shift the burden of "abstinence" to the consumer, and to the static producer. "saving" is still the source of capital, but it is involuntary saving. [ ] in , the first national bank of new york owned millions of bonds, but no stocks. report of pujo committee, feb. , , p. . the national city bank had millions in bonds, but no stocks. _ibid._, p. . state banks own few stocks; trust companies own a good many. [ ] _cf._ the chapter on "the origin of money," _supra_. [ ] in march, , one of the largest banking houses in boston informed the writer that over one-fourth of its notes and discounts (including all forms of loans) had been bought through note-brokers. [ ] _cf._, _e. g._, pp. ff. of scott's excellent _money and banking_, rev. ed., new york, . [ ] the year is chosen, in order that comparison may be more readily made with the figures of dean kinley's investigations based on reported deposits made on march of that year. the figures quoted are taken from p. of the report of the comptroller for . [ ] even excluding the item "due from other banks and bankers," as representing duplications, the item "other loans and discounts" remains approximately only one-fourth of total banking assets. [ ] almost all agricultural processes require more than six months from their inception to the marketing of the product. [ ] this view would seem to correspond with the view of babson and may (_commercial paper_, ), and of w. a. scott ("investment vs. commercial banking," _proceedings of investment bankers' association of america_, , pp. - ). both of these discussions appear in moulton, _money and banking_, pt. ii, pp. and - . dr. j. e. pope considers the view correct. on the other hand, professor o. m. w. sprague thinks the "other loans and discounts" of large city banks are more liquid than my statement would indicate. [ ] _principles of money and banking_, ii, p. . [ ] _report of the comptroller of the currency_, vol. ii, pp. _et seq._ [ ] total collateral loans in new york city on that date were $ , , . this is for national banks alone. _report of comptroller_, , ii, . there is every reason to suppose that if trust companies and private banks were included, the _proportion_ of stock exchange collateral loans would be very much higher. [ ] i am very fortunate in having the views of dr. j. e. pope on this question. i know no one whose knowledge of agricultural credit, whether of american or of european conditions, is so thorough and extensive. [ ] this table is constructed on the basis of data in the _report of the comptroller_ for , pp. - . [ ] a single observation does not justify very confident conclusions, and figures for subsequent years may alter this. there is reason for supposing that commodity collateral was unusually large in proportion in the comptroller's figures for national banks in june, , ( ) because the banks had been trying to reduce stock collateral loans, following the collapse of the outbreak of the war, ( ) because they were aiding cotton owners to tide over a period of stress, and ( ) because of great grain speculation. later: figures show this. comptroller's _report_, i, p. . stock loans increase from % to . %, of collateral loans. [ ] the preceding argument would indicate that it is much too high. [ ] the figures for are fairly typical of the proportions of these items in the assets of the three classes of institutions for the ten years from to . since , there has been some increase in the percentages of real estate loans and "all other loans," at the expense of the percentage of securities owned, and collateral loans, as these years have been years of reduced activity on the stock exchange. the changes are not important enough, however, to modify any conclusions which we shall base on the figures here given. all classes of loans have grown, and investments in securities have grown, but real estate loans and "all other loans," particularly the latter, have grown somewhat more rapidly. [ ] these figures are taken from conant, _principles of money and banking_, vol. ii, p. . [ ] the term "commercial paper," as here used by conant (whose source is the _comptroller's report_ for and preceding years), doubtless includes a good many items which we have decided not to count as commercial paper. the item, "advances on securities," also includes some items other than stock exchange loans, but not a high percentage in new york city. in the figures for all reporting banks in new york city were: collateral loans, , ; "other loans," . _report of comptroller_, , p. . [ ] taken by conant (_ibid._, p. ) from the _Économiste européen_ (april , ), xxv, p. . [ ] for the depositor who borrows from several banks, but deposits only in one,--as a stockbroker--the items deposited will, of course, substantially exceed the amounts borrowed at the bank where the deposits are made. but this will not affect our argument for _classes_ of depositors from _representative_ banks in the community as a whole. [ ] _supra_, chapters on "volume of money and volume of trade," and "statistical demonstrations of the quantity theory." [ ] the relevance of comparing wholesale and retail figures with figures for "commercial paper" may well be questioned, since our conception of commercial liquid loans would include manufacturers' paper which represents raw materials, work in process, and bills receivable. however, we have found reason to conclude that kinley's wholesale deposits include a large percentage of manufacturers' deposits. (_supra_, p. .) the comparison here is in any case rough. we do not need precise figures for the argument. [ ] pratt, _work of wall street_, ed., p. . [ ] returns from private banks in kinley's investigation of are virtually negligible, so far as absolute amounts are concerned, for the whole country. for new york city, they are absolutely negligible. the "all other deposits" reported by private banks in new york city for march , , are one thousand, nine hundred and eighty-four dollars, in all! the grand total, "all other deposits" for all classes of banks reporting in new york, is over a hundred and ninety-eight millions. the great private banks are, thus, clearly not represented. they are not represented in any form, since kinley's figures exclude deposits made by such banks in other banks. how important they would be, if included, one cannot be sure, since they keep their affairs pretty secret. some information, however, is available. thus, the pujo committee reports (_report_, feb. , , p. ) that on nov. , , there was $ , , on deposit with j. p. morgan and company, exclusive of $ , , on deposit with their philadelphia branch of drexel and co. it is understood to be the practice of j. p. morgan and co. to keep no cash on hand, and to deposit with other banks all their cash and checks. on this date, they had on deposit with other banks $ , , , "which presumably included all their own funds." it may be assumed, therefore, that the remaining millions was loaned out. there can be no doubt at all, i suppose, that practically all they had lent out was on stock and bond collateral. they are known to be one of the biggest lenders at the "money post" on the stock exchange. they are not supposed to do much business with ordinary merchants in the usual discount and deposit way. i have found no figures for kuhn-loeb & co., for total deposits made with them, nor for their deposits in other banks. the pujo committee (_ibid._, p. ) states that for the six years preceding this firm held, on the average, deposits from interstate corporations amounting to over millions. for j. p. morgan & co., this class of deposits amounted to about half of total deposits. (_ibid._, p. .) there is, of course, no assurance that this proportion holds with kuhn-loeb's deposits. these figures are very great, however. for the week ending april , , for example, only three banks (the national city bank, the national bank of commerce, and the chase national bank), and only two trust companies (the bankers trust company and the guarantee trust company), held deposits exceeding those credited to j. p. morgan and co., and only one of these, the national city bank, very markedly exceeded the morgan deposits. the majority of the new york clearing house banks had less than the deposits of interstate corporations with kuhn-loeb. as all the big private bankers deal chiefly in stock exchange loans and securities, and foreign exchange, and as this kind of business has been shown to be exceedingly active and to call for large checks and clearings, we may assume that kinley's figures would be greatly increased if they were included. the trust company reports for new york in kinley's figures are also very incomplete. new york trust companies report less than twice as much as boston trust companies, and an absurdly small amount as compared with banks. _cf._, _supra_, the chapter on "statistical demonstrations of the quantity theory." [ ] it has been supposed by many writers that new york clearings exaggerate new york transactions as compared with the extent to which outside clearings represent transactions. such evidence as we have would show that this is not true to a sufficient degree to modify the present argument. clearings are less than deposits in both new york and the country outside, _supra_, chapter on "statistical demonstrations of quantity theory." [ ] "the mystery of clearings," _annalist_, aug. , , p. . _supra_, chapter on "volume of money and volume of trade." [ ] see any congressional debate on "the money trust." [ ] _pujo committee report_, feb. , , p. . _cf._ also p. (statements of messrs. baker, reynolds, schiff, and perkins), and p. for statements regarding the testimony of messrs. morgan and baker. [ ] i know no responsible writer who has charged that there is a monopoly, or a tendency toward monopoly, in this matter. [ ] i am not naïve enough to suppose that this suggestion can be much more than an illustration of the bearing of my theory! i should even agree that the political difficulties are so great that we would do well to try out our system in times of stress before seriously raising the question of giving the federal reserve banks the power to rediscount loans on stock exchange collateral. [ ] walker's version of the quantity theory, excluding credit transactions, escapes much of this criticism. _supra_, chapter on "equation of exchange." [ ] it is nothing for wall street to "turn over" many times two billion dollars worth of securities. in a big bull year, this will be accomplished twelve or more times without effort--prices rising merrily, so long as no new supply of stocks and bonds comes in to make trouble. (see our estimate of new york security transactions, _supra_, chapter on "volume of money and volume of trade.") but let there be a liquidation by investors of anything like two billions, sold once, and the market feels a tremendous drag. it seems universally agreed that foreign selling of securities during the present war has been a great factor in checking advances in security prices in new york. the actual amount of liquidating by foreign investors, however, has been trifling as compared with the volume of sales since the war began. the best estimate of foreign liquidation is probably that of the national city bank, which has taken careful account of previous estimates, and which has unrivaled sources of "inside information." the estimate of this institution is that from a billion and a half to a billion six hundred million dollars worth of foreign held securities have been liquidated in america since the beginning of the war. (this does not include foreign loans placed here.) this estimate is given in october of . (monthly circular of the national city bank on "economic conditions, etc.," oct., , p. .) it is safe to say that no amount of "churning" of securities already in the market could have anything like the depressing effect on security prices that an unusual amount of liquidation by investors has. it is not increase in number of _exchanges_ that depresses prices. it is increase in the floating _supply_. activity in the floating supply makes it easier, rather than harder, for speculators to get banking accommodations which enable them to "hold" and "carry" securities, and activity in sales therefore positively tends to _increase_ rather than to decrease, security prices. the broadening of the range of securities dealt in, moreover, instead of depressing the prices of those already active, helps to sustain them. thus, brokers and bankers welcomed the recent revival of activity in the rails, following the bull market in war stocks. it gave a broader basis for loans. banks would lend more liberally, and on narrower margins, if railroad stocks could be mixed with the brokers' war stock collateral. here again we see the significance of the distinction between long-time interest rates, connected with the volume of real capital, and the "money-rates." again, periodic payments of interest and dividends, temporarily locking up considerable sums of bank deposits which have to be built up in anticipation of such payments, have a very much more serious effect on the money market than do payments many times greater in connection with stock sales. the tension in the london money market growing out of periodic accumulations and disbursements of the british government is well known. the summer of witnessed a temporary tightening in wall street (in what was, generally, the period of easiest money the street has ever known), from a similar cause--a bunching of dividend and interest payments, with some other large financial transactions. money rates in new york regularly show the influence of such payments, temporarily. money rates also show the influence of active speculation, as a rule, as shown by mr. silberling's investigations ("the mystery of clearings," _annalist_, aug. , ), but it takes a very much greater volume of stock sales than of dividend and interest payments to produce a given effect on money rates. [ ] as may , , when , , shares were sold. compare mitchell's stock barometer, - , _business cycles_, p. , with records of share sales for those years. [ ] _purchasing power of money_, ed., p. . the same criticism applies to kemmerer, and jevons. _cf._ kemmerer, _money and credit instruments_, pp. - . it is applicable to most quantity theorists. [ ] _ibid._, p. . it will be noted that at this point, fisher lapses from the doctrine that volume of trade is determined by "physical capacities and technique." _ibid._, p. . [ ] _cf._ our discussion, _supra_, in the chapter on the "functions of money," of money in retail trade. [ ] our great private banks, bond houses, and investment bankers, etc., of course do buy stocks of new enterprises on a huge scale. many of our big commercial banks have taken part in underwriting operations. [ ] see pp. - , _supra_. [ ] _wealth of nations_, bk. ii, ch. , ed. cannan, i, pp. and - . [ ] _theorie der wirtschaftlichen entwicklung_, chs. and . [ ] _supra_, chapter on "volume of money and volume of credit." [ ] _interviews on the banking and currency systems of england, scotland, etc._, senate document no. , (national monetary commission report), p. . [ ] this is clearly the opinion of european bankers, as indicated in their statements to interviewers for the monetary commission. see, _e. g._, statements by the _deutsche bank_, _ibid._, pp. - , and the _crédit lyonnais_, _ibid._, pp. - . [ ] the item, "due from other banks and bankers" in our table of total bank resources for , is , millions--about % of the whole and slightly more than the amount we assigned to "commercial paper." it is a highly important factor making for liquidity. for state, and national banks and trust companies it is almost as great-- , millions. the first figure does not include many great private banks. [ ] _vide_ professor taussig's history of the years, - , in his _silver situation_. [ ] _cf._ mitchell's _business cycles_, pp. - ; and _passim_. [ ] _cf._ the chapter, _supra_, on "the quantity theory and international gold movements." [ ] "the prospects of money," british _economic journal_, dec. . [ ] _cf._ conant's discussion, _principles of money and banking_, i, ch. . [ ] this would seem to be mitchell's view. _cf. business cycles_, p. . [ ] _cf._ chapter xiii. [ ] _cf._ the chapter on "the functions of money," _supra_. [ ] _money and credit instruments_, p. . [ ] _ibid._, p. . italics mine. [ ] kemmerer, in general, is less concerned, apparently, with defending a causal quantity theory than with defending the "equation of exchange." to the extent that this is true, i have little quarrel with his doctrines. to "prove" the "equation of exchange," however, is, first, a work of supererogation, and, second, in no sense a proof of the quantity theory. _vide_ the chapters, _supra_, on the equation of exchange and on statistics of the quantity theory. [ ] published by the national city bank of new york. _vide_ also bagehot. _lombard street_, introductory chapter, and withers, _the meaning of money_. [ ] this information is supplied me by an official of the new york coffee exchange, through the courtesy of mr. w. h. aborn, of aborn and cushman, coffee brokers, front st., new york. [ ] _principles of economics_, _passim_. [ ] _theorie der wirtschaftlichen entwicklung._ [ ] the writer has ventured some tentative predictions as to conditions following the present war in the new york _times_ sunday magazine of dec. , , pp. - . [ ] there are important dynamic and "frictional" considerations opposed to protective tariffs, as well as static considerations. very many of the "intangibles" later to be discussed depend on free trade. a high percentage of england's "capital" would be destroyed by protective tariffs and trade restrictions, and to a less degree this is true of all countries. _vide_ n. y. _times_ sunday magazine, dec. , , pp. - . [ ] a case in point is the discussion of the effects of increment taxes on the building trade, participated in by professor r. m. haig and the present writer in the _quarterly journal of economics_, aug. , and aug. . the doctrines criticised in my article were static theories, and my criticisms made the static assumptions. professor haig, accepting the validity of my criticisms on the assumptions laid down, for the most part, seeks to recast the argument on a dynamic basis, emphasizing dynamic and "frictional" considerations from which my argument had abstracted. i think that what difference of opinion remains between us would probably be removed if the distinction between static and dynamic were clearly drawn and rigidly adhered to. [ ] _cf._ my review-article, "schumpeter's dynamic economics," _pol. sci. quart._, dec. , p. . [ ] _distribution of wealth_; _essentials of economic theory_. [ ] _theorie der wirtschaftlichen entwicklung_. [ ] _cf._ my _social value_, pp. - , n. [ ] _purchasing power of money_, ch. . [ ] _theory of business enterprise._ [ ] _vide_ my discussion of professor patten's _reconstruction of economic theory_ in the _political science quarterly_ of march, , and the _american economic review_, supplement to the march number, , pp. - . [ ] _cf._ schumpeter, _loc. cit._, pp. - , and _passim_. that the quantity theory is essentially "static" will appear strikingly if the statements in the text be compared with fisher's discussion in chs. - of _the purchasing power of money_. [ ] it is only as a matter of highly abstract statics that the capitalization theory (as presented in earlier chapters) can be maintained with any strictness. in fact, capital values are not always passive shadows, yielding freely to changes in anticipated income, and to changes in the rate of discount. very often capital values become themselves substantial, become divorced from their presuppositions, can no longer be explained by any imputation process. this is particularly likely to be the case with lands in inactive markets. the income-bearer is as much an object of value as is the income; is often _immediately_, for its own sake, an object of value. the long-run tendency to assimilate this value to a capitalization of prospective incomes may be exceedingly slow in working out, if it ever works out. indeed, a high capital value may sometimes be a means of increasing the income, since in the minds both of lessor and lessee the usual percentage return on capital will be a factor in determining what is a "proper" rental. if a capital value, no longer justified by prospective income, has behind it the sanction of actual cost-outlay, there may easily be a reflex from it on the size of the income itself. such a capital value, unjustified by prospective income, but still believed in by the market, may function just as effectively as any other capital value. book-values, not marked down to correspond with changed income-prospects, even when they cannot command purchasers, may still serve as a basis for _loans_--veblen's theory of crises rests, as we shall see, in part on this fact. considerations of this sort strengthen still further the case against the marginal utility theory of value. to pass,--as fetter and the austrians in general seek to do--from marginal individual consumption values to market prices of consumption goods, then to prices of production goods, or to magnitudes of distributive shares, then, simply, by the capitalization theory, to capital values, with the notion that the original marginal utilities supply the psychological explanation at every stage of the process, the remoter values being merely built up of the original marginal utilities, is quite invalid. at every stage there is a hitch: the marginal utilities do not explain the prices or values of the consumption goods, as has already been elaborately pointed out; and the relation between the values of consumption goods and the capital values is very much looser and less direct than the static theory requires. institutional, legal, and moral forces come in, not alone at the first step, in giving social weight to the wants of special classes and individuals, but also at the second, giving prestige to certain enterprises, and so higher values to their securities, giving banking support here and refusing it there, giving popular and patriotic support here, and not there, giving direct action of law, custom and tradition on certain _prices_ (whence, indirectly on values), and leaving prices free to change readily in other cases. (_cf._ my discussion in _quart. jour, of economics_, aug. , pp. - .) the static theory of capitalization describes an ideal logical relation, while capital values are, in fact, built up by a psychological process which is logical only in part. in large degree, especially when the market lacks perfect fluidity, capital values are _immediate_, and not merely _derived_, values. in this, i think, i am in accord with the view briefly stated by a. s. johnson in his recent review of böhm-bawerk (_am. econ. rev._, march, , pp. - ). [ ] _loc. cit._, ch. iv. _vide_ veblen's discussion of fisher in the _pol. sci. quart._ of , and his discussion of clark in the _quart. jour. of econ._, feb. . [ ] chapter on "volume of money and volume of trade." [ ] on oct. of , i still venture the opinion that the stock market has shown wonderful conservatism in the face of extraordinary temptations. from oct. , to aug. , the "bears" dominated the market, and prices fell pretty steadily. the "bull" movement of sept. , seems to have reached its crest without passing the level of a year ago. the market may "run away," but it has not yet done so. [ ] _psychologie Économique_, vol. i, pp. - . [ ] nor do i see any method for bringing into our equilibrium picture the control which the environment retains over values by its power to _eliminate_ those groups whose choices vary too widely from the norms of "survival-necessities." vide giddings, _principles of sociology_, ed. , p. ; carver, _essays in social justice_, _passim_. i think that the range of choices compatible with survival is very wide. moreover, "adaptation" is not a simple matter of adjustment to the physiographic environment. it includes adjustment to the _social values_, both of the group in question and of other groups. [ ] _cf._ h. c. emery's discussion of "manipulation" in his _speculation in the stock and produce exchanges_, pp. ff. [ ] _cf._ dewey, _essays in logical theory_; bergson, _time and free will_, _passim_, and _creative evolution_; james, _problems of philosophy_. [ ] _cf._ bagehot's discussion in _lombard street_ of the features of english organization which prevented supremacy in the eastern trade from passing to greece and italy with the opening of the suez canal. (introductory chapter.) see also the discussion of the english money market in ch. xxiv, _supra_. [ ] _cf._ my article on "schumpeter's dynamic economics" in _political science quarterly_, dec. , and ch. xxiii, _supra_. [ ] in my article on schumpeter's theory above mentioned, i have pointed out that his contrast between statics and dynamics is not by any means a fixed one, and that in particular he shifts back and forth between a hypothetical static state, primarily a methodological device, which assumes perfect fluidity and mobility of the objects of exchange, on the one hand, and a realistic static state, immobile, held in the bonds of custom and tradition, illustrated by india and china, on the other hand. the version of the distinction between statics and dynamics here discussed is only one of several which he gives. it is, however, the one which at present i wish to contrast with my own view. with many of schumpeter's doctrines i am in hearty accord, and i have learned much from his book. i think that his book affords abundant evidence of the usefulness of the static-dynamic contrast. [ ] schumpeter's contrast between statics and dynamics is in most essentials closely parallel to veblen's contrast between the theory of wealth and the theory of prosperity, and his main conclusions resemble veblen's, despite schumpeter's optimism and veblen's pessimism, and despite temperamental and methodological differences. most of my criticisms of veblen apply also to schumpeter. [ ] _cf._ our discussion, _supra_, of the relation of credit to futurity. * * * * * transcriber's notes . passages in italics are surrounded by _underscores_. . footnotes have been moved from the middle of a paragraph to the end of the e-text. . the original text includes greek sigma character. for this e-text version it has been replaced with its transliteration [greek: s]. . fractions are indicated as in the example below: - / indicates whole number with fractional part of one-fourth. . the following misprints have been corrected: "thing" corrected to "think" (page ) "theorrists" corrected to "theorists" (page ) "$ , , . " corrected to "$ , , . " (page ) "theory theory" corrected to "theory" (page ) "practive" corrected to "practice" (page ) "this held" corrected to "thus held" (page ) "in in" corrected to "in" (page ) "clasess" corrected to "classes" (page ) "legarthic" corrected to "lethargic" (page ) "enchancement" corrected to "enhancement" (page ) " - " corrected to " - " (ftn. ) "equilibbrium" corrected to "equilibrium" (ftn. ) "instrnmeuts" corrected to "instruments" (ftn. ) "reguularly" corrected to "regularly" (ftn. ) missing text added in footnotes , , . . some of the page references in the index have been corrected. . other than the corrections listed above, printer's inconsistencies in spelling and hyphenation have been retained. lombard street a description of the money market. by walter bagehot chapter i. introductory. i venture to call this essay 'lombard street,' and not the 'money market,' or any such phrase, because i wish to deal, and to show that i mean to deal, with concrete realities. a notion prevails that the money market is something so impalpable that it can only be spoken of in very abstract words, and that therefore books on it must always be exceedingly difficult. but i maintain that the money market is as concrete and real as anything else; that it can be described in as plain words; that it is the writer's fault if what he says is not clear. in one respect, however, i admit that i am about to take perhaps an unfair advantage. half, and more than half, of the supposed 'difficulty' of the money market has arisen out of the controversies as to 'peel's act,' and the abstract discussions on the theory on which that act is based, or supposed to be based. but in the ensuing pages i mean to speak as little as i can of the act of ; and when i do speak of it, i shall deal nearly exclusively with its experienced effects, and scarcely at all, if at all, with its refined basis. for this i have several reasons,--one, that if you say anything about the act of , it is little matter what else you say, for few will attend to it. most critics will seize on the passage as to the act, either to attack it or defend it, as if it were the main point. there has been so much fierce controversy as to this act of parliament--and there is still so much animosity--that a single sentence respecting it is far more interesting to very many than a whole book on any other part of the subject. two hosts of eager disputants on this subject ask of every new writer the one question--are you with us or against us? and they care for little else. of course if the act of really were, as is commonly thought, the _primum mobile_ of the english money market, the source of all good according to some, and the source of all harm according to others, the extreme irritation excited by an opinion on it would be no reason for not giving a free opinion. a writer on any subject must not neglect its cardinal fact, for fear that others may abuse him. but, in my judgment, the act of is only a subordinate matter in the money market; what has to be said on it has been said at disproportionate length; the phenomena connected with it have been magnified into greater relative importance than they at all deserve. we must never forget that a quarter of a century has passed since , a period singularly remarkable for its material progress, and almost marvellous in its banking development. even, therefore, if the facts so much referred to in had the importance then ascribed to them, and i believe that in some respects they were even then overstated, there would be nothing surprising in finding that in a new world new phenomena had arisen which now are larger and stronger. in my opinion this is the truth: since , lombard street is so changed that we cannot judge of it without describing and discussing a most vigorous adult world which then was small and weak. on this account i wish to say as little as is fairly possible of the act of , and, as far as i can, to isolate and dwell exclusively on the 'post-peel' agencies, so that those who have had enough of that well-worn theme (and they are very many) may not be wearied, and that the new and neglected parts of the subject may be seen as they really are. the briefest and truest way of describing lombard street is to say that it is by far the greatest combination of economical power and economical delicacy that the world has even seen. of the greatness of the power there will be no doubt. money is economical power. everyone is aware that england is the greatest moneyed country in the world; everyone admits that it has much more immediately disposable and ready cash than any other country. but very few persons are aware how much greater the ready balance--the floating loan-fund which can be lent to anyone or for any purpose--is in england than it is anywhere else in the world. a very few figures will show how large the london loan-fund is, and how much greater it is than any other. the known deposits--the deposits of banks which publish their accounts--are, in london ( st december, ) , , l paris ( th february, ) , , l new york (february, ) , , l german empire ( st january, ) , , l and the unknown deposits--the deposits in banks which do not publish their accounts--are in london much greater than those many other of these cities. the bankers' deposits of london are many times greater than those of any other city--those of great britain many times greater than those of any other country. of course the deposits of bankers are not a strictly accurate measure of the resources of a money market. on the contrary, much more cash exists out of banks in france and germany, and in all non-banking countries, than could be found in england or scotland, where banking is developed. but that cash is not, so to speak, 'money-market money:' it is not attainable. nothing but their immense misfortunes, nothing but a vast loan in their own securities, could have extracted the hoards of france from the custody of the french people. the offer of no other securities would have tempted them, for they had confidence in no other securities. for all other purposes the money hoarded was useless and might as well not have been hoarded. but the english money is 'borrowable' money. our people are bolder in dealing with their money than any continental nation, and even if they were not bolder, the mere fact that their money is deposited in a bank makes it far more obtainable. a million in the hands of a single banker is a great power; he can at once lend it where he will, and borrowers can come to him, because they know or believe that he has it. but the same sum scattered in tens and fifties through a whole nation is no power at all: no one knows where to find it or whom to ask for it. concentration of money in banks, though not the sole cause, is the principal cause which has made the money market of england so exceedingly rich, so much beyond that of other countries. the effect is seen constantly. we are asked to lend, and do lend, vast sums, which it would be impossible to obtain elsewhere. it is sometimes said that any foreign country can borrow in lombard street at a price: some countries can borrow much cheaper than others; but all, it is said, can have some money if they choose to pay enough for it. perhaps this is an exaggeration; but confined, as of course it was meant to be, to civilised governments, it is not much of an exaggeration. there are very few civilised governments that could not borrow considerable sums of us if they choose, and most of them seem more and more likely to choose. if any nation wants even to make a railway--especially at all a poor nation--it is sure to come to this country--to the country of banks--for the money. it is true that english bankers are not themselves very great lenders to foreign states. but they are great lenders to those who lend. they advance on foreign stocks, as the phrase is, with 'a margin;' that is, they find eighty per cent of the money, and the nominal lender finds the rest. and it is in this way that vast works are achieved with english aid which but for that aid would never have been planned. in domestic enterprises it is the same. we have entirely lost the idea that any undertaking likely to pay, and seen to be likely, can perish for want of money; yet no idea was more familiar to our ancestors, or is more common now in most countries. a citizen of london in queen elizabeth's time could not have imagined our state of mind. he would have thought that it was of no use inventing railways (if he could have understood what a railway meant), for you would not have been able to collect the capital with which to make them. at this moment, in colonies and all rude countries, there is no large sum of transferable money; there is no fund from which you can borrow, and out of which you can make immense works. taking the world as a whole--either now or in the past--it is certain that in poor states there is no spare money for new and great undertakings, and that in most rich states the money is too scattered, and clings too close to the hands of the owners, to be often obtainable in large quantities for new purposes. a place like lombard street, where in all but the rarest times money can be always obtained upon good security or upon decent prospects of probable gain, is a luxury which no country has ever enjoyed with even comparable equality before. but though these occasional loans to new enterprises and foreign states are the most conspicuous instances of the power of lombard street, they are not by any means the most remarkable or the most important use of that power. english trade is carried on upon borrowed capital to an extent of which few foreigners have an idea, and none of our ancestors could have conceived. in every district small traders have arisen, who 'discount their bills' largely, and with the capital so borrowed, harass and press upon, if they do not eradicate, the old capitalist. the new trader has obviously an immense advantage in the struggle of trade. if a merchant have , l. all his own, to gain per cent on it he must make , l. a year, and must charge for his goods accordingly; but if another has only , l., and borrows , l. by discounts (no extreme instance in our modern trade), he has the same capital of , l. to use, and can sell much cheaper. if the rate at which he borrows be per cent., he will have to pay , l. a year; and if, like the old trader, he make , l. a year, he will still, after paying his interest, obtain , l. a year, or per cent, on his own , l. as most merchants are content with much less than per cent, he will be able, if he wishes, to forego some of that profit, lower the price of the commodity, and drive the old-fashioned trader--the man who trades on his own capital--out of the market. in modern english business, owing to the certainty of obtaining loans on discount of bills or otherwise at a moderate rate of interest, there is a steady bounty on trading with borrowed capital, and a constant discouragement to confine yourself solely or mainly to your own capital. this increasingly democratic structure of english commerce is very unpopular in many quarters, and its effects are no doubt exceedingly mixed. on the one hand, it prevents the long duration of great families of merchant princes, such as those of venice and genoa, who inherited nice cultivation as well as great wealth, and who, to some extent, combined the tastes of an aristocracy with the insight and verve of men of business. these are pushed out, so to say, by the dirty crowd of little men. after a generation or two they retire into idle luxury. upon their immense capital they can only obtain low profits, and these they do not think enough to compensate them for the rough companions and rude manners they must meet in business. this constant levelling of our commercial houses is, too, unfavourable to commercial morality. great firms, with a reputation which they have received from the past, and which they wish to transmit to the future, cannot be guilty of small frauds. they live by a continuity of trade, which detected fraud would spoil. when we scrutinise the reason of the impaired reputation of english goods, we find it is the fault of new men with little money of their own, created by bank 'discounts.' these men want business at once, and they produce an inferior article to get it. they rely on cheapness, and rely successfully. but these defects and others in the democratic structure of commerce are compensated by one great excellence. no country of great hereditary trade, no european country at least, was ever so little 'sleepy,' to use the only fit word, as england; no other was ever so prompt at once to seize new advantages. a country dependent mainly on great 'merchant princes' will never be so prompt; their commerce perpetually slips more and more into a commerce of routine. a man of large wealth, however intelligent, always thinks, more or less 'i have a great income, and i want to keep it. if things go on as they are i shall certainly keep it; but if they change i may not keep it.' consequently he considers every change of circumstance a 'bore,' and thinks of such changes as little as he can. but a new man, who has his way to make in the world, knows that such changes are his opportunities; he is always on the look-out for them, and always heeds them when he finds them. the rough and vulgar structure of english commerce is the secret of its life; for it contains 'the propensity to variation,' which, in the social as in the animal kingdom, is the principle of progress. in this constant and chronic borrowing, lombard street is the great go-between. it is a sort of standing broker between quiet saving districts of the country and the active employing districts. why particular trades settled in particular places it is often difficult to say; but one thing is certain, that when a trade has settled in any one spot, it is very difficult for another to oust it--impossible unless the second place possesses some very great intrinsic advantage. commerce is curiously conservative in its homes, unless it is imperiously obliged to migrate. partly from this cause, and partly from others, there are whole districts in england which cannot and do not employ their own money. no purely agricultural county does so. the savings of a county with good land but no manufactures and no trade much exceed what can be safely lent in the county. these savings are first lodged in the local banks, are by them sent to london, and are deposited with london bankers, or with the bill brokers. in either case the result is the same. the money thus sent up from the accumulating districts is employed in discounting the bills of the industrial districts. deposits are made with the bankers and bill brokers in lombard street by the bankers of such counties as somersetshire and hampshire, and those bill brokers and bankers employ them in the discount of bills from yorkshire and lancashire. lombard street is thus a perpetual agent between the two great divisions of england, between the rapidly-growing districts, where almost any amount of money can be well and easily employed, and the stationary and the declining districts, where there is more money than can be used. this organisation is so useful because it is so easily adjusted. political economists say that capital sets towards the most profitable trades, and that it rapidly leaves the less profitable and non-paying trades. but in ordinary countries this is a slow process, and some persons who want to have ocular demonstration of abstract truths have been inclined to doubt it because they could not see it. in england, however, the process would be visible enough if you could only see the books of the bill brokers and the bankers. their bill cases as a rule are full of the bills drawn in the most profitable trades, and _caeteris paribus_ and in comparison empty of those drawn in the less profitable. if the iron trade ceases to be as profitable as usual, less iron is sold; the fewer the sales the fewer the bills; and in consequence the number of iron bills in lombard street is diminished. on the other hand, if in consequence of a bad harvest the corn trade becomes on a sudden profitable, immediately 'corn bills' are created in great numbers, and if good are discounted in lombard street. thus english capital runs as surely and instantly where it is most wanted, and where there is most to be made of it, as water runs to find its level. this efficient and instantly-ready organisation gives us an enormous advantage in competition with less advanced countries--less advanced, that is, in this particular respect of credit. in a new trade english capital is instantly at the disposal of persons capable of understanding the new opportunities and of making good use of them. in countries where there is little money to lend, and where that little is lent tardily and reluctantly, enterprising traders are long kept back, because they cannot at once borrow the capital, without which skill and knowledge are useless. all sudden trades come to england, and in so doing often disappoint both rational probability and the predictions of philosophers. the suez canal is a curious case of this. all predicted that the canal would undo what the discovery of the passage to india round the cape effected. before that all oriental trade went to ports in the south of europe, and was thence diffused through europe. that london and liverpool should be centres of east indian commerce is a geographical anomaly, which the suez canal, it was said, would rectify. 'the greeks,' said m. de tocqueville, 'the styrians, the italians, the dalmatians, and the sicilians, are the people who will use the canal if any use it.' but, on the contrary, the main use of the canal has been by the english. none of the nations named by tocqueville had the capital, or a tithe of it, ready to build the large screw steamers which alone can use the canal profitably. ultimately these plausible predictions may or may not be right, but as yet they have been quite wrong, not because england has rich people--there are wealthy people in all countries--but because she possesses an unequalled fund of floating money, which will help in a moment any merchant who sees a great prospect of new profit. and not only does this unconscious 'organisation of capital,' to use a continental phrase, make the english specially quick in comparison with their neighbours on the continent at seizing on novel mercantile opportunities, but it makes them likely also to retain any trade on which they have once regularly fastened. mr. macculloch, following ricardo, used to teach that all old nations had a special aptitude for trades in which much capital is required. the interest of capital having been reduced in such countries, he argued, by the necessity of continually resorting to inferior soils, they can undersell countries where profit is high in all trades needing great capital. and in this theory there is doubtless much truth, though it can only be applied in practice after a number of limitations and with a number of deductions of which the older school of political economists did not take enough notice. but the same principle plainly and practically applies to england, in consequence of her habitual use of borrowed capital. as has been explained, a new man, with a small capital of his own and a large borrowed capital, can undersell a rich man who depends on his own capital only. the rich man wants the full rate of mercantile profit on the whole of the capital employed in his trade, but the poor man wants only the interest of money (perhaps not a third of the rate of profit) on very much of what he uses, and therefore an income will be an ample recompense to the poor man which would starve the rich man out of the trade. all the common notions about the new competition of foreign countries with england and its dangers--notions in which there is in other aspects much truth require to be reconsidered in relation to this aspect. england has a special machinery for getting into trade new men who will be content with low prices, and this machinery will probably secure her success, for no other country is soon likely to rival it effectually. there are many other points which might be insisted on, but it would be tedious and useless to elaborate the picture. the main conclusion is very plain--that english trade is become essentially a trade on borrowed capital, and that it is only by this refinement of our banking system that we are able to do the sort of trade we do, or to get through the quantity of it. but in exact proportion to the power of this system is its delicacy i should hardly say too much if i said its danger. only our familiarity blinds us to the marvellous nature of the system. there never was so much borrowed money collected in the world as is now collected in london. of the many millions in lombard street, infinitely the greater proportion is held by bankers or others on short notice or on demand; that is to say, the owners could ask for it all any day they please: in a panic some of them do ask for some of it. if any large fraction of that money really was demanded, our banking system and our industrial system too would be in great danger. some of those deposits too are of a peculiar and very distinct nature. since the franco-german war, we have become to a much larger extent than before the bankers of europe. a very large sum of foreign money is on various accounts and for various purposes held here. and in a time of panic it might be asked for. in we held only a much smaller sum of foreign money, but that smaller sum was demanded and we had to pay it at great cost and suffering, and it would be far worse if we had to pay the greater sums we now hold, without better resources than we had then. it may be replied, that though our instant liabilities are great, our present means are large; that though we have much we may be asked to pay at any moment, we have very much always ready to pay it with. but, on the contrary, there is no country at present, and there never was any country before, in which the ratio of the cash reserve to the bank deposits was so small as it is now in england. so far from our being able to rely on the proportional magnitude of our cash in hand, the amount of that cash is so exceedingly small that a bystander almost trembles when he compares its minuteness with the immensity of the credit which rests upon it. again, it may be said that we need not be alarmed at the magnitude of our credit system or at its refinement, for that we have learned by experience the way of controlling it, and always manage it with discretion. but we do not always manage it with discretion. there is the astounding instance of overend, gurney, and co. to the contrary. ten years ago that house stood next to the bank of england in the city of london; it was better known abroad than any similar firm known, perhaps, better than any purely english firm. the partners had great estates, which had mostly been made in the business. they still derived an immense income from it. yet in six years they lost all their own wealth, sold the business to the company, and then lost a large part of the company's capital. and these losses were made in a manner so reckless and so foolish, that one would think a child who had lent money in the city of london would have lent it better. after this example, we must not confide too surely in long-established credit, or in firmly-rooted traditions of business. we must examine the system on which these great masses of money are manipulated, and assure ourselves that it is safe and right. but it is not easy to rouse men of business to the task. they let the tide of business float before them; they make money or strive to do so while it passes, and they are unwilling to think where it is going. even the great collapse of overends, though it caused a panic, is beginning to be forgotten. most men of business think--'anyhow this system will probably last my time. it has gone on a long time, and is likely to go on still.' but the exact point is, that it has not gone on a long time. the collection of these immense sums in one place and in few hands is perfectly new. in the liabilities of the four great london joint stock banks were , , l.; they now are more than , , l. the private deposits of the bank of england then were , , l.; they now are , , l. there was in throughout the country but a fraction of the vast deposit business which now exists. we cannot appeal, therefore, to experience to prove the safety of our system as it now is, for the present magnitude of that system is entirely new. obviously a system may be fit to regulate a few millions, and yet quite inadequate when it is set to cope with many millions. and thus it may be with 'lombard street,' so rapid has been its growth, and so unprecedented is its nature. i am by no means an alarmist. i believe that our system, though curious and peculiar, may be worked safely; but if we wish so to work it, we must study it. we must not think we have an easy task when we have a difficult task, or that we are living in a natural state when we are really living in an artificial one. money will not manage itself, and lombard street has a great deal of money to manage. chapter ii. a general view of lombard street. i. the objects which you see in lombard street, and in that money world which is grouped about it, are the bank of england, the private banks, the joint stock banks, and the bill brokers. but before describing each of these separately we must look at what all have in common, and at the relation of each to the others. the distinctive function of the banker, says ricardo, 'begins as soon as he uses the money of others;' as long as he uses his own money he is only a capitalist. accordingly all the banks in lombard street (and bill brokers are for this purpose only a kind of bankers) hold much money belonging to other people on running account and on deposit. in continental language, lombard street is an organization of credit, and we are to see if it is a good or bad organization in its kind, or if, as is most likely, it turn out to be mixed, what are its merits and what are its defects? the main point on which one system of credit differs from another is 'soundness.' credit means that a certain confidence is given, and a certain trust reposed. is that trust justified? and is that confidence wise? these are the cardinal questions. to put it more simply--credit is a set of promises to pay; will those promises be kept? especially in banking, where the 'liabilities,' or promises to pay, are so large, and the time at which to pay them, if exacted, is so short, an instant capacity to meet engagements is the cardinal excellence. all which a banker wants to pay his creditors is a sufficient supply of the legal tender of the country, no matter what that legal tender may be. different countries differ in their laws of legal tender, but for the primary purposes of banking these systems are not material. a good system of currency will benefit the country, and a bad system will hurt it. indirectly, bankers will be benefited or injured with the country in which they live; but practically, and for the purposes of their daily life, they have no need to think, and never do think, on theories of currency. they look at the matter simply. they say 'i am under an obligation to pay such and such sums of legal currency; how much have i in my till, or have i at once under my command, of that currency?' in america, for example, it is quite enough for a banker to hold 'greenbacks,' though the value of these changes as the government chooses to enlarge or contract the issue. but a practical new york banker has no need to think of the goodness or badness of this system at all; he need only keep enough 'greenbacks' to pay all probable demands, and then he is fairly safe from the risk of failure. by the law of england the legal tenders are gold and silver coin (the last for small amounts only), and bank of england notes. but the number of our attainable bank notes is not, like american 'greenbacks,' dependent on the will of the state; it is limited by the provisions of the act of . that act separates the bank of england into two halves. the issue department only issues notes, and can only issue , , l. on government securities; for all the rest it must have bullion deposited. take, for example an account, which may be considered an average specimen of those of the last few years--that for the last week of : _an account pursuant to the act th and th victoria, cap. , for the week ending on wednesday, the th day of december, ._ issue department. notes issued , , l| government debt , , l | other securities , , l | gold coin and bullion , , l | silver bullion , , | , , l banking department. proprietors' capital , , l| government securities , , l rest , , l| other securities , , l public deposits, | notes , , l including exchequer, | gold and silver coins , l savings' banks, | commissioners of | national debt, | and dividend | accounts , , l| other deposits , , l| seven-day and other | bills , l| , , l| , , l geo. forbes, chief cashier. dated the th december, . there are here , , l. bank notes issued on securities, and , , l. represented by bullion. the bank of england has no power by law to increase the currency in any other manner. it holds the stipulated amount of securities, and for all the rest it must have bullion. this is the 'cast iron' system--the 'hard and fast' line which the opponents of the act say ruins us, and which the partizans of the act say saves us. but i have nothing to do with its expediency here. all which is to my purpose is that our paper 'legal tender,' our bank notes, can only be obtained in this manner. if, therefore, an english banker retains a sum of bank of england notes or coin in due proportion to his liabilities, he has a sufficient amount of the legal tender of this country, and he need not think of anything more. but here a distinction must be made. it is to be observed that properly speaking we should not include in the 'reserve' of a bank 'legal tenders,' or cash, which the bank keeps to transact its daily business. that is as much a part of its daily stock-in-trade as its desks or offices; or at any rate, whatever words we may choose to use, we must carefully distinguish between this cash in the till which is wanted every day, and the safety-fund, as we may call it, the special reserve held by the bank to meet extraordinary and unfrequent demands. what then, subject to this preliminary explanation, is the amount of legal tender held by our bankers against their liabilities? the answer is remarkable, and is the key to our whole system. it may be broadly said that no bank in london or out of it holds any considerable sum in hard cash or legal tender (above what is wanted for its daily business) except the banking department of the bank of england. that department had on the th day of december, , liabilities as follows: public deposits , , l private deposits , , l seven-day and other bills , l ------------ total , , l and a cash reserve of , , l. and this is all the cash reserve, we must carefully remember, which, under the law, the banking department of the bank of england--as we cumbrously call it the bank of england for banking purposes--possesses. that department can no more multiply or manufacture bank notes than any other bank can multiply them. at that particular day the bank of england had only , , l. in its till against liabilities of nearly three times the amount. it had 'consols' and other securities which it could offer for sale no doubt, and which, if sold, would augment its supply of bank notes--and the relation of such securities to real cash will be discussed presently; but of real cash, the bank of england for this purpose--the banking bank--had then so much and no more. and we may well think this a great deal, if we examine the position of other banks. no other bank holds any amount of substantial importance in its own till beyond what is wanted for daily purposes. all london banks keep their principal reserve on deposit at the banking department of the bank of england. this is by far the easiest and safest place for them to use. the bank of england thus has the responsibility of taking care of it. the same reasons which make it desirable for a private person to keep a banker make it also desirable for every banker, as respects his reserve, to bank with another banker if he safely can. the custody of very large sums in solid cash entails much care, and some cost; everyone wishes to shift these upon others if he can do so without suffering. accordingly, the other bankers of london, having perfect confidence in the bank of england, get that bank to keep their reserve for them. the london bill brokers do much the same. indeed, they are only a special sort of bankers who allow daily interest on deposits, and who for most of their money give security. but we have no concern now with these differences of detail. the bill brokers lend most of their money, and deposit the remnant either with the bank of england or some london banker. that london banker lends what he chooses of it, the rest he leaves at the bank of england. you always come back to the bank of england at last. but those who keep immense sums with a banker gain a convenience at the expense of a danger. they are liable to lose them if the bank fail. as all other bankers keep their banking reserve at the bank of england, they are liable to fail if it fails. they are dependent on the management of the bank of england in a day of difficulty and at a crisis for the spare money they keep to meet that difficulty and crisis. and in this there is certainly considerable risk. three times 'peel's act' has been suspended because the banking department was empty. before the act was broken-- in , the banking department was reduced to l , , " " l , , " " l , , in fact, in none of those years could the banking department of the bank of england have survived if the law had not been broken. nor must it be fancied that this danger is unreal, artificial, and created by law. there is a risk of our thinking so, because we hear that the danger can be cured by breaking an act; but substantially the same danger existed before the act. in , when only coin was a legal tender, and when there was only one department in the bank, the bank had reduced its reserve to , , l., and was within an ace of stopping payment. but the danger to the depositing banks is not the sole or the principal consequence of this mode of keeping the london reserve. the main effect is to cause the reserve to be much smaller in proportion to the liabilities than it would otherwise be. the reserve of the london bankers being on deposit in the bank of england, the bank always lends a principal part of it. suppose, a favourable supposition, that the banking department holds more than two-fifths of its liabilities in cash--that it lends three-fifths of its deposits and retains in reserve only two-fifths. if then the aggregate of the bankers' deposited reserve be , , l., , , l. of it will be lent by the banking department, and , , l. will be kept in the till. in consequence, that , , l. is all which is really held in actual cash as against the liabilities of the depositing banks. if lombard street were on a sudden thrown into liquidation, and made to pay as much as it could on the spot, that , , l. would be all which the bank of england could pay to the depositing banks, and consequently all, besides the small cash in the till, which those banks could on a sudden pay to the persons who have deposited with them. we see then that the banking reserve of the bank of england--some , , l. on an average of years now, and formerly much less--is all which is held against the liabilities of lombard street; and if that were all, we might well be amazed at the immense development of our credit system--in plain english, at the immense amount of our debts payable on demand, and the smallness of the sum of actual money which we keep to pay them if demanded. but there is more to come. lombard street is not only a place requiring to keep a reserve, it is itself a place where reserves are kept. all country bankers keep their reserve in london. they only retain in each country town the minimum of cash necessary to the transaction of the current business of that country town. long experience has told them to a nicety how much this is, and they do not waste capital and lose profit by keeping more idle. they send the money to london, invest a part of it in securities, and keep the rest with the london bankers and the bill brokers. the habit of scotch and irish bankers is much the same. all their spare money is in london, and is invested as all other london money now is; and, therefore, the reserve in the banking department of the bank of england is the banking reserve not only of the bank of england, but of all london--and not only of all london, but of all england, ireland, and scotland too. of late there has been a still further increase in our liabilities. since the franco-german war, we may be said to keep the european reserve also. deposit banking is indeed so small on the continent, that no large reserve need be held on account of it. a reserve of the same sort which is needed in england and scotland is not needed abroad. but all great communities have at times to pay large sums in cash, and of that cash a great store must be kept somewhere. formerly there were two such stores in europe, one was the bank of france, and the other the bank of england. but since the suspension of specie payments by the bank of france, its use as a reservoir of specie is at an end. no one can draw a cheque on it and be sure of getting gold or silver for that cheque. accordingly the whole liability for such international payments in cash is thrown on the bank of england. no doubt foreigners cannot take from us our own money; they must send here 'value in some shape or other for all they take away. but they need not send 'cash;' they may send good bills and discount them in lombard street and take away any part of the produce, or all the produce, in bullion. it is only putting the same point in other words to say that all exchange operations are centering more and more in london. formerly for many purposes paris was a european settling-house, but now it has ceased to be so. the note of the bank of france has not indeed been depreciated enough to disorder ordinary transactions. but any depreciation, however small--even the liability to depreciation without its reality--is enough to disorder exchange transactions. they are calculated to such an extremity of fineness that the change of a decimal may be fatal, and may turn a profit into a loss. accordingly london has become the sole great settling-house of exchange transactions in europe, instead of being formerly one of two. and this pre-eminence london will probably maintain, for it is a natural pre-eminence. the number of mercantile bills drawn upon london incalculably surpasses those drawn on any other european city; london is the place which receives more than any other place, and pays more than any other place, and therefore it is the natural 'clearing house.' the pre-eminence of paris partly arose from a distribution of political power, which is already disturbed; but that of london depends on the regular course of commerce, which is singularly stable and hard to change. now that london is the clearing-house to foreign countries, london has a new liability to foreign countries. at whatever place many people have to make payments, at that place those people must keep money. a large deposit of foreign money in london is now necessary for the business of the world. during the immense payments from france to germany, the sum _in transitu_--the sum in london has perhaps been unusually large. but it will ordinarily be very great. the present political circumstances no doubt will soon change. we shall soon hold in lombard street far less of the money of foreign governments; but we shall hold more and more of the money of private persons; for the deposit at a clearing-house necessary to settle the balance of commerce must tend to increase as that commerce itself increases. and this foreign deposit is evidently of a delicate and peculiar nature. it depends on the good opinion of foreigners, and that opinion may diminish or may change into a bad opinion. after the panic of , especially after the suspension of peel's act (which many foreigners confound with a suspension of cash payments), a large amount of foreign money was withdrawn from london. and we may reasonably presume that in proportion as we augment the deposits of cash by foreigners in london, we augment both the chances and the disasters of a 'run' upon england. and if that run should happen, the bullion to meet it must be taken from the bank. there is no other large store in the country. the great exchange dealers may have a little for their own purposes, but they have no store worth mentioning in comparison with this. if a foreign creditor is so kind as to wait his time and buy the bullion as it comes into the country, he may be paid without troubling the bank or distressing the money market. the german government has recently been so kind; it was in no respect afraid. but a creditor who takes fright will not wait, and if he wants bullion in a hurry he must come to the bank of england. in consequence all our credit system depends on the bank of england for its security. on the wisdom of the directors of that one joint stock company, it depends whether england shall be solvent or insolvent. this may seem too strong, but it is not. all banks depend on the bank of england, and all merchants depend on some banker. if a merchant have , l. at his bankers, and wants to pay it to some one in germany, he will not be able to pay it unless his banker can pay him, and the banker will not be able to pay if the bank of england should be in difficulties and cannot produce his 'reserve.' the directors of the bank are, therefore, in fact, if not in name, trustees for the public, to keep a banking reserve on their behalf; and it would naturally be expected either that they distinctly recognized this duty and engaged to perform it, or that their own self-interest was so strong in the matter that no engagement was needed. but so far from there being a distinct undertaking on the part of the bank directors to perform this duty, many of them would scarcely acknowledge it, and some altogether deny it. mr. hankey, one of the most careful and most experienced of them, says in his book on the bank of england, the best account of the practice and working of the bank which anywhere exists--'i do not intend here to enter at any length on the subject of the general management of the bank, meaning the banking department, as the principle upon which the business is conducted does not differ, as far as i am aware, from that of any well-conducted bank in london.' but, as anyone can see by the published figures, the banking department of the bank of england keeps as a great reserve in bank notes and coin between and per cent of its liabilities, and the other banks only keep in bank notes and coin the bare minimum they need to open shop with. and such a constant difference indicates, i conceive, that the two are not managed on the same principle. the practice of the bank has, as we all know, been much and greatly improved. they do not now manage like the other banks in lombard street. they keep an altogether different kind and quantity of reserve; but though the practice is mended the theory is not. there has never been a distinct resolution passed by the directors of the bank of england, and communicated by them to the public, stating even in the most general manner, how much reserve they mean to keep or how much they do not mean, or by what principle in this important matter they will be guided. the position of the bank directors is indeed most singular. on the one side a great city opinion--a great national opinion, i may say, for the nation has learnt much from many panics--requires the directors to keep a large reserve. the newspapers, on behalf of the nation, are always warning the directors to keep it, and watching that they do keep it; but, on the other hand, another less visible but equally constant pressure pushes the directors in exactly the reverse way, and inclines them to diminish the reserve. this is the natural desire of all directors to make a good dividend for their shareholders. the more money lying idle the less, _caeteris paribus_, is the dividend; the less money lying idle the greater is the dividend. and at almost every meeting of the proprietors of the bank of england, there is a conversation on this subject. some proprietor says that he does not see why so much money is kept idle, and hints that the dividend ought to be more. indeed, it cannot be wondered at that the bank proprietors do not quite like their position. theirs is the oldest bank in the city, but their profits do not increase, while those of other banks most rapidly increase. in , the dividend on the stock of the bank of england was per cent, and the price of the stock itself ; the dividend now is per cent, and the price of the stock . but in the same time the shares of the london and westminster bank, in spite of an addition of per cent to the capital, have risen from to , and the dividend from per cent to per cent. that the bank proprietors should not like to see other companies getting richer than their company is only natural. some part of the lowness of the bank dividend, and of the consequent small value of bank stock, is undoubtedly caused by the magnitude of the bank capital; but much of it is also due to the great amount of unproductive cash--of cash which yields no interest--that the banking department of the bank of england keeps lying idle. if we compare the london and westminster bank--which is the first of the joint-stock banks in the public estimation and known to be very cautiously and carefully managed--with the bank of england, we shall see the difference at once. the london and westminster has only per cent of its liabilities lying idle. the banking department of the bank of england has over per cent. so great a difference in the management must cause, and does cause, a great difference in the profits. inevitably the shareholders of the bank of england will dislike this great difference; more or less, they will always urge their directors to diminish (as far as possible) the unproductive reserve, and to augment as far as possible their own dividend. in most banks there would be a wholesome dread restraining the desire of the shareholders to reduce the reserve; they would fear to impair the credit of the bank. but fortunately or unfortunately, no one has any fear about the bank of england. the english world at least believes that it will not, almost that it cannot, fail. three times since the banking department has received assistance, and would have failed without it. in , the entire concern almost suspended payment; in , it actually did so. but still there is a faith in the bank, contrary to experience, and despising evidence. no doubt in every one of these years the condition of the bank, divided or undivided, was in a certain sense most sound; it could ultimately have paid all its creditors all it owed, and returned to its shareholders all their own capital. but ultimate payment is not what the creditors of a bank want; they want present, not postponed, payment; they want to be repaid according to agreement; the contract was that they should be paid on demand, and if they are not paid on demand they may be ruined. and that instant payment, in the years i speak of, the bank of england certainly could not have made. but no one in london ever dreams of questioning the credit of the bank, and the bank never dreams that its own credit is in danger. somehow everybody feels the bank is sure to come right. in , when it had scarcely any money left, the government said not only that it need not pay away what remained, but that it must not. the 'effect of letters of licence' to break peel's act has confirmed the popular conviction that the government is close behind the bank, and will help it when wanted. neither the bank nor the banking department have ever had an idea of being put 'into liquidation;' most men would think as soon of 'winding up' the english nation. since then the bank of england, as a bank, is exempted from the perpetual apprehension that makes other bankers keep a large reserve the apprehension of discredit--it would seem particularly necessary that its managers should be themselves specially interested in keeping that reserve, and specially competent to keep it. but i need not say that the bank directors have not their personal fortune at stake in the management of the bank. they are rich city merchants, and their stake in the bank is trifling in comparison with the rest of their wealth. if the bank were wound up, most of them would hardly in their income feel the difference. and what is more, the bank directors are not trained bankers; they were not bred to the trade, and do not in general give the main power of their minds to it. they are merchants, most of whose time and most of whose real mind are occupied in making money in their own business and for themselves. it might be expected that as this great public duty was cast upon the banking department of the bank, the principal statesmen (if not parliament itself) would have enjoined on them to perform it. but no distinct resolution of parliament has ever enjoined it; scarcely any stray word of any influential statesman. and, on the contrary, there is a whole _catena_ of authorities, beginning with sir robert peel and ending with mr. lowe, which say that the banking department of the bank of england is only a bank like any other bank--a company like other companies; that in this capacity it has no peculiar position, and no public duties at all. nine-tenths of english statesmen, if they were asked as to the management of the banking department of the bank of england, would reply that it was no business of theirs or of parliament at all; that the banking department alone must look to it. the result is that we have placed the exclusive custody of our entire banking reserve in the hands of a single board of directors not particularly trained for the duty--who might be called 'amateurs,' who have no particular interest above other people in keeping it undiminished--who acknowledge no obligation to keep it undiminished who have never been told by any great statesman or public authority that they are so to keep it or that they have anything to do with it who are named by and are agents for a proprietary which would have a greater income if it was diminished, who do not fear, and who need not fear, ruin, even if it were all gone and wasted. that such an arrangement is strange must be plain; but its strangeness can only be comprehended when we know what the custody of a national banking reserve means, and how delicate and difficult it is. ii. such a reserve as we have seen is kept to meet sudden and unexpected demands. if the bankers of a country are asked for much more than is commonly wanted, then this reserve must be resorted to. what then are these extra demands? and how is this extra reserve to be used? speaking broadly, these extra demands are of two kinds--one from abroad to meet foreign payments requisite to pay large and unusual foreign debts, and the other from at home to meet sudden apprehension or panic arising in any manner, rational or irrational. no country has ever been so exposed as england to a foreign demand on its banking reserve, not only because at present england is a large borrower from foreign nations, but also (and much more) because no nation has ever had a foreign trade of such magnitude, in such varied objects, or so ramified through the world. the ordinary foreign trade of a country requires no cash; the exports on one side balance the imports on the other. but a sudden trade of import like the import of foreign corn after a bad harvestor (what is much less common, though there are cases of it) the cessation of any great export, causes a balance to become due, which must be paid in cash. now, the only source from which large sums of cash can be withdrawn in countries where banking is at all developed, is a 'bank reserve.' in england especially, except a few sums of no very considerable amount held by bullion dealers in the course of their business, there are no sums worth mentioning in cash out of the banks; an ordinary person could hardly pay a serious sum without going to some bank, even if he spent a month in trying. all persons who wish to pay a large sum in cash trench of necessity on the banking reserve. but then what is 'cash?' within a country the action of a government can settle the quantity, and therefore the value, of its currency; but outside its own country, no government can do so. bullion is the cash' of international trade; paper currencies are of no use there, and coins pass only as they contain more or less bullion. when then the legal tender of a country is purely metallic, all that is necessary is that banks should keep a sufficient store of that 'legal tender.' but when the 'legal tender' is partly metal and partly paper, it is necessary that the paper 'legal tender'--the bank note--should be convertible into bullion. and here i should pass my limits, and enter on the theory of peel's act if i began to discuss the conditions of convertibility. i deal only with the primary pre-requisite of effectual foreign payments--a sufficient supply of the local legal tender; with the afterstep--the change of the local legal tender into the universally acceptable commodity cannot deal. what i have to deal with is, for the present, ample enough. the bank of england must keep a reserve of 'legal tender' to be used for foreign payments if itself fit, and to be used in obtaining bullion if itself unfit. and foreign payments are sometimes very large, and often very sudden. the 'cotton drain,' as it is called--the drain to the east to pay for indian cotton during the american civil war took many millions from this country for a series of years. a bad harvest must take millions in a single year. in order to find such great sums, the bank of england requires the steady use of an effectual instrument. that instrument is the elevation of the rate of interest. if the interest of money be raised, it is proved by experience that money does come to lombard street, and theory shows that it ought to come. to fully explain the matter i must go deep into the theory of the exchanges, but the general notion is plain enough. loanable capital, like every other commodity, comes where there is most to be made of it. continental bankers and others instantly send great sums here, as soon as the rate of interest shows that it can be done profitably. while english credit is good, a rise of the value of money in lombard street immediately by a banking operation brings money to lombard street. and there is also a slower mercantile operation. the rise in the rate of discount acts immediately on the trade of this country. prices fall here; in consequence imports are diminished, exports are increased, and, therefore, there is more likelihood of a balance in bullion coming to this country after the rise in the rate than there was before. whatever persons--one bank or many banks--in any country hold the banking reserve of that country, ought at the very beginning of an unfavourable foreign exchange at once to raise the rate of interest, so as to prevent their reserve from being diminished farther, and so as to replenish it by imports of bullion. this duty, up to about the year , the bank of england did not perform at all, as i shall show farther on. a more miserable history can hardly be found than that of the attempts of the bank--if indeed they can be called attempts--to keep a reserve and to manage a foreign drain between the year (when cash payments were resumed by the bank, and when our modern money market may be said to begin) and the year . the panic of that year for the first time taught the bank directors wisdom, and converted them to sound principles. the present policy of the bank is an infinite improvement on the policy before : the two must not be for an instant confounded; but nevertheless, as i shall hereafter show, the present policy is now still most defective, and much discussion and much effort, will be wanted before that policy becomes what it ought to be. a domestic drain is very different. such a drain arises from a disturbance of credit within the country, and the difficulty of dealing with it is the greater, because it is often caused, or at least often enhanced, by a foreign drain. times without number the public have been alarmed mainly because they saw that the banking reserve was already low, and that it was daily getting lower. the two maladies--an external drain and an internal--often attack the money market at once. what then ought to be done? in opposition to what might be at first sight supposed, the best way for the bank or banks who have the custody of the bank reserve to deal with a drain arising from internal discredit, is to lend freely. the first instinct of everyone is the contrary. there being a large demand on a fund which you want to preserve, the most obvious way to preserve it is to hoard it--to get in as much as you can, and to let nothing go out which you can help. but every banker knows that this is not the way to diminish discredit. this discredit means, 'an opinion that you have not got any money,' and to dissipate that opinion, you must, if possible, show that you have money: you must employ it for the public benefit in order that the public may know that you have it. the time for economy and for accumulation is before. a good banker will have accumulated in ordinary times the reserve he is to make use of in extraordinary times. ordinarily discredit does not at first settle on any particular bank, still less does it at first concentrate itself on the bank or banks holding the principal cash reserve. these banks are almost sure to be those in best credit, or they would not be in that position, and, having the reserve, they are likely to look stronger and seem stronger than any others. at first, incipient panic amounts to a kind of vague conversation: is a. b. as good as he used to be? has not c. d. lost money? and a thousand such questions. a hundred people are talked about, and a thousand think,--'am i talked about, or am i not?' 'is my credit as good as it used to be, or is it less?' and every day, as a panic grows, this floating suspicion becomes both more intense and more diffused; it attacks more persons; and attacks them all more virulently than at first. all men of experience, therefore, try to strengthen themselves,' as it is called, in the early stage of a panic; they borrow money while they can; they come to their banker and offer bills for discount, which commonly they would not have offered for days or weeks to come. and if the merchant be a regular customer, a banker does not like to refuse, because if he does he will be said, or may be said, to be in want of money, and so may attract the panic to himself. not only merchants but all persons under pecuniary liabilities--present or imminent--feel this wish to 'strengthen themselves,' and in proportion to those liabilities. especially is this the case with what may be called the auxiliary dealers in credit. under any system of banking there will always group themselves about the main bank or banks (in which is kept the reserve) a crowd of smaller money dealers, who watch the minutae of bills, look into special securities which busy bankers have not time for, and so gain a livelihood. as business grows, the number of such subsidiary persons augments. the various modes in which money may be lent have each their peculiarities, and persons who devote themselves to one only lend in that way more safely, and therefore more cheaply. in time of panic, these subordinate dealers in money will always come to the principal dealers. in ordinary times, the intercourse between the two is probably close enough. the little dealer is probably in the habit of pledging his 'securities' to the larger dealer at a rate less than he has himself charged, and of running into the market to lend again. his time and brains are his principal capital, and he wants to be always using them. but in times of incipient panic, the minor money dealer always becomes alarmed. his credit is never very established or very wide; he always fears that he may be the person on whom current suspicion will fasten, and often he is so. accordingly he asks the larger dealer for advances. a number of such persons ask all the large dealers--those who have the money--the holders of the reserve. and then the plain problem before the great dealers comes to be 'how shall we best protect ourselves? no doubt the immediate advance to these second-class dealers is annoying, but may not the refusal of it even be dangerous? a panic grows by what it feeds on; if it devours these second-class men, shall we, the first class, be safe?' a panic, in a word, is a species of neuralgia, and according to the rules of science you must not starve it. the holders of the cash reserve must be ready not only to keep it for their own liabilities, but to advance it most freely for the liabilities of others. they must lend to merchants, to minor bankers, to 'this man and that man,' whenever the security is good. in wild periods of alarm, one failure makes many, and the best way to prevent the derivative failures is to arrest the primary failure which causes them. the way in which the panic of was stopped by advancing money has been described in so broad and graphic a way that the passage has become classical. 'we lent it,' said mr. harman, on behalf of the bank of england, 'by every possible means and in modes we had never adopted before; we took in stock on security, we purchased exchequer bills, we made advances on exchequer bills, we not only discounted outright, but we made advances on the deposit of bills of exchange to an immense amount, in short, by every possible means consistent with the safety of the bank, and we were not on some occasions over-nice. seeing the dreadful state in which the public were, we rendered every assistance in our power.' after a day or two of this treatment, the entire panic subsided, and the 'city' was quite calm. the problem of managing a panic must not be thought of as mainly a 'banking' problem. it is primarily a mercantile one. all merchants are under liabilities; they have bills to meet soon, and they can only pay those bills by discounting bills on other merchants. in other words, all merchants are dependent on borrowing money, and large merchants are dependent on borrowing much money. at the slightest symptom of panic many merchants want to borrow more than usual; they think they will supply themselves with the means of meeting their bills while those means are still forthcoming. if the bankers gratify the merchants, they must lend largely just when they like it least; if they do not gratify them, there is a panic. on the surface there seems a great inconsistency in all this. first, you establish in some bank or banks a certain reserve; you make of it or them a kind of ultimate treasury, where the last shilling of the country is deposited and kept. and then you go on to say that this final treasury is also to be the last lending-house; that out of it unbounded, or at any rate immense, advances are to be made when no once else lends. this seems like saying--first, that the reserve should be kept, and then that it should not be kept. but there is no puzzle in the matter. the ultimate banking reserve of a country (by whomsoever kept) is not kept out of show, but for certain essential purposes, and one of those purposes is the meeting a demand for cash caused by an alarm within the country. it is not unreasonable that our ultimate treasure in particular cases should be lent; on the contrary, we keep that treasure for the very reason that in particular cases it should be lent. when reduced to abstract principle, the subject comes to this. an 'alarm' is an opinion that the money of certain persons will not pay their creditors when those creditors want to be paid. if possible, that alarm is best met by enabling those persons to pay their creditors to the very moment. for this purpose only a little money is wanted. if that alarm is not so met, it aggravates into a panic, which is an opinion that most people, or very many people, will not pay their creditors; and this too can only be met by enabling all those persons to pay what they owe, which takes a great deal of money. no one has enough money, or anything like enough, but the holders of the bank reserve. not that the help so given by the banks holding that reserve necessarily diminishes it. very commonly the panic extends as far, or almost as far, as the bank or banks which hold the reserve, but does not touch it or them at all. in this case it is enough if the dominant bank or banks, so to speak, pledge their credit for those who want it. under our present system it is often quite enough that a merchant or a banker gets the advance made to him put to his credit in the books of the bank of england; he may never draw a cheque on it, or, if he does, that cheque may come in again to the credit of some other customer, who lets it remain on his account. an increase of loans at such times is often an increase of the liabilities of the bank, not a diminution of its reserve. just so before , an issue of notes, as in to quell a panic entirely internal did not diminish the bullion reserve. the notes went out, but they did not return. they were issued as loans to the public, but the public wanted no more; they never presented them for payment; they never asked that sovereigns should be given for them. but the acceptance of a great liability during an augmenting alarm, though not as bad as an equal advance of cash, is the thing next worst. at any moment the cash may be demanded. supposing the panic to grow, it will be demanded, and the reserve will be lessened accordingly. no doubt all precautions may, in the end, be unavailing. 'on extraordinary occasions,' says ricardo, 'a general panic may seize the country, when every one becomes desirous of possessing himself of the precious metals as the most convenient mode of realising or concealing his property, against such panic banks have no security _on any system_.' the bank or banks which hold the reserve may last a little longer than the others; but if apprehension pass a certain bound, they must perish too. the use of credit is, that it enables debtors to use a certain part of the money their creditors have lent them. if all those creditors demand all that money at once, they cannot have it, for that which their debtors have used, is for the time employed, and not to be obtained. with the advantages of credit we must take the disadvantages too; but to lessen them as much as we can, we must keep a great store of ready money always available, and advance out of it very freely in periods of panic, and in times of incipient alarm. the management of the money market is the more difficult, because, as has been said, periods of internal panic and external demand for bullion commonly occur together. the foreign drain empties the bank till, and that emptiness, and the resulting rise in the rate of discount, tend to frighten the market. the holders of the reserve have, therefore, to treat two opposite maladies at once--one requiring stringent remedies, and especially a rapid rise in the rate of interest; and the other, an alleviative treatment with large and ready loans. before we had much specific experience, it was not easy to prescribe for this compound disease; but now we know how to deal with it. we must look first to the foreign drain, and raise the rate of interest as high as may be necessary. unless you can stop the foreign export, you cannot allay the domestic alarm. the bank will get poorer and poorer, and its poverty will protract or renew the apprehension. and at the rate of interest so raised, the holders--one or more-of the final bank reserve must lend freely. very large loans at very high rates are the best remedy for the worst malady of the money market when a foreign drain is added to a domestic drain. any notion that money is not to be had, or that it may not be had at any price, only raises alarm to panic and enhances panic to madness. but though the rule is clear, the greatest delicacy, the finest and best skilled judgment, are needed to deal at once with such great and contrary evils. and great as is the delicacy of such a problem in all countries, it is far greater in england now than it was or is elsewhere. the strain thrown by a panic on the final bank reserve is proportional to the magnitude of a country's commerce, and to the number and size of the dependent banks--banks, that is, holding no cash reserve--that are grouped around the central bank or banks. and in both respects our system causes a stupendous strain. the magnitude of our commerce, and the number and magnitude of the banks which depend on the bank of england, are undeniable. there are very many more persons under great liabilities than there are, or ever were, anywhere else. at the commencement of every panic, all persons under such liabilities try to supply themselves with the means of meeting those liabilities while they can. this causes a great demand for new loans. and so far from being able to meet it, the bankers who do not keep an extra reserve at that time borrow largely, or do not renew large loans--very likely do both. london bankers, other than the bank of england, effect this in several ways. first, they have probably discounted bills to a large amount for the bill brokers, and if these bills are paid, they decline discounting any others to replace them. the directors of the london and westminster bank had, in the panic of , discounted millions of such bills, and they justly said that if those bills were paid they would have an amount of cash far more than sufficient for any demand. but how were those bills to be paid? some one else must lend the money to pay them. the mercantile community could not on a sudden bear to lose so large a sum of borrowed money; they have been used to rely on it, and they could not carry on their business without it. least of all could they bear it at the beginning of a panic, when everybody wants more money than usual. speaking broadly, those bills can only be paid by the discount of other bills. when the bills (suppose) of a manchester warehouseman which he gave to the manufacturer become due, he cannot, as a rule, pay for them at once in cash; he has bought on credit, and he has sold on credit. he is but a middleman. to pay his own bill to the maker of the goods, he must discount the bills he has received from the shopkeepers to whom he has sold the goods; but if there is a sudden cessation in the means of discount, he will not be able to discount them. all our mercantile community must obtain new loans to pay old debts. if some one else did not pour into the market the money which the banks like the london and westminster bank take out of it, the bills held by the london and westminster bank could not be paid. who then is to pour in the new money? certainly not the bill brokers. they have been used to re-discount with such banks as the london and westminster millions of bills, and if they see that they are not likely to be able to re-discount those bills, they instantly protect themselves and do not discount them. their business does not allow them to keep much cash unemployed. they give interest for all the money deposited with them--an interest often nearly approaching the interest they can charge; as they can only keep a small reserve a panic tells on them more quickly than on anyone else. they stop their discounts, or much diminish their discounts, immediately. there is no new money to be had from them, and the only place at which they can have it is the bank of england. there is even a simpler case: the banker who is uncertain of his credit, and wants to increase his cash, may have money on deposit at the bill brokers. if he wants to replenish his reserve, he may ask for it, suppose, just when the alarm is beginning. but if a great number of persons do this very suddenly, the bill brokers will not at once be able to pay without borrowing. they have excellent bills in their case, but these will not be due for some days; and the demand from the more or less alarmed bankers is for payment at once and to-day. accordingly the bill broker takes refuge at the bank of england the only place where at such a moment new money is to be had. the case is just the same if the banker wants to sell consols, or to call in money lent on consols. these he reckons as part of his reserve. and in ordinary times nothing can be better. according to the saying, you 'can sell consols on a sunday.' in a time of no alarm, or in any alarm affecting that particular banker only, he can rely on such reserve without misgiving. but not so in a general panic. then, if he wants to sell , l. worth of consols, he will not find , l. of fresh money ready to come into the market. all ordinary bankers are wanting to sell, or thinking they may have to sell. the only resource is the bank of england. in a great panic, consols cannot be sold unless the bank of england will advance to the buyer, and no buyer can obtain advances on consols at such a time unless the bank of england will lend to him. the case is worse if the alarm is not confined to the great towns, but is diffused through the country. as a rule, country bankers only keep so much barren cash as is necessary for their common business. all the rest they leave at the bill brokers, or at the interest-giving banks, or invest in consols and such securities. but in a panic they come to london and want this money. and it is only from the bank of england that they can get it, for all the rest of london want their money for themselves. if we remember that the liabilities of lombard street payable on demand are far larger than those of any like market, and that the liabilities of the country are greater still, we can conceive the magnitude of the pressure on the bank of england when both lombard street and the country suddenly and at once come upon it for aid. no other bank was ever exposed to a demand so formidable, for none ever before kept the banking reserve for such a nation as the english. the mode in which the bank of england meets this great responsibility is very curious. it unquestionably does make enormous advances in every panic in the loans on 'private securities' increased from , , l to , , l ditto ditto , , l to , , l ditto ditto , , l to , , l but, on the other hand, as we have seen, though the bank, more or less, does its duty, it does not distinctly acknowledge that it is its duty. we are apt to be solemnly told that the banking department of the bank of england is only a bank like other banks--that it has no peculiar duty in times of panic--that it then is to look to itself alone, as other banks look. and there is this excuse for the bank. hitherto questions of banking have been so little discussed in comparison with questions of currency, that the duty of the bank in time of panic has been put on a wrong ground. it is imagined that because bank notes are a legal tender, the bank has some peculiar duty to help other people. but bank notes are only a legal tender at the issue department, not at the banking department, and the accidental combination of the two departments in the same building gives the banking department no aid in meeting a panic. if the issue department were at somerset house, and if it issued government notes there, the position of the banking department under the present law would be exactly what it is now. no doubt, formerly the bank of england could issue what it pleased, but that historical reminiscence makes it no stronger now that it can no longer so issue. we must deal with what is, not with what was. and a still worse argument is also used. it is said that because the bank of england keeps the 'state account' and is the government banker, it is a sort of 'public institution' and ought to help everybody. but the custody of the taxes which have been collected and which wait to be expended is a duty quite apart from panics. the government money may chance to be much or little when the panic comes. there is no relation or connection between the two. and the state, in getting the bank to keep what money it may chance to have, or in borrowing of it what money it may chance to want, does not hire it to stop a panic or much help it if it tries. the real reason has not been distinctly seen. as has been already said--but on account of its importance and perhaps its novelty it is worth saying again--whatever bank or banks keep the ultimate banking reserve of the country must lend that reserve most freely in time of apprehension, for that is one of the characteristic uses of the bank reserve, and the mode in which it attains one of the main ends for which it is kept. whether rightly or wrongly, at present and in fact the bank of england keeps our ultimate bank reserve, and therefore it must use it in this manner. and though the bank of england certainly do make great advances in time of panic, yet as they do not do so on any distinct principle, they naturally do it hesitatingly, reluctantly, and with misgiving. in , even in --the latest panic, and the one in which on the whole the bank acted the best--there was nevertheless an instant when it was believed the bank would not advance on consols, or at least hesitated to advance on them. the moment this was reported in the city and telegraphed to the country, it made the panic indefinitely worse. in fact, to make large advances in this faltering way is to incur the evil of making them without obtaining the advantage. what is wanted and what is necessary to stop a panic is to diffuse the impression, that though money may be dear, still money is to be had. if people could be really convinced that they could have money if they wait a day or two, and that utter ruin is not coming, most likely they would cease to run in such a mad way for money. either shut the bank at once, and say it will not lend more than it commonly lends, or lend freely, boldly, and so that the public may feel you mean to go on lending. to lend a great deal, and yet not give the public confidence that you will lend sufficiently and effectually, is the worst of all policies; but it is the policy now pursued. in truth, the bank do not lend from the motives which should make a bank lend. the holders of the bank reserve ought to lend at once and most freely in an incipient panic, because they fear destruction in the panic. they ought not to do it to serve others; they ought to do it to serve themselves. they ought to know that this bold policy is the only safe one, and for that reason they ought to choose it. but the bank directors are not afraid. even at the last moment they say that 'whatever happens to the community, they can preserve themselves.' both in and (i believe also in , though there is no printed evidence of it) the bank directors contended that the banking department was quite safe though its reserve was nearly all gone, and that it could strengthen itself by selling securities and by refusing to discount. but this is a complete dream. the bank of england could not sell 'securities,' for in an extreme panic there is no one else to buy securities. the bank cannot stay still and wait till its bills are paid, and so fill its coffers, for unless it discounts equivalent bills, the bills which it has already discounted will not be paid. 'when the reserve in the ultimate bank or banks--those keeping the reserve--runs low, it cannot be augmented by the same means that other and dependent banks commonly adopt to maintain their reserve, for the dependent banks trust that at such moments the ultimate banks will be discounting more than usual and lending more than usual. but ultimate banks have no similar rear-guard to rely upon. i shall have failed in my purpose if i have not proved that the system of entrusting all our reserve to a single board, like that of the bank directors, is very anomalous; that it is very dangerous; that its bad consequences, though much felt, have not been fully seen; that they have been obscured by traditional arguments and hidden in the dust of ancient controversies. but it will be said--what would be better? what other system could there be? we are so accustomed to a system of banking, dependent for its cardinal function on a single bank, that we can hardly conceive of any other. but the natural system--that which would have sprung up if government had let banking alone--is that of many banks of equal or not altogether unequal size. in all other trades competition brings the traders to a rough approximate equality. in cotton spinning, no single firm far and permanently outstrips the others. there is no tendency to a monarchy in the cotton world; nor, where banking has been left free, is there any tendency to a monarchy in banking either. in manchester, in liverpool, and all through england, we have a great number of banks, each with a business more or less good, but we have no single bank with any sort of predominance; nor is there any such bank in scotland. in the new world of joint stock banks outside the bank of england, we see much the same phenomenon. one or more get for a time a better business than the others, but no single bank permanently obtains an unquestioned predominance. none of them gets so much before the others that the others voluntarily place their reserves in its keeping. a republic with many competitors of a size or sizes suitable to the business, is the constitution of every trade if left to itself, and of banking as much as any other. a monarchy in any trade is a sign of some anomalous advantage, and of some intervention from without. i shall be at once asked--do you propose a revolution? do you propose to abandon the one-reserve system, and create anew a many-reserve system? my plain answer is that i do not propose it. i know it would be childish. credit in business is like loyalty in government. you must take what you can find of it, and work with it if possible. a theorist may easily map out a scheme of government in which queen victoria could be dispensed with. he may make a theory that, since we admit and we know that the house of commons is the real sovereign, any other sovereign is superfluous; but for practical purposes, it is not even worth while to examine these arguments. queen victoria is loyally obeyed--without doubt, and without reasoning--by millions of human beings. if those millions began to argue, it would not be easy to persuade them to obey queen victoria, or anything else. effectual arguments to convince the people who need convincing are wanting. just so, an immense system of credit, founded on the bank of england as its pivot and its basis, now exists. the english people, and foreigners too, trust it implicitly. every banker knows that if he has to prove that he is worthy of credit, however good may be his arguments, in fact his credit is gone: but what we have requires no proof. the whole rests on an instinctive confidence generated by use and years. nothing would persuade the english people to abolish the bank of england; and if some calamity swept it away, generations must elapse before at all the same trust would be placed in any other equivalent. a many-reserve system, if some miracle should put it down in lombard street, would seem monstrous there. nobody would understand it, or confide in it. credit is a power which may grow, but cannot be constructed. those who live under a great and firm system of credit must consider that if they break up that one they will never see another, for it will take years upon years to make a successor to it. on this account, i do not suggest that we should return to a natural or many-reserve system of banking. i should only incur useless ridicule if i did suggest it. nor can i propose that we should adopt the simple and straightforward expedient by which the french have extricated themselves from the same difficulty. in france all banking rests on the bank of france, even more than in england all rests on the bank of england. the bank of france keeps the final banking reserve, and it keeps the currency reserve too. but the state does not trust such a function to a board of merchants, named by shareholders. the nation itself--the executive government--names the governor and deputy-governor of the bank of france. these officers have, indeed, beside them a council of 'regents,' or directors, named by the shareholders. but they need not attend to that council unless they think fit; they are appointed to watch over the national interest, and, in so doing, they may disregard the murmurs of the 'regents' if they like. and in theory, there is much to be said for this plan. the keeping the single banking reserve being a national function, it is at least plausible to argue that government should choose the functionaries. no doubt such a political intervention is contrary to the sound economical doctrine that 'banking is a trade, and only a trade.' but government forgot that doctrine when, by privileges and monopolies, it made a single bank predominant over all others, and established the one-reserve system. as that system exists, a logical frenchman consistently enough argues that the state should watch and manage it. but no such plan would answer in england. we have not been trained to care for logical sequence in our institutions, or rather we have been trained not to care for it. and the practical result for which we do care would in this case be bad. the governor of the bank would be a high parliamentary official, perhaps in the cabinet, and would change as chance majorities and the strength of parties decide. a trade peculiarly requiring consistency and special attainment would be managed by a shifting and untrained ruler. in fact, the whole plan would seem to an englishman of business palpably absurd; he would not consider it, he would not think it worth considering. that it works fairly well in france, and that there are specious arguments of theory for it, would not be sufficient to his mind. all such changes being out of the question, i can propose only three remedies. first. there should be a clear understanding between the bank and the public that, since the bank hold out ultimate banking reserve, they will recognise and act on the obligations which this implies; that they will replenish it in times of foreign demand as fully, and lend it in times of internal panic as freely and readily, as plain principles of banking require. this looks very different from the french plan, but it is not so different in reality. in england we can often effect, by the indirect compulsion of opinion, what other countries must effect by the direct compulsion of government. we can do so in this case. the bank directors now fear public opinion exceedingly; probably no kind of persons are so sensitive to newspaper criticism. and this is very natural. our statesmen, it is true, are much more blamed, but they have generally served a long apprenticeship to sharp criticism. if they still care for it (and some do after years of experience much more than the world thinks), they care less for it than at first, and have come to regard it as an unavoidable and incessant irritant, of which they shall never be rid. but a bank director undergoes no similar training and hardening. his functions at the bank fill a very small part of his time; all the rest of his life (unless he be in parliament) is spent in retired and mercantile industry. he is not subjected to keen and public criticism, and is not taught to bear it. especially when once in his life he becomes, by rotation, governor, he is most anxious that the two years of office shall 'go off well.' he is apt to be irritated even by objections to principles on which he acts, and cannot bear with equanimity censure which is pointed and personal. at present i am not sure if this sensitiveness is beneficial. as the exact position of the bank of england in the money market is indistinctly seen, there is no standard to which a bank governor can appeal. he is always in fear that 'something may be said;' but not quite knowing on what side that 'something' may be, his fear is but an indifferent guide to him. but if the cardinal doctrine were accepted, if it were acknowledged that the bank is charged with the custody of our sole banking reserve, and is bound to deal with it according to admitted principles, then a governor of the bank could look to those principles. he would know which way criticism was coming. if he was guided by the code, he would have a plain defence. and then we may be sure that old men of business would not deviate from the code. at present the board of directors are a sort of semi-trustees for the nation. i would have them real trustees, and with a good trust deed. secondly. the government of the bank should be improved in a manner to be explained. we should diminish the 'amateur' element; we should augment the trained banking element; and we should ensure more constancy in the administration. thirdly. as these two suggestions are designed to make the bank as strong as possible, we should look at the rest of our banking system, and try to reduce the demands on the bank as much as we can. the central machinery being inevitably frail, we should carefully and as much as possible diminish the strain upon it. but to explain these proposals, and to gain a full understanding of many arguments that have been used, we must look more in detail at the component parts of lombard street, and at the curious set of causes which have made it assume its present singular structure. chapter iii. how lombard street came to exist, and why it assumed its present form. in the last century, a favourite subject of literary ingenuity was 'conjectural history,' as it was then called. upon grounds of probability a fictitious sketch was made of the possible origin of things existing. if this kind of speculation were now applied to banking, the natural and first idea would be that large systems of deposit banking grew up in the early world, just as they grow up now in any large english colony. as soon as any such community becomes rich enough to have much money, and compact enough to be able to lodge its money in single banks, it at once begins so to do. english colonists do not like the risk of keeping their money, and they wish to make an interest on it. they carry from home the idea and the habit of banking, and they take to it as soon as they can in their new world. conjectural history would be inclined to say that all banking began thus: but such history is rarely of any value. the basis of it is false. it assumes that what works most easily when established is that which it would be the most easy to establish, and that what seems simplest when familiar would be most easily appreciated by the mind though unfamiliar. but exactly the contrary is true. many things which seem simple and which work well when firmly established, are very hard to establish among new people, and not very easy to explain to them. deposit banking is of this sort. its essence is that a very large number of persons agree to trust a very few persons, or some one person. banking would not be a profitable trade if bankers were not a small number, and depositors in comparison an immense number. but to get a great number of persons to do exactly the same thing is always very difficult, and nothing but a very palpable necessity will make them on a sudden begin to do it. and there is no such palpable necessity in banking. if you take a country town in france, even now, you will not find any such system of banking as ours. cheque-books are unknown, and money kept on running account by bankers is rare. people store their money in a caisse at their houses. steady savings, which are waiting for investment, and which are sure not to be soon wanted, may be lodged with bankers; but the common floating cash of the community is kept by the community themselves at home. they prefer to keep it so, and it would not answer a banker's purpose to make expensive arrangements for keeping it otherwise. if a 'branch,' such as the national provincial bank opens in an english country town, were opened in a corresponding french one, it would not pay its expenses. you could not get any sufficient number of frenchmen to agree to put their money there. and so it is in all countries not of british descent, though in various degrees. deposit banking is a very difficult thing to begin, because people do not like to let their money out of their sight, especially do not like to let it out of sight without security--still more, cannot all at once agree on any single person to whom they are content to trust it unseen and unsecured. hypothetical history, which explains the past by what is simplest and commonest in the present, is in banking, as in most things, quite untrue. the real history is very different. new wants are mostly supplied by adaptation, not by creation or foundation. something having been created to satisfy an extreme want, it is used to satisfy less pressing wants, or to supply additional conveniences. on this account, political government--the oldest institution in the world--has been the hardest worked. at the beginning of history, we find it doing everything which society wants done, and forbidding everything which society does not wish done. in trade, at present, the first commerce in a new place is a general shop, which, beginning with articles of real necessity, comes shortly to supply the oddest accumulation of petty comforts. and the history of banking has been the same. the first banks were not founded for our system of deposit banking, or for anything like it. they were founded for much more pressing reasons, and having been founded, they, or copies from them, were applied to our modern uses. the earliest banks of italy, where the name began, were finance companies. the bank of st. george, at genoa, and other banks founded in imitation of it, were at first only companies to make loans to, and float loans for, the governments of the cities in which they were formed. the want of money is an urgent want of governments at most periods, and seldom more urgent than it was in the tumultuous italian republics of the middle ages. after these banks had been long established, they began to do what we call banking business; but at first they never thought of it. the great banks of the north of europe had their origin in a want still more curious. the notion of its being a prime business of a bank to give good coin has passed out of men's memories; but wherever it is felt, there is no want of business more keen and urgent. adam smith describes it so admirably that it would be stupid not to quote his words:--'the currency of a great state, such as france or england, generally consists almost entirely of its own coin. should this currency, therefore, be at any time worn, clipt, or otherwise degraded below its standard value, the state by a reformation of its coin can effectually re-establish its currency. but the currency of a small state, such as genoa or hamburgh, can seldom consist altogether in its own coin, but must be made up, in a great measure, of the coins of all the neighbouring states with which its inhabitants have a continual intercourse. such a state, therefore, by reforming its coin, will not always be able to reform its currency. if foreign bills of exchange are paid in this currency, the uncertain value of any sum, of what is in its own nature so uncertain, must render the exchange always very much against such a state, its currency being, in all foreign states, necessarily valued even below what it is worth. 'in order to remedy the inconvenience to which this disadvantageous exchange must have subjected their merchants, such small states, when they began to attend to the interest of trade, have frequently enacted, that foreign bills of exchange of a certain value should be paid, not in common currency, but by an order upon, or by a transfer in, the books of a certain bank, established upon the credit, and under the protection of the state, this bank being always obliged to pay, in good and true money, exactly according to the standard of the state. the banks of venice, genoa, amsterdam, hamburgh and nuremburg, seem to have been all originally established with this view, though some of them may have afterwards been made subservient to other purposes. the money of such banks, being better than the common currency of the country, necessarily bore an agio, which was greater or smaller, according as the currency was supposed to be more or less degraded below the standard of the state. the agio of the bank of hamburgh, for example, which is said to be commonly about fourteen per cent, is the supposed difference between the good standard money of the state, and the clipt, worn, and diminished currency poured into it from all the neighbouring states. 'before the great quantity of clipt and worn foreign coin, which the extensive trade of amsterdam brought from all parts of europe, reduced the value of its currency about per cent below that of good money fresh from the mint. such money no sooner appeared than it was melted down or carried away, as it always is in such circumstances. the merchants, with plenty of currency, could not always find a sufficient quantity of good money to pay their bills of exchange; and the value of those bills, in spite of several regulations which were made to prevent it, became in a great measure uncertain. 'in order to remedy these inconveniences, a bank was established in under the guarantee of the city. this bank received both foreign coin, and the light and worn coin of the country at its real intrinsic value in the good standard money of the country, deducting only so much as was necessary for defraying the expense of coinage, and the other necessary expense of management. for the value which remained, after this small deduction was made, it gave a credit in its books. this credit was called bank money, which, as it represented money exactly according to the standard of the mint, was always of the same real value, and intrinsically worth more than current money. it was at the same time enacted, that all bills drawn upon or negotiated at amsterdam of the value of six hundred guilders and upwards should be paid in bank money, which at once took away all uncertainty in the value of those bills. every merchant, in consequence of this regulation, was obliged to keep an account with the bank in order to pay his foreign bills of exchange, which necessarily occasioned a certain demand for bank money.' again, a most important function of early banks is one which the present banks retain, though it is subsidiary to their main use; viz. the function of remitting money. a man brings money to the bank to meet a payment which he desires to make at a great distance, and the bank, having a connection with other banks, sends it where it is wanted. as soon as bills of exchange are given upon a large scale, this remittance is a very pressing requirement. such bills must be made payable at a place convenient to the seller of the goods in payment of which they are given, perhaps at the great town where his warehouse is. but this may be very far from the retail shop of the buyer who bought those goods to sell them again in the country. for these, and a multitude of purposes, the instant and regular remittance of money is an early necessity of growing trade; and that remittance it was a first object of early banks to accomplish. these are all uses other than those of deposit banking which banks supplied that afterwards became in our english sense deposit banks. by supplying these uses, they gained the credit that afterwards enabled them to gain a living as deposit banks. being trusted for one purpose, they came to be trusted for a purpose quite different, ultimately far more important, though at first less keenly pressing. but these wants only affect a few persons, and therefore bring the bank under the notice of a few only. the real introductory function which deposit banks at first perform is much more popular, and it is only when they can perform this more popular kind of business that deposit banking ever spreads quickly and extensively. this function is the supply of the paper circulation to the country, and it will be observed that i am not about to overstep my limits and discuss this as a question of currency. in what form the best paper currency can be supplied to a country is a question of economical theory with which i do not meddle here. i am only narrating unquestionable history, not dealing with an argument where every step is disputed. and part of this certain history is that the best way to diffuse banking in a community is to allow the banker to issue bank-notes of small amount that can supersede the metal currency. this amounts to a subsidy to each banker to enable him to keep open a bank till depositors choose to come to it. the country where deposit banking is most diffused is scotland, and there the original profits were entirely derived from the circulation. the note issue is now a most trifling part of the liabilities of the scotch banks, but it was once their mainstay and source of profit. a curious book, lately published, has enabled us to follow the course of this in detail. the bank of dundee, now amalgamated with the royal bank of scotland, was founded in , and had become before its amalgamation, eight or nine years since, a bank of considerable deposits. but for twenty-five years from its foundation it had no deposits at all. it subsisted mostly on its note issue, and a little on its remittance business. only in , after nearly thirty years, it began to gain deposits, but from that time they augmented very rapidly. the banking history of england has been the same, though we have no country bank accounts in detail which go back so far. but probably up to in england, or thereabouts, the main profit of banks was derived from the circulation, and for many years after that the deposits were treated as very minor matters, and the whole of so-called banking discussion turned on questions of circulation. we are still living in the debris of that controversy, for, as i have so often said, people can hardly think of the structure of lombard street, except with reference to the paper currency and to the act of , which regulates it now. the french are still in the same epoch of the subject. the great enquete of is almost wholly taken up with currency matters, and mere banking is treated as subordinate. and the accounts of the bank of france show why. the last weekly statement before the german war showed that the circulation of the bank of france was as much as , , l., and that the private deposits were only , , l. now the private deposits are about the same, and the circulation is , , l. so difficult is it in even a great country like france for the deposit system of banking to take root, and establish itself with the strength and vigour that it has in england. the experience of germany is the same. the accounts preceding the war in north germany showed the circulation of the issuing banks to be , , l., and the deposits to be , , l. while the corresponding figures at the present moment are--circulation, , , l. and deposits , , l. it would be idle to multiply instances. the reason why the use of bank paper commonly precedes the habit of making deposits in banks is very plain. it is a far easier habit to establish. in the issue of notes the banker, the person to be most benefited, can do something. he can pay away his own 'promises' in loans, in wages, or in payment of debts. but in the getting of deposits he is passive. his issues depend on himself; his deposits on the favour of others. and to the public the change is far easier too. to collect a great mass of deposits with the same banker, a great number of persons must agree to do something. but to establish a note circulation, a large number of persons need only do nothing. they receive the banker's notes in the common course of their business, and they have only not to take those notes to the banker for payment. if the public refrain from taking trouble, a paper circulation is immediately in existence. a paper circulation is begun by the banker, and requires no effort on the part of the public; on the contrary, it needs an effort of the public to be rid of notes once issued; but deposit banking cannot be begun by the banker, and requires a spontaneous and consistent effort in the community. and therefore paper issue is the natural prelude to deposit banking. the way in which the issue of notes by a banker prepares the way for the deposit of money with him is very plain. when a private person begins to possess a great heap of bank-notes, it will soon strike him that he is trusting the banker very much, and that in re turn he is getting nothing. he runs the risk of loss and robbery just as if he were hoarding coin. he would run no more risk by the failure of the bank if he made a deposit there, and he would be free from the risk of keeping the cash. no doubt it takes time before even this simple reasoning is understood by uneducated minds. so strong is the wish of most people to see their money that they for some time continue to hoard bank-notes: for a long period a few do so. but in the end common sense conquers. the circulation of bank-notes decreases, and the deposit of money with the banker increases. the credit of the banker having been efficiently advertised by the note, and accepted by the public, he lives on the credit so gained years after the note issue itself has ceased to be very important to him. the efficiency of this introduction is proportional to the diffusion of the right of note issue. a single monopolist issuer, like the bank of france, works its way with difficulty through a country, and advertises banking very slowly. even now the bank of france, which, i believe, by law ought to have a branch in each department, has only branches in sixty out of eighty-six. on the other hand, the swiss banks, where there is always one or more to every canton, diffuse banking rapidly. we have seen that the liabilities of the bank of france stand thus: notes l , , deposits l , , but the aggregate swiss banks, on the contrary, stand: notes l , deposits l , , the reason is that a central bank which is governed in the capital and descends on a country district, has much fewer modes of lending money safely than a bank of which the partners belong to that district, and know the men and things in it. a note issue is mainly begun by loans; there are then no deposits to be paid. but the mass of loans in a rural district are of small amount; the bills to be discounted are trifling; the persons borrowing are of small means and only local repute; the value of any property they wish to pledge depends on local changes and local circumstances. a banker who lives in the district, who has always lived there, whose whole mind is a history of the district and its changes, is easily able to lend money safely there. but a manager deputed by a single central establishment does so with difficulty. the worst people will come to him and ask for loans. his ignorance is a mark for all the shrewd and crafty people thereabouts. he will have endless difficulties in establishing the circulation of the distant bank, because he has not the local knowledge which alone can teach him how to issue that circulation with safety. a system of note issues is therefore the best introduction to a large system of deposit banking. as yet, historically, it is the only introduction: no nation as yet has arrived at a great system of deposit banking without going first through the preliminary stage of note issue, and of such note issues the quickest and most efficient in this way is one made by individuals resident in the district, and conversant with it. and this explains why deposit banking is so rare. such a note issue as has been described is possible only in a country exempt from invasion, and free from revolution. during an invasion note-issuing banks must stop payment; a run is nearly inevitable at such a time, and in a revolution too. in such great and close civil dangers a nation is always demoralised; everyone looks to himself, and everyone likes to possess himself of the precious metals. these are sure to be valuable, invasion or no invasion, revolution or no revolution. but the goodness of bank-notes depends on the solvency of the banker, and that solvency may be impaired if the invasion is not repelled or the revolution resisted. hardly any continental country has been till now exempt for long periods both from invasion and revolution. in holland and germany--two countries where note issue and deposit banking would seem as natural as in england and scotland--there was never any security from foreign war. a profound apprehension of external invasion penetrated their whole habits, and men of business would have thought it insane not to contemplate a contingency so frequent in their history, and perhaps witnessed by themselves. france indeed, before , was an exception. for many years under the old regime she was exempt from serious invasion or attempted revolution. her government was fixed, as was then thought, and powerful; it could resist any external enemy, and the prestige on which it rested seemed too firm to fear any enemy from within. but then it was not an honest government, and it had shown its dishonesty in this particular matter of note issue. the regent in law's time had given a monopoly of note issue to a bad bank, and had paid off the debts of the nation in worthless paper. the government had created a machinery of ruin, and had thriven on it. among so apprehensive a race as the french the result was fatal. for many years no attempt at note issue or deposit banking was possible in france. so late as the foundation of the caisse d'escompte, in turgot's time, the remembrance of law's failure was distinctly felt, and impeded the commencement of better attempts. this therefore is the reason why lombard street exists; that is, why england is a very great money market, and other european countries but small ones in comparison. in england and scotland a diffused system of note issues started banks all over the country; in these banks the savings of the country have been lodged, and by these they have been sent to london. no similar system arose elsewhere, and in consequence london is full of money, and all continental cities are empty as compared with it. ii. the monarchical form of lombard street is due also to the note issue. the origin of the bank of england has been told by macaulay, and it is never wise for an ordinary writer to tell again what he has told so much better. nor is it necessary, for his writings are in everyone's hands. still i must remind my readers of the curious story. of all institutions in the world the bank of england is now probably the most remote from party politics and from 'financing.' but in its origin it was not only a finance company, but a whig finance company. it was founded by a whig government because it was in desperate want of money, and supported by the 'city' because the 'city' was whig. very briefly, the story was this. the government of charles ii. (under the cabal ministry) had brought the credit of the english state to the lowest possible point. it had perpetrated one of those monstrous frauds, which are likewise gross blunders. the goldsmiths, who then carried on upon a trifling scale what we should now call banking, used to deposit their reserve of treasure in the 'exchequer,' with the sanction and under the care of the government. in many european countries the credit of the state had been so much better than any other credit, that it had been used to strengthen the beginnings of banking. the credit of the state had been so used in england: though there had lately been a civil war and several revolutions, the honesty of the english government was trusted implicitly. but charles ii. showed that it was trusted undeservedly. he shut up the 'exchequer,' would pay no one, and so the 'goldsmiths' were ruined. the credit of the stuart government never recovered from this monstrous robbery, and the government created by the revolution of could hardly expect to be more trusted with money than its predecessor. a government created by a revolution hardly ever is. there is a taint of violence which capitalists dread instinctively, and there is always a rational apprehension that the government which one revolution thought fit to set up another revolution may think fit to pull down. in , the credit of william iii.'s government was so low in london that it was impossible for it to borrow any large sum; and the evil was the greater, because in consequence of the french war the financial straits of the government were extreme. at last a scheme was hit upon which would relieve their necessities. 'the plan,' says macaulay, 'was that twelve hundred thousand pounds should be raised at what was then considered as the moderate rate of per cent.' in order to induce the subscribers to advance the money promptly on terms so unfavourable to the public, the subscribers were to be incorporated by the name of the governor and company of the bank of england. they were so incorporated, and the , , l. was obtained. on many succeeding occasions, their credit was of essential use to the government. without their aid, our national debt could not have been borrowed; and if we had not been able to raise that money we should have been conquered by france and compelled to take back james ii. and for many years afterwards the existence of that debt was a main reason why the industrial classes never would think of recalling the pretender, or of upsetting the revolution settlement. the 'fund-holder' is always considered in the books of that time as opposed to his 'legitimate' sovereign, because it was to be feared that this sovereign would repudiate the debt which was raised by those who dethroned him, and which was spent in resisting him and his allies. for a long time the bank of england was the focus of london liberalism, and in that capacity rendered to the state inestimable services. in return for these substantial benefits the bank of england received from the government, either at first or afterwards, three most important privileges. first. the bank of england had the exclusive possession of the government balances. in its first period, as i have shown, the bank gave credit to the government, but afterwards it derived credit from the government. there is a natural tendency in men to follow the example of the government under which they live. the government is the largest, most important, and most conspicuous entity with which the mass of any people are acquainted; its range of knowledge must always be infinitely greater than the average of their knowledge, and therefore, unless there is a conspicuous warning to the contrary, most men are inclined to think their government right, and, when they can, to do what it does. especially in money matters a man might fairly reason--'if the government is right in trusting the bank of england with the great balance of the nation, i cannot be wrong in trusting it with my little balance.' second. the bank of england had, till lately, the monopoly of limited liability in england. the common law of england knows nothing of any such principle. it is only possible by royal charter or statute law. and by neither of these was any real bank (i do not count absurd schemes such as chamberlayne's land bank) permitted with limited liability in england till within these few years. indeed, a good many people thought it was right for the bank of england, but not right for any other bank. i remember hearing the conversation of a distinguished merchant in the city of london, who well represented the ideas then most current. he was declaiming against banks of limited liability, and some one asked--'why, what do you say, then, to the bank of england, where you keep your own account?' 'oh!' he replied, 'that is an exceptional case.' and no doubt it was an exception of the greatest value to the bank of england, because it induced many quiet and careful merchants to be directors of the bank, who certainly would not have joined any bank where all their fortunes were liable, and where the liability was not limited. thirdly. the bank of england had the privilege of being the sole joint stock company permitted to issue bank notes in england. private london bankers did indeed issue notes down to the middle of the last century, but no joint stock company could do so. the explanatory clause of the act of sounds most curiously to our modern ears. 'and to prevent any doubt that may arise concerning the privilege or power given to the said governor and company' that is, the bank of england' of exclusive banking; and also in regard to creating any other bank or banks by parliament, or restraining other persons from banking during the continuance of the said privilege granted to the governor and company of the bank of england, as before recited; it is hereby further enacted and declared by the authority aforesaid, that it is the true intent and meaning of the said act that no other bank shall be created, established, or allowed by parliament, and that it shall not be lawful for any body politic or corporate whatsoever created or to be created, or for any other persons whatsoever united or to be united in covenants or partnership exceeding the number of six persons in that part of great britain called england, to borrow, owe, or take up any sum or sums of money on their bills or notes payable on demand or at any less time than six months from the borrowing thereof during the continuance of such said privilege to the said governor and company, who are hereby declared to be and remain a corporation with the privilege of exclusive banking, as before recited.' to our modern ears these words seem to mean more than they did. the term banking was then applied only to the issue of notes and the taking up of money on bills on demand. our present system of deposit banking, in which no bills or promissory notes are issued, was not then known on a great scale, and was not called banking. but its effect was very important. it in time gave the bank of england the monopoly of the note issue of the metropolis. it had at that time no branches, and so it did not compete for the country circulation. but in the metropolis, where it did compete, it was completely victorious. no company but the bank of england could issue notes, and unincorporated individuals gradually gave way, and ceased to do so. up to london private bankers might have issued notes if they pleased, but almost a hundred years ago they were forced out of the field. the bank of england has so long had a practical monopoly of the circulation, that it is commonly believed always to have had a legal monopoly. and the practical effect of the clause went further: it was believed to make the bank of england the only joint stock company that could receive deposits, as well as the only company that could issue notes. the gift of 'exclusive banking' to the bank of england was read in its most natural modern sense: it was thought to prohibit any other banking company from carrying on our present system of banking. after joint stock banking was permitted in the country, people began to inquire why it should not exist in the metropolis too? and then it was seen that the words i have quoted only forbid the issue of negotiable instruments, and not the receiving of money when no such instrument is given. upon this construction, the london and westminster bank and all our older joint stock banks were founded. but till they began, the bank of england had among companies not only the exclusive privilege of note issue, but that of deposit banking too. it was in every sense the only banking company in london. with so many advantages over all competitors, it is quite natural that the bank of england should have far outstripped them all. inevitably it became the bank in london; all the other bankers grouped themselves round it, and lodged their reserve with it. thus our one reserve system of banking was not deliberately founded upon definite reasons; it was the gradual consequence of many singular events, and of an accumulation of legal privileges on a single bank which has now been altered, and which no one would now defend. chapter iv. the position of the chancellor of the exchequer in the money market. nothing can be truer in theory than the economical principle that banking is a trade and only a trade, and nothing can be more surely established by a larger experience than that a government which interferes with any trade injures that trade. the best thing undeniably that a government can do with the money market is to let it take care of itself. but a government can only carry out this principle universally if it observe one condition: it must keep its own money. the government is necessarily at times possessed of large sums in cash. it is by far the richest corporation in the country; its annual revenue payable in money far surpasses that of any other body or person. and if it begins to deposit this immense income as it accrues at any bank, at once it becomes interested in the welfare of that bank. it cannot pay the interest on its debt if that bank cannot produce the public deposits when that interest becomes due; it cannot pay its salaries, and defray its miscellaneous expenses, if that bank fail at any time. a modern government is like a very rich man with very great debts which he cannot well pay; its credit is necessary to its prosperity, almost to its existence, and if its banker fail when one of its debts becomes due its difficulty is intense. another banker, it will be said, may take up the government account. he may advance, as is so often done in other bank failures, what the government needs for the moment in order to secure the government account in future. but the imperfection of this remedy is that it fails in the very worst case. in a panic, and at a general collapse of credit, no such banker will probably be found. the old banker who possesses the government deposit cannot repay it, and no banker not having that deposit will, at a bad crisis, be able to find the , , l. or , , l. which the quarter day of a government such as ours requires. if a finance minister, having entrusted his money to a bank, begins to act strictly, and say he will in all cases let the money market take care of itself, the reply is that in one case the money market will take care of him too, and he will be insolvent. in the infancy of banking it is probably much better that a government should as a rule keep its own money. if there are not banks in which it can place secure reliance, it should not seem to rely upon them. still less should it give peculiar favour to any one, and by entrusting it with the government account secure to it a mischievous supremacy above all other banks. the skill of a financier in such an age is to equalise the receipt of taxation, and the outgoing of expenditure; it should be a principal care with him to make sure that more should not be locked up at a particular moment in the government coffers than is usually locked up there. if the amount of dead capital so buried in the treasury does not at any time much exceed the common average, the evil so caused is inconsiderable: it is only the loss of interest on a certain sum of money, which would not be much of a burden on the whole nation; the additional taxation it would cause would be inconsiderable. such an evil is nothing in comparison with that of losing the money necessary for inevitable expence by entrusting it to a bad bank, or that of recovering this money by identifying the national credit with the bad bank and so propping it up and perpetuating it. so long as the security of the money market is not entirely to be relied on, the government of a country had much better leave it to itself and keep its own money. if the banks are bad, they will certainly continue bad and will probably become worse if the government sustains and encourages them. the cardinal maxim is, that any aid to a present bad bank is the surest mode of preventing the establishment of a future good bank. when the trade of banking began to be better understood, when the banking system was thoroughly secure, the government might begin to lend gradually; especially to lend the unusually large sums which even under the most equable system of finance will at times accumulate in the public exchequer. under a natural system of banking it would have every facility. where there were many banks keeping their own reserve, and each most anxious to keep a sufficient reserve, because its own life and credit depended on it, the risk of the government in keeping a banker would be reduced to a minimum. it would have the choice of many bankers, and would not be restricted to any one. its course would be very simple, and be analogous to that of other public bodies in the country. the metropolitan board of works, which collects a great revenue in london, has an account at the london and westminster bank, for which that bank makes a deposit of consols as a security. the chancellor of the exchequer would have no difficulty in getting such security either. if, as is likely, his account would be thought to be larger than any single bank ought to be entrusted with, the public deposits might be divided between several. each would give security, and the whole public money would be safe. if at any time the floating money in the hands of government were exceptionally large, he might require augmented security to be lodged, and he might obtain an interest. he would be a lender of such magnitude and so much influence, that he might command his own terms. he might get his account kept safe if anyone could. if, on the other hand, the chancellor of the exchequer were a borrower, as at times he is, he would have every facility in obtaining what he wanted. the credit of the english government is so good that he could borrow better than anyone else in the world. he would have greater facility, indeed, than now, for, except with the leave of parliament, the chancellor of the exchequer cannot borrow by our present laws in the open market. he can only borrow from the bank of england on what are called 'deficiency bills.' in a natural system, he would borrow of any one out of many competing banks, selecting the one that would lend cheapest; but under our present artificial system, he is confined to a single bank, which can fix its own charge. if contrary to expectation a collapse occurred, the government might withdraw, as the american government actually has withdrawn, its balance from the bankers. it might give its aid, lend exchequer bills, or otherwise pledge its credit for the moment, but when the exigency was passed it might let the offending banks suffer. there would be a penalty for their misconduct. new and better banks, who might take warning from that misconduct, would arise. as in all natural trades, what is old and, rotten would perish, what is new and good would replace it. and till the new banks had proved, by good conduct, their fitness for state confidence, the state need not give it. the government could use its favour as a bounty on prudence, and the withdrawal of that favour as a punishment for culpable folly. under a good system of banking, a great collapse, except from rebellion or invasion, would probably not happen. a large number of banks, each feeling that their credit was at stake in keeping a good reserve, probably would keep one; if any one did not, it would be criticised constantly, and would soon lose its standing, and in the end disappear. and such banks would meet an incipient panic freely, and generously; they would advance out of their reserve boldly and largely, for each individual bank would fear suspicion, and know that at such periods it must 'show strength,' if at such times it wishes to be thought to have strength. such a system reduces to a minimum the risk that is caused by the deposit. if the national money can safely be deposited in banks in any way, this is the way to make it safe. but this system is nearly the opposite to that which the law and circumstances have created for us in england. the english government, far from keeping cash from the money market till the position of that market was reasonably secure, at a very early moment, and while credit of all kinds was most insecure, for its own interests entered into the money market. in order to effect loans better, it gave the custody and profit of its own money (along with other privileges) to a single bank, and therefore practically and in fact it is identified with the bank of this hour. it cannot let the money market take care of itself because it has deposited much money in that market, and it cannot pay its way if it loses that money. nor would any english statesman propose to 'wind up' the bank of england. a theorist might put such a suggestion on paper, but no responsible government would think of it. at the worst crisis and in the worst misconduct of the bank, no such plea has been thought of: in when its till was empty, in when it had to ask aid from the bank of france, no such idea was suggested. by irresistible tradition the english government was obliged to deposit its money in the money market and to deposit with this particular bank. and this system has plain and grave evils. st. because being created by state aid, it is more likely than a natural system to require state help. ndly. because, being a one-reserve system, it reduces the spare cash of the money market to a smaller amount than any other system, and so makes that market more delicate. there being a less hoard to meet liabilities, any error in the management of that reserve has a proportionately greater effect. rdly. because, our one reserve is, by the necessity of its nature, given over to one board of directors, and we are therefore dependent on the wisdom of that one only, and cannot, as in most trades, strike an average of the wisdom and the folly, the discretion and the indiscretion, of many competitors. lastly. because that board of directors is, like every other board, pressed on by its shareholders to make a high dividend, and therefore to keep a small reserve, whereas the public interest imperatively requires that they shall keep a large one. these four evils were inseparable from the system, but there is besides an additional and accidental evil. the english government not only created this singular system, but it proceeded to impair it, and demoralise all the public opinion respecting it. for more than a century after its creation (notwithstanding occasional errors) the bank of england, in the main, acted with judgment and with caution. its business was but small as we should now reckon, but for the most part it conducted that business with prudence and discretion. in , it had been involved in the most serious difficulties, and had been obliged to refuse to pay some of its notes. for a long period it was in wholesome dread of public opinion, and the necessity of retaining public confidence made it cautious. but the english government removed that necessity. in , mr. pitt feared that he might not be able to obtain sufficient species for foreign payments, in consequence of the low state of the bank reserve, and he therefore required the bank not to pay in cash. he removed the preservative apprehension which is the best security of all banks. for this reason the period under which the bank of england did not pay gold for its notes--the period from to --is always called the period of the bank restriction. as the bank during that period did not perform, and was not compelled by law to perform, its contract of paying its notes in cash, it might apparently have been well called the period of bank license. but the word 'restriction' was quite right, and was the only proper word as a description of, the policy of . mr. pitt did not say that the bank of england need not pay its notes in specie; he 'restricted' them from doing so; he said that they must not. in consequence, from to (when a new era begins), there never was a proper caution on the part of the bank directors. at heart they considered that the bank of england had a kind of charmed life, and that it was above the ordinary banking anxiety to pay its way. and this feeling was very natural. a bank of issue, which need not pay its notes in cash, has a charmed life; it can lend what it wishes, and issue what it likes, with no fear of harm to itself, and with no substantial check but its own inclination. for nearly a quarter of a century, the bank of england was such a bank, for all that time it could not be in any danger. and naturally the public mind was demoralised also. since , the public have always expected the government to help the bank if necessary. i cannot fully discuss the suspensions of the act of in , , and ; but indisputably one of their effects is to make people think that government will always help the bank if the bank is in extremity. and this is the sort of anticipation which tends to justify itself, and to cause what it expects. on the whole, therefore, the position of the chancellor of the exchequer in our money market is that of one who deposits largely in it, who created it, and who demoralised it. he cannot, therefore, banish it from his thoughts, or decline responsibility for it. he must arrange his finances so as not to intensify panics, but to mitigate them. he must aid the bank of england in the discharge of its duties; he must not impede or prevent it. his aid may be most efficient. he is, on finance, the natural exponent of the public opinion of england. and it is by that opinion that we wish the bank of england to be guided. under a natural system of banking we should have relied on self-interest, but the state prevented that; we now rely on opinion instead; the public approval is a reward, its disapproval a severe penalty, on the bank directors; and of these it is most important that the finance minister should be a sound and felicitous exponent. chapter v. the mode in which the value of money is settled in lombard street. many persons believe that the bank of england has some peculiar power of fixing the value of money. they see that the bank of england varies its minimum rate of discount from time to time, and that, more or less, all other banks follow its lead, and charge much as it charges; and they are puzzled why this should be. 'money,' as economists teach, 'is a commodity, and only a commodity;' why then, it is asked, is its value fixed in so odd a way, and not the way in which the value of all other commodities is fixed? there is at bottom, however, no difficulty in the matter. the value of money is settled, like that of all other commodities, by supply and demand, and only the form is essentially different. in other commodities all the large dealers fix their own price; they try to underbid one another, and that keeps down the price; they try to get as much as they can out of the buyer, and that keeps up the price. between the two what adam smith calls the higgling of the market settles it. and this is the most simple and natural mode of doing business, but it is not the only mode. if circumstances make it convenient another may be adopted. a single large holder--especially if he be by far the greatest holder--may fix his price, and other dealers may say whether or not they will undersell him, or whether or not they will ask more than he does. a very considerable holder of an article may, for a time, vitally affect its value if he lay down the minimum price which he will take, and obstinately adhere to it. this is the way in which the value of money in lombard street is settled. the bank of england used to be a predominant, and is still a most important, dealer in money. it lays down the least price at which alone it will dispose of its stock, and this, for the most part, enables other dealers to obtain that price, or something near it. the reason is obvious. at all ordinary moments there is not money enough in lombard street to discount all the bills in lombard street without taking some money from the bank of england. as soon as the bank rate is fixed, a great many persons who have bills to discount try how much cheaper than the bank they can get these bills discounted. but they seldom can get them discounted very much cheaper, for if they did everyone would leave the bank, and the outer market would have more bills than it could bear. in practice, when the bank finds this process beginning, and sees that its business is much diminishing, it lowers the rate, so as to secure a reasonable portion of the business to itself, and to keep a fair part of its deposits employed. at dutch auctions an upset or maximum price used to be fixed by the seller, and he came down in his bidding till he found a buyer. the value of money is fixed in lombard street in much the same way, only that the upset price is not that of all sellers, but that of one very important seller, some part of whose supply is essential. the notion that the bank of england has a control over the money market, and can fix the rate of discount as it likes, has survived from the old days before , when the bank could issue as many notes as it liked. but even then the notion was a mistake. a bank with a monopoly of note issue has great sudden power in the money market, but no permanent power: it can affect the rate of discount at any particular moment, but it cannot affect the average rate. and the reason is, that any momentary fall in money, caused by the caprice of such a bank, of itself tends to create an immediate and equal rise, so that upon an average the value is not altered. what happens is this. if a bank with a monopoly of note issue suddenly lends (suppose) , , l. more than usual, it causes a proportionate increase of trade and increase of prices. the persons to whom that , , l. was lent, did not borrow it to lock it up; they borrow it, in the language of the market, to 'operate with' that is, they try to buy with it; and that new attempt to buy--that new demand raises prices. and this rise of prices has three consequences. first. it makes everybody else want to borrow money. money is not so efficient in buying as it was, and therefore operators require more money for the same dealings. if railway stock is per cent dearer this year than last, a speculator who borrows money to enable him to deal must borrow per cent more this year than last, and in consequence there is an augmented demand for loans. secondly. this is an effectual demand, for the increased price of railway stock enables those who wish it to borrow more upon it. the common practice is to lend a certain portion of the market value of such securities, and if that value increases, the amount of the usual loan to be obtained on them increases too. in this way, therefore, any artificial reduction in the value of money causes a new augmentation of the demand for money, and thus restores that value to its natural level. in all business this is well known by experience: a stimulated market soon becomes a tight market, for so sanguine are enterprising men, that as soon as they get any unusual ease they always fancy that the relaxation is greater than it is, and speculate till they want more than they can obtain. in these two ways sudden loans by an issuer of notes, though they may temporarily lower the value of money, do not lower it permanently, because they generate their own counteraction. and this they do whether the notes issued are convertible into coin or not. during the period of bank restriction, from to , the bank of england could not absolutely control the money market, any more than it could after , when it was compelled to pay its notes in coin. but in the case of convertible notes there is a third effect, which works in the same direction, and works more quickly. a rise of prices, confined to one country, tends to increase imports, because other countries can obtain more for their goods if they send them there, and it discourages exports, because a merchant who would have gained a profit before the rise by buying here to sell again will not gain so much, if any, profit after that rise. by this augmentation of imports the indebtedness of this country is augmented, and by this diminution of exports the proportion of that indebtedness which is paid in the usual way is decreased also. in consequence, there is a larger balance to be paid in bullion; the store in the bank or banks keeping the reserve is diminished, and the rate of interest must be raised by them to stay the efflux. and the tightness so produced is often greater than, and always equal to, the preceding unnatural laxity. there is, therefore, no ground for believing, as is so common, that the value of money is settled by different causes than those which affect the value of other commodities, or that the bank of england has any despotism in that matter. it has the power of a large holder of money, and no more. even formerly, when its monetary powers were greater and its rivals weaker, it had no absolute control. it was simply a large corporate dealer, making bids and much influencing--though in no sense compelling--other dealers thereby. but though the value of money is not settled in an exceptional way, there is nevertheless a peculiarity about it, as there is about many articles. it is a commodity subject to great fluctuations of value, and those fluctuations are easily produced by a slight excess or a slight deficiency of quantity. up to a certain point money is a necessity. if a merchant has acceptances to meet to-morrow, money he must and will find to-day at some price or other. and it is this urgent need of the whole body of merchants which runs up the value of money so wildly and to such a height in a great panic. on the other hand, money easily becomes a 'drug,' as the phrase is, and there is soon too much of it. the number of accepted securities is limited, and cannot be rapidly increased; if the amount of money seeking these accepted securities is more than can be lent on them the value of money soon goes down. you may often hear in the market that bills are not to be had, meaning good bills of course, and when you hear this you may be sure that the value of money is very low. if money were all held by the owners of it, or by banks which did not pay an interest for it, the value of money might not fall so fast. money would, in the market phrase, be 'well held.' the possessors would be under no necessity to employ it all; they might employ part at a high rate rather than all at a low rate. but in lombard street money is very largely held by those who do pay an interest for it, and such persons must employ it all, or almost all, for they have much to pay out with one hand, and unless they receive much with the other they will be ruined. such persons do not so much care what is the rate of interest at which they employ their money: they can reduce the interest they pay in proportion to that which they can make. the vital points to them is to employ it at some rate. if you hold (as in lombard street some persons do) millions of other people's money at interest, arithmetic teaches that you will soon be ruined if you make nothing of it even if the interest you pay is not high. the fluctuations in the value of money are therefore greater than those on the value of most other commodities. at times there is an excessive pressure to borrow it, and at times an excessive pressure to lend it, and so the price is forced up and down. these considerations enable us to estimate the responsibility which is thrown on the bank of england by our system, and by every system on the bank or banks who by it keep the reserve of bullion or of legal tender exchangeable for bullion. these banks can in no degree control the permanent value of money, but they can completely control its momentary value. they cannot change the average value, but they can determine the deviations from the average. if the dominant banks manage ill, the rate of interest will at one time be excessively high, and at another time excessively low: there will be first a pernicious excitement, and next a fatal collapse. but if they manage well, the rate of interest will not deviate so much from the average rate; it will neither ascend so high nor descend so low. as far as anything can be steady the value of money will then be steady, and probably in consequence trade will be steady too--at least a principal cause of periodical disturbance will have been withdrawn from it. chapter vi. why lombard street is often very dull, and sometimes extremely excited. any sudden event which creates a great demand for actual cash may cause, and will tend to cause, a panic in a country where cash is much economised, and where debts payable on demand are large. in such a country an immense credit rests on a small cash reserve, and an unexpected and large diminution of that reserve may easily break up and shatter very much, if not the whole, of that credit. such accidental events are of the most various nature: a bad harvest, an apprehension of foreign invasion, the sudden failure of a great firm which everybody trusted, and many other similar events, have all caused a sudden demand for cash. and some writers have endeavoured to classify panics according to the nature of the particular accidents producing them. but little, however, is, i believe, to be gained by such classifications. there is little difference in the effect of one accident and another upon our credit system. we must be prepared for all of them, and we must prepare for all of them in the same way--by keeping a large cash reserve. but it is of great importance to point out that our industrial organisation is liable not only to irregular external accidents, but likewise to regular internal changes; that these changes make our credit system much more delicate at some times than at others; and that it is the recurrence of these periodical seasons of delicacy which has given rise to the notion that panics come according to a fixed rule, that every ten years or so we must have one of them. most persons who begin to think of the subject are puzzled on the threshold. they hear much of 'good times' and 'bad times,' meaning by 'good' times in which nearly everyone is very well off, and by 'bad' times in which nearly everyone is comparatively ill off. and at first it is natural to ask why should everybody, or almost everybody, be well off together? why should there be any great tides of industry, with large diffused profit by way of flow, and large diffused want of profit, or loss, by way of ebb? the main answer is hardly given distinctly in our common books of political economy. these books do not tell you what is the fund out of which large general profits are paid in good times, nor do they ex plain why that fund is not available for the same purpose in bad times. our current political economy does not sufficiently take account of time as an element in trade operations; but as soon as the division of labour has once established itself in a community, two principles at once begin to be important, of which time is the very essence. these are: first. that as goods are produced to be exchanged, it is good that they should be exchanged as quickly as possible. secondly. that as every producer is mainly occupied in producing what others want, and not what he wants himself, it is desirable that he should always be able to find, without effort, without delay, and without uncertainty, others who want what he can produce. in themselves these principles are self-evident. everyone will admit it to be expedient that all goods wanting to be sold should be sold as soon as they are ready; that every man who wants to work should find employment as soon as he is ready for it. obviously also, as soon as the 'division of labour' is really established, there is a difficulty about both of these principles. a produces what he thinks b wants, but it may be a mistake, and b may not want it. a may be able and willing to produce what b wants, but he may not be able to find b--he may not know of his existence. the general truth of these principles is obvious, but what is not obvious is the extreme greatness of their effects. taken together, they make the whole difference between times of brisk trade and great prosperity, and times of stagnant trade and great adversity, so far as that prosperity and that adversity are real and not illusory. if they are satisfied, everyone knows whom to work for, and what to make, and he can get immediately in exchange what he wants himself. there is no idle labour and no sluggish capital in the whole community, and, in consequence, all which can be produced is produced, the effectiveness of human industry is augmented, and both kinds of producers--both capitalists and labourers--are much richer than usual, because the amount to be divided between them is also much greater than usual. and there is a partnership in industries. no single large industry can be depressed without injury to other industries; still less can any great group of industries. each industry when prosperous buys and consumes the produce probably of most (certainly of very many) other industries, and if industry a fail and is in difficulty, industries b, and c, and d, which used to sell to it, will not be able to sell that which they had produced in reliance on a's demand, and in future they will stand idle till industry a recovers, because in default of a there will be no one to buy the commodities which they create. then as industry b buys of c, d, &c., the adversity of b tells on c, d, &c., and as these buy of e, f, &c., the effect is propagated through the whole alphabet. and in a certain sense it rebounds. z feels the want caused by the diminished custom of a, b, & c, and so it does not earn so much; in consequence, it cannot lay out as much on the produce of a, b, & c, and so these do not earn as much either. in all this money is but an instrument. the same thing would happen equally well in a trade of barter, if a state of barter on a very large scale were not practically impossible, on account of the time and trouble which it would necessarily require. as has been explained, the fundamental cause is that under a system in which everyone is dependent on the labour of everyone else, the loss of one spreads and multiplies through all, and spreads and multiplies the faster the higher the previous perfection of the system of divided labour, and the more nice and effectual the mode of interchange. and the entire effect of a depression in any single large trade requires a considerable time before it can be produced. it has to be propagated, and to be returned through a variety of industries, before it is complete. short depressions, in consequence, have scarcely any discernible consequences; they are over before we think of their effects. it is only in the case of continuous and considerable depressions that the cause is in action long enough to produce discernible effects. the most common, and by far the most important, case where the depression in one trade causes depression in all others, is that of depressed agriculture. when the agriculture of the world is ill off, food is dear. and as the amount of absolute necessaries which a people consumes cannot be much diminished, the additional amount which has to be spent on them is so much subtracted from what used to be spent on other things. all the industries, a, b, c, d, up to z, are somewhat affected by an augmentation in the price of corn, and the most affected are the large ones, which produce the objects in ordinary times most consumed by the working classes. the clothing trades feel the difference at once, and in this country the liquor trade (a great source of english revenue) feels it almost equally soon. especially when for two or three years harvests have been bad, and corn has long been dear, every industry is impoverished, and almost every one, by becoming poorer, makes every other poorer too. all trades are slack from diminished custom, and the consequence is a vast stagnant capital, much idle labour, and a greatly retarded production. it takes two or three years to produce this full calamity, and the recovery from it takes two or three years also. if corn should long be cheap, the labouring classes have much to spend on what they like besides. the producers of those things become prosperous, and have a greater purchasing power. they exercise it, and that creates in the class they deal with another purchasing power, and so all through society. the whole machine of industry is stimulated to its maximum of energy, just as before much of it was slackened almost to its minimum. a great calamity to any great industry will tend to produce the same effect, but the fortunes of the industries on which the wages of labour are expended are much more important than those of all others, because they act much more quickly upon a larger mass of purchasers. on principle, if there was a perfect division of labour, every industry would have to be perfectly prosperous in order that any one might be so. so far, therefore, from its being at all natural that trade should develop constantly, steadily, and equably, it is plain, without going farther, from theory as well as from experience, that there are inevitably periods of rapid dilatation, and as inevitably periods of contraction and of stagnation. nor is this the only changeable element in modern industrial societies. credit--the disposition of one man to trust another--is singularly varying. in england, after a great calamity, everybody is suspicious of everybody; as soon as that calamity is forgotten, everybody again confides in everybody. on the continent there has been a stiff controversy as to whether credit should or should not be called capital:' in england, even the little attention once paid to abstract economics is now diverted, and no one cares in the least for refined questions of this kind: the material practical point is that, in m. chevalier's language, credit is 'additive,' or additional--that is, in times when credit is good productive power is more efficient, and in times when credit is bad productive power is less efficient. and the state of credit is thus influential, because of the two principles which have just been explained. in a good state of credit, goods lie on hand a much less time than when credit is bad; sales are quicker; intermediate dealers borrow easily to augment their trade, and so more and more goods are more quickly and more easily transmitted from the producer to the consumer. these two variable causes are causes of real prosperity. they augment trade and production, and so are plainly beneficial, except where by mistake the wrong things are produced, or where also by mistake misplaced credit is given, and a man who cannot produce anything which is wanted gets the produce of other people's labour upon a false idea that he will produce it. but there is another variable cause which produces far more of apparent than of real prosperity and of which the effect is in actual life mostly confused with those of the others. in our common speculations we do not enough remember that interest on money is a refined idea, and not a universal one. so far indeed is it from being universal, that the majority of saving persons in most countries would reject it. most savings in most countries are held in hoarded specie. in asia, in africa, in south america, largely even in europe, they are thus held, and it would frighten most of the owners to let them out of their keeping. an englishman--a modern englishman at least--assumes as a first principle that he ought to be able to 'put his money into something safe that will yield per cent;' but most saving persons in most countries are afraid to 'put their money' into anything. nothing is safe to their minds; indeed, in most countries, owing to a bad government and a backward industry, no investment, or hardly any, really is safe. in most countries most men are content to forego interest; but in more advanced countries, at some times there are more savings seeking investment than there are known investments for; at other times there is no such superabundance. lord macaulay has graphically described one of the periods of excess. he says--'during the interval between the restoration and the revolution the riches of the nation had been rapidly increasing. thousands of busy men found every christmas that, after the expenses of the year's housekeeping had been defrayed out of the year's income, a surplus remained; and how that surplus was to be employed was a question of some difficulty. in our time, to invest such a surplus, at something more than three per cent, on the best security that has ever been known in the world, is the work of a few minutes. but in the seventeenth century, a lawyer, a physician, a retired merchant, who had saved some thousands, and who wished to place them safely and profitably, was often greatly embarrassed. three generations earlier, a man who had accumulated wealth in a profession generally purchased real property, or lent his savings on mortgage. but the number of acres in the kingdom had remained the same; and the value of those acres, though it had greatly increased, had by no means increased so fast as the quantity of capital which was seeking for employment. many too wished to put their money where they could find it at an hour's notice, and looked about for some species of property which could be more readily transferred than a house or a field. a capitalist might lend on bottomry or on personal security; but, if he did so, he ran a great risk of losing interest and principal. there were a few joint stock companies, among which the east india company held the foremost place; but the demand for the stock of such companies was far greater than the supply. indeed the cry for a new east india company was chiefly raised by persons who had found difficulty in placing their savings at interest on good security. so great was that difficulty that the practice of hoarding was common. we are told that the father of pope, the poet, who retired from business in the city about the time of the revolution, carried to a retreat in the country a strong box containing near twenty thousand pounds, and took out from time to time what was required for household expenses; and it is highly probable that this was not a solitary case. at present the quantity of coin which is hoarded by private persons is so small, that it would, if brought forth, make no perceptible addition to the circulation. but, in the earlier part of the reign of william the third, all the greatest writers on currency were of opinion that a very considerable mass of gold and silver was hidden in secret drawers and behind wainscots. 'the natural effect of this state of things was that a crowd of projectors, ingenious and absurd, honest and knavish, employed themselves in devising new schemes for the employment of redundant capital. it was about the year that the word stockjobber was first heard in london. in the short space of four years a crowd of companies, every one of which confidently held out to subscribers the hope of immense gains, sprang into existence--the insurance company, the paper company, the lutestring company, the pearl fishery company, the glass bottle company, the alum company, the blythe coal company, the swordblade company. there was a tapestry company, which would soon furnish pretty hangings for all the parlours of the middle class, and for all the bed-chambers of the higher. there was a copper company, which proposed to explore the mines of england, and held out a hope that they would prove not less valuable than those of potosi. there was a diving company, which undertook to bring up precious effects from shipwrecked vessels, and which announced that it had laid in a stock of wonderful machines resembling complete suits of armour. in front of the helmet was a huge glass eye like that of a cyclops; and out of the crest went a pipe through which the air was to be admitted. the whole process was exhibited on the thames. fine gentlemen and fine ladies were invited to the show, were hospitably regaled, and were delighted by seeing the divers in their panoply descend into the river and return laden with old iron and ship's tackle. there was a greenland fishing company, which could not fail to drive the dutch whalers and herring busses out of the northern ocean. there was a tanning company, which promised to furnish leather superior to the best that was brought from turkey or russia. there was a society which undertook the office of giving gentlemen a liberal education on low terms, and which assumed the sounding name of the royal academies company. in a pompous advertisement it was announced that the directors of the royal academies company had engaged the best masters in every branch of knowledge, and were about to issue twenty thousand tickets at twenty shillings each. there was to be a lottery--two thousand prizes were to be drawn; and the fortunate holders of the prizes were to be taught, at the charge of the company, latin, greek, hebrew, french, spanish, conic sections, trigonometry, heraldry, japaning, fortification, bookkeeping, and the art of playing the theorbo.' the panic was forgotten till lord macaulay revived the memory of it. but, in fact, in the south sea bubble, which has always been remembered, the form was the same, only a little more extravagant; the companies in that mania were for objects such as these:--' "wrecks to be fished for on the irish coast--insurance of horses and other cattle (two millions)--insurance of losses by servants--to make salt water fresh--for building of hospitals for bastard children--for building of ships against pirates--for making of oil from sun-flower seeds--for improving of malt liquors--for recovery of seamen's wages--for extracting of silver from lead--for the transmuting of quicksilver into a malleable and fine metal--for making of iron with pit-coal--for importing a number of large jack asses from spain--for trading in human hair--for fatting of hogs--for a wheel of perpetual motion." but the most strange of all, perhaps, was "for an undertaking which shall in due time be revealed." each subscriber was to pay down two guineas, and hereafter to receive a share of one hundred, with a disclosure of the object; and so tempting was the offer, that , of these subscriptions were paid the same morning, with which the projector went off in the afternoon.' in there were speculations in companies nearly as wild, and just before there were some of a like nature, though not equally extravagant. the fact is, that the owners of savings not finding, in adequate quantities, their usual kind of investments, rush into anything that promises speciously, and when they find that these specious investments can be disposed of at a high profit, they rush into them more and more. the first taste is for high interest, but that taste soon becomes secondary. there is a second appetite for large gains to be made by selling the principal which is to yield the interest. so long as such sales can be effected the mania continues; when it ceases to be possible to effect them, ruin begins. so long as the savings remain in possession of their owners, these hazardous gamblings in speculative undertakings are almost the whole effect of an excess of accumulation over tested investment. little effect is produced on the general trade of the country. the owners of the savings are too scattered and far from the market to change the majority of mercantile transactions. but when these savings come to be lodged in the hands of bankers, a much wider result is produced. bankers are close to mercantile life; they are always ready to lend on good mercantile securities; they wish to lend on such securities a large part of the money entrusted to them. when, therefore, the money so entrusted is unusually large, and when it long continues so, the general trade of the country is, in the course of time, changed. bankers are daily more and more ready to lend money to mercantile men; more is lent to such men; more bargains are made in consequence; commodities are more sought after; and, in consequence, prices rise more and more. the rise of prices is quickest in an improving state of credit. prices in general are mostly determined by wholesale transactions. the retail dealer adds a percentage to the wholesale prices, not, of course, always the same percentage, but still mostly the same. given the wholesale price of most articles, you can commonly tell their retail price. now wholesale transactions are commonly not cash transactions, but bill transactions. the duration of the bill varies with the custom of the trade; it may be two, three months, or six weeks, but there is always a bill. times of credit mean times in which the bills of many people are taken readily; times of bad credit, times when the bills of much fewer people are taken, and even of those suspiciously. in times of good credit there are a great number of strong purchasers, and in times of bad credit only a smaller number of weak ones; and, therefore, years of improving credit, if there be no disturbing cause, are years of rising price, and years of decaying credit, years of falling price. this is the meaning of the saying 'john bull can stand many things, but he cannot stand two per cent:' it means that the greatest effect of the three great causes is nearly peculiar to england; here, and here almost alone, the excess of savings over investments is deposited in banks; here, and here only, is it made use of so as to affect trade at large; here, and here only, are prices gravely affected. in these circumstances, a low rate of interest, long protracted, is equivalent to a total depreciation of the precious metals. in his book on the effect of the great gold discoveries, professor jevons showed, and so far as i know, was the first to show, the necessity of eliminating these temporary changes of value in gold before you could judge properly of the permanent depreciation. he proved, that in the years preceding both and there was a general rise of prices; and in the years succeeding these years, a great fall. the same might be shown of the years before and after , _mutatis mutandis_. and at the present moment we have a still more remarkable example, which was thus analysed in the economist of the th december, , in an article which i venture to quote as a whole: 'the great rise in the price of commodities. 'most persons are aware that the trade of the country is in a state of great activity. all the usual tests indicate that--the state of the revenue, the bankers' clearing-house figures, the returns of exports and imports are all plain, and all speak the same language. but few have, we think, considered one most remarkable feature of the present time, or have sufficiently examined its consequences. that feature is the great rise in the price of most of the leading articles of trade during the past year. we give at the foot of this paper a list of articles, comprising most first-rate articles of commerce, and it will be seen that the rise of price, though not universal and not uniform, is nevertheless very striking and very general. the most remarkable cases are-- january december l, s. d. l, s. d. wool--south down hogs per pack cotton--upland ordinary per lb. - / - / no. mule yarn, &c. per lb. - / - / iron--bars, british per ton pig, no. clyde per ton lead per ton tin per ton copper--sheeting per ton wheat (gazette average) per qr. --and in other cases there is a tendency upwards in price much more often than there is a tendency downwards. 'this general rise of price must be due either to a diminution in the supply of the quoted articles, or to an increased demand for them. in some cases there has no doubt been a short supply. thus in wool, the diminution in the home breed of sheep has had a great effect on the price-- in the home stock of sheep was , , in , , ---------- diminution , , equal to . per cent and in the case of some other articles there may be a similar cause operating. but taking the whole mass of the supply of commodities in this country, as shown by the plain test of the quantities imported, it has not diminished, but augmented. the returns of the board of trade prove this in the most striking manner, and we give below a table of some of the important articles. the rise in prices must, therefore, be due to an increased demand, and the first question is, to what is that demand due? 'we believe it to be due to the combined operation of three causes cheap money, cheap corn, and improved credit. as to the first indeed, it might be said at first sight that so general an increase must be due to a depreciation of the precious metals. certainly in many controversies facts far less striking have been alleged as proving it. and indeed there plainly is a diminution in the purchasing power of money, though that diminution is not general and permanent, but local and temporary. the peculiarity of the precious metals is that their value depends for unusually long periods on the quantity of them which is in the market. in the long run, their value, like that of all others, is determined by the cost at which they can be brought to market. but for all temporary purposes, it is the supply in the market which governs the price, and that supply in this country is exceedingly variable. after a commercial crisis, for example, two things happen: first, we call in the debts which are owing to us in foreign countries; and we require these debts to be paid to us, not in commodities, but in money. from this cause principally, and omitting minor causes, the bullion in the bank of england, which was , , l. in may , rose to , , l. in january , being an increase of over , , l. and then there comes also a second cause, tending in the same direction. during a depressed period the savings of the country increase considerably faster than the outlet for them. a person who has made savings does not know what to do with them. and this new unemployed saving means additional money. till a saving is invested or employed it exists only in the form of money: a farmer who has sold his wheat and has l. 'to the good,' holds that l. in money, or some equivalent for money, till he sees some advantageous use to be made of it. probably he places it in a bank, and this enables it to do more work. if , , l. of coin be deposited in a bank, and it need only keep , , l. as a reserve, that sets , , l. free, and is for the time equivalent to an increase of so much coin. as a principle it may be laid down that all new unemployed savings require _either an increased stock of the precious metals, or an increase in the efficiency of the banking expedients by which these metals are economised_. in other words, in a saving and uninvesting period of the national industry, we accumulate gold, and augment the efficiency of our gold. if therefore such a saving period follows close upon an occasion when foreign credits have been diminished and foreign debts called in, the augmentation in the effective quantity of gold in the country is extremely great. the old money called in from abroad and the new money representing the new saving co-operate with one another. and their natural tendency is to cause a general rise in price, and what is the same thing, a diffused diminution in the purchasing power of money. 'up to this point there is nothing special in the recent history of the money market. similar events happened both after the panic of , and after that of . but there is another cause of the same kind, and acting in the same direction, which is peculiar to the present time; this cause is the amount of the foreign money, and especially of the money of foreign governments, now in london. no government probably ever had nearly as much at its command as the german government now has. speaking broadly, two things happened: during the war england was the best place of shelter for foreign money, and this made money more cheap here than it would otherwise have been; after the war england became the most convenient paying place, and the most convenient resting place for money, and this again has made money cheaper. the commercial causes, for which there are many precedents, have been aided by a political cause for the efficacy of which there is no precedent. 'but though plentiful money is necessary to high prices, and though it has a natural tendency to produce these prices, yet it is not of itself sufficient to produce them. in the cases we are dealing with, in order to lower prices there must not only be additional money, but a satisfactory mode of employing that additional money. this is obvious if we remember whence that augmented money is derived. it is derived from the savings of the people, and will only be invested in the manner which the holders for the time being consider suitable to such savings. it will not be used in mere expenditure; it would be contrary to the very nature of it so to use it. a new channel of demand is required to take off the new money, or that new money will not raise prices. it will lie idle in the banks, as we have often seen it. we should still see the frequent, the common phenomenon of dull trade and cheap money existing side by side. 'the demand in this case arose in the most effective of all ways. in and the first half of corn was dear, as the following figures show: gazette average price of wheat. s. d. december, january, february march april may june july august september october november december january, february march april may june july from that time it fell, and it was very cheap during the whole of and . the effect of this cheapness is great in every department of industry. the working classes, having cheaper food, need to spend so much less on that food, and have more to spend on other things. in consequence, there is a gentle augmentation of demand through almost all departments of trade. and this almost always causes a great augmentation in what may be called the instrumental trades--that is, in the trades which deal in machines and instruments used in many branches of commerce, and in the materials for such. take, for instance, the iron trade-- in the year we exported , , tons " " , , tons -------------- , , tons " " , , tons " " , , tons -------------- , , tons -------------- increase , , tons that is to say, cheap corn operating throughout the world, created a new demand for many kinds of articles; the production of a large number of such articles being aided by iron in some one of its many forms, iron to that extent was exported. and the effect is cumulative. the manufacture of iron being stimulated, all persons concerned in that great manufacture are well off, have more to spend, and by spending it encourage other branches of manufacture, which again propagate the demand; they receive and so encourage industries in a third degree dependent and removed. 'it is quite true that corn has not been quite so cheap during the present year. but even if it had been dearer than it is, it would not all at once arrest the great trade which former cheapness had created. the "ball," if we may so say, "was set rolling" in and , and a great increase of demand was then created in certain trades and propagated through all trades. a continuance of very high prices would produce the reverse effect; it would slacken demand in certain trades, and the effect would be gradually diffused through all trades. but a slight rise such as that of this year has no perceptible effect. 'when the stimulus of cheap corn is added to that of cheap money, the full conditions of a great and diffused rise of prices are satisfied. this new employment supplies a mode in which money can be invested. bills are drawn of greater number and greater magnitude, and through the agencies of banks and discount houses, the savings of the country are invested in such bills. there is thus a new want and a new purchase-money to supply that want, and the consequence is the diffused and remarkable rise of price which the figures show to have occurred. 'the rise has also been aided by the revival of credit. this, as need not be at length explained, is a great aid to buying, and consequently a great aid to a rise of price. since , credit has been gradually, though very slowly, recovering, and it is probably as good as it is reasonable or proper that it should be. we are now trusting as many people as we ought to trust, and as yet there is no wild excess of misplaced confidence which would make us trust those whom we ought not to trust.' the process thus explained is the common process. the surplus of loanable capital which lies in the hands of bankers is not employed by them in any original way; it is almost always lent to a trade already growing and already improving. the use of it develops that trade yet farther, and this again augments and stimulates other trades. capital may long lie idle in a stagnant condition of industry; the mercantile securities which experienced bankers know to be good do not augment, and they will not invent other securities, or take bad ones. in most great periods of expanding industry, the three great causes--much loanable capital, good credit, and the increased profits derived from better-used labour and better-used capital--have acted simultaneously; and though either may act by itself, there is a permanent reason why mostly they will act together. they both tend to grow together, if you begin from a period of depression. in such periods credit is bad, and industry unemployed; very generally provisions are high in price, and their dearness was one of the causes which made the times bad. whether there was or was not too much loanable capital when that period begins, there soon comes to be too much. quiet people continue to save part of their incomes in bad times as well as in good; indeed, of the two, people of slightly-varying and fixed incomes have better means of saving in bad times because prices are lower. quiescent trade affords no new securities in which the new saving can be invested, and therefore there comes soon to be an excess of loanable capital. in a year or two after a crisis credit usually improves, as the remembrance of the disasters which at the crisis impaired credit is becoming fainter and fainter. provisions get back to their usual price, or some great industry makes, from some temporary cause, a quick step forward. at these moments, therefore, the three agencies which, as has been explained, greatly develope trade, combine to develope it simultaneously. the certain result is a bound of national prosperity; the country leaps forward as if by magic. but only part of that prosperity has a solid reason. as far as prosperity is based on a greater quantity of production, and that of the right articles--as far as it is based on the increased rapidity with which commodities of every kind reach those who want them--its basis is good. human industry is more efficient, and therefore there is more to be divided among mankind. but in so far as that prosperity is based on a general rise of prices, it is only imaginary. a general rise of prices is a rise only in name; whatever anyone gains on the article which he has to sell he loses on the articles which he has to buy, and so he is just where he was. the only real effects of a general rise of prices are these: first, it straitens people of fixed incomes, who suffer as purchasers, but who have no gain to correspond; and secondly, it gives an extra profit to fixed capital created before the rise happened. here the sellers gain, but without any equivalent loss as buyers. thirdly, this gain on fixed capital is greatest in what may be called the industrial 'implements,' such as coal and iron. these are wanted in all industries, and in any general increase of prices, they are sure to rise much more than other things. everybody wants them; the supply of them cannot be rapidly augmented, and therefore their price rises very quickly. but to the country as a whole, the general rise of prices is no benefit at all; it is simply a change of nomenclature for an identical relative value in the same commodities. nevertheless, most people are happier for it; they think they are getting richer, though they are not. and as the rise does not happen on all articles at the same moment, but is propagated gradually through society, those to whom it first comes gain really; and as at first every one believes that he will gain when his own article is rising, a buoyant cheerfulness overflows the mercantile world. this prosperity is precarious as far as it is real, and transitory in so far as it is fictitious. the augmented production, which is the reason of the real prosperity, depends on the full working of the whole industrial organisation--of all capitalists and labourers; that prosperity was caused by that full working, and will cease with it. but that full working is liable to be destroyed by the occurrence of any great misfortune to any considerable industry. this would cause misfortune to the industries dependent on that one, and, as has been explained, all through society and back again. but every such industry is liable to grave fluctuations, and the most important--the provision industries--to the gravest and the suddenest. they are dependent on the casualties of the seasons. a single bad harvest diffused over the world, a succession of two or three bad harvests, even in england only, will raise the price of corn exceedingly, and will keep it high. and a great and protracted rise in the price of corn will at once destroy all the real part of the unusual prosperity of previous good times. it will change the full working of the industrial machine into an imperfect working; it will make the produce of that machine less than usual instead of more than usual; instead of there being more than the average of general dividend to be distributed between the producers, there will immediately be less than the average. and in so far as the apparent prosperity is caused by an unusual plentifulness of loanable capital and a consequent rise in prices, that prosperity is not only liable to reaction, but certain to be exposed to reaction. the same causes which generate this prosperity will, after they have been acting a little longer, generate an equivalent adversity. the process is this: the plentifulness of loanable capital causes a rise of prices; that rise of prices makes it necessary to have more loanable capital to carry on the same trade. , l. will not buy as much when prices are high as it will when prices are low, it will not be so effectual for carrying on business; more money is necessary in dear times than in cheap times to produce the same changes in the same commodities. even supposing trade to have remained stationary, a greater capital would be required to carry it on after such a rise of prices as has been described than was necessary before that rise. but in this case the trade will not have remained stationary; it will have increased--certainly to some extent, probably to a great extent. the 'loanable capital,' the lending of which caused the rise of prices, was lent to enable it--to augment. the loanable capital lay idle in the banks till some trade started into prosperity, and then was lent in order to develope that trade; that trade caused other secondary developments; those secondary developments enabled more loanable capital to be lent; and that lending caused a tertiary development of trade; and so on through society. in consequence, a long-continued low rate of interest is almost always followed by a rapid rise in that rate. till the available trade is found it lies idle, and can scarcely be lent at all; some of it is not lent. but the moment the available trade is discovered--the moment that prices have risen--the demand for loanable capital becomes keen. for the most part, men of business must carry on their regular trade; if it cannot be carried on without borrowing per cent more capital, per cent more capital they must borrow. very often they have incurred obligations which must be met; and if that is so the rate of interest which they pay is comparatively indifferent. what is necessary to meet their acceptances they will borrow, pay for it what they may; they had better pay any price than permit those acceptances to be dishonoured. and in less extreme eases men of business have a fixed capital, which cannot lie idle except at a great loss; a set of labourers which must be, if possible, kept together; a steady connection of customers, which they would very unwillingly lose. to keep all these, they borrow; and in a period of high prices many merchants are peculiarly anxious to borrow, because the augmentation of the price of the article in which they deal makes them really see, or imagine that they see, peculiar opportunities of profit. an immense new borrowing soon follows upon the new and great trade, and the rate of interest rises at once, and generally rises rapidly. this is the surer to happen that lombard street is, as has been shown before, a very delicate market. a large amount of money is held there by bankers and by bill-brokers at interest: this they must employ, or they will be ruined. it is better for them to reduce the rate they charge, and compensate themselves by reducing the rate they pay, rather than to keep up the rate of charge, if by so doing they cannot employ all their money. it is vital to them to employ all the money on which they pay interest. a little excess therefore forces down the rate of interest very much. but if that low rate of interest should cause, or should aid in causing, a great growth of trade, the rise is sure to be quick, and is apt to be violent. the figures of trade are reckoned by hundreds of millions, where those of loanable capital count only by millions. a great increase in the borrowing demands of english commerce almost always changes an excess of loanable capital above the demand to a greater deficiency below the demand. that deficiency causes adversity, or apparent adversity, in trade, just as, and in the same manner, that the previous excess caused prosperity, or apparent prosperity. it causes a fall of price that runs through society; that fall causes a decline of activity and a diminution of profits--a painful contraction instead of the previous pleasant expansion. the change is generally quicker because some check to credit happens at an early stage of it. the mercantile community will have been unusually fortunate if during the period of rising prices it has not made great mistakes. such a period naturally excites the sanguine and the ardent; they fancy that the prosperity they see will last always, that it is only the beginning of a greater prosperity. they altogether over-estimate the demand for the article they deal in, or the work they do. they all in their degree--and the ablest and the cleverest the most--work much more than they should, and trade far above their means. every great crisis reveals the excessive speculations of many houses which no one before suspected, and which commonly indeed had not begun or had not carried very far those speculations, till they were tempted by the daily rise of price and the surrounding fever. the case is worse, because at most periods of great commercial excitement there is some mixture of the older and simpler kind of investing mania. though the money of saving persons is in the hands of banks, and though, by offering interest, banks retain the command of much of it, yet they do not retain the command of the whole, or anything near the whole; all of it can be used, and much of it is used, by its owners. they speculate with it in bubble companies and in worthless shares, just as they did in the time of the south sea mania, when there were no banks, and as they would again in england supposing that banks ceased to exist. the mania of and the mania of were striking examples of this; in their case to a great extent, as in most similar modern periods to a less extent, the delirium of ancient gambling co-operated with the milder madness of modern overtrading. at the very beginning of adversity, the counters in the gambling mama, the shares in the companies created to feed the mania, are discovered to be worthless; down they all go, and with them much of credit. the good times too of high price almost always engender much fraud. all people are most credulous when they are most happy; and when much money has just been made, when some people are really making it, when most people think they are making it, there is a happy opportunity for ingenious mendacity. almost everything will be believed for a little while, and long before discovery the worst and most adroit deceivers are geographically or legally beyond the reach of punishment. but the harm they have done diffuses harm, for it weakens credit still farther. when we understand that lombard street is subject to severe alternations of opposite causes, we should cease to be surprised at its seeming cycles. we should cease too to be surprised at the sudden panics. during the period of reaction and adversity, just even at the last instant of prosperity, the whole structure is delicate. the peculiar essence of our banking system is an unprecedented trust between man and man: and when that trust is much weakened by hidden causes, a small accident may greatly hurt it, and a great accident for a moment may almost destroy it. now too that we comprehend the inevitable vicissitudes of lombard street, we can also thoroughly comprehend the cardinal importance of always retaining a great banking reserve. whether the times of adversity are well met or ill met depends far more on this than on any other single circumstance. if the reserve be large, its magnitude sustains credit; and if it be small, its diminution stimulates the gravest apprehensions. and the better we comprehend the importance of the banking reserve, the higher we shall estimate the responsibility of those who keep it. chapter vii. a more exact account of the mode in which the bank of england has discharged its duty of retaining a good bank reserve, and of administering it effectually. the preceding chapters have in some degree enabled us to appreciate the importance of the duties which the bank of england is bound to discharge as to its banking reserve. if we ask how the bank of england has discharged this great responsibility, we shall be struck by three things: first, as has been said before, the bank has never by any corporate act or authorised utterance acknowledged the duty, and some of its directors deny it; second (what is even more remarkable), no resolution of parliament, no report of any committee of parliament (as far as i know), no remembered speech of a responsible statesman, has assigned or enforced that duty on the bank; third (what is more remarkable still), the distinct teaching of our highest authorities has often been that no public duty of any kind is imposed on the banking department of the bank; that, for banking purposes, it is only a joint stock bank like any other bank; that its managers should look only to the interest of the proprietors and their dividend; that they are to manage as the london and westminster bank or the union bank manages. at first, it seems exceedingly strange that so important a responsibility should be unimposed, unacknowledged, and denied; but the explanation is this. we are living amid the vestiges of old controversies, and we speak their language, though we are dealing with different thoughts and different facts. for more than fifty years--from down to --there was a keen controversy as to the public duties of the bank. it was said to be the 'manager' of the paper currency, and on that account many expected much good from it; others said it did great harm; others again that it could do neither good nor harm. but for the whole period there was an incessant and fierce discussion. that discussion was terminated by the act of . by that act the currency manages itself; the entire working is automatic. the bank of england plainly does not manage--cannot even be said to manage--the currency any more. and naturally, but rashly, the only reason upon which a public responsibility used to be assigned to the bank having now clearly come to an end, it was inferred by many that the bank had no responsibility. the complete uncertainty as to the degree of responsibility acknowledged by the bank of england is best illustrated by what has been said by the bank directors themselves as to the panic of . the panic of that year, it will be remembered, happened, contrary to precedent, in the spring, and at the next meeting of the court of bank proprietors--the september meeting--there was a very remarkable discussion, which i give at length below, and of which all that is most material was thus described in the 'economist': 'the great importance of the late meeting of the proprietors of the bank of england. 'the late meeting of the proprietors of the bank of england has a very unusual importance. there can be no effectual inquiry now into the history of the late crisis. a parliamentary committee next year would, unless something strange occur in the interval, be a great waste of time. men of business have keen sensations but short memories, and they will care no more next february for the events of last may than they now care for the events of october . a _pro forma_ inquiry, on which no real mind is spent, and which everyone knows will lead to nothing, is far worse than no inquiry at all. under these circumstances the official statements of the governor of the bank are the only authentic expositions we shall have of the policy of the bank directors, whether as respects the past or the future. and when we examine the proceedings with care, we shall find that they contain matter of the gravest import. 'this meeting may be considered to admit and recognise the fact that the bank of england keeps the sole banking reserve of the country. we do not now mix up this matter with the country circulation, or the question whether there should be many issuers of notes or only one. we speak not of the currency reserve, but of the banking reserve--the reserve held against deposits, and not the reserve held against notes. we have often insisted in these columns that the bank of england does keep the sole real reserve--the sole considerable unoccupied mass of cash in the country; but there has been no universal agreement about it. great authorities have been unwilling to admit it. they have not, indeed, formally and explicitly contended against it. if they had, they must have pointed out some other great store of unused cash besides that at the bank, and they could not find such store. but they have attempted distinctions; have said that the doctrine that the bank of england keeps the sole banking reserve of the country was "not a good way of putting it," was exaggerated, and was calculated to mislead. 'but the late meeting is a complete admission that such is the fact. the governor of the bank said: "'a great strain has within the last few months been put upon the resources of this house, and of the whole banking community of london; and i think i am entitled to say that not only this house, but the entire banking body, acquitted themselves most honourably and creditably throughout that very trying period. banking is a very peculiar business, and it depends so much upon credit that the least blast of suspicion is sufficient to sweep away, as it were, the harvest of a whole year. but the manner in which the banking establishments generally in london met the demands made upon them during the greater portion of the past half-year affords a most satisfactory proof of the soundness of the principles on which their business is conducted. this house exerted itself to the utmost--and exerted itself most successfully--to meet the crisis. we did not flinch from our post. when the storm came upon us, on the morning on which it became known that the house of overend and co. had failed, we were in as sound and healthy a position as any banking establishment could hold, and on that day and throughout the succeeding week we made advances which would hardly be credited. i do not believe that anyone would have thought of predicting, even at the shortest period beforehand, the greatness of those advances. it was not unnatural that in this state of things a certain degree of alarm should have taken possession of the public mind, and that those who required accommodation from the bank should have gone to the chancellor of the exchequer and requested the government to empower us to issue notes beyond the statutory amount, if we should think that such a measure was desirable. but we had to act before we could receive any such power, and before the chancellor of the exchequer was perhaps out of his bed we had advanced one-half of our reserves, which were certainly thus reduced to an amount which we could not witness without regret. but we would not flinch from the duty which we conceived was imposed upon us of supporting the banking community, and i am not aware that any legitimate application made for assistance to this house was refused. every gentleman who came here with adequate security was liberally dealt with, and if accommodation could not be afforded to the full extent which was demanded, no one who offered proper security failed to obtain relief from this house." 'now this is distinctly saying that the other banks of the country need not keep any such banking reserve--any such sum of actual cash--of real sovereigns and bank notes, as will help them through a sudden panic. it acknowledges a "duty" on the part of the bank of england to "support the banking community," to make the reserve of the bank of england do for them as well as for itself. 'in our judgment this language is most just, and the governor of the bank could scarcely have done a greater public service than by using language so business-like and so distinct. let us know precisely who is to keep the banking reserve. if the joint stock banks and the private banks and the country banks are to keep their share, let us determine on that; mr. gladstone appeared not long since to say in parliament that it ought to be so. but at any rate there should be no doubt whose duty it is. upon grounds which we have often stated, we believe that the anomaly of one bank keeping the sole banking reserve is so fixed in our system that we cannot change it if we would. the great evil to be feared was an indistinct conception of the fact, and that is now avoided. 'the importance of these declarations by the bank is greater, because after the panic of the bank did not hold exactly the same language. a person who loves concise expressions said lately "that overends broke the bank in because it went, and in because it was not let go." we need not too precisely examine such language; the element of truth in it is very plain--the great advances made to overends were a principal event in the panic of ; the bill-brokers were then very much what the bankers were lately they were the borrowers who wanted sudden and incalculable advances. but the bill-brokers were told not to expect the like again. but alderman salomons, on the part of the london bankers, said, "he wished to take that opportunity of stating that he believed nothing could be more satisfactory to the managers and shareholders of joint stock banks than the testimony which the governor of the bank of england had that day borne to the sound and honourable manner in which their business was conducted. it was manifestly desirable that the joint stock banks and the banking interest generally should work in harmony with the bank of england; and he sincerely thanked the governor of the bank for the kindly manner in which he had alluded to the mode in which the joint stock banks had met the late monetary crisis." the bank of england agrees to give other banks the requisite assistance in case of need, and the other banks agree to ask for it. 'secondly. the bank agrees, in fact, if not in name, to make limited advances on proper security to anyone who applies for it. on the present occasion , , l. was so advanced in three months. and the bank do not say to the mercantile community, or to the bankers, "do not come to us again. we helped you once. but do not look upon it as a precedent. we will not help you again." on the contrary, the evident and intended implication is that under like circumstances the bank would act again as it has now acted.' this article was much disliked by many of the bank directors, and especially by some whose opinion is of great authority. they thought that the 'economist' drew 'rash deductions' from a speech which was in itself 'open to some objection--'which was, like all such speeches, defective in theoretical precision, and which was at best only the expression of an opinion by the governor of that day, which had not been authorised by the court of directors, which could not bind the bank. however the article had at least this use, that it brought out the facts. all the directors would have felt a difficulty in commenting upon, or limiting, or in differing from, a speech of a governor from the chair. but there was no difficulty or delicacy in attacking the 'economist.' accordingly mr. hankey, one of the most experienced bank directors, not long after, took occasion to observe: 'the "economist" newspaper has put forth what in my opinion is the most mischievous doctrine ever broached in the monetary or banking world in this country; viz, that it is the proper function of the bank of england to keep money available at all times to supply the demands of bankers who have rendered their own assets unavailable. until such a doctrine is repudiated by the banking interest, the difficulty of pursuing any sound principle of banking in london will be always very great. but i do not believe that such a doctrine as that bankers are justified in relying on the bank of england to assist them in time of need is generally held by the bankers in london. 'i consider it to be the undoubted duty of the bank of england to hold its banking deposits (reserving generally about one-third in cash) in the most available securities; and in the event of a sudden pressure in the money market, by whatever circumstance it may be caused, to bear its full share of a drain on its resources. i am ready to admit, however, that a general opinion has long prevailed that the bank of england ought to be prepared to do much more than this, though i confess my surprise at finding an advocate for such an opinion in the "economist." if it were practicable for the bank to retain money unemployed to meet such an emergency, it would be a very unwise thing to do so. but i contend that it is quite impracticable, and if it were possible, it would be most inexpedient; and i can only express my regret that the bank, from a desire to do everything in its power to afford general assistance in times of banking or commercial distress, should ever have acted in a way to encourage such an opinion. the more the conduct of the affairs of the bank is made to assimilate to the conduct of every other well-managed bank in the united kingdom, the better for the bank, and the better for the community at large.' i am scarcely a judge, but i do not think mr. hankey replies to the 'economist' very conclusively. first. he should have observed that the question is not as to what 'ought to be,' but as to what is. the 'economist' did not say that the system of a single bank reserve was a good system, but that it was the system which existed, and which must be worked, as you could not change it. secondly. mr. hankey should have shown 'some other store of unused cash' except the reserve in the banking department of the bank of england out of which advances in time of panic could be made. these advances are necessary, and must be made by someone. the 'reserves' of london bankers are not such store; they are used cash, not unused; they are part of the bank deposits, and lent as such. thirdly. mr. hankey should have observed that we know by the published figures that the joint stock banks of london do not keep one-third, or anything like one-third, of their liabilities in 'cash' even meaning by 'cash' a deposit at the bank of england. one-third of the deposits in joint stock banks, not to speak of the private banks, would be , , l.; and the private deposits of the bank of england are , , l. according to his own statement, there is a conspicuous contrast. the joint stock banks, and the private banks, no doubt, too, keep one sort of reserve, and the bank of england a different kind of reserve altogether. mr. hankey says that the two ought to be managed on the same principle; but if so, he should have said whether he would assimilate the practice of the bank of england to that of the other banks, or that of the other banks to the practice of the bank of england. fourthly. mr. hankey should have observed that, as has been explained, in most panics, the principal use of a 'banking reserve' is not to advance to bankers; the largest amount is almost always advanced to the mercantile public and to bill-brokers. but the point is, that by our system all extra pressure is thrown upon the bank of england. in the worst part of the crisis of , , l. 'fresh money' could not be borrowed, even on the best security--even on consols except at the bank of england. there was no other lender to new borrowers. but my object now is not to revive a past controversy, but to show in what an unsatisfactory and uncertain condition that controversy has left a most important subject. mr. hankey's is the last explanation we have had of the policy of the bank. he is a very experienced and attentive director, and i think expresses, more or less, the opinions of other directors. and what do we find? setting aside and saying nothing about the remarkable speech of the governor in , which at least (according to the interpretation of the 'economist') was clear and excellent, mr. hankey leaves us in doubt altogether as to what will be the policy of the bank of england in the next panic, and as to what amount of aid the public may then expect from it. his words are too vague. no one can tell what a 'fair share' means; still less can we tell what other people at some future time will say it means. theory suggests, and experience proves, that in a panic the holders of the ultimate bank reserve (whether one bank or many) should lend to all that bring good securities quickly, freely, and readily. by that policy they allay a panic; by every other policy they intensify it. the public have a right to know whether the bank of england--the holders of our ultimate bank reserve--acknowledge this duty, and are ready to perform it. but this is now very uncertain. if we refer to history, and examine what in fact has been the conduct of the bank directors, we find that they have acted exactly as persons of their type, character, and position might have been expected to act. they are a board of plain, sensible, prosperous english merchants; and they have both done and left undone what such a board might have been expected to do and not to do. nobody could expect great attainments in economical science from such a board; laborious study is for the most part foreign to the habits of english merchants. nor could we expect original views on banking, for banking is a special trade, and english merchants, as a body, have had no experience in it. a 'board' can scarcely ever make improvements, for the policy of a board is determined by the opinions of the most numerous class of its members--its average members--and these are never prepared for sudden improvements. a board of upright and sensible merchants will always act according to what it considers 'safe' principles--that is, according to the received maxims of the mercantile world then and there--and in this manner the directors of the bank of england have acted nearly uniformly. their strength and their weakness were curiously exemplified at the time when they had the most power. after the suspension of cash payments in , the directors of the bank of england could issue what notes they liked. there was no check; these notes could not come back upon the bank for payment; there was a great temptation to extravagant issue, and no present penalty upon it. but the directors of the bank withstood the temptation; they did not issue their inconvertible notes extravagantly. and the proof is, that for more than ten years after the suspension of cash payments the bank paper was undepreciated, and circulated at no discount in comparison with gold. though the bank directors of that day at last fell into errors, yet on the whole they acted with singular judgment and moderation. but when, in , they came to be examined as to their reasons, they gave answers that have become almost classical by their nonsense. mr. pearse, the governor of the bank, said: 'in considering this subject, with reference to the manner in which bank-notes are issued, resulting from the applications made for discounts to supply the necessary want of bank-notes, by which their issue in amount is so controlled that it can never amount to an excess, i cannot see how the amount of bank-notes issued can operate upon the price of bullion, or the state of the exchanges; and therefore i am individually of opinion that the price of bullion, or the state of the exchanges, can never be a reason for lessening the amount of bank-notes to be issued, always understanding the control which i have already described. 'is the governor of the bank of the same opinion which has now been expressed by the deputy-governor? 'mr. whitmore, i am so much of the same opinion, that i never think it necessary to advert to the price of gold, or the state of the exchange, on the days on which we make our advances. 'do you advert to these two circumstances with a view to regulate the general amount of your advances?--i do not advert to it with a view to our general advances, conceiving it not to bear upon the question. and mr. harman, another bank director, expressed his opinion in these terms: 'i must very materially alter my opinions before i can suppose that the exchanges will be influenced by any modifications of our paper currency.' very few persons perhaps could have managed to commit so many blunders in so few words. but it is no disgrace at all to the bank directors of that day to have committed these blunders. they spoke according to the best mercantile opinion of england. the city of london and the house of commons both approved of what they said; those who dissented were said to be abstract thinkers and unpractical men. the bank directors adopted the ordinary opinions, and pursued the usual practice of their time. it was this 'routine' that caused their moderation. they believed that so long as they issued 'notes' only at per cent, and only on the discount of good bills, those notes could not be depreciated. and as the number of 'good' bills--bills which sound merchants know to be good--does not rapidly increase, and as the market rate of interest was often less than per cent, these checks on over-issue were very effective. they failed in time, and the theory upon which they were defended was nonsense; but for a time their operation was powerful and excellent. unluckily, in the management of the matter before us--the management of the bank reserve--the directors of the bank of england were neither acquainted with right principles, nor were they protected by a judicious routine. they could not be expected themselves to discover such principles. the abstract thinking of the world is never to be expected from persons in high places; the administration of first-rate current transactions is a most engrossing business, and those charged with them are usually but little inclined to think on points of theory, even when such thinking most nearly concerns those transactions. no doubt when men's own fortunes are at stake, the instinct of the trader does somehow anticipate the conclusions of the closet. but a board has no instincts when it is not getting an income for its members, and when it is only discharging a duty of office. during the suspension of cash payments--a suspension which lasted twenty-two years--all traditions as to a cash reserve had died away. after the bank directors had to discharge the duty of keeping a banking reserve, and (as the law then stood) a currency reserve also, without the guidance either of keen interests, or good principles, or wise traditions. under such circumstances, the bank directors inevitably made mistakes of the gravest magnitude. the first time of trial came in . in that year the bank directors allowed their stock of bullion to fall in the most alarming manner: on dec. , , the coin and bullion in the bank was l , , on dec. , , it was reduced to l , , and the consequence was a panic so tremendous that its results are well remembered after nearly fifty years. in the next period of extreme trial--in - --the bank was compelled to draw for , , l. on the bank of france; and even after that aid the directors permitted their bullion, which was still the currency reserve as well as the banking reserve, to be reduced to , , l.: a great alarm pervaded society, and generated an eager controversy, out of which ultimately emerged the act of . the next trial came in , and then the bank permitted its banking reserve (which the law had now distinctly separated) to fall to , , l.; and so intense was the alarm, that the executive government issued a letter of licence, permitting the bank, if necessary, to break the new law, and, if necessary, to borrow from the currency reserve, which was full, in aid of the banking reserve, which was empty. till there was an unusual calm in the money market, but in the autumn of that year the bank directors let the banking reserve, which even in october was far too small, fall thus: oct. , , l " , , l " , , l " , , l nov. , , l " , l and then a letter of licence like that of was not only issued, but used. the ministry of the day authorised the bank to borrow from the currency reserve in aid of the banking reserve, and the bank of england did so borrow several hundred pounds till the end of the month of november. a more miserable catalogue than that of the failures of the bank of england to keep a good banking reserve in all the seasons of trouble between and is scarcely to be found in history. but since there has been a great improvement. by painful events and incessant discussions, men of business have now been trained to see that a large banking reserve is necessary, and to understand that, in the curious constitution of the english banking world, the bank of england is the only body which could effectually keep it. they have never acknowledged the duty; some of them, as we have seen, deny the duty; still they have to a considerable extent begun to perform the duty. the bank directors, being experienced and able men of business, comprehended this like other men of business. since they have always kept, i do not say a sufficient banking reserve, but a fair and creditable banking reserve, and one altogether different from any which they kept before. at one period the bank directors even went farther: they made a distinct step in advance of the public intelligence; they adopted a particular mode of raising the rate of interest, which is far more efficient than any other mode. mr. goschen observes, in his book on the exchanges: 'between the rates in london and paris, the expense of sending gold to and fro having been reduced to a minimum between the two cities, the difference can never be very great; but it must not be forgotten that, the interest being taken at a percentage calculated per annum, and the probable profit having, when an operation in three-month bills is contemplated, to be divided by four, whereas the percentage of expense has to be wholly borne by the one transaction, a very slight expense becomes a great impediment. if the cost is only / per cent, there must be a profit of per cent in the rate of interest, or / per cent on three months, before any advantage commences; and thus, supposing that paris capitalists calculate that they may send their gold over to england for / per cent expense, and chance their being so favoured by the exchanges as to be able to draw it back without any cost at all, there must nevertheless be an excess of more than per cent in the london rate of interest over that in paris, before the operation of sending gold over from france, merely for the sake of the higher interest, will pay.' accordingly, mr. goschen recommended that the bank of england should, as a rule, raise their rate by steps of per cent at a time when the object of the rise was to affect the 'foreign exchanges.' and the bank of england, from onward, have acted upon that principle. before that time they used to raise their rate almost always by steps of / per cent, and there was nothing in the general state of mercantile opinion to compel them to change their policy. the change was, on the contrary, most unpopular. on this occasion, and, as far as i know, on this occasion alone, the bank of england made an excellent alteration of their policy, which was not exacted by contemporary opinion, and which was in advance of it. the beneficial results of the improved policy of the bank were palpable and speedy. we were enabled by it to sustain the great drain of silver from europe to india to pay for indian cotton in the years between . in the autumn of there was especial danger; but, by a rapid and able use of their new policy, the bank of england maintained an adequate reserve, and preserved the country from calamities which, if we had looked only to precedent, would have seemed inevitable. all the causes which produced the panic of were in action in --the drain of silver in and the preceding year was beyond comparison greater than in and the years before it--and yet in there was no panic. the bank of england was almost immediately rewarded for its adoption of right principles by finding that those principles, at a severe crisis, preserved public credit. in undoubtedly a panic occurred, but i do not think that the bank of england can be blamed for it. they had in their till an exceedingly good reserve according to the estimate of that time--a sufficient reserve, in all probability, to have coped with the crises of and . the suspension of overend and gurney--the most trusted private firm in england caused an alarm, in suddenness and magnitude, without example. what was the effect of the act of on the panic of is a question on which opinion will be long divided; but i think it will be generally agreed that, acting under the provisions of that law, the directors of the bank of england had in their banking department in that year a fairly large reserve quite as large a reserve as anyone expected them to keep--to meet unexpected and painful contingencies. from to there was almost an unbroken calm on the money market. the bank of england had no difficulties to cope with; there was no opportunity for much discretion. the money market took care of itself. but in the bank of france suspended specie payments, and from that time a new era begins. the demands on this market for bullion have been greater, and have been more incessant, than they ever were before, for this is now the only bullion market. this has made it necessary for the bank of england to hold a much larger banking reserve than was ever before required, and to be much more watchful than in former times lest that banking reserve should on a sudden be dangerously diminished. the forces are greater and quicker than they used to be, and a firmer protection and a surer solicitude are necessary. but i do not think the bank of england is sufficiently aware of this. all the governing body of the bank certainly are not aware of it. the same eminent director to whom i have before referred, mr. hankey, published in the 'times' an elaborate letter, saying again that one-third of the liabilities were, even in these altered times, a sufficient reserve for the banking department of the bank of england, and that it was no part of the business of the bank to keep a supply of 'bullion for exportation,' which was exactly the most mischievous doctrine that could be maintained when the banking department of the bank of england had become the only great repository in europe where gold could at once be obtained, and when, therefore, a far greater store of bullion ought to be kept than at any former period. and besides this defect of the present time, there are some chronic faults in the policy of the bank of england, which arise, as will be presently explained, from grave defects in its form of government. there is almost always some hesitation when a governor begins to reign. he is the prime minister of the bank cabinet; and when so important a functionary changes, naturally much else changes too. if the governor be weak, this kind of vacillation and hesitation continues throughout his term of office. the usual defect then is, that the bank of england does not raise the rate of interest sufficiently quickly. it does raise it; in the end it takes the alarm, but it does not take the alarm sufficiently soon. a cautious man, in a new office, does not like strong measures. bank governors are generally cautious men; they are taken from a most cautious class; in consequence they are very apt to temporise and delay. but almost always the delay in creating a stringency only makes a greater stringency inevitable. the effect of a timid policy has been to let the gold out of the bank, and that gold must be recovered. it would really have been far easier to have maintained the reserve by timely measures than to have replenished it by delayed measures; but new governors rarely see this. secondly. those defects are apt, in part, or as a whole, to be continued throughout the reign of a weak governor. the objection to a decided policy, and the indisposition to a timely action, which are excusable in one whose influence is beginning, and whose reign is new, is continued through the whole reign of one to whom those defects are natural, and who exhibits those defects in all his affairs. thirdly. this defect is enhanced, because, as has so often been said, there is now no adequate rule recognised in the management of the banking reserve. mr. weguelin, the last bank governor who has been examined, said that it was sufficient for the bank to keep from one-fourth to one-third of its banking liabilities as a reserve. but no one now would ever be content if the banking reserve were near to one-fourth of its liabilities. mr. hankey, as i have shown, considers 'about a third' as the proportion of reserve to liability at which the bank should aim; but he does not say whether he regards a third as the minimum below which the reserve in the banking department should never be, or as a fair average, about which the reserve may fluctuate, sometimes being greater, or at others less. in a future chapter i shall endeavour to show that one-third of its banking liabilities is at present by no means an adequate reserve for the banking department--that it is not even a proper minimum, far less a fair average; and i shall allege what seem to me good reasons for thinking that, unless the bank aim by a different method at a higher standard, its own position may hereafter be perilous, and the public may be exposed to disaster. ii. but, as has been explained, the bank of england is bound, according to our system, not only to keep a good reserve against a time of panic, but to use that reserve effectually when that time of panic comes. the keepers of the banking reserve, whether one or many, are obliged then to use that reserve for their own safety. if they permit all other forms of credit to perish, their own will perish immediately, and in consequence. as to the bank of england, however, this is denied. it is alleged that the bank of england can keep aloof in a panic; that it can, if it will, let other banks and trades fail; that if it chooses, it can stand alone, and survive intact while all else perishes around it. on various occasions, most influential persons, both in the government of the bank and out of it, have said that such was their opinion. and we must at once see whether this opinion is true or false, for it is absurd to attempt to estimate the conduct of the bank of england during panics before we know what the precise position of the bank in a panic really is. the holders of this opinion in its most extreme form say, that in a panic the bank of england can stay its hand at any time; that, though it has advanced much, it may refuse to advance more; that though the reserve may have been reduced by such advances, it may refuse to lessen it still further; that it can refuse to make any further dis counts; that the bills which it has discounted will become due; that it can refill its reserve by the payment of those bills; that it can sell stock or other securities, and so replenish its reserve still further. but in this form the notion scarcely merits serious refutation. if the bank reserve has once become low, there are, in a panic, no means of raising it again. money parted with at such a time is very hard to get back; those who have taken it will not let it go--not, at least, unless they are sure of getting other money in its place. and at such instant the recovery of money is as hard for the bank of england as for any one else, probably even harder. the difficulty is this: if the bank decline to discount, the holders of the bills previously discounted cannot pay. as has been shown, trade in england is largely carried on with borrowed money. if you propose greatly to reduce that amount, you will cause many failures unless you can pour in from elsewhere some equivalent amount of new money. but in a panic there is no new money to be had; everybody who has it clings to it, and will not part with it. especially what has been advanced to merchants cannot easily be recovered; they are under immense liabilities, and they will not give back a penny which they imagine that even possibly they may need to discharge those liabilities. and bankers are in even greater terror. in a panic they will not discount a host of new bills; they are engrossed with their own liabilities and those of their own customers, and do not care for those of others. the notion that the bank of england can stop discounting in a panic, and so obtain fresh money, is a delusion. it can stop discounting, of course, at pleasure. but if it does, it will get in no new money; its bill case will daily be more and more packed with bills 'returned unpaid.' the sale of stock, too, by the bank of england in the middle of a panic is impossible. the bank at such a time is the only lender on stock, and it is only by loans from a bank that large purchases, at such a moment, can be made. unless the bank of england lend, no stock will be bought. there is not in the country any large sum of unused ready money ready to buy it. the only unused sum is the reserve in the banking department of the bank of england: if, therefore, in a panic that department itself attempt to sell stock, the failure would be ridiculous. it would hardly be able to sell any at all. probably it would not sell fifty pounds' worth. the idea that the bank can, during a panic, replenish its reserve in this or in any other manner when that reserve has once been allowed to become empty, or nearly empty, is too absurd to be steadily maintained, though i fear that it is not yet wholly abandoned. the second and more reasonable conception of the independence of the bank of england is, however, this: it may be said, and it is said, that if the bank of england stop at the beginning of a panic, if it refuse to advance a shilling more than usual, if it begin the battle with a good banking reserve, and do not diminish it by extra loans, the bank of england is sure to be safe. but this form of the opinion, though more reasonable and moderate, is not, therefore, more true. the panic of is the best instance to test it. as everyone knows, that panic began quite suddenly, on the fall of 'overends.' just before, the bank had , , l. in its reserve; in fact, it advanced , , l. of new money in the next few days, and its reserve went down to nothing, and the government had to help. but if the bank had not made these advances, could it have kept its reserve? certainly it could not. it could not have retained its own deposits. a large part of these are the deposits of bankers, and they would not consent to help the bank of england in a policy of isolation. they would not agree to suspend payments themselves, and permit the bank of england to survive, and get all their business. they would withdraw their deposits from the bank; they would not assist it to stand erect amid their ruin. but even if this were not so, even if the banks were willing to keep their deposits at the bank while it was not lending, they would soon find that they could not do it. they are only able to keep those deposits at the bank by the aid of the clearing-house system, and if a panic were to pass a certain height, that system, which rests on confidence, would be destroyed by terror. the common course of business is this. a b having to receive , l. from c d takes c d's cheque on a banker crossed, as it is called, and, therefore, only payable to another banker. he pays that cheque to his own credit with his own banker, who presents it to the banker on whom it is drawn, and if good it is an item between them in the general clearing or settlement of the afternoon. but this is evidently a very refined machinery, which a panic will be apt to destroy. at the first stage a b may say to his debtor c d, 'i cannot take your cheque, i must have bank-notes.' if it is a debt on securities, he will be very apt to say this. the usual practice--credit being good--is for the creditor to take the debtor's cheque, and to give up the securities. but if the 'securities' really secure him in a time of difficulty, he will not like to give them up, and take a bit of paper--a mere cheque, which may be paid or not paid. he will say to his debtor, 'i can only give you your securities if you will give me bank-notes.' and if he does say so, the debtor must go to his bank, and draw out the , l. if he has it. but if this were done on a large scale, the bank's 'cash in house' would soon be gone; as the clearing-house was gradually superseded it would have to trench on its deposit at the bank of england; and then the bankers would have to pay so much over the counter that they would be unable to keep much money at the bank, even if they wished. they would soon be obliged to draw out every shilling. the diminished use of the clearing-house, in consequence of the panic, would intensify that panic. by far the greater part of the bargains of the country in moneyed securities is settled on the stock exchange twice a month, and the number of securities then given up for mere cheques, and the number of cheques then passing at the clearing-house are enormous. if that system collapse, the number of failures would be incalculable, and each failure would add to the discredit that caused the collapse. the non-banking customers of the bank of england would be discredited as well as other people; their cheques would not be taken any more than those of others; they would have to draw out bank-notes, and the bank reserve would not be enough for a tithe of such payments. the matter would come shortly to this: a great number of brokers and dealers are under obligations to pay immense sums, and in common times they obtain these sums by the transfer of certain securities. if, as we said just now, no. has borrowed , l. of no. on exchequer bills, he, for the most part, cannot pay no. till he has sold or pledged those bills to some one else. but till he has the bills he cannot pledge or sell them; and if no. will not give them up till he gets his money, no. will be ruined, because he cannot pay it. and if no. has no. to pay, as is very likely, he may be ruined because of no. 's default, and no. only on account of no. 's default; and so on without end. on settling day, without the clearing-house, there would be a mass of failures, and a bundle of securities. the effect of these failures would be a general run on all bankers, and on the bank of england particularly. it may indeed be said that the money thus taken from the banking department of the bank of england would return there immediately; that the public who borrowed it would not know where else to deposit it; that it would be taken out in the morning, and put back in the evening. but, in the first place, this argument assumes that the banking department would have enough money to pay the demands on it; and this is a mistake: the banking department would not have a hundredth part of the necessary funds. and in the second, a great panic which deranged the clearing-house would soon be diffused all through the country. the money therefore taken from the bank of england could not be soon returned to the bank; it would not come back on the evening of the day on which it was taken out, or for many days; it would be distributed through the length and breadth of the country, wherever there were bankers, wherever there was trade, wherever there were liabilities, wherever there was terror. and even in london, so immense a panic would soon impair the credit of the banking department of the bank of england. that department has no great prestige. it was only created in , and it has failed three times since. the world would imagine that what has happened before will happen again; and when they have got money, they will not deposit it at an establishment which may not be able to repay it. this did not happen in former panics, because the case we are considering never arose. the bank was helping the public, and, more or less confidently, it was believed that the government would help the bank. but if the policy be relinquished which formerly assuaged alarm, that alarm will be protracted and enhanced, till it touch the banking department of the bank itself. i do not imagine that it would touch the issue department. i think that the public would be quite satisfied if they obtained bank-notes. generally nothing is gained by holding the notes of a bank instead of depositing them at a bank. but in the bank of england there is a great difference: their notes are legal tender. whoever holds them can always pay his debts, and, except for foreign payments, he could want no more. the rush would be for bank-notes; those that could be obtained would be carried north, south, east, and west, and, as there would not be enough for all the country, the banking department would soon pay away all it had. nothing, therefore, can be more certain than that the bank of england has in this respect no peculiar privilege; that it is simply in the position of a bank keeping the banking reserve of the country; that it must in time of panic do what all other similar banks must do; that in time of panic it must advance freely and vigorously to the public out of the reserve. and with the bank of england, as with other banks in the same case, these advances, if they are to be made at all, should be made so as if possible to obtain the object for which they are made. the end is to stay the panic; and the advances should, if possible, stay the panic. and for this purpose there are two rules: first. that these loans should only be made at a very high rate of interest. this will operate as a heavy fine on unreasonable timidity, and will prevent the greatest number of applications by persons who do not require it. the rate should be raised early in the panic, so that the fine may be paid early; that no one may borrow out of idle precaution without paying well for it; that the banking reserve may be protected as far as possible. secondly. that at this rate these advances should be made on all good banking securities, and as largely as the public ask for them. the reason is plain. the object is to stay alarm, and nothing therefore should be done to cause alarm. but the way to cause alarm is to refuse some one who has good security to offer. the news of this will spread in an instant through all the money market at a moment of terror; no one can say exactly who carries it, but in half an hour it will be carried on all sides, and will intensify the terror everywhere. no advances indeed need be made by which the bank will ultimately lose. the amount of bad business in commercial countries is an infinitesimally small fraction of the whole business. that in a panic the bank, or banks, holding the ultimate reserve should refuse bad bills or bad securities will not make the panic really worse; the 'unsound' people are a feeble minority, and they are afraid even to look frightened for fear their unsoundness may be detected. the great majority, the majority to be protected, are the 'sound' people, the people who have good security to offer. if it is known that the bank of england is freely advancing on what in ordinary times is reckoned a good security--on what is then commonly pledged and easily convertible--the alarm of the solvent merchants and bankers will be stayed. but if securities, really good and usually convertible, are refused by the bank, the alarm will not abate, the other loans made will fail in obtaining their end, and the panic will become worse and worse. it may be said that the reserve in the banking department will not be enough for all such loans. if that be so, the banking department must fail. but lending is, nevertheless, its best expedient. this is the method of making its money go the farthest, and of enabling it to get through the panic if anything will so enable it. making no loans as we have seen will ruin it; making large loans and stopping, as we have also seen, will ruin it. the only safe plan for the bank is the brave plan, to lend in a panic on every kind of current security, or every sort on which money is ordinarily and usually lent. this policy may not save the bank; but if it do not, nothing will save it. if we examine the manner in which the bank of england has fulfilled these duties, we shall find, as we found before, that the true principle has never been grasped; that the policy has been inconsistent; that, though the policy has much improved, there still remain important particulars in which it might be better than it is. the first panic of which it is necessary here to speak, is that of : i hardly think we should derive much instruction from those of and ; the world has changed too much since; and during the long period of inconvertible currency from to , the problems to be solved were altogether different from our present ones. in the panic of , the bank of england at first acted as unwisely as it was possible to act. by every means it tried to restrict its advances. the reserve being very small, it endeavoured to protect that reserve by lending as little as possible. the result was a period of frantic and almost inconceivable violence; scarcely any one knew whom to trust; credit was almost suspended; the country was, as mr. huskisson expressed it, within twenty-four hours of a state of barter. applications for assistance were made to the government, but though it was well known that the government refused to act, there was not, as far as i know, until lately any authentic narrative of the real facts. in the 'correspondence' of the duke of wellington, of all places in the world, there is a full account of them. the duke was then on a mission at st. petersburg, and sir r. peel wrote to him a letter of which the following is a part: 'we have been placed in a very unpleasant predicament on the other question--the issue of exchequer bills by government. the feeling of the city, of many of our friends, of some of the opposition, was decidedly in favour of the issue of exchequer bills to relieve the merchants and manufacturers. 'it was said in favour of the issue, that the same measure had been tried and succeeded in and . our friends whispered about that we were acting quite in a different manner from that in which mr. pitt did act, and would have acted had he been alive. 'we felt satisfied that, however plausible were the reasons urged in favour of the issue of exchequer bills, yet that the measure was a dangerous one, and ought to be resisted by the government. 'there are thirty millions of exchequer bills outstanding. the purchases lately made by the bank can hardly maintain them at par. if there were a new issue to such an amount as that contemplated--viz., five millions--there would be a great danger that the whole mass of exchequer bills would be at a discount, and would be paid into the revenue. if the new exchequer bills were to be issued at a different rate of interest from the outstanding ones--say bearing an interest of five per cent--the old ones would be immediately at a great discount unless the interest were raised. if the interest were raised, the charge on the revenue would be of course proportionate to the increase of rate of interest. we found that the bank had the power to lend money on deposit of goods. as our issue of exchequer bills would have been useless unless the bank cashed them, as therefore the intervention of the bank was in any event absolutely necessary, and as its intervention would be chiefly useful by the effect which it would have in increasing the circulating medium, we advised the bank to take the whole affair into their own hands at once, to issue their notes on the security of goods, instead of issuing them on exchequer bills, such bills being themselves issued on that security. 'they reluctantly consented, and rescued us from a very embarrassing predicament.' the success of the bank of england on this occasion was owing to its complete adoption of right principles. the bank adopted these principles very late; but when it adopted them it adopted them completely. according to the official statement which i quoted before, 'we,' that is, the bank directors, 'lent money by every possible means, and in modes which we had never adopted before; we took in stock on security, we purchased exchequer bills, we made advances on exchequer bills, we not only discounted outright, but we made advances on deposits of bills of exchange to an immense amount--in short, by every possible means consistent with the safety of the bank.' and for the complete and courageous adoption of this policy at the last moment the directors of the bank of england at that time deserve great praise, for the subject was then less understood even than it is now; but the directors of the bank deserve also severe censure, for previously choosing a contrary policy; for being reluctant to adopt the new one; and for at last adopting it only at the request of, and upon a joint responsibility with, the executive government. after , there was not again a real panic in the money market till . both of the crises of and were severe, but neither terminated in a panic: both were arrested before the alarm reached its final intensity; in neither, therefore, could the policy of the bank at the last stage of fear be tested. in the three panics since --in , , and --the policy of the bank has been more or less affected by the act of , and i cannot therefore discuss it fully within the limits which i have pre scribed for myself. i can only state two things: first, that the directors of the bank above all things maintain, that they have not been in the earlier stage of panic prevented by the act of from making any advances which they would otherwise have then made. secondly, that in the last stage of panic, the act of has been already suspended, rightly or wrongly, on these occasions; that no similar occasion has ever yet occurred in which it has not been suspended; and that, rightly or wrongly, the world confidently expects and relies that in all similar cases it will be suspended again. whatever theory may prescribe, the logic of facts seems peremptory so far. and these principles taken together amount to saying that, by the doctrine of the directors, the bank of england ought, as far as they can, to manage a panic with the act of , pretty much as they would manage one without it--in the early stage of the panic because then they are not fettered, and in the latter because then the fetter has been removed. we can therefore estimate the policy of the bank of england in the three panics which have happened since the act of , without inquiring into the effect of the act itself. it is certain that in all of these panics the bank has made very large advances indeed. it is certain, too, that in all of them the bank has been quicker than it was in ; that in all of them it has less hesitated to use its banking reserve in making the advances which it is one principal object of maintaining that reserve to make, and to make at once. but there is still a considerable evil. no one knows on what kind of securities the bank of england will at such periods make the advances which it is necessary to make. as we have seen, principle requires that such advances, if made at all for the purpose of curing panic, should be made in the manner most likely to cure that panic. and for this purpose, they should be made on everything which in common times is good 'banking security.' the evil is, that owing to terror, what is commonly good security has ceased to be so; and the true policy is so to use the banking reserve, that if possible the temporary evil may be stayed, and the common course of business be restored. and this can only be effected by advancing on all good banking securities. unfortunately, the bank of england do not take this course. the discount office is open for the discount of good bills, and makes immense advances accordingly. the bank also advances on consols and india securities, though there was, in the crisis of , believed to be for a moment a hesitation in so doing. but these are only a small part of the securities on which money in ordinary times can be readily obtained, and by which its repayment is fully secured. railway debenture stock is as good a security as a commercial bill, and many people, of whom i own i am one, think it safer than india stock; on the whole, a great railway is, we think, less liable to unforeseen accidents than the strange empire of india. but i doubt if the bank of england in a panic would advance on railway debenture stock, at any rate no one has any authorised reason for saying that it would. and there are many other such securities. the amount of the advance is the main consideration for the bank of england, and not the nature of the security on which the advance is made, always assuming the security to be good. an idea prevails (as i believe) at the bank of england that they ought not to advance during a panic on any kind of security on which they do not commonly advance. but if bankers for the most part do advance on such security in common times, and if that security is indisputably good, the ordinary practice of the bank of england is immaterial. in ordinary times the bank is only one of many lenders, whereas in a panic it is the sole lender, and we want, as far as we can, to bring back the unusual state of a time of panic to the common state of ordinary times. in common opinion there is always great uncertainty as to the conduct of the bank: the bank has never laid down any clear and sound policy on the subject. as we have seen, some of its directors (like mr. hankey) advocate an erroneous policy. the public is never sure what policy will be adopted at the most important moment: it is not sure what amount of advance will be made, or on what security it will be made. the best palliative to a panic is a confidence in the adequate amount of the bank reserve, and in the efficient use of that reserve. and until we have on this point a clear understanding with the bank of england, both our liability to crises and our terror at crises will always be greater than they would otherwise be. chapter viii. the government of the bank of england. the bank of england is governed by a board of directors, a governor, and a deputy-governor; and the mode in which these are chosen, and the time for which they hold office, affect the whole of its business. the board of directors is in fact self-electing. in theory a certain portion go out annually, remain out for a year, and are subject to re-election by the proprietors. but in fact they are nearly always, and always if the other directors wish it, re-elected after a year. such has been the unbroken practice of many years, and it would be hardly possible now to break it. when a vacancy occurs by death or resignation, the whole board chooses the new member, and they do it, as i am told, with great care. for a peculiar reason, it is important that the directors should be young when they begin; and accordingly the board run over the names of the most attentive and promising young men in the old-established firms of london, and select the one who, they think, will be most suitable for a bank director. there is a considerable ambition to fill the office. the status which is given by it, both to the individual who fills it and to the firm of merchants to which he belongs, is considerable. there is surprisingly little favour shown in the selection; there is a great wish on the part of the bank directors for the time being to provide, to the best of their ability, for the future good government of the bank. very few selections in the world are made with nearly equal purity. there is a sincere desire to do the best for the bank, and to appoint a well-conducted young man who has begun to attend to business, and who seems likely to be fairly sensible and fairly efficient twenty years later. the age is a primary matter. the offices of governor and deputy-governor are given in rotation. the deputy-governor always succeeds the governor, and usually the oldest director who has not been in office becomes deputy-governor. sometimes, from personal reasons, such as ill-health or special temporary occupation, the time at which a director becomes deputy-governor may be a little deferred, and, in some few cases, merchants in the greatest business have been permitted to decline entirely. but for all general purposes, the rule may be taken as absolute. save in rare cases, a director must serve his time as governor and deputy-governor nearly when his turn comes, and he will not be asked to serve much before his turn. it is usually about twenty years from the time of a man's first election that he arrives, as it is called, at the chair. and as the offices of governor and deputy-governor are very important, a man who fills them should be still in the vigour of life. accordingly, bank directors, when first chosen by the board, are always young men. at first this has rather a singular effect; a stranger hardly knows what to make of it. many years since, i remember seeing a very fresh and nice-looking young gentleman, and being struck with astonishment at being told that he was a director of the bank of england. i had always imagined such directors to be men of tried sagacity and long experience, and i was amazed that a cheerful young man should be one of them. i believe i thought it was a little dangerous. i thought such young men could not manage the bank well. i feared they had the power to do mischief. further inquiry, however, soon convinced me that they had not the power. naturally, young men have not much influence at a board where there are many older members. and in the bank of england there is a special provision for depriving them of it if they get it. some of the directors, as i have said, retire annually, but by courtesy it is always the young ones. those who have passed the chair--that is, who have served the office of governor--always remain. the young part of the board is the fluctuating part, and the old part is the permanent part; and therefore it is not surprising that the young part has little influence. the bank directors may be blamed for many things, but they cannot be blamed for the changeableness and excitability of a neocracy. indeed, still better to prevent it, the elder members of the board--that is, those who have passed the chair--form a standing committee of indefinite powers, which is called the committee of treasury. i say 'indefinite powers,' for i am not aware that any precise description has ever been given of them, and i doubt if they can be precisely described. they are sometimes said to exercise a particular control over the relations and negotiations between the bank and the government. but i confess that i believe that this varies very much with the character of the governor for the time being. a strong governor does much mainly upon his own responsibility, and a weak governor does little. still the influence of the committee of treasury is always considerable, though not always the same. they form a a cabinet of mature, declining, and old men, just close to the executive; and for good or evil such a cabinet must have much power. by old usage, the directors of the bank of england cannot be themselves by trade bankers. this is a relic of old times. every bank was supposed to be necessarily, more or less, in opposition to every other bank--banks in the same place to be especially in opposition. in consequence, in london, no banker has a chance of being a bank director, or would ever think of attempting to be one. i am here speaking of bankers in the english sense, and in the sense that would surprise a foreigner. one of the rothschilds is on the bank direction, and a foreigner would be apt to think that they were bankers if any one was. but this only illustrates the essential difference between our english notions of banking and the continental. ours have attained a much fuller development than theirs. messrs. rothschild are immense capitalists, having, doubtless, much borrowed money in their hands. but they do not take l. payable on demand, and pay it back in cheques of l. each, and that is our english banking. the borrowed money which they have is in large sums, borrowed for terms more or less long. english bankers deal with an aggregate of small sums, all of which are repayable on short notice, or on demand. and the way the two employ their money is different also. a foreigner thinks 'an exchange business'--that is, the buying and selling bills on foreign countries--a main part of banking. as i have explained, remittance is one of the subsidiary conveniences which early banks subserve before deposit banking begins. but the mass of english country bankers only give bills on places in england or on london, and in london the principal remittance business has escaped out of the hands of the bankers. most of them would not know how to carry through a great 'exchange operation,' or to 'bring home the returns.' they would as soon think of turning silk merchants. the exchange trade is carried on by a small and special body of foreign bill-brokers, of whom messrs. rothschild are the greatest. one of that firm may, therefore, well be on the bank direction, notwithstanding the rule forbidding bankers to be there, for he and his family are not english bankers, either by the terms on which they borrow money, or the mode in which they employ it. but as to bankers in the english sense of the word, the rule is rigid and absolute. not only no private banker is a director of the bank of england, but no director of any joint stock bank would be allowed to become such. the two situations would be taken to be incompatible. the mass of the bank directors are merchants of experience, employing a considerable capital in trades in which they have been brought up, and with which they are well acquainted. many of them have information as to the present course of trade, and as to the character and wealth of merchants, which is most valuable, or rather is all but invaluable, to the bank. many of them, too, are quiet, serious men, who, by habit and nature, watch with some kind of care every kind of business in which they are engaged, and give an anxious opinion on it. most of them have a good deal of leisure, for the life of a man of business who employs only his own capital, and employs it nearly always in the same way, is by no means fully employed. hardly any capital is enough to employ the principal partner's time, and if such a man is very busy, it is a sign of something wrong. either he is working at detail, which subordinates would do better, and which he had better leave alone, or he is engaged in too many speculations, is incurring more liabilities than his capital will bear, and so may be ruined. in consequence, every commercial city abounds in men who have great business ability and experience, who are not fully occupied, who wish to be occupied, and who are very glad to become directors of public companies in order to be occupied. the direction of the bank of england has, for many generations, been composed of such men. such a government for a joint stock company is very good if its essential nature be attended to, and very bad if that nature be not attended to. that government is composed of men with a high average of general good sense, with an excellent knowledge of business in general, but without any special knowledge of the particular business in which they are engaged. ordinarily, in joint stock banks and companies this deficiency is cured by the selection of a manager of the company, who has been specially trained to that particular trade, and who engages to devote all his experience and all his ability to the affairs of the company. the directors, and often a select committee of them more especially, consult with the manager, and after hearing what he has to say, decide on the affairs of the company. there is in all ordinary joint stock companies a fixed executive specially skilled, and a somewhat varying council not specially skilled. the fixed manager ensures continuity and experience in the management, and a good board of directors ensures general wisdom. but in the bank of england there is no fixed executive. the governor and deputy-governor, who form that executive, change every two years. i believe, indeed, that such was not the original intention of the founders. in the old days of few and great privileged companies, the chairman, though periodically elected, was practically permanent so long as his policy was popular. he was the head of the ministry, and ordinarily did not change unless the opposition came in. but this idea has no present relation to the constitution of the bank of england. at present, the governor and deputy-governor almost always change at the end of two years; the case of any longer occupation of the chair is so very rare, that it need not be taken account of. and the governor and deputy-governor of the bank cannot well be shadows. they are expected to be constantly present; to see all applicants for advances out of the ordinary routine; to carry on the almost continuous correspondence between the bank and its largest customer--the government; to bring all necessary matters before the board of directors or the committee of treasury, in a word, to do very much of what falls to the lot of the manager in most companies. under this shifting chief executive, there are indeed very valuable heads of departments. the head of the discount department is especially required to be a man of ability and experience. but these officers are essentially subordinate; no one of them is like the general manager of an ordinary bank--the head of all action. the perpetually present executive--the governor and deputy-governor--make it impossible that any subordinate should have that position. a really able and active-minded governor, being required to sit all day in the bank, in fact does, and can hardly help doing, its principal business. in theory, nothing can be worse than this government for a bank a shifting executive; a board of directors chosen too young for it to be known whether they are able; a committee of management, in which seniority is the necessary qualification, and old age the common result; and no trained bankers anywhere. even if the bank of england were an ordinary bank, such a constitution would be insufficient; but its inadequacy is greater, and the consequences of that inadequacy far worse, because of its greater functions. the bank of england has to keep the sole banking reserve of the country; has to keep it through all changes of the money market, and all turns of the exchanges; has to decide on the instant in a panic what sort of advances should be made, to what amounts, and for what dates; and yet it has a constitution plainly defective. so far the government of the bank of england being better than that of any other bank--as it ought to be, considering that its functions are much harder and graver--any one would be laughed at who proposed it as a model for the government of a new bank; and that government, if it were so proposed, would on all hands be called old-fashioned, and curious. as was natural, the effects--good and evil--of its constitution are to be seen in every part of the bank's history. on one vital point the bank's management has been excellent. it has done perhaps less 'bad business,' certainly less very bad business, than any bank of the same size and the same age. in all its history i do not know that its name has ever been connected with a single large and discreditable bad debt. there has never been a suspicion that it was 'worked' for the benefit of any one man, or any combination of men. the great respectability of the directors, and the steady attention many of them have always given the business of the bank, have kept it entirely free from anything dishonorable and discreditable. steady merchants collected in council are an admirable judge of bills and securities. they always know the questionable standing of dangerous persons; they are quick to note the smallest signs of corrupt transactions; and no sophistry will persuade the best of them out of their good instincts. you could not have made the directors of the bank of england do the sort of business which 'overends' at last did, except by a moral miracle--except by changing their nature. and the fatal career of the bank of the united states would, under their management, have been equally impossible. of the ultimate solvency of the bank of england, or of the eventual safety of its vast capital, even at the worst periods of its history, there has not been the least doubt. but nevertheless, as we have seen, the policy of the bank has frequently been deplorable, and at such times the defects of its government have aggravated if not caused its calamities. in truth the executive of the bank of england is now much such as the executive of a public department of the foreign office or the home office would be in which there was no responsible permanent head. in these departments of government, the actual chief changes nearly, though not quite, as often as the governor of the bank of england. the parliamentary under-secretary--the deputy-governor, so to speak, of that office--changes nearly as often. and if the administration solely, or in its details, depended on these two, it would stop. new men could not carry it on with vigour and efficiency; indeed they could not carry it on at all. but, in fact, they are assisted by a permanent under-secretary, who manages all the routine business, who is the depository of the secrets of the office, who embodies its traditions, who is the hyphen between changing administrations. in consequence of this assistance, the continuous business of the department is, for the most part, managed sufficiently well, notwithstanding frequent changes in the heads of administration. and it is only by such assistance that such business could be so managed. the present administration of the bank is an attempt to manage a great, a growing, and a permanently continuous business without an adequate permanent element, and a competent connecting link. in answer, it may be said that the duties which press on the governor and deputy-governor of the bank are not so great or so urgent as those which press upon the heads of official departments. and perhaps, in point of mere labour, the governor of the bank has the advantage. banking never ought to be an exceedingly laborious trade. there must be a great want of system and a great deficiency in skilled assistance if extreme labour is thrown upon the chief. but in importance, the functions of the head of the bank rank as high as those of any department. the cash reserve of the country is as precious a deposit as any set of men can have the care of. and the difficulty of dealing with a panic (as the administration of the bank is forced to deal with it) is perhaps a more formidable instant difficulty than presses upon any single minister. at any rate, it comes more suddenly, and must be dealt with more immediately, than most comparable difficulties; and the judgment, the nerve, and the vigour needful to deal with it are plainly rare and great. the natural remedy would be to appoint a permanent governor of the bank. nor, as i have said, can there be much doubt that such was the intention of its founders. all the old companies which have their beginning in the seventeenth century had the same constitution, and those of them which have lingered down to our time retain it. the hudson's bay company, the south sea company, the east india company, were all founded with a sort of sovereign executive, intended to be permanent, and intended to be efficient. this is, indeed, the most natural mode of forming a company in the minds of those to whom companies are new. such persons will have always seen business transacted a good deal despotically; they will have learnt the value of prompt decision and of consistent policy; they will have often seen that business is best managed when those who are conducting it could scarcely justify the course they are pursuing by distinct argument which others could understand. all 'city' people make their money by investments, for which there are often good argumentative reasons; but they would hardly ever be able, if required before a parliamentary committee, to state those reasons. they have become used to act on them without distinctly analysing them, and, in a monarchical way, with continued success only as a test of their goodness. naturally such persons, when proceeding to form a company, make it upon the model of that which they have been used to see successful. they provide for the executive first and above all things. how much this was in the minds of the founders of the bank of england may be judged of by the name which they gave it. its corporate name is the 'governor and company of the bank of england.' so important did the founders think the executive that they mentioned it distinctly, and mentioned it first. and not only is this constitution of a company the most natural in the early days when companies were new, it is also that which experience has shown to be the most efficient now that companies have long been tried. great railway companies are managed upon no other. scarcely any instance of great success in a railway can be mentioned in which the chairman has not been an active and judicious man of business, constantly attending to the affairs of the company. a thousand instances of railway disaster can be easily found in which the chairman was only a nominal head--a nobleman, or something of that sort--chosen for show. 'railway chairmanship' has become a profession, so much is efficiency valued in it, and so indispensable has ability been found to be. the plan of appointing a permanent 'chairman' at the bank of england is strongly supported by much modern experience. nevertheless, i hesitate as to its expediency; at any rate, there are other plans which, for several reasons, should, i think, first be tried in preference. first. this plan would be exceedingly unpopular. a permanent governor of the bank of england would be one of the greatest men in england. he would be a little 'monarch' in the city; he would be far greater than the 'lord mayor.' he would be the personal embodiment of the bank of england; he would be constantly clothed with an almost indefinite prestige. everybody in business would bow down before him and try to stand well with him, for he might in a panic be able to save almost anyone he liked, and to ruin almost anyone he liked. a day might come when his favour might mean prosperity, and his distrust might mean ruin. a position with so much real power and so much apparent dignity would be intensely coveted. practical men would be apt to say that it was better than the prime ministership, for it would last much longer, and would have a greater jurisdiction over that which practical men would most value, over money. at all events, such a governor, if he understood his business, might make the fortunes of fifty men where the prime minister can make that of one. scarcely anything could be more unpopular in the city than the appointment of a little king to reign over them. secondly. i do not believe that we should always get the best man for the post; often i fear that we should not even get a tolerable man. there are many cases in which the offer of too high a pay would prevent our obtaining the man we wish for, and this is one of them. a very high pay of prestige is almost always very dangerous. it causes the post to be desired by vain men, by lazy men, by men of rank; and when that post is one of real and technical business, and when, therefore, it requires much previous training, much continuous labour, and much patient and quick judgment, all such men are dangerous. but they are sure to covet all posts of splendid dignity, and can only be kept out of them with the greatest difficulty. probably, in every cabinet there are still some members (in the days of the old close boroughs there were many) whose posts have come to them not from personal ability or inherent merit, but from their rank, their wealth, or even their imposing exterior. the highest political offices are, indeed, kept clear of such people, for in them serious and important duties must constantly be performed in the face of the world. a prime minister, or a chancellor of the exchequer, or a secretary of state must explain his policy and defend his actions in parliament, and the discriminating tact of a critical assembly--abounding in experience, and guided by tradition--will soon discover what he is. but the governor of the bank would only perform quiet functions, which look like routine, though they are not, in which there is no immediate risk of success or failure; which years hence may indeed issue in a crop of bad debts, but which any grave persons may make at the time to look fair and plausible. a large bank is exactly the place where a vain and shallow person in authority, if he be a man of gravity and method, as such men often are, may do infinite evil in no long time, and before he is detected. if he is lucky enough to begin at a time of expansion in trade, he is nearly sure not to be found out till the time of contraction has arrived, and then very large figures will be required to reckon the evil he has done. and thirdly, i fear that the possession of such patronage would ruin any set of persons in whose gift it was. the election of the chairman must be placed either in the court of proprietors or that of the directors. if the proprietors choose, there will be something like the evils of an american presidential election. bank stock will be bought in order to confer the qualification of voting at the election of the 'chief of the city.' the chairman, when elected, may well find that his most active supporters are large borrowers of the bank, and he may well be puzzled to decide between his duty to the bank and his gratitude to those who chose him. probably, if he be a cautious man of average ability, he will combine both evils; he will not lend so much money as he is asked for, and so will offend his own supporters; but will lend some which will be lost, and so the profits of the bank will be reduced. a large body of bank proprietors would make but a bad elective body for an office of great prestige; they would not commonly choose a good person, and the person they did choose would be bound by promises that would make him less good. the court of directors would choose better; a small body of men of business would not easily be persuaded to choose an extremely unfit man. but they would not often choose an extremely good man. the really best man would probably not be so rich as the majority of the directors, nor of so much standing, and not unnaturally they would much dislike to elevate to the headship of the city, one who was much less in the estimation of the city than themselves. and they would be canvassed in every way and on every side to appoint a man of mercantile dignity or mercantile influence. many people of the greatest prestige and rank in the city would covet so great a dignity; if not for themselves, at least for some friend, or some relative, and so the directors would be set upon from every side. an election so liable to be disturbed by powerful vitiating causes would rarely end in a good choice. the best candidate would almost never be chosen; often, i fear, one would be chosen altogether unfit for a post so important. and the excitement of so keen an election would altogether disturb the quiet of the bank. the good and efficient working of a board of bank directors depends on its internal harmony, and that harmony would be broken for ever by the excitement, the sayings, and the acts of a great election. the board of directors would almost certainly be demoralised by having to choose a sovereign, and there is no certainty, nor any great likelihood, indeed, that they would choose a good one. in france the difficulty of finding a good body to choose the governor of the bank has been met characteristically. the bank of france keeps the money of the state, and the state appoints its governor. the french have generally a logical reason to give for all they do, though perhaps the results of their actions are not always so good as the reasons for them. the governor of the bank of france has not always, i am told, been a very competent person; the sub-governor, whom the state also appoints, is, as we might expect, usually better. but for our english purposes it would be useless to inquire minutely into this. no english statesman would consent to be responsible for the choice of the governor of the bank of england. after every panic, the opposition would say in parliament that the calamity had been 'grievously aggravated,' if not wholly caused, by the 'gross misconduct' of the governor appointed by the ministry. or, possibly, offices may have changed occupants and the ministry in power at the panic would be the opponents of the ministry which at a former time appointed the governor. in that case they would be apt to feel, and to intimate, a 'grave regret' at the course which the nominee of their adversaries had 'thought it desirable to pursue.' they would not much mind hurting his feelings, and if he resigned they would have themselves a valuable piece of patronage to confer on one of their own friends. no result could be worse than that the conduct of the bank and the management should be made a matter of party politics, and men of all parties would agree in this, even if they agreed in almost nothing else. i am therefore afraid that we must abandon the plan of improving the government of the bank of england by the appointment of a permanent governor, because we should not be sure of choosing a good governor, and should indeed run a great risk, for the most part, of choosing a bad one. i think, however, that much of the advantage, with little of the risk, might be secured by a humbler scheme. in english political offices, as was observed before, the evil of a changing head is made possible by the permanence of a dignified subordinate. though the parliamentary secretary of state and the parliamentary under-secretary go in and out with each administration, another under-secretary remains through all such changes, and is on that account called 'permanent.' now this system seems to me in its principle perfectly applicable to the administration of the bank of england. for the reasons which have just been given, a permanent ruler of the bank of england cannot be appointed; for other reasons, which were just before given, some most influential permanent functionary is essential in the proper conduct of the business of the bank; and, mutatis mutandis, these are the very difficulties, and the very advantages which have led us to frame our principal offices of state in the present fashion. such a deputy-governor would not be at all a 'king' in the city. there would be no mischievous prestige about the office; there would be no attraction in it for a vain man; and there would be nothing to make it an object of a violent canvass or of unscrupulous electioneering. the office would be essentially subordinate in its character, just like the permanent secretary in a political office. the pay should be high, for good ability is wanted--but no pay would attract the most dangerous class of people. the very influential, but not very wise, city dignitary who would be so very dangerous is usually very opulent; he would hardly have such influence he were not opulent: what he wants is not money, but 'position.' a governorship of the bank of england he would take almost without salary; perhaps he would even pay to get it: but a minor office of essential subordination would not attract him at all. we may augment the pay enough to get a good man, without fearing that by such pay we may tempt--as by social privilege we should tempt--exactly the sort of man we do not want. undoubtedly such a permanent official should be a trained banker. there is a cardinal difference between banking and other kinds of commerce; you can afford to run much less risk in banking than in commerce, and you must take much greater precautions. in common business, the trader can add to the cost price of the goods he sells a large mercantile profit, say to per cent; but the banker has to be content with the interest of money, which in england is not so much as per cent upon the average. the business of a banker therefore cannot bear so many bad debts as that of a merchant, and he must be much more cautious to whom he gives credit. real money is a commodity much more coveted than common goods: for one deceit which is attempted on a manufacturer or a merchant, twenty or more are attempted on a banker. and besides, a banker, dealing with the money of others, and money payable on demand, must be always, as it were, looking behind him and seeing that he has reserve enough in store if payment should be asked for, which a merchant dealing mostly with his own capital need not think of. adventure is the life of commerce, but caution, i had almost said timidity, is the life of banking; and i cannot imagine that the long series of great errors made by the bank of england in the management of its reserve till after , would have been possible if the merchants in the bank court had not erroneously taken the same view of the bank's business that they must properly take of their own mercantile business. the bank directors have almost always been too cheerful as to the bank's business, and too little disposed to take alarm. what we want to introduce into the bank court is a wise apprehensiveness, and this every trained banker is taught by the habits of his trade, and the atmosphere of his life. the permanent governor ought to give his whole time to the business of the bank. he ought to be forbidden to engage in any other concern. all the present directors, including the governor and deputy-governor, are engaged in their own business, and it is very possible, indeed it must perpetually have happened, that their own business as merchants most occupied the minds of most of them just when it was most important that the business of the bank should occupy them. it is at a panic and just before a panic that the business of the bank is most exacting and most engrossing. but just at that time the business of most merchants must be unusually occupying and may be exceedingly critical. by the present constitution of the bank, the attention of its sole rulers is most apt to be diverted from the bank's affairs just when those affairs require that attention the most. and the only remedy is the appointment of a permanent and influential man, who will have no business save that of the bank, and who therefore presumably will attend most to it at the critical instant when attention is most required. his mind, at any rate, will in a panic be free from pecuniary anxiety, whereas many, if not all, of the present directors must be incessantly thinking of their own affairs and unable to banish them from their minds. the permanent deputy-governor must be a director and a man of fair position. he must not have to say 'sir' to the governor. there is no fair argument between an inferior who has to exhibit respect and a superior who has to receive respect. the superior can always, and does mostly, refute the bad arguments of his inferior; but the inferior rarely ventures to try to refute the bad arguments of his superior. and he still more rarely states his case effectually; he pauses, hesitates, does not use the best word or the most apt illustration, perhaps he uses a faulty illustration or a wrong word, and so fails because the superior immediately exposes him. important business can only be sufficiently discussed by persons who can say very much what they like very much as they like to one another. the thought of the speaker should come out as it was in his mind, and not be hidden in respectful expressions or enfeebled by affected doubt. what is wanted at the bank is not a new clerk to the directors--they have excellent clerks of great experience now--but a permanent equal to the directors, who shall be able to discuss on equal terms with them the business of the bank, and have this advantage over them in discussion, that he has no other business than that of the bank to think of. the formal duties of such a permanent officer could only be defined by some one conversant with the business of the bank, and could scarcely be intelligibly discussed before the public. nor are the precise duties of the least importance. such an officer, if sound, able, and industrious, would soon rule the affairs of the bank. he would be acquainted better than anyone else, both with the traditions of the past and with the facts of the present; he would have a great experience; he would have seen many anxious times; he would always be on the watch for their recurrence. and he would have a peculiar power of guidance at such moments from the nature of the men with whom he has most to deal. most governors of the bank of england are cautious merchants, not profoundly skilled in banking, but most anxious that their period of office should be prosperous and that they should themselves escape censure. if a 'safe' course is pressed upon them they are likely to take that course. now it would almost always be 'safe' to follow the advice of the great standing 'authority'; it would always be most 'unsafe' not to follow it. if the changing governor act on the advice of the permanent deputy-governor, most of the blame in case of mischance would fall on the latter; it would be said that a shifting officer like the governor might very likely not know what should be done, but that the permanent official was put there to know it and paid to know it. but if, on the other hand, the changing governor should disregard the advice of his permanent colleague, and the consequence should be bad, he would be blamed exceedingly. it would be said that, 'being without experience, he had taken upon him to overrule men who had much experience; that when the constitution of the bank had provided them with skilled counsel, he had taken on himself to act of his own head, and to disregard that counsel;' and so on ad infinitum. and there could be no sort of conversation more injurious to a man in the city; the world there would say, rightly or wrongly, 'we must never be too severe on errors of judgment; we are all making them every day; if responsible persons do their best we can expect no more. but this case is different: the governor acted on a wrong system; he took upon himself an unnecessary responsibility:' and so a governor who incurred disaster by disregarding his skilled counsellor would be thought a fool in the city for ever. in consequence, the one skilled counsellor would in fact rule the bank. i believe that the appointment of the new permanent and skilled authority at the bank is the greatest reform which can be made there, and that which is most wanted. i believe that such a person would give to the decision of the bank that foresight, that quickness, and that consistency in which those decisions are undeniably now deficient. as far as i can judge, this change in the constitution of the bank is by far the most necessary, and is perhaps more important even than all other changes. but, nevertheless, we should reform the other points which we have seen to be defective. first, the london bankers should not be altogether excluded from the court of directors. the old idea, as i have explained, was that the london bankers were the competitors of the bank of england, and would hurt it if they could. but now the london bankers have another relation to the bank which did not then exist, and was not then imagined. among private people they are the principal depositors in the bank; they are therefore particularly interested in its stability; they are especially interested in the maintenance of a good banking reserve, for their own credit and the safety of their large deposits depend on it. and they can bring to the court of directors an experience of banking itself, got outside the bank of england, which none of the present directors possess, for they have learned all they know of banking at the bank itself. there was also an old notion that the secrets of the bank would be divulged if they were imparted to bankers. but probably bankers are better trained to silence and secrecy than most people. and there is only a thin partition now between the bankers and the secrets of the bank. only lately a firm failed of which one partner was a director of the london and westminster bank, and another a director of the bank of england. who can define or class the confidential communications of such persons under such circumstances? as i observed before, the line drawn at present against bankers is very technical and exclusively english. according to continental ideas, messrs. rothschild are bankers, if any one is a banker. but the house of rothschild is represented on the bank direction. and it is most desirable that it should be represented, for members of that firm can give if they choose confidential information of great value to the bank. but, nevertheless, the objection which is urged against english bankers is at least equally applicable to these foreign bankers. they have, or may have, at certain periods an interest opposite to the policy of the bank. as the greatest exchange dealers, they may wish to export gold just when the bank of england is raising its rate of interest to prevent anyone from exporting gold. the vote of a great exchange dealer might be objected to for plausible reasons of contrary interest, if any such reasons were worth regarding. but in fact the particular interest of single directors is not to be regarded; almost all directors who bring special information labour under a suspicion of interest; they can only have acquired that information in present business, and such business may very possibly be affected for good or evil by the policy of the bank. but you must not on this account seal up the bank hermetically against living information; you must make a fair body of directors upon the whole, and trust that the bias of some individual interests will disappear and be lost in the whole. and if this is to be the guiding principle, it is not consistent to exclude english bankers from the court. objection is often also taken to the constitution of the committee of treasury. that body is composed of the governor and deputy-governor and all the directors who have held those offices; but as those offices in the main pass in rotation, this mode of election very much comes to an election by seniority, and there are obvious objections to giving, not only a preponderance to age, but a monopoly to age. in some cases, indeed, this monopoly i believe has already been infringed. when directors have on account of the magnitude of their transactions, and the consequent engrossing nature of their business, declined to fill the chair, in some cases they have been asked to be members of the committee of treasury notwithstanding. and it would certainly upon principle seem wiser to choose a committee which for some purposes approximates to a committee of management by competence rather than by seniority. an objection is also taken to the large number of bank directors. there are twenty-four directors, a governor and a deputy-governor, making a total court of twenty-six persons, which is obviously too large for the real discussion of any difficult business. and the case is worse because the court only meets once a week, and only sits a very short time. it has been said, with exaggeration, but not without a basis of truth, that if the bank directors were to sit for four hours, there would be 'a panic solely from that.' 'the court,' says mr. tooke, 'meets at half-past eleven or twelve; and, if the sitting be prolonged beyond half-past one, the stock exchange and the money market become excited, under the idea that a change of importance is under discussion; and persons congregate about the doors of the bank parlour to obtain the earliest intimation of the decision.' and he proceeds to conjecture that the knowledge of the impatience without must cause haste, if not impatience, within. that the decisions of such a court should be of incalculable importance is plainly very strange. there should be no delicacy as to altering the constitution of the bank of england. the existing constitution was framed in times that have passed away, and was intended to be used for purposes very different from the present. the founders may have considered that it would lend money to the government, that it would keep the money of the government, that it would issue notes payable to bearer, but that it would keep the 'banking reserve' of a great nation no one in the seventeenth century imagined. and when the use to which we are putting an old thing is a new use, in common sense we should think whether the old thing is quite fit for the use to which we are setting it. 'putting new wine into old bottles' is safe only when you watch the condition of the bottle, and adapt its structure most carefully. chapter ix. the joint stock banks. the joint stock banks of this country are a most remarkable success. generally speaking the career of joint stock companies in this country has been chequered. adam smith, many years since, threw out many pregnant hints on the difficulty of such undertakings--hints which even after so many years will well repay perusal. but joint stock banking has been an exception to this rule. four years ago i threw together the facts on the subject and the reasons for them; and i venture to quote the article, because subsequent experience suggests, i think, little to be added to it. 'the main classes of joint stock companies which have answered are three:-- st. those in which the capital is used not to work the business but to guarantee the business. thus a banker's business--his proper business--does not begin while he is using his own money: it commences when he begins to use the capital of others. an insurance office in the long run needs no capital; the premiums which are received ought to exceed the claims which accrue. in both cases, the capital is wanted to assure the public and to induce it to trust the concern. ndly. those companies have answered which have an exclusive privilege which they have used with judgment, or which possibly was so very profitable as to enable them to thrive with little judgment. rdly. those which have undertaken a business both large and simple--employing more money than most individuals or private firms have at command, and yet such that, in adam smith's words, "the operations are capable of being reduced to a routine or such an uniformity of method as admits of no variation." 'as a rule, the most profitable of these companies are banks. indeed, all the favouring conditions just mentioned concur in many banks. an old-established bank has a "prestige," which amounts to a "privileged opportunity"; though no exclusive right is given to it by law, a peculiar power is given to it by opinion. the business of banking ought to be simple; if it is hard it is wrong. the only securities which a banker, using money that he may be asked at short notice to repay, ought to touch, are those which are easily saleable and easily intelligible. if there is a difficulty or a doubt, the security should be declined. no business can of course be quite reduced to fixed rules. there must be occasional cases which no pre-conceived theory can define. but banking comes as near to fixed rules certainly as any existing business, perhaps as any possible business. the business of an old-established bank has the full advantage of being a simple business, and in part the advantage of being a monopoly business. competition with it is only open in the sense in which competition with "the london tavern" is open; anyone that has to do with either will pay dear for it. 'but the main source of the profitableness of established banking is the smallness of the requisite capital. being only wanted as a "moral influence," it need not be more than is necessary to secure that influence. although, therefore, a banker deals only with the most sure securities, and with those which yield the least interest, he can nevertheless gain and divide a very large profit upon his own capital, because the money in his hands is so much larger than that capital. 'experience, as shown by plain figures, confirms these conclusions. we print at the end of this article the respective profits of banks in england, and scotland, and ireland, being all in those countries of which we have sufficient information--the bank of england excepted. there are no doubt others, but they are not quoted even on local stock exchange lists, and in most cases publish no reports. the result of these banks, as regards the dividends they pay, is-- no. of companies capital l above per cent , , between and per cent , , " and per cent , , " and per cent , , under per cent , , ----------------- , , that is to say, above per cent of the capital employed in these banks pays over per cent, and / per cent of the capital pays more than per cent. so striking a result is not to be shown in any other joint stock trade. 'the period to which these accounts refer was certainly not a particularly profitable one--on the contrary, it has been specially unprofitable. the rate of interest has been very low, and the amount of good security in the market small. many banks--to some extent most banks--probably had in their books painful reminiscences of . the fever of excitement which passed over the nation was strongest in the classes to whom banks lent most, and consequently the losses of even the most careful banks (save of those in rural and sheltered situations) were probably greater than usual. but even tried by this very unfavourable test banking is a trade profitable far beyond the average of trades. 'there is no attempt in these banks on the whole and as a rule to divide too much--on the contrary, they have accumulated about , , l., or nearly / rd of their capital, principally out of undivided profits. the directors of some of them have been anxious to put away as much as possible and to divide as little as possible. 'the reason is plain; out of the banks which pay more than per cent, all but one were old-established banks, and all those paying between and per cent were old banks too. the "privileged opportunity" of which we spoke is singularly conspicuous in such figures; it enables banks to pay much, which without it would not have paid much. the amount of the profit is clearly proportional to the value of the "privileged opportunity." all the banks which pay above per cent, save one, are banks more than years old; all those which pay between and are so too. a new bank could not make these profits, or even by its competition much reduce these profits; in attempting to do so, it would simply ruin itself. not possessing the accumulated credit of years, it would have to wind up before it attained that credit. 'the value of the opportunity too is proportioned to what has to be paid for it. some old banks have to pay interest for all their money; some have much for which they pay nothing. those who give much to their customers have of course less left for their shareholders. thus scotland, where there is always a daily interest, has no bank in the lists paying over per cent. the profits of scotch banks run thus: capital dividend l bank of scotland , , british linen company , , caledonian , clydesdale , commercial bank of scotland , , national bank of scotland , , north of scotland , union bank of scotland , , city of glasgow , royal bank , , --------- , , good profits enough, but not at all like the profits of the london and westminster, or the other most lucrative banks of the south. 'the bank of england, it is true, does not seem to pay so much as other english banks in this way of reckoning. it makes an immense profit, but then its capital is immense too. in fact, the bank of england suffers under two difficulties. being much older than the other joint stock banks, it belongs to a less profitable era. when it was founded, banks looked rather to the profit on their own capital, and to the gains of note issue than to the use of deposits. the first relations with the state were more like those of a finance company than of a bank, as we now think of banking. if the bank had not made loans to the government, which we should now think dubious, the bank would not have existed, for the government would never have permitted it. not only is the capital of the bank of england relatively greater, but the means of making profit in the bank of england are relatively less also. by custom and understanding the bank of england keep a much greater reserve in unprofitable cash than other banks; if they do not keep it, either our whole system must be changed or we should break up in utter bankruptcy. the earning faculty of the bank of england is in proportion less than that of other banks, and also the sum on which it has to pay dividend is altogether greater than theirs. 'it is interesting to compare the facts of joint stock banking with the fears of it which were felt. in , lord overstone observed: "i think that joint stock banks are deficient in everything requisite for the conduct of the banking business except extended responsibility; the banking business requires peculiarly persons attentive to all its details, constantly, daily, and hourly watchful of every transaction, much more than mercantile or trading business. it also requires immediate prompt decisions upon circumstances when they arise, in many cases a decision that does not admit of delay for consultation; it also requires a discretion to be exercised with reference to the special circumstances of each case. joint stock banks being of course obliged to act through agents and not by a principal, and therefore under the restraint of general rules, cannot be guided by so nice a reference to degrees of difference in the character of responsibility of parties; nor can they undertake to regulate the assistance to be granted to concerns under temporary embarrassment by so accurate a reference to the circumstances, favourable or unfavourable, of each case." 'but in this very respect, joint stock banks have probably improved the business of banking. the old private banks in former times used to lend much to private individuals; the banker, as lord overstone on another occasion explained, could have no security, but he formed his judgment of the discretion, the sense, and the solvency of those to whom he lent. and when london was by comparison a small city, and when by comparison everyone stuck to his proper business, this practice might have been safe. but now that london is enormous and that no one can watch anyone, such a trade would be disastrous; at present, it would hardly be safe in a country town. the joint stock banks were quite unfit for the business lord overstone meant, but then that business is quite unfit for the present time. this success of joint stock banking is very contrary to the general expectation at its origin. not only private bankers, such as lord overstone then was, but a great number of thinking persons feared that the joint stock banks would fast ruin themselves, and then cause a collapse and panic in the country. the whole of english commercial literature between and is filled with that idea. nor did it cease in . so late as , sir r. peel thought the foundation of joint stock banks so dangerous that he subjected it to grave and exceptional difficulty. under the act of , which he proposed, no such companies could be founded except with shares of l. with l.; paid up on each; which effectually checked the progress of such banks, for few new ones were established for many years, or till that act had been repealed. but in this, as in many other cases, perhaps sir r. peel will be found to have been clear-sighted rather than far-sighted. he was afraid of certain joint stock banks which he saw rising around him; but the effect of his legislation was to give to these very banks, if not a monopoly, at any rate an exemption from new rivals. no one now founds or can found a new private bank, and sir r. peel by law prevented new joint stock banks from being established. though he was exceedingly distrustful of the joint stock banks founded between and , yet in fact he was their especial patron, and he more than any other man encouraged and protected them. but in this wonderful success there are two dubious points, two considerations of different kinds, which forbid us to say that in other countries, even in countries with the capacity of co-operation, joint stock banks would succeed as well as we have seen that they succeed in england. st. these great banks have not had to keep so large a reserve against their liabilities as it was natural that they should, being of first-rate magnitude, keep. they were at first, of course, very small in comparison with what they are now. they found a number of private bankers grouped round the bank of england, and they added themselves to the group. not only did they keep their reserve from the beginning at the bank of england, but they did not keep so much reserve as they would have kept if there had been no bank of england. for a long time this was hardly noticed. for many years questions of the 'currency,' particularly questions as to the act of , engrossed the attention of all who were occupied with these subjects. even those who were most anxious to speak evil of joint stock banks, did not mention this particular evil. the first time, as far as i know, that it was commented on in any important document, was in an official letter written in by mr. weguelin, who was then governor of the bank, to sir george lewis, who was then chancellor of the exchequer. the governor and the directors of the bank of england had been asked by sir george lewis severally to give their opinions on the act of , and all their replies were published. in his, mr. weguelin says: 'if the amount of the reserve kept by the bank of england be contrasted with the reserve kept by the joint stock banks, a new and hitherto little considered source of danger to the credit of the country will present itself. the joint stock banks of london, judging by their published accounts, have deposits to the amount of , , l. their capital is not more than , , l., and they have on an average , , l., invested in one way or another, leaving only , , l. as a reserve against all this mass of liabilities.' but these remarkable words were little observed in the discussions of that time. the air was obscured by other matters. but in this work i have said so much on the subject that i need say little now. the joint stock banks now keep a main part of their reserve on deposit with the bill-brokers, or in good and convertible interest-bearing securities. from these they obtain a large income, and that income swells their profits. if they had to keep a much larger part than now of that reserve in barren cash, their dividends would be reduced, and their present success would become less conspicuous. the second misgiving, which many calm observers more and more feel as to our largest joint stock banks, fastens itself on their government. is that government sufficient to lend well and keep safe so many millions? they are governed, as every one knows, by a board of directors, assisted by a general manager, and there are in london unrivalled materials for composing good boards of directors. there are very many men of good means, of great sagacity and great experience in business, who are obliged to be in the city every day, and to remain there during the day, but who have very much time on their hands. a merchant employing solely or principally his own capital has often a great deal of leisure. he is obliged to be on the market, and to hear what is doing. every day he has some business to transact, but his transactions can be but few. his capital can bear only a limited number of purchases; if he bought as much as would fill his time from day to day he would soon be ruined, for he could not pay for it. accordingly, many excellent men of business are quite ready to become members of boards of directors, and to attend to the business of companies, a good deal for the employment's sake. to have an interesting occupation which brings dignity and power with it pleases them very much. as the aggregation of commerce in great cities grows, the number of such men augments. a council of grave, careful, and experienced men can, without difficulty, be collected for a great bank in london, such as never could have been collected before, and such as cannot now be collected elsewhere. there are facilities, too, for engaging a good banker to be a manager such as there never were before in the world. the number of such persons is much on the increase. any careful person who is experienced in figures, and has real sound sense, may easily make himself a good banker. the modes in which money can be safely lent by a banker are not many, and a clear-headed, quiet, industrious person may soon learn all that is necessary about them. our intricate law of real property is an impediment in country banking, for it requires some special study even to comprehend the elements of a law which is full of technical words, and which can only be explained by narrating its history. but the banking of great cities is little concerned with loans on landed property. and all the rest of the knowledge requisite for a banker can easily be obtained by anyone who has the sort of mind which takes to it. no doubt there is a vast routine of work to be learned, and the manager of a large bank must have a great facility in transacting business rapidly. but a great number of persons are now bred from their earliest manhood in the very midst of that routine; they learn it as they would learn a language, and come to be no more able to unlearn it than they could unlearn a language. and the able ones among them acquire an almost magical rapidity in effecting the business connected with that routine. a very good manager and very good board of directors can, without unreasonable difficulty, be provided for a bank at present in london. it will be asked, what more can be required? i reply, a great deal. all which the best board of directors can really accomplish, is to form a good decision on the points which the manager presents to them, and perhaps on a few others which one or two zealous members of their body may select for discussion. a meeting of fifteen or eighteen persons is wholly unequal to the transaction of more business than this; it will be fortunate, and it must be well guided, if it should be found to be equal to so much. the discussion even of simple practical points by such a number of persons is a somewhat tedious affair. many of them will wish to speak on every decision of moment, and some of them--some of the best of them perhaps--will only speak with difficulty and slowly. very generally, several points will be started at once, unless the discussion is strictly watched by a rigid chairman; and even on a single point the arguments will often raise grave questions which cannot be answered, and suggest many more issues than can be advantageously decided by the meeting. the time required by many persons for discussing many questions, would alone prevent an assembly of many persons from overlooking a large and complicated business. nor is this the only difficulty. not only would a real supervision of a large business by a board of directors require much more time than the board would consent to occupy in meeting, it would also require much more time and much more thought than the individual directors would consent to give. these directors are only employing on the business of the bank the vacant moments of their time, and the spare energies of their minds. they cannot give the bank more; the rest is required for the safe conduct of their own affairs, and if they diverted it from these affairs they would be ruined. a few of them may have little other business, or they may have other partners in the business, on whose industry they can rely, and whose judgment they can trust; one or two may have retired from business. but for the most part, directors of a company cannot attend principally and anxiously to the affairs of a company without so far neglecting their own business as to run great risk of ruin; and if they are ruined, their trustworthiness ceases, and they are no longer permitted by custom to be directors. nor, even if it were possible really to supervise a business by the effectual and constant inspection of fifteen or sixteen rich and capable persons, would even the largest business easily bear the expense of such a supervision. i say rich, because the members of a board governing a large bank must be men of standing and note besides, or they would discredit the bank; they need not be rich in the sense of being worth millions, but they must be known to possess a fair amount of capital and be seen to be transacting a fair quantity of business. but the labour of such persons, i do not say their spare powers, but their principal energies, fetches a high price. business is really a profession often requiring for its practice quite as much knowledge, and quite as much skill, as law and medicine; and requiring also the possession of money. a thorough man of business, employing a fair capital in a trade, which he thoroughly comprehends, not only earns a profit on that capital, but really makes of his professional skill a large income. he has a revenue from talent as well as from money; and to induce sixteen or eighteen persons to abandon such a position and such an income in order to devote their entire attention to the affairs of a joint stock company, a salary must be given too large for the bank to pay or for anyone to wish to propose. and an effectual supervision by the whole board being impossible, there is a great risk that the whole business may fall to the general manager. many unhappy cases have proved this to be very dangerous. even when the business of joint stock banks was far less, and when the deposits entrusted to them were very much smaller, a manager sometimes committed frauds which were dangerous, and still oftener made mistakes that were ruinous. actual crime will always be rare; but, as an uninspected manager of a great bank has the control of untold millions, sometimes we must expect to see it: the magnitude of the temptation will occasionally prevail over the feebleness of human nature. but error is far more formidable than fraud: the mistakes of a sanguine manager are, far more to be dreaded than the theft of a dishonest manager. easy misconception is far more common than long-sighted deceit. and the losses to which an adventurous and plausible manager, in complete good faith, would readily commit a bank, are beyond comparison greater than any which a fraudulent manager would be able to conceal, even with the utmost ingenuity. if the losses by mistake in banking and the losses by fraud were put side by side, those by mistake would be incomparably the greater. there is no more unsafe government for a bank than that of an eager and active manager, subject only to the supervision of a numerous board of directors, even though that board be excellent, for the manager may easily glide into dangerous and insecure transactions, nor can the board effectually check him. the remedy is this: a certain number of the directors, either those who have more spare time than others, or those who are more ready to sell a large part of their time to the bank, must be formed into a real working committee, which must meet constantly, must investigate every large transaction, must be acquainted with the means and standing of every large borrower, and must be in such incessant communication with the manager that it will be impossible for him to engage in hazardous enterprises of dangerous magnitude without their knowing it and having an opportunity of forbidding it. in almost all cases they would forbid it; all committees are cautious, and a committee of careful men of business, picked from a large city, will usually err on the side of caution if it err at all. the daily attention of a small but competent minor council, to whom most of the powers of the directors are delegated, and who, like a cabinet, guide the deliberations of the board at its meetings, is the only adequate security of a large bank from the rash engagements of a despotic and active general manager. fraud, in the face of such a committee, would probably never be attempted, and even now it is a rare and minor evil. some such committees are vaguely known to exist in most, if not all, our large joint stock banks. but their real constitution is not known. no customer and no shareholder knows the names of the managing committee, perhaps, in any of these large banks. and this is a grave error. a large depositor ought to be able to ascertain who really are the persons that dispose of his money; and still more a large shareholder ought not to rest till he knows who it is that makes engagements on his behalf, and who it is that may ruin him if they choose. the committee ought to be composed of quiet men of business, who can be ascertained by inquiry to be of high character and well-judging mind. and if the public and the shareholder knew that there was such a committee, they would have sufficient reasons for the confidence which now is given without such reasons. a certain number of directors attending daily by rotation is, it should be said, no substitute for a permanent committee. it has no sufficient responsibility. a changing body cannot have any responsibility. the transactions which were agreed to by one set of directors present on the monday might be exactly those which would be much disapproved by directors present on the wednesday. it is essential to the decisions of most business, and not least of the banking business, that they should be made constantly by the same persons; the chain of transactions must pass through the same minds. a large business may be managed tolerably by a quiet group of second-rate men if those men be always the same; but it cannot be managed at all by a fluctuating body, even of the very cleverest men. you might as well attempt to guide the affairs of the nation by means of a cabinet similarly changing. our great joint stock bands are imprudent in so carefully concealing the details of their government, and in secluding those details from the risk of discussion. the answer, no doubt will be, 'let well alone; as you have admitted, there hardly ever before was so great a success as these banks of ours: what more do you or can you want?' i can only say that i want further to confirm this great success and to make it secure for the future. at present there is at least the possibility of a great reaction. supposing that, owing to defects in its government, one even of the greater london joint stock banks failed, there would be an instant suspicion of the whole system. one _terra incognita_ being seen to be faulty, every other _terra incognita_ would be suspected. if the real government of these banks had for years been known, and if the subsisting banks had been known not to be ruled by the bad mode of government which had ruined the bank that had fallen, then the ruin of that bank would not be hurtful. the other banks would be seen to be exempt from the cause which had destroyed it. but at present the ruin of one of these great banks would greatly impair the credit of all. scarcely any one knows the precise government of any one; in no case has that government been described on authority; and the fall of one by grave misgovernment would be taken to show that the others might as easily be misgoverned also. and a tardy disclosure even of an admirable constitution would not much help the surviving banks: as it was extracted by necessity, it would be received with suspicion. a sceptical world would say 'of course they say they are all perfect now; it would not do for them to say anything else.' and not only the depositors and the shareholders of these large banks have a grave interest in their good government, but the public also. we have seen that our banking reserve is, as compared with our liabilities, singularly small; we have seen that the rise of these great banks has lessened the proportion of that reserve to those liabilities; we have seen that the greatest strain on the banking reserve is a 'panic.' now, no cause is more capable of producing a panic, perhaps none is so capable, as the failure of a first-rate joint stock bank in london. such an event would have something like the effect of the failure of overend, gurney and co.; scarcely any other event would have an equal effect. and therefore, under the existing constitution of our banking system the government of these great banks is of primary importance to us all. chapter x. the private banks. perhaps some readers of the last part of the last chapter have been inclined to say that i must be a latent enemy to joint stock banking. at any rate, i have pointed out what i think grave defects in it. but i fear that a reader of this chapter may, on like grounds, suppose that i am an enemy to private banking. and i can only hope that the two impressions may counteract one another, and may show that i do not intend to be unfair. i can imagine nothing better in theory or more successful in practice than private banks as they were in the beginning. a man of known wealth, known integrity, and known ability is largely entrusted with the money of his neighbours. the confidence is strictly personal. his neighbours know him, and trust him because they know him. they see daily his manner of life, and judge from it that their confidence is deserved. in rural districts, and in former times, it was difficult for a man to ruin himself except at the place in which he lived; for the most part he spent his money there, and speculated there if he speculated at all. those who lived there also would soon see if he was acting in a manner to shake their confidence. even in large cities, as cities then were, it was possible for most persons to ascertain with fair certainty the real position of conspicuous persons, and to learn all which was material in fixing their credit. accordingly the bankers who for a long series of years passed successfully this strict and continual investigation, became very wealthy and very powerful. the name 'london banker' had especially a charmed value. he was supposed to represent, and often did represent, a certain union of pecuniary sagacity and educated refinement which was scarcely to be found in any other part of society. in a time when the trading classes were much ruder than they now are, many private bankers possessed variety of knowledge and a delicacy of attainment which would even now be very rare. such a position is indeed singularly favourable. the calling is hereditary; the credit of the bank descends from father to son: this inherited wealth soon begins inherited refinement. banking is a watchful, but not a laborious trade. a banker, even in large business, can feel pretty sure that all his transactions are sound, and yet have much spare mind. a certain part of his time, and a considerable part of his thoughts, he can readily devote to other pursuits. and a london banker can also have the most intellectual society in the world if he chooses it. there has probably very rarely ever been so happy a position as that of a london private banker; and never perhaps a happier. it is painful to have to doubt of the continuance of such a class, and yet, i fear, we must doubt of it. the evidence of figures is against it. in there were private banks in lombard street admitted to the clearing-house: there now are only . though the business of banking has increased so much since , this species of banks is fewer in number than it was then. nor is this the worst. the race is not renewed. there are not many recognised impossibilities in business, but everybody admits 'that you cannot found a new private bank.' no such has been founded in london, or, as far as i know, in the country, for many years. the old ones merge or die, and so the number is lessened; but no new ones begin so as to increase that number again. the truth is that the circumstances which originally favoured the establishment of private banks have now almost passed away. the world has become so large and complicated that it is not easy to ascertain who is rich and who is poor. no doubt there are some enormously wealthy men in england whose means everybody has heard of, and has no doubt of. but these are not the men to incur the vast liabilities of private banking. if they were bred in it they might stay in it; but they would never begin it for themselves. and if they did, i expect people would begin to doubt even of their wealth. it would be said, 'what does a b go into banking for? he cannot be as rich as we thought.' a millionaire commonly shrinks from liability, and the essence of great banking is great liability. no doubt there are many 'second-rate' rich men, as we now count riches, who would be quite ready to add to their income the profit of a private bank if only they could manage it. but unluckily they cannot manage it. their wealth is not sufficiently familiar to the world; they cannot obtain the necessary confidence. no new private bank is founded in england because men of first-rate wealth will not found one, and men not of absolutely first-rate wealth cannot. in the present day, also, private banking is exposed to a competition against which in its origin it had not to struggle. owing to the changes of which i have before spoken, joint stock banking has begun to compete with it. in old times this was impossible; the bank of england had a monopoly in banking of the principle of association. but now large joint stock banks of deposit are among the most conspicuous banks in lombard street. they have a large paid-up capital and intelligible published accounts; they use these as an incessant advertisement, in a manner in which no individual can use his own wealth. by their increasing progress they effectually prevent the foundation of any new private bank. the amount of the present business of private banks is perfectly unknown. their balance sheets are effective secrets--rigidly guarded. but none of them, except a few of the largest, are believed at all to gain business. the common repute of lombard street might be wrong in a particular case, but upon the general doctrine it is almost sure to be right. there are a few well-known exceptions, but according to universal belief the deposits of most private bankers in london tend rather to diminish than to increase. as to the smaller banks, this naturally would be so. a large bank always tends to become larger, and a small one tends to become smaller. people naturally choose for their banker the banker who has most present credit, and the one who has most money in hand is the one who possesses such credit. this is what is meant by saying that a long established and rich bank has a 'privileged opportunity'; it is in a better position to do its business than any one else is; it has a great advantage over old competitors and an overwhelming superiority over new comers. new people coming into lombard street judge by results; they give to those who have: they take their money to the biggest bank because it is the biggest. i confess i cannot, looking far forward into the future, expect that the smaller private banks will maintain their ground. their old connections will not leave them; there will be no fatal ruin, no sudden mortality. but the tide will gently ebb, and the course of business will be carried elsewhere. sooner or later, appearances indicate, and principle suggests, that the business of lombard street will be divided between the joint stock banks and a few large private banks. and then we have to ask ourselves the question, can those large private banks be permanent? i am sure i should be very sorry to say that they certainly cannot, but at the same time i cannot be blind to the grave difficulties which they must surmount. in the first place, an hereditary business of great magnitude is dangerous. the management of such a business needs more than common industry and more than common ability. but there is no security at all that these will be regularly continued in each generation. the case of overend, gurney and co., the model instance of all evil in business, is a most alarming example of this evil. no cleverer men of business probably (cleverer i mean for the purposes of their particular calling) could well be found than the founders and first managers of that house. but in a very few years the rule in it passed to a generation whose folly surpassed the usual limit of imaginable incapacity. in a short time they substituted ruin for prosperity and changed opulence into insolvency. such great folly is happily rare; and the business of a bank is not nearly as difficult as the business of a discount company. still much folly is common, and the business of a great bank requires a great deal of ability, and an even rarer degree of trained and sober judgment. that which happened so marvelously in the green tree may happen also in the dry. a great private bank might easily become very rotten by a change from discretion to foolishness in those who conduct it. we have had as yet in london, happily, no example of this; indeed, we have hardly as yet had the opportunity. till now private banks have been small; small as we now reckon banks. for their exigencies a moderate degree of ability and an anxious caution will suffice. but if the size of the banks is augmented and greater ability is required, the constant difficulty of an hereditary government will begin to be felt. 'the father had great brains and created the business: but the son had less brains and lost or lessened it.' this is the history of all great monarchies, and it may be the history of great private banks. the peculiarity in the case of overend, gurney and co. at least, one peculiarity is that the evil was soon discovered. the richest partners had least concern in the management; and when they found that incredible losses were ruining them, they stopped the concern and turned it into a company. but they had done nothing; if at least they had only prevented farther losses, the firm might have been in existence and in the highest credit now. it was the publicity of their losses which ruined them. but if they had continued to be a private partnership they need not have disclosed those losses: they might have written them off quietly out of the immense profits they could have accumulated. they had some ten millions of other people's money in their hands which no one thought of disturbing. the perturbation through the country which their failure caused in the end, shows how diffused and how unimpaired their popular reputation was. no one in the rural districts (as i know by experience) would ever believe a word against them, say what you might. the catastrophe came because at the change the partners in the old private firm--the gurney family especially--had guaranteed the new company against the previous losses: those losses turned out to be much greater than was expected. to pay what was necessary the 'gurneys' had to sell their estates, and their visible ruin destroyed the credit of the concern. but if there had been no such guarantee, and no sale of estates, if the great losses had slept a quiet sleep in a hidden ledger, no one would have been alarmed, and the credit and the business of 'overends' might have existed till now, and their name still continued to be one of our first names. the difficulty of propagating a good management by inheritance for generations is greatest in private banks and discount firms because of their essential secrecy. the danger may indeed be surmounted by the continual infusion of new and able partners. the deterioration of the old blood may be compensated by the excellent quality of the fresh blood. but to this again there is an objection, of little value perhaps in seeming, but of much real influence in practice. the infusion of new partners requires from the old partners a considerable sacrifice of income; the old must give up that which the new receive, and the old will not like this. the effectual remedy is so painful that i fear it often may be postponed too long. i cannot, therefore, expect with certainty the continuance of our system of private banking. i am sure that the days of small banks will before many years come to an end, and that the difficulties of large private banks are very important. in the mean time it is very important that large private banks should be well managed. and the present state of banking makes this peculiarly difficult. the detail of the business is augmenting with an overwhelming rapidity. more cheques are drawn year by year; not only more absolutely, but more by each person, and more in proportion to his income. the payments in, and payments out of a common account are very much more numerous than they formerly were. and this causes an enormous growth of detail. and besides, bankers have of late begun almost a new business. they now not only keep people's money, but also collect their incomes for them. many persons live entirely on the income of shares, or debentures, or foreign bonds, which is paid in coupons, and these are handed in for the bank to collect. often enough the debenture, or the certificate, or the bond is in the custody of the banker, and he is expected to see when the coupon is due, and to cut it off and transmit it for payment. and the detail of all this is incredible, and it needs a special machinery to cope with it. a large joint stock bank, if well-worked, has that machinery. it has at the head of the executive a general manager who was tried in the detail of banking, who is devoted to it, and who is content to live almost wholly in it. he thinks of little else, and ought to think of little else. one of his first duties is to form a hierarchy of inferior officers, whose respective duties are defined, and to see that they can perform and do perform those duties. but a private bank of the type usual in london has no such officer. it is managed by the partners; now these are generally rich men, are seldom able to grapple with great business of detail, and are not disposed to spend their whole lives and devote their entire minds to it if they were able. a person with the accumulated wealth, the education and the social place of a great london banker would be a 'fool so to devote himself. he would sacrifice a suitable and a pleasant life for an unpleasant and an unsuitable life. but still the detail must be well done; and some one must be specially chosen to watch it and to preside over it, or it will not be well done. until now, or until lately, this difficulty has not been fully felt. the detail of the business of a small private bank was moderate enough to be superintended effectually by the partners. but, as has been said, the detail of banking--the proportion of detail to the size of the bank--is everywhere increasing. the size of the private banks will have to augment if private banks are not to cease; and therefore the necessity of a good organisation for detail is urgent. if the bank grows, and simultaneously the detail grows in proportion to the bank, a frightful confusion is near unless care be taken. the only organisation which i can imagine to be effectual is that which exists in the antagonistic establishments. the great private banks will have, i believe, to appoint in some form or other, and under some name or other, some species of general manager who will watch, contrive, and arrange the detail for them. the precise shape of the organisation is immaterial; each bank may have its own shape, but the man must be there. the true business of the private partners in such a bank is much that of the directors in a joint stock bank. they should form a permanent committee to consult with their general manager, to watch him, and to attend to large loans and points of principle. they should not themselves be responsible for detail; if they do there will be two evils at once: the detail will be done badly, and the minds of those who ought to decide principal things will be distracted from those principal things. there will be a continual worry in the bank, and in a worry bad loans are apt to be made and money is apt to be lost. a subsidiary advantage of this organisation is that it would render the transition from private banking to joint stock banking easier, if that transition should be necessary. the one might merge in the other as convenience suggested and as events required. there is nothing intrusive in discussing this subject. the organisation of the private is just like that of the joint stock banks; all the public are interested that it should be good. the want of a good organisation may cause the failure of one or more of these banks; and such failure of such banks may intensify a panic, even if it should not cause one. chapter xi. the bill-brokers. under every system of banking, whether that in which the reserve is kept in many banks, or one in which it is kept in a single bank only, there will always be a class of persons who examine more carefully than busy bankers can the nature of different securities; and who, by attending only to one class, come to be particularly well acquainted with that class. and as these specially qualified dealers can for the most part lend much more than their own capital, they will always be ready to borrow largely from bankers and others, and to deposit the securities which they know to be good as a pledge for the loan. they act thus as intermediaries between the borrowing public and the less qualified capitalist; knowing better than the ordinary capitalist which loans are better and which are worse, they borrow from him, and gain a profit by charging to the public more than they pay to him. many stock brokers transact such business upon a great scale. they lend large sums on foreign bonds or railway shares or other such securities, and borrow those sums from bankers, depositing the securities with the bankers, and generally, though not always, giving their guarantee. but by far the greatest of these intermediate dealers are the bill-brokers. mercantile bills are an exceedingly difficult kind of security to understand. the relative credit of different merchants is a great 'tradition'; it is a large mass of most valuable knowledge which has never been described in books and is probably incapable of being so described. the subject matter of it, too, is shifting and changing daily; an accurate representation of the trustworthiness of houses at the beginning of a year might easily be a most fatal representation at the end of it. in all years there are great changes; some houses rise a good deal and some fall. and in some particular years the changes are immense; in years like many active men make so much money that at the end of the year they are worthy of altogether greater credit than anyone would have dreamed of giving to them at the beginning. on the other hand, in years like a contagious ruin destroys the trustworthiness of very many firms and persons, and often, especially, of many who stood highest immediately before. such years alter altogether an important part of the mercantile world: the final question of bill-brokers, 'which bills will be paid and which will not? which bills are second-rate and which first-rate?' would be answered very differently at the beginning of the year and at the end. no one can be a good bill-broker who has not learnt the great mercantile tradition of what is called 'the standing of parties' and who does not watch personally and incessantly the inevitable changes which from hour to hour impair the truth of that tradition. the 'credit' of a person--that is, the reliance which may be placed on his pecuniary fidelity--is a different thing from his property. no doubt, other things being equal, a rich man is more likely to pay than a poor man. but on the other hand, there are many men not of much wealth who are trusted in the market, 'as a matter of business,' for sums much exceeding the wealth of those who are many times richer. a firm or a person who have been long known to 'meet their engagements,' inspire a degree of confidence not dependent on the quantity of his or their property. persons who buy to sell again soon are often liable for amounts altogether much greater than their own capital; and the power of obtaining those sums depends upon their 'respectability,' their 'standing,' and their 'credit,' as the technical terms express it, and more simply upon the opinion which those who deal with them have formed of them. the principal mode in which money is raised by traders is by 'bills of exchange;' the estimated certainty of their paying those bills on the day they fall due is the measure of their credit; and those who estimate that liability best, the only persons indeed who can estimate it exceedingly well, are the bill-brokers. and these dealers, taking advantage of their peculiar knowledge, borrow immense sums from bankers and others; they generally deposit the bills as a security; and they generally give their own guarantee of the goodness of the bill: but neither of such practices indeed is essential, though both are the ordinary rule. when overends failed, as i have said before, they had borrowed in this way very largely. there are others now in the trade who have borrowed quite as much. as is usually the case, this kind of business has grown up only gradually. in the year there was no such business precisely answering to what we now call bill-broking in london. mr. richardson, the principal 'bill-broker' of the time, as the term was then understood, thus described his business to the 'bullion committee:' 'what is the nature of the agency for country banks?--it is twofold: in the first place to procure money for country bankers on bills when they have occasion to borrow on discount, which is not often the case; and in the next place, to lend the money for the country bankers on bills on discount. the sums of money which i lend for country bankers on discount are fifty times more than the sums borrowed for country bankers. 'do you send london bills into the country for discount?--yes. 'do you receive bills from the country upon london in return, at a date, to be discounted?--yes, to a very considerable amount, from particular parts of the country. 'are not both sets of bills by this means under discount?--no, the bills received from one part of the country are sent down to another part for discount. 'and they are not discounted in london?--no. in some parts of the country there is but little circulation of bills drawn upon london, as in norfolk, suffolk, essex, sussex, &c.; but there is there a considerable circulation in country bank-notes, principally optional notes. in lancashire there is little or no circulation of country bank-notes; but there is a great circulation of bills drawn upon london at two or three months' date. i receive bills to a considerable amount from lancashire in particular, and remit them to norfolk, suffolk, &c., where the bankers have large lodgments, and much surplus money to advance on bills for discount.' mr. richardson was only a broker who found money for bills and bills for money. he is further asked: 'do you guarantee the bills you discount, and what is your charge per cent?--no, we do not guarantee them; our charge is one-eighth per cent brokerage upon the bill discounted, but we make no charge to the lender of the money. 'do you consider that brokerage as a compensation for the skill which you exercise in selecting the bills which you thus get discounted?--yes, for selecting of the bills, writing letters, and other trouble. 'does the party who furnishes the money give you any kind of compensation?--none at all. 'does he not consider you as his agent, and in some degree responsible for the safety of the bills which you give him?--not at all. 'does he not prefer you on the score of his judging that you will give him good intelligence upon that subject?--yes, he relies upon us. 'do you then exercise a discretion as to the probable safety of the bills?--yes; if a bill comes to us which we conceive not to be safe, we return it. 'do you not then conceive yourselves to depend in a great measure for the quantity of business which you can perform on the favour of the party lending the money?--yes, very much so. if we manage our business well, we retain our friends; if we do not, we lose them.' it was natural enough that the owners of the money should not pay, though the owner of the bill did, for in almost all ages the borrower has been a seeker more or less anxious; he has always been ready to pay for those who will find him the money he is in search of. but the possessor of money has rarely been willing to pay anything; he has usually and rightly believed that the borrower would discover him soon. notwithstanding other changes, the distribution of the customers of the bill-brokers in different parts of the country still remains much as mr. richardson described it sixty years ago. for the most part, agricultural counties do not employ as much money as they save; manufacturing counties, on the other hand, can employ much more than they save; and therefore the money of norfolk or of somersetshire is deposited with the london bill-brokers, who use it to discount the bills of lancashire and yorkshire. the old practice of bill-broking, which mr. richardson describes, also still exists. there are many brokers to be seen about lombard street with bills which they wish to discount but which they do not guarantee. they have sometimes discounted these bills with their own capital, and if they can re-discount them at a slightly lower rate they gain a difference which at first seems but trifling, but with which they are quite content, because this system of lending first and borrowing again immediately enables them to turn their capital very frequently, and on a few thousand pounds of capital to discount hundreds of thousands of bills; as the transactions are so many, they can be content with a smaller profit on each. in other cases, these non-guaranteeing brokers are only agents who are seeking money for bills which they have undertaken to get discounted. but in either case, as far as the banker or other ultimate capitalist is concerned, the transaction is essentially that which mr. richardson describes. the loan by such banker is a re-discount of the bill; that banker cannot obtain repayment of that loan, except by the payment of the bill at maturity. he has no claim upon the agent who brought him the bill. bill-broking, in this which we may call its archaic form, is simply one of the modes in which bankers obtain bills which are acceptable to them and which they re-discount. no reference is made in it to the credit of the bill-broker; the bills being discounted 'without recourse' to him are as good if taken from a pauper as if taken from a millionaire. the lender exercises his own judgment on the goodness of the bill. but in modern bill-broking the credit of the bill-broker is a vital element. the lender considers that the bill-broker--no matter whether an individual, a company, or a firm--has considerable wealth, and he takes the 'bills,' relying that the broker would not venture that wealth by guaranteeing them unless he thought them good. the lender thinks, too, that the bill-broker being daily conversant with bills and bills only, knows probably all about bills: he lends partly in reliance on the wealth of the broker and partly in reliance on his skill. he does not exercise much judgment of his own on the bills deposited with him: he often does not watch them very closely. probably not one-thousandth part of the creditors on security of overend, gurney and co., had ever expected to have to rely on that security, or had ever given much real attention to it. sometimes, indeed, the confidence in the bill-brokers goes farther. a considerable number of persons lend to them, not only without much looking at the security but even without taking any security. this is the exact reverse of the practice which mr. richardson described in ; then the lender relied wholly on the goodness of the bill, now, in these particular cases, he relies solely on the bill-broker, and does not take a bill in any shape. nothing can be more natural or more inevitable than this change. it was certain that the bill-broker, being supposed to understand bills well, would be asked by the lenders to evince his reliance on the bills he offered by giving a guarantee for them. it was also most natural that the bill-brokers, having by the constant practice of this lucrative trade obtained high standing and acquired great wealth, should become, more or less, bankers too, and should receive money on deposit without giving any security for it. but the effects of the change have been very remarkable. in the practice as mr. richardson described it, there is no peculiarity very likely to affect the money market. the bill-broker brought bills to the banker, just as others brought them; nothing at all could be said as to it except that the bank must not discount bad bills, must not discount too many bills, and must keep a good reserve. but the modern practice introduces more complex considerations. in the trade of bill-broking, as it now exists, there is one great difficulty; the bill-broker has to pay interest for all the money which he receives. how this arose we have just seen. the present lender to the bill-broker at first always used to discount a bill, which is as much as saying that he was always a lender at interest. when he came to take the guarantee of the broker, and only to look at the bills as a collateral security, naturally he did not forego his interest: still less did he forego it when he ceased to take security at all. the bill-broker has, in one shape or other, to pay interest on every sixpence left with him, and that constant habit of giving interest has this grave consequence: the bill-broker cannot afford to keep much money unemployed. he has become a banker owing large sums which he may be called on to repay, but he cannot hold as much as an ordinary banker, or nearly as much, of such sums in cash, because the loss of interest would ruin him. competition reduces the rate which the bill-broker can charge, and raises the rate which the bill-broker must give, so that he has to live on a difference exceedingly narrow. and if he constantly kept a large hoard of barren money he would soon be found in the 'gazette.' the difficulty is aggravated by the terms upon which a great part of the money at the bill-brokers is deposited with them. very much of it is repayable at demand, or at very short notice. the demands on a broker in periods of alarm may consequently be very great, and in practice they often, are so. in times of panic there is always a very heavy call, if not a run upon them; and in consequence of the essential nature of their business, they cannot constantly keep a large unemployed reserve of their own in actual cash, they are obliged to ask help of some one who possesses that cash. by the conditions of his trade, the bill-broker is forced to belong to a class of 'dependent money-dealers,' as we may term them, that is, of dealers who do not keep their own reserve, and must, therefore, at every crisis of great difficulty revert to others. in a natural state of banking, that in which all the principal banks kept their own reserve, this demand of the bill-brokers and other dependent dealers would be one of the principal calls on that reserve. at every period of incipient panic the holders of it would perceive that it was of great importance to themselves to support these dependent dealers. if the panic destroyed those dealers it would grow by what it fed upon (as is its nature), and might probably destroy also the bankers, the holders of the reserve. the public terror at such times is indiscriminate. when one house of good credit has perished, other houses of equal credit though of different nature are in danger of perishing. the many holders of the banking reserve would under the natural system of banking be obliged to advance out of that reserve to uphold bill-brokers and similar dealers. it would be essential to their own preservation not to let such dealers fail, and the protection of such dealers would therefore be reckoned among the necessary purposes for which they retained that reserve. nor probably would the demands on the bill-brokers in such a system of banking be exceedingly formidable. considerable sums would no doubt be drawn from them, but there would be no special reason why money should be demanded from them more than from any other money dealers. they would share the panic with the bankers who kept the reserve, but they would not feel it more than the bankers. in each crisis the set of the storm would be determined by the cause which had excited it, but there would not be anything in the nature of bill-broking to attract the advance of the alarm peculiarly to them. they would not be more likely to suffer than other persons; the only difference would be that when they did suffer, having no adequate reserve of their own, they would be obliged to ask the aid of others. but under a one-reserve system of banking, the position of the bill-brokers is much more singular and much more precarious. in fact, in lombard street, the principal depositors of the bill-brokers are the bankers, whether of london, or of provincial england, or of scotland, or ireland. such deposits are, in fact, a portion of the reserve of these bankers; they make an essential part of the sums which they have provided and laid by against a panic. accordingly, in every panic these sums are sure to be called in from the bill-brokers; they were wanted to be used by their owners in time of panic, and in time of panic they ask for them. 'perhaps it may be interesting,' said alderman salomons, speaking on behalf of the london and westminster bank, after the panic of , to the committee, 'to know that, on november , we held discounted bills for brokers to the amount of , , l. out of these bills , , l. matured between november and december ; , , l. more between december and december ; consequently we were prepared merely by the maturing of our bills of exchange for any demand that might come upon us.' this is not indeed a direct withdrawal of money on deposit, but its principal effect is identical. at the beginning of the time the london and westminster bank had lent , , l. more to the bill-brokers than they had at the end of it; and that , , l. the bank had added to its reserve against a time of difficulty. the intensity of the demand on the bill-broker is aggravated therefore by our peculiar system of banking. just at the moment when, by the nature of their business, they have to resort to the reserves of bankers for necessary support, the bankers remove from them large sums in order to strengthen those reserves. a great additional strain is thrown upon them just at the moment when they are least able to bear it; and it is thrown by those who under a natural system of banking would not aggravate the pressure on the bill-brokers, but relieve it. and the profits of bill-broking are proportionably raised. the reserves of the bankers so deposited with the bill-broker form a most profitable part of his business; they are on the whole of very large amount, and at all times, except those of panic, may well be depended upon. the bankers are pretty sure to keep them there, just because they must keep a reserve, and they consider it one of the best places in which to keep it. under a more natural system, no part of the banking reserve would ever be lodged at the brokers. bankers would deposit with the brokers only their extra money, the money which they considered they could safely lend, and which they would not require during a panic. in the eye of the banker, money at the brokers would then be one of the investments of cash, it would not be a part of such cash. the deposits of bill-brokers and the profits of bill-broking are increased by our present system, just in proportion as the dangers of bill-brokers during a panic are increased by it. the strain, too, on our banking reserve which is caused by the demands of the bill-brokers, is also more dangerous than it would be under a natural system, because that reserve is in itself less. the system of keeping the entire ultimate reserve at a single bank, undoubtedly diminishes the amount of reserve which is kept. and exactly on that very account the danger of any particular demand on that reserve is augmented, because the magnitude of the fund upon which that demand falls is diminished. so that our one-reserve system of banking combines two evils: first, it makes the demand of the brokers upon the final reserve greater, because under it so many bankers remove so much money from the brokers; and under it also the final reserve is reduced to its minimum point, and the entire system of credit is made more delicate, and more sensitive. the peculiarity, indeed, of the effects of the one reserve is indeed even greater in this respect. under the natural system, the bill-brokers would be in no respect the rivals of the bankers which kept the ultimate reserve. they would be rather the agents for these bankers in lending upon certain securities which they did not themselves like, or on which they did not feel competent to lend safely. the bankers who in time of panic had to help them would in ordinary times derive much advantage from them. but under our present system all this is reversed. the bank of england never deposits any money with the bill-brokers; in ordinary times it never derives any advantage from them. on the other hand, as the bank carries on itself a large discount business, as it considers that it is itself competent to lend on all kinds of bills, the bill-brokers are its most formidable rivals. as they constantly give high rates for money it is necessary that they should undersell the bank, and in ordinary times they do undersell it. but as the bank of england alone keeps the final banking reserve, the bill-brokers of necessity have to resort to that final reserve; so that at every panic, and by the essential constitution of the money market, the bank of england has to help, has to maintain in existence, the dealers, who never in return help the bank at any time, but who are in ordinary times its closest competitors and its keenest rivals. it might be expected that such a state of things would cause much discontent at the bank of england, and in matter of fact there has been much discussion about it, and much objection taken to it. after the panic of , this was so especially. during that panic, the bank of england advanced to the bill-brokers more than , , l., though their advances to bankers, whether london or country, were only , , l.; and, not unnaturally, the bank thought it unreasonable that so large an inroad upon their resources should be made by their rivals. in consequence, in they made a rule that they would only advance to the bill-brokers at certain seasons of the year, when the public money is particularly large at the bank, and that at other times any application for an advance should be considered exceptional, and dealt with accordingly. and the object of that regulation was officially stated to be 'to make them keep their own reserve, and not to be dependent on the bank of england.' as might be supposed, this rule was exceedingly unpopular with the brokers, and the greatest of them, overend, gurney and co., resolved on a strange policy in the hope of abolishing it. they thought they could frighten the bank of england, and could show that if they were dependent on it, it was also dependent on them. they accordingly accumulated a large deposit at the bank to the amount of , , l., and then withdrew it all at once. but this policy had no effect, except that of exciting a distrust of 'overends': the credit of the bank of england was not diminished; overends had to return the money in a few days, and had the dissatisfaction of feeling that they had in vain attempted to assail the solid basis of everyone's credit, and that everyone disliked them for doing so. but though this un-conceived attempt failed as it deserved, the rule itself could not be maintained. the bank does, in fact, at every period of pressure, advance to the bin-brokers; the case may be considered 'exceptional,' but the advance is always made if the security offered is really good. however much the bank may dislike to aid their rivals, yet they must aid them; at a crisis they feel that they would only be aggravating incipient demand, and be augmenting the probable pressure on themselves if they refused to do so. i shall be asked if this anomaly is inevitable, and i am afraid that for practical purposes we must consider it to be so. it may be lessened; the bill-brokers may, and should, discourage as much as they can the deposit of money with them on demand, and encourage the deposit of it at distant fixed dates or long notice. this will diminish the anomaly, but it will not cure it. practically, bin-brokers cannot refuse to receive money at call. in every market a dealer must conduct his business according to the custom of the market, or he will not be able to conduct it at all. all the bin-brokers can do is to offer better rates for more permanent money, and this (though possibly not so much as might be wished) they do at present. in its essence, this anomaly is, i believe, an inevitable part of the system of banking which history has given us, and which we have only to make the best of, since we cannot alter it. chapter xii. the principles which should regulate the amount of the banking reserve to be kept by the bank of england. there is a very common notion that the amount of the reserve which the bank of england ought to keep can be determined at once from the face of their weekly balance sheet. it is imagined that you have only to take the liabilities of the banking department, and that a third or some other fixed proportion will in all cases be the amount of reserve which the bank should keep against those liabilities. but to this there are several objections, some arising from the general nature of the banking trade, and others from the special position of the bank of england. that the amount of the liabilities of a bank is a principal element in determining the proper amount of its reserve is plainly true; but that it is the only element by which that amount is determined is plainly false. the intrinsic nature of these liabilities must be considered, as well as their numerical quantity. for example, no one would say that the same amount of reserve ought to be kept against acceptances which cannot be paid except at a certain day, and against deposits at call, which may be demanded at any moment. if a bank groups these liabilities together in the balance-sheet, you cannot tell the amount of reserve it ought to keep. the necessary information is not given you. nor can you certainly determine the amount of reserve necessary to be kept against deposits unless you know something as to the nature of these deposits. if out of , , l. of money, one depositor has , , l. to his credit, and may draw it out when he pleases, a much larger reserve will be necessary against that liability of , , l. than against the remaining , , l. the intensity of the liability, so to say, is much greater; and therefore the provision in store must be much greater also. on the other hand, supposing that this single depositor is one of calculable habits--suppose that it is a public body, the time of whose demands is known, and the time of whose receipts is known also--this single liability requires a less reserve than that of an equal amount of ordinary liabilities. the danger that it will be called for is much less; and therefore the security taken against it may be much less too. unless the quality of the liabilities is considered as well as their quantity, the due provision for their payment cannot be determined. these are general truths as to all banks, and they have a very particular application to the bank of england. the first application is favourable to the bank; for it shows the danger of one of the principal liabilities to be much smaller than it seems. the largest account at the bank of england is that of the english government; and probably there has never been any account of which it was so easy in time of peace to calculate the course. all the material facts relative to the english revenue, and the english expenditure, are exceedingly well known; and the amount of the coming payments to and from this account are always, except in war times, to be calculated with wonderful accuracy. in war, no doubt, this is all reversed; the account of a government at war is probably the most uncertain of all accounts, especially of a government of a scattered empire, like the english, whose places of outlay in time of war are so many and so distant, and the amount of whose payments is therefore so incalculable. ordinarily, however, there is no account of which the course can be so easily predicted; and therefore no account which needs in ordinary times so little reserve. the principal payments, when they are made, are also of the most satisfactory kind to a banker; they are, to a great extent, made to another account at his bank. these largest ordinary payments of the government are the dividends on the debt, and these are mostly made to bankers who act as agents for the creditors of the nation. the payment of the dividends for the government is, therefore, in great part a transfer from the account of the government to the accounts of the various bankers. a certain amount no doubt goes almost at once to the non-banking classes; to those who keep coin and notes in house, and have no account at any bank. but even this amount is calculable, for it is always nearly the same. and the entire operation is, to those who can watch it, singularly invariable time after time. but it is important to observe, that the published accounts of the bank give no such information to the public as will enable them to make their own calculations. the account of which we have been speaking is the yearly account of the english government--what we may call the budget account, that of revenue and expenditure. and the laws of this are, as we have shown, already known. but under the head 'public deposits' in the accounts of the bank, are contained also other accounts, and particularly that of the secretary for india in council, the laws of which must be different and are quite unknown. the secretary for india is a large lender on its account. if any one proposed to give such power to the chancellor of the exchequer, there would be great fear and outcry. but so much depends on habit and tradition, that the india office on one side of downing street can do without remark, and with universal assent, what it would be thought 'unsound' and extravagant to propose that the other side should do. the present india office inherits this independence from the old board of the company, which, being mercantile and business-like, used to lend its own money on the stock exchange as it pleased; the council of india, its successor, retains the power. nothing can be better than that it should be allowed to do as it likes; but the mixing up the account of a body which has such a power, and which draws money from india, with that of the home government clearly prevents the general public from being able to draw inferences as to the course of the combined account from its knowledge of home finance only. the account of 'public deposits' in the bank return includes other accounts too, as the savings' bank balance, the chancery funds account, and others; and in consequence, till lately the public had but little knowledge of the real changes of the account of our government, properly so called. but mr. lowe has lately given us a weekly account, and from this, and not from the bank account, we are able to form a judgment. this account and the return of the bank of england, it is true, unhappily appear on different days; but except for that accident our knowledge would be perfect; and as it is, for almost all purposes what we know is reasonably sufficient. we can now calculate the course of the government account nearly as well as it is possible to calculate it. so far, as we have said, an analysis of the return of the bank of england is very favourable to the bank. so great a reserve need not usually be kept against the government account as if it were a common account. we know the laws of its changes peculiarly well: we can tell when its principal changes will happen with great accuracy; and we know that at such changes most of what is paid away by the government is only paid to other depositors at the bank, and that it will really stay at the bank, though under another name. if we look to the private deposits of the bank of england, at first sight we may think that the result is the same. by far the most important of these are the 'bankers' deposits'; and, for the most part, these deposits as a whole are likely to vary very little. each banker, we will suppose, keeps as little as he can, but in all domestic transactions payment from one is really payment to the other. all the most important transactions in the country are settled by cheques; these cheques are paid in to the 'clearing-house,' and the balances resulting from them are settled by transfers from the account of one banker to another at the bank of england. payments out of the bankers' balances, therefore, correspond with payments in. as a whole, the deposit of the bankers' balances at the bank of england would at first sight seem to be a deposit singularly stable. indeed, they would seem, so to say, to be better than stable. they augment when everything else tends to diminish. at a panic, when all other deposits are likely to be taken away, the bankers' deposits, augment; in fact they did so in , though we do not know the particulars; and it is natural that they should so increase. at such moments all bankers are extremely anxious, and they try to strengthen themselves by every means in their power; they try to have as much money as it is possible at command; they augment their reserve as much as they can, and they place that reserve at the bank of england. a deposit which is not likely to vary in ordinary times, and which is likely to augment in times of danger, seems, in some sort, the model of a deposit. it might seem not only that a large proportion of it might be lent, but that the whole of it might be so. but a further analysis will, as i believe, show that this conclusion is entirely false; that the bankers' deposits are a singularly treacherous form of liability; that the utmost caution ought to be used in dealing with them; that, as a rule, a less proportion of them ought to be lent than of ordinary deposits. the easiest mode of explaining anything is, usually, to exemplify it by a single actual case. and in this subject, fortunately, there is a most conspicuous case near at hand. the german government has lately taken large sums in bullion from this country, in part from the bank of england, and in part not, according as it chose. it was in the main well advised, and considerate in its action; and did not take nearly as much from the bank as it might, or as would have been dangerous. still it took large sums from the bank; and it might easily have taken more. how then did the german government obtain this vast power over the bank? the answer is, that it obtained it by means of the bankers' balances, and that it did so in two ways. first, the german government had a large balance of its own lying at a particular joint stock bank. that bank lent this balance at its own discretion, to bill-brokers or others, and it formed a single item in the general funds of the london market. there was nothing special about it, except that it belonged to a foreign government, and that its owner was always likely to call it in, and sometimes did so. as long as it stayed unlent in the london joint stock bank, it increased the balances of that bank at the bank of england; but so soon as it was lent, say, to a bill-broker, it increased the bill-broker's balance; and as soon as it was employed by the bill-broker in the discount of bills, the owners of those bills paid it to their credit at their separate banks, and it augmented the balances of those bankers at the bank of england. of course if it were employed in the discount of bills belonging to foreigners, the money might be taken abroad, and by similar operations it might also be transferred to the english provinces or to scotland. but, as a rule, such money when deposited in london, for a considerable time remains in london; and so long as it does so, it swells the aggregate balances of the body of bankers at the bank of england. it is now in the balance of one bank, now of another, but it is always dispersed about those balances somewhere. the evident consequence is that this part of the bankers' balances is at the mercy of the german government when it chooses to apply for it. supposing, then, the sum to be three or four millions and i believe that on more than one occasion in the last year or two it has been quite as much, if not more--that sum might at once be withdrawn from the bank of england. in this case the bank of england is in the position of a banker who is liable for a large amount to a single customer, but with this addition, that it is liable for an unknown amount. the german government, as is well known, keeps its account (and a very valuable one it must be) at the london joint stock bank; but the bank of england has no access to the account of the german government at that bank; they cannot tell how much german money is lying to the credit there. nor can the bank of england infer much from the balance of the london joint stock bank in their bank, for the german money was probably paid in various sums to that bank, and lent out again in other various sums. it might to some extent augment that bank's balance at the bank of england, or it might not, but it certainly would not be so much added to that balance; and inspection of that bank's balance would not enable the bank of england to determine even in the vaguest manner what the entire sum was for which it might be asked at any moment. nor would the inspection of the bankers' balances as a whole lead to any certain and sure conclusions. something might be inferred from them, but not anything certain. those balances are no doubt in a state of constant fluctuation; and very possibly during the time that the german money was coming in some other might be going out. any sudden increase in the bankers' balances would be a probable indication of new foreign money, but new foreign money might come in without causing an increase, since some other and contemporaneous cause might effect a counteracting decrease. this is the first, and the plainest way in which the german government could take, and did take, money from this country; and in which it might have broken the bank of england if it had liked. the german government had money here and took it away, which is very easy to understand. but the government also possessed a far greater power, of a somewhat more complex kind. it was the owner of many debts from england. a large part of the 'indemnity' was paid by france to germany in bills on england, and the german government, as those bills became due, acquired an unprecedented command over the market. as each bill arrived at maturity, the german government could, if it chose, take the proceeds abroad; and it could do so in bullion, as for coinage purposes it wanted bullion. this would at first naturally cause a reduction in the bankers' balances; at least that would be its tendency. supposing the german government to hold bill a, a good bill, the banker at whose bank bill a was payable would have to pay it; and that would reduce his balance; and as the sum so paid would go to germany, it would not appear to the credit of any other banker: the aggregate of the bankers' balances would thus be reduced. but this reduction would not be permanent. a banker who has to pay , l. cannot afford to reduce his balance at the bank of england , l.; suppose that his liabilities are , , l., and that as a rule he finds it necessary to keep at the bank one-tenth of these liabilities, or , l., the payment of , l. would reduce his reserve to , l.; but his liabilities would be still , , l. and therefore to keep up his tenth he would have , l. to find. his process for finding it is this: he calls in, say, a loan to the bill-brokers; and if no equal additional money is contemporaneously carried to these brokers (which in the case of a large withdrawal of foreign money is not probable), they must reduce their business and discount less. but the effect of this is to throw additional business on the bank of england. they hold the ultimate reserve of the country, and they must discount out of it if no one else will: if they declined to do so there would be panic and collapse. as soon, therefore, as the withdrawal of the german money reduces the bankers' balances, there is a new demand on the bank for fresh discounts to make up those balances. the drain on the bank is twofold: first, the banking reserve is reduced by exportation of the german money, which reduces the means of the bank of england; and then out of those reduced means the bank of england has to make greater advances. the same result may be arrived at more easily. supposing any foreign government or person to have any sort of securities which he can pledge in the market, that operation gives it, or him, a credit on some banker, and enables it, or him, to take money from the banking reserve at the bank of england, and from the bankers' balances; and to replace the bankers' balances at their inevitable minimum, the bank of england must lend. every sudden demand on the country causes, in proportion to its magnitude, this peculiar effect. and this is the reason why the bank of england ought, i think, to deal most cautiously and delicately with their banking deposits. they are the symbol of an indefinite liability: by means of them, as we see, an amount of money so great that it is impossible to assign a limit to it might be abstracted from the bank of england. as the bank of england lends money to keep up the bankers' balances, at their usual amount, and as by means of that usual amount whatever sum foreigners can get credit for may be taken from us, it is not possible to assign a superior limit (to use the scientific word) to the demands which by means of the bankers' balances may be made upon the bank of england. the result comes round to the simple point, on which this book is a commentary: the bank of england, by the effect of a long history, holds the ultimate cash reserve of the country; whatever cash the country has to pay comes out of that reserve, and therefore the bank of england has to pay it. and it is as the bankers' bank that the bank of england has to pay it, for it is by being so that it becomes the keeper of the final cash reserve. some persons have been so much impressed with such considerations as these, that they have contended that the bank of england ought never to lend the 'bankers' balances' at all, that they ought to keep them intact, and as an unused deposit. i am not sure, indeed, that i have seen that extreme form of the opinion in print, but i have often heard it in lombard street, from persons very influential and very qualified to judge; even in print i have seen close approximations to it. but i am satisfied that the laying down such a 'hard and fast' rule would be very dangerous; in very important and very changeable business rigid rules are apt to be often dangerous. in a panic, as has been said, the bankers' balances greatly augment. it is true the bank of england has to lend the money by which they are filled. the banker calls in his money from the bill-broker, ceases to re-discount for that broker, or borrows on securities, or sells securities; and in one or other of these ways he causes a new demand for money which can only at such times be met from the bank of england. every one else is in want too. but without inquiring into the origin of the increase at panics, the amount of the bankers' deposits in fact increases very rapidly; an immense amount of unused money is at such moments often poured by them into the bank of england. and nothing can more surely aggravate the panic than to forbid the bank of england to lend that money. just when money is most scarce you happen to have an unusually large fund of this particular species of money, and you should lend it as fast as you can at such moments, for it is ready lending which cures panics, and non-lending or niggardly lending which aggravates them. at other times, particularly at the quarterly payment of the dividends, an absolute rule which laid down that the bankers' balances were never to be lent, would be productive of great inconvenience. a large sum is just then paid from the government balance to the bankers' balances, and if you permitted the bank to lend it while it was still in the hands of the government, but forbad them to lend it when it came into the hands of the bankers, a great tilt upwards in the value of money would be the consequence, for a most important amount of it would suddenly have become ineffective. but the idea that the bankers' balances ought never to be lent is only a natural aggravation of the truth that these balances ought to be used with extreme caution; that as they entail a liability peculiarly great and singularly difficult to foresee, they ought never to be used like a common deposit. it follows from what has been said that there are always possible and very heavy demands on the bank of england which are not shown in the account of the banking department at all: these demands may be greatest when the liabilities shown by that account are smallest, and lowest when those liabilities are largest. if, for example, the german government brings bills or other good securities to this market, obtains money with them, and removes that money from the market in bullion, that money may, if the german government choose, be taken wholly from the bank of england. if the wants of the german government be urgent, and if the amount of gold 'arrivals,' that is, the gold coming here from the mining countries, be but small, that gold will be taken from the bank of england, for there is no other large store in the country. the german government is only a conspicuous example of a foreign power which happens lately to have had an unusual command of good securities, and an unusually continuous wish to use them in england. any foreign state hereafter which wants cash will be likely to come here for it; so long as the bank of france should continue not to pay in specie, a foreign state which wants it must of necessity come to london for it. and no indication of the likelihood or unlikelihood of that want can be found in the books of the bank of england. what is almost a revolution in the policy of the bank of england necessarily follows: no certain or fixed proportion of its liabilities can in the present times be laid down as that which the bank ought to keep in reserve. the old notion that one-third, or any other such fraction, is in all cases enough, must be abandoned. the probable demands upon the bank are so various in amount, and so little disclosed by the figures of the account, that no simple and easy calculation is a sufficient guide. a definite proportion of the liabilities might often be too small for the reserve, and sometimes too great. the forces of the enemy being variable, those of the defence cannot always be the same. i admit that this conclusion is very inconvenient. in past times it has been a great aid to the bank and to the public to be able to decide on the proper policy of the bank from a mere inspection of its account. in that way the bank knew easily what to do and the public knew easily what to foresee. but, unhappily, the rule which is most simple is not always the rule which is most to be relied upon. the practical difficulties of life often cannot be met by very simple rules; those dangers being complex and many, the rules for encountering them cannot well be single or simple. a uniform remedy for many diseases often ends by killing the patient. another simple rule often laid down for the management of the bank of england must now be abandoned also. it has been said that the bank of england should look to the market rate, and make its own rate conform to that. this rule was, indeed, always erroneous. the first duty of the bank of england was to protect the ultimate cash of the country, and to raise the rate of interest so as to protect it. but this rule was never so erroneous as now, because the number of sudden demands upon that reserve was never formerly so great. the market rate of lombard street is not influenced by those demands. that rate is determined by the amount of deposits in the hands of bill-brokers and bankers, and the amount of good bills and acceptable securities offered at the moment. the probable efflux of bullion from the bank scarcely affects it at all; even the real efflux affects it but little; if the open market did not believe that the bank rate would be altered in consequence of such effluxes the market rate would not rise. if the bank choose to let its bullion go unheeded, and is seen to be going so to choose, the value of money in lombard street will remain unaltered. the more numerous the demands on the bank for bullion, and the more variable their magnitude, the more dangerous is the rule that the bank rate of discount should conform to the market rate. in former quiet times the influence, or the partial influence, of that rule has often produced grave disasters. in the present difficult times an adherence to it is a recipe for making a large number of panics. a more distinct view of abstract principle must be taken before we can fix on the amount of the reserve which the bank of england ought to keep. why should a bank keep any reserve? because it may be called on to pay certain liabilities at once and in a moment. why does any bank publish an account? in order to satisfy the public that it possesses cash--or available securities--enough to meet its liabilities. the object of publishing the account of the banking department of the bank of england is to let the nation see how the national reserve of cash stands, to assure the public that there is enough and more than enough to meet not only all probable calls, but all calls of which there can be a chance of reasonable apprehension. and there is no doubt that the publication of the bank account gives more stability to the money market than any other kind of precaution would give. some persons, indeed, feared that the opposite result would happen; they feared that the constant publication of the incessant changes in the reserve would terrify and harass the public mind. an old banker once told me: 'sir, i was on lord althorp's committee which decided on the publication of the bank account, and i voted against it. i thought it would frighten people. but i am bound to own that the committee was right and i was wrong, for that publication has given the money market a greater sense of security than anything else which has happened in my time.' the diffusion of confidence through lombard street and the world is the object of the publication of the bank accounts and of the bank reserve. but that object is not attained if the amount of that reserve when so published is not enough to tranquillise people. a panic is sure to be caused if that reserve is, from whatever cause, exceedingly low. at every moment there is a certain minimum which i will call the apprehension minimum,' below which the reserve cannot fall without great risk of diffused fear; and by this i do not mean absolute panic, but only a vague fright and timorousness which spreads itself instantly, and as if by magic, over the public mind. such seasons of incipient alarm are exceedingly dangerous, because they beget the calamities they dread. what is most feared at such moments of susceptibility is the destruction of credit; and if any grave failure or bad event happens at such moments, the public fancy seizes on it, there is a general run, and credit is suspended. the bank reserve then never ought to be diminished below the 'apprehension point.' and this is as much as to say, that it never ought very closely to approach that point; since, if it gets very near, some accident may easily bring it down to that point and cause the evil that is feared. there is no 'royal road' to the amount of the 'apprehension minimum': no abstract argument, and no mathematical computation will teach it to us. and we cannot expect that they should. credit is an opinion generated by circumstances and varying with those circumstances. the state of credit at any particular time is a matter of fact only to be ascertained like other matters of fact; it can only be known by trial and inquiry. and in the same way, nothing but experience can tell us what amount of 'reserve' will create a diffused confidence; on such a subject there is no way of arriving at a just conclusion except by incessantly watching the public mind, and seeing at each juncture how it is affected. of course in such a matter the cardinal rule to be observed is, that errors of excess are innocuous but errors of defect are destructive. too much reserve only means a small loss of profit, but too small a reserve may mean 'ruin.' credit may be at once shaken, and if some terrifying accident happen to supervene, there may be a run on the banking department that may be too much for it, as in and , and may make it unable to pay its way without assistance--as it was in those years. and the observance of this maxim is the more necessary because the 'apprehension minimum' is not always the same. on the contrary, in times when the public has recently seen the bank of england exposed to remarkable demands, it is likely to expect that such demands may come again. conspicuous and recent events educate it, so to speak; it expects that much will be demanded when much has of late often been demanded, and that little will be so, when in general but little has been so. a bank like the bank of england must always, therefore, be on the watch for a rise, if i may so express it, in the apprehension minimum; it must provide an adequate fund not only to allay the misgivings of to-day, but also to allay what may be the still greater misgivings of to-morrow. and the only practical mode of obtaining this object is--to keep the actual reserve always in advance of the minimum 'apprehension' reserve. and this involves something much more. as the actual reserve is never to be less, and is always, if possible, to exceed by a reasonable amount the 'minimum' apprehension reserve, it must when the bank is quiet and taking no precautions very considerably exceed that minimum. all the precautions of the bank take time to operate. the principal precaution is a rise in the rate of discount, and such a rise certainly does attract money from the continent and from all the world much faster than could have been anticipated. but it does not act instantaneously; even the right rate, the ultimately attractive rate, requires an interval for its action, and before the money can come here. and the right rate is often not discovered for some time. it requires several 'moves,' as the phrase goes, several augmentations of the rate of discount by the bank, before the really effectual rate is reached, and in the mean time bullion is ebbing away and the 'reserve' is diminishing. unless, therefore, in times without precaution the actual reserve exceed the 'apprehension minimum' by at least the amount which may be taken away in the inevitable interval, and before the available precautions begin to operate, the rule prescribed will be infringed, and the actual reserve will be less than the 'apprehension' minimum. in time the precautions taken may attract gold and raise the reserve to the needful amount, but in the interim the evils may happen against which the rule was devised, diffused apprehension may arise, and then any unlucky accident may cause many calamities. i may be asked, 'what does all this reasoning in practice come to? at the present moment how much reserve do you say the bank of england should keep? state your recommendation clearly (i know it will be said) if you wish to have it attended to.' and i will answer the question plainly, though in so doing there is a great risk that the principles i advocate may be in some degree injured through some mistake i may make in applying them. i should say that at the present time the mind of the monetary world would become feverish and fearful if the reserve in the banking department of the bank of england went below , , l. estimated by the idea of old times, by the idea even of ten years ago, that sum, i know, sounds extremely large. my own nerves were educated to smaller figures, because i was trained in times when the demands on us were less, when neither was so much reserve wanted nor did the public expect so much. but i judge from such observations as i can make of the present state of men's minds, that in fact, and whether justifiably or not, the important and intelligent part of the public which watches the bank reserve becomes anxious and dissatisfied if that reserve falls below , , l. that sum, therefore, i call the 'apprehension minimum' for the present times. circumstances may change and may make it less or more, but according to the most careful estimate i can make, that is what i should call it now. it will be said that this estimate is arbitrary and these figures are conjectures. i reply that i only submit them for the judgment of others. the main question is one of fact--does not the public mind begin to be anxious and timorous just where i have placed the apprehension point? and the deductions from that are comparatively simple questions of mixed fact and reasoning. the final appeal in such cases necessarily is to those who are conversant with and who closely watch the facts. i shall perhaps be told also that a body like the court of the directors of the bank of england cannot act on estimates like these: that such a body must have a plain rule and keep to it. i say in reply, that if the correct framing of such estimates is necessary for the good guidance of the bank, we must make a governing body which can correctly frame such estimates. we must not suffer from a dangerous policy because we have inherited an imperfect form of administration. i have before explained in what manner the government of the bank of england should, i consider, be strengthened, and that government so strengthened would, i believe, be altogether competent to a wise policy. then i should say, putting the foregoing reasoning into figures, that the bank ought never to keep less than , , l.. or , , l. since experience shows that a million, or a million and a half, may be taken from us at any time. i should regard this as the practical minimum at which, roughly of course, the bank should aim, and which it should try never to be below. and, in order not to be below , , l., the bank must begin to take precautions when the reserve is between , , l. and , , l.; for experience shows that between , , l. and , , l. may, probably enough, be withdrawn from the bank store before the right rate of interest is found which will attract money from abroad, and before that rate has had time to attract it. when the reserve is between , , l. and , , l., and when it begins to be diminished by foreign demand, the bank of england should, i think, begin to act, and to raise the rate of interest. chapter xiii. conclusion. i know it will be said that in this work i have pointed out a deep malady, and only suggested a superficial remedy. i have tediously insisted that the natural system of banking is that of many banks keeping their own cash reserve, with the penalty of failure before them if they neglect it. i have shown that our system is that of a single bank keeping the whole reserve under no effectual penalty of failure. and yet i propose to retain that system, and only attempt to mend and palliate it. i can only reply that i propose to retain this system because i am quite sure that it is of no manner of use proposing to alter it. a system of credit which has slowly grown up as years went on, which has suited itself to the course of business, which has forced itself on the habits of men, will not be altered because theorists disapprove of it, or because books are written against it. you might as well, or better, try to alter the english monarchy and substitute a republic, as to alter the present constitution of the english money market, founded on the bank of england, and substitute for it a system in which each bank shall keep its own reserve. there is no force to be found adequate to so vast a reconstruction, and so vast a destructions and therefore it is useless proposing them. no one who has not long considered the subject can have a notion how much this dependence on the bank of england is fixed in our national habits. i have given so many illustrations in this book that i fear i must have exhausted my reader's patience, but i will risk giving another. i suppose almost everyone thinks that our system of savings' banks is sound and good. almost everyone would be surprised to hear that there is any possible objection to it. yet see what it amounts to. by the last return the savings' banks--the old and the post office together--contain about , , l. of deposits, and against this they hold in the funds securities of the best kind. but they hold no cash whatever. they have of course the petty cash about the various branches necessary for daily work. but of cash in ultimate reserve--cash in reserve against a panic--the savings' banks have not a sixpence. these banks depend on being able in a panic to realise their securities. but it has been shown over and over again, that in a panic such securities can only be realised by the help of the bank of england--that it is only the bank with the ultimate cash reserve which has at such moments any new money, or any power to lend and act. if in a general panic there were a run on the savings' banks, those banks could not sell , l. of consols without the help of the bank of england; not holding themselves a cash reserve for times of panic, they are entirely dependent on the one bank which does hold that reserve. this is only a single additional instance beyond the innumerable ones given, which shows how deeply our system of banking is fixed in our ways of thinking. the government keeps the money of the poor upon it, and the nation fully approves of their doing so. no one hears a syllable of objection. and every practical man--every man who knows the scene of action--will agree that our system of banking, based on a single reserve in the bank of england, cannot be altered, or a system of many banks, each keeping its own reserve, be substituted for it. nothing but a revolution would effect it, and there is nothing to cause a revolution. this being so, there is nothing for it but to make the best of our banking system, and to work it in the best way that it is capable of. we can only use palliatives, and the point is to get the best palliative we can. i have endeavoured to show why it seems to me that the palliatives which i have suggested are the best that are at our disposal. i have explained why the french plan will not suit our english world. the direct appointment of the governor and deputy-governor of the bank of england by the executive government would not lessen our evils or help our difficulties. i fear it would rather make both worse. but possibly it may be suggested that i ought to explain why the american system, or some modification, would not or might not be suitable to us. the american law says that each national bank shall have a fixed proportion of cash to its liabilities (there are two classes of banks, and two different proportions; but that is not to the present purpose), and it ascertains by inspectors, who inspect at their own times, whether the required amount of cash is in the bank or not. it may be asked, could nothing like this be attempted in england? could not it, or some modification, help us out of our difficulties? as far as the american banking system is one of many reserves, i have said why i think it is of no use considering whether we should adopt it or not. we cannot adopt it if we would. the one-reserve system is fixed upon us. the only practical imitation of the american system would be to enact that the banking department of the bank of england should always keep a fixed proportion--say one-third of its liabilities--in reserve. but, as we have seen before, a fixed proportion of the liabilities, even when that proportion is voluntarily chosen by the directors, and not imposed by law, is not the proper standard for a bank reserve. liabilities may be imminent or distant, and a fixed rule which imposes the same reserve for both will sometimes err by excess, and sometimes by defect. it will waste profits by over-provision against ordinary danger, and yet it may not always save the bank; for this provision is often likely enough to be insufficient against rare and unusual dangers. but bad as is this system when voluntarily chosen, it becomes far worse when legally and compulsorily imposed. in a sensitive state of the english money market the near approach to the legal limit of reserve would be a sure incentive to panic; if one-third were fixed by law, the moment the banks were close to one-third, alarm would begin, and would run like magic. and the fear would be worse because it would not be unfounded--at least, not wholly. if you say that the bank shall always hold one-third of its liabilities as a reserve, you say in fact that this one-third shall always be useless, for out of it the bank cannot make advances, cannot give extra help, cannot do what we have seen the holders of the ultimate reserve ought to do and must do. there is no help for us in the american system; its very essence and principle are faulty. we must therefore, i think, have recourse to feeble and humble palliatives such as i have suggested. with good sense, good judgment, and good care, i have no doubt that they may be enough. but i have written in vain if i require to say now that the problem is delicate, that the solution is varying and difficult, and that the result is inestimable to us all. appendix. note a. liabilities and cash reserve of the chief banking systems. the following is a comparison of the liabilities to the public, and of the cash reserve, of the banking systems of the united kingdom, france, germany, and the united states. for the united kingdom the figures are the most defective, as they only include the deposits of the bank of england, and of the london joint stock banks, and the banking reserve of the bank of england, which is the only cash available against these liabilities is also the only cash reserve against the similar liabilities of the london private banks, the provincial english banks, and the scotch and irish banks. in the case of england, therefore, the method of comparison exhibits a larger proportion of cash to liabilities than what really exists. ( ) english banking. liabilities. deposits of bank of england, less estimated joint stock bank balances, at december , l , , deposits of london joint stock banks at december (see 'economist,' february , ) l , , ------------ total liabilities l , , ============= reserve of cash banking reserve in bank of england. l , , ============= making proportion of cash reserve to liabilities to the public about ' per cent. ( ) bank of france (february, ). liabilities circulation l , , deposits l , , ------------- total liabilities l , , ============= reserve of cash. coin and bullion in hand l , , making proportion of cash reserve to liabilities to the public about per cent. ( ) banks of germany (january, ). liabilities circulation l , , deposits l , , acceptances and indorsements l , , ------------ total liabilities l , , ============ reserves of cash cash in hand l , , ============ making proportion of cash reserve to liabilities to the public about per cent. ( ) national banks of united states (october , ). liabilities circulation l , , deposits l , , ------------- total liabilities l , , ============= reserve of cash coin and legal tenders in hand l , , ============ making proportion of cash reserve to liabilities to the public about . per cent. summary liabilities cash held proportion of cash to the public to liabilities per cent bank of england and london joint stock banks , , , , . bank of france , , , , . banks of germany , , , , . national banks of united states , , , , . note b. extract from evidence given by mr. alderman salomons before house of commons select committee in . . [chairman.] the effect upon yourselves of the pressure in november was, i presume, to induce you to increase your reserve in your own hands, and also to increase your deposits with the bank of england?--yes, that was so; but i wish to tell the committee that that was done almost entirely by allowing the bills of exchange which we held to mature, and not by raising any money, or curtailing our accommodation to our customers. perhaps it may be interesting to the committee to know that on the th of november we held discounted bills for brokers to the amount of , , l. out of those bills, , , l. matured between the th of november and the th of december, and , , l. more between the th of december and the st. so that about , , l. of bills matured between the th of november and the st of december; consequently we were prepared, merely by the maturing of our bills of exchange, for any demands that might possibly come upon us. . i understand you to say that you did not withdraw your usual accommodation from your own customers, but that you ceased to have in deposit with the bill-brokers so large a sum of money as you had before?--not exactly that; the bills which we had discounted were allowed to mature, and we discounted less; we kept a large reserve of cash. . that is to say, you withdrew from the commercial world a part of that accommodation which you had previously given, and at the same time you increased your deposits with the bank of england?--yes, our deposits with the bank of england were increased. we did not otherwise withdraw accommodation. . [mr. weguelin.] had you any money at call with the bill-brokers?--a small amount; perhaps about , l. or less, which we did not call in. . [chairman.] what i understand you to say is, that the effect of the commercial pressure upon you was to induce you upon the whole to withdraw from commerce an amount of accommodation which in other times you had given, and at the same time to increase your deposits with the bank of england?--so far only as ceasing to discount with strangers, persons not having current accounts with us. . or to give the same amount to the bill-broker?--for a while, instead of discounting for brokers and strangers, we allowed our bills to mature, and remained quiescent with a view to enable us to meet any demand that might be made on ourselves. . except what you felt bound to your own customers to continue to give, you ceased to make advances?--quite so; perhaps i might say at the same time, that besides a large balance which we kept at the bank of england, which of course was as available as in our own tills, we increased our notes in our tills at the head office and at all the branches. . i suppose at that time large sales of public securities were made by the london joint stock banks, which securities were purchased by the public?--it is understood that some joint stock and other banks sold, but i believe it is quite certain that the public purchased largely, because they always purchase when the funds fall. . are you prepared to give the committee any opinion of your own as to the effect, one way or the other, which the system of the joint stock banks may have produced with regard to aggravating or diminishing the commercial pressure in the autumn of last year?--i should state, generally, that the joint stock banks, as well as all other banks, in london, by collecting money from those who had it to spare, must of necessity have assisted, and could not do otherwise than assist commerce, both then and at all other times. . you say that your discounts, either at your own counter or through the bill-brokers, are ordinarily very large, but that at the time of severest pressure you contracted them so far as you thought was just to your own immediate customers?--yes; but the capital was still there, because it was at the bank of england, and it was capable of being used for short periods; if we did not want it, others might have used it. . [mr. weguelin.] in fact, it was used by the bank of england?-- undoubtedly; i should suppose so; there is no question about it. . you, of course, felt quite certain that your deposits in the bank of england might be had upon demand?--we had no doubt about it. you did not take into consideration the effect of the law of , which might have placed the banking department of the bank of england in such a position as not to be able to meet the demands of its depositors? i must say that that never gave us the smallest concern. . you therefore considered that, if the time should arrive, the government would interfere with some measure as they had previously done to enable the bank to meet the demands upon it?--we should always have thought that if the bank of england had stopped payment, all the machinery of government would have stopped with it, and we never could have believed that so formidable a calamity would have arisen if the government could have prevented it. . [chairman.] the notion of the convertibility of the note being in danger never crossed your mind?--never for a moment; nothing of the kind. . [mr. weguelin.] i refer not to the convertibility of the note, but to the state of the banking department of the bank of england?--if we had thought that there was any doubt whatever about it, we should have taken our bank-notes and put them in our own strong chest. we could never for a moment believe an event of that kind as likely to happen. . therefore you think that the measure taken by the government, of issuing a letter authorising the bank of england to increase their issues of notes upon securities, was what was generally expected by the commercial world, and what in future the commercial world would look to in such a conjunction of circumstances?--we looked for some measure of that nature. that, no doubt, was the most obvious one. we had great doubts whether it would come when it did, until the very last moment. . have you ever contemplated the possibility of the bank refusing to advance, under circumstances similar to those which existed in november, , upon good banking securities?--of course i have, and it is a very difficult question to answer as to what its effect might be; but the notion appears to me to be so thoroughly ingrained in the minds of the commercial world, that whenever you have good security it ought to be convertible at the bank in some shape or way, that i have very great doubt indeed whether the bank can ever take a position to refuse to assist persons who have good commercial securities to offer. . [mr. cayley.] when you say that you have come to some fresh arrangement with regard to your allowance of interest upon deposits, do you speak of yourselves as the london and westminster bank, or of some of the other banks in combination with yourselves?--i think all the banks have come to an understanding that it is not desirable, either for their proprietors or for the public, to follow closely at all times the alterations of the bank. i believe it is understood amongst them all that they do not intend following that course in future. . is that from a feeling that it is rather dangerous under particular circumstances?--i cannot admit as to its being dangerous, but there can be no doubt of this, that there is a notion in the public mind which we ought not to contend against, that when you offer a high rate of interest for money, you rather do it because you want the person's money, than because you are obeying the market rate; and i think it is desirable that we should show that if persons wish to employ their money, and want an excessive rate, they may take it away and employ it themselves. . you think that there is now a general understanding amongst the banks which you have mentioned, to act upon a different principle from that on which they acted during last october and november?--i think i may say that i know that to be the case. . was not it the fact that this system of giving so high a rate of interest upon money at call commenced very much with the establishment of some banks during the last year or two, which, instead of demanding days' or a month's notice, were willing to allow interest upon only three days' notice; did not that system begin about two years ago?--i do not think it began with the new banks; i think it began with one of the older banks; i know that as regards my own bank, that we were forced into it; i forgot to say, that with regard to ourselves in taking money on deposit, the parties must leave the money a month, or they lose interest. we do not take money from any depositor at interest unless upon the understanding and condition that it remains a month with us; he may withdraw it within the month, but then he forfeits interest; it will not carry interest unless it is with us a month, and then it is removable on demand without notice. . is it or is it not a fact that some of the banks pay interest upon their current accounts?--yes, i think most of the new banks do so; and the union bank of london does it. . at a smaller rate than upon their deposits, i presume?--i think at a smaller rate, but i believe it is a fixed rate on the minimum balance for some period, either six months or one month, i do not exactly know the period. i think i ought to add (and i believe it is the case with all the banks) that the london and westminster bank, from the day of its first institution until the present day, has never re-discounted a bill. no bill has ever left our bank unless it has been for payment. . is not that generally the case with the london joint stock banks?--i believe it is the case. . [mr. weguelin.] but you sometimes lend money upon bills deposited with you by bill-brokers?--yes. . and you occasionally call in that money and re-deliver those securities?--yes; but that we do to a very small extent. . is not that equivalent to a re-discount of bills?--no; the discount of a bill and the lending money on bills are very different things. when we discount a bill, that bill becomes our property; it is in our control, and we keep it and lock it up until it falls due; but when brokers come to us and want to borrow, say , l. on a deposit of bills, and we let them have the money and afterwards return those bills to them and we get back our money, surely that is not a re-discount. . when you want to employ your money for a short period, do you not frequently take bills of long date, and advance upon them?--but that is not a re-discount on our part. very often brokers in borrowing money send in bills of long date, and afterwards we call in that loan; but that is no more a re-discount than lending money upon consols and calling in that money again. it is not an advance of ours; we do not seek it; they come to us and borrow our money, and give us a security; when we want our money we call for that money, and return their security. surely that is not a re-discount. . [mr. hankey.] is there not this clear distinction between returning a bill on which you have made an advance and discounting a bill, that if you have discounted a bill your liability continues upon the bill until that bill has come to maturity?--yes. . in the other case you have no further liability whatever?--certainly. . should you not consider that a very important distinction?--i think it is an important distinction. take this case: suppose a party comes to us and borrows , l., and we lend it him, and when the loan becomes due we take our money back again. surely that is not a discount on our part. . is there not this distinction, that if you re-discount you may go on pledging the liability of your bank to an almost unlimited amount, whereas in the other case you only get back that money which you have lent?--undoubtedly. . [mr. cayley.] the late chancellor of the exchequer stated before the adjournment, in a speech in the house of commons, that during the monday, tuesday, wednesday, and thursday of the panic, the bank was almost, if not entirely, the only body that discounted commercial bills; how can you reconcile that with what you have said, that you gave as much accommodation as usual to your customers?--i am not responsible for what the chancellor of the exchequer said; i am responsible for what i am now stating as to the course of our bank, that our advances to our customers on the st of december were nearly , l. higher than they were on the st of october. with regard to our not discounting for other parties, it was in consequence of the discredit which prevailed, that it was necessary we should hold a portion of our deposits in order that they should be available in case persons called for them; a certain number of persons did so; in the month of november we had a reduction of our deposits, and if we had gone on discounting for brokers we should have had to go into the market ourselves to raise money on our government securities, but we avoided that by not discounting, and leaving our money at the bank of england. . then you did not discount as much as usual for your customers during that period?--yes, we did, and more. . but not to strangers?--not to strangers; i make a distinction between our transactions with our customers, who of course expect us to give accommodation, and discounts for brokers, which is entirely voluntary, depending upon our having money to employ. . how would it have been if the letter had not issued at the last moment? that is a question which i can hardly answer. . what do you mean by that general expression of yours?--it is impossible to predicate what may happen in time of panic and alarm. a great alarm prevailed certainly amongst the commercial world, and it could never have been alleviated, except by some extraordinary means of relief. we might probably have been in the state in which hamburg was, where they have no bank-notes in circulation. . [mr. spooner.] what did you mean by the expression, 'the last moment'? you said that the letter came out at the last moment; the last moment of what?--it was late in the day; it was a day of great distress. for two days there was a great deal of anxiety, and everybody expected that there would be some relief; and it was when expectation, i suppose, was highly excited that the letter came, and it gave relief. . cannot you tell us what your opinion would have been, if that last moment had happened to have elapsed, and the letter had not come?--it is very difficult to say; it is too much to say that it could not have been got over. there can be no doubt whatever that what created the difficulty existed out of london, and not in it; and therefore it is much more difficult for me to give an opinion. i believe that the banking interest, both private and joint stock, was in a perfectly sound condition, and able to bear any strain which might have been brought upon it in london. . [mr. hankey.] can you give the committee any idea as to what proportion of deposits you consider generally desirable to keep in reserve?--you must be very much guided by circumstances. in times of alarm, when there are failures, of course all bankers strengthen their reserves; our reserve then is larger. in times of ordinary business we find, both as regards our deposits at interest as well as those which are not at interest, that there is a constant circulation; that the receipts of money very nearly meet the payments. . you probably keep at all times a certain amount of your deposits totally unemployed; in reserve?--yes. . in a normal state of commercial affairs, is there any fixed proportion, or can you give the committee any idea of what you would consider about a fair and desirable proportion which should be so kept unemployed?--i think the best idea which i can give upon that subject is to give our annual statement, or balance sheet, for the st of december. . does that show what amount of unemployed money you had on that day?--yes. i will put in a statement, which perhaps will be the best means of meeting the question, showing the cash in hand on the th of june and the st of december in every year, as shown by our published accounts, together with our money at call and our government securities; that will be perhaps the best and most convenient way of giving the information you desire to have. (see table below.) . do you consider that when your deposits are materially on the increase it is necessary to keep a larger amount of money in reserve than you would keep at other times?--i may say that, as a general rule, our reserve would always bear some proportion to our deposits. _total lodgments with london and westminster bank; also amount of cash in hand, moneys with bill-brokers at call, and government securities held by the bank._ date deposits cash money government total. in hand at call securities l l l l l december , , , , , , , , december , , , , , , , december , , , , , , , , june , , , , , , , , december , , , , , , , , june , , , , , , , december , , , , , , , june , , , , , , , december , , , , , , , , june , , , , , , , , december , , , , , , , , june , , , , , , , , december , , , , , , , , june , , , , , , , , december , , , , , , , , june , , , , , , , , december , , , , , , , , june , , , , , , , , december , , , , , , , , june , , , , , , , , december , , , , , , , , , june , , , , , , , , december , , , , , , , , , , . do you employ your money in the discounting of bills for other persons than your own customers?--discount brokers. . only to discount brokers? yes. . not to strangers who are in the habit of bringing you in bills; commercial houses?--i should say generally not. we have one or two houses for whom we discount who have not accounts with us as bankers, but generally we do not discount except for our customers or for bill-brokers. . do you consider that any advantage can arise to the public by the bank of england advancing to a greater extent than can be considered strictly prudent on the soundest principle of banking, under the idea of their affording aid to the commercial world?--as i said before, as long as there are good bills in circulation, that is, bills about which there would be no doubt of their being paid at maturity, there should be some means by which those bills could be discounted. . and do you think that it is part of the functions of the bank of england to discount a bill for anybody, merely because the party holding the bill wishes to convert it into cash?--as i said before, the bank of england will have great difficulty in getting rid of that inconvenient idea which there is in the mind of the public, that the bank of england is something more than an ordinary joint stock bank. i think it must depend very much upon circumstances whether you can or cannot refuse the discount of good bills which are offered to you. note c. statement of circulation and deposits of the bank of dundee at intervals of ten years between and . year circulation deposits l l , -- , -- , -- , -- , , , , , , , , , , , , , , the bank did not begin to receive deposits until , in which year they amounted to , l. note d. meeting of the proprietors of the bank of england. september , . (from 'economist,' september , .) a general court of the bank of england was held at the bank at twelve o'clock on the th instant, for the purpose of declaring a dividend for the past half-year. mr. launcelot holland, the governor of the bank, who presided upon the occasion, addressed the proprietors as follows: this is one of the quarterly general courts appointed by our charter, and it is also one of our half-yearly general courts, held under our bye-laws, for the purpose of declaring a dividend. from a statement which i hold in my hand it appears that the net profits of the bank for the half-year ending on the st of august last amounted to , l. s. d.; making the amount of the rest on that day, , , l. s. d.; and after providing for a dividend at the rate of l. s. per cent, the rest will stand at , , l.. s. d. the court of directors, therefore, propose that a half-yearly dividend of interest and profits, to the amount of l. s. per cent, without deduction on account of income tax, shall be made on the th of october next. that is the proposal i have now to lay before the general court; but as important events have occurred since we last met, i think it right i should briefly advert to them upon this occasion. a great strain has within the last few months been put upon the resources of this house, and of the whole banking community of london; and i think i am entitled to say that not only this house but the entire banking body acquitted themselves most honourably and creditably throughout that very trying period. banking is a very peculiar business, and it depends so much upon credit that the least blast of suspicion is sufficient to sweep away, as it were, the harvest of a whole year. but the manner in which the banking establishments generally of london met the demands made upon them during the greater portion of the past half-year affords a most satisfactory proof of the soundness of the principles on which their business is conducted. this house exerted itself to the utmost--and exerted itself most successfully--to meet the crisis. we did not flinch from our post. when the storm came upon us, on the morning on which it became known that the house of overend and co. had failed, we were in as sound and healthy a position as any banking establishment could hold; and on that day and throughout the succeeding week, we made advances which would hardly be credited. i do not believe that any one would have thought of predicting, even at the shortest period beforehand, the greatness of those advances. it was not unnatural that in this state of things a certain degree of alarm should have taken possession of the public mind, and that those who required accommodation from the bank should have gone to the chancellor of the exchequer and requested the government to empower us to issue notes beyond the statutory amount, if we should think that such a measure was desirable. but we had to act before we could receive any such power, and before the chancellor of the exchequer was perhaps out of his bed we had advanced one-half of our reserves, which were certainly thus reduced to an amount which we could not witness without regret. but we could not flinch from the duty which we conceived was imposed upon us of supporting the banking community, and i am not aware that any legitimate application for assistance made to this house was refused. every gentleman who came here with adequate security was liberally dealt with, and if accommodation could not be afforded to the full extent which was demanded, no one who offered proper security failed to obtain relief from this house. i have perhaps gone a little more into details than is customary upon these occasions, but the times have been unusually interesting, and i thought it desirable to say this much in justification of the course adopted by this house of running its balances down to a point which some gentlemen may consider dangerous. looking back, however, upon recent events, i cannot take any blame to this court for not having been prepared for such a tornado as that which burst upon us on the th of may; and i hope the court of proprietors will feel that their directors acted properly upon that occasion, and that they did their best to meet a very extraordinary state of circumstances. i have now only to move that a dividend be declared at the rate of l. s. per cent for the past half-year. mr. hyam said that before the question was put he wished to offer a few observations to the court. he believed that the statement of accounts which had just been laid before them was perfectly satisfactory. he also thought that the directors had done their best to assist the commercial classes throughout the late monetary crisis; but it appeared to him at the same time that they were in fault in not having applied at an earlier period to the chancellor of the exchequer for a suspension of the bank act. it was well known that the demand on the bank was materially lessened in the earlier part of the day, in consequence of a rumour which had been extensively circulated that permission to overstep the limits laid down in the act had been granted. that concession, however, had only been made after the most urgent representations had been addressed to the chancellor of the exchequer at a late hour in the night, and if it had then been refused he felt persuaded that the state of affairs would have been much worse on the saturday than it had been on the friday. the fact was that the act of was totally unsuited to the present requirements of the country, which since that period had tripled or quadrupled its commerce; and he was sorry to know that the measure seemed to meet with the approval of many of their directors. any one who read the speeches made in the course of the discussion on mr. watkins' motion must see that the subject called for further inquiry; and he trusted that the demand for that inquiry would yet be conceded. mr. jones said he entirely dissented from the views with respect to the bank act entertained by the hon. proprietor who had just addressed the court. in his opinion the main cause of the recent monetary crisis was that, while we had bought , , l. worth of foreign produce in the year , the value of our exports had only been , , l., so that we had a balance against us to the amount of , , l. he believed that the bank acted wisely in resisting every attempt to increase the paper currency, and he felt convinced that the working classes would be the people least likely to benefit by the rise in prices which would take place under such a change. mr. moxon said he should be glad to know what was the amount of bad debts made by the bank during the past half-year. it was stated very confidently out of doors that during that period the directors had between , , l. and , , l. of bills returned to them. the governor of the bank.--may i ask what is your authority for that statement? we are rather amused at hearing it, and we have never been able to trace any rumour of the kind to an authentic source. mr. moxon continued--whether the bad debts were large or small, he thought it was desirable that they should all know what was their actual amount. they had been told at their last meeting that the bank held a great many railway debentures; and he should like to know whether any of those debentures came from railway companies that had since been unable to meet their obligations. he understood that a portion of their property was locked up in advances made on account of the thames embankment, and in other ways which did not leave the money available for general banking and commercial purposes; and if that were so, he should express his disapproval of such a policy. there was another important point to which he wished to advert. he was anxious to know what was the aggregate balance of the joint stock banks in the bank of england. he feared that some time or other the joint stock banks would be in a position to command perhaps the stoppage of the bank of england. if that were not so, the sooner the public were full & informed upon the point the better. but if ten or twelve joint stock banks had large balances in the bank of england, and if the bank balances were to run very low, people would naturally begin to suspect that the joint stock banks had more power over the bank of england than they ought to have. he wished further to ask whether the directors had of late taken into consideration the expediency of paying interest on deposits. he believed that under their present mode of carrying on their business they were foregoing large profits which they might receive with advantage to themselves and to the public; and he would recommend that they should undertake the custody of securities after the system adopted by the bank of france. in conclusion, he proposed to move three resolutions, for the purpose of providing, first, that a list of all the proprietors of bank stock should be printed, with a separate entry of the names of all those persons not entitled to vote from the smallness of their stock, or from the shortness of time during which they held it; secondly, that a copy of the charter of the bank, with the rules, orders, and bye-laws passed for the good government of their corporation, should be printed for the use of the shareholders; and thirdly, that auditors should be appointed to make detailed audits of their accounts. mr. gerstenberg recommended that the directors should take some step for the purpose of preventing the spread of such erroneous notions as that which lately prevailed on the continent, that the bank was about to suspend specie payments. mr. w. botly said he wished to see the directors taking into their consideration the expediency of allowing interest on deposits. mr. alderman salomons said he wished to take that opportunity of stating that he believed nothing could be more satisfactory to the managers and shareholders of joint stock banks than the testimony which the governor of the bank of england had that day borne to the sound and honourable manner in which their business was conducted. it was mainfestly desirable that the joint stock banks and the banking interest generally should work in harmony with the bank of england; and he sincerely thanked the governor of the bank for the kindly manner in which he had alluded to the mode in which the joint stock banks had met the late monetary crisis. the governor of the bank said--before putting the question for the declaration of a dividend, i wish to refer to one or two points that have been raised by the gentlemen who have addressed the court on this occasion. the most prominent topic brought under our notice is the expediency of allowing interest on deposits; and upon that point i must say that i believe a more dangerous innovation could not be made in the practice of the bank of england. the downfall of overend and gurney, and of many other houses, must be traced to the policy which they adopted of paying interest on deposits at call, while they were themselves tempted to invest the money so received in speculations in ireland or in america, or at the bottom of the sea, where it was not available when a moment of pressure arrived. mr. botly said he did not mean deposits on call. the governor of the bank of england continued--that is only a matter of detail; the main question is whether we ought to pay interest on deposits, and of such policy i must express my entire disapproval. mr. moxon has referred to the amount of our debts, but, as i stated when i took the liberty of interrupting him, we could never trace the origin of any rumour which prevailed upon that subject. as far as it can be said to have ever existed it had its origin most probably in the vast amount advanced by the bank. it must, however, be remembered that we did not make our advances without ample security, and the best proof of that is the marvelously small amount of bad debts which we contracted. it has never been a feature of the bank to state what was the precise amount of those debts; but i believe that if i were to mention it upon the present occasion, it would be found to be so inconsiderable that i should hardly obtain credence for the announcement i should have to make. i am convinced that our present dividend has been as honestly and as hardly earned as any that we have ever realised; but it has been obtained by means of great vigilance and great anxiety on the part of each and all of your directors; and i will add that i believe you would only diminish their sense of responsibility, and introduce confusion into the management of your business, if you were to transfer to auditors the making up of your accounts. if your directors deserve your confidence they are surely capable of performing that duty, and if they do not deserve it you ought not to continue them in their present office. with regard to the supposed lock-up of our capital, i must observe that, with , , l. on our hands, we must necessarily invest it in a variety of securities; but there is no ground for imagining that our money is locked up and is not available for the purpose of making commercial advances. we advanced in the space of three months the sum of , , l.; and what more than that do you want? it has been recommended that we should take charge of securities; but we have found it necessary to refuse all securities except those of our customers; and i believe the custody of securities is becoming a growing evil. with regard to railway debentures, i do not believe we have one of a doubtful character. we have no debentures except those of first-class railway companies and companies which we know are acting within their parliamentary limits. having alluded to those subjects, i will now put the motion for the declaration of the dividend. the motion was accordingly put and unanimously adopted. the chairman then announced that that resolution should be confirmed by ballot on tuesday next, inasmuch as the bank could not, under the provisions of its act of parliament, declare otherwise than in that form a dividend higher than that which it had distributed during the preceding half-year. the three resolutions proposed by mr. moxon were then read; but they were not put to the meeting, inasmuch as they found no seconders. mr. alderman salomons said that their governor had observed that he thought the payment of interests on deposits was objectionable; and everyone must see that such a practice ought not to be adopted by the bank of england. but he took it for granted that the governor did not mean that his statement should apply to joint stock banks which he had himself told them had conducted their business so creditably and so successfully. the governor of the bank said that what he stated was that such a system would be dangerous for the bank of england, and dangerous if carried into effect in the way contemplated by mr. moxon. mr. p. n. laurie said he understood the governor of the bank to say that it would be dangerous to take deposits on call, and in that opinion he concurred. mr. alderman salomons said that he, too, was of the same opinion. on the motion of mr. alderman salomons, seconded by mr. botly, a vote of thanks was passed to the governor and the directors for their able and successful management of the bank during the past half-year, and the proceedings then terminated. produced from images provided by the million book project. _to be completed in volumes, s. d. each_. the prose works of jonathan swift, d.d. edited by temple scott vol. i. a tale of a tub and other early works. edited by temple scott. with a biographical introduction by w.e.h. lecky, m.p. with portrait and facsimiles. vol. ii. the journal to stella. edited by frederick ryland, m.a. with two portraits of stella and a facsimile of one of the letters. vols. iii. & iv. writings on religion and the church. edited by temple scott. with portraits and facsimiles of title-pages. vol. v. historical and political tracts--english. edited by temple scott. with portrait and facsimiles of title-pages. vol. vi. the drapier's letters. edited by temple scott. with portrait, reproductions of wood's coinage, and facsimiles of title pages. vol. viii. gulliver's travels. edited by g. ravenscroft dennis. with portrait, maps and facsimiles. vol. ix. contributions to the "examiner," "tatler," "spectator," &c. edited by temple scott. with portrait. vol. x. historical writings. edited by temple scott. with portrait. _to be followed by:_ vol. vii. historical and political tracts--irish. vol. xi. literary essays. vol. xii. bibliography and index to complete works. * * * * * london: george bell and sons. bohn's standard library * * * * * the prose works of jonathan swift vol. vi george bell and sons london: york st. covent garden cambridge: deighton, bell & co. new york: the macmillan co. bombay: a.h. wheeler & co. [illustration: jonathan swift from a painting in the national gallery of ireland once in the possession of judge berwick and ascribed to francis bindon] the prose works of jonathan swift, d.d. edited by temple scott vol. vi the drapier's letters london george bell and sons chiswick press charles whittingham and co tooks court, chancery lane, london introduction in swift left england for ireland, disappointed, distressed, and worn out with anxiety in the service of the harley ministry. on his installation as dean of st. patrick's he had been received in dublin with jeering and derision. he had even been mocked at in his walks abroad. in , however, he entered for the second time the field of active political polemics, and began with renewed energy the series of writings which not only placed him at the head and front of the political writers of the day, but secured for him a place in the affections of the people of ireland--a place which has been kept sacred to him even to the present time. a visitor to the city of dublin desirous of finding his way to st. patrick's cathedral need but to ask for the dean's church, and he will be understood. there is only one dean, and he wrote the "drapier's letters." the joy of the people of dublin on the withdrawal of wood's patent found such permanent expression, that it has descended as oral tradition, and what was omitted from the records of parliament and the proceedings of clubs and associations founded in the drapier's honour, has been embalmed in the hearts of the people, whose love he won, and whose homage it was ever his pride to accept. the spirit of swift which grattan invoked had, even in grattan's time, power to stir hearts to patriotic enthusiasm. that spirit has not died out yet, and the irish people still find it seasonable and refreshing to be awakened by it to a true sense of the dignity and majesty of ireland's place in the british empire. a dispassionate student of the condition of ireland between the years of swift's birth and death--between, say, and --could rise from that study in no unprejudiced mood. it would be difficult for him to avoid the conclusion that the government of ireland by england had not only degraded the people of the vassal nation, but had proved a disgrace and a stigma on the ruling nation. it was a government of the masses by the classes, for no other than selfish ends. it ended, as all such governments must inevitably end, in impoverishing the people, in wholesale emigration, in starvation and even death, in revolt, and in fostering among those who remained, and among those whom circumstances exiled, the dangerous spirit of resentment and rebellion which is the outcome of the sense of injustice. it has also served, even to this day, to give vitality to those associations that have from time to time arisen in ireland for the object of realizing that country's self-government. it may be argued that the people of ireland of that time justified swift's petition when he prayed to be removed from "this land of slaves, where all are fools and all are knaves"; but that is no justification for the injustice. the injustice from which ireland suffered was a fact. its existence was resented with all the indignation with which an emotional and spiritual people will always resent material obstructions to the free play of what they feel to be their best powers. there were no leaders at the time who could see this, and seeing it, enforce its truth on the dull english mind to move it to saner methods of dealing with this people. nor were there any who could order the resentment into battalions of fighting men to give point to the demands for equal rights with their english fellow-subjects. had swift been an irishman by nature as he was by birth, it might have been otherwise; but swift was an irishman by accident, and only became an irish patriot by reason of the humanity in him which found indignant and permanent expression against oppression. swift's indignation against the selfish hypocrisy of his fellow-men was the cry from the pain which the sight of man's inhumanity to man inflicted on his sensitive and truth-loving nature. the folly and baseness of his fellow-creatures stung him, as he once wrote to pope, "to perfect rage and resentment." turn where he would, he found either the knave as the slave driver, or the slave as a fool, and the latter became even a willing sacrifice. his indignation at the one was hardly greater than his contempt for the other, and his different feelings found trenchant expression in such writings as the "drapier's letters," the "modest proposal," and "gulliver's travels." it has been argued that the _saeva indignatio_ which lacerated his heart was the passion of a mad man. to argue thus seems to us to misunderstand entirely the peculiar qualities of swift's nature. it was not the mad man that made the passion; it was rather the passion that made the man mad. as we understand him, it seems to us that swift's was an eminently majestic spirit, moved by the tenderest of human sympathies, and capable of ennobling love--a creature born to rule and to command, but with all the noble qualities which go to make a ruler loved. it happened that circumstances placed him early in his career into poverty and servitude. he extricated himself from both in time; but his liberation was due to an assertion of his best powers, and not to a dissimulation of them. had he been less honest, he might have risen to a position of great power, but it would have been at the price of those very qualities which made him the great man he was. that assertion cost him his natural vocation, and swift lived on to rage in the narrow confines of a dublin deanery house. he might have flourished as the greatest of english statesmen--he became instead a monster, a master-scourger of men, pitiless to them as they had been blind to him. but monster and master-scourger as he proved himself, he always took the side of the oppressed as against the oppressor. the impulse which sent him abroad collecting guineas for "poor harrison" was the same impulse which moved him in his study at the deanery to write as "m.b. drapier." on this latter occasion, however, he also had an opportunity to lay bare the secret springs of oppression, an opportunity which he was not the man to let go by. no doubt swift was not quite disinterested in the motives which prompted him to enter the political arena for the second time. he hated the walpole ministry in power; he resented his exile in a country whose people he despised; and he scorned the men who, while they feared him, had yet had the power to prevent his advancement. but, allowing for these personal incentives, there was in swift such a large sympathy for the degraded condition of the irish people, such a tender solicitude for their best welfare, and such a deep-seated zeal for their betterment, that, in measuring to him his share in the title of patriot, we cannot but admit that what we may call his public spirit far outweighed his private spleen. above all things swift loved liberty, integrity, sincerity and justice; and if it be that it was his love for these, rather than his love for the country, which inspired him to patriotic efforts, who shall say that he does not still deserve well of us. if a patriot be a man who nobly teaches a people to become aware of its highest functions as a nation, then was swift a great patriot, and he better deserves that title than many who have been accorded it. the matter of wood's halfpence was a trivial one in itself; but it was just that kind of a matter which swift must instantly have appreciated as the happiest for his purpose. it was a matter which appealed to the commonest news-boy on the street, and its meaning once made plain, the principle which gave vitality to the meaning was ready for enunciation and was assured of intelligent acceptance. in writing the "drapier's letters," he had, to use his own words, seasonably raised a spirit among the irish people, and that spirit he continued to refresh, until when he told them in his fourth letter, "by the laws of god, of nature, of nations, and of your country, you are, and ought to be, as free a people as your brethren in england," the country rose as one man to the appeal. neither the suavities of carteret nor the intrigues of walpole had any chance against the set opposition which met them. the question to be settled was taken away from the consideration of ministers, and out of the seclusion of cabinets into the hands of the people, and before the public eye. there was but one way in which it could be settled--the way of the people's will--and it went that way. it does not at all matter that walpole finally had his way--that the king's mistress pocketed her _douceur_, and that wood retired satisfied with the ample compensation allowed him. what does matter is that, for the first time in irish history, a spirit of national life was breathed into an almost denationalized people. beneath the lean and starved ribs of death swift planted a soul; it is for this that irishmen will ever revere his memory. in the composition of the "letters" swift had set himself a task peculiarly fitting to his genius. those qualities of mind which enabled him to enter into the habits of the lives of footmen, servants, and lackeys found an even more congenial freedom of play here. his knowledge of human nature was so profound that he instinctively touched the right keys, playing on the passions of the common people with a deftness far surpassing in effect the acquired skill of the mere master of oratory. he ordered his arguments and framed their language, so that his readers responded with almost passionate enthusiasm to the call he made upon them. allied to his gift of intellectual sympathy with his kind was a consummate ability in expression, into which he imparted the fullest value of the intended meaning. his thought lost nothing in its statement. writing as he did from the point of view of a tradesman, to the shopkeepers, farmers, and common people of ireland, his business was to speak with them as if he were one of them. he had already laid bare their grievances caused by the selfish legislation of the english parliament, which had ruined irish manufactures; he had written grimly of the iniquitous laws which had destroyed the woollen trade of the country; he had not forgotten the condition of the people as he saw it on his journeys from dublin to cork--a condition which he was later to reveal in the most terrible of his satirical tracts--and he realized with almost personal anguish the degradation of the people brought about by the rapacity and selfishness of a class which governed with no thought of ultimate consequences, and with no apparent understanding of what justice implied. it was left for him to precipitate his private opinion and public spirit in such form as would arouse the nation to a sense of self-respect, if not to a pitch of resentment. the "drapier's letters" was the reagent that accomplished both. * * * * * the editor takes this opportunity to express his thanks and obligations to mr. g.r. dennis, to mr. w. spencer jackson, to the late colonel f.r. grant, to mr. c. litton falkiner of killiney, and to mr. o'donoghue of dublin. his acknowledgment is here also made to mr. strickland, of the national gallery of ireland, to whose kindness and learning he is greatly indebted. temple scott. new york, _march_, . contents letter i. to the shopkeepers, tradesmen, farmers, and common-people of ireland letter ii. to mr. harding the printer the report of the committee of the lords of his majesty's most honourable privy-council, in relation to mr. wood's halfpence and farthings, etc. letter iii. to the nobility and gentry of the kingdom of ireland letter iv. to the whole people of ireland seasonable advice to the grand jury, concerning the bill preparing against the printer of the drapier's fourth letter letter v. to the lord chancellor middleton letter vi. to the right honourable the lord viscount molesworth letter vii. an humble address to both houses of parliament appendixes i. addresses to the king ii. report of the assay on wood's coinage, made by sir isaac newton, edward southwell, esq., and thomas scroope, esq. iii. tom punsibi's dream iv. a letter from a friend to the right honourable ---- a second letter from a friend to the right honourable ---- v. the presentment of the grand jury of the county of the city of dublin vi. proclamation against the drapier vii. report of the irish privy council on wood's coinage viii. the patentee's computation of ireland, in a letter from the author of the "whitehall evening post" concerning the making of copper coin ix. descriptions of the various specimens of wood's coins index plates. jonathan swift. from a painting in the national gallery of ireland, ascribed to francis bindon halfpence and farthings coined by william wood, and [illustration: _half-pence & farthings coined by william wood, & _] letter i. to the shop-keepers, tradesmen, farmers, and common-people of ireland. note about the year it was generally acknowledged in ireland that there was a want there of the small change, necessary in the transaction of petty dealings with shopkeepers and tradesmen. it has been indignantly denied by contemporary writers that this small change meant copper coins. they asserted that there was no lack of copper money, but that there was a great want of small silver. be that as it may, the report that small change was wanting was sufficiently substantiated to the english government to warrant it to proceed to satisfy the want. in its dealings with ireland, however, english governments appear to have consistently assumed that attitude which would most likely cause friction and arouse disturbance. in england coins for currency proceeded from a mint established under government supervision. in scotland such a mint was specially provided for in the act of union. but in ireland, the government acted otherwise. the irish people had again and again begged that they should be permitted to establish a mint in which coins could be issued of the same standard and intrinsic value as those used in england. english parliaments, however, invariably disregarded these petitions. instead of the mint the king gave grants or patents by which a private individual obtained the right to mint coins for the use of the inhabitants. the right was most often given for a handsome consideration, and held for a term of years. in charles ii. granted such a patent to sir thomas armstrong, permitting him to coin farthings for twenty years. it appears, however, that armstrong never actually coined the farthings, although he had gone to the expense of establishing a costly plant for the purpose. small copper coins becoming scarce, several individuals, without permission, issued tokens; but the practice was stopped. in sir william armstrong, son of sir thomas, with colonel george legg (afterwards lord dartmouth), obtained a patent for twenty-one years, granting them the right to issue copper halfpence. coins were actually struck and circulated, but the patent itself was sold to john knox in the very year of its issue. knox, however, had his patent specially renewed, but his coinage was interrupted when james ii. issued his debased money during the revolution (see monck mason, p. , and the notes on this matter to the drapier's third letter, in present edition). knox sold his patent to colonel roger moore, who overstocked the country with his coins to such an extent that the currency became undervalued. when, in , moore endeavoured to obtain a renewal of his patent, his application was refused. by , owing either to moore's bad coinage, or to the importation of debased coins from other countries, the copper money had degraded considerably. in a pamphlet[ ] issued by george ewing in dublin ( ), it is stated that in that year, w. trench presented a memorial to the lords of the treasury, complaining of the condition of the copper coinage, and pointing out that the evil results had been brought about by the system of grants to private individuals. notwithstanding this memorial, it was attempted to overcome the difficulty by a continuance of the old methods. a new patent was issued to an english iron merchant, william wood by name, who, according to coxe, submitted proposal with many others, for the amelioration of the grievance. wood's proposals, say this same authority, were accepted "as beneficial to ireland." the letters patent bear the date july th, , and were prepared in accordance with the king's instructions to the attorney and solicitor general sent in a letter from kensington on june th, . the letter commanded "that a bill should be prepared for his royal signature, containing and importing an indenture, whereof one part was to pass the great seal of great britain." this indenture, notes monck mason,[ ] between his majesty of the one part, "and william wood, of wolverhampton, in the county of stafford, esq.," of the other, signifies that his majesty "has received information that, in his kingdom of ireland, there was a great want of small money for making small payments, and that retailers and others did suffer by reason of such want." [footnote : "a defence of the conduct of the people of ireland in their unanimous refusal of mr. wood's copper money," pp. - .] [footnote : "history of st. patrick's cathedral," note v, pp. - .] by virtue, therefore, of his prerogative royal, and in consideration of the rents, covenants, and agreements therein expressed, his majesty granted to william wood, his executors, assigns, etc., "full, free, sole, and absolute power, privilege, licence, and authority," during fourteen years, from the annunciation of the blessed virgin, , to coin halfpence and farthings of copper, to be uttered and disposed of in ireland, and not elsewhere. it was provided that the whole quantity coined should not exceed tons of copper, whereof tons only were to be coined in the first year, and tons in each of the last thirteen, said farthings and halfpence to be of good, pure, and merchantable copper, and of such size and bigness, that one avoirdupois pound weight of copper should not be converted into more farthings and halfpence than would make thirty pence by tale; all the said farthings and halfpence to be of equal weight in themselves, or as near thereunto as might be, allowing a remedy not exceeding two farthings over or under in each pound. the same "to pass and to be received as current money, by such as shall or will, voluntarily and willingly, and not otherwise, receive the same, within the said kingdom of ireland, and not elsewhere." wood also covenanted to pay to the king's clerk or comptroller of the coinage, £ yearly, and £ per annum into his majesty's treasury. most of the accounts of this transaction and its consequent agitation in ireland, particularly those given by sir w. scott and earl stanhope, are taken from coxe's "life of walpole." monck mason, however, in his various notes appended to his life of swift, has once and for all placed coxe's narrative in its true light, and exposed the specious special pleading on behalf of his hero, walpole. but even coxe cannot hide the fact that the granting of the patent and the circumstances under which it was granted, amounted to a disgraceful job, by which an opportunity was seized to benefit a "noble person" in england at the expense of ireland. the patent was really granted to the king's mistress, the duchess of kendal, who sold it to william wood for the sum of £ , , and (as it was reported with, probably, much truth) for a share in the profits of the coining. the job was alluded to by swift when he wrote: "when late a feminine magician, join'd with a brazen politician, expos'd, to blind a nation's eyes, a parchment of prodigious size." coxe endeavors to exonerate walpole from the disgrace attached to this business, by expatiating on carteret's opposition to walpole, an opposition which went so far as to attempt to injure the financial minister's reputation by fomenting jealousies and using the wood patent agitation to arouse against him the popular indignation; but this does not explain away the fact itself. he lays some blame for the agitation on wood's indiscretion in flaunting his rights and publicly boasting of what the great minister would do for him. at the same time he takes care to censure the government for its misconduct in not consulting with the lord lieutenant and his privy council before granting the patent. his censure, however, is founded on the consideration that this want of attention was injudicious and was the cause of the spread of exaggerated rumours of the patent's evil tendency. he has nothing to say of the rights and liberties of a people which had thereby been infringed and ignored. the english parliament had rarely shown much consideration for irish feelings or irish rights. its attitude towards the irish houses of legislation had been high-handed and even dictatorial; so that constitutional struggles were not at all infrequent towards the end of the seventeenth and during the first quarter of the eighteenth century. the efforts of sir constantine phipps towards a non-parliamentary government,[ ] and the reversal by the english house of lords of the decision given by the irish house of lords in the famous annesley case, had prepared the irish people for a revolt against any further attempts to dictate to its properly elected representatives assembled in parliament. moreover, the wretched material condition of the people, as it largely had been brought about by a selfish, persecuting legislation that practically isolated ireland commercially in prohibiting the exportation of its industrial products, was a danger and a menace to the governing country. the two nations were facing each other threateningly. when, therefore, wood began to import his coin, suspicion was immediately aroused. [footnote : see lecky's "history of ireland," vol. i., p. , etc.] the masses took little notice of it at first; but the commissioners of revenue in dublin took action in a letter they addressed to the right hon. edward hopkins, secretary to the lord lieutenant. this letter, dated august th, , began by expressing surprise at the patent granted to mr. wood, and asked the secretary "to lay before the lord lieutenant a memorial, presented by their agent to the lords of the treasury, concerning this patent, and also a report of some former commissioners of the revenue on the like occasion, and to acquaint his grace, that they concurred in all the objections in those papers, and were of opinion, that such a patent would be highly prejudicial to the trade, and welfare of this kingdom, and more particularly to his majesty's revenue, which they had formerly found to have suffered very much, by too great a quantity of such base coin."[ ] no reply was received to this letter. [footnote : "a defence of the conduct of the people of ireland," etc., p. .] fears began to be generally felt, and the early murmurs of an agitation to be heard when, on september th, , the commissioners addressed a second letter, this time to the lords commissioners of his majesty's treasury. the letter assured their lordships "that they had been applied to by many persons of rank and fortune, and by the merchants and traders in ireland, to represent the ill effects of mr. wood's patent, and that they could from former experience assure their lordships, it would be particularly detrimental to his majesty's revenue. they represented that this matter had made a great noise here, and that there did not appear the _least want of such small species of coin for change_, and hoped that the importance of the occasion would excuse their making this representation of a matter that had not been referred to them."[ ] [footnote : _ibid_, pp. - .] to this letter also no reply was vouchsafed. in the meantime, wood kept sending in his coins, landing them at most of the ports of the kingdom. "then everyone that was not interested in the success of this coinage," writes the author of the pamphlet already quoted, "by having contracted for a great quantity of his halfpence at a large discount, or biassed by the hopes of immoderate gain to be made out of the ruins of their country, expressed their apprehensions of the pernicious consequences of this copper money; and resolved to make use of the _right they had by law to refuse the same_".[ ] [footnote : _ibid_, p. .] the lord lieutenant, the duke of grafton, had arrived in august, , and parliament sat early in september. its first attention was paid to the wood patent. after the early excitement had subsided, they resolved to appeal to the king. during the early stages of the discussion, however, the commons addressed the lord lieutenant, asking that a copy of the patent and other papers relating to it, be laid before them. this was on september th. on the following day mr. hopkins informed the house that the lord lieutenant had no such copy, nor any papers. the house then unanimously resolved to inquire into the matter on its own account, and issued orders for several persons to appear before it to give evidence, fixing the day for examination for september th. on that day, however, mr. hopkins appeared before the members with a copy of the patent, and informed them that the lord lieutenant had received it since his last communication with them. this incident served but to arouse further ridicule. a broadside, published at the time with the title "a creed of an irish commoner," amusingly reveals the lameness of the excuse for this non-production of the exemplification. coxe says that the cause for the delay was due to the fact that the copy of the patent had been delivered to the lord lieutenant's servant, instead of to his private secretary; but this excuse is probably no more happily founded than the one offered. on friday, september th, the house resolved itself into a committee "to take into consideration the state of the nation, particularly in relation to the importing and uttering of copper halfpence and farthings in this kingdom." after three days' debate, and after examining competent witnesses under oath, it passed resolutions to the following effect ( ) that wood's patent is highly prejudicial to his majesty's revenue, and is destructive of trade and commerce, and most dangerous to the rights and properties of the subject. ( ) that for the purpose of obtaining the patent wood had notoriously misrepresented the state of the nation. ( ) that great quantities of the coin had been imported of different impressions and of much less weight than the patent called for. ( ) that the loss to the nation by the uttering of this coin would amount to per cent. ( ) that in coining the halfpence wood was guilty of a notorious fraud. ( ) "that it is the opinion of this committee, that it hath been always highly prejudicial to this kingdom to grant the power or privilege of coining money to private persons; and that it will, at all times, be of dangerous consequence to grant any such power to any body politic, or corporate, or any private person or persons whatsoever."[ ] [footnote : "comm. journals," vol. iii., pp. - .] addresses to his majesty in conformity with these resolutions were voted on september th. the house of lords passed similar resolutions on september th, and voted addresses embodying them on september th.[ ] [footnote : "lords' journals," vol. ii., pp. - .] these addresses received a better attention than did the letters from the revenue commissioners. the houses were courteously informed that their communications would receive his majesty's careful consideration. walpole kept his promise, but not before he had fought hard to maintain the english prerogative, as he might have called it. the "secret" history as narrated in coxe's lively manner, throws some light on the situation. coxe really finds his hero's conduct not marked with "his usual caution." the lord lieutenant was permitted to go to ireland without proper instructions; the information on which walpole acted was not reliable; and he did not sufficiently appreciate the influence of chancellor midleton and his family. "he bitterly accused lord midleton of treachery and low cunning, of having made, in his speeches, distinction between the king and his ministers, of caballing with carteret, cadogan, and roxburgh, and of pursuing that line of conduct, because he was of opinion the opposite party would gain the ascendency in the cabinet. he did not believe the disturbances to be so serious as they were represented, nor was he satisfied with the duke of grafton's conduct, as being solely directed by conolly, but declared that the part acted by conolly, almost excused what the brodricks had done." carteret complained to the king and proved to him that walpole's policy was a dangerous one. the king became irritated and walpole "ashamed." he even became "uneasy," and it is to be supposed, took a more "cautious" course; for he managed to conciliate the brodricks and the powers in dublin. but the devil was not ill long. the cabinet crisis resulted in the triumph of townshend and walpole, and the devil got well again. carteret must be removed and the patent promoted. but midleton and the brodricks must be kept friendly. so carteret went to ireland as lord lieutenant, midleton remained chancellor, and constituted a lord justice, and st. john brodrick was nominated a member of the privy council. still farther on his "cautious" way, ireland must be given some consideration; hence the committee of the privy council, specially called to inquire into the grievances complained of by the irish houses of parliament in their loyal addresses. the committee sat for several weeks, and the report it issued forms the subject of swift's animadversions in the drapier's third letter. but the time spent by the committee in london was being utilized in quite a different fashion by swift in ireland. "cautious" as was walpole, he had not reckoned with the champion of his political opponents of queen anne's days. swift had little humour for court intrigues and cabinet cabals. he came out into the open to fight the good fight of the people to whom courts and cabinets should be servants and not self-seeking masters. whatever doubts the people of ireland may have had about the legal validity of their resentment towards wood and his coins, were quickly dissipated when they read "a letter to the shop keepers, tradesmen, farmers, and common people of ireland, concerning the brass half-pence coined by mr. wood," and signed, "m.b. drapier." the letter, as lord orrery remarked, acted like the sound of a trumpet. at that sound "a spirit arose among the people, that in the eastern phrase, was _like unto a trumpet in the day of the whirlwind_. every person of every rank, party, and denomination was convinced, that the admission of wood's copper must prove fatal to the commonwealth. the papist, the fanatic, the tory, the whig, all listed themselves volunteers under the banners of m.b. drapier, and were all equally zealous to serve the common cause." the present text of the first of the drapier's letters is based on that given by sir w. scott, carefully collated with two copies of the first edition which differed from each other in many particulars. one belonged to the late colonel f. grant, and the other is in the british museum. it has also been read with the collection of the drapier's letters issued by the drapier club in , with the title, "fraud detected"; with the london edition of "the hibernian patriot" ( ), and with faulkner's text issued in his collected edition of swift's works in . [t.s.] [illustration: a *letter* to the _shop-keepers_, _tradesmen_, _farmers_ and _common-people_ of *ireland*, concerning the *brass half-pence* coined by **mr. woods,** with a _design_ to have them _pass_ in this *kingdom*. wherein is shewn the power of the said patent, the value of the half-pence, and how far every person may be oblig'd to take the same in payments, and how to behave in case such an attempt shou'd be made by woods or any other person. [very proper to be kept in every family.] by m.b. _drapier_. dublin: printed by _j. harding_ in _molesworth's-court_. ] letter i. to the tradesmen, shop-keepers, farmers, and common-people in general of ireland. brethren, friends, countrymen and fellow-subjects, what i intend now to say to you, is, next to your duty to god, and the care of your salvation, of the greatest concern to yourselves, and your children, your bread and clothing, and every common necessary of life entirely depend upon it. therefore i do most earnestly exhort you as men, as christians, as parents, and as lovers of your country, to read this paper with the utmost attention, or get it read to you by others; which that you may do at the less expense, i have ordered the printer to sell it at the lowest rate. it is a great fault among you, that when a person writes with no other intention than to do you good, you will not be at the pains to read his advices: one copy of this paper may serve a dozen of you, which will be less than a farthing a-piece. it is your folly that you have no common or general interest in your view, not even the wisest among you, neither do you know or enquire, or care who are your friends, or who are your enemies. about three[ ] years ago, a little book was written, to advise all people to wear the manufactures of this our own dear country:[ ] it had no other design, said nothing against the king or parliament, or any man, yet the poor printer was prosecuted two years, with the utmost violence, and even some weavers themselves, for whose sake it was written, being upon the jury, found him guilty. this would be enough to discourage any man from endeavouring to do you good, when you will either neglect him or fly in his face for his pains, and when he must expect only danger to himself and loss of money, perhaps to his ruin.[ ] [footnote : in his reprint of the drapier's letters, issued in with the title, "fraud detected; or the hibernian patriot," faulkner prints "four" instead of "three"; but this, of course, is a correction made to agree with the date of the publication of this reprint. the "proposal" was published in . [t.s.]] [footnote : the "little book" was "a proposal for the universal use of irish manufactures." see vol. vii. [t.s.]] [footnote : instead of the words "loss of money," faulkner in the reprint of has "to be fined and imprisoned." [t.s.]] however i cannot but warn you once more of the manifest destruction before your eyes, if you do not behave yourselves as you ought. i will therefore first tell you the plain story of the fact; and then i will lay before you how you ought to act in common prudence, and according to the laws of your country. the fact is thus: it having been many years since copper halfpence or farthings were last coined in this kingdom, they have been for some time very scarce,[ ] and many counterfeits passed about under the name of _raps_, several applications were made to england, that we might have liberty to coin new ones, as in former times we did; but they did not succeed. at last one mr. wood,[ ] a mean ordinary man, a hardware dealer, procured a patent[ ]under his majesty's broad seal to coin fourscore and ten thousand pounds[ ] in copper for this kingdom, which patent however did not oblige any one here to take them, unless they pleased. now you must know, that the halfpence and farthings in england pass for very little more than they are worth. and if you should beat them to pieces, and sell them to the brazier you would not lose above a penny in a shilling. but mr. wood made his halfpence of such base metal, and so much smaller than the english ones, that the brazier would not give you above a penny of good money for a shilling of his; so that this sum of fourscore and ten thousand pounds in good gold and silver, must be given for trash that will not be worth above eight or nine thousand pounds real value. but this is not the worst, for mr. wood when he pleases may by stealth send over another and another fourscore and ten thousand pounds, and buy all our goods for eleven parts in twelve, under the value. for example, if a hatter sells a dozen of hats for five shillings a-piece, which amounts to three pounds, and receives the payment in mr. wood's coin, he really receives only the value of five shillings. [footnote : they had become scarce because they had been undervalued, and therefore sent out of the country in payment of goods bought. see prior's "observations on coin," issued in , where it is stated that this scarcity had occurred only within the last twenty years. [t.s.]] [footnote : william wood ( - ) was an ironmaster of wolverhampton. in addition to the patent for coining copper halfpence which he obtained for ireland, and to which full reference is made in the introductory note to this first drapier's letter, wood also obtained a patent, in , for coining halfpence, pence and twopence for the english colonies in america. this latter patent fared no better than the irish one. the coins introduced in america bear the dates and , and are now much sought after by collectors. they are known as the rosa american coinage. a list of the poems and pamphlets on wood, during the excitement in dublin, attending on the drapier's letters, will be found in the bibliography of swift's works to be given in vol. xi. of this edition. see also monck mason's "history of st. patrick's cathedral." in the original edition of the letter, wood's name is mis-spelt woods. [t. s.]] [footnote : see the introductory note for the manner in which this patent was obtained. [t.s.]] [footnote : this is how the amount is named in the first edition; but the amount in reality was £ , (the value of tons of copper, as stated by the patent). sir w. scott prints this as £ , . coxe, in his "memoirs of sir robert walpole" gives the amount as £ , . lecky states it as £ , . [t.s.]] perhaps you will wonder how such an ordinary fellow as this mr. wood could have so much interest as to get his majesty's broad seal for so great a sum of bad money, to be sent to this poor country, and that all the nobility and gentry here could not obtain the same favour, and let us make our own halfpence, as we used to do. now i will make that matter very plain. we are at a great distance from the king's court, and have nobody there to solicit for us, although a great number of lords and squires, whose estates are here, and are our countrymen, spending all their lives and fortunes there. but this same mr. wood was able to attend constantly for his own interest; he is an englishman and had great friends, and it seems knew very well where to give money, to those that would speak to others that could speak to the king and could tell a fair story. and his majesty, and perhaps the great lord or lords who advised him, might think it was for our country's good; and so, as the lawyers express it, "the king was deceived in his grant," which often happens in all reigns. and i am sure if his majesty knew that such a patent, if it should take effect according to the desire of mr. wood, would utterly ruin this kingdom, which hath given such great proofs of its loyalty, he would immediately recall it, and perhaps shew his displeasure to somebody or other. but "a word to the wise is enough." most of you must have heard, with what anger our honourable house of commons received an account of this wood's patent.[ ] there were several fine speeches made upon it, and plain proofs that it was all a wicked cheat from the bottom to the top, and several smart votes were printed, which that same wood had the assurance to answer likewise in print, and in so confident a way, as if he were a better man than our whole parliament put together.[ ] [footnote : the irish house of commons reported that the loss to the country, even if the patent were carried out as required, would amount to about per cent.; and both irish houses of parliament voted addresses against the coinage, and accused the patentee of fraud and deceit. they asserted that the terms of the patent had not been fulfilled and "that the circulation of the halfpence would be highly prejudicial to the revenue, destructive of the commerce, and of most dangerous consequences to the rights and properties of the subjects." see introductory note. [t.s.]] [footnote : wood's indiscreet retort was published in the "flying post" october th, . later he boasted that he would, with walpole's assistance, "pour the coin down the throats of the people." [t.s.]] this wood, as soon as his patent was passed, or soon after, sends over a great many barrels of these halfpence, to cork and other sea-port towns,[ ] and to get them off offered an hundred pounds in his coin for seventy or eighty in silver. but the collectors of the king's customs very honestly refused to take them, and so did almost everybody else. and since the parliament hath condemned them, and desired the king that they might be stopped, all the kingdom do abominate them. [footnote : at dublin, cork, waterford and other ports, the merchants refused to accept the copper coins. monck mason notes that "in the 'dublin gazette,' no. , we meet with resolutions by the merchants of cork, dated the th of aug., , and like resolutions by those of waterford, dated d aug. wherein they declare, that, 'they will never receive or utter in any payment, the halfpence or farthings coined by william wood; as they conceive the importing and uttering the same, to be highly prejudicial to his majesty's revenue, and to the trade of the kingdom': these resolutions are declared to be conformable to those of the trinity guild, of merchants, of the city of dublin, voted at their guild-hall, on the th day of the same month" (hist. st. patrick's, p. , note r). see also appendix no. ix. [t.s.]] but wood is still working underhand to force his halfpence upon us, and if he can by help of his friends in england prevail so far as to get an order that the commissioners and collectors of the king's money shall receive them, and that the army is to be paid with them, then he thinks his work shall be done. and this is the difficulty you will be under in such a case. for the common soldier when he goes to the market or alehouse will offer this money, and if it be refused, perhaps he will swagger and hector, and threaten to beat the butcher or alewife, or take the goods by force, and throw them the bad halfpence. in this and the like cases, the shopkeeper or victualler, or any other tradesman has no more to do, than to demand ten times the price of his goods, if it is to be paid in wood's money; for example, twenty-pence of that money for a quart of ale, and so in all things else, and not part with his goods till he gets the money. for suppose you go to an alehouse with that base money, and the landlord gives you a quart for four of these halfpence, what must the victualler do? his brewer will not be paid in that coin, or if the brewer should be such a fool, the farmers will not take it from them for their bere,[ ] because they are bound by their leases to pay their rents in good and lawful money of england, which this is not, nor of ireland neither, and the 'squire their landlord will never be so bewitched to take such trash for his land, so that it must certainly stop somewhere or other, and wherever it stops it is the same thing, and we are all undone. [footnote : bere = barley. cf. a.s. _baerlic_, icelandic, _barr_, meaning barley, the grain used for making malt for the preparation of beer. [t.s.]] the common weight of these halfpence is between four and five to an ounce, suppose five, then three shillings and fourpence will weigh a pound, and consequently twenty shillings will weigh six pound butter weight. now there are many hundred farmers who pay two hundred pound a year rent. therefore when one of these farmers comes with his half-year's rent, which is one hundred pound, it will be at least six hundred pound weight, which is three horse load. if a 'squire has a mind to come to town to buy clothes and wine and spices for himself and family, or perhaps to pass the winter here; he must bring with him five or six horses loaden with sacks as the farmers bring their corn; and when his lady comes in her coach to our shops, it must be followed by a car loaden with mr. wood's money. and i hope we shall have the grace to take it for no more than it is worth. they say 'squire conolly[ ] has sixteen thousand pounds a year, now if he sends for his rent to town, as it is likely he does, he must have two hundred and forty horses to bring up his half-year's rent, and two or three great cellars in his house for stowage. but what the bankers will do i cannot tell. for i am assured, that some great bankers keep by them forty thousand pounds in ready cash to answer all payments, which sum, in mr. wood's money, would require twelve hundred horses to carry it. [footnote : william conolly (d. ) was chosen speaker of the irish house of commons on november th, . he held this office until october th, . swift elsewhere says that wharton sold conolly the office of chief commissioner of the irish revenue for £ , . between the years and conolly was ten times selected for the office of a lord justice of ireland. the remark in the text as to conolly's income is repeated by boulter ("letters," vol. i., p. ), though the primate writes of £ , a year. the reference to conolly is of set purpose, because conolly had advocated the patent as against midleton's condemnation of it. [t.s.]] for my own part, i am already resolved what to do; i have a pretty good shop of irish stuffs and silks, and instead of taking mr. wood's bad copper, i intend to truck with my neighbours the butchers, and bakers, and brewers, and the rest, goods for goods, and the little gold and silver i have, i will keep by me like my heart's blood till better times, or till i am just ready to starve, and then i will buy mr. wood's money as my father did the brass money in k. james's time,[ ] who could buy ten pound of it with a guinea, and i hope to get as much for a pistole, and so purchase bread from those who will be such fools as to sell it me. [footnote : james ii., during his unsuccessful campaign in ireland, debased the coinage in order to make his funds meet the demands of his soldiery. archbishop king, in his work on the "state of the protestants in ireland," describes the evil effects which this proceeding had: "king james's council used not to stick at the formalities of law or reason, and therefore vast quantities of brass money were coined, and made current by a proclamation, dated th june, , under severe penalties. the metal of which this money was made was the worst kind of brass; old guns, and the refuse of metals were melted down to make it; workmen rated it at threepence or a groat a pound, which being coined into sixpences, shillings, or half-crowns, one pound weight made about £ . and by another proclamation, dated , the half-crowns were called in, and being stamped anew, were made to pass for crowns; so that then, three pence or four pence worth of metal made £ . there was coined in all, from the first setting up of the mint, to the rout at the boyne, being about twelve months, £ , . in this coin king james paid all his appointments, and all that received the king's pay being generally papists, they forced the protestants to part with the goods out of their shops for this money, and to receive their debts in it; so that the loss by the brass money did, in a manner, entirely fall on the protestants, being defrauded (for i can call it no better) of about, £ , per month by this stratagem, which must, in a few months, have utterly exhausted them. when the papists had gotten most of their saleable goods from their protestant neighbours, and yet great quantities of brass money remained in their hands, they began to consider how many of them, who had estates, had engaged them to protestants by judgments, statutes staple, and mortgages; and to take this likewise from them they procured a proclamation, dated feb. , to make brass money current in all payments whatsoever." a proclamation of william iii., dated july th, , ordered that these crown pieces of james should pass as of equal value with one penny each. [t.s.]] these halfpence, if they once pass, will soon be counterfeit, because it may be cheaply done, the stuff is so base. the dutch likewise will probably do the same thing, and send them over to us to pay for our goods.[ ] and mr. wood will never be at rest but coin on: so that in some years we shall have at least five times fourscore and ten thousand pounds of this lumber. now the current money of this kingdom is not reckoned to be above four hundred thousand pounds in all, and while there is a silver sixpence left these blood-suckers will never be quiet. [footnote : the dutch had previously counterfeited the debased coinage of ireland and sent them over in payment for irish manufactures. [t. s.]] when once the kingdom is reduced to such a condition, i will tell you what must be the end: the gentlemen of estates will all turn off their tenants for want of payment, because as i told you before, the tenants are obliged by their leases to pay sterling which is lawful current money of england; then they will turn their own farmers, as too many of them do already, run all into sheep where they can, keeping only such other cattle as are necessary, then they will be their own merchants and send their wool and butter and hides and linen beyond sea for ready money and wine and spices and silks. they will keep only a few miserable cottiers.[ ] the farmers must rob or beg, or leave their country. the shopkeepers in this and every other town, must break and starve: for it is the landed man that maintains the merchant, and shopkeeper, and handicraftsman. [footnote : "unlike the peasant proprietor," says lecky, "and also unlike the mediaeval serf, the cottier had no permanent interest in the soil, and no security for his future position. unlike the english farmer, he was no capitalist, who selects land as one of the many forms of profitable investment that are open to him. he was a man destitute of all knowledge and of all capital, who found the land the only thing that remained between himself and starvation. rents in the lower grades of tenancies were regulated by competition, but it was competition between a half-starving population, who had no other resources except the soil, and were therefore prepared to promise anything rather than be deprived of it. the landlord did nothing for them. they built their own mud hovels, planted their hedges, dug their ditches. they were half naked, half starved, utterly destitute of all providence and of all education, liable at any time to be turned adrift from their holdings, ground to the dust by three great burdens--rack-rents, paid not to the landlord but to the middleman; tithes, paid to the clergy--often the absentee clergy--of the church to which they did not belong; and dues, paid to their own priests" ("hist, of ireland," vol. i., pp. - , ed. ). [t.s.]] but when the 'squire turns farmer and merchant himself, all the good money he gets from abroad, he will hoard up or send for england, and keep some poor tailor or weaver and the like in his own house, who will be glad to get bread at any rate. i should never have done if i were to tell you all the miseries that we shall undergo if we be so foolish and wicked as to take this cursed coin. it would be very hard if all ireland should be put into one scale, and this sorry fellow wood into the other, that mr. wood should weigh down this whole kingdom, by which england gets above a million of good money every year clear into their pockets, and that is more than the english do by all the world besides. but your great comfort is, that as his majesty's patent does not oblige you to take this money, so the laws have not given the crown a power of forcing the subjects to take what money the king pleases: for then by the same reason we might be bound to take pebble-stones or cockle-shells or stamped leather for current coin, if ever we should happen to live under an ill prince, who might likewise by the same power make a guinea pass for ten pounds, a shilling for twenty shillings, and so on, by which he would in a short time get all the silver and gold of the kingdom into his own hands, and leave us nothing but brass or leather or what he pleased. neither is anything reckoned more cruel or oppressive in the french government than their common practice of calling in all their money after they have sunk it very low, and then coining it anew at a much higher value, which however is not the thousandth part so wicked as this abominable project of mr. wood. for the french give their subjects silver for silver and gold for gold, but this fellow will not so much as give us good brass or copper for our gold and silver, nor even a twelfth part of their worth. having said thus much, i will now go on to tell you the judgments of some great lawyers in this matter, whom i fee'd on purpose for your sakes, and got their opinions under their hands, that i might be sure i went upon good grounds. a famous law-book, called "the mirror of justice,"[ ] discoursing of the articles (or laws) ordained by our ancient kings declares the law to be as follows: "it was ordained that no king of this realm should change, impair or amend the money or make any other money than of gold or silver without the assent of all the counties," that is, as my lord coke says,[ ] without the assent of parliament. [footnote : this was an important legal treatise often quoted by coke. its full title is: "the booke called, the mirrour of justices: made by andrew home. with the book, called, the diversity of courts, and their jurisdictions ... london ... ." the french edition was printed in with the title, "la somme appelle mirroir des justices: vel speculum justiciariorum, factum per andream home." coke quotes it from a manuscript, as he died before it was printed. [t.s.]] [footnote : inst. . [orig. ed.]] this book is very ancient, and of great authority for the time in which it was wrote, and with that character is often quoted by that great lawyer my lord coke.[ ] by the law of england, the several metals are divided into lawful or true metal and unlawful or false metal, the former comprehends silver or gold; the latter all baser metals: that the former is only to pass in payments appears by an act of parliament[ ] made the twentieth year of edward the first, called the "statute concerning the passing of pence," which i give you here as i got it translated into english, for some of our laws at that time, were, as i am told writ in latin: "whoever in buying or selling presumeth to refuse an halfpenny or farthing of lawful money, bearing the stamp which it ought to have, let him be seized on as a contemner of the king's majesty, and cast into prison." [footnote : inst. - . [orig. ed.]] [footnote : inst. . [orig. ed.]] by this statute, no person is to be reckoned a contemner of the king's majesty, and for that crime to be committed to prison; but he who refuses to accept the king's coin made of lawful metal, by which, as i observed before, silver and gold only are intended. that this is the true construction of the act, appears not only from the plain meaning of the words, but from my lord coke's observation upon it. "by this act" (says he) "it appears, that no subject can be forced to take in buying or selling or other payments, any money made but of lawful metal; that is, of silver or gold."[ ] [footnote : inst. . [orig. ed.]] the law of england gives the king all mines of gold and silver, but not the mines of other metals, the reason of which prerogative or power, as it is given by my lord coke[ ] is, because money can be made of gold and silver, but not of other metals. [footnote : inst. . [orig. ed.]] pursuant to this opinion halfpence and farthings were anciently made of silver, which is most evident from the act of parliament of henry the th. chap. .[ ] by which it is enacted as follows: "item, for the great scarcity that is at present within the realm of england of halfpence and farthings of silver, it is ordained and established that the third part of all the money of silver plate which shall be brought to the bullion, shall be made in halfpence and farthings." this shews that by the word "halfpenny" and "farthing" of lawful money in that statute concerning the passing of pence, are meant a small coin in halfpence and farthings of silver. [footnote : swift makes an incorrect reference here. the act was henry iv., cap. . [t.s.]] this is further manifest from the statute of the ninth year of edward the d. chap. . which enacts, "that no sterling halfpenny or farthing be molten for to make vessel, nor any other thing by the goldsmiths, nor others, upon forfeiture of the money so molten" (or melted). by another act in this king's reign[ ] black money was not to be current in england, and by an act made in the eleventh year of his reign chap. . galley halfpence were not to pass, what kind of coin these were i do not know, but i presume they were made of base metal, and that these acts were no new laws, but farther declarations of the old laws relating to the coin. [footnote : the act against black money was passed in henry iv.'s reign not edward iii.'s. the "galley halfpence" were dealt with by hen. iv., cap. . [t.s.]] thus the law stands in relation to coin, nor is there any example to the contrary, except one in davis's reports,[ ] who tells us that in the time of tyrone's rebellion queen elizabeth ordered money of mixed metal to be coined in the tower of london, and sent over hither for payment of the army, obliging all people to receive it and commanding that all silver money should be taken only as bullion, that is, for as much as it weighed. davis tells us several particulars in this matter too long here to trouble you with, and that the privy-council of this kingdom obliged a merchant in england to receive this mixed money for goods transmitted hither.[ ] [footnote : this refers to sir john davies's "abridgement of sir edward coke's reports," first published in . davies was attorney-general for ireland and a poet. his works have been collected and edited by dr. a.b. grosart in the fuller worthies library. [t.s.]] [footnote : charles i., during the civil war, paid his forces with debased coin struck by him. [t.s.]] but this proceeding is rejected by all the best lawyers as contrary to law, the privy-council here having no such power. and besides it is to be considered, that the queen was then under great difficulties by a rebellion in this kingdom assisted from spain, and whatever is done in great exigences and dangerous times should never be an example to proceed by in seasons of peace and quietness. i will now, my dear friends to save you the trouble, set before you in short, what the law obliges you to do, and what it does not oblige you to. first, you are obliged to take all money in payments which is coined by the king and is of the english standard or weight, provided it be of gold or silver. secondly, you are not obliged to take any money which is not of gold or silver, no not the halfpence, or farthings of england, or of any other country, and it is only for convenience, or ease, that you are content to take them, because the custom of coining silver halfpence and farthings hath long been left off, i will suppose on account of their being subject to be lost. thirdly, much less are you obliged to take those vile halfpence of that same wood, by which you must lose almost eleven-pence in every shilling. therefore my friends, stand to it one and all, refuse this filthy trash. it is no treason to rebel against mr. wood. his majesty in his patent obliges nobody to take these halfpence,[ ] our gracious prince hath no so ill advisers about him; or if he had, yet you see the laws have not left it in the king's power, to force us to take any coin but what is lawful, of right standard gold and silver, therefore you have nothing to fear. [footnote : the words of the patent are "to pass and to be received as current money; by such as shall or will, voluntarily and wittingly, and not otherwise, receive the same" (the halfpence and farthings). [t.s.]] and let me in the next place apply myself particularly to you who are the poor sort of tradesmen, perhaps you may think you will not be so great losers as the rich, if these halfpence should pass, because you seldom see any silver, and your customers come to your shops or stalls with nothing but brass, which you likewise find hard to be got, but you may take my word, whenever this money gains footing among you, you will be utterly undone; if you carry these halfpence to a shop for tobacco or brandy, or any other thing you want, the shopkeeper will advance his goods accordingly, or else he must break, and leave the key under the door. do you think i will sell you a yard of tenpenny stuff for twenty of mr. wood's halfpence? no, not under two hundred at least, neither will i be at the trouble of counting, but weigh them in a lump; i will tell you one thing further, that if mr. wood's project should take, it will ruin even our beggars; for when i give a beggar an halfpenny, it will quench his thirst, or go a good way to fill his belly, but the twelfth part of a halfpenny will do him no more service than if i should give him three pins out of my sleeve. in short these halfpence are like "the accursed thing, which" as the scripture tells us, "the children of israel were forbidden to touch," they will run about like the plague and destroy every one who lays his hands upon them. i have heard scholars talk of a man who told a king that he had invented a way to torment people by putting them into a bull of brass with fire under it, but the prince put the projector first into his own brazen bull to make the experiment;[ ] this very much resembles the project of mr. wood, and the like of this may possibly be mr. wood's fate, that the brass he contrived to torment this kingdom with, may prove his own torment, and his destruction at last. [footnote : it is curious to find swift so referring to phalaris, of whom he had heard so much in the days of the "battle of the books." [sir h. craik.]] n.b. the author of this paper is informed by persons who have made it their business to be exact in their observations on the true value of these halfpence, that any person may expect to get a quart of twopenny ale for thirty-six of them. i desire all persons may keep this paper carefully by them to refresh their memories whenever they shall have farther notice of mr. wood's halfpence, or any other the like imposture. letter ii. to mr. harding the printer. note. towards the beginning of the august of , the committee of inquiry had finished their report on wood's patent. somehow, an advance notice of the contents of the report found its way, probably directed by walpole himself, into the pages of a london journal, from whence it was reprinted in dublin, in harding's newspaper on the st of august. the notice stated that the committee had recommended a reduction in the amount of coin wood was to issue to £ , . it informed the public that the report notified that wood was willing to take goods in exchange for his coins, if enough silver were not to be had, and he agreed to restrict the amount of each payment to - / _d_. but a pretty broad hint was given that a refusal to accept the compromise offered might possibly provoke the higher powers to an assertion of the prerogative. walpole also had already endeavoured to calm the situation by consenting to a minute examination of the coins themselves at the london mint. the lords commissioners had instructed sir isaac newton, the master of the mint, edward southwell, and thomas scroope, to make an assay of wood's money. the report of the assayists was issued on april th, ;[ ] and certified that the coins submitted had been tested and found to be correct both as to weight and quality. in addition to this evidence of good faith, walpole had nominated carteret in place of the duke of grafton to the lord-lieutenancy. carteret was a favourite with the best men in ireland, and a man of culture as well as ability. it was hoped that his influence would smooth down the members of the opposition by an acceptance of the altered measure. he was in the way in london, and he might be of great service in dublin; so to dublin he went. [footnote : a full reprint of this report is given in appendix ii.] but walpole had not reckoned with the drapier. in the paragraph in harding's sheet, swift saw a diplomatist's move to win the game by diplomatic methods. compromise was the one result swift was determined to render impossible; and the drapier's second letter, "to mr. harding the printer," renews the conflict with yet stronger passion and with even more satirical force. it is evident swift was bent now on raising a deeper question than merely this of the acceptance or refusal of wood's halfpence and farthings. there was a principle here that had to be insisted and a right to be safeguarded. mr. churton collins ably expresses swift's attitude at this juncture when he says:[ ] "nothing can be more certain than that it was swift's design from the very beginning to make the controversy with wood the basis of far more extensive operations. it had furnished him with the means of waking ireland from long lethargy into fiery life. he looked to it to furnish him with the means of elevating her from servitude to independence, from ignominy to honour. his only fear was lest the spirit which he had kindled should burn itself out or be prematurely quenched. and of this he must have felt that there was some danger, when it was announced that england had given way much more than it was expected she would give way, and much more than she had ever given way before." [footnote : "jonathan swift," pp. - .] this letter to harding was but the preliminary leading up to the famous fourth letter "to the whole people of ireland." it was also an introduction to, and preparation of the public mind for, the drastic criticism of the privy council's report, the arrival of which was expected shortly. the present text of this second letter is that given by sir w. scott, collated with the copies of the original edition in the possession of the late colonel f. grant and in the british museum. it has also been compared with faulkner's issue of , in "fraud detected." [t.s.] [illustration: a *letter* to mr. _harding_ the printer, upon occasion of a **paragraph** *in his* **news-paper** of _aug_. st. relating to mr. _wood's_ half-pence. _by_ m.b. _drapier_. author of the letter to the shop-keepers, &c. dublin: printed by _j. harding_ in _molesworth's-court_. ] letter ii. to mr. harding the printer. sir, in your newsletter of the st. instant there is a paragraph dated from london, july th. relating to wood's halfpence; whereby it is plain what i foretold in my "letter to the shopkeepers, &c." that this vile fellow would never be at rest, and that the danger of our ruin approaches nearer, and therefore the kingdom requires new and fresh warning; however i take that paragraph to be, in a great measure, an imposition upon the public, at least i hope so, because i am informed that wood is generally his own newswriter. i cannot but observe from that paragraph that this public enemy of ours, not satisfied to ruin us with his trash, takes every occasion to treat this kingdom with the utmost contempt. he represents "several of our merchants and traders upon examination before a committee of council, agreeing that there was the utmost necessity of copper money here, before his patent, so that several gentlemen have been forced to tally with their workmen and give them bits of cards sealed and subscribed with their names." what then? if a physician prescribes to a patient a dram of physic, shall a rascal apothecary cram him with a pound, and mix it up with poison? and is not a landlord's hand and seal to his own labourers a better security for five or ten shillings, than wood's brass seven times below the real value, can be to the kingdom, for an hundred and four thousand pounds?[ ] [footnote : thus in original edition. £ , is the amount generally given. see note on p. . [t.s.]] but who are these merchants and traders of ireland that make this report of "the utmost necessity we are under of copper money"? they are only a few betrayers of their country, confederates with wood, from whom they are to purchase a great quantity of his coin, perhaps at half value, and vend it among us to the ruin of the public, and their own private advantage. are not these excellent witnesses, upon whose integrity the fate of a kingdom must depend, who are evidences in their own cause, and sharers in this work of iniquity? if we could have deserved the liberty of coining for ourselves, as we formerly did, and why we have not _is everybody's wonder as well as mine_,[ ] ten thousand pounds might have been coined here in dublin of only one-fifth below the intrinsic value, and this sum, with the stock of halfpence we then had, would have been sufficient:[ ] but wood by his emissaries, enemies to god and this kingdom, hath taken care to buy up as many of our old halfpence as he could, and from thence the present want of change arises; to remove which, by mr. wood's remedy, would be, to cure a scratch on the finger by cutting off the arm. but supposing there were not one farthing of change in the whole nation, i will maintain, that five and twenty thousand pounds would be a sum fully sufficient to answer all our occasions. i am no inconsiderable shopkeeper in this town, i have discoursed with several of my own and other trades, with many gentlemen both of city and country, and also with great numbers of farmers, cottagers, and labourers, who all agree that two shillings in change for every family would be more than necessary in all dealings. now by the largest computation (even before that grievous discouragement of agriculture, which hath so much lessened our numbers [ ]) the souls in this kingdom are computed to be one million and a half, which, allowing but six to a family, makes two hundred and fifty thousand families, and consequently two shillings to each family will amount only to five and twenty thousand pounds, whereas this honest liberal hardwareman wood would impose upon us above four times that sum. [footnote : time and again ireland had petitioned the king of england for the establishment of a mint in dublin. both houses of parliament addressed king charles i. in , begging for a mint which should coin money in ireland of the same standard and values as those of england, and allowing the profits to the government. wentworth supported the address; but it was refused (carte's "ormond," vol. i., pp. - ). when lord cornwallis's petition for a renewal of his patent for minting coins was presented in , it was referred to a committee of the lords justices. in their report the lords justices condemned the system in vogue, and urged the establishment of a mint, in which the coining of money should be in the hands of the government and in those of a subject. no notice was taken of this advice. see lecky's "ireland," vol. i., p. (ed ) [t.s.]] [footnote : boulter stated that £ , or £ , would have amply fulfilled the demand ("letters," vol. i., pp. , ). [t.s.]] [footnote : it was not alone the direct discouragement of agriculture which lessened the population. this result was also largely brought about by the anti-catholic legislation of queen anne's reign, which "reduced the roman catholics to a state of depression," and caused thousands of them to go elsewhere for the means of living. see crawford's "ireland," vol. ii., pp. - . [t.s.]] your paragraph relates further, that sir isaac newton reported an assay taken at the tower of wood's metal, by which it appears, that wood had in all respects performed his contract[ ]. his contract! with whom? was it with the parliament or people of ireland? are not they to be the purchasers? but they detest, abhor, and reject it, as corrupt, fraudulent, mingled with dirt and trash. upon which he grows angry, goes to law, and will impose his goods upon us by force. [footnote : for the full text of newton's report see appendix, no. ii. [t.s.]] but your newsletter says that an assay was made of the coin. how impudent and insupportable is this? wood takes care to coin a dozen or two halfpence of good metal, sends them to the tower and they are approved, and these must answer all that he hath already coined or shall coin for the future. it is true indeed, that a gentleman often sends to my shop for a pattern of stuff, i cut it fairly off, and if he likes it, he comes or sends and compares the pattern with the whole piece, and probably we come to a bargain. but if i were to buy an hundred sheep, and the grazier should bring me one single wether fat and well fleeced by way of pattern, and expect the same price round for the whole hundred, without suffering me to see them before he was paid, or giving me good security to restore my money for those that were lean or shorn or scabby, i would be none of his customer. i have heard of a man who had a mind to sell his house, and therefore carried a piece of brick in his pocket, which he shewed as a pattern to encourage purchasers: and this is directly the case in point with mr. wood's assay.[ ] [footnote : monck mason remarks on this assay that "the assay-masters do not report that mr. wood's coinage was superior to that of former kings, but only to those specimens of such coinages as were exhibited by mr. wood, which, it is admitted were much worn. whether the money coined in the preceding reign was good or bad is in fact nothing to the purpose." "'what argument,'" quotes monck mason from the tract issued in entitled, "a defence of the conduct of the people of ireland, in their unanimous refusal of mr. wood's copper money," "'can be drawn from the badness of our former coinages but this, that because we have formerly been cheated by our coiners, we ought to suffer mr. wood to cheat us over again? whereas, one reason for our so vigorously opposing mr. wood's coinage, is, because we have always been imposed upon in our copper money, and we find he is treading exactly in the steps of his predecessors, and thinks he has a right to cheat us because he can shew a precedent for it.' in truth, there was a vast number of counterfeits of those coins, which had been imported, chiefly from scotland, as appears from a proclamation prohibiting the importation of them in " ("history st. patrick's cathedral," p, , note d.) [t.s.]] the next part of the paragraph contains mr. wood's voluntary proposals for "preventing any future objections or apprehensions." his first proposal is, that "whereas he hath already coined seventeen thousand pounds, and has copper prepared to make it up forty thousand pounds, he will be content to coin no more, unless the exigences of trade require it, though his patent empowers him to coin a far greater quantity." to which if i were to answer it should be thus: "let mr. wood and his crew of founders and tinkers coin on till there is not an old kettle left in the kingdom: let them coin old leather, tobacco-pipe clay or the dirt in the streets, and call their trumpery by what name they please from a guinea to a farthing, we are not under any concern to know how he and his tribe or accomplices think fit to employ themselves." but i hope and trust, that we are all to a man fully determined to have nothing to do with him or his ware. the king has given him a patent to coin halfpence, but hath not obliged us to take them, and i have already shewn in my "letter to the shopkeepers, &c." that the law hath not left it in the power of the prerogative to compel the subject to take any money, beside gold and silver of the right sterling and standard. wood further proposes, (if i understand him right, for his expressions are dubious) that "he will not coin above forty thousand pounds, unless the exigences of trade require it." first, i observe that this sum of forty thousand pounds is almost double to what i proved to be sufficient for the whole kingdom, although we had not one of our old halfpence left. again i ask, who is to be judge when the exigences of trade require it? without doubt he means himself, for as to us of this poor kingdom, who must be utterly ruined if his project should succeed, we were never once consulted till the matter was over, and he will judge of our exigences by his own; neither will these be ever at an end till he and his accomplices will think they have enough: and it now appears that he will not be content with all our gold and silver, but intends to buy up our goods and manufactures with the same coin. i shall not enter into examination of the prices for which he now proposes to sell his halfpence, or what he calls his copper, by the pound; i have said enough of it in my former letter, and it hath likewise been considered by others. it is certain that by his own first computation, we were to pay three shillings for what was intrinsically worth but one,[ ] although it had been of the true weight and standard for which he pretended to have contracted; but there is so great a difference both in weight and badness in several of his coins that some of them have been nine in ten below the intrinsic value, and most of them six or seven.[ ] [footnote : the report of the committee of the privy council which sat on wood's coinage, stated that copper ready for minting cost eighteen pence per pound before it was brought into the mint at the tower of london. see the report prefixed to letter iii. and appendix ii., in which it is also stated that wood's copper was worth thirteen pence per pound. [t.s.]] [footnote : newton's assay report says that wood's pieces were of unequal weight. [t.s.]] his last proposal being of a peculiar strain and nature, deserves to be very particularly considered, both on account of the matter and the style. it is as follows. "lastly, in consideration of the direful apprehensions which prevail in ireland, that mr. wood will by such coinage drain them of their gold and silver, he proposes to take their manufactures in exchange, and that no person be obliged to receive more than fivepence halfpenny at one payment." first, observe this little impudent hardwareman turning into ridicule "the direful apprehensions of a whole kingdom," priding himself as the cause of them, and daring to prescribe what no king of england ever attempted, how far a whole nation shall be obliged to take his brass coin. and he has reason to insult; for sure there was never an example in history, of a great kingdom kept in awe for above a year in daily dread of utter destruction, not by a powerful invader at the head of twenty thousand men, not by a plague or a famine, not by a tyrannical prince (for we never had one more gracious) or a corrupt administration, but by one single, diminutive, insignificant, mechanic. but to go on. to remove our "direful apprehensions that he will drain us of our gold and silver by his coinage:" this little arbitrary mock-monarch most graciously offers to "take our manufactures in exchange." are our irish understandings indeed so low in his opinion? is not this the very misery we complain of? that his cursed project will put us under the necessity of selling our goods for what is equal to nothing. how would such a proposal sound from france or spain or any other country we deal with, if they should offer to deal with us only upon this condition, that we should take their money at ten times higher than the intrinsic value? does mr. wood think, for instance, that we will sell him a stone of wool for a parcel of his counters not worth sixpence, when we can send it to england and receive as many shillings in gold and silver? surely there was never heard such a compound of impudence, villainy and folly. his proposals conclude with perfect high treason. he promises, that no person shall be _obliged_ to receive more than fivepence halfpenny of his coin in one payment: by which it is plain, that he pretends to _oblige_ every subject in this kingdom to take so much in every payment, if it be offered; whereas his patent obliges no man, nor can the prerogative by law claim such a power, as i have often observed; so that here mr. wood takes upon him the entire legislature, and an absolute dominion over the properties of the whole nation. good god! who are this wretch's advisers? who are his supporters, abettors, encouragers, or sharers? mr. wood will _oblige_ me to take fivepence halfpenny of his brass in every payment! and i will shoot mr. wood and his deputies through the head, like highwaymen or housebreakers, if they dare to force one farthing of their coin upon me in the payment of an hundred pounds. it is no loss of honour to submit to the lion, but who, with the figure of a man, can think with patience of being devoured alive by a rat. he has laid a tax upon the people of ireland of seventeen shillings at least in the pound; a tax i say, not only upon lands, but interest-money, goods, manufactures, the hire of handicraftsmen, labourers, and servants. shopkeepers look to yourselves. wood will _oblige_ and force you to take fivepence halfpenny of his trash in every payment, and many of you receive twenty, thirty, forty payments in a day, or else you can hardly find bread: and pray consider how much that will amount to in a year: twenty times fivepence halfpenny is nine shillings and twopence, which is above an hundred and sixty pounds a year, whereof you will be losers of at least one hundred and forty pounds by taking your payments in his money. if any of you be content to deal with mr. wood on such conditions they may. but for my own particular, "let his money perish with him." if the famous mr. hampden rather chose to go to prison, than pay a few shillings to king charles st. without authority of parliament, i will rather choose to be hanged than have all my substance taxed at seventeen shillings in the pound, at the arbitrary will and pleasure of the venerable mr. wood. the paragraph concludes thus. "n.b." (that is to say _nota bene_, or _mark well_), "no evidence appeared from ireland, or elsewhere, to prove the mischiefs complained of, or any abuses whatsoever committed in the execution of the said grant." the impudence of this remark exceeds all that went before. first; the house of commons in ireland, which represents the whole people of the kingdom; and secondly the privy-council, addressed his majesty against these halfpence. what could be done more to express the universal sense and opinion of the nation? if his copper were diamonds, and the kingdom were entirely against it, would not that be sufficient to reject it? must a committee of the house of commons, and our whole privy-council go over to argue _pro_ and _con_ with mr. wood? to what end did the king give his patent for coining of halfpence in ireland? was it not, because it was represented to his sacred majesty, that such a coinage would be of advantage to the good of this kingdom, and of all his subjects here? it is to the patentee's peril if his representation be false, and the execution of his patent be fraudulent and corrupt. is he so wicked and foolish to think that his patent was given him to ruin a million and a half of people, that he might be a gainer of three or four score thousand pounds to himself? before he was at the charge of passing a patent, much more of raking up so much filthy dross, and stamping it with his majesty's "image and superscription," should he not first in common sense, in common equity, and common manners, have consulted the principal party concerned; that is to say, the people of the kingdom, the house of lords or commons, or the privy-council? if any foreigner should ask us, "whose image and superscription" there is in wood's coin, we should be ashamed to tell him, it was caesar's. in that great want of copper halfpence, which he alleges we were, our city set up our caesar's statue[ ] in excellent copper, at an expense that is equal in value to thirty thousand pounds of his coin: and we will not receive his _image_ in worse metal. [footnote : an equestrian statue of george i. at essex bridge, dublin, [f.]] i observe many of our people putting a melancholy case on this subject. "it is true" say they, "we are all undone if wood's halfpence must pass; but what shall we do, if his majesty puts out a proclamation commanding us to take them?" this hath been often dinned in my ears. but i desire my countrymen to be assured that there is nothing in it. the king never issues out a proclamation but to enjoin what the law permits him. he will not issue out a proclamation against law, or if such a thing should happen by a mistake, we are no more obliged to obey it than to run our heads into the fire. besides, his majesty will never command us by a proclamation, what he does not offer to command us in the patent itself. there he leaves it to our discretion, so that our destruction must be entirely owing to ourselves. therefore let no man be afraid of a proclamation, which will never be granted; and if it should, yet upon this occasion, will be of no force. the king's revenues here are near four hundred thousand pounds a year, can you think his ministers will advise him to take them in wood's brass, which will reduce the value to fifty thousand pounds. england gets a million sterl. by this nation, which, if this project goes on, will be almost reduced to nothing: and do you think those who live in england upon irish estates will be content to take an eighth or a tenth part, by being paid in wood's dross? if wood and his confederates were not convinced of our stupidity, they never would have attempted so audacious an enterprise. he now sees a spirit hath been raised against him, and he only watches till it begins to flag, he goes about "watching" when to "devour us." he hopes we shall be weary of contending with him, and at last out of ignorance, or fear, or of being perfectly tired with opposition, we shall be forced to yield. and therefore i confess it is my chief endeavour to keep up your spirits and resentments. if i tell you there is a precipice under you, and that if you go forwards you will certainly break your necks. if i point to it before your eyes, must i be at the trouble of repeating it every morning? are our people's "hearts waxed gross"? are "their ears dull of hearing," and have "they closed their eyes"? i fear there are some few vipers among us, who, for ten or twenty pounds gain, would sell their souls and their country, though at last it would end in their own ruin as well as ours. be not like "the deaf adder, who refuses to hear the voice of the charmer, charm he never so wisely." though my letter be directed to you, mr. harding, yet i intend it for all my countrymen. i have no interest in this affair but what is common to the public. i can live better than many others, i have some gold and silver by me, and a shop well furnished, and shall be able to make a shift when many of my betters are starving. but i am grieved to see the coldness and indifference of many people, with whom i discourse. some are afraid of a proclamation, others shrug up their shoulders, and cry, "what would you have us do?" some give out, there is no danger at all. others are comforted that it will be a common calamity and they shall fare no worse than their neighbours. will a man, who hears midnight robbers at his door, get out of bed, and raise his family for a common defence, and shall a whole kingdom lie in a lethargy, while mr. wood comes at the head of his confederates to rob them of all they have, to ruin us and our posterity for ever? if an highwayman meets you on the road, you give him your money to save your life, but, god be thanked, mr. wood cannot touch a hair of your heads. you have all the laws of god and man on your side. when he or his accomplices offer you his dross it is but saying no, and you are safe. if a madman should come to my shop with an handful of dirt raked out of the kennel, and offer it in payment for ten yards of stuff, i would pity or laugh at him, or, if his behaviour deserved it, kick him out of my doors. and if mr. wood comes to demand any gold and silver, or commodities for which i have paid my gold and silver, in exchange for his trash, can he deserve or expect better treatment? when the evil day is come (if it must come) let us mark and observe those who presume to offer these halfpence in payment. let their names, and trades, and places of abode be made public, that every one may be aware of them, as betrayers of their country, and confederates with mr. wood. let them be watched at markets and fairs, and let the first honest discoverer give the word about, that wood's halfpence have been offered, and caution the poor innocent people not to receive them. perhaps i have been too tedious; but there would never be an end, if i attempted to say all that this melancholy subject will bear. i will conclude with humbly offering one proposal, which, if it were put in practice, would blow up this destructive project at once. let some skilful judicious pen draw up an advertisement to the following purpose. that "whereas one william wood hardware-man, now or lately sojourning in the city of london, hath, by many misrepresentations, procured a patent for coining an hundred and forty thousand pounds[ ] in copper halfpence for this kingdom, which is a sum five times greater than our occasions require. and whereas it is notorious that the said wood hath coined his halfpence of such base metal and false weight, that they are, at least, six parts in seven below the real value. and whereas we have reason to apprehend, that the said wood may, at any time hereafter, clandestinely coin as many more halfpence as he pleases. and whereas the said patent neither doth nor can _oblige_ his majesty's subjects to receive the said halfpence in any payment, but leaves it to their voluntary choice, because, by law the subject cannot be _obliged_ to take any money except gold or silver. and whereas, contrary to the letter and meaning of the said patent, the said wood hath declared that every person shall be _obliged_ to take fivepence halfpenny of his coin in every payment. and whereas the house of commons and privy-council have severally addressed his most sacred majesty, representing the ill consequences which the said coinage may have upon this kingdom. and lastly whereas it is universally agreed, that the whole nation to a man (except mr. wood and his confederates) are in the utmost apprehensions of the ruinous consequences, that must follow from the said coinage. therefore we whose names are underwritten, being persons of considerable estates in this kingdom, and residers therein, do unanimously resolve and declare that we will never receive, one farthing or halfpenny of the said wood's coining, and that we will direct all our tenants to refuse the said coin from any person whatsoever; of which that they may not be ignorant, we have sent them a copy of this advertisement, to be read to them by our stewards, receivers, &c." [footnote : in the first paragraph of this letter the sum was given as £ , . [t.s.]] i could wish, that a paper of this nature might be drawn up, and signed by two or three hundred principal gentlemen of this kingdom, and printed copies thereof sent to their several tenants; i am deceived, if anything could sooner defeat this execrable design of wood and his accomplices. this would immediately give the alarm, and set the kingdom on their guard. this would give courage to the meanest tenant and cottager. "how long, o lord, righteous and true." i must tell you in particular, mr. harding, that you are much to blame. several hundred persons have enquired at your house for my "letter to the shopkeepers, &c." and you had none to sell them. pray keep yourself provided with that letter, and with this; you have got very well by the former, but i did not then write for your sake, any more than i do now. pray advertise both in every newspaper, and let it not be _your_ fault or _mine_, if our countrymen will not take warning. i desire you likewise to sell them as cheap as you can. _i am your servant_, m.b. _aug._ , . _the report of the committee of the lords of his majesty's most honourable privy-council, in relation to mr. wood's halfpence and farthings, etc._[ ] at the council chamber at whitehall, the th day of july, . in obedience to your majesty's order of reference, upon the several resolutions and addresses of both houses of parliament of ireland, during their late session, the late address of your majesty's justices, and privy-council of that kingdom, and the petitions of the county and city of dublin, concerning a patent granted by your majesty to william wood esq; for the coining and uttering copper halfpence and farthings in the kingdom of ireland, to such persons as would voluntarily accept the same; and upon the petition of the said william wood, concerning the same coinage, the lords of the committee have taken into their consideration the said patent, addresses, petitions, and all matters and papers relating thereto, and have heard and examined all such persons, as upon due and sufficient notice, were desirous and willing to be heard upon the subject matter under their consideration, and have agreed upon the following report, containing a true state of the whole matter, as it appeared before them, with their humble opinion, to be laid before your majesty for your royal consideration and determination, upon a matter of such importance. [footnote : for the story of the origin of this report see the note prefixed to letter iii. [t.s.]] the several addresses to your majesty from your subjects of ireland, contain in general terms the strongest representations of the great apprehensions they were under, from the importing and uttering copper halfpence and farthings in ireland, by virtue of the patent granted to mr. wood, which they conceived would prove highly prejudicial to your majesty's revenue, destructive of the trade and commerce of the kingdom, and of dangerous consequence to the properties of the subject. they represent, that the patent had been obtained in a clandestine and unprecedented manner, and by notorious misrepresentations of the state of ireland; that if the terms of the patent had been complied with, this coinage would have been of infinite loss to the kingdom, but that the patentee, under colour of the powers granted to him, had imported and endeavoured to utter great quantities of different impressions, and of less weight, than required by the patent, and had been guilty of notorious frauds and deceit in coining the said copper money: and they humbly beseech your majesty, that you would give such directions, as in your great wisdom you should think proper, to prevent the fatal effects of uttering any half pence or farthings by virtue of the said patent: and the house of commons of ireland, in a second address upon this subject, pray, that your majesty would be pleased to give directions to the several officers intrusted in the receipt of your majesty's revenue, that they do not on any pretence whatever, receive or utter any of the said copper halfpence or farthings. in answer to the addresses of the houses of parliament of ireland, your majesty was most graciously pleased to assure them, "that if any abuses had been committed by the patentee, you would give the necessary orders for enquiring into and punishing those abuses; and that your majesty would do everything, that was in your power, for the satisfaction of your people." in pursuance of this your majesty's most gracious declaration, your majesty was pleased to take this matter into you royal consideration; and that you might be the better enabled effectually to answer the expectations of your people of ireland, your majesty was pleased by a letter from lord carteret, one of your principal secretaries of state, dated march , - , to signify your pleasure to your lord lieutenant of ireland, "that he should give directions for sending over such papers and witnesses as should be thought proper to support the objections made against the patent, and against the patentee, in the execution of the powers given him by the patent." upon the receipt of these your majesty's orders, the lord lieutenant, by his letter of the th of march, - , represented the great difficulty he found himself under, to comply with these your majesty's orders; and by another letter of the th of march - , "after consulting the principal members of both houses, who were immediately in your majesty's service, and of the privy council," acquainted your majesty, "that none of them would take upon them to advise, how any material persons or papers might be sent over on this occasion; but they all seemed apprehensive of the ill temper any miscarriage, in a trial, upon _scire facias_ brought against the patentee, might occasion in both houses, if the evidence were not laid as full before a jury, as it was before them," and did therefore, a second time, decline sending over any persons, papers or materials whatsoever, to support this charge brought against your majesty's patent and the patentee. as this proceeding seemed very extraordinary, that in a matter that had raised so great and universal a clamour in ireland, no one person could be prevailed upon to come over from ireland, in support of the united sense of both houses of parliament of ireland; that no papers, no materials, no evidence whatsoever of the mischiefs arising from this patent, or of the notorious frauds and deceit committed in the execution of it, could now be had, to give your majesty satisfaction herein; "your majesty however, desirous to give your people of ireland all possible satisfaction, but sensible that you cannot in any case proceed against any of the meanest of your subjects, but according to the known rules and maxims of law and justice," repeated your orders to your lord lieutenant of ireland, that by persuasion, and making proper allowances for their expenses, new endeavours might be used to procure and send over such witnesses as should be thought material to make good the charge against the patent. in answer to these orders, the lord lieutenant of ireland acquaints your majesty, by his letter of the d of april to one of your principal secretaries of state, "that in order to obey your majesty's commands as far as possibly he could, at a meeting with my lord chancellor, the chief judges, your majesty's attorney and solicitor-general, he had earnestly desired their advice and assistance, to enable him to send over such witnesses as might be necessary to support the charge against mr. wood's patent, and the execution of it. the result of this meeting was such, that the lord lieutenant could not reap the least advantage or assistance from it, every one being so guarded with caution, against giving any advice or opinion in this matter of state, apprehending great danger to themselves from meddling in it." the lords of the committee think it very strange, that there should be such great difficulty in prevailing with persons, who had already given their evidence before the parliament of ireland, to come over and give the same evidence here, and especially, that the chief difficulty should arise, from a general apprehension of a miscarriage, in an enquiry before your majesty, or in a proceeding by due course of law, in a case, where both houses of parliament had declared themselves so fully convinced, and satisfied upon evidence, and examinations taken in the most solemn manner. at the same time that your majesty sent your orders to the lord lieutenant of ireland, to send over such evidences as were thought material to support the charge against the patent, that your majesty might, without any further loss of time than was absolutely necessary, be as fully informed as was possible, and that the abuses and frauds alleged to be committed by the patentee, in executing the powers granted to him, might be fully and strictly enquired into, and examined, your majesty was pleased to order that an assay should be made of the fineness, value, and weight of this copper money, and the goodness thereof, compared with the former coinages of copper money for ireland, and the copper money coined in your majesty's mint in england; and it was accordingly referred to sir isaac newton, edward southwell, and thomas scroope, esqs. to make the said assay and trial. by the reports made of this assay, which are hereunto annexed, it appears,[ ] "that the pix of the copper moneys coined at bristol by mr. wood for ireland, containing the trial pieces, which was sealed and locked up at the time of coining, was opened at your majesty's mint at the tower; that the comptroller's account of the quantities of halfpence and farthings coined, agreed with mr. wood's account, amounting to tons, hundred, quarter, pounds, and ounces; that by the specimens of this coinage, which had from time to time been taken from the several parcels coined, and sealed up in papers, and put into the pix, halfpence weighed ounces troy, and penny-weight, which is about a quarter of an ounce above one pound weight avoirdupois; and farthings weighed ounces and quarters of an ounce troy, and grams, which is also above the weight required by the patent. it also appears, that both halfpence and farthings when heated red-hot spread thin under the hammer without cracking; that the copper of which mr. wood's coinage is made, is of the same goodness and value with the copper of which the copper money is coined in your majesty's mint for england, and worth in the market about pence per pound weight avoirdupois; that a pound of copper wrought into bars of fillets, and made fit for coinage, before brought into the mint at the tower of london, is worth pence per pound, and always cost as much, and is coined into pence of copper money by tale, for england; it likewise appears, that the halfpence and farthings coined by mr. wood, when compared with the copper money coined for ireland, in the reigns of king charles ii. king james ii. and king william and queen mary, considerably exceeds them all in weight, very far exceeds them all in goodness, fineness, and value of the copper, none of them bearing the fire so well, not being malleable, wasting very much in the fire, and great part of them burning into a cinder of little or no value at all; specimens of all which, as likewise of mr. wood's copper money, upon trials and assays made by sir isaac newton, mr. southwell, and mr. scroope, were laid before this committee for their information." [footnote : see appendix, no. ii. [t.s.]] the lords of the committee beg leave upon this article of the complaint, "that notorious frauds and deceits had been committed by the patentee, in executing the powers granted him," to observe to your majesty, that this is a fact expressly charged upon the patentee, and if it had in any manner been proved, it might have enabled your majesty, by due course of law, to have given the satisfaction to your people of ireland, that has been so much insisted upon; but as it is now above four months since your majesty was pleased to send over to ireland for such evidence, as might prove a fact alleged to be so notorious, and no evidence at all has been as yet transmitted, nor the least expectation given of any that may hereafter be obtained, and the trials and assays that have been taken of the halfpence, and farthings coined by mr. wood proving so unquestionably the weight, goodness and fineness of the copper money coined, rather exceeding the conditions of the patent, than being any way defective, the lords of the committee cannot advise your majesty, by a writ of _scire facias_, or any other manner to endeavour vacating the said patent, when there is no probability of success in such an undertaking. as these trials and assays fully shew that the patentee hath acted fairly according to the terms and conditions of his patent, so they evidently prove, that the care and caution made use of in this patent, by proper conditions, checks, and comptrols have effectually provided, that the copper money coined for ireland by virtue of this patent, should far exceed the like coinages for ireland, in the reigns of your majesty's royal predecessors. and that your majesty's royal predecessors have exercised this undoubted prerogative of granting to private persons the power and privilege of coining copper halfpence and farthings for the kingdom of ireland, was proved to this committee by several precedents of such patents granted to private persons by king charles ii. and king james ii. none of which were equally beneficial to your kingdom of ireland, nor so well guarded with proper covenants and conditions for the due execution of the powers thereby granted, although the power and validity of those patents, and a due compliance with them, was never in any one instance, till this time, disputed or controverted. by these former patents, the sole power of coining copper money for ireland, was granted to the patentees for the term of years, to be coined in such place as they should think convenient, and "such quantities as they could conveniently issue within the term of years," without any restriction of the quantity to be coined within the whole term, or any provision of a certain quantity, only to be coined annually to prevent the ill consequences of too great a quantity to be poured in at once, at the will and pleasure of the patentees; no provision was made for the goodness and fineness of the copper, no comptroller appointed to inspect the copper in bars and fillets, before coined, and take constant assays of the money when coined, and the power of issuing not limited "to such as would voluntarily accept the same"; but by the patent granted to john knox, the money coined by virtue of the patent, "is made and declared to be the current coin of the kingdom of ireland," and a pound weight of copper was allowed to be coined into shillings and pence, and whatever quantity should be coined, a rent of _l_ _per annum_ only was reserved to the crown, and tons of copper were computed to be coined within the years, without any complaint. the term granted to mr. wood for coining copper money is for years only, the quantity for the whole term limited to tons, ton only to be issued within one year, and tons each year for the remaining years; a comptroller is appointed by the authority of the crown to inspect, comptrol, and assay the copper, as well not coined as coined; the copper to be fine british copper, cast into bars or fillets, which when heated red hot would spread thin under the hammer; a pound weight of copper to be coined into shillings and sixpence, and without any compulsion on currency enforced, to be received by such only as would voluntarily and wilfully accept the same"; a rent of _l_ _per annum_ is reserved unto your majesty,[ ] and _l per annum_ to your majesty's clerk comptroller, to be paid annually by the patentee, for the full term of the fourteen years, which for years when tons of copper only are coined, is not inconsiderable; these great and essential differences in the several patents, that have been granted for coining copper money for the kingdom of ireland, seemed sufficiently to justify the care and caution that was used in granting the letters-patent to mr. wood. [footnote : see the extract from the patent itself, where the amount is given differently [t.s.]] it has been further represented to your majesty, that these letters-patent were obtained by mr. wood in a clandestine and unprecedent manner, and by gross misrepresentations of the state of the kingdom of ireland. upon enquiring into this fact it appears, that the petition of mr. wood for obtaining this coinage, was presented to your majesty at the time that several other petitions and applications were made to your majesty, for the same purpose, by sundry persons, well acquainted and conversant with the affairs of ireland, setting forth the great want of small money and change in all the common and lower parts of traffic, and business throughout the kingdom, and the terms of mr. wood's petition seeming to your majesty most reasonable, thereupon a draught of a warrant directing a grant of such coinage to be made to mr. wood, was referred to your majesty's then attorney and solicitor-general of england, to consider and report their opinion to your majesty; sir isaac newton, as the committee is informed was consulted in all the steps of settling and adjusting the terms and conditions of the patent; and after mature deliberation, your majesty's warrant was signed, directing an indenture in such manner as is practised in your majesty's mint in the tower of london, for the coining of gold and silver moneys, to pass the great seal of great britain, which was carried through all the usual forms and offices without haste or precipitation, that the committee cannot discover the least pretence to say, this patent was passed or obtained in a clandestine or unprecedented manner, unless it is to be understood, that your majesty's granting a liberty of coining copper money for ireland, under the great seal of great britain, without referring the consideration thereof to the principal officers of ireland, is the grievance and mischief complained of. upon this head it must be admitted, that letters-patent under the great seal of great britain for coining copper money for ireland, are legal and obligatory, a just and reasonable exercise of your majesty's royal prerogative, and in no manner derogatory, or invasive, of any liberties or privileges of your subjects of ireland. when any matter or thing is transacting that concerns or may affect your kingdom of ireland, if your majesty has any doubts concerning the same, or sees just cause for considering your officers of ireland, your majesty is frequently pleased to refer such considerations to your chief governors of ireland, but the lords of the committee hope it will not be asserted, that any legal orders or resolutions of your majesty can or ought to be called in question or invalidated, because the advice or consent of your chief governors of that kingdom was not previously had upon them: the precedents are many, wherein cases of great importance to ireland, and that immediately affected, the interests of that kingdom, warrants, orders, and directions, by the authority of your majesty and your royal predecessors, have been issued under the royal sign manual, without any previous reference, or advice of your officers of ireland, which have always had their due force, and have been punctually complied with and obeyed. and as it cannot be disputed but this patent might legally and properly pass under the great seal of great britain, so their lordships cannot find any precedents of references to the officers of ireland, of what passed under the great seal of england; on the contrary, there are precedents of patents passed under the great seal of ireland, where in all the previous steps the references were made to the officers of england. by the misrepresentation of the state of ireland, in order to obtain this patent, it is presumed, is meant, that the information given to your majesty of the great want of small money, to make small payments, was groundless, and that there is no such want of small money: the lords of the committee enquired very particularly into this article, and mr. wood produced several witnesses, that directly asserted the great want of small money for change, and the great damage that retailers and manufactures suffered for want of such copper money. evidence was given, that considerable manufacturers have been obliged to give tallies, or tokens in cards, to their workmen for want of small money, signed upon the back, to be afterwards exchanged for larger money: that a premium was often given to obtain small money for necessary occasions: several letters from ireland to correspondents in england were read, complaining of the want of copper money, and expressing the great demand there was for this money. the great want of small money was further proved by the common use of _raps_, a counterfeit coin, of such base metal, that what passes for a halfpenny, is not worth half a farthing, which raps appear to have obtained a currency, out of necessity and for want of better small money to make change with, and by the best accounts, the lords of the committee have reason to believe, that there can be no doubt, that there is a real want of small money in ireland, which seems to be so far admitted on all hands, that there does not appear to have been any misrepresentation of the state of ireland in this respect. in the second address from the house of commons to your majesty, they most humbly beseech your majesty, that you will be graciously pleased to give directions to the several officers intrusted with the receipt of your majesty's revenue, that they do not, on any pretence whatsoever, receive or utter such halfpence or farthings, and mr. wood, in his petition to your majesty, complains, that the officers of your majesty's revenue had already given such orders to all the inferior officers not to receive any of this coin. your majesty, by your patent under the great seal of great britain, wills, requires and commands your "lieutenant, deputy, or other chief governor or governors of your kingdom of ireland, and all other officers and ministers of your majesty, your heirs and successors in england, ireland or elsewhere, to be aiding and assisting to the said william wood, his executors, &c. in the execution of all or any the powers, authorities, directions, matters or things to be executed by him or them, or for his or their benefit and advantage, by virtue, and in pursuance of the said indentures, in all things as becometh, &c." and if the officers of the revenue have, upon their own authority, given any orders, directions, significations, or intimations, to hinder or obstruct the receiving and uttering the copper money coined and imported, pursuant to your majesty's letters-patent, this cannot but be looked upon as a very extraordinary proceeding. in another paragraph of the patent your majesty has covenanted and granted unto the said william wood, his executors, &c. "that upon performance of covenants, on his and their parts, he and they shall peaceably, and quietly, have, hold, and enjoy all the powers, authorities, privileges, licences, profits, advantages, and all other matters and things thereby granted, without any let, suit, trouble, molestation or denial of your majesty, your heirs or successors, or of or by any of your or their officers or ministers, or any person or persons, &c." this being so expressly granted and covenanted by your majesty, and there appearing no failure, non-performance, or breach of covenants, on the part of the patentee, the lords of the committee cannot advise your majesty to give directions to the officers of the revenue, not to receive or utter any of the said copper halfpence or farthings as has been desired. mr. wood having been heard by his counsel, produced his several witnesses, all the papers and precedents, which he thought material, having been read and considered, and having as he conceived, fully vindicated both the patent, and the execution thereof. for his further justification, and to clear himself from the imputation of attempting to make to himself any unreasonable profit or advantage, and to enrich himself at the expense of the kingdom of ireland, by endeavouring to impose upon them, and utter a greater quantity of copper money, than the necessary occasions of the people shall require, and can easily take off, delivered a proposal in writing, signed by himself, which is hereunto annexed, and mr. wood having by the said letters-patent, "covenanted, granted, and promised to, and with your majesty, your heirs and successors, that he shall and will from time to time in the making the said copper farthings and halfpence in england, and in transporting the same from time to time to ireland, and in uttering, vending, disposing and dispersing the same there, and in all his doings and accounts concerning the same, submit himself to the inspection, examination, order and comptrol of your majesty and your commissioners of the treasury or high-treasurer for the time being;" the lords of the committee are of opinion, that your majesty upon this voluntary offer and proposal of mr. wood, may give proper orders and directions for the execution and due performance of such parts of the said proposal, as shall be judged most for the interest and accommodation of your subjects of ireland: in the mean time, it not appearing to their lordships that mr. wood has done or committed any act or deed, that may tend to invalidate, or make void his letters-patent, or to forfeit the privileges and advantages thereby granted to him by your majesty; it is but just and reasonable, that your majesty should immediately send orders to your commissioners of the revenue, and all other your officers in ireland, to revoke all orders, directions, significations, or intimations whatsoever, that may have been given by them, or any of them, to hinder or obstruct the receiving and uttering this copper money, and that the halfpence and farthings already coined by mr. wood, amounting to about , _l_. and such further quantity as shall make up the said , _l_. to , _l_. "be suffered and permitted without any let, suit, trouble, molestation, or denial of any of your majesty's officers or ministers whatsoever, to pass, and be received as current money by such as shall be willing to receive the same." at the same time, it may be advisable for your majesty, to give the proper orders, that mr. wood shall not coin, import into ireland, utter or dispose of any more copper halfpence or farthings, than to the amount of , _l_. according to his own proposal, without your majesty's special licence or authority, to be had for that purpose; and if your majesty shall be pleased to order, that mr. wood's proposal, delivered to the lords of the committee, shall be transmitted to your majesty's chief governor, deputies, or other your ministers, or officers in ireland, it will give them a proper opportunity to consider, whether, after the reduction of tons of copper, being in value , _l_. to tons, hundred, pounds being in value , _l_. only, anything can be done for the further satisfaction of the people of ireland. letter iii. to the nobility and gentry of the kingdom of ireland. note. the drapier's second letter was dated august th, . a few days later the english privy council's report, dated th july, , arrived in dublin, and on august th, swift had issued his reply to it in this third letter. the report itself, which is here prefixed to the third letter, was said to have been the work of walpole. undoubtedly, it contains the best arguments that could then be urged in favour of wood and the patent, and undoubtedly, also, it would have had the desired effect had it been allowed to do its work uncriticised. but swift's opposition was fatal to walpole's intentions. he took the report as but another attempt to foist on the people of ireland a decree in which they had not been consulted, and no amount of yielding, short of complete abandonment of it, would palliate the thing that was hateful in itself. he resented the insult. after specific rebuttals of the various arguments urged in the report in favour of the patent, swift suddenly turns from the comparatively petty and insignificant consideration as to the weight and quality of the coins, and deals with the broad principle of justice which the granting of the patent had ignored. had the english houses of parliament and the english privy council, he said, addressed the king against a similar breach of the english people's rights, his majesty would not have waited to discuss the matter, nor would his ministers have dared to advise him as they had done in this instance. "am i a free man in england," he exclaims, "and do i become a slave in six hours in crossing the channel?" the report, however, is interesting inasmuch as it assists us to appreciate the pathetic condition of irish affairs at the time. the very fact that the petition of the irish parliament could be so handled, proves how strong had been the hold over ireland by england, and with what daring insistence the english ministers continued to efface the last strongholds of irish independence. monck mason, in reviewing the report, has devoted a very elaborate note to its details, and has fortified his criticisms with a series of remarkable letters from the archbishop of dublin, which he publishes for the first time.[ ] i have embodied much of this note in the annotations which accompany the present reprint of this letter. [footnote : "history of st. patrick's cathedral," pp. lxxxvi-xcv.] the text of this third letter is based on sir w. scott's, collated with the first edition and that given by faulkner in "fraud detected." it has also been read with faulkner's text given in the fourth volume of his edition of swift's works, published in . [t.s.] [illustration: some **observations** upon a paper, call'd, the **report** of the **committee** of the most honourable the _privy-council_ in **england,** relating to wood's _half-pence_. _by_. m.b. _drapier_. author of the letter to the _shop-keepers_, &c. dublin: printed by _john harding_ in _molesworth's-court_ in _fishamble street_. ] letter iii. to the nobility and gentry of the kingdom of ireland. having already written two letters to people of my own level, and condition; and having now very pressing occasion for writing a third; i thought i could not more properly address it than to your lordships and worships. the occasion is this. a printed paper was sent to me on the th instant, entitled, "a report of the committee of the lords of his majesty's most honourable privy-council in england, relating to mr. wood's halfpence and farthings."[ ] there is no mention made where the paper was printed, but i suppose it to have been in dublin; and i have been told that the copy did not come over in the gazette, but in the london journal, or some other print of no authority or consequence; and for anything that legally appears to the contrary, it may be a contrivance to fright us, or a project of some printer, who hath a mind to make a penny by publishing something upon a subject, which now employs all our thoughts in this kingdom. mr. wood in publishing this paper would insinuate to the world, as if the committee had a greater concern for his credit and private emolument, than for the honour of the privy-council and both houses of parliament here, and for the quiet and welfare of this whole kingdom; for it seems intended as a vindication of mr. wood, not without several severe remarks on the houses of lords and commons of ireland. [footnote : the full text of this report is prefixed to this third letter of the drapier. the report was published in the "london journal" about the middle of august of . neither the "gazette" nor any other ministerial organ printed it, which evidently gave swift his cue to attack it in the merciless manner he did. monck mason thought it "not improbable that the minister [walpole] adopted this method of communication, because it served his own purpose; he dared not to stake his credit upon such a document, which, in its published form, contains some gross mis-statements" ("history of st. patrick's cathedral," note, on p. ). [t.s.]] the whole is indeed written with the turn and air of a pamphlet, as if it were a dispute between william wood on the one part, and the lords justices, privy-council and both houses of parliament on the other; the design of it being to clear and vindicate the injured reputation of william wood, and to charge the other side with casting rash and groundless aspersions upon him. but if it be really what the title imports, mr. wood hath treated the committee with great rudeness, by publishing an act of theirs in so unbecoming a manner, without their leave, and before it was communicated to the government and privy-council of ireland, to whom the committee advised that it should be transmitted. but with all deference be it spoken, i do not conceive that a report of a committee of the council in england is hitherto a law in either kingdom; and until any point is determined to be a law, it remains disputable by every subject. this (may it please your lordships and worships) may seem a strange way of discoursing in an illiterate shopkeeper. i have endeavoured (although without the help of books) to improve that small portion of reason which god hath pleased to give me, and when reason plainly appears before me, i cannot turn away my head from it. thus for instance, if any lawyer should tell me that such a point were law, from which many gross palpable absurdities must follow, i would not, i could not believe him. if sir edward coke should positively assert (which he nowhere does, but the direct contrary) that a limited prince, could by his prerogative oblige his subjects to take half an ounce of lead, stamped with his image, for twenty shillings in gold, i should swear he was deceived or a deceiver, because a power like that, would leave the whole lives and fortunes of the people entirely at the mercy of the monarch: yet this, in effect, is what wood hath advanced in some of his papers, and what suspicious people may possibly apprehend from some passages in that which is called the "report." that paper mentions "such persons to have been examined, who were desirous and willing to be heard upon that subject." i am told, they were four in all, coleby, brown, mr. finley the banker, and one more whose name i know not. the first of these was tried for robbing the treasury in ireland, and although he was acquitted for want of legal proof, yet every person in the court believed him to be guilty. the second was tried for a rape, and stands recorded in the votes of the house of commons, for endeavouring by perjury and subornation, to take away the life of john bingham, esq.[ ] [footnote : referring to these persons who were examined by the committee, monck mason quotes from two letters from archbishop king to edward southwell, esq. king was one of the council, and southwell secretary of state at the time. the first of these letters remarks: "could a greater contempt be put upon a nation, than to see such a little fellow as wood favoured and supported against them, and such profligates as brown and coleby believed before a whole parliament, government, and private council." from the second letter, written on august th, , monck mason gives the following extracts: "--when i returned to dublin i met with resolutions concerning our halfpence, founded chiefly on the testimony of two infamous persons, john brown and coleby: as to the first of these, you will find his character in the votes of the house of commons, last parliament. tuesday, the th of november. "'resolved, that it appears to this committee, that a wicked conspiracy was maliciously contrived and carried on against john bingham, to take away his life and fortune. "'resolved, that it is the opinion of this committee, that the said john brown, of rabens, esq. and his accomplices, were the chief promoters and advisers of the said conspiracy. "'resolved, that it is the opinion of this committee, that the said john brown is a person not fit to serve his majesty, in any office or employment, civil or military, whatsoever. "'resolved, that the said john brown has, in the course of his examination, grossly prevaricated with this committee. "'to all which resolutions, the question being severally put, the house did agree, _nemine contradicente_. "'ordered, that the said john brown be, for his said prevarication, taken into the custody of the serjeant at arms attending this house. "'ordered, that his majesty's attorney-general do present the said john brown, for conniving and maliciously carrying on the said conspiracy to take away the life of the said john bingham, and others.' "as to coleby, he was turned out of the treasury for robbing it of a considerable sum of money. i was present at his trial at the king's-bench, and the evidence was such as convinced every one, in his conscience, that he was guilty; but, the proofs being presumptive, and not direct, the jury acquitted him; on which the judge (pine, if i remember right) observed the happiness of english subjects, that, though everybody was convinced of a man's guilt, yet, if the evidence did not come up to the strict requisites of the law, he would escape" ("history of st. patrick's cathedral," pp. xciv-xcv.) [t.s.]] but since i have gone so far as to mention particular persons, it may be some satisfaction to know who is this wood himself, that has the honour to have a whole kingdom at his mercy, for almost two years together. i find he is in the patent entitled _esq_; although he were understood to be only a hardware-man, and so i have been bold to call him in my former letters; however a '_squire_ he is, not only by virtue of his patent, but by having been a collector in shropshire, where pretending to have been robbed, and suing the county, he was cast, and for the infamy of the fact, lost his employment. i have heard another story of this 'squire wood from a very honourable lady, that one hamilton told her. he (hamilton) was sent for six years ago by sir isaac newton to try the coinage of four men, who then solicited a patent for coining halfpence for ireland; their names were wood, coster, elliston, and parker. parker made the fairest offer, and wood the worst, for his coin were three halfpence in a pound less value than the other. by which it is plain with what intentions he solicited this patent, but not so plain how he obtained it. it is alleged in the said paper, called the "report," that upon repeated orders from a secretary of state, for sending over such papers and witnesses, as should be thought proper to support the objections made against the patent (by both houses of parliament) the lord lieutenant represented "the great difficulty he found himself in to comply with these orders. that none of the principal members of both houses, who were in the king's service or council, would take upon them to advise how any material person or papers might be sent over on this occasion, &c." and this is often repeated and represented as "a proceeding that seems very extraordinary, and that in a matter which had raised so great a clamour in ireland, no one person could be prevailed upon to come over from ireland in support of the united sense of both houses of parliament in ireland, especially that the chief difficulty should arise from a general apprehension of a miscarriage, in an enquiry before his majesty, or in a proceeding by due course of law, in a case where both houses of parliament had declared themselves so fully convinced, and satisfied upon evidence, and examinations taken in the most solemn manner."[ ] [footnote : commenting on this monck mason has the following note. this learned biographer's remarks are specially important inasmuch as he has fortified them with letters from archbishop king, unpublished at the time he wrote: "but this [referring to the extract from the report given by swift] will not appear so strange or inexplicable after perusing the following letter from archbishop king ... to edward southwell, esq. ...; this important state paper may, therefore, be considered as an official communication of the sentiments of the irish privy council upon this matter. "letter from william king, archbishop of dublin, to edward southwell, esq., dated the d march, . "'i have not had any occasion of late to trouble you with my letters; but yesternight i came to the knowledge of an affair which gave me some uneasiness, and, i believe, will do so to the whole kingdom, when it becomes public. my lord lieutenant sent for several lords and commoners of the privy council, and communicated to them a letter from my lord carteret, writ by his majesty's command, in which was repeated the answer given to the addresses of the lords and commons, about one william wood's farthings and halfpence; and his grace is required to send over witnesses and evidences against the patentee or patent: this has surprised most people, because we were borne in hand that that affair was dead, and that we should never hear any more of it. "'his grace's design was, to be advised by what means and methods he might effectually comply with his majesty's commands; and, by what i could perceive, it was the sense of all, that it was not possible, in the present situation of affairs, to answer his majesty's expectations or those of the kingdom; and that, for these reasons: "' st, because this is a controversy between the parliament of ireland and william wood, and, the parliament being now prorogued, nobody either would, or durst, take on them to meddle in a business attacked by the parliament, or pretend to manage a cause which so deeply concerned the parliament, and the whole nation, without express orders. if this letter had come whilst the parliament was sitting, and had been communicated to the houses, they could have appointed certain persons to have acted for them, and raised a fund to support them, as has been done formerly in this kingdom on several occasions; but, for any, without such authority, to make himself a party for the legislature and people of ireland, would be a bold undertaking, and, perhaps, dangerous; for, if such undertaker or undertakers should fail in producing all evidences that may be had, or any of the papers necessary to make the case evident, they must expect to be severely handled the next parliament for their officiousness, and bear the blame of the miscarriage of the cause: for these reasons, as it seemed to me, the privy councillors were unwilling to engage at all in the business, or to meddle with it. "'but, dly, the thing seemed impracticable; because it would signify nothing to send over the copies of the papers that were laid before the parliament, if the design is, as it seems to be, to bring the patent to a legal trial; for such copies we were told by lawyers, could not be produced in any court as evidence; and, as to the originals, they are in the possession of the houses, and (as was conceived) could not be taken from the proper officers with whom they were trusted, but by the like order. "'and, as to the witnesses, it was a query whether my lord lieutenant by his own power could send them; and, if he have such power, yet it will not be possible to come at the witnesses, for several in each house vouched several facts on their own knowledge, to whom the houses gave credit; my lord lieutenant can neither be apprised of the persons nor of the particulars which the members testified; whereas, if the parliament was sitting, those members would appear, and make good their assertions. "'there were several sorts of farthings and halfpence produced to the houses, differing in weight, and there was likewise a difference in the stamp. these were sent over by william wood to his correspondents here, and by them produced. but can it be proved, on a legal trial, that these particular halfpence were coined by him? it is easy for him to say, that they are counterfeited, as (if i remember right) he has already affirmed in the public prints, in his answer to the address of the commons. "'but, dly, it was not on the illegality of the patent, nor chiefly on the abuse of it the patentee (which was not so much as mentioned by the lords), that the parliament insisted, but on the unavoidable mischief and destruction it would bring on the kingdom, and on its being obtained by most false and notorious misinformation of his majesty; it being suggested, as appears by the preamble, that the kingdom wanted such halfpence and farthings: now, if the king be misinformed, the lawyers tell us, that the grant is void. and, that his majesty was deceived in this grant by a false representation, it was said, needed no further proof than the patent itself.--william wood by it was empowered to coin tons of copper into halfpence and farthings, which would have made £ , , about the fifth part of all the current cash of ireland; for that is not reckoned, by those who suppose it most, to be £ , . now, the current cash of england is reckoned above twenty millions; in proportion, therefore, if ireland wants £ , england will want four millions. it is easy to imagine what would be said to a man that would propose to his majesty such a coinage; and it is agreed, that the people of england would not be more alarmed by such a patent, than the people of ireland are, by the prospect of turning the fifth part of their current coin into brass. "'this, so far as i can remember, is a brief of what passed in the meeting before my lord lieutenant'" ("history of st. patrick's cathedral," pp. lxxxvii-lxxxviii). [t.s.]] how shall i, a poor ignorant shopkeeper, utterly unskilled in law, be able to answer so weighty an objection. i will try what can be done by plain reason, unassisted by art, cunning or eloquence. in my humble opinion, the committee of council, hath already prejudged the whole case, by calling the united sense of both houses of parliament in ireland an "universal clamour." here the addresses of the lords and commons of ireland against a ruinous destructive project of an "obscure, single undertaker," is called a "clamour." i desire to know how such a style would be resented in england from a committee of council there to a parliament, and how many impeachments would follow upon it. but supposing the appellation to be proper, i never heard of a wise minister who despised the universal clamour of a people, and if that clamour can be quieted by disappointing the fraudulent practice of a single person, the purchase is not exorbitant. but in answer to this objection. first it is manifest, that if this coinage had been in ireland, with such limitations as have been formerly specified in other patents, and granted to persons of this kingdom, or even of england, able to give sufficient security, few or no inconveniencies could have happened, which might not have been immediately remedied. as to mr. knox's patent mentioned in the report, security was given into the exchequer, that the patentee should at any time receive his halfpence back, and pay gold or silver in exchange for them. and mr. moor (to whom i suppose that patent was made over) was in forced to leave off coining, before the end of that year, by the great crowds of people continually offering to return his coinage upon him. in he coined again, and was forced to give over for the same reason. this entirely alters the case; for there is no such condition in wood's patent, which condition was worth a hundred times all other limitations whatsoever.[ ] [footnote : it will serve to elucidate this paragraph if an account be given of the various coinage patents issued for ireland. monck mason gives an account in a long note to his biography of swift; but as he has obtained it from the very ably written tract, "a defence of the conduct of the people of ireland," etc., i have gone to that pamphlet for the present _résumé_. i quote from pp. - of the dublin edition, issued in and printed by george ewing: "k. charles d. granted a patent for coining only farthings for the kingdom of ireland to coll. armstrong: but i do not find he ever made any use of it.[a] for all our copper and brass money to the year was issued by private persons, who obtained particular licences, _on giving security to change their half-pence and farthings for gold and silver_; but some of their securities failing, others pretending the half-pence which were tendered to be changed were counterfeits, the public always suffered. col. armstrong's son, finding great profit was made by coining half-pence in ireland, by virtue of particular licences recallable at pleasure, solicited and obtained a patent in the name of george legg afterwards lord dartmouth, for coining half-pence for ireland from , for years, _he giving security to exchange them for gold or silver on demand_.[b] in pursuance of this he coined considerable quantities of half-pence for four years; but in [john] knox, with the consent of armstrong, got the remaining part of this term granted by patent in his own name, he giving security as above, and got his half-pence declared the current coin of ireland, notwithstanding two acts of parliament had enacted that they should not be received in the revenue. knox was interrupted in his coinage in , by king james's taking it into his own hands, to coin his famous brass money, of which he coined no less than £ , , three penny worth of metal passing for £ _ster_. in this money creditors were obliged to receive their debts, and by this cruel stratagem ireland lost about £ , per month. this not only made our gold and silver, but even our half-pence to disappear; which obliged king william to coin pewter half-pence for the use of his army.... [footnote a: monck mason, quoting simon "on irish coins" (append., no. lxv), says: "sir thomas [armstrong] was never admitted to make use of this grant, nor could he obtain allowance of the chief governor of ireland, to issue them as royal coin among the subjects of that kingdom."] [footnote b: "a proclamation was issued by the lord lieutenant, declaring these half-pence to be the current coin of the kingdom, but it provided that none should be enforced to take more than five shillings in the payment of one hundred pounds, and so proportionately in all greater and lesser sums.... this patent was granted, by and with, the advice of james, duke of ormond" (monck mason, "history of st. patrick's," p. , note y).] "after the revolution, col. roger moore being possessed of knox's patent, commenced his coinage in dublin, and at first kept several offices for changing his half-pence for gold or silver. he soon overstocked the kingdom so with copper money, that persons were obliged to receive large sums in it; for the officers of the crown were industrious dispensers of it, for which he allowed them a premium. it was common at that time for one to compound for / copper, and the collectors paid nothing else. the country being thus overcharged with a base coin, everyone tendered it to col. moore to be changed. this he refused, on pretence they were counterfeits.... on this he quitted coining in , but left us in a miserable condition, which is lively represented in a memorial presented by will. trench, esq. to the lords of the treasury, on mr. wood's obtaining his patent, and which our commissioners referred to.... col. moore finding the sweet of such a patent, applied to king william for a renewal of it; but his petition being referred to the government of ireland, the affair was fairly represented to the king, whereby his designs were frustrated. "in the reign of the late queen, application was made by robert baird and william harnill, trustees for the garrison which defended londonderry, for a patent to coin base money for ireland ... their petition was rejected.... since this time there have been many applications made for such patents." [t.s.]] put the case, that the two houses of lords and commons of england, and the privy-council there should address his majesty to recall a patent, from whence they apprehend the most ruinous consequences to the whole kingdom: and to make it stronger if possible, that the whole nation, almost to a man, should thereupon discover the "most dismal apprehensions" (as mr. wood styles them) would his majesty debate half an hour what he had to do? would any minister dare advise him against recalling such a patent? or would the matter be referred to the privy-council or to westminster-hall, the two houses of parliament plaintiffs, and william wood defendant? and is there even the smallest difference between the two cases? were not the people of ireland born as free as those of england? how have they forfeited their freedom? is not their parliament as fair a representative of the people as that of england? and hath not their privy-council as great or a greater share in the administration of public affairs? are they not subjects of the same king? does not the same sun shine on them? and have they not the same god for their protector? am i a freeman in england, and do i become a slave in six hours by crossing the channel? no wonder then, if the boldest persons were cautious to interpose in a matter already determined by the whole voice of the nation, or to presume to represent the representatives of the kingdom, and were justly apprehensive of meeting such a treatment as they would deserve at the next session. it would seem very extraordinary if an inferior court in england, should take a matter out of the hands of the high court of parliament, during a prorogation, and decide it against the opinion of both houses. it happens however, that, although no persons were so bold, as to go over as evidences, to prove the truth of the objections made against this patent by the high court of parliament here, yet these objections stand good, notwithstanding the answers made by wood and his council. the report says, that "upon an assay made of the fineness, weight and value of this copper, it exceeded in every article." this is possible enough in the pieces upon which the assay was made; but wood must have failed very much in point of dexterity, if he had not taken care to provide a sufficient quantity of such halfpence as would bear the trial; which he was well able to do, although "they were taken out of several parcels." since it is now plain, that the bias of favour hath been wholly on his side.[ ] [footnote : the report of the assayers as abstracted by the lords of the committee in their report is not accurately stated. monck mason notes that the abstract omits the following passage: "but although the copper was very good, and the money, one piece with another, was full weight, yet the single pieces were not so equally coined in the weight as they should have been." nor is it shown that the coins assayed were of the same kind as those sent into ireland. the committee's report fails to see the question that must arise when it is noted that while in england a pound of copper was made into twenty-three pence, yet for ireland wood was permitted to make it into thirty pence, in spite of the statement that the copper used in england was worth fivepence a pound more than that used by wood. [t.s.]] but what need is there of disputing, when we have positive demonstration of wood's fraudulent practices in this point? i have seen a large quantity of these halfpence weighed by a very skilful person, which were of four different kinds, three of them considerably under weight. i have now before me an exact computation of the difference of weight between these four sorts, by which it appears that the fourth sort, or the lightest, differs from the first to a degree, that, in the coinage of three hundred and sixty tons of copper, the patentee will be a gainer, only by that difference, of twenty-four thousand four hundred and ninety-four pounds, and in the whole, the public will be a loser of eighty-two thousand one hundred and sixty-eight pounds, sixteen shillings, even supposing the metal in point of goodness to answer wood's contract and the assay that hath been made; which it infallibly doth not. for this point hath likewise been enquired into by very experienced men, who, upon several trials in many of these halfpence, have found them to be at least one fourth part below the real value (not including the raps or counterfeits that he or his accomplices have already made of his own coin, and scattered about). now the coinage of three hundred and sixty ton of copper coined by the weight of the fourth or lightest sort of his halfpence will amount to one hundred twenty-two thousand four hundred eighty-eight pounds, sixteen shillings, and if we subtract a fourth part of the real value by the base mixture in the metal, we must add to the public loss one fourth part to be subtracted from the intrinsic value of the copper, which in three hundred and sixty tons amounts to ten thousand and eighty pounds, and this added to the former sum of eighty-two thousand one hundred sixty-eight pounds, sixteen shillings, will make in all, ninety-two thousand two hundred forty-eight pounds loss to the public; besides the raps or counterfeits that he may at any time hereafter think fit to coin. nor do i know whether he reckons the dross exclusive or inclusive with his three hundred and sixty ton of copper; which however will make a considerable difference in the account. you will here please to observe, that the profit allowed to wood by the patent is twelvepence out of every pound of copper valued at _ s. d_. whereas _ d_. only is allowed for coinage of a pound weight for the english halfpence, and this difference is almost _per cent_. which is double to the highest exchange of money, even under all the additional pressures, and obstructions to trade, that this unhappy kingdom lies at present. this one circumstance in the coinage of three hundred and sixty ton of copper makes a difference of twenty-seven thousand seven hundred and twenty pounds between english and irish halfpence, even allowing those of wood to be all of the heaviest sort. it is likewise to be considered, that for every halfpenny in a pound weight exceeding the number directed by the patent, wood will be a gainer in the coinage of three hundred and sixty ton of copper, sixteen hundred and eighty pounds profit more than the patent allows him; out of which he may afford to make his comptrollers easy upon that article. as to what is alleged, that "these halfpence far exceed the like coinage for ireland in the reigns of his majesty's predecessors;" there cannot well be a more exceptionable way of arguing: although the fact were true, which however is altogether mistaken; not by any fault in the committee, but by the fraud and imposition of wood, who certainly produced the worst patterns he could find, such as were coined in small numbers by permissions to private men, as butchers' halfpence, black dogs and the like, or perhaps the small st. patrick's coin which passes for a farthing, or at best some of the smallest raps of the latest kind. for i have now by me some halfpence coined in the year by virtue of the patent granted to my lord dartmouth, which was renewed to knox, and they are heavier by a ninth part than those of wood, and in much better metal. and the great st. patrick's halfpenny is yet larger than either. but what is all this to the present debate? if under the various exigencies of former times, by wars, rebellions, and insurrections, the kings of england were sometimes forced to pay their armies here with mixed or base money, god forbid that the necessities of turbulent times should be a precedent for times of peace, and order, and settlement. in the patent above mentioned granted to lord dartmouth, in the reign of king charles d. and renewed to knox, the securities given into the exchequer, obliging the patentee to receive his money back upon every demand, were an effectual remedy against all inconveniencies. and the copper was coined in our own kingdom, so that we were in no danger to purchase it with the loss of all our silver and gold carried over to another, nor to be at the trouble of going to england for the redressing of any abuse. that the kings of england have exercised their prerogative of coining copper for ireland and for england is not the present question: but (to speak in the style of the report) it would "seem a little extraordinary," supposing a king should think fit to exercise his prerogative by coining copper in ireland, to be current in england, without referring it to his officers in that kingdom to be informed whether the grant was reasonable, and whether the people desired it or no, and without regard to the addresses of his parliament against it. god forbid that so mean a man as i should meddle with the king's prerogative: but i have heard very wise men say, that the king's prerogative is bounded and limited by the good and welfare of his people. i desire to know, whether it is not understood and avowed that the good of ireland was intended by this patent. but ireland is not consulted at all in the matter, and as soon as ireland is informed of it, they declare against it; the two houses of parliament and the privy-council addresses his majesty upon the mischiefs apprehended by such a patent. the privy-council in england takes the matter out of the parliament's cognizance; the good of the kingdom is dropped, and it is now determined that mr. wood shall have the power of ruining a whole nation for his private advantage. i never can suppose that such patents as these were originally granted with the view of being a job for the interest of a particular person, to the damage of the public: whatever profit must arise to the patentee was surely meant at best but as a secondary motive, and since somebody must be a gainer, the choice of the person was made either by favour, or _something else_[ ] or by the pretence of merit and honesty. this argument returns so often and strongly into my head, that i cannot forbear frequently repeating it. surely his majesty, when he consented to the passing of this patent, conceived he was doing an act of grace to his most loyal subjects of ireland, without any regard to mr. wood, farther than as an instrument. but the people of ireland think this patent (intended _no doubt_ for their good) to be a most intolerable grievance, and therefore mr. wood can never succeed, without an open avowal that his profit is preferred not only before the interests, but the very safety and being of a great kingdom; and a kingdom distinguished for its loyalty, perhaps above all others upon earth. not turned from its duty by the "jurisdiction of the house of lords, abolished at a stroke, by the hardships of the act of navigation newly enforced; by all possible obstructions in trade," and by a hundred other instances, "enough to fill this paper." nor was there ever among us the least attempt towards an insurrection in favour of the pretender. therefore whatever justice a free people can claim we have at least an equal title to it with our brethren in england, and whatever grace a good prince can bestow on the most loyal subjects, we have reason to expect it: neither hath this kingdom any way deserved to be sacrificed to one "single, rapacious, obscure, ignominious projector." [footnote : a hint at the duchess of kendal's influence in the procuring of the patent. [t.s.]] among other clauses mentioned in this patent, to shew how advantageous it is to ireland, there is one which seems to be of a singular nature, that the patentee shall be obliged, during his term, "to pay eight hundred pounds a year to the crown, and two hundred pounds a year to the comptroller."[ ] i have heard indeed that the king's council do always consider, in the passing of a patent, whether it will be of advantage to the crown, but i have likewise heard that it is at the same time considered whether the passing of it may be injurious to any other persons or bodies politic. however, although the attorney and solicitor be servants to the king, and therefore bound to consult his majesty's interest, yet i am under some doubt whether eight hundred pounds a year to the crown would be equivalent to the ruin of a kingdom. it would be far better for us to have paid eight thousand pounds a year into his majesty's coffers, in the midst of all our taxes (which, in proportion, are greater in this kingdom than ever they were in england, even during the war) than purchase such an addition to the revenue at the price of our _utter undoing_. [footnote : by the terms of the patent, wood covenanted to pay to the king's clerk, or comptroller of the coinage, £ yearly, and £ per annum into his majesty's exchequer, and not as walpole's report has it, £ and £ . [t.s.]] but here it is plain that fourteen thousand pounds are to be paid by wood, only as a small circumstantial charge for the purchase of his patent, what were his other visible costs i know not, and what were his latent, is variously conjectured. but he must be surely a man of some wonderful merit. hath he saved any other kingdom at his own expense, to give him a title of reimbursing himself by the destruction of ours? hath he discovered the longitude or the universal medicine? no. but he hath found out the philosopher's stone after a new manner, by debasing of copper, and resolving to force it upon us for gold. when the two houses represented to his majesty, that this patent to wood was obtained in a clandestine manner, surely the committee could not think the parliament would insinuate that it had not passed in the common forms, and run through every office where fees and perquisites were due. they knew very well that persons in places were no enemies to grants, and that the officers of the crown could not be kept in the dark. but the late lord lieutenant of ireland[ ] affirmed it was a secret to him (and who will doubt of his veracity, especially when he swore to a person of quality; from whom i had it, that ireland should never be troubled with these halfpence). it was a secret to the people of ireland, who were to be the only sufferers, and those who best knew the state of the kingdom and were most able to advise in such an affair, were wholly strangers to it. [footnote : the duke of grafton. walpole called him "a fair-weather pilot, that knew not what he had to do, when the first storm arose." charles, second duke of grafton ( - ), was the grandfather of the third duke, so virulently attacked by junius in his famous letters. [t. s.]] it is allowed by the report that this patent was passed without the knowledge of the chief governor or officers of ireland; and it is there elaborately shewn, that "former patents have passed in the same manner, and are good in law." i shall not dispute the legality of patents, but am ready to suppose it in his majesty's power to grant a patent for stamping round bits of copper to every subject he hath. therefore to lay aside the point of law, i would only put the question, whether in reason and justice it would not have been proper, in an affair upon which the welfare of a kingdom depends, that the said kingdom should have received timely notice, and the matter not be carried on between the patentee and the officers of the crown, who were to be the only gainers by it. the parliament, who in matters of this nature are the most able and faithful counsellors, did represent this grant to be "destructive of trade, and dangerous to the properties of the people," to which the only answer is, that "the king hath a prerogative to make such a grant." it is asserted that in the patent to knox, his "halfpence, are made and declared the current coin of the kingdom," whereas in this to wood, there is only a "power given to issue them to such as will receive them." the authors of the report, i think, do not affirm that the king can by law declare _anything_ to be current money by his letters-patents. i dare say they will not affirm it, and if knox's patent contained in it powers contrary to law, why is it mentioned as a precedent in his majesty's just and merciful reign:[ ] but although that clause be not in wood's patent, yet possibly there are others, the legality whereof may be equally doubted, and particularly that, whereby "a power is given to william wood to break into houses in search of any coin made in imitation of his." this may perhaps be affirmed to be illegal and dangerous to the liberty of the subject. yet this is a precedent taken from knox's patent, where the same power is granted, and is a strong instance what uses may be sometimes made of precedents. [footnote : knox's patent, as monck mason points out, did not contain the right to have his coins pass as the current coin of the realm; that was permitted by a proclamation of the lord lieutenant, and could in the same manner be withdrawn. knox's patent differed materially from that granted to wood, since he was obliged to take back his coins and give gold or silver for them, and no one was compelled to take more than five shillings in the payment of each £ . see note, p. . [t.s.]] but although before the passing of this patent, it was not thought necessary to consult any persons of this kingdom, or make the least enquiry whether copper money were wanted among us; yet now at length, when the matter is over, when the patent hath long passed, when wood hath already coined seventeen thousand pounds, and hath his tools and implements prepared to coin six times as much more; the committee hath been pleased to make this affair the subject of enquiry. wood is permitted to produce his evidences, which consist as i have already observed, of four in number, whereof coleby, brown and mr. finley the banker are three. and these were to prove that copper money was extremely wanted in ireland. the first had been out of the kingdom almost twenty years, from the time that he was tried for robbing the treasury, and therefore his knowledge and credibility are equal. the second may be allowed a more knowing witness, because i think it is not above a year since the house of commons ordered the attorney-general to prosecute him, for endeavouring "to take away the life of john bingham esq; member of parliaments by perjury and subornation." he asserted that he was forced to tally with his labourers for want of small money (which hath often been practised in england by sir ambrose crawley[ ] and others) but those who knew him better give a different reason, (if there be any truth at all in the fact) that he was forced to tally with his labourers not for want of halfpence, but of more substantial money, which is highly possible, because the race of suborners, forgers, perjurers and ravishers, are usually people of no fortune, or of those who have run it out by their vices and profuseness. mr. finley the third witness honestly confessed, that he was ignorant whether ireland wanted copper money or no; but all his intention was to buy a certain quantity from wood at a large discount, and sell them as well as he could, by which he hoped to get two or three thousand pounds for himself. [footnote : ambrose crowley (not crawley) was alderman and sheriff of london. he was knighted january st, - , and sat in the house of commons as member for andover in - . [t.s.]] but suppose there were not one single halfpenny of copper coin in this whole kingdom (which mr. wood seems to intend, unless we will come to his terms, as appears by employing his emissaries to buy up our old ones at a penny in the shilling more than they pass for), it could not be any real evil to us, although it might be some inconvenience. we have many sorts of small silver coins, to which they are strangers in england, such as the french threepences, fourpence halfpennies and eightpence half-pennies, the scotch fivepences and tenpences, besides their twenty-pences, and three-and-four-pences, by all which we are able to make change to a halfpenny of almost any piece of gold or silver, and if we are driven to brown's expedient of a sealed card, with the little gold or silver still remaining, it will i suppose, be somewhat better than to have nothing left but wood's adulterated copper, which he is neither obliged by his patent, nor hitherto able by his estate to make good. the report farther tells us, it "must be admitted that letters-patents under the great seal of great britain for coining copper money for ireland are legal and obligatory, a just and reasonable exercise of his majesty's royal prerogative, and in no manner derogatory or invasive of any liberty or privilege of his subjects of ireland." first we desire to know, why his majesty's prerogative might not have been as well asserted, by passing this patent in ireland, and subjecting the several conditions of the contract to the inspection of those who are only concerned, as was formerly done in the only precedents for patents granted for coining for this kingdom, since the mixed money[ ] in queen elizabeth's time, during the difficulties of a rebellion: whereas now upon the greatest imposition that can possibly be practised, we must go to england with our complaints, where it hath been for some time the fashion to think and to affirm that "we cannot be too hardly used." again the report says, that "such patents are obligatory." after long thinking, i am not able to find out what can possibly be meant here by this word _obligatory_. this patent of wood neither obligeth him to utter his coin, nor us to take it, or if it did the latter, it would be so far void, because no patent can oblige the subject against law, unless an illegal patent passed in one kingdom can bind another and not itself. [footnote : "civill warre having set all ireland in a combustion, the queene [elizabeth] more easily to subdue the rebels, did take silver coyne from the irish, some few years before her death, and paid her army with a mixed base coyne, which, by proclamation, was commanded to be spent and received, for sterling silver money. this base mixed money had three parts of copper, and the fourth part of silver, which proportion of silver was in some part consumed by the mixture, so as the english goldsmiths valued a shilling thereof at no more than two silver pence, though they acknowledged the same to be worth two pence halfpenny." (fynes moryson's "itinerary," pt. i., p. ). [t.s.]] lastly, it is added that "such patents are in no manner derogatory or invasive of any liberty or privilege of the king's subjects of ireland." if this proposition be true, as it is here laid down, without any limitation either expressed or implied, it must follow that a king of england may at any time coin copper money for ireland, and oblige his subjects here to take a piece of copper under the value of half a farthing for half-a-crown, as was practised by the late king james, and even without that arbitrary prince's excuse, from the necessity and exigences of his affairs. if this be in no manner "derogatory nor evasive of any liberties or privileges of the subjects of ireland," it ought to have been expressed what our liberties and privileges are, and whether we have any at all, for in specifying the word _ireland_, instead of saying "his majesty's subjects," it would seem to insinuate that we are not upon the same foot with our fellow-subjects in _england_; which, however the practice may have been, i hope will never be directly asserted, for i do not understand that poining's act[ ] deprived us of our liberty, but only changed the manner of passing laws here (which however was a power most indirectly obtained) by leaving the negative to the two houses of parliament. but, waiving all controversies relating to the legislature, no person, i believe, was ever yet so bold as to affirm that the people of ireland have not the same title to the benefits of the common law, with the rest of his majesty's subjects, and therefore whatever liberties or privileges the people of england enjoy by common law, we of ireland have the same; so that in my humble opinion, the word _ireland_ standing in that proposition, was, in the mildest interpretation, _a lapse of the pen_. [footnote : it was not intended that poyning's act should interfere with the liberty of the people, but it is undoubted that advantage was taken of this law, and an interpretation put on it far different from the intention that brought it on the statute books. it was passed by a parliament convened by sir edward poyning, at drogheda, in the tenth year of henry vii.'s reign. its immediate cause was the invasion of perkin warbeck. that pretender assumed royal authority in ireland and had several statutes passed during his short-lived term of power. to prevent any viceroy from arrogating to himself the powers of law-making it was enacted by poyning's parliament: "that no parliament be holden hereafter in ireland, but at such season as the king's lieutenant and counsaile there first do certifie the king, under the great seal of that land, the causes and considerations, and all such acts as them seemeth should pass in the same parliament, and such causes, considerations, and acts affirmed by the king and his counsaile to be good and expedient for that land, and his licence thereupon, as well in affirmation of the said causes and acts, as to summon the said parliament, under his great seal of england had and obtained; that done, a parliament to be had and holden as afore rehearsed" ("irish statutes," vol. i., p. ). two statutes, one, the act of and phil., and mary, cap. , and the other of ii eliz. ses. , cap. , explain this act further, and the latter points out the reason for the original enactment, namely, that "before this statute, when liberty was given to the governors to call parliaments at their pleasure, acts passed as well to the dishonour of the prince, as to the hindrance of their subjects" ("irish statutes," vol. i., p. ). "by poyning's law," says lecky, "a great part of the independence of the irish parliament had indeed been surrendered; but even the servile parliament which passed it, though extending by its own authority to ireland laws previously enacted in england, never admitted the right of the english parliament to make laws for ireland." ("hist. ireland," vol. ii., p. ; ed). [t.s.]] the report farther asserts, that "the precedents are many, wherein cases of great importance to ireland, and that immediately affected the interests of that kingdom, warrants, orders, and directions by the authority of the king and his predecessors, have been issued under the royal sign manual, without any previous reference or advice of his majesty's officers of ireland, which have always had their due force, and have been punctually complied with, and obeyed." it may be so, and i am heartily sorry for it, because it may prove an eternal source of discontent. however among all these precedents there is not one of a patent for coining money for ireland. there is nothing hath perplexed me more than this doctrine of precedents. if a job is to be done, and upon searching records you find it hath been done before, there will not want a lawyer to justify the legality of it, by producing his precedents, without ever considering the motives and circumstances that first introduced them, the necessity or turbulence or iniquity of times, the corruptions of ministers, or the arbitrary disposition of the prince then reigning. and i have been told by persons eminent in the law, that the worst actions which human nature is capable of, may be justified by the same doctrine. how the first precedents began of determining cases of the highest importance to ireland, and immediately affecting its interest, without any previous reference or advice to the king's officers here, may soon be accounted for. before this kingdom was entirely reduced by the submission of tyrone in the last year of queen elizabeth's reign, there was a period of four hundred years, which was a various scene of war and peace between the english pale and the irish natives, and the government of that part of this island which lay in the english hands, was, in many things under the immediate administration of the king. silver and copper were often coined here among us, and once at least upon great necessity, a mixed or base metal was sent from england. the reign of king james ist. was employed in settling the kingdom after tyrone's rebellion, and this nation flourished extremely till the time of the massacre . in that difficult juncture of affairs, the nobility and gentry coined their own plate here in dublin. by all that i can discover, the copper coin of ireland for three hundred years past consisted of small pence and halfpence, which particular men had licence to coin, and were current only within certain towns and districts, according to the personal credit of the owner who uttered them, and was bound to receive them again, whereof i have seen many sorts; neither have i heard of any patent granted for coining copper for ireland till the reign of king charles ii. which was in the year . to george legge lord dartmouth, and renewed by king james ii. in the first year of his reign to john knox. both patents were passed in ireland, and in both the patentees were obliged to receive their coin again to any that would offer then twenty shillings of it, for which they were obliged to pay gold or silver. the patents both of lord dartmouth and knox were referred to the attorney-general here, and a report made accordingly, and both, as i have already said, were passed in this kingdom. knox had only a patent for the remainder of the term granted to lord dartmouth, the patent expired in , and upon a petition by roger moor to have it renewed, the matter was referred hither, and upon the report of the attorney and solicitor, that it was not for his majesty's service or the interest of the nation to have it renewed, it was rejected by king william. it should therefore seem very extraordinary, that a patent for coining copper halfpence, intended and professed for the good of the kingdom, should be passed without once consulting that kingdom, for the good of which it is declared to be intended, and this upon the application of a "poor, private obscure mechanic;" and a patent of such a nature, that as soon as ever the kingdom is informed of its being passed, they cry out unanimously against it as ruinous and destructive. the representative of the nation in parliament, and the privy-council address the king to have it recalled; yet the patentee, such a one as i have described, shall prevail to have this patent approved, and his private interest shall weigh down the application of a whole kingdom. st. paul says, "all things are lawful, but all things are not expedient." we are answered that this patent is lawful, but is it expedient? we read that the high-priest said "it was expedient that one man should die for the people;" and this was a most wicked proposition. but that a whole nation should die for one man, was never heard of before. but because much weight is laid on the precedents of other patents, for coining copper for ireland, i will set this matter in as clear a light as i can. whoever hath read the report, will be apt to think, that a dozen precedents at least could be produced of copper coined for ireland, by virtue of patents passed in england, and that the coinage was there too; whereas i am confident, there cannot be one precedent shewn of a patent passed in england for coining copper for ireland, for above an hundred years past, and if there were any before, it must be in times of confusion. the only patents i could ever hear of, are those already mentioned to lord dartmouth and knox; the former in . and the latter in . now let us compare these patents with that granted to wood. first, the patent to knox, which was under the same conditions as that granted to lord dartmouth, was passed in ireland, the government and the attorney and solicitor-general making report that it would be useful to this kingdom: [the patentee was obliged to make every halfpenny one hundred and ten grains troy weight, whereby _ s. d_. only could be coined out of a pound of copper.][ ] the patent was passed with the advice of the king's council here; the patentee was obliged to receive his coin from those who thought themselves surcharged, and to give gold and silver for it; lastly, the patentee was to pay only _ l. s. d. per ann._ to the crown. then, as to the execution of that patent. first, i find the halfpence were milled, which, as it is of great use to prevent counterfeits (and therefore industriously avoided by wood) so it was an addition to the charge of coinage. and for the weight and goodness of the metal; i have several halfpence now by me, many of which weigh a ninth part more than those coined by wood, and bear the fire and hammer a great deal better; and which is no trifle, the impression fairer and deeper. i grant indeed, that many of the latter coinage yield in weight to some of wood's, by a fraud natural to such patentees; but not so immediately after the grant, and before the coin grew current: for in this circumstance mr. wood must serve for a precedent in future times. [footnote : the portion here in square brackets was printed in the fourth edition of this letter and in the work entitled, "fraud detected." it is not given in faulkner's first collected edition issued in , nor in "the hibernian patriot," issued in . [t.s.]] let us now examine this new patent granted to william wood. it passed upon very false suggestions of his own, and of a few confederates: it passed in england, without the least reference hither. it passed unknown to the very lord lieutenant, then in england. wood is empowered to coin one hundred and eight thousand pounds, "and all the officers in the kingdom (civil and military) are commanded" in the report to countenance and assist him. knox had only power to utter what we would take, and was obliged "to receive his coin back again at our demand," and to "enter into security for so doing." wood's halfpence are not milled, and therefore more easily counterfeited by himself as well as by others: wood pays a thousand pounds _per ann._ for years, knox paid only _ l. s. d. per ann._ for years. it was the report that set me the example of making a comparison between those two patents, wherein the committee was grossly misled by the false representation of william wood, as it was by another assertion, that seven hundred ton of copper were coined during the years of lord dartmouth's and knox's patents. such a quantity of copper at the rate of _ s. d. per_ pound would amount to about an hundred and ninety thousand pounds, which was very near as much as the current cash of the kingdom in those days; yet, during that period, ireland was never known to have too much copper coin, and for several years there was no coining at all: besides i am assured, that upon enquiring into the custom-house books, all the copper imported into the kingdom, from to , which includes years of the (besides one year allowed for the troubles) did not exceed tons, and we cannot suppose even that small quantity to have been wholly applied to coinage: so that i believe there was never any comparison more unluckily made or so destructive of the design for which it was produced. the psalmist reckons it an effect of god's anger, when "he selleth his people for nought, and taketh no money for them." that we have greatly offended god by the wickedness of our lives is not to be disputed: but our king we have not offended in word or deed; and although he be god's vicegerent upon earth, he will not punish us for any offences, except those which we shall commit against his legal authority, his sacred person (which god preserve) or the laws of the land. the report is very profuse in arguments, that ireland is in great want of copper money.[ ] who were the witnesses to prove it, hath been shewn already, but in the name of god, who are to be judges? does not the nation best know its own wants? both houses of parliament, the privy-council and the whole body of the people declare the contrary: or let the wants be what they will, we desire they may not be supplied by mr. wood. we know our own wants but too well; they are many and grievous to be borne, but quite of another kind. let england be satisfied: as things go, they will in a short time have all our gold and silver, and may keep their adulterate copper at home, for we are determined not to purchase it with our manufactures, which wood hath graciously offered to accept. our wants are not so bad by an hundredth part as the method he hath taken to supply them. he hath already tried his faculty in new-england,[ ] and i hope he will meet at least with an equal reception here; what _that_ was i leave to public intelligence. i am supposing a wild case, that if there should be any person already receiving a monstrous pension out of this kingdom, who was instrumental in procuring this patent, they have either not well consulted their own interests, or wood must[ ] put more dross into his copper and still diminish its weight. [footnote : on this subject of the want of small money in ireland, monck mason traverses the report in the following manner: "there appears to be a manifest prevarication in their lordships' report upon this part of the subject; they state, that the witnesses testified, that there was a want of small money in ireland; they attempt, therefore, to impose a copper currency, which certainly was not wanted. to satisfy the reader upon this point, i shall quote, from the unpublished correspondence of archbishop king, the following extracts: the first, from his letter to general gorge, dated the th october, , is to the following purpose. "'... as to our wanting halfpence for change, it is most false; we have more halfpence than we need, already; it is true, we want change; but it is sixpences, shillings, half-crowns, and crowns; our silver and our guineas being almost gone; and the general current coin of the kingdom is now moydores, which are thirty shillings a-piece; at least nine pence above the value in silver: now, they would have us change these for halfpence, and so the whole cash of the kingdom would be these halfpence.' ... "but the true state of the case, as to coin, is more circumstantially developed in the following letter of the same prelate to mr. southwell, which was written a few months before, viz., on the th june, . "'... and yet, after all, we want change, and i will take leave to acquaint you with the state of this kingdom as to coin. we used to have hardly any money passing here, but foreign ducatoons, plate pieces, perns, dollars, etc. but, when the east india company were forbid sending the coin of england abroad, they continued to buy up all our foreign coin, and give us english money in lieu of some part of it; by which we lost twopence in every ounce, the consequence of this was, that in two years there was not to be seen in ireland a piece of foreign silver. "'if any be brought, it is immediately sent away, the two, or as i am informed, the three pence in the ounce, given by the east india company, being a temptation not to be resisted; but, the truth is, very little is brought in, for the merchants that carry our commodities to foreign markets, find it more to their advantage to carry directly to london whatever they receive in cash; and whereas formerly they used, when they had disposed of their cargo, to load their vessels with such commodities as there was a demand for in ireland, and bring the rest in cash, they bring now only the commodities, and send the silver to london; and when they have got the twopence in every ounce from the east india company, the rest serves to answer the returns we are obliged to make to england, for the rents we are obliged to pay to noblemen and gentlemen who have estates in ireland and live in england, and for the pensions, and other occasions which are many; by this means they gain likewise the exchange, which is commonly four or five per cent, better to them than if they sent cash. "'it is farther to be observed, that shillings, which is the value of a guinea in england, makes in ireland shillings and pence, whereas a guinea passes for shillings with us, therefore, he who sends silver into england, gains three pence more by it than if he sent guineas; this advantage, though it may seem little, yet in a manner has entirely drained us of our english money which was given in lieu of foreign silver. "'but farther, if any carry foreign gold to england, they cannot easily pass it, and if they do, it is at a greater loss than there is in the guineas, this has taken away our guineas, so that there is hardly one to be seen; we have hardly any coin left but a few moydores and pistoles, which can, by no means, serve the inland trade of the kingdom. "'to give, therefore, a short view of our case, it is thus; we can have english coin but by stealth, there being an act of parliament forbidding the exportation of english coin; if, therefore, we should send our gold or silver to england to be coined, we cannot have it back again, or if we could, we cannot keep it for the reason above; we cannot for the same reason have foreign silver; let us add to these, that by the act of navigation and other acts, we cannot make our markets of buying where we make our markets for selling; though we might have the commodities we want much cheaper there, than we can have them in england, viz. all east india and turkey goods, with many others: nor is it to be expected that any nation will trade with us with their silver only, when we will not exchange commodities with them. "'except, therefore, england designs entirely to ruin ireland, a kingdom by which it is demonstrable that she gains yearly thirteen or fourteen hundred thousand pounds, she ought to think of giving us some relief'" ("history of st. patrick's," pp. xciii-xciv). [t.s.]] [footnote : see note on p. . [t.s.]] [footnote : another hint at the duchess of kendal and her connection with the patent. [t.s.]] upon wood's complaint that the officers of the king's revenue here had already given orders to all the inferior officers not to receive any of his coin, the report says, that "this cannot but be looked upon as a very extraordinary proceeding," and being contrary to the powers given in the patent, the committee say, they "cannot advise his majesty to give directions to the officers of the revenue here, not to receive or utter any of the said coin as has been desired in the addresses of both houses," but on the contrary, they "think it both just and reasonable that the king should immediately give orders to the commissioners of the revenue, &c. to revoke all orders, &c. that may have been given by them to hinder or obstruct the receiving the said coin." and accordingly, we are told, such orders are arrived.[ ]. now this was a cast of wood's politics; for his information was wholly false and groundless, which he knew very well; and that the commissioners of the revenue here were all, except one, sent us from england, and love their employments too well to have taken such a step: but wood was wise enough to consider, that such orders of revocation would be an open declaration of the crown in his favour, would put the government here under a difficulty, would make a noise, and possibly create some terror in the poor people of ireland. and one great point he hath gained, that although any orders of revocation will be needless, yet a new order is to be sent, and perhaps already here, to the commissioners of the revenue, and all the king's officers in ireland, that wood's "halfpence be suffered and permitted, without any let, suit, trouble, molestation or denial of any of the king's officers or ministers whatsoever, to pass and be received as current money by such as shall be willing to receive them." in this order there is no exception, and therefore, as far as i can judge, it includes all officers both civil and military, from the lord high chancellor to a justice of peace, and from the general to an ensign: so that wood's project is not likely to fail for want of managers enough. for my own part, as things stand, i have but little regret to find myself out of the number, and therefore i shall continue in all humility to exhort and warn my fellow-subjects never to receive or utter this coin, which will reduce the kingdom to beggary by much quicker and larger steps than have hitherto been taken.[ ] [footnote : archbishop king's letter, quoted by monck mason, explains why it was that the revenue officers refused to receive wood's coins. it seems the officers had been advised by lawyers that, in the event of their taking the coins, it might be quite likely they would be compelled to make them good, should such a demand be made of them. precedents could easily be cited by those taking action, since all previous patents issued to private individuals for coining money, required of the patentee to take them back and pay for them with gold or silver. [t. s.]] [footnote : the suggestion thus made by the lords of the committee, although coupled with the reduction in the amount of money wood was to be permitted to introduce, did not do any good. archbishop king argued rightly that this was treating the people of ireland as if they were fools and children. if wood could coin £ , , what was to prevent him coining £ , ? the suggestion indeed irritated the people almost as much as did the patent itself. [t.s.]] but it is needless to argue any longer. the matter is come to an issue. his majesty pursuant to the law, hath left the field open between wood and the kingdom of ireland. wood hath liberty to offer his coin, and we have law, reason, liberty and necessity to refuse it. a knavish jockey may ride an old foundered jade about the market, but none are obliged to buy it. i hope the words "voluntary" and "willing to receive it" will be understood, and applied in their true natural meaning, as commonly understood by protestants. for if a fierce captain comes to my shop to buy six yards of scarlet cloth, followed by a porter laden with a sack of wood's coin upon his shoulders, if we are agreed about the price, and my scarlet lies ready cut upon the counter, if he then gives me the word of command, to receive my money in wood's coin, and calls me a "disaffected jacobite dog" for refusing it (although i am as loyal a subject as himself, and without hire) and thereupon seizes my cloth, leaving me the price in his odious copper, and bids me take my remedy: in this case, i shall hardly be brought to think that i am left to my own will. i shall therefore on such occasions, first order the porter aforesaid to go off with his pack, and then see the money in silver and gold in my possession before i cut or measure my cloth. but if a common soldier drinks his pot first, and then offers payment in wood's halfpence, the landlady may be under some difficulty; for if she complains to his captain or ensign, they are likewise officers, included in this general order for encouraging these halfpence to pass as current money. if she goes to a justice of peace, he is also an officer, to whom this general order is directed. i do therefore advise her to follow my practice, which i have already begun, and be paid for her goods before she parts with them. however i should have been content, for some reasons, that the military gentlemen had been excepted by name, because i have heard it said, that their discipline is best confined within their own district. his majesty in the conclusion of his answer to the address of the house of lords against wood's coin, is pleased to say that "he will do everything in his power for the satisfaction of his people." it should seem therefore, that the recalling the patent is not to be understood as a thing in his power. but however since the law does not oblige us to receive this coin, and consequently the patent leaves it to our voluntary choice, there is nothing remaining to preserve us from rain but that the whole kingdom should continue in a firm determinate resolution never to receive or utter this fatal coin:[ ] [footnote : so ready was the response to this suggestion of swift's, that it was found necessary for tradesmen to take precautions to have it publicly known that they were in no way connected with wood and his money, the following is a copy of an advertisement which illustrates this: "whereas several persons in this kingdom suspect that john molyneux of meath street, ironmonger, and his brother daniel molyneux, of essex street, ironmonger, are interested in the patent obtained by william wood for coining of halfpence and farthings for this kingdom. "now we the said john molyneux and daniel molyneux, in order to satisfy the public, do hereby declare, that we are in no way concerned with the said wood in relation to his said patent; and that we never were possessed of any of the said halfpence or farthings, except one halfpence and one farthing, which i the said john molyneux received in a post-letter, and which i immediately afterwards delivered to one of the lords-justices of ireland. "and we do further declare, that we will not directly or indirectly, be anyways concerned with the said wood's halfpence or farthings; but on the contrary, act to the great advantage and satisfaction of this kingdom, as good, loving and faithful subjects ought to do. and we do further declare, that to the best of our knowledge, the said william wood is not in this kingdom. "given under our hands in dublin this d. day of august . "john molyneux "dan. molyneux." another ran as follows: "advertisement. "whereas, i, thomas handy, of meath street, dublin, did receive by the last packet, from a person in london, to whom i am an entire stranger, bills of lading for eleven casks of wood's halfpence, shipped at bristol, and consigned to me by the said person on his own proper account, of which i had not the least notice until i received the said bills of lading. "now i, the said thomas handy, being highly sensible of the duty and regard which every honest man owes to his country and to his fellow-subjects, do hereby declare, that i will not be concerned, directly or indirectly, in entering, landing, importing, receiving, or uttering any of the said wood's halfpence, for that i am fully convinced, as well from the addresses of both houses of parliament, as otherwise, that the importing and uttering the said halfpence will be destructive to this nation, and prejudicial to his majesty's revenue. "and of this my resolution i gave notice by letter to the person who sent me the bills of lading, the very day i received them, and have sent back the said bills to him. "tho. handy. "dublin, th. august, ." [t.s.]] after which, let the officers to whom these orders are directed, (i would willingly except the military) come with their exhortations, their arguments and their eloquence, to persuade us to find our interest in our undoing. let wood and his accomplices travel about the country with cart-loads of their ware, and see who will take it off their hands, there will be no fear of his being robbed, for a highwayman would scorn to touch it. i am only in pain how the commissioners of the revenue will proceed in this juncture; because i am told they are obliged by act of parliament to take nothing but gold and silver in payment for his majesty's customs, and i think they cannot justly offer this coinage of mr. wood to others, unless they will be content to receive it themselves. the sum of the whole is this. the "committee advises the king to send immediate orders to all his officers here, that wood's coin be suffered and permitted without any let, suit, trouble, &c. to pass and be received as current money by such as shall be willing to receive the same." it is probable, that the first willing receivers may be those who must receive it whether they will or no, at least under the penalty of losing an office. but the landed undepending men, the merchants, the shopkeepers and bulk of the people, i hope, and am almost confident, will never receive it. what must the consequence be? the owners will sell it for as much as they can get. wood's halfpence will come to be offered for six a penny (yet then he will be a sufficient gainer) and the necessary receivers will be losers of two-thirds in their salaries or pay. this puts me in mind of a passage i was told many years ago in england. at a quarter-sessions in leicester, the justices had wisely decreed, to take off a halfpenny in a quart from the price of ale. one of them, who came in after the thing was determined, being informed of what had passed, said thus: "gentlemen; you have made an order, that ale should be sold in our country for three halfpence a quart: i desire you will now make another to appoint who must drink it, for _by g-- i will not_."[ ] [footnote : the following broadside, ascribed to swift, but written probably by sheridan, further amusingly illustrates the point swift makes. the broadside was printed by john harding: "another letter to mr. harding the printer, upon occasion of the report of the committee of the lords of his majesty's most honourable privy-council, in relation to mr. wood's halfpence and farthings, etc., lately published. "mr. harding,--although this letter also is directed to you, yet you know that it is intended for the benefit of the whole kingdom, and therefore i pray make it public, and take care to disperse it. "the design of it is only to desire all people to take notice, that whatever apprehensions some persons seem to be under on account of the above-mentioned report concerning mr. wood's halfpence and farthings, yet the utmost advice which the right honourable committee have thought fit to give his majesty, is, that a certain sum of the said halfpence and farthings may be received as current money by such as shall be willing to receive the same. and if we are willing to ruin ourselves and our country, i think we are not to be pitied. "upon this occasion i would only tell my countrymen a short story. "a certain king of great britain who spoke broad scotch, and being himself a man of wit, loved both to hear and speak things that were humorous, had once a petition preferred to him, in which the petitioner, having set forth his own merits, most humbly prayed his majesty to grant him letters-patent for receiving a shilling from every one of his subjects who should be willing to give so much to him. 'in gude troth,' said the king, 'a very reasonable petition. let every man give thee twa shillings gin he be willing so to do, and thou shalt have full liberty to receive it.' 'but,' says the petitioner, 'i desire that this clause may be inserted in my patent, that every man who refuses to give me a shilling, should appear at westminster hall to shew cause why he so refuses.' 'this also,' says the king, 'shall be granted thee, but always with this proviso, that the man be willing to come.' "i am your, etc. "misoxulos."] i must beg leave to caution your lordships and worships in one particular. wood hath graciously promised to load us at present only with forty thousand pounds of his coin, till the exigences of the kingdom require the rest. i entreat you will never suffer mr. wood to be a judge of your exigences. while there is one piece of silver or gold remaining in the kingdom he will call it an exigency, he will double his present _quantum_ by stealth as soon as he can, and will have the remainder still to the good. he will pour his own raps[ ]and counterfeits upon us: france and holland will do the same; nor will our own coiners at home be behind them: to confirm which i have now in my pocket a rap or counterfeit halfpenny in imitation of his, but so ill performed, that in my conscience i believe it is not of his coining. [footnote : the word rap is probably a contraction of "raparee," and was the name given to the tokens that passed current in ireland for copper coins of small value. generally it referred to debased coins; hence it may be allied to "raparee," who might be considered as a debased citizen. the raparees were so called from the rapary or half-pike they carried. [t.s.]] i must now desire your lordships and worships that you will give great allowance for this long undigested paper, i find myself to have gone into several repetitions, which were the effects of haste, while new thoughts fell in to add something to what i had said before. i think i may affirm that i have fully answered every paragraph in the report, which although it be not unartfully drawn, and is perfectly in the spirit of a pleader who can find the most plausible topics in behalf of his client, yet there was no great skill required to detect the many mistakes contained in it, which however are by no means to be charged upon the right honourable committee, but upon the most false impudent and fraudulent representations of wood and his accomplices. i desire one particular may dwell upon your minds, although i have mentioned it more than once; that after all the weight laid upon precedents there is not one produced in the whole report, of a patent for coining copper in england to pass in ireland, and only two patents referred to (for indeed there were no more) which were both passed in ireland, by references to the king's council here, both less advantageous to the coiner than this of wood, and in both securities given to receive the coin at every call, and give gold and silver in lieu of it. this demonstrates the most flagrant falsehood and impudence of wood, by which he would endeavour to make the right honourable committee his instruments, (for his own illegal and exorbitant gain,) to ruin a kingdom, which hath deserved quite different treatment. i am very sensible that such a work as i have undertaken might have worthily employed a much better pen. but when a house is attempted to be robbed it often happens that the weakest in the family runs first to stop the door. all the assistance i had were some informations from an eminent person,[ ] whereof i am afraid i have spoiled a few by endeavouring to make them of a piece with my own productions, and the rest i was not able to manage: i was in the case of david who could not move in the armour of saul, and therefore i rather chose to attack this "uncircumcised philistine (wood i mean) with a sling and a stone." and i may say for wood's honour as well as my own, that he resembles goliath in many circumstances, very applicable to the present purpose; for goliath had "a helmet of brass upon his head, and he was armed with a coat of mail, and the weight of the coat was five thousand shekels of brass, and he had greaves of brass upon his legs, and a target of brass between his shoulders." in short he was like mr. wood, all over brass; and "he defied the armies of the living god." goliath's condition of combat were likewise the same with those of wood. "if he prevail against us, then shall we be his servants:" but if it happens that i prevail over him, i renounce the other part of the condition, he shall never be a servant of mine, for i do not think him fit to be trusted in any honest man's shop. [footnote : mr. robert lindsay, a dublin lawyer, assisted swift on the legal points raised in the drapier's letters. this is the mr. lindsay, counsellor-at-law, to whom swift submitted a case concerning a mr. gorman (see scott's edit., vol. xix., p. ). mr. lindsay is supposed to be the author of two letters addressed to chief justice whitshed on the matter of his conduct towards the grand jury which discharged harding the printer (see scott's edit., vol. vi., p. ). [t.s.]] i will conclude with my humble desire and request which i made in my second letter; that your lordships and worships would please to order a declaration to be drawn up expressing, in the strongest terms, your firm resolutions never to receive or utter any of wood's halfpence or farthings, and forbidding your tenants to receive them. that the said declaration may be signed by as many persons as possible who have estates in this kingdom, and be sent down to your several tenants aforesaid.[ ] [footnote : a declaration, pursuant to this request, was signed soon after by the most considerable persons of the kingdom, which was universally spread and of great use. [f.] "the humble petition of the lord-mayor, sheriffs, commons, and citizens of the city of dublin, in common council assembled," was issued as a broadside on th september, . see also appendix ix. [t.s.]] and if the dread of wood's halfpence should continue till next quarter-sessions (which i hope it will not) the gentlemen of every county will then have a fair opportunity of declaring against them with unanimity and zeal. i am with the greatest respect, (may it please your lordships and worships) your most dutiful and obedient servant, m.b. aug. , . letter iv. a letter to the whole people of ireland. note the country was now in a very fever of excitement. everywhere meetings were held for the purpose of expressing indignation against the imposition, and addresses from brewers, butchers, flying stationers, and townspeople generally, were sent in embodying the public protest against wood and his coins. swift fed the flame by publishing songs and ballads well fitted for the street singers, and appealing to the understandings of those who he well knew would effectively carry his message to the very hearths of the poorest labourers. courtier and student, tradesman and freeman, thief and prostitute, beggar and loafer, all were alike carried by an indignation which launched them on a maelstrom of enthusiasm. so general became the outcry that, in coxe's words, "the lords justices refused to issue the orders for the circulation of the coin.... people of all descriptions and parties flocked in crowds to the bankers to demand their money, and drew their notes with an express condition to be paid in gold and silver. the publishers of the most treasonable pamphlets escaped with impunity, provided wood and his patent were introduced into the work. the grand juries could scarcely be induced to find any bill against such delinquents; no witnesses in the prosecution were safe in their persons; and no juries were inclined, or if inclined could venture, to find them guilty." in such a state of public feeling swift assumed an entirely new attitude. he promulgated his "letter to the whole people of ireland"--a letter which openly struck at the very root of the whole evil, and laid bare to the public eye the most secret spring of its righteous indignation. it was not wood nor his coins, it was the freedom of the people of ireland and their just rights and privileges that were being fought for. he wrote them the letter "to refresh and continue that spirit so seasonably raised among" them, and in order that they should plainly understand "that by the laws of god, of nature, of nations, and of your country, you are, and ought to be as free a people as your brethren in england." the king's prerogative had been held threateningly over them. what was the king's prerogative? he asked in effect. it was but the right he enjoyed within the bounds of the law as made by the people in parliament assembled. the law limits him with his subjects. such prerogative he respected and would take up arms to protect against any who should rebel. but "all government without the consent of the governed, is the very definition of slavery." the condition of the irish nation was such that it was to be expected eleven armed men should overcome a single man in his shirt; but even if those in power exercise then power to cramp liberty, a man on the rack may still have "the liberty of roaring as loud as he thought fit." and the men on the rack roared to a tune that walpole had never before heard. the letter appeared on the th october, .[ ] the duke of grafton had been recalled and carteret had taken up the reins of government. for reasons, either personal or politic, he took walpole's side. coxe goes into considerations on this attitude of carteret's, but they hardly concern us here. suffice it that the lord lieutenant joined forces with the party in the irish privy council, among whom were midleton and st. john brodrick, and on october th issued a proclamation offering a reward of £ [ ] for the discovery of the author of this "wicked and malicious pamphlet" which highly reflected on his majesty and his ministers, and which tended "to alienate the affections of his good subjects of england and ireland from each other." [footnote : not on october rd as the earlier editors print it, and as monck mason, scott and mr. churton collins repeat.] [footnote : see appendix, no. vi.] the author's name was not made public, nor was it likely to be. there is no doubt that it was generally known who the author was. in that general knowledge lies the whole pith of the biblical quotation circulated abroad on the heels of the proclamation: "and the people said unto saul, shall _jonathan_ die, who had wrought this great salvation in israel? god forbid: as the lord liveth there shall not one hair of his head fall to the ground, for he hath wrought with god this day: so the people rescued _jonathan_ that he died not." swift remained very much alive. harding, for printing the obnoxious letter, had been arrested and imprisoned, and the crown proceeded with his prosecution. in such circumstances swift was not likely to remain idle. on the th october he addressed a letter to lord chancellor midleton in defence of the drapier's writings, and practically acknowledged himself to be the author.[ ] it was not actually printed until , but there is no doubt that midleton received it at the time it was written. what effect it had on the ultimate issue is not known; but midleton's conduct justifies the confidence swift placed in him. the grand jury of the michaelmas term of sat to consider the bill against harding. on the th of november swift addressed to them his "seasonable advice." the bill was thrown out. whitshed, the chief justice, consistently with his action on a previous occasion (see vol. vii.), angrily remonstrated with the jury, demanded of them their reasons for such a decision, and finally dissolved them. this unconstitutional, and even disgraceful conduct, however, served but to accentuate the resentment of the people against wood and the patent, and the crown fared no better by a second grand jury. the second jury accompanied its rejection of the bill by a presentment against the patent,[ ] and the defeat of the "prerogative" became assured. every where the drapier was acclaimed the saviour of his country. any person who could scribble a doggerel or indite a tract rushed into print, and now whitshed was harnessed to wood in a pillory of contemptuous ridicule. indeed, so bitter was the outcry against the lord chief justice, that it is said to have hastened his death. the cities of dublin, cork and waterford passed resolutions declaring the uttering of wood's halfpence to be highly prejudicial to his majesty's revenue and to the trades of the kingdom. the drapier was now the patriot, and the whole nation responded to his appeal to assist him in its own defence. [footnote : the highly wrought up story about swift's butler, narrated by sheridan, deane swift and scott, is nothing but a sample of eighteenth century "sensationalism." swift never bothered himself about what his servants would say with regard to the authorship of the letters. certainly this letter to midleton proves that he was not at all afraid of the consequences of discovery.] [footnote : see appendix v.] the text of the present reprint is based on that given by sir walter scott, collated with the original edition and with that reprinted in "fraud detected" ( ). faulkner's text of has also been consulted. [t.s.] [illustration: a **letter** to the **whole people** of **ireland**. _by_ m.b. _drapier_. author of the letter to the _shop-keepers_, &c. _dublin:_ printed by _john harding_ in _molesworth's-court_ in _fishamble street_. ] letter iv. a letter to the whole people of ireland. my dear countrymen, having already written three letters upon so disagreeable a subject as mr. wood and his halfpence; i conceived my task was at an end: but i find, that cordials must be frequently applied to weak constitutions, political as well as natural. a people long used to hardships, lose by degrees the very notions of liberty, they look upon themselves as creatures at mercy, and that all impositions laid on them by a stronger hand, are, in the phrase of the report, legal and obligatory. hence proceeds that poverty and lowness of spirit, to which a kingdom may be subject as well as a particular person. and when esau came fainting from the field at the point to die, it is no wonder that he sold his birthright for a mess of pottage. i thought i had sufficiently shewn to all who could want instruction, by what methods they might safely proceed, whenever this coin should be offered to them; and i believe there hath not been for many ages an example of any kingdom so firmly united in a point of great importance, as this of ours is at present, against that detestable fraud. but however, it so happens that some weak people begin to be alarmed anew, by rumours industriously spread. wood prescribes to the newsmongers in london what they are to write. in one of their papers published here by some obscure printer (and probably with no good design) we are told, that "the papists in ireland have entered into an association against his coin," although it be notoriously known, that they never once offered to stir in the matter; so that the two houses of parliament, the privy-council, the great number of corporations, the lord mayor and aldermen of dublin, the grand juries, and principal gentlemen of several counties are stigmatized in a lump under the name of "papists." this impostor and his crew do likewise give out, that, by refusing to receive his dross for sterling, we "dispute the king's prerogative, are grown ripe for rebellion, and ready to shake off the dependency of ireland upon the crown of england." to countenance which reports he hath published a paragraph in another newspaper, to let us know that "the lord lieutenant is ordered to come over immediately to settle his halfpence." i entreat you, my dear countrymen, not to be under the least concern upon these and the like rumours, which are no more than the last howls of a dog dissected alive, as i hope he hath sufficiently been. these calumnies are the only reserve that is left him. for surely our continued and (almost) unexampled loyalty will never be called in question for not suffering ourselves to be robbed of all that we have, by one obscure ironmonger. as to disputing the king's prerogative, give me leave to explain to those who are ignorant, what the meaning of that word _prerogative_ is. the kings of these realms enjoy several powers, wherein the laws have not interposed: so they can make war and peace without the consent of parliament; and this is a very great prerogative. but if the parliament doth not approve of the war, the king must bear the charge of it out of his own purse, and this is as great a check on the crown. so the king hath a prerogative to coin money without consent of parliament. but he cannot compel the subject to take that money except it be sterling, gold or silver; because herein he is limited by law. some princes have indeed extended their prerogative further than the law allowed them; wherein however, the lawyers of succeeding ages, as fond as they are of precedents, have never dared to justify them. but to say the truth, it is only of late times that prerogative hath been fixed and ascertained. for whoever reads the histories of england, will find that some former kings, and these none of the worst, have upon several occasions ventured to control the laws with very little ceremony or scruple, even later than the days of queen elizabeth. in her reign that pernicious counsel of sending base money hither, very narrowly failed of losing the kingdom, being complained of by the lord-deputy, the council, and the whole body of the english here:[ ] so that soon after her death it was recalled by her successor, and lawful money paid in exchange. [footnote : see moryson's "itinerary" (pt. ii., pp. , and ), where an account is given which fully bears out swift.[t.s.]] having thus given you some notion of what is meant by the king's "prerogative," as far as a tradesman can be thought capable of explaining it, i will only add the opinion of the great lord bacon: that "as god governs the world by the settled laws of nature, which he hath made, and never transcends those laws but upon high important occasions; so among earthly princes, those are the wisest and the best, who govern by the known laws of the country, and seldomest make use of their prerogative."[ ] [footnote : the words in inverted commas appear to be a reminiscence rather than a quotation. i have not traced the sentence, as it stands, in bacon; but the regular government of the world by the laws of nature, as contrasted with the exceptional disturbance of these laws, is enunciated in bacon's "confession of faith," while the dangers of a strained prerogative are urged in the "essay on empire." bacon certainly gives no support to swift's limits of the prerogative as regards coinage. [craik.]] now, here you may see that the vile accusation of wood and his accomplices, charging us with "disputing the king's prerogative" by refusing his brass, can have no place, because compelling the subject to take any coin which is not sterling is no part of the king's prerogative, and i am very confident if it were so, we should be the last of his people to dispute it, as well from that inviolable loyalty we have always paid to his majesty, as from the treatment we might in such a case justly expect from some who seem to think, we have neither common sense nor common senses. but god be thanked, the best of them are only our fellow-subjects, and not our masters. one great merit i am sure we have, which those of english birth can have no pretence to, that our ancestors reduced this kingdom to the obedience of england, for which we have been rewarded with a worse climate, the privilege of being governed by laws to which we do not consent, a ruined trade, a house of peers without jurisdiction, almost an incapacity for all employments; and the dread of wood's halfpence. but we are so far from disputing the king's prerogative in coining, that we own he has power to give a patent to any man for setting his royal image and superscription upon whatever materials he pleases, and liberty to the patentee to offer them in any country from england to japan, only attended with one small limitation, that nobody alive is obliged to take them. upon these considerations i was ever against all recourse to england for a remedy against the present impending evil, especially when i observed that the addresses of both houses, after long expectance, produced nothing but a report altogether in favour of wood, upon which i made some observations in a former letter, and might at least have made as many more. for it is a paper of as singular a nature as i ever beheld. but i mistake; for before this report was made, his majesty's most gracious answer to the house of lords was sent over and printed, wherein there are these words, "granting the patent for coining halfpence and farthings agreeable to the practice of his royal predecessors, &c." that king charles d. and king james d. (and they only) did grant patents for this purpose is indisputable, and i have shewn it at large. their patents were passed under the great seal of ireland by references to ireland, the copper to be coined in ireland, the patentee was bound on demand to receive his coin back in ireland, and pay silver and gold in return. wood's patent was made under the great seal of england, the brass coined in england, not the least reference made to ireland, the sum immense, and the patentee under no obligation to receive it again and give good money for it: this i only mention, because in my private thoughts i have sometimes made a query, whether the penner of those words in his majesty's most gracious answer, "agreeable to the practice of his royal predecessors," had maturely considered the several circumstances, which, in my poor opinion seem to make a difference. let me now say something concerning the other great cause of some people's fear, as wood has taught the london newswriter to express it. that "his excellency the lord lieutenant is coming over to settle wood's halfpence." we know very well that the lords lieutenants for several years past have not thought this kingdom worthy the honour of their residence, longer than was absolutely necessary for the king's business, which consequently wanted no speed in the dispatch; and therefore it naturally fell into most men's thoughts, that a new governor coming at an unusual time must portend some unusual business to be done, especially if the common report be true, that the parliament prorogued to i know not when, is by a new summons (revoking that prorogation) to assemble soon after his arrival: for which extraordinary proceeding the lawyers on t'other side the water have by great good fortune found two precedents. all this being granted, it can never enter into my head that so little a creature as wood could find credit enough with the king and his ministers to have the lord lieutenant of ireland sent hither in a hurry upon his errand. for let us take the whole matter nakedly as it lies before us, without the refinements of some people, with which we have nothing to do. here is a patent granted under the great seal of england, upon false suggestions, to one william wood for coining copper halfpence for ireland: the parliament here, upon apprehensions of the worst consequences from the said patent, address the king to have it recalled; this is refused, and a committee of the privy-council report to his majesty, that wood has performed the conditions of his patent. he then is left to do the best he can with his halfpence; no man being obliged to receive them; the people here, being likewise left to themselves, unite as one man, resolving they will have nothing to do with his ware. by this plain account of the fact it is manifest, that the king and his ministry are wholly out of the case, and the matter is left to be disputed between him and us. will any man therefore attempt to persuade me, that a lord lieutenant is to be dispatched over in great haste before the ordinary time, and a parliament summoned by anticipating a prorogation, merely to put an hundred thousand pounds into the pocket of a sharper, by the ruin of a most loyal kingdom. but supposing all this to be true. by what arguments could a lord lieutenant prevail on the same parliament which addressed with so much zeal and earnestness against this evil, to pass it into a law? i am sure their opinion of wood and his project is not mended since the last prorogation; and supposing those methods should be used which detractors tell us have been sometimes put in practice for gaining votes. it is well known that in this kingdom there are few employments to be given, and if there were more, it is as well known to whose share they must fall. but because great numbers of you are altogether ignorant in the affairs of your country, i will tell you some reasons why there are so few employments to be disposed of in this kingdom. all considerable offices for life here are possessed by those to whom the reversions were granted, and these have been generally followers of the chief governors, or persons who had interest in the court of england. so the lord berkeley of stratton[ ] holds that great office of master of the rolls, the lord palmerstown[ ] is first remembrancer worth near _l. per ann._ one dodington[ ] secretary to the earl of pembroke,[ ] begged the reversion of clerk of the pells worth _l._ a year, which he now enjoys by the death of the lord newtown. mr. southwell is secretary of state,[ ] and the earl of burlington[ ] lord high treasurer of ireland by inheritance. these are only a few among many others which i have been told of, but cannot remember. nay the reversion of several employments during pleasure are granted the same way. this among many others is a circumstance whereby the kingdom of ireland is distinguished from all other nations upon earth, and makes it so difficult an affair to get into a civil employ, that mr. addison was forced to purchase an old obscure place, called keeper of the records of bermingham's tower of ten pounds a year, and to get a salary of _l._ annexed to it,[ ] though all the records there are not worth half-a-crown, either for curiosity or use. and we lately saw a favourite secretary descend to be master of the revels, which by his credit and extortion he hath made pretty considerable.[ ] i say nothing of the under-treasurership worth about _l_. a year, nor the commissioners of the revenue, four of whom generally live in england; for i think none of these are granted in reversion. but the test is, that i have known upon occasion some of these absent officers as keen against the interest of ireland as if they had never been indebted to her for a single groat. [footnote : berkeley was one of the junta in harley's administration of - . he had married sir john temple's daughter. his connection with a person so disliked by swift may account for his inclusion here. [t.s.]] [footnote : this was henry temple, first viscount palmerston, with whom swift later had an unpleasant correspondence. palmerston could not have been more than seven years old when he was appointed (september st, ), with luke king, chief remembrancer of the court of exchequer in ireland, for their joint lives. king died in , but the grant was renewed to palmerston and his son henry for life. he was raised to the peerage as baron temple of mount temple, and viscount palmerston of palmerston, in march, - . sir charles hanbury williams called him "little broadbottom palmerston." he died in . [t.s.] ] [footnote : george bubb ( - ) was chief secretary during wharton's lord lieutenancy in . he took the name of doddington on the death of his uncle in . [t.s.]] [footnote : thomas herbert, eighth earl of pembroke ( - ), had preceded the earl of wharton as lord lieutenant of ireland. he bears a high character in history and on four successive coronations, namely, those of william and mary, anne, george i. and george ii., he acted as sword carrier. although a tory, even macaulay acknowledges pembroke's high breeding and liberality. [t.s.]] [footnote : this is the edward southwell to whom archbishop king wrote the letters quoted from monck mason in previous notes. he was the son of sir robert southwell, the diplomatist and friend of sir william temple, to whom swift bore a letter of introduction from the latter, soliciting the office of amanuensis. in june, , edward southwell had his salary as secretary increased by £ ; and in july of the same year the office was granted to him and his son for life. the southwell family first came to ireland in the reign of james i., at the time of the plantation of munster. [t.s.]] [footnote : richard boyle, third earl of burlington (or bridlington of yorks), and fourth earl of cork ( - ), was appointed lord high-treasurer of ireland in august, . his great-grandfather, the first earl of cork, had held the same office in . the lord-lieutenancy of the west riding of yorkshire, and the office of custos rotulorum of the north and west ridings, seem also to have been inheritances of this family. the third earl had a taste for architecture, and spent enormous sums of money in the reconstruction of burlington house, a building that was freely satirized by hogarth and lord hervey. his taste, however, seems to have run to the ornamental rather than the useful, and its gratification involved him in such serious financial difficulties, that he was compelled to sell some of his irish estates. swift notes that "my lord burlington is now selling in one article £ , a year in ireland for £ , which must pay his debts" (scott's edit. , vol. xix., p. ). [t.s.]] [footnote : this post was found for addison on his appointment in as secretary to the earl of wharton, lord-lieutenant of ireland. tickell, in his preface to his edition of addison's works, says the post was granted to addison as a mark of queen anne's special favour. bermingham's tower was that part of dublin castle in which the records were kept. [t.s.]] [footnote : mr. hopkins, secretary to the duke of grafton. the exactions made by this gentleman upon the players, in his capacity of master of the revels, are the subject of two satirical poems. [s.] this may have been john hopkins, the second son of the bishop of londonderry, who was the author of "amasia," dedicated to the duchess of grafton. [t.s.]] i confess, i have been sometimes tempted to wish that this project of wood might succeed, because i reflected with some pleasure what a jolly crew it would bring over among us of lords and squires, and pensioners of both sexes, and officers civil and military, where we should live together as merry and sociable as beggars, only with this one abatement, that we should neither have meat to feed, nor manufactures to clothe us, unless we could be content to prance about in coats of mail, or eat brass as ostriches do iron. i return from this digression to that which gave me the occasion of making it: and i believe you are now convinced, that if the parliament of ireland were as temptable as any other assembly within a mile of christendom (which god forbid) yet the managers must of necessity fail for want of tools to work with. but i will yet go one step further, by supposing that a hundred new employments were erected on purpose to gratify compilers; yet still an insuperable difficulty would remain; for it happens, i know not how, that money is neither whig nor tory, neither of town nor country party, and it is not improbable, that a gentleman would rather choose to live upon his own estate which brings him gold and silver, than with the addition of an employment, when his rents and salary must both be paid in wood's brass, at above eighty _per cent._ discount. for these and many other reasons, i am confident you need not be under the least apprehensions from the sudden expectation of the lord lieutenant,[ ] while we continue in our present hearty disposition; to alter which there is no suitable temptation can possibly be offered: and if, as i have often asserted from the best authority, the law hath not left a power in the crown to force any money except sterling upon the subject, much less can the crown devolve such a power upon another. [footnote : lord carteret, afterwards earl granville. see note to "a vindication of lord carteret," in vol. vii. of present edition of swift's works. [t.s.]] this i speak with the utmost respect to the person and dignity of his excellency the lord carteret, whose character hath been given me by a gentleman that hath known him from his first appearance in the world: that gentleman describes him as a young nobleman of great accomplishments, excellent learning, regular in his life, and of much spirit and vivacity. he hath since, as i have heard, been employed abroad, was principal secretary of state, and is now about the th year of his age appointed lord lieutenant of ireland. from such a governor this kingdom may reasonably hope for as much prosperity as, under so many discouragements, it can be capable of receiving.[ ] [footnote : carteret was an old friend of swift. on the earl's appointment to the lord-lieutenancy, in april, , swift wrote him a letter on the matter of wood's halfpence, in which he took the liberty of "an old humble servant, and one who always loved and esteemed" him, to make known to him the apprehensions the people were under concerning mr. wood's patent. "neither is it doubted," he wrote, "that when your excellency shall be thoroughly informed, your justice and compassion for an injured people, will force you to employ your credit for their relief." swift waited for more than a month, and on receiving no reply, sent a second letter, which sir henry craik justly calls, "a masterpiece of its kind." it was as follows: "june , . "my lord, "it is above a month since i took the boldness of writing to your excellency, upon a subject wherein the welfare of this kingdom is highly concerned. "i writ at the desire of several considerable persons here, who could not be ignorant that i had the honour of being well known to you. "i could have wished your excellency had condescended so far, as to let one of your under clerks have signified to me that a letter was received. "i have been long out of the world; but have not forgotten what used to pass among those i lived with while i was in it: and i can say, that during the experience of many years, and many changes in affairs, your excellency, and one more, who is not worthy to be compared to you, are the only great persons that ever refused to answer a letter from me, without regard to business, party, or greatness; and if i had not a peculiar esteem for your personal qualities, i should think myself to be acting a very inferior part in making this complaint. "i never was so humble, as to be vain upon my acquaintance with men in power, and always rather chose to avoid it when i was not called. neither were their power or titles sufficient, without merit, to make me cultivate them; of which i have witnesses enough left, after all the havoc made among them, by accidents of time, or by changes of persons, measures, and opinions. "i know not how your conception of yourself may alter, by every new high station; but mine must continue the same, or alter for the worse. "i often told a great minister, whom you well know, that i valued him for being the same man through all the progress of power and place. i expected the like in your lordship; and still hope that i shall be the only person who will ever find it otherwise. "i pray god to direct your excellency in all your good undertakings, and especially in your government of this kingdom. "i shall trouble you no more; but remain, with great respect, my lord, "your excellency's most obedient, "and most humble servant, "jon. swift." this letter brought an immediate reply from carteret, who confessed himself in the wrong for his silence, and trusted he had not forfeited swift's friendship by it. with regard to mr. wood's patent, he said that the matter was under examination, "and till that is over i am not informed sufficiently to make any other judgment of the matter, than that which i am naturally led to make, by the general aversion which appears to it in the whole nation." swift replied in a charming vein, and elegantly put his scolding down to the testiness of old age. his excellency had humbled him. "therefore, i fortel that you, who could so easily conquer so captious a person, and of so little consequence, will quickly subdue this whole kingdom to love and reverence you" (scott's ed. , vol. xvi., pp. - ). [t.s.]] it is true indeed, that within the memory of man, there have been governors of so much dexterity, as to carry points of terrible consequence to this kingdom, by their power with _those who were in office_, and by their arts in managing or deluding others with oaths, affability, and even with dinners. if wood's brass had in those times been upon the anvil, it is obvious enough to conceive what methods would have been taken. depending persons would have been told in plain terms, that it was a "service expected from them, under pain of the public business being put into more complying hands." others would be allured by promises. to the country gentleman, besides good words, burgundy and closeting. it would perhaps have been hinted how "kindly it would be taken to comply with a royal patent, though it were not compulsory," that if any inconveniences ensued, it might be made up with other "graces or favours hereafter." that "gentlemen ought to consider whether it were prudent or safe to disgust england:" they would be desired to "think of some good bills for encouraging of trade, and setting the poor to work, some further acts against popery and for uniting protestants." there would be solemn engagements that we should "never be troubled with above forty thousand pounds in his coin, and all of the best and weightiest sort, for which we should only give our manufactures in exchange, and keep our gold and silver at home." perhaps a "seasonable report of some invasion would have been spread in the most proper juncture," which is a great smoother of rubs in public proceedings; and we should have been told that "this was no time to create differences when the kingdom was in danger." these, i say, and the like methods would in corrupt times have been taken to let in this deluge of brass among us; and i am confident would even then have not succeeded, much less under the administration of so excellent a person as the lord carteret, and in a country where the people of all ranks, parties and denominations are convinced to a man, that the utter undoing of themselves and their posterity for ever will be dated from the admission of that execrable coin; that if it once enters, it can be no more confined to a small or moderate quantity, than the plague can be confined to a few families, and that no equivalent can be given by any earthly power, any more than a dead carcass can be recovered to life by a cordial. there is one comfortable circumstance in this universal opposition to mr. wood, that the people sent over hither from england to fill up our vacancies ecclesiastical, civil and military, are all on our side: money, the great divider of the world, hath by a strange revolution, been the great uniter of a most divided people. who would leave a hundred pounds a year in england (a country of freedom) to be paid a thousand in ireland out of wood's exchequer. the gentleman they have lately made primate[ ] would never quit his seat in an english house of lords, and his preferments at oxford and bristol, worth twelve hundred pounds a year, for four times the denomination here, but not half the value; therefore i expect to hear he will be as good an irishman, upon this article, as any of his brethren, or even of us who have had the misfortune to be born in this island. for those, who, in the common phrase, do not "come hither to learn the language," would never change a better country for a worse, to receive brass instead of gold. [footnote : hugh boulter ( - ) was appointed archbishop of armagh, august st, . he had been a fellow of magdalen college, oxford, and had served the king as chaplain in hanover, in . in this latter year he was promoted to the bishopric of bristol, and the deanery of christ church, oxford. his appointment as primate of ireland, was in accordance with walpole's plan for governing ireland from england. walpole had no love for carteret, and no faith in his power or willingness to aid him in his policy. indeed, carteret was sent to ireland to be got out of the way. he was governor nominally; the real governor being walpole in the person of the new primate. what were boulter's instructions may be gathered from the manner in which he carried out his purpose. of a strong character and of untiring energy, boulter set about his work in a fashion which showed that walpole had chosen well. nothing of any importance that transpired in ireland, no fact of any interest about the individuals in office, no movement of any suspected or suspicious person escaped his vigilance. his letters testify to an unabating zeal for the english government of irish affairs by englishmen in the english interest. his perseverance knew no obstacles; he continued against all difficulties in his dogged and yet able manner to establish some order out of the chaos of ireland's condition. but his government was the outcome of a profound conviction that only in the interest of england should ireland be governed. if ireland could be made prosperous and contented, so much more good would accrue to england. but that prosperity and that contentment had nothing whatever to do with safeguarding irish institutions, or recognizing the rights of the irish people. if he gave way to popular opinion at all, it was because it was either expedient or beneficial to the english interest. if he urged, as he did, the founding of protestant charter schools, it was because this would strengthen the english power. to preserve that he obtained the enactment of a statute which excluded roman catholics from the legal profession and the offices of legal administration; and another act of his making actually disfranchised them altogether. boulter was also a member of the irish privy council, and lord justice of ireland. the latter office he held under the vice-regencies of carteret, dorset and devonshire. his secretary, ambrose philips, had been connected with him, in earlier years, in contributing to a periodical entitled, "the free thinker," which appeared in . philips, in , supervised the publication of boulter's "letters," which were published at oxford. [t.s.]] another slander spread by wood and his emissaries is, that by opposing him we discover an inclination to "shake off our dependence upon the crown of england." pray observe how important a person is this same william wood, and how the public weal of two kingdoms is involved in his private interest. first, all those who refuse to take his coin are papists; for he tells us that "none but papists are associated against him;" secondly, they "dispute the king's prerogative;" thirdly, "they are ripe for rebellion," and fourthly, they are going to "shake off their dependence upon the crown of england;" that is to say, "they are going to choose another king;" for there can be no other meaning in this expression, however some may pretend to strain it. and this gives me an opportunity of explaining, to those who are ignorant, another point, which hath often swelled in my breast. those who come over hither to us from england, and some weak people among ourselves, whenever in discourse we make mention of liberty and property, shake their heads, and tell us, that ireland is a "depending kingdom," as if they would seem, by this phrase, to intend that the people of ireland is in some state of slavery or dependence different from those of england; whereas a "depending kingdom" is a modern term of art, unknown, as i have heard, to all ancient civilians, and writers upon government; and ireland is on the contrary called in some statutes an "imperial crown," as held only from god; which is as high a style as any kingdom is capable of receiving. therefore by this expression, a "depending kingdom," there is no more understood than that by a statute made here in the d year of henry th. "the king and his successors are to be kings imperial of this realm as united and knit to the imperial crown of england." i have looked over all the english and irish statutes without finding any law that makes ireland depend upon england, any more than england does upon ireland. we have indeed obliged ourselves to have the same king with them, and consequently they are obliged to have the same king with us. for the law was made by our own parliament, and our ancestors then were not such fools (whatever they were in the preceding reign) to bring themselves under i know not what dependence, which is now talked of without any ground of law, reason or common sense.[ ] [footnote : this was the passage selected by the government upon which to found its prosecution. as sir walter scott points out, it "contains the pith and essence of the whole controversy." [t.s.]] let whoever think otherwise, i m.b. drapier, desire to be excepted,[ ] for i declare, next under god, i _depend_ only on the king my sovereign, and on the laws of my own country; and i am so far from _depending_ upon the people of england, that if they should ever rebel against my sovereign (which god forbid) i would be ready at the first command from his majesty to take arms against them, as some of _my_ countrymen did against _theirs_ at preston. and if such a rebellion should prove so successful as to fix the pretender on the throne of england, i would venture to transgress that statute so far as to lose every drop of my blood to hinder him from being king of ireland.[ ] [footnote : for a humorous story which accounts for swift's use of the words "desire to be excepted," see the drapier's sixth letter. [t.s.]] [footnote : great offence was taken at this paragraph. swift refers to it again in his sixth letter. sir henry craik, in his "life of jonathan swift" (vol. ii., p. ), has an acute note on this paragraph, and the one already alluded to in the sixth letter. i take the liberty of transcribing it: "the manoeuvre by which swift managed to associate a suspicion of jacobitism with his opponents, is one peculiarly characteristic; and so is the skill with which, in the next letter, he meets the objections to this paragraph, by half offering an extent of submission that might equally be embarrassing--a submission even to jacobitism, if jacobitism were to become strong enough. he does not commit himself, however: he fears a 'spiteful interpretation.' in short, he places the english cabinet on the horns of a dilemma. 'am i to resist jacobitism? then what becomes of your doctrine of ireland's dependency?' or, 'am i to become a jacobite, if england bids me? then what becomes of your protestant succession? must even that give way to your desire to tyrannize?'" [t.s.]] 'tis true indeed, that within the memory of man, the parliaments of england have sometimes assumed the power of binding this kingdom by laws enacted there,[ ] wherein they were at first openly opposed (as far as truth, reason and justice are capable of opposing) by the famous mr. molineux,[ ] an english gentleman born here, as well as by several of the greatest patriots, and best whigs in england; but the love and torrent of power prevailed. indeed the arguments on both sides were invincible. for in reason, all government without the consent of the governed is the very definition of slavery: but in fact, eleven men well armed will certainly subdue one single man in his shirt. but i have done. for those who have used power to cramp liberty have gone so far as to resent even the liberty of complaining, although a man upon the rack was never known to be refused the liberty of roaring as loud as he thought fit. [footnote : particularly in the reign of william iii., when this doctrine of english supremacy was assumed, in order to discredit the authority of the irish parliament summoned by james ii. [s.] see note on poyning's law, p. . [t.s.]] [footnote : see note on p. . [t.s.]] and as we are apt to sink too much under unreasonable fears, so we are too soon inclined to be raised by groundless hopes (according to the nature of all consumptive bodies like ours) thus, it hath been given about for several days past, that somebody in england empowered a second somebody to write to a third somebody here to assure us, that we "should no more be troubled with those halfpence." and this is reported to have been done by the same person, who was said to have sworn some months ago, that he would "ram them down our throats" (though i doubt they would stick in our stomachs) but whichever of these reports is true or false, it is no concern of ours. for in this point we have nothing to do with english ministers, and i should be sorry it lay in their power to redress this grievance or to enforce it: for the "report of the committee" hath given me a surfeit. the remedy is wholly in your own hands, and therefore i have digressed a little in order to refresh and continue that spirit so seasonably raised amongst you, and to let you see that by the laws of god, of nature, of nations, and of your own country, you are and ought to be as free a people as your brethren in england. if the pamphlets published at london by wood and his journeymen in defence of his cause, were reprinted here, and that our countrymen could be persuaded to read them, they would convince you of his wicked design more than all i shall ever be able to say. in short i make him a perfect saint in comparison of what he appears to be from the writings of those whom he hires to justify his project. but he is so far master of the field (let others guess the reason) that no london printer dare publish any paper written in favour of ireland, and here nobody hath yet been so bold as to publish anything in favour of him. there was a few days ago a pamphlet sent me of near pages written in favour of mr. wood and his coinage, printed in london; it is not worth answering, because probably it will never be published here: but it gave me an occasion to reflect upon an unhappiness we lie under, that the people of england are utterly ignorant of our case, which however is no wonder, since it is a point they do not in the least concern themselves about, farther than perhaps as a subject of discourse in a coffee-house when they have nothing else to talk of. for i have reason to believe that no minister ever gave himself the trouble of reading any papers written in our defence, because i suppose their opinions are already determined, and are formed wholly upon the reports of wood and his accomplices; else it would be impossible that any man could have the impudence to write such a pamphlet as i have mentioned. our neighbours whose understandings are just upon a level with ours (which perhaps are none of the brightest) have a strong contempt for most nations, but especially for ireland: they look upon us as a sort of savage irish, whom our ancestors conquered several hundred years ago, and if i should describe the britons to you as they were in caesar's time, when they painted their bodies, or clothed themselves with the skins of beasts, i would act full as reasonably as they do: however they are so far to be excused in relation to the present subject, that, hearing only one side of the cause, and having neither opportunity nor curiosity to examine the other, they believe a lie merely for their ease, and conclude, because mr. wood pretends to have power, he hath also reason on his side. therefore to let you see how this case is represented in england by wood and his adherents, i have thought it proper to extract out of that pamphlet a few of those notorious falsehoods in point of fact and reasoning contained therein; the knowledge whereof will confirm my countrymen in their own right sentiments, when they will see by comparing both, how much their enemies are in the wrong. first, the writer, positively asserts, "that wood's halfpence were current among us for several months with the universal approbation of all people, without one single gainsayer, and we all to a man thought ourselves happy in having them." secondly, he affirms, "that we were drawn into a dislike of them only by some cunning evil-designing men among us, who opposed this patent of wood to get another for themselves." thirdly, that "those who most declared at first against wood's patent were the very men who intended to get another for their own advantage." fourthly, that "our parliament and privy-council, the lord mayor and aldermen of dublin, the grand juries and merchants, and in short the whole kingdom, nay the very dogs" (as he expresseth it) "were fond of those halfpence, till they were inflamed by those few designing persons aforesaid." fifthly, he says directly, that "all those who opposed the halfpence were papists and enemies to king george." thus far i am confident the most ignorant among you can safely swear from your own knowledge that the author is a most notorious liar in every article; the direct contrary being so manifest to the whole kingdom, that if occasion required, we might get it confirmed under five hundred thousand hands. sixthly, he would persuade us, that "if we sell five shillings worth of our goods or manufactures for two shillings and fourpence worth of copper, although the copper were melted down, and that we could get five shillings in gold or silver for the said goods, yet to take the said two shillings and fourpence in copper would be greatly for our advantage." and lastly, he makes us a very fair offer, as empowered by wood, that "if we will take off two hundred thousand pounds in his halfpence for our goods, and likewise pay him three _per cent_. interest for thirty years, for an hundred and twenty thousand pounds (at which he computes the coinage above the intrinsic value of the copper) for the loan of his coin, he, will after that time give us good money for what halfpence will be then left." let me place this offer in as clear a light as i can to shew the unsupportable villainy and impudence of that incorrigible wretch. first (says he) "i will send two hundred thousand pounds of my coin into your country, the copper i compute to be in real value eighty thousand pounds, and i charge you with an hundred and twenty thousand pounds for the coinage; so that you see i lend you an hundred and twenty thousand pounds for thirty years, for which you shall pay me three _per cent_. that is to say three thousand six hundred pounds _per ann_. which in thirty years will amount to an hundred and eight thousand pounds. and when these thirty years are expired, return me my copper and i will give you good money for it." this is the proposal made to us by wood in that pamphlet written by one of his commissioners; and the author is supposed to be the same infamous coleby one of his under-swearers at the committee of council, who was tried for robbing the treasury here, where he was an under-clerk.[ ] [footnote : see note on p. . [t.s.]] by this proposal he will first receive two hundred thousand pounds, in goods or sterling for as much copper as he values at eighty thousand pounds, but in reality not worth thirty thousand pounds. secondly, he will receive for interest an hundred and eight thousand pounds. and when our children came thirty years hence to return his halfpence upon his executors (for before that time he will be probably gone to his own place) those executors will very reasonably reject them as raps and counterfeits, which probably they will be, and millions of them of his own coinage. methinks i am fond of such a dealer as this who mends every day upon our hands, like a dutch reckoning, where if you dispute the unreasonableness and exorbitance of the bill, the landlord shall bring it up every time with new additions. although these and the like pamphlets published by wood in london be altogether unknown here, where nobody could read them without as much indignation as contempt would allow, yet i thought it proper to give you a specimen how the man employs his time, where he rides alone without one creature to contradict him, while our few friends there wonder at our silence, and the english in general, if they think of this matter at all, impute our refusal to wilfulness or disaffection, just as wood and his hirelings are pleased to represent. but although our arguments are not suffered to be printed in england, yet the consequence will be of little moment. let wood endeavour to persuade the people there that we ought to receive his coin, and let me convince our people here that they ought to reject it under pain of our utter undoing. and then let him do his best and his worst. before i conclude, i must beg leave in all humility to tell mr. wood, that he is guilty of great indiscretion, by causing so honourable a name as that of mr. walpole to be mentioned so often, and in such a manner, upon his occasion: a short paper printed at bristol and reprinted here reports mr. wood to say, that he "wonders at the impudence and insolence of the irish in refusing his coin, and what he will do when mr. walpole comes to town." where, by the way, he is mistaken, for it is the true english people of ireland who refuse it, although we take it for granted that the irish will do so too whenever they are asked. he orders it to be printed in another paper, that "mr. walpole will cram this brass down our throats:" sometimes it is given out that we must "either take these halfpence or eat our brogues," and, in another newsletter but of yesterday, we read that the same great man "hath sworn to make us swallow his coin in fire-balls." this brings to my mind the known story of a scotchman, who receiving sentence of death, with all the circumstances of hanging, beheading, quartering, embowelling and the like, cried out, "what need all this cookery?" and i think we have reason to ask the same question; for if we believe wood, here is a dinner getting ready for us, and you see the bill of fare, and i am sorry the drink was forgot, which might easily be supplied with melted lead and flaming pitch. what vile words are these to put into the mouth of a great councillor, in high trust with his majesty, and looked upon as a prime-minister. if mr. wood hath no better a manner of representing his patrons, when i come to be a great man, he shall never be suffered to attend at my levee. this is not the style of a great minister, it savours too much of the kettle and the furnace, and came entirely out of mr. wood's forge. as for the threat of making us eat our brogues, we need not be in pain; for if his coin should pass, that unpolite covering for the feet, would no longer be a national reproach; because then we should have neither shoe nor brogue left in the kingdom. but here the falsehood of mr. wood is fairly detected; for i am confident mr. walpole never heard of a brogue in his whole life.[ ] [footnote : a biting sneer at walpole's ignorance of irish affairs. [t.s.]] as to "swallowing these halfpence in fire-balls," it is a story equally improbable. for to execute this operation the whole stock of mr. wood's coin and metal must be melted down and moulded into hollow balls with wild-fire, no bigger than a reasonable throat can be able to swallow. now the metal he hath prepared, and already coined will amount at least fifty millions of halfpence to be swallowed by a million and a half of people; so that allowing two halfpence to each ball, there will be about seventeen balls of wild-fire a-piece to be swallowed by every person in this kingdom, and to administer this dose, there cannot be conveniently fewer than fifty thousand operators, allowing one operator to every thirty, which, considering the squeamishness of some stomachs and the peevishness of young children, is but reasonable. now, under correction of better judgments, i think the trouble and charge of such an experiment would exceed the profit, and therefore i take this report to be spurious, or at least only a new scheme of mr. wood himself, which to make it pass the better in ireland he would father upon a minister of state. but i will now demonstrate beyond all contradiction that mr. walpole is against this project of mr. wood, and is an entire friend to ireland, only by this one invincible argument, that he has the universal opinion of being a wise man, an able minister, and in all his proceedings pursuing the true interest of the king his master: and that as his integrity is above all corruption, so is his fortune above all temptation. i reckon therefore we are perfectly safe from that corner, and shall never be under the necessity of contending with so formidable a power, but be left to possess our brogues and potatoes in peace as remote from thunder as we are from jupiter. i am, my dear countrymen, your loving fellow-subject, fellow-sufferer and humble servant. m.b. oct. . . seasonable advice to the grand jury. seasonable advice to the grand jury, concerning the bill preparing against the printer of the drapier's fourth letter. since a bill is preparing for the grand jury, to find against the printer of the drapier's last letter, there are several things maturely to be considered by those gentlemen, before whom this bill is to come, before they determine upon it. first, they are to consider, that the author of the said pamphlet, did write three other discourses on the same subject; which instead of being censured were universally approved by the whole nation, and were allowed to have raised, and continued that spirit among us, which hitherto hath kept out wood's coin: for all men will allow, that if those pamphlets had not been writ, his coin must have overrun the nation some months ago. secondly, it is to be considered that this pamphlet, against which a proclamation hath been issued, is writ by the same author; that nobody ever doubted the innocence, and goodness of his design, that he appears through the whole tenor of it, to be a loyal subject to his majesty, and devoted to the house of hanover, and declares himself in a manner peculiarly zealous against the pretender; and if such a writer in four several treatises on so nice a subject, where a royal patent is concerned, and where it was necessary to speak of england and of liberty, should in one or two places happen to let fall an inadvertent expression, it would be hard to condemn him after all the good he hath done; especially when we consider, that he could have no possible design in view, either of honour or profit, but purely the good of his country. thirdly, it ought to be well considered, whether any one expression in the said pamphlet, be really liable to just exception, much less to be found "wicked, malicious, seditious, reflecting upon his majesty and his ministry," &c. the two points in that pamphlet, which it is said the prosecutors intend chiefly to fix on, are, first, where the author mentions the "penner of the king's answer." first, it is well known, his majesty is not master of the english tongue, and therefore it is necessary that some other person should be employed to pen what he hath to say, or write in that language. secondly, his majesty's answer is not in the first person, but the third. it is not said "we are concerned," or, "our royal predecessors," but "his majesty is concerned;" and "his royal predecessors." by which it is plain these are properly not the words of his majesty; but supposed to be taken from him, and transmitted hither by one of his ministers. thirdly it will be easily seen, that the author of the pamphlet delivers his sentiments upon this particular, with the utmost caution and respect, as any impartial reader will observe. the second paragraph, which it is said will be taken notice of as a motive to find the bill, is, what the author says of ireland being a depending kingdom. he explains all the dependency he knows of it, which is a law made in ireland, whereby it is enacted that "whoever is king of england, shall be king of ireland." before this explanation be condemned, and the bill found upon it, it would be proper, that some lawyers should fully inform the jury what other law there is, either statute or common for this dependency, and if there be no law, there is no transgression. the fourth thing very maturely to be considered by the jury, is, what influence their finding the bill may have upon the kingdom. the people in general find no fault in the drapier's last book, any more than in the three former, and therefore when they hear it is condemned by a grand jury of dublin, they will conclude it is done in favour of wood's coin, they will think we of this town have changed our minds, and intend to take those halfpence, and therefore that it will be in vain for them to stand out. so that the question comes to this, which will be of the worst consequence, to let pass one or two expressions, at the worst only unwary, in a book written for the public service; or to leave a free open passage for wood's brass to overrun us, by which we shall be undone for ever. the fifth thing to be considered, is, that the members of the grand jury being merchants, and principal shopkeepers, can have no suitable temptation offered them, as a recompense for the mischief they will suffer by letting in this coin, nor can be at any loss or danger by rejecting the bill: they do not expect any employments in the state, to make up in their own private advantage, the destruction of their country. whereas those who go about to advise, entice, or threaten them to find that bill, have great employments, which they have a mind to keep, or to get greater, which was likewise the case of all those who signed to have the author prosecuted. and therefore it is known, that his grace the lord archbishop of dublin,[ ] so renowned for his piety, and wisdom, and love of his country, absolutely refused to condemn the book, or the author. [footnote : the proclamation against the drapier's fourth letter as given in appendix iv. at the end of this volume, does not bear archbishop king's signature. in a letter from that prelate, written on november th, , to samuel molineux, secretary to the prince of wales, it appears that other persons of influence also refrained from sanctioning it. the following is an extract from this letter as given by monck mason for the first time: "a great many pamphlets have been writ about it [wood's patent], but i am told none of them are permitted to be printed in england. two have come out since my lord lieutenant came here, written with sobriety, modesty, and great force, in my opinion, which put the matter in a fair and clear light, though not with all the advantage of which it is capable; four were printed before, by somebody that calleth himself a drapier which were in a ludicrous and satyrical style; against the last of these the lord lieutenant procured a proclamation, signed by of the council; offering £ for discovering the author. i thought the premium excessive, so i and three more refused to sign it, but declared, that if his excellency would secure us from the brass money, i would sign it, or any other, tending only to the disadvantage of private persons; but, till we had that security, i would look on this proclamation no otherwise than as a step towards passing that base and mischievous coin, and designed to intimidate those who opposed the passing it; and i declared, that i would not approve of anything that might countenance, or encourage such a ruinous project; that issuing such a proclamation would make all believe, that the government was engaged to support wood's pretensions, and that would neither be for their honour nor ease. i was not able to stop the proclamation, but my refusing to sign it has not been without effect." ("history of st. patrick's," p. , note n.). [t.s.]] lastly, it ought to be considered what consequence the finding the bill, may have upon a poor man perfectly innocent, i mean the printer. a lawyer may pick out expressions and make them liable to exception, where no other man is able to find any. but how can it be supposed, that an ignorant printer can be such a critic? he knew the author's design was honest, and approved by the whole kingdom, he advised with friends, who told him there was no harm in the book, and he could see none himself. it was sent him in an unknown hand, but the same in which he received the three former. he and his wife have offered to take their oaths that they knew not the author; and therefore to find a bill, that may bring a punishment upon the innocent, will appear very hard, to say no worse. for it will be impossible to find the author, unless he will please to discover himself, although i wonder he ever concealed his name. but i suppose what he did at first out of modesty, he now continues to do out of prudence. god protect us and him! i will conclude all with a fable, ascribed to demosthenes. he had served the people of athens with great fidelity in the station of an orator, when upon a certain occasion, apprehending to be delivered over to his enemies, he told the athenians, his countrymen, the following story. once upon a time the wolves desired a league with the shepherds, upon this condition; that the cause of strife might be taken away, which was the shepherds and the mastiffs; this being granted, the wolves without all fear made havoc of the sheep.[ ] novem. th, . [footnote : the advice had the desired effect. the jury returned a verdict of "ignoramus" on the bill, which so aroused whitshed, the chief justice, that he discharged them. as a comment on whitshed's illegal procedure, the following extract was circulated: extract from a book entitled, "an exact collection of the debates of the house of commons held at westminster, october , ," page . _resolutions of the house of commons, in england, november , ._ "several persons being examined about the dismissing a grand jury in middlesex, the house came to the following resolutions:-- "_resolved_, that the discharging of a grand-jury by any judge, before the end of the term, assizes, or sessions, while matters are under their consideration, and not presented, is arbitrary, illegal, destructive to public justice, a manifest violation of his oath, and is a means to subvert the fundamental laws of this kingdom. "_resolved_, that a committee be appointed to examine the proceedings of the judges in westminster-hall, and report the same with their opinion therein to this house." [t.s.]] letter v. a letter to the lord chancellor middleton. note. i have departed from the order given by faulkner and the earlier editors,[ ] and followed by sir w. scott in arranging the series of the drapier's letters, by adhering to a more correct chronological sequence. this letter has always been printed as the sixth drapier's letter, but i have printed it here as the fifth, since it was written prior to the letter addressed to viscount molesworth, which has hitherto been called the fifth. the molesworth letter i print here as "letter vi." as already noted the letter to midleton was written on the th october, , but its first publication in print did not occur until faulkner included it in the fourth volume of his collected edition of swift's works, issued in . there it is signed "j.s." and is given as from the "deanery house." all the other letters are printed as "by m.b. drapier." the advertisement to the reader prefixed to the present fifth letter is from faulkner's edition. probably it was printed by faulkner under swift's direction. [footnote : sheridan, deane swift, hawkesworth and nichols] swift's acquaintance with midleton had been of long standing. the chancellor had been an avowed opponent of the patent and yet, by his signature to the proclamation, he seemed to be giving the weight of his official position against the popular sentiment. in addressing him, swift was endeavouring, apparently, to keep him to his original line of action and to destroy any influence the government party may have had on him, since he was well aware of carteret's insinuating charm. midleton, however, had always stood firm against the patent. his signature to the proclamation against the drapier was justified by him when he said that the drapier's letters tended to disturbance. carteret had really tried to win him over, but he did not succeed "while he [midleton] expressed the highest obligation to the lord lieutenant," writes coxe, "he declared that his duty to his country was paramount to every other consideration, and refused to give any assistance to government, until the patent was absolutely surrendered." the text here given of this letter is based on faulkner's issue in vol. iv. of the edition of swift's works. it has been collated with that given in the fifth volume of the "miscellanies," printed in london in the same year. [t.s.] advertisement to the reader[ ] the former of the two following papers is dated oct. th [ ], by which it appears to be written a little after the proclamation against the author of the drapier's fourth letter. it is delivered with much caution, because the author confesseth himself to be dean of st. patrick's; and i could discover his name subscribed at the end of the original, although blotted out by some other hand, i can tell no other reason why it was not printed, than what i have heard; that the writer finding how effectually the drapier had succeeded, and at the same time how highly the people in power seemed to be displeased, thought it more prudent to keep the paper in his cabinet. however, having received some encouragement to collect into one volume all papers relating to ireland, supposed to be written by the drapier; and knowing how favourably that author's writings in this kind have been received by the public; to make the volume more complete, [i procured a copy of the following letter from one of the author's friends, with whom it was left, while the author was in england; and][ ] i have printed it as near as i could in the order of time. [footnote : nichols, in the second volume of his supplement to swift's works ( , vo), prints a note on this "advertisement," furnished him by bowyer. it is as follows: " . the first of the papers is said to be dated oct. , ; and that it appears from thence to be dated a little after the proclamation against the drapier's fourth letter. now the fourth letter itself is dated oct. , . this is a pardonable mistake anywhere, but, much more in a country where _going before just coming after_ is the characteristic dialect. but i little thought that the dean, in his zeal for ireland, would vouchsafe to adopt the shibboleth of it. " . the preface-writer, in the choice ms which he found, could discover the dean's name subscribed at the end of the original; but _blotted out_ by _some other hand_. as the former passage is a proof that the advertisement was drawn up in ireland, so this affords a strong presumption that it was under the direction of the dean himself: for who else could divine that his name was struck out by another hand? other ink it might be: but in these recent mss. of our age, it is the first time i ever heard of a blot carrying the evidence of a handwriting. whether the dean or the printer hit this _blot_, i shall not inquire; but lay before you the pleasant procedure of the latter upon this discovery. he had got, we see, the original in the dean's hand; but the name was obliterated. what does he, but send away to england for a copy which might authenticate _his original_; and from such a copy the public is favoured with it! i remember, in a cause before sir joseph jekyll, a man began reading in court the title-deeds of an estate which was contested. 'the original is a little blind,' says he; 'i have got a very fair copy of it, which i beg leave to go on with'--'hold,' says sir joseph, 'if the original is not good, the copy can never make it so.' i am far, however, from accusing the printer of intending any fraud on the world. he who tells his story so openly gives security enough for his honesty. i can easily conceive the advertisement might be in a good measure the dean's, who never was over-courteous to his readers, and might for once be content to be merry with them." [t.s.]] [footnote : misprinted by faulkner for oct. th. [t.s.]] [footnote : this portion in square brackets is not given by faulkner in his advertisement. [t.s.]] the next treatise is called "an address, &c." it is without a date; but seems to be written during the first session of parliament in lord carteret's government. the title of this address is in the usual form, by m.b. drapier. there is but a small part of it that relates to william wood and his coin: the rest contains several proposals for the improvement of ireland, the many discouragements it lies under, and what are the best remedies against them. by many passages in some of the drapier's former letters, but particularly in the following address, concerning the great drain of money from ireland by absentees, importation of foreign goods, balance of trade, and the like, it appears that the author had taken much pains, and been well informed in the business of computing; all his reasonings upon that subject, although he does not here descend to particular sums, agreeing generally with the accounts given by others who have since made that enquiry their particular study. and it is observable, that in this address, as well as in one of his printed letters, he hath specified several important articles, that have not been taken notice of by others who came after him. letter v. a letter to the lord chancellor middleton.[ ] my lord, i desire you will consider me as a member who comes in at the latter end of a debate; or as a lawyer who speaks to a cause, when the matter hath been almost exhausted by those who spoke before. [footnote : alan brodrick, lord midleton ( ?- ), came of a surrey family that had greatly benefited by the forfeitures in ireland. adopting the profession of the law, brodrick was, in , appointed solicitor-general for ireland. he sat in the irish house of commons as the member for cork, and in was chosen its speaker. his strong opposition to the sacramental test act lost him the favour of the government, and he was removed from his office of solicitor-general. in , however, he was appointed attorney-general for ireland, and in made lord chancellor. in the year following he was created baron brodrick of midleton. his trimming with walpole and carteret did not, however, prevent him from opposing the wood's patent, though he signed the proclamation against the drapier. he thought the letters served to "create jealousies between the king and the people of ireland." [t.s.]] i remember some months ago i was at your house upon a commission, where i am one of the governors: but i went thither not so much on account of the commission, as to ask you some questions concerning mr. wood's patent to coin halfpence for ireland; where you very freely told me, in a mixed company, how much you had been always against that wicked project, which raised in me an esteem for you so far, that i went in a few days to make you a visit, after many years' intermission. i am likewise told, that your son wrote two letters from london, (one of which i have seen) empowering those to whom they were directed, to assure his friends, that whereas there was a malicious report spread of his engaging himself to mr. walpole for forty thousand pounds of wood's coin, to be received in ireland, the said report was false and groundless; and he had never discoursed with that minister on the subject; nor would ever give his consent to have one farthing of the said coin current here. and although it be long since i have given myself the trouble of conversing with people of titles or stations; yet i have been told by those who can take up with such amusements, that there is not a considerable person of the kingdom, scrupulous in any sort to declare his opinion. but all this is needless to allege, when we consider, that the ruinous consequences of wood's patent, have been so strongly represented by both houses of parliament; by the privy-council; the lord mayor and aldermen of dublin; by so many corporations; and the concurrence of the principal gentlemen in most counties, at their quarter-sessions, without any regard to party, religion, or nation. i conclude from hence, that the currency of these halfpence would, in the universal opinion of our people, be utterly destructive to this kingdom; and consequently, that it is every man's duty, not only to refuse this coin himself, but as far as in him lies, to persuade others to do the like: and whether this be done in private or in print, is all a case: as no layman is forbid to write, or to discourse upon religious or moral subjects; although he may not do it in a pulpit (at least in our church). neither is this an affair of state, until authority shall think fit to declare it so: or if you should understand it in that sense; yet you will please to consider that i am not now a preaching. therefore, i do think it my duty, since the drapier will probably be no more heard of, so far to supply his place, as not to incur his fortune: for i have learnt from old experience, that there are times wherein a man ought to be cautious as well as innocent. i therefore hope, that preserving both those characters, i may be allowed, by offering new arguments or enforcing old ones, to refresh the memory of my fellow-subjects, and keep up that good spirit raised among them; to preserve themselves from utter ruin by lawful means, and such as are permitted by his majesty. i believe you will please to allow me two propositions: first, that we are a most loyal people; and, secondly, that we are a free people, in the common acceptation of that word applied to a subject under a limited monarch. i know very well, that you and i did many years ago in discourse differ much, in the presence of lord wharton, about the meaning of that word _liberty_, with relation to ireland. but if you will not allow us to be a free people, there is only another appellation left; which, i doubt, my lord chief justice whitshed would call me to an account for, if i venture to bestow: for, i observed, and i shall never forget upon what occasion, the device upon his coach to be _libertas et natale solum;_ at the very point of time when he was sitting in his court, and perjuring himself to betray both.[ ] [footnote : on this motto of whitshed's swift wrote the following poetical paraphrase: "_libertas et natale solum:_ fine words! i wonder where you stole 'em. could nothing but thy chief reproach serve for a motto on thy coach? but let me now thy words translate: _natale solum,_ my estate; my dear estate, how well i love it, my tenants, if you doubt, will prove it, they swear i am so kind and good, i hug them till i squeeze their blood. _libertas_ bears a large import: first, how to swagger in a court; and, secondly, to shew my fury against an uncomplying jury; and, thirdly, 'tis a new invention, to favour wood, and keep my pension; and, fourthly, 'tis to play an odd trick, get the great seal and turn out broderick; and, fifthly, (you know whom i mean,) to humble that vexatious dean: and, sixthly, for my soul to barter it for fifty times its worth to carteret. now since your motto thus you construe, i must confess you've spoken once true. _libertas et natale solum_. you had good reason when you stole 'em." [t.s.]] now, as for our loyalty, to his present majesty; if it hath ever been equalled in any other part of his dominions; i am sure it hath never been exceeded: and i am confident he hath not a minister in england who could ever call it once in question: but that some hard rumours at least have been transmitted from t'other side the water, i suppose you will not doubt: and rumours of the severest kind; which many good people have imputed to the indirect proceeding of mr. wood and his emissaries; as if he endeavoured it should be thought that our loyalty depended upon the test of refusing or taking his copper. now, as i am sure you will admit us to be a loyal people; so you will think it pardonable in us to hope for all proper marks of favour and protection from so gracious a king, that a loyal and free people can expect: among which, we all agree in reckoning this to be one; that wood's halfpence may never have entrance into this kingdom. and this we shall continue to wish, when we dare no longer express our wishes; although there were no such mortal as a drapier in the world. i am heartily sorry, that any writer should, in a cause so generally approved, give occasion to the government and council to charge him with paragraphs "highly reflecting upon his majesty and his ministers; tending to alienate the affections of his good subjects in england and ireland from each other; and to promote sedition among the people."[ ] i must confess, that with many others, i thought he meant well; although he might have the failing of better writers, to be not always fortunate in the manner of expressing himself. [footnote : swift here quotes the words of the proclamation issued against the fourth drapier's letter. see appendix iv. [t.s.]] however, since the drapier is but one man, i shall think i do a public service, by asserting that the rest of my countrymen are wholly free from learning out of _his_ pamphlets to reflect on the king or his ministers, to breed sedition. i solemnly declare, that i never once heard the least reflection cast upon the king, on the subject of mr. wood's coin: for in many discourses on this matter, i do not remember his majesty's name to be so much as mentioned. as to the ministry in england, the only two persons hinted at were the duke of grafton, and mr. walpole:[ ] the former, as i have heard you and a hundred others affirm, declared, that he never saw the patent in favour of mr. wood, before it was passed, although he were then lord lieutenant: and therefore i suppose everybody believes, that his grace hath been wholly unconcerned in it since. [footnote : walpole was created a knight of the bath in , when that order was revived. in he was installed knight of the order of the garter, being the only commoner who had been so distinguished since the reign of james i., except admiral montague, afterwards earl of sandwich. he had been offered a peerage in , but declined it for himself, accepting it for his son, who was created baron walpole of walpole, in norfolk. [t.s.]] mr. walpole was indeed supposed to be understood by the letter w. in several newspapers; where it is said, that some expressions fell from him not very favourable to the people of ireland; for the truth of which, the kingdom is not to answer, any more than for the discretion of the publishers. you observe, the drapier wholly clears mr. walpole of this charge, by very strong arguments and speaks of him with civility. i cannot deny myself to have been often present, where the company gave then opinion, that mr. walpole favoured mr. wood's project, which i always contradicted; and for my own part, never once opened my lips against that minister, either in mixed or particular meetings: and my reason for this reservedness was, because it pleased him, in the queen's time (i mean queen anne of ever blessed memory) to make a speech directly against me, by name, in the house of commons, as i was told a very few minutes after, in the court of requests, by more than fifty members. but you, who are in a great station here, (if anything here may be called great) cannot be ignorant, that whoever is understood by public voice to be chief minister, will, among the general talkers, share the blame, whether justly or no, of every thing that is disliked; which i could easily make appear in many instances, from my own knowledge, while i was in the world; and particularly in the case of the greatest, the wisest, and the most uncorrupt minister, i ever conversed with.[ ] [footnote : robert harley, earl of oxford. [t.s.]] but, whatever unpleasing opinion some people might conceive of mr. walpole, on account of those halfpence; i dare boldly affirm, it was entirely owing to mr. wood. many persons of credit, come from england, have affirmed to me, and others, that they have seen letters under his hand, full of arrogance and insolence towards ireland; and boasting of his favour with mr. walpole; which is highly probable: because he reasonably thought it for his interest to spread such a report; and because it is the known talent of low and little spirits, to have a great man's name perpetually in their mouths.[ ] [footnote : see coxe's "memoirs of walpole" (vol. i., cap. , p. , ed. ), where wood is blamed for his indiscretion on this matter. see also note prefixed to the drapier's first letter in the present edition. [t.s.]] thus i have sufficiently justified the people of ireland, from learning any bad lessons out of the drapier's pamphlets, with regard to his majesty and his ministers: and, therefore, if those papers were intended to sow sedition among us, god be thanked, the seeds have fallen upon a very improper soil. as to alienating the affections of the people of england and ireland from each other; i believe, the drapier, whatever his intentions were, hath left that matter just as he found it. i have lived long in both kingdoms, as well in country as in town; and therefore, take myself to be as well informed as most men, in the dispositions of each people toward the other. by the people, i understand here, only the bulk of the common people; and i desire no lawyer may distort or extend my meaning. there is a vein of industry and parsimony, that runs through the whole people of england; which, added to the easiness of their rents, makes them rich and sturdy. as to ireland, they know little more than they do of mexico; further than that it is a country subject to the king of england, full of bogs, inhabited by wild irish papists; who are kept in awe by mercenary troops sent from thence: and their general opinion is, that it were better for england if this whole island were sunk into the sea; for, they have a tradition, that every forty years there must be a rebellion in ireland. i have seen the grossest suppositions pass upon them; "that the wild irish were taken in toils; but that, in some time, they would grow so tame, as to eat out of your hands:" i have been asked by hundreds, and particularly by my neighbours, your tenants, at pepper-harrow; "whether i had come from ireland by sea:" and, upon the arrival of an irishman to a country town, i have known crowds coming about him, and wondering to see him look so much better than themselves. a gentleman now in dublin, affirms, "that passing some months ago through northampton, and finding the whole town in a flurry, with bells, bonfires, and illuminations, upon asking the cause, was told, it was for joy, that the irish had submitted to receive wood's halfpence." this, i think, plainly shews what sentiments that large town hath of us; and how little they made it their own case; although they be directly in our way to london, and therefore, cannot but be frequently convinced that we have human shapes. as to the people of this kingdom, they consist either of irish papists; who are as inconsiderable, in point of power, as the women and children; or of english protestants, who love their brethren of that kingdom; although they may possibly sometimes complain, when they think they are hardly used: however, i confess, i do not see any great consequence, how their personal affections stand to each other, while the sea divides them, and while they continue in their loyalty to the same prince. and yet, i will appeal to you; whether those from england have reason to complain, when they come hither in pursuit of their fortunes? or, whether the people of ireland have reason to boast, when they go to england on the same design? my second proposition was, that we of ireland are a free people: this, i suppose, you will allow; at least, with certain limitations remaining in your own breast. however, i am sure it is not criminal to affirm; because the words "liberty" and "property," as applied to the subject, are often mentioned in both houses of parliament, as well as in yours, and other courts below; from whence it must follow, that the people of ireland do, or ought to enjoy all the benefits of the common and statute law; such as to be tried by juries, to pay no money without their own consent, as represented in parliament; and the like. if this be so, and if it be universally agreed, that a free people cannot, by law, be compelled to take any money in payment, except gold and silver; i do not see why any man should be hindered from cautioning his countrymen against this coin of william wood; who is endeavouring by fraud to rob us of that property, which the laws have secured. if i am mistaken, and that this copper can be obtruded on us; i would put the drapier's case in another light, by supposing, that a person going into his shop, should agree for thirty shillings' worth of goods, and force the seller to take his payment in a parcel of copper pieces, intrinsically not worth above a crown: i desire to know, whether the drapier would not be actually robbed of five and twenty shillings, and how far he could be said to be master of his property? the same question may be applied to rents and debts, on bond or mortgage, and to all kind of commerce whatsoever. give me leave to do what the drapier hath done more than once before me; which is, to relate the naked fact, as it stands in the view of the world. one william wood, esq; and hardware-man, obtains, by fraud, a patent in england, to coin , _l._ in copper, to pass in ireland, leaving us liberty to take, or to refuse. the people here, in all sorts of bodies and representatives, do openly and heartily declare, that they will not accept this coin: to justify these declarations, they generally offer two reasons; first, because by the words of the patent, they are left to their own choice: and secondly, because they are not obliged by law: so that here you see there is, _bellum atgue virum_, a kingdom on one side, and william wood on the other. and if mr. wood gets the victory, at the expense of ireland's ruin, and the profit of one or two hundred thousand pounds (i mean by continuing, and counterfeiting as long as he lives) for himself; i doubt, both present and future ages will, at least, think it a very singular scheme. if this fact be truly stated; i must confess, i look upon it as my duty, so far as god hath enabled me, and as long as i keep within the bounds of truth, of duty, and of decency, to warn my fellow-subjects, as they value their king, their country, and all that ought or can be dear to them, never to admit this pernicious coin; no not so much as one single halfpenny. for, if one single thief forces the door, it is in vain to talk of keeping out the whole crew behind. and, while i shall be thus employed, i will never give myself leave to suppose, that what i say can either offend my lord lieutenant; whose person and great qualities i have always highly respected; (as i am sure his excellency will be my witness) or the ministers in england, with whom i have nothing to do, or they with me; much less the privy-council here, who, as i am informed, did send an address to his majesty against mr. wood's coin; which, if it be a mistake, i desire i may not be accused for a spreader of false news: but, i confess, i am so great a stranger to affairs, that for anything i know, the whole body of the council may since have been changed: and, although i observed some of the very same names in a late declaration against that coin, which i saw subscribed to the proclamation against the drapier; yet possibly they may be different persons; for they are utterly unknown to me, and are like to continue so. in this controversy, where the reasoners on each side are divided by st. george's channel, his majesty's prerogative, perhaps, would not have been mentioned; if mr. wood, and his advocates, had not made it necessary, by giving out, that the currency of his coin should be enforced by a proclamation. the traders and common people of the kingdom, were heartily willing to refuse this coin; but the fear of a proclamation brought along with it most dreadful apprehensions. it was therefore, absolutely necessary for the drapier, to remove this difficulty; and accordingly, in one of his former pamphlets, he hath produced invincible arguments, (wherever he picked them up) that the king's prerogative was not at all concerned in the matter; since the law had sufficiently provided against any coin to be imposed upon the subject, except gold and silver; and that copper is not money, but as it hath been properly called _nummorum famulus_. the three former letters from the drapier, having not received any public censure, i look upon them to be without exception; and that the good people of the kingdom ought to read them often, in order to keep up that spirit raised against this destructive coin of mr. wood: as for this last letter, against which a proclamation is issued; i shall only say, that i could wish it were stripped of all that can be any way exceptionable; which i would not think it below me to undertake, if my abilities were equal; but being naturally somewhat slow of comprehension; no lawyer, and apt to believe the best of those who profess good designs, without any visible motive either of profit or honour; i might pore for ever, without distinguishing the cockle from the corn. that which, i am told, gives greatest offence in this last letter, is where the drapier affirms; "that if a rebellion should prove so successful, as to fix the pretender on the throne of england, he would venture so far to transgress the irish statute, (which unites ireland to england under one king) as to lose every drop of his blood, to hinder him from being king of ireland." i shall not presume to vindicate any man, who openly declares he would transgress a statute; and a statute of such importance: but, with the most humble submission, and desire of pardon for a very innocent mistake, i should be apt to think that the loyal intention of the writer, might be at least some small extenuation of his crime. for, in this i confess myself to think with the drapier. i have not hitherto been told of any other objections against that pamphlet; but, i suppose, they will all appear at the prosecution of the drapier. and, i think, whoever in his own conscience believes the said pamphlet to be "wicked and malicious, seditious and scandalous, highly reflecting upon his majesty and his ministers, &c." would do well to discover the author, (as little a friend as i am to the trade of informers) although the reward of _l_. had not been tacked to the discovery. i own, it would be a great satisfaction to me, to hear the arguments not only of judges, but of lawyers, upon this case. because, you cannot but know, there often happens occasions, wherein it would be very convenient, that the bulk of the people should be informed how they ought to conduct themselves; and therefore, it hath been the wisdom of the english parliaments, to be very reserved in limiting the press. when a bill is debating in either house of parliament there, nothing is more usual, than to have the controversy handled by pamphlets on both sides; without the least animadversion upon the authors. so here, in the case of mr. wood and his coin; since the two houses gave their opinion by addresses, how dangerous the currency of that copper would be to ireland; it was, without all question, both lawful and convenient, that the bulk of the people should be let more particularly into the nature of the danger they were in; and of the remedies that were in their own power, if they would have the sense to apply them; and this cannot be more conveniently done, than by particular persons, to whom god hath given zeal and understanding sufficient for such an undertaking. thus it happened in the case of that destructive project for a bank in ireland, which was brought into parliament a few years ago; and it was allowed, that the arguments and writings of some without doors, contributed very much to reject it.[ ] [footnote : swift himself assisted in writing against this "destructive project" in a series of pamphlets (see vol. vii.). the arguments for and against the bank were thoroughly discussed by hercules rowley and henry maxwell in a series of controversial letters against each other. [t.s.]] now, i should be heartily glad if some able lawyers would prescribe the limits, how far a private man may venture in delivering his thoughts upon public matters: because a true lover of his country, may think it hard to be a quiet stander-by, and an indolent looker-on, while a public error prevails; by which a whole nation may be ruined. every man who enjoys property, hath some share in the public; and therefore, the care of the public is, in some degree, every such man's concern. to come to particulars, i could wish to know, whether it be utterly unlawful in any writer so much as to mention the prerogative; at least so far as to bring it into doubt, upon any point whatsoever? i know it is often debated in westminster-hall; and sir edward coke, as well as other eminent lawyers, do frequently handle that subject in their books. secondly, how far the prerogative extends to force coin upon the subject, which is not sterling; such as lead, brass, copper, mixt metal, shells, leather, or any other material; and fix upon it whatever denomination the crown shall think fit? thirdly, what is really and truly meant by that phrase of "a depending kingdom," as applied to ireland; and wherein that dependency consisteth? lastly, in what points relating to liberty and property, the people of ireland differ, or at least ought to differ, from those of england? if these particulars were made so clear, that none could mistake them, it would be of infinite ease and use to the kingdom; and either prevent or silence all discontents. my lord somers, the greatest man i ever knew of your robe; and whose thoughts of ireland differed as far as heaven and earth, from those of some others among his brethren here; lamented to me, that the prerogative of the crown, or the privileges of parliament, should ever be liable to dispute, in any single branch of either; by which means, he said, the public often suffered great inconveniences; whereof he gave me several instances. i produce the authority of so eminent a person, to justify my desires, that some high points might be cleared. for want of such known ascertainment, how far a writer may proceed in expressing his good wishes for his country; a person of the most innocent intentions, may possibly, by the oratory and comments of lawyers, be charged with many crimes, which from his very soul he abhors; and consequently may be ruined in his fortunes, and left to rot among thieves in some stinking jail; merely for mistaking the purlieus of the law. i have known, in my lifetime, a printer prosecuted and convicted, for publishing a pamphlet; where the author's intentions, i am confident, were as good and innocent, as those of a martyr at his last prayers.[ ] i did very lately, as i thought it my duty, preach to the people under my inspection, upon the subject of mr. wood's coin; and although i never heard that my sermon gave the least offence, as i am sure none was intended; yet, if it were now printed and published, i cannot say, i would ensure it from the hands of the common hangman; or my own person from those of a messenger.[ ] [footnote : supposed to be "a proposal for the universal use of irish manufactures," written by the author. [f.]] [footnote : the reference here is to swift's sermon on "doing good." see swift's works, vol. iv., p. , present edition. [t.s.]] i have heard the late chief justice holt[ ]affirm, that in all criminal cases, the most favourable interpretation should be put upon words, that they can possibly bear. you meet the same position asserted in many trials, for the greatest crimes; though often very ill practised, by the perpetual corruption of judges. and i remember, at a trial in kent, where sir george rook[ ] was indicted for calling a gentleman knave and villain; the lawyer for the defendant brought off his client, by alleging, that the words were not injurious; for, _knave_ in the old and true signification, imported only a servant; and _villain_ in latin, is _villicus_; which is no more than a man employed in country labour; or rather a bailiff. [footnote : sir john holt ( - ) held the recordership of london, in , and was appointed lord chief justice of the king's bench in . in the celebrated case, ashby _v._. white, holt strongly upheld the rights of the voter as against the house of commons. he was distinguished, in his time, for the fair and impartial hearing he always accorded a prisoner, and he even personally assisted the accused in cases where the law did not allow him to be represented by counsel. many of holt's opinions did become "standard maxims." [t.s.]] [footnote : admiral sir george rooke ( - ), who, with rear-admiral byng, captured gibraltar in . [t.s.]] if sir john holt's opinion were a standard maxim for all times and circumstances, any writer, with a very small measure of discretion, might easily be safe; but, i doubt, in practice it hath been frequently controlled, at least before his time; for i take it to be an old rule in law. i have read, or heard, a passage of signor leti, an italian; who being in london, busying himself with writing the history of england, told king charles the second, that he endeavoured as much as he could to avoid giving offence, but found it a thing impossible; although he should have been as wise as solomon: the king answered, that if this were the case, he had better employ his time in writing proverbs as solomon did: but leti lay under no public necessity of writing; neither would england have been one halfpenny the better, or the worse, whether he writ or no. this i mention, because i know it will readily be objected, "what have private men to do with the public? what call had a drapier to turn politician, to meddle in matters of state? would not his time have been better employed in looking to his shop; or his pen in writing proverbs, elegies, ballads, garlands, and wonders? he would then have been out of all danger of proclamations, and prosecutions. have we not able magistrates and counsellors hourly watching over the public weal?" all this may be true: and yet, when the addresses from both houses of parliament, against mr. wood's halfpence, failed of success; if some pen had not been employed, to inform the people how far they might legally proceed, in refusing that coin, to detect the fraud, the artifice, and insolence of the coiner; and to lay open the most ruinous consequences to the whole kingdom; which would inevitably follow from the currency of the said coin; i might appeal to many hundred thousand people, whether any one of them would ever have had the courage or sagacity to refuse it. if this copper should begin to make its way among the common, ignorant people, we are inevitably undone; it is they who give us the greatest apprehension, being easily frighted, and greedy to swallow misinformations: for, if every man were wise enough to understand his own interest, which is every man's principal study, there would be no need of pamphlets upon this occasion. but, as things stand, i have thought it absolutely necessary, from my duty to god, my king, and my country, to inform the people, that the proclamation lately issued against the drapier, doth not in the least affect the case of mr. wood and his coin; but only refers to certain paragraphs in the drapier's last pamphlet, (not immediately relating to his subject, nor at all to the merits of the cause,) which the government was pleased to dislike; so that any man has the same liberty to reject, to write, and to declare against this coin, which he had before: neither is any man obliged to believe, that those honourable persons (whereof you are the first) who signed that memorable proclamation against the drapier, have at all changed their opinions, with regard to mr. wood or his coin. therefore concluding myself to be thus far upon a safe and sure foot; i shall continue, upon any proper occasion, as god enables me, to revive and preserve that spirit raised in the nation, (whether the real author were a real drapier or no is little to the purpose) against this horrid design of mr. wood; at the same time carefully watching every stroke of my pen, and venturing only to incur the public censure of the world as a writer; not of my lord chief justice whitshed, as a criminal. whenever an order shall come out by authority, forbidding all men upon the highest penalties, to offer anything in writing or discourse against mr. wood's halfpence; i shall certainly submit. however, if that should happen, i am determined to be somewhat more than the last man in the kingdom to receive them; because i will never receive them at all: for, although i know how to be silent; i have not yet learned to pay active obedience against my conscience, and the public safety. i desire to put a case, which i think the drapier, in some of his books, hath put before me; although not so fully as it requires. you know the copper halfpence in england are coined by the public; and every piece worth pretty tolerably near the value of the copper. now suppose, that, instead of the public coinage, a patent had been granted to some private, obscure person, for coining a proportionable quantity of copper in that kingdom, to what mr. wood is preparing in this; and all of it at least five times below the intrinsic value: the current money of england is reckoned to be twenty millions; and ours under five hundred thousand pounds: by this computation, as mr. wood hath power to give us , pound; so the patentee in england, by the same proportion, might circulate four millions three hundred and twenty thousand pounds; besides as much more by stealth and counterfeits: i desire to know from you, whether the parliament might not have addressed upon such an occasion; what success they probably would have had; and how many drapiers would have risen to pester the world with pamphlets: yet that kingdom would not be so great a sufferer as ours in the like case; because their cash would not be conveyed into foreign countries, but lie hid in the chests of cautious, thrifty men, until better times. then i desire, for the satisfaction of the public, that you will please to inform me why this country is treated in so very different a manner, in a point of such high importance; whether it be on account of poining's act; of subordination; dependence; or any other term of art; which i shall not contest, but am too dull to understand. i am very sensible, that the good or ill success of mr. wood, will affect you less than any person of consequence in the kingdom; because i hear you are so prudent as to make all your purchases in england; and truly so would i, if i had money, although i were to pay a hundred years' purchase; because i should be glad to possess a freehold that could not be taken from me by any law to which i did not give my own consent; and where i should never be in danger of receiving my rents in mixed copper, at the loss of sixteen shillings in the pound. you can live in ease and plenty at pepper-harrow, in surrey; and therefore i thought it extremely generous and public-spirited in you to be of the kingdom's side in this dispute, by shewing, without reserve, your disapprobation of mr. wood's design; at least if you have been so frank to others as you were to me; which indeed i could not but wonder at, considering how much we differ in other points; and therefore i could get but few believers, when i attempted to justify you in this article from your own words. i would humbly offer another thought, which i do not remember to have fallen under the drapier's observation. if these halfpence should once gain admittance; it is agreed, that in no long space of time, what by the clandestine practices of the coiner, what by his own counterfeits, and those of others, either from abroad or at home; his limited quantity would be trebled upon us, until there would not be a grain of gold or silver visible in the nation. this, in my opinion would lay a heavy charge upon the crown, by creating a necessity of transmitting money from england to pay the salaries at least of the principal civil officers: for i do not conceive how a judge (for instance) could support his dignity with a thousand pounds a year in wood's coin; which would not intrinsically be worth near two hundred. to argue that these halfpence, if no other coin were current, would answer the general ends of commerce among ourselves, is a great mistake; and the drapier hath made that matter too clear to admit an answer; by shewing us what every owner of land must be forced to do with the products of it in such a distress. you may read his remarks at large in his second and third letter; to which i refer you. before i conclude, i cannot but observe, that for several months past, there have more papers been written in this town, such as they are, all upon the best public principle, the love of our country, than, perhaps, hath been known in any other nation, and in so short a time: i speak in general, from the drapier down to the maker of ballads; and all without any regard to the common motives of writers: which are profit, favour, and reputation. as to profit, i am assured by persons of credit, that the best ballad upon mr. wood will not yield above a groat to the author; and the unfortunate adventurer harding, declares he never made the drapier any present, except one pair of scissors. as to favour, whoever thinks to make his court by opposing mr. wood is not very deep in politics. and as to reputation, certainly no man of worth and learning, would employ his pen upon so transitory a subject, and in so obscure a corner of the world, to distinguish himself as an author. so that i look upon myself, the drapier, and my numerous brethren, to be all true patriots in our several degrees. all that the public can expect for the future, is only to be sometimes warned to beware of mr. wood's halfpence; and refer them for conviction to the drapier's reasons. for, a man of the most superior understanding, will find it impossible to make the best use of it, while he writes in constraint; perpetually softening, correcting, or blotting out expressions, for fear of bringing his printer, or himself, under a prosecution from my lord chief-justice whitshed. it calls to my remembrance the madman in don quixote, who being soundly beaten by a weaver for letting a stone (which he always carried on his shoulder) fall upon a spaniel, apprehended that every cur he met was of the same species. for these reasons, i am convinced, that what i have now written will appear low and insipid; but if it contributes, in the least, to preserve that union among us for opposing this fatal project of mr. wood, my pains will not be altogether lost. i sent these papers to an eminent lawyer (and yet a man of virtue and learning into the bargain) who, after many alterations returned them back, with assuring me, that they are perfectly innocent; without the least mixture of treason, rebellion, sedition, malice, disaffection, reflection, or wicked insinuation whatsoever. if the bellman of each parish, as he goes his circuit, would cry out, every night, "past twelve o'clock; beware of wood's halfpence;" it would probably cut off the occasion for publishing any more pamphlets; provided that in country towns it were done upon market days. for my own part, as soon as it shall be determined, that it is not against law, i will begin the experiment in the liberty of st. patrick's; and hope my example may be followed in the whole city but if authority shall think fit to forbid all writings, or discourses upon this subject, except such as are in favour of mr. wood, i will obey as it becomes me; only when i am in danger of bursting, i will go and whisper among the reeds, not any reflection upon the wisdom of my countrymen; but only these few words, beware of wood's halfpence. i am, with due respect, your most obedient, humble servant, j.s. deanery house, oct. , . letter vi a letter to the right honourable the lord viscount molesworth. note. this letter, hitherto styled the drapier's fifth letter, is here printed as the sixth, for the reasons already stated. it was published on the th december, , at a time when the drapier agitation had reached its last stage. the drapier had taught his countrymen that "to be brave is to be wise," and he now struck the final blow that laid prostrate an already tottering opposition. walpole realized that to govern ireland from england he must have a trustier aid, a heavier hand, and a more vigilant eye, than were afforded in carteret. carteret, however, was better away in ireland, and, moreover, as lord-lieutenant, he was an ameliorating influence on the irish patriotic party in dublin. but that party was now backed by a very important popular opinion. for the present, therefore, he gave way; but his real feelings might have been discovered by an interpretation of his appointment of hugh boulter as archbishop of armagh and primate of ireland.[ ] boulter's letter to the duke of newcastle, written after his arrival in dublin towards the end of november, , gave a very unambiguous account of the state of the country towards the patent. on the rd of december, he wrote, "we are at present in a very bad state, and the people so poisoned with apprehensions of wood's halfpence, that i do not see there can be any hopes of justice against any person for seditious writings, if he does but mix somewhat about wood in them.... but all sorts here are determinedly set against wood's halfpence, and look upon their estates as half sunk in their value, whenever they shall pass upon the nation."[ ] on january th - , the primate wrote again to the same effect. on the rd of july, he hopes that, as parliament is about to meet, the lord-lieutenant "will be impowered in his speech to speak clearly as to the business of the halfpence, and thoroughly rid this nation of their fear on that head."[ ] boulter's advice was taken. on the th august, , a vacation of the patent was issued, and when parliament met shortly after, the lord-lieutenant was able, in his speech, to announce that his majesty had put an entire end to the patent granted wood for coining copper halfpence and farthings. he alluded to the surrender as a remarkable instance of royal favour and condescension which should fill the hearts of a loyal and obedient people with the highest sense of duty and gratitude. he doubted not the houses would make suitable acknowledgment of their sense of happiness enjoyed under his majesty's most mild and gracious government.[ ] [footnote : see note on pp. - .] [footnote : boulter's letter, vol. i., p. . dublin edition, .] [footnote : _ibid_., p. .] [footnote : comm. journals, vol. iii., p. .] the commons unanimously voted an address suitable to the occasion and in harmony with the lord-lieutenant's suggestion. but the lords procrastinated in debates. it was a question whether their address should or should not include the words "great wisdom" in addition to the word "condescension" to express their sense of his majesty's action. finally, however, the address was forthcoming, though not before some strenuous expressions of opinion had been made by midleton and archbishop king against walpole's administration. as passed, their address included the debated words; as presented the address omitted them. thus ended this famous agitation in which the people of ireland won their first victory over england by constitutional means. wood was no loser by the surrender; indeed, he was largely the gainer, since he was given a pension of £ , per annum for twelve years.[ ] [footnote : coxe says for eight years.] now that the fight was over the people, to use scott's words, "turned their eyes with one consent on the man, by whose unbending fortitude, and pre-eminent talents, this triumph was accomplished." he was hailed joyously and blessed fervently wherever he went; the people almost idolized him; he was their defender and their liberator. no monarch visiting his domains could have been received with greater honour than was swift when he came into a town. medals and medallions were struck in his honour. a club was formed to the memory of the drapier; shops and taverns bore the sign of the drapier's head; children and women carried handkerchiefs with the drapier's portrait woven in them. all grades of society respected him for an influence that, founded in sincerity and guided by integrity and consummate ability, had been used patriotically. the dean became ireland's chiefest citizen; and irishmen will ever revere the memory of the man who was the first among them to precipitate their national instincts into the abiding form of national power--the reasoned opinion of a free people. the text of this letter is based on that given by sir walter scott, collated with the original edition and with the text given in "fraud detected" ( ). [t.s.] [illustration: a **letter** to the right honourable the *lord viscount _molesworth_.* * * * * * by _m.b. drapier_, author of the letter to the _shop-keepers_, &c. * * * * * they compassed me about also with words of deceit, and fought against me without a cause. for my love they are my adversaries, but i give my self unto prayer. and they have rewarded me evil for good, and hatred for my love. _psalm_ . _v_. , , . seek not to be judge, being not able to take away iniquity, lest at any time thou fear the person of the mighty, and lay a stumbling block in the way of thy uprightness. offend not against the multitude of a city, and then thou shalt not cast thy self down among the people. bind not one sin upon another, for in one thou shalt not be unpunished. _ecclus_. ch. . v. , , . * * * * * _non jam prima peto mnesttheus, neque vincere certo: quanquam o! sed superent, quibus hoc, neptune, dedisti._ * * * * * dublin: printed by _john harding_ in _molesworth's court_ in _fishamble-street_. ] directions to the printer. mr. harding, when i sent you my former papers, i cannot say i intended you either good or hurt, and yet you have happened through my means to receive both. i pray god deliver you from any more of the latter, and increase the former. your trade, particularly in this kingdom, is of all others the most unfortunately circumstantiated; for as you deal in the most worthless kind of trash, the penny productions of pennyless scribblers, so you often venture your liberty and sometimes your lives, for the purchase of half-a-crown, and by your own ignorance are punished for other men's actions. i am afraid, you in particular think you have reason to complain of me for your own and your wife's confinement in prison, to your great expense, as well as hardship, and for a prosecution still impending. but i will tell you, mr. harding, how that matter stands. since the press hath lain under so strict an inspection, those who have a mind to inform the world are become so cautious, as to keep themselves if possible out of the way of danger. my custom is to dictate to a 'prentice who can write in a feigned hand, and what is written we send to your house by a blackguard boy. but at the same time i do assure you upon my reputation, that i never did send you anything, for which i thought you could possibly be called to an account. and you will be my witness that i always desired you by a letter to take some good advice before you ventured to print, because i knew the dexterity of dealers in the law at finding out something to fasten on where no evil is meant; i am told indeed, that you did accordingly consult several very able persons, and even some who afterwards appeared against you: to which i can only answer, that you must either change your advisers, or determine to print nothing that comes from a drapier. i desire you will send the enclosed letter, directed "to my lord viscount molesworth at his house at brackdenstown near swords;" but i would have it sent printed for the convenience of his lordship's reading, because this counterfeit hand of my 'prentice is not very legible. and if you think fit to publish it, i would have you first get it read over carefully by some notable lawyer: i am assured you will find enough of them who are friends to the drapier, and will do it without a fee, which i am afraid you can ill afford after all your expenses. for although i have taken so much care, that i think it impossible to find a topic out of the following papers for sending you again to prison; yet i will not venture to be your guarantee. this ensuing letter contains only a short account of myself, and an humble apology for my former pamphlets, especially the last, with little mention of mr. wood or his halfpence, because i have already said enough upon that subject, until occasion shall be given for new fears; and in that case you may perhaps hear from me again. i am, your friend and servant, m.b. from my shop in st. francis-street dec. . . _p.s._ for want of intercourse between you and me, which i never will suffer, your people are apt to make very gross errors in the press, which i desire you will provide against. letter vi a letter to the right honourable the lord viscount molesworth, at his house at brackdenstown near swords.[ ] my lord, i reflect too late on the maxim of common observers, that "those who meddle in matters out of their calling, will have reason to repent;" which is now verified in me: for by engaging in the trade of a writer, i have drawn upon myself the displeasure of the government, signified by a proclamation promising a reward of three hundred pounds to the first faithful subject who shall be able and inclined to inform against me. to which i may add the laudable zeal and industry of my lord chief justice [whitshed] in his endeavours to discover so dangerous a person. therefore whether i repent or no, i have certainly cause to do so, and the common observation still stands good. [footnote : robert, viscount molesworth ( - ), born in dublin and educated at the university there, was a prominent adherent of the prince of orange during the revolution of . in william sent him to denmark as envoy-extraordinary to the court at copenhagen; but he left abruptly because of the offence he gave there. retiring to flanders, molesworth revenged himself by writing, "an account of denmark as it was in ," in which he described that country as no fit place for those who held their liberties dearly. molesworth had been strongly imbued with the republican teachings of algernon sidney, and his book affords ample proof of the influence. its publication aroused much indignation, and a controversy ensued in which swift's friend, dr. william king, took part. in molesworth returned to ireland, became a privy councillor in , sat in the irish parliament in - , and in the english house of commons from to . in he was removed from the irish privy council on a charge of a treasonable utterance, which steele vindicated in "the englishman" and "the crisis." the accession of george i., however, brought molesworth into his honours again, and he was created baron molesworth of philipstown, and viscount molesworth of swords, in . his work entitled "considerations for promoting agriculture," issued in , was considered by swift as "an excellent discourse, full of most useful hints." at the time swift addressed him this sixth letter, molesworth was living in retirement at brackdenstown. [t.s.]] it will sometimes happen, i know not how in the course of human affairs, that a man shall be made liable to legal animadversions, where he has nothing to answer for, either to god or his country; and condemned at westminster-hall for what he will never be charged with at the day of judgment. after strictly examining my own heart, and consulting some divines of great reputation, i cannot accuse myself of any "malice or wickedness against the public;" of any "designs to sow sedition," of "reflecting on the king and his ministers," or of endeavouring "to alienate the affections of the people of this kingdom from those of england."[ ] all i can charge myself with, is a weak attempt to serve a nation in danger of destruction by a most wicked and malicious projector, without waiting until i were called to its assistance; which attempt, however it may perhaps give me the title of _pragmatical_ and _overweening_ will never lie a burthen upon my conscience. god knows whether i may not with all my caution have already run myself into danger, by offering thus much in my own vindication. for i have heard of a judge, who, upon the criminal's appeal to the dreadful day of judgment, told him he had incurred a _premunire_ for appealing to a foreign jurisdiction: and of another in wales, who severely checked the prisoner for offering the same plea, taxing him with reflecting on the court by such a comparison, because "comparisons were odious." [footnote : the quotations are from the charges stated in the indictment and proclamation against the writer and printer of the previous letters. [t.s.] ] but in order to make some excuse for being more speculative than others of my condition, i desire your lordship's pardon, while i am doing a very foolish thing, which is, to give you some little account of myself. i was bred at a free school where i acquired some little knowledge in the latin tongue, i served my apprenticeship in london, and there set up for myself with good success, till by the death of some friends, and the misfortunes of others, i returned into this kingdom, and began to employ my thoughts in cultivating the woollen manufacture through all its branches wherein i met with great discouragement and powerful opposers, whose objections appeared to me very strange and singular they argued that the people of england would be offended if our manufactures were brought to equal theirs; and even some of the weaving trade were my enemies, which i could not but look upon as absurd and unnatural i remember your lordship at that time did me the honour to come into my shop, where i shewed you a piece of black and white stuff just sent from the dyer, which you were pleased to approve of, and be my customer for it.[ ] [footnote : the "piece of black and white stuff just sent from the dyer," refers to his pamphlet, issued in , "the proposal for the universal use of irish manufactures." see vol. vii. [t.s.]] however i was so mortified, that i resolved for the future to sit quietly in my shop, and deal in common goods like the rest of my brethren; till it happened some months ago considering with myself that the lower and poorer sort of people wanted a _plain strong coarse stuff to defend them against cold easterly winds, which then blew very fierce and blasting for a long time together_, i contrived one on purpose, which sold very well all over the kingdom, and preserved many thousands from agues i then made a second and a third kind of stuffs for the gentry with the same success, insomuch that an ague hath hardly been heard of for some time.[ ] [footnote : the "cold easterly winds" refer to the demands made on the irish people to accept wood's halfpence. the three different kinds of "stuffs" are the three letters written under the _nom de guerre,_ "m.b. drapier." [t.s.]] this incited me so far, that i ventured upon a fourth piece made of the best irish wool i could get, and i thought it grave and rich enough to be worn by the best lord or judge of the land. but of late some great folks complain as i hear, "that when they had it on, they felt a shuddering in their limbs," and have thrown it off in a rage, cursing to hell the poor drapier who invented it, so that i am determined never to work for persons of quality again, except for your lordship and a very few more.[ ] [footnote : this refers to the fourth letter of the drapier, which brought forth the proclamation, and for the author of which the reward of £ was offered. [t.s.]] i assure your lordship upon the word of an honest citizen, that i am not richer by the value of one of mr. wood's halfpence with the sale of all the several stuffs i have contrived; for i give the whole profit to the dyers and pressers.[ ] and therefore i hope you will please to believe, that no other motive beside the love of my country could engage me to busy my head and hands to the loss of my time and the gain of nothing but vexation and ill-will. [footnote : the printers [f.]] i have now in hand one piece of stuff to be woven on purpose for your lordship, although i might be ashamed to offer it you, after i have confessed that it will be made only from the shreds and remnants of the wool employed in the former. however i shall work it up as well as i can, and at worst, you need only give it among your tenants. i am very sensible how ill your lordship is like to be entertained with the pedantry of a drapier in the terms of his own trade. how will the matter be mended, when you find me entering again, though very sparingly, into an affair of state; for such is now grown the controversy with mr. wood, if some great lawyers are to be credited. and as it often happens at play, that men begin with farthings, and go on to gold, till some of them lose their estates, and die in jail; so it may possibly fall out in my case, that by playing too long with mr. wood's halfpence, i may be drawn in to pay a fine, double to the reward for betraying me, be sent to prison, and "not be delivered thence till i shall have paid the uttermost farthing." there are my lord, three sorts of persons with whom i am resolved never to dispute: a highwayman with a pistol at my breast, a troop of dragoons who come to plunder my house, and a man of the law who can make a merit of accusing me. in each of these cases, which are almost the same, the best method is to keep out of the way, and the next best is to deliver your money, surrender your house, and confess nothing. i am told that the two points in my last letter, from which an occasion of offence hath been taken, are where i mention his majesty's answer to the address of the house of lords upon mr. wood's patent, and where i discourse upon ireland's being a dependent kingdom. as to the former, i can only say, that i have treated it with the utmost respect and caution, and i thought it necessary to shew where wood's patent differed in many essential parts from all others that ever had been granted, because the contrary had for want of due information been so strongly and so largely asserted. as to the other, of ireland's dependency, i confess to have often heard it mentioned, but was never able to understand what it meant. this gave me the curiosity to enquire among several eminent lawyers, who professed they knew nothing of the matter. i then turned over all the statutes of both kingdoms without the least information, further than an irish act, that i quoted, of the d of henry th, uniting ireland to england under one king. i cannot say i was sorry to be disappointed in my search, because it is certain, i could be contented to depend only upon god and my prince and the laws of my own country, after the manner of other nations. but since my betters are of a different opinion, and desire further dependencies, i shall readily submit, not insisting on the exception i made of m.b. drapier. for indeed that hint was borrowed from an idle story i had heard in england, which perhaps may be common and beaten, but because it insinuates neither treason nor sedition, i will just barely relate it. some hundred years ago when the peers were so great that the commons were looked upon as little better than their dependents, a bill was brought in for making some new additions to the power and privileges of the peerage. after it was read, one mr. drewe a member of the house, stood up, and said, he very much approved the bill, and would give his vote to have it pass; but however, for some reasons best known to himself, he desired that a clause might be inserted for excepting the family of the drewes. the oddness of the proposition taught others to reflect a little, and the bill was thrown out. whether i were mistaken, or went too far in examining the dependency must be left to the impartial judgment of the world, as well as to the courts of judicature, although indeed not in so effectual and decisive a manner. but to affirm, as i hear some do, in order to countenance a fearful and servile spirit, that this point did not belong to my subject, is a false and foolish objection. there were several scandalous reports industriously spread by wood and his accomplices to discourage all opposition against his infamous project. they gave it out that we were prepared for a rebellion, that we disputed the king's prerogative, and were shaking off our dependency. the first went so far, and obtained so much belief against the most visible demonstrations to the contrary, that a great person of this kingdom, now in england, sent over such an account of it to his friends, as would make any good subject both grieve and tremble. i thought it therefore necessary to treat that calumny as it deserved. then i proved by an invincible argument that we could have no intention to dispute his majesty's prerogative, because the prerogative was not concerned in the question, the civilians and lawyers of all nations agreeing that copper is not money. and lastly to clear us from the imputation of shaking off our dependency, i shewed wherein as i thought this dependency consisted, and cited the statute above mentioned made in ireland, by which it is enacted, that "whoever is king of england shall be king of ireland," and that the two kingdoms shall be "for ever knit together under one king." this, as i conceived, did wholly acquit us of intending to break our dependency, because it was altogether out of our power, for surely no king of england will ever consent to the repeal of that statute. but upon this article i am charged with a heavier accusation. it is said i went too far, when i declared, that "if ever the pretender should come to be fixed upon the throne of england (which god forbid) i would so far venture to transgress this statute, that i would lose the last drop of my blood before i would submit to him as king of ireland." this i hear on all sides, is the strongest and weightiest objection against me, and which hath given the most offence; that i should be so bold to declare against a direct statute, and that any motive how strong soever, could make me reject a king whom england should receive. now if in defending myself from this accusation i should freely confess, that i "went too far," that "the expression was very indiscreet, although occasioned by my zeal for his present majesty and his protestant line in the house of hanover," that "i shall be careful never to offend again in the like kind." and that "i hope this free acknowledgment and sorrow for my error, will be some atonement and a little soften the hearts of my powerful adversaries." i say if i should offer such a defence as this, i do not doubt but some people would wrest it to an ill meaning by some spiteful interpretation, and therefore since i cannot think of any other answer, which that paragraph can admit, i will leave it to the mercy of every candid reader. i will now venture to tell your lordship a secret, wherein i fear you are too deeply concerned you will therefore please to know that this habit of writing and discoursing, wherein i unfortunately differ from almost the whole kingdom, and am apt to grate the ears of more than i could wish, was acquired during my apprenticeship in london, and a long residence there after i had set up for myself. upon my return and settlement here, i thought i had only changed one country of freedom for another. i had been long conversing with the writings of your lordship,[ ] mr. locke, mr. molineaux,[ ] colonel sidney[ ] and other dangerous authors, who talk of "liberty as a blessing, to which the whole race of mankind hath an original title, whereof nothing but unlawful force can divest them." i knew a good deal of the several gothic institutions in europe, and by what incidents and events they came to be destroyed; and i ever thought it the most uncontrolled and universally agreed maxim, that _freedom_ consists in a people being governed by laws made with their own consent; and _slavery_ in the contrary. i have been likewise told, and believe it to be true, that _liberty_ and _property_ are words of known use and signification in this kingdom, and that the very lawyers pretend to understand, and have them often in their mouths. these were the errors which have misled me, and to which alone i must impute the severe treatment i have received. but i shall in time grow wiser, and learn to consider my driver, the road i am in, and with whom i am yoked. this i will venture to say, that the boldest and most obnoxious words i ever delivered, would in england have only exposed me as a stupid fool, who went to prove that the sun shone in a clear summer's day; and i have witnesses ready to depose that your lordship hath said and writ fifty times worse, and what is still an aggravation, with infinitely more wit and learning, and stronger arguments, so that as politics run, i do not know a person of more exceptionable principles than yourself; and if ever i shall be discovered, i think you will be bound in honour to pay my fine and support me in prison; or else i may chance to inform against you by way of reprisal.[ ] [footnote : see note _ante_, p. . [t.s.]] [footnote : william molyneux ( - ), the correspondent of john flamsteed and locke. his "dioptrica nova" contains a warm appreciation of locke's "essay on the human understanding." he died in october, , but in the early part of this year, he published his famous inquiry into the effect of english legislation on irish manufactures. the work was entitled, "the case of ireland's being bound by acts of parliament in england stated," and its publication made a great stir both in england and in ireland. molyneux attempted to show that the irish parliament was independent of the english parliament. his book was reported by a committee of the house of commons, on june nd, , to be "of dangerous consequence to the crown and parliament of england," but the matter went no further than embodying this resolution of the committee in an address to the king. [t.s.]] [footnote : algernon sidney ( - ), the author of the well known "discourses concerning government," and the famous republican of the cromwellian and restoration years, was the second surviving son of the second earl of leicester his career as soldier, statesman, agitator, ambassador and author, forms an interesting and even fascinating chapter of the story of this interesting period of english history. he was tried for treason before jeffreys, and in spite of a most excellent defence, sentenced to death. his execution took place on december th, . [t. s.]] [footnote : a writer, signing himself m.m., replying to this letter of swift's in a broadside entitled, "seasonable advice to m.b. drapier, occasioned by his letter to the r--t. hon. the lord visct. molesworth," actually takes this paragraph to mean that swift intended seriously to turn informer: "now sir, some people are of opinion that you carried this too far, inasmuch as you become a precedent to informers: others think that you intimate to his lordship, the miserable circumstance you are in by the menaces of the prentice to whom you dictate; they conceive your declaring to inform, if not fee'd, to the contrary, signifies your said prentice on the last occasion to swear, if you don't forthwith deliver him his indentures, and half of your stock to set up trade with, he will inform against you, bring you to justice, be dismissed by law, and get the promised £ to begin trade with; how near these conceptions be to truth i can't tell; but i know people think that word _inform_ unseasonable. . . ." [t.s.]] in the meantime, i beg your lordship to receive my confession, that if there be any such thing as a dependency of ireland upon england, otherwise than as i have explained it, either by the law of god, of nature, of reason, of nations, or of the land (which i shall never hereafter contest,) then was the proclamation against me, the most merciful that ever was put out, and instead of accusing me as malicious, wicked and seditious, it might have been directly as guilty of high treason. all i desire is, that the cause of my country against mr. wood may not suffer by any inadvertency of mine; whether ireland depends upon england, or only upon god, the king and the law, i hope no man will assert that it depends upon mr. wood. i should be heartily sorry that this commendable resentment against me should accidentally (and i hope, what was never intended) strike a damp upon that spirit in all ranks and corporations of men against the desperate and ruinous design of mr. wood. let my countrymen blot out those parts in my last letter which they dislike, and let no rust remain on my sword to cure the wounds i have given to our most mortal enemy. when sir charles sidley[ ] was taking the oaths, where several things were to be renounced, he said "he loved renouncing," asked "if any more were to be renounced, for he was ready to renounce as much as they pleased." although i am not so thorough a renouncer; yet let me have but good city security against this pestilent coinage, and i shall be ready not only to renounce every syllable in all my four letters, but to deliver them cheerfully with my own hands into those of the common hangman, to be burnt with no better company than the coiner's _effigies,_ if any part of it hath escaped out of the secular hands of the rabble. [footnote : this must be sir charles sedley (properly sidley), the famous wit and dramatist of charles ii.'s reign. in his reprint of , faulkner prints the name "sidley," though the original twopenny tract and the "hibernian patriot" print it as "sidney." sir w. scott corrects it to "sedley." [t.s.]] but whatever the sentiments of some people may be, i think it is agreed that many of those who subscribed against me, are on the side of a vast majority in the kingdom who opposed mr. wood; and it was with great satisfaction that i observed some right honourable names very amicably joined with my own at the bottom of a strong declaration against him and his coin. but if the admission of it among us be already determined the worthy person who is to betray me ought in prudence to do it with all convenient speed, or else it may be difficult to find three hundred pounds in sterling for the discharge of his hire; when the public shall have lost five hundred thousand, if there be so much in the nation; besides four-fifths of its annual income for ever. i am told by lawyers, that in all quarrels between man and man, it is of much weight, which of them gave the first provocation or struck the first blow. it is manifest that mr. wood hath done both, and therefore i should humbly propose to have him first hanged and his dross thrown into the sea; after which the drapier will be ready to stand his trial. "it must needs be that offences come, but woe unto him by whom the offence cometh." if mr. wood had held his hand every body else would have held their tongues, and then there would have been little need of pamphlets, juries, or proclamations upon this occasion. the provocation must needs have been great, which could stir up an obscure indolent drapier to become an author. one would almost think the very stones in the street would rise up in such a cause: and i am not sure they will not do so against mr. wood if ever he comes within their reach. it is a known story of the dumb boy, whose tongue forced a passage for speech by the horror of seeing a dagger at his father's throat. this may lessen the wonder that a tradesman hid in privacy and silence should cry out when the life and being of his political mother are attempted before his face, and by so infamous a hand. but in the meantime, mr. wood the destroyer of a kingdom walks about in triumph (unless it be true that he is in jail for debt) while he who endeavoured to assert the liberty of his country is forced to hide his head for occasionally dealing in a matter of controversy. however i am not the first who hath been condemned to death for gaining a great victory over a powerful enemy, by disobeying for once the strict orders of military discipline. i am now resolved to follow (after the usual proceeding of mankind, because it is too late) the advice given me by a certain dean. he shewed the mistake i was in of trusting to the general good-will of the people, "that i had succeeded hitherto better than could be expected, but that some unfortunate circumstantial lapse would probably bring me within the reach of power. that my good intentions would be no security against those who watched every motion of my pen, in the bitterness of my soul." he produced an instance of "a writer as innocent, as disinterested, and as well meaning as myself, where the printer, who had the author in his power, was prosecuted with the utmost zeal, the jury sent back nine times, and the man given up to the mercy of the court."[ ] the dean further observed "that i was in a manner left alone to stand the battle, while others who had ten thousand times better talents than a drapier, were so prudent to lie still, and perhaps thought it no unpleasant amusement to look on with safety, while another was giving them diversion at the hazard of his liberty and fortune, and thought they made a sufficient recompense by a little applause." whereupon he concluded with a short story of a jew at madrid, who being condemned to the fire on account of his religion, a crowd of school-boys following him to the stake, and apprehending they might lose their sport, if he should happen to recant, would often clap him on the back, and cry, "_sta firme moyse_ (moses, continue steadfast)." [footnote : this was for the publication of "a proposal for the universal use of irish manufactures." [t.s.]] i allow this gentleman's advice to have been good, and his observations just, and in one respect my condition is worse than that of the jew, for no recantation will save me. however it should seem by some late proceedings, that my state is not altogether deplorable. this i can impute to nothing but the steadiness of two impartial grand juries, which hath confirmed in me an opinion i have long entertained, that, as philosophers say, "virtue is seated in the middle," so in another sense, the little virtue left in the world is chiefly to be found among the middle rank of mankind, who are neither allured out of her paths by ambition, nor driven by poverty. since the proclamation occasioned by my last letter, and a due preparation for proceeding against me in a court of justice, there have been two printed papers clandestinely spread about, whereof no man is able to trace the original further than by conjecture, which with its usual charity lays them to my account. the former is entitled, "seasonable advice,"[ ] and appears to have been intended for information of the grand jury, upon the supposition of a bill to be prepared against that letter. the other[ ] is an extract from a printed book of parliamentary proceedings in the year containing an angry resolution of the house of commons in england against dissolving grand juries. as to the former, your lordship will find it to be the work of a more artful hand than that of a common drapier. it hath been censured for endeavouring to influence the minds of a jury, which ought to be wholly free and unbiassed, and for that reason it is manifest that no judge was ever known either upon or off the bench, either by himself or his dependents, to use the least insinuation that might possibly affect the passions or interests of any one single juryman, much less of a whole jury; whereof every man must be convinced who will just give himself the trouble to dip into the common printed trials; so as, it is amazing to think, what a number of upright judges there have been in both kingdoms for above sixty years past, which, considering how long they held their offices during pleasure, as they still do among us, i account next to a miracle. [footnote : see p. . [t.s.]] [footnote : see note on p. . [t.s.]] as to the other paper i must confess it is a sharp censure of an english house of commons against dissolving grand juries by any judge before the end of the term, assizes, or sessions, while matters are under their consideration, and not presented; is arbitrary, illegal, destructive to public justice, a manifest violation of his oath, and is a means to subvert the fundamental laws of the kingdom. however, the publisher seems to have been mistaken in what he aimed at. for, whatever dependence there may be of ireland upon england, i hope he would not insinuate, that the proceedings of a lord chief justice in ireland must depend upon a resolution of an english house of commons. besides, that resolution although it were levelled against a particular lord chief justice, sir william scroggs,[ ] yet the occasion was directly contrary: for scroggs dissolved the grand jury of london for fear they should present, but ours in dublin was dissolved because they would not present, which wonderfully alters the case. and therefore a second grand jury supplied that defect by making a presentment[ ] that hath pleased the whole kingdom. however i think it is agreed by all parties, that both the one and the other jury behaved themselves in such a manner, as ought to be remembered to their honour, while there shall be any regard left among us for virtue or public spirit. [footnote : sir william scroggs ( ?- ) was appointed lord chief justice of england on the removal of sir thomas ramsford in . one of the eight articles of impeachment against scroggs, in , was for illegally discharging the grand jury of middlesex before the end of the term. although the articles of impeachment were carried to the house of lords in , the proceedings went no farther than ordering him to find bail and file his answer by a certain time. scroggs was removed, on account of his unpopularity, on april th, . as a lawyer, scroggs has no great reputation; as a judge he must be classed with the notorious jeffreys. [t.s.]] [footnote : see appendix no. v. [t.s.]] i am confident your lordship will be of my sentiments in one thing, that some short plain authentic tract might be published for the information both of petty and grand juries, how far their power reacheth, and where it is limited, and that a printed copy of such a treatise might be deposited in every court, to be consulted by the jurymen before they consider of their verdict; by which abundance of inconveniences would be avoided, whereof innumerable instances might be produced from former times, because i will say nothing of the present. i have read somewhere of an eastern king who put a judge to death for an iniquitous sentence, and ordered his hide to be stuffed into a cushion, and placed upon the tribunal for the son to sit on, who was preferred to his father's office. i fancy such a memorial might not have been unuseful to a son of sir william scroggs, and that both he and his successors would often wriggle in their seats as long as the cushion lasted. i wish the relater had told us what number of such cushions there might be in that country. i cannot but observe to your lordship how nice and dangerous a point it is grown for a private person to inform the people even in an affair where the public interest and safety are so highly concerned as that of mr. wood, and this in a country where loyalty is woven into the very hearts of the people, seems a little extraordinary. sir william scroggs was the first who introduced that commendable acuteness into the courts of judicature; but how far this practice hath been imitated by his successors or strained upon occasion, is out of my knowledge. when pamphlets unpleasing to the ministry were presented as libels, he would order the offensive paragraphs to be read before him, and said it was strange that the judges and lawyers of the king's bench should be duller than all the people of england; and he was often so very happy in applying the initial letters of names, and expounding dubious hints (the two common expedients among writers of that class for escaping the law) that he discovered much more than ever the authors intended, as many of them or their printers found to their cost. if such methods are to be followed in examining what i have already written or may write hereafter upon the subject of mr. wood, i defy any man of fifty times my understanding and caution to avoid being entrapped, unless he will be content to write what none will read, by repeating over the old arguments and computations, whereof the world is already grown weary. so that my good friend harding lies under this dilemma, either to let my learned works hang for ever a drying upon his lines, or venture to publish them at the hazard of being laid by the heels. i need not tell your lordship where the difficulty lies. it is true, the king and the laws permit us to refuse this coin of mr. wood, but at the same time it is equally true, that the king and the laws permit us to receive it. now it is most certain the ministers in england do not suppose the consequences of uttering that brass among us to be so ruinous as we apprehend; because doubtless if they understood it in that light, they are persons of too much honour and justice not to use their credit with his majesty for saving a most loyal kingdom from destruction. but as long as it shall please those great persons to think that coin will not be so very pernicious to us, we lie under the disadvantage of being censured as obstinate in not complying with a royal patent. therefore nothing remains, but to make use of that liberty which the king and the laws have left us, by continuing to refuse this coin, and by frequent remembrances to keep up that spirit raised against it, which otherwise may be apt to flag, and perhaps in time to sink altogether. for, any public order against receiving or uttering mr. wood's halfpence is not reasonably to be expected in this kingdom, without directions from england, which i think nobody presumes, or is so sanguine to hope. but to confess the truth, my lord, i begin to grow weary of my office as a writer, and could heartily wish it were devolved upon my brethren, the makers of songs and ballads, who perhaps are the best qualified at present to gather up the gleanings of this controversy. as to myself, it hath been my misfortune to begin and pursue it upon a wrong foundation. for having detected the frauds and falsehoods of this vile impostor wood in every part, i foolishly disdained to have recourse to whining, lamenting, and crying for mercy, but rather chose to appeal to law and liberty and the common rights of mankind, without considering the climate i was in. since your last residence in ireland, i frequently have taken my nag to ride about your grounds, where i fancied myself to feel an air of freedom breathing round me, and i am glad the low condition of a tradesman did not qualify me to wait on you at your house, for then i am afraid my writings would not have escaped severer censures. but i have lately sold my nag, and honestly told his greatest fault, which was that of snuffing up the air about brackdenstown, whereby he became such a lover of liberty, that i could scarce hold him in. i have likewise buried at the bottom of a strong chest your lordship's writings under a heap of others that treat of liberty, and spread over a layer or two of hobbes, filmer, bodin[ ] and many more authors of that stamp, to be readiest at hand whenever i shall be disposed to take up a new set of principles in government. in the mean time i design quietly to look to my shop, and keep as far out of your lordship's influence as possible; and if you ever see any more of my writings upon this subject, i promise you shall find them as innocent, as insipid and without a sting as what i have now offered you. but if your lordship will please to give me an easy lease of some part of your estate in yorkshire,[ ] thither will i carry my chest and turning it upside down, resume my political reading where i left it off; feed on plain homely fare, and live and die a free honest english farmer: but not without regret for leaving my countrymen under the dread of the brazen talons of mr. wood: my most loyal and innocent countrymen, to whom i owe so much for their good opinion of me, and of my poor endeavours to serve them, i am with the greatest respect, my lord your lordship's most obedient and most humble servant, m.b. from my shop in st. francis-street, dec. . . [footnote : sir robert filmer, the political writer who suffered for his adhesion to the cause of charles i. his chief work was published after his death in . it is entitled, "patriarcha," and defends the patriarchal theory of government against the social-compact theory of hobbes. locke vigorously attacked it in his "two treatises on government" published in . jean bodin, who died in , wrote the "livres de la republique," a remarkable collection of information and speculation on the theoretical basis of political government. [t.s.]] [footnote : molesworth's estate in yorkshire was at edlington, near tickhill. [t.s.]] letter vii. an humble address to both houses of parliament. by m.b. drapier. "multa gemens ignominiam plagasque superbi victoris.--" [virgil, _georg. iii._, - .] note. this letter was published in the fourth volume of the collected edition of swift's works, issued by faulkner, in dublin, in . it is there stated that it was written "before the lord carteret came over, and soon after the fourth drapier's letter." if faulkner be correct, and he probably is, the subject matter of the letter shows that it was not to be printed until after the agitation had subsided. the letter is in an entirely different spirit from the other letters, and deals with suggestions and methods of action for a general righting of the wrongs under which ireland was suffering. in matter as well as in manner it is not a continuation of the contest against wood, but an effort to send the people along paths which would lead to their general welfare and prosperity. as such it properly concludes the drapier series. the text of the letter here printed is that of faulkner collated with that given in the fifth volume of "miscellanies," issued in london in. . [t.s.] letter vii. an humble address to both houses of parliament. i have been told, that petitions and addresses, either to king or parliament, are the right of every subject; providing they consist with that respect, which is due to princes and great assemblies. neither do i remember, that the modest proposals, or opinions of private men, have been ill-received, when they have not been delivered in the style of advice; which is a presumption far from my thoughts. however, if proposals should be looked upon as too assuming; yet i hope, every man may be suffered to declare his own and the nation's wishes. for instance; i may be allowed to wish, that some further laws were enacted for the advancement of trade, for the improvement of agriculture, now strangely neglected, against the maxim of all wise nations: for supplying the manifest defects in the acts concerning plantation of trees: for setting the poor to work, and many others. upon this principle, i may venture to affirm; it is the hearty wish of the whole nation, very few excepted; that the parliament in this session would begin by strictly examining into the detestable fraud of one william wood, now or late of london, hardwareman; who illegally and clandestinely, as appears by your own votes and addresses, procured a patent in england, for coining halfpence in that kingdom, to be current here. this, i say, is the wish of the whole nation, very few excepted; and upon account of those few, is more strongly and justly the wish of the rest: those few consisting either of wood's confederates, some obscure tradesmen, or certain bold undertakers[ ] of weak judgment, and strong ambition; who think to find their accounts in the ruin of the nation, by securing or advancing themselves. and, because such men proceed upon a system of politics, to which i would fain hope you will be always utter strangers, i shall humbly lay it before you. [footnote : this was a phrase used in the time of charles ii. to express those dashing ministers who obtained power by undertaking to carry through particular favourite measures of the crown. but the dean applies it with his usual studied ambiguity, so that it may be explained as meaning schemers or projectors in general. [s.]] be pleased to suppose me in a station of fifteen hundred pounds a year, salary and perquisites; and likewise possessed of _l_. a year, real estate. then, suppose a destructive project to be set on foot; such, for instance, as this of wood; which if it succeed, in all the consequences naturally to be expected from it, must sink the rents and wealth of the kingdom one half, (although i am confident, it would have done so five-sixths.) suppose, i conceive that the countenancing, or privately supporting this project, will please those by whom i expect to be preserved, or higher exalted. nothing then remains, but to compute and balance my gain and my loss, and sum up the whole. i suppose that i shall keep my employment ten years, (not to mention the fair chance of a better.) this at _l_. a year, amounts, in ten years, to , _l_. my estate, by the success of the said project, sinks _l_. a year; which at twenty years' purchase, is but _l_. so that i am a clean gainer of _l_. upon the balance. and during all that period, i am possessed of power and credit, can gratify my favourites, and take vengeance of mine enemies. and if the project miscarry, my private merit is still entire. this arithmetic, as horrible as it appears, i knowingly affirm to have been practised, and applied in conjunctures, whereon depended the ruin or safety of a nation: although, probably the charity and virtue of a senate, will hardly be induced to believe, that there can be such monsters among mankind. and yet, the wise lord bacon mentions a sort of people, (i doubt the race is not yet extinct) who would "set a house on fire, for the convenience of roasting their own eggs at the flame." but whoever is old enough to remember, and hath turned his thoughts to observe the course of public affairs in this kingdom, from the time of the revolution; must acknowledge, that the highest points of interest and liberty, have been often sacrificed to the avarice and ambition of particular persons, upon the very principles and arithmetic that i have supposed: the only wonder is, how these artists were able to prevail upon numbers; and influence even public assemblies to become instruments for effecting their execrable designs. it is, i think, in all conscience, latitude enough for vice, if a man in station be allowed to act injustice, upon the usual principles of getting a bribe, wreaking his malice, serving his party, or consulting his preferment; while his wickedness terminates in the ruin only of particular persons: but, to deliver up our whole country, and every living soul who inhabits it, to certain destruction; hath not, as i remember, been permitted by the most favourable casuists on the side of corruption. it were far better, that all who have had the misfortune to be born in this kingdom, should be rendered incapable of holding any employment whatsoever, above the degree of a constable, (according to the scheme and intention of a great minister[ ] _gone to his own place_)than to live under the daily apprehension of a few false brethren among ourselves. because, in the former case we should be wholly free from the danger of being betrayed; since none could then have impudence enough to pretend any public good. [footnote : the earl of sunderland. see note on p. of vol. _v._ of present edition. [t.s.]] it is true, that in this desperate affair of the new halfpence, i have not heard of any man above my own degree of a shopkeeper, to have been hitherto so bold, as, in direct terms, to vindicate the fatal project; although i have been told of some very mollifying expressions which were used, and very gentle expedients proposed and handed about, when it first came under debate: but, since the eyes of the people have been so far opened, that the most ignorant can plainly see their own ruin, in the success of wood's attempt; these grand compounders have been more cautious.[ ] [footnote : alluding to walpole's overture for reducing the amount to be coined to £ , . [t.s.]] but that the same spirit still subsists, hath manifestly appeared (among other instances of great compliance) from certain circumstances, that have attended some late proceedings in a court of judicature. there is not any commonplace more frequently insisted on, by those who treat of our constitution, than the great happiness and excellency of trials by juries; yet if this blessed part of our law be eludible at pleasure, by the force of power, frowns, and artifice; we shall have little reason to boast of our advantage, in this particular, over other states or kingdoms in europe. and surely, these high proceedings, exercised in a point that so nearly concerned the life-blood of the people, their necessary subsistence, their very food and raiment, and even the public peace; will not allow any favourable appearance; because it was obvious, that so much superabundant zeal could have no other design, or produce any other effect, than to damp that spirit raised in the nation against this accursed scheme of william wood, and his abettors; to which spirit alone, we owe, and for ever must owe, our being hitherto preserved, and our hopes of being preserved for the future; if it can be kept up, and strongly countenanced by your wise assemblies. i wish i could account for such a demeanour upon a more charitable foundation, than that of putting our interest in over balance with the ruin of our country. i remember some months ago, when this affair was fresh in discourse; a person near allied to somebody, or (as the hawkers called him) nobody, who was thought deeply concerned, went about very diligently among his acquaintance, to shew the bad consequences that might follow from any public resentment to the disadvantage of his ally mr. wood; principally alleging the danger of all employments being disposed of from england. one of these emissaries came to me, and urged the same topic: i answered, naturally, that i knew there was no office of any kind, which a man from england might not have, if he thought it worth his asking; and that i looked upon all who had the disadvantage of being born here, as only in the condition of leasers and gleaners. neither could i forbear mentioning the known fable of the countryman, who entreated his ass to fly for fear of being taken by the enemy; but the ass refused to give himself that trouble; and upon a very wise reason, because he could not possibly change his present master for a worse: the enemy could not make him fare harder; beat him more cruelly; nor load him with heavier burthens. upon these, and many other considerations, i may affirm it to be the wish of the whole nation, that the power and privileges of juries were declared, ascertained, and confirmed by the legislature; and that whoever hath been manifestly known to violate them, might be stigmatized by public censure; not from any hope that such a censure will amend their practices, or hurt their interest, (for it may probably operate quite contrary in both:) but that the nation may know their enemies from their friends. i say not this with any regard or view to myself; for i write in great security; and am resolved that none shall merit at my expense further than by shewing their zeal to discover, prosecute, and condemn me, for endeavouring to do my duty in serving my country: and yet i am conscious to myself that i never had the least intention to reflect on his majesty's ministers, nor on any other person, except william wood, whom i neither did, nor do yet conceive to be of that number. however, some would have it, that i went too far; but i suppose they will now allow themselves mistaken. i am sure i might easily have gone further; and i think i could not easily have fared worse. and therefore i was no further affected with their proclamation, and subsequent proceedings, than a good clergyman is with the sins of the people. and as to the poor printer, he is now gone to appear before a higher, and before a righteous tribunal. as my intention is only to lay before your great assemblies, the general wishes of the nation; and as i have already declared it our principal wish that your first proceeding would be to examine into the pernicious fraud of william wood; so i must add, as the universal opinion, that all schemes of commutation, composition, and the like expedients, either avowed or implied, will be of the most pernicious consequences to the public; against the dignity of a free kingdom; and prove an encouragement to future adventurers in the same destructive projects. for, it is a maxim, which no man at present disputes, that even a connivance to admit one thousand pounds in these halfpence, will produce, in time, the same ruinous effects, as if we openly consented to admit a million. it were, therefore, infinitely more safe and eligible, to leave things in the doubtful, melancholy state they are at present, (which, however, god forbid) and trust entirely to the general aversion of our people against this coin; using all honest endeavours to preserve, continue, and increase that aversion, than submit to apply those palliatives which weak, perfidious, or abject politicians, are, upon all occasions, and in all diseases, so ready to administer. in the small compass of my reading, (which, however, hath been more extensive than is usual to men of my inferior calling) i have observed that grievances have always preceded supplies; and if ever grievances had a title to such a pre-eminence, it must be this of wood; because it is not only the greatest grievance that any country could suffer, but a grievance of such a kind that, if it should take effect, would make it impossible for us to give any supplies at all; except in adulterate copper; unless a tax were laid for paying the civil and military lists, and the large pensions, with real commodities instead of money; which, however, might be liable to some few objections as well as difficulties: for although the common soldiers might be content with beef and mutton, and wool, and malt, and leather; yet i am in some doubt as to the generals, the colonels, the numerous pensioners, the civil officers, and others, who all live in england upon irish pay; as well as those few who reside among us only because they cannot help it. there is one particular, which although i have mentioned more than once in some of my former papers, yet i cannot forbear to repeat, and a little enlarge upon it; because i do not remember to have read or heard of the like in the history of any age or country; neither do i ever reflect upon it without the utmost astonishment. after the unanimous addresses to his sacred majesty, against this patent of wood, from both houses of parliament, which are the three estates of the kingdom; and likewise an address from the privy-council, to whom, under the chief governors, the whole administration is entrusted; the matter is referred to a committee of council in london. wood, and his adherents, are heard on one side; and a few volunteers, without any trust or direction from hence, on the other. the question (as i remember) chiefly turned upon the want of halfpence in ireland: witnesses are called on the behalf of wood (of what credit i have formerly shewn :) upon the issue the patent is found good and legal; all his majesty's officers here, (not excepting the military) commanded to be aiding and assisting to make it effectual. the addresses of both houses of parliament, of the privy-council; and of the city of dublin: the declarations of most counties and corporations through the kingdom, are altogether laid aside, as of no weight, consequence, or consideration whatsoever: and the whole kingdom of ireland nonsuited, in default of appearance; as if it were a private cause between john doe, plaintiff, and william roe, defendant. with great respect to those-honourable persons, the committee of council in london, i have not understood them to be our governors, councillors, or judges. neither did our case turn at all upon the question, whether ireland wanted halfpence or no. for there is no doubt, but we do want both halfpence, gold, and silver; and we have numberless other wants, and some that we are not so much as allowed to name; although they are peculiar to this nation; to which no other is subject, whom god hath blessed with religion and laws, or any degree of soil and sunshine: but, for what demerits on our side, i am altogether in the dark. but, i do not remember, that our want of halfpence was either affirmed, or denied in any of our addresses or declarations, against those of wood: we alleged, the fraudulent obtaining and executing his patent, the baseness of his metal, the prodigious sum to be coined, which might be increased by stealth, from foreign importation and his own counterfeits, as well as those at home; whereby we must infallibly lose all our little gold and silver, and all our poor remainder of a very limited and discouraged trade: we urged, that the patent was passed without the least reference hither; and without mention of any security given by wood, to receive his own halfpence upon demand; both which are contrary to all former proceedings in the like cases. these, and many other arguments we offered; but still the patent went on, and at this day our ruin would have been half completed; if god, in his mercy, had not raised an universal detestation of these halfpence, in the whole kingdom; with a firm resolution never to receive them; since we are not under obligations to do so by any law, either human or divine. but, in the name of god, and of all justice and piety; when the king's majesty was pleased that this patent should pass; is it not to be understood, that he conceived, believed, and intended it as a gracious act, for the good and benefit of his subjects, for the advantage of a great and fruitful kingdom; of the most loyal kingdom upon earth, where no hand or voice was ever lifted up against him; a kingdom where the passage is not of three hours from britain; and a kingdom where papists have less power, and less land, than in england? can it be denied, or doubted, that his majesty's ministers understood and proposed the same end, the good of this nation, when they advised the passing this patent? can the person of wood be otherwise regarded, than as the instrument, the mechanic, the head-workman, to prepare his furnace, his fuel, his metal, and his stamps? if i employ a shoe-boy, is it in view to his advantage, or to my own convenience? i mention the person of william wood alone, because no other appears, and we are not to reason upon surmises; neither would it avail, if they had a real foundation. allowing therefore, (for we cannot do less) that this patent, for the coining of halfpence, was wholly intended, by a gracious king, and a wise public-spirited ministry, for the advantage of ireland; yet when the whole kingdom to a man, for whose good the patent was designed, do, upon maturest consideration, universally join, in openly declaring, protesting, addressing, petitioning, against these halfpence, as the most ruinous project that ever was set on foot, to complete the slavery and destruction of a poor innocent country: is it, was it, can it, or will it ever be a question, not whether such a kingdom, or william wood, should be a gainer; but whether such a kingdom should be wholly undone, destroyed, sunk, depopulated, made a scene of misery and desolation, for the sake of william wood? god, of his infinite mercy, avert this dreadful judgment; and it is our universal wish, that god would put it into your hearts to be his instruments for so good a work. for my own part, who am but one man, of obscure condition, i do solemnly declare, in the presence of almighty god, that i will suffer the most ignominious and torturing death, rather than submit to receive this accursed coin, or any other that shall be liable to the same objections, until they shall be forced upon me, by a law of my own country; and if that shall ever happen, i will transport myself into some foreign land, and eat the bread of poverty among a free people. am i legally punishable for these expressions? shall another proclamation issue against me, because i presume to take my country's part against william wood; where her final destruction is intended? but, whenever you shall please to impose silence upon me, i will submit; because, i look upon your unanimous voice to be the voice of the nation; and this i have been taught, and do believe to be, in some manner, the voice of god. the great ignominy of a whole kingdom, lying so long at mercy, under so vile an adversary, is such a deplorable aggravation, that the utmost expressions of shame and rage, are too low to set it forth; and therefore, i shall leave it to receive such a resentment, as is worthy of a parliament. it is likewise our universal wish, that his majesty would grant liberty to coin halfpence in this kingdom, for our own use; under such restrictions as a parliament here shall advise: since the power of coining even gold and silver, is possessed by every petty prince abroad; and was always practised by scotland, to the very time of the union; yet surely scotland, as to soil, climate, and extent, is not, in itself, a fourth part the value of ireland; (for bishop burnet says, it is not above a fortieth part in value, to the rest of britain) and with respect to the profit that england gains from hence, not the forty thousandth part. although i must confess, that a mote in the eye, or a thorn in the side, is more dangerous and painful than a beam, or a spike at a distance. the histories of england, and of most other countries, abound in relating the miserable, and sometimes the most tragical effects, from the abuses of coin; by debasing the metal, by lessening, or enhancing the value upon occasions, to the public loss; of which we have an example, within our own memory in england, and another very lately in france. it is the tenderest point of government, affecting every individual, in the highest degree. when the value of money is arbitrary, or unsettled; no man can well be said to have any property at all; nor is any wound so suddenly felt, so hardly cured, or that leaves such deep and lasting scars behind it. i conceive this poor unhappy island, to have a title to some indulgence from england; not only upon the score of christianity, natural equity, and the general rights of mankind; but chiefly on account of that immense profit they receive from us; without which, that kingdom would make a very different figure in europe, from what it doth at present. the rents of land in ireland, since they have been of late so enormously raised, and screwed up, may be computed to about two millions; whereof one-third part, at least, is directly transmitted to those, who are perpetual absentees in england; as i find by a computation made with the assistance of several skilful gentlemen. the other articles by which we are altogether losers, and england a gainer; we found to amount to almost as much more. i will only set down as many heads of them as i can remember; and leave them to the consideration of those, who understand accounts better than i pretend to do. the occasional absentees, for business, health, or diversion. three-fourths of the revenue of the chief governor, during his absence; which is usually four-fifths of his government. the whole revenue of the post-office. the numerous pensions paid to persons in england. the pay of the chief officers of the army absent in england, which is a great sum. four commissioners of the revenue, always absent. civil employments very numerous, and of great income. the vast charge of appeals to the house of lords, and to the court of delegates. students at the inns of court, and the two universities. eighty thousand pounds sent yearly to england, for coals; whereof the prime cost is nothing; and therefore, the profit wholly theirs. one hundred thousand pounds paid several years past, for corn sent over hither from england; the effect of our own great wisdom in discouraging agriculture. the kind liberty granted us of wearing indian stuffs, and calicoes, to gratify the vanity and folly of our women; which, beside the profit to england, is an unconceivable loss to us; forcing the weavers to beg in our streets, or transport themselves to foreign countries. the prodigious loss to us, and gain to england, by selling them all our wool at their own rates; whereof the manufacture exceeds above ten times the prime cost: a proceeding without example in the christian or heathen world. our own wool returned upon us, in english manufactures, to our infinite shame and damage; and the great advantage of england. the full profit of all our mines accruing to england; an effect of great negligence and stupidity. an affectation among us, of liking all kinds of goods made in england. note, many of the above articles have been since particularly computed by another writer, to whose treatise the reader is referred.[ ] [footnote : the work referred to is "a list of the absentees of ireland, and the yearly value of their estates and incomes spent abroad," by thomas prior, esq. prior was a native of ireland and the schoolfellow and life-long friend of berkeley, the philosopher. in concert with samuel madden and other friends, he founded, in , the dublin society for the promotion of agriculture, manufactures, arts and sciences. this society was the parent of the present royal dublin society. his "list of the absentees of ireland" was published in . he also issued "observations on coin" ( ), and "an authentic narrative of the success of tar water in curing a great number and variety of distempers" ( ), to which berkeley contributed. [t.s.]] these and many other articles, which i cannot recollect at present, are agreed by judicious men to amount to near seven hundred thousand pounds _per ann_. clear profit to england. and, upon the whole, let any man look into those authors who write upon the subject of commerce, he shall find, that there is not one single article in the essentials, or circumstances of trade, whereby a country can be a loser, which we do not possess in the highest perfection; somewhat, in every particular, that bears a kind of analogy to william wood; and now the branches are all cut off, he stands ready with his axe at the root. upon this subject of perpetual absentees, i have spent some time in very insignificant reflections; and considering the usual motives of human actions, which are pleasure, profit, and ambition, i cannot yet comprehend how those persons find their account in any of the three. i speak not of those english peers or gentlemen, who, beside their estates at home, have possessions here; for, in that case, the matter is desperate; but i mean those lords, and wealthy knights, or squires, whose birth, and partly their education, and all their fortune (except some trifle, and that in very few instances) are in this kingdom. i knew many of them well enough, during several years, when i resided in england; and truly i could not discover that the figure they made was, by any means, a subject for envy; at least it gave me two very different passions: for, excepting the advantage of going now and then to an opera, or sometimes appearing behind a crowd at court; or adding to the ring of coaches in hyde park, or losing their money at the chocolate house; or getting news, votes, and minutes, about five days before us in dublin, i say, besides these, and a few other privileges of less importance, their temptations to live in london, were beyond my knowledge or conception. and i used to wonder, how a man of birth and spirit, could endure to be wholly insignificant and obscure in a foreign country, when he might live with lustre in his own; and even at less than half that expense, which he strains himself to make, without obtaining any one end; except that which happened to the frog when he would needs contend for size with the ox. i have been told by scholars, that caesar said, he would rather be the first man, in i know not what village, than the second in rome. this, perhaps, was a thought only fit for caesar: but to be preceded by thousands, and neglected by millions; to be wholly without power, figure, influence, honour, credit, or distinction, is not, in my poor opinion, a very amiable situation of life, to a person of title, or wealth, who can so cheaply and easily shine in his native country. but, besides the depopulating of the kingdom, the leaving so many parts of it wild and uncultivated, the ruin of so many country-seats and plantations, the cutting down all the woods to supply expenses in england; the absence of so many noble and wealthy persons, hath been the cause of another fatal consequence, which few perhaps have been aware of. for if that very considerable number of lords, who possess the amplest fortunes here, had been content to live at home, and attend the affairs of their own country in parliament; the weight, reputation, and dignity thereby added to that noble house, would, in all human probability, have prevented certain proceedings, which are now ever to be lamented; because they never can be remedied: and we might have then decided our own properties among ourselves, without being forced to travel five hundred miles by sea and land, to another kingdom, for justice; to our infinite expense, vexation, and trouble: which is a mark of servitude without example, from the practice of any age or nation in the world. i have sometimes wondered, upon what motive the peerage of england were so desirous to determine our controversies; because i have been assured, and partly know, that the frequent appeals from hence, have been very irksome to that illustrious body; and whoever hath frequented the painted chamber, and court of requests, must have observed, that they are never so nobly filled, as when an irish appeal is under debate. the peers of scotland, who are very numerous, were content to reside in their castles and houses, in that bleak and barren climate; and although some of them made frequent journeys to london, yet i do not remember any of their greatest families, till very lately, to have made england their constant habitation, before the union: or, if they did, i am sure it was generally to their own advantage; and whatever they got, was employed to cultivate and increase their own estates; and by that means enrich themselves and their country. as to the great number of rich absentees, under the degree of peers; what particular ill effects their absence may have upon this kingdom, besides those already mentioned, may perhaps be too tender a point for me to touch. but whether those who live in another kingdom, upon great estates here; and have lost all regards to their own country, further than upon account of the revenues they receive from it: i say, whether such persons may not be prevailed on to recommend others to vacant seats, who have no interest here, except a precarious employment; and consequently can have no views, but to preserve what they have got, or to be higher advanced: this, i am sure, is a very melancholy question, if it be a question at all. but, besides the prodigious profit which england receives by the transmittal thither of two-thirds of the revenues of this whole kingdom; it hath another mighty advantage by making our country a receptacle, wherein to disburthen themselves of their supernumerary pretenders to offices; persons of second-rate merit in their own country; who, like birds of passage, most of them thrive and fatten here, and fly off when their credit and employments are at an end. so that ireland may justly say what luther said of himself; poor ireland maketh many rich. if amidst all our difficulties, i should venture to assert, that we have one great advantage, provided we could improve it as we ought; i believe most of my readers would be long in conjecturing what possible advantage could ever fall to our share. however, it is certain, that all the regular seeds of party and faction among us are entirely rooted out, and if any new ones shall spring up, they must be of equivocal generation, without any seed at all; and will justly be imputed to a degree of stupidity beyond even what we have been ever charged with upon the score of our birth-place and climate. the parties in this kingdom (including those of modern date) are, first, of those who have been charged or suspected to favour the pretender; and those who were zealous opposers of him. secondly, of those who were for and against a toleration of dissenters by law. thirdly, of high and low church; or, (to speak in the cant of the times) of whig and tory: and, fourthly, of court and country. if there be any more, they are beyond my observation or politics: for as to subaltern or occasional parties, they have all been derivations from the same originals. now, it is manifest, that all these incitements to faction, party, and division are wholly removed from among us. for, as to the pretender, his cause is both desperate and obsolete: there are very few now alive who were _men_ in his father's time, and in that prince's interest; and in all others, the obligation of conscience hath no place;[ ] even the papists in general, of any substance, or estates, and their priests almost universally, are what we call whigs in the sense which by that word is generally understood. they feel the smart, and see the scars of their former wounds; and very well know, that they must be made a sacrifice to the least attempts towards a change; although it cannot be doubted, that they would be glad to have their superstition restored, under any prince whatsoever. [footnote : that is to say, they had not sworn any allegiance to him. [t.s.]] secondly, the dissenters are now tolerated by law; neither do we observe any murmurs at present from that quarter, except those reasonable complaints they make of persecution, because they are excluded from civil employments; but their number being very small in either house of parliament, they are not yet in a situation to erect a party: because, however indifferent men may be with regard to religion, they are now grown wise enough to know, that if such a latitude were allowed to dissenters; the few small employments left us in cities and corporations, would find other hands to lay hold on them. thirdly, the dispute between high and low church is now at an end; two-thirds of the bishops having been promoted in this reign, and most of them from england, who have bestowed all preferments in their gift to those they could well confide in: the deaneries all except three, and many principal church-livings, are in the donation of the crown: so that we already possess such a body of clergy as will never engage in controversy upon that antiquated and exploded subject. lastly, as to court and country parties, so famous and avowed under most reigns in english parliaments: this kingdom hath not, for several years past been a proper scene whereon to exercise such contentions; and is now less proper than ever; many great employments for life being in distant hands, and the reversions diligently watched and secured; the temporary ones of any inviting value are all bestowed elsewhere as fast as they drop; and the few remaining, are of too low consideration to create contests about them, except among younger brothers, or tradesmen like myself. and, therefore, to institute a court and country party without materials, would be a very new system in politics, and what i believe was never thought on before; nor, unless in a nation of idiots, can ever succeed. for the most ignorant irish cottager will not sell his cow for a groat. therefore, i conclude, that all party and faction, with regard to public proceedings, are now extinguished in this kingdom; neither doth it appear in view how they can possibly revive; unless some new causes be administered; which cannot be done without crossing the interests of those who are greatest gainers by continuing the same measures. and, general calamities without hope of redress, are allowed to be the great uniters of mankind. however we may dislike the causes; yet this effect of begetting an universal concord among us in all national debates, as well as in cities, corporations, and country neighbourhoods, may keep us at least alive, and in a condition to eat the little bread allowed us in peace and amity. i have heard of a quarrel in a tavern, where all were at daggers-drawing, till one of the company cried out, desiring to know the subject of the quarrel; which, when none of them could tell, they put up their swords, sat down, and passed the rest of the evening in quiet. the former part hath been our case; i hope the latter will be so too; that we shall sit down amicably together, at least until we have something that may give us a title to fall out; since nature hath instructed even a brood of goslings to stick together while the kite is hovering over their heads. it is certain, that a firm union in any country, where every man wishes the same thing with relation to the public, may, in several points of the greatest importance, in some measure, supply the defect of power; and even of those rights which are the natural and undoubted inheritance of mankind. if the universal wish of the nation upon any point, were declared by the unanimous vote of the house of commons, and a reasonable number of lords; i should think myself obliged in conscience to act in my sphere according to that vote; because, in all free nations, i take the proper definition of law to be the will of the majority of those who have the property in land; which, if there be a monarchy, is to be confirmed by the royal assent. and, although such votes or declarations have not received such a confirmation, for certain accidental reasons; yet i think they ought to be of much weight with the subject; provided they neither oppose the king's prerogative, endanger the peace of the nation, nor infringe any law already in force; none of which, however, can reasonably be supposed. thus, for instance, if nine in ten of the house of commons, and a reasonable number of native temporal peers, should declare, that whoever received or uttered brass coin, except under certain limitations and securities, should be deemed as enemies to the king and the nation; i should think it a heinous sin in myself to act contrary to such a vote: and, if the same power should declare the same censure against those who wore indian stuffs and calicoes, or woollen manufactures imported from abroad, whereby this nation is reduced to the lowest ebb of misery; i should readily, heartily, and cheerfully pay obedience; and to my utmost power persuade others to do the like: because, there is no law of this land obliging us either to receive such coin, or to wear such foreign manufactures. upon this last article, i could humbly wish that the reverend the clergy would set us an example, by contenting themselves with wearing gowns, and other habiliments of irish drapery; which, as it would be some incitement to the laity, and set many hands to work; so they would find their advantage in the cheapness; which is a circumstance not to be neglected by too many among that venerable body.[ ] and, in order to this, i could heartily desire, that the most ingenious artists of the weaving trade, would contrive some decent stuffs and silks for clergymen, at reasonable rates.[ ] [footnote : this hath since been put in practice, by the persuasions, and influence of the supposed author; but much defeated by the most infamous fraud of shop-keepers. [f.]] [footnote : this scheme was likewise often urged to the weavers by the supposed author; but he could never prevail upon them to put it in practice. [f.]] i have pressed several of our most substantial brethren, that the whole corporation of weavers in silk and woollen, would publish some proposals, (i wish they would do it to both houses of parliament) inviting persons of all degrees, and of both sexes, to wear the woollen and silk manufactures of our own country; entering into solemn, mutual engagements, that the buyer shall have good, substantial, merchantable ware for his money; and at a certain rate, without the trouble of cheapening: so that, if i sent a child for a piece of stuff of a particular colour and fineness, i should be sure not to be deceived; or if i had reason to complain, the corporation should give me immediate satisfaction; and the name of the tradesman who did me the wrong, should be published; and warning given not to deal with him for the future; unless the matter plainly appeared to be a mistake: for, besides the trouble of going from shop to shop; an ignorant customer runs the hazard of being cheated in the price and goodness of what he buys; being forced to an unequal combat with a dexterous, and dishonest man, in his own calling. thus our goods fall under a general disreputation; and the gentry call for english cloth, or silk, from an opinion they have (and often too justly by our own faults) that the goodness more than makes up for the difference of price. besides, it hath been the sottish and ruinous practice of us tradesmen, upon any great demand of goods, either at home or from abroad, to raise the prices immediately, and manufacture the said goods more slightly and fraudulently than before. of this foul and foolish proceeding, too many instances might be produced; and i cannot forbear mentioning one, whereby this poor kingdom hath received such a fatal blow in the only article of trade allowed us of any importance that nothing but the success of wood's project, could outdo it. during the late plague in france, the spaniards, who buy their linen cloths in that kingdom, not daring to venture thither for fear of infection; a very great demand was made here for that commodity, and exported to spain: but, whether by the ignorance of the merchants, or dishonesty of the northern weavers, or the collusion of both; the ware was so bad, and the price so excessive, that except some small quantity, which was sold below the prime cost, the greatest part was returned back: and i have been told by very intelligent persons, that if we had been fair dealers, the whole current of the linen trade to spain would have taken its course from hence. if any punishment were to be inflicted on numbers of men; surely there could none be thought too great for such a race of traitors, and enemies to god and their country; who for the prospect of a little present gain, do not only ruin themselves, (for that alone would be an example to the rest, and a blessing to the nation) but sell their souls to hell, and their country to destruction; and, if the plague could have been confined only to these who were partakers in the guilt, had it travelled hither from marseilles, those wretches would have died with less title to pity, than a highwayman going to the gallows. but, it happens very unluckily, that, for some time past, all endeavours or proposals from private persons, to advance the public service; however honestly and innocently designed, have been called _flying in the king's face:_ and this, to my knowledge, hath been the style of some persons, whose ancestors, (i mean those among them who had any) and themselves, have been flying in princes' faces these fourscore years; and from their own inclinations would do so still, if their interest did not lead them rather to fly in the face of a kingdom; which hath given them wings to enable them for such a flight. thus, about four years ago, when a discourse was published, endeavouring to persuade our people to wear their own woollen manufactures,[ ] full of the most dutiful expressions to the king, and without the least party hint; it was termed "flying in the king's face;" the printer was prosecuted in the manner we all remember; (and, i hope, it will somewhere be remembered further) the jury kept eleven hours, and sent back nine times, till they were under the necessity of leaving the prisoner to the mercy of the court, by a special verdict. the judge on the bench invoking god for his witness, when he asserted, that the author's design was to bring in the pretender.[ ] [footnote : this was swift's pamphlet entitled, "a proposal for the universal use of irish manufactures." [t.s.]] [footnote : the action and language of justice whitshed. [t.s.]] and thus also, my own poor endeavours to prevent the ruin of my country, by the admission of wood's coin, was called by the same persons, "flying in the king's face;" which i directly deny: for i cannot allow that vile representation of the royal countenance in william wood's adulterate copper, to be his sacred majesty's face; or if it were, my flying was not against the impression, but the baseness of the metal; because i well remembered; that the image which nebuchadnezzar "commanded to be set up, for all men to fall down and worship it," was not of _copper_, but pure _gold_. and i am heartily sorry, we have so few royal images of that metal among us; the sight whereof, although it could hardly increase our veneration for his majesty, which is already so great; yet would very much enliven it with a mixture of comfort and satisfaction. alexander the great, would suffer no statuary, except phidias, to carve his image in stone or metal. how must he have treated such an operator as wood, who goes about with sackfuls of dross; odiously misrepresenting his prince's countenance; and would force them, by thousands, upon every one of us, at above six times the value. but, notwithstanding all that hath been objected by william wood himself; together with his favourers, abettors, supporters, either public or private; by those who connive at his project, or discourage and discountenance his opposers, for fear of lessening their favour, or hazarding their employments; by those who endeavour to damp the spirit of the people raised against this coin; or check the honest zeal of such as by their writings, or discourses, do all they can to keep it up: those softeners, sweeteners, compounders; and expedient-mongers, who shake their heads so strongly, that we can hear their pockets jingle; i did never imagine, that, in detecting the practices of such enemies to the kingdom, i was "flying in the king's face"; or thought they were better representers of his majesty, than that very coin, for which they are secret or open advocates. if i were allowed to recite only those wishes of the nation, which may be in our power to attain; i think they might be summed up in these few following. first, that an end might be put to our apprehensions of wood's halfpence, and to any danger of the like destructive scheme for the future. secondly; that halfpence might be coined in this kingdom, by a public mint, with due limitations. thirdly, that the sense of both houses of parliament, at least of the house of commons, were declared by some unanimous and hearty votes, against wearing any silk or woollen manufactures, imported from abroad, as likewise against wearing indian silks or calicoes, which are forbidden under the highest penalties in england: and it behoves us, to take example from so wise a nation; because we are under a greater necessity to do so, since we are not allowed to export any woollen manufactures of our own; which is the principal branch of foreign trade in england. fourthly, that some effectual methods may be taken to civilize the poorer sort of our natives, in all those parts of this kingdom where the irish abound; by introducing among them our language and customs; for want of which they live in the utmost ignorance, barbarity and poverty; giving themselves wholly up to idleness, nastiness, and thievery, to the very great and just reproach of too many landlords. and, if i had in me the least spirit of a projector, i would engage that this might be effected in a few years, at a very inconsiderable charge.[ ] [footnote : since this hint was suggested, several useful seminaries have been instituted, under the name of "charter working schools," in ireland, supported by the royal benefaction of a thousand pounds a year, by a tax on hawkers and pedlars, and by voluntary subscriptions. the schools are for the education of boys and girls born of popish parents; in most of them, the children manufacture their own clothing, and the boys are employed in matters relative to husbandry. [f.] these charter schools, founded by marsh, bishop of clogher, and adopted by primate boulter in , were intended "to rescue the souls of thousands of poor children from the dangers of popish superstition and idolatry, and their bodies from the miseries of idleness and beggary." in reality the scheme was one by which it was hoped to prevent the growth of catholicism. the conditions and methods of instruction were positively cruel, since the children were actually withheld from any communication with their parents. mr. lecky deals with the subject fully in the first volume of his "ireland in the eighteenth century," froude gives the scheme his praise and admiration, but at the time of its institution it was the cause of "an intensity of bitterness hardly equalled by any portion of the penal code. parents would rather do anything than send their children into such prisons where, at last, they would receive an education which, to their minds, must lead them to forfeit their soul's salvation." [t.s.]] fifthly, that due encouragement should be given to agriculture; and a stop put to that pernicious practice of graziers; engrossing vast quantities of land, sometimes at great distance; whereby the country is extremely depopulated. sixthly, that the defects in those acts for planting forest trees, might be fully supplied, since they have hitherto been wholly ineffectual; except about the demesnes of a few gentlemen; and even there, in general, very unskilfully made, and thriving accordingly. neither hath there yet been due care taken to preserve what is planted, or to enclose grounds; not one hedge, in a hundred, coming to maturity, for want of skill and industry. the neglect of copsing woods cut down, hath likewise been of very ill consequences. and if men were restrained from that unlimited liberty of cutting down their own woods before the proper time, as they are in some other countries; it would be a mighty benefit to the kingdom. for, i believe, there is not another example in europe, of such a prodigious quantity of excellent timber cut down, in so short a time, with so little advantage to the country, either in shipping or building. i may add, that absurd practice of cutting turf, without any regularity; whereby great quantities of restorable land are made utterly desperate, many thousands of cattle destroyed, the turf more difficult to come at, and carry home, and less fit for burning; the air made unwholesome by stagnating pools and marshes; and the very sight of such places offensive to those who ride by. neither should that odious custom be allowed, of cutting scraws, (as they call them) which is flaying off the green surface of the ground, to cover their cabins; or make up their ditches; sometimes in shallow soils, where all is gravel within a few inches; and sometimes in low ground, with a thin greensward, and sloughy underneath; which last turns all into bog, by this mismanagement. and, i have heard from very skilful country-men, that by these two practices in turf and scraws, the kingdom loseth some hundreds of acres of profitable land every year; besides the irreparable loss of many skirts of bogs, which have a green coat of grass, and yet are mangled for turf; and, besides the want of canals, by regular cutting, which would not only be a great convenience for bringing their turf home at an easy rate; but likewise render even the larger bogs more dry and safe, for summer pasture. these, and some other speculations of the like kind, i had intended to publish in a particular discourse against this session of parliament; because, in some periods of my life, i had opportunity and curiosity to observe, from what causes those great errors, in every branch of country management, have arisen; of which i have now ventured to relate but few, out of very many; whereof some, perhaps, would not be mentioned without giving offence; which i have endeavoured, by all possible means, to avoid. and, for the same reason, i chose to add here, the little i thought proper to say on this subject. but, as to the lands of those who are perpetual absentees, i do not see any probability of their being ever improved. in former times, their tenants sat at easy rents; but for some years past, they have been, generally speaking, more terribly racked by the dexterity of merciless agents from england, than even those held under the severest landlords here. i was assured upon the place, by great numbers of credible people, that a prodigious estate in the county of cork, being let upon leases for lives, and great fines paid; the rent was so high, that the tenants begged leave to surrender their leases, and were content to lose their fines. the cultivating and improvement of land, is certainly a subject worthy of the highest enquiry in any country, but especially in ours; where we are so strangely limited in every branch of trade, that can be of advantage to us; and utterly deprived of those, which are of the greatest importance; whereof i defy the most learned man in europe, to produce me an example from any other kingdom in the world: for, we are denied the benefits which god and nature intended to us; as manifestly appears by our happy situation for commerce, and the great number of our excellent ports. so that, i think, little is left us, beside the cultivating our own soil, encouraging agriculture, and making great plantations of trees, that we might not be under the necessity of sending for corn and bark from england, and timber from other countries. this would increase the number of our inhabitants, and help to consume our natural products, as well as manufactures at home. and i shall never forget what i once ventured to say to a great man in england; "that few politicians, with all their schemes, are half so useful members of a commonwealth, as an honest farmer; who, by skilfully draining, fencing, manuring, and planting, hath increased the intrinsic value of a piece of land; and thereby done a perpetual service to his country;" which it is a great controversy, whether any of the former ever did, since the creation of the world; but no controversy at all, that ninety-nine in a hundred, have done abundance of mischief. appendixes appendix i addresses to the king[ ] "to the king's most excellent majesty: _the humble_ address _of the_ knights, citizens _and_ burgesses, _in parliament assembled._ "most gracious sovereign, it is with the utmost concern, that we, your majesty's most dutiful subjects, the commons of ireland in parliament assembled, find ourselves indispensably obliged, to represent to your majesty, our unanimous opinion: that the importing and uttering of _copper farthings_ and _halfpence_ by virtue of the patent lately granted to _william wood,_ esq.; under the great seal of _great britain,_ will be highly prejudicial to your majesty's revenue, destructive of the trade and commerce of this nation, and of the most dangerous consequence to the properties of the subject. [footnote : addresses by the house of commons and the house of lords presented to the king in conformity with the resolutions passed by these houses. see introductory note to the drapier's first letter. the texts of these addresses are taken from "fraud detected: or, the hibernian patriot," printed by george faulkner in . [t.s.]] "we are fully convinced, from the tender regard your majesty has always expressed for our welfare and prosperity, that this patent could not have been obtained, had not _william wood_ and his accomplices, greatly misrepresented the state of this nation to your majesty, it having appeared to us, by examinations taken in the most solemn manner, that though the terms thereof had been strictly complied with, there would have been a loss to this nation of at least _per cent._ by means of the said coinage, and a much greater in the manner the said _half-pence_ have been coined. "we likewise beg leave to inform your majesty, that the said _william wood_ has been guilty of a most notorious fraud and deceit in coining the said _half-pence,_ having, under colour of the powers granted unto him, imported and endeavoured to utter great quantities of different impressions, and of much less weight than was required by the said patent. "your faithful _commons_ have found, by experience, that the granting the power or privilege of coining _money_, or _tokens_ to pass for _money_ to private persons, has been highly detrimental to your loyal subjects; and being apprehensive, that the vesting such power in any body politic or corporate, or any private person or persons whatsoever, will be always of dangerous consequence to this kingdom, are encouraged, by the repeated assurances your majesty hath given us of your royal favour and protection, humbly to entreat your majesty, that whenever you shall hereafter think it necessary to coin any _farthings_ or _half-pence,_ the same may be made as near the intrinsic value as possible, and that whatever profit shall accrue thereby, may be applied to the public service. "and we do further humbly beseech your majesty, that you will be graciously pleased to give such direction, as you, in your great wisdom, shall think proper, to prevent the fatal effects of uttering any _farthings_ or _half-pence_ pursuant to the said patent. "as this enquiry has proceeded entirely from our love to our country, so we cannot omit this opportunity of repeating our unanimous resolution, to stand by and support your majesty to the utmost of our power, against all your enemies, both at home and abroad; and of assuring your majesty, that we will, upon every occasion, give your majesty, and the world, all possible demonstration of our zeal and inviolable duty and affection to your majesty's most sacred person and government, and to the succession, as established in your royal house." "to the king's most excellent majesty. _the humble address of the lords spiritual and temporal of_ ireland, _in parliament assembled, against_ wm. wood. "may it please your most sacred majesty, we the lords spiritual and temporal in parliament assembled, are under the utmost concern to find, that our duty to your majesty and our country, indispensably calls upon us to acquaint your majesty with the ill consequences, which will inevitably follow from a patent for coining half-pence and farthings to be uttered in this kingdom, obtained under the great seal of _great britain,_ by one _william wood_ in a clandestine and unprecedented manner, and by a gross misrepresentation of the state of this kingdom. "we are most humbly of opinion, that the diminution of your majesty's revenue, the ruin of our trade, and the impoverishing of your people, must unavoidably attend this undertaking; and we beg leave to observe to your majesty, that from the most exact enquiries and computations we have been able to make, it appears to us, that the gain to _william wood_ will be excessive, and the loss to this kingdom, by circulating this base coin, greater than this poor country is able to bear. "with the greatest submission and deference to your majesty's wisdom, we beg we may offer it as our humble opinion. that the reserving the coining of _half-pence_ and _farthings_ to the _crown_ and _the not intrusting it_ with any private person, body politic or corporate, will always be for your majesty's service, and the good of your people in _this kingdom._ "in confidence, sir, of your paternal care of the welfare of _this_ country, we beseech your majesty, that you will be pleased to extend that goodness and compassion to us, which has so eminently shewed itself to all your other subjects, who have the happiness to live under your protection and government; and that you will give such directions as may effectually free us from the terrible apprehensions we labour under from the _patent_ granted to _william wood."_ the following was the king's reply to the above address: "george r. "his _majesty is very much concerned to see, that his granting the patent for coining_ half-pence _and_ farthings _agreeable to the practice of his royal predecessors, has given so much uneasiness to the_ house of lords: _and if there have been any abuses committed by the_ patentee, _his majesty will give the necessary orders for enquiring into, and punishing those abuses. and will do everything that is in his power, for the satisfaction of his people."_ appendix ii report of the assay on wood's coinage, made by sir isaac newton, edward southwell, esq., and thomas scroope, esq.[ ] "_to the right honourable the lords commissioners of his majesty's treasury. "may it please your lordships_, according to your lordships' order, the pix of the copper-money coined at bristol by mr. wood for ireland, has been opened and tried before us at his majesty's mint in the tower; and by the comptroller's account, to which mr. wood agreed, there hath been coined from lady-day to march , , in half-pence, fifty and five tons, five hundred and three quarters, and twelve ounces, and in farthings, three tons, seventeen hundred and two quarters, ten pounds, and eight ounces, _avoirdupois_, the whole coinage amounting to tons, cwt, qr. lbs. ozs., and by the specimens of this coinage which have, from time to time, been taken from the several parcels coined and sealed up in papers, and put into the pix, we found that sixty half-pence weighed fourteen ounces, _troy_, and eight pennyweight, which is about a quarter of an ounce above one pound _avoirdupois_; and that thirty farthings weighed three ounces, and three quarters of an ounce _troy_, and forty-six grains, which is also above the weight required by his patent. we found also that both half-pence and farthings when heated red hot, spread thin under the hammer without cracking, as your lordships may see by the pieces now laid before your lordships. but although the copper was very good, and the money, one piece with another, was full weight, yet the single pieces were not so equally coined in the weight as they should have been. [footnote : the copy of this report as here printed is taken from the tract already quoted in previous notes, entitled, "a defence of the conduct of the people of ireland in their unanimous refusal of mr. wood's copper-money ... dublin: printed for george ewing, at the angel and bible in dames-street, mdccxxiv." as already noted, the assayists had for trial only those coins which were coined between march, , and march, , and these coins were neither imported into ireland nor attempted to be uttered there. as wood asked for the assay, he no doubt knew what he was about. but even as it stands, the report was not very favourable to him. the author of the tract named above enters minutely into this point, and for a further inquiry the reader is referred to pages to of his publication. [t.s.]] "we found also that thirty and two old half-pence coined for ireland in the reigns of king charles d., king james d., and king william d. and queen mary, and produced by mr. wood, weighed six ounces and eight pennyweight _troy_, that is, one hundred and three grains and a half apiece one with another. they were much worn, and if about six or seven grains be allowed to each of them one with another for loss of their weight by wearing, the copper-money coined for england, in the reign of king william being already as much lightened by wearing, they might at first weigh about half a pound _avoirdupois_; whereas only thirty of those coined by mr. wood are to be of that. they were also made of bad copper, two of those coined in the reign of king charles ii. wasted much in the fire, and then spread thin under the hammer, but not so well without cracking as those of mr. wood. two of those coined in the reign of king james ii. wasted much more in the fire, and were not malleable when red hot. two of those coined in the reign of king william and queen mary wasted still more in the fire, and turned to an unmalleable substance like a cinder, as your lordships may see the pieces now laid before you. "by the assays we reckon the copper of mr. wood's halfpence and farthings to be of the same goodness and value with the copper of which the copper money is coined in the king's mint for england; or worth in the market about twelve or thirteen pence per pound weight _avoirdupois_; and the copper of which the half-pence were coined for ireland in the reigns of king charles, king james, and king william, to be much inferior in value, the mixture being unknown, and not bearing the fire for converting it to any other use until it be refined. "the half-pence and farthings in the pix coined by mr. wood had on one side the head of the king, with this inscription georgius dei gratia rex: and on the other side, a woman sitting with a harp by her left side, and above her the inscription hibernia with the date. the half-pence coined in the reigns of king charles, king james, and king william, had on one side the head of king charles, king james, or king william and queen mary, and on the reverse a harp crowned. "all which facts we most humbly represent to your lordships. april , ." appendix iii tom punsibi's dream[ ] [greek: "a ghar proseidon nukthi taeoe phasmata disson oneiron, tauta moi---- ehi men pephaenen esthlha, dus telesphora, eid echthra, tois echthroisin empalin methes kai mae me plete te paront ei tines doloisi beleueoin ekbalein, ephaes."] soph, elec. [ - ]. since the heat of this business, which has of late so much and so justly concerned this kingdom, is at last, in a great measure over, we may venture to abate something of our former zeal and vigour in handling it, and looking upon it as an enemy almost overthrown, consult more our own amusement than its prejudice, in attacking it in light excursory skirmishes. thus much i thought fit to observe, lest the world should be too apt to make an obvious pun upon me; when beginning to dream upon this occasion, i presented it with the wild nocturnal rovings of an unguided imagination, on a subject of so great importance, as the final welfare or ruin of a whole nation. [footnote : the following tract, written probably by thomas sheridan, swift's humorous friend, is interesting as affording an example of the lighter kind of literature brought into existence by this agitation. it may be that swift had a hand in its composition. the text is taken from a copy of the original broadside in the south kensington collection. it was published during the height of the controversy. [t.s.]] but so it was, that upon reading one of the drapier's letters, i fell asleep, and had the following dream: the first object that struck me was a woman of exquisite beauty, and a most majestic air, seated on a throne, whom by the figure of a lion beneath her feet, and of neptune who stood by her, and paid her the most respectful homage, i easily knew to be the genius of england; at some distance from her, (though not at so great an one as seemed to be desired,) i observed a matron clothed in robes so tattered and torn, that they had not only very nigh lost their original air of royalty and magnificence, but even exposed her to the inclemency of the weather in several places, which with many other afflictions had so affected her, that her natural beauty was almost effaced, and her strength and spirits very nigh lost. she hung over a harp with which, if she sometimes endeavoured to sooth her melancholy, she had still the misfortune to find it more or less out of tune, particularly, when as i perceived at last, it was strung with a sort of wire of so base composition, that neither she nor i could make anything of it. i took particular notice, that, when moved by a just sense of her wrongs, she could at any time raise her head, she fixed her eyes so stedfastly on her neighbour, sometimes with an humble and entreating, at others, with a more bold and resentful regard, that i could not help (however improbable it should seem from her generous august appearance) in a great measure to attribute her misfortunes to her; but this i shall submit to the judgment of the world. i should now at last mention the name, were not these circumstances too unhappily singular to make that any way necessary. as i was taken up with many melancholy reflections on this moving object, i was on a sudden interrupted by a little sort of an uproar, which, upon turning my eyes towards it, i found arose from a crowd of people behind her throne; the cause it seems was this: there was, i perceived, among them the god of merchandise, with his sandals, mostly of brass, but not without a small proportion of gold and silver, and his wings chiefly of the two latter metals, but allayed with a little of the former; with those he used to trudge up and down to furnish them with necessaries; with these he'd take a flight to other countries, but not so dexterously or to so good purpose as in other places of his office, not so much for want of encouragement among 'em here, as on account of the haughty jealousy of their neighbours, who, it seems dreading in them a rival, took care to clip his wings and circumscribe his flights; the former, more especially, being, by these and other means so much worn, he performed his office but lamely, which gave occasion to some who had their own private interest more at heart, than that of the public, to patch up some of the places that were worn, with a metal of the same nature indeed, but so slight and base, that though at first it might serve to carry him on their errands, it soon failed, and by degrees grew entirely useless; insomuch, that he would rather be retarded than promoted in his business, and this occasioned the above disturbances among his dependents, who thereupon turned their eyes towards their mistress (for by this time she will i presume be better known by that, than the more homely and sociable name of neighbour) and not daring of late to say or do anything without her approbation, made several humble applications to her, beseeching that she would continue them that liberty of refitting these implements themselves, which she had been formerly pleased graciously to allow 'em; but these, however reasonable, were all rejected, whereupon i observed a certain person (a mean ill-looking fellow) from among a great number of people that stood behind the genius of england, who, during the whole affair had kept his eyes intently fixed on his neighbours, watching all their motions, like a hawk hovering over his quarry, and with just the same design: him, i say, i observed to turn off hastily, and make towards the throne, where being arrived, after some preparations requisite, he preferred a petition, setting forth the wants and necessities, (but taking care to make 'em appear at least four times greater than they really were) of his neighbours, or as he might have more truly and honestly said his own, both which, for the latter, though not expressed, he chiefly intended, but modestly or rather knavishly left to be understood, he begged the royal licence to redress, by supplying those defects which were the occasion of 'em. this humble suppliant i observed both before and after this petition, seemed to employ his utmost industry and art, to insinuate himself into the good graces of two persons that stood on each side the throne;[ ]the one on the right was a lady of large make and swarthy complexion; the other, a man, that seemed to be between fifty and sixty, who had an air of deep designing thought: these two he managed with a great deal of art; for the lady he employed all the little arts that win her sex, particularly, i observed, that he frequently took hold of her hand, as in raptures, to kiss it, in such a manner as made me suspect she did not always draw it back empty; but this he did so slily, that it was not easy for anybody to be certain of it: the man on the other hand, he plied his own way with politics, remonstrating to him the several things he had before the throne; which however, as might be presumed from his manner of attending to them, seemed to make little impression; but when he came to lay before him the great advantages that might accrue from thence to their mistress, and consequently to him, he heard him with the utmost eagerness and satisfaction; at last, having plainly told him, that he himself should be a considerable gainer by it, and thereupon, that every thing that came to his hands of that nature should be at his service: as a sort of token or earnest he kissed his hand in the same manner he had the lady's, and so retired; by these and the like means he soon brought over both parties to him, who, with a whisper or two, procured him the royal licence; whereupon he immediately fell to making up a metal, if it deserved the name, of a very strange composition, wherewith he purposed to refit the implements of that useful deity, but in such manner, that for the base metal he put into them, he would take care to draw away from them an infinitely more than proportionable quantity of gold and silver, and thereby render him almost incapable of taking flight to foreign countries; nay, at last perhaps utterly so, when under pretence of their not being completed, he should filch in more of his metal, and filch away more of theirs. [footnote : the duchess of kendal and sir robert walpole. [s.]] these things being therefore prepared, he sends 'em over to his neighbours, and there endeavoured to get them admitted by fair words and promises, being too sensible that they were not of themselves the most willing to accept of his favour, and indeed he was not deceived; for they being advertised of his designs, had taken the alarm, and had almost to a man united in one common faction against him. this generous ardour had first taken hold of the most active and important part, and if i may be allowed to call it, the heart of this body, from thence was on one side by a quick passage, and in its more refined parts, communicated through the blood to the contemplative, and reasoning, the head, which it inspired with noble thoughts and resolutions; and on the other, to the inferior extremities, which were thereby rendered more expedite and readier to obey the dictates of the head in a rougher method of opposition, from each of which extremities being carried back to its fountain, it was returned to them from thence, and so backwards and forwards, till the circulation and union were confirmed and completed, the sordid unnatural, offensive parts being in the meantime thrown off as dregs of nature, and nuisances of human society; but of these in so well-tempered a constitution, there were but few; however, when there were any to be found, though they had been of the most exalted nature, and bore most noble offices in this body, by any corruption became so, they shared the common fate, with this only difference, that they were rejected with greater scorn and contempt on account of their former dignity, as was found in one notorious instance; but on the other hand, among all the parts that were serviceable to the constitution on this occasion, there was not one more so, than a certain one whose name indeed is not openly known, but whose good offices and usefulness are too great ever to be forgotten; for it by its nice diligence and skill selected out things of the most noble and exquisite nature, by infusing and dispersing them to enliven and invigorate the whole body, which how effectually they did, our bold projector sadly experienced. for finding all his endeavours to pass his ware upon them, disappointed, he withdrew; but his patron on the other side being informed of what had passed, fell into a most terrible passion, and threatened, they say, i know not what, of making to swallow and ramming down throats; but while they were in deep conference together, methought all on a sudden a trap-door dropped, and down fell our projector; this unexpected accident did on many accounts not a little alarm the throne, and gave it but too great occasion to reflect a little on what had been doing, as what a mean ordinary fellow it had intrusted with the care of an affair of so great consequence that though their neighbours' refusal might possibly have put him to such straits as might be the great occasion of this disgrace, yet that very refusal could not be so universal and resolute without some reason, which could arise from nothing else but the unseasonableness or unworthiness of his offers, or both, and he, consequently, must deserve as much to suffer as they did; not for the better information, therefore in these surmises some of the neighbours were consulted, who confirming them, things seemed to bear a good face, and be in a very fair way of clearing up. when i awoke, i cannot say whether more pleased at the present posture of affairs, when i recollected how indifferent an one they had lately been in, or anxious when upon considering that they were not yet firm and settled, i was led to reflect in general on the uncertainty of events, and in particular, on the small reason the persons in hand can have to promise themselves prosperous ones, especially when they are depending in that part of the world. dublin, printed in the year - . appendix iv a letter from a friend to the right honourable ------[ ] ceteri, quanto quis servitio promptior, opibus et honoribus extollerentur: invalido legum auxilio, quae vi, ambitu, postremo pecunia turbabantur.--_tacit. an._ to the right honourable ------ i fear your lordship in your wonted zeal for the interest of your country will think this paper very unseasonable; but i am very confident not more than one man in this kingdom will be of your lordship's judgment. [footnote : the two following severe letters are directly addressed to lord chief justice whitshed, and were generally circulated. they probably underwent swift's correction, though they have too much of a legal cast to have been written by the dean himself.... they were, perhaps, composed by mr. robert lindsay, distinguished by swift in his letter to lord midleton, as an eminent lawyer, as well as a man of virtue and learning, whose legal advice he used during the whole controversy. [s.] the present letters are taken from copies of the original broadsides in the south kensington collection. [t.s.]] in matters of law your opinion has from our first acquaintance entirely guided me, and the things you have assured me i might depend upon as law, have few of them escaped my memory, though i have had but little conversation with you since you first appeared in parliament and moved the house to resolve, that it is the indispensable duty of the judges of this kingdom to go through their circuits; nor have i had any since you fell sick and was made solicitor-general. i have often heard your lordship affirm, and therefore i do affirm it, that the great ends for which grand juries were instituted, were the support of the government, the safety of every man's life and fortune, it being necessary some should be trusted to inquire after all disturbers of the peace, that they might be prosecuted and brought to condign punishment; and it is no less needful for every man's quiet and safety, that the trust of such inquisitions should be put into the hands of persons of understanding and integrity, that will suffer no man to be falsely accused or defamed; nor the lives of any to be put in jeopardy, by the malicious conspiracies of great or small, or the perjuries of any profligate wretches. so material a part of our constitution are grand juries, so much does the security of every subject depend upon them, that though anciently the sheriff was by express law, chosen annually by the people of the county, and trusted with the power of the county, yet the law left not the election of grand juries to the will of the sheriff, but has described their qualifications, which if they have, and the sheriff return them, no man, nay no judge, can object to their being sworn, much less may they to their serving when sworn: and to prevent the discretionary power (a new-fashioned term) of these judges over juries, you used to say was made the statute of the th of hen. . pardon me my lord if i venture to affirm, that a dissolving power is a breach of that law, or at least an evasion, as every citizen in dublin in sir constantine phipps's time perfectly understood, that disapproving the aldermen lawfully returned to the privy-council was in effect assuming the power of choosing and returning----but your lordship and i know dissolving and disapproving are different terms. i always understood from your lordship the trust and power of grand juries is or ought to be accounted amongst the greatest and of most concern, next to the legislative: the honour, reputations, fortunes and lives of every man being subject to their censure; the kings of england have an undoubted power of dissolving parliaments, but dissolving 'till one was returned to their or their ministers' liking, has never been thought very righteous, and heaven be praised never very successful. i am entirely of your lordship's opinion, the oath of a grand juryman is not always sufficiently considered by the jurors, which is as follows. "you shall diligently enquire, and true presentment make of all such articles, matters and things as shall be given you in charge; and of all other matters and things as shall come to your own knowledge, touching this present service. the king's counsel your fellows' and your own you shall keep secret," &c.--and from some other men's behaviour, i fear oaths are not always as sacredly observed as they ought to be: "the king's counsel, your fellows' and your _own_ you shall keep secret"--though our grandmothers my lord might have thought there was a dispensing power in the pope, you and i profess no power upon earth can dispense with this oath, so that to force a man to discover the counsel he is sworn to keep, is to force him into direct perjury. suppose upon information taken before your lordship of a rape committed, a bill of indictment were sent to a grand jury, and the grand jury return _ignoramus_ on it, application is made to the court to recommend it to them to reconsider it, and they return as before _ignoramus_--suppose a judge with more than decent passion should ask them their reasons (which is their counsel) for so doing, nay should be so particular as to demand of them whether they thought the woman a whore. must not all the world conclude somebody had forgot the oath of a grand juryman? yes sure, or his own, or worse.--but suppose they should ask a juror a question might criminate himself? my lord, you know i put not bare possibilities, it is generally believed these things have been done within an oak of this town--and if i am rightly informed, the restraint a juror is under by his oath, is so well understood, that a certain person desired the clerk of the crown to change the form of it by adding this exception: "unless by leave or order of the court." these things, my lord, would seem strange in westminster-hall, and would be severely noted in st. stephen's chapel. the honour of the crown would be thought a very false as well as weak plea for such proceedings there, as indeed it is an infamous one everywhere, for 'tis a scandal upon a king, if he is represented in a court of justice, as if he were partially concerned or rather inclined to desire, that a party should be found guilty, than that he should be declared innocent. the king's interest and honour is more concerned in the protection of the innocent, than in the punishment of the guilty, as in all the immediate actions of his majesty we find that maxim pursued, a maxim can never run a prince into excesses. we do not only find those princes represented in history under odious characters, who have basely betrayed the innocent, but such as by their spies and informers were too inquisitive after the guilty, whereas none was ever blamed for clemency, or for being too gentle interpreters of the law. though trajan was an excellent prince, endowed with all heroical virtues; yet the most eloquent writers, and his best friends, found nothing more to be praised in his government, than that in his time, all men might think what they pleased, and every man speak what he thought, this i say, that if any amongst us by violent measures, and a dictatorial behaviour have raised jealousies in the minds of his majesty's faithful subjects, the blame may lie at their door. i know it has been said for his majesty's service, grand juries may be forced to discover their counsels: but you will confess a king can do nothing against law, nor will any honest man judge that for his service, which is not warranted by law. if a constant uninterrupted usage, can give the force of a law, then the grand jurymen are bound by law, as well as by their oaths, to keep the king's, their fellows' and their own counsel secret. bracton and britton in their several generations bear witness, that it was then practised; and greater proof of it needs not be sought, than the disputes that appear by the law-books to have been amongst the ancient lawyers, whether it was treason or felony for a grand juryman to discover their counsels--the trust of grand juries was in those days thought so sacred, and their secrecy of so great concern to the kingdom, that whosoever should break their oaths, was by all thought worthy to die, only some would have them suffer as traitors, others as felons. if a king's commands should come to the judges of a court of justice or to a jury, desiring them to vary from the direction of the law, (which it is criminal to say, and no man ought to be believed therein) they are bound by their oaths not to regard them. the statute of of e. . . and e. . i. are express; and the substance of these and other statutes is inserted into the oaths taken by every judge; and if they be under the most solemn and sacred tie in the execution of justice to hold for nothing the commands of the king under the great seal, then surely political views and schemes, the pleasure or displeasure of a minister, in the like case ought to be less than nothing. it is a strange doctrine that men must sacrifice the law to secure their properties, if the law is to be fashioned for every occasion, if grand jurymen contrary to their oaths must discover their fellows' and their own counsels, and betray the trust the law has reposed in them, if they must subject the reasons of their verdicts to the censure of the judges, whom the law did never design to trust with the liberty, property, or good name of their fellow-subjects. no man can say he has any security for his life or fortune, and they who do not themselves, may however see their best friends and nearest relations suffer the utmost violences and oppressions. which leads me to say a few words of the petit jury, not forgetting mr. walters. i am assured by an eminent lawyer, that the power and office of a petit jury is judicial, that they only are the judges from whose sentence the indicted are to expect life or death. upon their integrity and understanding the lives of all that are brought in judgment do ultimately depend; from their verdict there lies no appeal, by finding guilty or not guilty. they do complicately resolve both law and fact. as it hath been the law, so it hath always been the custom and practice of these juries (except as before) upon all general issues, pleaded in cases civil as well as criminal, to judge both of the law and fact. so it is said in the report of the lord chief justice vaughan in bushell's case, that these juries determine the law in all matters where issue is joined and tried, in the principal case whether the issue be about trespass or debt, or disseizin in assizes, or a tort or any such like, unless they should please to give a special verdict with an implicate faith in the judgment of the court, to which none can oblige them against their wills. it is certain we may hope to see the trust of a grand juryman best discharged when gentlemen of the best fortunes and understandings attend that service, but it is as certain we must never expect to see such men on juries, if for differing with a judge in opinion, when they only are the lawful judges, they are liable to be treated like villains, like perjurers, and enemies to their king and country; i say my lord such behaviour to juries will make all gentlemen avoid that duty, and instead of men of interest, of reputation and abilities, our lives, our fortunes, and our reputations must depend upon the basest and meanest of the people. i know it is commonly said, _boni judicis est ampliare juridictionem_. but i take that to be better advice which was given by the lord chancellor bacon upon swearing a judge; that he would take care to contain the jurisdiction of the court within the ancient mere-stones without removing the mark. i intend to pay my respects to your lordship once every month 'till the meeting of the parliament, when our betters may consider of these matters, and therefore will not trouble you with any more on this subject at present. but conclude, most heartily praying---- that from depending upon the will of a judge, who may be corrupted or swayed by his own passions, interests, or the impulse of such as support him and may advance him to greater honours, the god of mercy and of justice deliver this nation. i am, my lord, your lordship's most obedient humble servant, n.n. dec. the first . dublin: printed in the year . a second letter from a friend to the right honourable ------ my lord, i think the best service men employed by his majesty can do for him and this country, is to shew such prudence and temper in their behaviours as may convince every man they are not intrusted with any power but what is necessary and will always be exercised for the advantage and security of his majesty's subjects. for my own part i hold it the duty of every man though he has not the honour of serving his majesty in public employment, not only, not to misrepresent the actions of his servants, but in matters of small concern, to wink at their follies and mistakes; i know the jacobites and papists our irreconcilable enemies are too watchful to lay hold of every occasion to misrepresent his majesty and turn the faults of ambitious and self-interested servants upon the best of kings. i hear some men say, that in my last to your lordship, there appears more of the satirist, than becomes a man engaged merely in the defence of liberty and justice; but i am satisfied i can with charity affirm, they are either such as have no knowledge of the several steps [that] have been taken to bring this poor country into ruin and disgrace, or they are of the number of those who have had a share in the actings and contrivances against it; for my lord, he must rather be an insensible stoic than an angry cynic, who can survey the measures of some men without horror and indignation--to see men act as if they had never taken an oath of fidelity to their king, whose interest is inseparable from that of his people, but had sworn to support the ruinous projects of abandoned men (of whatever faction) must rouse the most lethargic, if honest, soul. i who have always professed myself a whig do confess it has mine. i beg leave in this place to explain what i intended in my last by the words, "unless by leave or order of the court," lest whilst i plead for justice i should do an injury to your lordship. i do declare i never heard that story of your lordship, and i hope no man did believe it of you. my intention was by that hint to remember you of judge u--p--n and a certain assizes held at wicklow, as i believe your lordship understood it, and as i now desire all the world may. having learned from your lordship and other lawyers of undoubted abilities, that no judge ought by threats or circumvention to make a grand-juryman discover the king's counsel his fellows' or his own i should not at present say anything in support of that position. but that i find a most ridiculous and false explanation seem to mislead some men in that point: say they, by the word counsel is understood, such bills as are before the grand jury and the evidence the prosecutors for the crown have to support the charge against the subject--lest that being known the party indictable may fly from justice, or he may procure false witnesses to discredit the evidence for the king, or he may by bribes and other indirect measures take off the witnesses for the crown. i confess _i_ take that to be the meaning of the word counsel, but i am certain that is not _all_ that is meant by it, that is what must be understood when it is called the king's counsel, _id est_, the counsel or reasons for which the king by his servants, his attorney-general or coroner, has drawn and sent to the grand jury a charge against a subject. but the counsel of a juror is a different thing, it is the evidence, the motives and reasons that induce him or his fellow-jurors to say _billa vera_ or _ignoramus_, and the opinion he or they happen to be of when the question is put by the foreman for finding or not finding: this counsel every man is sworn to keep secret, that so their opinion and advice may not be of prejudice to them hereafter, that as they are sworn to act without favour or affection, so may they also act without fear. whereas, were it otherwise the spirit of revenge is so universal, there are but few cases wherein a juror could act with safety to himself; either the prosecuted, as where the bill is found, or the prosecutor, where it is returned _ignoramus_, may contrive to defame the jurors who differ from them in opinion: as i am told has happened to some very honest citizens who are represented to be jacobites since their opinions were know to be against ----. and sometimes revenge or ambition may prompt men to carry it further, as in the case of mr. wilmer, who in king charles d's time was very severely handled for being one of an _ignoramus_ jury.---- 'tis not necessary to say whom he disobliged by being so.----but if i remember right his case was this. he was a merchant, (and as i said, an _ignoramus_ juryman) had covenanted with a servant boy to serve him in the west indies, and accordingly sent him beyond sea: upon suggestion and affidavit by which any person might have it, a writ _de homine replegiando_ was granted against mr. wilmer; the sheriffs would have returned on the writ the agreement and the boy's consent, but the court (in the case of this wilmer) easter , cha. . [_i.e.,_ charles the second] in b.r. ruled they must return _replegiari fecimus_ or _elongavit_, that is, they had replevy'd the boy, or that wilmer had carried him away where they could not find him, in which last case mr. wilmer, though an innocent person must have gone to gaol until he brought the boy into court or he must have been outlawed--shower's rep. part. i do not say this that i think the same thing will be practised again, or anything like it, though i know that very homely proverb, "more ways of killing a dog than hanging him."--but i instance it to shew, the counsels of every grand juryman should be kept secret, that he may act freely and without apprehensions of resentment from the prosecuted or prosecutor. my resolution when i writ to you last, was, not to have said anything in this concerning the power of dissolving or dispensing, but as i have been forced to say something of the dispensing, for the same reason i must of the dissolving power.--a power undoubtedly in effect including that of returning, which makes me wish two men of great interest in this kingdom, differing in every other thing, had not undertaken to defend it, or they had better reasons for it than i have yet heard. 'tis said, "this power is in the court as a right of resistance is in the people, as the people have a power superior to the prerogative of the prince, though no written or express law for it; so of necessity though no statute directs it, and it may seem to overturn the greatest security men have for their liberties, yet the court has a power of dissolving grand juries, if they refuse to find or present as the court shall direct." pray let us consider how well this concludes. the people may do anything in defence of their lives, their religion and liberties, and consequently resistance is lawful, therefore an inferior court a _bene placito_ judge may----monstrous absurdity. another, i am sorry i can't say more modest argument to support it is this.-- "considering," say they, "grand juries, it is but reasonable a discretionary power of dissolving them should be lodged in the judges." by the words "considering grand juries," i must understand considering their understandings, their fortunes or their integrity, for from a want of one or more of those qualifications must arise the reason of such a discretionary power in the judges. though i shall not urge it as far as i could, i will venture to say the argument is at least as strong the other way--considering the judges.-- first as to their understandings, it must be confessed the benches are infinitely superior to the lower professors of the law: yet surely it can't give offence to say the gentlemen of the several counties have understandings sufficient to discharge the duty of grand jurymen--if want of fortune be an objection to grand jurymen, _a pari ratione_, it is an objection to some other men.--besides, that the fact is not true, for in their circuits, no judge goes into any county where he does not meet at least a dozen gentlemen returned upon every grand jury, every one of whom have better estates than he himself has--and these not during pleasure, which last consideration, saves me the trouble of shewing the weakness of the objection in the third qualification. "ay. but it was a necessary expedient to keep out wood's brass." are the properties of the commons of this kingdom better secured by the knight-errantry of that day? in the name of common sense, what are we to believe? has the undaunted spirit, the tremendous voice of ------ frightened wood and his accomplices from any further attempts? or rather has not the ready compliance of ------ encouraged them to further trials? the officers and attendants of his court may tremble when he frowns, but who else regards it more than they do one of wood's farthings. "there is no comparison," says another, "between the affair of sir w. scroggs and this of ------. sir w. discharged a grand jury because they were about to present the duke of york for being a papist, but ------ discharged the grand jury for not presenting a paper he recommended to them to present as scandalous, (and in which, i say, he was a party reflected on.)" i agree there is a mighty difference, but whom does it make for? a grand jury of a hundred (part of a county) take upon them to present a no less considerable person than the king's brother and heir presumptive of the crown, the chief-justice thinks this a matter of too much moment for men of such sort to meddle in, but a matter more proper for the consideration of parliament: i would not be understood to condemn the jury; i think they acted as became honest englishmen and lovers of their country; but i say if judges could in any case be allowed to proceed by rules of policy, surely here was a sufficient excuse. however the commons impeached him. the determinations of ignorant or wicked judges as they are precedents of little weight, so they are but of little danger, and therefore it will become the commons at all times to animadvert most carefully upon the actions of the most knowing men in that profession. i say, my lord, _at all times_, because i hear former merit is pleaded to screen this action from any inquiry. i am sensible much is due to the man who has always preferred the public interest to his private advantages as -------- has done. when a man has signalized himself, when he has suffered for that principle, he deserves universal respect. yet men should act agreeably to the motive of that respect, and not ruin the liberty of their country to shew their gratitude, and so, my lord, where a man has the least pretence to that character, i think 'tis best to pass over small offences, but never such as will entail danger and dishonour upon us and our posterity. the romans, my lord, when a question was in the senate, whether they should ransom fifteen thousand citizens who had merited much by their former victories, but losing one battle were taken prisoners; were determined by the advice of that noble roman attilius regulus not to redeem them as men unworthy their further care, though probably it was their misfortunes not their faults lost that day. flagitio additis damnum: neque amissos colores luna refert medicata fuco he thought they were not worthy to be trusted again:---- to shew them pity, in his mind, would betray the romans to perpetual danger: _et exemplo trahenti_ perniciem veniens in aevum, si non periret immiserabilis captiva pubes i hear some precedents have been lately found out to justify that memorable action; but if precedents must control reason and justice, if a man may swear he will keep his counsels secret, and yet by precedents may be forced to divulge them, i would advise gentlemen very seriously to consider, the danger we are in; and examine what precedents there are on each side of the question, for my part i think the commons of england are not a worse precedent than the judges of england. besides it must be remembered that precedents in some cases will not excuse a judge, even where they are according to the undoubted law of the land, as for instance, suppose a man says what is true, not knowing it to be true, though it be logically a truth as it is distinguished, yet it is morally false; and so, suppose a judge give judgment according to law, not knowing it to be so, as if he did not know the reason of it at that time, but bethought himself of a reason or precedent for it afterwards, though the judgment be legal and according to precedent, yet the pronouncing of it is unjust; and the judge shall be condemned in the opinions of all men: as happened to the lord chief justice popham a person of great learning and parts, who upon the trial of sir walter raleigh; when sir walter objected to reading or giving in evidence, lord cobham's affidavit, taken in his absence, without producing the lord face to face, the lord being then forthcoming: the chief justice overruled the objection, and was of opinion it should be given in evidence against sir walter, and summing up the evidence to the jury the chief justice said, "just then it came into his mind why the accuser should not come face to face to the prisoner, because, &c." now if any judge has since found precedents, or has since picked up the opinion of lawyers, i fear he will come within the case i have put. i foresee, if ever this question happens to be debated, _you know where_, gentlemen will be divided; some will be desirous to do their country justice and free us from all future danger of this kind; others upon motives not quite so laudable, will strive to screen, and with others private friendship will prevail: but i would recommend to your friends, who really love their country, to consider the several circumstances concurring in your lordship which probably may not in your successor: let them suppose a person were to fill your place, from whose manifest ignorance in the law, we may reasonably conclude, his only merit is an inveteracy and hatred to this country. i say how could your best friends excuse themselves, if in regard to your lordship they should suffer such a precedent to be handed down to such a man unobserved or uncensured? _invenit etiam aemulos infaelix nequitia_--ambitious men have not always been deterred by the unhappy fate of their predecessors, _quid si floreat vigeatque?_ but what lengths will they run if injustice and corruption shall ride triumphant? had somebody received a reprimand upon his knees in a proper place, for treating a printer's jury like men convict of perjury, forcing them to find a special verdict, i dare to say he had not been quite so hardy as to have discharged the grand jury or treated them in the manner he did, because they had not an implicit faith in the court; nor had he dared not to receive a presentment made by the second grand jury against wood's farthings upon pretence it was informal, which i mention because the worthy drapier has mistaken the fact. some of your lordship's screens i hear advise you to shew great humility and contrition for what's past, as the only means to appease the just indignation all sorts of men have conceived against you.----were i well secured you will not recommend this letter to the next grand jury to be presented, i could give you more _seasonable advice_, but happen as it may i will venture to give you a little. fawning and cajoling will have but little effect on those who have had the honour of your acquaintance these ten years past, for caligula who used to hide his head if he heard the thunder, would piss upon the statues of the gods when he thought the danger over--a better expedient is this,---- tell men the drapier is a tory and a jacobite.--that he writ "the conduct of the allies."--that he writ not his letters with a design to keep out wood's halfpence, but to bring in the pretender; persuade them if you can, the dispute is no longer about the power of judges over juries, nor how much the liberty of the subject is endangered by dissolving them at pleasure, but that it is now become mere whig and tory, a dispute between his majesty's friends and the jacobites, and 'twere better to see a thousand grand juries discharged than the tories carry a question though in the right.--_haec vulnera pro libertate publica excepi, hunc oculum pro vobis impendi._ try this cant, pin a cloth over your eyes, look very dismal, and cry, "i was turned out of employment, when the drapier was rewarded with a deanery," i say, my lord, if you can once bring matters thus to bear, i have not the least doubt you may escape without censure. to your lordship's zeal and industry without doubt is owing, that the papists and the tories have not delivered this kingdom over to the pretender, so caesar conquered pompey that _legum auctor et eversor,_ and 'twas but just the liberty and laws of rome should afterwards depend upon his will and pleasure.----the drapier in his letter to lord molesworth has made a fair offer, "secure his country from wood's coinage," then condemn all he has writ and said as false and scandalous, when your lordship does as much i must confess it will be somewhat difficult to discover the impostor. thus to keep my word with your lordship, i have much against my inclinations writ this, which shall be my last upon the ungrateful subject.--if i have leisure, and find a safe opportunity of giving it to the printer, my next shall explain what has long duped the true whigs of this kingdom. i mean _honesty in the "worst of times."_ though your lordship object to my last, that what i writ was taken out of lord coke, lord somers, sir will. jones, or the writings of some other great men, yet i will venture to end this with the sentiments of philip de comines upon some thorough-going courtiers. "if a sixpenny tax is to be raised, they cry by all means it ought to be double. if the prince is offended with any man, they are directly for hanging him. in other instances, they maintain the same character. above all things they advise their king to make himself terrible, as they themselves are proud, fierce, and overbearing, in hopes to be dreaded by that means, as if authority and place were their inheritance." i am, my lord, your lordship's most obedient and most humble servant. n.n. _jan_. , - . appendix v the presentment of the grand jury of the county of the city of dublin.[ ] whereas several great quantities of base metal coined, commonly called _wood's halfpence,_ have been brought into the port of dublin, and lodged in several houses of this city, with an intention to make them pass clandestinely, among his majesty's subjects of this kingdom; notwithstanding the addresses of both houses of parliament and the privy-council, and the declarations of most of the corporations of this city against the said coin; and whereas his majesty hath been graciously pleased to leave his loyal subjects of this kingdom at liberty to take or refuse the said halfpence. [footnote : chief justice whitshed, after browbeating the grand jury that threw out the bill against harding for printing the fourth drapier's letter, discharged it, and called another grand jury. the second grand jury not only repeated the verdict of the first, but issued the following expression of its opinion on the matter of wood and his patent. [t.s.]] we the grand jury of the county of the city of dublin, this michaelmas term, , having entirely at heart his majesty's interest and the welfare of our country, and being thoroughly sensible of the great discouragement which trade hath suffered by the apprehensions of the said coin, whereof we have already felt the dismal effects, and that the currency thereof will inevitably tend to the great diminution of his majesty's revenue, and the ruin of us and our posterity: do present all such persons as have attempted, or shall endeavour by fraud or otherwise, to impose the said halfpence upon us, contrary to his majesty's most gracious intentions, as enemies to his majesty's government, and to the safety, peace and welfare of all his majesty's subjects of this kingdom, whose affections have been so eminently distinguished by their zeal to his illustrious family, before his happy accession to the throne, and by their continued loyalty ever since. as we do with all just gratitude acknowledge the services of all such patriots, as have been eminently zealous for the interest of his majesty, and this country, in detecting the fraudulent impositions of the said wood, and preventing the passing his base coin: so we do at the same time declare our abhorrence and detestation of all reflections on his majesty, and his government, and that we are ready with our lives and fortunes to defend his most sacred majesty against the pretender and all his majesty's open and secret enemies both at home and abroad: given under our hands at the grand jury chamber this th, november, .[ ] george forbes, david tew, william empson, thomas how, nathaniel pearson, john jones, joseph nuttall, james brown, william aston, charles lyndon, stearn tighe, jerom bredin, richard walker, john sican, edmond french, anthony brunton, john vereilles, thomas gaven, philip pearson, daniel elwood, thomas robins, john brunet. richard dawson, [footnote : on august th, , the grand jury, and the other inhabitants of the liberty of the dean and chapter of st. patrick's waited on the dean, and read him the following declaration, desiring him to give orders for its publication: "the declaration of the grand-jury, and the rest of the inhabitants of the liberty of the dean and chapter of st. patrick's, dublin. "we, the grand-jury, and other inhabitants of the liberty of the dean and chapter of st. patrick's, dublin, whose names are underwritten, do unanimously declare and determine, that we never will receive or pay any of the half-pence or farthings already coined, or that shall hereafter be coined, by one william wood, being not obliged by law to receive the same; because we are thoroughly convinced by the addresses of both houses of parliament, as well as by that of his majesty's most honourable privy-council, and by the universal opinion of the whole kingdom, that the currency of the said half-pence and farthings would soon deprive us of all our gold and silver, and therefore be of the most destructive consequence to the trade and welfare of the nation." [t. s.]] appendix vi proclamation against the drapier. "_oct. th,_ . "a proclamation for discovering ye author of ye pamphlet intituled a letter to ye whole people of ireland, by m.b. drapier, author of the letter to the shop-keepers, etc. £ reward by the lord-lieutenant and council of ireland. a proclamation. "content: "whereas a wicked and malicious pamphlet, intituled a letter to the whole people of ireland, by m.b. drapier, author of the letter to the shop-keepers, etc., printed by john harding, in molesworth's court, in fishamble street, dublin, in which are contained several seditious and scandalous paragraphs highly reflecting upon his majesty and his ministers, tending to alienate the affections of his good subjects of england and ireland from each other, and to promote sedition among the people, hath been lately printed and published in this kingdom: we, the lord-lieutenant and council do hereby publish and declare that, in order to discover the author of the said seditious pamphlet, we will give the necessary orders for the payment of three hundred pounds sterling, to such person or persons as shall within the specified six months from this date hereof, discover the author of the said pamphlet, so as he be apprehended and convicted thereby. "given at the council chamber in dublin, this twenty-seventh day of october, one thousand seven hundred and twenty-four. "(signed) midleton _cancer_. shannon; donnerail; g. fforbes; h. meath; santry; tyrawly; fferrars; william conolly; ralph gore; william whitshed; b. hale; gust. hume; ben parry; james tynte; r. tighe; t. clutterbuck. "god save the king." appendix vii it is very interesting and even curious to note, that the signatories to the public expression of their attitude towards wood and his patent, as shown by the proclamation, should have almost all of them signed another document, in their capacities of privy councillors, which addressed his majesty _against_ wood and the patent. so far as i can learn, monck mason seems to have been the first historian to discover it; nor do i find the fact mentioned by any of swift's later biographers. "it was rumoured in swift's time," says monck mason, "but not actually known to him" (see drapier's sixth letter), "that the irish privy council had addressed his majesty against mr. wood's coin. having inspected the papers of the council office, i shall lay before the reader the particulars of this event, which were never promulgated, probably, because they had not the desired effect, the premier [walpole] having determined, notwithstanding all opposition or advice, to persevere in his ill-judged project. "on the th april, , at a meeting of the council, in which the duke of grafton himself presided, it was ordered, that it should be referred to a committee of the whole board, or of any seven or more, 'to consider what was proper to be done to allay and quiet the great fears of the people, occasioned by their apprehensions of william wood's copper money becoming current among them,' on the th of may, the committee reported, that they had considered the matter referred to them, and were of opinion, that an address should be sent to his majesty, of which they then presented a draught. it was again on the th, referred to a committee of the whole board to prepare a letter, which was accordingly done on the next day.--the report was as follows: "'to the king's most excellent majesty, the humble address of the lords justices, and privy-council. * * * * * "'may it please your majesty, "'we, your majesty's most dutiful and loyal subjects, the lords justices and privy council, most humbly beg leave, at this time, to give an instance of that duty, which, as upon all other occasions, so more especially upon such as are of the greatest moment and importance, we hold ourselves always bound to pay to your majesty. "'your majesty's great council, the high court of parliament, being now prorogued, we conceive ourselves bound, by the trust which your majesty has been pleased to repose in us, and the oaths we have taken, with all humility to lay before your majesty the present state of this your kingdom, with reference to a great evil that appears to threaten it, to which, if a speedy remedy be not applied, the unavoidable consequence, as we apprehend, will be, the ruin of multitudes of your majesty's subjects, together with a great diminution of your revenue. "'though the fears of your majesty's subjects of this kingdom, in relation to the coinage of copper half-pence and farthings, were, in a great measure, allayed by your majesty's most gracious resolution to do every thing in your power for the satisfaction of your people, expressed in your majesty's answer to the addresses of both houses of parliament; yet, the repeated intelligence from great britain, that william wood has the assurance to persist in his endeavours to introduce his copper half-pence and farthings amongst us, has again alarmed your faithful subjects, to such a degree, as already to give a great check to our inland trade. if the letters patent granted to william wood should, in all points, be exactly complied with, the loss to be sustained by taking his half-pence and farthings would be much greater than this poor kingdom is able to bear. but if he, or any other persons, should, for the value of gain, be tempted to coin and import even more than double the quantity he by his patent is allowed to do, your people here do not see how it is possible for your majesty's chief governors of this your kingdom, to detect or hinder the cheat. "'it is found by experience, that we have already a sufficient quantity of half-pence, to serve by way of exchange in the retailing trade, which is the only use of such sort of money, of which, therefore, we find ourselves to be in no want. "'and since, by the letters patent granted to the same william wood, no man is required or commanded to take the said half-pence or farthings, but the taking them is left at liberty to those who are willing so to do; we most humbly submit it to your royal wisdom and goodness, whether it may not be for your majesty's service, and the great satisfaction and good of your subjects, and very much tend to the allaying and quieting of their fears, that your majesty should cause your royal pleasure to be signified to the commissioners, and other officers of your majesty's revenue in this kingdom, that they neither receive those half-pence and farthings, nor give countenance or encouragement to the uttering or vending of them; or that some other speedy method may be taken to prevent their becoming current amongst us.'" appendix viii searching among the pamphlets of the halliday collection at the royal irish academy, dublin, i came across a tract of twelve pages, printed by john whaley of dublin in , with the following title: "the patentee's computation of ireland, in a letter from the author of the whitehall evening-post concerning the making of copper-coin. as also the case and address of both houses of parliament together with his majesty's most gracious answer to the house of lords address." the writer of this tract in defence of the patent maintained the following propositions: ( ) that the kingdom of ireland wants a copper coin. ( ) that the quantity of this coin will be no inconvenience to it. ( ) that it is better than ever the kingdom had, and as good as (in all probability) they ever will or can have, and that the patentee's profit is not extravagant, as commonly reported. ( ) that the kingdom will lose nothing by this coin. ( ) that the public in ireland will gain considerably by it, if they please. ( ) that the kingdom will have £ , additional cash. as he states his arguments, they are quite reasonable. on proposition three, if his figures are correct, he is especially convincing. he details the cost of manufacture thus: _s. d._ copper prepared for the coinage at his majesty's mint at the tower of london, costs per pound weight coinage of one pound weight - / waste and charge of re-melting yearly payment to the exchequer and comptroller allowed to the purchaser for exchange, &c. total charge - / "so that the patentee," he concludes, "makes a profit of only - / _d._ in the half crown or about %." the tract, however, is more interesting for the reprint it gives of the twenty-eight articles stated by the people in objection to the patent and the coin. i give these articles in full: ireland's case humbly presented to the honourable the knights, citizens, and burgesses in parliament assembled most humbly sheweth, whereas your honours finding the late grant or letters patents obtained by mr. william wood, for making three hundred and sixty tun weight of copper half-pence for the kingdom of ireland, were to be manufactured in london &c. which money is now coining in bristol, and that the said money was to weigh two shillings and sixpence in each pound weight, and that change was to be uttered or passed for all such as were pleased to take the same in this kingdom. that it's humbly conceived your honours on considering the following remarks, will find the permitting such change to pass, exceeding injurious and destructive to the nation. first. that the same will be a means to drain this kingdom of all its gold and silver, and ten, fifteen, or twenty per cent abated, will most effectually do the same. d. that the making such money in england will give great room for counterfeiting that coin, as well in this kingdom, as where it is made. d. that the copper mines of this island which might be manufactured in the nation, is by management shipped off to england by some persons at, or about forty shillings per tun, by others at four pounds and six pounds per ton, which copper when smelted and refined is sold and sent back to this kingdom at two shillings and six pence per pound weight as aforesaid, which is two hundred and eighty pound sterl. per ton. th. that two shillings and sixpence per pound weight is making the said coin of very small value, the said coin ought not to weigh or exceed two shillings in each pound weight as the english halfpence are. th. that all such money brought to this nation manufactured, is to be entered at value, which value is in the book of rates, ten per cent duty and excise. th. that no security is given to this nation to make such money in any one point, the same may be found defective in either, as to baseness of metal, workmanship or weight, or to give gold and silver for the same, when the subject was, or may be burthened therewith. th. that if such monies as aforesaid be permitted to pass in this nation, all persons that have gold or silver by them would not part therewith, but brass money must be carried from house to house on truckles, and in the county by carts and horses, with troops to guard them. th. that such money will raise the price of all commodities from abroad, probably to three or four hundred per cent. th. that linen, yarn, beef, butter, tallow, hides and all other commodities, will raise to that degree by being bought with half-pence, and workmen paid with brass money, that commissions from abroad will not reach them, therefore such goods must lie on hands and remain a drugg. th. that the excise of beer, ale, brandy, &c., and hearth-money will be paid in such coin, the same falling first into the hands of the poor and middling people. th. that if any trouble should happen in this nation, no army could be raised with such specie, but an enemy in all appearance would be admitted with their gold and silver, and which would drive the nation before them. th. the courts of law could not subsist, for all the suits there must be supported and maintained with ready money. viz. gold and silver. th. that all the bankers must shut up their shops, no lodgment would be made except halfpence, such as would lodge their money with them, would rather draw off and cause a run on them, fearing that their specie should be turned into the said brass and copper money. th. that such bills as are drawn to the country, viz. cork, limerick, waterford, kingsale, deny, &c. the exchange would be instead of a quarter per cent, twenty per cent and then paid in the said brass specie, by means of its being brought on cars, carts, or waggons, and guards to attend the same. th. that all the rent in the kingdom would be paid in half-pence; no man would give gold or silver, when he had brass money to pay the same. th. that no one can coin or manufacture such a quantity of halfpence or farthings for this kingdom, out of the same, but either he must be ruined in the undertaking or the nation undone by his project, in taking such light money, by reason of ten per cent, duty, and probably this session be made twenty or thirty per cent duty, and the exchange nine or ten per cent. ten per cent abated to circulate them. ten per cent factorage, freight, gabberage, key-porters, &c. all which is forty per cent, charged on the same. th. that if the said wood was obliged to make his light money not to exceed two shillings in the pound weight according to the english coin, he would give up such grant, for six pence in each pound weight is per cent. th. that the said twenty-five per cent is , _l._ sterl. on the said ton of copper, loss to this nation, by being coined out of this kingdom, besides , _l._ of gold and silver sent out of the kingdom for brass or copper money. th. that the copper mines of this kingdom is believed to be the metal such copper is made of, which verifies the english saying, that irish people are wild, that would part with , _l._ sterl. of their gold and silver, for their own copper mines, which cost them not one pound sterl. th. that the said wood's factors probably may send in fourteen years double the quantity of copper which is ton, then this kingdom loses , _l._ sterl. and parts with , _l._ sterl. of their gold and silver for almost nothing. st. if any great sum was to be raised by this nation, on any emergency extraordinary, to serve his majesty and his kingdom how would it be possible to do the same; copper half-pence would not stem the tide, no silver now to be had of value, then no gold to be seen. d. that england also must be a great loser by such money, by reason the said half-pence being from to grains lighter and less in value than their own, so that the same will not pass in that kingdom scarce for farthings a piece, how then shall the vast quantities of goods be paid for, that are brought from that kingdom here, a considerable part of this island must be broke and run away for want of silver and gold to pay them their debts. d. that if the said wood should get all that money, what power would he regard, and what temptation would he be subject unto on that head, he is but a man, and one almost as little known or heard of, as any one subject the king has on this side the water. th. that the vast quantity of sea-coal brought from england here, would not be had for such money; the colliers will keep both their ships and coal at home, before they trade with such a nation, as had their treasure turned into brass money. th. that the army must be paid with such money, none else to be had, they would lay down their arms and do no duty, what blood and confusion then would attend the same. th. that no people out of any other kingdom would come into this country to dwell, either to plant or sow, where all their money must be brass. th. that the beautiful quay and river of dublin which is now lined and filled with ships in a most delightful order, would then be scattered to other harbours, as also the new range, there and now a building, would be left, nothing but empty places all as doleful as the weeping river, deserted by her fleets and armies of merchants and traders. th. that the aforesaid scheme is to be viewed and considered by a king and parliament, that will do themselves and their nation justice, who will with hearts and hands, stem that tide and current, as never to suffer so dutiful and loyal a people to be ruined and undone without relief. appendix ix descriptions of the various specimens of wood's coins the following descriptions of the various varieties of wood's coins, taken from a note in monck mason's "history of st. patrick's cathedral" (ed. , pp. xcvi-xcvii), may be interesting to the student. the two varieties of the coins given as illustrations in this volume are reproduced from specimens in the british museum. monck mason obtains his information from simon's "essay on irish coins," dublin, , to; snelling's supplement to simon issued in ; and the edition of simon's work reprinted in . with the exception of no. ii. of this list all of wood's coins had, on one side, "the king's head laureat, looking to the left, with this inscription, georgius, dei gratia, rex. on the reverse is the figure of ireland, represented by a woman sitting, beside her, a harp: the differences consist chiefly, in variations in the attitude of the figure, and in the date of the coin." no. i. .--hibernia, with both her hands on the harp, which is placed on her right side; her figure is full front, but she looks towards the right; round her this inscription, hibernia, . (simon, plate , numb. ) no. ii. .--hibernia is seated as in the last, but has her head turned to the left, on which side there is a rock; round her is inscribed, hibernia; in the exergue, ; on the obverse the usual head, the inscription, georgius d.g. rex. (snelling, plate , numb. .) no. iii. .--hibernia, in profile, looking to the left, holding, in her right hand, a palm branch, resting her left on a harp; round it, hibernia, . (simon, plate , numb. .) no. iv. .--hibernia, as in the last; round her, hibernia, . (simon, plate , numb. .) it was some of this coin that was submitted to sir isaac newton for assay. no. v. .--hibernia, as in the last two, differing only in the date. (mentioned by simon, but no engraving given.) no, vi. .--hibernia, seated as in the three preceding; round her, hibernia: in the exergue, . (snelling, plate , numb. .) mason notes of this specimen: "mr. snelling does not specify, particularly, in what respect this coin differs from those which precede; his words are, 'different from any other, and very good work, especially the halfpenny, which is the finest and broadest piece of his money i ever saw, and belongs to mr. bartlet.' they do not, however, appear to have attained to circulation in ireland. a few might, perhaps, have been struck off by the patentee, to distribute among his own, and the minister's friends." no. vii.--mr. snelling mentions, "another halfpenny, which has hibernia pointing up with one hand to a sun in the top of the piece"; but of this he has not given any engraving. index. addison, made keeper of the records of bermingham's tower armstrong, sir thomas, granted a patent to coin farthings in ireland armstrong, sir william, granted a patent to coin halfpence in ireland bacon, lord, on the royal prerogative, quoted berkeley, lord, of stratton, master of the rolls bingham, john bodin, jean boulter, archbishop brodrick, st. john, made a privy councillor brown, john burlington, earl of, lord high treasurer of ireland carteret, lord, attempts to injure walpole's reputation by means of the wood agitation made lord lieutenant of ireland takes walpole's side character of swift's letters to his relations with walpole charles i., paid his troops with debased coin coinage, the law with reference to _see_ wood's coinage coke, sir edward, on the laws regarding coinage coleby conolly, william, speaker of the irish house of commons coxe, archdeacon, his account of the agitation in ireland "creed of an irish commoner, a" crowley, sir ambrose dartmouth, lord, granted a patent to coin halfpence in ireland davies, sir john, his "abridgement of coke's reports" "defence of the conduct of the people of ireland, a," quoted doddington, bubb drapier, the, his account of himself proclamation against dublin, petition of the lord mayor, sheriffs and citizens of dutch, the, counterfeited debased coinage of ireland elizabeth, queen, her army paid with base coin base money sent to ireland by ewing, george, "defence of the conduct of the people of ireland" published by filmer, sir robert finley france, system of re coinage in george i., equestrian statue of, in dublin grafton, duke of, lord lieutenant of ireland recalled not concerned with wood's patent harding, john, arrest and prosecution of harley, robert, earl of oxford, swift's tribute to holt, sir john hopkins, right hon. edward, secretary to the lord lieutenant made master of the revels hopkins, john ireland, want of small change in patents granted for coining in relations between england and petitions for establishment of a mint in computed population of copper money not wanted in not a "depending kingdom," english contempt for loyalty of a free country project for a bank in england's profit from the absentees of absence of faction in charter schools founded in needed reforms in _see also_ wood's coinage. james ii., debased the coinage in ireland kendal, duchess of, sold wood his patent for £ , king, archbishop, letters to southwell quoted letter to general george refused to condemn the drapier letter to molyneux on the proclamation against the drapier's th letter knox, john, his patent to coin halfpence comparison of his patent with wood's legg, colonel george. _see_ dartmouth, lord. leti, signor lindsay, robert marsh; bishop, charter schools founded by midleton, chancellor, and walpole swift's letter to opposed to wood's patent but signed the proclamation against the drapier account of "mirror of justice, the," molesworth, viscount, letter to account of molyneux, william moore, colonel roger, patent to coin halfpence sold to newton, sir isaac, wood's coinage assayed by palmerston, lord, chief remembrancer pembroke, earl of, lord-lieutenant of ireland philips, ambrose, secretary to archbishop boulter phipps, sir constantine poyning's law precedents, swift on prior, thomas, his "list of the absentees of ireland" privy council, report of the, on wood's coinage and _see_ letters ii. and iii. privy council, the irish, report of, on wood's coinage "proposal for the universal use of irish manufactures, a" rooke, admiral sir george royal prerogative, the explained scotland, power of coining in scroggs, sir william, lord chief justice scroope, thomas, one of the assayists of wood's coinage "seasonable advice to the grand jury," effect of sedley, sir charles sheridan, thomas, probably the author of "tom punsibus dream" sidney, algernon somers, lord southwell, edward, one of the assayists of wood's coinage king's letters to secretary of state sunderland, earl of swift, jonathan, his aims in writing the drapier's letters his letter to midleton acclaimed the saviour of his country his sermon on "doing good" idolized in ireland trench, w., memorial of, with reference to the copper coinage "tom punsibi's dream" tyrone's rebellion walpole, sir robert, his conduct in the matter of wood's patent said to have been the author of the report of the privy council his irish policy wood's reliance on exonerated by the drapier whitshed, chief justice, dissolves the grand jury in the case against harding his motto letters to william, king, pewter halfpence coined by wood, william, terms of the patent granted to account of his indiscreet boasts stories of his profit considered his patent obtained clandestinely his patent compared with knox's pamphlets published in london in favor of his reliance on walpole his patent ended a pension given to wood's coinage, letters of the revenue commissioners regarding resolutions of the irish houses of parliament on report of the committee of the privy council on and letters ii and iii. value of refused by the merchants at the ports no one obliged to take it assay of, at the mint baseness of the revenue officers ordered to pass it popular indignation against the matter summed up end of the agitation concerning addresses to the king concerning presentment of the grand jury on description of the various specimens of generously made available by the internet archive/american libraries.) banking by william a. scott, ph.d., ll.d. director of the course in commerce and professor of political economy in the university of wisconsin chicago a. c. mcclurg & co. copyright a. c. mcclurg & co. published april, copyrighted in great britain w. f. hall printing company, chicago editor's preface in europe the average man looks upon the bank as a benefactor. through its agency he secures capital at low rates for his business. in america the bank is too often regarded as a necessary evil, certainly not with affection. yet it plays a most important rôle in the nation's economy. our banking laws are obsolete, unsatisfactory, and actually in some instances detrimental to the best and widest use of the nation's resources. europe has many lessons for us in the problem of how best to use our accumulations. with agriculture demanding and the railroads calling for more capital, the question of scientific banking assumes new proportions. this book, with its chapters on commercial and investment banking, will help to a better knowledge. f. l. m. author's preface the purpose of this book is to supply the general reader with a simple statement of the principles and problems of banking. since it is designed primarily for american readers, special attention has been given to conditions in this country. an effort has been made clearly to draw the line between commercial and investment banking and to indicate the problems peculiar to each. that it may assist the average person in understanding present-day banking problems and thus contribute towards the formation of a sound public opinion regarding them, is the author's hope and desire. wm. a. scott. _university of wisconsin._ contents page chapter i. the nature, functions, and classification of banking institutions, . services performed by banking institutions, . the economic functions of banks, . classification of banking institutions, chapter ii. the nature and operations of commercial banking, . commercial paper, . the operation of discount, . the conduct of checking accounts, . the issue of notes, . collections, . domestic exchange, . foreign exchange, chapter iii. the problems of commercial banking, . the supply of cash, . the selection of loans and discounts, . rates, . protection against unsound practices, (a) capital and surplus requirements and double liability of stockholders, (b) inflation and means of protecting the public against it, (c) other means of safeguarding the interests of the public, . adequacy and economy of service, chapter iv. commercial banking in the united states, . state banks, . national banks, . the independent treasury system, . the interrelations of these institutions, . operation of the system, (a) conflict of functions and laws, (b) loan operations, (c) treasury operations, (d) operation of the reserve system, (e) lack of elasticity in the currency, . plans for reform, chapter v. commercial banking in other countries, . common features, . the english system, . the french system, . the german system, . the canadian system, chapter vi. investment banking, . saving and savings institutions, . trust companies, . bond houses and investment companies, . land banks, . stock exchanges, . some defects in our investment banking machinery, references, index, banking chapter i the nature, functions, and classification of banking institutions the terms, "bank" and "banking," are applied to institutions and to businesses which differ considerably in character, functions, and methods, but which nevertheless have certain common features which justify their being grouped together. we can best prepare the way for a discussion of these differences and common features by a description of the services which these institutions perform in modern society. _ . services performed by banking institutions_ from the point of view of their customers these services may be grouped under the following heads: the safekeeping of money and other valuables; the making of payments; the making of loans; and the making of investments. it is a common practice everywhere, and in some countries, notably the united states, almost a universal practice for people to intrust their money to banks for safekeeping. to a degree, hoarding, in the sense of locking up money in private vaults and other receptacles and keeping it under the eye and in the personal care of the owner, is still practiced, but it is doubtless on the wane in all civilized countries. the practice of intrusting to banks the safekeeping of other valuables, such as important documents, jewelry, plate, etc., is also widespread and growing. the service of the safekeeping of money naturally leads to the second, the making of payments. when we intrust our means of payment to a bank, it is natural that we should also make it our treasurer and disbursing agent, and so we do. if we have payments to make to people at home, in other cities of our own country, or in other countries, we usually order our bank to perform the service for us. loans of almost all kinds are made by banks, and certain kinds, namely, those to business men for the everyday conduct of commerce and industry, are made almost exclusively by them. for the most part these are short-term loans. for long-term loans banks are also one of the chief resorts, but in some countries these are not to so great a degree monopolized by them as the short-term variety. for the investment of the surplus funds of people banks are the chief agencies. this function takes the form mainly of the sale of stocks, bonds, and mortgages, and sometimes of the promotion of new enterprises. none of these services are performed by banks exclusively. for the safekeeping of valuables, and sometimes of money, there are in some places safe deposit companies to which the term "banks" is not applied. in the making of payments the post office departments of governments and express companies participate, and in the making of loans and investments brokers, loan companies, lawyers, etc., participate. the peculiarity of banking institutions consists not in the performance of any one of these services, but in the fact that they specialize in them all, or in a combination of them. merely to keep money and valuables on deposit, or to act as paymaster, or to make loans, or to sell bonds, stocks, and mortgages would not make an institution a bank or an individual a banker; but to make a business of performing most or all of these services for the public involves the use of certain machinery and certain methods of procedure, and the assumption of a rôle in the nation's economy which is distinctive and peculiar, and which has set these institutions apart in every country as objects of legislation and of scientific treatment, as well as in the thought and regard of the people. _ . the economic functions of banks_ viewed from the standpoint of the nation rather than from that of individuals, the functions of banks may be described as those of intermediaries in exchanges and in the investment of capital. in the former capacity they supply the world with the major part of its medium of exchange and serve as distributing agents for that portion of the supply which comes from other sources. they create a medium of exchange through a process of bookkeeping which is world-wide in extent, and through which the mutual indebtedness of individuals, cities, and other subdivisions of countries and nations, brought about by purchases and sales on credit, are offset without the use of money. the practice of depositing surplus funds with banks for safekeeping and consequently of using them as paymasters has resulted in the reliance of everybody upon banks for currency in any form, and has thus thrown upon them the responsibility of directly utilizing all the sources of money supply. thus while the mints of the united states and most other countries coin gold bullion, and supply subsidiary silver and copper and nickel coins to private persons on the same terms as to banks, as a matter of fact few private persons take advantage of this privilege, finding it more convenient and profitable to get the coin they want from banks. the same is true of government notes in countries in which such notes constitute a portion of the currency. the accumulation of a nation's capital and its investment require the cooperation of numerous agencies of which banks are the chief. they collect the savings of the people, combine them into amounts of sufficient size for investment purposes, and invest them temporarily and sometimes permanently. cooperating agencies in this work are insurance companies, societies of various kinds for the promotion of saving, stock exchanges, promoters, etc. some of these take the place of banks in the performance of these services, while others supplement and aid them. _ . classification of banking institutions_ banks differ from one another chiefly in the nature and degree of their specialization, in legal status, and in the place they occupy in the system to which they belong. some banks devote the major portion of their effort to the conduct of exchanges and are called _commercial_ banks, others to investment banking and are called _investment_ banks. the most common subclasses under the latter head are savings banks, land or mortgage banks, and bond houses. savings banks specialize in the collection and investment of small savings; land banks are primarily intermediaries between capitalists and people who wish to invest capital in land, building operations, and agriculture; and bond houses are intermediaries between capitalists and those who wish to invest capital in industrial, commercial, and transportation enterprises, or loan it to states, cities, or other public corporations. commercial banks rarely confine themselves exclusively to the conduct of exchanges. most of them also conduct savings departments and invest the funds intrusted to them through such departments in agricultural, industrial, or commercial enterprises or loan them to public corporations. commercial banking, however, is their main concern, their other departments being side issues of greater or less importance according to circumstances. investment banks also frequently carry on commercial banking as a side issue. these two lines of business are sometimes mixed in such proportions as to render classification difficult. from a legal point of view the banks of nearly all countries may be classified as _private_ or unincorporated, and _incorporated_, sometimes also called joint-stock banks. private banks are started by individuals or firms, like any other private enterprise, without the formality of application for permission to some public officer, and without compliance with a set of legally prescribed regulations. they are subject to the laws of the country governing all kinds of private business enterprises and sometimes to special laws applying specifically to them. in some of the states of the united states such banks are prohibited by law. incorporated banks are usually started by private initiative but owe their actual legal existence and status to a special law, to the requirements of which they must conform before they are permitted to do business. their right to do business is usually evidenced by a document known as a charter, executed and delivered by a public officer legally endowed with the requisite authority, or passed in the form of a law by the legislative organs of the state. charters of the latter kind are known as special charters and are rarely used nowadays, except in the case of institutions of a peculiar character, endowed with special functions. the central banks of europe owe their existence to such charters, as did also the first and second united states banks. in the early history of the united states special charters were uniformly employed by the states, but for many years general incorporation laws have been the rule, on compliance with the requirements of which persons who desire to incorporate banks can secure charters. in federal states, both the federal government and the governments of the constituent states frequently have and exercise the right to incorporate banks. in the united states, banks incorporated by the federal government under the terms of a general law, originally passed in and many times amended since that date, are known as _national_ banks, and those incorporated by the states under the terms of general banking acts or of general incorporation laws are known as _state_ banks. these latter are endowed with privileges which enable them to exercise commercial and some investment banking functions. other banks also are incorporated by our states under the terms of general laws, which are known as savings banks and trust companies. the former, as the name implies, are institutions primarily designed for the encouragement, collection, and investment of savings. the latter are called trust companies because the earliest institutions of this type made the execution of trusts of various kinds their exclusive business. banking functions were later added and in many cases have now assumed chief importance. the nature of the banking business requires some kind of organization of the individual institutions in which certain ones will assume to a degree at least the rôle of bankers' banks. in most european countries this position is occupied by single institutions specially chartered and endowed with special privileges and usually described as central banks. examples are the bank of england in england, the bank of france in france, and the imperial bank of germany in germany. around these are grouped the other institutions in a kind of hierarchy, certain large banks in the larger cities forming centers about which smaller institutions group themselves. in the united states there is no single central institution, but a small group of banks in new york city are the real centers of the system. around these are grouped the banks in the other large cities of the country and these in turn perform important services for banks in the surrounding smaller towns and country districts. chapter ii the nature and operations of commercial banking in the preceding chapter commercial banking has been defined as the conduct of exchanges by means of a world-wide process of bookkeeping. we must now describe this process. its essential features are the discount of commercial paper, the conduct of checking accounts, and the issue of notes. _ . commercial paper_ by commercial paper is meant the credit instruments or documents which the credit system now in general use throughout the commercial world regularly brings into existence and liquidates. the essence of this system is buying and selling _on time_. the farmer buys seed, implements, fertilizer, labor, etc., and pays for them after the crops have been harvested and sold. the manufacturer buys raw materials and pays for them after they have passed through the transformation process which he conducts and the completed goods have been marketed. he frequently sells them to jobbers or wholesalers on time and these in turn sell them on time to retailers and these to consumers. farmers, manufacturers, and merchants both buy on time and sell on time, and are thus both debtors and creditors, and each expects that his sales will ultimately pay for his purchases. the obligations involved in these transactions are represented and recorded in the form of book accounts, promissory notes, or bills of exchange, the latter being written or printed, or partly written and partly printed, orders of creditors on debtors to pay to themselves or to third parties the sums indicated. these documents are being constantly made and constantly paid as the processes of agriculture, industry, and commerce proceed. indeed, their creation and liquidation is a normal phenomenon of our modern economic life. the term commercial paper, as we are using it, applies to such promissory notes and bills of exchange as belong to this credit system. it does not apply to such notes and bills when they owe their existence to credit operations of a different kind, such for example as accommodation loans or investment operations. indeed, the essential characteristic of commercial paper is not revealed in the form of the credit document but in the fact that it is a link in this chain of exchange operations by which modern commerce is carried on. this use of the term should also be distinguished from the one common among bankers and others. in this popular usage these documents are called commercial paper because they are themselves objects of commerce. in our use of the term the adjective "commercial" applies to them only when they play the rôle of intermediary in a process of exchange through credit. in this sense it is a matter of indifference whether they pass through the hands of brokers or not, and the fact of their being objects of purchase and sale does not confer the quality of commercial paper upon documents having an origin and character other than that above described. _ . the operation of discount_ every person in this chain of credit is confronted with the problem of paying his debts as they mature by the use of the amounts due him from other people. since it is rarely possible to arrange maturities on both sides in such a way that the amounts due to be paid him at a given date shall at least equal those he is due to pay on that date, some means of transforming claims against other people due in the future into present means of payment must be found. the one universally employed is the discount of commercial paper. by this is meant the exchange at a bank of his own promissory notes due at times when debts of equal or greater amount due him mature, or of bills of exchange drawn against his debtors, for cash or credits on a checking account. these latter are available as means of payment at any time. as a consideration for this accommodation, the bank charges interest for the period intervening before the maturity of the paper discounted. sometimes this charge is paid at the time the paper is purchased and sometimes at the date of its maturity. the term "discount" technically means taking interest in advance by making available as means of present payment in any of the above mentioned forms a sum less than the amount the bank expects to collect at the date of the maturity of the discounted paper. if the interest is paid when the discounted paper matures, the process is technically called a loan. however, since the time of collecting interest makes no essential difference in the nature of the transaction, the process is commonly described as the discount of commercial paper, regardless of whether the interest is collected in advance or not. _ . the conduct of checking accounts_ a checking account is an ordinary book account on which are credited the cash deposited by a customer and the proceeds of collections, loans, and discounts made on his behalf, and on which are debited payments made to him in cash or on his behalf to other people or to the bank itself. these payments are made on orders signed by the customer and known as checks. the ordinary customer of a commercial bank every day brings to the bank the cash he receives as the result of the day's business, and the checks received, drawn on his own and other banks, and is credited with the amount on the books of the bank as well as on a passbook which he himself retains. if he needs cash during the day, he presents to the bank a check payable to himself for the amount needed, and receives the kinds and denominations wanted; and if he wants to make payments to his creditors in other forms than cash, he sends them checks on his bank payable to their order, or a check drawn by his bank on some bank in another place, usually called a draft, which he has obtained by exchanging for it a check drawn to the order of his bank. to the amount of these payments his account at the bank is debited, and from time to time his passbook is left at the bank for the entry therein of the debits made to date and its subsequent return to him. the customer must take care that his account is not overdrawn, that is, that the debits on his account do not exceed the credits, since overdrafts, except by accident or for very short periods and small amounts, are not allowed in this country, and in other countries, where they are allowed, they must be provided for in advance by a special agreement between the bank and the customer, which usually involves the deposit with the bank of ample security. in order to avoid overdrafts, the customer in this country agrees with his banker on what is known as a "line," that is, a maximum amount of loans or discounts to be allowed. whenever his credit balance falls to a certain minimum, also established by agreement with the bank, the latter discounts for him the paper of his customers, that is, bills of exchange drawn on them or their promissory notes in his favor, or his own promissory notes. the proceeds of these discounts are credited on his account like deposits of cash or of checks for collection. so long as the discounts are confined to commercial paper the bank's part in these transactions consists almost exclusively of bookkeeping between its customers and between itself and other banks. ordinarily, what is debited on one man's account is credited on another's, the cash received nearly balancing that paid out. to the extent that the cash receipts and payments do not balance, the bank either has a surplus or is obliged to provide for the meeting of a deficit. the means available for this latter purpose will be explained in subsequent sections, as well as some of the details of this bookkeeping process. for the present it is important to note precisely how the discount of commercial paper is related to this bookkeeping process. as explained in section , commercial paper is an essential part of the process of exchanging goods through credit. a person buys on time and sells on time and expects to pay for his purchases by the proceeds of his sales. so long, therefore, as the processes of commerce and industry proceed in a normal fashion, the paper discounted by a bank will be paid at maturity and the credit balance created by means of such discounts offset by corresponding debits. ordinarily the credits created through discounts during a given period, say a day or a week, in favor of one set of customers will be balanced during this same period by the payment of notes previously discounted for other customers. within a complete trading area this is certain to happen, since purchases and sales of goods are equal and what is credited to one man is debited to another. the result is very different if a bank discounts investment paper, that is, credit documents which represent the unproductive consumption of individuals or of public and private corporations, or which represent the purchase on time of the instruments of production rather than the production of goods through the use of such instruments and their transfer from the producer to the consumer. the means of payment of such documents can only be created gradually by the application of the profits of the enterprises in which the investments were made, or by taxes spread over a series of years, or by a slow process of saving. if a bank issues its own demand obligations in exchange for such documents, it cannot make its books balance and it will be constantly exposed to the danger of forced liquidation. if it attempts to protect itself by requiring that the discounted paper shall mature in a short period, the necessity of liquidation will be forced upon customers who are responsible for the payment of the discounted paper; that is, such customers will be obliged to sell at such prices as they can command the property in which the investments were made, or some other property. such liquidation always results in forced readjustments of prices and business depression, and sometimes in commercial crises. _ . the issue of notes_ as an alternative for or a supplement to the conduct of checking accounts a commercial bank may issue its promissory notes payable to bearer on demand. by the issue of notes is meant their transfer to customers in exchange for cash, for checks left for collection or drawn against a credit balance in a checking account, or for discounted notes and bills. by the use of these notes commercial banking can be carried on without checking accounts. in that case the notes are issued in exchange for cash and discounted bills, and notes are returned to the bank in exchange for cash or when discounted bills or notes mature and are paid. in the bookkeeping process which has been described bank notes thus issued and returned perform precisely the same function as checking accounts, and are related to the discount of commercial paper and the credit system of the country in precisely the same manner as such accounts. most banks of issue at the present time conduct checking accounts also, using the one instrumentality or the other as their customers desire. in this case notes are issued in exchange for checks drawn against credit balances on checking accounts or deposited for collection as well as in exchange for discounted notes and bills and cash. by the use of both notes and checking accounts, a bank can supply most of the needs of its customers for a circulating medium, the notes serving as hand-to-hand money, and the checking accounts, practically all other purposes. being the direct obligations of banks attested by the signatures of their responsible officers, and being payable to bearer on demand and capable of being issued in all necessary denominations, such notes can be transferred without indorsement, can be used for making change and payments of small and moderate size for which checks are not convenient, and they do not need to be presented at a bank for the test of their validity. if the bank or banks which issue them are properly conducted and supervised and properly safeguarded by law, such notes will circulate freely through the length and breadth of a country. checking accounts meet in the most satisfactory manner all currency needs for which hand-to-hand money is not well adapted, such as large payments and payments at a distance. with a few strokes of a pen payments of the greatest magnitude can be made through their agency. checks can be sent through the mails at slight expense and without danger of loss of the amount involved. by the devices known as travelers' and commercial letters of credit, checking accounts supply the most convenient form of currency for travelers and for merchants engaged in foreign trade. besides bank notes and checking accounts the only forms of currency needed in any community are standard and subsidiary coins, the former for use as ultimate redemption material for all other forms of currency and for the payment of international and other balances, and the latter for small change. even these forms of currency are supplied by commercial banks, but since they do not create them, ways and means of procuring them in the quantities needed constitute one of their peculiar problems. _ . collections_ one of the most important functions of commercial banks is the collection for their customers of checks and drafts drawn on other institutions. when these documents are received, the accounts of customers who deposited them are credited with the amounts, less a small fee for collection, unless by agreement this service of collection is performed free of charge. the checks are then assorted according to the banks upon which they are drawn and the cities in which those banks are located. checks drawn upon home banks are collected either through messengers who present the checks at the counters of the banks upon which they are drawn and secure payment therefor, or through the local clearing house. this is a place where representatives of the banks meet for the exchange of checks. after the representative of each bank has distributed all the checks held by his institution against the others participating in the clearing, and received from them those drawn against his bank, a balance sheet is prepared showing the balance due by or to his bank after the total of the checks distributed has been balanced against the total received. if said balance is adverse, it is paid to the master of the clearing house, and if it is favorable, it is received from him. the checks received through the clearing house or presented by messengers from other banks and paid, are debited to the accounts of the persons who drew them and returned to such persons as vouchers, the net result of the entire transaction being the same as if all the parties involved had been customers of a single bank, with the exception that some means of paying balances had to be found. since balances are sometimes paid by checks on some central institution in which credit balances may be obtained by rediscounts of commercial paper, this necessity can be met without the use of any form of currency other than that furnished by banks themselves. checks drawn upon out-of-town banks are, in this country, collected through so-called correspondents. each bank enters into an arrangement with a few other banks, distributed throughout the country and conveniently located for the purpose, by which the correspondent bank agrees to conduct with it a checking account on which it will credit at par or at a stipulated discount the checks sent it for collection and debit checks drawn against such an account. a comparatively small number of such correspondents suffices, since certain banks in the larger cities, by making a business of such collections, conduct checking accounts with a large number of banks, and can thus make collections by mere transfers of credits on their own books or by the use of the local clearing house. the so-called reserve cities in this country constitute clearing centers for the territories contiguous to them, and new york, chicago, and st. louis, for the entire country. checks received from correspondents and drawn against themselves are debited to the accounts of the customers who drew them and returned as vouchers in the same manner as checks received through the clearing house or paid over their own counters. through this interchange of checks between banks and the conduct of checking accounts with each other, intermunicipal and international exchanges are conducted through the bookkeeping processes of commercial banks with the same ease and economy as are exchanges between people living in the same town. _ . domestic exchange_ the accounts of a bank with its correspondents are a record of the transactions of its customers with the outside world, the checks they receive as a result of sales to outsiders of merchandise, real estate or other property, or as a result of gifts by outsiders to them being credited on such accounts, while the checks they draw or the drafts they purchase in payment for merchandise, real estate or other property purchased of outsiders, or of gifts made to them are debited. when in a given period, say a day or a week, the receipts of the customers of a bank from outsiders, as a result of current or past sales and gifts, exceed the payments made by them as a result of purchases and gifts, its credit balances with its correspondents will increase, and under opposite conditions they will decrease. if the payments should continue in excess for a considerable period, the credit balances of a bank with its correspondents would be exhausted and some means of replenishing them would have to be found, and under the opposite conditions too large a portion of the bank's resources would accumulate with its correspondents and some means of withdrawing funds would have to be found. when a bank needs to replenish its credit balances with its correspondents, it may ship cash or purchase drafts from other home banks, which it can send to its correspondents for collection like checks deposited in the ordinary course of business. the latter resource will of course be available only when these other banks' balances with their correspondents are not exhausted. should the balances of all the banks of a town with their out-of-town correspondents be nearly or quite exhausted, shipments of cash to correspondents could not be avoided. if a bank wishes to withdraw funds from its correspondents for home use, it may order cash shipped or it may, perhaps, be able to sell drafts for cash to other home banks. the expenses involved in shipments of cash, loans, or purchases or sales of drafts for the purpose of replenishing balances with or withdrawing them from out-of-town correspondents, give rise to what is called the _rate of exchange_. if, in order to make out-of-town payments for its customers, a bank is obliged to pay the expense of shipping cash to its correspondents or to pay a premium on drafts purchased from other banks, the natural method of reimbursement will be a premium charge on drafts sold equal to the amount of the expense incurred. if it wishes to withdraw a balance with its correspondent, since to order cash shipped will involve expense, it will be glad to sell drafts for cash at a discount not to exceed such expense. the rate of exchange, or the price of drafts on a given point, may, therefore, fluctuate between a premium equal to the cost of shipping cash to that point and a discount of the same amount. beyond these extremes, these fluctuations cannot ordinarily go, because customers may demand cash of their banks in payment of checks against their own credit balances and ship it to their out-of-town creditors at their own expense, and would do so if the rates charged on drafts should make such procedure profitable. the actual rate of exchange will not ordinarily reach either of these extremes, on account of competition either between the banks which are desirous of selling drafts on their correspondents or between those which are forced to buy as an alternative to cash shipments. if the aggregate balances of the banks of a town with their out-of-town correspondents are large and increasing, the pressure to sell drafts will be greater than that to buy and the rate of exchange will go to a discount, the amount of which, however, will be fixed by competition between the selling banks. in the opposite case, the rate will go to a premium and be fixed by competition between the buying banks. in most towns in the united states there is little or no competition between banks in the business of buying and selling drafts and consequently no open market for exchange and no quotations of exchange rates. in such cases each bank acts more or less independently; shipments of cash to or from correspondents are the ordinary means of regulating balances; and the cost of such shipments are charged to the general expense account of the bank and taken out of customers either by a fixed and more or less invariable charge on drafts sold, or in other ways. since the balances of the banks of a town with their out-of-town correspondents depend primarily upon the commercial and gift relations of their customers with the outside world, it is pertinent to inquire whether as a result of a long continued excess of purchases from outsiders over sales to them and of gifts to over gifts from them, the cash resources of a community might not be completely exhausted, and if not, how such an outcome is prevented. bankers have no direct control over the purchases and sales of their customers, but through the rate of interest they charge on loans and discounts and their ability absolutely to discontinue such accommodations they exert a very potent indirect influence. the rates of interest and discount charged are an important element in the cost of doing business and, if loaning and discounting is discontinued, sales of property to meet maturing obligations are forced, with the result of price readjustments between the town in question and the outside world which speedily change the relations between purchases and sales. when the cash resources of the banks of a town approach the limit of safety and their balances with their correspondents fall to an ominously low point, the normal method of procedure is to raise the rates on loans and discounts, and if conditions grow worse, to raise them higher still and as a last resort to cease temporarily to make them at any price. by increasing the cost of doing business this rise in the rates will check purchases by diminishing or annihilating the profits resulting, and will stimulate sales by rendering it more profitable for some customers to secure funds by sales to outsiders at lower prices than were formerly asked rather than by borrowing from banks. under ordinary circumstances this procedure will be sufficient to change an unfavorable into a favorable balance of indebtedness with the outside world, with the result that more checks on outside institutions will be deposited with the banks and a smaller amount of drafts purchased. bankers' balances with their correspondents will, therefore, increase, and with them their ability to command cash in case of need. the demands made upon them for cash will also decrease, since the volume of loans and of business transacted will fall. if the banks stop discounting, a more or less violent readjustment with the outside world results. business men who have obligations to meet, and most of them will belong to this class, are obliged to sell their goods and property at whatever prices are necessary and to stop purchasing entirely. the outcome, so far as the banks are concerned, is as above indicated. if conditions are such that sales at any price cannot be forced, a crisis ensues; that is, business operations are temporarily suspended and transfers of property in settlement of obligations are made through bankruptcy and other court proceedings. _ . foreign exchange_ the business relations between banks located in different countries do not differ in any essential respect from those between banks located in the same country. interchange of checks, the conduct of checking accounts, shipments of cash, and borrowing and lending proceed in the same manner as between domestic institutions. the chief peculiarities of the foreign exchanges are due to the fact that different units of value and sometimes different standards must here be reckoned with, and that the precious metals, chiefly gold, are used in the settlement of balances. drafts drawn in the united states on english points, for example, call for the payment of pounds sterling, those on french points for francs, and those on german points for marks, while all must be paid for in dollars. the translation of the language of values of one country into that of others thus involved requires the calculation of a so-called _par of exchange_. by this is meant the relation between the weights of pure metal contained in their respective units of value, if the countries in question have the same standard, and the relation between the market values of the metallic content of their units, if their standards are different. thus the par of exchange between this country and england is $ . , since our dollar contains . grains of pure gold and the english pound sterling . times as many grains, or . . our par of exchange with france is . cents, the quotient of . , the number of grains of pure gold in the french franc, divided by . . between china and the united states the par of exchange is the market value in our dollars of the amount of silver contained in the tael, the chinese unit. another technical term employed in connection with the foreign exchanges is _the gold points_. these are the points above and below the par of exchange fixed by the addition in the one case, and the subtraction in the other, of the cost of shipping gold between the two places in question. they are the points between which the rates of exchange fluctuate, or the points at which, when the rate of exchange reaches them, gold moves between gold standard countries. assuming for example, that the cost of shipping gold between new york and london is two cents per pound sterling, the gold points are . and . , it being profitable to ship gold from new york to london when sterling exchange reaches the former figure and to import gold from london when it reaches the latter figure. in the conduct of the foreign exchanges several classes of bills are employed upon which the quotations differ, in part on account of differences in their quality and in part on account of the interest element entering into the value of time bills. for example, new york regularly quotes on london _cables_, _demand_, and _sixty-day_ bills. the rates on a certain date were: cables, . ; demand, . ; and sixty days, . . inasmuch as these are all bankers' bills and consequently of the same quality, the differences in their quotations are due to the interest element and to the fact that in the case of the cables the cost of the cablegram is included. when a new york banker sells a cable on london, his balance with his correspondent is reduced by the amount in a few hours, and the interest he receives on such balances is proportionately diminished at once, and he is also out the cost of the necessary cablegram. when he sells a demand bill, his account with his london correspondent remains undiminished during the time required for sending the bill by mail across the atlantic and for its presentation for payment. he draws interest on his entire balance during this period. when he sells a sixty-day bill, his balance does not suffer diminution on its account for sixty days. in order to place these bills on a footing of equality so far as he is concerned, therefore, he must quote demand and sixty-day bills lower than cables; the former by the cost of the cablegram plus interest on the amount of the bill, say for ten days, at the rate he receives on his london balance, and the latter by the amount of the cablegram plus interest on the amount for sixty days at the same rate. trade, or mercantile, as well as bankers' bills are also frequently and, in some markets, regularly quoted. being of a quality ranked as inferior to bankers' bills, they must be negotiated at a lower rate and are quoted accordingly. chapter iii the problems of commercial banking the conduct of commercial banking presents problems both to the bankers and to the public, the methods of solution of which will be given attention at this point. the problems concerning the bankers primarily may be grouped under the heads, supply of cash, selection of loans and discounts, and rates; and those which primarily concern the public may be grouped under the heads, protection against unsound practices, and adequacy and economy of service. _ . the supply of cash_ the credit balances on checking accounts and the notes of commercial banks are payable on demand in the legal-tender money of the nation to which they belong, and such banks must at all times be prepared to meet these obligations. the term employed to designate the funds provided for this purpose is _reserves_, and in this country they consist of money kept on hand and of credit balances in other banks. in other countries there is also included under this head commercial bills of the kind which can always be discounted. the term _secondary reserve_ is sometimes employed in this country to designate certain securities, such as high-class bonds listed on the stock exchanges, which can be sold readily for cash in case of need. the amount of reserve required can be determined only by experience. in ordinary times it depends chiefly upon the habits of the community in which the bank is located regarding the use of hand-to-hand money as distinguished from checks and upon the character of its customers. these habits differ widely in different nations, and considerably in the different sections and classes of the same nation. in most european and oriental countries, for example, checks are little used by the masses of the people, while in the united states and england they are widely used. in these latter countries, however, they are less widely used by people in the country than in the cities, and by the laboring than the other classes in the cities. within the same city one bank may need to keep larger reserves than another on account of the peculiarities of the lines of business carried on by its customers and the classes of people with whom it deals. in times of crisis and other periods of extraordinary demand, bank reserves must be much larger than in ordinary times. hoarding, unusually large shipments of money to foreign countries and between different sections of the same country, and payments of unusual magnitude, increase the demands for cash made upon banks at such times. the manner in which clearing and other balances between banks are met also has an influence on the amount of reserves required. if such balances are paid daily and always in cash, the amount needed for this purpose is much larger than if they are paid in checks on some one or a few institutions and at longer intervals. the note issue privileges of a bank also affect its reserve requirements. since, if not prohibited by law, notes may be issued in all denominations needed for hand-to-hand circulation within a nation, and since for all purposes except small change such notes are as convenient as any other form of currency, a bank with unrestricted issue privileges can supply all the demands of its customers for currency for domestic use, except those for small change, without resort to outside sources of supply. in this case, however, it needs to keep a reserve in order to meet demands for the redemption of notes. such demands arise on account of the need of coin for small change or for shipment abroad or of means for meeting domestic clearing and other bank balances. the aggregate needed for the supply of such demands, however, is much less than would be required if the privilege of issuing notes did not exist. in the maintenance of reserves the chief reliance of commercial banks is the circulation of standard coin within a nation and the importation of such coin. the coin within the borders of a nation passes regularly into the vaults of banks by the process of deposit, and on account of the credit balances they carry with foreign institutions, the loans they are able to secure from them, the commercial paper they hold which is discountable in foreign markets, and the bonds and stocks sometimes in their possession which are salable there, they are able to import large quantities in case of need. since the standard coin in existence in the world adjusts itself to the need for it in substantially the same manner that the supply of any other instrument or commodity adjusts itself to the demand, banks ordinarily have no difficulty in supplying their needs, and under extraordinary circumstances, though difficulties along this line sometimes arise, means of overcoming them are available which will be discussed in the proper place. if, as is the case in the united states, certain forms of government notes are available as bank reserves, these find their way into the banks' vaults by the process of deposit in the same manner as coin. the possession of such notes by a bank enables it, to the extent of their amount, to throw the responsibility for the supply of standard coin upon the government, and in the circulation of the country such notes take the place of an equivalent amount of standard coin. whether or not a government ought to assume such a responsibility is a question which will be discussed in a subsequent chapter. for the nation as a whole, the balances in other banks and the discountable commercial paper and bonds which a bank may count as a part of its reserves are not reserves except to the extent that they may be employed as a means of importing gold. they are only means through which real reserves of standard coin are distributed. the payment in cash of a balance with another bank or the discount of commercial paper with another domestic bank or the sale of bonds on domestic stock exchanges do not add to the sum total of the cash resources of the banks of a nation. their only effect is to increase the cash resources of one bank at the expense of another. adequate facilities for the distribution of the reserve funds of a country, however, are second in importance only to the existence of adequate supplies of standard coin. if such facilities are lacking, existing reserves can be only partially and uneconomically used, with the result that much larger aggregate reserves are required than would otherwise be necessary and that the entire credit system is much less stable than it otherwise would be. _ . the selection of loans and discounts_ the problem of the reserves is vitally connected with that of the selection of loans and discounts. as was shown in the preceding chapter, the chief business of a commercial bank is to conduct exchanges by a process of bookkeeping between individuals, banks, communities, and nations. this process consists primarily in the converting of commercial bills and notes into credit balances and bank notes, in the transfer of such balances and notes between individuals and banks, and in the final extinguishment of such balances and the return of such notes at the maturity of the commercial bills and notes in which the process originated. in this process there is little need for cash, provided the arrangements between banks for clearing checks and for the interchange of notes are complete and efficiently administered. but when a bank accepts investment in lieu of commercial paper, its need for cash at once increases, because the demand obligations created by the credit balances or the bank notes into which this paper was converted are not extinguished by payments for goods purchased, but must be met by cash. to distinguish between commercial and investment paper is, therefore, one of the chief problems confronting commercial bankers. for its solution an accurate knowledge of the business operations of customers is necessary. an inspection of the paper presented and a general knowledge of their wealth and business capacity are important, but not sufficient. the forms of the paper employed in both commercial and investment operations may be the same, and the possession of wealth does not ensure the payment of the paper at maturity. the chief means available for the acquisition of this knowledge are the requirement from customers of frequent statements of their operations, on properly prepared forms; the use, wherever possible, of the documented commercial bill of exchange; and the maintenance of credit departments equipped with the means of accurately studying commercial, industrial, and agricultural operations, and of diagnosing economic conditions. the study of carefully prepared statements of customers made at frequent intervals reveals to the banker not only the nature of the operations represented by the paper presented for discount, but the trend of the business of his customers and, through them, of the entire country. with such knowledge, he is not only able to protect his institution against improper loans and discounts, but to give valuable advice to his customers, advice which no one else is in a position to give so accurately. by a documented bill of exchange is meant a bill drawn by a seller upon the purchaser of goods, accompanied by documents evidencing the transaction; such, for example, as bills of lading, warehouse receipts, and insurance policies. the names on such bills guide the banker in his efforts to trace the transaction in which it originated and the documents enable him absolutely to identify it, and constitute security for the loan. instead of such bills, promissory notes made payable to banks are commonly used in this country, greatly to the disadvantage of the banking business. such a note reveals nothing to the banker concerning the purpose for which the loan is made, while a commercial bill, even without documents, reveals the names of the principals of the transaction in which the banker is asked to participate. acquaintance with these men and knowledge of the business in which they are engaged at once suggests the probable origin of the bill and furnishes the clue needed for subsequent investigation. a properly equipped credit department will keep on file and at all times available for use the data requisite for the information of the officers upon whom the responsibility of selecting the loans and discounts rests. such data will not only concern the character and business of each customer and the bank's previous dealings with him, but general economic conditions, the operations and experiences of other banks, other business institutions, governments, etc. _ . rates_ besides rates of exchange considered in the preceding chapter, commercial banks are concerned with loan and discount rates. rates on deposits, though sometimes employed, have no place in commercial banking, since commercial deposits are only the credit balances resulting from loans and discounts or from funds intrusted to the bank for temporary safekeeping or disbursement in the interest of the depositor. in every case they represent a service rendered the depositor for which the bank must be paid, and, when interest is allowed, the depositor must repay it in some form with an increment sufficient to remunerate said service. commercial banks may and usually do conduct savings accounts also, for which an interest payment is not only defensible but in every sense desirable, but in so doing they are going beyond the sphere of commercial banking, which alone is under consideration at this point. rates charged on loans and discounts are the chief means through which commercial banks are remunerated for the services they perform. in the long run these rates are determined by competition, and represent the current market value of the services performed by bankers. custom often affects them temporarily and sometimes for long periods prevents their response to influences tending to produce change, but in the long run they yield to economic force and conform to the laws of value. variations in the rate of discount are the most efficient means employed by commercial banks for the regulation of the volume of their loans and discounts and for changing the percentage their reserves bear to deposits and note issues. an increase of these rates tends to check loans and discounts, to decrease deposits and note issues, to increase reserves, and consequently to raise the percentage of reserves to deposits and issues. it checks loans and discounts by increasing the expense of conducting business operations on a credit basis, thus diminishing profits and sometimes causing losses, checking enterprise and decreasing the volume of commercial transactions. a decrease of loans and discounts correspondingly diminishes deposits or note issues, or both, since these are simply the counterpart or representative of such loans and discounts in the form of credit balances in the checking accounts conducted by the banks or the equivalent of such balances in a hand-to-hand money form. an increase in the rate of discount at a given point tends to attract funds from other points where the rates are lower and thus to increase reserves. a decrease of rates produces opposite effects all along the line. _ . protection against unsound practices_ commercial banks are an essential part of the machinery by which the agriculture, industry, and commerce of a country are carried on, and their proper conduct is, therefore, a matter of public concern. on this account they have long been subjects of legislation and of public supervision and control. the methods evolved for safeguarding the public against abuses and unsound practices differ considerably among different nations and to some extent among the different states of the united states, and could only be adequately explained by a history of banking in each nation. only the more important and most widely used of them will be described here. (_a_) _capital and surplus requirements and double liability of stockholders._--a very common, indeed, almost universal, legal requirement is that before beginning business the proprietors of a commercial bank shall contribute a fund to be known as the _capital stock_, and that an additional fund, usually called the _surplus_, shall afterwards be set aside from profits. these funds are required to be maintained intact, so long as the bank continues in business, and to be used for the payment of losses in case of failure or liquidation for any reason. in this country it is also customary to hold the proprietors legally liable in case of failure for an assessment equal to the amount of their capital stock. in foreign countries it is a common practice to have the subscribed considerably in excess of the paid-in capital, the balance being subject to call by the directors at any time, and being available for the payment of losses in case of failure. these funds serve not only as a protection against loss to the customers of a bank in case of failure, but also as a restraining influence on the managers in the everyday conduct of the bank's affairs. they constitute the proprietors' stake in the business, what they are likely to lose if the management is imprudent, dishonest, or inefficient. the absence of such funds would put a premium on rashness and speculation and tempt into the business the unscrupulous and the unfit. in the determination of the size of capital and surplus funds and of the amount of the liability of stockholders for subscriptions in case of failure, no well-founded principles have been developed for the guidance of legislators. they should be great enough to cover prospective losses and to induce conservatism, honesty, and efficiency in management, and not so great as to prevent the free flow of an adequate amount of capital into the business. unfortunately, the statistics of losses in cases of failure are not a sufficient guide. in some cases they bear a large proportion to the volume of business transacted and in others a very small one, and the number of cases available are too small to give much value to averages. the amount necessary to secure the best possible management is also purely problematical. in lieu of well-founded principles, the practice has developed in this country of making the minimum capitalization permitted depend upon the population of the town in which the bank is located. this seems to be a very crude and indirect method of proportioning capital to the volume of business transacted. the fixing of such a proportion, or of a proportion which no bank should be permitted to exceed, is probably the best method of solving this problem, but it should be done directly and not by the roundabout method which has been mentioned above. a proportion of ten to one between capital and aggregate demand obligations would probably be justified by american experience. the present practice of fixing the surplus fund at twenty per cent of the capital would be justifiable if the capital fund were properly regulated in amount. (_b_) _inflation and means of protecting the public against it._--the greatest abuse to which the business of commercial banking is subject, and against which the public most needs protection, is inflation. this is a condition difficult to diagnose, and not well understood by the general public and even by bankers. the most easily recognized symptom of its existence is the forced liquidation of credits; that is, forced sales of property in order to meet maturing obligations to banks. when, for example, the people whose notes or bills have been discounted by banks default in large numbers, and the collateral deposited as security has to be sold, or, in the absence of collateral, the courts must order the sale of their property, the presence of inflation may be suspected. the chief cause of inflation is the issue by commercial banks of demand obligations against investment securities. the means of liquidating such securities are the profits of the enterprises in which the investments were made and in the nature of the case several years are required for the accomplishment of this end. meantime the demand obligations of the banks issued against them in the form of balances on checking accounts or notes must be met and, the funds regularly deposited with them as a result of the operation of such enterprises being inadequate, other means must be found. the only one available is the sacrifice, at forced sales, of the property in which the investment was made or of some other property in the possession of the persons responsible to the bank. the banks usually protect themselves against such forced liquidation by the requirement that the paper they discount shall mature at short intervals, usually not to exceed four to six months, and accept the long-time securities, such as bonds, stocks, and mortgages, only as collateral. by this means they are able to force the liquidation on their customers. otherwise they would be obliged themselves to endure it, with the result that their capital and surplus funds would be impaired and perhaps exhausted; and, if they should prove inadequate, failure would be inevitable. the evil involved in the forced sales of property caused by inflation is the readjustment of prices through which it is accomplished, and the depression and, sometimes, panic which follow. when the prices of many kinds of property must be greatly depressed in order to induce their transfer to other hands, the machinery of commerce and industry is thrown out of adjustment and is sometimes rendered temporarily useless. this result is due to the fact that the relations between costs of production and the returns from the sale of finished products are so changed that profits are reduced or annihilated, and many persons are financially ruined. readjustments of the prices of raw products, labor, and finished goods, and the transfer of plants to new hands, are, therefore, necessary before industry, commerce, and agriculture can again operate in a normal way, and during the period of readjustment some enterprises must entirely stop operations, and all must slow down. at such times many laborers are thrown out of employment, many more work part time only, the wages of nearly all are lowered, and most other classes of income are cut down. depression and, in extreme cases, panic are the result, and these have serious consequences other than financial. the means employed for the protection of the public against inflation are crude and inadequate. they may be grouped under the heads: regulations regarding investments, reserves, and note issues. under the first head belong in the banking legislation of this country limitations on real estate investments and on the amount that may be loaned to a single firm or individual. our national banking act and most of our state banking acts prohibit banks from holding real estate except for their own accommodation, and as a means of reimbursing themselves for defaulted loans, and our national banking act prohibits the taking of real estate security for loans, and many of our state banking acts limit the amount of such security that may be held. our national banking act limits the amount that may be loaned to a single firm or individual to one-tenth of the bank's capital and surplus, and similar regulations are common in state banking legislation. the purpose of these regulations is to confine the investments of banks to what are called liquid securities, but they fail to evince a proper conception on the part of their authors of what really makes a security liquid. apparently legislators and their advisers have felt that if the securities held by the banks mature in short periods, or are listed on a stock exchange, they are liquid; but such is not necessarily the case. commercial paper only is really liquid, since it represents a current commercial process which will soon be completed and the completion of which automatically provides the means for its payment. such paper usually matures in short periods, but the characteristic of liquidity results not from the date at which it is made to mature, but from the commercial process which called it into existence and will ultimately retire it. in this country very often paper of short maturity is so in form only, its makers expecting to renew it, instead of pay it, at maturity. bonds and stocks, even though they may be listed on a stock exchange and daily bought and sold, are not liquid securities in the proper sense of that term. an individual bank may be able to sell them in case of need, but such sale is simply the transfer of the investment to another bank or person, and not its liquidation. the security still exists and must be paid, while its liquidation would take it out of existence. foreign legislators have approximated more closely than ours what is needed in the regulation of bank investments. in the case of their central banks, many of them, notably those of france and germany, have recognized the fundamental distinction between commercial and investment paper, and have required them to hold the former against their demand obligations, especially their notes. the regulation of reserves has become a subject of legislation in this country only. our national banking act classifies national banks into three groups, called country, reserve city, and central reserve city banks, and requires those in the first mentioned group to keep cash in their vaults to the amount of at least six per cent of their deposits, and balances in approved reserve city banks sufficient to bring the total amount up to fifteen per cent of their deposits. banks in reserve cities are required to keep in their vaults cash to the amount of at least twelve and one-half per cent of their deposits, and balances in central reserve cities sufficient to bring the total up to twenty-five per cent of their deposits. banks in central reserve cities are required to keep at least twenty-five per cent of their deposits in cash in their vaults. when the reserves of a bank fall to the prescribed minimum, all discounting must cease. regulations essentially similar are found in the banking laws of most of our states. the purpose of these regulations is to set a limit to the extent to which banks may expand the volume of their loans and discounts, in the belief, apparently, that, if at least the prescribed proportion of cash is all the time kept on hand, the banks will be able to meet their obligations. as in the case of the regulations concerning investments, the authors of these failed to recognize the significance, from the point of view of the cash demands likely to be made upon banks, of the kind of paper admitted to discount. if discounts be confined to commercial paper, the demand obligations they create will be met for the most part by transfers of credits on the banks' books or by the return of the notes issued, and, as foreign experience has demonstrated, the adjustment of cash resources to needs can safely be left to the judgment of the bankers themselves, who, through variations in the discount rate, rediscounts, and other means, can regulate it with ease. if investment paper is admitted to discount, reserves less than one hundred per cent of the demand obligations thereby created are unsafe, since a less amount is likely to force liquidation on the banks' customers, with the results above indicated. the most elaborate regulations for the prevention of inflation have been developed in connection with legislation concerning note issues. the reason for this is the fact that commercial banking was at its origin and for a long time thereafter carried on almost exclusively through note issues, the conduct of checking accounts being a comparatively recent development. the phenomenon of inflation was, therefore, first observed in connection with note issues and associated with them. even now the essential similarity of note issues and checking accounts as banking instrumentalities is not universally recognized. the means of safeguarding note issues which have been incorporated into legislative enactments are the prior lien on assets, the safety fund, the requirement and sometimes the mortgaging of special assets, and the limitation of the total issues. by the prior lien is meant the provision that in case of failure the note holders shall be paid in full before any of the assets are distributed among other creditors. by the safety fund is meant a required contribution from each bank, usually a percentage of the amount of notes issued, placed in the hands of some public official and kept for the redemption, in case of failure, of such of the notes of failed banks as cannot be redeemed out of the assets of the banks themselves. additional contributions from the solvent banks are required for the replenishment of the fund when it has been depleted. the practice of different countries regarding the requirement of special assets to be held against note issues, as well as regarding the mortgaging of such assets, is not the same. germany and france, for example, require their banks to cover their note issues by designated proportions of commercial paper and coin, while the united states requires its banks of issue to cover their notes by government bonds and to contribute a five per cent redemption fund in addition, and england requires the bank of england to cover a designated amount of its issues by government and other securities and the remainder by coin. unlike the others, the united states mortgages to the note holders the securities, that is, the government bonds, required to be held against the notes, by providing that in case of failure these securities shall be sold and the proceeds used for the settlement of their claims. in all of these provisions, the protection of note holders against loss in case of failure has been an influential consideration, and in the cases of the prior lien and the safety fund, the only one. the prevention of inflation may have entered into consideration in the other cases, but among the states mentioned the regulations of france and germany alone are efficient in this direction, since they alone prohibit note issues against investment securities. the above mentioned regulations of england and the united states tend rather to promote, than to prevent, inflation, since they require the holding of investment securities against note issues. the limitation of the aggregate amount of notes that may be issued is a common legislative regulation. in the united states the limit set is the amount of the capital stock, and in france it is an arbitrary figure from time to time changed as the needs of the bank seem to require. as a safeguard against inflation, the value of such limitation depends upon the basis of the issues. if it is investment securities, as in the case of the united states, limitation to a low figure, not in any case to exceed the capital stock, is desirable, since such limitation keeps the inflation within such bounds that the banks themselves may be able to withstand the effects of it by selling upon foreign markets, without great and perhaps without any loss, the securities in which their capital and surplus funds are invested. if the basis of issues be commercial paper, such limitation is unnecessary, since inflation in such a case is improbable, and pernicious, unless it be placed above the point which the volume of issues is likely in ordinary cases to reach. (_c_) _other means of safeguarding the interests of the public._--experience has shown that publicity is a valuable safeguard against bad bank practices, and legislation has, therefore, provided for it by the requirement that statements of banking operations shall be published from time to time. the national banking act of the united states and many of our state banking acts, for example, provide for the publication five times a year of bank balance sheets, drawn up according to prescribed forms. the inspection of banks by public examiners and the requirement of detailed reports to public officials are also provided for in our federal and state legislation. canada requires the reports but not the inspection by public officials, on the ground that the latter cannot be thorough and efficient, and is, therefore, likely to mislead the public and cause it to be less vigilant than it otherwise would be in the use of other means of safeguarding its interests. legislation in this country has also concerned itself with the duties of bank directors and the enforcement of their performance, and with the relations of bank officers to their banks, particularly those involved in borrowing for their own uses or for firms or corporations in which they are interested. a recent legislative experiment along quite a new line has been undertaken in this country in the form of laws providing for the mutual insurance of depositors. oklahoma started this experiment, and her example has been followed by other states. the essence of the experiment consists in the provision of a fund out of which is paid to the depositors of failed banks that portion of their claims which cannot be met from the liquidation of the assets of the defunct banks, such fund to be contributed by the other banks belonging to the system. the protection of depositors against loss is a commendable aim of legislation, but this method of attaining this aim is open to the serious objection that it removes from depositors all concern regarding the proper management of the bank with which they do business, and thus gives the unscrupulous, dishonest, and plunging banker an advantage. attraction of depositors is the chief field in which competition between banks is carried on, and when the power of good management in this direction is removed, high rates on deposits, high lines of credit, low or no rates of exchange, extravagance in equipment, etc., remain the only attractions, and in the offer of these the unscrupulous and plunging banker will always outdo the conservative. it is impossible to overcome this objection by public supervision, and more frequent and rigid examinations. no public officer can equip himself to pass judgment on the relations of a bank with each customer, or to detect secret contracts and unwritten understandings, or to keep unscrupulous people out of the banking business. there can be no doubt that a reputation for conservatism, good judgment, strict integrity, and careful management is, at the present time, the most valuable asset a banker can have, because customers know that they are in danger to the extent that these qualities are lacking. to substitute for the present basis of competition between banks that established by mutual insurance laws is to undermine the foundations of our credit system and to invite disaster and ruin. _ . adequacy and economy of service_ from the point of view of adequacy and economy of service, two types of banking systems require attention; namely, that characterized by a large number of relatively small local independent banks, chartered under general laws, and exemplified in this country; and that characterized by a relatively small number of large banks endowed with the privilege of establishing branches, and exemplified in the other leading nations of the world. under our system each community is encouraged to look after its own banking needs. local initiative in the establishment of new institutions is given free play and local capital and local talent is attracted. outside promoters and outside capital are not excluded, but, if they come, they do so as colonists expecting to cast in their lot with the community and to become identified with it. the managers of our banks for the most part are local men who are the real heads of the institutions they manage and whose careers and prosperity depend on the success of these institutions. the localism which characterizes this system contributes elements both of strength and of weakness. it develops local talent, and promotes mutual understanding and cooperation between the banks and the business enterprises of the community, and conformity of organization and methods to local needs. its weakness consists in the financial isolation and the narrowness of vision and training which are its natural accompaniments. under this system capital does not easily and quickly move from place to place and readily distribute itself according to the relative needs of different communities. in consequence, rates of interest are apt to vary widely, some communities to be under- and others over-capitalized, and the capital of the nation as a whole to be inefficiently employed. under this system the opportunity of bankers for training is meager, since the broader and more fundamental aspects of the business are rarely brought to their attention, and in the smaller towns and country districts they are apt to be recruited from people of mediocre ability and often from those not well fitted by nature and education for this branch of commercial enterprise. the system of branch banking, almost universally employed elsewhere, is strong where our system is weak, but it has weaknesses of its own. it promotes distribution of capital according to relative needs, and consequently efficiency in the application of a nation's capital as a whole, and it offers a wide field of training for the people engaged in the business, and draws its recruits from every quarter. it can readily supply banking facilities to communities too small or too poor to provide for an independent bank, and more readily than our system can adjust itself to rapidly growing communities. its chief weakness consists in the lack of independence of the managers of the branches and the consequent danger that local needs may not be fully satisfied. the manager of a branch is usually granted freedom of action only in routine matters. any business out of the usual order must be referred to higher authorities connected or associated with the main office; and, even with the advice of the manager, who alone is familiar with local conditions, the decision cannot be made with that intimacy of knowledge of and sympathy with the business and aspirations of the individual or firm under consideration that full justice to him and his town may require. in the matter of adequacy and character of service, therefore, the city in which the main office is located has an advantage over those in which the branches are located. in this connection it should also be noted that, while the branch banking system is able to adjust itself to the capital requirements of towns of all sizes more readily than the independent banking system, and thus to secure a better distribution of the banking capital of the community, it does not follow that it will do so. on account of ignorance of conditions, insufficiency of capital or inability readily to increase it, or inertia on the part of the head office, a town may have to wait for the establishment of a branch longer than it would for the establishment of an independent bank. whether or not this will be the case, however, depends to a considerable extent upon the keenness of the competition between the big banks with branches. the big central banks of europe, which have no competition within their field, have been slow to establish branches. the coercive force of the government has been necessary in many cases to secure their proper expansion. in the case of the other big banks, however, both of europe and of canada, competition has resulted in very rapid expansion during the last half century, probably as rapid as could be desired. regarding adequacy of service, the method of granting charters and the attitude of the government towards private banking is important. if banks are allowed to spring up spontaneously, like manufacturing and commercial establishments and farms, they are likely to be plentiful and to be located wherever needed. experience, however, has shown that private banks cannot be adequately regulated in the interest of the public and that incorporation under public auspices should be required. two methods of incorporation are employed, those of the special charter and of the general law. except in the case of special institutions, like central banks, the former is objectionable, since it opens the doors to political favoritism and is likely to result in bad distribution, lack of uniformity in regulation, and lack of steadiness and regularity in development. incorporation under general laws, or the free banking system, as it is sometimes called in this country, is unquestionably the best from every standpoint. all the necessary checks and balances can be incorporated in these laws, and the supervision of public officers, together with the necessary administrative machinery, provided for. this is the only practicable method to employ in an independent system like ours. the special charter method works best in connection with the branch bank system, in which the question of chartering new institutions only occasionally arises, and in which delay is not so serious. chapter iv commercial banking in the united states the commercial banking system of the united states consists of several elements which have been contributed at different periods in our history. the most important of these are state banks, national banks, and the independent treasury system. _ . state banks_ from the very beginning of our national history institutions enjoying, among others, the privilege of commercial banking have been chartered by our states. for several years after the adoption of our constitution it remained an open question whether the incorporation of such institutions was not their exclusive privilege, but in the case of mcculloch v. maryland, in , the supreme court decided that the federal government also had this right. during the years - , and - , the state banks had as competitors the first and second united states banks, and in so-called national banks entered the field, and, more recently still, trust companies. private banks have also existed from the beginning, but their number and relative importance have declined in recent years. at the present time the number of state banks exceeds that of all other classes of banking institutions combined, but in capital and resources they are inferior to both national banks and trust companies. since each state has had a free hand in the matter of legislation concerning the banks chartered under its auspices, uniformity in the regulations imposed upon and in the kind and degree of supervision exercised over this class of institutions, is lacking. in most cases, however, as compared to national banks, the amount of capital required is smaller; they have greater freedom in the making of loans, especially upon real estate security; and they are not so carefully examined and supervised by public officials. the most frequently imposed legislative requirements are: the accumulation of a surplus fund from earnings; double liability of stockholders; a minimum cash reserve to be kept in the vaults, and an additional reserve on deposit in other banks; the organization of a banking department for the administration of the laws pertaining to them; regular reports and examinations; and some limitation on real estate holdings and on the amount of loans to be made on real estate security. on account of the relatively low capital requirements imposed upon them, and the liberality of the laws concerning them in other respects, state banks have been able to prosper where national banks and trust companies could not exist, and on this account in many parts of the south and west they do most of the banking business in small towns and country districts. they generally perform a wide range of banking functions, including those of investment and savings as well as of commercial banks. _ . national banks_ our national banking system owes its existence to financial exigencies of the federal government experienced during the civil war. for a considerable period preceding the outbreak of that struggle the expenses of the government had exceeded its receipts. the deficit was greatly increased as soon as the war began, and congress did not find it possible immediately to devise adequate new sources of revenue, including a market for government bonds. it was, therefore, forced to the issue of legal-tender notes under authority of an act passed february , . after three issues of these notes, amounting to $ , , , had been exhausted, and the value of the notes had depreciated to such an extent that persistence in this method of financiering portended speedy financial disaster, congress adopted a suggestion made early in the war by secretary chase, to the effect that a market for government bonds might be created by compelling banks to purchase them as security for their note issues. an act passed february , , provided for the incorporation of banks with the right to issue notes on condition that they purchase government bonds and deposit them with an official to be known as comptroller of the currency. it was the expectation of the authors of this act that the state banks, then numbering over one thousand, would exchange their state for national charters and purchase bonds sufficient to secure their circulation under the terms of the new act, but, since they showed reluctance so to do, in force was applied in the form of a tax of ten per cent on bank notes otherwise secured. under this pressure most of the state banks reorganized as national institutions, but a few retained their state charters and formed the nucleus of the state system of the present day. on account of the ten per cent tax, however, the issue of notes by this remnant became unprofitable, and the new national banks have to this day remained the sole banks of issue in the country. the act of has been amended several times, notably in , , , , , , and . in its present form it permits the organization of banks with a capitalization as low as $ , in towns of , inhabitants or less, and with a capitalization as low as $ , in towns of , or less. banks organized under this act must put ten per cent of their profits into a surplus fund until said fund amounts to twenty per cent of the capital; must invest at least twenty-five per cent of their capital, if it is less than $ , , and at least $ , , if it is $ , or more, in government bonds; and may deposit said bonds with the comptroller of the currency and receive circulating notes to the amount of their par value, provided their market value is par or above. the rights and privileges of these banks are stated in very broad and general terms, a fair interpretation of which permits them to engage in both commercial and investment banking under certain specified limitations, of which the most important are the following: they must not invest in or hold real estate beyond their owns needs for suitable quarters, or temporarily for the purpose of collecting debts due them; they must not accept real estate as security for loans; they must not loan more than ten per cent of their capital and surplus to any one person or firm; and they must keep reserves to the amount of fifteen per cent of their deposits, if they belong to the group known as country banks, and to the amount of twenty-five per cent of their deposits, if they belong to either the reserve city or the central reserve city group. in the case of country banks, at least two-fifths of the required reserves, and in the case of reserve city banks, at least one-half, must consist of specified forms of money in their own vaults. the remainder may be balances payable on demand in approved banks in reserve or central reserve cities in the case of country banks, and in the central reserve cities in the case of reserve city banks. in the case of banks in central reserve cities, the entire reserve prescribed by law must consist of money in the vaults. these required minimum reserves must not be infringed upon. when a bank's cash and balances with its reserve agents fall to the prescribed minimum, discounting must be stopped under penalty of suspension of privileges and liquidation by the comptroller of the currency. at five dates each year, selected by the comptroller of the currency, national banks must make detailed reports of their condition on prescribed blanks and publish abstracts of such reports in local newspapers. they must also submit to examination by persons appointed for that purpose by the comptroller as often as this official may deem necessary and proper. national banks have been organized in every state of the union, and in maine, massachusetts, and vermont they have completely supplanted the state banks. elsewhere they exist side by side with state banks and compete with them. in some states they are more and in others less numerous than state banks. in the kind of business transacted the only important difference between the two classes of institutions consists in the loans on real estate security, which national banks are prohibited, and state banks allowed, to make. the latter, therefore, share this class of business with the trust companies only, and where it predominates have a distinct advantage in competition over the national institutions. _ . the independent treasury system_ while not a banking institution, the treasury of the united states handles its funds in such a manner and performs such functions with reference to the currency that it has become an important part of the banking system of the country. previous to the funds of the federal government were kept on deposit in banking institutions, during the greater part of the time in the first and second united states banks. friction between president jackson and the second united states bank resulted in their withdrawal from that institution in and their deposit in selected state banks, several of which failed and all of which suspended specie payments during the crisis of . the embarrassment which the treasury experienced in consequence, combined with previous unsatisfactory relations between the government and its depositories, convinced president van buren that the treasurer ought himself to keep and to disburse the funds of the government. he made a recommendation to this effect to congress, which in accordance therewith enacted the first independent treasury act in . the revival of agitation for a third united states bank led to the repeal of this act the following year, but in it was reenacted and with modifications has remained upon our statute books to the present day. in its original form this act provided for the acquisition of vaults in certain cities, in which should be deposited the funds of the government as soon as possible after they came into the hands of the receiving officers, and out of which should be taken, upon drafts issued by the secretary of the treasury, the money needed for the payment of the government's obligations. it further provided that all dues to the government in the future should be paid either in coin or in currency issued exclusively by the government, and that all expenses should be paid in the same forms of money. important modifications in this act were made during and after the civil war. in permission was granted the secretary of the treasury to deposit in national banks funds accumulated in the treasury, and derived from any source except duties on imports, provided the banks selected for this purpose should deposit with him government bonds for their security. subsequently the discretionary power of the secretary in this direction was extended so that at the present time he is authorized at his discretion to deposit in national banks surplus funds derived from any source, trust funds alone excepted, and to accept as security therefor other securities than government bonds. other laws have made national bank notes acceptable for certain public dues, and have given the secretary authority to issue gold and silver certificates against gold coin and silver dollars deposited in corresponding amounts, and to redeem united states notes in gold coin and to keep on hand for that purpose a gold reserve of $ , , . in its operation, this independent treasury system affects the reserves of the banks and through them their discounts and the commerce of the country. whenever the receipts of the government exceed its expenditures, money accumulates in the treasury and the reserves of the banks are diminished; and, under opposite conditions, they are increased. the return of accumulated surplus funds to the banks is possible when the secretary of the treasury decides that such return is desirable or necessary and when the banks are able and willing to supply the bonds demanded as security. in case a deposit is agreed upon the funds go to a relatively small number of national banks selected as depositories by the secretary of the treasury, the amount allowed each depository also being determined by him. through its ability to issue gold and silver certificates, its obligation to redeem united states notes in gold on demand, its administration of the united states mints and assay offices and the laws regulating the supply and distribution of subsidiary coin, the united states treasury cooperates with the banks in the supply and distribution of the circulating medium of the country. the people apply to the banks for the forms of money and currency desired and these institutions meet the demand by means of the funds deposited with them or by their exchange at the various subtreasuries, if the forms of money deposited do not correspond with these demands. _ . the interrelations of these institutions_ under the operation of the national banking act, new york, chicago, and st. louis have been designated as _central reserve_, and forty-seven other cities as _reserve_ cities. the national banks in these reserve cities act as reserve agents for national banks in the cities and towns not so designated and ordinarily receive on deposit the major part of their reserves plus surplus funds not needed for local purposes. banks in the central reserve cities act as reserve agents for the banks in the reserve cities as well as for country banks, and on account of their importance as commercial and investment centers receive and hold in the form of bankers' balances a large part of the reserve funds as well as the surplus investment funds of the national banks of the entire country. state banks and trust companies manage their reserve and surplus investment funds in substantially the same manner as national banks, using national banks in the reserve and central reserve cities as their reserve agents. state laws usually allow approved state banks and trust companies also to act as reserve agents for the banks and trust companies under their jurisdiction, but these approved banks are generally located in the reserve and central reserve cities, and themselves employ the national banks there located as their reserve agents, thus forming simply an additional conduit through which the reserve and surplus investment funds of state banks and trust companies reach the central money reservoirs administered by national banks in the central reserve cities. national banks in the reserve and central reserve cities are also clearing centers for the enormous volume of checks and drafts which the administration of the checking accounts of the banks and trust companies of the country bring into existence. they act as correspondents as well as reserve agents for these other banks and trust companies, and in this capacity collect out-of-town checks and drafts and conduct checking accounts for them. within these cities, as well as in hundreds of others, clearing house associations conduct the local clearings and also act as agencies through which national and state banks and trust companies cooperate in the promotion of common interests. the center of the entire system is in new york city. the clearing house association of that city, consisting of over fifty national and state banks and trust companies, includes the banks the vaults of which constitute the central money reservoir of the country and which constitute the center of the country's clearing system. through the new york subtreasury pass the greater part of the receipts and disbursements of the government, and the chief assay office in the country is located there. the new york stock exchange is our only stock and bond market of national scope, and consequently the investment center of the country. the associated banks of new york city, as the members of the clearing house association are called, hold the greater part of the reserves of the banks and trust companies not required by law to be kept in the local vaults, as well as the greater part of the surplus investment funds of the entire country. it is through the operation of the new york subtreasury on the reserves of the associated banks that the chief influence of the independent treasury system on the banking business of the country is exerted, the greater part of the government's receipts coming directly out of those reserves, and a large part of the expenditures going into them, and the greater part of the money deposited in national banks by the secretary of the treasury going directly or indirectly into new york institutions. most of the exports and imports of coin and bullion pass through new york, and the major portion of the foreign exchanges of the entire country are there effected. the new york assay office receives and distributes the greater part of the new supplies of gold and silver bullion which come from our mines and transforms into bullion the major part of these metals that come to us from abroad and do not find employment as foreign coin. the new york stock exchange is the medium through which a large part of the surplus savings of the country are invested in our industries or loaned for the use of our national, state, municipal, and other local governmental agencies. _ . operation of the system_ the most noteworthy features of the working of this machinery may be discussed under the heads: conflict of functions and laws; loan operations; treasury operations; reserve system; absence of elasticity in the currency. (_a_) _conflict of functions and laws._--the two classes of banking institutions which have been described (state banks and national banks) and trust companies, described in a subsequent chapter, exist side by side in many communities, and in the performance of certain services compete for the patronage of the public. as has already been pointed out, state and national banks differ little in their functions except in their relation to real estate loans, and in some states trust companies perform all the functions of these institutions and many others besides. in the performance of these common services, however, they are rarely regulated by the same laws or subjected to the same kind or degree of public supervision. the competition between them, therefore, is not always on a fair basis and the temptation to violate restraining laws and administrative regulations is strong. the supervising officers recognize the situation as a rule and go to the extreme limit of leniency in administering laws and regulations which operate to the manifest disadvantage of the institutions over which they have jurisdiction, but even then it is often impossible to render the basis of competition fair and equitable. this condition of affairs has resulted in the devising of ways and means of circumventing obnoxious laws and in some cases in practices which are pernicious in themselves. as examples may be mentioned the widespread practice of national banks, which are prohibited by law from making loans on real estate security, of making loans to customers who can offer no other collateral, on the security of their personal notes only, or of making loans secured by real estate by a three cornered operation utilizing a director or officer or some other third party as intermediary. all three classes of institutions compete in soliciting the savings deposits of the community, with the result that the trust companies and savings banks, which often have the advantage here, sometimes force upon their state and national bank competitors a higher rate of interest on such deposits than they ought to pay. the differing regulations in some places in force regarding the amount that may be loaned to a single individual or firm has also resulted in some cases in devious and uncommendable practices. for the remedy of these conditions the first desideratum is the careful differentiation of the various functions performed by all these institutions, and the devising of appropriate legal and administrative regulations for each one. these regulations should then be incorporated into the legislation and the administrative practices of the federal government and of each state, and any institution which performs any of these functions should be obliged to submit to the regulations pertaining thereto. the difficulties in the way of securing such a differentiation of functions and such community of action between the federal government and our states are too obvious to require statement, but they should not prevent the formulation of ideal conditions, and a conscious and persistent effort to attain them. (_b_) _loan operations._--in making loans, a typical method of procedure for a business man is to arrange with a bank for what is technically called a "line," that is, the maximum amount he may expect to be able to borrow under normal conditions. this "line" determined, he borrows from time to time according to his needs, giving as security his personal note, payable in one, two, three, four, or six months. sometimes an indorser is required, and sometimes the deposit of collateral, mortgages on real estate, bonds, stocks, and warehouse receipts being the most commonly used securities employed in such cases. ordinarily, when a note falls due, he expects the bank to renew it, if its payment at the time is not convenient, the agreement on a "line of credit" ordinarily carrying with it that implication, though not legally, probably not morally, binding the bank so to do. indeed, the customer ordinarily counts the amount of his "line" as a part of his working capital and expects to keep it in use a large part, if not all, of the time. in the determination of the amount of these "lines of credit," the judgment of some one or more bank officers, assisted by a discount committee and sometimes, though not as a rule, by a specially organized credit department, rules. in forming these judgments, the bankers of the united states as a class are not guided by any universally recognized and well established principles. the best ones require from their customers carefully prepared statements showing the nature and volume of the business they transact, and a careful classification of their assets and liabilities. others, and these are a large majority, rely upon the knowledge they already possess, gained by general observation, and supplemented by verbal inquiries made from time to time and by the voluntary statements of the customers themselves. the significance of the distinction between commercial and investment operations in the business of banking is not generally understood, and is consequently little regarded. the dominant question in the mind of the average banker, both in determining the amount of a customer's line and in making loans to him after the line is fixed, is how much he is "good for," and on this point the total net worth, rather than the nature of the business operations, of the customer is likely to be decisive. of course, the banker is also influenced by the customer's reputation for both integrity and business ability. this method of procedure has the advantage of rendering access of people to the banks easy and of promoting their extensive use, but it has the grave disadvantage of opening the doors wide to inflation of credit. the majority of our bankers do not know whether more or less than their savings deposits and their capital and surplus, the only funds which can safely be invested in fixed forms, is so invested. the promissory notes of their customers, which constitute the major part of their assets, give no information on this point, and they have not made the investigations necessary to determine with certainty the destination of the funds they have loaned. they are satisfied with the knowledge or the conviction that their loans can be collected, not at maturity--they know very well that many, probably most, of them can not--but ultimately. the result is that unconsciously and gradually the banks create their demand obligations in the form of balances on checking accounts against fixed investments in machinery, buildings, lands, mines, etc., and, when the payment of these obligations is demanded, the reserves fall below the danger point and they are forced to require payment at maturity of paper which the maker had counted upon having renewed indefinitely, and the payment of which is only possible by the forced sale of the property in which the borrowed funds were invested, or of some other property in his possession. if only a single bank or a comparatively few banks find themselves in this condition, relief may be found in the rediscount of paper with other banks, in direct loans, or in the sale of securities on the exchanges; but, if the condition is general, relief by these means is impossible, and widespread forced liquidation becomes necessary. an aggravated situation of this kind causes panic and results in a commercial crisis. (_c_) _treasury operations._--the operation of our independent treasury system produces arbitrary fluctuations in the reserves of the banks and prevents that degree of prevision which is essential to the most economical and the safest practices. the funds needed for current purposes are withdrawn from the banks and kept under lock and key in the treasury vaults, thus diminishing reserves to the extent of their amount. surplus funds likewise accumulate in the vaults with the same result, until the secretary of the treasury sees fit to deposit, and the banks find it possible to receive them. even then the depository banks alone are directly benefited, and no one of these knows long in advance how much it is going to receive or when funds left on deposit will be withdrawn. since the volume of the business of the government is very large, the effects produced by the movement of its funds are of such magnitude as to give them national importance, the ability of banks to loan and to meet obligations already incurred being profoundly affected by them. among these effects must also be noted the inability of the banks to calculate these movements in advance, as they to a degree can those produced by the operations of their commercial customers, and the relation between them and the secretary of the treasury, which results. the relation between the receipts and the disbursements of the government vary greatly from month to month and year to year, so that, on the basis of past experience, it is impossible to predict when the banks will gain from or lose to the treasury. the action of the secretary of the treasury regarding deposits of surplus funds is equally uncertain and unpredictable. no fixed policy regarding this matter has yet been established by precedent or determined by law. each secretary follows his own judgment and is influenced by current events and conditions. the uncertainty which results creates a speculative atmosphere about the money market and renders the banks dependent upon the secretary and the secretary influential on the money market in a manner which is unfortunate for both. since they cannot be indifferent to the operations of the treasury, and cannot predict them, banks are obliged to speculate regarding them, and, if they err, they are likely either to over-extend their credit operations or unduly to contract them. the former will result when they expect an increase in their reserves from treasury sources and do not get it, and the latter when contemplated withdrawals of funds do not occur. the secretary of the treasury is not in a position properly to exercise the power conferred upon him. he is outside the channels of commerce and industry, and must, therefore, secure at second hand the information necessary for intelligent action. such sources of information are frequently unreliable and inaccurate and their use subjects him to the charge of favoritism and to the danger of acting in the interest of special groups or special localities. (_d_) _operation of the reserve system._--each national bank now keeps locked up in its vaults money to the amount of at least six to twenty-five per cent of its deposits and a balance with banks in reserve and central reserve cities sufficient to bring the total to at least fifteen per cent of deposits in the case of country banks, and twenty-five per cent of deposits in the case of reserve city banks. in addition, it is customary for most banks to carry as a secondary reserve high-grade bonds which can be readily sold in case of need. the practice of state banks is practically the same as that of national, and that of trust companies differs only in the amount of reserves carried and in the proportion between the different items. this system has many disadvantages. among them the most obvious, perhaps, is the withdrawal of enormous sums from the current use of the agriculture, industry, and commerce of the country. that portion of these reserve funds which is required to be kept under lock and key in the vaults, amounting in the aggregate to a billion and a half of dollars or more, is not available for use in ordinary times, and is practically useless even in times of stringency, since according to present law, when the reserves fall to the minimum prescribed by law, banks must stop discounting, under penalty of being put in the hands of a receiver. the other portions of these funds, namely, those deposited with banks in reserve cities and those invested in bonds, are likewise withdrawn from the uses of current commerce, since a large part of the former is only available for use on the new york stock exchange, and the latter are invested in railroads, mines, factories, land, etc. the explanation of the devotion of the redeposited portion of the reserves to the operations of the new york stock exchange is to be found in the fact that that exchange furnishes a regular market for call loans on a large scale. since these funds are held subject to the call of the banks which deposited them, and interest at the rate of at least two per cent is paid upon them, the depository banks are bound to seek investment for them, and call loans on collateral listed on the exchange under ordinary circumstances are best suited to their purposes. another disadvantage of this reserve system is the dangerous situation in which it places banks from time to time, and the tendency to panic which it fosters. the demands made upon banks for both cash and credit vary with the seasons. in the fall and spring they are much greater than in the winter and summer. they also vary regularly through periods of years, increasing during the up-grade of a credit cycle and decreasing for a longer or shorter period after a crisis. irregular and unexpected events also cause variations. on account of the rigidity of this reserve system and the lack of elasticity in our currency, the means available to banks for meeting increased demands, especially those of an irregular and unexpected character, are inadequate, and their employment is often dangerous. these means are: keeping in the vaults in slack times a large amount of unused cash, a practice too expensive to be employed; keeping surplus balances with correspondents at two or three per cent interest, not a sufficiently remunerative practice to be employed on a sufficiently extensive scale; rediscount with correspondents of some of their customers' paper, or loans from them on the security of their own signatures or on such security supplemented by collateral; and sale of bonds at such prices as they will bring. none of these expedients is certain at all times and under all conditions, and some of them are precarious at all times. surplus balances with correspondents are most reliable, but they occasionally fail on account of the inability of correspondents to realize upon their call loans. when calls for the payment of balances are large and general, it is impossible for brokers whose loans are called by one bank to transfer them to another. the collateral deposited as security must, therefore, be offered for sale on the stock exchange, and the very stringency which resulted in their being so offered renders their sale, even at slaughter prices, difficult and sometimes impossible. the result at the best is a heavy fall in the prices of stock-market securities, and at the worst a stock-market panic and a suspension of payments by the banks. rediscounts and loans from correspondent banks cannot be depended on. correspondents are under no obligation to make them. they will usually do so as a favor, if their condition warrants, otherwise not. sales of bonds on the stock exchange are difficult and sometimes impossible in times of emergency, and are usually attended with loss. on account of this uncertainty and the danger attending it, when new and unusual conditions likely to result in increased demands upon them arise, banks are likely to act "panicky"; to call in their balances from correspondents; to sell bonds; to call loans; and greatly to curtail or absolutely to cut off new discounts. this action spreads the panicky feeling among their customers, and creates such pressure at the reserve centers as to cause curtailment of accommodations and panic there. at the very best, this reserve system is accompanied by high discount and loan rates and by speculation on the stock market. high rates result inevitably from the hoarding of currency which it involves, the supply of loan funds being abnormally diminished, and speculation follows from the concentration in slack times of funds in new york city, which can only be employed in call loans on stock-exchange collateral. stock brokers regularly take advantage of this situation, speculate themselves and inspire speculation among their customers. the mutual dependence of the stock and money markets thus produced by this reserve system is disadvantageous to both, fluctuations in values, uncertainty, and irregularity on both being the result. (_e_) _lack of elasticity in the currency._--the money of the united states consists of four main elements, gold and silver coin, united states notes, and national bank notes, and none of these fluctuate in volume in accord with the needs of commerce. the gold element depends primarily upon the output of our gold mines and upon the international movement of gold, increasing when that output increases and when our imports of gold exceed our exports, and decreasing under opposite conditions. these fluctuations, however, are quite independent of our commercial needs. silver dollars, which constitute the major part of our silver currency, for several years have been unchanged in quantity, and the volume of united states notes has remained at $ , , since the resumption of specie payments, january , . national bank notes fluctuate in volume as a result of changes in the number of national banks and in the prices of government bonds. whenever a new national bank is organized, a specified portion of its capital must be invested in government bonds, which bonds are usually deposited with the comptroller of the currency in exchange for notes; and, when the price of government bonds rises, banks holding more than the minimum required by law frequently retire a portion of their circulation in order to recover their bonds for sale at the enhanced price. when the price of government bonds falls, many banks purchase additional quantities and increase their circulation. changes in the price of government bonds and in the number of national banks, however, have no connection whatever with changes in our currency needs, and no more do the fluctuations in the volume of the currency as a whole, made up of these various elements combined. as a result of this condition, rates on loans and discounts fluctuate greatly on account of wide variations between the demand and the supply of loan funds, and commerce is hampered at certain seasons and overstimulated at others. as was indicated above, this lack of elasticity in our currency aggravates the defects of our reserve system and also aids in the production of financial panics. _ . plans for reform_ on account of the defects in our system of banking, there has been long-continued agitation for reform, increasing in scope and intensity in recent years. after the crisis of , which revealed these defects to many persons who had not observed them before, congress appointed a commission to make investigations and to prepare a reform measure. in january, , this committee submitted a report which embodied a bill for the incorporation of a national reserve association, to be made up of a federation of local associations of banks and trust companies. the purpose of this association was to supply a market for commercial paper, an elastic element in the currency, a place for the deposit of the bank reserves of the country and of the funds of the government, as well as proper machinery for the administration of this market and these funds. for various reasons, the plan of the monetary commission did not meet with universal favor. it was condemned in particular by the democratic party, which was victorious at the polls in the fall elections, and installed a new administration in washington, march , . a special session of the new congress was called to consider the tariff question, and to it was submitted another plan for the reform of our banking system, which was enacted into law december , . this law provides for the incorporation of so-called "federal reserve banks," the number to be not less than eight or more than twelve. the country is to be divided into as many districts as there are federal reserve banks, and the national banks in each district must subscribe six per cent and pay in three per cent of their capital and surplus to the capital stock of the federal reserve bank located in that district. state banks and trust companies may contribute on compliance with the same conditions as national institutions. if, in the judgment of the organization committee, the amount of stock thus subscribed is inadequate, the public may be asked to subscribe, and as a last resort stock sufficient to raise the total to an adequate figure may be sold to the federal government. cooperation between these federal reserve banks and a degree of unity in their administration are provided for through a federal reserve board of seven members, two ex officio and five to be especially appointed by the president of the united states. for the administration of each federal reserve bank, a board of directors of nine members is provided for, six to be appointed by the member banks and three by the federal reserve board, one of those three to be designated as federal reserve agent and to be the intermediary between the federal reserve board and the bank of whose directorate he is a member. the proposed federal reserve banks are to hold a part of the reserves of member banks and to rediscount commercial paper, administer exchange accounts, and conduct clearings for them. they are also to serve as depositories for the united states government, and to issue treasury notes obtained from the federal reserve board in exchange for rediscounted commercial bills, these notes to be redeemable on demand by them and to be a first lien on all their assets. their retirement, when the need for them has passed, is provided for by the requirement that no federal reserve bank shall pay out any notes except its own, all others being sent in to the issuing bank or to the treasury for redemption. against outstanding note issues a reserve of at least per cent in gold must be maintained, and against deposits one of at least per cent in gold or lawful money. this law provides remedies for the chief defects of our system; namely, a market for commercial paper which will enable a properly conducted bank at any time, through rediscounts, to secure notes, legal-tender money, or checking accounts in the amounts needed; a system of note issues which will fluctuate automatically with the needs of commerce for hand-to-hand money; a more economical administration of the reserve funds of the country, unattended by the dangers of the present system, and an administration of the funds of the federal government which is free from the evils of the independent treasury system. chapter v commercial banking in other countries in contrast with that of the united states, the characteristic features of the commercial banking systems of europe are the central bank performing important functions for all other financial institutions and for the government; a relatively small number of large institutions with many branches mediating between the central bank and the people; and the use of commercial and bank bills instead of promissory notes as the chief instruments of loans and discounts. _ . common features_ the central banks differ considerably in organization and business methods, but perform essentially the same functions; that is, they act as financial agents for their respective governments; discount high-grade commercial and bankers' bills for other banks and usually for private persons; administer the cash reserves of the entire country; and furnish the greater part and, in some cases, the entire supply of bank notes. the other large banks do most of the business with the public, the central bank's relations being chiefly with them and with the government. they conduct checking accounts with merchants, manufacturers, farmers, and others; receive and invest savings deposits, and deal in certain classes of investment securities; conduct the domestic and foreign exchanges; discount various kinds of commercial and banking bills, frequently those not available for discount at the central bank; and make advances on personal and other kinds of security. their main offices are located either in the central money market of the country or in important financial centers, and their branches are extended to all places in which banking facilities are supposed to be needed. as a rule, they are less restricted by legislative provisions than are the national and state banks and trust companies of the united states, and are less carefully supervised and inspected by public officers. commercial and bankers' bills are widely used as credit instruments between buyers and sellers and between bankers and their customers. a common method of procedure, when a sale is made on time, is the drawing of a bill for the amount due, by the seller upon the buyer, payable at the end of the credit period agreed upon, and accepted by the buyer, and the discount of the bill by the seller's bank. in foreign and in some branches of domestic trade, the banker's bill is used on account of its more general acceptability as an object of discount, such bills usually being discountable by the central bank and by banks far distant from the place in which the bill originated. in case a buyer desires to furnish his creditors with bills of this kind, he arranges with his banker for a line of "acceptance" credit, which permits people who sell goods to him to draw bills upon his banker instead of himself, the banker agreeing to accept the bill and guaranteeing its payment at maturity. the seller will usually have no difficulty in discounting such a bill at his own bank, no matter how far removed it may be from the home of the buyer, the character of the accepting bank being known throughout the financial world. "acceptance lines" are usually granted only on condition that the customer agrees to supply the bank with the funds necessary for meeting the accepted bills as they fall due, and to pay a fee for the accommodation. ample security that these obligations will be met is usually demanded. _ . the english system_ in the english system, the central bank is the bank of england, with the possible exception of a few private banks, the oldest financial institution in the country. it is privately owned and privately governed. its board of directors, chosen by the stockholders, consists of twenty-four persons, a portion of whom are practically life members, being regularly reelected when their terms of office expire. the others usually serve alternate years only, vacancies being filled by promising young men selected from the business houses of london. the oldest director is regularly elected to the office of governor of the bank, and the next oldest to that of deputy governor, both serving two years, the deputy governor regularly succeeding to the office of governor, and the ex-governors forming the life members of the board and constituting a kind of advisory council to the governor, and known as the board of treasury. the head office of the bank of england is in london, and there are eleven branches, two in london and nine in the provinces. by a law passed in , the bank was divided into two departments, called respectively the banking and the issue departments, the latter having exclusive charge of the issue of notes, and the former of all other branches of the bank's business. this same law prescribed the conditions under which notes could be issued. it provided that the bank of england might issue £ , , of notes in exchange for securities, and any amount in addition in exchange for an equal amount of coin or bullion. additions to the amount issued in exchange for securities might be made by order of the government to the extent of two-thirds the amount of issues relinquished by the other issuing banks, all such banks in existence at the time the act was passed being permitted to retain, without increasing, their existing issues. most of these other issues having been abandoned since , the bank of england is now permitted to issue in exchange for securities £ , , . the securities against which these issues are made were transferred to the issue department by the banking department, and consist of the debt owed by the government to the bank and of other government or governmentally guaranteed securities. the issue department freely issues additional notes in exchange for an equal amount of gold coin or bullion, and on demand redeems notes in gold coin. since the amount of notes all the time outstanding greatly exceeds £ , , , the business of the issue department is confined to the exchange of notes for gold coin and bullion and the redemption of notes in gold. the banking department receives and disburses the funds of the government, manages the public debt, and serves as the government's agent in most of its other financial operations; receives on deposit from other financial institutions the money which comes into their possession, and supplies them with such money funds as they need from day to day in payment of checks drawn against their balances; discounts bills of exchange with a minimum maturity of four, and in exceptional cases six, months; and to a limited extent makes advances on and invests in high-grade public and other securities. besides the english government and financial institutions, it has other customers, but it is to be presumed that these are of a special character, since the conditions under which it does business with private persons are in most cases more onerous than those prescribed by other banks, and consequently not attractive to the ordinary business man. the so-called english joint-stock banks are classified into three groups, known as metropolitan, metropolitan and provincial, and provincial banks. the metropolitan banks have their head offices in london, and do not, as a rule, extend their branches beyond the suburbs of the metropolis. the metropolitan and provincial banks have their head offices in london and branches scattered throughout the provinces, as well as in various parts of the city and suburbs, and the provincial banks have their head offices in the larger provincial cities, and each one confines its branches usually to the town and country districts tributary to the city in which its head office is situated. often the provincial banks establish branches in london. for banking purposes, these banks are the chief reliance of the agriculture, industry, and commerce of the country, but competing with and supplementing them are the bill brokers and discount houses, the private banks, and the foreign and colonial banks. the bill brokers and discount houses make a business of dealing in foreign and domestic bills of exchange. they buy in the first instance a large percentage of the bills brought to market, keep some of them until maturity, and sell the remainder to the other banks, usually indorsing them first. a large part of the capital employed in their business is obtained by loans made from the other banks, subject to call and secured by the bills they purchase deposited as collateral. the private banks are the remnant left of the oldest group in the country. there were private banks in london centuries before the bank of england was incorporated, and previous to the bank of england was their only competitor. since their number has steadily diminished. those which remain have, as a rule, built up a special constituency, to the special interests of which they cater. among them are strong institutions, but as a class their importance in the system is not great, and is waning. the foreign and colonial banks are branches of important institutions in foreign countries and the english colonies which have a considerable volume of business to transact in london. they serve as intermediaries between their respective countries and the english money market, and on account of the enormous volume of foreign commerce which is financed in london, their number is large, and the rôle they play on that market is important. in the operation of this machinery, the most noteworthy features are the reserve system, and the administration of the discount rate of the bank of england. there is no law on the english statute books prescribing the amount of cash which banking or other financial institutions shall keep in their vaults. the custom of these institutions regarding that matter is to keep on hand relatively small sums and to rely upon the bank of england or some other london banking house for the replenishment of their supply as needed. for this purpose, london and many provincial banks keep balances with the bank of england, and other banks maintain balances with other london institutions. these balances may be obtained by the deposit of coin or bank of england notes or by rediscounts. another widely used resource is the calling of loans made to bill brokers or discount houses. such loans or a considerable volume of bills of the kind discounted by the bank of england, or both, are regularly carried by london banks and counted as a part of their reserves. on account of these practices, surplus cash not needed in the conduct of the current business of the country speedily finds its way into the vaults of the bank of england, and additional supplies, when needed, come from this source. the administration of the cash reserves of the country thus becomes one of the important duties of the bank of england, in the performance of which variation of the rate charged on discounts is the most important device. many years' experience has enabled the bank to determine with a considerable degree of accuracy the volume of the demands for cash likely to be made upon it from day to day, and consequently the amount that it should keep on hand in the vaults. whenever this amount approaches the minimum regarded as consistent with safety, the directors raise the rate of discount, and when the amount on hand becomes excessive, they lower it. the efficiency of this procedure in increasing the reserves in the one case and in decreasing them in the other is due to certain conditions and practices which deserve attention at this point. long-established custom has made the rate of interest paid on deposits in london and other parts of england vary with the discount rate of the bank, and on this account the market rate of discount also varies in the same manner. the bank of england is thus ordinarily able to regulate the market for commercial paper. since paper payable in london is a favorite form of investment for continental bankers, by raising its rate of discount and with it the market rate above the level of the rates of some or all of the continental centers, the bank of england is able to induce these bankers to send money to london for investment and thereby to increase her reserves, and by lowering its rate below the level of the rates in these continental centers, she is able to induce them to sell some of the paper they already hold, and thus to furnish a market for her surplus funds and diminish her reserves. on account of the readiness with which the international gold movement responds to variations in the discount rate of the bank of england, the need for an elastic system of bank note issues is not felt in england to the same extent as in other countries. it is this fact, doubtless, which explains the retention to the present day of the essentially inelastic bank note system created by the act of . _ . the french system_ in france, the bank of france is the central institution. it is the oldest of the important french banks of the present day, having been established in by napoleon the first. its capital, amounting at the present time to , , francs, or approximately $ , , , is supplied by about , private stockholders, about , of whom own only one share each. the two hundred largest stockholders appoint a general council, consisting of fifteen regents and three censors. five regents and all the censors must be chosen from the commercial and industrial classes, and three of the remaining ten regents must be selected from the _tresoriers payeurs généreaux_, an important group of representatives of the public treasury scattered throughout the country. the general council as well as the stockholders' assembly is presided over by a governor, who, together with two sub-governors, is appointed by the president of the republic upon the nomination of the minister of finance. the governor is the chief executive officer of the bank and the final source of authority in most matters of vital importance. he is responsible to the government rather than to the stockholders, and is subject to removal only by the power which appointed him. the bank of france has about two hundred branches and sub-branches located in paris and all the important cities and towns in the republic, also over three hundred so-called agencies located in smaller places and transacting only a limited line of business. each branch has a manager appointed in substantially the same manner as the governor, and the sub-branches and agencies are administered through the branches. through this network of offices, every part of the country is brought into direct and easy access to the bank. the bank of france is the only institution in the country privileged to issue circulating notes. the maximum allowed it is regulated by law and is increased from time to time. at present it amounts to , , , francs, or approximately $ , , , . the bank is obliged to redeem these notes on demand in gold coin or silver five-franc pieces, but it is free to determine how much cash it shall keep on hand for that purpose, and when and under what conditions it shall issue them. its discount operations are limited by law to bills maturing in not more than three months, and bearing the signatures of at least three solvent persons, or two signatures and secured in addition by specified forms of collateral. it is also permitted to make loans or advances, as they are called, on securities of the french government maturing at fixed dates, gold and silver bullion, and the money of foreign countries, and obligations of the french railroads, french cities, and departments, the crédit foncier, and the société algerienne. it is also obliged to loan , , francs ($ , , ) to the government without interest. one of the chief branches of the business of the bank of france is the service of the public treasury and the performance of other financial duties imposed upon it by the government. it serves as the depository and disbursing agent for the government, and performs important functions connected with the public debt, the mints, the savings institutions, and publicly administered trusts of various kinds. it is also the depository for the banking reserves of the country. in france, as in england, it is not the custom of banking and other financial institutions to hoard money in their vaults, but to depend upon the bank of france for supplies as needed. to this end they keep funds on deposit there, and regularly rediscount the paper of their customers when balances need to be replenished. through its network of branches and agencies spread over the entire country, the bank of france is able economically and expeditiously to conduct the intermunicipal exchanges of the country. it participates in local clearings through membership in the clearing houses, at which balances are paid by checks drawn against credits on its books maintained for that purpose by all members, and it conducts so-called transfer accounts with other banks and financial institutions against which drafts can be drawn payable at any place where one of its offices is located. such drafts constitute the chief means through which transfers of funds are made between different places. the business of the bank of france with private persons is limited by the requirement that all paper discounted must have three signatures, or two signatures and collateral security, and that advances can only be made on the security of the forms of collateral indicated above. most business men find it either inconvenient or impossible to comply with these conditions, and consequently transact most of their business with other banking institutions. the third signature on paper discounted by the bank is, therefore, usually supplied by these institutions, which thus act as an intermediary between the bank and the commercial world. next to the bank of france, the most important banking institutions of the country are the crédit foncier, the crédit lyonnais, the comptoir d'escompte de paris, the société générale, and the crédit industrielle et commercial. the crédit foncier is principally engaged in extending credit based on real estate security, but it also discounts large amounts of commercial paper. its organization is modeled after that of the bank of france, and, like that institution, it is controlled by the state. since it is primarily an investment bank, a description of its principal operations will be deferred to the next chapter. the four other banks mentioned are a product of the commercial life of modern france, all having been established since the revolution of . they are all heavily capitalized, the smallest, the crédit industrielle et commercial, having a capital of , , francs ($ , , ), and the largest, the société générale, having a capital of , , francs ($ , , ), and all extend their business by means of branches. the crédit lyonnais and the comptoir d'escompte have branches in france itself, the french colonies, and a number of foreign countries; the société générale, throughout france, in london, and san sebastian, spain; and the crédit industrielle et commercial, in paris and its suburbs. taken together, these four institutions supply the french people in paris and the provinces with banking facilities for both their domestic and their foreign business. while in some of the larger provincial cities local banks with branches in surrounding towns and sometimes in paris are to be found, branches of one or more of these four institutions are the chief reliance in nearly all places. these institutions cater to all the financial needs of their constituents. they supply their needs for cash and for exchange; conduct checking accounts for them, although these are not used in france to the same extent as in the united states; discount their commercial paper and make loans to them on personal and other security; and receive on deposit their savings and provide them with investments. in performing these functions they make extensive use of the bank of france and of the stock exchanges of the country. with the former they conduct checking and transfer accounts and rediscount their customers' bills, by these means procuring the coin, bank notes, and exchange needed; and from the latter they obtain the investment securities required for the satisfaction of both their own and their customers' needs. gold and silver coin and the notes of the bank of france constitute the hand-to-hand money of the country. the latter form the elastic element, and their operation approximates perfection. when demand for money increases for any reason, more commercial bills are presented for discount to the banks, which, after indorsement, exchange them at the bank of france for the notes with which they supply their customers' needs. the note issues of the bank thus expand in direct and immediate response to the needs of the country for more currency. when such needs have passed, the discounted bills, in exchange for which these notes were issued, mature and are paid in greater volume than new bills are created and presented for discount, and notes, or a corresponding amount of coin, accumulate in the vaults of the bank. the notes are cancelled and destroyed and the coin is kept in store until it again passes into circulation through exchange for notes still outstanding, or for discounted bills. on account of the elasticity of its note issues, and the extent to which they are used in the commerce of the country, the bank of france has occasion to change its rate of discount less frequently than any other bank in europe. the result is that the country enjoys the advantage of steady and low rates, since in france, as in england, the discount rate of the central bank controls the market rate, and the ease and inexpensiveness with which the notes are issued make low rates possible. _ . the german system_ the imperial bank, with head offices in berlin, and about one hundred branches and more than four hundred sub-branches scattered throughout the country, plays essentially the same rôle in the german banking system that the bank of england and the bank of france play in the english and french systems, respectively. it was established in by an act which also profoundly affected the entire banking system of the country, and its development has been aided and directed by several acts passed subsequently. its capital, supplied by the general public, amounts at the present time to , , marks ($ , , ), and it is governed by three boards, known respectively as the curatorium, the direktorium, and the central ausschuss. the curatorium is composed of five members, of which body the chancellor of the empire is ex-officio chairman. a second member is appointed by the emperor, and for that position he has always selected the prussian minister of finance, and the three remaining members are appointed by the bundesrath. it meets quarterly and reviews all the operations of the bank. it, or rather, the chancellor, its chairman, has supreme power, which, however, he has never exercised except on one occasion, when he ordered the bank not to accept russian securities as collateral for loans, an order since revoked. the administration of the bank's affairs is chiefly in the hands of the direktorium, consisting of a president, vice president, and seven other persons, all of whom are appointed by the emperor for life, from a list of candidates recommended to him by the bundesrath. this board selects the staff of bank officers and clerks, and superintends the daily conduct of the bank's business. the central ausschuss is a committee of fifteen persons elected by and representing the stockholders. it holds monthly meetings; has the right to demand complete information concerning the bank's operations, to discuss all matters freely, and to tender advice and counsel; but it has no power to control except regarding two matters: it can set a limit to the amount of securities the bank can purchase, and can veto any proposed transactions with the imperial government or with the governments of any of the states. like the other central banks described above, it receives on deposit and disburses the funds of the imperial government; administers the coin reserves of the country; conducts the domestic exchanges, and serves as a bankers' bank. it is free to do business with the general public, but the legal and other limitations under which it must operate give the other banking institutions of the country the advantage in competition for this kind of business. it shares the right of note issue with four other banks, which, out of thirty-two that retained that privilege at the time the imperial banking system was established, alone retain it at the present time. the issues of these four institutions, however, are relatively small in volume, and the imperial government has the right to deprive them of it january , , or any tenth year thereafter, on condition of giving one year's notice of its intention so to do. the issues of the imperial bank are subject to the following regulations: they must be covered by cash and discounted bills maturing in not more than three months, and signed by at least two solvent persons, the proportion of cash being not less than one-third of the total. if the total amount issued exceeds the bank's holdings of gold bullion, specie, and government notes by more than , , marks at the end of march, june, september, and december, and , , marks at other times, a tax of five per cent per annum is levied on the excess. the law confers upon the bank the following powers: a. to buy and sell gold and silver coin and bullion. b. to discount, buy and sell bills of exchange whose maturity shall be three months at the longest, and for which usually three, and in no case less than two, accredited vouchers shall stand good; furthermore, to discount, buy and sell bonds of the empire or of any german state, or domestic municipal corporations, provided such bonds mature within three months at the longest and conform to the new standards of value. c. to grant interest-bearing loans for terms no longer than three months, upon movable security (lombard, or deposit loan business), such as: gold and silver, coined or uncoined; interest-bearing or non-transferable bonds maturing within a maximum term of three months, whether of the empire, a german state, or of domestic municipal corporations; interest-bearing non-transferable bonds on which the interest is guaranteed by the empire or by any one of the german states; capital stock and stock priority shares, fully paid up, of german railway companies in actual operation; mortgage bonds of the provincial, municipal, or other land credit institutions of germany that are subject to state control, including shares of german mortgage banks to an amount never exceeding three-fourths of their market value; interest-bearing non-transferable bonds of foreign states, and foreign railway priority bonds, covered by state security, in amounts not exceeding per cent of their market value; bills of exchange of recognized soundness, after deducting at least per cent of their market value; and pledges of native merchandise, in amounts within two-thirds of their value. d. to negotiate collections for the account of individuals, institutions, and governing boards; and upon security, as before mentioned, to furnish payments, and make orders or conveyances on the branch banks or on correspondents. e. upon prior security, to buy on behalf of outside parties, effects of all kinds, including the precious metals; and after delivery to sell the same. f. to receive money for circulation or on deposit, with or without interest, the sum of interest-bearing deposits not to exceed that of the capital stock and reserve fund. g. to accept the custody or other management of objects of value. besides the imperial bank there are in germany eight very large and powerful banking institutions and a considerable number of smaller and less powerful ones. the eight great ones have each its head office in berlin, and connections, through branches, agencies, and controlled institutions, in other parts of the empire, the german colonies, and foreign countries. together they control about eighty per cent of the entire banking capital of the empire. in reality they are federations of banking institutions, many of which were once independent, and some of which were promoted and established in the interests of the group. while these eight institutions are primarily engaged in commercial banking, they are also promoters on a large scale of german industry and commerce, both at home and abroad. through interlocking directorates, stock ownership, and in other ways, they are closely allied with the leading industrial and transportation interests of the empire, and they have been and are leaders in the promotion of these interests in other parts of the world, notably in the orient, south america, and africa. they are, therefore, leaders on the stock as well as the discount markets of the country, and are widely influential in investment as well as commercial banking affairs. these, as well as the other commercial banks, consisting for the most part of local institutions and those catering to special interests, use the imperial bank for rediscounts, for transfers of funds between different parts of the country, and as a depository for surplus funds. they do not normally keep on hand more cash than is needed for till purposes. being in easy reach of an office of the imperial bank, supplies can be obtained at any time by checks drawn against credit balances or through rediscounts of commercial bills. special accounts are carried for transfer purposes and are used even in the transfer of funds between different offices of the same institution. on account of its right to issue notes against commercial securities, the imperial bank has the power to meet the demands made upon it and to supply the country with an elastic medium of exchange. the levy of a tax upon the excess of the issues above a prescribed maximum prevents perfect elasticity, unless this maximum be kept above the highest point which the circulation would normally reach, since the actual levy of the tax forces the rate of discount to such a point as to seriously restrict commercial operations. however, since the line between commercial and investment banking is not drawn by the great berlin banks with the care that is desirable, and since they have been able at times, especially on account of their foreign connections, to embarrass the imperial bank in its efforts to maintain adequate specie reserves, such a tax is probably a desirable safeguard against over-expansion of credit. _ . the canadian system_ in important respects the canadian banking system differs from those of the european countries which have been described and from that of the united states. it consists of a varying number of relatively large institutions, each with several offices administered from a common center, but without a central bank. for some time the total number has decreased, since from thirty-six to twenty-seven, in spite of the fact that the canadian law, like that of the united states, provides for the formation of new banks at any time, on compliance with certain prescribed conditions, including a subscribed capital of at least $ , and a paid-up capital of at least $ , . the number of branches, however, has increased rapidly, much more rapidly than the population. the most noteworthy legal provisions pertaining to the banking business in canada concern note issues and loans and discounts. regarding the establishment of branches, the amount, and, with one exception, the composition of the reserves, and many other matters carefully regulated by law in the united states, canadian bankers are left free to follow their own judgment. neither is there public examination of banks in canada. reports must be regularly made to the minister of finance, and he may call for special reports whenever he desires so to do; but neither he nor any other public officer has the right to examine a bank's books or to quiz its officers or directors. in contrast with banking legislation in the united states, another peculiar feature of canadian law is the incorporation of the canadian bankers' association, an organization resembling in essentials the american bankers' association, and the assignment to it of important functions connected with the issue of notes and the winding up of the affairs of failed banks. regarding note issues, the chief provisions of the canadian law are as follows: each bank is permitted at any time to issue circulating notes to the amount of its capital stock, and between october and january an additional amount, equal to fifteen per cent of its combined capital and surplus, may be issued on payment of a tax to be assessed by the governor in council, not to exceed five per cent per annum. the notes are a first lien on all the assets of the bank that issued them, and must be redeemed on demand at the head office and at such other places as are designated by a committee of public officials known as the treasury board. as such redemption centers, this board has named toronto, montreal, halifax, winnipeg, victoria, st. john, and charlottetown. each bank must also deposit with the minister of finance a sum of money equal to five per cent of its average circulation. the aggregate of the amounts thus deposited by all the banks is known as the "circulation redemption fund," and may be used in the redemption of the notes of a failed bank. in case the fund is so used, and the liquidated assets of the bank prove to be inadequate for its complete replenishment, a tax sufficient to meet the deficit is levied on the solvent banks in proportion to their circulation. regarding loans and discounts, the law aims rather to protect than to restrict the operations of the banks. they may "deal in, discount, and lend money, and make advances upon the security of, and may take as collateral security for any loans, ... bills of exchange, promissory notes, and other negotiable securities, or the stocks, bonds, debentures, and obligations of municipal and other corporations, whether secured by mortgage or otherwise, or dominion, provincial, british, foreign, and other public securities." the only important restriction placed upon their loaning activities is the prohibition of making advances on the security of landed or other immovable property. in making loans to wholesale dealers and shippers of produce, the law safeguards the banks by allowing them to take a blanket lien on the goods dealt in by the borrower. this lien applies not only to the goods in possession at the date of making the loan, but to any others which may be substituted for them or manufactured out of them. this lien is prior to that of any other unpaid vendor, except one acquired before the bank's lien was established. the chief officers of a canadian bank are the general manager, the chief accountant, the superintendent of branches, the inspector, and the secretary, all connected with the head office, and the managers of the branches. the general manager is the chief executive and the chief in authority. while he is subject to the board of directors, on account of his wide experience and knowledge his judgment is usually followed. the other officers are appointed by him with the approval of the board, but, almost without exception, from persons who have served the bank in subordinate capacities. the general manager himself is nearly always a man who has passed through the hierarchy of positions from the bottom up, and is therefore thoroughly familiar with every detail of the bank's business and history. the inspector has charge of the examination of the branches, and this work is so carefully and thoroughly done that examination by public officials is not considered necessary, or regarded as desirable by most canadian bankers. regarding this matter, however, there are differences of opinion, and changes in the near future are not improbable. the managers of the branches are in strict subordination to the authority of the general manager, though they are necessarily allowed a large amount of discretionary authority in matters pertaining to the branch over which they preside. unless prevented by distance, they are in daily communication with the head office or with one of its representatives. in the operation of the canadian system, noteworthy features are the methods of controlling credits, of managing the issues and the reserves, and of securing unity or at least harmony of action. it is the usual practice in canada for a business man to do all his banking with one institution. this practice is rendered possible because most of the banks are large enough to take proper care of almost any business establishment in the dominion, and because experience has demonstrated its wisdom. the banks compete vigorously for new business but do not attempt to attract one anothers' customers. indeed a customer who desires to change his banking connections is looked upon with suspicion and is subjected to a very careful examination by the bank that is asked to take him on, including a careful discussion of all the aspects of the matter with the bank he desires to leave. the result of this practice is that a man's banker is thoroughly familiar with his affairs, especially his credit relations, and at the same time feels under obligations to render him such support and guidance as he deserves. on account of this practice, also, commercial paper brokerage does not flourish in canada. the notes of the canadian banks constitute practically all of the hand-to-hand money of the country in denominations above two dollars. the one and two dollar denominations are supplied by dominion notes--all but $ , , of which are represented by gold coin or bullion--and the lower denominations by subsidiary silver supplied by the government. each bank pays out its notes freely to supply the cash demands of its customers, and receives from them on deposit, without hesitation or depreciation, the notes of other banks as well as its own. the former, however, are either sent in for redemption as soon as received or used in making payments to the banks which issued them. thus notes are cleared as readily as checks and the volume in circulation expands and contracts in automatic response to business needs. the fact that these notes are neither legal tender nor guaranteed by the government does not interfere with their circulation--daily clearings, the first lien on assets, and the redemption fund amply protecting holders against the possibility of loss--but does prevent their being hoarded as reserves or for any other purpose and thus contributes towards their elasticity. the connection now established by law between the maximum volume of bank note issues and the capitalization of the banks renders necessary the increase of the latter in correspondence with the expansion of commerce in order to prevent a contraction of credit. present law, however, does not provide for such an increase. it is left to the voluntary action of the banks, which seem inclined to increase surplus funds rather than capital. the permission granted in to extend issues beyond the amount of capital during the crop moving season, on payment of a tax, is a makeshift and not a solution of the difficulty, since a tax on issues is a means of forcing contraction of credit and not of adjusting issues to legitimate needs. since canadian banks are able to meet the greater part of the public demand for hand-to-hand money by means of their own notes, they do not need to carry in their vaults large amounts of gold and silver coin and dominion notes. they keep on hand only so much as experience indicates they are likely to be called upon to supply to their customers, plus a reasonable margin for safety and for the payment of clearing house balances. the greater part of their reserves consists of balances in banks outside of canada, especially in the united states and england, call loans in new york city, and easily salable securities. in case of an emergency of any kind these resources may be transformed into gold or their customers supplied with foreign exchange, which is often as much or even more needed. gold can at any time be exchanged for dominion notes if that is the currency wanted. the lack of a central bank and of a rediscount market is to a degree compensated by unity of action among the banks. this is the result not so much of law as of conditions, among which the most important are: the fact that the six largest banks do fifty per cent of the business and that one of these, the bank of montreal, holds most of the deposits of the government and is generally spoken of as the government bank; the fact that the general managers are experts, in first-hand touch through their branches with business conditions in canada and other parts of the world, and in possession of the same data concerning these conditions, and through the same kind of acquired skill and similar experiences likely to draw the same or at least similar conclusions from this data; common interests in the prosperity of the country and in the prevention of speculative excesses and mutual interdependence in the successful conduct of their everyday business as well as in times of emergency and stress: and the bankers' association, which through its journal gives authoritative expression to the best banking opinion and actually acts for the banks in many matters of common interest. to what extent this community of action takes the form of rediscounts for each other in ordinary times it is impossible for an outsider to say, but that it is operative in times of stress is indicated by the manner in which the failures of the bank of ontario in and the sovereign bank in were handled. in both of these cases the public was protected against loss and panic was averted by the cooperative action of the other banks in assuming the obligations of these institutions to the public, and in winding up their affairs in such a manner as to occasion little disturbance. while canadian banks are free to carry on investment as well as commercial banking operations, their published reports indicate that they take care to avoid confusion of the two, or the infringement of one upon the other. their holdings of investment securities are kept well within the limits set by their aggregate capital, surplus, and savings funds, and their method of handling commercial business, based as it is on accurate knowledge of their customer's operations and upon the lien upon produce heretofore described, prevents their acceptance, through ignorance, of investment securities under commercial disguise. chapter vi investment banking in the economy of nations the encouragement and promotion of saving and the accumulation, distribution, and investment of capital are as essential as the conduct of exchanges, but the performance of these functions has not been segregated and institutionalized to the same extent as has commercial banking. vast amounts of capital are invested directly by the people to whom it belongs without the aid of middlemen and large amounts are also invested through brokers of one kind and another who can hardly be classed as bankers. the most important types of institutions which have been developed in connection with these functions are savings banks, trust companies, bond houses and investment companies, land banks, and stock exchanges. _ . saving and savings institutions_ saving is an individual matter for which the essential conditions are the development of the instinct to make provision against uncertainties of future income and to better the material condition of one's self and family, and a surplus of income above necessary daily expenditures. in order to secure the realization of these conditions to as great an extent as possible, many agencies cooperate in all modern nations, among them savings institutions. included among these are various forms of provident associations, sometimes independently organized and sometimes connected with other organizations, insurance associations of many kinds, building and loan societies, and savings banks. the need for savings institutions varies greatly among the different nations and among different classes of people in the same nation. among people of great wealth the surplus of income above expenditures is so great that large savings can hardly be avoided, and among all the well-to-do classes the margin from which savings are possible is sufficiently large and the desire to save sufficiently great to insure large accumulations of capital. among these classes there is little or no need for institutions designed primarily for the development of the saving instinct. what they need are institutions for the safe keeping, accumulation, and investment of the savings which they are constantly making. the principal work of savings institutions, therefore, pertains to the classes of people who are not well-to-do and who need encouragement and help in their efforts to improve their material condition, if they are so inclined, and stimulus to make such efforts, if they are not so inclined. the means available to savings institutions for the accomplishment of these ends are the urging of the importance of saving upon the attention of people who do not adequately appreciate it, the placing at their easy disposal of facilities for making savings when they have the ability and inclination to save, and the application of pressure of various kinds to compel or induce saving. in the application of these means the methods employed by the various groups of institutions mentioned differ widely and they are efficient in different degrees, partly because they have other objects in view besides the promotion of saving and partly because they deal with different classes of people. savings banks constitute the only group to which the term bank can properly be applied and consequently the only one to which attention will here be given. in a book entitled, _savings and savings institutions_, written by professor hamilton of syracuse university, the following definition is given:[pages and .] savings banks are institutions established by public authority, or by private persons, in order to encourage habits of saving by affording special security to owners of deposits, and by the payment of interest to the full extent of the net earnings, less whatever reserve the management may deem expedient for a safety fund; and in furtherance of this purpose bank offices are located at places where they are calculated to encourage savings among those persons who most need such encouragement. professor hamilton classifies these institutions as trustee, cooperative, municipal, and postal savings banks. in the first group he places institutions managed by boards of philanthropically inclined persons who serve without pay; in the second, those managed cooperatively by the people who make use of them; in the third, those established and administered by municipalities; and in the fourth, those connected with the post-office departments of governments. the strength of trustee savings banks lies in the comparatively low costs of their administration and in the fact that in their investments they are likely to enjoy the advantages of the judgment and enthusiasm of people skilled in the investment business; that of cooperative savings banks, in their adaptability to the special needs of their constituents and in the education which cooperative administration involves; and that of municipal, and especially of postal savings banks, in their capacity to place their services within the easy reach of all who need them and in the confidence which their public character inspires. in the investment of the funds intrusted to savings banks, safety and as large returns as are consistent with it, rather than ease of liquidation, are the prime considerations, and hence they usually take the form of high grade investment securities rather than of commercial paper. their deposits are usually subject to withdrawal only after due notice, and, being savings deposits, their withdrawal usually follows only after the lapse of a considerable period of time. the purpose of their withdrawal is frequently investment and this is sometimes made through the agency of the bank which held the deposit and may involve merely a transfer of securities. outside of the new england and middle states, savings banks were rare in this country previous to the inauguration of our postal savings bank system in . the explanation of this condition is doubtless to be found chiefly in the wide extension of private, state, and national banks, and trust companies, practically all of which conduct savings departments and solicit the patronage of savers. these institutions have coveted this field and have not encouraged the establishment of savings banks. there is reason to believe, however, that they have not worked the field as thoroughly as savings banks would have done and that, on account of the dominance of their other interests, they are not as well fitted as savings banks to work the field thoroughly. moreover it is probable that they are not able to pay as high a rate on deposits as well conducted savings banks would be able to pay. there seems, therefore, to be room, and probably need, here for the development of savings banks of some at least, if not all, of the types above described. _ . trust companies_ within a comparatively short period of time the trust company has developed into an institution of prime importance in the united states. in the beginning of its history it was, as its name implies, simply an institution for the administration of trusts of various kinds, such as the execution of wills, the guardianship of minors and other dependent persons, the administration of the estates of persons either unable or unwilling to administer them for themselves, and trusteeship under corporate mortgages, especially those of railroads. in the latter capacity they became mortgagees in trust for bondholders, registering the bonds, collecting the interest as it became due, paying the bonds at maturity, and in case of default taking the legal steps which were necessary for the protection of the bondholders. the execution of these trusts involved in most cases the custody and investment of funds, so that investment banking became a part of their business almost from the beginning, and, in time, in states in which the laws passed for their regulation did not prevent, they added commercial banking to their other functions. in some cases they have also become promoters of enterprises, taking the initiative in the organization of corporations for various industrial and commercial purposes. in new york city, and in individual cases in some other large cities, the commercial end of the business has become the dominant one; in the former case on account of the ability of these companies, unrestricted by certain laws applying to state and national banks, to offer to commercial customers better terms than their competitors. in most states, however, especially in the large cities in which they chiefly flourish, trust companies have become primarily investment banking institutions, their other functions being carried on as side lines and assuming, of course, in some cases greater importance than in others. since they are still in the early stages of their development, the status of trust companies in the banking system of the united states is not yet definitely determined. legislation concerning them varies considerably in different states, as do also their relations with other banking institutions. the competitive character of these relations has resulted in some cases in legislation which has aimed to differentiate and define the various functions which all these institutions perform, and to prescribe the conditions under which each one or each group must be performed, regardless of the way in which they are combined, and in others, in their practical consolidation with national or state banks, or both, through community of stock ownership, interlocking directorates, etc. from the point of view of the convenience of the public there are advantages in the combination of all the banking functions in a single institution, and the success of trust companies to some extent has been due to this cause, but they have also profited from the unequal competition which exemption from certain limitations imposed on state and national banks has enabled them to enjoy. the removal of the conditions which result in this unequal competition, a process already in progress and likely to continue to completion, will reveal the strength of the advantages of combination versus specialization of functions. previous to such a revelation it will be impossible to determine whether or not the trust company form of organization is destined to become the dominant one. _ . bond houses and investment companies_ a large part of the business of investment banking in the united states is conducted by corporations and firms organized for the purpose of buying and selling investment securities, especially bonds and mortgages. rarely, if ever, do these concerns conduct savings accounts. ordinarily they confine their attention exclusively to the investment end of the business and act in the capacity of jobbers, or brokers, or both. within the investment field some of them specialize closely and others deal in a wide range of securities. the specialties most frequently followed are government, state, and municipal bonds, railroad bonds, public service securities, timber bonds, irrigation bonds, and real estate mortgages. specialization involves the development of expert knowledge of the class of securities dealt in and thus of special serviceableness to both investors and the promoters of the enterprises or the public bodies which issue the securities. these specialists sometimes serve as middlemen between the issuers of securities and other investment banks, as well as between them and the real owners of the capital invested, their expert knowledge being of service to the former as well as the latter. until recently there have been few attempts to regulate the operation of these institutions by law, but the fraudulent practices of some of them, and the ignorance and weakness of perhaps the majority of investors, have recently created in some quarters a strong public sentiment in favor of such regulation. in several states legislation has resulted, of which the most noteworthy is the so-called "blue sky laws" of kansas and some other states. in details these laws differ widely from one another, but they are alike in that they impose upon some branch of the state government the obligation of supervising both companies which issue securities and those which offer securities for sale. the kansas law, the first of this kind passed in the united states, has been considered too drastic by most of the companies that have attempted to operate under it, but the wisconsin law, which went into effect october , , is looked upon with more favor. in formulating these and other laws for the proper regulation of these concerns, it has been found difficult to provide adequate protection to the investing public without unduly hampering the issue and negotiation of securities, but this difficulty should, and in time doubtless will, be overcome. a free and open market for bonds, stocks, and other evidences of indebtedness is essential to freedom of enterprise and mobility of capital, which are in turn essential to the economic prosperity of any country. on the other hand, investors undoubtedly need and deserve the protection of the state against misrepresentation and fraud. it is practically impossible for them in many, perhaps in most, cases to obtain the information necessary for self-protection. the matters and conditions to be dealt with in such legislation are so complex and subject to such frequent change that laws are apt to be imperfect, inefficient, or obstructive. it seems probable that those which do not attempt to be specific and detailed, but give wide powers and discretion to administrative boards or commissions, are most likely to be successful. _ . land banks_ in europe an important group of institutions has developed for the supplying of agriculture and the building industries with the capital needed in their operations. the greatest number and variety of these are in germany, in which their development has been continuous since the days of frederick the great. in order to assist in the recuperation of his kingdom from the devastation caused by the seven years' war, frederick caused the land owners of certain provinces to be organized into associations called landschaften, which were authorized to issue mortgage bonds on the joint security of the lands of all the members of the association in exchange for mortgages on the lands of individual members who needed funds for the improvement of their estates. these mortgages were made payable to the association in the form of small annuities, to which were added the interest paid on the bonds and an increment for the payment of the expenses of the association. these associations were governed by the members through a general assembly, representative boards, and elected officers, and were supervised by the state and carefully regulated by law. regulations were carefully worked out pertaining to the ratio that the loan should bear to the value of the estate mortgaged, methods of valuation, ways and means of maintaining an equilibrium between the bonds issued and the mortgages held, the treatment of defaulting members, etc., etc. machinery for the sale of the mortgage bonds delivered to members was also created, and in some cases later on these sales were made directly by the associations themselves, and cash paid to the maker of the mortgages. five of these original landschaften have continued to the present day, and others modeled after them were subsequently established. in in all germany twenty-five were in operation, of which eighteen were in prussia. the newer ones have not in all respects followed their models. unlike the original five, membership in them is not limited to the nobility and is not compulsory; the liability of the members for the payment of the bonds issued has in some cases been limited to a percentage of the total; the loans are usually paid in cash; and the bonds are sold directly by the associations; but the principles of mutual liability and mutual control which were basic in the old organizations have not been violated in any case. both old and new are organized in the interests of borrowers on real estate mortgage security, and aim to secure funds for these on the lowest possible terms and for long periods of time, by making the security offered the lenders greater than any single borrower could supply. the degree of their success is indicated by the fact that in the amount of their outstanding mortgage loans amounted to nearly a billion dollars, and that their mortgage bonds rank on the exchanges with prussian state bonds and have at times outranked them. another type of land bank appeared in the early part of the nineteenth century as a result of the movement for the freeing of the serfs and their transformation into freehold peasants. the lands of these cultivators were burdened with a variety of feudal dues and charges which had to be commuted before they could become freeholds. in order to facilitate this process banks were established which assumed the obligations of a peasant towards his feudal superior in return for a mortgage on his holding, repayable with interest in the form of an annuity, and in amount equal to the sum to be paid to the feudal superior for the total extinguishment of all feudal obligations. some of these banks were established and administered by states, provinces, and communes, and some by private parties. the public ones obtained the funds they needed partly from subsidies and partly from the sale of guaranteed mortgage bonds and the private ones wholly from the sale of mortgage bonds. the completion of the work for which these banks were originally established put an end to their development about , but similar institutions have since been established in prussia to assist colonists in the purchase and equipment of their farms, and in central and western germany to promote general agricultural and urban real estate operations. the colonists sent into poland for the germanization of that province were in this way assisted by the prussian government, and in some parts of germany the same means have been employed for the purpose of aiding in the process of breaking up large estates into small holdings, in the construction of dikes, roads, and reservoirs, and in changing the courses of streams. next to the landschaften the most important intermediaries between capitalists and investors in real estate in germany are the so-called hypothekenaktienbanken, or joint-stock mortgage banks. these are private corporations, capitalized by the sale of stock shares to the general public, and controlled by their stockholders through directorates, like industrial corporations the world over. their business is the making of long-period loans on real estate security, and the funds thus employed are obtained by the sale of mortgage bonds secured by the real estate mortgages in which the proceeds are invested and by their own capital, surplus, and other funds. they differ from the landschaften in that they are not cooperative or mutual institutions, but strictly business enterprises run in the interests of their stockholders. their primary aim is to earn dividends rather than to secure the lowest possible loan rates and other favorable terms for borrowers. as a matter of fact they are forced by competition and by the principles of good business to make loans at reasonable rates and on favorable terms regarding repayment and other matters, and they successfully compete with the landschaften and other cooperative credit institutions of germany. their mortgage loans are usually made repayable on the annuity plan, one-half per cent each year being the common rate of payment, and they loan about the same percentage of the value of the lands mortgaged, as do the landschaften and other land banks, and the rate of interest charged is the market rate, into the determination of which, of course, the competition of all other institutions enter. while these institutions loan in the aggregate enormous sums on farm property, their chief field of operations is urban real estate, and particularly the industry of residence, or as we would call it in this country, apartment-house construction. it is on this account that the period of their most rapid development coincides with that of the recent rapid industrial and commercial development of germany, which dates back only to the establishment of the empire in . most of them began operations in the decade - , but the most rapid growth in the magnitude and scope of their business operations has come in recent years. in there were forty institutions of this kind in operation in the german empire. the number at the present time is probably considerably greater, since for obvious reasons combinations among them are not promoted by the same kind of economic pressure that in recent years has operated so efficiently in germany in the field of commercial banking. two other groups of german institutions merit attention in this connection, namely, the so-called schulze-delitzsch and the raiffeisen credit associations. the schulze-delitzsch societies were the direct outcome of the period of dearth and famine through which germany passed in the years immediately preceding the revolution of . the first one was not a credit association, but a cooperative buying society, organized by a local judge named schulze for the aid of his needy neighbors of the small trading class in the town of delitzsch. in a credit association on the same plan was organized. others followed, in rapid succession in and after the seventies, until at the present time they are numbered by the thousands and their members by millions, and they are scattered throughout the entire empire. the principle of their organization is the association of a comparatively small group of neighbors, or of people who know one another well, or who may easily come to know one another well, by each making a contribution to a common fund to be loaned out to individuals on personal security chiefly, and which, together with the credit of the entire group, may be made the basis of security for larger funds to be borrowed on the open market. they are carefully organized on the cooperative principle, each member having an equal voice in a general assembly which chooses a board of directors and a small administrative board, to which is intrusted the actual management and administration of the affairs of the society. loans are made to members only, usually for short periods of time, on the personal security of the borrower and of others who are willing to vouch for him, and on the unusually favorable terms which the credit of the entire organization and very low costs of administration render possible. the knowledge which each member has of the character and business methods of his fellow members who borrow, and of the use to which borrowed funds are put, and the stake which each one has in the financial stability and success of the organization, bring the percentage of losses to a very low figure, and make it possible for these societies to grant their members maximum accommodations at minimum prices. to the funds accumulated from initiation fees, membership dues and the sale of the associations' credit have been added, in constantly increasing amounts in recent years, the savings of the members themselves. many societies have such an amount of funds intrusted to them in this way that they are not only entirely freed from the necessity of borrowing, but are obliged to seek opportunities for investment outside their own group. this condition of affairs, in addition to many other common interests, led to the federation of the schulze-delitzsch societies into larger groups, and these in turn into state and national associations, through which surplus funds in one could be made to serve the needs of others inadequately supplied, and through which all the societies could be brought into efficient connection with the general money market of the country. for a number of years these federated societies conducted a large central institution, first in frankfurt and afterwards in berlin, known as the deutsche genossenschaftsbank. in , however, this institution was absorbed by the dresdener bank, one of the eight great private banking corporations of germany, which now serves as the central agency for all these societies. the membership of these associations is not restricted to any class of persons, and they actually include a very large number of small farmers. an inquiry made in showed that in of them, with a total membership of , , there were , farmers, and that one-fifth of the total loans of these associations were made to this class of their members. they must, therefore, be numbered among the land banks of the empire, or at least among the institutions which are helping to solve the credit problem for the agricultural classes. the raiffeisen societies resemble the schulze-delitzsch in many particulars and differ from them in others. like them they are strictly cooperative in character, and, when organized for credit purposes, designed to supply members with loans on the most favorable possible terms. their development was also due to the hard economic conditions of the period immediately succeeding the revolution in . they differ from the schulze-delitzsch societies chiefly in the following particulars: they charge no initiation fees and do not rely to the same extent on the proceeds of the sale of shares, the amount of which they place at a very low figure, often the lowest permitted by law; they make long-period as well as short-period loans, indeed the former chiefly; they do not pay dividends on their share capital, but instead put all profits into reserve funds or prevent their accumulation by keeping the loan rates low; they exercise more care than do the schulze-delitzsch associations to keep their societies small, laying great emphasis upon the importance of personal acquaintance between members and thus upon mutual watchfulness; and, in their origin, they were peasant organizations pure and simple, and hence more strictly land banks. their founder, f. w. raiffeisen, burgomeister of a small village in westphalia, prussia, wanted to rescue the poor peasants of his and other districts from the clutches of the usurers, into whose hands they had fallen and by whom they were being exploited in a most shameful manner. since it was loans that these people needed and since their cash resources were always very low and in many cases nil, he felt that to require, as a condition of membership, entrance fees and the purchase of one or more shares of stock, however small, would be fatal to the success of his plans. he also firmly believed that in the integrity, industry, frugality, and agricultural skill of these people was the basis for sound credit and that cooperation was a means by which these elements of sound credit could be made available and attractive on the money market. at the beginning, therefore, no entrance fees or share subscriptions were required. later prussian law made share subscriptions compulsory and they were, of course, introduced, but they were made so low, and the acquisition of the money for their purchase so easy, that they have not been a serious obstacle. from the beginning raiffeisen invited to membership in his societies the well-to-do and substantial people as well as peasants. of course these people did not require the society for the satisfaction of their own credit needs, but raiffeisen saw that they would greatly strengthen the credit of the societies and he was able to appeal to them on philanthropic grounds. this class of people have a leading part in the administration of the societies of which they are members and have contributed greatly to their success. at the outset the raiffeisen societies had to rely chiefly on borrowing for the acquisition of the capital needed, but with time and success savings deposits, surplus funds accumulated out of profits, and lastly the proceeds of the sale of shares have played an increasing rôle. at the present time many societies are not obliged to borrow at all, and not a few have surplus funds which are placed at the disposition of other societies which are still obliged to borrow. like the schulze-delitzsch societies the raiffeisen associations have federated. at present there are thirteen so-called unions, and at the head of all is a central bank with head office at berlin and branches at königsberg, danzig, breslau, cassel, frankfurt, coblenz, brunzwick, strassburg, nuremberg, posen, and ludwigshafen. the central bank is a joint-stock company, organized on the principle of limited liability, the stock of which is owned by the local societies. it formerly had close relations with the imperial bank, but is now associated with the so-called centralgenossenschaftskassa, endowed by the state of prussia, in such a way that advances and discounts are extended to it on favorable terms. the raiffeisen societies rival the schulze-delitzsch in the rapidity of their growth and in the rôle they play in the economic life of modern germany. in they numbered , , of which , were credit associations. the collective balance sheets of these societies in showed , , marks assets, , , marks liabilities, and a membership of , . while germany was the pioneer in the establishment of land credit institutions, and while such institutions have attained a greater variety of form and a higher degree of perfection in that country than in any other, other countries have advanced along similar lines and now have institutions and a fund of experience well worthy of study. the institutions of germany have in most cases served as models in these other countries, the mortgage banks and the schulze-delitzsch and raiffeisen societies having been most frequently copied. these models have been adapted to foreign conditions and modified in interesting and instructive ways as well as copied without essential change. among the mortgage banks developed outside of germany the crédit foncier of france is especially noteworthy. in its organization it was modeled after the bank of france and is second only to that institution in the magnitude of its operations and the scope of its influence. its head office is in paris and it has at least one branch in each department. its capital stock owned by private parties amounts to about $ , , , its surplus to over $ , , , its loans secured by mortgage to over $ , , , and its total resources to about $ , , , . like the german mortgage banks, it secures the greater part of its loan funds through the issue of mortgage bonds and a large percentage of its loans are made on mortgage security for long periods of time and are repayable on the annuity plan. however, it transacts a greater variety of business than does the typical mortgage bank of germany. it loans on city and farm real estate and to communes, and it transacts a large commercial banking business, though this is distinctly a side issue, incorporated with its other business in order to give profitable employment to funds, sometimes large in amount, which are temporarily on hand awaiting investment. at various times it has absorbed competing institutions and at times it has established collateral institutions to transact lines of business for which its own constitution and legal limitations did not fit it. among these the most important are the crédit agricole and the foncier algierienne. it was obliged ultimately to absorb and liquidate the former, but the latter still flourishes in the colony of algiers. mortgage banks have also gained a footing in most of the other countries of continental europe. in italy they passed through a period of storm and stress, owing to their connection with the issue banks of that country and the consequent confusion between commercial and investment banking which resulted, but they have recently been established on an independent basis and are now developing along right lines and with apparent success. the schulze-delitzsch and raiffeisen societies have been imitated in austria, hungary, belgium, switzerland, and, to some extent, in france and india. the so-called "banche populari" and "casse rurali" of italy are respectively modified forms of these two german types, and rank among the most important means employed in that country for the improvement of the condition of the peasants and small tradesmen. state, provincial, and communal aid for these institutions has been more frequently evoked and more extensively employed outside than inside of germany, and other important modifications of the german prototypes have been made in italy and elsewhere. _ . stock exchanges_ an essential part of the machinery of investment banking is the stock exchange. this is a place where the buyers and sellers of securities or their agents regularly meet for the transaction of business. it may be a portion of a street or a market place or a room in a building. a fully equipped modern exchange contains a large room equipped with telegraphic and telephonic communication with the most important parts of the country in which it is located and of the world, with apparatus for registering prices and easily communicating information to its members, and with the offices needed for the accommodation of the clerks and other employees required. either by posts or in some other manner the precise places in it in which each security or group of securities is to be dealt in is also usually indicated. the purpose of the stock exchange is to facilitate and to regulate dealings in securities. it facilitates such dealings by providing as nearly perfect means as is possible for putting buyers and sellers into communication with each other, and for collecting and making available to them the information they need. to this end they provide for daily meetings at fixed hours; they make and publish lists of the securities dealt in; they speedily record and, through the telegraph and the telephone, communicate to all quarters of the globe the prices at which securities change hands; and through the meeting room equipped as before described they make it possible for buyers and sellers, no matter where located, to communicate with each other in a very short period to time. they regulate such dealings by establishing and rigidly enforcing rules and regulations for listing, transferring, clearing, and paying for securities and for other matters pertaining to the conduct of their members. these institutions serve investment banks as well as private investors, constituting the machinery which connects them all. they thus enlarge the area and scope of the markets for securities, and greatly increase the mobility of capital. without them the surplus savings of one locality would only very slowly and with difficulty find their way to other localities where they are needed, with the result that capital would lie idle or be very inefficiently employed in some places while in others natural and human resources would be undeveloped or very inefficiently developed. existing stock exchanges differ considerably in the manner in which they are organized and managed, in methods of doing business, and in the scope of their operations. some of them are incorporated and others unincorporated; some restrict their membership to a prescribed number, others admit as many as are able and willing to comply with the conditions imposed; some are local in their scope, some national, and others international. in this country all the exchanges deal in local securities chiefly, except the one in new york city, which is national in its scope. the london exchange does a larger business in international securities than any other, but the paris and berlin exchanges, as well as those located at the other important european capitals, and the one at new york share in it to a greater or less degree. stock exchanges have suffered in reputation, and their real functions and merits have been obscured by the abuses to which they have been subjected. connected with their legitimate business of facilitating the investment of capital, various forms of speculation have developed which in some cases have degenerated into gambling pure and simple. the better managed ones have striven to rid themselves of these abuses, and in some countries, notably in germany, legislative bodies have taken a hand. the results, however, have proved only partially successful. some forms of speculation are not only legitimate but necessary in modern business life, and these shade into the illegitimate, unnecessary, and positively harmful forms by such short and easy steps as to render it difficult, and perhaps impossible, to draw a line between the two which can serve as a guide for regulations of an administrative or legislative kind. _ . some defects in our investment banking machinery_ a comparison of our investment banking machinery with that of european countries, especially germany, reveals important differences. among these the most notable are the wide use there and the almost complete absence here of the following: (a) the resort to cooperation as a means of revealing and making available the basis for credit of large numbers of people who lack capital but could use it to the advantage of themselves and of the nation; (b) the long-period mortgage loan repayable on the annuity plan and the mortgage bond as a means of accumulating capital for such loans; and (c) the cooperation of the state and other public bodies and of capitalists and philanthropically disposed persons in developing the credit possibilities of the masses and in directing the flow of proper portions of the stream of capital in their direction. in the development of investment banking institutions in this country, individual initiative prompted by self-interest has been the chief, and except in the case of savings banks, the sole motive force. the result is that most of them have been organized in the interests of lenders rather than borrowers and serve best the purposes of big business and of persons already possessed of large credit by virtue of their wealth or their business reputations. under these conditions, while enormous amounts of capital in the aggregate have been invested in agriculture and urban real estate, the former has suffered relatively in comparison with transportation, manufacturing, and speculation. contributory causes in the development of this situation have been the great need for capital for the development of our transportation system, the stimulation of manufactures by high protective duties, and the enormous area of our public domain which was given or sold to settlers on very easy terms. inasmuch as our transportation system and our manufacturing industries have now attained a high degree of development, our public domain has been nearly exhausted, and land values and the cost of living are rapidly rising, the needs of agriculture are pushing themselves into the foreground, and we are beginning to look to european experience for suggestions regarding the best methods of diverting to that industry a larger part of our rapidly accumulating capital resources. there are obvious difficulties in the way of the application of cooperation to the solution of the problem of agricultural credit in this country. in spite of the fact that immigration is constantly bringing to us people from the very foreign countries in which cooperative credit associations flourish, our agricultural population is still dominated by the spirit of individualism which has been and is one of our dominant national traits. our farmers are also more widely scattered than is the case in europe, and consequently less closely knit together in social units. their holdings are also larger, their capital needs greater, and their business instincts more highly developed. there seems to be no good reason, however, why the joint-stock mortgage bank should not flourish here as well as in europe. it is a purely private business enterprise of the kind with which we are perfectly familiar. the mortgage bond ought to appeal to our investors, many of whom have exhibited a strong predilection for mortgage security and real estate investments, and long-period mortgage loans, repayable on the annuity plan, would meet the needs of many land purchasers and of people who need to invest considerable sums in drainage, irrigation works, etc., better than our present methods. in most, if not all, of our states, trust companies could develop these new lines of finance without prejudice to the other branches of their business. the use of state, county, and municipal subsidies or credit in enterprises of this kind is rendered difficult, if not impossible, in this country, by strong prejudice against the use of public funds in private enterprises, and in some states by constitutional prohibitions. this prejudice is based upon unfortunate experiences, and is at least partially justified by the laxness of our administrative methods and the prevalence of graft, which expose us to the danger of the improper use of public funds devoted to enterprises of this kind. there is no reason, however, why our states should not take the initiative in the improvement of our investment banking machinery and why private capitalists and philanthropists should not turn some of their energy into this channel. suggestion and leadership are needed in this field quite as much as legislation tending to restrict and regulate the operations of existing institutions. references the following books are comprehensive in character, treating most of the subjects covered in the foregoing chapters: macleod, h. d., theory and practice of banking. gilbart, j. w., history and principles of banking. bagehot, walter, lombard street. dunbar, charles f., history and theory of banking. scott, wm. a., money and banking. rev. ed. white, horace, money and banking. fisk, a. k., the modern bank. the subject of clearings and the exchanges are discussed in the following books: cannon, j. g., clearing houses. clare, george, the a, b, c of the exchanges. clare, george, a money market primer and key to the foreign exchanges. margraff, a. w., international exchange. escher, f., foreign exchange. the following cover the history and present condition of banking in the leading countries: conant, c. a., modern banks of issue. knox, j. j., a history of banking in the united states. sumner, wm. g., a history of banking in the united states, being vol. i of a history of banking in all the leading nations. kirkbride & sterrett, j. e., the modern trust company, its functions and organization. breckenridge, r. m., the history of banking in canada. laughlin, j. l., editor, banking reform. johnson, j. f., the canadian banking system. withers, hartley, palgrave, r. h., and others, the english banking system. liesse, a., evolution of credit and banks in france. national monetary commission, the reichsbank, - . riesser, j., the german great banks and their concentration. on investment banking see: wolff, h., people's banks. peters, e. e., co-operative credit associations. hamilton, j. h., saving and savings institutions. pratt, s. s., the work of wall street. conant, c. a., wall street and the country. index "acceptance" credit and lines, accommodation loans, , accounts overdrawn, agriculture, capital for, ; individualism in, assets, prior lien on, ; special, balances, , , , banche populari, bank of england, - bank reserves, - bank of france, - banker's banks, ; bills, , ; most valuable assets, ; making loans, banking, act, , ; adequacy and economy of service, , ; branch, , ; business, ; commercial, nature and operation of, - ; commercial in the united states, - ; commercial in other countries, - ; canadian, - ; defects and reforms in banking systems, - ; english, - ; french, - ; functions in single institutions, ; german, - ; incorporation, ; investment, - ; kansas "blue sky laws," ; problems of commercial, ; reserve, ; services rendered by, - ; wisconsin regulations, ; local, , bank notes, see _notes_ banks, bond houses, ; canadian, - ; central of europe, ; central reserve, ; classified, ; classification of national, ; collections, ; commercial, , ; cooperative, ; correspondent, , ; england, bank of, - ; european land banks, - ; european central, ; federal, ; federal reserve, - ; france, bank of, - ; french land, - ; functions of, ; german imperial, - ; german land, - ; incorporated, ; inspection of, ; interest charges, ; investment, , ; italian land, - ; joint stock, ; land, ; loan-making, ; municipal, ; national, , - ; note issue privileges, , ; of issue, , ; postal saving, ; private, ; protection against unsound practices of, - ; real estate, , ; savings, , - ; services rendered by, - ; state, , - ; supply currency, ; trustee, berlin stock exchange, bills of exchange, , ; documented, "blue sky laws" of kansas, bond houses, - bonds, government, , ; mortgage, , , bonds and stocks, not liquid securities, book accounts, branch banking, , , bullion, , ; in canada, ; in england, ; in france, ; in germany, buying and selling on time, , cables in foreign exchange, canadian banking system, - capital and surplus requirements for banks, - ; stock, , cash, supply of, - ; demands on banks, ; resources, casse rurali, central banks of europe, , , , ; england, - ; france, - ; german, - charters, ; special, , checking accounts, , , , , checks, , , - ; abroad, chicago, clearing center, ; central reserve banks, clearing house, - ; center in new york, coin, ; and bank reserves, ; in england, ; in france, ; in germany, , ; standard and subsidiary, ; supply, collections, , commercial banking, collections, ; currency, , ; domestic exchange, ; nature and operations of, - ; other countries, - ; problems of, ; promissory notes, ; protection against unsound practices of, - ; savings accounts, ; in the united states, - commercial paper, - ; discount of, , , ; and investment paper, , ; liquid security, ; market for, competition in banking, comptoir d'escompte de paris, , conflict of functions and laws, cooperative banks, correspondent banks, , credit "acceptance" line, ; balance, , - , , ; cooperation in, - ; department in banks, , ; inflation of, ; "line" of, , , ; subsidies, state, county, and municipal, ; system, - credits, forced liquidation of, crédit agricole, ; foncier, ; industrielle et commercial, , ; lyonnais, , crisis, commercial, , , currency, , ; lack of elasticity, - debt paying, , debits, - demand in foreign exchange, , deposits, - depositors, mutual insurance of, - discount, defined, ; loans and discounts, selection of, - ; loans and rates, ; operation of, ; rate, canadian, , ; bank of england, ; bank of france, ; reserve system, , ; stopped, discounted paper, , , - , documented bill of exchange, domestic exchange, drafts, , , ; foreign payments, england, bank of, , - ; banking system, - ; foreign and colonial, ; joint stock banks, ; metropolitan, ; private, ; provincial, ; reserve system, europe, commercial banking in, - ; central banks of, - ; land banks, - european investment banking machinery, exchange operations, - ; checks, - ; domestic, - ; foreign, - federal reserve banks, - ; federal reserve board, , foncier algierienne, foreign exchange, - ; _par of_, , ; classes of bills used, france, bank of, , - french banking system, - german banking system, - ; hypothekenaktienbanken, , ; investment banking machinery, ; land and mortgage banks, - ; landschaften, - ; schulze-delitzsch, - ; raiffeisen, - germany, bank of, , - gold element of currency, , ; points, , ; and silver coin in england, , ; in france, ; canada, incorporation, ; should be required, independent treasury system, - inflation, - , - ; of credit, inspection of banks, , insurance, mutual of depositors, , investment, banking, - ; commercial paper, , ; confined to liquid securities, ; defects in machinery, ; improvement of machinery, ; paper, , , , ; of surplus funds, italy, land banks, , joint-stock mortgage banks, ; english joint-stock banks, ; german, - kansas "blue sky laws," land banks, - letters of credit, "line" of credit, , , liquidation, forced, , ; of credits, , ; protection against, liquid securities, loan operations, - loans, , , , ; and discounts, selection of, - ; canadian system, , ; fluctuations, ; german land bank, - ; in the interest of big business, ; limits to, , ; long-term, ; pernicious practice of national banks, ; and reserve system, ; short term, local banking, , london stock exchange, mints, monetary commission, , money of the united states, mortgage banks, ; france, - ; germany, - ; italy, ; mortgage bonds, ; mortgage loans, long period, municipal banks, national banks, , , , - , , ; federal reserve, , ; money in vaults, ; notes, ; pernicious loan practices, ; subscribed to federal reserve banks, national reserve association, new york city, assay office, ; central reserve bank, ; clearing center, , , ; stock exchange, , , , notes, bank, - ; central banks of europe and supply of, ; canadian, - ; bank of england, ; of france, , ; of germany, ; issue of, - ; issue privileges, , ; government, ; limitation of issue, ; promissory notes, ; regulations regarding, ; safeguarding issue, ; volume of united states, oklahoma, mutual insurance plan, overdrafts, "panicky" conditions and feeling, , , par of exchange, , paris stock exchange, passbook, , postal savings banks, , promissory notes, , , - , prior lien, on assets, , protection against unsound practices of banks, - ; - publicity, a safeguard, rate of discount, law in france, ; of exchange, , rates, - ; raising on loans and discounts, real estate and banks, reserve banks, federal, - ; central reserve, ; cities, , reserves, administration of funds, ; bank, ; english system, - ; in national banks, ; operations of system, - ; regulations regarding, , ; secondary, - ; in state banks, ; in country banks, safety, in savings banks, ; fund, , savings banks, , ; defined, saving and saving institutions, - secretary of the treasury and surplus funds, - securities, dealings in the stock exchange, , security, liquid, silver dollars, sixty-day bills in foreign exchange, , société algerienne, société generale, , state banks, , - , , ; and federal reserve, st. louis, central reserve bank, ; clearing center, stock exchanges, - stockholders, liability of, - surplus, , trade or mercantile bills, treasury of the united states, - ; operations, - trust companies, , - trustee banks, united states, notes, volume of, ; subtreasury, , ; treasury, - units of value and foreign exchange, vouchers, wisconsin, regulation laws, the national social science series _edited by frank l. mcvey, ph.d., ll.d.,_ _president of the_ _university of north dakota_ now ready money. william a. scott, director of the course in commerce, and professor of political economy, university of wisconsin taxation. c. b. fillebrown, president massachusetts single tax league, author of _a b c of taxation_ the family and society. john m. gillette, professor of sociology, university of north dakota banking. william a. scott in preparation the city. henry c. wright trusts and competition. john f. crowell the cost of living. walter e. clark statistics. w. b. bailey basis of commerce. e. v. robinson public finance. carl c. plehn each, fifty cents net a. c. mcclurg & co., publishers, chicago transcriber's note: text enclosed by underscores is in italics (_italics_). text enclosed by tilde characters is in bold face (~bold~). a simple explanation of modern banking customs by humphrey robinson edited from a legal standpoint by w. overton harris, former judge of the jefferson county (kentucky) circuit court, dean of the louisville (kentucky) law school designed for the promotion of closer and more satisfactory relations between the public and the banks; for the information of depositors generally, and of those just entering the banking business. boston small, maynard & company publishers copyright, , by humphrey robinson entered at stationers' hall contents page i. general remarks ii. the choice of a bank iii. opening a bank account iv. how to deposit v. your account on the bank's books vi. stopping payment of a check vii. how the bank collects the checks you deposit viii. the clearing house ix. a certified check x. protesting notes, drafts, etc.,--why necessary and how it is executed xi. the local collection department xii. the loan department xiii. new york exchange xiv. the method of issuing national bank notes xv. the so-called "special privileges" of banks a simple explanation of modern banking customs i general remarks after some years of work in a bank, it has been impressed daily upon the writer that, if the depositors were fully informed about the details of the conduct of banks, closer and more satisfactory relations would result. hence this attempt to explain, in a simple and concise way, avoiding as much as possible the use of technical terms, certain things that every depositor should know. for ten years the writer was "in business." for an equal length of time he has been connected with a large city bank. he remembers his utter lack of comprehension of banks and their ways, and his consequent mistakes, perplexity, and embarrassment in dealing with them. also the unfairness and prejudice with which he often judged them. recalling all this, he believes that, without giving offense, he can state these facts. many men having constant transactions with the banks do not realize the importance of the choice of a bank; few understand the correct way in which a note should be drawn, or how to determine the exact due date of a sixty or ninety-day note, or acceptance; what "protesting" a note or draft really means, and what effect it has on the drawers or endorsers; the functions of the clearing house and the simplicity of its methods; why the banks are compelled to pursue a certain course in the collection of paper sent them, even though this course may be very objectionable to the payers; how checks are collected; the effect of certifying a check; and many other details. also that very few depositors have ever seen a copy of the national bank act, or are familiar with the laws governing their own state banks and trust companies. this lack of knowledge of the laws and customs, from which there can be no safe departure, is undoubtedly the cause of many unreasonable requests; assertions of fancied rights; remonstrances, and irritating misunderstandings. this condition should not exist. one explanation for it may be, that the work in a bank is so strenuous, everything having to be accomplished in so short a time, that the officers and employes do not have the opportunity to explain fully the reason why. many seem to think that the details of banking are very complicated. but there is no mystery about these details. they are very simple and sane. the methods of bookkeeping are really elementary, principally mere addition and subtraction. of course the science of banking and political economy involves deep and profound study, but these are not treated here, and the writer has attempted merely to give an idea of the daily routine of a bank. this can be stated with certainty. the interests of the public and the banks are identical; and an acquaintance with banking customs will enable any man to conduct his business with much greater intelligence, satisfaction and profit. also that banks want to accommodate, as far as possible, not only their own customers, but others, because they are possible customers. it is hoped that this writing, in some small degree, may hasten the time, when the political orators, remembering that the day of the private banker has passed, and that the people now own the banks, will cease inciting the public against them; when the law makers, elected by the stockholders and depositors of banks, will cease oppressing them by unequal and unjust taxation; when the public generally, realizing the necessity and importance of banks to every community, will cease being prejudiced against them and their ways, and, by reason of a better understanding, will feel closer and more cordial toward them. so "here's to a better acquaintance" between the public and the banks. ii the choice of a bank the choice of a bank should be most carefully considered, especially by a business man. the same care should be exercised in selecting a bank as would be used in choosing your lawyer or your doctor. having done this, make it a rule to be as frank and open and straightforward with your banker as with your lawyer or your doctor. you will never lose by it. all banking relations must be founded on mutual confidence. once let your banker get the idea that you have deceived him, and naturally he is forced to view your statements with suspicion. tell him the whole truth about your business and your resources, even though it hurts sometimes. it is primarily to his interest to help all his customers build up their business as much as possible, and to keep them going, and your success contributes to the general success of your bank. he should be, not only your banker, but your intimate financial adviser and your very good friend. in deciding upon your bank, did you inquire into the character and disposition of its president and cashier? are they men whose business sagacity and honorable careers are such that you are glad to seek their advice; and can you repose every confidence in their keeping inviolate your business secrets? will they fulfill to the letter their promises of protection to the best of their ability in times of financial stress? or, have they exaggerated their resources and facilities and made all kinds of suave, but very general promises in order to get your account? have you gone a little further and considered the personnel of the board of directors of your chosen bank? that board is supposed to approve or disapprove all loans and business arrangements. or, did you open your account with some bank merely because of convenience of location, or because some friend suggested that institution? iii opening a bank account in opening your account with a bank, you will be asked to give your signature and your address. write your name naturally, as you are in the habit of signing it. the paying teller has to accustom himself to the peculiarities of the signature of every patron of the bank, and has to be constantly on the lookout for forgeries; for if he pays a forgery, the bank must stand the loss. he soon gets to know your signature as he knows your face. so don't have your signature on the bank's books as, john p. williams, for instance, and then sign numbers of your checks, j. p. williams. the letter "j" might stand for james or joseph, and, if the account is in the name of john p. williams, the bank is taking an unreasonable risk in paying out your money on a check signed, "j. p. williams." it would have to make good any loss that might result thereby. a woman, for instance, will open an account as florence perkins smith, and then send out checks signed "florence p. smith"; or "f. p. smith"; or if married, will sign, mrs. harry b. smith. then the paying teller must see that every endorsement on the check is technically correct. for instance, that a check made payable to john p. williams is not endorsed "j. p. williams," and again that a check payable to "j. p. williams, trustee," is not endorsed by j. p. williams only, and not as "trustee." before going to the paying teller's window you should endorse any check you are collecting; even though it is made payable to "cash" or to "bearer." if the check should turn out "no good," the teller can then see at a glance who cashed it, and communicate with the proper party. compliance with these points saves much delay. every check should be endorsed exactly as it is made payable on its face. many firms, as well as individuals, overlook this point daily. the paying teller must watch for raised or altered checks. the law holds that any legal instrument is void if altered in any material way. so many people, if they make a mistake in writing a check, will erase or alter the amount or the name, instead of taking a little more time and making out a new one. the banks have to be very cautious and particular about paying such checks, for they are paying out actual cash on doubtful orders. according to law, they must suffer the consequences if they pay to the wrong person or pay the wrong amount. but all depositors must use every reasonable precaution to keep their checks from being altered in any way. many people, especially in the rural districts, write checks in lead pencil. how easy it is for such checks to be changed if they fall into the hands of dishonest parties. the rejection of the account of any person, who will be so careless, is plainly only the part of safety. the figures should be placed close to the dollar mark. in writing the amount of the check in words, begin close to the left hand margin, and when the amount is written, draw a line in the blank space left between the amount, and the word "dollars." the law says that where the figures and the written amount differ, the written amount shall govern. iv how to deposit in making your deposit, always head your deposit ticket with your name exactly as you wrote it when leaving your signature with the paying teller, otherwise, it might be credited to some other person. also, fill in the amount of your deposit as plainly, and as legibly as possible. after the receiving teller has checked off your deposit ticket, it is passed on to the individual bookkeeper who has charge of your account. he is only human, and any bad figures on your ticket may lead to mistakes and consequent irritation to you. always make out your own deposit ticket. the receiving teller should not be asked to do this. there are generally other people in line, and they, as well as the teller, have a right to complain if he has to stop and do this for you. list your _money_ separately as _gold_ and _silver_, and, in entering your _checks_, write against each amount the name of the bank drawn on, and the town, as plainly and briefly as possible. then add the various amounts and hand the slip to the teller. when depositing currency arrange the bills so that the ones and twos will be together, the fives together, the tens together and so on. have the bills straight and face upward. with the gold and silver follow the same idea. if your deposit is large put the money in packages and label with amount and your name. by following these directions you will put the receiving teller under everlasting obligations. he has a very short time in which to accomplish a great deal, and his position at best is nerve racking. in endorsing a check, either simply write your name on the back, or write "pay to the order of ---- bank" and then sign your name. when a check is undoubtedly intended for you, and your name is not stated correctly on its face, endorse it _exactly_ as it is made payable, and then endorse as you generally do. for instance, if a check intended for brown bros. & co. is made payable to brown bros., it should be endorsed first brown bros., and then brown bros. & co. checks should be deposited or cashed promptly. you have only until the next succeeding business day in which to collect, or deposit for collection, any check. if you hold a check longer than forty-eight hours, and the bank on which it is drawn should fail in the meantime, you have released the drawer and must take your chances with the other claimants against the bank. for this reason the banks send out all checks deposited with them for collection on the same day, or the next succeeding business day; otherwise they have released both the drawer and the endorsers, if the paying bank should fail or any loss should result by reason of their delay. checks drawn on banks in the same town, and which are deposited after the clearing hour, are held over at the depositor's risk, until the next day. v your account on the bank's books there is no mystery about bank bookkeeping. it is about the simplest known. the total amount of your deposit is added to the balance you already have in the bank; then the total amount of your checks, that reach your bank that day, is deducted; the result is your balance. right here it is well to emphasize that the great majority of the banks _keep no record of the names of the parties from whom you receive checks which you deposit; nor do they keep any record of the names of the people to whom you make your checks payable_. when you deposit a check, the only record generally kept by the banks is the date that you deposited it, the amount, and the town in which it is payable. if it is on a bank in the _same city_, your bank will keep a record of the name of that bank, but not otherwise. in handling thousands of checks daily, it can be seen what a stupendous task it would be for a bank to keep a complete record of the drawers and _all_ the endorsers on every check. its force of clerks would have to be doubled or trebled. the bank should not be expected to keep your private memoranda, and it is the duty of the depositor to keep a complete record of the parties from whom he gets the checks that he deposits or cashes. if a check is lost in the mails, the bank has a perfect right, after giving the depositor the amount, the date on which it was deposited, and the town in which it was payable, to charge the amount to the depositor's account until he furnishes a duplicate of the lost check. so, if you cash a check drawn by john b. smith, for example, and payable to james a. jones, and then endorsed by several other parties; it is your duty, and not the bank's, to keep a record of the person from whom you received that check, and obtain a duplicate if it is lost before reaching its destination. also with all other checks which you deposit or cash. many retail firms cash checks for customers; and after endorsing, will deposit them for collection; keeping absolutely no record of the sources from which they received them. for example,--mrs. brown, of st. louis, receives a check from her son in cincinnati. she gets it cashed at the dry goods store with which she deals. then the merchant deposits it, with numerous other checks, in his bank for collection. if the check is returned unpaid, the bank certainly has a perfect right to call on the merchant to pay it. the merchant then calls on mrs. brown to pay him. now if that check is lost in the mails, say burned in a railroad wreck, the bank has the same right to call on the merchant for a duplicate. and it is no valid excuse for him to say that he has no record of the person from whom he received it. in short, each person endorsing a check should keep a record of the person from whom he received it, or for whom he endorsed it. on the last business day of every month your statement is made up and you should call for it as soon after as convenient. then you should assort your canceled checks according to the dates or numbers of same, and compare them with the stubs in your check book. this is _very important_ in order that you may detect any forged or raised checks and _promptly_ inform your bank. if such checks are not reported to the bank in a reasonable time, you will have to stand the loss. the total amount of the checks _not_ returned by the bank should be the exact amount of the difference between the balance as shown by your check book and your bank book. for example,--you give a check on the last day of the month; it does not reach your bank until the first, second or third day of the next month. it can not be charged to your account until it does reach your bank; therefore, the bank's statement will generally show a larger balance than your check book. the difference is the amount of checks that are out. banks do not like to tell the amount of your balance over the telephone. they can not identify you "over the 'phone," and some person, who has no business to know, may be inquiring into your affairs. for the same reason they do not like to state the amount of your balance to any one in person, unless you authorize it. that is a confidential matter between you and the bank, and they make this rule for your protection as much as their own. vi stopping payment of a check if, for any reason, you desire to stop payment on a check, communicate with the paying teller as quickly as possible. give him a full description of the check, the name of the party to whom it is made payable, the number, the date, and the amount. then _always_ confirm this action in writing. if, after examination of your checks, the bank informs you that this particular one has not been paid, you can safely issue another, if desired. inform your bank, however, that you are issuing a duplicate, and write the word "duplicate" across the face of the check. vii how the bank collects the checks you deposit when your deposit is handed in to the receiving teller, he assorts the checks you give him into "foreign" and "clearing" items. the "foreign" items, that is, checks or drafts on banks in other towns, are then passed on to the route clerk. he, in turn, assorts them so that they may be sent to the banks that will collect them for the least possible cost. for instance, if your bank is situated in the middle west, the checks you deposit on the far west will be sent to a chicago or st. louis bank. checks on eastern cities, except new york possibly, will be sent to philadelphia or baltimore. checks on nearby towns probably will be sent direct to banks in those towns. the reason for not sending checks direct to the towns on which they are drawn, is, that often they can be collected much more cheaply by sending them through other large cities. the less expense your bank incurs in collecting, the less it will have to charge you. the depositor should understand that the bank's charges for these collections are figured at about cost. it is a fact that an examination of this account on the books of any city bank almost invariably will show that it is a source of loss rather than profit. in other words, the city banks really charge their depositors less than it actually costs for collections on other towns. the "clearing" items, that is, checks on banks in your own town, are passed to the clearing house clerks. the collection of these checks through the clearing house, and the operation of that institution, are next explained. viii the clearing house the clearing house is simply a meeting room for the convenience of the different banks in a city; a place in which to swap checks. small towns have none. ordinarily no figuring is done here except addition and subtraction. its operation is simple. suppose you owe brown $ . , and you owe jones $ . . then suppose brown owes you $ . , and owes jones $ . . then suppose jones owes you $ . , and owes brown $ . . now, instead of each of you going around to two other places, you three meet in a certain conveniently located room to square, or clear up, accounts. this saves time and steps. a clerk is in this room to do the sums for you. with a little addition and subtraction he has the following: you owe brown and jones together $ . brown and jones together owe you . ------ therefore, you owe brown and jones together $ . you and jones together owe brown $ . brown owes you and jones together . ------ therefore, you and jones together owe brown $ . you and brown together owe jones $ . jones owes you and brown together . ------ therefore, you and brown together owe jones $ . the clerk then announces that you owe $ . here; mr. brown is entitled to receive $ . , and mr. jones is entitled to $ . . then he gives mr. brown an order on you for $ . , and mr. jones an order for $ . . nothing complex about this if you know how to add and subtract. now just substitute for your name, the first national bank; for brown's, the second national bank; for jones', the third national bank. then put the figures up into the thousands or hundreds of thousands of dollars in place of the small ones given above. then name the room where you met, the clearing house, and call the clerk who did the sums, the clearing house manager. then call the orders he has given, the clearing house manager's checks. no matter how many banks in any one city, or how large the figures, this simple method of settling is in operation daily. say there are twenty banks in your city. your bank receives through the mails, and from its local depositors, numbers of checks on the other nineteen banks in the same town. the clerk, who goes to the clearing house, and his assistants, assort these checks into nineteen different piles. each bank goes by a number at the clearing house. then these checks are stamped on the back about like this--"paid through the ---- clearing house"; then follows the date, and name, and number of the bank which sends them. these nineteen piles of checks are added up into nineteen different totals; the checks on each bank being kept in separate bundles. the nineteen totals are added into one grand total. the clerk then starts for the clearing house with nineteen bundles of checks; and a sheet which shows how much his bank has against each of the other banks; and the grand total it has against all the other banks combined. therefore, at a certain hour, generally noon, on each day, twenty clerks, one from each bank, meet at the clearing house. each one takes his stand at his desk. when the manager taps the bell, every clerk makes the round of all the other desks, and leaves the bundle of checks he has against each bank with a slip showing the total amount of the package. when this is over, each desk has nineteen bundles of checks on it and nineteen slips showing the different totals. each clerk then adds up these nineteen totals, and the grand total resulting shows what all the other banks have against his bank. he then reports two amounts to the manager of the clearing house,--the grand total of the checks he has brought in, and the grand total of the checks which have been brought in against him. say he has brought in $ , . worth of checks against the other nineteen banks, and they have brought in $ , . worth of checks against his bank. then his bank has a credit at the clearing house of $ , . . after the manager figures up from these totals handed him by the different bank clerks, he finds that certain banks brought more than was brought against them, and that certain other banks brought less than was brought against them. in other words certain banks have "lost" at clearing while others have "gained" and at a later (designated) hour of the day, the debtor banks pay in their losses at the clearing house and the creditor banks receive their gains, the total losses and gains, of course, exactly offsetting each other. while the systems employed at the clearing houses of the various cities of the united states may vary in some particulars, they are all founded on the principles stated in the preceding paragraphs. these principles have been so perfected that the clerks from the different banks are at the clearing house for a few minutes only each day. the manager imposes a fine of several dollars on the bank for every mistake in calculation its clearing house clerk makes; also for tardiness. to return to the checks which have been brought back from the clearing house. if, on examination, the paying teller has discovered any forgeries, or irregular or missing endorsements, or anything suspicious about any checks; or if the bookkeepers have found that any check overdraws the account of the depositor, the bank has only until the close of banking hours to return such checks and collect from the banks that sent them through the clearing house. so the examination of these checks must be made carefully and very quickly. the "_clearing house association_" in your city is what might be called a mutual aid society, which the banks have organized for purposes of mutual convenience and protection. this association pays the expenses of the clearing house; the manager's salary; the rent; etc. it adopts rules and by-laws and fixes fines and penalties for breaking them. but it is not an incorporated body and can not sue or be sued. in time of panic, the association is a tower of strength, not only for the banks themselves, but for the whole community. the associated banks, at such times, have it in their power to make or break the business interests of their city. _but their interests are identical with the interests of their patrons._ remember the banks are owned by the people, not by two or three private individuals. the failure of any one bank, or of any one business house, increases the panicky feeling. therefore, the clearing house association naturally and from very self-interest, must do its utmost to keep its members and their customers on their feet. in financial storms, the association may adopt certain rules and regulations which may seem unreasonable to the public; but these methods are put in force for "the greatest good of the greatest number"; not only for the protection of the banks, but of their customers and depositors. it is a time for the public to be as reasonable as possible; to uphold the banks and their officers and directors. it is a time for the public and the banks to come closer together. rest assured the banks have no desire to see any firm or person fail in times of panic, or any other time. they make their largest dividends when business is brisk and everything is prosperous. what every clearing house association does want to wipe out, however, is the dishonest and reckless banker. he is a menace and source of anxiety to every bank in the community. the sooner the other banks can detect and expel him from the business, the better. in some cities, notably chicago and st. louis, the clearing house association regularly employs expert accountants to make periodical and unexpected examinations of the banks in the association. if any bank is found to be doing a reckless business and not living up to the rules and regulations of the clearing house, it is heavily fined or expelled. and expulsion from the clearing house means ruin for that bank as soon as the business community learns of it. all clearing house associations should adopt this strict supervision. many a bank was saved embarrassment and possible failure in the recent panic of by the wise methods put into effect by the clearing house association. selfishness and enmity were ordered to the rear. there are always banks whose officers have less foresight and wisdom than others. some of these had been lending too freely, and their actual cash reserves were not sufficient to meet the storm of checks of their frightened depositors; frightened mainly because of ignorance, for, with a few exceptions, the banks were in good condition. to call in their loans and replenish their supply of cash would cause business failures and add to the panic. so the clearing house associations of the different cities determined that the strong and wise banks should help the weak and foolish ones. loan committees were appointed to sit daily at the clearing house. the various banks brought to this committee notes they had discounted, or stocks and bonds owned by them. if the committee thought them good, the clearing house association would lend the bank bringing them, up to about % of their face value. of course, the clearing house association did not lend these banks actual cash, but they issued them clearing house certificates, bearing interest, which could be used among the banks in settling daily claims against each other; just as if the banks had deposited actual cash at the clearing house. in this way, if bank number one had the clearing house manager's check on bank number two for $ , . , in settlement of some daily balancing at the clearing house, bank number two could pay bank number one with clearing house certificates instead of actual cash. in other words, the banks which had a number of good notes, or stocks and bonds, but a small amount of cash, were saved by the combined, unselfish and patriotic action of all the banks working together for the common weal. if the public generally knew of the many instances of generosity and unselfishness that were shown in the clearing houses in this and other panics, the banks, as a class, would not be denounced and condemned as they sometimes are. and this unselfishness was not exercised by the banks for the salvation of the banks alone, but for the business interests of the whole community as well; for, as has been pointed out, _the interests of the banks and the people are one_. ix a certified check your check is nothing but a piece of paper on which is written an order on your bank to pay some one a certain sum. strangers might not like to accept this piece of paper in payment of debts due them. in many cases your check should be "certified." when a depositor presents a check to his bank to be certified, it should be handed to the paying teller. he, in turn, hands it to the individual bookkeeper having charge of that depositor's account. if the bookkeeper finds the balance sufficient to cover the amount of the check, he stamps across its face the words "good for $---- (the sum named in the check) when properly endorsed." then the teller or some officer of the bank, signs that statement and the amount of the check is immediately charged to that depositor. in other words, the bank guarantees or certifies that your check is good. the bank must be very particular about certifying a check. if any officer or employe of a national bank certifies a check, which calls for more than the maker of the check _actually_ has to his credit, such officer, or employe, has committed a penitentiary offense. this provision of the national banking act is most strictly enforced, and the penalty is severe. when certification is necessary, the maker of the check should be the one to have it certified. if you take brown's check to his bank and have it certified, you release brown entirely and can only hold the bank. for example,--a man sold a piece of land, and, on delivering the deed, took the purchaser's uncertified check. after the purchaser had left with the deed, the seller, thinking the check might not be good, had it certified. the bank failed that afternoon. the purchaser proved that he had more than the amount of the check to his credit on the bank's books. on consultation with his lawyers, the seller found that he had no claim on the drawer of that check and could only file his claim against the bank with its other depositors. and he only received about fifty cents on the dollar when the bank's affairs were finally wound up. all because he did not insist on the purchaser of the land having his own check certified. if he had done this he could have held both the purchaser and the bank. by having your check certified, you practically exchange your check for one guaranteed by the bank. for example, the bank certifies your check for $ . . it immediately _charges_ your account with the $ . , and _credits_ its "certified check account" with $ . . then when your certified check comes back to the bank, through the person to whom you delivered it, the bank _charges_ its "certified check account" with $ . , and the transaction is closed. therefore, if, for any reason, you decide not to use a check after you have had it certified, _do not destroy it as you would an uncertified check_. be sure to bring it back to the bank so that the amount may be _credited_ your account, and be _charged_ to the bank's "certified check account." otherwise your account will remain charged with the amount and your balance will show that much less. x protesting notes, drafts, etc. why necessary and how it is executed protesting notes, drafts, checks, or other commercial paper is simply warning or giving notice to people, _secondarily_ liable on that paper, that it has not been paid when due. the person who ought to pay the paper is _primarily_ liable. all other persons who have endorsed the paper or drawn it on another person, firm or bank are _secondarily_ liable. you have endorsed brown's note. brown does not pay it when due. if you do not receive a prompt notice of this, you might endorse another note for brown under the false impression that he had paid the first one. likewise, if you have endorsed jones' draft on his firm, or his check, and his firm, or his bank refuses to pay such draft or check, both you and jones should receive prompt notice that payment was refused. with such notice you would not endorse for jones a second time unless he made good to you, and explained matters satisfactorily. if jones was honest in drawing his draft or check he is entitled to prompt notice of non-payment so that he can take immediate steps to get his money. possibly his firm is embarrassed financially, or his bank has failed. say smith & co. have drawn a draft on a customer and have taken it to a bank and secured the money on it. if the customer refuses to pay the draft, the bank wants prompt notice so it can collect from smith & co. and smith & co. want prompt notice so they can take legal steps at once to protect themselves, and probably stop further shipments to this customer. various other instances might be given where endorsers or drawers of paper might suffer loss or damage from lack of notice of its non-payment. the law holds that this giving of notice is of such grave importance, that, if the bank receiving paper for collection does not promptly notify all persons, _secondarily liable_, of non-payment, all such persons are released from obligation, and the collecting bank must take its chances on making the amount from the payer. this statement must be qualified to this extent. if a _check_ is not protested, the maker of the check must _prove_ that he has suffered loss by not receiving notice of non-payment. but the drawer of a draft, or the endorsers on any check, draft, or note are released, whether they suffer damage or not. generally speaking, a check is a written request of a depositor to his bank to pay a certain sum to a certain party; whereas a draft is a written request of any one to a firm or individual, to pay a certain sum to a certain party. of course, if the bank receives orders from the parties sending them, _not_ to protest certain notes, checks, or drafts, it must obey these orders. but if no such instructions accompany the paper, the bank _must_ protest or make itself liable. every bank of any size has one of its employes appointed a notary, or it can employ a notary on the outside. he is an officer appointed by the state, and is under bond to the state to perform all his duties according to law. when the bank hands protestable paper to a notary, it is his duty to make a formal demand at the proper place on the person who should pay it. if payment is refused, the notary makes an exact copy of the note, draft or check at the top of a printed form used for this purpose. then, over his signature as a notary, accompanied by his official seal, he states that he has made a demand in person for payment of the paper described by him; and, on payment being refused, he has "protested" the non-payment. also that he has mailed or delivered notices of this non-payment to all the parties secondarily liable on this paper and states their names. the notary's official statement is called the "instrument of protest." the notices he mails are called the "notices of protest." certain fees are allowed the notary by law for protesting. these are called "protest fees," and become a part of the debt. of course, the person who ought to have paid the paper gets no "notice of protest." he certainly knows if he has not paid. the notary must keep a copy of all his "instruments of protest." this is a public record, just as any court record is, and as accessible to the public. it is rarely examined, however. so, from the language prescribed by law, that the notary uses in his "instrument of protest," comes the common use of the terms "protest" and "no protest" paper. to bind the parties _secondarily_ liable a notary can protest paper only on the _exact_ day it is due. otherwise he might put it off several days, or demand payment before it was due, and damage might result in either case. so, if the protesting is not done on the exact date when the paper is due, it is of no avail. the maturity of a draft reading so many days, or months, after _date_ must be calculated from the date of the draft itself. but the maturity of a draft reading so many days, or months, after _sight_ must be calculated from the date it was presented to the sight of the payer and accepted. it is very necessary to date acceptances of time drafts reading "after sight." _demand for payment must be made at the proper place during business hours._ a check of course is payable at the bank on which it is drawn, during banking hours. a draft on a firm is payable at its office; likewise a draft on an individual is payable at his office, or if he has none, then at his residence. notes or accepted drafts are payable at the place stated on their face. but, when no place of payment is stated, demand for payment must be made at the office of the maker of the note, or the acceptor of the draft; or if he has no office, then at his residence. when you draw up a note it is the proper thing to state on its face "payable at ---- bank" (giving the name of your bank); or "payable at my office"; or "payable at my residence." likewise, when accepting a draft, write the date, then "accepted, payable at ----" (stating your bank, or residence) across the face of the draft over your signature. therefore when a note, or an accepted draft is made payable at a certain bank, demand for payment _must_ be made at that bank, and _not_ on the maker of the note, or the acceptor of the draft. most notes and accepted drafts are made payable at the bank of the payer. all of them should be. in this way, if you keep money enough in your bank to meet your notes and acceptances, just as you keep money there to meet your checks, the bank will save you all worry about their payment in case you or your bookkeeper overlook them. under such circumstances your paper would never be protested. in accepting a note from a customer, _do not have it made payable at your bank_. have the drawer make it payable _in his own town and at his own bank_. demand for payment must be made at the exact place stated in the note. as every business man is particular about protecting his credit in his own town, and _especially_ at his own bank, it is obvious that he will be most diligent about providing for the payment of paper made payable at the bank with which he is doing business. notes and accepted drafts should be sent, a week or two in advance of their maturity, to the town in which they are made payable. if paper, made payable at new orleans, for instance, is not in new orleans _when due_, proper demand for payment can not be made and the drawers or endorsers might be released. _there is absolutely no law requiring a bank to send you a notice that it holds your note, or draft accepted by you, for collection and due at some future date._ it is customary for banks to send such notices, but it is only a courtesy. it is _your_ duty to keep account of when your paper is due, and to have funds at the place of payment when it is due. the banks that do so are very careful about sending out these notices, but the public should regard it as a favor shown them and not as their lawful right. many people do not know or appreciate this fact. you should always put your street address just below your signature on a note so that notice can be addressed properly. also, in drawing a draft, always put the name of the person or firm, on which it is drawn, in the lower left hand corner, and _invariably_ state the street address. xi the local collection department a bank has a perfect right to refuse to accept and to return any checks, notes, drafts, etc., sent it for collection. but if it does accept them, it must obey the instructions of the sender, literally and exactly. the bank has absolutely no right to disregard these instructions, no matter how obnoxious or disagreeable they may seem to the payer of the paper. many people regard all collectors as offensive and unwelcome. they wish to take their own time about paying their debts. please mark this difference between the collector of your grocer's or druggist's bill, and the city bank as a collector of your note, or of a draft on you. the monthly collector must turn in cash for the majority of the bills given him or lose his position. but it really makes little difference to the bank whether you refuse or pay the note or draft that some other bank has sent it. when collections are sent to a bank direct by firms, or by banks in another city, that do not keep an account with it; the collecting bank makes small fees, but these fees are very insignificant. so, by prompt payment of notes and drafts, you are conferring more of a favor on yourself than on the bank. it is wise to protect your credit with strange banks as well as your own. every bank receives many confidential inquiries concerning the financial standing of firms and persons in its city. if not personally known to the officer in charge of this correspondence, he invariably inquires of the collection department as to the promptness with which the parties in question meet their notes and drafts. and even though you are not a patron, a bank in your own city would rather give you a good financial reputation than a poor one. the collecting bank must regard most carefully the instructions of the sender, especially about protesting or not protesting. also about telegraphing payment or non-payment, and whether to hold the paper after it is due or not. in no case must it surrender any documents attached to a draft until the draft is paid, or accepted; and, in case of acceptance, documents attached must not be surrendered unless the sender so directs. when drafts have bills of lading attached, and the draft states on its face that it is payable on arrival of the goods, the bank can hold it until the goods arrive; but if the draft calls for payment on presentation, even though it has a bill of lading attached, the bank holding it, until the arrival of the goods, does so at its own risk. as has been stated, and it can't be stated too forcibly, the presenting bank has no option and must obey orders to the letter. if it does not, it must suffer any resulting loss. it is only an agent and can not regard the wishes of the payer. another point you should bear in mind. the bank must not only pay strict attention to the instructions of the sender of the collection, but it must follow the law. in self-protection a bank must keep itself informed about the laws regarding collections and any changes in these laws. if a bank accepts anything but the actual cash in payment of a collection, it does so at its own risk, and not at the risk of the sender. for instance, a bank has a draft on smith, or holds smith's note for collection. smith offers his check in payment. if the check turns out "no good" the bank must recover the paper immediately, and any document which might have been attached; otherwise the sender can hold the bank for the amount. therefore, when you tender your check to a bank in payment for collections, you are asking them to take a risk. if you are not well known in the bank, it is only a reasonable request for the bank to ask you to have your check certified. don't ask the bank to have it certified; for, as has been explained in the remarks on "certified checks," the bank by so doing would release you, and could hold only the paying bank. you might just as well ask a strange bank to _cash_ your check as to offer it your uncertified check for a collection on you. you would hardly cash a check for a stranger. why should the bank take an equal risk for you? yet nothing seems to rouse the ire of the average man more, than for the collection clerk to ask him to have his check certified. it is a well-nigh universal rule in all clearing house associations, that the banks, which are members thereof, shall not collect checks on each other before the daily hour for meeting. also it is a general custom not to collect from each other, checks that are deposited, or taken in payment for paper due, after that hour. hence, when a bank accepts uncertified checks in payment before the clearing hour, it will know before closing time whether such checks are good. but, if a bank accepts an uncertified check in payment after the clearing hour, either, it must have it certified, and thereby release the drawer; or, it must hold it until the next day at its own risk. the banks always respect the man who has his check certified, if tendered after the clearing hour. for these same reasons you can see why a bank can not take a check on a bank in some other town in payment of a collection. it then would be several days before the bank would know whether the check was good or not. also the bank would be out that amount of money for the length of time it takes to collect that check; for every bank must remit to the sender on the very day it puts its "paid" stamp on a collection and delivers it to the payer. therefore, when a bank notifies you that it holds your note, or a draft drawn on you, for collection, bear in mind four points. first: the bank must follow the instructions of the sender or owner of the paper. second: it can not disregard the law. third: you are benefiting yourself more than the bank by paying your paper promptly. fourth: the bank is taking a risk every time it accepts anything other than actual cash for a collection. the collecting bank can not consider the instructions of any one but the bank or persons from whom it receives the item. for instance, you live in st. louis, and have sent your note to brown & co. of bridgeport, conn. brown & co. discount your note with their bank, or give it to their bank for collection. before it is due the bridgeport bank forwards this note to a philadelphia bank, which in turn forwards it to a st. louis bank. you are duly notified by the st. louis bank. for various reasons you may not wish to pay. in that event, positively the only way to have this note recalled is for you to communicate with brown & co. then they must request its recall by the bridgeport bank, which in turn instructs the philadelphia bank. then that bank instructs the st. louis bank to return the note. in other words, all instructions must come through the same channels by which the note was originally sent. bear in mind that you are not the owner of this paper, nor is the bank which receives it for collection. when a draft has the words "with exchange" on its face the drawer is asking the payer, not only to pay the amount of the draft, but also the bank charges for collecting. unless the presenting bank has instructions to collect this exchange or return the draft, it can accept the amount of the draft and deduct its charges when it remits for the collection. so don't feel resentment toward the bank when it asks you to pay for collection charges. many people do. but the bank is only following instructions and cares nothing whether you, or the fellow at the other end, pays the cost. because it is human nature to object to paying out money, the local collection department is the recipient of more complaints and unreasonable requests than any other department of the bank. any number of actual happenings could be set down. now the law says that banks shall keep open _during certain hours_ on every business day, which is not a legal holiday. after the closing hour there is a tremendous amount of work to be done. the tellers must balance their cash; the bookkeepers must take off a balance of every account on their particular set of books; and every check and draft deposited, or received through the mails, and payable in other towns, must be listed and forwarded for collection. nothing can be held over without risk, no matter how heavy the day's work. the rule in every bank is to clean up all the work on the very day it is received. none of this daily balancing of cash, or books, can be commenced until the last check has been cashed, the last depositor has come in, and the last payer of a collection has settled. for instance, the payment of a single draft or note after banking hours, necessitates the holding open of several sets of books or the erasure and changing of various totals by the bookkeepers. it is a very mistaken, but popular, idea that the bank employes practically are through with their duties at the close of banking hours. the fact is, that the usual hours for the employes are from eight till five, and it is no uncommon thing for the clerk and officers to be hard at work many hours after the business houses have closed. yet many persons think the bank very disobliging if it refuses to transact business after hours. one unreasonable individual insisted that he had until sundown to pay his note on the day it was due. when the collecting bank told him it would be protested if not paid before the end of banking hours, he became very abusive and wanted to know who gave that bank the power to say how late he could pay. he was politely referred to the law makers, but this did not lessen his resentment against the bank. the foregoing are statements of actual daily occurrences and are only fair samples of the injustice with which many persons treat the banks. and it is mainly the result of ignorance of the laws and customs, which the banks _must_ obey. xii the loan department as a preface to the remarks on this department, the following simple and concise statement is taken, by permission, from that excellent book, "money and banking," by mr. horace white. (book ii, chapter i, page , edition of .) "function of a bank" "a bank is a manufactory of credit and a machine of exchange. mr. h. d. mcleod's analysis of the mechanism of banking is substantially this: a man has $ , . of his own money. he starts a bank. his neighbors deposit $ , . with him. this money becomes the absolute property of the banker. the depositors have simply a right to withdraw an equal amount whenever they like, which right can be enforced by law. the banker owns the money and the depositor has a claim, or right of action, against him for an equal sum. but the depositors will not draw the money out immediately; if they had intended to do so, they would not have deposited it at all. the banker finds by experience that some of his customers will deposit as much money as others draw out, so that $ , . is on hand all the time. he concludes that if his own $ , . in connection with his good reputation, is considered by the public a guarantee for $ , . , then the whole $ , . will serve as a guarantee for at least $ , . . when he begins, his balance sheet reads in this way: liabilities. assets. deposits $ , . cash $ , . "he now begins to discount the commercial paper of his customers running say ninety days at %. when he discounts a bill of exchange for $ , . , he deducts the interest for ninety days ($ . ) and credits the customer the remainder ($ . ) on his books. this $ . is called a deposit, because the customer has the right to draw it out by his check exactly as he could draw out an equal sum of gold deposited by him in the same bank. in the eye of the banker, and of the customer, and of the law, it is a deposit. in ordinary times it is like any other deposit. that is, the proportion remaining uncalled for at any time will be about the same as the proportion of actual money deposited. yet it is nothing but a bank credit. hence the word deposit, when thus used, is clearly a misnomer, since, by derivation and common understanding, a deposit means a thing laid away, or given in charge of somebody. it must be borne in mind, therefore, that bank deposits consist of two different things, namely, ( ) money, ( ) bank credits, and that the latter may be four or five times as large as the former. "the process continues till the banker has $ , . of discounted bills in his portfolio. then his accounts stand thus-- liabilities. assets. deposits $ , . cash $ , . profit , . loans & discounts , . ----------- ----------- $ , . $ , . "this is mr. mcleod's exposition and it is the correct one. it follows that the banker has manufactured something which serves as a medium of exchange to the extent of nearly $ , . . this something is credit. goods can be bought and sold with it as readily as with money, since the checks drawn against these deposits are universally accepted. the whole $ , . of bills are not discounted in a lump, but gradually, so that some are always maturing and bringing money in to meet the checks of customers, in an endless chain of deposits and discounts. it is found in practice that $ , . of loans and discounts may be easily carried on $ , . of cash. thus, the loans of all the national banks in the united states in october, , were $ , , , . , and their cash (including silver certificates and silver dollars) was a trifle less than $ , , . , or only one-fifth of the amount of the loans. the other four-fifths was credit, and perfectly sound credit too, for it had passed through one of the severest panics in our history." the foregoing quotation is an unanswerable argument for the need of banks as manufacturers of credit in every community. the greater the banking capital in any section, the easier it will be for the people of that section to carry on and enlarge their business. the loan department is not only the most important, but it is the money-making end of the bank. if it makes no loans it will pay no dividends. if, on the other hand, it makes bad loans, it will go out of existence. it can be understood readily that the successful bank officer, whose duty it is to accept or reject loans, must be a person of large experience and wide knowledge of men and affairs. he must be an excellent judge of human nature. not too conservative, nor yet too venturesome. he must be a constant student of financial conditions; and must expand or contract his loans as the sea of finance is placid or stormy. his responsibility is great. he must lend, but he must lend judiciously, millions of other people's money. he can not allow feelings of personal friendship to warp his judgment. he must be thoroughly familiar with the laws concerning the making and the collection of notes. in an address to the national banks in , the hon. hugh mcculloch, the first comptroller of the currency, gave this sound advice: "_do nothing to foster and encourage speculation. give facilities only to prudent and legitimate transactions._ distribute your loans rather than concentrate them in a few hands. pursue a straightforward, upright, legitimate banking business. treat your customers liberally, bearing in mind that a bank prospers as its customers prosper." in lending, the bank should encourage the _business interests_ of its community and should discourage speculation. if every one, before asking a loan, would put this question to himself, "would i take this risk," his banker would be saved much embarrassment. on the other hand, if you know your security is good, there is no reason why you should feel any degree of awe or nervousness in offering your own or your customer's notes. that is what the bank is in business for, and your proposition, if not made for purposes of reckless speculation, is welcomed in ordinary times. bear in mind, however, that your banker may, at times, have to refuse your paper, because he has seen clouds on the financial horizon of which the average person is ignorant, and he is endeavoring to protect, not only his stockholders, but his patrons, from the storms that are imminent. it is advisable for you to consider his views carefully, and probably to curtail business expansion. _your average balance on the bank's books has a great deal to do with the amount of the loans, no matter how well secured, that you can ask reasonably._ every bank has a number of customers who expect to be taken care of in the loan department. but, if all the bank's patrons are borrowers, it soon will have loaned out all of its funds. the bank must have depositors also. while some depositors do not ask for loans, experience has shown that the proportion of a customer's balance to his loans must be sustained in order to keep the bank adjusted. in new york the banks generally require a regular customer to keep an average balance of not less than twenty per cent. of the loans made him. most interior banks consider ten per cent. about the right proportion. for example, in the interior cities, if your account shows an average balance of $ . , you can reasonably request loans, properly secured, of $ , . . an average balance of $ , . should entitle the depositor to loans of $ , . and so on. experience proves that if the banker does not keep this important point in mind, his machinery will be "out of gear." speaking generally, it will pay any concern to _borrow_ money, if necessary, to show a fair balance to its credit. bankers are only human, and all business is selfish. every bank will be disposed to take care of its best paying customers first in times of financial storms. every merchant looks out for his best customers first. why not a banker? when a firm attempts to hold its bank down to the last cent of profit, keeps no balance to speak of, and subjects the bank to endless expense in the collection of its checks and drafts, it can not reasonably expect as liberal treatment in "squally times" as the concern which pursues the broader policy of "live and let live." some firms, if they would figure it out, could see plainly that the bank was handling their account at a loss; yet, they think they are conferring a great favor in placing their business with any bank. a large concern was pursuing this narrow policy. among other things it made a practice of borrowing large sums in other cities at four or five per cent. when the local rate was six. the recent panic came on. money advanced to fifty, to one hundred per cent. in new york. the local banks were having all they could do to take care of their own good customers. the result was that this firm came to the verge of an assignment. and, if it had not happened that the banks of its city did generously come to its rescue, it would have collapsed. it is well to remember, that, while the rates of interest in new york are temptingly low at times, they fluctuate violently and often without warning; also that the bankers in a strange city have no personal interest or local pride in your success or failure. money is only a commodity, and rates of interest are governed by supply and demand. now the _supply_ of money in the new york banks varies tremendously, by millions of dollars in fact. this variation comes from many causes. on the other hand, the _demand_ for money in new york is constantly changing. the reasons for this are manifold. but in the smaller cities, both the supply and demand are much more uniform and steady. hence the rates of interest, outside of new york, are much less liable to change. therefore, unless the demands of your business exceed the banking facilities of your town, it is _very_ advisable for you to confine your loans to the local banks. the loan department is restricted by certain laws, just as the other departments. state and savings banks, and trust companies must obey the laws of their particular state, but any bank having the word "national" as part of its name, or the letters "n. a." (national association), or the letters "n. b. a." (national banking association) following its name, must adhere strictly to the provisions of the national bank act. the congress of the united states has forbidden the use of the word "national" as part of the name of any bank or trust company which does not comply with all of the sections of the national bank act. as the statutes differ in each of the separate states, only the laws governing national banks will be considered here. the whole spirit of the national bank act in relation to loans is to prevent the advancing of money on anything but "quick assets." in other words, loans must not be made on any security, that can not be turned into money quickly. for this reason a national bank can not lend on real estate as a security. also it should not accept notes having longer than ninety days or four months to run. the fundamental principle of the law is the guarding of the depositors' money; to have it ready for them at all times. but the _whole fabric and theory of banking is founded on the fact_, demonstrated by centuries of experience, that at no _one_ time do _all_ the depositors want to draw _all_ their money from _all_ the banks. also that every day some loans are due and can be converted into cash if necessary. payment of demand, or "call," loans can be demanded any day. on time loans, payment can not be asked for until the maturity of the note, the day agreed upon by the bank and the borrower. on demand, or "call," loans the interest must be paid at the end of every three months, or when the loan is paid. on time loans, the interest, or discount, is paid in advance. notes reading one, two, three, or four months after date are due, of course, one, two, three or four months after the date of the notes. but thirty, sixty, or ninety-day paper is not due in one, two, or three months. this is a common error. the exact number of days must be calculated. the following table for determining the maturity, or "due date," of thirty, sixty, or ninety-day paper is herewith given: table for finding maturity of notes and drafts at , , and days +-----------+---------------+---------------+---------------+ | | at days | at days | at days | | dated in | will be due | will be due | will be due | | month of | same date in | same date in | same date in | +-----------+---------------+---------------+---------------+ | january | february less | march plus | april | | | day | day | | +-----------+---------------+---------------+---------------+ | february | march plus | april plus | may plus | | | days | day | day | +-----------+---------------+---------------+---------------+ | march | april less | may less | june less | | | day | day | days | +-----------+---------------+---------------+---------------+ | april | may | june less | july less | | | | day | day | +-----------+---------------+---------------+---------------+ | may | june less | july less | august less | | | day | day | days | +-----------+---------------+---------------+---------------+ | june | july | august less | september | | | | day | less days | +-----------+---------------+---------------+---------------+ | july | august less | september | october less | | | day | less days | days | +-----------+---------------+---------------+---------------+ | august | september | october less | november less | | | less day | day | days | +-----------+---------------+---------------+---------------+ | september | october | november less | december less | | | | day | day | +-----------+---------------+---------------+---------------+ | october | november less | december less | january less | | | day | day | days | +-----------+---------------+---------------+---------------+ | november | december | january less | february less | | | | day | days | +-----------+---------------+---------------+---------------+ | december | january less | february less | march | | | day | days | | +-----------+---------------+---------------+---------------+ | | | ~example.~--paper dated march th at days is | | due june th. | | | | ~to prove.~--exclude day of date, then days in | | march, plus days in april, days in may, days | | in june equals days. | | | | paper apparently due, from this table, on february | | th, is, of course, due march d, or apparently due | | april st, is, of course, due may st. | | | | in leap year allowance must be made for days in | | february. | | | | for paper payable in states allowing grace use table, | | then add days of grace. | +-----------------------------------------------------------+ national banks can lend only a certain proportion of their deposits. in new york, chicago, and st. louis, called central reserve cities, national banks must keep on hand, in lawful money, a reserve of twenty-five per cent. of their deposits. in albany, baltimore, boston, cincinnati, cleveland, detroit, louisville, milwaukee, new orleans, philadelphia, pittsburg, san francisco and washington, called _reserve cities_, the national banks must have the same reserve of twenty-five per cent. of their deposits. but the national banks in these last-named thirteen cities can keep one-half of _their_ reserve in national banks located in any of the three central reserve cities, viz.: new york, chicago and st. louis. in all other cities or towns the national banks must have a reserve of fifteen per cent. of their deposits, but nine per cent. of _their_ reserve can be kept in national banks located in any of the thirteen "reserve cities"; or in national banks in the three central reserve cities. "approved reserve agents" are the banks of the larger cities, selected by the banks of smaller cities or towns, in which to carry part of their reserve. these selections _must_ be approved by the comptroller of the currency, the executive head of the national banking system. a national bank is forbidden to lend more than ten per cent. of its combined capital and surplus to any one firm or individual. "but the discount of bills of exchange drawn in good faith against actually existing values, and the discount of commercial or business paper actually owned by the person negotiating the same, shall not be considered as money borrowed." also no national bank can lend on its own stock as security. the comptroller of the currency can have an examination made, as often as he may deem proper, of the condition of any national bank. the visits of the national bank examiners are never announced in advance. they come suddenly and without warning. their duties are not only to balance the books and count the cash, but also _critically to examine each loan and its security_; and to give especial attention to loans to any director or officer, and to any concerns in which they may be financially interested. if the bank is overloaned, that is, has loaned more than the law allows, the examiner immediately reports it, and the comptroller of the currency orders that bank to cease lending, and to require payment of enough of its loans to make good the reserve required by law. and if the bank does not court disaster and the closing of its doors, it hastens to obey orders and to "get in line." the supervision of the national banks is not perfunctory or careless. it is very strict. the inquisitorial powers of the national bank examiners are practically unlimited. they have a legal right to put any bank officer on oath in questioning the affairs of the bank. they look into every department in the most searching way, and any disobedience of the law is reported promptly to the comptroller. these examiners are appointed by the united states government; and if they want to hold their positions, they must be strictly impartial in their reports to the authorities. the provisions of the national bank act have been so rigidly enforced, _that in forty-four years, or since the act was passed by congress, the average annual loss to depositors in national banks, has been only thirty-seven one thousandths part of one per cent. of their deposits_. practically no loss at all. isn't that a tribute to the wisdom of that law; to the strict supervision of the government; and to the honesty and integrity of the officers of national banks; past and present? it has happened, of course, that some spoilers have occasionally obtained control of a national bank, and have dishonestly used the depositors' money in risky ventures for their own profit. but the officials of the treasury department have soon sized them up, and such men shortly find the banking business not to their liking, especially with "uncle sam" as a supervisor. xiii new york exchange practically every bank in the united states keeps part of its funds in banks in new york city, the money center of the country. all national banks are allowed to keep part of their reserve in the national banks of new york, chicago and st. louis, the three central reserve cities. for these reasons checks drawn on banks in these three cities are generally accepted at par, that is, collected without cost to the depositor. in this connection, the word "exchange" comes from the fact that you _exchange_ your personal check for the bank's check on another bank, located in some other city. in remitting for collections, or for balances due, the banks outside of the three central reserve cities, generally send their checks on one of these cities, according to their location. under certain conditions you will notice your local newspapers quoting new york exchange at so much premium or so much discount. these rates are generally in use only between the different banks in your city. the banks do not charge a depositor any premium for its checks on other cities, unless the amount of the checks called for is large. the proper way to draw your check when you want new york exchange, is to make it read "pay to the order of new york exchange." the bank then makes out its check on a new york bank payable to your order. then you should endorse the bank's check to the order of the party to whom you are remitting. banks do not like to sell their checks on other banks to strangers. some expert at raising checks may buy new york exchange for ten dollars and raise it to ten thousand. also he might buy the bank's check with the idea of obtaining the cashier's signature for the purpose of forgery. xiv the method of issuing national bank notes many people have the idea that a national bank, having a capital of, say one hundred thousand dollars, can call on the united states treasury department for an equal amount of national bank notes, without expense to the bank; and thus have double the amount of its capital to lend at the start. the national bank act does say that each national bank _must_ issue currency equal to a certain per cent. of its capital; and further, that each national bank _can_ issue currency equal to the full amount of its capital. but the profit on taking out this currency, or circulating notes, is so very small that many banks do not issue as much as the law allows. these circulating notes must be issued under certain expensive conditions. first--the bank must purchase and deposit with the treasurer of the united states an amount of registered united states bonds, equal at their par value, to the amount of the circulating notes called for. second--dependent on the kind of bonds deposited, the bank must pay a tax on its circulating notes. third--the bank must stand the expense of plates for printing and the express charges for sending it the original issue of its notes. also, when any of its worn-out or mutilated notes are sent to the treasury department, they are destroyed, and the bank then has to pay the expense of re-issue and the express charges for sending them to the bank that originally issued them. the signature of the president and cashier of the bank must be affixed. therefore national banks, in calculating the possible profit on taking out circulating notes, have the following example to be considered in issuing every one hundred thousand dollars of their notes: bonds purchased: united states registered % bonds to be paid at par in . price of bonds $ , . par value of bonds purchased , . money worth %. income from bonds $ , . income from circulating notes loaned at % , . --------- $ , . _less deductions._ annual tax on circulating notes $ . sinking fund to retire premium on bonds at maturity, amount to be charged off each year . expenses (plates, express charges, etc.) . . --------- net income from circulating notes $ , . net income from loaning $ , . (net cost of bonds purchased) at % , . --------- net profit on taking out $ , . of circulating notes $ , . hence the net percentage of profit on taking out national bank notes on this class of bonds, is about one per cent., based on their _present_ market price. the profit on taking out circulation on other united states bonds is even less. suppose the market price of the % bonds purchased was higher, say , as it was several years ago, the profit would be even less. also, if the bonds decline in market value below par (as in case of war, for instance), the bank must stand that loss; and purchase and deposit an additional amount of bonds, so as to make the market value of the bonds deposited equal to the amount of its outstanding circulating notes. in order to retire its circulating notes and obtain possession of its united states bonds, deposited as security therefor, the bank must send the treasury department an amount of lawful money equal to the amount of the circulating notes it wishes to retire. it can then "withdraw a proportionate amount of the bonds held as security for its circulating notes." but the law says that not more than nine millions of national bank notes can be retired in any one month. therefore, if the market price of united states bonds goes up to a point where all profit on its circulation is wiped out, the bank may have to wait several months until previous requests for retiring circulation are out of the way. in the meantime united states bonds may have gone down in price. as has been stated, a national bank _can_ take out an amount of circulating notes, or national bank currency, equal to the amount of its capital. but the profit on the operation is so small (leaving out the chances of actual loss) that many banks do not issue notes to the full amount allowed. the following figures relative to the total capital of all the national banks, and the total circulation of these banks on the dates stated, conclusively prove this fact. (these figures are taken from the annual report of of the comptroller of the currency.) november , january , march , . . . capital stock $ , , . $ , , . $ , , . circulating notes , , . , , . , , . may , august , . . capital stock $ , , . $ , , . circulating notes , , . , , . it can be seen from these figures that the national banks _could_ have taken out _over three hundred millions_ more of circulating notes than they _actually_ issued during the time stated. and these figures are not exceptional. banks, other than national, "shall pay a tax of ten per centum on the amount of their own notes used for circulation and paid out by them." this tax is prohibitive and no state banks issue circulating notes for this reason. xv the so-called "special privileges" of banks in every political campaign, especially the national ones, the orators talk a great deal about the "special privileges" of banks. but they are never defined exactly. according to them, one privilege (?) the bank enjoys is the power to lend a certain per cent. of its depositors' money. but if it could not do this, what reason would the bank have for existing? that is its principal real source of profit. practically the only other privilege the national banks have, is the right to take out national bank notes, or currency. as has been shown in the remarks on "the method of issuing national bank notes," this privilege allows so little profit that the banks do not use it to the full extent of the law. on the other hand, consider a few of the many risks the bank is constantly taking. every loan it makes is a risk. a few bad loans, made through dishonest or visionary representations of its customers, may blot out the bank's profits for a year or more. every check or draft cashed is a risk. every check, draft, or note it takes for collection is a risk. in fact, every transaction the bank undertakes is more than ordinarily hazardous. moreover the profits of the average city bank are not large. considering their responsibilities and the innumerable ways by which they may involve the bank, the salaries paid the employes, from the president to the messengers, are small. also remember there is no "water" in the stock of banks. the capital of every national bank must be fully paid in, before it is allowed to open for business; and in most of the states, the banks, other than national, must have their entire capital paid up within a year from their beginning. the net profits of successful banks, located in cities with a population of one hundred thousand or over, average about six to ten per cent. the business man, when considering an investment in a mercantile or manufacturing enterprise, generally counts on double that amount of dividends. if, as the politicians state, the banks enjoy so many "special privileges"; it is strange that the people of every section of the country do not rush in to organize and take stock in banks. * * * * * * transcriber's note: minor typographical errors have been corrected without note. irregularities and inconsistencies in the text have been retained as printed. social comptabilism by ernest solvay the cheque and clearing service in the austrian postal savings bank proposed law laid before the chamber of representatives of belgium by prof. hector denis (extract from the _annals of the institute of social sciences_) brussels at the institute , rue ravenstein, bruxelles.--imp. écon., n. vandersypen, rue de trèves, . social comptabilism its principle and ground of existence theory of the measure of transactional value by ernest solvay would it be possible, in a society constituted as ours is, to replace the agency of money by another agency which would have its advantages without its inconveniences, and which could be considered as theoretically perfect,--in other words would it be possible to replace the agency of money by a system which would be the final expression of possible improvement in this matter and the definitive point to which social economics ought necessarily to tend? this is the subject which we propose to consider. the paper _social comptabilism and proportionalism_[a] which was the starting point of the institute of social sciences of brussels, was necessarily done in a premature fashion, the subject being regarded from too general a point of view, so as to be harmful to a true explanation of «comptabilism» properly so called. it laid itself open to criticism and lays itself open still; it does not satisfy all those who wish to go deeply into the question. on these accounts we deem it our duty, after what the institute has already published with reference to it, to return again to the subject, limiting ourselves to purely monetary and account-keeping grounds, and an exclusively theoretical explanation of the conception which, connected as it is with the inductive researches of our fellow workers we have submitted to their consideration. in the first place let us examine into the use of money in society, and to whom it is of use; we will next consider if it is indispensable. money presents itself to us as being an indispensable instrument for effecting transactions which are not mere acts of barter, and it presents itself also as having rendered possible,--and this is of capital importance as the sequel will show,--the registering, the writing down or account-keeping of the transactions, if one may so say, which barter did not permit. money is exclusively of use to those who enter into commercial transactions. thus a man who could sufficiently provide for himself in everything without any such transactions, would not have to make any use of money; a landed proprietor may have a considerable fortune and have only a small monetary need, whilst a merchant whose fortune may be much less will find himself in a very different situation: for the greater part of his fortune consisting of merchandise, continually renewed, and consequently engaged in circulation, his monetary need will be considerable. it may therefore be said that the need of money is proportional to the need for commercial transactions. beyond what we have just pointed out, has money fulfilled, or does it fulfil any other purpose? we shall see. if, from the beginning, we could have had a system allowing us to exactly register transactions, would money have been indispensably necessary? in a word, is money in point of fact the particular element in such transactions which caused the writing of them down, or, in reality does not its use hide an agency entirely independent of money? let us examine this. but we cannot do so without offering as a necessary preliminary a few words in explanation of the term «transactions», which we have already used and which will continue to be employed in this paper to the exclusion of the word «exchanges». in our opinion exchange properly speaking,--true exchange and free from the alloy of any foreign element whatsoever, has never been anything but barter; and as soon as the system of barter was left and that of money entered upon, the exchange system was rather abandoned for another system quite different, than that one form of exchange was simply substituted for another form of exchange. and if we have continued afterwards to make use of the word «exchange» it is due more to the force of habit than in order to define the actual condition of things. what in reality fundamentally characterises barter, is that it is an exchange, carried out on the spot, of goods immediately usable by the two parties, each of them giving one usable thing in order to enter into possession of another; whilst that which fundamentally characterises the operation of selling and buying, by means of money, is that it constitutes an exchange of goods carried out on the spot, of which one form only can be immediately used by one of the parties, the other party obtaining not a real thing but an instrument by which he will be able to procure it. so that the party who has received the money, the seller, has only thus obtained a _power_ to make subsequently an inverse operation, that is a purchase where and when it pleases him. the operation of selling and buying is then nothing less than the _exchange of a thing for a power_. but can we still make use of the word «exchange» to define such an operation? we do not think so, and it is for this reason that we substitute for it that of «transaction.» the word «exchange» has continued to be employed after having quitted the system of barter to enter upon the system of buying and selling, by means of money, just as the expression «money» has continued to be used to describe bank-notes, which are only paper having the power of money, as money is an instrument having the power of «things.» thus we have here an example of the general rule, that the evolution of ideas and of facts, is always more rapid than that of the words which represent them. our opinion with regard to «exchange» will be found all the more justified since it will be seen later on that the power conferred by money upon the seller does not exclusively belong to the monetary system, but that it can be obtained, and that theoretically it always could be obtained, in quite another way, without exchanging anything, without having anything to do with money, by simple entry, registering or writing down of figures on paper which is not exchanged, but which remains in one's own hands. let us now come back to the question. we proceed to show that the relative value of things is independent of the unity of value chosen, and that the transactions can be registered, written down, abstraction made of the real, actual value of the material support which has served to fix this unity. in a general way and within possibly narrow limits, very different and variable according as the case may be, given the existence in actual society of fortunes and desires of all degrees of importance, one can, in principle, admit that theoretically, the value _v_ of a thing or of a certain quantity of goods, is proportional to the average _d_ of the desire to possess it, which the men demanding it have, either on account of its use, or from any other reason, multiplied by the number _h_ of these men and divided by the number _o_ offered of this thing; these three factors _d_, _h_ and _o_ not being probably in other respects determinable with precision. we shall then have for the formula of value: _v_ = _u_ × _dh/o_ _u_ being a coefficient of proportionality depending on the unity of value adopted. it will be seen that the term _dh/o_ represents in reality the account of the conditions of the supply and of the demand at the moment and at the place where the value is determined[b]. in substituting e, we have a new term expressive of the value: _v_ = _u_ × e. the relatively fixed value of the precious metals has made it possible for the unity of value to be determined on and easily represented by means of a certain quantity of metal, and the actual monetary system is the result, the value of all things having been henceforth expressed by means of the monetary unity identifying itself with the unity of value determined on. but it may in consequence be remarked in looking closely into this, and it is important to do so, that this result has been reached not because the thing: «metal money», has made its appearance, but because thanks to it, a common denominator of the value of things in general has been employed which did not exist before. now, as we shall see, this common denominator does not of necessity remain invariably tied to the thing, money, or more generally to any sort of material support which has served to define it at a given moment. once fixed it may be considered independently of this support; becoming thus a permanent quantity in time and space, taking in consequence the character of a common measure of the transactional value of things and being employed as a unity of measure of that value[c]. in reality this hypothesis could only be made when there was no such thing as money, and a system of barter exclusively prevailing, those engaged in making transactions might have said to themselves. «let us choose a common denominator of the value of things that we may write down our transactions, and not be any longer obliged to carry on the exchange of usable things when we do not want them, let us take for example the value of a kilogram of wheat here at ... to day, the ... as common denominator and let us calculate directly the value of all other things by this unity. »evidently every other thing would be worth as many times this unity as we see men would give kilograms of wheat to possess it, and thus the numerical value of things would be easily established. »let us agree further in future always to express the value of things by this initial value of the kilogram of wheat, _a value which has only existed during the preceding operation, and which strictly can only have existed for an indefinitely short time, but which can be considered as absolutely permanent_, and apart from any necessity of occupying ourselves with the variation of value undergone in time and space by the kilogram of wheat itself.» it will result that if _v'_ is the value of a thing at any period and at any place of which the originally fixed value was _v_, the relations will be: _v_ = _u_ × e _v'_ = _u_ × e whence: _v'/v_ = e'/e and _v'_ = _v_ × e'/e that is the value _v_ of a thing at any time and place is equal to its initial value simply multiplied by the proportion of the terms which represent the conditions of the supply and demand at the two periods under consideration. let us note, that, as it should do the formula _v'/v_ = e'/e shows that the unity is eliminated when the point in question is the estimate of relative values. it is needless to say that we do not insist on the practical possibility of the determination of the coefficients e and e', which intervene in the preceding formula. we have in effect said that the factors _d_, _h_ and _o_, do not appear to us determinable; we limit ourselves simply to showing here, the theoretical possibility of the system. what is important to remark is that in proceeding, as we have just pointed out, in all estimates of value and in consequence in the registration of all transactions, the variation in the value of the material support, corn, metal, etc. of the unity adopted does not intervene in any way. it will be further seen and we would insist on this point, that the common denominator of the value of things takes in this system, by the fact of its invariability, the character of a common measure; that it can in consequence be taken as unity, and considered in an abstract way. in fact this unity served once in a certain place and at a given moment to fix the initial value of things. from that moment it separates itself from the material thing which served to define it, which has momentarily represented it, and which has served as a support in our mind to effect the operations necessary to the relative fixing of the value of things. these operations made, it is of little consequence if the value itself of the kilogram of wheat varies, as is the case with the value of every thing else. its initial value was for ever fixed, it can be taken as absolutely permanent and immutable,--the fundamental condition which a unity of measure ought to satisfy. in like manner original values of all kinds are equally constant quantities and anyone from among them might be taken as unity. in due course the actual values of things alter; varying continually, and it is the same with the kilogram of wheat or with any support whatever that has served to define the unity. the new values will always express themselves numerically by means of the fixed unity, although that has ceased to have a material representation. in practice the new numerical values will be obtained very easily; from the theoretical point of view they are fixed by means of the formula already given: _v'_ = _v_ × e'/e a formula which by the way, shows that if it happened that for anything at any moment and at any place, the elements _d_, _h_ and _o_ took values such that the term (_d'_ × _h'_)/_o'_ should return to a value equivalent to its initial value (_d_ × _h_)/_o_, the value of this same thing would again become identical with its initial value. this formula shows that the value of things is only relatively to be taken for it varies ceaselessly, shifting to as great a degree as supply and demand itself, just as human desire often does,--it is only mathematically fixed in time and space, we would again repeat for an infinitely short period. this being so it is evident that it becomes possible to put down in writing all transactions by means of the unity determined on. and if this writing down of transactions can be made under a legal form, that is, can be carried out under conditions which have the effect of conferring on the seller a _legal right_, corresponding to what the thing is worth to him who acquires it, and here we enter into the conception of «social accountancy», it becomes useless, superfluous and even harmful to make a material use of the thing representing the unity of the value adopted. it is thus that from the beginning, from the very time barter is abandoned and it is no longer necessary to give a kilogram of wheat to obtain possession of a thing, that at that very moment a writing down would confer on the holder of a thing a right representing a value equivalent to it and permitting him to effect under the same conditions new transactions. if things can thus take place, it will be seen how absurd it becomes to persist in the custom of representing materially a unity which should be detached from the support which has served to define it at a given moment, and which no longer appears as anything but an abstraction permitting in a homogenous manner the arithmetical representation by figures, of the value of things, relatively and individually. this abstract unity ought to be detached from every material tie. on the other hand, it becomes evident that money does not in the least constitute the indispensable element for effecting transactions. and if at the distant period to which the introduction of money goes back it had been possible to tell beforehand that transactions could be written down in a simple but legal manner, after having fixed as above indicated the numerical value of things by the use of a unity essentially invariable, an enormous error in principle would have been committed if to the unities admitted as estimates of value had been given, as is actually the case now, a representation of them in gold and silver,--the franc, the mark, the pound sterling. the usage of money has taken from the unity of value that character of invariability which it ought necessarily to possess. this unity being associated in point of fact with a real article of merchandise, society has been exposed either to want, or to have too much of the matter thus become the indispensable element of transactions, to suffer in fact monetary contractions and dilations, the results of the traffic which necessarily takes place, results which, for a nation producing the precious metals, like the united states does, may possibly end in disaster. a confusion must necessarily be brought about between the conventional fixed value attached to pieces of gold and silver money and the actual variable value of the very matter of those pieces. the conventional value of a piece of silver corresponds to the value we have called its initial value, and we have seen it was possible to preserve to that initial value the character of absolute permanency. but how can its invariability be assured if a material support is given to it open to incessant fluctuations of value resulting from all the speculations to which what ever can be bought and sold is submitted? the very fact of the association of the unity of value with an actual marketable article takes away all stability from the base of our estimates of the value of things. if the price of any commodity,--for example, some article of food or manufacture,--rises in comparison with what it was years or a century ago, it is often asked whether the augmentation is real or only apparent and due to the diminution in the value of the metal which supports the unity: it results clearly from what has been advanced that the variation in the value of metal goes for nothing if, _it be well understood that the quantity of money in use is supposed to remain exactly proportioned to the needs of the transactions_. but when monetary contractions take place, the implement necessary in transactions is wanting, the value of things in general falls, for those who are engaged in making transactions offer their goods at a reduced price to get the monetary implement without which they cannot effect their operations. it would evidently be the same if this implement instead of being in gold or silver, was in wood or paper; and still the same if it was represented only by comptabilist unities. directly it is conceded that man must make transactions then, if an implement is indispensable to that end, be that implement paper or comptabilist unities, he will make sacrifices to procure it and will for this object part with some of his wealth, and therefore the value of things will in a general way fall. while if this implement is in excess, that is if there is monetary dilation, as excess of the implement is of no service to the great bulk of those who transact business, who only want what is necessary to effect their transactions and nothing more, it will be found that the value of things cannot be affected by this as it is in the preceding case. we would say that if this implement is in paper, or represented by accountancy unities, its excess would do no harm, nor have any effect on the value of things, when in the contrary case as we have just seen, this value would fall. but if it is in gold or silver and instead of being stored up in the iron safes of the banks it circulates amongst those who transact business, these last will seek to get rid of it, not because as in the preceding case it is a mere implement of transaction, but as a valuable metal, and in consequence of withdrawal of this kind the value of things will be raised. when we say that the value of things in general would rise in a case of monetary dilatation occurring in the way we have put it, and that it would fall in the case of monetary contraction pure and simple, it is because we are allowing that the supposed want or excess of money would make itself generally felt amongst those engaged in transacting business. if it only affected a special class of such persons, if gold or silver were only wanting or only circulated amongst them, it is needless to say that the rise or fall in prices would only affect the commodities in which their special property exactly consisted. we believe it right to attempt to give as logically deduced from the preceding formulas this note of precision in a rather complex question, which, as we think, has not always been rightly looked at, and that, in consequence of the fact that in money, a marketable article of variable value, is associated with a unity which ought to be invariable. in our epoch of exact science and profound insight into phenomena and things, it is no longer possible to err on the very basis of a question of an interest so general and so vital as this relating to the monetary system. the suppression of such a defective instrument as money and its substitution by a mere simple writing down of transactions, but legally guaranteed,--a system which we have entitled «social comptabilism» demands the study of every economist who wishes progress independently of any dogma, doctrine or party. the time is at hand in which by the force of circumstances it must be carried into effect in highly civilized countries. germany, almost entirely educated to-day, should have no reason to oppose its adoption, if she saw clearly the advantages which social comptabilism presents and the difficulties and inconveniences which would disappear on its use. it would be a great error to imagine that any kind of economic revolution is necessary to establish it. in belgium m. de greef[d], in his «_essais sur la monnaie, le crédit et les banques_», has shown how simple, logical and profitable it would be to approach it by rapid strides resting on the fundamental principle of «social comptabilism»,--the guarantee of property. m. h. denis[e] in his work on the «_organisation et le fonctionnement du service des chèques et des virements à la caisse d'epargne postale de l'empire d'autriche_», shows how such comptabilism has been already approached in what chiefly relates to deferred payments, in a great country, which although it does not generally lead the way in progress, seems to have correctly apprehended what relates to the machinery money masks and wrongly represents. we shall only add one more observation in justification of the way we look at the matter, it is that in our country there is in principle at the present time in the financial organisms patronised and guaranteed by the state, all that is needed to realize «social comptabilism». does not the national bank of belgium, as well as the bank of france, among our neighbours to the west, issue bank notes,--and from our point of view, these notes represent unities of comptabilist value--to all those who offer them sufficient guarantees. in exchange for a deposit of securities, or for well known signatures, paper is obtained, notes equivalent to metal money:--this is already on the road to social comptabilism. in place of that, let these banks issue notes, counters--only possible to be used once--or rather bankbooks containing leaves or fractions of leaves, or squares having a meaning equivalent to that of notes or counters, or able in some way easily to realize that meaning, and which would be simply obliterated in case of transactions accomplished and the working of comptabilism is fully seen although only at the threshold of the system. let the state then enlarge to the utmost degree possible the power of these banks to issue such notes or cheque books; let these be authorised to accept mortgages, deposits and all guarantees from third parties or others, whether directly or more indirectly by the intervention of other public organisms appointed to the work, or even analogous private organisms, of a solvency secured beyond all doubt; let this issue be made for any amounts, however small; let these establishments be even authorised to issue notes similar in form, but blank, or account-books to people without means and only usable on the understanding that all that results in connection with them is at the risk and peril of those transacting business, and we have arrived at comptabilism complete and definitive, even to the point of suppressing the copper coinage. it is evident that in this way society as it is at present organised, can demonetize the precious metals and establish social comptabilism without in principle having to make any revolution whatever in its present position, it has only largely to increase a portion of its machinery, already existing and in full swing. to sum up, it is a question of a simple change in the machinery of transactions and all society is interested in the realization of such a progress purely mechanical and functional, which moreover has no connection with any doctrine, opinion or party, and is no new invention whatever. in conclusion, and at the risk of repeating ourselves, in order to explain our idea under all its forms, and to render it accessible to every mind, we think we cannot do better than to recapitulate it in formulating some articles which set forth in principle the basis on which legal arrangements could be made on the hypothesis that the legislative power should determine suddenly to decree the application of «social comptabilism» such as we have defined it in basing it on the guarantee of property, on the employ of account books, with debit and credit entries, and on the use of a stamp or punch to inscribe or obliterate figures. the articles recapitulate the essential principles of the reform from a point of view wholly general, the only one in this notice we have proposed to examine, leaving for the present absolutely out of consideration details of application which have to be studied and which might vary infinitely. it is needless to say that we by no means believe that a reform like this can be realized at once, we rather think that it will come by stages, as is always the case in every fundamental change relating to any established order of things. the intermediary phases would probably be the adoption of the system of comptabilism already in operation in austria, principally for defered payments, as it is explained in the work of m. h. denis, already cited (it would be only necessary to add to this system the guarantee of the state, based itself entirely on the guarantee of individual property, in order to enter into the plan of «social comptabilism»), and on the other hand, a large extension of the issue by the state of paper money for that which concerns current payments as proposed by m. de greef (it would suffice to add the system of stamping as equivalent to signature, the limitation of the use of paper to a single operation, and its regular return to the accountant's office, for to make such reforms equally a part of the plan of «social comptabilism»). articles setting forth the principles of an organic project. .--from ... the monetary system shall be replaced by the comptabilist system. .--the national bank shall become a comptabilistic establishment, commissioned to deliver to individuals, to societies, etc., account books, divided into leaves and squares having a certain significance for the credit, and leaves and squares having a certain significance for the debit, in which the signification of the transactional operations effected, and which at present involve the use of money, shall be stamped[f] respectively to the credit and debit of the account-books of each of the operators in account unities equivalent to the actual franc. .--the accountant-general will deliver either blank account-books, or account-books having a certain sum inscribed to the credit of the account-book. .--the transactional operations inscribed in a blank account-book will be effected at the risk and peril of the operators. every-one will be able to obtain such an account-book. .--contrariwise, the transactional operations inscribed in a credit account-book will be made under the guarantee of the national bank, but only in so far as they concur with the sum inscribed to the credit of that account-book. .--every-one can obtain credit account-books, for a certain sum, either in mortgaging some corresponding property in favour of the bank, or in offering to it the guarantee of a third party, who should have agreed to a similar mortgage, or ... .--an account-book out of use or obliterated, or of which the sum appearing to its credit is exhausted, will be returned to the accountant-general; should such returner of an account-book have a balance, then the accountant-general will open an account in the official books, and enter this balance to that account. .--every individual whose account-book balance is to his credit will be able to obtain credit account-book for a maximum sum equivalent to this balance, if he offers a corresponding mortgage either as before stated, on an existing property, or on property he may acquire by means of the sum thus inscribed to the credit of his account-book. * * * * * what has preceded shows how simple, unobtrusive, passive is the part played by the accountant-general. the books containing the figures signifying what transactions have been effected either to the credit or debit side, with the figures attached identifying those who have made the transactions, are remitted to him. he adds up the credit and debit account and, if there is a balance, enters it to the account of the possessor of the account-book. that is all. if he comes across mistakes or errors, he rectifies them, notably if he discovers that the statements of the account-books do not agree with the corresponding statements of the account-books of those whose transactions appear there. the accountant-general acts as a piece of machinery would act. he is a recorder of figures, _a registrar of balances_. if there are no balances to enter he does not even make a registration, and is then only a _legal witness_ of transactional operations. no more is asked of him in order to arrive at the suppression, pure and simple of the monetary system. but from the day in which the comptabilist system becomes legal to the exclusion of the monetary system, from the moment in which each individual has his personal account introduced into the registers of the accountant-general, his _transactional life_ is henceforth, and for ever, represented on the one side by the mortgages and guarantees that he furnishes in order to obtain comptabilist unities, on the other hand by the balances of his account books that the accountant enters successively and indefinitely to his account. if the whole fortune of each person were treated in such a manner, and it is this we foresee must be the legal situation in the definitely social state (having for sole tax the succession duty, etc., etc.), it is plain that the true function of the accountant-general would be that of recorder of the state, of the shifting social position of each person, the determiner of the diagram of his active, relatively effective life. each individual would thus have the stereotype of his effective social life cast; each social being would have his effective life formulated, if one may so speak, _by relation_, always by relations, nothing but by relations--to that of all the rest, but in figures, and yet again, in nothing but figures. and herein is seen clearly the fundamental error or profound confusion of those who believe there can be any other thing in the social problem which occupies us than what has just been stated; of those who imagine that capital or fortune must be able at _every moment_, and not eventually, in the sole end of utilising the metal for itself, to be represented by its equivalent in gold or silver; of those who persuade themselves that the words capital and fortune represent anything else than _relative_ social power of action or enjoyment which it is sufficient to record, to make public, purely, simply and legally, as we propose, in order that it may be absolutely guaranteed to each person. ernest solvay. footnotes: [a] _annals of the institute._ n^o . june, . [b] if it is not admitted that the term _dh/o_ exactly represents the account of the conditions of the supply and the demand, it could be represented in a more general way by a function f (_dho_) of the elements _d_, _h_, _o_, which are the only ones which ever can, according to our view, intervene in the fixing, for even admitting that things could be regulated to the last point, socialized if you will, these two elements of supply and demand would at least remain always existing and dominant. [c] it is by design that we employ the expression _transactional value_ in order to differentiate it from a value such as would result from a theory of the measure of value based on work stored up in transactional merchandise, a theory with which we have not here to occupy ourselves. [d] _annales de l'institut_, . n^{os} and . [e] _annales de l'institut_, . n^o . [f] we think we ought here to recall (see: _comptabilism et proportionnalisme social_) that every-one who makes transactions carries about with him not only his account book, but also a marker or stamp bearing representative figures or signs, identifying his personality and by aid of which he inscribes or obliterates the figures significant of the transactions in the account book of his correspondent. it is needless to add, that instead of marking,--an operation we have always put forward the better to show that all account-keeping can be done by simple inscription or the registration of figures and without any «exchange» whatsoever, not even of bits of paper--a system could be adopted, for example, consisting of having on the credit and debit sides of the account-books, leaves of stamps more or less analogous to postage stamps, credit-stamps which the buyer would detach from his account-book, and which would be fastened into that of the seller, then the seller would detach from his account-book corresponding debit stamps to be fastened to the debit side of that of the buyer. these stamps would carry naturally besides their signification the same figures or representative signs of the personality of the maker of the transaction as the marker they would be destined to replace. the comptabilistic system making use of such stamps rather than of marks would be applied to defered payments as well as to current payments, it could be thus used in every case. the principle of the account-book consists naturally in the book forming a real account with debit and credit--like all accounts in ordinary book keeping,--in which is inscribed in a way which would be regarded as valid, having legal force the sums corresponding to the transactions effected either by being written out at full length, with the signature, or by marking in figures, and indicating at the same time the personality of the party making the transaction, or by means of stamps as we have just seen, or finally by some other way. directly we leave the principle above mentioned to look at some intermediary form of its application, a host of combinations offer themselves. the use of stamps for example would permit doing away with the debit side in the account books. the buyer in this case detaches, from his account-book, which becomes now only a credit account book, the stamps corresponding to the extent of the transaction, and he sticks them in the account book of the seller, which is also only a credit one: the credit of the seller increases, that of the buyer diminishes, that is all. if the buyer does not stick his stamps in the account-book of the seller, these stamps can circulate, they would be analogous to bank notes which have been endorsed by writing upon them the name of the first party holding them. social comptabilism (complementary note) by ernest solvay in the last number of these annals[g], i explained in a manner which i consider definitive, the theoretical conception of comptabilism. to this point of view it seems to me necessary to add a few words in order to throw light on certain points which the first article did not sufficiently bring out. we have seen what is the use of money and to whom it is of use, we have considered if it was indispensable. gold and silver are not a «real commodity» except when they take the form of useful objects, utensils, works of art, etc., the possession of which produces enjoyment. turned into coin, they lose this character, they become an instrument, an instrument recognised so far as indispensable for obtaining a real commodity, be this commodity material or moral, by an operation which i have designated under the general term of «transaction». money is not then a commodity in the true sense of the word; on the contrary it is generally obtained by the surrender of a commodity. it is solely in order to accomplish the «operation» of transaction that money is needed, because this is the method, the means, the instrument which custom has consecrated; and if another practicable method, means or instrument were found in order to accomplish this operation money would no longer be indispensable. now, this is what comptabilism does. it is essential to note here that the comptabilistic unities, francs, marks, pounds, etc., would be derived from securities, and not, as with money by the surrender of commodities, that in consequence these unities would no longer have a value by themselves, but simply by the things which they represented. but apart from that, they could be with held or parted with, they could be borrowed or lent, with or without interest, directly from man to man, or by the medium of banking houses, exactly as in the case of money. and in fact, if the force of habit required, nothing would prevent their being called money of account or comptabilistic money, since apart from what has just been said as to the way of obtaining them and their nature, nothing would be altered in the current methods, everything would remain as to day both in the organisation of business and of society. and all that might have been said, written or thought until now in an opposite sense to the fore going considerations should be held as contrary to the reality of the facts resulting from comptabilism. the conception of the comptabilistic system is one quite other than that of the monetary system. there is not the smallest trace of this second conception in the first; it becomes necessary to leave entirely the one to understand the other. in a word the two conceptions mutually exclude each other; the one is based upon _exchange_, the other upon _accounts_, and the two systems derived rest thus on two essentially different principles. the examination of the theoretical side of the comptabilistic system could not be undertaken through the ideas, nor from the point of view derived from the monetary system. it is necessary first of all to accustom oneself to think and speak of business, finances, etc., abstraction being made of every idea of money and to persuade oneself that transactions--and by transactions i understand every operation, whatever it may be, which gives rise at present to the use of money or its equivalent--when finally analysed, only modify the ratio of fortunes. if these ratios could be continuously recognised and fixed, could be officially registered, money would lose its use. indeed, money put in circulation by whatsoever an operation is only a means of granting to the one who receives it, the power to acquire subsequently its equivalent, the other who has given the money having diminished by this much this power as far as he is concerned. now the comptabilistic system in officially registering this power, acquired on the one hand and diminished on the other, permits the afore mentioned ratios being fixed, and realises entirely the part played by money. therefore it can entirely be substituted for the monetary system. and let it be said, in its favour, that the power registered in this system cannot itself be lessened by the fact of the fluctuations in price of the metal, as actually now takes place. moreover, the necessity which exists at this present moment of surrendering commodities to procure the monetary instrument indispensable in transactions, would disappear. it is evident that it might have been possible _theoretically_ to pass directly from the regime of barter to the application of the comptabilistic system, and if one admits that the conception of this system could have been produced at this far distant epoch, and have been thus used from the commencement,--which in the presence of the laws of evolution of the human mind, could only be a pure hypothesis--it must be immediately granted that the monetary idea could not then have occurred to anyone--and even admitting, which is impossible, that it had occurred all the same to someone, no one would have dreamt of making use of it, so much in the presence of comptabilism would the monetary system have seemed barbarous by its illogical and inconvenient character. such are the theoretical considerations which it seems necessary to insist upon. but if there is a difficulty in comprehending the question from its theoretical side, this difficulty disappears if approached from the practical side. this is what will be seen on examining the system which m. hector denis has gone to study in austria and which he proposes to realise in belgium. all the post-offices in the austrian empire are in connection with the savings bank, the central establishment of which is in vienna and which has become during the last few years a thoroughly comptabilistic establishment, in this sense, that,--independent of its primitive aim, it keeps the accounts of over thirty thousand who are affiliated and who annually through this medium do business of which the figures are above a thousand millions of florins. the savings bank exacts from those persons who wish to transact business through its medium, a fixed monetary deposit of florins, without relation therefore to the importance of the transactions which they can effect; it opens for them an account and delivers them, upon request, cheque books which serve to effect the payments which they desire to make. all this is done by the intervention of any post-office of the empire. each time that a cheque is paid by an affiliated person, the central office at vienna is advised by post and returns immediately, also by post, an extract of their account to the two persons concerned. each affiliated person's account is thus kept to date, and this as much for the central bank as for the person affiliated. here then are thirty thousand persons who could at a stretch do entirely without money--if their mutual relations were sufficient to permit them to do so for all the necessaries of life, and this result is obtained merely by the fact that an official establishment is willing to undertake to keep the banking account. but it is seen that these thirty thousand persons are but a select few in the mass of the population, since the savings bank admits them to carry on transactions merely upon the deposit of florins, thus almost always at the risk and peril of the transactors, as has always been the case so far in regard to cheques. and it is evident that if it were desired to make the system general, it would be necessary to adopt the principle of comptabilism which would mean that the transactions were guaranteed by the property of the persons affiliated. here then, as i said, has the savings bank of vienna become up to a certain point a comptabilistic establishment. i may add that the dangers that might threaten this institution, as far as it actually works, spring from its being not entirely comptabilistic, in so far as it still retains the metallic basis. the deposits received are not left unproductive, they are placed in funds, public or otherwise. let a political crisis occur which should cause a rush of withdrawals of these deposits from the bank and it would be exposed to the greatest dangers. solely because the institution is based upon current ideas and not upon the comptabilistic system. in effect, in this latter system, the individual who is affiliated does not make a deposit of monetary unities having a value in themselves, he gives as a pledge a commodity, and according to the value of this commodity he is permitted to make use of more or less unities. here then is the ground on which the institution ought to be based. under these conditions deposits are not necessary. the affiliated person will give a pledge in exchange for his cheque book. the registers of the central savings bank will declare that he is permitted to carry on transactions with _x_ unities, and his cheques will be accepted, as long as he does not go beyond this figure. in place of a deposit having a value of its own, there is the simply writing down, the entry of a right, and the dangers of the present system would be avoided. the entry and the writing down constitute the ideal realization of the comptabilistic system. they lead one to understand that the transactional unities have only a fictitious value, that they serve solely to measure the transactional value of things, that their system is thus dependant on the existence of these things. ideally speaking, all the transactions, that is to say the changes in the fortunes of individuals, may be written down, may be entered, for example in bank books. but concerning the practical side, although the entry remains the ideal conception, it may be that the necessities of human relations require other methods of a more convenient nature. this is a side of the question upon which we hope soon to set forth some solutions, but which can be discussed without the theoretical side of comptabilism being introduced. ernest solvay. footnotes: [g] _annales de l'institut des sciences sociales_, of brussels. the organisation and working of the cheque and clearing service (checks und clearing verkehr) in the austrian postal savings bank by hector denis the accumulation and safe keeping of funds, their investment with the triple guarantee of security, productiveness and easy and prompt realization are regarded as the fundamental functions of savings banks, and it is in these directions that their development has especially been accomplished. the comparative studies on these institutions, such as the works of rostrand and the fine account of messrs hamande and burny testify to the increasing ingenuity of the means of drawing out and gathering up savings, and of the great expansion savings banks well conducted can give to divers forms of credit, and will finally be obliged to give them. but such is the flexibility of this institution that in carrying the spirit of reform into the means of assuring to the depositor the most prompt and convenient disposal of his savings, there ought, in order to apply it to his payments, to be accomplished in the savings bank, an evolution equally fecund in a new direction. a savings bank like that of vienna having at its command the powerful lever of the postal service, combining in a few years with singular ability, the centralization of the accounts of its depositors with the post office functions,--at once receptive and distributive, centripetal and centrifugal, cannot fail to appear one of the most ingenious, stable and perfect organs of modern circulation. there is no need to discover in this functional evolution the realisation of any new principle--undeniable bonds of filiation attach it manifestly to the bank of amsterdam, whose system of clearing accounts adam smith has so admirably described, and in a still more distant past to the bank of venice, which, more perhaps than the bank of st-george, served as a type to the bank of amsterdam; only like the most advanced modern institutions of credit and settling up, it has, over the primitive institutions, the advantage of perfections of means, of rapidity, and of an ever-growing importance in its operations, and of an ever increasing economy of money;--it has as its own peculiar features conditions of special expansion, valuable means of control and specially a capacity of adaptation to a system of credit institutions which can make it one of the instruments of the transformation of the monetary system. the austrian imperial government in carrying out the reforms which are the subject of this paper does not directly pursue the solution of the monetary problem, but is primarily occupied with the financial interest of the savings bank. as its able secretary, m. tobisch, has explained, the law of may ^{th} , of which the text is given further on, in organising the postal savings bank, caused no doubt a considerable number of deposits to be made, but their average importance was so feeble and they involved such general expenses, that the cost almost completely absorbed the results of the investments. in order to distribute these general expenses over a greater mass of monies and to realise a larger clear profit, that is to cause more considerable deposits to be made by especially interesting tradesmen and working-men to have recourse to the medium of the savings bank, a notice of the minister of commerce of oct. , authorised the depositors of over florins to draw cheques on the central office at vienna. originally the depositor remained the holder of his account-book, but from dec. , the deposit of all such books at the central office in vienna became obligatory for those who wished to take advantage of the cheque service. the institution of this service had a considerable influence on the progress of the amount of deposits; before the reform in the total deposits amounted to , , florins, a year after in , they reached , , florins, of which , , was connected with the cheque service. the natural corollary of the centralisation at vienna of the accounts of all those who adhered to the cheque-service was the organisation of the service of clearing accounts, for the more the number of its adherents increased, the more frequently it happened that one depositor drew a cheque in favour of another depositor. the cheque, up till then payable in specie, became a clearing cheque realisable by a simple transfer in writing. this complimentary service which is destined to become the principal one, was instituted sept. . the austrian institution is only at present an element in the vast modern system of credit and the balancing of accounts and no one is ignorant that the system entirely rests on metallic money, as stanley jevons, francis a. walker and macleod have elsewhere clearly shown. macleod makes the striking comparison of modern circulation to the movement of a peg top which spins round on a very fine metallic point. the postal savings bank, as it is organised and works, has not yet any kind of purpose of freeing circulation from its metallic basis, but like all other credit institutions, it contributes to this end by economising more and more the use of money; with extraordinary powers of expansion, it enables an ever increasing number of respectable persons, associations or bodies, to effect all their payments without the least risk, almost without loss of time and without having to keep any metallic money in their possession. and if one tries to conceive the future ideal evolution of an instrument so flexible as the savings bank, one may expect as i shall attempt to show in subsequent papers, that in combining its circulatory function with its function of investment it will be led into concurrence with the radical transformation sought by m. solvay in the definitive elimination of the metallic instrument. the sources from which the materials of this account have been drawn, are the laws, regulations and instructions of which the translation is appended, the statistics of the cheque and clearing service in the last official report (zwölfter rechenschaftsbericht des postsparcassen amtes) the remarkable studies of m. tobisch, secretary of the savings bank, and finally direct observation. guided by one of the most enlightened officials of the savings bank, inspector l. kotschy, i have been able to penetrate into the inner life of this admirable institution. the vienna central postal bank occupies the old palace of the university; there, distributed in its antique halls, a population of , employés, among them ladies, working after a skilfully organised plan, pursue silently now for thirteen years, with inflexible method, an experiment of very great interest for science and for the economic life of societies. bound by invisible threads to more than four thousand secondary organs:--the post offices, which plunge directly into the torrent of the exchanges,--the central office records each day with extraordinary precision the minutest changes that the ever increasing number of its adherents accomplish in the social movement of wealth. all the operations of which it thus fixes the traces arrange themselves into two great classes which recur as the two essential aspects of the rhythmic movement of a central organ of circulation; one joins in the formation of the property of every adherent of the system, in the constitution of his credit at the central bank; the other leads to different modes of disposing of his property and to the formation of his debit. the services of cheques and account-clearing[h] of the austrian savings bank enable on the one hand every person to make, under conditions fixed by law, in any post office in the austrian empire, payments on account, or to the profit of all those who participate in the service; on the other and they enable every adherent to assign by means of a payment cheque, a part of his property to anyone, physically and morally, or by means of a clearance cheque to cause the transfer to be made to the account of another participator in the service. the austrian terminology bristles with difficulties, the name of _cheque verkehr_ is here given to the first of these services, _circulation of payment cheques_ resulting in the end in the use of metallic money, and to the second service, the name of _clearing verkehr_, circulation of _clearing cheques_, which resolves itself, as far as the savings bank is concerned, into the transference from one account to another, in the substitution of one creditor for another. the cheque service may exclusively be adhered to, or the cheque and _clearing_ service. for affiliation to the cheque service it is necessary to request the office of the postal savings bank in vienna to open an account, to send a cheque book and a book of _certificates of receipts and deposits_, of which we are now about to speak. the cheque book costs florin kreutzers, the certificates of deposit kreutzer a piece. the post office can refuse the request without having to give any reason. if an account is opened to the grantee, he receives cheque books and certificates, but he is bound within a month to effect a deposit of florins as security. neither the law nor the regulations fix any maximum of deposit. the minimum of florins will remain in the hands of the administration, without the person entitled to it being able to dispose of it as long as he has an account open in the post office. the adhesion to the _clearing_ circulation is at once requested by the post office, of adherents to the cheque service. the number of adherents to the cheque service is not identical with that of adherents to the service of _clearing_. for the thirteen years that these services have been instituted the first has always taken precedence of the second, but the divergence which exists between the two numbers is being reduced and the number of adherents to the _clearing_ service tends to blend and will finally blend with the adherents to the cheque service. the geographical distribution of those who have accounts in the two services is of much interest. in , out of , adherents to the cheque service there were , in austria, in hungary, and abroad,-- in the german empire, in england, in france, in holland, in italy, in switzerland, in belgium--an interesting fact. the twelfth report: _zwölfter rechenschaftsbericht des postsparcassen amtes_, insists on the important number of hungarian commercial firms, affiliated to the austrian bank, all of whom have an account open in the post office savings bank instituted in at budapest; it announces the approaching inauguration of a direct and regular service of account-keeping between the two banks, a service to which the traders in both countries attach great importance. it will mark a new phase in the evolution of the institution; and form as it were the preface to its internationalisation. it is curious to note that out of residing in hungary and abroad who have cheque accounts, there are who are affiliated to the _clearing_ at vienna, that is . %, a proportion very much larger than is seen in all those in the various austrian provinces. the number of those having accounts has successively been: in the in the cheque service clearing service in » , , » , , » , , » , , » , , » , , » , , » , , » , , » , , » , , » , , from the above it is seen that the proportion per cent of the number of adherents to the service of clearing rises gradually in the later years;--after having from to been nearly uniformly from to %, it rises in to . %. the classification of the adherents from the point of view of conditions and profession reveals the elasticity peculiar to such an institution. advocates, notaries, doctors, even professors appear in great numbers. manufacturers and traders united represent nevertheless more than half the total number of members; bankers and money-changers, associations for savings and loans, private savings banks, , associations or corporations,--public establishments of which were communes and administrative bodies,-- benevolent associations, funds, establishments and foundations, agricultural and forestal associations and religious associations, assurance societies, and journals or periodicals serving as media for the savings bank. the administration of the state forests and domains have recourse to the savings bank in order to bank the produce of the forestal sales, and the administration of taxes is now experimenting as to its intervention for the getting in of duties. this institution thus presents a marvellous flexibility, invading by degrees the whole domain of exchange and enveloping one by one all the organs of the collective life. let us first explain the modes of operating payments to the profit of every member affiliated to the cheque and clearing service. in the first of these modes, the instrument employed is the _certificate or attestation of receipt and of deposit_ (_empfang erlag scheine_). (fig. .) books containing blank certificates are issued by the central office at the low price of a kreutzer the piece, to every person adhering to the cheque and clearing services; these are books of , , and pieces, and to meet the needs of various holders they are drawn up either in german or in some other of the tongues spoken in the empire. all these certificates bear the number of the account to the operations of which they are destined and carry the name and the address of the account holder. each of the certificates presents three parts which are separated one from the other in the course of the operation: the first, the counterfoil, remains attached to the book and in the hands of the holder of the account; of the two others, one, the attestation of the payment, has to be returned by the post office receiver to the person who makes the payment; the third the certificate of the deposit has to be transmitted to the central office at vienna, which returns it to the holder of the account. to make a payment it is necessary to fill in the certificate of receipt and the certificate of deposit, and to present them at a post office with the sum to be paid into the holder's account. the receiver of the post office will bank the sum, and will sign the receipt, imprinting on it the stamp of the office, and will remit it to the person making the payment; he will then detach the certificate of the deposit and will send it to the central office at vienna with the daily account of his operations. the central administration will immediately credit the person in whose favour the payment is made, in the account that it has opened for him, and it will then transmit to him the deposit certificate with an extract of his account. such is the series of operations which result from _empfang erlag schein_. suppose for example that the holder of an account is a merchant who has furnished supplies to a customer in the provinces to the amount of a hundred florins, net. he fills up a leaf of the account book, bearing a certain number, on which he indicates the amount payable, and which payment is to be placed to his account; he sends this leaf to his customer, keeping the counterfoil with the customer's name written on it: the customer forwards the leaf to the post office where he lives with the sum due: the postal receiver separates from the leaf the certificate of receipt (_empfang schein_), which he signs and returns to the customer, he sends the certificate of deposit to the central office at vienna, where the sum is carried to the account of the merchant. after which the deposit certificate bearing the name of the person making the payment is forwarded to the merchant with an extract from his current account, enabling him thus to exercise strict control. [illustration: figure i. [ ]coupon den ____ __ [ ]empfang-schein pr. ____ fl. __ kr. gesendet an: d. s. nr. c ( .) ex . * * * * * nummer [ ]empfang-schein über eine einlage von ____ fl. ____ kr., d. i. fl. _______________ auf das check conto nr. . des k. k. postsparcassen-amtes. [ ]conto-inhaber: josef fischer, jÄgerndorf * * * * * [ ]unterschrift des postbeamten * * * * * [ ]erlag-schein nummer über eine einlage von ____ fl. ____ kr. geleistet durch. ____ ____ auf das check-conto nr. . des k. k. postsparcassen-amtes. [ ]postempel: [ ]dieser erlag-schein ist durch den postbeamten abzutrennen und mit der tagesrechnung an das k. k. postsparcassen-amt einzusenden. d. s. nr. c ( .) ex . * * * * * }von der partei auszufüllen. * * * * * [ ] voucher. [ ] acknowledgement of receipt of ... fl.... kr. sent to ... [ ] acknowledgement of a payment of ... fl.... kr. l. e fl.... to the cheque-account n^o ... of the post office savings bank. [ ] holder of the current-account. [ ] signature of the post office official. [ ] acknowledgement of a deposit ... fl.... kr. made by ... to the cheque account n^o ... of the post office savings bank. [ ] post office stamp. [ ] this acknowledgement of deposit is to be detached and to be sent with the daily account to the post office savings bank.] [illustration: space for notifications sent to the holder of the current account (affix a postage stamps of kr.). * * * * * by means of this acknowledgement of receipt, a payment to the cheque account designated on the other side may be made in every post office (receiving office). the acknowledgement of receipt and the acknowledgement of deposit, properly filled up are to be presented with the sum in question to the post office official. this official certifies the receipt of the sum on the acknowledgement of receipt and returns it to the payer, whilst he detaches the acknowledgement of deposit and sends it to the post office savings bank. the savings bank informs the holder of the account both by extract from the current-account and by the acknowledgement of deposit, that the sum has been received. acknowledgements of receipt or deposit on which are found erasures, obliterations or alterations of any kind, either in the printed text or the written sum are not accepted by the post offices. similarly acknowledgements of receipt or of deposit which are very dirty or much torn are refused.] deposits can be made by the intermediary of rural postmen to the extent of florins. in this case the receipt and deposit certificates must be remitted to them with the sum; a provisional receipt is given which is replaced at the next round by the official receipt of the district post-office. it will be interesting to show the importance to which this mode of arranging deposits has now attained. there is at the central office at vienna a printing office which permanently employs workmen, exclusively engaged in printing cheques and certificates of receipts and deposits. six million of the latter kind of certificates are now annually printed and the number of them printed since the setting up of this system in amounts to millions. an office for the verification and control of the printed matter is connected with this workshop. as to the amount of payments made through these certificates to the accounts of holders the ^{th} report enables us to give the statistics. at the opening of the year the sums paid into the funds of the account holders, by means of the _empfang erlag schein_ amounted to , florins. they rose successively: in to , , florins. » » , , » » » , , » » » , , » » » , , » » » , , » » » , , » » » , , » » » , , » » » , , » » » , , » » » , , » the annual growth has been during the later years about to millions of florins. it moves at a regular pace. i have shown by the example above how by aid of the _empfang erlag scheine_, the trader can by means of his responsible agent, the savings bank, receive at once the amounts of his invoices, without the money passing through his own hands. numerous other applications of the system are before us: commercial travellers can deposit to the account of their employers, the sums they have collected in their rounds; they can even add at the back of the certificate such helpful notes as they think necessary; the commercial firm which employs them being regularly and immediately informed of payments by account extracts and the certificates of deposit being successively forwarded to the firm by the central office at vienna. associations of every kind having accounts at the savings bank can by the same means gather subscriptions from the members: it is enough to send their members _certificates of receipt and deposit_; each one makes his payment at the neighbouring post office; the associations receiving, as the merchants, extracts of their accounts. assurance societies can in like manner, effect the payment of their insurers' premiums without any formality beyond that of sending to these insurers the _empfang erlag scheine_. and in like manner subscriptions to journals and all kinds of periodical payments can be received. _secondly._ post office orders issued to the benefit of any person affiliated to the cheque-service can, at his request be placed to the credit of his account. he gives to this end, on forms required by the regulations, an authorisation at his district post office. on its side the central office of the savings bank puts itself in relation with the post office. ingenious combinations which are indicated in the instructions reproduced in the appendix to this paper, cause the order to be transmitted to the money order office of the viennese post office, which in paying the amount to the central office of the savings bank will at the game time inform of this transmission, the person in whose favour the order is made out. the post office orders only take a very secondary position in the accounts of the _cheque_ and _clearing_ service. in their amount rose to , florins » to , , » » » , , » » » , , » » » , , » » » , , » » » , , » » » , , » » » , , » » » , , » » » , , » » » , , » it is stated that the progressive movement is at once slower and more regular since , than it was previously. _thirdly._ the postal savings bank receives in like manner for the benefit of holders of cheque-books, dividend warrants due from the austrian public funds. it records the amount of them to the credit of the holder's account and receives a fee of kreutzer a piece. it is the least important of the agencies which feed the credit of the adherents of the system. in the amount received was , florins » , » » , » » , » » , » » , » » , » » , » » , » » , » » , » » , » _fourthly._ the amount of claims to debts and bills rendered payable at the post office can in like manner be placed to the credit of the adherent to the cheque and clearing service in favour of whom these bills have been drawn. the importance of this agency is more considerable, but its progressive development is said to move at an irregular rate. introduced in , it was absolutely insignificant during the first two years. , florins , » , , » , , » , , » , , » , , » , , » , , » , , » _fifthly._ when the bearer of a cheque book is at the same time an adherent to the _clearing_ circulation, the amount of the cheques issued in his favour is carried to the credit of his account by the postal savings bank, unless on these cheques is expressly noted: _outside the clearing circulation_. the amount of this service, after that of the _empfang erlag scheine_, is the most important element in the formation of the accounts' credit. it has nearly quintupled in the last ten years, moving forward, since , at a steady rate, a proof, as the whole of the facts otherwise witness, of the progressive penetration of the system into the national economy. at the opening of the institution of _clearing verkehr_, in the second fortnight in , the amount of the sums carried to the _clearing_ account was: , , florins , , » , , » , , » , , » , , » , , » , , » , , » , , » , , » , , » the last and assuredly the most ingenious of the application of the system is being made at this very time in the payment of taxes. the _certificate of the payment of taxes (steuer einzahlungs-schein)_ is nothing but a special form of _empfang erlag schein_; the savings bank proceeds experimentally by the trial of this mode of collecting the taxes in the province of lower austria. the document, which costs kreutzers, is divided into three parts: the _empfang schein_, the _erlag schein_, the _treasury acknowledgement: amtliche bestätigung_ (confirmation and official attestation). (fig. ii.) the tax payer pays at the post office the amount of his tax which must be paid to the account of the central administration of taxes at vienna; the document bears the account number of this receipt office of taxation. the attestation of this payment of the tax-payer is signed by the postal employé and bears the stamp of his post office. the remainder of the document is detached from the tax receipt and presents at first the _erlag schein_; it is the authentication of the deposit paid to the cashier of the administration of finances and which is sent by an employé of the central post office at vienna. it bears the name, the profession, the address of the tax-payer, the amount of the payment made by him, and shows what is the nature of the taxes received and the number of the account at the ministry of finances. the other part of the document is the attestation by the ministry of finances itself of the payment made to its account; this _amtliche bestätigung_ will be detached and sent to the tax-payer: he will thus possess in the end a double authentication. it may be easily imagined how a tax-payer who is an adherent of the clearing service can pay his tax by a simple transfer of accounts, the ministry of finances having itself an account open at the savings bank. if the various modes which concur to the formation of the property of the account holders in the central office at vienna are considered as a whole the total amount of deposits has successively been: in , florins » , , » » , , » » , , » » , , » » , , » » , , » » , , » » , , , » » , , , » » , , , » » , , , » » , , , » in fixing the proportional relations per cent of all the statistical data here brought together we see that the factors which concur to form the credit of the double service of cheques and of clearing, the payments made by way of _empfang erlag schein_ represent in , %, and the transfers by writing about %, while the total amount of the banking of post office orders, of interest in the public funds and of bills does not come to more than % of the whole. [illustration: figure ii. preis[ ] kr. steuer-einzahlungs-schein, preis kr. _n^o _ [ ]empfang-schein über eine einlage von .. fl. .. kr., d. i. fl. ____________________ ____________________ auf das postsparcassen-check-conto nr. , des städtischen central-steueramtes in wien (i. rathhaus). * * * * * post-stempel: [ ]unterschrift des postbeamten; d.s. nr. ( .) ex . * * * * * post-stempel _n^o _ [ ]erlag-schein über eine einlage von ____ fl. __ kr. geleistet durch: (vor-und zuname des steuerträgers) (dessen gewerbe oder beschästigung) (dessen wohn-oder betriebsort) bez gasse (platz); haus-nr. auf das postsparcassen-check-conto nr. , des städtischen central-steueramtes in wien. [ ]als grundateuer: bezirk (sleuergeineinde) ___ besitzbogen-nr. ___ [ ]als hammeclammenutuer: bezirk (sleuergeineinde) ___ conscript.-nr. d. s. nr. ( .) ex . * * * * * [ ]amtliche bestätigung der im checkverkehr des k. k. postsparcassen-amtes am. ______ ___ --entrichtete betrag pr. ______ fl. ___ kr. wurde verrechnet; * * * * * ----------+-----------------+---------------- |[ ]steuer sammt |[ ]vereugssinsen | umlagen | +---------+-------+----------+----- | fl. |kr. | fl. |kr. +---------+-------+----------+----- | | | | * * * * * [ ](baum für mittheilungen an die partei.) * * * * * [ ] acknowledgement of payment of taxes, price: kr. [ ] acknowledgement of receipt of a sum of ... fl.... kr. for the cheque account n^o ... of the central office of taxes of the city of vienna. [ ] signature of the post office official. [ ] acknowledgement of deposit of a sum of ... fl.... kr. made by ... (surname and christian name of the tax-payer, his profession, domicile, district, street (place), n^o ...) for the cheque account n^o ... of the central office of taxes of the city of vienna. [ ] as land-tax. [ ] as house-tax. [ ] official attestation. the sum paid by the cheque service of the post office savings bank, on the ... th of ... ..., has been placed to account. [ ] tax. [ ] interest charged for delay in payment of tax. [ ] space for notifications to the person interested.] [illustration: post card amount fl. kr. house-tax professional-tax income-tax costs arising from delay, execution, etc. (space for other advices to the office of taxes) this certificate of deposit is to be detached by the post-office official, and to be sent with the adhering official attestation together with the daily account to the post office savings bank. kreutzers * * * * * instructions for the persons interested by means of this acknowledgement of payment, the direct taxes indicated on the acknowledgement of deposit and their additions can be paid in each post office, but only to the central office of taxes of the city of vienna ( . town-hall). the tax-payer should indicate exactly and legibly, the sum paid, in figures and in letters, his name, profession and residence; he should also write down the tax in the columns designated for it indicating the kind. this condition not being fulfilled, the payment is not accepted by the post office. the tax-payers having a cheque-account in the post office savings bank can pay the taxes designated in this acknowledgement by a cheque sent to the post office savings bank at vienna at the same time as this acknowledgement form, duly filled in. in this case the tax is only considered as paid on the day on which the cheque is entered in the books of the post office savings bank. acknowledgements of payment on which alterations or erasures occur are not accepted.] the second class of operations of the cheque and clearing service of the austrian postal savings bank embraces the different modes of disposing of the property of the depositors who share in the service. the cheque is in a general way the instrument to which they recur under its two fundamental forms of cheques of payment and cheques of clearing, according as the amount is to be paid in cash or to be transferred to the account of another participant in the clearing service. the cheque books remitted to holders serve the double purpose; it has not been found necessary to print distinct documents, nor even to give to these two classes of cheques different colours. cheque books containing fifty pieces are remitted to participants by the central office at the charge of florin kreutzers; this sum means kreutzers, expense of paper and printing and florin stamp duty. they are printed on the premises of the central office as are the attestations of receipts and deposits. about , , of them are now annually reproduced and more than , , of cheques have been issued since the official presses were first set up at vienna. they are prepared either in german, or in any other language spoken in the empire. before sending them to the holders of an account the office prints on each of these vouchers the number of the account for which they are to be used, as well as the name and address of the holder. (fig. iii.) expressed in ordinary terms, the cheque states, that the savings bank will pay, on the voucher being forwarded, the sum of which the amount in florins has been written out in full. it bears the signature of the person drawing it. to avoid frauds in the statement of the sums to be paid, the savings bank has adopted moreover an arrangement so ingenious and sure that up to the present time no fraud has been noted. the cheque bears to the right four series of figures going from to . the first set corresponds to thousands, the second to hundreds, the third to tens, the fourth to units; the four series united together can express the sum of , florins, beyond which no cheque can be drawn, so that if this part of the document is left intact, the amount of the cheque will be , florins, provided always that the written statement agrees with the series of figures. if a lower figure is stated, then the number of the thousands, hundreds, tens exceeding the amount desired must be cut off with a pair of scissors. suppose for example the cheque is to be for florins; the column of the thousands is to be cut off, figures and in the columns of the hundreds, the last figure in that of the tens and the last seven in the column of units. it is evident that by this ingenious method of control, it will never be possible to raise the amount of the cheque; it will be of no use to alter the written statement of the amount in order to augment it, for it will never be possible to make a corresponding alteration in the arrangement of the figures to the right; by this process of cutting off, the cheque can only be reduced in value but never augmented. and if the agreement between the written figures and the combination of the figures resulting from this way of cutting them out is not perfectly exact, the central office at vienna rejects the voucher as possibly fraudulent, at any rate erroneous. _firstly._ (_cassa-checks._) the cheque (of payment) can be payable to bearer at the postal savings bank at vienna. in this case it is delivered to the person who ought to receive the amount without the drawer having to transmit it to him. this party can either bank it himself immediately at the post office bank at vienna, or put it in circulation: this circulation is authorised for fourteen days, but the voucher cannot carry any endorsement. the cheque will be paid by the office up to the time that the credit account of the drawer is sufficient to meet it. if the cheque has been delivered to a person affiliated to the postal-service of cheques and clearing, he can have the amount put to his credit instead of receiving it in cash. _secondly._ (_zahlungsanweisungen des postsparcassen-amtes._) the customer of the postal savings bank has the right to cause the amount of the cheque to be paid into the hands of a particular person in any one of the post offices; in this case he writes on the back of the cheque the address of the person for whom he intends it. [illustration: figure iii. coupon _datum_ .......... .... _fl._ .... _kr._ _an_ ............. ...................... ...................... ...................... ...................... [ ]_conto-inhaber_: josef fischer _in_ jÄgerndorf [ ]_conto nr._ . * * * * * ........................ _den_ ...................... _ .._ [ ]_das_ =k.k. postparacassen-amt in wien= _zahle gegen diesen_ =check= _den betrag von_: _fl._ [ ]_öst. w._ [ ]unterschrift des ausstellers: _gulden_ _kr._ _öst. w._ * * * * * [ ]tausender [ ]hunderter [ ]zehner [ ]einer * * * * * [ ] holder of the current account. [ ] number of the current account. [ ] the post office savings bank at vienna is requested to pay as against this cheque the sum of.... [ ] austrian standard. [ ] signature of the drawer. [ ] thousands. [ ] hundreds. [ ] tens. [ ] units.] this cheque will be sent by him to the central office at vienna. there are special envelopes for the transmission of these advices which are sold by the office to the possessors of cheque books. the central office will immediately transmit to the person designated an assignment of payment and the cheque will be paid to him on his returning this assignment, signed by him as a receipt. he will detach from it, in order to preserve it, a portion on which is noted the amount of the sum he has received, who the holder of the account is, the said portion bearing also the stamp of the postal office at vienna. a notice to the post office where it is payable will have been sent at the same time, giving authority to pay the cheque. (fig. iv.) everyday , to , of these authorisations to pay cheques are issued. ladies write out these authorisations by means of type-writing machines: their fingers work the machine with astounding rapidity. according to the data given me each of them prints every day to assignments of payment to the persons designated and authorisations to the post-offices to pay; and the hours of work averaging seven, they write about one a minute. _thirdly. (postanweisungen.)_ the cheque can be drawn in favour of a person living in hungary or a foreign country. it is enough that on the back is noted:--«for the issue of a post office order in favour of n ...», and that it is signed. the central office at vienna will send immediately a post office order of corresponding import. the telegraphic order can even be used. statistics distinguish these three categories of cheques and enable us to follow their movement. payments effected by cheques by cheques to particular persons by foreign payable to bearer paid at the post post office (cassa checks)[i] offices[j] orders[k] , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , it will be seen that in the last ten years the movement of the cheques payable to bearer has been more rapid than that of cheques paid at the post offices; the amount of the former has more than tripled. _fourthly._ the possessors of cheque books can cause purchases to be made by the post office in the public funds up to the amount of their account. the order ought to be explained by the transmission of a cheque of a value corresponding to that of the stocks to be bought. the rights acquired by the post office will either be sent on to the purchaser of the stocks, or at his request kept by the office and under its guarantee. the office banks the dividend warrants on their payments and places them to the credit of its client unless he requires them to be sent to him or the money remitted. [illustration: figure iv. [ ]k. k. postsparcassen-amt in wien [ ]aviso über eine zahlungsanweisung _n^o_ ddto per [ ]zahlbar an [ ]bei dem aus der aussenseite bezeichneten postamte. [ ]ausgezahlt: [ ]ohne büchel auszuzahlen. d.s. nr. ii ( .) ex ------------------------------------------ coupon | | | für rechnung | | von der partei | abzutrennen. [ ]k. k. postsparcassen-amt in wien. [ ]zahlungs-anweisung. _n^o_ [ ]( monate giltig.) [ ]das k. k. postamt [ ]zahlt gegen diese anweisung an: [ ]den betrag von ====================================================================== | [ ]ausgezahlt: | [ ]den obigen betrag empfangen | | zu haben bestätigt: | | | | | | [ ]datum. | | | | | | ---------------------------------------------------------------------- d. s. nr. ii ( .) ex . * * * * * [ ] post office savings bank. [ ] advice with reference to an order for repayment. [ ] payable to.... [ ] in the post office designated on the back. [ ] paid. [ ] to be paid without savings book. [ ] post office savings bank. [ ] order for repayment. [ ] valid during two months. [ ] the post office. [ ] pay on this order to.... [ ] the sum of.... [ ] paid. [ ] in acknowledgement of the receipt of the above sum. [ ] date.] the importance of these payments is not considerable as is seen by the following figures: , florins. , " , " , " , " , " , , " , , " , , " , , " , , " , , " _fifthly._ the postal savings bank pays in the same way on account of the adherents of the cheque and clearing service, bills, signed bonds, accounts admitted and approved. bills of exchange are settled at the postal office at vienna. in order to realize their payment, the holder of an account draws a cheque for the amount of the bill and writes on the back: _for payment of the bill herein refered to_. he indicates the date of its falling due and puts his signature below these remarks. this cheque is sent to the postal office at vienna before the bill falls due. it can be addressed also to the possessor of the bill, who will present it at the date it is due to the postal pay office with at the same time his claim. if the possessor of the bill is himself affiliated to the cheque service he can have the bill put to the credit of his account. the degree of importance of this branch is indicated by the following figures: , florins , , " , , " , , " , , " , , " , , " , , " , , " , , " , , " from this it will be seen that during the last five years the movement has so accelerated that the amount has in the interval nearly doubled. _sixthly._ here the system presents to us its highest degree of interest: the possessors of account books, adherents of the clearing service, can discharge their debts one to the other by the transfer of accounts. it is sufficient to write at the back of the cheque: to be carried to the credit of account n^o ..., with the name of the holder of the account and his address. in this case the amount of the cheque is placed to the debit of the person who issued it and to the credit of the person in whose favour it is drawn. the two holders of accounts at the savings bank are immediately informed of this transfer by the sending of the extract of their accounts. the cheques which have this destination are properly speaking clearing cheques not intended to be paid in species; but it may happen that a cheque destined for a member, adherent to the clearing service has in an exceptional case to be paid in money; the person who has issued it will in that case have to make a note at the back of the document: _outside the clearing circulation_. the statistics show the growing importance of _clearing cheques_. , , florins , , " , , " , , " , , " , , " , , " , , " , , " , , " , , " , , " it will be seen that in the last ten years, the amount has nearly quintupled. the pace of the movement is here more rapid than in cheques payable in cash. the proportional relations of all the modes of disposing of the credit of the adherents of the cheques and _clearing_ service show that in on a total of liquidations or payments of , , , florins, % were occasioned by transfers of accounts, % by cheques to bearer (_cassa-checks_), % by cheques to appointed persons, and the remainder by the other modes indicated. the progress of the figures taken all round is as follows: , florins , , " , , " , , " , , " , , " , , " , , " , , " , , , " , , , " , , , " , , , " all this formidable account keeping is done strictly day by day. three hundred employés are working at it constantly. special employés who have acquired an extraordinary ability, verify the signatures on each occasion. the type signatures are classed alphabetically. current-accounts are drawn up on loose sheets and not in books: this is considered a real progress for books are soon in tatters. on each occasion an extract of the account is sent to the party interested: every transfer entails the sending extracts to both parties interested. envelopes with their names and addresses printed are classified in pigeon holes so as to be easily found. i join to this explanation some extracts from typical accounts. one shows a banking made by a post office, the other a transfer made between adherents to the _clearing_ system. (fig. v.) the centralisation of all this vast account-keeping at the central office of the savings bank at vienna is the basis of the system, the pledge of the regularity of the service and of the certainty of the control. notwithstanding the inevitable complexity of operations and accounts, this complexity does not entail any really prejudicial delays[l]. the increasing figure of the operations is a proof of the growing favour of the public and is a testimony to the usefulness of the institution beyond all argument. the coefficient of error has been very slight and fraud has not been as yet able to succeed in causing trouble in the working of this admirable machinery of circulation. the central office is put every day in relation with , post offices, which transmit to it packets containing the _empfang erlag schein_, the claims and all the documents which have been brought them. the unfastening of this immense correspondence is simplified by machinery. all these documents are enclosed in large envelopes of uniform dimensions so that they can be opened by packets, in cutting off their edges by means of large knives working mechanically. (fig. vi.) the postal office of vienna prepares annually the list of all the possessors of cheque books who are adherents to the clearing service; this list is printed and can be obtained by subscribers with the supplements published at irregular intervals for one florin a year. [illustration: figure v. [ ]nummer des checkbüchels: [ ]_k. k. postsparcassen-amt._ = = [ ]conto-auszug [ ]=n^o vom / .= +----+-------+---------+---+---+---+---+---+---+----+---+----+----+ |[ ]_nr. des erlagscheines oder checks_ | |[ ]_einlagestelle bezw. zahlstelle_ | | |[ ]_name des einzahlers bezw. empfängers_ | | | |[ ]_einlagen und gutschriften_ | | | | |[ ]_rückzahlungen_ | | | | | |[ ]_lastschriften im_ | | | | | |_clearingverkehr_ | | | | | | |[ ]_guthaben_ | | | | | | | |[ ]_c. c.[a]_ | | | | | | | |_folio_ | | | | | | | | |[ ]_fact.[a]_ | | | | | | | | |_datum_ +----+-------+---------+---+---+---+---+---+---+----+---+----+----+ | | | |fl.|kr.|fl.|kr.|fl.|kr.|fl. |kr.| | | +----+-------+---------+---+---+---+---+---+---+----+---+----+----+ | | |[ ] | | | | | | | | | | | | | |uebertrag| | | | | | | | | | | | | |vom / .| | | | | | | | | | | +----+-------+---------+---+---+---+---+---+---+----+---+----+----+ | |wein | | | | | | | | | | | | +----+-------+---------+---+---+---+---+---+---+----+---+----+----+ | |inglan | | | | | | | | | | | | +----+-------+---------+---+---+---+---+---+---+----+---+----+----+ | | | | | | | | | | | | | | +----+-------+---------+---+---+---+---+---+---+----+---+----+----+ | | | | | | | | | | | | | | +----+-------+---------+---+---+---+---+---+---+----+---+----+----+ | | | | | | | | | | | | | | +----+-------+---------+---+---+---+---+---+---+----+---+----+----+ | | |[ ] | | | | | | | | | | | | | |fürtrag | | | | | | | | | | | +----+-------+---------+---+---+---+---+---+---+----+---+----+----+ [a] _colonne zur eventuellen benützung der conto-inhaber._ d. s. nr. b ( .) ex . * * * * * [ ] number of the cheque book. [ ] post office savings bank. [ ] extract of current account. [ ] number of the th of september . [ ] number of the acknowledgement of payments or cheques. [ ] receiving office (pay-office). [ ] name of payer or of receiver of money. [ ] deposits and entries to the credit of current account. [ ] repayments. [ ] debit entries in the clearing service. [ ] balance in hand. [ ] page. [ ] date. [ ] brought over from . . . [ ] to be carried over.] [illustration: [ ]nummer des checkbüchels: [ ]_k.k. postsparcassen-amt._ = = [ ]conto-auszug [ ]=n^o vom / .= +----+-------+---------+---+---+---+---+---+---+----+---+----+----+ |[ ]_nr. des erlagscheines oder checks_ | |[ ]_einlagestelle bezw. zahlstelle_ | | |[ ]_name des einzahlers bezw. empfängers_ | | | |[ ]_einlagen und gutschriften_ | | | | |[ ]_rückzahlungen_ | | | | | |[ ]_lastschriften im_ | | | | | |_clearingverkehr_ | | | | | | |[ ]_guthaben_ | | | | | | | |[ ]_c. c.[a]_ | | | | | | | |_folio_ | | | | | | | | |[ ]_fact.[a]_ | | | | | | | | |_datum_ +----+-------+---------+---+---+---+---+---+---+----+---+----+----+ | | | |fl.|kr.|fl.|kr.|fl.|kr.| fl.|kr.| | | +----+-------+---------+---+---+---+---+---+---+----+---+----+----+ | | |[ ] | | | | | | | | | | | | | |uebertrag| | | | | | | | | | | | | |vom / .| | | | | | | | | | | +----+-------+---------+---+---+---+---+---+---+----+---+----+----+ | |taxe | | | | | | | | | | | | | |de | | | | | | | | | | | | | |manipu-| | | | | | | | | | | | | |lation | | | | | | | | | | | | +----+-------+---------+---+---+---+---+---+---+----+---+----+----+ | |provi- | | | | | | | | | | | | | |sion | | | | | | | | | | | | +----+-------+---------+---+---+---+---+---+---+----+---+----+----+ | | | | | | | | | | | | | | +----+-------+---------+---+---+---+---+---+---+----+---+----+----+ | |lies- | | | | | | | | | | | | | |ing | | | | | | | | | | | | +----+-------+---------+---+---+---+---+---+---+----+---+----+----+ | | | | | | | | | | | | | | +----+-------+---------+---+---+---+---+---+---+----+---+----+----+ | | | | | | | | | | | | | | +----+-------+---------+---+---+---+---+---+---+----+---+----+----+ | | | | | | | | | | | | | | +----+-------+---------+---+---+---+---+---+---+----+---+----+----+ | | |[ ] | | | | | | | | | | | | | |fürtrag | | | | | | | | | | | +----+-------+---------+---+---+---+---+---+---+----+---+----+----+ [a] _colonne zur eventuellen benützung der conto-inhaber._ d. s. nr. b ( .) ex . * * * * * [ ] number of the cheque book. [ ] post office savings bank. [ ] extract of current account. [ ] n^o of the th september . [ ] number of the acknowledgements of payments or cheques. [ ] receiving office (pay office). [ ] name of payer or of receiver of money. [ ] deposits and entries to the credit of current account. [ ] repayments. [ ] debit entries in the clearing service. [ ] balance in hand. [ ] page. [ ] date. [ ] brought over from . . . [ ] to be carried over.] [illustration: figure vi. [ ]tagesrechnung der einlagen im checkverkehr. [ ](einlagen auf empfangscheine.) +------------------------------------+ | [ ]raum zum aufkleben der vignette.| +------------------------------------+ +------------+---------+-----------+---------------+---------------+ | [ ] von | |[ ] betrag| [ ] | | | seiten der |[ ]nummer|der einlage| nr. des | [ ]name des | |sammelstelle| des +-----+-----+empfangscheines| einzahlers | | leer zu | contos | fl. | kr. | | [aus dem | | lassen | | | | | erlagscheine] | +------------+---------+-----+-----+---------------+---------------+ | | | | | | | +------------+---------+-----+-----+---------------+---------------+ | | | | | | | +------------+---------+-----+-----+---------------+---------------+ | | | | | | | +------------+---------+-----+-----+---------------+--+------------+ | |[ ] | | | anzahl | | [ ] | | |gesammt- | | | der | |unterschrift| | |betrag | | | einlagen[ ] | | des | | |der | | | | |postbeamten:| | |einlagen | | | | | | + +---------+-----+-----+---------------+--+------------+ | d. s. nr. n ( .) ex .| +------------+---------+-----+-----+---------------+--+------------+ [ ] daily account of deposits in the cheque service. [ ] payments upon acknowledgement of receipt. [ ] space for affixing the vignette. [ ] to be left blank by the receiving office. [ ] number of current account. [ ] amount of the payment. [ ] number of the acknowledgement of receipt. [ ] name of the payer according to the acknowledgement of deposit. [ ] total sum of the payments. [ ] number of the payments. [ ] signature of the post office official.] [illustration: tagesrechnung der rückzahlungen im checkverkehr[ ] * * * * * belehrung für den postbeamten.[ ] . alle einlagen auf empfangscheine sind in diese tagesrechnung einzutragen, ebenso alle rückzahlungen, welche ohne vorweisung eines einlagebüchels auf grund der vereinigten drucksorte nr. - zu leisten sind. . die eintragung hat genau dem vordrucke entsprechend zu geschehen. . anzahl und gesammtbetrag der einlagen und rückzahlungen sind nach abschluss der tagesrechnung in die correspondirenden rubriken des tagessummariums zu übertragen. die anzahl der zu dieser tagesrechnung gehörigen erlagscheine und zahlungsanweisungen ist am schlusse der rechnung auszusetzen und in der beilagenliste anzumerken. . die tagesrechnung wird nur dann an das k. k. postsparcassen-amt eingesendet, wenn eine einlage oder rückzahlung in derselben zu verzeichnen ist. =nur am letzten eines jeden monates ist stets eine tagesrechnung einzusenden, ohne rücksicht, ob eine eintragung stattgefunden hat oder nicht.= * * * * * +-------------+------------+-----------------+----------------------+ | | | [ ] | | |nummer des[ ]| betrag[ ] | ausstellungstag |[ ]name des adressaten| | contos |-------+----| der |der zahlungsanweisung | | | fl. | kr.|zahlungsanweisung| | +-------------+-------+----+-----------------+----------------------+ | | | | | | +-------------+-------+----+-----------------+----------------------+ | | | | | | +-------------+-------+----+-----------------+----------------------+ | | | | | | +-------------+-------+----+-----------------+----------------------+ | [ ] | | | [ ]anzahl | | | |gesammtbetrag| | | der | | | | der | | | rückzahlungen | | | |rückzahlungen| | | | | | +-------------+-------+----+-----------------+----------------------+ [ ] daily account of repayments in the cheque service. [ ] instruction for the post office official: . in this daily account must be entered all the deposits made upon acknowledgement of receipt as well as all the repayments made without presentation of deposit-book on the ground of the united document n^o - ; . the entry must be absolutely conformable to the printed text; . the number and the total sum of the deposits and the repayments are to be entered after the closing of the daily account in the corresponding columns of the summary of the day. the number of the pay-cheques and the orders for repayment which belong to this daily account is to be set forth at the end of the account and to be noted on the supplementary list; . the daily account is only to be sent to the post office savings bank when there is a deposit or a repayment to be entered. _only at the end of each month this daily account must be sent whether there be an entry or not._ [ ] number of the current account. [ ] amount. [ ] date of issue of the order for repayment. [ ] name of the person to whom the order for repayment is to be sent. [ ] total sum of the repayments. [ ] number of the repayments.] this list is the expression as it were, of a conscious agreement of wills on a more and more extended scale in a common work of reciprocity. the all round figure which sums up for the service during , the total amount of operations relating to the credit and debit of holders of accounts in the postal savings bank of vienna is , , , florins. it will be interesting to learn what have been the expenses which have arisen from such a vast amount of business. the account of the financial administration of the service of cheques and _clearing_ makes the administrative expenses , florins, that is three-hundredths of a florin, for every florins of business[m]. the average business done for each possessor of a cheque book is , florins, and the average charges of the service per person have been about florins. going back ten years it is seen that when in the amount reached , , florins, the total expense was , florins, or six-hundredths of a florin for every florins of business done. the operations averaged about , florins to each holder of a cheque book and the charges florins each person. the law, in accordance with which the general expenses are relatively reduced by the increase in the figure of business done, receives here a fresh verification. such is the summary explanation of the organisation and working of the cheque and clearing system instituted thirteen years ago at the postal savings bank of vienna. it is based on the centralisation at vienna of the accounts of depositors holding cheque books and on the almost absolute perfectness of the regularity and precision with which all those interested are every time fully informed of their position of the central bank, and, in consequence, of the extent of the credit they have at their command. this institution implies the free adhesion under conditions fixed by law of all the depositors at the savings bank and the right of each to withdraw as he thinks proper. the institution therefore works on the ground of stipulated contract, but its elasticity is seen in the perpetually widening extension of its operations and its making way in every class of society and in every one of the professions. its realization under the international form, for we give this character to an agreement between the savings banks of austria and hungary, is only a question of time, and the new experiment will prepare the way for a new enlargement of the system. the basis of the institution is monetary, it differs in this respect in no way from all the other modern institutions of credit and of balancing one account against the other; but the saving of money is ever on the increase. within the monetary circulation is developed a circulation which if it remains still subordinate to the monetary circulation is not inevitably enchained to it. our collective effort tends to break for ever this bond of subordination. the papers which will follow will be a contribution to that work. footnotes: [h] the account-books of _empfang erlagscheine_ are used as instruments in this first class of operations. [i] rückzahlungen auf grund von checks, zahlbar an den überbringer bei des cassa des postsparcassen amtes. [j] rückzahlungen an dritte personen durch zahlungsanweisungen des postsparcassen amtes. [k] auszahlung von beträgen an dritte personen nittelst postanweisungen. [l] to accomplish operations in the remotest part of dalmatia, five or six days is the maximum required. [m] a kreutzer is charged for posting a sum to the credit of an adherent, but no charge is made on the debit side. appendix i law of the ^{th} of may _with reference to the introduction of postal savings banks in the kingdoms and lands represented in the imperial council. (r. g. bl.[n] n^o .) with the alterations made by the law of the ^{th} of november . (r. g. bl. n^o .)_ with the consent of the two houses of the imperial council i will to order as follow: article . under state administration and guarantee there will be founded at vienna a state savings bank, under the control of the minister of commerce and belonging to the jurisdiction of the postal administration, with the title «post office savings bank». the sphere of activity, the organisation and the civil service of the post office savings bank will be fixed by means of ordinances. post offices in the kingdom and lands represented in the imperial council will be appointed by the minister of commerce to serve as receiving offices of the post office savings bank. to the post office savings bank will belong the management and execution of the business assigned to it by this law; in which business it will represent before the public the administration of the state. to give advice as well as to make proposals in the business relating to the postal savings banks, a special council will be constituted. regulations as to the composition of this special council as well as the determination of its special sphere of action will follow by way of ordinance. article . the post office savings bank will receive savings deposits paid into the post offices, and by the agency of the post offices will pay back the deposits when reclaimed. article . all deposits in excess of the current needs of the post office savings bank are to be profitably invested. such profitable investments of the savings-deposits will be made by the purchase of the austrian consolidated bonds bearing interest. article . from the profit of the invested deposits is to be defrayed the interests on the deposits, as well as the whole expenses, administrative or otherwise. as long as the profit of the funded capital of the deposits is not sufficient to pay the interest of the savings-deposits and to cover the expenses of the administration, the deficit as well as the costs of the establishment of the institution will be advanced by the state as a charge on the postal budget. these advances are to be restored without interest, to the postal budget, out of the surplus appearing at the close of the administrative year. the surplus remaining over after the entire liquidation of the above named advances is to be employed in the formation of a reserve fund. article [o]. the receiving office (post office) in which a first deposit is made, gives to the party who makes the deposit, a deposit book, in which each amount paid in, each amount paid back and the interest added to the capital is to be entered. each subsequent payment can be made in any receiving office (post office), the amount being entered in the deposit book. that person is to be considered the depositor on whose behalf the deposit is made. the deposit-book is to be delivered gratuitously and is stamp free. the post office savings bank will open an account for each depositor. article [p]. the deposit-book is issued in the name of the depositor and is to contain the notes necessary in forming a judgement of his identity, as well as the signature of the party who makes the first deposit. a depositor who cannot write will have to bring with him a trustworthy man, who will have to attest the identity of the depositor and to sign the deposit-book in his stead. an assignment of a deposit-book to another person, is only to be accepted by the post office savings bank when the act of assignment has taken place at a post office entrusted with post office savings bank business. this being done, the assignee is to be regarded as the proprietor of the deposit-book. (art. , § .) minors are entitled to pay in sums as savings and to receive repayments back provided their legal representatives have entered no written objection at the post office savings bank. in case of the loss of the deposit-book, a duplicate is, after carrying out the proceedings prescribed by article , to be issued. whoever causes two or more deposit-books to be issued loses the interests on the capital entered in the second and in any subsequent books. if the whole amount of the deposits in the two or more deposit-books, that a depositor has caused to be issued, is over the sum of a , florins, the depositor loses that part of the capital which exceeds , florins. the minister of commerce is empowered on well considered reasons to be indulgent with reference to the loss of capital, which, in conformity with the regulations occurs to surplus deposits. post office servants are forbidden, except to their superiors, to give any information whatever to anyone, as to the names of depositors, or the amount of their deposits. article [q]. each single payment must amount to at least kreutzers or a multiple of kreutzers. the balance in favour of a depositor can at no time amount to more than , florins including deposits paid in and interest added to the capital. deposits of kreutzers can be made in postage stamps, or in special postal savings stamps as soon as such stamps are issued by the minister of commerce. these stamps are to be fastened on forms supplied gratuitously. article [r]. the rate of interest for savings deposits, which is never to exceed per cent per annum, after having been placed before the special council (art. ) will be fixed by the minister of commerce in concert with the ministers of the interior and of finances, by way of ordinances, and every alteration is to be published in the imperial law pamphlets (_reichs-gesetz-blatte_) in the official part of the «vienna gazette» (_wiener zeitung_) and in the various official gazettes. the new rate of interest will begin to come into operation on the ^{st} and ^{th} of the month which follows its publication and will also apply to deposits made previously. article . savings deposits bear interest commencing from the ^{st} or the ^{th} day of the month following the date of their payment, and the interest ends on the ^{th} or last day of the month preceding the arrival of the notice of the expiration of the agreement with the post office savings bank at vienna. sums under a florin are not to bear interest. the ^{st} of december, each year, the interests accruing are to be added to the capital and from that time forward they also bear interest. in the calculation of interest each month is to be regarded as days. the officially prepared table of interest is to be publicly posted up in the receiving offices (post offices). article . any amount exceeding , florins to the credit of a savings deposit is not to bear interest. article . the post office savings bank is obliged as soon as the deposits and capitalized interest of a depositor surpasses the figure of , florins, by a registered letter, to require the depositor to lessen his capital. if during the month following the depositor has not lessened the balance to his credit, then at the expiration of the period, bonds of the state debt bearing interest in notes will in the course of the day be officially bought to the nominal amount of florins, and the depositor is to be informed of the fact. from the time of the sending out of the notice until the reduction is effected in the balance to the credit of a depositor no interest will accrue. in case the depositor on whose account the bonds were bought, does not withdraw the documents, the post office savings bank will receive the interest falling in on the bonds under its care and will enter these interests in the books of the institutions as a new deposit in favour of the depositor. for the state funds belonging to a depositor lying at the post office savings bank a book is to be issued. article . at the request of a depositor and that the balance in his favour is sufficient, it can be employed in the purchase of austrian state funds. article [s]. the payment back of the balance in favour of a depositor or any part of it to him or to his legal heir or authorised agent, will take place upon a notice which can be made by the party giving it, at the receiving office (post office) which he names in the notice. the payment back is to made through the receiving office (post office) named in the notice, on production of the deposit-book, on the basis of an assignment by the post office savings bank, except the payment is according to article barred by legal proceedings having been instituted, or according to articles and , by a protest having been made. when such notice has been given with reference to sums up to florins, the assignment will be sent by the post office savings bank by return of post and the payment back will be made by the receiving office (post office) immediately after its arrival. the repayment of sums between and florins will be made in a fortnight at the latest, that of sums between and florins in a month at the latest, that of sums above florins, at the latest within two months after the arrival of the notice. the administration is however authorised, with power of countermand and under necessary precautions to permit sums up to florins of which notice has been given to be immediately paid at one of the authorised receiving offices without waiting for the arrival of the foregoing assignment from the post office savings bank. article . if a deposit-book proves to be lost the following proceedings occur: the owner has, in order to obtain a duplicate to give immediate notice of the loss, either directly to the post office savings bank, or to the nearest receiving office (post office) with as exact an account as possible of its characteristic marks. the post office savings bank immediately orders a note of the characteristic marks to be entered in its books with the result that meanwhile no payment is made to anyone on the lost deposit-book. at the same time the post office savings bank causes a public placard to be put up at the post office where the lost book was issued, and also in that to which perhaps it might be forwarded, by which all persons are informed that at the expiration of a month from the date of its publication, if no claim to the lost book is made in the interval, it will be cancelled and declared null and void, and a new one issued. if within the month no claim is made, the post office savings bank will on payment of a fee of kreutzers austrian currency, issue a duplicate and declare the deposit-book proved lost, to be null and void. if a claim is made during the course of a month, the post office savings bank must refer the parties to the ordinary tribunals, and no duplicate is to be issued nor any proceedings permitted with reference to the lost book until the validity of the outstanding claim has been decided by a legal judgement. article . the statement of paragraph of the general civil code, by which claims to arrears of interests are lost after three years, has no application to interests of depositors in the post office savings bank. in relation to the lapse of post office savings bank deposits the ordinary legal decisions will be relied upon. lapsed deposits fall into the postal treasury. such a lapsing of deposits will be stopped by every new payment, every notice for payment back, every entry of interest in the deposit book. article . state bonds bought officially, or at the request of depositors, and kept at the post office savings bank fall into the postal treasury, if, during a lapse of years, no one has laid claim either to the deposit or to the interest, and the depositor has not forwarded to the post office savings bank any order whatever with reference to them. article . neither savings deposited at the post office savings bank, nor the post office savings bank deposit-books can be sequestered, and in like manner they cannot be used as security. nor can a deposit-book be seized or taken in distraint. these restrictions have no application to the books mentioned in articles and , as issued for the state bonds bought for a depositor. if a depositor declares himself insolvent, the official receiver is empowered to give notice to the post office savings bank to pay him the balance in favour of the depositor, and thereon to give a receipt. a protest against the payment back of a savings deposit can only be considered in case a lawsuit has been entered into with reference to the right of property in a deposit-book, or on the hypothesis which article meets. article . the reserve fund which is primarily intended to cover every possible loss which may occur to the post office savings bank is to be formed by the laying aside of the surpluses which remain at the close of the administrative years from the produce of the savings-money deposited, after deduction for interest paid, administrative and other expenses, and after restitution of the advances made from the postal budget. the reserve fund is to be gradually stored up until it reaches per cent of the total amount of the deposits, but it must never go beyond the point of two million austrian florins. article . the reserve fund capital is to be placed at interest and whatever it brings in is to be added to the reserve fund so long as this last has not reached the maximum fixed. when the reserve fund has reached the above mentioned point, all the business profits will be entered to the credit of the postal revenue. article . the post office savings bank is to render a formal account of the administration of the savings-money paid in at the receiving offices (post offices), and the duty of the control lies with the supreme audit-office. at the end of each solar year the minister of commerce will communicate to both houses of the imperial council, a detailed business statement with reference to the administration, working and position of the post office savings bank and will publish the same in the official part of the «vienna gazette». the post office savings bank will periodically make known the actual position of the institution in the «vienna gazette». article . the correspondence of the post office savings bank and its organs with the depositors is post free. the revenue of the post office savings bank is exempt from duty. in the business of the post office savings bank all legal documents passing between the bank, the authorities or the organs of the bank and the depositors, their legal heirs or authorised agents, are free from stamp duty and taxes. in like manner the interest of savings-deposits is exempt from the income-tax and from any tax which may replace it in time to come. article . the exact time when the post office savings bank in vienna, as well as the receiving offices will commence their work will be fixed by the minister of commerce. article . the carrying out of this law is entrusted to the minister of commerce. ii law of november ^{th} _containing alterations in the law of may ^{th} (r. g. bl. n^o ) and decisions with regard to the orders' (cheque and clearing) service of the post office savings bank (r. g. bl. n^o )._ with the consent of the two houses of the imperial council i ordain as follows: § . the arrangements of the law of may ^{th} , contained in the articles , , , and (_r. g. bl._ n^o ) will no longer be in force. in their stead will come the following arrangements, indicated in the articles bearing the same numbers. (_the articles altered: , , , and , are with their new text given in appendix i, containing the law of may ^{th} ._) § . to the existing orders' (cheque and clearing) service of the post office savings bank the modifications in the law of may ^{th} (_r. g. bl._ n^o ) as well as the alterations refered to in § of the present law, have no application. an exception, however, occurs with reference to articles , and of the above mentioned law which are to be applied to the aforesaid service conformably to their sense. in addition to which the government is authorized to regulate this service by way of ordinances. apart from such regulations the service is to proceed according to the following determinations. § . the administration and keeping of the accounts of the orders' (cheque and clearing) service at the post office savings bank are to be carried on separately from those of the savings' service. participation in the cheque service with or without inclusion in the clearing service is to be granted by the post office savings bank on paying in a guarantee deposit. the post office savings bank will open an account for each participant. § . the guarantee deposit remains in the post office savings bank as long as the holder of the account continues a participant in the cheque service and contingently also in the clearing service. in case a holder of an account on the one side, or the post office savings bank on the other, wishes to give notice to withdraw, which either can do at any time, the guarantee-deposit will, within a fortnight at latest after receiving the notice, be repaid. to the post office savings belongs also the right by giving notice of the repayment of the guarantee-deposit to cause the immediate withdrawal of a participant and it has also the right to decline, without giving any reason a request to participate in the cheque and clearing service. § . the amount of the guarantee-deposit, which is on every occasion to be paid in specie, will be always fixed by way of ordinance. this fixing can be arranged in such a way, that in the event of the whole transactions exceeding an agreed maximum sum the guarantee deposit is to be increased. § . the rate of interest for deposits in the orders' (cheque and clearing) service cannot rise higher than two per cent per annum. the government is empowered within this maximum point to fix the rate of interest for deposits. the government can also ordain that the abovementioned deposits, especially the guarantee deposits shall either bear no interest at all or only partially do so. § . of the money paid into the orders' (cheque and clearing) service of the post office savings bank there will always be kept in hand a portion in specie adequate to meet probable needs. the surplus remaining is to be placed out at interest in such a way as always to assure the complete fulfilment of the engagements entered into. the placing out can be made: . by acquiring partially mortgaged bills of exchange (salt mine, treasury bonds). . by opening at a banking establishment a running account at short dates of payment (a deposit running account). . by advances on security of bonds of the united national debt and of the national debt of the kingdoms and lands represented in the imperial council, also those austrian bills upon which loans are permitted by the statutes of the austro-hungarian bank, finally upon stock and other securities in the austro-hungarian bank. (advances with the exception of accounts booked.) . by discounting coupons of the funds pointed out in n^o , also in prize-tickets in the austrian state lottery, also of other funds indicated in n^o , repayable by draft, last on discharge certificates of customs duties. . by discounting bills of exchange to be cashed at a bank, a savings bank, or else at a deposit or credit company, registered according to the law of april ^{th} (z. r. g. bl.). . by purchase of bonds of the national debt, deeds of mortgage or bonds having priority rights, in so far as such stocks are, in conformity with n^o , capable of being taken in deposit. the duration of the loans described in n^o , as well as the paper to be discounted, described in n^o , and the bills of exchange within the kingdoms and lands represented in the imperial council as described in n^o , is limited to three months. in selecting what to take in deposit, or what to buy, in fixing the extent of the sum to be lent out, as well as the choice of the institutions with which it is to enter into business relations, the post office savings bank is to seek direction from the ministry of finance. § . the orders (cheques) issued in the orders' (cheque and clearing) service are subject to no other tax than that fixed by the law of february ^{th} , § (r. g. bl. n^o ) of kreutzers a piece. the declarations which, in conformity with the regulations of the orders service are added to the order (cheque) by the drawer, especially such as the declaration by which a third person is designated as receiver of the sums assigned, or by which commissions are given for the issuing of post-office orders or the retiring of bills, etc.; also the authorisations for the post office savings bank and the receipt-vouchers, reciprocally given by the post office savings bank office and participants, are free from stamp duty and taxation. in like manner the extracts forwarded to parties from their accounts are free from stamp duty and taxation. in respect of sums received in current account by the post office savings bank, the payment of the percentage tax fixed by the law of february ^{th} , § , paragraph (r. g. bl. n^o ) does not operate. § . for the use of the orders' (cheque and clearing) service the post office is to impose special fees. in addition to the already existing fees and repayment of the cost price of printed matter supplied to parties interested, the government is empowered to impose to the amount stated below the following fees: . a record-fee of kreutzers for each official act with reference to the account (deposit, assignment, entry to credit or debit). . a commission up to the maximum of / the thousand on the paying out side of the account (entering to the debit). these fees are to be taken by the post office savings bank deducting them from the account. § . for the orders' (cheque and clearing) service, a special reserve fund is to be formed, which is primarily intended to cover possible losses which may result from the service. this reserve fund is to be formed from what remains of the surpluses at the close of the administrative year after deduction resulting from the possible deficit in the savings service. this allotment of the surpluses is to continue as long as the reserve fund designated has not reached the point of per cent of what remains of the deposit capital in the orders' (cheque and clearing) service, at the close of the year, after deduction of the payments back. the money of the reserve fund formed for the orders' (cheque and clearing) service is to be placed out at interest under the restrictions of § as to the nature of such arrangements, and the produce accruing from time to time, is to be added to the reserve until it has reached the abovementioned point. the reserve fund having reached this point, the whole of the profits on the business done in the orders' (cheque and clearing) service will accrue as receipts to the postal revenue. to what remains the determinations of article of the law of may ^{th} (r. g. bl. n^o ) understood in conformity with their sense will apply. § . the determinations of §§ to of the present law apply from the time it comes into operation, also to deposits paid in before that time to the orders' (cheque and clearing) service of the post office savings bank. § . with the execution of this law which comes into operation from the date of its publication, together with the partially altered law of may ^{th} (r. g. bl. n^o ) my minister of commerce and my minister of finance are charged. iii ordinance of the ministry of commerce _in agreement with the ministry of the interior and with the finance ministry, november ^{nd} , by which on the basis of the law of november ^{th} (r. g. bl. n^o ) regulations with reference to the orders' (cheque and clearing) service in the post office savings bank are issued._ in carrying out the law of november ^{th} (r. g. bl. n^o ) by which alterations were made in the law of may ^{th} (r. g. bl. n^o ), and determinations with regard to the orders' (cheque and clearing) service in the post office savings bank, the ministry of commerce in agreement with the ministry of the interior and the finance ministry ordains as follows: a.--_savings service._ § . the highest point of the rate of interest, according to the determination of the special council of the post office savings bank, is to be fixed at _three_ per cent per annum. § . whoever pays the first deposit in favour of another--of the depositor and signs the deposit-book in this name, is to be called the payer. the depositor is at any time entitled without the intervention of the payer to appear at a receiving office and to have his own signature accepted. as long as the depositor has not exercised this right, the post office savings bank will consider the payer as authorised in the name of the depositor to dispose of the balance in his favour, unless the post office savings bank has been made aware that it is against the depositor's will. § . until further notice repayments may be made of sums up to florins, immediately upon notice of recall, by duly authorised receiving offices, without previous assignment from the post office savings bank. § . business regulations which have been made by the post office savings bank not in present agreement with the arrangements of articles , , , and of the law of november ^{th} (r. g. bl. n^o ) in relation with §§ and of the present ordinance are out of force. b.--_orders' (cheque and clearing) service._ § . in carrying out § of the law of november ^{th} (r. g. bl. n^o ), the orders' (cheque and clearing) service of the post office savings bank is to be regulated by the rules existing with reference to them in the post office savings bank applied in such a manner as the alterations of the aforesaid law as well as the following determinations render necessary. § . the post office savings bank will keep separate the accounts and administration of the orders' (cheque and clearing) service from those of the savings service. participation in the orders' (cheque and clearing) service is also to be allowed to persons who are not depositors in the savings service. it will be granted on payment of a guarantee-deposit, and of course if the participant wishes he can enter the clearing as well as the cheque service. in order to obtain permission to be a participant in the orders' service the person wishing to enter has to ask for an account to be opened and to pay in the guarantee-deposit. this request is to be made on one of the forms issued by the post office savings bank, which are to be delivered gratuitously at all post-offices and to be forwarded to vienna post paid under an enclosure containing the sum for the desired cheque and receipt books. to the post office savings bank belongs the right to refuse a request for admission as participant in the orders' (cheque and clearing) service without giving reasons (§ of the law). the guarantee-deposit is to be paid within a month at any receiving office after the grant of the said request by using a receipt (pay) certificate. the post office savings bank opens an account for each participant. deposit-books are no longer to be used in the orders' (cheque and clearing) service. § . the amount of the guarantee-deposit will until further notice be fixed at florins. the guarantee-deposit will remain at the post office savings bank as long as the holder of an account continues a participant in the orders' (cheque and clearing) service. during participation in the orders' (cheque and clearing) service, the guarantee-deposit cannot be disposed of and in case the participant should withdraw from the service it can only be paid back upon days notice (§ of the law). § . the deposits in the orders' (cheque and clearing) service, including the guarantee-deposit, will until further notice bear interest at per cent per annum. the interest begins from the ^{st} or from the ^{th} of the month following the booking of the deposit, and terminates at the expiration of the ^{th} or from the last day of the month which precedes the writing off from the account of the sum assigned for payment. sums under one florin will not bear interest. on the ^{st} of december in every year the interest accruing will be added to the capital and will in like manner bear interest. in reckoning the interest every month will be regarded as thirty days. § . the post office savings bank has always the right to give notice to a participant to withdraw his guarantee-deposit, with the result that from the day the participant receives the notice he can no longer dispose of the balance to his credit by way of cheques (§ of the law). § . for making use of the orders' (cheque and clearing) service, besides the fees at present existing--under which are included the fee of kreutzers the cheque, already fixed by § of the law of november ^{th} , and according to rule the equivalent of the cost price of the various printed documents furnished to participants in the service,--the under mentioned fees will be taken: . a record-fee of kreutzers for each official act with reference to the account (deposit, assignment, entering to credit or debit); . a commission on each entry to the debit up to the sum of , florins at the rate of / the thousand, and / the thousand for sums exceeding that amount. these fees will be taken by writing them off the account. from the commission, however, are free: _a_) the debit entries in the clearing service; _b_) sums sent by means of post office orders through the post office savings bank; _c_) sums written off in the cheque service on account of a purchase of state-bonds made for a participant, finally; _d_) every entry of fees, commissions, etc. in favour of the post office savings bank. § . the post office savings bank will keep for three years the accounts, documents and writings in the orders' (cheque and clearing) service relating to business concluded; it can only therefore give consideration to claims with reference to payments in, assignments, payments back, interest and fees, etc., when they come within this period. to claims which refer to a post office missive (paying in order, post office order, registered letter and the like) the post office regulations as to the time in which such claims can be made will apply. § . the foregoing regulations §§ to apply from the time this ordinance comes into operation, and will also apply from the same time to all deposits already made in the orders' (cheque and clearing) service, (§ of the law). § . the officials of the post office savings bank and of the receiving offices are bound by duty to keep the business and official secrets, and not to give to any third person, except their superiors, any kind of information whatever with reference to the name of a depositor, to the sums paid in or paid back, or to the amount of the balance in hand. final regulations § . the receiving offices of the post office savings bank will receive at the end of each calendar year an indemnity for business done in the post office savings bank service. this indemnity amounts to: _a_) two kreutzers at the close of each year for every deposit-book issued at the receiving office in question during the year and then existing. _b_) one and a quarter kreutzer for every payment during the year effected at the receiving office in question, into the savings service and into the orders' (cheque and clearing) service. § . this ordinance will come into force at the same time as the law of november ^{th} (r. g. bl. n^o ). iv instruction concerning the savings service of the post office savings bank. .--_receiving offices._ all post offices in the kingdoms and lands represented in the imperial council are appointed to be receiving offices of the post office savings bank, and have daily during the prescribed hours to carry out the post office savings bank service. they receive deposits, effect payments back, give information about all branches of the post office savings bank service, and in connection with this institution, aid the depositors in every way. .--_depositors and payers._ any one can become a depositor in the post office savings bank and obtain a deposit-book, or cause another person to obtain one, upon making, in conformity with the regulations, a payment at a receiving office, of a given sum within the prescribed limits. societies, unions, cooperative associations and persons having a legal position are competent depositors in the post office savings bank. the person in whose name the book has been issued is to be regarded as the depositor. no depositor is permitted to obtain, or cause to be obtained on his behalf, more than one deposit-book issued in his name; on the other hand every one is free, beyond their own deposit-books, to obtain for other, wholly distinct persons, deposit-books and to pay in deposits on their behalf. whoever in favour of another,--the depositor,--pays in the first payment and signs the deposit-book in his name is called the payer. any one can be a depositor who can read and write. minors no more than persons having a legal position are debarred from being depositors. the post office savings bank regards the payer as empowered in the name of the depositor to dispose of the balance to his credit as long as the latter has not informed the post office savings bank that it is against his will. this can be done by the depositor signing his own name in the deposit-book at a post office. the admission of the signature can take place: _a_) in the presence of and with the consent of the payer; _b_) without the intervention of the payer. in the first case the payer confirms the authenticity of the signature, in the second case the depositor has to establish his own personal identity. .--_the deposits._ the smallest deposit is kreutzers, larger deposits must be a multiple of that sum. in order to render possible the saving of smaller sums than kreutzers, post office savings cards have been issued. post office savings cards are cards imprinted with a postage stamp of kreutzers, and having the necessary room to fasten on further stamps; these cards are sold at all post offices, and by all postage stamp vendors on payment of the value of the imprinted stamp. such a post office savings card with stamps fastened on to the value of kreutzers will be accepted at the receiving offices of the post office savings bank as a deposit. one and the same depositor can only be permitted to bring for deposit three post office savings cards during one week, either singly or at the same time. the balance of a depositor in paid up deposits and capitalised interests is not permitted to amount at any time to more than , florins. the depositor must with the first deposit inscribe his signature in the place appointed on the third page of the deposit-book and must further give an account of his calling or occupation, the place, day, month, year of his birth, as well as the place where he lives and his address. he must moreover sign with his own hand the so-called «_gegenschein_» (counter-certificate) to be found in the deposit book. and he himself choose a given private «watchword» (_losungswort_) and inscribe it in the appointed place in the counter-certificate. the result of this will be that payments back in the customary way can only follow on giving this watchword. a person who cannot write is obliged to bring with him a witness who authenticates the depositors mark by his own signature. to those known personally to the post office official, or, who identify themselves by means of a certificate of domicile, a passport or a work-or service book, the post office official can himself become the witness. in the case of societies, unions, cooperative associations and persons having a legal position either the bringer of the first deposit can give his signature and be then regarded as the payer, or no signature will be received. in the latter case nothing can be done with reference to the deposits until the payer by means of an official document, n^o , signifies to the post office savings bank who will be authorised to give notices of withdrawals and to collect payments. subsequent payments can be effected on each book at any office without further notice and without its being necessary for the person to come personally. every deposit must be at once entered in the deposit-book by the post office official and this entry is to be certified by the imprint of the receiving offices stamp of the day and the signature of the post office official. the depositor (payer) is bound before leaving the office to examine the entries sufficiently so as to see that they are correct. deposits are also received from rural agents to the limit of florins for each deposit-book and for each commission bought. deposits up to florins pay no fee. for deposits of more than florins a receiving-fee of kreutzers is charged. the post office savings bank receives from depositors, coupons of austrian bond falling due and enters the proceeds in the deposit-book and to the depositors account. to this end the coupons together with the deposit-book are either to be given in at the bank of the office, or forwarded post-paid to the post office savings bank at vienna. each single coupon given in or forwarded must have legibly written on the back, the number of the deposit-book and the depositor's name, if not, a list of the sorts and numbers of the coupons as well as the number of the deposit-book will have to be given. for receiving the coupons the post office savings bank charges a commission of kreutzer the coupon, which will be deducted from what it produces. the sending-back of the deposit-book will be post free. it is moreover allowable when a depositor has to receive at a post office not dependent on the treasury a sum by order,--whether it be an ordinary post office order, or a repayment--or transfer post-office order, or finally by a pay-order in the cheque service of the post office savings bank, not to pay the same in cash, but have it immediately entered in the deposit-book. .--_acknowledgments of receipts._ beyond the entry which the post office service makes in the deposit-book, the depositors receive, and so, relatively, payers, upon each deposit an acknowledgment of receipt from the post office savings bank at vienna, forwarded every time to their address or to _poste restante_ as they desire. should this acknowledgment of receipt not have reached a depositor within days, or should it contain some errors with reference to the sum or name or in some other way be erroneous, the depositor has to find in his deposit-book, «complaint», and to separate the paper, fill it in conformity with the case, and to forward it in an envelope, n^o ^o, which he will receive gratis at any post office. other blank forms of complaint are gratuitously supplied at every post-office. for entries of interest and coupon the post office savings bank does not give receipts. .--_replacement of lost, spoiled or filled in deposit-books._ should a deposit-book be lost, the loser must notify the fact to the post office savings bank at vienna, on a printed form, supplied gratuitously at every receiving office, stating the peculiar marks of the lost book as exactly as he can possibly remember them, also the particular circumstances under which the loss took place, as well as his full address, enclosing at the same time kreutzers in postage stamps and the notice of withdrawal book, requesting that a duplicate of the deposit-book lost may be given him. should the notice-book be also mislaid, this is to be notified on the printed form and the sum of five kreutzers added for a new notice-book. the post office savings bank notes down the loss and until further notice makes no payment on the lost deposit-book. meanwhile arrangements will be made for its annulment and if during the space of a month no claim is raised, a duplicate book will be issued and forwarded. if no room can be found in a deposit-book for further entries, or it has become torn or so dirty as to become useless, the depositor has to send it with the printed form, n^o , properly filled up to post office savings bank at vienna for exchange. books filled up will be exchanged gratuitously, for a spoilt book, however, the sum of kreutzers is to be added to the request. in case the notice book is also spoilt, the sum of kreutzers is to be added for issuing a new one. .--_interest._ deposits begin to yield interest at three per cent per annum from one florin upwards. interest begins from the ^{st} or from the ^{th} day of the month which follows on the deposit and ends with the ^{th} or with the last day of the month which precedes the arrival of the notice of withdrawal from the post office savings bank. on december ^{st} of each year the interest accruing will be added to the capital and from that time it will, in like manner bear interest. to each depositor, the post office savings bank sends at the close of the year an interest-order, valid for two months with an announcement of the amount of interest which has accrued to him for the year ending december ^{st}. the depositor must cause the amount of this interest to be entered in his deposit-book within the prescribed two months, on presentation of the interest order at some receiving office. if a depositor has not within the time allowed caused the entry of the capitalised interest to be effected as per order received, he does not lose the interest, only he has to forward his book to the post office savings bank for the purpose of having it entered there. the determination of § of the general civil code according to which claims on arrears of interest lapse after three years, do not apply to the interest on deposits in the post office savings bank. with reference to the lapsing of post office savings bank deposits the general legal decisions are valid. this lapsing will be arrested by any fresh deposit, by any fresh notice or by any fresh entry of interest in the deposit-book. .--_notice of withdrawal._ a depositor or the legal successors or authorised agents of a depositor are entitled at any time to require through the prescribed notice the payment back of any part of the deposit or the whole deposit. sums less than a florin can, however, only be recalled if the deposit-book proves that the total amount deposited does not exceed the amount recalled. notice of withdrawal is given on a special document, that is on a leaf out of the notice-book which the depositor receives gratuitously at the same time as the deposit-book. these leaves are to be detached according to the order determined by the numbers printed on them, to be duly filled up and forwarded undercover (document n^o ^b) to the post office savings bank. for the notice of withdrawal the following rules are to regarded: . the notices must always bear the signature which according to instructions was received in the deposit-book, or communicated to the post office savings bank on document n^o . . the address to which the order should be sent must, where _poste restante_ is stated, in every case give the receiver's full name. addresses in figures cannot be used, because they are not allowed on registered letters, and the orders for payment are always sent for the greater security of the depositor by registered letter. . the watchword chosen by the depositor must be added to the notice. if the depositor has forgotten his watchword he can at any receiving office desire the issuing of a request to make it known to him anew. to obtain this favour he must present his deposit-book to the post office officials and prove himself the depositor (payer). in case he is not personally known to the officials, he must bring some witness who is known to them, or a document capable of giving this proof (passport, certificate of being naturalised, work-or service-book). . if the depositor cannot write he must add his mark to the notice-form and this mark must be attested by a witness. should the witness be the same one who attested the depositor's signature on the counter-cheque and in the deposit-book, the notice with the mark of the depositor and the signature of such a witness can be sent without further delay to the post office savings bank. but should the signature of this person be no longer adducible, the depositor has himself to go to a receiving office and establish his own identity. in the case of depositors who cannot write but have a watchword, its declaration and the attestation of the mark by any witness is enough. the right is reserved to give notice to withdraw the balance to the depositor's credit and to give a receipt for the same to the official assignee, should the depositor fail,--to the guardian appointed by the authorities, should the depositor become incapable of managing his affairs,--to the executor of the estate with relation to the person to whom the right of inheritance to the deposit-book belongs should the depositor die. the persons designated, are required to address their memorials direct to the post office savings bank, sustained by the documents necessary to form a judgement of the case together with the deposit-and notice-books. the deposits of a deceased depositor are to be withdrawn in full by notice from the person who has the right of inheritance. if a notice-book has been used up, or in any way has become useless, or a depositor has lost his notice-book, he can on form n^o ^d which will be supplied at all post offices gratuitously, request the post office savings bank to forward him a new notice-book. in the case of notice-book lost or spoilt the sum of five kreutzers must be added in postage-stamps; in that of an ordinary used up notice-book, a new one will be substituted gratuitously. .--_repayment._ consequent on the notice of withdrawal the post office savings bank sends to the depositor, to the address he has named payment-order valid for two months. the order is sent as a rule by return of post, but in any case soon enough for the repayment to take place within the limit named by the law of may ^{nd} :--upon notice of sums between and florins within days, upon notice of sums between and florins at the latest within a month, and finally, upon notice of sums over florins, at the latest within two months of the arrival of the notice at the post office savings bank. on delivery of this order, _the depositor, in the presence of the post office official, putting his signature in receipt to the payment order_, and on producing the deposit-book, in which the sum paid back will be entered by the post office official and deducted from the sum total of the balance, the repayment to the depositor will follow at the pay-counter. the depositor can authorise any person he pleases to receive payment of a sum thus withdrawn by notice. if he possesses a watchword he needs only to duly fill in the form, n^o (authorisation) and to give or send it by the person authorised with the deposit-book and the payment-order. on this person presenting the authorisation and signing the payment-order, and at the same time presenting the deposit book, the sum will be paid. but the depositor can in like manner also request in the notice that the payment-order be sent to the person he has authorised to receive it and whose address he has given. then the depositor sends the deposit-book together with the authorisation to the person he thus authorises to receive the payment. but for payment of the sum the person thus authorised must, if not personally known to the post office officials, produce a document for his identification or establish his identity by bringing with him a witness. for authorisation without the watchword, the legalisation of the signature of the withdrawer, either in a law court or by a notary is requisite. .--_repayments without delay._ but also without having to send a previous notice to the post office savings bank, a depositor (payer) can at once at any post office obtain repayments of sums from to florins. repayments can be made without delay on producing the notice drawn out according to the regulations together with the last acknowledgment of receipt or abstract of the credit account with at the same time an entry of the sum in the deposit-book. repayments made without delay are not allowed on authorisations, also the whole balance of the depositor's account cannot thus be withdrawn, but a sum of at least kreutzers must remain in the book. this sum as well as the interest can then in the usual way be withdrawn by notice. after each repayment made without delay, the depositor receives a statement from the post office savings bank with reference to his remaining balance (statement of credit-account), on the ground of which he can again obtain a repayment without delay. repayments without delay cannot be made with reference to annulled deposit-books, or, with reference to deposit-books concerning which a protest, recognised by the post office savings bank has been made. the post office savings bank sends out no acknowledgements of receipt upon entering and carrying to the depositor's credit, interest and coupons,--the last receipt or statement of balance of account is therefore valid for a repayment made without delay; but the sum to be repaid must not include the credited interests or coupons. after repayments in the usual manner or after such payments as the post office savings bank at vienna itself makes as well as after other debit entries in the deposit-book, as for example purchases in the stocks, no statement with reference to the remaining balance is given, the acknowledgement of the receipt of the last deposit remains therefore in like manner valid until the next repayment made without delay. in the same way a statement with reference to the remaining balance retains its validity without regard to these repayments or debit entries, until in its place comes another acknowledgment of receipt in consequence of a new deposit, or a new statement with reference to the balance of the account in consequence of a new payment made without delay. it is evident of itself that a higher sum than the balance remaining at the depositor's disposal after deduction of the last repayment and entered in the book cannot at any time be paid. should it happen that owing to the post office service the acknowledgment of the receipt of the last deposit has not come into the depositor's hands, the previous receipt-acknowledgment, or statement of balance will be considered valid; the last deposit, not yet confirmed cannot however be included in the payment requested. if after a payment made without delay there remains less than fl. kr. to the credit of the depositor, the post office savings bank will issue no statement of the balance of the account, since in such a case there can be no further payment made without delay until there has been a new deposit paid in followed by an acknowledgment of receipt. at the bank of the post office savings bank at vienna repayments can be made without delay every day from o'clock in the morning until o'clock in the evening (on sundays and holidays from until at noon) without regard to the amount of the sums required. to this end it is necessary to present at the cashier's sliding window the notice-paper filled in and signed by the person empowered to do this together with the deposit-book; bringing the last receipt acknowledgment or statement of balance is not requisite. for sums above florins, the depositor, in case he has no watchword must prove his own identity. .--_business in the public funds._ when the savings account of a depositor's exceeds , florins, the post office savings bank is obliged to request the depositor by a registered letter to lessen the amount of his saved up capital. if within a month after the request the depositor has not lessened the amount of his capital, there will at the expiration of the time, be bought on his account in the course of the day, bonds of the only stock issued in notes, to the amount of the sum required to reduce the account to , florins, in any case for the nominal sum at least of florins. the price of this purchase will be entered to the debit of the depositor's account as repayment; the bonds bought will remain under the care of the post office savings bank and a stocks-book will be forwarded to the depositor. * * * * * a depositor (payer) who has in the post office savings bank an adequate sum at his disposal can at any time request the office to make purchases for him in the public funds. the request for the purchase is to be drawn up on form n^o , and must, if the purchased stock is to remain at the post office savings bank contain a watchword. if the depositor already has a watchword in connection with his deposit book that watchword is to be inserted. if a depositor cannot write he must make his mark and have it attested by a witness. if this witness is the same person who attested the depositor's mark on the counter-cheque and in the deposit book, then the request with the mark of the depositor and the signature of the witness can be sent without further delay to the post office savings bank. but if the signature of this witness cannot any longer be obtained, the depositor has to go to a receiving office and himself prove his own identity. for the first purchase together with the request it is simply necessary to enclose the deposit-book; for each subsequent purchase the deposit-book and if it relates to deposited bonds the stock account-book also must be sent. the purchase is made as far as practicable according to the state of the market as noted in the official price-list of the vienna exchange on the day in which the request refered to reached the post office savings bank, a commission being charged of per thousand, which however cannot amount to less than kreutzers. the stock bought will, according to desire of the depositor either be sent at his own risk and cost to the address he names in his request or be taken care of without cost by the office under guarantee for kind and number of documents, class of coupons and winning numbers in the lotteries, and the post office savings bank will prepare and send to the depositor with reference to them a «stock account-book» (document n^o ). stock which the depositor has not bought through the post office savings bank can be deposited by means of a stock account-book. the process is thus: the post office savings bank buys the stock sent and enters it to the credit of the sender, upon which the resale to him is gone through and the stock entered in the usual way in the stocks account-book. in such cases the purchase and sale in respect of stock of the same kind takes place at the same market price, so that there is no loss to the depositor, merely costing for the purchase on account the fixed commission of per thousand. depositors have, with a view to the taking over of such stock to send it at their own cost to the post office savings bank, joining with it a request in which the stock to be taken over is described, the deposit-book being sent (either lottery or stock account-book). * * * * * the post office savings bank undertakes to present at the treasury of the public debt, the bonds bought on account of depositors in order that they may be stamped with the names of the holders. this can be done at the request of the purchaser immediately after purchase of the bonds refered to in which case the stamp duty will be accounted for at the same time as the costs of purchase, or, the stamping of the bonds can be requested which according to the stock account-book are already in the post office savings bank. in the last case the duty which including the cost of the form used amounts to kreutzers a stamp is to be forwarded in postage stamps enclosed with form n^o . in every case the request must contain the exact name of the holder and further information as to where he wishes to take the interest, otherwise it will be understood that it is to be received at the public debt treasury. after the stamping has occurred, which, according to rule must take place within or weeks, the post office savings banks forwards the stamped bonds to the address given before the business was entered on. if an account of the interest due has to be prepared it is forwarded to the holder by the treasury of the public debt. * * * * * the coupons of the bonds deposited as per stock account-book will, when they fall due, be detached and cashed, and upon the day of their falling due entered both in the stock account-books of the holders without their having in each particular case to give notice. with reference to these sums coupon-orders will be issued to the depositor on the ground of which they can receive payment of them at any receiving office, on the amount being entered in their deposit-book before the expiration of the two months during which the orders are valid. after this the entry can only take place by sending the deposit-book to the post office savings bank at vienna. it remains free to the holder of the stock-account book to cause the post office savings bank to forward the coupons in its case, falling due in their entirety or in part, either _in natura_ or in money to himself or to a third party. this order should be sent to the post office savings bank in sufficient time for it to arrive before the coupons fall due. when the coupons are detached and sent _in natura_, no commission is charged, only the persons to whom they to be addressed must pay the postage as when coupon interests are forwarded. for banking coupons or lottery prizes, a commission will be charged as for stock in case of the post office savings bank at per thousand, excepting, however, when the produce of the coupons is itself entered to the account of the depositor. * * * * * the owner of a stock-account book can at any time request that his stock in the public funds be sent to him or that it be sold. the request is to be duly addressed to the post office savings bank on form n^o ^c in connection with n^o . the request forwarded to the post office savings bank must contain the watchword and personal signature of the person making the request and be accompanied by the stock-account book and also by the deposit-book when it is a question of entering the money resulting from the sale to the credit of the depositor's account. the sale takes place in agreement with the final state of the market officially noted on the day the request arrived at the post office savings bank upon a commission of per , at the lowest, kreutzers. if a stock-account book is lost, the loser is to inform the post office savings bank in writing, sending at the same time his watchword, and, enclosing kreutzers in postage stamps to request a duplicate. if after eight days subsequent to the notice the stock-account book is not found the post office savings bank will issue a duplicate and send it to the depositor, or if an official act is sought with reference to the book, the post office savings bank will enter into communication with the actual possessor of the book and it will depend upon the result whether the post office savings bank can grant the request of the loser, or whether it decides to relegate the parties to the magistrate in whose jurisdiction the matter lies. .--_freedom from cost of postage and commissions._ the correspondence of depositors with post office savings bank as well as with the receiving offices and with the post office management is always post-free, even in the case of a registered letter. this favour however has no application to the sending of certificates of stock or with reference to money transactions which result from the purchase and collection of the interest on the stock, nor does it apply to notices forwarded of their declared value, with the sole exception of the deposit-book being sent by letter with the declared value for the purchase of stock in the funds. the correspondence of the post office savings bank and its organs with the depositors is with reference to orders to addresses designated free from the tax of kreutzer the letter, a tax appointed with reference to the post offices not dependent on the treasury and to rural post offices, and in connection with the collection of registered letters also to those dependent on the treasury. the memorials addressed to the post office savings bank, to the post office authorities and their organs by depositors their legal successors, or authorised representatives, as well as the acts of conveyance mentioned in article of the law of may ^{th} are stamp and duty free. the interests of the savings deposits are in like manner exempt from the income tax and from any future tax coming in its place. the deposit-book as well as the forms necessary in giving instructions in business transactions with the post office saving bank will be supplied to depositors gratuitously. .--_official secrets._ the officials of the post office savings bank are bound by duty to keep the business and official secrets and it is strictly forbidden to them, beyond their superiors, to impart to any persons whatever, knowledge of any kind relating either to the names of depositors or the the amount of the sums deposited or withdrawn, or to the amount of balances. those who contravene this rule will undergo disciplinary treatment, and, according to the circumstances, will be dismissed from the service. every depositor may therefore rely on the strictest secrecy with relation to his business transactions with the post office savings bank, not only with reference to the usual post office savings service, but also with regard to the business in the public funds. post office savings bank. _the director_, wacek. footnotes: [n] _reichs-gesetz-blatt._ collection of the imperial laws. [o] _according to the altered form of the law of november ^{th} ._ the earlier form of article ran thus: each depositor will receive from the receiving office (post office) where he pays in his first deposit, a deposit book in which each amount paid in, each amount paid back, and the interest added to the capital is to be entered. each subsequent payment can be made at any receiving office (post office), the amount being entered in the deposit book. that person is to be considered the depositor on whose behalf the deposit is made. the deposit book is to be delivered gratuitously and stamp-free. the post office savings bank will open an account for each depositor. [p] _according to the altered form of the law of november ^{th} ._ the earlier form of article ran thus: the deposit-book is issued in the name of the person for whom the savings have been deposited, and is to contain the notes necessary to the identification of the same, as well as the signature of the depositor. a depositor who cannot write will have to bring with him a trustworthy man who will have to attest the identity of the depositor and to sign the deposit-book in his stead. an assignment of a deposit-book to another person is only to be accepted by the post office savings bank when the act of assignment has taken place at a post office entrusted with post office savings bank business. this being done, the assignee is to be regarded as the proprietor of the deposit-book. (art. , paragraph .) minors are entitled to pay in sums as savings and to receive repayments back, provided their legal representative has entered no written objection at the post office savings bank. in the case of the loss of the deposit-book, a duplicate is, after carrying out the proceedings prescribed by article , to be issued. for one and the same person, but one post office savings bank deposit-book is to be issued. whoever causes two or more deposit-books to be issued loses the interests on the capital entered in the second and in any subsequent books. if the whole amount of the deposits in the two or more deposit-books that a depositor has caused to be issued is over the sum of a , florins, or if a depositor has deposited in one year more than florins, in the two or more deposit-books issued to him, he will lose in the first case that part of the capital which exceeds , florins, and in the second, that part of the capital which exceeds florins. the minister of commerce is empowered for well considered reasons to be indulgent with reference to the loss of capital, which, in conformity with the regulations, would occur to the surplus deposits. post office servants are forbidden, except to their superiors, to give any information whatever to anyone, as to the names of depositors and the amounts of their deposits. [q] _according to the altered form of the law of november ^{th} ._ the earlier form of article ran thus: each payment must amount to at least kreutzers or a multiple of kreutzers. the sum total of payments in the course of a year cannot exceed the amount of florins, after deducting the amount resulting from payments back during that year. the balance in favour of a depositor including deposits paid in and interest added to the capital cannot, deducting the amount of repayments amount to more than , florins. deposits of kreutzers can be made in postage stamps, or in special postal savings stamps as soon as such stamps are issued by the minister of commerce. these stamps are to be fastened on forms supplied gratuitously. [r] _according to the altered form of the law of november ^{th} ._ the earlier form of article ran thus: the rate of interest for savings deposits is to be fixed at per cent per annum. the rate of interest can only be altered by legislation. [s] _according to the altered form of the law of november ^{th} ._ the earlier form of article ran thus: the repayment of the balance in favour of a depositor, or any part of it, to him or to his legal heir or authorised agent, will take place upon a notice which can be made by the party giving it, at the receiving office (post office) which he names in the notice. the repayment is to be made through the receiving office (post office) named in the notice on the production of the deposit-book on the basis of an assignment by the post office savings bank, except the payment is, according to article , barred by proceedings having been instituted, or according to articles and by a protest having been made. when such notice has been received with reference to sums up to florins, the assignment will be sent by return of post by the post office savings bank and the payment back will be made by the receiving office (post office) immediately after its arrival. the repayment of sums between and florins will be made in a fortnight at the latest, that of sums between and florins in a month at the latest, that of sums above florins at the latest within two months after the arrival of the notice. proposed law dealing with the organisation of a service of cheques and clearing of accounts in the general savings bank laid before the chamber of representatives of belgium at the sitting of nov. ^{th} explanations[t] gentlemen, the proposed law laid before the chamber of representatives, proposes to attach to our general savings bank, a service of which the great importance, the remarkable stability and singular capacity for development, has been proved by a trial conducted with vigilant carefulness during thirteen years in austria and five in hungary. in fact the chief part of the unfolding of a project of this kind consists in the setting forth of the results of foreign experience. * * * * * (this part of the explanation relating to austrian experience is a summary of the preceding article, to which we refer our readers.) * * * * * returning now to belgium we cannot fail to recognise first of all that the institution of the general savings bank by the act of march ^{th} , is one of the important events of our economic evolution. history will justly connect the name of frère-orban with a work so perfectly balanced and bearing the imprint of a real constructive genius. the solution given to the fundamental problem of the relations of the savings bank with the state, and of which the essential characteristics were:--making the central bank a distinct legal entity, whilst at the same time surrounding it with the guarantee of the state;--taking measures so that this state guarantee should not be to onerous,--and the constitution of a reserve fund,--the conception of the complex and diversified system of investing the capital in the best way to suit both the exigencies of its productivity and its disposal;--fixing the rates of interest and the periodic distribution of a portion of the reserve;--the accession of all classes of society to the savings bank and the admission of unlimited deposits;--the correctives brought to bear on these principles by the fixing of differential rates of interest according to the largeness of the deposits;--all these elements wisely co-ordinated, give to the work of the legislator of , at once an original physiognomy and a true grandeur. no one of the fundamental ideas of this edifice is attacked by the bill laid before the chamber. but this work is perfectible and it contains in its constitution even the principles of its perfectibility. in studying the functions of the savings bank, the conviction is soon arrived at that the authors of the act of , conceived them in the most general and simple form possible, leaving it to time to complete their work. thus it is that the investments are above all things regarded and portioned out with the view of the possible eventual withdrawal of deposits. the great peril which the makers of the law had before them, was that of not being able to satisfy a sudden and simultaneous demand for the repayment of the deposits. as to the various forms which these investments could take, they were thoroughly recognized and pointed out by the law-makers, but there were some which were only mentioned in their explanatory statement, but which must take a more and more important position. this has occurred with regard to agricultural investments, which have awaited a complementary organic legislation. this again is the case with the investments in land, the importance of which in the economy of the savings bank, frère-orban had seen already in , better than anyone, but which so far has lacked appropriate embodiment by which to give a real satisfaction to the needs of rural property. the acts of april ^{th} and june ^{st} , with regard to agricultural credit, of august ^{th} , with regard to working-class dwellings, the bill of november ^{th} , with regarded to landed credit only develop the thought contained in the institution of . the much-regretted mahillon has profoundly said: «it is indispensable in order to produce its whole useful effect, that the savings bank should be completed by distinct bodies which regulate its working. it is by this organic development that the fruitful character of the genius of our legislators will show itself.» our bill tends less to give a larger expansion to these original functions of the savings bank than to set free a new function which will carry we think according to the words of mahillon, its useful effect to a still higher degree. the act of makes no preparation for this putting into motion the property of the depositors, but then neither its text, nor the spirit even of the institution excludes it. it has been seen at work in the examples of austria and hungary; such important innovations however require in themselves real legal sanction. thus it is that the two large classes of operations which the new service proposes to combine, imply the possibility for third parties to effect at all post offices payments in favour of depositors whose deposit-books will be kept centralized at the general savings bank. to-day the deposits, like the withdrawals, although they can be effected at all the post offices, can only be so effected on presentation of the savings account-book, whether this is done by the holders themselves or by third parties in their names. the annual report of the savings bank on these operations gives the statistics of deposits effected by teachers on behalf of their pupils, by parents on behalf of their children, by masters on behalf of their workmen. teachers, parents, workers, retain the account-books. according to the proposed law depositors will be able to dispose of the free balance of their account by payment-cheques or clearing-cheques. at present the holders of the account books cannot have recourse to the cheque, nor transfer any sum from their account to that of another on a simple demand addressed to the savings bank. every transfer resolves itself into an act of cession which must be signified to the bank by a judicial act or notified by a letter bearing the legalised signature of the ceder. the carrying out of these extra judicial formalities is evidently incompatible with what is required in a perfect organ of circulation. the end in view is in fact to place at the disposition of the greatest number of depositors a permanent intermediary which will enable them to economise time to the utmost, to reduce risk and expense and to save money. the postal administration by the extraordinary development of its invaluable public service in collecting bills and taking receipts, the importance of which has tripled in the last fifteen years, and by the aid which it has given to the savings bank in virtue of the act of may ^{th} , in the collection of deposits and in payment of withdrawals, has realized one part of the operations which the projected institution includes. but it is necessary to attain a still higher degree of organisation taking the savings bank itself as the foundation on which to rest. the point aimed at is how to place at the disposal of its depositors a regular and continuous service of account-keeping both individual and collective in character, and to co-ordinate in a permanent manner all the operations which it embraces; the point aimed at is how to assure to every depositor the power of causing regular collections to be made by the mediation of the savings bank and the post offices, the amount being carried to his or her account; the point aimed at, is how to effect these payments by the same intermediaries without running the slightest risk, without the least of these operations escaping an inflexible account-keeping, constantly kept before the depositor's eyes, and without there being any need for the depositors themselves directly and personally to handle the funds. the centralization of the accounts of all the adherents makes it possible for the savings bank to obtain clear and definite results and to eliminate by means of the clearing of accounts the intermediary of money in an ever increasing number of transactions, for this service is by its natural evolution, by the rapid increase of the number of the adherents destined to preponderate. assuredly, the instruments of credit and of liquidation, of clearing and balancing, which more and more reduce the use of money, have in belgium taken an already great importance at the national bank, in the private banks, and in the unions de credit:--the credit given and received having, in a quarter of a century attained two thousand millions of francs at the national bank alone;--the extent of the movement being shown by the large figures of the current accounts upon which it operates, and during the last three years the national bank has sought to connect by a sort of clearing the other credit institutions. but who can hide the fact that we have yet much progress to make, or how far we are behind certain nations such as england. we may judge of it by the collected statistics given very lately by m. des essarts in the annals of the statistical society of paris. the point to aim at is to make the more perfect means of liquidation penetrate more thoroughly into new soil and of bringing them into closer connection with the social organism. this is precisely the project now laid before the chamber, by which it is proposed for this end to have recourse to an institution like the savings bank, the deposits in which rise to more than millions of francs and are distributed in more than million , bankbooks, and which has seen these deposits increase, in five years, more than millions; and to bring this institution to help to accelerate the general evolution of the community in the fruitful direction of the gradual economising of the monetary instrument and its final elimination. in looking into the official statistics we become convinced that the one most fixed idea of frère-orban is there definitely brought into operation; that of the common participation of all classes of society in the savings bank. out of , savings-books, if % be set on one side as children's books, it will be seen that the surplus may be divided into nearly equal proportions between the class of manual workers on the one hand, and on the other that of the shopkeepers, the heads of industrial or agricultural enterprises, officials military men, proprietors, stock holders and professional persons. if to this division according to the number of account-books be added, the classification of the account-books according to their total sum, the conviction is soon arrived at that it is to the members of the working-classes that the cheques and the clearing of cheques will directly render the least service. in effect, if one ought to attribute to the working-class all the account-books of to , francs, their total importance would represent hardly a quarter of the sum total of the account-books of the savings bank. this point will be rendered more clear by the publication of the book of messrs hamande and burny. however, if putting the consideration of individuals on one side we consider the different forms of working class associations, the conviction is arrived at that, in the service of cheques and clearing they will have a valuable intermediary: the mutual aid societies, the cooperative societies, the professional unions themselves will find in this organ of circulation, the same help as the multitudinous associations of every kind connected with the savings bank of vienna, the popular banks and the rural savings banks, specially carried on with a view to small industrial agricultural and commercial enterprises, and in a higher degree the unions de credit, will connect themselves by organic threads to the service of the savings bank; they will find in it a means of bringing their efforts to a common point. it may be added that, to the leading idea of the monetary benefit, is, in our idea united that, of assuring to the workers in this great movement of association one of the indispensable organs to a general and truly democratic financial service and a powerful instrument of economic education, for it will accustom the working-class societies which connect themselves with it to the invaluable discipline of a strict and permanent bookkeeping. the articles of the proposed law only reproduce the general conditions of this new institution as they result from experience. the cheques and clearing service ought to have a distinct existence, its accounts being kept separate from those of the savings service, understanding the term savings in the sense which the law of has given to it. the austrian law of november ^{th} , the complement of the law of may ^{th} , has laid this down. this condition is bound up with the liberty and spontaneity which ought to characterise the association; nothing can oblige the depositors in the savings bank to give their adhesion to this service, to run the risks, small though they be, of these operations, to submit to the working out of its special conditions. its utility ought to be freely appreciated and the savings bank will on the other hand have to fix the regulations which the adherents must satisfy. thus those affiliated to the service will not be necessarily confounded with the whole mass of the depositors in the savings bank. in carrying out this law it will be necessary to fix a minimum deposit enabling anyone to become a participant in the institution and to have an account; and until the withdrawal of the depositor he will not be able to dispose of this sum; this is the fundamental guarantee the austrian law imposes and it is a legitimate one: the risks are in other respects insignificant; however it is wise to render this guarantee complete by the formation of a reserve fund; all those who adhere to the service will participate in it; the mode of its formation, and the amount will be fixed by subsequent ordinances. thus the stability of the institution will be completely assured. free to adhere to the service, the depositor ought to be free to withdraw from it, only the regulations will have if this occurs, to determine the consequences of withdrawal, from the point of view of responsibility. the working of the system absolutely requires the complete centralisation of the accounts of the adherents. the account-books ought to be preserved as well as the accounts kept at the central office of the savings bank. what enlargement will be required in number of persons employed must be left to the future. this centralisation is the absolute condition of the regularity of the entries, the certainty of the control and of the preservation against error and fraud; without it the transferring of the entries and of the clearing could not be carried out; by it alone the exact state of the balance of every adherent can be known at any moment; by it alone exact information can be had at each operation of the situation and consequently of the extent of the capital which can be disposed of. the secret of the way in which the surplus is employed will moreover be kept from the knowledge of outsiders. experience has proved that the central service of bookkeeping can, without any disturbance, be placed every day in relation with all the post-offices, and the accounts be kept to date notwithstanding the apparent inextricable complexity of all this correspondence and of all these various operations. the instruments intended to facilitate the two classes of operations in which the savings bank and the postal administration will intervene in the interest of the adherents:--the collection on behalf of the latter, the payments in or the payments in discharge are the object of special bye-laws. in this direction still, and in this direction especially we shall be able to learn from experience. perfected instruments, as the _empfang erlag schein_, the certificate of payment in and of deposit, the cheque-books of payment and of clearing with the ingenious measures taken to baffle every fraud have been well tried in austria and hungary and there would be no longer any peril in adopting them. a metallic reserve sufficient to satisfy all immediate wants ought to be secured. experience has proved that this condition is to be realized without difficulty. the establishment of a service of cheques and clearing may lead to a more considerable flow of capital to the savings bank. this has been the result in vienna and has been in fact the very thing the viennese legislation wished to bring about. but, on the one hand the investments continue without ceasing to increase: for example, the extent of the advances connected with agriculture and land which will be solicited of the savings bank or in which it will participate cannot be measured; on the other hand it is possible to exercise regulative and limiting action on the deposits in making a difference in the rates of interest given to depositors; it is possible to go the length of suppressing all interest; to this end special arrangements with reference to deposits belonging to the cheque and clearing service will be made in carrying out the law. such is the economy of a proposition in itself modest and simple, which we have no hesitation to submit to the chamber. if we make an effort to conceive what in the future will be the evolution of an apparatus so marvellously flexible as the savings bank, we may fairly expect from a combination of the service of cheques and clearing with that of investments, of the association of special organs,--such as mahillon speaks of,--with the central organism of the bank, a powerful co-operation in the legitimate effort to eliminate metallic money from our circulating system. but without inquiring, now, what may occur in a future perhaps alas still remote, in only occupying ourselves with the production of present good, it has seemed to us in the general interest to solicit the chamber to establish a service of which decisive experiences have fixed the essential conditions and shown the efficacy, and of which the link is as manifest with our democratic evolution as with the higher forms of credit and circulation. footnotes: [t] sitting of december ^{nd} . parliamentary documents n^o . proposed law _additions to the laws of march ^{th} instituting a general, savings bank, and of march ^{th} , codifying the postal legislation._ article .--the savings bank is authorised to organise, with the assistance of the postal administration, a service of cheques and of clearing in current accounts in the interest of those depositors who shall satisfy certain conditions in virtue of the present law. art. .--this service shall have a distinct and separate administration to that of the savings service; the bookkeeping operations to which it gives rise shall be centralised at the savings bank in brussels. art. .--all participation in this service by the opening of a current account shall be voluntary; withdrawal shall always be possible. art. .--royal decrees shall determine: . the general conditions of admission and particularly the minimum of deposit which shall be required of every adherent and which shall remain non-withdrawable so long as his participation in the service shall continue; the carrying out of his withdrawal; . the conditions and the forms under which the savings bank shall receive deposits of third parties and payments on account of adherents, either directly or by the intermediary of the postal administration; . the rules according to which the adherents shall be able to dispose of the free balance of their account, by means of cheques and clearings; the conditions and the forms of the cheques given out; the arrangements made to prevent errors and frauds; the intervention of the postal administration in the payments or repayments effected on account of the adherents; . the rules which will permit the accounts to be kept from day to day and to enable the account holders to know the condition of affairs in a regular manner; . the formation of a reserve sufficient to assure the regularity of the operations; . the rate of interest which shall be given to the funds placed in the cheque and clearing service; . the constitution of a reserve destined to cover the eventual losses of this service; . the fees for collection which shall be charged to the adherents. h. denis. e. vandervelde. f. flÉchet. l. bertrand. t. niezette. transcriber's notes: simple spelling, grammar, and typographical errors were corrected. punctuation normalized. anachronistic and non-standard spellings retained as printed. italics markup is enclosed in _underscores_. bold markup is enclosed in =equals=. superscripts are indicated with a single caret (^) followed by the superscripted text. if the superscript continues for more than one character, then the text is surrounded by curly braces { and } as well. added missing "figure v." reference to top of page . robinson crusoe's money; or, the remarkable financial fortunes and misfortunes of a remote island community. by david a. wells, late u. s. special commissioner of revenue. "it requires a great deal of philosophy to observe once what may be seen every day." --rousseau. new york: harper & brothers, publishers, franklin square. . preface. the origin of this little book is as follows: some months ago, the expediency was suggested to the author, by certain prominent friends of hard money in this country, of preparing for popular reading--and possibly for political campaign purposes--a little tract, or essay, in which the elementary principles underlying the important subjects of money and currency should be presented and illustrated from the simplest a b c stand-point. that such a work was desirable, and that none of the very great number of speeches and essays already published on these topics in all respects answered the existing requirement, was admitted; but how to invest subjects, so often discussed, and so commonly regarded as dry and abstract, with sufficient new interest to render them at once attractive and intelligible to those whose tastes disincline them to close reasoning and investigation, was a matter not easy to determine. at last the old idea--recognized in fables, allegories, and parables--of making a story the medium for communicating instruction, suggested itself; and, in accordance with the suggestion, a remote island community has been imagined, in which, starting from conditions but one remove from barbarism, but gradually rising to a high degree of civilization, the progress, the use, and the abuse of the instrumentalities and mechanism of exchange--through barter, money, and currency--have been traced consecutively; and the effect of the application of not a few of the most popular fiscal recommendations and theories of the day practically worked out and recorded. and, in carrying out this scheme, the reader will not fail to perceive, by reference to the marginal notes accompanying the text, that hardly an absurdity in reference to exchange, money, or currency can be imagined, which somewhere and at some time has not had its exact counterpart in actual history or experience. if any apology for the objects designed or the course pursued is needed, the author thinks he finds it in the precedent established by the illustrious geoffrey crayon, gent., who, in the introduction to his "tales of a traveler," thus happily sets forth the special advantage which accrues from the proper employment of a story as a means of communicating information. "i am not," he says, "for those barefaced tales which carry their moral on their surface, staring one in the face; on the contrary, i have often hid my moral from sight, and disguised it as much as possible by sweets and spices; so that while the simple reader is listening with open mouth to a ghost or love story, he may have a bolus of sound morality popped down his throat, and be never the wiser for the fraud." whether in "robinson crusoe's money" the author shall succeed in inducing his fellow-countrymen--to whom the ordinary currency medicine is becoming distasteful--to swallow without wry faces the same dose sugar-coated, remains to be determined. norwich, conn., january, . contents. chapter i. page the three great bags of money chapter ii. a new social order of things chapter iii. the period of barter chapter iv. how they invented money chapter v. how the people on the island and elsewhere learned wisdom chapter vi. gold, and how they came to use it chapter vii. how the islanders determined to be an honest and free people chapter viii. how the people on the island came to use currency in the place of money chapter ix. war with the cannibals, and what came of it chapter x. after the war chapter xi. the new millennium chapter xii. getting sober robinson crusoe's money. chapter i. the three great bags of money. all who have read "robinson crusoe" (and who has not?) will remember the circumstance of his opening, some time after he had become domiciled on his desolate island, one of the chests that had come to him from the ship. in it he found pins, needles and thread, a pair of large scissors, "ten or a dozen good knives," some cloth, about a dozen and a half of white linen handkerchiefs concerning which he remarks, "they were exceedingly refreshing to wipe my face on a warm day;" and, finally, hidden away in the till of the chest, "three great bags of money--gold as well as silver." the finding of all these articles--the money excepted--it will be further remembered, greatly delighted the heart of crusoe; inasmuch as they increased his store of useful things, and therefore increased his comfort and happiness. but in respect to the money the case was entirely different. it was a thing to him, under the circumstances, absolutely worthless, and over its presence and finding he soliloquized as follows: "i smiled at myself at the sight of all this money. 'oh, drug!' said i, aloud, 'what art thou good for? thou art not worth to me, no, not the taking off the ground. one of these knives is worth all this heap. nay, i would give it all for a gross of tobacco-pipes; for sixpenny-worth of turnip and carrot seed from england; or for a handful of pease and beans, and a bottle of ink.'" in introducing this episode in the life of his hero, nothing was probably further from the thought of the author, de foe, than the intent to give his readers a lesson in political economy. and yet it would be difficult to find an illustration which conveys in so simple a manner to him who reflects upon it so much of information in respect to the nature of that which is popularly termed "wealth;" or so good a basis for reasoning correctly in respect to the origin and function of that which we call "money." and in such reasoning, the truth of the following propositions is too evident to require demonstration: st. the pins and needles, the scissors, knives, and cloth were of great utility to robinson crusoe, because their possession satisfied a great desire on his part to have them, and greatly increased his comfort and happiness. d. possessing utility, they nevertheless possessed no exchangeable value, because they could not be bought or sold, or, what is the same thing, exchanged with any body for any thing. d. they had, moreover, no price, for they had no purchasing power which could be expressed as money. th. the money, which is popularly regarded as the symbol and the concentration of all wealth, had, under the circumstances, neither utility, value, nor price. it could not be eaten, drunk, worn, used as a tool, or exchanged with any body for any thing, and fully merited the appellation which crusoe in another place gives it, of "sorry, worthless stuff." finally, the pins, needles, knives, cloth, and scissors were all capital to robinson crusoe, because they were all instrumentalities capable of being used to produce something additional, to him useful or desirable. the money was not capital, under the circumstances, because it could not be used to produce any thing. starting, then, with a condition of things on the island in which money had clearly neither utility nor value, let us next consider under what change of domestic circumstances it could become useful, acquire value, become an object of exchange, and constitute a standard for establishing prices. chapter ii. a new social order of things. the first person that came to join robinson crusoe on his island was friday, and next, friday's father. but even with this increase of numbers there was still no use for the money, inasmuch as the three constituted but one family, the members of which labored and shared all useful things they acquired in common, and made no exchanges. but when will atkins and the english sailors came, and the population of the island, we may suppose, was largely and permanently increased, a new social order of things became inevitable. incompatibility of taste and temper, and a natural desire for personal independence, soon made it impossible for all to live and share in common as one family. and self-interest also soon taught, that, in order that the quantity of useful things available for the new community as a whole might be increased, and their quality perfected, it was desirable, that, instead of each man endeavoring to supply all his own wants, and for this purpose following irregularly the business of a carpenter, baker, tailor, mason, and the like, it was best for each man to pursue but one occupation, and, making himself skilled in it, procure the things which he himself did not produce, and which he might need, by exchanging his own products or services for the products or services of some other man. they saw instinctively that robinson crusoe, although originally civilized, would, if he had remained alone on the island, have inevitably become a pure savage, and simply because he was alone, and could make no exchanges. for a time, the things which he obtained from the wreck raised him above this condition; for what the ship brought him--the knives, axes, guns, cloth, etc.--were capital, or the accumulated labor of other men. but if the ship had given him nothing, he would have had to make every thing for himself--"his hat, his garments, his feet-covering, his bread, his meat with bow and arrows, his house by blows of his hatchet, his hatchet by blows of his hammer, his hammer heaven knows how"--and become a barbarian in spite of himself, because all his effort would have been required, and would have only sufficed, to insure him a bare subsistence. systematic division of labor and the exchange of products and services thus, for the first time on the island, came in, and constituted a part of the perfected machinery of production, or the means of getting a living. and it is also to be here noted, that, because commodities and services now for the first time became exchangeable, they also for the first time acquired the attribute which we call value. chapter iii. the period of barter. all exchanges must, however, in the first instance, have been made directly, or, as we term it, by barter; so much of one commodity or service being given for so much of some other commodity or service--corn for cloth, furs and skins for knives or tobacco, so much labor in building a house for so much skill in constructing a canoe. but in all this method of exchanging, which, while it is the most ancient, is also one which still extensively prevails in even the most civilized societies, there was no place for the use or intervention of money; and consequently, also, there was no such thing as price; for price, as before stated, is the purchasing power of any commodity or service expressed in money. but the people on robinson crusoe island soon found out by experience that there was an obstacle in the way of carrying on all exchanges according to the principle of direct barter, so serious in its nature as to constitute, unless removed, a complete bar to any further considerable progress in civilization and social development. and the discovery happened somewhat in this wise: twist, who was a tailor, and had made a coat, discovered all at once that he was out of bread; and being hungry, suspended work, and went in search of needum, the baker, to effect an exchange. he found him without difficulty, just heating his oven, and with plenty of bread to dispose of; but as the baker had all the coats he wanted, he declined to trade. needum, however, kindly informed twist that if any fellow should call with any surplus grain or flour, he (needum) would be most happy to supply him with all the bread he needed in exchange; but as the tailor was neither a farmer nor a miller, and had neither of these articles, he (twist) set off for the other end of the island, where there was another baker, to see how the latter was situated in respect to garments. on his way, twist was overtaken by pecks, the mason, who had no coat, and, wanting the very garment which twist had been making, had stopped work on a stone wall and gone in search of the tailor, to whom he proposed to exchange the coat for a new chimney. but as twist had already two chimneys to his house, and nothing to cook, and didn't want another chimney, the mason was as unsuccessful in his effort to trade with the tailor as the tailor had been just before with the baker. at last, after much vexatious traveling about, involving great waste of time and labor, twist found a baker who wanted to exchange bread for the coat, and pecks a tailor who would give a coat for a chimney; needum having, in the mean time, shut up his bakery and gone in search of diggs, the farmer, who was willing to supply grain for bread. but when all these different persons, each desirous of exchanging his special products or services, had been found, and had come together, a new perplexity at once made its appearance, and one so embarrassing as to cause each man seriously to consider whether it were not better to return home and endeavor to produce every thing for himself, rather than attempt to exchange any thing. "for how," said they all, "is the comparative value of our different commodities and services which we propose to exchange to be ascertained?" "how can i know," said twist, "how many loaves i ought to receive for my coat?" "or i," said pecks, "find out how high and broad a chimney i ought to make for my garment?" diggs, furthermore, got up a little private dispute of his own with needum, growing out of the circumstance that the latter wanted to make his entire payment in bread to the former at once; while diggs, who did not relish the idea of living on stale and possibly moldy bread for an indefinite length of time, wanted pay for his grain, from the baker, at the rate of one fresh loaf per day. as for poor twist, he had become by this time so humble through hunger that he had not the heart to object to the proposition to take a cart-load of bread at once in exchange for his coat, although his house was so small that he knew he would have to store part of his "pay" on the roof, where it would be certain to be eaten by others than his own family. there was another incident which happened about this time which made much talk among the island community. a man who had nothing to sell but his labor had been employed to load a vessel with coal--a vein of which had been discovered; and, after working faithfully all day, had received in pay for his services a ton of coal. but as it was meat, drink, and lodging, and not coal (although the latter was greatly needed for some purposes), which the laborer wanted, there was nothing left for the laborer to do but to attempt to exchange his coal, and that, too, as soon as possible, in order to satisfy his immediate necessities. being too poor to hire a horse and cart, he therefore borrowed a wheelbarrow, and, filling it with coal, went in search of persons who had a surplus of meat, drink, and lodgings to dispose of. but all of them happened to have all the coal they wanted; and morning found the laborer still trundling through the streets his most useful commodity unexchanged, and ready to sink with hunger and exposure. a like experience befell also the journeyman butcher, blacksmith, carpenter, and dry-goods clerk, who received for their day's labor respectively a sheep-skin, a dozen horse-shoes, a piece of pine timber, and two yards of red flannel. all were in no condition, through bodily exhaustion, to resume work on the next day; and all also clearly saw that their condition would not have been much improved, if each had received an entire payment in either meat, drink, or lodging, in place of coal, skin, lumber, horseshoes, or cloth. the laborers, therefore, held a meeting, and at once resolved: "that whereas it was evident that the system of paying for labor with a portion of the commodity which each laborer produced would necessitate as much time and labor to make their wages serviceable to their wants as was required in the first instance to earn said wages; therefore, it was but right and proper that the employers should allow the laborers to use half of the whole time for which they were paid, for the purpose of rendering their wages wholly available for their immediate necessities." but to this the employers rejoined that such an agreement would be equivalent not only to doubling the proportion of wages to direct production, but also to impairing, to the extent of one-half, the effectiveness of all labor engaged in production, thereby increasing scarcity, diminishing abundance, and rendering further advance in material development exceedingly slow, if not altogether impossible. for a time, therefore, there was a prospect of a very serious difficulty between the representatives of labor and the representatives of capital; resulting, as is always the case, in immense losses, not only to those directly concerned, but to the whole community. chapter iv. how they invented money. the people on the island--both laborers and employers--were, however, fully agreed that life was too short to waste a good part of it in a game of "blindman's-buff" on a large scale--for such this attempt to conduct exchanges on a basis of direct barter substantially was; [ ] but they nevertheless also clearly perceived that the game would continue to be played, to the interruption of all material progress, unless some other method of exchanging could be devised and adopted. under the guidance, therefore, as it were, of instinct (robinson crusoe encouraging), and without any enactment of law, twist, needum, pecks, diggs, friday, friday's father, will atkins, and every body else, by common consent, agreed to select and adopt some single commodity which all should agree to take in exchange for whatever of products or services they might have to dispose of; so that whenever any one had any thing to exchange, he might first exchange it for this commodity, whatever it might be, and then with such intermediate object purchase at such times and places, and in such proportions as he might desire, whatever he might need. and the moment this was done, civilization on the island took a long step forward, and the first great embarrassment growing out of the attempt to exchange exclusively by direct barter was removed. the tailor was no longer in danger of starving; the mason had no longer any anxiety about procuring clothing, and the laborer received as pay for his labor something which gave him an equivalent in meat, drink, lodging, and other necessities which he might need, without trouble; every man giving freely of his goods or services for the intermediate object, because he knew that every other person desirous of exchanging would be willing to do the same. again: the selection of some commodity or article, and the investing it by common consent with a universal and comparatively unvarying purchasing power, also solved the second perplexity, inasmuch as it provided a measure or standard, for ascertaining the comparative value or purchasing power of every other exchangeable commodity or service; and in precisely the same manner as the length or weight of any thing is ascertained, i.e., by comparing it with some other thing which the community have universally agreed to recognize as a standard of length or weight--as, for example, the rod of wood which we call a yard-stick, or a piece of metal which is termed a pound. "my loaves are each worth ten pieces of the intermediate commodity," said needum, the baker! "my coat," rejoined twist, the tailor, "is worth a thousand pieces!" the terms of fair exchange between the baker and the tailor would therefore have been one hundred loaves for one coat. the general name given to the commodities or articles which the people of different countries universally accept in exchange, as the equivalent for all other commodities or services, and as the measure of values, is money. the commodities or articles which have been selected by men at various times and places to serve as this universal equivalent, intermediate agent, or medium for facilitating exchanges, have been exceedingly various. among the north american indians, and the early settlers who came among them, wampum and beaver-skins were used as money; among the natives of west africa, money consists of small shells called "cowries;" in abyssinia, the common money of to-day is salt; in chinese tartary, it is cubes of pressed tea; and within a comparatively recent period small cakes of soap have been used as money on the west coast of mexico. among pastoral people of antiquity, cattle and sheep were so extensively used for money that our common english word pecuniary has its derivation from the old word pecus, signifying a flock. and while we read in homer that the price of the armor of glaucus was one hundred head of cattle, we also know that the zulus of south africa pay their debts to-day in cattle, and reckon their wealth by the same standard. money, therefore, existed before statutes, and exists and is used to-day among nations who have no written or acknowledged code of laws. it is also of importance to a clear understanding of this subject to recognize at this point another fundamental fact, namely, that there is no evidence that any nation or people has ever adopted, in the first instance, any article or commodity to use as money which did not possess, by reason of some inherent or intrinsic desirable qualities, a natural purchasing power or value. and a little reflection will make it obvious that this must have been so from necessity. for in the absence of all law defining what money should be, and regulating exchanges, the adoption of any article to serve as money which represented little or no effort for its production or accumulation would enable the shrewd, the idle, or unscrupulous, easily, and without fear of punishment or restraint, to take from the rest of the community products which represented the expenditure of time and labor, without giving in return any equivalent. thus, for example, if dried leaves, or pieces of paper with such marks as any might choose to stamp or scrawl upon them, had been invested with a universal purchasing power, the primary practical result of the use of such money would have been to enable somebody to obtain something for nothing, or to permit those who would not work or save, to rob those who did. the people on the island, being uneducated, never did any such foolish thing; but when they came to study history, they found out, to their great surprise, that the people of other countries had repeatedly used things worthless in themselves as money; and many years afterward a man who aspired to be a great teacher even came to the island from the united states, and endeavored to convince the people that it was a great defect to use any thing as money which had any intrinsic value as a commodity. [ ] the children of the first school he attempted to talk to soon made his position embarrassing by reading from their histories that the people of every country, especially the poor and ill-informed, who had ever attempted to facilitate their exchanges by using something as money which had no intrinsic value, had in every case been so swindled and robbed, as a consequence, that sooner or later they were always compelled, as a measure of simple self-protection, to abandon its use, and in its place adopt something as money which had a generally acknowledged and comparatively permanent inherent value or purchasing power as a commodity. the following were some of the narrations which the children found and read out of their histories: "in december, , a poor soldier's widow put into the savings-bank two hundred dollars in specie, and then removed with four young children to california. in july, , when gold stood at two hundred and eighty, she sent for her money. in return, she received a gold draft for eighty-three, accrued interest at six per cent, included."--henry bronson, nature and office of money. "the morals of the people were corrupted (by the continental irredeemable money) beyond any thing that could have been believed prior to the event. all ties of honor, blood, gratitude, humanity, and justice were dissolved. old debts were paid when the paper money was worth no more than seventy for one. brothers defrauded brothers, children parents, and parents children. widows, orphans, and others were paid for money lent in specie with depreciated paper."--breck, sketch of continental money. "the assignats gradually dwindled down to nothing, involving the whole land in ruin--excepting a few lucky speculators--and resulted eventually in national bankruptcy. when thousands of wretches, even before the final collapse of the assignats, were committing suicide to escape starvation, war was a blessing; and napoleon was the instrument by means of which all europe was made to feel the results of worthless money, either directly or by inoculation, from its maddened victims."--notes on the french assignats, and their influence. "he had to pay four hundred dollars for a hat; for a pair of boots the same. he wanted a good horse, but was asked a price equivalent to ten years' pay." "my six months' earnings will scarce defray the most indispensable outlay of a single day. * * * for a bed, supper, and grog for myself, my three companions, and their servants, i was charged, on going off without a breakfast next day, the sum of eight hundred and fifty dollars."--life of general de kalb. "in all, from first to last ( to ), the amount of notes, bills, drafts, bonds, etc., issued by the treasury of the republic of texas, and serving to a greater or less extent as a 'circulating medium,' amounted to $ , , , or at the rate of more than two hundred and sixty dollars per head of the entire population. if paper issues serving as money could have made a people rich, the texans ought to have been the richest people in the universe. in january, , texas treasury-notes were worth no more than forty cents on the dollar; in the spring of , they were worth thirty-seven and a half cents; in , from twelve to fifteen cents; and in it required, in the characteristic language of the times, 'fifteen dollars in treasury-notes to buy three glasses of brandy-and-water without sugar.' 'by this time there was little circulating medium of any kind in texas; but this was no great calamity, as the people had but little left to circulate.' the evils the system did were immense, and such as for which, even were it so disposed, the government could afford no compensation to the sufferers."--gouge's fiscal history of texas. again, one of the principal objects for which money was devised and brought into use was to serve as a measure, or standard, for estimating the comparative value of other things. but it seems hardly possible to conceive of a person desirous of using money for such purpose, selecting an article to measure values which in itself possesses no value, or costs no labor to produce, any more than he would select as a standard for measuring length something which had no length, or as a standard for measuring weight something which had no weight. the people of the island must have been unusually stupid if they did not from the outset, therefore, clearly see that nothing can be reliable and good money under all circumstances which does not of itself possess the full amount of the value which it professes on its face to possess. chapter v. how the people on the island and elsewhere learned wisdom. but while any commodity possessed of acknowledged purchasing power or value may be used as money, the experience of the islanders and every other people must have soon taught them that some commodities are much better adapted to this purpose than others; or, rather, that the use of certain commodities as money, while they may answer the purpose, nevertheless entail very serious disadvantages. and the details of the manner in which this information has been acquired by experience constitute one of the most interesting chapters in the world's history. the experience of the islanders was somewhat as follows: at the outset they agreed to use cowries--a pretty shell picked up on the beach, and which the women all desired to have and use as an ornament. these shells were not, however, plentiful; and, in fact, it was found that it required about as much time and labor for a man to collect a hundred of them as it did to grow a bushel of wheat. consequently, wheat regularly exchanged for cowries (as money) at the rate of one hundred cowries for one bushel, while the farmer with two thousand cowries could readily buy a plow, which was considered equivalent in value to twenty bushels. by-and-by, some idle fellows that were in the habit of sailing made a long excursion, and, for the first time, visited a little island on the remote horizon. when they landed, they found, to their surprise, that instead of cowries being very scarce on the beach, they were very abundant. they winked at one another, and said little; but each man proceeded to gather all the cowries he could, and, returning to the main island, kept their discovery a profound secret. the first thing of note that next happened among the robinson crusoe people was a great and unexpected revival in business. money began to grow abundant. societary circulation was never so active. every thing that was offered for sale speedily found a purchaser, and, demand increasing, prices rapidly increased also. it was also noticed that a few persons who never did any regular work, but speculated and gambled all the morning, and took pleasant sailing excursions every afternoon, had, especially, plenty of money, which, as patriotic citizens, desirous of making trade lively, they were always most ready to part with for other commodities. the shop-keepers, the farmers, and the mechanics, all also finding that they had more money than usual, all also felt impelled to buy something, and prices took a fresh start upward, so that a bushel of wheat that could previously have been sold for one hundred cowries easily brought one hundred and fifty, and even two hundred. but, on the other hand, the farmer, instead of being able to buy, as before, a plow for two thousand cowries, now found that he had to pay double, or four thousand; or, in other words, the cowries had only about one-half the purchasing power they possessed before. but for a time every body was jubilant. was it not evident that the value of every man's possessions, measured in cowry money, had greatly increased--and what could be more natural than that the shrewd adventurers who had been the authors of these golden days should be highly honored, invited to speak before cowry clubs in all parts of the island, and be even talked of for the chief offices, which still continued to be filled by robinson crusoe and his man friday? the continually augmenting prices--measured in cowry money--of all commodities, or, what is the same thing, the continually diminishing purchasing power of the cowries, at last began to attract attention, and this in turn induced distrust; so that the price of a bushel of wheat, which had been at first one hundred cowries, and then two hundred, rose to three, four, and even five hundred cowries. another remarkable circumstance noticed was, that, as prices increased, the wants of trade for cowry money also increased proportionably, which want the adventurers who had been the means of giving the island its increased volume of money took care to supply by bringing additional quantities of cowries as they were needed. it was also observed that, as distrust increased, there was also a remarkable increase in societary activity; for every body desired to change off his cowry money for something else. [ ] persons who were in debt made haste to pay their debts, and every body was ready to lend cowry money to start all sorts of new enterprises. a company was organized, for example, with a capital of ten million cowries, to explore the wreck of the original ship which brought robinson crusoe to the island; and although nobody knew exactly where the wreck was, or what was supposed to remain in it, it was advocated as affording great opportunity for labor. another project, for which a company with fifty million cowries capital was started, was to build a system of canals across the island, although the island had a width of only about ten miles, with a remarkably safe ocean navigation all around it. finally, the secret of the whole matter gradually leaked out. other people besides the original three shrewd fellows found out where the supply of cowries came from, and made haste to visit the remote island, provide themselves with money, and put it in circulation. but the more money that was issued, the more was needed to supply the wants of trade, until at last it took a four-horse wagon-load of cowries to buy a bushel of wheat. then the bubble burst. stock-companies all failed. trade became utterly stagnant. the man whom robinson crusoe had made secretary of the island treasury thought he could help matters by issuing a few more cowries, but it was no use. some very wise persons were certain that every thing would be all right again if people would only have confidence; but as long as the people who worked and saved were uncertain what they were to receive for the products of their labor--something or nothing--confidence didn't return. every body felt poor and swindled. every body who thought he had money in savings-banks woke up all at once to the realization that his money was nothing but a lot of old shells. every body had his bags, his tills, and his money-boxes filled with shells, which he had taken in exchange for commodities which had cost him valuable time and labor. strictly speaking, however, calamity did not overtake every body. there were some exceptions, namely the shrewd and idle fellows who had first found the cheap supply of cowries, and, taking advantage of the ignorance of the community, had added them to the before-existing circulation to serve as money. all these had taken very good care to keep the substantial valuable things--houses, lots, plows, grain, etc.--which they had received in exchange. they had, in fact, grown rich by robbing the rest of the community. [ ] the community, however, were too courteous to call them thieves, and in conversation they were usually referred to as shrewd financiers, and as men ahead of their time. the concluding act of this curious island experience was, that the formerly so highly prized money became depreciated to such an extent as to possess value only as a material for making lime. the people accordingly, by burning, made lime out of it, and then, in order to make things outwardly cheerful, used the lime as white-wash. but upon one point they were all unanimous, and that was, that the next commodity they might select to use as money should be something whose permanency of value did not depend on elements capable of being suddenly affected by accidental circumstances, or arbitrarily and easily changed by the devices of those who desired to get their living without working for it. but this experience of the islanders in reference to the originating and using of money, although curious, has not been exceptional; for the records of history show that men almost everywhere, in going through the process of civilization, have had a greater or less measure of the same experience. one particularly noteworthy illustration of this is recorded in the "history of new york," by diedrich knickerbocker, and in the manuscript records of the new york historical society. it was in the days of dutch rule-- --in new amsterdam (afterward new york), when the common money in use was the so-called indian money, or "wampum;" which consisted "of strings of beads wrought of clams, periwinkles, and other shell-fish. these had formed a simple currency among the savages, who were content to take them of the dutch in exchange for peltries." william kieft was at that time governor, and being desirous of increasing the wealth of new amsterdam, and withal, as the historian relates, somewhat emulous of solomon (who made gold and silver as plenty as stones in the streets of jerusalem), he (the governor) determined to accomplish his desire, and at the same time rival solomon by making this money of easy production the current coin of the province. "it is true, it had an intrinsic value among the indians, who used it to ornament their robes and moccasins; but among the honest burghers it had no more intrinsic value" than bits of bone, rag, paper, or any other worthless material. "this consideration, however, had no weight with governor kieft. he began by paying all the servants of the company, and all the debts of the government, in strings of wampum. he sent emissaries to sweep the shores of long island, which was the ophir of this modern solomon, and abounded in shell-fish. these were transported in loads to new amsterdam, coined into indian money, and launched into circulation." "and now for a time affairs went on swimmingly. money became as plentiful as in the modern days of paper currency, and, to use a popular phrase, 'a wonderful impulse was given to public prosperity.'" unfortunately for the success of governor kieft's scheme, the yankees on connecticut river soon found that they could make wampum in any quantity, with little labor and cost, out of oyster-shells, and accordingly made haste to supply all the wampum that the wants of trade in new amsterdam required; buying with it every thing that was offered, and paying the worthy dutchmen their own price. governor kieft's money, it is to be further noticed, had also in perfection that most essential attribute of all good money, "non-exportability." accordingly, when the dutchmen wanted any tin pans or wooden bowls of yankee manufacture, they had to pay for them in substantial guilders, or other sound metallic currency; wampum being no more acceptable to the yankees in exchange than addled eggs, rancid butter, rusty pork, rotten potatoes, or any other non-exportable dutch commodity. [ ] the result of all this was, that in a little time the dutchmen and the indians got all the wampum, and the yankees all the beaver-skins, dutch herrings, dutch cheeses, and all the silver and gold of the province. then, as might naturally have been expected, confidence became impaired. trade also came to a stand-still, and, to quote from the old manuscript records, "the company is defrauded of her revenues, and the merchants disappointed in making returns with which they might wish to meet their engagements." it is safe to conclude that, after this, the commodity made use of by the dutchmen as money was something less liable to have its value impaired than wampum. the early settlers in east tennessee also came to a similar conclusion, after a somewhat similar experience. raccoon-skins were in demand for various purposes, and consequently were valuable. they accordingly selected them for use as money. opossum-skins, on the other hand, were not in demand, and therefore had little value. those of the settlers who desired to discharge their obligations without giving a full equivalent paid their taxes in opossum-skins to which coons' tails were attached. the counterfeits having once got into the treasury, could not be exported out of the treasury to meet the payments of the state, and the use of coon-skins as currency came to an end. but to return to the island. although the first experience of the islanders in selecting a commodity to be used as money had been particularly unfortunate, the necessity of having some agency to serve the purpose of money remained as great as before, and consequently a new commodity had to be selected. various people proposed various things. some proposed to use bananas, which were always desirable, and, when good and ripe, were always exchangeable at a very constant value; but their unfitness to be used as money was acknowledged as soon as it was pointed out that bananas decayed very quickly after they became most useful, and that therefore a man who had plenty of money to-day might have none tomorrow, and that through no fault of his own. [ ] wheat, cattle, and pieces of stamped iron were also proposed, but all of these were found to be unsuitable in some essential particular. thus, for example, it was objected to wheat, that, though it was almost always in demand, and represented a very constant amount of labor for its production, it was too bulky to carry about, and rarely had the same exact value one year as another; to cattle, that it was impossible to divide up an ox, cutting off the tail at one time and the ears at another, for the purpose of making change, without destroying the value of the animal as a whole; and that if cows in general were to be used as legal tender to pay debts, the very poorest cow would very probably be selected from the money-pen for such a purpose; [ ] while, if iron were adopted as money, and circulated at its current value, it might be necessary to move about a ton to pay a debt of twenty or thirty dollars. a peculiar kind of beads, made of blue glass, had come into use with the women on the island as ornaments, and being greatly in demand, small in bulk, and of most durable material, they were thought to be peculiarly well fitted to serve the purpose of money. they were accordingly adopted, and for a time fairly answered the purpose. but all at once the women declared their continued use to be unfashionable; and all use and demand for the beads at once ceasing, the merchants and others who had accumulated a large stock of them, in exchange for other commodities, at the same moment found that what they had regarded as money had no longer any purchasing power or value, and in consequence experienced great losses. thereupon the community concluded not to use blue glass beads any longer as money. [ ] how fast the people on the island, by reason of their varied experience, educated themselves up to a knowledge of what constitutes good money may be inferred from the following incident: a portion of the inhabitants on the island were heathen, and, to defray the expense of efforts to civilize and christianize them, it was the habit of certain good men to take advantage of the assembling of the people from time to time to solicit and receive contributions for such objects. it was observed, however, on such occasions that some persons, either through ignorance of what constitutes money, or by reason of great poverty, were in the habit of depositing commodities in the hat which were not money; and the practice having been brought to the attention of robinson crusoe (who generally presided at such meetings), he is reported to have administered rebuke and instruction in the following impressive manner: "before proceeding to take up our regular contribution for the heathen," he said, "i would suggest to the congregation--and more especially to those who sit in the gallery--that the practice of putting into the hat commodities which are not money, more especially buttons, shows a degree of ignorance respecting the uses of money on the part of some in this community which i had not supposed possible, after all our recent and varied experience on this subject. but if, through ignorance or impecuniosity, any should feel obliged to continue to contribute buttons in the place of money, i would request that they do not stamp down or break off the eyes; inasmuch, as while by so doing they utterly destroy the utility of these commodities as buttons, and do not increase their desirability as money, they also utterly fail to deceive the heathen; who, although ignorant of the gospel, and not using buttons for any purpose, are nevertheless, as a general thing, good judges of currency." chapter vi. gold, and how they came to use it. finally, time and circumstances helped the islanders to a solution of their difficulties. a man, walking in a ravine one day, picked up a small bright mass of shining metal. although it had evidently lain in the sand, been washed by the water, exposed to the atmosphere, and rubbed against the rocks, nobody knows how long, it had a remarkable brightness and color; and the more it was rubbed, the brighter and more attractive it became. this little mass of metal, which afterward came to be designated as gold, the man carried home to his wife, who in turn was so much pleased with it that she hung it by a string about her neck as an ornament. its attractiveness of course excited the desire of every other woman to have the same, and a further search in the ravine resulted in the discovery of other nuggets. closer examination of the new metal also showed that it possessed many other remarkable qualities besides brightness. it was found it could easily be melted and cast, and also be readily molded without heat by hammering and pressing; and that when so cast, molded, and pressed, it persistently retained the shape and impression that were given it. further, that it could be drawn into the finest of wire, hammered into the thinnest of plates and leaves, and be bent and twisted to almost any extent without breaking; that an admixture with it of the slightest impurity or alloy so immediately changed its color, that color became to a very high degree a test of its purity; [ ] that fire, water, air, and almost all the agencies destructive to other things, had comparatively little or no effect upon it; that with the exception of size and weight, every piece, no matter how small, possessed all the attributes of every other larger piece; and that when any large piece was divided into a great number of smaller pieces, these last, in turn, could be reunited without loss or difficulty again into one whole. of course, the discovery of all these remarkable qualities united in one substance not only greatly increased its utility, but at the same time greatly increased the desire of every body to have it. in place of being worn in a rough state as an ornament, it was converted into rings, bracelets, chains, pins, etc. it was found to be almost indispensable for a great number of mechanical and chemical purposes; and, finally, the charm for its possession and desire for its use proved so overpowering that to many it actually became almost an object of worship. if a man was a pagan, he felt that in no way could he so honor and symbolize the god he worshiped as to fashion in gold the image of that which he imagined; if he was a christian, he chose gold for the fabrication of his symbolic vessels and ornaments, as, of all material things, the one which was most typical of purity, beauty, durability, and worth. if a great government or a people desired to commemorate the deeds of a hero or statesman, it impressed their effigies in medals of gold; if a maxim was enunciated which by general consent embodied the best rules of life, it was called golden; if a law or precept was thought worthy of being kept in ever-present remembrance before the people, it was emblazoned in letters of gold; while for speech, prophecy, or poetry, this same metal has ever been a never-failing source for the finest of comparisons and the most attractive of figurative illustrations. in short, from the time of its first discovery, among all nations, in all countries, with the ignorant and the learned, the savage and the civilized, the rich and the poor, the humble and the powerful, gold has always been, of all material things, the one which most men have desired most; the one for which, under most circumstances, they have been willing to exchange all other material possessions, and for the sake of acquiring which, even part with immaterial things of greater value--honor, creed, morality, health, and even life itself. gold so becoming an object of universal desire to the people on the island, and made exchangeable for all other things, it soon acquired spontaneously a universal purchasing power, and from that moment became money. this purchasing power was at first by no means fixed or constant. so long as there was but a small quantity of gold, its purchasing power was large. as the quantity extracted from the rocks or washed from the sands became greater, and the wants of the people became more and more satisfied, its purchasing power or value decreased; and if the supply had continued, and the demand had been limited to the wants of the island exclusively, its value in time would have undoubtedly been no greater than copper or iron, and possibly not so great. but, very curiously, an abundant supply did not continue. that which was obtained first and with little labor proved to be the result of the decay and washing of the rocks through long ages; and when the readily accessible or surface deposits became exhausted, as was soon the case, the conditions determining the supply of gold became altogether different. on the one hand, there was no lack of gold. instead of being a very scarce metal, as was for a time supposed, it was found to be so widely disseminated that the chemists and metallurgists readily detected traces of gold in almost every extensive bed of clay and sand they examined. [ ] but, on the other hand, experience also proved that to collect any very considerable quantity of the metal required the expenditure not only of a vast amount of most disagreeable and exhausting labor, but also of a great quantity of other commodities. so that the people who, at the outset, abandoned their various occupations of raising wheat, making coats, building boats, baking bread, and constructing stone walls and chimneys, and betook themselves to digging gold, soon learned that, as a general rule, the results of a day's labor thus employed purchased no more of useful or desirable commodities--meat, drink, clothes, etc.--than the results of a similar amount of labor exerted in the most ordinary occupations; and not a few even were ready to assert, as the result of their individual experience, that a man could do better for himself in the way of earning a living by following any and every other occupation rather than that of seeking for gold. [ ] accordingly, after trying it for a little while, the most skilled laborers left the gold regions and went back to their old occupations; and these, in turn, were followed by the unskilled laborers in such numbers, that had it not been for the encouragement growing out of the hope of suddenly enriching themselves through the chance discovery of a great nugget (as sometimes happened), the mines would have been entirely deserted. as it was, the supply of gold greatly fell off, and, the demand for it remaining about the same, the purchasing power of the stock on hand for other commodities gradually increased, until it came about that the result of an average day's labor in digging gold was found to buy more than the result of an average day's labor in other occupations. but as soon as this was observed, an additional supply of labor went back to gold-mining, and continued to follow it, until an equalization of results from effort in gold-digging and effort in other corresponding employments was again established, as before related. and this interchange of employments and equalization of results from labor went on, year by year, until at last the people, as it were by instinct, found out that a given quantity of gold represented more permanently a given amount of a certain grade or kind of human labor or effort than any other one substance. and the moment this fact became apparent, the people on the island for the first time also clearly perceived that gold, in addition to the universal exchanging quality or purchasing power which it had before naturally acquired, from the circumstance that every body from the time of its first discovery wanted it, had further acquired two other attributes, which fitted it, above all things else, to serve as money; namely, and first, that it had become a measure or standard of value, by which, as by a yard-stick, the comparative value of all other commodities might be measured or estimated; and, second, that its value or purchasing power was so constant and continuously inherent in itself, even under circumstances when the value of most other commodities would be destroyed, that the greatest security or guarantee which any person owning gold could possibly have of its remaining valuable to him for any length of time was, that the owner should simply keep possession of it. by no portion of people on the island was this last attribute regarded so much in the light of a blessing as by the poor old men and women. as a general rule, they earned but little more than sufficed to support them, and they were therefore always naturally very anxious lest what little they saved should be impaired in value or made worthless by keeping, before the time when they might especially need it to pay for doctors and medicine, or insure them a decent burial. the cowry money, which had before represented their hard toil and personal deprivation, had turned out, on keeping, to be only worthless shells; the bead money had become valueless when it became unfashionable; the cattle money had to be fed every day to keep it from experiencing a heavy discount, and penned up every night to prevent it from walking off; the wheat money was always liable to be injured by damp or devoured by vermin; while twenty pounds of pig-iron had proved too heavy for their old limbs to carry to the store every time they wanted to purchase a little cloth or tobacco. but here was something at last which completely satisfied the necessities of their situation, and enabled them to feel certain that, whether they buried it in the ground, where it was always damp and moldy; or put it in the chimney, where it was always hot and smoky; or lived at one end of the island among the heathen, or at the other end among the christians, would always, year in and year out, buy about the same average quantity of all sorts of things; and which, when offered in payment for services or commodities, to the doctor, lawyer, merchant, druggist, undertaker, mason, or tailor; to the yankee, irish, dutch, turk, or hindoo; to the governor of ohio, or a senator from indiana, did not require any of them to look in a book, examine a law, read the bible, or hunt up the resolutions of the last congress or political convention, to tell how much it was worth, or whether it was safe to take and keep it. there was a very wise man on the island who objected to the use of gold as money, for the reason that he felt afraid that the poor old women who wanted to feel certain of having always something of reliable value in their possession would fill their old stockings with it and hoard it. [ ] but he was soon shut up by some one asking him, why, if the old women wanted to keep something by them perfectly secure against a rainy day, and slept better nights because they knew they had it, they shouldn't be allowed that privilege? and if there could be any possible reason why any one should object to the old women hoarding gold, except that he wanted to cheat and wrong the poor by compelling them to keep their hard-earned savings in something whose value was not certain, and which might have no value whatever when it came time to pay the doctor or the undertaker? when the people on the island first began to use gold as money, they carried it around with them in the form in which it was first found; the fine dust or scales inclosed in quills, and the nuggets in bags; or they melted and hammered it into large lumps and bars; [ ] and, as the purchasing power of the gold was always proportioned to its weight and purity, every body carried round with him small scales and tests with which he proved the gold before making exchanges with it (the same as is customary at the present day in china). but this method involved great inconveniences; and although the statement of a person of recognized honesty that he had proved the value of the gold he offered in payment was generally accepted, it was nevertheless recognized that there was no more unfairness or discourtesy in the claim of the grocer to test the quality of the money of his customer by scales and acids, than there was in the claim of the customer to test, by tasting, the salt and sugar of the grocer. as might be inferred, therefore, it often required a good deal of time to complete the most ordinary exchanges, and people everywhere complained about it and wrote letters to the newspapers. merchants who were very cautious and particular, irritated their customers, and got the reputation of being very exacting and distrustful; while merchants who had but little capital and wanted to get business, advertised they would take gold on the simple word of their customers. but it was observed of the last, that, owing to being constantly cheated, they all, sooner or later, failed. at last the difficulty was remedied by a series of happy circumstances. robinson crusoe had, some years before this, died, at a good old age, as had also will atkins, and all the sailors who had come with him to the island from other countries; so that there were none now on the island who had ever known any thing about or ever seen any coined money. in making some public improvements, however, a party of workmen one day broke into the old cave in which crusoe had first lived when he escaped from the shipwreck, and there, in the dirt beneath the floor, were discovered the three great bags of money which crusoe had found in the chest, and in his disgust had buried and utterly forgotten. every body at once recognized the metal to be gold, and was perfectly willing to exchange other commodities for it with the finders, the same as he was willing to do for any other gold. but why it should be in the form of flat round disks, and stamped with inscriptions and images, was something that puzzled every body; and the antiquarian and philosophical society called a special meeting to discuss the subject. some, looking to only one side of the pieces, thought they were medals struck to commemorate some distinguished man, or a woman, whose name often appeared to be "liberty." others, who looked only at the other side, thought they were intended to signalize a great contest between the lion and the unicorn, or to make the people familiar with the peculiarities of some unnatural bird or beast, which, as it was not like any thing either in the heavens, or on the earth, or in the waters under the earth, it might not be sinful to worship. at last, after the flat disks or coins had been for some time in circulation, and the community had found out, by repeatedly weighing and testing them, that each disk represented a constant weight of gold of uniform purity, the idea came at once to every one that the only use of the fanciful images and inscriptions on the disks was to officially testify to the fact of their uniformity of weight and value; and then every body wondered that he could have been so stupid as not to have before recognized the idea and adopted it, in place of every man weighing, cutting up, and testing his gold every time he desired to part with or receive it in making an exchange. an arrangement was accordingly at once made for a public establishment--afterward called a mint--to which every person who so desired could bring his gold and receive it back again after it had been divided into suitable pieces of determinate weight and fineness; the fact that the weight and fineness of each piece had been so proved being indicated by appropriate marks upon the metal. and in this manner "coined money" first came into use on the island. and by this time, also, the money which robinson crusoe found in the chest, and which, when it first came into his possession, had neither utility, value, nor use as a standard, or measure of value, had gradually acquired all these several attributes: utility, when the material of which it was composed became capable of satisfying some human desire for it, as an ornament, as a symbol of worship, or for some mechanical or chemical purpose; value (the sole result of labor), when it became an object of or equivalent in exchange, or acquired a power of purchasing other things; a standard, or measure of value, when its purchasing power, by reason of various circumstances, was found to be, if not absolutely permanent, at least more permanent, on the average, than that of any other commodity. the conversion of money into coin was something purely artificial, and the result of law, or statute enactments, the sole object of which was simply to make the money (previously in use) true and in the highest degree convenient. but, as has already been pointed out, money came into use in the first instance without statute, and was the result, as it were, of men's instincts; and the subsequent choice by them of gold, in preference to any other commodities for use as money, was for reasons similar to those which induced men to choose silk, wool, flax, and cotton as materials for clothing; and stone, brick, and timber as materials for houses. it was the thing best adapted to supply the want needed. the introduction and use of coined money at once gave an impetus to business, and made the people richer, because it saved time and labor in making exchanges, and relieved every man from the trouble and expense of buying and carrying round with him scales and other tests. the only persons dissatisfied were the scale-makers, who found their business almost destroyed, and they petitioned the authorities to have their interests protected by the enactment of a law compelling all persons to weigh their coins with scales before exchanging, as formerly they did their gold. but, as every body at once saw that the effect of such a law would be equivalent to compelling all exchangers to do useless work, the petition amounted to nothing. for convenience in speaking and writing, also, each piece of gold or coin of determinate weight and fineness regularly issued by the mint received a particular name and had a particular device impressed on it. thus, for example, the piece of lowest denomination, containing . grains of standard gold, which had on it a likeness of crusoe's old and faithful servant, was called a "friday;" a piece of ten times its weight and value, with a small portrait of the founder of the island community, was called a "crusoe;" and a piece of double the weight of the last, or twenty times the weight of the first, with a large portrait on it, was called a "robinson crusoe" or a "double crusoe." some time after, when the island became generally known to the rest of the world, it was found that these coins exactly corresponded in weight, fineness, and value with those adopted in that foreign country called the united states, and there known under the names of the gold dollar, eagle, and double-eagle; and after a time, for the purpose of favoring the development of civilization and assimilating nationalities by the adoption of a common monetary standard, it was agreed to discard all local sentiments, and to substitute the latter names for the former. chapter vii. how the islanders determined to be an honest and free people. next came the consideration of the laws regulating the exchanges and the use of money. some people wanted laws enacted that every person should be obliged to sell and part with any thing he owned, provided a nominal or real equivalent in what the state should declare money should be offered him; and, also, that when any person had bought commodities and services of another, and had promised to pay for them after a time, he might fully discharge the obligation by tendering that which the state said was money, no matter whether in the mean time the persons in charge of the mint had, for any reasons, taken out one-half the valuable gold in the coins, and substituted in its place comparatively worthless lead. but, to the honor of the islanders, these propositions met with little favor. they said, we mean to be an honest and also a free people; and, therefore, every one in buying or selling shall do exactly what he has agreed to do; unless, by reason of some unforeseen or unavoidable circumstances, he is absolutely unable to perform his agreement or contract. and they said, further, that if any one receives commodities and services, and promises to give, five years or five minutes afterward, in return, an agreed-upon quality and quantity of gold, wheat, cod-fish, or cabbages, it shall be considered, as in truth it is, dishonest to attempt to discharge the obligation by offering pig-iron in the place of gold, pease or beans in the place of wheat, soft-shell crabs in the place of cod-fish, or pumpkins in the place of cabbages; and any community which shall in any way sanction any such evasion of the letter or spirit of its obligations can have no rightful claim to call itself an honest, christian people; and if any community enacts and maintains laws compelling any person to receive in exchange, or in pay for his services or products, something which he did not agree to and would not otherwise receive, such a community has no rightful claim to call itself a free community. the people on the island, therefore, decided that they would allow the island authorities to interfere with exchanges to this extent only: that the medium of exchange and measure of values that they had adopted and called a friday, or a dollar, should always and under all circumstances contain . grains of standard gold; that this standard should never be departed from; and that although no one should be compelled to use it, yet whenever any one talked about or promised to pay or give money, without specifying whether the money should be wampum money, bead money, cattle money, gold money, or any other particular kind of money, the money issued by the acknowledged authorities of the island should be understood and accepted as what was meant. in short, like sensible men, the islanders concluded that as long as they maintained in common use a real, good, and true money, which carried on its face evidence (easily read and known of all men) of its value or purchasing power, there was little use of cumbering up the statute-book with any thing about legal tender. they would leave that to other people wiser than they were, who desired to use money that would not circulate, except it had some artificial power or agency back of it to make it go. after this, every thing for a time pertaining to trade and commerce went on very smoothly on the island. it is true there were bad persons who obtained commodities and services on credit for which they never intended to pay; careless and extravagant persons who bought more than they were able to pay for; and foolish and oversanguine people who, after having by labor and economy accumulated a good store of commodities, exchanged them for shares in enterprises which never could pay. and when people by one or more of such methods lost the results of their hard labor and toil, they naturally felt depressed, lost confidence in their fellow-men, and thought times and things might be improved by turning all those in office out, and putting new men in. but no one on the island ever for a moment imagined that there was any way to honestly replace the money they had lost, except by acquiring through industry and economy a new store of useful commodities with which to buy money; and no one who ever had any thing to sell which others in the community wanted, and were able to give in return a fair equivalent, ever found himself in want of money or a market; while, on the other hand, no one who had nothing to sell which the community wanted or were able to pay for ever succeeded in obtaining either money or a market. chapter viii. how the people on the island came to use currency in the place of money. as time went on, changes in the method of doing business gradually occurred on the island. instead of being an isolated and unknown community, their existence as an organized, civilized state became generally known to the rest of the world, and a brisk trade and commerce resulted from the exchange of the products of the island for the products of other countries. an excellent harbor existed at each end of the island, and about these points the population naturally aggregated, and built up two very considerable towns. the middle of the island, on the other hand, was elevated into high mountain ranges, covered with dense forests, in crossing which travelers journeying between the two cities were often robbed of all the gold they carried about them. to obviate this danger, and avoid the necessity of carrying gold, persons living at opposite ends of the island, therefore, adopted a system of giving written orders for money on each other, which each reciprocally agreed to pay to the person whose name was written in the order or draft, and then periodically settled or balanced their accounts by offsetting one order or payment against another. in this way value or purchasing power was transmitted long distances much more cheaply and conveniently than could be effected by the transmission of gold itself; and also much more safely, inasmuch as the thieves could make no use of the orders, even if they obtained them. and thus it was that the people on the island became acquainted with and first used what were afterward known as "bills of exchange." [ ] this labor-saving and danger-avoiding device, moreover, proved so useful, that the idea soon suggested itself that by an extension of the principle involved in the bill of exchange the necessity of carrying gold at all in any quantity might also be avoided. a public office was therefore established, where people might deposit their gold under the guardianship of the state, and receive a ticket or receipt for the amount, payable in coin on demand; which tickets, from the fact that every body knew that they were convertible into gold at will, and that no more tickets were issued than corresponded to gold actually deposited and retained, soon came to be regarded as equally good and valid as gold itself, and vastly more convenient for the purpose of making exchanges. and thus it was that currency (from the latin curro, to run) originated and came into use on the island as a substitute and representative of money. [ ] the name originally given to these receipts was first "bank-credits," and then "bank-notes," but after a time people acquired a habit of designating them as "paper money." but this latter term was conceded to be but a mere fiction of speech and a bad use of language; for every intelligent person at once saw that a promise to deliver a commodity, or an acknowledgment of the receipt of, or a title to, a thing, could not possibly be the commodity or the thing itself, any more than a shadow could be the substance, or the picture of a horse a horse, or the smell of a good dinner the same as the dinner itself. nevertheless, as an instrumentality for transferring commodities used for money, and avoiding the loss and waste unavoidable in handling and transporting such commodities, the currency thus devised was a great invention, and being always represented by, or, as we may express it, covered with, the commodity--gold--which, of all things, fluctuates least in value, it perfectly answered the purpose of money, without actually being so. it also furnished another striking illustration of the superiority of the commodity gold to serve either as money or as an object of value for deposit, against which receipts or certificates of deposit might be issued to serve as currency; for if other valuable commodities, like cattle, corn, cloth, or coal, had been selected for a like purpose, the bank would have been obliged to erect large pens, sheds, and warehouses for the storing of the deposits; and, let them be guarded ever so carefully, their value or purchasing power would, after a time, rapidly diminish from natural and unavoidable causes. the value of most commodities, even in a perfect condition, furthermore differs so much by reasons of mere locality, that there could be no possible uniformity in the value of the receipt for the deposit of one and the same article, issued by banks in different places, to serve as currency; the value or purchasing power of a ton of coal, or a fat ox, being one thing at the mouth of a coal-mine or on a prairie stock-farm, and quite a different thing ten, twenty, or a hundred miles distant. but in the case of gold, the space needed to store up what represents a vast value is very small, while the value or purchasing power of gold not only is, but is certain to remain, on the average, very constant all the world over. [ ] chapter ix. war with the cannibals, and what came of it. but more serious matters than the making and issuing of money soon claimed the attention of the people of the island. it will be remembered that friday was first brought to the island by the cannibals, for the purpose of being cooked and eaten, and that he was rescued from this fate by the valor of robinson crusoe, as was subsequently also friday's father and others of his countrymen. but the cannibals, although then repulsed, did not at the same time lose their appetites, or the remembrance of the good cheer that had escaped them; and meat becoming scarce in their own country, they projected a grand invasion of the island, with the intent of capturing and cooking friday, if he was still there, or, in default of friday, any body and every body they might happen to catch. the islanders all at once, therefore, found themselves precipitated into a terrible war, and were obliged to struggle not only for their homes, but for their individual existence. the government was active and energetic, but to carry on the war a vast expenditure of commodities was necessary; and as the government of the island--in common with all other governments--never had, or could have, any commodities or money to buy commodities with, other than what it obtained through loans and taxes, the people, one and all, were called upon to help. there was, however, some fear that if the calls for help were put in the form of taxes, the fires of patriotism might not burn as brightly as was desirable, and it was therefore deemed expedient to say little about taxes at the outset, and rely mainly on loans, to be repaid after the war was over. the people, on their side, responded most cheerfully. some gave one thing and some another. some gave service as soldiers, laborers, and artificers; others contributed timber for canoes, cloth for tents, iron for spear-heads and guns, corn and flour, hay, medicines, and money--in short, all sorts of useful things, the results of previous labor and economy on the part of the individual contributors. in return, the contributors received back from the government a promise, expressed on paper, to repay the commodities borrowed, or their value in money. these promises were of two kinds. in one the promise was made definite as to the time of its fulfillment, and the amount or value of the promise carried interest. these were called bonds. in the other, the promise, although definite, specified no particular time for making it good, and its amount or value was not subject to interest. these latter, from the circumstance that they were written on blue paper, were popularly termed "bluebacks." when the people got the bonds, they put them carefully away, for the sake of the interest that would accumulate upon them; but when they got the bluebacks, they were at first at a loss to know what to do with them. they were in some respects unlike any thing they had ever seen before; and yet there was a very close resemblance between them and the certificates of deposits of gold in the public repository, which they had now been in the habit for some time of using as currency. and as the one promised, on the part of the government, to pay money equally with the other, there seemed to the public to be no good reason why one should not be used as the representative and equivalent of money as readily as the other. the real difference was, that their former currency, composed of tickets or certificates given in exchange for a deposit of actual gold, represented an actual accumulation of an equivalent of every thing desirable which labor could produce all the world over; while, on the other hand, the promises to pay which the island authorities issued in ex- change for the commodities loaned them by the people, and subsequently used up in fighting the cannibals, represented an actual destruction of almost every thing useful and desirable in place of accumulation. the people, however, did not see this; and by reason of not seeing it they continued to accept and regard the promises to pay, which represented loss and destruction, as the same thing as money, and naturally also as wealth; and as the creation and issue of this sort of money or wealth increased as destruction increased, they finally, one and all, came to the conclusion that the more and faster they destroyed, the richer they should all be; and that, by a happy series of accidents, they had at last solved that great problem which the world had so long been anxious about--namely, "of how to eat your cake and at the same time keep it." and, as a further illustration of the extent to which this idea acquired a hold upon the public mind, it may be mentioned that some of the most popular books which were published about this time on the island had the following suggestive titles: "a national debt a national blessing;" "don't pay as you go, a sure way to get rich;" "pulling at your boot-straps the best way to rise in the world," and the like. undoubtedly one great reason which encouraged the people of the island in their delusion was the circumstance that the government promises to pay, although they had ceased to represent accumulation, or a definite equivalent of any thing in particular, did not thereby cease to be instrumentalities for effecting exchanges; but, on the contrary, continued to constitute great labor-saving machines, performing a work precisely similar in character to that performed by a ship or a locomotive--namely, the removal of obstacles between the producer and consumer. but, in becoming a representative of a debt to be paid in place of representing a means of paying a debt, the new currency lost at once the really most important quality of good money; inasmuch as it ceased to be a common equivalent, or in itself an object of value in exchange, and therefore became incapable of properly discharging the function of a standard, or measure, for estimating the comparative value of other things; resembling, in this deficiency, a ship without a rudder, or a locomotive without a track to run on. the removal of a rudder from a ship, or the taking up the track in front of a locomotive does not impair the capacity of the one for cargo, or the power of the other for pulling. but if it is attempted to use a ship or a locomotive under such circumstances for the purposes for which they were constructed--i.e., as agencies for effecting and facilitating exchanges--the result of their work will be so uncertain and hazardous that the owners of the things to be exchanged would require large insurance against the possible action of the exchanging agencies. and so it was with this blueback currency of the island, which, ceasing to represent or be convertible on demand into a constant quantity of any commodity, ceased to be a constant equivalent or measure of value of any thing. if the news came one day that the cannibals had been repulsed, a given number of the bluebacks would buy a bushel of wheat. if the news came the next day that the black troops, although they had fought nobly, had been driven back, and that there was some prospect that every body, sooner or later, would be cooked and eaten, then the same number of bluebacks bought only half the quantity of wheat. consequently, every body, in selling commodities representing expenditure of time and labor, added to the price of the same, in order to insure himself against the fluctuations of the purchasing power of the currency he received; or, in other words, to make sure that what he received should remain, for a greater or less length of time, the equivalent of what he gave. but as no one could tell what the cannibals were likely to do from day to day, and therefore what were to be the fluctuations in the purchasing power of the currency, every body in selling any thing felt that he incurred a risk, in addition to the risks usually attendant upon ordinary buying and selling. and as the data for estimating these risks were just as uncertain as the data for estimating the results of dice-throwing, every body guessed at the amount of insurance needed, or, what is the same thing, bet on the purchasing power of the currency at future periods. an abnormal gambling character, therefore, necessarily became a part of every business transaction, and worked to the great detriment of all that class of people on the islands, who had only labor to sell, which loses its entire value for the time, if not bought at the moment it is offered for sale, and the selling price of which, when once established, can only be changed with difficulty. and as this was a very important matter in the financial history of the island, it is desirable to illustrate it by relating the details of what actually happened: the people on the island clothed themselves largely in cloth made in foreign countries; and as the island currency was non-exportable, the cloth was paid for by exporting gold, or commodities which could readily be exchanged in other countries for gold. the cloth thus purchased with gold was made up into clothing by the "ready-made" clothing dealers in the cities, and sold in this form for currency, to smaller or retail dealers on a credit of from three to six or nine months. had the currency involved in this transaction throughout been gold, or certificates representing deposits of gold, the credit price of the ready-made clothing would have been the cash price, with a small amount additional to represent interest on the credit-time, and a possible risk of non-payment; and the seller would never for one moment have taken into consideration the question whether the currency, or representation of money in which he was to be paid, three, six, or nine months afterward, would have the same value or purchasing power that it had on the day the debt was contracted. he might have doubted whether his customer would pay him at all, but he never would as to the quality of that which he was entitled to receive as payment. but as the currency involved in so much of the transaction as occurred after the cloth was made into clothing was neither gold nor any thing which represented gold, nor any other valuable commodity, and therefore, like a ship without a rudder, or a locomotive without a track, was sure to be unreliable as an exchanging instrumentality, the seller knew to a certainty that what he was to receive in payment of his goods, three, six, or nine months afterward, would not have the same value or purchasing power that it had on the day the debt was contracted. it might be greater, it might be less; but the seller never bet on the former contingency, or allowed for it by deducting any thing from the time price of his goods, for to do so would be to discard in anticipation a possible incidental profit. but he always, as a matter of safety, felt obliged to bet on the latter contingency, and then cover the bet by adding correspondingly to the price of every thing he sold on credit. when, by reason of the disturbed condition of things, the purchasing power of the currency fluctuated greatly in brief intervals, the seller on all his time sales bet in favor of great risks, and bet differently every day, and added ten, fifteen, twenty, or even thirty per cent. to his prices over and above the general aggregate representing cost, profit, interest, and ordinary risk, in order to make sure of receiving currency of sufficient purchasing value to enable him to buy back as much gold as he was obliged to give for the cloth originally. when, on the other hand, the fluctuations in the purchasing power of the currency became limited, the insurance percentage added to price became also limited, and followed a somewhat general rule. thus, when a clothing-dealer sold goods on three months' credit, for currency whose purchasing power was so much less than gold that it took one hundred and fifteen of currency to buy one hundred in gold, he added five per cent. to his sale price, or he bet that the depreciation of currency at the end of three months would be indicated by one hundred and twenty for gold; while for a credit longer than three months he bet that the risk of depreciation would be greater, and added, to cover this risk, an average of ten per cent. to his price. if now, at the end of three months, it required one hundred and twenty-five in currency to buy one hundred in gold, the dealer lost five per cent. through the payment of his debt. but if, on the other hand, the fluctuation of the purchasing power of the currency was the other way, and it required at the end of the three months only one hundred and ten of currency to buy a hundred in gold, he made ten per cent. over and above his ordinary and legitimate profit, while an equivalent burden or loss fell on the consumers. [ ] as the dealers were shrewd, the result of this betting and insurance was rarely loss, and so constantly profit, that some dealers after a while came to regard the obtaining of this species of profit as the main thing for which all business was instituted; while others, more clear-headed and discerning, concluded that the wisest and easiest way to get rich was to bet directly on the varying quantity of currency which it would take from day to day to buy the same quantity of gold, or other valuable commodities, instead of attempting to do the same thing indirectly, through the agency of stores, stocks of goods, clerks, books, credits, and the like. the last, accordingly, wound up their business, and, in the language of the day, "went on to the street," and made their living by selling on time what they did not possess, and buying on time what they never expected to receive, and reckoning profit or loss according to the difference in prices growing out of the fluctuations of the currency between the day of buying or selling, and the day of receiving or delivering. in short, as with the magic fiddle in the fairy tale, which, when played upon, made every body dance, no matter whether in the brambles or on the plain, so the use on the island of a currency which continually fluctuated in purchasing power, because it was not a constant equivalent of any thing, made every body gamble that could; some because they liked to, and others because they had to, to protect themselves from losses. the masses who could not conveniently gamble tried to protect themselves by asking high prices in return for their services, or by giving less in proportion to what they received; [ ] but, in the long run, they learned by hard experience that they were not as well off as they expected to be; and that if one effect of an overabundant, non-equivalent-to-any-thing currency was to stimulate production, another and greater effect of it was to unequally distribute the results of production, transferring from those who had little to those who had much, and thus making the rich richer, and the poor poorer. chapter x. after the war. at last the war ended. the cannibals were utterly repulsed; and the islanders no longer laid awake nights for fear of being roasted and eaten. a vast amount of every thing useful had, however, been necessarily destroyed; and it would seem as if this admitted fact would have made the people of the island feel poor. but, very curiously, it did not. the promises to pay for the commodities destroyed had all been preserved. they were regarded by almost every body as money; and if money, then, of course, as every body knew, they were wealth, and wealth so great and superabundant that the one thing especially necessary to do was to devise plans for using it. every body, therefore, devised plans; those who had no money more especially devising plans for those who had. all sorts of schemes were accordingly entered upon; railroads to carry people to the isothermals and every other place where they didn't want to go; and oil-wells on cheat and al(l)gon(e)quin rivers, and patented inventions for making substitutes for tea and coffee, being especially recommended as permanent investments. john law, lemuel gulliver, baron munchausen, sir john mandeville, juan ferdinand mendez-pinto, and sindbad the sailor, all came to town, and were chronicled in the newspapers as having registered at the principal hotels. great and commendable industry was also displayed in replacing the things destroyed by the war, so that, for a time, the societary circulation became more brisk than ever; while some who had up to this time regarded war as a misfortune and national calamity, now felt that they had made a mistake; and others who had known all the time that war was a blessing, seriously thought of proposing another war as a means of increasing national prosperity. [ ] the large and constant investment of the results of labor and economy in enterprises which never could by any possibility give back any adequate return, was, as every body saw, the next best thing to war; and on the advice of the most christian newspapers, very many of the best people made haste to make such use of their little savings; although, as agriculturists, they were perfectly well aware that to plant seed wheat or corn in soils where it would not come up, or, coming up, bear no fruit, was always very bad business, and did not encourage the sower to hire much additional labor the next year. another idea which about this time had become very popular on the island was, that while it was a very desirable thing to sell as much as possible of the products of the island to people in other countries, it was not desirable to buy any thing from foreigners in return, and that it was wise to put all possible obstructions in the way of any ill-informed persons who desired to make such exchanges. but as no one can long continue to buy unless he proportionally sells, or sell unless he proportionally buys, the foreign commerce of the island soon came to a stand-still; and what also notably helped to this result was, that the necessity of insuring all exchanges made through the medium of the unstable currency of the island caused all the island products to cost from five to ten or fifteen per cent. more than they otherwise would, and more than they would cost the foreigners to buy elsewhere. [ ] but as every industrious community (especially if it calls in the aid of the forces of nature through machinery) produces more than it consumes; and as the islanders were both industrious and ingenious, it oddly enough happened that the community became sorely troubled by an accumulation of useful things, which the manufacturers would not part with, because they were unwilling to sell at a loss, and which the foreigners would not buy because they could buy cheaper elsewhere, and pay in their own products for what they bought. then the manufacturers stopped producing, and next the laborers, by lack of employment, being unable to buy a full share of the existing abundance, in turn diminished their consumption; so that for a time it seemed as though the island would get into the condition of those unfortunate people who die of their own fatness. in this way the times gradually "got out of joint." gradually the people on the island came to realize that much which they had considered as wealth was not wealth, and that many influences, before little regarded, were powerfully acting to make and keep them poor. all were satisfied that the currency which they were using was one prime cause of their difficulties, but in precisely what manner the currency exerted an influence few agreed. all were of one mind, that they ought to talk about it continually; and they accordingly did so, those who knew the least talking the most. some thought that the honest thing to do, and because honest the best, was for the government of the island to redeem its promises to pay on demand as rapidly as possible; that where they had borrowed a canoe of one man, cloth of another, spears of a third, or money of a fourth, they should return them, and not keep promising and never doing. but even these did not agree as to the manner of thus paying. some thought it was best to return the canoes, the iron, the cloth, and the money from day to day as the government gradually acquired them. others thought that a better way would be to accumulate each separate thing in a separate warehouse, and then when the warehouses had, after some years, become full, open the doors, and return every man what had been borrowed of him all at once. but, as before pointed out, the government never had, or could have, any canoes, cloth, iron, or money, except such as it obtained from the people; and, therefore, payment on the part of the government was really the same thing as payment on the part of the people. but payment of debts is something to which many people are constitutionally opposed; and this scheme accordingly found many opponents, who alleged that, if it were carried out, it would deprive them of money, and consequently of instrumentalities for making their exchanges; while the real trouble with many of this class of people was, that they hadn't any thing useful, the products of their own industry, to exchange, and therefore could get no money, unless they went to work, or, what was preferable, acquired it from somebody without consideration. besides the persons referred to, who either openly or by their indecision opposed fiscal reform, there were various other classes of obstructives. there were those, for example, who, during the war, were always friends of peace, dressed in broad-brimmed hats and drab coats, and were at any time ready to compromise with the cannibals, on condition that the latter should be satisfied with roasting and eating only the old men, the babies, and an occasional mother-in-law. all such, as a part of their peace policy, opposed the original issue and circulation of the bluebacks as something arbitrary, illegal, and unnecessary. when, however, the cannibals were driven away, these "friends of peace in time of war" at once changed their quaker garb; became "friends of war in time of peace;" declared earnestly for the enlarged issue and continued use of the bluebacks, and, as a pretext for so doing, were willing, if necessary, to have another war, or, at least, an annual scare. during the war, these friends of peace were called "copper-heads;" and after the war, their copper-headism, although disguised, was substantially the same thing. for it was apparent that opposition to the issue of the bluebacks, as manifested by the advocates of peace during the war, and opposition to their payment and withdrawal after the war, were only different manifestations of hostility to the government and to the war itself: inasmuch as failure on the part of the government to observe its promises, made under such circumstances of extreme peril, would manifestly put it in bad repute, and prevent it from ever resorting to similar measures in like emergencies. [ ] the really intelligent and patriotic men of the island at once saw through this duplicity and repudiation, advocated under pretense of extreme solicitude for the wants of trade. they remembered the old couplet: "when the devil was sick, the devil a monk would be; when the devil got well, the devil a monk was he;" [ ] and thereafter designated the opponents of paying the bluebacks, as inflated, or elongated, copper-heads, by which name they were ever after known in history. there were also many well-meaning citizens, who sincerely desired to have the balloon of inflation come down, but strenuously objected to have this result effected by any diminution of the volume of gas contained in it. all the first-cousins of the man who waited for the river to run by before crossing were certain the balloon would come down, if people would only be patient, keep a sharp lookout, and wait. but to this it was objected, that if people were obliged to consume a large part of their time in watching the balloon, to avoid having their heads smashed by its swayings and fluctuations, there would ultimately be a scarcity of victuals and drink; and that, rendered desperate with watching, and want of employment, food, and clothing, those interested would finally insist on pulling open the valves, and letting the whole volume of gas escape at once. some proposed to imitate the example of "peter the headstrong" in fighting the yankees, and bring down the balloon by proclamation; while others professed to have great faith in family prayer. eminent patriotic constitutional lawyers maintained that the military necessity that authorized and created the bluebacks must necessarily limit their duration solely to the period of their military necessity; and that their continued re-issue and use after the repulse of the cannibals was but a prolongation of the war--not against the enemy, but against their own people. the astute elongated copper-head lawyers held, on the other hand, that an instrument of military necessity, once created, remains such an instrumentality for continued use for all time; and, therefore, that a bullet or shell, once lawfully employed for effecting destruction in time of war, could legitimately be reissued or reshot in time of peace, without matter as to whom it might hit or what property it might destroy; and that, in fact, to go on reloading and refiring these instruments, and thereby killing and destroying, were not crimes, but high acts of patriotism. this theory, however, alarmed some timid people, who said that one shell or one bullet thus re-used indefinitely might destroy all the property, or kill all the people on the island; and they rather regretted, in view of such a construction, that they did not at once succumb to the cannibals, whose appetites, in time, might have become cloyed, or whose diet might have been changed through indigestion or moral suasion. in the period of doubt and perplexity which thus came to the community, those fond of precedents carefully searched the old chronicles and records of other nations for lessons of experience; and, among various things which profited them greatly, they found, among the chronicles of the learned spanish historian, fray antonio agapida, the following account of what the veteran soldier, don inigo lopez de mendoza, count de tendilla, did, when, besieged by the moors in the town of alhama, he had also serious financial difficulties to contend with: "it happened," says agapida, "that this catholic cavalier, at one time, was destitute of gold and silver wherewith to pay the wages of his troops; and the soldiers murmured greatly, seeing that they had not the means of purchasing necessities from the people of the town. in this dilemma, what does this most sagacious commander? he takes me a number of little morsels of paper, on the which he inscribes various sums, large and small, according to the nature of the case, and signs me them with his own hand and name. these did he give to the soldiery, in earnest of their pay. 'how!' you will say, 'are soldiers to be paid with scraps of paper?' 'even so,' i answer, 'and well paid, too, as i will presently make manifest; for the good count issued a proclamation ordering the inhabitants of alhama to take these morsels of paper for the full amount thereon inscribed, promising to redeem them at a future time with silver and gold, and threatening severe punishment to all who should refuse. the people, having full confidence in his word, and trusting that he would be as willing to perform the one promise as he certainly was able to perform the other, took these curious morsels of paper without hesitation or demur. thus, by a subtile and most miraculous kind of alchemy, did this catholic cavalier turn worthless paper into precious gold, and make his late impoverished garrison abound in money!' "it is but just to add," continues the historian, "that the count de tendilla redeemed his promises, like a loyal knight; and this miracle, as it appeared in the eyes of agapida, is the first instance on record of paper money." [ ] it may be also remarked that the island antiquarians did not find any chronicle of any other soldier who imitated count de tendilla in issuing "little morsels of paper" to serve as money, and subsequently did not imitate him in promptly redeeming his promises, who found it easy to obtain again the confidence of the soldiers or the people when he again got into similar difficulties. [ ] chapter xi. the new millennium. at last there arose a sect of philosophers (calling themselves friends of humanity) who felt confident of settling all difficulties, and who also aspired to the government of the island. their chief had the reputation of being an ogre. he had served in the war against the cannibals, looked exceedingly fierce, and therefore was accounted brave; he talked loud and with great assurance, and therefore he was accounted wise; he had acquired great riches without ever doing any thing useful, and therefore he was accounted skilled in business. his principal associates and counselors were two. the first was a great orator, who had spent most of his life as a missionary among an uneducated people who never had any property, and, of course, made no exchanges; and in this most excellent and practical school had learned all that could be acquired on this complicated subject. the second was a great athlete, who had performed for many years in the national circus, and had acquired great reputation by carrying weighty packages on both shoulders, labeled "domestic industry," but which in reality contained only pig-iron. about these two "every one that was in distress, every one that was in debt, and every one that was discontented gathered themselves," so that they soon had a large body of disciples. the first thing they did was to abuse poor old robinson crusoe, because he had advised his people, in his life-time, to make their money of gold (which can be only produced by labor, and not by hocus-pocus); and their currency of something that represented gold, and this, too, when he must have known that gold "was the machinery and relic of old despotisms;" [ ] and they made no account whatever of the fact that he was the father of his country and lived in a cave. next they declared that all the opinions heretofore accepted on this subject by the rest of mankind were fallacious; that nature had done its best to make the island an isolated community; that legislation had pretty effectually supplemented whatever in this respect nature had left deficient; and, therefore, that the wants of the island, in respect to money, currency, and every thing else, were so exceptional and peculiar that the accumulated experience of all the rest of the world could not be to them either applicable or instructive. all agreed that the pernicious theory taught by robinson crusoe, friday, and other men of by-gone days and other countries--that money, to be good, ought to be a universally desirable commodity, and the equivalent of that for which it is exchanged--was the real source of all financial trouble; for was it not clear, that, if such were the case, those only could ever have money who, like the bloated wheat-holders, pig-holders, cattle-holders, house-holders, or bond-holders, had through labor previously come into possession of some desirable things, which they could give in exchange as an equivalent for money? while the true end of all financial reform, and the key to the terrible problem of poverty, was obviously to devise and bring into use that kind of money which those who had no wheat, pigs, cattle, houses, bonds, or other commodities, and were not able or disposed to acquire any through an exchange of their services, could have without difficulty, and in abundance. "we mean, therefore," said the orator-philosopher, speaking for himself and his colleague friends of humanity, "to have more democracy and less aristocracy in the money market; more money in every body's reach, and less for the petted few." [ ] in short, the patient having become very sick and attenuated by reason of the low (fiscal) diet upon which he had been fed, the doctors now proposed to resuscitate him by administering a still thinner gruel. all also agreed that the word "money" was a bad name, and that the public would obtain a much clearer idea of the great problems at issue if more intelligible and scientific terms embodying definitions were used. one philosopher accordingly proposed that, as they intended to sprout it everywhere, they should go back to the biblical designation, and call it the "root," at the same time remarking that "the lord showed what he thought of money by the kind of people he gave it to." another proposed to call it "the instrument of association" (carey); a third, the "sign of transmission, of which the material shall be of native growth" (john law, ); a fourth, "a sense of value as compared with commodities" ("british tracts on money," - ); a fifth, "a standard neither gold nor silver, but something set up in the imagination to be regulated by public opinion" (ibid.). as to what money, under the reform system, was, or should be, was also a question in respect to which there was not at first an entire agreement. one idea which found some favor, was, that money ought to be only a token, representative of services rendered at some indefinite time or place (possibly forgotten or disputed by its recipient), and "for which the holder has not received the equivalent to which he is inherently entitled under the system of division of labor." [ ] the best money, therefore, according to the philosophers of this idea, was an evidence that some one person owed some other person; and, consequently, the more debt, the more money; and the more money, the more wealth, unless it is to be supposed (as is not reasonable) that this sort of money was not to have the first attribute of all other money--namely, purchasing power. moreover, although the philosophers did not exactly say so, the inference was also legitimate, that in a community using merely "token" or "remembrance" money, the surest way to get rich would be to get in debt, and the best way of carrying on an enlightened system of trade and commerce, to exchange commodities, the results of time and labor, for evidences of debt without interest. it is needless to say that these teachings and inferences tended to greatly strengthen the people on the island in the opinion they before entertained, that the currency they already had--namely, evidences of destruction--was the "best currency the world ever saw." the three leaders among the philosophers were not, however, men who were going to be contented with any half-way measures. had they not put their hands to the plow of reform? and were they, after so doing, to allow the plow to stick fast in the furrow? they accordingly appealed first to authority, and then to untutored reason. the following are some of the authorities to which great weight was given: "commerce and population, which are the riches and power of the state, depend on the quantity and management of money."--john law, memoir to the duke of orleans, . "does, or does not, our duty to ourselves and the world at large demand that we maintain permanently a non-exportable circulation? such is the question which now agitates the nation, and must at no distant day absorb all others. the affirmative of this question is also in perfect harmony with the practice and experience of leading nations, and in harmony with the teachings of sound economic science."--letter of henry c. carey to congressman moses w. field, of detroit, september, . consult also governor william kieft, "on the use of wampum money in new amsterdam" (large folio, scarce and rare), . "long familiarity with the practice of giving security for loans, and of paying them back at a fixed date, has blinded us to the national advantages of loans without security and payable at any date."--karl marx, secrétaire, organisation de l'internationale. but the thing which the philosophers relied on more than any thing else to sustain their views before the people was a judicial decision recently made in a neighboring country, by its highest court, before whom the question as to what constituted money was officially brought for determination. this decision, expressed in the very peculiar language of the country, was as follows: "what we do assert is, that congress has power to enact that the government promises to pay money shall be, for the time being, equivalent in value to the representative of value determined by the coinage acts, or to multiples thereof." all of which, translated into the language of the island, meant that government has the power to make a promise to pay, containing an acknowledgment in itself that the promise has not been paid, a full satisfaction that the promise has been paid. that this decision, furthermore, covered no new points of law, was indirectly conceded by the learned judges, inasmuch as, in giving their opinions, they cited, as precedents worthy of being ever remembered, the decisions of that eminent old-time jurist, cade (jack), who ordained that "seven half-penny loaves should be sold for a penny;" and that "the three-hooped pot shall have ten hoops." the same court also strengthened its position by saying that "it is hardly correct to speak of a standard of value. the constitution does not speak of it. value is an ideal thing. the coinage acts fix its unit as a dollar; but the gold and silver thing we call a dollar is in no sense the standard of a dollar. it is a representative of it. there might never have been a piece of money of the denomination of a dollar." [ ] [note.--this last remark of the learned court embodied a great discovery; for how can there be a representative without something to represent? in the case of peter schlemihl, there was a man without a shadow; but here we have a shadow without any substance to make it. a gold dollar is not a specific and mechanically formed coin; but . grains of standard gold is a dollar. did the court mean that these grains of gold may never have existed, and yet have representatives?--author.] the moment this decision was received, all the philosophers got down their dictionaries, and searched for the meaning of the word "ideal." as was anticipated, its definition was found to be "visionary;" "existing in fancy or imagination only" (webster); and from this time forth there was no longer any doubt in the minds of the reformers of the truth and strength of the position they occupied. for, to descend to reasoning, were not two intricate questions definitely settled by the highest of human tribunals? st. that the representative of a thing may be (and if those in authority say so, shall be) equivalent to the thing itself. d. that value is an ideal thing, and therefore imagination, which creates all ideal things, can create value. it followed, of course, that to have and enjoy any thing and every thing, it is only necessary to create and use its symbol or representative; and to pay for value received, it is only necessary to imagine a corresponding and equivalent value, and pass it over in exchange and settlement. on these conclusions of law and reason, then, it was decided by the three leaders of the philosophers and their friends, who had control of the government, that the future money of the state should be based. the former inscription on the currency in use, "promise to pay," they were clear, was entirely unnecessary; for why promise money when the store on hand of money was to be made practically unlimited, or, at least, always equal to the wants of every body who desired to have it, whether he traded or not? mathematical calculations were also made by a scientist, which proved that the amount of labor which would be actually saved to the community, and made available for other purposes, by using something as money which cost little or no labor to produce, in place of gold or commodities which represented much labor, would be so great as to require the immediate enactment of a law prohibiting any one from working over six hours per day, in order to guard against the evil of too great abundance. the same scientist had previously been so carried away by his demonstrations of the utility of a new stove which saved half the fuel, that he had recommended the purchase of two stoves in order to save the whole. with few exceptions, to be hereafter noted, the whole population of the island were jubilant, and proceeded as rapidly as circumstances would permit to adjust all their commercial transactions to the new basis. but joy at the prospect of the coming millennium did not extinguish feelings of gratitude in the hearts of the people, and they resolved to send ample testimonials to all, in foreign lands, to whom they had been indebted for wisdom. to each of the judges who had so intelligently defined value they accordingly voted an ideal castle and estate, possession of the same conferring nobility upon their owner, with the title of "baron ideality," to which, by special patent, the recipient was authorized to use (if he pleased) the prefix of "damn." to the most notable advocate, in foreign lands, of the idea of non-exportable money a gift of one million of "instruments of association," represented by ideal currency, was voted. but as this currency, both by law and the fitness of things, could not be exported from the island, it became impossible to pay this gift, and in its place a letter was written explaining the circumstances, and requesting that the resolution to pay might be accepted as a "sign of transmission." to the eminent financier who defined money, "as a sense of value in reference to currency as compared with commodities," there was sent a plaster image of the "what is it;" while to his colleague, who had given the opinion that "the less costly the material out of which money was made, the better for the community which uses it," was sent a large box, containing contributions of the most worthless things every body could think of, with a polite note requesting the recipient to make his choice out of the collection of what seemed to him best adapted as a token, and forward a detailed report of his experience in attempting to use it as a representative of unrequited service. pending the slow preparations of the government of the island to provide the requisite laws for the issue and use of the new money, various enlightened individuals attempted to anticipate official legislative action by putting into practical operation, on their own account, the principles involved in the new fiscal system. the first of these who thus acted was a secretary for the interior part of the island, whose chief business was to supply the heathen--for whom, it will be remembered, robinson crusoe took up contributions--with beef. there had been a suspicion for some time past hanging over this official that the heathen did not get all the beef that they were entitled to; but the suspicion probably had no further foundation than the inability of the heathen to make the sense of completion harmonize with the sign of transmission. to satisfy the heathen, and at the same time effectually clear up his character, the official in question now hastened to have prepared a large number of pictures of fine, fat cattle, which he dispatched by a quaker to the heathen, with a request that they would kill and eat, and be satisfied, adding in a postscript that they would do well to begin to learn economy by saving the skins. as the quaker never came back, it was deemed reasonably certain that, at least, the first part of the request had been complied with. the managers of the island provident society also promptly determined to develop and apply the ideal system in their sphere of usefulness to the full extent that circumstances permitted. thus a large part of the business of this old and respected society was the distribution of clothing to the destitute; and, as is always the case when times are hard, the extent of the demands made upon it for aid tended to exceed the means of supply contributed by the charitable. the managers, however, knew that it never would answer in using the ideal system to subserve the work of charity, to put the locally needy on the same footing as the heathen, and in answer to appeals for raiment distribute to them elaborate pictures of fine clothing, cut from the fashion-plates; for there was this essential difference in the situations, that the needy were at their doors, while the heathen were a great way off. they, therefore, hit upon this happy mean: they employed a competent artist, with a full supply of paints and brushes, and when any destitute person applied for clothing, they painted upon his person every thing he desired in way of clothing of the finest and most fashionable patterns, from top-boots to collars, and from blue swallow-tailed coats to embroidered neck-ties, with jewelry and fancy buttons to match. of course, the first man who appeared in public thus arrayed created a profound sensation. but the idea was so novel, and had obviously so many advantages over the old way of clothing one's self, that the supremacy of the ideal over the real was at once greatly strengthened. for example--and here was one of the greatest merits of the new system--it not only symbolized, but practically applied, the views of the most advanced financial philosophers; favored (as the orator-philosopher wished) "more democracy and less aristocracy in the clothes market;" and encouraged the use of the least costly material out of which the community could make clothes; while the painted cotton, silk, wool, and leather could be made to look so exactly like the real articles, that it was only when the attempt was made to exchange the representative for the real that the difference was clearly discernible. furthermore, every garment devised in accordance with the new system was, in all cases, a perfect fit. the plague of buttons was annihilated. every man could save time enough in dressing and undressing to enrich himself, if he only employed his economized moments usefully. every man might, without embarrassment, sleep in his clothes; and if he desired to change his monkey-jacket three hundred and sixty-five times in a year for an overcoat, or an overcoat for a monkey-jacket, he could do it most expeditiously, without the waste of any raw material more expensive than paint; and thus the system, after a time, by a happy thought, got the name of the "three-sixty-five interchangeable." of course, this answered very well so long as the weather continued mild and pleasant; but later in the season, when it became cool and frosty, experience soon showed that the warming qualities of different kinds of paint were not essentially different; that something more than confidence was necessary to keep out the cold; and that the temperature and circulation of the body physical remained unaffected, whether a man painted himself sky-blue one day and pea-green the next. [ ] again, two shrewd fellows, peter von scrapehem and israel double, owned each a farm worth ten thousand dollars. peter sold his farm for its full value to israel, and took a mortgage for the total purchase-money; and israel, in turn, sold his to peter, and took a mortgage also for its full value. by so doing, each of these worthy persons clearly doubled the property in his possession, inasmuch as while each had at the outset only ten thousand dollars' worth of real estate, each now had ten thousand of real estate and ten thousand of personal property; or an aggregate of forty thousand between them, in the place of twenty thousand originally. this method of multiplying property by multiplying titles was so easy, and the result so apparent, that the example was very generally followed; and when the census came to be taken, a few months afterward, all were amazed at the enormous increase of wealth that had followed the discovery and simple recognition of the true nature and value of titles. up to this time the supply of milk on the island had been mainly controlled by a single corporation, which, under the name of the "lacteal fluid association," owned all the cows, and, for the purpose of facilitating supply, had long been in the habit of issuing tickets, each good for a pint or a quart of milk, and disposing of milk to those only who had tickets. these tickets revolved perfectly in the closed circle of exchange between the milk-men and their customers, satisfying all demands, and being accepted as the same thing as milk; for the more tickets, the more milk; and no tickets, no milk. during the war the cannibals, in lack of any other meat, had eaten a large number of the cows belonging to the "lacteal association." many had been also taken by the government for the soldiers; so that after the war was over there were really no more cows than the island absolutely needed. all at once, the "foot-and-mouth disease" invaded the island, and, attacking every cow belonging to the association, rendered her unable to give milk. then arose such a piteous cry from every household where there were babies as carried a pang to the stoutest hearts. there was no need of any concerted action, for the people assembled spontaneously and demanded action. an immense public meeting was at once organized. a highly popular and humane man, a special friend of children, familiarly known as uncle dick, was called to the chair. he was supported by a long list of leading citizens as vice-presidents and secretaries, none of whom, however, had had any practical acquaintance with milk since their childhood, except in the form of punch. the chairman made an eloquent speech. he did not know whether he was most agitated by pity or indignation--pity for the poor babies, whose sufferings had become intolerable; indignation at the cruelty of the chartered monopolists, who had wantonly refused to issue more tickets at the very time when the demand for milk was most imperative. the assembly was of one mind with the chairman, and unanimously resolved that the lacteal association should immediately increase their supply of tickets, and that, in default thereof, their charter should be altered and amended. unable to resist the storm of popular indignation, the association at once complied, and every patriotic citizen went home to the bosom of his afflicted family, carrying an abundant supply of milk-tickets, and feeling conscious that for once at least he had risen to the level of the occasion. that night the babies were all supplied with milk-tickets in the place of milk. milk-tickets hot, milk-tickets cold, milk-tickets sweetened, milk-tickets plain, milk-tickets with their backs printed green, and interchangeable with milk-tickets drawing cream skimmed from other milk-tickets. but, strange to say, the babies, one and all, with that same sort of instinctive perversity which induces children of a larger growth to refuse to accept shams for reality, and be grateful in addition, refused to take to milk-tickets. the uproar of the night preceding was as nothing to the disturbances of the night following, and morning dawned upon an unrefreshed and troubled population. as soon as the necessary arrangements could be made, another meeting assembled. but the meeting this time was composed of babies, backed by their mammas and nurses. there was no theory in their sentiments; and though young in years, one and all felt that they had lived long enough to know what their fathers apparently did not know--namely, the difference between milk and paper. the resolutions voted were brief, but to the point, and were, substantially, as follows: first, that the exigencies of the times demanded more milk, and not more milk-tickets; second, that the way to get more milk was to have more cows; third, that the way to get more cows was to go to work and raise them, or raise something else equally valuable, and then with this something else buy cows; fourth, that there are certain eternal verities against which it is useless for either babies or men to contend. a committee was appointed to procure a mill of the gods, to grind up those who disbelieved in the last resolution, and the meeting then adjourned. this was the first indication of any thing like popular dissent from the views of the friends of humanity. others, however, soon followed. value having been declared to be an ideal thing, and ideal measures of value having been substituted in the place of the real and tangible measures formerly in use, it had been deemed proper to substitute ideal measures of length, weight, and capacity in the place of the foot-rules, yard-sticks, pound-weights, and bushel-measures formerly employed. shop-keepers, plumbers, charcoal-men, gas corporators, and all others who had any thing to sell accordingly provided themselves with slips of paper, upon which were printed, respectively, "this is a foot," "this is a bushel," "this is a pint," "this is a pound;" and the services of the arithmetic-man were again called for, to prove how much more cloth, beer, charcoal, gas, and all other measurable things the community would certainly have by the saving of labor and capital contingent on the avoidance of the necessity of further manufacturing, purchasing, and using the old measures. but the new system did not work smoothly. there was no harmony of sentiment between buyers and sellers; and what was one man's ideal of what he should give or receive in trade was always different from every other man's; and, before the community were well aware of what they were about, they found themselves drifting back to the adoption of the old system of barter, which had been tried and abandoned in the early days of the island's history. instead of one price, every one who had commodities or services to sell adopted a scale of at least four prices: "pay price," "money price," "pay as money price," and a "trusting price;" and the seller, before fixing his price, invariably asked his customer how he would pay. [ ] "pay price" was barter; "money price" was payment in foreign coin; "pay as money" was in the ideal money of the island; "trusting" was an enhanced price, according to time. thus, supposing a customer wanted a knife, its price in "pay" would be a bushel of corn; in "money price," a fifty-cent gold or silver coin; in "pay as money," sometimes as much as he could bring in a basket, at other times as much as he could bring in a wheelbarrow; and before the ultimate abandonment of the use of ideal money, a cart had to be employed to bring the money. trade in this way became "most intricate." news also came, about this time, that the heathen, not being able to stay their stomachs with the pictures of fat cattle that had been so abundantly sent them, and considering themselves humbugged, were preparing to declare war. to meet a threatened increased expenditure on this account, the government, therefore, levied new taxes; and as the valuation of the property of the island, under the influence of the new fiscal system, had, as before stated, enormously increased, it was anticipated that a small rate would yield a large revenue. but as soon as scrapehem, double, and their friends, who had been multiplying their property by multiplying titles, found out that the titles were to be valued and assessed as wealth, equally with the property which the titles represented, they hasted to swap back, and cancel their mortgages; and immediately half the reputed wealth of the island disappeared. there were some people, it will be remembered, who did not share in the general jubilation which welcomed the discovery and adoption of the new monetary system. these were the stony-hearted capitalists, meaning thereby persons who had produced by industry and frugality more than they had consumed, and had lent out this surplus in the form of ships, houses, horses and carts, wheelbarrows, coal, iron, and the like, on condition that they should be repaid the value of the several articles as expressed in money, with a portion of the profit that might have accrued to the borrower from their using. there was a popular feeling that all these lenders were "bloated," the degrees of bloat being, of course, different all the way from the man who owned and lent a ship down to the man who owned and lent a cart, or their equivalents in money; and that the best remedy for this frightful disease was tapping, and tapping by tendering in payment the ideal money, which was something very different in value from the money understood at the time the loans were effected. natives of heathen lands, who had never enjoyed the light of the gospel, called this robbing; but many on the island who had always been christians regarded the matter with indifference, and treated it as a purely sanitary measure; and christian ministers who never preached against such practices, but always did preach against the sins of that ancient people, the jews, wondered at the low tone of morality that seemed to generally characterize society. as it appears, however, from an examination of the ancient records of the island, that strenuous exertions were made about this time to interest the government and the people in the momentous question of the reading of the bible in the public schools, and thus prevent public attention from being diverted to the consideration of any such unimportant and side issues as the nature and obligations of promises, it may be that the low tone of morality thus referred to was more apparent than real; no province devolving upon the historian being more difficult than that of attempting to reconcile, after a long lapse of years, what appears to be a series of contemporaneous but utterly incongruous circumstances. but, be this as it may, all who had loaned valuable commodities desired to avoid tapping, and consequently hastened to demand repayment before the ideal money could be extensively issued and put into circulation; and, having once obtained payment, were very cautious how they lent again. all this contributed, in the language of the day, to make money very tight; but this language had, to a great extent, no meaning. the only money that was tight was good money, and this had been gone so long that the younger part of the population didn't even know how it looked; while of the bad money there was a continually increasing quantity. besides good money, all real capital, timber for building ships, factories, and houses, iron for the construction of machinery, cloth for clothes, and grain for food, were tight; not because there was any lack of all these useful things, but because the owners had all become afraid that if they once loaned or parted with them they should never receive back an equivalent. so the island, instead of being lifted up to great prosperity, was plunged into the depths of adversity. there was a general lack of confidence. societary activity was abated; production was arrested; and men desirous of being industrious had no opportunity of following any industry. gold had long disappeared from circulation. although produced in large quantities on the island, none of it would stay there, but flowed off to foreign countries in a steady stream. the common explanation of this phenomenon was, that gold had become the cheapest thing the island produced, and was, therefore, the first thing exported. but a majority of those who said and heard this did not clearly see that the average purchasing power of gold the world over had not varied in any degree; but that the price of almost every other thing produced on the island had so varied and relatively increased, by reason of domestic fiscal circumstances, that it was far better for the foreigner to take pay in gold for all the commodities he sold to the island, and then, with this gold, purchase in other countries the very things which the island specially produced and wanted to sell. as already intimated, the islanders found great difficulty in understanding this little arrangement; but the foreigners understood it as by intuition, and never failed to act upon it. [ ] all of this further contributed to turn upside down and inside out the industries of the island; and while the friends of humanity continued to loudly proclaim that the issue of more money would cure all difficulties, the people, sorely distressed, and ready to accept relief from any quarter, began to loudly murmur, in turn, at what seemed an unnecessary delay in making the issue; the fact being, that although public opinion was nearly unanimous on the subject, the regular time for the congress of the island to meet and enact the laws had not come round. at last, the long-expected day arrived, and congress assembled. all the special and immediate friends of "more money," of "ideal money," and of "humanity," were members; and hardly had the presiding officer taken his seat before fifty men sprung for the floor, each with a resolution demanding immediate fiscal legislation. the first resolution adopted was, that the government should at once supply all the money which the wants of every body, and every trade and industry, might, could, would, or should require; and that the money thus issued should be a legal tender for the payment of all debts, past, present, and prospective. the next important question was, in what manner should the new and unlimited supply of money be distributed? all saw at once that it would never do to commence on a system of giving unlimited something for unlimited nothing; and yet, if this was not done, how was it possible for the wants of those who had nothing, and who, of course, wanted money for this reason most imperatively, to be supplied? besides, to create an unlimited supply of the new money, it would be necessary to have a good many hundreds of thousands of slips of paper with the words, "this is a dollar," "this is ten dollars," or "this is--" (some other amount), properly and artistically printed on them; all of which, in turn, would require a great expenditure, not only of ink and paper, but also of time; while the necessity of the hour was for immediate relief, especially to trade. it was therefore decided to leave the troublesome question of equal distribution for a time unsettled, and endeavor to first relieve trade by doubling the volume of the currency. and in order to do this at once, and without cost to the government for engraving, printing, paper, and ink, it was therefore enacted that every one having legal-tender currency might cut or divide the same into two equal halves or pieces, and that each of these halves or pieces so resulting should be a legal tender to the full amount that the whole had previously been. at first thought, this proposition to exclude all those who had no money from participation in the new supply seemed most palpably unfair and unjust, but a little consideration satisfied to the contrary; for unless it was proposed to give away the new money, it was obvious that those only would get it who had money, and that the proportion which all such would obtain would be in proportion to what money they already had. it was, therefore, deemed wise to anticipate what was certain to be the ultimate result, and distribute it in the manner indicated. chapter xii. getting sober. it was expected that this new and immense volume of currency, poured at once on to the wheels of trade, would immediately start the wheels. but, somehow, it didn't seem to have that effect at all. the wheels not only would not revolve, but the friction on them seemed to have become more persistent and chronic than ever. in fact, the doubling the volume of the currency, instead of increasing the before existing instrumentalities for facilitating exchanges, had really diminished them; for all who were willing to exchange commodities for the new currency either doubled the price of their commodities, or gave only half the quantity for what they regarded as half of the former money; so that with all this class the abundance of currency was relatively the same as before. but the majority who had any thing to sell would not accept the ideal money in exchange at all. they did not claim, they said, to be financiers, or philosophers, or even special friends of humanity; but they did think that they were not such fools that they could be made to believe that the half of a thing was equal to the whole, or that one bushel of grain could be converted into two by putting one bushel into two half-bushel measures. the only really positive effect of the doubling of the volume of the currency in the manner authorized by law was, therefore, to scale all debts to the extent of fifty per cent., and in such a manner that creditors were wholly unable to help themselves; for by terms of the act every one dollar of old legal tender was now made two for all new legal-tender purposes. in this way the people on the island soon learned a most important elementary lesson in finance, which was, that the only one attribute of legal tender which is imperative and unavoidable [ ] is its inherent power of canceling or liquidating debts or of tapping creditors--and this, too, irrespective of the endowment of the legal tender with any real or representative value. so that a truthful designation of the act in question would have been "an act to relieve debtors from half of their obligations, and swindle creditors to a corresponding extent of what was due them by the debtor's acknowledgment." to the credit of the people of the island it must be recorded that, as a general rule, they were too honorable to take advantage of the law to do so wrong and mean a thing; [ ] but the knowledge that every debtor had it in his power to so act, and the fear that some would take advantage of their unquestionable legal privileges, contributed still further to bring all business to a stand-still. there was also a curious phenomenon incident to the situation, and pertaining to the rate of interest, which excited no little comment and attention. every body took it for granted that with an unlimited supply of money a low rate of interest would prevail, and that, however much the financiers and philosophers might disagree about other things, this one result would be certain. an eminently practical man in one of the public debating societies of the island thought he had definitely, and for all time, settled the question by authoritatively remarking that "an abundance of money does produce enterprise, prosperity, and progress;" "that when money was plenty interest would be lower," just as when horses and hogs are abundant, horses and hogs would be cheap. he, for one, "put aside all these old theories, these platitudes of finance." there was "no vitality in them." he preferred "to take the actual results, and the actual condition of the country, and let theory go to the dogs." [ ] there was so much of originality and home sense in these remarks, so much of a lordly contemning of the teachings of musty old experience, that the friends of the orator thought him much more worthy than ever of the executive chair formerly filled by the wise robinson crusoe. but, unfortunately for the orator, he hadn't got far enough along in his financial primer to appreciate the difference between capital and currency; and in the simplicity of his heart imagined that it was all the same, whether we had pictures of horses, hogs, and money, or real horses, hogs, and money, which represent and are accumulated by labor. so the things which he thus settled in opposition to theory and experience wouldn't stay settled; and the islanders in due time came to a realizing sense of the following truths: that the more of a redundant, irredeemable paper that is issued, the more it depreciates, and the more it is depreciated, the more there is required of it to transact business; and that if any one borrows depreciated money to do any thing, he has to borrow a greater nominal amount than he would of money that was not depreciated; and that it is on the number of nominal dollars, and not on their purchasing power, that the rate of interest is always calculated. the invariable rise in prices consequent on the depreciation of money (price as already explained being the purchasing power of any commodity or service expressed in money), furthermore stimulates borrowing for the purpose of speculation; and the more borrowers, the more competition; and the more the competition to obtain an article or service, the higher the price demanded for it. again, the currency of the island having been made artificially abundant, its exchangeable value was always uncertain; and capital, therefore, as it always does at such times, locked up its pockets, hesitated to take risks, and, if it consented to loan at all, demanded extra pay by reason of the increased risk or induced scarcity. [ ] after testing all these principles experimentally for a considerable time, the people on the island came to see that the possession of money was the consequence rather than the cause of wealth; and that, except under special circumstances and conditions, the rate of interest depends on the abundance or scarcity of that part of the capital of a community which does not consist of money; and that it can not be permanently lowered by any increase in the quantity of money. [ ] in this way, through the school of hard experience, the people on the island came gradually to understand that there were certain economic truths which had got to be accepted and lived up to in order to insure either individual or national prosperity. they came to understand that property is a physical actuality, the result of some form of labor; that capital is that portion of the results of production which can be reserved and made available for new and further production; that money is an instrumentality for facilitating the distribution and use of capital and the interchange of products and services; that production alone buys production; that when one buys goods with a paper representative or symbol of money, the goods are not paid for until the representative is substituted by a value of some sort in labor, or money, or some other commodity; and, finally, that a country and its inhabitants increase in wealth or abundance by increasing their products, rather than by inordinately multiplying machinery for the exchange of products. they also saw that the promises to pay which they had been using and regarding as money were debts; and that debts, as well as all other forms of title, are but shadows of the property they represent; and that, in endeavoring to all get rich by first creating debts, then calling the debts money, and the money wealth, they had been led, successively, into speculation, extravagance, idleness, and impoverishment; and, like the dog in the fable, which let go of the meat in crossing a stream for the sake of grasping its shadow, they had lost much of real wealth resulting from previous industry by trying to make the shadow of wealth supply the place of its substance. coming to gradually realize, also, that one of the first requisites for an increase of trade was that confidence should exist between the buyer and the seller, but that such confidence never would exist so long as the representatives of value, or other intermediate agencies made use of for facilitating exchanges, were of an uncertain, fluctuating character, they also came finally to the conclusion that there was no economy in using cheap money; or, in other words, that the loss and waste inevitably resulting from the use of poor tools (money being a tool) was many times in excess of the interest accruing from any increased cost of good tools. so reasoning, gold, or undoubted promises to pay gold, gradually came once more into use as money on the island. there were some prophecies, and a good deal of apprehension, that there would be difficulty experienced in obtaining sufficient gold to serve as money or as a basis for currency, especially when it was remembered that the influence of all that had recently happened had been to encourage the export of all the gold that was owned or produced on the island. but as the goldsmiths and the jewelers never experienced any difficulty during the war with the cannibals, or afterward, in obtaining all the gold they wanted, no matter how scarce and valuable it was as compared with currency, and could have had a hundred times more than they actually used, if their customers had been willing to pay for it; so the merchants, traders, and people at large on the island, as soon as they became satisfied that it was economical to use gold, and determined to have it, experienced no difficulty in obtaining an ample supply. one circumstance which, pending this result, tended to greatly relieve the popular apprehension on this score, was the reading in foreign newspapers that the people in certain comparatively poor countries--as oregon, arizona, nevada, and washington territory--had no more difficulty in obtaining and retaining all the gold that they found it desirable to use for the purpose of money, than they had in obtaining and retaining all the wheelbarrows and steam-engines that they desired to use in conducting their business; and laughed when any body talked of depriving them of their gold money. the first step having been thus taken in the right direction, a sequence of other proper acts occurred as naturally and with the same favorable results as in the celebrated case of the old woman and the kid; in which it will be remembered that as soon as the water began to quench the fire, the fire began to burn the stick, the stick began to beat the dog, the dog began to bite the kid, and, as a consequence of this sequence and its concluding act, the old woman got safely home with the kid, though at a period of the evening much later than was desirable or proper. and so, by a succession of events, prosperity slowly but surely came back to the island. as for the friends of humanity, who had been the authors of so much financial and commercial disturbance and national misfortune, they soon ceased to command attention from any one, then became objects of laughter and derision, and finally passed out of the remembrance of the people, who were now all too busy in restoring their fortunes to give a thought to bygone and mortifying experiences. some became convinced of their errors, and made good citizens; but in the case of the majority, the belief that the calling of things of no intrinsic value by the name of money was equivalent to the creation of wealth, became chronic, and finally developed into a harmless insanity. on pleasant days they might often be seen on the corners of the streets gathering leaves and bits of sticks and straws, and telling the children that assembled about them that all that was necessary to make these worthless gatherings money was to simply have confidence that they were so. but this was asking for a simplicity of belief that was a little too much, even for the children. it only remains to add that, as memorials of this eventful history, there is still exhibited in one of the public buildings on the island an exact model of the cave in which the venerable robinson crusoe dwelt, and, what is even more interesting, the identical chest which he brought from the ship, and which contained the pins, needles, knives, cloth, and scissors, and the three great bags of what was then useless, but now good and true, money. numerous specimens of the "ideal money" may also be seen in the same room, together with a picture of the barber who papered his shop with it, and of the dog which the people paraded in the streets covered with a plaster of pitch and currency. [ ] notes [ ] that the inconveniences experienced by a community attempting to conduct its exchanges exclusively by pure and direct barter as here depicted, are not only not imaginary, but have their exact counterpart in the present every-day experiences of countries of great geographical area and population, is proved by the testimony of barth, burton, and other recent travelers in eastern africa. thus barth, for example, says (see "travels," vol. i., p. ; vol. iii., p. ) that he was repeatedly prevented from buying what he absolutely needed--corn, rice, etc.--because he did not have, and could not get, what the people wanted in exchange; and, again (vol. ii., p. ), he states that so great was the difficulty of getting things in some of the african towns which he visited, in consequence of the people having no general medium of exchange, that his servants would often return from their purchasing expeditions in a state of the utmost exhaustion. [ ] "the precious metals have many qualities which fit them for use as coin money. their defects are their weight, their intrinsic value as commodities."--social science and national economy, by r. e. thompson, philadelphia, . "the moment it is perceived that money is nothing but a token, it becomes evident that any token currently accepted in exchange of useful services and products of labor will perform the proper functions of money without regard to the material of which it is made; and that the less costly the material out of which money is made, the better for the community that uses it."--money, currency, and banking, by charles moran, new york, , p. . [ ] "to my mind, the great and immediate need of the day is the issuance of more legal-tender notes, in order to impair the confidence in them to an extent as to cause the owners of them to desire to exchange them for other kinds of property, or man's wants--not simply to loan out on short or long date paper, with fire-proof security, at low or high rates of interest, which can now be done to any extent required--but absolutely part with them for other kinds of property."--views of enoch ensley, of memphis, tennessee, on the national finances, memphis, september, . [ ] "in the midst of the public distress, one class prospered greatly--the bankers; and, among the bankers, none could, in skill or in luck, bear a comparison with charles duncombe. he had been, not many years before, a goldsmith of very moderate wealth. he had probably, after the fashion of his craft, plied for customers under the arcades of the royal exchange, had saluted merchants with profound bows, and had begged to be allowed the honor of keeping their cash. but so dexterously did he now avail himself of the opportunities of profit which the general confusion of prices gave to a money-changer, that, at the moment when the trade of the kingdom was depressed to the lowest point, he laid down near ninety thousand pounds for the estate of helmsley, in the north riding of yorkshire."--macaulay's history of england, state of the currency in -' . [ ] "beyond the sea, in foreign lands, it (the greenback) fortunately is not money; but, sir, when have we had such a long and unbroken career of prosperity in business as since we adopted this non-exportable currency?"--speech of hon. william d. kelley, house of representatives, . "i desire the dollar to be made of such material, for the purpose, that it shall never be exported or desirable to carry out of the country. framing an american system of finance, i do not propose to adapt it to the wants of any other nation."--speech of general b. f. butler before the new york board of trade, october th, . [ ] "some years since, mademoiselle zélie, a singer of the théâtre lyrique at paris, made a professional tour round the world, and gave a concert in the society islands. in exchange for an air from 'norma,' and a few other songs, she was to receive a third part of the receipts. when counted, her share was found to consist of three pigs, twenty-three turkeys, forty-four chickens, five thousand cocoa-nuts, besides considerable quantities of bananas, lemons, and oranges. at the halle (market) in paris, the prima donna remarks, in her lively letter printed by m. walowski, this amount of live stock and vegetables might have brought four thousand francs, which would have been good remuneration for five songs. in the society islands, however, pieces of money were very scarce; and as mademoiselle could not consume any considerable portion of the receipts herself, it became necessary in the mean time to feed the pigs and poultry with the fruit."--jevons's money and mechanism of exchange. [ ] in , it was ordered by the general court of massachusetts that no man should pay taxes "in lank cattle."--felt's massachusetts currency. [ ] this incident is related by burton, in his "explorations of the lake regions of central africa" ( -' ), as one within his knowledge of actual occurrence. [ ] in one of the mints there is exhibited as a curiosity a case in which this fact is demonstrated in the most striking manner. it contains some fifty or more very thin ribbons, or strips, of gold, half an inch wide by three inches in length, placed in a row, parallel to, but separated from each other by a slight interval. the first ribbon is composed of gold of the highest standard of purity; the second differs from the first to the extent of one per cent. of admixture with a baser metal; while the third contains two per cent., the fourth three per cent., and so on, until in the last ribbon, or strip, the amount of gold and alloy is equal. the color of the first ribbon is, in the highest sense of the term, golden or typical. the color of the second differs from the first by a shade, which shade in every successive ribbon changes and becomes more and more marked as the proportion of alloy entering into its composition increases: and so peculiar are these differences of color that it is possible for an individual unskilled in metallurgy, but having access to the standard, to make a comparatively accurate test of the purity of any article of gold in his possession by a simple comparison of color. [ ] in mr. eckfelt, then principal assayer at the mint in philadelphia, communicated to the american philosophical society the result of some exceedingly curious examinations demonstrating the very wide distribution of gold. the city of philadelphia, he stated, was underlaid by a bed of clay having an area of about ten square miles, with an average depth of about fifteen feet. specimens of this clay--all natural deposits--taken from such localities as might furnish a fair assay of the whole--the cellar of the market on market street, near eleventh, and from a brick-yard in the suburbs of the city--all yielded, on careful analysis, small amounts of gold; the average amount indicated being seven-tenths of a grain--or about three cents' worth--of gold for every cubit foot of clay. assuming these data to be correct, the value of the gold, according to mr. eckfelt, which lies securely buried underneath the streets and houses of philadelphia must therefore be equivalent to $ , , ; or if we include all the clay contained in the corporate limits, the amount of gold contained in it must be equal to all that has yet been obtained from california and australia. "it is also apparent," says mr. eckfelt, "that every time a cart-load of clay is hauled out of a cellar in philadelphia, enough gold goes with it to pay for the carting; and if the bricks which front our houses could have brought to their surface, in the form of gold-leaf, the amount of gold which they contain, we should have the glittering show of two square inches on every brick." [ ] on the rhine, near strasburg, a good able-bodied laborer can earn on an average one franc seventy-five centimes per day, washing gold from the sands of the river; but, as under most circumstances he can earn ten sous more by working in the fields on the banks of the river, and without so much risk of getting rheumatism, gold-washing on the rhine is not often adopted as a regular employment. [ ] "and when the substitution is made" (of a silver for a paper fractional currency), "what will be the consequence? the metal currency will have to be considerably debased, or else every old woman in the country will fill her stockings with it and bury it. it will be hoarded, sir; hoarded to the extent of removing millions from the currency of the country." the general paused, glared at a village wrapped in rain, by which we were rattling, chewed his cigar vigorously, and lapsed into silence.--a newspaper reporter's interview with general butler, september, . [ ] gold in its crude state, and uncoined, was until recently in use as money in some parts of california, mexico, and on the west coast of africa. [ ] historically, bills of exchange probably originated with the jews of the middle ages, who, ever liable to persecution, adopted a system of drafts, or written orders, upon one another, which each agreed to honor and pay to the person named in the draft. [ ] it was in this manner that the first bank of which we have any record originated in , namely, the bank of the republic of venice. venice in that year was at war and needed money. the council of ten, or the government, called upon the merchants to bring in their gold or coin into the public treasury, and gave credit on the books of the state for the amounts so deposited; which credits carried interest (always promptly paid) at the rate of four per cent. per annum. soon after the establishment of this bank one of the depositors died; and it becoming necessary to distribute his estate among five children, his bank-credit was divided into five portions and transferred to five new owners. a system of transferring bank-credits was thus introduced, and proved so useful that in a brief time the merchants adopted it very generally as a means of paying balances in all great business transactions. the banks of amsterdam and of hamburg were also subsequently established on substantially the same basis, and are doing business to-day successfully. the bank of venice did business for five hundred years; during which period the state was prosperous, and there were few failures among the mercantile classes. [ ] if to any it may seem puerile and unnecessary to enter into such explanations, it may be well to remind them that one of the schemes for a new currency, which has of late found some earnest advocates in the united states, is that of josiah warren, of ohio, who proposed that currency "should be issued by those men, women, and children who perform useful service"--i. e., grow corn, mine coal, catch cod-fish, pick up chestnuts and the like--"but by nobody else;" such results of service being deposited in safe receptacles, and having receipts of deposit issued against them to serve as "equitable money." a further axiom of mr. warren was, "that the most disagreeable labor" (not the most useful) "is entitled to the highest compensation;" and, therefore, inferentially entitled to issue the most money. a specimen of this equitable money before the writer reads as follows: the most disagreeable labor is entitled to the highest compensation. $ . cincinnati, ohio. due to bearer, eight hours' labor, in shoe-making, or a hundred pounds of corn. william morton. no. --, f---- street. time is wealth. of course, to make this money equitable, and its issue, as claimed, "the satisfactory solution of the great problem of labor and capital," there must be some presupposed equitable relation between eight hours of shoe-making and a hundred pounds of corn. but one hundred pounds of corn in illinois are the result of only a quarter as much labor as a hundred pounds in new england; and what comparison is there between eight hours' work of a skilled mechanic and that of a mere cobbler in making shoes? or of the man who performs a disagreeable, slavish piece of work, and of the genius who invents or makes a machine that makes this disagreeable work unnecessary? e. d. linton, of boston, one of warren's most eminent disciples, improves on warren's ideas, and proposes that the united states government should prepare and issue a currency, which should read as follows: the united states will pay one dollar to bearer, on demand, in ---- bushels of illinois fall wheat, at united states no. store-house, no. river street, chicago, ill. this note is receivable for all debts due the united states. and the same inferentially in respect to pigs, coal, shoes, and the services of doctors, lawyers, and cooks. so, then, if the note is not to be on its face a lie, and the promise is to be actually performed on demand, the necessity will be absolute on the part of the government of the united states to have store-houses for wheat at chicago, pig-pens at peoria, coal-mines or dépôts at pottsville, and trained professionals ready on call to plead a case, preach a sermon, cure a cold, and cook a dinner; and all of these last must take their pay in pigs if required. but as a pig has one value at peoria, and another value at almost every other place, the dollar's worth of pig which the united states would pay might be a whole pig in one place, a half in another, and possibly only the snout in another. [ ] although, to all who have investigated the subject, the evidence is conclusive that an irredeemable fluctuating paper money is always made an agency for taxing with special severity all that class of consumers who live on fixed incomes, salaries, and wages, it has, nevertheless, always been a somewhat difficult matter to find illustrations of the fact so clear and simple as carry conviction by presentation that it does thus act to the classes most interested. with a view of obtaining such an illustration, application was made some months since to an eminent american merchant, whose large and varied experience abundantly qualified him to discuss the subject; and the result of the application may be thus stated: q. in buying in gold and selling in currency, what addition do you make to your selling price, in the way of insurance, that the currency received will be sufficient--plus profit, interest, etc.--to replace or buy back the gold represented by the original purchase? a. we do but very little of that now; hardly enough to speak about. q. but still you make insurance against currency fluctuations an item in your business to be regarded to some extent? a. why, yes, certainly; it won't do to overlook it entirely. q. well, then, if you have no objections, please tell me what you do allow under existing circumstances? a. i have certainly no objections. we buy closely for cash; sell largely for cash, or very short credit; and, within the comparatively narrow limits that currency has fluctuated for the last two or three years, add but little to our selling prices as insurance on that account--say one to two per cent. for cash, or three months' credit; and for a longer credit--if we give it--something additional. during or immediately after the war, when the currency fluctuations were more extensive, frequent, and capricious, the case was very different. then selling prices had to be watched very closely, and changed very frequently--sometimes daily. my present experience, therefore, is exceptional; and to get the information you want, you must look further. i think i can help you to do this. we buy regularly large quantities of a foreign product--let us suppose, for illustration, cloth, for the large manufacturers and dealers in ready-made clothing. we buy for gold, and we sell for gold, and do not allow the currency or its fluctuations to enter in any way into these transactions. but how is it with my customers? i allow them some credit; and the amount involved being often very large, i, of course, must know something of the way in which they manage their business. they transform the cloth, purchased with gold, into clothing; and then sell the clothing, in turn, to their customers--jobbers and retailers--all over the country, for currency, on a much longer average credit than they obtain from me for their raw material. as a matter of safety and necessity, these wholesale dealers and manufacturers must add to their selling prices a sufficient percentage to make sure that the currency they are to receive at the end of three, six, or nine months will be sufficient to buy them as much gold as they have paid to me, or as much as will buy them another lot of cloth to meet the further demands of their business and their customers. how much they thus add i can not definitely say. there is no regular rule. every man doubtless adds all that competition will permit; and every circumstance likely to affect the prospective price of gold is carefully considered. five per cent., in my opinion, on a credit of three months would be the average minimum; and for a longer time, a larger percentage. if competition does not allow any insurance percentage to be added, there is a liability to a loss of capital, which, in the long run, may be most disastrous--a circumstance that may explain the wreck of many firms, whose managers, on the old-fashioned basis of doing business, would have been successful. the jobbers and the retailers, to whom the wholesale dealers and manufacturers sell, are not so likely to take currency insurance into consideration in fixing their selling prices; but to whatever amount the cost price of their goods has been enhanced by the necessity of insurance against currency fluctuations, on that same amount they estimate and add for interest and profits; the total enhancement of prices falling ultimately on the consumer, who, of necessity, can rarely know the elements of the cost of the article he purchases. q. so mr. webster, then, in his remark, which has become almost a proverb, that "of all contrivances for cheating the laboring classes, none has been more effectual than that which deludes them with paper money," must have been thoroughly cognizant of the nature of such transactions? a. most undoubtedly; for such transactions are the inevitable consequence of using as a medium of exchange a variable, irredeemable currency. the illustration above given, therefore, in the place of being imaginary, is based on the actual condition of business at the present time--january, . [ ] in , a ship was built in new york, at the time when labor and materials, reckoned in currency, had touched their highest prices. in , another ship was built in the same place and on the same model--like the former in every particular. it was expected that, as wages and the cost of materials were less in than in , the cost of the latter ship would be much less than that of the former; but the result showed that this was not the case. [ ] when the japanese embassy visited the united states, in , they were seriously advised to create, by some means, a national debt as soon as they returned home, and make use of it as a basis for the creation and issue of currency. [ ] machiavelli, in his "discourses on the first ten books of livy," book ii., chap, iii., in explaining the great difference in the relative growth of the roman and spartan republics, relates that "lycurgus, the founder of the spartan republic, believing that nothing could more readily destroy his laws than the admixture of new inhabitants, did every thing possible to deter strangers from flocking thither. besides denying them intermarriage, citizenship, and all other companionships (conversationi) that bring men together, he ordered that in his republic only leather (non-exportable) money should be used, so as to indispose all strangers to bring merchandise into sparta, or to exercise any kind of art or industry there, so that the city never could increase in population." [ ] examination will show that the united states, for one-sixth part of their existence as a federated nation, have been in a state of war; and, for the future, there is no good reason for supposing that the country is to be any more exempt from the vicissitudes of nations than it has been in the past. with irredeemable paper, violation of plighted faith, gold demonetized and banished, in what condition is the nation for maintaining a great national struggle? [ ] in a case often overlooked (bank vs. supervisors, wallace), the united states supreme court decided that "united states notes are engagements to pay dollars; and the dollars intended are coined dollars of the united states." refusal to pay such notes in coin is clearly, therefore, repudiation. [ ] irving's "conquest of granada." [ ] in every cabinet of rare coins in europe there will be found specimens of what are known as "obsidional" coins, or coins struck in besieged places to supply the place of coined money. these coins appear, in all instances, to have been regarded as obligations sacred in their nature, and their repudiation a high crime against morality and patriotism. [ ] speech of general b. f. butler, united states house of representatives. [ ] letter of wendell phillips to the new york legal-tender club, . [ ] charles moran, new york commercial bulletin, october th; . [ ] opinion of the united states supreme court, by justice strong.--wallace, , p. . [ ] the indians on the atrato river (central america), when first visited by one of the recent inter-ocean-canal exploring parties, were found to be unaccustomed to the use of much, if any, clothing; but after a little intercourse with civilized man, some of the more intelligent of the natives presented themselves with their bodies painted in close imitation of clothes, which they claimed to be superior in every respect to the genuine articles worn by their visitors. [ ] this was what actually happened in connecticut in and thereabouts. see "madame knight's journal," quoted in felt and bronson's "histories of new england currencies." [ ] whatever may have been the immediate effect of the gold-discoveries in california and australia, no economist of repute now holds to the opinion that the average purchasing power of gold all the world over is any less than it was in -' ; or, in other words, that any increase in the quantity of gold since -' has resulted in any present depreciation. [ ] this is the american interpretation. the english interpretation of "legal tender" was brought out in a debate in the house of lords, in june, , when it was shown to mean, in its application to great britain, no more than this: that in a suit between creditor and debtor, if a judgment went against the debtor, he was allowed to plead a tender of bank-notes in arrest of execution, but he could not claim that the notes should be forced upon the creditor in discharge of the debt. during the long suspension of specie payments in great britain, therefore, bank-notes were never made legal tender in the american sense. [ ] after the revolutionary war it was considered disgraceful to take advantage of the legal-tender character of the depreciated continental or state paper money to liquidate debts with it; and the society of cincinnati expelled a member for so doing. the state of rhode island also, which longer than any of the other states endeavored to maintain by law the legal-tender character and use of such money, was often spoken of in consequence as "rogue's" in place of "rhode" island. [ ] to any who may desire to know how far imagination has been drawn upon for this picture, reference is made to the speech of hon. o. p. morton, united states senate, "congressional record," vol. ii., part i., forty-third congress, first session, p. . [ ] the pertinacity "with which a mind befogged on the subject of money and currency holds on to the delusion that the making and issue of promises to pay, and calling the same money, is equivalent to the creation of wealth; and, vice versâ, that the cancellation or withdrawal, by payment, of such promises is the same thing as the destruction of wealth, and also tends to make money--in the sense of capital--scarce, and interest high, finds many amusing illustrations, which for educational purposes are better than arguments. for example, we have, first, the assumption of a leading senator of the united states (already referred to, and which, if not on record, would seem incredible) that because an increased supply of horses and hogs made available to a market make horses and hogs cheap, therefore an increased supply of evidences that capital had been borrowed, used, and never paid, would tend to increase the quantity and rate of interest of loanable capital. a corresponding illustration is also to be found in the case of the member of the continental congress mentioned by pelatiah webster, who, when the subject of increased taxation for the support of the war was under consideration, indignantly asked "if he was expected to help tax the people, when they could go to the printing-office and get money by the cart-load?" the experience of the irish mob also finds an appropriate place under this head, which made a bonfire of all the notes issued by an obnoxious private banker that they could gather, little imagining, as they shouted and capered with wild delight about the fire that consumed them, that, in place of impoverishing, they were really enriching, their enemy. the following story, also illustrative of the same popular fallacy, passes current in one of the towns of eastern connecticut: during the severe financial panic of , an honest country farmer and deacon, who, by virtue of being a considerable stockholder in one of the local banks, had been placed as a figure-head on its board of directors, was applied to by a farmer friend to help him in procuring from the bank a small loan. knowing that the times were hard, and money scarce, the deacon, although desirous of obliging his friend, did not at once commit himself, but promised to go to the bank, and make his action contingent upon the state of affairs which he might there find. the two friends, accordingly, went into town the next day (which happened to be the culminating day of the crisis, when every promise to pay issued by any bank was, in the general distrust, gathered up and rushed in for redemption); and, while the applicant for the loan waited outside, the director entered the bank to reconnoitre. passing into the directors' room, and thence behind the counter, he said little, but, keeping his eyes wide open, did not fail to notice the extraordinarily large packages of bills, filling safe and drawers, which, to the annoyance and strain of the bank, had been recently sent in for payment. seeking no further proof of the financial strength of his institution, he returned to the street, and, informing his friend that every thing was all right, the latter next entered, and confidently asked for his discount. to his great surprise, he received the usual polite answer, that "they would be too glad to oblige him, but that, really, they had no money." "out of money!" said the deacon, when the result of the application was made known to him. "out of money! how can they lie so, when i have just seen the safe and drawers full of it? as a christian man, and an officer of the church, i can't conscientiously be a director and stockholder any longer in such an immoral institution." and yet, if, on returning home, the good deacon had found in his table-drawer a number of his individual promissory-notes, signed and ready to issue, but not issued, he would not have thought himself any richer by their existence, but, on the contrary, would have felt much more comfortable at such a time to know that the notes were all under double-lock security, or, better, if he saw them vanishing into ashes. and yet, in the case of the bank-notes, he couldn't understand why they were not money, to be used at all times and under all circumstances! [ ] between the years and , the united states doubled the quantity of currency available for use by its citizens, and yet the rate of interest was as high in the latter year as in the former. [ ] such were some of the uses finally made of the continental currency. see sumner's "history of american currency," p. . http://www.archive.org/details/readingsnimoney philuoft transcriber's note: text enclosed by tilde characters is in bold face (~bold~). text enclosed by underscores is in italics (_italics_). an underscore followed by a letter enclosed in curly braces indicates that the enclosed letter is a subscript. (example: c_{b} indicates that the "b" is a subscript). readings in money and banking * * * * * the macmillan company new york · boston · chicago · dallas atlanta · san francisco macmillan & co. limited london · bombay · calcutta melbourne the macmillan co. of canada. ltd. toronto * * * * * readings in money and banking selected and adapted by chester arthur phillips assistant professor of economics in dartmouth college and assistant professor of banking in the amos tuck school of administration and finance new york the macmillan company all rights reserved printed in the united states of america copyright by the macmillan company set up and electrotyped. published september, . ferris printing company new york city preface designed mainly for class room use in connection with one of the introductory manuals on the subject of money and banking or of money and currency, this volume, _in itself_, lays no claim to completeness. where its use is contemplated the problems of emphasis and proportion are, accordingly, to be solved by the selection of one or another of the available texts, or by the choice of supplementary lecture topics and materials. the contents of the introductory manuals are so divergent in character as to render possible combinations of text and readings that will include, it is hoped, matter of such range and variety as may be desired. fullness of treatment has been attempted, however, in the chapters dealing with the important recent developments in the "mechanism of exchange," and my aim has been throughout to select and, in many instances, to adapt with a view to meeting the wants of those who are interested chiefly in the modern phases of the subject. for valuable suggestions in the preparation of the volume i am greatly indebted to professors f. h. dixon and g. r. wicker and mr. j. m. shortliffe of dartmouth, professor hastings lyon of columbia, professor e. e. day of harvard, and to my former teacher, professor f. r. fairchild of yale. i desire also to mention my great obligation to authors and publishers who alike have generously permitted the reproduction of copyrighted material. chester arthur phillips. dartmouth college, hanover, n. h., july, . table of contents chapter page i the origin and functions of money ii the early history of money iii qualities of the material of money iv legal tender v the greenback issues vi international bimetallism vii the silver question in the united states viii index numbers ix banking operations and accounts x the use of credit instruments in payments in the united states xi a symposium on the relation between money and general prices xii the gold exchange standard xiii a plan for a compensated dollar xiv monetary systems of foreign countries xv the nature and functions of trust companies xvi savings banks xvii domestic exchange xviii foreign exchange xix clearing houses xx state banks and trust companies since the passage of the national bank act xxi the canadian banking system xxii the english banking system xxiii the scotch banks xxiv the french banking system xxv the german banking system xxvi banking in south america xxvii agricultural credit in the united states xxviii the concentration of control of money and credit xxix crises xxx the weaknesses of our banking system prior to the establishment of the federal reserve system xxxi the federal reserve system xxxii the european war in relation to money, banking and finance appendices readings in money and banking chapter i the origin and functions of money [ ]in order to understand the manifold functions of a circulating medium, there is no better way than to consider what are the principal inconveniences which we should experience if we had not such a medium. the first and most obvious would be the want of a common measure for values of different sorts. if a tailor had only coats, and wanted to buy bread or a horse, it would be very troublesome to ascertain how much bread he ought to obtain for a coat, or how many coats he should give for a horse. the calculation must be recommenced on different data, every time he bartered his coats for a different kind of article; and there could be no current price, or regular quotations of value. whereas now each thing has a current price in money, and he gets over all difficulties by reckoning his coat at £ or £ , and a four-pound loaf at _d._ or _d_. as it is much easier to compare different lengths by expressing them in a common language of feet and inches, so it is much easier to compare values by means of a common language of pounds, shillings, and pence. in no other way can values be arranged one above another in a scale: in no other can a person conveniently calculate the sum of his possessions; and it is easier to ascertain and remember the relations of many things to one thing, than their innumerable cross relations with one another. this advantage of having a common language in which values may be expressed, is, even by itself, so important, that some such mode of expressing and computing them would probably be used even if a pound or a shilling did not express any real thing, but a mere unit of calculation. it is said that there are african tribes in which this somewhat artificial contrivance actually prevails. they calculate the value of things in a sort of money of account, called macutes. they say, one thing is worth ten macutes, another fifteen, another twenty. there is no real thing called a macute: it is a conventional unit, for the more convenient comparison of things with one another. this advantage, however, forms but an inconsiderable part of the economical benefits derived from the use of money. the inconveniences of barter are so great, that without some more commodious means of effecting exchanges, the division of employments could hardly have been carried to any considerable extent. a tailor, who had nothing but coats, might starve before he could find any person having bread to sell who wanted a coat: besides, he would not want as much bread at a time as would be worth a coat, and the coat could not be divided. every person, therefore, would at all times hasten to dispose of his commodity in exchange for anything which, though it might not be fitted to his own immediate wants, was in great and general demand, and easily divisible, so that he might be sure of being able to purchase with it, whatever was offered for sale. the primary necessaries of life possess these properties in a high degree. bread is extremely divisible, and an object of universal desire. still, this is not the sort of thing required: for, of food, unless in expectation of a scarcity, no one wishes to possess more at once than is wanted for immediate consumption; so that a person is never sure of finding an immediate purchaser for articles of food; and unless soon disposed of, most of them perish. the thing which people would select to keep by them for making purchases, must be one which, besides being divisible, and generally desired, does not deteriorate by keeping. this reduces the choice to a small number of articles. by a tacit concurrence, almost all nations, at a very early period, fixed upon certain metals, and especially gold and silver, to serve this purpose. no other substances unite the necessary qualities in so great a degree, with so many subordinate advantages. next to food and clothing, and in some climates even before clothing, the strongest inclination in a rude state of society is for personal ornament, and for the kind of distinction which is obtained by rarity or costliness in such ornaments. after the immediate necessities of life were satisfied, every one was eager to accumulate as great a store as possible of things at once costly and ornamental; which were chiefly gold, silver, and jewels. these were the things which it most pleased every one to possess, and which there was most certainty of finding others willing to receive in exchange for any kind of produce. they were among the most imperishable of all substances. they were also portable, and containing great value in small bulk, were easily hid; a consideration of much importance in an age of insecurity. jewels are inferior to gold and silver in the quality of divisibility; and are of very various qualities, not to be accurately discriminated without great trouble. gold and silver are eminently divisible, and when pure, always of the same quality; and their purity may be ascertained and certified by a public authority. accordingly, though furs have been employed as money in some countries, cattle in others, in chinese tartary cubes of tea closely pressed together, the shells called cowries on the coast of western africa, and in abyssinia at this day blocks of rock salt; though even of metals, the less costly have sometimes been chosen, as iron in lacedæmon from ascetic policy, copper in the early roman republic from the poverty of the people; gold and silver have been generally preferred by nations which were able to obtain them, either by industry, commerce, or conquest. to the qualities which originally recommended them, another came to be added, the importance of which only unfolded itself by degrees. of all commodities, they are among the least influenced by any of the causes which produce fluctuations of value. they fluctuate less than almost any other things in their cost of production. and from their durability, the total quantity in existence is at all times so great in proportion to the annual supply, that the effect on value even of a change in the cost of production is not sudden: a very long time being required to diminish materially the quantity in existence, and even to increase it very greatly not being a rapid process. gold and silver, therefore, are more fit than any other commodity to be the subject of engagements for receiving or paying a given quantity at some distant period. if the engagement were made in corn, a failure of crops might increase the burthen of the payment in one year to fourfold what was intended, or an exuberant harvest sink it in another to one-fourth. if stipulated in cloth, some manufacturing invention might permanently reduce the payment to a tenth of its original value. such things have occurred even in the case of payments stipulated in gold and silver; but the great fall of their value after the discovery of america, is, as yet, the only authenticated instance; and in this case the change was extremely gradual, being spread over a period of many years. when gold and silver had become virtually a medium of exchange, by becoming the things for which people generally sold, and with which they generally bought, whatever they had to sell or to buy; the contrivance of coining obviously suggested itself. by this process the metal was divided into convenient portions, of any degree of smallness, and bearing a recognized proportion to one another; and the trouble was saved of weighing and assaying at every change of possessors, an inconvenience which on the occasion of small purchases would soon have become insupportable. governments found it their interest to take the operation into their own hands, and to interdict all coining by private persons; indeed, their guarantee was often the only one which would have been relied on, a reliance however which very often it ill deserved; profligate governments having until a very modern period seldom scrupled, for the sake of robbing their creditors, to confer on all other debtors a licence to rob theirs, by the shallow and impudent artifice of lowering the standard; that least covert of all modes of knavery, which consists in calling a shilling a pound, that a debt of a hundred pounds may be cancelled by the payment of a hundred shillings. it would have been as simple a plan, and would have answered the purpose as well, to have enacted that "a hundred" should always be interpreted to mean five, which would have effected the same reduction in all pecuniary contracts, and would not have been at all more shameless. such strokes of policy have not wholly ceased to be recommended, but they have ceased to be practised; except occasionally through the medium of paper money, in which case the character of the transaction, from the greater obscurity of the subject, is a little less barefaced. money, when its use has grown habitual, is the medium through which the incomes of the different members of the community are distributed to them, and the measure by which they estimate their possessions. as it is always by means of money that people provide for their different necessities, there grows up in their minds a powerful association leading them to regard money as wealth in a more peculiar sense than any other article; and even those who pass their lives in the production of the most useful objects, acquire the habit of regarding those objects as chiefly important by their capacity of being exchanged for money. a person who parts with money to obtain commodities, unless he intends to sell them, appears to the imagination to be making a worse bargain than a person who parts with commodities to get money; the one seems to be spending his means, the other adding to them. illusions which, though now in some measure dispelled, were long powerful enough to overmaster the mind of every politician, both speculative and practical, in europe. it must be evident, however, that the mere introduction of a particular mode of exchanging things for one another, by first exchanging a thing for money, and then exchanging the money for something else, makes no difference in the essential character of transactions. it is not with money that things are really purchased. nobody's income (except that of the gold or silver miner) is derived from the precious metals. the pounds or shillings which a person receives weekly or yearly, are not what constitutes his income; they are a sort of tickets or orders which he can present for payment at any shop he pleases, and which entitle him to receive a certain value of any commodity that he makes choice of. the farmer pays his laborers and his landlord in these tickets, as the most convenient plan for himself and them; but their real income is their share of his corn, cattle, and hay, and it makes no essential difference whether he distributes it to them directly or sells it for them and gives them the price; but as they would have to sell it for money if he did not, and he is a seller at any rate, it best suits the purposes of all, that he should sell their share along with his own, and leave the laborers more leisure for work and the landlord for being idle. the capitalists, except those who are producers of the precious metals, derive no part of their income from those metals, since they only get them by buying them with their own produce: while all other persons have their incomes paid to them by the capitalists, or by those who have received payment from the capitalists, and as the capitalists have nothing, from the first, except their produce, it is that and nothing else which supplies all incomes furnished by them. there cannot, in short, be intrinsically a more insignificant thing, in the economy of society, than money; except in the character of a contrivance for sparing time and labor. it is a machine for doing quickly and commodiously, what would be done, though less quickly and commodiously, without it: and like many other kinds of machinery, it only exerts a distinct and independent influence of its own when it gets out of order. the introduction of money does not interfere with the operation of any of the laws of value.... the reasons which make the temporary or market value of things depend on the demand and supply, and their average and permanent values upon their cost of production, are as applicable to a money system as to a system of barter. things which by barter would exchange for one another, will, if sold for money, sell for an equal amount of it, and so will exchange for one another still, though the process of exchanging them will consist of two operations instead of only one. the relations of commodities to one another remain unaltered by money: the only new relation introduced, is their relation to money itself; how much or how little money they will exchange for; in other words, how the exchange value of money itself is determined. and this is not a question of any difficulty, when the illusion is dispelled, which caused money to be looked upon as a peculiar thing, not governed by the same laws as other things. money is a commodity, and its value is determined like that of other commodities, temporarily by demand and supply, permanently and on the average by cost of production. in the foregoing,[ ] attention has been directed mainly to the two functions of money known ( ) as the standard or common denominator of value, and ( ) as the medium of exchange. concerning transactions begun and ended on the spot nothing more need be said; but the fact of contracts over a period of time introduces an important element--the time element. whenever a contract is made covering a period of time, within which serious changes in the economic world may take place, then difficulties may arise as to what is a just standard of payments. various articles might serve equally well as a standard for exchanges performed on the spot, but it is not so when any one article is chosen as a standard for deferred payments. without much regard to theory, the world has in fact used the same standard for transactions whether settled on the spot, or whether extending over a period of time. in order to work with perfection as a standard for deferred payments, the article chosen as that standard should place both debtors and creditors in exactly the same absolute, and the same relative, position to each other at the end of a contract that they occupied at its beginning; this implies that the chosen article should maintain the same exchange value in relation to goods, rents, and the wages of labour at the end as at the beginning of the contract, and it implies that the borrower and lender should preserve the same relative position as regards their fellow producers and consumers at the later as at the earlier point of time, and that they have not changed this relation, one at the loss of the other. this makes demands which any article that can be suggested as a standard cannot satisfy. and yet it is a practical necessity of society that some one article should in fact be selected as the standard. the business world has thus been forced to find some commodity which--while admittedly never capable of perfection--provides more nearly than anything else all the essentials of a desirable standard. the causes which may bring about changes in the relations between goods and labor, on the one side, and the standard, on the other, are various. we may, for instance, compare wheat with the existing gold standard. the quantity of gold for which the wheat will exchange is its price. as wheat falls in value relatively to gold, it exchanges for less gold, that is, its price falls; or, _vice versa_, gold exchanges for more wheat, and relatively to wheat gold has risen. as one goes up, the other term in the ratio necessarily goes down; just as certainly as a rise in one end of a plank balanced on a log necessitates a fall in the other end of the plank. therefore, changes in prices can be caused by forces affecting either the gold side or the wheat side of the ratio; by forces affecting either the money standard or the goods compared with that standard. consequences of importance follow from this explanation. first suppose that commodities and labor remain unchanged in their production and reward, respectively; then, anything affecting the supply of and demand for gold will affect in general the value of gold in comparison with goods and labor. or, second, if we suppose an equilibrium between the demand for and supply of gold, then, prices and wages can be affected also by anything affecting the cost of obtaining goods or labor. it is one-sided to look for changes in prices solely from causes touching gold, or one term of the price ratio. if, however, it should be desired that prices should remain stationary, then this can be brought about only by finding for the standard an article that would automatically move in extent, and in the proper compensating direction, so as to meet any changes in value arising not only from causes affecting itself, but also from causes affecting labor and the vast number of goods that may be quoted in price. no commodity ever existed which could thus move in value. during long periods of time--within which gains in mechanical skill and invention, revolutions in political and social habits, changes in taste or fashion, settlement of new countries, opening of new markets, may take place--great alterations in the value of the standard may occur wholly from natural causes affecting the commodity side of the price ratio. and yet, in default of a perfect standard, persons who borrow and lend create debts and obligations expressed in terms of that article which has been adopted as the standard by the concurring habits of the commercial community of which they form a part. it should be understood, whenever men enter into obligations reaching over a period of time, that a necessary part of the risks involved in this undertaking is the possibility of an alteration in the exchange values of goods, on the one hand, and in the standard metal on the other, due to industrial changes and natural causes. this is one of the risks which belong to individual enterprise, differing in no way from other possibilities of gain and loss. for instance, prices rose, as indicated by an index number of in to an index number of in . therefore, in the united states, in this period of rising prices the creditor lost and the debtor gained. on the other hand, from to , prices fell from to , and in this period of falling prices the creditor gained and the debtor lost. it is to be observed, however, that these figures refer to actual quotations of prices during the fluctuations of our paper money. but it is evident in such movements as these, that parties to a time-contract must take their own chances of changes; and indeed it is much more wholesome that they should do so. it should be kept well in mind that it is not a proper function of government to step in and save men from the ordinary risks of trade and industry. it goes without saying that if changes in the value of the standard due to natural causes take place during the continuance of a contract, it is not the business of government to indemnify either party to the contract. this is a matter on which every individual who enters into time obligations must bear his own responsibility. footnotes: [ ] john stuart mill, _principles of political economy_, vol. ii, pp. - . [ ] adapted from _the report of the commission of the indianapolis convention_, pp. , , , . the university of chicago press, . chapter ii the early history of money [ ]living in civilized communities, and accustomed to the use of coined metallic money, we learn to identify money with gold and silver; hence spring hurtful and insidious fallacies. it is always useful, therefore, to be reminded of the truth, so well stated by turgot, that every kind of merchandise has the two properties of measuring value and transferring value. it is entirely a question of degree what commodities will in any given state of society form the most convenient currency, and this truth will be best impressed upon us by a brief consideration of the very numerous things which have at one time or other been employed as money. though there are many numismatists and many political economists, the natural history of money is almost a virgin subject, upon which i should like to dilate; but the narrow limits of my space forbid me from attempting more than a brief sketch of the many interesting facts which may be collected. currency in the hunting state perhaps the most rudimentary state of industry is that in which subsistence is gained by hunting wild animals. the proceeds of the chase would, in such a state, be the property of most generally recognized value. the meat of the animals captured would, indeed, be too perishable in nature to be hoarded or often exchanged; but it is otherwise with the skins, which, being preserved and valued for clothing, became one of the earliest materials of currency. accordingly, there is abundant evidence that furs or skins were employed as money in many ancient nations. they serve this purpose to the present day in some parts of the world. in the book of job (ii, ) we read, "skin for skin, yea, all that a man hath will he give for his life"; a statement clearly implying that skins were taken as the representative of value among the ancient oriental nations. etymological research shows that the same may be said of the northern nations from the earliest times. in the esthonian language the word _râha_ generally signifies money, but its equivalent in the kindred lappish tongue has not yet altogether lost the original meaning of skin or fur. leather money is said to have circulated in russia as late as the reign of peter the great, and it is worthy of notice, that classical writers have recorded traditions to the effect that the earliest currency used at rome, lacedæmon, and carthage, was formed of leather. we need not go back, however, to such early times to study the use of rude currencies. in the traffic of the hudson's bay company with the north american indians, furs, in spite of their differences of quality and size, long formed the medium of exchange. it is very instructive, and corroborative of the previous evidence to find that even after the use of coin had become common among the indians the skin was still commonly used as the money of account. thus whymper says, "a gun, nominally worth about forty shillings, bought twenty 'skins.' this term is the old one employed by the company. one skin (beaver) is supposed to be worth two shillings, and it represents two marten, and so on. you heard a great deal about 'skins' at fort yukon, as the workmen were also charged for clothing, etc., in this way." currency in the pastoral state in the next higher stage of civilization, the pastoral state, sheep and cattle naturally form the most valuable and negotiable kind of property. they are easily transferable, convey themselves about, and can be kept for many years, so that they readily perform some of the functions of money. we have abundance of evidence, traditional, written, and etymological, to show this. in the homeric poems oxen are distinctly and repeatedly mentioned as the commodity in terms of which other objects are valued. the arms of diomed are stated to be worth nine oxen, and are compared with those of glaucos, worth one hundred. the tripod, the first prize for wrestlers in the rd iliad, was valued at twelve oxen, and a woman captive, skilled in industry, at four. it is peculiarly interesting to find oxen thus used as the common measure of value, because from other passages it is probable, as already mentioned, that the precious metals, though as yet uncoined, were used as a store of value, and occasionally as a medium of exchange. the several functions of money were thus clearly performed by different commodities at this early period. in several languages the name for money is identical with that of some kind of cattle or domesticated animal. it is generally allowed that _pecunia_, the latin word for money, is derived from _pecus_, cattle. from the agamemnon of Æschylus we learn that the figure of an ox was the sign first impressed upon coins, and the same is said to have been the case with the earliest issues of the roman _as_. numismatic researches fail to bear out these traditions, which were probably invented to explain the connection between the name of the coin and the animal. a corresponding connection between these notions may be detected in much more modern languages. our common expression for the payment of a sum of money is _fee_, which is nothing but the anglo-saxon _feoh_, meaning alike money and cattle, a word cognate with the german _vieh_, which still bears only the original meaning of cattle. in the ancient german codes of law, fines and penalties are actually defined in terms of live-stock. in the zend avesta, as professor theodores ... informs me, the scale of rewards to be paid to physicians is carefully stated, and in every case the fee consists in some sort of cattle. the fifth and sixth lectures in sir h. s. maine's most interesting work on _the early history of institutions_, which has just been published, are full of curious information showing the importance of live-stock in a primitive state of society. being counted by the head, the kine was called capitale, whence the economical term capital, the law term chattel, and our common name cattle. in countries where slaves form one of the most common and valuable possessions, it is quite natural that they should serve as the medium of exchange like cattle. pausanias mentions their use in this way, and in central africa and some other places where slavery still flourishes, they are the medium of exchange along with cattle and ivory tusks. according to earl's account of new guinea, there is in that island a large traffic in slaves, and a slave forms the unit of value. even in england slaves are believed to have been exchanged at one time in the manner of money. articles of ornament as currency a passion for personal adornment is one of the most primitive and powerful instincts of the human race, and as articles used for such purposes would be durable, universally esteemed, and easily transferable, it is natural that they should be circulated as money. the _wampumpeag_ of the north american indians is a case in point, as it certainly served as jewellery. it consisted of beads made of the ends of black and white shells, rubbed down and polished, and then strung into belts or necklaces, which were valued according to their length, and also according to their color and luster, a foot of black _peag_ being worth two feet of white _peag_. it was so well established as currency among the natives that the court of massachusetts ordered in , that it should be received in the payment of debts among settlers to the amount of forty shillings. it is curious to learn, too, that just as european misers hoard up gold and silver coins, the richer indian chiefs secrete piles of wampum beads, having no better means of investing their superfluous wealth. exactly analogous to this north american currency, is that of the cowry shells, which, under one name or another--_chamgos_, _zimbis_, _bouges_, _porcelanes_, etc.--have long been used in the east indies as small money. in british india, siam, the west coast of africa, and elsewhere on the tropical coasts, they are still used as small change, being collected on the shores of the maldive and laccadive islands, and exported for the purpose. their value varies somewhat, according to the abundance of the yield, but in india the current rate used to be about five thousand shells for one rupee, at which rate each shell is worth about the two-hundredth part of a penny. among our interesting fellow-subjects, the fijians, whale's teeth served in the place of cowries, and white teeth were exchanged for red teeth somewhat in the ratio of shillings to sovereigns. among other articles of ornament or of special value used as currency, may be mentioned yellow amber, engraved stones, such as the egyptian scarabæi, and tusks of ivory. currency in the agricultural state many vegetable productions are at least as well suited for circulation as some of the articles which have been mentioned. it is not surprising to find, then, that among a people supporting themselves by agriculture, the more durable products were thus used. corn has been the medium of exchange in remote parts of europe from the time of the ancient greeks to the present day. in norway corn is even deposited in banks, and lent and borrowed. what wheat, barley, and oats are to europe, such is maize in parts of central america, especially mexico, where it formerly circulated. in many of the countries surrounding the mediterranean, olive oil is one of the commonest articles of produce and consumption; being, moreover, pretty uniform in quality, durable, and easily divisible, it has long served as currency in the ionian islands, mytilene, some towns of asia minor, and elsewhere in the levant. just as cowries circulate in the east indies, so cacao nuts, in central america and yucatan, form a perfectly recognized and probably an ancient fractional money. travellers have published many distinct statements as to their value, but it is impossible to reconcile these statements without supposing great changes of value either in the nuts or in the coins with which they are compared. in , at caracas, about thirty cacao nuts were worth one penny english, whereas recently ten beans would go to a penny, according to squier's statements. in the european countries, where almonds are commonly grown, they have circulated to some extent like the cacao nuts, but are variable in value, according to the success of the harvest. it is not only, however, as a minor currency that vegetable products have been used in modern times. in the american settlements and the west india islands, in former days, specie used to become inconveniently scarce, and the legislators fell back upon the device of obliging creditors to receive payment in produce at stated rates. in , the governor of the plantations of virginia ordered that tobacco should be received at the rate of three shillings for the pound weight, under the penalty of three years' hard labor. we are told that, when the virginia company imported young women as wives for the settlers, the price per head was one hundred pounds of tobacco, subsequently raised to one hundred and fifty. as late as , the legislature of maryland made tobacco and indian corn legal tenders; and in there were similar laws concerning corn in massachusetts. the governments of some of the west india islands seem to have made attempts to imitate these peculiar currency laws, and it was provided that the successful plaintiff in a lawsuit should be obliged to accept various kinds of raw produce, such as sugar, rum, molasses, ginger, indigo, or tobacco.... the perishable nature of most kinds of animal food prevents them from being much used as money; but eggs are said to have circulated in the alpine villages of switzerland, and dried codfish have certainly acted as currency in the colony of newfoundland. manufactured and miscellaneous articles as currency the enumeration of articles which have served as money may already seem long enough for the purposes in view. i will, therefore, only add briefly that a great number of manufactured commodities have been used as a medium of exchange in various times and places. such are the pieces of cotton cloth, called _guinea pieces_, used for traffic upon the banks of the senegal, or the somewhat similar pieces circulated in abyssinia, the soulou archipelago, sumatra, mexico, peru, siberia, and among the veddahs. it is less easy to understand the origin of the curious straw money which circulated until in the portuguese possessions in angola, and which consisted of small mats, called _libongos_, woven out of rice straw, and worth about - / _d._ each. these mats must have had, at least originally, some purpose apart from their use as currency, and were perhaps analogous to the fine woven mats so much valued by the samoans, and also treated by them as a medium of exchange. salt has been circulated not only in abyssinia, but in sumatra, mexico, and elsewhere. cubes of benzoin gum or beeswax in sumatra, red feathers in the islands of the pacific ocean, cubes of tea in tartary, iron shovels or hoes among the malagasy, are other peculiar forms of currency. the remarks of adam smith concerning the use of hand-made nails as money in some scotch villages will be remembered by many readers, and need not be repeated. m. chevalier has adduced an exactly corresponding case from one of the french coalfields. were space available it would be interesting to discuss the not improbable suggestion of boucher de perthes, that, perhaps, after all, the finely worked stone implements now so frequently discovered were among the earliest mediums of exchange. some of them are certainly made of jade, nephrite, or other hard stones, only found in distant countries, so that an active traffic in such implements must have existed in times of which we have no records whatever. there are some obscure allusions in classical authors to a wooden money circulating among the byzantines, and to a wooden talent used at antioch and alexandria, but in the absence of fuller information as to their nature, it is impossible to do more than mention them.... the invention of coining the date of the invention of coining can be assigned with some degree of probability. coined money was clearly unknown in the homeric times, and it was known in the time of lycurgus. we might therefore assume, with various authorities, that it was invented in the mean time, or about b. c. there is tradition, moreover, that pheidon, king of argos, first struck silver money in the island of Ægina about b. c., and the tradition is supported by the existence of small stamped ingots of silver, which have been found in Ægina. later inquiries, however, lead to the conclusion that pheidon lived in the middle of the eighth century b. c., and grote has shown good reasons for believing that what he did accomplish was done in argos, and not in Ægina. the mode in which the invention happened is sufficiently evident. seals were familiarly employed in very early times, as we learn from the egyptian paintings or the stamped bricks of nineveh. being employed to signify possession, or to ratify contracts, they came to indicate authority. when a ruler first undertook to certify the weights of pieces of metal, he naturally employed his seal to make the fact known, just as, at goldsmiths' hall, a small punch is used to certify the fineness of plate. in the earliest forms of coinage there were no attempts at so fashioning the metal that its weight could not be altered without destroying the stamp or design. the earliest coins struck, both in lydia and in the peloponnesus, were stamped on one side only.... footnotes: [ ] w. stanley jevons, _money and the mechanism of exchange_, d. appleton and company, new york, , pp. - , , . chapter iii qualities of the material of money [ ]many recent writers, such as huskisson, macculloch, james mill, garnier, chevalier, and walras, have satisfactorily described the qualities which should be possessed by the material of money. earlier writers seem, however, to have understood the subject almost as well.... of all writers, m. chevalier ... probably gives the most accurate and full account of the properties which money should possess, and i shall in many points follow his views. the prevailing defect in the treatment of the subject is the failure to observe that money requires different properties as regards different functions. to decide upon the best material for money is thus a problem of great complexity, because we must take into account at once the relative importance of the several functions of money, the degree in which money is employed for each function, and the importance of each of the physical qualities of the substance with respect to each function. in a simple state of industry money is chiefly required to pass about between buyers and sellers. it should, then, be conveniently portable, divisible into pieces of various size, so that any sum may readily be made up, and easily distinguishable by its appearance, or by the design impressed upon it. when money, however, comes to serve, as it will at some future time, almost exclusively as a measure and standard of value, the system of exchange, being one of perfected barter, such properties become a matter of comparative indifference, and stability of value, joined perhaps to portability, is the most important quality. before venturing, however, to discuss such complex questions, we must proceed to a preliminary discussion of the properties in question, which may thus perhaps be enumerated in the order of their importance: . utility and value. . portability. . indestructibility. . homogeneity. . divisibility. . stability of value. . cognisability. . utility and value since money has to be exchanged for valuable goods, it should itself possess value and it must therefore have utility as the basis of value. money, when once in full currency, is only received in order to be passed on, so that if all people could be induced to take worthless bits of material at a fixed rate of valuation, it might seem that money does not really require to have substantial value. something like this does frequently happen in the history of currencies, and apparently valueless shells, bits of leather, or scraps of paper are actually received in exchange for costly commodities. this strange phenomenon is, however, in most cases capable of easy explanation, and if we were acquainted with the history of every kind of money the like explanation would no doubt be possible in other cases. the essential point is that people should be induced to receive money, and pass it on freely at steady ratios of exchange for other objects; but there must always be some sufficient reason first inducing people to accept the money. the force of habit, convention, or legal enactment may do much to maintain money in circulation when once it is afloat, but it is doubtful whether the most powerful government could oblige its subjects to accept and circulate as money a worthless substance which they had no other motive for receiving. certainly, in the early stages of society, the use of money was not based on legal regulations, so that the utility of the substance for other purposes must have been the prior condition of its employment as money. thus the singular _peag_ currency, or _wampumpeag_, which was found in circulation among the north american indians by the early explorers, was esteemed for the purpose of adornment, as already mentioned.... the cowry shells, so widely used as a small currency in the east, are valued for ornamental purposes on the west coast of africa, and were in all probability employed as ornaments before they were employed as money. all the other articles [previously] mentioned ... such as oxen, corn, skins, tobacco, salt, cacao nuts, tea, olive oil, etc., which have performed the functions of money in one place or another, possessed independent utility and value. if there are any apparent exceptions at all to this rule, they would doubtless admit of explanation by fuller knowledge. we may, therefore, agree with storch when he says: "it is impossible that a substance which has no direct value should be introduced as money, however suitable it may be in other respects for this use." when once a substance is widely employed as money, it is conceivable that its utility will come to depend mainly upon the services which it thus confers upon the community. gold, for instance, is far more important as the material of money than in the production of plate, jewellery, watches, gold-leaf, etc. a substance originally used for many purposes may eventually serve only as money, and yet, by the demand for currency and the force of habit, may maintain its value. the cowry circulation of the indian coasts is probably a case in point. the importance of habit, personal or hereditary, is at least as great in monetary science as it is, according to mr. herbert spencer, in morals and sociological phenomena generally. there is, however, no reason to suppose that the value of gold and silver is at present due solely to their conventional use as money. these metals are endowed with such singularly useful properties that, if we could only get them in sufficient abundance, they would supplant all the other metals in the manufacture of household utensils, ornaments, fittings of all kinds, and an infinite multitude of small articles, which are now made of brass, copper, bronze, pewter, german silver, or other inferior metals and alloys. in order that money may perform some of its functions efficiently, especially those of a medium of exchange and a store of value, to be carried about, it is important that it should be made of a substance valued highly in all parts of the world, and, if possible, almost equally esteemed by all peoples. there is reason to think that gold and silver have been admired and valued by all tribes which have been lucky enough to procure them. the beautiful lustre of these metals must have drawn attention and excited admiration as much in the earliest as in the present times. . portability the material of money must not only be valuable, but the value must be so related to the weight and bulk of the material, that the money shall not be inconveniently heavy on the one hand, nor inconveniently minute on the other. there was a tradition in greece that lycurgus obliged the lacedæmonians to use iron money, in order that its weight might deter them from overmuch trading. however this may be, it is certain that iron money could not be used in cash payments at the present day, since a penny would weigh about a pound, and instead of a five-pound note, we should have to deliver a ton of iron. during the last century copper was actually used as the chief medium of exchange in sweden; and merchants had to take a wheelbarrow with them when they went to receive payments in copper _dalers_. many of the substances used as currency in former times must have been sadly wanting in portability. oxen and sheep, indeed, would transport themselves on their own legs; but corn, skins, oil, nuts, almonds, etc., though in several respects forming fair currency, would be intolerably bulky and troublesome to transfer. the portability of money is an important quality not merely because it enables the owner to carry small sums in the pocket without trouble, but because large sums can be transferred from place to place, or from continent to continent, at little cost. the result is to secure an approximate uniformity in the value of money in all parts of the world. a substance which is very heavy and bulky in proportion to value, like corn or coal, may be very scarce in one place and over-abundant in another; yet the supply and demand cannot be equalised without great expense in carriage. the cost of conveying gold or silver from london to paris, including insurance, is only about four-tenths of one per cent.; and between the most distant parts of the world it does not exceed from to per cent. substances may be too valuable as well as too cheap, so that for ordinary transactions it would be necessary to call in the aid of the microscope and the chemical balance. diamonds, apart from other objections, would be far too valuable for small transactions. the value of such stones is said to vary as the square of the weight, so that we cannot institute any exact comparison with metals of which the value is simply proportional to the weight. but taking a one-carat diamond (four grains) as worth £ , we find it is, weight for weight, times as valuable as gold. there are several rare metals, such as iridium and osmium, which would likewise be far too valuable to circulate. even gold and silver are too costly for small currency. a silver penny now weighs - / grains, and a gold penny would weigh only half a grain. the pretty octagonal quarter-dollar tokens circulated in california are the smallest gold coins i have seen, weighing less than four grains each, and are so thin that they can almost be blown away. . indestructibility if it is to be passed about in trade, and kept in reserve, money must not be subject to easy deterioration or loss. it must not evaporate like alcohol, nor putrefy like animal substances, nor decay like wood, nor rust like iron. destructible articles, such as eggs, dried codfish, cattle, or oil, have certainly been used as currency; but what is treated as money one day must soon afterwards be eaten up. thus a large stock of such perishable commodities cannot be kept on hand, and their value must be very variable. the several kinds of corn are less subject to this objection, since, when well dried at first, they suffer no appreciable deterioration for several years. . homogeneity all portions of specimens of the substance used as money should be homogeneous, that is, of the same quality, so that equal weights will have exactly the same value. in order that we may correctly count in terms of any unit, the units must be equal and similar, so that twice two will always make four. if we were to count in precious stones, it would seldom happen that four stones would be just twice as valuable as two stones. even the precious metals, as found in the native state, are not perfectly homogeneous, being mixed together in almost all proportions; but this produces little inconvenience, because the assayer readily determines the quantity of each pure metal present in any ingot. in the processes of refining and coining, the metals are afterwards reduced to almost exactly uniform degrees of fineness, so that equal weights are then of exactly equal value. . divisibility closely connected with the last property is that of divisibility. every material is, indeed, mechanically divisible, almost without limit. the hardest gems can be broken, and steel can be cut by harder steel. but the material of money should be not merely capable of division, but the aggregate value of the mass after division should be almost exactly the same as before division. if we cut up a skin or fur the pieces will, as a general rule, be far less valuable than the whole skin or fur, except for a special intended purpose; and the same is the case with timber, stone, and most other materials in which reunion is impossible. but portions of metal can be melted together again whenever it is desirable, and the cost of doing this, including the metal lost, is in the case of precious metals very inconsiderable, varying from / _d._ to / _d._ per ounce. thus, approximately speaking, the value of any piece of gold or silver is simply proportional to the weight of fine metal which it contains. . stability of value it is evidently desirable that the currency should not be subject to fluctuations of value. the ratios in which money exchanges for other commodities should be maintained as nearly as possible invariable on the average. this would be a matter of comparatively minor importance were money used only as a measure of values at any one moment, and as a medium of exchange. if all prices were altered in like proportion as soon as money varied in value, no one would lose or gain, except as regards the coin which he happened to have in his pocket, safe, or bank balance. but, practically speaking, as we have seen, people do employ money as a standard of value for long contracts, and they often maintain payments at the same variable rate, by custom or law, even when the real value of the payment is much altered. hence every change in the value of money does some injury to society. it might be plausibly said, indeed, that the debtor gains as much as the creditor loses, or vice versa, so that on the whole the community is as rich as before; but this is not really true. a mathematical analysis of the subject shows that to take any sum of money from one and give it to another will, on the average of cases, injure the loser more than it benefits the receiver. a person with an income of one hundred pounds a year would suffer more by losing ten pounds than he would gain by an addition of ten pounds, because the degree of utility of money to him is considerably higher at ninety pounds than it is at one hundred and ten. on the same principle, all gaming, betting, pure speculation, or other accidental modes of transferring property involve, on the average, a dead loss of utility. the whole incitement to industry and commerce and the accumulation of capital depends upon the expectation of enjoyment thence arising, and every variation of the currency tends in some degree to frustrate such expectation and to lessen the motives for exertion. . cognisability by this name we may denote the capability of a substance for being easily recognised and distinguished from all other substances. as a medium of exchange, money has to be continually handed about, and it will occasion great trouble if every person receiving currency has to scrutinize, weigh, and test it. if it requires any skill to discriminate good money from bad, poor ignorant people are sure to be imposed upon. hence the medium of exchange should have certain distinct marks which nobody can mistake. precious stones, even if in other respects good as money, could not be so used, because only a skilled lapidary can surely distinguish between true and imitation gems. under cognisability we may properly include what has been aptly called _impressibility_, namely, the capability of a substance to receive such an impression, seal, or design, as shall establish its character as current money of certain value. we might more simply say, that the material of money should be coinable, so that a portion, being once issued according to proper regulations with the impress of the state, may be known to all as good and legal currency, equal in weight, size, and value to all similarly marked currency.... footnotes: [ ] w. stanley jevons, _money and the mechanism of exchange_, pp. - . d. appleton & company, new york, . chapter iv legal tender[ ] the essential idea of "legal tender" is that quality given to money by law which obliges the creditor to receive it in full satisfaction of a past debt when expressed in general terms of the money of a country. a debt is a sum of money due by contract, express or implied. when our laws, for instance, declare that united states notes are legal tender--and this is the only complete designation of a legal-tender money--for "all debts public and private," it must be understood that this provision does not cover any operations not arising from contract. current buying and selling do not make a situation calling for legal tender; a purchaser cannot compel the delivery of goods over a counter by offering legal-tender money for them, because, as yet, no debt has been created.[ ] contracts made in general terms of the money units of the country must necessarily often be interpreted by the courts. the existence of contracts calling for a given sum of dollars and the necessity of adjudicating and enforcing such contracts, require that there should be an accurate legal interpretation of what a dollar is. as every one knows, the name, or unit of account, is affixed to a given number of grains of a specified fineness of a certain metal. this being the standard, and this having been chosen by the concurring habits of the business world, it is fit that the law should designate that, when only dollars are mentioned in a contract, it should be satisfied only by the payment of that which is the standard money of the community. since prices and contracts are expressed in terms of the standard article, it is clear that the legal-tender quality should not be equally affixed to different articles having different values, but called by the same name. this method would be sure to bring confusion, uncertainty, and injustice into trade and industry. no one who had made a contract would know in what he was to be paid. the legal-tender quality, then, should be confined to that which is the sole standard. and it is also obvious that when a standard is satisfactorily determined upon, and when various effective media of exchange, like bank notes, checks, or bills of exchange, have sprung up, the legal-tender quality should not be given to these instruments of convenience. they are themselves expressed in, and are resolvable into, the standard metal; so the power to satisfy debts should be given not to the shadow, but to the substance, not to the devices drawn in terms of the standard, but only to the standard itself, even though, as a matter of fact, nine-tenths of the debts and contracts are actually settled by means of these devices. so long as these instruments are convertible into, and thus made fully equal to, the standard in terms of which they are drawn, they will be used by the business community for the settlement of debts without being made a legal tender. and whenever they are worth less than the standard they certainly should not be made a legal tender, because of the injustice which in such a case they would work. having shown that the legal-tender quality is only a necessary legal complement of the choice of a standard, it will not be difficult to see that the state properly chooses an article fit to have the legal-tender attribute for exactly the reasons that governed the selection of the same article as a standard. the whole history of money shows that the standard article was the one which had utility to the community using it. as the evolution of the money commodity went on from cattle to silver and gold, so the legal-tender provisions naturally followed this course. a state may select a valueless commodity as a standard, but that will not make it of value to those who would already give nothing for it; and so, it may give the legal-tender quality to a thing which has become valueless, but that will not of itself insure the maintenance of its former value. this proposition may, at first, appear to be opposed to a widely-spread belief; but its soundness can be fully supported. it should be learned that a commodity, or a standard, holds its value for reasons quite independent of the fact that it is given legal recognition. it has happened that legal recognition has been given to it because it possessed qualities that gave it value to the commercial world, and not that it came to have these qualities and this value because it was made a legal tender. a good illustration of this truth is to be found in international trade. money which is not dependent on artificial influences for its value, and which is not redeemable in something else, is good the world over at its actual commercial value, not at its value as fixed by any legal-tender laws. it is not the legal-tender stamp that gives a coin its value in international payments. a sovereign, an eagle, a napoleon, is constantly given and received in international trade not because of the stamp it bears, but because of the number of grains of a given fineness of gold which it contains--the value of which is determined in the markets of the world. and an enormous trade among the great commercial countries goes on easily and effectively without regard to the legal-tender laws of the particular country whose coins are used. by imposing the attribute of legal tender, however, upon a given metal or money, it may be believed that thereby a new demand is created for that metal, and that its value is thus controlled. and in theory there is some basis for this belief. it is, of course, true that, in so far as giving to money a legal-tender power creates a new demand for it (which without that power would not have existed) an effect upon its value can be produced. but this effect is undoubtedly much less than is usually supposed. it must be remembered that the value of gold, for instance, is affected by world influences; that its value is determined by the demand of the whole world as compared with the whole existing supply in the world. in order to affect the value of gold in any one country, a demand created by a legal-tender enactment must be sufficient to affect the world-value of gold. evidently the effect will be only in the proportion that the new demand bears to the whole stock in the world. it is like the addition of a barrel of water to a pond; theoretically the surface level is raised, but not to any appreciable extent. it may now be permissible to examine into the extent to which a demand is created by legal-tender laws. if the article endowed with a legal-tender power is already used as the standard and as a medium of exchange, it is given no value which it did not have before. the customs and business habits of a country alone determine how much of the standard coin will be carried about and used in hand-to-hand purchases, and how much of the business will be performed by other media of exchange, such as checks or drafts. the decision of a country to adopt gold--when it had only paper before, as was the case in italy--would create a demand for gold to an extent determined by the monetary habits of that country; and this demand has an effect, as was said, only in the proportion of this amount to the total supply in the world. this operation arises from choosing gold as the standard of prices and as the medium of exchange. to give this standard a legal-tender power in addition does not increase the demand for it, because the stamp on the coin does not in any way alter the existing habits of the community as to the quantity of money it will use. but in case an equal power to pay debts is given to fixed quantities of two metals, while each quantity so fixed has a different metallic value but the same denomination in the coinage, gresham's law is set in operation with the result that the cheaper metal becomes the standard. after this change has been accomplished, the legal tender has no value-giving force. when the cheaper metal has become the standard, its legal-tender quality does not raise the value of the coin beyond the value of its content. this cheaper standard, in international trade, would be worth no more in the purchase of goods because it bore the stamp of any one country. prices must necessarily be adjusted between the relative values of goods and the standard with which they are compared. if the standard is cheaper, prices will be higher, irrespective of legal-tender acts. where two metals are concerned, then, the only effect of a legal-tender clause is an injurious one, in that the metal which is overvalued drives out that which is under-valued. the example of an inconvertible paper, such as our united states notes (greenbacks) in - , is still more conclusive. although a full legal tender for all debts public and private, their value steadily sank until they were at one time worth only cents in gold. in california, moreover, these notes, although legal-tender, were even kept out of circulation by public opinion. in short, the value of inconvertible paper can be but little affected by legal-tender powers. its value is more directly governed, as in the case of token coins, by the probabilities of redemption.[ ] as bearing on the point that the value of the paper was more influenced by the chances of redemption than by legal-tender laws, we may cite the sudden fluctuations in the value of our united states notes during the civil war. with no change in the legal-tender quality and no change in the indebtedness which might be paid with such notes, their value frequently rose or fell many per cent. in a single day owing to reports of federal successes or defeats in battle, which had a tendency to affect one way or the other the public estimate of the probabilities of an early resumption of specie payments. the fact that they were legal tender evidently had no effect whatever in maintaining their value. in view of the evident fact that legal-tender acts do not preserve the value of money, it is clear that the demand created by such legislation must be insignificant. and this must be so in principle as well as in fact. there is but one thing which the legal-tender quality enables money to do which it could not equally well do without being a legal tender; that is, to pay past debts. an examination, however, shows that this use of money is very small compared with its other uses. the amount of past debts coming due and which might be paid in any year, month or day is insignificant when compared with the total transactions of that year, month or day--so very small as to lose all measurable value-giving power. in other words, the one thing which legal-tender money can surely do in spite of the habits, wishes or prejudices of the business community in which it exists, namely, cancel past debt, is infinitesimally small when compared with those other things which man wishes money to do for him. it is for this reason that it ceases to give value, and this is why history has shown so many instances where money endowed with legal-tender power has become utterly valueless. the legal-tender money is no longer money if it will not secure for man the things which are most important for his welfare, if it will not buy food, clothes and shelter; for it performs none of the functions of money except the subsidiary one of cancelling past debts. moreover, the obligatory uses of legal-tender money are in fact very inconsiderable. a law requiring a past debt to be satisfied with money of a certain kind has for its essence only the payment of something of a definite value, or its equivalent; in practice, it does not even bring about the actual use of a legal money, since the monetary habits of the community will not necessarily require the debt to be paid in such money. take the extreme case of a judgment by a court against a defendant for fulfilment of a contract; in such an example, of all others, it would be supposed that legal money would be exacted. but even here, the judgment would most probably be satisfied by the attorney's check, or at most by a certified check. if such media of exchange are of common usage in the community they will be resorted to in practice even for legal-tender payments. the necessity of paying that which would be mutually satisfactory to payer and payee also makes clear why the existence of a legal-tender money does not necessarily cause its actual use in payments. the business habits of the community are stronger than legislative powers. business men will not as a rule take advantage of a legal-tender act to pay debts in a cheaper money, if they look forward to remaining in business. for, if, by taking advantage of legal devices they defraud the creditor, they cannot expect credit again from the same source; and since loans are a necessity of legitimate modern trade, such action would ruin their credit and cut them off from business activity in the future. gold was not driven out of circulation by paper money during the years - in california, because the sentiment of the business public was against the use of our depreciated greenback currency; and a discrimination was made against merchants who resorted to the use of paper. explanation has been given of the principles according to which legal-tender laws should be applied, if at all. it is not wholly clear that there is any reason for their existence. it may now be well to indicate briefly the origin of legal-tender provisions. it can scarcely be doubted that their use arose from the desire of defaulting monarchs to ease their indebtedness by forcing upon creditors a debased coinage. having possession of the mints, the right of coinage vesting in the lord, the rulers of previous centuries have covered the pages of history with the records of successive debasements of the money of account. the legal-tender enactment was the instrument by which the full payment of debts was evaded. there would have been no reason for debasing coins, if they could not be forced upon unwilling creditors. it is, therefore, strange indeed that, in imitation of monarchical morals of a past day, republican countries should have thought it a wise policy to clothe depreciated money with a nominal value for paying debts. although the people are now sovereign, they should not embrace the vices of mediæval sovereignty for their own dishonest gain in scaling debts. footnotes: [ ] _report of the monetary commission of the indianapolis convention_, pp. - . the hollenbeck press, indianapolis, . [ ] "a contract payable in money generally is, undoubtedly, payable in any kind of money made by law legal tender, at the option of the debtor at the time of payment. he contracts simply to pay so much money, and creates a debt pure and simple; and by paying what the law says is money his contract is performed. but, if he agrees to pay in gold coin, it is not an agreement to pay money simply, but to pay or deliver a specific kind of money and nothing else; and the payment in any other is not a fulfilment of the contract according to its terms or the intention of the parties." california , carpenter _vs._ atherton. [ ] for a contrary view, see joseph french johnson, _money and currency_, chapter .--editor. chapter v the greenbacks the greenback issues [ ]the greenbacks were an outgrowth of the civil war. soon after the opening of the struggle the secretary of the treasury negotiated a loan of $ , , with eastern banks. partly because of confederate successes and partly because of the failure of secretary chase to adopt a firm policy of loans supported by taxation, public credit greatly declined, and government bonds became almost unsaleable. the outlook became alarming and depositors withdrew gold from the new york banks in such large amounts that specie payments were suspended, december , . in february, , congress provided for the issue of $ , , in united states notes or greenbacks. bond sales proceeded slowly and a second issue of $ , , of notes was authorised in july of the same year. as a result of "military necessity" a third issue of $ , , was authorised january , , and temporarily increased march to $ , , . provision was made for the reissue of the greenbacks and $ , , were outstanding at the close of the war. the fluctuating premium on gold depreciation of the greenbacks occurred at once and the value of gold as expressed in greenbacks was subject to almost constant change. during the year the premium varied from to ; in from to ; and in from to . among the most important political and economic factors which caused these fluctuations may be mentioned: ( ) the increase in the amount of the greenbacks. each new issue was reflected in a rise in the premium. ( ) the condition of the treasury. the annual reports of the secretary of the treasury were anxiously awaited and their appearance caused a rise or fall of the premium according as the condition of the finances seemed gloomy or hopeful. ( ) ability of the government to borrow. the fate of a loan indicated public confidence or distrust. ( ) changes in the officials of the treasury department. secretary chase's resignation, july , , depressed the currency decidedly. ( ) war news. every victory raised the price of currency and every defeat depressed it. from to the premium on gold and the median of relative prices correspond so well that one cannot resist the conclusion that these changes were mainly due to a common cause, which can hardly be other than the varying esteem in which the notes of the government that constituted the standard money of the country were held. if this conclusion be accepted, it follows that the suspension of specie payments and the legal-tender acts must be held almost entirely responsible for all the far-reaching economic disturbances following from the price upheaval which it is our task now to trace in detail. the effects of greenbacks upon wages statistical evidence supports unequivocally the common theory that persons whose incomes are derived from wages suffer seriously from a depreciation of the currency. the confirmation seems particularly striking when the conditions other than monetary affecting the labour market are taken into consideration. american workingmen are intelligent and keenly alive to their interests. there are probably few districts where custom plays a smaller and competition a larger rôle in determining wages than in the northern states. while labor organisations had not yet attained their present power, manual laborers did not fail to avail themselves of the help of concerted action in the attempt to secure more pay. strikes were frequent. all these facts favored a speedy readjustment of money wages to correspond with changed prices. but more than all else, a very considerable part of the labor supply was withdrawn from the market into the army and navy. in and about one million of men seem to have been enrolled. about one-seventh of the labor supply withdrew from the market. but despite all these favoring circumstances, the men who stayed at home did not succeed in obtaining an advance in pay at all commensurate with the increase in living expenses. women on the whole succeeded less well than men in the struggle to readjust money wages to the increased cost of living. it is sometimes argued that the withdrawal of laborers from industrial life was the chief cause of the price disturbances of the war period. this withdrawal, it is said, caused the advance of wages, and greater cost of labor led to the rise of prices. the baselessness of this view is shown by two well established facts--first, that the advance of wages was later than the advance of prices, and second, that wages continued to rise in after the volunteer armies had been disbanded and the men gone back to work. wage-earners, however, seem to have been more fully employed during the war than in common times of prosperity. of course, the enlistment of so many thousands of the most efficient workers made places for many who might otherwise have found it difficult to secure work. moreover, the paper currency itself tended to obtain full employment for the laborer, for the very reason that it diminished his real income. in the distribution of what marshall has termed the "national dividend" a diminution of the proportion received by the laborer must have been accompanied by an increase in the share of some one else. nor is it difficult to determine who this person was. the beneficiary was the active employer, who found that the money wages, interest, and rent he had to pay increased less rapidly than the money prices of his products. the difference between the increase of receipts and the increase of expenses swelled his profits. of course, the possibility of making high profits provided an incentive for employing as many hands as possible. after an examination of the change in the condition of the great mass of wage-earners, it may seem surprising that few complaints were heard from them of unusual privations. this silence may be due in part to the fact that a considerable increase of money income produces in the minds of many a fatuous feeling of prosperity, even though it be more than offset by an increase of prices. but doubtless the chief reason is to be found in the absorption of public interest in the events of the war. the people both of the south and north were so vitally concerned with the struggle that they bore without murmuring the hardships it entailed of whatever kind. government taxation that under other circumstances might have been felt to be intolerable was submitted to with cheerfulness. the paper currency imposed upon wage-earners a heavier tax--amounting to confiscation of perhaps a fifth or a sixth of real incomes. but the workingmen of the north were receiving considerably more than a bare subsistence minimum before the war, and reduction of consumption was possible without producing serious want. accordingly the currency tax, like the tariff and the internal revenue duties, was accepted as a necessary sacrifice to the common cause and paid without protest by severe retrenchment. rent urban rents in studying the influence of depreciation upon rent, it is necessary to use that term in its popular rather than in its scientific sense. this fact is less to be lamented, because the theorist himself admits that the distinction becomes sadly blurred when he attempts to deal with short intervals of time. capital once invested in improvements can seldom be withdrawn rapidly. in "the short run," therefore, it is practically a part of the land, and the return to it follows the analogy of rent rather than of interest. the renting landlord found that the degree in which he was affected by the fluctuations in the value of the paper money depended largely upon the terms of the contract into which he had entered. it is clear from a careful examination that the landlord who before suspension had leased his property for a considerable period without opportunity for revaluation must have suffered severely if paid in greenbacks. the number of "dollars" received as rental might be the same in as in , but their purchasing power was less than one-half as great. somewhat less hard was the situation of the landlord who had let his property for but one or two years. at the expiration of the leases he had opportunities to make new contracts with the tenants. in his capacity as special commissioner of the revenue, mr. david a. wells devoted some attention to the rise of rent. his report for december, , says: the average advance in the rents of houses occupied by mechanics and laborers in the great manufacturing centres of the country is estimated to have been about per cent.; in some sections, however, a much greater advance has been experienced, as for example, at pittsburgh, where per cent. and upward is reported. in many of the rural districts, on the other hand, the advance has been much less. mr. wells later modified this estimate somewhat. the advance in rents was greater in cities than in minor towns. in some cities--_e. g._, cincinnati and louisville--owners of workingmen's tenements appear to have been able to increase their money incomes rather more rapidly than prices advanced, but in boston, philadelphia, st. louis, and in smaller towns, their money incomes appear to have increased more slowly than living expenses. these conclusions rest, however, on a narrow statistical basis. farm rents the rural landowner suffered serious injury from the paper currency when he let his land for a money rent. but renting farms for a fixed sum of money has always been less common in the united states than renting for a definite share of the products. it is probable that at the time of the civil war more than three-quarters of the rented farms were let "on shares." inasmuch as no money payments entered into such arrangements, the pecuniary relations of landlord and tenant were not directly affected by the change in the monetary standard. farm owners who had let their places on these conditions escaped the direct losses that weighed so heavily on the recipients of money rents. but even they did not avoid all loss. for the price of agricultural products for the greater part of the war period lagged considerably behind the price of other goods. this difference, of course, meant loss to men whose incomes were paid in bushels of grain. interest and loan capital the problem of lenders and borrowers of capital the task of ascertaining the effect of the greenback issues upon the situation of lenders and borrowers of capital is in one respect more simple and in another respect more complex than the task of dealing with wage-earners. it is simpler in that there are not different grades of capital to be considered like the different grades of labor. but it is more complex in that the capitalist must be considered not only as the recipient of a money income, as is the laborer, but also as the possessor of certain property that may be affected by changes in the standard money. the problem is further complicated by the fact that the relative importance of these two items--rate of interest and value of principal--is not the same in all cases. whether a lender is affected more by the one item or the other depends upon what he intends to do with his property at the expiration of existing contracts. a widow left in with an estate of say $ , , who expected to keep this sum constantly at interest and to find new borrowers as soon as the old loans were paid, could neglect everything but the net rate of interest received. on the other hand, if this estate had been left to a youth of twenty who intended to invest his property in some business after a few years, the rate of interest would be of relatively less importance to him than the purchasing power of the principal when the time came to set up for himself. of course, the same difference exists in the case of different borrowers. those borrowers who expected to renew old loans on maturity would have to consider little beyond the interest demanded by lenders, while borrowers who expected to pay off the loans out of the proceeds of their ventures would be interested primarily in the amount of goods that would sell for sufficient money to make up the principal. although these two classes of cases are by no means independent of each other, the following discussion will be rendered clearer by observing the broad difference between them. accordingly, attention will first be directed to the effect of the price fluctuations upon the purchasing power of the principal of loans, and afterward to changes in the rate of interest. purchasing power of the principal of loans most persons who made loans in the earlier part of the civil war and were repaid in greenbacks must have suffered heavy losses from the smaller purchasing power of the principal when it was returned to them. but while this general fact is clear, it is difficult to make a quantitative statement of the degree of the loss that will be even tolerably satisfactory. in the case of almost all loans made before the middle of and repaid prior to , the creditor found that the sum returned to him had a purchasing power much less than the purchasing power that had been transferred to the borrower when the loan was made. this decline varied from to more than per cent. on loans made in the middle of or later, on the contrary, the creditor gained as a rule. in the case of loans made in january, , and repaid six months later, the increase in purchasing power was over per cent. the rate of interest in turning to study the fortunes of men who have no thought of employing their capital for themselves, but expect to seek new borrowers as rapidly as old loans are repaid, one finds it necessary to distinguish between cases where loans have been made for short and for long terms; between the cases, that is, where there is and where there is not an opportunity to make a new contract regarding the rate of interest. the latter cases may be dismissed with a word. the capitalist who lent $ , for five years in april, , at per cent. interest, would be in relatively the same position as the workingman who received no advance in money wages; while his money income remained the same, the rise of prices would decrease his real income in and by about one-half. of course, this loss to the creditor is a gain to the debtor; for to the business man using borrowed capital the advance of prices means that he can raise his interest money by selling a smaller proportion of his output. more interesting is the case of loans maturing and made afresh during the period under examination. the important question is: how far did the lender secure compensation for the diminished purchasing power of the money in which he was paid by contracting for a higher rate of interest? the advance in the rate of interest was comparatively small--much too small to compensate for the increased cost of living. while prices rose approximately per cent. and money wages somewhat less than per cent. during the years - , rates of interest on call and time loans increased less than per cent. during the same period. the conclusion is not only that persons who derived their income from capital lent at interest for short terms were injured by the issues of the greenbacks, but also that their injuries were more serious than those suffered by wage-earners. to explain this state of affairs is not easy. the first reason that suggests itself to the mind considering the problem is that both lenders and borrowers failed to foresee the changes that would take place in the purchasing power of money between the dates when loans were made and repaid. no doubt there is much force in this explanation. if, for instance, men arranging for loans in april, , to be repaid a year later, had known that in the meantime the purchasing power of money would decline per cent., they would have agreed upon a very high rate of interest. men able to discern the future course of prices would not have lent money at the ordinary rates, and if the rates prevailing in the new york market throughout all and were less than per cent., it must have been because the extraordinary rise of prices was not foreseen by borrowers and lenders. nor is it surprising that business men failed to see what was coming; for the course of prices depended chiefly upon the valuation set upon the greenbacks, and this valuation, in turn, depended chiefly upon the state of the finances and the fortunes of war--matters that no one could foresee with certainty. indeed, there was much of the time a very general disposition to take an unwarrantedly optimistic view of the military situation and the chances of an early peace. many members of the business community seem to have felt that the premium on gold was artificial and must soon drop, that prices were inflated and must collapse. to the extent that such views prevailed borrowers would be cautious about making engagements to repay money in a future that might well present a lower range of prices, and lenders would expect a gain instead of a loss from the changes in the purchasing power of money. but the full explanation of the slight advance in interest cannot be found in this inability to foresee the future--at least not without further analysis of what consequences such inability entailed. workingmen are commonly credited with less foresight than capitalists, and nevertheless they seem, according to the figures, to have succeeded better in making bargains with employers of labour than did lenders with employers of capital. the explanation of this less success seems to be found in the difference between the way in which depreciation affected what the capitalist and the laborer had to offer in return for interest and wages. there is no reason for assuming that an artisan who changed employers during the war would render less efficient service in his new than in his old position, or that a landlord who changed tenants had less advantages to put at the disposal of the incoming lessee. in both these cases the good offered to the active business man remained substantially the same, and it may safely be assumed that, other things being equal, this business man could afford to give quite as much for the labor and the land after as before suspension. from the business man's point of view, therefore, there seems to have been room for a doubling of money wages and rent when the purchasing power of money had fallen one-half. but in the case of the borrower of capital the like was not true. the thousand dollars which mr. a offered him in was not, like the labour of john smith or the farm of mr. b, as efficient for his purposes as it would have been five years before. for, with the thousand dollars he could not purchase anything like the same amount of machinery, material, or labor. and since the same nominal amount of capital was of less efficiency in the hands of the borrower, he could not without loss to himself increase the interest which he paid for new loans in proportion to the decline in the purchasing power of money, as he could increase the wages of laborers or the rent for land. it should also be pointed out that on one important class of loans capitalists suffered comparatively little even during the war. interest on many forms of government bonds was paid in gold. capitalists who invested their means in these securities consequently received an income of almost unvarying specie value. if the person who made these investments were an american, he would be able to sell his gold-interest money at a high premium, but he would also have to pay correspondingly high prices for commodities, so that upon the whole his position would not be greatly different from that of the foreign investor. that such opportunities for investment as these securities offered should exist when men were most of the time loaning money for short terms at per cent. or less, is perhaps the most emphatic proof that could be offered of the inability of the public to foresee what the future had in store. profits laborers, landlords, and lending capitalists are all alike in that the amount of remuneration received by them for the aid which they render to production is commonly fixed in advance by agreement, and is not immediately affected by the profitableness or unprofitableness of the undertaking. it remains to examine the economic fortunes of those men whose money incomes are made up by the sums left over in any business after all the stipulated expenses have been met. a very important part of the solution of the problem of profits has already been contributed by the preceding studies of wages, rent, and interest. the evidence has been found to support the conclusion that in almost all cases the sums of money wages, rent, and interest received by laborers, landlords, and capitalists increased much less rapidly than did the general price level. if the wording of this conclusion be reversed--the prices of products rose more rapidly than wages, rent, or interest--we come at once to the proposition that as a rule profits must have increased more rapidly than prices. for, if the sums paid to all the other co-operating parties were increased in just the same ratio as the prices of the articles sold, it would follow that, other things remaining the same, money profits also would increase in the same ratio. but if, while prices doubled, the payments to labourers, landlords, and capitalists increased in any ratio less than per cent., the sums of money left for the residual claimants must have more than doubled. in other words, the effect of the depreciation of the paper currency upon the distribution of wealth may be summed up in the proposition: the shares of wage-earners, landowners, and lenders in the national dividend were diminished and the share of residual claimants was increased. two other general propositions respecting profits are suggested. first, other things being equal, profits varied inversely as the average wage per day paid to employees. this conclusion follows directly from the fact that the money wages of men earning $ -$ . per day before the perturbation of prices increased in higher ratio than those of men earning $ . -$ . ; that the wages of the latter class increased more than the wages of men in the next higher wage class, etc. second, other things being equal, profits varied directly as the complexity of the business organization. by this proposition is meant, for example, that a farmer who paid money rent, used borrowed capital, and employed hired labourers, made a higher percentage of profits than a farmer of whom any one of these suppositions did not hold true. if, as has been argued, the increase of profits was made at the expense of laborers, landlords, and capitalists, it follows that that _entrepreneur_ fared best whose contracts enabled him to exploit the largest number of these other persons. profits in agriculture the farmers of the loyal states were among the unfortunate producers whose products rose in price less than the majority of other articles, and from this standpoint they were losers rather than gainers by the paper currency. of course, it is possible that the farmer's loss from this inequality of price fluctuations might be more than offset by his gains at the expense of labourers, landlord, and lending capitalist. but there is good reason for believing that the increase of the _entrepreneur's_ profits in the latter fashion was less in farming than in any other important industry. this conclusion seems to follow from the proposition that, other things being equal, profits varied directly as the complexity of business organization. the american farmers of the civil war were in a large proportion of cases their own landlords, capitalists, and laborers. so far as this was true, they had few important pecuniary contracts with other persons of which they could take advantage by paying in depreciated dollars. of those farmers who hired labor very many paid wages partly in board and lodging--an arrangement which threw a considerable part of the increased cost of living upon them instead of upon their employees. finally, the renting farmer probably gained less on the average from the contract with his landlord than tenants of any other class, because in a majority of cases the rent was not a sum of money, but a share of the produce. while, then, the general effect of the paper standard was in the direction of increasing profits, it seems very doubtful whether farmers as a whole did not lose more than they gained because of the price disturbances. statistical evidence regarding profits it would be highly desirable to test our general conclusions by means of direct information regarding profits made in various branches of trade, but the data available for such a purpose are very meager. what scraps of information are available, however, support the view that profits were uncommonly large. mr. david a. wells, for example, in his reports as special commissioner of the revenue, has stories of "most anomalous and extraordinary" profits that were realized in the paper, woolen, pig-iron, and salt industries. a more general indication of the profitableness of business is afforded by the remark in the annual circular of dun's mercantile agency for , that "it is generally conceded that the average profits on trade range from to per cent." but the most important piece of evidence is found in the statistics of failures compiled by the same agency. the following table shows dun's report of the number of bankruptcies and the amount of liabilities in the loyal states from the panic year to the end of the war: _year_ _number_ _liabilities_ , $ , , , , , , , , , , , , $ , , , , , , , , , , , the very great decrease both in the number and the liabilities of firms that failed is the best proof that almost all business enterprises were "making money." from one point of view the small number of failures is surprising. an unstable currency is generally held to make business unsafe, and seldom has the standard money of a mercantile community proven so unstable, undergone such violent fluctuations in so short a time, as in the united states during the civil war. yet, instead of being extremely hazardous, business seems from the statistics of failures to have been more than usually safe. the explanation of the anomaly seems to be that the very extremity of the danger proved a safeguard. business men realized that the inflation of prices was due to the depreciation of the currency, and that when the war was over gold would fall and prices follow. they realized very clearly the necessity of taking precautions against being caught in a position where a sudden decline of prices would ruin them. they did this by curtailing credits. so long as prices continued to rise such precautions were really not needed by the man in active business except, in so far as he was a creditor of other men; but when prices commenced to fall prudence had its reward. such a sudden and violent drop of prices as occurred between january and july, , would have brought a financial revulsion of a most serious character upon a business community under ordinary circumstances. but so well had the change been prepared for, that the number of failures was actually less than it had been in the preceding year of rapidly rising prices. the whole situation can hardly be explained better than it was by a new york business man writing in _harper's monthly magazine_: "when the war ended," he said, "we all knew we should have a panic. some of us, like mr. hoar, expected that greenbacks and volunteers would be disbanded together. others expected gold to fall to or in a few days. others saw a collapse of manufacturing industry, owing to the cessation of government purchases. but we all knew a 'crisis' was coming, and having set our houses in order accordingly, the 'crisis' of course never came." the production and consumption of wealth production what influence did the greenback currency have as one of the many factors that affected the production of wealth? in the first place, the paper standard was responsible in large measure for the feeling of "prosperity" that seems from all the evidence to have characterized the public's frame of mind. almost every owner of property found that the price of his possessions had increased, and almost every wage-earner found that his pay was advanced. strive as people may to emancipate themselves from the feeling that a dollar represents a fixed quantity of desirable things, it is very difficult for them to resist a pleasurable sensation when the money value of their property rises or their incomes increase. they are almost certain to feel cheerful over the larger sums that they can spend, even though the amount of commodities the larger sums will buy is decreased. habit is too strong for arithmetic. but, more than this, "business" in the common meaning of the word was unusually profitable during the war. the "residual claimant" is in most enterprises the active business man, and, as has been shown, his money income did as a rule rise more rapidly than the cost of living. in other words, "business" was, in reality as well as in appearance, rendered more profitable by the greenbacks. there is therefore no error in saying that the business of the country enjoyed unwonted prosperity during the war. and it may be added that the active business man is probably a more potent factor in determining the community's feeling about "good times" and "bad times" than is the workingman, the landlord, or the lending capitalist. the effect of high profits, however, is not limited to producing a cheerful frame of mind among business men. under ordinary circumstances one would say that when the great majority of men already in business are "making money" with more than usual rapidity they will be inclined to enlarge their operations, that others will be inclined to enter the field, and that thus the production of wealth will be stimulated. but the circumstances of the war period were not ordinary and this conclusion cannot be accepted without serious modifications. . it has been shown that business men realised the precariousness of all operations that depended for their success upon the future course of prices--and nearly all operations that involved any considerable time for their consummation were thus dependent. so far did this disposition prevail that it produced a marked curtailment in the use of credit. the prudent man might be willing to push his business as far as possible with the means at his own disposal, but he showed a disinclination to borrow for the purpose. thus the uncertainty which all men felt about the future in a large measure counteracted the influence of high profits in increasing production. . the foregoing consideration of course weighed most heavily in the minds of cautious men. but not all business men are cautious. among many the chance of winning large profits in case of success is sufficient to induce them to undertake heavy risks of loss. on the whole, americans seem to display a decided propensity toward speculative ventures and are not easily deterred by having to take chances. to men of this type it seems that the business opportunities offered by the fluctuating currency would make a strong appeal. but, while the force of this observation may be admitted, it does not necessitate a reconsideration of the conclusion that the instability of prices tended to diminish the production of wealth. for in a time of great price fluctuations the possibilities of making fortunes rapidly are much greater in trade than in agriculture, mining, or manufactures. every rise and fall in quotations holds out an alluring promise of quick gain to the man who believes in his shrewdness and good fortune, and who does not hesitate to take chances. the probable profits of productive industry in the narrower sense might be larger than common, but this would not attract investors in large numbers if the probable profits of trading were larger yet; and such seems clearly to have been the case during the war when the paper currency offered such brilliant possibilities to fortunate speculators in gold, in stocks, or in commodities. instead, then, of the greenbacks being credited with stimulating the production of wealth, they must be charged with offering inducements to abandon agriculture and manufactures for the more speculative forms of trade. this tendency of the times did not escape observation. on the contrary, it was often remarked and lamented in terms that seem exaggerated. hugh mcculloch, for instance, in his report as secretary of the treasury for , said: there are no indications of real and permanent prosperity ... in the splendid fortunes reported to be made by skilful manipulations at the gold room or the stock board; no evidences of increasing wealth in the facts that railroads and steamboats are crowded with passengers, and hotels with guests; that cities are full to overflowing, and rents and the necessities of life, as well as luxuries, are daily advancing. all these things prove rather ... that the number of non-producers is increasing, and that productive industry is being diminished. in one of his reports as special commissioner of the revenue, mr. wells said: during the last few years large numbers of our population, under the influence and example of high profits realized in trading during the period of monetary expansion, have abandoned employments directly productive of national wealth, and sought employments connected with commerce, trading, or speculation. as a consequence we everywhere find large additions to the population of our commercial cities, an increase in the number and cost of the buildings devoted to banking, brokerage, insurance, commission business, and agencies of all kinds, the spirit of trading and speculating pervading the whole community, as distinguished from the spirit of production. within the period under review, then, it seems very doubtful whether the high profits had their usual effect of leading to a larger production of raw materials or to an increase in manufactures. the prudent man hesitated to expand his undertakings because of the instability of the inflated level of prices; the man with a turn for speculative ventures found more alluring opportunities in trade. consumption no one can read contemporary comments on american social life of the later years of the war without being impressed by the charges of extravagance made against the people of the north. newspapers and pulpits were at one in denouncing the sinful waste that, they declared, was increasing at a most alarming rate. the "shoddy aristocracy" with its ostentatious display of wealth became a stock subject for cartoonists at home, and earned a well-merited reputation for vulgarity abroad. in trying to account for this unpleasant phase of social development, men usually laid the blame upon the paper standard. high prices were said to make every one feel suddenly richer and so to tempt every one to adopt a more lavish style of living than his former wont. thus the view gained general credence that the greenbacks were ultimately responsible for a great increase in the consumption of wealth. however, such a view regarding the consumption of wealth can be but partially true. the enormous profits of _entrepreneurs_ made possible the rapid accumulation of an unusual number of fortunes, and the families thus lifted into sudden affluence enjoyed spending their money in the ostentatious fashion characteristic of the newly rich. it is therefore true that the monetary situation was largely responsible for the appearance of a considerable class of persons--of whom the fortunate speculator and the army contractor are typical--who plunged into the recklessly extravagant habits that called down upon their heads the condemnation of the popular moralist. but if the greenbacks were in the last resort a chief cause of the increased consumption of articles of luxury by families whom they had aided in enriching, they were not less truly a cause of restricted consumption by a much larger class of humbler folk. the laboring man whose money wages increased but one-half, while the cost of living doubled, could not continue to provide for his family's wants so fully as before. he was forced to practise economies--to wear his old clothing longer, to use less coffee and less sugar, to substitute cheaper for better qualities in every line of expenditure where possible. similar retrenchment of living expenses must have been practised by the families of many owners of land and lenders of capital. in other words, the war time fortunes resulted in a very large measure from the mere transfer of wealth from a wide circle of persons to the relatively small number of residual claimants to the proceeds of business enterprises. the enlarged consumption of wealth which the paper currency made possible for the fortunate few was therefore contrasted with a diminished consumption on the part of the unfortunate many on whose slender means the greenbacks levied contributions for the benefit of their employers. that the diminished consumption of wealth by large numbers of poor people escaped general notice, while the extravagance of the newly rich attracted so much attention, need not shake one's confidence in the validity of these conclusions. the purchase of a fast trotting-horse by a government contractor, and the elaborateness of his wife's gowns and jewelry, are much more conspicuous facts than the petty economies practised by his employees. the same trait that leads fortunate people to flaunt their material prosperity in the eyes of the world leads the unfortunate to conceal their small privations. even an attentive observer may fail to notice that the wives of workingmen are still wearing their last year's dresses and that the children are running barefoot longer than usual. but though the newspapers were not full of comments on the enforced economies of the mass of the population, wholesale dealers in staple articles of food and clothing noticed a decrease in sales. in reviewing the trade situation in september, . when real wages were near their lowest ebb, hunt's _merchants' magazine_ remarked that "the rise in the prices of commodities has ... outrun the power of consumption and the fall trade has been almost at a stand. those articles such as coffee, sugar, low grade goods, which form the staple products of the great mass of the people in moderate circumstances, have reached such high rates that the decline in consumption is very marked, amounting almost to a stagnation of the fall trade." the consumption of many articles of luxury increased very greatly, while the consumption of many staple articles declined. the greenbacks and the cost of the civil war the reader who goes back to the debates upon the legal-tender bills will find that most of the unfortunate consequences that followed their enactment were foretold in congress--the decline of real wages, the injury done creditors, the uncertainty of prices that hampered legitimate business and fostered speculation. but a majority of this congress were ready to subject the community to such ills because they believed that the relief of the treasury from its embarrassments was of more importance than the maintenance of a relatively stable monetary standard. greenbacks and expenditures what effect had the greenbacks upon the amount of expenditures incurred? few questions raised by the legal-tender acts have attracted more attention than this. even while the first legal-tender bill was being considered its critics declared that if made a law it would increase the cost of waging the war by causing an advance in the prices of articles that the government had to buy. as the war went on the soundness of this view became apparent. when the war was over and the divers reasons that had deterred many men from criticizing the financial policy of the government were removed, competent writers began to express similar views with freedom. for example, mr. c. p. williams put the increase of debt at one-third to two-fifths; s. t. spear, at a billion dollars; l. h. courtney, an english critic, at nearly $ , , . of later discussions that of h. c. adams has attracted the most attention. he estimated that of the gross receipts from debts created between january , , and september , , amounting to $ , , , the gold value was but $ , , , --a difference of $ , , between value received and obligations incurred. a detailed consideration of the elements that enter the problem would seem to warrant a reduction of the estimates given to $ , , . it is hardly necessary to insist strenuously that this is but a very rough estimate. the greenbacks and receipts the total increase of receipts was approximately $ , , , as shown in the following table: (in millions of dollars) _ _ _fiscal year_ _ _ _(six months) (two months)_ current receipts: from customs . . . . . from sales of public lands . . . . . from direct tax . . . . . from miscellaneous sources . . . . . from internal revenue ... . . . . ---- ----- ----- ----- ----- . . . . . estimated actual increase the caution is hardly necessary that the above results are to be accepted subject also to a wide margin of error. there were other financial consequences of the shift from the specie to the paper standard, however, that were not unimportant, though they were indirect and difficult to gauge. two of the most prominent must be indicated. . it is probable that not a little of the lavishness with which public funds were appropriated by congress during the war can be traced to the paper-money policy. . if the paper currency tempted the government to reckless expenditures, it also predisposed the people to submit more willingly to heavy taxation. it has been remarked several times that the advance of money wages and of money prices made most people feel wealthier, and, feeling wealthier, they were less inclined to grumble over the taxes. while these indirect effects of the paper currency on expenditures and receipts could not by any system of bookkeeping be brought to definite quantitative statement, it is probable that their net result was unfavorable to the treasury. contraction and inflation of the legal tenders[ ] the policy of a permanent currency of government legal-tender paper at the close of the civil war was unknown. upwards of four hundred million notes of the united states were, it is true, in circulation at the return of peace. there were doubtless many individuals who approved the continuance of exactly this form of currency. but no such proposition had been advanced by any public man of influence or by any political organization. that the resort to legal-tender powers was an evil justified only by extreme emergency, and that the circulation of government notes in any form was a purely temporary measure, were the unanimous convictions of the statesmen who contrived the system. the logical inference that these government notes would be paid off and cancelled, as soon as the war deficiency had ended, was publicly accepted. such was the theory and purpose of the public men through whom the legal-tender act was constructed and applied. nor is the general position of our statesmen, at the close of the civil war, any more obscure than their original position. the first financial resolution adopted by congress, in december, , was an explicit promise to retire the legal tenders. the first legislation of that congress gave discretionary powers to the secretary of the treasury for continuous contraction. very few legislative victories are won without at least a temporary popular endorsement, and the votes of december, , and of march, , were no exceptions. but the popular approval of contraction in that year, exception as it was to all our subsequent legislation, is readily enough explained. public opinion, when the war ended, was governed by impatience with inflated prices; inflation far beyond the european level, and properly ascribed to the condition of the currency. the cost of living reached during the highest point recorded in this country's history. from to , inclusive, the average of european prices rose only to per cent.; average prices in the united states advanced, in the same period, no less than per cent. with flour at $ a barrel, butter at cents a pound, coal at $ a ton, and wages and salaries advanced since hardly one-third as far as prices, the demand for currency reform obtained ready endorsement from the people. this popular sentiment was further strengthened by the administration's attitude at the opening of lincoln's second term. mr. mcculloch's first official treasury report, dated december , , took positive ground for the reduction of the legal-tender debt. he asked authority to issue bonds in his discretion, at per cent. or less, "for the purpose of retiring not only the compound interest notes, but the united states notes." two weeks after the publication of this report, on december , , the house of representatives resolved, by a vote of to , that this house cordially concurs in the view of the secretary of the treasury in relation to the necessity of a contraction of the currency, with a view to as early a resumption of specie payments as the business interests of this country will permit; and we hereby pledge co-operative action to this end as speedily as practicable. this resolution of , however, marked the climax of the movement. never thereafter did the policy of retiring the legal-tender notes even approach success. the truth is, that the inflated prices had begun already, during the three months after the resolution of december, to recede. this was inevitable, from the very nature of the previous expansion; and it was a welcome movement to consumers. but it necessarily caused some derangement in the plans of trade, and politicians began to ask, when they had to face the fulfilment of their pledge through a formal act of congress, how the contraction policy would be greeted by producers. the bill, as originally introduced, granted full powers to the secretary of the treasury to issue new bonds for the retirement both of interest-bearing and of noninterest-bearing debt. in the spring of this measure was defeated in the house of representatives by a vote of to . reconsidered and amended so as to restrict contraction of the legal tenders to $ , , in the first six months and to $ , , per month thereafter, the compromise measure did indeed pass the house by to , and the senate by to . but a victory thus won was ominous. mr. mcculloch himself declared the amended act to be awkward and ineffective. still more significant was the character of opposition developed in the course of the debate. it had a dozen varying grounds of argument, most of them pretty certain to appeal to popular prejudice later on. some congressmen objected to the discretionary powers as revolutionary, and, while conceding mr. mcculloch's ability and conservatism, pointed out that a very different treasury secretary might succeed him. others pronounced the notion of immediate resumption of specie payments to be "utopian in the extreme." much was heard of the comfortable theory that if congress would "allow things to go on without active interference," the "natural development of events" would automatically bring about resumption. more than one legislator could not understand, "when we have $ , , [debt] bearing no interest, and which need bear no interest, why it is to be taken up and put into bonds." the excellence of a circulating medium "that rests on the property of the whole country, and has for its security the faith and patriotism of the greatest and freest country on the face of the globe," played its usual part in the discussion; so did the argument that "the amount of legal tenders now outstanding is not too much for the present condition of the country." in short, all the arguments which have been made familiar by the twenty subsequent years of controversy, cut a figure in this opening discussion. as a matter of fact, even the restricted powers of note retirement granted under the law of march, , were revoked within two years. little or no progress had meantime been made towards resumption of specie payments. the secretary himself had officially pointed out that two commercial influences must be removed before resumption would be possible; the excessively high prices in the united states and the heavy balance of foreign trade against us. but prices continued above the european level, and, as a consequence, export of merchandise was checked and imports greatly stimulated. the entire gold product of each year in the united states was sent abroad. contraction of the inflated currency, even if pursued under the limitations of the act of , would in time have brought about conditions under which resumption might have been planned. but events outside of the united states now moved in such a way as to turn the entire financial community against the secretary's policy. hardly two months after the vote of march came a wholly unexpected crisis in the foreign money markets. the london collapse, precipitated by the overend-gurney failure of may, , was in some respects as complete as any in the history of england. it affected every nation with which great britain had commercial dealings; not least of all the united states, of whose securities it was estimated that european investors even then held $ , , . during three months the bank of england kept its minimum discount rate at the panic figure of per cent.; the consequent sudden recall of foreign capital put a heavy strain on the american markets. with the familiar disposition of the trade community to lay the blame for disordered markets on some move of public policy, the treasury's operations to reduce outstanding notes were made the scapegoat. politicians with an eye to popularity were quick to catch this drift of public sentiment. some of them honestly believed that mcculloch's action in the currency was the cause of the trade distress; others, better informed but equally politic, avoided personal declaration of opinion, but characteristically announced that whether the theory was correct or not, the public believed it, and that in deference to the public, currency contraction ought to cease. the usual result ensued. under the previous question, and without debate, a measure revoking absolutely the secretary's power of contraction passed the house of representatives in december, , by a vote of to . in the senate there was an able show of opposition, but it was plainly put on the defensive, and on january , , the resolution passed both chambers in its original and final shape. this was the end of the mcculloch plan. it was the end of all serious debate upon resumption, for at least six years. it was also, and very logically, the beginning of the fiat-money party. the republicans were forced into open defence of sound financial principles by the very recklessness of their opponents. helped by the great personal prestige of its candidate, general grant, the republican party won a sweeping victory. president johnson, who was then at open odds with his party, had produced in his annual message of december , , the extraordinary suggestion that "the per cent. interest now paid by the government" on its debt "should be applied to the reduction of the principal in semi-annual instalments"; in other words, that the plan of repudiating interest obligations--since adopted, with no agreeable results, by turkey and greece--should be formally approved by the united states. this remarkable utterance was first condemned by an overwhelming vote in both house and senate; next, by an almost equally decisive vote, on march , , congress adopted the public credit act, promising coin redemption of both notes and bonds, solemnly pledging its faith "to make provision, at the earliest practicable period, for the redemption of the united states notes in coin." the promise was as easily made as the similar pledge of december, ; was still more easily broken. no such arrangement was made, nor any serious attempt in that direction, until the matter was forced on the party by the exigency of politics. not only was no effort made to reduce outstanding legal tenders, but the supply in circulation was heavily increased; rising from $ , , in the middle of to $ , , in , and two years later, as a result of the treasury's weak experiments in the panic, to $ , , . this period was congenial to such juggling with public credit and legislative pledges. socially, financially, and politically, it stands out quite apart from any other decade of the century. moral sense for a time seemed to have deteriorated in the whole community; it was a sorry audience, at washington or elsewhere, to which to address appeals for economy, retrenchment, and rigid preservation of the public faith. the government's financial recklessness was readily imitated by the community at large; debt was the order of the day in the affairs of both. as the period approached its culmination, foreign trade reflected the nature of the situation. merchandise imports in the fiscal year rose $ , , over ; in they increased $ , , over . this movement was the familiar warning of an approaching crash; but the warning fell on deaf ears, as it usually does. in the house of cards collapsed. the panic of left the country's financial and commercial structure almost a ruin. it had, however, several ulterior results so valuable that it is not wholly unreasonable to describe the wreck of credit as a blessing in disguise. american prices, long out of joint with the markets of the world, and thoroughly artificial in themselves, were certain to be eventually brought down. this very liquidating process served a useful double purpose; it disclosed the nation's true resources, and it placed the united states on equal footing with the commercial world at large. with the bursting of the bubble of inflated debt and inflated prices, the excessive importations ceased. simultaneously the export trade, which had halted during , in spite of the continued agricultural expansion, rose to proportions never before approached in our commercial history. in , the balance of foreign trade turned permanently in our favor. by , even the continuous outflow of gold was checked. in short, the two conditions fixed by hugh mcculloch, ten years before, as indispensable to resumption of specie payments, had now been realized. congress was not by any means disposed, however, to seize the opportunity. the first result of the money market crisis in , as in all similar years, was urgent public clamor for more currency. the supreme court had decided finally, in , for the constitutionality of the legal tenders; the secretary of the treasury, in , had so far yielded to the prevalent excitement as to reissue legal-tender notes already formally retired. the first response of congress, therefore, was an inflation measure. by a vote of to in the house of representatives, and of to in the senate, a law was passed for the permanent increase of the legal-tender currency, by $ , , . the republican party controlled congress by unusually large majorities; but per cent. of the party's vote in each chamber was cast in favor of the bill. only the interposition of grant's presidential veto prevented this first positive backward step in the direction of fiat money. it is reasonable to suppose that this curious vote of the administration party, which occurred in april, , measured the party's political desperation. they were about to receive, in the congressional elections, the usual chastisement experienced by a dominant party when the people vote in a period of hard times; the inflation act was an anchor thrown desperately to windward. the experiment was in all respects a failure. even the party's own state conventions failed to say a good word for the inflation bill, and it gained no mitigation of sentence in the november vote. passage of the resumption act[ ] the forty-third congress had three months of existence left to it after the vote of november, . already defeated overwhelmingly at the polls, it had nothing to risk by a move in sound-money legislation, and possibly much to gain. it used this three-months' period to enact a law of the first importance, not only to the nation, but to the republican party's future history--a law which must fairly be described, however, under the circumstances of the time, as an expression of death-bed repentance. this was the specie-resumption act, drawn up by a party committee, and submitted to congress, in december, , by senator john sherman. it fixed the date for resumption of specie payments at january , , provided for the reduction of legal-tender notes from $ , , to $ , , , but made no provision for any further retirement of the notes. it went through congress on january , . it was contended by some that under the resumption act of there could be no reissue of the greenbacks once received into the treasury. inflationist successes of - settled this uncertainty, as congress, may , , ordered that there be no further destruction of greenbacks. the amount then outstanding was $ , , --the volume of legal tenders still current. the struggle for resumption[ ] the resumption act is one of the most curious laws in financial history. it was plain in its requirement that on and after january , , the treasury should "redeem in coin the united states legal-tender notes then outstanding, on their presentation for redemption"; but it left the treasury to make whatever arrangements it might choose. the law, it is true, conferred ample powers. in order "to prepare and provide for the redemption in this act authorized or required," it empowered the secretary of the treasury "to use any surplus revenues, from time to time, in the treasury not otherwise appropriated, and to issue, sell, and dispose of bonds of the united states at not less than par in coin." this power was perpetual. the law of involved the double problem of providing for resumption at the stipulated date, and of maintaining it afterward. it is the first of these undertakings, which we shall now sketch. there were, as we have already seen, two influences at work in , which made possible the achievement as it would not have been in . these influences--the shifting of the foreign trade balance in favor of the united states and the subsequent check to gold exports--were factors on which no finance minister could have reckoned. both in fact developed after the passage of the resumption law. but even after allowing for these accidental commercial advantages, the credit for the return to specie payments on january , , belongs individually and without dispute to john sherman. as one of the authors of the resumption act, mr. sherman was responsible both for its virtues and its vices. his appointment to the treasury, therefore, in the administration under which resumption must by law be carried out, was entirely logical. yet the practical efficiency of mr. sherman, in an administrative office, could not then have been foretold. the secretary's previous career, though useful and industrious, had been marred by weaknesses which did not promise well. as a legislator, he belonged to the school of compromisers who have indirectly been responsible, in a score of critical emergencies, for the gravest mischief in our history. but mr. sherman was not the first of public men to show that the faults or weakness of a legislator, whose purpose is to obtain enactment of a policy, will sometimes disappear in the administrator, who presses settled policies into execution. as secretary he was unwavering in pursuit of the resumption goal; practical, resolute, and adroit in the means employed. it was in the face of the repudiation clamor that he declared officially for payment of the government bonds in gold. equally distinct was the secretary's public declaration that the act of conferred the power to issue bonds after, as well as before, resumption; another precedent which did invaluable service sixteen years afterward. to say that secretary sherman's management of the treasury achieved during his time precisely the results proposed, and achieved them promptly, is to concede his administration's practical success. nor were these results attained through extravagance or waste. in his refunding and resumption operations, mr. sherman placed the bonds of the united states on better terms than any of his predecessors. arrangements for resumption[ ] the secretary of the treasury now put the final touches on his arrangements for resumption. partly by accident and partly through stress of circumstances, the treasury gold reserve was defined, in later years, at a fixed and arbitrary minimum. the theory adopted by mr. sherman, however, in his early operations, was different and undoubtedly better. following probably the practice of the bank of england, he fixed his reserve at per cent. of outstanding notes--"the smallest reserve," he wrote to congress, "upon which resumption could be prudently commenced and successfully maintained." on this basis he held in the treasury, on december , , $ , , gold in excess of outstanding gold certificates, which was a trifle over per cent. of the government notes then circulating outside the treasury. of this gold reserve, $ , , had been obtained through sale of bonds, part of the coin being procured in europe. there remained now to be settled only the formal machinery of exchange between the treasury and outside institutions. if the treasury had left the banks to pursue unchanged their policy of keeping special gold deposits, the government reserve would have been at once imperilled. if the banks had continued to present their individual drafts for redemption across the counter of the sub-treasury, any timid or blundering banker might have started a general drain of gold. against these possibilities mr. sherman now took measures. he secured the admission of the new york sub-treasury as a member of the clearing-house. at new york and boston the clearing-houses modified their rules, agreed to abolish "gold deposits" after january st, and to accept the legal tenders freely in discharge of balances against one another and against the government. at the same time, the requirement of coin payment of customs duties was revoked, and public officers were directed to receive coin or legal tenders at the payer's option--a move of obvious propriety, since refusal to take notes in payment would merely send the importer to the treasury's redemption office to convert them into coin. all these preliminaries had been formally and positively settled before the close of . on december th, the premium on gold disappeared, for the first time since ; on january st, specie payments were quietly resumed. should the greenbacks be retired? [ ]let us now consider for a moment an issue which twenty years ago was urgently pertinent, was in fact the very crux of so-called "currency reform," and which still persists as a live issue in the minds of some of the veteran "reformers" of those days, although the conditions which then gave it point have long since disappeared. in the middle nineties, when it was estimated that the total gold stock of the entire country was only about million dollars and less than millions of this was in the vaults of the treasury, the government's fiduciary currency, consisting of millions of greenbacks and millions or more of overvalued silver, presented beyond question a serious menace to the country's monetary standard. it meant that the treasury had outstanding currency obligations payable in gold to the extent of three or four times its own gold holdings, and amounting to far more than all of the gold in the country, including the holdings of the treasury, the banks, and the general public. at that time fluctuations in the trade balance of a single year sometimes almost equalled the treasury's gold holdings in amount, and it was quite conceivable, in fact not improbable, that a sudden unfavorable change in that balance might drain the treasury of all of its gold, and leave the country with a currency standard of depreciated silver or paper. this was the situation which continually menaced mr. cleveland's second administration, causing great financial anxiety and forcing the treasury during those years of peace and normal expenditures to borrow million dollars in gold in order to replenish its continually dwindling reserve. such a situation inevitably led the advocates of monetary legislation in the nineties to place first and foremost among their proposals the necessity of getting rid of the precarious greenback, and most of the plans proposed by bankers' associations, chambers of commerce, and financial experts generally at that time emphasized the urgency of this measure. why retirement is not important it sometimes happens that, with the lapse of time and with changed conditions, infirmities, long left untreated, cure themselves, and so it has been with the one-time bothersome greenback. twenty years ago, when the outstanding greenbacks amounted to twice the gold holdings of the treasury and to much more than half of the country's entire gold stock, there was abundant reason for anxiety on account of their continued circulation. the situation is utterly different to-day. gold has accumulated in the treasury beyond the wildest "dreams of avarice" of the nineties. from less than millions in the middle nineties the treasury's gold holdings have grown to approximately , millions to-day, and the estimated gold stock of the country has increased from to more than , millions, despite the fact that the director of the mint in reduced the estimate for gold in circulation by millions as compared with the basis of previous years. the greenback has thus become each year a relatively less important element in our currency system, an element of ever less and less potency for harm. doubtless the absolute amount of outstanding greenbacks has diminished considerably through loss and destruction during fifty years, and is to-day far less than the $ , , issued during the civil war, which are still carried as an obligation on the government books.... the greenbacks are less menacing to-day for the further reason that they are being rapidly transformed into small denominations which are absorbed in the general circulation, and which could only with great difficulty be collected in sufficiently large amounts to cause a serious drain upon the treasury through presentation for redemption.... so great and continuous is the demand for notes of small denominations that one may safely predict that in another decade practically all of the greenbacks still in existence will be in small denominations in the pockets of the people. the "endless chain" with its ineffectual bond issues, the imminence of specie suspension, and the fear of treasury bankruptcy will never again result from the outstanding greenbacks. their dangers, lurid and nerve-racking though they were twenty years ago, are now only memories. the confederate currency[ ] the financial system adopted by the confederate government was singularly simple and free from technicalities. it consisted chiefly in the issue of treasury notes enough to meet all the expenses of the government, and in the present advanced state of the art of printing there was but one difficulty incident to this process; namely, the impossibility of having the notes signed in the treasury department, as fast as they were needed. there happened, however, to be several thousand young ladies in richmond willing to accept light and remunerative employment at their homes, and as it was really a matter of small moment whose name the notes bore, they were given out in sheets to these young ladies, who signed and returned them for a consideration. i shall not undertake to guess how many confederate treasury notes were issued. indeed, i am credibly informed by a gentleman who was high in office in the treasury department, that even the secretary himself did not certainly know. it was clearly out of the power of the government ever to redeem the notes, and whatever may have been the state of affairs within the treasury, nobody outside its precincts ever cared to muddle his head in an attempt to get at exact figures. we knew only that money was astonishingly abundant. provisions fell short sometimes, and the supply of clothing was not always as large as we should have liked, but nobody found it difficult to get money enough. it was to be had almost for the asking. and to some extent the abundance of the currency really seemed to atone for its extreme badness. money was so easily got, and its value was so utterly uncertain, that we were never able to determine what was a fair price for anything. we fell into the habit of paying whatever was asked, knowing that to-morrow we should have to pay more. speculation became the easiest and surest thing imaginable. the speculator saw no risks of loss. every article of merchandise rose in value every day, and to buy anything this week and sell it next was to make an enormous profit quite as a matter of course. so uncertain were prices, or rather so constantly did they tend upward, that when a cargo of cadet gray cloths was brought into charleston once, an officer in my battery, attending the sale, was able to secure enough of the cloth to make two suits of clothes, without any expense whatever, merely by speculating upon an immediate advance. naturally enough, speculation soon fell into very bad repute, and the epithet "speculator" came to be considered the most opprobrious in the whole vocabulary of invective. the feeling was universal that the speculators were fattening upon the necessities of the country and the sufferings of the people. nearly all mercantile business was regarded at least with suspicion, and much of it fell into the hands of people with no reputations to lose, a fact which certainly did not tend to relieve the community in the matter of high prices. the prices which obtained were almost fabulous, and singularly enough there seemed to be no sort of ratio existing between the values of different articles. i bought coffee at forty dollars and tea at thirty dollars a pound on the same day. my dinner at a hotel cost me twenty dollars, while five dollars gained me a seat in the dress circle of the theatre. i paid one dollar the next morning for a copy of the _examiner_, but i might have got the _whig_, _dispatch_, _enquirer_, or _sentinel_, for half that sum. for some wretched tallow candles i paid ten dollars a pound. the utter absence of proportion between these several prices is apparent, and i know of no way of explaining it except upon the theory that the unstable character of the money had superinduced a reckless disregard of all value on the part of both buyers and sellers. a facetious friend used to say prices were so high that nobody could see them, and that they "got mixed for want of supervision." he held, however, that the difference between the old and the new order of things was a trifling one. "before the war," he said, "i went to market with the money in my pocket, and brought back my purchases in a basket; now i take the money in the basket, and bring the things home in my pocket." as i was returning to my home after the surrender at appomattox court house, a party of us stopped at the residence of a planter for supper, and as the country was full of marauders and horse thieves, deserters from both armies, bent upon indiscriminate plunder, our host set a little black boy to watch our horses while we ate, with instructions to give the alarm if anybody should approach. after supper we dealt liberally with little sam. silver and gold we had none, of course, but confederate money was ours in great abundance, and we bestowed the crisp notes upon the guardian of our horses, to the extent of several hundreds of dollars. a richer person than that little negro i have never seen. money, even at par, never carried more of happiness with it than did those promises of a dead government to pay. we frankly told sam that he could buy nothing with the notes, but the information brought no sadness to his simple heart. "i don' want to buy nothin', master," he replied. "i's gwine to keep dis always." i fancy his regard for the worthless paper, merely because it was called money, was closely akin to the feeling which had made it circulate among better-informed people than he. everybody knew, long before the surrender, that these notes never could be redeemed. there was little reason to hope, during the last two years of the war, that the "ratification of a treaty of peace between the confederate states and the united states," on which the payment was conditioned, would ever come. we knew the paper was worthless, and yet it continued to circulate. it professed to be money, and on the strength of that profession people continued to take it in payment for goods. the amount of it for which the owner of any article would part with his possession was always uncertain. prices were regulated largely by accident, and were therefore wholly incongruous. in the winter of - congress became aware of the fact that prices were higher than they should be under a sound currency. if congress suspected this at any earlier date, there is nothing in the proceedings of that body to indicate it. now, however, the newspapers were calling attention to an uncommonly ugly phase of the matter, and reminding congress that what the government bought with a currency depreciated to less than one per cent. of its face, the government must some day pay for in gold at par. the lawgivers took the alarm and sat themselves down to devise a remedy for the evil condition of affairs. with that infantile simplicity which characterized nearly all the doings and quite all the financial legislation of the richmond congress, it was decided that the very best way to enhance the value of the currency was to depreciate it still further by a declaratory statute, and then to issue a good deal more of it. the act set a day, after which the currency already in circulation should be worth only two-thirds of its face, at which rate it was made convertible into notes of the new issue, which some, at least, of the members of congress were innocent enough to believe would be worth very nearly their par value. this measure was intended, of course, to compel the funding of the currency, and it had that effect to some extent, without doubt. much of the old currency remained in circulation, however, even after the new notes were issued. for a time people calculated the discount, in passing and receiving the old paper, but as the new notes showed an undiminished tendency to still further depreciation, there were people, not a few, who spared themselves the trouble of making the distinction. i am sometimes asked at what time prices attained their highest point in the confederacy, and i find that memory fails to answer the question satisfactorily. they were about as high as they could be in the fall of , and i should be disposed to fix upon that as the time when the climax was reached, but for my consciousness that the law of constant depreciation was a fixed one throughout the war. the financial condition got steadily worse to the end. the government's course in levying a tax in kind, as the only possible way of making the taxation amount to anything, led speedily to the adoption of a similar plan, as far as possible, by the people. a physician would order from his planter friend ten or twenty visits' worth of corn, and the transaction was a perfectly intelligible one to both. the visits would be counted at ante-war rates, and the corn estimated by the same standard. in the early spring of i wanted a horse, and a friend having one to spare, i sent for the animal, offering to pay whatever the owner should ask for it. he could not fix a price, having literally no standard of value to which he could appeal, but he sent me the horse, writing, in reply to my note: "take the horse, and when the war shall be over, if we are both alive and you are able, give me as good a one in return. don't send any note or due-bill. it might complicate matters if either should die." a few months later i paid my debt by returning the very horse i had bought. i give this incident merely to show how utterly without financial compass or rudder we were. how did people manage to live during such a time? i am often asked; and as i look back at the history of those years, i can hardly persuade myself that the problem was solved at all. a large part of the people, however, was in the army, and drew rations from the government. the country people raised upon their plantations all the necessaries of life, and were generally allowed to keep enough of them to live on, the remainder being taken by the subsistence officers for army use. in the cities, living was not by any means so easy as in the country. business was paralyzed, and abundant as money was, it seems almost incredible that city people got enough of it to live on. very many of them were employed, however, in various capacities, in the arsenals, departments, bureaus, etc., and these were allowed to buy rations at fixed rates, after the post-office clerks in richmond had brought matters to a crisis by resigning their clerkships to go into the army, because they could not support life on their salaries of nine thousand dollars a year. for the rest, if people had anything to sell, they got enormous prices for it, and could live a while on the proceeds. above all, a kindly, helpful spirit was developed by the common suffering, and this, without doubt, kept many thousands of people from starvation. nobody formed any plans or laid by any money for to-morrow or next week or next year, and indeed to most of us there really seemed to be no future. we were not used to think of ourselves as possible survivors of a struggle which was every day perceptibly thinning our ranks. the coming of ultimate failure we saw clearly enough, but the future beyond was a blank. the reader may find it difficult to believe that with gold at a hundred and twenty-five for one, or , per cent. premium; when every day made the hopelessness of the struggle more apparent; when our last man was in the field; when the resources of the country were visibly at an end, there were financial theorists who honestly believed that by a mere trick of legislation the currency could be brought back to par. i heard some of these people explain their plan during a two days' stay in richmond. gold, they said, is an inconvenient currency always, and nobody wants it, except as a basis. the government has some gold--several millions in fact--and if congress will only be bold enough to declare the treasury notes redeemable at par in coin, we shall have no further difficulty with our finances. so long as notes are redeemable in gold at the option of the holder, nobody wants them redeemed.... the gold which the government holds will suffice to satisfy a few timid ones, and there will be an end of high prices and depreciated currency. i am not jesting. this is, as nearly as i can repeat it, the utterance of a member of the confederate congress. the matter of prices was frequently made a subject for jesting in private, but for the most part it was carefully avoided in the newspapers. as with the accounts of battles in which our arms were not successful, necessary references to the condition of the finances were crowded into a corner, as far out of sight as possible. the _examiner_, however, on one occasion denounced with some fierceness the charges prevailing in the schools; and i quote a passage from prof. sidney h. owens's reply, which is interesting as a summary of the condition of things in the south at that time: "the charges made for tuition are about five or six times as high as in . now, sir, your shoemaker, carpenter, butcher, market man, etc., demand from twenty, to thirty, to forty times as much as in . will you show me a civilian who is charging only six times the prices charged in , except the teacher only? as to the amassing of fortunes by teachers, spoken of in your article, make your calculations, sir, and you will find that to be almost an absurdity, since they pay from twenty to forty prices for everything used, and are denounced exorbitant and unreasonable in demanding five or six prices for their own labor and skill!" there were compensations, however. when gold was at , per cent. premium with us, we had the consolation of knowing that it was in the neighborhood of one hundred above par in new york, and a richmond paper of september , , now before me, fairly chuckles over the high prices prevailing at the north, in a two-line paragraph which says, "tar is selling in new york at two dollars a pound. it used to cost eighty cents a barrel." that paragraph doubtless made many a five-dollar beefsteak palatable. footnotes: [ ] adapted from wesley clair mitchell, _a history of the greenbacks_, part ii, the university of chicago press, . [ ] adapted from a. d. noyes, _forty years of american finance_, pp. - . g. p. putnam's sons, new york and london, . [ ] _ibid._, pp. - . [ ] _ibid._, pp. - . [ ] _ibid._, pp. - . [ ] a. piatt andrew, the essential and the unessential in currency legislation, in _questions of public policy_, addresses delivered in the page lecture series, , before the senior class of the sheffield scientific school, yale university, pp. - . yale university press, new haven, connecticut. . [ ] adapted from george gary eggleston, _a rebel's recollections_, pp. - . hurd and houghton. boston, . chapter vi international bimetallism [ ]... there are natural and commercial causes which may operate to produce either an incessant fluctuation in the relative value of silver and gold, or a wide and increasing divergence, from year to year, through a long period, from the ratio of exchange existing between the two metals at the commencement of the period. so far are the sources and conditions of supply of the one different from those of the other that, notwithstanding the influence of the durableness of the metals in giving steadiness of value to either by turns, and hence to the two in their relation to each other, it would be in the highest degree unreasonable to assume that the ratio of exchange between gold and silver would remain unaltered through any considerable term of years. the annual or monthly variations may take the form of oscillations, now on one side and now on the other of any historical ratio, or they may be cumulative on one side of that ratio, producing a divergence increasing from month to month, and year to year; but variations in some degree, in some direction, are to be expected under the unrestrained operation of causes influencing the demand for, or the supply of, each metal. the conditions, natural and commercial, which determine the ratio of exchange of the two metals being such, we have seen that government may enter, and, by making the two indifferently legal tender for debts at a ratio fixed by law, may, for the time, counteract the operation of any and all forces tending to produce divergence. so long as any country establishing such a principle holds a considerable amount of that metal which, under the natural and commercial conditions of supply and demand prevailing at the time, tends to become the dearer of the two, it is impossible that the cheapened metal should there, or in any market, fall far below that ratio. by the force of the bimetallic law, the substitution of the cheapened for the dearer metal will at once begin; and so long as that continues, the divergence of the market ratio from the mint ratio can never be wide. why should any one in london or new york pay much more than fifteen and a half ounces of silver for an ounce of gold, when gold can, at any time and in any amount, be obtained for silver at the rate of fifteen and a half in paris? this operation of the bimetallic system can not be denied; but there is ground for dispute as to the degree of the advantages to result, and as to the cost at which those advantages are to be obtained. the monometallist, or advocate of the so-called single standard, is disposed to disparage the benefits to be expected, and to magnify the expense of this system. he points to the fact that the two metals do not actually circulate in the same country, at the same time, in any considerable degree; that it is always the one metal or the other which is used as money, according as the market ratio diverges to the one side or the other of the mint ratio, while the coin made from the dearer metal acquires a premium, and is exported or hoarded. hence it is said bimetallism really means the use of but one metal in a country at a time. it is not a double standard, but an alternate standard. to this the bimetallist replies that the concurrent use of the two money metals, side by side, in the same markets, is a matter wholly of indifference. the merit of the bimetallic scheme does not depend on this at all. the object of bimetallism is, by joining the two metals together in the coinage, at a fixed ratio, to diminish the extent of the fluctuations to which the value of each would be separately liable, by generating a compensatory action between the two, by which the cheapening metal shall receive a larger use, while the appreciating metal drops partially out of its former demand, thus making the two fall together, if there must be a fall, or rise together, in the opposite case: or, conceivably, making the tendency of one to fall precisely counteract the tendency of the other to rise. thus we may suppose four successive cases to illustrate the working of this principle. the first is, where the demand for the use of either metal in trade remaining the same, a large increase in the supply of one metal, a, takes place, the supply of the other, b, remaining unchanged. in this case, without the bimetallic system, the value of a would tend to fall rapidly through a considerable space, while the value of b would stand fast. with the bimetallic system, the joint supply of the two metals would be applicable to meet the joint demand for the two. now, as the joint supply has been increased without any change in the joint demand, there must be a fall in value; but the fall will be in the two indistinguishably, except for a slight degree of delay and friction in exchange. both will fall, but the depth of the fall will be diminished as the surface over which it is to take place has been enlarged. the second is where, the demands of trade for both metals remaining the same, a diminution occurs in the supply of a, while the supply of b remains unchanged. here, by the operation of the same principle, a rise in the value of money will take place, since the joint supply has been reduced without any corresponding change in the joint demand. the rise will be a rise of the two metals indistinguishably, the height of the rise being diminished as the surface over which it is to take place has been enlarged. the third case is where, demand remaining the same, the supply of both metals undergoes a change in the same direction, either of increase or of diminution, at the same time. in this event, the fall or rise will again be of the two indistinguishably, the point reached being a mean between the points which would have been reached by the two severally. the fourth case is where, demand remaining the same, the supply of the two metals undergoes a change at the same time, but in opposite directions, a through diminution, b through increase. in this case, the opposite tendencies will counteract each other. if of equal force, the value of money will be stable; if of unequal force, there will be movement in the direction of the stronger to the extent of the difference between the two. instead of one falling and the other rising in value, the change will be wrought in the two indistinguishably. it will appear from the foregoing statements that, under the bimetallic system, the value of money will be liable to vary more frequently than under the monometallic system. that is, a change in respect to either constituent of the money mass will produce a change of value; and it is apparent that the chances of change are greater with two constituents than with one. on the other hand, the variations under the bimetallic system are likely to be less extensive. indeed, it is a matter of practical certainty that they will be far less extensive than they would be under the monometallic system, whichever metal were adopted as the standard of deferred payments. but, again, the monometallist interposes the objection that the bimetallic system is only to be supported at great expense to the states maintaining it; that they lose by the exchange of the dearer for the cheapened metal, even though they acquire a certain premium in doing so, and that sooner or later the stock of the dearer metal in the bimetallic countries will become exhausted, and the system will collapse, the price of the two metals no longer being held closely or nearly at the former ratio by the possibility of exchanging them at that ratio, freely, in any amount. how far a bimetallic country loses by the alternation of the metals in circulation, as now one and now the other becomes the cheaper at the coinage ratio, is a nice question. that the service rendered to the commerce of the world by establishing a normal price for each metal in terms of the other, and thus creating and maintaining a par-of-exchange between gold countries and silver countries, is worth far more than its cost, seems to me beyond a rational doubt. it would, in my view, be as reasonable to doubt whether london bridge repays the expense of its erection and repair. were the cost of this bimetallic service, whatever it is, properly assessed upon and collected from each commercial nation of the world by turns, according to the proportion in which it derives advantage therefrom, i think it might safely be said that no one of these nations would sustain a single other charge which so fully justified itself in the return it made, whether that other charge were for works of construction, for the administration of justice, or for any other strictly necessary purpose. but there is no assurance that the cost of the bimetallic system will be thus equitably assessed. if the whole charge of erecting and repairing london bridge were thrown upon the merchants of the two or three streets nearest thereto, while yet the whole population were allowed to use the bridge, free of toll, there would not unnaturally arise a strong sense of injustice on the part of those who bore this burden for the public benefit; it might even become a question whether the undoubted advantages derived by them from the use of the bridge repaid the disproportionate expense which it caused them. if the maintenance of the bimetallic system involves a certain burden on the nations which sustain it, as i am disposed to think is the case, it fairly becomes a question whether those individual nations are compensated for bearing the whole expense of the service by their share of the advantages resulting therefrom to the trade and industry of the world. that england could well have afforded, throughout the present century, to maintain this system for her own benefit, whatever it cost, even though other nations profited by it in greater or less degree, is clear as the light. that france, a country of far less extended international trade, has been compensated for bearing so large a part as she has done of the burden of maintaining a par-of-exchange for the commerce of the world, by her share of the resulting advantages, i make no question; but it must be admitted to be fairly a matter of dispute. on such a point it is evidence of no small value that the french people themselves and the french statesmen, though singularly acute and sagacious in matters of finance, have apparently not doubted that the bimetallic system was for the interest of their country. certain of the french political economists--mm. chevalier, levasseur, bonnet, mannequin, leroy beaulieu--from their theory of the subject have held that france lost by her policy in this respect; but the financiers of that remarkable nation held firmly to the "double standard" from to . and though france at the latter date restricted her silver coinage, and two years later stopped it altogether, it was not done as the result of any change of views. partly it was from deference to her monetary allies, belgium and switzerland, but chiefly because the demonetization of silver by germany and the sale of the discarded metal of that empire brought a sudden strain upon the bimetallic system which threatened to break it violently down. hence france closed her mints to silver, but not with any confession that her policy had been erroneous under the conditions previously existing; not from any desire to abandon that policy should the future offer conditions which would admit the resumption of bimetallism. it was the declaration of m. léon say, the french minister of finance, the president of the international monetary conference of , that france, in suspending the coinage of silver, had taken no step towards the single gold standard, but had placed herself in a position to await events, a position which she would not leave till good reasons for action should appear, and then most probably to re-enter on the system of the double standard.... the objection that the stock of the dearer metal in the bimetallic states must, if the drain be indefinitely continued, become after a while exhausted, and that the system will then lose all its efficiency in holding the two metals together, is unquestionably valid; but an altogether unreasonable weight has been assigned to it in the discussion of bimetallism as a scheme of practical statesmanship. if we look at almost any treatise written from the monometallic point of view, we shall find that it is taken as conclusive against that scheme, that conditions of supply and demand can be assumed for the two metals separately which would result in the complete exhaustion of the dearer metal, and the consequent loss of all virtue in the bimetallic scheme. the bimetallist is confronted with a series of adverse conditions, taken each at its maximum and piled one above the other without the least regard to the modesty of nature, or the experience of the past; and is then challenged to say whether the system he proposes could be maintained under such circumstances. if he is candid enough to admit that bimetallism would fail there, it is taken for granted that the whole question is disposed of. now, human institutions are not to be judged of, and approved or disapproved, by such methods. the folly of reasoning like this would be seen at once were it applied to ordinary political matters. no government on earth could stand against one-fourth or one-tenth of the elements of hostility which might conceivably be arrayed against it. mankind do not, therefore, refuse to form governments. bimetallism is a political institution for practical ends, and is entitled to be judged with reference to reasonable probabilities. it may claim the benefit of the chance that adverse conditions will be offset by conditions favourable, and that the adverse conditions will not prove so severe at the start as they may be conceived, and that their force will be more quickly spent than might be feared. it would be perfectly legitimate ground on which to establish european bimetallism, that the french system, with so little of support from other states, passed within a quarter of a century through the three successive shocks of the gold discoveries of siberia, the gold discoveries of california, and the gold discoveries of australia, and yet was not brought to the ground. with germany, france, and england joined in a monetary union, no changes reasonably to be anticipated in the conditions of supply of the one metal or the other would succeed in moving the market ratio far apart from the mint ratio thus supported by maintaining over so wide a surface a legal equivalence between the two metals in payment of debts. and, moreover, while bimetallism is entitled to be judged like any other political institution, with reference to the reasonable probabilities of the future, the allowance which requires to be made for error and extraneous force is less than in most political institutions, inasmuch as the failure of bimetallism involves no disaster to industry or society. when an engineer designs a bridge which is intended to sustain a weight of eighty tons, he introduces a "factor of safety," say three or five, and makes the bridge strong enough to bear two hundred and forty or four hundred tons. the greater the calamity which would result from the breaking down of the bridge--the deeper the chasm which it spans, the swifter the torrent below--the larger the factor of safety. with many political institutions, likewise, the consequences of failure would be so disastrous that the statesman seeks to introduce a high factor of safety; but in the case of bimetallism no catastrophe whatever is to be anticipated, even in the event of failure. at the worst, after the drain of the dearer metal, in consequence of changes in the conditions of supply, is completed, the bimetallic country is simply in the same position with the countries of the single standard using the cheapened metal. while the process of substitution is going on, it sells the dearer metal at a premium; when the process is over, it is no worse off than it would have been had it originally selected as its sole money of full legal-tender power the metal which it has bought at a discount, and which other countries, perhaps its immediate neighbours, are still using. it is not the case of a country seeking to reject the cheapening metal, and to supply its place with the metal which is continually becoming scarcer and dearer.... there is all the difference, in the two cases, between going down hill and going up hill. not only is no catastrophe involved in the failure of bimetallism through the exhaustion of the dearer metal, but it is always in the power of the government to arrest the drain at any point without shock. thus, in , france and her monetary allies, seeing the prospect of a considerable drain of gold through the importation of the discarded and cheapened silver of germany, and having decided, whether wisely or unwisely, not to prevent that drain, restricted the coinage of silver without repealing or suspending the law which made gold and silver legal tender indifferently at a fixed ratio. two years later, finding that the forces operating to lower the value of silver were powerful and persistent, the coinage of silver was peremptorily stopped. can one point to any sign that france has suffered any special injury to her trade and production from this act?... we now have to note ... that every additional state which joins the bimetallic group, having the same mint ratio between gold and silver, does not only share the cost or the burden with those already in the system, but diminishes the aggregate cost or burden to be borne, and this, not in a slight, but in an important degree, so that should the monetary league become general, the total cost or burden to be divided among the many allies would be inappreciable; while, should the system come to embrace all commercial states, there would, in theory, be no burden at all to be borne by any one. thus let us suppose the commercial world to be divided into sixteen states, a to p, inclusive, the first six having the single gold standard, four, g to j, the so-called double standard of gold and silver, say at - / : ; the remaining six states having the single standard of silver, thus: a, b, c, d, e, f (g, h, i, j), k, l, m, n, o, p. it is evident that in the case of a change in the conditions of supply tending to cheapen silver relatively to gold, the new silver would pass into the countries of the double standard, g to j, be there exchanged for gold at the rate of - / : , with some small premium as the profit of the transaction, and the gold would go to the gold countries, a to f, in settlement of trade balances. the rapidity with which this substitution of silver for gold will go forward will depend, first, on the force of the natural causes operating to cheapen silver, and, secondly, on the force of the commercial causes operating to maintain or advance the value of gold. the length of time during which the drain of the dearer metal can be sustained without exhaustion will (given the rate of movement) depend solely on the stock of that metal existing in the bimetallic states jointly when the drain begins. but chief among the commercial causes operating to maintain or advance the value of gold is the exclusive power with which gold is invested by law to pay debts within states a to f; while the stock of the dearer metal available to sustain the drain described is made up, not of all the gold in the sixteen states a to p, or in the ten states a to j, but only of the gold in the four bimetallic states, g to j. hence we see that for every gold state which adopts the "double standard" the amount of gold available, in the case of a cheapening of silver, to meet the drain of the dearer metal (on which the virtue of the bimetallic system depends) is increased; while the demand for gold in preference to silver at - / : (the only cause which threatens the stability of the bimetallic system) is, in just so far, diminished. on the other hand, every silver state that adopts the "double standard" strengthens the bimetallic system in the case of a cheapening of gold. let us suppose the sixteen commercial states to be divided as four gold states, eight gold and silver states, and four silver states, as follows: a, b, c, d (e, f, g, h, i, j, k, l), m, n, o, f. we see that the bimetallic system is now not twice as strong merely as in the case first assumed, but many times as strong, since not only is the amount of the dearer metal (whichever that may at the time be) subject to drain greatly increased, but the demand for that metal, in preference to silver at - / : , now comes from four countries only, instead of six, as formerly. the transfer of still another state from each of the two single-standard groups would vastly increase the stability of the bimetallic system, a, b, c (d, e, f, g, h, i, j, k, l, m), n, o, p. not only would the base of the system be broadened by bringing the dearer metal of ten states, d to m, under tribute in the event of changes operating on the supply of either to affect its value; but the force of the causes threatening the equilibrium of the system would be reduced, since the demand for the dearer metal would now come from only three states: a, b, c, in the case of a cheapening of silver relatively to gold; n, o, p, in the case of a cheapening of gold relatively to silver. bring still another state from each group into the monetary union, and the danger of a breaking down of the system, under any change in the conditions of supply which it would be reasonable to anticipate, almost disappears. a, b (c, d, e, f, g, h, i, j, k, l, m, n), o, p. twelve states now supply the dearer metal; only two states will take it in preference to the other at the ratio of the mint. those two states--whether a, b, or o, p--can not take the dearer metal indefinitely. they will soon be surfeited. a further increase of money in them would only be followed by a fall in its value, which would soon proceed so far as to bring the metals together again. what the one metal would tend to lose in value through increase of supply, the other would tend to lose through diminution of demand. this is the modern bimetallic scheme advocated by wolowski and cernuschi in france, malou and de laveleye in belgium, mees and vrolik in holland, schneider in germany, haupt in austria, seyd and the liverpool writers in england, horton, nourse, and george walker in the united states. it differs widely from the plan of the so-called "double standard," which was pronounced impracticable by locke, adam smith, and ricardo. not the smallest presumption against the reasonableness of this scheme is created by the fact that eminent economists of the past century, and of the first half of the present, declared in favour of the single standard, whether of gold or of silver. those writers contemplated a condition of international relations in which anything like general and permanent concert of action, in establishing and maintaining a ratio between the metals in the coinage, would have been wholly beyond reasonable expectation.... a general or universal system of bimetallism would involve no machinery, no international accounts, no detail whatever. the simple agreement of governments to coin at a certain ratio would be sufficient for all the objects that have been discussed. if unification of coinage, identity of moneypieces, and mutual acceptance of coins by the several nations forming such a monetary league, were to be added, some machinery for the redemption of worn pieces might require to be brought into existence; but this is not a necessary feature of successful bimetallism, which would be entirely compatible with the retention by each state of its own devices and denominations, and with the exchange of moneys as at present effected.... footnotes: [ ] francis a. walker. _money in its relations to trade and industry_, pp. - ; - . henry holt & company. new york. . chapter vii the silver question in the united states [ ]such was the singular combination of events after the peace of that almost at the moment when a million citizens were turned from organised destruction to pursuit of peaceful industry, the avenues of american employment and production were widened in a degree unprecedented in the history of trade. within eight years after lee's surrender, the railway mileage of the united states was literally doubled. only a fraction of this increase belonged to the transcontinental lines which linked the two oceans in . quite aside from the , miles of the pacific railways, upwards of , miles of track were laid in the united states between and . four noteworthy economic developments accompanied this extension of the transportation system. a fertile interior domain, hitherto untouched, was opened up to industry. with the rush of population to these western districts, not only did the disbanded army resume production without industrial overcrowding such as followed the napoleonic wars, but provision was made for three or four hundred thousand immigrants annually. european capital in enormous volume was drawn upon to provide the means for this development. finally, the united states rose from the position of a second- or third-class commercial state to the first rank among agricultural producers and exporters. each of these several phenomena had its special influence on the period. not less immediately connected with this opening up and settlement of our agricultural west was still another phenomenon, of peculiar interest to the study of the ensuing period. the average price of grain had advanced with great rapidity during the civil war. in , the price of wheat, even on the chicago market, reached the remarkable level of $ . per bushel; nor was this price very greatly above the annual maximum of the period. in a large degree, this advance resulted from inflation of the american currency. but the upward movement was world-wide; in and the average price, even in england, was close to the equivalent of two dollars a bushel. that any such abnormal market could be maintained in the face of the new american supplies was at least improbable. the increase in cereal production was twice as rapid as the country's increase in population; the united states became therefore the leading figure in the world's export markets; and this was certain to have important influence on prices. as in america, so in europe, production received immediate stimulus. while american capital was opening up the mississippi valley, european capital was similarly busy along the fertile river basins of the dnieper and the danube. the russian railway system grew during this period from something like , miles to upwards of , . in austria-hungary the percentage of increase was almost equally large. all of these new transportation lines, like our own new granger railways, were at once engaged in carrying to the seaboard supplies of grain which never before had reached an export market. the problem of an earlier generation had been how to feed the constantly increasing population; a wholly new problem was presently to arise, based on the question how to find a ready and profitable market for the year's output of breadstuffs. prices, in short, which rose almost continuously throughout the world during the period of slack production from to , receded almost as continuously in the ensuing generation. nowhere was this phenomenon destined to have more immediate importance, economically, socially, and politically, than in the united states. the opinion is more or less widely held that the decline in prices, notably of grain, has resulted from legislation on the currency. without for the present arguing that proposition, it may be affirmed with entire safety that a good share of the period's currency legislation has resulted from the decline in the price of grain. the fall in wheat has been the typical argument for arbitrary increase of the silver or paper currency in almost every congressional debate since . what is perhaps even more significant, the division in almost every congressional vote upon these subjects has been, not political but geographical--the commercial east against the agricultural west. agitation for silver and the passage of the bland bill [ ]in the summer session of , several bills had been introduced, providing for increased silver coinage and for remonetization of the silver dollar. none of these propositions came to anything; they were chiefly remarkable from the fact that they first gave vogue to the theory of the "crime of "--a theory which assumed that the dropping of the silver dollar from the list of coins in the statutes of that year was the outcome of a conspiracy which carried its legislation through in secret. the entire baselessness of this assertion has been demonstrated often enough and in convincing detail; this very provision regarding the silver dollar was a subject of public discussion in the house, and met with no serious opposition. the assertion in itself is so patently absurd that i shall not pause to discuss it. the truth is that silver in , and during a generation before that date, was worth more to its owner in the form of bullion than in the form of coin. in the silver requisite to coin a dollar at the established ratio was worth $ . . for years, therefore, nobody thought of bringing his silver to the mint for coinage; he sold it in the commercial markets. the total silver-dollar coinage of the united states, between and , was barely eight million dollars, and when, in , the law provided that except for the so-called trade dollar coined for export, "no deposit of silver for other coinage shall be received," no one had interest enough in the matter to offer criticism. but in and came one of those curious coincidences which render possible for all time conflicting theories of an economic event. germany, having adopted the gold standard of currency in july, , began to sell its old silver coin as bullion. at exactly the same time, mackay and fair, in the heart of the nevada mountains, were opening up the great bonanza. the pacific coast was in fact going wild over the rise in mining shares while the east was financially and industrially paralysed. the statute dropping the silver dollar from this country's coinage list was enacted february , ; the german law for retirement of silver coinage was adopted july , ; and a year later the news of the rich nevada "ore-finds" became public property. between the german sales and the sales at nevada city, the price of silver yielded. in , for the first time in a generation, - / grains of standard silver would have been worth more when coined into a legal-tender dollar than when sold in the bullion market. the motive of the mining interest in the free-silver coinage agitation of and was not mysterious. the motive of the anti-administration party in congress was somewhat different. there is not the slightest question that the silver-coinage movement, in the agricultural west particularly, had the same origin and the same following as the paper inflation movement of a few years before. mr. bland himself, the author of the silver bill, declared that the question was presented as between what he called "honest resumption" with silver coinage, "or on the other hand a forced unlimited inflation of paper money." in the heat of debate on the silver bill, the same statesman declared in congress that if his coinage plan could not be passed, he was "in favour of issuing paper money enough to stuff down the bondholders until they are sick." the point of these remarks lies in their frank assumption that the free-silver sentiment and the fiat-money sentiment were interchangeable. so much, then, for the origin and nature of the silver movement. the bland bill passed the house on november , , under the previous question and without debate, by a vote of to , and the resumption operations of the government came to an instant halt. the market price of silver then was such that the legal-tender dollar of the act would have been worth intrinsically less than ninety cents. foreign subscribers to our resumption bonds suspected instantly that payment of the government debt in a depreciated coin was planned by congress; their suspicions were confirmed by a resolution introduced december th by stanley matthews, mr. sherman's own successor in the senate, and passed by both houses. the resolution explicitly declared that in the opinion of congress, all the bonds of the united states, "issued or authorized to be issued," were payable in the silver dollars of the bland law. the extraordinary character of this resolution may be judged from the fact that it was proposed and passed in both houses while the coinage act was still pending, and while, therefore, there was not in existence the coin which was duly declared a legal tender for settlement with public creditors. to the conservative portion of the public, the resolution seemed a piece of financial lunacy; to the treasury, it was not only embarrassing but humiliating. hardly a month before, in his annual report to congress, the secretary had repeated his official statement, previously made to bond subscribers, that payment of the bonds in gold might safely be anticipated. the publication of this statement in new york and london had been followed by greatly increased subscriptions to the bonds, in payment of which gold was required by the government. the matthews resolution amounted, so far as congress was concerned, to repudiation of a formal bargain of which the government had already obtained the fruits. the debate was such as might have been expected on a measure of the sort. it centred repeatedly on denunciation of government bond investors. foreign subscribers were treated with especial scorn; indeed, our foreign customers in general were not spared. it was this debate which drew forth senator matthews's somewhat celebrated query: "what have we got to do with abroad?"--a remark which was perhaps as typical of the session's deliberations as any utterance made from the floor of congress. the situation, during the early months of , was extremely critical. for the time the three direct assaults on the public credit were warded off. the matthews resolution was "concurrent," and hence a mere expression of opinion without binding force. the bill repealing the resumption act of was killed by disagreement in the senate. meantime the silver-coinage act was modified by the senate into a compromise requiring purchase and coinage by the government of two to four millions' worth of silver monthly. even thus modified, it encountered the veto of the president, but was passed over his veto, without a day's delay, by the requisite two-thirds majority. executive conservatism seemed to be fruitless; nevertheless, there is no doubt whatever that the steadfast policy of mr. hayes did much to stem the current of reaction. congress adjourned on june th. even before congressional adjournment, the canvass for the november state elections had begun. the state convention platforms in the summer of , were not in all respects such as the session's work in congress would have suggested. the opposition had gone too far in congress, and popular opinion to that effect was expressed with sufficient emphasis in november, . the administration party gained what amounted to a decided victory. there were but four states, east or west, where opposition majorities were increased in or administration majorities diminished, and these were agricultural states, where the season's sharp decline in wheat had stirred up discontent. there was not much danger from the closing session of a congress whose earlier ventures had received this response from the people. provisions of the act of [ ]although the silver dollar of which the coinage was resumed in , dates back as a coin to the earlier days of the republic, its reissue in that year marks a policy so radically new that the experience of previous years throws practically no light on its working. the act of provided for the purchase by the government, each month, of not less than two million dollars' worth, and not more than four million dollars' worth of silver bullion, for coinage into silver dollars at the rate of - / grains of standard silver (or - / grains of fine silver) for each dollar. the amount of the purchases, within the specified limits, was left to the discretion of the secretary of the treasury. as every secretary of the treasury, throughout the period in which the act was in force, kept to the minimum amount, the practical result was a monthly purchase of two million dollars' worth of silver bullion. the act is sometimes described as having called for a monthly issue of two million silver dollars; but this was not the exact situation. the amount of silver obtainable with two million dollars obviously varies according to the price of the metal in terms of the dollars with which the purchases are made. in february, , when the first purchases were made, those dollars were the inconvertible united states notes, or greenbacks, worth something less than their face in gold. the amount of silver bullion obtainable with two million such dollars depended, on the one hand, on the price of silver bullion in terms of gold, and on the other hand on the value of the dollars themselves in terms of gold. when specie payments were resumed, on the first of january, , and the greenbacks became redeemable in gold, the measure of value in the united states became gold, and the extent of the coinage of silver dollars under the act of became simply a question of how much silver bullion could be bought with two million dollars of gold. the price of silver in was, in terms of gold, not far from a dollar for an ounce of standard silver. since it has gone down almost steadily, and ... in was barely above cents an ounce.[ ] the silver dollar of - / grains contains less than an ounce ( grains) of standard silver. the monthly purchase of two million dollars' worth of silver has therefore always yielded more than two million silver dollars, the amount being obviously greater as the price of silver went lower. on the average, the monthly yield [was] not far from two million and a half of silver dollars.... thirty millions of silver dollars a year was roughly the addition to the currency of the community from the act of . silver certificates [ ]an important provision of the act of was that authorising the issue of silver certificates against the deposit of silver dollars. this authority was limited at the time to certificates in denominations only of ten dollars and upward: a restriction which ... proved to be of great importance. at the time it does not seem to have been expected that the silver certificates would enter directly into the circulating medium; we may infer from the restriction to large denominations that no such expectation was entertained. but in fact, it has been chiefly in the form of certificates that the silver has entered into circulation. these certificates, it is true, are not, like the dollars themselves, a legal tender; but they are receivable for all public dues, customs included, and they pass from hand to hand at least as readily as the bulky pieces which they represent. causes of the act [ ]the passage of that act was due to causes easily described. it was part of the opposition to the contraction of the currency and the resumption of specie payments which forms the most important episode in our financial history between and . the resumption of specie payments had been provided for by the act of , and was to take place on january , . in the meanwhile, the long-continued depression which followed the crisis of intensified the demand for more money and higher prices. that demand led to the inflation bill passed by both houses of congress in , and killed by the veto of president grant. the same feeling led to the silver act. the great fall in the price of silver, beginning in , and showing itself markedly in , made silver, at the old ratio, a cheaper currency than gold, and so caused the opponents of the return to specie payments to prefer silver to gold, as they preferred paper to either. no doubt some additional force was given to the movement in favor of the use of silver from the desire of the silver-mining states and their representatives, that the price of the metal should be kept up through a larger use of it for coinage.... wherein peculiar [ ]although the specific measure passed in thus rested on a long train of historical causes, it contained details that were essentially new, not only in our own experience, but in that of the world at large.... it ... provided for a regular mechanical addition of large amount to the general circulating medium. no precise experiment of this kind had ever been tried. it is true that germany and the countries of the latin union possess, in their circulating medium, large quantities of overvalued thalers and five-franc pieces which are exactly like our silver dollars. they also are legal tender without limit; their total quantity is limited; and it is only by this limitation of the quantity that their value is kept above that of the bullion contained in them. but the thalers and francs in these countries are not new additions to the currency. they are remnants from an earlier period, when germany had a silver standard, and the latin union a complete bimetallic standard. no addition whatever to the thalers is made in germany; and if some coinage of five-franc pieces takes place in france and in other countries of the latin union, the additions are meant merely to fill the place of abraded coins, to provide for the ordinary losses from daily use, and to make any additions to the supply which may be needed for convenience in making small change. no other country has ever entered on an addition of overvalued coin to its circulating medium having the object and extent of that made by our silver act of . this characteristic of the measure, it need hardly be said, was the result not of any deliberate intention to try a new experiment, but of the spirit of compromise which explains so many anomalies in the legislation of democratic communities. the silver act, as passed by the house of representatives, provided for complete bimetallism--for the free and unlimited coinage of the silver dollar at the old ratio of to . in the senate, it was amended by the substitution of the provisions for a limited coinage, which were finally enacted. the compromise was meant to satisfy both those who objected to the cheaper standard and those who wanted more money; and it afforded a welcome escape to the legislators who were trying to satisfy all parties. at the time, no one probably expected that the measure would remain in force for any great length of time. the conservative element hoped that it would be repealed after a short trial; the inflationists (for by that name they might, then at least, fairly be called) believed that it would soon be superseded by the free and unlimited coinage of silver. as it happened, the act remained in force, unamended, and indeed without very serious attempt at amendment, for over twelve years; and the measure which succeeded it in , though different in many details, followed the same method of forcing a large regular injection into the circulating medium of money based on silver purchases by the government. limited circulation of the silver dollars [ ]the government has made every effort to get the dollar coins out of its hands.... but the great bulk of the coins thus got out of the treasury return to it almost at once. the degree of favor which they meet with of course ... varies in different parts of the country, apparently reflecting in a curious way the popular feeling as to the desirability of having silver currency at all. they circulate very little east of the alleghanies, but are used more freely and permanently in the mississippi valley. among the negroes of the south the big pieces are said to be favorites, and to find a permanent lodgment. their greatest circulation ... was reached in ; after that time the change in the denominations of silver certificates caused a decline in the amount used. provisions of the act of [ ]the act of july , , is[ ] more remarkable than that of . it is unique in monetary history. it provides that the secretary of the treasury shall purchase each month at the market price four and a half million ounces of silver bullion. in payment he shall issue treasury notes of the united states, in denominations of between one dollar and one thousand dollars. these treasury notes, unlike the old silver certificates, are a direct legal tender for all debts, public or private, unless a different medium is expressly stipulated in the contract. they differ from the silver certificates in another respect; they are redeemable either in gold or silver coin, at the discretion of the secretary of the treasury. the indirect process of redemption which,... was applied to the silver certificates, is replaced for the new notes by direct redemption. the avowed object is to keep the silver money equal to gold, for it is declared to be "the established policy of the united states to maintain the two metals at a parity with each other on the present legal ratio, or such ratio as may be provided by law." the act of is repealed; but the coinage of two million ounces of silver into dollars is to be continued for a year (until july , ). thereafter it is directed that only so many silver dollars shall be coined as may be needed for redeeming any treasury notes presented for redemption. practically this means that the coinage shall cease; redemption in silver dollars will not be called for under present conditions. the coinage of silver dollars accordingly was suspended by the treasury on july , ; a change which was the occasion of some vociferous abuse and equally vociferous praise, but which in reality was of no consequence whatever. amount of monthly issues [ ]the monthly issues of the new treasury notes vary, like those of the old silver certificates, with the price of silver. but the new issues vary directly with the price of silver, while as we have seen, the old issues varied inversely with the price. the volume of treasury notes issued is equal to the market price of four and one-half million ounces of silver. for a month or two after the passage of the act, the price of silver advanced rapidly, and at its highest, on august , , touched $ . . after september a steady decline set in.... the policy of the banks [ ]shortly after the passage of the act [of ], some sort of understanding seems to have been reached between the treasury department and the banks of new york. the banks came to an agreement that the new notes were to be treated as "current funds," receivable in all payments, clearing-house settlements included.... the fact that the new notes were received by the banks from the sub-treasury in settlement of clearings, was of sensible advantage to the government. the success of the government in maintaining its nominal willingness to pay gold to all comers was due to the forbearance of the banks. gold was called for by them only when needed for export. the argument for silver the bimetallist arguments [ ]... is it desirable that we should have more money? does the maintenance of the gold standard involve injustice or hardship to debtors, or to any class in the community? does it have any ill effects in hampering industry or checking the advance of production? is the free coinage of silver, or any measure leading ultimately to a silver basis, fairly open to the objections commonly urged against it on the grounds of dishonesty and injustice?... in considering these questions, we must look to the ultimate and permanent results of the silver standard. the details ... as to the mode in which the silver issues circulate and the degree of promptness with which they will affect prices, are here of no great importance. under a silver standard the rise in prices will take place in the end; and we are concerned with the social consequences of such an eventual result.... i propose here to take up chiefly one set of serious arguments--those which rest on the changes in general prices which have taken place throughout the civilised world in the last twenty years. the conclusions in favor of a wider use of silver, drawn from such changes, have been maintained by distinguished economists. it is true that the particular plans for the use of silver which are now in vogue in the united states have generally been opposed by these economists. they have urged international agreements for the wider use of silver, and have deprecated independent action by any one nation. but the more thoroughgoing advocates of free silver in the united states say, certainly with much force, that an international agreement has proved to be simply impracticable, and that if the wider use of silver is to be deferred until there is concerted action by the great nations, it will never come. if anything in this direction is to be done, some one country must be courageous enough to take the lead, trusting that others will follow in due time. and certainly it is true that the scheme for international bimetallism has practically no prospect of adoption; while, on the other hand, the serious arguments urged by its advocates tell, in some degree, in favor of any scheme for enlarging the use of silver as money. these arguments, moreover, are of weight, and deserve a more painstaking consideration than is often admitted by those who oppose the silver legislation of the united states. the serious and important arguments, then, among those who, both in this country and in europe, advocate a greater use of silver as money, are derived from the general fall in prices which has been so conspicuous among the economic phenomena of the last twenty years. to that fall they ascribe two evils: first, an unjust increase in the burdens of debtors; and, second, a check to enterprise and to the efficient working of the productive machinery of the community. the increase in the burdens of debtors is one which all economists have pointed to as the result of a general fall in prices, or rise in the value of the circulating medium. the debtor who borrows a hundred dollars now, and repays them five years hence, when all prices have fallen, gives back more than he received. on debts running for short periods of time, changes in general prices are not likely to be great enough to cause serious hardship; but on debts running over long periods the loss to debtors and the gain to creditors will be great and continuing. but such a steady and continuous fall, it is urged, has taken place since ; and the fall is likely to continue further, and to renew its hardships on each new act of borrowing, because its cause is a permanent one. that cause is found in the growing scarcity of gold, which has been selected as the sole standard of value among civilised countries. the production of gold, after having increased with great rapidity in the twenty years following the californian and australian discoveries in , has gone on but slowly since . meanwhile, the population of the civilized countries, their wealth, their production of commodities to be exchanged, have increased with extraordinary rapidity; while the adoption of the gold standard by germany in , and the resumption of specie payments by the united states in and by italy in , have added to the demands for which the scanty annual supply of gold must suffice. hence the general fall in prices; in other words, the appreciation of gold. the second effect of the appreciation of gold, in checking industrial progress and promoting industrial depression, has been less insisted on in the united states than in european countries. the classic economists had generally reasoned that a general rise or fall in prices was indifferent, except in regard to the relations of debtor and creditor. if money became scarce, if its value rose and all prices fell, every producer, to be sure, would receive a smaller money income than before, and would have a smaller money capital. but he would be able to buy as many commodities and as much labor as before, and would be in reality just as rich and prosperous. in the middle of the eighteenth century, when economic thought was just beginning to assume its modern form, david hume had argued that though a fall in prices is at bottom indifferent to everybody (except as debtor or creditor), it would yet, in its effects on men's spirits and expectations, which are all connected with money and with terms of money, exert a depressing influence on industry, and would so be harmful; while rising prices, though also really indifferent to all, would stimulate hope and confidence, and so arouse to more active exertion and more plentiful production. the younger mill, in his _political economy_, thought it worth while to enter on a careful refutation of hume's reasoning. but the bimetallists of our time are disposed to agree with the shrewd scotchman. they say that the active manager of industry, the business man or _entrepreneur_, in the first place is always more or less in debt; in the second place, is always buying labor, or materials, or goods, with the intention of selling a product at a later date at an advance in price. he habitually measures his gains in terms of money, and not in terms of the commodities he can buy with the money. in times when prices are falling, he finds it harder to meet his debts, and to dispose of his goods in hand at a money advance over what they cost him. but the business man, or entrepreneur, in our day is the director and initiator of industry. he employs labor, borrows capital, sets the wheels of industry in motion; it is his expectations and fears and hopes which determine primarily whether the investment of capital shall take place in large or small amount, and whether the machinery of production shall move smoothly and effectively, or slowly, hesitatingly, inefficiently. the argument certainly does not lack plausibility; nor can it be said to have often been squarely met. no doubt it takes the form, in the united states, more frequently of confused encomiums on the inspiriting effects of plentiful money, than of direct reasoning as to the ill effects of too little money, such as i have endeavored to state with fairness in the preceding sentences. yet it does not lack weighty backing. so eminent an economist as president francis a. walker has ... insisted on the evils of a deficient supply of money as strangling the arteries of industrial life. on the whole, however, the other argument, bearing on the increase in the burdens of debtors under falling prices, has been more often heard in the united states, and certainly has been of more effect. prosperity, activity, general industrial advance, have been in this country so great and so obvious that the argument as to any check to industry could take serious hold only in occasional periods of depression or slackened advance. the burden on american debtors from falling prices has therefore been much more steadily complained of, chiefly in regard to the debts of the farmers and other borrowers on a comparatively small scale. no doubt there are other debtors whose burdens are affected at least as much, notably the railways, among whom the practice of borrowing heavily on long time has sometimes had its serious effects. but it is the farmer whose case has received most attention, and in some ways doubtless has deserved it most. the discussion of the relations of debtors and creditors under the gold standard has led to some further conclusions as to the "honesty" of the gold and silver standards. those who oppose a silver basis speak of the silver dollar as a "dishonest" coin. but those who attack the gold standard retort that the really dishonest dollar is that of gold. it is pointed out by them that the fall in the price of silver which has taken place since has not been greater than that in the prices of commodities generally. as compared with commodities, therefore, silver has been more steady in value than gold. the fall in the gold price of silver, which is adduced by the mono-metallists to show that silver is not a good standard of value, is said to be the very thing which proves it to be a good standard of value; for a given amount of silver will buy the same amount of commodities, roughly, as it would twenty years ago, while a given amount of gold will buy more. if debts had been expressed in terms of silver, the debtor would have had to repay the creditor the same amount of commodities that he received--not more commodities, as he has had to do, with debts measured and repaid in terms of gold. so far as the attainment of the closest possible approach to ideal justice is concerned, a silver standard would have served the purpose better than a gold one. the effect of improvements in production the bimetallist agitation for a return to the wider use of silver concurrently with gold first became prominent in the years of depression which followed the crisis of . for some time those who opposed it took the ground that the alleged evils did not exist--that in fact there had been no permanent fall in general prices. the decline in the years after was supposed to be simply the usual reaction from the rise in prices which marks a period of speculative activity. it was expected that the upward movement of the next period of activity would bring the average range of prices as high as it had been before. the general revival which set in after in all civilized countries did indeed check the downward tendency, and in some countries brought about an appreciable rise. but this counter-movement by no means offset the marked fall which had preceded it; and in any case it soon came to an end, and was followed by a new fall, which has continued with no considerable interruption to the present time ( ). it is true that some part of the fall is no more than a recoil from the abnormally high prices of the years - . it is true, also, that some commodities have shown a tendency to rise, and that in one very important respect--in money incomes and the money rate of wages--there has been a striking exception to the general movement. further, it must be borne in mind that even the lowered level which has now been reached cannot be described as abnormally low, being still as high as that which obtained at the middle of the present century. but on the whole, the fact of a general fall in the prices of commodities during the last fifteen or twenty years cannot be denied. the fall has not been uninterrupted; it has not been so rapid or general as to bear on the face of it proof of harmful results; but it has been steady, and, in the opinion of the present writer at least, is likely to continue slowly and steadily for some time to come. recently, therefore, those who combat the bimetallist reasoning have taken a different position. they have reasoned that while prices may in fact have gone down, the fall is not due, as the bimetallists allege, to an appreciation of gold. it is to be accounted for, they say, by other causes, notably by the extraordinary improvements in the production of commodities. new inventions and the perfecting of old ones have cheapened almost all manufactured articles. raw materials and food products have been cheapened partly by the discovery of new sources of supply, and partly by that improvement which has been transforming the industrial situation more radically than any other--the wonderful cheapening of transportation by railways and steamships, which has made the resources of the plains of our west and of the sheep-runs of australia available for the supply of the markets of london and new york. so far as this train of reasoning undertakes to explain the mode in which the fall in prices has been brought about, it seems to me impregnable. but in so far as it endeavors to disprove the appreciation of gold, or to show that the general fall is not due to this appreciation, i have never been able to see its force. in truth, both the bimetallists and their opponents seem to confuse the question when they speak of the appreciation of gold as causing lower prices. the appreciation of gold _is_ the general fall in prices. the two are not related as cause and effect; they are simply two names for one and the same thing--namely, a different rate of exchange between gold on the one hand and commodities in general on the other, by which the same amount of gold buys more commodities than before. when the general fall in prices is admitted, the case of the bimetallists as to the appreciation of gold is established once for all. improvements in the production of commodities may explain how it happens that they are more abundant, and exchange on less favorable terms with gold, of which the quantity has not been increased by new rich mines or great improvements in production; but the fact of the depreciation of commodities, or of the appreciation of gold, is not thereby explained away. nevertheless, the improvements in production do seem to me to have an important bearing on the question in hand: a bearing not on the simple fact of the appreciation of gold, but on the social consequences which are said to flow from it, and therefore on the questions of policy which are here under consideration. a moment's thought will show, for example, that a general increase in the efficiency of labor affects very materially the mode in which a fall in prices acts on the relations of debtor and creditor. if a borrows from b a hundred dollars, repayable in five years, and if at the end of the five years prices in general have fallen to one-half of the previous rates, b, in paying back to a the one hundred dollars, clearly returns twice as many commodities as he got. but if, at the same time, the efficiency of labor has been doubled by improvements in production, b can produce with the same labor twice as many commodities as before; and he returns to a the product of the same quantity of labor as he received. the classic economists and the socialists (at least some schools of socialists) have maintained alike that the ideally perfect standard of justice in the exchange of commodities and services is equality of sacrifice or labor; that if things so exchanged for each other that equal sacrifice got the same reward, complete justice would be attained. applying this test to the relations of debtor and creditor in the case supposed, we find it not one of hardship to the debtor, but apparently one of justice to both parties. it is true the creditor gets more commodities than he gave; but he gets the product of the same amount of labor as he devoted to the commodities originally lent; and why should he not share with the rest of the community the benefits of a general increase in the productiveness of labor? this line of reasoning will become simpler and more concrete if we approach it from another point of view. reference has already been made to the most striking and important exception to the general tendency of prices to fall, namely, that money wages and incomes in all civilized countries have shown a tendency not to fall, but to rise. whether the incomes of the rich have increased faster than those of the poor, or whether the movement has shown itself with rough uniformity for all classes, is immaterial for the present discussion. the admitted fact of a general upward movement alike among rich, middle class, and poor is the significant thing. in other words, there has been an inverse movement of money wages and of the prices of commodities, the one going up while the other went down. now, such an inverse movement is what must take place in case of any real improvement in material welfare. the only concrete way in which civilized people can become better off, is by being able to buy more--by their money incomes going further in the purchase of commodities. the improvement may take the form either of higher money incomes, with stationary prices; or that of stationary incomes, with lower prices; or the intermediate form which in fact seems to have occurred, of money incomes rising somewhat and prices at the same time falling somewhat. if we assume a monetary supply that is limited, or does not increase as fast as improved means of production cause the quantities of commodities to increase, one or the other of the two forms last mentioned must be found. in such a state of things there can hardly be said to be any real hardship for the debtor. it is true that prices have fallen, and that the money he repays the creditor will buy more goods than it did when the loan was contracted; but his own money income has risen, or at least has not fallen, and the repayment of the loan can cause him no special hardship--none greater than he must have expected. the case clearly differs fundamentally from that of a simple rise in the value of money, or general fall in both prices and wages.... the fall in prices in the united states since , and that in european countries in the period since , are the result, on the whole and in the long run, of ... the general improvements in production; they have not been accompanied by a fall in money incomes, and they cannot be said to have caused an increase in the burden of debtors. the reasoning of the preceding paragraphs bears also on the second part of the bimetallist indictment--that, namely, as to the depressing effects of falling prices on industrial enterprise. whether a simple rise in the value of money, unaccompanied by any other circumstance, would have the depressing effects which the bimetallists predict and the classic economists deny, is a question radically different from that which in fact presents itself. it may be that in this simple case the bimetallists might prove to be, in some degree at least, in the right, and that the classic reasoning, here as on many other subjects, while sound in the long run, would need some qualifications and correction. in the long run, no doubt, it is immaterial whether prices are high or low, whether money returns fall or rise; and yet it might turn out that the habitual association of gain or loss with "making money" would cause a period of simple falling prices to be one of hesitating investment of capital and unenterprising conduct of business. but what the world in fact has seen has been the complex case of a fall in prices accompanied by great improvements in production. the business man and capitalist has had, to be sure, to deal with falling prices; but the same amount of capital and labor has turned out more commodities than before; and his total money returns, so far from declining, have generally increased. the money incomes of the managers of industry have shown the same upward movement as the money incomes of the other classes in society. so long as this is the case, it is idle to talk of a depressing effect on enterprise from the fall in prices, or of a strangling of the industrial organism from insufficiency of the circulating medium. in fact, the immediate cause of the fall in prices has been the pushing on the market for sale of larger and larger quantities of commodities, produced with profit at lower and lower cost: a state of things fortunate for the community, and surely not depressing for the business man.... this effect on the entrepreneur of improvements and of falling prices combined, doubtless accounts for the failure of the bimetallist agitation to secure any appreciable hold in the business world. the bimetallists, both in england and on the continent, have labored zealously to engage support among the business men, but never with a degree of success at all proportionate to the energy displayed. the simple reason is that the business world has not been in any state of chronic depression. in the ups and downs of industrial activity there have been periods which seemed to confirm the pessimistic accounts of the bimetallist and of other persons malcontent with the present order of things; but in due time the tide has always turned.... on the whole, then, the fall in prices, when considered in connection with the other great changes which have accompanied it, does not afford so much countenance to the bimetallist proposal as at first sight it seems to. the rise in money incomes and the improvements in production disprove any intolerable burden on debtors, and make it highly improbable that the change has had any general depressing effect on industry. the case of the farmer nevertheless, there is something more to be said, in explanation and justification of the discontent with falling prices, and of the silver agitation which rests on that discontent. while the effects of the fall in prices on debtors as a class and on producers as a whole have not given real grounds for complaint, certain particular debtors and producers have undoubtedly been injured. the case of these latter have given plausibility to the general arguments of the bimetallists, and, what is more important at the present juncture, has given strength to the movement in the united states for more money and more silver. the situation will be best understood if we contrast for a moment the different modes in which the improvements in production have been brought about in manufacturing industries on the one hand, in agriculture on the other hand. in manufactures the improvements have been better machinery, new processes, labor-saving inventions, the conduct of business on a larger scale, and so the greater and more effective division of labor. in agriculture the main cause of cheaper production has been different: it has been the opening up of new lands and new sources of supply. no doubt there are important exceptions to these general statements. in agriculture there have been advances in the arts--new plants, better fertilizers, improved implements, more effective ways of cultivating the soil. in manufactures, on the other hand, there have been important changes due to the discovery of new and rich mines of materials, such as coal, iron, copper. but on the whole, the difference holds good. in agriculture undoubtedly the opening of new lands through the improvements in transportation has been the most important single cause at work. the cheapening of agricultural products has been due not so much to the more effective use of the soil already under cultivation, as to the development of soil not formerly available for the supply of the market. the changes in production and prices have consequently affected the producers in these two branches of production in very different ways. in manufactures all alike have felt them, and have been able to accommodate themselves to the effects. no doubt the shrewder producers adopt improvements and new inventions first, and, so long as they keep in the lead, have the advantage of their competitors. they gain by doing a large business at lower prices, while for the time being their slower competitors lose. but new processes and new inventions spread over the whole field in no long time. the opening of a new source of supply, on the other hand, cheapens production through a process which the holders of the old source of supply cannot avail themselves of. if wheat is raised in large quantities in dakota, the price goes down as effectively as if the wheat fields of england and new york had suddenly become more fertile; but as those wheat fields produce no more than before, the farmer or land owner on the old soil has nothing to offset the lower price. this is the explanation of the agricultural distress of which so much has been heard in europe in recent years, and which has been the main occasion of the revival of protectionist feeling in france, germany, and other countries of the continent. the farmer on the old lands does not find in improvements in production any compensation for lower prices. if he owns the land, he must pocket the loss, and perhaps in the end abandon his land and turn to something else; such has been a common case in new england. if he is a tenant on the land, he will probably, after a period of struggle and hardship, get lower rents, leaving the landlord as the permanent sufferer; such has been the outcome in old england. if he was in debt before the change took place, he will find his debts growing more burdensome as his money income goes down; such has been the result with many a western farmer. it is in causes of this sort that we find the explanation, in part at least, of the restlessness among the western farmers of which the silver agitation is one sign. the fall in the prices of wheat, corn, and other staples has been due to enormously increased production in regions which were formerly out of reach of the market: in india, australia, russia, as well as in california, dakota, washington, oregon, and the far west generally.... it is probable that some of the complaints in regard to the burden of debt on the farmers are simply a legacy from the old days of inflated paper money. not a few of the debts of the present [ ] go back to the years before , when we had prices high in terms of over-issued paper money. these debts have been renewed and continued, in whole or in part; and the fall in prices has made them heavier and heavier to bear. the evil here again is real, and a remedy is now hard to find. the only conclusion which can be laid down with perfect conviction is that we should make sure of preventing the recurrence of a new era of excessive paper money. ... another important circumstance is the general transition in agricultural methods inevitable in those western states which have been settled for a generation or more. when new land is first taken into cultivation the most effective use of it is found in the continuous production of some staple crop like wheat and corn, which can be grown, so long as the cream of the soil is not exhausted, year after year with large returns. after a while, however, the land begins to show signs of exhaustion. the staple crops do not yield as largely as before, and less crude methods of using the soil must be resorted to. manures have to be applied, and the rotation and selection of crops practised. meat and dairy products, vegetables, fruits, and the miscellaneous agricultural articles, must take their place in rural economy. this change has been carried through very largely in states like new york, pennsylvania, and ohio. in the heart of the mississippi valley it is now under way; but the transition is trying, and to some of the farmers it is impossible. a good share of the american agricultural population has been so steadily bred to the easy and careless use of virgin soil that it cannot accommodate itself to more intensive methods. it is constantly moving westward; settling for a generation in one spot, and then, as the land shows signs of exhaustion, moving farther west. the more intelligent and versatile stay behind, adapt themselves to new conditions, and in time prosper under them. the least active also stay behind, and flounder hopelessly in the old ways. but a large number are always moving west. in every state between the alleghanies and the missouri river there are large tracts formerly cultivated by native settlers, who have sold their lands, as they showed signs of giving out, to german or swedish immigrants. these latter have not infrequently paid good prices for the lands: but they have been bred to intensive farming, to careful and varied use of the soil, and they have prospered where their native predecessors have been unwilling or unable to adapt themselves to the new conditions. the period of transition is a hard one for all of the native farmers, whether they stay behind or move on, and the lesson of using the soil with more skill and care is learned only under the pressure of necessity. in such periods all sorts of remedies for hard times make their appearance and have their run. the repeal of the sherman silver purchase act and the financial and economic consequences of silver legislation [ ]for fourteen years, - , only an insignificant amount of gold was paid out of the treasury in the redemption of legal-tender notes; the total amount of gold in the treasury increased almost steadily and continuously from $ , , on january , , to $ , , in . in the new issue of treasury notes, together with a change in commercial conditions, placed heavy burdens upon the reserve, the rapid diminution of which is shown in the following figures: _date_ _net gold reserve_ june , $ , , june , , , june , , , june , , , june , , , the reasons for the fall in the gold reserve are too various and complicated to be treated here: the failure of the great english banking-house of baring brothers in brought about a considerable withdrawal of english capital invested in the united states; and an unhealthy and inflated industrial development in this country was stimulated by the new tariff. to outward appearances the country was very prosperous; expenditures were large, imports increased, and a failure of the crops in europe in enlarged our grain exports. for a brief season only, were the natural effects of the sherman law delayed: europe soon recovered, american exports fell, and in the six months ending june , , the balance of trade against the united states was $ , , . the tariff of was followed by diminished customs receipts. the revenue from customs was as follows: $ , , , , , , , , , , ... fortunately the internal revenue receipts maintained their customary level with something to spare; but increased appropriations, due largely to the passage of a dependent pension bill in , cut deep into the funds of the treasury. in the surplus was $ , , ; in , $ , , ; in , $ , , ; in , $ , , ; but in appeared a deficit amounting to $ , , . the treasury had been weakened by the reluctance of secretary windom to deposit government funds in national bank depositories, and by his preference to rely entirely upon the purchase of bonds for getting money back into circulation. in the earlier years of harrison's administration, bonds were purchased freely--too generously in view of the impending strain upon the resources of the treasury. another element of concern was due to the change in the kind of money received by the government in the payment of revenue. before the passage of the sherman act nine-tenths or more of the customs receipts at the new york custom-house were paid in gold and gold certificates; in the summer of the proportion of gold and gold certificates fell as low as per cent., and in september, , to less than per cent. the use of united states notes and treasury notes of correspondingly increased.... the reason for this substitution of notes for gold was partly due to a reversal in treasury practice. for many years it had been the custom of the sub-treasury in new york to settle its clearing-house balances almost exclusively in gold or gold certificates. for example, in the fiscal year - the sub-treasury paid gold balances to the banks of nearly $ , , , and in the next year $ , , . the banks were thus daily supplied with gold which they in turn could furnish to their customers either for customs purposes or export deliveries. in august, , the treasury began the policy of using ... the new treasury notes in the settlement of new york balances, and in the year ending june, , secretary foster, apparently convinced of the need of a larger gold reserve to support the credit of the treasury notes, increased the use of the older united states notes and held on to the gold reserve. the unexpected result was that the banks, deprived of their usual supply of gold for trade purposes, sought for it at the treasury by the presentation of government notes.... in march, , cleveland for a second time entered upon the presidency. he demanded as the first condition of relief the suspension of silver purchases. the silver advocates, however, were still powerful in both parties, and president cleveland was at a disadvantage in not having the undivided support of his own party. even the position of secretary carlisle was ... doubted: it was publicly declared that he stood ready, if expediency demanded it, to redeem the treasury notes of in silver instead of gold, and, while standing upon the letter of the law which demanded their redemption in _coin_, practically to cut asunder the parity of gold and silver which had thus far been maintained. although the president attempted by a specific declaration to make clear the harmonious purpose of the administration that redemption would continue in gold, public apprehension would not be allayed. whatever might be the wishes of the administration, it was feared that it would not have power to carry them out; particularly when it was announced in april, , that the gold reserve had been drawn down to $ , , by redeeming the treasury notes of . at this juncture of financial and commercial difficulties, in june, , the british government closed the mints in india to the free coinage of silver. the price of silver bullion fell promptly and rapidly, and, while such a decline might on another occasion have produced no immediately serious consequences to the treasury, it came at a moment when public opinion, at least in the eastern states, was aroused to a belief that the entire financial problem was associated with the coinage of silver; and it thus furnished one of the contributory forces which drove the commercial community into a state of panic. it was not until june , , when the panic was well under way, that a special session of congress was called for august ; only by the most strenuous efforts could an adequate support, composed of elements in both political parties, be rallied to uphold the president's insistence that purchases of silver by the government should cease. the house quickly acquiesced, and on august , by a vote of to , passed a bill for the repeal of the purchasing clause; but the senate was stubborn, and not until october could a favorable vote, to , be secured. so far as the treasury was concerned, the mischief had been done; although the government was relieved from further purchase of silver which increased the volume of the obligations to be supported by gold, the old burdens still were sufficiently heavy, in connection with the low state of commerce and industry, to exhaust its immediate revenues. thus on december , , the actual net balance in the treasury above the gold reserve, pledged funds, and agency accounts was only $ , , . trade and industry had been disorganized; the panic of extended into every department of industrial life. in december, , the comptroller of the currency announced the failure during the year of national banks, state banks, private banks, savings banks, loan and trust companies, and mortgage companies. some of these institutions afterwards resumed business, but the permanent damage was great. the fright of depositors was general and the shrinkage in deposits enormous; bank clearings were the lowest since ; clearing-house loan certificates were once more resorted to, this time on a much larger scale than ever before, and extended to cities throughout the country. the production of coal, both anthracite and bituminous, fell off; the output of pig-iron, which had been about , , tons in , fell to , , tons in ; new railway construction almost ceased; in there were railways, operating a mileage of nearly , miles, in the hands of receivers; among these were three great railway systems,--the erie, northern pacific, and union pacific. the total capitalization in the hands of receivers was about $ , , , , or one-fourth of the railway capital of the country. the earnings of railroads and the dividends paid to stockholders were seriously affected; securities fell to one-half and even one-quarter their former value; commercial failures increased from , in , with liabilities of $ , , , to , in , with liabilities of $ , , . the problem of the unemployed became general; special committees were organized in nearly all of the large cities to provide food, and in many places relief work by public bodies was instituted. in the spring of general want and distress led to labor strikes and riots, as in chicago, and even to more abnormal outbreaks, as seen by the march of coxey's army of unemployed from ohio to washington. the distress was increased by the failure of the corn crop in ; the demand for wheat in europe fell off and wheat was sold on the western farm for less than fifty cents a bushel. sale of bonds for gold under these adverse conditions it was inevitable that the revenues of the government should continue to decline. in the six months, january to june, , the excess of expenditures over receipts was $ , , , and during the fiscal year ending june , , this excess increased to $ , , . it was even necessary to encroach upon the gold reserve for current expenses, and for months this fund was far less than caution and prudence demanded. when the integrity of the gold reserve was first assailed, both secretary foster, in the closing months of harrison's administration, and secretary carlisle, at the beginning of cleveland's term, endeavored, with some success, to tide over emergencies by appealing to the banks to exchange gold for legal tenders. the banks recognized that the instability of government credit seriously affected the value of all securities in which they were interested; and in february, , they handed over to the treasury about $ , , in gold, and in march and april about $ , , more. the expedient was not enough to stop the continued drain upon the treasury. at the very moment that the government was relieved of notes through the exchange of gold by the banks, other notes were presented to the treasury for redemption, largely to draw gold for exportation in the settlement of trade balances.... the only way to protect the fund of gold reserve under the circumstances was borrowing--that is, the sale of bonds for gold--yet some people who were opposed to the overthrow of the gold standard consistently urged that borrowing be postponed until the last moment, so as to add as little as possible to the resources available for purchases of silver. some of the gold party would even have permitted the drain to go on to the end, notwithstanding the inevitable evils, in the belief that the country could be convinced of its errors in no other way. eventually, to prevent a suspension of specie payments in gold, the treasury department made successive issues of bonds for the purchase of gold. these issues are very interesting to the student of finance. no administration wishes to add to public indebtedness in times of peace; and secretary carlisle had scruples against selling bonds, except with the authority of the congress then sitting; hence the issue of bonds was put off to the last possible moment. the only existing authority for selling bonds was the resumption act of ; this provided only for ten-year per cent., fifteen-year - / , and thirty-year per cent. bonds, all of which would command a premium so high as to diminish their attractiveness as an investment, and, taken in connection with the length of time which they ran, to hamper the treasury in purchasing or refunding the debt when the crisis was over. the administration asked for the issue of low-rate bonds, but congress, inspired in part by free silver arguments, and in part by political intrigues to discredit the administration, paid no attention to the recommendation of the secretary. finally, in january, , without special legislation, but under the ancient authority of the resumption act, $ , , of per cent. ten-year bonds were sold, yielding $ , , ; and again in november an equal amount of bonds with like conditions were marketed, yielding $ , , . the sale of the first issue was on the whole creditable, considering that at about the same time the president was obliged to veto a bill providing for coining the silver seigniorage, and that an effort had been made in the courts to enjoin the secretary of the treasury from selling bonds under the law of . in each case the sale of bonds called for subscriptions in gold, but the new supplies were quickly exhausted by fresh redemption of notes. the fluctuations in the volume of gold in the treasury as a consequence of the bond sales is seen in the following figures: _date_ _gold in treasury_ january , $ , , february , " , , _bond issue._ november , " , , november , " , , _bond issue._ february , , , the endless chain appeared to be in full and unceasing operation; not only was gold being withdrawn for export but also for individual hoarding, in fear of an impending suspension of gold payments. the treasury finally recognized the futility of selling bonds for gold, most of which was drawn out of the treasury itself, by the presentation of legal-tender notes for redemption. a new device was tried: in february, , the secretary of the treasury entered into a contract with certain bankers for the purchase of , , ounces of standard gold at the price of $ . per ounce, to be paid for by the delivery of united states bonds having thirty years to run and bearing per cent. interest; not less than one-half of this gold was to be procured abroad, and the parties with whom the contract was made stipulated that they would "as far as lies in their power exert all financial influence and make all legitimate efforts to protect the treasury of the united states against the withdrawals of gold, pending the complete performance of this contract." an ounce of standard gold was worth $ . , and the difference between that sum and the contract price represented the premium received by the government on the bonds, making the price at which the bonds were accepted $ . . a condition was affixed to the contract, by which, in case congressional authority could be secured, a per cent. _gold_ bond might be substituted, and for this the syndicate agreed to pay a higher price. in view of the unfavorable terms of the bargain imposed by this contract, the administration hoped that congress would promptly act and authorize the issue of the lower and more remunerative bond. faithful in its adherence to silver, congress could not be swerved; it defeated the bill authorizing the sale of a low-rate gold bond, and then engaged in an angry debate denouncing the executive for his subserviency to the gold standard banking interests in entering into a contract not only disgraceful but illegal. in reply it could be shown that the new york sub-treasury was within forty-eight hours of gold exhaustion.... at first the syndicate was successful, because of some slight improvement in trade, but later it practically failed to control the price of exchange. it once more became cheaper for merchants to ship gold than to purchase bills, and gold continued to be withdrawn from the treasury. on december , , the gold reserve stood at $ , , , and after the commercial apprehension caused by president cleveland's venezuelan message a fortnight later, the reserve was still further reduced. once more the administration resorted to a bond sale, and again the action was preceded by a special message from the president to congress asking for a grant of authority to issue gold bonds instead of coin bonds, and also for the retirement of the legal-tender notes which continued in an endless chain their journey to the treasury, and drove off gold to the commercial market. as congress still refused to act, the treasury resorted to a fourth issue of $ , , per cent. bonds. the treasury now carefully avoided any appearance of dealing through a syndicate and publicly advertised for offers, with the encouraging result of , bids, amounting to $ , , . seven hundred and eighty-one bids were accepted and the premium yielded about $ , , . the relief obtained by the treasury, however, was meagre, for it is estimated that $ , , of the bonds were purchased with gold withdrawn from the treasury by the redemption of notes. this was the government's penalty for its endeavor to separate itself from all dealings with a banking syndicate. in spite of this sale of bonds the reserve remained near the traditional danger line. in july, , it fell to $ , , because of hoarding due to popular apprehension as to the success of the silver movement in the november presidential election. fearful that a new bond issue might strengthen the claims of the silver advocates, bankers and dealers in foreign exchange voluntarily combined to support the treasury by exchanging gold for notes. the effort succeeded, and the reserve was placed in safety. after the elections in november gold came out from its hiding-places, and was turned into the treasury in large amounts. business and revenue improved and the difficulties of the treasury department were tided over. many republicans held the earnest conviction that the issue of bonds would not have been necessary if the revenue had been sufficient. not only had industry and commerce been unsettled by the tariff act of , but the operations of the endless chain must certainly continue, it was held, until there was a generous income in excess of expenditures, whereby a considerable part of the credit currency might be covered into the treasury and thus lessen the possible claims for redemption. the administration emphatically replied that at no time when bonds were issued was there intention of paying the expenses of the government with their proceeds, and that the treasury department had no authority whatever to issue bonds for such purposes. president cleveland was insistent that on each occasion of a bond issue there were sufficient funds in the treasury to meet the ordinary expenditures of the government. the proceeds of the bonds sold for the maintenance of the national credit were, however, turned into the general fund of the treasury, and consequently, though not originally designed for that purpose, employed to meet indiscriminately all demands made upon the government, whether for redemption of notes or the payment of debts.... there was a series of deficits beginning with , but the deficit by no means equalled the amounts of bonds sold. footnotes: [ ] adapted from a. d. noyes, _forty years of american finance_, pp. - g. p. putnam's sons, new york and london. . [ ] _ibid._, pp. - . [ ] f. w. taussig, _the silver situation in the united states_, pp. , . g. p. putnam's sons. new york. . [ ] i have stated the price here, for simplicity, in terms of so much per ounce of standard silver, _i. e._, silver containing per cent. of alloy. the usual quotation in the united states is per ounce of fine silver. [thus, the new york price, march , , was - / cents per ounce of fine silver.] [ ] _ibid._, pp. , . [ ] _ibid._, pp. , . [ ] _ibid._, pp. - . [ ] _ibid._, pp. , . [ ] _ibid._, pp. , . [ ] [present tense because written while the act was still in force.] [ ] _ibid._, pp. , . [ ] _ibid._, pp. , . [ ] _ibid._, pp. - . [ ] davis r. dewey, _financial history of the united states_, pp. - . longmans, green and company, new york, . chapter viii index numbers [ ]index numbers are used to indicate changes in the value of money. the objects for which this measurement is undertaken are thus well stated by sir r. giffen (second report of the committee appointed for the purpose of investigating the best method of ascertaining and measuring variations in the value of the monetary standard. report of the british association, ): ( ) the fixation of rents or other deferred payments extending over long periods of time, for which it has been desired to obtain a currency of a more stable sort than money is supposed to be. ( ) to enable comparisons to be made between the value of money incomes in different places, which is often an object of great practical interest; not only individuals contemplating residential changes, but also governments and other large spending bodies, spending money in widely distant places, having to consider this question. ( ) to enable historians and other students making comparisons between past and present to give an approximate meaning to the money expressions which they deal with, and say roughly what a given fine, or payment, or amount of national revenue or expenditure in a past age would mean in modern language. to which some would add: ( ) to afford a measure of the extent to which trade and industry have been injuriously affected by a variation in prices; and of the correction which it would be desirable to apply to the currency. an index number is constructed by combining several items, each of which is a ratio between the price of a certain article at a particular date under consideration (_e. g._, last year or month) and the price of the same article at a period taken as base or standard (_e. g._, - , in the index number constructed by mr. sauerbeck, _journal of the statistical society_, and ). these ratios are generally expressed as percentages. _e. g._, the percentage for _flour_ in , as given by mr. sauerbeck, is ; meaning that the price of flour in is to the average price of the same article in - as : . the term index number is sometimes applied (_e. g._, by mr. sauerbeck, _op. cit._) to each of these items, as well as to their combination. the percentages are usually compounded by taking an average of them. but a result of equal generality may be obtained by taking their sum. one of the best-known index numbers, that of the _economist_, is thus constructed. twenty-two articles having been selected, the price of each article at the current date compared with its price at the standard period ( - ) is expressed as a percentage; and the sum of these percentages is put as the index number. thus the _economist_ index number for the year is ; such a sum is easily reduced to the form of an average by simple division (_e. g._, ÷ = ). accordingly in what follows it will be sufficient to consider the latter form only. the construction of an index number presents the following problems: (_a_) what are the commodities of which the prices are to be taken? (_b_) how are the prices to be ascertained? (_c_) how are the ratios between the prices of each article at the current and the standard dates to be combined? the answers to these questions vary according to the purpose in hand.... as appropriate to the first purpose, a standard of deferred payments, two methods present themselves, viz., to arrange that the debtor should pay, the creditor receive, either ( ) the same quantity of goods and services, the same amount of utility, so to speak; or ( ) the product of the same quantity of labour--or more exactly effort and sacrifice. of these methods the former has been more generally accepted. it is adopted for instance by the british association committee already referred to, as _par excellence_ the measure of the change in the value of the monetary standard. the former method is indeed more intelligible. however, in favour of the latter there are some weighty considerations and authorities. it seems to be the nearest possible approach to ricardo's conception of a commodity invariable in value, "which at all times requires the same sacrifice of toil and labour to produce it." (_principles_, iii. ch. xx., "on value and riches," cp. mill, bk. iii. ch. xv., "on a measure of value.") "a standard," says mr. leonard courtney, "should be something which as far as possible involves the same labour and the same sacrifice in obtaining it" (_nineteenth century_, march, ). prof. marshall, in his evidence before the royal commission on gold and silver, says, speaking of appreciation of gold: "when it is used as denoting a rise in the real value of gold, i then regard it as measured by the diminution in the power which gold has of purchasing labour of all kinds--that is, not only manual labour, but the labour of business men and all others engaged in industry of any kind" (question ). if the first method is adopted, the answers to the questions above set are as follows: (_a_) the commodities of which the prices are to be taken should be articles of consumption rather than materials and implements. payments for personal services should be included, but not wages in general. (_b_) retail prices should be used. (_c_) the proper combination of the ratios is an average of the kind technically called _weighted_.... the general principle according to which the weights are to be assigned is that they should represent the importance of each commodity to the consumer. but this idea may be embodied in different plans. . one plan is to assign as the weight of each percentage, or ratio between prices, the value of the corresponding commodity at the initial or standard period. according to this plan the index number is the ratio between these two values: the quantities initially consumed at the prices of the current date, and the same quantities at the standard prices. this method is exemplified by sir r. giffen's estimate of the change in the value of money between (and ) and _earlier_ years, in his report on prices of exports and imports, , table v. . another plan is to assign, as the relative importance of each percentage, its value at the particular epoch, the current year. this plan is adopted by mr. palgrave in his memorandum on _currency and standard of value_ ... in the third report of the royal commission on depression of trade and industry, table xxvii. . according to another plan, the index number is the ratio between the following two values: the quantities consumed at the current date at the current prices, and the same quantities at standard prices. this plan is adopted by mr. sauerbeck (_journ. stat. soc._, , p. ). . or, instead of taking either the initial quantities or those of the current date, a mean between the two may be taken. this is the plan adopted by the british association committee. they estimate "the average national expenditure on each class of article at present and for the last few years"; and put for the relative importance of each commodity a round number corresponding to that estimate. thus the estimated expenditure per annum on _wheat_ is £ , , , and on _meat_ £ , , : that is respectively . per cent., and per cent. of the sum of the corresponding estimates for all the commodities utilized by the committee. as convenient approximations, the weights five and ten are recommended by the committee. if the index number based on labour ... rather than on consumption, is adopted as the standard for deferred payments, it would be proper by analogy to take as the measure of appreciation or depreciation the change in the pecuniary remuneration of a certain set of services, namely all, or the principal, which are rendered in the course of production throughout the community during a year, either at the initial or the current epoch; or some expression intermediate between the two specified. but it may be doubted whether the statistics requisite for this method are available. with regard to the second and third of the purposes above enumerated, the determination of the comparative value of money at distant places and remote times--one or other of the two methods indicated would seem to be theoretically proper. for the fourth purpose, the regulation of currency, the proper construction of the index number would seem to be as follows: (_a_) the "articles" of which the prices are taken into account should be both commodities and services; (_b_) both wholesale and retail prices should be used; (_c_) the relative importance of each article should be proportioned to the demand upon the currency which it makes. but here as in other parts of the subject theory halts a little, and statistics lag far behind theory. considering the theoretical doubts and statistical difficulties which attend the determination of _weights_ proper to each purpose, there is much to be said in favour of assigning equal relative importance to all the items; especially if care is taken to include many articles such as _corn_, _cotton_, etc., which for any of the purposes which may be contemplated must be of first-rate importance. such is the character of some of the principal index numbers which have been constructed--those of the _economist_, of jevons, of soetbeer, and of mr. sauerbeck. in the construction of such an index number the use of the arithmetic mean is not imperative. jevons employs the geometric mean. his reasons for preferring it are not very clear (the "variation of prices," _currency and finance_, p. ).... the geometric mean has also the advantage of being less liable than the ordinary average to be unduly affected by extremely high prices (_report of the british association_, , p. ). the great objection to the geometric mean is its cumbrousness. there is another kind of mean which has some of the advantages of the geometric, and is free from its essential disadvantage; namely, the median ... which is formed by arranging the items in the order of magnitude, and taking as the mean that figure which has as many of the items above as below it. for instance the median of the forty-five percentages on which mr. sauerbeck's index number is based was, for , ; while the arithmetic mean was . it is difficult to see why the latter result is preferable to the former; if what is required is an _index_ of the change in general prices, not specially referred to any particular purpose, such as of securing a constant benefit to a legatee. the perplexity of a choice between such a variety of methods is much reduced by the two following considerations. _first_, beggars cannot be choosers. the paucity of statistical data (see the report drawn up by sir r. giffen in the _report of the british association_ for , p. ) restricts the operation. thus for the purpose of index numbers based on consumption ... retail prices are theoretically appropriate; but "practically it is found that only the prices of leading commodities, capable of being dealt with in large wholesale markets, can be made use of" (giffen, _loc. cit._). _second_, the difference between the results of different methods is likely to be less than at first sight appears. for instance, the probable difference between the index number constructed by the british association committee, and six others which have been proposed by high authorities--supposing the different methods to be applied to the same data, viz., the prices of twenty-one articles specified by the committee may thus be expressed. the discrepancy which is as likely as not to occur between the committee's and other results is from to . per cent. the discrepancy which is very unlikely to occur is from to per cent. (_report of the british association_ for , p. ). in fact, the index number for the year , as determined from the same data by seven different methods, proved to be , . , , , , , . (_ibid._, p. ). the practical outcome of these two considerations is thus well expressed by giffen (_loc. cit._ p. ), "the articles as to which records of prices are obtainable being themselves only a portion of the whole, nearly as good a final result may apparently be arrived at by a selection without bias, according to no better principle than accessibility of record, as by a careful attention to weighting.... practically the committee would recommend the use of a weighted index number of some kind, as, on the whole, commanding more confidence.... a weighted index number, in one aspect, is almost an unnecessary precaution to secure accuracy, though, on the whole, the committee recommend it." footnotes: [ ] _dictionary of political economy_, edited by r. h. t. palgrave. vol. ii, pp. - . macmillan and company, limited. london. . chapter ix banking operations and accounts [ ]the intermediate employed in actual transactions is, in increasing degree, that form of currency called credit, the lowest order of currency, rather than money itself. checks and drafts make up a progressively larger share of the circulating medium. the net deposit credits in the national banks in the united states--to say nothing of the other banks--are double the volume of the actual money in the country. and a large share of this actual money is really employed as reserves to support the credit circulation. more than per cent. of the larger sorts of transactions are mediated through the use of deposit credit, and probably more than one-half of the remaining transactions are similarly effected. thus the study of banking is essential to any understanding of monetary problems.... [ ]for a bank, as well as for any other considerable establishment, it is requisite that a capital should be provided at the outset. there can be no constant proportion between the amount of this capital and the extent of the business which may be built up by its means. we can only say that, other things being equal, the larger the business that can be carried on with safety with a given capital, the larger will be the field from which profits can be earned, and the higher the proportion which the profits will bear to the original investment; but the point at which the extension of the business passes the line of safety, must be determined by the circumstances of the particular bank, by the kind of business carried on by those dealing with it, and by the condition of the community in which it is established. the attempt has sometimes been made to limit by law for incorporated banks the proportion of transactions for a given amount of capital, but no such provision has any foundation except a conjectured average, too rough to be of service in any individual case. in this respect, as in so many others, the judgment of the persons most interested, acting under the law of self-preservation, is far more trustworthy than any legislative decision. the capital thus to be provided at the outset is, of course, in the case of a private bank, the contribution of the partners, as in any other undertaking. in the case of an incorporated bank the capital is divided by law into equal shares or units of fixed amount; as _e. g._, under the law of the united states, a capital of $ , is divided into , shares of $ each; and these shares are contributed by the individual shareholders, in such proportion as they please. the law may as a matter of public policy limit the proportion of capital stock to be owned by any one individual or firm, and it may also limit the liability of shareholders for debts due by the bank, in case of its failure; but in general, in the absence of special provisions to the contrary, the powers, rights, and liabilities of every shareholder are now usually determined by the number of shares of the stock contributed or owned by him. in the election of directors and of other officers for the immediate management of the business, every share entitles its owner to cast one vote; the dividend of profit is divided in the ratio of shares owned, and contributions to meet losses, if required by law, are called for in the same ratio. the capital subscribed by the intending shareholders must necessarily be paid in in money or in the legal tender of the country. it is not necessary that the whole should be paid in at the outset, but the payment of the whole usually precedes the full establishment of the business; and, in the case of incorporated banks, the law often requires that some definite proportion, as _e. g._, one-half, shall be paid in before the opening of business, in order to insure good faith and a solid basis for the business undertaken. if, now, we undertake to represent by a brief statement of account the condition of a bank having a capital of $ , paid in, in specie, on the morning when it opens its doors for business, we shall have the following: _liabilities_ _resources_ capital $ , specie $ , it may at first sight appear to be a contradiction in terms, that the capital should be set down as a liability and not as a resource. but we must here distinguish between the financial liability for what has been received from the shareholders and the right of property in the thing received. the bank has become accountable to its shareholders for the amounts paid in by them respectively, but the money actually paid in has become the property of the bank; or, in the language of accountants, the bank has become liable for its capital, and the money in hand is for the present its resource for meeting this liability, or for explaining the disposition made of what has been received. as the bank requires banking-rooms and a certain supply of furniture and fixtures for the convenient transaction of its business, we may suppose it to expend $ , of its cash in providing this "plant." the property thus procured, with the remaining $ , in cash, will then be the aggregate resources by means of which the capital is to be accounted for, and the account will stand as follows: _liabilities_ _resources_ capital $ , real estate, furniture, fixtures, etc. $ , specie , -------- -------- $ , $ , the bank, however, cannot answer the purposes of its existence, or earn a profit for its shareholders, until its idle cash is converted into some kind of interest-bearing security. nor is it enough that a permanent investment of the ordinary kind should be made, as by the simple exchange of the cash for government bonds or railway securities. it is the chief business of the bank to afford to purchasers and dealers the means of using, by anticipation, funds which are receivable by them in the future, and this implies both the purchase of private securities or "business paper" to a considerable extent, and also frequent change and renewal of purchases. moreover, while the private capitalist finds it advantageous to make simple investments of a permanent sort, this would plainly be insufficient for the shareholders of a bank, who have to pay from its profits some serious expenses of management, and need, therefore, a larger field for earnings than the ordinary returns on their capital alone. the bank being obliged then to extend its operations beyond the amount of its capital, is compelled for this purpose to make use of its credit. in fact, it is only by such a use of its credit that the establishment becomes in reality a bank. most of the conditions of the case are best answered by the "discount" of commercial paper as above described. the time for which such obligations have to run varies with the custom of the trade which gives rise to them, but is in most cases short enough to imply early repayment to the bank. and even where custom gives the paper longer time, if the paper itself is used only as a collateral security, the note which is the actual object of negotiation with the bank is by preference usually made not to exceed four months. it is easy then to arrange the purchases of paper with reference to the times of maturity, so as to provide for a steady succession of payments to the bank, and thus facilitate the reduction of the business, if necessary, or its direction into new channels, as prudence or good policy may require. the certainty of prompt payment at maturity, needed for this end, is presented in a high degree by the paper created in the ordinary course of business. independently of the collateral security which the bank may hold, the written promise of a merchant or manufacturer to pay on a fixed day is an engagement which involves the credit of the promisor so far that failure is an act both of legal insolvency and of commercial dishonor. selected with judgment, then, such paper is not only the investment which most completely answers the purposes of the bank's existence, but is probably as safe as any investment which could be found. it may easily happen, however, that the bank may find it desirable to invest a part of its resources in some other form, either because good commercial paper cannot be procured in sufficient amount, or as a matter of policy. in this case it will purchase such other securities as offer not only complete safety of investment, but the possibility of easy conversion into cash in case of need. in this country united states bonds, and many descriptions of state, municipal, and corporation bonds might answer this purpose. stocks would more rarely answer it, being more liable to the fluctuations in price caused by misfortune or the ordinary vicissitudes of business. mortgages on real estate, however, would not be admissible, except when held as a security, collateral to some other which is more easily convertible, for even when the mortgaged property is so ample and stable as to insure the goodness of the mortgage, the conversion of the mortgage into cash by sale is not always easy, and is especially difficult at those times when the bank most needs to have all its resources at command. indeed, the danger to be apprehended from the locking up of resources, in securities which may be solid but are not easily realized, is so great, that it has been said to be the first duty of the banker to learn to distinguish between a note and a mortgage, his business lying with the former. real estate, of course, cannot be regarded as a banking security, however desirable it may be as an investment for individuals, for it is not only subject to great fluctuations in value, but is at times unsaleable.... the results of the process of investment in commercial paper and in other securities are best understood when we trace the effect in the account of the bank. taking then the account as it stood after the purchase of fixtures, let us suppose that the bank buys paper or securities from those dealing with it, or, in the common phrase, makes "loans to its customers," to the amount of $ , , the paper being in many pieces and having various lengths of time to run, but averaging about three months. supposing the interest to be computed at per cent., we should have the account changed by the operation as follows: _liabilities_ _resources_ capital $ , loans $ , undivided profits , real estate, furniture, fixtures, etc. , deposit , specie , -------- -------- $ , $ , here we have the securities which certify the right of the bank to demand and receive $ , at a future date placed among the resources; the net proceeds of the securities, or the aggregate of the sums which the bank holds itself liable to pay for them on demand, stand among the liabilities as deposits; and the interest deducted in advance, or the profit on the operation, which the bank must at the proper time account for to the stockholders, also stands as a liability. this, however, is the condition of the account at the moment of making the investment, when the bank has made its purchase of securities by merely creating a liability. as this liability is real and must be met, so far as the depositors at any time see fit to press it, let us suppose that depositors call for cash to the amount of $ , , and we shall have a further change in the account as follows: _liabilities_ capital $ , undivided profits , deposits , ------ $ , _resources_ loans $ , real estate, etc , specie , ------ $ , it is clear that, unless the enforcement of the liability for deposits and consequent withdrawal of specie goes much farther than this, the bank can safely increase its loans or its purchase of securities, although its method of doing so is by the increase of its liabilities. we will suppose it, therefore, to have expanded its affairs until it has reached something like the average condition of those banks in the united states, which, being incorporated under the laws of the several states, are not authorized to issue notes. it will then stand thus: _liabilities_ capital $ , surplus , undivided profits , deposits , -------- $ , _resources_ loans $ , bonds and stocks , real estate , other assets , expenses , legal-tender notes } cash items } , specie } -------- $ , postponing for the present the consideration of some terms which here occur for the first time, it appears from the above account that purchases of securities have been made to more than three times the amount of the capital, and that this has been effected chiefly by the creation of liabilities in the form of deposits. what determines the limit to which this process can be carried? if depositors seldom demanded the payment to which they are entitled, but were contented with the mere transfer of their rights among themselves as a conventional currency, the bank might dispense with holding any large amount of specie or cash in any form and keep most of its resources employed in its productive securities. the expansion of the deposits would then resemble in its effects the expansion of any other currency and might go on until a check should be interposed by the consequent rise of prices and demand for specie for exportation. and it is true, as we shall see, that in communities where banking is largely practised, the use of deposits as currency by transfer from hand to hand is so extensive, that a bank in good credit can rely upon their being withdrawn so slowly, or rather to so small an extent, as to make it unnecessary to have cash in readiness for the payment of more than a small proportion at any given moment. but in a period of financial disorder or alarm, withdrawals may be made earlier or more frequently, and a larger provision of cash may be needed for safety, than at other times; the kind of business carried on by depositors may expose one bank, or the banks in one place, to heavier occasional demands, or may on the other hand make demands steadier, than is the case elsewhere; and a city bank may be more subject to heavy calls from depositors than a country bank. in general, then, for every bank, in its place and under the circumstances of the time, there is some line below which its provision of cash cannot safely fall. this provision of cash, which in the account last given includes the cash items, specie, and legal-tender notes, is called the reserve, and the necessity of maintaining a certain minimum reserve fixes a limit to the ability of the bank to increase its securities. for obviously any increase of securities, that is, of loans or bonds, must ordinarily be effected, either by an increase of deposits, or by an actual expenditure of cash. if, then, the reserve were already as low as prudence would allow, or were threatened by approaching heavy demands from depositors, no increase of securities could be made without serious risk. what proportion the reserve should bear to the liabilities which it is to protect is a question which the law has sometimes attempted to settle, by requiring a certain minimum, leaving it to every individual bank to determine for itself how much may be required in addition to this minimum. and this is no doubt as far as any general rule can go. as has already been suggested, the requirements for safety of different banks and in different places must vary, and so must the requirements of the same bank at different times. in fact, the question as to the proper amount of reserve never depends simply on the absolute ratio of the reserve to the liabilities, but always involves further questions as to the probable receipts of cash by the bank and probable demands upon it, in the near future. it can only be said that the reserve should be large enough, not only to insure the immediate payment of any probable demand from depositors, but also to secure the bank from being brought down to the "danger line" by any such demand. if per cent. is the minimum consistent with safety, the reserve should be far enough above this to be secure from reduction to a point where any further demand or accident may make the situation hazardous. in the management of its reserve the bank itself necessarily feels a strong conflict of interests. on the one hand, it is impelled to increase its securities as far as possible, for it is from them that it derives its profits, and the retention of a large amount of idle cash is felt as a loss. on the other hand, the maintenance of a reserve sufficient, not only to enable the bank to continue its payments but to inspire the public with confidence in its ability to continue them, is a necessity of its existence, even though a part of its resources do thus appear to be kept permanently idle. as a natural consequence, the actual settlement of the question in favor of a large or of a small reserve in any particular case will depend in good measure on the temperament of the managers. in every banking community may be found "conservative" banks, the caution of whose managers forbids them to take risks by extending their business at the expense of an ample reserve; and by their side may be seen the more "active" banks, whose managers habitually spread all possible sail, and provide for the storm only when it comes. it is to be observed that the necessity of providing a cash reserve is not met by the excellence of the securities held by the bank. although their certainty of payment at maturity be absolute, still the demands upon the banks are demands for cash, and cannot be answered by the offer of even the best securities. if the depositor or creditor does not receive cash in full for his demand when it is made, the bank has failed, and any satisfaction of his claim by the delivery of a security is, as it were, only the beginning of a division of the property of the bank among its creditors. specie, therefore, or the paper which is a substitute for it as a legal tender for debt, forms the real banking reserve. the reserve of the bank may, however, be greatly strengthened by the judicious selection of securities. for example, if, in the account above given, the "bonds and stocks" are, as they should be, of descriptions which are readily saleable, they afford the means of replenishing the reserve in case of need, without foregoing the enjoyment of an income from this amount of resources for the present. in extreme cases of general financial panic, it is true, even the strongest government securities may find but few purchasers; still such a provision is the best support which can be had in the absence of, or as an auxiliary to, a sufficient reserve of actual cash. the natural method of securing the proper apportionment of resources between securities and reserve, under ordinary circumstances, is by increasing or diminishing the loans, or, in other words, the purchases of securities made from day to day in the regular course of business. that part of the securities which consists of the promises of individuals or firms to pay to the bank at fixed dates, is made up of many such pieces of commercial paper, maturing, if properly marshalled, in tolerably steady succession. the payment of one of these engagements when it becomes due may be made either in money, or by the surrender to the bank of an equal amount of its own liabilities ... [in the form of deposits]. in the former case, the payment of the maturing paper to the bank is in fact the conversion of a security into cash, and increases the reserve without change in the liabilities; in the latter, the reduction of securities is balanced by a reduction of liabilities which raises the proportion of reserve. if, then, the bank stops its "discounts" or the investments in new securities, or if it even slackens its usual activity in making such investments, the regular succession of maturing paper will gradually strengthen its reserve; if it increases its activity in investment, it will weaken or lower its reserve; and if it adjusts the amount of its new investments to the regular stream of payments made by its debtors, it may keep the strength of its reserve unaltered, until some change in the condition of affairs brings cash to it or takes cash away by some other process. this natural dependence of the reserve upon the more or less rapid re-investment of its resources by the bank is distinctly recognized by the law of the united states, which provides that when the reserve of any national bank falls below the legal minimum, such bank "shall not increase its liabilities by making any new loans or discounts," until its reserve has been restored to its required proportion. by a less harsh application of the same principle, the bank of england operates upon its reserve by lowering or raising its rate of discount, and thus encouraging or discouraging applications for loans. and it was with a view of facilitating the replenishment of the reserve by the curtailment of loans, that the law of louisiana formerly provided that the banks of new orleans should hold what were called "short bills," or paper maturing within ninety days, to the amount of two-thirds of their cash liabilities, so that the constant stream of payments of such paper might always insure to every bank the early command of a large part of its resources. to return, in conclusion, to the account last given; we have there among the liabilities certain sums classified as "surplus" and as "undivided profits." taken together these sums represent the profits which have been made, but not divided among the stockholders, and which are therefore to be accounted for by the bank. the surplus is that portion of these profits which as a matter of policy it has been determined not to divide and pay over to the stockholders, but to retain in the business, as in fact, although not in name, an addition to the capital. the remaining portion, the undivided profits, is the fund from which, after payment of current expenses and of any losses which may occur, the next dividend to the stockholders will be made. the current expenses are for the present entered on the other side of the account, as they represent a certain amount of cash which has disappeared; but at the periodical settlement of accounts they must be deducted from the undivided profits, and will thus drop out from the statement. "other assets," here set down as an investment, may be supposed to cover any form of property held by the bank and not otherwise classified, but especially the doubtful securities, or such property, not properly dealt in by a bank, as it may have been necessary to take and to hold temporarily, for the purpose of securing some debt not otherwise recoverable. for example, although the bank could not properly invest in a mortgage, it might be wise for it to accept a mortgage in settlement with an embarrassed debtor, and in this case the mortgage would stand among the "other assets." and, finally, "cash items" include such demands on individuals or other banks as are collectible in cash and can therefore fairly be deemed the equivalent of cash in hand. in the absence of any legal provision limiting the classification of such demands as reserve, they may be regarded as virtually a part of the reserve, which in the case before us may therefore be treated as made up of cash items, specie, and legal-tender notes. to illustrate what has been said in this chapter we will now suppose the bank to make the following operations: a. to add to its securities $ , , by discount of three-months paper at per cent., three-fourths being purchased by the creation of liabilities, and one-fourth by the expenditure of cash. the account would then stand as follows: _liabilities_ capital $ , surplus , undivided profits , deposits , -------- $ , _resources_ loans $ , bonds and stocks , real estate , other assets , expenses , reserve , -------- $ , b. to retrace its steps by diminishing its "discounts" or holding of securities to the extent of $ , , of which four-fifths are paid to it by the surrender of demands for deposits to a like amount and one-fifth in cash; to pay $ , for current expenses; and further to increase its reserve by the sale of bonds and stocks to the amount of $ , . the following would then be the state of the account: _liabilities_ capital $ , surplus , undivided profits , deposits , -------- $ , _resources_ loans $ , bonds and stocks , real estate , other assets , expenses , reserve , -------- $ , c. to sell $ , of its other assets for cash with a loss of $ ; to make a semi-annual dividend of per cent., of which one-half is credited to stockholders who happen to be depositors also, and one-half is paid in cash; to sell $ , of bonds at a profit of per cent., and to carry $ , of its undivided profits to surplus. the account would then stand at the beginning of the new half year, as follows: _liabilities_ capital $ , surplus , undivided profits , deposits , -------- $ , _resources_ loans $ , bonds and stocks , real estate , other assets , reserve , -------- $ , statement of a representative national bank _resources_ loans and discounts $ , . overdrafts, secured . u. s. bonds deposited to secure circulation , . u. s. bonds pledged to secure u. s. deposits , . bonds other than u. s. bonds pledged to secure postal savings deposits , . other securities , . stock of federal reserve bank , . banking house , . furniture and fixtures , . due from federal reserve bank , . due from approved reserve agents , . due from other banks , . checks on banks in same city , . outside checks and other cash items , . fractional currency, nickels, and cents . notes of other national banks , . coin and certificates , . legal-tender notes , . redemption fund , . ------------- $ , , . _liabilities_ capital stock paid in $ , . surplus fund , . undivided profits , . less current expenses, interest, and taxes paid , . , . circulating notes out-standing , . individual deposits subject to check , . certificates of deposit due in less than days , . certified checks . united states deposits , . postal savings deposits , . ------------- $ , , . [ ]~the method and extent of credit issue.--~assume that a bank with a cash capital of $ , is opening for business in an isolated town and is the only bank in that town. how much can it lend? ordinarily a bank lends by discounting a customer's note and by giving the customer a deposit credit upon its books for the proceeds of the note.... if, now, our bank in question lends $ , , giving deposit credit for this sum, it has $ , of cash on hand against $ , of cash liability. its statement will stand as follows: _resources_ cash $ , notes , -------- $ , _liabilities_ capital stock $ , deposits , -------- $ , now let it lend another $ , . with its loans and deposits each standing at $ , its reserves are per cent. of its demand liability. only with $ , of loans will its reserves have reached ... [a] per cent. limit: _resources_ cash $ , notes (loans and discounts) , -------- $ , _liabilities_ capital stock $ , deposits , -------- $ , further: suppose that $ , of cash is deposited with the bank from the channels of business; how much more can it lend? fifteen thousand dollars must be retained as reserve against the new liability; $ , is available as reserves against further lending. based upon these further reserves loans may be granted to the extent of nearly $ , more. in fact, only with an expansion of $ , , in loans and in derived deposits--a total deposit of $ , , --has its reserve fallen to the ratio of per cent. of its liability. _resources_ cash (original) $ , loans and discounts , cash (new) ( , ( , l & d (new) , ---------- $ , , _liabilities_ capital stock $ , deposits , deposits (new) ( , ( , ---------- $ , , the situation summarizes as follows: on its asset side the bank has $ , of cash and $ , , of securities (bills and notes). its deposit liabilities amount to $ , , . its cash is / . + of its liability-- per cent. ~the function of reserves.~--if this is what actual banking means, is banking safe? what would happen if all these deposits were immediately called for in cash? true, not all are likely to be called for, but some cash will be demanded. in fact, the borrowers, instead of accepting all of the proceeds of these notes in deposit credit, will in some measure require and receive cash. precisely so; and so the bank must keep on hand a cash reserve to meet this possibility. for the most part, however, the customers of the bank make payments through checks upon the bank, and these credits are deposited in turn to the credit of other customers. no cash, but only bookkeeping, is required. and if some customers draw out cash, other customers will probably receive it and return it to the bank. a reserve of per cent. is enough for the case. there, would, indeed, be small gain in banking if against every deposit an equal sum in cash must be held in store by the bank. ~economy of redemption money.~--it is thus evident that the employment of $ , cash as a banking reserve has made possible the existence of a more than sixfold volume of circulating medium--currency. against each $ , of deposit liability there need be only $ of actual cash. the bank customer, however, thinks of his deposit claim as money, and it really serves him all the purposes of money. the right to have the money when desired is as good as the actual money, is more convenient, and is as readily and as serviceably transferred. the economy of money through the use of credit substitutes for money extends really further than the foregoing analysis indicates. under the [now superseded] law, three-fifths of the reserves of a rural bank may be on deposit with banks in reserve cities. thus against $ , of deposit liability the rural bank needs hold only $ , of reserve money. against the deposit of the remaining $ , , the reserve city bank is required in turn to hold a reserve of only per cent.--$ , . and of this required $ , , one-half may be represented by deposits in central reserve cities, _e. g._, new york, chicago, and st. louis. against the $ , deposited with it the central reserve bank is required to hold only per cent. of reserves--$ . . thus at the outside limit of credit extension, $ , of deposit currency may be supported by only $ , . of reserves in money, ( + / × ( / ) + ( / )). one dollar of reserves upholding $ of currency.[ ] it is, of course, not true that the banks ordinarily allow their reserves to run as low as the legal limit, or make the utmost possible use of the privilege of counting claims against one another as legal reserves. nor is it accurately true that all forms of money are of equal efficiency in the support of credit. not all forms of money, but only those of the higher levels in the money scale, are allowed to be counted as legal reserves.... some forms of money make demands upon other forms for redemption, or are limited in exchange power to the exchange power of the form in which redemption is to be made. the total exchange efficiency of the money of a country is, then, not accurately to be computed on the assumption that all moneys are equally efficient for all purposes--that some are not in varying degree burdens upon the money functions of the others. ~banking viewed in detail and in the aggregate.~--and one further modification is called for. the analysis so far made, while valid for any isolated bank, or for the banking system regarded as an aggregate, is not precisely accurate for the affairs of any one competing bank among other banks. when the check drawn by the borrowing depositor may be deposited in other banks and collected by them against the lending bank, its granting of credits rapidly draws down its reserves to swell the reserves of its competitors. one hundred thousand dollars of new reserves may not mean to it an increase of lending power of more than, say, $ , . for banks in the aggregate, however, this increase of reserves brings its full several-fold increase of lending power, provided that all the reserve efficiency is utilized in whatever bank it rests. as the lending by each bank is depleting its reserves, the lending which other banks are doing is reinforcing these reserves. the aggregate possible extension of credit is not changed. ~what banks actually do and lend.~--it follows from the foregoing analysis that, in the main, banks do not lend their deposits, but rather, by their own extensions of credit, create the deposits; that these deposits are funds which the deposit-creditors of the bank can lend if they will, and that many men into whose hands these deposits fall through transfer are certain to use them as funds to be lent. in fact, also, even when the deposits in the bank are not derived from the lending activity of the bank, but are really funds deposited from outside sources, these funds are commonly used by the bank as a reserve basis on which loans are extended rather than as funds which are themselves loaned out by the bank. banks are, in truth, mostly intermediaries between debtors and creditors--but not in the sense of borrowing funds from one class of customers in order to lend them to another class, but rather in the sense of creating for their borrowing customers funds which may be used by these borrowers as present purchasing power. the borrower becomes indebted to the bank in order that for his own purposes he may use the promise of the bank as the equivalent of cash to himself. in the form of a deposit liability the bank becomes a debtor to whomever the borrower shall nominate. the fact that the borrower pays interest while the bank undertakes a noninterest-bearing obligation, or pays relatively low interest, explains in the main the gains attending the business of commercial banking. ~deposits and solvency.~--it is, therefore, a sheer blunder to infer that a bank is rich or strong because of its great total of deposits, or to regard deposits in banking institutions as making part of the aggregate wealth of the community. instead, the deposits indicate for a bank the extent of its operations, and indicate for a community the extent to which the banks, under the guise of noninterest-bearing obligations, have assumed the debts of business men, on terms of these business men becoming debtors--and interest-paying debtors--to the banks. the solvency of the bank is in its portfolio of securities. its deposits are not its assets, but its liabilities. these liabilities it has mostly created for the use of its borrowers. the further it may safely go in assuming liabilities, the larger its holdings of borrowers' notes may be, and the more interest or discount charges it may collect. essentially, therefore, the business of a bank is a form of suretyship--the guaranteeing of its borrowers' solvency--an underwriting of the credit of its customers. the bank transfers its customers' prospective future paying power into present funds. it is for this reason that the contract takes the form of a money loan and the premium the guise of an interest payment. ~bank loans related to currency and loan funds.~--and note now that it is precisely because the business of a bank is to furnish to its borrower a present purchasing power for his own use that the business of banking becomes the source of the larger part of the circulating medium of society. in their service to their customers the banks create currency; and in creating currency they create loan funds which, in the hands of the holders of them, are available like other currency for any purpose, either lending or other. ~the sources of currency supply.~--it is, then, clear that the larger part of the circulating medium of society is not money; that not all of the money that there is is bullion money; and that not even all of the bullion money need be ultimate money--redemption money of the highest rank. the sources of currency in society are various--some of it bullion, with a cost of production limit upon its supply, some of it government paper, substantially free of cost, some of it banking credit with certain peculiar and appropriate costs attending its issue. ~currency and its cost of production.~--it is obvious that the actual limitations upon the supply of exchange media must be made clear if we are to understand the influences which are fundamental to the exchange values of the currency unit. only, indeed, by this investigation of the sources of the supply, and of the terms on which each different factor of the supply is available, are we in position to understand the influences which impose upon bidders for money a certain level of sacrifice in obtaining it. what, then, are the limitations upon the supply of credit currency supplied by the banks? in other words, what are the banking costs in the granting of demand deposit rights to customers? evidently limitations there must be, and limitations in the nature of costs, else the competitive activity of the banks would indefinitely increase the supply of currency, and any would-be purchaser of goods or payor of debts or projector of an enterprise could have the time use of purchasing power gratis; no limit would exist to the rise in prices which must attend this increase in the circulating medium. what are these limitations? ( ) each bank must conform the volume of its lending, and therewith its issue of circulating credit, to the fundamental requirement that it be always able to make good its agreement to discharge its deposit liabilities on demand. to maintain reserves involves expense. especially may it be expensive if they have been allowed to get low; securities may have to be marketed at a sacrifice, or good customers pressed for payment at inconvenient times. in periods of general pressure or panic, other banks are not likely to be in a position to lend their own reserve funds or to consent to create deposit credit in aid of still other suffering banks. not rarely the bank of england, in the attempt to attract reserve funds, advances bank notes or deposit credit to importers of gold, without imposing the customary interest charge for the covering of the delays of the mint. in at least one case, in , it borrowed reserves from the bank of france. in the united states treasury made especially large money deposits with the national banks of new york to help eke out the needed reserves. meantime the interior banks were compelled to pay to exporting merchants generous premiums for exchange bills upon europe, through which, despite the high interest rates ruling in european markets, these banks were able to import millions of gold for their own reserve requirements. in fact, the banking business involves the hazard not merely that some of the debtors of the bank may become insolvent, but also the general and overhead hazard attaching to its underwriting service that it may itself in time of stress become unable to meet its obligations. its liabilities must not be allowed to get seriously out of ratio to its cash resources. ~the protection of reserves.~--in point of fact also the efforts of the various different banks to maintain each its own reserve place a limit on the extent to which any one bank can extend its activity in the expansion of loans and of the derivative liabilities. just as a relatively liberal granting of credit by one bank must tend to transfer its reserves to other banks, so a relatively great extension of credit in one center or in one country must tend to transfer the reserves, _e. g._, gold, to other centers or countries. even were it true that a local credit expansion has no effect upon local prices and thereby upon the currents of trade, some transfers of reserves would still take place, and would impose a policy of restriction in credit accommodations.... the influence is actually exerted by both methods. ~( ) another cost in bank-made currency.~--the loan rates of the bank must also provide a fund to cover its costs of administration--salaries, clerk hire, rents, and the like. where transactions run in large units the ratio of expense to the volume of business may be low. this is in part the explanation for the low rates of discount in the great financial centers compared with the rates outside. credit currency has its cost of production rate as truly as any other service upon the market.... the relation between loans and deposits [ ]the money of modern english commerce and finance is the cheque, and the credit dealt in in the london money market is the right to draw a cheque.... now that we have come to the point at which the manufacture of the right to draw cheques has to be made as clear as may be, it will be well to come into close touch with the facts of the case and look at a bank balance-sheet of to-day. in order to get a fair average specimen i have taken the latest available balance-sheets of half a dozen of the biggest london banks, and put their figures together.... let us examine the aggregated specimen that i have drawn up. _millions of £_ capital paid up reserve fund current and deposit accounts acceptance on behalf of customers - / profit and loss account - / ------- _millions of £_ cash in hand and at the bank of england loans at call and short notice - / bills discounted and advances investments liability of customers on acceptances - / premises ------- the above statement does not include the figures of the bank of england, but is an agglomeration of the balance-sheets of six of the biggest of the ordinary joint-stock banks. the first feature that strikes the casual observer is the smallness of the paid-up capital of the banks when compared with the vastness of the figures that they handle. we see that only millions out of the that they have to account for have been actually paid up by shareholders, though millions have been retained out of past profits and accumulated in reserve funds ["surplus," in united states], and - / millions are due to shareholders, for distribution as dividend or addition to reserve, in the shape of the profit and loss account balance for the period covered by the balance-sheet. a profit of - / millions on is handsome enough, especially when it is considered that most of these balance-sheets covered a half-year's work, but - / millions out of is a trifle, and it thus appears that a narrow margin of profit on their total turnover enables the banks to pay good dividends, and that the business of credit manufacture earns its reward, as might be expected, out of the credit that it makes. proceeding in our examination, we see that the item of acceptances on behalf of customers on one side is balanced by the liability of customers on the other. this means that the banks have accepted bills for their customers (so making them first-class paper and easily negotiable), and are so technically liable to meet them on maturity; but since the customers are expected to meet them, and have presumably given due security, this liability of the customer to the bank is an offsetting asset against the acceptance. and since the acceptance business is a comparatively small item, and a bank's liability under its acceptances is not a liability in quite the same sense as its deposits, and does not immediately affect the present question of the manufacture of currency, it may be omitted for the present. we can thus simplify the balance-sheet by taking out this contra entry on both sides. further analysis of the liabilities shows that the capital, reserves, or surplus, and profit and loss balance may be regarded as due from the banks to their shareholders, and that the remaining big item, current and deposit accounts, is due to their customers. this is the item which is usually spoken of as the deposits, according to the tiresome habit of monetary nomenclature which seems to delight in applying the same name to a genus and one of the species into which it is divided. just as the bill of exchange is divided into cheques and bills of exchange, so the english banks' deposit accounts are divided into current and deposit accounts. but most people who have a banking account know the meaning of this distinction. your current account is the amount at your credit which you can draw out, or against which you can draw cheques, at any moment; your deposit account is the amount that you have placed on deposit with the bank and can only withdraw on a week's or longer notice, and it earns a rate of interest, usually - / per cent. below the bank of england's official rate. the essential point to be grasped is the fact that the banks' deposits, as usually spoken of, include both the current and deposit accounts, and are due by the banks to their customers. now let us see how this huge debt from the banks to the public has been created. an examination of the assets side of the balance-sheet proves that most of it has been created by money lent to their customers by the banks, and that the cheque currency of to-day is, like the note currency of a former day, based on mutual indebtedness between the banks and their customers. for the assets side shows that the banks hold millions in cash and at the bank of england, millions in investments, and millions invested in their premises--the buildings in which they conduct their business--and that - / millions have been lent by them to their customers, either by the discounting of bills or by advances to borrowers, or by loans at call or short notice. we can now reconstruct our balance-sheet, leaving out the acceptances on both sides, as follows: _millions of £._ _millions of £._ due to shareholders - / cash in hand and at bank due to customers of england -------- investments - / premises due from customers - / -------- - / and it thus appears that nearly three-quarters of the amount due from the banks to their customers are due from their customers to the banks, having been borrowed from them in one form or another. and this proportion would perhaps be exceeded if we could take the figures of english banking as a whole. but that cannot be done at present, because some of the smaller banks do not separate their cash from their loans at call in their published statements. the greater part of the banks' deposits is thus seen to consist, not of cash paid in, but of credits borrowed. for every loan makes a deposit, and since our balance-sheet shows - / millions of loans, - / out of the millions of deposits have been created by loans. to show how a loan makes a deposit, let us suppose that you want to buy a thousand-guinea motor-car and raise the wherewithal from your banker, pledging with him marketable securities, and receiving from him an advance, which is added to your current account. being a prudent person you make this arrangement several days before you have to pay for the car, and so for this period the bank's deposits are swollen by your £ , , and on the other side of its balance-sheet the entry "advances to customers" is also increased by this amount, and the loan has clearly created a deposit. but you raised your loan for a definite purpose, and not to leave with your bank, and it might be thought that when you use it to pay for your car the deposit would be cancelled. but not so. if the seller of your car banks at your bank, which we will suppose to be parr's, he will pay your cheque into his own account, and parr's bank's position with regard to its deposits will be unchanged, still showing the increase due to your loan. but if, as is obviously more probable, he banks elsewhere--perhaps at lloyd's--he will pay your cheque into his account at lloyd's bank, and it will be the creditor of parr's for the amount of £ , . in actual fact, of course, so small a transaction would be swallowed up in the vast mass of the cross-entries which each of the banks every day makes against all the others, and would be a mere needle in a bottle of hay. but for the sake of clearness we will suppose that this little cheque is the only transaction between parr's and lloyd's on the day on which it is presented; the result would be that parr's would transfer to lloyd's £ , of its balance at the bank of england, where all the banks keep an account for clearing purposes. and the final outcome of the operation would be that parr's would have £ , more "advances to customers" and £ , less cash at the bank of england among its assets, while lloyd's would have £ , more deposits and £ , more cash at the bank of england. and the £ , increase in lloyd's deposits would have been created by your loan, and though it will be drawn against by the man who sold you the car, it will only be transferred perhaps in smaller fragments to the deposits of other banks; and as long as your loan is outstanding there will be a deposit against it in the books of one bank or another, unless, as is most unlikely, it is used for the withdrawal of coin or notes; and even then the coin and notes are probably paid into some other bank, and become a deposit again; and so we come back to our original conclusion that your borrowing of £ , has increased the sum of banking deposits, as a whole, by that amount. the same reasoning applies whenever a bank makes a loan, whatever be the collateral, or pledge deposited by the borrower, whether stock exchange securities, as in the case cited, or bales of cotton or tons of copper; or, again, whenever it discounts a bill. in each case it gives the borrower or the seller of the bill a credit in its books--in other words, a deposit; and though this deposit is probably--almost certainly--transferred to another bank, the sum of banking deposits is thereby increased, and remains so, as long as the loans are in existence. and so it appears that the loans of one bank make the deposits of others, and its deposits consist largely of other banks' loans.... relation between reserves and demand liabilities again [ ]... a bank must so regulate its loans and note issues as to keep on hand a sufficient cash reserve, and thus prevent insufficiency of cash from ... threatening. it can regulate the reserve by alternately selling securities for cash and loaning cash on securities. the more the loans in proportion to the cash on hand, the greater the profits, but the greater the danger also. in the long run a bank maintains its necessary reserve by means of adjusting the interest rate charged for loans. if it has few loans and a reserve large enough to support loans of much greater volume, it will endeavor to extend its loans by lowering the rate of interest. if its loans are large and it fears too great demands on the reserve, it will restrict the loans by a high interest charge. thus, by alternately raising and lowering interest, a bank keeps its loans within the sum which the reserve can support, but endeavors to keep them (for the sake of profit) as high as the reserve will support. if the sums owed to individual depositors are large, relatively to the total liabilities, the reserve should be proportionately large, since the action of a small number of depositors can deplete it rapidly. similarly, the reserves should be larger against fluctuating deposits (as of stock brokers) or those known to be temporary. the reserve in a large city of great bank activity needs to be greater in proportion to its demand liabilities than in a small town with infrequent banking transactions. experience dictates differently the average size of deposit accounts for different banks according to the general character and amount of their business. for every bank there is a normal ratio and hence for a whole community there is also a normal ratio--an average of the ratios for the different banks. no absolute numerical rule can be given. arbitrary rules are often imposed by law. national banks in the united states, for instance, are required to keep a reserve for their deposits, varying according as they are or are not situated in certain cities designated by law as "reserve" cities, _i. e._, cities where national banks hold deposits of banks elsewhere. these reserves are all in defense of deposits. in defense of notes, on the other hand, no cash reserve is required--that is, of national banks. true, the same economic principles apply to both bank notes and deposits, but the law treats them differently. the government itself chooses to undertake to redeem the national bank notes on demand. the state banks are subject to varying restrictions. thus the requirement as to the ratio of reserve to deposits varies from - / per cent. to - / per cent., being usually between per cent. and per cent. of the reserve, the part which must be cash varies from per cent. (of the reserve) to per cent., usually per cent. such legal regulation of banking reserves, however, is not a necessary development of banking.... the rÔle of a specie reserve illustrated by the inconvertible notes of the bank of england issued during the operation of the restriction act[ ] [ ]... your committee proceeded, in the first instance, to ascertain what the price of gold bullion [in terms of bank of england notes] had been, as well as the rates of the foreign exchanges, for some time past; particularly during the last year. your committee have found that the price of gold bullion, which, by the regulations of his majesty's mint, is £ _s._ - / _d._ per ounce of standard fineness, was, during the years , , and , as high as £ in the market. towards the end of it began to advance very rapidly, and continued very high during the whole year ; the market price of standard gold in bars fluctuating from £ _s._ to £ _s._ per ounce. the market price at £ _s._ is about - / per cent. above the mint price.... it is due,... in justice to the present directors of the bank of england, to remind the house that the suspension of their cash payments, though it appears in some degree to have originated in a mistaken view taken by the bank of the peculiar difficulties of that time, was not a measure sought for by the bank, but imposed upon it by the legislature for what were held to be urgent reasons of state policy and public expediency. and it ought not to be urged as matter of charge against the directors, if in this novel situation in which their commercial company was placed by the law, and entrusted with the regulation and control of the whole circulating medium of the country, they were not fully aware of the principles by which so delicate a trust should be executed, but continued to conduct their business of discounts and advances according to their former routine. it is important at the same time to observe that under the former system, when the bank was bound to answer its notes in specie upon demand, the state of the foreign exchanges and the price of gold did most materially influence its conduct in the issue of those notes, though it was not the practice of the directors systematically to watch either the one or the other. so long as gold was demandable for their paper, they were speedily apprised of a depression of the exchange, and a rise in the price of gold, by a run upon them for that article. if at any time they incautiously exceeded the proper limit of their advances and issues, the paper was quickly brought back to them, by those who were tempted to profit by the market price of gold or by the rate of exchange. in this manner the evil soon cured itself. the directors of the bank having their apprehensions excited by the reduction of their stock of gold, and being able to replace their loss only by reiterated purchases of bullion at a very losing price, naturally contracted their issues of paper, and thus gave to the remaining paper, as well as to the coin for which it was interchangeable, an increased value, while the clandestine exportation either of the coin, or the gold produced from it, combined in improving the state of the exchange and in producing a corresponding diminution of the difference between the market price and mint price of gold, or of paper convertible into gold. your committee do not mean to represent that the manner in which this effect resulted from the conduct which they have described, was distinctly perceived by the bank directors. the fact of limiting their paper as often as they experienced any great drain of gold, is, however, unquestionable.... it was a necessary consequence of the suspension of cash payments, to exempt the bank from that drain of gold, which, in former times, was sure to result from an unfavourable exchange and a high price of bullion. and the directors, released from all fears of such a drain, and no longer feeling any inconvenience from such a state of things, have not been prompted to restore the exchanges and the price of gold to their proper level by a reduction of their advances and issues. the directors, in former times, did not perhaps perceive and acknowledge the principle more distinctly than those of the present day, but they felt the inconvenience, and obeyed its impulse; which practically established a check and limitation to the issue of paper. in the present times the inconvenience is not felt; and the check, accordingly, is no longer in force.... by far the most important ... consequence ... [of the restriction act] is, that while the convertibility into specie no longer exists as a check to an over-issue of paper, the bank directors have not perceived that the removal of that check rendered it possible that such an excess might be issued by the discount of perfectly good bills. so far from perceiving this ... they maintain the contrary doctrine with the utmost confidence.... that this doctrine is a very fallacious one, your committee cannot entertain a doubt. the fallacy, upon which it is founded, lies in not distinguishing between an advance of capital to merchants, and an addition of supply of currency to the general mass of circulating medium. if the advance of capital only is considered, as made to those who are ready to employ it in judicious and productive undertakings, it is evident there need be no other limit to the total amount of advances than what the means of the lender, and his prudence in the selection of borrowers, may impose. but in the present situation of the bank, intrusted as it is with the function of supplying the public with that paper currency which forms the basis of our circulation, and at the same time not subjected to the liability of converting the paper into specie, every advance which it makes of capital to the merchants in the shape of discount, becomes an addition also to the mass of circulating medium. in the first instance, when the advance is made by notes paid in discount of a bill, it is undoubtedly so much capital, so much power of making purchases, placed in the hands of the merchant who receives the notes; and if those hands are safe, the operation is so far, and in this its first step, useful and productive to the public. but as soon as the portion of circulating medium in which the advance was thus made performs in the hands of him to whom it was advanced this its first operation as capital, as soon as the notes are exchanged by him for some other article which is capital, they fall into the channel of circulation as so much circulating medium, and form an addition to the mass of currency. the necessary effect of every such addition to the mass is to diminish the relative value of any given portion of that mass in exchange for commodities. if the addition were made by notes convertible into specie, this diminution of the relative value of any given portion of the whole mass would speedily bring back upon the bank which issued the notes as much as was excessive. but if by law they are not so convertible, of course this excess will not be brought back, but will remain in the channel of circulation, until paid in again to the bank itself in discharge of the bills which were originally discounted. during the whole time they remain out, they perform all the functions of circulating medium; and before they come to be paid in discharge of those bills, they have already been followed by a new issue of notes in a similar operation of discounting. each successive advance repeats the same process. if the whole sum of discounts continues outstanding at a given amount, there will remain permanently out in circulation a corresponding amount of paper; and if the amount of discounts is progressively increasing, the amount of paper, which remains out in circulation over and above what is otherwise wanted for the occasions of the public, will progressively increase also, and the money prices of commodities will progressively rise. this progress may be as indefinite as the range of speculation and adventure in a great commercial country.... footnotes: [ ] herbert joseph davenport, _the economics of enterprise_, pp. , . the macmillan company, new york. . [ ] charles f. dunbar, _chapters on the theory and history of banking_, pp. - , g. p. putnam's sons, new york and london. . [ ] herbert joseph davenport, _the economics of enterprise_, pp. - . the macmillan company. new york. . [ ] it should not be overlooked, furthermore, that the velocity of the circulation of deposits is approximately two and one-half times that of money.--editor. [ ] hartley withers, _the meaning of money_, pp. - . e. p. dutton and company. new york. . [ ] irving fisher, _the purchasing power of money_, pp. - . the macmillan company. new york. . [ ] this act, passed in in order to prevent a drain of gold to the continent during the napoleonic war, forbade the bank of england to redeem its notes. it remained in force until , when specie payment was resumed.--editor. [ ] report from the select committee on the high price of gold bullion. ordered by the house of commons, to be printed, june, . chapter x the use of credit instruments in payments in the united states [ ]discussions concerning the issue of notes by banking institutions, which largely occupied the attention of students of finance and business men in the eighteenth and the first three quarters of the nineteenth centuries, have been succeeded by equally intense discussions of the amount and influence of credit deposits on the books of the banks, when drawn on by their customers with checks. the fact that the use of checks against deposits renders unnecessary a large amount of money, or currency, attracted attention early in the history of deposit banking, and efforts have been made from time to time to determine the proportion of money, or currency, replaced with checks and credit documents of similar character.[ ] we may summarize the results of our inquiry and inferences therefrom briefly as follows: . in the first place, it is very clear that a large proportion of the business of the country, even the retail trade, is done by means of credit instruments. while it is probably true that wage-earners, as a class, do not commonly use checks, it is also true that a great many of them do. moreover, the use of checks is common among people who derive their income from other sources, even though it be not larger than the well-paid day laborer. we are justified ... in concluding that or per cent. of the retail trade of the country is settled in this way. .... over per cent. of the wholesale trade of the country is done with checks and other credit documents. . the very general use of checks is shown in the deposits of "all other" depositors. the average is close up to that of the wholesale trade, and while many corporations, public and private, are doubtless represented here, and many speculative transactions are included, there is no reason for excluding any one of those in determining the proportion of business done, whatever we may think of its legitimacy from the point of view of public morals or public utility. . the use of checks is promoted in a measure by the payment of wages by check. it appears from our investigation that of weekly pay rolls reported by the banks, aggregating $ , , for the week ending march last, per cent. was in checks.... . the great use of checks is shown also by the large number of accounts under $ .... . we may therefore safely accept an average of to per cent. as the probable percentage of business of this country done by check. . the fact that so large a proportion of business is done with credit paper may or may not be a good thing. whether it is or not depends on circumstances. if any part of the country is compelled to use checks because of the lack of currency, when it would prefer the latter, the situation is an evil. . the transaction of so large a volume of our business by checks is an element of danger in times of stringency and crisis. in such times the uncalled balance of credit transactions creates a larger demand for money, but the habit of settling by check has meantime kept the available amount of money at a minimum. . consequently there ought to be some means of supplying additional currency when credit as a means of payment diminishes. this currency ought to be as safe and as uniform as the ordinary currency, and it should be capable of being quickly emitted and recalled. that is, it should possess elasticity. . the large money circulation of the country is explained by the facts that our prices and wages range high, that our people probably carry a larger average amount of money on their persons than do foreigners, that some portion of our currency has been destroyed or lost or hoarded.... as our business grows, the amount of money needed as reserve to perform this vast volume of business transactions increases, too.... . the volume of credit transactions very likely tends to increase as population and business grow. it does not increase uniformly, however, but by periodic movements. that is to say, the rate of increase of credit transactions, as compared with the whole volume of business, grows, as it were, by jerks and at a decreasing rate. several important questions are closely related to the inquiry which has been [made and summarized]. among them are these: . what is the amount of money rendered unnecessary by the use of credit paper? . what is the influence of the vast volume of credit transactions on the value of money or the level of prices?[ ] . why is it that our per capita circulation is so large and where is the money in active circulation?... . we will take these questions up in order.... no one can say ... with definiteness what is the amount of money released if or per cent. of our business transactions are settled by means of credit paper. this is a matter in which the long experience of practical bankers is the only safe guide, because the amount in question is changing from day to day as the conditions change. no simple rule about it can be laid down.... one point needs to be carefully borne in mind. however great the volume of credit exchanges, however extensive the use of credit may become in a community, they can never fully displace sales for direct money payment. the extensive use of credit is not of itself a sign that a community is well off. credit is used in poor as well as in rich communities. its extensive use in a poor and undeveloped country is likely to indicate a lack of capital rather than an abundance of wealth. every community tends to use the cheapest medium of exchange accessible to it. if its capital is of very high value for producing goods for direct consumption, a community will be averse to investing much of it in a medium of exchange. this is the reason why undeveloped countries, as our own was a century ago, try to effect their exchanges by means of credit paper to a larger extent than wealthier communities. under such conditions paper money is commonly thought to be the cheapest medium of exchange. if, now, part of the money exchanges are replaced with credit exchanges, the amount of money released, or the amount without which the community could now get on, would be the whole amount formerly used in money payments ... minus the reserve necessary to do this credit business. the important point, however, is that less money is necessary. how much less we can not be sure. we can get some light on the subject, however, by noting the volume of business done by credit paper and the balances which from time to time are carried as a basis of settlement. it is important to note also that an increase in the volume of credit transactions does not necessarily mean that we must get a proportionate increase in our reserve of money. every refinement of the credit mechanism makes it possible to do a larger volume of business on the same reserve.... the volume of business that can be done by credit paper depends on several circumstances. obviously, in the first place, it depends upon the banking facilities of the country. if the banks are widely distributed, if they are willing to deal in transactions small enough to be within the reach of large numbers of people, many more transactions will be settled through them than would otherwise be the case. this fact undoubtedly explains in large measure the development of what may be called the "banking habit" among the people of the united states. undoubtedly our people pay by check much more commonly and much more largely than people of any other country. we settle smaller transactions by check; our banks are willing to carry smaller accounts. indeed, the rapid industrial development of our country is probably due in no small degree to our system of independent banks and the facility with which we have permitted banks to be established. the small independent bank in the country community has felt that its interests and success were bound up with the interests and success of the community, and, therefore, has undoubtedly been willing to do more for the general interests than a branch of a large bank in some remote commercial center would have felt like doing, even if it had been justified in doing so. the small capital with which we have permitted banks to be established also has undoubtedly been a contributing factor to our rapid economic development, as well as to the promotion of the banking habit among our people. in the next place, the density of population is, of course, an important factor for the growth of credit exchanges. a larger volume of business is settled by bank paper in a commercial center than in an agricultural community, even though the proportion of total business thus settled may not be larger. however, it is necessary that there should be a certain number of people within reach of a common center in order to have a bank established there. of course the smaller the bank the fewer the people thus required. thus again our inclination in the past to favor the establishment of the small independent banks has facilitated the spread of banking and promoted the volume of business settled in the country districts by credit payment and stimulated the banking habit among our people. finally, the general education and intelligence of the mass of the people is an important factor. men do not use banks unless they have confidence in them, and they have come to be regarded as a settled part of the ordinary commercial mechanism of the community. our people are people of a wide general education and high order of intelligence. they understand the place and work of the bank in a community much better than the same number of people, for example, in a european country. this fact is strikingly brought out by a study of the proportion of retail business settled by means of checks, in what are called the "foreign" districts of our large cities, on the one hand, and in an agricultural community on the other. the european immigrant is not a man who has had banking connections in his home country, and he does not use them here, even though the facilities are more numerous. such evidence as there is seems to indicate that payment by check has shown an increase during the past few years: (a) in the first place, the returns of our reports show a larger percentage in retail trade.... (b) the prosperity of the farmers in the central west has enabled many to have bank accounts who fifteen years ago could not carry balances. the writer's information from central illinois is strongly in this direction. (c) the third evidence is found in the growth of the number of small banks, especially in the country districts.... (d) the appearance of a considerable proportion of checks in the deposits of mutual savings banks is also, to some degree, significant.... on the other hand, the increase of that part of the population which consists of the wage-earning class, by whom the use of checks is small, is undoubtedly greater than that of our other classes of population. however, the wealthy classes, though fewer in number, have more to spend and their use of checks raises the proportion of credit paper in payments. we can not expect any social movement to continue steadily in one direction for an indefinite time. such evidence as inquiries of this character furnish seems to show that there is a certain ebb and flow in the proportion of checks used in business payments. with a given amount of money a certain proportion of it can be used for bank reserves on which to build credit transactions. for a time the volume of business will increase more rapidly than the money supplies, so that the proportion of credit business to the whole will increase, the improvement of the credit machinery in the meantime facilitating the movement. but the perfection of the facilities for utilizing to the utmost a given reserve, or a slowly increasing one, will come to a stop after a time, and it will be necessary to increase the money supply for any further expansion of credit. in the language of business, another unit of capital must be added to plant. the unit added to the social capital devoted to exchange--that is, the additional amount of money--will be larger than is necessary for most profitable immediate use, consequently the proportion of money exchanges will for a time show an increase. we may conclude, therefore, that the volume of business done on credit gradually increases as the population and total amount of business are enlarged, but at a decreasing rate and with occasional or periodic retardations. . _relation of credit exchanges to the volume of money and prices._--it is pertinent to inquire, now, what effect, if any, this great settlement of indebtedness by means of credit paper has upon the value of money. evidently, it can influence this value, or the general price level, only as it changes the amount of demand for money. we have seen reason, now, to think that per cent. of our business transactions are settled by means of credit paper. credit paper cancellation enables a larger amount of business to be done with the same amount of money and has an effect in determining the value of money by increasing the demand for reserves.... ... the use of credit paper in effecting credit exchanges makes possible a far larger volume of business than could otherwise be done, and that this increased volume of business must in some way influence prices seem[s] undeniable.... ... we are told by many that there is a vast amount of credit transactions embodied in banking and clearing-house statistics which may be termed "fictitious." that is to say, they are not a part of the necessary work of exchange in a community. for example, the cotton and wheat crops are sold several times over on the exchanges of the country, but not all these purchases and sales are a necessary part of the process of getting the cotton from the planter to the manufacturer. these sales, we are told, are purely speculative and born out of the credit organization, which, it is urged, merely makes the transactions possible.... however,... these exchanges actually exist. all the purchases involved constitute a part of the demand for means of settlement. therefore they are to be regarded as a proper part of the exchange business of the country, and in some degree they must influence the need for money.... ... the demand for money to effect exchanges includes, first, demand for money for direct exchanges; second, demand for reserves for credit exchanges. some goods exchange by direct barter and still more probably by indirect barter. if these last exchanges just cancelled one another, the credit paper that grows out of them would also cancel, and no balances would remain to be settled with money. usually, however, they do not cancel, and the balance must be settled with cash; hence a reserve is necessary.... this demand for reserve is certainly one of the influences that go to determine the value of money. in short, the demand for money includes a demand for direct payment and a demand for reserve.... . _our monetary circulation._--our per capita circulation, as estimated by the comptroller of the currency, has increased from $ . in to $ . in .[ ] this is larger than the per capita circulation of other great industrial and commercial countries with the exception of france. why is it necessary and where is it? it is necessary, perhaps, for the following reasons: (a) a larger amount of money is needed in this country because, in the first place, our prices range higher. if the prices of articles commonly consumed range per cent. higher than they do abroad, the people who buy them and pay for them with money need a larger amount to make their purchases. the same cause makes a larger reserve necessary to exchange a given volume of goods by credit. the demand for money, therefore, both for reserve and direct money transactions, is greater on account of the higher scale of prices. (b) the same kind of reasoning applies to our wage scale. whether the wage scale be the cause of the higher cost of living or the higher cost of living be the cause of the higher wage scale, more money will be needed in proportion to the trade. if wages are paid with checks, more money will be needed by the amount that the reserve must be increased to furnish a basis for the checks. (c) our country is more sparsely settled than england, france, or germany. in spite of the large increase in the banking facilities of the country, it still remains true that very many places are remote from banks, so that business, so far as it is not barter, will probably be carried on with money. it is necessary, therefore, to have a larger amount of money than if population were denser.... (d) it may be that our spirit of individualism plays some part. so large a proportion of our wage-earning population have come from conditions where they had opportunity to handle very little money, that they like to carry money on their persons. it makes them feel, as one man said to the writer, "more independent." to quote the same informant, they would "rather pay higher prices and have more money to pay with." (e) doubtless there is a good deal of hoarding by people who distrust banks or are not near enough to use them. it might be urged that no larger proportion of people here hoard than is the case in europe. without disputing this, it is true, however, that if only the same proportion hoard and in the same relative amounts as is done by corresponding classes of the population, the absolute amount thus withdrawn would be larger because of our higher scale of wages and prices.... footnotes: [ ] david kinley, _the use of credit instruments in payments in the united states_, pp. , ; - . senate document no. . st congress, _ d session_. [ ] in this discussion the phrase "credit documents" or "credit instruments" does not include bank notes. [ ] [the effect of credit exchanges on the value of money, treated at length in the next chapter, is only briefly discussed in the extracts here reproduced.] [ ] [approximately $ in .] chapter xi a symposium on the relation between money and general prices the form of this chapter was suggested by the proceedings of a session of the meeting of the american economic association, devoted to a consideration of the causes of the rise in prices between and . selections from papers there presented, and from the relative discussion, make up a considerable part of the chapter, and it is suggested that all of the selections, except the last, may well be considered for purposes of study as having come from the papers and discussion of the session referred to, although numerous additions and substitutions have been made in order to render the treatment one of principles involved in the determination of general prices without special reference to any particular period of years. irving fisher[ ]: overlooking the influence of deposit currency, or checks, the price level may be said to depend on only three sets of causes: ( ) the quantity of money in circulation; ( ) its "efficiency" or velocity of circulation (or the average number of times a year money is exchanged for goods); and ( ) the volume of trade (or amount of goods bought by money). the so-called "quantity theory,"[ ] _i.e._, that prices vary proportionately to money, has often been incorrectly formulated, but (overlooking checks) the theory is correct in the sense that the level of prices varies directly with the quantity of money in circulation, provided the velocity of circulation of that money and the volume of trade which it is obliged to perform are not changed. the quantity theory has been one of the most bitterly contested theories in economics, largely because the recognition of its truth or falsity affected powerful interests in commerce and politics. it has been maintained--and the assertion is scarcely an exaggeration--that the theorems of euclid would be bitterly controverted if financial or political interests were involved. the quantity theory has, unfortunately, been made the basis of arguments for unsound currency schemes. it has been invoked in behalf of irredeemable paper money and of national free coinage of silver at the ratio of to . as a consequence, not a few "sound money men," believing that a theory used to support such vagaries must be wrong, and fearing the political effects of its propagation, have drifted into the position of opposing, not only the unsound propaganda, but also the sound principles by which its advocates sought to bolster it up.[ ] these attacks upon the quantity theory have been rendered easy by the imperfect comprehension of it on the part of those who have thus invoked it in a bad cause. personally, i believe that few mental attitudes are more pernicious, and in the end more disastrous, than those which would uphold sound practice by denying sound principles because some thinkers make unsound application of those principles. at any rate, in scientific study there is no choice but to find and state the unvarnished truth. the quantity theory will be made more clear by the equation of exchange, which is now to be explained. the equation of exchange is a statement, in mathematical form, of the total transactions effected in a certain period in a given community. it is obtained simply by adding together the equations of exchange for all individual transactions. suppose, for instance, that a person buys pounds of sugar at cents per pound. this is an exchange transaction, in which pounds of sugar have been regarded as equal to cents, and this fact may be expressed thus: cents = pounds of sugar multiplied by cents a pound. every other sale and purchase may be expressed similarly, and by adding them all together we get the equation of exchange _for a certain period in a given community_. during this same period, however, the same money may serve, and usually does serve, for several transactions. for that reason the money side of the equation is of course greater than the total amount of money in circulation. the equation of exchange relates to all the purchases made by money in a certain community during a certain time. we shall continue to ignore checks or any circulating medium not money. we shall also ignore foreign trade and thus restrict ourselves to trade within a hypothetical community. later we shall reinclude these factors, proceeding by a series of approximations through successive hypothetical conditions to the actual conditions which prevail to-day. we must, of course, not forget that the conclusions expressed in each successive approximation are true solely on the particular hypothesis assumed. the equation of exchange is simply the sum of the equations involved in all individual exchanges in a year. in each sale and purchase, the money and goods exchanged are _ipso facto_ equivalent; for instance, the money paid for sugar is equivalent to the sugar bought. and in the grand total of all exchanges for a year, the total money paid is equal in value to the total value of the goods bought. the equation thus has a money side and a goods side. the money side is the total money paid, and may be considered as the product of the quantity of money multiplied by its rapidity of circulation. the goods side is made up of the products of quantities of goods exchanged multiplied by their respective prices. the important magnitude, called the velocity of circulation, or rapidity of turnover, is simply the quotient obtained by dividing the total money payments for goods in the course of a year by the average amount of money in circulation by which those payments are effected. this velocity of circulation for an entire community is a sort of average of the rates of turnover of money for different persons. each person has his own rate of turnover which he can readily calculate by dividing the amount of money he expends per year by the average amount he carries. let us begin with the money side. if the number of dollars in a country is , , , and their velocity of circulation is twenty times per year, then the total amount of money changing hands (for goods) per year is , , times twenty, or $ , , . this is the _money_ side of the equation of exchange. since the money side of the equation is $ , , , the goods side must be the same. for if $ , , has been spent for goods in the course of the year, then $ , , worth of goods must have been sold in that year. in order to avoid the necessity of writing out the quantities and prices of the innumerable varieties of goods which are actually exchanged, let us assume for the present that there are only three kinds of goods,--bread, coal, and cloth; and that the sales are: , , loaves of bread at $ . a loaf, , , tons of coal at . a ton, and , , yards of cloth at . a yard. the value of these transactions is evidently $ , , , _i. e._, $ , , worth of bread plus $ , , worth of coal plus $ , , worth of cloth. the equation of exchange therefore (remember that the money side consisted of $ , , exchanged times) is as follows: $ , , × times a year = , , loaves × $ . a loaf + , , tons × . a ton + , , yards × . a yard this equation contains on the money side two magnitudes, viz. ( ) the quantity of money and ( ) its velocity of circulation; and on the goods side two _groups_ of magnitudes in two columns, viz. ( ) the quantities of goods exchanged (loaves, tons, yards), and ( ) the prices of these goods. the equation shows that these four sets of magnitudes are mutually related. because this equation must be fulfilled, the prices must bear a relation to the three other sets of magnitudes--quantity of money, rapidity of circulation, and quantities of goods exchanged. consequently, these prices must, as a whole, vary proportionally with the quantity of money and with its velocity of circulation, and inversely with the quantities of goods exchanged. suppose, for instance, that the quantity of money were doubled, while its velocity of circulation and the quantities of goods exchanged remained the same. then it would be quite impossible for prices to remain unchanged. the money side would now be $ , , × times a year or $ , , ; whereas, if prices should not change, the goods would remain $ , , , and the equation would be violated. since exchanges, individually and collectively, always involve an equivalent _quid pro quo_, the two sides _must_ be equal. not only must purchases and sales be equal in amount--since every article bought by one person is necessarily sold by another--but the total value of goods sold must equal the total amount of money exchanged. therefore, under the given conditions, prices must change in such a way as to raise the goods side from $ , , to $ , , . this doubling may be accomplished by an even or uneven rise in prices but some sort of _a rise of prices there must be_. if the prices rise evenly, they will evidently all be exactly doubled.... if the prices rise unevenly, the doubling must evidently be brought about by compensation; if some prices rise by less than double, others must rise by enough more than double to exactly compensate. but whether all prices increase uniformly, each being exactly doubled, or some prices increase more and some less (so as still to double the total money value of the goods purchased), the prices _are_ doubled _on the average_.... from the mere fact, therefore, that the money spent for goods must equal the quantities of those goods multiplied by their prices, it follows that the level of prices must rise or fall according to changes in the quantity of money, _unless_ there are changes in its velocity of circulation or in the quantities of goods exchanged. if changes in the quantity of money affect prices, so will changes in the other factors--quantities of goods and velocity of circulation--affect prices, and in a very similar manner. thus a doubling in the velocity of circulation of money will double the level of prices, provided the quantity of money in circulation and the quantities of goods exchanged for money remain as before.... again, a doubling in the quantities of goods exchanged will not double, but halve, the height of the price level, _provided_ the quantity of money and its velocity of circulation remain the same.... finally, if there is a simultaneous change in two or all of the three influences, _i. e._, quantity of money, velocity of circulation, and quantities of goods exchanged, the price level will be a compound or resultant of these various influences. if, for example, the quantity of money is doubled, and its velocity of circulation is halved, while the quantity of goods exchanged remains constant, the price level will be undisturbed. likewise, it will be undisturbed if the quantity of money is doubled and the quantity of goods is doubled, while the velocity of circulation remains the same. to double the quantity of money, therefore, is not always to double prices. we must distinctly recognize that the quantity of money is only one of three factors, all equally important in determining the price level.... we now come to the strict algebraic statement of the equation of exchange.... let us denote the total circulation of money, _i. e._, the amount of money expended for goods in a given community during a given year, by _e_ (expenditure); and the average amount of money in circulation in the community during the year by _m_ (money). _m_ will be the simple arithmetical average of the amounts of money existing at successive instants separated from each other by equal intervals of time indefinitely small. if we divide the year's expenditures, _e_, by the average amount of money, _m_, we shall obtain what is called the average rate of turnover of money in its exchange for goods, _e_/_m_ that is, the velocity of circulation of money. this velocity may be denoted by _v_, so that _e_/_m_ = _v_; then _e_ may be expressed as _mv_. in words: the total circulation of money in the sense of money expended is equal to the total money in circulation multiplied by its velocity of circulation or turnover. _e_ or _mv_, therefore, expresses the money side of the equation of exchange. turning to the goods side of the equation, we have to deal with the prices of goods exchanged and quantities of goods exchanged. the average price of sale of any particular good, such as bread, purchased in the given community during the given year, may be represented by _p_ (price); and the total quantity of it purchased, by _q_ (quantity); likewise the average price of another good (say coal) may be represented by _p´_ and the total quantity of it exchanged, by _q´_; the average price and the total quantity of a third good (say cloth) may be represented by _p´´_ and _q´´_ respectively; and so on, for all other goods exchanged, however numerous. the equation of exchange may evidently be expressed as follows: _mv_ = _pq_ + _p´q´_ + _p´´q´´_ + etc. the right-hand side of this equation is the sum of terms of the form _pq_--a price multiplied by a quantity bought. it is customary in mathematics to abbreviate such a sum of terms (all of which are of the same form) by using "sigma" as a symbol of summation. this symbol does not signify a _magnitude_ as do the symbols _m, v, p, q_, etc. it signifies merely the _operation_ of addition and should be read "the sum of terms of the following type." the equation of exchange may therefore be written: _mv_ = sigma_pq_. that is, the magnitudes _e_, _m_, _v_, the _p_'s and the _q_'s relate to the _entire_ community and an _entire_ year; but they are based on and related to corresponding magnitudes for the individual persons of which the community is composed and for the individual moments of time of which the year is composed. the algebraic derivation of this equation is, of course, essentially the same as the arithmetical derivation previously given. it consists simply _in adding together the equations for all individual purchases within the community during the year_.... [we are now] ... prepared for the inclusion of bank deposits or circulating credit in the equation of exchange. we shall still use _m_ to express the quantity of actual money, and _v_ to express the velocity of its circulation.[ ] similarly, we shall now use _m´_ to express the total deposits subject to transfer by check; and _v´_ to express the average velocity of circulation. the total value of purchases in a year is therefore no longer to be measured by _mv_, but by _mv_ + _m´v´´_. the equation of exchange, therefore, becomes: _mv_ + _m´v´_ = sigma_pq_ = _pt_[ ].... with the extension of the equation of monetary circulation to include deposit circulation, the influence exerted by the quantity of money on general prices becomes less direct; and the process of tracing this influence becomes more difficult and complicated. it has even been argued that this interposition of circulating credit breaks whatever connection there may be between prices and the quantity of money.[ ] this would be true if circulating credit were independent of money. but the fact is that the quantity of circulating credit, _m´_, tends to hold a definite relation to _m_, the quantity of money in circulation; that is, deposits are normally a more or less definite multiple of money. two facts normally give deposits a more or less definite ratio to money. the first ... [is] that bank reserves are kept in a more or less definite ratio to bank deposits. the second is that individuals, firms, and corporations preserve more or less definite ratios between their cash transactions and their check transactions, and also between their money and deposit balances.[ ] these ratios are determined by motives of individual convenience and habit. in general, business firms use money for wage payments, and for small miscellaneous transactions included under the term "petty cash"; while for settlements with each other they usually prefer checks. these preferences are so strong that we could not imagine them overridden except temporarily and to a small degree. a business firm would hardly pay car fares with checks and liquidate its large liabilities with cash. each person strikes an equilibrium between his use of the two methods of payment, and does not greatly disturb it except for short periods of time. he keeps his stock of money or his bank balance in constant adjustment to the payments he makes in money or by check. whenever his stock of money becomes relatively small and his bank balance relatively large, he cashes a check. in the opposite event, he deposits cash. in this way he is constantly converting one of the two media of exchange into the other. a private individual usually feeds his purse from his bank account; a retail commercial firm usually feeds its bank account from its till. the bank acts as intermediary for both. in a given community the quantitative relation of deposit currency to money is determined by several considerations of convenience. in the first place, the more highly developed the business of a community, the more prevalent the use of checks. where business is conducted on a large scale, merchants habitually transact their larger operations with each other by means of checks, and their smaller ones by means of cash. again, the more concentrated the population, the more prevalent the use of checks. in cities it is more convenient both for the payer and the payee to make large payments by check; whereas, in the country, trips to a bank are too expensive in time and effort to be convenient, and therefore more money is used in proportion to the amount of business done. again, the wealthier the members of the community, the more largely will they use checks. laborers seldom use them; but capitalists, professional and salaried men use them habitually, for personal as well as business transactions. there is, then, a relation of convenience and custom between check and cash circulation, and a more or less stable ratio between the deposit balance of the average man or corporation and the stock of money kept in pocket or till. this fact, as applied to the country as a whole, means that by convenience a rough ratio is fixed between _m_ and _m´_. if that ratio is disturbed temporarily, there will come into play a tendency to restore it. individuals will deposit surplus cash, or they will cash surplus deposits. hence, both money in circulation ... and money in reserve ... tend to keep in a fixed ratio to deposits. it follows that the two must be in a fixed ratio to each other. it further follows that any change in _m_, the quantity of money in circulation, requiring as it normally does a proportional change in _m´_, the volume of bank deposits subject to check, will result in an exactly proportional change in the general level of prices except, of course, so far as this effect be interfered with by concomitant changes in the _v_'s or the _q_'s. the truth of this proposition is evident from the equation _mv_ + _m´v´_ = sigma_pq_; for if, say, _m_ and _m´_ are doubled, while _v_ and _v´_ remain the same, the left side of the equation is doubled and therefore the right side must be doubled also. but if the _q_'s remain unchanged, then evidently all the _p_'s must be doubled, or else if some are less than doubled, others must be enough more than doubled to compensate.... the factors in the equation of exchange are ... continually seeking normal adjustment. a ship in a calm sea will "pitch" only a few times before coming to rest, but in a high sea, the pitching never ceases. while continually seeking equilibrium, the ship continually encounters causes which accentuate the oscillation. the factors seeking mutual adjustment are money in circulation, deposits, their velocities, the _q_'s and the _p_'s. these magnitudes must always be linked together by the equation _mv_ + _m´v´_ = sigma_pq_. this represents the mechanism of exchange. but in order to conform to such a relation the displacement of any one part of the mechanism spreads its effects during the transition periods [_i.e._, periods of rising or falling prices] over all parts. since periods of transition are the rule and those of equilibrium the exception, the mechanism of exchange is almost always in a dynamic rather than a static condition....[ ] [illustration] [ ]it is interesting to make a quantitative comparison of the various magnitudes with the increase in the quantity of money as the most important factor in raising the price level. while it is true, as shown by the diagram, that the volume of deposits subject to check has increased greatly, the major part of the increase has to be ascribed to the increase in the quantity of money. only so far as the volume of deposits subject to check has increased relatively to the money in circulation, can the increase of deposits be regarded as an independent cause of the rise in prices. we have thus to consider the relative importance of the five causes affecting prices: . the quantity of money in circulation (m). . the volume of bank deposits subject to check considered relatively to money (m´/m). . the velocity of the former (v´). . the velocity of the latter (v). . the volume of trade (t). we may best compare the relative importance of these five magnitudes by answering the question: what would the result have been had any one of these magnitudes remained unchanged, assuming that the other four changed in the same manner that they actually did change. we find ( ) that if the money in circulation, m, had not changed, between the years and , for example, the price level of would have been per cent. lower than it actually was; ( ) that if m´/m, the relative deposits, had not changed, during the same period the price level in would have been per cent. lower than it actually was; ( ) if the velocity of circulation of money, v, had not changed, the price level for would have been per cent. lower; ( ) if the velocity of circulation of deposits, v´, had not changed, the price level in would have been per cent. lower; ( ) if t had not changed, the price level in would have been per cent. _higher_. thus the changes in the first four factors have tended to raise prices, while the change in t has tended to lower prices. the relative importance of the four price-raising causes may be stated in terms of the per cent. already given which represents how much lower prices would have been except for each of these causes separately considered. according to this test we find the relative importance of the four price-raising factors to be as follows: the importance of v is represented by , the importance of m´/m is represented by , the importance of v is represented by , the importance of m is represented by . that is, the increase in the quantity of money had an importance nearly double that of any other one price-raising factor, during the period mentioned. indirect influences on purchasing power[ ] thus far we have considered the level of prices as affected by the volume of trade, by the velocities of circulation of money and of deposits, and by the quantities of money and of deposits. these are the only influences which can _directly_ affect the level of prices. any other influences on prices must act through these five. there are myriads of such influences (outside of the equation of exchange) that affect prices through these five. it is our purpose ... to note the chief among them.... we shall first consider the outside influences that affect the volume of trade and, through it, the price level. the conditions which determine the extent of trade are numerous and technical. the most important may be classified as follows: . _conditions affecting producers._ (a) geographical differences in natural resources. (b) the division of labor. (c) knowledge of the technique of production. (d) the accumulation of capital. . _conditions affecting consumers._ (a) the extent and variety of human wants. . _conditions connecting producers and consumers._ (a) facilities for transportation. (b) relative freedom of trade. (c) character of monetary and banking systems. (d) business confidence. (a). it is evident that if all localities were exactly alike in their natural resources, in other words, in their comparative costs of production, no trade would be set up between them.... cattle raising in texas, the production of coal in pennsylvania, of oranges in florida, and of apples in oregon have increased the volume of trade for these communities respectively. (b). equally obvious is the influence of the division of labor.... (c).... the state of knowledge of production will affect trade. vast coal fields in china await development, largely for lack of knowledge of how to extract and market the coal. egypt awaits the advent of scientific agriculture, to usher in trade expansion. nowadays, trade schools in germany, england, and the united states are increasing and diffusing knowledge of productive technique. (d). but knowledge, to be of use, must be applied; and its application usually requires the aid of capital. the greater and the more productive the stock or capital in any community, the more goods it can put into the currents of trade.... since increase in trade tends to decrease the general level of prices, anything which tends to increase trade likewise tends to decrease the general level of prices. we conclude, therefore, that among the causes tending to decrease prices are increasing geographical or personal specialization, improved productive technique, and the accumulation of capital. the history of commerce shows that all these causes have been increasingly operative during a long period including the last century. consequently, there has been a constant tendency, from these sources at least, for prices to fall. (a).... an increase of wants, by leading to an increase in trade, tends to lower the price level. historically, during recent times through invention, education, and the emulation coming from increased contact in centers of population, there has been a great intensification and diversification of human wants and therefore increased trade. consequently, there has been from these causes a tendency of prices to fall. (a). anything which facilitates intercourse tends to increase trade. anything that interferes with intercourse tends to decrease trade. first of all, there are the mechanical facilities for transport. as macaulay said, with the exception of the alphabet and the printing press, no set of inventions has tended to alter civilization so much as those which abridge distance,--such as the railway, the steamship, the telephone, the telegraph, and that conveyer of information and advertisements, the newspaper. these all tend, therefore, to decrease prices. (b). trade barriers are not only physical but legal. a tariff between countries has the same influence in decreasing trade as a chain of mountains. the freer the trade, the more of it there will be.... (c). the development of efficient monetary and banking systems tends to increase trade. there have been times in the history of the world when money was in so uncertain a state that people hesitated to make many trade contracts because of the lack of knowledge of what would be required of them when the contract should be fulfilled. in the same way, when people cannot depend on the good faith or stability of banks, they will hesitate to use deposits and checks. (d). confidence, not only in banks in particular, but in business in general, is truly said to be "the soul of trade." without this confidence there cannot be a great volume of contracts. anything that tends to increase this confidence tends to increase trade.... we see, then, that prices will tend to fall through increase in trade, which may in turn be brought about by improved transportation, by increased freedom of trade, by improved monetary and banking systems, and by business confidence. historically, during recent years, all of these causes have tended to grow in power, except freedom of trade.... having examined those causes outside the equation which affect the volume of trade, our next task is to consider the outside causes that affect the velocities of circulation of money and of deposits. for the most part, the causes affecting one of these velocities affect the other also. these causes may be classified as follows: . _habits of the individual._ (a) as to thrift and hoarding. (b) as to book credit. (c) as to the use of checks. . _systems of payments in the community._ (a) as to frequency of receipts and of disbursements. (b) as to regularity of receipts and disbursements. (c) as to correspondence between times and amounts of receipts and disbursements. . _general causes._ (a) density of population. (b) rapidity of transportation. (a). taking these up in order, we may first consider what influence thrift has on the velocity of circulation. velocity of circulation of money is the same thing as its rate of turnover. it is found by dividing the total payments effected by money in a year by the amount of money in circulation in a year. it depends upon the rates of turnover of the individuals who compose the society. this velocity of circulation or rapidity of turnover of money is the greater for each individual the more he spends, with a given average amount of cash on hand; or the less average cash he keeps, with a given yearly expenditure.... (b). the habit of "charging," _i.e._, using book credit, tends to _increase_ the velocity of circulation of money, because the man who gets things "charged" does not need to keep _on hand_ as much money as he would if he made all payments in cash. a man who pays _cash_ daily needs to keep cash for daily contingencies. the system of cash payments, unlike the system of book credit, requires that money shall be kept on hand _in advance_ of purchases. evidently, if money must be provided in advance, it must be provided in larger quantities than when merely required to liquidate past debts.... but we have seen that to increase the rate of turnover will tend to increase the price level. therefore, book credit tends to increase the price level.... (c). the habit of using checks rather than money will also affect the velocity of circulation; because a depositor's surplus money will immediately be put into the bank in return for a right to draw by check.... we see, then, that three habits--spendthrift habits, the habit of charging, and the habit of using checks--all tend to raise the level of prices.... (a). the more frequently money or checks are received and disbursed, the shorter is the average interval between the receipt and the expenditure of money or checks and the more rapid is the velocity of circulation. this may best be seen from an example. a change from monthly to weekly wage payments tends to increase the velocity of circulation of money. if a laborer is paid weekly $ and reduces this evenly each day, ending each week empty-handed, his average cash ... would be a little over half of $ , or about $ . this makes his turnover nearly twice a week. under monthly payments the laborer who receives and spends an average of $ a day will have to spread the $ more or less evenly over the following days. if, at the next pay day, he comes out empty-handed, his average money during the month has been about $ . this makes his turnover about twice a month. thus the rate of turnover is more rapid under weekly than under monthly payments.... frequency of disbursements evidently has an effect similar to the effect of frequency of receipts; _i.e._, it tends to accelerate the velocity of turnover, or circulation. (b). _regularity_ of payments also facilitates the turnover. when the workingman can be fairly certain of both his receipts and expenditures, he can, by close calculation, adjust them so precisely as safely to end each payment cycle with an empty pocket. this habit is extremely common among certain classes of city laborers. on the other hand, if the receipts and expenditures are irregular, either in amount or in time, prudence requires the worker to keep a larger sum on hand, to insure against mishaps.... we may, therefore, conclude that regularity, both of receipts and of payments, tends to increase velocity of circulation. (c). next, consider the synchronizing of receipts and disbursements, _i. e._, making payments at the same intervals as obtaining receipts.... this arrangement obviates the necessity of keeping much money or deposits on hand, and therefore increases their velocity of circulation.... (a). the more densely populated a locality, the more rapid will be the velocity of circulation. there is definite evidence that this is true of bank deposits. the following figures give the velocities of circulation of deposits in ten cities, arranged in order of size: paris berlin brussels madrid rome lisbon indianapolis new haven athens santa barbara madrid is the only city seriously out of its order in respect to velocity of circulation. (b). again the more extensive and the speedier the transportation in general, the more rapid the circulation of money. anything which makes it easier to pass money from one person to another will tend to increase the velocity of circulation. railways have this effect.... mail and express, by facilitating the transmission of bank deposits and money, have likewise tended to increase their velocity of circulation. we conclude, then, that density of population and rapidity of transportation have tended to increase prices by increasing velocities. historically this concentration of population in cities has been an important factor in raising prices in the united states.... [summary] [ ]the purchasing power ... of money has been studied as the effect of five, and only five, groups of causes. the five groups are money, deposits, their velocities of circulation, and the volume of trade. these and their effects, prices, we saw to be connected by an equation called the equation of exchange, _mv + m'v' = sigmapq_. the five causes, in turn,... are themselves effects of antecedent causes lying entirely outside of the equation of exchange, as follows: the volume of trade will be increased, and therefore the price level correspondingly decreased by the differentiation of human wants; by diversification of industry; and by facilitation of transportation. the velocities of circulation will be increased, and therefore also the price level increased by improvident habits; by the use of book credit; and by rapid transportation. the quantity of money will be increased and therefore the price level increased correspondingly by the import and minting of money, and, antecedently, by the mining of the money metal; by the introduction of another and initially cheaper money metal through bimetallism; and by the issue of bank notes and other paper money. the quantity of deposits will be increased, and therefore the price level increased by extension of the banking system and by the use of book credit. the reverse causes produce, of course, reverse effects. thus, behind the five sets of causes which alone affect the purchasing power of money, we find over a dozen antecedent causes. if we chose to pursue the inquiry to still remoter stages, the number of causes would be found to increase at each stage in much the same way as the number of one's ancestors increases with each generation into the past. in the last analysis myriads of factors play upon the purchasing power of money; but it would be neither feasible nor profitable to catalogue them. the value of our analysis consists rather in simplifying the problem by setting forth clearly the five proximate causes through which all others whatsoever must operate. at the close of our study, as at the beginning, stands forth the equation of exchange as the great determinant of the purchasing power of money. j. laurence laughlin[ ]: to my mind, the following propositions contain the essence of the theory of prices.... as every one will appreciate, only general statements, without any limiting qualifications to speak of, can be given in so small a compass. . the price of a commodity is measured by the quantity of a given standard for which it will exchange. . a change of prices may be due to changes in the conditions affecting the supply (thus including expenses of production) of goods, as well as to changes in the demand for and supply of gold. a statistical statement of a change of price is not a statement of the cause of the change. . probably there is not so much difference of opinion regarding the theory of prices as is sometimes supposed. other causes being supposed constant, an increased supply of gold would tend to raise prices. no one can fail to see that, if by "money" is meant gold, a change in its quantity would, other things being equal, be a factor affecting prices. an increasing demand for gold, however, would work against the effect of an increasing supply. if the new demand offset the new supply, then, if changes of prices occurred, their cause must be sought in the influences touching the producing and marketing of goods. . the effective demand for goods (granting their utility) is limited by the buyer's purchasing power. this purchasing power is not identical with the quantity of the media of exchange in circulation, any more than the value of the total exchangeable wealth of the community is identical with the value of the total money in circulation. . the general level of prices is not independent of particular prices; since there can be no such thing as a general level, or average, of prices which is not the resultant of a number of particular prices each arrived at by individual buyers and sellers. the causes of price changes must be sought in the forces settling particular prices. this does not exclude the consideration of any causes affecting the value of the standard in which the prices of goods are expressed, because the standard is itself a particular commodity. . in particular cases, competitive prices in this country are arrived at by the higgling of the market, which depends on buyers' and sellers' judgment of the demand and supply of the commodity (_e. g._, wheat); and, when the price is fixed, the credit medium by which the commodity is passed from seller to buyer comes easily and naturally into existence and, of course, for a sum exactly equaling the price agreed upon, multiplied by the number of units of goods. price-making generally precedes the demand upon the media of exchange, and does not at all imply any necessary demand at the moment upon the standard in which the prices are expressed (cf. ). . the offer of "money" for goods is only a resultant of price-making forces previously at work, and does not measure the demand for goods (cf. ). that is, the quantity of the actual media of exchange thus brought into use is a result and not a cause of the price-making process. the supposed offer of money has no money as its basis, but is only the offer of a purchasing power, previously existing, based on saleable goods, which at the moment of payment appears expressed in terms of the standard. by credit devices the actual transfer of the standard is reduced to an inconsiderable minimum. in reality (as in foreign trade) goods are exchanged against goods. . the effect of credit on prices is to be found mainly in banking facilities by which goods are coined into means of payment, so that, expressed in terms of the standard gold, they may be exchanged against each other. thus credit devices relieve the standard to an incredibly great degree from the demand for the use of gold as a medium of exchange, and thus remove a demand, as trade increases, which would otherwise have enormously affected the value of gold. thus the effect of credit on the general level of prices in considerable periods of time is shown by a tendency to reduce the demand on the standard gold, and hence to prevent the tendency toward falling prices. . a general proposition is that banks are limited in making loans by the possession of capital, a bank of large capital and deposits being able to make large loans, a bank of small capital and deposits, small loans. a second proposition is that the demand for legitimate loans varies with the exchanges of goods and collateral and the opportunities for investment. with an increasing activity in business, however--either sound or speculative--the expansion of loans is limited by the resources of the bank. next, a bank trying to carry a certain amount of loans, must hold a specified proportion of reserves to demand liabilities under the rule of banking experience or law. the amount of its capital and the funds left with it determine the relative size of its loan item; and the sum of its loans and resultant deposits determine the amount of its reserves. the reserves of a bank are thus a consequence of the loan operations. this conclusion, however, as it affects the practical problem of the present day, is not, in my opinion, invalidated by the conceivable cases arising, when business tends to outrun banking facilities, in which anything that makes increasing reserves possible would increase the power of the banks to lend. when gold becomes increasingly abundant, the banks having large resources more easily get the gold reserves needed for their operations. it still remains true that the fact of an increased supply of gold does not of itself increase loans, unless conditions of business demand an increase in loans. therefore, the expansion of business is not a necessary consequence of an increasing supply of gold, any more than an expansion of railway traffic is the necessary consequence of an increasing supply of cars. if increasing goods are in existence to be transported, then, of course, there is an increasing demand for cars. likewise, if there are more bank resources and loans, there is an increasing demand for that which is lawful reserve; from which it is claimed that the use of new gold in bank reserves, under present conditions, is not the significant causal force which expands business and raises prices (although it may be contemporary with it). . the problem of explaining the general level of prices is one of arriving at the adjustment between two terms of a ratio (the standard on the one side, and goods on the other), each of which is influenced by supply and demand. gold being one, and goods being many, a cause working on gold alone, and important enough to show an appreciable effect, might explain a general movement of prices. in practical operation, however, because of the large existing stock of gold, very considerable additions may take place in the supply of gold without materially changing the world value of gold as related to goods in general. rapid changes of prices are hence more likely to be due to influences in the market for goods, to speculative changes of demand for goods, or to psychological forces working independently of facts.... in the problem of discovering the causes of changes in the level of prices, it is necessary first to reach a conclusion as to those causes which operate on the gold standard in which our prices are expressed. by so doing we may locate the general level--so far as the standard is concerned--or the one thing which might work as a cause common to all goods. the relation between gold and goods might be illustrated by the familiar mechanical illustration: a rod balanced on a fulcrum, on one end of which works the forces affecting the value of gold, and on the other end the forces affecting the value of particular goods. the relation between goods and gold being a ratio, as one end of the rod goes up, the other necessarily goes down. there are, as we all know, various forces at work to produce the resultant price level. we may here start from a proposition on which we can all agree. an increase in the quantity of the monetary standard in the world--such as gold--would tend, _other things being equal_, to lower its value and thus raise prices. in trying to find the causes in the price level at any given time (as in - ) it is necessary, therefore, after stating the facts as to the increase of gold, to examine into the influence of "the other things." to begin, we may take up the demand for gold, which, of course, is both monetary and non-monetary. first as to the non-monetary uses, such as abrasion, shipwreck, and disappearance in the arts: the statistics of consumption in the arts are unsatisfactory; at the best they are only estimates. although the total production of the world, - , was $ , , , , there is no evidence as to the available stock in . my belief is that there was not more than $ , , , .[ ] in the period of - , the production was $ , , , , and the consumption in the arts, at the average rate of $ , , a year requires a deduction of $ , , , , which leaves $ , , , . the arts in recent years are estimated to use more than $ , , .[ ] in the period, - , if $ , , , be deducted from the production of $ , , , we have $ , , , . thus the total available stock in would be about $ , , , . the production of the last four years, - , is about $ , , , , or, less the consumption in the arts, about $ , , , . the monetary demand for gold, on the other hand, has shown certain definite characteristics. whether it be prejudice, or enlightened business judgment, the commercial nations of the world have shown a persistent and continuing disposition to adopt a gold monetary system as soon as their own means, or the forthcoming supply of gold, has made it possible. the united states led in , when we declined to change the ratio in order to bring silver into circulation when only gold was in use. from - , germany, the countries of the latin union, austria-hungary, the united states (with the resumption in gold in ), and india (in ), in response to the preferences of the commercial world, placed themselves on the gold standard by legal enactments. the demand for gold all through this period was based upon considerations independent of the movement of prices. for this was a time of falling prices when much was heard of the appreciation of gold and the need of silver. in spite of this tendency toward falling prices, the movement toward the adoption of gold went on.... it was precisely this large new supply of gold which enabled the commercial nations to gratify their desire for what they believed was a more stable standard. as we enter the present period ( - ) we find this momentum towards the gold standard still in force: and other countries in emulation planned to put themselves on an equally stable standard with those whose means had permitted an earlier action--quite irrespective of the fact that this last was a period of rising prices, while the former was one of falling prices. in this period, russia, japan, various states in south america, such as peru, argentina, and brazil, and recently mexico, have emphasized the movement away from silver to gold. moreover, as backward lands, like turkey, parts of asia, egypt, and various districts of africa, have developed their resources and increased their trade, they have taken on gold in their monetary systems. with increasing trade also there are more exchanges of goods; hence, even in countries (like great britain and the united states) that do not use gold to speak of, except in reserves, there are increasing loans and deposits and thus a demand for more gold reserves. consequently, in countries long ago established on the gold standard there will be a steadily increasing demand for gold as exchanges expand. we find thus a special characteristic of the demand for gold (certainly not existing in the demand for silver). the power of developing countries to soak up new gold is as marked a part of present conditions as is the power of a porous and sandy soil to soak up a heavy rainfall. we must, therefore, take full account of the noticeable fact that the recent demand for gold seems about to keep pace with the new supply; that a shipment of gold from the mines to london is to-day eagerly competed for, not only by european countries, but by egypt, india, turkey, argentina, and brazil. consequently it may be of interest to see which countries have taken the largest amounts of gold into their stocks since : united states $ , , russia , , germany , , south american states , , british empire , , austria-hungary , , italy , , besides the demand for gold in the arts, and the apparent monetary demand, as thus already presented, we must not omit to take into account also the large stocks of gold held by banks and institutions which publish no statements. in the hands of large private institutions like those of the rothschilds, bleichroders, and others, great amounts of gold are carried. it is from such stores that the needs of states, such as austria-hungary, france, italy, and even the united states (in cleveland's administration), have been supplied without drawing down visible reserves. thus far, then, we have examined the one factor of demand for gold, among the "other things" (which were supposed to remain equal). there is abundant evidence to show that the demand for gold, in this recent period of rising prices ( - ) has been as strong as, or even stronger than, the demand for gold in the previous period ( - ) of falling prices. it looks very much as if we must seek for the causes of rising prices since in some of the "other things" not yet examined. there is no time, however, for extended discussion on these points.... the effects of tariffs and taxation, unionism and higher wages, and changing agricultural conditions in increasing expenses of production in all industries are so patent as to require no enlargement. immediately after the passage of the dingley act in , a large list of articles rose in price precipitously. moreover, just so far as higher money wages for the same work, or the same money wages for a reduced number of hours, have been granted without a corresponding increase in the efficiency of the labor, the expenses of producing goods in general--and consequently prices--have risen. but, without doubt, one of the most important factors in raising prices--directly and indirectly--has been the increased price of food due to the changing conditions of agriculture. this most influential cause of higher prices is one of the "other things" which has been at work quite independent of the quantity of new gold. moreover, the indirect effect of high prices of food produces the most serious practical problem. it wipes out all the gain of previous increases of wages, and drives laborers to repeat their demands for higher pay, thus working again to increase expenses of production. it is not too much to say that the gains of industry, shown by the fall in prices, as they stood about have been lost to us by the high tariffs of and the wastes of bad farming and the recent high costs of agriculture. our analysis would be inadequate, however, if we stopped here with our examination of expenses of production. the really practical problem is still before us in trying to analyze the forces at work fixing prices in that vague and dangerous margin between actual expenses of production and the prices in fact paid by the consumer.... the whole _raison d'être_ of monopolistic combinations is to control prices, and prevent active competition. as every economist knows, in the conditions under which many industries are to-day organized, expenses of production have no direct relation to prices. in such conditions, there is a field in which the policy of charging "what the traffic will bear" prevails; and this includes industries that are not public utilities. furthermore, we must face the fact of increasing riches not only in this country, but all over the world. new wealth makes a liberal spender. the retail dealer finding his expenses increasing and--even when they are not--tries the experiment of charging his richer customers an increasing price. the newly rich pay and do not feel it. but what can the poorer unorganized buyer do when retail prices are raised? what can he do if his meat bill, or his plumbing-repairs bill, rises enormously? the extravagance of the rich has increased the cost of traveling, the rates at hotels, the fees, the luxury of steamships and automobiles, the consumption of fruits and vegetables out of season once never thought of, and has generally raised the standard of expenditure. those of smaller income find they also must pay the higher prices. thus we have reached a point where we have to pay almost whatever any one asks. organized buyers are the only offset to organized sellers. moreover, rising prices due to high expenses of production, or to combinations of sellers, present a paradise for speculation. a movement upward based on facts can be easily converted into a further rise based only on speculative manipulation. a rise of prices which brings large profits to a combination, thus directly affects earnings and gives especial opportunity to speculation in the securities of industrials. hence, the field of speculation spreads from commodities to securities. the facts as to the movement of prices of securities are well shown in brookmire's economic charts since ; and, while the presence of gold serves as a fund of lawful money in reserves, the spread of speculation has gone on seemingly unaffected by the new supplies of gold. that is, speculative conditions may arise and disappear antecedent to and seemingly independent of the gold supplies. * * * * * d. f. houston[ ]: the discussion of money and prices to-day reminds one very strongly of the discussion forty years ago. now, as then, the opinion is that prices have risen; but now, as then, there is wide difference as to the explanation. now, as then, a highly respectable body of economists attribute the rise mainly to the new gold; and now, as then, a number of economists attribute the rise to influences immediately affecting the cost of production of commodities in general, instancing such things as labor unions, monopolies, extravagance, the tariff, general prosperity, etc.... that the tariff has played a part in the situation, i should of course not deny. by preventing us from securing supplies where they can be more economically produced, and by making it possible for domestic manufacturers to monopolize the market, and by tending to compel the payment for exports in gold, it has unquestionably played a part and is a notable factor.... in considering the tariff as a factor, however, we must not forget that we have had the tariff since the beginning, and that the rates have been nearly as high since the civil war as they are to-day; and we must remember, further, that in one of the great countries which has no protective tariff the tendency of price has been upward; furthermore, we must not overlook the fact that many of the tariff rates, which are very high now, are not effective or not nearly so effective as they were in the earlier period, and also that its influence is probably greater in things in which the rise of price has been less marked. i should not deny that labor unions and monopolies have had an influence in increasing price. the evidence seems to justify the conclusion that monopolies have had some effect in increasing price. i am not sure that there is sufficient evidence in regard to labor unions to enable us to form a conclusion.... much has been said in discussion about the influence of extravagance. this has played a part in similar discussions at all times; every era has its cry of extravagance, and it is not clear that it has been more marked in our time than in former times. and one thing is quite clear, that the extravagance, or economic waste, resulting from the prosecution of war and its after effects, has been conspicuously absent during the last fifteen years.... the stock of gold in the leading western commercial nations, with which we are concerned in discussing prices, probably did not exceed $ , , , at the end of . during the next fourteen years there was added to the stock of gold of these countries an amount nearly equal to the existing stock. in addition, a number of these countries enormously developed their credit devices. according to all economic law, these facts create a strong presumption that gold has been the main factor affecting price. no sufficient evidence has been presented to overthrow this presumption. * * * * * e. w. kemmerer[ ]: an adequate discussion of the papers presented by professors fisher and laughlin would require much more time than the few minutes at my disposal. i shall accordingly limit myself to a few points and support my conclusions principally by footnote references. this procedure is perhaps the more justifiable in view of the fact that my own philosophy of the relationship between money and prices is given in detail in the book[ ] on money and prices to which professor fisher has so generously referred.[ ] i have had the opportunity of reading in manuscript professor fisher's forthcoming book on price levels, of which his paper to-day represents one chapter, and find myself in substantial agreement with his main contentions. his discussion is a permanent contribution to monetary science of very great value. to a number of minor points, however, it seems to me, exception must be taken.... professor fisher's formula expressing the relationship between the circulating media and prices is essentially the same as my own,[ ] but he pays little attention to the factor of business confidence, which is a most important consideration in the interpretation of the formula. the ratio of deposit currency to bank reserves is a function of business confidence.[ ] the distinction professor fisher draws between the prices of individual commodities and the general price level appears to me, as to professor laughlin, to be untenable. it is, moreover, contradictory to his general philosophy of money. his index numbers recognize no general price level distinct from individual prices. he illustrates the point that the price of any individual commodity presupposes a general price level by saying that "the position of a particular wave in the ocean depends on the general level of the ocean." i can conceive of no such distinction between the general price level and individual prices as his statements seem to imply. general prices "are but a combination, or composite photograph, as it were, of individual prices."...[ ] passing to professor laughlin's paper, which has been presented to me merely in the form of an abstract, we find ten propositions, which to a considerable extent are repetitious. his first five propositions are rather commonplace generalizations and few economists will be disposed to dissent from their essential soundness. they place him much closer to the quantity theory of money than most of us, judging him from his previous writings, were disposed to think he would go; and in his third proposition he says, "probably there is not so much difference of mind regarding the theory of prices as is sometimes supposed." with reference to professor laughlin's fourth proposition it may be said that no economist of standing claims that purchasing power is "identical with the quantity of the media of exchange in circulation." effective purchasing power, however, in our modern business communities, does depend upon the possession of money or of the right to demand money. the amount of deposit currency which can be used at any time in purchasing goods is limited by bank reserves because commercial deposits are payable in money on demand at the order of the depositor. other assets, no matter how good, cannot be used for the purpose of meeting deposit obligations, except when the entire credit machinery breaks down and suspension is resorted to under the euphemistic name of clearing house loan certificates. professor laughlin's sixth and seventh points are essentially the same and may be considered together. he says: ... price-making generally precedes the demand upon the media of exchange, and does not at all imply any necessary demand at the moment upon the standard in which the prices are expressed.... the offer of money for goods is only a resultant of price-making forces previously at work, and does not measure the demand for goods.... that is, the quantity of the actual media of exchange thus brought into use is a result and not a cause of the price-making process.... this contention appears to me to result from a superficial view of the price-making process. the offer of money for goods and the offer of goods for money are of course not the first steps. each person has his own individual or subjective prices on all sorts of commodities; these subjective prices represent the valuations which he places upon the respective commodities in terms of the valuation which he places upon the money unit. the more of a particular commodity he has the lower his subjective valuation of a unit of that commodity; the more money he owns the lower his estimation of a dollar and the higher his subjective prices; and _vice versa_. through a process of competition, selection, and adaptation, some of these subjective prices develop into market prices, that is, prices at which both buyer and seller benefit, and at which therefore an exchange takes place. to paraphrase an old adage, the proof of the market price is in the exchange. it is a common observation that stock quotations to be of much value must show the number of sales effected at the prices quoted. a stock for which the maximum bids were and the minimum offers were , would not possess a market price in the strict sense of the word. the fact that sales have recently been made at a certain price, or are now being so made, is of course presumptive evidence that intending purchasers can buy at about that price. a market price, however, is the amount of money paid for a commodity, not the amount asked, offered, or promised. professor laughlin's ninth proposition i find very difficult to follow. his premise that reserves are "a consequence of the loan operations" is a dangerous half truth; they are also a consequence of most other kinds of banking operations, cash deposits, cash withdrawals and clearing house balances, foreign and domestic exchange operations, etc. his other premise, that "the fact of an increased supply of gold does not _of itself_ [the italics are mine] increase loans, unless the bank possesses the control of the capital which is a condition precedent to the loans," contains an element of truth, but is misleading. while an increased supply of gold does not of itself increase loans it normally has that result; and the bank's discount rate and the condition of its reserve are powerful factors in influencing its loan account. his premises, i believe, are not sound, and his conclusion, namely, that "the expansion of business is not a direct consequence of an increasing supply of gold, any more than an expansion of railway traffic is the direct consequence of an increasing supply of cars," would not follow from his premises, even if they were sound. the normal causal chain is more nearly this: increased gold production results in greatly increased amounts of gold coming into the monetary uses.[ ] this gold comes into the hands of individuals and is to a large extent deposited in banks; increased money incomes on the part of individuals lower their estimations of the value of the money unit, raise subjective prices, and as a consequence market prices; larger money deposits in banks result in larger reserves, banks do not make interest on money held in reserves, and accordingly take measures to invest such surplus money, keeping these reserves as low as is consistent with law and their ideas of safety;[ ] inducements to borrowers are made in the form of more favorable discount rates; collateral is not scrutinized so carefully; the speculative market is stimulated by increasing supplies of call money; confidence everywhere increases; new enterprises spring up and old ones are expanded; and in a short time the new gold is absorbed by a higher price level and an overstimulated business activity. this was the situation after the californian and australian gold discoveries of the last century and it has been the result of the greatly increased gold production of the last few years. professor laughlin's final point is that since the new demand for gold has roughly equalled the new supply, and that the changes in prices since must be sought mainly in the "other things," which have not remained equal. in support of this conclusion he offers two principal arguments. the first is as follows: ... because of the large existing stock of gold, very considerable changes may take place in the supply of gold without materially changing the world value of gold as related to goods in general. rapid changes of price are hence more likely to be due to influences in the market for goods, to speculative changes of demand for goods, or to psychological forces working independently of facts.... in reply it may be said that the production of gold since represents a very large percentage of the total supply. the soetbeer figures as supplemented by those of the director of the mint show that the world's gold production for the years - inclusive was in round numbers $ , , , ,[ ] and that for the eleven years - , was $ , , , ; in other words, for these eleven years it was over per cent. of the total for the preceding years. probably the effective supply represents a much larger proportion of recent gold because of ( ) the large amount of loss chiefly by abrasion of the gold produced in the earlier years, and of ( ) the greater degree to which this early gold has assumed specialized forms, such as jewelry, plate, etc. satisfactory index numbers of prices for recent years are not available for all the principal countries of the world. such as we have, however, point to a decided rise of prices in all gold standard countries since about . comparing standard price index numbers in six of the chief countries of the world for the years and , we find the general price level to have risen as follows:[ ] united states--bureau of labor figures . % canada--coats figures, (weighted) . % england--sauerbeck figures . % france--de foville, figures for export prices[ ] . % germany--hamburg figures . % italy--necco figures for export prices . % if we average these figures together, assigning the same importance to the figures of each country, in order to get a _rough_ idea of the movement of world prices in gold standard countries during the eleven years in question, we find that the average increase was . per cent. if we follow professor laughlin and compare the years and , we find the average increase in prices to have been . per cent., and the world's gold production for the years to to have been about per cent. of that for the preceding years. when to this is added the fact that the evidence points to a smaller percentage of the world's annual gold production going into the industrial uses than formerly, and the further fact that during the period in question the increase and improvements in the world's banking facilities have greatly economized the uses of money, we see that a very substantial increase in general prices would be expected, despite a great expansion of business. world prices in fact have not increased nearly as rapidly as the flow of gold into monetary uses since , not to mention the enormous development of deposit currency. the director of the mint estimates each year the amount of the world's new gold used in the industrial arts. computations i have made based upon these figures show a tendency for a decreasing percentage of the annual production to be used in the arts, although there is considerable irregularity. for the seven years - the average percentage was . , and for the seven years - it was . .[ ] professor laughlin's second argument in favor of the proposition that the recent rise in prices has not been due primarily to the increased gold production is one of the most beautiful examples of begging the question that i have seen in economic literature. he says: "in recent discussions one of the 'other' factors which has been slighted is the demand for gold since . the examination shows that the new demand in countries turning to the gold standard, and in those already using gold and extending their demand, amounts in round numbers to about $ , , , . hence the new demand has roughly equalled the new supply, since --a fact which jumps with the known conditions in the great financial markets like london, where new arrivals of gold are eagerly competed for by european banks." of course the demand for gold equals the supply, as does the demand for wheat or any other commodity, when one interprets demand and supply as one should, in terms of market prices. the general price level is the very thing which equilibrates the demand for gold and the supply. the higher price level about which we are talking is an expression of the absorption of most of this new gold into the world's circulation. banks and merchants eagerly compete for it, because higher prices require more money to do a given amount of exchange work, and rising prices stimulate business. * * * * * joseph french johnson[ ]: i am glad to observe that there appears to be a tendency toward agreement with regard to the fact that the value of money depends upon the demand for it and supply of it. professor laughlin likes the word standard better than i do. it suggests something permanent and fixed, whereas money is a very changeable thing. while i am in agreement with professor laughlin in the conclusion that the general level of prices depends upon the demand for and supply of money, i am unable to give assent to many of the propositions which he puts forward as links in the chain of reasoning leading to that conclusion. for example, professor laughlin says, "a change of prices may be due to changes in the demand for and supply of (thus including the expenses of production) goods as well as to changes in the demand for and supply of gold." this proposition is true with regard to changes in the prices of particular commodities. the price of wheat may rise or fall as a result of a change in the demand for or in the supply of wheat. the proposition, however, is not true with regard to a change in the general level of prices. an increase in the supply of goods will lower the level of prices for the simple reason that it will increase the demand for gold. i am not certain that i have understood professor laughlin's exposition of his theory, but he certainly seemed to me to argue that there could be a change in the general level of prices without any change whatever in the demand for or supply of gold. such a position, it seems to me, is absolutely untenable. that professor laughlin seeks to hold this untenable position, it seems to me, is made evident by the qualification with which he accepts the statement that a change in the quantity of money, other things being equal, would be a factor affecting prices. he says, "an increasing demand for gold, however, would work against the effect of an increasing supply. if the new demand offset the new supply, then, if changes of price occurred, their cause must be sought in the influences touching the producing and marketing of goods." the second conditional clause in that last sentence introduces an impossible supposition, for if a new supply of gold is offset by a new demand for it, there could be no change in the general level of prices, so that no cause for any change would have to be sought in the "influences touching the producing and marketing of goods." professor laughlin appears to have in mind forces affecting the general level of prices which are entirely hidden from my sight. a change in the level of prices means a change in the value of gold, and how can there be a change in that if the new demand for gold just offsets the new supply? professor laughlin's analysis of the price-making process is incomplete and misleading. he is correct when he says that the causes of price changes must be sought in the forces settling particular prices, but he is manifestly wrong when he states that the price of wheat is "arrived at by the higgling of the market, which depends on the buyers' and sellers' judgment of the demand for and supply of wheat." such higgling would determine only the value of wheat. the price of wheat is not fixed until buyer and seller have reached an agreement in their estimates as to the value not only of wheat, but also of money. if wheat is comparatively easy to get, the price falls. if money is easier to get, the price rises. the demand for and supply of money is evidently just as important in the determination of the price of wheat as is the demand for and supply of wheat itself. when professor laughlin says that the offer of money for goods is only a resultant of price-making forces previously at work, he must have in mind some price-making process and price-making forces of which i have never heard. i know of no market in which goods are lowered in price except for the reason that at the higher price not enough money is offered to absorb the supply; nor of any market in which goods are raised in price except for the reason that buyers are willing to offer more money for the goods. in his analysis of credit and its relation to the value of money, professor laughlin seems to me to have in mind a hypothetical financial world, the like of which does not and could not exist on earth. he strives to show that a bank's ability to make loans depends upon the amount of its capital and deposits, and that therefore any increase in the supply of gold would not in itself lead to an increase of loans. "expansion of business," he remarks, "is not a direct consequence of an increasing supply of gold any more than an expansion of railway traffic is the direct consequence of an increasing supply of cars." he is quite right if he means that an increase in the amount of gold will not necessarily cause the exchange of more goods. but this does not appear to be his meaning. he holds that the use of new gold in bank reserves cannot be a causal force raising prices, for the bankers cannot increase their loans, in his opinion, unless the condition of business demands such an increase. in his hypothetical financial world bankers are willing to carry idle stocks of gold and to wait until business conditions make necessary an increase in their loans. in the real financial world, of course, bankers do nothing of the sort. bankers with surplus gold immediately tempt borrowers by lowering the rate of discount and thus increasing the money demand for goods in the markets. as a result there is an irregular and general rise of prices. more goods may not be bought and sold and there may be no expansion of business, but expressed in terms of money the totals are bigger. there is no analogy between dollars and freight cars. the carrying capacity of a car is fixed and unchangeable, but the carrying capacity of a dollar is elastic--so elastic, in fact, that dollars are always fully loaded no matter how small the supply of goods. as professor laughlin points out, although he apparently does not see its significance, the new demand for gold since has "roughly equalled the new supply." surely it could not have been otherwise, and no statistics are necessary to prove the fact. * * * * * murray s. wildman[ ]: my comments on these interesting papers will be directed upon the methods employed, and certain assumptions involved, in the arguments of both. granting that professor fisher's analysis shows a perfect correspondence between the course of prices on the one hand and the quantity of money and credit instruments on the other hand, i am still unable to see which magnitudes are properly to be regarded as causes and which as effects. that variations in the value of gold and in the price level must be reciprocal, all will admit. if we regard m as denoting the gold supply for the present, a causal relation between m and p cannot be denied. but may it not be possible that variations in m´, or credit, and v and v´, the velocity of circulation of both money and credit, be simply in consequence of the variation in m and p? why is p the only passive term or why is it passive at all? suppose that the problem set was to discover the cause of credit expansion from to . would we not seek at once to explain it by reference to rising prices and greater volume of goods, making a broader basis for credit, while along with that is a greater gold supply which promotes the convertibility of an extended credit? then might we not invoke professor fisher's algebraic formula, with terms rearranged, and show by this method of reasoning, supported by statistical verification, that the high prices afford an adequate cause for the present expansion of credit? but we are seeking the cause or causes of rise in the price level. this is equivalent to seeking the cause of decline in the value of gold. does the "quantity theory" as newly expounded give us the solution? i think not. rather it shows us that as gold has grown in supply, and fallen in value, credit has grown in magnitude and in rapidity of circulation, and that these changes in values and volumes have gone hand in hand with proportional changes in the price level and in the magnitude of commodity exchanges. this view of the case brings me to substantial approval of professor laughlin's method of analysis and argument. that is, we must seek the facts regarding supply and demand as applied to gold, and those which bear upon supply and demand as touching goods, in so far as the demand for goods is expressed in offers of gold and gold representatives. here the algebraic formula would be invoked to support his reasoning since m´ and v and v´ may be regarded as factors in the demand for gold. to accept professor laughlin's method does not involve the necessity of his conclusions. the terms, by this method, do not lend themselves to exact mathematical statement and statistical proof, so conclusions cannot be exact and definite. this may be illustrated in a consideration of demand for gold. some say that demand has grown step by step with supply and therefore gold has not been cheapened. others say that supply has grown more rapidly than demand, and so gold has been cheapened and to that extent prices are raised. either statement may be wrong. i do not believe we have yet any reliable data regarding the demand for gold in the sense of a value-making factor. most efforts to measure demand are based on statistics of gold in use. if one can show that consumption of gold in the arts, in the circulation, and in greater bank reserves, has increased _pari passu_ with production, we are told that the value of gold has not been lowered by the greater supply. but statistics of consumption give no clue to demand in the value-determining sense. we have many staple commodities, such as wheat and cotton, whose price drops sharply when the supply exceeds a certain normal volume, even though the whole crop is consumed. statistically speaking, the demand for a cotton crop always rises as supply rises, and falls as supply falls, but that is because demand and supply become equated through a variation in price. demand, in this sense of quantity demanded, is in part a result rather than a cause of value. when we can properly speak of demand as potent for the determination of value, we are thinking of demand from the point of view of _intensity_ rather than the point of view of _magnitude_. but the demand which makes for value--demand intensively considered--is only measured by the purchasing power offered. applied to gold, i know of no measure of demand except in the goods and services offered in exchange. to say that goods and services offered for an ounce of gold in are less than are offered for an ounce of gold in , is simply to say that prices are higher. but it is these prices that we are trying to explain by giving the effect for the cause, when we say that demand has risen with supply. those staple commodities whose value falls off abruptly with any increase of supply beyond a customary stock are said to be subject to an inelastic demand, and those whose value declines uniformly with excessive supplies are said to have an elastic demand. is the demand for gold elastic, or is it inelastic? and is it possible by independent analysis to construct the curve of elasticity which properly belongs to gold, and so avoid circular reasoning from the very prices we are trying to explain? if the demand for gold is inelastic and the demand curve drops off abruptly after a certain supply is in evidence, the presumption is that in the conditions of gold production, rather than in the conditions of commodity production, lies the cause of our high prices. moreover, if this be the case, we can readily see the cause of cheapening of gold, even though the product of a single year bears a small proportion to the existing stock. if on the other hand the demand for gold be very elastic, so that it expands with growing supplies with no substantial alterations in value, then we are driven to seek the cause of high prices in influences directly touching the goods and services rather than in those directly affecting gold. it would seem therefore that both methods of treatment have left something to be desired. the algebraic analysis, even as verified, presents the relations between magnitudes without showing the cause of high prices. the argument directed immediately at the value of gold of necessity involves consideration of the demand for gold, which, as a price-making factor, remains an unknown quantity. * * * * * t. n. carver[ ]: professor fisher ... has demonstrated beyond all question the accuracy of his formula. the question remains, however, whether his formula supports his own conclusion or professor laughlin's. if, for example, it should be found that p is the cause of m, the formula would to that extent support professor laughlin's position. i believe that to a certain extent p is actually the cause of m. if the growing scarcity of agricultural land, or the increase in population and the increased demand for agricultural products without an increase in land, should increase the marginal cost of producing agricultural products to supply this larger demand, that would tend to increase the exchange value of these products, even according to the formula of cairnes as quoted by president houston.[ ] even without any increase in the gold supply, this would cause each unit of product to exchange for a little more gold; then, in order that a given number of exchanges in agricultural products could be carried on, it would be necessary to have a larger number of ounces of gold, or a larger number of gold coins, or some other form of money of given denominations to do the money work. this, in other words, would necessitate a larger supply of money: and, if other forms than gold were not forthcoming, it would necessitate that a larger proportion of the stock of gold should be coined into money in order to do the work. thus, without any increase whatever in the world's total gold supply, there would come to be an increase in the proportion of that supply used as money, or in the amount of gold coin actually used in circulation. i believe that this has taken place, and that it is one of the factors in the problem, although there has also been a very large increase in the gold supply to still further accentuate the tendency. * * * * * f. w. taussig[ ]: i congratulate professor fisher on his admirable paper. i am in accord with him in his method of reasoning and in all his essential results. his investigation of this subject adds another to the brilliant studies with which he has enriched economic science. it deserves to be said, perhaps, that the term m´ (deposits) in his equation is not entirely independent, but is in some degree a function of t. i say to some degree; it is dependent on t in part only, and not for very long periods. professor fisher has here treated it as dependent simply on m.... he has indicated the qualifications which must be attached to this dependence of deposits on bank reserves. he has pointed out that though a general dependence appears over long periods of time, it is affected by changes in banking ways, and by the tendency to build up a higher superstructure of deposits in times of active business. but there is also a connection between t, volume of trade, and m´. that is, for short periods--nay, for periods of some years--an increasing volume of trade tends of itself to bring about an increasing volume of deposits. (i may say, parenthetically, that "volume of trade" does not seem to me an apt expression; "units of commodities," the other phrase used by professor fisher, is better.) though i would by no means go the length of professor laughlin's reasoning, which seems to imply that every act of exchange supplies automatically its own medium of exchange, it does seem to me that our modern mechanism of deposit banking supplies an elastic source of deposits, which, for considerable periods, enables them to run _pari passu_ with the transactions and loans resting on them. in the end, an increase of deposits finds its limit in the volume of cash held by the banks. but there is some elasticity of adjustment, by which loans and deposits increase as fast as transactions or faster; and this accounts in no small degree for the rise in prices during periods of activity. the phenomenon shows itself most strikingly in stock exchange loans, especially in a center like new york. there the business creates for itself quasi-automatically its own medium of exchange. i suspect it is undue generalization from operations of this sort that has led professor laughlin to take his extreme position--a position which i can not but think untenable. some allowance for the temporary interaction between m´ and t is necessary for the completeness of professor fisher's reasoning. * * * * * ralph h. hess[ ]: professor fisher's formula (mv + m´v´ = pt) approximately expresses the mathematical equality of purchase and payment which cannot be questioned. i say _approximately_ because m´ (defined by professor fisher as "bank deposits subject to check"), if it be made to express an accurate measure of circulating credit, should include not only open bank accounts, but certain other values which constitute _current means of payment_, such as bankers' bills, trade bills, cashiers' checks, and certified checks.... the relation which professor taussig has pointed out between m´ and t (the _value of negotiable credit_ and the contemporary _volume of trade_) is not only possible, but, in any community of modernized commerce, is actual. moreover, a knowledge of the process by which commerce is financed by the existing mechanism of discount, loan, deposit, and draft justifies the conclusion that, if the volume of trade (t) be resolved into its factors, namely, _materials of trade_ and their _frequency of exchange_, the latter factor of t is quite commensurate with the velocity of credit (v´). to me it seems incontestable that the volume and velocity of credit currency, as represented by bank deposits and other circulating media, vary directly as the volume and value of the materials of trade in the process of exchange, and are, mathematically speaking, dependent functions thereof. granting this relation, an analysis of the equation of exchange establishes pt as the major determinant of m´v´, and, in so far as paper money may be authorized and issued upon the security of commercial assets, of m. that part of the money in circulation which does not derive its circulating powers from actual and potential commercial values is itself material of barter incorporating so-called intrinsic values. the conclusion is clear that p (price) is independent of all other terms and factors of professor fisher's equation, that v and v´ are determined by the mechanical circumstances and organization of exchange, and that the value of m and m´, taken collectively, is a spontaneous derivative of pt. the fundamental determinants of prices and of "price levels," therefore, are to be found outside of monetary and credit agencies _per se_. as to the nature and order of the price-making process and the actual forces behind price movements, i am in substantial accord with professor laughlin. that prices, individually and collectively considered, express the value-proportion of demand for and supply of goods on the market to demand for and "visible supply" of the standard commodity is fundamentally logical. nor is there occasion to quibble over the paradox of disturbed equilibrium of demand and supply. physically considered, the goods which objectify these terms are, of course, identical; but, in the valuation process, demand and supply denominate, respectively, _desire_ and _utility_--the generally acknowledged antecedents of value. price is the equalizing factor between the effective demand for gold and the effective demand for other goods, each taken in conventional units; and price changes are resultants of, and commensurate with, net variations in the value-factors of the standard and of the objects of exchange. referring to the nature of credit and the economic qualities of credit instruments, the somewhat figurative expression "goods coined into a means of payment" is a striking and accurate characterization. it is possible that all legitimate market values, under normal trade conditions, may be liquidized through credit agencies, and the goods in which they are incorporated be thus rendered immediately and conveniently exchangeable. this process may be consummated independently of prices and with slight regard to the actual supply of money. the truth of this assertion is, in fact, demonstrated daily in the marts of trade. * * * * * j. laurence laughlin[ ]: there is time to answer briefly only a few of the points raised by several speakers. first, professor fisher's equation of mv + m´v´ = pt is to my mind not a solution, but only a statement, of the problem of price levels. it can be read backward as well as forward. for instance, it does not follow that the level of prices (p) will rise with an increase of m´, since--as professor taussig has pointed out already--an active development of trade and industry (t) would itself be a reason for an increase of banking loans and deposits subject to check (m´), thus equalizing effects on both sides of the equation without necessarily increasing p. this result is, in fact, one of the points on which i have steadily insisted in my own exposition of the theory of prices and credit; and professor fisher's equation allows it to appear distinctly. his equation does not show causes; it states a static situation, into which various causes may be read. the facts between and disclose an increase of bank deposits of or per cent., and yet that period was distinguished as one of falling prices. therefore m´ cannot be regarded as having been proved to be a cause of higher prices. second, professor fisher ... seeks to establish a causal relation between the amount of money in circulation (m) and the amount of deposits (m´) which, in my judgment, is wholly unfounded. he has developed this in his paper in the _royal statistical journal_. the error consists in supposing that a man's deposit account at any time varies with the amount of money in his possession. rather, the deposit account varies with a man's wealth. the rich man does not carry much more money to pass from hand to hand than the man of moderate means. monetary habits in the community require a certain level of circulation for all persons, but the deposits of an individual may soar above the common level without regard to the money he keeps in circulation. his bank deposits are rather a measure of the saleable goods he has sold, "coined into means of payment." third, i well recognize the high position professor fisher occupies in the mathematical school of walras and others; but has he not made an error in stating the essence of the price relation in his mathematical symbols? so far as i understand him, he seems to deny the fundamental value-concept (on which there has hitherto been general agreement) that price is a ratio between goods and gold. in furtherance of that idea, he thinks that, before individual prices can be arrived at, the general price level must be ascertained. now, in my exposition using the ratio-concept, i explained in detail how the general level of prices might be affected by causes affecting the gold side of the ratio. therefore, i did not neglect to account for the general level and that too without doing violence to the accepted value-concept. but the ratio-concept (which professor fisher seems to deny) allows the forces acting on goods also to affect the general level of prices as i have shown. in my opinion, he wrongly works from a general level of prices to particular prices; while i hold that particular prices, or actual quotations, are the bases from which all averages, or price levels, are always and inevitably computed. moreover, in his diagrams, the level of prices he used was the one computed from individual quotations. hence his whole reasoning on the conformity of the statistics to the terms of his equation is vitiated. indeed the better agreement he finds--after elaborate statistical computations--between the elements and their result on prices ...--is due, i think, to relying on an equation which is nothing more than a statement that the whole is equal to the sum of its parts.... finally, when professor johnson suggests that i am wrong in stating that forces affecting the goods side of the price ratio have an influence on prices, he certainly cannot mean that conditions affecting the producing, marketing, and financing of goods have no effect on prices. how else, for instance, can we explain the rise of the prices of agricultural products? the special causes affecting them have little to do with the quantity of "money." moreover, the term "money" itself is used so loosely and vaguely that we can come to agreement on price theories only by first agreeing upon what we mean by "money." in my paper, i have discussed the relations of goods, and their prices, to gold. but, in this country, we use gold little as a medium by which goods are exchanged. thus the relation of the prices of goods to our media of exchange has been practically omitted. and yet the price-making process generally precedes the creation of the usual banking media of exchange by which most goods are exchanged. * * * * * irving fisher[ ]: in connection with the statement and explanation of the equation of exchange it was shown ( ) that prices vary directly as the quantity of money, provided the volume of trade and the velocities of circulation remain unchanged; ( ) that prices vary directly as the velocities of circulation (if these velocities vary together), provided the quantity of money and the volume of trade remain unchanged, and ( ) that prices vary inversely as the volume of trade, provided the quantity of money--and therefore deposits--and their velocities remain unchanged. let us now inquire how far these propositions are really _causal_ propositions. an examination of the influence of each of the six magnitudes on each of the other five will afford answers to the objections which have been raised to the quantity theory of money. to set forth all the facts and possibilities as to causation we need to study the effects of varying, one at a time, the various magnitudes in the equation of exchange. our first question is: given (say) a doubling of the quantity of money in circulation (_m_) what are the normal or ultimate effects on the other magnitudes in the equation of exchange, viz.: _m´_, _v_, _v´_, the _p_'s and the _q_'s? we have seen that normally the effect of doubling money in circulation (_m_) is to double deposits (_m´_) because under any given conditions of industry and civilization deposits tend to hold a fixed or normal ratio to money in circulation. hence the ultimate effect of a doubling in _m_ is the same as that of doubling both _m_ and _m´_. we propose next to show that this doubling of _m_ and _m´_ does not normally change _v_, _v´_ or the _q_'s, but only the _p_'s. the equation of exchange of itself does not affirm or deny these propositions. for aught the equation of exchange itself tells us, the quantities of money and deposits might even vary inversely as their respective velocities of circulation. were this true, an increase in the quantity of money would exhaust all its effects in reducing the velocity of circulation, and could not produce any effect on prices. if the opponents of the "quantity theory" could establish such a relationship, they would have proven their case despite the equation of exchange. but they have not even attempted to prove such a proposition. as a matter of fact, the velocities of circulation of money and of deposits depend, as will be seen, on technical conditions and bear no discoverable relation to the quantity of money in circulation. velocity of circulation is the average rate of "turnover", and depends on countless individual rates of turnover. these depend on individual habits. each person regulates his turnover to suit his convenience. a given rate of turnover for any person implies a given time of turnover--that is, an average length of time a dollar remains in his hands. he adjusts this time of turnover by adjusting his average quantity of pocket money, or till money, to suit his expenditures. he will try to avoid carrying too little lest, on occasion, he be unduly embarrassed; and on the other hand to avoid encumbrance, waste of interest, and risk of robbery, he will avoid carrying too much. each man's adjustment is, of course, somewhat rough, and dependent largely on the accident of the moment; but, in the long run and for a large number of people, the average rate of turnover, or what amounts to the same thing, the average time money remains in the same hands, will be very closely determined. it will depend on density of population, commercial customs, rapidity of transport, and other technical conditions, but not on the quantity of money and deposits nor on the price level. these may change without any effect on velocity. if the quantities of money and deposits are doubled, there is nothing, so far as velocity of circulation is concerned, to prevent the price level from doubling. on the contrary, doubling money, deposits, and prices would necessarily leave velocity quite unchanged. each individual would need to spend more money for the same goods, and to keep more on hand. the ratio of money expended to money on hand would not vary. if the number of dollars in circulation and in deposit should be doubled and a dollar should come to have only half its former purchasing power, the change would imply merely that twice as many dollars as before were expended by each person and twice as many kept on hand. the ratio of expenditure to stock on hand would be unaffected. if it be objected that this _assumes_ that with the doubling in _m_ and _m´_ there would be also a doubling of prices, we may meet the objection by putting the argument in a slightly different form. suppose, for a moment, that a doubling in the currency in circulation should not at once raise prices, but should halve the velocities instead; such a result would evidently upset for each individual the adjustment which he had made of cash on hand. prices being unchanged, he now has double the amount of money and deposits which his convenience had taught him to keep on hand. he will then try to get rid of the surplus money and deposits by buying goods. but as somebody else must be found to take the money off his hands, its mere transfer will not diminish the amount in the community. it will simply increase somebody else's surplus. everybody has money on his hands beyond what experience and convenience have shown to be necessary. everybody will want to exchange this relatively useless extra money for goods, and the desire so to do must surely drive up the price of goods. no one can deny that the effect of every one's desiring to spend more money will be to raise prices. obviously this tendency will continue until there is found another adjustment of quantities to expenditures, and the _v_'s are the same as originally. that is, if there is no change in the quantities sold (the _q_'s), the only possible effect of doubling _m_ and _m´_ will be a doubling of the _p_'s; for we have just seen that the _v_'s cannot be permanently reduced without causing people to have surplus money and deposits, and there cannot be surplus money and deposits without a desire to spend it, and there cannot be a desire to spend it without a rise in prices. in short, the only way to get rid of a plethora of money is to raise prices to correspond. so far as the surplus deposits are concerned, there might seem to be a way of getting rid of them by cancelling bank loans, but this would reduce the normal ratio which _m´_ bears to _m_, which we have seen tends to be maintained. we come back to the conclusion that the velocity of circulation either of money or deposits is independent of the quantity of money or of deposits. no reason has been, or, so far as is apparent, can be assigned, to show why the velocity of circulation of money, or deposits, should be different, when the quantity of money, or deposits, is great, from what it is when the quantity is small. there still remains one seeming way of escape from the conclusion that the sole effect of an increase in the quantity of money in circulation will be to increase prices. it may be claimed--in fact it has been claimed--that such an increase results in an increased volume of trade. we now proceed to show that (except during transition periods) the volume of trade, like the velocity of circulation of money, is independent of the quantity of money. an inflation of the currency cannot increase the product of farms and factories, nor the speed of freight trains or ships. the stream of business depends on natural resources and technical conditions, not on the quantity of money. the whole machinery of production, transportation, and sale is a matter of physical capacities and technique, none of which depend on the quantity of money. the only way in which the quantities of trade appear to be affected by the quantity of money is by influencing trades accessory to the creation of money and to the money metal. an increase of gold money will, as has been noted, bring with it an increase in the trade in gold objects. it will also bring about an increase in the sales of gold mining machinery, in gold miners' services, in assaying apparatus and labor. these changes may entail changes in associated trades. thus if more gold ornaments are sold, fewer silver ornaments and diamonds may be sold. again the issue of paper money may affect the paper and printing trades, the employment of bank and government clerks, etc. in fact, there is no end to the minute changes in the _q_'s which the changes mentioned, and others, might bring about. but from a practical or statistical point of view they amount to nothing, for they could not add to nor subtract one-tenth of per cent. from the general aggregate of trade. only a very few _q_'s would be appreciably affected, and those few very insignificant. we conclude, therefore, that a change in the quantity of money will not appreciably affect the quantities of goods sold for money. since, then, a doubling in the quantity of money: ( ) will normally double deposits subject to check in the same ratio, and ( ) will not appreciably affect either the velocity of circulation of money or of deposits or the volume of trade, it follows necessarily and mathematically that the level of prices must double. while, therefore, the equation of exchange, of itself, asserts no causal relations between quantity of money and price level, any more than it asserts a causal relation between any other two factors, yet, when we take into account conditions known quite apart from that equation, viz., that a change in _m_ produces a proportional change in _m´_, and no changes in _v_, _v´_, or the _q_'s, there is no possible escape from the conclusion that a change in the quantity of money (_m_) must _normally_ cause a proportional change in the price level (the _p_'s). while the equation of exchange is, if we choose, a mere "truism," based on the equivalence, in all purchases, of the money or checks expended, on the one hand, and what they buy, on the other, yet in view of supplementary knowledge as to the relation of _m_ to _m´_, and the non-relation of _m_ to _v_, _v´_, and the _q_'s, this equation is the means of demonstrating the fact that normally the _p_'s vary directly as _m_, that is, demonstrating the quantity theory. to throw away contemptuously the equation of exchange because it is so obviously true is to neglect the chance to formulate for economic science some of the most important and exact laws of which it is capable. we may now restate, then, in what causal sense the quantity theory is true. it is true in the sense that one of the _normal effects of an increase in the quantity of money is an exactly proportional increase in the general level of prices_. i have no desire, as some one has humorously suggested, to hide behind an equation, but i do find it necessary to take refuge behind my book on the _purchasing power of money_. so many new questions have been asked that, in the few moments at my disposal, i could not answer them all satisfactorily. i believe they have all been answered in the book referred to. for instance, a chapter has been devoted to transition periods in which it has been shown, as professor taussig has suggested, that during transition periods an increase in _t_ may cause an increase in _m´_. the testimony of ricardo [ ]let us suppose that the circulation of all countries were carried on by the precious metals only, and that the proportion which england possessed were one million; let us further suppose, that, at once, half of the currencies of all countries, excepting that of england, were suddenly annihilated, would it be possible for england to continue to retain the million which she before possessed? would not her currency become relatively excessive compared with that of other countries? if a quarter of wheat, for example, had been both in france and england of the same value as an ounce of coined gold, would not half an ounce now purchase it in france, whilst in england it continued of the same value as one ounce? could we by any laws, under such circumstances, prevent wheat or some other commodity (for all would be equally affected) from being imported into england, and gold coin from being exported? if ... the exportation of bullion were free, gold might rise per cent.; and for the same reason, if flemish schillings in hamburgh had before been of equal value with a pound sterling, - / schillings would now attain that value. if the currency of england only had been doubled, the effects would have been precisely the same. suppose, again, the case reversed, and that all other currencies remained as before, while half that of england was retrenched. if the coinage of money at the mint was on the present footing, would not the prices of commodities be so reduced here that cheapness would invite foreign purchasers, and would not this continue till the relative proportions in the different currencies were restored? if such would be the effects of a diminution of money below its natural level, and that such would be the consequences the most celebrated writers on political economy are agreed, how can it be justly contended that the increase or diminution of money has nothing to do either with the foreign exchanges, or with the price of bullion? now, a paper circulation, not convertible into specie, differs in its effects in no respect from a metallic currency, with the law against exportation strictly executed. supposing, then, the first case to occur whilst our circulation consisted wholly of paper, would not the exchanges fall, and the price of bullion rise in the manner which i have been representing; and would not our currency be depreciated, because it was no longer of the same value in the markets of the world as the bullion which it professed to represent? the fact of depreciation could not be denied, however the bank directors might assure the public that they never discounted but good bills for bona fide transactions; however they might assert that they never forced a note into circulation; that the quantity of money was no more than it had always been, and was only adequate to the wants of commerce, which had increased and not diminished;[ ] that the price of gold, which was here at twice its mint value, was equally high, or higher, abroad, as might be proved by sending an ounce of bullion to hamburgh, and having the produce remitted by bill payable in london bank notes; and that the increase or diminution of their notes could not possibly either affect the exchange or the price of bullion. all this, except the last, might be true, and yet would any man refuse his assent to the fact of the currency being depreciated? could the symptoms which i have been enumerating proceed from any other cause but a relative excess in our currency? could our currency be restored to its bullion value by any other means than by a reduction in its quantity, which should raise it to the value of the currencies of other countries; or by the increase of the precious metals, which lower the value of theirs to the level of ours? footnotes: [ ] _the purchasing power of money_, pp. - . the macmillan company. new york. . [ ] this theory, though often crudely formulated, has been accepted by locke, hume, adam smith, ricardo mill, walker, marshall, hadley, fetter, kemmerer and most writers on the subject. the roman julius paulus, about a. d., stated his belief that the value of money depends on its quantity. see zuckerkandl, _theorie des preises_: kemmerer, _money and credit instruments in their relation to general prices_, new york (holt), . it is true that many writers still oppose the quantity theory. see especially, laughlin, _principles of money_, new york (scribner). . [ ] see scott, "it has been a most fruitful source of false doctrines regarding monetary matters, and is constantly and successfully employed in defense of harmful legislation and as a means of preventing needed monetary reforms." _money and banking._ new york, , p. . [ ] [for a method of determining the velocity of the circulation of money, see appendix a.] [ ] it is important to bear in mind that wherever _p_ is used in this chapter it represents the index number, or scale of prices, at which the trade, _t_, is conducted.--editor. [ ] an almost opposite view is that of laughlin that normal credit cannot affect prices because it is not an offer of standard money and cannot affect the value of the standard which alone determines general prices. see the _principles of money_, new york (scribner), , p. . both views are inconsistent with that upheld ... [here]. [ ] this fact is apparently overlooked by laughlin when he argues that there is not "any reason for limiting the amount of the deposit currency, or the assumption of an absolute scarcity of specie reserves." see _principles of money_, p. . [ ] interesting changes in the magnitudes of the equation of exchange between and are given in the appended diagram, which is taken from a reprint of professor fisher's article, _the equation of exchange for , and the war_, the _american economic review_, vol. v, no. , june, .--editor. [ ] adapted from irving fisher. _recent changes in price levels and their causes_, bulletin of the american economic association. fourth series, no. , papers and discussions of the twenty-third annual meeting, december, , pp. - . [ ] irving fisher, _the purchasing power of money_, pp. - . [ ] _ibid._, pp. , . [ ] _causes of the changes in prices since ._ bulletin of the american economic association, fourth series, no. , papers and discussions of the twenty-third annual meeting, december, , pp. - . [ ] there is a possible error here of perhaps $ , , . [ ] the estimate for is $ , , . cf. u. s. report of director of mint, , p. . [ ] bulletin, am. econ. assoc., fourth series, no. , , pp. - . [ ] _ibid._, pp. - . [ ] _money and credit instruments in their relation to general prices_, d edition, . new york: henry holt & company. [ ] the passages referred to are omitted.--editor. [ ] kemmerer, _money and credit instruments_, pp. - , - . [ ] _ibid._, pp. - , - , - . [ ] _ibid._, p. . [see fisher: _purchasing power of money_, pp. - .] [ ] the value of gold bullion deposited at the united states mints and assay offices increased from $ , , for to $ , , for . figures furnished by the director of the mint. [ ] it is noteworthy that the reserves of the new york associated banks for example are usually kept very close to the legal reserve requirements. cf. sprague, _crises under the national banking system_, p. . [ ] gold produced before represents an insignificant part of the existing supply. [ ] useful tables summarizing all of these index numbers, except those of canada, are given by achille necco, in his article on _la curva dei prezzi delle merci in italia negli anni - _, in _la riforma sociale_, sept.-oct., . [ ] comparison is for and , figures for not being available. [ ] de launay thinks that the industrial consumption averages somewhere between and per cent. of the annual output, but believes that for several years past the industrial uses have been absorbing a decreasing proportion, though an increasing amount. (_the world's gold_, pp. - .) [ ] bulletin, am. econ. assoc., fourth series, no. , , pp. - . [ ] _ibid._, pp. - . [ ] _ibid._, p. . [ ] the quotation here referred to is omitted.--editor. [ ] _ibid._, pp. - . [ ] _ibid._, pp. - . [ ] _ibid._, pp. - . [ ] adapted from _the purchasing power of money_, pp. - ; and bulletin of the american economic association, fourth series, no. . papers and discussions of the twenty-third annual meeting, december, . p. . [ ] david ricardo, _reply to mr. bosanquet's practical observations on the report of the bullion committee_, works, pp. - . john murray. london. . [ ] the bank could not on their own principles, then urge that most erroneous opinion, that the rate of interest would be affected in the money market if their issues were excessive, and would therefore cause their notes to return to them, because, in the case here supposed, the actual amount of the money of the world being greatly diminished, they must contend that the rate of interest would generally rise, and they might therefore increase their issues. if, after the able exposition of dr. smith, any further argument were necessary to prove that the rate of interest is governed wholly by the relation of the amount of capital with the means of employing it, and is entirely independent of the abundance or scarcity of the circulating medium, this illustration would i think afford it. chapter xii the gold exchange standard it is an essential feature of the gold exchange standard as it exists in the philippines, for example, that premiums charged by the government in manila for exchange on new york, and in new york for exchange on manila are fixed at a point somewhat below the gold export points in each case. thus the would-be exporter of gold in the philippines never finds it profitable to ship gold to new york. on the other hand, international bankers in new york never find it profitable to ship gold or currency to the philippines, because the authorised agent of the philippine government in new york always stands ready to sell in exchange for united states currency, drafts drawn upon manila at a premium less than the cost of shipping gold or currency. through a regulation of the supply of silver pesos in actual circulation in the philippines they are maintained at a definite ratio to--not gold in the philippines, but--gold, or its equivalent, in new york. the way in which the supply of local currency in the gold-exchange country is regulated will be made clear in what follows. the gold exchange standard has not entirely escaped criticism. professor j. shield nicholson has recently attacked this standard in india. (_economic journal_, june, .) it is his contention that inflation may occur in india, if it has not already occurred, on account of the "impeded convertibility of rupees into gold." after a certain point is reached in the inflation the decline in the general purchasing power of the rupee must be followed, he affirms, by a specific depreciation as regards gold; and then the main object of the plan would be defeated. he offers no evidence, however, that prices have risen faster in india than in gold standard countries. with the exception of mexico, where currency conditions have become extremely chaotic, the historical material here reprinted is in accord with the recent monetary history of the countries under discussion. [ ]when the government of british india sought, in , to give a fixed gold value to about £ , , in rupee silver, it undertook an experiment of great importance to the financial world, and one which was naturally viewed in many quarters with grave misgivings. the experience of fifteen years which have followed that experiment has taught many lessons in monetary science. it may, indeed, be said to have blazed a new path in the principles of money--at least, in their practical application. the effort to raise the coins to a fixed gold value by scarcity alone was not successful, but it led to other devices, which, imitated or improved upon in mexico, the philippines, and the straits settlements, as well as in india, have created a new type of monetary system which has come to bear the title of the gold exchange standard. the gold exchange standard differs in several respects from the limping standard. it has been the product of definite purpose and plan in the philippines and in mexico and to a certain extent in india. while in british india it has been, like the limping standard, a compromise with existing conditions, it has there, as elsewhere, received a definite form and substance which separated it from the limping standard as evolved in france and in other countries which found themselves with a large amount of legal-tender silver on their hands when the metal had fallen below the official parity. there are two other essential differences between the limping standard and the gold exchange standard. one is that the gold exchange standard contemplates a circulation of token coins of silver without any necessary concurrent circulation of gold or paper. the other is that the gold exchange standard contemplates definite and comprehensive measures to maintain the value of token coins at par with gold instead of relying purely upon custom and scarcity to give them value. the essential principle upon which the exchange standard has been established is that the value of money is governed by the law of supply and demand. so long as supply was indefinite and excessive, as under the system of the free coinage of silver, there was no way of preventing safely and effectively the decline in the gold value of the coins to the bullion value of their silver contents. the moment, however, that government undertook to limit the supply of coins to the demand for them, it took an important step to separate their value from that of their bullion contents and to give them a value based upon the demand for them as money signs required for carrying on exchanges. strangely enough, while this principle had been in operation for many years in the case of subsidiary coins, its bearing upon the use of silver in countries where the standard had been depreciating was not clearly comprehended until within recent years. those who understood the principle doubted its sufficiency to give a fixed value to silver coins as the sole medium of exchange, or they distrusted the ability of any government to judge accurately the number of coins required. upon the latter point they would have been correct if dependence had been placed upon guesswork or any empirical method of determining the amount needed. it remained to find the true solution of the problem by so regulating the quantity of the coins that it would respond automatically to the demands of trade. the correct method of doing this is through the system of exchange funds. as this system is operated in the philippines, it is not possible to obtain gold coin for silver certificates in small quantities; but it is possible always to obtain drafts upon new york at par, plus the usual charges for exchange between gold standard countries. these drafts have to be purchased with actual silver coin or coin certificates. in either case the coins and certificates are, by the requirements of the coinage law, held in the philippine treasury. the law does not permit their deposit by the treasury in current account at a bank, which would turn them back into the general circulation. for practical purposes the volume of currency in circulation is contracted to the same extent as if a corresponding amount of gold were taken from the circulation for export. when the current turns and rates for money become high in the philippines, philippine currency can be released for local circulation by the purchase in new york from the gold standard fund of bills upon the philippine treasury. this rule of locking up the proceeds of the sale of bills is not rigidly applied to the funds in new york, because the influence of the philippine purchases upon the local circulation there would be insignificant. on the contrary, the government obtains a generous interest rate, which has at times been as high as per cent., upon the deposit of philippine funds with new york bankers. during the stress of the autumn of considerable transfers of capital were made from manila to new york by means of the purchase of new york drafts from the philippine treasury. the process, often repeated even under less serious pressure, clearly shows that the monetary system of the philippines is linked to gold, and that capital can be freely transferred upon a gold basis between manila and other markets. the experience of fifteen years since the free coinage of rupees was first suspended in british india, of five years since the new system was established in the philippines, and of nearly four years since it was in operation in mexico, have settled most of the doubts which were felt when the experiment was undertaken in india. in the first place, it has been made clear that the value of the coins in exchange, as fixed by law, has not been influenced by variations in the price of silver bullion. this statement, of course, applies only to one side of the problem--the fall of the gold value of the silver in the coin below its face value. it would not be possible under any system yet discovered, except such uneconomic devices as prohibiting exportation, to prevent the disappearance of silver coins when the [bullion] value of their contents rises above the legal value in exchange. both the philippines and mexico have faced this menace to their monetary circulation since their systems were inaugurated, but both have succeeded in removing it. in the philippines the contents of the silver unit--the peso--was reduced in from about grains to grains in pure silver. the amount fixed by the law of was practically the same as the contents of the old mexican dollar. the adoption of a coin of this weight was caused partly by the desire to avoid the distrust which some feared might arise from reducing the weight. at the time of the passage of the law, moreover, the price of silver was nearly at the lowest point in its history, having touched the minimum of - / pence in january, , and being at an average price of - / pence in march. the adoption of so heavy a coin, however, was not in accordance with the original recommendation made by the present writer to the war department in november, . the weight then recommended was grains, nine-tenths fine, or about grains of pure silver. in mexico the rise of the silver coins above the legal gold value proved a blessing in disguise. it enabled mexico to go almost to an absolute gold standard by selling her silver at a premium. from may st, , to october nd, , the old silver piasters were exported to the amount of $ , , , while gold coinage was executed to the amount of $ , , (about £ , , ).[ ] the gold has gone chiefly into the reserves of the banks, which have in circulation about $ , , in notes. gold holdings of the banks, which were only $ , , in january, , were $ , , in october, , while silver holdings declined over the same period from $ , , to $ , , .[ ] this influx of gold came about because silver at pence was above the mexican coinage ratio of about to , and much of it was sold by the commission on money and exchange at a direct profit to the mexican treasury. in view of the subsequent fall in silver below pence, at which rate mexico is in a position to replenish her supply of subsidiary coinage, her statesmen may claim the credit of following the great rule of profit in the commercial world as well as on the stock exchange--to sell when things are dear and to buy when things are cheap. the coincidence in the rise of silver and the adoption of the mexican monetary reform in was in some degree accidental. it facilitated the reform, not only by introducing gold, but by removing the objections which would otherwise have been heard from the miners of silver to the rise in gold wages which would have accompanied a fixing of the exchange at a point above the value of silver bullion. it was the intention of the mexican government, however, to proceed resolutely, though deliberately, to a fixed exchange, and they would undoubtedly have accomplished this result, even if they had not been aided by the rise in the value of silver. its subsequent fall has in no wise impaired the stability of the gold standard. some fears were expressed in the philippines as to the willingness of the natives and of chinese traders to accept a silver coin at a gold value fixed by law which was obviously above its value as bullion. this difficulty has proved almost negligible. silver within less than three years has been above pence per ounce and below pence. it is doubtful if the government officials in india or the philippines have so much as taken note of the daily fluctuations since the price dropped below the legal parity of the coins, and it is certain that the exchange value of the coins has been in no wise impaired by their fall in bullion value. when the last reduction was made in the weight and fineness of the philippine coins, lowering by almost per cent. their silver contents, the precaution was taken of advising the public by means of an official circular, translated into the various languages and dialects of the islands, why the change had been made, and that it would not affect the exchange value of the coins. provincial and municipal treasurers were also directed to carry on a campaign of education among the people by way of explaining the character and effect of the change. the greatest menace to the value of the new coins lay with the chinese, for in china for many hundreds of years local bankers and merchants have adhered to the rule that a coin derived no value from the stamp, but was worth just what it would fetch on the scales. the chinese traders at first undertook to discriminate in this manner against the new coins of the philippines. in some cases they refused to receive them except at a discount varying from to per cent. they also offered in the new coins for in the old, evidently in the hope of exporting the old at a profit while they continued to be worth as bullion more than their legal gold value. the success of this discrimination was local and extremely short-lived. the first consignment of the new coins reached manila on may , , and when the treasurer of the islands prepared his annual report on october th, , he was able to make the following statement of conditions: at this time, october , the new coin is accepted without question in every part of the islands, and no reports or complaints have been received for the past two months as to discounting it, and, so far as can be ascertained, no premium is now paid for the old coin. in fact, the demand for the new coin for exchange purposes has so far exceeded the supply that it became necessary to withdraw nearly half a million of the new pesos from the banks to meet the requisitions therefor from the provinces. the hesitation which prevailed, therefore, in many quarters in regard to the ability of a government to overcome the conservatism of the east in its preference for coins of full bullion value has not been warranted by events. this demonstration is of importance if the exchange standard is to be considered for china. at present the government of china is not perhaps strong enough and sufficiently centralised to assure its subjects that it can give a definite gold value to a token coin and maintain it honestly and efficiently. the trial of the system, however, in the philippines, in british india, and in the straits settlements, in all of which there are many chinese, has probably so far cleared the air upon this point that the chinese imperial government would be able to establish the gold exchange system if it did so under sufficient guarantees to the financial world that it would be honestly and intelligently maintained. next in importance to the settlement of this question of native willingness to accept the new system may be considered the degree of difficulty in maintaining it. it is not surprising, perhaps, that when it was proposed in an incomplete form for british india, it should have been denounced as a "fair weather" device--"a leap in the dark," which would not stand the test of business depression, deficient crops, and an unfavourable balance of trade.[ ] the most serious difficulty which has been foreseen by critics of the gold exchange system relates to the sufficiency of the exchange funds. up to the period of the general panic of and the crop failure in india in the spring of , it might fairly be said, perhaps, that the system had not been subjected to any but "fair weather" conditions. the experience of india, however, has thrown striking light upon the possibilities and limitations of the system in time of stress. the test in india has been of such magnitude, moreover, that its results are much more conclusive than any test which might have been afforded in a smaller country dealing with a less enormous mass of token coins. if the test had come before the exchange funds had acquired a respectable size, the system might have been allowed to break down, through timidity and delay in taking proper measures of protection, and discredit have thus been cast upon it before it had been fairly tried. what happened in india was that the failure of the crops deprived the country of the usual means of compensating by exports the heavy imports of foreign goods which had been contracted for. it became necessary, under the settled principles of exchange, to find gold to fill the gap. usually the exchange account substantially balanced itself by the sale in london of council drafts upon the indian government to obtain gold to pay the interest on the debt held in england. these drafts were purchased by importers in london, and used to pay for the indian crops; but all through the spring of purchasers for drafts failed to appear, because there had been no considerable exports of indian crops to be paid for. hence council drafts were without a market, and for a moment it seemed that the link which bound the indian monetary system to the gold market of london had been severed, and that the silver rupee might drop as disastrously as the mexican dollar before its free coinage was suspended. this would have added the influence of an appalling disaster to the burden already imposed upon indian finance by the failure of the crops, for it would have compelled the indian importer of english goods to find a greatly increased number of rupees to meet his gold obligations in london. obviously, it was a disaster which, if it had occurred, would have invited the bankruptcy of the country, reflected lasting disgrace upon english financial foresight, and perhaps even have led to organised revolt. the indian government had available for meeting the crisis about £ , , , principally invested in securities in london. this fund, known as the gold standard reserve, was distinct from the currency reserve, consisting of gold received for currency notes, which amounted in the spring of to about £ , , . it was against the former fund that the indian government felt compelled to offer to sell exchange in india. such offers were made for a time in limited amounts of £ , each, but they proved substantially adequate for meeting the demand, and by early summer the demand fell below the supply. the offer of exchange in this form for rupees maintained the value of the rupee coinage, contracted the amount of rupees in circulation in india, and enabled the indian merchants to meet their obligations without the loss which they must have suffered if the currency had been allowed to depreciate in gold value. the actual sales of bills upon the exchange funds in london reached, between march th and august th, , the considerable total of £ , , . of this amount about £ , , was taken from the currency reserve in gold, which was "earmarked" at the bank of england, incidentally affording relief to the london money market which was keenly appreciated. most of the remainder was obtained by the sale of securities to an amount which reduced such holdings from £ , , on march st to £ , , on july st. the test to which the indian system, as the most important example of the gold exchange standard, was thus subjected was perhaps of a higher importance than was realised by those in the thick of the conflict. it was plainly intimated, however, in the annual report on financial conditions for that, if necessary, the indian government would have issued short-dated securities in order to still further replenish the exchange funds in london. this would have been the true means of meeting the situation if the existing fund had been unduly impaired. the argument against it would have been that the demand was indefinite, and might become so large as to be unmanageable. the fact that the demand for exchange was met without the issue of new securities and without trenching upon the reserve funds beyond the amount of £ , , out of £ , , affords pretty strong evidence that there is a natural limit to such demands. it is in this principle, that there is a natural limit to the possible drain upon the exchange funds, that the security of the new system lies.... it is only the supply of local currency on the margin of possible export demands which needs to be safeguarded. the substratum, which can never leave the country unless under the influence of an almost inconceivable economic cataclysm, is analogous in some respects to the "authorised" circulation of the bank of england. it represents the irreducible minimum below which the local need for currency can never fall. if the supply on the margin of the international exchange movement is adequately guarded, then the whole system is secure. if it were conceivable that the demand for exchange would equal the whole amount of the local currency, or even the half of it, then it would be necessary to maintain exchange funds equal to the whole amount of token coins or the half of them in order to insure safety. but obviously this could never be the case. this argument against the exchange standard is only a repetition of the dilemma sometimes presented by untrained minds in regard to bank-notes: what would happen if all the notes should be presented at one time for redemption? that question has been answered by banking experience; the question in regard to the gold exchange system has been and must be answered by experience in substantially the same manner. no country can be subjected to such stress as to consent to part with its entire monetary circulation, or even the half of it. on the contrary, every influence which tends to contract the circulation tends to create a condition which makes further contraction more difficult. rates for the loan of money are affected, prices of imported goods are influenced, imports fall off and exports increase, and inevitably in the modern money market local equilibrium is restored, often with considerable strain, but none the less without pulling down the pillars of the financial temple. the experience of last spring in india proves the adequacy of a reserve of or per cent. of the circulation to maintain the steady parity of a token coinage. there is apparently no evidence that serious distrust of the rupee arose, even when the government was hesitating as to just what steps should be taken to meet the demand for exchange. even if such distrust had arisen, however, it could have expressed itself through financial channels only by the demand for drafts on london. these would not have been very valuable to the average local tradesman except as he was able to sell them back again to the banks for the very rupees which had aroused his distrust. in this respect the gold exchange standard may be said to put a brake upon the disposition to export currency from fear alone, when the exportation is not demanded by the balance of trade. if any mistake was made in the management of the indian currency, it was in the investment of too large a proportion of the gold standard reserve in securities. while investment in securities is naturally attractive because of the income earned, and while it is not subject to just criticism while kept within certain limits, the possession of actual gold to a considerable amount is highly desirable. it would not be necessary, perhaps, that such gold should be "earmarked." if the indian government had a large deposit account in such an institution as the union of london and smith's bank, or the london city and midland, it would possess for the purposes of the indian government the character of gold. drafts against such a deposit could be sold without the discount or delay which might be required in disposing of securities. it seems highly desirable, therefore, in spite of the prudence with which the recent pressure was met, that at least or per cent. of the gold standard reserve should in the future be kept either in "earmarked" gold or in the form of demand deposits. in the case of the philippine islands the reserve is not "earmarked," but is at present entirely in the form of deposits with new york bankers. the problem in the philippines is really child's play compared to that in british india. the entire circulation of the philippine islands is about , , pesos (£ , , ), against which a large reserve has accumulated as the result of the recoinage at a reduced rate as well as by the profits on the original coinage. it is hardly conceivable that an emergency would arise which would impair this reserve; but if this should occur, the scratch of a pen in washington would remedy the situation. this would be accomplished by depositing gold or its equivalent in the exchange fund in new york to the credit of the war and navy, and placing an equivalent amount of local currency at the command of the military forces in the philippines. such a deposit would operate to increase the resources at the command of military disbursing officers in the islands without increasing the amount actually in circulation until the occasion arose to disburse it. the panama currency has been steadily maintained at par by friendly interchanges of this sort, even with a very insignificant official exchange fund. no governor of the philippines, therefore, need have any fear of his ability to maintain the parity of the philippine coinage. whether the exchange standard would stand the strain of a great war is yet to be subjected to practical test.[ ] it may be said, however, that its capacity to meet such a test would run upon all fours with the capacity of any monetary system which does not consist exclusively of gold coin. the experience of france in the war with prussia seemed to justify the suspension of specie payments for the purpose of husbanding the national stock of gold. the history of the spanish exchange, where the coins have followed the value of the bank-notes instead of that of silver bullion, is another case in point. both russia and japan, however, in the war of - , succeeded in maintaining complete convertibility of their bank-notes. there is no reason why the gold exchange standard should not be successfully maintained so long as the country where it was established retained its national independence and pursued a sound financial policy. the issue of large amounts of debt would not in itself impair the stability of the standard, unless the government, in order to obtain gold, ravished the exchange funds in financial centres. the questions involved would be substantially the same as those involved in maintaining the parity of bank-notes or paper money: first, the disposition of the government to maintain its credit; secondly, the resources which the government was able to command. without either good intentions or monetary resources, the monetary system, along with the fiscal system, would break down. it is not apparent, however, that a country operating upon the gold exchange system would find any greater difficulty in maintaining the system than the bank of japan had in maintaining the convertibility of its notes during the war with russia. if there were a disposition in time of war to transfer capital abroad by excessive demands upon the exchange funds, it could be counteracted in three ways. one would be the automatic influence of the deficiency of currency which would arise at home. another would be the issue of loans abroad, from which exchange demands could be met. a third would be the deliberate elevation by a small percentage of the charge for exchange. this would amount to a slight depreciation in the currency, but if kept within prudent bounds, it would probably permit the maintenance of an adequate circulation without disturbance to local prices and without even a theoretical depression below the or - / per cent. which affected the notes of the bank of france in the war of . the gold exchange system may indeed be said to be an extension of the bank-note system to token coins. the token coin is, in effect, a metallic bank-note, whose maintenance at gold par is subject to the rules of sound banking. its advantages over the bank-note in undeveloped countries are that it conforms to a strong prejudice in favour of "hard money," not subject to the vicissitudes of tropical climes, and that the output can be more safely regulated, where new coins are issued only for gold, than where a bank may increase its note issues to take over assets of speculative or doubtful character. in the advanced countries, with a highly organised credit system, gold, and gold alone, is the proper form of full legal-tender coin; but in the less advanced countries of the orient silver token coins have the advantage that they conform in size and denominations to the small scale of local transactions, that they are not so rapidly absorbed by hoarding, and that their very non-exportability enables the government to keep in circulation a quantity of currency which might under a different system be drained away to richer countries, and leave the community denuded of an adequate medium for carrying on exchanges. objections to the gold-exchange standard for the straits settlements answered [ ]... the establishment of the gold standard in the straits settlements ... in the spring of ... provided for the recoinage of the british and mexican dollars then circulating in the malay peninsula into new straits settlements dollars ... of the same weight and fineness as the british dollar, and for the subsequent raising of the value of these new dollars to an unannounced gold par by means of limiting the supply, in accordance with the principle by which india raised the gold value of the rupee.... the objections urged to the adoption of the gold-exchange standard are [were]: ( ) that it would unduly interfere with the [foreign exchange] business of the banks. ( ) that it would encourage banks to work on dangerously low cash balances, knowing as they would that they could obtain dollars of the government on a moment's notice by the purchase of cable transfers on singapore from the crown agents for the colonies in london. ( ) that there would be danger of the government's notes [a part of the circulating medium] depreciating unless they were redeemable in gold in the country itself. ( ) that the monetary circulation of the straits settlements was too small to make the plan feasible there. ( ) that the plan would require a larger reserve fund than would otherwise be necessary, because the government would be compelled to keep a reserve both in london and singapore; and that in each place the reserve would have to be large, because drafts on the fund through the sale of telegraphic transfers would not give the government any such warning in advance of the demands liable to be made as would enable it to replenish the reserve. the above arguments, all of which were urged upon the writer either by officials or business men in the straits settlements, do not appear to be conclusive for the following reasons, which may conveniently be stated in the same order as the objections.[ ] ( ) if the rates for the sale of government drafts were fixed at the "gold points," as they presumably would be under the gold-exchange standard, and if only drafts of large amounts were to be sold by the government, redemption by the sale of drafts would not interfere appreciably more with the business of the banks than would redemption in coin. under these circumstances the banks themselves would be the principal purchasers of government drafts, and such drafts would be purchased and forwarded merely in lieu of the shipment of sovereigns. ( ) the sale of telegraphic transfers, while desirable in the interest of currency elasticity, is by no means a necessary feature of the gold-exchange standard. if the government were opposed to making a minimum legal reserve requirement of banks, it could limit its sales of drafts to demand drafts or even, if need be, to short-time drafts. ( ) if government notes were redeemable in silver dollars on demand, and if the silver dollars were redeemable in gold exchange on demand, depreciation would be impossible in a country where the people have the confidence in the government which they have in the straits settlements. ( ) the system of the gold-exchange standard is better suited to a country with a small circulation than to one with a large circulation. it is evidently easier to maintain a small reserve abroad than a large one and the operations with a small reserve are less disturbing to the money market of the financial center in which the reserve is located. ( ) it is not probable that the straits settlements would require so large a reserve under the gold-exchange standard as it will under the system to be adopted. under either system it would need a sovereign reserve and a dollar reserve. under the system to be adopted both reserves will be located in singapore; under the gold-exchange standard the dollar reserve would be located in singapore and the sovereign reserve in london. the sale of cable transfers is not a necessary part of the system, as above pointed out; and, even if it were, the movement of market rates of exchange would ordinarily give ample warning of a demand for dollar drafts or sovereign drafts. emergency cases, if such should arise, could be met through the temporary transfer of funds to the gold reserve from the security portion of the note guarantee fund, or through the transfer of dollars to the credit of the home government in singapore in exchange for an equivalent amount of sovereigns placed to the credit of the straits government in london.... a prolonged and severe drain upon the reserve fund, which in a country like the straits settlements would be an extremely improbable contingency if the government withdrew from circulation dollars presented in the purchase of government drafts, could of course always be met by the forward sale on the london silver market of the redundant dollars piling up in the government's dollar reserve in singapore. the gold-exchange standard would probably enable the country to get along with a smaller gold reserve than will the system to be adopted, inasmuch as it would keep gold coins out of circulation and the demands upon it would be limited to the requirements of meeting foreign trade balances--the only monetary use to which the dollars could not be applied. the straits settlements, inasmuch as it is a country for whose trade requirements silver coins are better adapted than gold, and a country which is anxious to maintain its reserve at as small an expense as possible, would in fact seem to be a place peculiarly adapted to the gold-exchange standard. the premiums which the government would realize on its sale of exchange, together with the interest it would obtain on that part of its reserve deposited abroad, would doubtless yield sufficient profit, as in the philippines, to pay the expenses of administering the currency system and to provide in addition a substantial annual increment to the gold reserve. footnotes: [ ] charles a. conant, _the gold exchange standard in the light of experience, the economic journal_, vol. , june, , pp. - . [ ] _le marché financier en - _, p. . [ ] these figures are from the annual budget statements of the minister of finance. [ ] for some of these doubts see _london bankers' magazine_, october, , lxxxvi, p. . [ ] throughout august, , while sterling rates in other countries rose to unprecedented heights, india succeeded in maintaining rates on london in the neighborhood of the gold export point--a striking testimony to the soundness of the indian arrangements.--editor. [ ] e. w. kemmerer, _a gold standard for the straits settlements ii., political science quarterly_, vol. xxi, no. , p. , - . [ ] the answers given to the objections just stated have been confirmed and strengthened by the actual operation of the gold-exchange standard as later adopted by the straits settlements.--editor. chapter xiii a plan for a compensated dollar [ ]in the _purchasing power of money_ ( ) i sketched a plan for controlling the price level, _i. e._, standardizing the purchasing power of monetary units. this plan was presented more briefly, but in more popular language, before the international congress of chambers of commerce, at boston, september, . the details were most fully elaborated in the _quarterly journal of economics_, february, . following these and various other presentations of the subject, especially the discussion at the meeting of the american economic association in december, , the plan was widely criticized by economists, both favorably and unfavorably, as well as by the general public. on the whole the plan has been received with far more favor than i had dared to hope and even the adverse criticism has usually been tempered by a certain degree of approval. the object of the present paper is briefly to state the plan and to answer the more important and technical objections which have been raised. answers to the more popular objections, omitted from this article through lack of space, will appear in a book, _standardising the dollar_, which i hope to publish in . i shall begin with a skeleton statement of the plan; space is lacking for more. in brief, the plan is _virtually_ to vary each month the weight of the gold dollar, or other unit, and to vary it in such a way as to enable it always to have substantially the same general purchasing power. the word "virtually" is emphasized, lest, as has frequently happened, any one should imagine that the actual gold coins were to be recoined at a new weight each month. the simplest disposition of existing gold coins would be to call them in and issue paper certificates therefor. the virtual gold dollar would then be that varying quantum of gold _bullion_ in which each dollar of these certificates could be redeemed. the situation would be only slightly different from that at present, since very little actual gold now circulates; instead, the public uses gold certificates, obtained on the deposit of gold bullion at the treasury, and redeemable in gold bullion at the treasury at the rate of . grains, nine-tenths fine, per dollar. the only important change which would be introduced by the plan is in the redemption bullion; we would substitute for . a new figure each month. the gold miner, or other owners of bullion, would, just as now, deposit gold at the united states mint or treasury and receive paper representatives, while the jeweler, exporter, and other holders of these certificates would, just as now, present them to the treasury when gold bullion was desired. there would also be a small fee or "brassage," of, say, per cent. for "coinage," _i. e._, for depositing the bullion and obtaining its paper circulating representative. in other words, the government would buy gold bullion at per cent less than it sold it. this pair of prices, for buying and selling, would be shifted in unison, both up or both down, from month to month, it being provided, however, that no single shift should exceed per cent., a figure equal to the amount by which the two differ. the object of this proviso is to prevent speculation in gold. to determine each month what the pair of prices should be, or, what is practically the same thing, to determine what amount of gold bullion should be received and paid out in exchange for paper, recourse would be had to an official index number of prices. if, in any month, the index number is found to deviate from the initial par, the weight of bullion in which it shall be redeemable the next month is to be corrected in proportion to this deviation. thus, the depreciation of gold would lead to a heavier virtual dollar; and an appreciation, to a lighter virtual dollar. there are, of course, other details and possible variants of the plan, some of which will be referred to later when necessary. the objections to the plan are classified under the following heads: . "_the plan assumes the truth of the quantity theory of money._" there is nothing whatever in the plan itself which could not be accepted by those who reject the quantity theory altogether. on the contrary, the plan will seem simpler, i think, to those who believe a direct relationship exists between the purchasing power of the dollar and the bullion from which it is made--without any intermediation of the quantity of money--than it will seem to quantity theorists. . "_it contradicts the quantity theory._" this objection, the opposite of that above, is raised by some, who, like professor boissevain, believe in the quantity theory, but imagine that the operation of the plan could not affect the quantity of money at all (or would not affect it to the degree needed). but evidently an increase in the weight of the virtual dollar, _i. e._, a reduction in the price of gold bullion, would tend to contract the currency, by diverting gold from the mint into the arts; because its reduced price would cause an increased demand and consumption. a decrease, of course, would have the opposite effect. . "_it might aggravate the evils it seeks to remedy._" this objection, raised by professor taussig and a few others, is based on the preceding. it is claimed that an increase in coined money may take place for years "without visible effect on prices; then comes a flare-up, so to speak." i doubt if professor taussig meant the first half of this statement to be quite so strong. the evidence only justifies the statement that the rise is slow at first and rapid later while similarly the effect of a scarcity of money is slow at first and rapid later. professor taussig then proceeds to apply the same idea to my plan: the cumulative consequence would be like the cumulative consequence of a long continued decline in gold production. after a season or two of declining bank reserves, tight money, and so on, a sudden collapse might be occasioned, and apparently caused, by the announcement of some particular seigniorage adjustment. then there might be a decline in prices much greater than in proportion to the bullion change. but the working of the compensated dollar would not be in the least analogous to the operation of gold inflation or contraction, even as professor taussig supposes it. the plan always works cumulatively _toward_ par, never cumulatively _away from_ par. one often sees a wagon with its wheels on a street-railway track having some difficulty getting off; the front wheels have to be turned at a large angle before they are forced out of their grooves; then of a sudden they jump away. this is analogous to the delayed "flare-up" of prices which professor taussig supposes under the influence of a long continued decline or increase in the gold supply. but if the driver instead of trying to turn out is trying to keep the wagon on the track he will pull the horse back at every tendency to turn to the right or left. the more the horse turns to the right the harder will the driver endeavor to turn him to the left. clearly the effect of the driver's efforts will be to avert or delay, not to aggravate or hasten, any jumping out of the grooves which other causes may tend to produce. in other words, if it takes as much time as professor taussig fears for a pressure on prices to move them, then so much the more certain is it that, under the plan, deviations from par, though they may be persistent, cannot be either rapid or wide. a long continued small deviation gives plenty of time for the counter pressure exerted by the compensating device to accumulate and head off any wide deviation. suppose that, following professor taussig's ideas, some cause such as an increase of gold production would, in the absence of the compensated dollar plan, gradually lift the price level as follows: during the first year, not at all; during the second year, per cent.; during the third year, per cent.; after which would come a "flare-up" of per cent. we may suppose then that, if the plan were in operation during the first year, there being no deviation visible, there would be no change in the weight of the dollar. after the first month of the second year when prices were per cent. above par, the weight of the dollar would according to the plan be raised per cent. if this were unavailing, so that in the second month the deviation were still per cent., the weight of the dollar would be again increased per cent. every month, as long as the deviation of per cent. lasts, the weight of the dollar would receive an _additional_ per cent. unless some effect were produced on the supposed original schedule of deviations, the weight of the dollar of the second year would be increased per cent., and by the end of the third year by per cent. more, or per cent. in all. but it is clear that by this time, with so swollen a dollar, the "flare-up" scheduled for the fourth year could not occur, but that a counter movement would set in--in fact, would have set in long before the dollar became so heavily counterpoised. nor could the result of the counterpoise, even if so heavy, be to swing suddenly prices far below par. prices would, by hypothesis, yield slowly and again give time for taking the counterpoise off. if the price level sank, say to per cent. below par for six months, then to per cent. for another six months and to per cent. in the next six months, evidently the entire per cent. would be taken off in eighteen months (since × + × + × = ). the compensating device is thus similar to the governor on a steam engine. it is the balance wheel that is largest and hardest to move which is the most easily controlled by the governor. so if the "flare-up" theory is true, the system will work more perfectly than if it were not true. . "_it would not work unless every single mint in the world employed it._" this is an error. although it could be easily shown to be politically inadvisable for one nation alone to operate the plan, this would not be economically impossible. those who hold the contrary are deceived by the term "mint price." they reason that our mint price ($ . an ounce of gold, / fine) and england's mint price (£ _s._ - / _d._ for gold / fine) are now "the same," and that, consequently, if our price were lowered per cent., _i. e._, to $ . , while the english price remained unchanged, _all_ our gold would be taken to england to take advantage of the "higher" price there. but these comparisons between english and american prices are based on the present "par of exchange" ($ . of american money for the english sovereign): which par of exchange is in turn based on the relative weights of the dollar and the sovereign. as soon as our dollar were made per cent. heavier, not only would the new american mint price go down per cent., but the par of exchange would also go down per cent., to $ . . consequently, the new mint price of $ . , although in figures it is lower than the old, yet, being in heavier dollars, would still be "the same" as the english mint price of £ _s._ - / _d._ this sameness of mint price as between the two countries means at bottom merely that an ounce of gold in america is equivalent to an ounce of gold in england. it is true that each increase in the weight of the virtual dollar in america--in other words, each fall in the official american price of gold--would at first discourage the minting of gold in america. the miner would _at first_ send his gold to london, where the mint price was the same as formerly, and realize by selling exchange on the london credit thus obtained. but the rate of exchange would soon be affected through these very operations, by which he attempted to profit, and his profit would soon be reduced to zero; the export of gold to england would increase the supply of bills of exchange in america drawn on london and lower the rate of exchange until there would be no longer any profit in sending gold from the united states to england and selling exchange against it. when this happened it would be as profitable to sell gold to american mints at $ . per ounce as to ship it abroad; and $ . in america would be the exact equivalent at the new par of exchange ($ . ) of the english mint price of £ _s._ - / _d._ . "_the system would be destroyed by war._" professor taussig fears that if money were stabilized, the system would itself be upset by war. "any war would put an end to it." to this i would reply: first, that if war did put an end to it the system would do good so long as it lasted and its discontinuance would do no more harm than the existence of our present unscientific system is doing at all times; secondly i do not see any reason for thinking that war would put an end to it. possibly professor taussig has in mind the first form in which i explained the plan, _viz._, in my book, _the purchasing power of money_. in that form one country was to serve as a centre and all other countries were to have the gold exchange standard in terms of gold reserves in the central country, just as now the philippines have a gold exchange standard with reference to the united states and india with reference to england. professor taussig's objection would undoubtedly apply, to some extent, in cases where the plan was carried out through the gold exchange mechanism. but where the system was independently established in each country simply parallel to the systems in other countries, there would be no more need for its abandonment in case of war than for the abandonment now by germany of the gold standard because england, its enemy, has the gold standard also. we know, of course, that in time of war, the gold standard is often temporarily abandoned in favor of a paper standard; and the new proposal would not escape such a difficulty. this, however, would not be due to the international character of the plan, but to the exigencies of war. . "_the multiple standard is not ideal. especially is it faulty when the cause of price movements is entirely a matter of the abundance or scarcity of goods in general._" those who hold this objection point out that an ideal standard would not be one which always smooths out the price level but one which discriminates and leaves unchanged such rises and falls as are due to general scarcity and abundance of goods. there is much to be said in favor of such discrimination as an ideal. it must be admitted that the compensated dollar plan would not discriminate between changes in the price level due to the scarcity or abundance of goods in general and those due to changes in money and credit. it must be further admitted that a theoretically ideal standard would take some account of this distinction. but the compensated dollar plan does not claim to be ideal. the plan would simply correct the gold standard to make it conform to a multiple commodity standard. it does not pretend to correct the multiple commodity standard to make it conform to some "absolute" standard of value. such an ideal standard is as unattainable as is absolute space. changes in relative value indicate change in absolute value, either of goods or of money; but it is not possible for us to know, except in a general way, how much of the absolute change is in goods and how much in the dollar. on general principles we may be assured that the absolute change is wholly or mostly in the dollar. we economists in our measurements of value are in much the same predicament as the astronomers. our economical "fixed stars" are fixed only in a relative sense. we cannot measure the empty spaces of absolute value, but can only express values in terms of visible goods, the general average of which is the nearest approach to absolute invariability we can, in practice, reach. but if it were possible to measure absolute values to our universal satisfaction, in terms, say, of "marginal utility," or of "disutility of labor," or of anything else, there are no statistics by which we can realize such a standard in practice. the only readily available statistics by which we can correct our present standard are price statistics from the great markets. we can, by index numbers based on these price statistics, translate from gold into commodities, but as yet we cannot translate from commodities into any ideal or absolute standard. if i were treating of the problem of an ideal standard of value, i think i should be inclined to agree with professor marshall that a standard that represents a gradually descending scale of prices to keep pace with the "real" cheapening improvements in industrial processes is better than one which represents an absolute constancy of prices. but it would be quite impracticable to discover the exact rate of fall of prices which would correctly register the improvement going on in industry, and, moreover, it would, i believe, be so small as not to depart much from the mutiple standard. this i infer is also the opinion of professor marshall. professor kinley makes the very interesting suggestion that we can suppose a more ideal standard than the tabular by making our unit a definite percentage of the national annual dividend. this appeals to me as a rough and ready way of fixing a unit more nearly ideal than that fixed by the tabular standard. but it would certainly not be practicable. it would not even be quite ideal. but if professor kinley will measure his standard, the compensated dollar plan will be able to take care of it. in fact, if we could find a more absolute standard than the tabular standard and could accurately measure it in statistics, precisely the same method of compensating the dollar could be employed to keep the dollar in tune with that standard as with the tabular standard. the only difference would be that the guiding index would be different. the plan for compensating the dollar does not in essence consist in selecting the multiple or any other standard. it consists in a method of making the monetary unit conform to any standard chosen. but there is convincing evidence that the multiple standard is usually near enough to the ideal for all practical purposes and infinitely nearer than the gold standard. _while individual goods may vary greatly in absolute value, the general mass of goods will vary comparatively little and seldom._ there may be some absolute change in the general mass of commodities, but it must usually be extremely small in comparison with changes in any one commodity like gold. it is clear from the theory of chances that this must be the case. the odds are hundreds to one that the variations in absolute value in several hundred commodities will offset each other to a large degree. we very seldom have world feasts or world famines. if the corn crop is short in some places it is abundant in others. if it is short everywhere the crop of wheat or barley or something else is practically certain not to be. we cannot expect that everything will usually move in one and the same direction. if there is a war in japan, it is not likely that there will also be a war in india. a world war or even anything as near to a world war as the present conflict in europe is a most unusual thing. a standard composed of several hundred commodities must therefore be, in all human probability, more stable than a standard based, as is our present gold standard, on one commodity. bimetallists made much of this point when claiming that two metals joined together were steadier than one, just as two tipsy men walk more steadily arm in arm than separately. still more steady is the average of a hundred commodities just as a line of a hundred tipsy men abreast and holding each other's arms will march even more steadily than two. this is because it is wholly unlikely that every man in the line will lurch in the same direction at the same instant. the lurching of some in one direction can always be depended on to offset almost entirely the lurching of others in the other direction. this theory of probabilities in its application to the present rise of prices is, i believe, borne out by the facts. after a careful study of all available evidence, i am convinced that the present general rise in prices beginning in , cannot be traced to any simultaneous scarcity of goods. i refer the reader to _why is the dollar shrinking?_ where i have given the summary of the evidence. i think the facts are equally clear that the great fall in prices from to can not be laid, wholly at least, to the increasing plentifulness of goods. finally, even if we could measure and apply an absolute standard, it is doubtful if, in practice, it would be of any more service in regulating contracts, than a multiple standard. for after all, as i have tried to show in _appreciation and interest_ what we want in a contract is something that is _dependable_ rather than something that is absolutely constant; and the multiple standard gives dependability in terms of the ordinary staple necessities of life. if we could know that the dollar always means a definite collection of goods, we could know that the bondholder or the salaried man who gets a stated income of $ a month, would have the same command over actual goods, and such knowledge would be of great service. this whole subject i have discussed in chapter x of my _purchasing power of money_. . "_it would be inadequate to check rapid and large changes of the price level._" owing to the narrow limits, _e. g._, per cent. as stated, imposed on the monthly adjustments, it is quite true that a sudden and strong tendency of prices to rise or fall could not be completely checked. if prices were to rise per cent. per annum and the plan permitted no more rapid shift than per cent. per annum, this would leave only per cent. per annum uncorrected, or only one-fourth the rate at which prices would rise if wholly uncorrected. but half (or in this illustration three-quarters of) a loaf is better than no bread. moreover, such extreme cases are rare and when they occur there is all the keener need for mitigation even if it be somewhat inadequate. ultimately, of course, after the rapid spurt has abated, the counterpoise, in its relentless pursuit, would overtake the escaped price level and bring it back to par. . "_the correction always comes too late._" it is objected that the plan does not make any correction until actual deviation has occurred, and so the remedy always lags behind the disease. it is true that the corrections follow the deviations. they could not precede them unless we foreknew what the deviations were to be; and we could not afford to entrust the work of guessing to government officials. in this respect, as in others, the plan does not attain perfection; yet it is infinitely better than the present plan, which leaves the standard haphazard. it is also pointed out that after the correction is applied it may happen that prices will take the opposite turn, in which case the remedy actually aggravates the disease. but, taking the extremely fitful course of prices since and correcting it according to the plan, month by month, as shown in the _quarterly journal of economics_ diagram, we find that in nine cases out of ten the opposite is true. even in the few remaining cases the deflections were very slight and were, of course, soon corrected immediately after the following adjustments. if the corrections are sufficiently frequent, it is impossible not to maintain, in general, an extremely steady adjustment. when steering an automobile the chauffeur can only correct the deviation from its intended course _after_ the deviation has occurred; yet, by making these corrections sufficiently frequent, he can keep his course so steady that the aberrations are scarcely perceptible. there seems no reason why the monetary automobile cannot be driven almost equally straight. . "_the plan assumes that a per cent. fluctuation can be exactly corrected by a per cent. adjustment of the dollar's weight._" owing, i fear, to my own fault of phrasing, i have found that several people have acquired the mistaken impression that the plan requires, to be made at each adjustment, an increase of per cent. in the weight of the dollar for every per cent. _increase_ of the index number since the last adjustment; whereas actually the plan requires, to be made at each adjustment, an increase of per cent. in the weight of the dollar for every per cent. excess of the index _above par_ then outstanding. from this mistaken premise it has naturally been inferred that, in order that the plan should work correctly, a per cent. loading of the dollar would always have to exactly correct a per cent. change in the index number, and, very properly, the critics doubted the truth of this. but since the premise was mistaken the objection based on it disappears. . "_the plan would be sure to create dissatisfaction and quarrelling._" this fear is, i believe, wholly imaginary. there would be some ground for it if the proposal were to adopt the old "tabular standard" by correcting money payments through the addition to or subtraction from the debt of a certain number of dollars. under these circumstances the extra dollars paid or the dollars from which the debtors were excused would stand out definitely and would be a subject for debate and dispute, but if the tabular standard were merged in the actual money of the country the ordinary debtor and creditor would be as unaware of how his interests had been affected as he is now unaware of how his interests are affected by gold appreciation. it would still be true that to the ordinary man "a dollar is a dollar." if we cannot get the ordinary man to-day really excited over the fact that his monetary standard has affected him to the tune of some per cent. of his principal of fifteen years ago, it does not seem likely that he could get excited because some one tells him that the index number used in the "compensated dollar" plan robbed him of or per cent. as compared with some other possible system. the debtor class favored in large measure bimetallism, or free silver, as a means of helping them pay debts, while the creditor class opposed it. but this was a question of changing the standard, not of keeping it unchanged. if it were proposed to shorten the yardstick, undoubtedly many who would profit in the outstanding contracts would and ought to oppose it. but there is and can be no contest over efforts to keep the yardstick from changing. . "_it has never been tried._" true; but the proposal is, in mechanism, almost identical with the gold exchange device introduced by great britain to maintain the indian currency at par with gold. the system here proposed would really be to-day less of an innovation in principle than was the indian system when introduced and developed between and , while the evils it would correct are similar to, but vastly greater than, the evils for which the indian system was devised. the truth is, unless i am greatly mistaken, that the last named is the only strong objection to the plan in the minds of most of its critics; it is the constitutional objection to any change of the _status quo_. it is simply the temperamental opposition to anything new. as bunty well says in the play, "anything new is scandalous." the conservative temperament dislikes experiment because it is experiment. accordingly it is not surprising that we find many of the objectors saying, "let well enough alone," "let us 'rather bear those ills we have than fly to others that we know not of.'" these people seldom give assent to untried experiments; yet after the new plan has been tried and established they invariably turn about and become its most staunch supporters. this fact has been often illustrated in our monetary and banking system. nothing short of the shock of civil war was required to divert us from a state system of banking to a national one. in spite of the intolerable evils of the former, it was easy to find many arguments in its favor. after the change these arguments never reappeared. the same was true of slavery. but conservatism always yields gradually to pressure. its resistance is strong but has no resiliency. it is not like the resistance of a steel spring (which, when pushed in one direction, will bend back), but a mass of dough or putty which, though it resists impact strongly, yet when it is moved stays inert and does not return. under these circumstances, even if progress is made an inch at a time, it seems to me worth while to try to make it. the two steps first necessary have been taken, namely, the perfecting of the plan and the running the gauntlet of criticism. it is not impossible, judging from the many and authoritative endorsements of the plan, that it may be pushed rapidly toward realization. all depends on the opening up of opportunities. after the present war, for instance, it may be that "internationalism" will come into a new vogue and that some special opportunity will be afforded to bring the plan with its endorsements to the serious attention of the world's administrative officials. * * * * * [ ]it must be admitted at the outset that the plan, if carried out with iron consistency for a considerable stretch of time, would achieve the result mainly had in view--the prevention of a long-continued and considerable rise in prices. it might not achieve that result as smoothly and evenly as its proposer expects; and the qualifications just stated--that it must be carried out unflinchingly for a long period--should be borne in mind. no one who holds to the doctrine that the general range of prices is determined by the relation between the quantity of commodities and the volume of the circulating medium, and that the volume of the circulating medium in the end depends, _ceteris paribus_, on the amount of coined money, can do otherwise than admit the logical soundness of the scheme. he who maintains that the rise in prices during the last fifteen years is due to the greater gold supply must admit that a restriction of the monetary supply of gold will check the rise. the plan proposed is in essence one for a regulation in the monetary supply of gold. its effects must be the same in kind as those of a cessation of free coinage, with an apportioned limited coinage.... the question arises whether it would be feasible for one country alone to adopt the plan. it would be feasible, in the same sense that it would be feasible for all countries together to adopt it. one country alone, carrying it out with unflinching consistency, might secure the desired result, subject to the qualifications which have already been indicated. but that any one country would in fact adopt it alone seems to me in the highest degree improbable. consider for a moment the mode in which the scheme would work in detail if adopted by a single country. though the immediate effect upon general prices within the country would be unpredictable, the effect upon certain kinds of prices would be certain, predictable, almost instantaneous. exported commodities would feel the effect at once. their prices are determined, to use the current expression, by the foreign market. it would be more accurate to say that their prices are determined by the total market, domestic as well as foreign. but it is clear that their prices must be the same (due allowance being made for transportation charges and the like) within the country as without. now the immediate effect of a seigniorage would be, as professor fisher points out, a readjustment of the par of foreign exchange. the exporter would find the par of exchange lessened, and in terms of domestic money (compensated dollars) he would receive less than he got before. all commodities of export would fall in price at once, or fail to rise, to the extent of the seigniorage. other commodities probably would be unaffected for the moment. in the long run, no doubt, these other commodities (we may call them domestic commodities) would also be affected. but, to repeat, the rapidity and extent of the change in general prices is impossible of prediction. the exporters, none the less, would feel an immediate and unmistakable effect. beyond question they would be as hotly indignant with the plan as if an excise tax had been imposed on their commodities without any possibility of their raising the price of their products. consider for a moment what would be the state of mind in our cotton-exporting south. is it to be supposed that any set of legislators could resist the political pressure from the various exporting sections, and carry out the scheme unflinchingly? can we imagine a congressman telling his constituents that they need only wait a while, until all money incomes and all prices had adjusted themselves to the new conditions? that then nobody would be worse off or better off than before? to ask this sort of question is to answer it. the very proposal of the scheme in the halls of congress would invite the hot opposition of the exporting sections and industries. its immediate consequences for them would be seen quickly enough, and no promise of ultimate adjustment would lessen their hostility.... professor fisher has predicted that prices will rise further. he is disposed to believe that there will be not only a rise, but that there will be a considerable rise. i hesitate very greatly to enter the domain of prediction. i am inclined to believe that the rise in prices will not cease for the next decade; but whether it will be considerable or moderate or negligible in extent, i should not venture to say. predictions concerning the output from the mines are to be taken with the greatest caution. we all recall the predictions which suess made in . the distinguished geologist believed that the prospects of an increased production of gold were of the slightest, and that the world must fall back on the use of both metals. how different the course of events has been from that which he predicted! there are those who believe that the output of gold, so far from continuing to increase, has reached, or is approaching, its maximum. for myself, i should not be surprised if there were a cessation in growth, and should certainly be surprised if there were not a relaxation in the rate of growth. further: it deserves to be borne in mind that the total supply of the precious metals is now so much greater than it was twenty years ago that the same annual increment will have much less effect on prices. this is the familiar consequence of the durability of the precious metals.... finally, a circumstance should be borne in mind which bears not only upon the intrinsic desirability of a regulative plan, but also upon the attitude of the general public and the consequent political and industrial possibilities. economists are familiar with the difference between the phrase which they use in describing the new conditions, and that which is current in popular discussion. the economists speak of the "rise in prices"; the general public speaks of the "high cost of living." the difference in phraseology is not due simply to variation of the point of view. it results from the fact that very different phenomena are had in mind by the two sets of persons. the economist is thinking and reasoning about the change which has been of special interest for him--the general rise in prices. the man on the street is thinking about the exceptional rise in the prices of one important set of commodities. any one who will examine with care the index numbers of our bureau of labor will see what a marked rise, much beyond that of the general index number, has appeared in the prices of farm products, and especially in the prices of meat. that special advance has taken place within the last three or four years. it is precisely within this period that general attention has been turned to rising prices. what the public has had chiefly in mind has been the commodities of wide consumption. this, i believe, is the main cause of labor unrest.... whatever be the particular causes that have led to the high prices of food, economists agree that these causes will operate irrespective of any compensated dollar plan. this would simply serve, at its best, to keep general prices where they are, leaving each particular group of commodities subject to its own particular set of causes. if the compensated dollar plan were to be adopted, and if the prices of food should continue to mount, there would be disappointment for the general public, but nothing to surprise the economist. and conversely, it is entirely possible that the rise in the cost of living, that is, the special rise in the prices of foodstuffs, will reach its end irrespective of any monetary change whatever. the general rise in prices and money incomes ... is not unwelcome to the great majority of people. its incidental consequences are perceived and debated chiefly by the economists; such as the effects on the creditor class and the slowness of so-called fixed incomes to rise correspondingly. the general public is concerned chiefly with the conspicuous rise in the prices of foodstuffs, which is ascribable to causes very different from those that bring the general rise, and can be reached only by remedies very different.... footnotes: [ ] adapted from irving fisher, _objections to a compensated dollar answered_, reprint from _the american economic review_, vol. iv, no. , december, . [ ] f. w. taussig, _the plan for a compensated dollar_, _the quarterly journal of economics_, vol. , may, , pp. - . chapter xiv monetary systems of foreign countries england[ ] [ ]the monetary unit is the _pound_, or _sovereign_, equal to $ . , divided into _shillings_ of _pence_ each, each penny equal to _farthings_. originally the pound was a troy pound of silver, . fine. under the law of gold was made the standard and silver subsidiary. the coinage of gold is free, and to avoid delay the bank of england is required to buy all gold and pay for the same at once at the [minimum] rate of £ _s._ _d._ per ounce, a [maximum] charge of - / _d._ being imposed for the accommodation. silver is only coined on government account and the coinage ratio is . to one. they have the gold _sovereign_ (containing . grains pure gold), the unit of their currency, also _half-sovereigns_, _crowns_ ( _s._), _double florins_, ( _s._), _half-crowns_, _florins_, _shillings_, _six_ and _three pence_ pieces, _four pence_ (groat), _two pence_ and _penny_, all in silver, also _penny_, _half-penny_, and _farthing_ in bronze. a few english banks, operating under old charters, issue notes to a limited extent, which circulate as money. otherwise the paper currency of england and wales consists wholly of notes of the bank of england.... extraordinary measures were resorted to by the british government in the early stages of the european war of ; with the close of the war currency conditions will doubtless go back to normal, as described above. the government, also, under date of august , authorized an issue of currency notes, in denominations of £ and shillings.... these notes, which were first issued to the public august , were deposited with the bank of england for account of the british government, as the practical way of getting them into use; they were used for various purposes, including advances to banks at per cent. per annum, up to per cent. of their deposits; the volume outstanding december , , was £ , , ; the amount outstanding on june , , was £ , , . these notes were protected in part by securities and by an increasingly large gold reserve, exceeding per cent. in march, . postal orders were made legal tender and so remained until february , .... canada in the legislature of upper and lower canada formally adopted dollars and cents as the money in which public accounts should be kept. the confederation in adopted the same for the dominion, retaining, however, the sovereign. in the currency act prescribed the same for all accounts, providing also that the gold coins of the united states of america should be legal tender along with british sovereigns, the latter at a rating of $ . / . the silver and bronze tokens (including pieces of , , , , , and cents) had been supplied from the london mint, or from birmingham on its behalf, from to . after the confederation no more coins were issued for the separate provinces. the twenty-cent piece (though still retained by newfoundland) has not been struck for canada since . from january , , the whole supply of british and canadian coins was undertaken by the ottawa mint. by the ottawa mint act the dominion parliament undertook the support of a branch of the royal mint in ottawa, the administration to be in the hands of the british treasury. this system (the same as that of the australian branch mints, sydney, melbourne, perth) was preferred to the plan of an independent dominion mint because that was the only way of procuring the privilege of coining british sovereigns. a royal proclamation published on november , , duly established a branch of the royal mint at ottawa, and authorized the coinage of british sterling gold coins from dies prepared in england, such coins to rank with those struck in london. the depositor of gold bullion has the right to demand british sovereigns in exchange.... the british sovereign (or pound) is legal tender in canada at $ . . the american gold coins are also legal tender. canadian silver coins are parts fine, and have a slightly less amount of fine silver than united states of america silver coins of similar circulating values. the dollar, though sanctioned, has not yet been struck. paper currency consists of legal-tender dominion notes and bank-notes issued against the credit of the banks; there were at the end of , banks, with , branches in the dominion, in newfoundland and in the united states and other foreign countries.... on july , , just before the war, dominion notes were issuable without limit, providing the amount over $ , , was covered by gold. the volume at that time was $ , , . and the gold held amounted to $ , , . . as a consequence of the war the limit beyond which dominion notes may not ordinarily be issued without being entirely covered by gold was by an act passed in august increased from $ , , to $ , , .... british colonies the british west indies, as also guiana, make british gold legal tender. united states gold also circulates freely. there are a few banks with limited note-issuing power, and minor coins are similar to those of england. there is a growing use of united states currency. british honduras has a dollar unit, identical with that of the united states. british india has ... adopted the gold [-exchange] standard and india has for some years been largely absorbing gold; the _pound_ is the unit--the metallic currency, mainly silver, is maintained at parity with gold by an arbitrary valuation or rate of exchange. the principal coin is the _rupee_, equal to $ . ; by a fixed government rating rupees equal £ . there is a gold [-exchange] standard reserve for india, amounting, march , , to £ , , , about one-half held in india and one-half in london; it consists of gold and investments.... paper money is issued only by the government and is covered by gold, silver largely, and securities to some extent. the straits settlements have a _dollar_ currency, divided into _cents_; the value of the dollar was fixed by the government at _s._ _d._, on january , , and has since been maintained at approximately that rate, a gold [-exchange] standard reserve being accumulated for that purpose. the system is copied after that of india. hong kong, silver standard, is the exchange point between gold and silver countries, and hence important. the british _dollar_ of grains is the principal coin. it fluctuates in value with the value of silver bullion. australia and new zealand have the british system of banking. there are many banks, some with british charters, and many branches; they issue notes covered by gold. gold in large quantities has been produced in these states since . british africa and other minor eastern possessions have the british system, modified in various respects. egypt having recently been formally annexed by great britain, her monetary system will naturally be closely identified with that of england in the future. the english sovereign has been for many years the gold coin of common use. latin union the latin union consists of france, italy, belgium, switzerland and greece; they are bimetallic, both gold and silver being full legal tender, and the coinage ratio being - / to ; they have identical systems, and formed a union to maintain the parity of silver and gold, at the above ratio, by accepting each other's silver coins; while their systems are bimetallic in law, silver is now coined only in small denominations and on government account. the general adoption of the gold standard by other countries has embarrassed the efforts of the union to preserve the parity and also the interchangeability of silver coins between these nations. france france has the _franc_, equal to $ . , as the monetary unit; the principal gold coin is the _louis_, equal to francs. the paper currency of france is issued wholly by the bank of france, a private corporation, privately owned, but whose chief officers are appointed by the government, which thereby obtains a general control of policy and administration; the maximum amount of note-issue is fixed by law, arbitrarily, and by occasional increase is kept well ahead of the country's necessities; no fixed legal reserve is required, but the total note-issue must be covered by gold, silver, securities, and commercial paper; as a matter of fact it carries very large metallic reserves, and since it may lawfully pay its obligations in either gold or silver, it can always conserve its gold holdings by requiring a premium for the same, or withhold gold payment altogether. it has over branches and the same rate of discount obtains in all branches on the same day; it thus regulates and controls the interest rate throughout france, in the interest of uniformity and fairness; it may do business with banks or individuals and has many very small loans; its notes are a legal tender; the power to issue currency is one of its chief elements of banking power.... belgium belgium is bimetallic and its coins are the same as those of france and have unlimited lawful currency; bank-notes are issued only by one bank, privately owned; the government receives a share of the dividends in excess of per cent., and imposes a tax upon the note-issues; demand liabilities, including notes, must be protected by a coin reserve of - / per cent. and the notes must be covered by cash, commercial paper and securities. italy italy has the _lira_, equal to $ . , and divided into _centesimi_; her coins correspond to those of france; the bank of italy largely, and two other banks to a lesser extent, issue notes against their credit, limited, however, to three times their capital, unless covered by gold; the issue may be increased, but comes in for a tax of per cent. per annum and must be protected by a - / per cent. reserve in coin and foreign exchange.... switzerland switzerland's coinage system duplicates that of france, and her federal bank is very similar to the bank of france.... greece greece ... has for its monetary unit the _drachma_, equal to $ . . her coinage follows the latin union agreement. paper currency is issued both by the government and by banks, and both are depreciated. greece had to resort to emergency measures during the balkan war, which may have an influence upon her currency for some time. spain spain ... has the _peseta_, equal to $ . united states, as her unit. the bank of spain has the sole right to issue notes, which may equal five times its capital and must be protected by a per cent. coin reserve. gold commands a premium. silver is coined only on government account.... germany germany, gold standard, has for her currency unit the _mark_, of _pfennig_, equal to $ . ; the -mark piece contains the same amount of pure silver as the -franc piece and two united states half-dollars.... silver is legal tender to the amount of marks. the coins for her colonies are varied to suit local needs. austria-hungary austria-hungary, gold standard, has as its unit the _krone_, equal to $ . ; -krone and -krone pieces are coined in gold, also gold ducats, worth $ . ; silver coins are of various fineness.... portugal the portuguese government, by decree of may , , adopted a new monetary system and the coins will be placed in circulation as soon as possible. the unit of the system, excepting for her possessions in india, is the gold _escudo_,... equal to $ . american gold. the escudo is divided into equal parts called _centavos_.... multiples are , , and escudos. divisions of the escudo are of silver, with values of , , and centavos; subsidiary coins consist of bronze and nickel pieces. her currency is not maintained at a parity with gold. netherlands ... the unit is the _florin_ or _guilder_ of cents, equal to $ . . the -florin piece is the principal gold coin; the _ryksdaalder_ ( - / florins), the florin and half-florin in silver are legal tender, as well as all gold coins; silver is maintained at parity with gold by law; coinage of silver is only on government account; paper money is issued by a central bank and per cent. metallic (gold and silver) reserve is required against deposits as well as notes; the balance of the notes are covered by negotiable instruments. the central bank was organized in . banking in the netherlands is excellently managed. sweden--norway--denmark (scandinavian union) these have the gold standard and have for their unit the _krone_, equal to $ . united states currency; their subsidiary silver has various fineness; paper currency of sweden is issued by the royal bank, owned by the government; notes are legal tender and may be issued to a fixed amount in excess of gold on hand or in foreign banks, but must at all times have gold to the extent of at least , , _kroner_. norway has a single bank of issue, controlled by the state, which owns a majority of the stock; notes are legal tender and may be issued to twice the amount of gold on hand and in foreign banks. denmark's paper money is issued by a privately owned bank, but under strict control by the government; the notes are legal tender and may be issued to a sum , , kroner in excess of the gold on hand. russia russia is on a gold basis and has for its unit the _ruble_, of _kopecks_, equal to $ . in united states currency; the silver coins in common use are the ruble, one-half and one-fourth ruble; paper money is issued by the imperial bank, which is owned by the government and managed as part of its finance department; the law requires the coin reserve to equal two-thirds of the note issue.... japan japan maintains the gold standard and its unit is the _yen_, equal to $ . ; the yen is divided into _sen_, the sen into _rin_. the yen equals . grains of pure gold. the bank of japan may issue notes to the extent of $ , , upon securities, any amount upon specie, and also may issue further sums in excess of specie, subject to a tax of per cent. the stock of the bank is all privately owned. japan first copied the national banking system of the united states and after trial abandoned the same for a central bank. she has managed her finances and her banking with wonderful ability and great success. besides the bank of japan, there are many strong private banks, notably the yokohama specie bank. china china, silver basis, had for its unit the _tael_, divided into _cash_; there are said to be sixteen different kinds of tael in the different states of china; the most valuable is the "haikwan," or "_customs tael_," the one in which customs dues are reckoned, and this equalled $ . united states currency, october , . the cash is of base metal, with a square hole punched in the centre and is worth less than a mill in our currency. in the last years of the empire a new system of coinage was established and since continued by the republic. the unit is the _yuan_ of silver, worth $ . , but varies with the price of silver; one-half, one-fifth, and one-tenth yuan are also coined in silver and smaller coins in copper and brass.... philippines the unit of value is the _peso_, equal to $ . in united states currency. the fiscal affairs are administered by the united states and the currency is safe and maintained on [essentially] a gold basis. argentina at a time when the cultivation and development of trade relations with south america seem most alluring, we find a principal embarrassment in the currency and credit conditions which obtain in most south american states, but argentina, one of the most favored of south american states, has a stable and sound currency system. her unit is the _peso_, of _centavos_. the gold peso is equal to $ . in united states money. in the government took measures to acquire gold and fixed the relation of paper to gold at . per cent., and it has since been maintained at that level without fluctuation. this made the paper peso equal to about $ . gold. they have a very large gold reserve in their _caja de conversion_, , , pesos gold, which protects the paper money and gives it stability. gold payments were suspended temporarily at the commencement of the european war ( ), but paper money seems to have remained at par.... brazil brazil was formerly a colony of portugal, and naturally copies the parent country in her currency system. her unit is the _milreis_, of _reis_. nominally the gold standard prevails, but depreciated paper is the currency of her commerce. the milreis contains . grains of pure gold and is worth in united states currency $ . . in the government assumed the sole power to issue paper money, and strove to bring the same to a parity with gold; the arbitrary valuation put upon the milreis by the government was _d._ or $ . . on december , , the value of a milreis was raised to _d._ the government accumulated a conversion fund, understood to be $ , , to $ , , , but owing to crises at home and abroad it has not yet been able to make gold and paper notes interconvertible. brazil possesses an enormous area, and is wonderfully rich in undeveloped resources. her coffee and rubber are especially valuable and should take care of her international trade balances. in the near future her currency should become stable and free from fluctuation. brazilians receive important service from foreign banks and bankers. chili chili has the gold standard, but her paper currency is not maintained at a parity with gold; her unit is the _peso_, of _centavos_, of the value of _d._... footnotes: [ ] the following table, from _the monetary systems of the principal countries of the world_, compiled in the office of the director of the mint, washington, , gives the weight, fineness, etc., of the coins of great britain: gold -----------------+-------+------------+-------+--------+--------+-------- | | | | | pure |value in denominations. |weight.| fineness. | fine | weight.|gold or | united | | |weight.| |silver. |states |grams. |thousandths.|grams. |grains. |grains. | money. -----------------+-------+------------+-------+--------+--------+-------- pounds | . | - / | . | . | . |$ . pounds | . | - / | . | . | . | . sovereign | . | - / | . | . | . | . half sovereign | . | - / | . | . | . | . -----------------+-------+------------+-------+--------+--------+-------- silver -----------------+-------+------------+-------+--------+--------+-------- half crown | . | | . | . | . | $ . florin | . | | . | . | . | . shilling | . | | . | . | . | . sixpence | . | | . | . | . | . fourpence (groat)| . | | . | . | . | . threepence | . | | . | . | . | . twopence | . | | . | . | . | . penny | . | | . | . | . | . -----------------+-------+------------+-------+--------+--------+-------- [ ] a. barton hepburn, _a history of currency in the united states_, pp. - . the macmillan company. new york. . chapter xv the nature and functions of trust companies [ ]the trust company supplements the bank. through a long process of evolution the bank has developed as a means of facilitating the exchange of commodities. the trust company is a still further step in the same process, and, in a highly organized society, it meets needs which the bank is not able to supply. in a new community the general store forms the centre of the business life of the place. with growth and increasing trade, the private banker sees room for the profitable employment of his funds. the state or national bank meets the needs of further growth. success and the accumulation of wealth pave the way for the trust company. the bank is organized primarily to serve the needs of active commercial life; the trust company handles funds in less active circulation. it is customary for the courts to designate or approve certain trust companies as depositories for funds paid into court, and the effect of such designation or approval would be to relieve executors, trustees, or others acting in a fiduciary capacity and depositing with these companies from liability for loss through their failure. a person charged with due care in the selection of a depository could not be held to have been wanting in such care in choosing as a depository a trust company which the court has itself approved. the powers of trust companies vary in different states, and when they are created by special legislation, local companies are found with different charter privileges. the capital and surplus of these institutions are liable for their acts in fiduciary capacities, and in some states they are required to deposit with one of the state departments a fund as a special guarantee. the liability assumed is generally accepted by the courts in lieu of the bonds which individuals acting in similar capacities are required to give. the development of trust companies in the united states has been remarkably rapid. since , when the first legal authority was given for the exercise by corporations of fiduciary powers, they have steadily grown in number until there are now more than fifteen hundred, distributed as follows: alabama arizona arkansas california colorado connecticut delaware district of columbia florida georgia idaho illinois indiana iowa kansas kentucky louisiana maine maryland massachusetts michigan minnesota mississippi missouri montana nebraska nevada new hampshire new jersey new mexico new york north carolina north dakota ohio oklahoma oregon pennsylvania rhode island south carolina south dakota tennessee texas utah vermont virginia washington west virginia wisconsin wyoming hawaii ---- total their business in all departments has shown a steady increase, and the trust companies of the united states to-day carry deposits amounting to over $ , , , . net deposits in the national banks aggregate $ , , , . in some states commercial banking and trust powers are exercised by the same companies. in such cases, separate departments are maintained for the various classes of business. another method is for the same individuals to organize a national bank and a trust company, the former under national and the latter under state laws. the securities company or trust company organized under state laws and controlled by a national bank with the stock interest in the former distributed among the owners of the stock of the bank and evidenced by indorsement on its certificates is still another expedient which has been resorted to in order to enable a closely affiliated and controlled organization to exercise legitimate functions which are, however, outside the province of a national bank. the earning power of trust companies has equalled and even exceeded that of the banks, and the stock of those companies which are well established and doing a flourishing business sells at such a premium that investment in it at its market value gives a very low return. trust company failures have been few and far between, and where they have occurred they can be traced to a disregard of sound banking principles and to the assumption of unwarranted risks. even in the case of companies which have failed there is no record of any impairment of trust funds, whatever loss there was having been borne by the stockholders and, to a less degree, by the depositors. this fact, the result of the absolute separation of trust assets from assets belonging to the company, is the strongest argument for the employment of trust companies in fiduciary capacities, and explains their rapid growth in popular favor. the literature put out by these institutions invariably recites the advantages to be gained by dealing with them instead of with individuals. the following is a good example of such reasoning: the advantages of a trust company as trustee a trust company is preferable to individual trustees, because it possesses every quality of desirability which the individual lacks, to wit:-- ( ) its permanency: it does not die. ( ) it does not go abroad. ( ) it does not become insane. ( ) it does not imperil the trust by failure or dishonesty. ( ) its experience and judgment in trust matters are beyond dispute. ( ) it never neglects its work or hands it over to untrustworthy people. ( ) it does not refuse to act from caprice or on the ground of inexperience. ( ) it is invariably on hand during business hours and can be consulted at all times. ( ) its wide experience of trust business and trust securities is invaluable to the estate. ( ) it is absolutely confidential. ( ) it has no sympathies or antipathies and no politics. ( ) it can be relied upon to act up to its instructions. ( ) it does not resign. ( ) all new investments of value suitable for trust estates are offered in the first instance to trust companies, and in that way it has a choice of valuable security; and as its purchases are on a scale of magnitude, it can usually buy at a rate which is lower than that at which the individual trustee can purchase. the most common objection to the appointment of corporate trustees is thus stated by augustus peabody loring, esq.: the trust companies, which have of late years become so numerous, to a considerable extent do away with the element of personal risk attaching to an individual trustee; but they lack the advantages of personal management. these companies sometimes fail from improper management as utterly as individuals do, and as a rule the lack of personal management results in securing the minimum return only on the amount invested, and lacks the great advantages often secured by the able personal oversight of individual trustees. the question, after all, comes back to the personal qualifications of corporate officers and individuals. if the former are less capable than the latter, the fault is with the particular company--not the system, and if interest returns are sometimes less under corporate management, this fact is more than equalized by the added safety to the corpus of the estate. a "trustee company" has been suggested as a proper title for the company doing a legitimate trust business, and is the name used in australia and in new zealand. in some states the use of the word "trust" in corporate titles is now regulated by law. confusion has arisen in the popular mind between the trust company and the trusts or industrial combinations. the usual functions of a trust company are: banking in a more or less limited form, execution of corporate trusts, execution of individual trusts, care of securities and valuables. in addition, other functions are sometimes exercised, such as life, title, and fidelity insurance, and the business of becoming surety. the earlier companies in the united states were chartered to manage individual estates only and to act in certain fiduciary capacities; the recent development of the trust company has been in the direction of banking functions and corporate trust business. it is worthy to note that the life insurance companies which originally secured trust powers have, with but few exceptions, given up their life insurance business, and that most of the fidelity insurance and surety business is given over to companies which now make a specialty of such risks. the fact is being recognized that the assumption of vast risks contingent on future occurrences is not compatible with the absolute security which is essential in the transaction of legitimate trust business. banking the banking functions of trust companies may include any or all of the following: the receipt of money deposits payable on demand and subject to check, or payable at a fixed date, or according to special agreement. interest is usually allowed on all deposits above a fixed maximum amount or on the total sum. money advances secured by the hypothecation of stocks, bonds, life insurance policies, bonds and mortgages, or other personal property. real estate loans, secured by bond and mortgage. it is customary to loan not over two-thirds of the value of improved property; when the property is unimproved, not more than half. discounting paper is engaged in principally by companies transacting a commercial banking business. the purchase of unsecured paper is permitted in some states where discounting is not allowed. the purchase and sale of securities. trust companies sometimes guarantee issues of bonds, or at least set their stamp of approval upon them. the issue or guarantee of letters of credit, and the transaction of a foreign exchange business. the care of savings deposits. for this purpose a separate department is usually maintained. corporate trusts among the most important functions of a trust company are those relative to the business of other corporations: of late years the trust companies in the eastern cities have been selected as trustees instead of individuals whenever the law of the state where the property was situated allowed such selection. trust companies have manifold advantages over individuals in such a relationship; they do not die; the large amount of financial business which they daily transact provides them with the machinery for such purposes; while their well-known names stand as evidence to the purchasing public that at least the necessary formalities have been complied with. beyond that responsibility the trustees of corporation mortgages usually assume none. in recent years the trust companies have shown a tendency, when acting as mortgage trustees, to recognize a greater moral responsibility than they at first were willing to bear. trust companies did not, of course, intend to appear as in any way guaranteeing the bonds to which they certified, though that seems often to have been the erroneous opinion of the unthinking; but trustees now acknowledge themselves bound within the limits of the mortgage to use their influence to protect the interest of the bondholders. a trust company which should now allow the issue of unsecured bonds because of some glaring defect in the language of the mortgage, would not longer be morally excused by financial opinion, though perhaps held technically innocent.[ ] as trustee under corporate mortgages and trust deeds, the trust company acts for the bondholders. it is customary for it to authenticate each bond issued subject to the provisions of the mortgage, to represent the bondholders in case of default, and to exercise such other functions as may be provided in the mortgage. a generation ago it was customary for a railroad to name one or more individuals as trustees of the mortgages executed to secure bond issues. the development of trust companies and their manifest advantages over individuals in such a capacity has resulted in their absorbing almost all this business. trust companies are now generally appointed as trustees in corporation mortgages, and are also often named to succeed individuals who have died or resigned. the appointment is one of the most important and far reaching which the trust company can accept. its name and reputation serve as an assurance that the transaction is a regular one, and entered into in good faith. although the modern corporation mortgage is usually explicit in its terms to the effect that the trustee in no way guarantees the value of the security and assumes no liability except for its own negligence, yet the intimate connection between the trustee and the borrowing corporation in the minds of investors makes it necessary that care be taken not to assume trusteeships which may lead to a wrong use of the name and credit of the trust company. as trustee under mortgages securing bond issues, the title to the mortgaged property is vested in the trust company for the benefit of the security holders. the corporation owning the mortgaged property retains physical possession of it so long as the terms of the obligation are complied with, except in the case of securities pledged, which are usually lodged with the trustee. in case of default, however, it devolves upon the trustee to protect the interests of the bondholders, and this may necessitate the foreclosure of the mortgage and sale of the property. as fiscal agent it dispenses coupon and interest payments on bond issues, and dividends on stock. it receives sums set aside as sinking funds to provide for the retirement of obligations at maturity, or when bonds are subject to redemption, draws the specified amount by lot and pays the principal. as registrar the trust company authenticates certificates of stock and bonds in order to prevent an over-issue, and to reduce the chance of loss or theft. as transfer agent, the company attends to perfecting transfers of ownership for stock and bond issues or parts thereof. the new york stock exchange, like most other stock exchanges, in its constitution requires that all active listed stocks must be registered. this exchange also requires that a trust company or other agency shall not at the same time act as registrar and transfer agent of the same corporation. in the popular mind, and even in the minds of some trust company officers, the difference between the duties of the two positions has been more or less confused. both have been created to safeguard and facilitate the passing of title to shares of stock, but the duties of a transfer agent and a registrar are not synonymous; they are distinctive. one is called upon to examine and give clear titles to property transfers, and the other is merely to record such transfers. as manager of underwriting syndicates, the trust company issues the prospectus and markets the securities of corporations which are being launched, or of established companies which are putting out new securities. in railroad and other reorganizations, the trust company takes a prominent part, acting both as a depositary for, and as a representative of, the committees which formulate and execute the plans of reorganization. its officers often have a large share in the preparation of such plans. as assignee and receiver, the trust company acts in the same capacity for corporations as for individuals and firms or partnerships, assisting in winding up insolvent businesses and in conducting embarrassed ones. individual trusts the execution of individual trusts is the function originally assumed by trust companies. the various other forms of business which are now engaged in, have, with the exception of life insurance, been later developments of the trust company idea. the earliest power granted these companies was to receive moneys or other property, real or personal, in trust. the trust company now also acts as executor and administrator of the estates of decedents. as executor appointed by the will of a decedent, it takes out letters testamentary upon probate of the will, advertises, files inventory and appraisement, pays debts, collects claims, makes the requisite accounting to the probate or orphans' court, and makes distribution of the estate in accordance with the terms of the will and the court's decree. as administrator acting under appointment of the register of wills or probate court, it performs similar duties, distributing the estate in accordance with decedent's will if there is one, or if there is none, in accordance with the intestate laws of the state, which specify the order of succession and distributive shares in the case of estates of decedents leaving no wills. there are different kinds of administrators, in any of which capacities a trust company may be called upon to act. as trustee under will, the trust company carries out the provisions of the will, investing and managing the estate or particular fund in accordance with the directions of the testator. as such it may hold real and personal property. as trustee under deed or private agreement, a contract is entered into between the company and the owner of the property, by which the title to the property is vested in the corporation subject to the terms recited in the instrument. such deeds of trust may be revocable or irrevocable. marriage settlements are frequently made in this way. the trustee's duty in investing the funds is a double one; namely, to invest them securely so that the principal shall be preserved intact, and to invest them as productively as possible under his powers, so that they shall yield the best rate of interest obtainable for the benefit of the person or persons entitled to the income. he must hold the scales evenly, regarding scrupulously his duties to all beneficiaries. the popular idea that security is the only consideration is erroneous, as the trustee is equally bound to invest the funds as profitably as possible and cannot neglect one duty more than the other. the mistaken impression that the corporate trustee, even more than the individual, is mindful only of the safety of the principal and entirely loses sight of the question of income, has arisen from the restrictions as to investments imposed by law, and frequently also by the will or trust deed, and from the fact that the individual executor or trustee, rightly or wrongly, sometimes assumes risks and personal liability which the proper rules of a trust company would not permit it to assume. the executor or trustee is governed, as to the kinds of investments, by the directions of the will or deed of trust. this may require the purchase of "legal investments" only, or state that the trustee is not to be confined to securities prescribed by law, or give specific directions as to the classes of securities which are to be bought. the terms of such documents are always strictly construed by the courts; if no directions are given, the trustee is expected to buy only "legal" securities, and when he exceeds his powers he is held responsible for any loss. administrators and guardians without broader powers given by will are obliged to invest, except at their personal risk, in such securities as are sanctioned by law or directed by the court. some states prescribe by statute the securities in which a trustee may invest. "where there is no statute or decision of the highest court fixing the class of securities in which a trustee may invest, he can safely follow the rule prescribed for the investment of the funds of savings banks." in general, city, state, and united states bonds, first mortgages secured on improved real estate with ample margin, are among the investments sanctioned by law. as to real estate, stocks, and first mortgage bonds of railroad, manufacturing, and other corporations, the practice varies in the different states. loans on personal property, second mortgages, and other investments subject to prior liens or of a speculative character are excluded. all investments must possess "intrinsic" value; the courts hold trustees liable for any losses from speculative risks--but any gains accrue to the trust estate. other functions the trust company acts as guardian, curator, or committee of the estates, and in some states, of the persons of minors, those who are insane or mentally incompetent, spendthrifts, drunkards, and any other persons not legally qualified to take charge of their own affairs. in the case of a minor, the trust terminates on the ward's becoming of age; in other cases, when the disability is removed, or in accordance with a decree of court. these appointments are frequently made by order of court, and to it accounting must be made. in some states the company is styled "conservator" when caring for the estates of persons of unsound mind. when acting as attorney in fact, the company obtains its authority by virtue of a letter of attorney which usually is or can be recorded, conveying certain definitely specified powers. this may be either to perform a single act--such as to satisfy a mortgage--or may be broader and continuing, granting authority to sell and transfer securities and collect income. a general power of attorney, as the term indicates, is a delegation to another of the general powers of the person appointing--as to payments, collections, transfers of property, and all transactions of a business nature. as agent merely, the company takes charge of property, real or personal, for its owner, but such agency does not imply nor ordinarily include authority to sell or convey title. moreover, trust companies as agent often take up lines of business which they either cannot or would not engage in on their own account. thus, a trust company can act as agent for fire or life insurance companies, for water, gas, and other public service corporations. in new communities and where it is difficult to find responsible representatives, the trust company can often render efficient service and secure a steady income without risk by assuming agencies of various sorts. as assignee the trust company takes possession of the property assigned for the purpose of carrying out the terms of the deed of assignment in the interest both of the assignor and the creditors of the assignor. the deed of assignment is an acknowledgment of an embarrassed or insolvent condition, and the efforts of the assignee are directed to realizing as much as possible from the assets intrusted to its management. as receiver, the duties may be very similar to those of assignee, although they are usually broader in scope. the business may not be insolvent, and the application for the appointment of a receiver may be due to temporary difficulties only. by such an appointment the property is preserved intact and equal treatment is afforded creditors. an able receivership often results in the adjustment of difficulties and the return of the property to its owners on a paying basis. while in the case of assignee the appointment is by the individual, partnership, or corporation executing the deed of assignment which specifies the powers and duties of the assignee, in the case of receiver the appointment is by a court and the company so appointed acts as an appointee or ministerial officer of the court, and as such is directly subject to the court's orders. a trust company acting as receiver is better able than an individual to furnish additional capital, if amply secured, and thus successfully to meet the difficulties which withdrawal of credit and restricted capital have temporarily brought upon an otherwise prosperous business. the courts authorize the issue of receivers' certificates to provide funds for purchase of equipment and the proper maintenance of the property and conduct of the business when the creditors are benefited by such expenditures. such certificates may be made a first lien on all assets, taking precedence even of mortgages and other secured obligations. the receiver thus secures the capital necessary to make the property more productive and to secure the largest return from the business. as custodian or depositary, the trust company sometimes holds property the title to which is in dispute, delivering the same when the ownership is legally determined. in taking charge of escrows or conditional instruments or deeds delivered to a third party until the condition is performed, the trust company acts in a similar capacity, as the joint representative of both parties. the trust company acts as the representative of both the living and the dead in practically every legal relation in which an individual is qualified to act. its function is not only to keep intact the estate of which it has charge, but to look to and safeguard the interest of every beneficiary. care of securities and valuables the functions already recited have resulted in the assumption of the duty of caring for property other than that of the estates held in the trust department. in the safe deposit department, individual safes are rented, bulky packages--not containing stocks or bonds--are received on storage, certificates of deposit covering securities are issued, and provision is made for access to, and examination of, the property so deposited. for personal property received on storage, the charges are either according to bulk or value. wills are usually receipted for and kept without charge. insurance the examination and insurance of real estate titles is a later development often found in connection with the usual trust functions. fidelity insurance and suretyship providing against loss by reason of the dishonesty of individuals and the non-performance of obligations, contracts, etc., have often been combined with the various forms of trust company activity. they are, however, largely passing into the hands of corporations especially organized for the transaction of such business. compensation when acting as trustee under corporation mortgages, a definite charge may be made for accepting the trust, and a fixed amount per annum thereafter for paying coupons and performing other duties. for the certification of bonds it is usual to charge fifty cents per bond in the case of large issues, and one dollar for small issues. the figures, however, vary in different places. the charge for certifying the bonds may be the only one, although an additional charge is usually made for counsel fees. in case of default and consequent foreclosure of the mortgage, extra payment is made to the trustee covering all services incident to the foreclosure. for the disbursement of sinking funds, interest, or coupons, the temporary use of the money may be considered adequate compensation, if the amount involved is large. a commission on the sum distributed or a fixed amount is charged when acting as fiscal agent, apart from duties in other capacities. for acting as registrar or as transfer agent it is usual to make a fixed charge per annum, based on the amount of labor involved. the transfer agent is usually paid about twice as much as the registrar. compensation for acting as manager of an underwriting syndicate may be a fixed sum or a commission, according to the provisions of the underwriting agreement. for acting as depositary under plans of reorganization, assignee, or receiver, a lump sum is usually paid covering all services. agency work of various sorts is paid for in accordance with the usual practice in the business which is undertaken; a fixed sum, or a fixed sum and a commission, or a commission only, may be received. the trust company is in a position to render valuable, and often indispensable, aid to its corporate clients. large amounts being involved, the great railroad and industrial corporations are willing to pay well for such services. corporate trust business has, consequently, been a profitable field for the trust companies. government regulation an examination of the laws of the various states is interesting as showing the attempts which are being made at regulation. most of these laws have been enacted within recent years and to-day there are but few states which do not have such statutes on their books. the step which massachusetts first took in requiring a legal reserve to secure deposits has been followed by similar action in other states. in general, the wisdom of prohibiting companies which engage in the care of estates from assuming excessive risks is becoming better recognized. the promotion and underwriting of commercial ventures and the assumption of unknown risks are functions not compatible with the proper exercise of the duties of trustee or executor. the supervision of trust companies by the separate states provides an elastic system to supplement the rigidly guarded powers of the national banks, and can adapt itself to changing conditions and enlarging needs, leaving for solution according to the requirements of each section of the country such questions as proper functions, reserves, and the authority to establish branch offices. footnotes: [ ] adapted from kirkbride and sterrett, _the modern trust company_, pp. - , , , , - , , , . the macmillan company. . [ ] thomas l. greene, _corporation finance_, p. . chapter xvi savings banks [ ]the savings bank works with those unacquainted with the ways of business and who could not single handed take good care of their money, or invest it safely or profitably. the bank of discount is generally managed by business men versed in the ways of business, acquainted with monetary affairs, and able to conduct financial operations with intelligence. they combine their _capital_ in order to make it effective; the savings bank combines _savings_ in order to make them _capital_, and as such to acquire a power impossible to the scattered savings. the savings bank is for the saver; its funds are invested permanently, while the business bank opens its doors to business men and loans rather than invests its funds, and for a short time only. the latter deals with borrowers rather than savers, and serves for hire. the one serves best by keeping--the other by lending. one _aims_ at profit, while the other _never_ makes (or should make) profit an end. the savings bank is the receiving reservoir for the little springs, the bank of discount is the distributing reservoir for accumulated capital. we must get the last idea clearly in mind or we get a misconception of the savings bank. however much the element of interest may figure in the management, and whether we pay depositors per cent. or per cent., or no interest at all, the accumulation of interest is not to be compared in importance with the _accumulation of principal_. no man ever acquired riches at per cent. in fact, per cent. upon small deposits is so trifling a matter that it may be ignored in considering the greater value of the increase of capital. however desirable the accumulation of interest may be (and this in the course of years is considerable), the chief end and aim of the savings bank should be the _accumulation of principal_. classification of savings banks we may roughly classify savings institutions into: first, mutual (trustee), or philanthropic; second, stock (including "savings and trust companies"); third, co-operative, or democratic, as exemplified in the co-operative banks of europe. the first are usually managed by a self-perpetuating body of trustees, who do not share the earnings; the second are managed by the directors elected by the stockholders; the third are managed by officials elected by the members. a second classification may be made into public and private institutions; the first includes the postal and municipal banks; the private embraces the mutual, stock, and co-operative. a third classification may still be made into the "unit" and the chain system. in the unit system the bank is an independent entity and has no connection (aside from a managerial standpoint) with any other bank. the banks of the united states are all, excepting the postal savings banks and a few branch savings banks, of this character. in the second, the bank is but a part of a chain, as in the postal system, the municipal banks of germany, and the co-operative credit banks of europe. we shall briefly review each system. trustee savings banks the _original_ savings bank is the trustee bank. as hamilton says, "it stands for the attempt on the part of the well-to-do to improve the condition of the poorer classes, and involves a self-sacrificing service on the part of a few in the interest of the many." while many of the early savings banks partook of this character, others were organised from purely selfish motives and were characterised by bad management and bad faith from the start. a study of savings bank frauds will amply bear out this statement. the "spirit of commercialism" hereafter spoken of has invaded the domain of the mutual savings bank and it cannot in truth be said that some of the newer banks were organised from any spirit of philanthropy, although the management as a whole may be above suspicion and honorable in the highest degree. but, however this may be, the mutual savings bank is a product of the east and promises to remain so in spite of the fact that some of the western states have very good, if not excellent, savings bank laws. the distinguishing characteristic of the trustee savings bank is _mutuality_. _all_ the earnings of the bank, less reasonable administrative expenses and the apportionment to surplus or guaranty fund, are divided among the depositors in the form of interest. one or two features of the mutual bank may be mentioned. first, the investments of such institutions are usually carefully restricted, looking primarily to the element of safety; and as long as the trustees keep their funds so invested they cannot be held, either in law or morals, responsible for losses. second, the predominancy of the mortgage loan. the nature of the deposits being more or less permanent, investments of a permanent character may be made without fear of a sudden demand for their return on the part of depositors; and to safeguard the banks from such unexpected calls, quite generally trustee banks are permitted by law to require notice, the usual time being either sixty or ninety days. the third distinguishing feature is the self-perpetuation of the board of managers. no amount of money can _buy_ a man's way into a mutual savings bank. he cannot, as in stock concerns, buy enough stock to _vote himself_ into office--he can only gain office as the other men advocate his cause. and, on the contrary, he cannot be voted _out_ of office. only an act, such as bankruptcy (which voids his office), can affect him, and, like a supreme court judge, he is appointed during good behavior. the greatest weakness of the trustee bank is this: lacking the "essential element" that prompts men to undertake such ventures (profit), it does not appeal to the average man of means unless he is sentimentally inclined; and not being indispensable to trade and commerce, like a bank of discount, it does not come to be a commercial necessity. even in a great state like new york we find twenty-eight counties with no savings banks. and in many of these counties there are large and thriving towns and cities. thus the city of jamestown, with over , population, has no savings banks; while elmira, with over , population, has but one, and that with but half a million assets. from the viewpoint of intensive results, as tested by the volume of patronage accorded these institutions, a perusal of the statistics will demonstrate that in some places the trustee bank has had a remarkable record. for instance, in maine, a sparsely-settled state, and largely of a rural nature, we find one savings account to every of the population. more remarkable is vermont, the "green mountain state," where natural conditions would seem to be much more hostile to such development, we find per cent. of the population having savings bank accounts. new hampshire has an account for every - / of the population, while massachusetts heads the list, with seventy-five out of every hundred. new york has one to every three. "in seeking an explanation of this remarkable success of the trustee system," says hamilton, "we are reminded that new england is singularly separate and distinct in its customs, habits and ideals from the rest of the country. notwithstanding the large foreign population, the dominant type is more homogeneous and more anglo-saxon than it is in any other section, and therefore fixed customs have been more rigid and controlling. among the ideals behind the customs and institutions must be noted a stern, puritanical sense of simple living, industry and providence, and this spirit is so strong as to be well calculated to give color and direction to the philanthropic impulse. there is also an unusual amount of public spirit, of collective rather than a neighborly character, as seen in the institution of the town meeting." stock savings banks the stock savings bank, where it is a savings bank, and not a bank of discount under a savings title, differs in no essential degree from the mutual institution. the mutual bank belongs to the depositors; the stock bank to the stockholders. the mutual bank pays dividends to depositors only; the stock bank pays dividends to both stockholders and depositors. the stock bank does not pretend to be philanthropic in its management. it is purely a business proposition, and where the investments are of the accepted savings bank type, it can justly claim to be on a par with its mutual friends, provided, of course, that it measures up to the standard in its management. as is implied in the term "stock," it issues capital shares and pays dividends thereon. it has, therefore, the added protection of the stockholder's liability, which, together with the accumulated surplus, affords the element of strength so necessary in all financial concerns. it usually pays the depositors a stipulated rate of interest, and the profits beyond this belong to and are distributed to the stockholders as dividends. the partnership idea is entirely lacking, and the depositors get what they bargain for, while the surplus goes to those who invest, not necessarily their savings, but their _capital_, and assume all risks of the business. it could not in law or equity "scale down" its deposits to make good any losses--a feature peculiar to the mutual institution. in this respect one thing is certain: in so far as safety is concerned, especially in a young bank, the stock bank with the stockholders' liability is surely superior to the mutual, unless the trustees of the latter are of such high order and of such financial worth as to be able and _willing_ to assume the burden of any losses that may accrue until the surplus or guaranty fund affords ample protection. this was the trouble in the early days of the mutual savings banks in england. guaranty savings banks new hampshire is the only state in which "guaranty savings banks" are found. these are a combination of mutual and stock--a cross between the two. they do not transact a commercial business, being strictly savings banks in their functions, yet having "special deposits," which to all intents and purposes are capital stock. "the guaranty savings bank differs from the ordinary mutual savings bank in that it has capital stock or _special deposits_, as they are called. it pays a certain stipulated rate of interest to its _general_ depositors and _any surplus of earnings above this dividend is available for dividends on the capital stock or special deposits. these special deposits constitute a guaranty fund for the general depositors, and the charter ordinarily stipulates that the special deposits shall always equal per cent. of the deposits._" such institutions are savings banks in every sense of the word, but the strictly mutual feature is lacking in the specialising of part of the deposits and paying a higher rate of interest on these deposits. in new york state savings banks cannot take a "special deposit," but in new hampshire, in return for the higher interest rate, the special depositors assume all the risk of loss or depreciation, and, as in the case of stock concerns, they would be the first to suffer in the event of insolvency. municipal savings banks this form of savings banks properly belongs to a strong class of municipalities. they can only thrive in places where the local spirit is strong, the local government pure, and where the local officials are accustomed to wield a large measure of authority. accordingly, they have come into being and met with success in those countries where the early history of the town made a large measure of local autonomy a necessity. towns of this class possess the public spirit and the intelligent administration required for the success of such a public venture. they also possess a fund of gratuitous public service among the citizens which may be drawn upon when occasion requires. such banks are found in austria, france, italy, denmark, sweden, and japan. the best examples are to be found in germany, where they have been in operation for a long period of years. savings institutions exist here at present in great variety and number, including state or province savings banks, city savings banks, township savings banks, county savings banks, _bezirk_ (district) savings banks, private savings banks, and co-operative savings banks. these banks have some , , pass books out and their deposits amount to , , , marks ($ , , , ). these deposits are practically all guaranteed by the various municipalities of the empire, which condition forms a bulwark of confidence in the security of private wealth and earnings that cannot be shaken by hard times, panics, bank failures, etc. people's banks the co-operative banks of europe, otherwise called "people's banks," are essentially savings banks, in that they depend for their working capital upon the accumulated savings of their members. the aims of these banks are first _economic_, to enable the economically weak to make themselves financially strong by the power of combination; second, _moral_, to bring the members together in a unity of interests and to develop character by making thrift and good habits the groundwork of their operations; third, educational, to train in business methods and in the handling of money those whose scope has been narrow and whose experiences have been few in this regard. in the establishment of these banks, the cardinal rules have been: maximum of responsibility, minimum of risk, maximum of publicity. to secure the maximum of responsibility, unlimited liability has been accepted by the members in many cases; that is, each one pledging his all for the good of all; and, second, to secure the minimum of risk, character is made the basis of membership and good habits the prime requisite for membership. no investments are made in speculative enterprises, and the purposes for which the money is borrowed are closely inquired into and due care taken that the funds shall be applied for such purposes only. to secure the maximum of publicity the action of the bank in all matters is given the widest publicity possible in order that the work may have public inspection. the result of these simple rules has been that the poor have proven as good, if not better, creditors than the rich; for once losing credit they can never regain it except by the slow process of years of good behavior. the great pioneers in the "people's banks" were raiffeisen and schulze-delitzsch. they fully appreciated that any system that would succeed must descend to the level of its beneficiaries and they have admirably adapted the co-operative idea of banking. the localization of savings banks in the united states the home of the mutual savings bank is in the east, where it began operations in , and may even be said to be in the eastern states; for west of buffalo and south of baltimore, we find only savings banks of the mutual character. out of savings banks of the mutual type found in the united states, are found in new england, new york, and new jersey; and over one-half, or , are found in the two states of new york and massachusetts. maine, vermont, connecticut and new hampshire have , the total of which accounts for all but of the mutual savings banks in this country. the dearth of savings banks in pennsylvania is notable. it would seem strange that in a state of such character, where the mutual savings bank had its first test, and where in individual instances it has been extremely popular and successful, the failure of such an institution has been so pronounced; but pennsylvania is the home of the building and loan association (there are over , in operation), which seems in a measure at least, to fulfill the same purpose. from a pamphlet issued by the dollar savings bank of pittsburgh in , the striking sentence is gathered, that to-day at the end of half a century the dollar savings bank stands as the _only_ institution of its kind in western pennsylvania. as we go south and west the banks take on a more commercial aspect, and the savings bank as we know it in the east is a rarity, and the word "savings" in their title is a misnomer. this is particularly true of iowa, where we find practically all state banks using this word, and yet very few of them are other than banks of discount. the reason for the large number may be in the economic conditions of that state, and also the fact that banks may organise with as low as $ , in capital, making it possible to establish a bank in even the smallest place. in illinois, for instance, we find no distinctively savings banks, and in a city like chicago, where if the same success had attended the savings banks as it has in new york, upwards of a billion dollars would be on deposit, we find no strictly savings institution other than banks of discount and trust companies operating savings departments. the reasons for the absence of mutual savings banks in the west and south lie, no doubt, as hamilton suggests, in the fact that these sections were not settled from religious, but commercial motives; and the "spirit of new england" being lacking, the savings bank which requires a peculiar spirit of philanthropy, and age, as well, has not become a factor in the development of the country. in fact, the eleemosynary institution, such as the college, the hospital, or the savings bank, the former requiring endowments of money to become successful, and the latter the endowment of gratuitous management to become possible, is last to follow in the economic development of a community. another reason may be in the pre-ponderance of agriculture among the employments, which does not, until the country becomes highly prosperous, afford much in the way of idle funds which would go into the savings banks. the mutual savings bank is a product of the east and promises to remain so in spite of the fact that some of the western states have very good, if not excellent, savings banks laws. the dearth of savings banks in the south is, no doubt, due to the prostration following the civil war, which left the country drained of its resources; the general ignorance of banking functions, and the improvidence of the negro. postal savings banks the postal savings bank is not a bank, or a banking system, so much as it is an adjunct of the government; for the fundamental idea is that through the post office the government holds itself out as willing to accept the savings deposits of the people, invest them in its own securities and become absolutely responsible for the safe return of the funds when called for, with a nominal rate of interest. all the leading countries of the world except germany and switzerland now operate the postal savings banks. while the rules may differ in the details, the general scheme is the same, and a review in brief of the system of great britain will serve to illustrate the methods of operation of such an institution. the present system was established in england in . the deposits, at whatever office they may be made, can be withdrawn from any other office which transacts a savings bank business. the accounts are kept in london and all moneys are remitted to the headquarters, where it is handed over to the commissioners for the reduction of the national debt, who invest the funds in public securities. deposits may be made as low as one shilling or multiples thereof, and the limit of deposits for an individual is $ during one year or $ in all. charitable societies may deposit without limit. for the benefit of youthful depositors, who have not a shilling to deposit, cards are issued upon which stamps are placed as purchased, and when filled represent one shilling, and may be turned in as cash. school managers are urged to bring this plan to the attention of the pupils, and it has been productive of good results, over , schools having adopted this system. the interest rate is fixed at - / per cent. and never varies. american postal savings banks arguments for and against the establishment of postal savings banks in the united states. [ ]in spite of the numerous differences in the postal savings bank system of the forty-odd countries possessing them, there are certain fundamental features common to all. whatever else a postal savings bank may be, it is without exception an institution working principally through the post offices, and its primary object is the encouragement of thrift among the poorer classes by providing safe and convenient places for the deposit of savings at a comparatively low rate of interest. in the discussion of the postal savings bank proposition in this country, no one questioned the desirability of encouraging habits of economy and thrift on the part of the public, nor was there any question that adequate savings bank facilities should be provided for this purpose; the debate hinged very largely upon the question whether adequate facilities of this character were not already provided by private initiative. the advocates of a postal savings bank claimed that adequate savings facilities were not and could not be provided by private enterprise, because of the expense of conducting savings banks in small communities, and also in larger communities where the people were not yet educated to the saving habit; and they pointed particularly to the lack of savings facilities in the southern and western states.... ... the country is not nearly so well provided with banks receiving savings accounts as with post offices. in the united states there are square miles of territory to each bank carrying savings accounts and square miles to each post office; there is a population of , to each such bank and of , to each post office; and there are . post offices to each bank carrying savings accounts. a comparison of the figures for the different sections and states shows that it is in the southern, western, and pacific states that savings bank facilities are most lacking.... the new england, eastern, and middle western states are much better provided with banking facilities than are the other sections; but even in these states post office facilities are much more ample than savings bank facilities.... an objection repeatedly urged against the establishment of a postal savings bank was that it would prove a competitor to existing banks. the fear of such competition appears to have been the chief cause of the opposition of most members of the banking fraternity to all postal savings banks proposals. senator cummins of iowa said in the senate: the banks of the united states are opposed unanimously to the institution of a postal savings system.... i venture the assertion that during the nearly two years that i have been a member of this body ... i have received the protests of nearly every bank in my state against any such scheme, and those protests have usually been accompanied by a very large number of petitions, secured, i have no doubt, through the industry and energy of the bank officers. it was argued that postal savings banks would have an undue advantage over private institutions because of the great confidence in the government entertained by working people; and it was asserted that funds would be withdrawn from existing banks and deposited in the postal savings banks.... in reply, the advocates of postal savings banks claimed that existing banks had nothing to fear from governmental competition; that they had the advantages of an established clientele, higher interest rates, higher limits, if any, in the amounts that could be kept on deposit, and of the close personal and advisory relation which so often exists between a bank and its customers. they further argued that postal savings banks would be a help rather than a hindrance to other banks. they would educate the people to habits of thrift and would draw money out of hoards; and the deposits which they received would for the most part be transferred to other banks as soon as the limit fixed for postal savings banks deposits should be reached, or even before, as the depositor began to appreciate the safety of other banks and the advantage of their higher rate of interest.... the immediate occasion of the last active movement for a postal savings bank system in the united states was ... the losses and inconveniences arising from bank failures and from the suspension of cash payments in the panic of . naturally, therefore, the demand for great safety of savings deposits played an important part in the discussion. the advocates of postal savings banks cited figures showing the number of national bank failures and the losses involved, and similar figures for savings bank failures in certain states. they made much of the large amounts involved and of the hardships in individual cases. on the other hand, the opponents of the postal savings bank scheme quite generally dealt with percentage figures rather than with absolute amounts and showed that for recent years the average losses, in terms of percentage of the amounts on deposit, were almost infinitesimal. the figures cited for bank failures, so far as they relate to savings deposits, are so incomplete as to be of doubtful value in measuring the extent of the losses.... after all, such figures give us no adequate measure for losses of this kind. "among the experiences of working people none is more demoralizing and few are more cruel than loss of savings through failure of banks or absconding of individuals intrusted with funds." to such people there is cold comfort in the assurance that the average loss of savings bank depositors over a long period of years is but a fraction of a mill on a dollar. the loss is theirs: it is not distributed among all depositors. in urging that a postal savings bank would draw money from hoards into circulation, the advocates of the scheme claimed also that such a bank would keep in the united states money that would otherwise be sent abroad by foreigners.... much was made of the fact that every year many millions of dollars in money orders payable to self are bought for savings purposes.... in such cases the purchaser not only failed to receive any interest on his savings but was required to pay the money order fee. many immigrants, moreover, distrust american banks, and, being familiar with postal savings banks in their home countries and having great confidence in government institutions, remit their savings to these home banks. how extensively this is done we have no figures to show.... the main features of the system [ ]the postal savings bank system of the united states, which began operations january , , by the opening of a postal savings bank in each state, is under the control of a board of trustees, consisting of the postmaster-general, the secretary of the treasury, and the attorney-general. depositories for the receipt of such moneys are designated by the board. an initial appropriation of $ , was made to cover the cost of putting the law in operation, which was supplemented by another appropriation of $ , in the session of . any person over ten years of age may deposit, but no person shall have more than one postal savings bank account in his or her own right. upon making the first deposit, a _certificate of deposit_ is issued, which is to be surrendered when paid, and cancelled; or in the event of making a subsequent deposit is to be surrendered for one calling for a higher amount. the lowest deposit permitted is one dollar, the limit being $ in a calendar month; but to provide for small deposits, a postal savings card is issued for ten cents, to which may be attached postal savings stamps, which when filled will be accepted in lieu of one dollar. the interest rate allowed is per cent., credited once a year, and the highest balance permitted is $ to one person. withdrawals may be made on demand. the funds so received are to be deposited in national and state banks at - / per cent. interest. five per cent. of these deposits may be withdrawn and kept in the treasury of the united states as reserve. before becoming a depository, the bank must furnish as security government, state, or municipal bonds, the limit of deposits being an amount equal to the paid-up capital and one-half the surplus.... not over per cent. of the amount of such funds may be withdrawn by the trustees for investment in united states bonds, and it is the intent of the act that the residue of such funds amounting to per cent., shall remain on deposit in the banks in each state and territory willing to receive the same under the terms of the act, but may be withdrawn for investment in bonds under the direction of the president, "when in his judgment, the general welfare and interests of the united states so require." provision is also made for the conversion of savings bank deposits into united states bonds, at the request of depositors. "postal savings behind the scenes" speech of hon. carter b. keene, director of the united states postal savings system at the banquet of the investment bankers association of america at denver, colorado, tuesday evening, september , . _mr. toastmaster and gentlemen:_ i appreciate very highly your invitation to speak here to-night, also the words of commendation from your presiding officer. i have often wondered whether the fact that i am the only director of a big savings institution has anything to do with the ability of that institution to pay every depositor his money on demand. (laughter and applause.)... the toastmaster was wrong when he said that postal savings has nothing to do with investment bankers. we have a great deal to do with them. indirectly, we are one of their best customers. more than ninety-four million dollars in bonds are now with the treasurer of the united states as security for postal savings funds, and you gentlemen have largely supplied the banks with these bonds. sixteen million dollars are in state and territory bonds; city, town, and village bonds amount to forty-six millions; county bonds nine; miscellaneous bonds ten; and bonds of the united states government and its dependencies thirteen.... since i have been here this week i have heard billions and billions talked about.... i can hardly comprehend what a million is. but i want to tell you that in four and a half years the postal savings system of the united states has become custodian of sixty-eight million dollars, in cash, of the people's savings. let me lay emphasis on the _cash_, because big figures do not always mean cash. sixty-five million dollars of this money is on deposit in six thousand banks scattered throughout the country. in other words, practically all of the money we have collected has been released through the banks to channels of trade in the very localities where it originated. i am sure you will agree with me that this is a very creditable showing so far as dollars and cents are concerned. the federal reserve act, which went into effect on the th of november last, provided that postal savings funds should not be deposited in non-member banks. the attorney general for the united states has held that the prohibition relates to funds received on and after november th. therefore, postal savings on deposit in state institutions when the act became effective have been allowed to remain, except as it has been necessary to withdraw it to pay depositors. the post office department has made frequent investigations to determine where postal savings deposits come from; with the invariable result that they are found to come from chimney corners, mattresses, bootlegs, etc., but until very recently no effort has been made to ascertain where postal savings go when withdrawn. and this recent inquiry has been both gratifying and entertaining. it was found that in a vast majority of cases savings were withdrawn for very substantial reasons, prominent among them being payments on homes and the launching of small business enterprises. occasionally a hospital bill was paid. some depositors sent money to the old country to bring over a parent or a brother; a wedding trousseau here and there; and in colorado we have record of a withdrawal to buy an automobile. (laughter.) i am glad to say that there has been a very great change in the attitude of the banks toward postal savings in the last few years. at the outset, many bankers thought that postal savings was an unwarranted invasion of the domain of private enterprise and that the service would prove a severe drain on their established business. the opposite has been the result. the tarnished coins and soiled currency that come into our postal depositories represent hidden savings--money that is beyond the reach of any corporate banking institution no matter how sound it may be or how conservatively managed. this newly discovered money has been made available for commercial purposes in the very cities and localities from which it was withdrawn, so instead of being a drain on corporate banking institutions postal savings has added to the deposits of some six thousand banks more than sixty-five millions. the bankers now freely admit that postal savings has been a help to them, and it is no uncommon thing for banks, especially in the mining regions of the west, to urge the post office department to extend postal savings facilities in order that more money may be made available for local uses. among our , depositors every nation on the face of the earth is represented, also every conceivable occupation. the fisherman, the miner, the shoemaker, the preacher, the bank teller, the butcher, the baker, the candle-stick maker, all have accounts, but the great bulk of our deposits come from the men and women who work with their hands for a daily wage. the foreign born are our most numerous and liberal patrons. an interesting poll of depositors has just been made by the post office department and it was found that per cent. of all postal savings depositors were born outside the united states, while the american born comprise per cent. a still more surprising fact is that the foreign born own per cent. of all the deposits. the russians lead with $ , , to their credit, or . per cent. then follow the italians with $ , , , or . per cent.; natives of great britain and her colonies with $ , , , or . per cent.; the austrians with $ , , , or . per cent.; hungarians, $ , , , or . per cent.; germans, $ , , , or . per cent.; swedes, $ , , , or . per cent.; and greeks, $ , , , or . per cent. what a splendid vote of confidence on the part of our foreign-born citizens in the good faith of the united states. and in these figures also is a high testimonial to the industry and frugality of our newly acquired citizens. that they should take most kindly to postal savings is not remarkable when we consider that they were accustomed to a similar service in their native countries.... another thing that has induced foreigners to become postal savings depositors is the disastrous experiences many of them have had with so-called "private banks," usually operated by people of their own tongue. it is difficult to conceive of a more heinous crime than some of these so-called "bankers"--slick and persuasive--have committed in alluring credulous, hard-working men and women, to entrust their humble savings with them for the deliberate purpose of theft. i am glad to see that prosecuting officers have recently been aroused to the "private bank swindle" and that their promoters are getting the punishment they deserve. when europe got on fire last year, our postal savings receipts began to increase by leaps and bounds. during the fiscal year , the deposits jumped from $ , , to $ , , and more than , new accounts were opened. the war still has an influence upon postal savings deposits, but the more immediate cause of large deposits at this time is the remarkable revival of commercial activities. seven cities now have more than a million dollars on deposit, namely. new york, brooklyn, chicago, boston, detroit, san francisco, and portland, oregon. greater new york, including brooklyn and several other offices in the municipality, now have over one-fourth of all the money in the postal savings system. during the past fiscal year new york city gained per cent.; bridgeport, connecticut, per cent.; brooklyn, new york, per cent.; paterson, new jersey, per cent.; jersey city, new jersey, per cent.; detroit, michigan, per cent.; newark, new jersey, per cent.; akron, ohio, per cent.; gary, indiana, per cent.; pueblo, colorado, per cent. now, my friends, i come to a point that i hope will make an impression on your minds--a lasting impression--and that point is that the postal savings system from the first has been seriously handicapped by statutory restrictions on the amount that may be accepted. the law permits the acceptance of only one hundred dollars a month and five hundred dollars in all from a depositor. it has been shown that the foreign born are the largest patrons of our savings service and if this service is to reach its full measure of success we must recognize and respect the habits of the foreigner, and one of his habits is to save his money until he gets several hundred dollars together and then take the entire amount to the post office, just as he did in the old country. because the postmaster cannot accept all that is offered, the intending depositor very frequently goes away in resentment and disappointment without depositing a dollar.... it is the testimony of postmasters from all over the country that they are rejecting about as much money as they are taking in. the postmaster general last year recommended to congress that one thousand dollars be accepted with interest and that another thousand dollars be accepted without interest, but for safekeeping. that was a practical and reasonable recommendation--one which would meet all requirements in ninety-five per cent. of the cases. unfortunately the recommendation failed.... the postmaster general has indicated that he will repeat the recommendation in his forthcoming annual report and i sincerely hope that congress will promptly recognize the urgent need of the legislation. millions of dollars, my friends, are spent every year by uplift societies for the betterment of the foreigners. these foreigners, these begrimed, hard-working foreigners, come to our post offices and ask us to take their humble savings. how unfortunate that we cannot accept what they offer, within reasonable bounds. what an effective agency this would be in bettering in a most practical and permanent way the conditions of the very people we want to americanize as speedily as possible. ... we have five hundred and forty thousand depositors in the united states to-day and postal savings has a new and different story for each of them. it is not always the big things in life that change or fix our course. can't you remember when a few dollars or the want of a few dollars tipped you one way or the other in some important matter. who can estimate the happiness and prosperity that the starting of a postal savings account may lead to. it is a step, and an important one, in the right direction. some one has well said that the immigrant who opens a postal savings account steps unconsciously on a moving platform; one thing leads to another, and his deposit might lead him into local investment and investment into business and into citizenship. there is a very interesting human-interest side to postal savings in which every phase of good fortune and disaster is reflected. an aged couple at norfolk without the knowledge of each other had been carrying $ on their persons as a guaranty of respectable burial. they are now postal savings depositors. two sisters died in each other's arms in the _eastland_ disaster in chicago a few weeks ago--two working girls--and they had postal savings accounts for like amounts. their savings went to pay for their burial. one of uncle sam's bluejackets who went down on the ill-fated submarine _f- _ was the owner of a substantial postal savings account. gentlemen, the postal savings system means something more than a cold array of assets and liabilities, a balance sheet. way off in an isolated spot in russia a money order went not long ago to the home of a humble peasant. that money order represented the savings of a son who was drowned in the susquehanna river. a few weeks back, a thrifty mexican girl withdrew her savings from the post office at san diego, california, to buy a trousseau. after the honeymoon she returned to the office with her new husband and both opened postal savings accounts. last year leadville, colorado, struck a thrift note that was new in this country, so far as i know, and reference to it is particularly timely as christmas is approaching. a mining company in that city struck the note and i hope it will be heard from one end of this country to the other. it was this: last december an officer of the company went to the post office and opened a postal savings account for every employee--ninety in all--as a christmas present. he placed to the credit of each per cent. of what he had earned during the year. these christmas remembrances amounted to over fifteen hundred dollars. out of the ninety employees only five had previously opened postal savings accounts. now, i count that substantial charity; i call that well-directed charity. we have kept track of these particular deposits and the workmen who get their start through that christmas bounty are adding to their savings weekly by their own personal efforts. (applause.) gentlemen, as a rule, we in official life swing back and forth in a measured arc, and the little one can do is so small when compared with the mass of government activity that we feel insignificant and lost. but i feel, my friends, that in the postal savings system my associates and i are doing a positive good for humanity. i believe that we are making people better and happier because postal savings points the way from the sweat shop to the school--it stands for clean homes and empty alleys. each of you is a stockholder in the postal savings system and its success is your success. your dividends are in the better and happier american citizenship which it encourages and promotes. (applause.) footnotes: [ ] adapted from w. h. kniffin, _the savings bank and its practical work_, pp. - . the bankers publishing company. new york, . [ ] e. w. kemmerer, _the united states postal savings bank_, _political science quarterly_, vol. xxvi, no. , september, , pp. - . [ ] w. h. kniffin, _the savings bank and its practical work_, pp. , . the bankers publishing company, new york. . chapter xvii domestic exchange [ ]the banker has become the bookkeeper and settling agent of the business world. the products of a locality, let us say the state of georgia, move out to the markets of the world and create credits in favor of that locality on the books of banking institutions in the commercial centers, while at the same time a counter movement of commodities is under way from other localities into georgia, in like manner creating credits for those localities which are debits against georgia. the practical effect is that the commodities moving between these communities are exchanged and pay for themselves, the running accounts being kept and settlements effected in the banks. to illustrate the details: a dealer in cotton in atlanta makes a sale to a mill in fall river and receives in payment a check or draft drawn on a new york bank, which he deposits for the credit of his account in an atlanta bank, and which the latter forwards for the credit of its bank account in new york. meanwhile an atlanta merchant has bought goods in new york and in order to pay for them buys from the atlanta bank an order for the new york credit, and this when forwarded completes the circle of payments for cotton and goods. if we would extend the investigation to include the bank accounts of the fall river mill and the atlanta dealer we would find, first, that the mill account was built up constantly by deposits of checks and drafts received in payment for goods sold in all parts of the country and perhaps all over the world, with almost no deposits of cash, and that it was drawn down by checks for raw cotton, and supplies and large amounts of cash for the pay-rolls; second, that the cotton dealer's account was built up entirely by deposits of checks or drafts received for cotton shipments and drawn down by checks and cash payments to farmers for cotton. for payments at a distance bank credit in the form of a check or draft is [commonly] used.... the foregoing illustrates the movement of the exchanges constantly proceeding ... between ... different communities.... there is a network of relationship between banks through which each local community and market is connected with all other communities and markets.... no locality is so remote as to be outside of the circle and no community's sales and purchases are so scattered but that they can be brought together in the settlements. each bank is the center of a circle of which it is the clearing agent; all payments between its own customers may be made by a transfer of credit upon its books. if there are two banks or more banks in a town, all payments between their customers are resolved into offsets between these banks, and in like manner all payments between localities are resolved into offsets between banks, and if not settled in local centers are passed up to larger and larger clearing centers.... but while the cross-payments of trade may be depended upon in the long run to balance and settle themselves, it does not follow that they will do so from day to day, or that they coincide so closely that payments in money are never required. an individual's sales and purchases are seldom made at the same time, and the sales and purchases of communities are not constantly balanced. the trade of a one-crop farming district will not be so evenly balanced as one of a district in which mixed farming prevails, and in every industry there are periods, usually recurring every year, when the payments exceed the current income, and corresponding periods when income exceeds outgo.... a region like the cotton states, whose products move quickly to market, may have large credit balances at one season and at another be wanting to borrow.... the banker is an equalizing agency in the situation. he stands in the breach: he must either supply the missing offsets of credit, or, as a last resort, make the payments in money.... the entire system of settlements, with transfers and offsets and advances and interchange of capital and credit, is exceedingly interesting and wonderfully simple and effective, but depends for its effectiveness upon a scrupulous observance of the principle upon which it is based. that principle is the natural reciprocity of trade.... while there are balances from time to time in the exchanges ... between different localities ... which cannot be settled without shipments of money, they are usually met without inconvenience unless there is a disturbance of credit. exchange relations between chicago and new york [ ]... it should always be borne in mind that the fact that new york city is the country's dominating financial market results in making new york funds acceptable everywhere as a means of payment, and in making a ready market for new york exchange throughout the country for a large part of the year. throughout january money in chicago relative to that in new york city is cheap. exchange rates on new york are high and there is a considerable movement of cash from chicago to the eastern states--particularly to new york city.... just prior to january there is normally a large demand in chicago for new york exchange with which to meet dividend and interest payments due in new york, and the high rates thus created continue somewhat into the new year. the crop-moving and holiday demand, however, being over, money becomes relatively cheap in chicago and flows to new york city, where it can at least earn the per cent. paid by banks on bankers' balances, and where it is absorbed somewhat in speculative activity and in the higher security prices, which normally rule the latter part of january and the fore part of february. from the last of january to the fore part of march the demand for money in chicago relative to that in new york rapidly rises. exchange rates on new york fall to a low point, and shipments of cash to the eastern states are very small.... ... there is, however, no evidence of a movement of cash from the east to chicago in february, although there is something of a westward movement in march. during this period the relative demand for money in chicago is increased by the anticipated opening of navigation on the great lakes, for the opening of navigation gives rise to a large amount of new york exchange received in payment of grain bills. there is also a demand on the part of western bankers for currency to meet the spring needs of the western farmers. the first of march in many sections of the middle west is the commonest time for making settlements of interest and principal on farm mortgages. it is also a common date for paying farm rents. this spring advance in the value of money in chicago as compared with new york reaches its maximum early in march. the demand then falls off rapidly and with only temporary interruptions (the most noteworthy being about the first of may) until it reaches the low level of the early summer, the latter part of may. it continues at a low level until early in july, when the crop-moving advance begins.... about the first of july the relative demand for money in chicago and vicinity begins to increase, advancing rapidly, with minor interruptions, until early in september, and then maintaining a high level until the fore part of november. during this period exchange rates rule low and money moves in large quantities from the eastern states to chicago.... the primary cause for this increasing and large demand for money in chicago is of course the anticipated and actual crop-moving demand, there being no sufficiently strong eastern demand for money at the time to hold it back.... it has been found ... that during the last six to eight weeks of the year, after the crop-moving demand has to a large extent subsided, the relative demand for moneyed capital in both new york city and chicago is maintained until the time of january settlements at nearly the high level of the crop-moving period. a study of domestic exchange rates and of currency shipments shows that the relative demand for money is stronger during this period in new york city than in chicago, that exchange rates in chicago on new york rise, and that cash moves eastward.... money becomes relatively cheap in chicago and vicinity during these last six to eight weeks of the year, principally because of the return flow of currency previously shipped to the country districts for crop-moving purposes. there is also considerable demand at this time for new york exchange to meet payments in certain lines of goods, such as hardware and dry goods, that are due new york and new england houses by western establishments, and to make purchases for the holiday trade.... comparatively high exchange rates... [near] the end of the year are largely due to preparations for the january disbursements, which western concerns are called upon to make in new york city....[ ] exchange relations between st. louis and new york [ ]... general seasonal movements in the relative demand for money in st. louis (as compared with new york city), ... are fairly regular in their occurrence. from the beginning of the year until the fore part of may the demand appears to be moderate, exchange rates rule near par, and there is a moderate tendency for cash to move from st. louis to the eastern states, with almost no tendency to move in the opposite direction.... the first eighteen weeks of the year, st. louis bankers say, are a period of comparative inactivity in the local money market. concerning this period, a prominent st. louis banker writes: "for the first eighteen weeks in the year... there is comparatively no new york exchange making and also a nominal demand for it, and likewise an easy, quiet money market."... the second noticeable movement in the st. louis money market is the sharp decline in the relative demand for money from the fore part of may to about the first of june. exchange on new york rises rapidly at this time, and may is the month of heaviest shipments of cash to the east.... the high exchange rates in may, and the resulting eastward movement of money, are due largely to the fact that at about this time in st. louis the bills of boot, shoe, hardware, and dry goods merchants mature, and as their paper is held largely in the east, exchange is required in large amounts. the result is large payments to st. louis banks, the building up of their reserves, and resulting reduction of their credit balances in new york city. from the first of june to the first of november the demand for money in st. louis relative to that in new york city increases rapidly, advancing from the cheapest money in the year (twenty-first week) to the dearest money (forty-fourth week).... this greatly increasing relative demand for money in st. louis is, of course, attributable to the crop-moving requirements.... the cashier of a st. louis bank writes: "new york exchange... always goes to a discount here in the fall of the year, and this is caused by the large cotton drafts drawn in payment of cotton shipped out from the southwest. the banks down there either send us drafts drawn on new england points or new york, or else they send drafts drawn on the two large cotton buyers here, who, in turn, draw their drafts on eastern points. the result is a great deal of exchange comes in, for which there is a demand for currency." the resulting low rates of exchange continue as long as the cotton season lasts. during this crop-moving season there are heavy shipments of cash from st. louis to the southern states.... after about the first week in november the relative demand for money in st. louis falls off rapidly until about the first of december, and then fluctuates at a moderate level until the end of the year.... the rise in exchange and easing up of the st. louis money market in the latter part of november and in december is due to the decline in the crop-moving demand for cash, particularly in the south, and the return movement of cash from that section,... which begins the latter part of november. southern banks in settling their st. louis bills first use their eastern exchange and then ship currency. the upward movement of exchange is hastened shortly after the first of november by heavy purchases, for about four weeks, of new york exchange by dry goods, hardware, and boot-and-shoe houses for the purpose of settling their eastern accounts.... domestic exchange in san francisco on new york city [ ]... before taking up the subject of seasonal variations in san francisco domestic exchange rates on new york city, it may be well to observe that in a number of respects the san francisco domestic exchange market is a peculiar one. in the first place the principal kind of money in circulation is gold coin and this fact materially influences the range of domestic exchange fluctuations, _i. e._, the shipping points. concerning this matter i can do no better than quote from letters of mr. f. l. lipman of the wells fargo nevada national bank. mr. lipman writes (under date of february , ): "in the east the medium of exchange is paper or new gold by weight. in california it is current gold coin by tale, with a mingling of paper and new gold. the first effect of an upward movement of exchange, there, is that at about cents per $ , the currency shipping point is reached, which in due course, drains off our paper money. at approximately $ . per $ , the gold shipping point is reached. of course the only gold that can be economically shipped is new gold. now it not infrequently happens that the demand for remittance will be so great as to exhaust ( st) the currency and ( d) the new gold, leaving only our current gold, for which there is practically no shipping point, the discount on worn coin being practically prohibitory." a second peculiarity of the san francisco exchange market arises from the fact that san francisco, being the chief port city of the pacific coast and the seat of one of the united states mints and subtreasury offices, is the recipient of large quantities of gold from gold-producing regions, _i. e._, california, alaska, and australia. the united states mint will issue without any charge its transfer drafts on the subtreasury in new york in return for deposits of gold, the new product of mines, or for deposits of imported gold. "frequently," writes mr. lipman, "this usage is without influence on our local market, as when large importations of australian gold are received for new york on london account. at other times this practice of the treasury has a decided effect on our exchange market as, for instance, when the early gold shipments come down from alaska. these shipments command the service of the treasury department to the full amount thereof, while a portion at least of the proceeds is used in payment of local bills for supplies to alaska from this city. this throws on the market an additional supply of exchange when such exchange is desired. the owners of the gold, however, have the privilege of taking gold coin instead of eastern exchange from the treasury, and this alternative tends to bring exchange to about par. the government also influences exchange from the other side, by its willingness to transmit money by telegraph from new york and chicago to this city."... professor carl c. plehn of the university of california, suggests three other characteristics of the san francisco domestic exchange market, _i. e._, ( ) the close exchange relations with the orient, ( ) the fact that in san francisco, new york bills very frequently represent merely steps in a general arbitrage transaction, and ( ) the appreciable interest element involved in demand transactions because of the distance between san francisco and new york.... from the beginning of january to about the first of march there is a rapid decline in the relative demand for money in san francisco, resulting in the lowest level of the year during february. the average rate of exchange rose from cents discount in the first week to $ . premium in the seventh.... ... among the principal factors cheapening money in san francisco at this time and forcing up exchange may be mentioned: ( ) the fact that advances which have been made for the movement of general crops up and down the pacific coast are being repaid very rapidly; ( ) the demand for eastern exchange with which to pay bills incurred for holiday purchases; and, finally ( ), the latter part of february, the desire of taxpayers to discharge eastern obligations and get movable funds out of the state before the tax returns of the first monday in march are made to the assessor. from the fore part of march to the fore part of june the demand for money in san francisco relative to new york city tends to increase.... among the causes at work in reducing exchange rates at this time may be mentioned: ( ) the readjustment after the heavy demands for exchange which were made anticipatory of assessment day: ( ) preparation for the second installment of taxes which become delinquent the last monday in april; ( ) demand for funds by the large fruit canneries with which to buy sugar and tin in preparation for the annual fruit pack which begins in may; ( ) by may the shipping trade in green fruits has begun, giving rise to many eastern bills; ( ) demand for funds for equipping fishing companies going on long trips.... from about the st of july to the fore part of september there is an almost continuous increase in the relative demand for money in san francisco.... ... during august and september, particularly the latter month, substantial transfers of cash [are made] to san francisco by the united states subtreasury at new york. this decline in exchange is principally due to the large amount of eastern credits available locally at this time from the shipment of california products, especially green fruits, to eastern points; the returns for such shipments being usually available in either chicago or new york exchange.... the california hay and grain harvests cause considerable demand for funds by the middle of july, while the ships returning from the fisheries in august and september require large sums with which to pay their crews. from about the middle of september (thirty-fourth week) to the latter part of october (thirty-ninth week) new york exchange tends to rule at near par.... during these weeks the outward movements of grain, green fruit, and fish tend to force exchange down, while the fact that this is the quarter of large receipts of gold ... from alaska, making it a period of large receipts of gold bullion at the mint, and that the san francisco mint makes returns for this gold in gold coin or new york exchange, at the option of the owner of the bullion, tends to keep new york exchange at par. the demand for money in san francisco relative to new york city increases rapidly from the latter part of october to about the st of december when it reaches its highest point in the year.... november and december are the months of largest transfers of cash to san francisco by the united states subtreasury in new york. the fall in exchange during this period appears to be due primarily to the outward movement of dried fruits, such as raisins, prunes, and apricots. the banks pay out large amounts of actual coin which goes to the country, and receive in return drafts on eastern points which build up their eastern balances. this also represents the most active part of the northern grain season. the low point of the year for exchange is about the last week in november when the tax collector for the city and county of san francisco withdraws large sums of actual coin from circulation and locks much of it up in the vaults of the city hall. december is a month in which the relative demand for money in san francisco lightens considerably as the result of the rapid falling off of the crop-moving demand.... the demand for remittances to the east for january st settlements tends to force up exchange rates at the end of the year.... currency movements between new england and the eastern states [ ]... the distance between new york city and the principal new england cities is very small, and there is a great community of financial interest among these cities and new york. between new york city and boston the currency shipping points are only about cents premium and cents discount. single financial deals between new york city and boston are frequently of sufficient moment to lead to considerable shipments of currency, although exchange rates previously were only moderate. the relations among the clearing-house banks of boston and among those of other new england cities are close, so that when one bank is in need of new york funds it is liable to obtain them from another which may have more than it needs. for this reason, it is said, much less money is now received from new york city and shipped there than was the case a few years ago.... the domestic exchanges during the crisis of [ ] there is no part of our banking machinery which has received so little elucidation as that of the domestic exchanges. even for normal times the subject is obscure, and the writer therefore ventures upon an explanation of its course during a period of crisis with hesitation, and he is by no means confident that important considerations may not have been overlooked. as in the case of foreign exchange, domestic exchange rates fluctuate within limits fixed by the cost of shipping money, and also, in the case of cities distant from new york, by the loss of interest while currency is in transit. the quoted rates apply principally to business between banks, the rates being determined by demand and supply. a boston bank, for example, receives from its customers new york drafts and also checks drawn on banks in new york and its vicinity. all these items will serve to build up its balances in that city. on the other hand, its depositors have been sending out checks, many of which will in the course of time reach new york and reduce its balances there. the boston bank will also have received from banks of new york and from banks elsewhere items for collection in its vicinity, and remittance in ordinary course will be made by it in new york funds. similarly it has sent away items for collection to banks in other cities upon which it expects a like remittance. as a result of all these various influences the balances of the boston bank may either increase or decrease. if they increase it may be ready to sell exchange to other boston banks whose balances are running low. it may also happen that the bank is desirous of reducing its new york balances, and in that case it will also appear as a seller of exchange in the market. now, if in the course of a crisis clearing-house loan certificates become the principal or sole medium of payment between banks, it may well happen that a bank will be unwilling to sell exchange unless it is unusually well supplied with new york funds. by the sale of exchange it can at best only secure a favorable clearing-house balance, which will be settled in loan certificates, and if this balance should be unfavorable it can meet it by taking out certificates on its own account. each bank, therefore, to a greater extent than in normal times, is obliged to rely upon itself for means of payment in new york. the loan certificate does indeed yield a return or involve an expense of or per cent., while the return on new york balances is only per cent. this advantage does not, however, seem to have induced the banks to sell exchange as freely as in normal times. this is, however, not the only disturbing influence. the boston bank may have remitted to new york upon items collected by it for other banks--let us say those of philadelphia--but it may happen that the philadelphia banks delay or even discontinue remitting to new york upon items sent to them for collection by banks of boston and other cities. the boston bank can then no longer rely upon what would normally serve to build up its own new york balances. it will be simply acquiring a mass of unavailable credits at scattered points throughout the country. the supply of new york exchange which it might have been willing to sell is consequently diminished, and the premium on exchange must rise to a point at which it will tempt some of the banks to sell exchange, even though it intrenches upon their balances with agents which are available for reserve. the premium would naturally be especially high in those cities where the banks were most unwilling to reduce their new york balances. philadelphia seems a case in point, as its deposits with reserve agents, which were $ , , on august , were reduced to only $ , , on december . at that time the premium on currency in philadelphia ranged from $ . to $ per $ , . it is, therefore, a reasonable conclusion that the banks were strongly disinclined to make use of their new york balances. in a few cities it is probable that the premium reached a high level because the banks had exhausted their new york balances. st. louis may be mentioned as a probable example. being a central reserve city, its banks would naturally have only such balances in new york as normal business requirements made necessary. the dislocation of exchange elsewhere or the course of payments between new york and st. louis may have combined to produce such a balance of payments as would have required currency shipments if the st. louis banks had remitted promptly to new york. the extent to which banks in different cities delayed or refused to remit to new york on items collected by them for other banks cannot be determined. banks in one city, very naturally and honestly, were inclined to lay the blame upon banks elsewhere. the banks in other places, however, may not have been able to secure payment of the items sent to them for collection from other banks in their locality with the usual promptness. when every allowance has been made, however, there can be no question that banks in certain cities, in these as well as in other matters, adopted a policy wholly designed to strengthen themselves regardless of consequences. the general prevalence of the premium on new york exchange is, as we have seen, accounted for in part by the use of clearing-house loan certificates in settling balances between banks and by the delay in remitting in new york funds upon items collected for other banks. it seems probable, however, that, taking the country as a whole, the course of payments was favorable to the new york banks. at the beginning of november withdrawals for crop-moving purposes have in recent years begun to diminish, except to the south, and movements of money from eastern centers are distinctly in favor of new york at that season of the year. if this were indeed the case in , it affords still another reason for thinking that the new york banks might have met the crisis successfully without restricting payments. they would probably have been obliged to meet only withdrawals arising from lack of confidence and not real needs for crop-moving purposes, such as would have increased the difficulties of the situation had the crisis begun at the beginning of september. finally, it should be noted that the restriction of cash payments to depositors and the currency premium seem to have increased the demand for new york exchange. only in that city was it possible to buy any considerable quantity of money. many banks in various parts of the country purchased gold and currency at a premium in new york and, instead of drawing on their own balances, then entered their home market as purchasers of exchange which was remitted in payment. in the few instances where exchange was below par the currency premium was a more direct influence; but exchange could not have dropped to the low figures recorded in in the case of chicago [$ discount per $ , ], because the chicago banks in did not maintain payments among themselves as they had done on previous occasions. exchange was at a discount only in those cities where the course of payments was so strongly against new york that practically all the banks found their balances in that city increasing. chicago might have been expected to belong to this group, but its banks made extensive use of bills derived from grain exports to secure gold which was shipped directly to them. in general, exchange was at a discount, or at par only, in the southern states, the banks of which, by means of cotton sales, are normally in position to draw money from the northeastern part of the country during the late autumn. in conclusion, it should perhaps be pointed out that the quoted rates of exchange were often without much significance. the ordinary course of dealings was so completely disorganized in many places that the rates were purely nominal, representing little or no actual transactions. footnotes: [ ] frank a. vanderlip, _modern banking_, three addresses delivered at chautauqua, new york, august, , pp. - . the national city bank. new york. [?]. [ ] e. w. kemmerer, _seasonal variations in the relative demand for money and capital in the united states_. publication of the national monetary commission, senate document no. , st congress, _ d session_, pp. - . [ ] [owing to the growth of deposit banking among the farming classes, the increasing diversification of industry in the agricultural states, _sub-treasury operations_, and the offer of remunerative rates of interest on loans in new york during the fall, the net autumnal currency movement since has frequently been to new york. see e. m. patterson, _certain changes in new york's position as a financial center_, _journal of political economy_. vol. xxi, june, , pp. - .] [ ] e. w. kemmerer, _op. cit._, pp. - . [ ] _ibid._, pp. - . [ ] _ibid._, . . [ ] o. m. w. sprague, _history of crises under the national banking system_, publications of the national monetary commission, senate document no. , st congress, _ d session_, pp. - . chapter xviii foreign exchange the nature of foreign exchange [ ]the bill, or order to pay money in a foreign centre, is the commodity that is actually bought and sold by dealers in foreign exchange, but it is better for the moment to leave bills out of consideration. they are only the tangible expression of the claim for money in another centre, and at this early stage of our inquiry it is better to keep our minds fixed on what is at the back of the bill, namely, the money in a foreign centre to which it gives its holder a claim. the french buyer of a bill on london buys it, as a rule, because by sending it to his english correspondent he can discharge a debt to him in english money. what he really buys with his francs is so many english pounds, and the labyrinth of the foreign exchanges is much easier to thread if, before we complicate the question by talking about bills, we keep our eye on the comparatively simple problem which is the key to the puzzle, namely, the exchange of one country's money for another's. thus stripped to its naked simplicity, the problem begins to look as if it were not a problem at all, and a critical inquirer may be excused for thinking that at least in the case of countries that use currencies based on the same metal, there ought to be no need for daily quotations of rates of exchange, because the relative value of their moneys ought to be constant. it is a natural question to ask, why should there be these daily fluctuations, and, since they are evidently there, what is the sense or purport of them? the answer is, that money in france and money in england are two different things, and the relative value of two different things is almost certain to fluctuate. quite apart from any differences in the fineness of gold coined by two different countries, or the ease or difficulty with which a credit instrument can be turned into gold, mere distance is quite enough to make the difference that will create fluctuation in price. new york and chicago use exactly the same currencies, but money in new york differs from money in chicago by being nearly a thousand miles away, and consequently there are frequent variations in their relative value. the english and australian sovereigns are identical in weight and fineness, but there is constant fluctuation in the buying power of the english sovereign as expressed in its brother that is circulating in the antipodes. these fluctuations are based on the same influence that sways the movements in the prices of all goods and services that are bought and sold, that is, the influence of supply and demand. just as the price of boots, consols, medical advice, football professionals, or anything else that can be the subject of a bargain, will depend in the end upon the number of people who want to buy them compared with that of those who want to sell them, at or near a certain figure, so the price of english pounds, when expressed in francs, guilders, milreis, or australian sovereigns, depends on the number of people abroad who have to buy money in england as compared with the number of those who have money in england to sell. people abroad have to buy money in england when they owe money to englishmen and want to pay it; and they have money in england to sell when englishmen owe them money. jacques bonhomme in paris has been selling shiploads of christmas kickshaws to john robinson in london, and so has thousands of english pounds due to him by the said robinson. but english pounds, as such, are not wanted by m. bonhomme. he wants to sell them, to turn them into francs, the currency of his own country, with which he makes his daily payments at home. on the other hand, there are always plenty of frenchmen who have imported english goods or have had services rendered by english bankers, or shipowners, or insurance companies, and so want to buy english money wherewith to pay their english creditors. so it follows that the price that m. bonhomme will get for his english pounds will depend on the value of goods and services that other frenchmen have been selling to england, so producing english pounds to be sold in paris, as compared with the value of the claims that have to be met in london, for the satisfaction of which english pounds have to be bought. if the amount of english money on offer is bigger than the amount wanted, down will go the price of the english pound as expressed in francs, and the seller in francs will get less in francs for his pound. if the amount of english money wanted is the bigger, the price will go up, and the seller will get more for his pound. when the price goes down, the exchange is said to move against london, because there is a depreciation in the value of the sovereign as expressed in francs. when it goes up the exchange moves in favour of london, because the buying power of the sovereign is enhanced. the process is exactly the same, and is even more simple and easy to understand when we take away the complication of the exchange of the moneys of two different nations, and look at it at work between two distant towns of the same country. if in the course of trade new york has large payments to make in chicago, money in chicago will be wanted in new york, and competition there will send up the price of it, so that a dollar in chicago will be worth more for the time being to new yorkers than a dollar in new york, and any new york bank or firm that has a balance or a credit in chicago will be able to dispose of it at a premium. the extent of this premium, however, will obviously be limited by the expense involved in sending lawful money, as the americans call it, from new york to chicago. if we suppose, for the sake of simplicity, that the cost of sending a dollar and insuring it is covered by a cent, no one in new york will pay much more than one dollar and a cent for a dollar in chicago. rather than do so he will send his dollar. he will probably pay a small fraction more to save himself the trouble and time involved by sending and insuring money, and this minute fraction that he will sacrifice is the opportunity of the exchange dealer, who will send money to chicago, and put himself in funds there, and so be able to supply money in chicago to any one in new york who will pay for it at the rate of one dollar and one cent plus any profit that the exchange dealer can squeeze out of him. viewed in this simple example the problem of exchange has few terrors. it is merely a question of the price of money in one place, as expressed in the same money in another, with fluctuations governed by supply and demand and limited by the cost of sending money from place to place. this limitation does not mean that supply and demand cease to govern the market, but merely that at a point supply can be increased to meet any demand by the despatch of currency. "favourable" and "unfavourable" exchanges [ ]the general feeling with regard to the function of the exchanges, as giving evidence of the mercantile (or rather monetary) situation of any country, is indicated by the usual phrase of a "favourable or unfavourable state of the exchanges." a phrase which occurs so frequently in all banking discussions that it cannot be passed over without remark. it may originally have implied the erroneous theory that the object of commerce is to attract gold, and that that country towards which the tide of bullion sets with the greatest force is _ipso facto_ the most prosperous. political economists, from their point of view, are correct in their statement that, as regards the country at large and the interchange of commodities, exports and imports are always balanced, and that both the words "unfavourable balance of trade" and "unfavourable exchanges" involve fallacy. but merchants and bankers are influenced by the feeling, that at any given moment they may be under greater liabilities for imports than they can temporarily meet, owing to the system of credit which disturbs the coincidence of payments for exports and imports, though their value may actually be equal; and further, by the anxiety as to the possibility of meeting these liabilities in that specific mode of payment to which they are pledged, namely, in gold or convertible notes. when, therefore, in banking treatises, it is said that the exchanges are favourable to any particular country, it should be understood that the intention is simply to state the fact that bills of that country upon foreign cities are difficult of sale, whilst bills drawn upon it from abroad are at a premium, indicating an eventual influx of specie. so, when it is said that the exchanges are unfavorable, a situation is described in which foreign bills are in great demand, and when, consequently, their value seems likely to be so enhanced as to render the export of bullion an unavoidable alternative. the origin and supply of foreign exchange [ ]underlying the whole business of foreign exchange is the way in which obligations between creditors in one country and debtors in another have come to be settled--by having the creditor draw a draft directly upon the debtor or upon some bank designated by him. john smith in london owes me money. i draw on him for pounds, take the draft around to my bank and sell it at, say, . , getting for it a check for $ . . i have my money, and i am out of the transaction. the fact that the gold in a new british sovereign (or pound sterling) is worth $ . in our money by no means proves, however, that drafts payable in pounds in london can always be bought or sold for $ . per pound. to reduce the case to a unit basis, suppose that you owed one pound in london, and that, finding it difficult to buy a draft to send in payment, you elected to send actual gold. the amount of gold necessary to settle your debt would cost $ . , in addition to which you would have to pay all the expenses of remitting. it would be cheaper, therefore, to pay considerably more than $ . for a one-pound draft, and you would probably bid up until somebody consented to sell you the draft you wanted. which goes to show that the mint par is not what governs the price at which drafts in pounds sterling can be bought, but that demand and supply are the controlling factors. there are exporters who have been shipping merchandise and selling foreign exchange against the shipments all their lives who have never even heard of a mint par of exchange. all they know is, that when exports are running large and bills in great quantity are being offered, bankers are willing to pay them only low rates--$ . or $ . , perhaps, for the commercial bills they want to sell for dollars. conversely, when exports are running light and bills drawn against shipments are scarce, bankers may be willing to pay . or . for them. for a clear understanding of the mechanics of the exchange market there is necessary a clear understanding of what the various forms of obligations are which bring foreign exchange into existence. practically all bills originate from one of the following causes: . merchandise has been shipped and the shipper draws his draft on the buyer or on a bank abroad designated by him. . securities have been sold abroad and the seller is drawing on the buyer for the purchase price. . foreign money is being loaned in this market, the operation necessitating the drawing of drafts on the lender. . finance-bills are being drawn, _i. e._, a banker abroad is allowing a banker here to draw on him in pounds sterling at or days' sight in order that the drawer of the drafts may sell them (for dollars) and use the proceeds until the drafts come due and have to be paid. . looking at these sources of supply in the order in which they are given, it is apparent, first, that a vast amount of foreign exchange originates from the direct export of merchandise from this country. not all merchandise is drawn against; in some cases the buyer abroad chooses rather to secure a dollar draft on some american bank and to send that in payment. but in the vast majority of cases the regular course is followed and the seller here draws on the buyer there. . the second source of supply is in the sale abroad of stocks and bonds. origin of bills from this source is apt to exert an important influence on rates, in that it is often sudden and often concentrated on a comparatively short period of time. the announcement of a single big bond issue, often, where it is an assured fact that a large part of it will be placed abroad, is enough to seriously depress the exchange market. bankers know that when the shipping abroad of the bonds begins, large amounts of bills drawn against them will be offered and that rates will in all probability be driven down. . the third great source of supply is in the draft which bankers in one country draw upon bankers in another in the operation of making international loans. the mechanism of such transactions will be treated in greater detail later on, but without any knowledge of the subject whatever, it is plain that the transfer of banking capital, say from england to the united states, can best be effected by having the american house draw upon the english bank which wants to lend the money. the arranging of these loans means the continuous creation of very large amounts of foreign exchange. . drawing of so-called "finance-bills," is the fourth source whence foreign exchange originates. whenever money rates become decidedly higher in one of the great markets than in the others, bankers at that point who have the requisite facilities and credit, arrange with bankers in other markets to allow them (the bankers at the point where money is high) to draw or days' sight bills. these bills can then be disposed of in the exchange market, dollars being realized on them, which can then be loaned out during the whole life of the bills. these are the principal sources from which foreign exchange originates--shipments of merchandise, sales abroad of securities, transfer of foreign banking capital to this side, sale of finance-bills. other causes of less importance--interest and profits on american capital invested in europe, for instance--are responsible for the existence of some quantity of exchange, but the great bulk of it originates from one of the four sources above set forth. the sources of the demand for foreign exchange[ ] turning now to consideration of the various sources from which spring the demand for foreign exchange, it appears that they can be divided about as follows: . the need for exchange with which to pay for imports of merchandise. . the need for exchange with which to pay for securities (american or foreign) purchased by us in europe. . the necessity of remitting abroad the interest and dividends on the huge sums of foreign capital invested here, and the money which foreigners domiciled in this country are continually sending home. . the necessity of remitting abroad freight and insurance money earned here by foreign companies. . money to cover american tourists' disbursements and expenses of wealthy americans living abroad. . the need of exchange with which to pay off maturing foreign short-loans and finance-bills. . payment for merchandise imported constitutes probably the most important source of demand for foreign exchange. practically the whole amount of our huge importations has had to be paid for with bills of exchange. whether the merchandise in question is cutlery manufactured in england or coffee grown in brazil, the chances are it will be paid for by a bill of exchange drawn on london or some other great european financial centre. . the second great source of demand originates out of the necessity of making payment for securities purchased abroad. so far as the american participation in foreign bond issues is concerned, the past few years have seen very great developments. security operations involving a demand for foreign exchange are, however, by no means confined to american participation in foreign bond issues. accumulated during the course of the past half century, there is a perfectly immense amount of american securities held all over europe. the greater part of this investment is in bonds and remains untouched for years at a stretch. but then there come times when, for one reason or another, waves of selling pass over the european holdings of "americans," and we are required to take back millions of dollars' worth of our stock and bonds. such selling movements do not really get very far below the surface--they do not, for instance, disturb the great blocks of american bonds in which so large a proportion of many of the big foreign fortunes are invested. the same thing is true with stocks, though in that case the selling movements are more frequent and less important. . so great is the foreign investment of capital in this country that the necessity of remitting the interest and dividends alone means another continuous demand for very large amounts of foreign exchange. estimates of how much european money is invested here are little better than guesses. the only sure thing about it is that the figures run well up into the billions and that several hundred millions of dollars' worth of interest and dividends must be sent across the water each year. at the interest periods at the beginning and middle of each year it becomes apparent how large a proportion of our bonds are held in europe and how great is the demand for exchange with which to make the remittances of accrued interest. at such times the incoming mails of the international banking houses bulge with great quantities of coupons sent over here for collection. for several weeks on either side of the two important interest periods, the exchange market feels the stimulus of the demand for exchange with which the proceeds of these masses of coupons are to be sent abroad. . freights and insurance are responsible for a fourth important source of demand for foreign exchange. a walk along william street in new york is all that is necessary to give a good idea of the number and importance of the foreign companies doing business in the united states. in some form or other all the premiums paid have to be sent to the other side. times come, of course, like the year of the baltimore fire, when losses by these foreign companies greatly outbalance premiums received, the business they do thus resulting in the actual creation of great amounts of foreign exchange, but in the long run--year in, year out--the remitting abroad of the premiums earned means a steady demand for exchange. with freights it is the same proposition, except that the proportion of american shipping business done by foreign companies is much greater than the proportion of insurance business done by foreign companies. an estimate that the yearly freight bill amounts to $ , , is probably not too high. that means that in the course of every year there is a demand for that amount of exchange with which to remit back what has been earned from us. . tourists' expenditures abroad are responsible for a further heavy demand for exchange. the sums spent by american tourists in foreign lands annually aggregate a very large amount--possibly as much as $ , , --all of which has eventually to be covered by remittances of exchange from this side. then again there must be considered the expenditures of wealthy americans who either live abroad entirely or else spend a large part of their time on the other side. by these expatriates money is spent extremely freely, their drafts on london and paris requiring the frequent replenishment, by remittances of exchange from this side, of their bank balances at those points. furthermore, there must be considered the great amounts of american capital transferred abroad by the marriage of wealthy american women with titled foreigners. such alliances mean not only the transfer of large amounts of capital _en bloc_, but mean as well, usually, an annual remittance of a very large sum of money. no account of the money drained out of the country in this way is kept, of course, but it is an item which certainly runs up into the tens of millions. . lastly, there is the demand for exchange originating from the paying off of the short-term loans which european bankers so continuously make in the american market. these loaning operations, it must be understood, both originate exchange and create a demand for it. they were mentioned as one of the sources from which exchange originates, and now as one of the sources from which, during the course of every year, springs a demand for a very great quantity of exchange. in a general way, it may be pointed out, the sources of demand for exchange conform with influences which cause exchange to go up, and the sources of supply of exchange constitute causes which make for low rates. it is to be noted, however, that money rates are a great factor influencing foreign exchange. whenever money is cheap at any given centre, and borrowers are bidding only low rates for its use, lenders seek a more profitable field for the employment of their capital. money rates in the new york market are not often less attractive than those in london, so that american floating capital is not generally employed in the english market, but it does occasionally come about that rates become abnormally low here and that bankers send away their balances to be loaned out at other points. such a time was the long period of stagnant money conditions following the panic. trust companies and banks who were paying interest on large deposits at that time sent very large amounts of money to the other side and kept big balances running with their correspondents at such points as amsterdam, copenhagen, st. petersburg, etc.--anywhere, in fact, where some little demand for money actually existed. demand for exchange with which to send this money abroad was a big factor in keeping exchange rates at their high level during all that long period. high money rates at some given foreign point as a factor in elevating exchange rates on that point might almost be considered as a corollary of low money here, but special considerations often govern such a condition and make it worth while to note its effect. suppose, for instance, that at a time when money market conditions all over the world are about normal, rates, for any given reason, begin to rise at some point, say london. instantly a flow of capital begins in that direction. in new york, paris, berlin, and other centres it is realized that london is bidding better rates for money than are obtainable locally, and bankers forthwith make preparations to increase the sterling balances they are employing in london. exchange on that particular point being in such demand, rates begin to rise, and continue to rise, according to the urgency of the demand. the international money markets are a most decidedly complex proposition, and there is literally never a time when several influences tending to put exchange rates up are not conflicting with several influences tending to put rates down. the actual movement of the rate represents the relative strength of the two sets of influences. to be able to "size up" the influences present and to gauge what movement of rates they will result in, is an operation requiring, first, knowledge, then judgment. the former qualification can perhaps be derived, in small degree, from study of the foregoing pages. the latter is a matter of mental calibre and experience. methods of financing imports and exports[ ] the foreign trade of the united states has increased during the last forty years about per cent.... this increase ... reflected not alone our own marvellous development, but as well the wonderful growth of trade throughout the world. the united states stands third among the countries of the world, its foreign trade being exceeded only by that of the united kingdom ... and germany.... our imports and exports[ ] are being financed more and more by means of what are known as commercial letters of credit.... an explanation of the operation of the commercial letter of credit will ... disclose the methods and conditions under which our imports are financed. the commercial letter of credit is an authorization, say of an american bank to its london correspondent, to honor drafts for its account drawn at various tenors by foreign shippers or others against shipments of merchandise to this country. these credits are of two kinds, documentary and clean. under the documentary credit the london bank is authorized to accept drafts for the account of the american bank only when the bill of exchange is accompanied by certain documents described in the letter of credit. these documents may be the bills of lading for the goods, consular invoices, insurance certificates and possibly other papers. probably a large proportion of such credits requires that drafts be drawn at sixty or ninety days' sight. so many elements of danger are involved in financing commodities under commercial letters of credit, even where the control of the goods is given to the bank issuing the credit or its agents, that the financial standing of those asking for credits must be the first consideration in their issuance. dishonesty on the part of the shipper, resulting in a drawing under the credit against forged documents or against shipments of inferior merchandise, is always possible, and the financial responsibility of the buyer of the credit is all that stands between the banker issuing the credit and a loss in such cases. in order to obtain a clear understanding of the working of a commercial letter of credit, we will take a concrete example and follow its every transaction. an importer of coffee (a) in new york purchases a certain number of bags of coffee from an exporter (b) in brazil. a agrees to furnish b with a commercial letter of credit. b is not in position, we will say, to await the arrival of the coffee in new york and the return of a remittance before receiving his pay. a on the other hand is unable to remit b for the coffee before its receipt and sale to his customers. a goes to his banker in new york and requests him to authorize b to draw upon the new york banker's london correspondent at ninety days' sight with bills of lading for coffee to the amount of the purchase attached to the draft, consular invoice and insurance certificate, if b is to furnish insurance. if a's banker is willing to extend the credit he writes a letter (or uses a printed form), requesting his london banker to accept b's drafts upon presentation under the conditions already mentioned and others of minor importance. this letter is issued in duplicate, one copy going to the london banker, the other being delivered to a. a then mails the copy received by him to b. b thereupon arranges to ship the coffee, obtains the bill of lading, invoice, etc., and takes them with the copy of the credit to his banker in brazil. a draft is then drawn on the london bank under the terms of the credit at ninety days' sight and is discounted by the brazilian banker, the proceeds being placed to the credit of b's account or given to him in the form of a check or cash. the brazilian banker then forwards the draft and documents, except such documents as the instructions may require to be forwarded direct to new york, to his london banker. he may secure discount of the bill at once by cable or await its arrival in london before doing so, or he may request his london banker to have the bill accepted and hold it for maturity. if the bill is discounted the brazilian banker may draw against it immediately and thus put himself in funds to purchase other coffee bills. upon receipt of the bill by the london correspondent it is presented to the london banker on whom it is drawn for acceptance. the acceptor bank examines the documents and if they are drawn according to the terms of the credit accepts the draft and returns it to the correspondent of the brazilian bank, retaining the documents, which it then forwards to the new york bank which opened the credit. in accepting the draft the london bank has in effect agreed to pay it at the end of ninety days, or, figuring grace, ninety-three days. upon maturity payment is made and the amount is charged to the account of the issuing new york bank. upon receipt of the documents the new york bank delivers them to its customer under a trust receipt or against collateral, and the latter is then in position to obtain the goods. ten days before the bill of exchange is due in london the new york bank collects the amount from a, together with the commission agreed upon when the credit was opened, and remits the amount to its london banker to meet the draft. on all such transactions the london banker, while not himself advancing any money, is extending a credit for which he charges the new york bank a commission. the result is that we are paying tribute to european bankers amounting to an immense sum annually for the purpose of financing our imports. the fact that london exchange is more marketable generally throughout the world than new york exchange is one of the principal reasons why it is necessary for us to issue credits upon london instead of upon new york. our imports are distributed generally throughout the united states. the importers, however, are mostly situated at the ports of entry. a very large proportion of them obtain their credits through new york institutions, although some of them deal direct with foreign bankers. probably a smaller proportion of our exports is financed by means of commercial letters of credit than of our imports. different commodities are handled in accordance with special customs which have grown up around them, due partly to trade conditions and partly to the nature of the products. sellers of grain usually draw at sixty days' sight upon the foreign buyer instead of under a bank credit. these bills, under the customs prevailing in most foreign countries, may be rebated by the foreign buyer whenever he desires to obtain the goods at the "bank rate" or per cent. under the bank rate, or such other rate as custom in the country on which the drafts are drawn requires. such drafts, with bills of lading and such other documents as are necessary, are purchased by american banks and are forwarded by them to their european correspondents. the american banker is obliged to advance the money on such paper, unless he draws his own time bills against them, until such time as they are rebated. in the case of grain bills the average time rebated is probably around fifty-six days, which places the american bank in possession of demand foreign exchange, against which it can draw in order to reimburse itself with the loss of a very few days' interest. flour bills, which are financed in the same manner as grain bills, usually run nearly to maturity before they are rebated, although the condition of the discount market sometimes influences the purchaser, and causes him to take the bills up more promptly. many foreign shipments are made under three-day sight bills, which uses the money of the american banks making the advance from four to seven days or more, depending upon whether the laws of the country on which the bills are drawn allow grace or not and whether the bills are purchased with intervening days before the sailing of steamers. other classes of bills are drawn at sight. this includes a portion of our lumber shipments and miscellaneous articles. where shipments are made on sailing vessels, drafts are frequently drawn at four or six months' sight, and many other transactions go through against cable payments. as nearly per cent. of our exports consist of cotton, the method under which it is financed is worthy of special consideration. cotton bills are ordinarily of two kinds: documentary payment bills and bills drawn upon bankers. documentary payment bills, which are drawn upon cotton merchants or spinners at sixty or ninety days' sight or other tenors, are handled in the same manner as flour bills. the cotton merchant accepts the draft upon presentation and rebates it when the goods arrive, or when he desires to obtain the cotton. a small percentage of cotton is handled in this way. most of the commodity is financed by means of credits opened by the foreign buyer through his banker. various abuses have developed under this system, which have caused losses running into millions of dollars to all of the various parties engaged in carrying the transactions to their close. these losses have only been possible because of the turning over of credits by the foreign buyers to irresponsible concerns in america in their endeavor to obtain cotton at lower prices than their competitors. a foreign buyer makes arrangements with certain american concerns to cable him offers of cotton. the american firms whose offers are accepted receive cablegrams from the buyer advising them of the acceptance of their offers and giving them the names of the foreign bankers on whom the drafts in payment of the cotton are to be drawn. the american sellers thereupon ship the cotton to the buyer under bills of lading drawn to the shipper's order and endorsed in blank. the bills of lading are then attached to drafts drawn upon the bankers designated by the buyer at the given tenor, which is usually sixty or ninety days. this exchange is then sold in the market to the highest bidder or it is forwarded to new york to be sold in the same manner upon arrival. the american exchange buyers have no means whatever of designating whose bills shall be upon the market, as the sellers are all agents of the european buyers. the american exchange houses in their need for exchange to meet the demands of their importers have accepted the bills offered in the market, each exchange man endeavoring to keep his "water line" on weak names as low as possible. if the european buyers only dealt with first-class houses only first-class bills would be offered, but when they deal with second- or third-rate houses, or houses with no standing whatever, such bills drawn upon prime european banks come upon the market. the american exchange buyers having the cotton as collateral while the drafts are on the water, and then having the acceptance of a prime european bank for the sixty or ninety days following before maturity of the draft, have accepted these risks, although unwillingly, for want of better bills. they endeavor to protect themselves as far as possible by trying to buy bills only of those in whose honesty they have reason to believe, whether they have any capital back of them or not. if the cotton were actually shipped under a bona fide order, any fluctuation in the value of the cotton which they accepted as collateral, although taken entirely without margin, would probably cause them neither loss nor friction. they have run the risk, however, of having forged documents forced upon them which did not represent goods, or exchange that was drawn without authority. lines which exchange buyers are willing to take from each cotton shipper before acceptance, and before the name of a prime european banker is added to the paper, have to be based upon this consideration. the old form of the cotton bill of lading which has been signed by freight agents or their assistants or others has been an instrument not possible to authenticate. this was particularly dangerous, due to the manner in which bills of lading were issued. they were formerly given out to the shippers, who filled them in and returned them to the railroad agent, who in turn often signed them without having any knowledge as to whether the goods called for by the bill of lading were in his possession or not. under a new system bills of lading are not to be given up until the goods are actually in possession of the railroads. this system, which calls for validation certificates, numbered and printed upon a specially protected water-mark paper, to be attached to the bills of lading in such manner as to make it practically impossible to remove them without detection, went into effect september , , and it is confidently hoped that it will give sufficient added safety to the bills of lading of american railroads to satisfy the foreign bankers. the very act of guaranteeing such bills is recognized by foreign bankers as being wrong in principle, and while they are requesting that american exchange buyers guarantee bills of lading for exports yet on the other hand they particularly call attention to the fact that no bills of lading which pass through their hands for imports to the united states are guaranteed by them in any way, shape, or manner. credit risks of drafts drawn on buyers abroad [ ]many american manufacturers do not realize the essential "credit" element of transactions on the basis of drafts drawn on _foreign customers_.... the exporter has received an order; he purchases the goods covered by this order from the manufacturer, and should the customer change his mind the exporter may suffer a loss. or the customer refuses to accept the goods, and the exporter may again suffer a loss. or the customer may accept the goods and the draft, but fail to pay, and the exporter once more is the loser.... ... the turning over of the bill of lading vests the property right to the goods in the customer. the customer either pays the value of the draft in cash ("documents against payment," abbreviated d/p) or accepts the draft for payment at some future date, which is the more customary course ("documents against acceptance," d/a). even in the case of d/p drafts, payment by the customer may be postponed; instead of paying cash he accepts the draft at one to three months, but neither the documents nor the goods are turned over to him. he may want to wait until he has sold the goods, on the basis of samples, perhaps, and the goods are warehoused until he can pay the amount of the draft into the bank or to the forwarding agency. this is frequently done in the far east. here the banks maintain so-called "godowns" for this purpose. the goods are occasionally turned over to the customer for warehousing purposes against the so-called "trust receipt." one important feature of "acceptance" of the draft by the customer is the fact that it forms an acknowledgment of indebtedness, which it is then unnecessary to prove item by item in case of litigation. in most countries acceptances are far simpler to collect judicially than open accounts. when an accepted draft is unpaid it is "protested," and the debtors may be proceeded against without further trouble. frequently open accounts may be neglected by a customer who may find himself for some reason short of immediately available funds, but to neglect the payment of an accepted draft is regarded in the trade and by banks as so serious a matter that the drawee would lose caste with the banks; oversea buyers endeavor in most cases to honor accepted drafts.... england draws few bills, but accepts many--the reason and the result [ ]it has been shown that, if two countries buy of each other to the same amount, their transactions need not give rise to two separate sets of bills, but that on the contrary, if the foreigner draws on us to the full value of his exports, the bills so created will be sent as remittances to the exporter on this side and will pay him for his sales. conversely, if the british exporter draws, there is no necessity for the other side to do so. what, then, are the facts? does the united kingdom, generally speaking, draw on abroad, or does the foreigner take the initiative by drawing on london? as a matter of fact, both sides draw; but, as all who are acquainted with the customs of trade are well aware, the bills drawn by great britain on abroad are vastly outnumbered by those drawn from abroad on london. owing chiefly to the magnitude of our trade, but also to several contributory causes--such as the stability of our currency; the certainty that a bill on london means gold and nothing but gold; the facility with which those who deserve credit can obtain it here; our freedom from invasion, etc.--london has become to a great extent the settling-place of europe and the world, and the seller, wherever he may be, of a good bill on london can always be sure of finding a buyer and of realizing a fair price. as the sale of a bill, moreover, carries the valuable advantage of ready money and a speedy turnover of capital, it is invariably preferred by the foreign exporter, who has consigned or sold produce to us, to the alternative plan of awaiting remittances from this side. the foreign importer, too, who has to pay for the goods he has bought, would rather do so by remitting to london than by allowing us to draw upon him. in the former case, the rate he has to pay depends upon his own success in higgling; in the latter, it is fixed by a london bill-broker, who has not the same interest in the matter. if the same considerations held good on this side also, our merchants and manufacturers might perhaps object to letting the foreigner have it all his own way; but, on the contrary, it appears to suit both buyers and sellers very well--the former, because in the majority of cases they would scarcely know how or where to buy suitable bills, and the latter, because the drawing and negotiation of a foreign bill requires a certain amount of knowledge of the exchanges, which they do not always possess, and entails a certain amount of trouble, which they would gladly be spared. there is also more risk of loss in drawing. in the latter case they have only their correspondent to look to, while on a london remittance they have the additional security of the other parties to the bill. practically speaking, therefore, the settlement of our foreign trade is effected by means of bills of exchange which are drawn and negotiated abroad, and are accepted and paid in london. to the student of the exchanges this fact is of considerable importance, for, as the rate of exchange between two countries--the price at which bills on the one are sold in the other--must be _fixed by the one that draws and negotiates the bill_, it follows that the exchanges between england and most other countries are controlled from the other side, and that we in london have scarcely part or say in the matter. the rate of exchange, for example, between england and the united states is fixed in new york; between england and brazil, in rio; between england and turkey, in constantinople; and so on. there may be exceptions, of which the indian exchange is the most notable, but that is the general rule, and it is one that should be carefully borne in mind. the same fact also supplies a reason for the solicitude with which the foreign trader watches the fluctuations of the exchange, and for the utter indifference with which they are regarded by the british trader. to the former, who intends maybe to draw a few hundred pounds on london in a day or two against the shipment he is preparing, the difference between selling his draft next week instead of this may mean, if the rate should move in his favor, the gain of an additional half per cent.; but to our home manufacturers, who sell their wares in sterling and stipulate for payment in bills on london, the see-saw of rates is but of academic interest. they pay attention to the _course of discount_, because they may have to melt some of their paper before pay-day comes round; but the course of the exchange--the question of the rate rising or falling--hardly concerns them at all. it is not sought to detract from the influence of the english-drawn foreign bill, or, as might be imagined, to explain it away altogether. on the contrary, paper to a considerable amount is, and will continue to be, negotiated on the royal exchange (though the total, if compared with that of the paper on london negotiated abroad, would appear quite insignificant).[ ] the object in view is merely to bring into prominence, and to impress on the reader, the essential principle that, while the position of every rate of exchange is the outcome of the market conditions _in the two countries combined_, the predominant mass of the dealings take place on the other side, so that, as a consequence, the real significance of the fluctuations can only be grasped by viewing them from the foreign [_e. g._, american] standpoint. the recent rise of the american acceptance market [ ]probably the most important effect at this time [ ] of the federal reserve act is the establishment of the american acceptance market. it may well be said that heretofore america has had no real money market. the only semblance of a money market previously existing in this country was the call loan market of new york city. that, however, did not truly reflect money conditions in this country, as it has more often reflected the secondary effect of some movement of the stock market. the development of a real money market in this country was greatly hampered by the lack of a standardized credit instrument. in every other country the bank acceptance in which the element of credit risk has been practically eliminated is the standard instrument of credit, and the discount rate of such paper marks the level of the money market. bank acceptances were not known in this country prior to the operation of the federal reserve act. for the benefit of those who may not be familiar with bank acceptances, i will briefly describe an operation giving rise to such acceptances. jones, an importer of coffee in new york, desires to purchase a cargo of coffee in rio de janeiro. he goes to his bank in new york and arranges with them to finance the deal. smith, the grower of the coffee in brazil, makes the shipment to new york and draws a ninety days' sight draft on the new york bank for the amount of his invoice. this draft he then sells to some brazilian bank.... the brazilian bank then sends the draft to new york. it is there presented to the new york bank for acceptance. the new york bank accepts the draft by writing the word "accepted" across the face of the draft and affixing its official signature thereto. the draft now becomes the primary obligation of the new york bank. of course, jones, for whose account the new york bank accepted the draft, has obligated himself to provide the new york bank with funds to meet the draft, but if he should fail to do so the new york bank must pay the acceptance nevertheless. it is, therefore, the direct obligation of the new york bank, and as such it commands the best discount rates current. this briefly is what is known as a bank acceptance, _i. e._, a draft drawn on and accepted by a prime bank or banker. although this business is still in its infancy, it has reached important proportions and there is an active market for them in new york city. a number of brokers have taken up the business of buying and selling acceptances. every morning they make the rounds of the various banks with the list of the acceptances they have for sale and the rates at which they are willing to sell them. incidentally, they also learn whether the banks have any acceptances for sale and at what rates. as the credit risk is practically eliminated, acceptances are a very attractive form of secondary reserve; they are, as a london banker once expressed it, a means of enabling the banker to eat his cake and have it too--the banker by investing his money in acceptances earns the discount and at the same time he knows that his money is instantly available in case of need, so that they are almost as available as cash. this explains why the discount rate on acceptances ranges so low. ninety days' sight acceptances sold in new york city at one time as low as per cent. per annum and to-day prime acceptances command the excellent rate of - / per cent. the economies and advantages of "dollar credits"[ ] many radical changes in the mechanism of international finance have occurred during the past fifteen months, since the beginning of the european war. not the least important among these changes, viewed from the standpoint of the american importer, is the evolution in the methods of financing our importations. our imports in the way of commodities such as hides, coffee, rubber, wool, etc., etc., run into hundreds of millions of dollars annually, and these are financed generally through the medium of commercial credits established by the purchaser in favor of the vendor of the merchandise. commercial credits, so called, are in effect a bank guarantee to the seller that his drafts covering certain merchandise, when drawn in accordance with the conditions prescribed in the credit, will meet with due honor on presentation to the accepting bank named in the credit instrument. in order merely to gain an idea as to the importance and volume of such transactions, it is only necessary to glance at the totals of a few of our principal imports. in the year we imported, among other commodities, the following: hides and skins $ , , . coffee , , . rubber , , . wool (unmanufactured) , , . prior to the outbreak of the war in europe, it is safe to assume that fully per cent. of the credits issued to cover these importations were passed through london in the form of sterling credits; that is to say, credits available by drafts drawn in pounds sterling on london. requests for the issuance of credits available by drafts drawn in united states dollars on new york were extremely rare, and they were issued only in exceptional cases. conditions have changed materially in this respect. the federal reserve act grants to national banks the privilege of accepting drafts or bills of exchange growing out of transactions involving the importation or exportation of goods. this acceptance privilege was accorded to national banks only a short time before the commencement of hostilities abroad, and this fact in conjunction with the resulting dislocation in the delicate machinery of international credit brought about by the war, together with the coincidental establishment of american branch banks in south america, has contributed in a large measure to bring about the use of what is known now as "dollar credits." as a factor in creating the existing demand for dollar credits, the establishment of american branch banks abroad cannot be emphasized too strongly. through these branch banks, a new and adequate medium for the liquidation of transactions as between the united states and certain south american countries, especially the argentine, brazil, and uruguay, has been placed at the disposal of our merchants. a direct channel is now open to the ebb and flow of credit transfer between the united states and the countries mentioned, and, as a natural sequence, the former disparity existing against the dollar, as compared with pounds sterling and the principal continental exchanges, has disappeared. the resulting equalization in the rates of exchange benefits the american merchant to the extent of relieving him of the tribute formerly paid to the indirect channels of liquidation, or, in other words, to the foreign banker. the dollar credit is of capital importance to every american merchant who is interested either directly or indirectly in the importation of commodities of any character. a study of the advantages accruing from this form of credit will demonstrate the desirability of its general employment as the vehicle for financing not only our own imports but also those of other countries. primarily, it is more economical than the sterling or continental credit, for the initial commission cost of issuance is lower. secondly, it is based on a known quantity, the dollar, a factor of supreme importance in these days of extreme and violent fluctuations in the exchange rates, and therefore all exchange risk is eliminated from the operation as far as the importer is concerned. maturities drawn under dollar credits are due and payable in dollars on a given date, and no question arises as to what the exchange rate on london may be ninety days after acceptance of the bill. under existing conditions in the new york money market, and considering the present low rates of interest actually in effect, the use of dollar credits is proving to be particularly attractive to the american importer as the medium for financing his importations. the rate of discount in new york for prime bank acceptances is - / @ - / per cent. per annum, and a broad, well-developed discount market now exists, with an ever-increasing demand in evidence for this class of paper. on the other hand, the rate of discount in london for prime ninety-day bills is - / per cent. per annum, with operations restricted in a far from normal market. a comparison of these two discount rates will show a difference in favor of new york of - / @ - / per cent. per annum. in addition to this difference in interest, there is also a difference in the initial cost in the form of commission for issuance, as between credits available by ninety-day drafts drawn on new york in dollars and those available by ninety-day drafts drawn on london in pounds sterling. this difference in commission in favor of new york will average / per cent. per annum, and when added to the saving in discount or interest already noted, will show a net saving on the dollar credit of @ - / per cent. per annum, which accrues to the importer through the use of dollar credits in his operations. quite apart from the direct economy to the individual resulting from the use of dollar credits, is the broader question of the economic value accruing to the nation as a whole through the designation of the dollar as the basis of value in our credit transactions with the rest of the world. since , when the total of our imports amounted to $ , , , , the volume of our imports has increased rapidly, and in , the total imports reached the enormous sum of $ , , , . these figures cover products from all parts of the world shipped direct to our own shores, and while no nation enjoys higher international credit than the united states, yet it is a fact that in order to finance the movement of our imports we have been compelled to have recourse to indirect channels and call on foreign money centers to furnish us with the necessary credit facilities to take care of a large part of our importations. naturally, we have been obliged to pay for this accommodation, and the service has cost us millions of dollars annually in interest, commissions, etc. these charges can be saved and an important economy effected, thus benefiting our commerce as a whole by the general designation of dollars in our foreign credit transactions. the purchasing power of the dollar in foreign markets is much greater to-day than it is in normal times because of the varying premium which the dollar commands at present practically throughout the world. the time is unquestionably opportune to increase the prestige of the dollar and to standardize its use in the liquidation of our direct purchases abroad. co-operation and concerted action on the part of our merchants to the end of generalizing the use of dollar credits is therefore a duty, which will bring about lasting benefit to the economic fabric of our commerce. the new york foreign exchange market[ ] a market may be defined as the coming together of buyers and sellers. it therefore involves all the mechanism necessary to facilitate their intercourse. one may speak of a general market or of a local market, of a market in one or in another place. thus, there is the new york market for the buying and selling of exchange on london. a bank in new haven, connecticut, may be a part of that market if it buys from and sells to it. that market includes, besides the commercial and industrial organizations which buy or sell drafts, all middlemen of whatever class who engage in the trade. the middlemen may be divided roughly into three classes. first may be mentioned banks which do a regular foreign exchange business, buying bills from those who have them to sell and selling their own drafts on foreign correspondents to persons desiring to remit. much of this business is done by foreign exchange banks which carry on little or no other business. some of it is done by ordinary commercial banks, such as united states national banks, in addition to their other banking business. second, we may call attention to those exchange dealers whose principal business is to buy commercial and bankers' bills, and to resell them, chiefly to banks. third are the independent brokers who make small commissions by bringing buyers and sellers together. these do not invest their own capital, do not, that is, buy bills of exchange in the market, but assist those desiring to sell bills to find buyers, and _vice versa_.... new york city practically absorbs by purchase all american foreign exchange [ ]there is, perhaps, no feature pertaining to banking throughout the country so dependent upon new york financiers, as foreign exchange. the very foundation of this branch of banking is constructed by the new york bankers, and from their banking houses emanate the basic prices and quotations upon which foreign bills are bought and sold throughout the united states. it is the custom of new york foreign exchange brokers to furnish their western clients, direct, or through their local representatives, daily market quotations, and to promptly advise them of fluctuations throughout the day. so closely is the west allied to the east, in this respect, that any interruption caused by delayed or suspended telegraphic service, immediately superinduces a practical standstill of exchange transactions, and operations thereafter must necessarily be made in the "dark" until free communication is again renewed between the cities.... the absorptive power of the new york market, to digest not only the surplus foreign exchange of the chicago market, but that of the entire united states as well, has been demonstrated for many years. the reason for this can be attributed to the fact that international trade balances are at the present day, and always will be, adjusted by the financiers of new york city. how money is made in foreign exchange--the operations of the foreign department [ ]complete description of the various forms of activity of the foreign exchange department of an important firm would fill a large volume, but there are certain stock operations in foreign exchange which are the basis of most of the transactions carried out and the understanding of which ought to go a long way toward making clear what the nature of the foreign exchange department's business really is. i. selling "demand" against "demand" the first and most elementary form of activity is, of course, the buying of demand bills at a certain price and the selling of the banker's own demand drafts against them at a higher price. a banker finds, for instance, that he can buy john smith & co.'s sight draft for £ , , on london, at the rate of . , and that he can sell his own draft for £ , on his london banking correspondent at . . all he has to do, therefore, is to buy john smith's draft for $ , , send it to london for credit of his account there, and then draw his own draft for £ , on the newly created balance, selling it for $ , . it cost him $ , to buy the commercial draft, and he has sold his own draft against it for $ , . his gross profit on the transaction, therefore, is $ . as may be imagined, not very much money is made in transactions exactly of this kind--the one cited is taken only because it illustrates the principle. for whether the banker sends over in every mail a bewildering assortment of every conceivable form of foreign exchange to be credited to his account abroad, or whether he confines himself to remittances of the simplest kind of bills, the idea remains exactly the same--he is depositing money to the credit of his account in order that he may have a balance on which he can draw. that is, indeed, the sum and substance of the exchange business of the foreign department of most banking houses--the maintaining of deposit accounts in banks at foreign centres on which deposit account the bank here is in a position to draw according to the wants and needs of its customers. ii. selling cables against demand exchange a "cable," so-called, differs from a sight draft only in that the banker abroad who is to pay out the money is advised to do so by means of a telegraphic message instead of by a bit of paper instructing him to "pay to the order of so and so." under ordinary circumstances foreign exchange dealers who engage in the business of selling cables carry adequate balances on the other side, balances which they keep replenishing by continuous remittances of demand exchange. iii. selling "demand" bills against remittances of long bills if there is a stock operation in the conduct of a foreign exchange business it is the selling by bankers of their demand bills of exchange against remittances of commercial and bankers' long paper. bills of the latter class make up the bulk of foreign exchange traded in, and its disposal naturally is the most important phase of foreign exchange business. what the foreign exchange business really is grounded on is the existence of commercial bills called into existence by exports of merchandise. buying and remitting commercial long bills is no pastime for an inexperienced man. entirely aside from the question of rate, and profit on the exchange end of the transaction, there must be taken into consideration the matter of the credit of the drawer and the drawee, the salability of the merchandise specified in the bill of lading, and a number of other important points. where documents accompany the draft and the merchandise is formally hypothecated to the buyer of the draft, it might not be thought that the standing of the drawer would be of such great importance. possession of the merchandise, it is true, gives the banker a certain form of security in case acceptance of the bill is refused by the parties on whom it is drawn or in case they refuse to pay it when it comes due, but the disposal of such collateral is a burdensome and often expensive operation. the banker in new york who buys a sixty-day draft drawn against a shipment of butter is presumably not an expert on the butter market and if he should be forced to sell the butter, might not be able to do so to the fullest possible advantage. employment of an expert agent is an expensive operation, and, moreover, there is always the danger of legal complication arising out of the banker's having sold the collateral. it is desirable in every way that if there is to be any trouble about the acceptance or payment of a draft, the banker should keep himself out of it. the successive steps in an actual transaction are as follows: the banker in new york having ascertained by cable the rate at which bills "to arrive" in london by a certain steamer will be discounted, buys the bills here and sends them over, with instructions that they be immediately discounted and the proceeds placed to his credit. on this resulting balance he will at once draw his demand draft and sell it in the open market. if, from selling this demand draft, he can realize more dollars than it cost him in dollars to put the balance over there, he has made a gross profit of the difference. to illustrate more specifically: a banker has bought, say, a £ , ninety days' sight prime draft, on london, documents deliverable on acceptance. this he has remitted to his foreign correspondent, and his foreign correspondent has had it stamped with the required "bill-stamp," has had it discounted, and after having taken his commission out of the proceeds, has had them placed to the credit of the american bank. in all this process the bill has lost weight. it arrived in london as £ , , but after commissions, bill-stamps, and ninety-three days' discount have been taken out of it, the amount is reduced well below £ , . the net proceeds going to make up the balance on which the american banker can draw his draft are, perhaps, not over £ . he paid so-and-so many dollars for the £ , ninety-day bill, originally. if he can realize that many dollars by selling a demand draft for £ he is even on the transaction. iv. the operation of making foreign loans in its influence upon the other markets, there is perhaps no more important phase of foreign exchange than the making of foreign loans in the american market. the mechanics of these foreign loaning operations, the way in which the money is transferred to this side, etc., will now be taken up. to begin at the very beginning, consider how favorable a field is the american market for the employment of europe's spare banking capital. almost invariably loaning rates in new york are higher than they are in london or paris. this is due, perhaps, to the fact that industry here runs on at a much faster pace than in england or france, or it may be due to the fact that we are a newer country, that there is no such accumulated fund of capital here as there is abroad. such a hypothesis for our own higher interest rates would seem to be supported by the fact that in germany, too, interest is consistently on a higher level than in london or paris, germany, like ourselves, being a vigorous industrial nation without any very great accumulated fund of capital saved by the people. but whatever the reason, the fact remains that in new york money rates are generally on so much more attractive a basis than they are abroad that there is practically never a time when there are not hundreds of millions of dollars of english and french money loaned out in this market. all through the past ten years london has at various times opened her reservoirs of capital and literally poured money into the american market. to take up the actual operation of loaning foreign money in the american market, suppose conditions to be such that an english bank's managers have made up their minds to loan out £ , in new york--not on joint account with the american correspondent, as is often done, but entirely independently. included in the arrangements for the transaction will be a stipulation as to whether the foreign bank loaning the money wants to loan it on the basis of receiving a commission and letting the borrower take the risk of how demand exchange may fluctuate during the life of the loan, or whether the lender prefers to lend at a fixed rate of interest, say per cent., and himself accept the risk of exchange. what the foregoing means will perhaps become more clear if it is realized that in the first case the american agent of the foreign lender draws a ninety days' sight sterling bill for, say, £ , on the lender, and hands the actual bill over to the parties here who want the money. upon the latter falls the task of selling the bill, and, ninety days later, when the time of repayment comes, the duty of returning a _demand_ bill for £ , , plus the stipulated commission. in the second kind of a loan the borrower has nothing to do with the exchange part of the transaction, the american banking agent of the foreign lender turning over to the borrower not a sterling draft but the dollar proceeds of a sterling draft. how the exchange market fluctuates in the meantime--what rate may have to be paid at the end of ninety days for the necessary demand draft--concerns the borrower not at all. he received dollars in the first place, and when the loan comes due he pays back dollars, plus , , or per cent., as the case may be. what rate has to be paid for the demand exchange affects the banker only, not the borrower. loans made under the first conditions are known as sterling, mark, or franc loans; the other kind are usually called "currency loans." at the risk of repetition, it is to be said that in the case of sterling loans the borrower pays a flat commission and takes the risk of what rate he may have to pay for demand exchange when the loan comes due. in the case of a currency loan the borrower knows nothing about the foreign exchange transaction. he receives dollars, and pays them back with a fixed rate of interest, leaving the whole question and risk of exchange to the lending banker. to illustrate the mechanism of one of these sterling loans. suppose the london bank, ltd., to have arranged with the new york bank to have the latter loan out £ , in the new york market. the new york bank draws £ , of ninety days' sight bills, and, satisfactory collateral having been deposited, turns them over to the brokerage house of smith & jones, the borrowers. smith & jones at once sell the £ , , receiving therefor, say, $ , . the bills sold by smith & jones find their way to london by the first steamer, are accepted and discounted. ninety days later they will come due and have to be paid, and ten days prior to their maturity the new york bank will be expecting smith & jones to send in a _demand_ draft for £ , , plus / per cent. commission, making £ additional. this £ , less its commission for having handled the loan, the new york bank will send to london, where it will arrive a couple of days before the £ , of ninety days' sight bills originally drawn on the london bank, ltd., mature. what each of the bankers concerned makes out of the transaction is plain enough. as to what smith & jones' ninety-day loan cost them, in addition to the flat / per cent. they had to pay, that depends upon what they realize from the sale of the ninety days' sight bills in the first place and secondly on what rate they had to pay for the demand bill for £ , . exchange may have gone up during the life of the loan, making the loan expensive, or it may have gone down, making the cost very little. plainly stated, unless they secured themselves by buying a "future" for the delivery of a £ , demand bill in ninety days at a fixed rate, messrs. smith & jones have been making a mild speculation in foreign exchange. if the same loan had been made on the other basis, the new york bank would have turned over to smith & jones not a _sterling bill_ for £ , , but the _dollar proceeds_ of such a bill, say a check for $ , . at the end of ninety days smith & jones would have had to pay back $ , , plus ninety days' interest at per cent., $ , , all of which cash, less commission, the new york bank would have invested in a demand bill of exchange and sent over to the london bank, ltd. whatever more than the £ , needed to pay off the maturing nineties such a demand draft amounted to, would be the london bank, ltd.'s profit. from all of which it is plainly to be seen that when the london bankers are willing to lend money here and figure that the exchange market is on the down track, they will insist upon doing their lending on the "currency loan" basis--taking the risk of exchange themselves. conversely, when loaning operations seem profitable but rates seem to be on the upturn, lenders will do their best to put their money out in the form of "sterling loans." bankers are not always right in their views, by any means, but as a general principle it can be said that when big amounts of foreign money offered in this market are all offered on the "sterling loan" basis, a rising exchange market is to be expected. from what has been said about the mechanism of making these foreign loans, it is evident that no transfer of cash actually takes place, and that what really happens is that the foreign banking institution lends out its credit instead of its cash. for in no case is the lender required to put up any money. the foreign lender is at no stage out of any actual capital, although it is true, of course, that he has obligated himself to pay the drafts on maturity, by "accepting" them. where, then, is the limit of what the foreign bankers can lend in the new york market? on one consideration only does that depend--the amount of accepted long bills which the london discount market will stand. for all the ninety days' sight bills drawn in the course of these transfers of credit must eventually be discounted in the london discount market, and when the london discount market refuses to absorb bills of this kind a material check is naturally administered to their creation. v. the drawing of finance-bills approaching the subject of finance-bills, the author is well aware that concerning this phase of the foreign exchange business there is a wide difference of opinion. finance-bills make money, but they make trouble, too. their existence is one of the chief points of contact between the foreign exchange and the other markets, and one of the principal reasons why a knowledge of foreign exchange is necessary to any well-rounded understanding of banking conditions. strictly speaking, a finance-bill is a long draft drawn by a banker of one country on a banker in another, sometimes secured by collateral, but more often not, and issued by the drawing banker for the purpose of raising money. such bills are not always distinguishable from the bills a banker in new york may draw on a banker in london in the operation of lending money for him, but in nature they are essentially different. whether or not any collateral is put up, the whole purpose of the drawing of finance-bills is to provide an easy way of raising money without the banker here having to go to some other bank to do it. the origin of the ordinary finance-bill is about as follows: a bank here in new york carries a good balance in london and works a substantial foreign exchange business in connection with the london bank where this balance is carried. a time comes when the new york banking house could advantageously use more money. arrangements are therefore made with the london bank whereby the london bank agrees to "accept" a certain amount of the american banker's long bills, for a commission. in the course of his regular business, then, the american banker simply draws that many more pounds sterling in long bills, sells them, and for the time being has the use of the money. in the great majority of cases no extra collateral is put up, nor is the london bank especially secured in any way. the american banker's credit is good enough to make the english banker willing, for a commission, to "accept" his drafts and obligate himself that the drafts will be paid at maturity. naturally, a house has to be in good standing and enjoy high credit not only here but on the other side before any reputable london bank can be induced to "accept" its finance paper. the ability to draw finance-bills of this kind often puts a house disposed to take chances with the movement of the exchange market into line for very considerable profit possibilities. suppose, for instance, that the manager of a house here figures that there is going to be a sharp break in foreign exchange. he, therefore, sells a line of ninety-day bills, putting himself technically short of the exchange market and banking on the chance of being able to buy in his "cover" cheaply when it comes time for him to cover. in the meantime he has the use of the money he derived from the sale of the "nineties" to do with as he pleases, and if he has figured the market aright, it may not cost him any more per pound to buy his "cover" than he realized from the sale of the long bills. in which case he would have had the use of the money for the whole three months practically free of interest. it is plain speculating in exchange--there is no getting away from it, and yet this practice of selling finance-bills gives such an opportunity to the exchange manager shrewd enough to read the situation aright to make money, that many of the big houses go in for it to a large extent. during the summer, for instance, if the outlook is for big crops, the situation is apt to commend itself to this kind of operation. money in the summer months is apt to be low and exchange high, affording a good basis on which to sell exchange. then, if the expected crops materialize, large amounts of exchange drawn against exports will come into the market, forcing down rates and giving the operator who has previously sold his long bills an excellent chance to cover them profitably as they come due. vi. arbitraging in exchange. arbitraging in exchange--the buying by a new york banker, for instance, through the medium of the london market, of exchange drawn on paris--is another broad and profitable field for the operations of the expert foreign exchange manager. take, for example, a time when exchange on paris is more plentiful in london than in new york--a shrewd new york exchange manager needing a draft on paris might well secure it in london rather than in his home city. between such cities rates are not apt to be wide enough apart to afford a wide margin of profit, but the chance for arbitraging does exist and is being continuously taken advantage of. so keenly, indeed, are the various rates in their possible relation to one another watched by the exchange men that it is next to impossible for them to "open up" to any appreciable extent. the chance to make even a slight profit by shifting balances is so quickly availed of that in the constant demand for exchange wherever any relative weakness is shown, there exists a force which keeps the whole structure at parity. the ability to buy drafts on paris relatively much cheaper at london than at new york, for instance, would be so quickly taken advantage of by half a dozen watchful exchange men that the london rate on paris would quickly enough be driven up to its right relative position. if a chance exists to sell a draft on london and then to put the requisite balance there through an arbitration involving paris, brussels, and amsterdam, the chances are that there will be some shrewd manager who will find it out and put through the transaction. some of the larger banking houses employ men who do little but look for just such opportunities. the foregoing are the main forms of activity of the average foreign department, though there are, of course, many other ways of making money out of foreign exchange. gold movements [ ]when there is a heavy demand for exchange and little supply, the price of exchange gradually advances. the banker, called on by his customers to draw exchange for them, finding few bills in the market that he can remit to cover his drafts, sends gold and directs its equivalent in foreign coin to be placed to his credit, and against this credit he draws. there may be no market abroad for our crops or manufactures; but gold need not be sold in order to produce money; it need only be coined. as this process can be carried on indefinitely, the cost of sending gold is obviously the limit beyond which the price of demand bills cannot advance. let us follow this transaction in detail. the pure gold contained in one english sovereign is exactly equal to the pure gold contained in $ . of our gold coins; so that, apart from charges and expenses, $ . of our gold will, when sent abroad, produce a credit of £ ; to this cost must be added freight, insurance, and other expenses, amounting to about one-fourth of per cent. this brings the cost of £ through shipment of gold to about $ . , which is, roughly, the gold export point for full weight coin. the exporting banker obtains his gold either by drawing gold coin from his bank or else by drawing suitable currency from his bank, and obtaining gold coin for it at the subtreasury. in either case, he obtains coin that has suffered more or less abrasion by handling, and this loss of weight by abrasion, amounting to perhaps one-tenth of per cent., increases the cost of his remittance. generally, however, the banker can obtain gold bars from the united states assay office at the nominal charge of one twenty-fifth of per cent., although at times a larger charge is made. the banker prefers bars, because on these there is no loss by abrasion; the government can afford to give bars, because their export prevents the export of coin, and so saves the cost of coining new money to replace that shipped. now for gold import. when there is a large volume of bills offered to bankers, perhaps by grain and cotton exporters, and but little demand from buyers of exchange, the market gradually declines in price, while new york bankers, sending abroad the bills they buy, with little occasion to draw against them, accumulate large sums to their credit in london, with no way of getting the money back to new york through operations in the exchange market. they are not, however, helpless; they can order gold sovereigns sent here, and, once here, can have them melted down at the united states assay office and coined into eagles and double eagles, which they can deposit with their banks. obviously, the amount received in dollars for each melted sovereign will mark the price the banker can afford to pay for sterling bills, and competition among bankers will prevent the rate of exchange from declining below this point by more than a fair margin of profit. the british sovereign, if full weight, will, when sent here and melted down, yield gold for which the united states assay office will pay $ . ; the expense of sending the sovereign, freight, insurance, cartage, and kegs, will amount to about one quarter of per cent., so that the net yield of the full weight sovereign in dollars will be $ . - / . but between the day on which the banker buys the bill of exchange in new york and the day on which he receives in new york the gold which the bill entitled him to collect in london, there must elapse the time needed to send the bill to london, plus the time needed to send the gold back (roughly fifteen days), during which period the banker loses the use of the money. this loss of interest must be deducted from the net yield of the imported sovereign, and thus, if money is worth per cent. per annum, the net yield of full weight sovereigns is brought down to about $ . - / , which is the gold import point for demand exchange, when money is worth per cent. per annum. losses by abrasion will bring down this point by perhaps one-tenth of per cent., to about $ . - / . when money is higher, the import point will be lower, and _vice versa_. there is therefore a margin of profit in buying demand bills and importing gold sovereigns against the purchase, whenever the rate for demand bills falls below the gold import point. active exchange bankers take advantage of this profit whenever exchange prices decline to the proper point, and their competition in buying bills to cover their gold importations stops further decline in exchange rates. it is interesting to note that during the recent crisis, when gold and currency were at a premium, bankers could sell the imported gold at a premium, and this constituted an additional and very large profit; gold importers could therefore pay higher prices than ordinarily for exchange bought to cover the importations, and the stress of competition so drove up the rate of exchange that gold was being imported at a profit, though exchange rates stood at what, under ordinary circumstances, would have been the gold export point. gold is, however, not always imported from england in the form of sovereigns. the bank of england has in its vaults large quantities of american eagles and double eagles exported to england in the past and held without melting. the bank also holds foreign coin and bar gold. any holder of bank of england notes can get sovereigns on demand--other gold he can get only as the result of a special bargain. when gold is wanted for export, the bank is often glad to sell bar gold or double eagles at rates somewhat more advantageous to the exporter than would be the export of sovereigns; this the bank can afford to do, for the expense of coining sovereigns to replace those exported is thus saved, while the exporter, if he can get bar gold on the same basis as sovereigns, avoids the losses of abrasion. eagles are even more advantageous to the exporter, for they are bought in england by weight and used in america by count; the banker therefore gets an advantage if they are light, so long as that lightness is not so great as to make them uncurrent--practically he buys them as light and uses them as full weight.... the mechanism of gold import to, and export from, germany is practically the same as with england, the reichsbank being required to give gold coin in exchange for its circulating notes. at times, however, german exchange has fallen below the theoretical gold import point, owing, not to the refusal of the reichsbank to give gold, but to the practical obstacles that at times are somehow placed in the way of free export of gold. the reichsbank does not refuse gold for its bank-notes, but german bankers say to their correspondents: "don't ask us to get gold for you, or we shall lose caste," and on such occasions german exchange rates drop to a point that is theoretically impossible. i do not mean to criticise them: german banks, when they refuse to demand gold of the reichsbank, do no more than our own banks and bankers did recently, when asked by foreign correspondents to collect in gold the maturing obligations of railroads and other corporations. as will be remembered, clearing-house funds rather than cash were at that time current here, and new york banks and bankers sent to their foreign correspondents the same answer as the germans have at times sent us. i cite the german instance in partial mitigation of censure of our own course rather than as a reproach to them. the bank of france is not compelled to give gold in exchange for its circulating notes; it may at its option give silver. thus, when it is inconvenient to give gold, the bank can refuse, or, if it prefers, it can exact a premium. this power has been very moderately and very wisely used by the bank to modify foreign demands on the one hand, and, on the other, to keep interest rates low for the requirements of internal trade. of course, when a premium is exacted, the french gold import point drops accordingly. between the gold export point and the gold import point, exchange fluctuates under the sway of conflicting currents and tendencies--i had almost said emotions, for these currents and tendencies have their rise in emotions, needs, and passions as varied as life itself, whether they be hunger as expressed in the grain bill, or love of elegance in the importation of silk, or forethought in the profitable investment of capital. this brief review will have made clear what is meant by a free gold market--a market in which current money can at all times be exchanged for gold without delay and without premium. such a market has great commercial advantages; its stability draws business to it. london is such a market, and its commercial and financial pre-eminence is in great measure due to that fact. paris is not such a market and does not pretend to be; berlin pretends to be, but cannot always be counted on; new york was believed to be before our recent panic. i have spoken of the exchange market as an economical mechanism, automatically making delicate international adjustments. in justification of that observation, let me direct attention to the manner in which gold, in moving from financial centre to financial centre, always travels by the most direct route, and that, too, not because some public official is charged with the duty of preventing waste, but because a private trader is trying to make a profit, and is incidentally serving the community; serving it perhaps better than if he had consciously determined to serve it. useful acts springing from self-interest have one very comforting aspect--we need have no misgivings as to their continuance. charity may grow weary or disgusted, but self-interest, once enlisted, may be counted on to continue in operation, whether it be the business man's self-interest in a profit or the professional man's self-interest in advancement and fame. of course, both the business man and the professional man, in addition to seeking the direct rewards of their labor, take an interest in their work as work and make it yield them pleasure. it is therefore satisfactory to know that, so long as the banker looks after his profits, gold will move by the most direct route. let us suppose the united states to be exporting a large quantity of cotton to england at a time when little merchandise is being imported here from england, but when much is being imported from france. if the volume of exports to england and of imports from france were large enough, we might conceivably be importing gold from england in payment of our produce, and exporting it to france in payment for her luxuries; but, in practice, gold does not move that way. every morning, the new york exchange banker learns by cable the paris market rate for demand bills on london. when, therefore, he finds a large volume of bills on london offered for sale, and little demand for such bills, while there is large demand for bills on paris and little supply, he determines, instead of drawing from new york against his purchases of london bills, to let his paris agent draw against these purchases, placing the proceeds to his credit in paris; against this credit in paris, the new york banker draws his bill in francs, having thus supplied via london the new york demand for bills on paris. he knows how many dollars each pound sterling costs him in new york, and the paris rate for bills on london tells him how many francs each pound sterling will net him in paris, and so he can calculate how many cents each franc will cost him. moreover, he is not the only banker in new york that receives cable quotations; and so with a large volume of london bills offered and little direct demand for such bills, and large demand for paris bills with little direct supply, we get a situation where new york bankers, competing with each other to buy the london bills for use via paris, prevent the price of sterling from falling to the gold import point; and then, as a result, these same bankers, competing with each other to supply the demand for paris bills, by their competition prevent the paris rate from rising to gold export point. lastly, they compete with each other in paris, where all are sellers of bills on london against their new york purchases of london bills, and by that competition they reduce the rate for london bills in paris to the point, at which, other things being equal, gold will go from london to paris. what has happened, therefore, is that instead of our importing gold from london, and then exporting it to paris, it has gone direct from london to paris. complications in the determination of gold points [ ]it is safe to assert that when the exchanges go down to the point at which it pays better to ship gold from london than to buy a bill, gold will go. but in the first place, experts always differ as to where that point begins; and in the second, gold often leaves london long before there is any question of its being the more profitable form of remittance. in fact, it may be asserted that the foreign exchanges very seldom go down to the export gold point, because gold begins to go before they can get there. it has often happened to me, when i was a financial journalist and had to try to find out the how and why of gold movements, to ask several of the most experienced and well-informed cambists in the city whether a gold shipment which had taken place had been made as a genuine exchange transaction or was done for some other reason, and to hear from one that there was a reasonable exchange profit on it, from another that there might be just a shade of a turn to be got out of it if you scraped it very hard with a knife, and from another that you could not find a particle of profit in it if you put it under a microscope for a week. so many complications have to be considered that the most eminent doctors may be pardoned for disagreeing. it may be objected that dealers in exchange, and the comparatively few firms that make a special study of gold shipping, are not in the business for their health, and that shipments would not happen if there were not some profit in them. this is perfectly true, but the profit need not be got from the exchange. as an exchange transaction it only pays to ship gold to america when bills on london can only be sold in new york at a lower price than gold would fetch if brought from london and exchanged into dollars in new york. if bills on london are selling at . - / , and gold can be bought and shipped and turned into dollars at the rate of . - / , after allowing for all charges and commissions and the loss of interest during transit, then the operation pays as an exchange transaction. if the dollars realized by the gold were at the rate of only . - / the importer would be no better off than if he had sold a bill; if they were at the rate of . - / he would be out of pocket on the business, viewed strictly as an exchange transaction. but this is by no means the only consideration. gold has such a magical fascination for moneyed mankind, and its movements are so eagerly discussed in their markets and newspapers, that it is often handled and shipped at a loss, especially in america, for the sake of the advertisement that the importing firm thereby gains for itself. moreover, imports of gold have a very stimulating effect on speculative stock markets, because an increase in the amount of gold available means a roughly corresponding increase in the amount of credit that bankers can give, so that when gold is known to be coming speculators know that credit will be cheaper for carrying their commitments, and will come in and buy, with a light heart, stock that they could not possibly pay for, but hope to pawn with their bankers until they can sell it at a higher price. and so unless the loss on the exchange side of the business is too great, it often pays the leaders of a bull campaign to import gold, having first laid in a line of stock, and make their profit by unloading during the fit of exhilaration produced by the news that the gold is on the way. or, again, quite apart from any speculative and spectacular motives behind gold shipments, it may pay bankers, in a country where rates for money are ruling high, to import gold at an apparent loss, because of the high rates that they get for the credit that they are thereby enabled to give. they thus, in effect, borrow gold, and recoup themselves by being able to lend, on profitable terms, larger amounts than they borrow, since they can always create credit to larger amounts than that of the gold in their vaults. sometimes, in fact, in times of pressure banks find themselves obliged to import gold so as to strengthen their position, whatever the loss on exchange may be. for instance, last september, when the berlin exchange was at the point at which, if theory ruled in these matters, berlin ought to have been thinking of packing up some gold to send to london, berlin was buying gold in london and shipping it to the fatherland, because there is always great pressure for currency in germany at the end of september when the interest on mortgages falls due and has to be paid in cash, with the result that the reichsbank's note circulation expands very rapidly and the backing of gold behind it has to be increased. sometimes, again, in order to attract gold, a central bank will give importers credit for gold that is on the way, so that they may be saved from loss of interest while the metal is afloat. thus the actual importer may make a profit on the shipment, not as a genuine exchange transaction, but at the expense of the central bank. in these cases two of the many functions performed by gold have to be considered. as a means of international remittance, it may not be as cheap as a bill, but it may have to be sent, not as a means of remittance, but because it is urgently wanted in the importing country as a make-weight for the balloon of credit. so we see that the grumbling bill broker who ... [said] that these confounded exchanges only work one way, was actually understating his case. not only do we [englishmen] always lose gold when the exchanges go against us, and often get none when they go in our favour, but we also often lose gold long before the exchanges are sufficiently against us to justify its going, and sometimes even when they are strongly in our favour. the effect on the exchange of an import or export of gold is, of course, just the same as that of the import or export of any other commodity--an import turns the exchange against us and an export turns it in our favour. if we send gold, for example, to germany we thereby meet a german claim on us or create a claim for ourselves on germany; in the former case the bills drawn on us will be less by the amount of the gold shipped, and the supply in berlin of bills on london will be less in relation to the demand, so that the tendency will be for the price of sovereigns, as expressed in marks, to rise. in the latter case some one in berlin will have a claim to meet in london and will have to bid there for a bill on london, and his bidding will have the same beneficent effect on the exchange. when we import gold, whether brought out of bankers' vaults, or dug out of the bowels of the earth, the country that sends it to us meets claims of ours on it or establishes claims on us. in either case the tendency is for the exchange to move against us. the handling of gold shipments [ ]whether in coined pieces or bars (bullion), the gold is packed in strong kegs or boxes, securely strapped with hoop iron, and carefully sealed with private seals; the latter to discover if tampered with en route. space is chartered from the steamship company, as in the case of merchandise, although nearly all large fast steamers have rooms especially constructed for such valuable cargo.... as an extra safeguard in case of large shipments, the steamship company details special armed men to guard the room day and night, and sometimes the shipper employs special detectives in citizens' clothes to watch the passengers on the trip, since it is generally known several days in advance when large shipments of gold are to be made. the silver exchanges [ ]... it is acknowledged that commerce between gold standard countries is satisfactory to all classes of traders, for both importers and exporters know exactly the return they may expect, but in trade between a silver-using country and one on a gold basis, a large measure of uncertainty invariably exists. whenever there is a fall in the gold value of silver, either the exporter in the gold standard country or the importer in the silver country must suffer. let us take the case of the exporter. we will suppose that a. blank & company, of manchester, calico printers, send goods to shanghai, which they hope to sell there for a total sum of, say, £ , . the price of silver when the shipment was despatched was, we will say, _d._ per standard ounce, and on this basis a. blank & company have calculated the selling price which is to yield them £ , . by the time the calico arrives in shanghai, the gold price of silver has dropped, we will suppose, to _d._ per standard ounce, and this obviously indicates that the manufacturers will receive one-fifth less for their wares, since they are paid in the currency of the province (taels in this instance), and when blank & company's money comes to be converted back into british gold pieces, they are face to face with the fact that the outturn is £ less than they had calculated: they have lost one-fifth, and receive £ only. this is, of course, an extreme case, as in the ordinary course silver would be unlikely to drop _d._ in the period between shipment and arrival of the goods in shanghai; but whatever the fall, the principle is the same, and the illustration serves to show exactly what happens. it is not only the british exporters who stand to lose in the lottery of trade with countries which have an unstable silver exchange; the capitalist also, and every class of investor, is liable to be adversely affected in operations with silver standard countries. the rate of exchange between such countries and gold standard countries is plainly the exchange between gold and silver; therefore, if a person has invested in undertakings in the silver country, when he receives his dividends in the currency of that country, he will obtain less for his dividend warrant on the london market in proportion to the fall in the price of silver--assuming that it does fall. conversely, he may reap a higher return on his investment if silver has gone up before the encashment of his dividend. finally, the principal is affected in the same way, whenever it is desired to convert it back into gold. a further example will show how this works out in practice. we may assume that an investor, encouraged by the chance of earning per cent. on his money, remits to china £ , . the price of silver on the st january, , was - / _d._ per ounce standard; on the st december, , - / _d._ for the sake of argument, we will imagine our investor sent the money out to the eastern country on the st january, , but circumstances made it advisable for him to recall his money at the end of december in the same year, when the metal had depreciated to - / _d._; in converting his principal back to british currency he will find himself faced with a sharp loss. silver, in which the investment stood, has dropped - / _d._ of its gold equivalent, roughly, one-seventh; consequently on conversion the gold value of his original £ , has fallen to about £ .... ... the exchanges of these silver standard countries ... [are] quoted in shillings and pence to the dollar, tael, or rupee, as the case may be, that is, the gold value of the respective silver coins. hong-kong, for instance, is quoted _s._ - / _d._ to the dollar, and shanghai, _s._ - / _d._ to the tael. the rates from these centres ... indicate the price for telegraphic transfers on london: the unit of exchange in the centres named being by general consent the rate for telegraphic transfers on london. let us take the shanghai rate as an example: _s._ - / _d._ per tael, means that for every silver tael the remitter hands over to the exchange bank in shanghai, _s._ - / _d._, or, to give it its real significance, a little less than one-eighth of a sovereign in gold, will be paid to the person in whose favour the remittance is made, as soon as a telegram can reach the bank's london branch.... ... besides the t. t. rate, as it is called for the sake of brevity, we have the four months' sight and six months' sight rates, which are the quotations for first-class bank bills. both quotations are higher than for the telegraphic transfers, that is to say, for every silver tael paid in shanghai the bank will allow more shillings and pence where it is a question of paying the gold value in london four or six months hence, than it would if the payment is to be made on demand or by wire. the reason is, that if a bill drawn on london, payable four months after sight, is sent, the remitter is bound to place the receiver in such a position that if the latter chooses to turn the bill into cash after it has been "sighted" and accepted, he will not be worse off than if the money had been sent by cable.... as may be gathered, therefore, the discount rates ruling on the london market are of great importance to the eastern bankers and exchange dealers: so important are they in fact, that it is necessary for each side to keep in direct telegraphic communication regarding the existing discount quotations and the probable trend of the markets.... ... the rate at which they are able to cover their drawing operations ... governs the price at which they will sell bills. if a banker has funds deposited with his correspondent upon which he can draw, well and good: if he has no balance with the agent, he must either provide the wherewithal to meet the bills which he has drawn, or, alternatively, he can instruct the agent to draw on him in reimbursement. finally, there comes a time,... when, as all other means of placing his correspondent in funds have been exhausted, the banker will be obliged to ship ... silver to be sold for what it will fetch.... it is fairly clear that the real trouble in eastern exchange lies in the fact that we have three main factors to deal with instead of two. in the gold exchanges we have simply the demand for and supply of bills and telegraphic transfers; in the silver exchanges the matter is complicated by the way in which we also have to depend upon the fluctuations in the price of silver on the london market.... shanghai draws on london for the cost of her exports and remits to london for the value of her imports, and the principal reason for this procedure is that the manufacturer in great britain does not wish to be bothered with the variations in exchange, although as the reader has seen, he may be pretty severely affected if silver has depreciated before his goods are sold. leaving that out of the question, however, we may take it that as all his expenses are payable in gold, he naturally prefers to deal in terms of that metal. consequently, goods shipped to china are nearly always paid for by remittances, or drawn for in sterling, which comes to the same thing. the chinese producer is on rather a different footing. his expenses are in silver, and in silver he wishes to be paid. his produce, however, he has sold to great britain for a gold price, and either he cannot afford to, or does not want to wait until a remittance can be sent by mail from london. the one way open to him is to draw in sterling and settle the rate of exchange on the spot, which he does and so makes an end of the matter.... footnotes: [ ] hartley withers, _money changing_, pp. - . e. p. dutton and company. new york. . [ ] adapted from the rt. hon. viscount goschen, _the theory of the foreign exchanges_, pp. - . effingham wilson. london. . [ ] adapted from franklin escher, _the elements of foreign exchange_, pp. - . bankers publishing company. new york. . [ ] _ibid._, pp. - , , - , . [ ] adapted from frederick i. kent, _financing our foreign trade_, the annals of the american academy of political and social science, vol. xxxvi, no. , november, , pp. - . [ ] [the method explained would apply without qualification to our imports generally prior to , whether coffee from brazil, hides from the levant or textiles from france. the recent and growing practice of drawing on new york rather than on london is discussed later in this chapter.] [ ] adapted from archibald j. wolfe, _foreign credits_, pp. , , special agents series--no. . department of commerce and labor. washington. . [ ] george clare, _the a b c of the foreign exchanges_, pp. - . macmillan and company. london. . [ ] [english bills drawn on our banks have increased in volume since , through the operation of the federal reserve act and the amended new york state bank law which make provision for the acceptance of time drafts by national and new york state banks, respectively.] [ ] john e. rovensky, _how the war affects practical operations in international exchange_, journal of the american bankers association, vol. , no. , june, , pp. , . [ ] joseph t. cosby, _the economies and advantages of "dollar credits."_ the national city bank. new york. . [ ] harry g. brown, _international trade and exchange_, pp. - . the macmillan company. new york. . [ ] anthony w. margraff, _international exchange_, pp. - . fergus printing company. chicago. . [ ] adapted from franklin escher, _elements of foreign exchange_, pp. - . bankers publishing company. . [ ] albert strauss, _gold movements and the foreign exchanges_, the currency problem and the present financial situation. a series of addresses delivered at columbia university, - , pp. - . the columbia university press. . [ ] hartley withers, _money changing_, pp. - . e. p. dutton and company. new york. . [ ] address by h. k. brooks. _lectures on commerce_, edited by henry rand hatfield, university of chicago publications of the college of commerce and administration, vol. i., pp. - . the university of chicago press. chicago. . [ ] william f. spalding, _foreign exchange and foreign bills in theory and in practice_, pp. - . sir isaac pitman & sons, ltd., bath, new york and melbourne. . chapter xix clearing houses the following discussion of clearing houses is confined mainly to the united states and england. references to the clearing houses of france and germany, where the introduction of the use of checks and the consequent development of clearing facilities have been tardy, are contained in the chapters devoted to the banking systems of those countries. i. in the united states a clearing house defined [ ]what is a clearing house? the supreme court of the state of pennsylvania has defined it thus: it is an ingenious device to simplify and facilitate the work of the banks in reaching an adjustment and payment of the daily balances due to and from each other at one time and in one place on each day. in practical operation it is a place where all the representatives of the banks in a given city meet, and, under the supervision of a competent committee or officer selected by the associated banks, settle their accounts with each other and make or receive payment of balances and so "clear" the transactions of the day for which the settlement is made. but we must go farther than this, for though originally designed as a labor-saving device, the clearing house has expanded far beyond those limits, until it has become a medium for united action among the banks in ways that did not exist even in the imagination of those who were instrumental in its inception. a clearing house, therefore, may be defined as a device to simplify and facilitate the daily exchanges of items and settlements of balances among the banks and a medium for united action upon all questions affecting their mutual welfare. methods of exchange in new york prior to [ ]during a comparatively short period immediately following the number of banks in new york increased from to . in the daily course of business each bank received checks and other items on each of the other banks, which had to be presented for collection. all such items on hand were assorted and listed on separate slips at the close of the day, and items coming in through the mail on the following morning were added at that time. to make the daily exchanges each bank sent out a porter with a book of entry, or pass book, together with the items to be exchanged. the receiving teller of the first bank visited entered the exchanges brought by the porter on the credit side of his book and the return exchanges on the debit side, who then hurried away to deliver and receive in like manner at the other banks. it often happened that five or six porters would meet at the same bank, thereby retarding one another's progress and causing much delay. considerable time was consumed in making the circuit. hence, the entry of the return items in the books of the several banks was delayed until the afternoon, at an hour when the other work of the bank was becoming urgent. a daily settlement of the balances was not attempted by the banks, owing to the time it would have required, but they informally agreed upon a weekly adjustment, the same to take place after the exchanges on friday morning. at that time the cashier of each bank drew a check for each of the several balances due it, and sent a porter out to collect them. at the same time the porter carried coin with which to pay balances due by his bank. after the settlement had been made, there was a meeting to adjust differences and bring order out of chaos. an old bank officer (j. s. gibbons), in describing the inconveniences and defects of this system, says that some of the more speculative banks took advantage of the weekly method of settlements by carrying a line of discounts to an amount greater than their legitimate resources would allow. thus, a bank would manage to carry a small debit balance of $ , or $ , with thirty or more institutions, making a total debit balance of, say, $ , on which it discounted paper. it was the practice to borrow enough on thursday to make the settlements on friday, and the return of the loan on saturday threw it again into the debtor column. virtually, therefore, the weekly settlements were nominal only, and to show that there was no attempt at economy of time and labor in making them, it is only necessary to say that the cashier drew a check for every balance due him, whereas a draft on one bank in favor of another might have settled two accounts at once. the banks were at liberty to draw on each other for their credit balances without waiting for the settlements on friday, and hence, when specie was needed, this was not infrequently done. but so far did many of the banks extend their loans and discounts that a single small draft by one bank on another would induce a general drawing and involve them all in confusion and virtual war on each other. three o'clock would arrive, with the line of drafts incomplete, thus enabling debtor banks ofttimes to add $ , to their specie, whereas creditor banks would find themselves at the close of the day depleted in perhaps twice that sum. the origin of the new york clearing house [ ]the desirability of a substitute for such a system had long been realized, but as yet no plausible scheme had been proposed. as early as a plan had been suggested by albert gallatin, which, to a very remarkable degree, coincided with the one ultimately adopted. but the times were not ripe for the scheme thus proposed. mr. gallatin was thinking in advance of the age. in time, however, the question began to be more generally discussed. for nearly a year it was under consideration, and finally it was deemed advisable to call a meeting to take decisive action upon it. on august , , presidents, vice-president, and cashiers, representing banks, assembled in the directors' room of the merchants' bank, and at this meeting a resolution was passed providing that "a committee be appointed to procure or hire a suitable room in or near wall street, for the purpose of holding meetings of the officers of the city banks; that the said committee be requested to submit a plan, at an adjourned meeting of this body, to simplify the system of making exchanges and settling the daily balances; and that when a room is procured or hired for the above purpose, the presidents or cashiers be requested to meet weekly until a plan is agreed upon." in compliance with this request, the committee presented a plan for the daily settlement of balances, at a meeting held on august , , which plan was amended so as to provide "that a room be procured for that purpose, sufficiently large to afford suitable accommodations." on september , , the scheme was adopted and the committee was "clothed with full power to hire a room, appoint a manager and clerks, and make all the necessary arrangements to carry the plan for a clearing house into effect." the date for beginning operations was fixed for october . accordingly, on the appointed day, the representatives of the banks, members of the association, met in a room which had been procured in the basement at no. wall street, and made the first exchanges. the total clearings on that day were $ , , . , and the balances were $ , , . . these clearings have since been eclipsed by over $ , , in the totals of a single bank. the clearing system in america was thus fairly launched, and from that time forth its success exceeded the expectations of even its most ardent projectors. the association consisted at that time of banks, banded together for their common good, which, as they then conceived, consisted solely in the exchange of items and settlement of balances at a uniform time and place. for nearly a year the operations were conducted without a constitution. the adoption of such an instrument was opposed, on the ground that it was not needed and might lead to a dangerous concentration of power in the hands of a few managers, who might use it for personal aggrandizement, or for the exercise of an arbitrary supervision. membership and admittance fees at new york [ ]the association at present ( ) consists of members[ ] ( national banks and state banks) and the united states subtreasury located at new york. the latter makes its exchanges only at the clearing house, its balances being settled at its own counter. it has no voice in the government of the association, and pays a nominal sum for actual expenses. the privilege which the subtreasury enjoys of making its exchanges through the clearing house is a matter of great accommodation both to the subtreasury and to the banks. the new york post-office clears through one of the members, but renders no compensation to the association for the privilege. the membership of the association since its organization has been constantly changing, owing to the admission and expulsion of members and voluntary withdrawals, as provided by the constitution. the association began with members, but by the list had declined to , the lowest number in the history of the clearing house. a membership of was attained in . on february , , the bank of the union was expelled and the clearing-house association was authorized to return to it whatever amount was necessary to offset its advances toward the expenses of the clearing house. in the following december the empire city bank was expelled and a similar resolution was passed but in no case thereafter were any such refunds made.... the constitution is very explicit in its terms governing the admission and conduct of members. applicants are first considered by the clearing-house committee and referred hence to the committee on admissions. the latter committee, if, in its opinion, after a careful examination, the applicants are qualified for membership, refers them to the association for final action, a three-fourths vote of those present being necessary for admission. banks may be elected to membership at any meeting of the association, but before being considered by the clearing-house committee each applicant must be shown to have an unimpaired capital or an unimpaired capital and surplus of at least $ , . each new member is required to signify its assent to the constitution, in the same manner as the original members, and pay an admission fee, according to capital, as follows: a bank the capital of which does not exceed $ , , must pay $ , ; a bank the capital of which exceeds $ , , must pay $ , . any member increasing its capital is required to pay in accordance with those rates. [ ]methods of settling balances there are no less than five different methods of settling balances, in whole or in part, without the use of money at the clearing house. they are ( ) by manager's check on debtor banks given to creditor banks; ( ) by borrowing and loaning balances without interest; ( ) by borrowing and loaning balances with interest; ( ) by the use of one or more of four forms of certificates, viz., gold and currency depository certificates, united states assistant treasurer certificates, and clearing-house loan certificates; and ( ) by draft on another city. when money is not used in the adjustment of balances at the clearing house, one of the most common methods of settlement is by manager's check on debtor banks in favor of creditor banks. in such cases the creditor banks send clerks to the clearing house to receive the manager's checks, which may be cashed by the debtor banks, exchanged for cashier's checks or exchange on another city, or sent through the clearings on another day. there is one important advantage of the manager's check over settlements in cash at the clearing house: by its use only one transfer of cash is necessary in making settlements, and thus the risk is greatly diminished. the second mode of settlement, other than on a cash basis, is by borrowing and loaning balances without interest. at chicago and pittsburg this method is practised as a matter of convenience to the several members. after the exchanges have been made and the balances determined, a certain length of time is devoted to this transfer. the third method is that of borrowing and loaning balances upon interest, as practised in boston. the fourth method is that of employing some form of certificate. many of the large clearing houses provide for a depository to receive in special trust such united states gold coin as any of the banks belonging to the association may voluntarily deposit with it for safekeeping, upon which certificates may be issued, to be used in the settlement of clearing-house balances. such certificates are usually issued in denominations of $ , and $ , , and are negotiable only among the associated banks. many of the clearing houses impose a fine for their transfer to any other party than a member of the association. coin certificates were devised by f. w. edmunds of new york, and came into use about . the bank of america first acted as a depository, but after the beginning of the greenback epoch the associated banks chose the united states subtreasury as such depository for both gold and currency. when the new clearing house in cedar street was occupied, the gold deposits were transferred to the magnificent vaults with which it is provided, and these at the present time hold a very heavy deposit of gold, as well as a very large amount of currency, against which have been issued clearing-house certificates as before mentioned. the associations in practically all of the large cities of the united states now use these gold depository certificates in the settlement of clearing-house balances. clearing-house loan certificates are issued only in emergencies. the period during which balances are settled by such instruments lasts usually only three or four months, or until the financial disturbance which called them forth has subsided. the fifth method is by draft on some other city. in some places the option is given of settling in cash or by draft, as at austin, tex.; charleston, s. c.; frederick, md.; jacksonville, fla.; kansas city, mo.; new orleans, la.; rochester, n. y.; and saginaw, mich. in others settlements are made exclusively by drafts on another city. among these are syracuse, n. y.; worcester, mass.; fall river, mass.; fremont, ohio; hartford, conn.; holyoke and lowell, mass.; and binghamton, n. y. sometimes foreign drafts are used in payments of equal thousands only, as at wilmington, del., and chester, pa. generally speaking, about per cent. of the clearing houses of the united states use drafts on other cities in paying their balances. about per cent. settle by manager's check, and about per cent. settle by cash alone, the remaining per cent. settling by a combination of two or more of the foregoing methods. clearing houses located in new england settle, as a rule, with drafts on boston or new york, or both. clearing houses in the vicinity of philadelphia usually settle with drafts on that city or on new york, and those located in that part of the country lying east of the mississippi river settle more or less by draft on new york or chicago. settlement is also sometimes made by draft on some of the larger cities, such as baltimore, washington, savannah, kansas city, detroit, omaha, and san francisco. [ ]ratio of balances to clearings the ratio of balances to clearings depends partly upon the number of banks, but much more upon the amount and character of their business and upon their relations one to another. this is illustrated by figures which have just been collected, covering the transactions for the year . at pittsburg, with members and non-members clearing through members, the balances were . per cent. of the clearings; at buffalo, with members and non-members, per cent.; at chicago, with members and non-members clearing through members, . per cent.; at philadelphia, with members and non-member, . per cent.; at st. louis, with members and non-members, . per cent.; while in new york, during the fifty-four years of its existence, the percentage of balances to clearings has been only . per cent., notwithstanding the operation of the united states assistant treasurer, who almost always has a heavy debit balance. the more nearly the banks stand on an equality with one another, the more nearly will their transactions approach a complete offset, which, of course, would leave no balance to settle. [ ]the nature of clearing-house loan certificates clearing-house certificates are of two kinds--those issued upon the deposit of gold coin (and in new york city and boston on gold and silver certificates and legal-tender notes) and those issued upon the deposit of collateral securities. the former are employed in ordinary times solely as a method of economizing time and labor and reducing risk in handling large sums of money. the latter are employed in times of financial disturbance or panic, and although both are intended for use solely in the settlement of balances at the clearing house, the circumstances that call them forth, the results effected by their use, and the part they play in banking economy have little or nothing in common. the certificates issued upon the deposit of gold, etc., are termed "clearing-house certificates," and those issued upon the deposit of collateral security are very properly termed "clearing-house loan certificates," with which latter only are we here concerned. clearing-house loan certificates may be defined as temporary loans made by the banks associated together as a clearing-house association, to the members thereof, for the purpose of settling clearing-house balances. such certificates are negotiable, as a rule, only among the members of the association, and are not in any sense to be regarded as currency. they are not even seen by the business community, and do not pass from bank to bank except in payment of clearing-house balances. to obtain an intelligent understanding of the real character and purpose of such certificates it will be well to treat somewhat of the circumstances under which they are issued. in the course of the present century the united states has undergone periodical derangements of business affairs, when confidence was displaced by mistrust, when the payment of debts became difficult, when property values declined, and business houses failed; when industry and trade were paralyzed, and general stagnation ensued in all lines of enterprise. in such times depositors in banks, stricken with fear and sometimes pressed by need, draw out their deposits, in many cases to such an extent as to render it difficult or even impossible for the banks to contract their loans sufficiently to meet the demands thus made upon them. under our currency system no adequate method is [was] provided for expanding the money volume as occasion demands, whereby the banks can continue their usual loans and discounts, and thus prevent a panic with all its evil consequences. hence it is left in a large measure to the financiers of each community to work out their own remedy, supplemented by such mutual assistance as a courteous regard for each other may dictate or as business relations may demand. quick to see the defects in our currency system, and the desirability of in some way supplying it, the bankers of new york, nearly fifty years ago, devised the scheme of issuing clearing-house loan certificates as a method of relief from temporary stringencies. subsequently, nearly all the clearing houses in the great centres adopted the same device, and by their heroic resort to the measure they have at different times relieved the business community of untold disaster, for which invaluable service they have justly received the grateful recognition of the entire country. the great value of clearing-house loan certificates lies in the fact that they take the place of money in settlements at the clearing house, and hence save the use of so much actual cash, leaving the amount to be used by the banks in making loans and discounts, and in meeting other obligations. the volume of currency, to all intents and purposes, is expanded by this means to the full amount of the certificates issued. the loan certificates are taken out by the clearing-house members through loan committees, specially appointed, and are used, as a rule, only in the payment of balances among the associated banks. thus, when the stringency in the money market seems sufficient to demand it, the clearing-house association meets and appoints a committee called the "loan committee," consisting usually of five bank officers, to act in concurrence with the president of the clearing-house association, who serves ex officio as a member. it is the duty of such committee to meet each morning at the clearing house and examine the collateral offered as security by the banks and issue loan certificates thereon, in such denominations and proportions to collaterals deposited as may be agreed upon. in the past the denominations have varied from cents to $ , in the different associations and in proportions varying from $ to $ of certificates to $ of collateral deposited. these loan certificates bear interest at rates varying from to per cent. per annum, payable by the banks to which they are issued to the banks receiving such certificates in settlement of daily balances. hence the interest charged against certain banks must exactly equal and offset that credited to certain other banks. the aim is to fix the rates sufficiently high to insure the retirement of the certificates as soon as the emergency which called them forth has passed by. as a rule they are retired by the banks, which take them out as soon as they have obtained sufficient cash to meet their daily obligations. notice is given by the debtor banks to the committee, calling for such certificates as they wish to retire, and the committee gives notice to the banks holding the same, stating that the interest will cease after a specified date. in due course the holders send the certificates to the clearing house for redemption. upon the retirement of the certificates the collateral deposited as security is surrendered by the committee in the same proportion to certificates turned in as was required for deposit at the time of issue. it is by no means the general practice for all the members to take out loan certificates when issues are arranged by the association. some banks are in such condition as to be able to weather the storm without them, while others are weak and in great need of relief. some banks regard their use of clearing-house loan certificates as a reflection upon their standing, and hence refuse to apply for them unless driven to it by sheer necessity. others regard it as in no way prejudicial to their interests, but rather as a patriotic movement in which all the banks should engage, both for the purpose of assisting their fellow-members and for the welfare of the community as a whole. clearing-house loan certificates and the equalization of reserves[ ] comparison of the course of events during the crisis of with that in subsequent crises shows a progressively increasing unwillingness or inability among the new york banks to make use of their cash reserves. in the new york banks at the outset of the crisis held an available reserve of $ , , . in the course of four weeks this was reduced to $ , , , and the ratio to deposit liabilities was then less than . per cent.[ ] suspension was not escaped in but it was of shorter duration than in later crises. the banks at that time were unable to increase their cash resources by any of the means which have been available in later crises. the government had no surplus of greenbacks, aside from about $ , , which was almost entirely secured and retained by the savings banks. banknotes could not be issued because the total circulation was at that time limited by law. finally, additional supplies of gold, secured through imports, were useless for ordinary banking purposes because the business of the country was then carried on by means of an inconvertible and depreciated paper currency. notwithstanding all these special difficulties, the new york banks, by continuing to use their reserves freely even after payments had been restricted, were able to restore confidence in a comparatively short time, and money began to flow back to them within three weeks after the outbreak of the crisis. in the new york banks were in what was for them an unusually strong condition at the beginning of the disturbance, having early in june a cash reserve exceeding per cent. of their net deposits. a succession of banking failures in the west and south led to heavy withdrawals from new york during the latter part of june and the beginning of july. then followed a lull and money began to be returned to new york. during the third week of july banking failures were renewed in the west and south and the drain was resumed. the positively unfavorable aspects of the situation were altogether similar to those of the previous month with the one further circumstance of a reduced cash reserve in new york. on the other hand, additional means with which to meet the situation were becoming available. at the end of july gold imports in large amount had been arranged. foreign purchases of our securities were heavy, reflecting increasing confidence in the repeal of the silver purchase law. arrangements had also been made which would certainly lead to a considerable increase in the issues of bank-notes during august and september. notwithstanding all these favorable circumstances the new york banks suspended, during the first week of august, when they still held a cash reserve of $ , , , more than per cent. of their deposit liabilities. in the new york banks restricted payments when they still held a cash reserve of more than $ , , and when the reserve ratio was also above per cent. both in and in suspension was not a measure of last resort taken after the banks had entirely exhausted their reserves and when there was no means of securing additional cash resources. moreover, after cash payments were restricted the policy of the banks was unlike that adopted in , in that the banks did not make further use of their reserves; they hoarded them and added to their amount, thus unduly prolonging the period of suspension. explanation of the failure of the banks in and to use their cash resources as completely as in is simple; but it is of the very greatest significance because it will bring to light the most serious element of weakness in our credit structure. [written before our banking reform of .] in and in the clearing-house loan certificate was the only device resorted to in order to secure the adoption of a common policy by the banks. in , as on earlier occasions when its use was authorized, provision was also made for the equalization of the reserves of the banks. thus in the clearing house association in addition to the customary arrangements for the issue of loan certificates adopted the following resolution: that in order to accomplish the purposes set forth in this agreement the legal tenders belonging to the associated banks shall be considered and treated as a common fund, held for mutual aid and protection, and the committee appointed shall have power to equalize the same by assessment or otherwise at their discretion. for this purpose a statement shall be made to the committee of the condition of such bank on the morning of every day, before the opening of business, which shall be sent with the exchanges to the manager of the clearing house, specifying the following items: ( ) loans and discounts. ( ) amount of loan certificates. ( ) amount of united states certificates of deposit and legal tender notes. ( ) amount of deposits deducting therefrom the amount of special gold deposits. two fairly distinct powers were given the clearing-house committee: the right to issue clearing-house certificates, and control over the currency portion of the reserves of the banks. this machinery was devised (according to tradition) after the crisis of by george s. coe, who for more than thirty years was president of the american exchange national bank. the purpose of the certificate was to remove certain serious difficulties which had become generally recognized during that crisis. the banks had pursued a policy of loan contraction which ultimately led to general suspension, because it had proved impossible to secure any agreement among them.[ ] the banks which were prepared to assist the business community with loans could not do so because they would be certain to be found with unfavorable clearing-house balances in favor of the banks which followed a more selfish course. the loan certificate provided a means of payment other than cash. what was more important, it took away the temptation from any single bank to seek to strengthen itself at the expense of its fellows, and rendered each bank more willing to assist the community with loans to the extent of its power. but in addition to the arrangement for the use of loan certificates provision was also made for what was called the equalization of reserves. the individual banks were not, of course, equally strong in reserves at the times when loan certificates were authorized. from that moment they would be unable to strengthen themselves, aside from the receipt of money from depositors, except in so far as the other banks should choose to meet unfavorable balances in cash. moreover, withdrawals of cash by depositors would not fall evenly upon the banks. some would find their reserves falling away rapidly with no adequate means of replenishing them. the enforced suspension of individual banks would pretty certainly involve the other banks in its train. finally, it would not be impossible for a bank to induce friendly depositors to present checks on other banks directly for cash payment, instead of depositing them for collection and probable payment in loan certificates, through the clearing house. the arrangement for equalizing reserves therefore diminished the likelihood of the banks working at cross purposes--a danger which the use of clearing-house certificates alone cannot entirely remove. these arrangements had enabled the banks to pass through periods of severe strain in and in without suspension. in both instances the use of the loan certificate was followed immediately by an increase in the loans of the banks, and in no short time by an increase in their reserves. the situation in was more serious, and as events proved, the reserve strength of the banks, while sufficient to carry them through the worst of the storm, was not enough to enable them to avoid the resort to suspension. in , the next occasion when clearing-house loan certificates were issued, the opposition to the provision for the equalization of reserves was so widespread that it does not appear that it was even formally considered. the ground for this opposition can be readily understood. in the practice of paying interest upon bankers' deposits was generally regarded with disfavor. only twelve of the clearing-house banks offered this inducement to attract deposits; but by this means they had secured the bulk of the balances of outside banks. it was in meeting the requirements of these banks that the reserves of all the banks were exhausted at that time. the noninterest paying banks entered into the arrangement for the equalization of reserves in expectation of securing a clearing-house rule against the practice of paying interest on deposits. but their efforts had resulted in failure. some of them had employed their reserves for the common good most reluctantly in , and the feeling against a similar arrangement in was naturally far stronger and more general. moreover, the working of the pooling agreement in had occasioned heart-burnings which had not entirely disappeared with the lapse of time. it was believed, and doubtless with reason, that some of the banks had evaded the obligations of the pooling agreement. it was said that some of the banks had encouraged special currency deposits so as not to be obliged to turn money into the common fund. further, as the arrangement had not included bank-notes, banks exchanged greenbacks for notes in order either to increase their holdings of cash or to secure money for payment over the counter. here we come upon an objection to the pooling arrangement which doubtless had much weight with the specially strong banks, although it is more apparent than real. in order to supply the pressing requirements of some banks, others who believed that they would have been able to meet all demands of their depositors were obliged to restrict payments. that such an expectation would have proved illusory later experience affords ample proof. when a large number of the banks in any locality suspend, the others cannot escape adopting the same course. but in the erroneousness of the belief had not been made clear by recent experience. the new york banks weathered the moderate storms of and without suspension, by means of the clearing-house loan certificate alone, and in the course of time all recollection of the arrangement for the equalization of reserves seems to have faded from the memory of the banking community. there was, however, in those years another potent influence which tended to lessen the likelihood of suspension following the issue of loan certificates. many banks were unwilling to take them out, fearing that such action would be regarded as a confession of weakness. the prejudice against them was indeed so strong that needed loan expansion did not follow the authorization of their issue. in the directors of the bank of commerce, then, as now, one of the most important banks of the city, passed a resolution urging other banks to relieve the situation by increasing loans and by taking out loan certificates. in only a small part of the balances between the banks was settled in certificates at first; but by the end of july practically all balances were settled in that way and suspension followed at once. in all the banks having unfavorable balances, with but one important exception, took out certificates on the first day that their issue was authorized, and suspension was then for the first time simultaneous with their issue. the connection between suspension and the use of clearing-house loan certificates as the sole medium of payment between the banks is simple and direct. the bank which receives a relatively large amount of drafts and checks on other banks from its customers cannot pay out cash indefinitely if it is unable to secure any money from the banks on which they are drawn. so long as only a few banks are taking out certificates and the bulk of payments are made in money, no difficulty is experienced; but as soon as all the banks make use of that medium, the suspension of the banks which have large numbers of correspondents soon becomes inevitable. the contention of bankers both in and in that they had not suspended since they had only refused to honor drafts on other banks was untenable. the clearing-house loan certificate was a device which the banks themselves had adopted and they had failed to provide any means for preventing partial suspension as the result of its use. the further contention of some bankers that they had suspended because they had no money to pay out was doubtless true of a few banks, but for that very reason other banks must have been all the stronger, probably well above their required reserve. that the arrangement for equalizing the reserves, adopted in , would have availed to prevent suspension on subsequent occasions, is highly probable, indeed a practical certainty. in events proved that the banks had maintained payments up to the very last of the succession of disasters with the results of which they had been contending. during august the number of bank failures was not large and none of them was of great importance. we cannot, of course, know how soon money would have begun to flow back to new york, but certainly the suspension of payments could hardly have hastened the movement. from the beginning of september the reported movements of currency showed a gain for the new york banks, and for the week ending september the gain was no less than $ , , . one month more of drain, therefore, was the most that the banks would have been obliged to endure, and for the needs of that month the banks would not, as in , have been confined to the single resource of the $ , , of the cash in their vaults.[ ] similarly, the enormous increase in the money supply of the country in november and december, , would have offset much of the loss of reserve which the banks would have incurred, if they had continued to meet all the demands of their customers for cash. and, finally, it may be observed that in the unlikely event that alarm had not been allayed and suspension in the end had become unavoidable, it would not have made any practical difference to depositors whether the reserves of the banks had been but per cent. rather than per cent. of their demand liabilities. clearing-house bank examinations[ ] most bank failures are due to the gradual acquirement of undesirable assets over a period of years, and if some authority exists with power to make recommendations of a remedial character, with the further power to enforce such recommendations, if necessary, there is little doubt that many bank failures would be averted. the panic of presented many striking examples of just what is intended to be here emphasized, viz., that under the careful supervision of a competent and reliable examiner many of the assets of the failed banks, upon which it was impossible for them to realize at a time when they needed their funds, would probably have been liquidated upon his recommendation and advice long before the necessity for such liquidation had arisen. mr. j. b. forgan of chicago, has recently said on this subject: a competent examiner--and there are many such now in the government employ--while he can not pass judgment on all the loans in a bank, can, after a careful examination, or a series of examinations, form a wonderfully correct judgment as to the general character of its assets and as to whether its management is good or bad, conservative or reckless, honest or dishonest. examinations, as they are now conducted, have a most beneficial influence on bank management, especially by way of restraint. the correspondence carried on by the comptroller, based on the examiners' reports, does an inestimable lot of good in the way of forcing bank officers to comply with the law and in compelling them to face and provide for known losses as they occur. supervision by examination does not, however, carry with it control of management and can not, therefore, be held responsible for either errors of judgment or lapses of integrity. examination is always an event after the act, having no control over a bank's initiative, which rests exclusively with the executive officers and directors, and depends entirely on their business ability, judgment, and honesty of purpose. the clearing-house association of chicago was the pioneer in the establishment of an independent system of clearing-house bank examinations in this country, its system having been inaugurated on june , , with results that have, to the present time, more than fulfilled the expectations of the bankers of that community[ ].... in substantially his own words the chicago examiner operates under the following conditions: the examinations extend to all the associated banks of chicago and to all non-member institutions. the work is conducted with the aid of five regular assistants, each fitted by experience to thoroughly do that part of the work assigned to him. the examinations include, besides a verification of the assets and liabilities of each bank, so far as is possible, an investigation into the workings of every department and are made as thorough as is practicable. after each examination the examiner prepares a detailed report in duplicate, describing the bank's loans, bonds, investments, and other assets, mentioning specially all loans, either direct or indirect, to officers, directors, or employees, or to corporations in which they may be interested. the report also contains a description of conditions found in every department. one of these reports is filed in the vaults of the clearing house, in the custody of the examiner, and the other is handed to the examined bank's president for the use of its directors. the individual directors are then notified that the examination has been made and that a copy of the examiner's report has been handed to the president for their use. in this way every director is given an opportunity to see the report, and the examiner, in every instance, insists upon receiving acknowledgment of the receipt of these notices. the detailed report retained by the examiner is not submitted to the clearing-house committee, under whose direct supervision he operates, unless the discovery of unusual conditions makes it necessary. a special report in brief form is prepared in every case and read to the clearing-house committee at meetings called for that purpose. the report is made in letter form, and describes in general terms the character of the examined bank's assets, points out all loans, direct or indirect, to officers, directors, or employees, or to corporations in which they may have an interest. it further describes all excessive and important loans, calls attention to any unwarranted conditions, gross irregularities, or dangerous tendencies, should any such exist, and expresses, in a general way, the examiner's opinion of each bank as he finds it. less than a year after the chicago clearing house association appointed its special examiner the associated banks of minneapolis took similar action. the conditions under which the minneapolis examiner operates are substantially the same as those governing the examiner at chicago, the principal difference being that instead of the examiner sending a copy of his report to the president of the examined bank and notifying each of the directors of such bank that he has made such examination and that the report is in the hands of the president of the institution, as is the rule of procedure at chicago, and which, in a measure, leaves it to the discretion of the directors whether they examine the report carefully and in detail, the original report is delivered by the examiner at minneapolis in person to the board of directors of each bank which he examines, at a meeting convened for that purpose. the report is read and the criticisms, if any, are fully discussed, and the recommendations considered. in this way no director can complain that he had not sufficient opportunity to become fully conversant with all the details of his bank. ii. clearing houses in england the london bankers' clearing house as the foremost example [ ]the exact origin of the london bankers' clearing house will probably never be determined, for, like other institutions whose purpose has been to save time and trouble, its system appears to have been gradually evolved.[ ] with the growth of the check system, each banker would daily find himself in possession of a number of drafts for the credit of his customers that needed collection at the offices of other bankers. this would necessitate each bank sending out one or more clerks on what became known as "walks" to obtain cash or notes for these drafts from the houses on which they were drawn. as in london alone there were some fifty or more private firms carrying on a banking business this necessitated a considerable amount of work and was attended with grave risk of robbery. it is probable, therefore, that arrangements were made by some of the bankers, as it is still done in some country towns, to meet at one bank one week and at another the next for the purpose of exchanging checks. but in consequence of the number of the london bankers this method would prove awkward, and about the year we find that the walk clerks from the city and west end banks had made a practice of meeting at lunch time at a public house called the five bells in dove court, lombard street, close to st. mary woolnoth church, and not so very far from the site of the bankers' clearing house of to-day. here in the public room, or according to tradition on the posts in the court outside, each day after lunch a rough system of exchange of checks was carried on between the clerks from each bank, the balances being settled in notes and cash. from this rough system has developed the efficient organization of to-day. in may, , the clearing house was closed for alterations and enlargement, and the business was temporarily carried on at the hall of commerce. here, on june , , applications for admission to the clearing house were received from the following joint-stock banks: the london and westminster, the london joint stock, the union bank of london, the commercial bank of london, and the london and county bank; and it was resolved "that the secretary be authorized to comply with such applications, subject to the payment of an annual sum to be fixed by the committee to reimburse them for the outlay that has been found necessary to afford accommodation for their admission." there were at this time private banks in the clearing house. following on the admission of the five premier joint-stock banks in there were frequent applications from other joint-stock banks--many from the moment of their foundation. but the wise reply of the committee was invariably that they did not "deem it expedient to take into consideration such applications from any banking establishment that has not been in operation at least for a period of twelve months." though the joint-stock banks had been admitted to the clearing house yet they were only allowed to rent seats there and had no share in the management, so for the support of their mutual interests they had a committee of their own which settled the rate to be given by the joint-stock banks in the london district for deposit money at seven days' notice. in the country bankers submitted a plan for establishing a country bankers' clearing house in london and proposed that the clearing house committee should appoint two or three of their number to unite with them as a working committee. the establishment of a separate country bankers' clearing house would have led to many inconveniences, and mr. john lubbock, now lord avebury, submitted a plan for carrying out a separate country clearing at the clearing house. the committee approved the plan and submitted it to the country bankers' committee, who also gave their approval. thus was instituted at the bankers' clearing house the country clearing, which more than all else has brought about the almost universal use of checks in england, to the exclusion of notes and coin. mr. lubbock's scheme was so well thought out that from its initiation to the present time the rules have had to be only very slightly modified. in the bank of england entered the clearing house to clear on one side only, the outside, for though the bank presents to the clearing bankers at the clearing house all checks payable by them, all checks and bills drawn on the bank are presented by the clearing bankers at the bank itself, and the proceeds placed to the credit of each bank's account. at the same time the governor of the bank of england was made ex officio a member of the committee of clearing bankers. after few changes were made in the working of the clearing house, the volume of the country and town clearings increased greatly, but the house proved capable of meeting any increase. friction between the old private bankers and the joint-stock banks grew less as amalgamations and absorptions increased, and before many years the committee of london clearing bankers and joint-stock banks committee amalgamated, it being agreed, as a condition of the joint-stock banks committee ceasing to exist, that all the banks would abide by the ruling of the committee as to the rate of deposit at seven days' notice. henceforth, every bank in the clearing house was entitled to have one representative on the committee. such representatives have hitherto been chosen solely from the board or the partners and are nominated by their banks and formally elected by the committee. the committee elects its own chairman, vice-chairman, and honorary secretary. this committee meets regularly on the first thursday in each month, thursday being the day on which the bank of england in normal times makes any alteration in the bank rate of discount, but it may be summoned by requisition at any time and meets automatically should the bank rate be altered, since this governs the rate of deposit allowed by the bankers. the committee has full power over all clearing house matters, and from the importance of the banks who compose the clearing house its opinion carries very great weight on all matters in the banking world. it is, however, controlled only by the mutual agreement of its members: and the decision of the majority of its members, though followed loyally, is never used with any ultimate power of compulsion in matters affecting banking in general. in a third clearing, the metropolitan, was established. hitherto, with the exception of one or two city offices which were included in the town clearing, the collection of drafts on london branches of the clearing banks had been effected by the post and by the sending out of walk clerks by each bank; but in it was determined to do away with such means of collection as far as possible and to collect the branch checks through the clearing house. this proved so successful that the west end banks were approached the following year, and with one exception readily consented to come into the new plan by which their clearing agents had delivered to them at the metropolitan clearing all checks drawn upon them. this clearing is the first clearing made each morning and is handled so expeditiously that even the most distant london branches get their checks almost earlier than under the old system. they have, therefore, plenty of time to go through them and to make returns of any checks that cannot be paid in time for such return checks to reach the clearing house early in the afternoon. there are now over banks and branches using this clearing. for the better defining of the three clearing areas--town, metropolitan, and country--the letters t m c have been placed in the corner of all bank checks. from february , , the date of the initiation of the metropolitan clearing, up to december of that year, £ , , was paid in this clearing, while for the year the total was £ , , , as compared with the town clearing total for that year of £ , , , and the country total of £ , , , , making in all a grand total of £ , , , , which figures, vast as they are, were a decrease of £ , , on the total £ , , , for the previous year, .[ ] the work entailed by such vast figures as these could scarcely have been dealt with by hand alone, but by the installation of adding machines the work is easily and quickly done. it must not be thought that all checks on london are presented through the clearing house, for checks on the london branches of the scotch banks and of the colonial and foreign banks are still presented over the counter. moreover, though it is mutually understood between the clearing banks that checks on each other will only be presented through the clearing house, this agreement has no legal binding. two exceptions are continually made; documents or goods have to be taken up against cash, and the owner before parting wishes to be certain of his money. in this case the presenting banker either presents his check for marking--that is to say, the paying banker having ascertained from his customer's account that there is sufficient money thereon, marks the check for payment, which has the same effect as if the banker had accepted it; or, as is becoming more usual, the paying banker gives one of his own drafts on the bank of england in exchange for the check. provincial clearings besides the london clearing house, which is an irregular building of no architectural features whatever, there are eight provincial clearing houses in england--birmingham, bristol, leeds, leicester, liverpool, manchester, newcastle and sheffield.[ ] two only of these clear over £ , , in the year. manchester cleared £ , , in , with an average weekly total of £ , , and an average daily total of £ , , , and liverpool £ , , . the others cleared in the same year from £ , , to £ , , . small figures, indeed, compared with london, where the highest total paid on any one day was, in , £ , , . in the highest total paid in one day in the london clearing was £ , , and the lowest £ , , . in london, as in the provincial places, the object of the clearing house is primarily the convenience of exchange of checks, not the regulation of banking, and little is regulated save, perhaps, the rate of interest to be paid on deposits at seven days' notice. in these days, too, when the tendency is strong for amalgamation, the local banks are dwarfed by their gigantic competitors, with their branches in many counties and head offices in london, with the result that london each year controls more of the banking in england and the provincial clearings cease more and more to be under local control, but are controlled by their london head offices. this may, if the present tendency of amalgamation continues,[ ] result in the committee of london clearing bankers becoming an important controlling body, but that time is not yet at hand, and though, as we have said, an expression of opinion on the part of the committee carries very great weight, yet anything like dictation would very properly be resented by the important and old-established banks in both london and the provinces that are outside the clearing house. footnotes: [ ] james g. cannon, _clearing houses_, publications of the national monetary commission, senate document, no. , st congress, _ nd session_, p. . [ ] _ibid._, pp. - . [ ] _ibid._, pp. - . [ ] _ibid._, pp. - . [ ] members in . [ ] _ibid._, pp. , , - . [ ] _ibid._, p. . [ ] _ibid._, pp. - . [ ] o. m. w. sprague, _banking reform in the united states_, pp. - . harvard university. . [ ] the figures in the text refer to the legal tender holdings of the banks. the banks also held a considerable amount of specie but it was not a free asset as most of it had been received on special accounts payable in gold. including the specie holdings the reserve ratio was . per cent. [ ] c. f. dunbar, economic essays, chap. xvi. [ ] the increase in the amount of money in circulation for august, , was estimated at $ , , . [ ] james g. cannon, _clearing houses_. publications of the national monetary commission, senate document no. , st congress, _ d session_, pp. - . [ ] [a number of the more important cities such as st. paul, st. louis, and philadelphia, following the example of chicago and minneapolis, have instituted clearing house bank examinations since .] [ ] adapted from robert martin holland, _the london bankers clearing house_. publications of the national monetary commission, senate document no. , st congress. _ nd session_. [ ] the date of the establishment of the clearing house is not known. the clearing has, however, been in existence about years.--editor. [ ] [for the five years - , the total clearings of the london clearing house were in the neighborhood of £ , , , per annum of which the town, metropolitan, and country clearings were about , . , and . per cent., respectively.] [ ] [the approximate number of clearing houses outside of london, in england, in is twelve, but these are used only for local clearings. in addition, most of the towns in england and wales have a local exchange which is a clearing on a small scale.] [ ] this tendency has continued as to both the joint-stock and private banks.--editor. chapter xx state banks and trust companies since the passage of the national bank act [ ]the banking institutions of the united states other than national banks are ordinarily classified into (a) state banks, (b) trust companies, (c) stock savings banks, (d) mutual savings banks, and (e) private banks. the following pages deal with two of these classes, viz., state banks and trust companies. it will be desirable at the outset to distinguish them from the other classes, and to outline the history of legislation concerning them since . the term "state bank" has been used in the united states in several different senses; but whatever the variance in meaning, such banks have always had one common characteristic--incorporation under state authority. in the bank reports of some of the states, private banks are not distinguished from state banks. this is due to the fact that in these states incorporated and unincorporated banks are subject to the same regulation. a private bank, however, is an unincorporated bank. not all banking institutions incorporated by the states are state banks. mutual savings banks, stock savings banks, and trust companies are also corporations organized under state laws or charters granted by state legislatures. the distinction between mutual savings banks and state banks is clear. mutual savings banks do not have a capital stock and do not carry on a discount and deposit business--_i. e._, they do not discount commercial paper, and do not receive demand deposits payable on check. state banks, on the other hand, have a capital stock and carry on a discount and deposit business. many state banks, however, receive also savings deposits. the line of demarcation between state banks and stock savings banks is much less definitely marked. both state banks and stock savings banks have a capital stock. stock savings banks are primarily savings banks, and many of them do not do a discount and deposit business, but confine themselves to the savings bank business. but in several states the distinction between state banks and stock savings banks is of the most unsubstantial character, since the stock savings banks carry on the business of a commercial bank, receiving demand deposits payable on check, and discounting commercial paper. finally, the distinction between state banks and trust companies is not exactly the same in any two of the states. "state banks" then, as the term is used in the following pages, are banks of discount and deposit (as distinguished from savings banks, mutual and stock) incorporated by one of the states or territories (in contrast with private banks, which are unincorporated, and with national banks, which are organized under the national-bank act).[ ] in there were in the united states , state banks. owing to the repressive influence of the national-bank act, hastened in its effect by the per cent. tax on state-bank notes, the number of state banks had by fallen to . one result of this decline in the number and importance of state banks was the cessation of state banking legislation. the old laws regulating state banks of issue were swept away by code revisions, or remained obsolete and unchanged on the statute books. the number of state banks began to increase about . in a few states old banking laws intended for the regulation of banks of issue hampered their development, but in the remaining states they were left for a considerable period almost entirely without regulation. as late as , in his digest of the state statute law, mr. stimson said: it seems unnecessary to incorporate the state banking laws in this edition. nearly all the states, except the newer states and territories, have special chapters in their corporation acts concerning banks and moneyed institutions, but these chapters are usually of old date, and have practically been superseded for so long a time by the national banking laws that they have become obsolete in use and form. the increasing attention paid in recent years by the state legislatures to the regulation of the state banks has been partly due to the rapid growth of the banks in numbers and in financial importance; but it is to be accounted for primarily by a change of view as to the purpose of banking regulation. the antebellum state-bank regulations were intended to secure the safety of the bank note. although the depositor was protected by many of the regulations, this protection was purely incidental. the view that note-issuing banks alone required governmental regulation persisted for a considerable time after the passage of the national-bank act. since the national banks had a monopoly of the issue of bank notes, the regulation of state banks was considered needless. as the importance of note issue as a banking function decreased, banking regulation, as seen in the national-bank act, began to be considered desirable as a protection to depositors. the evolution of the trust company with the exception of the power to issue notes, which would be unavailable because of the tax on note issue, the powers of the state banks of to-day are essentially the same as the powers of the state banks which were in operation before the civil war. on the other hand, the trust company is a new type of banking institution, the functions of which are even yet not clearly defined. a great part of the legislation with reference to trust companies, therefore, has had to do with defining the powers of these corporations. the early laws for the incorporation of trust companies show the widest differences of opinion with regard to their field of operation. the one point of agreement appears to have been the idea that a corporation could administer trusts more advantageously and safely than an individual. but the companies in all the states were given additional powers more or less closely connected with their trust powers. some of the companies, chiefly the very early ones, were empowered to insure lives and to grant annuities. in a considerable number of states the companies were authorized to insure the fidelity of persons in positions of trust and in some states to insure titles to land. almost all the companies were empowered to do a safe-deposit business. among these powers there was a certain apparent connection. the power to insure the fidelity of trustees, administrators, and executors seemed a natural addition to the powers of a company which might act in such capacities. similarly, it appeared that the business of insuring titles to land was one which could be most economically conducted by a corporation which, in its capacity of trustee, would be a large owner of real estate. one other power was given to practically all the companies--the power to receive deposits of money in trust. the following quotation from the report of the massachusetts commissioners of savings banks for shows the use which it was expected would be made of this power: the trust company in worcester and the new england trust company in boston, both in successful operation, are the first of such corporations established in this state. they were incorporated after a very careful investigation by the legislature, with power to hold money in trust, and so restricted in making loans and investments as to afford the safety which the character of their business requires. a similar institution will soon be organized in northampton, and others are contemplated. they are well calculated to promote public interests by affording to the owners of capital not engaged in business many of the advantages secured by our savings-bank system for the savings of labor. the development of the trust company as reflected in the legislation with reference to its powers shows two main tendencies: ( ) the companies have to a very large extent given up the insuring of the fidelity of persons in positions of trust and the guaranteeing of land titles. ( ) they have largely increased their banking activities. . in some states which formerly authorised trust companies to insure the fidelity of persons in positions of trust, or to guarantee titles to real estate, the more recent laws do not permit the combination of such business with the business of a trust company. the fidelity insurance business during the past twenty years has been largely concentrated in the hands of a comparatively small number of companies which have agencies in all parts of the country and which do not undertake a trust or banking business. the elimination of fidelity insurance from the functions of the trust company has not been chiefly or even largely due to adverse legislation, but to the nature of the fidelity insurance business. the most successful conduct of that business appears to require, like other kinds of insurance, that the risks shall be numerous and widely distributed. these conditions are best met by companies which carry on business in many different places. for the most economical conduct of the title insurance business an expensive plant is necessary. the business in each city tends therefore to fall into the hands of a single company, which ordinarily finds it profitable to devote itself entirely to the one kind of business. at the present time, only a very small part of the trust companies in the united states insure titles to land. . the second great tendency in the development of the powers of the trust company--the enlargement of its banking powers--has also been primarily an economic development and not one due to legislative design. as has already been noted, the early trust companies ordinarily had power to receive trust deposits and to loan money. some such powers were necessary for the exercise of their trust functions. the opportunity to enlarge the banking powers of the companies lay in the difficulty of distinguishing clearly between the powers which it was intended to confer upon the trust companies and the banking powers possessed by state and national banks. in the greater number of the states the wording of the sections conferring powers to do a trust business was such that the trust companies were either held by the courts to be empowered to do a banking business, or, if the power to do such business seemed not to be granted, were able by some change in the method of doing the kind of banking business in question to bring it within the powers actually conferred. in missouri, for instance, since trust companies have been empowered to "receive money in trust and to accumulate the same at such rate as may be obtained or agreed upon or to allow such interest thereon as may be agreed." the supreme court of missouri in construing the power thereby conferred has held that a trust company can take only interest-bearing deposits, but that such deposits may be demand deposits payable on check. the rate of interest may, however, be nominal. in other states the trust companies have attained legal recognition of their banking powers by slow steps. the history of the pennsylvania trust companies affords an illustration. in the pennsylvania general corporation act of no provision was made for the formation of trust companies, but provision was made for the incorporation of title-insurance companies. by an amendment to the corporation act in title-insurance companies with a capital of at least $ , were given trust and fidelity-insurance powers; but it was expressly provided that such companies were not authorized thereby to do a banking business. in the trust companies were given the power to receive upon deposit for safekeeping valuable property of every description, and in trust companies were given power to "receive deposits of money and other personal property and to issue their obligations therefor ... and to loan money on real and personal securities." in the united states circuit court of pennsylvania decided that pennsylvania trust companies might legally receive demand as well as time deposits. pennsylvania trust companies apparently even now cannot discount commercial paper, but they may loan on it as collateral and may purchase it from the holder. the states in which the banking powers of the trust companies have been most narrowly restricted are iowa, michigan, nebraska, and wisconsin. in nebraska a trust company cannot do a banking business. in iowa trust companies cannot do a banking business except that they may receive time deposits and issue drafts on their depositories. in michigan trust companies are expressly forbidden to do "a general banking business." the michigan commissioner of banking in his report for complained, however, that the law was not clear as to the banking powers of the companies. in minnesota the trust companies may receive trust deposits, but may not "engage in any banking business except such as is expressly authorized for such a corporation." in wisconsin the extent of the power of trust companies to receive deposits was much debated until , when the legislature provided for the incorporation of "trust-company banks," which have power to receive time and savings deposits, but do not have power to receive deposits subject to check. the result of the two tendencies described above--the elimination of the insurance powers of the trust company and the addition of banking powers--has gradually standardized the powers of the trust company, until at the present time the trust company, as it appears in the corporation laws of most of the states, may be fairly well defined as a bank which has power to act in the capacity of trustee, administrator, guardian, or executor. in a number of states the legislation concerning trust companies deals with them explicitly from this standpoint. the illinois bank act of provided that any bank might have power to execute trusts by complying with the trust-company law. in alabama and tennessee any state bank may be appointed and may act as an executor, administrator, receiver, or guardian. in mississippi any bank with a paid-up capital of $ , may do a trust-company business. in georgia any trust company may acquire banking powers by complying with the laws regulating banks. in texas banks may acquire trust-company powers. the same tendency is shown in the important banking laws enacted in ohio in and california in . the gradual change from the view that the trust company is an institution of markedly different character from the ordinary bank of discount and deposit to the view that the trust company is merely a bank exercising functions additional to those exercised by the majority of banks has been the chief influence in determining the form of the legal regulations imposed upon trust companies. as long as the older view obtained, the regulations concerning trust companies were widely different from those imposed upon banks; but as the trust company has increased both the scope and amount of its banking business, the regulation of the banking business of the trust company has tended to become assimilated to the regulations imposed upon state banks. incorporation since state banks and trust companies have been incorporated by the use of one of three methods: ( ) by special charter; ( ) under the "business incorporation law"; ( ) under the general banking law. not very many of the states have used consecutively all three methods, for the special charter and the "business incorporation law" were used contemporaneously in different sections of the country. both have given place, in the great mass of states, to the general banking law. from to probably the greater number of the banks formed were incorporated under special acts; from to incorporation under the "business incorporation law" was the prevailing method, and since then the general banking law has become the almost universal method of incorporating banks and trust companies. capital and surplus requirements when the states began to give attention to the regulation of the banking business the question of capital received immediate attention. the national-bank act and the banking laws in new york and the middle west which had survived from the antebellum period contained provisions concerning the amount and payment of capital. a requirement with regard to capital was recognized as the central point in any system of bank regulation. the capital stock is a buffer interposed between the bank's creditors and losses which the bank may suffer. if there is no capital, losses may fall directly on the creditor, and the larger the capital stock, other things being equal, the less the likelihood of loss to the depositor. the states and territories may be divided roughly into two groups according to the amount of the smallest permissible capital for state banks: . in the eastern states and the more easterly of the middle western states, the banking laws, with one exception, require that banks shall have a capital of at least $ , . . in the other sections of the united states banks in most of the states are incorporated with a capital as small as $ , , although in a few of these states the smallest permissible capital is $ , , $ , , $ , , and $ , , and in one, north carolina, it is $ , . the amount of capital required, except in a few states, is not a uniform amount, but is graded, usually according to the size of the city in which the bank is located. in of the states and territories which require under a general law a specified amount of capital for the incorporation of state banks the amount of capital is thus graded. the grading of the amount of capital required according to the population of the place in which a bank is located has been chiefly due to the desire to bring about some adjustment between the capital of each bank and the volume of its business. it is assumed that the larger the business of the bank the greater the chance of its suffering large losses and the larger the capital necessary to protect its depositors against loss. it is also assumed that the size of the city in which it is located is a rough index of the volume of business done by a bank. under many of the state banking laws the grades are very numerous. the minute gradation of the capital requirements found in many of the state banking laws is due to the desire to encourage the formation of banks in the smaller cities and towns, for it is to be noted that in the greater part of the state laws the grades are not numerous for the larger places. obviously, if any law requiring a minimum capital for banks is to be effective, it must provide specifically for the payment either of all the capital or of a specified sum; otherwise the directors of the bank may require the payment of only a small part of the capital. the provision in the national-bank act concerning the payment of capital has been the model for similar provisions in the banking laws of a large number of the states. many of the state banking laws likewise contain the same provision as the national-bank act with reference to surplus. in several states the laws make no provision with reference to the amount of capital required for a trust company. in connecticut, delaware, new hampshire, and vermont, trust companies are incorporated only under special acts and the amount of their capital is determined in each particular case by the legislature. in rhode island trust companies are incorporated by a board which has power to fix the terms of incorporation, including the amount of capital. the first general laws for the incorporation of trust companies in the united states required such companies to have a much larger capital than that required for banks, but the later legislation shows a distinct tendency in the direction of lowering the requirements in regard to capital. in nearly all of the states, however, the requirement for trust companies is still substantially different from that for state banks. the smallest permissible capital for a trust company ranges from $ , in north carolina to $ , , in the district of columbia. the majority of the states, which provide that trust companies must have a specified minimum capital, do not permit the organization of trust companies with a smaller capital than $ , . in only one state, iowa, is the smallest permissible capital less for trust companies than for state banks; in six states it is the same; in all the others it is larger. the accumulation of a surplus is not required in so many states for trust companies as for banks. liability of stockholders with the practical prohibition of the issue of state bank notes in and the consequent decrease in the number of state banks, the liability of stockholders in state banks became in nearly all of the states, except where an additional liability was imposed by the constitution, the same as that of stockholders in ordinary business corporations. since , however, provisions imposing an additional liability on the stockholders of banking corporations have been placed in the banking and trust-company laws of nearly all the states in which state banks or trust companies have assumed any great importance. in the larger number of the states and territories the liability is a proportionate one, and the stockholders are responsible "equally and ratably and not one for another." the imposition of the statutory liability on the stockholders of state banks and trust companies has not proved of great service as a protection to bank creditors against loss. as yet little has been accomplished in the way of making the enforcement of the liability effective. restrictions on loans and discounts the desirability of some legal limitation on the extent of the liability to a banking institution which any one person, firm, or corporation may incur is largely due to the fact, that, since the american banking system is a system of independent banks, the resources of many of the banks are necessarily small in comparison with the needs of some of their customers for loans. a large manufacturing concern located in a small town may very well be able to use all the assets of the local bank. if the local bank were the branch of a larger bank, the mere fact that a large loan was wanted by a manufacturer in a small town would be of no significance, since the amount of the loan would be small compared with the total assets of the bank. moreover, in many banks a controlling interest is held by a person, firm, or corporation that is actively engaged in other business enterprises. such control is far more likely to be found in small banks than in large, and in a system of independent banks than in one of branch banks. one consequence of the close identification of interest thus brought about between banking and other business enterprises is the probability that loans will be made directly or indirectly to some one borrower to an amount larger than a proper distribution of risks would justify. the national-bank act in its original form provided that the total liabilities to any national bank of any person, company, corporation, or firm for money borrowed should not exceed one-tenth of the amount of the paid-in capital stock of the bank. the liabilities of the members of the firm or company were to be included in the liabilities of the firm or company. it was provided, however, that "the discount of bills of exchange in good faith against actually existing values and the discount of commercial or business paper actually owned by the person negotiating the same" should not be considered as money borrowed. this section of the national-bank act remained unchanged until , when it was amended so as to permit a single liability to be contracted equal to one-tenth of the capital and surplus, instead of one-tenth of capital only, but it was also provided that the liability should not, in any case, exceed per cent. of the capital stock. in the banking laws of seven states the limit on the amount of single liability is the same as under the national-bank act. the banking laws of almost all the other states permit a larger amount to be loaned on a single liability than is permitted by the national-bank act. in nearly all of those states in which trust companies have acquired full banking powers the provision limiting the amount of any single liability applies to both banks and trust companies. in only one state or territory--new mexico--is there such a provision for trust companies and none for state banks. in a few states--kansas, michigan, minnesota, missouri, montana, oklahoma, new jersey, nebraska, and wisconsin--there are limitations on the amount of a single liability for banks, but none for trust companies. loans to directors and officers in almost all the banking institutions of the united states the directors or a part of them are actively engaged also in other business enterprises; and in many cases they borrow from the banks or trust companies in which they are directors. moreover, in some banks one or two of the directors own a controlling interest, and are at the same time large borrowers. the possibility, in such cases, that larger loans may be made than the credit of those directors warrant is very considerable. the national-bank act contains no provisions regarding loans to directors, but in the laws of about one-half of the states attempts have been made to devise rules which would prevent the making of loans to directors in excess of the amount to which their credit entitles them. the requirement that loans to directors shall be formally approved by the board of directors is the one most frequently found. it has been thought that directors would be reluctant to vote for excessive loans to other directors if their vote is to be recorded. real estate loans there is no more characteristic difference between state banking laws and the national-bank act than the fact that, in almost all the states, state banks and trust companies may make loans on the security of real estate, whereas national banks are [were] prohibited from doing so [before the passage of the federal reserve act]. in some states, where the influence of the example of the national-bank act was strong enough at the beginning of state-bank regulation to secure the insertion in the state banking laws of the prohibition of real estate loans, it has later been found desirable to amend the laws in this respect. the pennsylvania general banking law of , for instance, did not permit banks to loan on real estate, but was amended in , so as to permit such loans to be made. in north dakota and south dakota, also, similar changes have been made in the banking laws. in trust companies in all the states and territories where incorporated under general laws were allowed to loan on the security of real estate. state banks so incorporated may also loan on real estate in all the states and territories except new mexico and rhode island. in rhode island, however, banks may loan on real estate part of their savings deposits. a few of the state banking and trust-company laws contain provisions limiting the amount which may be invested in real estate loans. not withstanding the disadvantages of real estate as a convertible asset, the power to loan on the security of real estate is a valuable one to many of the state banks.[ ] many banks, particularly those in the smaller towns and cities, if restricted to loans on personal security, find it difficult to fully employ their funds. there are not sufficient local loans of this kind to employ all the funds of the bank; and the amount not so employed, if it is to yield a revenue, must either be invested in outside commercial paper or deposited with banks in the great commercial cities. reserves in most of the antebellum state banking laws reserves were required only against note issue. in ohio, for example, the general banking law required a reserve of per cent., against circulation, but none whatever against deposits. several of the state banking laws which survived the destruction of the state bank-note issue contained, however, provisions requiring banks to hold a reserve against deposits; but in none of these states was the increase in the number of state banks important. in those states in which the state banks were organized under the "business incorporation laws" there were, of course, no reserve requirements. until a reserve was required for state banks in only three states, ohio, minnesota, connecticut, and in these the required reserves were small. even since the revival of state bank regulation, which began in , the requirement of a reserve has not been regarded in many of the states as an important part of the state banking law. the most striking and important difference between the reserve required by the national-bank act and the reserves required by the state banking laws is that under the national-bank act the reserve is a percentage of "deposits"--_i. e._, of all deposits--while under the banking laws of a majority of the states either no reserve is required against time or savings deposits, or a smaller amount of reserve is required than against demand deposits. none of the state banking laws require that the reserve of any class of banks shall consist wholly of cash in bank. all the laws permit balances in other banks to be counted at least as a part of the reserve. there are great differences among the laws, however, with respect to the amount which may be so counted. the laws in all the states leave the banks almost entirely free to deposit their funds in banks in the great commercial centres. the strong economic pressure toward concentration is thus left free to act toward drawing reserves into banks located in the reserve and central reserve cities. in the greater number of states which incorporate both state banks and trust companies the reserve requirement is the same for both classes of credit institutions. slight differences between the requirements for trust-company reserves and those for state-bank reserves are chiefly of two kinds. in the first place, the provisions for trust-company reserves more frequently permit the counting of bonds as a part of reserve; secondly, the provisions for differing amounts of reserve against time and demand deposits. in recent years there has been much complaint in some states that the reserves required for trust companies are inadequate. branch banks the most characteristic feature of american banking is the extent to which the banks and trust companies are independent institutions. the national-bank act makes no provision for the establishment of branch banks except in cases of the conversion of state banks which already have branches. such banks are allowed to retain their branches on condition that the capital is assigned to the mother bank and the branches in definite proportions, but only a few national banks have branches. under none of the state banking laws has there been built up an important system of branch banks. this has been partly due to the very general desire of each american community, no matter how small, to have its bank managed by its own citizens, and partly to the fact that in most of the states the establishment of branch banks is either explicitly forbidden or in no way provided for by law. in eight states--colorado, connecticut, mississippi, missouri, nevada, pennsylvania, texas, and wisconsin--the opening of branch offices is forbidden by specific enactment. in a large number of other states the banking laws make no provision for the establishment of branches, and it has been held in most of these states that the opening of branch offices is unlawful. the states in which state banks and trust companies are definitely permitted to have branches are california, delaware, florida, georgia, new york, oregon, rhode island, virginia, and washington. in louisiana, maine, and massachusetts trust companies may have branches. in maryland and north carolina branches are operated by some banks and trust companies which were chartered by special act. there are in several of these states, however, restrictions on the opening of branch offices. in new york and massachusetts branches may be established only in the city in which the principal office of the bank or trust company is located. in new york, moreover, only banks located in a city of , , inhabitants or over may have branches; but any trust company may have branches. in maine a trust company may establish branches only in the county in which it is located or in an adjoining county. in nearly all the states which permit banks or trust companies to establish branches one or both of two conditions are imposed. in the first place, additional capital is required for each branch bank over and above the amount of the parent bank. secondly, the establishment of a branch bank must be specifically authorized by some state official or officials. the number of branches of banks and trust companies cannot exceed a few hundred in the entire united states. compared with the total number of banks and trust companies this is a small development. moreover, the most important affiliations among banking institutions are among those located in the same city. the "chains" of country banks possess, for the most part, little vitality, and in the total banking business of the country they play an insignificant rôle. the great mass of state banks and trust companies are independent institutions. the most enduring affiliations at present existing among the banking institutions are those between a national bank and a trust company or a state bank and a trust company. the comparatively limited powers of the national banks and in some states of the state banks have made it desirable for many of these institutions to affiliate trust companies with themselves in order that desirable business may not be lost. further reason for the lack of branch banks in the united states [ ]it would seem that there must be a reason for this peculiarity [the small number of branches] in the banking system of the united states. in searching for this reason, the first fact of importance seems to be that, although the organization of branches has been permitted to the non-note-issuing banks in some of the states, they have not been organized, while in other countries they have been established in nearly every case. by note-issuing banks. this seems at once to indicate that in places where notes are the most important medium of exchange a connection of some sort exists between the issue of notes and the establishment of branches. the inducement to the establishment of branches by banks is, of course, the possibility of profit. but as has already been frequently pointed out, profit can be obtained only by making loans. these when greater than the amount of the capital, as it is necessary that they should be, can be made by the loan of funds left with banks by others or by the issue of circulating notes. it is also clear that, were the possibilities of loaning beyond the amount of the capital wholly or chiefly confined to one of these forms of liability--the other being unavailable, as in the case of the state bank notes whose issue is prohibited by the per cent. tax--and were this other form distasteful or impossible of introduction among the community where the branch was to be established, the motive for the creation of the branch would be absent. this motive has been wanting in many parts of the united states. by the laws of the united states, the issue of notes has been made impossible to all save national banks, and the capital of these banks has been limited to $ , as a minimum. banks other than national must, therefore, be established under state laws, some of which have permitted the organization of such institutions with capitals as low as $ , or $ , . they can, however, make use only of deposits as a means of loaning beyond the amount of their capital. but deposits do not provide a desirable form of currency for use in country districts. it follows, therefore, that the state-bank systems supply the deficiencies of the national system only in so far as they furnish independent banks of smaller capital than $ , ($ , since ). nor would it have been of material assistance had the organization of national banks of capitals smaller than $ , been allowed. as the system has worked out, the issue function has been a useless one. the compulsory deposit of bonds to secure circulation has hampered the banks in exercising this function, since the requirement to deposit bonds now cuts off all profit arising from the issue of notes. moreover, the rural communities are those where interest is highest, and hence where notes can least advantageously be issued under the present system of bond-deposit, owing to the high price of the bonds. these difficulties probably cannot be overcome by the establishment of banks of lower capitals than now exist. [ ]at the convention of the alabama bankers' association, held in birmingham in may, one of the speakers, whose topic was "state banks and their branches," closed a condemnatory address with the words: "we believe the days of the branch bank are numbered." two months later, at cooperstown, hon. e. b. vreeland told the bankers of new york state, at their convention: "no one will ever live to see the day when the branch banking system which prevails in canada and in germany and in england and in france will be tolerated by the people of the united states."... "the economies of the branch banking system are such that no other system can live beside it. it is just as sure as the sun will rise to-morrow that the branch banking system, if taken up in the united states, would in the end drive out of existence all the banks in every city and town in the country outside of the great financial centres. that is the experience of the world." if this statement means anything it is a confession that the system of local single-office banks is wasteful in operation, and it seems to me that it sets forth one reason why branch banks are inevitable. when a banking system is wasteful it is the stockholders, borrowers, and depositors who suffer from the circumstance, and as soon as they realize the fact its doom is sealed. it should be said here that it is not their economical operation alone that has enabled the branch banks to displace the small local banks in england, germany, and france. the branch institutions are cleaner, more efficient, and they provide better opportunities for the clerks and officers; they give a better and more complete service to the localities in which they work.... another reason is found in their stability during crises.... the new york state bank act of [ ] in june, , george c. van tuyl, jr., superintendent of banks of the state of new york, appointed a commission to look into the banking conditions of the state and to make a thorough revision of the law relating to banks. this commission conducted many public hearings; sought information from banking experts in this state and in other states; made a careful study of private banking conditions, rural credits, and other special banking problems of the state; and, finally, on february , , they presented their report in the form of a bill of some pages. after a good many amendments had been made to appease conflicting interests, the bill was passed and became law april , . in general, the new law marks a decided improvement and shows a commendable spirit of progressiveness. its framers believe that it is a law which may well become the model for other states, and there are some who say that it is without question the best balanced and most comprehensive state banking legislation which has ever been enacted. the new law was the outgrowth of the general agitation for banking reform which had swept over this country following the panic of . the inciting cause, however, was the passage of the federal reserve act which made it necessary to revise the state law so that the state banks either might join the federal system or be in a position to compete successfully against the national banks of the state, whose powers had been considerably enlarged by this act. in part, the law is modelled after the federal act, and, in part, european experience has been drawn upon. under the new law the state banks will have even more importance in the competition for banking business than in the past. from the point of view of banking power, the banks of deposit and discount and trust companies have aggregate deposits in excess of those of the national banks in the sum of $ , , .[ ] furthermore, it has been estimated that the total resources of the new york state banks are equivalent to per cent. of the aggregate resources of all banks in the united states, both state and national. superiority in banking power is one element in the strong competitive position of the state banks, and another element is the privileges granted to these banks under the new law which, in some respects, are superior to those granted the national banks under the federal law. in view of the fact that the state banks can enjoy either directly or indirectly most of the advantages of the federal system and also that in some particulars the state law gives them more liberal powers, it seems probable that these banks will continue to see an advantage in their state charters; and thus the amount of defection from the state system will be negligible. more real power has been given to the banking department in the provisions of the law. through investigation, authorization certificates, and regular uniform reports, the superintendent of banks has more direct control over the banks than ever before. besides the extension of the supervisory powers, the penal provisions of the act have been strengthened and made more exacting. . _features of the act relating to banks of deposit and discount and trust companies._ the reserves required against deposits were reduced substantially, and made nearly uniform with those required for national banks. the following table gives the percentage of reserve required and the percentage of reserve on hand which the new law specifies for these banks. ------------------------+---------------------+-------------------------- |banks of deposit and | | discount | trust companies |per cent. of deposits| per cent. of deposits ------------------------+----------+----------+----------+--------------- population | required | reserve | required | reserve | reserve | on hand | reserve | on hand ------------------------+----------+----------+----------+--------------- , , or over | | | | , , - , , | | | | elsewhere in the state | | | | or ------------------------+----------+----------+----------+--------------- the reserve requirements are made still more definite by the fact that the law compels the banks to keep one-half at least of the reserve on hand in "gold, gold bullion, gold coin, united states gold certificates, or united states notes: and the remainder in any form of currency authorized by the law of the united states other than federal reserve notes." among the powers granted to these banks is the power "to accept for payment at a future date, drafts drawn upon its customers and to issue letters of credit authorizing the holders thereof to draw drafts upon it or its correspondents at sight or on time not exceeding one year." this clause gives a much wider power to the state banks in the important matter of acceptances than its counterpart in the federal reserve act. in the one case both domestic and foreign acceptances may be made and handled without stipulation as to aggregate amount and bearing maturities of one year or less, while in the other case the acceptances are limited to those arising out of the importation or exportation of goods with maturities not exceeding six months. seemingly, the state banks have the advantage, and to this extent the state law is superior to the federal act. one other important forward step was taken in relation to this group of banks. they are given the privilege of establishing branches outside the state of new york, either in the united states or in foreign countries. this privilege is qualified, however, by the provision that no bank can establish such branches unless it has a combined capital and surplus of $ , , or over and the written approval of the superintendent of banks. although the old law permitted trust companies to establish branches in the place where they were incorporated, the practical effect was to limit branch banking to the city of new york. in this particular also the state banks have the advantage over the banks in the federal reserve system which are allowed to establish branches only in foreign countries. . _features relating to private banks and bankers._ the regulation of private banks and bankers is an entirely new departure in the law of this state. in the past the banking department had no authority to supervise that relatively large number of private bankers who receive deposits in small amounts from the wage-earning classes while conducting in connection therewith a mercantile or some other kind of business. mercantile firms like the siegel company, by paying a higher rate of interest upon deposits than savings banks, were able to obtain the savings of many small depositors. this money was invested in the business and secured only by the capital stock of the mercantile establishments. in case the firm failed there was no security back of these deposits but these same shares of stock, and so depositors were fortunate if they received in settlement even per cent. of their claims. such firms were not doing a legitimate banking business inasmuch as they did not keep their assets in liquid form and carried no reserve against deposits. the new act corrects this situation by giving the banking department authority to conduct independent investigations into any violation of the banking law by a corporation or individual. in the future a corporation which is in any way engaged in the business of banking cannot hide under the wing of the general corporation law when the banking department sees fit to make an investigation of its affairs. some of the specifications of this part of the law are all securities, property, and the evidences of title thereto in which the permanent capital and the deposits are invested are to be segregated and kept separate from all other property and assets of the private banker; depositors have a prior lien on the assets of the private banker, in case of insolvency or suspension of business; and, in addition, every private banker must maintain a reserve of per cent. against deposits in cities of the first class and a reserve of per cent. in any other city, one-tenth of which shall consist of reserve on hand and the remainder may be kept on deposit subject to call with banks approved by the superintendent of banks. these requirements will go far toward preventing the recurrence of such disasters as the siegel failure. . _features relating to co-operative credit._ within the last thirty years the agricultural methods of the state, in harmony with the agricultural methods throughout the united states, have undergone great changes. scientific farming, improved machinery, and changed market conditions have brought new problems in the field of agricultural credit. to-day agriculture has come to be in a real sense capitalistic and has in consequence laid new requirements on the credit structure of the nation. moreover, the period of large returns or satisfactory returns from an extensive and rather careless cultivation of the soil, which made possible an ignoring of unit cost, or, at least, brought the farmer to minimize the importance of such cost, has given way, so far as the successful farmer is concerned, to the careful estimates of cost and close calculations of profits on a narrow margin between unit cost and unit selling price. in the field of cost, the rate at which capital or money may be borrowed is no small factor; and with the high rates prevailing in the united states in comparison with those current in europe, the borrower in this country who pledges his land or agricultural products as security for a loan finds himself at a disadvantage. to meet this condition cheaper agricultural credit has been strongly urged. europe furnishes the example in her well-organized land banks and co-operative credit unions. already massachusetts has a law authorizing co-operative organizations for furnishing cheaper credit facilities to the agriculturalist, and in illinois there is a "crédit foncier" which has been in successful operation a number of years. new york state has put itself in line with this growing movement to furnish ample and cheaper credit to the farmer and the purchasers of real estate by putting into the new law provisions for the establishment of a land bank and co-operative credit unions. sections - authorize ten or more savings and loan associations, the aggregate resources of which shall not be less than $ , , , to form a land bank of the state of new york. this bank can "issue, sell and redeem debenture bonds secured by bonds and first mortgages made to or held by member associations" and "invest its capital and other funds in bonds secured by first mortgages on real estate situated within the territory in which its members are authorized to make loans." the bank is not permitted to do a general deposit business or incur any indebtedness upon notes and bonds in excess of twenty times the amount of its capital. the debenture bonds authorized by the act are to be issued in series of not less than $ , , and may be called on any interest day at - / provided a sixty-day notice is given. amortization payments upon mortgages which are given as collateral security for the debentures of the land bank shall be sufficient to liquidate the debt in a period not exceeding forty years. in article xi the law provides for the establishment of credit unions. a credit union may be organized by any seven or more persons with a share capital the par value of which shall not exceed $ . the objects of the credit union are: ( ) to loan money in small amounts on personal security or in larger amounts on endorsed notes at rates not exceeding per cent. per month, inclusive of all charges incident to the making of such loans; ( ) to receive the savings of its members in payment of shares on deposit; ( ) to borrow money to an amount not to exceed per cent. of its capital; ( ) to pay dividends on its share capital. as to the method of making loans, the law prescribes that a credit committee shall pass upon all applications for loans which must be made in writing and must state the purpose for which the loan is desired and the security offered. no loan will be made unless it receives the unanimous approval of the members of the committee present at the meeting, provided always a majority of the committee is present. with the land bank acting as a central clearing agency for the local savings and loan associations and the organization of many rural credit unions the problem of agricultural credit will be largely solved for new york state. this, however, all hinges on the proper functioning of the land bank and the co-operation of the farmers in the establishment of local credit unions. agriculturists as a class are slow to adopt new methods and it may be only after prolonged education that all the possibilities of this new legislation will be realized. footnotes: [ ] adapted from george e. barnett, _state banks and trust companies since the passage of the national bank-act_, publications of the national monetary commission. senate document no. , st congress, _second session_. [ ] [at least one savings bank has gained admittance to the federal reserve system as a "state" bank.] [ ] according to reports to the national monetary commission on april , , the loans of all the state banks in the united states on the security of real estate were . per cent. of their total loans and discounts. [ ] _the report of the monetary commission of the indianapolis convention_, pp. - . the university of chicago press. . [ ] adapted from h. m. p. eckardt, _branch banking among the state banks_, the annals of the american academy of political and social science, vol. , no. , november, pp. - . [ ] adapted from everett w. goodhue, _the revision of the new york state banking law_, the american economic review, vol. v, no. , pp. - . [ ] annual report of the superintendent of banks of the state of new york, jan. , , p. . chapter xxi the canadian banking system [ ]financially, canada is part of the united states. fully half the gold reserve upon which its credit system is based is lodged in the vaults of the new york clearing house. in any emergency requiring additional capital montreal, toronto, and winnipeg call on new york for funds just as do st. paul, kansas city, and new orleans. new york exchange is a current and universal medium in canada and is in constant demand among the banks. a canadian wishing to invest in securities that may be quickly marketed commonly turns to the new york market for stocks and bonds. yet the american banker visiting in canada, if he is unacquainted with the history of banking in his own country, finds himself in a land of financial novelties, for canada has a banking system unlike any in operation in the united states at the present time. twenty-nine banks, known as the "chartered banks," transact all the banking business of the dominion. they have , branches, and each may establish new branches without increase of its capital stock. [at the close of the year there were twenty-two banks with approximately , branches.] they issue notes without depositing security with the government and in such abundance that no other form of currency in denominations of $ and above is in circulation. notwithstanding the fact that the notes are "unsecured," their "goodness" is unquestioned among the canadian people. the system not new but to the student of the history of banking in the united states there is little that is radically new in the canadian system. he finds in it many of the practices and expedients that were found excellent in the united states in the first half of the nineteenth century, and is almost persuaded that but for the civil war what is now known as the canadian banking system would everywhere be called the american system. the fiscal exigencies of war, which have caused changes in the banking systems of most countries, have had no influence upon the development of banking in canada. during the first half of the nineteenth century the commercial and financial interests of canada and the united states were comparatively intimate and the financial institutions of both countries developed on similar lines. the safety-fund system, first introduced in the state of new york in , found favor also in canada and is still an integral part of the canadian banking system. branch banking, which was most successfully illustrated in this country by the state bank of indiana, and which now exists in some form or other in almost all countries except the united states, has always prevailed in canada. the importance of a prompt redemption of bank notes as exemplified in the old suffolk banking system in new england before the war, was fully realized in canada and is probably better illustrated in the present canadian system than in any other country. there bank notes and bank checks are treated as identical in nature, both being cleared with the same regularity and promptness. the so-called free banking system, which was first adopted in the state of new york in and thereafter adopted by eighteen other states of the union, was tried in canada in the fifties, but not on a large scale. this system, requiring that issues of bank notes should be secured by a segregated deposit of certain classes of stocks and bonds, has never met with approval among the leading bankers of canada. the canadian system is a product of evolution. it has taken its present form because of the commercial and financial needs of the canadian people. it was not created by lawyers or statesmen to meet a fiscal need of the government, but has grown up gradually under the fostering care of experienced bankers, no changes having been made until experience proved them necessary or advisable. the chartered banks transact the business which in the united states is divided among national banks, trust companies, private banks, and savings banks. they buy and sell commercial paper, discount the notes of their customers, lend money on stocks and bonds, make advances to farmers, and sometimes aid in the financing of railroads and industrial enterprises. to a canadian the word "bank" means one of the twenty-odd "chartered banks," for the law prohibits the use of the word "bank" by any other institution. other financial institutions the only other financial institutions in canada which possess much importance are the mortgage and loan companies. these usually operate under charters granted by the provincial legislatures and do a business similar to that of the farm and mortgage companies which once flourished in the united states, making loans to farmers for a term of years and taking farm mortgage for security. they also make loans upon urban and suburban real estate and thus aid in the upbuilding of the cities and their suburbs. the business of these institutions is made possible by the fact that the bank act does not permit the chartered banks to accept loans secured by real estate. the dominion government maintains a double system of savings banks. one set is managed by the post-office department, every post-office receiving deposits. the other set is managed by the finance department. the post-office department also sells annuities and old-age pensions. the money received through the savings banks is regarded as a loan from the people and is used, like money obtained by taxation, in the payment of the government's general expenses. the government is required to carry a gold reserve of per cent. against the savings deposits, but no assets are set aside for their security. the chartered banks pay the same rate of interest and get most of the business, for they offer facilities with which the government does not attempt to compete. most of the government's deposits come from the poorest and most ignorant classes, people who in all countries are suspicious of banks. some of the canadian cities maintain municipal savings banks, but they are of relatively small importance. trust companies in canada are not financial institutions. they are trust companies in fact as well as in name, their business being to act as trustee and administrator. a few of them accept deposits, although it is not certain that they have a right to do so. the bulk of the money they handle comes to them through the administration of estates and trust funds. private banking firms are almost unknown in canada, there being only two or three in the entire dominion, and these do a mortgage and loan business rather than a strictly commercial banking business. hence, if any one seeks to understand the financial or banking situation in canada, he must devote his attention in the main to the chartered banks. these through their branches furnish the loanable capital necessary for the support of the dominion's trade and industry and for much of its agricultural enterprise. to them the government turns when funds are needed for internal improvements or when the exchequer faces a deficit. the promoters of street railways, steam railways, steam railroads, and other permanent improvements take counsel with the managers of these chartered banks before they issue their securities. the banks as a rule do not invest their funds in the stocks or bonds of new enterprises, yet their managers are the men most familiar with the world's money markets and their approval, therefore, of any financial undertaking is highly esteemed. the essentials of the system a chartered bank in canada is a bank of branches, not a bank with branches. the parent bank, technically known as the "head office," neither takes deposits nor lends money. all the banking business is done by the branches, each enjoying considerable independence, but all subject to the supervision and control of the head office. the law places no restrictions upon the number or location of branches. canadian banks, therefore, have branches in foreign countries as well as in canada. process of incorporation the provisions of the bank act with respect to the organization of new banks are intended to guard against the entry of unfit or inexperienced persons into the banking business. the minimum required capital of a bank is $ , , of which all must be subscribed and one-half paid in before a new bank can open. at least five men of integrity and good financial standing must agree to act as provisional directors and secure a favorable report on their project from the parliamentary committee on banking and commerce. these men must agree to subscribe for fairly large blocks of stock, otherwise the committee will be inclined to reject their application. they must convince the committee that their project is a well considered one, that there is need for the new bank. if they satisfy the parliamentary committee it will be granted. the bank, however, cannot yet begin business. provisional directors now have merely the right to advertise and cause stock books to be opened. if inside of one year capital stock to the amount of $ , has been subscribed and $ , thereof paid in, the provisional directors may call a meeting of the shareholders, at which a board of regular directors shall be chosen. before this meeting is held at least $ , in cash must be paid over to the minister of finance. the regular directors must then apply to a body known as the treasury board for a certificate permitting the bank to issue notes and begin business and the treasury board may refuse this certificate unless it is entirely satisfied that all the requirements of the law have been met. delay on the part of the treasury board might prove fatal to the new enterprise, for if a new bank does not obtain a certificate within one year from the date of its incorporation, all the rights, powers, and privileges conferred by the act of incorporation cease. these requirements make it impossible to organize a new bank in canada with any degree of secrecy. note issues having obtained its charter, a new bank must open its head office in the place designated, and may then proceed to establish branches or agencies, upon the number and location of which the law places no restriction. under its charter it has authority to issue circulating notes up to the amount of its unimpaired paid-up capital in denominations of $ and multiples thereof. an amendment of the bank act passed july , , gives the bank the right to issue what may be called an emergency circulation during the crop-moving season (october to january ). during this period the legal maximum of the circulation of a bank is its paid-up capital plus per cent. of its combined paid-up capital and surplus or rest fund. this emergency circulation, which consists of notes in form and in other respects exactly like the regular issues, is subject to a tax at a rate not to exceed per cent. per annum, the rate being fixed by the governor in council. if a bank's circulation does not exceed its paid-up capital, it pays no tax. security of notes the law is silent on several subjects that seem of great importance to most bankers in the united states. for instance, it does not require that the banks shall deposit with a government official, or in any way set aside any kind of security for the protection of the note holder. it does not even require that the banks shall carry a cash reserve against either notes or deposits, nor does the law make the notes a legal tender for any payment. a bank need not accept the notes of other banks. the government does not guarantee the redemption of the notes. neither does it bind itself to receive them in payment of dues to itself. nevertheless the notes of the canadian banks are everywhere acceptable at par, the people apparently not being at all concerned about their "goodness." and their confidence in the note has been well justified, for nobody since has lost a dollar through the failure of a bank to redeem its notes. following are the legal requirements, which for twenty years have proved adequate protection for the note holder: . every bank must redeem its notes at its head office and in such commercial centres as are designated by the treasury board. the redemption cities are the same for all the banks. they are toronto, montreal, halifax, winnipeg, victoria, st. john, and charlottetown. . each bank must keep on deposit with the minister of finance a sum of lawful money (gold or dominion notes) equal to per cent. of its average circulation; the total so deposited is called the "circulation redemption fund." it is a guaranty or insurance fund for use, if need be, in the redemption of the notes of failed banks. . bank notes possess first lien upon the assets of a bank. . bank stockholders are liable to an assessment equal to the par value of their stock. . a bank must make to the minister of finance on or before the fifteenth of each month a detailed statement of its assets and liabilities on the last business day of the preceding month. this monthly return, the form for which is set forth in the act, must be signed by three general officers. . the canadian bankers' association, an incorporated body of which each bank is a member, is given supervision by the bank act of the issue and cancellation of notes and of the affairs of a failed bank. . the notes of a failed bank draw interest at per cent. from the date fixed for their redemption by the minister of finance, who may redeem them out of the assets of the bank or out of the "circulation redemption fund." importance of redemption each of these provisions of the law has its value and significance, but only the first is absolutely essential to the successful operation of the system. all the other provisions might be changed or abolished without impairment of the efficiency of the banking system. but the abolishment of this redemption system would at once give canada a new banking system. the bank note is _almost the sole circulating medium_ in canada, and the people have confidence in it because it is tested every day at the clearing houses and proves itself as good as gold. this daily test would probably not take place with the same regularity as now if the banks did not have branches or if they were obliged to deposit security against their issues. canadian banks are national, not local institutions. all but a few of them have branches in every part of the dominion, and these branches, as fast as they receive the notes of other banks, either send them in to the nearest redemption centre or convert them into lawful money--or its equivalent, a bill of exchange--through branches of the issuing banks located in the same towns. each bank is seeking, through its branches, to satisfy all the legitimate needs of the people for a circulating medium. when the note of a bank is in circulation it is earning money for the bank, but when it is in the vault or on the counter of the bank it is an idle and useless piece of paper. hence every bank always pays out its own notes through its branches and sends the notes of other banks in for redemption, thus increasing its own circulation and _strengthening its own reserve_. furthermore, if the banks were not allowed complete freedom of issue within the prescribed limit, but were required to deposit some form of security, as is required of the national banks in the united states, an investment or speculative risk would arise that would inevitably cause friction. if bonds were designated as security, bankers might often be tempted by high prices to sell their bonds and forego the profit on circulation for the sake of making a larger profit by the sale of the security. thus the volume of bank notes might contract even at a time when the people needed more currency. in such case, of course, canada would be obliged to import gold in order to fill the gap in the circulating medium. the circulation redemption fund the per cent. insurance fund for the redemption of the notes of failed banks is theoretically an important and prominent part of the system, yet practically it would seem to be of little consequence, for not once since has it been necessary to use a dollar of the fund. banks have failed, to be sure, but the notes of these banks have always been redeemed either out of the assets or by recourse to the double liability of the shareholders. it is a mistake to suppose that the people of canada have confidence in bank notes because of the existence of this redemption fund. the average business man knows nothing about the fund and if his attention were called to it as being a source of security for the bank notes, he would probably think a per cent. reserve altogether too small. the real reason why the people have faith in bank notes is because the notes are always honored by the banks and never fail to stand the test of the clearing house. in other words, they believe that bank notes are good for about the same reason that they believe the sun will rise in the east every twenty-four hours, and do not bother themselves about reasons. nevertheless this redemption fund does contribute to the strength of the banking system. it makes each bank to a certain extent liable for the mistakes of other banks, and as a result gives rise to a spirit of mutual watchfulness and helpfulness. other features of the system contribute to the same result, especially the fact that a canadian bank accepts from a depositor without indorsement the notes of other banks. since the banks have branches in agricultural and mining communities, often distant from the railroad by several days' journey, and these branches are accepting the notes of other banks and giving credit for them as if they were gold itself, it is evidently important that each banker should have all possible information with regard to the status and business of his competitors. as a result one finds among the bankers of canada a surprisingly intimate knowledge of each other's affairs. two negative qualities the two negative qualities of the canadian bank note--its lack of a legal-tender quality and of a government guaranty--at first sight may seem to readers in the united states a source of weakness. yet canadian bankers would doubtless all agree that nothing would be gained by making bank notes legal tender for any kind of payment or by making the government in any measure liable for their ultimate redemption. such measures would probably be rejected as likely to prove harmful. it would be like hampering a flying machine with unnecessary bars of steel. bank notes, like bank checks, are mere promises to pay money and are more convenient than money because they can be created as need for a medium of exchange arises. when either has done the work that called it into existence, it should disappear from circulation and be redeemed. if it is made a legal tender like money itself, or if its redemption is guaranteed by a strong government, there is always the danger that ignorant classes of people will regard it as money itself and withdraw it from circulation. the canadian government has nothing to do with the daily redemption of bank notes and does not guarantee that they shall be redeemed. it is custodian of the per cent. redemption fund and is under obligation to redeem the notes of failed banks out of this fund, but if a series of bank failures should exhaust it the note holder has no guaranty that government funds will be used for his relief. the possession by the note holder of a first lien upon the assets of a bank, including the funds that may be collected from shareholders on account of their double liability, gives rise to such general confidence in the ultimate convertibility of a bank note that the notes of a failed bank, on account of the interest they bear, sometimes command a premium. as a rule, the notes of such a bank are collected by the other banks and held until the date of redemption has been named by the minister of finance. canadian bankers' association the canadian bankers' association is an incorporated body with powers and duties prescribed in an amendment to the bank act passed in . each chartered bank is represented in the membership and has one vote. the association is required by law to supervise the issue of bank notes and to report to the government all over-issues, to look after the destruction of worn and mutilated notes, and to take charge of suspended banks. its headquarters are in ottawa. the expenses of the association are apportioned among the banks and do not apparently constitute a very heavy burden, for the secretary has an exceedingly small staff. all expenses incurred by the association on account of a suspended bank are, of course, a charge against the assets of the bank. when the notes of a bank are so worn or mutilated that it wishes to replace them with new notes, notice is sent to the secretary of the association, a date is fixed, and in the presence of the secretary the old notes are duly counted and taken to a furnace, where they are consumed in the presence of the secretary and other witnesses. after this solemn operation has been performed and the signatures of all parties observing it have been duly attested, new notes are issued by the association to replace those that have been destroyed. the clearing houses in the dominion are subject to regulation by the association. it also has the power to establish sub-sections and to do educational work by providing for lectures, competitive papers, examinations, etc. the _journal of the canadian bankers' association_, a quarterly publication of excellent quality, is edited by the secretary and is at present the only educational force at work among bank employees. elasticity of the circulation while the amount of notes that the chartered banks may issue is limited by the bank act to the amount of their paid-up capital, experience has proved that this legal limitation is only nominal and that the real and effective limit is imposed unconsciously and automatically by their customers and themselves. each constantly seeks to increase its issue of notes to the legal limit, yet the combined efforts of all are never able to force into circulation more notes than the people need. the reason why an excessive issue of bank notes in canada is impossible is found in the two following facts: . every bank must redeem its notes on demand in seven commercial centres in different parts of the dominion. . the monetary circulation of canada, exclusive of $ and $ bills, and "change" consists entirely of bank notes. the redemption system is an automatic and effectual check against inflation. it is easier to get notes redeemed in canada than it is to secure payment of checks in the united states, for the notes are redeemable at different points throughout the dominion and no exchange is ever charged. if a country merchant accumulates more currency than he desires to keep on hand, he deposits it, together with his checks and drafts, in the local branch of his bank. this branch immediately sorts out the notes of other banks and treats them as it does checks and drafts upon other banks, either sending them to the nearest redemption agency or using them as an offset in the local clearing house if the issuing banks have branches in the locality. the branches of a bank are not obliged to redeem the notes of the parent bank, but must accept them at par in the payment of all dues. thus each bank is doing its utmost to bring about the redemption of the notes of other banks. at the same time it is paying out its own notes to all customers who ask for cash, seeking to bring its circulation up to the limit. as a result of these operations, two powerful forces are constantly at work, one putting notes into circulation, the other retiring them, and the people of canada always have on hand just the amount of currency they need and no more. it is the people, not the banks, who determine how much the circulation of the banks shall be. bank notes have no competition the fact that the bank note has exclusive possession of the monetary field in canada is most important. his ignorance of this fact is one reason why the average banker or business man in the united states has been unable to get a practical understanding of the canadian system. its significance is easily seen. if canada, like the united states, had in circulation a lot of government notes in denominations of $ , $ , $ , the canadian banks would be able to increase their issues of bank notes almost without limit, for their new notes would simply take the place of the government notes, the latter going into bank reserves. the people of canada in making deposits would not discriminate against bank notes, but would deposit the government paper quite as freely as the bank paper. as a result, the amount of the government paper in circulation would gradually decrease and the amount of bank notes would increase. the volume of dominion notes in the vaults of the banks would expand, and as these notes are redeemable in gold the banks would feel justified in larger extension of their credit, so that an increase in deposits and current loans would ensue. under such circumstances such freedom of issue as is enjoyed by the canadian banks would doubtless result in inflation. but such conditions do not exist in canada. all the paper currency in the hands of the people, excepting $ and $ bills, is in the form of bank notes. there is no chance to substitute bank notes for government notes. hence, if at any time business relaxes and the need for money among the people grows less, an increasing tide of bank notes flows into the banks. the people who bring these notes do not ask for money in exchange, for to them the notes are money. they take bank notes to the banks just as people in the united states take greenbacks and silver certificates--to be exchanged for a deposit credit or account. no limit of issue really necessary theoretically there is no reason why any limit should be fixed upon the amount of notes which a bank may issue. even though a bank has a monopoly of issue in a country--like the bank of france--it nevertheless is unable to expand its circulation beyond the people's needs. such a bank, unless it should adopt a reckless policy of lending which would bring ruin quickly upon itself, can exercise very little influence upon the amount of currency in circulation. in a country like canada, where several banks are issuing currency, no single institution can enlarge its issue of notes beyond the needs of its own customers. if it should endeavor to do this by lending freely to customers who promised to use its notes in different parts of the country, the effort would be futile. the notes would quickly find their way into the branches of other banks and be sent in for redemption. like most other countries, however, canada has placed a limit on the note-issuing privilege, fixing it at the amount of a bank's paid-up capital. while there is no scientific necessity that such a limit be fixed in order to prevent the over-issue of notes, nevertheless there are other considerations which justify it. it is an indirect method of compelling banks to increase their capitalization _pari passu_ with the growth of their business. inasmuch as the capital of a bank is the stockholder's contribution toward its assets, it is exceedingly desirable that this contribution be made as large as possible, for, other things being equal, the strength of a bank varies with the amount of its capital. it is not unreasonable, therefore, to require that banks in return for the useful note-issuing privilege should be required to keep their capital resources large. when a canadian bank has reached the limit of its note issue--which has rarely happened--it begins at once to treat the notes of other banks very much as if they were its own. instead of going to the expense of sending them in for redemption, it uses them as counter money, paying them out to depositors in response to their calls for cash. if all the banks in canada should issue notes up to the limit, as some of them did during the exciting months of , and if the current rate of interest did not warrant the issue of the taxed notes provided for by the amendment of , the note circulation would immediately lose its elasticity. as further expansion would be impossible, the banks would have to meet any increasing demand for currency by paying out gold and dominion notes, thus depleting their reserves. such a situation would doubtless lead to a sharp advance in the discount rate and to the importation of gold. the practical limit under the legal it should be noted that the practical limit of note issue is about per cent. below the legal limit. the manager of a bank having a paid-up capital of $ , , begins to get nervous when his circulation equals $ , . his office may be in montreal and his bank may have branches in the far east and in the far west and in the mining wilderness of the north. some of these branches he can not reach by telegraph and some are distant a week by mail. he immediately sends warning to all the branches and cautions them against any large out-giving of notes and against entering into transactions which will be likely to lead to unusual demands for currency. on account of this situation, even in times of greatest pressure, the total issue of the banks is usually per cent. below the authorized limit. deposits the liabilities of canadian banks, like those of commercial banks in great britain and the united states, furnish a fairly correct index to the expansion of the country's credit. since the canadians, like other anglo-saxons, make free use of the check book in the settlement of both business and private accounts, any increase of bank loans and discounts is usually attended by a corresponding increase in deposits. when a canadian business man discounts his note at his bank he almost invariably leaves the proceeds on deposit with the bank. as he makes his payments by check his own deposit account declines, but the bank accounts of his creditors increase, so that the net result of borrowing in canada is an increase in the total of bank deposits. consequently, in good times, when the banks are freely extending credit, the deposits grow, and in periods of dullness and liquidation they decline. a growth of deposits, therefore, is commonly accepted as an indication of business and industrial activity. if a business man in canada has temporarily a large balance in his bank and realizes that he will not need the money for several months, he will either arrange for its entry as a time or savings bank account, or for the payment of interest on his balance as a current account. of course, the bankers do not encourage this practice, nor can it be indulged in by a depositor who is also a borrower. depositors of the class who are paid a small rate of interest--usually per cent.--by national and state banks in the united states, usually have savings department accounts in canada and get per cent. savings deposits always paid on demand on account of the fact that the time or savings bank deposits contain such a large proportion of money likely to be needed in business at any time, the banks regard both classes of deposit as being essentially the same form of liability. practically all the deposit liabilities of a canadian bank are payable on demand, although payment on two-thirds of them at the present time can not legally be demanded until after notice. custom has made it imperative that a canadian bank shall pay any and all of its depositors on demand. for any bank to refuse to let a depositor have his money when he calls for it would be regarded by the public as an acknowledgment of weakness. certainly no canadian bank would take the risk of making the experiment. canadian bankers feel that per cent. is too high a rate of interest to pay depositors. this rate is a matter of tacit agreement among the banks and no single bank can afford to lower it, for such action would cause it a loss of business. on the other hand, if any bank, hoping to increase its deposits, should offer to pay - / per cent. or per cent., its conduct would be looked upon with grave disapproval by its competitors. some of the new banks in recent years have obtained business in this manner and have been severely criticised by the managers of the older institutions. savings depositors not properly rewarded to an outsider it would seem that the savings bank depositor in canada is not generously treated. in the united states he gets per cent. on his savings even in the large cities. in canada, a country where real estate mortgages yield from to per cent. and the bonds of new corporations are selling at prices giving the investor a higher return than he can get in the united states, it is certain that a real savings bank could well afford to pay depositors per cent. it is doubtless true that per cent. is a higher rate of interest than most of the savings depositors in the chartered banks have a right to expect. a large part of these deposits are not savings deposits at all. nevertheless it is doubtful if the banks would be justified in a reduction of the rate. the right solution of the problem seems to lie in another direction, namely, in the making of a sharper distinction between demand and savings deposits. the funds received from both classes of depositors should not be treated alike. the money of savings bank depositors should be invested in bonds and mortgages and then could be made to yield a net return of over per cent. if the depositors were not allowed to check upon their accounts they would be a source of such little expense to a bank that it could easily afford to pay them interest at the rate of per cent. at the present time the banks are paying per cent. interest on money which they are lending to commercial borrowers and for the care of which they are maintaining an expensive force of clerks. depositors who have checking accounts might be allowed per cent. on large balances, but out-and-out savings depositors, people who make no use of the check book, are certainly entitled to a -per-cent. rate in a country where investment capital is as fruitful as it is in canada. strictly speaking, the savings departments of the chartered banks are not savings banks, for they do not pretend to devote their time funds to long-time investments. the amount of securities held by the banks is never equal to the amount of time deposits. a thorough reorganization of the savings departments of the chartered banks, to equip them for the real business of a savings bank, would not be possible without an amendment to the bank act, which now prohibits them from loaning money upon real estate or upon the security of real-estate mortgages. it is generally believed that this prohibition is commonly evaded by the banks through the acceptance of such mortgages as "additional security" after loans have been made. a savings bank, of course, must have the legal right to accept such security. no bankers' bank the indebtedness of banks to banks is not large in canada. the branch system makes it unnecessary for banks to carry balances in other institutions located in the financial centres. nearly every bank has a branch in either montreal or toronto and in these branches carries the major proportion of its cash reserve, so that branches in the far west or in the maritime provinces are always able to sell exchange on montreal or toronto. canada has no bankers' bank. the bank of montreal, which is the largest bank in the dominion, its assets being equal to about per cent. of the total, is often spoken of as the government bank because it is the largest government depositary, yet it holds a very small amount of funds belonging to other banks. amount of the reserve fixed by each bank it must not be supposed that the canadian banks do not carry adequate reserves. on the contrary, every bank manager gives to this subject daily and most conscientious thought. to the canadian banker the word "reserve" means a fund immediately available for the liquidation of liabilities. how much this fund ought to be depends altogether upon the amount and character of the liabilities to be protected. a canadian bank manager, having before him the amount of time deposits and demand deposits, respectively, knowing the probable future needs of the various depositors, being in constant touch with branch managers both by wire and by letter, and having back of him information born of many years' experience, easily determines how much his bank's reserve ought to be in order to assure its safety. the law neither helps nor hinders him; it simply requires that the bank shall satisfy the demands of depositors in accordance with the terms of the contract and that it shall redeem its notes on demand. the public by force of custom expects a bank to do a little more than the law requires, for its credit is bound to suffer if it take advantage of its legal privilege to delay payment upon time deposits. the manager is a hired man, sworn to do his utmost to protect the credit of the bank, trained for many years in its service, familiar with its history and its policy, anxious to guard his own reputation and character against criticism. under these circumstances it would be remarkable if he did not fix the amount of his bank's reserve nearer the ideal figure--if an ideal banking reserve is possible--than could possibly be done by a body of lawmakers or of any other men outside the bank. competition is not lacking in many respects banking competition is quite as active in canada as it is in the united states. apparently there are only two things which the banks do not like to do in order to attract business--lower the discount rate, or advance the rate paid on depositors' balances. there is no express agreement among the bankers on these points, but every banker knows that he would become _persona non grata_ among his brethren if he should discount certain kinds of paper at less than per cent., or pay his depositors on their monthly minimum balances more than per cent. per annum. in montreal and toronto large borrowers can get money at per cent., but the average merchant and manufacturer must pay . in winnipeg borrowers can do almost as well, but farther west the usual rate is per cent., and in some of the remoter districts merchants and farmers alike pay per cent. bankers do not believe in lowering the discount or interest rate unless they are compelled to do so in order to find a market for their funds. some of the older institutions would like to prevent competition from absorbing the minor profits which come from collections and transactions in exchange, but they are not entirely successful. the nominal or schedule charges for collections and exchange are frequently cut for the benefit of business men whose favor it is desired to propitiate. in their efforts to get new business, to be the first to open a branch in a promising new community, or to keep their regular customers from being dissatisfied, there seems to be the keenest kind of competition. few villages of people can complain that their banking facilities are less than they deserve, and many of them, with barely enough business to pay the expenses of one branch, are supplied with two. the recent rapid increase in the number of branches has been caused by the great expansion of the west and by the competition among the more progressive and energetic general managers, each desiring that his bank shall be the first in a promising field, even though his enterprise lead him to establish branches which at first do not pay expenses. in a new mining camp the first bank, like the first saloon or the first boarding house, usually begins business in a tent. some of the more conservative bank managers in canada think that new branches are being started in excess of the country's needs, but others are willing to take chances on the country's future and to charge considerable sums to the debit side of the profit and loss account in order to keep their institutions at the front in the great and developing west. banking in different provinces it is generally known that the eastern branches get heavy deposits and are creditors of the head office, and that the funds they collect are forwarded to the western branches, whose loans greatly exceed deposits. bankers will admit that this transference of funds takes place, but there is considerable grumbling about it in the old communities of the east, and the bankers fear that a monthly or even annual publication of the facts would keep them perpetually in hot water. a glance at clearing-house statistics leaves no doubt as to the banking importance of the western provinces or as to the relative financial quietude of the east. between and the total of canada's bank clearings increased per cent., but halifax gained only per cent., st. john only per cent., and quebec only per cent. on the other hand, toronto's clearings increased per cent., winnipeg's per cent., and vancouver's per cent. eastern provinces have suffered this transference of funds from sluggish to active communities is the inevitable result of a system of branch banking and is the cause of the tendency of the rate of interest toward uniformity in all parts of canada. whatever may be said against a system of branch banks, there can be no question that it does bring about a more even distribution of capital in a country than is possible under a system of independent local banks. canadian bank managers are anxious to put out their money where it is most wanted, for there they get the best possible rate of interest and obtain paper of the best quality. no matter where a manager's headquarters may be, he is most deeply concerned in three questions: ( ) where is idle money accumulating? ( ) how can he best draw it into his bank? ( ) in what parts of the dominion is money most needed? in localities of both kinds he establishes branches; in the one the branches accumulate deposits often much in excess of their loans, in the others the loans exceed the deposits. thus it happens that the savings of the eastern provinces, where the growth of industry and trade is slow and the demand for new capital is not increasing, are sent westward and loaned out to merchants and manufacturers and farmers of the new territories. the people of the east supply the capital for the development of the west, though many of them perhaps are entirely ignorant of the useful purpose their savings are made to perform. in the western cities of canada one hears no talk among business men about the scarcity of capital. a merchant or manufacturer in manitoba gets the money he needs as easily as does the merchant or manufacturer in toronto or montreal. justifiable as the bank's policy is from a national point of view, one can not help believing that the branch banking system has really checked the development of business and industry in the maritime provinces. if canada during the last thirty years had depended, like the united states, upon independent local banks, there would have been a plethora of capital in the east, and montreal, quebec, and halifax, like boston, new york, and philadelphia, would years ago have had and per cent. money, while winnipeg and other western cities, less populous than now, would still be paying per cent. a month. the relative cheapness of capital undoubtedly helped build up the prosperous industries of massachusetts. the same cause operating in the maritime provinces of canada would doubtless have led to the establishment there of industries of which the people under existing conditions have not ventured to dream. large use of deposit currency it is sometimes assumed that a free and large use of bank notes tends to discourage the use of the check book and the growth of bank deposits. on the continent of europe, for instance, where the notes of central banks supply all the currency the people need, the check book is comparatively little used. this fact is sometimes explained by the ease with which people can obtain bank notes for use in making all payments. experience in canada makes one doubt the validity of this explanation. the check book is almost as popular there as in the united states, and would probably be used still more than it is if the banks would adopt a policy as liberal as that in vogue in the united states. the canadian banks not only charge exchange on checks and drafts payable in other localities, but even charge exchange on checks drawn on their own branches. the charge is a small one and probably has no great effect one way or the other, yet it certainly does not encourage the increase of deposits or the use of the check book. when a canadian starts on a journey it is in a small way economical for him to fill his wallet with all the cash he expects to need. the notes of his bank will be taken at par everywhere throughout the country; his checks, even though he presents them at a branch of his bank, will be cashed only at a discount. notwithstanding this discrimination against the check, the deposits of canadian banks have grown much more rapidly than the note circulation and the inference is that the volume of deposit currency has increased at the same rapid pace. since the volume of notes has increased approximately per cent., while the deposits by the public showed a gain of per cent. these figures prove that business men in canada appreciate the advantages of the check as a means of payment, and that the proportion of business transactions settled by it is steadily increasing. banks silent partners in industry a large part of the so-called commercial paper of canadian banks is secured practically by title to goods in warehouses, factories, and wholesale stores. such security is more saleable than stocks and bonds, and paper having such security back of it is therefore better banking paper than notes secured by stock-market collateral. so far as would seem possible the canadian bank act makes merchandise of all kinds a sort of collateral security for bank advances. it assumes that if a bank advances capital for the conduct of a business it should have a claim upon all the assets of the business and upon all goods as they come and go in the course of trade. no matter how a merchant's stock may change in character, it all belongs to his bank in case he fails to take up his paper or meet his engagements. in the same way a manufacturer's stock of goods, the raw material and the finished products, no matter how they change from day to day and month to month, will become the property of his bank if he fails to pay his note. the law practically makes every bank a silent partner in many wholesale and manufacturing businesses and gives it many rights which no ordinary silent partner can acquire. it has the effect naturally of making bankers keep a close eye upon business conditions as well as upon the affairs of their individual borrowers. canadian bankers are interested in the lumber market, in the prices of metals, in changes in the tariff, and in the acquisition of foreign markets for canadian manufactures and products, even as the wall street banker is interested in the prices of stocks and bonds. he is in a sense the owner of merchandise of all kinds, and both trade and financial news has equal significance to him. a customer's line of credit in canada the banks are managed by men whose long experience in the business has taught them to avoid certain banking practices that are in vogue in other countries. realizing how important is the relation between a bank and its customer, they believe that this relation should be made as intimate and helpful as possible. among canadian bankers, therefore, it is part of the law and gospel of banking that a bank is entitled to full knowledge of the financial condition and business operations and prospects of its customers. hence a bank insists that its customers shall rely _entirely upon itself_, that they shall make a full statement of their affairs at least once a year, and that they shall begin each year with a clean slate. as a result of this policy a business man in canada deals exclusively with one bank. once a year he arranges with his bank for a line of credit and learns exactly the amount of paper he will be able to discount. if he happens to need less than he anticipated, he will not exhaust the credit allowed by the bank and will pay interest, of course, only upon such portion of the bank's funds as he actually utilizes. if, on the other hand, his business is unexpectedly large, giving opportunity to make bigger profits and creating the need for more capital, he will find the bank ready to increase his line of credit, provided the manager is satisfied that business conditions and prospects warrant expansion. under no circumstances, however, must the customer of a bank seek to raise funds elsewhere unless he first gets the consent of his bank. if he sells his notes in the open market, he must do it with the full knowledge of his bank or run the risk of being placed upon the "black list." as one would naturally expect, there is very little commercial paper floating about in the canadian money market. the bill broker is unknown. wholesalers and manufacturers, unless shipping to foreign countries, do not draw upon their customers. if credit is granted, it takes the form of a book account or of a promissory note. the promissory notes received by a manufacturer or wholesaler are deposited with his bank. the book accounts under ordinary conditions remain entirely at the disposal of the business, but in extraordinary cases, when the situation is not satisfactory, or if an additional credit at the bank is desired, an assignment of the book accounts to the bank may be required. during the harvest season heavy drafts are made upon the resources of the banks to provide for the movement of the grain crops of the west. in its advance of money for this purpose the law makes it possible for a bank always to have abundant security. under section of the bank act the buyer makes assignment to his bank of the grain purchased. when the grain is delivered to a railroad, the bill of lading becomes the property of the bank. when it reaches port arthur, or some other distributing point, and is stored in an elevator, the bank receives a warehouse receipt in exchange for the bill of lading; and when shipment is made to new york, to montreal, or to europe, the bank receives on surrendering the warehouse receipt the shipper's draft on the consignee, the bill of lading, and other documents. throughout the entire transaction, from the purchase from the farmer to the final sale to the eastern consumer, the bank practically has title to all agricultural products which are being moved by means of its funds. loans to farmers the branches of canadian banks in agricultural districts quite commonly lend assistance to farmers. they do not make a practice of taking mortgages on farm property, but lend outright on the farmer's credit, depending for their security upon his character as a man and ability as a farmer, and often as well upon a neighbor's indorsement. farmers' paper ranks high among the canadian bankers and constitutes a considerable proportion of the assets of some of the banks. the banks, of course, do not undertake to supply the farmer with anything more than working capital. they do not help him pay for his land and buildings, but they do let him have at least part of the money he needs for tools, wages, seed, stock, etc. despite the fact that these advances are unsecured by mortgage, the banks suffer very little loss on farm paper. call loans in canada and elsewhere after "current loans in canada" the next largest item among the assets is "call and short loans elsewhere than in canada." the call loans outside of canada consist mainly of loans in the new york market and are as a rule secured by collateral easily convertible into cash. these loans are regarded by canadian bankers as equivalent to cash and are figured by them as part of their reserve. only the larger banks make a practice of loaning on call in new york. the banks as financial institutions that the chartered banks of canada are financial as well as commercial institutions is evidenced by their holdings of stocks and bonds. these securities represent partly an investment carried as a secondary reserve and partly a business carried on for the benefit of their customers. in canada the demand for long-time investments is not large, but whatever market there is for securities is mainly in the hands of the chartered banks. an investor seeks the advice of a bank manager and often is able to obtain from him securities which satisfy his needs. the banks do not publish a list of their holdings, but it is generally taken for granted that they carry only gilt-edge securities. if a customer desires to obtain second or third rate securities, being eager for a high rate of return, a bank can accommodate him, not by selling him out of its own stock, but by negotiating the purchase of the desired securities in new york or london. as the wealth in canada increases and idle capital accumulates in excess of its immediate needs, this financial side of the business of canadian banks will doubtless expand. it may, indeed, during the next generation or two greatly expand and become an important feature of the chartered banks. they are in a position to take care of the business as it develops and will doubtless be able to prevent the establishment of any purely financial banking houses in canada. the revision of the bank act, [ ] the canadian bank act, as is well known, is subject to decennial revision. the last revision was due to take place in ; but owing to circumstances which it is not necessary here to describe, it was not until the present year that the work was finally undertaken. the leading features of the canadian banking system are so well known that they may be passed over, and the nature and causes of the recent changes in the act alone described. there were many minor modifications, but the essential changes effected were: ( ) provision for a shareholders' audit, ( ) the creation of central gold reserves, and ( ) the providing of additional facilities for making loans to farmers. in the recent revision of the act the public was most deeply concerned with the problem of securing an adequate system of bank inspection. the immediate reason for this was the disastrous failure of the farmers' bank. this institution had gambled away its resources on the keeley mine; and had, in its failure, brought many farmers as well as others to the verge of ruin. for several years previous, however, there had been an insistent demand for some sort of external bank inspection.... the banks as a whole have been opposed to any change in the method of inspection. the reason they advance is that the keynote of the organization of canadian banks has always been the centralization of responsibility; and they do not think it wise to divide that responsibility with any outside authority.... as far as the public is concerned it has no means of judging of the soundness of a bank except by examining the monthly returns which are required by law from each bank. these returns are fairly comprehensive, and have been made more so by the revision of the act this year. the minister of finance may call for supplementary information from any bank, whenever, in his judgment, such data are required to afford a fuller knowledge of a bank's affairs. of course, these returns can be taken only for what they are worth. in the case of several failed banks the returns were made with every degree of falsification, because no independent checking of the figures was possible. nevertheless, in obedience to the strong demand for some sort of independent bank examination, provision was made in the recent revision of the act for a shareholders' audit of each bank's affairs. the auditors are to be chosen by the shareholders from a list of forty names selected by the whole body of the general managers of the banks. the list must be submitted to the minister of finance for his approval. if one-third of the shareholders of a bank are dissatisfied with the auditor appointed by the majority, they may appeal to the minister for the appointment of another auditor. the auditors must submit a statement of their findings to the shareholders at the annual meeting, or on any other occasion the necessity may require. in addition the minister of finance may require a special return to be made to him, the cost of the service rendered being paid for by the government. canadians would be wise not to expect too much from this system of external examination. after all, it can do no more than verify a bank's statements and books.... in every large undertaking, the soundness of the transaction must depend, as before, upon the judgment of the general manager and the board of directors. the establishment of central gold reserves is the most important feature added to canada's banking system by the legislation of .... under the new act each bank may issue any amount of notes that it may desire, provided that it deposits with a board of trustees, at montreal, gold or dominion notes to the full amount of the notes issued. these notes are to be identical in form with the ordinary notes of the bank. the gold or dominion notes deposited with the trustees shall be returned to the bank whenever the notes which the bank has outstanding do not amount to the paid-up capital of the bank together with the amount of legal-tender money deposited with the trustees. in other words, the banks can still issue their notes up to the full amount of their paid-up capital, and an additional amount from september to the end of the following february, which may equal per cent. of a bank's combined capital and surplus. it is only for notes issued in excess of these amounts that legal-tender money must be deposited with the trustees at montreal. it should be observed, however, that the banks pay a tax of per cent. on the extra issue during the crop-moving period, whereas there is no tax upon gold-reserve notes. and as canadian banks are not required to keep a legal reserve against their demand liabilities, there is no reason why the idle gold in their reserves should not be sent to montreal to form the basis of new note issues, especially when it is considered that the gold may be recalled at once when no longer needed to cover notes. the ability to issue notes to any amount required, on a gold basis, will greatly strengthen the position of the banks. the third important new feature in the revision of the act is the power given to the banks to make loans to farmers on grain which is stored on the farm and still in the farmer's possession.... the permission granted them to loan money to farmers on stored grain in the latter's possession is an attempt to extend to the farmers aid similar to that hitherto granted to manufacturers and wholesalers alone. it should not be thought, however, that the banks have not always granted loans liberally to farmers.... the possibility of making advances to the farmers on their grain is expected to be of especial benefit to the west.... it is hoped that, under the new legislation, the farmer will be able to hold his grain for higher prices; and in the meantime secure accommodation from the banks to meet his obligations. many bankers, however, refuse to see any remedy for the situation in the new legislation. they maintain that it will involve too much risk to extend loans on grain over which the farmer continues to assert control. only the operation of time will enable us to estimate the value of this feature of the act. comparative figures of condition of canadian banks[ ] assets nov. , june , . gold and subsidiary coin-- in canada $ , , $ , , elsewhere , , , , ----------- ----------- total $ , , $ , , dominion notes , , , , deposit with min. of finance for security of note circulation , , , , deposit in central gold reserves , , , , due from banks , , , , loans and discounts , , , , bonds, securities, etc. , , , , call and short loans in canada , , , , call and short loans elsewhere than in canada , , , , other assets , , , , -------------- -------------- total $ , , , $ , , , liabilities capital authorized $ , , $ , , capital subscribed , , , , capital paid up , , , , reserve fund , , , , ------------ ------------ circulation , , , , government deposits , , , , demand deposits , , , , time deposits , , , , due to banks , , , , bills payable , , , , other liabilities , , , , -------------- -------------- total, not including capital or reserve fund $ , , , $ , , , note.--owing to the omission of the cents in the official reports, the footings in the above do not exactly agree with the totals given. footnotes: [ ] adapted from joseph french johnson, _the canadian banking system_, publications of the national monetary commission, senate document no. , st congress, _ d session_. [ ] w. w. swanson. _the revision of the canadian bank act_, american economic review, vol. , december, , pp. - . [ ] _the commercial and financial chronicle_, vol. , january , , p. . chapter xxii the english banking system foundation and growth of the bank of england [ ]about the year the government of william and mary experienced considerable difficulty in raising the necessary funds to prosecute the war with france; but "the hour brings the man." the man on this occasion was william paterson, a merchant of scotland, who had been educated for the church, but had led a varied and adventurous life. the scheme he presented for the consideration of the government for the relief of the situation was the foundation of a public joint-stock bank; which, in return for certain powers and privileges to be conferred, should advance money to the government.... ... the bill establishing the bank of england was successfully carried through parliament, and obtained the royal assent on the th april, . the basis of the bill was that £ , , should be voluntarily subscribed by the public, and that the subscribers should be incorporated into a body, to be known as "the governor and company of the bank of england." the whole of the sum forming the capital of the bank was to be lent to the government, for which the bank was to receive interest at the rate of per cent. per annum, together with an allowance of £ , per annum for management and expenses; making in all £ , per annum. it was also provided that the sum of £ , was to be raised by public subscription, for which the contributors were to receive certain terminable annuities. by its first charter, which was for ten years only, the bank of england was not allowed to borrow or owe more than the amount of its capital; which meant that it could issue notes to the extent of its capital and no more. if this amount were exceeded the members were liable for such excess, in their private capacities, in proportion to their holding of stock. the capital of the bank was subscribed in a few days, and when duly paid up, the agreed sum of £ , , was handed in to the exchequer.... the charter originally granted to the bank was for ten years only, as we have already seen; but this charter has from time to time been renewed, and also varied--sometimes in favour of the bank and sometimes curtailing its privileges. the monopoly of joint-stock banking was not granted to the bank by its first charter, but this monopoly was practically conferred on it in . the act passed in that year provides: that during the continuance of the said corporation of the governor and company of the bank of england, it shall not be lawful for any body politic or corporate whatsoever, created or to be created (other than the said governor and company of the bank of england), or for any other persons whatsoever, united or to be united in covenants or partnership, exceeding the number of six persons, in that part of great britain called england, to borrow, owe, or take up any sum or sums of money on their bills or notes, payable at demand, or at a less time than six months from the borrowing thereof.... we pass on now to the end of the eighteenth century, when the country was plunged into the throes of war and financial difficulty. up to this time the bank, since its foundation, had succeeded in meeting its notes when presented; but in the year a steady drain on the reserve of the bank commenced, owing to the fear of invasion. this drain began to assume a very serious aspect in the early part of , and it appeared probable that the bank would be subjected to the danger and humiliation of a temporary stoppage. the directors, fully aware of this danger ahead of them, laid the position before the government, and left the solution of the difficulty in its hands. after due consideration, an order in council was issued on the th february, , requiring the bank not to pay its notes in gold.... it was not until that the restriction was entirely withdrawn, although as a matter of fact the bank really resumed paying in cash on demand on may , , deeming it then safe to do so. although a period of safety and prosperity then appeared to have dawned, the bank was not quite clear of its troubles. the very prosperity of the times led imperceptibly to another period of distress and danger, culminating in the panic of .... in the bank of england, by arrangement with the government, agreed to establish branches in various parts of the country, and gave up their monopoly of joint-stock banking, except within a radius of sixty-five miles of london. the year , however, saw a further restriction in the powers of the bank, when, after protracted negotiations, and in return for a further renewal of its charter, the bank surrendered its monopoly of joint-stock banking entirely, provided that no bank having more than six partners might issue notes within the sixty-five-mile limit of london. it is a curious point that the charter of the bank never did restrict joint-stock banking in its present accepted form, but only the issue of notes by joint-stock bankers or banks having more than six partners. up to this time the issue of notes by a bank had been thought to be its main business; so much so, that it was believed to be useless to attempt to conduct a bank without power of issue, and consequently no joint-stock bank had been founded. but about this time the need of such institutions began to be felt, and the presumed monopoly of the bank of england was called in question--largely by mr. gilbart, the founder of the london and westminster bank. the bank tried to assert their monopoly, but without success, and in order to settle the matter effectually, the following clause was inserted in the act passed in dealing with the bank charter: be it therefore declared and enacted, that any body politic or corporate, or society, or company, or partnership, although consisting of more than six persons, may carry on the trade or business of banking in london, or within sixty-five miles thereof, provided that such body politic or corporate, or society, or company, or partnership, do not borrow, owe or take up in england, any sum or sums of money on their bills or notes payable on demand, or at any less time than six months from the borrowing thereof, during the continuance of the privileges granted by this act to the said governor and company of the bank of england. it may be noted that this act of constituted bank of england notes a legal tender, except by the bank itself or its branches.... peel's act or the bank charter act of , and its suspensions [ ]after the renewal of the charter in , the directors of the bank of england laid down as a principle on which their future operations were to be guided, that one-third of their liabilities should be kept in cash and bullion, and the remaining two-thirds in securities. if this principle had been acted on, the bank would have been saved from many of the troubles which shortly assailed it; but though the intentions of the directors were good, circumstances were too strong for them, and the actual proportions of cash and securities to liabilities, respectively, often differed materially from the standard laid down. this was notably the case during the periods of financial pressure which were experienced in the years and . in the year matters assumed a very serious aspect. in the early part of this year the amount of cash held by the bank was about one-third of the amount of securities, but during the year the amount invested in securities increased at the expense of the amount held in cash; and by september we find that securities stood at nearly £ , , , while the cash was reduced to a tenth of that figure, and stood at £ , , only. in order to avert a calamity which appeared to be impending, the bank arranged loans in paris and hamburg to the extent of between three and four millions. this manifest exhibition of weakness on the part of the bank led to the appointment of a committee of the house of commons to inquire into the matter. the committee condemned the principles on which the bank was working, but were powerless to effect any alteration, owing to the charter of the bank not expiring till . on the expiry of the charter, however, sir robert peel brought forward his famous act for remodelling the bank, and regulating the issues of the country banks throughout. england and wales. the act was passed on the th july, , and continues without alteration to the present day. the main provisions enacted thereby, briefly stated, are as follows: i. the issue department and the ordinary banking department of the bank of england were to be entirely separated as from the st august, . ii. on such separation taking place, securities to the value of £ , , (including the [book] debt due to the bank from the government) were to be transferred to the issue department, together with so much gold coin and bullion that the total so transferred should equal the total amount of notes then outstanding. thereafter (with the exception noted below) the issue department must not issue any notes in excess of a total of £ , , except in exchange for gold coin or bullion. iii. the issue department might not at any time hold more silver than one-fourth part of the gold held. as a matter of fact the issue department holds no silver. iv. notes might be demanded from the issue department by any person in exchange for gold at the rate of £ _s._ _d._ per standard ounce. v. if any banker having the power of issue on the th may, , should relinquish such issue, the issue department may be authorised to increase its issue of notes against securities to the extent of two-thirds of the issue so relinquished; but all the profits on such increased issue against securities were to belong to the government. vi. the bank must issue a weekly statement of the position of both its issue and banking departments, in a prescribed form. vii. bankers having the right to issue their own notes on the th may, , might continue such issue under certain conditions, and to an agreed amount; but no provision was made compelling such bankers to keep any reserve either in cash or securities against their issues. if any issue lapsed, from any cause, it could not be resuscitated; and no institutions could acquire the right of issue in the future. viii. banks consisting of more than six partners, though within the sixty-five-mile radius of london, might draw, accept, or endorse bills of exchange not being payable to bearer on demand. the first return issued by the bank in accordance with the regulations of the new act was that of the th september, , and was as follows: account of the liabilities and assets of the bank of england for the week ending th september, dr. issue department cr. notes issued £ , , government debt , , other securities , , gold coin and bullion , , silver bullion , , ----------- ----------- £ , , £ , , dr. banking department cr. proprietor's capital , , government securities , , rest , , other securities , , public deposits , , notes , , other deposits , , gold and silver coin , seven-day and other bills , , ----------- ----------- £ , , £ , , ... taken as a whole the act has worked well, and has succeeded, in combination with greater knowledge and foresight, in maintaining our banking system in a sound condition.... the main point of contention between the supporters and opponents of the act lies in its want of elasticity in time of need. under no circumstances can the bank increase its issue of notes against securities beyond the prescribed limit, without a breach of the law; but on three occasions in the past the law has been broken, though with the consent of the government, and subsequent confirmation of parliament.... we will now briefly review the ... occasions on which the bank act was suspended, and the effect of such suspensions. the first of these occasions was during the panic in the year --known as the "railway panic." shortly previous to this year a great accumulation of capital had led to a demand for new investments, which were duly provided for the public by those concerned with such matters. added to this, interest rates had ruled low for some time, and this conduced to a period of speculative activity. too much capital was put into fixed investments--chiefly railways--and in one session of parliament sanction was asked for various railway schemes involving a total capital of £ , , . wild gambling in railway stocks ensued, credit was inflated above all reason, and then the turn came. this was primarily due to a bad harvest and potato crop, causing a heavy importation of corn, and consequent export of gold. during the panic which ensued, the reserve of the bank of england fell to £ , , , but when the panic was at its height, the act, passed only three years before, was suspended. the bank was authorised to increase its accommodation to the public by exceeding, to an indefinite extent, the limit fixed for the issue of notes not secured against gold. the effect of this suspension of the act was immediate and complete. the fear that "there was not enough to go round" passed from men's minds. as a matter of fact, the issue on this occasion did not exceed the normal limit, the mere knowledge that the bank was empowered to exceed this limit proving sufficient to allay the panic. the second suspension of the bank act was due to the crisis of , a crisis that was brought about by reckless overtrading, and came upon the public very suddenly and with practically no warning.... the third suspension of the bank act took place in .[ ] many elements of disturbance to the money market had been in force during two or three preceding years. the civil war in america had resulted in gold being sent to this country; but the stoppage of the supply of cotton from america, owing to the war, disorganised one of our staple national industries, and supplies of cotton had to be obtained from elsewhere at high prices, and paid for in cash. hence a drain of gold set in on a large scale. in addition, a large speculation had been built up on credit in the stocks and shares of the many new limited liability companies which were formed at that time. general uneasiness began to prevail towards the end of ; in january, , the bank raised its discount rate to per cent., and a crisis began to develop rapidly.... on the th may the bank rate was raised to per cent. on the th may the failure of overend, gurney, and company--for upwards of ten millions--was announced, and the bank rate went to per cent. this failure was not made known till after business hours, so it was not till friday, the th may, --known as "black friday"--that the crisis reached its height. the stoppage of this large house affected the whole world, and general failure seemed imminent, when, in the afternoon of the day on which the failure became known, it was announced that the bank act was again suspended, and calm began to take the place of mania. but though the panic was allayed, many failures shortly took place, which delayed the quick restoration of a sense of security.... from the above brief records of the financial tragedies of the past, we see that on each occasion reckless speculation and overtrading had been allowed to reach a dangerous height before any steps were taken to check them, and on each occasion the check came too late. but we also see the marvellously quick effect which the suspension of the act had on the situation.... the functions of the bank of england [ ]the distinctive functions of the bank of england consist in its acting as: . banker to the british government. . banker to the joint stock and private banks. . (a) sole possessor of the right to issue notes which are legal tender in england; (b) sole possessor, among joint stock banks with an office in london, of the right to issue notes at all. . provider of emergency currency. . keeper of the gold reserve for british banking. . keeper of the gold reserve which is most readily available for the purposes of international banking. these various functions fit into and supplement one another, and though their diversity is sometimes pointed to as throwing too much responsibility onto one institution, it in fact enables the bank to carry out its duties with extraordinary ease, and with the least possible disturbance to the financial community. by the fact that it keeps the balances of the other banks, the bank of england is enabled to conduct the payment of the interest on the british debt largely by transfers in its books. by the fact that it keeps the balances of the government and has the monopoly of the legal-tender note issue, the bank has a great prestige in the eyes of the general public, which it communicates to the other banks which bank with it. there is an impression that the government is always behind the bank, and that the bank is always behind the other banks, and this feeling has certainly done much to foster the confidence of the british public in its banking system. a credit in the books of the bank of england has come to be regarded as just as good as so much gold; and the other banks, with one exception, habitually state their "cash in hand and at the bank of england" as one item in their balance sheets, as if there were no difference between an actual holding of gold or legal tender and a balance at the bank of england. it thus follows at times when an increase of currency is desirable, it can be expanded by an increase in the balances of the other banks at the bank of england, since they thus become possessed of more cash to be used as the basis of credit. for currency in england chiefly consists of cheques, and customers who apply to the banks for accommodation, by way of discount or advance, use it by drawing a cheque which is passed on and so creates a deposit; and expansion of currency thus consists chiefly in expansion of banking deposits. this expansion is only limited by the proportion between deposits and cash which the banks think fit to keep, and as long as they can increase their cash by increasing their credit in the bank of england's books the creation of currency can proceed without let or hindrance. their balances can be increased by borrowing from the bank of england, which is generally carried out not by the banks themselves but by their customers from whom they have called in loans, and the bank of england is thus enabled to provide emergency currency with great ease, by means of loans and discounts which are used to swell the balances of the other banks, which thus show an increase of the cash at the bank of england which they use as a basis for credit operations. the elasticity of the system is thus remarkable, and the merchants and bill brokers of london can by taking approved security to the bank of england, increase the basis of english credit in a few minutes by borrowing. . examining these functions of the bank of england in closer detail we find that its first and most obvious one, which originally brought it into being, of financing the british government and acting as its banker, is now perhaps its least difficult and important duty. apart from the prestige which it thus acquires and its close touch with the government and the officials of the treasury, the bank's position as government banker is of little direct material advantage. its duties as such, besides the normal relation between a bank and a customer, consist chiefly in making advances to the treasury in the shape of "deficiency advances" when the government balances are too low to admit of the payment of the quarterly interest on the british debt without replenishment, or against "ways and means" advances at times when the revenue is coming in more slowly than government expenditure is proceeding. it also, when the government has to borrow to a greater extent, manages its issues of treasury bills, or any loan operation that the government may have to undertake. . the second of the bank of england's distinctive functions--its acting as banker to the rest of the english banking community--is the one which throws upon it its most serious responsibilities and gives it most of its actual power and ease in working. the government gives it prestige in the eyes of the multitude, which considers that governments are omnipotent; the other banks give it the power of providing emergency currency by making entries in its books, and so acting as the easily efficient centre of a banking system in which elasticity and the economy of gold are carried to a perfection which is almost excessive. nevertheless, it pays heavily for its apparently privileged position as bankers' bank. at first sight it would appear that these customers, keeping a regular balance of twenty-odd millions, which varies little and on which the bank of england pays no interest, were a source of comfortable income and no anxiety to it. but in the first place it is obvious that a liability which is regarded as cash by the rest of the banking community requires special treatment by its custodian, and in practice it is so specially treated that the bank of england maintains a proportion of cash to liabilities which is fully twice as high as that of the strictest of the other banks. this proportion rarely is allowed to fall below per cent. and generally ranges between and per cent., and it need not be said that this high level of cash holding tells heavily on the earning power of the bank of england. moreover, it is its position as bankers' bank that exposes the bank of england to the responsibility of maintaining the gold reserve for english banking and being prepared to meet, in gold, any draft on london that any one abroad who has acquired or borrowed the right to draw wishes to turn into metal to be shipped to a foreign country. the amount of the bankers' balances is not separately stated, but is wrapped up in the total of the other deposits in the bank of england's weekly return. it is believed to average about millions in these days, and it is often contended that valuable light would be thrown on the monetary position if this item were separated from the balances of the other customers of the bank. many of the outer bankers are in favor of this change, but there is a serious practical objection to it, in that a dangerous impression might be created in the public mind if at any time it were seen that the bank's cash reserve was below its liability to its banking customers; and the separate publication of the bankers' balances might thus check the readiness with which the bank of england creates emergency credit. another suggestion that is sometimes made by the many critics of the existing order of things in english banking is that the banks should keep their cash reserves themselves; but this very revolutionary change would deprive the system of its two great advantages, a centralised organisation with a centre which specialises on the duties involved by acting as centre, and the extreme elasticity with which the present arrangements work. at the same time it must be admitted that the system by which the other banks treat their balances at the bank of england as cash leads to the existence of a vast amount of "cash" in england which on being looked into is found to consist of paper securities or promises to pay. . the bank of england's monopoly of note issue, which once gave it the monopoly of joint-stock banking in london, is now a matter of comparatively minor importance, owing to the change in english banking habits by which the cheque has ousted the bank note for the purpose of daily commercial payments, and the regulations which were imposed on the note issue by the bank act of . this monopoly was conferred on the bank in and was maintained until , when the implied monopoly in joint-stock banking was restricted to a sixty-five-mile radius around london. in joint-stock banks were established in london itself, since it had been discovered that the bank of england's alleged monopoly only reserved to it the privilege of note issue, and the private bankers in london had already found that it was more convenient to banker and customer to work by the system of deposit and cheque. the development of this system was quickened by the provisions of peel's act of , which, under the influence of banking disasters that had arisen out of reckless note issuing by private banking firms in the counties, laid down an iron rule for the regulation of note issues in england. none of the other note issuers were allowed to increase their issues under any circumstances, and the bank of england, for every additional note issued beyond £ , , , was to hold metal in its vaults. under the terms of peel's act one-fifth of this metal might be silver, and in the early returns issued by the bank under the act a certain amount of silver is found among the assets of the issue department. but since , no silver has been held in the issue department of the bank, and in , when the influence of the bimetallists on the existing government led to a proposal that the proportion of silver allowed by law should be held by the bank as backing for its note issue, public opinion expressed itself so vigorously that the suggestion was promptly buried. the bank's fiduciary note issue, thus fixed at £ , , , was only allowed to increase by the lapse of the issues of the existing issuers, the bank being empowered to increase it by two-thirds of the amount lapsed. the lapsing process has proceeded steadily by the amalgamation of country banks with banks which have london offices and so are prohibited by the bank's monopoly. and the bank's fiduciary issue has thus been raised from the original £ , , to £ , , . above this line it can not go except by means of the suspension of the bank act, which has been found necessary occasionally in the past. the english currency system is thus, as far as the law can rule it, entirely inelastic, but it has already been shown that even when the law of was passed, the cheque currency, over which the law exercises no restriction, was already driving out the note, and banks without any right of note issue had been eleven years established in london. the bank of england's note issue is now chiefly used by other banks as "till money," or part of the store of legal-tender cash they keep to meet demands on them. it has thus become part of the basis of credit in england, since the other banks roughly base their operations on their holding of cash in hand and at the bank of england. their cash at the bank of england has already been discussed above: their cash in hand consists of coin and notes, and since the latter have thus become part of the foundation on which the deposit liabilities of the other banks are based, there is reasonable ground for the contention often put forward by practical expert critics of the english system, that the fiduciary note issue should be reduced by the repayment by the government of the whole or part of a government debt of £ , , to the bank, which backs the greater part of it, and its replacement by gold. it is evident that the amount of metallic backing for a note issue which is intended to circulate as currency is a different matter from that required in the case of a note issue which is held by bankers as a reserve and used by them as a foundation for a pyramid of credit operations. . by the ease with which the bank of england provides emergency currency, it gives the english banking system the great advantage of extreme elasticity and adaptability; and it is enabled to do this by the fact that it acts as banker to the other banks, and that every credit which they have in its books is regarded by them and by the rest of the community as "cash" to be taken as practically equal to so much gold. this cash at the bank of england in the hands of the rest of bankers can be multiplied as rapidly as the bank of england is prepared to make advances, and as the mercantile and financial community can bring it bills for discount or securities to be borrowed on. there is no legal restriction of any sort or kind, and the close relations between the bank and its borrowing customers enable the necessary operations to be carried through with a celerity which is unrivalled, at any rate in the eastern hemisphere. the process works as follows: in every english bank balance sheet there will be found an item among the assets "cash at call or short notice," though in a few cases the slovenly habit is adopted of including this entry along with the cash in hand. this "cash," as it is called, really consists chiefly of loans made by the banks to the discount houses, and regarded by the banks as the most liquid of their resources. as such, it is at once made use of when for any reason, such as the many payments which have to be made on quarter days, or at the end of the half year when the preparation of balance sheets by firms and companies require an abnormal amount of cash for more or less ornamental purposes, the banks are subjected to extra pressure by their customers, who both withdraw actual currency from them for smaller payments, and require advances in order to show cash with bankers in their balance sheets. the banks in order to meet this pressure, and at the same time to preserve an adequate amount of cash in their own statements, call in their loans from the discount houses; the discount houses, at a point, can only repay them by borrowing from the bank of england and transferring the credit raised with it to the bankers, whose cash at the bank of england is thus increased. this book entry takes the place in their balance sheets of the legal-tender cash that their customers have withdrawn, and is used as the basis for the increased deposits that have been created by the loans of the bankers to their customers for ornamental purposes. similarly at the time of year when the transfer of the taxes to the government's balance reduces the cash at the bank of england held by the other banks the gap is filled by the loans made by the bank of england to the customers of the other banks. in short, by discounting and making advances the bank of england can at any time create book credits, which are regarded as cash by the english banking community, and on which the latter can base the credits which give the right to draw cheques, which are the most important part of the english currency. the extent to which the bank of england can create this credit is a matter for its own discretion, but any creation of it diminishes the proportion that it shows in its own weekly returns between its reserve and liabilities. consequently when it is applied to for amounts which bring that proportion too low the bank of england has to take steps to reinforce its cash reserve. . it has been shown that the bank of england keeps the balances of the other banks, and from this it follows that the latter look to it for gold or notes at times when the local commercial community requires an extra supply. at the end of every month, especially at the ends of the quarters or at times of national holidays, the bank's note circulation expands and coin is taken from it. the duty is thus thrown upon it of keeping an adequate supply of cash for home purposes, and, as has been already stated, its normal proportion of cash to liabilities is very much higher than that of the other banks. but these movements are tidal and regular, and though times of active trade increase slightly the demand for coin and note currency in england, the extensive and ever-growing use of the cheque reduces the importance of this part of the bank's duties. . much more important is the bank of england's duty as custodian of the gold store for international banking. london is the only european centre which is always prepared to honor its drafts in gold immediately and to any extent. consequently the bank of england has to be prepared to meet demands on it at any time from abroad, based on credits given to foreigners by the english banking community, and it has thus to observe the signs of financial weather in all parts of the world and to regulate the price of money in london so that the exchanges may not be allowed to become or remain adverse to a dangerous point. the difficulties of this task are increased by the extent to which the english banking community works independently of it, by accepting and discounting finance paper, and giving foreigners credits at rates which encourage their further creation. for the low and wholly unregulated proportion of cash to liabilities on which english banking works, enables the other banks to multiply credits ultimately based on the bank of england's reserve, leaving the responsibility for maintaining the reserve to the bank. this it does by raising its rate when necessary, and so, if it has control of the market and its rate is "effective"--a phrase which will be explained later--raising the general level of money rates in london. when its rate is not effective, the bank of england finds itself obliged to intervene in the outer money market--consisting of the other banks and their customers--and control the rates current in it. this it does by borrowing some of the floating funds in this market, so lessening their supply and forcing up the price of money. by means of this borrowing it diminishes the balances kept with it by the other banks, either directly or indirectly--directly if it borrows from them, indirectly if it borrows from their customers who hand the advance to it in the shape of a cheque on them. the result is that so much of the "cash at the bank of england," which the english banking community uses as part of its basis of credit, is wiped out, money--which in london generally means the price at which the bankers are prepared to lend for a day or for a short period to the discount houses--becomes dearer, the market rate of discount consequently tends to advance, the foreign exchanges move in favor of london, and the tide of gold sets in the direction of the bank of england's vaults, and it is enabled to replenish its reserve or check the drain on it. that the bank of england should have to go through this clumsy ceremony of borrowing money that it does not want, in order to deprive the outer market of a surplus which depresses discount rates in a manner that is dangerous owing to its effect on the foreign exchanges, arises from the want of connection between bank rate and market rate. in former days the london money market never had enough money to work without help from the bank of england. bagehot, in his great work on lombard street, published in , says that "at all ordinary moments there is not money enough in lombard street to discount all the bills in lombard street without taking some money from the bank of england." as long as this was so, bank rate--the price at which the bank would discount bills--was at all times an important influence on the market rate. since then, however, the business of credit making has been so quickly and skillfully extended that lombard street is frequently able to ignore bank rate, knowing that it will easily be able to supply its needs from the other banks, at rates which are normally below it. currency in england consists of cheques drawn against deposits which are largely created by the loans and discounts of the other banks. there is no legal limit whatever on the extent to which these loans and discounts can be multiplied, and the only limits imposed are those of publicity, which is applied rarely in all cases and in some not at all, and of the prudence with which the banks conduct their business. hence it follows that competition between the banks often impels them to continue to make advances or discount bills at low rates when the bank of england, as custodian of the english gold reserve, thinks it advisable in the interests of the foreign exchanges to impose a higher level. this it does by borrowing some of the credit manufactured by the other banks, in order to create artificial scarcity of money, and make its own official rate effective. it thus appears that the bank of england's official rate is often through long periods a mere empty symbol, bearing no actual relation to the real price of money in london; and only becomes effective, and a factor in the monetary position ( ) when the trade demand for credit is keen enough to tax the credit-making facilities of the other banks to their full extent, ( ) when the payment of taxes transfers large sums from the other banks to the government's account at the bank of england, so reducing the "cash at the bank" on which they build credit operations, and ( ) when, owing to foreign demands for gold, the bank of england takes measures, by borrowing, to restrict credits in the open market and to make its rate effective. in other respects its official rate differs materially from the rates quoted by ordinary dealers in credit. it does not fluctuate according to the supply and demand for bills, but is regularly fixed once a week at the meetings of the bank of england court on thursday morning. it is extremely rare for any change to be made in the bank of england rate on any day except thursday. instances occur rarely when some sudden change of position makes it essential, as at the end of , when the bank rate was raised to per cent. on a friday morning. in normal times the rate which is fixed on one thursday is maintained until the next, though the rate is only a minimum and the bank of england occasionally takes advantage of this fact and refuses to discount at its minimum, which still remains ostensibly the bank rate, while the bank actually makes a rather higher charge, which is usually made the official rate on the next thursday. but it must not be supposed that when bank rate is ineffective the bank of england is doing no business. it discounts bills and makes advances at market rates at its branches, and also at its head office to its private customers. bank rate may be described as the price at which the bank is prepared to discount in its official capacity as centre of the london market, and it is because appeal is only made in exceptional circumstances to the bank to provide credit in this capacity that bank rate is often ineffective. the joint-stock banks the most obvious function of the joint-stock banks of england is the business of taking care of money for customers and meeting cheques drawn against their balances. customers place money with them either on current or deposit account. on current account it can be withdrawn at any time and earns, as a rule, no interest. many banks make it a condition that unless the current account is maintained at a certain figure, generally £ , a charge shall be made for keeping it. a usual charge is £ _s._ _d._ each half year, but arrangements vary according to the terms agreed with different customers, and the keen competition now prevalent enables many to obtain the convenience of a bank account for nothing. sums left on deposit are generally placed for a week or longer, and if placed for a week the rate paid on them by the banks is generally - / per cent. below bank rate. out of this function of meeting checks drawn by customers against the sums deposited has grown the banker's chief duty, which is now the provision of cheque currency for the mercantile and financial community. currency in england consists of coins, notes, and cheques. the note issues are almost obsolete as currency, the bank of england's being used chiefly as reserve by the other banks, while the issues of the country banks are so small as to be negligible. most of the commercial and financial transactions of england to-day are settled by cheques drawn on the banks by their customers. these cheques are not legal tender, since it would obviously be impossible that a cheque drawn by an individual on a bank could be legally made acceptable by a creditor whether he wished to take it or not. there is no legal obligation of any sort on them to maintain any regular proportion between cash and liabilities, and as their position in this respect is only subjected to occasional publicity they are not obliged to consider even the effect upon their customers of any considerable variation in the proportion between cash and liabilities which they keep. the system thus works with extreme elasticity and banking facilities can be provided in england with extraordinary ease. it has of late years been frequently contended that the ease and elasticity with which it works have carried the english banking machinery to a somewhat extreme length in the matter of the economy of gold and legal tenders and the extent of the credit pyramid which it builds up on them. after the crisis of , lord goschen seems to have been strongly imbued with the conviction that the system had been carried too far. he therefore urged upon the london banks that they should make a monthly statement of their position, and this suggestion was adopted by the majority of them. the result was that they published a monthly statement showing how they stood on one day at the end of each month, and it thus followed that on one day at the end of each month the banks showed a proportion of cash to liabilities which they considered sufficiently adequate to stand the light of publicity. but the system has long been seen to be faulty, and a certain amount of abuse has grown up round it. it is strongly suspected, for example, that some of the banks which publish these statements make preparations for them by calling in loans or reducing their discounts for the day on which the statements are drawn up. as far as this is done the statement is to a certain extent misleading, and this practice of "window dressing," as it is called in lombard street, has been subject to frequent criticism, so much so that one of the leading london banks--the london and county--adopted early in the practice of showing its daily average cash holding, thus demonstrating that it was not in the habit of preparing a statement which did not represent its position fairly throughout the month. it has been stated by a president of the english bankers' institute that the proportion of cash to liabilities shown by country banks ranges down to a point as low as . per cent. no one can contend that this is an adequate cash basis for banking to work on, and as long as certain members of the banking community conduct their business on these lines an obvious hardship is involved on those which keep a more prudent and strong reserve of cash. it is contended by the big strong banks that their smaller brethren compete with them by providing more credit than they have any right to create, relying on their assistance in times of difficulty. apart from this danger of the over-multiplication of credit on an inadequate cash basis, the complete absence of any legal or other restrictions on the operations of english banking enables it to work with extraordinary ease and readiness. as long as good unpledged security, whether in the form of bills of exchange, commodities, or stock exchange securities, are available in the hands of customers the banks can advance against them to any extent that they consider prudent. prudence dictates in the case of a great majority of them that a certain proportion of cash to liabilities shall be maintained, but, as was shown above in dealing with the bank of england, the cash of english banking consists partly of credits with the bank of england. these credits with the bank of england, and consequently the cash credits of english banking, can be multiplied as rapidly as the bank of england is prepared to make advances or discount bills, and so give credit in its books. the bank of england must publish its account weekly, and it watches over its proportion of cash to liabilities with a vigilance which is greater than that of the rest of the banking community as a whole. nevertheless, its prudence in this respect is the only restriction on it, and we thus arrive at the conclusion that the chief function of the english joint stock banks, that of providing the mercantile community with currency and credit, can be carried out to any extent as long as their customers have security to offer and their proportion of cash remains adequate to their sense of prudence. and further, their proportion of cash can be increased as rapidly as the bank of england is prepared to make advances, which it can and does to an extent which again is only limited by its own prudence. besides this absence of outside regulation, the english monetary system is also distinguished by a remarkable lack of cohesion and co-operation among the members of its own body. except to a certain extent in the country districts, where the rates allowed to depositors and charged to customers are to a certain extent a matter of convention, english banking works almost entirely at the mercy of very keen internal competition. this extreme development of competition leaves the market liable to pronounced depression in rates at times when slackness of trade or other causes decrease the demand for credits. at these times the adroit bill brokers and discount houses, which are in some respects the most important borrowing customers of the banks in london, are enabled by the use of this weapon of competition to obtain loans from the banks at rates which are often below the price that the bankers are paying to their depositors. hence, it follows that in these times of monetary ease the credit machine goes on turning out its product at rates which are quite unremunerative and have a detrimental effect on the market rate of discount, and so on the foreign exchanges, thus increasing the difficulties of the bank of england, which at these times of extreme ease is without any control of the position. against this weakness of the system, however, must be set the advantage which the unrestricted and fiercely competitive manufacture of credit confers on the mercantile and trading community. a few words should be said concerning the form of cheques with which the english banks provide their customers as currency. legally a cheque is a bill of exchange drawn on a bank and payable on demand. that is to say, it is an order signed by a customer of the bank directing it to pay a certain sum to another party or to himself. the form, however, can be varied in various methods, increasing or diminishing the ease with which the cheque can be turned into cash. the cheque can be made payable to a b or bearer, and in this form can be taken to the bank drawn on and immediately turned into cash. when drawn to a b or order, a cheque has to be indorsed, or signed on the back, by a b before the bank drawn on will pay it. a still further restriction is the english system of crossing cheques, that is to say, of drawing two lines across the face of the cheque, by which mark it is shown that the cheque is not to be paid in cash across the counter by the bank drawn on, but must be paid into a bank by the payee, and so only becomes credited to him in his own banking account through the operations of the clearing house. it is evident that this protection greatly increases the safety of the cheque, since if it fell into the wrong hands its chance of being made fraudulent use of is greatly diminished. as the lines drawn across the face of the check by the bankers' customers are often faint and irregular, it has been found in practice that they lend themselves to the ingenuity of the fraudulent, who are easily enabled to erase them and so obtain possession of money that is not meant for them. some of the banks therefore print these crossing lines on all of the cheques that they issue to their customers to be filled in, and when the customer wishes to obtain cash from his bank on one of these cheques he is consequently obliged to write upon it "please pay cash," and sign this note upon it. the extensive use of crossed cheques thus tends to make the cheque still further an instrument which merely transfers banking credits from the books of one bank to another, since every crossed cheque implies that it can not be turned into cash directly, but can only transfer credit with one bank to credit with another. another restriction with which custom has protected the english cheque is the system of writing "not negotiable" on the face of it. these words do not mean that the cheque is really not negotiable, but their legal effect is that the holder of the cheque can not establish a better right to it than the party from whom he received it. if therefore the party from whom he received it had no right to it, his claim against the paying bank is _nil_. with these safeguards, and with the enormous convenience of being drawn to any amount to fit the exact requirements of each transaction, the cheque, although not legal tender, has been enabled to supersede the bank note in english currency. the chief function of the joint stock banks having thus been shown to be the provision of currency for the english community, it may further be noted that a remarkable development of their activity has been the rapidity with which they have covered england with branch establishments. it was estimated in that the total number of bank offices in the whole of the united kingdom was just over , ; at the present moment the aggregate branch offices of four of the english joint stock banks which are richest in respect of branch establishments have exceeded this total. one bank in england has over offices, one has over , two have over , three have more than , twelve have more than . this multiplication of branch offices has been carried out partly by the absorption by the joint-stock banks of the smaller institutions in the country, whether private or joint stock, and partly by the rapidity with which they have opened branches in the great provincial centres and their suburbs, and to a moderate extent in the small country towns. the result of it is to give the english monetary system the power of easily supplying the needs of the various parts of the community as the requirements of others ebb and flow. at the same time this rapid development increases the competition between the various english banks, which we have already shown to be carried to an almost excessive degree, and by the wide local distribution of their liabilities enhances the possibility of strain on them in times of difficulty. some of the banks include under the heading "cash at call and short notice" advances which they make to the stock exchange for the fortnightly periods that elapse between its settlements. the funds that they so use obviously have an important effect upon the marketability and price of securities in london. on the first day of every settlement it is usual to see rates quoted as those at which the banks are lending to their stock exchange clients for the financing of speculative commitments. in the arrangement of these rates a certain amount of combination and co-operation among the banks, or some of them, has grown up as a matter of custom, but since for this class of accommodation the bankers are subject to competition on the part of the agencies of the foreign banks and the big finance houses it is often found difficult to maintain even this amount of harmonious working among the bankers. it has been shown that the rate at which the banks make advances to the discount houses has an important effect upon the market rate of discount in london, but the banks exercise a still more important and direct effect upon this discount by being themselves large buyers of bills. it is impossible to gauge exactly the extent to which they hold bills among their assets, since many of them in their balance sheets include their discounts along with their loans and advances. among the many suggestions that reformers have put forward in the matter of english banking, one is that this item of the banks' holding of bills should be separately stated. but though this obscurity in the statements of the english banks makes it impossible to know the precise extent to which they hold bills, there is no doubt their purchases of them are on the whole the most important influence upon the market rate of discount in london. nearly all the discount houses, whose functions will be described later, buy bills, largely with the intention of reselling them to customers, among whom the joint-stock banks are the largest and most important and most regular buyers, and it is contended by the discount houses that the market rate of discount, for which they themselves are generally supposed to be responsible, is really and in fact regulated by the price at which the big joint-stock banks are prepared to buy. this being so, since the market rate of discount is perhaps the most important influence on the foreign exchanges and so on the inward and outward movements of gold, it will be seen that this function of the bankers is one of the greatest possible importance from the point of view of london's free market in gold. besides thus regulating the price at which bills of exchange can be discounted in london, the banks have in recent years taken an increasingly large and important part in the creation of bills of exchange by placing their acceptances at the disposal of their customers. the increasing extent to which the bankers have in recent years intruded into this class of business is a grievance that is resented rather keenly by the merchant firms, or accepting houses, as they are often called. it is contended by the latter that the business of acceptance is a special function for which special training is required, and that the joint-stock banks rarely have available the special abilities that make for its proper conduct. on the other hand, the high standing of the joint-stock banks and their big reserve resource in the shape of their uncalled capital makes their acceptances an exceptionally fine credit instrument, and it seems natural enough that they should, to a certain extent and within moderate limits, place these facilities at the service of their customers. finally it may be added that the english joint-stock banks are now showing a disposition to engage to some extent in the business of dealing in foreign exchange which has hitherto been left to the finance houses and foreign firms established in london. the london and county and the london city and midland banks have now established regular foreign exchange departments. this development is generally welcomed as a sign of a desire on the part of the banks to widen their horizon and to come into closer touch with the affairs of the financial world at large, but, as in the case of the banks' increasing interest in acceptance, there are some critics who consider that it is better for the bankers to stick to their obvious and highly important function of providing the community with credit and currency, and taking care of the money of their customers. the private banks any differences that exist between the private and joint-stock banks of england lie in their ownership rather than in their functions. their functions are the same, but the manner in which they carry them out is perhaps influenced to a slight extent by the fact, which really distinguishes them, that the private banks are owned by a few partners who generally conduct the business for themselves or exert more or less influence on it, while the joint-stock banks are managed by salaried directors and officials on behalf of a large body of shareholders formed into a public company, the shares in which can as a rule be bought and sold on the london stock exchange. since private enterprise naturally precedes joint-stock institutions, it goes without saying that the private banks of england were the pioneers of the banking business. there are still in existence private firms which were founded before the bank of england. a goldsmith called child was doing business of a banking character soon after , and child's bank still exists. hoare's bank was instituted in about , fourteen years before the bank of england received its charter. modern developments have almost driven them out of the field, and among the leading banks in the city of london only two are left which can still be called private in the old sense of the word. there are one or two other institutions which are on the borderland: and at the west end of the town several old firms, including child's and hoare's, have retained their old constitutions. the merchant bankers and accepting houses the most important function of the merchant bankers is not that of banking, but of accepting. banking, in the strict sense of the term, they do not engage in--that is to say, they are not prepared to meet claims upon them by an immediate payment of cash or legal tender over the counter, but by payment of a cheque on one of the banks in the stricter sense of the term. the function of the london accepting houses, though of enormous importance, is still to a certain extent subordinate to the judgment of the english banks. they finally decide whose paper is most readily negotiable, and, in times when the credit machine is felt to be somewhat out of gear, the bankers occasionally discriminate against the paper of firms which they consider to have been giving their acceptance too freely. in this respect, as in so many others, the bank of england remains the final arbiter, since the paper of an accepting house which is questioned by the other banks can be negotiated at the bank of england through a discount house, and the bank of england has before now intervened with effect when it considered that questions raised concerning certain acceptances have been without justification. this business of acceptance is one into which the other banks have themselves recently intruded with considerable effect, accepting bills for their customers, home and foreign, for a commission; and there is a certain apparent anomaly in the position which makes them guardians of the volume of acceptance created by the private firms and acceptors themselves on a steadily increasing scale. nevertheless, this anomaly has little or no untoward effect in practice. the bankers are naturally extremely cautious in raising any question as to the security of general credit in london, and they are in many ways closely connected with the private accepting houses, so that the system, which appears to be full of uncomfortable possibilities on paper, works easily enough in practice. other functions of the merchant firms and accepting houses are their activity in general finance and in exchange business. both these functions arise out of their old business as merchants, which gave them close connection both with the governments and the business communities of foreign countries. the discount houses the great volume and diversity of the bills of exchange which come into the london market to be melted and turned into present cash before their date of maturity has caused the existence of a class of dealers in bills (bill brokers) who specialise in handling them and may be regarded as intermediaries between the holders of the bills--that is to say, originally, the drawers of them, or their representatives, or any one else into whose hands they may have passed them on--and the bankers, who are the ultimate buyers and hold them as investments until maturity. it is the business of the discount houses to buy these bills on a wholesale scale, using for this purpose funds largely lent them by the banks, and to meet the requirements of the bankers with regard to the date named and quality of the bill, providing them out of the store that they keep constantly replenished. we have also seen that the discount houses fulfill a very important function by borrowing funds from the bankers at call and short notice. these funds are regarded by the bankers, and actually described in their balance sheets, as cash, cash at call, and short notice. it is a somewhat elastic extension of the term "cash" to apply it to money that is being lent to any borrower, even of the highest credit and against the most liquid possible collateral. but it is always assumed by the bankers that these funds placed in the discount market can be called in readily at any moment. that they can be called in is practically a fact; but it arises chiefly from the ability of the discount houses when pressed for repayment of these loans by the bankers to fill the gap in credit by an appeal to the bank of england and the production of fresh cash, as it is called, by borrowing from it. the discount houses take security to the bank of england and raise with it the right to draw cheques. these cheques they pay to their bankers, whose cash at the bank of england, which we have already seen to be regularly used as a part of the basis of credit in england, is thus increased. besides the money that they habitually borrow for short periods from bankers, the discount houses also have considerable amounts placed on deposit with them by other lenders, some of which they employ, especially in times when the volume of bills is comparatively small, by loans to the stock exchange for financing the speculative commitments of the public, and by holding or carrying securities of a reasonably liquid character. they also take some part in the underwriting of new loans and in the general financial business of the london market. [ ]it is impossible to exaggerate the importance of the functions which the bill brokers discharge in the london money market. they are only about twenty in number, including three joint stock companies. one or two of the brokers work on commission, as your brokers do, but the majority are really dealers in bills. that is, they buy or discount, and sell, or rediscount, bills of exchange. let me illustrate their method of working: a bank in new york may buy $ , , worth of sterling bills drawn on england and send them forward to its london agent to be discounted with the bill broker. the bill broker will discount these bills at, say, per cent. if he thinks rates are likely to fall, he will hold the bills; if he thinks them likely to rise, he will try to sell the bills at about - / per cent. or - / per cent. discount, thus making a profit on the transaction of / per cent. or / per cent. per annum. similarly he may discount large parcels of bills for eastern and south american banks. many of these bills will be bills drawn on and accepted by banks and finance houses. these are known as "bank bills." but on the other hand, the bill brokers are free buyers of "trade bills." the trade bill in england arises in the following way: trader a sells goods to trader b. he will draw a draft on trader b at, say, three months date. trader b will accept the draft and return it to trader a, who will discount it with his banker or with the bill broker. the rate of discount for trade bills is usually / per cent. per annum higher than the rate for bank bills. the essential feature of almost all the bills on the market is that they represent a commercial transaction, such as a sale of goods, where value passes. it is this that lends them their self-liquidating quality; for they are usually liquidated by the acceptor out of the proceeds of the resale of the goods during the currency of the bill. the bill broker not only employs his own capital in buying bills, but also money which he borrows from the banks and others at call or at short notice. enormous sums are employed in this way. interview with the governor and directors of the bank of england [ ]q. when does your present charter expire? a. the bank's exclusive privileges of banking continue subject to one year's notice and to repayment by the government of the debt of £ , , and of all other public debt held by the bank at the time. q. what is the par value and present selling price of your shares? a. the bank's capital is in the form of stock, £ of which is at present quoted at about £ . q. how many stockholders have you? a. there are at present over , accounts. q. is the stock fully paid? a. yes. q. have your shareholders any liabilities in addition to the ownership of shares? a. legal opinion is to the effect that there is no further liability on bank stock. q. is there any limit to the number of shares which may be held by any one person, and is your approval required before a transfer of your stock can be made? a. there is no limit--the bank's approval is not required. q. does every share have a vote at shareholders' meetings? a. to have a vote a proprietor must hold £ of stock, but no matter how much additional stock a proprietor may hold he can not have more than one vote. q. is there any custom restricting the class from which the directors may be selected? a. there is no legal restriction as to the class from which directors may be selected, except that they must be "natural-born subjects of england, or naturalized," but in actual practice the selection is confined to those who are, or have been, members of mercantile or financial houses, excluding bankers, brokers, bill discounters, or directors of other banks operating in the united kingdom. q. how many branches have you? a. there are eleven branches--two in london and nine in the provinces. q. is the business conducted at your branches of the same class as at your main office in london? a. yes. q. do your branches have business relations with merchants, farmers, and all classes of people in their respective localities? a. there are no restrictions of any kind as to the class of people with whom the bank has business relations. q. is the bank of england a member of the london clearing house? a. yes; but "on one side only," as it is termed. the bank of england presents, through the clearing house, all drafts drawn on clearing bankers paid in to it by its customers; but the clearing bankers do not present, through the clearing house, drafts on the bank of england paid in to them by their customers. such drafts are paid direct to the credit of their accounts at the bank of england. q. do you at any time allow interest on special deposits? a. it is not the practice of the bank to allow interest on any deposit. q. can you state approximately the average length of time and the average size of bills discounted by you? a. time, forty to fifty days; size, probably about £ , . q. what is the distinction between what are known as "prime bills" and other bills? a. a "prime" bill we should define as a bill accepted by a london or provincial bank in first-class credit or a merchant or merchant banker of the first class whose business it is to grant credits. q. do you discount any prime bills? a. yes. q. do you discount to any considerable amount for individuals and merchants? a. the bank discounts all approved bills offered to it by persons or firms having properly constituted accounts. q. is it your custom to employ surplus funds in purchase of bills from discount houses? a. no. q. do you rediscount bills for the joint stock or other banks? a. the bank is always prepared to rediscount for other banks at its official rate, and does a large business from time to time with the colonial and foreign exchange banks who are from the nature of their business always sellers of bills. q. would you charge a merchant house having a good account with you the bank rate or the market rate for prime bills? a. the market rate. q. to what extent does bank rate govern your discount and loan transactions? a. the rates for discount and loan transactions at the bank usually approximate more or less closely to the bank rate. q. do you at times discount bills for parties having no account with you? a. no. q. are a considerable number of your loans on call? a. none. q. when and under what conditions is the bank rate changed? a. the bank rate is raised with the object either of preventing gold from leaving the country, and lowered when it is completely out of touch with the market rate and circumstances do not render it necessary to induce the import of gold. q. does the bank sometimes borrow money in the open market for the purpose of raising the market rate? a. yes. q. do you sometimes sell consols for the same purpose? a. yes; on rare occasions. interview with sir felix schuster, governor of the union of london and smith's bank limited [ ]q. your bank is organised under the general companies acts as are all joint stock banks in england? a. yes. q. you are not under government supervision or examination? a. no. q. the authorised par of your stock is £ , and £ _s._ have been paid on each? a. yes. q. are your shares held by individuals and corporations? a. by individuals, not by corporations. there are upwards of , different shareholders. q. in the transfer of shares, do you require the name of the transferee to be submitted and approved before the transfer is made? a. yes. q. that of course is in order to insure the responsibility of your stockholder? a. this is in order to insure the responsibility of our stockholder, and to prevent one holder from securing too large a holding. furthermore we give no single proprietor more than votes, however large his holding may be. every shares carry one vote, so the holder of shares has a maximum number of votes. q. is that the usual custom with the joint-stock banks of england? a. i am afraid i cannot answer offhand. i suppose it is so in some cases, but the practice varies. q. in london there is usually a difference between the rates charged on loans and bills in favor of bills, is there not? a. yes. q. would you say that that difference is perhaps from one-half to per cent. in favor of the bill? a. it depends so very much on the circumstances of the moment that it is very difficult to generalise. at the present moment i would say a three months' bill is worth - / , and a three months' loan would be worth perhaps - / . q. were most of your branches organised by you or were most of them other institutions purchased by you? a. some of them were other institutions; some of them were organised by us; most of them were those old banking firms which were carried on as private businesses and have since become branches of our bank. q. the tendency is for the consolidation of banking in great britain, is it not? a. yes. q. very strongly in that direction? a. very strongly in that direction, yes. q. as a matter of fact, a large part of the commercial banking in england is done by about a dozen institutions, is it not? a. in liverpool and manchester there are very important local banks. however, it is no doubt the fact that four or five banks do about half the banking business. q. in the main you believe that the banking situation is stronger and better and the country is better served through the system of branches than through the independent banks? a. i am quite convinced of that, if only for one reason, that i do believe the indiscriminate granting of credits to the individual is injurious to himself, the private bankers being too much in the habit of regarding old family associations and not so careful as the joint-stock company would be, and he has accustomed people to trade on the credit that they get from the banker. i do not think that is banking business. the bank ought never to supply the trader with working capital. i think it is bad for the trader. q. is it not quite essential to the success of a financial institution doing a commercial business to become a member of the clearing house if it is to meet with a large degree of success? a. no. after all, there are only seventeen banks, i believe, now in the clearing house, but there are a great many other institutions who are not members of the clearing house and who do not suffer from that fact. scotch banks with branches here who do a large banking business are not members of the clearing house. there are all the colonial banks with head offices or branches in london and other large institutions; those are not members of the clearing house. there are barings and rothschilds; they are not members of the clearing house. q. would you say the bank of england is in any way a competitor of the other banks in england? a. yes. that is a source of very grave complaint by the other banks. q. the bank of england do not pay interest on any accounts? a. no; but in some cases they act as intermediaries for lending money. it is a very subtle distinction. q. while the bank rate is fixed and is to-day, say - / per cent., is it not a fact that the bank of england does some business for its customers and also purchases bills for their account at a lower rate? a. that is so, and that is one of the matters of complaint. by fixing the rate at - / per cent., or per cent., or per cent., they can regulate the rate we fix for our own customers. we regulate our deposit rate in accordance with the bank rate. we also regulate the rate we charge for our loans in accordance with the bank rate, and we are bound by it to a certain extent, and they themselves feel at liberty to depart from it. q. what does the bank rate mean; what does it govern in fact? a. it means the general charge to the trade of the country, because although we say that bills in the market are discounted at a lower rate than bank rate, yet there is a vast number of trade bills which are purely governed by the bank rate. q. we found both in germany and in france the question of the amount of reserves, either in specie or in bank, was regarded as of little importance by the bankers. they depend on the reichsbank and the bank of france for rediscount in times of need. a. both in france and in germany banks are much more dependent on the central institution than we are here. they lean on their central institution to a very great extent; for instance, the rediscounting of bills and borrowing from the central institution is, i believe, quite a usual occurrence. here it is an occurrence which would only take place in the last resort. as far as i am aware this bank has never as long as it has been in existence had one penny from the bank of england, whether by way of advance or by way of a discounted bill. we do not rediscount our bills in the market either; so every transaction we enter into we have to see through to the very end. interview with mr. charles gow, general manager of the london joint stock bank, limited [ ]q. your capital stock is £ authorised, £ paid? a. yes. q. does your board pass upon a new stockholder? a. yes. q. who really conducts the business of the bank? a. the managers, who are appointed by the directors; that is to say, myself and all those belonging to me. q. are most of your acceptances secured? a. every one. q. how are they secured, generally speaking? a. they are secured in the great majority of cases by bills of exchange, by first-class securities with plenty of margin, even by cash in hand to a moderate extent, and to a very small extent by bills of lading for produce shipped. that is a very small item. q. can you state the reason for accepting bills instead of furnishing the cash? a. we accept those bills because it happens to be the custom of the particular banks to draw a long bill. the customer himself who buys cotton in bombay, or wherever it may be, acts according to the custom there to draw a bill to a certain usance. now, for instance, with regard to an inland bill, we would not give credit of that sort to a man in london, but wherever there is a regular course of business abroad to draw at long usance we comply with it. q. what is the character of your bills discounted? a. those are all marketable bills, trade bills; you know what they are; they are between the manufacturer and the man to whom he sells. q. you always require two names? a. always. q. what does the form of obligation by the borrowers upon collateral take? a. just the same form as your promissory note. q. you have branches, have you not? a. we have about forty-odd branches all in london and close to london. q. you do not then endeavor to acquire a country business through your branches? a. for this reason, that we commenced as a purely london bank, and we have so far kept to that original determination of not launching out into country business, because, as i say, it differs from the ordinary london business. country business is not quite so liquid, and can not be. q. if you had an account of a man running, say, a hat store, his account was satisfactory in character and had been carried with you for several years, and he wanted to stock up on hats, there would be no way in which he could go to you and borrow the money with which to buy those goods unless it was through a guarantor? a. no. he would go then to the wholesaler from whom he would buy the goods, and give that wholesaler his bill, and that bill would be a discountable article, and that is how the money would be raised. q. do you ever allow overdrafts, as they do in scotland? a. they are not unheard of, but not a principle of our business. overdraft is a principle of country banking. q. my observation leads me to believe that the banking situation in london is practically controlled by twelve or fourteen of what are known as the london joint-stock banks, through their offices and through their branches? a. yes; i think that is right. however, there are still independent banks in the country, and i doubt whether amalgamation will go very much farther than it has gone. you see, these amalgamated banks have already become so large that they begin to get a little unwieldy. lloyds bank is an enormous thing, with $ , , of current and deposit accounts. q. would you say that the public are better served through these branches than they were through the independent banks? a. some say that they are not so well served, that accommodations are curtailed now as compared with what they used to be, and that i can understand to some extent, because, working a very large concern from one centre, you see, fiats will go forth, "cut that man's credit off," and not listen to taking a large view. they say, "i have enough of that kind of accommodation; i have shipbuilders or shipowners; i am not going to give out more than a proportion of my money into that particular trade; therefore, i will not have any more," whereas the independent banks would be perhaps a little more accommodating. q. if i were to go to you to-day with a ninety-day trade bill, the acceptor known to you as good, and also with a loan secured by pennsylvania railroad bonds, my loan to mature in ninety days, what rate would you charge me on those separate items? a. the bank rate to-day is - / per cent. you are a good customer, and i should charge you - / per cent. for discounting that trade bill, and i might charge you per cent., or even perhaps - / per cent. on the pennsylvania railroad collateral for this reason, that one is not as realisable as the other. when the bill becomes due it has to be paid, or i give it back to my customer, and say "give me the money for that." i can not quite say the same to him about his collateral. q. what per cent. of earnings on your capital did you show last year? a. roughly, our net earnings were per cent. it cost us per cent. of our gross earnings to run the business. q. what taxes do you have to pay? a. we pay income tax on all our earnings, and deduct from our gross profits. we are entitled to deduct, roughly speaking, our expenses, and then upon the remainder we have to pay the income tax, or whatever it is, at shilling in the pound, for instance, now. q. would you say that the bank of england is a popular banking institution among other banks in england? a. yes, i should say so decidedly. its popularity goes to this extent, that it is absolutely indispensable to them. some of them may grumble at this proceeding or that proceeding, but they have one and all to own that the bank of england is indispensable to them. q. as a matter of fact, if you had presented to the bank of england last fall some bills which had been negotiated through you which appeared to be finance bills, do you not think they might have gently hinted that it was not agreeable to them to have you negotiate any more finance bills? a. i may say they have that recourse, and they might say to me if i gave them any just cause for doing it, just the same as anybody else. q. in other words, the bank of england has such a commanding position here among the financial institutions which control all the finances of great britain that they dominate it when they choose to? a. when they choose. q. it is the custom of the bank to co-operate very cordially with the other banks, is it not? a. oh, yes; we are as free as free can be. there is very little conference, or anything of the kind; we are all pretty good friends all round. footnotes: [ ] f. straker, _the money market_, pp. - . methuen and company. london. . [ ] _ibid._, pp. - . [ ] [the fourth suspension occurred august , .] [ ] adapted from hartley withers, _the english banking system_, publications of the national monetary commission, senate document no. , st congress, _ nd session_, pp. - . [ ] james h. simpson, _some leading features of the london money and discount markets_, an address delivered at the annual banquet of the bankers of the city of new york, jan. , . (in banking and currency at home and abroad, distributed with the compliments of the national city bank.) [ ] adapted from _interviews on banking and currency systems of england, scotland, france, germany, switzerland, and italy_, publications of the national monetary commission, senate document no. , st congress, _ nd session_, pp. - . [ ] _ibid._, pp. - . [ ] _ibid._, pp. - . chapter xxiii the scotch banks [ ]the functions performed by the eight scotch banks and their , branches[ ] are essentially similar to those already described as being carried out by their english brethren. the differences between the currency systems of the two countries are in degree rather than in essence. in scotland the note issue has made a harder fight for its existence than in england, owing no doubt to the fact that the bank of england's monopoly did not extend to scotland and that the great scotch joint-stock banks therefore extended the system of using notes as currency, while the development of joint-stock banking in england was necessarily opposed to it, since joint-stock banks in england with an office in london were unable to issue notes. nevertheless, even in scotland the advantages of the cheque have told in its favour, and, as will be seen below, liabilities of scotch banks under note issue are now much smaller than those under deposit as current accounts. democracy of scotch banking the scotch note circulation increased from £ , , in to £ , , in . this increase, when compared with the fact that the note issues of the english country banks have during the same period diminished almost to vanishing point, shows that the bank note is much more tenacious of life north of the tweed. this is partly owing to the fact that in scotland notes may be issued of the denomination of £ , whereas in england the smallest allowed is of £ , so that the note was thus circulated more easily among the poorer classes in scotland and so gained and retained a hold upon a much wider circle of the community. in this respect, as in others, scotch banking is more democratic than english, and provides its facilities for a poorer and lower class of the community, though this distinction between the banking systems of the two countries is being rapidly diminished. especially in its early days it laid itself out much more readily to the encouragement of the small capitalist and borrower, often granting him facilities against security, or an absence of security, which would have been only regarded as feasible under quite exceptional circumstances in england. a very interesting system was at one time fairly general in scotland, and is even now by no means obsolete. it was the system described as that of cash credits, by which borrowers were able to go to banks and obtain advances against the joint personal security of themselves and one, or two, or three friends. by this means, in which a kind of co-operative responsibility was recognised as a security by the scotch bankers, very poor borrowers were enabled to obtain banking facilities, and many instances are recorded in which by a loan of this kind, of quite small importance from the banking point of view, foundations of fortunes have been laid and the general commercial prosperity of the community has been furthered in a very satisfactory manner. and even now the essential difference between scotch and english banking is this readiness of the former to take into consideration the personal standing of the applicant rather than the stuff or paper which he brings to it as security for an advance. use of notes as "till money" in relation to the establishment of branches banking by branches in scotland has proceeded even more rapidly than in england, and the percentage of branches per head of the population is higher in the northern part of the kingdom. this wide diffusion of banking facilities in scotland has been largely brought about by the fact that its banks, having the privilege of note issue, were able to hold their own notes as "till money," so economising in the matter of cash. the following passage is from a work entitled _scottish banking, - _, by a. w. kerr, author of a _history of banking in scotland_: were it not for the power to issue notes, and the readiness with which the public receive them, the banks could never have afforded to open a third of the branches which have been established. the reason for this is a very simple one. without the right of issue a bank must, at every one of its offices, hold the whole of its balance of cash in the shape of coin, or of notes of other banks, which, as far as it is concerned, are as unprofitable as coin. such balances entail a complete loss of interest which can only be borne where the amount of business is of considerable extent. there are probably not above (at most ) localities in scotland that would satisfy such conditions. when, however, a bank can hold its till money in the shape of notes, it is enabled to extend its operations into districts which would otherwise be quite inaccessible.... the authority of a practical scotch banker is equally emphatic on the point. mr. robert blyth, general manager of the union bank of scotland, read a paper at the thirty-first annual convention of the american banking association, in october, , on the subject of scottish banking. in the course of this very interesting paper he made the following statement: "it is in another quarter altogether that the scotch banks find the value of the £ note. it is the unissued notes in the tills of the branch offices, forming the till money at more than a thousand branches, wherein the real value lies. without them the banks would require to keep £ , , or £ , , of gold coin, not as a reserve but as till money. it is these £ notes which have enabled branch offices to be planted in every part of the country." it thus appears, from the highest possible authority, that the scotch banks are enabled by their right of note issue to economise gold to the extent of £ , , or £ , , , and it is amusing to observe how the objects aimed at by peel's legislation with regard to note issue have thus been defeated even more completely in scotland than in england. in england banking turned the flank of peel's act by developing the use of cheques, which superseded the note as the common form of payment in daily transactions. in scotland, banking evaded the spirit of peel's regulations, which were intended to insure that every addition to currency should be secured on an addition to the bullion held by it, by actually economising bullion to the extent of £ , , or £ , , . evasion of peel's act scotland used the same weapons as england, namely, the cheque and the development of deposit banking. the eight scotch banks have, according to their latest balance sheets, £ , , of notes outstanding, and £ , , of liability on deposits and drafts. with regard to the latter item peel's regulations had nothing to say, and since ordinary banking prudence demanded that some cash should be held against it, and since the gold held against notes was not specially earmarked as such, scotch banking was able to treat its cash against deposits as the basis both of its notes and deposits and so produce the economy which is boasted of by its champions. the law says nothing concerning cash to be held against deposits, and the metallic basis of these is probably extremely slender, if the cash held against notes is set on one side; but it is impossible to detect its actual amount, since the scotch banks include with their cash their balances at the bank of england, etc. and the net result is, that when the proportion of its cash to its total liabilities on notes and deposits is worked out it is found to be decidedly low, even when compared with english practice. for the eight banks taken together, gold and silver coin, notes of other banks, cash at bank of england, and cheques in course of transmission represent almost exactly per cent. of their note and deposit liabilities. it should be observed that the notes which the scotch banks hold as till money do not appear in their statements, for until they are issued they are not a liability, and though they are treated by the banks in practice as an asset, they can not figure as such in a balance sheet. that they are practically treated as such is witnessed by mr. blyth, as quoted above, when he says that without them the banks would require to keep £ , , or £ , , of gold coin. and it is, of course, this habit of regarding unissued notes as a banking asset in the shape of till money that accounts for the low reserve of actual cash that the scotch banks show. defects scotch banking is so generally regarded as one of the highest achievements of the banking intelligence that some hesitation is natural in criticising the system by which, according to its own evidence, it has obtained most of its success. at the same time, it is difficult to avoid the conclusion that a serious danger lurks in a system which regards a banker's unissued promise to pay in the light of a banking asset. mr. blyth points out that these unissued notes are "not a reserve but till money," but the distinction between till money and reserve is one upon which it is possible to lay too much stress. in assessing the strength of a bank it is usual to compare the amount of its cash in hand, as a whole, with the amount of its liability to the public on deposit and current account, etc., and note circulation if any. the cash in hand, as a whole, consists of the till money and cash reserve. if the till money consists to any extent of the bank's own promises to pay, it follows that the bank's cash reserve as a whole is to that extent weakened, for it need not be said that in case of serious trouble, which is a contingency of which all provident bankers have at all times to beware, a bank's own promises to pay would be of little service to it. if a bank's credit were doubted, these promises to pay would not be available for it in meeting demands upon it. at such periods the public requires from its bankers not promises to pay but physical gold. in scotland the confidence of the public in its bankers is so great, and the readiness with which it circulates their promises to pay appears to be so ingrained in the national character, that the contingency of the demand of the public for gold seems to be extremely remote. the criticism therefore which detects a weak point in this asset upon which scotch banking prides itself so highly may be said to be merely academic. nevertheless, when we examine scotch banking by the test of figures, we find that it does actually work, as indeed would be expected from the statement of its exponents, on a cash basis which is decidedly narrow. though the functions that they perform are practically the same as those of the english bankers, scotchmen have succeeded in avoiding the excessive competition in carrying them out which is a weakness of english banking. in scotland, on the other hand, cohesion and co-operation among the banks are carried to an extreme of which the mercantile community frequently complains. the banks are few and stand together like a close corporation; they agree absolutely and arbitrarily among themselves as to the rates they will allow to depositors, the rates at which they will advance or discount, and the terms and commissions for which they will do business for customers. the extent to which this regulation of the price of the product that they turn out is carried, is almost incredible from the english point of view, and though it is contended by the champions of the scotch system that it encourages that wholesome democratic influence in scotch banking which is in favor of the small borrower of limited resources, who is thus able to obtain accommodation on the same terms as much larger and more important customers, yet it must be obvious that the scotch banks, by making these hard and fast agreements among themselves as to the price of the accommodation that they will give, and maintaining it in every case, are in fact putting the same price upon a very different article. the result of it is beginning to tell upon them a little in these days, since, when the big scotch merchants and manufacturers find that their local bankers charge them the same rates for accommodation as the small tradesmen of the towns, they are naturally impelled to make arrangements to provide themselves with monetary facilities somewhere south of the tweed, where rates are ruled by the circumstances of each case, and competition and higgling often in times of monetary ease deliver the bankers into the hands of the borrowers. as it is, the scotch banks in regular conclave fix their rates in accordance with those current in the london money market or the bank of england's official minimum, and, having fixed them, stick to them. the system is very profitable to themselves, and their customers certainly can not complain on the whole of the facilities with which they provide them. nevertheless, the cast-iron rigor with which they work hand in hand in combination appears to be an excessive development of banking unity, and an ideal banking system would seem to lie somewhere in the middle between the excessive competition of the english bankers and the cast-iron combination of their scotch brethren. finally, it may be added that it is a little inaccurate to speak of a scotch banking system, if the phrase be taken to imply that scotch banking stands by itself and works on its own resources. in fact, it is only an appendage of the english system and relies habitually on drawing gold from the bank of england, as its centre and the keeper of its reserve. bank of scotland interview with sir george anderson, general manager[ ] q. when was the bank of scotland founded? a. in . q. when does your present charter expire? a. by act of parliament the "governor and company of the bank of scotland" have "perpetual succession." q. how many branches have you? a. one hundred and sixty-three branches and twelve sub-branches in scotland: also an office in london. q. how are your branches managed? a. by agents (managers at london and glasgow) appointed by the directors. q. do your branches have business relations with merchants, farmers, and all classes of people in their respective localities? a. yes. q. what is the law governing your note issues, and how are note issues limited and how secured? a. the bank is authorised to issue, without holding coin against them, notes to the value of £ , , but for any excess beyond that amount we must hold, at the head office, an equivalent value in gold coin, one-fourth of which may, however, be in silver coin. q. will you state (a) the class of bills usually discounted by you, giving the number of names required; (b) the minimum size; and (c) the maximum length of time to run? a. mercantile bills, also a few accommodation bills, usually two names; minimum, say, £ . the maximum length of time to run is six months. q. what classes of collateral are accepted by you for loans? a. personal security, marketable securities, life policies, mortgages over ships, shipping documents, etc. in the important banking centers of scotland lending against collateral security has become largely prevalent. q. do you rediscount bills from other banks? a. no. q. explain the phrase "cash credits," and upon what conditions are they given? a. a "cash credit" is a credit allowed, in virtue of which a customer may draw cheques on the bank until the balance due to us reaches a certain fixed limit. the account is an ordinary operative one, and interest is charged on the balances actually due to the bank from day to day. q. have you in mind how many branches you had ten years ago? a. one hundred and twenty. q. do you ever buy any shares of railroad or industrial companies? a. yes; of the highest class. q. do you ever own bank shares? a. no. royal bank of scotland interview with adam tait, cashier and general manager[ ] q. when was the royal bank of scotland founded? a. in the year . q. when does your present charter expire? a. it is perpetual. q. how many branches have you? a. one hundred and fifty-two. q. are all your branches of the same class, or have you main and subsidiary branches? a. in some cases there are sub-branches. some are mainly or almost entirely deposit branches; others have few deposits, but a large advance business. q. is the business conducted at your branches of the same class as at your office in london? a. no; the london office is itself a branch office and much of the ultimate settlement of balances takes place there. the conduct of the ordinary london business is on the same lines as that of any other london branch bank. no notes can be issued in london. q. do your branches have business relations with merchants, farmers, and all classes of people in their respective localities? a. yes, they have business relations with all classes of people. q. what is the law governing your note issues, and how are note issues limited and how secured? a. the act of parliament of governs our note issue. there is no limit to the amount of notes that may be issued, but the bank is required to hold gold (and silver to an extent not exceeding one-fifth of the total) against the notes in the hands of the public on the average of each month, and that at its head office in edinburgh--gold held at branch offices does not count--to an amount sufficient each week on saturday to cover the notes in the hands of the public in excess of a certain amount specified, £ , . q. to what extent are your notes legal tender in great britain? a. our notes are not legal tender at all. q. what other banks have the right of issue in scotland? a. the bank of scotland, the british linen bank, the commercial bank of scotland (limited), the national bank of scotland (limited), the north of scotland and town and county bank (limited), the union bank of scotland (limited), the clydesdale bank (limited). q. are the notes of your issuing banks secured; and if so, how? a. they are not secured. in case of the liquidation of the five last-named banks, however, their shareholders are unlimitedly liable for their notes and they are liable to contribute a sum necessary to restore to the general assets the sums that may have been paid out of the same in respect of claims under notes. q. what is the total amount of their outstanding issues? a. about £ , , . q. do you pay the government in the form of taxes or otherwise, either directly or indirectly, for your privilege of note issue? a. yes, we all pay a license duty of £ for each place at which notes are issued, and a tax of _s._ _d._ per £ , or a penny per £ , on the average amount of notes in the hands of the public at the close of each week. q. is it your custom to carry a fixed amount in government securities? a. yes, but the amount is not rigidly fixed. q. do you discount any but prime bills? a. yes; we do all classes of business. q. is it your custom to employ surplus funds in purchase of bills from discount houses? a. yes; bills accepted by london banks. q. do you rediscount bills for other banks? a. no; except for foreign or colonial banks who are correspondents. q. is the bank, through its branches, employed by other banks to any considerable extent for the transfer of funds from one city to another? a. yes. q. what, if any, artificial means are taken by you to secure changes in the volume of currency (notes and coin) to make it responsive to business demands? a. none are deemed necessary. our system works automatically. our note issue is unlimited; we are only required to provide gold to cover the amount in the hands of the public at the close of each week and on the average of each four weeks. q. what is the customary charge for acceptance of a ninety-day bill? a. five shillings per cent. q. your acceptance constitutes what is known in london as a prime bill? a. yes. q. do you pay interest on both current accounts and deposit accounts? a. it is our custom to pay interest on deposits only. in london, however, it is different; there interest is allowed in special cases on large balances on current accounts if left for some time. q. how does the bank rate affect the rate allowed by you on deposit? a. the scotch banks all allow the same rate and charge the same rates for discounts and overdrafts, and these are fixed relatively to the bank of england rate. our deposit rate is usually - / per cent. under the minimum bank rate. q. were most of your branches organised by you or were most of them other institutions purchased by you? a. most of them were originated by ourselves. q. have you in mind how many branches you had ten years ago? a. about . q. what relations do the scotch banks bear to the bank of england? do they deal with it directly? a. the royal bank of scotland has an account with the bank of england, which has been in operation since , and it collects bills and cheques for the bank of england all over scotland. q. do you regard your system of currency issue as sufficiently elastic for your needs? a. yes; there never has been any difficulty. moreover, no scotch bank has ever failed to pay its creditors, including the holders of notes, in full. commercial bank of scotland (limited) interview with alexander bogie, general manager[ ] q. when was the commercial bank of scotland (limited) founded? a. in the year . q. when does your present charter expire? a. it is not limited in point of time. q. has the government any voice in the management of the bank or any interest in it through the ownership of shares? a. none. q. have the managers of the branches full control of the business in granting discounts, etc.; if not, what discretion is usually given them? a. agents have power to grant advances, but subject to the approval of head office. in advances of considerable amount, an agent's duty is to get authority from the head office before granting it. the discretion allowed is dependent on the size of the branch and the nature of the business and the class of customer, and on the record of the agent. by our system of reports on advances (weekly, monthly, and quarterly) we keep in close touch with the advances and means of borrowers. the london branch is, of course, on different lines, and our manager there has greater powers than an agent at a branch in scotland. q. is the business conducted at your branches of the same class as at your main office in edinburgh? a. yes; very much the same. the head office has administrative work and supervision of branches, investment, etc., which does not, of course, arise elsewhere. q. do you discount to any considerable amount for individuals and merchants? a. yes; it would perhaps be well to point out that in scotland a large portion of advances made to traders are granted in the form of overdrafts on current accounts. _the number and amount of bills in scotland are less now than in former years. cash payments for the purpose of obtaining discount are more frequent, and the number of bills discounted by wholesale houses is reduced in consequence._ q. is it your custom to employ surplus funds in purchase of bills from discount houses? a. only occasionally, when rates suit. q. do you rediscount bills for other banks? a. it is not our practice to do so. q. to what extent does bank rate govern your discount and loan transactions? a. in ordinary transactions, altogether. in all transactions the bank rate governs as regards the minimum. q. explain the phrase "cash credits," and upon what conditions are they given? a. a cash credit account is an operative current account in security of which the principal debtor and two or more co-obligants have granted a personal bond in favor of the bank. the account is operated upon by the principal debtor, but all the parties are bound as principals and are jointly and severally liable to the bank.[ ] q. is the bank, through its branches, employed by other banks to any considerable extent for the transfer of funds from one city to another? a. we act as correspondents for the large english and irish banks and for colonial and foreign banks. q. do you favor the issue of £ notes? why? a. yes; under the scottish system, as it enables the banks to plant branches at little expense and so to open up the trade of the country in all districts and directions. q. it is your practice to employ your surplus funds in the purchase of prime bills through bill brokers? a. we occasionally have such transactions. q. were most of your branches organised by you, or were most of them other institutions purchased by you? a. all of them were organised by ourselves. q. is the question of the amount of reserves, either in specie or in bank, regarded as of importance by scotch bankers? a. i should think so, though i only know positively my own opinion. q. do you ever buy any shares of railroad or industrial companies? a. no industrial company shares and only gilt-edged railway stocks. q. do you ever own bank shares? a. no. union bank of scotland (limited) interview with robert blyth, general manager[ ] q. when was the union bank of scotland (limited) founded? a. in . q. when does your present charter expire? a. the bank has no charter expiring at any specified time. it is incorporated under the companies acts. q. have the obligations of the bank to the public or to the government been changed from time to time? a. the liability of the shareholders was formerly unlimited, but when the bank became registered under the companies act, , the liability of the shareholders--unless in respect of notes--was limited to the amount of the uncalled capital. q. the tendency is for the consolidation of banking in great britain, is it not? a. it is, but this tendency set in at a much earlier period in scotland than it has done in england. q. do you rediscount bills for other banks? a. yes; but only to a very limited extent. q. is private banking carried on in scotland? a. private banking ceased to exist in scotland prior to . q. do you ever buy any shares of railroad or industrial companies? a. no. q. do you ever own bank shares? a. no. footnotes: [ ] adapted from hartley withers, _the english banking system_. publication of the national monetary commission, senate document no. , st congress, _ nd session_, pp. - . [ ] (september, ). [ ] adapted from _interviews on the banking and currency systems of england, scotland, france, germany, switzerland and italy_, publications of the national monetary commission, senate document no. . st congress, _ nd session_, pp. - . [ ] _ibid._, pp. - . [ ] _ibid._, pp. - . [ ] the cash credit system, sometimes pointed to as a unique feature of scotch banking, is by no means unknown in england.--editor. [ ] _ibid._, pp. - . chapter xxiv the french banking system the bank of france [ ]the bank of france was established in the year , and was at first an entirely private concern, with a capital of $ , , . among the first subscribers were napoleon bonaparte, hortense beauharnais, and bearers of names which are still prominent in the french banking world, such as mallet, hottinguer, seillers, etc. at that time, the privilege of issuing notes was not confined to a single bank. but in the bank of france was placed under state control, and, by and by, the other issuing banks disappeared, by amalgamation or otherwise, and the bank of france became, and has ever remained since, the only issuing bank in continental france. the present capital is $ , , , all paid, divided in $ shares.... [francs are given in terms of dollars.] these shares are held by the public, the average being about - / shares for each shareholder. one-third of the shares are held by persons possessing only one share. they are dealt in freely in the market, their quotation being at present about per cent. the profits go to the shareholders, as in every other company. in the bank earned a net profit of $ , , . the last yearly dividend was paid at the rate of . per cent.... the governor of the bank of france and the two sub-governors are appointed by the state. they are assisted by fifteen regents, nominated by the meeting of the shareholders. the same meeting appoints three censors whom you would call auditors. the board, composed of the governors and regents, decides all questions concerning the rate of discount on loans, the issue of notes, etc. three of the regents, assisted by twelve shareholders chosen from amongst the prominent members of the commercial and industrial profession, compose the "discount committee," which meets at least three times a week and decides upon the acceptance or refusal of the bills presented for discount.... the notes are ... legal tender, but, of course, may be exchanged, at sight, against cash--i don't say against gold, as i will explain presently. the denominations circulating at present are $ , $ , $ , and $ . one dollar and $ notes were issued at critical times, but have been withdrawn since. in case of need, they would be resorted to again, and in this respect i should like to mention the fact, demonstrated by experience, that even where the circulation is already sufficient, a supplementary issue of small notes--unless, of course, the amount be too unreasonable--is much less likely to depreciate the currency than an issue of larger ones. in a certain sense, we may consider that a country which refrains from issuing small notes in normal times, possesses _ipso facto_ a valuable reserve in case of emergency.... i need not recall the remarkable rôle played by the bank of france, under the leadership of its very distinguished governor, m. pallain, during critical periods such as , when that institution succeeded in keeping the french discount rate on an exceptionally moderate level, while giving valuable and effective aid, at the same time, to the london market. how is this successful policy of the bank of france materially possible? precisely because it has the option to pay in silver as well as in gold. when the situation is such that withdrawals of yellow metal are to be feared, the bank quotes a premium on gold. at present, for instance, the quotation is about one-tenth of one per cent. premium, that is to say, you will only get $ in gold against $ , in notes. if you want to get $ , cash, you can get them, but in silver. as a consequence, there is no necessity to raise the discount rate in order to protect the gold reserve, and french commerce has the privilege of benefiting, as a rule, by the lowest rate of discount in the world. thus the average bank rate, in , was . per cent. in france, as against . per cent. in england, and . per cent. in germany. if we consider a period of fifteen years, from to , the average rates are: _per cent._ france . holland . england . belgium . switzerland . austria . germany . cash holdings of the bank of france [ ]the undeniable characteristic of our present currency system is that it presents a transition between the money system and the clearing system, the ultimate form of which we are unable accurately to define. this period of transition, which began when the idea of genuine credit was conceived, will last for centuries before we can rid ourselves of money as a medium. the system of purely fiduciary currency, which is in process of becoming firmly established, is not yet sufficiently stable to prevent us from being thrust rudely back into the old ways whenever we exceed the limits of our resources. crises afford a striking proof of this fact. the initial period, the precursor of the crisis, is nothing but an abnormal extension of credit and of speculation. at such times the need of leaning upon the solid foundation of metallic currency is felt with a new intensity; and when, with a blindness resulting from overconfidence, this need has been neglected, when, from a disregard of the functions of money, a crisis is brought about by the violent rupture of the equilibrium of credit, gold at once resumes its rights, is sought for on all sides, and, according to the seriousness of the offence, exacts complete amends, with the honors of a premium as high as it may choose to make. it clearly appears, therefore, that this quest for simplification in the means of credit, which each nation ardently pursues in the interest of its own industrial and commercial development, demands the greatest circumspection. in developing credit, metallic currency must not be too much overlooked. we must not lose sight of the fact that "credit, in order to be solid and permanent, must have a solid and permanent foundation." the first care of the architect who is about to erect a great building is to secure for it a broad and firm foundation. likewise, in the vast and continuous upbuilding of a nation's credit, the metallic base requires the most attentive and enlightened consideration. to provide for it, the entire resources of the state are not too great. it is difficult to understand how, in certain countries, an undertaking of such universal interest should be left to private enterprise. how can the latter be powerful enough to accumulate holdings in currency which may have to remain idle for long periods, and which can unflinchingly resist all assaults and all storms? in france a system which has already passed the hundred-year mark and has been particularly fortunate as to results, intrusts the bank of france with the duty of building up and preserving the metal holdings, and this great organisation shows itself fully worthy of the confidence which the government has always reposed in it. during its long career the bank has never ceased to control credit with rare foresight and a remarkably steady hand. from up to the present time the cash holdings of the bank of france have not ceased to grow. but the bank, of its own volition, could not have made such an accumulation. the exchanges are usually in our favor, owing to our position as lenders to foreign countries and to the extent of our exports, and this for many years past has resulted in the continual flowing of the precious metal into the vaults of the bank of france. in thirty-five years the amount of our metallic reserves has increased almost threefold. and it is worthy of note that while the amount of circulation increases together with that of discounts, loans, and current accounts, the fact is nevertheless established that the bank note tends to be more and more exclusively represented by cash holdings. the silver holdings are continually diminishing, while the total holdings have increased. indeed, the bank of france avails itself of every opportunity to relieve its coffers of this depreciated currency. since a considerable portion of the holdings have been absorbed by the recoinage of a certain number of -franc pieces into subsidiary coins. place of the bank of france in the distribution of credit we purpose now to investigate the organs of french credit, and to assign to each of these organs its function, in order then to ascertain what operations the bank of france can perform and within what limitations. we have therefore to examine ( ) the function of local banks and of financial institutions; ( ) in what manner the bank of france promotes the free distribution of credit; ( ) in what measure the bank must control credit. local banks and the financial institutions the natural organs for the distribution of credit are the banks, but not all are able to spread it or popularise it in the same degree. thus the "haute banque" (the great banking interests of paris), solely engaged in operations of higher speculation or in international financial relations, does not interest us. the function of distribution is reserved for the local banks and the financial institutions, while the function of the bank of france is to preside over this distribution. local banks, pre-eminent less than one hundred years ago, have gradually seen their field of activity growing smaller, and a large number of them have been amalgamated with great institutions, possessed of much greater resources, with branches over the entire country, and, it must be said, free from the routine which caused the downfall of many provincial houses. with their decline we greatly regret to see the disappearance of personal credit, which it is more and more difficult to make available. the _intuitus personae_ (the judgment of character), which may serve as a basis for credit granted to a neighbor by a neighbor, can not be considered by a corporation official who has almost no means of estimating the solvency of individuals except from the material and tangible side. the local banks, as far as they have survived, have adopted methods which do not bring them into competition with their powerful rivals. they have been obliged to grant long-term credits or content themselves with being intermediaries for the bank of france in granting credits to parties known to them, generally farmers or small landed proprietors, with a view to rediscounting the paper. on this point again there is cause to regret, if not their disappearance, at least their effacement. the institutions for agricultural credit, in spite of all the attention they have received, have not yet been able to replace the local banks in the distribution of personal credit applied to agriculture. the great financial institutions, of which the four most important are the crédit lyonnais, the comptoir national d'escompte de paris, the société générale, and the crédit industriel et commercial, have a much more important part in the distribution of credit. thanks to their numerous agencies, to their attractive conduct of business, with the service of a courteous and attentive staff, they have gradually taught the people new habits in investment and confidence in credit, to such a degree that he who but yesterday hoarded in a stocking prefers to-day, if not to speculate on the bourse, at least to make deposits in the savings banks. the great financial institutions have done much to give even the lowest classes confidence in credit, and to introduce a system of clearing. in closer contact with the public than the bank of france, which is restricted by having to protect the reserve of which we have spoken, these institutions are able more readily and effectually to reach and to mould the public. but that is not their only service nor the only reason for their existence. there are transactions which they alone undertake, which they alone can undertake, and which must be performed because they are in the line of progress. these operations are sources of profit in the same way as are discounts and loans for the bank of france. such are demand deposits, stock-market orders, and the flotation of securities. these operations cannot be undertaken by the local banks. occupied for the most part with long-term dealings, they have no use for deposits payable on demand. if they should have such deposits, their total would never reach a sufficient proportion safely to permit the investing of an important amount. on the other hand, the bank of france does not and, even if it wished, cannot compete with the financial institutions in undertaking such operations. neither the acceptance of interest-paying deposits nor the flotation of securities can come within the province of a bank of issue. the flotation of securities necessitates a certain contingent responsibility, and the institutions which place securities on the market sometimes engage their credit for very large sums, which are sufficiently guaranteed by their capital, but the credit which is intended to safeguard the stability of the bank note cannot be pledged for that purpose. it happens that the bank of france sometimes transmits subscriptions, but this is a gratuitous and entirely voluntary service. in no case can the bank take for its own account bundles of securities in order to dispose of them to the public. the purchase and sale of securities, which is so profitable a business in all financial institutions, could never, it is clear, be a successful undertaking in the bank of france. the staff of the bank has no special information as to the various securities dealt in on the bourse, and cannot, therefore, give valuable advice. its rôle would apparently be confined to handing out the financial journals and passively awaiting orders. if it should act otherwise, the staff would engage the moral responsibility of the bank of france; but the bank, evidently reluctant to undertake such operations, prefers to leave that field to its auxiliaries, the financial institutions. however, at the present time, the bank of france tends to compete with these institutions for the purpose of maintaining sound conditions of credit which inclines more and more to speculation. thus it is extending its department for the purchase and sale of securities in order to safeguard a poorly informed public against the excesses of speculation which dazzle with the hope of an always illusive gain. in what manner the bank of france promotes the free distribution of credit in france thus the bank of france must leave entire freedom of action to the financial institutions and must not encroach, theoretically at least, on their functions, which, as has been shown, differ materially from its own. the bank even owes them its protection, since they are valuable auxiliaries in pursuing its aim of extending credit as liberally as our metallic base permits. in the interest of the public the cash holdings are daily at their disposal. the help and protection of which we speak are not mere passive professions. unfortunately, there have already been numerous cases where the bank has had to interfere in order to bring effective assistance to private banks. the bank has, of course, acted thus for the welfare of the entire community, but also for the satisfaction of protecting its auxiliaries with all its power in the fulfilment of a difficult task. let us recall the failure of the société des dépôts et comptes courants, in the beginning of . "the bank of france, after exacting such security as the concern could still offer and, furthermore, the guaranty of several large banking institutions, for the purpose of limiting possible losses, authorised discounts to the amount of , , . francs. thanks to this assistance, all deposits were paid off, and the dreaded effects of a panic were once more averted."[ ] however, in spite of the precautions that had been taken, the liquidation was slow. whenever the financial institutions have found themselves in need of effective pecuniary assistance, the bank of france has regarded it a duty to help them, and in normal times, by assisting them with its resources, it facilitates liberal credits. in what measure the bank must control credit it may happen that the great financial institutions expand too rapidly or unwisely this or that branch of credit. mindful, above all, of their own interest, which is but natural, they have no especial regard for the public welfare, their only aim being to make their capital bear fruit and to pay large dividends to their shareholders. the bank of france aspires to a nobler ideal, and many of its policies are primarily for the public good. the development of credit is an extremely delicate matter; there are many instances where the application of this agency has led to great catastrophes. it is undoubtedly impossible to exercise a strict supervision over the financial institutions; any such measure would soon appear vexatious and would be, moreover, contrary to our spirit of liberty and independence. but we can quite justly ask whether these concerns are fully sheltered against disasters; whether nothing can happen to them of a nature to shake their credit; and in such a contingency what should be the attitude of the bank of france. the preceding instance, and others that might be referred to, inform us sufficiently as to the possibility of failures. the house of baring bros., the union générale, and others enjoyed an immense credit, thought to be unshakable, and the events of a day flatly contradicted that opinion. in the course of the discussion concerning the last renewal of the charter of the bank of france, much was said as to the possibility of allowing a certain interest to depositors in the bank.... m. burdeau[ ] has shown that it is impossible for the bank of france to become a bank of deposit. the issue of bank notes and the receipt of interest-bearing deposits are absolutely incompatible services. their union in a single hand "would replace the present organization by an entirely new one, which, in case of a crisis, would offer much less vitality and power of resistance." for us it is sufficient to know that the payment to depositors of per cent. on deposits subject to check would attract to the bank nearly all inactive funds, and that a sum in the neighbourhood of , , , francs would leave the private banks. this would be their death-blow--a result which we are unwilling to contemplate. by their very nature the financial institutions are liable to weakness, and for the public good there must be some means of supporting them. for this reason the bank of france, which presides over the distribution of credit, can permit the expansion of its auxiliaries only up to the point where its help would suffice to prevent the collapse of the market. such a measure appears imperative in a country where the protecting wisdom of the bank of france has always been relied upon. fortunate land, fortunate institution, which excites the envy of foreigners, especially of england, where the least failure may result in disastrous consequences. thus the banks of deposit have contributed to progress by gathering and giving life to sums previously lying scattered and idle. they are valuable auxiliaries in the distribution of credit. for this reason they deserve help and protection. the bank, the mission of which is of a wider and loftier scope,[ ] has shown on many occasions that its helpfulness is not a pretence; daily, in fact, it assists them by rediscounting their bills. the prosperity of the financial institutions has continually increased. it is associated with the confidence and growing security of our times.[ ] but the bank must be ready to meet even improbable contingencies in order to be in a position to recapture the market with a sure hand as soon as danger threatens it. under these circumstances, what can the bank do? in the first place, it can utilise its powerful reserve which has been accumulated for this purpose. it can, in the next place, curb the action of the banks by competing with them when they appear to enter upon a dangerous course, and by showing them what steps to take.[ ] on the other hand, there is a whole series of operations which private banks do not undertake, or do not tend to develop as they deserve. directed by self-interest toward the more profitable transactions, they somewhat neglect the others. the bank of france finds no one engaged in these less remunerative operations, and is, moreover, the better able to undertake them itself, because they are not incompatible with the duties of a bank of issue. foremost, perhaps, among these operations is the popularising of credit by means of an ever increasing number of small loans, frequently accepting as pledge securities such as state rentes, bonds of the crédit foncier, of cities, railroads, and industrials. an enormous transfer business is also carried on for both banks and the public at very low cost. moreover, the bank clears large sums, annually relieving the clearing house of this burden. the small business man, much more than the small rentier, reaps continually greater benefit from the advantages offered to the public by the bank of france. we shall here simply call to mind the dates of some innovations favorable to the democratisation of credit. january , .--creation of transfer drafts. april , .--creation of transferable certificates of deposit. january , .--reduction of interest on loans against bars and coin from per cent. to per cent. .--loans against rentes and public securities. .--daily discounting of paper except on holidays. law of june , , article .--option of replacing the third signature, exacted for discount, by deposit of any french public securities. decree of march , .--similar option of replacing by warehouse receipts. law of november , .--admission of bills for discount carrying the signature of an agricultural syndicate. the minimum for bills discounted is reduced to francs. there is here a whole series of measures, which, with the assurance of a cordial welcome, should induce the small business man to trade with the bank. the bank accepts large quantities of small paper with small signatures, and it finds itself, accordingly, in normal times deprived of first-rate paper, of that which is as good as gold in international commerce. gilt-edged paper always finds its market at lower rates than in the bank, and m. d'eichthal, a regent of the bank, wrote as far back as fifty years ago: "whatever may be the discount rate, among the bills discounted there will be found but few with the signatures of the rothschilds, the hottinguers, and other houses of the same rank. those are delicacies which always command a premium."[ ]... the bank has always resolutely undertaken to carry through a whole series of operations which could not show great profit; above all, it has unremittingly aimed to be of service to the greatest number. the number of bills discounted grows continuously, while the total amounts, smaller during the most prosperous periods, invariably increase in periods of tight money. the average amount and term of bills is francs for twenty days. this result would be considerably modified, if we were to take into account the bills handed in for collection only, the average value of which hardly exceeds to francs. territorial expansion of the bank of france with its growth in extent the bank has not only developed its services to meet new business needs, by providing an increased staff, and larger, more attractive, and better conducted offices, but it has also endeavored to reach a more and more widely extended territory. indeed, the mere fact that the bank has entered a place, if only to make collections there, gives a favorable turn to credit conditions; credit becomes cheaper, in that the basis for money rates becomes the official discount rate, because the financial institutions have then a more economical method of replenishing their cash. the smallest provincial town where the bank has entered is, therefore, in regard to low money rates, as favored as paris. exchange between cities, particularly when joined with a special commission, reaches sometimes a considerable sum. as soon as the bank opens its branch, exchange is no longer possible. therefore, whenever the charter of the bank has been renewed, the legislator, in response to the wishes of the public, has wisely required new territorial expansion of the bank. if the bank has not always taken the initiative in this mode of expansion, it is because it has been restrained by several motives. in the first place, the opening of new offices entails considerable expense. it is necessary to count upon several years of deficit, during which the running expenses, including salaries of staff, are just as high as if the profits were large. we could name several cities which for years have shown constant deficits. it can therefore be understood that the bank of france, which is already established in the towns most important from a commercial standpoint, and which, by means of its collecting department, touches towns of less importance, extends its service only with caution to new localities, since each new branch must necessarily produce a larger and more persistent deficit. thus territorial expansion is for the bank an ever-increasing burden; it is equivalent to an additional tax imposed by the legislature at every renewal of the charter. the bank submits to this with good grace for the benefit of the public. in the second place, there is a limit to that expansion. where the bank has no branches, the financial institutions may take root and develop among a population which appreciates their services. their profits come largely, it appears, from small towns, where competition is less keen. we have already said enough concerning the service of these institutions in the development of french credit to show the danger of inflicting upon them fresh injury. on whatever side the bank desires to expand it finds this limit. if the bank encroaches a little on all sides, the result may be very appreciable. the territorial expansion is further perceptibly increased by what is known in the bank as the exterior accounts. this system, of quite recent origin, allows any person not residing in the town where the branch is established to enjoy the same privileges as residents. business may be transacted by mail with the aid of certain accounting forms, which often differ from those used for ordinary accounts. each transaction is the subject of a special report, addressed to the customer by the branch. not only is the transaction itself reported, but useful information as to the position of the account is also given, thus permitting the customer to follow the movement of the account until the half-yearly statement is sent. this department is highly esteemed by the suburban public, and renders many services to landed proprietors and to farmers, especially in the cattle-raising trade. thus the direct expansion, which, as has been seen, meets with serious obstacles, is assisted by this indirect expansion.[ ] evidently we are far from realising the attractive dream of a france no longer deprived in part of banking facilities, but with all bills taken at par because the bank would reach everywhere. but for the sake of this end, no doubt desirable in itself, is it worth while to go to extremes for a scarcely perceptible advantage, to disturb an institution in other respects strong and useful, and thus perhaps to risk disorganising the general credit system of france? on the contrary, we should be content with and even congratulate ourselves upon a progress which leads us, slowly perhaps, but surely, toward the realisation of credit on low terms everywhere and for all. the bank of france and agricultural credit "there is no such thing as agricultural credit; there is only credit," said m. dupin in .[ ] matters have not changed since. it is certain, for instance, that scotland, which for a long time was the classical land of pauperism, owes its prosperity to the banks, which, by developing credit in favor of agriculture, have entirely transformed the soil and the country. indeed, more than any other, the scotch farmer needed credit, and more than any other he has benefited by it. it may be said that personal credit is peculiar to agriculture. thus it suffered as a result of the evolution already mentioned, which, by causing the disappearance of local banks or by giving them a new direction, struck a fatal blow to personal credit. we know that "agricultural credit" includes loans from seed-time to harvest. the first labor done, the first loan made to the land can only be repaid much later. the average time necessary for agricultural loans is five or six months at least. now, for other reasons the by-laws of the bank prohibit the discounting of paper having more than ninety days to run. by a special favor which would not be accorded in business, where each loan has a different object, the bank allows the renewals necessary for agricultural loans, which almost exclusively take the form of bills payable to order. the bill returned to the maker on the day of maturity is renewed the following day. the date of maturity alone is changed. a very important agricultural industry, which we have already mentioned, is that of cattle-raising. the cattlemen are, for the most part, customers of the bank wherever it has a branch. this customer of a somewhat special kind appears, by the very nature of his trade, to be indicated as a suitable client for the bank and not for the financial institutions. the bank permits the cattlemen to indorse each other's paper, and thus can accommodate them without intermediaries. there results a very useful co-operation. moreover, by using the bank the cattlemen effect great savings, the full value of which they alone can estimate. after the law of july , , and the legislation that followed, it might have been expected that the use of agricultural warehouse receipts would be greatly extended. this legislation makes a serious exception to the common law for the benefit of agriculture. it "constitutes the landowner, so to speak, a public warehouse. it is he who, without any other controlling appraisement, makes declaration as to quantity and commercial value to the clerk of the justice of the peace. in short, the agriculturist enjoys a confidence which so far has been denied to industry and commerce." notwithstanding this favor, the agricultural warehouse receipts are little used,[ ] and the bank, despite its willingness to take them freely, regrets to find them among its discounts in such very small number. our survey would not be complete should we fail to say a word concerning the agricultural credit associations, of which also much was expected and which have only in a very limited measure fulfilled the high hopes of their founders.[ ] for the support of agricultural credit the state draws from two sources the funds required to supply the organs of distribution, the local and regional associations. the first source is the loan of , , francs made by the bank on november , , when the charter was renewed. this amount, like the , , francs already advanced in and , bears no interest. the second source is the yearly payment made by the bank of france on the profit-yielding circulation. this payment cannot be less than , , francs yearly, and more often it is in the neighborhood of , , francs. all these sums, intended for agriculture, are distributed by the government, and are used in endowing the associations of agricultural credit. the regional associations, which are the pivot of the present organisation, are self-governing societies, with a capital of their own. this capital, added to the advance made by the state, is invested in first-class securities, which are then deposited in the bank of france, as discount guarantee to take the place of the third signature, if need be. the local offices send their paper to the regional office, which then takes it to the bank, as the needs of funds are felt. such is the part of the bank of france in the distribution of agricultural credit. effective intervention was obviously very difficult, yet the bank has contrived, even beyond its legal obligations, to give the benefit of its credit to agriculture, which so justly deserves the care it is receiving. the bank of france interview with m. pallain, governor of the bank of france[ ] q. is the bank of france ever attacked in the controversies between political parties? a. no charge has ever been made that the bank favored or aided any political party. there is never any claim that politics enters in any degree into the management of the bank. q. is the capital entirely private property? a. yes. all the shares are divided between , shareholders, of whom about , have not more than one share. q. how are your branches managed? a. all branches are managed by a manager, assisted by a local board of directors, selected from among the best qualified commercial, industrial, and agricultural representatives in the region. q. do the branches have business relations with the merchants, farmers, and all classes of people of the locality? a. yes, they are open to everybody. q. you have, i suppose, in the branches regular clients who have an account with you? a. yes, and a considerable number of them. q. do your branches do the same kind of business as the branches of the crédit lyonnais? a. the bank of france and its numerous branches do all banking business consistent with the laws properly regulating a bank of issue. q. a bill drawn in new york on france, on a bank, for instance, the crédit lyonnais, at paris, and accepted by it, would it be admissible for discount? a. yes, if it bore, besides the signature of the french establishment accepting it, at least one other french signature; that of the person presenting it, for instance, having a current account at the bank of france. q. a part of your portfolio comes from rediscounting for banks? a. certainly, and it is an important part. q. could you give us an estimate of the proportion of bills which are discounted for banks and those discounted for other customers? a. i should estimate that about per cent. of the paper now held bears the signature of some bank as one of the indorsers; but it is manifest to us that the number of merchants and manufacturers who appreciate the facilities given by the bank for direct discounting and who profit by it increases perceptibly every day. q. does the bank of france make the same charge for the discount of bills and for loans upon collateral? a. the bank usually charges somewhat more for loans upon collateral than for the discount of bills. the rates at present are per cent. and per cent., respectively. q. could we obtain an estimate of the percentage of the deposits of the other banks at the bank of france in comparison with the whole of such deposits? a. in the credit establishments which you will visit you will be able to establish the fact that the liquid cash is, in comparison with their turnover, relatively very small. in france we consider that the strength of a bank consists more in the composition of its portfolio, _i. e._, in the value of its commercial bills, rather than in the importance of its cash reserve. q. is the amount of all taxes paid by the bank to the state included in your report? a. yes. the public charges of the bank in were more than , , francs, whereas the profits distributed were , , francs. q. have you a system of transfers similar to that used by the reichsbank? a. yes, this system, in france, dates as far back as a century or more. q. what is your method of transfer? a. transfers from place to place are made by simple notification to branches. q. are the other banks accustomed to use the bank of france in order to transfer their funds? a. the greater part of the banks use no other method, even to increase the cash in one of their branches in a remote part of france. q. is the bank of france subject to examination by the government? a. there is no regular system of examination, but the minister of finance has the right to ask for information whenever he chooses. q. is the bank of france regarded as a bank for banks or as a bank for the people? a. the bank of france remained for a long time, indeed, the bank for banks, but since it has covered so much territory with its numerous branches; since the minimum amount of all its operations has been lowered; since it has opened deposit accounts to all, it is already and it tends to become more and more--as you ask--the bank of all the french public. q. is there any contention in banking or economic circles that it is necessary to restore or extend the right of issue to banks, other than the bank of france, to enable them to increase their own profits or to afford adequate facilities to borrowers or to meet legitimate business demands? a. the unity of issue was achieved in france in , and at no time since then has there been any question, in responsible circles, of a possible return to plurality of issue. the same tendency is leading, little by little, to an absolute monopoly in england, germany, and even in italy. i think that it would also be interesting for you to examine the recent example of switzerland, which had its note-issue system founded, as in america, on the plurality of banks and which has now substituted for this system one single privileged bank. this transformation has received popular approval by referendum. q. does the export of gold reduce the volume of notes? a. not necessarily. it may happen that among our assets a certain fraction of the gold is replaced by an equal amount of bills in our portfolio, and that without changing the total of notes in circulation. q. there is nothing in the law requiring your notes to be covered by a certain proportion of gold? a. no regulation of this kind exists in our legislation. q. do you rely upon raising the rates of discount to stimulate the importation and to prevent the exportation of gold? a. it is a principle consecrated by experience that the supreme means of defence for an issue bank, to protect its metallic reserve, is to raise the rate of discount, and we never lose sight of this principle. however, the extent of our reserves allows us to contemplate without emotion important variations of our metallic stock, and we only exceptionally have recourse to a measure which is always painful for commerce and industry. the stability and the moderation of the rate of discount are considered as precious advantages, which the french market owes to the organisation and traditional conduct of the bank of france. q. would you like to express an opinion as to why the bank of france is able to hold its gold with a bank rate of per cent. when the rates elsewhere are higher? a. the causes of this phenomenon are multiple. theory teaches us that capital goes where it can obtain the highest remuneration, but in considering this remuneration account must be taken of risks; these are numerous and of different kinds; i mean, of course, commercial risks; risk of losing on exchange when the capital is brought back, etc. this at once explains why it is possible in france to maintain a rate of discount lower than elsewhere. french capitalists might fear, perhaps, that the higher interest obtainable outside might be offset or more than offset by the risks incurred. account must be taken, secondly, of the situation always held by france as a creditor nation, and which by the constant income of capital which it assures to us certainly contributes to counter-balance the current of exportation which might result from the lowering of the rate of discount. q. does the bank of france sometimes take steps to maintain the bank rate by the purchase of bills in the market or otherwise? a. no, never. q. the tradition and the reputation of the bank of france make it important that it should hold a larger reserve than any other bank in the world? a. it is true that france keeps locked up in its bank a proportionately larger amount of specie than any other country, but this policy is not without important compensations. suppose the french public, changing its mind, should reduce by one-half its monetary reserve of which the bank is the guardian. it would gain thereafter the interest on perhaps two milliards of francs released and which would have become productive--that is to say, a saving of from to millions of francs per year at the maximum--but if one reflects that it would lose the advantage of the reduced rates of discount which the extent and character of our reserves enable us to maintain and from which all french production profits; that it would lose, in addition, the sentiment of absolute security, of complete financial independence, which every crisis has strengthened, one would be less tempted to conclude--with certain critics--that the policy of maintaining heavy reserves, the natural expression of the country's instincts, is an unwise policy from an economic and practical standpoint. q. you have, i believe, no requirement of law by which the bank of france is obliged to purchase gold at a certain fixed price? a. the bank buys gold according to the tariff of the mint, but it is not obliged to do so. private individuals, instead of having their money coined for themselves, find it more advantageous to sell their ingots to the bank, which has them coined when needed. the crÉdit lyonnais interviews with baron brincard, administrateur dÉlÉguÉ, and other officials of the crÉdit lyonnais[ ] q. what is the date of the organisation of the crédit lyonnais? a. july , . q. under what law was it organised? a. we are under the general law, a general companies law. q. what is the minimum amount of capital required? a. there is no minimum, but at least one-fourth of the capital is required by law to be actually paid in. q. how many shareholders have you? a. our capital is divided into , shares, but as many of these shares are issued to "bearer" we do not know how many shareholders we have. q. the cash in hand is merely carried for the necessities of business? a. yes. any bank, if it has need for additional cash, may present for rediscount at the bank of france the bills and other commercial paper which it has in its vaults. q. what per cent. of your deposits do you intend to carry in cash either in your own vaults or in other banks? a. eight to per cent. on the average. q. does the bank of france ever loan below its published rate? a. no. it never does. q. it is not, i believe, the policy of your bank to buy public securities in large amounts? a. no. our idea is to buy all the commercial paper that we can get. that is our business. at present it is almost impossible to get any commercial paper because business is so slack; therefore, we are obliged to go outside and buy treasury bills. q. to what kinds of banks do you lend on collateral? a. mostly foreign banks; for instance, banks in new orleans during the cotton season. it is not to our interest to lend to french banks. we lend money to foreign banks and to french merchants, but never to foreign merchants or to french banks. we never lend on real estate. that is the business of the crédit foncier. q. do you own all of the securities you sell, or do you take orders and buy and sell them on commission? a. the greater part of our transactions are made on commission. q. in your statement of liabilities you show deposits about $ , , , and current accounts about $ , , . will you kindly explain the difference between these two accounts? a. deposits are sums of money deposited, especially by private people. accounts current represent the balances to the credit of business people. q. if i come here and open an account with you and make a deposit and say i want to transact business with you, borrowing money from time to time, and depositing and drawing daily, would you put that account in your "accounts current"? a. if you were not a merchant, you would have a deposit account opened for your daily deposits and drawings. your account could never show a debit balance and the amounts which you might borrow would have to be secured by deposit of securities and would be placed under the item "loans on securities." if you were a merchant, an account current would be opened for the requirements of your business, and this account could become debtor. q. deposits and current accounts are payable on demand? a. yes; on demand. deposits are made up of sums deposited by customers whose accounts are not active; they are more in the nature of reserve deposits, whereas current accounts represent deposits made by customers mostly in active business. q. do you pay interest on practically all of your deposits and current accounts? a. yes. q. do you find that the bank of france competes with you in any way? a. in no way. q. they receive accounts from individuals and small tradesmen in the branches, do they not? a. yes; but they do not grant uncovered credits. there is no competition between the bank of france and the other banks, because they do not do the same kind of business. the bank of france receives deposits, but does not allow interest upon them; it only discounts bills with three signatures; it is the bankers' bank; it acts as the regulator of the money market. q. do its branches receive deposits? a. yes; they receive deposits, without allowing any interest. in times when money is cheap the rate of discount of the bank of france is rarely below per cent., and in the crédit lyonnais and other banks the rate may be sensibly below that of the bank of france. q. can you state the number of employés in the crédit lyonnais? a. about , . it varies according to the time of year. q. are all of the important banks in the city of paris members of the clearing house? a. yes; about of the most important. q. how frequently are the clearings made? a. three times a day. as a matter of fact, our clearing house is not so important as yours in america. q. the clearing houses in the cities of france are in no sense a factor; they are merely the machinery through which the cheques are cleared, are they not? a. to our knowledge there is but one clearing house; it is in paris and is merely a mechanism for settling balances. q. are you examined at any time and in any way by the government? a. no. the control of the government is limited to the supervision for taxes, to which every company is subject. q. your relations with the bank of france are very intimate and cordial, are they not? a. yes. q. is that true with all the banks in france? a. the bank of france is quite impartial; it gives no preference to any one; there is no favoritism. q. i understand none of the farmers or peasants will use cheques. a. the use is extremely rare. q. how about your tradesmen all through the small towns, and the doctor and lawyer and professional man; would they draw the money out and pay their bills in cash? a. certainly; most of them. q. when you establish a branch in a small town, you generally find a local independent bank there. can this local bank compete with you? a. there are certain places where the private banks have kept on, but the tendency is for the private banker to disappear. we take small sums and have numerous branches. one great distinction is that the private bank is always in the hands of a family. a man who originally starts a private bank may be a good banker, financier, and business man, but it does not always follow that his son, who in all likelihood will inherit the business, will be capable of running it. our joint-stock banks do not go from father to son, but are always under efficient management. q. what proportion of your own payments are made in gold? a. a very small proportion. the people prefer notes. q. do the french people hoard money as much as formerly? a. no; it is becoming more the custom to put money in the banks. thirty years ago they kept the money at home. comptoir d'escompte interview with m. ullmann, director of the comptoir d'escompte[ ] q. one of the things that we have in mind is to inquire in regard to the character of the business done by your branches. a. yes. we are especially a discount bank and our customers are mostly commercial people engaged in commerce and industry, so that our principal business in our branch offices consists in discounting commercial paper, in making advances against securities, goods, or warehouse receipts, or sometimes giving blank credits to our customers for commercial requirements. q. have you stock in other banks which you control? a. we are interested in the banque de l'indo chine, which is an issue bank in the french colonies, but we do not control it; we hold a certain amount of shares. q. are there any other banks which you control? a. no. q. you have not been in the habit of buying up other banks? a. no. the system here is to establish agencies of our own; the germans, on the contrary, control other banks in order to arrive at the same result, viz., to get as much influence as possible throughout the country. we try to come to the same result by establishing our own agencies. q. is that true of the crédit lyonnais? a. the crédit lyonnais and the société générale have the same system. q. is it usual for large banks in paris to confine their underwriting operations to bond syndicates? a. yes; banks receiving deposits, such as the crédit lyonnais and the société générale, do not usually participate in syndicate operations covering the _shares_ of industrial concerns; other banks, such as the banque de paris et des pays-bas, do so, but they are not deposit banks. they have more liberty to engage their own capital in any enterprise. q. you are not restricted by law in doing any business you please? a. no; it is only the custom and rules of our society. q. if there were a large industrial corporation in france which wanted to develop its business and issue bonds upon it, and if they were customers of yours of unquestioned financial standing, would you take their bonds and sell them? a. yes. q. but not their stock? a. if they were a well-known concern we would sell their shares too; we have done so. q. is there co-operation between the large banks? a. we meet very often and often have common interests in business. q. do you, in a sense, divide the field? i suppose you have a certain field in which you do business and other banks do not; turkey, for instance? a. turkey is reserved for the banque ottomane. q. take the electrical business, for instance. a. as far as we are concerned we are connected with the thomson-houston; and it is natural if the thomson-houston and their friends have any business to do, that they deal with us. q. there is nothing in the law which restricts you to any class of investment? a. no. q. and nothing that requires you to keep any reserve; that is, any amount of cash as against your liabilities? a. no. q. is the bank of france your principal reliance in case you need money? do you think it necessary to carry any additional reserve? a. under our french system we consider the commercial paper we keep in the portfolio a cash reserve, as we can rediscount it at the bank of france. we know the bank of france will discount these bills and thus enable us to convert the bills instantly into cash; this is the basis of the french banking system. q. outside of paris it happens that you have branches at many of the same places as the bank of france; is there competition between the branches of the bank of france and your own branches? a. no; the bank of france does more rediscounting than discounting, and the bank of france also has more conservative rules than the other banks. we may lend under the bank of france rate, so our clients have an interest in keeping their accounts with us. q. you do not consider the bank of france as an active competitor? a. no; competition is greater with the crédit lyonnais and with the other private banks than with the bank of france. q. you do considerable rediscounting of bills, i take it? a. yes. q. at a lower rate than the bank of france? a. frequently. q. is the development of branches a matter of recent times? a. yes; we began the system of establishing branches about twenty years ago. q. how many employés have you? a. including the country, something like , . q. have you a pension system for your employés? a. our clerks consent to a rebate of per cent. on their salaries, and we duplicate this rebate by a voluntary contribution, in order to constitute a pension fund; it amounts now to about , , francs. q. if a new bank were to be organised here, would it be admitted as a member of the clearing house? a. certainly. q. you have no new banks except the union parisienne? a. there is also the banque française, managed by m. rouvier, who formerly was premier. banque de paris et des pays-bas interview with m. moret, manager of the banque de paris et des pays-bas[ ] q. we assume that your business is in many respects quite unlike that of the other joint-stock banks? a. yes; in some respects. q. what is the difference? a. the société générale, crédit lyonnais, etc., receive deposits from the public; they invest these deposits and try to make the most of them, paying a small rate of interest on them; they also loan money on commercial paper which can be rediscounted at the bank of france. here we are more a business bank; we do not care for deposits from the public; we work with our own money, with the money which is the capital of the bank, and we are occasionally assisted by the capital of the directors, the people who sit around this table, who are all rich people and some of them bankers. as a rule we do not receive deposits from the public. q. but you do receive some deposits? a. we receive the deposits of big companies which we have created or promoted or whose stocks we have issued--they are our customers--but we do not receive deposits of small accounts from the public. q. what is your capital? a. , , francs. q. you have current accounts-- , , francs? a. they are current accounts, from manufacturing concerns, railway companies, big organisations of any kind. q. you have a considerable foreign business? a. we have connections all over the world, and very often we take an interest in business abroad. q. do you operate more particularly in one part of the world than in another? a. no; although we have only three branches--one in brussels, one in amsterdam, and one in geneva. q. do you endeavor to carry any special amount of cash at the bank of france? or are you indifferent as to the amount of balance you have there? a. we always calculate what sum each day will be likely to be withdrawn; besides which we always have a large amount of commercial paper which we could rediscount at the bank of france at once. therefore we keep just enough cash in vault to meet any cheques which may be presented. q. do you carry an account in new york? a. we lend money to bankers there. different kinds of loans, some are at sixty days or ninety days. q. you are not restricted in any way as to the character of the undertakings you may make? a. no; we can do as we like. q. do you specialise in practice or do you consider propositions of various kinds? a. all sorts of propositions, railway building, harbors, tramways, electrical enterprises, etc. q. do you sometimes take an interest in business such as placing pennsylvania railroad and union pacific bonds? a. yes. q. you frequently act as managers of syndicates which might include the other banks of france? a. very often we take the head of syndicates. q. you are the leading bank in that business in france? a. they say so. q. is there cordial co-operation between the banks of paris and the bank of france, generally speaking? a. yes; business as a rule is done, when it is a big business, with several of these big societies or banks, and perhaps with all of them together. q. are there particular corporations in which you have a permanent interest? a. yes; so as to have some control in certain large companies. q. what do you think of the attitude of the government toward the bank of france? that is to say, are they exacting more and more from it? a. i do not think that they exact too much from it. the shares of the bank of france are always very high in price; it has not hurt at all the development of the bank. crÉdit foncier de france interview with m. touchard, secretary[ ] q. is the crédit foncier a public institution? a. yes, it is a mixed institution; it is at the same time a joint-stock company and a society under the control of the government by reason of privileges which the government has granted to it. q. who are the shareholders? a. any one; the shares are dealt in on the bourse. the firm capital is at present , , francs; the shares are issued at francs. q. what dividend do you pay? a. we now pay per cent.; for several years it was only per cent. q. does the government receive no income from it? a. no; on the contrary, the government began by giving us a subsidy of , , francs; that was at the beginning, in , in order to help us make loans at a rate advantageous for that time. this subsidy was not renewed, and the state does not intervene now, except occasionally to exercise its control. q. does the company appoint the officers? a. the government appoints the governor and the two sub-governors. there must also be three treasurers-general among the members of the council of administration. these treasurers, as well as the other administrators, are named by the general assembly of stockholders; but before presenting their names to this assembly, it is customary to obtain the approval of the minister of finance. q. do you pay the same taxes as the other banks? a. yes. we are treated like any ordinary bank. we have the special privilege of issuing bonds secured by mortgages. it is a very complicated system in france; there are legal complications which would render it impossible for any corporation to undertake the business unless it had special privileges. q. are you confined by law to business with mortgages? a. we have two principal kinds of operations--mortgage loans and communal loans. the total business of the two branches of operations amounts at present to about , , , francs. operations on so large a scale involve a considerable transfer of funds, and make necessary a treasury service requiring, of course, the use of banking methods. our statutes, therefore, recognise our right to carry on ordinary banking operations, within certain rather sharply defined limits. q. how is your banking business limited? a. we are allowed to receive deposits up to a maximum of , , francs. q. do you invest in securities other than mortgages? a. we employ our deposit funds in discounting commercial bills on condition that they have two signatures and can be presented to the bank of france; that is to say, they must not run over three months. q. you take mortgages on private estates? a. our mortgages may be on houses or on rural property. q. what is the precise relationship of the stockholders to the business of the company? have they really a voice in the administration? a. the two hundred largest stockholders meet once a year to ratify accounts, vote the dividend, and consider the questions docketed for the day of the meeting. q. what is the usual length of time for mortgages on real estate? a. our statutes allow us to loan for seventy-five years on ordinary rural or city property. in the case of summer resorts and certain other property liable to depreciate rapidly, for the sake of prudence we do not generally lend for more than thirty years; besides, the borrowers always have the right to repay at any time, and they often avail themselves of this right, so that the average length of our loans is much less--hardly exceeding fifteen or twenty years. q. what is the cost for amortisation in the long mortgages on property in the country? a. the amortisation is spread over the whole duration of the loan, so that the total of the interest paid and the capital reimbursed forms a constant yearly annuity. q. do you employ your amortisation funds to buy new mortgages? a. yes; we lend again. q. may you call your bonds at par? are they payable at par at your option? a. in our recent issue we have put that clause in, viz., that we can redeem our bonds at par. generally we only redeem a certain portion of them each year, which are drawn by lottery. q. what is the minimum size of your mortgages on private estates? a. there is no minimum; but we do not care to make very small loans because it costs too much to foreclose. q. what percentage of your total business is in the country and what in the city? a. about one-half in paris, and our best business is in paris. the urban mortgages cause us less difficulty, and the tendency is for the proportion of them to increase. q. who are the subscribers to the bonds, and what are the usual sums subscribed? are they small or large? a. they are bought by small people, and generally remain in the hands of persons of small capital. this is one of the reasons why their quotations show so little fluctuation. q. do you lend on farms? a. yes. up to one-half, except on forest land, vineyards, and the like, on which we lend only one-third. we do not lend on mines. on factory buildings we lend only on the value of the ground and of the building, independently of its industrial value. q. what other institutions of this character are there in france? a. there are no others; we no longer have a _legal_ monopoly, but we very nearly have a _practical_ monopoly. there are private individuals who make mortgage loans, but no large company makes this the principal feature of its business. q. how long has it been the privilege of the crédit foncier to add lotteries to its loans? a. it has done so from the beginning, although we are obliged to ask the permission of the minister, but it is on that account that we have been able to place our bonds so low. caisse des dÉpÔts et consignations interview with m. delatour, general director of the caisse des dÉpÔts et consignations[ ] q. we should like to know the general character of the business conducted by your institution. a. the mission of the caisse des dépôts et consignations is to receive, hold, and repay all private funds intrusted to the state either voluntarily or under compulsion. q. you say that you also do an insurance business. what do you mean by that? a. the insurance office, managed by the caisse, issues policies of life insurance, insurance payable after death or in case of accident, like any private insurance company. as regards accidents to employés while at work, it insures only against such accidents as cause death or permanent total or partial incapacity for work. q. is this a corporation? a. the caisse des dépôts et consignations is not a corporation. it is a state organism, but, while charging the caisse with the management of all private funds, which may be turned over to it by the state under different headings, the legislature bestows upon it full autonomy, in order to avoid even a semblance of possible confusion in the handling of private moneys with the handling of public moneys. moreover, it has placed the caisse under the direct supervision and the guaranty of the legislative powers. q. what is done with the profits realised from the business? a. profits earned by the caisse on deposits of the savings banks are turned over to the reserve and guaranty fund of savings banks. q. what restrictions govern the investment of your funds? a. as long-term investments, we make loans to departments and municipalities, sometimes to the state; we take government rentes, treasury securities, guaranteed railroad bonds, etc. as short-term investments, we take treasury bonds, bonds of the monte de piété of paris (municipal pawnshop), etc. finally, we keep large sums in cash, either in our own vaults or to our credit in the treasury and the bank of france, which, for that purpose, keep account currents on demand for us. q. you do not, as a rule, invest in mortgages? a. no; owing to the difficulty in disposing of such investments. q. you purchase no bills and do no commercial business whatever? a. no; that rôle is played by the bank of france. sometimes we make advances on securities, but only on treasury bonds. q. your organisation is quite unique in the world, is it not? a. there is nothing like it in england or america, but there are similar institutions in belgium and italy, for instance. in france this institution is highly appreciated by the lawmakers, who steadily increase its functions, and the number of laws and regulations governing the caisse is ever growing. q. it is customary in france for savings banks to carry their reserve with this establishment? a. the savings banks are bound to turn over to us all they receive from their depositors, except such sums as may be required to meet immediate demands. q. then, as a matter of fact, this is a central bank for the savings banks of france? a. precisely. crÉdit agricole interview with m. decharme, chef du service du crÉdit mutuel et de la coopÉration agricole at the ministÈre de l'agriculture[ ] q. what is the nature of the business of the crédit agricole and when was it instituted? a. the first law was in . the first bank was opened in . the crédit agricole is based upon local organisations. france is divided into departments, in each of which we are to have a regional bank (_caisse régionale_); and we hope eventually to have a local office (_caisse locale_) in each commune of each department. among these , communes there are many which are cities, which naturally would not have agricultural banks. there are only out of the departments in france which have not already established a regional bank. q. who furnishes the capital? a. the basis of the system is the local office of the crédit agricole in which each member--local farmers--has one or many shares of francs, but on which he has to pay only francs down. on payment of these francs he becomes a stockholder. when a local office has been established it turns all of its capital over to the regional office. then comes the state which advances to the regional bank an amount four times the capital which has been subscribed by the local banks. the money given by the government is not really given; it is lent without charge, without interest. q. for what purposes can this capital be used? a. the regional office does not lend directly to the farmers; it lends to the local office, and the local office has a board of directors which examines the demands of the various members. q. under what conditions do they make loans to farmers, and are their loans confined entirely to people engaged in agriculture? a. the state loans to the regional office without interest; the regional office loans to the local office at per cent.: the local office loans to the farmers at between - / and per cent.; in the northern region at - / per cent.; in the southern at per cent. q. under what conditions? a. the farmer who wants to borrow from the local office draws a bill upon himself, takes it to the local office, and the board of administration there considers it. if they approve it, the president signs it--and it has then two signatures--and then sends it to the regional office; if the regional office has plenty of money they will lend the money directly; if not, the president of the regional office signs it--it has then three signatures and is bankable paper--and it is taken to the bank of france. during the crisis in the south of france last year in the wine-growing region at montpellier, the centre, the regional office had one million capital; the government then added ; that made , but they lent at that office all together millions, and the difference was obtained from the bank of france in the way described by using paper with three signatures. before the founding of these agricultural societies it would have been difficult for a farmer to obtain the three signatures necessary to borrow from the bank of france, and what happened last year in the south of france could not have occurred before the organisation of the crédit agricole. it should be added there has never been one cent lost by the crédit agricole. q. are all loans made to members? a. yes; exclusively to members. q. who can become a member? a. farmers; agricultural workmen are excluded. we do not lend to people for nourishment to support themselves. we lend them money to increase the production of the land. q. must a man have some share in the crops? a. we lend money to buy a horse, a cow, or to buy fertilizer. we will lend to a man who rents a farm, but does not own it, to buy machinery, cattle, etc., but we will not lend to a man who wants to borrow the money for his own consumption; we do not lend money for a man to buy a coat, for instance. these local offices are in communities where everybody knows everybody else, and they always ask what the man wants to borrow for, and if he says he wants francs to buy a cow, they watch him, and if four or five days afterwards he has no cow, they know it. as the liability is without limit, the other members of the locality would be responsible. at the beginning the farmers were afraid of unlimited liability, and on that account they had to make it limited, but now, in all of the new offices, the responsibility is unlimited. q. what are your co-operative societies? a. they are societies for the production, preservation, sale, or transformation of agricultural products. there are co-operative agricultural societies in the wine-growing regions which have their own wine cellar; there are co-operative dairy societies for making butter and cheese; there are also co-operative societies which use waterfalls and electricity; co-operative mills to grind corn; co-operative railways to bring beet roots to the sugar refinery; co-operative distilleries and co-operative warehouses for corn. to these co-operative societies we make loans for twenty-five years. the government loans without charge to the regional office and the regional office lends to these co-operative societies for twenty-five years at per cent. q. what is the security? a. the guarantee is the consolidated liability of all of the members of these co-operative societies and also a mortgage upon their real estate; their responsibility is absolutely without limit. q. do you compete at all with the branches of the other banks or with the bank of france? a. no; we have an entirely different class of customers. q. is there any other institution of this character in france, or do you practically cover the field? a. the members of these local offices are people who up to the time these local offices were organised had never had any banking connection at all. the only persons with whom the local offices compete are individuals who used to loan to farmers at very high rates of interest. footnotes: [ ] m. robert masson, sous-directeur du crédit lyonnais, _the bank of france_, an address delivered at the annual banquet of the bankers of the city of new york, january , . [ ] adapted from maurice patron, _the bank of france in its relation to national and international credit_. publications of the national monetary commission, senate document no. , st congress, _ d session_. [ ] "compte rendu de l'assemblée générale des actionnaires de la banque de france," . [ ] burdeau, "discours sur le renouvellement du privilège de la banque de france," june and july , , in the officiel of june and july . [ ] the bank of france, during periods of quiet and prosperity, aims at a gradual effacement, at a more complete retreat toward a very high but very restricted sphere of economic activity. but as soon as the least trouble appears ... the bank assumes again its place at the head of our great financial institutions. (brouilhet, "le nouveau régime de la banque de france." revue d'economie politique, .) [ ] the discounts and loans of the financial institutions are growing in importance, and are steadily increasing in proportion to those of the bank. this condition, revealed by statistics, is in itself not alarming, but it once more justifies that intervention, so many motives for which we have brought out. [ ] it seems that this protective mission especially applies to the department for stock market orders, originally reserved for the customers of the bank, and later opened to everybody. thus it prevents the financial institutions from driving us toward excessive speculation. this purpose explains, according to our notion, the growth and broadening of the business of stock market orders at the bank of france. [ ] p. coq, "les circulations en banque," paris, guillaumin, , p. . [ ] the indirect expansion might be increased by wider use of the "crossed check." it will be long before we may expect good results from this practice, since we are as yet too far from the time when this check, almost unknown in france, will be currently used. [ ] journal officiel, , p. . [ ] the main reason lies in the numerous formalities which the law of april , , has simplified but not suppressed, in the many expenses caused by the organisation, and also, it appears, in the inexperience of some of the officials. the clerks of the justices of the peace, intrusted with the delicate and novel functions of registrars of chattel mortgages, are, as a rule, little fitted to perform them. [ ] the model of these institutions came to us from foreign countries; but the foreign differ from ours materially, because of the diversity of their origin. with our neighbors, the movement began slowly in the lowest levels of the rural population. with us, on the contrary, the system of agricultural associations began at the top. thus, these institutions penetrate only with difficulty into the rural districts, where economic education has but just begun. [ ] adapted from _interviews on the banking and currency systems of england, scotland, france, germany, switzerland, and italy_. publications of the national monetary commission, senate document no. , st congress, _ nd session_, pp. - . [ ] adapted from _interviews on the banking and currency systems of england, scotland, france, germany, switzerland and italy_. publications of the national monetary commission, senate document no. , st congress, _ nd session_, pp. - . [ ] adapted from _interviews on the banking and currency systems of england, scotland, france, germany, switzerland, and italy_. publications of the national monetary commission, senate document no. , st congress, _ nd session_, pp. - . [ ] adapted from _interviews on the banking and currency systems of england, scotland, france, germany, switzerland, and italy_. publications of the national monetary commission, senate document, no. , st congress, _ nd session_, pp. - . [ ] adapted from _interviews on the banking and currency systems of england, scotland, france, germany, switzerland, and italy_, publications of the national monetary commission, senate document, no. , st congress, _ nd session_, pp. - . [ ] adapted from _interviews on the banking and currency systems of england, scotland, france, germany, switzerland, and italy_, publications of the national monetary commission, senate document, no. , st congress, _ nd session_, pp. - . [ ] adapted from _interviews on the banking and currency systems of england, scotland, france, germany, switzerland, and italy_. publications of the national monetary commission, senate document, no. , st congress, _ nd session_, pp. - . chapter xxv the german banking system banking arrangements in germany [ ]various systems can be adopted in the banking profession for the transaction of business. the most lucrative method, at all events the one in which the power of large capital is most effectively turned to account, is that of the rothschild firms, whose example was followed by many large private concerns at home and abroad. these firms avoid troublesome current business, maintain only a few connections, and concentrate their whole energies on isolated but important ventures and undertakings in which, owing to the large amount of means immediately required, no competition worth mentioning existed before the growth of capable joint-stock banks. up to the middle of last century these firms actually possessed a monopoly so far as the loan issues of most european states were concerned, and they earned enormous profits according to present-day ideas. in the course of the last decades, however, this monopoly has been done away with so far as european states are concerned and only prevails to a limited extent in some foreign countries. since that time the rothschilds have devoted themselves to several large industrial enterprises, such as the russian naphtha industry, the spanish copper and quicksilver mines, etc. another system consists in the division of work and specialisation, customary in england, but which has been frequently abandoned of late. in england the issuing and syndicate business is carried on by special houses which, like rothschild, do not call themselves bankers, but merchants. brokers and jobbers carry on stock broking on the stock exchange and in the open market, the former (theoretically at least) on account of third persons and the latter on their own account. it is the exclusive business of other firms to place credit at the disposal of home and foreign firms by giving acceptance to bills. these firms, strange to say, are mostly of german origin (frühling & goschen, frederik huth & co., kleinwort & sons, etc.), and carry on business in such a reliable manner that they are allowed to enter into bill obligations amounting to more than five times their estimated means. the clearing and deposit banks manage moneys on account of third parties. it must be noted that the division of labour and its operation are based on free business practice in england without any legal compulsion. consequently, no opposition is offered in that country to the different methods of carrying on business employed by the so-called foreign banks, _i. e._, the numerous branches of continental banks, including the branch offices of the deutsche bank, the dresdner bank, and the disconto-gesellschaft, despite the fact that their competition is unpleasant for the english institutions. in germany, in consequence of business requirements and also of the small amount of capital in the country at the beginning of its modern economic development, the peculiar system has developed that credit banks combine all kinds of financial business (generally with the sole exception of mortgage-credit transactions), so that every customer can settle all his financial affairs in one spot on comparatively the cheapest terms possible. account-current transactions form the fundamental branch of business. the bank undertakes all the financial business of its client in return for a moderate commission on the turnover calculated on that side of the account which happens to be the greater, makes and receives payments, collects bills, checks, and other documents, and pays, or charges, interest on the balance, generally at per cent. below the reichsbank discount rate for credit balances and per cent. above the reichsbank discount rate for balances debited. the bank discounts the bills received by its customers, special arrangements being made as to the limit of the amount and terms, according to the quality of the bill, _i. e._, according to the trustworthiness of the other persons figuring on it. should a customer require foreign bills to settle his liabilities abroad, _i. e._, checks or bills payable in the country concerned, the bank provides them from its own stock or draws bills or checks to the amount desired on its agents or correspondents in the country in question. should the debit balance not be a merely temporary one, or one soon covered by fresh receipts, the granting of special credit is necessary, and arrangements have to be made as to the amount and conditions of the same. such credit is either covered or uncovered credit. the cover consists principally of current securities with a margin against fluctuations according to the nature of the security, and which is higher for shares than for securities bearing a fixed rate of interest. uncovered credit is only granted in exceptional cases to others than business men--as a rule only to first-class mercantile firms of repute, whose affairs are in strict order. bankers and other firms with large cash transactions keep a so-called "cheque" account at their bank in addition to the chief account, in which no debit balances may occur; no interest is paid on the amount deposited, which is always kept in suitable proportion to the payments made, but, on the other hand, no turnover commission is charged. those customers are appreciated most who claim credit during their buying seasons, but who not only pay back the borrowed money during their selling season, but who have balances to their credit. this is the case with a great number of commercial firms and in many branches of industry, more especially in berlin. the seasons in different branches occurring at different times of the year, it follows that a large bank, with branches and connections in all industrial parts of germany, has the advantage of a suitable distribution of accounts among all branches of trade, etc., and the best possible adjustment of its debit and credit arrangements. the debtors in a bank's balance sheet comprise not only those who have received advances of ready money but also those to whom the bank has granted credit by bill acceptance; the bill drawn by the debtor and accepted by the bank is discounted elsewhere. it is the duty of the drawer of the bill to cover it before it matures, and when the bill is accepted he is booked simultaneously as a debtor to the bank under _the date of maturity_. whether the general public will make an extensive use of checks is doubtful. in england the conditions necessary for check transactions exist, as every one has a banking account, and all payments to be made or received are effected through the banks. to germans this seems very strange; a large part of the public cannot keep a banking account, and when it is in a position to do so either expects high rates of interest or keeps no permanent balances and pays no commissions. under such circumstances there is no sense, from a business point of view, in the shoemaker, who has no banking account, accepting a check, which he has to cash, instead of ready money; for the shoemaker has to take an unprofitable walk, and the bank has to examine the check, pay and book it, and in some cases notify by letter the customer of its payment. the ingenuous idea prevails that by some cabalistic method of procedure the bank earns something by such transactions that in reality only cause irksome work. the reichsbank, with a creative and organising spirit, laid the foundations of the system of payments by means of transfers to, and deductions from accounts current that obtains in germany, the so-called giro system.[ ] it was in every way preordained for this creative work, for at the time of its foundation it was the only financial institution whose activities extended over the whole empire, while in the territorially restricted and immature banking systems of those days the conditions were lacking for the development either of a giro business or of a system of payments by means of checks. in the giro system, with its splendid organisation, the reichsbank has created an institution that has given the german system of payments its characteristic stamp, just as the apparatus of checks and clearing houses has imparted a typical character to the system of payments in other countries, like england and the united states. the giro business in germany, however, is far from having attained the dimensions that the use of checks has in england and america. the number of long-distance transfers is about double that of the locals. this is as it should be, as it is mainly in the matter of long-distance transfers that the giro system has the advantage over the method of payment by check. in the matter of local transfers, on the other hand, giro and check are probably about on a level with respect to the number of transactions. to prevent themselves from being ruined by the competition of the reichsbank, the private banks of issue[ ] have been obliged to offer various inducements to their customers in the matter of the giro business. they make no demands in regard to a minimum balance, pay interest on deposits, do not oblige their customers to domicile bills drawn on them at the bank, and exact no charge from persons having no account with them who desire to have sums placed to the account of depositors (to some extent also making cash payments free to third parties who are nondepositors for account of depositors). the private banks of issue sustained a severe blow in on the occasion of the renewal of the bank laws through the provision prohibiting them from discounting bills at a lower rate than the reichsbank whenever its rate reaches or exceeds per cent. and not allowing them to go more than one-fourth of per cent. below the official rate and one-eighth of per cent. below whatever private rate the reichsbank may have whenever the bank rate is below per cent. these trammels imposed upon the principal business of the banks was bound to affect their giro business injuriously in spite of the efforts made to counteract the mischief by the establishment (especially in württemberg) of many new branches and agencies. these banks of issue have never had any great importance as regards the giro business, and even at the present day the volume of their transactions is relatively insignificant. the post-check system supplements in a most effective manner the giro system of the reichsbank in that it brings in connection with the five hundred establishments (more or less) of the reichsbank about , post-offices and post agencies. as all the post stations are included in the post-check system, the reichsbank's network of branches is spread out uniformly in a compact manner over the whole empire. the post-check system, inaugurated january , , would more appropriately be termed the post giro system. for at bottom its purpose is to become a giro system, a system of monetary transfers by means of assignments to, and deductions from accounts current. what it is aiming at is to make it unnecessary for german letter carriers to be lugging around millions in cash every day. the money sent through the german post-office in amounted to no less than - / billion marks. the post-check system has this in common with the giro system of the reichsbank that it extends over the whole length and breadth of the german empire, while the activity of all other institutions carrying on a system of giro, as well as check, payments, with the exception of the union of the schulze-delitzsch credit associations, is territorially or locally restricted. the giro network and that of the post-check system are connected with each other by certain channels that render it possible for payments to travel unhindered from the one system over to the other without the intervention of cash. general sketch of bank and credit organisation in germany [ ]germany witnessed a tremendous economic expansion during the twenty-year period - . there occurred a considerable increase and extensive circulation of capital. this movement of capital naturally passes through the banks and is brought about by them. as collectors and distributors of capital, the banks are, so to speak, the focal points of economic life. we are here concerned with three kinds of credit institutions--the note banks (banks of issue), the credit banks, and the land credit institutions (mortgage banks and land mortgage associations). banks of issue the present organisation of the note-bank system is based on the bank act of march , , and the supplement to this act of june , . even previous to the founding of the german empire the greater part of germany had become united commercially through the formation of the customs union (zollverein). similar further movements toward union, however, had met with but little success in the domain of currency and with none whatever in that of banking. in the newly founded german empire seven different monetary systems were in existence, and as all german states, with the exception of the free city of bremen, were on a silver basis, there was above all a great want of a well regulated and adequate circulation of gold coin. the prevalence of paper circulation was felt in the most annoying manner. thirty-two banks had the right to issue notes, and in the absence of adequate legislation, it was found on many occasions that the notes issued were not sufficiently secured. the first step which the government took to improve these conditions was the act of december , , concerning the coining of imperial gold pieces. the coinage act of july , , which proclaimed the gold standard for the empire, formally completed the organisation of the german currency system. it was recognised more and more that, in order to give effect to the gold standard, which for the time being existed merely on paper, and in order to regulate and supervise the entire currency circulation, the establishment of a central bank was an absolute necessity. this consideration finally led to the establishment of the german reichsbank, which came into being on january , , absorbing at the same time the bank of prussia (note bank). the predominance of the reichsbank over the private note banks was secured through its considerably larger capital, further through the volume of its tax-free note contingent, which exceeded considerably the amount of all the other contingents, and which subsequently was to increase still more through the accretion of the contingents of the note banks which might renounce their rights of issue. commercial banks and their relation to industry and commerce the close relation of the so-called regular banking business to that of the floating of enterprises, the trading in and the issue of shares is typical of the organisation of the german credit-bank system. the development of the railroad system beginning about the middle of the last century, which caused a considerable demand for and circulation of capital, and the greater extension of state credit, induced the banks to turn to the flotation and issue business. the period following the founding of the german empire, as mentioned before, witnessed a vigorous development of german industry, especially of the mining and (beginning with the nineties) of the electrical industries, which required a continuous inflow of new capital. at the same time german foreign commerce, particularly with oversea countries, kept on steadily increasing. under such conditions the economic policy of the banks of placing the funds entrusted to them at the service of the new development must be regarded as perfectly proper. the banks furthered this development by forming stock companies, granting long-term credit, assuming shares and bonds, placing the new industrials on the stock market and selling them to the public. there is no doubt that but for their policy of furthering the industries, the economic development of germany would have taken considerably longer than has been the case. in order to obtain the means for granting industrial credit and to dispose of the enormous amounts of newly created industrial securities, it was and is necessary to attract in as large a measure as possible the surplus funds of the community available for capital investments. for this purpose the joint-stock banks spread a network of deposit branches, destined to serve as reservoirs for the inflow of available funds, and at the same time as distributors for the industrial securities created. with the same end in view the large berlin banks, either through the acquisition or exchange of stock (for permanent investment), entered into friendly alliances with the provincial banks. it cannot be said that the banks created our industries, since the funds which are gathered by the banks in increasing volume are mainly the result of the increasing productivity of capital invested in industrial undertakings. it is true, however, that the creative power which in a comparatively short time placed german industry in its present commanding position took its origin with the men who put to practical use and in the interest of economic progress of the nation the achievements and inventions in the domain of science and technique. it is the undisputed merit of the persons at the head of the banks that they appreciated those endeavours and supported them by advancing the requisite capital, oftentimes incurring great risks for the banks. it is almost self-evident that the banks, which in carrying out their policy of furthering industry had often to assume considerable risks, have tried to secure, and in a large measure have succeeded in securing, a lasting and decisive control over industrial corporations. until the seventies of the last century the financial regulation of german foreign oversea trade had been almost exclusively in the hands of london banks. the establishment in of the deutsche bank at berlin meant a turning point in this regard. the founders of the deutsche bank had recognised that there existed in the organisation of the german banking and credit system a gap which had to be filled in order to render german foreign trade independent of the english intermediary, and to secure for german commerce a firm position in the international market. it was rather difficult to carry out this programme during the early years, the more so, because germany at that time had no gold standard and bills of exchange made out in various kinds of currency were neither known nor liked in the international market. the introduction of the gold standard in germany in did away with these difficulties, and by establishing branches at the central points of german oversea trade (bremen and hamburg) and by opening an agency in london the deutsche bank succeeded in vigorously furthering its programme. very much later the other berlin joint-stock banks, especially the disconto gesellschaft and the dresdner bank, followed the example of the deutsche bank, and during the last years particularly the berlin joint-stock banks have shown great energy in extending the sphere of their interests abroad. among the customers of the joint-stock credit banks figure chiefly members of the commercial and industrial classes, who obtain from these banks both their long- and short-term credit, and in the second place holders of medium-sized and large agricultural property, who apply to them for short-term "operation" credit. the credit demands of the members of the small-farm class and of the small independent producers are generally met by the co-operative credit societies. land credit institutions as regards the credit on landed property there is hardly a country with an organisation as perfect as germany. the beginning of this organisation dates back about one hundred and thirty years. the prussian state had emerged from the storms of the seven years' war ( - ) as a recognised european power, but the sacrifices of the years of war had completely exhausted the country. as the landed nobility was then the principal support of the state and was so regarded by the government, it became a matter of public interest to relieve the financial distress of the landed proprietors by enabling them to pay off systematically their mortgage debts. the efforts in this direction, in which the prussian king, frederick the great, personally took an active part, led to the creation of the land-mortgage associations (_landschaften_), which must be considered the first important step toward the organisation of land credit. "landschaften" are associations endowed with the rights of a corporation and operating under state control. their boards of directors have the attributes of official authority. they are autonomous institutions within the limits set by the state supervision. the landschaften obtain the funds for the granting of credit through the issues of letters of mortgage or mortgage bonds--_i. e._, as a rule, the borrowers receive the loan in the shape of mortgage bonds of the association, and it is left to them to negotiate these bonds on the stock exchange. at first the letters of mortgage were made out on a certain estate (estate debentures). but as the purchaser of such letters of mortgage was forced to keep watch over the condition and management of the mortgaged estate--even though the association itself maintained permanent control of the debtor--the sphere of circulation and the ease with which these bonds could be sold were naturally limited. it was only when the issue of corporate mortgage bonds was started, the security of which was guaranteed either by the entire mortgage claims of the association or the collective responsibility of their members, and when these bonds were given a large market through their admission to exchange transactions, that the highest degree of mobility was reached. it was mainly to meet the needs of credit on urban real estate that mortgage banks (_hypothekenbanken_) were created, and thus a special organisation of city real estate credit was formed. the greater number of the mortgage banks now in existence was founded during the decade to ; practically all the others were founded during the building boom of - . most of the mortgage banks cater exclusively to the demand for real estate credit; some others combine this specialty with other lines of banking. while the land-mortgage associations are based on the principle of co-operation and do not pursue a profit-making policy, the mortgage banks have been founded as joint-stock companies. the capital stock serves as working capital as well as guaranty fund. bonds are issued against acquired mortgages and secured by the latter. almost all these banks issue their bonds to bearer, a privilege granted them by the state. inasmuch as the bonds are held in many cases by small investors, the state, in order to protect the interests of these bondholders, from the very beginning secured to itself the right of control, limiting at the same time the field of operation of these banks by certain legal enactments and regulations. on the whole, interest rates on mortgage loans are subject to but slight variations. it should be remarked, however, that the borrower when obtaining a mortgage loan has to pay a bonus the rate of which will be considerably higher in times when money is scarce than in times when its supply is redundant. in times of a large increase in the supply of bonds the mortgage banks may go into the market to buy their own bonds. such action prevents serious fluctuations in the quotations of these securities and fits them to be objects of permanent as well as temporary investments, including the investment of funds which must be kept in liquid shape. in the present day when complaints are urged against the great indebtedness of country landowners, the fact must not be lost sight of that the transition from extensive to intensive operations in agriculture could not have been accomplished without a wide use of mortgage credit, and that such development was necessary to feed the rapidly increasing population of the country. moreover, through this great growth in the population a basis was created for industrial activity on a large scale. raiffeisen and schulze-delitzsch banks [ ]the raiffeisen bank is the schulze-delitzsch bank applied to the country, with the variations required and justified by the difference of environment. the model rules of the raiffeisen societies state that: "the object of the society is to improve the situation of its members both materially and morally, to take the necessary steps for the same, to obtain through the common guarantee the necessary capital for granting loans to members for the development of their business and their household, and to bring idle capital into productive use, for which purpose a savings bank will be attached to the society." one word in the above, viz., "morally," intimates at the outset a distinctive trait. raiffeisen always kept the moral aspect very prominently before him. he insisted that all the members of his institutions should profess the christian virtues. in his propaganda he used to the full the one intelligent power in rural districts, the parish priest or pastor. with their help he developed a new parochial life around the village bank. with their help he touched in the peasant the chord of neighbourly affection and stirred him to give it practical effect. what is the structure of a raiffeisen bank? and, first of all, whence comes the working capital? the subscribed capital of the bank is practically nil; there is nothing but the universal unlimited liability of the associating members. schulze-delitzsch, dealing with industrialists subject to unseen risks, who operated in trade matters out of sight and control of the society, obliged his associates to subscribe a considerable share capital, not only as a proof of thrift, but as a material guarantee for their individual and corporate debts. raiffeisen, dealing with agriculturists and villagers, demanded no such security, since each member possessed in his little farm, his cattle or implements, material guarantee far beyond those of any subscribed share. in addition he avoided the danger to which a share bank is always exposed, namely, that the concern may be run for the benefit of a few non-borrowing shareholders, rather than for that of the general credit-seeking members. unfortunately this natural difference was elevated, or rather dragged down, into an issue of principle; and the law of , drawn up under the guidance of the schulze-delitzsch party, insisted that every co-operative society should have shares. the raiffeisen societies comply with this by nominal shares of (say) marks[ ] on which no dividend is declared; though, occasionally, some of the annual profit is indirectly returned to individuals in the shape of a slight addition to deposit rates and a slight deduction from loan charges, calculated at the end of the year. because raiffeisen wished to create credit among small agriculturists out of the immaterial asset of mutual knowledge, he limited the size of each society to a single village. for his purpose he was right, but his partisans are not right when they look askance at the larger areas of the town bank, where the nature of the members' business and the society's control is different. all profits remain the collective property of the society, to be used for the society's good. they are divided into two classes of reserve fund--( ) reserve fund proper; ( ) foundation fund. the former is regulated in the same way as in town banks. the second corresponds to the shareholders' dividend. it is undesirable to have nothing beyond an ordinary reserve fund, because money thus placed can only be withdrawn to cover losses: while if placed in the foundation fund it can be used for positive improvements, such as the extension of premises or the establishment of a burial fund. in actual figures, the reserve funds are not so strong as in the town bank, owing in part to the lower loan charges. the loan capital, as in the town banks, is made up of small savings and deposits. it is drawn, either from within the area covered by the bank, in which case it comes both from members and non-members, the former being where possible rewarded at slightly higher rates in order to encourage membership; or from without the area, in which case it of necessity comes from non-members. savings are received in sums from one mark upwards: the smaller amounts being collected by penny stamp books, similar to those used in the post office savings banks of england. the willingness with which the peasants bring their savings to the bank is a triumphant proof of raiffeisen's contention that the small agriculturists by a combination of unlimited liability and close supervision can become absolutely credit-worthy. no savings since the foundation of the first village bank have ever been lost through bankruptcy. in addition the bank obtains credit from a central bank with which it has a current account. the funds thus raised are utilised for three kinds of credit--( ) simple loans; ( ) current accounts; ( ) property transfers. current accounts are rare except in villages where there is a little industry. with regard to the simple loan, the security, as in town banks, is personal pledge, land mortgage, or (very rarely) deposit of collateral. the personal pledge, as with schulze-delitzsch, is the most frequent. but raiffeisen interpreted it more strictly than schulze-delitzsch. not only must the credit-seeker produce an outside testimony to his character: he must also convince his society that he really merits this testimony. the member of the schulze-delitzsch bank is accepted on the strength of his general business reputation, added to his security, personal or material. the member of the raiffeisen bank, though he have the best of pledges, is rejected unless he is known in his private life to be virtuous and industrious. the man of doubtful sobriety has no chance of obtaining anything from a country bank. if it happen that an applicant is little known or new in the district, so that no one will go pledge for him, then the society, provided it is convinced of his good character, will grant a loan against land mortgage. this is not to be confused with the real credit granted by a land bank, where the value of the estate alone is considered. it is personal credit with a material caution, and it is not a long-term loan. furthermore, the society requires to know not only the character of the borrower, but also the specific object for which his loan is destined. it must be satisfied not only that the borrower wishes to employ the loan in his business, but also that the operation proposed is likely to turn out successful. property transfers are not strictly credit business. they are in the nature of investments for superfluous money, just as a town bank might invest in railway shares, with the difference that the investment is local and designed to meet indirectly the credit wants of members. the nature of the operation is as follows: a dies, leaving his estate to his heirs; and these, perhaps because they wish to leave the neighbourhood or because they want ready money for other reasons, put up the estate for sale in allotments. or perhaps a during his lifetime wishes to get rid of a part of his estate. x, y, z, neighbouring peasants, are buyers, but they can pay only gradually--which they are allowed to do by law. the credit bank steps in as intermediary. it pays to the heirs of a or to a himself, as the case may be, the price of the estate minus a small commission. x, y, z become the debtors of the credit society, paying off their debt by regular instalments, which include principal and interest. the bank cuts out small traffickers in land, usually jews, to the benefit of sellers and buyers. it benefits the sellers by charging them a moderate instead of an extravagant commission: the buyers by saving them from permanent relationship with land dealers who seek their ruin. the bank insists on regular payment of the instalments, because it wants its money back, while the dealer is constantly tempting the buyers to fall into arrears in order that he may eventually acquire the land himself. there is a second form of property transfer, where the bank not only acts as intermediary but itself holds the estate for a time. some land dealer, having obtained a mortgage on the estate of a, demands payment. a cannot pay and is forced to sell his estate by public auction. the dealer forces the sale, just when the estate market is likely to be most unfavourable, hoping to buy the estate for himself at an absurdly low rate. thereupon the bank steps in; it bids against the dealer, and if he does not offer a good price, buys the estate itself and resells it later in the year, when the market is more favourable. in this way a can pay off his debts at once. moreover, the bank does not keep the difference between the price of purchase and final resale. after the deduction of a moderate commission, it is handed over to a, who thus obtains a further sum with which he can make a fresh start. these dealings in property transfers are confined to southwest germany, where estates are sold to be split up into little lots. the banks only enter on these transactions where the following conditions are satisfied--(a) where they have a superfluity of money over and above that needed in their ordinary loan business; (b) where some party to the transaction is a member of the society: either the seller or the buyer or the creditors of the seller holding second and third mortgages, who would obtain nothing were the estate sold below its real value. what is the nature of the machinery by which this work is conducted? a raiffeisen bank is never what a schulze-delitzsch bank sometimes is; a handsome building with barred windows, within which are a number of clerks discharging a constant round of business, while the directors interview special clients in a room apart. it is a small single room, probably at the back of a farm building, opened twice a week and presided over by a single occupant--the accountant. business is apt to proceed desultorily; a small child brings in a few savings; an hour afterwards a palsied old man, signing by a cross, draws out a couple of pounds, and so on to the end of the day. but this is the unimportant part of the business. the really important part is the weekly meeting of the directors, half a dozen in number, who meet to discuss the various credit claims which have arisen. they are unpaid, as by the nature of their work they can afford to be. the accountant, their executive clerk who keeps the books, "the soul of the society," as raiffeisen called him, is the only salaried official. the committee of supervision and the general assembly function as in the town banks; except that their control is more decided, probably because their knowledge is more on a level with that of the directorate, which is itself unspecialised. what are the results achieved by the rural bank, thus operating and thus controlled? more than ten times the number of country banks grant only one-sixth of the credit afforded by the town banks. the total membership of the country banks is nearly twice as large, but the average membership per bank is nearly seven times as small. the average credit advanced per member is marks. the average rate of interest is not exactly known; it appears to be between and per cent., _i. e._, nearly per cent. cheaper than in the town bank. the duration of loans varies between one and ten years in accordance with the requirements of agriculture. they are repayable in small instalments, covering principal and interest, although the member may repay in lump if he wishes. the loan can always be called on four weeks' notice, but the right is never exercised, unless the borrower is allowing his property to deteriorate or is becoming insolvent through extravagance or has misapplied money lent for a particular purpose. the inculcation of punctuality in payment, as a moral duty, was the hardest of raiffeisen's tasks, as it was his greatest triumph. if it be asked finally what raiffeisen banks have done, which other banks have not, it may be replied that raiffeisen created out of hopeless chaos the only kind of credit organisation possible for the small agriculturist. industry necessarily brings business men together to some extent. agriculture in itself holds the farmer apart, and preserves him in lonely ignorance to be the victim of the perambulating money-lender. to-day more than per cent. of the independent agriculturists of germany are members of rural banks; and another per cent., chiefly the larger farmers, are members of town banks. the non-co-operative agriculturist is becoming the exception. the raiffeisen banks are thickest in the southwest of germany, the home of the small peasant proprietors. indeed the change wrought in many of these villages is nothing short of a revolution. the experience of the parent village bank may serve in illustration: "about an hour's walk from neuwied on the rhine is situated on a plateau bordering the westerwald the little village of anhausen. the district is not very fertile and the inhabitants are mostly small peasant proprietors, some with only sufficient land to graze a single ox or cow. an owner of ten acres is a rich man. before the year the village presented a sorry aspect; rickety buildings, untidy yards, in rainy weather running with filth; the inhabitants themselves ragged and immoral; drunkenness and quarrelling universal. houses and oxen belonged with few exceptions to jewish dealers. agricultural implements were scanty and dilapidated; and badly-worked fields brought in poor returns. the villagers had lost confidence and hope, they were the serfs of dealers and usurers. to-day anhausen is a clean and friendly-looking village, the buildings well kept, the farmyards clean even on work days. the inhabitants are well if simply clothed, and their manners are reputable. they own the cattle in their stalls. they are out of debt to dealers and usurers. modern implements are used by nearly every farmer, the value of the farms has risen and the fields, carefully and thoroughly cultivated, yield large crops." and this change, which is something more than statistics can express, is the work of a simple raiffeisen bank. both town and country banks are formed into higher unions for general organisation and educational propaganda; the country banks also unite for credit business. the partisans of the town banks are apt to pride themselves on their complete self-sufficiency. they forget that this is possible for them, not because they have sufficient funds in their own coffers to supply every credit need, but because an increasing part of their business is conducted through the trade bill of exchange, which is a marketable commodity that can be rediscounted by any outside bank, the imperial bank, the dresdner bank or any other. but agricultural societies, inasmuch as their loan papers cannot readily be bought and sold on the open market, require a special organisation. hence central organisations act as money equalisers between the different societies. in some districts money is superabundant, in others it is deficient. the central bank acts as a channel through which the abundance of one district can be drawn to supply the scarcity of another, the operations being conducted by means of current accounts with both parties. in germany as a whole the societies of small agriculturists of the southwest have always an abundance of money, which is one reason why they dispense so much of their funds in the purchase of property transfers. the societies of large agriculturists in the northeast (the ost-elbien provinces), where the capital employed on each farm is large and the population thin, are as a whole in continual want of it. interview with herr kleemann, director of the dresdner bank [ ]q. when were the first of your co-operative societies organised? a. in . they were organised on a voluntary basis and for philanthropic purposes. they developed very rapidly. the first form which developed was for the purchase of means of subsistence, such as sugar, coffee, grain, wine, cigars, etc. then they bought agricultural machinery, threshing machines, etc., which they would rent to small farmers in the country who could not purchase such machinery. they also formed societies to build houses for peasants and working people. there might be six or seven with different purposes. later on schulze-delitzsch came to the conclusion that it would serve working people and small tradesmen to have co-operative societies founded simply for the purpose of extending credit to them. that was the last development in the system. q. how many kinds of co-operative societies are there in germany? a. it is very difficult to classify them. the raiffeisen societies are confined to prussia. there are other organisations in saxony, bavaria, and different states in germany. q. the attitude of the reichsbank is the same toward them as toward any other bank? a. yes; and their bills are frequently offered and taken by the reichsbank as from other institutions. q. do they carry their reserve with the reichsbank or with the dresdner bank? a. principally with the dresdner bank, because they get interest upon it. q. do they pay interest on deposits? a. they pay an average of per cent., which may be considered as an almost permanent rate. the money they get is in most cases money for a long period. they have to compete with the savings banks. q. are the small societies at all in competition with the reichsbank, where they have a branch? a. no. there is no competition. they do a business which the reichsbank would not do. they give credit to people who would not suit the reichsbank, because they could not give the guarantee. the reichsbank interviews with herr dr. von glasenapp, vice-president, and herr dr. von lumm, director, of the reichsbank[ ] q. by whom are the shares of the reichsbank owned? a. it is all private ownership. the shares are held mostly in germany and holland, and distributed in small lots. q. would the bank discount a bill drawn by one merchant and accepted by another? a. yes. the reichsbank is not only a bank for banks, but for the commercial and industrial enterprises of the empire. q. if a railroad finds it necessary to make improvements and wants to borrow money could they get money at the reichsbank? a. only on collateral acceptable by the reichsbank. the railroad would probably in such a case go to private banks to be financed. q. assume that there is a manufacturer in bremen, making well-known articles, which he ships to a merchant in berlin and draws a bill against that merchant, would it be a satisfactory bill to the reichsbank? a. yes; but in that instance also the merchant would probably go to the private bank, where he would get a better rate of discount. q. if there were a severe money stringency, would he still go to his bank? a. yes; that would probably be the case, and his bank might afterwards take his bills to the reichsbank. q. what is the smallest bill the bank will discount? a. we have no minimum. we discount bills as low as marks. q. upon what kind of a bill does the farmer secure an advance from the bank? a. he sells his produce, draws a bill upon the purchaser, and takes the bill to the bank as any other man would do, or a bill might be drawn upon a farmer and accepted by him. q. when he borrows money in the spring with which to buy seeds, how does he secure the cash? a. he goes to his own bank for that. there are co-operative societies for this purpose, which are a great factor in germany. q. will the manager of a branch of the reichsbank renew a farmer's three months' bill if desired? a. yes; an exception is made for the farmer. other bills are not renewed. q. the bank rate is per cent. does that mean per cent. is charged on three months' bills? a. the reichsbank has only one rate of discount. there was a time when the reichsbank did a similar business to that which the bank of england does now, _i. e._, that they would purchase in the market prime bills at a more favourable rate, but in it was decided to have but one rate for everybody. q. please state the reason for the change of policy. a. the most important reason was that it was thought that a great central institution like the reichsbank, with its tasks and duties to the whole of the community, ought not to make a distinction of any class, or make an exception in favour of any one. it is the policy of the bank to serve all alike. q. is the reichsbank disposed to favour every application for discount or loans if the character of the offering be satisfactory? a. it is their duty to listen to every one who comes for accommodation, whether he has an account or not. the principle of the reichsbank is not to serve a part of the community, but the whole. the reichsbank is for everybody. q. are your deposits subject to check? a. the money is drawn against check. there are two kinds of check--white and pink. the white is for withdrawing cash over the counter, the pink for making transfers. q. have you different classes of deposits? a. no. q. do you pay interest on your deposits? a. the reichsbank does not pay interest on money deposited with it. it receives money on deposit and for transfer. most large houses keep an account with the reichsbank. the reichsbank does a large transfer business for them. q. is it the custom for banks in berlin and other important centres to carry balances in the reichsbank as a part of their reserve? a. it is the custom for the banks to keep a large part of their cash with the reichsbank. they keep only a small amount of cash in their tills. q. is that true of banks in other cities than berlin? a. yes. q. does the reichsbank pay the same taxes that the other banks do? for instance, income tax and other taxes? a. no; we are free from the government income tax, and the license fees, but we must pay the real-estate tax. q. what is the relation between this bank and other banks, such as the deutsche and the dresdner--that is, as to the character of business transacted? are you not competitors? a. it may be said that the reichsbank is more restricted by law. at a private bank the rate of discount may be much cheaper than at the reichsbank. the private banker knows his clients, and he may be willing to accept from them a bill that the reichsbank would not and could not accept. q. then there is to some extent competition? a. yes; but that competition is not large. it is not felt that the reichsbank is a competitor of other banks, but it is a public institution. the reichsbank has its official rate, which is higher than the private rate. a bank will take bills on its own account running three months or more and hold them, and in case of need will take bills running ten days or less to the reichsbank for discount. the reichsbank pays no interest and acts as agent for transfer of currency and credit to all parts of the empire without charge. q. has there been any feeling that your branches were supplanting the private local banks in small towns? a. there may have been some instances where a banker may have been dissatisfied at the reichsbank opening a branch in his locality, but as a rule the banks at such a place are quite pleased to have the reichsbank open a branch in order that they may have the benefits of its facilities. q. the government deposits are received and treated exactly the same as the deposits of farmers? a. yes. the business for the government and its departments is handled the same as for others, and no interest is paid on deposits. there is, however, one exception; every private institution is required to keep a minimum balance to its credit, but not so with the departments of the government. the empire keeps in the aggregate sufficient to compensate. q. do you always charge a higher rate of discount for bills when you have a large amount of taxed notes outstanding? a. no. on occasions the reichsbank has not increased its rate of discount above per cent. at times we have discounted even at per cent., when we have had to pay a tax of per cent. q. it has been suggested to us as a matter of policy in times of stress that it would be better for you to add the per cent. tax to the rate of discount. a. the reichsbank must be considered in the first place as a public institution which has to take care of the public interest, and secondarily as a money-making institution. q. is there any restriction as to the percentage of silver in your reserve? a. no; but there is another law, the coinage act, by which the amount of silver coined depends upon the population. they do not coin more than marks per capita. q. what steps do you take to increase your gold reserve or to protect it? a. we always have a large amount of bills of exchange payable in foreign countries, payable in gold. we also increase the rate of discount. we consider that the latter measure is the only effective one. we also make advances without interest to importers for the time the gold is in transit; we do that even in times when the ordinary gold import point is not reached. then we may raise our tariff for the purchase of foreign gold coins, as the bank of england does. q. do you take any steps to prevent exports of gold? we have been told that it is the habit of the reichsbank, in case of large exports of gold from germany, to suggest to the other banks that it is not agreeable to have the gold exported. a. it has never been the case and never will be the case that any such suggestion has been made by the reichsbank to anybody. kÖnigliche seehandlung (royal sea-trade society) interview with herr geh. oberfinanzrat lottner, director of the royal seehandlung, prussian state bank[ ] q. when was this bank organised? a. in . q. what is the capital of the bank? a. one hundred million marks. q. by whom are the shares owned? a. there are no shares; the capital is owned by the bank, which may be regarded as a juristic person, an independent legal subject. q. who invested the money? a. the money was originally invested by stockholders in the time of frederick ii, but afterwards the shareholders gave up their stock, for which they were paid. the shares were mostly owned by the king and by his associates, and they handed them over to the bank, so the capital is really owned by the bank itself. the proceeds in excess of all the expenses are paid to the prussian state. q. who is responsible for the conduct of the business? a. the president. q. has he associated with him directors? a. no; he is personally responsible. q. by whom is the president appointed? a. by the king of prussia for life. q. what are the particular functions of the bank? a. in the first place, it is an organisation to help the state of prussia. the principal part of the business is to finance the loans of the state. it may undertake the loans alone, but as a rule it heads a syndicate of the large banks. q. do you compete for deposits from merchants, manufacturing concerns, banks, etc., with the deutsche bank or the dresdner bank? a. yes, to some extent. it is not our intention to do so, but of course we practically compete in some ways. our rates on deposits are less favorable than those of these banks. q. do you take real estate mortgages? a. no. q. you are known as the sea-trade (seehandlung) society. why is that? a. frederick the great founded the seehandlung to promote prussian trade, especially the oversea trade. at one time this company had a salt monopoly and a wax monopoly. the salt which came into the different ports of prussia and the wax which came from poland were bought up by the seehandlung. at one time the seehandlung also had mills, spinning and weaving plants, iron foundries, and river steamers. we still own two industrial establishments, the flour mills in bromberg and a linen spinnery in landeshut in silesia. q. a large percentage of your funds is loaned on the stock exchange? a. yes. q. and your discount business is comparatively insignificant? a. not insignificant, but small compared with our loans on the stock exchange. q. do you receive promissory notes from customers? a. no. q. do you transact business of any other character than that heretofore mentioned? a. we have a branch known as the royal loan office, which lends money in small amounts upon the pledge of different kinds of goods as security. this was established in . in we made , loans upon watches, jewels, clothing, etc., at an average of marks per loan. two-thirds of the borrowers are labourers; last year about per cent. were widows and spinsters, also a few were mechanics--occasionally professional men--artists, actors, and the like. our rate is very low, per cent. for the year, which is low compared with the ordinary pawnshops. no other banks conduct a business of this class. deutsche bank interviews with herr paul mankiewitz, director, and herr a. blinzig, alternate, of the deutsche bank[ ] q. when was your bank organised? a. in the year . q. how is your stock owned? a. by a large number of shareholders. our shareholders are principally in germany, but also in england, france, austria, and elsewhere. q. what does the item "shares in other banks," $ , , , represent? a. this represents the purchase by us of practically the controlling interest in independent banks in the empire. we are represented upon each board and we are kept closely informed of the business. our return is in the dividends. q. a large percentage of the stock exchange business is really handled through the incorporated banks, is it not? a. yes. we ourselves have fifty members on the stock exchange. q. you mean that the deutsche bank has fifty men, members of the stock exchange, who trade there on the floor? a. yes. there is quite a difference, however, in our method of handling the business from that followed in new york. we do not have the margin system. most of our customers who do not pay in full pay at least for half the amount involved in the purchase. q. are the clearing-house associations important factors in the cities in germany? a. no. they are not associations of importance or power, but merely pieces of machinery through which cheques are cleared. q. you all go to the reichsbank to clear? a. yes; once a day. there are clearing houses and members in the empire. q. what taxes do you have to pay? a. we pay to the state per cent. on our income remaining after deduction of - / per cent. of our share capital, which is exempt, and to the city of berlin per cent. on our income. all banks pay on the same basis. q. is there a limit to the amount of discretion given to the branch directors on first-class bills? a. each of the main branches has a fixed capital arbitrarily set aside by the deutsche bank. they have a sum according to the importance of the branch, and they must do business according to it. q. the reichsbank has branches everywhere? a. yes; in every place where there is sufficient business. it has about branches. we transferred through the reichsbank last year , , , marks. our strength is the reichsbank. our branch in bremen, for instance, wants money when cotton shipments start, and the money is transferred to them. the importers in bremen sell the cotton to the large manufacturers. when they get the money the money comes back to us. q. in london the joint-stock banks usually pay interest at about - / per cent. below the bank rate. in the country they have to pay more. what is the custom here? a. there is no strict rule. the bank rate is now per cent. and we allow - / per cent. on call money. in the interior our branches allow a little more. it is the same as in england. q. does the bank rate influence your rate for discounts? a. yes; we are influenced. the bank rate is now per cent. and our private discount rate is - / per cent. q. if a mercantile customer came with a four months' bill satisfactory in character, what would be the rate to him? a. we have no fixed rate. it depends upon the man and the bill. q. how do you invest your surplus funds when you have no demand from customers? a. we buy bills in the open market, or accept offerings made to us from houses desiring to borrow. dresdner bank interviews with herr schuster and herr nathan, directors of the dresdner bank[ ] q. what is the date of your organisation? a. . q. in practice, you and all other banks endeavour to fully employ all available funds? a. yes; we only carry in the reichsbank and other banks sufficient cash for the conduct of business. q. you regard your item "bills discounted" as one of practical reserve? a. yes; it is immediately convertible into cash at the reichsbank. q. referring to the item "shares in other banks," $ , , , do you control all banks in which you have any interest? a. yes; practically. we probably have not the majority of the stock in any bank; but our holdings are sufficiently large to give us control. q. is the tendency toward bank consolidation? are the smaller banks becoming more closely affiliated with the larger banks? a. yes; because it serves a mutual advantage. the smaller bank needs better facilities to take care of the increasing business. if a bank wants to increase its capital, and the shareholders do not care to subscribe for the increase, the new shares are frequently offered to us. we look out for the business of these banks in the centres and give them participations in some of our important undertakings. q. in great britain we found that banking interests were practically controlled by from to large banks. does that condition prevail in germany? a. no; but the tendency is in that direction. one difference between the banks of england and germany is this--in england the primary purpose of the banks seems to be to secure large earnings for their shareholders. in germany our banks are largely responsible for the development in the empire, having fostered and built up its industries. q. would it be any reflection upon a bank if it should go to the reichsbank for discounts or loans in easy times? a. no; we seldom go in easy times, however, because there is no need of our doing so. q. is there strong competition between the important banks of berlin or do they work more or less together? a. of course there is strong competition between the large, important banks, but there is no lack of harmony, and they very frequently work together in syndicate operations. while it is the desire and endeavour of each bank to build up its business, it must be recognised that each institution has more or less its own field of operation, which is in a measure respected by the other banks. as, for instance, the deutsche bank has done a very large volume of business with turkey, and business emanating from that source is expected to and naturally does go to the deutsche bank, while another institution may have been largely identified with roumania, or another with some large local interest. we ourselves are recognised as representing the krupp interest and have just recently formed a syndicate to finance one of their operations. q. our understanding is that a merchant, a customer of yours, may arrange with you for a credit of, say, , marks, which may or may not be secured, and may draw a ninety-day bill upon you for that amount. he may send that bill to the deutsche bank for discount. if the deutsche bank will discount it, they present it to you and you accept it. will you kindly state why this custom prevails? a. one reason is that it makes a bill which is acceptable at the reichsbank and is a prime bill. we receive one-fourth of per cent., or more, for our acceptance, and the deutsche bank, or any other bank discounting, invests its money at a rate for the period. it might be that we would prefer to give our customers a cash credit rather than to accept his bill, in which event we would so arrange. q. then this practically enables you to sell your credit without using your cash? a. yes. q. we understand this is the usual custom in germany. a. yes. q. is it not a fact that in the last analysis the customer who uses the money usually pays more than the bank rate--that is, would it not cost him, in such a transaction to-day, say or per cent., while the bank rate is per cent.? a. yes. q. is it your endeavour to reach the small country towns? a. no. q. in the united states we have brokers who handle commercial paper, and many of the banks purchase it to employ their surplus funds. in london we found discount houses whose sole business was to handle paper for sale to banks to employ their surplus funds. what corresponds to that agency in berlin? a. in berlin there are two brokers who handle prime bills, but they are not an important factor. q. how do you employ your surplus funds? a. we buy bills in the market or through these brokers. q. in employing your surplus funds do you buy any other bills than those which the reichsbank would accept? a. no. q. would you consider the issue of taxed notes by the reichsbank in a sense an evidence of an abnormal condition? a. no: on the contrary, it is quite normal. last year it happened twenty-five times. q. in times of trouble do the large banks, like your own, the deutsche bank, and disconto, co-operate with the reichsbank in an endeavour to prevent the exportation of gold? a. yes. opinions are divided as to whether it is for the good of our country to do so or not. last year, for instance, many people asked for gold. it was refused at first in some quarters; later we shipped freely. q. are you members of the stock exchange? a. all banks and bankers are members of the stock exchange. q. by virtue of their being banks? a. yes; they have to pay a tax for the exchange. q. are the seats expensive? a. no. you do not buy a seat. there is no limit to the number of people admitted. we have from twenty to thirty people go to execute our orders. bank des berliner kassen-vereins interview with herr hoppenstedt[ ] q. when was this bank organised? a. in , under the general companies act. q. what are its particular functions? a. this bank might be called strictly a clearing bank. it clears transactions made on the stock exchange and also cheques on banks which do not clear through the reichsbank clearing house. as you know, our banks do a large stock exchange business. it is their custom to send to us all securities sold to others clearing through us with a list of the purchasers. we charge the purchasers the amounts due from them and credit the amounts received from them, balancing every night. the securities are delivered to the various purchasers. _some settlements are made daily and others monthly._ a large volume of cheques and bills are also cleared. this is simply a clearing business. q. you show loans and discounts in your statement. what is the character of these? a. we invest our funds in first-class loans and prime bills. q. is this bank owned by the other banks? a. it is partly owned by other banks. there is also a commission of shareholders of the bank, among whom are the first banks of our city. these are members of our board. q. is it the custom for all banks which clear through you to have a balance in order to facilitate the payment of debits through clearing? a. yes. footnotes: [ ] adapted from geh. oberfinanzrat waldemar mueller, _the organization of credit and banking arrangements in germany_; max wittner and siegfried wolff, _the method of payment by means of bank-account transfers and the use of checks in germany_. publications of the national monetary commission, senate document no. , st congress, _ nd session_, pp. - . [ ] in order to facilitate its giro business and reduce the friction to a minimum, the reichsbank has special printed forms prepared for the various kinds of transactions, the use of which is made compulsory on the public. for a simple transfer of money from one customer to another, whether they be in the same town or in different places, the "red check" is employed, which is filled out by the party making the transfer and handed in to the bank. it is not a check in the proper sense of the term, but is so called because the printed forms resemble checks and are put up in books in the same way as checks. the word "check" does not occur in the printed matter of the blank; neither is the instrument transferable. when a number of payments are made simultaneously the party making the transfers is furnished with a blanket form on which the names of the individual firms and the various sums are entered and which has to be accompanied by a red check covering the aggregate amount. for the so-called "great banks" of berlin, some of which have a volume of transfer transactions amounting to as much as one hundred transfers for each bank per diem, there are blanket forms which are of a different colour for each bank. when cash is wanted the so-called "white check" is employed. this is a legally constituted check. there are special printed forms for the use of those who have no account with the reichsbank. [ ] banks of issue were formerly numerous in germany. gradually, however, nearly all of them renounced the privilege of issue, as the laws relating to banking made their existence as banks of issue more and more difficult. at the present time there are only such banks besides the reichsbank, viz.: the bayerische notenbank, the wurttembergische notenbank, the sachsische bank, and the badische bank. [ ] adapted from robert franz, _the statistical history of the german banking system, - _, publications of the national monetary commission, senate document no. , st congress, _ nd session_, pp. - . [ ] adapted from c.r. fay, _co-operation at home and abroad_, pp. - , . p.s. king and son, london. . [ ] occasionally even as low as _d._ or less. [ ] adapted from _interviews on the banking and currency systems of england, scotland, france, germany, switzerland, and italy_, publications of the national monetary commission, senate document no. , st congress, d. session, pp. - . [ ] _ibid._, pp. - . [ ] _ibid._, pp. - . [ ] _ibid._, pp. - . [ ] _ibid._, pp. - . [ ] _ibid._, pp. , . chapter xxvi banking in south america [ ]the special interest in south american banking which exists at this time is the product of at least four distinct factors: first. it has been evident for some years that the trade between north and south america is rapidly developing. in the ten years, - , the exports from the united states to the ten republics of south america increased per cent. against an increase of all our exports during the same period of per cent. in spite of inexperience, crude methods, lack of banks and of ships we have made notable gains in south american trade. there seems to be no reason to question the probability of a continued rapid increase during the next few years. our growing surplus for foreign investment second. other forces have gradually been bringing this country more and more into the position of looking for investment opportunities abroad. while it is true that the united states is a debtor nation in the sense that a large amount (estimated at $ , , , to $ , , , ) of european capital is invested here, it is also true, on the other hand, that the national income has for some years been sufficient to meet annual payments abroad, to make large fresh investments in our own enterprises, and still to leave a considerable surplus for investment in neighbouring countries. it is estimated that american capital in mexico and canada amounts approximately to $ , , , . in south america there are already american investments of perhaps $ , , to $ , , . as the national income and savings expand and as the opportunities for exceptionally profitable investment within this country decrease, it is clear that there must be a stronger and stronger tendency toward investment abroad. the immense sums, for instance, that have been flowing into railroad construction and rebuilding will not be needed to so great an extent in future. a considerable proportion of this overflow of capital may certainly be expected to spread into south america. greater lending power of banks third. the adoption of the federal reserve system has made a remarkable improvement in the handling of gold and of credit. it has released and made available for other forms of financing great sums which were formerly tied up in scattered reserves. we have only to look at the monetary history of the german empire during the last forty years to see how powerful an influence on industry, trade, and investment is exerted by the centralisation and control of bank reserves. the london _statist_ has calculated the ultimate increased lending power of american banks, under the federal reserve system, at $ , , , . european war fourth. the european war has suddenly stimulated the tendencies which were previously evident. it has temporarily cut off a considerable amount of european trade in south america, thus leaving an opening for even more rapid development of our trade than would otherwise have taken place. it has deprived south america for a period of several years of the steady inflow of european capital. it has enormously increased the exports and decreased the imports of this country, thus placing suddenly at our disposal greatly enlarged financial power, possibly as much as $ , , , per annum above normal. its ultimate effect, we may safely assume, must be to increase considerably rates of interest the world over, thus stimulating the tendency toward an enlarged outflow of capital from the united states into neighbouring countries. by reason of the war the same kind of a situation that would otherwise have developed slowly in a period of years now confronts us suddenly when we are as yet in a state of financial unpreparedness. the new machinery provided by the federal reserve act is not yet fully utilised or adjusted in its final form. it will require careful study, combined with prompt action, to utilise the financial opportunities now before us with greatest advantage to all concerned. english banks in south america although english interests have share holdings in other institutions, there are only five banks in south america that stand out as unmistakably british. in the order of their development, these are the london and river plate, london and brazilian, british bank of south america, anglo-south american bank, and commercial bank of spanish america. each institution, with one exception, has concentrated on one country, in which it has established most of its branches and to which it has devoted its first efforts. the exception is the british bank of south america, which has followed the contrary policy of having only a few branches strategically located in important cities; in other words, this bank has concentrated on selected cities rather than on a given territory. english trade and banks develop together the development of commercial banking by british interests has everywhere gone hand in hand with the development of british investment and british trade. the accounts of the railways, mercantile firms, steamship lines, public utilities, and other enterprises conducted by their fellow countrymen form the great bulk of the business of the four leading institutions; the commercial bank of spanish america is, however, operating under different conditions. indeed, it may even be said--again speaking in broad terms--that the english banks have made comparatively little effort to secure the accounts of domestic enterprises. it is certainly safe to say that they have not made efforts in this field at all comparable with the efforts of the german, spanish, french, and italian banks. it is interesting to note also in this connection that the management and even the clerical force are, with few exceptions, brought over from england. after more than fifty years the three leading institutions remain as distinctively british as they were at the beginning. german banks in south america to understand the energetic development of german banks in south america during the last forty-five years we must consider the conditions prevailing in germany during that period and the strong forces working toward industrial and banking expansion. beginning immediately after the franco-prussian war of - , german industrial interests, with the strong support of the german government, began to struggle more vigorously and more effectively than ever before for a larger share of trade in international markets, particularly in the far east and in south america. it was clearly realised that germany needed a large and rapidly growing export trade in order to maintain her own prosperous development. in order to get this trade it was necessary to follow a definite programme which included the provision of better shipping facilities and of better facilities for financing. up to that time germany had been fully as dependent as the united states is to-day upon foreign ships and foreign banks. it was also clearly realised that the tendency was toward large scale production in most industries and that those concerns which could secure large sales in the world-wide markets would soon come to enjoy an overwhelming advantage over smaller competitors. the german industries, in conjunction with the great german banks, began to follow, therefore, a programme of concentration, which has since gone steadily forward. these two forces--expansion in foreign markets and concentration at home--have had a controlling influence on germany's foreign trade, and incidentally on her foreign banking. other influences in bank expansion another influence of importance is the fairly well-marked division of german industrial interests into a small number of groups, each one of which centres about and is allied to one of the great banks. to some extent this is true in other countries, especially where banking is centralised--notably in canada, for instance--but it is especially clear and well recognised in germany. hence each one of the great banks is under especially strong pressure to foster and develop the interests of its important clients, even at the expense of some temporary risk or sacrifice for itself. this is doubtless the primary motive which has induced the great german banks one after another to enter foreign fields. there is a wide-spread notion outside germany that the german government has itself actively intervened for the purpose of stimulating foreign trade expansion and has brought pressure to bear on german banking interests, leading them to push ahead more rapidly than their private business interests would have required. this idea may or may not be correct; so far as the writer is aware there is no special evidence pertaining to south american banking development to sustain it. at any rate, it is easy to explain the policy of these banks as being based upon purely business considerations. as a matter of fact, there has probably been much exaggeration of the thought that the german banks are primarily self-sacrificing instruments of an ambitious national programme rather than ordinary business enterprises. the statement is frequently repeated that the english banks in south america aim first and all the time for profits, while the german banks aim for development of their national interests. of the four large german banks in south america only one is remarkable for energetic and successful expansion. the others have been moderately successful. the difference is to all appearances chiefly due to management. although these four banks were presumably designed primarily to advance the business interests of the banks which organised them, they have incidentally had a powerful influence on investment of capital and on trade. the german manufacturers of machinery, steel products, and the like, have been especially helped by the ability of the german banks, both in south america and at home, to help in finding capital and in financing. the german banks have not found political or economic conditions in south america which were insuperable obstacles to sound or profitable banking. other banking institutions other nationalities besides the english and the germans have invaded the banking field in south america. the french, the italians, and the spanish have all been active, particularly on the east coast, and are represented by large institutions. american banks only after the federal reserve act went into force in november, , was it possible for any bank organised under the national-bank act of the united states to establish branches abroad. the act restricts this privilege to institutions having capital and surplus of $ , , or more, and gives the federal reserve board discretion to withhold its consent. up to this writing the only institution which has taken advantage of the powers granted by the federal reserve act to enter south america is the national city bank of new york, which has established branches in buenos aires, montevideo, rio de janeiro, santos, and são paulo. other branches will probably be established in the near future. especial attention is being given to the collection of credit information. the bank also maintains a foreign trade department, which gives information and advice to its depositors as to building up business abroad. this department is now equipped to make specific reports on trade openings in argentina, uruguay, brazil, colombia, and venezuela. the buenos aires branch, which was the one first established, is understood to have done a satisfactory amount of exchange business. it stood ninth in volume of clearings in january, , among the twenty-odd commercial banks of that city. the other branches have not been in operation long enough to show clear results. the branches in argentina (including the subbranch at montevideo) and brazil have each $ , , allocated to them--though this is purely formal, as the bank's whole capital and surplus are behind the obligations of every branch. the expansion of the national city bank in south america has been much more rapid than that of any preceding institutions, including even the aggressive german banks. as a natural result, there is apparently less effort at this stage to build up local connections and influence in each city. so far the policy of the national city bank appears to be to furnish foreign trade facilities to american exporters over as wide a territory as possible, rather than to concentrate its activities in any restricted region. other national banks in this country are known to be desirous of aiding in the financing of foreign trade, but have not up to this time found it practicable to take action under the provisions of the banking law as it now stands. domestic banks there are many important and successful banks in south american countries which are strictly domestic institutions, not only incorporated under the laws of the country in which they do business, but owned and managed by local interests. the notion sometimes seriously put forward that south american banking is almost wholly in the hands of foreigners is quite unfounded. it is true that trading operations are generally handled either by foreign houses or by houses in which there is a strong foreign influence and that the financing of nearly all foreign trade and of much local trade is likely to go to foreign banks. but the accounts of the rest of the domestic trading firms, of land owners, and of governmental corporations, as a rule, gravitate toward the domestic banks. following is an approximate statement of the total of deposits and credits in account current in each south american country on or about december , , and an estimate of the distribution between foreign and domestic institutions: ---------------------+-------------+------------------+------------------ countries. | total bank | in | in | deposits. | european banks. | domestic banks. ---------------------+-------------+------------+-----+------------+----- | | amount. | per | amount. | per | | |cent.| |cent. | | | | | brazil | $ , , | $ , , | |$ , , | uruguay | , , | , , | | , , | argentina | , , | , , | | , , | paraguay | , , | | | , , | +-------------+------------+-----+------------+----- total, east coast | , , | , , | | , , | | | | | | chile | , , | , , | | , , | bolivia | , , | , , | | , , | peru | , , | , , | | , , | ecuador | , , | | | , , | +-------------+------------+-----+------------+----- total, west coast | , , | , , | | , , | | | | | | colombia | , , | | | , , | venezuela | , , | | | , , | +-------------+------------+-----+------------+----- total, north coast | , , | | | , , | | | | | | total, south america | , , , | , , | | , , | ---------------------+-------------+------------+-----+------------+----- the great banco de la nación argentina (bank of the argentine nation) is an official institution, all the shares of which are owned by the national government. it is a successor of the former national bank, which was driven into insolvency in the great financial crisis of and was afterwards liquidated. although it was organised during a period of disaster and there were many prophecies of its certain failure, the bank of the argentine nation has had a wonderful development and to-day ranks as the seventeenth in size among the great banks of the world. the bank pays no dividends, but carries per cent. of its profits to the credit of capital account and per cent. to reserves. entirely through this process the capital and reserve funds have increased from approximately $ , , in to over $ , , at the present time. during the same period deposits have grown from $ , , to $ , , , and discounts and advances from $ , , to $ , , . there are now more than branches. the bank differs from most other governmental institutions in that it carries on distinctly a commercial banking business more or less in competition with private commercial banks. until the crisis of it did no rediscounting for other banks, and even during the crisis its activities in assisting other banks were much restricted. land mortgage banks in several of the south american countries there is a well-organised system of land-mortgage banks following european models. in some cases the banks are owned and operated by the national government and in other cases receive some special support or guarantee. the plan under which they all operate is the following: the owner of land who desires to raise money on mortgage approaches the bank and requests an investigation and appraisal, the expenses of which he usually pays. if the property is shown to be unencumbered with prior claims and meets other conditions, the bank delivers to the owner the mortgage bonds in convenient denominations up to a given proportion, usually per cent., of the appraised value. these mortgage bonds are part of a series and are themselves secured, not by any specific piece of property, but by all the property covered by the series; they are also backed by the credit of the issuing bank. the owner of the property then offers the bonds for sale through a broker, and in this way obtains the desired funds. he pays the bank a small commission, from one-fourth of per cent. to per cent., for its services. in argentina, where this system is developed to its highest extent, these land-mortgage bonds are known as "cedulas," and are issued by the banco hipotecario nacional (national land mortgage bank). at the present time the argentine "cedulas" tend to sell on a per cent. basis, more or less. uruguay, brazil, and chile all have similar issues, which sell on bases ranging from to per cent. or even higher. broadly speaking, and without attempting to assign a definite value to any one of these issues, they are sound, conservatively issued, well protected, and under normal conditions readily marketable. the more important issues have been widely sold in england, france, and belgium. if they were properly introduced and made well-known in the united states, there is no reason to question their finding a good market here also. side by side with the land-mortgage banks there are operating in the argentine a number of english mortgage companies, which directly invest their own funds in land mortgages and have earned highly satisfactory profits. in several countries there are state-owned savings banks, a large portion of the funds of which also go into land mortgages. conditions of commercial banking a banking business, like any other, must adapt itself to surrounding conditions, including laws, business customs, precedents created by older banks, and the like. in south america these conditions differ in a number of respects from those which prevail in the united states. probably the first impression of most observers gives an exaggerated idea of the differences. however, they should be fully and carefully considered. the chief differences that directly affect banking operations are the following: ( ) comparative absence of banking regulation on the part of governments or associations; ( ) national colonies; ( ) social character of business relations; ( ) lack of highly developed economic organisation; ( ) relatively high and stable rates of interest; and ( ) in some countries fluctuating currencies. the first five of these circumstances call for brief comment. little control or co-operation not only is there a marked absence of laws directly applicable to banking concerns, but there is also an equally noteworthy absence of control exercised either by the government or by associations among the banks. even the large governmental or semi-governmental banks in brazil, uruguay, argentina, chile, and bolivia are competitive with the other banks. whatever influence they exercise is secured through their active and direct competition, not through any special authority over the other banks conferred upon them. in the fall of , for the first time, there was some rediscounting of the paper held by other banks on the part of the bank of the argentine nation and of the bank of the republic of uruguay; but this tendency did not go far. the other banks objected to placing information as to their relations with customers in the hands of the governmental institutions. in other countries there has not been even this much of an attempt toward fulfilling the functions of a central bank of rediscount. it is difficult to secure in most of the south american cities even the most elementary kind of co-operation among the banking institutions. how is it possible that they should continue to stand apart when they would obviously gain so much by coming together? a partial answer is to be found in the peculiarity that has already been pointed out, namely, the fact that many of the more powerful institutions are the offspring of european countries. each one is fighting to support the trade of a certain well-defined group of clients. the national antagonisms among them are deep-seated and sometimes virulent. all this was true even before the european war. it will be tenfold true for a number of years to follow. national colonies this leads to mention of the second condition, one which operates in favour of european-owned banks to the relative disadvantage perhaps of american banks. this condition is the presence in some of the large south american cities, notably buenos aires, of a large colony representing each one of several important european nations. naturally the tendency of each colony is to support banks of its own nationality. on the whole, although this matter of national affiliations is undoubtedly a factor to be reckoned with, it appears to be by no means decisive. the german banks, for instance, have been able to expand with much greater rapidity than we should have been justified in expecting on the basis of their national trade and national colonies alone. this is true likewise of the italian and french banks. a great proportion of the business men of south america, even those of foreign origin, are governed less by their national sentiments than by their business interests. personal character of business dealings to an observer accustomed to european or american methods, one of the most striking features of business life in the south american cities is its strongly personal and social flavour. we are accustomed in this country to emphasise the principle that friendship is not a safe guide in business dealings. in south america the contrary is more nearly true. family ties are apt to be a controlling factor in choosing partners and employés. if one's ultimate object is to have business dealings with a firm, he must first cultivate the personal friendship of the head of the firm. social relations and business relations become confused, and it is hopeless to expect the purely impersonal view of a business proposition that is considered correct in this country. like all sweeping statements, this one is subject to exceptions. there are many american, german, and english firms, especially in buenos aires, which prefer what we denominate "businesslike methods," but they are not numerous enough to give the tone to business life. this is a condition which directly affects banking practice. it makes it very difficult, for example, to introduce the custom of securing full financial statements from all applicants for credit. the request for a statement is apt to be construed (as was the case in this country not many years ago) as a reflection on the personal honesty and credit standing of the applicant. for the same reason it is difficult, and may frequently be poor policy, for a bank officer to ask a customer a direct question as to the status of his business. he is likely not to take an impersonal attitude toward the question, but to resent it as if it were an attempt to pry into his purely personal affairs. consequently, all business men, including bankers, are forced to rely to a great extent in estimating the credit standing of individuals and firms on their personal impressions, on such information as they are able to secure through indirect hints and questions and on the business gossip which they pick up. it must be remembered that, except for buenos aires, most of the business communities are comparatively small and isolated. there is little opportunity, therefore, for long-continued fraud. a man who shows traces of dishonesty is much more plainly marked than in larger communities. as a consequence, the lack of the machinery and the customs that we consider indispensable in extending credit does not prevent the formation of correct ideas as to the wealth and character of a business man. undeveloped economic organisation most of the south american countries, we should keep in mind, are still sparsely populated and have no need for the elaborate machinery of trade and finance which exists in europe and north america. the region farthest advanced in its economic development, the river plate basin, may be roughly compared to agricultural states like iowa, kansas, and nebraska as they were thirty years ago. farming methods are usually not economical. the small farmers have little money of their own, their lands are heavily mortgaged, and they are "carried" from one crop to another by the local general retailer, who makes advances to them both in goods and in money. the retailer must in turn secure liberal credits from wholesalers, who are in their turn partly "carried" by the banks. there is no clear-cut distinction between dealers in commodities and bankers, for the dealers are forced to finance most of their own sales. such an arrangement of course favours extravagant credits, high prices, speculation, and crises, just as it did in the united states. it is rapidly giving way to a more complex organisation, in which the farmer has funds of his own, does his short-term borrowing at a bank, and pays cash for his purchases. without attempting to comment on intermediate grades of organisation we may consider briefly the manner in which trade and finance are conducted in the north coast countries. an officer of a bank there asserts that banking in the north coast countries is not to any great extent a matter of handling currency or money funds. the intermediary system of brokers, merchants, and other middlemen between the producer and his market, to which we are accustomed, is lacking, and the banker must take the place of all of them. he must himself inspect and sell produce. loans are made, for instance, secured by growing crops; the bank sends a man to the plantation to look over the coffee or cocoa, or whatever the crop may be, and report on its condition and prospects; to protect itself the bank sees that it is properly prepared for shipment, and takes care of the sale in the new york, london, or hamburg market. the bank collects the proceeds and credits the customer with his share. interest rates run from to per cent. and commissions for selling from to per cent. interest rates interest rates average considerably higher--even making allowance for increased risk--in south america than in the united states. they are, however, much more stable and more uniform over the whole continent. the uniformity is no doubt to be ascribed chiefly to the large english and german banks, with their branches in several different countries and their ready access to european financial centres. the stability in rates over a period of years is presumably due in part to the relatively gradual development of banking, commerce, and production, so that sudden shifts in the demand for and supply of banking capital are not frequent. there are, however, a number of exceptions to the general stability. in argentina the crop-moving season creates, though to a much smaller extent, the same kind of extra demand for currency as in the united states, and tends to make some seasonal variations in discount rates. they vary from as low as per cent. to as high as per cent., but do not normally move far from or per cent. compensation of directorate the german, french, italian, spanish, and many of the domestic banks, especially in argentina and peru, follow the european custom of compensating the home office directorate by allowing them a fixed percentage of the net profits. the president, manager, founder, and others may also be compensated in the same way. the net profits of the banco español del río de la plata are distributed: - / per cent. to certain specified charities, per cent. to the founder, per cent. to the reserve fund, per cent. to the directors and managers, - / per cent. to the fund for employés, per cent. to the shareholders for dividends and dividend reserves; those of the banco de italia y río de la plata: / per cent. to charity, per cent. to the reserve fund, per cent. to the directorate, - / per cent. to the fund for employés, per cent. to the shareholders. there is apparently no general rule which governs the distribution except possibly that the larger the bank the smaller is the percentage for the directorate and management. in england the directors are more likely to receive a fixed compensation. whether this plan of having a paid directorate works better than the american method of having a directorate made up usually of some of the larger shareholders, whose payment is purely nominal, is an open question. it is largely a matter of national custom. classes of business of foreign banks first. the foreign banks in south america usually start by devoting a large proportion of their energy and capital to operations in exchange. second. in this connection they purchase and make advances against commercial bills drawn on importers in the countries where they are doing business. third. at the same time the home office in london, hamburg, or berlin is probably developing a business in acceptances which involves comparatively little direct expense and allows considerable profits. fourth. all south american banks are called upon to handle collection of drafts and sometimes to take care of ordinary mercantile transactions, both on a commission basis. fifth. an activity which may be of some importance from the beginning consists of underwriting and selling securities. sixth. as quickly as possible the foreign banks build up a local account current and loan and discount business. seventh. some of the banks, especially the german banks, have participations in syndicates and in industrial enterprises. eighth. in some branches they receive money and securities for safekeeping or rent safe-deposit boxes. ninth. many banks have savings and mortgage-loan departments. none of the distinctively foreign banks in south america has as yet issued circulating notes; this is being done, however, by some of the domestic banks in which foreign capital is heavily interested. there may, of course, be other miscellaneous activities. footnotes: [ ] adapted from william h. lough, _banking opportunities in south america_, department of commerce, special agents series, no. . washington. . chapter xxvii agricultural credit in the united states while agricultural credit has been a subject of intermittent discussion in the united states for almost a generation, the movement has had its main development within recent years. in november, , the american bankers' association created a committee to study land and agricultural credit at home and abroad. in march, , american ambassadors and ministers were instructed by the state department to gather information concerning rural credit institutions in europe. a year later the southern commercial congress also instituted a careful investigation. these acts, and reports published gave the movement a national character and scope. several states, such as massachusetts, new york, and missouri, have recently made legislative provision for rural credit institutions and during the last two years very numerous bills pertaining to rural credit have been introduced in congress. it seems not unlikely that legislation providing for the establishment of a federal system of land banks and rural credit associations, subsidized by the government, will be enacted in the near future. the functions and work of rural credit institutions in europe, briefly discussed in the first two selections of this chapter, are treated more fully in connection with the chapters on the banking systems of european countries, notably those of germany and france. [ ]various european nations, with soil naturally inferior to ours, have established agricultural credit and thereby have greatly eased the burden of the cost of living. hitherto we have lived on the bountiful overflow of our rich land, and the pinch of necessity has not been felt; but now our population has grown enormous, our standards of living have been greatly raised, and our land is showing the effect of generations of taking out with very little putting back. we must do better or suffer. by the installation of agricultural credit, farming will not only be made more profitable, but it will in the end make country life more attractive. the banking system of to-day is adapted to the needs of manufacture and commerce. the processes of nature are so much slower, however, that banking for farmers must be organised on a basis of credit for much longer periods. our present system of borrowing on land is by mortgages running from three to five years, the entire principal coming due at one time. this is expensive, involving renewals, and dangerous from the possibility of the mortgage falling due at a time of restricted credit so that it cannot be renewed. on the continent of europe this business is handled by so-called land-mortgage banks, or rather associations. the mortgages granted are pledged for the security of bonds which the institution issues and sells in the general market. these bonds have no fixed maturity, but can be retired at par or some small premium at any time. when the borrower mortgages his land to the bank he agrees to pay a certain fixed sum semi-annually. this is called the "annuity" and is composed of the annual interest plus an amount, generally / per cent., toward the reduction of the principal of the debt and known as "amortisation," and an additional amount, about / per cent., toward the expenses of the bank. the borrower, therefore, at once begins to extinguish the principal of the debt; and as each year the principal decreases, the interest, of course, decreases also, and, the annuity being fixed, the proportion of it applicable toward the extinction of the mortgage increases. thus it happens that, beginning with a payment of / per cent. toward principal, the mortgage bearing per cent. to - / per cent., which are the general rates, the entire debt is extinguished in between fifty and sixty years. the mortgaging of land is known as long-term credit, and it may be handled by joint-stock institutions or by associations of borrowers, but in institutions furnishing the credit required by farmers for working capital, such as the purchase of seeds, fertilizer, payment for labour, etc., which is known as short-term credit, the aim that the borrower should be primarily considered rather than the lender assumes fundamental importance. on the continent of europe a solution of the problem of short-term credit is found in the organisation of banks by the application of so-called co-operative principles. the purpose is to provide organisations in which the borrower receives consideration rather than the lender, also to keep the money of any body of individuals for the use of that body. under our present system a great deal of money belonging to farmers finds its way into wall street. at present the lenders are organised; whereas the borrower stands alone. agricultural credit conditions in the united states [ ]the united states, although the leading country of the world in the amount of its agricultural products and in the extent of its banking business, is behind nearly every other progressive country of importance in the development of agricultural credit, _i. e._, short-time non-mortgage credit. our manufacturing and commercial businesses are financed largely by means of such credit, and the capital invested in these industries is thereby rendered manifoldly efficient; not so with agriculture. most farmers apparently make little or no use of short-time credit. there seems to be a wide acceptance in this country even among the farmers themselves of the dictum of louis xiv, that: "credit supports agriculture, as the cord supports the hanged." is this a correct description of the situation? if so, what is the explanation, and what remedies if any are needed? the object of this paper is to throw light upon the answers to these questions. first, as to existing banking facilities for agricultural credit, and their utilization by farmers. it is well known that the banking capital of the country is concentrated to a great extent in our large cities--to a greater extent than it would be if we had a well-developed system of branch banks like canada--and that the banks of these cities are prevented by reason of their location from making many agricultural loans, even if they were so inclined. of the , national banks in the united states september , , or . per cent. were located in the dozen largest cities of the country.[ ] the national banks of these twelve cities, representing but per cent. of the population of the country, had per cent. of the national banking capital (capital, surplus, and undivided profits), per cent. of the individual deposits, and per cent. of the loans. it should be noted, however, that since the act of , authorizing the establishment of national banks with a capital of less than $ , in small towns, there has been a continual and rapid increase in the number of national banks in small communities. on september , , out of the total , national banks there were , with a capital of $ , , and therefore presumably located in towns of less than , population, with a capital between $ , and $ , , and therefore presumably in towns of less than , population, and , with a capital between $ , and $ , . except for banks in towns not exceeding , population, the law as amended in does not permit any national bank to be organized with a capital less than $ , . are the national banks which are accessible to farmers in a position under the law to meet farmers' needs? the answer to this question must be in the affirmative. aside from the fact that national banks are not permitted to make loans on real estate security,[ ] there is no restriction in the national banking act which would interfere with loans to farmers for agricultural purposes. personal security alone is legally acceptable; the range of possible collateral security is practically unlimited; and there is no limitation fixed by law as to the period of loans. national banks therefore have a very free hand in regard to loans to farmers. when we inquire concerning agricultural credit in banks under state charters we find conditions varying with the different states, but, with a few minor qualifications, it may be said that the state banking laws are free from restrictions that would hamper state banks and trust companies in extending credit liberally to responsible farmers. they are in a much better position in one respect to deal with farmers than are national banks, that is, in the matter of accepting real estate security. no state denies state banks this privilege, and such restrictions as exist upon its exercise are generally not onerous. if commercial banks are comparatively unhampered by law in making short-time loans to farmers, it may be asked: to what extent are such loans made? unfortunately practically no information is available on this question. in answer to an inquiry the comptroller of the currency wrote, under date of may of this year, that no information with reference to short-time loans made to farmers by national banks had ever been compiled by the comptroller's office. the writer has found no trace of any investigation of this subject by state banking departments. for about a year he has taken occasion to inquire at every opportunity of individual bankers concerning their experience with regard to loans to farmers in different parts of the country. the replies received are so divergent that no conclusion can be drawn from them, except that the practice varies widely in different sections of the country and even in different communities in the same section, and that probably the farmers of the north central and western states borrow of commercial banks more than do those of the eastern and southern states. there is not sufficient evidence, however, for this latter inference to make it much more than a guess. in the absence of any comprehensive data, i shall resort to the unsatisfactory but representative replies from different parts of the country. neither of the two national banks in the city of ithaca, n. y., makes any appreciable amount of loans to farmers. both claim to be willing to do so, but say there is practically no demand. in some of the neighboring cities, however, such loans by national banks are more common. the cashier of a national bank in a town of about population in an agricultural section of northeastern pennsylvania writes: our farmers as a rule are not large borrowers and want loans only in small amounts for short periods. farmers in general will not go on each other's paper no matter how good the parties are, for they have been so often taken in by wild-cat schemes that they are shy when their names are required to be placed upon paper. they realize also that they are not familiar with business methods in the commercial world and dare not trust themselves. there is a moderate amount of borrowing by farmers in western new jersey. estimates made by bankers in princeton as to the proportion of farmers in that neighborhood who borrow for short periods of local banks vary from to per cent. a former president of a national bank in indianapolis writes: we came very little in contact with farmers. we made special effort to secure such business by sending to a considerable mailing list of carefully selected farmers, circulars and personal letters ... but the business did not come. my inference was that they dealt with the nearby small banks. of the situation in lafayette, indiana, a former vice-president of a national bank, writes: about per cent. of our business was with farmers. they borrow frequently from commercial banks, funds to be used for crop planting, crop gathering, purchase of agricultural machinery, improvements on the farm, purchase of cattle, and the carrying of cattle or hogs to maturity. through indiana these farmers' loans are very usual in the country banks, many preferring state charters so they may make these loans not only on personal but also on mortgage security. farmers are seldom able to give any but personal or mortgage security. a large percentage of them are sufficiently responsible to be entitled to and to receive reasonable credit without security. farmers seem to endorse for each other much more readily than do those of other classes.... the reason is, i think, clear. each knows pretty much everything about his neighbor's financial status, the amount and value of his land, his live-stock, and other visible personal property, the amount of any mortgage and when due. so much being thus in the open there is less of the secretive habit, so that the extent of the invisible personal property and debts is apt to be known. a similar report comes from a national bank in lincoln, nebraska, from which the following extracts are taken: the farmers of this state have need of accommodations of this kind to carry them through the crop season. as a matter of fact, they use short-time credit to fully as great an extent as do the business men in the city and smaller towns. in fact, i think it is true that in the smaller towns the bankers favor the farmers in preference to the small business men.... there is no doubt about the average well-to-do farmer in this state being able to furnish satisfactory security aside from mortgaging his farm for such temporary loans within any reasonable limitations. in some cases the banks take chattel mortgages on cattle or other live-stock, and in some cases where the farmer has a good equity in his farm they will not hesitate to take his personal note. while i do not know that there is any particular difference between farmers and other classes in this state as to their willingness to go security for each other, yet very little of this is done any more. there was a time when it was not an uncommon thing, but it has become less and less until now there is very little signing done for others. in fact, the farmers feel that they are able to take care of themselves and do not ask others to sign with them, and are able to handle themselves without such an endorsement. this is true of all classes in this state. i have never felt that in this locality farmers suffered in any way from lack of credit facilities.... a former bank examiner in the state of california, himself a farmer, writes: the farmers of california do not to any considerable extent make a practice of borrowing money from local banks or money lenders for short periods.... in reviewing the various bank examiners' reports on some state banks i recall very few instances of crop mortgages, and it impresses me that in many of the cases the mortgage was taken to obtain additional security for loans previously granted and secured otherwise. i think it would be safe to say that the bankers as a rule have not favored short-time unsecured loans to farmers. they are, however, fast awakening to the fact that as a rule these are the safest loans a bank can make, and are making an effort to get in closer touch with the farmer. it would also be safe to say that the average small farmer does not as yet realize that he _can_ obtain such credit at a bank. our farmers as a class are exceedingly reluctant "to go each other's security." two-name paper is mostly confined to commercial transactions. a college professor in the state of washington informs me that short-time loans to farmers are common in that state, but that frequently the rate of interest charged is per cent. higher than that on commercial loans--the explanation commonly given being that a farmer borrowing generally reduces the resulting deposit credit more rapidly than does a merchant. in the southern states, particularly in the cotton, rice, and tobacco sections, the use of crop liens for short-time loans appears to be much greater than in other sections of the country.[ ] such meager testimony as i have been able to secure seems to show that the amount of short-time agricultural credit extended by banks in the south is relatively small but rather rapidly increasing. the banks are catering more and more to this class of business. other evidence might be cited, but the above gives a fair picture of the situation as revealed by all the testimony received--a confused picture of widely varying conditions. public opinion is now being aroused on the subject of agricultural credit, and pressure is liable to be brought for hasty and perhaps radical legislation. obviously, the first step to be taken in the interest of a sane solution of the problem is to find out exactly what the problem is. to this end the writer would urge strongly the need of investigations by the comptroller of the currency and by the various state banking departments of the present facilities and practices in the matter of agricultural loans. in view of the increasing public interest in the subject the investigations cannot be undertaken too soon. although the farmers in any section of the country may not resort to the banks for short-time credit it does not follow that they are not receiving such credit. as a matter of fact they are often receiving it on a considerable scale and in the most expensive way. _i. e._, in the form of book credits with merchants. it is a common practice throughout the country for farmers to run up book accounts with local merchants during the spring and summer to be paid in the fall when the crops are sold. when this is done on any considerable scale the farmer probably pays more than bank interest under the guise of prices; and this is particularly true when he obligates himself to sell his crops to the creditor merchant. in the south this practice is carried to the extreme in the familiar "store-lien" system which holds many farmers in the cotton belt in a condition bordering on perpetual servitude. the custom is for the farmer to buy supplies of the local general store on credit for the year, agreeing to sell to the merchant his cotton crop in the fall, thereby cancelling the debt. a crop lien is generally given, and the merchant often dictates the character and the amount of the planting. the prices paid for cotton under this system are liable to be exceptionally low, and the prices paid by the farmer for his supplies exceptionally high. the system has proven a curse to many sections of the south. witnesses before the united states industrial commission estimated the interest rates imposed by this system at from per cent. upwards. mr. george k. holmes of the united states department of agriculture testified: the rate of interest on the liens on the cotton crop of the south, it is safe to say, probably averages per cent. a year. all cotton men will agree that it is at least that. the store system of the south is a sort of peonage; that is what it amounts to with the cotton planter.[ ] since the industrial commission's report was published the banking facilities of the south have been greatly increased, and the banks are coming into closer touch with farmers, with the result that the store-lien system is gradually breaking down. another form of credit to farmers is that obtained from dealers in farm implements and machinery which the farmers frequently buy on time, paying interest during the credit period. one informant, who has been a bank examiner, writes from california--and his testimony is applicable to many other sections of the country: the new generation of merchants is not disposed to carry the farmer as of old and insists that overdue accounts be covered by promissory notes which are in turn hypothecated with their bank. in other words a clearer demarcation of function is being gradually brought about to the best interests of all concerned. such in general is the present situation in the united states in the matter of short-time agricultural credit as evidenced by the very indefinite and scant information available. what are the causes? perhaps in them will appear some suggestions for the remedy. the chief reasons for the backwardness of the united states as compared with europe with regard to agricultural credit may be briefly summarized as follows: ( ) our wonderful agricultural domain where good land could be had almost for the asking, and where for generations land was so cheap and labor and capital so dear that intensive cultivation was generally unprofitable. ( ) the prosperity of our farmers who have not been forced by dire necessity to resort to credit as were the farmers of germany at the middle of the last century when the raiffeisen co-operative banks were first organized. ( ) the nomadic character of a considerable part of our agricultural population as it has moved continually westward in taking up of new lands, and more recently as it has been retracing its steps or moving northward. ( ) the isolation of our farmers in this country of large farms and "magnificent distances." ( ) the rapid growth of the manufacturing and commercial business of the country--and that largely in the hands of the same class of people who control the bulk of the banking business.[ ] add to these circumstances the obstacles which farmers always encounter in the matter of credit, as compared with manufacturers and merchants, obstacles such as the uncertainty of crops and the strongly seasonal character of the farmer's credit demands, and we have a sufficient explanation for the backwardness of agricultural credit in this country. to emphasize most of these causes, however, is to brand oneself as belonging to a past generation. our domain of free arable land is practically gone; good farms must be bought, and for them ever increasing prices must be paid.[ ] the era of hand cultivation is giving way to that of farm machinery propelled by horse-power and even by steam, gasoline, or electricity, with its resulting great increase in the efficiency of labor. eleven years ago the editor of _the dakota farmer_, in his testimony before the united states industrial commission, put the matter tersely, and with little exaggeration, as affecting his own section of the country, at least, when he said: "when i first worked out it took five binders to follow a machine, one man to rake off, and one to carry the bundles together. now the hired girl frequently drives a machine that does the whole business."[ ] some idea of the extent of this increase may be obtained by reference to the following figures compiled from census reports: value of farm implements and machinery in the u. s.[ ] _year_ _value_ _per cent. , increase_ $ , [ ] the increase in the value of farm implements and machinery per acre of land in farms from to was from $ . to $ . , or . per cent. an analysis of the figures for farm machinery by geographic divisions shows a marked difference in the rates of increase, but the tendency in all sections during the last forty years has been decidedly upwards, the greatest growth having been witnessed in the decade ending . during that decade the lowest rate of increase in any section was that of new england, per cent., and the highest that of the mountain states, per cent.[ ] another development which is making larger demands upon the farmer for working capital is the increasing use of artificial fertilizers, the expenditure for which in the united states approximately doubled from to . as the result of such tendencies and of the rapid depletion of our free domain, farming in the united states is losing its old-time kinship to mining and becoming more like manufacturing. more and better machinery and more power are needed on most farms in the interest of efficiency. this calls for short-time credit. but a supply of good machinery requires a fair sized farm for its efficient utilization--hence the need for larger farms and for mortgage credit to make their purchase possible. upon this subject there are some very illuminating data in warren and livermore's _agricultural survey_ of four townships in tompkins county, n. y., from which the following is quoted: the value of farm machinery increases rapidly with the size of the farm.... any one who has ever made a list of the necessary farm machinery will see at once how inadequately these small farms are equipped. yet their machinery costs nearly twice as much per acre as that on the larger farms that have nearly three times as much machinery. machinery can be used more effectively on large farms. one mower, one hay rake, one tedder, one hay loader, one corn harvester, one grain harvester, one grain drill, one manure spreader, one potato digger, one potato planter, can do their work on a acre farm as readily as on a small farm. few of the small farms have half of these tools. if a small farm does have nearly all the list, it cannot use them enough to pay for the investment. the more efficient and numerous machines become, the larger our farms should be. it is interesting to notice how many of the tools are of very recent development. almost half of the value of farm machinery on a well-equipped farm is invested in machinery that has been perfected in the last few years. much the same situation exists in regard to an adequate equipment of horses. three or four horses are the smallest number that can be used efficiently with modern machinery.... the small farms have not enough horses to make efficient teams and yet they are over-supplied with horses compared with their area. on these farms there are only acres per horse. on the largest farms, one horse farms three times this area, with no resulting decrease in crop yields.... when we consider the cost of keeping a horse we see what a great advantage the larger farms have. forces like these are counteracting what is commonly thought of as the normal tendency of agriculture to move toward more intensive cultivation _on small farms_, with the result that the average amount of improved farm land per farm actually increased instead of diminishing in the united states during the last decade. this does not mean less intensive cultivation, in fact quite the contrary; it means more intensive cultivation, but by the efficient utilization of good machinery and of power. it means further, as said above, a demand for mortgage credit for the purpose of enlarging farms--and that, at rapidly increasing farm prices. the farming population is becoming more settled now that the free lands are practically gone and the frontier has disappeared.[ ] the isolation of the farmer is rapidly becoming a thing of the past, with the advent of rural free delivery, rural telephone, the automobile, and the parcels post. the farmer no longer buys gold-bricks nor is duped by fraudulent lightning-rod schemes except in the pages of the comic supplements. when seeking credit the farmer can offer better security than ever before. his markets are larger, better organized, more certain, and more accessible. the risk of crop failure is less, thanks to the wonderful progress of scientific agriculture. there are few pests which cannot now be readily controlled by the intelligent farmer, who takes time by the forelock. the problem of moisture is growing less serious every year with the improvements in irrigation, dry farming, and the more scientific diversification of crops. conditions then point to an increasing need for agricultural credit, and to improving circumstances for its safe development. if the time is ripe for a greater use of bank credit in agriculture, how is that credit to be obtained? broadly speaking, four methods may be mentioned, only the last two of which are deserving of much attention at the present time. they are: ( ) establish government agricultural banks; ( ) adopt the egyptian plan of a government guaranty to an agricultural bank established with private capital; ( ) encourage the farmers to organize co-operative credit societies on some such plan as the raiffeisen or schulze-delitzsch banks of germany; ( ) utilize more effectively in the interest of the farmer our present banking machinery, and improve it where it is defective. the suggestion of an agricultural bank owned and operated by government, either state or federal, is not worthy of serious consideration in this country at the present time. the history of such banks both in europe and america has generally been a disastrous one, although a few have succeeded. some exist to-day which are performing useful services to farmers, notably in the line of mortgage credit, among which may be mentioned those of the australian states and new zealand,[ ] and the recently established one in the philippine islands. the success of such institutions is not such as to justify any attempt to establish them in the united states, at least until every reasonable effort has been made to solve the problem by means of private and co-operative effort. the other plan, commonly known as the egyptian plan[ ] from its most important example, seeks to eliminate the evils of a purely government bank and to take advantage of its meritorious features. in egypt the agricultural bank is owned and financed by private capital; it enjoys, however a government guaranty of principal and of per cent. interest. its administrative expenses are kept low by an arrangement with the egyptian government by which the government tax collectors make collection of instalments on the bank's loans at the time of the collection of the regular land tax, for which the bank pays a small commission. the agricultural bank of egypt has had a phenomenal success, rendering an invaluable service to the egyptian fellaheen, and at the same time yielding good profits to its owners. it was this type of bank that the united states government authorized established in the philippines by the act of march , , but the interest guaranty of per cent. has so far proved too low to attract capital into the enterprise.[ ] a bank organized on the egyptian plan is well adapted to do pioneer work among ignorant farmers, where the apparent risks and heavy administrative expenses prevent private capital from entering the field. a government guaranty, however, hardly seems necessary in the united states, and our people would probably look askance at any proposal for a great agricultural bank or banks of this type with branches scattered throughout the country. it is contrary to our banking traditions, and, like the plan for a strictly government bank, should not be thought of until plans for meeting the need by private initiative have been fairly tried and found wanting. when one considers the question of the improvement of agricultural credit in the united states one instinctively thinks of the co-operative credit banks of the old world, because of their phenomenal success for a half century and more, the simplicity of their structures, the ease with which they may be established, and their ready adaptability to the widely varying conditions found in a great country like the united states. the description of the wonderful success of these institutions as told by henry w. wolff in his _people's banks_ reads like a fairy story. although the success of co-operative banks has been great in nearly every country of continental europe, nowhere else has it been so great as in germany, the country of their origin, and it is to germany one naturally turns first for suggestions. there we find four types of co-operative credit banks, landschaften, ritterschaften, schulze-delitzsch banks and raiffeisen banks. the first two are co-operative associations loaning money on land mortgages, and securing funds largely through the issue of bonds against the collective mortgages. being concerned with long-time mortgage credit they do not fall within the province of this paper. the other two types of banks deal especially with short-time credit, the one chiefly in the towns and cities, and the other with farmers in the rural communities. it is with the latter that we are most concerned. let us therefore consider briefly the essential features of the raiffeisen system. these features are: ( ) organization on the strictly co-operative principle, none but members having the right to borrow, although non-members may make deposits. ( ) limitation of loan operations to a very small area in which all farmers are acquainted with each other. a bank's field of business, the founder believed, should not cover a parish of less than people nor of more than , . the banks were to be, therefore, purely neighborhood affairs. there is a sympathetic but well-informed neighborhood opinion which prevents the squandering of loans. ( ) unlimited liability of all members for the debts of the bank, a necessary corollary of which is the provision that membership is obtained only by election by those already members. ( ) the working capital of the bank is obtained chiefly from the following sources: (a) small savings "drawn, either from within the area covered by the bank, in which case it comes both from members and non-members, the former being rewarded where possible at slightly higher rates in order to encourage membership; or from without the area, in which case it of necessity comes from non-members."[ ] (b) loans from the provincial bank of the district, or more importantly from the central bank of the empire at which the local bank keeps a current account and with which it may rediscount its paper. funds are also sometimes obtained from other banks or from private individuals. (c) a purely nominal share capital which the banks did not originally have, and which they have been forced against their will to issue. the requirement is now usually met by the issue of a few low-priced shares of which no member can hold more than one and upon which no dividend is paid. (d) two surplus funds called reserve funds; one used exclusively to cover losses, and the other being the principal reserve fund (_stiftungsfund_), commonly used for "positive improvements, such as the extension of the premises or the establishment of a burial fund."[ ] in this fund must be placed two-thirds of the annual profits. the fund cannot be distributed among the members, even though the bank be dissolved. in such a case it is held in trust for a time for a new bank, should one be established, and if no such bank is established it must be used for some work of public utility. a recent publication of the international institute of agriculture[ ] analyses the total working capital of the rural banks of germany for the year as follows: _amount percentage in marks , _ share capital . . reserves . . deposits on current account . . savings deposits , . . other liabilities[ ] . . total working capital , . . the striking fact brought out by these figures is that out of nearly two billion marks placed at the disposal of farmers, less than[ ] . per cent. was furnished by outsiders, while more than . per cent., was provided by the savings and other deposits of the farmers themselves and of the local public. ( ) a fifth feature of the raiffeisen system is that the bank's administrative organization is simple and democratic. final authority on local questions resides in the general meeting in which every member has one vote. there is elected annually a committee of management consisting usually of five or six directors who meet weekly. as a check upon this executive committee there is also elected annually a council of supervision consisting of from six to nine members. a biennial audit is made of the accounts of each bank by an accountant employed by the district or central union. the books of the bank, except the individual deposit ledger, are open to the inspection of all members. officers of the local banks serve without compensation, except the treasurer who has no vote in the making of loans.... ( ) advances take two forms: the ordinary loan (of which the name is sufficiently descriptive), and the current account which is similar to the scotch cash credit. the latter constitute about a third[ ] of the total and show a tendency to increase in proportion to the ordinary loans. the period of the ordinary loan varies from six months to three years; and in exceptional cases it may be even longer.[ ] loans are repayable in instalments covering interest and part of the principal, or in lump sums. banks reserve the right to call a loan on four weeks' notice. the average credit advanced per member is marks, and the average interest rate probably somewhere between and per cent. although mortgage and other collateral security is sometimes accepted, the banks' chief reliance is personal security, and the great bulk of the loans are made on two-name paper. the raiffeisen banks are organized into provincial federations with provincial banks at their head, and these in turn into a national federation with a central bank at its head. these provincial banks and the central bank "equalize the need of credit of the individual banks, supplying them with money when required and employing their surplus funds."[ ] a large proportion of the german co-operative banks and other co-operative agricultural societies are federated in a single national organization, the national federation of darmstadt.[ ] such are the leading features of the greatest agricultural credit system of the world. to the american the surprising thing about it all is that such co-operative credit banks are practically unknown in the united states, although there has been a remarkable development here in recent years of other forms of co-operation among farmers.[ ] this surprise is the greater when one bears in mind that "whole counties have been populated in the northwest by european agriculturists who came from neighborhoods where they were familiar with agricultural co-operative credit, and yet not a society of co-operative credit for these immigrants has been established from the beginning to the present time."...[ ] what is needed now--and possibly about all that will be needed in the future--is a campaign of education among the farmers themselves rather than one of legislation; although the development of such societies will doubtless be furthered in many states by legislation, such as was recently enacted in massachusetts (ch. , acts of ), freeing them from some of the hampering provisions of the general banking act of the state. conditions are so widely different in different sections of the country, and among different classes in the same section, that co-operative agricultural credit societies will need to be given a fairly free hand in such matters as limited or unlimited liability, the amount of share capital, receipt of deposits, etc., so that they may adapt themselves to local needs. a reasonable amount of government supervision on the part of the banking departments of the states seems desirable. passing now to the question of the better utilization of our existing banking machinery, we may consider it first from the standpoint of the government, then from that of the banks, and finally from that of the farmers themselves. the provisions of the national banking act _(revised statutes_, sec. ) are too rigid in the matter of loans on real estate security.[ ] national banks are, of course, intended to be banks for business men, and their assets should be quick assets in so far as their liabilities are quick liabilities. but it should not be overlooked that the modern farmer is a business man, that he needs active credit for the efficient conduct of his current business, and that land is the only kind of collateral many farmers can give that is acceptable to bankers. many worthy farmers are not willing and some are not able to secure satisfactory endorsers to their paper. crop liens, except in the south, are not usually very acceptable to banks. the ability of the farmer to give mortgage security to national banks in case of need would often prove a great help. furthermore, now that a majority of our national banks have savings departments, and that savings deposits might wisely be made withdrawable subject to advance notice, it is not unreasonable that these banks should be permitted to invest at least a substantial part of their savings funds in the same kinds of mortgage securities that are open to the investment of funds of savings banks; provided, of course, that due care be taken to prevent the juggling of accounts between the commercial department and the savings department of the bank. another form of desirable legislation in the interest of the farmer consists in the abandonment of our unscientific bond secured bank-note circulation for a scientific system, and in the rendering of our deposit currency more elastic. the more the farmer resorts to bank credit as a means of financing his current business the more will he suffer from the seasonal inelasticity of our bank-note and deposit currency. farming business is pre-eminently seasonal in character; the farmers over the greater part of the country need funds most at about the same times of the year, _i.e._, the fall and spring. a great increase in the demand for currency and capital, say in the fall, under an inelastic currency and credit system like our own, means to the farmer, highest interest rates at just the time when he needs most to borrow, greatest scarcity of cash at just the time when his need for cash is the most urgent, and prices depressed by a tight money market at the time of the year when he has most to sell. it is doubtful if any class of people in the country would benefit more from a thoroughgoing reform of our banking system than would the farmers. the apportionment of responsibility between farmer and banker for their not having gotten together better is an impossible task. although some exceptions must be made, particularly in the middle west, as a general proposition neither has appreciated the opportunity which the other offered. the banker must be brought to realize that one of the best kinds of paper in the world is short-time business paper bearing the names of two responsible farmers. he should be an adviser and friend to the farmer as much as to the city customer. he should make the farmer feel that a productive loan to him is not of the nature of a favor reluctantly granted--as so many farmers complain--but rather a business proposition profitable to both, as gladly given as it is received. he should further co-operate with the local business men in preparing financial ratings of farmers, to fill the gap left by the inability, to be hoped temporary, of mercantile credit agencies to rate farmers as extensively as they do other business men of like capital. the farmer, on the other hand, must be educated by the banker, the press, and the agricultural school and college, to the advantages of credit as a mean to the more efficient working of his farm. this should be done with caution, for credit is a two-edged sword. the farmer should be encouraged to borrow only when it is very clear that he can use additional capital so productively that it will pay. but what industrious farmer could not use profitably some additional capital every year, could he obtain it at as reasonable rates as does the merchant? the farmer must learn to keep careful accounts. he must be made to realize that the banks are open to him as to other business men, and that the bulk of the country's short-time commercial loans, as likewise of the agricultural loans of europe, are made on the very same security he is capable of giving, _i.e._, two-name paper of honest, industrious business men. farm credit in a northwestern state[ ] long-time loans in north dakota the average farm mortgage runs for . years; and the average interest rate is approximately per cent. (accurately . per cent.). this per cent. does not include the expense of abstracting titles, examining the property, and the recording of the mortgage. these fees are invariably paid by the borrower. nor does this interest rate of per cent. take account of the bonus that is frequently exacted, in the newer regions, from the borrower for the privilege of securing a loan; nor does it allow for the sum the borrower loses in paying his yearly interest in advance, which is deducted from the principal. while the practice of exacting a bonus is not common, it is generally the custom to deduct the entire year's interest in advance; assuming an per cent. rate, the farmer therefore pays $ interest not on $ , but on $ , which brings the rate up to . per cent. while the average prevailing rate, according to our returns, is approximately per cent., the rate varies in different parts of the state, depending upon the local conditions. the rates are lowest in the eastern tier of counties, and rise gradually towards the western part of the state, where the rate runs up to and per cent., which is also the rate in the eastern part of montana. that the per cent. rate is quite general for a large part of the state is evidenced from the fact that of the counties report an average rate of per cent. or more. in only counties is the rate less than per cent., and in no county does the average fall below per cent. the above figures are conservative. they are based on returns submitted by bankers who would naturally understate rather than overstate the rate of interest charged in their respective localities. furthermore, we have a check on these bank returns in the replies received from farmers. as a rule the rates reported by bankers and farmers are nearly identical in their respective counties. it is safe to conclude, therefore, that the average rate on farm mortgages for the entire state is about per cent. short-time loans short-time loans are of two kinds, bank loans and book credit advanced by retail stores. the bank loan is made on the farmer's note, generally unsecured, though often secured by a chattel mortgage. according to the reports received from banks, the average length of time for these short-time loans is - / months; and the average rate of interest is . per cent. the average rate reported by farmers residing in different counties was . per cent. an effort was made to compare rates paid by farmers with those paid by business men on short-time loans in the same locality. the same banks that reported an average of . per cent. to farmers averaged only . per cent. on loans made to merchants and manufacturers. fully out of the reporting banks stated that the rate was higher for agricultural short-time loans than for commercial loans; reported the rate to be the same for both classes; and only reported a lower rate for the farmer. as north dakota, however, is not a manufacturing nor a jobbing state, commercial paper is scarce, and consequently comparisons of the above nature are apt to be misleading. the significant fact remains that the farmer pays from to per cent. on small loans, for short periods of time. store or book credit is a form of short-time loan which is perhaps more important than bank credit. in a state where the bank charges a high rate of interest, the farmer is more likely to buy merchandise on credit than to borrow from the bank and pay cash. the north dakota farmer is rarely denied credit at a country store. to secure information on this form of credit, questionnaires were mailed to implement and hardware dealers, as well as to farmers. one question asked of implement dealers was: "what percentage of farmers pay cash in buying farm machinery?" the answer from firms, located in counties, was that only per cent. of the farmers pay cash, per cent. buying on time. out of farmers reporting only pay cash in buying machinery and supplies. these book accounts run anywhere from three months to two years; the average account is carried about one year ( . months). the farmer contemplates making payment immediately after his prospective crop is marketed. in case of crop failure the retailer will carry the account over until the next harvest season. it is quite common for the dealer to obtain a note from the farmer--the note generally bearing a per cent. interest rate from the date of issue. often, however, the note does not begin to bear interest until the farmer has failed to make payment at the expected time, that is, immediately following the harvesting season. the implement and hardware dealers reported an average of . per cent. interest per year on these notes. it is more difficult to secure uniform information from dealers on the subject of book credits, especially with reference to the interest rates charged on such accounts. the practice varies. usually an interest rate is added to the credit price depending on the duration of the account. there is no common discount rate for cash purchases, though per cent. is most common, that is, per cent. of the credit price. this brings the credit price of a $ binder down to $ for cash. as a matter of fact all dealers quote two prices, the cash and the credit price, the difference between the two depending upon the reputation of the buyer, the shrewdness of the seller, and the degree of competition in the particular locality. on this point, replies from farmers do not differ materially from the replies of the implement dealers. the difference between the cash price and the credit price of a binder is usually given as $ to $ , and a wagon or plough, as $ to $ . the general discount rate is per cent. off the credit price. the implement dealers and the farmers are all agreed that cash payments would be preferable if rates on bank loans were reduced. the farmer, however, is often afraid to approach the banker for a loan. on the other hand, the farmer does not always see that the book credit is quite as expensive as bank credit, if not more so. the prevailing high bank rate, however, from per cent. to per cent. on short-time loans, does not encourage cash payments. are the foregoing rates too high as compared with rates in other communities? the _crop reporter_ for april, , shows interest rates on short-time loans in every state in the union. in , the north dakota rate exceeded that of all other states; in , it exceeded all but oklahoma. farmers as a rule think that rates are fixed arbitrarily by the bankers and other money lenders in the community. that fundamental laws of supply and demand have any controlling influence is apt to be overlooked. without attempting to justify the high rates let us state some of the conditions which help to explain them. the demand for capital in a growing state is always greater than can be met by the local supply. in , north dakota farms were mortgaged for $ , , ; in , for $ , , ; in it will doubtless reach $ , , . outside capital is attracted into the state by high rates of interest. two life insurance companies, the union central of cincinnati and the northwestern mutual of milwaukee, loan heavily in the state. in the union central life insurance company reported a total investment of $ , , . in north dakota real estate. local banks use farm mortgages in borrowing money from banks in large cities outside of the state. every town and village has its money-lender who acts as agent for foreign investors in farm mortgages. banks within the state compete for capital by offering high rates of interest on time deposits, and pay all the way from - / to per cent. interest on deposits. the rate on loans must necessarily be higher under these circumstances than where banks are paying - / and per cent. interest. the high interest rate paid on bank deposits is evidence of the lack of local capital to satisfy the local demand. the inability to attract foreign capital on lower terms is due primarily to the character of the investment. the newness of the state, the instability of its population, the character of its agriculture, all make for uncertainty. hence the speculative character of the farm mortgage as security for a loan. in the eastern counties where the land has long been under cultivation, where the population is more stable, and where mixed farming has in a large measure supplanted the bonanza wheat farm, rates are correspondingly lower than in the newer portions of the state. as the element of risk is eliminated from investments, interest rates will come down. at least this seems to be the consensus of opinion among bankers. the character of the farming is frequently mentioned as a prominent factor in the credit situation. a crop failure under a single crop system, such as is practised in north dakota, is likely to find the farmer in bad straits. the payment of interest on the mortgage is delayed or deferred. the local bank or loan company is obliged either to carry the farmer along for a year or to foreclose. since many farm mortgages are held by outside investors, the annoyance is sufficient to reflect itself in an increased rate of interest. because of this fact many bankers are urging mixed farming as a means of reducing rates. this aspect of the question is well expressed in a communication from a banker in stark county who says: it is our belief that the scarcity of money and the high interest rates are largely due to poor farming. the people having money to loan know well that our farmers here have a very uncertain income according to their present methods of farming, and would expect a much higher rate commensurate with the risk taken when they can find people where money can be placed more safely. as conditions are here now, some people have not paid all their interest, for at least three or sometimes four years. in the older slates, like iowa for example, where people farm well, interest rates are much lower. as soon as our farmers can show that they are safe and will take care of their obligations promptly, they can command the lowest interest rates that may exist. we believe it more necessary to work on better farming methods, encouraging them, than on better interest rates, for the lower interest rates are a natural consequence of better farming. another factor is the character of the population. one prominent banker says of north dakota farmers: "they lack a sense of responsibility. farm loans require constant care, hence high rates." another complaint is: "farmers are careless in not making prompt payment or renewals of obligations." some bankers think the high rates due to too much borrowing; that is, too much liberality in the loaning of money. injudicious loaning leads to extravagance, and naturally calls for high rates to offset the risks involved. one banker in analyzing the situation claims that the legal restrictions placed on the loaning power of banks is responsible for unduly high rates. in support of this view it might be stated that while the total farm mortgages in the state in reached the $ , , mark, the power to loan on real estate by all banks, state and national, was less than $ , , . banks are forced to loan on the personal note of the farmer, secured by a mortgage, instead of taking a direct mortgage on the property. other banks turn these mortgage loans over to trust companies, and collect a commission from the farmer for placing the mortgage. commissions are responsible for at least from one to two per cent. of the rate when loans are handled by real estate agents and loan companies. in the case of loans by life insurance companies, the state agent generally receives one per cent. and the local agent, at interior points, receives one per cent. two per cent. could be saved by the farmer if the money could be borrowed directly from the investor, without the aid of an agent. allowing, however, for all these local conditions--the great demand for capital in a new and developing country, the inability to attract sufficient outside capital because of the risky character of investments, the irresponsible character of some elements in the population, the character of farming methods, the commission agent, and the legal restrictions handicapping banks--allowing for all these conditions, and because of some of them, it is believed that the farmers by organizing co-operative credit associations could reduce the rate of interest on both long- and short-time loans; and, furthermore, that such co-operative credit facilities would be a means of improving the methods of farming, would encourage stability in population, and would make the farmer feel that he is not being discriminated against in the borrowing and employment of capital. cattle loan banks[ ] consumers desiring a reduction in the cost of food supplies will be interested in a study of the operations of cattle loan companies and in the development which these may reasonably attain as a result of the provision in the federal reserve act for the rediscounting of agricultural paper. the cattle loan company, commonly referred to as "cattle bank," is a middleman between borrowing cattle-owners and lending bank-managers. its business methods and forms closely parallel those of real estate mortgage loan companies except for the fact that cattle loans are of shorter duration and secured by mortgages of the chattel variety. cattle loan companies, incorporated under state charters, have been operating in such cities as fort worth, denver, east st. louis, st. joseph, portland, south st. paul, omaha ( ), and kansas city ( ), some of them for over twelve years; and one is now being organized in chicago. these companies have a paid-in capital stock ranging from $ , to $ , , and are usually closely affiliated with a national or state bank, as are trust companies in the larger cities. these companies are informed of desired loans through country bankers, or by receipt of direct applications, the latter usually from the larger "cattle-growers." in some cases the company on its own initiative urges cattlemen in whom it has particular confidence to undertake feeding operations at a time when the beef market offers a favorable opportunity for such production. in every case a salaried examiner of the company inspects the plant and herd of the cattle-grower and his personal capacity and integrity before the granting of a loan. and thereafter the examiner, on his regular circuit, maintains a continuous inspection and volunteers advice designed to protect the value of the security given for the loan. when a loan application has been acted upon favorably, a promissory note and chattel mortgage are taken. the funds of the company then advanced to the borrowers may be utilized to buy more cattle, to pay outstanding debts such as those for feeding expense, or, as is often the case, to buy the very cattle which are pledged as security for the loan. in a few cases where the cattle-grower enjoys an exceptional credit, funds will be advanced for the full purchase price of a herd for seasonal feeding purposes, or to develop two-year-olds into finished four-year-old beef cattle. the loans granted are seldom less than per cent. of the known value of the cattle. to secure a buyer for the note and mortgage is the second primary function of the cattle loan company. if the loan is a small one, usually $ , , it may be sold entire, the chattel mortgage assigned and the note indorsed to the buyer. if the loan is a larger one, of $ , to $ , , it is necessary to subdivide it in order to provide a ready sale. the mortgage and note are assigned in parts of $ , , $ , , or other denominations, to suit the convenience of the buyers of the paper. in this case the assigned parts, since they are indorsed by the loan company, are equivalent to a "debenture" issue secured by a pledge of specified assets held by the company for the protection of the note-holders. the size of mortgage loan most frequently made is $ , , while loans of $ , are exceptional. the business of cattle loan companies approaches closely to the functions of the commercial paper broker. the cattle loan company has an advantage over the commercial paper broker in that the favorable location of the company--always at the receiving cattle-market of the district in which its loans are exclusively placed--enables it fully to protect its interest by claiming the proceeds of sales of mortgaged cattle. this is particularly true in the case of range cattle, which can be readily identified by the mortgaged brands. to cover expenses of administration the cattle loan company secures for itself a part of the interest paid on the loan. the rate charged the borrower is usually determined by conditions in the locality where it is made, sometimes running as high as per cent., and again, influenced by general rates for capital, falling as low as per cent. from this gross interest charge a commission has to be given to the local banker who makes the loan, expenses of examination and management must be met, and an appropriation made to a contingency reserve fund to cover occasional losses incurred from the circumstance that the companies usually become surety, by indorsement, for the final payment of all the loans which they have placed with lenders. these deductions determine what may be safely paid to eastern purchasers of the paper, usually or per cent. holders of cattle paper have never suffered in times of financial panic from failure to pay at maturity. cattle, like grain, are a cash commodity purchased by retailers and sold by them, largely for cash, to satisfy a relatively constant consuming demand. this characteristic is retained even in time of panic. maturities are usually six months for feeding purposes; and less often of two and one-half years for developing two-year-olds for market. this two and one-half year paper is occasionally converted into the six-month variety by the sale of notes running for six months, based upon the two-and-one-half year mortgage. these notes are taken up at maturity by the loan company and reissued or renewed for like succeeding periods until the original loan is repaid. in the past this form of loan has not been so desirable as it will be in the near future. it has been a relatively long-term investment; and while perfectly liquid at maturity and enjoying a good rate of return, it has not possessed a sufficiently wide market to insure salability at those times when the demands of depositors and local customers for accommodation press in upon the investing bank. this difficulty will be fully corrected by the expected operations of the federal reserve act. eastern bankers possessing these six-month notes will probably find them readily rediscountable with the local federal reserve bank at any time up to maturity. and a considerable amount of two-and-one-half year notes may be held to advantage, since, if properly selected with successive maturities, one-fifth of their total amount will be immediately rediscountable when necessary. by rendering this form of agricultural paper liquid before maturity the federal reserve act will have become a most important influence for enlarging the amount of capital devoted to this branch of industry. already eastern bankers have scouts touring the western states to study this form of banking with a view to investing several millions of dollars each. interest rates upon these loans will unquestionably be reduced in time through such increased competition of lenders. the loan companies will hardly suffer, however. while charging the cattle-grower less, they will be enjoying a larger turnover and should welcome this new development. the four or five million dollars placed in such loans yearly by the average loan company, as at present constituted, is but a fraction of the loans that may be placed by them within a few years. by reducing the interest cost charged to cattle-growers an important service will have been performed for the consumer. such a reduction will increase, in the first instance, the cattle-man's profit and induce him to increase his holdings. the benefit of increased production at lowered expense should, in time, be passed on to the final consumer of beef. this phase of the operations of the federal reserve act will be of distinct benefit, and possibly also the least dangerous of all forms of legislation designed to assist american agriculture. footnotes: [ ] adapted from r. b. van cortland. _what is agricultural credit? north american review_, vol. , april, , pp. - . [ ] e. w. kemmerer, _agricultural credit in the united states, the american economic review_, vol. , no. , december, , pp. - . [ ] new york, chicago, philadelphia, st. louis, boston, cleveland, baltimore, pittsburgh, detroit, san francisco, milwaukee, and cincinnati. for buffalo, the tenth city in population, cincinnati, the thirteenth city, was substituted, since for buffalo, which is not a reserve city, satisfactory banking figures are not available. [ ] [national banks are now permitted to lend on real estate security by the federal reserve act passed in .] [ ] cf. testimony before united states industrial commission (_report._ x, under subjects of "credit system" and "crop lien system," _passim_.) [ ] _report_. x, p. . [ ] in some states farmers themselves own considerable amounts of bank capital. this is said to be particularly true of iowa. [ ] the average value per acre of farm land in the united states rose from $ . in to $ . in , a rise of per cent. _thirteenth census, bulletin on farms and farm property_, p. . [ ] _report_, x, p. . [ ] exclusive of alaska and hawaii. [ ] values in gold. [ ] cf. _twelfth census_, v, pp. xxix and xxx. and _thirteenth census, bulletin on farm and farm property by states_, pp. and . [ ] every census since has shown a larger percentage of the native population living in state or territory of birth. [ ] on this subject see the writer's article on "agricultural credit" in l. h. bailey's _cyclopedia of american agriculture_, iv, p. ; and his _report to the treasurer of the philippine islands on the advisability of establishing a government agricultural bank in the philippine islands_, pp. - , - . [ ] cf. e. w. kemmerer, _report to the secretary of war and to the philippine commission, on the agricultural bank of egypt_. (manila, p. i.: . also published by bureau of insular affairs, washington, d. c.) [ ] cf. e. w. kemmerer, _an agricultural bank for the philippines, yale review_, november, , pp. - . [ ] c. r. fay, _co-operation at home and abroad_, p. . (new york; macmillan, .) [ ] fay, _co-operation_, etc., p. . [ ] _an outline of the european co-operative credit systems_, pp. and . [ ] under "other liabilities" are included in addition to other items the funds which the banks have borrowed from banks and individual capitalists. [ ] the capital of the district banks and of the central bank came largely from the local banks. [ ] in the figures for germany were: loans on current account, m , , and loans for fixed periods, m , , , . the international institute of agriculture, _an outline_, etc., p. . [ ] _idem_. [ ] _ibid._, p. . [ ] _idem_. [ ] "farmers' economic co-operation in the united states has developed enormously during the period under review [ - ], and it safe to say that at the present time more than half of the , , farms are represented in economic co-operation; the fraction is much larger if it is based on the total number of medium and better sorts of farmers to which the co-operators mostly belong." the most prominent objects are: insurance, creameries, cheese factories, co-operative selling organizations of numerous kinds, co-operative buying organizations, co-operative warehouses, co-operative telephones, co-operative irrigation, etc. _annual report of the secretary of agriculture _, pp. , . [ ] quoted from a letter from mr. george k. holmes, statistician of the department of agriculture, washington, d. c. [ ] for a statement of the more liberal privileges concerning the making continued: of loans on mortgage security conferred on national banks by the federal reserve act see p. .--editor. [ ] adapted from meyer jacobstein, _farm credit in a northwestern state, american economic review_, vol. , september, , pp. - . [ ] j. f. ebersole. _cattle loan banks, the journal of political economy_, vol. . no. , june, , pp. - . chapter xxviii the concentration of control of money and credit have we a money trust? [ ]if by a "money trust" is meant-- an established and well-defined identity and community of interest between a few leaders of finance which has been created and is held together through stock holdings, interlocking directorates, and other forms of domination over banks, trust companies, railroads, public-service and industrial corporations, and which has resulted in a vast and growing concentration of control of money and credit in the hands of a comparatively few men-- your committee has no hesitation in asserting as the result of its investigation that this condition, largely developed within the past five years, exists in this country to-day. the parties to this combination or understanding or community of interest, by whatever name it may be called, may be conveniently classified, for the purpose of differentiation, into four separate groups. first. the first, which for convenience of statement we will call the inner group, consists of j. p. morgan & co., the recognised leaders, and george f. baker and james stillman in their individual capacities and in their joint administration and control of the first national bank, the national city bank, the national bank of commerce, the chase national bank, the guaranty trust co., and the bankers trust co., with total known resources, in these corporations alone, in excess of $ , , , , and of a number of smaller but important financial institutions. this takes no account of the personal fortunes of these gentlemen. second. closely allied with this inner or primary group, and indeed related to them practically as partners in many of their larger financial enterprises, are the powerful international banking houses of lee, higginson & co. and kidder, peabody & co., with three affiliated banks in boston--the national shawmut bank, the first national bank, and the old colony trust co.--having at least more than half of the total resources of all the boston banks; also with interests and representation in other important new england financial institutions. third. in new york city the international banking house of messrs. kuhn, loeb & co., with its large foreign clientele and connections, whilst only qualifiedly allied with the inner group, and only in isolated transactions, yet through its close relations with the national city bank and the national bank of commerce and other financial institutions with which it has recently allied itself has many interests in common, conducting large joint-account transactions with them, especially in recent years, and having what virtually amounts to an understanding not to compete, which is defended as a principle of "banking ethics." together they have with a few exceptions pre-empted the banking business of the important railways of the country. fourth. in chicago this inner group associates with and makes issues of securities in joint account or through underwriting participations primarily with the first national bank and the illinois trust & savings bank, and has more or less friendly business relations with the continental & commercial national bank, which participates at times in the underwriting of security issues by the inner group. these are the three largest financial institutions in chicago, with combined resources (including the two affiliated and controlled state institutions of the two national banks) of $ , , . radiating from these principal groups and closely affiliated with them are smaller but important banking houses, such as kissel kinnicut & co., white. weld & co., and harvey fisk & sons, who receive large and lucrative patronage from the dominating groups and are used by the latter as jobbers or distributors of securities the issuing of which they control, but which for reasons of their own they prefer not to have issued or distributed under their own names. messrs. lee, higginson & co., besides being partners with the inner group, are also frequently utilised in this service because of their facilities as distributors of securities. beyond these inner groups and subgroups are banks and bankers throughout the country who co-operate with them in underwriting or guaranteeing the sale of securities offered to the public and who also act as distributors of such securities. it was impossible to learn the identity of these corporations, owing to the unwillingness of the members of the inner group to disclose the names of their underwriters, but sufficient appears to justify the statement that there are at least hundreds of them and that they extend into many of the cities throughout this and foreign countries. the patronage thus proceeding from the inner group and its subgroups is of great value to these banks and bankers, who are thus tied by self-interest to the great issuing houses and may be regarded as a part of this vast financial organisation. such patronage yields no inconsiderable part of the income of these banks and bankers and without much risk on account of the facilities of the principal groups for placing issues of securities through their domination of great banks and trust companies and their other domestic affiliations and their foreign connections. the underwriting commissions on issues made by this inner group are usually easily earned and do not ordinarily involve the underwriters in the purchase of the underwritten securities. their interest in the transaction is generally adjusted, unless they choose to purchase part of the securities, by the payment to them of a commission. there are, however, occasions on which this is not the case. the underwriters are then required to take the securities. bankers and brokers are so anxious to be permitted to participate in these transactions under the lead of the inner group that as a rule they join when invited to do so, regardless of their approval of the particular business, lest by refusing they should thereafter cease to be invited. it can hardly be expected that the banks, trust companies, and other institutions that are thus seeking participations from this inner group would be likely to engage in business of a character that would be displeasing to the latter or that would interfere with their plans or prestige. and so the protection that can be offered by the members of this inner group constitutes the safest refuge of our great industrial combinations and railroad systems against future competition. the powerful grip of these gentlemen is upon the throttle that controls the wheels of credit and upon their signal those wheels will turn or stop. in the case of the pending new york subway financing of $ , , of bonds by messrs. morgan & co. and their associates, mr. davison estimated that there were from to such underwriters who were apparently glad to agree that messrs. morgan & co., the first national bank, and the national city bank should receive per cent.--equal to $ , , --for forming this syndicate, thus relieving themselves from all liability, whilst the underwriters assumed the risk of what the bonds would realise and of being required to take their share of the unsold portion. this transaction furnishes a fair illustration of the basis on which this inner group is able to capitalise its financial power. it may be that this recently concentrated money power so far has not been abused otherwise than in the possible exaction of excessive profits through absence of competition. whilst no evidence of abuse has come to the attention of the committee from impartial sources, neither has there been adequate proof or opportunity for proof on the subject. here again the data have not been available. sufficient has, however, been developed to demonstrate that neither potentially competing banking institutions nor competing railroad or industrial corporations should be subject to a common source of private control. your committee is convinced that however well founded may be the assurances of good intentions by those now holding the places of power which have been thus created, the situation is fraught with too great peril to our institutions to be tolerated. the borrower and the money trust [ ]some trusts are denounced because of their attitude toward their employés. many trusts are efficient or inefficient because of the way their millions of labourers work. but let us be fair to big business. why not examine its one branch where labour is almost absent, where there is no brawn and all brain? banking the most logical of trusts a bank in new york city gave its employés a christmas present equal to half their annual salary. the bank had assets of $ , , . a fine example, you say, to other great business concerns! but the bank had only fifty employés. in the entire country there are probably not more than , persons engaged in banking, either directly or indirectly. the banker has, relatively speaking, no human factor to consider. and that factor with a concern like the united states steel corporation or the pennsylvania railroad is mammoth, almost baffling. the banker deals not in the production or distribution of wealth itself (in both of which much labor is needed), but solely in the paper representatives of wealth, money, and credit. thus he can apply far more directly than the manufacturer or railroad manager the economies and efficiencies of big business. banking--the business of dealing in money and credit--is the most logical of trusts. and in practice it has justified the theory. where banks have become larger they have become stronger, where co-operation and concentration have gone far, there safety and effectiveness have reached a high pitch.... banking is the one central business of all--it is the business of businesses. so if it has become more efficient as the trust idea, or at least the principle of concentration, has gained sway, how can we have too much concentration and who is there to complain?... if the bankers have, faithfully and well, handled the trust of extending credit to the limit of their ability, yet when the president of the second bank in size in the country acknowledges himself to be one of about a dozen men in whose hands the power of extending credit is, in the last analysis, concentrated--then it is high time, seriously and fearlessly, to consider the subject.... three main factors are in the main responsible for the concentration of the control of credit and they are the growth of big banks, the growth of big industries, and the financial laws of the country.... no lack of banking facilities however great the concentration of money power in this country, it cannot truthfully be said that banking facilities are not also increasing. figures taken from the reports of the national monetary commission and other official sources show that the number of banks is mounting up faster than either wealth or population.... where the money has gone when one first realises the extent of this country's banking resources he is properly astonished. but how evenly are these resources distributed? it is commonly known that banking facilities in the southern and western sections of the country are small indeed as compared with the new england, eastern, central, and pacific coast sections, where large cities abound. to illustrate, in , when the total banking power was close to twenty-one billions, more than half was represented by forty-seven cities, and close to one-quarter was held by the two hundred banks in new york and chicago. in other words about per cent. of the country's banks held close to one-quarter of the country's banking power. now it is a well-known fact that an individual or corporation with large resources and large business exerts an influence in his particular field far in excess of his actual mathematical percentage of the total resources or business. thus the dominating position of the big banks is even greater than mere figures indicate. but there is still another fact which centralises and cements their power. the only banks which are really large are in a few cities, and the larger they are, the more they tend to the very greatest centres of population. thus toward the end of , there were banking institutions with deposits of $ , , or more, of which sixty-two were in new york city. there were thirty-six institutions with deposits of $ , , or more. sixteen of these were in new york city and four in chicago. there were ten with deposits of $ , , or more, and of these, seven were in new york and two in chicago. of the ten largest trust companies six were in new york, three in chicago, and one in boston. these great banks and trust companies are of very recent growth. twenty years ago the deposits of our largest bank were one-twentieth of what they are to-day. at the first inauguration of president mckinley, which was really not so far back as the dark ages, there was no bank in new york with more than $ , , of deposits. now there are six banks each with more than $ , , of deposits. a trust company in new york city, which had deposits of $ , , five years ago, now has deposits of $ , , and its twenty-eight directors sit [ ] in boards of other banking institutions with resources of $ , , , . when it comes to actual cash we find the position of the new york and chicago banks even more dominant.... consolidation--a steady process despite the disproportionate size of new york and chicago banks their number is steadily decreasing. this is because the process of consolidation proceeds just as steadily. in there were fifty-three banks in the new york clearing house association, and in there were fifty, although in the meantime the amount of business had increased twenty times. there are now less than banks in new york, or ten less than ten years ago, although in that time cash holdings have doubled and deposits have increased a third. in ten years no less than banks have gone out of existence, generally through absorption into larger institutions.... in chicago the same process of consolidation has gone on. one chicago trust company has absorbed six others in eight years. new york and chicago are by no means the only cities in which the obvious tendency is to have fewer but larger banks. look about at random. akron, ohio, where the rubber industry has recently become of more than local importance, has felt the necessity of banks large enough to carry on its trade, and consolidation has resulted. in detroit, where the automobile trade has set in motion a great industrial development, the old detroit national has absorbed the american exchange national. in seattle, nashville, wilmington, portland, philadelphia, baltimore, san francisco, and louisville there have been many recent mergers and absorptions. in cincinnati one of the largest institutions in the ohio valley has been formed by the absorption of the merchants' national by the first national. as for boston the desire of her capitalists to make new england more powerful in the business life of the country has led to the recent absorption of the city trust company by the old colony and the steady growth of three financial institutions, the shawmut national bank, the first national bank, and the old colony trust company, these three far exceeding all others in size.... how the law has fostered affiliation ... one great cause of the concentration of banking and financial power into a few hands has been the consolidation of banking resources into a few great units and the friendly affiliations of these units. but these units have not grown big merely because their managers or owners willed it so. the banking and currency laws of the country have forced money into a few centres. the banks of new york city employ--mainly in financial or stock market loans--about $ , , which belongs to banks in other parts of the country. naturally this concentration of money in a few banks "places these banks in a position to control the issuing or granting of credit"--to use the exact words of the president of one of them--"thereby placing the money power in the hands of a comparatively small number of men." but this gravitation of money to new york is because the money is idle and is hunting a job, and not because of any process of usurpation, manipulation, or combination. it naturally arises under and by virtue of the reserve requirements of our national banking act.... the bulk of idle country bank cash which finds employment in new york comes here because of the existing reserve system, and there are several great banks in both new york and chicago which have few customers other than the thousands of country banks whose "correspondents" they are. the corporation and the bank thus banking and financial power is concentrated in a few hands not only by the growth of great banks and by the laws of the country, but also by the legitimate business practices which have grown up under these laws. but the massing of this power in a few vast, centralised units has been a development of the last ten or fifteen years only. that is, it has been coincident with the development of trusts and combinations. big business and big banking have gone hand in hand. each has made the other possible. by law a bank cannot loan more than one-tenth of its capital and surplus to any one customer. but the customers have grown into behemoths. how then could the banks fail to grow? before trusts existed and before small railroads were united into large systems the few banking houses of magnitude which existed in wall street had engaged in merchant banking, for the industries and railroads had not been large enough to attract their attention. these small industries and railroads were controlled by their owners, and their capital requirements were supplied largely in the localities in which they were situated. but as railroads and industries were consolidated it was found necessary to apply to the larger new york banking firms to supply the funds. these bankers had european connections as well as close affiliations with the big national banks and life insurance companies, and were able not only to furnish the needed capital but also undertook to market the securities of the newly formed combinations. thus a few banking houses, of which j. p. morgan & co. is the chief example, became in a way responsible for these new creations and naturally assumed charge not only of their finances, but to some extent of their other affairs. thus the headquarters of the trusts and railroads gradually moved to new york. in the treasuries of these companies were vast sums of money to be banked, and it was inevitable that most of it should be placed in new york banks. the average daily balance of the united states steel corporation is about $ , , and the american tobacco company has perhaps $ , , . there is also the standard oil company, whose balance is perhaps as large. these few financial groups, j. p. morgan & co., kuhn, loeb & co., and the capitalists identified with the national city bank and the first national bank, along with a few others, are primarily in the business of selling securities and loaning money upon them. in fact they may be described as the great security issuing houses. such influence as their members or directors may exert over railroad and other corporations is largely due to their ability to dispose of securities and to give these securities the stamp of soundness and conservatism. here it may be added that men like j. p. morgan would not be directors in so many corporations if their advice and assistance were not eagerly sought. in the small village a small group of men own the bank, the coal yard, the ice-plant, the trolley line, the gas plant, and the little factories. every day of the year these men, in their different capacities, have to trade with themselves in the purchase of supplies, etc., for their different companies, one from another. no one thinks of accusing them of double dealing, and yet the situation differs not a whit from the vast system of interlocking bank and corporate directors in new york except in degree and in fact, which, however, is vital, that the new york system affects the whole commonwealth whereas the business convolutions of deacon jones of jones' corners do not. now it must not be supposed that bankers such as mr. morgan and his partners are usually large owners in the companies they influence or even control. often they do not own per cent. of the stock of the banks they dominate. often they become directors with but a few shares of qualifying stock. still more often their influence is exerted merely as financial advisers. often they nominate the president of a railroad or manufacturing company as morgan & co. nominated the president of the atlas portland cement company. often the bankers take no part in the direction of companies until these companies have shown incapacity or have had for any reason, business or governmental, to be reorganised, either in form or management. recent cases which come under one or the other of these heads are the wabash railroad, the united states motors co., the westinghouse electric & manufacturing company, the international paper company, the american tobacco company and the american sugar refining company. harmony the watchword there is little evidence to show any actual agreement or even arrangement among the great financial groups. through interlocking directors and the wide following of smaller firms which each of the big groups has, the whole big banking situation in new york is closely knit together. there is a carefully fostered community of interest even among hostile groups, each group having a director or two, like a financial ambassador, in the other banks.[ ] in the past there has been keen rivalry. historically the morgan and first national bank groups have long been close, and two members of the morgan firm were taken from the first national bank. at one time these two groups bitterly fought the other two powerful groups--the kuhn, loeb-national city bank interests. but in recent years harmony has prevailed.... it must be remembered that the four banking groups are now managed for the most part by young men. these young men are more accustomed to the ways of conciliation than were the late e. h. harriman, and john d. rockefeller and j. p. morgan. the younger men trouble themselves little with the former conflicts of morgan, hill, rockefeller, schiff, stillman, harriman, and ryan. they have forgotten even the accusations and charges which the life insurance scandals made public. their aim is more impersonal--it is to "develop business," and the surest way to do that is by working harmoniously together. money power not distinctly american striking as the concentration of banking, money, and financial power seems, it is no greater here than abroad, perhaps not so great. in london there are banks with fifty millions of capital, or twice as much as our one largest bank, and deposits of nearly four hundred millions of dollars, or twice as much as our largest bank. even canada, with a population less than one-tenth of ours, has a bank as great as our greatest. relatively its big banks are bigger than ours. concentration in canada has gone much farther than here. six banks in the dominion hold half its entire banking resources. the autocratic power wielded by the score of great canadian banks would start a revolution in this country. germany and france long ago went through the process of bank consolidation. why, then, do we hear few complaints from abroad? here is a problem to be faced with intellectual honesty. money power may be a bad thing, but let us not be so dishonest as to declare it a new thing. the new york clearing house association may wield power too autocratic, but let it not be overlooked that a similar organisation in london, with only one-third as many members, has long exercised as great power without raising any hue and cry of a money trust. also consider germany. if you have the time and courage to undertake such a task, go through the ponderous volume issued by the national monetary commission telling of the actual results of the great bank system in that country. it is a weary task reading the long-winded testimony of herr professor doctor governor this and that, but it is worth the labour. we are told that great banks are more amenable to public opinion than smaller scattered institutions, that the government is more ably assisted in its financial operations, that fewer reckless loans are made. quicker prognostication of crises, whether on the bourse or in commerce and industry, quicker adoption of preventive measures thereby lessening the effects of crises, are other services rendered by concentrated banking in germany.... in , when there was far less both of co-operation and concentration among the banks of this country than there is to-day, each bank standing weakly isolated and alone, frantically grasped all the cash it could muster. when the panic storm broke banks struggled to call in loans and line their vaults with cash. business was crippled; industry was squeezed dry of its lifeblood. last year when germany was threatened with both war and panic, trouble was averted by the german "money trust," which loaned more than $ , , . it takes no expert knowledge of finance or banking to perceive that a few great, strong banks, or many smaller ones (provided they are welded closely together) can meet a storm more calmly than scattered, unconnected institutions. where is the vital difference? if concentration is a good thing, how can there be too much of it? here is the answer. concentrated power without responsibility may be the worst possible thing. the other great financial nations have money trusts ... too, but each is capped by a vast central bank, more or less a government institution, and from the necessity of the case operated not only with a view to the general welfare but more or less openly and publicly.... the american "money trust" is strictly private, responsible to no one. it may act philanthropically if it chooses, but it is governed by nothing but choice. the money kings can, if they wish, exact any price. r. h. thomas, former president of the new york stock exchange, told the pujo committee how wall street had finally to turn to one man, j. p. morgan, in the panic of , to save it from complete disaster. he did not know where the relief came from, in what form, nor with what conditions. it just came. since at that time the entire country was dependent upon wall street because its surplus money was there, there is no escaping the fact that the whole financial situation of the country was at the mercy of one man. a per cent. rate for loans would be inconceivable in one of the european financial centres because the central banks of europe are the guarantors of the stability of the money market. the central banks of europe depend upon no man, selfish or altruistic. they are the public financial regulators of the whole nation. has the money power been used to crush and squeeze?... suppose that it has not been so used. nevertheless, its control is in the hands of a few men. even if their action be honest and intended for the public interest, they are necessarily most interested in the great undertakings in which we have seen them to be engaged. by reason of these limitations they must check and limit, if they do not destroy, genuine economic freedom and competition.... a handful of men, responsible to no one but themselves and god, have become masters of the lifeblood of commerce and industry. that this power has been more rapidly concentrated into their hands than the people have supposed is the unavoidable conclusion of this article. from private persons, acting in private, and dominated in the main by private motives there cannot be expected the wisest and broadest direction of the flow of money--the lifeblood of business. these men have not asked for this power. they know it is too great for them. on the whole they have behaved with singular restraint. but only a fool would suppose that the best system for financing the small farmer in florida or the small tin can manufacturer in oregon is to turn over the entire money power of the nation to j. p. morgan and a few other private persons. how under such a system could the great trusts fail to thrive at the expense of the small man? the banks and railway finance [ ]close relationships of railways with banks or other credit institutions have grown up naturally through the need for new capital constantly imposed upon an expanding railway system. some railways have been fortunate enough to possess a relatively stable body of stockholders whose confidence in the management is so complete that new funds can be raised by direct appeal of the management to the stockholders without the intervention of outside financial interests. but these cases have thus far been rare in american railway finance. when the policy calls for the raising of funds by the issuance of bonds rather than stock, the appeal is to a wider and to an anonymous public rather than to a corporation's own stockholders. frequently the appeal must be to a class of investors situated in another section of the country or even in a foreign country. most railways have not the technical organization nor the established market necessary to handle their issues easily, and usually it is found that in spite of the often exorbitantly high commissions which the bankers exact for their services, the net result is more satisfactory than that secured through the railway's own efforts. to the extent that this is the case, the bankers are performing a service of genuine economic value, and it must be concluded that under present conditions such service cannot readily be dispensed with. assuming this service as a necessity, the next step is for the banker to seek representation upon the railway board. his house has made itself responsible for a large issue of securities. it appeals to the investing public, not technically guaranteeing the issue, but practically doing so because of solicitude that its reputation for the handling of high-grade securities shall not be impaired. it seeks therefore to protect its own standing, and at the same time to make the securities more attractive to its customers, by demanding a place on the board of directors from which it can follow in detail the employment of the funds secured through its assistance. large investors like life insurance companies, savings banks, fire insurance companies, guaranty companies, trust companies, demand as a prerequisite to purchase of securities that the underwriting house shall be represented on the board. the railway's credit--its ability to sell its issues--is dependent frequently upon the presence on its directorate of this representative. however, the banker is not in the position solely of a spectator or a detective. his expert advice is sought and usually followed. often he is in a position where he can stipulate conditions under which alone he will undertake to provide the funds required, and such stipulations are frequently of immense influence in furthering efficient railway management. a recent example is found in the furnishing of money to the chesapeake and ohio railway company by kuhn, loeb & co. under a stipulation that the road must put back into its property each year a certain amount of its earnings. instances might be multiplied in which railway corporations have been saved from disaster and set upon their feet through the aid of those who have furnished the funds, and who have stipulated in connection therewith that in order to insure their knowledge of all transactions, and to give them a position from which they might bring their influence to bear, they should be granted representation on the railway board. of course it must be admitted that the power of the banker may be misused to his own private advantage. the power is there--the power to refuse funds--the power that comes from command of enormous sources of capital, the prestige gained by years of successful experience. men who have attained such a position have the personal qualities that give them naturally a commanding place in any council of business men. when such men dominate the policy of a railway and the results are disastrous, it is exceedingly difficult fairly to fix the responsibility and assess the blame. the line between good faith and good judgment or between personal ambition that amounts to breach of trust, and a misplaced optimism concerning the outcome of a specific policy, is a very difficult line to draw. although praise and blame cannot be assigned with any precision between mr. morgan and mr. mellen in the unfortunate new haven situation, it is the prevailing opinion of the new england public that it has not been benefited greatly by the presence on the new haven board of the distinguished banker member. generally speaking, however, the powerful banking interests have thrown their influence in the direction of railway efficiency and the public advantage. if our judgment as to the desirability of the relationship of railways and credit institutions is to be determined solely by results, we must conclude that the balance swings heavily in favor of the continuance of the present policy. however, opposition to the close association of financial houses and railways has not sprung from any such favorable relationships as we have here described. it grows rather out of the concentration and monopolization of credit. a powerful banking house which has identified its interests with that of one railway system is in position, because of its direct influence on the railway and its close affiliation with all other sources of credit, seriously to hamper if not altogether to prevent the securing of credit by a rival interest. this power over credit is not confined to one city or to one section of the country, but it reaches every section and even extends beyond national boundaries into the foreign sources of investment funds. local or small enterprises requiring only moderate underwriting are frequently financed independently, but it is an acknowledged fact testified to by the large bankers themselves that with rare exceptions issues of securities in large amounts, except when taken up by the stockholders, must receive at least the tacit approval of the big financial group. participation by the smaller banking houses in future underwritings depends upon loyalty to the syndicate in whatever enterprises are now being offered. the little fellows are inclined to respect a suggestion not to assist an enterprise of a character likely to interfere with undertakings already financed by the large interests. this informal but none the less effective network of alliances tends to destroy the competitive market for capital, and to restrict the railways to one source of credit. there does not appear to be any serious competition among the large bankers, but rather an understanding in the nature of a division of the field. a railway obtains the services of a single banking house which acts as its fiscal agent, underwrites its securities, receives its deposits, and has a representative on the railway's board of directors. when the railway becomes involved in financial difficulties, the same banking house organizes protective committees, devises reorganization schemes, and creates voting trusts. as mr. brandeis has put it, it adds to its duty as midwife also that of undertaker. is this relationship potentially dangerous for the railways and the public? the late mr. morgan, in his illuminating testimony in the money trust investigation, took the position that the situation might be dangerous in the hands of the wrong men, but he clearly implied that there had been no bad results thus far and there were not likely to be in the future with a continuance of the present leadership. his argument reminds one of the young lady who "when she was good was very, very good, and when she was bad she was horrid." yet this view is that of most of the financial leaders who appeared before the pujo committee.... mr. davison and mr. schiff both opposed the policy of concentration through interlocking at the point where the representative of the two interests might wield a dominating influence, but they found it difficult to fix that point. mr. baker, who took the position that safety lies in the personnel of the men, that in good hands interlocking could not do any harm, but in bad hands would be very bad, concluded nevertheless that the movement of concentration had gone about far enough. and mr. george m. reynolds, of chicago, thus frankly expressed himself: "i am inclined to think that the concentration, having gone to the extent it has, does constitute a menace." and again, "i think a more wide distribution of the power of credit ... would really be better in the long run." when asked the direct question, "do you approve of the identity of directors or interlocking directorates in potentially competing institutions?" he replied, "personally i do not believe that is the best policy." it should be kept in mind that there is no evidence on record that this power has been used oppressively otherwise than in the rate of commission charged. many of the bankers insist that the monopolization of credit is a physical impossibility.... there is, nevertheless, a concentration of credit in comparatively few hands. if the conclusions thus far established are sound, it becomes clear that the real evil resulting from the interlocking of railways and credit houses, if any evil exists, arises primarily out of the relation of credit institutions to each other, rather than out of their relation to the railways through representation on railway boards. were this interlocking of railways and banks to be wholly prohibited without any alteration in the organization of the credit market, i am unable to see how the situation would be changed materially. the tendency on the part of the bankers would still be to follow the law of "banking ethics" and divide the field; a railway would still employ a single banking house as its fiscal agent, and this banking house would still exercise a powerful influence in determining the policy of the railway. at the same time the railway would be deprived of the presence on its board of a financial expert whose experience might be drawn upon in the detail of management day by day. as mr. reynolds has admitted, the menace is in the concentration of credit. such power may not thus far have been misused. but as the pujo committee has said, "whenever the incentive is at hand, the machinery is ready." those who have the public welfare at heart have no right to assume that such power will never be used to the personal interest of the bankers themselves and to the injury of the public. while i have no great enthusiasm for the popular pastime of rushing to washington for a statute whenever the economic machinery fails to run smoothly, i am in sympathy with those who are studying the problem of the restoration of an open competitive market for capital. however, this is a problem of extraordinary difficulty, and i do not myself see the way at present to its solution. i am aware that congress has enacted legislation with the purpose of destroying this concentration of credit, and that many look upon the clayton act, so far as it touches our problem, as a distinct step in advance. personally i am sceptical as to its efficacy in its present form. the opportunities for evasion are too numerous. however, it can be laid down as a general rule that all statutory enactment which really endures is a product of successive increments of legislation--the result of experimental tests and the knowledge that is gained by experience. it is no argument against the interlocking provisions of the clayton act that they do not solve the problem and that they can be evaded readily. such an attitude of timidity and pessimism assumed twenty-five years ago would never have given us our present air-tight interstate commerce act. it may well be, however, that no relief can be found short of the radical step of employing government credit in aid of public-service industries. so vital is the necessity of the service to the people that the time may come when government loans to transportation corporations will appear to be a logical and natural step. but this is a digression. once this free market for capital is assured, the question again arises, shall the railway board of directors contain banker members? obviously the only purpose that the railway could then have in admitting bankers to its directorate would be the opportunity to utilize their experience in the direct management of the property. quite as obviously the principal motive of the banker in accepting membership on a railway board would be to represent the underwriters and to act as fiscal agent. but with the capital market competitive, i can find no serious objection to such relationship. even under present conditions the banker in the majority of cases respects his trust, refuses to vote on questions involving his personal interest, and performs loyally his service to the railway; but his mere presence on the board as the embodiment of the railway's only source of credit may be sufficient to control the situation in his behoof. however, with a free credit market, the dominating position of the banker largely disappears and he becomes what he ought to be, an expert adviser on financial matters. it may be asked why, if the banker is now to confine his activities to what mr. loree has called the "necessarily intimate relation between the banker and the seeker for accommodation," this cannot be accomplished in the same manner as in unincorporated businesses without putting the banker on the directorate. in reply attention may be called to the fact that even in the case of unincorporated businesses, the credit departments of the large banks are virtually in the position of directors, so intimate and comprehensive is their influence and advice. but more than this the business of a railroad is so complex and extensive, its activities are so multifarious, that an intimacy with its affairs sufficient to make the banker's counsel of value would be impossible except by actual presence on the directorate. under these changed conditions of credit, i can see greater opportunity for the utilization of the service of expert bankers in railway management. directorships which have been monopolized in the hands of a few banker specialists in railway securities should then be more widely distributed. it is quite impossible to believe that expert banking talent available for this service is as rare as the present situation would suggest, in which the abilities of a relatively few men are made to do duty in dozens of corporations. this absurd situation springs not from a scarcity of talent but from the narrow market for credit. a liberation of that market would bring latent ability from its hiding-places, and by the infusion of new blood would stimulate the management of our railway enterprises. it would open this field of activity to men "who have been obliged to serve when their abilities entitled them to direct." footnotes: [ ] adapted from the _report of the committee appointed to investigate the concentration of control of money and credit_, d congress, d session, pp. - . [ ] adapted from albert w. atwood, _the borrower and the money trust, review of reviews_, vol. , august. , pp. - . [ ] [interlocking directorates among the more important banks were prohibited by the clayton act, passed in . see p. .] [ ] frank haigh dixon, _the economic significance of interlocking directorates in railway finance, the journal of political economy_, vol. , no. , february, , pp. - . chapter xxix crises the nature of an economic crisis [ ]a definition of an economic "crisis" is, like most other definitions, very difficult to construct. by way of introduction we shall quote a few chosen somewhat at random. adolph wagner, the german economist, expresses his idea by saying: "crises imply ... the overwhelming and simultaneous occurrence of inability on the part of independent _entrepreneurs_ to pay their debts." this is similar to the statement of john stuart mill: "there is said to be a commercial crisis when a great number of merchants and traders at once either have, or apprehend that they shall have, a difficulty in meeting their engagements." professor e. d. jones says: "a crisis is the sudden application of a critical conservatism to business transactions, leading to such a demand for liquidation as to cause a widespread inability among business men to meet their obligations." senator theodore e. burton states: "the word crisis, if employed with entire accuracy, describes a period of acute disturbance in the business world, the prevailing features of which are the breakdown of credit and prices and the destruction of confidence. it has especially to do with the relations of debtor and creditor." none of these definitions gives so clear an idea as does a brief description. probably no one has ever pictured the crisis and the associated events more effectively than did frederick engels in his little volume, _socialism: utopian and scientific_: as a matter of fact, since , when the first general crisis broke out, the whole industrial and commercial world, production and exchange among all civilized peoples and their more or less barbaric hangers-on, are thrown out of joint about once every ten years. commerce is at a standstill, the markets are glutted, products accumulate, as multitudinous as they are unsaleable, hard cash disappears, credit vanishes, factories are closed, the mass of the workers are in want of the means of subsistence; bankruptcy follows upon bankruptcy, execution upon execution. the stagnation lasts for years; productive forces and products are wasted and destroyed wholesale, until the accumulated mass of commodities finally filter off, more or less depreciated in value, until production and exchange gradually begin to move again. little by little the pace quickens. it becomes a trot. the industrial trot breaks into a canter, the canter in turn grows into the headlong gallop of a perfect steeplechase of industry, commercial credit, and speculation, which finally, after breakneck leaps, ends where it began--in the ditch of a crisis. and so over and over again. perhaps even this vivid word picture will be less impressive to some than a few facts as to the serious effects of the crisis and the depression that follows it. professor wesley c. mitchell in his recent volume entitled _business cycles_ has recorded the significant features of the crisis of in england and the united states and the following points have been taken from his account. by the middle of the summer evidences of difficulty had begun to appear in england. british railway stocks had fallen off in price; the shipbuilding yards had few new contracts; costs of production had become so great that many manufacturers were refusing to take new business at the ruling quotations; the building trades were dull; the ratio of net to gross railway receipts declined; commodity prices began to drop; bank clearings fell off; imports gained less rapidly; and the percentage of trade union members unemployed rose from . per cent. at the end of april to . per cent. by the close of august. these difficulties came to a climax in the latter half of the year, being intensified by the crash in the united states. the bank rate of the bank of england rose from - / to per cent., where it remained for nearly two months. during this period the market rate averaged from - / to - / per cent. imports and exports showed smaller and smaller increases over the preceding year and in the early months of began to decline; clearings fell off sharply and trade union unemployment increased to nearly per cent. during the latter months of . in the united states, where the crisis degenerated into a panic, conditions were much worse. in advance of the actual outbreak of the panic there was for months evidence of a tension in the investment market. copper especially fell in price and was followed by copper stocks. this precipitated difficulty among a group of banks that were more or less closely identified with the copper interests. runs were started and a number of banks were forced to suspend payments. a scramble for cash followed, spreading from new york throughout the united states and accompanied by very serious consequences. among the worst of the effects were a premium on currency which rose at one time as high as per cent.; the necessity of introducing numerous substitutes for cash; a demoralization of the domestic and foreign exchange markets that caused heavy losses both to bankers and to business men, while the amount and the prices of securities dealt in on the stock exchanges seriously declined. during november and december currency was at a premium of from / to per cent. call loan rates were erratic, going as high as per cent. in the latter part of october and fluctuating between and per cent. as late as during the latter half of december. during november there was a decline in the amount of time loans and the quoted rates ranged from to per cent. in october, to per cent. in november, and to per cent. in december. worse still was the stoppage of business by those enterprises that could not pay the high rates and could make no special arrangements to secure lower ones. business failures in the united states which had been as low as in the last week of , were for the week ending december , , and for the week ending january , . in the second quarter of there were , and for the first quarter of there were , . these derangements of business would seem to be of interest primarily to the bankers and brokers or to the large borrowers--to the capitalist class. the counterpart of the picture is to be found in the effect of the crisis upon the man of small means and upon the poor. inability to borrow may mean considerable inconvenience or even financial ruin for the man of large affairs but it does not usually mean actual suffering. nevertheless his failure to secure funds and the necessity of selling his securities or commodities at a low price may force him to close his factory, to delay extensions, or at least to curtail operations. he receives fewer orders for goods and as a result buys smaller amounts of raw materials and lessens his own output. this means reductions of wages and discharge of workmen. some writers have urged that the workingman receives a fixed wage and does not assume industrial risks, which are borne by the capitalist or entrepreneur. such a statement is fallacious. the employee participates in the risks of modern industry and suffers from a business derangement far more severely than his employer. the capitalist secures less profits but with his accumulated savings ordinarily endures no real privation, while large numbers of the workers with little or no savings face actual hunger or starvation. demands upon charitable organizations increase, bread lines grow longer, and suffering becomes widespread and intense until the crisis and the ensuing depression are over.... the crisis of in the light of history [ ]... from one point of view ... every economic crisis is a financial crisis. for since values are expressed in terms of money, and since the modern business superstructure is erected on the basis of credit, every economic revulsion expresses itself through the medium of a change in prices; and since the bank is the center of credit operations, every crisis inevitably involves a revolution in the conditions of credit. from this point of view, all crises may be declared to be financial crises. from another standpoint, however, a distinction may be drawn between financial crises proper and commercial or industrial crises in the larger sense. there may be a financial panic or crisis due primarily to temporary and sudden oscillations in the condition of the money market or in the price of securities. such oscillations, sharp and sudden though they be, may have but little relation, whether of effect or of cause, to the general commercial and industrial interests. of this character, for instance, were the original black friday in england, in , its namesake, the famous black friday in in new york, as well as many spasmodic fluctuations due either to political rumors like that which followed the venezuelan message of , or to temporary speculative manipulations, like the northern pacific "squeeze" of . of a distinctly different nature are those wider disturbances which are traceable to more general economic causes and which, even though they culminate in acute financial trouble, are followed by an industrial and commercial depression of more or less magnitude. into which category is to be put the crisis of ; and if in the latter, what were its causes? at the outset it must be remembered that crises are essentially modern phenomena. we have had financial transactions, and that, too, on a large scale, for many centuries and in many civilizations. but crises, in contradistinction to temporary panics, have existed in england only since the middle of the eighteenth, and in other countries only since the beginning of the nineteenth, century. the first crisis in england, barring the financial flurry connected with the south sea scheme in , was that of , followed by the minor disturbances of and , and the more widespread convulsions of , , and . the first crisis in the united states was that of ; and it was not until that we find the first international crisis, spreading from the united states to england and then to france. in germany the period of important crises was ushered in even later. crises, in other words, are products of modern economic life. modern economic life, however, has as its basal characteristic industrial capitalism, with the factory system and the newer methods of production for a wide market. this transition to modern industrial capitalism began in england in the latter half of the eighteenth century, was initiated in america in the first two decades of the nineteenth century, and took place on the continent at a later date, last of all in germany. the explanation of crises must therefore be sought in some feature of our modern capitalistic life. the current explanations may be divided into two categories. of these the first includes what might be termed the superficial theories. thus it is commonly stated that the outbreak of a crisis is due to lack of confidence--as if the lack of confidence was not in itself the very thing which needs to be explained. of still slighter value is the attempt to associate a crisis with some particular governmental policy, or with some action of a country's executive. such puerile interpretations have commonly been confined to countries like the united states, where the political passions of a democracy have had the fullest sway. thus the crisis of was ascribed by the republicans to the impending democratic tariff of ; and the crisis of has by some been termed the "roosevelt panic," utterly oblivious of the fact that from the time of president jackson, who was held responsible for the troubles of , every successive crisis has had its presidential scapegoat, and has been followed by a political revulsion. the crisis of helped to weaken the democrats; the crisis of resulted in a popular majority for tilden; the crisis of put cleveland into the presidential chair; and the crisis of , with the ensuing depression, brought the republicans back to power. opposed to these popular, but wholly unfounded, interpretations is the second class of explanations, which seek to burrow beneath the surface and to discover the more occult and fundamental causes of the periodicity of crises. here we find an interesting and progressive series of attempts to grapple with the difficulties of the problem. for a long time economists and business men advanced the theory of overproduction, forgetful of the fact that there really cannot be any such phenomenon as too much actual production of wealth. with the disappearance of this doctrine there came into prominence its variant, which put the emphasis on relative, rather than absolute, or universal overproduction, that is, the overproduction of some things and the underproduction of others. this theory also failed to command general assent, for the reason that no one could show in what respects there was any underproduction of wealth, or any lack of particular products during the years preceding a crisis. others again, have sought the causal fact in underconsumption, alleging that the larger consumption of wealth will in itself take up all the slack of production, and thus obviate a crisis. this explanation also is inadequate, because it overlooks the fact that the real falling off in consumption comes after the crisis has developed and not before; in fact, the period of prosperity which precedes a crisis is generally marked by a prodigious increase in consumption. the socialists, again, seek to explain crises by the existence of private property in the means of production, and contend that if we were to cease the exploitation of the laborer by the modern capitalistic method, crises would disappear. while, however, agreeing in this general conclusion, they differ in their detailed analyses. thus rodbertus maintains that the secret of crises is to be found in the fact that the progress of industry causes a continually greater output of product, while the exclusion of the laboring classes from any participation in this increased productivity involves a relative diminution in demand, and thus ultimately a fall in price, culminating in a crisis. marx, on the other hand, puts the emphasis on the fact that the necessary fall in the rate of profits (which, according to him, is a result of the surplus value, or exploitation theory) is incompatible with the greatly increased productivity of fixed capital inherent in the present system, and that the clashing of these two incongruous tendencies of modern industrial life brings about a relative overproduction of capital, and gives rise to periodical explosions. this view, finally, is sharply criticised by the latest and ablest of the socialist theorists, tugan-baranowsky, who in turn maintains that crises are due primarily to the fact that under the modern system it is impossible to invest the fresh accumulations of capital proportionally in all branches of industry, and that it is this relative disproportion of accumulated capital to the particular demand that causes the anarchy of the market and the recurrent convulsions of industry. while the socialist scholars have undoubtedly made valuable contributions to the discussion of the problem, they, like the earlier economists, have erred in laying stress on the question of technical production rather than, as is done by the more recent economic thinkers, on that of business enterprise and capitalization. this is manifestly not the place to elaborate a general theory of crises. if we attempt, however, to give the bare outline of the modern explanation. it would be approximately as follows: the problem of crises or industrial depressions is one of relative capitalization. under the present system of enterprise, production is carried on in mass for a prospective market, rather than as formerly in small quantities to fill a definite order. even if it be contended that certain factories nowadays are busy with producing to order, it is none the less true that numerous plants are continually being erected in the expectation that orders will be received in the future. the good times, or periods of rising prices, may be due to many causes--either in general to an augmented gold output, or in particular to the increase in the demand for some special product, whether in the iron industry through a new navy program, or in the clothing industry through the outbreak of a war, or in any other industry through a change of fashion or what not. prices first rise in the particular enterprise, production augments, the movement spreads to other lines of business, and the new enterprises are financed by loans from the banks or trust companies, or by the sale of securities on a capitalization proportionate to the anticipated earnings. in times of buoyancy we are continually capitalizing anticipated earnings and future hopes, and we do this through the utilization of credit on a large scale. we build railways, put millions into steel plants, "boom" land sites, and form combinations of all kinds, employing the credit facilities granted by the banks, or throwing the securities on the stock market. we "water" the stock or, if that be forbidden by law, we drive the market quotations to a high point, because we think that this is warranted by prospective earnings. sometimes we say that we capitalize the good will or, in the case of quasi-public enterprises, the franchise; but in all cases we capitalize the future because we believe that we shall earn an income which will justify this capitalization. the peculiarity, however, of an up-grade movement which rests on modern credit facilities is that we wear magnifying glasses or look at the future in too roseate a light. it is a natural tendency of human nature to capitalize one's hopes and expectations too liberally. if this is done on a continually larger scale, the capitalization becomes so great that actual earnings do not come up to our anticipations or the fear of a discrepancy between actual and estimated earnings begins to obsess us. it becomes necessary to reduce the capitalization to its true dimensions, _i. e._, to a sum proportioned to actual earnings. this process of readjustment of overcapitalized values obviously involves loss; but readjustment there must be. if the realization of its necessity is sudden, we have a crisis or panic. in the height of the period of exaltation or prosperity, something happens to disturb confidence. a chance occurrence, a mere rumor, may suffice. some bank considers its credit too heavily engaged, or suspects the adequacy of the collateral. just at the flood of the tide, when new demands are constantly being made, it finds itself unable or unwilling to respond. its refusal starts or intensifies the feeling of insecurity, and with the inability of some important concern to meet its obligations, a failure occurs and the crisis is precipitated. if, on the other hand, the situation is well handled, and if the readjustment of the overcapitalized values to actual earning capacity can be brought about more gradually, we have, in lieu of a crisis, a liquidation and a period of depression which lasts until the up-grade movement again sets in. crises, therefore, are not necessarily the result of increased technical production. the important point is not production, but capitalization. there may be overcapitalization, without overproduction. overproduction of particular things may indeed accompany overcapitalization, but the stress must be laid, not on the relation between production and consumption, as the old writers assumed, but on the discrepancy between the investment and its returns. while the general features of a crisis are thus everywhere the same, the details differ in each case. sometimes it is the banks that fail first, sometimes the general business enterprises. sometimes it is the railway securities that first feel the strain, at other times "the industrials," and at still other times the raw materials. sometimes the bolt comes out of the clear sky with prices at a maximum, sometimes it is only the last stage of a period of liquidation with progressively lower prices. but however unpredictable and seemingly inscrutable the actual course of events, the fundamental explanation is always the necessary readjustment of capitalization to actual earning capacity. that this is true of all our crises can be seen from a hasty review. the crisis of was the result of the first utilization of modern capitalist methods in america. the period of the war of was marked by three facts: first, the industrial revolution in new england and the introduction of the factory system in the textile industry; second, the great development of internal improvements through canal and turnpike companies; third, the sudden multiplication of banks to finance the new enterprises. the consequence was the so-called "golden age," which lasted for several years, until checked by the immense imports from england after the war, and destroyed by the collapse of the overcapitalized undertakings. it was well into the twenties before the country recovered from the industrial depression, and then came the second up-grade movement, which culminated in . this was primarily a land and transportation, rather than a purely industrial, phenomenon. the canals and turnpikes in the east were now being replaced by railways, and the spread of slavery caused a rush of cotton planters, not only to the black belt, but to the pine barrens and hill country of the south. it was primarily land values that were being overcapitalized, and the process went on to such an extent that the annual land revenues of the government now exceeded the total governmental receipts from all sources of a few years before. finally, to finance this land movement there were called into being hundreds of the "coon-box" banks, that found a champion in president jackson in his war against the bank of the united states. as the period of exaltation had been unexampled, so the collapse was proportionally great. the crisis of , followed as it was by those of and , was still more serious than that of . it was again well-nigh a decade before the readjustment of values had been completed. the following decade was in turn marked by five striking facts: first, the gold discoveries of california and australia, which soon initiated a general rise of prices; second, the consummation of the revolution in the media of transportation by land and water, and the settlement of the entire mississippi valley, the most fertile portion of the continent; third, the abolition of the corn laws in england and the opening up of a market for our incipient surplus of wheat; fourth, the era of industrial invention which resulted in the application of capitalistic methods to new classes of enterprise besides the old textile industries; and fifth, the development of free banking with the "wild-cat" institutions to provide the credit facilities for this prodigious overcapitalization. the crisis of , which was the inevitable result, was perhaps still more acute than its predecessors. the continuance of its depressing influence on industry, however, was checked by the economic effects of the civil war, which gave an artificial stimulus to many forms of enterprise. in the period immediately succeeding the war, great changes again occurred. the transcontinental roads were completed and the eastern trunk lines consolidated; the great wheat fields of the country were opened up under the new homestead laws, and the period of large exports began; the bessemer process revolutionized the iron industry, and the factory system was now applied to boots, sewing-machines, and agricultural implements; the great copper and silver deposits were developed, and the petroleum output grew apace; while the greenbacks and the greenback movement fomented the process of inflation. the discrepancy between the capitalization and the actual earning capacity of the country's business enterprises again became so overwhelming that the necessary readjustment took the form of the convulsion of --a convulsion the depressing effects of which were felt with almost increasing severity for six years. the crises of and were both less intensive and more short-lived than their predecessors, for reasons which it is now not difficult to explain. the resumption of specie payment in was rendered possible, and was followed by a series of abundant crops which revivified enterprise, and which were aided by the use of agricultural machinery on a large scale. the energy and the capital of the nation, however, were devoted in increasing measure to the transportation industry. this resulted in a perfect orgy of new railroad construction, the entire mileage of the country increasing in five years by per cent. as the overcapitalization was primarily a railway overcapitalization, the resulting reaction of was essentially a railway crisis, leading to but indirect and temporary disturbances in industry at large. within a year or two recovery was general, and the prosperous years from onward were reflected in the existence of a huge surplus of governmental revenues. the live-stock and meat-packing business attained its high-water mark; the textile industries made great progress in the finer grades, and the ready-made clothing industry assumed vast dimensions; the iron and steel industry was revolutionized anew by the invention of the open-hearth process and the utilization of cheap ore from the lake superior region; the south was being quickly developed by the northern capital that poured into the cotton mills and the coal and iron mines; electricity was applied to industry on an increasing scale, and the country took rapid strides in its evolution from an agricultural to an industrial community. the movement of overcapitalization, however, was somewhat checked by two important facts: the downward tilt of world prices in general, which had been falling since and which were fast reaching their lowest point; and the relative shrinkage, not only in the amount of the wheat crop, but also in the value of both the wheat and the cotton crops. the resulting reaction of , which was itself partly due to the ill-timed experiments with silver legislation, was as a consequence neither so profound nor so long-continued, since the discrepancy between anticipated and actual values turned out not to be so excessive. when we come particularly to the crisis of , we find that the general causes were very much the same. the last decade has been characterized by the most unexampled prosperity in our history. the most striking initial cause is the prodigious increase in the gold supply. whereas the annual average value of the output of gold was under one hundred millions in the first half of the eighties, and only a hundred and twelve millions in the second half, it has grown with such enormous strides that during the past two years it has reached an annual value of about four hundred millions. the result has been a constant rise of prices from the minimum level of . the rapid accumulation of gold, much of which went into the bank reserves, enabled the financial institutions to expand their credit facilities many fold, and as a consequence enterprise flourished in every direction. during the last decade the record crops of cereals and cotton, the extension of dry farming, the effects of irrigation on fruit culture, the development of truck farms, and the unparalleled increase of immigration led to a remarkable enhancement of land values throughout the length and breadth of the land; the output of coal doubled, that of petroleum more than doubled, and that of pig iron, as well as of steel, actually trebled; the huge combinations of capital, now spreading to every form of enterprise, effected prodigious economies and revolutionized business methods; and the transition from the agricultural to the industrial phase of economic development proceeded with unlooked-for celerity. values were pushed up on all sides and the hopes of a prosperous community were capitalized with a recklessness born of unbounded faith. the pace was too rapid; the reaction was bound to ensue. in the late autumn of the revulsion was precipitated, with all the familiar accompaniments of an acute panic such as the collapse of several financial institutions, the sudden curtailment of loans, leading to the failures of some prominent business concerns, the hoarding of money, the appearance of a premium on currency, going to over per cent., and the frantic efforts of the financiers to relieve the situation by the importation of gold, the issue of clearing-house certificates and the interference of government through the dubious expedients of the placing of a new bond issue and the emission of treasury loan certificates. the crisis of , however, is on the whole not comparable either to that of or to that of , for reasons which have thus far perhaps not been adequately discussed. these reasons may be classed under five heads. in the first place, the very magnitude of the country's resources has been a favorable factor. the unparalleled prosperity of the past decade has made possible the accumulation of a vast reserve in the case, not only of the great corporations, but also of the average business man. this reserve has acted as a buffer to the shock of reaction, and has softened the impact through a speedy restoration of confidence in the excellence of the country's assets and in the real solvency of business. secondly, the crops, while not those of a bumper year, have been large and valuable. it is significant that almost each of our great crises in the past has been preceded either by the failure of the harvest at home or by the existence of such a bountiful output abroad as greatly to reduce prices. it must be remembered that, notwithstanding all recent developments, this country is still primarily agricultural, and that upon the varying extent of our great staple crops depends in large measure the effective demand which sets and keeps in motion the wheels of business activity. by a fortunate coincidence, the crisis was attended by a phenomenon which in ordinary times would have spelled prosperity, and which in this extraordinary conjuncture helped to bring back normal conditions. in the third place, the overcapitalization of values was somewhat less conspicuous than hitherto in our greatest industry--that of transportation. some of our former crises have, as we know, been brought on primarily by the speculative building of railroads. but whereas in the early eighties the annual increase of construction reached ten and eleven thousand miles, during the past five years, with a railway system three times as large, the annual increment of new construction was only four or five thousand miles. the consequence has been that with the rapid upbuilding of the country the railways have grown up to their capitalization, until it is now reasonably certain that there has been for some little time scarcely any actual overcapitalization. a striking proof of the absence of any real discrepancy between normal values and the capitalization of actual earning capacity is afforded by the congestion of traffic of a year or two ago; and even with only normal business activity it is computed that, in order to prevent this congestion in future and to maintain the railways at a reasonable standard of efficiency, there will be required an annual investment of over a billion dollars. fourthly, the crisis of was preceded by a period of gradual liquidation. general prices of commodities, with a few notable exceptions like that of copper, were indeed high until well-nigh the outbreak of the panic. but the prices of securities had for some time undergone a marked shrinkage. some, quite mistakenly, attribute this shrinkage to lack of confidence engendered by the governmental policy toward industry; others, with equal readiness and no less extravagance, ascribe it to the distress caused by the exposure of the methods of "high finance" in positions of trusteeship. in reality, however, the depreciation in securities was caused chiefly by the rise in the rate of interest. in fact the one phenomenon is really the other; for where earnings remain unchanged, the capitalization of the earnings depends on the rate of interest. if it be objected that the price of stocks fell because of the apprehended decrease of future earnings, due to lack of confidence, the retort is obvious that this would not suffice to explain the equal or still greater fall in the capital value of bonds, private or public, with a fixed rate of interest. the depreciation was not national, but international, in character; and it applied not only to our railway and industrial securities, but to the english "consols" as well. the rise in the interest rate, which explains the fall in the capital value of securities, was due to several causes. first and foremost is the increase in the gold output. for, as is now well established by economic theory and reinforced by the observations of practical men, while any increase in the supply of loanable funds on the call-money market temporarily reduces the "money rate," an increase in the general supply of standard money in the community, on the contrary, raises not only the price level of all commodities, but the price for the use of capital, which we call the general rate of interest. the increase of money as the standard of value inevitably tends to increase the general rate of interest. again, since the rate of interest is always adjusted to the earnings of the fund of capital at the margin of its employment, the rate of interest has risen because there has been relatively less capital available for employment. the fund of free capital has been rapidly diminishing during the past few years. hundreds of millions were destroyed in the boer and japanese wars; hundreds of millions more disappeared through the destruction of san francisco and valparaiso; and countless millions in addition have been utilized to finance the more or less dubious schemes which have sprung up in all countries during the years of prosperity. even though there was no great overcapitalization of railroads and even though many of the industrial enterprises were really legitimate, the discounting of the future was not quite ample, and the capital was invested more rapidly than the immediate returns would warrant. the replacement fund, in other words, was neither quite large enough nor quite active enough; and with the gradual exhaustion of the available free capital, interest rates necessarily rose and security values as a consequence fell. the period of liquidation was thus a fortunate event. by checking the movement of exaltation and preventing the level of prices from being so extreme, it kept the reaction from being so great. where the crest of the wave is lower, the shock of its break is less. had the ascent of prices and values gone on unhindered, the convulsion of would have been far more severe. from this point of view, even those who mistakenly persist in ascribing the lack of confidence to the president ought in reality to be grateful to him; for to the extent that he may be said to have superinduced the liquidation of the spring and summer, he assuredly contributed to mitigate the shock of the inevitable reaction in the autumn. the fifth and final cause of the lesser magnitude of the crisis is the development of trusts. until we attain the right perspective, it is always difficult to get a correct view of the far-reaching changes which are taking place under our very eyes. especially true is this of such a veritable revolution as is typified by the modern concentration and integration of industry into the vast combinations known as trusts. there are indeed many disquieting and untoward symptoms in the development of which this is not the place to speak. but as against the undoubted perils of what we are all now coming to recognize as an inevitable process, we sometimes forget to put at least one countervailing advantage which is of especial importance in this connection. the modern trust, as typified in its most developed form by the united states steel corporation, is apt to exert an undeniably steadying influence on prices. precisely because of the immense interests at stake, and the danger of a reaction, the trust with its consummately able management tends toward conservatism. as compared with the action of a horde of small competitors under similar conditions, it is apt during a period of prosperity to refrain from marking up prices to the top notch, and is likely to make a more adequate provision for the contingencies of the market. with this greater moderation is apt to be associated a more accurate prevision, which succeeds in a more correct adjustment of present investment to future needs. the drift of business enterprise in its newer form is thus toward a relative checking of the discrepancy between estimated and actual earnings, or, in other words, toward a retardation in the process of overcapitalization. the history of trusts is still too recent, and in not all of them are we yet able to discern the working out of what ultimately will come to be recognized as the real laws of their evolution. to those, however, who comprehend what this revolution in business enterprise really implies, it can scarcely be doubted that the fruit of this steadying influence and of the better adaptation of the present to the future is already perceptible. notwithstanding the quite unexampled prosperity of the last decade, the tempo of overcapitalization has been relatively less rapid and the process of readjustment throughout the world of enterprise has therefore been less extreme. industry has slackened rather than collapsed, and the disturbance itself has been comparatively short-lived, with the prospects of an early rebound. the influence of trusts in moderating crises and in minimizing depressions will doubtless become more apparent with each ensuing decade in the history of modern industry. while the general causes which are responsible for the crisis of have been recounted above, there still remains one point of fundamental importance. if we compare our economic history with that of europe, we observe that acute financial crises have there almost passed away. england has had no severe convulsion since , and in france and germany also the disturbances are more and more assuming the form of periodic industrial depressions rather than of acute financial crises. the responsibility for the continuance in this country of a phenomenon which is in large measure vanishing elsewhere rests beyond all peradventure of doubt on the inadequacy of our currency system. current theories of crises two points of agreement [ ]wide divergences of opinion continue to exist among competent writers upon crises; but in recent years substantial agreement has been reached upon two points of fundamental importance. crises are no longer treated as sudden catastrophes which interrupt the "normal" course of business, as episodes which can be understood without investigation of the intervening years. on the contrary, the crisis is regarded as but the most dramatic and the briefest of the three phases of a business cycle--prosperity, crisis, and depression.[ ] modern discussions endeavor to show why a crisis is followed by depression, and depression by prosperity, quite as much as to show why prosperity is followed by a crisis. in a word, the theory of crises has grown into the theory of business cycles.[ ] this wider grasp of the problem has discredited the view that crises are due to abnormal conditions which tempt industry and trade to forsake their beaten paths and temporarily befog the judgment of business men and investors, or to misguided legislation, unsound business practices, imperfect banking organization, and the like.[ ] as business cycles have continued to run their round decade after decade in all nations of highly developed business organization, the idea that each crisis may be accounted for by some special cause has become less tenable. on the contrary, the explanations in favor to-day ascribe the recurrence of crises after periods of prosperity to some inherent characteristic of economic organization or activity. the complex processes which make up business life are analyzed to discover why they inevitably work out a change from good times to bad and from bad times to good. the influence of special conditions is admitted, of course, but rather as a factor which complicates the process than as the leading cause of crises. beveridge's "competition theory" among these theories which seek to account not for crises but for the cyclical fluctuations of economic activity, the "competition theory" tentatively advanced by beveridge is one of the simplest. in most instances, he begins, production is carried on by several or many establishments, each acting independently, and each seeking to do as large a share of the business as possible. whenever the demand for their wares increases, each competitor tries to engross a larger portion of the market. "inevitably, therefore, all the producers together tend to overshoot the demand and to glut the market for a time. this is a result not of wild speculation nor of miscalculation of the total demand; it must be a normal incident wherever competition has a place at all." such activity among producers constitutes the period of prosperity. but sooner or later the glutting of the market becomes apparent, and then the crisis comes, because the goods cannot all be sold at a profit. prices fall, production is checked, and a period of depression ensues. gradually, however, the slackened rate of production allows the accumulated stocks to be cleared, perhaps below cost price, perhaps by waiting until demand grows up to supply. when this excess of demand over supply has once again become patent, business recovers. depression yields to prosperity, competitors again vie with each other to increase their shares in the output, after a few years the market is glutted again, and a new crisis comes, to be followed once more by depression. thus business cycles are due in the last resort to "the simple and well nigh universal fact of industrial competition."[ ] may's theory of the discrepancy between wages and productivity like beveridge, may conceives crises to result immediately from the glutting of markets for industrial products. but may offers a quite different analysis of the cause of gluts. the continually growing productivity of industry makes necessary a corresponding growth of the market, if disaster is to be avoided. but to enable producers to sell their growing output promptly prices must be reduced and wages must be raised in proportion as the supply of goods increases. for it is only by combining an increase in the money income of the mass of the population with a decrease in the cost of commodities that a country's home markets can be kept expanding with the progress of industrial methods. periods of prosperity attended by rising prices necessarily violate this condition of business hygiene and inevitably end by glutting markets. then come crises, which restore the body politic to health by forcing down prices to the point where consumers can purchase the supplies which are offered. the germ of the trouble, then, is the tendency of prices to rise during periods of increasing productivity. accordingly, may urges as remedy a legal limitation of the rate of profits, in order that producers may be forced to reduce prices as they increase output.[ ] hobson's theory of over-saving a third explanation of how markets come to be glutted periodically is offered by hobson's theory of over-saving. hobson holds that at any given time "there is an exact proportion of the current income which, in accordance with existing arts of production and existing foresight, is required to set up new capital so as to make provision for the maximum consumption throughout the near future." now, if in a period of prosperity the rate of consumption should rise _pari passu_ with the rate of production, there is no inherent reason why the prosperity might not continue indefinitely. but in modern societies, a considerable portion of the wealth produced belongs to a small class. in active times their incomes rise more rapidly than their consumption and the surplus income is perforce saved. there results for the community as a whole a slight deficiency of spending and a corresponding excess of saving. the wealthy class seeks to invest its new savings in productive enterprises--thereby increasing the supply of goods and also increasing the incomes from which further savings will be made. this process runs cumulatively during the years of prosperity until finally the markets become congested with goods which cannot be sold at a profit. then prices fall, liquidation ensues, capital is written down, and the incomes of the wealthy class are so reduced that savings fall below the proper proportion to spending. during this period of depression the glut of goods weighing upon the market is gradually worked off, and the prospect of profitable investment slowly returns. saving rises again to the right proportion to spending and good times prevail for a season. but after a while the chronic impulse towards over-saving becomes fully operative once more, and soon or late begets another congestion of the markets and this congestion begets another depression. proximately, then, the cause of alternating prosperity and depression is the tendency toward over-saving; ultimately it is the existence of the surplus incomes which lead to over-saving.[ ] hull's theory of the changing costs of construction an american business man, george h. hull, has recently drawn from his experience of practical affairs conclusions which resemble those drawn by [a german] professor spiethoff, from his theoretical analysis of economic records. high prices of construction, runs his thesis, is the hitherto "unknown cause of the mysterious depressions" from which the industrial nations suffer. in demonstrating the thesis, hull contends that agriculture, commerce, and finance fluctuate within relatively narrow limits. agriculture provides the necessities of life, commerce distributes them, and finance adjusts the bills. the volume of all this business is fairly constant, because the demand for necessities is incapable of sudden expansion or contraction. industry, on the contrary, may expand or contract indefinitely--especially that part of industry devoted to construction work. for the sources of "booms" and depressions, therefore, we must look to the enterprises which build and equip houses, stores, factories, railways, docks, and the like. of the huge total of construction, which hull believes to make over three-quarters of all industrial operations, at least two-thirds, even in the busiest of years, consists of repairs, replacements, and such extensions as are required by the growth of population. this portion of construction is necessary and must be executed every year. but the remaining portion is "optional construction," and is undertaken or not according as investors see a liberal or a meagre profit in providing new equipment. now, when the costs of construction fall low enough to arouse "the bargain-counter instinct," many of "the far-seeing ones who hold the purse-strings of the country" let heavy contracts, and their example is followed by the less shrewd. the addition of the resulting new business to the regular volume of "necessity construction" plus the provision of ordinary consumers' goods creates a "boom." but, after a year or two, contractors discover that their order books call for more work than they can get labor and materials to finish on contract time. when this oversold condition of the contracting trades is realized, the prices of labor and of raw materials rise rapidly. the estimated cost of construction on new contracts then becomes excessive. shrewd investors therefore begin to defer the execution of their plans for extending permanent equipment, and the letting of fresh contracts declines apace. as they gradually complete work on their old contracts, all the enterprises making iron, steel, lumber, cement, brick, stone, etc., then face a serious shrinkage of business. just as the execution of the large contracts for "optional construction," let in the low-priced period, brought on prosperity, so the smallness of such contracts, let in the high-price period, now brings on depression. then the prices of construction fall until they arouse "the bargain-counter instinct" of investors once more, and the cycle begins afresh. while hull grants that panics are often caused by strictly financial disorders, he holds that all industrial depressions are caused by high prices of construction, and foreshadowed by high prices of iron. consequently he believes that depressions could be prevented from occurring if the government would collect and publish monthly "all pertinent information in relation to the existing volume of construction under contract for future months, and all pertinent information in relation to the capacity of the country to produce construction materials to meet the demand thus indicated."[ ] sombart's theory of the uneven expansion in the production of organic and inorganic goods sombart, like many of the recent german writers, finds ill-proportioned production the chief cause of crises; but he thinks it inaccurate to say that the overproduction is in industrial equipment. for during the german "boom" which collapsed in - , overproduction was quite as marked in industries making equipment for electric lighting systems, telephone plants, street railways, dwellings, bicycles, etc., as in industries making machines. the real lack of proportion he sees in the unlike degree of expansion in industries using organic and inorganic materials. the inorganic industries, typified by steel, can expand to an enormous extent within a brief period without being seriously hampered by scarcity of raw materials. the organic industries, typified by cotton-spinning, on the contrary, are always in precarious dependence upon the year's harvests. in the organic industries, one may say, the condition of business is determined by the harvests; in the inorganic industries the condition of business determines the production of raw materials. the modern crisis, then, following upon a period of prosperity, is substantially the result of the different rhythm of production in the organic and inorganic realms. the organic industries dependent upon harvests cannot keep pace with the inorganic when the latter are being rapidly extended by heavy investments of capital.[ ] carver's theory of the dissimilar price fluctuations of producers' and consumers' goods carver has suggested a way of accounting for business cycles by applying the laws of value which govern producers' goods. he points out that a comparatively small change in a factory's selling prices will cause a much greater change in its profits, if volume of output and expenses remain the same. since the value of the factory as a going concern is the capitalized value of its prospective profits, a large increase of profits will cause a large increase of the factory's value, provided the high profits are expected to continue long. hence the law that "the value of producers' goods tends to fluctuate more violently than the value of consumers' goods." it follows that: "a slight rise in the price of consumers' goods will so increase the value of the producers' goods which enter into their production as to lead to larger investments in producers' goods. the resulting larger market for producers' goods again stimulates the production of such goods, and withdraws productive energy from the creation of consumers' goods. this for the time tends to raise the price of consumers' goods still higher, and this again to stimulate still further the creation of producers' goods. there is no check to this tendency until the new stock of producers' goods begin to pour upon the market an increased flow of consumers' goods. this tends to produce a fall in their value, which in turn produces a still greater fall in the value of producers' goods, and so the process goes." thus, once more, prosperity breeds crisis and depression; but this time the reason is found in the dissimilar fluctuations which the laws of value establish for the goods which people use and the equipment with which they are made.[ ] fisher's theory of the lagging adjustment of interest another interesting suggestion comes from irving fisher. by statistics he has shown that when for any reason prices begin to rise, interest rates advance, but not fast enough to offset the decline in the purchasing power of the principal caused by the rise of prices. during such periods, accordingly, borrowers on the whole get the better of lenders and make high profits. since the borrowers consist largely of active business men, precisely the class of greatest foresight, they grasp the situation more quickly than lenders. as a result of their desire to profit by their opportunity, loans are rapidly extended. this extension is effected largely by the lending of bank credits, that is, by the increasing of deposit currency. the greater volume of the currency combines with more rapid circulation of money and checks to increase prices again, and so to start the whole process anew on a higher level. "there is thus set up a vicious circle, which will continue just as long as the rate of interest fails to make a proper adjustment to put on the brakes and prevent over-borrowing." "but the rise in interest, though belated, is progressive, and, as soon as it overtakes the rate of rise in prices, the whole situation is changed." borrowers can no longer hope to make great profits, and the demand for loans ceases to expand. further, the higher rate of interest reduces the price of many of the securities used as collateral for loans. business men "who have counted on renewing their loans at the former rates and for the former amounts are unable to do so. it follows that some of them are destined to fail." there follow suspicions regarding the solvency of the banks, runs for cash, forced curtailment of loans, and exceedingly high rates of interest--in short, the phenomena of crisis. the contraction of loans is accompanied by a reduction of deposit currency and a slower circulation both of money and of checks. hence prices decline. again the rate of interest follows; but just as it was slow to rise so now it is slow to fall. then the business men who borrow find that the sluggish adjustment of interest reduces their profits. therefore loans, and the deposits based on loans, contract again. but the shrinking volume of deposit currency causes a further fall of prices, and once more interest lags behind and renews the process. thus the phase of depressions runs cumulatively until at last the progressive reduction of interest has overtaken the fall of prices. at this point business men find their profits rising to the normal level. borrowing becomes freer, the volume of deposit currency swells, prices start upward, and the cycle begins afresh.[ ] * * * * * beveridge ascribes crises to industrial competition, may to the disproportion between the increase in wages and in productivity, hobson to over-saving,... hull to high costs of construction, lescure to declining prospects of profits,... [seligman] to a discrepancy between anticipated profits and current capitalization, sombart to the unlike rhythm of production in the organic and inorganic realms, carver to the dissimilar price fluctuations of producers' and consumers' goods, fisher to the slowness with which interest rates are adjusted to changes in the price level. one seeking to understand the recurrent ebb and flow of economic activity characteristic of the present day finds these numerous explanations both suggestive and perplexing. all are plausible, but which is valid? none necessarily excludes all the others, but which is the most important? each may account for certain phenomena; does any one account for all the phenomena? or can these rival explanations be combined in such a fashion as to make a consistent theory which is wholly adequate? mitchell's theory of business cycles [ ]only by putting any theory to the practical test of accounting for actual business experience can its value be determined. the case for the present theory, therefore, and also the case against it, is to be found not in the easy summary which follows, but in the difficult chapters which precede,[ ] or better still in an independent effort to use it in interpreting the ceaseless ebb and flow of economic activity. . the cumulation of prosperity with whatever phase of the business cycle analysis begins, it must take for granted the conditions brought about by the preceding phase, postponing explanation of these assumptions until it has worked around the cycle and come again to its starting point. a revival of activity, then, starts with this legacy from depression: a level of prices low in comparison with the prices of prosperity, drastic reductions in the costs of doing business, narrow margins of profit, liberal bank reserves, a conservative policy in capitalizing business enterprises and in granting credits, moderate stocks of goods, and cautious buying. for reasons which will appear in the sequel, such conditions are accompanied by an expansion in the physical volume of trade. though slow at first, this expansion is cumulative. now it is only a question of time when an increase in the amount of business transacted which grows more rapid as it proceeds will turn dullness into activity. left to itself, this transformation is effected by slow degrees; but it is often hastened by some propitious event arising from other than domestic business sources, such as exceptionally profitable harvests, heavy purchases of supplies by government, or a marked increase in the export demand for the products of home industry. even when a revival of activity is confined at first within a narrow range of industries or within some single section of the country, it soon spreads to other parts of the business field. for the active enterprises must buy more materials, wares, and current supplies from other enterprises, the latter from still others, and so on without assignable limits. meanwhile all enterprises which become busier employ more labor, use more borrowed money, and make higher profits. there results an increase in family incomes and an expansion of consumers' demand, which likewise spreads out in ever widening circles. shopkeepers pass on larger orders for consumers' goods to wholesale merchants, manufacturers, importers, and producers of raw materials. all these enterprises require more supplies of various kinds for handling their growing trade, and increase the sums which they pay out to employés, lenders, and proprietors--thus stimulating afresh the demand for both producers' and consumers' goods. soon or late this expansion of orders reaches back to the enterprises from which the impetus to greater activity was first received, and then this whole complicated series of reactions begins afresh at a higher pitch of intensity. all this while, the revival of activity is instilling a feeling of optimism among business men, and this feeling both justifies itself and heightens the forces which engendered it by making every one readier to buy with freedom. while the price level is often sagging slowly when a revival begins, the cumulative expansion in the physical volume of trade presently stops the fall and starts a rise. for, when enterprises have in sight as much business as they can handle with their existing facilities of standard efficiency, they stand out for higher prices on additional orders. this policy prevails even in the most keenly competitive trades, because additional orders can be executed only by breaking in new hands, starting old machinery, buying new equipment, or making some other change which involves increased expense. the expectation of its coming hastens the advance. buyers are anxious to secure or to contract for large supplies while the low level of quotations continues, and the first definite signs of an upward trend of quotations brings out a sudden rush of orders. like the increase in the physical volume of business, the rise of prices spreads rapidly; for every advance of quotations puts pressure upon some one to recoup himself by making a compensatory advance in the prices of what he has to sell. the resulting changes in prices are far from even, not only as between different commodities, but also as between different parts of the system of prices. retail prices lag behind wholesale, the prices of staple consumers' behind the prices of staple producers' goods, and the prices of finished products behind the prices of their raw materials. among raw materials, the prices of mineral products reflect the changed business conditions more regularly than do the prices of raw animal, farm, or forest products. wages rise often more promptly, but always in less degree than wholesale prices; discount rates rise sometimes more slowly than commodities and sometimes more rapidly; interest rates on long loans always more sluggishly in the early stages of revival, while the prices of stocks--particularly of common stocks--both precede and exceed commodity prices on the rise. the causes of these differences in the promptness and the energy with which various classes of prices respond to the stimulus of business activity are found partly in differences of organization between the markets for commodities, labor, loans, and securities; partly in the technical circumstances affecting the relative demand for and supply of these several classes of goods; and partly in the adjusting of selling prices to changes in the aggregate of buying prices which a business enterprise pays, rather than to changes in the prices of the particular goods bought for resale. in the great majority of enterprises, larger profits result from these divergent price fluctuations coupled with the greater physical volume of sales. for, while the prices of raw materials and of wares bought for resale usually, and the prices of bank loans often, rise faster than selling prices, the prices of labor lag far behind, and the prices which make up supplementary costs, _i. e._, interest, rent, depreciation, insurance, salaries for general officials and the like, are mainly stereotyped for a time by old agreements regarding salaries, leases, and bonds. this increase of profits, combined with the prevalence of business optimism, leads to a marked expansion of investments. of course the heavy orders for machinery, the large contracts for new construction, etc., which result, swell still further the physical volume of business, and render yet stronger the forces which are driving prices upward. indeed, the salient characteristic of this phase of the business cycle is the cumulative working of the various processes which are converting a revival of trade into intense prosperity. not only does every increase in the physical volume of trade cause other increases, every convert to optimism makes new converts, and every advance of prices furnishes an incentive for fresh advances; but the growth of trade also helps to spread optimism and to raise prices, while optimism and rising prices both support each other and stimulate the growth of trade. finally, as has just been said, the changes going forward in these three factors swell profits and encourage investments, while high profits and heavy investments react by augmenting trade, justifying optimism, and raising prices. . how prosperity breeds a crisis while the processes just sketched work cumulatively for a time to enhance prosperity, they also cause a slow accumulation of stresses within the balanced system of business--stresses which ultimately undermine the conditions upon which prosperity rests. among these stresses is the gradual increase in the costs of doing business. the decline in supplementary costs per unit of output ceases when enterprises have once secured all the business they can handle with their standard equipment, and a slow increase of these costs begins when the expiration of old contracts makes necessary renewals at the high rates of interest, rent, and salaries which prevail in prosperity. meanwhile prime costs, wages and raw materials, rise at a relatively rapid rate. equipment which is antiquated and plants which are ill located or otherwise work at some disadvantage are brought again into operation. the price of labor rises, not only because standard rates of wages go up, but also because of the prevalence of higher pay for overtime. more serious still is the fact that the efficiency of labor declines, because overtime brings weariness, because of the employment of "undesirables," and because crews cannot be driven at top speed when jobs are more numerous than men to fill them. the prices of raw materials continue to rise faster on the average than the selling prices of products. finally, the numerous small wastes, incident to the conduct of business enterprises, creep up when managers are hurried by a press of orders demanding prompt delivery. a second stress is the accumulating tension of the investment and money markets. the supply of funds available at the old rates of interest for the purchase of bonds, for lending on mortgages, and the like, fails to keep pace with the rapidly swelling demand. it becomes difficult to negotiate new issues of securities except on onerous terms, and men of affairs complain of the "scarcity of capital." nor does the supply of bank loans grow fast enough to keep up with the demand. for the supply is limited by the reserves which bankers hold against their expanding demand liabilities. full employment and active retail trade cause such a large amount of money to remain suspended in active circulation that the cash left in the banks increases rather slowly, even when the gold output is rising most rapidly. on the other hand, the demand for bank loans grows not only with the physical volume of trade, but also with the rise of prices, and with the desire of men of affairs to use their own funds for controlling as many business ventures as possible. moreover, this demand is relatively inelastic, since many borrowers think they can pay high rates of discount for a few months and still make profits on their turnover, and since the corporations which are unwilling to sell long-time bonds at the hard terms which have come to prevail try to raise part of the funds they require by discounting one- or two-year notes. tension in the bond and money markets is unfavorable to the continuance of prosperity, not only because high rates of interest reduce the prospective margins of profit, but also because they check the expansion in the volume of trade out of which prosperity developed. many projected ventures are relinquished or postponed, either because borrowers conclude that the interest would absorb too much of their profits, or because lenders refuse to extend their commitments farther. there is one important group of enterprises which suffers an especially severe check from this cause in conjunction with high prices--the group which depends primarily upon the demand for industrial equipment. in the earlier stages of prosperity, this group usually enjoys a season of exceptionally intense activity. but when the market for bonds becomes stringent, and--what is often more important--when the cost of construction has become high, business enterprises and individual capitalists alike defer the execution of many plans for extending old and erecting new plants. as a result, contracts for this kind of work become less numerous as the climax of prosperity approaches. then the steel mills, foundries, machine factories, copper smelters, quarries, lumber mills, cement plants, construction companies, general contractors, and the like find their orders for future delivery falling off. while for the present they may be working at high pressure to complete old contracts within the stipulated time, they face a serious restriction of trade in the near future. the imposing fabric of prosperity is built with a liberal factor of safety: but the larger grows the structure the more severe become these internal stresses. the only effective means of preventing disaster while continuing to build is to raise selling prices time after time high enough to offset the encroachments of costs upon profits, to cancel the advancing rates of interest, and to keep investors willing to contract for fresh industrial equipment. but it is impossible to keep selling prices rising for an indefinite time. in default of other checks, the inadequacy of cash reserves would ultimately compel the banks to refuse a further expansion of loans upon any terms. but before this stage has been reached, the rise of prices is stopped by the consequences of its own inevitable inequalities. these inequalities become more glaring the higher the general level is forced; after a time they threaten serious reduction of profits to certain business enterprises, and the troubles of these victims dissolve that confidence in the security of credits with which the whole towering structure of prosperity has been cemented. what, then, are the lines of business in which selling prices cannot be raised sufficiently to prevent a reduction of profits? there are certain lines in which selling prices are stereotyped by law, by public commissions, by contracts of long term, by custom, or by business policy, and in which no advance, or but meagre advances can be made. there are other lines in which prices are always subject to the incalculable chances of the harvests, and in which the market value of all accumulated stocks of materials and finished goods wavers with the crop reports. there are always some lines in which the recent construction of new equipment has increased the capacity for production faster than the demand for their wares has expanded under the repressing influence of the high prices which must be charged to prevent a reduction of profits. the unwillingness of investors to let fresh contracts threatens loss not only to contracting firms of all sorts, but also to all the enterprises from whom they buy materials and supplies. the high rates of interest not only check the current demand for wares of various kinds, but also clog the effort to maintain prices by keeping large stocks of goods off the market until they can be sold to better advantage. finally, the very success of other enterprises in raising selling prices fast enough to defend their profits aggravates the difficulties of the men who are in trouble. for to the latter every further rise of prices for products which they buy means a further strain upon their already stretched resources. as prosperity approaches its height, then, a sharp contrast develops between the business prospects of different enterprises. many, probably the majority, are making more money than at any previous stage of the business cycle. but an important minority, at least, face the prospect of declining profits. the more intense prosperity becomes, the larger grows this threatened group. it is only a question of time when these conditions, bred by prosperity, will force some radical readjustment. now such a decline of profits threatens worse consequences than the failure to realize expected dividends. for it arouses doubt concerning the security of outstanding credits. business credit is based primarily upon the capitalized value of present and prospective profits, and the volume of credits outstanding at the zenith of prosperity is adjusted to the great expectations which prevail when the volume of trade is enormous, when prices are high, and when men of affairs are optimistic. the rise of interest rates has already narrowed the margins of security behind credits by reducing the capitalized value of given profits. when profits themselves begin to waver the case becomes worse. cautious creditors fear lest the shrinkage in the market rating of the business enterprises which owe them money will leave no adequate security for repayment. hence they begin to refuse renewals of old loans to the enterprises which cannot stave off a decline of profits, and to press for a settlement of outstanding accounts. thus prosperity ultimately brings on conditions which start a liquidation of the huge credits which it has piled up. and in the course of this liquidation prosperity merges into crisis. . crises and panics once begun, the process of liquidation extends rapidly, partly because most enterprises which are called upon to settle their maturing obligations in turn put similar pressure upon their own debtors, and partly because, despite all efforts to keep secret what is going forward, news presently leaks out and other creditors take alarm. while this financial readjustment is under way, the problem of making profits on current transactions is subordinated to the more vital problem of maintaining solvency. business managers concentrate their energies upon providing for their outstanding liabilities and upon nursing their financial resources, instead of upon pushing their sales. in consequence, the volume of new orders falls off rapidly. that is, the factors which were already dimming the prospects of profits in certain lines of business are reinforced and extended. even when the overwhelming majority of enterprises meet the demand for payment with success, the tenor of business developments therefore undergoes a change. expansion gives place to contraction, though without a violent wrench. discount rates rise higher than usual, securities and commodities fall in price, and as old orders are completed working forces are reduced; but there is no epidemic of bankruptcies, no run upon banks, and no spasmodic interruption of the ordinary business processes. at the opposite extreme from crises of this mild order stand the crises which degenerate into panics. when the process of liquidation reaches a weak link in the chain of interlocking credits and the bankruptcy of some conspicuous enterprise spreads unreasoning alarm among the business public, then the banks are suddenly forced to meet a double strain--a sharp increase in the demand for loans, and a sharp increase in the demand for repayment of deposits. if the banks prove able to honor both demands without flinching, the alarm quickly subsides. but if, as has happened twice in america since , many solvent business men are refused accommodation at any price, and if depositors are refused payment in full, the alarm turns into panic. a restriction of payments by the banks gives rise to a premium upon currency, to hoarding of cash, and to the use of various unlawful substitutes for money. a refusal by the banks to expand their loans, still more a policy of contraction, sends interest rates up to three or four times their usual figures, and causes forced suspensions and bankruptcies. there follow appeals to the government for extraordinary aid, frantic efforts to import gold, the issue of clearing-house loan certificates, and an increase of bank-note circulation as rapid as the existing system permits. collections fall into arrears, domestic-exchange rates are dislocated, workmen are discharged because employers cannot get money for pay-rolls or fear lest they cannot get pay for goods when delivered, stocks fall to extremely low levels, even the best bonds decline somewhat in price, commodity markets are disorganized by sacrifice sales, and the volume of business is violently contracted. that crises still degenerate on occasion into panics in america, but not in england, france, or germany, arises primarily from differences in banking organization and practice. in each of the three european countries, the banking system as a whole is so organized by the prevalence of branch banking and the existence of a central bank that reserves which bear a small proportion to the aggregate demand liabilities of all the offices can be applied when and where they are most needed. the central bank not only carries a reserve which is far in excess of immediate requirements in ordinary times, but also uses this reserve boldly in times of stress, presenting in both these respects a marked contrast to the policy of american banks. as a result, european business men need not fear either a refusal to lend or a restriction of payments by the banks on which they depend. and panic has small chance to develop where the depositor can get his money at need and the solvent business man can borrow. [written before the establishment of the federal reserve system.] . depression the close of a panic is usually followed by the reopening of numerous enterprises which had been shut during the weeks of severest pressure. but this prompt revival of activity is partial and short-lived. it is based chiefly upon the finishing of orders received but not completely executed in the preceding period of prosperity, or upon the effort to work up and market large stocks of materials already on hand or contracted for. it comes to an end as this work is gradually finished, because new orders are not forthcoming in sufficient volume to keep the mills and factories busy. there follows a period during which depression spreads over the whole field of business and grows more severe. consumers' demand declines in consequence of wholesale discharges of wage-earners, the gradual exhaustion of past savings, and the reduction of other classes of family incomes. with consumers' demand falls the business demand for raw materials, current supplies, and equipment used in making consumers' goods. still more severe is the shrinkage of investors' demand for construction work of all kinds, since few individuals or enterprises care to sink money in new business ventures so long as trade remains depressed and the price level is declining. the contraction in the physical volume of business which results from these several shrinkages in demand is cumulative, since every reduction of employment causes a reduction of consumers' demand, and every decline in consumers' demand depresses current business demand and discourages investment, thereby causing further discharges of employés and reducing consumers' demand once more. with the contraction in the physical volume of trade goes a fall of prices. for, when current orders are insufficient to employ the existing equipment for production, competition for what business is to be had becomes keener. this decline spreads through the regular commercial channels which connect one enterprise with another, and is cumulative, since every reduction in price facilitates, if it does not force, reductions in other prices, and the latter reductions react in their turn to cause fresh reductions at the starting point. as the rise of prices which accompanied revival, so the fall which accompanies depression is characterized by certain regularly recurring differences in degree. wholesale prices fall faster than retail, the prices of producers' goods faster than those of consumers' goods, and the prices of raw materials faster than those of manufactured products. the prices of raw mineral products follow a more regular course than those of raw forest, farm, or animal products. as compared with general index numbers of commodity prices at wholesale, index numbers of wages and interest on long-time loans decline in less degree, while index numbers of discount rates and of stocks decline in greater degree. the only important group of prices to rise in the face of depression is that of high-grade bonds. of course the contraction in the physical volume of trade and the fall of prices reduce the margin of present and prospective profits, spread discouragement among business men, and check enterprise. but they also set in motion certain processes of readjustment by which depression is gradually overcome. the prime costs of doing business are reduced by the rapid fall in the prices of raw materials and of bank loans, by the marked increase in the efficiency of labor which comes when employment is scarce and men are anxious to hold their jobs, and by close economy on the part of managers. supplementary costs also are reduced by reorganizing enterprises which have actually become or which threaten to become insolvent, by the sale of other enterprises at low figures, by reduction of rentals and refunding of loans, by charging off bad debts and writing down depreciated properties, and by admitting that a recapitalization of business enterprises--corresponding to the lower prices of stocks--has been effected on the basis of lower profits. while these reductions in costs are still being made, the demand for goods ceases to shrink and then begins slowly to expand--a change which usually comes in the second or third year of depression. accumulated stocks left over from prosperity are gradually exhausted, and current consumption requires current production. clothing, furniture, machinery and other moderately durable articles which have been used as long as possible are finally discarded and replaced. population continues to increase at a fairly uniform rate: the new mouths must be fed and the new backs clothed. new tastes appear among consumers and new methods among producers, giving rise to demand for novel products. most important of all, the investment demand for industrial equipment revives; for though saving may slacken it does not cease, with the cessation of foreclosure sales and corporate reorganizations the opportunities to buy into old enterprises at bargain prices become fewer, capitalists become less timid as the crisis recedes into the past, the low rates of interest on long-term bonds encourage borrowing, the accumulated technical improvements of several years may be utilized, and contracts can be let on most favorable conditions as to cost and prompt execution. once these various forces have set the physical volume of trade to expanding again, the increase proves cumulative, though for a time the pace of growth is kept slow by the continued sagging of prices. but while the latter maintains the pressure upon business men and prevents the increased volume of orders from producing a rapid rise of profits, still business prospects become gradually brighter. old debts have been paid, accumulated stocks of commodities have been absorbed, weak enterprises have been reorganized, the banks are strong-all the clouds upon the financial horizon have disappeared. everything is ready for a revival of activity, which will begin whenever some fortunate circumstance gives a sudden fillip to demand, or, in the absence of such an event, when the slow growth of the volume of business has filled order books and paved the way for a new rise of prices. such is the stage of the business cycle with which the analysis began, and, having accounted for its own beginning, the analysis ends. moore's "rainfall" theory [ ]to professor moore the fundamental problem of economic dynamics is to formulate the law governing the "ebb and flow of economic life" which is "the most general and characteristic phenomenon of a changing society." the motto of the department of agriculture of the united states--"agriculture is the foundation of manufacture and commerce"--is significant and that the farmer is at the mercy of the weather is proverbial. there may be such a close connection between the weather, the crops, and crises that we shall be able to find in weather changes the cause of crises. an examination of all the numerous factors involved in the problem would be a stupendous task and professor moore limits himself to a consideration of a selected few. "the variation in the quantity of the rainfall is one of the weather changes known to have a marked effect upon the yield of the crops." hence the inquiry is directed to an examination of the "appropriate data with reference to three things: ( ) the periodicity of rainfall; ( ) the effect of rainfall on the crops; ( ) the relation of the yield of the crops to economic cycles." the study is a statistical one conducted with the greatest of care to avoid error and the conclusions are deserving of the most careful consideration. all generalizations are made carefully and used cautiously with a full realization that a limited area--the upper mississippi valley--has been used and a period of only seventy-two years surveyed. of the numerous climatic factors only rainfall has been examined. remembering that these limitations are fully realized we may state the conclusions in professor moore's own words: "the fundamental, persistent cause of the cycles in the yield of the crops is the cyclical movement in the weather conditions represented by the rhythmically changing amount of rainfall; the cyclical movement in the yield of the crops is the fundamental, persistent cause of economic cycles." this should be supplemented with a statement of the law that has been sought and which may be formulated thus: the weather conditions represented by the rainfall in the central part of the united states, and probably in other continental areas, pass through cycles of approximately thirty-three years and eight years in duration, causing like cycles in the yield per acre of the crops; these cycles of crops constitute the natural, material current which drags upon its surface the lagging, rhythmically changing values and prices with which the economist is more immediately concerned.... in conclusion we may merely observe that many theories are obviously presented to defend some of the other views of their advocates. the connection of the socialist theory with the socialistic idea of value is an obvious one. it may also be true that interest in some particular phase of study may cause the investigator to overlook the importance of other elements in the problem. thus to professor moore climatic conditions seem of great importance, while professor mitchell relegates them to a very minor position. as time passes it will doubtless be possible to estimate the significance of each factor with more accuracy. when this is done a more satisfactory theory can be formulated and methods of prevention and alleviation employed to better advantage. stringent money and financial panics[ ] is there any tendency for financial panics to occur more frequently in the seasons of the year when the money market is normally stringent? it has been found that the two periods of the year in which the money market is most likely to be strained are the periods of the spring trade revival (about march and april) and that of the crop-moving demand in the fall; and that the two periods of the easiest money market are the "readjustment period," extending from about the middle of january to about the first of march, and the period of the summer depression, extending through the summer months. of the eight panics which have occurred since , four occurred in the fall or early winter (_i. e._, those of , , , and ); and one (_i. e._, that of ) extended from march until well along in november. out of a total of twenty-one minor panics or "panicky periods" occurring between and , inclusive, nine occurred during the fall and early winter, eight during the spring, one began in may and extended into june, three occurred during the summer months, and one occurred in february. the evidence accordingly points to a tendency for the panics to occur during the seasons normally characterized by a stringent money market. how banks should handle panics [ ]whatever persons--one bank or many banks--in any country hold the banking reserve of that country, ought at the very beginning of an unfavourable foreign exchange at once to raise the rate of interest, so as to prevent their reserve from being diminished farther, and so as to replenish it by imports of bullion.... a domestic drain is very different. such a drain arises from a disturbance of credit within the country, and the difficulty of dealing with it is the greater, because it is often caused, or at least often enhanced, by a foreign drain. times without number the public have been alarmed mainly because they saw that the banking reserve was already low, and that it was daily getting lower. the two maladies--an external drain and an internal--often attack the money market at once. what then ought to be done? in opposition to what might be at first sight supposed, the best way for the bank or banks who have the custody of the bank reserve to deal with a drain arising from internal discredit, is to lend freely. the first instinct of every one is the contrary. there being a large demand on a fund which you want to preserve, the most obvious way to preserve it is to hoard it--to get in as much as you can, and to let nothing go out which you can help. but every banker knows that this is not the way to diminish discredit. this discredit means, "an opinion that you have not got any money," and to dissipate that opinion, you must, if possible, show that you have money: you must employ it for the public benefit in order that the public may know that you have it. the time for economy and for accumulation is before. a good banker will have accumulated in ordinary times the reserve he is to make use of in extraordinary times. ordinarily discredit does not at first settle on any particular bank, still less does it at first concentrate itself on the bank or banks holding the principal cash reserve. these banks are almost sure to be those in best credit, or they would not be in that position, and, having the reserve, they are likely to look stronger and seem stronger than any others. at first, incipient panic amounts to a kind of vague conversation: is a b as good as he used to be? has not c d lost money? and a thousand such questions. a hundred people are talked about, and a thousand think--"am i talked about, or am i not?" "is my credit as good as it used to be, or is it less?" and every day, as a panic grows, this floating suspicion becomes both more intense and more diffused; it attacks more persons, and attacks them all more virulently than at first. all men of experience, therefore, try to "strengthen themselves," as it is called, in the early stage of a panic; they borrow money while they can; they come to their banker and offer bills for discount, which commonly they would not have offered for days or weeks to come. and if the merchant be a regular customer, a banker does not like to refuse, because if he does he will be said, or may be said, to be in want of money, and so may attract the panic to himself. not only merchants but all persons under pecuniary liabilities--present or imminent--feel this wish to "strengthen themselves," and in proportion to those liabilities.... a panic, in a word, is a species of neuralgia, and according to the rules of science you must not starve it. the holders of the cash reserve must be ready not only to keep it for their own liabilities, but to advance it most freely for the liabilities of others. they must lend to merchants, to minor bankers, to "this man and that man," whenever the security is good. in wild periods of alarm, one failure makes many, and the best way to prevent the derivative failures is to arrest the primary failure which causes them. the way in which the panic of was stopped by advancing money has been described in so broad and graphic a way that the passage has become classical. "we lent it," said mr. harmon, on behalf of the bank of england, "by every possible means and in modes we had never adopted before; we took in stock on security, we purchased exchequer bills, we made advances on exchequer bills, we not only discounted outright, but we made advances on the deposit of bills of exchange to an immense amount, in short, by every possible means consistent with the safety of the bank, and we were not on some occasions over-nice. seeing the dreadful state in which the public were, we rendered every assistance in our power." after a day or two of this treatment, the entire panic subsided, and the "city" was quite calm. the problem of managing a panic must not be thought of as mainly a "banking" problem. it is primarily a mercantile one. all merchants are under liabilities; they have bills to meet soon,... are dependent on borrowing money, and large merchants are dependent on borrowing much money. at the slightest symptom of panic many merchants want to borrow more than usual; they think they will supply themselves with the means of meeting their bills while those means are still forthcoming. if the bankers gratify the merchants, they must lend largely just when they like it least; if they do not gratify them, there is a panic. on the surface there seems a great inconsistency in all this. first, you establish in some bank or banks a certain reserve; you make of it or them a kind of ultimate treasury, where the last shilling of the country is deposited and kept. and then you go on to say that this final treasury is also to be the last lending-house; that out of it unbounded, or at any rate immense, advances are to be made when no one else lends. this seems like saying--first, that the reserve should be kept, and then that it should not be kept. but there is no puzzle in the matter. the ultimate banking reserve of a country (by whomsoever kept) is not kept out of show, but for certain essential purposes, and one of those purposes is the meeting of a demand for cash caused by an alarm within the country. it is not unreasonable that our ultimate treasure in particular cases should be lent; on the contrary, we keep that treasure for the very reason that in particular cases it should be lent. when reduced to abstract principle, the subject comes to this. an "alarm" is an opinion that the money of certain persons will not pay their creditors when those creditors want to be paid. if possible, that alarm is best met by enabling those persons to pay their creditors to the very moment. for this purpose only a little money is wanted. if that alarm is not so met, it aggravates into a panic, which is an opinion that most people, or very many people, will not pay their creditors; and this too can only be met by enabling all those persons to pay what they owe, which takes a great deal of money. no one has enough money, or anything like enough, but the holders of the bank reserve.... ... before , an issue of notes [of the bank of england], as in , to quell a panic entirely internal did not diminish the bullion reserve. the notes went out, but they did not return. they were issued as loans to the public, but the public wanted no more; they never presented them for payment; they never asked that sovereigns should be given for them. but the acceptance of a great liability during an augmenting alarm, though not as bad as an equal advance of cash, [_i. e._, specie] is the thing next worst. at any moment the cash may be demanded. supposing the panic to grow, it will be demanded, and the reserve will be lessened accordingly.... "on extraordinary occasions," says ricardo, "a general panic may seize the country, when every one becomes desirous of possessing himself of the precious metals as the most convenient mode of realizing or concealing his property--against such panic banks have no security on any system." the bank or banks which hold the reserve may last a little longer than the others; but if apprehension pass a certain bound, they must perish too. the use of credit is, that it enables debtors to use a certain part of the money their creditors have lent them. if all those creditors demand all that money at once, they cannot have it, for that which their debtors have used, is for the time employed, and not to be obtained. with the advantages of credit we must take the disadvantages, too; but to lessen them as much as we can; we must keep a great store of ready money always available, and advance out of it very freely in periods of panic, and in times of incipient alarm. footnotes: [ ] e. m. patterson, _the theories advanced in explanation of economic crises. annals of american academy of political and social science_, vol. , may, , pp. - . [ ] address by edwin r. a. seligman, _the crisis of in the light of history_, in _the currency problem and the present financial situation_, a series of addresses delivered at columbia university, - , ix-xxv. the columbia university press, . [ ] wesley clair mitchell, _business cycles_, _pp._ - . the university of california press. berkeley, . [ ] the not infrequent statement that prosperity sometimes merges into depression without the intervention of a crisis means simply that the writers understand by crisis a violent disturbance of business conditions. it is in closer accord with every-day usage to call such occurrences "panics," and to apply the term "crisis" to the transition from prosperity to depression even when accomplished quietly. on closer inspection, a business cycle is often found to be complicated by minor changes, such as the interruption of depression by a premature resumption of activity, the occurrence of a pause or even a slight crisis in the midst of prosperity, and the like. but for the present it is wise to confine attention to the broadest features of the cycle. [ ] compare w. sombart, _versuch, einer systematik der wirtschaftskrisen_, archiv für sozialwissenschaft, , pp. - . [ ] the first type of theories mentioned in the preceding section. [ ] w. h. beveridge, _unemployment_, ed. (london, ), chapter iv. [ ] r.e. may, _das grundgesetz der wirtschaftskrisen_ (berlin, ). [ ] i have followed mr. hobson's latest exposition, _the industrial system_ (london, ), chapters iii and xviii. [ ] george h. hull, _industrial depressions_ (new york, ), p. . [ ] w. sombart, _die störungen im deutschen wirtschaftsleben_, schriften des vereins für socialpolitik, vol. , pp. - . [ ] t. n. carver, "a suggestion for a theory of industrial depressions," _quarterly journal of economics_, may, , pp. - . [ ] irving fisher, _the purchasing power of money_ (new york, ), chapter iv, and chapter xi, §§ , , . compare the same writer's summary statement of his theory in _moody's magazine_, february, , pp. - , and h. g. brown's paper "typical commercial crises _versus_ a money panic," _yale review_, august, . [ ] adapted from wesley clair mitchell, _business cycles_, pp. - . the university of california press. . [ ] the extract here reproduced is from the concluding chapter of the work indicated.--editor. [ ] e. m. patterson, _the theories advanced in explanation of economic crises_. _annals of american academy of political and social science_, vol. , may, , pp. , , . [ ] e. w. kemmerer, _seasonal variations in the relative demand for currency and capital in the united states_, p. . publications of the national monetary commission, senate document no. , st congress, d session. [ ] walter bagehot, _lombard street_, pp. - . charles scribner's sons. new york. . (first edition, .) chapter xxx the weaknesses of our banking system prior to the establishment of the federal reserve system conflicting opinions [ ]for fifty years the united states has lived rather happily under the national bank act, born in the strife of the civil war and developed in the period of the nation's greatest expansion and growth. this act has, by its record, earned for itself a place as a great piece of constructive legislation; and the recognition of this fact is responsible for the preservation of our national banking system almost intact under the federal reserve act. the national bank act removed the ills of wild-cat banking, which so afflicted the country prior to the civil war; gave us an absolutely safe form of money which, although not legal tender, is taken without question by everyone; and has made possible an enormous expansion in the banking resources and facilities of the country. in spite of the denunciation and abuse which have been heaped upon it, the act has been reasonably satisfactory in operation. anyone who reviews the figures of the material growth and prosperity of the nation and the rise of its financial power will be forced to the conclusion that no act that was fundamentally unsound could have been an integral part of the achievement of such a notable record. designed for the purpose of encouraging a system of independent banks, the act has been responsible, directly and indirectly, for the creation of some twenty-five thousand banking institutions in this country, practically all of which are independent of each other. instead of a small banking class and an equally small group of banks, all under the domination of one or a very few interests, we have developed a system of banking which has sprung from the people, and which is closer to the people than that of any other country. [ ]we have grown and prospered in spite of an imperfect, repressing, and perilous banking and currency system. we have grown as a vine sometimes forces its way through a crevice in a wall, our very growth inviting disaster and death, our wonderful vitality hastening catastrophe.... over fifty years of growth under the old banking act has been forced by the generosity of the soil of a new land, by the unconquerable energy and resiliency of a virile and courageous people; yet it has been interrupted by periods of business depression and stagnation; our progress punctuated by panics, discreditable, appalling--to many ruinous.... the immediate results ... have been crashing of banks and commercial houses, the wholesale stoppage of industries, the wiping away or cruel draining of the results of honest thrift, denial to willing and hungry labor of the opportunity to earn bread and shelter. [ ]a physician would probably say that what primarily ails our currency system and causes panics and desperate stringencies is something akin to _arteriosclerosis_. the veins and arteries of credit, which in order to function properly ought to be elastic and contractile like rubber, are hard and brittle as glass. when subjected to unusual strain they can yield but little and are very liable to rupture, and when once stretched they are apt to remain over-enlarged.... the temporary act of may , , which relaxed the rigor of the law in moments of critical emergency [as to note issues] by permitting additions to the currency to be based upon other security by payment of a heavy and increasing tax, was no real solution of the situation. it contained no provision to render the currency responsive to ordinary fluctuations in currency demand, and resort to its provisions in times of great stress might easily precipitate a panic if one did not already exist. it was only enacted for six years, and was only regarded by its sponsors as a temporary palliative pending the preparation of a permanent cure. _one universally recognized essential ... of a proper banking and currency plan is provision for a more flexible and responsive note issue_. inflexibility of ledger balances when we turn to credit in the form of ledger balances or "deposits" and enquire as to the causes of their inflexibility, the explanation also rests in quite familiar facts. there are two peculiar features of our banking system which are practically without counterpart in other important countries, and which render ledger balances or deposit credits in this country less flexible and responsive than such balances or credits are elsewhere. the _first_ is the rigidity of our reserve laws, and the _second_ is the lack of any bankers' bank or similar institution, with ample resources and lending power, from which the banks can replenish their own reserves when necessary. rigid reserve requirements outside of the united states i know of only one other country in which the law requires a cash reserve to be held against deposits. that country is holland, and the law applies to only one institution, the bank of the netherlands, and that institution does not hold enough deposits to make it worth mentioning in this connection (less than $ , , ). our national banking law, however, and the banking laws of most of the states are unreasonably and unsoundly rigorous in this regard. not only must stated proportions of all deposits be held by the banks in reserve, but these reserves, according to the law, can never under any circumstances be used. it is very much as if the government, having established naval and military reserve forces in times of peace, were to insist that these forces should not be used in time of war, in order to maintain them intact as reserves. whenever the cash held by a bank has fallen to the required minimum, the bank cannot legally continue to extend accommodation. it cannot issue more notes unless it has additional government bonds to deposit for their security, and it cannot enlarge its ledger balances unless it has additional reserves. no matter what may be the stress of an emergency, or whether it is due to war, catastrophe, or unreasoning fear, there are no legal means for relaxing this requirement. and so, in moments of great sensitiveness and anxiety, legal spokes are apt to be suddenly thrust into the wheels of credit, and the whole machinery of business brought crunching to a standstill. _a second essential then of any adequate currency plan is some provision which will render the reserve requirements pliable and the reserves of possible use._ need of bankers' bank our banks also have less flexibility in their power to lend ledger balances than the banks of practically all other countries for another reason, because of the lack of any permanent institution or institutions which can perform for them services similar to those which they perform for their customers. an individual bank makes the money of each and all of its customers flexible in amount, by rendering it of mutual service, and available to those who most need it, when they most need it, and, in order that the money of individual banks may be similarly flexible in amount, of mutual service to each other and available to those institutions which most need it, when they most need it, they require in their turn some agency which will do for them severally and jointly what they do for the general public.... it does not matter what such an agency may be called. it may be a discount bureau, or a rediscount bureau, a national clearing house, or a national or regional reserve association. out of deference to those great financial experts who write the banking clauses of political platforms and whose bans and edicts are blessed with sacerdotal infallibility, when such an institution is proposed for this country, it must not be called a central bank. such an institution is perhaps most plainly designated if it is called a "bankers' bank," but by whatever name it is referred to, the need of such an institution is the fact of primary importance in the american banking situation. just as an individual bank economizes and mobilizes and makes flexible in amount the funds of individual members of a community, so a bankers' bank mobilizes and economizes and makes flexible in amount the money of the banks. it collects money from institutions and localities when and where they do not need it, and lends it to others when and where they do. in like manner the active deposits of the various banks, as they are not all wanted simultaneously, furnish the bankers' banks with a large surplus reserve of lending power, which in turn is an invaluable source of flexibility to the individual banks. by its means they can, if need be, rediscount their commercial paper, exchange their unmatured assets for actual cash, and secure its still better known credit in place of their own. by its means their reserves can be replenished and their lending power made responsive to the needs of their communities. a bankers' bank makes it possible for the money of the individual banks to do many times the work it would do if left in the separate institutions, and to do it far more effectively. it is the only ultimate safeguard, the only scientific deposit guarantee, the only sound basis of flexibility in any banking system. as some philosopher once said of god--if such an institution did not already exist, people would certainly have to invent one, and, as we have no such institution permanently and legally established in america to-day, _the prime essential of any sufficient banking plan is the equipment of our system in some way or other with the facilities of a bankers' bank_. the parcellation of reserves [ ]if the absolute certainty of ability to pay all depositors in money on demand be taken as the _summum bonum_ of banking, an idea which quite generally prevails among the unthinking, it is interesting to reckon the cost. a bank has no fairy wand with a wave of which it can transmute into gold the amounts due it, whether represented by borrowers' notes or balances due from other banks. such repayments have an element of uncertainty which pervades all human affairs. all uncertainty could be eliminated only by having in money on hand an amount equal to the total of liabilities to depositors. a deposit with a bank would then be simply a warehousing transaction. if a readjustment to such a condition were accomplished, and if we consider only the ultimate result, and not the cataclysm of the process, it would clearly prove such an extinguishing restriction of commerce as would cost fabulously more than the value of the advantage gained. it would be like preferring the constitution of a jelly-fish to that of a human being in order to avoid the hazard of fracturing a bone. only by having banks which employ in loans a part of depositors' capital lodged with them, can the best interests of the whole people be served, even if this entails something less than an absolute certainty of power to liquidate deposits on demand. that banking system must then be best which combines equally the largest measure of each of two elements: the use in commerce of funds deposited, and the certainty of paying depositors in money on demand. turning now to the vast system of banks throughout the country, if the separate reserves of all the banks were gathered into one mass, available to meet the demands of depositors for payment in money, whether made in maine or texas, new york or california, the banks of the whole system would be able to operate with the highest degree of safety by having a total sum of money equal to only a small percentage of the aggregate amount owing to depositors, and consequently would be able to lend for use in the commerce of the country the greater proportion of the funds deposited. the total of deposits and withdrawals made throughout the country would very nearly offset one another. very little of the reserve money would actually be used. a special requirement of one section would represent only a small percentage of the total massed reserves. the country has such vast area, and the requirements in different parts so vary in season that a deficiency of money in some sections would find a measurably offsetting surplus in others. while theoretically an institution so constituted would be strongest and most efficient, none such exists, and no one would advocate such a system. omniscience and omnipotence would be required for its wise administration. but the conclusion seems clear that only in proportion to the massing of reserves can efficiency in lending for commerce be combined with strength to pay depositors. the greater the proportion of the entire reserves gathered into one mass, the greater the efficiency and strength rendered possible. this principle is fundamental. the fundamental defect of our banking system, then, is the parcellation of the entire reserves among the separate self-independent banks, necessitating either a wastefully large proportion of reserve for assured ability to pay, with correspondingly inefficient service to commerce, or efficient service with the hazard of unexpected exhaustion of reserves and consequent inability to make good the contracts to pay depositors in money on demand. [ ]if after a prolonged drought a thunderstorm threatens, what would be the consequence if the wise mayor of a town should attempt to meet the danger of fire by distributing the available water, giving each house owner one pailful? when the lightning strikes, the unfortunate householder will in vain fight the fire with his one pailful of water, while the other citizens will all frantically hold on to their own little supply, their only defence in the face of danger. the fire will spread and resistance will be impossible. if, however, instead of uselessly dividing the water, it had remained concentrated in one reservoir with an effective system of pipes to direct it where it was wanted for short, energetic, and efficient use, the town would have been safe. we have parallel conditions in our currency system, but, ridiculous as these may appear, our true condition is even more preposterous. for not only is the water uselessly distributed into , pails, but we are permitted to use the water only in small portions at a time, in proportion as the house burns down. if the structure consists of four floors, we must keep one-fourth of the contents of our pail for each floor. we must not try to extinguish the fire by freely using the water in the beginning. that would not be fair to the other floors. let the fire spread and give each part of the house, as it burns, its equal and inefficient proportion of water. _pereat mundus, fiat justitia!_ redeposited or overlapping reserves [ ]if we are to understand the radical change which will be worked by the federal reserve act in the reserve situation in this country it is necessary to examine at some length the system heretofore prevailing. under the national bank act these banks were divided into three groups or classes, referred to as the country banks, the reserve city banks and the central reserve city banks. there are three central reserve cities: new york, chicago, and st. louis. every national bank in these cities is a central reserve city bank. the reserve cities are forty-seven in number and include the larger cities of the country. every bank not situated in any one of the three central reserve cities or the forty-seven reserve cities is a country bank. this last term includes all the national banks of the smaller cities in the country, of the manufacturing towns and communities of new england and the middle states and thousands of national institutions doing business in the agricultural sections. ~the country banks.~--the country banks, by the terms of the national bank act, are required to keep a cash reserve at all times equal to per cent. of their deposits. under the old law the country bank must keep only per cent. of this required reserve in its own vaults, while it is allowed to deposit per cent. of the required reserve on call in such national banks in any of the reserve cities or central reserve cities as may be approved as "reserve agents" for it by the comptroller of the currency.... ~the reserve and central reserve cities.~--the second class of national banks, known as reserve city banks, includes all national banks located in forty-seven cities of the country, which from time to time have been designated as reserve cities. every national bank in them is required to keep a reserve at all times equal to at least per cent. of its deposits. it must be borne in mind that the deposits of a reserve city bank include not only what the banker refers to as individual deposits--the deposits of individuals, firms, partnerships, and corporations--but also deposits which have been made with the reserve city bank by country banks, for which it is the reserve agent. a reserve city bank is permitted by the national bank act to keep one-half of its required reserve on deposit, subject to withdrawal on demand, in a national bank or banks in a central reserve city, approved by the comptroller of the currency, as its reserve agent.... every national bank within the central reserve cities must keep a reserve equal in amount to at least per cent. of its deposits, including not only individual deposits but deposits by bankers for whom it acts as reserve agent or correspondent. ~the reasons for the system.~--this rather complicated system of reserves was authorized by congress because it was necessary to allow the banks of the country districts or smaller cities to keep reserves in other banks in the larger centres of trade in order to facilitate the commercial exchanges of the country; and also because it was necessary to have some means by which banks of the larger cities could finance payments for their customers in the great centres of the country, especially in new york, chicago, and st. louis.... ~its weaknesses.~--our system of deposited reserves has failed miserably in times of stress, although it has worked reasonably well in ordinary times. it is contended that it has, to a large degree, built up the great centres, and more especially new york city, at the expense of country districts. it has been responsible for the seasonal withdrawal of money which was at one time a most serious embarrassment to business, especially in new york, chicago, and other large cities in the fall months, but which has practically disappeared in new york city since the panic of .... it was not until the system of deposited reserves brought about the panic of that the country at large became convinced that this feature of the national banking system was vicious, dangerous, and likely to produce trouble at any time. with this conviction began the movement which finally ended in the enactment of the federal reserve act. ~much of our reserve fictitious.~--as a matter of fact, the actual available reserves of the three classes of national banks in the country are much less than is indicated by the percentage specified in the act quoted above.... this condition is referred to frequently as the pyramiding of reserves, which means, in substance, that the national banks of this country, omitting from consideration the state banks where the same conditions exist in an even more aggravated form, are doing business largely upon a paper reserve, which experience has shown is utterly useless in times of panic. the seven thousand five hundred and nine national banks held cash and paper reserves on october , , as follows: _cash in vaults._ _due from banks._ country banks $ , , $ , , reserve city banks. , , , , central reserve city banks , , ------------ ------------ $ , , $ , , as a matter of fact the national banks of the country held $ , , in cash as against total deposits subject to reserve requirements of $ , , , , or about . per cent. of the liabilities subject to the requirements. ~dangers of the system.~--so conclusive are the lessons to be learned from the experience of the last half century with the system of redeposited reserves, that there is a practical unanimity among bankers and financial experts that the reserves of our banks, with the exception of the money actually held in the vaults, are, in the words of william ingle, vice-president of the merchants and mechanics national bank of baltimore, "a great deal of a delusion and a snare." in every panic, the country banks and the reserve city banks have found that it has been impossible for them to secure the return of the portion of these reserves which has been redeposited in new york, chicago, and st. louis. at a time of great stress, when the banks have been subjected to a drain, they have been suddenly bereft of the support which, in theory, should have been forthcoming from their reserve agents, and have been forced to depend upon the per cent. or - / per cent. reserve, which was contained in their own vaults. what is even worse, the outbreak of a panic in new york city, where every panic of the last half century has started, was the signal for the suspension of cash payments by every bank in the country, within a few hours.... thus a local panic, in many cases occurring when business conditions were exceedingly prosperous and healthy, has completely disorganized the exchanges of the country and brought business to a standstill. the perverse elasticity of national bank notes [ ]... it is not quite correct to call our national bank notes inelastic. they are decidedly elastic. the trouble is that their elasticity is of a wrong sort; they expand when there is need of contraction, and contract when the need is for more currency. by calling the notes inelastic we mean that their volume does not correspond automatically to the need for currency. this is true, and is one of the most serious defects of the bond-secured notes.... the demand for currency depends upon the volume of business to be transacted, and is continually in a state of fluctuation. various causes have only to be mentioned to explain the unequal demand at different times. we have thus the payments of salaries, bills, etc., coming usually, on the first of each month. then there are the quarterly payments of dividends, interest, etc., falling generally on the first of january and at intervals of three months thereafter during the year. above all, we have in this country a regularly recurring seasonal change in the volume of business, due to the harvesting and moving of the crops every fall and early winter. besides these normal fluctuations in the demand for currency there are of course such abnormal circumstances as business emergencies, panics, depressions, etc., which at irregular intervals call for expansion or contraction of the currency. to meet all these varied demands an elastic currency is a necessity. the most serious evils of inelasticity in this country are seen in connection with the annual handling of the crops. it may be safely said that for this purpose the united states needs every fall at least one hundred and fifty million dollars of extra currency. since our monetary system contains no really elastic element, this extra business of the fall has to be done with little or no increase of the country's currency. the crops must be handled by means of a shifting of currency from one part of the country to another. in the spring and early summer the agricultural districts are apt to have more money than they need. accordingly, the country banks are in the habit of depositing part of their reserves in banks situated in the reserve cities. a large part of these sums eventually finds its way into the money markets of new york and other eastern cities, where a low rate of interest is paid to outside banks for such deposits. now comes the harvest season, and a demand goes up from the country banks for the return of their deposits. every fall the clearing-house banks of new york city alone give up about fifty millions of "lawful money" to meet this demand.[ ] of course this means a tight money market. in the spring and summer the funds obtained from the country banks were loaned out or used as reserves for deposits. money was in excess, interest rates were low, and speculation was encouraged. now loans must be called in and deposits reduced. this sudden contraction is a hard blow to all business interests. it is especially hard on the speculators, and their desperate demands cause the enormous rates on call loans which are witnessed every fall on the new york money market.... it has ... been suggested that the inelasticity of the national bank notes does not mean that their volume never changes. as a matter of fact, the circulation has been marked by enormous fluctuations, and these fluctuations, having no relation to the demands of business, have simply aggravated the evils of inelasticity which have been described. thus, between june , , and june , , the total volume of bank notes outstanding declined from $ , , to $ , , , a decrease of $ , , , or per cent. this retirement of half the circulation came during a decade marked by large growth in population and wealth, and by remarkable industrial expansion and business activity. the reason for this decline lies in the fact that the government was using part of its large surplus revenue to pay off the debt. in eleven years the treasury paid $ , , , , reducing the debt by more than half, something without parallel in the history of public finance. the retirement of half the debt caused a scarcity of united states bonds, and their prices went soaring. four per cents of rose from - in to - in . the inevitable result was the decline of circulation. the opposite course of events has been seen in recent years.... [the subjoined diagram (suggested by a similar one for - , accompanying the article a part of which is here reproduced) illustrates the comparative seasonal elasticity of the notes of our national banks and the circulation of the chartered banks of canada for the period - . the marked expansion of national bank notes in was due to the crisis brought on by the outbreak of the european war. the aldrich-vreeland notes which were issued in that emergency were retired in a few months and the volume of national bank notes assumed normal proportions. for the canadian statistics involved the editor is indebted to mr. g. w. morley, secretary of the canadian bankers' association.] [illustration] national bank notes unsound and unsafe [ ]... any correct system of credit currency must be based on a foundation of gold. bank credit is issued in the two forms of deposits and notes. the former are based on a reserve of gold, the latter are not. we have here a fundamental weakness of our bank-note system. under proper banking methods, deposits cannot expand without a proportional increase of the gold reserves of the banks. this furnishes the natural and necessary check to inflation. our bank notes, however, have no such connecting link with the business and the monetary stock of the world. the basis of the american bank-note currency is the government debt, a very inferior kind of foundation. such a system carries with it the possibility of paper money inflation of a peculiarly dangerous kind, because its real meaning is apt to be concealed. for example, between january , , and january , , the volume of national bank notes outstanding increased from $ , , to $ , , , an expansion of $ , , . in other words, the circulation nearly trebled in eight years. the cause of this great increase was not the need of more currency but the changes in the national bank act made in , changes which made the establishment of national banks easier and the issue of notes more profitable.... the future is likely to witness further expansion, unless some change is made in our system.... it is undoubtedly the present intention to give ... to future [bond] issues [the privilege of being used as security for notes]. indeed, unless this privilege is given, there will be no market for the per cent. bonds. we may expect, therefore, to see each issue made the basis of a further increase in the volume of bank notes. all this means inflation, and inflation by means of a circulating medium having no connection with the gold stock of the world. to make room for the additional currency, gold must be forced to leave the country, and our whole monetary system, by no means too strong to-day, will be weakened at its foundation. this is the fundamental difference between expansion of credit by means of deposits and expansion by means of national bank notes. the one is based on gold; the other is based on the government debt. when deposits expand, the reserves of the banks must increase proportionately and, if carried far enough, the result must be to bring in gold rather than to force it out. in like manner, deposits cannot for any considerable time be in excess of business needs. but bank notes may be increased indefinitely, if the government only borrows enough, and the result will be the expulsion of gold whenever the currency becomes redundant. that this is an actually present danger is sufficiently demonstrated by the recent action of the secretary of the treasury, who has seen fit to add to the national debt at a time when the treasury had a surplus of over millions, for the sole purpose of increasing the circulation of the national banks. our currency system can never be sound until the bank circulation is entirely divorced from the government debt. the danger of inflating our monetary system with bank notes having no gold reserve back of them is all the more serious from the fact that the notes of the national banks are used as reserves by state banks, private banks, trust companies, etc. they are part of the "cash reserves" on which these banks base their deposits. thus we have a system of credit based on credit, and any weakness in the national bank note is carried over and multiplied in the deposits of other banks. the complete _reductio ad absurdum_ of this multiple credit system came when at a recent convention of the american bankers' association it was seriously proposed that it be made lawful for national banks to count their notes as "lawful money" in their own reserves. there is good reason to believe that this is actually practised to some extent by national banks to-day, though the practice is, of course, illegal. the safety of the national bank notes is seldom questioned. whenever the evils of our currency system are pointed out and plans for asset currency or other reforms are proposed, the reformer is apt to be met by the reply that, at any rate, our bank notes are perfectly safe, and we had better put up with their other shortcomings rather than launch out on new schemes which may possibly sacrifice that safety which we now enjoy. the foregoing discussion should already have cast some suspicion on this complacent attitude. it will be further weakened by a closer analysis of the basis of the national bank circulation. national banks may issue their notes up to the amount of their paid-up capital, and up to per cent. of the par value of united states bonds deposited with the treasury, but never in excess of the market value of the bonds. the notes are engraved by the government and issued to the banks. when signed by the proper officers of the bank, they become the bank's promise to pay upon demand and may be issued for circulation. the united states treasury is also required by law to redeem on demand all notes of national banks presented to it. for this purpose each bank must keep with the treasury a reserve fund equal to per cent. of its circulation. the duty of the treasury to pay notes on demand, however, is not limited to the amount of this reserve, but applies to all notes properly presented. in case of the failure of a national bank, the treasury is required by law to immediately redeem all its notes. the treasury is secured against loss by the bonds deposited, by the per cent. cash reserve, by its prior lien on the assets of the banks, and by the personal liability of the stockholders for an amount equal to their stock investments. it is thus seen that the popular idea that the holder of a national bank note is secured against loss by the government bonds deposited in washington is not strictly correct. what protects the holder of a note is the absolute responsibility of the treasury to redeem all notes on demand. the bonds are to secure the treasury, not the individual noteholder, against loss. the noteholder is secured so long as the treasury is able to meet its legal obligations. let us examine the character of our government bonds as security to enable the treasury to meet its obligations. to understand the situation, it should be remembered that the leading purpose in the establishment of the national banking system was not the creation of a scientific currency system. the national bank act was a war measure enacted largely for the purpose of improving the market for government bonds during the civil war. it was for this purpose that the circulation of state banks was forced out of existence by a per cent. tax and the right of issue restricted to national banks on condition of the deposit of government bonds as security. in the accomplishment of this purpose the act has been eminently successful. united states bonds have been given a new utility over and above their utility as an investment. from the very beginning, this has given them an added value and enabled the government to borrow at lower rates of interest than it would otherwise have had to pay. the act of march , , made provision for the ultimate refunding of all the united states debt into per cent. bonds, and gave an added inducement to the use of these bonds as note security by lowering the annual tax on circulation from per cent. to one-half of per cent., provided the notes were secured by the new per cent. bonds. all bonds issued since have borne per cent. interest. yet the market value of these bonds has always stood above par.... obviously, this value is not based on earnings. british consols paying - / per cent. are to-day quoted in the neighborhood of , which makes them yield about per cent. on the investment. the french and german per cent. loans are both considerably below par. united states bonds have been given an artificial value through their use as security for bank circulation. the national banks to-day hold for this purpose about two-thirds of the total funded debt of the united states. remove this privilege from the national debt, and we should see the per cent. bonds (which compose two-thirds of the interest-bearing debt of the united states) fall to perhaps seventy cents on the dollar, very likely even lower. here we have a remarkable situation. our national bank notes are safe because they are secured by government bonds, and our government bonds are valuable because they are security for national bank notes. this looks very much like lifting oneself by one's bootstraps. if we are to cling to the bond-secured note system, this matter of the artificial value of government bonds will become an important practical problem whenever it becomes necessary for the united states to make any addition to its debt. either the rate of interest will have to be raised to per cent. or higher, or, if that alternative is rejected, means will have to be found to induce the banks to use the greater part of the new loans as security for additional note issues.[ ] in practical effect, this is only a thinly disguised resort to the time-honored but now thoroughly discredited practice of compelling the people to use the government debt as a circulating medium. the bearing of this matter on the safety of the national bank note is simple. the burden of the ultimate redemption of the bank notes has been placed on the shoulders of the treasury, to add to its other burdens of maintaining the value of the greenbacks and of the silver dollars. if loss of confidence in the bank notes should ever lead people to demand their wholesale redemption, the treasury would have to meet the demand in gold. but the moment it tried to sell the bonds, it would find there was no market for them except at a discount of perhaps or per cent. it is true that the treasury would still be able to recoup itself for this loss in the value of the bonds by exercising its prior lien on the assets of the banks. but this leads us to the important conclusion that the final security for our bond-secured notes rests on the assets of the banks after all. a more striking argument for asset currency could hardly be discovered. it must be remembered, however, that the foreclosure by the government of its claim on the assets of the national banks would cut into the wealth on which deposits are based and so have a most disastrous effect on the deposit system. the pressure upon the government to refrain from such a crushing blow to credit would be overwhelming. it is almost inconceivable that in time of panic or a national crisis the government would resort to such a procedure. almost any alternative would be preferred. it would not be too difficult a matter for the government to persuade itself that the wiser and safer course would be to suspend specie payments, perhaps even declaring the bank notes a legal tender. a more plausible case could be made out in favor of such action than was found sufficient to justify the issue of the greenbacks of the civil war. yet such action would mean the breakdown of our financial system. this is, of course, looking into the future and anticipating a state of disaster which may never come. but a system which bids fair to break down in time of disaster should be remodelled before disaster comes. and we should not rest too confidently in the notion that disaster can never reach us. it is only thirteen years ago [ ] that the burden of supporting its paper and silver currency brought the united states within twenty-four hours of suspension.... speculation involved in the issue of notes [ ]when a banker takes out currency he engages in two distinct transactions and enters upon two different hazards. in one transaction he assumes the risk and holds the expectation of greater profit for taking out circulation. since buying bonds and taking out circulation most of the time shows some theoretical profit over loaning direct, presumably if there were no other consideration, most of the time our bankers would keep outstanding all the notes they could. in the other transaction, however, the banker engages in a speculation in government securities. as a matter of fact, if the price of government bonds advances, the profit from taking out circulation declines; but our banker is pretty likely to view with equanimity the declining circulation profit when he considers the profit he is making in his speculation in bonds. on the other hand, as the price of government bonds declines, circulation grows more profitable. the banker is likely to view this with sour satisfaction when he looks on his loss in his bond speculation. profit or loss in the bond speculation is likely to outbalance loss or profit in the circulation transaction.[ ] let us examine the situation more closely. just what is the profit or loss from taking out circulation? in the first place the bank gets the regular current money rates on the loans it makes through issuing notes. also it gets the interest on the government bonds it buys. this, of course, means the real interest, or income on the investment, called basis, taking into consideration coupon interest, price paid, and date of maturity. excepting for the tax of / per cent. on the circulation taken out ( per cent. if taken out on the 's or 's) and for the expenses attendant on taking out circulation, which the government actuaries compute to average $ on the $ , , this interest on the government bonds looks like clear "velvet." it would be, too, if the banker did not have to pay more for the bonds than the amount of circulation he can take out against them. to figure his net profit he must deduct from the gain items just stated what he would have made if he had loaned his funds direct instead of investing in bonds. expressed as an algebraic equation the situation becomes much clearer. let x = current money rate; y = basis rate at which government bonds are bought; z = price of government bonds; b = circulation received ($ , used as basis of calculation); c = taxes, redemption, and other circulation expenses. (as already stated, government actuaries have calculated that circulation expenses average to cost the banks $ on the $ , of circulation taken out. taxes depend on whether the 's, in which case the tax is / per cent., or the 's or 's, in which case the tax is per cent., are bought. taxes, then, amount to either b(. ) or b(. ). we can take b as a constant in our calculations and base all our computations on taking out $ , of circulation.) the equation of profit or loss on taking out circulation then reads: yz + bx - xz - c = profit or loss. but circulation taken out (b) can never be greater than the amount of money paid for the bonds (z). if government bonds should be at par or at a discount, the nominal profit would always be just the basis interest on the bonds, less the tax and the cost of taking out circulation, or a constant advantage in the case of the 's of . per cent. for the purpose of this discussion we will consider only the 's of . in the regular case, then, the money paid for the bonds (z) is greater than the amount of circulation received (b). with that statement in mind we can draw certain very definite conclusions about our circulation direct from the equation we have formed; z is greater than b. repeating the equation in order to have it directly before us: yz + bx - xz - c = profit or loss. then as the current interest rate (x) increases, if all the other quantities remain constant, the negative influence in the equation grows greater, or profit from circulation decreases. we can, then, make definitely: statement i _if all other circumstances remain the same, circulation grows less profitable as the current money rate advances._ as business increases and the demand for both credit and money increases, as reflected in the rising interest rates, taking out circulation _cæteris paribus_, with the inexorability of a mathematical law, becomes _less_ profitable. further, there is an intimate relationship between y and z. if the price of bonds (z) declines, the basis rate (y) must advance. as a matter of fact as z declines yz grows greater. if, then, x remains constant and z declines the influence of the negative quantities of the equation is growing less. then follows: statement ii _as the price of bonds declines, if the current interest rate remains constant, the profit from taking out circulation increases._ that gives the absolute mathematical basis for such general statements as that "the price of bonds is too high to make circulation profitable." these two facts set out in statement i and statement ii place the banker who has taken out circulation between the devil and the deep, blue sea. if the price of bonds remains the same and the current interest rate rises, his circulation grows steadily less profitable. a decline in the price of bonds affords the only offset to an increasing interest rate. but if the price of bonds declines enough to offset the advance in the current interest rate, the banks must mark off enough profits to cover the loss on the capital value of the bonds. speculating in securities properly forms no part of a bank's business. it is an anomalous situation that in order to fulfil a proper function of note issue a bank should have to undertake such an improper speculation. the lack of adjustment between bank notes and deposits [ ]under our present currency system the volume of money in circulation is perfectly flexible. it constantly expands and contracts in automatic adjustment to the requirements of trade and the convenience of the people. an increase in the volume of cash transactions brings promptly an increase in the volume of currency in circulation through the current withdrawals of money exceeding the current deposits of money. a lessening in the volume of cash transactions promptly drives unneeded currency out of circulation through the deposits of money exceeding the withdrawals. no other system could provide a currency which would adjust its volume in circulation more exactly to the needs of trade and the preferences of the people. there is a ceaseless flow of the money in circulation into bank reserves, and of money in bank reserves into circulation--ceaseless except in an occasional crisis when the natural flow of money from bank reserves into circulation is arbitrarily stopped by banks refusing, for self-protection, to continue paying out to the point of exhausting reserves. while the volume of money in circulation is thus perfectly and automatically adjusted to trade requirements, it is to be noted that this flexibility arises from the flow back and forth, between the mass of money in circulation and the mass in bank reserves. in this lies the main economic defect of our present currency system. an expansion in the volume of money in circulation entails a corresponding contraction in the volume of bank reserves, and necessarily a corresponding contraction in loans. a period of expanding business would naturally be attended by both an increased volume of loans and an increased volume of cash transactions, such as increased pay-rolls, increased retail sales. increased cash transactions cause a larger volume of money to flow into circulation. but this flow is out of bank reserves, thus contracting them and necessitating a contraction of loans depending upon them, at the very time when loans would naturally expand. obviously, if business becomes very active, the effect upon bank reserves is so adverse, and the contraction of loans depending upon reserves so important, that embarrassment is widespread and panic ensues. the main defect, then, of our present currency system is that the volume of currency in circulation has its adjustment in the flow from bank reserves into money in circulation and from money in circulation into bank reserves, causing a contraction of bank reserves and the loans depending on them as business expands. a remedy would be the use of bank notes through which the volume of currency in circulation would have its adjustment in the flow from bank deposits into bank notes in circulation, and from bank notes in circulation into bank deposits, thus protecting from disturbance both bank reserves and the loans based on them. the commercial paper situation in the united states [ ]... at the present time the commercial paper situation in the united states is peculiar. "commercial paper" in the old and strict sense is little used in this country. "trade paper," as it is now called, arises in less than per cent. of the credit transactions in the united states.[ ] in some lines of trade, especially where a local wholesaler does a large business with small tradesmen, the wholesaler will extend credit by taking the retailers' notes; but in obtaining credit for himself the wholesaler will not surrender control of the bundle of retailers' notes, preferring instead to give simply his own note on a general understanding with his banker that the personal note rests on, and is fully covered by, the retailers' notes.[ ] the wholesaler hesitates to surrender to the banker the notes that he receives because he fears that his competitors might get some inkling of his trade connections, etc. in general, "trade paper" is used to settle accounts only when the credit terms are still long, that is, four months or more.[ ] what generally passes as "commercial paper" in the united states is single-name paper. as in the case of the wholesaler referred to above, the borrower of bank credit in these days offers for discount simply his own promissory note. some of this paper, particularly corporation notes, carries indorsements, but these are largely "accommodation" indorsements, which may buttress the security of the paper but which indicate nothing as to its purpose. the wide use of single-name paper in this country is largely explained by the fact that the prevailing terms of payment in business transactions are net in or days, with a discount for payment in cash within variously from days to one month. the cash discount allowed is usually so large that a purchaser can ill afford not to take advantage of it. two per cent. discount for cash within days, for example, with " days net" is equivalent to a return of per cent. per annum on one's capital. in actual practice the allowance is often even more liberal. hence where competition is at all keen the business man is practically forced to adopt the system of cash payments, depending upon his bank to advance to him, on his own notes, the necessary funds. moreover, so broadly has the custom of taking cash discounts spread that a failure to take advantage of them is generally regarded as an indication of weakness, and tends to undermine general confidence in the business man's credit standing. hence the necessity for maintaining his credit rating, as well as competition, virtually forces the business man into making anticipatory cash payments and thus, more or less as a consequence, into the general practice of discounting his personal paper.[ ] furthermore, as business operations have grown to a larger and larger scale, especially in the case of large corporate enterprises, the credit needs of business have in many cases expanded beyond the capacity of the local banks to supply them. the necessity arose, therefore, to go elsewhere for accommodation. this was met in some cases by the opening of bank accounts in other centers, but obvious difficulties and restrictions attend this method of procedure. more elastic possibilities and fewer difficulties grew out of the employment of middlemen to market the paper over the country as a whole on the best available terms. hence the note-broker is to-day an important factor in the discount market. as a result of the note-broker's activities there has come to be established an extensive open market for commercial (single-name) paper in this country, and the rates at which such paper is discounted are regularly reported in the daily newspapers. this development of a commercial-paper market reflects, of course, a considerable development of the demand of the banks for this form of investment.[ ] "country banks" especially have in the last few years heavily increased their purchases in the open market, because the necessity of writing off heavy losses due to the shrinkage of bond values has tended to make them more timid about investing in securities, and because they have also learned by experience that paper purchased through a broker does not have to be renewed, as does most of the purely local paper.[ ] this development has, of course, tended to put an increasingly heavy responsibility on the note-broker and has brought about, at least to some extent, a readjustment of his business methods. at first note-brokers simply solicited paper from merchants and charged a brokerage fee. latterly, the custom has grown up for the broker to buy up the paper outright.[ ] this forces the broker "to stand between the maker and the bank," and to the extent that any given piece of paper may be left on his hands, even though he does not indorse the paper that he sells, it compels him to be very circumspect about the paper that he purchases. moreover, some banks now purchase paper with an option of return within a specified period, making it a point carefully to inquire about the maker of the paper before the option expires. in the last few years banks as well as brokers have established carefully organized credit departments, the purpose of which is, through careful inquiry into the character and standing of sellers of paper, to enable both brokers and bankers to select paper with sounder discrimination. this characteristically american discount system differs greatly from that which prevails in europe. abroad, single-name paper is very little used.[ ] the european banker demands more than one signature, not only as a guaranty of security, but also as an assurance of the validity of the transaction out of which the paper offered for discount grew. when the prospective borrower, for some sufficient reason, does not wish to divulge the names of his clients, as would be necessary if he drew bills on them, he may arrange with his bank for an overdraft (known as a cash advance),[ ] or by paying a small commission he may get the bank to "accept" a bill drawn directly on it. with a bank's acceptance a bill, even though drawn by the humblest shopkeeper, becomes a prime investment and may be sold openly on the market at the lowest terms that prevail.[ ] on the continent bank acceptances thus open the market widely to all who can arrange for them, while the open market for single-name paper in this country is restricted to large firms of established reputations. in view of the prevailing practice in europe it is interesting to inquire why in america there should have been this peculiar development in the discount field. it has been pointed out that before the civil war trade paper, as it is now called, was pretty generally used, but the exigencies growing out of the war completely changed the situation. the excessive issue of the greenbacks and the uncertain value of credit instruments covering any appreciable period of time led sellers to endeavor to bring business to a cash basis. credits were shortened to or even to days, and strong emphasis was placed on immediate payment. with cash discounts alluringly liberal, merchants could ill afford to forego them, and cash payments tended to become more and more common. big houses offered single-name paper to raise the needed funds, and little by little the older system of settling by the promissory note of the debtor was supplanted by the system of selling on open account, with the choice given to the debtor of a liberal discount for cash or the payment of the due amount "net" at the expiration of a relatively short credit period. the transition was hastened by the development of the practice of selling goods by sample instead of by personal selection from an accumulated stock. under the old practice the buyer bought under the rule of _caveat emptor_, but when purchasing by sample he had a right to demand that the delivered goods attain the standard of the sample, and there grew up in consequence the doctrine of "implied warranties." these warranties have in some lines been pushed very far,[ ] but in any case the buyer would hesitate to pay for goods until he had had a chance to inspect them, and hence he would as a rule demand that they be consigned to him on open account. the seller, however, cannot afford to wait for payment until his accounts become due. too much of his capital would be tied up. he is forced, therefore, to go to his banker and, on the basis of his accounts receivable, to offer his own note and thus to obtain release of the capital otherwise temporarily beyond reach.... single-name paper virtually monopolizes the field.... no system of bank acceptances and the absence of an open discount market [ ]the weakness of our banking system as compared with the systems of europe may very certainly be attributed in part to the omission of the bank act to permit bank acceptances. it is a weakness, furthermore, which involves the country in serious economic loss. without a national discount market, the great majority of our merchants and manufacturers are compelled to confine their borrowings to american capital, either through the discounting of their paper with their local banks or through its sale to note brokers. all but the strongest and largest are practically excluded from the benefits of foreign competition for their paper. aside from the great concerns with international ramifications, which are able to arrange their own credits abroad, our merchants and manufacturers are not benefited by low foreign discount rates, except in so far as note brokers, who make it a practice to borrow in europe with commercial paper as collateral, are better able to finance their purchases. what is more, they receive relatively little advantage from an accumulation of funds in new york banks. low call loan rates have an indirect rather than a direct effect on the rate which the mercantile community has to pay for money. low call rates, in other words, are an indication more especially of stagnation in the stock market than of a lack of demand for accommodation from merchants and manufacturers. such rates do not act as a stimulus to trade in general any more than high call rates act as an immediate check to over-expansion. it is not only in our domestic trade that the country suffers through the want of a discount market. without bank acceptances we are at a distinct disadvantage in connection with our foreign trade. our importers, unable to open credits with their banks, as is done abroad, are not in a position to finance their purchases upon as favorable a basis as the importers in other countries, as english cotton spinners, for example. the english spinner about to purchase cotton in america arranges for his bank to accept sixty or ninety days' sight bills drawn on it by the american shipper. the latter draws his bills on the english bank and attaches the documents covering the shipment, such as the bills of lading, insurance certificates, invoices, etc. he then sells them to a new york bank, thereby receiving immediate payment for his cotton. the new york bank forwards the bills to its london correspondent, which presents them for acceptance to the bank upon which they are drawn. upon the acceptance of the bills the documents are delivered to the accepting bank, which then turns them over to the spinner upon whatever arrangement has previously been made. the accepted bills are discounted by the new york bank in london and the proceeds placed to its credit there. the new york bank can afford to pay a high rate for such bills, as they are drawn on prime bankers, rendering certain their ultimate payment. the purchase of the bills does not, moreover, necessitate any outlay of money, as against the credit to be received through the discount of the bills the new york bank can immediately sell its checks on london. without such banking facilities--that is, the ability to arrange with his bank to accept time bills drawn on it by a foreign shipper, the american importer is compelled to finance his purchases in either one of two ways. he may pay for the goods at once by remitting funds direct to the shipper. this, however, ordinarily necessitates the negotiation by the importer of a loan on his promissory note. if he is not in a position to secure such an advance he must shift the burden of providing funds to finance the shipment, from the time it is forwarded until it is to be paid for, upon the foreign shipper, who is then in a position to exact terms more favorable to himself through an adjustment of prices. the practice in connection with this method of making payment for foreign purchases is for the shipper to draw his draft on the american importer and turn it over to his banker to forward for collection. such drafts, drawn as they are on individual importers and not on banks whose standing is well known abroad, must be sent for collection since there is no general market for them. practically the only way in which a foreign shipper can realize immediately on bills of this character is to dispose of them to his own banker or get him to make an advance on them. either of these two methods of financing our imports is expensive even when the time between the shipment and the receipt of the goods is short. when the time is much longer, as in the case of imports from south america and the far east, the cost is almost prohibitive--that is, so great that we can not compete on an even basis with foreign buyers. in fact, we might be practically excluded from these markets if a makeshift were not possible. our importer gets around our lack of banking facilities by having his bank arrange a credit with its london correspondent. he receives an undertaking, called a commercial letter of credit, giving the terms of the credit--that is, the name of the london bank upon which the bills are to be drawn, the amount which may be drawn, the character of the goods which are to be purchased, the tenor of the bills, and the documents which must accompany them. on the strength of such a letter of credit, the shipper in south america, for example, is able to dispose of his bills on london and thus receive immediate payment for his goods. the local bank which buys the bills sends them with the documents to its london correspondent, which presents the bills to the bank on which they are drawn--that is, the bank with which the credit was opened. upon the acceptance of the bills the documents are delivered. they are then sent by the london accepting bank to the new york bank which opened the credit and the latter delivers them to the importer against his trust receipt. twelve days prior to the maturity of the bills in london the new york bank presents a statement to the importer indicating the amount of pounds sterling which must be remitted to london to provide for their payment at maturity or rather a bill stated in dollars for the amount of pounds sterling drawn under the credit. in this purchase of exchange the importer makes payment for his goods. this method while workable is obviously cumbersome, yet it is practically the only one which the american importer can follow in connection with such imports. it is expensive for the importer, for not only must he pay his bank a commission for arranging the credit, but there is included in this commission a charge made by the london bank for its acceptance. further than that the importer must take a material risk in exchange. at the time a credit is opened the cost of remitting, say £ , to take up the bills in london, might be only $ , , or at the rate of $ . , whereas by the time the bills actually mature exchange may have risen and cost him $ . , or $ , . as a result of the inability of our banks to finance imports through the acceptance of time bills, american importers are, then, made dependent to a large extent upon london, and are required to pay london a considerable annual tribute in the way of acceptance commissions. this practice not only adds to the importance of london and militates against the development of new york as a financial center, but it at the same time works serious injury to our export trade. since time bills can not be drawn on our banks from foreign points against shipments of goods to the united states, there are consequently in such foreign countries very few bills which can be purchased for remittance to the united states in payment for goods which have been bought here. in other words, under our present banking system our imports do not create a supply of exchange on new york, for example, which can be sold in foreign countries to those who have payments to make in new york. this means that our exporters are also, to their great disadvantage, made dependent upon london. it means that when they are shipping goods to south america and to the orient they can not, when they are subject to competition, advantageously bill them in united states dollars. they naturally do not care to value their goods in local currency--that is, in the money of the country to which the goods are going--so their only alternative is to value them in francs or marks or sterling, preferably the latter, owing to the distribution and extent of british trade, creating throughout the world, as it does under the english banking system, a fairly constant supply of and demand for exchange on london. when we come to bill our goods in sterling, however, it is at once seen that our exporters are obliged to take a risk of exchange, which is a serious handicap when competing with british exporters. our exporters who are to receive payment for their goods in sterling must previously decide on what rate of exchange will make the transaction profitable. if, in an effort to safeguard themselves against a loss in exchange, they calculate on too low a rate for the ultimate conversion of their sterling into dollars, their prices become unfavorable compared to those made by british exporters and they lose the business. if they do not calculate on a sufficiently low rate they get the business but lose money on the transaction through a loss in exchange. the prohibition of bank acceptances not only acts as a hamper upon our domestic and foreign trade, but is detrimental to our banks as well. it is the small country bank which is chiefly affected. the business of the country bank, so far as the employment of its funds is concerned, may be divided into two classes--that which relates to advances to local customers and that connected with the investment of its surplus. it is in respect to the latter that the matter of acceptances is important. under the present limitations of the national bank act there are three principal ways in which a country bank may render its surplus funds productive. it may deposit them with its reserve agent. this means a low interest return, too low in fact to permit of only a relatively small amount being thus employed. it may invest in bonds. in this way an increased interest return can be secured, providing a wise selection of securities is made, but it partakes of the nature of speculation. the third way is to buy commercial paper. such purchases give an ample interest return and there is no savor of speculation. even this method of employing a bank's funds, however, is far from satisfactory. it means the investment in a security for the strength of which the bank must depend on the word of note brokers, the rating of the mercantile agencies, or the opinion of some correspondent bank. it means, furthermore, the tying up of the bank's funds for a fixed period. if national banks were permitted to accept time bills the country bank could then invest its funds in paper bearing the guaranty of some great bank with whose standing it is perfectly familiar. risk such as now has to be taken would be eliminated. what is vital, however, is that with a national discount market an investment in a bank-accepted bill is one which could be realized upon immediately. commercial paper and bank acceptances are both discountable. the prime difference between them, as affecting a country bank, is that they are not both readily rediscountable. herein probably lies the reason for the strong prejudice against rediscounts which exists among bankers in the united states. in this country when a bank discounts a piece of commercial paper it is discounting something which for its security depends solely on its maker. should the bank desire to realize on this paper it could do so by rediscounting it, but such a rediscount would be practically equivalent to a loan to the bank on the strength of its own name. in other words, to rediscount its commercial paper would affect a bank's credit. to ask for a rediscount is to ask for accommodation. this would not be the case with bank-accepted bills. if such bills were discounted by a country bank as a means of investing its surplus and it was desired to realize on them such a rediscount would be made not on the name of the country bank, but on the name of the accepting bank. a rediscount in this instance would not constitute a loan to the country bank and would have absolutely no effect on its credit. it would merely indicate that some more profitable business had arisen in which to employ its funds or that it was desirous of increasing its reserve. since the reserves of interior banks are so largely concentrated with them and it is essential that they keep their assets in an especially liquid condition, the prohibition of bank acceptances works injury to the banks at the country's financial center, new york, in a different way. it deprives them of what london banks, for example, have--that is, a mass of the soundest securities against which to loan their money on call or in which they may invest their funds for very brief periods--bills of exchange, covering genuine commercial transactions, bearing the acceptance of prime bankers. unquestionably such securities as a basis for loans are preferable to stock and bonds, but without them new york banks must have recourse to day-to-day loans on the stock exchange. moreover, when the demand for such loans is limited. new york banks are forced into the keenest kind of competition, a competition which, as has been pointed out, is not only of little benefit to trade but which, through the lowering of the money rate, actually stimulates speculation. furthermore, without a steady money rate such as exists in countries possessing discount markets, new york banks are left with no reasonable or satisfactory basis upon which to fix a rate of interest to pay for the deposits of country banks. in london interest on bank deposits is fixed at a certain percentage below the bank of england discount rate, usually - / per cent.--that is, a rate which fluctuates with the value of money and normally leaves a certain margin of profit to the london bank. the same practice is followed in all the great financial centers of europe. with us, country banks receive a fixed rate of interest for their deposits, usually per cent., the year around, regardless of fluctuations in the value of money. the unscientific nature of such a rate is obvious. when the call loan rate is high country banks do not receive interest in proportion to the value of their deposits. when it is low the new york banks pay more interest than the deposits are worth. in the latter instance the new york banks are forced into injurious competition with one another. they are in much the same position as competing railroads were earlier in our history, with results similarly baneful. with the railroads it was worth while to secure traffic even at a losing rate, as no matter what the return it helped, if only a little, toward meeting fixed charges. oftentimes with the new york banks to-day any rate which they can secure for their money whether losing or not is acceptable as helping to meet this fixed interest charge on bank deposits. to pay per cent. for deposits and to keep a per cent. reserve a bank must loan its money at - / per cent., to come out even, taking into consideration the actual expense of making and recording the transaction. it is better to loan at - / per cent., however, than to let the money lie idle. it is better to lose per cent. than to lose the entire - / per cent., as would be done in case no loans at all were made, clerk-hire being just as much a fixed charge as interest. with the amendment of the national bank act, to permit the acceptance of time bills, such ruinous competition would cease. the funds of the banks would come to be principally invested in trade paper and stock-exchange loans would be relegated to a position of secondary importance, as in london and on the continent. the field for the investment of their deposits would be greatly broadened, to the benefit both of the banks and trade in general. to remedy this primary defect in our banking system, to make possible the financing of our domestic and foreign trade along the lines which have proved so advantageous in other countries, to provide negotiable paper of a character suitable to the investment of foreign funds, paper which can not only be discounted but rediscounted, to give trade the advantage of bank surpluses accumulated both in the country at large and in new york, to lessen the evils of speculation, to afford a reasonable basis for the calculation of interest rates on bank deposits in central reserve cities, to bring new york into the circle of those financial centers between which funds move naturally as discount rates rise or decline, to secure the advantage of the competition of foreign capital for our trade paper, can be put in the way of accomplishment by the insertion of a paragraph or two in the national bank act. * * * * * [ ]the european financial system is constructed upon discounts as its foundation; the american system is constructed upon bonds and stocks as its foundation. bank notes in europe are issued mainly against bullion and discounts; in the united states mainly against bullion and bonds. the quick assets held by european banks against their deposits consist of discounts or call loans, largely secured by discounts. the quick assets of american banks ... are primarily call loans on stock and bond collateral. in europe the daily plus and minus of money requirements are adjusted by the use of the discount market--that is to say, in a final analysis, by purchase or sale of bills. (calling in or putting out money on call where the loans are secured by bills amounts, in effect, to a sale or a purchase of bills.) in a last analysis this means that in europe attempts to liquidate are primarily appeals to the whole nation to liquidate its temporary commercial investments, the brunt of such liquidation being borne by the entire community, and the pressure being constantly subdivided, every member of the community thus contributing his share. as a majority of discounts represent goods in process of production or on the way to consumption, liquidation with them primarily expresses itself by a falling off in new production, while the consumer, on the other hand, can not stop consuming and must therefore continue to pay. the brunt is thus borne by the whole nation and adjustment follows without violent convulsions. in sharp contrast with such a system the attempts to liquidate in the united states are directed primarily at the contractors of stock exchange loans. this means that a comparatively limited number of debtors are called upon to sell their securities. this they can do only by finding new investors, who, as a rule, are at such times comparatively rare, because when acute pressure arises it generally originates in the inability of the investor to purchase because of lack of funds or in his unwillingness by reason of his distrust of the financial situation. the concomitant of this is that those forced to sell securities at such times must offer them at sufficiently reduced prices to bring about an entire change in the attitude of the investor. the difficulty here is that violent reductions of prices in themselves cause distrust, and low prices caused by distrust not only frighten away purchasers but, in addition, unsettle the owners of securities and thus cause them to join the ranks of the sellers. an acute convulsion, therefore, must inevitably follow before the tide can be turned.... of course, general liquidation in europe includes a liquidation of securities, just as liquidation in the united states also includes liquidation of commercial paper as it matures. but the difference is that in europe bills will be the main factor and securities will play a much more subordinate part, while with us just the reverse is true. the essential conditions for the establishment of an international discount market [ ]the essential conditions for the establishment of an international discount market are: . every bill offered for discount should be based on a commercial transaction where value passes. finance or accommodation bills should be extremely rare and capable of satisfactory explanation. . it follows that almost invariably the bill will arise out of a sale of goods and will be in the form of a draft by the seller upon the buyer, and accepted by the buyer. . it will thus be a two-name bill, and not an individual promissory note. how far you can change your system in this respect and how far the powers of your new federal banks can be used to induce such a change, is a question which i cannot pretend to answer, but which you will no doubt be able to answer. . the bill should be drawn for a period neither too long nor too short. the period should be sufficient to allow of a resale of the goods on which the bill is based, thus making the bill in a sense self-liquidating. the usual period is three months. . while there should be a large proportion of trade bills, there should be a still larger proportion of acceptances by banks and finance houses, based, of course, on collateral, which usually takes the form of imported produce. in germany, however, i understand that banks accept a good many drafts arising out of internal transactions. . if the market is not to be merely a home market, but international: that is, attractive to foreign bill buyers, an important and desirable step would be the opening of american banks or branches of american banks in foreign exchange centres, such as london, paris, berlin, amsterdam, buenos aires, shanghai, and so on, and these banks should always be prepared to encourage american bills by buying, at reasonable rates of exchange, bills on new york, chicago, and other american centres, payable in dollars. . your usury laws would have to be modified so as to allow discount rates to move freely upwards if required. . your federal reserve banks which are intended to be the equivalent of the central banks of other countries, such as the bank of england, bank of france, and the reichsbank, should be prepared to rediscount approved bills at all times and to any extent. the advantages to you of such a market would be the same advantages that we possess, namely, liquid employment for short money; power to meet demands for money without disorganizing stock exchange prices; power to check overtrading at home, and finally, power to check a foreign drain of gold. cash stock exchange dealings [ ]in england, france, and germany there exist monthly or half-monthly settlements of stock exchange transactions, and as stock exchange loans run from one settlement to the next the amount of money employed on the stock exchange between settlements remains stationary. if, at the settlement, it develops that commitments on the stock exchange have increased and that a larger amount of money is needed there, so much additional money will under normal circumstances be withdrawn from the bill market and go into the stock exchange. if less money is wanted on the stock exchange, so much more will go into the bill market. without entering upon a discussion of the question of cash stock exchange dealings versus stock exchange dealings per settlement (for which, be it said in passing, a suitable method of weekly stock exchange settlements can probably be devised for this country, combined with provisions for proper margining in order to prevent over-stimulation to gambling), we are, for the purposes of this article, interested only in the effect of this method of cash dealings on the whole financial system. an exclusive system of cash dealings brings about the pre-ponderance of the call loan on stock exchange collateral. but for the existence of the seducing call loan, which is one of the gravest dangers and curses of our system, we should have been forced to develop our bill market as a regulator of our daily money requirements. in that case, instead of seeing the idle money of the whole nation poured into stock exchange loans when trade is inactive--thus unduly stimulating speculation when it should be discouraged--and again withdrawing money from the stock exchanges in order to provide for the business of the whole nation when trade becomes active--thus bringing about anxiety and convulsions on the stock exchange in the face of prosperity--we should have a system based on bills; that is to say, based on the broad foundations consisting of the commerce and trade of the whole nation, and we should then enjoy an almost uniform rate of interest all over the country, gently rising and falling within moderate bounds, instead of the violent fluctuations and unbearable conditions to which we are now subjected. the aggregate amount invested by a nation in trade and commerce should be and is many times the amount invested in stock exchange loans, which latter represent undigested securities and securities carried for speculative investors. our way of doing business may be illustrated by two adjoining reservoirs, one small and one very large. the small one represents the stock exchange and contains the call loans; the large one represents the general business of the country, as expressed by commerce and industry. in europe the small reservoir is regulated by pumping water into it from the large one or by withdrawing water from it into the large one. in this way the outflow and inflow of the large reservoir are scarcely perceptible, and yet there is no difficulty in regulating the small one. with us, the reverse is done. if there is a shortage of water in the large reservoir we draw on the small one and, in order to increase the water in the large reservoir by perhaps an inch, we empty the small one altogether, or else in order to decrease the amount of water in the large reservoir by an inch, we fill the small one to overflowing. no power to lend on real estate[ ] most of the restrictions in the national banking law have to do with loans, reserves, or the issue of notes. of these the restrictions upon loans are by far the most serious impediment in competing for business with state banks and trust companies. for the banks outside the large cities this is particularly true of the provision which forbids loans upon real estate as security. this restriction is based upon a sound banking principle, learned after much bitter experience. but the experience which led to a complete prohibition of real estate loans was gained amid the economic conditions of the first half of the last century, and the principle itself is one which is applicable only to a particular form of banking organization. while the country was in process of settlement, with an abundance of unoccupied fertile land, real estate was a security of most uncertain value. moreover, the wildest of the speculative movements which preceded all our early crises were invariably in land. at present, land values are far more stable, and real estate is everywhere included among the most conservative of investments, proper for all with the one exception of commercial banks. for banks, all of whose obligations are payable upon demand, the real estate loan, quite regardless of its safety, is wisely considered unsuitable. such loans are commonly wanted by borrowers for a considerable period of time and, therefore, they can not readily be reduced in amount even by an individual bank. in other words, they are not liquid. but the importance of this quality in all its assets disappears when a bank begins to acquire time or savings deposits, as well as those payable on demand.... the example of the trust companies shows that a great variety of financial business can be carried on safely and profitably under a single management. failures among them have been comparatively few in number, and it would be difficult to find a single instance of disaster which could be attributed to the variety of business carried on. some of the advantages which the banks would derive if they were able to lend on real estate are so evident that they require little more than mere mention. it would give them more of the most profitable kind of business, that which has its origin in the neighborhood of the bank. the immediate return is generally greater than can be secured from the employment of funds in the money centers or in the purchase of paper from note brokers. moreover, in fostering the growth of wealth and population in its locality a bank is laying a solid foundation for the future expansion of its own business. finally, the ability to lend on real estate will often enable a bank to secure valuable customers who would otherwise go elsewhere. it has been the unpleasant experience of many a national banker to be obliged to refuse a loan to a would-be borrower who has nothing but real estate to offer as security and to see him enter a neighboring state bank or trust company where there was no legal obstacle to the transaction. relations once established are pretty certain to continue even after the borrower has security which falls within the provisions of the national law. there are then at least three distinct advantages which may be expected to follow if the national banks are permitted to lend on real estate. it would be profitable for the banks; it would be of advantage to the localities served by the banks; and, finally, it would enable the banks to compete with state institutions upon a more equal footing,[ ] thus checking to some extent the relative decline of banking under the national law. the independent treasury as a source of weakness in our banking system[ ] for many years the banks of this country have conducted a persistent agitation for the abolition of the independent treasury system. it has been their contention that the independent treasury was an archaic and inefficient system of administering the finances of the nation; that it worked serious hardship upon the banks and the business of the country, and that any system of reform should include its abolition. the treasury is, in reality, a central bank of deposit with branches, run by the government, in which the government is the only depositor, and from which there are no borrowers. the central office of the treasury is situated in washington, while there are ten subtreasuries or branches scattered among the various large cities of the country. the most important subtreasury, from the standpoint of the volume of business handled, is located in new york city.... the united states is the only large nation in the world which has a treasury system of this sort, and this fact has been made much of in the agitation for its abolition. difficulties arising from the treasury system there is no room for dispute that many features of the independent treasury have, in the past, been the source of serious difficulties. however, we must recognize that within the last decade, and particularly within the last two or three years, most of the glaring defects have been eliminated through a liberalization in methods, involving, in brief, a deposit of a very considerable amount of the government's money in national banks rather than carrying it locked up in the vaults of the treasury, through more liberal administrative regulations by which payments to the treasury could be made with certified checks, and through facilitating in other ways the transactions of business men with the treasury department. correspondence of treasury receipts and disbursements ... the real criticism against the treasury is that it causes the tying up of money, not over a series of years, but during the months in which the banking system of the country most needs it. this condition is the result of the lack of correspondence between government receipts and disbursements. during the first four months of the year the receipts are less than in any other period. during the month of may, the receipts sharply increase, reaching their maximum about the first of june, and continuing at a very high rate over that month. in july the income falls off, reaching by the end of the month a point a little above that which prevailed in april, after which it gradually increases during august and september. about october first the tide turns and the receipts fall off sharply during that month, while during december the revenue again increases. as contrasted with this the government expenditures change only in a general way.... exaggeration of treasury evils it should be stated that whatever embarrassment exists because of this condition, and which as a matter of fact has been grossly exaggerated, is found almost entirely in new york city. however, in order to reduce as much as possible the objections raised by the bankers and to prevent money being taken out of circulation and buried in the treasury, where it would be of no service to the country, the secretary of the treasury, on january , , issued the following order, which inaugurated a radical change in the manner of handling and disbursing the public funds. the objects to be accomplished were announced in the order as follows: "for the purpose of bringing the ordinary fiscal transactions of the federal government more nearly into harmony with present business practices, it has been determined that the daily receipts of the government shall be placed with the national bank depositaries to the credit of the treasurer of the united states. disbursements will be made by warrant or check drawn on the treasurer, but payable by national bank depositaries, as well as by the treasury and subtreasuries." secretary mcadoo, in his report for the fiscal year ending june , , in speaking of this, stated that while it had caused some embarrassment "the difficulties at first encountered are disappearing, and the system appears to respond to the public requirements, and to be accomplishing the purposes for which it was devised." lack of central control [ ]there is no country in the world where the volume of currency in circulation and the demand for bank credits fluctuate more widely than in the united states. this is due to the great expanse of our territory, to the annual harvest requirements of the agricultural sections, to the prevailing business activity and enterprise, and to the rapid and unequal increase of population and wealth in different sections. furthermore, there is no country in the world where intelligent control over bank credits and bank reserves is needed more than in the united states. there are in the united states nearly seven thousand national banks, besides twice as many state banks and trust companies. each of these institutions acts for its individual interest alone, independently of the others, and the prevailing tendency of each at all times is to expand its credits to the limit permitted by law. the country banks lend their surplus resources in the form of deposits at interest to the banks in the larger cities, and the banks in the principal money centres commonly expand their credits as much as practicable by lending on call such sums as they deem it unsafe to lend on time or by discount of commercial paper. each bank with a deposit in another bank assumes that, in case of need, it can strengthen its reserve by drawing upon this deposit; but it fails to consider that, when thus it strengthens its own reserve, it must to the same extent weaken the reserve of the other bank, and that the deposits of banks with other banks add no strength to the general credit situation. each bank that has loaned money on call assumes that, in case of need, it can strengthen its reserve by calling such loans; but it fails to consider that, generally, when a loan is called the borrower is obliged to borrow the same sum from some other bank, although a high rate of interest may be exacted, and, therefore, that call loans affect the security of the entire bank situation practically to the same extent as time loans. in the united states there is no way of regulating the supply of bank credits and of holding part of the potential supply in reserve for periods of financial stringency. consequently, nearly always there is either an over-abundance of money (meaning credit which the banks are ready to lend) or a money famine. it has been argued that the volume of credits granted by the banks depends upon business activity and upon the consequent demand for credit and not upon the power of the banks to grant credits, and, therefore, that low interest rates have little effect in causing an expansion of bank credits. experience, however, shows that the contrary is the case, at least in the united states. it is true that, when there is loss of confidence and when business is depressed, interest rates are low, because there is less currency in circulation and more in the bank reserves, while at the same time the demand for bank credits is diminished. it is true, also, that low interest rates will not stimulate speculation and enterprise unless people have confidence and are ready to speculate and to embark in new enterprises. but we know by experience that when people are in a mood for speculation and for business expansion low interest rates operate as a powerful stimulus to speculation and business expansion. a leading banker has said: "in the long run commerce suffers more from the periods of over-abundance (of money) than from those of scarcity. the origin of each recurring period of tight money can be traced to preceding periods of easy money. whenever money becomes so over-abundant that bankers, in order to keep it earning something, have to force it out at abnormally low rates of interest, the foundations are laid for a period of stringency in the not far distant future, for then speculation is encouraged, prices are inflated, and all sorts of securities are floated until the money market is glutted with them."[ ] [the need of intelligent control over discount rates and bank credits is (was) imperative.] absence of regulation of ratio of deposits to capital and surplus [ ]the reports of condition of the national banks, according to the statements of september , , to the comptroller of the currency, show that, on an average, the total deposits of all national banks amount to about four and six-tenths times their total capital and surplus. this means that the average capital and surplus of these banks is equal to approximately per cent. of the total amount of deposits. there are, however, national banks whose deposits amount to ten or more times their capital and surplus, and in these cases the margin of protection to depositors is only per cent. or less of the sum total of deposits. usually the amount of money which a bank has invested in loans approximates the amount of its deposits. in the case of a bank whose loans equal its deposits, and whose deposits are approximately ten times its capital and surplus, it is obvious that the loss of over per cent. in loans would wipe out both capital and surplus and destroy the solvency of the bank, rendering it unable to pay its depositors. the view is held by many practical bankers and experienced economists that it is not sound banking for an active commercial bank to be allowed to receive deposits in excess of ten times its capital and surplus. i am firmly impressed with the correctness of this view, and respectfully recommend to the congress that the national-bank act be amended so as to provide that no national bank shall be permitted to hold deposits in excess of ten times its unimpaired capital and surplus. perhaps it might be wiser to make this limitation eight times the capital and surplus. such a limitation need not interfere with the growth and development of the bank. when its deposits approach an amount equal to ten times its capital and surplus, or whatever other limitation may be fixed, arrangements may be made to increase its capital. a bank whose deposits amount to ten times the capital and surplus, if efficiently managed, should be so profitable that there would be no difficulty in providing for an increase of capital by the sale of additional stock, and when the proposed increase shall have been authorized by two-thirds of its stockholders and approved by the comptroller of the currency, it can be made promptly effective. a commercial bank whose capital and surplus amount to less than one-tenth of its deposits is, except possibly under very exceptional conditions, doing business on too small a capital and upon too narrow a margin for safety, and does not furnish its creditors the protection to which they are entitled against unexpected losses and contingencies which are liable to, and do, so frequently arise.... banking abuses [ ]... among the many abuses and violations of law and regulations with which the department has to contend are excessive loans; overdrafts; loose and unbusinesslike methods of accounting; excessive borrowings by the banks; investment of the bank's funds in securities not authorized by law; charging of usurious rates of interest; unlawful loans on real estate; excessive loans to officers, clerks, and employés of the bank employing them; loans to a bank's officers or employés and others through "dummies"; loaning money, directly or indirectly, upon the bank's own stock; transaction of a brokerage or commission business by the bank's executive officers, the commissions thus collected being sometimes appropriated personally by the officers and sometimes going directly or indirectly to the bank; false statements of directors as to ownership of stock; false statements made by bank officers, such as including as cash or cash items memoranda of moneys due from one source or another which do not represent actual cash and can not be immediately converted into cash; and failure or refusal when so directed to charge off bad debts and other ascertained losses; delay on the part of directors in taking the oath of office. for many of the offences indicated the only penalty which can be enforced by the comptroller's office is the forfeiture of the bank's charter by suit in the united states court. this in many cases would prove a great hardship to innocent stockholders and depositors, and can only be resorted to with much reluctance by this office.... usurious interest rates [ ]all the national banks of the country have been required in each report of condition made to the comptroller's office since january last to state under oath the highest rate of interest they have charged since the preceding report and the average rate of interest charged by them on all loans since the preceding report. the reports received at the comptroller's office show indisputably that in some states and sections borrowers, especially small borrowers, have been and are being subjected to extortions and exactions which the average man would consider impossible in this enlightened age. one thousand and twenty banks in different sections of the country, out of the total of , banks, admitted that they were receiving an average of per cent. or more--some an average of per cent.--on all their loans. those receiving an average of per cent. and upwards included banks in illinois, in minnesota, in missouri, in georgia, in florida, in alabama, in louisiana, in texas, in arkansas, in tennessee, in north dakota, in south dakota, in nebraska, in kansas, in montana, in wyoming, in colorado, in new mexico, in oklahoma, in washington, in oregon, in california, in utah, in nevada, and banks in idaho. let me illustrate the methods of some of these bankers by giving you the facts and figures as taken from the sworn statements submitted to the comptroller's office by the national banks in two particular states in the southwest. in one of these states there were banks which reported that they charged a maximum rate of interest ranging from per cent. to per cent. per annum, banks whose maximum rate ranged between per cent. and per cent. per annum, banks which charged between per cent. per annum and per cent. per annum, banks whose maximum rate was from per cent. to per cent. per annum, and banks which owned up to having charged maximum rates ranging between per cent. and , per cent. most of these disgraceful and unprecedented rates were for comparatively small loans.... these figures are not results of the rule, applied by many banks, not to pass a loan on their books for less than a dollar.... when we find loans made by national banks for $ , $ , $ , $ , $ , and $ , or more, at , , , or , per cent., it is merely a hideous gamble on how long the borrower can keep starvation from his door and live and work. yet i am told on good authority that in one state, largely agricultural, reports from nearly banks--lending chiefly or largely to farmers--show losses of only a fraction of per cent. on farmers' loans, while the average interest rate in these particular banks is per cent. to per cent.--and the maximum rate per cent. or per cent., the banks paying large dividends. we read much of the infernos of the slums of the great cities, of degradation and misery and squalor, of the grinding callousness of tenement landlords and sweatshop operators. here in the country we find bankers, men in business that should be the most respectable, as it is the most responsible, of all secular avocations, literally crushing the faces of their neighbors, deliberately fastening their fangs in the very heart of poverty.... a well thought out, carefully constructed, conservative system of rural credits for the development of agriculture and the increase of our wealth and resources by offering encouragement and opportunity to the ambitious farmer will come presently. when it comes all of us will share the splendid results.... bankers' view of usurious interest rates [ ]on february the following statement was "given out" from the office of the comptroller of the currency: the comptroller of the currency received to-day from the farmers' grain dealers' association of iowa notification of the adoption at the convention of that association in des moines, iowa, on the th instant, of the following resolution: _be it resolved_, by the farmers' grain dealers' association of iowa, representing , members, as follows: that we are as much opposed to bank discrimination in interest rates as to railroad discrimination in freight rates. we oppose private control of the public currency. that we strongly commend the comptroller of the currency for his courageous exposure of bank usury; and we unalterably oppose the efforts of the guilty parties to abolish his office. there has been no better statement of the comptroller's position than is here given--credit standing and variations of it must have no influence on interest rates and anyone who wishes his office abolished is guilty of usury; or, conversely, only those guilty of usury wish the office abolished. the statement is inadequate only in the failure to define what is meant by "private control of the public currency." footnotes: [ ] conway and patterson, _the operation of the new bank act_, pp. , . j. b. lippincott company, philadelphia, . [ ] john skelton williams, comptroller of the currency, _democracy in banking_, address delivered before the annual convention of the north carolina bankers' association, raleigh, may , . printed in _congressional record_, d congress, d session, vol. , pp. - . [ ] a. piatt andrew, _the essential and the unessential in currency legislation_, in questions of public policy, addresses delivered in the page lecture series, , before the senior class of the sheffield scientific school, yale university, pp. - . yale university press, new haven, connecticut, . [ ] adapted from john perrin, _what is wrong with our banking and currency system?, the journal of political economy_, vol. , no. , december, , pp. - . [ ] paul m. warburg. _the discount system in europe_, publications of the national monetary commission, senate document, no. , st congress, nd session, pp. , . [ ] conway and patterson, _the operation of the new bank act_, pp. - . j. b. lippincott company. philadelphia. . [ ] fred rogers fairchild, _bond-secured bank notes and elasticity_, _the outlook_, vol. , no. , march , , pp. - . [ ] [as was pointed out in an earlier chapter, the autumnal demand for currency in the agricultural sections of the country has fallen off appreciably since .] [ ] fred rogers fairchild. _fundamental defects of the bond-secured bank notes_, _bankers magazine_, vol. lxxvi, no. , april, , pp. - . [ ] we are not considering the third alternative of issuing bonds at a heavy discount. [ ] adapted from w. h. lyon, _a gamble in governments_, _moody's magazine_, vol. xi, no. , january, , pp. - . [ ] [in this extract the explanation of the so-called perverse elasticity of our national bank notes is given incidentally but very clearly.] [ ] adapted from john perrin, _what is wrong with our banking and currency system?_, _the journal of political economy_, vol. , no. december, , pp. - . [ ] eugene e. agger. _the commercial paper debate. the journal of political economy_, vol. , no. , july, , pp. - . [ ] _annalist_, march , , p. . [ ] _annalist_, march , , p. . [ ] j. j. klein, _annalist_, march , , p. . [ ] _ibid._ [ ] during over $ , , , in notes were sold by reputable brokers, and they represented in these transactions from , to , concerns. in one large eastern state over two-thirds of the state banks and trust companies regularly invest a portion of their funds in this class of paper (j. a. broderick, _finance_, october , , p. ). on august , , according to the report of the comptroller of the currency, the national banks held over six billions of dollars of commercial paper, most of which was single-name. [ ] _financier_, june , . [ ] j. g. cannon, _financial age_, october , . [ ] p. m. warburg, _the discount system in europe_, in report of the national monetary commission. [ ] _ibid._: see also william jacobs, _bank acceptances_, in report of the national monetary commission. [ ] warburg, _loc. cit._ [ ] e. d. page, _annalist_, march , , p. . [ ] lawrence merton jacobs, _bank acceptances_, publications of the national monetary commission, senate document no. , st congress, d session, pp. - . [ ] paul m. warburg, _the discount system in europe_, publications of the national monetary commission, senate document, no. , st congress, nd session, pp. - . [ ] adapted from james h. simpson, general manager, bank of liverpool, ltd., _some leading features of the london money and discount markets_, an address delivered at the annual banquet of the bankers of the city of new york, january , . [ ] paul m. warburg, op. cit., pp. - . [ ] o. w. m. sprague, _banking reform in the united states_, pp. - , harvard university, . [ ] the importance of real estate to the state banking institutions is shown in the special report from the banks of the united states on april , , recently published by the national monetary commission. for state banks real estate loans and mortgages amounted to $ , , or - / per cent. of total resources and for the trust companies to $ , , , more than per cent. of their resources. [ ] conway and patterson, _the operation of the new bank act_, pp. - . j. b. lippincott company. philadelphia, . [ ] victor morawetz, _the banking and currency problem in the united states_, pp. - . north american review publishing company. . [ ] from an address by mr. james b. forgan to the texas bankers' association. [ ] report of the comptroller of the currency, , pp. , . [ ] _ibid._, pp. , . [ ] john skelton williams, address before the kentucky bankers' association, october , . _the commercial and financial chronicle_, vol. , no. , october , , pp. , . [ ] _journal of the american bankers' association_, vol. viii, no. , march, , pp. - . chapter xxxi the federal reserve system the federal reserve act[ ] the spirit and objects of the act the primary purpose of the federal reserve act of december , , is to make certain that there will always be an available supply of money and credit in this country with which to meet unusual banking requirements. banks of a new class, to be known as federal reserve banks, are to be established, and upon these banks is to rest the heavy responsibility of supporting the structure of credit in periods of financial strain. the new banks are expected to keep themselves in a condition of such strength in ordinary times that the other banks may safely rely upon them for all needed cash and credit in emergencies. in the past, the banks in this country, when subjected to financial pressure, have relied mainly upon loan contraction and the selling of securities. in future it is expected that they will resort to the federal reserve banks, securing additional funds from these by rediscounting commercial loans. if the new arrangements work well, loans in future will not be reduced merely for the purpose of strengthening the banks. loan contraction will take place only when there is evidence of an over-extended condition of business; and even then contraction will be carried through gradually, so as to conserve all interests so far as may be possible. under the new system a most important influence, if not the most important single influence determining the character of banking operations, will be just the reverse of what it has been in the past. to meet the heavy responsibilities placed upon the federal reserve banks, two things are absolutely essential--good management, and ample powers and resources. good management cannot be secured with certainty by means of legislative provisions, however carefully designed with that end in view. in the particular instance of the federal reserve act, an ingenious combination of government and banking influence in selecting the management is provided. purely banking operations are very largely to be handled by boards of directors, a majority of the membership of which is to be chosen by banks. general supervision, and for some purposes control, is placed with the federal reserve board, which is to be appointed by the president of the united states, by and with the advice and consent of the senate. experience alone can determine the wisdom of these arrangements for securing effective management. the federal reserve banks are to exercise wide powers, and would seem likely to have ample resources. the country is to be divided into not less than eight, nor more than twelve districts, in each of which a federal reserve bank is to be established.[ ] all national banks are required, and qualified state banking institutions are invited, to subscribe to the capital of the reserve bank in their district. subscribing banks, to be known as member banks, are required to keep a part of their reserve with their federal reserve bank. these banks will presumably receive most if not all of the general funds of the united states government. they will provide an elastic currency, issuing notes secured by their commercial assets. they are also empowered to undertake the business of collecting, and clearing checks throughout the entire country, thus providing an organization for making settlements between banks in different places, the lack of which has been one of the most serious defects in our banking system. each federal reserve bank will be a central bank for the section of the country which it is to serve. it will have all the responsibilities and most of the powers of central banks in the various european countries; but largely because the system is to be superimposed upon a fully developed banking system, some important provisions of the federal reserve act are unlike anything to be found in european legislation. the federal reserve banks are to receive deposits from the government and from member banks only. ordinarily they will lend to member banks only. all european central banks, though the bulk of their business is with banks and bankers, may deal with the general public and do so. the most striking divergence from european example, however, is the really novel plan of a system of regional banks in place of a single central bank. but the extent of this divergence is generally exaggerated. political boundaries are indeed in large measure economic and financial boundaries as well; but central banks in the european countries do act and react upon each other, often working in harmony, and yet at times very much at cross purposes. if all europe were brought under a single government, very likely the various existing central banks would be merged into a single institution. in some respects this would be advantageous, but it would not be absolutely necessary. certainly european arrangements are not so fundamentally unlike those of a system of regional banks in a single country of great size, as to afford ground for the opinion that in setting up this system foreign experience has been altogether disregarded. the various considerations which led to the adoption of the plan for regional banks, rather than a single central institution, deserve careful attention, since they indicate the spirit and purpose of the federal reserve act. a single central bank was the solution of the banking problem reached without a dissenting voice by the members of the national monetary commission. the bill which the commission prepared was a notable achievement. pioneer work though much of it necessarily was, very few defects on the technical banking side were disclosed in the discussion which followed the statement of the proposed measure. its provisions regarding banking operations, including relations with other banks, are embodied with few changes of an essential character in the federal reserve act. most of the important differences between the bill and the federal reserve act reflect differences in spirit and purpose rather than in methods. a central bank and also the system of regional banks necessarily involve placing somewhere very extensive power to influence and control credit. in the present temper of public opinion, the possession of great economic power is not tolerated in the absence of a large measure of government supervision and control. but unfortunately, in framing its measure the monetary commission failed to realize the fundamental importance of this consideration as a factor in securing general public approval. in devising a form of organization, competent management and approval in banking circles were evidently the controlling factors. an organization was proposed under which out of forty-five directors, but three were to represent the government, the remainder being selected in various ways by bankers. support from some who were the most bitter opponents of the measure might have been secured if the bill had provided for a larger measure of government control; but an equal or even greater number of adherents would probably have been lost. under the plan of the commission and indeed under any central bank plan, government supervision and control cannot be made effective without at the same time placing the details of operation in charge of government officials. few of the most ardent advocates of a central bank were prepared to take this extreme step. under the plan of organization of regional banks, the difficulty of combining government control and private management vanished. purely banking matters, such as the granting of loans, could be placed with boards entirely or mainly composed of persons selected by the bankers whose funds were to provide most of the necessary resources. on the other hand, supervision and whatever measure of control might be deemed advisable, could be placed with a board mainly or entirely appointed by the president of the united states. differences of opinion may be entertained regarding the particular arrangements in the federal reserve act for selecting the various administrative bodies, and regarding the division of power between the directorates of the federal reserve banks and the federal reserve board. if experience should disclose defects in this form of organization, it is flexible enough to permit at any time an extension of government or of banking influence. another important advantage of the regional system is to be noted. the operation of a central bank would be far more likely to give rise to sectional antagonism. this danger was apparently fully realized by the members of the national monetary commission, and elaborate arrangements for selecting the management were devised in order to make certain that each section of the country should be properly represented. but obviously regional banks, managed by local people, are very much more certain to meet this requirement. apparently it was an endeavor to remove still further the danger of sectional dissatisfaction that led the monetary commission to make its one serious departure from sound banking principle in framing its bill. a provision was inserted requiring rediscounts to be made at a uniform rate throughout the entire country, regardless of the wide differences in the demand and supply of capital, which occasion the existing wide differences in lending rates. under the regional plan no such indefensible provision was found necessary. this important feature of the federal reserve act outweighs such advantages in economy of resources and effectiveness in management as were sacrificed in substituting for a central bank the regional banks. the monetary commission in framing its bill seems to have been guided by two principles generally wise in legislation--the scope of the measure was limited to the single purpose of removing purely banking defects in our banking system, and no greater departure from existing arrangements was proposed than was essential for the purpose in hand. the federal reserve act certainly runs counter to the first of these principles. its primary purpose is similar to that of the bill of the monetary commission; but a secondary purpose evidently exercised a potent influence. this purpose was to decentralize credits by lessening the concentration of banking funds in a few large banks in the chief financial centers, and especially in new york. the regional system itself gained much support because it was believed by many that it would lessen the financial predominance of new york city. no comprehensive scheme of legislation with this object in view was inserted in the bill; but wherever two or more means of accomplishing the primary purpose of the bill were open, that one was evidently selected which it was believed might tend toward decentralization. in general the desire to decentralize credits explains why the act makes very much greater changes in existing arrangements than were proposed in the bill of the monetary commission. in the latter, the practice of depositing a part of the required reserves of the banks with reserve agents was left undisturbed. under the terms of the federal reserve act, such deposits are to be reduced by successive installments, and discontinued entirely three years after the passage of the act. from a purely banking point of view, much can be said for this great change; but it was certainly not absolutely necessary in order to secure the desired improvements in the working of our banking system. the new banking institutions for which the federal reserve act makes provision cannot be put in successful operation (and in this it resembles the bill of the monetary commission) unless a considerable number of the existing banks enter into relations with them. an institution might have been established with large capital, and a monopoly of the right of note issue, authorized to act as government fiscal agent, and to deal with the general public. such an institution would presumably in the course of time have become a central bank, the main reliance of other banks in emergencies. in order to avoid competition with existing banks, the act provides that the receipt of deposits by the federal reserve banks, and their normal lending operations shall be confined to those banks which subscribe to the capital and maintain balances with them. obviously, then, if banks in large numbers do not accept the arrangement, subscribing to the capital and relying upon the new banks for accommodation, the system cannot be put into effective operation. moreover, it is necessary that many banks shall enter the system at the outset. an attitude of hesitation would change to one of positive distrust, if the initial response were inadequate. in the case of the bill of the monetary commission, reliance was placed simply upon the attractiveness of the measure. no bank would have suffered positive loss from failure to enter the system, though certain slight inducements were held out to those banks which accepted the arrangement at the outset. whether a sufficient number of banks would have entered that system, if it had been established, may be thought probable but is not certain. bankers are naturally and properly a conservative class and the inclination of many would have been to wait until the system was in successful operation. the attitude of bankers toward the federal reserve act while it was passing through congress was distinctly unfavorable. most of its provisions already referred to, as well as others in which it differed from the monetary commission bill, were disliked. it was evident that in the absence of positive pressure, the number of banks which would accept its terms would be too small to make successful operation possible. no attempt was made, however, to insert provisions which would bring pressure upon state banking institutions. perhaps it would be possible, either under the inter-state commerce or the postal clause in the constitution; but it would have been contrary to the constitutional traditions of the party in power, and it was not necessary. if the national banks very generally enter the system, the resources of the federal reserve banks will be sufficient to test the effectiveness of the measure. accordingly the federal reserve act contains a number of provisions designed to bring pressure to bear upon these to enter the system immediately. failure to accept the terms of the act within one year after its passage involves forfeiture of the national charter. this alone would be no great business sacrifice, since banking in most states is quite as profitable under a state as under a national charter. loss of the national charter, however, involves a loss of the right to issue bank notes and calls for the deposit of lawful money in washington equivalent to the amount of outstanding circulation. most national bank notes are secured by per cent. government bonds, the price of which, in the absence of the circulation privilege, would be perhaps about two-thirds of the price (somewhat above par) at which they were purchased by the banks. no considerable number of national banks could refuse to enter the system without involving themselves in a heavy immediate loss. a further provision in the act puts more immediate pressure upon the national banks in reserve cities. if within sixty days after the passage of the act, a reserve agent bank fails to signify acceptance of its terms, it must cease to exercise the reserve-holding right upon thirty days' notice from the federal reserve board. many bankers bitterly condemned the compulsory features in the act while it was on its passage through congress. this feeling was perfectly natural, but it was not very generally shared outside banking circles. impartially considered, the act imposes no unreasonable burden upon those who have invested capital in national banks. no one fears the loss of the funds which may be subscribed to the capital stock of the federal reserve banks or placed on deposit with them. if loss should be incurred, it would be primarily due to unsound banking on the part of the boards of directors of the reserve banks, a majority of the membership of which is to be chosen by the banks themselves. some bankers have doubted whether the act would prove an effective measure of banking reform; but few if any have felt that results under its operation could possibly be more unsatisfactory than those under the present system; and all agree that it is a long step toward a perfected system. organization the new system is to be organized under the supervision and direction of the "reserve bank organization committee," consisting of the secretary of the treasury, the secretary of agriculture, and the comptroller of the currency. the most important function of this committee is to determine, "with due regard to the convenience and the customary course of business," the number and area of the federal reserve districts into which the country is to be divided, and to designate the city in each district in which a federal reserve bank is to be established. not less than eight, nor more than twelve districts are to be created. this is a most difficult task. however carefully the initial lines of demarcation may be drawn, more or less modification is to be expected after there has been some experience with the working of the system. changes in area of districts, and additional districts if the organization committee designates less than twelve, may be made at any time in the future by the federal reserve board. while the rivalry of cities may tempt the committee to start the system with a larger number, it is to be hoped that it will be found feasible to begin with no more than eight or nine districts. the problems which will confront the management of the federal reserve banks are in many respects unlike those with which our bankers have had experience. a somewhat higher average of capacity in the management may more confidently be looked for if the smaller number of banks is established. moreover, especially at the outset, mere size will contribute not a little to the prestige of the banks, and so inspire public confidence in the new system. a greater variety of occupations in large areas will lessen, though not much, extremes of seasonal variation in demands for accommodation upon the federal reserve banks. then, too, the task of the federal reserve board in supervising and co-ordinating the system will be materially simplified, if the minimum rather than the maximum number of federal districts is decided upon. within sixty days after the passage of the act, in other words before february , , national banks are required, and properly qualified state banks are invited, to signify their acceptance of the terms of the act. within thirty days after the reserve districts have been designated, each national bank must subscribe to the capital of the reserve bank of its district an amount equal to per cent. of its capital and surplus. one-sixth of this subscription is to be paid at the call of the organization committee, another sixth within three months, and still another within six months thereafter. the remaining half of the subscription may be called at any time by the federal reserve board. all these payments are to be made in gold or in gold certificates. it will be observed that the exact time when the system will be established is uncertain. the organization committee is only required to designate the reserve districts as soon as is practicable; thirty days is then allowed for the banks to subscribe; and payments will begin sometime thereafter at the call of the committee.... after the minimum capital (four million dollars for any federal reserve bank) has been subscribed, the certificate of organization is to be executed by any five member banks designated for the purpose by the organization committee. the final duty of the committee will be to supervise all arrangements for the election of the six of the nine directors of each federal reserve bank, who are to be chosen by the member banks. for electoral purposes the banks of each district are to be divided into three groups--each group to "contain as nearly as may be one-third of the aggregate number of the member banks ... and as nearly as may be banks of similar capitalization." while the number of banks in each group will be the same, the capitalization will be very different. all the banks with a capitalization above the average in a district will certainly be in one group; those of somewhat less than average capital, in the second group; while the third group will be composed of banks having a very small capitalization. under this ingenious arrangement, it is evident that the direct influence of the banks of the large cities in selecting the directorates of the federal reserve banks is limited. local alignments are also avoided. on the other hand, this is not a grouping to which the banks have been accustomed in the past, and therefore there is some uncertainty as to whether at the outset it will be conducive to the selection of capable directorates. each group of banks is to choose two directors: a class a director, who is to be an active banker representing the stock-holding banks, and a class b director, who must be actively engaged in commerce, agriculture, or some other industrial pursuit in his district. the board of directors of each member bank is to elect a district reserve elector. candidates for the position of director of a federal reserve bank may be nominated by any member bank; but nomination is not necessary. electors are to signify their first, second, and other choices for one director in each class on a preferential ballot. in addition to the six directors chosen by the banks, three directors (class c) are to be appointed by the federal reserve board. two of these must be persons of "tested banking experience," one to serve as chairman of the board of directors and district reserve agent, the other as deputy chairman and deputy reserve agent. these reserve agents are the official representatives of the reserve board, through whom it will exercise its powers of supervision and control over the reserve banks. the act contains no provision regarding the officers to whom the operation of the banks will be entrusted. presumably each board of directors will appoint one of its members (probably one of the class a directors) as president and manager. the term of office of all directors is three years, but at the outset they are to be classified so that the term of one director of each of the three classes shall expire annually. the appointment of class c directors will be the first duty of the federal reserve board; inasmuch as the organization of the system can hardly be completed before the beginning of the summer, the appointment of this board could be deferred until that time. the selection of these directors for each of the eight or more federal reserve banks is, however, no small task in itself; and since public confidence in the new system will largely be based at the outset upon the character of the federal reserve board, its early selection is much to be desired. the federal reserve board itself is to consist of seven members: the secretary of the treasury and comptroller of the currency _ex officio_, and five members appointed by the president of the united states by and with the [advice and] consent of the senate. of the five appointed members, at least two must be persons experienced in banking or finance. not more than one shall be appointed from any federal reserve district, and due regard is to be given to the different commercial, industrial, and geographical divisions of the country. the term of office of the appointed members is ten years; but those first selected are to serve one for two, one for four years, and so on, so that the term of office of one member may expire every two years. under this arrangement a majority of the board, in the absence of death and resignation, will never be reconstituted at any one time. each president will select two of the appointed members: one in the second year of his term of office, and one in the fourth. the secretary of the treasury will, of course, be a new member appointed at the beginning of each presidential term. the term of office of the comptroller of the currency is for five years, so that here a variable element is introduced. it may happen that some presidents will never appoint more than three members during their term of office. generally, however, each president will appoint four members; but the last appointment, giving a majority on the board, will not be made until his final year of office. lack of continuity and the possibility of a political board were much greater under the provisions for selecting the federal reserve board which were in the measure at various stages while it was passing through congress. the arrangements finally adopted would seem to make it reasonably certain that the federal reserve board will be free from both these defects. organization of the system will be complete[ ] with the selection of the members of the federal advisory council. this council is to consist of as many members as there are federal reserve districts, the board of directors of each federal reserve bank selecting one member. the function and powers of the council are purely consultative. it is to meet regularly four times each year at washington, and at other times there or elsewhere if deemed necessary by the council itself. it is authorized to confer directly with the federal reserve board, to call for information, and make oral or written representations concerning matters within the jurisdiction of the federal reserve board. it may prove to be an important part of the organization, but this does not seem probable. with a scattered membership and holding regular meetings only at long intervals, it is not to be expected that the council will be in close touch with the federal reserve board, or in a position to formulate policies and urge them effectively. from individual members of the council, the federal reserve board should secure valuable information regarding conditions in different parts of the country; but the work of the council itself as an organized body seems likely to be of a formal and perfunctory nature. the importance of the council would doubtless have been measurably increased if the proposal had been adopted that its chairman should sit, even though without a vote, on the federal reserve board. capital, earnings, deposits of the federal reserve banks since the capital stock of each of the federal reserve banks is to be exactly per cent. of the capital and surplus of the member banks in its district, it will always be subject to slight variations. if all national banks enter the system at the outset, the total subscribed capital of the federal reserve banks will be a little more than one hundred million dollars. subscriptions may perhaps fall somewhat below this amount, since with the exception of the reserve agent banks, no penalty attaches to failure to subscribe until twelve months after the passage of the act. few state banking institutions will enter the system at the beginning. in many states legislation is necessary to permit them to invest in the stock of the federal reserve banks, and to enable them to count balances with the federal reserve banks as a part of their required reserves. it is to be presumed also, that such institutions, since they can enter at any time, will wait to see whether the system is working to the satisfaction of neighboring national banks.[ ] there will always be wide differences between the capital and other resources of the various federal reserve banks. neither the capital nor the resources of existing banks can be made the basis for dividing the country into federal reserve districts. geographical consideration will necessarily require the creation of a number of districts in sparsely settled parts of the country, in which banking resources are comparatively small. no federal reserve bank may, however, be established until it has a subscribed capital stock of at least four million dollars. it would, therefore, seem to follow that the organization committee is precluded from forming any district in which per cent. of the capital and surplus of the national and state banks is less than this minimum amount. there are indeed provisions in the act designed to meet the contingency of failure by banks to subscribe in sufficient numbers to provide a minimum capital; but they would not seem to authorize the organization committee to create districts in which resort to these provisions would be inevitable.[ ] whether the capital of the federal reserve banks is large or small is a matter of no great importance. subscriptions to capital provide a comparatively small part of the resources of banks. the capital is an indication that those conducting a bank have something at stake, and is also a margin of safety against loss to depositors. these federal reserve banks are, however, to accept deposits from banks only, and are ordinarily to confine their dealings to the banks. in these circumstances, there is practically no difference between the funds which the federal reserve banks will secure from member banks in payment of subscriptions to capital stock, and the funds which will be deposited with them by member banks. the depositors are the stockholders and, therefore, there is no separate interest to be protected by a margin of safety. shareholders in the reserve banks are entitled to a cumulative dividend of per cent. a limited dividend is obviously wise, since it tends to eliminate the profit-making motive in the management. whether all the federal reserve banks will regularly earn the per cent. dividend is, of course, not certain; but it seems highly probable, since the danger of serious losses is remote, and interest will presumably not be paid to the member banks on their balances. all earnings in excess of the dividend are to be paid to the government of the united states as a franchise tax; but half of these surplus earnings are to be paid into a surplus fund until it has become per cent. of the capital stock. whatever is received by the government from the federal reserve banks is to be used at the discretion of the secretary of the treasury, either to increase the gold reserve against united states notes or for the reduction of the interest-bearing debt. the federal reserve banks will doubtless secure very large resources through the deposit with them of the moneys held in the general fund of the treasury of the united states, although no power over the disposition which shall be made of these funds is granted either to the federal reserve banks or to the federal reserve board. entire discretion remains with the secretary of the treasury. he may continue the independent treasury system without change; he may continue to deposit funds with member banks, just as hitherto he has placed deposits with national banks; and finally he may deposit with any or all of the federal reserve banks, using them as government fiscal agencies. the responsibility of the secretary of the treasury is in no way changed. almost certainly in practice, however, the bulk of the free funds of the government will be placed with the federal reserve banks, and doubtless the opinion of the federal reserve board will determine the distribution of these funds between the various banks. the lion's share of the cash resources of the federal reserve banks will come from the reserves and working balances deposited with them by member banks. under the terms of the act, part of the required reserves of member banks _must_ be placed with federal reserve banks. this is a novelty in central banking legislation, but is based upon sound principle, and is especially to be commended for this country where, on account of the absence of branch banking, the number of banks to be served by the regional banks will be very great. it makes certain some increase in the resources of the federal reserve banks, along with the expansion of the credit liabilities of the member banks. it also lessens somewhat the danger of unnecessary withdrawals of funds from the reserve banks in emergencies. reserve requirements of the national banking law are radically changed. in addition to the requirement that a part of the reserve of the banks be kept with the federal reserve banks, the reserve ratio is reduced for all classes of banks: the practice of keeping a part of the reserve of country and reserve city banks with reserve agents is to be discontinued; and a distinction for reserve purposes is made between time and demand deposits. some of these changes become effective as soon as the new system is established; others are to be made in a succession of steps and completed three years after the passage of the act. time deposits are to comprise deposits payable after thirty days, and are to include certificates of deposit and savings accounts subject to thirty days' notice. a reserve of per cent. is required against these deposits, and no distinction is made between country and city banks. this low reserve requirement will certainly lead the banks to encourage the conversion of demand obligations into time obligations. a relatively large part of the deposits of banks in most european countries is payable at notice. it is obviously an arrangement which shields the banks somewhat from the effects of sudden waves of distrust. against demand deposits the ratio of reserves is also to be reduced at once; but the existing classification of banks is to be retained. the required ratio for country banks is reduced from to per cent., for reserve city banks, from to per cent., and for central reserve city banks from to per cent. a provision in the bill excluding from reserves the per cent. fund held in washington against outstanding circulation is a slight offset to this reduction in reserve ratios. as regards the banks in central reserve cities, the initial arrangement regarding the disposition to be made of their reserve is also the _final_ arrangement. they must hold / of their reserve in vault, / in their federal reserve bank, and the remaining / either in vault or with their federal reserve bank. other banks are allowed a period of transition. reserve city banks for three years must hold / of their reserve in vault, thereafter / ; for twelve months they must keep with their federal reserve bank / , adding an additional / every six months; so that at the end of two years they will have a deposit of / . during the three year period the remainder of the reserve may be deposited with reserve agent banks in a central reserve city, or by what would seem to be an inadvertent extension of existing practice with those in reserve cities; but thereafter it must be either in vault or with a federal reserve bank. country banks must hold in vault / of their reserve for three years, thereafter / ; for twelve months must deposit with their federal reserve bank / , and an additional / every six months until / are deposited at the end of two years. the remainder of the reserve may be kept for three years with reserve agent banks, but at the end of that period must be either in vault or in a federal reserve bank. whether these changes in reserves, together with payments by the banks of subscriptions to the capital stock of the reserve banks, will make necessary any considerable amount of loan contraction, cannot be precisely determined. if numbers of state banking institutions enter the system at the beginning, some strain may be occasioned, since, although these requirements are less than those to which the national banks have been subject, they exceed those imposed upon banks by the law of many of the states. in order to enable the banks to avoid contraction, the act contains a provision under which one-half of each instalment of reserve to be placed in reserve banks may be received in the form of the kinds of commercial bills of exchange which the reserve banks may purchase in the open market. it is, however, most unlikely that the banks will be able to make much use of this arrangement, because of the scanty amount of such paper available. federal reserve notes and national bank notes the power to issue notes is a useful but not indispensable resource for institutions having the responsibilities which are placed upon the federal reserve banks. the issue of notes by a central bank enables it to supply domestic requirements for currency without reducing its holdings of reserve money. in the absence of the right of issue, it would only be necessary to accumulate in ordinary times a somewhat greater amount of reserve money, to provide for seasonal and emergency needs. general public confidence in the federal reserve banks would, however, be far less secure if they were not empowered to issue notes. this is because of the exaggerated importance almost universally attached to the right of note issue, even in countries in which the check has become a universal medium of payment. the particular provisions in the act regarding the issue of notes are extremely complicated, and are in some respects quite without precedent. the notes for which provision was made in the bill of the monetary commission were to be bank notes pure and simple, subject to a variety of restrictions designed to keep the total amount issued within safe limits. the notes which are to be issued under the provisions of the act are certainly quite as well safeguarded in this respect. in addition, the notes are made obligations of the government of the united states, which also undertakes to redeem them at washington. the obligation of the government is in addition to and does not take the place of any banking safeguard. it is designed to meet the desires of the very large number of people throughout the country who believe that the issue of money is a government function. to many bankers and others familiar with our past financial history, this provision in the bill was most distasteful. their opposition, though natural, was, however, neither very practical nor reasonable. it was based very largely upon the fear that the government obligation on the notes would prove an entering wedge for an issue of fiat money at some future time. but paper money cannot be issued under the terms of the act for the purpose of meeting government expenditures. additional legislation would be necessary, and the possibility of such legislation is not appreciably increased by making the notes which are to be issued by the reserve banks an obligation of the government. on the other hand, this provision won many friends for this important piece of banking legislation; it allayed opposition which would always have been a serious menace to the permanence of the new system. the quantity of the new notes which may be issued is wholly within the control of the federal reserve board; but the initiative in taking out circulation rests entirely with the boards of directors of the reserve banks. applications for notes may be made at any time by a reserve bank to its district reserve agent, the member of its board of directors who is the medium of communication between the bank and the board. rediscounted commercial loans equal in amount to the notes applied for must be deposited with the agent, and a reserve in gold of per cent. must be maintained. (a reserve of per cent. in gold or lawful money is required against deposits.) the board may grant in whole or in part, or reject entirely, applications for notes, and may also impose such interest charge upon the notes as it may deem advisable. the notes are to be a prior lien on the assets of the issuing banks, and there is, therefore, no possibility of loss to note holders, nor any to the government on account of the obligation which it assumes. such part of the per cent. gold reserve against the notes as may be deemed advisable by the secretary of the treasury, but in no case less than per cent., must be deposited in the treasury of the united states for the redemption of the notes in washington. each reserve bank is required to redeem not only its own notes but also those of the other reserve banks either in gold or in lawful money; redemption in washington is in gold alone. in practice it is certain that reserve banks will redeem the notes in gold over the counter; and it is also certain that slight use will be made of the redemption machinery at washington. member banks will certainly deposit the notes with their own reserve banks, which are required to accept the notes of other banks at par. the reserve banks, in turn, are required under the law to return for redemption the notes issued by other reserve banks. redemption at washington has apparently been provided because national bank notes are redeemed there in large volume every year; a result of the circumstance that the present number of issuing banks is so large as to make counter redemption much more costly. various provisions in the act are evidently designed to keep the issue of notes within safe limits; but not much reliance should be placed upon them. reserve banks may not, under penalty of a prohibitive tax of per cent., pay out the notes of other reserve banks. if these banks, like the scotch banks, were working in the same territory, regular redemption would check over-issue on the part of any one of them. but under a system of regional banks, each with its own territory, there will be only a very irregular relation between the amount of notes put out by any one and the amount which will be received by the others. moreover, it should be borne in mind that regular redemption is no check whatever upon general expansion, either in the form of notes or of deposits, when all banks are expanding credit at the same time. not much effect also in checking over-issue is to be looked for from those provisions in the act which require a per cent. reserve in gold and impose a graduated tax upon reserve deficiencies. a considerable part of the total reserves of the reserve banks is certain to be in gold; and deposit liabilities are certain to be vastly greater than those for notes in circulation. the circumstances are hardly conceivable in which a reserve bank would not have an amount of gold in its entire reserve ample to provide a gold reserve for such notes as it might issue. the special tax on note reserve deficiency can therefore be readily evaded by shifting the deficiency to the reserve against deposits. deficient reserves are only allowed when reserve requirements are suspended by the federal reserve board. the board is to impose a graduated tax on all deficiencies except in the note reserve. on note reserve deficiencies, the tax imposed in the law is to be added to the rate of discount of the reserve banks. the arrangement would seem to be a most unworkable one, since there is no means of knowing to what extent a borrowing bank will have occasion to use the proceeds of its loan in the form of notes. fortunately this provision of the act is never likely to become operative. after all, for proper use of the right of issue under the act the main reliance must and should be on wise and experienced management for the reserve banks, and above all on a conservative federal reserve board. restrictions which would make over-issue impossible would also deprive the right of issue of all usefulness as a means of extending credit. moreover, the danger of the over-expansion of credit in the form of deposits is vastly greater than it is in the form of bank notes in any country in which deposit credits have become the more important credit medium. one of the most perplexing questions that presented itself in framing the act was the disposition to be made of the national bank notes and the per cent. government bonds which secure very nearly all of them. when the measure reached the senate, it contained provisions which contemplated the gradual substitution of federal reserve notes for the national bank notes. but when it was pointed out that this would require the reserve banks regularly to rediscount at least seven hundred million dollars of commercial paper, in order to support the existing volume of currency, it was felt that some other arrangement must be made. a plan to unify all the varieties of paper money now in circulation, with the exception of the silver certificate, by the issue of an equal amount of united states notes, backed by an ample gold reserve, found influential support; but it was wisely decided to present this in a separate measure. the particular provisions regarding the national bank notes and the bonds contained in the act should be regarded, therefore, as a temporary arrangement pending future legislation. in order to avoid the contraction of the currency which would follow the refusal of many national banks to enter the system, each reserve bank is authorized to purchase bonds and take out circulation similar in all respects to the notes issued by the national banks. after the end of a period of two years, additional bonds may be purchased, but only from member banks, and at the discretion of the federal reserve board. member banks desiring to retire circulation and dispose of their bonds, may make application to the board, which may require the reserve banks to purchase them. no more than twenty-five million dollars of bonds may be purchased in any one year, and the amount purchased is to be distributed among the various reserve banks in proportion to their capital stock. bonds thus purchased may be used as a basis for additional national bank notes by the reserve banks, or they may be converted into per cent. government obligations--one-half into thirty-year per cent. bonds, and one-half into one-year per cent. notes, both issues without the circulation privilege. in taking the one-year notes, a reserve bank enters into an obligation to purchase an equal amount at each successive maturity for thirty years. the purpose of the notes is to provide the reserve banks with a readily marketable asset, the sale of which abroad may prove serviceable in periods of strain, and the domestic sale of which will enable the reserve banks to make their discount rates effective in the money market. government short-term obligations are used for these purposes by many of the european central banks. the existing volume of national bank notes will not be reduced under the terms of the act, except in so far as the reserve banks convert per cent. bonds into per cent. bonds or notes. there may even be some slight increase in the total of national bank notes in circulation, since banks may use for this purpose the small quantity of bonds not already absorbed in this way. little concern, however, need be felt because the national bank notes are not to be retired. present requirements for money to be used outside the banks are sufficient to absorb all the notes at present; and with the growth in population a somewhat greater quantity could be absorbed in future. lending operations of the federal reserve banks the normal lending operations of the federal reserve banks are limited to the rediscounting for member banks of commercial loans maturing within ninety days. commercial loans are generally defined in the act as "notes, drafts, and bills of exchange arising out of actual commercial transactions; that is, notes, drafts, and bills of exchange issued or drawn for agricultural, industrial, or commercial purposes, or the proceeds of which have been used or are to be used for such purposes." the federal reserve board is authorized to define more precisely the nature and character of eligible paper. to make assurance doubly sure, the rediscount of loans secured by stocks and bonds is specifically prohibited. the act also provides that six months' maturities of paper drawn and used for agricultural purposes or based on live stock may be rediscounted. in confining rediscounts to commercial loans, the act is more stringent than that governing the operations of central banks in europe. in practice, however, the bulk of the loans of these institutions are in connection with commercial transactions. while this restriction may in some particular emergency hamper the reserve banks in giving assistance to some threatened bank, it is upon the whole amply justifiable. under our banking system in the past the collateral loan has enjoyed a prestige which it is hoped will be transferred to commercial loans. exclusion of collateral loans from rediscount will certainly contribute much to bring this about. the restriction also gives the public greater confidence that the resources of the reserve banks will be generally available throughout the entire country. one of the reasons which has been advanced for confining rediscounts to commercial loans is based upon certain misconceptions of the true nature of commercial paper--misconceptions which, if adopted by the management of the reserve banks in formulating their policy, may have disastrous consequences. it has been contended on all sides during the last few years that commercial paper was from its very nature liquid; and further, that credit could therefore safely be granted to an extent limited only by the amount of such paper. both of these contentions are hopelessly fallacious. in an emergency, no kind of loan is liquid to any considerable extent. business cannot suddenly be deprived of the amount of credit to which it has become adjusted. it is, indeed, often said that loans based upon any commodity entering into general consumption can be quickly liquidated. this can be done as regards any particular loan; but supplies for the immediate and distant future must be in process of production and they will require a new batch of loans. the view that credit can be safely granted to the full extent of merchandise in process of distribution and even in process of manufacture is equally fallacious. credit affects price. liberal discounts may cause speculative advances in commodity prices, stimulating excessive prices by wholesalers, jobbers, and retailers, as well as by speculative holders pure and simple. there is no mechanical or statistical test for the amount of credit which may be safely granted, whether the loans be commercial or collateral. over-expansion is possible by both operations. commercial loans will become the most liquid asset that member banks can hold, simply because they can be rediscounted with the reserve banks. a smaller amount of bank funds will be employed in the call loan market. but whatever amount remains available for that use will be subject to far less seasonal fluctuation both in volume and in rates. the retention of fixed reserve ratios, even though they may be suspended by the federal reserve board, will probably lead many city banks to use the call loan market to a moderate extent, since it will enable them to avoid the necessity of resorting to the reserve banks for rediscounts whenever reserves momentarily drop below legal requirements. a somewhat larger proportion of time loans will doubtless be used in connection with stock exchange dealings; but the available supply of call money will presumably be sufficient to permit the continuance of the present american practice of daily delivery of securities. at the outset, on account of the widespread prejudice among bankers against rediscounting, the demand for accommodation from the reserve banks may not be large; but this prejudice will surely die away in time, and most if not all of the reserve banks will suffer from no lack of regular business, except in periods of business depression. member banks in those parts of the country in which the supply of credit is inadequate for local requirements will lend more closely, while banks which regularly have more funds than can be thus employed will purchase more commercial paper from note brokers and perhaps rediscount for banks in those parts of the country in which rates are normally high. aside from the government account, member banks are to provide the funds for the reserve banking system. competition with member banks would therefore and justly occasion serious dissatisfaction. managed by boards of directors a majority of the membership of which is to be selected by the member banks, there would seem to be little danger of serious competition from the reserve banks. nevertheless the act places such restrictions upon dealings by the reserve banks with the general public that little or no competition will be possible. the reserve banks are permitted to engage in three kinds of open market operations: ( ) dealings in government securities, and also in obligations of the states and local bodies, maturing within six months and issued in anticipation of taxes; ( ) dealings in foreign exchange; and ( ) dealings in domestic bills of exchange. the purchase and sale of government bonds and notes and state and local short-term obligations require no detailed consideration. in periods of inactive demand for rediscounts, investments of this kind will doubtless be made by the reserve banks in order to employ surplus funds. the right to engage in foreign exchange dealings will also be similarly useful, surplus funds being invested in foreign bills. moreover, if any of the reserve banks find that their resources are regularly in excess of domestic requirements, they may be used to facilitate the financing of the foreign trade of the country with domestic capital. it is also very generally believed that the power to engage in foreign exchange operations may be so used that it will be possible to rely upon securing abundant foreign funds in periods of financial strain. this is most unlikely. it is entirely possible for a small country to rely upon holdings of foreign bills as a means of influencing the foreign exchanges, and even for such supplies of gold as may be needed on occasions when confidence is threatened. but the banks of a large country must rely mainly upon domestic resources, since the amount of cash and credit needed in an emergency is too great to be secured from foreign money markets. it should be the policy of the reserve banks to maintain themselves in a condition of such abundant strength as to be wholly independent of foreign assistance. moreover, if they maintain strong reserves in ordinary times, they will not be disturbed on account of gold exports. gold exports amounting to fifty, or even a hundred million dollars should not be made the occasion for obstructive measures such as are adopted by many of the european central banks. measures of this kind are generally an indication that the credit structure rests upon an inadequate foundation. new york has been a free gold market in the past, and even under our imperfect banking system, there has always been a sufficient amount of gold for every banking purpose. moreover, restrictions placed upon gold movements can have but temporary effects; in the long run the distribution of gold among the various commercial countries is determined by fundamental influences which override all such artificial barriers. the act permits only one kind of banking business between reserve banks and the general public. they are allowed to buy and sell to or from individuals, firms, and corporations, as well as domestic and foreign banks, bills of exchange of the kinds which are made eligible for rediscount. the purpose of this provision in the act is to enable the reserve banks to secure some employment for their funds when the demand for rediscounts slackens, and to develop a broad discount market. a broad discount market may be developed under the new banking arrangements; but the prediction is ventured that this provision in the act will not contribute to its development and that in general it will be barren of results. it should be observed that the promissory note, the usual borrowing instrument in this country, although it may be used for rediscounting purposes, cannot be bought and sold in the open market by the reserve banks. aside from foreign trade, the mercantile bill of exchange, payable at a future date, has largely fallen into disuse in most advanced commercial countries. more and more cash payments are either insisted upon, or are favored by the offer of trade discounts for cash considerably greater than bank discounts. when a purchaser pays cash, obviously a mercantile time bill of exchange cannot come into existence. in european countries, many purchasers who pay at once often draw a bill of exchange on their own bank and, after it has been accepted, discount it in the open market. in this country banks are to be allowed under the act to accept only bills drawn in connection with merchandise exports and imports. material will, therefore, be lacking for a broad discount market, if its development is dependent upon open market operations by the reserve banks. fortunately the development of a broad discount market does not require open market operations on their part. a broad discount market is one to which many borrowers resort with full assurance that they will find many lenders. even under past banking arrangements, many borrowers and lenders have been brought together through note brokers; but owing to the lack of an available supply of cash and credit with which to meet emergencies, this market has been subject to violent perturbations, and at times dealings have been almost entirely discontinued. in the future a solvent borrower will feel more certain that his paper can always be marketed by his note broker; and banks will purchase more largely, since they will prefer to use such paper for rediscounting purposes rather than that of their own regular customers. additional powers of national banks nearly half of the national banks have established savings departments and now hold more than eight hundred millions of savings deposits. this has been a recent development, and one for which there was no specific authority in the national banking law; but under the liberal interpretation of that law by the comptroller of the currency in recent years, it has been permitted because it was not forbidden. many have doubted, however, whether the banks could enforce the thirty and sixty days' notice of the withdrawal of deposits which, following the practice of regular savings banks, appeared on the passbooks issued to depositors. this uncertainty has been removed by implication by the new act, which includes in its definition of time deposits, savings accounts subject to at least thirty days' notice. it is of course a great advantage to the national banks, that in the employment of these deposits they are subject to much less restriction than is imposed upon savings banks in many of the states. subject to the permission of the federal reserve board, and when not in contravention of state laws, national banks may act as trustees, executors, administrators, and registrars of stocks and bonds. many banks will find this a useful extension of their powers. if trust companies may properly engage in banking, there can be no good reason why banks should not undertake trust functions. the department store principle in banking has made rapid headway in most countries in recent years. under proper supervision every kind of reasonable and safe financial business can be handled by a single institution safely and in a way which is convenient for the business community. in some states legislation may be necessary to permit national banks to undertake trust functions. in massachusetts, it seems to be the opinion among lawyers that no legislation is required. inability to lend on mortgage security has been the most serious disadvantage experienced by country national banks in competition with state institutions. land has been by far the best local security available over large parts of the country. rural bankers have, in fact, taken it into account in making loans and by various devices have succeeded in making it the security for many of the loans which they have granted. under the federal reserve act all banks, except those in central reserve cities, may lend for periods not exceeding five years per cent. of their capital and surplus, or one-third of their time deposits, on the security of unencumbered and improved farm land to per cent. of its market value. two changes are made in the law for the purpose of facilitating financial business with foreign countries. national banks having a capital of at least one million dollars may establish foreign branches, subject to the approval of the federal reserve board, and to such regulations as it may formulate for conducting this business. banks may also accept bills of exchange maturing within six months drawn in connection with exports and imports of merchandise. these are desirable changes in the law. it is not, however, probable that many foreign branches will be established in the near future, and it is most unlikely that the american acceptance will make rapid headway in foreign markets. the scope of the following provision in the act is uncertain. "other than the usual salary or director's fee paid to any officer, director, or employee of a member bank, and other than a reasonable fee paid by said bank to such officer, director, or employee for services rendered to such bank, no officer, director, employee, or attorney of a member bank shall be a beneficiary of, or receive, directly or indirectly, any fee, commission, gift, or other consideration for or in connection with any transaction or business of the bank." this prohibition obviously covers payments to bank directors and officers in return for aid in securing accommodation from the banks. it may be held that all purchases by a bank of commercial paper from a firm of note brokers, or of securities from a banking house, are forbidden if any of the partners of such firms are on its board of directors. in this event, a few banks would lose valuable directors; but the question of the wisdom of such exclusion is too complex to be given consideration in this paper.[ ] supervisory functions of the federal reserve board a variety of functions of a supervisory or administrative nature are to be exercised by the federal reserve board. it is to formulate detailed regulations regarding various matters concerning which only general provisions are contained in the act. among important matters regarding which the board is to formulate regulations may be mentioned: rules for conducting branch offices; the regulation of state banks which become member banks; rules defining precisely commercial loans eligible for rediscount; and the regulations for the operation of foreign branches.[ ] the board is to exercise many supervisory functions over the reserve banks which are similar to those which have long been exercised by the comptroller of the currency over the national banks. examination of the reserve banks is under its direction. there must be one examination each year, and additional examinations must be ordered upon the application of ten member banks.[ ] the board is also to publish once each week, a statement showing the condition of each reserve bank, and a consolidated statement for all these institutions. it is also given a number of important powers to be exercised at its discretion. it may suspend reserve requirements for a period of thirty days, and renew such suspension for successive fifteen day periods. for violations of law, it may suspend the operation of a reserve bank, and administer or liquidate it. the board may also reclassify cities as reserve or central reserve cities, or terminate their designation as such. the method of banking reform which has now been adopted, necessarily involves placing somewhere enormous power to expand credit. this power cannot be surrounded by sufficient safeguards to prevent all possibility of its misuse, because in so doing, its wise use would be quite as seriously interfered with. competent management is therefore absolutely essential if satisfactory results are to follow the passage of the federal reserve act. in the operation of the new system, the boards of directors of the reserve banks may prove the most important part of the organization; or that place may be occupied by the federal reserve board. the boards of directors will exercise all the ordinary powers of such boards, except in so far as they are subject to control by the board. all the loans of the reserve banks are to be made by the boards of those banks. in this matter, the board has no power whatever, except that it may require, on the affirmative vote of five members, one reserve bank to rediscount paper for others. here is a power that seems to be designed merely to prevent any working at cross purposes among the reserve banks. few or no occasions for its use will present themselves if all the reserve banks are well managed by their own boards. all rates of discount are to be fixed in the first instance by the boards, subject to review and determination by the federal board. here again the decision of the reserve bank boards is altogether unlikely to be overruled if these banks are skilfully managed. [illustration: the federal reserve districts] the power of the federal reserve board to restrain the reserve banks is vastly greater than its power to force them to take positive action which might lead to the inflation of credit. this was clearly the purpose in view in giving the board the more important of its many powers. it may, for example, reject applications of reserve banks for notes, but this will not endanger assets, it will simply lessen power to expand operations. its power over the discount rates of reserve banks will obviously be more effective when used to advance rates which it deems too low than it will be if used to enforce a rate lower than the management approves. the directors of the reserve bank would still determine the amount of accommodation which it might safely grant to member banks at the enforced low rate. officers and directors of reserve banks may be removed at any time by the federal board, which is merely required to communicate its reasons for removal in writing; but the right of member banks to choose successors will still remain. while it is impossible to make any prediction as to the relative place which the reserve bank directors and the federal board will hold, it is evident that, in the absence of harmonious co-operation, the system will not work smoothly, even if it can be made to work at all. if all the reserve banks and the federal board adopt a wise and conservative policy, the system will surely work well. if the reserve banks alone are conservative, the system may work well but with much friction. if the federal board alone is conservative, it may force good results from the system. on the other hand, if some of the reserve banks and the federal board are reckless, the system will probably break down; and if all the reserve banks and the federal board adopt a reckless policy, the results will be disastrous. both the directors of reserve banks, and the federal board will be confronted with numerous problems, many novel and some intricate. the possibilities of the new system cannot be foreseen, and the extent and nature of the responsibilities resting upon the reserve banks cannot be determined beforehand.... the federal reserve act--an experiment [ ]banking is the most delicate and sensitive of all businesses in which men engage. it goes without saying that it is a business in which the law maker should not needlessly interfere. perhaps some of you may not know that modern banking is a product of evolution. in this respect it is like all great human institutions. no language worth while was ever invented by a human being. speech, with all its intricacies and inconsistencies of grammar and syntax, was not planned by some master mind centuries ago, but is the result of countless ages of effort on the part of the human animal, guided only by his sub-conscious intelligence--that which we call instinct in the lower animals--to give expression to his emotions and his more or less hazy concepts. language, like the comb in which the bee stores its honey, has come to us as the product of the labor of our ancestors through many millions of years. money, credit, and banking are in like manner evolutionary products. if we attempt to tinker with them artificially without regard to the lessons of experience and in disregard of the forces of evolution, believing that our reason transcends the consolidated experience of our ancestry, we shall meet the fate that we deserve, the fate of the conceited bee who thinks he can improve the honey comb, or of the conceited grammarian who would make me walk a literary bridge of sighs for saying "it is me."... i am quite willing to admit that in some of its details the federal reserve act[ ] has taken leaves from the experience of banking institutions of this and other countries, but in its essentials, in its anatomy, in its bony structure as it has been called, it is an animal absolutely unknown to the natural history of finance. let me briefly call attention to the following novelties in banking: first. it provides for a system of twelve competing banking institutions which shall control the currency supply of this country, and over which there shall be no controlling body with power sufficient to compel them to regard the national welfare in the issue of currency and in the extension of their credit. it is taken for granted that the financial welfare of the people will be safe provided that these competing regional banks are required to hold gold or lawful money reserves of per cent. against deposits and per cent. gold (free from tax) against notes, and are not permitted to issue notes except upon deposit of good commercial paper.[ ] second. the act provides that the federal reserve banks shall have the right to deal only with banks, nay more, they may deal only with such banks as have contributed to their capital stock. this again is a novelty in the banking world. if these banks are to be in touch with all american business and industry and be powerful agents for the prevention and alleviation of panic, why should they be thus restricted in their operations? third. the capital of these regional banks is not a matter of voluntary subscription. it is not founded on business principles. the framers of the measure seemed to fear lest the banks they were planning might not prove profitable investments, hence, they have provided that our national banks must subscribe the necessary capital or forfeit their charters. no country on this green and prosperous earth has ever found it necessary to resort to such undemocratic compulsion in order to persuade people to go into the profitable business of banking. fourth. the bank notes issued by these federal reserve banks are called government obligations and must be redeemed on demand by the united states treasury. in no country will you find that any such bank note has ever been issued or even proposed, and i submit that in the united states, whose people for half a century have confessedly been subject to periods of anxiety and distress and panic because of the government's liability for the daily redemption of paper money, this provision of the federal reserve act is amazing, inexplicable, and indefensible. the united states treasury is not a bank and is not made one by this act. it cannot control the issue of the notes, nor the credit operations of the banks who do issue them. why then should the treasury be compelled to redeem these notes? fifth. the federal reserve act provides for an arbitrary shifting of bank reserves such as has never been attempted before. nobody can foretell what the result will be, but we know nothing of the sort has ever been attempted before and we also know that many banks will be obliged to reduce their loans and discounts, and that their customers, the business men of the country, may suffer serious losses in consequence. the united states has tried many financial experiments--indeed, our present national banking system was an experiment in finance and has been found wanting--but the federal reserve act, if it could be put on exhibition in a world's financial museum, would, i feel sure, be voted the newest and most spectacular thing we have yet constructed. the federal reserve act and democracy in banking [ ]beneath his skin every american citizen of every station and avocation, and whatever party name he may wear, is a democrat in all the essentials and fundamentals. that is, he is attached passionately to the principles of local self-government, of the widest individual liberty compatible with the general weal and order of society. this new currency measure is democratic essentially. it looks to decentralisation of direct financial control, to financial local self-government, so far as is consistent with stability and the general safety; to a currency which will be worth its face value everywhere, which will be based on the actual values it purports to represent, as well as the faith and credit of the general government, and which yet will be elastic, expanding to meet needs where and when they develop, receding when not needed; a system fitted to meet any emergency, moving smoothly and noiselessly for the ordinary uses of business in tranquil times. too much money and too little money are alike evil and dangerous. opinions differ as to which is the worse. probably one is as bad as the other. the design of the new law is to supply just enough money or credit, when and where business needs it, to create for our commerce, as has been said, foundations so even, so broadly laid, and so deeply planted that they can not be shaken. as it is, the country bleeds and sweats to the big financial centres. take the south as an instance--and the conditions with which you here in north carolina are familiar exist everywhere in the country. most of our railway systems are controlled frequently through the trust known as the voting trust--by men who are interested in the great banks in the three central reserve cities. so it happens that the large deposits of the railways, their collections from the southern people, as also from the western people, are sent on largely to those banks. the same is true of the telegraph and telephone companies, the life and fire insurance companies, and of many of the larger manufacturing enterprises. the merchants and manufacturers of north carolina pay their freight bills to the railways. the money goes largely and promptly to new york, and is lent out and used there in stock-market operations, or as the directors of the banks, who are also often the directors of the roads and other corporations, may elect. of course there is no law which provides for the carrying of the reserves and bank balances of railways and industrial corporations in the central reserve cities, where the national banks of the country have also been accustomed to keep their reserves. when north carolina needs money to move the cotton crop her banks must call on new york for money which should be in their own vaults; for the return of money paid in here in freight bills, insurance premiums, and otherwise; and your banks sometimes think themselves lucky if they can be allowed the use of any part of it.... it is not hard to see how centralization of financial resources and money supply and concentration of financial power has been forced, and the invisible and irresponsible despotism created by acts of congress and policies of government made necessary by those acts. now, we do not propose to use violence to force disintegration and decentralization, to do anything with a jolt and a jerk. it is understood clearly that to rush headlong and at full speed over an evil or an obstacle may cause derailment or jarring, uncomfortable and bad for passengers. the thought or plan, as i understand it, is to invite decentralization, to encourage it, to give opportunity for it, to make local self-government possible, to remove the influences which draw to a few centres the money that is paid out to the corporations and deposited in the local banks.... the law does not require a single business man to change his account from the bank with which he has kept it or any business man or bank to suspend dealings with the bank or banks in the central reserve or reserve cities with which they have in the past been doing business. it does offer to banks freedom of choice. it says to the banker that he can follow his preferences, sentiments, or habit in selecting the source of his borrowing; and the member banker of any federal reserve district may feel free and peaceful and at ease when he knows that he has in his portfolio notes, drafts, and bills of exchange arising out of actual commercial transactions, which he can convert into money at his federal reserve bank with greater ease and promptness than it has sometimes been possible for him to withdraw his cash balances from his reserve agents and almost with as much ease as it has ever been possible to draw on credit balances with any correspondent. he is not dependent on the whims or fortunes of any other bank. he need not shiver at the prospect of abundant crops for fear he may not have available the funds with which to meet demands for moving them. he will know that if he needs money to accommodate the bank's customers he can, as a matter of right, call on his federal reserve bank. among other benefits the new currency law, by its direct system of clearances, will release and make available for purposes of trade and commerce hundreds of millions of dollars which under the old system have been tied up in tedious processes of collection. it will also save to banks and to merchants and business men generally some millions of dollars which they are now paying, directly and indirectly, for the collection of country checks and checks on outside cities. to refer more particularly to your own district, the fifth, i will try to explain to you how the new method will work in transactions of domestic exchange. in this district, embracing the states of north and south carolina, virginia, west virginia (except four counties), the district of columbia, and maryland, there are some member banks. a cotton mill at columbia, s. c., under the old plan sends its check on its columbia bank for a shipment of coal to the coal company at bluefield, w. va. the local bank at bluefield forwards this check to its correspondent in richmond. this correspondent sends the check to its own correspondent in columbia, who makes the collection from the columbia bank and then draws a check on new york for new york exchange, which it remits to richmond. the richmond bank thereupon notifies the bluefield bank of the collection of the item. the collection and exchange charges on distant country banks amount usually to from one-tenth to one-fourth of per cent., or possibly more, and probably a week or more elapses between the remittance of the south carolina check to the bluefield bank and the time when the bluefield bank gets its report that the item has been collected and placed to its credit in richmond. under the new currency act "every federal reserve bank shall receive on deposit at par from member banks ... checks and drafts drawn upon any of its depositors." that means that the bluefield bank receiving the check on the columbia, s. c., bank mails it to the federal reserve bank at richmond. the federal reserve bank at richmond thereupon charges the columbia bank with the amount of the check, credits the bluefield bank with the proceeds, and notifies the two banks accordingly. the federal reserve act also provides that each federal reserve bank shall receive at par, and credit accordingly, all checks and drafts drawn upon any of its member banks, from every other federal reserve bank; that all checks and drafts drawn by any depositor--that is to say, by any member bank--on any federal reserve bank shall be received and credited at par by every other federal reserve bank. this means that the checks of the member banks in the country towns throughout these five states are worth their full face value, without deduction for exchange or collection charges, to every other member bank, and that the amount of each check may be cashed at par immediately, without following the devious and roundabout courses now observed in the collection of checks. virtually every bank in the fifth district is only one night distant from richmond, and a check mailed one afternoon in the most distant portions of the district should reach richmond the following day in time to be included in that day's operations of the federal reserve bank. let us now consider another aspect of the new law: under the old national bank act a national bank with a capital of, say, $ , , deposits of, say, $ , , , bills receivable amounting to $ , , , and $ , reserve, would only be permitted to borrow a total of $ , , the amount of its capital. if a run should start on such a bank, the amount which it could raise by loans, if strictly held to the old law, would be but $ , , the amount of its capital, which might be quite inadequate to meet a run, and the bank, though thoroughly solvent, might be forced to suspend. under the new law, however, if a bank with $ , capital and deposits of $ , , should have loaned $ , , to its customers on commercial paper and should encounter an unexpected run, in addition to borrowing $ , , the amount of its capital, such a bank would have authority to rediscount with the federal reserve bank of which it is a member, notes, drafts, and bills of exchange issued or drawn for agricultural, industrial, or commercial purposes, having not more than ninety days to run, to any reasonable extent which may be approved by the federal reserve bank to which application for such rediscounts may be made.... we can not overestimate the value of the additional security which this provision of the act confers upon every honestly, capably managed member bank, and the relief from strain and anxiety and from the fear and apprehension of panics and unreasoning runs which it gives to the officers of every member bank. another important change provided by the federal reserve act is the new arrangement for the compensation of national bank examiners. under the present law the compensation of national bank examiners is based, except as to reserve cities, on the capital stock of the bank examined. under the operations of this law a national bank examiner has been receiving for the examination of a certain national bank in the fifth district, with over $ , , of assets and many thousands of accounts, the munificent sum of $ . it is, of course, clear that an examiner could make only an imperfect examination of such a bank in the space of three days at a compensation of, say, $ per day, out of which $ allowance he has to pay his own railroad fare, hotel expenses, as well as clerical assistance. it is not unnatural that but few examiners would willingly spend the ten days or two weeks which it might require to make a thorough examination of such a bank when he is running personally in debt in doing so. under the new currency law the federal reserve board, upon the recommendation of the comptroller of the currency, is given authority to fix the compensation of bank examiners on the basis of annual salary, so that those banks which need additional time and attention from the examiner may receive the careful, close scrutiny which the case may call for. it is believed that the new system of bank examinations will reduce materially the number of bank failures and enable the department to check up many abuses and correct many evil situations which in the past have been ignored or glossed over by examiners in their hasty and incomplete investigations. i thank you, gentlemen, for the opportunity to address you. approaching the study of this new and revolutionary measure with the caution natural to every man trained in banking under the system with which we have grown up, i have become more thoroughly aroused to its merits and more deeply impressed as i have watched the methods of construction, the processes of growth, and have considered the underlying principles directing those who did the work. the elasticity of note issue under the new currency law[ ] to anyone who has been interested in currency reform for, say, twenty years, probably nothing is more striking than the change in emphasis which has taken place among the advocates of reform during this period. the typical reform plan of the earlier time, for example the so-called baltimore plan brought forward in , devoted itself almost exclusively to providing a thoroughly elastic note issue, based on ordinary assets. in contrast, the new law has as its central, primary object the organization into at least regional unity of something like the entire banking system of the country. doubtless this difference in the two reform plans was not altogether due to a fundamental difference of opinion with respect to what would be the ideal scheme. the reformers of the earlier period were not indifferent to the need for centralized organization in the banking system. but they considered any scheme involving a central bank, like the old bank of the united states, quite chimerical; and they were probably right. but times change; and men change with them. for one reason or another we have all become more tolerant of centralization in business matters, as also more tolerant of that increase in governmental control which increased centralization in business seems to make necessary. with at least fairly general approval, a system of regional organization has been set up, involving a very high degree of centralization and a very high degree of governmental control. but with this change in the method of reform, it became inevitable that the more important ends which earlier schemes sought to accomplish by giving the note a high degree of elasticity should be, in no small measure, attained by other means. in consequence, the need for elasticity in the note issue will be much diminished under the new law. nevertheless, it is admitted that this need will not disappear altogether. elasticity in the note issue will be wanted partly to assist in utilizing the newer methods of dealing with the difficulties involved and partly to supplement those newer methods. accordingly, the question "how far does the note issue under the new system seem likely to prove an elastic one?" is still important. from the beginnings of agitation for currency reform the advocates of elasticity have recognized more or less clearly two kinds: ( ) what we may call _seasonal_ or ordinary elasticity, and ( ) what we may call _emergency_ elasticity. by the former was meant the power of a note issue to adjust its volume to those moderate changes in the need for money which show themselves in the course of an ordinary year. by emergency elasticity was meant the power of a note issue to adjust its volume to those extraordinary changes in need which connect themselves with the typical banking panic. the evils which it was believed that seasonal or ordinary elasticity would remedy were principally ( ) the summer shortage of currency for moving crops, together with the temporary but more or less serious stringency in the new york money market which accompanies that shortage, and ( ) the plethora or excess of currency which usually appears three or four months after the crop-moving period has terminated. the evils which emergency elasticity was expected to relieve were principally ( ) the stringency which precipitates the panic, ( ) the money famine consequent on general bank suspension after the panic has fully developed, and ( ) the glut of currency which attends the depression following a panic, often leading to excessive exports of gold and thus endangering the whole credit system of the country. let us, now, take up seasonal or ordinary elasticity, and ask ourselves whether the new notes are likely to possess this characteristic. first, how about the expansibility needed to supply adequate funds for crop-moving? at this point, it must at once be admitted that the new currency does not meet the demands of the case in quite the thoroughgoing way which the earlier schemes thought to be necessary. the ideal of the earlier plans was to provide an adequate and easily utilized power of issue, located at the very place where the need for expansion is felt, _i. e._, in the local bank. the new law gives up this idea entirely. the local bank will not have power to issue the new currency at all. in so far as its customers are to get any benefit from that currency the benefit must come through two channels which the country bank could use in getting the needed funds, even if the currency had no expansibility, namely, ( ) calling in its balances kept with banks more centrally situated, and ( ) borrowing from such central banks. in other words, the new power of issue will help out in the crop-moving period merely because it will put the reserve banks in a better position to respond to the call of the country banks for the return of their own balances and for advances on discounted paper. judged from this point of view only, the elasticity provided by the new law is doubtless adequate. if the reserve banks have not kept themselves in a position to meet the calls of their country members from money already in possession, they will surely be able to put themselves into such a position by expanding their issue of notes. in one sense, then, the new issue has adequate expansibility for ordinary needs. there still perhaps remains a doubt whether effective elasticity is after all assured, for it is not clear that the country bank which needs money for crop-moving purposes will have the wherewithal to get advances from the reserve bank--that is, that it will have paper of the proper kind and in sufficient amount for rediscount. however, it seems probable that the act as finally passed has met this need by providing that agricultural paper shall be admitted on rather more liberal terms than paper arising out of ordinary commercial or manufacturing business. if this be so, it would seem that the provisions of the new law for securing one phase of seasonal elasticity--expansibility--are fairly adequate. passing, now, to the other side of elasticity--_i.e._, contractility--can we say as much? will the new issues promptly retire when their special task is over? _prima facie_, the verdict here is less favorable than in the previous case. in general, there are two principal processes by which a note circulation may be contracted: ( ) _driving_ the notes out of circulation, and ( ) _drawing_ them out. in so far as the former process is depended upon, means are devised to make sure that the notes shall persistently return to the issuer even against his will--they shall have good homing power. by the second process, it is made to the advantage of the issuer of the notes to hasten their withdrawal himself. as respects insuring contractility by the former of these processes, the act certainly cannot claim to promise high efficiency. the driving-out process requires roughly the fulfilment of two conditions: ( ) keeping the channels for the return of notes to the issuer fairly open, and ( ) supplying outsiders with a motive for sending the notes home. as regards the former of these conditions, the new system probably is all right. the return of the notes to the issuer seems not to be impeded by the inconvenience or expensiveness of the process. all member banks and all reserve banks must receive these notes; and the reserve banks will probably have branches within easy reach of any part of the district. hence, any holder desiring to get notes back to the issuing bank will find the process easy and the way open. but good homing power requires more than this. it requires, namely, that adequate motives be supplied to people generally, or, at least, to banks generally, for seeing that the notes get back. it is not enough that the track be smooth; people must desire to use it. now, earlier plans for securing elasticity relied on two principal motives for inducing holders to send notes back to the issuer: ( ) the desire of such holders to make room for their own notes, and ( ) their desire to exchange money which has various limitations imposed upon it for money which is free from those limitations. it is plain that the new system makes only a limited use of the former of these methods of procedure. _within_ the district for which any particular reserve bank is the central bank, this particular force will be practically inoperative; for the power to issue notes on the basis of common assets is not given to any but the reserve banks, and the profitableness of the power to issue the old type of note has always proved too low to induce banks generally to take much trouble to get their own notes into circulation. as between the reserve banks of the different districts, however, this particular motive will, of course, be more or less in evidence, since these reserve banks will all be competitors for this opportunity. but even here the motive in question will not play a large part, since more effective means for insuring the return of the notes from outside reserve banks are provided in other parts of the law. as regards the second motive for returning idle notes--that is, the desire to exchange a money subject to various limitations or disabilities for one not subject to those limitations--the new act does somewhat better than it does in respect to the first motive. it is, indeed, true that, within their own district, no special disability, like being forbidden to be paid out by other banks, is put on the new notes. but they are always subject to the disability of not being legal reserve money in the case of federal banks; and hence such banks will be more or less disposed to return the notes issued by their own reserve banks, in order to exchange them for reserve money. it may be doubted, however, whether in ordinary times this will prove a very potent force, since country banks will usually keep reserves considerably in excess of legal requirements, and so will not need to discriminate nicely between the two sorts of money. as between different districts, the case for the homing power of the new notes is rather stronger, since reserve banks are prohibited from paying out the notes of other reserve banks under penalty of a per cent. tax. even here, however, the provisions are none too adequate. while the notes of a particular reserve bank must not be paid out by the reserve banks of other districts, there is no prohibition against their being paid out by the member banks of other districts; and it is doubtful whether there is sufficient motive to induce said member banks of other districts to send in these notes to their own reserve banks and so start them on their homeward journey. the desire to exchange money which cannot be used as reserve for that which can be would have some force; but, under many circumstances, it would probably prove rather inadequate. another disability which contributes to the homing power of a bank note, and which is actually used in the case of our old note, is not used with this new note--i mean, the fact that they are not receivable for customs dues. the decision to omit this provision was perhaps wise; but it throws out a potent motive for sending notes home, and thus throws away an opportunity to make better provision for their contractility. on the whole, then, it must be acknowledged that, in so far as homing power is dependent on giving to outsiders strong and persistent motives for sending notes home, the new law is not altogether satisfactory. we have seen that there is very little in the new system to secure that the notes shall have good homing power--shall get home by what we have called the _driving-in_ process. is the system better off as respects the _drawing-in_ process? are matters so arranged that the issuing bank will have the power and the desire to withdraw its notes--or at least contract the currency proportionately--when the need for the notes has fallen off? as respects the first part--making sure that the issuing bank shall have the power to retire its notes, or at any rate to effect a corresponding contraction of the currency--the new system is practically perfect, as indeed was the old one. that is, any reserve bank desiring to contract its note obligations may at its discretion deposit with the federal reserve agent reserve notes, gold, or lawful money. obviously, this, if not strictly a contraction of its note circulation, at least brings about the desired contraction of the general circulation. when, however, we consider the provisions of the new law for insuring that reserve banks shall desire to contract their circulation when the special need has passed, we find that the law does not promise quite so well. the favorite device for accomplishing this result has been, of course, a tax on issues, similar to the per cent. tax of the german system. apparently, the new law provides for something equivalent to this in the shape of an interest charge by the federal reserve board, the rate to be fixed by said board. how far this device will prove effective in practice it is not safe to predict. in order that it should induce the banks to contract their circulation, circumstances must have arisen under which the issuing bank would be earning on its outstanding notes a profit smaller than the tax itself. now, it does not seem certain that an excessive issue of notes would necessarily bring about this condition. in the first place, in the absence of good homing power, a volume of notes in excess of business needs would not necessarily cause an accumulation of those notes in the vaults of the bank issuing them. secondly, so long as member banks are free to keep their balances in banking institutions other than their reserve banks, an excess of notes would not necessarily cause the general cash holdings of reserve banks to be abnormally large. for, so long as the ordinary new york banks are permitted to pay interest on bankers' balances, country banks will to a considerable extent keep their balances with these outside new york banks; and it seems not unlikely that the excessive monetary stock thus accumulating in new york city would, instead of getting into the hands of the new york reserve bank, largely remain in the hands of the outside banking institutions and be employed more or less as it has been in the past, that is, in financing doubtful enterprises and supporting excessive speculation. but if the reserve banks do not feel the pressure of excessive issues in the shape of accumulations of notes or some form of money in their own vaults, they may conceivably be able to invest advantageously all the funds in their possession, and, in that case, the rate of interest charged by the federal reserve board will not furnish an adequate motive for the retirement of their issues. doubtless, however, this may in some degree be answered by saying that even an excess which was felt only outside the reserve bank would, after all, compel the reserve bank to contract its issues, since it would lower the rate of discount so greatly that reserve banks could not profitably invest their ordinary holdings, and consequently would wish to get rid of the interest charge. perhaps this is true; but it would by no means insure the prompt and full contraction which most reformers have considered desirable. from the foregoing it would seem that one of the devices for inducing the reserve banks to contract their issues after the need for them had passed--that is, charging interest upon such issues--is not certain, at any rate, to prove adequate; it will not surely eliminate the winter plethora in new york city which is supposed to stimulate and support excessive stock speculation. but the new law contains another provision which may be viewed as a device for supplying the issuing banks with a motive for contracting their issues, namely, the requirement that such banks shall keep a gold reserve equal to per cent. of their issues. is this likely to prove effective? probably not. whatever might be true in panicky times, it seems certain that in an ordinary year the gold holdings of a reserve bank will be much above per cent. of its note issue. if this be true, the maintenance of this per cent. could become difficult only when the excess of money was so great as to cause a dangerous exportation of gold from the country, and this surely would show a very inadequate degree of contractility. in short, the new law does not insure that issuing banks shall be sufficiently disposed to draw in their notes any more than it insures that outsiders will drive them in. it would seem, then, that the new law does not promise to give to the note issue the degree of contractility which has hitherto been considered desirable. in other words, there is some point in the fear expressed by many bankers that the new law will result in note inflation--at least in so far as the avoiding of this danger is dependent on the contractility of the note issue. very likely, however, the possibility of such inflation is sufficiently guarded against by other provisions of the law. we have discussed the adequacy of the new note issue in respect to seasonal or ordinary elasticity. we pass on now to consider its adequacy in respect to emergency elasticity--the elasticity which enables a currency to adjust itself to those extraordinary fluctuations in need which mark a banking panic and the depression that follows. broadly speaking, it is pretty certain that at this point the new law will get a more favorable verdict than in the previous case. as pointed out in an earlier connection, the banking panic, when fully developed, gives rise to three difficulties and so to three needs: ( ) funds to relieve the antecedent stringency which threatens a complete collapse of the credit structure; ( ) a circulating medium for ordinary trade when a general suspension of payment by the banks has brought on a money famine; and ( ) a prompt and thoroughgoing contraction of the circulation in the depression which follows the panic. now, there surely can be no doubt that, under the new law, the availability of an issue sufficient in volume instantly to relieve the antecedent stringency, and so to put a stop to a panic before it had developed serious dimensions, is assured. in fact, it is not at all improbable that, under the new system, the reserve banks will be able to check the development of such a panic at the very outset without increasing at all their note issues. but, if this does not prove true--if it turns out that more currency is needed for this purpose--there would seem to be no shadow of doubt that the new system will insure the forthcoming of such currency both of a quality and in a quantity which will be fully adequate to the task put upon it. ( ) the notes to be issued, being obligations of the federal treasury, will be as acceptable as gold even on the eve of a panic. ( ) there is no limit to the absolute amount of these notes. ( ) the practical limit set by the requirement that discounted paper shall be furnished as a basis for their issue is of no real significance, since such paper will undoubtedly be vastly greater in volume than any need which could arise. accordingly, there can be no doubt that the new system provides all the expansibility needed to abort, or reduce to comparative harmlessness, any panic which might arise. a word now with respect to the second need which an emergency circulation is supposed to meet, that is, an ordinary circulating medium for trade when banks have by common consent suspended payment. in the first place, if we are right in supposing that the new law will surely prevent any panic from reaching such a degree of intensity, it is obvious that we shall not have occasion to meet the particular difficulty here under consideration--that our note issue will not be called on to display this particular sort of elasticity. if, however, it be supposed that the foregoing prediction does not turn out to be correct--if experience proves that panics can still go so far as to cause banks generally to suspend payments, to hold on to every form of reasonably solid money, and to try to satisfy the public with substitutes--our verdict for the new currency would necessarily be less favorable. we should have to admit that the new law does little or nothing to relieve such a situation. broadly speaking, the new money will be altogether too good to meet this particular need. banks that had reached a stage of panic sufficiently intense to cause them to suspend payment--to hoard the ordinary forms of money--would be sure to hoard money as good as those notes are bound to be. that is, the new issue would immediately pass into hoards, as did the greenbacks which the secretary of the treasury reissued during the panic of , and, therefore, would bring little if any relief to the currency famine which had developed. in fact, it is almost impossible to conceive any form of note fitted for this particular task except one which was so bad that there was no danger of its being hoarded. that is, the only proper way to meet this particular need of a severe panic is to make sure that it does not arise at all; and, in this respect, the new law promises well. we come, finally, to the third need which emergency elasticity is supposed to meet, that is, a prompt and great contraction of the circulation when the panic has passed and the inevitable business depression consequent upon such a panic has set in. here, again, though not in the same degree as in the last case, if the new law proves as successful as many conservative students expect, the need in question will be little, if at all, experienced. we shall usually escape the extreme business inflation of the antepanic period; the panic itself will be much abated, if not completely eliminated; and, in consequence, the trade reaction which naturally follows a panic will be much diminished in intensity. if this turns out to be true, the circulation will never again show such an extraordinary glut as characterized the winter of - . nevertheless, it can hardly be doubted that, after even an incipient panic, there will be some reaction, and consequently a more or less plethoric condition of the currency will follow. will the new issue have sufficient contractility to meet this need? earlier in this paper we have seen that the conditions attached to the new issue are in general not favorable to contractility, in that they do not provide for either the prompt driving home or the prompt drawing home of the notes when the necessity for their issue is past. outsiders lack adequate motives for sending the notes home; issuers lack adequate motives for calling them home. the case for emergency contractility, however, is somewhat better than the case for ordinary contractility. first, it is probable that the homing power of the note will prove greater at such a time than in an ordinary year, for, at such a time, outside banks will not be able to find investments for their funds, since speculative trading will disappear altogether and business generally will be at a very low ebb. again, it seems certain that the issuing bank will, in this case, have more than the usual motive for bringing about a contraction of the circulation. the chief reason why such a bank may not be eager in ordinary times to hasten the retirement of its notes is the fact that, provided the notes do not accumulate in its own vaults, such a bank will gain more by using the funds in its possession to make loans than it would by using them to retire notes, assuming that the interest charge made by the federal reserve board is not placed excessively high. but it is practically certain that, in the depression which follows a panic, no reserve bank will have opportunities for keeping all of its funds busy; and since, in that case, the interest charge, however small, will be a dead loss, the bank will have adequate motive for effecting, as promptly as possible, an adequate contraction of its note liabilities. this motive would be still further strengthened should the glut prove sufficient to cause a decided drain of gold, since, in that case, the reserve banks will find difficulty in maintaining the required per cent. reserve. on the whole, then, we seem warranted in affirming that, as respects emergency elasticity, the new notes will give no serious disappointment. finally, as respects elasticity in general, though the note issue, viewed by itself, does not seem quite fitted to satisfy the tests which an old-fashioned advocate of elasticity is inclined to impose upon it, yet, when we take the new law as a whole, it seems not unreasonable to affirm that it promises to accomplish, directly or indirectly, most of the ends which we had hoped to attain through elasticity and hence promises to give us a system which in essentials is truly and adequately elastic. notes printed and issued [ ]during the year the circulation of federal reserve notes has increased to $ , , as of december , . believing that the country should be prepared against any contingency, the board had authorized the printing of about $ , , of these notes. almost one-quarter of the total supply printed has been placed in circulation. on december , , however, only $ , , of notes secured by commercial paper pledged with the federal reserve agents was outstanding as an obligation of the federal reserve banks. the liability of the federal reserve banks as to the remainder has been discharged by the deposit with the federal reserve agents of a like amount of gold and lawful money. this result has been achieved by the federal reserve banks in responding to requirements, for currency by issuing federal reserve notes rather than by parting with gold. while the gold pledged with the federal reserve agents represents a very valuable protection in case of a substantial demand for gold, it must be observed that the process is expensive without, at the same time, giving to the federal reserve banks that additional strength and lending power which they would secure in case the law were amended so that the federal reserve banks would remain liable for the outstanding notes, but, on the other hand, would retain property title to the gold delivered to the federal reserve agents, which, in that case, would not be paid in to extinguish the liability upon the notes but would be deposited as collateral security against them. impounding gold [ ]on november , , the first shipment of federal reserve notes was received by the federal reserve agent [of the federal reserve bank of new york] from the comptroller of the currency. on november the bank pledged with the federal reserve agent $ , of commercial paper rediscounted by member banks and received from him a similar amount of federal reserve notes. these notes were not required by the banks which made the rediscounts, as they had already withdrawn by checks the credits so established. they were taken by this bank for its general use. the issue of federal reserve notes gave the reserve bank the opportunity of affording to its member banks complete interchangeability between book and note credits. the bank therefore established the policy of issuing federal reserve notes freely to any member bank desiring them whether the credit thus withdrawn was established by it through rediscounting, or the deposit of checks, or the deposit of gold or lawful money. in practice, however, most credits withdrawn by notes have been established by the deposit of checks which have been collected by this bank in gold or lawful money through the clearing house. accordingly, the accumulation of cover in the hands of the federal reserve agent has been mainly gold, with but a small amount of rediscounts. the processes provided by the act for the issue of federal reserve notes to the reserve bank permit complete interchangeability between gold and rediscounts held by the agent. gold may be substituted for rediscounts and rediscounts for gold, in accordance with the requirements of the reserve bank. during the entire period its requirements have been for notes with which it might exercise its statutory right to "exchange federal reserve notes for gold, gold coin, or gold certificates." the policy of the federal reserve bank has resulted in greatly strengthening its gold position and its ability to assist its member banks or other federal reserve banks should they at any future time seek credit in order to withdraw gold for domestic or foreign uses. through this policy also it has been able potentially, at least, to retard the expansion of credit by impounding in the hands of the agent a large volume of gold which might otherwise have found its way into bank reserves already superabundant. furthermore, through this policy it has been able to take the first step toward accomplishing one of the purposes of the act set forth in its title, _e. g._, "to furnish an elastic currency." there are two forms of elasticity, one of _quantity_ and the other of _quality_, both provided for in the act. from the point of view of cover, the gold certificate is completely inelastic. it stands at one extreme of our currency, with a dollar of gold set aside behind each dollar of paper. at the other extreme stands the national-bank note, with only cents of gold set aside behind each dollar of paper. the assets of the issuing bank make it good, but its elasticity is nullified by the requirement that it must be secured dollar for dollar by government bonds. between these two extremes the federal reserve note, a new form of currency, has been introduced. for each dollar of this paper there is set aside from cents to $ of gold. as in the case of the national-bank note, the obligation of the united states and the assets of the issuing bank secure it. the process in which this and other federal reserve banks have been engaged is the substitution, as a circulating medium, of a note which is elastic in quality for the inelastic gold certificate. gold is the most uneconomical medium of hand-to-hand circulation since, when held in bank reserves, it will support a volume of credit equal to four or five times its own volume. what the reserve bank does in accumulating gold behind its federal reserve notes is to establish with the holder of each note a credit which may be availed of whenever the occasion requires. with this credit established it can convert at will its gold-covered notes into notes covered partly by gold and partly by commercial paper. in times when credit is becoming strained and bank reserves need strengthening or when gold must be exported, this conversion will take place, and after the strain is over the gold cover will be restored through the repayment of the rediscounts substituted for it. in this way elasticity of quality in our currency is obtainable. but it should not be construed as in any way a deterioration of the currency contemplated by the act. quite the reverse is true. the act provides for the issue of federal reserve notes in unlimited amounts, with cents of gold behind each dollar of paper. this is elasticity of quantity and it becomes operative with the minimum of gold cover. elasticity of quality, on the other hand, operates with a gold cover always above the per cent. minimum and ranging as high as per cent. in order to be prepared for any currency demands which might be made upon it, the federal reserve bank of new york in the spring of adopted the policy of having printed and keeping constantly on hand a supply of federal reserve notes substantially in excess of the amount of emergency currency which, experience shows, this district might be called upon to supply. the maintenance of this policy and of the policy of issuing federal reserve notes freely has entailed a heavy cost upon this bank. unissued federal reserve notes are carried at cost on the books of the bank, and at the end of each month the amount of notes issued to the bank during the month is charged off at cost. the shipment of notes unfit for circulation to the comptroller of the currency at washington for cancellation and destruction is a further item of expense in connection with the maintenance of these policies. the directors and officers of the bank, however, feel that the results accomplished amply justify the expense incurred, and consider that the added strength furnished the bank by the gold thus accumulated is perhaps the most important result of the operations of the period. some reduction has already been made in the cost of printing federal reserve notes, and it is to be hoped that further experience and study will enable other substantial reductions to be made in the cost of preparing for issue what has already become an important element of the circulating medium of the country. the act provides that all expenses in connection with the issue and redemption of federal reserve notes shall be borne by the federal reserve banks, and in view of the service the banks are performing in accumulating gold through the medium of these notes, the feeling is quite general among their officers that the notes should be furnished to them at the lowest possible cost consistent with the high quality of workmanship required. the design of the notes is not altogether satisfactory for efficient handling. in sorting notes it is necessary to be able readily to distinguish between notes of this bank and notes of other reserve banks. this would be greatly facilitated if the printing of the distinctive number and letter of each bank were made more general on the face of the note. the financial policy of the federal reserve banks[ ] it seems clear that the cardinal principle in the management of the federal reserve banks will be to disregard the course which will lead to maximum profits, following instead the path which will lead to the greatest safety and which will permit these banks to be of the greatest service to the nation. large reserves should be maintained, and these should consist chiefly of gold. the payment of interest upon bankers' deposits and government deposits should be avoided, if possible, for the reason that the payment of interest will force the keeping of smaller reserves, if the cumulative dividend is to be earned. the banks should be managed, not from the standpoint of profit, but from the standpoint of safety. yet this is but one side of the policy of the federal reserve banks. their power and influence can be made to extend much farther than would result solely from the wise management of their own affairs. these banks are the financial trustees of the nation. the country will look to them to see that they exercise over the member banks a closer supervision and discipline than has been possible in the past. supplementing a negative control by the bank examiners, who are powerless so long as the letter of the law is observed, the federal reserve banks will be a great positive force. the federal reserve banks, with the approval of the federal reserve agent or the federal reserve board, may conduct examinations of a member bank, both for the purpose of ascertaining its condition, and, what will be of equal importance, for the purpose of determining the lines of credit which are being extended by it. in the long run, the greatest work which the federal reserve banks can do for the business men of this country is to improve and standardize the methods of commercial borrowing. i believe it is possible for these banks, with the approval of the federal reserve board, under the power just quoted, to establish a comprehensive credit information clearing service through which the aggregate loans of all large borrowers can be known by any bank official and through which excessive borrowing or the lending of money to concerns pursuing unwise financial policies can be checked before disaster overtakes them. this is one of the greatest needs of our banking system.... relations of federal reserve banks with member banks[ ] the aim of this bank [federal reserve bank of new york] at all times has been to maintain frank and friendly relations with its member banks. at every meeting of the new york or new jersey bankers' associations, or of their groups, to which invitations have been received, one or more of the directors or officers have been present and discussed the development of the various functions of the system. when the establishment of an intradistrict collection system was under consideration, the directors and officers invited representative member bankers from all parts of the district to confer with them at the office of the bank. the plan finally adopted was thoroughly discussed in all its aspects and a consensus of opinion seemed to prevail that it was a fair and reasonable plan. when the conditions under which state banks should be admitted to the reserve system were under consideration three conferences were held by the directors and officers of the bank, one with national bankers, one with state bankers, and one with trust company officers, from various parts of the district, to ascertain their views upon the question at issue. in every case the policy has been pursued of dealing frankly with those present, in order that they might understand fully how the action under consideration would affect them. the officers have expressed themselves at all times as desirous of establishing personal relations with officers of member banks and have invited them to call at the bank when in new york city. yet a year has gone by and officers of probably not over per cent. of the member banks have done so. many of them still have the feeling that the bank is a branch of the government. their experience with the government consists principally of the statutory and supervisory relationship which exists between them and the comptroller's office. the conception of the relation of this institution with them as co-operative makes headway slowly. the fact that the national banks were practically compelled to join the system naturally retards the development of the co-operative idea. the change of attitude, upon which the success of the system will ultimately depend, will probably come slowly, but there are already signs, as we enter upon the second year of the system, that the banks are getting more accustomed to it and appreciate the results it has already accomplished. it is hoped that during the coming year, with organization pressure somewhat lessened, more time can be devoted by the officers to developing personal relations with the officers of member banks. the present attitude of the member banks toward the reserve bank may be summarized as follows: the new york city banks, upon which the strain of all crises first and chiefly falls, fully understand the value and benefits of the system. while regretting the loss of bank deposits which will probably be drawn from them (estimated to be as high as $ , , ), they are nevertheless hearty supporters of the system, at all times co-operative in their attitude. many of the banks in other large cities are unable to take full advantage of the lowered reserve requirements, but in spite of the loss of interest on their reserve balance, most of them understand what the system in its larger aspects means for american banking and generally give it their support. while the same may be said of many of the country banks, yet it is among the country banks as a class that most of the apathy and hostility to the federal reserve system which still persists is found. their opportunities and earnings are relatively small, and in order to live they must figure closely. they feel the loss of interest on reserve deposits; the absence, as yet, of dividends on their capital contribution; and the prospective loss or decrease of the exchange they generally charge on remitting for checks drawn upon them. many banks in industrial centres are precluded by the activity of their business from taking advantage of the reduction in the required reserve. they believe that they will, in fact, be required to carry an even larger reserve than heretofore in order to obtain collection service for notes, drafts, and non-member bank checks and the various other services now rendered by their reserve agents, but not yet undertaken, by the reserve banks. it is very natural that they should view with reluctance the termination or diminution of long-standing business associations with their reserve agents. few of them, as yet, conceive of the reserve bank as their active reserve agent, performing all the services which go with the relationship. the dormant accounts most of the banks maintain with the reserve bank are, perhaps, indicative of their attitude toward it. relatively few banks of this district are borrowers; in good times and bad they have been able when necessary to borrow from their city correspondents on bonds or on the indorsement of their directors, two avenues which are now to be closed to them. the rediscounting privilege has been little availed of and the larger functions of the federal reserve system, such as influencing domestic rates and international gold movements through the development of a discount market and by dealing in foreign bills, appear remote from their spheres of activity. they feel that the system has few advantages to offer in return for the cost it entails upon them. all of these points will be felt with increasing acuteness by the country banker as his reserve transfers approach completion and as reduced balances result in reduced service from his city correspondent. his point of view is outlined thus frankly in order that the difficulties he sees may be clearly recognized and steps taken gradually to remove them. the development of a more satisfied relationship requires progress on the part of the reserve bank and a willingness to co-operate on the part of the country banker. the reserve bank should organize a complete collection system embracing the handling of notes, drafts, and items on non-member banks, which eventually will bring all the members into daily active relations with the bank. it must be ready to act for member banks in the purchase, sale, and custody of securities; to supply credit information on names whose paper is offered by brokers; to give its members information concerning methods of developing the new functions which the act authorizes them to exercise; to perform the services now rendered by their reserve agents; and generally to assist them in every reasonable way. the member banks should look upon the reserve bank not as an alien but as their own institution. they own all its capital and most of its resources, and they control its management through the directors they elect, subject always to the supervision of the reserve board. at the reserve bank they may borrow as a standing right and not as a favor which may be cut off. they no longer have to buy or carry bonds to serve as security for loans; the paper of their own customers, large or small, will now serve as their security. while panics in the past may not have affected them, they have been disastrous to the business interests of the country, who are their customers; and their contributions to the reserve bank should be recognized as a form of insurance not merely for themselves but for their customers as well. if this insurance is expensive and makes some changes in the nature of their business, the act should be carefully studied with a view to making the most of the new functions it provides. new avenues of activity should be looked for. the banks which will get the most out of membership are those which are the first to see and develop the opportunities it provides and to educate their customers to the protection and facilities they will enjoy through the system. the occasion is a favorable one also for the correction of abuses. customers will do things in the name of the federal reserve system which they have never done before. the experience of banks in using the forms provided by the reserve bank to get statements from their borrowers is evidence of this. the occasion should be seized also to increase the balances of depositors who carry unprofitable accounts. to assist member banks in studying their accounts this bank has had under preparation by chartered public accountants a reasonably simple form for analyzing accounts which may be obtained by banks desiring to use it. it is the duty of the directors and officers to understand not only the problems of the reserve bank but those of the member banks as well; and it has been their endeavor during the past year to give special study to those of the country bank. several suggestions for the relief of the country bank have come to their notice. one of these, which the american bankers' association at its seattle convention favored, was to permit the per cent. of reserve which the member bank may carry either in its vaults or in the reserve bank, to be deposited with member banks not more than miles distant and count as reserve. this seems to be contrary to the spirit and intent of the act, which is primarily to centralize reserves in federal reserve banks. another suggestion which seems more worthy of consideration is that the percentage of reserve required for country banks should be somewhat further reduced. when the reserve transfers are completed checks in transit can no longer count as reserves. it is clear, therefore, that the reserve reduction contemplated by the act will not be realized in practice. a further reduction in the reserve requirements would, in the case of many banks, result in a reserve less than the amount their business actually required, and would enable them to carry the amount thus freed wherever it would best serve their particular business, and, if they so desired, to maintain some relations with present city correspondents. it would lead away from the present rigidity of bank reserves toward greater flexibility and a better understanding of their meaning and purpose. relations between the federal reserve bank of minneapolis and its members [ ]the ninth federal reserve bank has sought to make the federal reserve act fully operative within its district. during the spring of it had opportunity to demonstrate its effectiveness in meeting the requirements of agriculture in the northwest during the planting season, and rediscounted liberally for member banks, in order to enable them to better satisfy the requirements of farmers. it relieved local pressure at a number of points where manufacturing enterprises and general business were depressed because of war conditions, and had opportunity to show that it can efficiently meet the demands of industry. again, in the fall of the year, when an adverse season had created large amounts of immature corn, it was able to perform a very valuable service in assisting member banks to meet the requirements of farmers who were suddenly compelled to make provision for utilizing a valuable forage crop. during the prevalence of the foot-and-mouth disease it was able to come to the assistance of many banks in the western part of its territory, which had applications for loans from numerous stockmen who had cattle ready for market, but were unable to ship on account of quarantine conditions. the service above indicated, while not perhaps of notable consequence in any single case, consists in the aggregate of a very valuable degree of assistance, which would not have been available except for the federal reserve bank, and without which, portions of the district would have encountered considerable hardships. relations between the federal reserve bank of boston and its member banks [ ]owing to the unusual conditions existing in the money market, and to the fact that the reserve city banks offer facilities to the country banks which this bank has not yet developed, more particularly in connection with the collection of checks and other items, the latter banks have carried only their minimum reserve requirements with this bank and have used its facilities only to a limited extent. the relations between country bank officials and the officials of this bank have been most cordial. while many of the banks in this district are borrowing, most of them find it much more convenient to go to their correspondent bank and borrow, either in the form of a demand loan, with or without collateral, or against a certificate of deposit. the comptroller's calls on the several dates show the total borrowings of member banks in the district as compared with their rediscounts with this bank, as follows: _total _borrowed, borrowed._ f.r.b._ dec. , $ , , $ , mar. , , , , may , , , , june , , , , sept. , , , , nov. , , , , the officials of the city banks on the other hand are apparently satisfied with the progress made in the development of this bank's functions. while but few of the boston banks have rediscounted with us, almost all have intimated that should occasion arise they would do so. furthermore, several boston banks have entered into the acceptance business to a large extent, and the assistance that this bank has given in the matter of rates and market for acceptances has done much to bring it into favor with those banks. the boston banks have also used this bank to a large extent in exchange transactions, and the services offered by the gold settlement fund have been used almost exclusively by those banks. thus far boston banks have received more benefits from this bank than have the other banks in this district. a possible exception to this is in aroostook county, me., where, owing to an unusual situation surrounding the principal industry, the potato crop, banks have relied on this bank to a considerable extent to carry them through a trying period. the moral effect of having the federal reserve bank of boston stand behind them was not only appreciated by those banks, but enabled them to handle their business much more satisfactorily and to finance themselves without having to call upon this bank to an undue extent for rediscounts or without embarrassing their customers. federal reserve banks and the acceptance market [ ]the right to accept drafts was conferred on new york state banking institutions by the act of april , . shortly afterwards a few acceptances were reported, principally against securities. it was not until the derangement of international credit facilities at the opening of the european war that american bankers' acceptances, especially those relating to foreign commerce, came into existence in substantial volume. at that time some of the trust companies with foreign connections extended credits freely to their customers to replace credits formerly granted by european banks which had been either withdrawn or reduced; they also accepted drafts in large volume. on and after may , , member banks were authorized also to accept drafts drawn upon them involving the importation or exportation of goods.... the monthly purchases of acceptances by this bank [the federal reserve bank of new york] in the new york market have been: _number_ _number_ _of pieces._ _amount._ _of pieces._ _amount._ _for itself._ _for other reserve banks._ february , , . , , . march , , . , , . april , , . , , . may , . , , . june , , . , . july , , . , , . august , , . , , . september , , . , , . october , , . , , . november , , . , , . december , , . , , . total , , , . , , , . the policy pursued by this bank thus far has been to purchase good acceptances whether or not the acceptor was a member bank.... the reserve bank and the market rate for the discount of such bills in new york has been for nearly a year, and is now, lower than the rate for similar bills in london. the relatively small volume of such credits which american banks have succeeded in making operative even under the unusually favorable opportunity which the war presents for their extension, is evidence of the difficulty which will be encountered in developing the acceptance business in the united states. some of the fundamental difficulties are: ( ) the disinclination to break old banking connections. ( ) the difficulty of educating handlers of bills in distant places as to american credits. ( ) the lack of bill buyers in foreign countries who will quote as low rates on dollar as on sterling bills. ( ) the natural prejudice of bill buyers in foreign countries in favor of a bill of known currency and against a bill of as yet unknown currency. ( ) the lack of men trained to exercise the judgment and financial responsibility required of them as managers of branches or agencies which american banks might establish in foreign countries. ( ) the inferior communications for both goods and mail between the united states and foreign countries as compared with those between great britain and foreign countries. only time, experience, and patient effort will remove these handicaps to the elevation of dollar exchange to its proper position in international finance. the business, however, is developing and will continue to grow as our banking machinery and connections extend throughout the world. the act permits member banks to accept an amount of bills not exceeding per cent. of their capital and surplus. by the amendment of march , , under certain conditions they may be authorized by the federal reserve board to accept up to per cent. of the capital and surplus. the following banks in this district have received such authorization: _amount of capital and surplus._ bank of new york, new york $ , , mechanics & metals national bank, new york , , atlantic national bank, new york , , american exchange national bank, new york , , as this bank has probably been the largest single purchaser of bankers' acceptances, it has been able, as it gained experience, to exert some influence toward standardizing practice and form.... the amended regulation[ ] issued september , , considerably broadened the field of acceptances eligible for purchase and encouraged an increased volume of these instruments. the further amended regulation issued december , , covering the purchase of bankers' acceptances arising out of domestic transactions relates to a class of bills which national banks are not authorized to accept. when accepted by institutions of high credit they have a ready market, though at a fractionally higher rate than acceptances based on foreign transactions. [ ]new england imports a large volume of hides and wool from south america and cotton and jute from the orient and other sections of the world. these shipments in the past have been financed through credits drawn on european centers. since the opening of the federal reserve banks these foreign trade transactions have been financed to a large extent through dollar credits drawn on this country and the acceptances arising there from have found a ready market in the federal reserve banks. several of the member banks in this district have entered this new field of finance and the federal reserve bank of boston has used every effort to further and develop that business, not only by buying a large amount of that class of paper, but also through furnishing favorable forward discount rates to assist in protecting its member banks. the following member banks have entered this field: . first national bank, boston, mass. . fourth-atlantic national bank, boston, mass. . merchants national bank, boston, mass. . national shawmut bank, boston, mass. . old colony trust co., boston, mass. . second national bank, boston, mass. . merchants national bank, worcester, mass. under special permission of the federal reserve board the first national bank, of boston, and the national shawmut bank, of boston, have been given authority to accept up to per cent. of their capital and surplus. it is of interest to note that the former bank has reported the largest amount of acceptances of any member bank of the federal reserve system. clearings and collections in practice [ ]section of the federal reserve act made general provision for the establishment of a system of clearance of checks throughout the united states, each federal reserve bank being required to act as a clearing house for its members if directed by the federal reserve board, while the federal reserve board was authorized to clear for the reserve banks themselves. the board had from the first recognized its duty to make this provision of the law effective as fully and at as early a date as conditions would permit; and in its first report spoke of this as "one of the most important responsibilities with which it is charged under the act." so, regarding its duty in this particular, it undertook early in the preparation of a general circular and regulations intended to provide for the clearing of checks within the several federal reserve districts, while it also took under advisement the establishment of a gold settlement fund at washington for the purpose of clearing obligations between federal reserve banks. the latter undertaking has been carried to a successful conclusion and the gold settlement fund has been in full and satisfactory operation since about the first of june. the board, however, had not advanced far with its work relating to the intradistrict branch of the clearance system before technical and other difficulties began to make their appearance. many banks, both city and country, throughout the system were opposed to the enforcement of the provisions of the law because of the loss of exchange charges which would thereby be entailed upon them. legal questions were also raised, it being argued that there is no power to compel a member bank not located in a federal reserve city to pay or have charged to its account at the federal reserve bank of its district a check which it had not seen and approved prior to the time of presentation at its own counter. for the purpose of ascertaining the board's powers in this connection the opinion of the attorney general has been requested. while the board was not inclined to attach undue importance to objections based upon self-interest, it felt that it must take cognizance of all legal objections, and it recognized that the clearing question was essentially a reserve problem rather than a technical question or a mere matter of administration. inasmuch as the federal reserve act had granted a period of three years within which to effect the final transfer of reserves to federal reserve banks (balances with correspondents counting as reserves in the meantime), there was a certain ground for objection to the immediate introduction of complete clearance at federal reserve banks. as is well known, reserve balances in some reserve cities have heretofore been used for the purpose of providing for exchange and collection operations, and so long as this function on the part of city correspondents continued there was some argument in favor of deferring any compulsory application of par clearance at the reserve banks. study of the problem, moreover, shows that, pending the time when state banks enter the system in larger numbers, it may be necessary for some member banks to collect and clear through their correspondents in reserve cities. so complex was the situation and so serious the difficulty involved in the compulsory application of any system, however carefully conceived, that the board felt it would be well if member banks could be brought to recognize of their own free will the advantages of a general and nation-wide clearing system--advantages which would inure not only to the benefit of the public at large, but ultimately to the direct benefit of the member banks themselves from the purely business standpoint. it therefore took under favorable consideration the question of a voluntary clearing system. both the difficulties of a compulsory plan and the probable merits of a voluntary system had been strongly represented to the board by the governors of the respective federal reserve banks who at various meetings had thoroughly canvassed the whole situation. under a plan, proposed by the governors, which in most districts became effective during june, , provision was made for the acceptance at par by the federal reserve bank of each district of checks drawn upon any member bank of that district which had previously assented to the provisions of the scheme. it was hoped that a very large number of member banks would promptly affiliate themselves with the new system of clearing and that the natural force of economic competition would ultimately attract to it those who at first might hesitate. this system, as already stated, became operative in most districts during june, . prior to this whole discussion, however, two districts had already undertaken the application of the clearing provision of the law. early in december, , district no. and district no. (kansas city and st. louis) had sought and obtained permission to apply to their members a complete system of required clearing. this system had been in full operation in both districts prior to the general application of the voluntary system. upon the inauguration of the latter the directors of the federal reserve bank of st. louis deemed it wise to offer to their member banks the option of withdrawing from the clearance system if they so desired; but so successful had been the working of the plan that comparatively few retired, about per cent. of all continuing their membership. the federal reserve bank of kansas city continued its required system as before for the benefit of all its member banks, numbering . as about banks continued their membership in the st. louis district, a total of approximately , was included in the clearing system of the two districts in question. outside of these two districts about , member banks voluntarily affiliated themselves with the clearing system within a short time after its inauguration, and there was a subsequent net inward movement of about additional members, making approximately , banks which of their own free will have assented to the voluntary clearing plan. this is considerably less than per cent, of the institutions eligible for membership, and the proportion has been so small as to prove a severe disappointment to those who had confidently expected that the foresight and enlightened self-interest of the member banks would speedily accomplish the desired result. some progress has been made through the action of the banks, both member and non-member, in improving exchange conditions and in providing for the clearance of country checks at points where this practice has never before prevailed; but in the main comparatively small advance has thus far been made in rendering effective the provisions of the law requiring the standardization of exchange and clearance practices. this slowness is largely due to the failure of jobbers and merchants to appreciate the advantages of the clearance system and to enlarge its membership by insisting that their own banks join and co-operate in the plan. the subject has recently been reopened at the conferences between the governors of the federal reserve banks, the federal reserve agents, the transit managers of the reserve banks, and the board itself, with a view to extending the present system not only in the several districts themselves but as between the various districts. for many years it has been lawful for banks to count as reserves deposits with other banks. it was never the intention of the federal reserve act that member banks should continue the maintenance of these reserve accounts. on the contrary, the full meaning of the act is manifestly opposed to such an idea. it is the plain conception of the act that the reserve banks should, to a very large extent, if not entirely, perform the work that is now being done by correspondent banks in this respect. this means that the reserve balances to be carried in the future by the reserve banks instead of by the correspondent banks should serve as the basis for a system of clearing and collecting the exchanges of the country. whatever can be done to bring about the prompt and effective use of this new system of bank settlement will be done. branches and agencies [ ]the question of branches of federal reserve banks has received careful attention during the past year. there has been intimation from several quarters that the establishment of a branch at a given point would be acceptable to the banks of that place. only in one instance--that of new orleans--did the board receive a definite request from a federal reserve bank to establish a branch. believing that new orleans and the adjacent territory could make advantageous use of this additional banking machinery, the board authorized the establishment of a branch of the federal reserve bank of atlanta to be located in new orleans, and this branch was opened for business on september . operations at the new orleans branch have proceeded satisfactorily, and the institution has been of considerable use to the local banks. the branch is already more than self-supporting. investigation and experience have seemed to show that, at least for some years to come, the organization of branches with completely equipped offices, vaults, and the like, and with a full staff of salaried officials, will be too heavy an expense for most of the reserve banks, yet, that valuable service could be performed by local offices of the several banks in not a few places. the board has, therefore, had under consideration the question whether establishing local agencies might not meet the requirements of the case better than the more fully organized branch office. competent legal opinion is to the effect that the creation of such local offices is permissible under the terms of the law, and the board believes that it may prove practicable to meet banking necessities in many sections of the country by this means. proposed amendments to federal reserve act[ ] a year's experience in the operation of the federal reserve act has confirmed the board in its profound conviction that the act has been one of the most beneficial pieces of legislation ever adopted by congress. not only have its fundamental principles been fully vindicated but in most details the working of the measure has been successful. the act, however, is a progressive piece of legislation and creates new conditions as the result of its own operation. modification in its terms growing in part out of these new conditions will subsequently be required from time to time. for the present the board presents the following suggestions for amendments to the act: ( ) in addition to powers now possessed in this connection by federal reserve banks and national banks, the latter should be permitted to subscribe for and hold stock in banks organized for the special purpose of doing a banking business in foreign countries. ( ) with the approval of the federal reserve board the issue of federal reserve notes to federal reserve banks should be permitted either against the deposit of an equal amount, face value, of notes, drafts, bills of exchange, and bankers' acceptances acquired by federal reserve banks under sections and of the act, or of gold, or of both, provided, however, that gold so deposited with a federal reserve agent shall count as part of the reserve required by the act to be maintained by the bank against such notes outstanding. ( ) the acceptance system, provision for which is made in foreign trade operations by the federal reserve act, should be extended to the domestic trade in so far as relates to documentary acceptances secured by shipping documents or warehouse receipts, covering readily marketable commodities or against the pledge of goods actually sold. there can be but little question of the safety of such acceptances, and their use will tend to equalize interest rates the country over and help to broaden the discount market. ( ) permission should be granted to national banks to establish branch offices within the city, or within the county, in which they are located. ( ) in order to enable member banks to obtain prompt and economical accommodations for periods not to exceed fifteen days, the federal reserve banks should be permitted to make advances to member banks against their promissory notes secured by such notes, drafts, bills of exchange, and bankers' acceptances as the law at present permits to be rediscounted or purchased; or against the deposit or pledge of united states government bonds, the purchase of which is now permitted under the law. ( ) the board furthermore recommends that the power of national banks to make loans on farm lands as provided in section be extended so as to permit any national bank not situated in a central reserve city to make loans secured by improved and unencumbered farm land situated within its federal reserve district, or within a radius of miles from the place in which such bank is located, irrespective of district lines. it also recommends that the powers of national banks be further extended to permit any such bank to make loans on any improved and unencumbered real estate located within miles of the place in which such bank is located, irrespective of district lines; provided, however, that the aggregate of farm land loans and other real estate loans made by any national bank shall not exceed per centum of its capital and surplus or one-third of its time deposits; and provided further, that no such real estate loan, as distinguished from a farm land loan, shall exceed a period of one year nor exceed per centum of the actual value of the property offered as security. it is believed that the enactment of these amendments will, besides enlarging the usefulness of the national banks, result in greatly strengthening the operation of the federal reserve act, and more completely realize the purposes of its framers. the text of the amendments designed to carry out these recommendations will be submitted by the board at an early date. the board has under consideration other suggestions for amendments to the federal reserve act concerning which no conclusions have yet been reached, and regarding which the board will take occasion to submit its views to the congress at an appropriate time in the future. statement of condition of federal reserve banks.[ ] _combined resources and liabilities of all federal reserve banks as at close of business on the last friday of each month during ._ resources. [in thousands of dollars.] ---------------------------+---------+---------+---------+---------+---------+ | dec. | jan. | feb. | mar. | apr. | | . | . | . | . | . | | . | | | | | ---------------------------+---------+---------+---------+---------+---------+ gold coins and certificates| | | | | | in vault | , | , | , | , | , | gold settlement fund | | | | | | gold redemption fund | | | | | | +---------+---------+---------+---------+---------+ total gold reserve | , | , | , | , | , | legal tender notes, silver,| | | | | | etc. | , | , | , | , | , | +---------+---------+---------+---------+---------+ total reserve | , | , | , | , | , | commercial paper | , | , | , | , | , | bankers' acceptances | | | , | , | , | united states bonds | | , | , | , | , | municipal warrants | | , | , | , | , | federal reserve notes, | | | | | | net assets | , | , | , | , | , | due from other federal | | | | | | reserve banks, net | , | , | , | , | , | all other resources | , | , | , | , | , | +---------+---------+---------+---------+---------+ total resources | , | , | , | , | , | ---------------------------+---------+---------+---------+---------+---------+ liabilities. ---------------------------+---------+---------+---------+---------+---------+ | dec. | jan. | feb. | mar. | apr. | | . | . | . | . | . | | . | | | | | ---------------------------+---------+---------+---------+---------+---------+ capital paid in | , | , | , | , | , | government deposits | | | | | | reserve deposits, net | , | , | , | , | , | federal reserve notes, | | | | | | net liability | , | , | , | , | , | all other liabilities | | | | | , | +---------+---------+---------+---------+---------+ total liabilities | , | , | , | , | , | ---------------------------+---------+---------+---------+---------+---------+ resources. (continued) [in thousands of dollars.] ---------------------------+---------+---------+---------+---------+---------+ | may. | june | july | aug. | sept. | | . | . | . | . | . | | | | | | | ---------------------------+---------+---------+---------+---------+---------+ gold coins and certificates| | | | | | in vault | , | , | , | , | , | gold settlement fund | , | , | , | , | , | gold redemption fund | , | , | , | , | , | |---------+---------+---------+---------+---------+ total gold reserve | , | , | , | , | , | legal tender notes, silver,| | | | | | etc. | , | , | , | , | , | +---------+---------+---------+---------+---------+ total reserve | , | , | , | , | , | commercial paper | , | , | , | , | , | bankers' acceptances | , | , | , | , | , | united states bonds | , | , | , | , | , | municipal warrants | , | , | , | , | , | federal reserve notes, | | | | | | net assets | , | , | , | , | , | due from other federal | | | | | | reserve banks, net | , | , | , | , | , | all other resources | , | , | , | , | , | +---------+---------+---------+---------+---------+ total resources | , | , | , | , | , | ---------------------------+---------+---------+---------+---------+---------+ liabilities. ---------------------------+---------+---------+---------+---------+---------+ | may | june | july | aug. | sept. | | . | . | . | . | . | | | | | | | ---------------------------+---------+---------+---------+---------+---------+ capital paid in | , | , | , | , | , | government deposits | | | | | , | reserve deposits, net | , | , | , | , | , | federal reserve notes, | | | | | | net liability | , | , | , | , | , | all other liabilities | , | , | , | , | , | ---------------------------+---------+---------+---------+---------+---------+ total liabilities | , | , | , | , | , | ---------------------------+---------+---------+---------+---------+---------+ resources. (continued) [in thousands of dollars.] ----------------------------+---------+---------+--------- | oct. | nov. | dec. | . | . | . | | | ----------------------------+---------+---------+--------- gold coins and certificates | | | in vault | , | , | , gold settlement fund | , | , | , gold redemption fund | , | , | , +---------+---------+--------- total gold reserve | , | , | , legal tender notes, silver, | | | etc. | , | , | , +---------+---------+--------- total reserve | , | , | , commercial paper | , | , | , bankers' acceptances | , | , | , united states bonds | , | , | , municipal warrants | , | , | , federal reserve notes, | | | net assets | , | , | , due from other federal | | | reserve banks, net | , | , | , all other resources | , | , | , |---------+---------+--------- total resources | , | , | , ----------------------------+---------+---------+--------- liabilities. ----------------------------+---------+---------+--------- | oct. | nov. | dec. | . | . | . | | | ----------------------------+---------|---------+--------- capital paid in | , | , | , government deposits | , | , | , reserve deposits, net | , | , | , federal reserve notes, | | | net liability | , | , | , all other liabilities | , | , | , ----------------------------+---------+---------+--------- total liabilities | , | , | , ----------------------------+---------+---------+--------- footnotes: [ ] o. m. w. sprague, _the federal reserve act of _, _the quarterly journal of economics_, vol. , no. , february, , pp. - . [ ] [the country has been divided into twelve districts in each of which a federal reserve bank began operations november , .] [ ] after the reserve banks have been in operation long enough to be running smoothly, not a few branches will doubtless be organized. branches are to have boards of directors, three of the members of which are to be chosen by the federal reserve board, and four by the directors of the parent reserve bank. branches are to be operated under rules and regulations approved by the federal reserve board. [ ] state banks and trust companies are eligible for membership, if they have a sufficient capital to entitle them to become national banks in the places where they are situated. on becoming member banks, they must comply with the provisions of the national banking law regarding reserves, examinations (the state examinations may be accepted), and various other general provisions of the national banking law. [ ] in case subscriptions by the banks of a district are inadequate, stock is to be offered to the general public; and if the response of the public is inadequate, the stock is to be taken by the government of the united states. neither privately owned nor government stock is entitled to voting power. [in no district were subscriptions by the banks "inadequate."] [ ] the inability of the pujo money trust committee to secure desired information from the banks evidently occasioned the following clause: "no bank shall be subject to any visitatorial powers other than such as are authorized by law, or vested in the courts of justice, or such as shall be or shall have been exercised or directed by congress, or by either house thereof, or by any committee of congress of either house duly authorized." [ ] [several of the more important regulations of the federal reserve board are contained in appendix b.] [ ] the law regarding the examination of national banks is recast. the only important changes are that hereafter all examiners are to be paid salaries, and that the federal reserve banks are empowered to conduct special examinations of member banks. [ ] adapted from joseph french johnson, _fundamental weakness of the glass-owen bill_, an address delivered before the economic club of new york city, monday evening, november , . [ ] although the address in part here reproduced was delivered as a criticism of the glass-owen bill, one of the measures that led up to the passage of the federal reserve act, that criticism, as a result of a few slight changes made, applies with almost equal force to the federal reserve act itself. the preceding article by professor sprague answers with striking directness professor johnson's trenchant argument.--editor. [ ] [it is commonly held that ample controlling power has been conferred upon the federal reserve board by the act as finally passed. it is of interest that senator owen listened to the address of which an adaptation is here given.] [ ] john skelton williams, comptroller of the currency, "democracy in banking," an address delivered before the annual convention of the north carolina bankers' association in the house of representatives at the capitol at raleigh, may , . printed in _congressional record_, d congress, d session, vol. , pp. - . [ ] f. m. taylor, _the elasticity of note issue under the new currency law_. _the journal of political economy_, vol. , no. , may, , pp. - . [ ] _second annual report of the federal reserve board_, p. . . [ ] _first annual report of the federal reserve bank of new york_, pp. , . . [ ] thomas conway, jr., _the financial policy of the federal reserve banks_, _the journal of political economy_, vol. , no. , april, , pp. - . [ ] _first annual report of the federal reserve bank of new york_, pp. - . . [ ] second annual report of the federal reserve board, pp. , . . [ ] _ibid._, pp. - . [ ] _ibid._, pp. - . [ ] [for regulations issued by the federal reserve board see appendix b.] [ ] _second annual report of the federal reserve board_, pp. . , . [ ] _ibid._, pp. - . [ ] _ibid._, p. . [ ] _ibid._, pp. , . [ ] _ibid._, pp. , . chapter xxxii the early events of the european war in relation to money banking and finance american finance and the european war [ ]during the half-century that has elapsed since the civil war, there has probably been no period of six months within which there have occurred transformations of so far-reaching a nature in american banking and finance as during the half-year between july , , and january , . it will be long before the full meaning and significance of these events are thoroughly understood; for what has been done cannot be finally interpreted until facts which have not yet been ascertained have developed their consequences. on the other hand, it would be impossible to forecast the ultimate effect of the european war should any one of certain tendencies which are still at least possible be fully carried out. what has already taken place, however, comprises a range of events full of important lessons and significant for the light they throw upon the methods to be employed in the near future in the management of industrial and commercial enterprises. this experience has been particularly rich in its bearing upon the relationship between banking and finance in the strict sense of the terms on the one hand, and the future of commerce and industry in general on the other. though it be true that only hasty thinkers will endeavor to draw final conclusions from what has thus far occurred, it is, nevertheless, also true that much can be learned from the mere marshaling of recent events in their relation one to another. i upon the outbreak of the european war, it was at once evident to all that very striking changes would result in every department of business life. there was, of course, at the outset no knowledge of the strategy or probable methods to be employed by any of the belligerents, and the general attitude of the business community was based upon the assumption that commerce would, for a time at least, become nearly impossible. as a corollary to that assumption, there prevailed the belief in many circles that american indebtedness to foreign countries would have to be liquidated in cash, and that this process would result in draining away from the united states a corresponding amount of gold. it was natural, therefore, that the first phenomenon of the war should be the suspension of dealings which it was believed would promote this gold movement, or would cause more serious trouble in any direction than would otherwise be inevitable. the closing of the principal stock exchanges of the country almost immediately upon the definite announcement that war was unavoidable was thus dictated by two considerations: ( ) the belief that prices for stocks and other securities would be reduced to a point so low as to bring about the repurchase of the securities by americans, who would then be obliged to pay for them in gold; ( ) the belief that, in consequence of this reduction of prices, many bank loans based upon securities would have to be "called," thereby bringing about failures and incidentally assisting in the movement of specie out of the country. in the case of the cotton exchanges, it was at once perceived that the cotton crop, which is so largely produced for export, could not now move abroad with any degree of facility, and that the demand for cotton would undoubtedly be slack. the very fact of the war, therefore, implied heavy reductions in the price of cotton, and the closing of the cotton exchanges was a measure of self-preservation on the part of the operators, who decided to protect themselves against the inevitable failures which would result from the fulfilment of existing contracts at very low prices. to close the exchanges would result in gaining time, and would, therefore, enable operators to meet their maturing obligations, besides perhaps affording an opportunity for actual recovery in cotton prices. this very fact, however, of the closing of the exchanges and the consequent removal of any other established method of determining prices for standard securities and for a staple like cotton involved most profound and far-reaching effects. the exchanges had closed in previous years, but never for the reasons which now controlled them. that they should close because of the fear of failure and the loss of gold implied a serious danger of disaster which appealed powerfully to the public mind, and which presented a problem that could not be explained away. the fact that, coincident with this closing of the exchanges, international trade was practically suspended for several days, and was seriously interrupted for several weeks, until british vessels assumed virtual control of the north atlantic, tended greatly to increase the public anxiety. it formed, apparently, good ground for the suspension of business operations and for the non-fulfilment of contracts, even when the very difficult conditions did not themselves compel a recourse to such methods. the fact that foreign countries had adopted legislation deferring the date when debts need be paid or contracts fulfilled, although not paralleled here, produced a sympathetic influence upon business in the united states, which practically resulted in the partial or tentative adoption of a somewhat similar relaxation of commercial requirements in many industries and branches of trade. it is notable that the produce exchange of new york and the other grain exchanges of the country continued in operation and did an enormous business in spite of the prevailing conditions. this was due to the fact that grain of all kinds, provisions, and every sort of food-stuff were, for the time being, subject to a very rapid upward movement. it was early perceived that a long continuance of the war would bring about a steady advance in the prices of all food products, the markets for which are not dependent upon temporary fluctuations for support, but are subject to far-reaching and semi-permanent influences. the fact that these exchanges continued open while those whose staples were subject to decline closed so speedily, naturally produced its own effect upon the public mind. many who had thought the exchanges invariably faithful registers of price fluctuations were now reluctantly obliged to confess that this could not be the case, since those exchanges where prices were rising continued to operate without interruption, while those where prices were falling were obliged to suspend business. from one point of view, undoubtedly, the closing of the stock and cotton exchanges tended still further to deepen the attitude of dissatisfaction with these institutions that had been prevalent for some years among the american public. on the other hand, however, as time went on, it became clear that the exchanges of the country and the service they performed when in operation were being appreciated as never before by the conservative popular mind of the nation. with the exchanges closed it was seen that the lack of a regular and established market subject to natural conditions meant suffering and inability to secure the advantage of free competition in the establishment of the price of products. this view was once more emphasized when, later on, the cotton exchanges reopened; for it was then seen that the effect of trading upon the exchanges was to advance the price of the staple rather than to lower it, a view the precise reverse of that which had been originally prevalent for a long time past. both in the psychological, as well as in the actual, effect of these closings, and in the influence the episode exerted upon public opinion, the suspension of the exchanges throughout the united states must be regarded as a fact of first-rate importance in the financial history of the united states during the european war. ii even without the suspension of certain classes of trading throughout the country, partially due as it was to the frenzied demand of european holders of american investments for money, the strain thrown upon our banks as a result of the great change in conditions would have been enormous. the closing of the exchanges, as already seen, had relieved matters to some extent by enabling the banks to avoid the calling of loans, and thereby to avoid the necessity of forcing customers into liquidation, with the resultant disastrous effect upon themselves. but on the other hand, the suspension of operations and the corresponding loss by the public would, it was felt, tend to the hoarding of legal-tender money. in order to meet this situation, the banks in many of the large financial centres sought to limit specie payments, taking out emergency currency and clearing-house certificates for the purpose of meeting their indebtedness to the public and to one another.... a phase of this phenomenon was seen in the tremendous rise in foreign exchange rates, the rates becoming practically prohibitive and thereby causing what amounted to a suspension of financial relationship between the united states and foreign countries, particularly great britain. iii it was early understood that the real difficulty and danger in the international situation did not lie in the superficial symptoms of trouble, but were found much deeper, being directly due to the fact that international business had been practically suspended as the result of the war. this was a factor of prime and material importance in the whole situation, because the maintenance of established relations between the united states and foreign countries was directly dependent upon the regular exportation of goods. as was customary during the summer months, there had been large expenditures by american tourists in europe; and we had become indebted to other countries, particularly great britain, for material sums in excess of what we were currently able to liquidate. this was on the assumption, as usual, that such indebtedness would be liquidated through the shipment of agricultural products, particularly of cotton, the country's principal cash crop. the breakdown of trade with europe through the inability of vessels to run regularly at the outset of the war, and through the reduction of buying power, due to the interruption of all regular industrial, commercial, and financial operations, meant that in the absence of some restoration of the normal course of business it would be necessary to find other means of liquidating our obligations to foreign countries. the first phase of the difficulty was met by investigating the extent of international indebtedness, which, in the absence of other means of payment, would necessitate the draining-away of gold from the united states. such an investigation was undertaken by the federal reserve board, which, by sending out questions to the principal international bankers of the country, succeeded in forming a more or less trustworthy estimate of the indebtedness on current accounts, these being, of course, of varying maturities extending over several months. the problem thus raised was how to provide for liquidating the debts without losing so much of the underlying gold supply as to impair the convertibility of american securities, and therewith general confidence in american ability to meet obligations. the two chief proposals put forward for bridging over the period of difficulty were the establishment of a joint gold fund by the bankers of the country, and the undertaking of negotiations with great britain whereby some relaxation of foreign demands on the united states might be arranged for. these two phases of policy may best be cursorily sketched at this point. since the new banks had not yet been established and could not be put into operation for some weeks, it was deemed desirable to furnish a makeshift substitute for the co-operative effort which would have been available for the relief of the situation had the banks been in existence. it was therefore determined to suggest to a number of representative bankers the establishment of a joint gold fund to be used in providing exchange on great britain, and to have this joint fund developed at the earliest possible moment. a letter was consequently sent out to the presidents of clearing-house associations throughout the country, under date of september , in which request was made for subscriptions to a fund intended to aggregate about one hundred million dollars. this letter had previously been considered and approved at meetings of representative bankers summoned to meet in washington on september and respectively, and was, therefore, issued with their moral support. the answer to this invitation was prompt and effective, a total of over one hundred and eight million dollars being subscribed and rendered available. it was almost immediately evident that the operation of this fund was proving decidedly beneficial notwithstanding that only a comparatively small percentage of the amount subscribed was asked for, and that a still smaller percentage was actually used to furnish a basis for gold shipments. nevertheless, it seemed, during the ten days immediately following the completion of the subscriptions, as if there might be need for still further relief to the situation. some of those who were closely connected with the administration of the gold exchange fund brought the subject to the attention of the secretary of the treasury and he extended an invitation to the british government to send representatives to this country mainly for the purpose of considering the possibility of further adjustment, in the event that the united states did not succeed in liquidating its indebtedness to great britain by the natural movement of commodities within a reasonably early period. the british government designated sir george paish and mr. b. p. blackett, who came to the united states and on october held a conference with the federal reserve board. subsequently another conference, attended by a number of representative bankers, was also held and the situation was discussed in very great detail. meantime the establishment of a better understanding with reference to commodities to be considered as contraband and the more effective policing of the north atlantic rendered possible the restoration of trade with european nations, and the development of the export trade proceeded with a speed which showed that current obligations of the united states to great britain and other countries would be liquidated at an early date without any necessity for further interference. by the time the reserve banks were ready to open [november ], exchange sales on london had fallen to normal, and there was, therefore, no danger that when opened the reserve banks might, as was for a time feared by some, find their gold rapidly drawn away from them in order to meet the requirements of the gold export movement. in another way it was deemed desirable that the federal reserve board should help to facilitate the restoration of customary conditions in the financial market. almost immediately after the outbreak of war it was seen that, unless hostilities should terminate within a very much shorter period than anyone thought likely, serious injury would be inflicted upon the cotton-producing states. as is well known, the cotton crop is largely grown for export, about two-thirds of the total production of the united states being annually sold abroad. it happened that an unusually large crop had been planted and was approaching maturity at the moment of the outbreak of the war. this would in any event have depressed prices of cotton, even under ordinary conditions. the almost immediate closing of the cotton exchanges of the country was, however, precipitated by reason of the interruption to the movement of cotton and the general understanding that, in view of the great area involved in the hostilities, it would not be reasonable to expect a normal demand for the staple to manifest itself. with the exchanges closed, and with shipments of cotton interrupted, the price was unstable and abnormally low, many sales undoubtedly having occurred at five cents per pound. inasmuch as the cotton crop is raised very largely upon credit, it was necessary to provide some means whereby the southern planter could be assisted to such extension of accommodation as he might require in meeting the obligations he would ordinarily have provided for by the sale of his crop in the open market. various suggestions were brought to the attention of the federal reserve board, one of them being that of mr. festus j. wade of st. louis, who suggested, both to the board and to the secretary of the treasury, the establishment of a cotton loan fund somewhat similar in purpose and management to the gold exchange fund. after very anxious consideration, the conclusion was reached that some measure of the sort would probably furnish relief to cotton-growers. various conferences were held with banking interests for the purpose of securing their co-operation and advice in regard to the matter. ultimately the bankers of new york pledged fifty million dollars in subscriptions to the fund, provided that fifty millions more should be raised from other bankers in non-cotton-producing states. it was understood that to the one hundred million dollars thus raised should be added thirty-five million dollars contributed by the bankers of the cotton-producing states under a special plan devised for that purpose.[ ] iv it was not, however, through any of these artificial means that real relief was brought to the community. while bankers were laboring to perfect the gold fund, and while the negotiations with great britain were in progress, foreign trade was being re-established through the effective policing of the north atlantic, the re-establishment of demands, and the resumption of the ordinary course of business. what took place during the months of august and september can be understood from ... comparative figures for importation and exportation which make an impressive showing of the suffering to which the united states was subjected through this decline in business. with the opening of october there came, however, a decided improvement. time had now been given for the establishment of normal conditions.... v with foreign trade in a fair way to recover, it was still necessary to secure a restoration of normal trade conditions within the united states, and for this purpose the thing most fundamentally necessary was the setting in motion of the federal reserve banking system which had been provided for by act of congress the d of december preceding. the time intervening between december , , and the opening of the war had been occupied in carrying out the preliminaries of organization; but it still remained for the federal reserve board, the controlling mechanism of the new system, to appoint officers and to provide for the active operation of the banks under its direction. the first detail to which the board necessarily addressed itself was the completion of the boards of directors of the several institutions, it being necessary to select and elect three in each institution, or thirty-six in all. the task required an elaborate process of comparison of the names and qualifications of the several candidates and was not completed until early in october. with the announcement of the thirty-six directors, it was possible to proceed to the active opening of the institutions. the board called for the first payment of capital stock on november , and the secretary of the treasury, who by law had been vested with that function, named november as the actual date for opening.... the establishment of the system ... greatly relieved the banking situation.... sec. of the federal reserve act provided for a readjustment of reserves upon a new and lower basis.... this readjustment, by the terms of the law, took effect immediately upon the establishment of the new banks, _i. e._, on november . from the outbreak of hostilities in europe, there had been a difficult reserve situation in most of the financial centers, new york banks particularly being much of the time largely under their reserve requirements because of the heavy drafts made upon them by interior banks and by the public. the change in reserve requirements, however, made a very material alteration in this condition of affairs, and released, not only in new york, but throughout the country, a very considerable amount of funds which had previously been held by the banks in order to bring themselves within the requirements of law. precisely what amount of reserves was thus released throughout the country has not been accurately estimated, and probably cannot be. it is, however, an undoubted fact that the release of actual cash was very large, and that the release of lending power as computed on the basis of reserves on the part of member banks was correspondingly larger. member banks were thereby enabled to extend loans to their customers very much more freely than they had previously been able to do, while at the same time they were able to grant lower rates of interest in due proportion. the prevailing rate of discount for prime commercial paper in new york at the beginning of november was about per cent., while other paper was considerably higher than that figure, and even more difficult conditions prevailed elsewhere. the opening of the reserve system enabled new york banks, because of the very great relief given to them through the release of reserves, to reduce this rate largely, and within two weeks after the new banks had come into existence prevailing interest rates for the best paper went as low as - / per cent. and per cent. while acceptances, which had been provided for by the federal reserve act, were marketed at a still lower rate. in some parts of the south, northern bankers were able to grant accommodation as low as per cent. and in considerable amounts. in view of the greater ease and material relief which was thus accorded, the federal reserve banks were naturally not called upon to assist member banks with accommodation, such banks naturally refraining from asking aid when they themselves were fully able to meet the situation. the opening of the reserve banks released, as already shown, a large amount of bank funds, and thereby rendered it possible to extend many loans which otherwise could not have been carried by the banks. it was also seen, soon after november , that the existence of the cotton fund, as was the case with the gold fund, had done its work by stimulating confidence and by leading to a more liberal extension of credit. with the cotton fund available for long-time loans, and with short-term credit much more freely extended by member banks in view of the reduction of national bank reserve requirements, it was possible for the reserve banks to open with full confidence that the work thus done in safeguarding the situation would relieve them from undue strain, while fully protecting the cotton-producers who were willing to pay a moderate rate of interest in order to carry their cotton until such time as would enable them to realize full market value for it. as has been shown by the secretary of the treasury in his annual report,[ ] an early phenomenon of the war was the issue by clearing-houses in many cities of clearing-house certificates. simultaneously therewith large quantities of emergency currency were issued under the provisions of the act of , which had been amended and extended by the federal reserve act, and which were still further amended by congress on august , so as to permit the freer issue of notes.... the total amount of the emergency currency taken out by associations had aggregated about three hundred and eighty million dollars, but it is probable that the clearing-house certificates were issued to a considerably larger sum. the channels of circulation were thus clogged long before the end of the summer, notwithstanding the fact that large quantities of gold and gold certificates were withdrawn and hoarded either by banks or by individuals. this condition of affairs made it certain that the reserve banks, upon their organization, would not be instantly pressed for the issue of reserve notes. two factors combined to produce this result--the circumstance that many banks had placed their best paper with the national currency associations in order to protect emergency currency, and the further circumstance that the tax on this currency at the lower rate established by congress would not, for some considerable time, be likely to approximate the rate of discount which every bank would have to pay to federal reserve banks in order to get the rediscounts that would enable them to obtain the notes they needed. combined with these factors was, of course, the natural inertia which in all such cases tends to prevent the withdrawal of one kind of currency and the issue of another. upon the organization of the federal reserve banks, moreover, the urgent pressure for note accommodation passed away as quickly as it had come. gold reappeared in circulation at an early date, and the retirement both of the clearing-house certificates and of the emergency currency was undertaken. in those cities where rates of interest on clearing-house certificates were very high, the reserve banks aided in the retirement of the certificates remaining in circulation. the emergency currency itself immediately began to be retired by its issuers.... had the reserve banks been in operation at the beginning of august, they would naturally have supplied the great volume of currency which was called for; but not having done so, a field of business which would naturally be theirs has been temporarily taken from them by reason of the fact that it was occupied by the clearing-house certificates and emergency notes.[ ] vi the result of the restoration of trade, banking, and credit to earlier and more normal conditions has been steadily apparent. cotton exchanges reopened on november , and stock exchanges opened for restricted trading shortly thereafter. in brief, by the close of the year, the phenomenal conditions growing directly out of the european war had been met and overcome. it is a notable fact that under the wholly unusual circumstances prevailing, the recovery was so prompt and effective. what share in this early improvement is to be assigned to the organization of the new banking system and to the effectiveness with which the treasury department co-operated in meeting the needs of the country cannot accurately be stated, and will probably afford grounds for difference of opinion. that it was great cannot be denied.... national bank failures and suspensions-- compared with and [ ] a comparison of the failures and suspensions of national banks during the past year with failures and suspensions in the panic periods of and may be interesting at this time. the figures show that for the months ended october , , national banks, with aggregate capital stock of $ , , , failed or suspended payment. the total liabilities of these banks (in the case of receiverships claims proved) amounted to $ , , . in the case of six recent failures, the figures of total liabilities, less capital, surplus, and undivided profits, are used in lieu of the "claims proved," no report of the latter having yet been received as to these six banks. for the months ending october , , national banks suspended, with capital of $ , , . sixty-five banks, with total capital stock of $ , , , were insolvent and required the appointment of receivers; , with capital stock aggregating $ , , , were able to resume business; and , with capital stock of $ , , , were placed in charge of examiners in the expectation of resumption. the total liabilities of failed and suspended banks for the period mentioned was $ , , --in the case of failed banks, "claims proved" being considered as "total liabilities." during the six-months period from october , , to april , , there were national bank failures and suspensions, and the total liabilities (in the case of receiverships these being "claims proved") were $ , , ; the total capital stock, $ , , . of these banks, however, , with capital stock of $ , , and liabilities of $ , , , resumed business. it is worthy of special note that in the crisis of , unlike the panics of and , there was no suspension of currency payments on the part of the banks of this country, either in the large cities or in the smaller towns. in the panics of and , in addition to clearing-house checks, many artificial methods of supplying a temporary currency were resorted to, while actual currency commanded a premium of from per cent. to per cent.--$ in currency costing anywhere from $ to $ , or more, in certified bank checks. in the banks of the country were enabled, as a result of the instant and active co-operation of the treasury department, and through the operations of the act of may , , as amended by the federal reserve act, to supply actual currency, even during the period of greatest stringency, to their customers and correspondents, both over the counter and in response to requests for shipments. whenever any indications were seen of an attempt or disposition on the part of any solvent bank or banks to withhold or suspend cash payments, the subject was taken up immediately by the treasury department, and payments of currency over the counter and shipments by the banks upon demand, from the centers to the nearby and far-off districts, and vice versa, have been maintained practically without interruption throughout this crisis. the effects of the war with special reference to the central banks of france, germany, and england i [ ]in france the gold held by the bank of france (february, ) is, in actual quantity, larger by about per cent. than that held in normal times before the war. instead of former gold reserves of about $ , , , they are now well over $ , , , . the percentage of gold to the notes--the main demand liability--has, of course, fallen from about to per cent. because of the increase of notes from about $ , , , to $ , , , . this increased supply of gold has come from hoardings and private holdings which have been placed at the disposal of the bank in return for bank-notes. there has been no reduction of this gold fund through demands from note-holders, since the bank was freed from redemption in gold at the very beginning of the war. that is, notes of the bank of france are inconvertible. as contrasted with the dollar of the united states, when expressed in bills of exchange between new york and paris, the bank of france note has depreciated nearly per cent. any paper money not having immediate redemption will depreciate. as regards the future it is a question of ultimate redemption. with so large an available gold supply, there can be little question as to the future intention or probability of redeeming the notes in gold. it looks very much as if the same policy adopted in the war of - had been consciously followed. then, also, the _cours forcee_ was declared, and the gold carefully retained in the vaults of the bank. the presence of a large gold fund was an assurance of the ability to return to specie payments after the close of the war. the war was short, and the notes were not seriously depreciated, bearing a discount as compared with gold of - / to per cent. in the present war, the same steps have been taken; but this war is extending over a much longer time than the former one, and the depreciation has already become much greater. it is equally clear, however, that if the gold were now to be paid out for redemption uses, it would become scattered, exported, and might even pass through holland or switzerland into germany. the increase and preservation of this large fund of gold is the strongest evidence of the ability of the bank to resume the gold redemption of its notes soon after the close of the war. the actual time, however will depend upon the rapidity with which the government can repay some of its large loans from the bank, since the excessive note issues have been largely due to loans to the state. ii in germany, likewise, every effort has been made to accumulate gold, even though the notes of the reichsbank were made inconvertible at the beginning of the war. not only was the requirement to redeem the notes in coin removed, but the regulations regarding a tax upon all notes uncovered by a specie beyond a specified _kontingent_ were suspended. thus, restrictions on the limit of note issues do not exist; and they have risen from about $ , , before the war to about $ , , , (february, ), while the stock of coin and bullion has changed from about $ , , to over $ , , . that is, the coin, which is mostly gold, is about per cent. of the notes. here, again there is an obvious tendency to increase and maintain the gold reserves so that germany may have the means of resuming gold payments at no great time after the close of the war. the campaign to collect gold from the public and from hoards was remarkable. it was successfully made a test of patriotism to hand in gold in return for reichsbank notes, and a house-to-house canvass in many places resulted in providing the gold which so signally increased the reserves behind the notes. of course, the usual international operations for obtaining gold were denied to germany. it was this campaign which was imitated by france. at the present time, certainly, no thought has ever occurred to germans that they would not go back to a gold basis. nevertheless, germany has clearly fallen into the same confusion of mind which characterized our own policy in regard to the issue of greenbacks in the civil war. we confused the monetary with the fiscal functions of the treasury. so has germany. thinking the war would be short and decisive, to be followed by large indemnities levied on her enemies, she had expected to finance her expenditure by temporary expedients. that is, the government was led into the policy of borrowing through the increase of monetary forms. it does not change the principle that this increase of paper money was not made solely by imperial treasury notes, but by a very large addition to the circulation in the form of reichsbank notes and _darlehnskassen_ notes. it was the loans by the reichsbank to the government which undoubtedly caused the main increase in the notes of this bank (just as was true of the bank of france), and the reduction of these issues, and their redemption in gold, will depend directly on the power and readiness of the government to pay off its obligations to the reichsbank after the war. the amount of borrowing by processes which led to an increase of the circulation was necessarily limited; and very soon borrowing through issues of paper money had to be followed by regular fiscal operations in the form of long- or short-term bonds which would not affect the quantity of the circulation. expenses could not well be met to any extent by current taxation, because taxes were already high, and in the few years before the war, no doubt in anticipation of it, some four or five hundred million dollars in taxes over and above normal taxation had already been levied. in a non-recurring tax of $ , , had been imposed on the wealthier classes. in addition a bonded debt, since the war, has been floated to the amount of $ , , , over and above the existing public debt before the war of about $ , , , . but all these fiscal operations should be, for our present purposes, separated from monetary operations. the carrying of these heavy government debts is a question of the future production of goods, of commerce, and of saving. whatever the burden of debts, the gold question is concerned with the mechanism of exchange by which taxes, subscriptions to loans, payments by the government for munitions and supplies, current purchases of goods by the public, payments to and by banks, are made. at present this medium is paper money depreciated, as in the case of the reichsbank notes, by nearly per cent. of course, the darlehnskassen issues would follow the value set by the notes of the reichsbank. it is interesting to mention that the increase of paper money has not been in answer to any need of the public for additional media of exchange; for ordinary business transactions have decreased, and would require a less quantity of money. it was an error not to separate borrowing entirely from monetary issues. moreover, as bearing on the maintenance of the gold standard after the war, it is worth noting that the rule requiring the reichsbank to keep one-third of its note issues covered by gold has not been violated. at last reports (february, ) the gold item stood at $ , , , as against $ , , , notes, or about . per cent. that is, the greatest efforts have been made to concentrate the gold holdings of the nation, including the "war chest" of about $ , , , in the reserves of the reichsbank. at the same time no gold is paid out in redemption of notes, nor is it allowed to be exported. some sums have been sent to holland in a vain attempt to support german exchange in that country; but the difficulty in exchange rates lies deeper than the relative supply of and demand for bills, since the depreciation of german paper money determines the general level about which the fluctuations of exchange due to demand and supply range. in fact, wherever gold is not freely moved in international exchange there are no shipping points, and hence no limits to which exchange can fall short of the discount of the paper in terms of gold. iii as regards great britain, the gold standard is yet preserved for all practical purposes. to her credit be it said that she has not fallen into the error of borrowing by excessive issues of paper money; so far she has not confused the fiscal with the monetary functions of the treasury. she resorted at once to fiscal operations in the form of heavy taxation and loans in the form of short-time treasury bills and longer-term bonds. the issue of government paper money is, indeed, a new departure; but its purpose has been more distinctly monetary than fiscal. the currency notes are emergency notes, issued under the act of august , , directly by the treasury, and not by the bank of england, although authorized by the same act which suspended the bank act in regard to additional issues of bank notes not covered by gold. in other crises the act of has been suspended to allow more notes based on consols than permitted by the act (_i. e._, above the £ , , ). in august, , such a suspension was in the future made legal, if authorized by the treasury, thus avoiding the old resort to a bill of indemnity by parliament. but in spite of the usual suspension of the bank act, no use was made of it. that is, a demand for more currency in the hands of the public could have been supplied by the bank, but was not. in truth, the lloyd george currency notes need not have been issued. nevertheless, when once issued, they made unnecessary any resort to additional bank of england notes. there was no need of both. but in one respect the currency notes helped to maintain the country's gold standard. by issuing them in small denominations of one pound, and ten shillings, they replaced the gold in general use for these denominations, and allowed it to be used as reserves. yet, it must be remembered that sound policy required a gold reserve (which has been generally kept at about per cent.) behind these currency notes, so that the whole amount of gold replaced was not, in fact, a gain. as all know, the question of gold for great britain pivots on the reserves of the bank of england, which is the agent for the government, receiving its taxes and paying out its expenses, as well as the holder of reserves for other banks--being thus a bankers' bank, as well as a national agent. moreover, the reserves mentioned, and which are of prime importance, are those of the banking department--and these are chiefly bank of england notes (not gold). the percentage of reserves to deposits, which marks the safety line for england, refers to the items in the banking department. these notes, however, are protected (except the bottom layer of £ , , covered by consols), pound for pound, by gold in the issue department. hence, they can be turned into gold at any moment. then, to what do these facts lead us? simply that gold has increased just in proportion to the issue of bank notes. in addition, the currency notes of the government served in the place _pro tanto_ of the bank of england notes. hence, at the end of the war, the provision for redemption of bank of england notes will work automatically. nor can there be any question as to the gold being there to redeem them; for they cannot get out without a previous deposit of gold. indeed, the questions of difficulty cannot arise regarding the basic currency of great britain; they will arise, if at all, in connection with the assets in the loan item of the banking department, since they will determine the safety of the deposits chiefly created as the result of loans. the bank discounted large sums of pre-moratorium acceptances and paper; and yet even in these assets it is protected by the guarantee of the government. darlehnskassen and other financial novelties in germany [ ]germany, at the outbreak of the war, removed the limit of notes issuable by the reichsbank without tax; created about , darlehnskassen (loan banks), located throughout the empire, wherever the reichsbank maintained a branch; they were started without capital, in lieu of which they issued _darlehnskassen scheine_ (imperial loan bank notes) in denominations of one mark and upwards, the aggregate amount being limited to , , , marks; these banks made loans against stocks, shares, produce, any personal property of a non-perishable character, as collateral, and issued certificates, having the quality of bank notes, to the borrowers; the loans ran for three and sometimes six months; the minimum loan was marks; a very wide margin of safety was required, making the loans good beyond question; these certificates were receivable for public dues and by the reichsbank; the smaller denominations circulated as money, the reichsbank received the larger, giving its notes in exchange; these certificates were not legal tender, but were given the quality of gold and "may be considered by the reichsbank as gold cover, which means that against marks of these scheine in its vault the reichsbank is allowed to issue marks of its own notes." (i. de bruyn.)[ ]... sir edward h. holden, president of the london city and midland bank, in a speech to his board of directors, january , , said: germany proceeded to establish war loan banks, war credit banks and war aid banks under the patronage of corporations, municipalities and private financiers, and to make use of the mortgage banks already established.... the mortgage banks are under the control of chambers of commerce and municipalities, and they make advances on the mortgage of properties by an issue of notes.... germany made greater use (than of the darlehnskassen) of the mortgage banks, the notes of which are identical in power and use with the notes of the darlehnskassen. another part of their scheme was to relieve the pressure on insurance companies (life), by forming an insurance bank, which advanced per cent. on the value of policies. these advances were paid on notes which were exchanged for reichsbank notes in the same way as the notes of the darlehnskassen and mortgage banks. germany, with characteristic system and detail, provided different kinds of banks to deal with different phases of the situation. war credit banks were designed to aid germans whose credits became unavailable, owing to the exigencies of the war, as for instance those who had sold and shipped goods abroad (the enemy's country), whose accounts would be temporarily uncollectible, and those who might be otherwise embarrassed in their foreign trade because of the interruption of business caused by the war. war credit banks were more general in their dealings than war loan banks. in germany, business is largely done upon credit, and especially so by small concerns and individuals, who possess no extended bank credit nor available collateral, and hence are not in position to make use of the reichsbank or other commercial banks, or the darlehnskassen. a german banker says: "it was deemed advisable to create an institution of an intermediary character which would bear the greater share of the risks involved. the so-called war credit banks are designed to serve this purpose. they were established throughout the country, have their own capital, and the obligations undertaken by them are guaranteed, and losses, if any, refunded by the respective municipalities and commercial associations. the war credit bank of greater berlin, for instance, was established with a capital of millions of marks, of which per cent. are fully paid in. in addition thereto, there is a liability of . million marks by official bodies of commercial organizations." still another kind of war credit bank was created on the co-operative plan to assist the middle and lower classes. through the instrumentality of these institutions, a large amount of credit instruments, possessing a currency function, was brought into existence in germany.... the war and the world's financial centre [ ]with the end of the moratorium on november , it may be said that the crisis produced by the outbreak of war was over. when peace comes and prices [of securities] adapt themselves to the new price of capital that the present destruction of some eight to ten millions of it a day will bring about, and creditors begin to try to collect debts from impoverished debtors in war-wasted countries, then there will be a new set of problems, the acuteness of which will largely depend on the length of the war and the extent to which the fighters are worn out. these problems will exercise all the ingenuity and strength that lombard street can muster. for the present it is enough to see how we stand at the end of the opening period of the war, and what have been the effects of the financial tornado with which its beginning was heralded.... the crisis of last august was the greatest evidence of london's strength as a financial centre that it could have desired or dreamt of. it was so strong that it did not know how strong it was. consequently, being a little flustered by the suddenness of the outbreak of war, on a scale that mankind had never seen before, it made the mistake of asking its debtors to repay it, not the thousands of millions that it had lent in the form of permanent investment, but the comparatively trifling amount--perhaps or millions--that it had lent in the shape of bills of exchange drawn on it, and other forms of short credits. thereby it put the rest of the economically civilized world, for the time being, into the bankruptcy court, and so, finding that none of its debtors could pay, it thought itself obliged to ask for time from its own creditors at home. foreign creditors it had none, except paris. it sent gold to paris as fast as it could be shipped and insured, and so seems to have liquidated its debt. for when a market in exchange reopened after the first shock of war, the paris cheque soon steadied itself at a more or less normal level, above the point at which gold could be sent to france as an exchange operation. it is possible, however, that london was still in debt to paris, and that paris preferred for obvious reasons to leave its money on this side of the channel. of the three possible rivals to london as a financial centre, paris was the only one that gave any evidence of real financial strength. behind paris stands the enormous power of the thrifty french investor, who probably accumulates a greater proportion of his income than anybody in the world, except, perhaps, some classes of scotsmen. this accumulating power of the french gives the paris money market a position of first-rate importance in the financial world, because capital has to be saved, and a saving people has capital to lend. the advantage that london holds in its more elastic credit system is partly balanced by the advantage given to paris by the thrifty habits of the french people. if paris adopted a more businesslike policy with regard to her huge store of gold, which she has hitherto seemed to regard as a precious asset to be sat on and protected by the charge of a premium to audacious people who want to withdraw a bit of it, she might, in normal times, be a much more dangerous rival to london than she is. but it need hardly be said that paris, as a financial centre, was soon wrapped in the cloud of war and invasion, and had no chance of making any effort to oust london from her pride of chief place. berlin was equally cut off from competition, for berlin had to devote herself to the task of financing war for germany. moreover, the rapid depreciation in the value of the mark that took place before the war began showed that germany was still a debtor country in the short-loan market. the berlin exchange, while war was as yet only a dreaded possibility, rose from m. pf. to m. pf. germany invests money abroad, but she seems to borrow as much, and more, in the discount markets of london and paris. so it came to pass that, in spite of the big sales of securities that she had thrown on the markets of new york and london, she still had to pay when the big day of settlement came, and to pay so fast that she had not a bill on london left to pay with. it was the chance of a century for new york. american ambition has long ago informed the world that the united states, having been the world's granary, is now the world's most progressive manufacturer, and means soon to be the world's banker. this may happen some day, and might have happened already if american policy in currency, financial and fiscal matters had been more enlightened, and if her people had been more thrifty. but they have tied their credit system in the bonds of narrow banking laws and their trade in those of a cramping tariff. these bonds they have just begun to shake off, and if the crisis had happened a few years later they might perhaps have made a bid for london's place as world banker. but it is hardly likely, for the development of the enormous resources of the country still craves for much more capital than its people can provide. the united states is still a debtor to the world at large and seems likely to be so for some time to come, and it is doubtful whether even new york, with all its skill in the jugglery of finance, can make itself a great banking centre as long as its heavy balance of indebtedness is always waiting to turn the world's exchanges against it, whenever the monetary sky is overcast. it was the chance of a century, but new york could not take it. when london called in its credits from other countries, any centre that could have said to these countries, "we will give you the credit that london has cut off, and lend you the money to pay london," would have stepped straight on to london's financial throne and set london a very difficult task to regain it after the war was over. in spite of the large amounts of gold taken from america to europe before the war, the united states had still a huge store within its borders--some estimates of it ranged up to millions sterling. if the united states had had the courage to use this mountain of metal and let other countries draw on it, london would have had more gold than it knew what to do with, and new york would have had a big slice of london's business. the united states were at peace, and, with all the chief countries of this antiquated hemisphere engaged in the mediæval business of killing one another's citizens and destroying one another's property, the united states might have been expected to leap into the position of economic leadership. but america feared to use its gold, and held on to it as tightly as it could, fearful of internal trouble and a run on its banks if too much of the metal went abroad. in new york, as in most other centres, the question of the moment was, not to take london's business, but to pay what she owed to london and to buy bills on london at skyrocket prices wherever they could be found. the strength of the fat old money-lender, whom the australian papers, angry with him because he did not lend fast enough, used to call john bull cohen, was never more wonderfully made manifest. strength in money bags is not everything--very far from it--but at least j. b. cohen can claim that he has made good use of it. he has peopled and fertilized the uttermost ends of the earth with his sons and his capital, and he alone among the nations has had the courage and the homely wit to throw his ports open to all and to tell all the peoples of the world to send their stuff along if it is worth buying. moreover, he has lately shown that, in spite of all his alleged decadence, he can still tuck up his sleeves on occasion and fight at least as well as anybody else. so far was new york from being able to supplant london that, as we have seen, the united states had to make special arrangements to tide over the difficulty which london's claims on her had produced.... the american government found it necessary to ask officials of the british treasury to come over and help it to find ways and means for meeting part of the debt of the united states to england, without shipping any more american gold. this could only be done by england's giving america some sort of credit to take the place of the finance bills and other forms of accommodation which lombard street had withdrawn. at the same time there is no doubt that new york did some of the business for herself that london had formerly done for her. if she was not in a position to finance other countries, she did make a beginning in financing her own imports. exporters of goods from south america to the united states who had formerly taken payment by drawing bills on london, and were no longer able to do so, drew on financial institutions in new york instead. some of these bills were used to make three-cornered payments from south america to london, and a very costly means of payment they were to the debtor, owing to the high rate of discount in new york, and the depreciation of the american dollar as compared with the pound sterling.... it seems likely that this business of financing american trade new york will keep in her own hands to a greater extent than she did before. probably she would have taken more of it to herself even if there had been no war. her new banking legislation has included in its aim the establishment of branches of american banks abroad, and the development of acceptance business in new york. it could not be expected that new york would always be content to see the greater part of america's external trade financed with english credit. her next step will be to endeavor to finance other people's trade, and she is already beginning to set about taking it, being assisted by lombard street's shyness in the matter of new acceptance business. if the war should be long continued, its appalling drain on the combatants ought to help her by exhausting the rivals whom she hopes to drive out of the field. so far, then, from the late crisis having given any evidence of weakness on the part of london, or of any likelihood that she will lose her supremacy as the world's banker, the commanding strength of her portion has been made abundantly manifest. the only weak point was not in her armor but in that of her foreign customers. the question arises whether she was wise in lending so much to debtors who showed such unanimous inability to pay on the due dates. i have heard it contended by a disinterested and well-qualified critic, that the risk run by lombard street in allowing bills to be drawn on her from all parts of the world against goods shipped from one country to another, has been shown by the late crisis to be too great to be worth the candle. bills drawn against goods coming to england are safe enough, for as long as the goods come to port and can be sold for them, the acceptor is sure of his money. but when the goods go from china to peru, and peru finds that it cannot remit to meet the bill, the acceptor is inconvenienced, and the bank or bill broker who holds the bill finds that he has got a security which was not quite as gilt-edged as he thought it. this is all quite true, but contrariwise it may be argued that this sort of world crisis is not going to happen again very soon, and that if all finance had to be arranged on the theory that it was likely to recur frequently, there would be very little finance of any kind. these bills drawn against international shipments of goods do much to make the bill on london popular all over the world, and if they are to be frowned on there will be a considerable restriction of international commerce, which will react unpleasantly on england. in ordinary times these bills are safe enough, if due precautions are taken. if mistakes are made they happen rarely and the resources of the accepting houses are easily able to repair the damage. as to finance bills, it has already been admitted that much credit was given by their means which was used for purposes with which bills of exchange ought not to be associated. the essence of a bill of exchange is that it has to be met at its due date, and so it should only be drawn to finance some commercial operation that will mature before the bill falls due, or to provide means of remittance when they are scarce, owing to seasonal causes which will have passed before the bill's maturity. when rolling credits, as they are called, are established, which go on from year to year, each bill being met by drawing another, and the money so raised in the borrowing country is put into bricks and mortar or machinery or other forms of fixed capital, the uses of the bill of exchange are being strained. when a jolt comes to the machinery and the rolling credit stops rolling, it is not possible to sell the factory or plant to provide a means of remittance. but there is no doubt that for a time, at least, this kind of finance bill is likely to be scarcer than it was; in fact, as we have seen, it was the excessive suddenness of the fit of virtue that seized lombard street on this subject that made the crisis more acute than it need have been, by reducing the means of remittance and so keeping the exchanges at an abnormal point. lombard street has thus shown that it has fully learnt the only lesson that the external side of the crisis had to teach it. too many finance bills of the wrong kind were out, and lombard street saw the fact so clearly that for some weeks it rang with the cry that there must never be any more finance bills of any kind at all. this exaggerated view is already discredited, and there is good reason to hope that opinion will settle down to a sensible midway path, taking the finance bill as a quite legitimate and necessary convenience, dangerous only when abused and distorted.... mr. withers a good englishman [ ]mr. withers is a very good englishman indeed and points out with pardonable pride how the london market stood the shock which rocked the rest of the financial world to its very foundations. what would have been his attitude had the book been written a little later, however, when the pound sterling had fallen to a discount of over per cent. as compared with the dollar, is an interesting subject of speculation. london financing the world is, from the englishman's point of view, an inspiring sight, but the pound sterling obtainable in new york for $ . ... is something which it would be interesting to hear mr. withers explain. _war and lombard street_ treats only with the beginning of a very big subject. it is sincerely to be hoped that a little later we shall have a continuation of the work from mr. withers' pen. america's chance of holding world purse-strings[ ] since the outbreak of the war new york has assumed a position of leadership in international banking. will this position be permanent or will its duration be limited practically to the period of the war? is the mantle of world financial leadership about to pass from london to new york, as it passed after the napoleonic wars from amsterdam to london? these are questions which many are asking, but which no one can answer positively, because so much depends upon those incalculable items--the duration of the war and the financial strength of the belligerents at its close.... at the end of our provincial banking system was overhauled by the federal reserve act, and put in shape to meet the needs of our growing trade, both domestic and foreign. by this act american commercial paper, which previously had been essentially local paper, was given an opportunity to assume a national, or even international, character, through the provisions for bank acceptances, rediscount, and "open market operations." an open discount market began to develop on american soil; and slowly, but surely, short-time paper of an international character and standing began to appear.... by the beginning of , therefore, it may be said, that the way was opened for our financial metropolis, new york, to play an increasingly important rôle in the international money market, and that there was already a movement in that direction. to this movement the european war gave a strong impetus, and to-day new york clearly holds the premier position in the field of international finance, although at a time when national finance in the leading countries of europe has assumed proportions never before dreamed of. the european exchange markets have been demoralized, and specie payments among the belligerent countries of europe have become little more than a name. on the other hand, "dollar exchange" is now quoted in the principal cities of latin america, the orient, and australia; and the american trade with those sections, which was formerly financed chiefly through london, is now being financed directly, and in dollars.... the united states has brought back home from a billion to two billion dollars' worth of the six billion dollars' worth of its securities estimated to have been held abroad, and is preparing to take more, either by purchase or as security for loans. it has loaned upwards of a billion dollars to the belligerent countries, and has had a net importation of gold during the year just closed greater than that of any five years of its history. our banks are carrying heavy surplus reserves, those of the new york clearing house banks alone on december having amounted to $ , , , and the gold reserve against net liabilities of the twelve federal reserve banks on december having amounted to per cent.; and this, at a time when the large gold reserves of the european banks are strained to the breaking point by the tremendous liabilities placed upon them. our export trade has reached unprecedented heights, and for the year was approximately equal to twice that of .... this war is likely to leave her [england] still with a secure position, a great and loyal colonial empire, an efficient banking system, and the control of the seas. her position as a creditor nation will lie greatly weakened, and she may even become a heavy debtor nation, but her foreign trade connections have been so long and so well established that it does not seem likely that they will be permanently impaired in any large degree by the readjustments necessitated by the war. if she disposes of her latin-american and asiatic investments to the united states she will doubtless greatly weaken her trade position in those countries, but the present evidence is that these will be about the last foreign investments she will dispose of. so far we have not made great progress in securing europe's latin-american trade. europe discontinued financing latin america at the same time that she discontinued her normal trading with latin america. for us to take her place it became necessary for us to loan before we could sell and buy. but loaning to european belligerents and selling war supplies offered larger immediate profits; and so our chief efforts have been turned eastward rather than southward. an analysis of our large export trade of last year shows that much of it was of a very abnormal character, and gives promise of being but temporary. the following figures comparing the exports of a few selected commodities for the ten months ended october, , with those for the same period of will make this point clear: _ten months ended oct. _ _commodities. . ._ breadstuffs $ , , $ , , iron and steel and mfrs. thereof, incl. wire , , , , meat products , , , , animals (notable horses and mules) , , , , explosives , , , , cars, carriages, etc. , , , , leather and mfrs. thereof , , , , a glance at these articles will show that most of them were intended chiefly for military uses, and that their heavy exportation presumably will be but temporary. it is interesting to note that some other articles of customary export showed large declines in as compared with . during the same ten months' period, for example, our exports of agricultural implements (and parts) declined from $ , , in to $ , , in ; of wood and manufactures thereof, from $ , , to $ , , ; of fertilizers, from $ , , to $ , , ; and of sewing machines, from $ , , to $ , , . viewed from the standpoint of the destination of the articles exported, the significant fact is that the increase in exports was chiefly to europe, and not to central and south america and asia--the places in which we have been strenuously endeavoring in recent years to build up a permanent export trade.... ... after the war is over europe will presumably discontinue, or greatly reduce, her importations from the united states of most of the articles which figured so largely in the great increase of . as her needs tend to become normal again she will immediately endeavor to resume her old-time trade connections, both import and export, at least in so far as the trading centres are in countries that were friendly or neutral during the war. in seeking to re-establish these connections the merchants of the belligerent countries will be strongly backed by their governments, which the war will have made more socialistic and more aggressive. they will have a great advantage in the fact of long-established business relations, and in the fact that the war trade will have been to such a large extent abnormal, both as regards the products dealt in and the parties to the trade. europe's banking machinery in south and central america, although it may not be very actively functioning in these trying times, still exists, and will be ready to resume its former activities as soon as peace is declared.... on the basis of london stock exchange listings british investments in latin america early in were computed at nearly $ , , , . germany also has a large number of banking establishments in south america and heavy investments.... united states investments in south america are very small as compared with those of england and germany, while only one american bank has established branches on that continent. these branches are only five in number, and the oldest of them is but a little over a year old. the conclusion seems clear that the war will need to be very long and very disastrous to england; and american merchants, bankers, and investors will need to be much more active and far-sighted in their exploitation of south american opportunities than they have been in the past, if london is to yield to new york her financial premiership for south america. other obstacles to new york's becoming permanently the world's financial centre are its great distance from the financial markets of europe, america's small merchant marine, its provincial protective tariff policy, the absence of an adequate supply of men possessing the necessary training both in foreign languages and in commerce and international finance to go into these foreign fields and to "tie them up" commercially and financially with the united states, and the slowness with which our recently reorganized banking system and our american discount market must grow, as regards international business, if it is to have roots that are strong and grow deep. the united states has before it a great opportunity. much depends upon the foresight with which americans prepare themselves to meet the tremendous readjustments that will be demanded at the close of the war. that will be the supreme test. now is the time to build for the future, and to avoid paying too much attention to immediate profits. new york can hardly be expected to succeed to london's position as the world's financial centre, at least for some time to come; dollar exchange will not at once take permanent rank ahead of sterling, or even alongside it; none the less, if the united states refuses to be blinded by the glamour of large immediate profits from a type of trade that is necessarily abnormal and temporary, and if she seriously turns her attention to the opportunities now open to her in latin america, she will make a long step forward in the direction of financial leadership. footnotes: [ ] h. parker willis, _american finance and the european war_, _the journal of political economy_, vol. , no. . february, , pp. - . [ ] a fuller account of the gold fund and cotton loan plans will be found in the _first annual report of the federal reserve board_, washington, january , . [ ] _report of secretary of the treasury_, december , . [ ] _first annual report of the federal reserve board_, p. . [ ] _report of the comptroller of the currency_, , pp. , . [ ] j. laurence laughlin, _will the gold basis survive in europe?_, _the annalist_, vol. , no. , feb. , , pp. , . [ ] a. barton hepburn, _a history of currency in the united states_, pp. - . the macmillan company. new york. . [ ] of boissevain co. [ ] hartley withers, _war and lombard street_, pp. - . e. p. dutton and company. . [ ] franklin escher, review of _war and lombard street_, _the american economic review_, vol. , no. , september, , pp. - . [ ] e. w. kemmerer, _america's chance of holding world purse-strings_, _the annalist_, vol. , no. , jan. , , pp. - , . appendix a an approximate formula for determining the velocity of the circulation of money [ ]for the purpose of tracing the circulation of money, and measuring it by bank records,[ ] we may classify the persons who use money in purchase of goods into three groups: . commercial depositors, _i. e._, all engaged in business--firms, companies, and others--who have bank deposits mainly or wholly apart from personal accounts. . all other depositors, chiefly private persons. . all who, like most wage earners, are not depositors at all. these three classes we shall distinguish as "commercial depositors," "other depositors," and "nondepositors," or c, o, and n. the money in the possession of "commercial depositors" we shall call "till money," and the rest "pocket money." the three groups necessarily include all in the community who circulate money. by circulating money is meant expending it in exchange, not for some other circulating medium, as checks, but for goods.... ... the category of "commercial depositors" coincides for all practical purposes with the category of business establishments. "other depositors" include most proprietors, professional, and salaried persons. almost no wage earners are included, and almost no business establishments or business men in a business capacity.... ... although "other depositors" include most proprietors and professional and salaried persons, yet some proprietors and professional men, especially in rural communities, and some salaried persons, chiefly small clerks, are "nondepositors."... ... "nondepositors" consist chiefly of those who are classed in statistics as wage earners. while there are some wage earners who are depositors,[ ] they are rare: and while there are some "nondepositors" who are not wage earners, especially (as just indicated) the agricultural proprietors (farmers) and small clerks, the amount of money circulated by them is small in comparison with the total circulation. while the line separating wages and salaries is not definitely marked in theory, it is usually easily recognised in practice.... we may now picture concretely the main currents of the monetary flow, including the circulation of money in exchange for goods.... [the figure here given] illustrates the three principal types. [illustration] the corners of the triangle, c, o, and n, represent the three groups of "commercial depositors," "other depositors," and "nondepositors," and the b's represent banks. the arrows represent the flow of money from each of these four categories to the others. thus b_{o} represents the annual withdrawals from banks by "other depositors," o_{c} the spending of this withdrawn money by "other depositors" among "commercial depositors," and c_{b} the return of the money from the "commercial depositors" to the banks. this circuit (b_{o} o_{c} c_{b}) of three links is very common. a second type of circuit is represented by a chain of four arrows (b_{o} o_{n} n_{c} c_{b}). it is illustrated by private depositors drawing money (b_{o}), and paying wages (o_{n}) to servants who in turn spend the money (n_{c}) among tradesmen who finally deposit it (c_{b}). a third type of circuit, also fourfold, is represented by the arrows b_{c} c_{n} n_{c} c_{b}. it is illustrated by commercial firms cashing their checks at banks (b_{c}) for pay rolls, with the cash so obtained paying wages (c_{n}) to workmen who spend it (n_{c}) among other tradesmen who redeposit it in banks (c_{b}). these three types are not the only ones, but they are so much more important than any others that they merit out undivided attention before a completer study is undertaken.... [the accompanying figure] has been constructed for the purpose of exhibiting them uncomplicated by other details. it will be noted that not all of the flows described are examples of the _circulation_ of money. as already indicated, money may be said to circulate only when it passes in exchange for _goods_. its entrance into and exit from banks is a flow, but not a circulation against goods. in the diagram the horizontal arrows represent such mere banking operations, not true circulation. on the other hand, the arrows along the sides of the triangle represent actual circulation. the diagram shows four such arrows, representing the four chief types of circulation: o_{c} payments of money from "other depositors" to "commercial depositors" in the purchase of goods; o_{o} payments from "other depositors" to "nondepositors," as when a housewife pays wages; c_{n} payments from "commercial depositors" to "nondepositors," as when a firm pays wages; and n_{c} payments from "nondepositors" to "commercial depositors," as when a wage earner buys goods of a merchant. there four types of circulation of money occur in the three circuits already described, being sandwiched between the flows from and to the banks. the first, o_{c}, is contained within the circuit b_{o} o_{c} c_{b} and, since no "nondepositors" intervene, represents money changing hands once between its withdrawal from bank and its redeposit there. the remaining types (o_{n}, c_{n}, and n_{c}) are contained within the two other circuits (b_{o} o_{n} n_{c} c_{b} and b_{c} c_{n} n_{c} c_{b}), and, owing to the fact that "nondepositors" intervene, represent money circulating twice between withdrawal and redeposit. in short, one of the three circuits (b_{o} o_{c} c_{b}) shows money circulating once out of bank. both the others pass through n, and show money circulating twice out of bank. the diagram, then, represents all circulating money as springing from and returning to the banks; all of it as circulating at least once in the interim; and that portion handled by "nondepositors" as circulating once in addition. therefore, the total circulation exceeds the total flow from and to banks by the amount flowing through "nondepositors." in other words, the total circulation in the diagram is simply the sum of the annual money flowing from and to banks and the money handled by "nondepositors." the quotient of this sum divided by the amount of money in circulation will give approximately the velocity of circulation of money.... footnotes: [ ] irving fisher, _purchasing power of money_, appendix xii. pp. - . _the macmillan company. new york. ._ [ ] for a complete formula for determining the velocity of the circulation of money see pages - , of the purchasing power of money. [ ] the term "depositors," as here used, does not, of course, include savings bank depositors. a savings bank is not a true bank of deposit, providing circulating credit. appendix b some regulations of the federal reserve board federal reserve board washington, january , . acceptance of statements in lieu of certificates as to character of commercial paper whenever a member bank shall offer for rediscount any note, draft, or bill of exchange bearing the indorsement of such member bank, with waiver of demand notice and protest, the directors or executive committee of the federal reserve bank may, until july , , accept as evidence that the proceeds of such note, draft, or bill of exchange were or are to be used for agricultural, industrial, or commercial purposes (and that such notes, drafts, or bills of exchange in other respects comply with the regulations of the board), a written statement from the officer of the applying bank that of his own knowledge and belief the original loan was made for one of the purposes mentioned, and that the provisions of the act and regulations issued by the board have been complied with. charles s. hamlin, governor. h. parker willis, secretary. federal reserve board washington, april , . bankers' acceptances i definition in this regulation the term "acceptance" is defined as a draft or bill of exchange drawn to order, having a definite maturity, and payable in dollars, in the united states, the obligation to pay which has been accepted by an acknowledgment written or stamped and signed across the face of the instrument by the party on whom it is drawn; such agreement to be to the effect that the acceptor will pay at maturity according to the tenor of such draft or bill without qualifying conditions. ii statutory requirements under sections and section of the federal reserve act as amended provides that: (a) any federal reserve bank may discount acceptances: ( ) which are based on the importation or exportation of goods; ( ) which have a maturity at time of discount of not more than three months; and ( ) which are indorsed by at least one member bank. (b) the amount of acceptances so discounted shall at no time exceed one-half the paid-up capital stock and surplus of the bank for which the rediscounts are made, except by authority of the federal reserve board and of such general regulations as said board may prescribe, but not to exceed the capital stock and surplus of such bank. (c) the aggregate of notes and bills bearing the signature or indorsement of any one person, company, firm, or corporation rediscounted for any one bank shall at no time exceed per centum of the unimpaired capital and surplus of said bank; but this restriction shall not apply to the discount of bills of exchange drawn in good faith against actually existing values. section of the federal reserve act permits federal reserve banks, under regulations to be prescribed by the federal reserve board, to purchase and sell in the open market bankers' acceptances, with or without the indorsement of member bank. iii ruling the federal reserve board, exercising its power of regulation with reference to paragraph ii (b) hereof, rules as follows: any federal reserve bank shall be permitted to discount for any member bank "bankers' acceptances" as hereinafter defined up to an amount not to exceed the capital stock and surplus of the bank for which the rediscounts are made. iv eligibility the federal reserve board has determined that, until further order, to be eligible for discount under section , by federal reserve banks, at the rates to be established for bankers' acceptances: (a) acceptances must comply with the provisions of paragraph ii (a), (b), (c) hereof; (b) acceptances must have been made by a member bank, non-member bank, trust company, or by some private banking firm, person, company, or corporation engaged in the business of accepting or discounting. such acceptances will hereafter be referred to as "bankers'" acceptances;[ ] (c) a banker's acceptance must be drawn by a commercial, industrial, or agricultural concern (that is some person, firm, company, or corporation) directly connected with the importation or exportation of the goods involved in the transaction in which the acceptance originated, or by a "banker." in the latter case the goods, the importation or exportation of which is to be financed by the acceptance, must be clearly specified in the agreement with or the letter of advice to the acceptor. the bill must not be drawn or renewed after the goods have been surrendered to the purchaser or consignee. (d) a banker's acceptance must bear on its face or be accompanied by evidence in form satisfactory to a federal reserve bank that it originated in an actual _bona fide_ sale or consignment involving the importation or exportation of goods. such evidence may consist of a certificate on or accompanying the acceptance to the following effect: this acceptance is based upon a transaction involving the importation or exportation of goods. reference no. ----. name of acceptor ----. (e) bankers' acceptances, other than those of member banks, shall be eligible only after the acceptors shall have agreed in writing to furnish to the federal reserve banks of their respective districts, upon request, information concerning the nature of the transactions against which acceptances (certified or bearing evidence under iv (d) hereof) have been made. (f) a bill of exchange accepted by a "banker" may be considered as drawn in good faith against "actually existing values," under ii (c) hereof, when the acceptor is secured by a lien on or by transfer of title to the goods to be transported; or, in case of release of the goods before payment of the acceptance, by the substitution of other adequate security; (g) except in so far as they may be secured by a lien on or by transfer of the title to the goods to be transported, as under (f), the bills of any person, firm, company, or corporation, drawn on and accepted by any private banking firm, person, company, or corporation (other than a bank or trust company) engaged in the business of discounting and accepting, and discounted by a federal reserve bank, shall at no time exceed in the aggregate a sum equal to per centum of the paid-in capital of such federal reserve bank; (h) the aggregate of acceptances of any private banking firm, person, company, or corporation (other than a bank or trust company) engaged in the business of discounting or accepting, discounted or purchased by a federal reserve bank, shall at no time exceed a sum equal to per centum of the paid-in capital of such federal reserve bank. to be eligible for purchase by federal reserve banks under section , bankers' acceptances must comply with all requirements and be subject to all limitations hereinbefore stated, except that they need not be indorsed by a member bank: _provided, however_, that no federal reserve bank shall purchase the acceptance of a "banker" other than a member bank which does not bear the indorsement of a member bank, unless a federal reserve bank has first secured a satisfactory statement of the financial condition of the acceptor in form to be approved by the federal reserve board. v policy as to purchases while it would appear impracticable to fix a maximum sum or percentage up to which federal reserve banks may invest in bankers' acceptances, both under section and section , it will be necessary to watch carefully the aggregate amount to be held from time to time. in framing their policy with respect to transactions in acceptances, federal reserve banks will have to consider not only the local demands to be expected from their own members, but also requirements to be met in other districts. the plan to be followed must in each case adapt itself to the constantly varying needs of the country. charles s. hamlin, governor. h. parker willis, secretary. federal reserve board washington, april , . acceptance by member banks by act of congress approved march , , section (paragraphs , , and of the federal reserve act) was amended and re-enacted so as to read as follows: any federal reserve bank may discount acceptances which are based on the importation or exportation of goods and which have a maturity at time of discount of not more than three months and indorsed by at least one member bank. the amount of acceptances so discounted shall at no time exceed one-half the paid-up and unimpaired capital stock and surplus of the bank for which the rediscounts are made, except by authority of the federal reserve board, under such general regulations as said board may prescribe, but not to exceed the capital stock and surplus of such bank. the aggregate of such notes and bills bearing the signature or indorsement of any one such person, company, firm, or corporation rediscounted for any one bank shall at no time exceed per centum of the unimpaired capital and surplus of said bank; but this restriction shall not apply to the discount of bills of exchange drawn in good faith against actually existing values. any member bank may accept drafts or bills of exchange drawn upon it and growing out of transactions involving the importation of exportation of goods having not more than six months' sight to run; but no bank shall accept such bills to an amount equal at any time in the aggregate to more than one-half of its paid-up and unimpaired capital stock and surplus, except by authority of the federal reserve board, under such general regulations as said board may prescribe, but not to exceed the capital stock and surplus of such bank, and such regulations shall apply to all banks alike, regardless of the amount of capital stock and surplus. in order to give effect to the above amendment of the law, the federal reserve board issues the appended regulation k, series of , stating the conditions under which member banks may accept, up to per cent. of their capital and surplus, drafts or bills of exchange growing out of transactions involving the importation or exportation of goods and having not more than six months' sight to run. charles s. hamlin, governor. h. parker willis, secretary. federal reserve board washington, may , . clearings between federal reserve banks i statutory provisions under section "the federal reserve board shall make and promulgate from time to time regulations governing the transfer of funds and charges therefore among federal reserve banks and their branches, and may at its discretion exercise the functions of a clearing house for such federal reserve banks, or may designate a federal reserve bank to exercise such functions, and may also require each such bank to exercise the functions of a clearing house for its member banks." ii general provisions in the exercise of the functions of the clearing house authorised under the provisions of section , quoted above, the federal reserve board and the federal reserve banks will be governed by and subject to the following regulations and the federal reserve board will be the custodian of the funds hereinafter termed the gold settlement fund. the board will appoint a settling agent who shall keep the necessary records and accounts. iii deposits in the gold settlement fund (a) each federal reserve bank shall, not later than may , , forward to the treasury or the nearest sub-treasury, for credit to the account of the gold settlement fund $ , , in gold, gold certificates or gold order certificates, and, in addition, an amount at least equal to its net indebtedness due to all federal reserve banks. (b) the treasurer of the united states or assistant treasurer will, in accordance with arrangements made with the treasury department, advise the federal reserve board, by mail or telegraph, of the receipt of all funds deposited on account of the gold settlement fund, and the treasurer will issue and deliver to the federal reserve board gold order certificates made "payable to the order of the federal reserve board" covering the sum so deposited. (c) each federal reserve bank shall maintain a balance in the gold settlement fund of not less than $ , , . (d) excess balances may, at the convenience of each federal reserve bank, remain deposited with the gold settlement fund. iv custody of funds (a) a safe in the treasury vault will be set apart for the exclusive use of the federal reserve board. (b) to open the treasury vault, the presence of two persons designated by the secretary of the treasury is required. the combination of the safe set apart for the use of the board will be controlled by two persons designated by the board. (c) a vault record shall be kept, giving a memorandum of all entrances to the safe, by whom made, for what purpose, and the certificates deposited or withdrawn. each entry on the vault record book shall be signed by the persons having access to the safe. v accounts in its relations with other federal reserve banks each federal reserve bank shall keep an account showing balances "due to" other federal reserve banks representing the proceeds of items which it has actually collected, and payments and transfers which have been made to it for the account of such other federal reserve banks; and an account showing balances "due from" other federal reserve banks representing the proceeds of items which it has sent to such other federal reserve banks, and payments and transfer which have been made to such other federal reserve banks for its account. vi procedure (a) at the close of business each wednesday night, each federal reserve bank shall telegraph to the federal reserve board, confirming such telegram by mail, the amounts in even thousands due to each other federal reserve bank as of that date, as indicated by its "due to" account provided for in rule v. if wednesday is a holiday in the state in which a federal reserve bank is located, then such bank shall telegraph as herein provided on tuesday, at the close of business. (b) the settling agent shall, on each thursday, make the proper debits and credits in the accounts of each federal reserve bank with the gold settlement fund, and shall telegraph to each bank the amounts, in even thousands, of credits to its settlement account, giving the name of each federal reserve bank from which each of its credits was received and also its net debit or credit balance in the weekly settlement. (c) each federal reserve bank shall, on receipt of the telegram from the settling agent, debit the "due to" federal reserve banks' accounts, and shall credit the gold settlement fund; and shall credit the "due from" federal reserve banks' accounts and charge the gold settlement fund. the difference between the total debits and credits shall equal the net debit or credit to the gold settlement fund, as advised in the telegram from the settling agent. vii deficits (a) should the debit settlement balance of any federal reserve bank be in excess of the amount of its credit in the gold settlement fund, such deficit must be immediately covered either by the deposit of gold, gold certificates, or gold order certificates in the treasury or nearest sub-treasury, or by credit operations with other federal reserve banks which have an excess balance with the gold settlement fund. any delay in covering such deficit shall be subject to such charge as the federal reserve board may impose. (b) as required in iii (c) of this regulation, each federal reserve bank shall maintain a balance in the gold settlement fund of not less than $ , , . should the credit balance of any federal reserve bank in such fund fall below $ , , , such bank shall restore its balance to that amount in either manner indicated under vii (a) of this regulation on or before tuesday of the following week. viii excess balances any excess balance shall, on request, either by telegraph or letter, of the federal reserve bank to which it is due, be refunded by the return to the reserve bank of the gold order certificates held by the gold settlement fund properly indorsed; or by the indorsement and delivery to the treasurer of a like amount of such certificates for which he will give in exchange bearer gold certificates, which the federal reserve board may send by registered mail, insured, to the banks, if they want funds other than gold order certificates, or in lieu of such payment, the treasurer may by wire or mail direct payment to be made by a sub-treasury office through the medium of the general account, provided funds are held in such office available for the purpose. gold order certificates will, when presented at the office of the treasurer of the united states or any sub-treasury, bearing the signatures of duly authorised officers of the federal reserve bank, be payable in gold or gold certificates. if the treasury finds it necessary to ship from one point to another in order to have the gold or gold certificates available at the sub-treasury to which such gold order certificates are presented, the federal reserve board will, for the account of the gold settlement fund, refund any expense incurred by the treasury in making such shipments. ix reserve each federal reserve bank shall count as a part of its legal reserve the funds standing to the credit of its account on the books of the gold settlement fund. x expenses cost of operation of and shipment of currency by the gold settlement fund shall be apportioned by a semi-annual accounting among the federal reserve banks on a basis to be hereafter determined by the board after consultations with the federal reserve banks. xi audit at least once in each three months an audit shall be made of the gold settlement fund by a representative of the federal reserve board and representative appointed by the federal reserve banks. xii the federal reserve board reserves the right to add to, alter, or amend these regulations. charles s. hamlin, governor. h. parker willis, secretary. federal reserve board washington, june , . membership of state banks i statutory requirements specific provisions of the federal reserve act applicable to state banks and trust companies which become member banks are quoted at the end of this regulation. ii banks eligible for membership a state bank or a trust company to be eligible for membership in a federal reserve bank must comply with the following conditions: ( ) it must have been incorporated under a special or general law of the state or district in which it is located. ( ) it must have a minimum paid-up unimpaired capital stock as follows: in cities or towns not exceeding , inhabitants, $ , . in cities or towns exceeding , but not exceeding , inhabitants, $ , . in cities or towns exceeding , but not exceeding , inhabitants, $ , . in cities exceeding , inhabitants, $ , . iii application for membership any eligible state bank or trust company may make application on form , made a part of this regulation, to the federal reserve agent of its district for an amount of capital stock in the federal reserve bank of such district equal to per cent. of the paid-up capital stock and surplus of such state bank or trust company.[ ] upon receipt of such application the federal reserve agent shall submit the same to a committee composed of the federal reserve agent, the governor of the federal reserve bank, and at least one other member of the board of directors of such bank, to be appointed by such board, but no class a director whose bank is in the same city or town as the applying bank or trust company shall be a member of such committee. this committee shall, after receiving the report of such examination as may be required by the federal reserve bank in pursuance of directions from the federal reserve board, consider the application and transmit it to the federal reserve board with its report and recommendations. iv approval of application in passing upon an application the federal reserve board will consider especially: ( ) the financial condition of the applying bank or trust company and the general character of its management. ( ) whether the nature of the powers exercised by the said bank or trust company and its charter provisions are consistent with the proper conduct of the business of banking and with membership in the federal reserve bank. ( ) whether the laws of the state or district in which the applying bank or trust company is located contain provisions likely to interfere with the proper regulation and supervision of member banks. if, in the judgment of the federal reserve board, an applying bank or trust company conforms to all the requirements of the federal reserve act and these regulations, and is otherwise qualified for membership, the board will issue a certificate of approval. whenever the board may deem it necessary, it will impose such conditions as will insure compliance with the act and these regulations. when the certificate of approval and any conditions contained therein have been accepted by the applying bank or trust company, stock in the federal reserve bank of the district in which the applying bank or trust company is located shall be issued and paid for under the regulations of the federal reserve act provided for national banks which become stockholders in the federal reserve banks. v powers and restrictions every state bank or trust company while a member of the federal reserve system: ( ) shall retain its full charter and statutory rights as a state bank or trust company, and may continue to exercise the same functions as before admission, except as provided in the federal reserve act and the regulations of the federal reserve board, including any conditions embodied in the certificate of approval. ( ) shall invest only in loans on real estate or mortgages of a character and to an extent which, considering the nature of its liabilities, will not impair its liquid condition. ( ) shall adjust, to conform with the requirements of the federal reserve act and these regulations, within such reasonable time as may be determined by the board in each case, any loans it may have at the time of its admission to membership which are secured by its own stock, or any loans to one person, firm, or corporation aggregating more than per cent. of its capital and surplus or more than per cent. of its capital, or any real estate loans which, in the judgment of the federal reserve board, impair its liquid condition. ( ) shall maintain such improvements and changes in its banking practice as may have been specifically required of it by the federal reserve board as a condition of its admission, and shall not lower the standard of banking then required of it: and ( ) shall enjoy all the privileges an observe all those requirements of the federal reserve act and of the regulations of the federal reserve board applicable to state banks and trust companies which have become member banks. vi withdrawals any state bank or trust company desiring to withdraw from membership in a federal reserve bank may do so twelve months after written notice of its intention to withdraw shall have been filed with the federal reserve board. the board will immediately notify the federal reserve bank of the receipt of such notice. at the expiration of said twelve months, such bank or trust company shall surrender all of its holdings of capital stock in the federal reserve bank, which stock shall then be cancelled and the withdrawing bank or trust company shall thereupon be released from its stock subscription not previously called. such bank or trust company shall, immediately upon the cancellation of its stock, cease to be a member of the federal reserve bank, and the federal reserve bank shall then refund to such bank or trust company a sum equal to the cash-paid subscription on the shares surrendered, with interest at the rate of one-half of one per centum per month computed from the last dividend, if earned, not to exceed the book value thereof, and the reserve deposits, less any liability of such member to the federal reserve bank: _provided_, that no federal reserve bank shall, except by the specific authority of the federal reserve board, cancel within the same calendar year more than per cent. of its capital stock for the purpose of effecting voluntary withdrawals during that year. all applications, including therein any on which action may have been deferred because in excess of the aforesaid per cent. limitation, will be dealt with in the order in which they were originally filed with the board. any state bank or trust company desiring to withdraw from membership at the expiration of the twelve months' notice, notwithstanding the fact that the federal reserve bank has previously cancelled per cent. of its stock during the same calendar year, may do so. in such case, however, the federal reserve bank shall not be required to repay to the withdrawing bank or trust company the sums due as above, until such time as its stock would have been cancelled had it not exercised this option. the federal reserve bank shall, however, give a receipt for the stock surrendered. vii examinations every state bank or trust company, while a member of the federal reserve system, shall be subject to such examinations as may be prescribed by the federal reserve board in pursuance to the provisions of the federal reserve act. in order to avoid duplication, the board will exercise the broad discretion vested in it by the act in accepting examinations of state banks and trust companies made by state authorities wherever these are satisfactory to the board and are found to be of the same standard of thoroughness as national bank examinations, and where in addition satisfactory arrangements for co-operation in the matter of examination between the designated examiners of the board and those of the states already exist or can be effected with state authorities. examiners from the staff of the board or of the federal reserve banks will, whenever desirable, be designated by the board to act with the examination staff of the state in order that uniformity in the standard of examination may be assured. viii future regulations the federal reserve board reserves the right to make such amendments and adopt and issue, from time to time, such further regulations authorised by the act as it may deem necessary, but no amendment of section vi of these regulations, relating to voluntary withdrawals, shall take effect until six months after its adoption and issue by the board. charles s. hamlin, governor. h. parker willis, secretary. footnotes: [ ] drafts and bills of exchange eligible for rediscount under section , other than "bankers'" acceptances, have been dealt with by regulation b, series of . [ ] three per cent. has already been called from national and other member banks, but the remainder of the subscription or any part of it shall be subject to call if deemed necessary by the federal reserve board. transcriber's note: minor typographical errors have been corrected without note. irregularities and inconsistencies in the text have been retained as printed. words printed in italics are noted with underscores: _italics_. my adventures with your money by george graham rice richard g. badger the gorham press boston copyright, , by the ridgway company copyright, , by richard g. badger all rights reserved the gorham press, boston, mass., u.s.a. to the american damphool speculator, surnamed the american sucker, otherwise described herein as the thinker who thinks he knows but doesn't--_greetings_! this book is for you! read as you run, and may you run as you read. g. g. r. new york, march , . contents page i the rise and fall of maxim & gay _the birth of an idea to coin money._ _the higher mathematics of the operation._ _how "the one best bet" was coined._ _real inside turf information._ _the public asks to be mystified._ _prestige restored by a clerk's ruse._ _a boastful race player gives aid._ _fortune changes her mood and smiles again._ _the kentucky colonel falls in line._ _betting the public's money at great profit._ _$ , is lost and won in a day._ _a disastrous newspaper wind-up._ ii mining finance at goldfield _a partnership of pure nerve._ _bucking the tiger on the desert._ _bidding $ , , when broke._ _millions in the vista held no charms._ _"human interest" versus technical mining._ _beginning the advertising business._ _some advertising that paid._ _building gold mines with publicity._ _hair-raising stories for distant readers._ _the mercury of speculation._ _the birth of bullfrog._ _enter, charles m. schwab._ _why the bottom fell out._ _how about the public's chances?_ _jumping jack manhattan._ iii the brewing of a saturnalia of speculation _trying it on the stray dog._ _advertising for thinkers._ _yes, "business is business."_ _fortunes that were missed._ _the tale of bullfrog rush._ _prize fights and mining promotion._ _the year of big figures._ _the story of goldfield consolidated._ _at the height of the frenzy._ iv the greenwater fiasco _getting into the game._ _all the copper in the world._ _the collapse of greenwater._ _the shame and the blame._ v on the eve of the great goldfield smash _the rise of wingfield and nipon._ _the winnings of a tenderfoot._ _i am landed high and dry._ _the beginning of the raid._ _some pertinent personalities._ _the time when money talks._ _clouds in the western sky._ _from credit to crash._ _down with the sullivan trust company._ _some hindsight that came too late._ vi nipissing and goldfield con _an orgy in market manipulation._ _the guggenheims enter nipissing._ _nipissing on the toboggan._ _who got the $ , , ?_ _the wonder mining-camp stampede._ _teague attacks senator nixon._ "_calling for a show-down._" _manipulating goldfield con._ _enter, nat. c. goodwin & co._ _the story of the goldfield labor "riots."_ _the death of governor sparks._ vii rawhide _real gold at rawhide._ _the rawhide coalition mines company._ _a race of gamblers._ viii the press agent and the public's money _publicity via elinor glyn._ _"al" miller's siege._ _the funeral oration for riley grannan._ _among the "big fellows."_ _the reverse english._ _the power of the public print._ _rawhide again._ ix the wall street game _good big fish vs. bad little fish._ _righteous wall street and the "sucker" public._ _the marketing of mining stock._ _i buck the wall street game._ _the "double-crossing" of rawhide coalition._ _"inside" market support._ x enter, b. h. scheftels and company _more truth on the "mining financial news."_ _the scheftels principles._ _the scheftels company against margin trading._ xi a fight to the death _the firing of the first guns._ _the story of ely central._ _the assault on ely central._ _the clash of battle._ _a bombshell in the enemy's camp._ _a government raid is rumored._ _the raid on b. h. scheftels and co._ _a tool's confession._ _the guggenheims._ xii the lesson of it all foreword you are a member of a race of gamblers. the instinct to speculate dominates you. you feel that you simply must take a chance. you can't win, yet you are going to speculate and to continue to speculate--and to lose. lotteries, faro, roulette, and horse-race betting being illegal, you play the stock game. in the stock game the cards (quotations or market fluctuations) are shuffled and riffled and stacked behind your back, after the dealer (the manipulator) knows on what side you have placed your bet, and you haven't got a chance. when you and your brother gamblers are long of stocks in thinly margined accounts with brokers, the market is manipulated down, and when you are short of them, the prices are manipulated up. you are on guard against the get-rich-quick man, and you flatter yourself that you can detect his wiles at a glance. you can--one kind of get-rich-quick operator. but not the dangerous kind. modern get-rich-quick finance is insidious and unfrenzied. it is practised by the highest, and you are probably one of its easy victims. one class of get-rich-quick operator uses crude methods, has little standing in the community, operates with comparatively small capital, and caters to those who do not think and have only small resources. he is not particularly dangerous. the other uses scientific methods--so scientific, indeed, that only men "on the inside" readily recognize them; occupies a pedestal in the community; is generally a man of excellent financial standing, a member of a stock exchange; employs large capital; appeals to thinkers or those who flatter themselves that they know the difference between a gold bar and a gold brick, and seeks to separate from their money all classes and conditions of men and women with accumulations large or small. the united states government during the past few years, at the behest of the big fellow, who seeks a monopoly of the game, has been raiding the little fellow--the crude operator whose power to injure is as nothing compared to the ravages that have been wrought by the activities of his really formidable prototype. i have a message to communicate to every investor and speculator, a story to tell of my experience through the great goldfield, bullfrog, manhattan and greenwater mining booms in nevada of - , in which the public lost upwards of $ , , , and of a series of great mining-stock promotions in wall street and other american financial centers, in which the public sank $ , , in . the narration of the facts demonstrates that the government's get-rich-quick crusade has made it less easy for some of the small offenders to thrive, but that the transcendentally greater culprits are at this very moment plucking the public to a fare-you-well, and that the government has not lifted a finger against them. no man, except a common thief, ever started out to promote a mining company or any other company that he was convinced at the outset had no merit; and the work of common thieves is quickly recognized and the offenders are easily apprehended. the more dangerous malefactors are the men in high places who take a good property, overcapitalize it, appraise its value at many times what it is worth, use artful publicity and market methods to beguile the thinking public into believing the stock is worth par or more, and foist it on investors at a figure which robs them of great sums of money. there are more than a million victims of this practice in the united states. after years of experience behind the scenes, the conclusion is forced upon me that the instinct to speculate is so strong in american men and women that they choose to "take a chance" regardless of the fact that at the outset they already half-realize they eventually must lose. myself, in boyhood, a victim of the instinct to speculate, i, years afterward, at the age of , learned to cater to the insatiable desire in others. i spent fortunes for advertising and wrote my own advertisements. i constructed on big lines powerful dollar-making machinery that succeeded in getting the money for my enterprises, and i was generally my own manager. ten years of hard work in a field in which i labored day and night has disclosed to me that the instinct to gamble is all-conquering among women as well as men--the rich and the poor, the young and the old, the wise and the foolish, the successful and the unsuccessful. worse, if you have lost some of your hard-earned money in speculation, your case is undoubtedly incurable, because you have a fresh incentive, namely, to "get even." experience, therefore, will teach you nothing. the professional gambler's aphorism, "you can't kill a sucker," had its genesis in a recognition of this fact, and now stock promoters and manipulators of the multi-millionaire class subscribe to its truth and on it predicate their operations. nearly everybody speculates (gambles); few win. where does the money go that is lost? who gets it? are you aware that in catering to your instinct to "invest," methods to get you to part with your money are so artfully and deftly applied by the highest that they deceive you completely? could you imagine it to be a fact that in nearly all cases when you find you are ready to embark on a given speculation, ways and means that are almost scientific in their insidiousness have been used upon you? what are these impalpable yet cunningly devised tricks that are calculated to fool the wisest and which landed you? i narrate them herein. what are your chances of winning in any speculation where you play another man's game? have you any chance at all? in playing the horse races in years past you had only one chance if you persisted--you could lose. in margin-trading on the new york stock exchange, new york curb, boston stock exchange, boston curb, chicago board of trade, chicago stock exchange, new york cotton exchange and kindred institutions, experience among stock-brokers proves that if you stick to the game you have only one chance--you can lose. in railroad, industrial and mining-stock speculation, where you buy the shares outright and hold them for stock market profits, you have two chances; if you are of the average and your operations are for a period continuous--you can break even if you are very lucky, or lose if you are not; and in justice to myself i must be allowed to explain that i had a much better opinion of the public's chances ten years ago than i have now, and that experience on the inside has taught me this. the moral to the investor and speculator is "never again!" and yet you will speculate again. experience teaches that so long as the chance of speculative gain exists in any enterprise, so long will the american public continue in its efforts to appease its speculative appetite. g. g. r. my adventures with your money chapter i the rise and fall of maxim & gay the place was new york. the time, march, . my age was thirty. my cash capital, tightly placed in my pocket, was $ . , and i had no other external resources. i was a rover and out of a job. since august of the year before i had been loafing. my last position, seven months before, was that of a reporter for the new orleans _times-democrat_. my last newspaper assignment was the great galveston cyclonic hurricane in which , lives were lost and $ , , in property was destroyed. i covered that catastrophe for the new york _herald_ and other journals as well as for the new orleans newspaper. it was a "beat" and i netted a big sum for a few days' hard work, but the money had all been spent for subsistence. at the corner of fortieth street and broadway i met an old-time racetrack friend, dave campbell. his face wore a hardy, healthful hue, but he bore unmistakable evidence of being down on his luck. "buy me a drink," he said. "i've got thirty cents in change and i must have a cigar," i answered, "and you know i like good ones." "well, i'll take a beer," he said, "and you can buy yourself a perfecto." no sooner said than done. the cigar and the drink were forthcoming. we sat down. it was a café with the regulation news-ticker near the lunch counter. "do you still bet on the horses?" asked campbell. "no, i haven't had a bet down in more than a year," i answered. "well, here's a letter i just received from frank mead at new orleans, and it ought to make you some money," he said. "there's a 'pig' down here named silver coin," the letter said, "that has been raced for work recently. i think he's fit and ready and that within the next few days they will place him in a race that he can win, and he will bring home the coonskins at odds of to ." i had seen letters like that before, but my interest was aroused. i picked up a copy of the new york _morning telegraph_ from the table. turning the pages, i noticed a number of tipsters' advertisements, all claiming they were continually giving the public winners on the races. the birth of an idea to coin money "do these people make money?" i asked campbell. "yes, they must," he answered, "because the ads have been running every day for months and months." "well, if poorly written ads like these can make money, what would well-written ads accomplish, and particularly from an information bureau which might give real information?" i queried. a moment later the ticker began its click, click, click. "here come the entries," said campbell. he went to the tape and ejaculated, "by jiminy! here's silver coin entered for to-morrow." the coincidence stirred me. "i've got an idea for an advertisement," i said. "get me a sheet of paper." it was supplied. i wrote: +---------------------------+ | bet your last dollar on | | silver coin | | to-day | | at new orleans | | he will win at to | +---------------------------+ and then i faltered. "i must have a name for the signature," i said. i picked up the newspaper again and turned to the page containing the entries for that day at the new orleans races. a sire's name was given as st. maxim. "maxim!" i said. "that's a good name. i'll use it. now for one that will make euphony." "gay!" said campbell. "how's that? it's sporty." thereupon i created the trade-mark of maxim & gay. in a postscript to this advertisement i stated that the usual terms for this information were $ per day and $ per week, and that the day after next maxim & gay would have another selection, which would not be given away free. "maxim & gay" were without an address. half a block away on broadway, at a real estate office, we were informed that upstairs they had some rooms to let. i engaged one of these for $ a month--no pay for a week. two tin signs were ordered painted, bearing the inscription, "maxim & gay." one was placed at the entrance of the building and the other on the door upstairs. the sign-painter extended credit. before bidding me adieu, campbell exclaimed of a sudden: "by golly! i can't understand that scheme. how can you make any money giving out that silver coin tip for nothing?" "watch and see!" i said. around to the _morning telegraph_ office, then on forty-second street, i went. "insert this ad and give me $ worth of space," i said, as i shelled out my last cent. when the advertisement appeared the next morning, its aspect was disappointing. the space occupied was only fifty-six agate lines, or four inches, single-column measure. it looked puny. would people notice it? that afternoon campbell and i took possession of the new office of maxim & gay. luckily, a former tenant had left a desk and a chair behind, in lieu of a settlement for rent. in walked a tall texan. "hey there!" he cried. "here's $ . it's yours. keep it. answer my question, and no matter what way you answer it, it don't make any difference. the $ is yours." i looked up in amazement. "give me the source of your information on silver coin," he said. "i bet big money. if your dope is on the level, i'll bet a 'gob.' if it ain't, your confession will be cheap at $ , which will be all the money i'll lose." i showed him the letter from frank mead. "that's good enough for me," he said, turning on his heel. silver coin won easily at to . the betting was so heavy in the new york pool-rooms that, at post time, when to was readily obtainable at the race-track, to was the best price that could be obtained in new york. it is history that the new york city pool-rooms at that time controlled by "jimmy" mahoney were literally "burned up" with winning wagers. pool-room habitués argued it thus: "if the tip is not 'a good thing,' what object in the world would these people have for publishing the ad? if the horse loses, the cost of the advertisement is certainly lost. the only way they can win is for the horse to win." it was good logic--as far as it went. the higher mathematics of the operation but it was really sophistry. if the horse lost, the inserter of the maxim & gay advertisement would be out exactly $ . if the $ was used to bet on the horse, the most that maxim & gay could win would be $ . i was taking the same losing risk as the bettor, with a greater chance for gain. by investing $ in the advertisement, it was possible for me to win much more money from the public by obtaining their patronage for the projected tipping bureau. i recall that the experimental features of the advertisement appealed to me strongly and struck me as being a splendid test of the possibilities of the business. if the horse won and there were few responses to the advertisement it would be convincing on the point that there was no money in the tipster branch of the horse-racing game. i argued that if the racing public would not believe that an information bureau was what it cracked itself up to be, in the face of a positive demonstration, how could it be expected to believe the lurid claims of the fakers whose advertisements crowded the sporting papers daily and in which they claimed _after_ the races were run that they named in advance the winners at all sorts of big odds? the next morning about ten o'clock, campbell called at my home and said that he had received another "good thing" by telegraph from mead and that the name of the horse was annie lauretta, with probable odds of to . "jiminy!" he exclaimed. "if we only get a few customers to-day and this one wins, what will happen?" leisurely we walked to the office. "if we get ten subscribers to-day to start with, we'll make a fine beginning," i said. as we approached the hotel marlborough, which is opposite the building on broadway in which the maxim & gay company had its modest little office, our attention turned abruptly to a crowd of people who were being lined up by half a dozen policemen. "what theater has a sale of seats to-day?" campbell asked. "don't know," i answered. as we approached the office, we found that the line extended into our own office building. as we ambled up the rickety stairs, we passed the crowd in line, one by one, until we discovered, to our great astonishment, that the line ended at our door. we turned the key, walked in, locked the door, and stood aghast. holding up both hands, i gasped, "in heaven's name, what have we done?" i was appalled. "give 'em annie lauretta," cried campbell. "but suppose annie don't win," i expostulated. "smokes!" exclaimed campbell. "are you going to turn down all those $ bills?" "let's see that telegram," i faltered. i perused it over and over again. "mead's judgment on silver coin is good enough reason to warrant advising people to put a wager on another one of his choices," campbell argued. i agreed. how to convey the information in merchantable form was the next question. a typist in the hotel marlborough, across the way, was sent for and asked to strike off the name "annie lauretta" or , times on slips of paper. envelopes were bought and a typed slip was placed in each. the line increased until it was a block and a half long. when all was ready, the door was opened. campbell passed the envelopes out as each man handed me $ . i stuffed the money in the right-hand drawer of the desk, and when that became choked, i stuffed it in the left-hand drawer. finally, the money came so thick and fast that i picked up the waste-paper basket from the floor, lifted it to the top of the desk and asked the buyers to throw their money into the receptacle. when a man wanted change, i let him help himself. for two and a half hours, or until within fifteen minutes of the calling of the first race at new orleans, the crowd thronged in and out of our office. when the last man passed out we counted the money and found the day's proceeds to be $ , . "what will we do next?" asked campbell. "what's my job, and what do i get?" "how much do you want?" i asked. "ten dollars a day," he said. thereupon he got possession of the $ and he admitted it was more money than he had seen in a month. "what will we do next?" he repeated. "let us take a walk," i said. "lock the office until after the fourth race, when we see what annie lauretta does." we hied ourselves to a nearby resort and stood by the news ticker to see what would happen to annie. it was half an hour since the third race had been reported. "fourth race--tick--tick--tick," it came. "a--al----," "we've lost!" i cried. "a--al--alpena first." there was grim silence. "tick--tick----," "here she is!" yelled campbell. "a-n-n-i-e lauretta second-- -- -- " (meaning that the odds were to , first, to , second, and to , third, and that those who had played "across the board" had won second and third money at great odds). i boarded a broadway car, rode down to the stewart building and rented one of the finest suites of offices in its sacred purlieus. i ordered a leading furniture dealer to furnish it sumptuously. at night i walked over to the _morning telegraph_ office, laid $ on the counter, ordered inserted a flaring full-page ad. announcing that maxim & gay had given annie lauretta at , and , second, and previously silver coin at to , won, and were ready for more business. a telegram was sent to frank mead, instructing him to spend money in every direction with a view to getting the very best information that could be obtained from handicappers, clockers, trainers and every other source he could reach. mead continued to wire daily the name of one horse, which we promptly labeled and thereafter advertised daily as "the one best bet." soon "one best bet" became a term to conjure with. the success of this enterprise was phenomenal. in the course of two years it earned in excess of $ , , . there were some weeks when the business netted over $ , profits. at the height of its career, in the summer of , at the saratoga race meeting, when the pool-rooms in new york were open, our net profits for the meeting of a little less than three weeks were in excess of $ , . we established an office in saratoga and our average daily sales on race days were envelopes at $ each. in new york the average was just as large, and, in addition, we had a large clientele in distant cities to whom we sent the information by telegraph. the wire business, in fact, increased to such an extent that it became necessary to call upon the western union and postal telegraph companies to furnish our office in the stewart building with direct loops. i spent the money as fast as i made it. i believed in our own information and made the fatal error of plunging on it. my error, as i afterwards concluded, was in not risking the same amount on every selection. had i done this, i would not have suffered serious losses. the trouble was that every time a horse on which i wagered won, i was encouraged to bet several times as much on the next one, and by doubling and trebling my bets, i played an unequal game. the expense of gathering this information within a few weeks increased to upwards of $ , a week, and it was not only our boast, but an actuality, that the bureau did really give more than value received. undoubtedly, the evil of the venture was the gambling it incited; but the effort to secure reliable information was honest, and what young man of my age and of my experiences, having indulged in a lark of the silver coin variety, could withstand the temptation of seeing the thing through? among the leading patrons of the maxim & gay company were soon numbered important horse owners on the turf, leading bookmakers and many leaders of both sexes in the smart set. maxim & gay made it a rule to sell no information of any kind to minors and often excluded young men from the offices for this reason. how "the one best bet" was coined our methods of advertising were unique. we used full pages whenever possible, and it was a maxim in the establishment that small type was never intended for commercial uses. we used in our big display advertisements a nomenclature of the turf that had never before been heard except in the vicinity of the stables, and we coined words and phrases to suit almost every occasion. the word "clocker," meaning a man who holds a watch on horses in their exercise gallops, was original with us, and has since come into common use, as has the phrase, "the one best bet," which we also coined. it was our aim, in using the language of horsemen, to be technical rather than vulgar, the theory being that, if we could convince professional horsemen that we knew what we were talking about, the general public would quickly fall in line. one morning we were alarmed to see in the _morning telegraph_, on the page opposite our own daily effort, the advertisement of a new tipster who called himself "dan smith." dan went maxim & gay "one better" in the use of race-track terminology. he evidently employed a number of negro clockers, for the horse lingo which he used in his advertisements smelled of soiled hay and the manure pile. it was awful! but it made a hit with race-goers, and before a week had passed we recognized "smith" as a dangerous competitor. we were loth to believe that the use of this horsy language was entirely responsible for smith's success, for we knew that his tips were not so good as ours. we investigated. his trick was this: in the sheet that he sent out to his customers, he would name for every race at least five horses as having a chance to win. he advised his clients, in varying terms, to bet on every one of them, and if any one of them won, he would print next morning what he had said on the preceding day regarding the winner alone, leading the public to believe that the only horse he had fancied was the actual winner. i decided to organize another bureau to knock out dan smith. the intention was "to go" our competitor "a few better" in the use of vulgar horse-racing colloquialisms and exaggerated claims, and thus nauseate the betting public and "put the kibosh" on dan. we created a fictitious advertiser whom we named "two spot," and the next morning there appeared at our instigation in the _morning telegraph_ a large display advertisement, headed substantially as follows: +-----------------------------+ | two spot | | turf info. merchant | | terms, $ daily; $ weekly | +-----------------------------+ following the style which dan smith had adopted in his racing sheets, "two spot" mentioned in his first advertisement, as a sample of his line of "dope," four or five horses to win each race, each one in more grandiloquent terms than the other, but these were selected because they, in reality, appeared to be the most likely losers of all the entries. a woman was sent over to the newly-organized office of "two spot" to take charge of the salesroom. i was completely taken off my feet the next day when she informed me that the receipts, as a result of the first advertisement, were in excess of $ , and that the public not only did not read between the lines, but had actually fallen for the hoax. to cap the climax, on the second day one of the "outsiders" which "two spot" named derisively as the one best bet "walked in" at to ! next day "two spot" did a land-office business, and within a few days we figured that the "two spot" venture would net $ , a week if continued. "two spot" then went after the game hammer and tongs and endeavored to gage the full credulity of the public. the distinctive difference between "two spot" and maxim & gay was this: maxim & gay, except in one instance, which is chronicled herein, never pretended to have selected a winner when it had not, while "two spot" enjoying the same source of information as maxim & gay, worded his daily advices to clients so artfully as to be able to claim the next morning in his advertisements à la dan smith, the credit of having said something good about every winner. the profits of dan smith's venture, i was informed, exceeded a quarter of a million dollars the first year, and the profits of "two spot," whose career was cut short within a month by a realization on our part that we could not afford to be identified with such an enterprise, was divided among the employees of the "two spot" office. "two spot" had been brought into being for the purpose of killing opposition and not for profit-making. the scheme failed of its purpose. to give an idea of the character of some of the raw kind of advertising put out by "two spot," and for which the public fell, i recall this excerpt from one of his tipping sheets: i am my own clocker. i have slept under horse-blankets for thirty years. i understand the lingo of horses. last night, when i was taking my forty winks in the barn of commando, i heard him whinny to butterfly and tell her to keep out of his way to-day because he was going to "tin-can" it from start to finish, and if butterfly tried to beat him, he would "savage" her. that makes it a cinch for commando. bet the works on him to win. real inside turf information maxim & gay repeated the "silver coin" method of advertising only once during the entire career of the company. this happened in the spring of , when john rogers, trainer for william c. whitney, sent to the post a mare named smoke. our information was that the mare would win, and our selections for the day named her to win--and she did. two days later, she was again entered, against an inferior class of horses, and the handicap was entirely in her favor. notwithstanding this, we inserted an advertisement which appeared in the newspapers on the morning of the race, reading substantially as follows: "_don't bet on smoke to-day. she will be favorite, but she will not win. rockstorm will beat her._" sure enough, smoke opened up favorite in the betting. the betting commissioners of mr. whitney placed large wagers on the horse with the bookmakers. the bulk of the public's money, however, went on rockstorm, and before post time thousands of dollars of the "wise" money followed suit. rockstorm won the race. smoke led into the stretch, when up went her tail and she "blew up." immediately i was cross-questioned by messengers from the judges' stand. they asked our reason why we were so positive that smoke would lose. mr. whitney, i was informed, was actually suspicious that his mare had been "pulled." the reason for the reversal of form, as i explained at the time, was this: william dozier, our chief clocker at the race-track, who had witnessed the preparation which smoke received for the races, was of the opinion that her training had been rushed too fast, and that her first race, instead of putting her on edge, had caused a setback. her first race, in fact, had "soured" her. being a veteran horseman, he was positive that smoke would lose. i afterwards learned that the training of smoke had been left to an understrapper, and that mr. rogers himself was not responsible for her condition. the public asks to be mystified the judges were apparently satisfied, but the public could not readily understand the truth, and we didn't point it out in our advertisements, because our policy was always to appear as mysterious as possible as to the source of our information. mystery played an important rôle in our organization, and it would have been better had we never succeeded in the smoke coup. up to this time my personal identity had not been revealed at the race-track, and even the bookmakers did not know who was the guiding spirit of maxim & gay. "jimmy" rowe, trainer for james r. keene; peter wimmer, trainer for captain s. s. brown of pittsburg, and john rogers, trainer for william c. whitney, were at this early period at various times the rumored sponsors for maxim & gay. the bookmakers and "talent" generally conceived the idea that nobody but a very competent trainer in the confidence of horse owners could possibly be responsible for so much exact information regarding the horses. of course, the track officials who made it their business to know everything knew of my connection with the organization. no sooner, however, did their messengers ask an interview with me than the fact became public property around the race-track and the mask was off. the effect for a while was very bad, for our business fell off considerably. "bismarck" korn, the well-known german bookmaker, put it to me this way on the day of the smoke incident: "you are the first horse tipster i effer saw dat vore eyeclasses, sported a cane, und vore tailor-made cloding. you look like a musicianer--not like a horseman. you're a vonder!" gottfried walbaum, another old-time bookmaker, chimed in: "dat vas obdaining money under false bredenses. i gafe your gompany dwendy-fife dollars a veek for two months alreaty. you gif me my money pack! you are a cheater!" riley grannan, the plunger, said, "got to hand it to you, kid! any time you can put one over on the weisenheimers that have been making a living on race-tracks for twenty years you are entitled to medals!" the attitude of "bismarck" and of walbaum was amusing, that of grannan flattering. but it was poor business, because most of these professional race-track people ceased for a while to subscribe for the maxim & gay service. for months i had purposely kept myself in the background, fearing a dénouement of this very description. i recalled that in the late 's, in a town of northern vermont, when john l. sullivan was advertised to appear in a sparring exhibition, his manager met him at the train, and, although it didn't rain and the sun didn't shine, an umbrella was raised to cover john l. while walking from the train to a waiting landau. no sooner did sullivan enter the vehicle than the blinds were drawn. when the carriage reached the hotel, it stopped before a side door. the manager alighted before sullivan, again quickly raised the umbrella and whisked the heavy-weight champion past the crowds and up to his room without exposing him to the view of anybody whatsoever. throughout the day sullivan was screened from public gaze. his face was not seen by a single citizen of the town until he appeared on the stage that night. i asked the manager why he was so very careful to shield sullivan from the popular view prior to his appearance before the footlights. i recall that he said: "if the public thought john l. was just an ordinary human being with black mustaches and a florid celtic face, they wouldn't go to see him. the public demand that they be mystified, and to have shown people off the stage that mr. sullivan is just a plain, ordinary mortal would disillusion them and keep money out of the house." that piece of showman's wisdom was fresh in mind during the early career of maxim & gay; and so long as maxim & gay kept race-track men guessing as to who was directing its destinies, the organization was a howling success. its good periods were mixed with bad periods after the mystery of sponsorship was cleared up to the satisfaction of the professionals by the inquiry of the race-track judges into the smoke affair. a few weeks after the smoke coup, our chief clocker informed us that the entries for a big stake race which would be run on the following saturday had revealed to him a "soft spot for a sure winner," as he expressed himself, and he said we could advertise the happening in advance with small chance of going wrong. this we proceeded to do. money poured in by telegraph from distant cities for the "good thing" on saturday. our advertisement on the thursday previous to the race read like this: +---------------------------------+ | the hog-killing of the year | | will come off at sheepshead bay | | on saturday, at o'clock. | | be sure to have a bet down. | | telegraph us $ for the | | information | +---------------------------------+ one of our constant patrons resided in louisville. he was among the first to whom we telegraphed the information on saturday morning. the race was run and the horse _lost_. about : p.m. we received a dispatch from our louisville customer, reading as follows: "the hog-killing came off on schedule time--here in louisville. i was the hog." another message from a pool-room habitué reached us, reading: "good game. have sent for more money." we were often in receipt of messages of similar character on occasions when our selections failed to win and our customers lost their money; but these communications were generally in good spirit. on one occasion we had what we believed to be first-hand information regarding a horse which was being prepared for a big betting coup by dave gideon, one of the cleverest horsemen in the country. following our customary method of using vividly glowing advertisements, with the blackest and heaviest gothic type in the print shop, we announced: +----------------------------------------+ | a gigantic hog-killing | | we have inside information of a long | | shot that should win to-morrow at | | to and put half of the bookmakers | | out of business. | | be sure to have a bet down on | | this one. terms $ . | +----------------------------------------+ the _argument_ of the advertisement, which appeared beneath these display lines, was couched in the most glowing terms, and made it very plain that our information came from a secret source, and, further, that we had spent legitimately a snug sum of money to secure the information. we also pointed out that the owner was one of the shrewdest betting men on the turf and seldom went astray when he put down a "plunge" bet on one of his own entries. next day the race was run. the horse did not finish "in the money." the following day we received many letters, as we always did when one of our heavily advertised "good things" lost. one of the most unique of these epistles contained a remonstrance from a philadelphia subscriber. he wrote in this vein: dear sir:--you have been advertising for some days that you would have a gigantic hog-killing to-day. i was tempted by your advertising bait and fell--and fell heavily with my entire bank roll. my bucolic training should have warned me that "hog-killings" are not customary in the early spring, but i fell anyway. permit me to state, having recovered my composure, that armour or swift need have no fear of you as a competitor in the pork-sticking line, for far from making a "hog-killing," you did not even crack an egg. pardon me. thanks. good-by. yours truly, ---- ---- prestige restored by a clerk's ruse in the summer of the second year of maxim & gay's great money-gathering career, the information bureau was "out of luck" and the patronage of the bureau fell away to almost nothing. at this period i was seriously ill and confined to my home. a man in my office decided to take advantage of my absence from the scene to improve business a bit on his own hook. it was the habit of our track salesmen, dressed in khaki, to appear at the office at noon every day and receive a bundle of envelopes containing the tips on the races, and then immediately to proceed to the race-track, stand outside of the gates and vend them at $ per envelope. one day these men, without their knowledge, were supplied with envelopes containing blank sheets of paper instead of the mimeographed list of tips. when a handful of town customers reached the office, they were informed that the selections would be late that day and would be on sale at the track only. at about half-past one o'clock the 'phone bell rang, and word came from the track messengers that apparently a mistake had been made, as their envelopes contained blanks. they were being compelled to refund money. they asked what to do. "wait," they were told. "we will send a messenger immediately with the tips." the messenger never reached the track. there were no tips issued. on that day may j. won at odds of to . the next morning, the newspapers contained full-page advertisements announcing that maxim & gay had tipped may j. at to as the day's "one best bet." it could not have been done without a "come-back" if any tips had been issued. a boastful race player gives aid i was not present, but i learned as soon as i became convalescent that on the afternoon of the day the advertisement appeared claiming credit for may j. at to , the office was thronged with new customers who enrolled for weekly subscriptions at a rate that put new life into the business. a few of the customers expressed some doubt as to whether maxim & gay gave out the to shot or not. that afternoon there appeared on the scene a race player who, laying $ down on the desk, said, "give me your good things. i played may j. yesterday at to and i am rolling in money." "where did you buy your information?" "from your man at the entrance to the track," he answered. "at what time?" he was asked. "a quarter to two," he replied. "say, young man, there were a lot of people who came in here this morning who said they were not sure we gave out that selection at all. would you make an affidavit that you bought the information from us?" "you bet i will!" he said; and thereupon a notary public was called in and the caller swore that he had bought the maxim & gay tips at the entrance to the race-track and that they contained may j. at to . that affidavit was posted in the office during the remainder of the day. when the clerk who performed this stunt was asked for more information as to how he came to secure such an affidavit, he gave absolute assurance that he did not offer the customer the smallest kind of bribe to make it, and that nothing but an innate desire to call himself "on top" had influenced the man to perjure himself. but i could not tolerate the misleading advertising that had been done as a result of misplaced energy, and the man responsible for it did not remain with the company. fortune changes her mood and smiles again peculiarly enough, the may j. advertisement was followed by a series of brilliant successes for maxim & gay in the selection of winners at big odds, and, within a month our net earnings again reached $ , per week. horse owners, horse trainers and society people who frequented the club-house at the race-track were our steadiest patrons. the women particularly were most loyal to our bureau. the wife of a young multi-millionaire of international prominence was one of our most ardent followers. she would never think of putting down a bet without first consulting maxim & gay's selections. on a notable occasion, this lady arrived at the gate of the morris park race-track with her husband, in their automobile, and took the long stroll to the club-house. they were a trifle late for the first race; the horses were already going to the post up the eclipse chute. suddenly the lady discovered she had forgotten to purchase maxim & gay's selections. hastily calling her husband, she gave him a sharp berating for not reminding her to buy the selections. they had a short but earnest interview, which was suddenly terminated by the young man doing a sprint of a quarter of a mile down the asphalt walk from the club-house to the main entrance where the tips were sold by the uniformed employees of maxim & gay. those who witnessed the sprint of the young financier attested to the fact that he never showed as much swiftness of foot in his early college days; but even his unusual speed failed to get him back on time to acquaint his wife with the name of the horse selected by maxim & gay for the first race, the race having been run and the maxim & gay selection having won. the gentleman thereupon got a curtain lecture from his better half that astonished and amused the society patrons on the club-house balcony. thereafter, he never forgot to get the maxim & gay selections. in fact, he made assurance doubly sure by engaging the colored attendant in charge of the field-glasses to deliver the selections to him daily immediately upon his arrival at the course. our popularity with racehorse proprietors was mixed. among the horse owners with whom we transacted business was colonel james e. pepper, the late noted distiller and owner of a big breeding farm and a stable of runners. he was an ardent lover of horses, and maintained that his native kentucky knowledge of thoroughbreds afforded him an opportunity to pick probable winners of horse-races better than any of "them ---- faking tipsters." he had great confidence in his judgment for a while. the kentucky colonel falls in line after separating himself from much cash, while one of his very intimate friends was "cleaning up" plenty of money on our selections, he finally strolled into our office one morning and sheepishly stated that one of his "fool friends" had asked him to step in and get our "fool selections" for him. we explained that it was against our rule to give out our choices before : p.m., whereat he grew exceedingly wroth. he finally agreed to our conditions, paid his money and was given an order to get the selections at the track-entrance from one of our messengers. nearly all of our choices won that day. colonel pepper came in the following morning and paid for another subscription, this time for a week's service. we were "in our stride," the majority of our selections winning from day to day, and colonel pepper had cause for exultation. on one of these days we divulged, on our racing sheet, the name of a "sleeper" that we were confident would win at to , a big betting coup having been planned by that napoleon of the turf, john madden. the horse won at big odds, and colonel pepper made a "killing" on the information. for the next day, our clockers had spotted another horse that had been got ready by the light of the moon, and we spread it pretty strong in our advertisements that the horse we would name could just fall down, get up again and then "roll home alone." the horse did not fall down; but he won; he "rolled home alone" by about ten lengths. he belonged to colonel pepper. it was anticipated that about to would be laid against this fellow, but on account of our strong tip, he opened at to and was played down to to . the bookmakers were badly crimped. the next day, as soon as the office opened, colonel pepper, hotter under the collar than even his name might indicate, stamped into the outer room. slamming his cane down on the big mahogany table, he demanded in stentorian tones: "what in the ---- does this ---- business mean? here i come and subscribe my good money to your ---- fool tips, and you-all are so low-down mean as to give my hoss for the good thing yesterday! what does it mean, suh; what does it mean?" the use of considerable diplomacy was necessary to calm down the irate colonel, who had no compunctions in winning a big bet on mr. madden's "sleeper," but "---- it, suh, it is outrageous to treat _me_ so." the colonel never got over that incident, and while he won a big bet on his own horse, he always claimed that maxim & gay had ruined the betting odds for him and that but for the vigilance of our clockers his winnings would have been twice as large. this was true, and time and again we ruined the price for many another owner who thought he was going to get away with something on the sly. bookmakers as a rule are very much self-satisfied about their knowledge of the mathematics of the game. in order to show them that they didn't know all about it, the maxim & gay company inserted an advertisement one day reading substantially as follows: +---------------------------------------+ | you pay us $ | | | | we refund $ | | | | if the horse we name as | | | | the one best bet | | | | to-day does not win, we will not | | only refund our $ fee, which is | | paid us for the information, but will | | pay each client an extra dollar | | by way of forfeit. | | | | pay us $ to-day for our one best | | bet, and if the horse does not win | | we will pay you $ to-morrow. | | | | maxim & gay co. | +---------------------------------------+ our receipts that day were approximately $ , . the horse did not win. we refunded $ , next day, and netted a considerable sum of money on the operation. it happened to be a two-horse race. our horse was at odds of to in the betting, that is to say, the bookmakers laid only one dollar against every six bet by the public. the other horse ruled at odds of to , meaning that here the bookmakers laid five dollars against the public's one. the maxim & gay company sent to the track $ , out of the $ , paid in by its customers and wagered the $ , on the contending horse at odds of to , drawing down $ , in winnings. from this money it paid its clients the thousand-dollar forfeit, netting $ , on the operation, after of course returning to them their own $ , . had the to shot won, the clients who had received the winning tip would have been happy, while the maxim & gay company would not have been compelled to refund any money and would have been ahead $ , on the operation, the $ , wagered and in that event lost in the betting ring on the other horse being subtracted from the $ , paid in by its customers. no matter which horse won our gain was sure to be $ , and we had here the ideal of a "sure thing." it was a case of "taking candy from a baby"; and yet many of the wise bookmakers could not at first figure it out. nearly all of them subscribed for the information. as for the public, they did not seem to catch on at all. betting the public's money at great profit the eastern racing season was about to close and it was decided to remove the entire force of clerks to new orleans for the winter and there to depart from the usual practice of selling tips only, and to bet the money of the american public on the horses at the race-track in whatever sums they wished to send. the company employed sol lichtenstein, then the most noted bookmaker on the american turf, to bet the money, and made him part of the organization, giving him an interest in the profits. the maxim & gay company at this time had made close to $ , , , and recklessly and improvidently i had let it slip through my fingers. it was "easy come and easy go." as i review that period in my career, i recall that the whole enterprise appeared to me in the light of an experiment--just trying out an idea, and having a lot of fun doing it. because of its dazzling success i became so confident of my ability to make money at any time that i didn't take serious heed whether i accumulated or not. besides, i had never loved money for money's sake. all the pleasure was in the accomplishing. the races at new orleans were advertised to start on thanksgiving day. on the th of october i ordered $ , worth of display advertising to run in thirty leading newspapers in the united states four days a week, until thanksgiving. credit was extended for the bill by one of the oldest advertising agencies in america. the advertisements told the public to send their money to maxim & gay, canal street, new orleans. on my arrival there, two days before thanksgiving, i called at the post-office, and asked if there was any mail for maxim & gay. the post-office clerk appeared to be startled. he gazed at me as if he were watching a burglar in the act. his demeanor was almost uncanny. he didn't talk. he didn't even move. he just looked. finally i asked, "what is the matter?" "wait a minute," he muttered. he left the window. he did not return. instead, what appeared to me to be a united states deputy marshal ambled up to my side and said, "see here; the postmaster wants to see you." i was escorted into a secluded chamber in the post-office building, and a few minutes later a post-office official, along with three or four assistants, came into the room. "what's the trouble?" i asked. "you bring us a recommendation as to who you are and what you are and all about yourself before we will answer any of your questions as to how much mail there is here for you," the official said. i smiled. the advertising, then, was a success. having been employed as a newspaper man in new orleans a few years before, i knew one of the leading lawyers of the city and several bank officials. within thirty minutes i had lawyer and bank men before the postmaster, vouching for my identity. thereupon i was informed that there were , pieces of registered mail, evidently containing currency, and, in addition, twelve sacks of first-class mail matter, which contained many money-orders, checks and inquiries. the official said that in the money-order department they had notices of nearly , money-orders issued on new orleans for the maxim & gay company. i sent a wagon for the mail, and notwithstanding the fact that a force of four men under me opened the letters and stayed with the job for two days, the task was not completed when the first race was called on thanksgiving day. on adding up the receipts, we found a little over $ , . the meeting continued days, and our total receipts for the whole period were $ , , . maxim & gay's system of money-making at new orleans was as follows: we charged each client $ per week for the information. we charged per cent. of the net winnings in addition, and we further contracted to settle with customers only at the closing odds for bets placed, retaining for ourselves the difference between the opening odds and the closing odds. the profit averaged approximately $ , a day for days--to us. as a guarantee of good faith, the maxim & gay company agreed with its clients that each day it would deposit in the post-office and mail to them a letter bearing a postmark prior to the hour of the running of the race, naming the horse their money was to be wagered on; and this was always done. an honest effort, too, was always made to pick a horse that was likely to win, for even a child can see that if we did not intend to bet the money and wanted to pick losers, all we would have had to do was to make book in the betting ring at the race-track and not spend thousands of dollars in advertising for money to lay against ourselves. did we invariably bet the money of our clients on the horse we named? yes, always--except once! $ , is lost and won in a day that incident is not easily forgotten by several. on this day the entry which we selected was one of durnell & hertz's string. the horse was known to be partial to a dry track. the "dope" said he could not win in heavy going. it was a beautiful sunshiny morning when we selected this horse to win, and at noon the envelopes containing the name of the horse were mailed in the post-office, as usual. something happened. half an hour before the race was run it began to rain in torrents and the track became a sea of mud. durnell & hertz, realizing that they were tempting fate to expect their horse to win under such conditions, appeared in the judges' stand and asked permission to scratch their entry. the judges refused. i asked sol lichtenstein, who had the wagering of our client's money in charge, what he proposed to do about betting on the horse under the changed conditions. he exclaimed, "bet? do you want to burn up the money?" "well, if he wins," i replied, "we will have to pay, because if he wins and you don't bet and we say we changed the selection on account of the rainstorm, they will not believe us and we will have trouble." "very well," he said. "you bet my book all the money, and we will, for the first time, book against our own choice. it's fair, because we must pay if we lose, and there is no way out of it. but don't burn up that money." i agreed. the opening odds against the horse were to . had it been a dry track, he would have opened a hot favorite at to or so. slowly the odds lengthened to to , which was the ruling price at the close. durnell & hertz bet on another horse to win. standing before sol lichtenstein's book, i said: "thirteen thousand on our selection, sol." "one hundred and thirty thousand to $ , ," he answered. "here's your ticket." sol and i repaired to the press-stand to see the race. durnell & hertz's entry got off in the lead. at the quarter he was in front by two lengths. at the half the gap of daylight was five lengths. at the turn into the stretch the horse was leading by nearly a sixteenth of a mile. then i heard a noise behind me as if a miniature dynamite bomb had exploded. sol's heavy field-glasses had dropped to the floor. sol did not wait to see the finish. the horse won in a gallop. at the office of maxim & gay accounts were figured and checks signed for the full amount of our obligations, and they were immediately mailed to all subscribers. at midnight i met sol in the lobby of the st. charles hotel. he looked worn. "i guess that will hold us!" he moaned. "hold us?" i answered. "nothing better ever happened. it'll make us!" "you poor nut!" he exclaimed. "lose $ , in a day and it will make you! stop your noise!" "listen!" i rejoined. "at an expense of $ , for tolls i have telegraphed a full-page ad to fifty leading city newspapers, telling the public that we tipped this horse to-day at to and that we mailed checks to our customers to-night for $ , . the gain we will reap in prestige and fresh business will repay our loss on the horse." the next day the western union telegraph company found it necessary to assign three cashiers to the work of issuing checks to the maxim & gay company for money telegraphed by new customers. some individual remittances were as high as $ , . the money telegraphed us amounted to about $ , , and within ten days eighty per cent. of our own dividend checks were returned to us by our customers, indorsed back to us with instructions to double their bets, and within two weeks we were able to figure that in the neighborhood of $ , was sent us as a result. a disastrous newspaper windup during the progress of the new orleans meeting, i purchased a controlling interest in the new york _daily america_--a newspaper patterned after the _morning telegraph_--from a group of members of the metropolitan turf association, who had sunk about $ , in the enterprise. the _morning telegraph_ was in the hands of a receiver. i calculated that, by transferring the maxim & gay advertisements from the _morning telegraph_ to the _daily america_, i could make the _daily america_ pay and force the _morning telegraph_ out of the field. later, the late william c. whitney, who was a shining light on the turf as well as in finance, was induced to purchase the _morning telegraph_. then trouble began to brew for me. one morning i was summoned to the offices of august belmont on nassau street. "for the good of the turf, you must omit your maxim & gay advertisements from the _daily america_ and other newspapers hereafter," declared mr. belmont on my entering his room. "why?" asked i. "they flagrantly call attention to betting on the races," he replied. "but you allow betting at the tracks." "yes," he replied, "but public sentiment is beginning to be aroused against betting, and an attack is bound to result." it occurred to me that at that very time mr. whitney was engaged in disposing of his stock in various traction enterprises in new york to mr. belmont and his syndicate, and that in all probability mr. whitney had sought the assistance of mr. belmont to put the _daily america_ out of business in this way. it was apparent that the _daily america_ would lose money fast without the maxim & gay advertising. maxim & gay, too, would practically be compelled to close up shop if it could not advertise. i promised to consider. returning to the _daily america_ office, i decided to pay no attention to mr. belmont's request, having become convinced that it was conceived in the interest of the _morning telegraph_. a few days later i was again summoned over the 'phone to mr. belmont's office. when i was ushered into mr. belmont's presence he said: "if you don't quit advertising the maxim & gay company in the _daily america_, i will see william travers jerome, and he will stop you." mr. jerome was then district attorney, and the idea of doing anything that mr. jerome considered illegal appalled me. "if mr. jerome sends word to me that the maxim & gay advertising is illegal, i will discontinue it," i said. i did not hear from mr. jerome, and so went on with the advertising. within a few weeks the washington race meeting opened at bennings. when the maxim & gay staff reached there, we were all informed that the post-office department was about to begin an investigation into our business affairs, and all of our staff voluntarily appeared before the inspectors and underwent an examination. our books were also submitted. this investigation, coming on the heels of mr. belmont's threat, convinced me that the influence of mr. belmont and mr. whitney reached all the way to washington, and i concluded that if i did not discontinue the maxim & gay advertising in the _daily america_, and then, of course, discontinue the _daily america_, they would make serious trouble. so i hung out the white flag. i announced my retirement from the maxim & gay company and offered to sell my newspaper to mr. whitney. my exchequer was low. nearly every dollar i had made in the maxim & gay enterprise had been lost by me in plunging on the races myself. during the following week mr. whitney received me at his palatial home on fifth avenue just after his breakfast hour. he interviewed me for about an hour, obtained my price on the paper, which was what i had put into it, namely $ , , and promised to cable to colonel harvey, then, as now, the distinguished editor of the harper publications, who was in paris, asking his advice, saying that colonel harvey advised him in all newspaper matters. i did not hear from mr. whitney again; but i did discover that my business manager was in close communication with mr. whitney and that the state of my financial condition every evening was being religiously reported to him. a few weeks later i was compelled to put the paper in the hands of a receiver, and a representative of mr. whitney bought it for $ , , or about cents on the dollar, and put it to sleep, leaving the field to the _morning telegraph_. from that moment the _morning telegraph_, which for a short period had been refusing all tipster advertising, resumed the acceptance of such business and has continued that policy up to this day. a year after i retired from maxim & gay, attorney-general knox decided that racehorse tipping is an offense against the old lottery law, and those who now advertise tips instruct that no money be sent by mail. having lost the _daily america_ and having "blown" the maxim & gay company, i was again broke. but my credit was good, particularly among race-track bookmakers. that summer, , i became a race-track plunger, first on borrowed money and then on my winnings. by june i had accumulated $ , . in july i was nearly broke again. in august i was flush once more, having recouped to the extent of about $ , . early in september i went overboard; that is to say, i quit the track losing all the cash i had and owing about $ , to a friendly bookmaker. disgusted with myself, i longed for a change of atmosphere. i stayed around new york a few days, when the yearning to cut away from my moorings and to rid myself of the fever to gamble became overpowering. i bought a railroad ticket for california and, with $ in my clothes, traveled to a ranch within fifty miles of san francisco, where i hoed potatoes, and did other manual labor calculated to cure race-trackitis. in less than six weeks i felt myself a new man, and decided to stick to the simple life forevermore--away from race-tracks and other forms of gambling. but i didn't. chapter ii mining finance at goldfield i had never visited san francisco. being close to the city of the golden gate--within fifty miles--i decided to "take a look." so one evening, in the late fall of , i packed my grip and within two hours was comfortably housed in the old palace hotel. the first man i met on entering the lobby was w. j. arkell, formerly one of the owners of _frank leslie's weekly_ and of _judge_. "hello, bill!" i exclaimed. "what are you doing here?" "same as you," he answered. "morse trimmed me in american ice, and i'm broke. i am in hock to the hotel. they think i am worth $ , , . i haven't cents." during the evening we consoled each other over a series of silver gin fizzes, several of which arkell paid for with the stub of a pencil. my companion promulgated a scheme for the quick putting on their feet of two eastern rovers adrift in the big coast city, and that night there was formed the w. j. arkell advertising agency. then the horse-tipping firm of "jack hornaday" was established. i declared that i preferred to have little to do with it except to show "willie" how it had been done in new york by maxim & gay. "i will do it for you, bill," i said; "but no more for me--i've had enough." "jack hornaday" advertisements appeared daily in all the san francisco papers. capable clockers and handicappers were hired and some excellent information was obtained. race-goers got a run for their money. but something happened. the race-track trust, which enjoyed a big pull in the san francisco _examiner_ office, soon realized that somebody outside of the inner circle was getting the public's money, and every day that "jack hornaday" tipped a loser the _examiner_ carried on its sporting page a notice to the effect that "jack hornaday's" tip had resulted very disastrously to his clients. a partnership of pure nerve "jack hornaday" discontinued business. i began to like san francisco and the coast. being thrown among arkell's associates in the palace hotel lobby, from time to time i naturally heard a great deal of talk about the new nevada mining camp of tonopah. "rice," said arkell one evening, "come with me up to tonopah and be my press agent. we will get hold of a mining property up there, promote a company and make a barrel of money." "what do you know about mines?" i asked. "well, i've lost enough in 'em to know a great deal," he answered. "i don't know a mine from a hole in the ground, and i know nothing about the stock-brokerage business; so i don't see how i can be of any assistance," i said. "don't let that bother you," he replied. "i'll show you how. you come with me." "i will go on one condition," i said. "i am in for half on anything you do." we shook hands and it was a bargain. we went to the depot. i had a trifle less than $ in my pocket. arkell had $ . "suppose we get stranded out there, what will happen?" i propounded. "oh, forget it!" he answered. "how can a couple of easterners like us, wide awake and with phosphorus brains, get stranded in a place where they dig silver and gold out of the ground?" we journeyed to tonopah--a thirty-six-hour ride. the altitude is , feet, and it was cold, nasty, penetrating winter weather. during the last hundred miles of our journey across the mountainous desert we looked out of the car window and saw trainload after trainload of what was said to be ore coming from the opposite direction, and we decided that tonopah was a sure-enough mining camp and that some of the sensational stories about bonanza mines that we had heard were really true. bucking the tiger on the desert arriving in tonopah after dusk, we sought hotel accommodations. the best we could get was a bed in a forbidding looking one-story annex, walled with undressed pine and roofed with tarpaulin. it was located feet to the rear of the hotel, which was already crowded with miners and soldiers of fortune drawn from all quarters of the world by the mining excitement. its aspect was so inhospitable that arkell and i decided not to retire for a little while. we gravitated out toward the barroom, where the click of the roulette wheel caught our ears. we sat down to watch the game. soon we were buying stacks of checks and ourselves bucking the tiger excitedly. in an hour the remnants of my $ passed to the ownership of the man behind the game, and arkell had put his last two-bit piece on the black and lost. i looked at him. he looked at me. "umph!" he grunted. "better hit the feathers!" meekly i followed him to the annex. when we got under the soiled gray woolen blankets, i remarked: "i've got a cane and an umbrella and three suits of clothes. do you think we can sell them in the morning for enough to provide breakfast money?" "oh, come off!" exclaimed my partner. "wait till i present my card around this burg in the morning; then we will get all the breakfast we want." we awoke hungry, as all men have a habit of doing when they are broke. "i am going over to the montana-tonopah mining company's office," said arkell. "a mining engineer by the name of malcolm macdonald makes his headquarters over there and he wants to sell some mining properties at goldfield and in other parts of the state for about three million dollars." "three millions!" i exclaimed. "yes," said arkell. "i'll get the facts and wire them to my friend joe hoadley in new york." "say, bill," i remonstrated, "they have a privately-owned jerkline telegraph in this town, and if you send any 'phony' telegrams over the wire, they'll be on to you. so don't do any of that kind of business." "nothing of the kind!" replied he promptly. "any message i send to hoadley he'll answer." "i guess you have it fixed on the other end," i remarked. he laughed. we strolled over to the state bank and trust company building, across the street, and there met malcolm macdonald, a mining engineer from butte, montana, and his friend, mr. dunlap, who was at the time secretary of the montana-tonopah mining company. the conversation was not more than five minutes old when arkell suggested that he would like to eat breakfast, but "didn't want any restaurants in his," intimating that he would like to have some good, old-fashioned home cooking. mr. dunlap remarked modestly that the camp was too young to boast of much home cooking, but that if we would be his guests he would guarantee to make arrangements for some special cooking at the palace restaurant. bidding $ , , when broke after breakfast, which consisted of mountain trout, the flavor of which was more delicious than anything i had tasted in many years--probably because of the artificial hunger which an empty purse had created--we returned to the office of the bank. there arkell explained to mr. macdonald that he wanted "a big mining proposition or nothing." he said he represented big eastern capital and that he was prepared to pay from one to three millions for the right kind of property. mr. macdonald named some mines and prospects which he said he was willing to sacrifice for $ , , . one of them was the simmerone, of goldfield, which mr. macdonald offered for $ , , . we afterward learned that he had paid $ , for it. at that time there was a six-foot hole in the ground, and the whole property contained less than five acres. a stockade had been built around the workings on account of the extreme richness of the ore that had been opened at grass-roots. mr. macdonald also offered for sale a lead property at reveille and a lead-silver property at tybo, both situated about to miles from a railroad. (later these properties, along with some others, were promoted by charles minzesheimer & company, a new york stock exchange house, as the nevada smelters & mines company and passed on to the public at a valuation of $ , , . the market value of the entire capitalization of this company is now less than $ , .) these "mines" were to be put into the deal at $ , , each. millions in the vista held no charms arkell wrote a dispatch to the east in the presence of our newly-made friends, describing the offering. then he and i held a consultation, and he vouchsafed the information that we would certainly get a free automobile ride to goldfield and have a chance to see there the new boom mining camp. i got "cold feet." arkell's talk of visionary millions in that bleak environment of snow-clad desert and wind-swept mountain didn't enthuse me at all. i protested against the proposed trip to goldfield, and insisted that i should be allowed to telegraph to relatives for money with which to return to the coast. but arkell persisted. he declared that the expense of the trip to goldfield and back to tonopah would be borne by the vendors of the mines and that our return trip to san francisco would be delayed only one day. i left my grip, umbrella and cane in tonopah, intending to return the same evening, and boarded the automobile for goldfield. arrived in goldfield, we were escorted to the simmerone. arkell appeared to be very much impressed, although he remarked to me a few minutes later that he would not give $ for the whole layout. and therein he was wise. the simmerone was later capitalized for , , shares, each share of a par value of $ , ballooned on the san francisco and goldfield stock exchanges to $ . a share, and then allowed to recede to nothing bid, one cent per share asked. the rich ore "petered out." there was an indefinable something in the atmosphere of goldfield--a new, budding mining camp, at an altitude of , feet and on the frontier--that stirred me, and i decided to stay awhile. arkell determined that he would go back to tonopah and get an option on the control of a mining company known as the tonopah home, which mr. dunlap had mentioned to him in the automobile en route to goldfield. he said he would then go to san francisco to promote it. the reason why he decided to handle the tonopah home, i afterward discovered, was that it was already incorporated and stock certificates had been printed, thereby eliminating the delay and expense incident to preparing something for the immediate consumption of the san francisco public. "how am i going to subsist here for a few days until i can begin to make a living?" i asked arkell. "how am i going to get back to tonopah and from there to san francisco?" arkell asked me. at that moment we stood in front of the goldfield bank and trust company's building--a tin bank literally as well as figuratively. it was constructed of corrugated iron and tin. a few months later, when the bank went up the flume, the cash balance found in the safe aggregated cents. "you take me into this bank and introduce me and i will cash a check," he said. "a check on what?" i asked. "on my bank in canajoharie, new york," he said. "i was born and brought up there, and they wouldn't let one of my checks go to protest. besides, i can get back to 'frisco and protect it by telegraph, if necessary, before it reaches canajoharie." we entered the bank. i introduced myself to the cashier as an eastern newspaper man, and then introduced w. j. arkell as the former publisher of _leslie's weekly_, _judge_, and so on. after a brief parley, arkell exchanged his paper for real money to the amount of $ . on leaving the bank, i said: "now, bill, come across! i'm flat broke, on the desert." he handed me $ . i was satisfied, because he needed all of the $ to get back to civilization. "human interest" versus technical mining after arkell's departure for tonopah i went to the office of the goldfield _news_ and asked for a job. i got it, at $ a day. my first assignment was to interview an old miner named tom jaggers. i wrote what i considered a first-class human-interest story, and handed it to the owner and editor, "jimmy" o'brien. he thought it was fair writing, but not the sort of matter the goldfield _news_ wanted. it wanted technical mining stuff. of course i didn't know a winze from a windlass, nor a shaft from a stope, and some of the weird yarns i handed in about mine developments certainly did make mr. o'brien jump sideways at times. within a week i was discharged for incompetency. i was not at all appalled at losing my job on the goldfield _news_. i had begun to like the life and was convinced there were some real gold mines in the camp. i was a tenderfoot and knew little or nothing about the mining business, but the visible aspect of shipment upon shipment of high-grade ore leaving the camp by mule-team was convincing. what probably impressed me most was the evident sincerity of the trail-blazers who had been on the ground since the day the camp was born. these men had suffered all kinds of hardships to hold their ground and make a go of the camp which, when discovered, was situated miles from a railroad station and at least miles from a known water-supply. tradition said that men had died of thirst on the very spot where goldfield was now adding daily to the world's wealth. my environment became an inspiration. there were a few penny-mining-stock brokerage firms doing business with the outside world, and the idea of starting an advertising agency appealed to me strongly. here was an opportunity for the great american speculating public to take "a flyer" on something much more tangible and lasting than a horse-race, i determined. failing to locate a furniture store i ordered a long, rough, pine board table made by a carpenter, rented desk-room from the goldfield bank and trust company right in front of the cashier's counter, and secured the services of an expert male stenographer from cripple creek. the goldfield-tonopah advertising agency was born. beginning the advertising business the idea of applying to the american newspaper publishers' association for recognition did not occur to me. i did not know that such was the practise of agents. i did believe, however, from my ad-writing experience with the maxim & gay company, in new york, that i could write money-getting advertising copy. further, my experience in making contracts with advertising agents for the publication of maxim & gay's advertising in the newspapers throughout the land had, it seemed, conveyed to me sufficient information regarding that end of the business to fortify me in my new field. next morning i entered the office of the mims-sutro company, a newly established brokerage firm, and urged advertising. "we are already spending about $ a month," said the manager. "one hundred dollars a month!" i exclaimed. "why, you ought to be spending that much every hour!" at first they thought me a fanatic on the subject, but within a fortnight i succeeded in inducing them to spend $ , in a single day for advertising. it was not, however, until after i had shown them how to follow up their correspondence successfully that they began to believe in me. i wired to nearly all of the important city newspapers throughout the country for rates. after obtaining their replies i decided to spend $ in the chicago sunday _american_, and $ in the san francisco _examiner_ in one issue. i forwarded the copy with the money, and it appeared promptly. the results were good--so good, indeed, that within two months the mims-sutro company was spending at the rate of from $ , to $ , a week for advertising, and my commissions amounted to thousands. my contracts with the advertisers required them to pay me one-time rates, and my contracts with the publishers permitted me to send in copy at long-time rates, and the profit was about per cent. and inasmuch as i always sent cash with the order, my copy was in great demand. indeed, my agency was fairly inundated day after day with blank contracts from newspapers all over the country, the managers of which were clamoring for the goldfield business. in addition to the mims-sutro account, i soon had many others; in fact, i had all the others. within six months after my arrival in goldfield my agency netted me $ , . some advertising that paid my second best customer was january jones, the noted welsh miner, and later, when the corporation of patrick, elliott & camp swung into business as promoter, i placed its advertising. i held it, too, until the death of c. h. eliott, when the control of that firm fell into other hands and it ultimately went out of business. in the course of three years my advertising agency inserted in the neighborhood of $ , , worth of advertising in the newspapers of the united states, chiefly those of the big cities, and all of the advertising made money. it simply had to make money, because the brokers who did the advertising had little or nothing to begin operations with except the mines, and the mines were not their property. the most remarkable feature of that advertising campaign to me was that i had never been a stock-broker, had never been a mine-promoter, and had never been in a mining camp before; but still, despite my utter lack of knowledge, to begin with, of the technical end of the business, my advertisements pulled in the dollars. i was an enthusiast. i believed in the merits of the camp, and my enthusiasm undoubtedly carried itself to the readers of my advertisements. but the quality of the advertising copy did not entirely explain my success in bringing the money into goldfield. the stock offerings undoubtedly _struck a popular chord_. tens of thousands of people who for years had been imbibing the daily financial chronicles of the newspapers, but whose incomes were not sufficient to permit them to indulge in stock-market speculation in rails and industrials, found in cheap mining stocks the thing they were looking for--an opportunity for those with limited capital to give full play to their gambling, or speculative, instinct. time and again promotions were almost completely subscribed by telegraph in advance of mail responses reaching goldfield; and it frequently needed but the publication of a half-page advertisement in or big city newspapers, of a sunday, to bring to goldfield by wire before monday night sufficient reservations to guarantee oversubscription in a few days. it was easy to give full play to my penchant for experimenting, in the evolution of mining-stock promotion in goldfield. the old system, and the one which recently has enjoyed much vogue among financial advertisers, was the endeavor first to get names of investors rather than immediate results from the advertisements, and to follow them up by correspondence. in spending the first $ , appropriated for advertising from goldfield, i split the money between two newspapers on one day. i constructed large display advertisements and appealed for direct, quick replies. this succeeded. building gold mines with publicity a little later i organized a news bureau as an adjunct of the advertising agency. it is acknowledged that this news bureau accomplished much for nevada. as a matter of fact, it is generally conceded by goldfield pioneers and by mining-stock brokers throughout the country that the news bureau was directly responsible for bringing into the state of nevada tens of millions of dollars for investment, and was indirectly responsible for the opening up of the mohawk and other great gold mines of the goldfield camp and of the state. the prospectors who located goldfield were without means. george wingfield, the man who is now president of the merged goldfield consolidated, came into the mining camps with only $ . no funds of consequence were available from home sources. the money that later made goldfield the "greatest gold camp on earth" came from the outside, and the news bureau secured it by focusing the attention of the american public on the great speculative possibilities of investments in the mining securities and leases of the camp. one of the leases, known as the hayes-monnette, operated with chicago money, afterward opened up the great mohawk ore deposit at a period when there was no money in the treasury of the mohawk mining company to do its own development work. and there are scores of other instances which bear me out. i was head of the news bureau, and the news bureau was nevada's publicity agent. i have always considered my work in this direction in the light of an achievement. no one contributed a dollar to the news bureau except myself. hair-raising stories for distant readers that news bureau, with its headquarters on the desert, at a time when water was commanding $ a barrel in goldfield and coal could not be obtained in the camp for love or money, was operated with as much calculating judgment as it could have been were it subsidized by the most powerful interests in america. human-interest stories that were written around the camp, its mines and its men, were turned out every day by competent newspaper men. these were forwarded to the daily newspapers in the big cities of the east and west for publication in the news columns. most of the stories were accepted and published. whenever hesitancy was observed, publishers were tempted by the news bureau with large advertising copy to continue to give the camp publicity. of such great assistance in arousing public interest did i find this work that noted magazinists like james hopper were imported to camp and pressed into service by the news bureau to write readable stories. at times, when public interest appeared to lag, the wires were used by the camp's newspaper correspondents to obtain publicity for all kinds of sensational happenings that were common on the desert. reports of gold discoveries, high play at gambling-tables, shooting affrays, gamblers' feuds, stampedes, hold-ups, narrow escapes, murders, and so forth, were used to rouse the public's attention to the fact that a mining camp called goldfield was on the horizon. i felt confident that the speculating public was going to make a great big "killing" in goldfield. tonopah, twenty-six miles to the north, was making good in a wonderful way. it had already enriched philadelphia investors to the extent of millions. i could see no reason why goldfield should not at least duplicate the history of tonopah. never in my life had i lived in an environment that inspirited me as this one. the visages of those around me were, as a rule, roughly hewn; the features of many were marked with all the blemishes that had been put upon them by time, by sleepless nights, by anxiety and by contact with the elements; but courage, sincerity and honesty of purpose were written in every line of their faces. i became imbued with the idea that investors who put their money into goldfield stocks were not only going to get an honest run for their money, in that the mines were going to be developed and many would make good, but that the opportunity for money-making, if embraced by the public at that time, would earn a great reputation for the man who educated the public to a full understanding of the situation. the mercury of speculation mining-stock speculators and investors at a distance who responded to the red-hot publicity campaign which marked those early days of goldfield rolled up enormous profits, and i made no mistake. terrific losses came eighteen months later, as a result of a madness of mining-stock speculation which followed on the heels of the great mohawk boom and the merger of various goldfield producers into a $ , , corporation. this was taken advantage of by "wild-catters" in every big city of the country, and the public was fleeced to a finish. but of this more and a plenty later. in those early days my agency advertised goldfield laguna at cents per share in order to finance the company for mine operations. within a year thereafter goldfield laguna sold at $ a share on the san francisco stock exchange, and was absorbed by the goldfield consolidated at that figure. and there were many others which duplicated or exceeded the performance of laguna. at the time of which i tell, when laguna was promoted at cents, goldfield was about a year old. a population of about , had gathered there from all sections of the country. there were mining experts from salt lake, san francisco and colorado, and miners from every part of the western mining empire; saloon-keepers from alaska and mexico; real-estate brokers from practically every western state and a scattering of "tin-horns." it was about as motley a gathering as one could find anywhere in the world, but compositely they were a sturdy lot. the camp was enjoying its maiden boom. in sixty days real-estate values had jumped from $ for a lot on main street to $ , . roughly constructed business houses banked the main thoroughfare for two or three blocks. the heavy traffic incident to hauling in supplies from tonopah had ground the dirt of the street into an impalpable mass of dust to the depth of fifteen inches, and the unchecked winds of the desert, sweeping from the sierra nevadas to the high uplifts east of goldfield, whipped the dust into blinding clouds that daily made life almost unendurable. practically the entire population was housed in tents that dotted the foothills. at night-time these presented the appearance of an army encampment. provisions were scarce and barely met the requirements. the principal eating-place was the mocha café, which consisted of a by tent with an earthen floor and a roughly constructed lunch-counter. here men stood in line for hours, waiting to pay a dollar for a dirty cup of coffee, a small piece of salty ham and two eggs that had long survived the hens that laid them. the popular rendezvous was the northern saloon and gambling house, owned and managed by "tex" rickard and associates. here fully seventy-five per cent. of the camp's male population gathered nightly and played faro, roulette and stud-poker, talked mines and mining, sold properties, and shielded themselves from the blasts that came with piercing intensity from the snow-capped peaks of the sierras. the brokers of the camp gathered every night in the northern and held informal sessions, frequently trading to the extent of , or , shares of the more active stocks. the mining stocks which were advertised through my agency in those early goldfield days were generally of the , and -cent per share variety. the incorporators of the companies were enthusiastic on the point of their "prospect" making good, but i argued to myself that if the chances of any mining prospect of this character proving to be a mine were only about one in or one in , and my agency advertised or companies of the average quality, and one of them made good in a handsome way, he who purchased an equal number of shares in each would at least "break even" with the profits from the one winner. later this principle was "knocked into a cocked hat" for conservatism by mohawk of goldfield advancing from cents to $ a share, proving that if mohawk had been one among companies, the shares of which were purchased by an investor at cents, he would have gained handsomely. early purchasers of mohawk gathered to for their money, many times more than could usually be won on a long shot at the horse-races, and not so very much less than was formerly won by lucky prize-winners in the louisiana lottery. and mohawk was only one of a dozen of the early ones which advanced in price on the exchanges and curb markets more than , per cent. at this early stage in goldfield, "wild-catting" was not indulged in from the camp, unless this long-shot gambling in shares of "prospects" can by a grave stretch of imagination be termed such, the promoter-brokers being able to offer stocks of close-in properties. among the prizes were red top, which advanced within two years thereafter from cents to $ . per share; daisy, which sky-rocketed from cents to $ ; goldfield mining, which soared from cents to $ ; jumbo, which improved from cents to $ ; jumbo extension, which rose from cents to above $ ; great bend, which jumped from cents to around $ . ; silver pick, which moved up from cents to $ . ; atlanta, which was promoted at and cents and sold up to $ . ; kewanas, which was lifted from cents to $ . , and others. "wild-catting" in a small way was prosecuted in goldfield's fair name even in those days, with denver as the headquarters of the swindlers. _eighteen months later, when the mohawk mine of goldfield was in the midst of its greatest half-year of production, at the rate of $ , , a month, and the consolidation of the important mining companies of the camp was in progress, "wild-catting" became general from office buildings in the large cities. there were more than companies incorporated during this last period, not one of which made good, and the public lost from $ , , to $ , , as the result of this operation alone. fully $ , , more was lost by the ballooning to levels unwarranted by mine showings of listed goldfield stocks on the new york curb and the san francisco stock exchange, at the same time._ but i am ahead of my story. it was late in the spring of . i had been at work in goldfield more than six months, and my campaign of publicity was beginning to gather momentum. the mines, however, were not at the moment keeping lively pace. the mohawk was yet undiscovered. the birth of bullfrog at this juncture the new mining camp of bullfrog, miles south of goldfield, was born. my publicity facilities were sought by owners of properties in bullfrog "to put the camp on the map." c. h. elliott, a goldfield pioneer, put an automobile at the disposal of myself and my stenographer, and we departed for bullfrog. elliott and his associates had staked out a townsite which they called rhyolite. i was presented with seven corner lots on my arrival, to help along my enthusiasm. there, on the saloon floor of a gambling house, which was the chief place of resort in the camp, i met for the first time george wingfield, then the principal owner of the tonopah club at tonopah, a gambling house which had lifted him from the impecunious tin-horn gambler class to the millionaire division; united states senator george s. nixon,[ ] his partner; t. l. oddie, later elected governor of nevada; sherwood aldrich, now one of the principal owners of the chino and ray consolidated mines, and worth millions, and others who have since accumulated great riches. [ ] on the death of mr. nixon in washington, d.c., in june, , mr. wingfield was appointed his successor as u.s. senator by governor oddie. mr. wingfield's goldfield newspaper felicitated its owner and pronounced the appointment to be logical and deserved. mr. wingfield, however, after hearing from washington as to the manner in which the news of his appointment was received by members of the senate, notified governor oddie three weeks later that he must decline the honor. he gave other reasons. they were on the ground and buying properties. mr. aldrich purchased the controlling interest in the tramps consolidated for about $ , . it was incorporated for , , shares of a par value of $ each, a year later boomed to $ a share on the new york curb, and is now selling at cents, without ever having paid a dividend. mr. elliott had a large stock interest in the amethyst mine and the national bank mine, which were capitalized for , , shares respectively, and he presented me with , shares of stock in each. he and his partner sold the control of the amethyst to malcolm macdonald of tonopah. later, when amethyst's neighbor, montgomery-shoshone, was selling at $ per share, the market price of amethyst was pushed up to above $ a share on the san francisco stock exchange, and i took my profit. the amethyst has since turned out to be a rank mining failure, as has practically every other property in the camp, not one ever having earned a dividend. the bullfrog national bank stock, representing another property that looked for a while as if it would make good, i disposed of on the san francisco stock exchange at cents a share, and i sold the town lots at figures which netted me, in all, in excess of $ , for my one day's trip to bullfrog. during my stay in bullfrog i became very much impressed with the montgomery-shoshone mine. this property, in fact, was the powerful magnet which attracted everybody to the camp. i was escorted through a tunnel seventy feet long. on each side as i walked were walls of talc. i was told these assayed in places anywhere from $ to $ , a ton. information was also forthcoming that the width of the ore-body was more than seventy feet. (it afterward turned out that the tunnel had been run along the ore-body and not across it, and that the ore-body was about feet wide.) some specimen ore was given me to assay, and the returns were staggering, running all the way from $ to $ , a ton. in my enthusiasm i wrote stories about the property for publication which must have induced the reader to believe that when all the riches of that great treasure-house were mined, gold would be demonetized. as a matter of fact, the stories from my news bureau, picturing the riches of that golconda, are said to have been indirectly responsible for the purchase of control of the property by charles m. schwab and his associates. the history of the montgomery-shoshone is mournful but highly instructive. for purposes of exposition of pitfalls in mining-stock speculation it possesses striking qualifications. here are the facts: malcolm macdonald, mining engineer, acquired a half interest in the mine from tom edwards, a tonopah merchant, for $ , , on time payments. on the strength of the showing in the -foot tunnel an effort was made to sell the control to the tonopah mining company at a profit. it did not succeed. oscar adams turner, of new york and baltimore, the promoter of the highly successful tonopah mining company, which to date has paid back to the original stockholders $ for every $ invested, examined the montgomery-shoshone, and turned it down because the property did not show him any well-defined veins or other marks of permanency, and the ore-body appeared to him to be only a superficial deposit of no great extent. many a good "prospect" has been condemned by mining men of the highest standing, and has afterwards made good, particularly in nevada. mr. turner's turn-down did not daunt the owners. enter, charles m. schwab engineer macdonald incorporated a company for , , shares of the par value of $ each, to own and operate the mine. investors were permitted by him to subscribe for small blocks of treasury stock at $ per share. shortly afterward mr. macdonald and the owner of the other half interest, bob montgomery, sold a controlling interest to mr. schwab and associates for a sum which has never been made public. mr. schwab at once reorganized the company, took in two adjoining properties that were undeveloped, and changed the capitalization to , shares of the par value of $ each. he, in turn, permitted his friends and the public to subscribe for the new stock at $ per share. later the shares advanced to $ on the new york curb. undoubtedly mr. schwab thought well of the proposition, for he loaned the company $ , to build a reduction works on the ground. to date the mine has failed to pay for its equipment. work on the property has been abandoned and the mill has been advertised for sale. _the company still owes mr. schwab about $ , , the net profits on the ore in six years being insufficient to repay his loan to the company. in fact, the enterprise has proved to be one of the sorriest failures in nevada. the mine in six years produced $ , , gross, and although mine and mill were operated in an economical way, the net proceeds from the ores were insufficient to pay off the schwab debt. recently the shares have been nominally quoted at from to cents on the new york curb. the public's loss mounts into millions._ investigation proves to me that mr. schwab was merely a mining "come-on" and allowed his enthusiasm to run away with him, but the public suffered just as much as if mr. schwab had perpetrated a cold-blooded swindle. i have heard the question propounded by a stockholder, "what possible excuse could a man, with a good business head like that of mr. schwab, have for promoting the montgomery-shoshone at a valuation of $ a share, or $ , , for the property, afterward allowing the stock to be quoted up to $ a share on the new york curb, or at a valuation of $ , , for the property, when, as a result of six years of mine operations, the company is practically insolvent?" an excuse acceptable to mining men might be offered were the montgomery-shoshone property situated in a nest of other great mines, intrinsically worth many times the valuation placed on the montgomery-shoshone at the time of its promotion. "prospects" of this variety, according to approved mining experience, are sometimes entitled to appraisement of great prospective value when neighboring mines have demonstrated deep-seated enrichment. but there was no such excuse in this case, because the deepest hole in the ground in the entire camp was less than feet at the time the montgomery-shoshone was promoted by mr. schwab, and there was not a proved mine in or near the camp. i was present in reno about three years ago when mr. schwab passed through the divorce city en route to california. at that time montgomery-shoshone had already cracked in price to around $ a share, and stories were being published in nevada that mr. schwab had been snubbed by members of an exclusive pittsburg club for recommending montgomery-shoshone for investment. mr. schwab, in hurriedly discussing the matter at the railroad station, was quoted to the effect that the property had been grossly misrepresented to him. this statement was widely published in nevada. thereupon, don gillies, mr. schwab's engineer in nevada, who, with malcolm macdonald, was believed to be mr. schwab's mining adviser, telegraphed mr. schwab and asked point-blank whether he referred to him. mr. schwab answered that he did not. this denial was also given wide publicity. there was only one reasonable corollary, then, and that was that mr. schwab referred to mr. macdonald. in fine, it appears that mr. schwab may have actually purchased the montgomery-shoshone on the sole representations of the vendor, the interested party, and may have actually promoted the property on the strength of the unverified representations of the vendor. it might be that the vendor did not misrepresent at all; he may have been too enthusiastic only, and communicated his enthusiasm to mr. schwab. possibly mr. schwab relied on newspaper accounts, and promoted the property on the strength of them. a letter from mr. schwab, which appears farther on, lends some color to this idea. even before this time mr. schwab had been in the mining game at tonopah. his tonopah venture was the tonopah extension. the control of the tonopah extension mining company was bought by john mckane, later a member of the english house of commons, from thomas lockhart at cents per share. the capitalization was , , shares. john mckane interested robert c. hall, a member of the pittsburg stock exchange, in the proposition. he, in turn, made a deal with mr. schwab. the stock was then sky-rocketed to above $ a share on the san francisco and pittsburg stock exchanges and the new york curb. afterward the price was allowed to recede to around cents per share. during the past half-year it has maintained an average quotation of $ . per share. although the market price of the shares at the time mr. schwab was believed to own the control was allowed to be advanced to a valuation for the mine of $ , , , the company has since failed to pay as much as $ , , in dividends, and a quite recent appraisement by henry krumb, a noted engineer, of the net value of the ore in sight in the mine did not place it at so much as $ , , . the accuracy of this report is disputed, on the ground that the ore-exposures at the time did not permit of fair sampling. this allows for a discrepancy, but hardly of $ , , . after tonopah extension declined from around $ a share to below $ . a share, it was alleged by tonopah stockholders that mr. schwab and his associates had unloaded at the top. mr. schwab replied that he owned just as much stock after the market collapse as he did when he went into the enterprise. this was met with an allegation by some stockholders that while mr. schwab could probably prove that his interest was as large at the later period as it had been at the outset, it did not mean that mr. schwab and his _confrères_ had not unloaded at the top and bought back at the bottom. the following letter from mr. schwab to sam c. dunham, formerly u.s. census commissioner to alaska, afterward editor of the tonopah _miner_, and later mining editor of the _mining financial news_ of new york when i was managing editor, denies personal guilt, although it leaves the reader free to believe that if mr. schwab personally did not unload his stock at high prices, his associates might have done so. charles m. schwab broadway new york november , . mr. sam c. dunham, editor _the tonopah miner_, tonopah, nevada, my dear mr. dunham: my attention has been called to your issue of saturday, october , . to such criticisms as that issue contained of me, i generally do not reply, as it is useless and only leads to further discussion. but your paper heretofore has been so uniformly kind to me, so fair in every respect, and as i have always regarded you as a friend, our relations having been so pleasant, it makes me feel that i would like to make a short reply to the criticisms mentioned, as showing the consistency of my position. the only thing i criticised about nevada was the inaccuracy of statements emanating from nevada. you seem to attack me because of this statement, and the strength of my position is fully confirmed by your article because little, if anything, stated therein is true or accurate. i will take up your statements one by one. you say i bought from john mckane $ , worth of stock of the tonopah extension mining company at cents per share. this is absolutely untrue. you say i bought , shares of extension stock from robert c. hall at $ per share, and paid for this stock with paper mill stock. no single part of that statement is correct. i never gave mr. hall any paper mill stock, nor did i buy , shares from him. the amount purchased from him was , shares. the price which you state i paid him for the stock is not correct, and, as i stated, i gave no paper mill stock in exchange. you say further that at the last annual meeting of tonopah extension stockholders, held in pittsburg last may, it developed that i had disposed of all the stock i purchased from mr. hall and over two-thirds of my original holdings of , shares. this is absolutely untrue. i am holding to-day exactly the amount i held after all purchases were made by me, and from the beginning, aggregating some , shares, and i think if you take the trouble to look up the records you will find my statement in this connection to be true. when i originally bought extension there was also some stock in my name belonging to others, which i subsequently transferred to them, leaving my own holdings of , shares where they now remain, intact, in my personal possession. going on down the article, you say that i purchased control of shoshone and polaris for less than $ per share. this statement of yours is inaccurate. you say i sold a large block of shoshone stock at $ per share. this is also without any truth whatever. the fact is that , shares were sold at this figure, $ , and these , shares came from the treasury of the company, all of which you will find a matter of record. it is true that i have loaned the company nearly $ , to build the new mill, and i shall be glad to have any other stockholder in the company assume his pro rata share of this amount. you wonder why i criticise statements from nevada. respectfully yours, (_signed_) c. m. schwab the general impression in nevada, as i have gathered it, is that mr. schwab's mining enterprises have been great disappointments to him, but that he did not lose any very large sum of money, and that the public did. his enemies go so far as to allege that he, his brother, and his brother-in-law, dr. m. r. ward, made millions out of the public. i have an opinion, and i may be allowed to express it. mr. schwab, at the time he became a promoter of nevada mines, was an expert steelmaker. he knew little or nothing about silver, gold and copper mines. the fact that friends in philadelphia, who knew as little about the game as he did, had made a fortune in tonopah (on the advice of a man who did know) should not have influenced him. because the mizpah mine at tonopah, promoted by oscar a. turner as the tonopah mining company, had made good in a phenomenal way, pennsylvania stockholders had rolled up fabulous profits in the venture. under this hypnotism mr. schwab "fell" for tonopah extension. later, when tonopah extension showed a market enhancement of more than $ , , , mr. schwab was in an ideal frame of mind to succumb to montgomery-shoshone. and when montgomery-shoshone in the bullfrog boom showed a market enhancement of $ , , , it did not take much argument to get him into greenwater, another "bloomer," which is described further on. market profits were evidently alluring to mr. schwab. he failed to realize that his own great name was in large measure responsible for the rise in price of his securities. sam c. dunham has informed me that mr. schwab told him he refunded to his personal friends in pittsburg, who subscribed for montgomery-shoshone stock on his recommendation, between $ , , and $ , , . this ought to be convincing that mr. schwab was guiltless of any intent to profit at the expense of others. mr. schwab's lack of caution, however, is instructive to the losing speculator. it furnishes a startling example of the danger in banking alone on an honored name for the success of an enterprise, and it also drives home the truth of the adage, "every shoemaker should stick to his last." incidentally, mr. schwab's mining career points another moral. it is this: don't think, mr. speculator, because a promoter represents the chances of profit-making in a mining enterprise to be enormous, and you later find his expectations are not realized, that the promoter is _ipso facto_ a crook. big financiers are apt to make mistakes and so are little ones. undoubtedly grave misrepresentations are made every day, and insidious methods are used to beguile you into forming a higher opinion regarding the merit of various securities than is warranted by the facts. but mine promoters are only human, and honest ones not infrequently are carried away by their own enthusiasm and themselves lose their all in the same venture in which they induce you to participate. why the bottom fell out when montgomery-shoshone was enjoying its market hey-day the bullfrog gold bar mining company was promoted at around cents a share on the usual million-share capitalization. a year later the price jumped to $ . on the san francisco stock exchange, and the stock was widely distributed among investors. recently the company was in the sheriff's hands. the biggest losers in this venture were alabama people, who had great confidence in the promoters. other bullfrog derelicts in which the public lost vast sums of money were gibraltar, bullfrog steinway, shoshone national bank, bullfrog homestake, bullfrog extension, denver rush extension, mayflower, four aces, golden scepter, montgomery mountain, original bullfrog, etc., etc. mining-stock brokers of the cities went into ecstasies over bullfrog during the height of the boom in that camp. philadelphia mining-stock brokers fed tramps consolidated of bullfrog to their clients. pittsburg brokers recommended montgomery-shoshone. butte brokers placed large blocks of amethyst. gold bar was distributed by brokers of the south. new york brokers were behind gibraltar, four aces, denver rush, montgomery mountain, eclipse, golden scepter, national bank and a score of others. practically every dollar of the millions invested in bullfrog stocks has been lost. the cause of the failure of the bullfrog district to make good was not the absence of gold-bearing rock, for there is much of it in the district, but it has been found that the per ton values are too low to make the mines a commercial success. bullfrog is situated on the desert and has no timber and but very little water. promoters and investors did not realize this until mills were constructed. then it was too late. if the camp were situated on the timbered shores of the hudson river, the stocks of many of the mines of the district would probably be in great demand at above par. probably the most remarkable fact regarding bullfrog is that its securities were more strongly recommended by eastern brokers than the goldfield issues and became more fashionable at this early period in goldfield's history. eastern brokers then had little confidence in goldfield; and at the very time when the stocks of goldfield representing inside properties, which later made good in an extraordinary way, were being offered, they advised their customers not to buy. the general cry then was that it was a fly-by-night offshoot of the first great tonopah boom, and the idea prevailed in the east, because of the ascending influence of george wingfield, then principal owner of tonopah's leading gambling hell, that goldfield was a haven for gambler's and wildcatters. it was during the early days of the bullfrog boom that my friend w. j. arkell's career as a mining promoter came to a sudden end. it will be remembered that when he left goldfield to go to tonopah to make the tonopah home deal his cash capital was $ . he closed the transaction for the option on the million shares of tonopah home's capitalization at a price around five cents a share. then our "partnership," of three days' duration, came to an end. arkell journeyed back to san francisco and there declared me out. arkell was a prominent figure for a while as a san francisco mining-stock promoter. he listed tonopah home on the san francisco stock exchange. then he started in to sky rocket the price. the rise continued until the stock sold at cents, an advance of about per cent, in a few months. then the psychological moment for arkell arrived. it leaked out that he had been financing his stock-market campaign by buying reams of his own stock on one-third margin and at the same time selling it, in like quantity, for all cash through other brokers. this was equivalent to borrowing - per cent. of the market value. the brokers and banks did the carrying. when arkell's tactics were discovered, indiscriminate short-selling by market sharp-shooters ensued. arkell's own hypothecated stock was used to make deliveries. in order to hold his ground and to get the floating supply of the stock off the market, arkell engineered a consolidation. the tonopah home consolidated was incorporated, and holders of tonopah home stock were invited to exchange their original certificates for shares in the consolidated company. just then somebody threw a brick. the names of united states senator george s. nixon and hon. t. l. oddie, later governor of nevada, had been published as directors of the new company, and when these gentlemen saw the half-page display advertisements in which their names were used, and were informed that arkell appeared to be on the ragged edge, they telegraphed to the san francisco stock exchange denying connection. tonopah home broke wildly on the announcement in the exchange to something like cents a share. then it dropped to nothing. arkell's methods were too "raw," and i knew the smash had to come, sooner or later. 'twas late in october, . bullfrog was still in its hey-day. goldfield's initial boom seemed to be flickering. work was going on day and night in the mines, but for want of fresh discoveries the camp was being deserted by some of the late-comers. out-of-town newspaper correspondents came upon the scene, and stories and pictures of the camp, labeled "a busted mining-camp boom," etc., soon appeared in the los angeles and san francisco newspapers. goldfield mine-owners were accused of beguiling the public. promoters were gibbeted as common bunco men. peculiarly enough, bullfrog, younger sister of goldfield, which has since proved to be such a graveyard of mining hopes, was immune. there men of substance were in control, the writers said, while goldfield was portrayed as a stamping ground for gamblers and "wild-catters." the stories had their effect even in goldfield. leading men of the camp began looking about for new fields to conquer. the majority of goldfield mine-owners had not "fallen" for bullfrog, but the success of the bullfrog stock company promotions in the east inspirited them. the great mining-camp boom of manhattan, miles north of goldfield, which followed, owes much of its success to these fortuitous circumstances. i was one of the first to get the manhattan fever. w. f. ("billy") bond, a goldfield broker-promoter whose ear was always glued to the ground, showed me a specimen of ore literally plastered with free gold. he said it came from manhattan and that manhattan was another cripple creek. it was only the night before that i had lost a good many thousand dollars "bucking the tiger." faro was the pastime of practically everybody in goldfield in those days, and i played for want of some other means of recreation and lost heavily. i was as broke as the day i entered the camp. i bought blankets, a suit of canvas clothes lined with sheep-skin, and a folding iron cot, all on credit. i packed the outfit off to tonopah. there i climbed aboard an old, rickety stage-coach of the regulation far-western type, and started for manhattan. we rode over a snow-clad desert, up mountains and down canyons--a perilous journey that i would not care to duplicate. the $ i had in my pocket, after paying my fare, was borrowed money. when i arrived that night at manhattan, situated in a canyon at an altitude of , feet, i set up my cot on the snow, wrapped myself in my blankets and slept in the open. there were only three huts and less than a score of tents in the camp. the next morning i strayed through the diggings. sacks of ore in which gold was visible to the naked eye were piled high on every side. the stray dog, the jumping jack and the dexter were the three principal producers. they honeycombed one another. i questioned some of the prospectors as to the names of the single claims adjoining the stray dog, jumping jack and dexter. they informed me that there was one group of claims adjoining that could be bought for $ , . with $ in my pocket i proceeded to purchase it. i gave a check for $ , signed a contract to pay the balance of $ , in days or forfeit the $ , and immediately started back to goldfield to induce the president of the bank to honor my check on presentation. he did. when i returned to goldfield i carried with me many specimens of high-grade ore. they were placed on display in a jewelry store. there was great excitement, and before night a stampede from goldfield to manhattan ensued which in magnitude surpassed the first goldfield rush. a few days later i returned to manhattan and sold my option for $ , cash. while i was there i met c. h. elliott. mr. eliott had "cleaned up" in bullfrog. he told me that he had formed a corporation partnership in goldfield with l. l. patrick, one of the owners of the great combination mine--which was later sold to the goldfield consolidated for $ , , --and sol. camp, a mining engineer from colorado. the name of the concern was patrick, elliott & camp, inc. it was organized to promote mining companies. mr. patrick is now president of the first national bank of goldfield. mr. elliott asked me to stay in camp for another day until he could pick up a good property. he made a deal with some cowboys for a large acreage embracing the april fool group of claims, scene of the original gold discovery. twenty leases on this property were in operation, and the surface showings were promising. if the ore "went down," the mine would prove to be a bonanza. mr. elliott incorporated a company known as the seyler-humphrey to own and operate the ground. we returned to goldfield. my publicity bureau telegraphed the news of the manhattan discoveries to a long chain of newspapers east and west. then i put out a big line of "display" advertisements in the big cities, offering for sale stock of the seyler-humphrey. the entire issue of , , shares of seyler-humphrey was oversubscribed at cents a share within two weeks. this was the result of $ , worth of advertising, and the profits of the firm were $ , . in quick succession mr. elliott promoted the manhattan combination and the manhattan buffalo. within six weeks the firm's promotion profits amounted to approximately $ , . how about the public's chances? i asked mr. elliott one evening, shortly after patrick, elliott & camp earned their first $ , from their three manhattan promotions, whether he did not think the public was entitled to subscribe for this stock at a lower price and at a smaller profit to his corporation. i recall that he said: "the article we sell is something that somebody wants and is willing to pay for. what we have sold them is worth what we have charged. the fact that we are on the ground and have endured hardships entitles us to a good profit, provided the gold showings on the surface of the properties are not exaggerated. the sale of the stocks has been accelerated by your gift of presentation through advertisements. big department stores and advertising specialists in the cities pay from $ , to $ , a year for that kind of talent, and we on the desert also have a right to avail ourselves of it." "but suppose the properties don't make good?" i queried. he answered: "it is not a case of excessive optimism for one to expect that manhattan properties will make into mines, in the presence of such wonderful surface showings; and so long as we are not knowingly guilty of deception, no harm is done. if the manhattan stocks we have promoted make good, $ will be a reasonable price for them, and if they don't make good, one cent will be too high for them. so why question the ethics of charging cents per share for seyler-humphrey when we might have sold it for cents and still have made money; or of charging cents for manhattan buffalo when we could have sold it at a profit for cents? the public knows it is gambling. if people want to buy stocks where they won't lose all of their investment under any circumstances, they know they can buy union pacific, pennsylvania railroad or new york central. the profits there, however, are limited, just like the losses. in the case of mining stocks, representing prospects under actual development, the public can lose or gain tremendously." mr. elliott, who confessed to me that he often played the horse-races when in san francisco, then wrote out a list of stocks and prices, representing what he said was a "book" on stocks, comparable to a gambler's book on the horse-races, reading substantially as follows: stock price odds union pacific $ . to reading . to missouri pacific . to erie . to seyler-humphrey . to manhattan buffalo . to manhattan combination . to "there," said mr. elliott, "you have the different prices on railroad and mining securities with their chances of winning for the speculator marked against them. when a man goes to a horse-race and plays the favorite, he does exactly what the man does who gives his broker an order to buy union pacific for him at current quotations. it is about to against the investment making a profit over current quotations on any given day, although the investor will hardly gain for his if the stock enjoys its highest probable advance. it is about to against the man buying seyler-humphrey making money, but he will gain for his one if the mine proves to be a bonanza. however, the rail is an investment and the mining a speculation." "do you mean to say that the odds against a man making money on union pacific on any given day are only to when he buys the stock _on margin_?" "not on your life!" he said. "a margin trader on the new york stock exchange, unless he has sufficient capital behind him to hold out against 'inside' manipulation, which has for its purpose the 'shaking out' of the speculator, has not got _any_ chance! he is bound to lose his money in the end. i am talking about people who buy stocks, pay for them in full and get possession of their certificates and 'sit tight' with them." mr. elliott was a plunger and lost large sums in the gambling-houses of goldfield and tonopah. he lost $ , in a night's play in the tonopah club, then owned by george wingfield and associates. when asked to settle he tendered a check for $ , and a certificate for , shares of goldfield laguna mining company stock, then selling at cents. this was accepted. within a year laguna sold freely at $ a share. this incident illustrates how the foundations were laid for some of the big fortunes which were amassed in the goldfield mining boom. when george wingfield came to tonopah in he brought with him $ , borrowed from george s. nixon, then president of a national bank at winnemucca, nevada, and later united states senator. mr. wingfield's fortune is now conservatively estimated at between $ , , and $ , , . success having been won by the patrick elliott & camp promotions, i was considering whether or not much of the money-making that was being done by the promoters around goldfield was not due to my own peculiar ability to reach the public, and i even meditated on my fitness to become a promoter on my own account. the best properties in manhattan, by common consent, were the stray dog, the jumping jack and the dexter. these were sure-enough producers of the yellow metal. they were shippers and were held in high esteem by mining men. i found it impossible to purchase the dexter because the company was already promoted and the stock widely distributed at around $ a share. george wingfield was then and is still interested in the dexter. the jumping jack was unincorporated. the stock of the stray dog was practically intact in the hands of the owners. the price asked for the jumping jack was $ , . stray dog was held at $ , . jumping jack manhattan i was again in funds as the result of my profits in the manhattan boom, and it was again my wont, for want of any other pastime, to play faro at night. i found myself gossiped about with men like january jones, zeb kendall, c. h. elliott, al. myers and others who rolled in money one day and were broke the next. the second largest gambling-house in goldfield was owned by "larry" sullivan and peter grant, both from portland, oregon. sullivan claimed that he was attracted to goldfield by the stories which appeared in the sunday magazine section of a coast newspaper, the copy for which had been carefully and methodically written in the back room of our goldfield news bureau. sullivan and grant were making money, and plenty of it. i patronized the sullivan house, of occasion, and sullivan usually presided over the games when i was there. one evening i cashed in $ , of winnings. the money was piled on the table in $ gold-pieces by the dealer. as i was about to place it in a sack to store away in the safe of the house until the morrow, sullivan began to josh me like this: "say, young feller, why don't you cut me in on some of your mining deals? i'm game!" "are you? well, stack up $ , against that money, and i'll see if you are." he went to the safe and lugged to the table a big canvas sack containing $ gold-pieces. stacking the money on the table in piles of $ each, he matched my stake. "well?" said he. "put that money in a sack," said i, "and go and get that big coonskin coat of yours, take a night ride by automobile to tonopah, and in the morning go by stage to manhattan. when you get there look up the owner of the jumping jack mine. i have met him. he is a member of the ancient order of hibernians. an irishman can buy that property from him much cheaper than anybody else. you go and buy it." "what will i pay?" asked larry. "he wants $ , , but get it as cheap as you can," i replied. "what? with this $ , ?" "yes," said i. "pay him the $ , down and sign a contract to pay the balance in or days; but fetch him back to goldfield, and have him bring the deeds." a few days later sullivan returned to goldfield, aglow with excitement. climbing out of the stage-coach, he pulled me into his private office. "say," he said, "i've got that guy with me and he's got the deeds. i bought the jumping jack for $ , . he'll do anything you want him to do." "good!" i said. the owner was introduced to me, and i turned him over to my lawyer, the late senator pyne. mr. pyne drew up a paper by which the transferred title of the property to the jumping jack manhattan mining company, capitalized for , , shares, , shares of which were placed in the treasury for mining purposes, and , , representing ownership stock, put in escrow, to be delivered to sullivan and myself on the payment of - / cents a share. a board of directors was selected. at this juncture sullivan, who knew as much about the mining promotion and mining-brokerage business as an ostrich knows about ocean tides, inquired what my next move would be. sullivan seemed to be bewildered, yet full of faith. my situation was this: i had conceived a rip-snorting promotion campaign for the best property that had yet been offered the public from manhattan, but i had no cash to present it. turning to sullivan i said: "do you know the goldfield manager of the western union telegraph company?" "yes, i know him well." "call him up by 'phone or send word to him that you will guarantee payment of any telegrams i file here to-night or during the next three days; i want to send some wires," said i. "i'll do it," said sullivan, and within a few minutes i was advised that sullivan's credit was unquestioned. i returned to the news bureau and there drafted a -word telegram, setting forth the merits of the jumping jack manhattan property and offering short-time options on big blocks of the stock. the message was sent to practically all of the well-known brokerage houses in the country which handled mining stocks. the bill for telegraph tolls was $ , . when sullivan learned of its size he nearly collapsed. "how far do you intend to go?" he gasped. "well," said i, "how can you lose? your friend, frank golden, president of the nye & ormsby county bank, has accepted the presidency of the company at our request, and the other officers we have secured are all representative citizens of this community, and, besides, the nye & ormsby county bank has agreed to receive subscriptions. can you beat that for a layout? never in my experience in this camp, with all the promotions i have advertised, has the public had a dish quite so palatable offered to it--a producing mine, in the first place; a high-class directorate headed by a bank president, in the second place; and a real bank as selling agent, in the third and last place. and it will go like wildfire!" i labored all that night in my advertising agency on some strongly-worded advertising copy recommending to the public the purchase of stock in jumping jack manhattan. in the morning i induced sullivan to advance $ , to pay the advertising bills. the copy was dispatched by first mail to the important daily newspapers of the country, with instructions to publish on the day following receipt of copy. within six days all of the advertising had appeared. the effect was magical. the display advertisements assisted the brokers in the various cities, who had asked for reservations of the stock, to dispose of their allotments in a few days. within ten days after the initial offering of the promotion by telegraph to the eastern brokers, sullivan showed me telegraphic orders for , , shares of jumping jack manhattan stock at cents a share, an oversubscription of , shares. before the stock certificate books were printed and delivered from the local printing office, we were, in fact, oversold. that week and the next, sullivan gave me _carte blanche_ to speculate in local mining stocks with partnership money, and within a fortnight we had made another small fortune from manhattan securities. these were advancing in price on the san francisco stock exchange by leaps and bounds. i recall one overnight winning that we made, amounting to about $ , , which came so easy i felt almost ashamed to take the money. manhattan seyler-humphrey stock, promoted by patrick, elliott & camp at cents per share, was now listed on the goldfield and san francisco stock exchanges. it was in fair demand at cents. a dispatch reached goldfield from new york, purporting to be signed by john w. gates, reading as follows: "at what price will you give me an option good hours on , shares of manhattan seyler-humphrey? answer to hotel willard, washington, to-night." this was to patrick, elliott & camp. within half an hour a half-dozen similar messages reached other goldfield brokers. i happened to be in the office of patrick, elliott & camp when the first telegram was received, and i lost no time in going out on the street and annexing all the goldfield offerings of the stock at current quotations. at first lou bleakmore, manager for patrick, elliott & camp, "smelled a rat," but when he learned that i was buying the stock he became convinced that i believed john w. gates really wanted some seyler-humphrey, and he shot buying orders for his own firm into san francisco. personally i considered the message a snare. somebody in the east, i guessed, had bitten off a block of seyler-humphrey at around cents when it was promoted a few weeks prior and had made up his mind that he would turn a trick. the goldfield brokers having received telegrams, i assumed that the same message had been sent to brokers in san francisco, where the stock was also listed. it seemed to me that an advance would certainly be recorded on the following day. sure enough, the next morning the stock advanced to cents a share, and the market boiled. at this figure, and a little higher, i unloaded in the neighborhood of , shares in goldfield and san francisco. a good deal of this stock had been picked up by me the night before. but i recall that one block of , shares had been allotted to me weeks before at the brokers' price of cents, and another block of , shares had been given me as a bonus for my publicity measures. after turning over to the treasury of the jumping jack manhattan mining company the amount netted from the sale of treasury stock, and paying off the amount still due on the original purchase price, sullivan and i, within three weeks of my little dare, had cleaned up a net profit of $ , . "do you want a cut?" i asked sullivan when our joint profits reached the quarter-million mark. "no, i'm game. stay with it," he returned. next day the l. m. sullivan trust company, destined to make and lose millions in the great goldfield boom that followed and to mold for me an exciting career as a promoter, was formed with a paid-up capital of $ , . sullivan was made president and i vice-president and general manager. chapter iii the brewing of a saturnalia of speculation mr. sullivan's gambling-house affiliation was not considered a drawback to the trust company. george wingfield, vice-president and heaviest stockholder of the leading bank in goldfield, was a gambler and mr. wingfield also owned extensive interests in the mines. his mines were making good, too. owners of the gambling places now stood as much for financial solidity in goldfield as did savings-bank directors in the east. as for myself, i was unafraid. i vowed i would henceforth prove an exception to the mining-camp rule and quit all forms of gambling. my new position demanded this. and i found it easy to obey the self-imposed inhibition. soon the stock-market operations of the trust company gave my speculative instinct all the vent it could possibly have craved under any circumstances. a few days later the sobering sense which impelled me to resolve that i must absent myself from gaming tables evolved into a stern ambition to accomplish big things for the trust company. i went about my business like a man who sees dazzling before him a golden scepter and who is imbued with the idea that if he exerts the power he can grasp the prize. it had been agreed that the trust company would specialize in the promotion of mining companies, and i determined that the trust company should conduct its business as a trust company ought. john douglas campbell, known on the desert as plain "jack" campbell, was engaged by the trust company as its mining adviser and mine manager. we agreed to pay him a salary of $ , a year, with a bonus of stock in every new mining company we promoted, a stipend which was later found to be equivalent to $ , a year. mr. campbell had been identified with tonopah and goldfield mining interests for three years, and was favorably known. for eight years before coming to tonopah he was employed as a mining superintendent in colorado by sam newhouse, the multi-millionaire mine operator of utah. in colorado mr. campbell's reputation had been good. on coming to tonopah he was employed by john mckane, then associated with charles m. schwab. later he was placed in charge of the kernick and fuller-mcdonald leases on the jumbo mine of goldfield from which, during a year's time, $ , , in gold was taken out. after that mr. campbell took hold of the quartzite lease at diamondfield, near goldfield, and he produced $ , in a few months from that holding. he followed this up by a record production from the famous reilly lease on the florence mine of goldfield, amounting to $ , in two months. it was within thirty days of the date of expiry of the reilly lease that mr. campbell was induced to take charge of the mining department of the trust company. mr. campbell's advent as our mine manager was immediately reflected in the stock market by the advance of jumping jack manhattan mining company shares, which were now regularly listed on the san francisco stock & exchange board, to cents per share, up points from the promotion price. the sharp rise wrought an undoubted sensation in stock-market circles. brokers in the cities who had sold jumping jack to their customers clamored for a new sullivan promotion. any new mining venture for which the trust company would stand sponsor was assured of heavy subscription and a broad public market. trying it on the stray dog the stray dog manhattan mine was furnishing daily sensations in the way of frequent strikes of fabulously rich ore. i urged that, no matter how small the profit, the sullivan trust company should begin its corporate career with the promotion of a property as good as the stray dog. the stray dog was for sale--at a price. one interest, of , shares, owned by vermilyea, edmonds & stanley, the law firm of highest standing in goldfield, could be acquired at cents a share, and another interest, of , shares, owned by prospectors who had located the ground, could be had at cents a share, all or none. the remainder of the stock was in the treasury of the company. the total demanded for , shares of ownership stock was $ , , all cash. a likely property adjoining the stray dog, known as the indian camp, could be purchased for $ , in its entirety. we knew that as soon as it should become known that we had bought the stray dog, the value of indian camp ground would double, and we therefore decided to annex the indian camp at the same time we took over the stray dog. the proposed outlay amounted to more money than we had, and i looked about for assistance. henry peery, a salt lake mining man of substance, had been negotiating for the stray dog in the interest of utah bankers. we agreed that mr. peery should be allowed to participate on the basis of a one-third interest for him, and a two-thirds interest for the trust company. besides supplying his quota of the cash needed to swing the deal, mr. peery agreed to furnish a president for the company, who, he said, interested himself very frequently in mining enterprises. this was henry mccornick, the salt lake banker, son of the head of the firm of mccornick & company, reputed to be the richest private bankers west of the mississippi river. the deal was made. we immediately proceeded to promote the stray dog manhattan mining company at cents per share, the average cost to us of the stock being - / cents. it was impossible for any huge profit to accrue in stray dog on any such margin as - / cents per share between our cost price and the selling price, because the expense of promotion appeared bound almost to equal this. we figured that any promotion profits must come out of the indian camp. the indian camp was capitalized for , , shares, , of which were paid over to the trust company and to mr. peery for the property. the remaining , shares were placed in the treasury of the company to be sold for purposes of mine development. the average per share cost to the trust company of its ownership stock was a fraction less than cents. we decided that as soon as the stray dog was promoted we would offer indian camp shares on a basis of cents per share net to the brokers and cents to the public, and looked forward, if successful, to gaining about $ , net on both ventures. immediately on taking over the control of stray dog and indian camp the trust company purchased treasury stock in each of these companies, and put a large force of men to work to open up the properties. within thirty days of the incorporation of the trust company gold hill in manhattan, on which were located the stray dog, jumping jack and indian camp, swarmed with miners. the orders given to engineer "jack" campbell were to put a man to work wherever he could employ one, and to be unsparing in expense so long as he could obtain results. towering gallows-frames and -horse-power gasoline engines were installed and other necessary mining equipment ordered shipped to the properties. blacksmith shops, bunk-houses and storehouses were erected on the ground. day and night shifts of miners were employed. in order to guarantee the constant presence on the properties of the engineer in charge, the sullivan trust company built for the engineer's use a $ , dwelling house on indian camp ground. having convinced the natives that we were in dead earnest about our mine-making intentions, we busied ourselves offering stray dog stock for subscription at cents per share. it was well known around the camp that we had paid cents per share for one block of , shares, and mining-camp followers were among the first to subscribe for the stock. then an effort was made to dispose of quantities of it to the eastern public by advertising and through mining-stock brokers. that advertising campaign was approached with considerable caution. in the first place, the subscription price of stray dog, cents, was per cent. higher than that of any other advertised promotion which had yet been made from either the goldfield or manhattan camps; and in the second place, the conduct of a mining-stock promotion campaign by a trust company appeared to me to justify more than ordinary care. there were other factors that entered for the first time in goldfield, too. the initial successes of the big display advertising campaigns directed from goldfield appeared to have been due to the fact that the american public had greeted mining-stock speculation as filling a long-felt want, namely, a channel for speculation in which they could indulge their gambling spirit with comparatively limited resources--resources that were insufficient to give them a "look-in" on the big exchanges where the high-priced rails and industrials are traded in. advertising for thinkers having "tried on the dog" my methods of advertising for nearly two years, that is to say, having conducted an advertising agency for mine promoters, and learned the business with their money, i had passed through the experimental stage and now marshalled a cardinal principal or two that i decided must guide me in the operations in which i had become more directly interested. i resolved never to allow an advertisement to go out of the office that was unconvincing to a thinker. if my argument convinces the man of affairs, i determined, it will certainly win over the man of no affairs. dogmatically expressed, the idea was this: never appeal to the intelligence of fools, no matter how easily they may part with their money. turn your batteries on the thinking ones and convince them, and the unthinking will to follow. that principle was applied to the _argument_ of the advertisement. the headlines were constructed on an entirely different principle, namely, to be positive to an extreme. the bible was my exemplar. it says, "it is" or "it was," "thou shalt" or "thou shalt not," and the bible rarely explains or tells why. the strength of a headline lies in its positiveness. the logic which directed that the flaring headline of my big display advertising copy embrace a very positive statement, and that the _argument_ which followed in small type be convincing to the thinker, was based on a recognition of the fact, that, while boldness of statement invariably attracts attention, analysis is the final resort of the thinker before becoming convinced. more circumspection was used also in the process of selecting media for the advertising. newspapers that did not publish in their news-columns mining-stock quotations of issues traded in on the new york curb, the boston stock exchange, the boston curb, the salt lake stock exchange or the san francisco stock exchange were taboo, on the theory that by this time trading in mining stocks had grown sufficiently popular to command a regular following, and that it was easier to appeal to those who had some experience in mining-stock speculations than to those who had never before ventured. subsequent advertising campaigns were always conducted from this viewpoint. i did not set the ocean on fire with my stray dog promotion, the advertising campaign of which was conducted on these lines, but this was due to circumstances which i explain further on. later, when the sullivan trust company grew and prospered, and afterward when i reached the east and learned more and more of the inside mechanism of the big wall street promotion game in rails and industrials as well as mining stocks, i found that my publicity principles were comparable to those accepted by the street generally. _the mighty powers of wall street recognize the fact that it is not in the nature of things that fools should have much money, and thinkers, not fools, are the quarry of the successful modern-day promoter, high or low, honest or dishonest._ _a little knowledge is a dangerous thing, and the man who thinks he knows it all because he has accumulated much money in his own pet business enterprise is a typical personage on whom the successful modern-day multi-millionaire wall street financier trains his batteries._ _the honest promoter aims at both the thinker who thinks he knows but doesn't, and the thinker who really does know. he is compelled to appeal to both classes because the membership of the first outnumbers that of the second in the proportion of about , to ._ _in fine, for every dollar of "wise" money which is thrown into the vortex of speculation_, $ , is "unwise," or considered so. the initial stray dog and indian camp promotion campaign was only half successful at the outset. about , shares of stray dog and , shares of indian camp had been disposed of when the manhattan boom began to lose its intensity. promotions had been made a little too rapidly for public digestion. there were more miners at work than ever in the manhattan camp, but the demand for securities was not keeping pace with the supply. manhattan's initial boom appeared to be flattening out just as goldfield's first boom had. we met with a setback from another direction. henry mccornick's banking connections in salt lake objected to the use of his name as president of the stray dog. at the very height of our advertising campaign mr. mccornick resigned. we elected our engineer, "jack" campbell, president, but damage was done. yes, "business is business" the offices of the trust company were furnished on an elaborate scale, resembling the interior of a banking institution of a large city. the offices became the headquarters of eastern mining-stock brokers whenever they arrived in camp. one morning j. c. weir, a new york mining-stock broker, whose firm held an option from the trust company on , shares of stray dog stock, was ensconced in one of the two luxuriously furnished rooms used as executive offices. mr. weir's firm was one of our selling agents in new york. he was the dean of mining-stock brokers in new york city. in those early days the telephone service of goldfield was not yet perfected, and it was only necessary for a person, in order to overhear any talk over the telephone in our offices, to lift the receiver from the nearest hook and listen. it was reported to me that mr. weir had been availing himself of this method of learning things at first hand. "say, rice," said mr. sullivan one morning, "weir hears your messages every time you are called on the 'phone. he takes advantage of you. i wish you would let me fix him." "all right; what do you want to do?" i answered. "say," said mr. sullivan, "campbell, our engineer, is in manhattan. i'll call him up from the public station and tell him to 'phone you some red-hot news about mine developments on stray dog, and i'll see to it that weir is in his office at the time you get the message. if weir don't steal the news and grab a big block of stray dog on the strength of it, i'm a poor guesser." all of our options to brokers were to expire on the th of march and this was the th. at four o'clock in the afternoon i was in my room. mr. weir was at the desk in the room opposite. the 'phone bell rang. "hello," i said, "who is this?" "campbell, at manhattan," was the response. "what's the news, jack?" i asked. "we've just struck six feet of $ , ore! it's a whale! never saw a mine as big as this one in my life! don't sell any more stray dog under $ a share!" shouted mr. campbell. "bully, jack," i said, "but keep that information to yourself. don't tell your mother, and don't let any more miners go down the shaft. close it up until i am able to buy back some of the stock i sold so cheap." fifteen minutes later mr. sullivan and i met mr. weir leaving the room. "weir," said i, "your option on stray dog expires on the th at noon. so far, your new york office has ordered only , shares of the , that were allotted to you. we have decided to close subscriptions on the moment and wish you would wire your new york office not to sell any more." "you are wrong," said mr. weir; "why, when i left new york we had oversold our entire allotment! if the office has not notified you of this, it has been a slip. we will, in fact, need at least , shares more." "you can't have them," said i. "not in a thousand years!" put in mr. sullivan. mr. weir sent a bunch of code messages to new york. all the next day mr. sullivan spent with mr. weir. he allowed mr. weir to cajole him into letting him have the entire block of stock. finally, it was agreed between mr. weir and mr. sullivan that mr. sullivan would give him the additional stock whether i consented or not. surreptitiously, according to mr. weir's idea, mr. sullivan was yielding to him, without my knowledge and against my wishes. next day the sullivan trust company shipped to mr. weir's firm in new york , shares of stray dog attached to draft at cents a share. the draft was paid. the avenging angel kept hot on mr. weir's trail, for right on the heels of the new york broker's stray dog purchase came a calamity which almost obliterated the market values of nevada mining stocks and particularly those of the shares of manhattan mining companies. san francisco was destroyed by earthquake and fire. not less than half of the capital invested in manhattan stocks had come out of the city of san francisco. the earthquake was fatal to manhattan. the san francisco stock exchange, which was the principal market for manhattan mining shares, was compelled to discontinue business for over two months. brokers and transfer companies lost their records, and the coast's property and money loss was so appalling that no more money was forthcoming from that direction for mining enterprises. every bank in nevada closed down, just as every california bank did, the governors of both states declaring a series of legal holidays to enable the financial institutions to gain time. nevada banks, as a rule, had cleared through san francisco banks, and practically all of nevada's cash was tied up by the catastrophe. the sullivan trust company faced a crisis. i had decided it was good business to lend support to jumping jack in the stock market when the manhattan boom began to relax from its first tension, and had accumulated several hundred thousand shares at an average of cents. the trust company had only $ , in gold in its vaults on the day of the 'quake. moneys deposited in bank were not available. of the $ , in gold coin, $ , was paid two days after the earthquake to the wells-fargo express company for an automobile which was in transit at the time, and for which wells-fargo demanded the coin. it was impossible to hypothecate mining securities of any description in nevada or san francisco. with the sullivan trust company's funds tied up in closed-up banks, and with an unsalable line of securities in its vaults, it was "up against it." for a period it looked as if we must go to the wall. for two months we eked out a bare subsistence by the direct sale of manhattan securities at reduced prices to the eastern brokers. this purchasing power came largely from brokers who were "short" of stocks to the public on commitments made at a much higher range of prices and needed the actual certificates for deliveries. it took the nevada banks and the san francisco stock exchange more than sixty days to rehabilitate themselves. no sooner did the san francisco stock exchange open for business than it became possible for the sullivan trust company to borrow some much needed cash on manhattan securities, of which it had a plethora. through members of the san francisco stock exchange, it obtained in this way in the neighborhood of $ , . goldfield banks supplied another $ , a little later by the same process. then the clouds rolled by. fortunes that were missed soon the mohawk of goldfield began to give unerring indications of being the wonderful treasure-house it has since proved to be. hayes and monnette, who owned a lease on a small section of the property, had struck high-grade ore and were producing at the rate of $ , per day. a few weeks later it was reported that the output had increased to $ , a day. the mohawk being situated only a stone's throw from the combination mine, the idea that the mohawk might turn out to be another combination was common in goldfield. hayes and monnette were startled--almost frightened--at their success. yielding for the moment to the warning of friends, who urged upon them the possibility of the ore soon pinching out, hayes and monnette called at the offices of the trust company and offered to sell their lease, which had six months to run, for $ , cash and $ , to be taken out of the net proceeds of the ore. my gambling instinct was aroused. "i will take it," i said. i sent over to the state bank & trust company, and had a check certified for the $ , . i was about to close the deal when mr. sullivan and "jack" campbell protested. "i ought to have fifteen days to examine the mine," urged mr. campbell. "it is too big a chance to take," declared mr. sullivan. when appealed to, hayes and monnette said that to allow a fifteen-day examination would mean practically to shut down the property for that period and would result in a positive loss to them because of the limited period of their lease. the extent of the loss, if the deal fell through, was too large to contemplate, and they refused. day by day, as mr. campbell and mr. sullivan dilly-dallied, the output of the lease increased, and when, a fortnight later, all three of us were unanimously in favor of the proposition, hayes and monnette flatly refused to sell. within half a year that lease on the mohawk produced in the neighborhood of $ , , worth of ore gross, and netted the leasers about $ , , . the sullivan trust company certainly "overlooked a bet" there. during this period i spent an evening with henry peery and w. h. ("daddy") clark. mr. clark, like mr. peery, hailed from salt lake. mr. clark had successfully promoted the bullfrog gibraltar. seated around a table in the palm restaurant, the conversation turned to new camps. "rice," said mr. clark, "i expect to be able to put you in on a townsite deal in a couple of weeks that will make you some money if you undertake to give the camp some publicity." "good," said i. "i am having some assays run," he said, "of some samples which were brought into camp last night by a couple of prospectors, and if they turn out to be what the prospectors claim, or anything near it, we'll need your services to put a new camp on the map." that night mr. peery learned from the assayer that the lowest assay of samples was $ , and the highest $ , per ton. next morning mr. peery informed me that he had remained all night with mr. clark to learn where the ore came from. mr. peery said that mr. clark had told him, in the wee sma' hours, that the place was fairview peak, fifty miles east of fallon. "rice," said mr. peery, "let's beat him to it. he's going to trek it across the desert by mule team with a camp outfit to-morrow, and it will take him a week to get there." "billy" taylor, who was interested with mr. peery in a bullfrog enterprise, joined the party, and we each gave mr. peery a check for $ , forming a pool of $ , to send a man to fairview to buy properties there. mr. peery wired the bank of the republic at salt lake to pay ben luce $ , , and instructed mr. luce by wire to take the money, go to fairview and do business. it was nearly two weeks before we heard of either mr. clark or mr. luce. mr. clark returned to camp and said he had purchased from a group of itinerant prospectors the nevada hills property, scene of the big find, for $ , , and that it was a "world-beater." "did you meet any outsiders there?" queried mr. peery. "yes," said mr. clark, "i met a man named luce who almost got ahead of me. in fact, he did buy the property before i got there, but he had no money, and they would not take his check for $ , which was the deposit required. i had the gold with me, and that settled it." a few days afterward, mr. luce came to goldfield. "i didn't get the big one," he said, "but i bought the eagle's nest, near by, for $ , , of which $ was demanded to be paid down, and there is ore in it and it looks good to me. i had no money with me when i arrived in fairview. they refused my check for the nevada hills, but the eagle's nest boys took it for their first payment of $ ." mr. luce was not at home when mr. peery's despatch was delivered in salt lake. when it reached him the bank was closed. in order to catch the first train he was compelled to leave the money behind. he arrived in fairview minus the $ , , and thereby lost the nevada hills for mr. peery, mr. taylor and the sullivan trust company. mr. clark and his partners incorporated the nevada hills for , , shares of the par value of $ each and accepted subscriptions at $ per share. within a few months the nevada hills paid $ , in dividends out of ore, and soon thereafter, at the height of the goldfield boom, it was reported that the owners of the control refused an offer of $ , , for the property. the mine has turned out to be a bonanza. the stock of the company sold recently on the new york curb and san francisco stock exchange at a valuation for the mine of $ , , , and it is believed by well-posted mining men to be worth that figure. george wingfield, president of the goldfield consolidated who followed the sullivan trust company into fairview and bought the fairview eagle, which is sandwiched in between the nevada hills and the eagle's nest, is now president of the nevada hills. treasury stock of the fairview eagle was sold in goldfield at cents per share. recently the nevada hills and fairview eagle companies were merged. "jack" campbell reported favorably on the eagle's nest, and we decided to organize and promote a company to own and develop the property. the sullivan trust company bought mr. taylor's interest in the eagle's nest for $ , , mr. luce's for $ , (he had been awarded a quarter interest for his work), and mr. peery's for $ , . it made the property the basis for the promotion of the eagle's nest fairview mining company, capitalized for , , shares of the par value of $ each. governor john sparks accepted our invitation to become president of the company. the entire capitalization was sold to the public through eastern and western stock brokers within thirty days at a subscription price of cents per share. after paying for the property, our net profits were in the neighborhood of $ , . the eagle's nest deal enabled the trust company to repay most of the money it had borrowed after the san francisco earthquake and put the company on easy street again. the tale of bullfrog rush following the eagle's nest promotion, the sullivan trust company became sponsor for bullfrog rush. i had met dr. j. grant lyman, owner of the property, on the lawn of one of the cottages of the united states hotel in saratoga a few years before, where he raced a string of horses and mixed with good people, and i knew of nothing that was to his discredit. dr. lyman bought the bullfrog rush property for $ , . i was present when he paid $ , of this money in cash at john s. cook & company's bank in goldfield. the bullfrog rush property was of large acreage, enjoyed splendid surface showings, and was situated contiguous to the tramps consolidated, which was then selling around $ a share. it looked like a fine prospect. dr. lyman incorporated the company for , , shares of the par value of $ each. the services of the sullivan trust company were employed to finance the enterprise for mine development. the trust company obtained an option on the treasury stock of the company at cents per share, and proceeded to dispose of it through eastern brokers and direct to the public by advertising, at cents per share to brokers and cents per share to investors. we sold , shares, realizing $ , in less than thirty days, retained $ , for commission and expenses, and turned into the treasury of the bullfrog rush company $ , , all of which was placed at the disposal of the company for mine development. half a dozen tunnels were run and several shafts were sunk. down to the -foot level the mine appeared to be of much promise. it was then learned that the shaft at the -foot point had encountered a bed of lime. it appeared that all the properties on bonanza mountain, where the bullfrog rush was situated, including the tramps consolidated, which was then selling in the market at a valuation of $ , , , were bound to turn out to be rank mining failures. the entire hill, according to our engineer, was a "slide," and below the -point ore could not possibly exist. we thereupon notified dr. lyman that we would discontinue the sale of the stock until such time as the property gave better indications of making a mine. a few weeks later dr. lyman entered my private office unannounced. at this period jumping jack, stray dog, indian camp, and eagle's nest were all selling on the san francisco stock exchange at an average of per cent. above promotion prices. the l. m. sullivan trust company was "making good" to investors. bullfrog rush had not yet been listed, and we were afraid to give it a market quotation. "i have formed here in goldfield the union securities company," dr. lyman said, as he sat down close to my desk, "and i am going into the promotion business myself. i don't believe a word of the reports you have that the bullfrog rush is a failure. i am going on with the promotion." i protested. "we shall not permit it," i said. "governor sparks, who is the best friend the sullivan trust company has, accepted the presidency of the bullfrog rush on our assurance that the property was a good one. john s. cook, the leading banker of this town, accepted the treasurership on the same representations. mr. sullivan, president of this trust company, is vice-president of the rush. we are 'in bad' enough as the matter already stands. don't dare go on with the promotion at this time." dr. lyman left the office without uttering a word. two days later i received a dispatch from governor sparks saying that a full-page advertisement of the union securities company had appeared in the _nevada state journal_ at reno, offering bullfrog rush stock for subscription. the governor protested vigorously against the sale of the stock. we had previously informed him as to the new conditions which prevailed at the mine. i sent peter grant, one of mr. sullivan's partners in the palace, to dr. lyman to protest. the answer came back that the _nevada state journal_ advertisement was about to be reproduced in all the newspapers of big circulation throughout the east, and that the orders for the advertisements would not be canceled. half an hour later dr. lyman entered the office with mr. grant. mr. grant looked nettled. dr. lyman glowered. i bade dr. lyman take a chair. "if you move a finger to stop me," he said, as he sat himself down before me, "i'll expose every act of yours since you were born and show up who the boss of this trust company is!" dr. lyman was tall as a poplar and muscled like a samson. he was fresh from the east, red-cheeked and groomed like a chesterfield. i was cadaverous, desert-worn, office-fagged, and undersized by comparison. in a glove fight, dr. lyman could probably have finished me in half a round. but the disparity did not occur to me. the sense of injustice made me forget everything except dr. lyman's blackmailing threat. i jumped to my feet. dr. lyman backed up to the glass door. i aimed a blow at him. he backed away to dodge it. in a second he had collided with the big plate-glass pane, which fell with a crash. in another instant he recovered his feet, turned on his heel and ran. his face was covered with scratches, the result of his encounter with the broken plate glass. several clerks who followed him, thinking he had committed some violent act, reported that he didn't stop running until he reached the end of a street feet away. "oh," he gasped, "i never want to see such a look in a man's eyes again. i thought i saw him reach for a gun." such an idea was farthest from my mind, although i was very angry. conscience had made a coward of the doctor. i was quick to decide upon a course of action. the position of the trust company was this: with the exception of bullfrog rush, we had a string of stock-market winners to our credit with the public. if we allowed dr. lyman to go ahead with his promotion of bullfrog rush, we should, unless we abandoned our rule to protect our stocks in the market, be compelled some day to buy back all of the stock he sold. the truth about the mine was bound to come out, and we stood before the public as its sponsors. i decided that the trust company should refund the money paid in by stockholders of bullfrog rush and prevent dr. lyman from selling more stock. to the brokers, through whom we had sold much of the stock to the public, we telegraphed that we would refund the exact amount paid us by the brokers on delivery back to us of the certificates. we also wired to governor sparks and asked his permission to insert an advertisement in the newspapers over his signature, announcing that the property had proved to be a mining failure and advising the public not to buy any more shares. this pleased the governor immensely, for he promptly wired back his o.k. with congratulations over the stand we took. that night a broadside warning to the public, bearing the signature of governor john sparks, and a separate advertisement of the sullivan trust company, offering to refund the money paid for bullfrog rush shares, were telegraphed to all the leading newspapers of the east. next day both of these announcements appeared side by side with the half-page and full-page advertisements of dr. lyman's union securities company of goldfield offering bullfrog rush for public subscription. the newspapers, peculiarly enough, performed this stunt without a quiver. the public didn't buy any more bullfrog shares. the bullfrog rush incident cost the sullivan trust company a little less than $ , , which was refunded to stockholders, and the additional sum that was expended for advertising our denouncement of the enterprise. dr. lyman was stripped of his entire investment in the property. the newspapers lost many thousands of dollars, representing dr. lyman's unpaid advertising bills. a number of mining-stock brokers also forfeited some money; they were compelled to refund their commissions. j. c. weir, the new york mining-stock broker, who does business under the firm name of weir brothers & company, had sold in the neighborhood of , shares of bullfrog rush to his clients, and he took violent exception to our decision not to refund an amount in excess of the net price paid to us. he held that his firm ought not to be compelled to disgorge its profits. we stood pat and argued that he ought to be proud to share with us the glory of "making good" in such an unusual way to stockholders. it was the first time in the history of western mining promotions that a thing like this had ever been done, and we pointed out to mr. weir that it would gain reputation both for himself and the trust company. for a period mr. weir carried on an epistolary warfare with the trust company. for nearly two months he refused to yield. finally, we received a letter from mr. weir saying that since we refused to come to his terms he would accept ours, and that he had drawn on us for $ , , with one lot of , shares of bullfrog rush stock attached. on receipt of the letter i gave instructions to the cashier promptly to honor the draft. an hour later the cashier reported that the draft had been presented and that an examination of the stock certificates showed that not a single one of them had been sold by the trust company through mr. weir's firm, and, in fact, had never been disposed of by the trust company to anybody. a hurried examination of the stock-certificate books of the bullfrog rush company, which were in the hands of the company's secretary in goldfield, a clerk of dr. lyman, revealed the fact that a large number of blank certificates had been torn out of the certificate books without any entry appearing on the stubs. the certificates returned to us by mr. weir bore dates of several months prior, and our immediate assumption was that dr. lyman, at the very moment when we were marketing the treasury stock under a binding contract which forbade him or any one else to dispose of any bullfrog rush stock under any circumstances, was clandestinely getting rid of these shares. mr. weir, it appeared, had neglected to segregate dr. lyman's certificates from those shipped him by the trust company. another hypothesis was that those certificates had never been sold at all, but had merely been received from dr. lyman to be reforwarded to us in order to claim a refund for what we had never been paid for. of course, we returned the draft unpaid. but that didn't end the incident. my partner, mr. sullivan, took it upon himself to wire his sentiments to weir brothers & company, as follows: "you are so crooked that if you swallowed a ten-penny nail and vomited, it would come out a corkscrew." that was "larry's" homely way of expressing his opinion. goldfield's year of wind and dust had brightened into the glow of summer. the still breath of august was diffused through the thin mild air of the high altitude. this thin air, which nearly two years before had prompted a camp wit to comment on the birth of my news bureau to the effect that "the high elevation was ideal for the concoction of the visionary stuff that dreams are made of," appeared unprophetic. there was plenty of concrete evidence of the yellow metal to be seen. production from the mines was increasing daily and money from speculators was pouring into the camp from every direction. a mining-stock boom of gigantic proportions was brewing. mohawk of goldfield, which was incorporated for , , shares of the par value of $ each, and which in the early days went begging at cents a share, was now selling around $ a share on the san francisco stock exchange, the goldfield stock exchange and the new york curb. other goldfields had advanced in proportion. combination fraction was up from cents to $ . . silver pick, which was promoted at cents a share, was selling at cents. jumbo extension advanced from to . red top, which was offered in large blocks at cents per share two years before, was selling at $ . jumbo advanced from cents to $ . . atlanta moved up from to . fifty others, representing prospects, enjoyed proportionate advances. the sullivan stocks were right in the swim. jumping jack was in hot demand on the san francisco stock exchange and new york curb at cents, stray dog at cents, indian camp at cents, and eagle's nest at cents. subscribers to indian camp could cash in at a profit of more than per cent. the country gave indications of going "goldfield crazy." my goldfield publicity bureau was working overtime. james hopper, the noted fiction writer and magazinist, ably assisted by harry hedrick and other competent mining reporters, was "on the job" and doing yeoman service. the news-columns of the daily papers of the country teemed with stories of the goldfield excitement. people began to flock into the camp in droves. the town was a scene of bustle and life. motley groups assembled at every corner and discussed the great production being made from the mohawk and the terrific market advances being chronicled by mining stocks representing all sorts and descriptions of goldfield properties. whenever hayes and monnette, owners of the mohawk lease, appeared on the streets, they were followed by a mixed throng of the riffraff of the camp, who hailed them, open-mouthed, as wonders. the madness of speculation in mining shares in the camp itself was beginning to exceed in its intensity the exciting play at the gaming tables. there was a contagion of excitement even in the open spaces of the street. at each meeting of the goldfield stock exchange the boardroom was crowded. the sessions were tempestuous. every step and every hallway leading to the room was jammed with men and women over whose faces all lights and shades of expression flitted. the bidding for mining issues was frantic. profits mounted high. everybody seemed to be buying and no one appeared to be willing to sell except at a substantial rise over the last quotations. castle-building and fumes of fancy usurped reason. bank deposits were increasing by leaps and bounds. the camp was rapidly becoming drunk with the joy of fortune-making. manhattan now shone mostly in the reflected glory of goldfield, but manhattan stocks were booming. this enabled the sullivan trust company to dispose of nearly all of its manhattan securities which had been carried over after the san francisco catastrophe and to pile up a great reserve of cash. a big demand was developing for shares in fairview companies. nevada hills of fairview was selling on the stock exchanges and curbs at $ per share, or a valuation of $ , , for the mine. only a few months before it had fallen into goldfield and salt lake hands for $ , . fairview eagle's nest, for which subscriptions had been accepted at cents per share by the sullivan trust company, was selling at cents on the san francisco stock exchange. the sullivan trust company announced the offering of , , shares, embracing the entire capitalization of the fairview hailstone mining company, at cents. the stock was purchased by us at cents. we sold out in a week. san francisco and salt lake were the principal buyers, and it was unnecessary even to insert an advertisement offering the stock. the brokers fell over one another to underwrite the offering by telegraph. prize fights and mining promotion for a fortnight there was a lull in news of sensatorial gold discoveries, but the approaching gans-nelson fight, which was arranged to be held in goldfield on labor day, september , furnished sufficient exciting reading matter for the newspapers throughout the land to keep the goldfield news pot boiling. the sullivan trust company had guaranteed the promoters of the fight against loss to the extent of $ , , and other camp interests put up $ , more. gans, the fighter, was without funds to put up his forfeit and make the match, and the sullivan trust company had also advanced the money for that purpose. mr. sullivan became gans' manager. when gans arrived in town mr. sullivan interviewed him to this effect: "gans, if you lose this fight they'll kill you here in goldfield; they'll think you laid down. i and my friends are going to bet a ton of money on you, and you must win." gans promised he would do his best. "tex" rickard and his friends wagered on nelson. the cashier of the sullivan trust company was instructed to cover all the money that any one wanted to bet at odds of to and to on gans, we taking the long end. a sign was hung in the window reading: "a large sum of money has been placed with us to wager on gans. nelson money promptly covered inside." mr. sullivan was in his glory. prize-fighting suited his tastes better than high finance, and he was as busy as a one-armed paper-hanger with the itch. an argument arose about who should referee the fight. "tex" rickard nominated george siler, of chicago, and battling nelson promptly o.k.'d the selection. mr. sullivan openly objected. he thought it good strategy. he sent for the newspaper men and gave out an interview in which he declared that mr. siler was prejudiced against gans because he was a negro, and he did not believe mr. siler would give gans a square deal. "rice," whispered sullivan after the newspaper men left the office, "i am four-flushing about that race-prejudice yarn, but it won't do any harm. siler needs the job. he's broke and i'll make him eat out of my hand before i'll agree to let him referee the fight. they've already invited siler to come here, and i won't be able to get another referee, but i'll beat them at their own game. when siler gets here i'll thrash matters out with him and agree to his selection, but first i want him to know who's boss." mr. siler arrived. an hour later he was closeted with mr. sullivan in one of the back rooms of the trust company offices. the dialogue which ensued was substantially as follows: _mr. siler._ you've got me dead wrong, sullivan. i want to referee this fight, and i want you to withdraw your objections. _mr. sullivan._ well, i've heard from sources which i can't tell you anything about that you don't like gans, and i can't stand for you. _mr. siler._ i need this fight, and i've come all the way from chicago in the expectation of refereeing it. i couldn't give gans the worst of it if i wanted to. he is a clean fighter and i would not have an excuse. _mr. sullivan._ gans is a clean fighter, but nelson isn't; he uses dirty tactics and he is a fouler for fair. _mr. siler._ if he does any fouling in this fight i'll make him quit or declare him out. _mr. sullivan._ what guarantee have i got that you won't give gans the worst of it? _mr. siler._ well, i'll tell you, sullivan, if you withdraw your objections i'll guarantee you that i'll be this fair. if nelson uses foul tactics, or if he don't, i'll show my fairness to gans by giving him the benefit of every doubt. now, will that satisfy you? _mr. sullivan._ yes, it'll satisfy me, but, remember, if you don't keep your word you'll have just as much chance of getting out of this town alive as gans will have if he lays down! you understand? _mr. siler._ yes. on the afternoon of the fight the sullivan trust company cast accounts and found that it had wagered $ , on gans against a total of $ , put up by the followers of nelson. mr. sullivan, after talking it over with me, had accepted the honorary position of announcer at the ringside. though not of aristocratic mien, "larry" was of fine physique, with a bold, bluff countenance, and i felt confident that his cordial manner would appeal to that far western assemblage. just before the prize-fighters entered the ring, "larry" jumped into the arena. standing above the mass of moving heads and holding up both hands, he hailed the great crowd thus: "gentlemen, we are assembled in this grand _areno_ to witness a square fight. this fight is held under the auspices of 'tex' rickard, a man of great _accumulations_----" "larry" did not get much farther. the audience laughed, and then jeered and hooted until it became hoarse. his words were drowned in the tempest of derision. i was informed by friends who were close to the ringside that he went on in the same rambling way for a few minutes more, but i can't testify to that fact from my own knowledge because "acclumuations" and "areno" overcame me and i stopped up my ears. the fight progressed for twenty rounds or more, when i began to doubt the ability of gans to win. mr. sullivan had a commissioner at the ringside, who, up to this time, had been betting anybody and everybody all the to that was wanted against nelson. i hailed mr. sullivan at the ringside. "this doesn't look like the cinch for gans you said it would be," i whispered. "wait a minute," mr. sullivan replied, "i'll go to gans' corner as soon as this round is over and find out what's doing with him." mr. sullivan went over to gans' corner and came back. "gans says he can't win this fight, but he won't lose. he's a good ring-general and he'll pull us out. don't bet any more money. i'm going to stay close to the ringside. watch close." it was apparent during the next ten rounds that gans was availing himself of every opportunity to impress upon the audience that nelson was inclined to use dirty fighting tactics, and soon nelson was being hooted for foul fighting. gans, on the other hand, appeared to be fighting fair and like a gentleman. soon it was evident that gans had won the sympathy and favor of the audience. the fight had continued through the fortieth round, when mr. sullivan again repaired to gans' corner and held another animated whispered conversation with him. in the forty-second round gans of a sudden went down, rolled over and, holding his hand under his belt, let out a yell of anguish that indicated to the excited multitude that nelson had fouled him frightfully. in another instant mr. sullivan had clambered into the ring. confusion reigned. the audience was on its feet. pushing his fist into the referee's face, mr. sullivan cried: "now, siler, you saw that foul, didn't you? it's a foul, isn't it? gans wins, doesn't he?" all of this happened quick as a flash. mr. siler, pale as a ghost, whispered something inaudibly. mr. sullivan, turning to the assemblage and raising both arms to the skies, yelled: "gentlemen, the referee declares gans the winner on a foul!" the audience acclaimed his decision with salvos of applause. there did not appear to be a man in the crowd who doubted a foul had been committed, although nelson at once protested his innocence. next day mr. sullivan told me that in or near the twenty-fourth round gans had broken his wrist and knew he could not win the fight by a knockout. he also said that gans went down in the forty-second round in order to save the day. "_i_ won that fight," said mr. sullivan. "i told gans while he was in his corner after the fortieth round that if he lost he would be laying down on his friends, that he had the audience with him, and that it was time to take advantage of nelson's foul tactics." this was my first experience in prize-fighting, and my last. my sympathies were, however, with the winner. gans' tactics throughout up to the last round were gentlemanly and those of nelson unfair. even the partisans of nelson who had wagered on him agreed after the fight that the battle put up by the negro up to the forty-second round was a white man's fight and he was entitled to win. nelson had been guilty of foul tactics in almost every round, but the probabilities are that gans was not disabled by a foul blow in the forty-second round and that he took advantage of the sentiment in his favor, which had been created by his manly battle up to that time, to go down at a psychological moment. i saw mr. siler after the contest, and he appeared pleased that his decision was so well received, but he assured me that if he was invited to referee another bout in any mining camp he would decline the job. the sullivan trust company, of course, won a big bet on the result, but it lost a bigger one as an outcome of the battle on the very next day. the impression created by announcer sullivan's attempt to reach lofty flights of eloquence in his speech to the fight-audience was bad for the trust company, and it required the use of over $ , on the day following to meet the flood of selling orders in sullivan stocks which poured into the san francisco stock exchange. the year of big figures i soon recouped these stock-market losses. at about four o'clock one afternoon, a few days afterward, a miner who had been at work during the day on the loftus-sweeney lease of the combination fraction, called at the office of the trust company and asked me to buy , shares of combination fraction stock for him. he divulged to me that just as he was coming off shift he had learned that a prodigious strike of high-grade ore had been made at depth. combination fraction had closed that afternoon on the san francisco stock exchange with sales at $ . . i went out on the street and proceeded to buy all the combination fraction in sight. in half an hour i had corralled about , shares at an average of $ . . an hour later the owners of the lease obtained the information on which i was working, and by eight o'clock that night, when the goldfield stock exchange began its evening session, the price had jumped to $ . . within a week thereafter the price sky-rocketed to $ . , and at this figure i took profits of nearly $ , . had i held on a little longer i could have doubled that profit, for combination fraction a few weeks later sold at higher than $ . the combination fraction strike was followed by a number of others, and the boom gathered force. by october, goldfield silver pick had advanced to $ per share, up per cent. goldfield red top was selling at $ , jumbo at $ , and mohawk at $ , showing profits of from , to , per cent. others had gained proportionately. in fact, there were over twenty goldfield securities listed on the exchange that showed the public a stock-market profit of anywhere from per cent. to , per cent. mining machinery of every description was being shipped into camp, and for half a mile around the combination mine the landscape of assembled gallows-frames resembled a great producing oil field. there were signs of mining activity everywhere. for four miles east of the combination mine and six miles south every inch of ground had been located. claims situated miles away from the productive area were changing hands hourly at high figures. the sullivan stocks kept pace in the markets with the other booming securities, and it was plain that the trust company was riding on a tidal wave of success. our profits exceeded $ , , at this period, and we were just eight months old. in a single fortnight the sullivan trust company promoted the lou dillon goldfield mining company at cents per share, a valuation of $ , for the property, which cost $ , ; and the silver pick extension, which cost $ , , at the same figure, netting several hundred thousand dollars' profit on these two transactions. options to purchase the lou dillon and silver pick extension, which were situated within feet of the combination mine, had been in possession of the sullivan trust company for months, and had increased in value to such an extent that on the day the subscriptions were opened in goldfield for lou dillon at cents per share, a prospector named phoenix, who had received $ , from the sullivan trust company for the entire property, subscribed for , shares, or a tenth interest in the enterprise, paying $ , therefor. it was the rule of the sullivan trust company to open subscriptions in goldfield on the day its advertising copy left the camp by mail for the east. newspaper publishers were always instructed to publish the advertisements, which were generally of the full-page variety, on the day following receipt. in the case of lou dillon it became necessary to telegraph all newspapers east of chicago not to publish the advertisement because of oversubscription before the copy reached them, and in the case of silver pick extension the orders to publish the advertisements were canceled by telegraph before the mail carrying the copy reached kansas city. san francisco, los angeles and salt lake subscribed for per cent. of the entire offering of lou dillon and silver pick extension, and goldfield for per cent. as a matter of fact, had we desired, we could have sold the entire offerings in goldfield, tonopah and reno without inserting any advertisements, so great was the excitement in the state itself. at this period the combined monthly payrolls of the mining companies promoted by the sullivan trust company totaled in excess of $ , , and excellent progress was being made in opening up the properties. it was early autumn in goldfield, warm, dry and dusty, and never a cloud in the sky. i was at my desk eighteen hours a day, and liked my job. things were coming our way. the sullivan trust company was in politics. mr. sullivan was popular with the miners, and governor sparks was a large asset of the trust company because he had been allowing the use of his name as president of all the mining companies promoted by it. nevertheless, when the state election approached, the governor had no money for campaign expenses. he telegraphed the trust company from carson: "i will not stand for renomination." we replied: "you are certain to be elected, and you will be renominated by acclamation if you accept." "i won't run unless you guarantee my election," he telegraphed. we answered: "we guarantee." the governor was renominated by the democrats. the republicans placed in nomination j. f. mitchell, a mining engineer and mine owner, who was very popular among mine operators. there were thousands of miners domiciled in goldfield. the western federation of miners dominated. "sullivan," i said, "isn't it a certainty that the miners will vote the democratic ticket because mitchell has been put forward by the mine owners? is it necessary to spend any money with the western federation?" "not a dollar!" replied mr. sullivan. "there's a meeting of the executive committee to-morrow. i'm going to be around when they meet. without spending a cent i'll bring home the bacon. watch me!" sullivan reported to me the next day that he had succeeded in his mission. "i didn't attend the meeting," he said, "but i did see the main 'squeeze.' he told me that a contribution to the miner's hospital would be gratefully accepted, but that even that was not necessary, and that sparks would win in a walk." the only campaign money advanced by the sullivan trust company was given to mr. sullivan to go to reno. he asked for $ , , and he used it in conducting open house on the first floor of the golden hotel, meeting people and greeting them. reno appeared to be a republican stronghold, and mr. sullivan, by baiting the catholics against the protestants, succeeded in holding down the republican majority to an extent that was wofully insufficient to overcome the democratic majority rolled up in goldfield with the aid of the miners. governor sparks was reëlected by a handsome majority. had the occasion demanded it, we would have "tapped a barrel." but it was not necessary. the story of goldfield consolidated rumors were rife in goldfield of a merger of mammoth proportions which was said to be on the tapis. great as were the gold discoveries in camp, they did not justify the terrific advances being chronicled in the stock-market, and it was apparent that something extraordinary must be hatching to justify the market's action. george wingfield, who had enjoyed a meteoric career, rising within five years from a faro dealer in tonopah to the ownership of control in the mohawk and many other mining companies and to part ownership of the leading goldfield bank, john s. cook & company, which was then credited with having $ , , on deposit, was said to be engineering the deal. the names of the properties were not given, nor the figures. it occurred to me that in any merger that was made the jumbo and red top, because of their central location, must be included. i sought out charles d. taylor, who with his brother, h. l. taylor, and capt. j. b. menardi, owned the control of these properties. he asked $ . per share for his stock and that of his partners--all or none. mr. taylor had walked into the camp as a prospector. most of his nights were spent at the gaming tables, and he was reported to be an easy mark for the professionals. his losses were constant and heavy. i put mr. sullivan on his trail. mr. sullivan reported to me that mr. wingfield was hobnobbing with mr. taylor. "get an option on these properties from taylor and be quick," i told mr. sullivan. next morning i met mr. sullivan. he held in his hands , shares of jumbo, selling at $ . per share on the goldfield stock exchange. "i won it in a poker game last night with taylor and wingfield," he said. "i have an oral option on the property good for three days at $ . , but if you leave it to me, i'll win these properties from him playing cards." i did not see mr. sullivan again for a week. next i heard of him he had "fallen off the water-wagon" and was reported to be celebrating the event in tonopah. while mr. sullivan was "kidding" himself about his poker-playing ability, mr. wingfield had come to terms with mr. taylor and had bought the control of jumbo and red top at an average price of $ . per share. that explained mr. sullivan's lapse. however, i blamed myself. mr. sullivan was no match for mr. wingfield. in any game from stud-poker to marketing mining stock mr. wingfield can outwit, outmaneuver and outgeneral a hundred like "larry." both companies had been capitalized for , , shares. the sale required that a fortune be paid over. mr. wingfield paid a small sum down, and mr. taylor placed the stock of both of these companies in escrow in the john s. cook & company bank, the balance to be paid a month later. the purchase of control of the jumbo and red top by the firm of wingfield and nixon signalized the beginning of a stock-market campaign for higher prices that stands unprecedented for audacity and intensity in the history of mining-stock speculation in this country since the great boom of the comstock lode in - . the market for all listed goldfield stocks was made to boil and sizzle day in and day out until jumbo and red top had been ballooned from $ to $ per share, laguna from cents to $ , goldfield mining from cents to $ , and mohawk from $ to $ . within three weeks the advance in market price of the issued capitalization of this quintet alone represented the difference between $ , , and $ , , . a few days before top prices were reached, it was officially announced that the merger of mohawk, red top, jumbo, goldfield mining and laguna into the goldfield consolidated mines company had been made on the basis of $ for each outstanding share of mohawk, $ for red top, $ for jumbo, $ for goldfield mining, and $ for laguna. it was also given out that the promoters, wingfield and nixon, had allotted themselves $ , , in stock of the merged companies as a promoters' fee. right on top of this came an announcement that the combination mine had been turned into the merger for $ , , in cash and stock, and it was learned that go-betweens had made a profit of $ , , on the deal by securing an option on the property for $ , , . in short, a merger was put through of properties and stocks, the issued capitalization of which was selling in already inflated markets on the day the merger was conceived for $ , , , at a valuation of $ , , , and in addition the promoters received a $ , , bonus. had the properties been merged on the basis of their selling prices three weeks prior, the equivalent value of the , , shares of merger stock would have been a fraction above $ . as it stood, under the ballooning process, the market value was $ , which was the par. at the time of the merger these were the conditions that ruled at the mines: the mohawk, appraised at $ , , , had produced under lease in the neighborhood of $ , , , of which less than $ , , had found its way into the treasury of the mohawk mining company, the balance going to the leasers. the leasers had "high-graded" the property to a fare-you-well, and less than $ , , worth of high-grade remained in sight, although it was conceded on every side that the leasers had not attempted, nor were they able during the period of their leasehold, to block out systematically and put into sight all of the ore in the mine. large, but indefinite, prospective value therefore attached to mohawk in addition to the tonnage in sight. the laguna, for which $ , , had been paid in stock, did not have a pound of ore in sight, and had cost wingfield and nixon less than $ , . goldfield mining, scene of a sensational production during the early days of the camp, appraised at $ , , more, had fizzled out as a producer. jumbo, taken in for $ , , , for a year previous had produced little or no ore, most of the time being exhausted by the management in sinking a deep shaft, and it had less than $ , in sight. red top, valued at another $ , , , had in excess of $ , , worth of medium grade ore blocked out. wingfield and nixon were also heavily interested in columbia mountain, sandstorm, blue bull, crackerjack, red hills, oro, booth, milltown, kendall, may queen, and other goldfield stocks. no sooner did the five stocks forming the merger begin to show such startling market advances than the ballooning tendency manifested itself in wingfield and nixon's miscellaneous list, and all of them showed phenomenal gains. soon the entire list of goldfield, tonopah, manhattan, bullfrog, and other nevada mining securities listed on the san francisco stock exchange and traded in on the exchanges and curbs of the country, felt the force of the terrific rises, and sympathetically they skyrocketed to unheard-of levels. to convey an idea as to how far the prices of these stocks were moved up beyond their intrinsic worth, as a result of the ballooning process of the merger, i give some comparisons. columbia mountain sold during the boom at above $ . ; it is now selling at cents. blue bull, crackerjack, oro, booth, red hills, milltown, kendall, conqueror, hibernia, ethel, kewanas, sandstorm and may queen sold at an average of cents during the boom; they are now selling at an average of less than cents. a hundred other goldfield securities, which were in eager demand at the zenith of the spectacular movement at prices ranging from cents to $ . can now be purchased at from to cents per share, while many others that were hopefully bought by an over-wrought public at all sorts of figures are now not quoted at all. at the height of the frenzy the difference between the market price of listed nevada stocks on november , , and that of to-day is in excess of $ , , . a fair estimate of the public's real-money loss in the listed division is $ , , . nor was this all of the damage that was done. when excitement in goldfield's listed stocks reached a frenzy, wild-catters operating from the cities got into harness, and within three months in the neighborhood of , companies, owning in most instances properties situated miles from the proved zone in goldfield, or in unproved camps near goldfield, were foisted on the public for $ , , more. the fact that mohawk, which in the early days of goldfield could have been purchased at cents, had advanced to $ and had shown purchasers a profit of , per cent.; that laguna had advanced in less than two years from cents to $ ; that jumbo and red top, selling at $ , could have been purchased a year or two before at around cents; that goldfield mining, which had in the early days been peddled around the camp at cents, had moved up to $ , etc., gave the wild-catters an argument that was convincing to gulls in every town and hamlet in the union. and the harvest was immense. not one of the , wild-cats has made good, and every dollar so invested has been lost. it will be noted from the reckoning as given that about as much money was lost in the listed stocks of the camps as in the unlisted "cats and dogs." as a matter of fact, veteran mining-stock buyers, in camp and out of the camp, lost as much hard cash as did the unsophisticated. san francisco, which owes its opulence of years gone by to successful mining endeavor, was probably hit as hard as any other city in the union. san francisco thought it knew the game, and it confined its operations to the stocks listed on the exchange where the comstocks are traded in. but san francisco did not know the inside of the merger deal as it is now known to every schoolboy in nevada. the operation on the inside was this. wingfield and nixon owned the john s. cook & company bank in goldfield, and they owned the control of nearly a score of mining companies which were of little account as well as having acquired the control of the biggest mine in camp. during the height of the boom, which they engineered to swing the merger, they disposed of millions of shares of an indiscriminate lot of companies, and used the many millions of proceeds to take over jumbo, red top and their outstanding contracts in mohawk and other integrals of the merger. they likewise were able during the ballooning process to dispose of much mohawk at from $ to $ , much jumbo at from $ to $ , much red top at from $ to $ , that cost them very considerably less than this, and in this way were enabled to finance their deal to a finish. i have just pointed out that in order to accomplish the merger it was necessary that the market in all goldfield securities, in which the promoters were interested, be stimulated in order to enable unloading by the insiders before some of the very large payments became due. this being accomplished, and the payments having been made, the promoters sought to establish a market for merger shares at or around par. in order to accomplish this the goldfield bank, in which the promoters were heavily interested, stimulated speculation and managed to spread a feeling of security by announcing its willingness to loan from to per cent. par on merger shares. all goldfield fell for this, and the camp went broke as a result. within eighteen months thereafter goldfield consolidated sold down to $ . in the markets, and margin-traders and borrowers who had put up the stock as collateral to purchase more were butchered. loans were foreclosed by the bank as rapidly as margins were exhausted. the carnage was awful. it must be evident that wingfield and nixon, both of whom became multimillionaires as the result of their mining-stock operations in goldfield, were directly and indirectly important factors in the loss by the public of $ , , , as set forth above. it is admitted that less than $ , , worth of ore had been developed as a reserve at the time $ , , worth of stock in the merger was issued and a market manufactured to dispose of the stock at this fictitious price-level. it is not of particular interest that goldfield consolidated, by reason of sensationally rich mine developments at depth, has since given promise of returning to stockholders an amount almost equal to par for their shares, and that it now appears that those who were able to weather the intervening declines may in the end be out only the interest on their money. _this fact stands out: although goldfield consolidated owned at the outset a bonanza gold mine, stockholders had just two chances. they could break even or lose--break even on their investment if the mine made good in a sensational way, which was a big gamble at the time, or lose if the mine didn't. they could not win._ mr. nixon was a united states senator from nevada. he was also president of the nixon national bank of reno, nevada. he held both of these positions at the time the merger was made, and it was largely because of mr. nixon's political and financial position that the daring ballooning market operations, which were staged as a curtain-raiser for the merger, proved so successful. in the _nevada mining news_ of may , , circulation , , an interview appeared with united states senator nixon of nevada, vouched for as follows: the manuscript of the interview was submitted to, and approved by, the senator. unchanged by one jot or tittle, it is printed just as it came from his hands. even now the senator holds a carbon of the original manuscript and may brand us with it if we have broken the faith we pledged. i quote from the senator's interview, as it appeared in that issue of the _nevada mining news_: "what do you estimate the ultimate earnings of goldfield consolidated will be?" was asked. "consolidated will be a bigger producer, i should say, three or four years from now than it will be one year from now," senator nixon replied, "and i believe i am conservative when i say that the property will be eventually earning $ , , net monthly." "_then, as an investment, the stock is easily a $ stock?_" "_that is a minimum estimate of its future value, i should say_," _was the response._ as to that interview: mr. nixon said that within three or four years (the time limit is up), $ would be a minimum price for the shares. they touched $ only once since then, or one-half of his estimate. shortly after the interview was given they sold down as low as $ . . recently the market quotation was $ . he said, further, that the mines would ultimately earn at the rate of $ , , a month. this statement also has fallen far short of fulfillment. soon after george s. nixon, as president of the goldfield consolidated company, gave out this interview for public consumption he, according to his own later admissions, disposed of all of his holdings, and at an average price, it is believed, of less than $ a share. this is only a superficial rendering of the big event in goldfield's history, but it is sufficient to furnish an example of the effect of get-rich-quick influences that radiate from high places and separate the public from millions upon millions, without being called to account. the dear american public has been falling for this kind of insidious brand of get-rich-quick dope for years. it is being gulled into losing millions through its fetish worship of promoters with millions, who are really the get-rich-quicks of the day that are very dangerous. greenwater, a rich man's camp, in which the public sank $ , , during three months that marked the zenith of the goldfield boom, is another case in point where a confiding investing public followed a deceiving light and was led to ruthless slaughter. chapter iv the greenwater fiasco when the excitement was at fever-heat in goldfield over the stupendous rises in market value of goldfield securities which were being chronicled hourly, news came to town of the successful flotation in new york of the greenwater & death valley mining company. the capitalization was , , shares of the par value of $ each. the stock had been underwritten at $ a share by new york and pittsburg stock exchange houses, had been listed on the new york curb, and had climbed to around $ . , or a valuation for the property of $ , , . among the officers of this company were m. r. ward, brother-in-law of charles m. schwab; t. l. oddie, now governor of nevada, and malcolm macdonald, later president of the nevada first national bank of tonopah. greenwater is situated about miles south of goldfield, across the state line in california. no one ever went to or fro without passing through goldfield. if there was a greenwater boom, how was it that we in goldfield, who were in touch with all nevada mining affairs, did not know about it? goldfield promoters soon began to give attention. shortly they caught the infection. a stampede from goldfield into greenwater ensued. in fact, people flocked to greenwater from every direction. a bunch of tonopah money-getters, headed by the indomitable malcolm macdonald, were grabbing the money on greenwaters in new york, and goldfield was not in the play. the reports that came from greenwater as a result of the first stampede from goldfield were of doubtful variety. greenwater & death valley was described as a raw prospect not worth over cents per share. goldfield people shook their heads. there was no gainsaying the fact, however, that greenwater & death valley appeared to be a giant success in the eastern stock markets. charles m. schwab was reported to be behind the flotation of greenwater & death valley. montgomery-shoshone and tonopah extension, two other schwab enterprises, were selling at hundreds of per cent. profit in the stock markets. the fact that mr. schwab was interested in the camp was an argument that appealed with great force to nevada promoters, for the fraternity had learned to attach just as much significance to having a market as to having a mine before commencing promotion operations. the sullivan trust company not having had a failure of any kind on the market, i hesitated to commit the trust company to any issue in the new camp. not to be entirely out of it, however, i sent our engineer, "jack" campbell, into the district to report on all the properties. news came thick and fast from the new york market as to the success of the greenwaters in the east. furnace creek copper company, originally promoted by "patsy" clark of spokane at cents per share, with a million-share capitalization, was reported to be getting the benefit of mr. clark's personal market handling on the new york curb, and the shares soon reached a high quotation of $ . . john w. gates had been let in by "patsy" at around cents and was reported to have unloaded , shares at all sorts of prices from $ up to $ . , and down again. on the heels of this advance came word of the successful promotion of the united greenwater company, with c. s. minzesheimer & company, members of the new york stock exchange, acting as fiscal agents for the company. the promoters were named as malcolm macdonald, donald b. gillies and charles m. schwab. j. c. weir, the new york mining-stock broker, who was conducting through the mails a nation-wide market-letter campaign in favor of greenwater, was reported to have sold , or , shares at the subscription price of $ . the offering was said to have been oversubscribed twice. the price then shot up to $ . on the new york curb. the market boiled. philadelphia was reported to be greenwater-mad. when united greenwater had reached $ . on its way up and greenwater & death valley had passed the $ point, the schwab crowd announced the formation of the greenwater copper mines & smelters company to consolidate the greenwater & death valley and united greenwater companies. this new parent company was capitalized for $ , , , with , , shares of the par value of $ each, and the east was reported to be eating up the new stock "blood raw." the president of this company was charles r. miller, who was president of the tonopah & goldfield railroad company, and the vice-president was m. r. ward, the redoubtable brother-in-law of charles m. schwab. the directorate included mr. schwab; john w. brock, who represented philadelphia interests on the directorate of the very successful tonopah mining company; malcolm macdonald, the champion "lemon" peddler of nevada; frank keith, general manager of the tonopah mining company, and others. it was a "swell" directorate. it was learned that the stock of the new company had been underwritten by new york stock exchange houses, principally those with philadelphia and pittsburg branches where the schwab crowd was influential, at $ . per share, and that large blocks were being sold to the public at up to $ . on the new york curb, a valuation for the "properties" of more than $ , , . getting into the game the birth of the $ , , merger, to take in two properties that had not yet matriculated even in the baby-mine class and were actually suspected at the outset by mining men in goldfield to be wildcats, was the signal for an outpouring in quick succession of greenwater promotions from all centers, of which the annals of the industry in this country chronicle no counterpart. at the height of the boom there was promoted out of los angeles and new york the furnace creek consolidated copper company, with a capitalization of $ , , . from butte, home of the copper-mining industry, the furnace creek extension copper mining company was promoted, with a capitalization of $ , , , and also the butte & greenwater, capitalized for $ , , . malcolm macdonald the "hero" of montgomery-shoshone at bullfrog, hailed from butte. he it was who interested the schwab crowd in greenwater, as he did in tonopah and bullfrog. "patsy" clark, the noted mine operator of spokane, having prospered marketwise with his furnace creek copper company, promptly headed a new one, the furnace valley copper company, with a capitalization of $ , , . these shares were listed on the spokane, butte and los angeles stock exchanges, but did not appear on the new york curb. a san francisco crowd of brokers and stock-market operators organized the greenwater bimetallic copper company. "they let her go gallagher" with a capitalization of $ , , . the c. m. sumner investment securities company of denver opened subscriptions for the greenwater-death valley copper company. (the title of this company was a play on the name of the greenwater & death valley copper company.) tonopah citizens, not to be outdone, sallied forth with the greenwater calumet incorporated for $ , , . hon. t. l. oddie, later governor of nevada, then of tonopah, and his brother, c. m. oddie, followed the lead and headed the greenwater arcturus copper mining company, with a capitalization of $ , , . the consolidated greenwater copper company was fed to the hungry public out of a pittsburg trough, with general offices in the keystone bank building, and with a high-class tonopah crowd on the directorate. eugene howell, cashier of the tonopah banking corporation, of which united states senator nixon was president, was treasurer. john a. kirby, of salt lake city, until recently associated with george wingfield in the ownership of nevada hills, was president. arthur kunze, who had sold the control of the greenwater & death valley copper company to malcolm macdonald, who in turn had interested the schwab coterie in the organization, put out a new one called the greenwater copper mining company, with a capitalization of $ , , . h. t. bragdon, formerly president of the goldfield mining company, which is one of the integrals of the goldfield consolidated, headed the greenwater black jack copper mining company, with a capitalization of $ , , . all the copper in the world united states senator george s. nixon of nevada lent his name, along with h. h. clark, william bayley and h. j. woollacott, as a director of the greenwater furnace creek copper company, with a capitalization of $ , , . the prospectus of this company announced that the ores were "melaconite, azurite, chalcocite, and occasionally chrysocolla, averaging to per cent. (copper) tenor." "taking the lowest percentage of ore reported by the company," says horace stevens in the _copper handbook_ of , "and the company's own figures as to the size of its ore-bodies, the first feet in depth on this wonderful property would carry upward of , , tons of refined copper, worth, at cents per pound, the comparatively trifling sum of five billion, two hundred million dollars." mr. stevens goes on: "the fact that a major is manager of this company, and a united states senator is vice-president, will prove a great consolation to the shareholders. it is indeed lamentable to note that this magnificent mine, which carries, according to the company's own statements, more copper than all the developed copper mines of the world, is idle, and present office address a mystery." donald mackenzie, of goldfield, promoter of the successful frances-mohawk mining & leasing company at goldfield, which netted over $ , , from mohawk ores, and distributed all of per cent. of this amount to stockholders in the shape of dividends, pushed out the greenwater red boy copper company and the greenwater saratoga copper company, with a capitalization of $ , , each. thomas b. rickey, president of the state bank & trust company of goldfield, tonopah and carson city, was president of both of these companies, and j. l. ("god-bless-you") lindsey, cashier of the state bank & trust company, was treasurer. greenwater consolidated, greenwater copper, furnace creek oxide copper, greenwater black oxide copper, greenwater california copper, greenwater polaris copper, greenwater pay copper, pittsburg and greenwater copper, greenwater copper range, greenwater ely consolidated, greenwater sunset, new york & greenwater, greenwater etna, greenwater superior, greenwater victor, greenwater ibex, greenwater vindicator, greenwater prospectors', greenwater el captain, greenwater & death valley extension, greenwater copper queen, greenwater helmet, tonopah greenwater, furnace creek gold & copper, and greenwater willow creek were the names of a score of others with capitalizations ranging all the way from $ , , to $ , , each. among these the greenwater willow creek copper company boasted of the fanciest directorate. george a. bartlett, nevada's lone congressman, was president, and richard sutro, then head of the world-known new york banking house of sutro bros. & co., was advertised as first vice-president. henry e. epstine, the popular tonopah broker, was second vice-president, and alonzo tripp, general manager of the tonopah & goldfield railroad, was a director. did i fall for greenwater? yes, and at the eleventh hour. on the half-hearted recommendation of the trust company's engineer, "jack" campbell, the l. m. sullivan trust company paid $ , for a property in greenwater that boasted of two ten-foot holes. on two sides it adjoined the property of the furnace creek copper company, the original location in the camp. our engineer reported that if "patsy" clark's furnace creek copper company, shares of which were selling in the market at a valuation of $ , , for the property, had any ore, we certainly could not miss it. no matter which way the veins trended, our ground must be as good as "patsy's," because the identical vein formation passed through both properties. the sullivan trust company thereupon incorporated the furnace creek south extension copper company to operate the property. the capitalization was , , shares of the par value of $ , of which , shares were placed in the treasury of the company to be sold for purposes of mine development. new york stock exchange houses having the call as purveyors of this particular line of goods, the sullivan trust company tendered the selling agency of furnace creek south extension treasury stock to e. a. manice & company, members of the new york stock exchange, whose officers are located in the same building in new york as j. p. morgan & company. we offered for public subscription , shares of treasury stock at par, $ , through e. a. manice & company, and this firm advertised the offering in new york newspapers over their own signature. the sullivan trust company paid the bills. the collapse of greenwater the offering turned out to be a "bloomer," the first the sullivan trust company had met with. e. a. manice & company did not dispose of as many as , shares. neither did the stock offered later by the sullivan trust company through brokers in other cities sell freely. just at the moment when we announced our offering of furnace creek south extension the greenwater boom began to crack. oscar adams turner, who promoted the tonopah mining company of nevada, which has paid $ , , in dividends on a capitalization of $ , , , is responsible for the early bursting of the bubble. mr. turner had invested in the greenwater camp on the reports of an engineer. he organized the greenwater central copper company. then he decided that it was advisable for him to take a look at the property for himself. he visited greenwater. two hours after arriving in camp he sent a telegram to philadelphia reading substantially as follows: stop offering greenwater central. make no more payments on the property. do not use my name any further. there is nothing here. the tenor of the message leaked out. indiscriminate selling ensued by a noted bank crowd in philadelphia who were loaded up with greenwaters. others followed suit. the market became sick. at the first sign of a market setback inquiries began to pour into nevada from all over the east, and noted copper experts from montana, arizona, california and other points came piling into the greenwater camp to examine the properties. soon a chorus of adverse opinion found its way into every financial center. market values crumbled as rapidly as they had risen. paper fortunes evaporated in thin air. i make a conservative statement when i say that the american public sank fully $ , , in greenwater in less than four months. not all of the greenwater promotions were over-subscribed--not half, not a quarter--and the american public may well congratulate itself that the boom "busted" when only approximately $ , , had passed into the pockets of the promoters. what of the camp? it exists no more. all mine development work ceased long ago. there are green-stained carbonates on the surface, but there are no copper ore-bodies. the "mines" have been dismantled of their machinery and other equipment, and not even a lone watchman remains to point out to the desert-wayfarer the spot on which was reared _the monumental mining-stock swindle of the century_. every dollar invested by the public is lost. the dry, hot winds of the sand-swept desert now chant the requiem. fix the responsibility here if you can. the job is not easy. let me attempt it. the buccaneers who took greenwater & death valley down to new york and allowed the public to subscribe for it with the name of charles m. schwab as a lure, at a valuation for the property of more than $ , , , and then ballooned the price on the curb until the shares sold at a valuation of $ , , for the property, without an assured mining success in sight in the entire camp--these men, in my opinion, were criminally responsible. they have never been called to account. members of the new york stock exchange who aided and abetted them by lending their names to the transaction, and charles m. schwab, who permitted the use of his name and that of his brother-in-law, are morally responsible. not for an instant do i entertain the thought that the stock exchange crowd and mr. schwab realized that the mines of the company were absolutely valueless, but i do maintain that men of their standing and prestige have opportunities which men of smaller caliber do not enjoy and that their conduct for this reason was reprehensible to an extreme. the shame and the blame i cite the instance of the sullivan trust company "falling" for greenwater, after hesitating about embarking on the enterprise for weeks, and i am convinced that others fell the same way. the sullivan trust company did not touch a greenwater property until its clients and its clientele among the brokers throughout the union had burned up the wires with requests for a greenwater promotion, and when it did finally "fall" it lost its own money, the only other sufferers being a handful of investors who at the tail-end of the boom subscribed for a comparatively small block of treasury stock. not all of the promoters "fell" innocently, however. there were half-baked promoters and mining-stock brokers in almost every city in the union who had witnessed the enhancement in values during the goldfield boom, and whose palms had itched for the "long green" that for so long came the way of men on the ground. these, at the first signal that the greenwater boom was on, with charles m. schwab in the saddle, lost no time in annexing ground in the district with the single view of incorporating companies and retailing the stock to the public at thousands of per cent. profit. the greenwater mining-boom fiasco stands in a class by itself as an example of mining-stock pitfalls. the only greenwater stock which at this time has a market quotation is greenwater mines & smelters, which reflects the true state of the public mind regarding all greenwaters by actually selling at a valuation of less than the amount of money in the company's treasury-- cents per share on an outstanding issue of , , shares--there being $ , in the treasury along with an i.o.u. of c. s. minzesheimer & company, the "busted" new york stock exchange house, for $ , , of which the company will realize cents on the dollar through the receiver. chapter v on the eve of the great goldfield smash it was early in november, . indian summer held goldfield in its soft embrace. nature wore that golden livery which one always associates with the idea of abundance. the mines of the district were being gutted of their treasures at the rate of $ , , a month. under the high pressure of the short-term leasing system new high records of production were being made. the population was , . bank deposits totaled $ , , . real estate on main street commanded $ , a front foot. the streets were full of people. every one had money. in years gone by men had died of thirst on that very spot. three years before there were no mines and the population numbered only a corporal's guard. the transformation was complete. within three years the dreams of the lusty trail-blazers, who had braved the perils of the desert to locate the district, had become a towering reality. the camp, which two years before was dubbed by financial writers of the press as a "raw prospect" and a "haven for wildcatters and gamblers," had developed bonanza proportions. the early boast of goldfield's press bureau, that goldfield would prove to be the greatest gold camp in the united states, was an accomplished fact. listed goldfield mining issues showed an enhancement in the markets of nearly $ , , . stocks of neighboring camps had increased in market value $ , , more. the camp rode complacently on the crest of the big boom, than which history chronicles no greater since the famous old days of mackay, fair, flood and o'brien on the comstock. there was no premonition that a climax must be reached in climbing values at some period, and that a collapse might be near. goldfield consolidated shares were selling on the exchanges at above par, $ , or at a market valuation of more than $ , , for the issued capitalization of the company. you could have bought all of the properties of this company for less than $ , when the camp was first located. a score of leases were operating the consolidated's properties. the leases were soon to expire. much market capital was made of the fact that the company would presently "come into its own." more than stocks of goldfield and near-by camps were listed on the exchanges and curbs. all of these were selling at sensational prices and enjoyed a swimming market. the successful merging by wingfield and nixon of the principal producing properties of goldfield at a $ , , valuation, more than four times the value of the known ore-reserves, stimulated the whole list. columbia mountain, promoted by the mergerers of goldfield consolidated, but excluded from the merger because not contiguous to the other integrals and because it had no ore, had been ballooned to $ . per share on a million-share capitalization, and stood firm in the market regardless of the fact that it was still only an unpromising "prospect." the issued stock of a dozen other companies in control of the promoters of the merger was selling at an aggregate value of many millions more. the most despised "pup" in this particular group was milltown, of not even prospective value; yet it easily commanded a per-share price that gave the "property" a market valuation of $ , . silver pick, capitalized for , , shares of the par value of $ each, had scored an uninterrupted advance from to $ . a share without a pound of ore being found on the property. the market price did not waver. kewanas, another million-share company, was in big demand at $ . per share, a valuation of $ , , for the property and an advance of , per cent. over the promotion price. kewanas's gain was also made despite the fact that mine developments had failed to open up pay ore in commercial quantities. eight months earlier the entire acreage had been offered to me for $ , and i had refused to buy. goldfield daisy, promoted by frank horton, a faro dealer in george wingfield's tonopah gambling joint, had been ballooned from cents to $ a share on a capitalization of , , shares. it had never earned a dollar for stockholders, but was actually selling in the open market at a valuation of $ , , . the price showed no sign of weakening. combination fraction, owning a few acres of ground, which was promoted at cents a share on a capitalization of , , shares, had risen rapidly, because of ore discoveries and contiguity to the mohawk, to $ . a share. stockholders gave no sign of a tendency to unload. great bend, situated in the diamondfield section of the goldfield district, four miles from the productive zone, had been carried up from cents a share to $ . without a mine being opened up, establishing a market valuation for the property of $ , , . these are but a few of the more striking instances of price appreciations. all of these stocks, excepting goldfield consolidated, are now selling for a few pennies per share each, the average not being so much as ten cents. there were over a hundred other goldfield stocks that also enjoyed spectacular market careers, on which it is now impossible to get any quotation at all. the rise of wingfield and nixon any one in goldfield who was willing to admit that stocks were selling too high at the time was decried as a "knocker." you could borrow freely on all listed goldfield stocks at john s. cook & company's bank, owned by the promoters of the goldfield consolidated, and the men of the camp for that reason felt that there must be concrete value behind nearly all of them. brokers in eastern cities reported that few of their customers were willing to take profits even at the prices to which stocks had been skyrocketed. most mining-stock brokers of the cities had "knocked" the stocks of the camp in the early days before the advance. at this stage, when prices had reached undreamed-of levels, the brokers did not advise their customers that values had been worked up far beyond intrinsic worth. indeed, they actually waxed enthusiastic in their recommendations to buy. every one was a bull. sessions of the goldfield stock exchange reflected the extent of the craze. outside of the exchange the stridulous, whooping, screeching, detonating voices of the brokers that kept carrying the market up at each session could be heard half a block away. later, did you find your way into the crowded board-room, the half-crazed manner in which note-books, arms, fists, index fingers, hats and heads tossed and swayed approached in frenzy a scene of violence to which madness might at once be the consummation and the curse. george wingfield and his partner, george s. nixon, were the heroes of the hour. less than five years before, mr. wingfield had come into tonopah with a stake of $ , supplied by mr. nixon, whose home was in winnemucca, nevada. mr. wingfield had formerly been an impecunious cowboy gambler. born in the backwoods of arkansas, and later of oregon, he hailed from golconda, nevada. mr. nixon, at the time he staked mr. wingfield and until his election as a united states senator in , was known as the "state agent" of the southern pacific company for nevada, having succeeded on the job the notorious "black" wallace, who for many years handled the "yellow-dog" fund for the huntington régime when franchises were hard to get and legislatures had to be bought. mr. nixon was also president of a bank in winnemucca, which was a way station on the southern pacific railroad. mr. wingfield had signalized his money-getting prowess by running mr. nixon's $ into $ , , as principal owner of the tonopah club, the biggest gambling house in tonopah, and later "parleying" the money for himself and partner into ownership of control of the merged $ , , goldfield consolidated, which was their corporate creation. mr. wingfield was said to be behind the market. he was looked upon as boss of the mining partnership, and mr. nixon as a circumstance. mr. wingfield was a conspicuous figure at nearly all the sessions of the goldfield stock exchange, of which he was a member. in the early evenings, when informal sessions were held on the curb, he could also be seen in the thick of the tumult. he was on the job at all hours. at that time mr. wingfield was about thirty years old. of stinted, meager frame, his was the extreme pallor that denoted ill health, years of hardship, or vicious habits. his eyes were watery, his look vacillating. uncouth, cold of manner, and taciturn of disposition, he was the last man whom an observer would readily imagine to be the possessor of abilities of a superior order. in and around the camp he was noted for secretiveness. he was rated a cool, calculating, selfish, surething gambler-man-of-affairs--the kind who uses the backstairs, never trusts anybody, is willing to wait a long time to accomplish a set purpose, keeps his mouth closed, and does not allow trifling scruples to stand in the way of final encompassment. among stud-poker players who patronized gaming tables in tonopah, goldfield and bullfrog, he was famed for a half-cunning expression of countenance which deceived his opponents into believing he was bluffing when he wasn't. in card games he was usually a consistent winner. his partner, george s. nixon, looked the part of the dapper little winnemucca bank manager and confidential state agent of the southern pacific that he was before becoming senator. he was considerably below middle weight, and above middle girth at that part of his anatomy which a political enemy once described as seat of his thoughts and the tabernacle of his aspirations. his steel-gray eyes were absolutely without expression. newly-rich, his money and his southern pacific connections had gained him a toga, but he did not carry himself like a man upon whom the honors had been thrust. around goldfield he strutted with the pride and gravity of a spanish grandee. the pair were in control of the mine, bank and market situation. brokers, bank men and officers of mining companies waited upon them and did their bidding. at night, in the montezuma club, where leading citizens were wont to congregate, mr. wingfield would on occasion ostentatiously offer to wager that goldfield consolidated "would sell at $ before $ ," etc. men with money who had flocked to the camp from every direction listened in rapt attention. at a later hour they secretly wired the news to their friends in the east. next morning the market would reflect more public buying and still higher prices. goldfield itself was blindly following the lead of the twain. it was indeed easier for these men to mark prices up than to put them down. the winnings of a tenderfoot what about me? where did i stand and what was my position at this conjuncture? did i have foresight? did i realize that stocks were selling at much higher prices than were warranted by intrinsic worth and speculative value? was not the fact that the mergerers and waterers of goldfield consolidated were in command of the mine, market and bank situation sufficient to make me suspect that possibly the cards might be stacked and that maybe cards were being dealt from the bottom of the deck? was i, in fact, wise to the exact situation and did i realize a smash was bound to ensue? 'tis a pity hindsight were not foresight, for only in that event could i laurel-wreath myself. i had been on the ground for more than two years. in reality i was still a tenderfoot. my experiences had been unique--all on the constructive side. i had mastered the first rudiments of the game, but only the first. intrinsic value didn't figure as the only item in my conception of the worth of a goldfield mining issue. the millionaires of the camp were not miners by profession and their judgment of the value of any mining property would not have influenced a guggenheim, a ryan or a rothschild to extend so much as $ on the development of any piece of likely mineral ground. goldfield was a poor man's camp. and it was making good despite the croakings of school-trained engineers who had turned the district down in the early days, as they did tonopah. at this period i was living frugally. i never touched a card. i worked at my desk on an average of sixteen hours a day, including sunday, and i never relaxed. although i had arrived in the camp broke, had i been offered $ , , for my half interest in the l. m. sullivan trust company i think i should have refused it. i liked my job. the leaven of my environment appealed directly to my perceptions. i was saturated with the traditions of western "mining luck" and also with the optimism of my sturdy neighbors. these men had stood their ground in the early period of the camp's days of "trial and tribulation." they had triumphed like their forebears on the comstock, just as did the hardy pioneers of leadville and cripple creek and as their brethren of tonopah did. their influence over me was unbounded. i relished the work, anyhow. as a matter of fact, i had little use for money except for the purposes of business. _and never a suggestion came to me that it was time for a "clean up."_ the l. m. sullivan trust company, of which i was vice-president and general manager, was doing remarkably well. the stocks of the mining companies that were organized and promoted by the trust company were listed on the san francisco stock exchange and new york curb and showed a market appreciation of $ , , above the promotion prices. indian camp, promoted at cents, was selling freely at $ . . jumping jack, for which subscriptions were originally accepted at cents, was in hot demand at cents. stray dog, sold to the public originally at cents, was active around cents. lou dillon, put out less than a month before at cents, had worked its way up to cents. silver pick extension, which was oversubscribed at cents and commanded cents two hours after we announced that subscriptions were closed, was selling on the exchanges and curbs of the country at cents. eagle's nest fairview, which original subscribers got into at cents, was very much wanted at cents. fairview hailstone, floated at cents, was in constant demand at cents. governor john sparks was now president of all of these companies. you could have sold big blocks of the sullivan stocks at these profit-making prices on any of the mining exchanges and curb markets of the country without reducing the price a cent, so constant was the public demand and so broad was the market. with the exception of bullfrog rush, for which the sullivan trust company had refunded the money to subscribers when the mine under development proved to be a "lemon," every promotion of the trust company showed investors a handsome stock-market profit. in the aggregate the promotion price of the seven sullivan mining companies figured $ , , for the entire capitalization. the market price of these was now $ , , , or an average gain of per cent. it was a record to be proud of, and i _was_ proud of it, not alone because i was vice-president and general manager of the trust company, but also because a firm of expert accountants, recommended by the american national bank of san francisco to examine the books of the trust company, had reported that our assets were $ , , in excess of liabilities, all of which had been gathered in about ten months' time. about $ , , of this represented promotion profits. the remainder was earned by the appreciation in price of mining securities carried or accumulated through the boom. it was the common boast of the camp that george wingfield had "parleyed" or "pyramided" $ , , which represented the profits of his gambling place in tonopah, into ownership of control along with his partner nixon, of the $ , , goldfield consolidated. as heretofore related, i had experienced a lot of hard luck in missing by a hair's breadth, ownership of the hayes-monnette lease on the mohawk and the nevada hills mine, which would have increased our profits $ , , more, but i felicitated myself that i had done very well by pyramiding $ , into a half interest in a flourishing $ , , trust company. i was vain enough to believe that my achievement was as unique as that of mr. wingfield, because he had had the influence of a united states senator and the money deposited in a chain of newly established banks in goldfield, tonopah and other points to aid him in his operations. against this i had not only been compelled to rely on my own resources, but was actually required to combat the work of black-mailers who from time to time attempted to levy tribute. on my failure to "come through" (i never did) they rarely hesitated to take a malevolent smash in print at the sullivan trust company, because in years gone by its active head happened to have had a very youthful past, even though they knew that past was no longer his and he had passed it like milestones on the way. i am landed high and dry the nevada state election took place in november. the democratic ticket, headed by "honest" john sparks for governor and denver s. dickerson for lieutenant-governor, was victorious. the republican ticket, headed by j. f. mitchell, a mining promoter and engineer, backed by united states senator nixon, the republican political boss, suffered humiliating defeat. denver s. dickerson was the candidate of the labor unions. during a former labor war in cripple creek mr. dickerson had been confined in the "bull-pen" when the government intervened to quell the labor riots there. goldfield miners to a man very naturally voted for him. governor sparks had accepted the renomination at the urgent request of the l. m. sullivan trust company, and his victory, as well as the complexion of the ticket, was credited largely to the activities in politics of the trust company. the trust company, while not a banking institution in the sense that it accepted deposits of cash from citizens of the town, having confined its operations to the financing of mining enterprises, loomed large on the political and business horizon because of its increasing financial and political power. the trust company carried all of its moneys in banks that were not affiliated with the wingfield-nixon confederacy and worked at cross-purposes with it in this particular, too. the wingfield-nixon crowd had pyramided a gambling house in tonopah and a little one-horse bank in winnemucca into ownership of control of the $ , , goldfield consolidated; into ownership of john s. cook & company's bank in goldfield, which was credited with deposits aggregating $ , , ; into a new bank in tonopah, known as the tonopah banking corporation, and into a newly formed bank in reno, called the nixon national. in politics it had succeeded in seating mr. nixon in the united states senate, placing at his command the federal patronage which goes with that exalted office. the confederacy was reaching out. in goldfield it had overcome such strong banking opposition as the nye & ormsby county bank and the state bank & trust company, both of which were in business before john s. cook & company were dreamed of. it had accomplished this by loaning large sums of money to goldfield brokers and other citizens on mining stocks of the camp at a time when this class of securities was not so readily accepted by the other banks as good collateral. in tonopah the newly-established nixon bank, known as the tonopah banking corporation, was making gradual headway against both the nye & ormsby and the state bank & trust company, which still carried about per cent. of the business of that camp. in reno the nixon national found it hard to compete with such old institutions as the bank of nevada, the washoe county bank and the farmers & merchants national, but rumors were already in the air that the nixon bank was soon to buy out and consolidate with the powerful bank of nevada. in goldfield the power of the confederacy was strongest in all lines except politics. there it already had its grasp on the throat of the mining and financial business of the camp, and through the out-of-town draft collection department of its bank held its finger on the pulse of the mining-share markets. its sore spot was politics. wingfield and nixon's market operations were clouded in mystery. no one knew exactly where they stood. brokers in goldfield and san francisco, who had compared notes, were convinced that the two had unloaded many millions of shares of the smaller companies not included in the merger, and had raked in not less than $ , , during the boom as the result of this selling. the disposal of huge blocks of stock by wingfield and nixon, however, was not interpreted as meaning that stocks were selling too high. the general idea prevailed that the proceeds were used to enable the confederacy to finance its stock purchases in the integral companies that were turned over in the making of the merger and to finance its new chain of banks. about the middle of november the market for goldfield securities took a turn for the bad. prices gave indication of having reached a stopping place. goldfield promoters began to complain that they were compelled to lend strong support to the market because of selling from many quarters that could not be explained. there was much market pressure. in a few days the market became unsteady, then soft, then wobbly again. in camp wingfield and nixon were reported still bullish. the securities of the sullivan trust company were under attack in all markets. salt lake and san francisco were reported to be spilling stock. great blocks were being thrown over. i gave support in a jiffy. there was no surcease. _within ten days i was forced to throw all of a million dollars behind the market to hold it._ this didn't faze me. i was getting stock certificates for the money, and i believed they were worth the price. but i was puzzled to determine what it was all about. the beginning of the raid soon it was reported to me that senator nixon was advising people at all points who held sullivan stocks, or knew of anybody who held them, to unload. from san francisco came word that a clique of brokers was operating for the decline. on the following monday the market on the san francisco stock exchange opened strong and buoyant, and it looked for a moment as if the selling movement had collapsed. i felt relieved. my 'phone bell rang. a stock broker of tonopah called me on the long distance. "offer you , lou dillon at ," he said. "do you want them?" lou dillon was a sullivan stock that had been promoted at ; was now a point under the market, however. "we'll take 'em," i said. "what's the matter?" "rumored up here that your books are under inspection by the post-office department. you have had five new men on your books for the past few weeks, and some one has spread a story here that nixon has sicked the government on to you." i denied it, of course. the five men in question were the experts who had been sent up from san francisco by the firm of accountants recommended to us by the american national bank, and they were there at our own behest. the story was a raw canard. throughout the day the sullivan trust company was called upon to stand behind the san francisco market and take in nearly all of the big blocks of sullivan stocks owned in the camps of tonopah and manhattan. before our denials could reach the sellers the damage had been done. and it took $ , a day for four days to hold the market against this fresh onslaught. color had been lent to the wild rumors about a postal investigation by the fact that an attack had been made on me in the columns of the _denver mining record_ a year before. rumor said the dose was going to be repeated. in the early days of the camp, when i was at the head of the goldfield-tonopah advertising agency, i had represented the _denver mining record_ in goldfield. as its agent i had secured advertising contracts for it which netted my agency in the neighborhood of $ , a year in commissions. the owners of the newspaper conceived the idea that i was making too much money on a commission basis and sent wing b. allen, formerly of salt lake, to the scene to take my place. mr. allen worked for smaller pay. he wanted me to divide my commission on standing business, and i refused. the publishers took mr. allen's part. as a result i withdrew all the advertising from the columns of the _denver mining record_ for which my agency had been responsible, and the _denver mining record_ was never able to regain the lost ground. a short time before the raid on our stocks began mr. allen had been arrested in goldfield on a warrant sworn out by l. m. sullivan, tried before judge bell on the charge of extortion and bound over to the grand jury. at the hearing before judge bell the sullivan trust company submitted evidence that mr. allen had threatened, if we did not give his paper a slice of the promotion advertising of the sullivan trust company, that the _denver mining record_ would commence to attack me personally in its columns, and, because of my early past, would do the trust company serious damage. at the hearing despatches were submitted which were filed at the goldfield office of the western union telegraph company by mr. allen, in which he had informed his paper that it had better proceed with the attack, because neither mr. sullivan nor myself gave indication of yielding. at the hearing, under oath and in a crowded courtroom, i openly denounced mr. allen and his newspaper as blackmailers of the very vilest type, and so did mr. sullivan. judge bell, on the submission by the western union of mr. allen's despatches to his paper, promptly held him for the grand jury. on the advice of former governor thomas, of colorado, to whom the sullivan trust company paid a retainer as counsel, and who later became chief counsel for the goldfield consolidated, i employed christopher c. clay of denver to commence suit against the owners of the _denver mining record_. as a result i secured from them a settlement by which they agreed not to mention my name again in their paper. i was harassed at the time, or i would not have compromised. the stuff printed by the _denver mining record_, which has been rehashed by every blackmailer who ever attempted to levy on me, was about two-tenths true and eight-tenths false. it was a literal copy of an anonymous publication put out by a set of blackmailers who had tried to circulate it years before in new york when i was head of the maxim & gay company. i had spent thousands of dollars to run down the authorship then, but without avail. the lawyers had succeeded in seizing thousands of copies of the publication, and had made an arrest, but they failed to prove authorship of the screed and ownership of the paper, and the culprits therefore were not punished. in denver when mr. clay applied for criminal warrants, he was asked first to furnish proof of authorship, which was impossible for us, the articles having been unsigned. some pertinent personalities the same stuff has recently appeared without signature in a goldfield paper which originally came into possession of george wingfield through foreclosure proceedings, and in a reno evening paper which is controlled by senator nixon, who owns a large slice of the paper's mortgage. it has also appeared in other papers "friendly" to wingfield and nixon. tens of thousands of copies of the goldfield publication containing the anonymous libel have been sent broadcast. other newspapers have reproduced the libelous stuff, some innocently and some for sordid reasons, but of this more later. my career is fraught with instances of recourse by enemies to blackmail and attempted blackmail. if i should undertake to tabulate the cases where men and interests, ranging from impecunious newspaper reporters to financial-newspaper publishers and mining-stock brokers and market operators who, from the background, publish market letters or furnish the capital for mining publications, have attempted to levy tribute or to club me into submission by the use of so vile a weapon, i should be compelled to write a big book on the subject. and right here i should like to place myself on record to the effect that seemingly the principal shortcoming that has marked my mining-financial career has been that i had a youthful past--a past which during the last decade has never been taken into serious consideration by men who have held close business relations with me, but which, of course, is a thorn in the sides of men and interests whose bidding i have failed to obey. i defy any man to cite a single instance where i was guilty of crookedness in a mining transaction or a business transaction of any kind in my entire career as a promoter. i have been fearless--too much so. i have been a rabid enthusiast. i have tried to build. i have given quarter, but have never taken any. i have been honest. were i really dishonest, i could have prevented every publication of an attack of consequence on me by lending myself in advance to the base purposes of my traducers, and i would have millions now for having compromised with them. it is heaven's own truth that in nine cases out of ten, when i have been attacked in print, the motive of the attacking party has been base and the facts have been so distorted or misrepresented that the fabric was a lie. nor has the cruelty of the operation stayed any one's hand. at the very moment in goldfield when i knew that the _denver mining record_ would not assault the sullivan trust company again because of the settlement of the libel suit by my lawyers out of court, fresh rumors were spread that the _denver mining record_ was getting ready for another attack and that tens of thousands of copies of that newspaper were to be circulated. but you can't stop a rumor by the declaration of the truth, and the sullivan trust company decided that it would be unwise to make a denial in print, for by so doing it would communicate to all stockholders the news that the sullivan stocks were actually under attack and thus cause more "frightened selling." sight drafts from brokers in new york, chicago, salt lake and san francisco, drawn on the sullivan trust company, with large bundles of sullivan stocks attached, were pouring into our office through the local banks for presentation. john s. cook & company made a specialty of this department of banking, and most of the drafts on us were cleared through the wingfield-nixon bank. it was reported to me that senator nixon was openly discussing the enormous volume of stocks coming in on us and was questioning our ability to stem the tide. as a strategic measure, the sullivan trust company decided to "cross" sales on the san francisco stock exchange so that it might ship out of the camp, through the banks, large blocks of stock with draft attached against san francisco brokers and thus convey to the minds of local bankers that we were selling large blocks of stock as well as buying them. the volume of the "cross" trades caused some talk in san francisco, and was magnified by brokers operating for the decline. the time when money talks some of our brokers in san francisco now demanded an independent bank guaranty that the drafts on us would be honored. we asked for a line of credit at the state bank & trust company. it was promptly given. as fast as the brokers asked for a guaranty, the state bank & trust company telegraphed them formally that it would honor our paper to the extent of $ , or $ , in every case. to protect the bank and in order to be able to borrow a large sum of money, should we need it in the event of another selling movement starting in, we deposited stocks of a market value of $ , , with the state bank & trust company, which signed a paper that this collateral was to stand against loans for any amount which the state bank & trust company might make to us on open account. a few days later we borrowed from the bank $ , in cash, and it was agreed that should we need $ , more on the same collateral, it would be promptly placed at our disposal. we did not yet need the money, but i realized the desirability of assembling cash in an exigency such as that. nor was this an unusual proceeding. there was a time during the manhattan boom when the overdraft of the sullivan trust company in the nye & ormsby county bank was $ , . the bank held against this overdraft sullivan stocks at the promotion price. nearly all of these stocks at that early period were as yet unlisted. the idea of withdrawing support and letting the market go to smash did not occur to me at all. as already stated, i believed the stocks were worth the money. but that was not the chief reason for my stubborn market position. i took great pride in the fact that every listed stock of the sullivan trust company showed a big profit to stockholders. i considered the greatest asset of the trust company to be, not its money, but its prestige, and i entertained big ideas as to a future i had mapped out for the corporation. i did not suspect that an organized campaign was on to destroy us and that the dominant interests of the camp were reaching out for everything in sight. nor did i have any use for money for hoarding purposes. the only thing that seriously nettled me was the fact that the sullivan trust company had been compelled to turn borrower. before the first selling movement started in, our assets were $ , , more than our liabilities. but this $ , , was not all cash. in fact, it was represented in part by stocks which we had purchased in the market with the idea that they were good stocks to own and would show the trust company a big profit, as they had. we could have cleaned up $ , , in cash, but we had not done so. now, within a month, all of our available cash had been put into fresh lines of our own securities, we had been compelled to sell other lines out, and the corporation was a borrower. i was stubborn--too stubborn for a man who boasted of so little experience in such a big game. it was a pet belief of mine that obstacles create character. i was in the heat of a battle and fighting my way against tremendous odds. i rather liked the sensation. another dominant trait which, deep down, has in recent years been the keynote of my actions is the fact that my philosophy teaches me that you can't down the truth, that a lie can't live, and that _justice will be finally done_. had i always put the accent on the "finally" and mixed with my philosophy a little "dope" to the effect that while justice is always _finally_ triumphant, injustice is often victorious _for a while_, i might have fared better. in a previous chapter i stated that "wall street deals for suckers" and that "thinkers who think they know, but don't" are the suckers for which wall street casts its net. i also stated that wall street promoters realized that "a little knowledge is a dangerous thing" and that this "little knowledge" leads astray this particular kind of sucker. in "falling" in goldfield for the philosophy that "justice is always triumphant in the end," by swallowing it whole, and in making no allowance for the fact that justice is sometimes tardy, even though it does prevail in the end, i here decorate myself with a medal as a top-notcher in the _sucker_ class--in the academic sense--which i have described, and which is the usual sense in which i use the term "sucker." again the selling ceased, and it looked as if the sullivan trust company would be compelled to wait only for a general turn in the market to relieve itself of money-pressure by disposing of some of the large blocks of stock it had accumulated during the periods of heavy liquidation. clouds in the western sky a new black cloud showed itself on the horizon. a labor war was threatened in goldfield. it was very apparent, from the conduct of george wingfield, that he was baiting the miners, and it appeared to be the general opinion of the people of goldfield that he was trying to precipitate trouble. the miners had asked for higher wages. the sullivan trust company, which was operating seven properties with a monthly pay-roll of $ , , was the first to express a willingness to grant the terms. wingfield and nixon refused. the miners asked for arbitration. it was refused. the mines were then shut down for a few days and the terms of the leases were extended. heavy selling in all goldfield stocks took place during the shut-down. rumors could now be heard on every side that wingfield and nixon were dumping overboard big blocks of stock. could it be possible that they themselves were scuttling the ship that had given them such glorious passage? again the sullivan trust company was called upon to stand behind the market. soon a cry of distress was heard in the camp from investors and stock brokers who had overloaded themselves with securities and who were in debt to the banks to the extent of millions, with stock of the camp put up as collateral. inquiry revealed the fact that all goldfield and tonopah banks were overloaded. this condition had been brought about by the liberal terms which had been granted by the wingfield-nixon banks during the "ballooning" of goldfield consolidated, when the confederacy, according to common belief, was unloading millions of dollars' worth of stocks in the small companies and was using the proceeds to finance their purchase of the stock of several of the integrals that formed the big merger. i began to get next to myself and to "smell a rat." i had never had so much as an argument with either mr. wingfield or mr. nixon, had never been engaged in any business transactions with them, and the campaign against the trust company, which i felt sure had been conceived at the outset in the interests of the republican political machine, i now suspected was part of a general scheme to get hold of anything and everything that was valuable in the camp. by smashing the sullivan trust company they could hurt the democratic party of the state, with which we were affiliated, and for which it was currently believed we were supplying the sinews of war. by smashing us they might also cripple the bank with which we were doing business, and which in both goldfield and tonopah, particularly tonopah, was a formidable competitor of their banking interests. and thus they might also facilitate a decline in the market which would shake out of their holdings borrowers at their banks. i figured it out this way: wingfield and nixon knew that we had foolishly attempted to support the market for our stocks, that other promoters in goldfield had done likewise, and that investors and brokers in goldfield had borrowed heavily from all of the banks. john s. cook & company were calling for more collateral from their customers, and real estate was being added to the pledges of mining securities. what more easy, even though diabolical, than to "bear" the market, shake out the stockholders in various important mines of the camp, take their stocks away from them by foreclosure, and get possession again, at bankrupt-sale prices, of the millions of dollars' worth of securities which they had unloaded during the boom? if this was the scheme of wingfield and nixon, what transpired could not have been patterned more perfectly. mr. wingfield walked the streets day and night, armed to the teeth, and openly dared any of the miners to "get him." he threatened another shut-down, a reduction of wages, the installation of change-rooms at the mines and other dire things, all seemingly calculated to rouse the ire of the mine-workers. the miners fell for the bait, became belligerent and nasty and did things with which the community was not in sympathy. day by day the situation became more critical. during one of the shut-downs which ensued, senator nixon revealed his hand by convening a meeting of the executive committees of the two goldfield stock exchanges. he insisted that the exchanges close, arguing that the prices of stocks should be allowed to recede in sympathy with the labor troubles. no thought was his for the men of the camp who were committed to the long side of the market at boom prices and who had worked day and night to create the boom which had thrown into the laps of wingfield and nixon riches far beyond the dreams of avarice. the brokers refused to close the exchanges. goldfielders were slow to grasp the real import of what was transpiring. things were very much unsettled. optimism would rule to-day on apparently inspired rumors that the differences between the mine owners and the miners were about to be patched up. the next day gloom would pervade the camp because of the unfavorable action by the union on the peace plans. nightly conferences were held. it was impossible to get an accurate line on the situation. crowds gathered about miners' union hall, where the meetings were held, and everyone sought something tangible on which to base his market operations. the officers of the union were in and out of the market, taking advantage of their official positions to anticipate every favorable or unfavorable development. it was a critically sensitive market situation. the drift, however, was unmistakably downward. values began to melt like snow in a spring thaw. through it all the sullivan trust company stood valiantly behind its securities in all markets where they were traded in--to the limit. i was bull-headed. i had never before been through a mining-camp boom of such proportions, and i failed to recognize that a reaction must ensue, whether it was forced by wingfield and nixon or not. tens of thousands of shares of sullivan stocks were thrown at our brokers on the san francisco stock exchange and new york curb from day to day, and we took them all in, refusing to allow the market to yield to the pressure. from credit to crash to convey an idea as to the standing of the l. m. sullivan trust company during this crucial period, i cite an instance. logan & bryan, members of the new york stock exchange, chicago stock exchange, chicago board of trade, new orleans cotton exchange and all other important exchanges, who conduct a leased-wire system from coast to coast at a cost of $ , per annum, and who have over correspondents in nearly as many cities, all of high standing as stock brokers, made a tentative offer to the sullivan trust company early in december to connect their wire system with our office in goldfield and to give us the exclusive wire connection for nevada at an annual rental of $ , . this offer would not have been made if the credit of the sullivan trust company had not been maintained at high notch, or if i, personally, had not convinced men of substance that i was strictly on the level, "past" or no "past." ben bryan, the active member of this firm, was in goldfield at the time. he asked as to our finances. there was present cashier j. l. lindsey of the state bank & trust company. "how much would your bank loan the sullivan trust company on its unindorsed paper and at a moment's notice?" i asked mr. lindsey. "a quarter of a million or more," answered mr. lindsey. this apparently satisfied mr. bryan. our rating in bradstreet's and dun's was "aa ." a private statement issued by bradstreet was to the effect that while our rating was only $ , , and we claimed a capital and surplus of only $ , , at the time the rating was given, it was believed in goldfield that we were worth much more, and that we had actually understated our resources because we considered it bad policy to divulge the great profits in the promotion business. by december the condition of the sullivan trust company had become about as follows: our $ , , surplus had been reduced to $ , , and all of this $ , , , plus the loss, was represented by our own bought-back stocks. we had no money, except about $ , , remaining of the $ , borrowed from the state bank & trust company. we were committed in excess of this $ , to brokers for stocks in transit, but by the "crossing" process we were able to maintain a chain that kept intact our reduced cash balance. we figured that a fresh loan of $ , , additional to the $ , already obtained from the state bank & trust company, would enable us to take up all of our paper and to discontinue the "cross" trades. we promptly arranged for the loan, which cashier lindsey of the state bank & trust company informed us would be immediately credited to our account whenever we required the money. interest charges were at the rate of per cent. a month in the camp at that time, and for that reason i did not ask that we be at once credited with the amount. i sent over to the state bank & trust company another big batch of stocks, to be held as collateral against the promised loan, and got a receipt for it stating that it was accepted as collateral on our "open loan" account. the market in sullivan stocks had now steadied itself and it appeared that it would be impossible for any further selling of consequence to take place. we had bought back in the open market fully per cent. of all the stocks promoted by the trust company. distribution of the stocks of our early promotions had originally taken place in such a broad way that it now appeared as if selling must necessarily become scattered. we felt somewhat crippled, but in no danger, and were "still in the ring." down with the sullivan trust company by this time i was "all in" physically. i had a cyst, of fifteen years' growth, on the back of my head. it had become infected. i was threatened with blood-poisoning. i suffered much pain. i had been on the desert for nearly three years, without leaving it for a day. my associates insisted that i go to los angeles immediately for treatment and a rest. believing that the trust company was secure, i made preparations to go. before leaving i busied myself with the preparation of a dozen full-page reading-matter advertisements on sullivan properties, which the salt lake _tribune_ and salt lake _herald_ had contracted to publish in their new year's day editions. these are an annual feature of those newspapers. i decided to "make" salt lake on my return trip from los angeles and be there on new year's day with our mailing-list, to superintend the mailing of the papers to all stockholders in sullivan properties. on account of the great value which we attached to the mailing-list, i would not trust anybody but myself with the job. i spent christmas in los angeles and arrived in salt lake on new year's day, ready for work. i was busy in the salt lake _herald_ office next day when affable peter grant, a partner of mr. sullivan, with whom mr. sullivan had at the outset divided his interest in the sullivan trust company, walked in. i asked mr. grant, who had remained at the helm with mr. sullivan while i was away from goldfield, about business. he assured me that the loan from the state bank & trust company would not only be forthcoming, as needed, but that cashier lindsey had informed him that we could have $ , instead of $ , additional, if we actually had to have it, and that the bank would back us to the extent of a million in all, if necessary. on calling next morning at the office of james a. pollock & company, our salt lake correspondents, i was astounded to learn that rumors had been telegraphed to them from san francisco that our paper was being held up in goldfield. "that's nonsense!" said mr. grant. "why, lindsey has given me his word, and there can't be a question about it." "maybe he has 'laid down' on us," i said, "and that would be ----!" "nonsense!" said mr. grant. "i'll telegraph him that in addition to honoring our goldfield paper with the money we have borrowed from him, he must wire $ , to our credit in san francisco, and you and i can jump on the train to-day and go to san francisco and support the market right on the ground. if those rumors have spread around san francisco a lot of short-selling will take place and the market will need support." i agreed. so confident were mr. grant, james a. pollock & company, and i that everything was right with us that we gave and they accepted a big supporting order to be used on the san francisco stock exchange during the succeeding day while mr. grant and i should be on the train to the coast city. we arrived in san francisco late at night. a number of brokers met us and conveyed the news that the state bank & trust company had "laid down" on us. in the meantime despatches to us from the cashier of the sullivan trust company had piled up at the hotel. he explained the situation, which was this: all the trains carrying drafts in the mail to goldfield had been stalled by snowstorms two days before new year's. the next day was sunday. monday was new year's day, a legal holiday. thus five days' mail had accumulated, and on tuesday the delayed drafts were presented, all in a bunch. l. m. sullivan, president of the trust company, who was supposed to be on deck at goldfield, was in tonopah, where he was reported to be in imminent danger of arrest on the charge that during a new year's brawl he had nearly brained a chauffeur with a butt-end of a revolver. the bank people became alarmed. in requisitioning the $ , we had stated that we would call for it piecemeal, as had been our custom in the past. the five days' mail had piled up drafts totaling nearly the entire amount. i was absent from goldfield. mr. grant was away, and so was mr. sullivan. employees were running the business. cashier lindsey concluded that we were "overboard." on top of it all, donald mackenzie, the heaviest depositor of the state bank & trust company, had that very morning drawn out a large sum, said to aggregate $ , , and had it transferred to san francisco. our wires from goldfield stated he had been frightened by rumors that the sullivan trust company was in trouble and that the state bank & trust company would be involved. that settled it. the enterprise that i had built up from such a meager beginning into a $ , , trust company crumbled in a heap and left us stranded on the financial shoals of an over-boomed mining camp. some hindsight that came too late i attribute the destruction of the sullivan trust company to six factors, namely, ( ) politics; ( ) blackmail; ( ) lack of wide distribution of our later promotions, we having sold most of these stocks in large blocks during the exciting boom days through brokers to speculators instead of disposing of them in small lots direct to investors; ( ) my lack of knowledge of markets and inexperience in market manipulation; ( ) my own stubborn pride and optimism, and ( ) the failure of the state bank & trust company to keep its pledge of assistance. it is conceded in nevada by all honest men that, without exception, all of the properties promoted by the l. m. sullivan trust company had merit, and that money was lavishly provided for mine development as long as the trust company was in existence. the properties were selected with great care. they were very much higher in quality than the average. those at manhattan are yielding treasure to this very day, and may make good yet in a handsome way from a mining standpoint. those at fairview bid fair to duplicate the performance. had i kept out of politics, been a good market general, and taken cognizance of the fact that the law of supply and demand is as inexorable in mining-stock markets as in every other line of human endeavor, i could have saved myself and associates from financial ruin. it would have been the better part of valor to have emulated bob acres--back up and "live to fight another day." instead, i attempted the impossible in my endeavor to stem the tide of liquidation, and exhausted our resources to the last dollar in buying back the sullivan stocks at advanced figures over the promotion prices. i didn't know then, as i know now, that the accepted practice of the successful market operators is to go with the crowd--to help along an advance when the public is buying, and, with equal facility, to further a decline when everybody wants to sell. it was my first experience, and, like so many beginners, i was overconfident, lacking in judgment, and fatally ignorant of the finer points of the game. the complete collapse of the financial structure i had labored so hard to construct came as an overwhelming blow to the camp and marked the beginning of the end of the great goldfield mining-stock craze. our enemies had overshot the mark. public confidence was irreparably shattered by the smash of the trust company, and it would have been better for goldfield and nevada had wingfield and nixon possessed sufficient foresight to go to our rescue instead of facilitating our destruction. money that had poured into the camp without cessation month after month for mine development started to flow the other way. less than a year later, when wall street's financial cataclysm put a quietus on market activities of every sort, the great fortunes of wingfield and nixon themselves hung in the balance, and had it not been for a quick transaction by which the united states mint at san francisco forwarded by express to reno and goldfield $ , in gold, the failure of wingfield and nixon and their chain of banks might have happened as a fitting climax to the scheme of aggrandizement which they had fostered. it was rumored at the time that this money had either been obtained from the government as a deposit for the nixon national bank in reno or was obtained at great sacrifice from wall street bankers, and that only by virtue of mr. nixon's position as chairman of the committee on national banks of the united states senate was he able to get the sub-treasury in new york to instruct the mint at san francisco to supply the gold at this crucial period when fiat money was current in the east. whether it was a government deposit or not, senator nixon got it--and he needed it. even to this day wingfield and nixon are engaged in an effort to shift the responsibility to me for the destruction of the great mining camp of goldfield, which to-day marks the graveyard of a million blighted hopes. on the eve of the wall street panic of , every bank in goldfield and tonopah that had existed through the mining boom with the exception of those of wingfield and nixon, went to the wall, and every goldfield broker, with one or two exceptions, went broke. the business interests of the camp suffered the same experience. wingfield and nixon succeeded in annexing the remnants of the goldfield banking business, along with the control of nearly all of the goldfield properties for which they had been seemingly gunning. wingfield and nixon are, in fact, to-day in control of the political as well as the banking and precious-metal mining industry of the state. they have triumphed, but goldfield, except for the big mine and one or two others of little consequence which they do not own, has been throttled and is dying the death. had wingfield and nixon played a broad gauged game, the camp would undoubtedly still be on the map and, instead of having only two or three mines, might now boast of thirty. as quickly as possible i convened a meeting of the creditors of the sullivan trust company, all of whom happened to be either western brokers or banks. the market had gone to smash and our liabilities were $ , , . the assets, calculated at the low market price of the securities that was reached after the embarrassment was publicly announced, were still in excess of the liabilities. the creditors agreed in jig time that if we would turn over all of the securities they would accept per cent. of the net proceeds as full payment of our obligation and return the other per cent. to the trust company. thomas b. rickey, president of the state bank & trust company, was appointed manager of the pool, and was also elected president of the sullivan trust company, which exists in moribund state to this day. mr. rickey had even a higher opinion of the value of the securities than we had, and he refused to sell any of them at the prices which then prevailed. he held on. during the bankers' panic of the state bank & trust company failed for about $ , , . the sullivan mines were compelled to shut down. mr. rickey still held on. manhattan, the mining camp, struck the toboggan. the boom in goldfield securities collapsed at the same moment. the sullivan stocks shriveled, like the rest of the list, to almost nothing. as far as i can learn, neither the bank or broker-creditors nor any of the members of the sullivan trust company have ever received a dollar as a result of the settlement. had the securities been disposed of immediately after the embarrassment, the trust company would have paid dollar for dollar. those of the public who did not sell their holdings in the sullivan companies when we were supporting the market to the extent of more than $ , , , lost most of their investment. those who did sell--most of them--made money. the market value of these securities, at the height of the boom, was in excess of $ , , . the price paid for them by the public, as already stated, was in the neighborhood of $ , , . after settling with the creditors of the sullivan trust company on the basis just outlined, i departed from goldfield as broke as when i arrived there three years before. the only money i or my partners had drawn from the business during the life of the trust company was about $ , , just sufficient to pay living expenses. my expenses to new york, where i went to have my head operated on--are you surprised?--were supplied by the proceeds of the sale of my seat on one of the goldfield stock exchanges, from which i netted $ . i landed back in the big city with $ in my pocket, the exact sum with which i had left town three years before. my reward for three years of untiring work on the desert was a big fund of experience. believe me, i thought it would hold me for a while! but it didn't. chapter vi nipissing and goldfield con the embarrassment of the l. m. sullivan trust company, was disastrous to goldfield, the decline and fall of the camp dated from that very hour. the _goldfield news_, of nation-wide circulation in those days and up to then unshackled, sought to stem the tide. it published a double-leaded editorial, in full-face type, setting forth that the sullivan trust company had gone down with its flag nailed to the masthead of a declining market and had lost its last dollar supporting its own stocks. the camp took courage. soon it became evident that the initial smash in stock-market values was not sufficient to convince the natives that the death-knell of the market for its long line of mining securities had been sounded. the population of goldfield was , . its life could not be snuffed out in a day. great was the depreciation in the market price of goldfield mining issues, but not to an extent as yet that indicated the almost complete annihilation of values which followed. final destruction for the general list, with some scattering exceptions, came only after a "starving-out" siege on the part of investors, who refused to commit themselves farther and gradually resorted to liquidation. listed goldfield securities, nearly in number, and valued in the markets at above $ , , during the boom, had within two months shown a falling off of $ , , in market value, but the list on the average was still quoted higher than the promotion prices. on january , , fifteen days after the newspapers throughout the land carried front-page stories of the failure of the sullivan trust company, the stocks promoted by the trust company were still in demand in all mining-share markets of the country at an average price not below that at which original subscriptions were accepted from the public. jumping jack, promoted at cents, was quoted at cents bid. stray dog manhattan, promoted at cents, was in demand at cents. lou dillon, promoted at cents, was still wanted at . indian camp, sold originally to the public at , was quoted at bid. silver pick extension, promoted at , was bid, a loss of cents from the promotion price. eagle's nest fairview was quoted at , off cents from the promotion figure. these prices represented terrific losses from the "highs" that had been reached during the height of the goldfield boom, yet the average market price was still above the subscription price of the shares at which the public was first allowed to participate. a remarkable part of this demonstration was that for twenty days no inside support had been lent to these stocks. the sullivan trust company being in trouble, the markets had been left to the mercy of short-sellers and market sharp-shooters generally. having settled the trust company's liabilities of $ , , by tying up in trust all of its securities and the other assets, of which the creditors agreed to accept in full quittance per cent. of the proceeds and to turn back to the trust company per cent., i returned to new york during the last week in january. i was again out of a job--and broke. i visited the officers of mining-stock brokers in wall street and broad street. wherever i went a hearty handclasp was extended. not one of the eastern stock brokers was involved to the extent of a single dollar in the sullivan trust company failure. the brokers were convinced that the embarrassment was honest. the trust company's credit had always been good. had the failure been meditated, i could have involved eastern brokers for at least $ , , . because i didn't, new york brokers were not slow to express their good feeling. a number of them offered to extend a helping hand did i wish to embark on a new enterprise. peculiarly enough--or shall i say, naturally--after tossing off the trust company's millions, of which half were mine, in a vain endeavor to support the market for its stocks, i was as full of spirit as the month of may. i had been broke before, and the sensation was not new to me. withal, i had profited. a new fund of experience was mine. even though i had not gathered shekels as a result of my hard work in goldfield, i had learned something--i had acquired the rudiments of a great business. goldfield had been the mining emporium--the security factory. new york was the recognized market center. market handling had been my weak spot. i now had a chance to witness the performance of some past-masters in the art of market manipulation, and i tried to make the best of the opportunity. i watched intently the daily sessions of the new york curb. i was in and out of brokerage offices hourly. nothing that transpired escaped me. within a month i heard enough and saw enough to convince me that, daring as were the operations of the mergerers and waterers of goldfield consolidated, in that they ballooned the price of their security at its inception some $ , , ( per cent.) above the accepted intrinsic worth and were able to get the public in at top prices, their activities were but amateurish when compared with the stock-market campaign in nipissing, which was now transpiring on the new york curb. in the nipissing campaign tens of millions of the public's money went glimmering, several great promoters' fortunes were reared as by magic, some big names and big reputations were tarnished, and dollars in $ , , blocks were juggled like glass balls under the touch of sleight-of-hand performers. an orgy in market manipulation this market melodrama was well staged. it had a sensational start-off, and action was at high tension every minute. the performance had covered a period of seven months when i arrived in new york, and was reaching its climax. it was a wild orgy in market-manipulation and money-fleecing that had no parallel in history from the early comstock days up to and including greenwater. as a mining-stock boom it was a dizzy, bewildering success--full of red fire and explosions to the last curtain climax. w. b. thompson, montana mine promoter and money-getter; captain joseph r. delamar, famed as a daring adventurer on land and sea, and recently a highly successful financier, mine-owner, stock-market operator and art collector; john hays hammond, mining engineer, promoter, politician and ambitious society leader; a. chester beatty, millionaire mining engineer, and the seven guggenheim brothers, were in the all-star cast. mr. thompson, by reason of the fact that he was market manager, was most under the spotlight, although at times he was obscured by the others. mr. thompson was a product of butte, montana. early in the game he had learned the wall street lesson that "stocks are made to sell." born and reared in butte without the aid of a silver spoon, he had never been "in the money" before coming east. the great pay-streak in the east apparently looked better to him than the pay-streaks that some of his butte neighbors had missed in their deep-mine operations. he was an ideal man for the nipissing job, as subsequent events in his career thoroughly confirm. of a school that believes money in hand to be worth more than mining certificates in the box, mr. thompson's route from montana to broad street was via boston, where he made his first visible stake by marketing stock in the shannon group of mines. when the cobalt excitement was in its infancy mr. thompson took a run up to the camp. the nipissing mine was about the best thing in sight. it was producing real silver. the company was owned by a little club consisting of e. p. earle, specialist in rare metals, captain delamar, millionaire soldier of fortune, e. c. converse, banker and steel magnate, ambrose monnell, r. m. thompson, joseph wharton, since deceased, of philadelphia, and duncan coulson, a rich canadian lawyer. considerable silver was being produced. the veins, however, were exceedingly narrow, not more than a few inches wide. it was impossible to block out ore to an extent that would warrant any opinion as to the real measure of the mine's riches. the gentlemen owners were not averse to giving mr. thompson an option on , shares of treasury stock of the , , five-dollar shares ($ , , ), at $ a share, when he made the proposition, and another , shares at $ . . later, they sold him a call on , or , shares around $ . all of this happened in the summer of , six months before i reached new york and at a time when the country was giving indication of going mining-stock crazy, nevada stocks having advanced on the new york curb in the goldfield boom hundreds per cent. after the goldfield boom had gained terrific headway, during the fall of , when mohawk was climbing from cents per share toward the $ mark, which it reached during the climax, the cobalt mining-stock excitement spread like wildfire. a sudden demand sprang up for nipissing shares. mr. thompson, about this time, connected himself with the old established and conservative banking house of c. shumacher & company on wall street. the affiliation was calculated to give the promoter of nipissing stock much standing. the move served well its purpose. the public grabbed at the shares. the price jumped to $ . in a jiffy. mr. thompson began to let go of stock after the $ point was reached. he was making a killing, but fed out his optional stock very cautiously at the rate of about , shares daily, each day at an advance. by the time the price reached $ mr. thompson got suspicious. there was something about the play he could not understand. he had not found it necessary to do much "laundry" work on the curb market. every time he offered stock it was lapped up silently and completely. every time his brokers opened their mouths to sell the certificates they were gobbled. mr. thompson stopped putting out any more stock and streaked it up to cobalt to see what was going on. he had a hard time laying hold of the inside facts, but learned enough to satisfy himself that rich ore had been encountered at depth. he discovered on his return to new york that captain delamar had been buying that cheap stock through s. h. p. pell & company and was even then the heaviest individual holder, a position contested only once during the whole campaign, and that by a rank outsider operating through eugene meyer, jr., whose name has never been publicly mentioned as having anything to do with the gamble. this "unknown" was a quiet, mild-spoken, college-bred gentleman. he pulled down $ , , in nipissing--and kept it. upon the return of mr. thompson from cobalt the promoters warmed up to their job. the manipulation which had been begun in a comparatively modest way now showed the spirit of the gambler who plays "the ceiling for the limit." new market-boosting accessories were called into use. they did their work. the game waxed hotter and hotter. the guggenheims enter nipissing boom! boom! boom! went nipissing. by the time the price crossed $ the gamblers and speculators of two continents were on fire with excitement. presently it became noised about that the guggenheim family had taken an option on , shares of nipissing stock at $ a share, making the investment $ , , , and putting a valuation of $ , , on the property. furthermore, it was announced that the deal had been made on the report and advice of john hays hammond, the international mining engineer, crony of cecil rhodes and famed as the head of the profession. as a part and parcel of the remarkable story, it was authoritatively stated that the guggenheims had paid $ , , cash for the option. w. b. thompson was said to have negotiated the transaction. confirmation of the deal set the gamblers crazy. there could be no risk in following such leadership as the guggenheims', endorsed by the eminent hammond. the market boiled up to $ and then majestically boomed to $ . . transactions in this single issue totaled hundreds of thousands of shares a day. waiters, bar-keepers, tailors, seamstresses and tenderloin beauties competed with bankers, merchants, professionals on the regular exchanges, and even ministers of the gospel, for the privilege of buying nipissing shares on a valuation of more than $ , , for the mine. on the way up the original bunch of insiders floated out of their holdings. most of them had cashed in under $ . some of them stayed out; others went back, and, like the moth, got burned. w. b. thompson, it is said, parted with the bulk of his , to , shares at from $ . up, cleaning up for personal account between $ , , and $ , , , according to the estimates of close friends then in his confidence. never was there a cleaner case of "finding" money for mr. thompson. the manipulative campaign, of which he was made manager, was a giant success. the only ability or skill needed, after the guggenheim deal was made--brilliant deal from a market standpoint!--was the sense to hold on to his optioned stock until his associates, the guggenheim following, and the public made a rich, ripe and juicy market for it. mr. thompson subsequently participated in cumberland-ely, el reyo, inspiration, la rose, utah copper, mason valley, and other mining promotions, and is now rated at $ , , to $ , , . he is generally prominent at the nutritious or selling end when a good market exists and is now head of a new york stock exchange brokerage and mining promotion firm which publishes its own newspaper. but what happened to nipissing? plenty, and then some, happened. as noted, the stock mounted by flying leaps to $ . , stayed well above $ for quite a while, and began slowly to recede. complacent in the consciousness that they had the biggest silver mine in the world, the guggenheims allowed all of their friends to share in their good fortune. of a sudden, stock from mysterious sources began to press on the market. it came in great quantity and without let-up. suspicion was aroused in the guggenheim camp. they despatched a. chester beatty, one of their very best expert engineers, and a former protege of john hays hammond, to cobalt to smell out the trouble. the text of his report was never printed. it didn't have to be. the facts beat it in. much of the showy mineral, on which glowing reports as to the fabulous value of the property had been based, contained little or no silver. it was _smaltite_, an ore of the metal cobalt, closely resembling many of the silver ores. the story was given out that mr. beatty had reported adversely on account of the unfavorable showing made by mine developments carried out subsequent to mr. hammond's report. the miners had run into non-productive calcite a few hundred feet down, it was said. as a matter of fact, because of the limited amount of all underground development in the interim, there could have been no condition observable in the property as a whole when mr. beatty made his examination that was not equally apparent when mr. hammond made his report. the talent jumped to the conclusion that the mine was a "deader." many millions in silver bullion have been taken from the property since then, and it is still a great producer, but this is another and more prosaic story. this deals with the stock-gambling feature of the record. scenes of the wildest disorder were witnessed on the curb in those days of soon after my return from goldfield. the guggenheims "laid down" on their option, getting out as best they could. according to published reports, they charged to profit and loss the $ , , originally put up, besides paying the $ , , to $ , , in losses of personal friends for whose misfortune they felt personally responsible. be that as it may, the guggenheims emerged from the campaign with damage to their market reputation and standing from which they have never fully recovered. previous to their acquaintance with the cobalt bonanza, they had a blindly idolatrous following that would have invested hundreds of millions on a tip from them. they have never regained the position in this respect they then held. nipissing on the toboggan the price of nipissing tobogganed from $ to under $ with terrific speed. w. b. thompson and his associates, who had unloaded their holdings on the way up, were reported to have taken advantage of the beatty report and to have sold the market short on the way down, making another "clean-up" of millions. the stock hit a few hard spots on the descent, but when the wreckage was cleared away and the dead and wounded assembled, there wasn't hospital or morgue space to accommodate half of them. the final carnage and mutilation was shocking beyond description. _the public had once more been landed with the goods. it had eaten up nipissing stock on a $ , , valuation which broke to $ , , or $ , , within the space of a few days. this $ , , slaughter represents only a fraction of the actual losses, for fabulous amounts were sacrificed in marginal accounts. the daily aggregate of open accounts in nipissing during the months of keenest excitement probably averaged not less than five times the total capitalization. actual losses were therefore far larger than would appear from a merely superficial calculation. the public contributed $ , , to $ , , to its nipissing experience fund._ there has always been more or less mystery as to just what john hays hammond said orally to the guggenheims to lead them into the crowning humiliation of their business career. it did not appear in his written and published report, for in that document is to be found a neat little hedge to the effect that "if" conditions as revealed to him were maintained, the values would be, etc., etc. that little "if" was the hammond saving clause, although it did not save that $ , , -a-year job of his, about which some of his admirers have liked to talk in joyous chorus, nor did it save the public from massacre. another nipissing mystery is the sustained professional and personal cordiality still existing between the eminent john hays hammond and the scarcely less eminent a. chester beatty. for a little while after mr. beatty had to turn down his chief their relations appeared to have been strained. but this was not for long. mr. beatty also severed connections with the guggenheim pay-roll, and the two great engineers were soon again, and are now, on the best of terms. on rainy days when the tickers drone along and there is no exciting news, evil-minded derelicts of the memorable nipissing campaign are prone to figure how much a man might have made in the market with a foreknowledge of the two adverse reports and to figure on the sporting chances for a "double cross" that such a situation would hold. scandal mongers, too, who have watched closely the friendship which exists between w. b. thompson and john hays hammond often ask unkindly what has cemented the bond between the two. recently, when the rocky mountain club needed a new club-house, messrs. hammond and thompson subscribed an equal amount--a goodly sum it was--to build it. they are seen much together in public and seem to have many tastes in common. mr. thompson, whose strangely fortunate campaign in nipissing on the new york curb was helped to a triumphant promotion climax by the hammond report to the guggenheims, bears mr. hammond no ill-will for that--and who would blame him for the kindly feeling? who got the $ , , ? but what of the public? it played $ , , to $ , , into the game, and has never yet learned who got it. who did get it? some of the details of the grand separation scheme have been set forth in the foregoing, but nothing like enough to satisfy the curiosity of the public who footed the bill, paid the freight, contributed sucker-toll for the whole prodigious sum. did the author of the report on the strength of which tens of millions were plunged on nipissing by an army of deluded investors and speculators ever suffer in fortune by the mischance or misshot, or whatever name you may give the "come-on" document? not that you could notice. true, he gave up his alleged $ , , job with the guggenheims. but is he not a heavy contributor to the republican national campaign fund, a close personal friend of the administration, and did he not represent this great government as special ambassador at the coronation of england's king? was he not talked of as running mate for mr. taft, and did he not organize the national league of republican clubs two years ago? he is tremendously rich and round-shouldered under a mountain-high burden of honors. every mother's son of the old nipissing crowd is at this very hour up and at it in regions where the public's money flows. many of them still have a grip on the property. it was a good old cow to milk. e. p. earle, who was president of nipissing in , headed the company four years later. captain delamar slipped down and away (he's now in on the extravagantly touted porcupine dome mines company), and so did e. c. converse, whose time is all taken up managing the stock exchange banknote engraving monopoly and a couple of banks and trust companies. w. b. thompson, who came into the nipissing directory in , still sticks in spite of the awful experience of - . has an outraged government ever raised hue and cry against these eminent captains of industry? not yet, nor soon. what difference is there between the respectable multi-millionaire bankers putting across a losing promotion and the little fellow? both may be equally honest or equally crooked, yet in equity both are entitled to the same treatment and the same consideration. their operations differ only in degree. the aim of each is to get the public's money. and the big fellow is more dangerous by a hundred thousand degrees. where does real tangible evidence of a conspiracy to defraud in nipissing exist? does _any_ exist? now i venture to say that you could put on the scent any young man who is a graduate of the public schools, and within thirty days he would obtain enough evidence to prove to any jury in the land that the manipulators of that stock used improper measures to get the public's money. a scrutiny of the files of the newspapers during the progress of the malodorous nipissing campaign reveals many strange happenings. it shows, among other things, most remarkable willingness on the part of financial writers for the press of that day to say every possible good word for the manipulators and to feed the public appetite for sensational gossip concerning the gamble. how this was done is easily understood by those familiar with wall street publicity. it was an open secret on the street at that time that many writers for the press were subjected to strongest temptations to lend their hand to the game of publicity. the columns of the daily newspapers carry in themselves evidence to show that the attempts were not always in vain. one little story will illustrate the methods employed. the business manager of a widely known and reputable daily financial publication was stopped one day by a man active in nipissing and told he had been put into shares of the nipissing stock at the market price when the stock was still selling under $ and at the time when it was being groomed for the terrific rise which followed and which did not culminate until $ had been passed. the newspaper man was not above making a turn in the street, but he objected to taking it that way. he politely turned down the proposition, saying that he did not wish any part of it. the tempter then went to him on another tack, agreeing to carry the stock for him, so that he would have no risk whatever, at the same time remarking that, in turn for the favor, generous recognition in the news columns of the publication, in support of the curb campaign, would be expected. again the newspaper man declined, this time with unmistakable emphasis. he intimated cannily that while he might be taken on he might not be told when to get off, adding that he might be discharged if he fell for anything of that sort. when the market price toppled from $ back to around $ this man's newspaper did not carry any front-page story denouncing the outrage upon the public. i do not know that the manipulators of nipissing "got to" his employers, but i do know of some newspapers in new york which pose before the public as embodying the very highest type of newspaper morality and which have at their head, either as part owners or as editors, men who were taken in hand by wall street magnates at a period when they were dependent for their daily livelihood on their weekly wage, and were lifted into the millionaire division by being put into "good things." do you suppose newspapers presided over by those men are going to say a word against the enterprises of their benefactors? conversely, if their benefactors happen to be bothered by any man whose business purposes run contrary to theirs, how far, do you think, these gentlemen of the press would go in their own news columns to poison the public mind against the enterprise of their patron's enemy? when i witnessed the climax of w. b. thompson's marvelously successful campaign in nipissing on the new york curb, i was fresh from goldfield. my recollection is that my chief thought at that time, with the goldfield consolidated swindle fresh in my mind, was simply that the western multi-millionaire highbinder promoter didn't class with his eastern prototype. indeed, the two appeared to be of different species, as different as the humble but noisy coyote from the abyssinian man-eating tiger. the late spring of found me back in nevada. i selected reno as a central point for residence and decided to locate there. eastern stock markets appeared to be beyond my ken. it seemed quite apparent that the western game, as compared with the eastern, was one of marbles as against millions. in new york's financial mart i felt like a minnow in a sea of bass. without millions for capital, nevada appealed to me as a more likely field of usefulness. i believed in nevada's mineral resources. having seen goldfield evolve from a tented station on the desert with a hundred people into a city of , inhabitants; from a district with a few gold "prospects" into a series of mines producing the yellow metal at the rate of nearly $ , , a month, i was enthused with the idea that there were other goldfields yet unexplored in the battle-born state and that opportunity was bound to come to me if i pitched my tent on the ground. the wonder mining-camp stampede i was back in nevada just a week when a stampede into a new mining camp called wonder took place. i was quick to join in the rush. the philadelphia crowd who owned control of the big tonopah mine had annexed a property there which they named the nevada wonder. it boasted of a big tonnage of low-grade silver-gold ore. on arrival at wonder, i found my former goldfield partner, l. m. sullivan, on the ground. he entreated me to allow him to cut in on any deal i made. a bargain was struck. he agreed to advance all the money and i was to receive half of the profits for my work. the corporation of sullivan & rice was formed. we purchased the rich gulch group of claims, a likely piece of ground with a well defined ledge, and incorporated the rich gulch wonder mining company. a company with the usual million-share capitalization was formed to operate the property. a high-class directorate was secured. t. f. dunnaway, vice-president and general manager of the nevada, california & oregon railroad, accepted the presidency. hon. john sparks, governor of nevada, became first vice-president. u. s. webb, attorney general of california, accepted the second vice-presidency. d. b. boyd, for twenty-five years successively treasurer of washoe county, nevada, was made treasurer. the first advertised offering of treasury stock of the rich gulch wonder carried the names of forty leading mining-stock brokers, situated in various cities stretching from new york to honolulu, who had signified over their signatures their willingness to undertake the sale of treasury stock at cents per share on a basis of per cent. commission. the first thousand shares of treasury stock at cents was sold to superintendent mcdaniel of the nevada wonder mine. this convinced us that we had a good "prospect." i had my doubts about the successful promotion of any nevada mining company at this period, because of the terrific slump which was transpiring in goldfield issues and also because of the smack in the face that mining-stock investors had just received in nipissing. it was my idea that if the rich gulch wonder made any money for us the cashing would have to be delayed until mills were erected and the property became a producer. i was willing to go ahead on that basis. the sale of treasury stock was slow, but sufficient was disposed of to warrant the expense for mine development of at least $ , a month for six months, and that appeared far enough to provide for in advance. pending the making good of this proposition in a financial way, i determined i would help finance a newspaper publication at reno which would give to mining-stock speculators an unbiased statement of mining and market conditions as they existed. in the mining camps it was considered tantamount to financial suicide for the home publication to reflect on the merits of any locally owned property. strictures were looked upon as "knocks," and "knockers" are taboo in mining camps. moreover, mining-camp papers could hardly make both ends meet at the time without support from inside interests, and unprejudiced statements of fact that were detrimental to a local property could hardly be expected. merrill a. teague was made editor of the new publication, which was called the _nevada mining news_. mr. teague had just blown into reno from goldfield where he had been connected with the nevada mines news bureau, a daily market sheet. before coming to nevada he had served in an editorial capacity on the _baltimore american_ and the _philadelphia north american_. mr. teague is the possessor of a facile pen. at $ a week, which was his stipend at the beginning, i was convinced that the _nevada mining news_ had a cheap editor. when news was scarce he could write more about nothing than any man i ever met before. incidentally, he could go further without finding a stopping place in a crusade than any man i had ever bumped up against. that was his drawback. however, compared with the work of other newspaper men then employed in nevada, his stuff was in a class by itself and was commercially very valuable. teague attacks senator nixon mr. teague was on the job just a week when he cut loose with an attack on united states senator george s. nixon of nevada in a front-page story headed "goldfield in the grasp of wall street sharks." the article declared that senator nixon, needing $ , , to conclude the merger plans of the goldfield consolidated, had got it through b. m. (berney) baruch of the new york stock exchange, factotum of thomas f. ryan, at terrible cost. the loan was made at a time when goldfield consolidated was selling around $ per share. in consideration for the loan, senator nixon, acting for the company, gave mr. baruch an option on , , shares of treasury stock of the goldfield consolidated at $ . per share. at the time mr. teague commenced his onslaught goldfield consolidated shares had slumped from $ to $ . . mr. teague alleged that the market on the stock was being juggled and speculators were being milked. mr. baruch, he asserted, had sold the stock down to $ . per share on the strength of his option, and was now tempted to break the market, sell the stock short and cover all at much lower prices. within two weeks after the publication of mr. teague's exposé of the terms of the outstanding option to mr. baruch, goldfield consolidated shares dropped to under $ . the story evidently had its effect. the issue of the paper which chronicled the break to $ contained an editorial headed "nixon in the rôle of brutus." it demanded of senator nixon that he stand behind the stock and support the market, and also called upon him to declare the payment of dividends which he had promised to stockholders in his annual report dated two months prior. people in nevada began asking, "who is teague?" mr. teague caused the publisher of the _nevada mining news_, who was hugh montgomery, formerly business manager of the _chicago tribune_, to explain over his signature that mr. teague had been the political editor of the _baltimore american_, later an editorial writer for the _philadelphia north american_, and that while on the _philadelphia north american_ he had crusaded against get-rich-quick swindlers who had headquarters in philadelphia, with the result that the storey cotton company, the provident investment bureau, the haight & freese company and other bucketshop concerns were put out of business. on evidence furnished by him, it was stated, mr. teague secured the conviction by the united states government of stanley frances and frank c. marrin as chief conspirators in the $ , storey cotton swindle. finally, the article said, mr. teague was engaged by a far-famed magazine to expose bucketshop iniquities in the united states. this series of articles had appeared in . the biographical sketch seemed to satisfy readers that they were getting their "dope" straight on goldfield consolidated. my name at this time did not appear in connection with the publication except as part of the aggregation of sullivan & rice who advertised therein, but i was openly accused by messrs. nixon and wingfield of dictating the policy of the paper. this was a half-truth. my sympathies were with the stockholders of goldfield consolidated--that's all. the story is told in nevada that when senator nixon received the check for $ , , from berney baruch, after having executed notes of the goldfield consolidated, signed by himself as president and endorsed by him as an individual, he took luncheon at the waldorf-astoria in new york. when the waiter presented the bill the senator ostentatiously tendered the $ , , check in payment. the waiter put it all over the senator by politely stating that if he wished to pay his dinner check out of the proceeds, proprietor boldt would undoubtedly attend to the matter for him. the senator was forced to tell the waiter he was "only joking." the _nevada mining news_ appeared to be catching on and was now printing , copies weekly. sample copies were sent in every direction with the idea of acquainting investors with its existence. a day after the issue appeared containing the editorial in which senator nixon was accused of playing the rôle of brutus, i was stopped on the street by the editor of the _reno gazette_, a newspaper which is loyally attached to the senator and his friends. "the senator wants to see you, rice. better go over to the bank right away. if you know what's good for you, you'll do it," the _gazette_ man said. "i will, like ----!" i replied. "my office is up in the clay peters building, and if the senator has anything to say to me he can give me a call. i am not one of his sycophants, and i am not going." i didn't go. an hour afterward the editor of the _gazette_ met me again. "senator nixon wants to see you at his office right away," he said bluntly. "about what?" i inquired. "about articles which have appeared in the _nevada mining news_," he answered. "very well," i replied, "i'll send the editor over." turning to mr. teague, i said, "i have no business with senator nixon, and if he has anything to communicate regarding the newspaper you, the editor, are the man for him to say it to." mr. teague went over to the nixon national bank and entered the directors' room. my stenographer accompanied him as far as the door and took a seat outside, in the banking room. as mr. teague entered, senator nixon jumped to his feet. he looked black as thunder. he quivered with rage. "why don't rice come over here himself, eh? he daren't! i've got his record from boyhood jacketed in these drawers. while i have not read it, i know the story, and i am going to have it published in a bunch of newspapers so the world can know who is holding me up to public scorn!" the senator spluttered. in relating what transpired mr. teague later informed me that the senator's wrathful indignation appealed to him as so grotesquely comic he felt like laughing, but he thought it a poor newspaper stunt to incense him further at a moment when it looked as if, by appeasing him, he could tempt him into volubility. soon mr. teague had the senator at ease, pouring forth a long interview, full of acrimony and affectation, which mr. teague promised to publish in the _nevada mining news_. mr. teague reported to me that the senator construed his pacifying attitude as meaning that i would undoubtedly "listen to reason" and that his threat would most certainly accomplish its purpose. "calling for a show-down" when mr. teague finished narrating to me what had transpired i was beside myself. presently i gave him these instructions: "write out the interview with the senator. have two carbon copies made. when finished, take the three copies over to the senator and have him read them and put his o.k. on them. after you have done that, give the senator one copy, give the printer a copy, and put the other copy in the safe. as soon as the copy of the interview is in the printer's hands, sit down and write an editorial. head it 'a united states senator with a blackmailing mind.' publish my record in full. tell of everything of any consequence i ever did, good or bad. parallel my record with the senator's record. tell the people of nevada all the facts about the senator's threat. say to them nobody can blackmail me, and ask them to choose between us." on may , , the editorial, headed "nixon a senator with a blackmailing mind," appeared. it was a passionate denouncement, calculated to stir the blood. also there appeared senator nixon's interview in full. in the interview the senator had made an effort to disentangle himself from a seemingly inextricable network in which he was enmeshed, and the paper contained still another editorial lambasting him in amplitude for trying to practise on the credulity of the newspaper's readers. the editor accused him of equivocation, artful dodging, false coloring, exaggeration, suppression of truth, cupidity and knavery. the arraignment wrought an undoubted sensation. the effect on the nevada public was unmistakable. it reminded me more of the motionless and breathless attitude of an audience at the third-act climax of a four-act drama, than anything else. the senator was not seen on the streets of reno for two months afterwards. for a fortnight afterward he didn't even call at the offices of the bank. when he did finally resume his visits to the bank he came in his automobile. he was whisked to the door of the building, immediately secreted himself in the directors' room and was not get-at-able. leading citizens, including the directors of a number of banks in reno, made clandestine calls at my office, shook my hand, felicitated me over the stand i took, and went away. even george wingfield, the senator's partner, it was reported (and i afterward corroborated this from the lips of george wingfield himself), backed me up in the stand i had taken. the general sentiment in the state appeared to be that the threat was a lowdown trick, and that of the two i had the less to be ashamed of. when the senator read the article headed "nixon a senator with a blackmailing mind" it is said he telegraphed to former governor thomas of colorado, his counsel, and asked him to come to reno. "if i don't say something in answer to this awful attack, i'll choke!" cried the senator as he nervously walked the floor. "did you sign that interview which they published?" asked governor thomas. "yes," said the senator. "well, then, if you say anything at all now, _they'll_ choke _you_," answered governor thomas. during the course of our attacks on senator nixon in the _nevada mining news_ which followed at various intervals, the newspaper accused him of making promises of early dividends to goldfield consolidated stockholders which he knew he could not keep; of having been the state agent in nevada of the southern pacific company at $ per month during the huntington régime when legislatures were bought; of having bilked the investing public out of millions in goldfield; of having carved his fortune, that made possible the acquisition by him and his partner of control of the goldfield consolidated, out of a gambling house in tonopah; of having gathered his first mining property and mining-stock interests in goldfield from prospectors who lost money and surrendered their mining claims and stock certificates to the gambling house in lieu of the cash; and of being generally a financial and political freebooter of the most despicable sort. and the senator never sued for libel nor proceeded in the courts in any way whatsoever to obtain a retraction. manipulating goldfield con about a week after the publication of the editorial headed "nixon a senator with a blackmailing mind," when goldfield consolidated stock had slumped to around $ , the _nevada mining news_ in big bold-faced type urged its readers to place their buying orders for goldfield consolidated at $ a share, saying that new york mining-stock brokers advised their clients that the stock would almost certainly go down to that figure because of the senator's mistakes in the financial management of the company. that edition contained another editorial on senator nixon, headed "branding a bilker." it accused him of saying in his annual report a few months previous that payments of dividends on a regular basis would commence within a short time, and contrasted this statement with the signed interview published in the _nevada mining news_, in which he said dividends would be paid "whenever the trustees thought it wise to do so _and not before_." within a day thereafter the stock "busted" wide open to $ - / bid, $ - / asked, and the whole goldfield list smashed farther in sympathy. by june th goldfield consolidated had crashed to $ . . on the dip from $ . to $ . an opportunity had been offered to berney baruch and his associates to buy back in the open market all of the stock they might have sold on the way down from $ to $ . , which was the option price. then the stock was promptly manipulated back to $ . on the way back to $ , the outstanding short interest (of other traders who had accompanied the decline with their selling orders) was forced to cover. to help along the covering by outsiders up to the $ point a report was circulated by lieutenants of senator nixon in reno that a dividend would be declared before the end of june, and almost simultaneously the general manager of the mining company in goldfield put forth a similar tip. as the market began to recover toward the $ point, senator nixon went to san francisco and was seen often at the sessions on the floor of the san francisco stock and exchange board. on the day before the bulge to $ he was quoted in a san francisco newspaper as saying that goldfield consolidated was such a good thing he would not take $ per share for his stock. when the stock hit $ and the shorts were being squeezed the hardest, senator nixon was quoted as saying in still another interview that a dividend was not far away. this interview was carried over the telegraph wires to all market centers by the associated press. at the same time a story was printed in the new york _times_ saying that it was reported on the street that j. pierpont morgan, acting for the baruch-ryan crowd, had taken over the control of the goldfield consolidated. the shorts were successfully driven to cover. then the price eased off again in a day from $ to $ - / . a month later mr. teague became editor in chief of the _nevada state journal_ and severed his connection with the _nevada mining news_. i succeeded mr. teague as editor and my name appeared at the head of the editorial columns. at about the same time the sullivan & rice enterprise was abandoned. i discovered that most of the money mr. sullivan had put into the corporation had been borrowed by him from a member of my own family with whom he had hypothecated most of his stock in the company. a rumpus ensued which ended in the shutting up of the $ - / shop. by august goldfield consolidated had been manipulated back to $ . - / a share. mr. baruch's option could certainly prove of little value to him unless the stock sold higher at periods than $ . . but he now evidently found it a hard job to hold the stock above $ . . by september it had receded again to $ . . at this period it was reported in reno that george wingfield, sick of his partner's bad bargain, was beginning to assert himself and demanded that the baruch option be cancelled at whatever cost. the erratic price movement of the stock was causing the loss of public confidence. the manipulation appeared to be raw. without any important transpiration except the news of the baruch option and the varying statements put out by senator nixon from time to time regarding the plans of the company, which was now awaiting the erection of a huge mill before going on a regular producing basis, the stock had dropped from $ to $ . , recovered to $ and eased off to $ - / , rallied to above $ , and was again tumbling. the option to mr. baruch was conceded to be practically a flat failure from a company standpoint, only , shares of stock having been purchased by mr. baruch from the treasury of the company in nine months. the impression prevailed that mr. baruch was milking the market and held the option principally as a club to accomplish his market designs. moreover, nearly every broker, investor and speculator residing in goldfield by this time had gone broke because of the vagaries of this stock in the market, and the losses in bad loans and unsecured overdrafts incurred by john s. cook & company's bank, controlled by messrs. nixon and wingfield, was said to total nearly $ , , as a result of the almost general smash in market values. the entire goldfield list, with the exception of goldfield consolidated, was now selling at cents on the dollar compared with boom prices of less than a year before, and it was a rather ordinary "piker" sort of broker or speculator in goldfield who at this time could not boast of being in "soak" to john s. cook & company's bank anywhere from $ , to $ , . on september the goldfield consolidated directorate met at goldfield. after the meeting it was officially announced that the option held by mr. baruch on , , shares at $ . had been canceled and that mr. baruch had been given sufficient of the optional stock to liquidate the $ , , obligation of the company, leaving the company free of debt and with a cash reserve of nearly $ , , . it was stated that mr. baruch had originally been given the option for services in securing the loan of $ , , from j. kennedy todd & company of new york for months with interest at the rate of per cent., and that the price of $ . was an "average" one, indicating that mr. baruch held an option on stock at varying figures on a scale up from a considerably lower price than $ . , which he might have exercised in whole or in part. it was also disclosed that a large block of goldfield consolidated stock had been put up as collateral for the note. because the officials of the company declared by resolution that the "unused certificates shall be canceled" it was generally believed that the entire , , shares under option to mr. baruch had been put up as security. the official statement of the company said that the option had been turned back to the company "on a satisfactory basis." no figures were given out. dispatches from san francisco to the _nevada mining news_, which i promptly published, alleged that mr. baruch was given , or more shares of goldfield consolidated in settlement of the loan to the corporation of $ , , and for the surrender of his option on , , shares at an average price of $ . . _the , shares of stock was taken out of the collateral at the rate of $ per share on a day when goldfield consolidated was selling around $ . , after the stock had been manipulated to a fare-ye-well and against a market price of $ for the stock on the day the option was given._ no denial was ever published. my opinion, based on private investigation and on analysis of the company's reports, is that mr. baruch fared even better than as outlined above. the giving of the option had made it dangerous for anybody except mr. baruch to attempt to hold the stock above $ . per share after the option had been given, and the company in addition was now mulcted for the difference between the low price per share at which settlement was made with mr. baruch and the price at which the stock could have been sold had it been quietly disposed of on the market during the period of nine months which had preceded the date of cancellation. as a matter of fact, there was no necessity at all for settling the loan with stock, the company having in its treasury more than sufficient to repay the loan, and the money was not due. the real purpose, apparently, was to shroud in darkness the exact amount given to mr. baruch to release the company from the option and to keep messrs. nixon and wingfield's goldfield bank, which was the depositary of the mining company, in funds. instead of quieting the stockholders the surrender of the option again thrust into the limelight the entire transaction and proved to be an exacerbation. the immediate effect was that goldfield consolidated began to slump again, and in a few days sold down to $ . . from this point it kept on tobogganing during a period of weeks down to the $ . point--a depreciation in market price for the capitalization of the company, within a year of its promotion at $ a share, of $ , , --before rallying once. enter, nat. c. goodwin & co. a mining partnership between nat. c. goodwin, the actor, and dan edwards had been formed at reno a little before this time. dan edwards was a hustling young mining man who had engaged in the business of "turning" properties to promoters. in august, when goldfield consolidated was selling around $ . , mr. edwards had asked me to give him a good market tip. i told him to sell goldfield consolidated short. when it hit $ . around october st he saluted me thus, "got to hand it to you. i have been trying to make my new firm stick, but it don't seem to work. i guess i don't know how to handle the situation in times like this. how would you like to join us?" "how much capital have you got?" i asked. "five thousand of nat's money," he answered. "get another man with $ , ," i said, "and i'll talk to you." a young easterner engaged in mining, named warren a. miller, was stopping at the riverside hotel. within an hour mr. edwards had him lined up. a week later nat. c. goodwin & company was incorporated with nat. c. goodwin president, mr. miller vice-president and general manager, and dan edwards secretary. the new corporation engaged to give me a salary for showing it how and an interest for other substantial considerations. within a fortnight the corporation of nat. c. goodwin & company was making money, not as promoters, however, but as demoters. instead of at first promoting a mining company and earning its profits on the constructive side of the market, it turned the tables and made money on the destructive side--of goldfield consolidated. during the first half of i had felt the country's speculative pulse from day to day with the promotion literature of the sullivan & rice corporation. although its new mining company, the rich gulch wonder, had boasted of a very high-class directorate and the property was conceded to have merit, the public refused to enthuse. instead of subscribing for large blocks, scattering purchases had been made, and money in dribs and drabs had been grudgingly paid over. the wonder mining camp boom had "died abornin'." investors seemed to have had enough of mining-stock speculation for a while. prices of listed nevada issues were crumpling like seersuckers in the rain. by this time the awful mess that had been made of goldfield affairs through the mistakes of messrs. nixon and wingfield had resulted in a depreciation in market value of more than $ , , in listed nevada issues. this in itself was sufficient to kill a world of buying sentiment. you have to be a rainbow-chaser by nature to be a successful promoter, but even i, despite my chronic optimism, began to feel the influence of what was transpiring. i made a flip-flop and turned bear on the whole market. on october th the heinze failure occurred in new york. five days later the embarrassment of the knickerbocker trust company was announced. i glued my ears to the ground. nat. c. goodwin & company "shorted" the mining-stock market so far as its limited capital would permit. on the day mr. heinze went overboard the company was already short , shares of goldfield consolidated at around $ . on hearing that the knickerbocker trust company was in trouble it promptly shorted , shares more at a lower figure. on the afternoon when the news reached reno of the knickerbocker trust company's embarrassment i received a private telegram from chicago stating that the paper of the state bank & trust company of goldfield, tonopah and carson city had gone to protest in san francisco. this set my blood tingling. i knew that meant a general nevada "bust." next morning nat. c. goodwin & company shorted , shares more of goldfield consolidated at about $ - / . later in the day the failure of the state bank & trust company was announced. a run followed on the nye & ormsby county bank and its branches in reno, carson city, tonopah, goldfield, and manhattan, and in two hours that institution, too, closed its doors. goldfield consolidated promptly broke to $ a share. around this point nat. c. goodwin & company covered its short sales, at discretion. all of the nixon banks in nevada experienced runs as a result of the failure of the two nevada banking institutions. so did the other banks. governor sparks was appealed to by nevada bank officials between two suns to come to the rescue. without hesitation he declared a series of legal holidays to enable the banks of the state which were still standing on their feet to catch their breath. these banks finally threw open their doors, but when they did, those of reno met depositors' withdrawals with asset money instead of legal tender. the only bank in reno which had refused to take advantage of the enforced legal holidays was the scheeline banking & trust company. and when asset money was finally resorted to as a makeshift, m. scheeline, the president, was made custodian of the bonds which were put up by the associated reno banks to secure payment. this restored confidence. it was believed in nevada at the time of the failure of the mining-camp banks, the state bank & trust company and the nye & ormsby county, that the nixon institution in goldfield would have found it hard to weather the storm but for the fact that the goldfield bank was believed to have upward of $ , , of the goldfield consolidated mines company's money on deposit. when the state bank & trust company went to the wall senator nixon, in an interview published in his reno newspaper, charged the failure of the state bank & trust company to me. he alleged that the state bank & trust company lost $ , by the failure of the sullivan trust company ten months before, and that i had broken the bank. the liabilities of the bank were $ , , , and its sullivan trust company loss was only "a drop in the bucket." the senator didn't fool anybody, not even himself. his effort was an ill-concealed attempt to prepossess the public against me, and was received by nevada people as such. senator nixon indulged in some more "interview" with a view to stemming the tide of liquidation in goldfield consolidated. notwithstanding the fact that the company had only recently resorted to the sale of treasury stock for money-raising purposes, he asserted that a quarterly dividend, payable january th, would probably be declared. beyond a question this statement was made for market purposes at a time when the senator was sweating money-blood. the stock promptly tobogganed farther on the strength of the dividend forecast. the senator's interviews had now become a standing joke in the community. speculators and brokers had learned the wisdom of "coppering" anything the senator said. the story of the goldfield labor "riots" a large force of miners was discharged from the goldfield consolidated properties. the action of the company in laying off its men at such a distressful period was denounced. it was alleged that senator nixon's goldfield bank could not afford to pay out the money on deposit to the credit of the company because it was required for bank purposes. the money was apparently being hoarded during the money stringency to help the bank out of a tight place. after-events appeared fully to confirm this theory. right in the teeth of the panic, during the depressed and troublous days of the latter part of november;--when current finance was deeply affected; when goldfield consolidated was selling below the $ point and the entire nevada share list had suffered an average depreciation of about per cent. from the "highs" reached during the goldfield boom of the year before; when the state of nevada was racked from end to end by the serious losses incurred by citizens through the failure of the nye & ormsby county's and the state bank & trust company's chain of banks, totaling nearly $ , , , and it appeared that the credit of the state had already been shattered almost beyond repair--a fresh blow was administered. government troops were reported to be en route to goldfield from san francisco "to preserve the law." it had been represented to the president of the united states that goldfield was in a state of anarchy. goldfield wasn't. as a matter of fact, the situation in goldfield with the miners, from the standpoint of law and order, was never good, but it was as good then as it had been in eighteen months. true, there had been some lawlessness, but no riot, and the sheriff of the county had made no call whatsoever on the governor for any aid. during the first days of the panic nixon and wingfield's goldfield bank, john s. cook & company, had tendered the miners the bank's unsecured scrip in lieu of money for the payment of wages. the miners refused acceptance. they were willing to take time-checks of two, three or four months, bearing the mining company's signature, but balked at the idea of becoming creditors of the bank. it has been stated to me by a number of goldfield brokers who were present in the camp at the time that the miners had even decided to concede this point, when an outsider secured by intrigue and money sufficient voting power at a meeting of the executive committee of the miners' union to pass a resolution objecting to the bank's scrip. the refusal to accept the bank's scrip was at once made an excuse by the goldfield mine owners' association, which was dominated by george wingfield, to determine upon a lockout and simultaneously to demand federal intervention. if messrs. nixon and wingfield's bank needed money, as the tender of unsecured scrip indicated all too plainly, the complete shutdown which left with the bank as available resources approximately $ , , in the account of the goldfield consolidated mines company, was a perfect stop-gap; and the need of the presence of troops was a fine coincidental excuse for the shutdown. incidentally, it would rid goldfield of the miners' union, which voted to a man against senator nixon's republican candidates for office, and would permit the importation of foreign labor, an expedient which was afterward successfully resorted to. senator nixon brought pressure to bear at washington. he invoked the good offices of uncle sam and urged that federal troops be sent to the state. he was assisted by congressman bartlett in laying the matter before the departments. the wires between goldfield, reno, carson city and washington were kept hot with an interchange of views. president roosevelt finally informed the senator he could not send the soldiers unless the governor of nevada wired that a state of anarchy actually existed which the state itself was powerless to put down. governor sparks, honest as the day was long and unsuspecting of any trickery or jobbery, listened to a goldfield committee and permitted a dispatch to be sent to washington over his signature representing that such conditions existed. thereupon brigadier-general funston, at the head of two thousand troops, was ordered to goldfield. the state being without any militia and the representations made by governor sparks in his dispatches being strong on the point that a state of anarchy actually existed in goldfield, the president finally succumbed. the maneuver was as swift as it was unexpected. nevada people at first could not understand what it was all about. dispatches from goldfield to reno said the town was quiet. the nearest approach to an overt act of recent occurrence that had been chronicled was the alleged theft a few days before of a box or two of dynamite, about feet of fuse and a quantity of caps that were said to have been clandestinely removed from the booth mine in goldfield. the theft, if theft there was, was charged to the miners, but proof was lacking. on the arrival of the troops in goldfield the goldfield consolidated announced a new wage scale, reducing the miners' wages from $ to $ and in some cases from $ to $ . . this was a new move, calculated to rouse the ire of the wage workers and to prolong the lockout. messrs. nixon and wingfield's bank in goldfield announced at the same time that it would thereafter discharge all of the pay-rolls of the company in gold. but there were no pay-rolls of any consequence then, the mines being shut down. general funston on his arrival in goldfield interviewed mine operators, union miners and citizens generally with a view to determining the necessity for maintaining government troops there. he discovered that the administration had been buncoed. the general wired the president his opinion. president roosevelt quickly dispatched a commission to goldfield to conduct a public inquiry. this commission consisted of charles b. neal, labor commissioner; herbert knox smith, commissioner of corporations, and lawrence o. murray, assistant secretary of the department of commerce and labor. they heard testimony day and night for a week. they reported to president roosevelt that there was no occasion for the presence of troops in goldfield and that the statements telegraphed to president roosevelt by governor sparks, indicating the existence of a state of anarchy, were without justification. the report was given to the associated press and received wide publicity. the president also issued a broadside backing up the findings, which was telegraphed far and wide. eastern editorial writers poured out torrents of abuse on governor sparks. senator nixon went unscathed. the death of governor sparks feeling under a weight of obligation to governor sparks, who had headed nearly all of the sullivan trust company promotions as president, i tried editorially in the _nevada mining news_ to justify the governor's action. but it was a wee voice drowned in an ocean of adverse opinion and was entirely without echo. it didn't even soothe the governor. the governor, honest, simple old man, broken in purse, in health and in spirit, grieved over the president's denouncement, took to bed, and died of a broken heart. at his imposing funeral pageant in reno, which was attended by thousands of mourners, who had come from all parts of the state to pay homage to the grand old man and who followed the hearse to the cemetery, senator nixon and his partner, george wingfield, were conspicuous by their absence. even at the moment when the grave closed over his remains the troops were leaving goldfield. "it's the 'dead march,'" said one of the bereaved. the bringing of federal troops to goldfield accomplished its purpose. the miners' union was destroyed and sufficient time was gained to enable the financial atmosphere to clarify. by the time the troops departed, goldfield consolidated had rallied to $ per share. the panic was over. money was comparatively easy again. i ask the reader's indulgence for having devoted so much space to the facts bearing on the appearance in nevada of united states troops at a time when there was no valid occasion for their presence. i feel that it is an important chapter of my experiences and is fraught with interest to the general reader, because it illustrates how easy it is to direct the powerful machinery of our great government so as to carry out the machinations of evil-minded men. you might think, after this demonstration of the lengths to which senator nixon went to accomplish a set purpose, and after witnessing the success which attended his efforts, that a poverty-stricken individual like myself, who had had the hardihood to conduct a newspaper campaign in the senator's own home town against his financial and political activities, would judge it the better part of valor to emigrate from the state. well, i didn't. i stayed right on the spot. that i would hear from washington later i had no doubt, but i stuck, just the same, until my business interests called me away. i wasn't wrong in my deductions. within a few months thereafter there came a visit to my office in reno by a postal inspector, who was apparently "sicked on to the job," and but for the quick intercession by telegraph of united states senator francis b. newlands of nevada with the postmaster general at washington, i am certain that potent influences even at that early day would successfully have "started something." but of this more at another time, i am ahead of my story. chapter vii rawhide because rawhide, the new nevada gold camp, was born during the financial crisis of , i couldn't see any future ahead of it from the promoter's coign of vantage--not "through a pair of field-glasses." it requires capital to develop likely-looking gold "prospects" into dividend-paying mines, and i could not imagine where the money was going to come from. eastern securities markets were in the doldrums. time money commanded a big premium. prices for all descriptions of mining stocks had flattened out to almost nothing. investors were at their wits' end to protect commitments already made. financiers everywhere were depressed. a revulsion of sentiment toward speculation had set in, seemingly for keeps. only a hair-brained enthusiast of the wild-eyed order could hope at such a time possibly to succeed in the marketing of new mining issues. a financial panic has no terrors, however, for gold-seekers. the lure of gold is irresistible. money stringency serves only to strengthen the natural incentive. by the first week in january, , fully , people were reported to be in rawhide. at the end of january the population had grown to , . the camp easily held the center of the mining stage in nevada. many of the rawhide pioneers hailed from tonopah and goldfield. without exception the opinion of these veterans appeared to be that the surface showings of the new district excelled those of either of the older camps. never before in the history of mining in the west had there been discovered a quartz deposit so seemingly rich in the yellow metal at or near the surface which at the same time embraced so large an area of auriferous mineralization. goldfield, at the same early age, had been a mere collection of prospectors' tents, while rawhide was a thriving, bustling, populous camp with more than a hundred leasing outfits conducting systematic mining operations. news was brought to reno of a phenomenal strike made on grutt hill in rawhide. specimen rock taken from a seam of ore assayed $ , to the ton. the kearns lease on balloon hill reported feet of shipping ore on the -foot level which assayed from $ to $ to the ton. there was full verification of this. also regular shipments were being made to the goldfield reduction works. samples of rock were received in town that were studded with free gold. i was thrilled. statements made by camp "boosters" that a part of balloon hill was "gold with a little rock in it," were not exaggerations, judging from the specimens that were placed in my possession. my apathy began to melt away. against my earlier judgment, i now began to change my attitude. the camp looked like "the real thing," panic or no panic. why should not the american public, even in these tough financial times, enthuse about a gold camp with possibilities for money-making such as are offered here, i asked myself. don't drowning men grasp at straws? is it not the habit of horse-race players when they lose five races in succession to make a plunge bet on the sixth with a view to getting out even? this panic had impoverished hundreds of thousands. what more natural than that those who were hit hard should now fall over one another to get in on the good things of rawhide? if the camp makes good, i reasoned, in the same measure that goldfield did, early investors will roll up millions in profits. i visited the camp. what i saw electrified me. soon i was under the magic spell. real gold at rawhide half a day's tramp over the hills seemed sufficient to convince anybody that the best of the practical miners of nevada had put the stamp of their approval on the district. most of the hundred or more operating leases of rawhide were owned by these hard-rock miners. more than half a dozen surface openings on grutt hill showed the presence of masses of gold-studded quartz. at the intersection of rawhide's two principal thoroughfares a round of shots in a bold quartz outcrop revealed gold-silver ore that assayed $ , a ton. a gold beribboned dyke of quartz-rhyolite struck boldly through grutt hill's towering peak. i walked along its strike and knocked off, with an ordinary prospector's pick, samples worth $ to $ a pound. across stingaree gulch to the south balloon hill's rugged hog-back formed a connection link between grutt and consolidated hills. the kearns nos. and leases on balloon hill were scenes of strikes of such extraordinary richness that they alone would have started a stampede in alaska. the murray lease on consolidated hill was rated as a veritable bonanza. there i saw quartz that was fully one-third gold. along the southern slope of hooligan hill several sets of leasers were mining ore so rich that guards were maintained through the night to prevent loss from theft. at the alexander lease on hooligan hill the miners were crushing the richer quartz from their shaft and washing out gold to the value of $ a pan. these were the three principal centers of activity, but they by no means embraced the productive area of the district. tall, skeleton-like gallows-frames dotted the landscape for miles in every direction. the soughing of gasoline engines suggested the breathing of some spectral titan in the throes of herculean effort. i was forcefully impressed, too, with the class of miners at work. it seemed to me there was no longer any room for cavil as to the fortune-making possibilities of investors who put their money into the camp. less than a half year old, rawhide loomed up as the most active mining region i had ever seen at anything like the same age. it required nearly three years for goldfield to make as good a showing, i reasoned. during my earlier efforts at press-agenting southern nevada's mining camps i had to conjure in my mind's eye what the reality would be if half the hopes of camp enthusiasts were fulfilled. here was apparently a fulfillment rather than a promise. at the threshold of the first stage of its development era rawhide could boast of more actual producers and nearly as many operating properties as goldfield could claim at the age of three years. i recalled that cripple creek had been panic-born but had lived through the acute period of - to take rank with the greatest gold camps of the world. i was more than convinced. effervescent enthusiasm succeeded my earlier skepticism. history is about to repeat the record of cripple creek, i concluded. the rawhide coalition mines company grutt hill, hooligan hill, a part of balloon hill, and the intervening ground, forming a compact group of eight claims, acres, were owned by a partnership of eight prospectors. the area formed the heart and backbone of the whole mining district. i soon "tied up" this property for nat. c. goodwin & company of reno, with whom i was identified. a company, with , , shares of the par value of $ a share, was incorporated to take title. it was styled the rawhide coalition mines company. of its entire capitalization, , shares were turned into the treasury of the rawhide coalition mines company. nat c. goodwin & company became agents for the sale of treasury stock, and were given an option by the company on , shares, to net the treasury $ , for purposes of administration and mine development. the goodwin company also purchased , , shares of the , , shares of ownership stock, amounting to $ , more, or at the rate of . cents per share plus a commission of $ , to be paid to a go-between. the ownership stock that was retained by the original owners, and the residue of treasury stock, amounting in all to , shares, were placed in pool. when i made this deal the cash in bank of nat. c. goodwin & company amounted to about $ , . it was up to me to finance the undertaking. i did. the contract i made called for only $ , in cash and the balance on time payments. nat c. goodwin & company didn't borrow money from any bank or individual, nor did anybody identified with the concern tax his personal resources to the extent of a single dollar to go through with the deal. the money was raised, first for the coalition's treasury and later for the vendors, by appealing directly to the speculative instinct of the american investing public. the public, too, paid the expense that was incurred in reaching them. it did this by paying nat c. goodwin & company an advance in price on coalition stock purchases, over and above the cost price. nat. c. goodwin & company had agreed to net a fraction more than cents per share to both the treasury and the vendors without any deductions whatsoever. all of the advertising expense and other outlays of promotion, it was stipulated, must be borne by nat. c. goodwin & company and none by the mining corporation. what was the system? how was it done? a race of gamblers prior to the birth of rawhide i had for seven years catered to the speculative (gambling) instinct of the american public, chiefly in building mining camps and financing mining enterprises. i now realized that in order to make a success of the undertaking before me, namely, to put the new camp of rawhide on the investment map, i must again appeal loudly to the country's gambling instinct. maybe you think, dear reader, that a man who caters to the gambling instinct of his fellow men, be his intentions honest or dishonest, is a highly immoral person. is he? do you know that the gambling instinct is responsible for the wonderful growth of the mining industry in the united states? would you believe that without the gambling instinct the development of the great natural resources of this country would be almost impossible? with rare exceptions every successful mining enterprise in the united states has been financed in the past by appealing directly to the gambling instinct. in the decade antedating this year considerably more than a billion dollars was raised and invested in this way. conservative investors who are satisfied with from three to six per cent. on their money do not buy mines or mining stocks. speculators (gamblers) who are willing to risk part of their fortune in the hope of gaining fivefold or more in a year or a few years--these are the kind who invest in mines and mining stocks. there are legions of these. not less than , men and women in the united states, according to the best statistical information obtainable, are stockholders of mining companies. in fact, the gambling instinct finds employment in the mining industry long before a property has reached the stage where it can be classed as even a prospect worthy of exploration. the prospector who follows his burro into the mountain fastnesses or across the desert wastes often gambles his very life against the success of his search; those who grub-stake him gamble their money. the gambling instinct seems bound to continue to play an important rôle in the mining industry for all time, or until either the fortune-hunting instincts of man are eradicated or all the treasures of the world shall have been mined. now, if the practice of catering to the gambling instinct is baneful, i'm a malefactor. so, too, would then be such lofty-pinnacled financiers as messrs. rothschild, rockefeller, morgan, the guggenheims and others. my own thought is that it is _custom_ and the times which are responsible for the maintenance of the great game, and not individuals. the truth is, we are a race of gamblers and _we allow the captains of industry to deal the game for us_. next to money and political power, publicity is recognized by all "doers" as the most powerful lever to accomplish big things. not infrequently publicity will accomplish what neither money nor political power can. generally, publicity can be secured and controlled by either money or political power. when rawhide was born i had neither money nor political power. the camp needed publicity. i had nothing to secure publicity with but my wit. i promptly requisitioned what wit i had, and used all of it. there is an important difference between owning a series of excellent gold-mine prospects, which have tremendous speculative possibilities, and the public recognizing them to be such. it is one thing for a manufacturer to be himself assured that his article is a better product for the money than that of his competitor. it is another thing for the consumer to be convinced. therein lies the value of organized publicity. to focus the attention of the great american investing public on the camp of rawhide was the proposition before me. how was this to be accomplished? display advertising in the newspapers is costly and requires large capital; the purchase of reading notices in publications which accept that class of business, even more so. one major fact stood out from my early experience as a publicity agent in goldfield. few news editors have the heart to consign good copy to the waste-paper basket, particularly if it contains nothing which might cause a come-back. i resolved to "press-agent" the camp. chapter viii the press agent and the public's money probably the most scientifically press-agented camp in nevada had been bullfrog. bullfrog was born two years after goldfield. the goldfield publicity bureau by this time had greatly improved its art and its efficiency. when the bullfrog boom was still young the late united states senator stewart, an octogenarian and out of a job, traveled from washington, at the expiration of his term, to the bullfrog camp. there he hung out his shingle as a practising lawyer. immediately the press bureau secured a cabinet photo of the venerable lawmaker and composed a story about his fresh start in life on the desert. the yarn appealed so strongly to sunday editors of the great city dailies throughout the country that bullfrog secured for nothing scores of pages of priceless advertising in the news columns. the senator built a home, the story said, on a spot where, less than a year before, desert wayfarers had died of thirst and coyotes roamed. the interior of the house on the desert was minutely described. olive-colored chintz curtains protected the bearded patriarch, while at work in his study, from the burning rays of the sun. old florentine cabinets, costly byzantine vases, and matchless specimens of sèvres, filled his living-rooms. silk persian rugs an inch thick decked the floors. venetian-framed miniature paintings of former presidents of the united states and champions of liberty of bygone days graced the walls. costly bronzes and marble statuettes were strewn about in profusion. visitors could not help deducing that the senator thought nothing too good for his desert habitat. _the name of bullfrog exuded from every paragraph of the story; also the name of a mine at the approach to which this desert mansion was reared and in the exploitation of which the press-agent had a selfish interest._ the remarkable part of this tale, which was printed with pictures of the senator in one metropolitan newspaper of great circulation and prestige to the extent of a full page on a sunday and was syndicated by it to a score of others, was that the only truth contained in it happened to be the fact that the senator had decided to make bullfrog his home with a view to working up a law practise. but it was a good story from the bullfrog press-agent's standpoint and from that of the sunday editor, and even the senator did not blink at it. he recognized it as camp "publicity" of the highest efficiency, as did other residents of bullfrog. during the manhattan boom, which followed that of bullfrog, the publicity bureau became more ambitious. it made a drive at the news columns of the metropolitan press on week days, and succeeded. at that time the sullivan trust company of goldfield was promoting the jumping jack-manhattan mining company. james hopper, the gifted magazinist, wrote a story in which the names "jumping jack" and "sullivan trust company" appeared in almost every other line. it was forwarded by mail to a great daily newspaper of new york and promptly published as news. the yarn told how the man in charge of the gasoline engine at the mouth of the jumping jack shaft had gone stark mad while at work and how but for the quick intervention of the president of the sullivan trust company, who happened to be on the ground, a tragedy might well have been the result. the miner, the story said, stepped into the bucket at the head of the shaft and asked the man in the engine-house to lower him to a depth of feet. quick as a flash the bucket was let down. when the -foot point was reached there was a sudden stop. with a rattle and a roar the bucket was jerked back to within feet of the surface. thereupon it was again lowered and quickly raised again, and the operation constantly repeated until the poor miner became unconscious and fell in a jangled mass to the bottom of the bucket. hearing the miner's early cries, mr. sullivan had gone to the rescue. he knocked senseless the man in the engine-house and pinioned him. then he brought up the bucket containing the almost inanimate form of the miner. turning to the demon in charge of the engine, who had now recovered consciousness, mr. sullivan cried, "how dare you do a thing like this?" the man responded, "his name is jack, ain't it?" "well, what of it?" roared mr. sullivan. "oh, i was just _jumping the jack_!" chuckled the "madman." this nursery tale was conspicuously printed in a high-class new york newspaper's columns as real news. undoubtedly the reason why the editors allowed it to pass was that it was believed to be true, but above all was cleverly written. i was too busy during the early part of the rawhide boom to do any writing of consequence or even to suggest particular subjects for stories. it seemed to me that the exciting events of every-day occurrence during the progress of the mad rush would furnish the correspondents with enough matter to keep the news-pot constantly boiling. i assembled around me the shining lights of the reno newspaper fraternity and put them on the pay-roll. for weeks an average of at least one column of exciting rawhide stampede news was published on the front pages of the big coast dailies. the publicity campaign went merrily on. i kept close watch on the character of the news that was being sent out and was pleased in contemplating the fact that very little false coloring, if any, was resorted to. a boisterous mining-camp stampede, second only in intensity to the klondike excitement of eleven years before, was in progress, and there was plenty of live news to chronicle almost every day. after returning from one of my trips to rawhide i became alarmed on reading on the front page of the leading san francisco newspapers a harrowing two-column story about the manner in which ed. hoffman, mine superintendent of the rawhide coalition, had been waylaid the day before on a dark desert road and robbed of $ , in gold which he was carrying to the mines for the purpose of discharging the pay-roll. i had just left mr. hoffman in rawhide and he had not been waylaid. i sent for the man who was responsible for the story. "say, jim," i said, "you're crazy. there is a come-back to that yarn that will cost you your job as correspondent for your san francisco paper. it is rough work. cut it out!" "gee whillikins!" he replied. "how can i? here's an order for a two-column follow-up and i have already filed it." "what did you say in your second story?" i inquired. "well, i told how a posse, armed to the teeth, were chasing the robbers and explained that they're within three miles of walker lake in hot pursuit." "you're a madman!" i protested. "kill those robbers and be quick; do it to-night so that you choke off the demand for more copy, or you're a goner!" next day the correspondent wired to his string of newspapers that the posse had chased the robbers into walker lake, where they were drowned. at the point in walker lake where the correspondent said the robbers had found a watery grave it was known to some reno people that for three miles in both directions the lake was shallow and that the deepest water in that vicinity was less than four feet. this caused some snickering in reno. still there was no come-back. the newspapers never learned of the deception. the correspondent had been canny enough in sending the story to keep the local correspondents of all other out-of-town newspapers thoroughly informed. they had sent out practically the same story, and therefore did not give the snap away. in the early days of the rawhide boom a rumor reached the camp that death valley "scotty," the illustrious personage who had been press-agented from one end of the land to the other as the owner of a secret golconda, was about to start a stampede into some new diggings. the news bureau decided to kill off opposition. newspapers of the land were queried as follows: "scotty's lair discovered in death valley. it is a cache containing a number of empty wells-fargo money-chests. scotty has apparently been looting the loot of old-time stage robbers. how many words?" the newspapers just ate this one up. column upon column was telegraphed from nevada. the source of scotty's wealth being cleared up to the satisfaction of readers of the "yellow," scotty's value as a mine promoter became seriously impaired. when i chided the reno correspondent for sending out the fake story regarding the robbery of rawhide coalition's mine manager, i recall that he argued he had made a blunder in one direction only. he said he should have seen to it that the mine manager was actually robbed! that, he said, would have eliminated the danger of a come-back. years ago in new york the public was startled by reading of an actress taking her bath in pure milk. a few weeks later newspaper readers were convulsed by stories of another star in the theatrical firmament performing her morning ablutions in a tub of champagne. "if you don't believe it," said the lady press-agent to a lady newspaper reporter who was sent to cover the story, "i will give you a chance to see the lady in the act." this was done and, of course, the newspapers were convinced that it was no idle press-agent's dream. of course, neither of these women had been in the habit of bathing in milk or in champagne. a tub of milk costs less than $ and a tub of champagne less than $ , but you could not have bought this kind of publicity for these performers at anything like such absurdly low figures if you used the display advertising columns of the newspapers. nor would the advertising have been nearly so effective. the absurd milk story scored a "knockout" with newspaper readers and earned a great fortune for the actress. publicity via elinor glyn at this early stage in rawhide's history the reigning literary sensation of two continents was "three weeks." nothing, reasoned the correspondents, would attract more attention to the camp than having mrs. elinor glyn at rawhide, particularly if she would conduct herself while there in a manner that might challenge the criticism of church members. sam newhouse, the multimillionaire mining operator of utah, famous on two continents as a charming host, especially when celebrities are his guests, was stopping at the fairmont hotel in san francisco. mrs. glyn was in san francisco at the same time. mr. newhouse and ray baker, a reno beau brummel, clubman, chum of m. h. de young, owner and editor of the san francisco _chronicle_, and scion of a house that represents the aristocracy of nevada, were showing coast hospitality to the distinguished authoress. a message was sent to mr. baker reading substantially as follows: "please suggest to mr. newhouse and mrs. glyn the advisability of visiting rawhide. the lady can get much local color for a new book. if you bag the game, you will be a hero." ray was on to his job. within three days mrs. glyn, under escort of messrs. newhouse and baker, arrived in rawhide after a thirty-eight-hour journey by railroad and auto from san francisco. the party having arrived in camp at dusk, it was suggested that they go to a gambling-house and see a real game of stud poker as played on the desert. they entered a room. six players were seated around a table. the men were coatless and grimy. their unshaven mugs, rough as nutmeg-graters, were twisted into strange grimaces. all of them appeared the worse for liquor. before each man was piled a mound of ivory chips of various hues, and alongside rested a six-shooter. from the rear trousers' pocket of every player another gun protruded. each man wore a belt filled with cartridges. although an impromptu sort of game, it was well staged. a man with bloodshot eyes shuffled and riffled the cards. then he dealt a hand to each. "bet you $ , ," loudly declared the first player. "call that and go you $ , better," shouted the second as he pushed a stack of yellows toward the center. "raise you!" cried two others, almost in unison. before the jack-pot was played out $ , (in chips) had found its way to the center of the table and four men were standing up in their seats in a frenzy of bravado with the muzzles of their guns viciously pointed at one another. there was enough of the lurking devil in the eyes of the belligerents to give the onlookers a nervous shiver. when the gun-play started, mrs. glyn and messrs. newhouse and baker took to the "tall and uncut." as the door closed and the vanishing forms of the visitors could be seen disappearing around the opposite street corner, all of the men in the room pointed their guns heavenward and shot at the ceiling, which was of canvas. the sharp report of the revolver-shots rang through the air. this was followed by hollow groans, calculated to freeze the blood of the retreating party, and by a scraping and scuffling sound that conveyed to the imagination a violent struggle between several persons. fifteen minutes later two stretchers, carrying the "dead," were taken to the undertaker's shop. mrs. glyn and mr. newhouse, with drooped chins, stood by and witnessed the dismal spectacle. of course, the "murder" of these two gamblers, during the progress of a card-game for sensationally high stakes and in the presence of the authoress of "three weeks," made fine front-page newspaper copy. rawhide suggested itself in every paragraph of the stories as a mining-center that was large enough to attract the attention of a multimillionaire mine magnate of the caliber of sam newhouse and of an authoress of such world-wide repute as elinor glyn. the camp got yards of free publicity that was calculated to convince the public it was no flash in the pan, which was exactly what was wanted. the next night elinor glyn, having recovered from the shock of the exciting poker-game, was escorted through stingaree gulch. the lane was lined on both sides with dance-halls and brothels for a distance of two thousand feet. mrs. glyn "sight-saw" all of these. rawhide scribes saw a chance here for some fine writing: the wasted cheeks and wasted forms of frail humanity, as seen last night in the jaundiced light that was reflected by the crimson-shaded lamps and curtains of stingaree gulch, visibly affected the gifted english authoress. they carried to mrs. glyn an affirmative answer to the question, so often propounded recently, whether it is against public morality to make a heroine in "three weeks" of a pleasure-palled victim of the upper set. it was made plain to mrs. glyn that her heroine differed from the stingaree gulch kind only in that her cheeks were less faded than her character. that's the kind of laura jean libby comment on mrs. glyn's tour of stingaree gulch that one of the rawhide correspondents wired to a "yellow," with a view to pleasing the editor and to insuring positive acceptance of his copy. later in the night a fire-alarm was rung in. the local fire-department responded in wild-western fashion. the conflagration, which was started for mrs. glyn's sole benefit, advanced with the rapidity of a tidal wave. it brought to the scene a mixed throng of the riffraff of the camp. the tumult of voices rose loud and clear. the fire embraced all of the deserted shacks and waste lumber at the foothills of one of the mines. the liberal use of kerosene and a favoring wind caused a fierce blaze. it spouted showers of sparks into the darkness and gleamed like a beacon to desert wayfarers. the fierce yells of the firemen rang far and wide. of a sudden a wild-haired individual thrust himself out of the crowd and sprang through the door of a blazing shack. he disappeared within the flames. three feet past the door was a secret passage leading to shelter in the tunnel of an adjoining mine. mrs. glyn, of course, did not know this. she acclaimed the act as one of daring heroism. water in the camp was scarce, so there was a resort to barreled beer and dynamite. soon the flames of the devouring fire were extinguished. again the newspapers throughout the land contained stories, which were telegraphed from the spot, regarding the remarkable experiences of the much-discussed authoress of "three weeks" in the new, great, gold camp of rawhide. the press agent was in his glory. "al" miller's siege elinor glyn's experiences in rawhide were by no means the most interesting that newspaper readers of the united states were privileged to read during the course of the press-agenting of the camp. "al" miller was one of the first experienced mining operators to get into rawhide. he landed in camp in the early part of . after a thorough inspection of the mine showings throughout the district, he hit upon the hooligan hill section of the rawhide coalition property as a likely-looking spot to develop pay ore. mr. miller had been mining for a great many years and had been identified with some important mining projects in colorado. when he applied for a lease on that section of the coalition property embracing a good part of hooligan hill it was granted to him without parley. mr. miller financed his project right in the camp of rawhide. he interested five other mining men. a syndicate was formed. each of these six took an equal interest. all agreed to subscribe to a treasury fund to meet the expense of development. a shaft was started on a very rich stringer of gold ore. when it had reached a depth of about feet the miller lease was regarded as one of the big "comers" of the camp. in fact, a good grade of ore was exposed on all sides and in the bottom of a - / × - / foot shaft. specimens assayed as high as $ , a ton. at this stage of the enterprise an operating company was formed. those who had formed the original syndicate divided the ownership stock among themselves. mr. miller was given full charge and allowed a salary for his services. day after day you could see him on the job, sharpening steel, turning a windlass to hoist the muck from the bottom of the shaft after each round of shots had been fired, and making a full hand as mine-manager, blacksmith, mucker and shift-boss. one day i was sitting in my office at reno when i received a telephone message that there was a big fight on over the control of the miller lease. mr. miller and a big swede who was working for him had barricaded themselves at the mine. they threatened death to any one who approached. we had, for a day or two, been hungering and thirsting for some live news of the camp. my journalistic instinct got busy. i queried our rawhide correspondent. he advised that the situation really looked serious and that a genuine scrap threatened. mr. miller had installed a good-sized arsenal at the mine and laid in about three days' provisions. he declared that he was prepared to hold out for an indefinite period. i wired our correspondent at rawhide instructions to file a story up to , or , words. naturally excitement ran high in the camp. soon hundreds of people gathered at points of vantage along the crest of hooligan hill and surrounding uplifts. every one was expectantly awaiting interesting developments. to the casual onlooker it seemed as though possibly a score or more who stood ready to storm the mine might become involved. in fact, no one could tell how soon hostilities would break loose. using the telegrams i had received from camp, one of my men dictated a story containing the facts and sent it over to the reno correspondent of the associated press. it was put on the wire without a moment's hesitation. mr. miller had formed a rampart about the collar of the shaft. sacked ore was piled up to a height of about five feet. the gold-laden stuff surrounded the shaft on all sides but one, the exception being to the northwest. there hooligan hill slanted upward at an angle of less than twenty degrees from vertical. it was from this approach that mr. miller was forced to guard constantly against attack. he found it necessary, according to our dispatches, to keep a constant vigil in order to preclude the possibility of a surprise. he and his swede companion alternated in keeping the lookout. occasionally the fitful soughing of the gasoline engine exhausts from the mining plants on balloon hill and grutt hill were interspersed by the sharp report of a six-shooter as the besieged parties either actually or mythically observed a threatened approach of the enemy. although the principals cast in this little mimic war were limited to perhaps less than a score, every incident or detail was provided to make up a very threatening and keenly interesting situation, with several lives hanging in the balance. there is no doubt that mr. miller at least, and perhaps his swede companion, would have resisted any attempt to take "fort miller," as we styled it, even to sacrificing his life, for he was known as a man of action who had been in numerous critical situations without showing the slightest exercise of the primal instinct. the fact that rawhide was saved from an episode that might have measured up to the tragic importance of a pitched battle and caused the loss of a number of lives was undoubtedly due to the patient willingness of mr. miller's partners and their supporters to satisfy themselves with a siege and to starve out the two men in possession of the mine rather than undertake to rout them. the story went like wildfire and we were besieged for others and for a follow-up on the original story. for three days we kept the yarn alive and the wires burdened with details of the siege and unsuccessful storming of camp miller, hooligan hill, nevada. i venture to say that mr. hearst, with his well-known facility for serving up hot stuff to a sensation-loving following, never surpassed in this particular the stories that were scattered broadcast over the united states foundered upon this interesting episode in the mining development of rawhide. the story promised to be good for at least a week when we were somewhat surprised to hear that mr. miller had capitulated. it seems that in storing his fort with provender he had supplied only one gallon of whisky and when this ran low, on the second or third day, he attempted, single-handed, a foraging expedition in search of a further supply of john barleycorn. during his absence his swede companion hoisted a flag of truce, and when miller returned to the scene of action he found his mine in the possession of his enemies. charles g. gates, son of john w. gates, the noted stock-market plunger, visited rawhide twice. he spent his time by day inspecting the numerous mine workings, of which there were not less than seventy-five in full blast. at night he was a frequent winner at the gaming-tables. his advent in rawhide was telegraphed far and wide and contributed to excite the general interest. a young woman of dazzling beauty and fine presence was discovered in camp unchaperoned. she had been attracted to the scene by stories of fortunes made in a night. under a grilling process of questioning by a few leading citizens she divulged the fact that she had run away from her home in utah to seek single-handed her fortune on the desert. in roguish manner she expressed the opinion that if allowed to go her own way she would soon succeed in her mission. but she would not divulge the manner in which she proposed to operate. she confessed she had no money. there was a serene but settled expression of melancholy in her eyes that captivated everybody who saw her. many roving adventurers of the better class in the district who had listened to the call of the wild yet would have felt as much at home in the salon of a fifth avenue millionaire as in the boom-camp, pronounced her beauty to be in a class by itself. there was no law in the camp which would warrant the girl's deportation, yet action appeared warranted. within a few moments $ was subscribed as a purse to furnish the girl a passage out of camp and for a fresh start in life. the late riley grannan, race-track plunger, nat. c. goodwin, the noted player, and three others subscribed $ each. she refused to accept the present. next day she disappeared. there was a corking human interest story here. newspapers far and wide published the tale. two years later this girl's photograph was sent without her knowledge to the judges of a famous beauty contest in a far western state. the judges were on the point of voting her the prize without question when investigation of her antecedents revealed her rawhide escapade. the award was given to another. when the camp was four months old and water still commanded from $ to $ a barrel, the standard price for a bath being $ , a banquet costing $ a plate was served to one hundred soldiers of fortune who had been drawn to the spot from nearly every clime. the banqueters to a man played a good knife and fork. the spirit of _camaraderie_ permeated the feast. there was much libation, much postprandial speechifying, much unbridled joyousness. _bon mots_ flew from lip to lip. song and jest were exchanged. the air rang with hilarity. nat. c. goodwin warmed up to a witty, odd, racy vein of across-the-table conversation. then he made a felicitous speech. others followed him in similar vein. luxuriant and unrestrained imagination and slashiness of wit marked most of the talks. the festivities ended in a revel. the correspondents burned up the wires on the subject of that banquet. in the memory of the most ancient prospector no scene like this had ever been enacted in a desert mining camp when it was so young and at a time when the country was just emerging from a panic that seemed for a while to warp its whole financial fabric. the funeral oration for riley grannan in april, , riley grannan, the noted race-track plunger, died of pneumonia in rawhide, where he was conducting a gambling house. he was ill only a few days and his life went out like the snuff of a candle. when all the gold in rawhide's towering hills shall have been reduced to bullion and not even a post is left to guide the desert-wayfarer to the spot where was witnessed the greatest stampede in western mining history, posterity will remember rawhide for the funeral oration that was pronounced over the bier of mr. grannan by h. w. knickerbocker, wearer of the cloth and mine-promoter. the oration delivered by mr. knickerbocker on this occasion was a remarkable example of sustained eloquence. pouring out utterances of exquisite thought and brilliant language in utter disregard of the length of his sentences and without using so much as a pencil memorandum, mr. knickerbocker with a delicacy of expression pure as poetry urged upon his auditors that the deceased "dead game sport" had not lived his life in vain. soon the crowd, who listened with rapt attention, was in the melting mood. as mr. knickerbocker progressed with his discourse his periods were punctuated with convulsive bursts of sorrow. rawhide correspondents reorganized the full value of the occasion from the press-agent's standpoint. mr. grannan had been a world-famous plunger on the turf, and the correspondents burned the midnight oil in an effort to do their subject justice. some other lights and shadows of rawhide press-agenting are contained in the following dispatch, which appeared in a san francisco newspaper in the early period of the boom: goldfield, february .--w. h. scott of the goldfield brokerage house of scott & amann, who returned from rawhide this morning, expresses the opinion that within a year that camp will be the largest gold-producer in the state. "when a man is broke in rawhide," said mr. scott, "he can always eat. all he has to do is to go to some lease and pan out breakfast money. there is rich ore on every dump, and every man is made welcome." h. w. knickerbocker sent this one to a reno newspaper: gold, gold, gold! the wise men of old sought an alchemy whereby they could transmute the base metals into gold. it was a fruitless quest then; it is a needless quest now. rawhide has been discovered! no flowers bloom upon her rock-ribbed bosom. no dimpling streams kiss her soil into verdure, to flash in laminated silver 'neath the sunbeam's touch. no flowers nor food, no beauty nor utility on the surface; but from her desert-covered heart rawhide is pouring a stream of yellow gold out upon the world which is translatable, not simply into food and houses and comfort, but also into pictures and poetry and music and all those things that minister in an objective way to the development of a full-orbed manhood. joseph s. jordan, the well-known nevada mining editor, filed this dispatch to the newspapers of his string on the coast: right through what is now the main street of rawhide, in the days of ' , the makers of california passed on their way to the new eldorado. they had many hardships through which to pass before reaching the gold which was their lure, and thousands that went through the hills of rawhide never reached their goal. they were massacred by the indians, or fell victims to the thirst and heat of the desert, and for many years the way across the plains was marked by the whitening bones of the pathfinders. and here all the while lay the treasures of captain kidd, the ransoms of crowns. harry hedrick, the veteran journalist of far western mining camps, sent his newspaper this: to stand on twenty different claims in one day, as i have done; to take the virgin rock from the ledge, to reduce it to pulp and then to watch a string of the saint-seducing dross encircle the pan; to peer over the shoulder of the assayer while he takes the precious button from the crucible--these are the convincing things about this newest and greatest of gold camps. it is not a novelty to have assays run into the thousands. in fact, it is commonplace. to report strikes of a few hundred dollars to the ton seems like an anticlimax. there were scores of actual happenings in rawhide that make it possible for me to say in reviewing the vigorous publicity campaign which marked its first year's phenomenal growth, that ninety per cent. of the correspondence, including the special dispatches sent from the camp and from reno, which was published in newspapers of the united states, was not only based on fact but was literally true in so far as any newspaper reporter can be depended upon accurately to describe events. ask any high-class newspaper owner or editor to express his sentiments regarding the "faking" which formed about ten per cent. of the rawhide press work described herein and he will tell you that such work is a reproach to journalism. maybe it is, but we are living in times when such work on the part of press-agents is the rule and not the exception. the publicity-agent who can successfully perform this way is generally able to command an annual stipend as big as that of the president of the united states. there was nothing criminal about the performance in rawhide, because there was no intentional misrepresentation regarding the character or quality of any mine in the rawhide camp. correspondents were repeatedly warned to be extremely careful not to overstep the bounds in this regard. confessedly there are grades of "faking" which no press-agent would care to stoop to. somewhere in de quincey's "confessions of an opium eater" he describes one of his pipe-dreams as perfect moonshine, and, like the sculptured imagery of the pendulous lamp in "christabel," _all carved from the carver's brain_. rawhide and reno correspondents were guilty of very little work which de quincey's description would exactly fit. there was a basis for nearly everything they wrote about, even the alleged discovery of death valley scotty's secret storehouse of wealth, that story having been in circulation in nevada, although not theretofore published, for upward of eighteen months. unsubstantial, baseless, ungrounded fiction had been resorted to, it is true, during the manhattan boom, in a single story about the madman in charge of the hoist on the jumping jack, but this was an exception to the rule and the story was harmless. among the "big fellows" if you don't think the character of the press-agent's work during the rawhide boom was comparatively high class and harmless, dear reader, you really have another "think" coming. at a time when goldfield consolidated was wobbling in price on the new york curb and the market needed support, just prior to the smash in the market price of the stock from $ to around $ . , the new york _times_ printed in a conspicuous position on its financial page a news story to the effect that j. p. morgan & company were about to take over the control of that company. that's an example of a _harmful_ "fake," the coarse kind that wall street occasionally uses to catch suckers. here is another: thompson, towle & company, members of the new york stock exchange, issue a weekly newspaper called the _news letter_. much of its space is given over to a review of the copper situation, at the mines and in the share markets. w. b. thompson, head of the firm, he of nipissing market manipulation fame, is interested to the extent of millions in inspiration, utah copper, nevada consolidated, mason valley and other copper-mining companies. on january , , when both the copper metal and copper share markets were sick, and both the price of the metal and the shares were on the eve of a decline, which temporarily ensued, the _news letter_, in an article headed "copper," said: every outcrop in the country has been examined and it is not known where one can look for new properties. the readers of the _news letter_ were asked to believe that no more copper mines would be discovered in this country and that, because of this and other conditions which it mentioned, the supply of the metal must soon be exhausted and the price of the metal and of copper securities must advance. the statement in the _news letter_ that every outcrop in the country has been examined and that it is not known where one can look for new properties--well, if the whole population of north america agreed in a body to accept the job of prospecting the rocky mountains and sierra nevada mountains alone they could hardly perform the job in a lifetime. the use of the automobile has undoubtedly been responsible in the past few years for an impetus to the discovery of mines which is calculated to double the mineral product of this country in the next two decades, and who shall say what the flying-machine will accomplish in this regard? further, new smelting processes and improved reduction facilities generally are daily reducing the cost of treatment of ores and are making commercially valuable low-grade ore-bodies heretofore passed up as worthless. the best opinion of mining men in this country is that our mineral resources have not yet been "skimmed" and that the mining ground of the western country has not yet been well "scratched." therefore, the statement made in a newspaper which is supposedly devoted to the interests of investors, that it need not be expected that more copper mines are going to be discovered, is a snare calculated to trap the unwary. the foregoing is an example of a very harmful but comparatively crude fake, employed by some promoters in wall street of the multimillionaire class when their stocks need market support. here is a specimen of the _insidious_ brand of get-rich-quick fake. on march , , the new york _sun_ printed in the second column of its front page the following dispatch: tacoma, wash., march .--f. augustus heinze has struck it rich again; this time it's a fortune in the porcupine gold fields in canada. charles e. herron, a nome mining man, who has just returned from the new gold fields, is authority for the statement that heinze is "inside the big money." he has bought the foster group of claims, adjoining the celebrated dome mine, from which it is estimated that $ , , will be gleaned this year and for the development of which a railroad is now under construction. the porcupine gold field, according to herron, is one of the wonders of the age. one prospector has stripped the vein for a distance of fifty feet and polished it in places, so that gold is visible all along. his trench is three feet deep and he asks $ , cash for it as it stands. a party of alaskans offered the owner of this claim $ , a shot for all the ore that could be blown out with two sticks of dynamite, but he refused. press-work like the foregoing is more than likely to separate the public wrongfully from its money. the item serves as an excellent example of one of "the impalpable and cunningly devised tricks that fool the wisest and which landed you" that i promised, at the beginning of "my adventures with your money," to lay bare. i said in my foreword: are you aware that in catering to your instinct to gamble, methods to get you to part with your money are so artfully and deftly applied by the highest powers that they deceive you completely? could you imagine it to be a fact that in nearly all cases where you find you are ready to embark on a given speculation, ways and means that are almost scientific in their insidiousness have been used upon you? the new york _sun_ article says it is estimated that $ , , will be gleaned this year from the dome mine in porcupine. the truth is, no engineer has ever appraised the ore in sight in the entire mine, according to any statements yet issued, at anything like half of that amount gross, and the mine itself can not possibly produce so much as $ , this year. a mill of tons per diem capacity has been ordered by the management and it is expected will be in operation by october first, but no sooner.[ ] the ore, according to h. p. davis's _porcupine hand book_, an accepted authority, "has been stated to average from $ to $ a ton." the lowest estimated cost of mining and milling is $ . a fair estimate of profits would, therefore, be $ per ton, not allowing for any expenses of mine-exploration in other directions on the property or other incidental outlay, which will undoubtedly amount to $ per ton on the production. the production of tons of ore per day at $ per ton net profit would mean net returns of $ , per month. if the mill runs throughout october, november and december of this the company will "glean" $ , during , and not $ , , , as the new york _sun_ article suggests.[ ] [ ] the fire of july will delay installation until a later date. [ ] in arriving at these figures i am more than fair. recent estimates of the average value of the ores is $ , and i know of some estimates by very competent mining men that are as low as $ . some engineers say justification is lacking for even a $ estimate. the dome is by no means a proved commercial success as yet from the mine standpoint, although the possessor of much ore, because of the uncertain average values. how great an exaggeration the new york _sun's_ $ , , estimate is may be gathered from the statement that to glean $ , , in one year from any mine where the ore assays $ on an average, and the cost of mining, milling and new development is $ , the gross value of the tonnage in the mine that is milled during the one year must be at least $ , , . further, to reduce such a quantity of that quality of ore to bullion in a single year would require the erection of mills of , tons per day capacity. as mentioned, the actual per diem capacity of the mill now under construction is tons.[ ] [ ] it has been destroyed by the july fire and must be replaced. undoubtedly the dome mining company flotation will soon be made and the public will be "allowed" to subscribe for the shares or buy them on the new york curb at a figure agreeable to the promoters. this seems certain, for otherwise why this raw press-work?[ ] [ ] the foregoing comment on the porcupine situation has been more than justified by developments after the date of this writing. the first battery of forty stamps in the first stamp mill was not in operation till april, , more than a year from the date of the prediction that $ , , would be gleaned in . the article says that a number of alaskans offered money at the rate of $ , a shot for all the ore that could be blown out with two sticks of dynamite, but were refused. there never was a statement made by any wild-catter now behind prison bars in any literature i ever saw that could approach this one in flagrant misrepresentation of facts. all the ore that could be displaced in one shot with two sticks of dynamite would not exceed four tons. in order to repay the investor it would be necessary, therefore, that this ore average better than $ , per ton. the new york _sun's_ story says that notwithstanding this offer the owner was willing to sell the whole property for $ , . imagine this: there are four tons of rock on the property worth $ , per ton, for a distance of feet the gold shimmers on the surface, and there are hundreds of thousands of tons of rock in the same kind of formation on the same property, but still the owner is willing to dispose of all of it for $ , ! the statement is preposterous and outrageous. it is the kind described by de quincey as "all carved from the carver's brain." the reverse english now, about the "reverse english" in this line of press-work. similar ways and means, dear reader, that are just as scientific in their insidiousness have been used upon you to poison your mind _against_ the value of mining investments of competing promoters, when it has been found to the interest of powerful men to bring this about. when the offices of b. h. scheftels & company, with which i was identified, were raided in seven cities by special agent scarborough (since permitted to resign) of the department of justice of the united states government, in september, , two of the men who had been active in bringing about the raid assembled in the parlor of the astor house the newspaper men assigned to cover the story by new york and brooklyn newspapers. there they gave out the information that ely central, which i had advised the purchase of at from cents per share up to $ and down again, was actually under option to me and my associates in large blocks at cents. as a matter of fact, the average price paid over for this option stock in real hard money by my people was in excess of cents per share, without adding a penny to the cost for expenses of mining engineers, publicity or anything else. my people had also partly paid for a block bought at private sale at the rate of $ a share, besides buying tens of thousands of shares in the open market at $ and higher. the new york _times_ and the new york _sun_, two newspapers which make capital of the rectitude of both their news and advertising columns, published this statement, along with forty others that were just as false, if not more so. so did the new york _american_ and the other hearst newspapers of the united states. the new york _times_ story related how i had personally cleaned up in fifteen months not less than $ , , as the result of my market operations. as a matter of fact, i and my associates had impoverished ourselves trying to support the stock in the open market against the concerted attacks of rival promoters and other powerful interests on whose financial corns we had tread. every well-informed person in wall street knows this. the new york _times_ stated that every man connected with b. h. scheftels & company had tried to obtain membership on the new york curb and that all of the requests were turned down. no application was ever made for membership because, first, the rules of the curb forbade corporation memberships, and, second, the scheftels company already employed several members on regular salary and more than a dozen members on a commission basis. it was also stated that b. h. scheftels & company applied to the boston curb for membership and that their application was rejected. this was also a lie made out of whole cloth. in three months, the new york _times_ said, no less than , letters had been received in reply to circulars sent out by b. h. scheftels & company. this is an average of over , letters for each business day during the period of three months. the exaggeration here was about , per cent. all of the properties promoted by the scheftels company were stated in the new york _times_ article to be "practically worthless." this was utter rubbish and so misleading that had i been accused of pocketpicking the effect could not have been more harmful. rawhide coalition had produced upward of $ , in gold bullion, had probably been "high graded" to the extent of nearly as much more, according to the judgment of well-posted men on the ground, and not less than five miles of underground development work had been done on the property. development work and production had never ceased for a day. besides, when the rawhide camp was still in its swaddling-clothes, i had originally purchased the controlling interest for nat. c. goodwin & company at a valuation of $ , for the mine. the control of ely central had been taken over by b. h. scheftels & company and paid for at a valuation well in excess of a million dollars for the property, and upward of $ , had been spent in mine development during the fourteen months of the scheftels quasi-control. jumbo extension was a famous producer of goldfield. subsequent to the raid one-twentieth of its acreage was sold to the goldfield consolidated for $ , . on july th of the current year the company disbursed to stockholders $ , in dividends, being per cent. on the par of the issued capitalization. bovard consolidated, which was promoted at cents a share as a speculation, had turned out to be a "lemon" after a period of active mine development, the values in the ore pinching out at depth, but b. h. scheftels & company had immediately informed stockholders to this effect. the new york _times_ stated that b. h. scheftels & company sold ely central stock to the amount of five or six millions in cash and made a profit of $ , , on the transactions. the books of the scheftels company show that the company not only made no money on the sale of ely central but actually lost vast sums. the new york _times_ said that it had been advertised that a carload of ore had been shipped from the ely central mine as a sample, but that the government had not been able to find out to whom this carload of ore was consigned. the truth was that the consignment had been made to the best-known smelter company in the united states, that the ore averaged seven per cent. copper, and that it could not have been shipped out of camp except over a single railroad which has the monopoly--an easy transaction to trace. b. h. scheftels & company were accused by the new york _times_ of clearing up nearly $ , in three months on the promotion of the south quincy copper company. the facts were that, after receiving $ , in subscriptions and returning every subscription on demand because of the slump in metallic copper, the scheftels company abandoned the promotion and never even applied for listing of the stock in any market. a large sum was lost by the scheftels company here. even in stating the penalty for misuse of the mails, which was the crime charged by the government agent who afterwards resigned as a consequence of conduct objectionable to the government, the new york _times_ stated that the punishment was five years in prison, which was more hop-skip-and-go-merry mistaking. the crime is a misdemeanor and the maximum penalty for an offense is eighteen months. i have counted not less than five hundred unfounded and misleading statements of this kind regarding myself and associates that have been made in the past year by newspapers and press associations. the shadow has been taken for the substance. now, the scheftels raid, i shall prove in due time, was the culmination of as bitterly waged a campaign of misrepresentation and financial brigandage as has ever been recorded. chronologically an introduction of the subject is out of place here. the effect, however, of the press-agenting which formed a part of the campaign of destruction is pertinent to the topic under consideration. the immediate result was that thousands of stockholders in the various mining companies that had been sponsored by the scheftels company were robbed of an aggregate sum amounting into millions, which represented the ensuing decline in market value of the stocks. the newspaper campaign of misrepresentation and villification was essential to the plans and purposes of the men who sicked the government on to me. the final destruction of public confidence in the securities with which i was identified became necessary to justify the whole proceeding in the public mind. on the surface of the play it was made to appear that the government of the united states had reached out righteously for the suppression of a dangerous band of criminals. the story in the new york _times_ and other newspapers on the day after the raid was justification made to this end. the fact that tens of thousands of innocent stockholders might lose their all, as a result of the foul use of powerful maladroit publicity-machinery, did not stop the conspirators for a moment. i had a youthful past and, therefore, the newspapers took little chance in publishing anything without investigation and proof that might be offered. and they went the limit, particularly those newspapers that are in the habit of permitting the use of their news columns from time to time to help along the publicity measures of powerful interests. contrasted with the comparatively harmless "faking" that characterized rawhide's press-agenting, the raw work of the newspapers just described is as different as angel-cake from antimony. if you are not yet convinced, hearken to this: the power of the public print in the _saturday evening post_ of december , , there appeared an article headed, "launching a corporation. how the pirates and merchantmen of commerce set sail. by edward hungerford," from which i quote, without the omission or change of so much as a comma. referring, in my opinion to ely central, promoted by myself and associates, mr. hungerford says: here is a typical case--a mining property recently exploited on the curb market, the shipyard of many of these pirate craft: a prospect located not far from one of the bonanza mines of the west was capitalized by a number of men who, after they had convinced themselves that it would not pay, dropped it and gave little thought to the company they had organized. one day they received through a lawyer an offer of four thousand dollars for the even million shares of stock they had prepared to issue at a face value of five dollars a share. they were told that a wealthy young man was willing to take a four-thousand-dollar flier on the property, on the outside chance that it might develop ore. the deal was made. soon after a well-known man was named as a part owner of the mine, which "promised" to enrich all those interested in it. that was not the first time that the marketable value of a name that is known had been used to exploit a corporation. any man of standing has many such offers. the shares of stock that had been purchased for four cents each were peddled on the curb at fifty cents. then they were advanced to sixty cents. soon a "market"--so called--was made and the stock found a ready sale. point by point it was advanced until it actually was eagerly sought by investors, who were not only willing but eager to pay four dollars a share for it. mr. hungerford states in the foregoing: "this mine was capitalized by a number of men who dropped out after they convinced themselves that it would not pay." the statement is false if it refers to ely central, as i believe it does. the chief owners and organizers attempted to promote it through a new york stock exchange house on the new york curb at above $ per share, or at a valuation of more than $ , , for the mine, but the bankers' panic of - intervened, and for _that reason_ they quit. the stock sold in at above $ . a share on the new york curb, two years before i became identified with it. mr. hungerford says that one day these men _received through a lawyer an offer of $ , for a million shares of stock, and they sold_. how cruelly false this statement is nobody can feel more than myself. the average price paid by my associates in hard money for the controlling interest in the , , shares of capitalization, as already mentioned, was above cents, or considerably more than one million dollars in all. an additional $ , or more was used to protect the market for the stock, making our cost, without adding a cent for promotion expenses, about $ . per share instead of four cents--more than $ , , for the property and not $ , . line by line and word for word i could analyze the statement of mr. hungerford and show that per cent. of it is false both in premise and deduction. but this would be only cumulative on the one point. my excuse for mentioning the item is to give a striking example of the startling force and power which attaches to insidious newspaper publicity of the kind quoted from the new york _times_. mr. hungerford "fell" for it, and innocently lent himself to the purposes of the men who sponsored the story by himself passing it on to the readers of the _saturday evening post_. the purpose here has been to show the imposition on the american public which is being practiced every day in the news columns of daily newspapers and other publications, but i have been able to convey to the reader only the barest kind of suggestion as to the depths to which this perception is practiced. limitations of space prohibit further encroachment, or i would fain extend my list of examples indefinitely. we hear much these days about the abuses of journalism. much of the criticism is leveled at publishers who lend the use of their columns for "boosting" that is calculated to help their advertisers. but little attention is paid to that other evil namely, the use of the news columns for the purpose of destroying business rivals, political rivals and enemies generally of men who wield sufficient influence to employ the method. this ramification of the subject appeals to me as of at least as much consequence to citizens as is the one of inspired puffery. i believe the public is going to hear much more of this feature of newspaper abuse in the future than it has in the past. the community is waking up and is manifesting a desire to learn more about the heinous practice. rawhide again to return to rawhide. as a result of the "scientific" press-agenting which the camp received, a frenzied stampede ensued. the rush was of such magnitude that it stands unparalleled in western mining history. not less than , people journeyed across the desolate, wind-swept reaches of nevada's mountainous desert during the excitement. not less than , of these remained on the ground for a period of several months. mining-camp records were broken. the maximum population of goldfield during the height of its boom was approximately , , but it had taken more than three years and the discovery of the world's highest grade gold mine to attract this number of people. cripple creek for two years after its discovery was little more than a hamlet. leadville during its first year was hardly heard of. the scenes enacted in rawhide when the boom was at its height beggar description. real estate advanced in value in half a year in as great degree as goldfield's did in three years. corner lots on the main street sold as high as $ , . ground rent for plots × feet commanded $ a month. during the day as well as at night the gaming-tables of the pleasure-palaces were banked with players, and the adventuresome were compelled literally to fight their way through the serried ranks of onlookers to take a hand in the play. the miners were flush. many assay offices, accessories of "high-graders," were turning out bullion from extraordinarily rich ore easily hypothecated by a certain element among the men working underground. the opening of "tex" rickard's gambling-resort in rawhide was celebrated by an orgy that cut a new notch for functions of this kind in southern nevada. the bar receipts aggregated over $ , . the games were reported to have won for mr. rickard $ , on the first day. champagne was the common beverage. day was merged into night and night into day. rouged courtesans of stingaree gulch provided the dash of ¯ on the densely crowded streets fashionably tailored easterners, digging-booted prospectors, grimy miners, hustling brokers, promoters, mine operators and mercantile men, with here and there a scattering of "tin horns," jostled one another and formed an ever shifting kaleidoscopic maelstrom of humanity. in the environing hills could be heard the creak of the windlass, the clank of the chain, and the buzz and chug of the gasoline hoist, punctuated at frequent intervals by sharp detonations of exploding dynamite. outgoing ore-laden freighters, hauled by ten-span mule teams, made almost impassable the roads connecting the camp with near-by points of ingress. coming from the opposite direction, heavily laden wagons carrying lumber and supplies, and automobiles crowded to the guards with human freight, blocked the roadways. rawhide's publicity campaign from a press-agent's standpoint was a howling success. from the standpoint of the promoter, however, results were mixed. nat. c. goodwin & company were enabled to make more than a financial stand-off of their promotion of the rawhide coalition mines company, but they did not profit to the extent they might have, had the times been propitious. i was not long in discovering that my first deductions, made at the inception of the rawhide boom, namely, that the country was in no financial mood to consider favorably the claims to recognition of a new mining camp, were right, and that it would have been better had the birth of rawhide been delayed for a period or until the country could catch its financial breath again. crowds came to rawhide, but few with money. flattering as was the extent of the inrush, it was easy to see that if the publicity campaign had been suppressed for a while, the result in harvest would have been immeasurably greater. had financial conditions been right, the effort to give the camp "scientific" publicity would undoubtedly have been crowded with results for "the inside" of a character that would have meant much larger sums of money in the bank. nat. c. goodwin & company recognized, too, that they had been working at a great disadvantage by attempting to finance a great mining enterprise at so great a distance from eastern financial centers as reno. we were hardly a match for the eastern promoter who, because of the handy location of his offices, was enabled to keep in close personal contact with his following. the usual happening in mining took place at rawhide. the extraordinary rich surface deposits opened up into vast bodies of medium and low-grade ore at depth. rawhide's one requirement appeared to be a railroad, and a milling plant of or tons a day capacity. it was decided that i should come east and attempt to finance the company for deep mine development, mill and railroad construction, and also to go through with the deal made with the vendors of the controlling interest. the time period for payments had been extended for nat. c. goodwin & company, and the option to purchase was now valued by the goodwin company at a fortune. in new york, over the signature of nat. c. goodwin the firm for a while, under my direction, conducted a display advertisement newspaper campaign in favor of the issue, which was now listed on the new york curb. hayden, stone & company, bankers, of boston and new york, who have since successfully financed the ray consolidated and chino copper companies, undertook to send their engineer to rawhide to make an examination of the property with a view to financing the company for railroad and milling equipment amounting to upward of a million dollars. under the impetus of this news and the nat. c. goodwin advertising campaign the market price of the shares shot up to $ . , or a valuation in excess of four million dollars for the property. a few weeks later a sharp market break occurred. some one got the news before nat. c. goodwin & company did that the million-dollar financing proposition had been acted upon adversely by the engineer. the company had done no systematic underground development work. an enormous amount of work had been done, but it was accomplished under the leasing system. the leasers, who, because of lack of milling facilities, were unable to dispose of a profit of ore that assayed less than $ per ton, had bent all of their efforts toward bringing to the surface high-grade shipping ore and had made no effort at all to block out and put into sight the known great tonnages of medium and low-grade. engineers take nothing for granted and this one reported that the proposition of spending a million dollars should be turned down because a commensurate tonnage had not been blocked out and put in sight. to this day the camp has struggled along without adequate milling facilities, but has been practically self-sustaining. from a physical standpoint the mines to-day are conceded to be of great promise. the company is honestly and efficiently managed. the president, from the day of incorporation to this hour, has been e. w. king, formerly president of the montana society of mining engineers, a director of a number of montana banks, and recognized as one of the ablest gold-mine managers of the west. m. scheeline, president of the scheeline banking & trust company of reno, who ranks as the oldest and most conservative banker in the state of nevada, has been treasurer from the outset. the history of rawhide is still in the making and its final chapter has not yet been written by any manner of means. nor is it within the pale of possibility that such latent productive potentialities as have been established at rawhide can long remain in great part dormant. in wall street nat. c. goodwin & company's deal with the venders of the control of rawhide coalition was later financed to a successful finish. it was done by appealing to the speculative instinct of that class of investors who habitually gamble in mining shares. the effort to finance the mining company itself, to a point where it might take rank with the great dividend-paying gold mines of the west, was not so successful. chapter ix the wall street game a man who thinks he knows what happened to me in wall street, and _why it happened_, suggests that the new york section of "my adventures with your money" be prefaced with the following: this is the story of an energetic, self-confident, aggressive, optimistic, enthusiastic, nervy, fearless, imprudent, uncompromising, presumptuous _fool_. maybe he was worthy of a following in that he would cast his own fortunes with those whom he asked to follow him, but withal he was a dangerous leader because he could not see the rents in his own armor and lacked caution, prudence and discretion. he could see a goal ahead and would lead the rush, but always failed to take into his reckoning one circumstance in his youth that left a blot on his escutcheon and placed in the hands of unfair opponents an envenomed weapon ready for use. he failed to see the necessity of making friends of his competitors and of placating his critics as he progressed. indeed, he reckoned these elements not at all. he made many enemies and few allies. he never compromised. naturally, he met with disastrous defeat for himself and the loyal ones who placed their faith in him. i disagree. i was not a fool. i refused to be a knave, and i am not sorry. i have in mind a man of parts who as a stockholder has been doing the dirty work of unscrupulous multimillionaire wall street mining promoters for years. dishonest in his expressed opinions and a sycophant in his every action, the interest of the wall street man of power is always his as against that of the unprotected investor. i look upon this man as a vile person. i could not do as he does if my very existence depended upon such conduct. i would rather be out of business and broke for the rest of my life than be he. for me to serve the base purposes of high-class crooks just because they have money and power, would be for me to barter away my soul and lose my peace of mind. i would not sell either for all the money in the world. honesty is the best policy. the type of man i have described can not thrive for long. he must evidently suffer total eclipse. the business of this world is founded and builded upon individual integrity. the business man who allows himself to be used to carry out the base purposes of men in high places forfeits the respect of those whom he serves, is forever afterwards mistrusted by them, and loses caste in the very set he tries to gain favor with. i charge that powerful, dishonest interests on wall street found it necessary for selfish reasons that i be put out of business. i declare that they bided their time until newspaper clamor against so-called get-rich-quick promoters had been fostered, aroused and stimulated to a point where citizens became imbued with the idea that all promoters who use the advertising columns of newspapers are crooks. and i aver that when the government used upon me and my associates its rare power of seizure, search and confiscation, it was with no evidence that any government statute had been violated. in this and the concluding chapter of "my adventures with your money" i state the facts which i believe prove these statements to the last syllable. good big fish vs. bad little fish ask the casual newspaper reader to define offhand the compound adjective get-rich-quick and he will tell you it is applied solely to professional promoters who employ flamboyant advertising methods, promise great speculative profits, use other devices which are calculated to separate the public from its money, and are in every instance dishonest. that is the idea which powerful "interests" have inculcated in the public mind by subtle, insistent press-agenting. time and again during the progress of "my adventures with your money" i have endeavored to show that the really dangerous get-rich-quick forces are the men in high places who, by the artful and insidious use of the news columns of "friendly" publications and others which copy from them, divorce the public from millions upon millions. i said in my foreword the following: the more dangerous malefactors are the men in high places who take a good property, overcapitalize it, appraise its value at many times what it is worth, use artful methods to beguile the thinking public into believing the stock is worth par or more, and foist it on investors at a figure which robs them of great sums of money. there are more than a million victims of this practice in the united states. no man has right to assume that a promoter who sells stock by means of display advertising in the newspapers is _per se_ a get-rich-quick operator. there are honest professional promoters of the display advertising variety and there are dishonest ones, just as there are honest promoters of the multimillionaire kind and dishonest ones. the _on-the-level_, trumpet-tongued mining promoter, who believes in newspaper advertising and successfully finances companies by appealing uproariously to the speculative investing public, performs an actual service and is entitled to a place among honorable men. indeed, he is the hero of the prospector and "poor" mine owner of the west. he alone stands between these men and grasping monopoly. mine men, stockholders, and financiers the country over understand this, although the eastern newspaper-reading public has been taught to believe that this type of promoter must be a get-rich-quick operator. a broker in wall street who speculates in the securities of the new york stock exchange for his own account is considered unsafe. e. h. gary, chairman of the executive board of the steel trust, stated under oath at washington in june that j. p. morgan never speculates. ask the average member of the new york stock exchange what chances the stock-gambler has. if he is frank, he will shrug his shoulders and reply something like this: "if the game could be beaten, do you think i would be a broker? wouldn't i be a player?" the aggregate market value of seats on the new york stock exchange is nearly $ , , . it costs more than a hundred million dollars more every year to gather and transact through offices and branch offices the speculative business which forms the bulk of the transactions of the members. the "kitty," or "rake-off," is enormous. who pays it? you hear of the stockbroker going to europe in his yacht every summer. how many of his trading customers travel that way? who pays the freight? can a game be beaten where so many multimillionaires are created among those who are on the "inside" and where so large a percentage of the speculator's money must come out every year to pay the enormous cost of maintaining a vast system of stock-brokerage offices, stock exchanges, telegraph and telephone wires, newspapers, publicity bureaus, yachts, fifth avenue palaces, huge contributions to national and state political campaigns, etc.? you hear a hue and a cry against bucketshops. there is no federal embargo against bucketshopping. yet somehow or other the machinery of the government's department of justice is used to crush out this sort of gambling institution. now, what is the difference in principle between gambling on margin on fluctuations of stocks in a bucketshop and doing the same through a new york stock exchange house? this is the unimportant difference: the bucketshop-keeper takes the other end of the play, pays you out of his pocket when the market goes your way and keeps your money when it goes against you. he never delivers any stocks. the new york stock exchange member is expected to buy your stocks for you and _carry_ them--some of them do and most of them don't, as is shown farther on--but in this case also no stocks are delivered to you. the transaction is the same in principle as the one in the bucketshop, so far as the gambling feature is concerned. the only real difference is that when you gamble on market fluctuations through the bucketshops no contribution is made to the new york stock exchange "kitty." righteous wall street and the "sucker" public the new york stock exchange member will tell you that the evil of bucketshopping is that the bucketshopper is tempted when the public is long on stocks to depress the market by heavy short sales. on the other hand, the bucketshopper urges upon you that his business is gambling against fluctuations which he has no hand in making and that the financial powers of wall street resort to the same trick that he is occasionally accused of. the "interests" know at every hour in the day approximately how many shares of stocks have been borrowed for delivery against "short" sales or are being carried on margin for the long account. they know what the public's short interest or long interest is, and they, too, have it in their power to shake out the public at any moment they choose. worse, it is common knowledge that this practice is continually resorted to. stocks are put up and held up on bad news and marked down and held down on good news or no news at all. news is withheld and is manufactured to suit occasions. for years the market has been thimble-rigged to a frazzle. margin-trading "suckers" have been milked to a finish. george e. crater, jr., writes: margin trading on the new york stock exchange is the most dangerous and destructive form of gambling known, because, being "legal" and therefore "respectable," it allures hundreds of thousands of people who would never think of risking their money at "faro," "rouge-et-noir," "roulette," or any of the other games of chance. statistics show that more people are ruined physically, morally and financially by stock gambling than by all the other forms of ordinary gambling combined. monte carlo is a christian philanthropy compared with "wall street." you have quite as good, if not a better chance to win a fortune at monte carlo than you have by putting up "margins" against stock exchange bulling and bearing, and if you ruin yourself at monte carlo the proprietor will at least refund enough of your money to pay your way home. the man who "goes broke" on "margins" finds no relief at his service on the stock exchange or among the brokers. there would not be so many millionaires in this country if there were not so many fools ready to throw their money away on margins. a howl of condemnation is raised against horse-racing. newspapers, periodicals, politicians, enthusiasts, crusaders, and charlatans in every walk of life, are encouraged to make a big noise. horse-racing, like bucketshopping, is an avenue for speculation--gambling--and it keeps much money out of wall street. fakirs, who are the tools of wall street, collect from wall street for their services and at the same time make moral or political capital of their zealousness in crusading against such wall street gambling competition. the small fry mining promoter, who is not a member of the stock exchange, pays no toll to the big game, is beyond the discipline and control of the governing body of the new york stock exchange and is not a part of the machinery, sets up a competitive business which caters to the gambling instinct in the way of fluctuating mining stocks. the speculating public gets action, likes it, and invests money that might have been used in margin-trading on the new york stock exchange or for "investment" in the constantly fluctuating low-priced industrials or higher-priced mining stocks that are sponsored by big interests with new york stock exchange affiliations. promptly the machinery of wall street is used to crush him. column upon column is printed in the magazines and newspapers about get-rich-quicks. a conviction for crime is obtained of a real get-rich-quick offender--a little fellow who is guilty, but no more so than his "licensed" brother higher up, who is doing infinitely greater damage. the _one_ that a coterie of high-class wall street thimbleriggers are really "after," because he thwarted them in their swindling operations by exposing them in his newspaper, but against whom they can not make a case, has a skeleton in his closet. they bring it forth, dangle it in the air, make the public think he, too, must be a scoundrel, and he is raided by a government agent during the uproar; and they "get away" with it. the "righteous" crusade against "get-rich-quicks" is press-agented to the limit. the public "falls" for the "dope." at last the government has acted to protect investors! wouldn't it wilt you? were p. t. barnum to be reincarnated and his hum-bugging mind by some miracle expanded a million times, it would still be impossible for him to conceive such a gigantic faking of the american public as it has been put to in the last few years. and the public isn't "on." shrewd schemers on wall street keep pulling the wool over the eyes of the "sucker-public," and not only see no reason why they should discontinue the practice but find it very lucrative to continue doing it. the marketing of mining stock as a rule, it takes much money to make a paying mine out of a promising prospect. later on in the mine's progress, through the constructive period, other very large sums are generally required to pay for the blocking out of an ore reserve and to supply milling facilities for the reduction of the ores. the peripatetic mining prospector of our western mining empire--the dauntless finder of mines who laughs at hardship and ridicules the thought of danger, who makes companions of gila monsters and the desert rattler, whose only relief from the everlasting silence of the untrodden reaches of arid wastes is the sex-call of the coyote--has the choice of just two markets for the sale of his "find." he may either accept a comparatively small sum from the agent of a powerful mining syndicate for his prospect or he may receive a fair speculative price from the professional promoter. the great mine financiers of this country rarely compete with one another for the purchase of any mining property. this is particularly true if one of the others happens to be operating in the district where the small mine owner's property lies. as a rule, the original owner, whose entire fortune is perhaps tied up in the property, then finds himself in the position where he must either accept the first offer, however small, which is made to him by one of these dominant interests, or find that market closed to him. his alternative, as mentioned, is a sale to the independent mine promoter of comparatively small means, who incorporates a company to own and develop the property and finances the operation from start to finish by selling stock in the enterprise to the general public. the method of this class of professional promoter--the hope of the small mine owner--in marketing stock, usually involves the liberal use of the advertising columns of newspapers. he lacks "pull" or power sufficient to get his stock and mine talked of favorably in financial literature of the day to a degree that will excite public interest, and so he must construct his own publicity forces. advertising costs money and the public foots the toll. but if the promoter is honest, this item of cost is not in itself an argument in favor of stock offerings of the multi-millionaire mine capitalist who does not patronize the display advertising columns of the newspapers. nor does it establish a case against the wares of the promoter who does. the promotion expenses incurred by the advertising promoter do not nearly approach in their totality the difference between cost price and the price at which the magnate promoter usually invites the public to participate in similar enterprises. for example: a few years ago a certain man bought a certain mine for $ , , on time payments. he has been making a market for the stock of that mine on the new york curb at an average of above $ per share, or more than $ , , for the property. his firm, members of the new york stock exchange, have been advising people in their widely circulated market literature to buy the stock at this figure. and yet the property is without a reduction works, will need $ , , to $ , , in excess of money now in the company's treasury to erect one, which money must yet be raised somewhere and somehow, and the producing era of the company can not possibly begin for two years yet at the very earliest. i could cite many such instances. when nat. c. goodwin & company of reno purchased the control of rawhide coalition, during the exciting rawhide camp boom early in , the valuation agreed upon for the property was $ , . this was considerably more than the original owners could obtain for it at that time from any big interest. it, too, needed milling facilities. as a matter of fact, but for the success of mine promoters of the nat. c. goodwin & company and b. h. scheftels & company class, the great comstock lode, which produced over $ , , in gold and silver bullion, would have likely remained undeveloped. the big public demand in the early 's for comstock mining shares of all descriptions was created by a series of flamboyant flotations and aggressive stock-market campaigns. if the con. virginia mine had not opened up into a bonanza ore-body at a depth of , feet, the frenzy of speculation in comstock shares might have gone down in history as another south sea bubble. the "brass-band" promoter, be it understood, is therefore not without honor in the far west. deprive the mine prospector of the services of this style of enterprise projector, with his operating machinery, namely, facilities for appealing to the speculating-investing public, and you hit the small western mine man a solar-plexus blow. conversely, every obstacle placed in the way of the mine promoter of loud methods and moderate means is an added cause for rejoicing on the part of the wall street multi-millionaire mine capitalist. when b. h. scheftels & company, with whom i was identified, were raided by the united states government in september, , a wail went up from the western mine operator to his representative in congress. the best sentiment of the far west, as i was able to gather it, favored the idea that the last hope of the small western mine owner had been shattered. during the short period of b. h. scheftels & company's activity in new york it raised directly nearly $ , , for western mining properties and indirectly influenced in that direction at least $ , , more. the raid was a body-blow to the small western mine owner who needs capital to develop his properties and has no affiliations with capitalists. since the raid i do not know of a mine owner of any of the great far western states who has successfully financed a mining proposition in the east except by delivering his property in its entirety into the hands of some big interest, which has taken it over for a sum insignificant by comparison with what the public may ultimately be expected to pay for it when the stock is finally marketed on the curbs and exchanges. i buck the wall street game after i had conducted the big camp publicity campaign of rawhide, which i had done with a view to centering the attention of the american investing public on the speculative possibilities of the stock of the rawhide coalition mines company, and in that way endeavored to finance the proposition--after i had failed by this method, in the teeth of the bankers' panic of - , to dispose of enough stock to finance the company for deep mine development, mill equipment and the payment to the original owners of the price for the control agreed upon, i came to new york, late in october, , bent on trying to succeed in the encompassment of my original purpose both by direct appeal to the public through display advertisements in the newspapers and by making a deal for part of the enterprise with the "big" fellows. i found rawhide coalition stock listed on the curb, and the market quiescent. public interest in the east had been aroused to some degree, but the market was not absorbing stock. an effort to induce leading stock brokers to mention the issue favorably in their market letters failed. those who were willing to give the stock some publicity exacted either a "call" on stock at a low price or an out-and-out reduction below the market quotation for such stock as they disposed of. such concessions were not to be thought of. it was the intention of nat. c. goodwin & company to support a rising market for rawhide coalition. my goldfield experience with mining-stock brokers convinced me that few might be expected to protect the shareholders' interest in such an enterprise. commission mining-stock brokers of that period, who put their customers into a stock at, say, , were tempted to advise profit-taking when the price advanced to, say, , because by the operation they made another commission and often earned an additional, or third, commission by getting their customers out of the stock at a profit and into another one, levying a commission on each transaction. nat. c. goodwin & company decided to "try it on" direct with mining-stock speculators by appealing to them through the advertising columns of the newspapers, asking them to purchase the stock on the new york curb through their own brokers. also, hayden, stone & company, the boston and new york banking firm, were induced to agree to raise $ , , for the company for railroad and mill purposes, if their engineer would report favorably. provided with money with which to buy advertising space and furnished with stock certificates to supply the market, nat. c. goodwin & company inaugurated an active campaign on the new york curb. what happened will be found instructive to the reader in several particulars; among them these: ( ) the free-lance mining promoter does not always "get the money" when he succeeds in creating a buoyant market for his stock. ( ) some stock brokers of seemingly high standing would just as soon "skin" a mining promoter of this order as they would an ordinary speculator. they play no favorites. ( ) be a mine promoter ever so honest, without new york stock exchange affiliations his motives are bound to be misconstrued if he makes an error. the "big" fellows will sick on to him the newspapers or newspaper men whom they control or influence. dust will be thrown into the eyes of the public so they'll buy the big fellow's wares, principally for sale on the new york stock exchange, and may forever be prejudiced against the little fellow's. the campaign in rawhide coalition made good progress. it was early in november, . for six weeks i had been supporting the market for the stock on the new york curb for nat. c. goodwin & company of reno. my office was an apartment in a fifth avenue hotel; our brokers were members of the new york stock exchange. for a month we had used, every day, display advertisements in the financial columns of new york city daily newspapers, signed by nat. c. goodwin, to boom the stock. about , shares of the stock were in the hands of the public. the market, which was on the new york curb, was "real." speculative buying had carried the price from cents up to $ a share. mine reports were rosy. wide distribution of the stock was taking place. the public evinced deep interest. the nat. c. goodwin advertisements set forth that $ ought to look reasonable for the stock by christmas day. there were reasons. several very promising mines had been opened up. an engineer of high rank was examining the property. if his report should be favorable, a deal was practically assured that would involve the expenditure of $ , , for deep mine development, a railroad, and adequate milling facilities. this, in turn, would mean early dividends for stockholders. experienced, conservative mining men had expressed the opinion that the property bore the unmistakable earmarks of a big producer. the stock became the feature of the curb market. it easily occupied the center of the stage. not less than brokers could be counted in the crowd executing orders at almost any hour during the daily session. the fact that a new york stock exchange house was executing the supporting orders from the "inside" impressed the "talent." public buying through other new york stock exchange houses further convinced curb veterans that the stock was "the goods." up went the price under the impulse of public buying. curb brokers themselves caught the infection. by december th the price soared to $ . per share. this was an advance of per cent. over the "low" for the stock of half a year prior. the "double-crossing" of rawhide coalition at the close of the day's business on december th, our brokers, a single firm, members of the new york stock exchange, reported the purchase of , shares in the open market at an average price of about $ . , and the sale of , shares at a little above this average. for the first time in the campaign there appeared to be selling pressure. we had quit "long" , shares. the sum of $ , in cash was required to pay for the "long" stock. on december th, the day following, the same firm of brokers reported that they had purchased , shares at an average price of $ . - / , and the sale of , shares at an average price of $ . --"long" on the day , shares. on december th our purchases through this firm aggregated , shares at an average price of $ . , while our sales totalled only , shares at a slight advance. nat. c. goodwin & company were now "long" on the three days' transactions , shares and had been called upon to throw $ , behind the market to hold it. this was a comparatively small load to carry and did not alarm us. we considered the stock worth the money. we were curious, however, to learn the reason for the selling. nat. c. goodwin & company had placed most of the outstanding stock direct from reno with the investing public at from cents to $ per share, and early buyers were reaping a harvest. but this did not appear to be the explanation for all of the selling. interest in the stock was now widespread. there was free public buying and for every actual profit-taker there appeared to be a new purchaser. apparently, somebody was selling the stock "short." late that night a member of our brokerage firm which had been executing our supporting orders, called on me at my apartment. i inquired of him what protective orders he thought the stock would need the next morning to guard against professional attack. he replied: "i think if you will give us a buying order for , shares at $ . there will be no difficulty." my understanding was that he wanted to handle the market for me the next morning and that he would, of course, give me quick notice if further supporting orders were needed. the order was given. it was a very ordinary precaution, for there is hardly a stock on the list that would not be raided by professionals if supporting orders were not known to be in the market. as saturday is only a short two hours' session, i really fell in with the idea. retiring late that night, i left a call for a.m. next morning at about : i was awakened by my valet. he said nat. c. goodwin wanted me on the long distance. mr. goodwin was in cincinnati, where he was playing a week's engagement. "hello," said mr. goodwin. "did they get you? shall i wire the knickerbocker trust company to pay you $ , to support the market? reported here they have you in a hole." "what's up?" i inquired. "why, brokers here say the stock broke to cents on the curb soon after the opening," he said. this was news to me. "i do not need more money," i answered. "i have been asleep. our brokers have been on the job. i will see what is doing and let you know in a little while. don't worry." and i rang off. i 'phoned our brokers and they reported that they had bought , shares of stock at $ . at the opening and had withdrawn support. "too much stock was pressing for sale," they said. "this is hell. you should not have permitted the market to break that way. support the stock!" i said. "buy , shares at the market!" in a few moments this firm of brokers reported that they had rallied the market to $ . . the recovery was only temporary, however. another drive broke the stock to cents. our brokers had bought , shares at from $ to $ . and then stopped. the member of their firm who had been handling our orders throughout this campaign said the purchase of this fresh block of stock exhausted our cash balance on deposit with his firm. they had a number of drafts out for collection, attached to stocks sold to western brokers, that had not yet been credited to us. there was also a big block of coalition stock due us from them. this was the stock they had bought on our supporting orders. they refused, however, to consider either the drafts or the stocks as a credit. we had cash on deposit and credit with a number of other brokers. i promptly telephoned several of them to buy large blocks of the stock at a limit of cents. this was points above the quotation that was given me. not a single share was reported bought on these orders. i jumped into a taxi and rode to the office of the brokers who had been handling our orders. the situation was critical. i realized fully that a sharp break of this character in the market price of a stock that had been so widely exploited must prove shocking to investors. i feared that public confidence would be shattered completely. "this is an outrage!" i protested. "buy , shares at !" i tendered five $ , -bills as payment in advance. it was five minutes to twelve when i gave the order. at noon they reported that they had purchased , shares, for which i gave them the money. the market closed bid for a "wagon load." on the face of things it appeared that the market had rallied from to on the purchase of , shares. this was another convincer that there must somewhere be much that was rotten about the play. investigation satisfied me that i had been "double crossed." the one firm of brokers, members of the new york stock exchange, who had been handling our orders, had acted as our clearing-house, holding our stocks and our money. they had an advantage, which stock brokers understand well. having executed most of our supporting orders, their agents on the curb were also in a position accurately to judge the professional and lay speculation pulse. it was easy for somebody to "put one over" on us. shortly after noon i learned that hayden, stone & company's engineer had turned down the proposition of advancing $ , , for railroad and mill construction. a sufficient tonnage of ore had not been blocked out in the mine. beyond a question this information was in the possession of brokers early in the day. while i slept damage had been done to the market that was irreparable. by the time the price hit $ on the way down trading had reached huge proportions. one clique of curb brokers were reported to have been persistent sellers throughout. their identity made it very plain that the double-crossing process had been employed to a fare-you-well. i accused our broker of not protecting our interests--the interests of stockholders. i raised a howl. he telegraphed another member of his firm who was away on a hunting-trip, to come back to town. next night both of these men, nat. c. goodwin and myself met in my apartments behind closed doors. their firm agreed to charge to their own account , of the , shares reported purchased for us at $ . . some other minor concessions were made. on the day after the "break" new york newspapers reeked with sensational flubdub about the causes of the smash in the price of the stock. in the preceding few months not less than a dozen other securities had "busted" wide open at various times on the new york curb and new york stock exchange, but stock exchange houses were sponsors for these and the newspaper kept mum. never on these occasions was there a hint in the newspapers that possibly somebody had separated the public from its money. nat. c. goodwin and i were wrongfully accused of willfully smashing the market to shake the public out. the new york _sun_ printed an account of the "break" on the front page, top of last column. it began in a strain that indicated to confiding readers that chorus girls had lost their savings through the recommendations of mr. goodwin. the _sun_ printed the list of officers of the rawhide coalition mines company and emphasized the fact that i "of sullivan trust company fame" was second vice-president. the _sun_ made no mention of the "double cross." nor did any of the other newspapers, with the exception of one. the new york _tribune_ said: a stock exchange house which has been putting out orders in the stock was charged with leading the attack on it yesterday, but members of the firm said that they had been acting merely as brokers for customers in the regular order of business. following the newspaper "roasts," which helped further to destroy public confidence, two brokers on logan & bryan's continental wire system resorted to tactics of a kind to force lower prices. this wire has over one hundred out-of-town broker connections. a report was sent over the wire that nat. c. goodwin & company had failed. another followed it that the rawhide coalition mines company was about to go into the hands of a receiver. the _nevada mining news_ accused nat. boas of san francisco and j. c. weir of new york of exchanging messages to this effect over the logan & bryan wire systems, so that all correspondents on the wire would have the false reports. both boas and weir were believed to be "short" of the stock. both were openly operating for a further decline. these and similar tactics resulted in a further easing off in price to cents bid on december th, which was the "low" on the movement. two weeks after christmas the stock rallied to bid, asked, and the market was firm again. on january the price bulged to . at this point the stock again became the center of attack. by january the price had eased back to . thus far the net result of nat. c. goodwin & company's various campaigns on rawhide coalition was the distribution of some , shares of stock. the issue had been well exploited. it had a big following and a broad market. some excellent judges of mine values had become stockholders. the company, however, was still unfinanced for a long period of systematic mine development and mill construction. we realized very clearly that some arrangement would have to be perfected to avoid a repetition of the trouble which the new york stock exchange brokerage firm had made us. "inside" market support the removal to new york of b. h. scheftels & company, chicago stock brokers, representatives there of nat c. goodwin & company of reno, and a merging of brokerage and promotion interests of the two firms took place. there was precedent for the move. there are a thousand other corporation interests in this country that are closely affiliated with stock exchange and other brokerage houses, through one or more of their directors or owners being partners in the business. as a matter of fact, it would be difficult to lay your finger on a single big interest of this kind that has not such a representation. these houses, of course, make it a rule to recommend the purchase of stocks in which their principals are interested. affiliations of this kind are found essential to successful financing of enterprises. a number of new york stock exchange houses which are headed or controlled by men who are heavily interested in mining ventures that require financing are exponents of this method in the mining field. most of these have succeeded in promoting projects in which they or their associates are heavily interested, with the aid of the banking and brokerage facilities thus afforded. principally by the use of the market literature and accompanying market manipulation, these houses have placed with their customers the securities of their firm members and associates. they have encompassed this by maintaining a brokerage, banking and promotion business without parading before the public, although never denying, the mixed nature of their business. for the reader to comprehend the necessity for transacting the business this way, he should understand the underlying principle of financing an enterprise by the route of the listed stock market. there are two ways of financing any enterprise with other people's money. one is by the primitive method of appealing directly to the public for subscriptions in huckster fashion, taking the money and then refraining from listing the stock or establishing an open market for it. you can't finance an enterprise of consequence these days by any such procedure. it is practically impossible to borrow from banks or from loan-brokers on any security that has no fixed market value. a market must be established, for without a market on which to sell, intelligent investors won't buy. the method, therefore, in common use, and the only one which has been found effective by financiers, is to create a demand for the security, encourage speculation, establish an active market, and dispose of stock on the market as necessity demands whenever financing is required. this implies and necessitates that the inside interests must support the security in the open market. therefore, it becomes necessary for the successful marketing of the stock by the promoters, once a demand is created and public buying is under way, that stockholders shall be kept in full touch with the latest transpirations on the property and in the market--be furnished with news concerning their interests so that they may judge the value of their stockholdings. this process is particularly essential during the financing period of the company and the security-digesting period of the public. in fine, the ultimate purpose in this regard of all the promotion machinery of wall street--the machinery that has been putting out billions of dollars' worth of securities to investors--is to place stock where it will "stay put," that is, not come out on the open market again to embarrass the interests that are behind the enterprise, and who for a long period are compelled to support the market. on the question of the ethics of market support by "the inside," a whole tome could be written. i will not attempt to discuss the subject at length here. suffice it to say that in my opinion "inside" support of a listed security is not base when it is done with a view to creating a broad market, to stimulate public interest, and to increase the price to a point within the bounds of intrinsic plus reasonable speculative worth. support of the market to the point of stimulation is moral obliquity, however, when dishonestly performed for the sole benefit of the "inside" and to the hurt of the stockholder. this sort of market support is only a shade less reprehensible than manipulation that has for its purpose the reduction of the market price of a security to beneath its real value, which, in my opinion, is nearly always infamous. i might place myself on record right here to the effect that only once did i ever "bear" a stock from "the inside," and on that occasion it was a temporary affair, caused by a desire to secure at a reduced price a big block of stock that was pressing for sale from a quarter that i was under no obligation to. even in that instance i gave the investor much of the benefit my associates secured by letting him have stock at the same figure at which "the inside" secured it. nor have i ever tried to push the price of a stock to a higher level than that which i considered warranted by the reasonable speculative and demonstrated intrinsic value behind the security. chapter x enter, b. h. scheftels & company b. h. scheftels & company, incorporated, mining-stock brokers, successors to b. h. scheftels & company, for many years stock brokers in chicago, opened its doors on broad street, new york, on january , . for a long period b. h. scheftels & company of chicago had been advertised as the eastern representatives of the corporation of nat. c. goodwin & company of reno, of which mr. goodwin had been president. it was now announced that nat. c. goodwin had become vice-president of the new corporation of b. h. scheftels & company. because mr. goodwin was by profession an actor and not a stock broker and because of the personal abuse he suffered in unfair newspaper criticism which followed the "break" in the market price of rawhide coalition a month before, he was quite willing to serve as vice-president instead of president. besides, he could not spare the time from his profession to attend closely to the business. the new corporation of b. h. scheftels & company made its bow to the public by at once featuring in its market literature advice to purchase stock of the rawhide coalition mines company. i became publicity manager for the scheftels corporation, manager of its promotion enterprises, and was placed in charge of the protection of the corporation's interests in all markets where its stocks were traded in. soon i was conducting a fresh campaign with investors that became so hot, so exciting and so big that for nineteen months i labored on an average sixteen hours a day, including sundays, without being able to complete in a single day a day's accumulated business. the business grew until b. h. scheftels & company were actually spending more than $ , , annually for office and publicity expenses. in the nineteen months of its existence it bought, sold and delivered approximately , , shares of mining stock. the scheftels corporation broke every record in this regard that was ever made by a mining-stock brokerage and promotion house in the history of wall street. throughout its career it was viciously attacked from many directions, but it held its own. through its hold on the mining-stock speculating public, who were getting fairer treatment than ever before, it survived the concerted onslaughts of a number of important interests which it had competed with and antagonized, until one day in september, , on a warrant sworn to singly by one george scarborough, since permitted to resign, clothed with the office and power of a special agent of the department of justice, its offices were raided, its books and papers seized, its property confiscated, and its officers and employees arrested. the annual expense of b. h. scheftels & company was $ , , or more. follows a tabulated statement of the expense item. the figures are approximated. the books of the corporation, which are now in the possession of the department of justice of the united states government, will probably show that the annual expense was larger. the books not being readily available, an attempt is made here to be ultra-conservative in setting down figures: annual expense of b. h. scheftels & company establishment of main office and six branch offices (furniture, fixtures, etc.) $ , office rentals , private wire system connecting branch offices in six cities with new york , telephones , telegraph tolls , salaries (all offices) , daily and weekly market letter (printing and postage) , general office expense, etc. , miscellaneous postage , miscellaneous printing and stationery , advertising, publicity, etc. , expert accountants , commissions and salaries to curb brokers , mining examinations, engineers' fees, legal fees, etc. , interest charges , ----------- total $ , , before the scheftels corporation was in business a month it became plain that it was "filling a long-felt want." in almost every branch it was performing some function in a manner more satisfactory to mining-stock speculators and investors than were its competitors. its market letter news service, usually pages, was the prime article. it soon gained a circulation of , among the highest class and best informed stockholders of mining companies in the country. it was also regularly sent to more than , stock brokers, including members of the new york stock exchange, new york cotton exchange, boston stock exchange, new york produce exchange, etc. before the scheftels corporation was five months old the work of its market letter was supplemented by the _mining financial news_, a weekly newspaper which had been published for a long period at reno as the _nevada mining news_, latterly as the _mining financial news_, and which removed to new york when the scheftels company found the mining-stock public was hungry for real live news and the truth regarding the mining propositions of other states as well as those of nevada. the _mining financial news_ and the scheftels market letter, which were published three days apart, were supplied with news from practically the same sources. the newspaper was mailed to all readers of the market letter. the ablest and most reliable mining correspondents obtainable for money in tonopah, goldfield, ely, rawhide, cobalt, butte, globe and other mining camps, and the most experienced market news-gatherers in the mining-stock-market centers of salt lake, san francisco, boston, philadelphia, toronto and new york, were placed on the pay-roll. brokers in these and other cities, including duluth, seattle and butte, supplied more news. wherever there was mining or market activity, representation of the very highest character was sought. news was always wired, no matter what the cost, whenever it was important to traders in mining shares. expense was never spared when the information was considered of value to the speculator or investor. in the new york offices of the scheftels corporation and the _mining financial news_, which adjoined each other, a staff of newspaper men with a mining financial experience of years was gathered. little that transpired in the mines or the markets ever got away from them. days before the mining newspapers of the west reached the east the scheftels market letter or the _mining financial news_ communicated the news regarding mine developments. they also contained a daily and weekly stock-market diagnosis and prognosis. these were based on the news, as gathered by trained forces and aided from time to time by secret information which filtered into the offices. this service soon obtained an accuracy theretofore unknown on the street. there is probably not one stock broker in five hundred that would know a mine underground if he saw one. on the pay-rolls of b. h. scheftels & company and the _mining financial news_ there were thirty men who had been literally brought up in the mines and who, when they put their pen to paper, knew what they were writing about. the scheftels company and the newspaper furnished mine and market information of quality to investors who had before been inundated with misinformation, guesses and twaddle. it sought to guide mining-stock speculators right. it was really a delicate job to handle the _mining financial news_ in a manner which would not lead stupid people to believe that it was an entirely independent paper. it was desirable that its independence be maintained to a degree, so that the full value of the _mining financial news_, as a property, might grow. the intention was some day, when the _mining financial news_ found itself on a paying basis, to sever the scheftels alliance. the _mining financial news_ had always been an entity. it had up to then been assisted financially at periods by mining promotion concerns with which i had been identified and was always a quasi house-organ for this reason. but it invariably preserved a certain independence in its news columns and at least such partial independence of ownership as enabled it to stand on its own bottom. more truth on the "mining financial news" when the _mining financial news_ removed to new york mr. scheftels used much persuasion to get the owners to transfer title to the scheftels company. admittedly, if the scheftels company could boast ownership of the newspaper at the head of its editorial page, it would be a great feather in the scheftels cap and might lead investors to think that an organization which could own and publish a first-class, metropolitan newspaper of the _mining financial news_ variety must for that reason alone be worthy of financial credit. thompson, towle & company, members of the new york stock exchange, print a small sized pattern of such a newspaper, called the _news letter_. hayden, stone & company, and paine, webber & company, of boston and new york, are said to have much influence with the _boston news bureau_, a newspaper which features news of mines and mining share markets. the _boston news bureau_ at times has printed no display advertisements and at other times has. it is considered by boston mining-stock brokers who handle the michigan and arizona copper securities as a necessary complement to their market literature. _walker's copper letter_ and the _boston commercial_ are other examples. _walker's copper letter_, which carries no advertising, for years has said the very nicest things about copper securities promoted and fathered by important boston and new york interests. needless to state, what _walker's copper letter_, the _boston commercial_ and the _boston news bureau_ say about the mining propositions of their friends is as a rule based on fact. the point is that promoters find it necessary that news happenings regarding the markets, the securities and the mines in which they are interested be given broad publicity. it was the idea of the owners of the _mining financial news_, of which b. h. scheftels, president and per cent. owner of the capital stock of b. h. scheftels & company, was not one, that anybody who would supply the sinews while the paper was getting on its feet and was establishing itself, was entitled to all the publicity which the paper could consistently and honestly give it. with this understanding the scheftels company assumed to take all of the income of the _mining financial news_ and pay all of the running expenses until such period as the newspaper might become self-sustaining. in doing so it performed a stupendous service to the entire mining industry in that the space devoted to the scheftels enterprises therein did not average more than one-eighth of the whole, and it spent dollars to supply the news of all stocks where other mining financial publications in its field spent pennies. to make sure that the public understood the _mining financial news_ was the quasi house-organ of the scheftels company many precautions were taken. no application was made for admission to the mails as second-class matter, and the paper was mailed under one and two-cent postage. the name of harry hedrick was lifted to the top of the page as vice-president of the corporation owning the _mining financial news_, mr. hedrick being openly employed by the scheftels company as head of its correspondence department. my own name was later placed at the head of the editorial page as editor, the scheftels company making no bones about my position as absolute head of its publicity department, its promotion enterprises, and of all markets for the scheftels promotion stocks. the connection had before been established even closer than this. i had formerly been advertised as vice-president of nat. c. goodwin & company of reno and vice-president of the rawhide coalition mines company; and the scheftels company had advertised that nat. c. goodwin was its own vice-president. further, the scheftels company announced in its market literature that it had selfish interests in protecting the market for the stock because of the nat. c. goodwin affiliation. occasionally market articles under the signature of b. h. scheftels were published on the front page of the _mining financial news_. whenever anybody made a request for the scheftels market letter a copy of the _mining financial_ news was quite regularly mailed to him without cost. articles under the signature of other officers and employees, formerly of nat. c. goodwin & company of reno and later of b. h. scheftels & company of new york, were very frequently printed in the _mining financial news_. probably the most important reason why the scheftels company made this sort of arrangement with the _mining financial news_ was that it could do so with only a very small additional outlay. the scheftels company found it necessary to employ correspondents in all mining and market centers, and the same correspondents could work for both enterprises. another economic argument was that an enormous saving could be made in telegraph tolls, all dispatches addressed to the newspaper being sent at press rates. these dispatches were always available to the scheftels corporation and its clientele. it was the idea of the scheftels organization that the mining-stock investing public sorely needed right direction and that any brokerage house which led it right would soon be unable to transact all the business that would be offered to it. and that is just what happened. before the scheftels company was six months old the fifteen men in its accounting department were compelled to work day and night--time and again throughout the night until a.m.--to catch up with their work. if the scheftels news service was as nearly perfect as money and brains could make it, its facilities for the execution of orders on the new york curb, the boston curb, san francisco stock exchange, salt lake stock exchange, toronto stock exchange, and other mining markets were unsurpassed. its new york and boston offices were connected with branch offices in philadelphia, chicago, detroit, milwaukee and providence by exclusive private wires, and the service to out-of-town offices was almost instantaneous. the new york offices were located right in front of the curb market on broad street on the ground floor of the big _wall street journal_ building, feet by feet deep--occupying about , square feet of floor space. the boston office, occupying two floors, was located within feet of the curb market in that city. the public wires of the telegraph companies gave quick service between san francisco, salt lake and toronto, where business was transacted through members of the mining-stock exchanges of those cities. the private wires of the scheftels company were constantly flooded with rapid quotations and market, mine and company news during every trading hour. in new york the curb brokers in the scheftels employ, some on salary and some on commission, rarely numbered less than ten and at one period exceeded twenty. the correspondence department was presided over for a long period by two of the best posted mining-market men that could be employed for money. from this department were usually graduated the managers of out-of-town offices. in the cashier's cage six men were engaged at an average salary of above $ a week, registering stocks, receiving stocks, paying money and drawing checks. the payroll of the mailing department, which was operated in conjunction with the _mining financial news_, was comparatively small. money-saving machinery for the handling of the large output of market letters and newspapers gave excellent and economic service. about ten stenographers were regularly employed in the correspondence department. occasionally, when a special effort was being made to interest the public in some security in which the corporation was particularly concerned, a force of forty additional typists was pressed into service for short periods. the scheftels principles when the corporation of b. h. scheftels & company opened its doors in new york it had no affiliations with any other wall street interests. it had no axes to grind except its own. it was practically a free-lance. it cracked up its own wares, careful always to keep within the facts, and never minced words about the quality of the goods of its contemporaries. the principle of both the scheftels corporation and the _mining financial news_ was to be always _right_ in their market forecasts. the general order to mine and market news-gatherers and market prognosticators was to give the facts. the law laid down was this: if the news is bad and is likely to injure the interests of our best friends, tell it in the interests of the investor. if it is good and the backers of the stock affected happen to be our worst enemies, tell it. no matter on what side of the market you think b. h. scheftels & company is committed in any of its own speculations, give the customer all the news. put the cause of the mining-stock trader in front of you as the one to further always. never exaggerate. eventually, this policy must redound to our credit and profit. _eventually, this policy resulted in our ruin. our truth-telling policy was directly responsible for the loss of millions to competing promoters, and they banded together to destroy us._ the publicity, promotion and brokerage activities of the corporation were of such magnitude, and withal so simple, that they at once challenged the attention of the street. before the scheftels corporation was half a year old veterans of the financial game began to opine that some big interest was behind the concern. its dashing market methods, its mighty publicity measures and its unbridled assurance attracted much notice. from every quarter expert views reached the scheftels company that its manner of doing things was convincing on the point that it knew the business. but the general opinion of the talent seemed to be that the new corporation was spending too much money and that it could not win out unless a big boom in mining shares ensued. the market tactics adopted by the scheftels company in its promotion enterprises were as old as the hills. on the new york stock exchange they had been employed in a thousand instances before. the method will probably survive all time. the corporation sought to distribute the stocks of which it became sponsor in turn--first rawhide coalition, then ely central, later bovard consolidated and finally jumbo extension--by the approved wall street system of establishing public interest and inquiry and causing an active market. the aim was to establish higher prices for the securities, always within the bounds of intrinsic and reasonable speculative value. all efforts were directed this way. plans like this are, however, sometimes thwarted. markets get sick. more stock presses for sale than the "inside" has money to pay for. stocks break in price. then the promoter can't make any money and might lose a lot of it. since money-making is his primary object, and stock distribution secondary, he has got to do some close figuring when markets are subject to the price-breaking habit. that's where b. h. scheftels & company, through its brokerage business, found, after a short period, that it held within its grasp the power to insure itself against declining markets. without promotion stocks on hand--obtained by wholesale at lower figures than values warranted--in which it could profit to the extent of hundreds of thousands of dollars on a rising market, the million-dollar annual expense of the scheftels company would not have been justified. once the market sought lower levels and no profit could be made on the promotions, it meant a discontinuance of the business on the large scale. the corporation's insurance was the open market in stocks on the general list and its brokerage business. from time to time it openly shorted tens of thousands of shares of stocks in which it had no promoter's interest whatever, by going out in the open market and selling them to all bidders against future delivery, by borrowing them from brokers and selling them for immediate delivery, and by short sales generally. speculators play the market and so did the scheftels company, but never against its own stocks. speculators, however, buy mining shares outright or on margin because they want to gamble. the scheftels company played the market for just the opposite reason. it didn't want to carry its eggs in one basket and wanted insurance against market declines to cover promotion losses that must ensue if a general market slump occurred. and the scheftels company did not inaugurate any fake bookkeeping system or otherwise hide behind any bushes in doing this. moreover, the corporation didn't take advantage of anybody. the cards were not marked. the deck was not stacked. there was no dealing from the bottom. market opinion for which the corporation was directly or indirectly responsible was genuine to the last utterance. no news was suppressed on any stock. the corporation divulged to its customers and to the general public every piece of important outside or inside information regarding any stock on the general list that was in its possession. at the very moment when it was going short of stocks in greatest volume its market prognostications were winning for it a reputation for accuracy never before recorded. if the stocks which the corporation went short of--stocks on the general list and amounting to probably per cent., of the volume of its entire business, the remainder of the transactions being all in "house" stocks (these "house" stocks it could not be short of because of its promoter's options on hundreds of thousands of shares)--if the stocks on the general list thus "shorted" went up in price and the corporation was compelled to go into the market later and "cover" at a great loss, it was always in the corporation's heart to sing a pæan of thanksgiving, for it could well afford to pay the losses sustained by it in the general list out of the greater profits which would be made in the "house" stocks, which must, forsooth, share in the general upswing. collateral securities put up by customers as margin for the purchase of other stocks were credited to the customers' accounts and mixed with the company's own securities. in every case proper endorsement of certificates, put up for collateral margin, was required. every certificate of stock bears on the reverse side a power of attorney, in blank. the signature thereto of the person to whom the certificate was issued makes it negotiable by the broker. it was the rule of the house always to inform those who brought collateral to the offices for margin that the stocks would be used and that they would not receive the identical certificates back again. in a number of cases objection was made. acceptance of the stock as collateral margin was then promptly refused. if there were any scattering exceptions to this rule, it was contrary to instructions and due to neglect or ignorance. whenever a customer closed his account and demanded the return of his collateral, stocks of the same description and denomination were recalled and delivery made. the same rule applied to stocks pledged with the corporation for loans, it being specifically set forth in the promissory note which the borrower signed that the privilege of using the stock was granted to the lender. this practice is so common and the rule so generally understood by mining-stock traders that objection was rarely made by customers. to test the general custom, a friend at my suggestion not long ago sent certificates of stock to stockbrokers now doing business on wall street. three of these were members of the new york stock exchange and were members of the new york curb, boston curb, or of a mining exchange. a letter substantially as follows was sent to each of the : enclosed please find ...... shares of ...... stock to be used as collateral margin for the purchase of an additional block of ...... shares. please buy at the market and report promptly. the orders were executed by the individual houses. a month later when the stock ordered purchased had advanced in the market, the following letter was sent to each of the : please sell the ...... shares of ...... stock which you purchased for me a month ago at the market and return to me the certificate of stock which i sent you as collateral with check for my profits. it took nearly two months for all of the to make delivery. when they did, not one of them returned the same certificate that had been put up as collateral. don't be shocked, dear reader, at this disclosure. it is the _custom_. and don't, please, think mining-stock brokers are alone given to the general practice. if you order the purchase of a block of stock on cash margin from any new york stock exchange house or send a certificate of stock as collateral in lieu of cash to one of them for the purchase of more stock, you will receive a confirmation slip of the trade which will generally read something like this: we reserve the right to mix this stock in our general loans, etc. that is, the right is reserved, and actually exercised, of immediately transferring ownership of the certificates to the broker. unless a certificate stands in a customer's name and is unendorsed by him, he has no control over it. according to law, a broker has a right to hypothecate or loan securities or commodities pledged with him, for the purpose of raising the moneys necessary to make up the purchase price, and such stocks have no earmarks. in other words, the customer is not entitled to specific shares of stock, so that stocks bought with one customer's money may be delivered to another customer. as for the scheftels company laying itself open to the charge of bucketshopping in "shorting" stocks, such a possibility was never dreamed of. the penal law of the state of new york, sections to , inclusive, is the only criminal statute covering market operations commonly known as bucketing and bucketshops. in each section and subdivision it is provided that where both parties intend that there shall be no actual purchase or sale, but that settlement shall be made on quotations, a crime has been committed, the language of the statute being, "wherein _both parties_ thereto intend, etc.," or "where _both parties_ do not intend, etc." the scheftels company was never a party to any such arrangement. and it always made it a practice to make delivery of stocks ordered purchased within a reasonable period after the customer had paid the amount due in full. now, neither myself nor the scheftels corporation is responsible for brokerage conditions as they exist, nor for the laws as written. custom and practice are responsible. the purpose here is to communicate the exact nature of the business methods of the street as i found them and to lay particular stress on those that are open to criticism. the scheftels company against margin trading the scheftels company did not encourage margin trading by its customers. in fact, it railed against the practice. time and again the _mining financial news_, editorially, denounced the business of margin trading. the weekly market letter of the corporation sounded the same note. on several occasions, in large display advertisements published in the newspapers, the scheftels company decried the practice and urged the public to discontinue trading of this character. there were selfish reasons for this. in the marketing of its promotions the scheftels company found that not more than per cent. of the public's orders for these stocks given to other brokers were being executed, or, if executed, that the stocks were at once sold back on the market, the brokers or their allies "standing" on the trade. had the scheftels company been able to destroy the practice by its campaign of publicity, it would undoubtedly have been able, during the nineteen months of its existence, successfully to promote three or four times as many mining companies as it did, and its profits would have been fourfold. it, however, appealed to the public in vain. loud, frequent calls to margin traders to pay up their debit balances and demand delivery of their certificates, which would compel every broker to go out in the market and buy the stocks he was short to customers, failed miserably. the lesson of this experience was that the speculating public did not "give a rap" whether their brokers were short of stocks to them or not. all they wanted, apparently, was to be assured that when they were ready to close their accounts, their stocks, their profits or their credit balances would be forthcoming. what is the evil of short selling of the kind described herein? the only evil that i could ever discover was that the market is denied the support which the actual carrying of the stock is calculated to afford. this hardship weighs heaviest on the promoter. there appears to be no cure. even if a broker does buy the stock and does not himself sell it out again, there is no law that denies him the right to borrow on it or loan it to somebody else. and it is to the interest of the broker, because he gets the use of the money, to loan the stock always. stocks are rarely borrowed by anybody except to make deliveries on short sales. what about the broker who doesn't execute his order at all but "stands" on the trade from the beginning and sells the stock "short" to his own customer, delaying actual purchase until delivery is demanded? this practice is even less damaging to the customer than the one of actually executing the buying order for the customer at the time the order is given and then selling the stock right back on the market again for the account of the broker or his pal--the usual practice when the object of going short is sought. when a broker buys stocks in the market he must bid for them, and actual purchase generally means a higher cost price to the customer than that at standing quotations. the rule of the street is to charge the customer interest on all debit balances. when a broker lends to a "short" seller a stock which he is carrying for his customer, he is paid the full market value, as security for its return. in that case the broker ceases to incur interest charges for the customer, and is actually able, in addition, to lend out at interest the cash marginal deposit put up by the customer. maybe you think, dear reader, that a broker who charges his customer interest at the rate of six per cent. per annum on money which he has ceased to advance is crooked. very well. if that be so, then all members of the new york stock exchange must be labelled "crooks." here is how it works, even among the highest class and most conservative members of that great securities emporium: john jones orders the purchase by his broker of , shares of steel on margin. he pays down per cent. of the purchase price. mr. jones receives a statement at the end of the month charging him with interest at the rate of six per cent. per annum, or more if the call-money market is higher, on the per cent. of the purchase price advanced by the house. on the same day that the order of john jones is received, william smith orders the same house to sell short , shares of steel at the market. this order is also promptly filled. thereupon the broker uses the , shares of steel, which he bought for the account of john jones to make delivery through the clearing house for the account of william smith. sometimes a fictitious william smith is created, known as "account no. ," "a. & s. account," "e. account," etc. this is usually done when a broker wants to hide from his bookkeepers that he or an associate is taking the other end of the customer's trade. the broker is out no money, yet he charges mr. jones the regular rate of interest on his debit balance. as a matter of fact, too, the stock bought for mr. jones is never even delivered to his broker. the clearing house, because of the "short" sale, steps in and delivers it to the broker to whom it is due "on balance." custom and practice cover a multitude of remarkable transactions--don't they? you have the framework of the scheftels structure and of its wall street environment outlined in this chapter. some of the narrative is undoubtedly "dry-as-dust," but its recital has appeared to be necessary to enable the lay reader properly to interpret the chronology of stirring events which forms the concluding installment. in the foregoing i have endeavored to lay bare many practices that are common to wall street. wherever i have laid them at the door of b. h. scheftels & company, i have given that corporation much the worst of it, because in the recital i have omitted to mention a multitude of happenings that were creditable to an extreme to the scheftels company. most of these had to do with the experiences of the scheftels company as publicity agents and promoters. its wide-open publicity and promotion policy called forth the ire of influential wall street pirates and caused the "pressure" at washington which resulted in the federal raid of the scheftels offices. i have reserved this dramatic series of events for my last chapter. chapter xi a fight to the death in professional quarters the scheftels corporation was regarded as an interloper from the day it set foot in the financial district. its first offense was to reduce its commission rates. this move set the whole curb against the enterprise. but as the play progressed it proved to have been unimportant in comparison to the unspeakable crime of telling the truth about other people's mining propositions that were candidates for public money. the scheftels corporation had laid it down as a set rule that an established reputation for accuracy of statement was a great asset for any promoter or broker to have. to gain such prestige the principle was followed in the nation-wide publicity which emanated from the house that, no matter whom the truth hurt or favored, it must be told always, when publishing information regarding the value of any listed or unlisted security. space in the scheftels market letter or the news columns of the _mining financial news_ was unpurchasable. the enforcement of this rule was a wide departure from prevailing methods. but that didn't make us hesitate. having felt the speculative pulse for years, i knew its throb. the public, after losing billions of dollars, were becoming "educated." the rank and file of mining promoters--high and low--in wall street still believed that "one is born every minute and none dies." but i and my associates didn't. an uneducated public had been unmercifully "trimmed" in scores of enterprises backed by great and respected names. speculators were ravenous for the truth. we decided to give it to them. we gave it to them straight. this publicity system brought about the ruin of the scheftels corporation through the powerful enemies it made. the policy was right all the same. persisted in, nothing was or is better calculated to strengthen the demand for all descriptions of meritorious securities. the scheftels corporation was the pioneer in the exploitation of this principle as a fundamental and underlying basis of brokerage and promotion. in pioneering this policy, however, the scheftels company was sacrificed to the prejudices and wrath of the old school of promoters. the firing of the first guns before the scheftels corporation was on the street three months it almost came a cropper. on the strength of excellent mine news it purchased nearly , shares of rawhide coalition in the open market, up to cents per share. a determined drive was made against the stock by mining-stock brokerage firms which had sold it short. bales of borrowed stock were thrown on the market by the crowd operating for the decline. the scheftels company took it all in. letters and telegrams were sent broadcast by market enemies urging stockholders to sell. a powerful clique had been losing big sums on the rise. the scheftels company published advertisements calling upon margin traders to demand delivery of their certificates. this expedient proved of small utility. the brokers continued to hold off deliveries to customers and sold and delivered to us all the stocks that they could borrow or lay hands on. the continued selling finally made inroads on the scheftels corporation's cash-reserve to a point that forced it one day to stand aside and leave the market to the sharpshooters. that day, in a few hours, approximately half a million shares of rawhide coalition changed hands out of a capitalization of , , shares. the corporation's loans were called. this forced it to throw large blocks of stock on the market. a sharp break ensued. that was just what was wanted by the interests which were gunning for us. they covered their short sales at great profit. in the midst of the mêlée the scheftels company tendered a stock exchange house of great prominence, which had loaned it for the account of a salt lake firm of brokers $ , on , shares of rawhide coalition, the money to take up the loan. a representative of the stock exchange house sheepishly stated that his firm had loaned part of the pledged stock to out-of-town brokers. he asked for time. under threat of dire consequences the stock exchange firm bought stock back from us in the open market that afternoon to supply the deficiency, and then made delivery of this stock back to us in lieu of that which they had parted with. it had been specifically stipulated by the scheftels company when the loan was made that the certificates must be held intact and that the stock must not be loaned out or sold while the money loan was in force. this experience was repeated frequently during the scheftels career on the curb. it cost b. h. scheftels & company more than one million dollars, during the nineteen months of its existence, in giving loyal market support, in times of "professional" attack, to the stocks it had fathered or promoted and felt moral responsibility for. time and again the scheftels company found among stocks delivered to it, against purchases made in the open market, the identical certificates it had pledged with loan-brokers as collateral for loans, and which had been hypothecated by it with the specific proviso that the certificates were not to be used. it opened our eyes to one of the most commonplace practices, not only on the curb, but also on the stock exchange. hardly a failure occurs on any of the exchanges or on the curb that does not reveal customers' certificates, which were originally pledged with the understanding that they were not to be "used," in the strong-boxes of others. the first grievous offense of the publicity forces of the scheftels corporation against wall street's "oh-let-us-alone" promotion combine was a wallop in april and may, , through the scheftels market literature, at nevada-utah. the combination which owned control took with bad grace the strictures on the property. we heard an awful underground roar. at that time the price of nevada-utah stock was around $ . the scheftels market letter said that there was probably not cents of share value behind the property. the price immediately began to crumble. it has been tobogganing ever since. the stock at the beginning of september of this year was quoted at - / to cents. such a thing as printing facts which would enlighten stockholders and the public as to the actual value and condition had not before been heard of when such enlightenment ran contrary to the plans of strongly entrenched promoters on the street. the campaign against nevada-utah, therefore, directed widespread attention to b. h. scheftels & company and the _mining financial news_. following the nevada-utah disclosure, the daily market letter and the weekly market letter of the scheftels corporation and the _mining financial news_ took a good, strong, husky "fall" out of the la rose mines company, capitalized for $ , , . the la rose owns one of the greatest producing mines in the cobalt silver camp. a market scheme was in progress, with la rose as the medium, and w. b. thompson, of nipissing fame, as a chief manipulator. we called a halt to the game when the price reached a "high" of $ . , and saved the public a huge sum of money. under our campaigning the stock declined to $ , a decrease of $ , , in the market value of the capitalization. this made w. b. thompson and his associates the implacable enemies of the scheftels company and myself. we didn't worry much. we were catering to the public. indeed, we were pleased with our work. following this incident, the scheftels market letter and the _mining financial news_ took a smash at a mining-stock deal in which w. b. thompson and the guggenheims were jointly interested. it was the now notorious cumberland-ely-nevada consolidated merger. later the merger was enlarged and took in the utah copper company, or rather the utah copper company took in the others, and the scheftels propaganda found another opportunity to do a great service for the stockholders of nevada consolidated. our attack hurt the guggenheim reputation among investors all over the country and contributed to reduce their influence over the large stockholding body--more than , men and women--of nevada consolidated. though finally successful, the guggenheims were sore from the lashing and exposures to which they had been subjected. as for the scheftels company and the _mining financial news_, they had still further established the honesty and value of their publicity service. a market scheme to balloon the price of ray central copper company shares to several times their value was a precious enterprise against which we trained our publicity guns and fired several effective broadsides. the effort of the promoters to connect with the public purse here would not have been half so sensational if men of lesser prominence were identified with the operation. in our "bear" publicity on this one we minced no words. in doing so we again hit another powerful interest--the lewisohns. later the exposure by the _mining financial news_ and the scheftels market letter of market manipulations of the lewisohn-controlled kerr lake still further "endeared" the members of these two organizations to that powerful faction, and more closely cemented the ties of fellowship between the ruling powers. keystone copper, another lewisohn "baby," was put through its courses on the curb while kerr lake was being played in a stellar rôle. the deal in keystone was an unobtrusive little thing, but awful good as far as it went from the one-sided point of view. i turned the searchlight of publicity on keystone. the scheftels market letter and _mining financial news_ disclosures in the interests of speculators and investors regarding nevada-utah, la rose, cumberland-ely, nevada consolidated, utah copper, ray central, and kerr lake were sensational enough, but they by no means included all of the work in this line. during this publicity literature took in practically every important mining company whose shares were traded in on the new york curb. the unpleasant truths these forces were obliged to tell from time to time touched the delicate sensibilities of many leading lights on the street. these had grown accustomed to an unvarying diet of sweets. it would seem that their appetite for saccharine provender would have become cloyed and that a change would be a grateful relief. it was not. the truth was distasteful. it interfered with the noble industry of mining the public and it cut down the profits of that end of the game. in keeping up the record of day-by-day market and mine developments these publicity agents punctured many a rainbow-tinted balloon. very frequently they gave to the public its first definite and intelligent idea of real value behind promotions and in properties. where market prices represented an overplus of hopes and expectations the truth was told. the aim was to take mining speculation out of the clouds and plant its feet firmly on earth. in this laudable effort we ran counter to the plans of the mighty. we also violated the vulgar unwritten rule of some of the wall street fraternity--"never educate a sucker." our publicity work caused a readjustment of judgment and market values, besides those already mentioned, on such stocks as first national, butte & new york, trinity copper, micmac, ohio copper, united copper, davis-daly, montgomery-shoshone, goldfield consolidated, combination fraction, british columbia, granby, cobalt central, chicago subway, and sixty to eighty others. the live wires of our publicity service blistered the flesh of the guggenheims, the thompsons and the lewisohns, and perturbed their widely diffused affiliations, connections and allies, including john hays hammond, j. parke channing, and e. p. earle; also charles m. schwab, e. c. converse, b. m. baruch, united states senator george s. nixon, george wingfield, hooley, learned & company, many other new york stock exchange houses, a group of powerful corporation law firms, a noted crowd of influential politicians, curb stockbrokers who had grown fat executing manipulative orders for the "inside," bankers who carried on deposit the cash balances of the mining companies, and even j. p. morgan & company, who were partners of the guggenheims in their alaska ventures and were for a time said to be meditating a merger of the copper companies of the country with those controlled by the guggenheims as a nucleus. the story of ely central by keeping speculators out of stocks that were selling at inflated prices, the scheftels corporation and the _mining financial news_ became endeared to a great popular moneyed element. the public was saved huge sums of money. this, however, only carried out the negative end of a grand idea. the affirmative demanded that the scheftels corporation must put its followers into a stock or stocks where they could actually make money. the scheftels corporation was on the eager lookout for a genuinely high-classed copper-mining proposition. it found what it was looking for in ely central, a property that is sandwiched in between the very best ground of the nevada consolidated, is bordered by the giroux and occupies a strategic position in the great nevada copper camp of ely, birthplace of what is probably the greatest lowest-cost porphyry copper mine of america. by invading the ely territory as promoter and annexing ely central, the scheftels corporation committed what was probably, to the interests among whom our publicity work had wrought greatest havoc, an unpardonable crime. we butted into the very heart of the game, and became a disturbing factor in their mining operations. the ely central property consists of more than acres. years before, in the early days of the camp, it had been passed over by the geologists and promoters who selected the ground for the nevada consolidated, giroux and cumberland-ely, because it was covered by a non-mineralized formation called rhyolite. as development work progressed and the enormous value of the surrounding mines was disclosed, it dawned on their owners that they might have made a mistake and that it would be just as well to obtain possession of the ely central property. the ground was especially valuable to the nevada consolidated, if for no other reason, as mere acreage to connect up and make compact the properties owned by them. the second demonstration of their bad judgment was the fact that, having planned to mine the copper flat ore-body by the steam-shovel method, they overlooked the value of the ely central property as affording them the only practical means of access to the lower levels of that pit for operation by the steam shovels. investigation had disclosed to me that the evidence which had been adduced by mine developments on neighboring properties was all in favor of copper ore underlying the ely central area. the rhyolite, which covered ely central, was a "flow," covering the ore, and not a "dyke," coming up from below and cutting it off. why was the property idle? inquiry revealed that the ely central copper company was $ , in debt, and that a pre-panic effort to finance the corporation for deep mine development had failed. the panic of - had crimped the promoters and they could not go ahead. the scheftels corporation entered into negotiations with the pheby brothers and o. a. turner, who held the control, for all the stock of the ely central company that was owned by them. during the progress of negotiations, early in july, , i heard that the guggenheims and w. b. thompson were very much put out to learn that the scheftels company was about to finance the company. they had belittled the value of the property, as would-be buyers are prone to do the world over. before i entered upon the scene the pheby brothers had found themselves objects of persistent and mysterious attacks. their credit was assailed in every quarter and they found themselves ambushed and bushwhacked in every move they made. they were forced into a position where it was believed they would accept anything that might be offered them for their interest in ely central. as fate would have it, the scheftels company entered the race at this psychological moment. summed up, the scheftels company actually contracted for , , shares out of , , , which represented the increased capitalization for a total sum of $ , , , or at an average price of - / cents per share. the time allowed for the payment of all the money was nine months, stipulated payments being agreed upon at regular intervals in between. the immediate effect of the arrangement was this: a dormant property, in debt and lying fallow, was metamorphosed into a going concern with good prospects of soon becoming a proved great copper mine, with an assured income to defray the expenses of deep mine development on a large scale, and a market career ahead of it that might be expected to match any that had preceded it in the ely district from the standpoint of public interest. during the progress of the negotiations the stock sold up to $ per share. the selling for philadelphia account of a large block of stock in the open market dropped the price back, of a sudden, to cents. the scheftels company bought stock on this break and urged its customers to do likewise. on the day the deal was concluded the market had rallied to cents. fully six weeks before the deal was arranged the scheftels market letter and the _mining financial news_ had begun to urge the purchase of the stock. the scheftels organization was not hoggish. the establishment was willing that the public should get in on the cellar floor. there were nearly , shares outstanding, which the scheftels corporation had not corralled in its contract. readers of the market letter and the _mining financial news_ fell over one another to get in on the good thing. therein they were wise. by early september the price had advanced in the market to $ . the scheftels publicity was strong in favor of the stock. but it had not yet put on full steam. it was waiting for an engineer's report to make doubly sure it was right. col. wm. a. farish, a mining engineer of many years' experience and a man with a high reputation throughout the whole of the western mining country, had been sent by the scheftels company to make a report on the ely central. years before colonel farish had reported on the nevada consolidated properties and outlined the very methods now being used for recovering its ores. but colonel farish had been ahead of his time, and the capitalists in whose interest he was acting were not prepared for such a radical step in advance of the then-existing methods, nor to believe that copper ores of such low grade could be mined at a profit, especially miles from the nearest railroad. times and conditions changed, and the miles were spanned by a well-equipped rail connection. colonel farish's opinion verified our fondest expectations. the report set forth that the mine possibilities of ely central were nearly as great as those of the nevada consolidated itself. on the basis of this report, which was made in september, the project acquired a new significance. development operations were undertaken to prove up the ground in an endeavor to demonstrate the existence of the , , tons of commercial porphyry ore which colonel farish indicated in his report would likely be found within the boundaries of the southern part of the ely central property. the prospect fairly took the scheftels organization off its feet. we were dazzled. we saw ourselves at the head of a mine worth $ , , to $ , , . no time was lost in organizing a campaign to finance the whole deal. having no syndicated multi-millionaires to back it up, the scheftels corporation went to the public for the money, the same as hundreds of other notable and successful promoters had done. the ensuing publicity campaign to raise capital has been described in hundreds of columns of newspaper space as one of the most spectacular ever attempted in wall street. i had absolute faith in the great merits of ely central, a faith that has not been dimmed in the slightest degree by the vicissitudes through which the company, the scheftels corporation, and myself personally have passed. within thirteen months the scheftels corporation caused to be spent for mine development more than $ , , and on mine and company administration an additional $ , . when the scheftels company was raided by the government on september , , and a stop put to further work the expenses at the mine had averaged for the nine months of that year above $ , a month. work was going on night and day. every possible effort was being made to prove-up the property in short order. core-drills sent down from the surface had already revealed the presence of ore at depth, and i am sublimely certain that another month or two would have put the underground air-drills into contact with a vast ore-body identical in quality and value with that lying on either side in nevada consolidated acreage. ely central was the new york curb sensation in - . i used the publicity forces which had been so successful in protecting the public against the rapacity of multi-millionaire mining-wolves to educate them up to the speculative possibilities of ely central. up went the price. between the first of september and the middle of october the market advanced to $ - . on october th advices reached us that per cent. copper ore had been struck in the monarch shaft. the monarch is an independent working, far removed from the area that is sandwiched in between the main ore-bodies of the nevada consolidated. we were highly elated. the prospect looked exceedingly bright to us, and there was no longer any hesitation in strongly advising our following to take advantage of an unusually attractive speculative opening. the market boomed along in a most satisfactory way. by october th the price reached $ ; on november d it was $ a share, and three days thereafter $ - / was paid. the expenses of the scheftels company on publicity work at this time amounted to about $ , a day. money for mine development on ely central was being spent as fast as it could be employed. we were trying to sell enough stock at a profit over the option price to defray the publicity expenses, keep the mine financed, and meet our payments on the option, but no more. we were not making any effort to liquidate on a large scale, a fact which was reflected in the advancing quotations. when the price of ely central hit $ in the market, the scheftels company rated itself as worth from $ , , to $ , , . i had visions of leading the guggenheims and lewisohns and thompsons up the great white way with rings in their noses. nat. c. goodwin, who had a per cent. interest in the scheftels enterprise, enjoyed similar visions, only his fancy ran to building new theaters for all-star casts. while ely central stock was going skyward and all the speculating world was making money in it, our publicity forces were busily driving the bald facts home regarding la rose, cumberland-ely, nevada-utah and other pets of the mighty. our batteries never let up for a moment. these various attacked interests were getting ready to strike back. if their movements had been directed by an individual general they could not have worked with more community of interest. one day the sky fell in on us. the plans had been beautifully laid for our complete ruin. that we escaped utter annihilation was almost a miracle. on wednesday, november d, the result of our market operations on the new york curb was that we quit long on the day nearly , shares of ely central at an average price of $ . on the same day our customers ordered the purchase of nearly twice as much stock as they ordered sold. this indicated to us that the curb selling was professional. there was nothing very remarkable about this performance because brokers doing business on the curb very frequently play the market for a fall. on thursday, the day following, the scheftels company was again compelled to purchase stock on the curb in excess of sales to the extent of , shares, while on the same day the buy orders of house customers exceeded their orders to sell at least three to one. the professional selling was now accompanied by rumors on the curb which spread like the smell of fire that trouble of some dire sort was pending for the scheftels company. most of this emanated from an embittered brokerage quarter and we paid little attention to it. on the succeeding day, friday, november th, the professional selling was quieted to a point that compelled the scheftels company to go long of only , shares on the day in its curb market operations. the purchase of so small a block of stock excited no suspicion in the scheftels camp, although it should have, because scheftels' customers on this day purchased more than four times as much stock as they ordered sold, pointing conclusively to a great public demand and much shorting by professionals. then came the _coup de main_. the assault on ely central the th day of november fell on a saturday. the new york _sun_ of that morning published under a scare head a vicious attack on the ely central promotion. the attack was based on an article which was credited in advance to the _engineering & mining journal_ and appeared in the _sun_ ahead of its publication in that weekly. the _sun_ had been furnished with advance proofs. the ely central project was stamped as a rank swindle. everybody identified with it was raked over and i, particularly, was pictured as an unprincipled and dangerous character, entirely unworthy of confidence and at the moment engaged in plucking the public of hundreds of thousands. it was stated that the ely central property had been explored in the early days of the ely camp and found of no value whatsoever from a mining standpoint. the scheftels corporation was accused of setting out in a cold-blooded way to swindle investors on a bunco proposition. i was in my apartment at the hotel marie antoinette at a.m. when i read the _sun's_ story. the scheftels company had thrown $ , behind the market during the three preceding market days to hold it against the attack of professionals. i called the scheftels office on the 'phone and gave instructions that a certified check for $ , be sent to wasserman brothers, members of the new york stock exchange, with orders to purchase , shares of ely central at $ - / , which was the quotation at the close on the afternoon before. orders to buy , shares more at the same figure were distributed among other brokers. the single order was given to wasserman brothers because i thought it good strategy. they are a house of undoubted great responsibility and it seemed to me that their presence in the market on the buying side would have an excellent tonic effect. during the two hours' session i held the 'phone, receiving five minute reports from the scene of action. mr. goodwin was at my side. at ten minutes to twelve the brokers had reported the purchase, on balance, of , shares. had they purchased shares more they would have completed the orders that were outstanding and it would have been up to me to decide whether to lend further support or not. by that time my figures showed that the scheftels corporation had thrown behind the market $ , in four days to hold it and i was beginning to have "that funny feeling." during the last few minutes of the saturday curb session the selling ceased and it seemed that possibly my fears were unfounded. on sunday, the th, my hopes went a-glimmering. all the new york papers featured scathing articles, using as authority the _engineering & mining journal's_ attack, which had appeared on the previous afternoon. dispatches indicated, too, that the papers of boston, chicago, los angeles and san francisco had played it up on the front page as the most shocking mining-stock scandal of the century. by monday, the whole country had been plastered with the sensation. of course my early past, all of which was a family affair and had transpired fourteen years prior, long before i essayed to enter the mining promotion field, was dragged out of the skeleton-closet. it lent verisimilitude to the stories. after reading the sunday newspapers, i grasped the meaning of the move and marshalled our forces. it was plain that we had been marked for the sacrifice. it looked as though we hadn't a chance in a million of weathering the onslaught if we lent the market further support. there were about , shares of ely central in the public's hands, and, without close to $ , , in ready cash to throw behind the market, we could not be certain of staying the tide. we didn't have anything like that sum. personally i did not give up the fight, but the outlook was mighty blue. all day sunday trusted clerks of the scheftels company worked on the books, making a statement of the "stop-loss" orders and "good-till-cancelled" orders of customers. on monday morning the newspapers contained aftermath stories of the _engineering & mining journal's_ arraignment. the air was surcharged with the impending calamity. the clash of battle with a line of defense carefully outlined, i approached the fray. first, the scheftels corporation placed with reliable brokers written orders to sell at the opening the stocks that were specified in the stop-loss and good-till-cancelled orders of customers. not an order to sell a share of inside stock was given. it was also decided not to place any supporting orders until after the market opened and it could be determined with some degree of accuracy what the volume of stock amounted to that was pressing for sale. just before the market opened i could see from my office window a dense crowd of brokers assembled around the ely central specialists. although ominously silent, they were struggling for position and were tensely nervous. it was plain that the over-sunday anti-scheftels newspaper publicity had racked ely central stockholders and created a panicky movement to liquidate, which was about to find vent in violent explosion. it was evident that the scheftels corporation would have to conserve every resource if the day was to be saved. the market opened. instantly there was terrific action. hundreds of hands were waving wildly in the air. everybody wanted to sell and nobody wanted to buy. the chorus was deafening. screams rent the air. the tumult was heard blocks away. every newspaper had a man on the spot. brokers from the new york stock exchange left their posts and came to see the big show; the stock exchange was half emptied. the spectacle had been advertised widely and everybody was keenly awake and wrought up to a high pitch of excitement over what had been scheduled to occur. had the scheftels brokers been supplied with orders to buy one-quarter of a million shares of stock at the closing market price of the saturday before, $ - , it was very apparent that they would have been unable to hold the market. the opening sale was at $ . downward to the $ point the stock traveled, breaking from to cents between sales. through $ and on down to the $ point the price crashed. blocks of , shares were madly thrown into the vortex of trading. the curb was a struggling, screaming, maddened throng of brokers. every trader appeared to be determined to crush the market structure. at $ a share there was a temporary check in the decline, but the bears renewed their onslaught, gaining confidence by the outpour of selling orders. within less than an hour after the opening the stock hit $ - a share. at this juncture the scheftels broker in ely central reported that he had executed all the stop-loss and good-till-cancelled orders entrusted to him with the exception of , shares. "the scheftels company will take the lot at $ - ," i said. in lending succor at $ - per share i was really stretching a point, although at this figure the net market shrinkage of the ely central capitalization was in excess of $ , , . this melting of market value was awful to contemplate. on the other hand the newspaper agitation was unmitigated in its violence, stockholders were convulsed, a break of serious proportions was certain, and it was up to me to conserve every dollar. the moment the scheftels bid of $ . a share made its appearance on the curb and the selling from the same source for the account of customers was discontinued, it was seen that the force of the drive had spent itself, at least for the time being. support now came from the "shorts." they started to cash their profits on their short sales of the days previous. crazed selling was transformed to frantic buying. the scene at this juncture was dramatic. it was the momentary culmination of a cumulative, convulsive cataclysm. in refraining from selling for its own account the scheftels corporation violated one of the sacred rules and privileges not only of the new york curb but of the new york stock exchange. in both of these markets it is the custom, where brokers have advance information of an impending calamity, to beat the public to the market and get out their own lines first, leaving customers to take care of themselves. by deftly feeding stock to bargain hunters and to the "shorts" at intervals and buying stock when it pressed for sale from frightened holders at other periods the scheftels company was able to support the market that afternoon to a close with sales recorded at $ a share. the cash loss of the scheftels company on its curb transaction in ely central that day was $ , . this fresh sacrifice was needed to steady the market. tuesday, the following day, the daily newspapers belched forth further tirades of abuse and calumny. the market crash in ely central was held up to the public as proof positive that the project was a daring swindle. the raid on the stock in the market was renewed. a johnstown flood of liquidation ensued. fluctuations were violent. opening at $ , the price was forced down to $ . it afterward rebounded to $ , but the waters would not subside, the stock was hammered again and it closed at $ per share. to meet the oncoming emergencies the scheftels corporation was obliged to fortify its cash reserve in the only one way that offered. it was compelled to convert a large part of its reserves of securities into cash and it had to sell on a declining market. many accounts were withdrawn by timid customers, and the scheftels company was further called upon to give stability to rawhide coalition and bovard consolidated, other stocks which it had been sponsoring in the markets. loans were called by brokers with whom the scheftels company was carrying stocks, deliveries were frantically tendered to the scheftels company of stocks it had purchased at previous high levels, and a financial onslaught made generally that would undoubtedly have sunk the scheftels' ship but for the fact that we had backed-up in the nick of time, had measured our distance, had gone just so far and not too far, and had kept on the firing-line. an exceedingly gratifying feature of the sensational day was the way in which our friends stood by us. the venom and selfishness of the overwhelming assaults that had been made upon us convinced many of the public that we were being made the victims of a special attack, and with the natural impulse that governs honorable men they gave testimony to their confidence in us. on wednesday the campaign terminated. ely central weakened an eighth from the $ point, the closing of the day before, recovered to sales at $ - / and closed at $ - / bid; $ - / asked. all day long our offices were thronged with newspaper reporters and with pale-faced and agitated customers. our clients felt their helplessness in such a tumult of warring forces. the only thing they could do was to stand by and watch developments as the battle waged. it was a proud moment for me when, at the end of the day's market, i mounted the platform in the scheftels customers' trading-room, gave voice to a shrill cheer of triumph and wrote on the blackboard the following: "we have not closed out a single margin account! we are carrying everybody!" the scene which followed warmed the cockles of my heart. i was literally mobbed, but it was a friendly mob. we all joined in a season of noisy rejoicing. that we should have been able to survive the three-days' siege with minimum losses to customers and without sacrificing a single margin account was a signal achievement. i doubt if there are many cases like it in the history of wall street. scores of telegrams were received from out-of-town customers to whom the margin respite was wired. one of these read: you may look for a tidal wave of business. your princely action warrants guns for the house of scheftels. another one was to this effect: the whole situation was greased for your descent. it was a shoot-the-chutes and a bump-the-bumps proposition. congratulations on your survival. hundreds of letters of a similar tenor poured in upon us. many of these came from the camp of ely itself, where large blocks of the stock were held by mining men on the ground. thursday the stock closed at $l- / ; friday it advanced to sales at $ - / and hung there. the scheftels organization now drew its first long breath. friends and enemies alike marveled how the corporation had managed to survive. we had held the fort, but at murderous cost. i got busy with the publicity forces at my command. through the scheftels market letter and the _mining financial news_ the story was told of the whole dastardly campaign. the weekly market letter of the scheftels company on november , , devoted columns to the story of the raid. that the guggenheim-managed nevada consolidated was well pleased with the publication of the _engineering & mining journal's_ attack seemed clear to me. the reason was this: in its attack the _engineering & mining journal_ stated that two drillholes put down by the nevada consolidated in the immediate vicinity of ely central had failed to show better than nine-tenths of one per cent. copper ore which, the article said, was below commercial grade. (at this late date, october, , they are mining ore in the steam-shovel pit of the nevada consolidated that will not average more than eight-tenths of one per cent. copper transporting it to the concentrator, more than twenty miles away, and treating it at a profit. but this is not the point.) an engineer of international prominence telegraphed the scheftels company from ely as follows: two drill holes mentioned in _engineering & mining journal_ article were completed only last week. results must have been telegraphed to new york. these holes gave great trouble on account of caving ground. i heard drill runners say they were stopped on that account and were in ore in bottom. in any case, it is not conclusive of unpayable ore in vicinity. this condition often occurs. i could write a book in reply to the _engineering & mining journal's_ tirade, showing the utter flimsiness of the statements it made. limited space forbids anything more than an outline. charles s. herzig was employed to report confidentially on the property. mr. herzig's report was later checked up by dr. walter harvey weed, a great copper geologist of known high standing who was formerly one of the principal experts of the united states geological survey and was himself a frequent contributor to the _engineering & mining journal_. dr. walter harvey weed wired to the c. l. constant company, the metallurgists and mining engineers, from ely, as follows: after making a most thorough examination my opinion is southern part ely central property is covered by rhyolite capping. geological evidence demonstrates that the porphyry extends eastward (through ely central) from steam-shovel pit and with excellent chance of containing commercial ore beneath a leached zone. a well defined strong fault separates steam-shovel ore from rhyolite area and this fault plane may carry copper glance (very rich copper ore) of recent origin, due to descending solutions. the iron-stained jasperoid croppings in the limestone areas give promise of making ore in depth on ely central property as they do in giroux. the _engineering & mining journal_ said in its article that the northern portion of ely central showed the arcturus limestone of the district. it stated that in this limestone at various places there is a little mineralization but never during the history of the district were any profitable results obtained. as against this, engineers farish, herzig and weed reported that the limestone areas on ely central would likely show the presence of mines. as a matter of fact, giroux, neighbor of ely central, had sunk through this limestone and opened one of the richest bodies of copper ore ever disclosed. the _engineering & mining journal_ said that in representing that pay ore is likely to exist in the area of ely central sandwiched in between the two big mines of nevada consolidated, the scheftels company was practicing deception. not only did messrs. farish, herzig and weed report in favor of the likelihood, but it is now a commonly accepted fact that, unless all known geological indications are deceptive, ely central has the ore in this stretch of territory. a report made as late as september, , by engineer richard t. pierce, for the reorganization committee of ely central, expresses the opinion that an area , feet by , feet at the south-east end of the eureka workings "will be found to contain mineralized porphyry, with reasonable assurance that commercial ore will be had in it." mr. herzig's first telegram from ely after examining the ely central property was to this effect: there is no question that the rhyolite was deposited in ely central after the enrichment of the porphyry. the fault that limits the rhyolite in the nevada consolidated pit is indicated by several feet thickness of crushed mineralized porphyry-rhyolite ore, which is a positive evidence that the porphyry was enriched before the faulting. the limestone and contact areas owned by the company, in my opinion, have great potential value. the indications are in every way similar to bisbee. rich carbonate ore has been encountered on the clipper and monarch claims of ely central and i look forward to seeing big ore bodies opened up at these places. reports of both these engineers, many thousand words in length, made later, confirm these messages. what probably convinced me more than anything else of the inaccuracy of the statement regarding the ely central property by the _engineering & mining journal_ was the attitude of charles s. herzig. he is my brother. up to within thirty days of the appearance of the attack in the _engineering & mining journal_ i had not set eyes on him in fifteen years. a graduate of the columbia school of mines, he had in the interim examined mining properties in south africa, egypt, australia, the east indies, siberia, every european country, canada, mexico, central america, south america and the united states in the interests of some of the world's greatest financiers. these expert examinations had covered deposits of gold, silver, copper, lead, zinc, coal and other minerals. in the engineering profession he is known as an expert who has his first failure yet to record. his standing is unquestioned as an engineer and a mine-valuer. i had heard some criticism of the farish report, made by engineers of the modern school, in which it was pointed out that colonel farish had failed to give scientific reasons for all of his deductions. i asked captain w. murdoch wiley, then a member of the c. l. constant company, assayers, metallurgists and mining engineers, whether he could induce my brother to make an examination. i did not approach charles myself, because we had been estranged. so it was that when he returned from europe after an absence of many years, he had not even looked me up. captain wiley arranged for a meeting at the engineers' club. i went there, and was formally introduced by captain wiley to my brother across a table. "what will you take to make a report on ely central?" i asked in the same matter-of-fact way i would have addressed a stranger. "what's the purpose of the report?" "the scheftels company wants confidential, expert information such as you are qualified to give as to the value and prospects of the property," i answered. "i'll take $ , ," he said, "but only on one condition. i am going to the ely and ray districts to report for english capitalists, and i can take your property in at the same time. my report is not to be published and i reserve the right to make a verbal instead of a written one. if you really want to know what i think of the property, i am quite willing to give it a careful examination and let you know. because of the stock-market campaign you are making, i would not accept your offer if, did i report favorably, your idea would be to make use of the report in the market." the bargain was struck. a few days later mr. herzig received $ , from the scheftels company, on account, and a check for traveling expenses. he left for ely. on the saturday morning when the new york _sun_ article appeared containing the excerpts from the _engineering & mining journal's_ onslaught, i wired my brother substantially as follows: savage attack in _engineering & mining journal_ on ely central. if your report on property is favorable, i beg you to let us have it by wire and allow the use of it to counteract. an hour later i followed it up with another message telling him not to wire any report. i set forth that because he was my brother, it might prove of little avail, now that the publication had been made, and that it might only tend to do him personal damage in the profession because of the unqualified manner in which the _engineering & mining journal_ had taken a stand against the property. in reply he wired captain w. murdoch wiley the short but decisive report already quoted herein, regarding the geological reasons why ely central should have the ore, which afterward was fully verified by dr. walter harvey weed in the message also reproduced in the foregoing. in a letter from ely to captain wiley confirming the message, the original of which is in my possession, mr. herzig said: i have formed a very favorable opinion of the property. i feel that it has the making of a big mine, and under the circumstances i am willing to stand a little racket for a time. the same day he wired captain wiley to buy for his account , shares of ely central at the market price, which order was executed through the scheftels company. editor ingalls of the _engineering & mining journal_ and my brother had been friends for years. my brother had been employed early in his career by the lewisohns, guggenheims and the anaconda copper company, and later in europe, australia and india by mine operators of even higher class. up to the time when the _engineering & mining journal's_ attack appeared he had not committed himself on ely central. when he did commit himself it was with the foreknowledge that in doing the unselfish and courageous thing his name would be besmirched if under development ely central turned out to be what the _engineering & mining journal_ had declared probable. in that event his relationship with me would be held up as positive proof of duplicity and it would look bad for him. the fact that under all these circumstances he jumped into the breach satisfied me that the attack of the _engineering & mining journal_ was unjustified. a bombshell in the enemy's camp as soon as the scheftels corporation was able to obtain a copy of the corroborative report of dr. walter harvey weed, which the great copper geologist made to the c. l. constant company, it filed a libel suit against the _engineering & mining journal_ for $ , damages. simultaneously mr. scheftels filed another suit for an additional $ , in his own behalf. the filing of the scheftels libel suits against the _engineering & mining journal_ was a bombshell. it was formal notice to the forces arrayed against us that we did not propose to be made victims of an unholy hostility and that we were determined to proceed along old lines and not abate in the slightest our wide-open publicity measures. it was also noticed that we proposed to go through with the ely central deal. after it became evident that we intended to keep on fighting, the scheftels offices were openly visited and inspected in detail one day by the late police inspector mccafferty. in a bullying manner this police official let it be known that we were in official disfavor with him. his manner could hardly have been more offensive if he had been invading a den of counterfeiters. mr. mccafferty did not specify just what he was after or just what he expected to find, but he made it plain to us that we were marked and that he had it in for us. he stalked scowlingly through the entire establishment and made vague threats of what was in store for us. late that night i learned that the inspector had invaded the living-rooms of my associate, nat. c. goodwin, where he delivered himself somewhat as follows: "what are you fellows trying to do, anyway? what are you trying to put across on us? do you think we are going to stand for any such newspaper notoriety as you are getting and watch it with our arms folded? do you think we are fools or crazy, or what? i want you to understand that you fellows have got your nerve with you. get busy or the police will be on your backs to-morrow!" i told mr. goodwin that our enemies had evidently sicked the inspector on to us, but that i didn't think any action would be taken. we were victims and not culprits, and unless, indeed, the united states was russia, nothing untoward could happen. i promised mr. goodwin, however, that i would attend to the matter without delay. i laid all of the facts regarding the newspaper attack before a prominent citizen who promised forthwith to convey the information in person to the inspector or one of his superiors. he did so. that was the last we heard of the matter. the _engineering & mining journal's_ lawyers addressed themselves to customers of the scheftels company, who had lost money in the market break in ely central from $ to $ . . by letter they urged them to send on a full statement of facts and suggested that they might be of service, and without charge. letters of this character were sent to large numbers of our customers, many of whom simply sent them to us. in some cases, however, customers who had read the attack in the _engineering & mining journal_ or quotations from it in widely circulated daily newspapers, needed but the letter from the lawyers to induce them to come forward with a complaint. on the whole, this fishing expedition must have been something of a water-haul and a disappointment, for the attorneys of the _engineering & mining journal_. the post-office department at new york, in january and february, sent letters broadcast to readers of the scheftels weekly market letter, asking whether the business carried on was satisfactory--the usual form that is used where a firm is under investigation. scores of these letters were forwarded to us by customers with remarks to the effect that evidently "somebody was after us." an inquiry of this sort is calculated to do terrible damage to the reputation and standing of any house that does a quasi-banking business. our attorneys complained to inspector mayer of the new york division of the post-office that an injustice was being done. no more letters of the character described were sent out, because the early replies that were received by the inspector to his circular letter brought forth no serious complaints. however, it was afterward disclosed that the investigation did not cease here and that the post-office department continued to conduct a searching inquiry only finally to abandon its enterprise. enters upon the scene an associate of the _engineering & mining journal's_ lawyers defending that publication against our suit for libel. he called at the scheftels offices and demanded from mr. scheftels information with regard to the account of c. h. slack of chicago. he got it. it showed that mr. slack had purchased , shares of bovard consolidated at cents per share, for which he had paid cash, and that mr. slack had purchased an additional , shares at - / and - / cents per share; and that mr. slack had refused, after the market declined to below the purchase price, to pay the balance due, because of delayed delivery. the delay in delivery was accidental. the scheftels company actually had in its possession two million shares of the stock or more, and the delivery would have been tendered earlier but for the fact that the raid on ely central had piled up so much work for the clerical force that everything was set back. we knew of no legitimate excuse for mr. slack, because he could have ordered the stock sold at any time, delivery or no delivery. the slack transaction receives amplification here, because later, when the scheftels corporation was raided by a special agent of the department of justice, it figured as one of the cases cited by the agent in the warrant sworn to by him against b. h. scheftels & company as proving the commission of crime. another case about which mr. scheftels was asked to give full information was that of d. j. szymanski, a corn doctor at broad street. mr. scheftels had urged the doctor to buy ely central when it was selling at cents before the rise. later, when the advance was well under way, above the $ point, the doctor bought some stock through the scheftels corporation. when the price hit $ he was urged to take profits. he refused to do so. when the attack began and the price broke badly the doctor saw a big loss ahead. he called at the scheftels' office and begged for the return of the money he had lost in his ely central speculation. the investigation was heralded among the brokers and caused much market pressure on the stocks fathered by the scheftels company. we were not dismayed. to strengthen our position and to give added token of our good faith we increased our development operations at the mines. our expenses in that quarter were swelled to the limit of working capacity on our underground explorations, as i realized that our salvation might depend on making good in quick order with ely central from a mining standpoint. we knew the ore was there and that it was up to us to get it before our enemies got us. a government raid is rumored out of a blue sky late in the month of june came news to the scheftels office that a newspaper reporter on the new york _american_ had stated that he had seen a memorandum in the city editor's assignment-book to watch out for a scheftels raid by the united states government. the information was reliable and it gave us a shock. yet the thought that the powers of a great government like the united states could be used to crush us without giving us a hearing seemed unbelievable. to be on the safe side mr. scheftels, accompanied by an attorney of high standing, visited washington. they went direct to the department of justice, where attorney-general wickersham's private secretary, after a friendly conversation, referred them to the chief clerk. he reported, after a search of twenty-five minutes' duration, that there was no charge against b. h. scheftels & company. he even volunteered the information that he did not know that such a firm was in existence. it afterward developed that at the very time mr. scheftels and the attorney were at the department of justice a special rubber-shoe investigation was on under the dual direction of a young washington lawyer on attorney-general wickersham's personal staff, and a special agent of the department of justice. the latter had been given extraordinary powers as a special agent of the department of justice, ostensibly to "clean out wall street." satisfied they were in the wrong place, mr. scheftels and the counsellor departed from the attorney-general's office for the post-office department. they were referred to chief inspector sharp. the lawyer requested that the scheftels corporation be given a hearing before any action was taken on any complaints that might reach the department. mr. sharp agreed to this on condition that the attorney would agree for the scheftels company that an inspection of the books of the corporation would be permitted on demand at any time. there was a ready assent. a memorandum to this effect was left with inspector sharp. mr. scheftels left the department with positive assurance that no snap judgment would be taken. edmund r. dodge of nevada, personal counsel of b. h. scheftels & company, then addressed a letter to u.s. senator newlands with the request that he take the matter up direct with the postmaster-general. senator newlands, under date of july , wrote mr. dodge that he had addressed a letter to the postmaster-general with the request that notice be given to mr. dodge in case any complaint or information was lodged against the scheftels corporation. a few days later senator newlands sent mr. dodge a letter from theodore ingalls, acting chief inspector of the post-office department, in which mr. ingalls said it was the practice of the department in case of alleged use of the mails for fraudulent purposes to give individuals against whom complaint has been made full opportunity to be heard either through person or counsel, should adverse action be contemplated as a result of the investigation of such allegation. feeling that our house had been securely safeguarded against surprise parties, i at this junction took a trip to nevada, where urgent business matters required my attention. while i was in the west telegrams were sent me that the premier mail-order mining-stock bucket-shop firm on broad street was flooding the mail and burdening the telegraph wires with urgent appeals to stockholders of rawhide coalition, one of our specialties, to sell out their holdings, as a severe break in the price of the shares was impending. forewarned of this attack, i telegraphed instructions from reno to meet the onslaught with a notice in the _mining financial news_ addressed to investors, telling them to be on their guard. my trip to the west made a pocketful of money for investors by my purchase of the control in the jumbo extension company on a monthly payment plan. the price of the stock tripled in the market. my re-entrance into the goldfield camp was especially distasteful to the nixon-wingfield interests. before i left goldfield i was actually warned that the vengeance wreaked on the sullivan trust company would be visited on the scheftels company for daring to reinvade the goldfield district. late in august the scheftels company endured what was probably the most severe strain it had been put to since its incorporation. we had been making heroic efforts to rally the price of our specialties on the new york curb market. we were meeting with unusual resistance from professional sources. at the period of which i narrate, ely central had registered a low quotation of - / cents and we had successfully strengthened it to around $ . all the way up we met with heavy sales. one day deliveries crowded in so fast that three cashiers working in the "cage" were unable to keep up with the transactions. the business of the corporation had been heavy in the general list as well as in the house specialties. there was more than sufficient money on hand to finance all the transactions that day, but not, however, unless deposits were made in bank as rapidly as our own deliveries were made and collected for by our messengers. about o'clock in the afternoon a report reached the curb that the bank checks of b. h. scheftels & company were not being promptly certified. as this rumor gained currency the excitement on the curb increased. the curb concluded that we were at last "busted." motley throngs began to assemble in front of the offices. the fierce yells of brokers could be heard bidding for and offering scheftels checks below their face value. a throng of the riffraff of the street swarmed in front of the building. one or two individuals, implacable enemies who had repeatedly led the market onslaught against the scheftels stocks, offered scheftels checks for small sums at as low as cents on the dollar. these were licked up by our friends who had been assured that we were financially all right and that some mistake must have been made at the bank. investigation showed that dilatory message service was responsible for the bank's delay in certifying. our deposits did not reach the bank as promptly as they should have. as a special favor to us that afternoon, while the tumult in front of our doors was greatest, the bank continued to certify checks until : o'clock, extending the closing time minutes. then they reported that a comfortable cash balance was still on hand. the next morning the newspapers started a jamboree. first-page, last-column, double-leaded, scare-head stories greeted every new yorker for breakfast, telling him about the panic among curb brokers to sell the scheftels checks the afternoon before. needless to say it was the kind of notoriety that was likely to do greatest injury to the house of scheftels. if anything half as bad had been printed about the strongest bank in new york, that bank would have been forced to close its doors before the day was half over. nor did i for a moment underrate the danger of our position. between two suns i managed to assemble $ , in addition to our cash reserves, with promises of as much more as was needed. we easily held the fort. at the end of the day's business i created a diversion by appearing in the scheftels board-room, flourishing a handful of $ , bills before the newspaper men. the scribes found the scheftels corporation meeting all demands, and, at the end of the session, with a small bale of undeposited money in its possession. the strain, however, was great. confidence was again impaired. many accounts were withdrawn by customers. we were compelled to ease our load by selling accumulated stocks at a loss. the price of ely central and other scheftels promotions dropped. the decline was assisted by general weakness in other curb stocks. peculiarly enough, at the time when the market for ely central shares was lowest, during the latter part of september, fourteen months after the scheftels company had taken hold of the proposition, mine reports were most favorable. underground development work and churn drilling had set at rest for all time the question of whether or not mineralized porphyry underlies the rhyolite cap or flow extending eastward through ely central ground from the steam-shovel pit of the nevada consolidated. upward of $ , had been paid out for administration, mine equipment and for miners' wages to make this demonstration. the scheftels company was now informed that the nevada consolidated was actually meditating a trespass on the juniper claim of the ely central company, in order to secure an outlet from the lower levels of its giant steam-shovel pit. warning in writing had already been served on the nevada consolidated officials against such a course. on september th attorneys of the ely central copper company secured from a nevada court an order restraining the nevada consolidated from proceeding with this trespass and citing it to show cause why it should not cease to trespass on other ely central ground. the attorney telegraphed to new york that a bond was required before the injunction could be made operative. on september th and th telegrams were exchanged between the ely central offices in new york and the nevada attorneys of the company at reno as to providing sureties for the bond. the sureties never qualified. a catastrophe befell us and brought to an earthquake finish the house of b. h. scheftels & company and all its ambitious plans. the constant turmoil in which the house of scheftels had found itself, from the day the _engineering & mining journal's_ attack appeared, had made it impossible for the scheftels company to hold the markets for ely central and rawhide coalition. impairment of credit, money stringency and a general declining market were partly responsible. but there was another important factor. because of the time-limit of its options, the scheftels company was forced, from time to time, to throw stock on the market at prices which showed an actual loss. it had one market winner which showed customers and the corporation itself a large profit, namely, jumbo extension. i held an option on approximately , shares of this stock at an average price of cents, which i had turned over to the corporation. the market advanced to . following the tactics employed in ely central at the outset of that deal, the scheftels corporation had urged all its customers to buy jumbo extension at the very moment when i was negotiating for the option in goldfield, with the result that purchases were made in the open market by readers of our market literature at from cents up, with accompanying profit-making. as the price soared, a short interest of , shares of jumbo extension had developed among brokers in san francisco and new york, and it was very apparent from the demands of stock for borrowing purposes that it would be impossible for the short interests to cover excepting upon our terms. the scheftels company was making ready for a "squeeze" of the shorts such as had not been administered before in the history of the curb. at the very moment of victory, however, when we were making ready to execute a magnificent market coup in jumbo extension in the markets of san francisco and new york, we were plunged without warning to complete ruin. the raid on b. h. scheftels & co. the destruction of the scheftels structure was consummated on the th day of september, . i was standing on the front stoop of the scheftels offices, watching the markets for the scheftels specialties. a broker with san francisco connections made me a bid of cents for , shares of jumbo extension. i promptly refused. at that very moment my attention was called to the violent slamming of a door behind me. turning to a scheftels employee who was standing by my side, i learned that a number of strangers had filed into the customers' room without attracting any particular attention. i tried to get in. the door was locked. undoubtedly something serious was transpiring. i walked a full block through the hallway to the new street entrance of the building where the offices of the _mining financial news_ adjoined those of the scheftels corporation. i tried the door there with similar result. it was locked against me. that settled it. i concluded that the ax had fallen. the shock of realization that our offices were being raided by the government did not for a moment throw me off my balance or put fear in my heart, nor did the sense of the outrage affect me at the moment. there was but one sickening thought--the ruin of the edifice i and my associates had labored day and night for so many months to build and the fate of our customers who had invested their money in the companies we had promoted. in three seconds i was on my way to the place where i thought succor could be found--the offices of the scheftels attorneys. i walked across the street to the new street entrance of a building that extends from broadway to new street, ambled across to the broadway side, jumped on a surface car, rode three blocks to broadway and cedar street, jumped into an elevator, and in a few minutes entered the offices of house, grossman & vorhaus. "go over to the scheftels offices," i said, "and be quick! i think we are being raided." in a moment two members of the law firm were on their way. within ten minutes after the raiders had entered the offices the lawyers were on the spot. they were denied admittance and had to content themselves with waiting outside the door until the prisoners were taken out. the moment the lawyers left their offices i began to use the 'phones to provide for the release on bail of the men arrested. i found it necessary to go in person and so i left the lawyers' offices and walked down broadway. my attention was attracted by the clanging of the bell of the police-patrol wagon. as it wheeled past me on the run i could see my associates huddled together in the black maria on their way to the bastile. for the moment, i lost full sense of the gravity of what was transpiring and was overcome by a feeling of joy that i had been spared that ignominy. that self-felicitating slant of an intensely serious situation passed. my associates were in trouble and it was up to me to help them. i was at large and i knew that i could do more for my friends and myself by not immediately surrendering. i returned to the lawyer's office, where i remained. all this time the thought never entered my mind that we were in any sense guilty of any intent to defraud anybody, or that we had committed any offense against law or the rules of fair conduct. the one consuming and controlling idea in my mind was that somebody had put one over on us and that it was up to me to organize for defense against the abominable outrage. what transpired behind the closed doors while the scheftels lawyers were attempting to gain an entrance for the instruction of the corporation, its officers and employees as to their rights, beggars description. gentle reader, you would not conceive the reality to be possible. armed with a warrant which conferred upon him the right to arrest, seize, search and confiscate, the special agent of the department of justice had secured from the local police headquarters a detail of fifteen heavily armed plain-clothes men. once inside the scheftels establishment, the doors were locked and egress barred. the main body of invaders then took possession of the front offices, while others searched through the back rooms and boisterously commanded everybody to remain where they were until given permission to depart. the establishment was under seizure, every foot of it, and every person found within its doors was held prisoner. the special agent took pains to impress upon everybody within hearing that he was in supreme command. leaving police guards in the front room, he stalked into the telegraph-cage where two or three operators were sitting at tables. pressing the muzzle of a revolver into the face of chief operator walter campbell--a quiet and inoffensive man--the special agent commanded: "cut off that connection!" mr. campbell didn't at first see the gun because it was pointed at his blind eye. when he got his first peep he concluded that a maniac had invaded his sanctum and he almost expired with apoplexy on the spot. returning to the front office, the agent entered the cashier's cage and took possession of the company's pouch containing its securities. he gave no receipt to any responsible employee of the scheftels company for anything. when mr. stone, one of the cashiers, suggested to him that he was there to safeguard the securities, he thundered, "come out of there!" "what authority have you for this?" demanded mr. stone. the agent thereupon showed his badge. a moment later one of the deputies pried open the cash-drawer. the special agent was at his elbow. "oh, look what's here!" cried the deputy. thereupon the agent of the department of justice impounded the contents of the cash-drawer, without counting the cash, checks, money-orders, etc., or giving any member of our firm a receipt for them. turning to the scheftels officers and employees who had been placed under arrest, he ordered them removed from the room. it was about as raw a performance as was ever witnessed in a peaceful brokerage firm's banking-room. bookkeepers were ordered to close up books. united states mail in the office was impounded, including mail that had been received in the office for delivery to others. the scheftels employees were commanded to stand in their places with arms folded. the desperadoes among them--those for whom a warrant had been issued and who had been jerked out and huddled together in the outer room--were then searched for deadly weapons. one penknife and the stub of a lead-pencil were found on their persons. the deadly knife was hardly sharp enough to serve the purpose of nail-manicuring. not one of the men under arrest would have known how to use a revolver if it had been placed in his hands. the men taken into custody were: mr. scheftels, aged , quiet and inoffensive, rounding out an honorable business career without a blemish of any kind on his character or standing; charles f. belser, one of the cashiers of the corporation and a d degree mason, who never before in his life had been so much as charged with the violation of the spirit of a minor ordinance; charles b. stone, aged , another cashier whose sons and sons-in-law had served their country in the army and who, himself, was as peaceful as a class leader in a sunday-school; john delaney, clarence mccormick, william t. seagraves and george sullivan, clerks of the establishment, who were as likely to offer resistance that would require gun-play to combat as were a quartette of psalm-singing children. mr. scheftels protested in a dignified and self-respecting way against the brutal demonstration. he asked to see the authority for the raid. this was refused until after he and the other desperate characters were collected in another room. his demand to see the officers' warrant was met by a vulgar exclamation from the special agent, to the effect that, "if you don't shut up, we will put the irons on you! if you are looking for any trouble, you ---- ---- stiff, you will get what you are looking for!" the absurdity of the armed invasion appealed to everybody but the ringleader of the raiders. it was a ludicrous situation from a service viewpoint. there had been no time up to the moment of the raid when a single man armed with proper authority could not have accomplished with decency and in good order everything and more than was done by the "rough house" and brutal invasion of the armed band. private papers were grabbed and bundles of certificates of stock, packages of money, checks, receipts and everything that came in sight were carried away. no complete record was made at the time of the raid of the documents and other valuables seized. the temporary receiver for b. h. scheftels & company, before his discharge later on, was able to gather together and take an accounting of part of the seized assets of the corporation, but i have no doubt that many thousands of dollars worth of securities and money were hopelessly lost. when the wreck was complete the prisoners were driven like malefactors out of the front entrance, down the steps and loaded into the black maria. five thousand people witnessed the act. the prisoners pleaded in vain to be allowed to pay for taxicabs to convey them before the united states commissioner. they urged that as yet they had had no hearing and were innocent in the eyes of the law, and until convicted of some offense they were entitled to decent treatment. this request was refused. the delay in the start to the federal building was just long enough to give the dense crowd that had filled the block time to insult the victims of the atrocity to the fullest extent. friends of the arrested men boiled over with indignation and several fights occurred. men were knocked down, trampled upon and the clothing torn from their backs in the desperate mêlée. the scene was disgraceful. an army of newspaper reporters, attended by a camera brigade, were on the spot and snapshotted the prisoners as they entered the black maria. with bells clanging and whips lashing, a start was made up broad street to wall. then the vehicle turned up broadway and ding-donged on to the federal building. there the men were arraigned. bail aggregating $ , was demanded. later several of the men taken into custody in this brutal manner were not even indicted. called upon to identify the prisoners, the special agent of the department of justice was unable to point out any of them except mr. scheftels. a stenographer in the employ of the corporation was forced to single them out. the warrant proved to have been sworn to by the special agent and had been granted on his affidavit that the corporation had committed crimes against some few of its customers. two of them have already been mentioned in this article as slack and szymanski, whose statements had been furnished to the attorneys of the _engineer & mining journal_. from the court house to the tombs, the scheftels desperadoes, in shackles, were escorted up broadway. later in the day when bail was ready and the prisoners were sent for, they were handcuffed again and marched in parade up streets and down avenues of the densest section of new york city. i had worked all afternoon in the lawyers' offices with one object in view, namely, the securing of bail for the imprisoned men. i succeeded. i now got busy with my own bail, the court having fixed it in advance at $ , . in the morning i walked from my lawyers' offices to the post-office building and surrendered myself, being immediately released on surety which was waiting in the office of the united states commissioner. as i left the building i recognized scores of scheftels customers. several grasped my hand. my indignation grew as the circumstances came up under review and i had time to connect and collate the facts. gradually the whole truth revealed itself. i can relate only part of it. the full, detailed story would extend itself into a volume, and the space here at my command is limited. i learned that from the moment the special agent had been put on the scent with permission to put us out of business he had never slackened his effort to turn the trick. his efforts attracted the attention of sundry newspaper editors with wall street affiliations and also enemies generally who hastened to coöperate with him. his office as a special agent of the department of justice gave to his statements weight which would not have been given to them had he as an individual sponsored the charges. his official position imparted exaggerated importance to his statements in the eyes of newspaper men, and, after the raid, to the public. a person whom we shall characterize as the tool now appears on the scene with alleged information which he placed at the service of the special agent to back him up before the assistant united states attorneys in new york with testimony since recanted over the signature of the false witness. in the preceding chapter i called attention to some of the atrociously false statements that were published on the day following the raid. i gave only an inkling. the newspapers declared that ely central had cost the scheftels company cents per share, that the capital stock was over-issued, and that the property was worthless. jumbo extension, which has since distributed $ , in dividends to its stockholders, has still a treasury reserve of $ , and is selling to-day in the markets at a share valuation of about one-quarter of a million dollars for the property, was also described as a "fake stock." rawhide coalition, which has produced upward of $ , in bullion, and which is to-day recognized as one of the substantial gold mines of the far west, was labeled plain junk. bovard, which represented an investment of nearly $ , for property account and mine development and which had been promoted at cents per share on representations that it was a "prospect," was stated to be a raw steal. the scheftels corporation was said to have got away with millions of dollars by selling "fake mining stocks." it was also stated that i had profited to the extent of millions for my personal account. the scheftels mailing-list was described as a regulation "sucker list," notwithstanding the fact that the principal names that were on it were stockholders in guggenheim companies. the ringleaders were pictured as myself--"a man with an awful past"--and the "notorious character," "red letter" sullivan. mr. sullivan was styled as the facile letter-writer who had addressed the "suckers" and hypnotized them, principally widows and orphans, to withdraw their money from the savings-banks and send it to the scheftels sharks. "red letter" sullivan was also referred to as a man with a "past." the true facts regarding mr. sullivan's connection with the scheftels company were these: a few months before, he had applied for a position. he was then employed as manager of a boston stock-brokerage office. he was awarded the job of time-clerk in the stenographers' department. his job, while employed with the scheftels company, was to see that the stenographers reported on time, did their work properly and were not paid for any services they did not render. he had little or nothing whatever to do with the correspondence department. he never dictated any answers to letters received by the scheftels company. never was he employed in an executive capacity by the scheftels company. we knew little or nothing of the "red letter" title with which he had been decorated. the first we learned of it was in the newspapers after the raid. investigation revealed that ten years before, while a broker in chicago, he had issued a weekly market letter which was printed on red paper. i have thus far not given space to one of the greatest wrongs connected with this disgraceful proceeding--the wrong and damage inflicted upon a multitude of helpless stockholders. while the special agent of the department of justice and his armed followers were wrecking the scheftels offices and terrorizing the place, the scheftels group of mining stocks was being savagely raided on the curb and enormous losses were inflicted on the public. thousands of margin accounts were wiped out in less time than it takes to tell of the massacre. declines in ely central, jumbo extension, rawhide coalition and bovard consolidated exceeded $ , , . this loss was distributed among approximately fourteen thousand shareholders of record and as many more not of record. this large army of innocent shareholders was helpless. from such species of confiscation the law affords no relief or recourse, except actual acquittal of the arrested persons, in whom lies the confiding investor's only chance for the market rehabilitation of his securities. a tool's confession the signed confession of the tool of the special agent, who appeared before assistant attorneys dorr and smith at the united states attorney's office in new york, which says he gave false testimony, and the voluntary statement of john j. roach, a stock broker who was employed by the now defunct firm of frederick simmonds, regarding the relations between the special agent and that firm, while special agent of the government, reveal the weak foundations of the government's charges. the tool, prior to the raid, had been in the scheftels employ. for a few months he had been a traveling business-getter for the firm. then he was discharged. he associated himself with frederick simmonds, a member of the consolidated stock exchange. mr. simmonds was badly in debt. the tool had no money. the agent, when he was trying to get the united states attorney's office in new york to agree that the information collected was sufficient to warrant a raid, prevailed upon the tool to appear before the assistant attorneys and give testimony. in this story the chief value of the tool himself is that he has no value. he made his statements against us to mr. dorr, assistant u.s. district attorney. then he gave me a statement, signed in the presence of witnesses, recanting the statements made to mr. dorr. to this he later added a written postscript enforcing his recantation. then he re-recanted and said that a large part of his first recantation, signed by him and initialed by him on each page with his initials was false. the reader is left to judge just which one of the tool's three positions is the one in which he tells the truth. it is obvious that he must be lying in the two others, and it is not impossible that he may be lying in all three--except that some of the stuff in his first recantation, which he later denies in his second, has been verified from other sources. here is the main point to bear in mind concerning the tool,--the sovereign power of seizure, search and confiscation brought into play by our great government without due process of law, was based in part on the flimsy testimony of such a person. thousands of investors suffered from the blow, as well as myself and associates. it would appear from the roach statement that he was largely instrumental in bringing about the crisis that resulted in the suspension of the simmonds firm and in the disclosures of the special agent's relations therewith. these facts have become, in most instances, matters of public record. they came out during the hearings before the receiver for the bankrupt concern. it was found that the liabilities of the "busted" firm were $ , and the assets shares of cheap mining stock and between $ , and $ , in cash. it was at this conjunction that the special agent was allowed to resign from the department of justice. the tool he had foolishly used had proved to be a two-edged one. the agent had been "hoist by his own petard." the guggenheims probably the most surprised branch of the government at the time of the scheftels raid was the post-office department. the crime charged was misuse of the mails. why, if the scheftels aggregation were guilty, didn't the post-office department do the raiding? why didn't it issue a fraud order? the scheftels company has since been declared solvent by the courts and the temporary receiver discharged. to this day no fraud order has been issued. only a short period before the raid, a presentation on the part of the post-office department of all of the evidence in the case had been met with a decision that there was no ground for action. that the guggenheim interests did not fail to take advantage of the plight of the house of scheftels immediately after the raid finds conclusive proof in the transpirations in the ely mining camp. soon after the special agent descended on the scheftels offices, an application in ely was made for a receiver to take charge of the assets of the ely central copper company. the attorneys making the application were chandler & quale, attorneys for the nevada consolidated copper company, a guggenheim enterprise. when the court appointed a receiver he named this firm as attorneys for the receiver. attorney j. m. lockhart for the ely central made a protest that these lawyers, because of their connection with the nevada consolidated were not the proper persons to protect the interests of the now defenseless ely central stockholders. then the court appointed another attorney, named boreman. shortly after the receiver was appointed, he applied to the courts for permission to sell to the nevada consolidated for $ , , which represented the entire cash indebtedness so far as the receiver knew, the surface rights to a large acreage of ely central and the rights through juniper canyon. this, if accomplished, would have given to the nevada consolidated a railroad right of way that would have solved the problem confronting it of the transportation of the ores from the lower levels of the steam-shovel pit. without such an outlet these ores could not have been handled without great expense and much difficulty. the benefits that would have accrued to nevada consolidated were almost incalculable. at the same time, such action would effectually cut the ely central property into two parts. according to the petition it was stipulated that in selling the surface rights the ely central should cede to the nevada consolidated practical ownership, because it was specified that ely central could not interfere in its mining operations with any rights granted. attorney lockhart of ely central fought the receiver and his attorneys and won a victory. the ely central property was saved intact for the stock-holders. later, an application was made to the court to sell the entire property of the ely central for $ , . this was believed to be in the interests of the nevada consolidated. in answer, a petition was filed to discharge the receiver on the ground that the court originally appointing him had no jurisdiction. the court finally decided that it was without jurisdiction, because neither fraud nor incompetency had been proved, and the property had not been abandoned. the receiver was discharged. what has been the attitude of the department of justice since the raid was made? since the raid the government has spent several hundred thousand dollars to disclose sufficient evidence from the books to make a case of any kind. one stand after another has been taken only to be abandoned after exhaustive research for evidence to sustain the original excessive pretenses. grand jury after grand jury has thrashed over masses of evidence presented them. armies of accountants have worked day and night for weeks and months in an effort to substantiate the action of the authorities who were led into the commission of a grave wrong. the charge that the scheftels corporation sold fake mining stocks has fallen to the ground. government examinations of the properties have revealed them to be all that they were cracked up to be. careful and industrious reading of the mass of market literature sent through the mails by the scheftels corporation has failed to disclose deliberate misrepresentation regarding the potentialities of any of the mining properties. the scheftels corporation transacted considerable margin business with its customers in the stocks which it sponsored--ely central, jumbo extension, rawhide coalition and bovard consolidated. if the scheftels corporation was run by rascals wouldn't they have been tempted frequently to throw their weight on top of the market and endeavor to break the price of stocks to wipe out the margin traders? did the government find any evidence of this in the books? no. it found evidence--overwhelming and cumulative--that on nearly all occasions the scheftels corporation actually exhausted its every resource to support the market in its stocks and hold up the price in the interests of stockholders. evidence was also found in quantity that the scheftels company discouraged the practice of margin-trading. the superseding indictment handed down by the grand jury late in august, , eleven months after the raid, eliminated the charge of mine misrepresentation regarding the scheftels promotions and reduced it practically to one of charging commissions and interest without earning them. not less than per cent. of the total brokerage transactions of the scheftels corporation were in their own stocks, and at nearly all times in the scheftels history it had on hand, put up on loans or in banks under option, anywhere from three million to seven million shares of these securities. it actually bought, sold and _delivered_ in this period over fifteen million shares of stock! as already stated, the scheftels corporation made it a practice to sell stocks on the general list as an insurance against declines in the market which might carry down the price of its own securities, and this, in the finality, was what the government, after the expense of hundreds of thousands of dollars and the employment of the wisest of counsel, was compelled to tie to in order to justify in the eyes of the great american public the use of the rare power of seizure, search and arrest and of its denial of a prayer for a hearing to the victims which was made before the arbitrary power was used. chapter xii the lesson of it all what is the lesson of my experience--the big broad lesson for the american citizen? this is it: don't speculate in wall street. you haven't got a chance. the cards are stacked by the "big fellows" and you can win only when they allow you to. the information that is permitted to reach you as to market probabilities through the financial columns of the daily newspapers is, as a rule, poisoned at its fountain. it has for its major purpose your financial undoing. few financial writers dare to tell the whole truth--even on the rare occasions when they are able to learn it. most of them are, indeed, subsidized to suppress the truth and to accelerate public opinion in the channels that mean money in the pockets of the securities sellers. as for the literature of stock brokers it is generally even more misleading. few brokers ever dare to tell the whole truth for fear of embittering the interests and being hounded into bankruptcy and worse. as for myself, what excuse have i had for catering to the gambling instinct? this is it: i thought the promoter and the public could both win. i now know that this happens only rarely. as the game is now generally played by the big fellows, the public hasn't got a chance. i have not got a dollar. who profited? the answer is: if anybody, the aggregate. the world has been the gainer. it is richer for the gold, the silver, the copper, and other indestructible metals that have been brought to the surface, as a result of this endeavor, and added to the wealth of the nation. but for the gambling instinct and the promoter who caters to it, the treasure-stores of nature might remain undisturbed and fallow and the world's development forces lie limp and impotent. the end transcriber's note: text enclosed by underscores is in italics (_italics_). history of savings banks. a history of banks for savings in great britain and ireland, including a full account of the origin and progress of mr. gladstone's financial measures for post office banks, government annuities, and government life insurance. by william lewins, author of "her majesty's mails." london: sampson low, son, and marston, milton house, ludgate hill, e.c. [all rights reserved] london: printed by r. clay, son, and taylor, bread street hill. to the right honourable william ewart gladstone, m.p. _chancellor of the exchequer_, &c. &c. &c. the greatest living authority on all matters of finance, whose name is now intimately and deservedly connected with all that relates to the subject of these pages, this work is by permission most respectfully dedicated. preface. the present volume is offered as a contribution to the history of a number of provident schemes, which, though quietly working in the country for many years, and affecting to no small extent the social condition of great masses of the people, can scarcely be said to have found an annalist. i think i may fairly consider that the ground covered by this work has not previously been occupied. in saying so much, i do not forget the only book which has hitherto emanated from the british press on savings banks. mr. scratchley's _practical treatise on savings banks_ deals, however, with the question technically, and is meant avowedly as a text-book for actuaries and those employed about savings banks. the present volume, on the contrary, while it may be supposed to possess some interest even for this limited circle, is not meant to take the place of the above, but seeks its public amongst general readers, and amongst those who, either from inclination in that direction, or through connexion with them as employers, take an interest in the progress of the industrial classes of our country. treating as this volume does of useful practical schemes and matter-of-fact topics, i have sought to avoid all matters of speculation, to speak in very plain terms and without waste of words, and, whilst noticing in their proper order all the different proposals having to do with the subject, to refrain from venturing upon any myself. my aim has been to give a full and accurate account of the early history of savings banks; and as subsequently to their origin the discussions in parliament with regard to them and kindred subjects were no incorrect reflex of the feeling in the country at different periods, i have also dealt fully with the parliamentary history of these institutions. in this way savings bank reformers, both in and out of parliament, and their measures of reform--many of them ending in the establishment of different kinds of supplementary banks--are made to pass under review; and the names of those who framed the original schemes, as well as of those who tried to improve upon them, are rescued, for a brief space at any rate, from a state of obscurity, if not of oblivion. with respect to the latest modification of the savings bank principle, as exhibited in the measures brought about within the past few years by mr. gladstone, great efforts have been made--as great efforts have been needed--to treat all the questions involved fully and impartially, and to accord these important and far-reaching measures their due place amongst the other wonderful provident schemes of the present century. great pains have also been taken to ensure perfect accuracy, both as to facts and figures, and my acknowledgments are due to many gentlemen who are acquainted with the subject in all its bearings, who sent me information, or answered my inquiries, with great readiness and cordiality. it is less necessary to mention any of these gentlemen in this place, inasmuch as reference is frequently made to their assistance at the proper place in the body of this work; but it would be wrong to omit to state that, with regard to mr. gladstone's recent measures, i have had every facility granted me by the post office authorities for obtaining the necessary and the most recent information respecting these schemes, and that this assistance has been rendered in a manner which calls for my heartiest thanks, as the only sufficient or fitting acknowledgment. dealing as i have done with what mr. carlyle will allow to be one of the "side sources" of history, i venture to hope that some of the facts now gathered together may not be without their interest to the student of human progress in some of its highest aspects; while to all those who are directly concerned in such schemes, and to masters of workmen, to whom the concluding parts especially are more particularly addressed, this volume is offered, with some confidence that they will find much new and original matter in it, and some old matter put in a new light. an appendix is added, giving the acts, or clear abstracts of acts, at present in force for all the different descriptions of banks for savings, together with some of the latest statistical information which may be thought of value. w. l. _london, may , ._ *.* two questions connected more or less with my subject have been brought into prominence by the action of parliament since the present work was completed, and to these questions it may not unreasonably be expected that i should in some way refer. the first, or the savings bank qualification in the new reform bill, concerns savings banks and savings bank depositors very intimately; the second question, or the proposal of mr. gladstone to employ a portion of the money of savings banks in reducing the national debt, can scarcely be said to have an immediate bearing upon either. with regard to the savings bank qualification, i may, perhaps, be permitted to say that, though received with hostility in some quarters and indifference in others, the balance appears to me to be in favour of the proposal. in most respects, if not in all, the qualification may be defended on the same grounds as the forty shilling freeholds; the investment is about the same; the one is open to much the same objections as the other, and there are similar merits in each. votes may be manufactured under the one equally as under the other, and it is not easy to understand why those who support the one "bye franchise" should oppose the other. little trouble will accrue to savings banks under the act; and the money forming the qualification may oftentimes be allowed to remain in the bank, whereas under other circumstances it might be squandered in unnecessary or unprofitable expenditure. the distinction may be hard on others quite as worthy of the franchise, but who may be in some way unfortunately circumstanced; and it may seem arbitrary to those who have an equal amount invested in some other shape: but these are the sort of arguments which may be brought against fancy franchises of any kind with quite as much reason as against this particular one. working men who may claim the franchise on the savings bank qualification will not be able to keep the fact secret that they are depositors, and that up to a certain amount; and they must submit, on misfortune overtaking them, to be deprived of a privilege which they may have learnt to prize: but, notwithstanding all these and some other minor considerations, i cannot help regarding the clause as, on the whole, a fair and reasonable acknowledgment of the merits and claims of many of the best portions of the community, who were not influenced by the consideration of this electoral qualification when they originally commenced the practice of provident habits, and also of the claims of others who may not be unduly influenced by the prospect of citizenship which the clause may henceforth hold out to them. mr. gladstone's recent proposal to convert the , , _l._ of consols, invested by the nation in savings banks, into terminable annuities concerns the nation itself much more than savings banks. so far, indeed, as the matter affects the trustees of savings banks, or depositors in them, it was settled some years ago when the money was made a book debt, and the government became the banker, as it were, for the sum in question. what the government now does with the money is no concern of savings banks. this is put so plainly by mr. gladstone in his budget speech, and is at the same time so indubitable, that to quote his words is to say all that can be said on this point. "they (the trustees) have nothing to do with the money; that is a mere question of investing it with which we are alone concerned. if we lost every farthing of it, we should have to pay it to them; and if we made a profitable investment of it, it would be entirely our own affair." in one respect only is mr. gladstone's proposal specially satisfactory to savings bank officials and all who take an interest in savings banks. under the operations described by the chancellor of the exchequer in his financial statement, and now familiar to every reader, the balance estimated to be deficient, of over three millions sterling--a deficiency which has long been a bugbear in all considerations of the subject--will disappear as a separate item in the national accounts in the process of redemption proposed. the entire scheme shows, especially and prominently, mr. gladstone's anxiety to reduce our enormous burden of debt. he here voluntarily proposes to cripple himself in no small degree in the matter of his resources. should his proposals become law--and it is sincerely to be hoped they will--the process must go on, even when he or his successors may require to raise money at an obvious disadvantage; but if he be satisfied to throw the burden equally on years of prosperity and adversity, surely this is a matter on which the public generally should feel no fear. contents. page chapter i. introductory chapter chapter ii. on the origin of savings banks chapter iii. early legislation of savings banks-- to chapter iv. on the progress of savings banks up to the year chapter v. legislation on savings banks from to the present time chapter vi. a chapter on savings bank frauds chapter vii. on the deficiencies of the existing system, and the establishment of supplementary savings banks chapter viii. on proposals for government savings banks chapter ix. on the development of the post office savings bank system chapter x. on government insurance and government life annuities chapter xi. concluding chapter appendix index history of savings banks. chapter i. introductory chapter. "archimedes was wont to say that he would remove the world out of its place, if he had elsewhere to set his foot, and truly i believe so far that otherwise he could not do it. i am sure that so much is evident in the architecture of fortunes, in the raising of which the best art or endeavour is able to do nothing, _if it have not where to lay the first stone_."--sir henry wotton. the habit of laying something by in a prosperous season for the wants of an adverse one is one of the very oldest customs in the world. all our laws, divine and human, enjoin the exercise of providence and frugality as a social, and as a personal duty. these habits which are inculcated in scripture as positive duties, and which find ample illustrations in many of the arrangements of nature and providence, have been common in one form or other to all people in every country and in every age. in england, in almost everything relating to the social advancement of the industrial population, there has been a great and manifest improvement since the commencement of the present century. in nothing is this more true than in the incentives and appliances provided for the growth of provident habits amongst them. an old stocking, a hole in the floor, or a crevice in the wall, was formerly a sufficient bank for such of the poor as cared to save anything; but were that mode of investment unsatisfactory to some few, it was not possible to obtain better. the change which fifty years have wrought in the means for saving and investing small sums of money is remarkable. not only have these savings assumed in consequence a variety of different forms, but they represent a sum which in the aggregate must be well calculated to astonish anyone who can remember anything of the last century. before dealing, however, with this as our special subject, a few words may not be spent in vain in endeavouring to trace the gradual advancement made among the poorer classes, the causes that have led to the improvement in their condition, and the means by which the difficulties in their position have been encountered. after this it will not be inappropriate to refer to what still remains to be done. "the nineteenth century," as mr. gladstone, in addressing the working men of glasgow, has just said, "whatever else it is, is undoubtedly in a new and peculiar sense the century of the working man." "it is the century which has seen his position raised, his circumstances improved, new means organised for his benefit, new prospects opened for the future, and he has before him--i mean not the individual but the class--a prospect which, i trust, nothing can mar--of increased weight, increased consideration, increased usefulness, increased happiness in the generations to come." the chancellor of the exchequer might with justice have said that the second quarter of the present century has seen this great improvement inaugurated and carried on. beginning with , and letting the period of the removal of political and fiscal burdens mark the commencement of the better order of things, the progress of political economy, of social knowledge, and the favouring circumstances of the times achieved the rest. in the first quarter of the century the working population, left pretty much to themselves, or given over to the tender mercies of political demagogues, were either stolidly indifferent to any improvement, or were kept in a constant turmoil of excitement and confusion. the reform bill bringing political power to the better class of artisans, gave a decided stimulus to the intelligence of the people, and an impulse to the then existing means of education. this political power brought its responsibilities, and it may be fairly assumed that increased political knowledge was the result. whether so much will be granted or no, it is certain that schools and educational establishments now began to multiply in a manner unknown to any previous decade. it was now that there came demands for knowledge, and that the demand brought forth supplies of the most practical kind. the story of the popular literary ventures of --the very first of their kind--need not be repeated here, though a volume might well be written on the subject, and showing the influence which they, and other ventures to which they gave rise, have had on the intellectual progress of the people. on the demand for knowledge there followed in quick succession the removal of many barriers that stood in the way; and more important still, the remissions of, to the poor man, enormous fiscal burdens which pressed with great weight upon his energies.[ ] it would scarcely be too much to say that every year for the last thirty years the working man has found himself better able to cope with the disadvantages of his position, and, if he should so choose, to place himself to a very great extent beyond the reach of absolute want. we have alluded to the necessity which began to be felt for the mental improvement of the adult population; still more important were the steps taken from time to time to educate the children who are the old people and the adults of the present day. the present century, among many wonderful changes which it has witnessed, has seen a complete revolution in the means of education for the masses. many generations since, milton, with that clear mental vision which was in him like a kind of second sight, foretold that a time would come when the bulk of the people would get a better education "in extent and comprehension far more large, and yet of time far shorter, and of attainment far more certain, than hath yet been in practice;" and although we may not have exactly reached the point prefigured by the poet-seer, some marvellous strides have been taken during the present century. a dramatist of milton's own period makes a man of substance reply, in answer to the query, "can you read and write then?" "as most of you gentlemen do, my bond has been taken with my mark at it."[ ] at the beginning of the present century little had been done for the education of the masses. grammar schools for the children of the middle classes, and free schools, as they were called, for an infinitesimal fraction of the poor of our towns had been long established, and, so far as they went, with certain enough results; but, if we except the establishment of sunday schools by mr. raikes of gloucester in , nothing had been done for the educational wants of the general poor. malthus in his "essay on population," published twenty years after this date, says, "it is surely a great national disgrace that the education of the lower classes should be left merely to a few sunday schools supported by subscriptions from individuals," adding at the same time, that the country "lavished immense sums on the poor which we have every reason to think have constantly tended to aggravate their misery." "in their education," he goes on to say, "and _in the circulation of those important political truths that most nearly concern them_, which are perhaps the only means in our power of really raising their condition, and of making them happier men and more peaceable subjects, we have been miserably deficient." what the state neglected, private enterprise took up; earnest men like raikes and pounds, the working shoemaker, not only set an admirable example in their own spheres of labour, but roused to action other men who applied to the work greater powers of mind and the benefits of greater system. dr. bell and mr. lancaster were two of these, who nearly at the same time expounded their views of a general scheme for educating the people; and who were strengthened in their opinion, as one of them tells us, of its necessity, by the clamour of many who held that the stability of our institutions was only sure so long as the people were kept in ignorance. mr. whitbread, a statesman whose name was very prominent about this time for efforts to promote the interests of the bulk of the people, tried to induce parliament at this stage to take the subject into its consideration, by proposing a plan for the establishment of parochial schools "for the exaltation of the character of the labourer," and it would have been well if he had met with more success. as it was, the sage legislators of the day, led on by mr. windham, considered that such a plan would be very liable to give an education to these classes much above their condition, and mr. whitbread's scheme, like many other of his wise proposals to which we shall have subsequently to allude, was set aside. the work, however, had begun and could not be stopped by the attitude of the government. dr. bell commenced his system by the establishment of national schools; mr. lancaster, supported by nonconformists principally, set up lancasterian schools. although there was for some time much hostility displayed between the rival factions, both organizations struck deep into the dense masses of ignorance in our towns and villages. then came government assistance, and gradually that system of government education and supervision which, in spite of many objections to it, has been an untold blessing to the land. within the last thirty years the wise legislation of the government has had a direct influence on the progress of the people in education, and in their social well-being. no more powerful aid, for example, was given towards the triumph of enlightenment than the passing, in , of the penny postage measure, when thousands of the poorer classes became emulous of each other in learning the rudiments of education, so as to be enabled to possess themselves of the untold advantages of this wonderfully successful scheme. mr. laing, the celebrated traveller, after visiting the continent, declared that the system of penny postage was far more likely to cause the spread of education among the masses than the prussian system of education, if it came to be adopted in this country. only second to the repeal of the taxes on correspondence was that of the reduction of the newspaper stamp duty, and, still more recently, the abolition of the paper duty. the relinquishment of these taxes redounds to the honour of those who took part in the agitation for their abolition, and who held that no artificial impediment, such as a paltry consideration of revenue, ought to stand between the people and the free circulation of thought. lord brougham said on one occasion that, "if newspapers, instead of being sold for sixpence, could be sold for a penny, there would immediately follow the greatest possible improvement in the tone and temper of the political information of the people." lord campbell once expressed a hope that newspapers would be sold for a halfpenny. much of this has been realized, and the result has been powerful for good. on this point no one can speak with anything like the authority of mr. gladstone. speaking of the repeal of the paper duty, this eloquent statesman has said within the present year, "i did to the best of my ability fight a hard battle for its repeal. and i find now that not only in its repeal was there involved the liberation of a great branch of trade, but there was involved a seed of social and moral good that has sprung up with rapidity, producing a harvest such as, i confess, i had hardly been sanguine enough to anticipate."[ ] the cheap press now finds its way into the homes of the poorest, keeps them informed of the current public events, and makes them interested and anxious in all that concerns their country and its institutions; and, inasmuch as the press of the present day is, under proper conduct, well qualified to enlarge the minds of those whom it must instruct, it is a "seed of social and moral good" from which a constantly-increasing harvest of good fruit may be obtained. in view of such facts it cannot be said that, during the last quarter of a century, the industrial classes have been entirely thrown on their own resources for the means of their enjoyment and improvement. over and above the tendency of the legislation of the past thirty years, the upper classes have felt it their duty, as it is unquestionably their interest, to attend to the wants and requirements of those at the bottom of the social scale. they are the safest when the vast mass of our working population are the happiest. dr. chalmers must have felt this when he wrote, "i would like to see a king upon the throne, not like an unsupported may-pole among a level population, but a king surrounded by a noble aristocracy and gradations below them, shelving downwards to the lowest basis of the people." society has been very often and very truly likened to a pyramid, at the apex of which is the throne; gradually descending, we have substantial strata of the ruling, the upper, and the middle classes, the rough and strong material at the base not inappropriately said to represent the unpolished millions of our industrial population. how far it may be considered true that the foundations of english society are laid in this great class, and how much of the social superstructure they bear on their broad shoulders, we will not attempt to decide. we will content ourselves with saying that the well or ill-being of every man forming this great social pyramid must have a direct or reflex influence on every other man. _homo sum, humani nihil a me alienum._ of the hundreds of charitable and benevolent agencies set on foot to improve the condition of the english artisan we can only speak in the aggregate. we have the clearest evidence of our senses, that many of them have not been established in vain. some of them, indeed, have been born and carried on under serious misapprehensions, fatal to their existence, and so have perished without doing half the good which the expenditure of money and time would have warranted. but this is the exception and not the rule. under the influence of properly organised and properly conducted societies of this nature, which have been quietly working for years, there is a sensible improvement in public morals among the masses of the people. within the memory of the present generation lewdness, profanity, and vulgarity polluted the atmosphere of most large workshops, and the effect of all this on the minds of the younger portions of the workers must have been utterly demoralizing. then their hours of idleness were hours of mischief; in them the old proverb of "an idle brain" being "the devil's workshop" was fully exemplified; bull-baiting, cock-fighting, low drinking, and gambling were their amusements; sunday nor weekday did their children frequent any school, nor they themselves any place of worship; they made no provision for want, sickness, or death, and in times of enforced idleness they were a terror and reproach to the country, only kept in order by the strong arm of the law. to say that all this is changed would be idle, but that much of it is changed is beyond doubt. even humble society now quickly lays its ban upon those who would think "to rule the roast" by proficiency in vulgarity and profanity; in our large workshops we are assured that acquirements of this nature get less and less appreciation, nor do their exhibition often escape rebuke. under better and happier influences, many of the rules and social regulations among large congregations of workmen, such as fines and footings, which have always offered great encouragement to idleness and intemperance, have either been done away with or altered for good;[ ] masters not only see it to be their interest to encourage their men where they can in habits of sobriety and prudence, but they are now often enabled to enforce regulations tending to this end which before they were almost powerless to effect.[ ] the good results of such habits to the industrial classes themselves and to all portions of society are neither few nor doubtful. the pursuit of economy and thrift will beget, as a matter of course, self-dependence; and as soon as men become socially independent they also become self-relying and self-supplying. "few men come to the parish who have ever saved money," said one large employer of labour before a committee of the house of commons on poor laws. another never knew a man who had saved a pound out of his earnings who had in the end become a pauper. but the good work does not stop here. "in proportion as our men save money," said another large employer, "their morals are improved; then they come to see that they have a stake in the country, and behave better." or, as vegetius, describing the roman soldier, puts it, "knowing that his property is deposited with the standards in the public chest, he never thinks of desertion, becomes attached to his standards, and in battle fights more bravely for them; according to the nature of man, who has always his heart where his treasure is." arrived at this stage of the upward journey, the provident man feels the need of education, and must have it; he must also take a part in exerting an influence among his fellows, and even in the government of the country, and if his reading takes a rigid-turn, higher principles of duty are superadded; he will do his work, whatever it is, in every sense better. "i would rather have," said another well-known gentleman, to the committee just referred to, "a hundred men in my employ who save money than two hundred who spend every shilling they get; the sober, saving man is always to be depended upon, and the one lot in the long run will almost do as much work as the other." the improvement of which we have been speaking must not blind us, however, to the darker side of the picture. notwithstanding the improvement which has been made, and the inestimable good which flows from the practice and pursuit of frugality and economy, it is still the exception and not the rule among the bulk of our labouring population. for the hundreds who look to the exigencies of their life, there are thousands who are utterly careless of such considerations, and who, in the coarse enjoyment of the present, bury alike all thought of the past and all expectation of and hope for the future. the stigma of improvidence has long attached, and we fear must yet long attach, itself to the generality of english artisans. but for this stigma there would be no operatives in the world equal to the english operative either in wealth, intelligence, or influence. no one with any experience in the case, and with any care as to accuracy, would venture to say that the english workman, _sui generis_, is not industrious at his work,[ ] but too many can say that he is not provident in his home.[ ] the english artisan has been said to be at once the hardest worker and the hardest spender in the world. he works like a horse and spends like an ass. so foolishly, indeed, is much of this hard-earned money spent, or misspent, that it were a charity to withhold it, or if it could be done, to throw it into the sea. the consequences attending this riot of expenditure is as natural and as inevitable as any of the laws of god's government. as one who knows them well, and one who has done much for the intellectual culture of the better portion of the artisan class tells us: "in a time of prosperity they feast; in a time of adversity they _clem_." any depression of trade, be it even of the most transient nature, finds them totally unprepared for it; those who have been accustomed to the best wages invariably suffer the most; for, accustomed to the greatest amount of indulgences, they can do worst without it. it is such classes as these that must be reached by some means. in the improvement brought about in the social habits of the people of late years we have a happy augury of the future.[ ] it is time that we brought these introductory remarks to a close. we have to enter upon the consideration of helps and accessories to the spread of prudential habits among the working classes. we have to direct attention to the history and working of some of those schemes which, since the commencement of the present century, have been started to teach men self-reliance and self-dependence, and how they might best help themselves. anxious not to over-estimate the importance of the subject, we still think it not too much to say that on our industrial classes depends very much the continued and onward progress of the world. let them but be thoughtful and sober, and these classes, which are the direct agents in our wondrous and manifold british industry, will, not only under circumstances of huge toil and no inconsiderable danger, continue to provide all classes with the necessaries or comforts of life, but they will yet strike out new paths; they will become, in the future, as they have been in the past, the skilful inventors of new instruments and new modes. no fact is more capable of proof than that almost all the successful inventions that have been given to the world to economize the strength of the human hand have been either the productions of thoughtful and industrious workmen, or of those who have risen from that class. "deduct all," says mr. helps, "that men of the humbler classes have done for england in the way of inventions only, and see where she would have been but for them." nor is this all. the list would be a long one of those who have risen by their own industry and perseverance from the lowest ranks to fill the highest positions in every department of life. "it is notorious," says mr. smiles, "that many of our most successful employers, and some of our largest capitalists, have sprung directly from the working classes, and to use the ordinary phrase, have been 'the architects of their own fortunes;' whilst many more have risen from a rank scarcely a degree above them. it was the prudent thrift and careful accumulations of working-men that laid the foundations of the vast capital of the middle class; and it is this capital, combined with the skilled and energetic industry of all ranks, which renders england, in the quantity and quality of her work, superior to any other nation in the world."[ ] and what the humbler classes have done for england in past times they may do, and indeed _must_ do in the future, if we would keep our country in the proud position she now occupies in the world. it requires no prophetic vision to foresee that labour must yet undergo many transformations; and it is of paramount importance that the labourers themselves be not only intelligent but sober and frugal, in order that they may always compete on at least equal terms with the skilled workmen of any other nation. it is far more difficult to point out what course of action will tend most successfully to secure the fair results of sobriety and frugality than it is to show how necessary it is that these virtues should be cultivated. "the difficulty of doing good," as one writer expresses it, "is at least equal to its luxury." the task we have undertaken is far from easy, and beset with perils, but we will endeavour to avoid all occasion of dispute. the pointing out of safe and profitable investments for the hard-earned savings of the frugal and industrious need not and should not be regarded as an invidious task. it seems to us that, as savings banks have to do primarily with the foundation of the habit of saving money, and indeed scarcely ever can be considered as competing with any of the numerous schemes for the investing of money, the subject should never be regarded with any jealous feeling. the principle upon which these institutions are founded "interferes," to use the words of one who has written most ably on such subjects, "with no individual action, saps no individual self-reliance." "it prolongs childhood by no proffered leading-string; it valitudinarises energy by no hedges or walls of defence, no fetters of well-meant paternal restriction. it encourages virtue and forethought by no artificial excitements, but simply by providing that they shall not be debarred from full fructification, nor defrauded of their natural reward. it does not attempt to foster the infant habit of saving by the unnatural addition of a penny to every penny laid by; it contents itself with endeavouring to secure to the poor and inexperienced that safe investment and that reasonable return for their small economies which is their just and scanty due."[ ] strengthened by such testimony, we will proceed at once to sketch the history, and, as far as we are able, to show the benefits to be derived from the various kinds of banks for savings established from time to time amongst us. [ ] the following table taken from the _statistical returns_, presented by the board of trade, shows in a clear light how much of the position of the working classes must have been improved by the removal of fiscal burdens. almost all the impositions of taxation between and have fallen upon the wealthier classes:-- +------------------------+------------+-----------+-------------+ | |repealed or | |diminution or| | | reduced. | imposed. | addition. | +------------------------+------------+-----------+-------------+ | | £ | £ | £ | |customs | , , | , , |d. , , | | | | | | |excise | , , | , , |a. , | | | | | | |property and income tax | , , | , , |d. , , | | | | | | |other taxes | , , | , |d. , , | | | | | | |stamps (including | , , | , , |a. , | | succession duty) | | | | +------------------------+------------+-----------+-------------+ | total |£ , , | , , |d. , , | +------------------------+------------+-----------+-------------+ [ ] in , according to the report of the registrar general for that year, out of the persons married in that year, one man out of three, and one woman in two, signed the register with marks. what was being done for the children of that year may be gathered from the return for , where it is shown that only eighteen in of those marrying in that year were unable to write their names. [ ] speech at newton-le-willows, july , . [ ] by way of giving an example of our meaning, we would adduce the case of the workmen employed in the large brass works of messrs. guest and chrimes, rotherham. when one of their number, for instance, gets married, instead of the accustomed hard-drinking, the men and their wives drink tea together, and a piece of furniture of substantial value is presented to the newly-married pair, paid for out of the subscriptions by the men. on one of these occasions it is related, that the head of the firm was asked to present articles which had been bought for two newly-married couples, and mr. guest complied and introduced the business as follows: "the custom you have adopted deserves the warmest commendation and support, and is well worthy of superseding those footings, fines, treats, &c., which, until recently, had become a source of the most cruel, heartless, and unjust robbery to which workmen could possibly be exposed by each other. thank god that wicked system is fast passing away." [ ] in - a large and well-known engineering firm in leeds had a serious struggle with their workmen on account of the masters having determined to pay the men according to their merit and the character of the work turned out. a determined strike was the result, which, though the original difference was only with eight men, threw eventually more than out of employment. fresh hands were obtained with the usual difficulty, and these were subjected to great annoyance and even danger; in eighteen months, however, the works were again all going and were efficiently manned. the masters henceforth made it a condition of employment under them that no member of a trades' union should be engaged, and the sequel was a better behaved and superior class of men. not only so, but the masters are now enabled to make their own regulations for the benefit of those employed under them, which before, owing to the interference of the trades society, they could not make. they have instituted a sick and funeral fund to which the men contribute by working _ten minutes additional time when necessary_, an arrangement which we recommend to other large employers of labour and large bodies of workmen. that the masters should be acquitted of any selfish motive, they allow the funds to be managed and applied by a committee of workmen appointed by themselves from their own number. [ ] "no labourer," says mr. smiles in his _workman's earnings, &c._, "is better worthy of his hire than the english one. it is not merely that he works harder than the labourer of any other country, but he generally produces a better quality of workmanship. he possesses a power of throwing himself bodily into his occupation, which has always been a marvel to foreigners;" and he then recurs to the well-known example of the surprise created among the french peasantry when gangs of english navvies proceeded with the works of the rouen railway, and worked amidst constant exclamations, of "voilà! voilà ces anglais! somme ils travaillent!" [ ] we put the matter quite mildly here, though it is customarily and very properly spoken of much more severely. for example, mr. norris, one of the government inspectors of schools, in speaking of the well-paid miners and iron workers of staffordshire--who doubtless are little worse than the same classes throughout the country--says in one of his able reports: "improvidence is too tame a word for it--it is recklessness; here young and old, married and single, are uniformly and almost avowedly self-indulgent spendthrifts. one sees this reckless character marring and vitiating the nobler traits of their nature. their gallantry in the face of danger is akin to foolhardiness; their power of intense labour is seldom exerted except to compensate for time lost in idleness and revelry; their readiness to make "gatherings" for their sick and married comrades seems only to obviate the necessity of previous savings," &c. [ ] much of what we have said in the foregoing pages is admirably summed up in a sentence or two in an article on "savings banks," which we would not be far wrong in attributing to dr. wynter, and which we had not seen before these pages were written: "contemporaneously with the growth of savings banks, we have seen a growth of civilization among the poorer classes. thrift has not effected _all_ that amelioration of morals which contrasts so happily the mid years of the century with its younger ones; but it has been no mean confluent to the tide of progress, the softening of manners, the spread of education, the humanising of popular sports and pastimes, the wakening up of the natural dignity and self-reliance of the people,--the broad and indispensable basis of every other virtue."--_london review._ [ ] _quarterly review_, . [ ] mr. w. r. greg in the _edinburgh review_, , p. . chapter ii. on the origin of savings banks. "it would be difficult, we fear, to convince either the people or their rulers that the spread of savings banks is of far more importance, and far more likely to increase the happiness and even the greatness of the nation, than the most brilliant success of its arms, or the most stupendous improvements of its trade or its agriculture. and yet we are persuaded that it is so."--_edinburgh review_, . great britain can with justice, we think, lay claim to the original establishment of the system of savings banks. one well-known writer[ ] on this and cognate subjects has traced them to switzerland, if not to hamburg, at a time prior to any experiments with them in this country; but from the best investigation we have been able to make, the institutions in question were something very different from savings banks as english people understand them, dealing, as they did, in business more like the sale of deferred annuities. the institution at hamburg, which is said to have been founded in the year ,--and which is interesting to readers of history as being one of those whose coffers the first napoleon swept of their funds, thus giving it its death blow,--simply took the spare cash of domestic servants and handicraftsmen, and granted annuities on the members arriving at a certain age. no withdrawal of money was allowed. in this country the first proposals for a bank for savings were made in or , according to the judgment of the reader as to which of the two original schemes best deserves the name of savings bank, or whether either of them is entitled to the honour. the two persons whose names it is customary to speak of in connexion with the earliest people's banks are those of the well-known priscilla wakefield, and the rev. joseph smith of wendover. in the mind of each of these estimable persons we think the question of becoming the bankers for the poor around them was at first only a subordinate measure, and quite auxiliary to other matters deemed of greater importance. mrs. wakefield's scheme arose out of a well-meant anxiety to better the condition of the weaker and more defenceless portions of the community, an object to which she devoted much of her literary ability, and was first started in , for the benefit of women and children in her own village of tottenham, and under her immediate superintendence. members paying according to their age certain sums per month became entitled to a pension after sixty years of age; in case of sickness, four shillings a week; in case of extraordinary misfortune a certain amount could be withdrawn; in case of death a sum of money was allowed for the funeral. honorary members paid subscriptions, which went to meet deficiencies and current expenses. in there was added, first, a fund from which loans were made to those who had been members for six months; and second, a regular bank for savings. the interest given in the latter case was the same as that charged in the former, or five per cent. the clauses relating to children were such as almost to entitle the founders to the honour of being the originators of penny banks, if nothing else; juveniles were encouraged to deposit their penny per month, which was kept for them, along with interest, until such a time as the accumulation was needed for apprentice fee, clothes, or such like object. the management of this parent institution, as it may well be called, was equitably divided amongst the honorary and the "benefited" members. in the tottenham bank was more regularly organized, and mr. eardley wilmot, m.p. and mr. spurling, were appointed trustees.[ ] the wendover institution, which was really started a year before that at tottenham, partook at first so largely of the nature of a charity as to make it almost of the character of a private undertaking between a rich and benevolent rector and his poor parishioners. still, there was here the germ of that of which we are in search. mr. smith, and two of his richer parishioners, who joined him in the work, circulated proposals in the summer of to receive any surplus money which any of the working population round them felt they could spare--provided it were not less in amount than twopence; to keep a strict account of every deposit made in this way; and then to repay the money during the winter season, or generally about christmas, with the addition of one third of the whole, which would be allowed as interest on their deposits--or to speak, perhaps, more correctly, as a bounty for their economy. any depositor might receive his money before christmas on demand; and it was further stipulated that, in case of sickness or loss of employment, these fruits of his savings should not preclude him from parish relief, if otherwise he could obtain it. a christmas dinner was the comfortable addition to the good round sum which, generally, was garnered at this time, the dinner, too, being provided by the three directors. it is rather curious that the time chosen to receive deposits was limited to sunday evenings; but we suppose this would be justified by the scriptural text, not generally applied in this fashion, which they chose for their motto, "upon the first day of the week, let every one of you lay by him in store, as god hath prospered him." for several years these benevolent gentlemen carried on their operations, and had generally about sixty subscribers, who deposited from five to ten pounds every season. in february, , mr. whitbread introduced his poor laws amendment bill into the house of commons, and went over the whole ground of the condition and the wants and requirements of the working population in an eloquent manner. that speech--which must have been of several hours' duration--dealt with the past legislation on the subject, and commented on the various steps which ought to be taken, over and above the mere collection of poor-rates, to alleviate the condition of the poor. after dwelling on the subject of national education, and hinting at a mode such as was eventually brought into operation many years afterwards, mr. whitbread went on to describe the want felt by the poor of some safe and profitable investment for their earnings; "that so few are found to make any saving may in a great degree be accounted for by the difficulty of putting out the little they can raise at a time." he described the action of friendly societies, and showed that at that early period they were open to the same objections that are now being continually raised against them. "mr. malthus,"[ ] said mr. whitbread, "had just proposed the establishment of county banks, but he would go farther than mr. malthus, and extend his principle." it seemed to him that there would be less trouble in his proposals than in the less extensive proposals of mr. malthus. mr. whitbread then went into the matter of his proposals under this head, and we give his own words:[ ] "i beg gentlemen not to start at what i am about to suggest, which to many who hear me may be quite new, but to afford it their cool and deliberate consideration. i would propose the establishment of one great national institution, in the nature of a bank, for the use and advantage of the labouring classes alone; that it should be placed in the metropolis, and be under the control and management of proper persons; that every man who shall be certified by one justice of the peace to subsist on the wages of his own labour shall be at liberty to remit to the accountant of the poor's fund (as i would designate it) any sum from _s._ upwards, but not exceeding _l._ in any one year, and not more than _l._ in the whole." he then proceeded to show how the money might be invested in government stock, in the name of commissioners to be appointed, and by this means interest would be allowed to depositors at the highest rate possible. "the plan," added mr. whitbread, "will be more amply detailed in the bill itself, and such regulations are provided as will, _with the intervention of the post-office_, give ample facilities to its execution. gentlemen need not to be told that the perfection attained in the management of that great machine is such as to give the most easy and rapid means of communication with the metropolis, much greater, indeed, than usually subsists between the remote parts of any county and its capital town." mr. whitbread then went on to say, that in addition to this form of investment, the same machinery might be employed to give those who might wish it an opportunity of purchasing annuities by the payment of stated regular sums up to a certain age; and even to insure their lives. so strong, indeed, was this feeling, that he eventually proposed, as an addition to his bill, that under the same management there should be an insurance-office for the poor, with properly-calculated tables and modes of payment. we need not here dwell upon the miscellaneous items which he fully went into in his admirable speech. he finally begged the patient attention of the house and the country to the consideration of the general outline of the plan which he had proposed, in order to encourage the labourer to acquire property, and to secure to them the certain and profitable possession of it when acquired. he had the greatest hope of a happy effect from its being put in practice. "if the poor," said he, "should be found to avail themselves of it to any extent, the advantage to them and the country would be incalculable, and the expense attending it would speedily be covered." this bill went through several necessary stages; there was little objection manifested to mr. whitbread's plans for securing the savings of the poor, but there was also little anxiety to forward the measure. mr. whitbread in this, as in many others of his wise proposals, was far ahead of his time, and he suffered the matter to drop towards the end of the session.[ ] one at least of the important organs of public opinion frowned upon mr. whitbread, and laughed at his scheme; an organ whose frown and whose laugh was no joke at that date. it has not unfrequently been a subject of remark how persistently the _quarterly review_ stood in the way of progress, clogging the wheels of all kinds of reform. in matters of this kind, however, it generally showed a most enlightened policy, and was not unfrequently in the van of improvement instead of obstruction. it was not so always with its more powerful rival, the _edinburgh review_. it commented upon mr. whitbread's "strange project" of uniting the savings banks throughout the kingdom in one national establishment, and his minor proposals under that head, and very warmly ridiculed all. "neither from theory nor from experience," it concludes an article, "are we able to discover any kind or degree of good as likely to result from so vast a project; though it is easy to see that it might be productive of infinite confusion, trouble, and expense. in fact, every savings bank is perfectly competent in itself to transact the whole of its affairs, and can have no great difficulty to provide the requisite facilities or securities without either disturbing its neighbours, or withdrawing the attention of government or the legislature _from their proper concerns_." before we come to the plans and exertions of mr., afterwards dr. henry duncan, of ruthwell, we ought to speak of the original foundation of the savings bank at bath. the idea of establishing a bank for taking the wages of industrious domestic servants only, and granting them interest for their money, originated with lady isabella douglas in . the managers consisted of four ladies and four gentlemen. no servant could deposit more than _l._, and the entire amount of the funds in the bank could never exceed , _l._ a servant might deposit up to _l._, withdraw the money and place it in safety, and deposit again in the servants' bank. interest was allowed at four per cent., and the money could be withdrawn at will. this scheme, so far as it proceeded, was very successful; so much so, that an endeavour was made in to convert it into a general savings bank, which should know no limit, either in the amount of the deposits or in the class of people from whom the deposits could be taken. for this purpose a committee, "highly respectable for their rank, ability, and benevolence," met frequently at bath; but only to find, "after much deliberation," that these conditions "were utterly impracticable."[ ] in , the provident institution of bath was projected, on very different conditions; and this time, through the exertions of dr. haygarth and the marquis of lansdowne, who was president, the bank was successfully floated. this bank was essentially the first of its kind in this country, and upon its basis have been formed almost all subsequent banks of any note. the sums deposited were invested in the public funds, and each man's interest at this early period varied according to the price of the funds on the day when the investment was made for him. in november, , the provident institution of southampton was established, principally through the exertions of the right hon. george rose, who was appointed president, and who soon afterwards wrote an account of the undertaking.[ ] the exertions of mr. rose on behalf of savings banks will frequently require to be spoken of in subsequent pages. the southampton bank was an improvement on the bath institution, having copied several of the details of the bank at edinburgh. the average rate of interest given was four per cent. notice had to be given for withdrawing deposits. one regulation, new at that period, which was a suggestion of mr. rose, empowered the officiating clergyman or other responsible person, in adjacent parishes, to receive sums "on account of the institution," and remit them to the treasurer at southampton. it was stipulated, however--and this had an ill effect upon the public, though the proviso was by no means unreasonable in itself--that the institution should not be answerable for the money until it absolutely reached the office. we will here refer to two other original english savings banks, quite equal in importance to those of bath or southampton. the exeter savings bank, since better known as the exeter and devon bank, was established in , principally through the exertions of sir john acland, one of the county members. the rules of this bank limited the amount which could be deposited to _l._ in the first and second years, and _l._ in any succeeding year. the distinguishing feature about the exeter bank was the application, attended with much greater success, of the southampton plan of rural or branch banks. in , there were sixty of these branch banks, all contributing sums to the parent bank through village clergymen, who acted as the agents. the plan only entailed a trifling expense for printing, postage, &c., and even these expenses were paid out of a fund raised by voluntary contributions. at the date of the first enactment relating to savings banks, this bank had depositors, who had paid in , _l._ in , deposits. the interest given was at the rate of four per cent. within the two years of which we have spoken, only _l._, or about a fifteenth-part of the deposits, were paid as withdrawals. the original hertford savings bank was a charitable concern, after the fashion of mr. smith's at wendover. "the sunday bank," as it was called, was established about the year , by the vicar of the place, the rev. thomas lloyd. sums of from sixpence to two shillings were received by the benevolent pastor from his poorer parishioners after morning service on sundays, and in this way about _l._ a year was invested between and . the money did not accumulate from year to year, but was repaid on new year's day, with the addition of _ten_ per cent. interest, which the vicar was able to give by the help of some charitable funds at his disposal. we must now, without referring to other early banks, such as the important institution in st. martin's place, london, and other societies, turn to dr. duncan, whose exertions on behalf of savings banks were much greater than those of any other person, and which exertions, more than any original suggestions which he may have made with regard to them, entitle him to the foremost place in any history of savings banks. dr. duncan's claim to be considered the founder of savings banks rests on the ground of his having originated and organized the first self-sustaining bank, and in having succeeded in so arranging his scheme as to make it applicable not to one locality only, but to the country generally.[ ] it remains to be seen whether the bank established by dr. duncan in his own village answers the description here given of the distinctive character attaching to the banks of his proposing. it is very true that all the banks established up to partook very much of the character of eleemosynary institutions, supported in great part by the benevolence of the rich, and therefore very unsuitable to some localities, where the benevolent rich did not preponderate. dr. duncan's great merit--merit for which he has received neither enough credit nor praise, but which should entitle him to a high place in the ranks of those who have sought to do their fellow-men good service--seems to us to lie in having deeply studied the nature and wants of the industrial classes; in having modified existing proposals in order to make them suitable to the general requirements; and, finally, in having laboured with unremitting energy to make his plans known around him, and to secure their general adoption. a writer in the _quarterly review_ of october, , incidentally referring to dr. duncan and his proposals for parish banks, says, "it is our belief, founded on no slight investigation, that but for this scotch clergyman, there would at this time have been found only a few insulated establishments for the savings of industry, of which the intelligent and wealthy would have had little knowledge, and from which the lower classes in general would have derived no advantage." henry duncan, who was the son of a dumfriesshire clergyman, was born at lochrutton manse, in that county, in the year . at the age of twenty-five he too was ordained a clergyman, and appointed to the charge of the parish of ruthwell, a remote locality in the same county. when very young, it is said, he showed remarkable powers of mind; and it appears he early exercised them in writing for the young, with whom he was an especial favourite. before he was thirty he had made great progress in geology, and a book he published on the subject when he was about that age gained him the friendship of dr. buckland and mr. sedgwick. perhaps, however, he showed most zeal during all the periods of his life in the prosecution of schemes for the benefit of the poor and distressed around him; and his manse in this way, lonely as it was, and far from the busy haunts of men, soon became a place of resort to much of the young and remarkable talent to be found in that part of scotland. david brewster, and james grahame, the sabbath bard, dr. chalmers, and dr. andrew johnson, were frequent visitors beneath his roof; robert owen, then an amiable enthusiast in the walks of philanthropy; thomas carlyle, a young man who had not then emerged to fame; robert mccheyne, and many others who subsequently rose to eminence, were friends of the village pastor, and frequently met to talk over with him different schemes of practical benevolence. "few, indeed," says his biographer, "whose lot has been cast in a retired spot like that of ruthwell, have been more fortunate in attaching the affection and good-will of so many of the best class of their fellow men," and the boast is neither an idle nor a vain one. mr. duncan must have been no ordinary man to have brought round him such a circle of friends. his literary abilities were of no mean order, but gave a charm to all he wrote. delighting in humble usefulness, he edited, in and , a number of tracts for the instruction and moral improvement of "the lower orders," to use the vulgar term then in constant use. the greater part of the work seems to have been the production of his own pen. one series of these tracts, called "the cottage fireside; or, the parish schoolmaster," was afterwards published separately with duncan's name attached, and had a very large sale at the time. "in point of genuine humour and pathos," says a high authority of that period,[ ] "we are inclined to think it fairly merits a place by the side of 'the cottagers of glenburnie;' while the knowledge it displays of scottish manners and character is more correct and more profound." whether the plans which he laid for the benefit of the poor, and which occupied so much of his after life, came up at any of the _réunions_ at his house, we have no means of knowing. however it was, we have mr. duncan's own statements to show that they were originated in his mind by the frequent discussion at that time of the question of poor-rates, and the endeavours on the part of many of his friends to prevent their introduction into scotland. it is also clear, that though mr. whitbread's name is never mentioned, the parish minister had heard of his scheme, and had been much struck with it. the result of mr. duncan's reflections on the subject were given in the _dumfries courier_, with which paper he seems to have had some literary connexion. a discussion ensued in the columns of this paper, in the course of which some books and pamphlets on cognate subjects were forwarded to mr. duncan by mr. erskine, afterwards earl of mar. among the pamphlets he found a very curious and ingenious paper by john bone, the originator of a charitable institution in london, the plan of which was there sketched. the society was called by the whimsical title of "tranquillity, or an institution for encouraging and enabling industrious and prudent individuals to provide for themselves, and thus effecting the gradual abolition of the poor's rate." this pamphlet, which we have carefully examined, contains, among much matter of a visionary and impractical kind, many proposals for the safe keeping of the savings of the poor similar to those acted upon in the case of the charitable bank at tottenham. these subordinate provisions attracted the notice of mr. duncan, as he himself admits, and he thought that if he could in any way reduce them to a regular scheme, the result would be beneficial to the working classes, wherever they might be adopted. he resolved to form some such scheme and give it a fair trial in his own parish, when, if successful, he would endeavour to get it introduced elsewhere. with this object he published a paper, as a sequel to the discussion he had commenced in its pages, in the _dumfries courier_, in which paper he directly proposed to the gentlemen of the county the establishment of a bank for savings in all the different parishes of the district. "the only way," said mr. duncan in making these proposals, "it appears to me, by which the higher ranks can give aid to the lower in their temporal concerns, without running the risk of aiding them to their ruin, is by affording every possible encouragement to industry and virtue; by inducing them to provide for their _own_ support and comfort; by cherishing in them that spirit of independence which is the parent of so many virtues; and by judiciously rewarding extraordinary efforts of economy, and extraordinary instances of good conduct. friendly societies, excellent as they are in their way, do not in every respect appear to be calculated for this intended effect; advantages are held out which cannot always be realized, but in simple parish banks there can be no objection of this sort." mr. duncan met with little response to his appeals from the gentlemen of the neighbourhood, but he resolved to make the attempt single-handed. the fact that an institution of the kind contemplated could possibly be carried out by a single individual, however benevolently disposed, is evidence enough of that person's sagacity and perseverance; but the ordinary difficulties were greatly increased by the circumstances in which this particular parish where mr. duncan was located was placed. few parishes, we are told, presented so many and such unusual obstacles to the progress of a scheme of this kind. almost every adult member of the parish belonged to some friendly society, and many of these found it extremely difficult to fulfil their engagements to the established societies. again, there were few, if any, resident heritors or proprietors of the land to whom mr. duncan could look in any difficulty that might arise, or to whom he could look for any assistance of a pecuniary kind. nevertheless, he resolved to commence. he had arrived at that experience of human kind which made him understand that, in even the poorest family, "there are odds and ends of income which are only too likely to get frittered away in thoughtless extravagance." could he but induce the mass of the people to comprehend the value of the savings which might by a reasonable economy be gathered from this source alone, and could he succeed in supplying the means of investing these savings securely, affording them at the same time the prospect of a fair rate of interest, not from charity, but from the resources of trade, he was confident the hopes he cherished would be realized.[ ] the scheme was started in may, , and savings to the amount of _l._ were deposited under the stipulated conditions during the first year. in the two succeeding years they rose to _l._ _l._ and in to _l._ mr. duncan's work was far from completed when even his most sanguine expectations were realized in the progress of the ruthwell bank. his advice and assistance was now continually sought in aid of the formation of similar institutions, both in scotland and england. in , "the edinburgh society for the suppression of beggars" conceived the idea of adding to their already extensive operations a savings bank on some similar principle to his. a neighbour of mr. duncan's, who was also a member of the edinburgh society, communicated a full account of the ruthwell bank, and all the accounts of it which had up to that time been published. the opening of the edinburgh bank, of which we shall presently speak more at length, took place in . in , mr. duncan paid a long promised visit to kelso, in order to forward the proposals for a savings bank at that place. mr. duncan relates[ ] that during his journey to kelso he passed through the town of hawick, and was much gratified to find that his scheme was freely talked of there. in the shop of one of the booksellers of the town he found a large number of copies of an account of the ruthwell bank wet from the press, which had been taken from the pages of the _dumfries courier_ and supplied by himself. these handbills, which likewise gave a copy of the rules of the parish bank, had been printed by order of the magistrates of the county at their ordinary meeting. finding that his scheme had many favourers in hawick, he promised to call on his journey home and assist them in the formation of a bank. on his arrival at kelso an important meeting was held, with the duke of roxburgh in the chair, when mr. duncan addressed the meeting; the kelso savings bank, one of the most important of the scotch institutions, being the direct result. the number of letters which mr. duncan received and wrote per day is described as something enormous; they arrived by every post, not only from his own and the sister country, but even from ireland. not only did these letters contain requests for information and advice; but they frequently were of a controversial nature, and generally from such people, ardent friends of the poor, as required consideration and some reply. that duncan was an agreeable and clever correspondent is evident from his published letters; that this correspondence was voluminous we can well believe. with a view of lessening the amount of his labours in this respect, he was induced to publish a full account of his scheme, together with all the rules and regulations for its working; and this pamphlet, which came out in , went through three editions very rapidly. even at this date duncan's "essay on the nature and advantages of parish banks" will well repay perusal, and besides, its intrinsic worth as a literary production is interesting as the first published pamphlet on a subject which will always possess attractions to the philanthropist, if to none else. we have the clearest evidence that mr. duncan laboured with uncommon zeal to spread a knowledge of the plans he proposed, and to help to their general introduction; and it is a matter of wonder to us, that, whilst many names are familiar to the world who did not do a tithe of the real hard work he did to benefit the poor around him, duncan's name should be for all essential purposes really unknown, and that but for the filial regard of his son, scarcely an account of his existence should have survived him.[ ] speaking during his life time, the _quarterly review_ warmly noticed his labours of love: "justice leads us to say that we have seldom heard of a private individual in a retired sphere, with numerous avocations and a narrow income, who has sacrificed so much ease, expense, and time, for an object purely disinterested, as mr. duncan has done." some years before his death, in , mr. duncan attained to the honorary degree of doctor of divinity, and he was for one year chosen moderator of the assembly of the church to which he belonged. the duncan institution at dumfries, one of the few mementos of the man who did so much for savings banks, serves the purposes of a savings bank in the principal town of his native county, a statue of dr. duncan being very appropriately placed in front of it. not long after the establishment of the edinburgh savings bank, there was great contention as to whether that bank or dr. duncan's at ruthwell had the priority of merit on the score of general advantage. pamphlets were written on the subject, not always without bitterness, and even the great _reviews_ interfered. the dispute was scarcely called for at that early period, seeing that posterity is best able to judge of such matters, and there was nothing dependent upon an earlier settlement. the edinburgh bank followed the village bank by three and a half years, so it was not a claim for priority of establishment. the question as to which of the two possessed the materials best fitting it to be a model for all subsequent banks would not be so easily settled; and, in fact, this was the point in dispute. seeing the question was one of considerable importance for many years, and is so still in an archaic point of view, we cannot do better than attempt to give some idea of the difference between them, as gathered from the two accounts now before us.[ ] unquestionably the arrangements of mr. duncan suffer considerably by a comparison of points, and though we admire the character and arduous labours of the man, there is not the slightest need that we should abstain from hostile criticism of his measures. for example, mr. duncan laid great stress on the fact of his bank being the first self-sustaining bank, and the first not partaking to any extent of the nature of a charity. it will be seen how far this was absolutely true. the ruthwell institution consisted of ordinary, extraordinary, and honorary members. the ordinary members were the poor who deposited their savings; the extraordinary, those who paid to an auxiliary fund an "annuity" of _s._, or a single donation of _l._; and honorary members were those who paid to the same fund an "annuity" of _l._, or a single donation of _l._ the general business of the society was transacted by a court of directors, consisting of a governor, five directors, a treasurer, and one or more trustees, to be chosen from the honorary and extraordinary members. the court acted under the superintendence and control of a standing committee, which consisted of fifteen persons chosen from the self-same kind of members. both these bodies were subordinate again to the general meeting, composed of all the members of the two courts mentioned, and all the ordinary members of six months' standing. we scarcely think there could be any possible necessity for such elaborate machinery. in circumstances such as the rural population of ruthwell, were cast, one would have supposed that rules as little stringent as possible, hampered with conditions as few as possible, would be needed, to induce that population to save the trifles they could spare. inducements were held out to encourage and reward the frugal and attentive; and so far admirable: but the system of fines inflicted upon those who did not deposit a certain sum each year was a questionable proviso. mr. duncan put the case very plausibly in his _essay_, where he said the chief defect of the scheme was, originally, the want of some strong motive for regular payments; and, "as what we have no pressing motive to do at a particular time we are apt to delay till it is beyond our power to do it at all," he decided to fix a small sum as penalty, should not a certain moderate amount be deposited each year, a decision which we think was neither proper nor wise. the regulations acted upon in the case of a proposed new member were, we think, equally uncalled for, and likely to scare the well-disposed away, rather than induce them to join. before a person's first deposit could be received, the elaborate machinery of management commenced to make inquiries into the age, the family affairs, and moral conduct of the proposed contributor, and according to the report which followed, it was considered whether his deposits would be admitted at all, or if admitted, what rate of interest it would be proper to allow. the society lodged its money with the british linen company, and got five per cent. interest for it. four per cent. was the usual interest allowed to depositors; to those, however, of three years' standing whose deposits reached _l._, an indulgence of the higher rate of per cent. was made, provided the depositor wanted to get married; in case of his having arrived at the age of fifty-six; to his friends in case of his death; or, fourthly, in case the possession of the money _should appear to the court of directors_, after due inquiry, to be advantageous to the depositor or his family.[ ] to put a climax, as it were, upon this charitable disposition of a man's own hard-earned savings, we would merely recite the fifth statute, which directs that "when the depositor shall have become incapable of maintaining himself, from sickness or otherwise, a weekly allowance may be made to him, _at the option of the court of directors_, out of the money he has deposited." the auxiliary fund, to which the honorary and extraordinary directors were required to contribute, was employed in awarding premiums to those who were most regular with their deposits, especially to those regular depositors who should have exhibited proofs of superior industry or virtue. it may well be thought that, in such delicate matters as were thus dealt with, differences of opinion would arise, so it was wisely provided, that any aggrieved member should have the power of appeal from the court of directors to the standing committee, and from the standing committee to a general meeting, whose decision should be final. "the example set by dr. duncan at ruthwell," says mr. smiles,[ ] "was shortly followed in many other parishes in scotland, and in most of the principal towns in england," and, so far, we have seen this is true. what follows is certainly open to question: "in every instance, the model of the ruthwell bank was followed, and the vital, self-sustaining principle was adopted. the savings banks were not eleemosynary institutions, nor dependent upon anybody's charity or patronage; but their success rested entirely with the depositors." our readers may judge from the details of management which we have given how far this is borne out by the facts of the case; for ourselves, we are slow to take from the merit which undoubtedly should attach to dr. duncan. there were, doubtless, many circumstances connected with the minister's own parish which made the arrangements to which we have referred more excusable; but there must have been many districts where the poor would never suffer themselves to be patronized, petted, or provoked in the same manner. hence the inapplicability of the details to the country generally. real, honest, independent workmen have always had a great dislike to be experimented upon, "raised," or "elevated," in the sense that some men use the terms; what was felt to be required at this early period was, that there should be afforded some facility for the depositing, without any unnecessary trouble or annoyance, such small sums as the poor might have to spare, and wish to save; and that this money should not only be safe, but produce interest according to its value in the market, and neither more nor less. that arrangements made with this laudable object should be accompanied with others which should have the tendency, however remote, to disgust and repel the poor, was unfortunate, to say the least. any interference with, or superintendence over the family affairs or the private conduct of members, was likely to be, it seems to us, most irksome, and no less to the poor than to the rich. the arrangement by which various rates of interest were given to different classes of depositors, according to their good or indifferent characters, was eminently arbitrary, if not unfair. we have already alluded to the edinburgh savings bank, instituted after the parent bank at ruthwell, and to some extent upon its model; the offspring, however, in many points presented a happy contrast to the ruthwell bank, in the simplicity and greater fairness with which its affairs were managed. as it is now a matter beyond doubt that many banks formed subsequently were started on the model of the edinburgh institution, a few words of description of its principal new features may not be out of place. all depositors were paid the same rate of interest; they deposited their savings without any preliminary investigation of any sort; and whilst the management was not left, even in part, to the classes it was designed to benefit, contributors had nothing to do but pay in such sums as suited them, and withdraw at pleasure, altogether as the classes above them would deal in the ordinary bank. from the pamphlet published in the same year as that of dr. duncan's, and to which we have already alluded, we are enabled to give some account of the plan of working in the edinburgh bank; and it is very interesting at this distant period to see how nearly identical with the modern savings bank this early one was, or rather, we think we ought to say, how closely the example of the edinburgh bank has been followed. the bank, we find, was open every monday morning between nine and ten o'clock. no less sum than one shilling could be received. the uniform interest paid was at the rate of four per cent.[ ] the money might be paid back at any time on a mere demand and production by the depositor of his _deposit sheet_. each depositor was furnished, on making his deposit, with a duplicate of the _leaf of the ledger_ in which his account was kept; on each succeeding visit he brought the duplicate with him, and each separate transaction was entered in the ledger and on the duplicate at the same time. this arrangement, as might have been expected, soon gave place to the more convenient bank-book at present in use. it will be observed that up to this time, and some years subsequently, the savings banks had no connexion with government, and the funds realized were accordingly deposited with some banking company, and, as a rule, the interest received was at a higher rate than has since obtained. one feature in the edinburgh bank, as in other scotch banks of the period, is unknown at present. when the deposits of any one person amounted to ten pounds (the minimum sum received by an ordinary bank), he was presented with an interest-note upon any banking firm he chose to name for the amount. henceforth he held an account with the bank in question, receiving a higher rate of interest, and a strengthened security for his money. the savings bank, however,--and this is noteworthy,--was still open to him as a bank for his small accumulations as before, and until they again amounted to the sum of ten pounds. the edinburgh bank, thus restricted to such small sums and simple operations, was able to get through its work with little trouble and a minimum of expense. perhaps here the endeavour to save expense proceeded to too great an extent, and resulted in more gratuitous service than the depositing classes at any time have cared to see. no honest man would object to have the legitimate expenses of a careful management deducted from the interest of his savings. in recommending the system to others, the penurious style in which it was thought not improper to do the business is manifest in the language adopted. "it can scarcely be doubted," says the author of the pamphlet, "that in every parish and district there will be found persons benevolent enough to perform the office of attending to this work, viz. one hour per week, gratuitously, by turns; and it will be easy to procure a room rent free. thus the only expense of management will be the purchase of stationery; and for this purpose the saving already described (a small difference between the interest paid and the interest given) will be amply sufficient, without lowering the rate of interest allowed to the contributors. it may be supposed, indeed, that some expense may be incurred for transmitting to the great house (the banking company chosen) the money deposited in the savings bank." "but we are persuaded," adds this man of cheap expedients, "that in every case a safe and free conveyance will be furnished by the principal proprietors or inhabitants of the parish." the growth of savings banks, and the progress of banking generally, soon left out of view all such minor considerations as these. such was the excellent institution at edinburgh, and it deserved all the success it obtained. at first it was thought that its connexion with the society for the suppression of beggars retarded its progress; and it was not at all wonderful that this was the case. perseverance, and the laborious exertions of its originators, especially the efforts and high character of mr. (afterwards sir william) forbes, soon made up what the bank may have lost by this connexion, and in five years from its formation was in every respect a decided success. without ostentation, and without trenching in any respect on the independence of those who needed their assistance, the originators of this bank went on, not only in edinburgh, but in other scotch towns to which their influence extended, and with which the metropolis has always some connexion, and their endeavours to cope with the improvidence and carelessness of that period resulted, in a few years, in a complete spread of the principle. what society owes to the men who at this early date laboured with such zeal and devotion in behalf of their fellows, little thought has ever been given; the names of many of them have not even been preserved. it ought to have been far otherwise. "it would be difficult, we fear," says francis jeffrey in an early number of the _edinburgh review_, "to convince, either the people or their rulers that the spread of savings banks is of far more importance, and far more likely to increase the happiness, and even the greatness of the nation, than the most brilliant success of its arms, or the most stupendous improvements of its trade or its agriculture. and yet we are persuaded that it is so."[ ] before we close this notice of original savings banks, we would refer to their establishment in ireland. the first savings bank in the sister country of which record is made was one established at stillorgan in , and was called the "parochial bank." the rev. john reade, the parish minister of that place, was not only the founder of this bank, but also of the second venture of the kind; for, on removing to clondalkin, he would seem to have taken his benevolent disposition with him, and to have repeated the process among the poor of his new charge. a peculiar arrangement existed in these early irish banks, of which no trace is found elsewhere. the deposits of each subscriber were kept separately, and open to the inspection of the owner when he brought any fresh deposit, on which occasion he might count his money if he chose. so soon as the deposits of any person had reached _l._ the money was invested in stock, and produced interest, but not till then. both banks eventually formed the nuclei for ordinary savings banks after the act relating to irish banks was passed in . the belfast savings bank, opened in , was the first formed after the ordinary model, and has always been very successful. [ ] mr. scratchley's _practical treatise on savings banks_, st edit. p. . [ ] see the _reports of the society for bettering the condition and increasing the comforts of the poor_, vol. iii. which contains a full account of this earliest savings bank. [ ] "to facilitate the saving of small sums of money and to encourage young labourers to economise their earnings with a view to provision for marriage, it would be extremely useful to have county banks, where the smallest sums might be received, and a fair interest granted for them. at present, the few labourers who have a little money are often greatly at a loss to know what to do with it; and under such circumstances we cannot be surprised that it should sometimes be ill-employed and last but for a short time."--malthus. _essay on population_, . [ ] _hansard_, vol. viii. p. . [ ] the most important clauses of this bill we have given in the appendix (a). besides its intrinsic importance, it is very interesting, as viewed in the light of subsequent measures. the similarity of mr. whitbread's proposals to the measures which nearly half a century afterwards have been carried out, cannot fail to strike the reader. [ ] _an explanation of the principles and proceedings of the provident institution at bath_. by john haygarth, m.d., f.r.s., one of the managers, london, . [ ] _observations on banks for savings_. by the right hon. george rose. london, . [ ] _memoir of dr duncan._ by his son, the rev. g. j. c. duncan. edinburgh, . [ ] _quarterly review._ october, . [ ] _memoir_, page . [ ] _ibid_, page . [ ] strange to say, dr. duncan's name does not find a place even in mr. robert chambers's elaborate dictionary of celebrated scotchmen, an oversight much to be regretted. [ ] ( ) _an essay on the nature and advantages of parish banks, together with a corrected copy of the rules and regulations of the parent institution at ruthwell; and directions for conducting the details of business; forms showing the methods of keeping the accounts, &c._ by the rev. henry duncan, minister of ruthwell. edinburgh. . ( ) _a short account of the edinburgh savings bank, containing directions for establishing similar banks, &c._ second edition. edinburgh. . [ ] duncan's _essay_ page . [ ] _workmen's earnings, strikes and savings_, page . [ ] one clause in the rules states that "interest is to be calculated by months, as the calculation by days on such small sums would be extremely troublesome, and without any adequate advantage." [ ] _edinburgh review_, xlix. page . chapter iii. early legislation on savings banks-- to . "the promotion of economical habits amongst the people is so much a matter of national concern, that we cannot conceive any direction in which the powers of government would be more beneficially directed than in giving effect to schemes calculated to produce such valuable social results among the humbler classes of the people."--mr. smiles. it was not till savings banks had been regularly organised in this country, and not before they had achieved some considerable success, that the legislature interfered in any way with regard to them. that the ruling classes, however, were not slow to encourage these undertakings is sufficiently manifest, when it is remembered that the first legislation on the subject dates from , or only seven years after dr. duncan had organised his parish bank; and further, that the purport and effect of the bill then introduced was not to embarrass and hamper the new institutions, as was too often the case with new and partially-tried measures, but to offer them protection and encouragement. prior to , savings banks were simply voluntary associations, established, as we have already seen, by some benevolent gentlemen, who took a sort of leading part in the affairs of their respective neighbourhoods, and who were actuated in doing so by their desire to afford to their poorer neighbours help and inducement to save money. up to this time the confidence entertained by the poor in the integrity and well-meaning of the rich was the only security they had that their money was in safe keeping; and it is only fair to add, that, so long as savings banks were promoted and kept up in this semi-paternal fashion, that confidence was seldom, if ever, misplaced. savings banks were soon seen, however, to possess germs of national good which would require greater means of development to be brought to bear upon them; and it was quite as plainly apparent that the more they extended, the greater the necessity became that they should be legally recognised and protected. the first mention of the new institution in parliament was made by the right hon. george rose, who was at the time treasurer of the navy, and one of the committee of council for the affairs of trade and foreign plantations, and who, at the close of the session of , and again in april, , asked leave to bring in a bill, "to afford protection to banks for savings." mr. rose, for the next two years, took a leading part in all discussions on the subject, as indeed he did on all kindred subjects.[ ] he had written on poor laws and benefit societies; and, on account of his having, towards the close of the last century, carried through parliament a bill legalizing friendly societies, was generally looked upon as an authority on such subjects. the first speech of the hon. gentleman on savings banks was remarkably able: he referred to the immense good which such banks as those of edinburgh and bath had done, and were capable of doing. the instances which had come before him of persons who before the establishment of savings banks had never saved a penny, but who then had made ample provision for a rainy day, were cheering in the extreme. he proceeded to give particulars of several instances of the kind, mentioning them, as he put it, "to induce hon. gentlemen to exert themselves, and that they might not sit with their hands before them, believing that nothing could be done." the moral good to be expected from these banks was great and obvious. he hoped and expected that they would gradually tend to revive in the lower classes that decent spirit of independence, now almost extinct, which shrinks from accepting parochial relief; the poor man would learn to regard his own industry and labour as the source whence he was to derive temporary aid in the hour of sickness, or permanent support when the approaches of age should unfit him for active exertions. not that this matter was applicable only to the poor; a consideration of the subject in all its bearings might well be given to it by the rich on their own account; he thoroughly believed that the poor-rates of the country would diminish in proportion to the spread of savings banks among the masses. _mr. thompson_, a yorkshire member, expressed his warmest approbation of the proposed bill. in yorkshire, he knew there was a great desire to establish savings banks of this sort, but the better classes were afraid of doing so, on account of their apparent complexity, and because they had not received up to this time the sanction or countenance of the legislature. he hoped the provisions of the proposed bill would be as simple as possible, and afterwards that the bill and its clauses would be made as public as possible. hundreds of working men, to his knowledge, might easily save ten shillings a week, whereas they did not then save a penny; nor could they be blamed to any great extent so long as they were without the requisite machinery for acting differently. establish these banks, and place their working under proper acts of parliament, and he should then say that many who were accustomed in times of scarcity to solicit parochial relief would have no excuse for their conduct; if they did not avail themselves of the opportunity of becoming independent he would rather punish than assist them. thus early were our legislators alive to the maxim that "the only true secret of assisting the poor is to make them agents in bettering their own condition." the _chancellor of the exchequer_ (mr. vansittart) believed that nothing tended more to the independence of the poor than their learning to support themselves by their own exertions. he thought the object of the proposed bill would be congenial to the feelings of the whole house. on the part of the government, he was ready to offer his best assistance on behalf of an institution such as the savings bank, where rich and poor might meet together and mutually combine in promoting, under divine protection, their natural rights. "there, forgetful of those petty distinctions which temporary circumstances had created, they met as brethren, each to do his duty to his neighbour." after an irish member had expressed his wish that the same bill might be extended to ireland, where, he truly said, such habits as these banks inculcated were most urgently needed, even more so than in england, this one-sided debate was closed.[ ] the bill was read a first time on the th of may, . it provided, that any number of individuals might enrol themselves as trustees of a provident institution or savings bank at the quarter sessions. it was not meant by this to give any power to justices of the peace, but simply that the act of enrolment might thus be made in as public a manner as possible. it was further arranged, that the rules proposed for the management of the new savings banks should in like manner be left with the clerk of the peace for the respective counties. the bill authorised the trustees or managers to appoint such officers as were likely to be needed, and required that in all cases where the persons were to be entrusted with money, they should give reasonable security. it was only further provided, that depositors should not be prevented from applying for parish relief, but that, if any dispute arose on this point, the decision in the matter should be left with the magistrates in quarter sessions. the session being near its close, and several members having expressed their sense of the importance of the subject and the necessity of producing a well-considered bill to regulate these banks, the bill was withdrawn till the next session. on the th of february, , mr. rose again returned to the subject, and got leave to re-introduce his bill. he did not on this occasion enter minutely into the consideration of savings banks, further than to express a conviction he had, "which daily became stronger," that these institutions, if properly directed, would have a very direct influence on the vexed question of poor law relief. he contended, that, if they became generally introduced through the length and breadth of the country, they would gradually mitigate, and then do away with, the evils attending the system of the english poor law; and he very reasonably urged that any measure which would tend, even remotely, to such a desirable object, was deserving of, and ought to have, the hearty support and countenance of the legislature. _mr. curwen_, an authority on this phase of the subject, held that there could be only one opinion as to the utility of the banks, but he was satisfied "it was an error to imagine they would essentially contribute to the alleviation of the present distressing situation of affairs." nothing short of a measure which in its nature might have a compulsory influence over the minds of the people, to teach the poor and the peasantry that the means of relief, of content and happiness, were within the reach of their own exertions and industrious application, would be effectual. after a little further opposition, during which another member said that the bill would do more harm than good--that savings banks were going on extremely well without any act of parliament, _mr. wilberforce_, ready at all times to forward any measure which seemed likely to benefit the poorer and more defenceless portions of society, congratulated his friend on his proposals, and said that the system of savings banks pleased him most because it was so eminently adapted to teach the poor how much they might do for themselves by their own self-denying exertions. this was one of the class of things for which he, the house, and the country ought to be extremely indebted to all who had been instrumental in originating it and bringing it to greater perfection. "whatever difference of opinion," continued mr. wilberforce, "there might exist as to the poor laws, it was of all things desirable to countenance and foster so sanative a principle as that on which savings banks were founded." the second and principal reading of the bill took place on the th of may, , on which night many petitions were presented in its favour, and only three--viz., from norwich, hertford, and st. paul's, covent garden--against it. all opposition, however, to the bill resolved itself into simply contesting one or two of its clauses. an attempt was made to throw out the clause which obliged the trustees of savings banks to vest all moneys received by them in the public funds, several members contending that at any rate some of the money might be much better employed on mortgage, to the relief of many different interests in the immediate neighbourhood, and to the greater productiveness of the money so lent. the arguments used on this occasion were very similar to those occasionally used now in relation to the same subject, and they were then as unavailing as they have been subsequently: the preponderating opinion was that the _safety_ of the investments was, and ought to be, the first and greatest consideration. the clause, however, which proposed the giving of premiums out of the parish funds to those contributors who had done best in the way of saving money, fared worse, being rejected in committee almost unanimously. the growth of such principles could not be forced, and, if they grew at all, they would do better without the crutches eleemosynary aid. at the third reading, a spirited contest arose about the proviso that depositors in savings banks should not be disqualified from receiving parochial relief. _mr. rose_ contended that anything, which would have a tendency to make the poor think that the richer classes were legislating with ulterior objects in view, such as to get rid of poor-rates, would throw obstacles in the way of savings banks. there would be no need to think of such considerations in a few years, when savings banks were more firmly fixed amongst the institutions of the country; it was highly expedient, however, that they should now be allowed to have their weight. in a few years, argued he, the poor will have formed habits of saving, and so they will have become independent, and be above throwing themselves on the parish, at any rate with impunity. mr. wilberforce held and expressed the same view, which lord milton and others opposed; the clause was retained, notwithstanding, by a majority of thirty-three in a house of eighty-seven members. with this discussion the bill passed, and became law in august, . as this bill[ ] is the beginning of legislation on the subject of savings banks, we would here state in outline the principal objects with which it dealt. a sort of supplementary act, cap. , was passed to apply more particularly to ireland, to suit the irish members, who, when the matter was under discussion, argued that the same act would not deal so well with ireland, and who, therefore, wished the two countries treated separately. both the acts required that the rules of the proposed bank for savings should be deposited with the clerk of the peace of the county in which the bank should be situated, though no discretionary power was left with the magistrates in the matter. the trustees and managers were prohibited from receiving any profit from any transactions in these banks, and were empowered to pay over the moneys they received into the bank of england, or ireland (as the case might be), to the account of the commissioners for the reduction of the national debt, the latter being instructed and empowered to invest them in three per cent. bank annuities. interest on money thus deposited in the hands of government was guaranteed to the trustees of savings banks at the rate of _d._ per cent. per day, or _l._ _s._ _d._ per annum. the act restricted the amount which any one depositor could place in a savings bank in england to _l._ in the first year, and _l._ in any subsequent year. in ireland the limitation was _l._ in any year, though why this distinction was agreed upon does not appear. it was not long before it was seen that the act just described was defective in many particulars, and further legislation rendered necessary. during the year which elapsed after the passing of the savings bank act, the progress of these institutions, in so far as the number and amount of their deposits were concerned, was great beyond all expectation. in nine months from the date of the bill of , the large sum of , _l._ had been deposited. the largest amount received at the national debt office during that period from any one bank was , _l._, remitted from the flourishing exeter bank; the smallest was received from a new bank just then opened at st. john's, wapping, for the benefit of sailors living in that locality. by the middle of the year , or less than twelve months after the passing of the first bill, there were no fewer than banks established in england and wales, and about an equal number in ireland and scotland. that the encouragement which the bill had given was real is evident from the fact that more than half the entire number of english banks were first opened in - . so rapid indeed had been the development of the measure, that it was soon apparent that the increase of deposits was in a ratio far beyond any possible increase in the amount of wages or profit from which small savings could have been made. no doubt that now, for the first time, many hoarded savings saw the light, and began to bring in to their owners a return; but even this does not account for such an increase of business. towards the close of , , _l._ was deposited in one day, in a town in the north of england where a bank had just been opened, and it was known that very little of this money belonged to the industrial classes. the interest given for the investment made, it appeared, was attracting a much higher class of depositors than it was ever sought to encourage, or than the act was intended to benefit. the interest guaranteed by government has already been stated. in amount, it was at least _s._ _d._ more than the interest yielded by any other government security, while consols did not bring in more than _l._ _s._ per cent. many, we believe, in the first instance put their money into the savings banks to afford encouragement to their poorer neighbours or dependents, and in order to inspire them with confidence: and it will be well understood how necessary this was at the outset, seeing that at that time there were few means of inculcating sound political knowledge, or, indeed, information of any sort, among the great mass of the people, who too often were swayed hither and thither at the mere whim of some noisy and ignorant demagogue. whether or not this sufficiently accounts for the fact of the better classes contributing to the early savings banks, it is clear that all classes soon found out that it was not possible to do better with their money, and hence allowed it to remain where it was. several banks were very careful to exclude by their rules all but mechanics, servants, and persons in similar ranks of life, but the rest either had no such rules, or were very careless about enforcing them. one gentleman, possessed of , _l._ was known to have deposited large sums of money in one savings bank in the names of his six children. on the th of march, , the chancellor of the exchequer, influenced by such abuses as these, asked leave to bring in a bill to amend the act passed last year. no trace of the proceedings of parliament with regard to this little bill remains, but it seems only to have been meant as a temporary measure of relief till the whole subject could be more effectually grappled with. it simply provided for some alterations in the forms of debenture, gave power to justices of the peace to reject, for a sufficient reason, any rules deposited with their clerks, and prohibited the arrangement by which a person might invest in a savings bank by means of a ticket or number, and without disclosing his or her name. shortly after this period, in the year , a question was put to the chancellor of the exchequer in the house, which seems to have raised some merriment among the members. ridiculous as it might seem, it only reflected the spirit in which many people spoke of the measures which had recently been passed with regard to the compulsory investments with government of the money placed in the banks. in lancashire, aided and stimulated by mr. cobbett, who all along sneered at the "bubble" of savings banks, the people got up an absurd cry, and long kept it up. _mr. wilbraham_, a lancashire member, asked mr. vansittart if there was "any tittle of truth" in the reports that were so prevalent "that government was about to seize the funds of the friendly societies and savings banks, and apply them to the payment of the national debt. this report," said the hon. member, "had been caught up by persons little conversant in political matters, and had actually caused the breaking up of friendly societies, to the great loss of those who had claims upon them." he had no doubt the course of legislation had led to this report being circulated by designing persons, and though quite aware that it was impossible for the government to touch any of these funds, he would like to hear a declaration on the subject from the authority which in that house was alone competent to give it. _the chancellor of the exchequer_ said, that even after much experience of the extent to which malignity and absurdity could go in the propagation of reports injurious to the ministry, he had not been prepared for such a rumour as this. "it was utterly groundless; there was not the smallest foundation for it, either in fact or possibility. under the authority of parliament, the money belonging to the institutions in question was kept _entirely apart_ from the public money, and even if the treasury were base enough, they had not the power to misappropriate these funds."[ ] _mr. brougham_ observed that this was not the first time that such reports had been circulated, and such absurd cries raised. when the education committee was sitting, it was asserted that its intention was to seize all charitable funds, and to turn the two universities into charity schools. in such cases as these facts or reason on such reports were very ineffectual, but he hoped that in this particular instance they would be of some avail. before we notice the further progress of legislation in respect to savings banks, it would be well to refer to their progress and operation in scotland. none of the acts passed up to this time in any way related to the scotch banks. when mr. rose's bill was before parliament, its application to scotland was successfully opposed; a separate bill was introduced by mr. douglas, the member for the dumfries burghs, in , but this did not pass. the failure to obtain this act was said to be owing exclusively to the necessity for legislative interference not being felt in scotland; it seems now much more likely that the failure was owing to the want of unanimity among the scotch promoters of savings banks, mr. duncan taking a decided stand with the member whom he had influenced so far as to get him to bring in a bill, and the promoters of the edinburgh bank, on the other hand, who kept up in this way the long-standing dispute which they had always had with "the father of savings banks."[ ] there was certainly some reason why the same legislation was unnecessary for the two countries. there were many circumstances which rendered interference on the part of the legislature necessary, or at least expedient, in the case of the english banks, and these circumstances scarcely in any way applied to scotland. the chief of these were the poor laws, and the want of secure places of deposit for small sums to bear interest, and be payable on demand; the english bankers did not usually allow interest on money lodged with them, whereas in scotland they gave a liberal return for it. the general dispute was at its height in , when the edinburgh society published a report against any state interference, and when mr. duncan, who, as we have already said, was a strong advocate for parliamentary encouragement and protection, replied in a lengthy and able letter,[ ] in which he clearly showed that difficulties and discouragements would surely be felt in the progress of savings banks, if they were not arranged according to law. the radical difference observable in the two classes of banks--and there were at this time savings banks in scotland with , depositors, and deposits to the amount of , _l._--was the difference between the parish bank at ruthwell, and the savings bank at edinburgh, for on one or other of these models all the scotch banks were with very few variations formed. mr. duncan placed, or intended to do so, the management of his bank in the hands of the whole body of depositors; the edinburgh bank excluded all popular interference in its management, and left every one to deal with it or not, at their pleasure. the ruthwell bank confessedly, and as we have seen, partook of the nature of a friendly society; the edinburgh bank as nearly as possible approached to the character of a commercial undertaking. the founder of the former was thus an advocate for minute regulations, while the patrons of the latter wished to be left at liberty to manage their affairs in their own way, and only to call in the help of the legislature when real grievances needed redressing. with the exception of a short act[ ] passed in , by which it was provided that charitable institutions might deposit a whole or a portion of their funds with the commissioners, no further legislation on savings banks was attempted till . in this year the chancellor of the exchequer (mr. robinson) took up the matter where mr. vansittart had left it, and carried a bill through parliament still further to amend the law.[ ] with a view to remedy still more completely the evil of classes, other than the industrious ones, investing their money in savings banks, this act provided that the sum which could be deposited during the first year should be limited to _l._ and should stand at _l._ for any succeeding year. to provide against anything like evasion of these regulations, a form of declaration was introduced,--which we scarcely need say has existed up to the present time,--stating that the subscriber to it had not contributed to any other bank than the one at which he made the declaration. the chancellor of the exchequer endeavoured to carry a clause which required that this declaration should be subscribed by the proposed depositor in his own name, "and own handwriting," in place of a mark or initials, but this was wisely discarded. this absurd proviso would have put an educational test in the way of those very classes whom, to the exclusion of all others, it was desirable to attract to savings banks. another important clause succeeded better, and was plainly proper to the object meant to be served by it. no depositor could by this further clause invest more than _l._ excluding interest, in any savings bank. the case of the funds of friendly societies was the subject of another clause. it was only four years since these societies, as we have seen, were allowed to deposit their funds through the medium of savings banks; but the act of had given rise to so much abuse, or to so much that seemed like abuse, that some alteration was necessary. the high rate of interest which had been guaranteed by law to these banks induced, not only individuals of rank and property, but large charities to place their funds in them: the result was a great burthen to the public, inasmuch as the excess over the ordinary rate of interest for public securities was thrown in by the legislature with the object of increasing the provident disposition of the poor. as it was seen that, if this state of things continued, the original object of state assistance and countenance to savings banks would be defeated and the public in some degree prejudiced, it was proposed that no friendly society or charitable institution of any kind should deposit their funds in any bank. if the alterations now proposed did not suffice to preserve savings banks from the inroads of the rich, the chancellor of the exchequer saw no other means of meeting the evil than by reducing the interest given. he "should feel most reluctant to weaken the confidence which the public reposed in these banks, and which rendered them one of the greatest blessings ever conferred upon the country;" but the evil must be met in one way or the other, or with the loss of their normal character they would lose their efficiency. the act of amendment then went on to deal with the responsibility of trustees, the giant difficulty of savings banks from that time until now. the same arguments were used at this early period as at different times subsequently. those who placed money in savings banks ought to have some security that that money was not made away with by some one through whose hands it would pass; and the trustees, who had the sole control over the affairs of the banks, and appointed all the subordinate officers, were the persons who ought to give some security. on the other hand, enforce to the full the liability of trustees, and the most able persons would be deterred from accepting so much responsibility, and would give up the connexion which they had already voluntarily assumed. it was now therefore settled that the trustees should deposit all the money they received with the national debt commissioners, and that they should be held liable in case of default only to a certain amount. a legally and efficiently constituted bank should consist of twelve trustees, each liable for _l._, or _l._ in the aggregate. this act, it was also decided, should refer to ireland equally as to england. early in february, , _mr. joseph hume_--who had not then been many years in parliament, but who had already commenced that course of conduct in connexion with the public expenditure which, at first, gained him little but ridicule and derision, and subsequently the respect of friend and foe and the confidence of the entire nation--took up the question of savings banks, or more especially that part of it which related to the question of expense to the government. mr. hume had already asked for returns of the progress of savings banks; but on the th of this month he required the production of an account, showing the amount of interest that had been allowed to them since they had become connected with the state in . he tried to disabuse the mind of the members of the house as to his having any prejudice against savings banks. he told how he had been one of the earliest friends of these institutions and heartily wished well to them. when he found, however, that they had already cost the country half a million sterling, and were likely to cost still more as their numbers and efficiency increased, he thought it was high time to have the matter inquired into, and this expenditure stopped. mr. hume said that his original notion about savings banks,--which was likewise that of all he knew who had endeavoured to establish them,--was that each bank might, and therefore ought to maintain itself, and, whilst it enabled the poor to invest safely their _l._ or _l._ as cheaply and as profitably as the rich could their larger amounts, it should neither be a burthen on the charity of the benevolent nor an incubus on the state. mr. hume stated that he believed it would be found that up to january, , the amount paid to trustees, over and above what the money remitted to the national debt commissioners had produced, was , _l._ by the arrangement of the act of , which ordered that a separate account should be kept of the moneys deposited with government on behalf of savings banks, he was enabled to tell exactly how affairs stood. he found that government had obtained interest on the savings bank fund to the extent, in round numbers, of , , _l._ and had paid to depositors for the same , , _l._ hence the loss[ ] above given, which he had no doubt by the time the accounts were finally made up for the financial year ending in march would be half a million sterling. mr. hume went on to state that, if honourable members thought it proper after an inquiry to pay , _l._ or , _l._ a year, as a means of encouraging these banks, let them do so; perhaps he would not make any more appeals about it; at any rate, however, in this case, and if this state of things continued, he thought it would be only fair that government, and not separate directors, should have the management and control of these banks. there was no possible uniformity among them; some paid one rate of interest, and some another; some charged much higher for paid assistance than others, and yet, with unvarying uniformity, he might have said, the executive granted the same high rate of interest to all, irrespective of how they disposed of it. the returns were ordered _nem. con._ the statement which mr. hume more particularly referred to is in its proper place among the "accounts and papers" for that year, and is as follows:-- +---------+--------------------+------------------+-----------------+ | | dividends on stock | interest paid | | | years. | received by | trustees. | difference. | | | commissioners. | | | +---------+--------------------+------------------+-----------------+ | | £ s. d. | £ s. d. | £ s. d. | | - | , | , | , | | | , | , | , | | | , | , | , | | | , | , | , | | | , | , | , | | | , | , | , | | | , | , | , | | | , | , | , | | | , | , | , | | | , | , | , | | | , | , | , | +---------+--------------------+------------------+-----------------+ a month afterwards, the returns having been furnished, mr. hume returned to the charge. the accounts had more than borne him out in all particulars. he now again asked if the daily loss ought to be suffered in the financial state the country was in. the act regulating savings banks ought to be repealed, and another passed in its place. his opinion was, decidedly, that government should just give the interest which it realized by the savings bank money, and not add a farthing to it. "at a change in the price of stock," added the reformer, "government might very possibly lose three or four millions, and yet the depositors would not suffer the loss of a penny." much as he wished for the progress and advancement of the poorer classes--and few, we think, worked harder to obtain it for them,--he contended that these classes ought to be placed precisely in the same situation as other people who had capital to invest. another point which mr. hume dwelt upon was the _surplus money_ which managers of savings banks had in their possession untouched, after paying their depositors all the interest that was allowed them. at that time mr. hume stated that the surplus in the newcastle savings bank, after paying the expenses of management, amounted to , _l._ and in the exeter and devon bank to a still larger sum; and this money which had been paid by government and saved after the trustees had given a liberal interest to depositors, was now turned into an invincible argument for some change in the law. mr. hume concluded with expressing a hope that government would bring in a bill to amend the law relating to savings banks, or at any rate not throw any obstacles in the way of some private member doing it. the secretary of the treasury said, in reply, that mr. hume had stated the case fairly and correctly; and that the chancellor of the exchequer fully intended during the present session to bring in a bill with which he hoped _to satisfy all classes_.[ ] the vicissitudes of party prevented this high government functionary from carrying out his laudable, but very impossible design. in a few weeks the chancellor is on the other side of the house, and another occupies his place. a bill, however, was introduced on the th of june, , by mr. pallmer, which, supported by the new administration, was passed through parliament, and became law in the same year.[ ] in introducing this bill, _mr. pallmer_ said it was quite obvious that the laws which affected savings banks ought to be as clear and as distinct as possible. savings banks were now very important institutions, and the welfare of thousands was connected with them. at that time there were no less than five acts of parliament regulating savings banks, and these acts, which contained clauses, involved an enormous amount of confusion and perplexity. he would in the place of these five acts, propose an act, simple and consolidated, of thirty or forty clauses. he would endeavour to deal with all the questions of interest allowed, surplus money, responsibility of trustees, and to make the necessary restrictions towards carrying on the banks safely. and leave was quickly given to proceed with the bill. nothing transpired in the passage of the bill through parliament of much moment: so little hold were questions of this nature supposed to have on the public mind, that it is barely alluded to in the pages of _hansard_. it seems never to have occurred to the reporters of the day, that posterity might wish for a detailed account of the steps by which institutions, such as these we are considering, arrived at some important position, and so important indeed as to make every step of that progress interesting after the lapse of years. two or three little incidents have survived this neglect. _mr. lewis_, for example, during the second reading of the bill, proposed a clause for preventing the national debt commissioners from taking more than , , _l._ from the savings bank trustees, and ordering that, when that amount had been invested, the funds should be declared full. the answer which mr. goulburn, the new chancellor of the exchequer, gave to the hon. member was, that he "would take a day or two for consideration, after which he should be able to say better whether such a clause ought, or ought not, to be agreed to." two or three days before there had appeared in the _times_ newspaper a well-written lampoon on the new ministry, over which, it will be remembered the duke of wellington presided as premier, and one verse ran-- "to rest from toil our great untaught, and soothe the pangs his warlike brain must suffer when, _unused to thought_, _it tries to think, and--tries in vain_." _sir joseph yorke_ embraced the opportunity to compliment the chancellor, amidst great laughter, on being such a "valuable auxiliary of the 'great untaught.' the right hon. gentleman evidently was not one who spoke on the strength of two bottles of wine: his eloquence was certainly not of a fiery description;" and more banter of the like description. mr. lewis, however, withdrew his amendment, as did also mr. hume, who, when the amount of interest which should be given was discussed, had proposed that, in place of a reduction from _d._ to - / _d._ per diem, the interest on deposits should only be at the rate of _d._ per diem. the bill was only further opposed in some trifling particulars and, when finally carried, was ordered to come into operation in the november of the same year. the statute was entitled, "an act to consolidate and amend the laws relating to savings banks," and repealed all other acts previously in force. from this circumstance, the clauses of the bill of are generally known as the "governing statutes" relating to savings banks. as the great majority of these clauses are still in force, it will suffice, when we come to give the present act, to simply mark those which were originally passed in , and so distinguish them from the clauses passed in . we will here give the principal items and arrangements of the new bill. the act provided that the rules of every savings bank should be entered in a book, which book should be deposited with the clerk of the peace: the clerk of the peace was directed to submit this book to a barrister, who, under the terms of the act, would be appointed by the national debt commissioners.[ ] the duty of the barrister would be to certify that the rules of the proposed bank were strictly according to law, and this certification, after it had been made, was to be laid before the justices of the peace in quarter sessions, who were empowered under certain circumstances to reject the same, or any part thereof. if admitted, as they most commonly would be, after certification, the rules became binding on depositors and officers. the interest to be given to depositors, as we have already stated, was reduced by this act from _l._ _s._ _d._ per cent. per annum, to _l._ _s._ - / _d._ per annum. it was provided that savings of minors might be invested, and that deposits might be made by married women. charitable societies were again authorized to invest sums not exceeding _l._ per year, or _l._ in the whole. friendly societies were also authorized to subscribe any portion of their funds into savings banks, but a friendly society enrolled after the date of the bill could not invest more than _l._ principal and interest included. trustees were not to receive from any one depositor more than _l._ in any one year, nor more than _l._ in the whole and, when the deposit and interest amounted to _l._ interest was to cease. depositors might withdraw their money and again subscribe, providing they did not do it to a greater extent than _l._ in any one year. deposits might be withdrawn from one savings bank and placed in another. should a depositor die leaving any sum exceeding _l._ the same was not to be paid without probate or letters of administration. administration bonds for effects under _l._ were exempt from stamp duty. section nine exacted that no trustee or manager should be responsible except for his own wilful neglect or default; and finally, and a matter of considerable importance, the bill provided that once in each year the trustees of every savings bank should make a return to the national debt office, in which a full financial statement should be made of the condition of the bank; and a minor clause enacted that depositors should be entitled, on payment of one penny, to a printed copy of this annual statement. for several years after the thorough change which we have just described, the institution of savings banks increased and prospered wonderfully; up to the year , we find that no steps were taken, nor agitation of any sort got up, to alter the law with regard to them. in this year, some further changes took place; but if we except a slight modification which was made in the arrangements under which depositors could withdraw their money,--a longer notice being thought necessary,--nothing was done which did not place additional powers in the hands of trustees. in april, , lord althorp, chancellor of the exchequer in the government of earl grey, influenced, by a suggestion of mr. woodrow, introduced a bill to grant immediate and deferred annuities through the medium of savings banks, and to grant them on so small a scale as to place them within reach of the humblest classes. something of this sort was undoubtedly required, and the necessity became more and more felt on account of the action of friendly societies. the poorer classes, it would seem, had scarcely any means of investing in pensions for their old age: although nearly , friendly societies had up to this time proposed to make some provision of the kind, all but thirty-nine had in entirely relinquished this class of business. it may be said that friendly societies gave up this business because so few availed themselves of the provision that was made. from the very constitution of these societies, however, the poor had little confidence that any one of them would last so long as to give them those benefits in their old age for which they would have to subscribe for a long term of years. benefit societies might be broken up at any time by two-thirds of their number; this sort of thing was constantly occurring, generally leaving the oldest members in the lurch. an attempt, to which we have not yet alluded, was made even before savings banks were established, to give the industrial classes a chance of providing for their old age, and preventing them from being left destitute of other support than parish pay, or a home in the workhouse. baron mazeres, so early as , who published a work on annuities, succeeded in getting a bill introduced and passed through the house of commons--though unfortunately it was lost in the house of lords--which would have made the legislation of less necessary. _lord althorp_ now stated that the object he had in view was simply and solely to benefit the working classes. the lowest sum which could be granted as a government annuity was _l._ a-year. he would propose to make the sum _l._ the annuity should not be assignable, or transferable, except in cases of bankruptcy or insolvency; and in the case of the purchaser, either through necessity or choice making default in the annual payments, or dying before the annuity commenced, the whole of the money subscribed should be paid to him or his executors. the tables would be calculated at the rate of _l._ _s._ per cent. and this rate being less than the ordinary savings bank rate, would enable the government to introduce the clause for returning deposits. to no class, it was thought, would these proposals be of more service than to members of benefit societies, who would thus be enabled to secure superannuation on government security, and confine the objects of the society in which they might be members to relief in cases of sickness or death. lord althorp calculated that a person at the age of twenty-five, paying six shillings a month as a deposit into the savings bank, would be entitled at the age of sixty to an annuity of _l._ a-year. he contended, that, from the calculations which had been made, government could not lose by these arrangements, and he thought the principal feature of deferred annuities for a small amount, with money returnable in the cases above stated, might be made,--if the working classes would only avail themselves of the measure,--to tend greatly to their worldly comfort and advantage. _mr. thomas attwood_, the member for birmingham, who made some remarkable speeches in the house on matters of finance, but especially with regard to savings banks, objected not only to this proposal, but to legislation of any sort with regard to them. the money deposited in savings banks might as well be put into the country banks, for the average amount of each deposit, he was sure, was over _l._ and _l._ was the minimum sum which country banks would take. he "did not believe in paying so much to keep up such establishments, especially when they were not wanted." to such lengths will intelligent men go, and to such an extent will they shut their eyes! mr. attwood put his views before the house quite mildly in this instance, as compared with subsequent speeches. _mr. brotherton_, a member greatly respected in the house, who had once belonged to the ranks of the people, and who might therefore be supposed better to understand their requirements, felt sure that savings banks had been productive of great national good, and could not be too numerous. _mr. pease_, the quaker member for south durham, hoped that nothing would be done to induce the working classes to try country banks in preference to savings banks. in his own county , _l._ or , _l._ had been lost in country banks, and therefore it would be highly dangerous to advise the poor to lodge their money there. mr. pease's position, as a large employer of labour, gave his remarks weight, when he trusted that the clause in the bill of , which provided that accounts of savings banks should annually be laid before the government, would be carried out in its entirety; "there was little hope of savings banks turning out uniformly profitable to the industrious classes, except government maintained a strict superintending control over them." the chancellor of the exchequer said this was done, and in two or three instances since he took office, where the trustees had neglected to furnish proper returns, the commissioners had exercised the power which the law gave them, _and had closed the banks_ till the accounts were sent up.[ ] in may the bill was carried through parliament unaltered, but, as usual, opposed by two or three fractious members. mr. thomas attwood again expressed his disapprobation of savings banks; and we allude to his speech with a view solely of enlivening our pages, which may over this ground of legislative enactments be dull to some readers. this gentleman stated his belief on the third reading of the savings bank annuities bill, that savings banks "were instituted by the late lord liverpool and his government, not for the good of the people, but for three different purposes." the first was to draw capital to london, in order to bolster up the funds; the second was to give the government the power of putting their hands into the pockets of the people; and the third, to enable them to scourge the people.[ ] on the house showing manifest signs of disapprobation, mr. attwood said, "hon. members might express disapprobation as much as they pleased, and the noble lord (althorp) might laugh, but he firmly believed that lord liverpool's great object in getting up these banks was to get his claw in the people." _lord althorp_ replied with the straightforward understanding, and quiet, manly good sense which always characterized this eminent statesman. he wondered that mr. attwood had not imputed to government another motive, that being, to realize _profit_ by savings banks, which he need not say they had scarcely yet done. he might have smiled, but it was entirely on account of the originality of the hon. member's ideas on the subject: seriously, it was astonishing that such arguments should be used by reasoning men. "so far from being an injury to the people, he believed these banks conferred on them the greatest advantages; and so far from affording the government the means of trampling upon them, they would have an exactly contrary effect." and there can be no question that lord althorp was right. the evident effect of savings banks, from their commencement, had been to make people independent; and surely persons of this description would be the very last that any government would attempt to ill-use. another member spoke a word for mr. attwood: he believed him to have the kindest intentions towards the poor; only, he must add, that he took the strangest way of showing these good intentions, when he strove to prejudice the poor against institutions which were capable of rendering them independent and comfortable sooner than any other organization whatever. _mr. slaney_ thought the people showed great good sense in preferring government security to the allurements of country bankers. as for the member for birmingham, he ought to be reminded of franklin's story about the two sacks, where the empty sack fell to the ground, whilst the full sack stood bolt upright. the fuller the sacks, the more likely were the people to be independent, and the less likely were they to be trampled upon. mr. slaney was glad to find, that though the crisis of last session had had a bad effect on the deposits of savings banks, they were now daily increasing. with this discussion, so far as any record is left, the bill became law. an act passed in [ ] extended the bill for consolidating and amending the law with respect to savings banks to scotland, and of course the bill of , which we have just described, became at the same time applicable to scotland. nothing further was done in the way of legislation for savings banks till , so we will close this chapter by referring to another attempt made by mr. hume, in , to reduce the interest given to savings banks, and to introduce other changes into their organization. and here we cannot forbear to state our belief, that, though many thought very differently at that time, savings banks, the working classes, and the country generally, had not a better friend than mr. joseph hume. he saw a lavish expenditure going on in connexion with savings banks, and he endeavoured to stop it; with what success remains to be seen. he saw that in consequence of this expenditure, or the inducements which it gave, legislative enactments were openly set at defiance by well-to-do people, who, besides their own deposits, made fraudulent investments in the names of the various members of their families, or their friends; and that the action of the legislature was in this way an attempt to cultivate good habits amongst one portion of the community, at the expense of promoting bad habits amongst another. mr. hume on this occasion reminded the house that he was one of the original founders of saving banks, and had always taken a deep interest in them. it was far from him to do anything to interfere with their usefulness in the country, only the country ought not to be put to large and increasing expense over them. he compared the rate of interest given before and after , and now stated that on this latter rate the country lost from ten shillings to fifteen shillings per cent. on the entire amount of deposits. the average annual loss to the public up to the time he was speaking, and from , had been , _l._ if this money went to the provident poor he would not so much care; but if all was paid to depositors, that might not be the case. of the savings banks in existence in , to whom the commissioners paid _l._ _s._ - / _d._ per cent. interest, of them paid to the depositors only _l._ _s._ _d._, and of them paid _l._ _s._ leaving of course a large surplus, after every expense had been paid, in the hands of both sets of trustees. hon. gentlemen might say that this surplus money was required by law to be invested in the surplus fund account at the national debt office; but the act, in leaving it to the trustees to say what they themselves deemed "surplus," defeated its own ends, and without doubt had opened a door to fraud. mr. hume made a motion that the house at its rising should go into committee on the th geo. iv. c. , which fixes the rate of interest to be given, and to permit the chancellor of the exchequer to reduce that rate to an equality with that which is received in the public funds. he thoroughly believed that the security afforded by savings banks was a matter of far greater importance than the amount of interest which was paid. mr. hume then referred to a subject which was made matter for great discussion, and which a committee of the house of commons treated at great length some years subsequently. this was the power which was supposed to rest with the national debt commissioners, of using savings bank money for the exigencies of the state; "the dangerous power," as mr. hume characterized it, "to change the money they had in charge from funded to unfunded debt." he said the commissioners had paid thirty-five millions sterling from to , for the purchase of stock and exchequer bills, and had received from the sale of stock and exchequer bills seventeen millions, leaving more than a similar amount then standing in their names. he urged, "that as the whole of the deposits were by law payable in cash, and that as sums under , _l._ could be demanded in five days, and even larger sums at fourteen days' notice, the public might in a time of panic, such as they had recently passed through, legally make demands of cash, and so produce a heavy loss to the government, and greatly inconvenience, if not endanger, public credit." he gave a recent example, taking five months of the year , when the country was at its greatest height of political ferment. the money transactions of the english savings banks in deposits. withdrawals. £ £ march were , , april " , , may " , , june " , , july " , , [ ] _the chancellor of the exchequer_, who at the time of which we are speaking was mr. spring rice (the late lord monteagle), was quite unwilling to take the course recommended by mr. hume. he was sure it would tend to shake the security of the deposits, to which the loss which mr. hume had spoken of was a mere trifle. he admitted, however, that if parliament could have foreseen the extent to which savings banks would so soon have arrived, wiser arrangements would undoubtedly have been made. people certainly did not want all the inducements to save their money which it was once thought they did require. still, he was not for changing the rate; government paid more than they received as interest, but he declined to argue the matter as a mere money question. mr. hume might say that depositors cared more for security than interest, but he (the chancellor) said, that if they reduced that interest, the depositors would rush to take out their money. nor did mr. rice speak without the book. he produced a paper in which was described the effect of the various commercial and political panics on savings banks, and in distinction to this the result of the reduction of the rate of interest in . so far as it went, the return is conclusive and instructing.[ ] in the commercial panic of , the total amount withdrawn was , _l._; in the political panic of , , _l._; in , when the interest was reduced by _s._ per cent., no less a sum than , , _l._ was withdrawn. the chancellor would not say that under no possible circumstances should a reduction take place; a time might come when it might be done wisely and discreetly, though he believed it would never take place without creating some degree of uncertainty and risk. the depositors in savings banks were not the class to be experimented upon, and he would not have it said of him by persons out of doors that he had commenced reductions in the public expenditure by cutting down the interest payable to the poorer classes, who, after all, he believed, were the principal investors in savings banks. one other little item of statistics mr. rice gave before he sat down, which is very interesting, and much more convincing than his other arguments. he gave, from a return which we have not been able to find, the amount of interest which had been paid _in money_ since the establishment of savings banks and, on the other hand, the interest which had been credited to depositors _and made into principal_. in the former case it was , _l._; in the latter, or interest made principal, it was , , _l._ finally, the chancellor believed, that to pay depositors interest at the rate of the value of money in the market would be a death-blow to savings banks altogether! if mr. hume, in his pursuit of economy, tried to enforce it by dividing the house on the subject, his duty would be to resist. _mr. goulburn_, as the spokesman of the opposition on financial subjects, condemned the proposition as likely to cause distrust amongst all classes connected with savings banks. so far from thinking that the interest ought to be reduced, or could be reduced, with safety--and this remark is curious, viewed in the light of subsequent events--"it was only by great care and good management on the part of those who superintended such banks" that expenses could be paid. time, however, works wonders, and among other things, brings its revenges. the financial reformer, who from the first had the best of the argument, had not long to live to see a change, and to find that change brought about under the direct auspices of one who only six years before, in the words just quoted, had strenuously opposed his motion. we must leave mr. goulburn's bill of to be described in a subsequent chapter. [ ] mr. rose's exertions in this respect were only ended by his death, which took place in january, , at the age of seventy-four. "his whole life," says a contemporary, "was the continued and strenuous effort of a powerful mind to promote the welfare of the state and the happiness of his fellow creatures." in contrast to this testimony, which cannot be called exaggerated, we might refer to william cobbett's bitter tirades against mr. rose, which, indeed, may with some readers form the most convincing evidence of the merits of the statesman. in cobbett's "new year's gift to old george rose," published in the _register_ of , and to which choice production we shall again refer, there is an elaborate and embittered attack upon the latter, in the course of which cobbett stated that the amount of the sinecures which mr. rose and his sons held would furnish ample funds for all the savings banks then in existence. [ ] from a bare record of the debate in question to be found in _hansard_. third series. . [ ] act george iii. c. . [ ] _hansard's debates_, vol. xli. page . [ ] this cognomen was given to mr. duncan more than once in the house of commons about this period. [ ] _a letter to w. r. k. douglas, esq. m.p. on the expediency of the bill brought by him into parliament, occasioned by a report of the edinburgh society for the suppression of beggars._ by the rev. henry duncan, of ruthwell. . [ ] george iv. c. . [ ] george iv. c. . [ ] we shall see subsequently that this loss was more than made up in other ways. [ ] _times_, march , . [ ] george iv. c. . [ ] the barrister appointed, under clause , was mr. john tidd pratt, who still holds the office after a lapse of thirty-six years. under a subsequent clause of the same act there was power given to the commissioners to appoint an umpire in cases of dispute, and mr. pratt was likewise appointed to decide in these cases on behalf of the government. mr. pratt's name is now properly and deservedly connected with all questions relating to savings banks. from time to time this gentleman's intimate acquaintance with the legal history and working of these and kindred societies has gained him other appointments in connexion with them. by the act of & victoria, c. , he had additional powers conferred upon him, this act setting forth that all cases of dispute should be referred to him in the first instance, without the necessity of each party appointing an arbitrator. in , under the & vict., he obtained the appointment of registrar of friendly societies, an office which he still holds; and in , on the establishment of postal banks, he was appointed consulting barrister. mr. pratt was born in , and called in to the bar at the inner temple. [ ] _times_, april , . [ ] _hansard_, vol. xvii. third series. . [ ] & william iv. cap. . [ ] _the westminster review_ of this period thus refers to mr. hume 's motion for a reduction of interest rate for savings banks: "we are ignorant of any good reason why the public should receive these deposits on other terms than those which would be settled between individual and individual in a common mercantile transaction. admitting to the full importance of giving encouragement to economical habits, we deny that the payment of bounties is necessary for such a purpose, or that more is requisite than to extend to the parties that superior accommodation and greater security for investment which it is in the power of government to afford. this should form an inducement adequate to every salutary purpose. all that is given as interest beyond the market price of money is simply a premium upon fraud." vol. ix. old series. [ ] but it did not go far enough; the years and are the years which ought to have been taken. chapter iv. on the progress of savings banks up to the year . "they to whom this subject is indifferent may censure our minuteness; but those who, like us, regard the establishment of savings banks as marking an era in political economy, and as intimately connected with the external comfort and moral improvement of mankind, will be gratified to trace the rise and progress of one of the simplest and most efficient plans which has ever been devised for effecting these invaluable purposes."--_quarterly review._ . arrived at the year , when savings banks have had a legislative existence for a quarter of a century, it may be well to stop and pass the period in review; to endeavour to show the progress made by these institutions during this time; and to exhibit, so far as we are able, their effect upon the general progress of the country. we have up to this point dealt principally with the legislation on savings banks, and have taken little account of what was said or done with respect to them out of parliament, after the year . at this early period there were frequent and warm discussions out of the house as to their value and utility. when they first began to attract public attention, "the friends of the working classes" were nearly equally divided between their advocacy of them and the friendly societies. when mr. rose, who had strongly advocated the formation of these societies, saw the benefit that saving banks were calculated to render to the poorer classes, he cordially took up their advocacy; and although he urged that there was scope enough for all societies which inculcated the duty and practice of providence and frugality, he was loudly accused of leaving his first love, and advocating the savings bank plan for some political purpose. we cannot give the reader a better idea of the way the industrial classes were beguiled, and the kind of influence which was only too often brought to bear upon them at this period, than by giving some extracts from a paper to which we have previously incidentally referred. in his "new year's gift to old george rose," cobbett reminds mr. rose, that after all he had done for them, he had at length "left friendly societies in the lurch, and taken to _the bubble of savings banks_." cobbett, however, said that he could see through the change, and he shows the amount of his penetration by such argument as the following:--in "friendly societies mr. rose found that 'the members got drunk and _talked_--the naughty rogues.' yes, and even politics too! and it might have been added," continues the writer and proprietor of the _register_, "that they very frequently heard one of their number read--the _register!_" the object of savings banks, or at any rate, parliamentary interference with them, was nothing else, cobbett considered, "than to get the pennies of the poor together, but to keep their owners asunder." "what a bubble!" repeats cobbett. then addressing mr. rose in the first person, he tells him how, in his opinion, "the company of projectors who, in the reign of george the first, wanted a charter granted to them for the purpose of making deal boards out of sawdust, just saves you from the imputation of having, in the savings bank scheme, been the patron of the most ridiculous project _that ever entered into the mind of man_." another person of mr. cobbett's stamp, though one who aspired to greater knowledge of all questions connected with trade and currency, and who really paid closer attention to such subjects, was mr. thomas attwood--"currency attwood," or "little shilling attwood," as he was variously designated in some parts of the country. whenever he could get an opportunity in parliament to speak of savings banks, we have seen that he invariably clothed his ideas in a vocabulary of prejudiced invective. and he repeated himself outside the walls of the house whenever he had the chance. "savings banks," we find him saying on one occasion, "besides costing the nation so much, were a nuisance;" "savings banks were a sort of screw in the hands of the government to fix down the working classes to the system." on these expressions, and others of a like tendency, as texts, those minor demagogues who went "on stump," preached for many a day. considering how such men treated the institution of savings banks, it is wonderful that they progressed as they did. that they kept many from using these institutions is beyond a doubt. such men had a surprising power over the labouring classes, and though that power was often used for good, too often it only excited distrust and apprehension when distrust and fear were least needed and most dangerous. the true friends of the poor--and there have been many such at all times--said, in effect, "we have reason to believe that much money now spent unnecessarily might be saved for seasons of want and old age, if the poor had the means offered them of putting that money by easily, safely, and profitably. we have exerted ourselves to get such places established, we give our best exertions to have them conducted properly, and we advise all who have money to spare to intrust it to this safe keeping." cobbett, on the other hand, put his printers to work to say "what a bubble! at a time when it is notorious that one half of the whole nation are in a state little short of actual starvation--when it is notorious that hundreds of thousands of families do not know when they rise where they are to find a meal during the day--when of the far greater part of the whole people much more than half of them are paupers; at such a time, to bring forth a project for collecting the savings (!) of journeymen and labourers _in order to be lent to government_, and to form a fund for the support of the lenders in sickness and old age!"[ ] it would be idle to show the fallacy of such reasoning, even admitting the facts of the case to be as they are here stated. suffice it to say, that in this way did such men pander to the prejudices of the uneducated. many thousands of industrious workmen who had had no training, and who could not discriminate between real and imaginary evils, were thus too often flattered into believing that they had more than their share of the truth, honesty, and manliness of the age on their side, and that the upper classes were against them on every side and in all respects. all this is pretty well over now.[ ] just as the sun expels the mists of the morning, so have education and a free press opened the eyes of the people to their true interests, and shown them which class of men have most wished for and best worked to promote these interests. it was not, however, only by such men as cobbett that savings banks were misinterpreted and misrepresented. like every other new and untried measure, it had to run the gauntlet of an educated as well as an ignorant opposition. it was a very usual thing to find the discussion on the utility of savings banks waxing warm in the most important organs of public opinion. for example, the _times_ newspaper early took a decided stand against savings banks, and tried to maintain its position, as we shall see more fully subsequently, long after the country had given them a pretty unanimous verdict of approval. just after the period of which we are speaking, a correspondent in the then, as now, leading journal, thought himself able to trace in savings banks, "a great source of mischief; and that to them,"--though in what manner it is not attempted to be proved,--"may be attributed a considerable portion of the distress which has been so long felt, and which does not appear to diminish in most of the manufacturing districts." "god forbid," ejaculates this remarkable genius, "that i should desire to encourage improvidence amongst any portion of society; but there is a wide distinction between parsimony and extravagance, and these banks have literally made misers, and held out a bonus for them to become so." but even this is not all: the same spirit, says our authority, which actuates a man in becoming a miser, will operate to prevent their making use of their petty accumulations. "with the habit of parsimony the mind becomes degraded, and the workhouse or an application to the dispensers of parochial relief lose their horrors." it is almost useless, seeing that now few could be found to advocate such views, to reply to them. they are based on the assumption, which we take to be utterly erroneous, that a poor man is less at liberty to lay out his mite at interest than his richer neighbour; or that if he did so, the step was more likely to lead to his becoming a miser than his wealthier neighbour who had all his money in the funds. it is less necessary to argue the point, inasmuch as the aim of this nonsense is made quite apparent by the writer concluding with an elaborate eulogium on benefit societies for working men. "they could there, provide," says he, "at a very trifling expense, against sickness, want of employment, and numerous other casualties; while, on the other hand, there would be no need to deprive themselves of the common necessaries of life in order to add to their hoard." but here again the fallacy of the argument is clearly apparent. the allowance from a benefit society, then as now, in case of sickness or distress, would be, generally speaking, quite inadequate to the circumstances requiring it; and how could it possibly be more likely that a person in this situation would be more independent of parochial relief than one who had a fund of his own to look to, or perhaps a livelihood at his command. such warfare as this went on uninterruptedly for several years; the advocates of benefit societies running down savings banks, and _vice versá_, not in all cases seeing that the two might exist together, and that each was well calculated to supply a want which the one or the other class of institutions did not meet. there can be no doubt, however, which institution suffered most from these discussions. the most decisive proof of the improvement which was seen in the condition and the habits of the labouring classes during the first quarter of the century was the progress of benefit societies from to . in the former year there were , of these societies; in the latter year there were nearly five times that number. the people during this period had not improved in comforts and conveniences as they did subsequently; they progressed in the more skilful use of the same, or even diminished means. these societies made a deep impression upon the population, and in the same proportion the people were recovered from the control of their appetites and passions, and from that propensity to use without restraint those means of immediate gratification which distinguishes all ignorant people of whatever rank. notwithstanding all this, the friendly societies were beset with difficulties, and in the discussions to which we have alluded their opponents made the most of them. perhaps the well-meaning might better have assisted the poor in instructing them how to reform the management of these societies, and by showing them the principles upon which they could be most safely established. however it was, there can be no question that, either from their inherent defects or the comparison of the benefits to be derived from the one as against the other institution, savings banks soon took the place of benefit societies in the public estimation, and progressed when, comparatively speaking, the latter declined. in the evidence given by mr. lloyd, the founder of the hertford "sunday bank," before the committee on the poor law previously referred to, he assigned as one of the causes which had promoted the success of savings banks the evils arising from benefit clubs or friendly societies, as then constituted. "there is always," he said, "a regulation, that when two-thirds of the members choose to assemble and agree to break up the club, they can; the consequence is, that the other one-third, the old members, who ought to be deriving an assistance during the last period of their lives from these clubs, are deprived of it." he had known six clubs which had been broken up in this way. the following extract from a report of a committee which was appointed to investigate the rival claims of benefit societies and savings banks so admirably sums up the whole argument, and says so much with reference to both institutions which is no less true now than then, that we feel confident our readers will not object to have it reproduced here.[ ] "benefit societies have done much good; but they are attended with some disadvantages. in particular, the frequent meetings of the members occasion the loss of much time, and frequently of a good deal of money spent in entertainments.[ ] the stated payments must be regularly made; otherwise, after a certain time, the member loses the benefit of all that he has formerly paid. nothing more than the stated payments can be made, however easily the member might be able at the moment to add a little to his store. frequently the value of the chances on which the societies are formed, is ill calculated; in which case, either the contributors do not receive an equivalent for their payments, or too large an allowance is given at first, which brings on the bankruptcy of the institution. frequently the sums are embezzled by artful men, who, by imposing on the inexperience of the members, get themselves elected into offices of trust. the benefit is distant and contingent; each member not having benefit from his contributions in every case, but only in the case of his falling into the situations of distress provided for by the society. and the whole concern is so complicated, that many have hesitation in embarking in it their hard-earned savings. with such disadvantages who would not rather choose the simple, secure mode of investment offered by the bank--free (as the banks were at that time) from them all? but if they must have the benefit society, with its contingent and distant benefits, working men should not rest here. thousands of the working classes could well afford to pay their weekly sums to secure their sick and burial money, and yet have enough to spare to provide against the other rainy days of their life. a poor man's savings are continually liable, while in his own custody, not simply to professional thieves, but also--and there is far more danger of it--to be pilfered by himself and his family. they are often lost by being intrusted to improper hands; they are still oftener worse than lost in the ale-house or the gin-palace, and the money which properly taken care of might give the means for occasional enjoyments of a harmless kind, providing for the legitimate wants of his children, or which might support all during the intermissions of employment to which all are exposed, may be worse than squandered." it was thus that the institution of savings banks lost, by being cried down by the leaders of the people, and by the discussion which continued as to their merits; and thus that they gained, by a close comparison with the kindred institution of friendly societies. the loss, however, was but temporary. in ten years from the date of their legal formation the deposits in savings banks amounted to upwards of sixteen millions sterling, and this sum had been contributed by no fewer than four hundred thousand persons. a writer of the period characterizes the progress made by institutions such as these "as one of the most striking manifestations of virtue that ever was made by any people;" and he seems to have had some good grounds for the opinion. "for persons merged in poverty and totally deprived of education, as the english population have heretofore so generally been, it is not easy or common to have much of foresight, or much of that self-command which is necessary to draw upon the gratifications of the present for those of a future day." and though, as we have previously seen, the money here deposited could not have been put there by persons exclusively of the industrial class, yet it is clear that many of the labouring community did possess means beyond what were needed to procure them the necessaries of life, and that these institutions exactly met the want which was felt in not having the means to safely dispose of that little surplus, and to call it in when the need arose for it. the year was the year, it will be remembered, after one of the most terrible financial crises that this country has ever passed through, and yet, though the average amount of money deposited in savings banks in one year before this time had only been about , , _l._, no less a sum than , _l._ was deposited in , and not half of that sum was withdrawn. these facts show the great hold which savings banks had already taken upon the country. of what service they were during such times as those witnessed in we shall have to speak. we are far from anxious to trouble the reader with any statistical information which might easily be withheld, but the progress of which we are now speaking can be best traced by presenting first, a tabular view, which gives that progress from year to year, and which will likewise furnish material for remark.[ ] table . showing the amounts invested by savings banks with the national debt commissioners from to , with the total capital of all the banks at the end of each year:-- +-------------+-----------------------+--------------------+ | year ending | total amount | total capital at | | th nov. | credited to trustees, | the close of each | | | including interest. | year. | +-------------+-----------------------+--------------------+ | | | | | | £ | £ | | | | | | | , | , | | | , , | , , | | | , , | , , | | | , | , , | | | , , | , , | | | , , | , , | | | , , | , , | | | , , | , , | | | , , | , , | | | , , | , , | | | , , | , , | | | , , | , , | | | , | , , | | | , , | , , | | | , , | , , | | | , , | , , | | | , , | , , | | | , , | , , | | | , , | , , | | | , , | , , | | | , , | , , | | | , , | , , | | | , , | , , | | | , , | , , | | | , , | , , | +-------------+-----------------------+--------------------+ remembering that this table does not give the actual business done by savings banks within this period,--which, indeed, from the absence of proper returns in the earlier years of those banks it would be difficult to present,--many instructive lessons may be gathered from it as to their value and utility. in fact, however, and for all practical purposes, the amounts remitted by the trustees to the national debt office very fully represents the progress of savings banks, for they may be considered as representing so much surplus every year, after all the claims on the banks had been met. the variations observable in the returns are accounted for quite easily by the state of the country at the time. when the amount falls, it may be taken for granted that the country is passing through a period of exceptional suffering and trial, and that the funds which have been patiently accumulated for times of need are thus made available when the necessity arises for it. the country was unusually prosperous, for example, in - , and an enormous surplus was returned. in , as if to mark the coming storm, there is a heavy fall in deposits. in , the tables were turned, not only in a figurative, but, so far as we are concerned, in a literal sense. the circumstance can be only too well explained. the _quarterly review_ of that time gives a glowing account of the increased wealth of all classes, especially those of the trading community.[ ] "the increased wealth of the middle classes is so obvious, that we can neither walk the fields, visit the shops, nor examine the workshops and storehouses, without being deeply impressed with the changes which a few years have produced. in the agricultural districts we do not, indeed, see such great strides, but we see universal advancement." then we have the familiar record of the exportation of gold; of the bank of england and provincial banks deluging the country with notes.[ ] money became so abundant that a terrible rage for speculation set in; joint-stock companies with unlimited liability were projected for every imaginable object. on the reorganization of the south american republics, which had just then been effected, all sorts of proposals for mines were started; the el dorado had to be found now, if ever.[ ] in the session of , petitions for private bills were presented, and private acts were passed. the king, even, was so deceived by the general appearance of things, or was so purposely blind to their real state, as to congratulate the country, in july, , on "the prosperity everywhere pervading the country." the time arrives when anxious speculators begin to look out for some return for their money; they are told that their capital cannot possibly realize so soon; then the bankers are besieged, but, tempted by the abundance of money, they had discounted bills at long dates to an enormous extent, and lent money upon securities which were presently seen to be almost worthless. then came the panic,--and then the crash. commercial houses first failed, big, substantial firms, which were supposed to have the wealth of croesus at their back, came down thunderingly. "many a firm of unimpeachable honour and unquestionable solvency was compelled to bend before the storm." then came the turn of the great banks: they had advanced their money to the merchants, and now that the security had failed, they also must bend before the blast. on the th of december, the news spread with the wings of the wind, that the banking house of sir peter cole and co. had failed; next day, williams and co. stopped payment; and from that time, without intermission, seventy country banks went down within six weeks.[ ] how things were restored to their original condition, and how promptly the government acted during the terrible panic, we need not stay to tell. savings bank deposits fell from about three millions in , to less than half that sum in . more money was withdrawn in the year of the panic than had been withdrawn altogether since the year . it is not a little curious, as showing that depositors in savings banks are less inclined to speculation than other classes, to point out, that during the panic a sum equal to at least fourteen millions sterling must have been safely lodged in the different provident banks of the country; and that little money was hazarded in the speculations of the time is evident from the fact that only one-tenth part of the whole amount of deposits was withdrawn to supply emergencies. in this way were those people rewarded who preferred a safe deposit with a reasonable interest to "cent. per cent." and unlimited risk. nor can we stop to describe the result of the panic on the industrial classes. the picture of that terrible time has often been drawn, when thousands of hungry, infuriated men, roused by the sorest distresses, went about robbing shops, breaking machinery, rick-burning, chased by the constabulary, and fired upon by the soldiery. the time was a most disastrous one, but it was full of lessons for all classes. many of the provident poor suffered little, and never had anything to fear, on account of having prepared themselves for such calamities. those of the poor who acted less wisely, and ventured their little surplus in some speculation or other, met with few condolences. when a portion of them petitioned the house of commons for relief, they were rather roughly told that they ought to have deposited their earnings in savings banks. it was on this occasion that sir robert peel replied to this taunting, and recognised the imperfections of the existing machinery, by asking, indignantly, how the house could expect this to be done in cases where "the savings bank was perhaps twenty miles from the working man's home." to return again to the table. in and the accounts show a much more healthy state of things, and it is clear that the deposits are steadily gaining their natural ascendancy over the withdrawals, when there is another rebound, of a greater magnitude than ever; the withdrawals not only exceeded the deposits of , but the deposits of added thereto. there can be no question that, primarily, the savings bank act of , which came into operation on the november of that year, and under which the amount of interest allowed on deposits was reduced by _s._ per cent., was the cause of this exceptional and most important change. like all misfortunes of this nature, it had its bright side, and was far from being an unmixed evil. as we have already endeavoured to show, a large number of depositors up to this period belonged to classes much above the artisan class; and as the former looked more to the interest given, while the industrious classes thought most of the security offered, it is no wonder and no calamity that the connexion which the higher classes had formed with savings banks was now dissolved. henceforth, the returns may be looked upon as more than ever the result of habits of economy and thrift, and as representing the surplus money of the artisan and the lower portions of the middle classes. the year shows that confidence was slowly returning, when again there is a period of great depression. two millions of capital is withdrawn in - , over and above the deposits of those years, to meet demands on the banks. the political agitation of those years sufficiently accounts for this state of things. it will require little to be said in order to show that a time like that was likely to tell largely against such institutions as those under consideration. the time was one of great anxiety among all classes, and amidst the uncertainties and anticipations which followed in rapid succession, it would be only bold people, and those of more than average intelligence and power of mind, that could confide, without the smallest degree of wavering, in the stability of the country. we had a turbulent population at home, and amidst much agitation for their undoubted political rights, there were many clamouring for bread, many clamouring for work, and thousands for they knew not what: and france offered an illustration of what might possibly happen. with such manifest agitation everywhere, with funds falling, and the entire political sky lowering, there cannot be much wonder that many waited patiently for some issue before they trusted to resources other than their own. not only were actual hardships endured during this great crisis in our history, but the working classes brought hardships upon themselves. led by intemperate and impracticable men, many thousands of the more ignorant beguiled themselves into believing that the reform bill would do everything for them, and they would need to do nothing; that every man would be forced into independence and competence whether he would or no; that taxes would be repealed; and that in this new state of society there would no longer be any need of that spirit of striving which is at the bottom of all true schemes of social progress and advancement. this period over, many illusions were dispelled, many useful lessons learnt. under somewhat fairer and happier auspices, society settled down into its old ruts again, only too thankful in many cases that the old ways were still open. after the year , the progress of savings banks continued to be eminently satisfactory. there was a transitory cloud in , and another in , caused by exceptionally hard times, such as a bad harvest and scarcity of food, and distress in the manufacturing districts caused by unusual reverses in trade, when again the funds laid by came opportunely in aid; but, with these exceptions, the returns furnish no further grounds for remark. we will therefore proceed to give a small table, which, without giving the details of each year, shows in a clear light the progress made by the banks at the expiration of three quinquennial periods. table . from to . +--------------+-------------+--------------+-------------------------+ | | number of | total amount | increase. | | year ended | depositors. | of deposits +------------+------------+ | | | from . | depositors.| deposits. | +--------------+-------------+--------------+------------+------------+ | | | £ | | | | nov. | , | , , | --- | --- | | nov. | , | , , | , | , , | | nov. | , | , , | , | , , | | nov. | , | , , | , | , , | +--------------+-------------+--------------+------------+------------+ taking the year , on account of the facilities for calculation afforded by the census of that year, we find that up to the th of november, , the total number of savings banks in the united kingdom was , of which were in england, in wales, in ireland, and in scotland. the smallness of the number of scotch banks is accounted for by the popular character of the private banks, and the fact that until within six years of the period we have reached, or , none of the acts relating to savings banks had any reference to scotland. the average amount of each deposit in was--in england about _l._; in ireland _l._; and in scotland _l._ the total number of depositors in england as compared with the population of , was one to every inhabitants, in wales in , in scotland in , and in ireland in . one of the most positive proofs of the increase in the provident habits of the people between and is to be found in the increase of the number of small depositors. in the number of depositors in savings banks who had not subscribed more than _l._ was , . in they had increased to , , or nearly three times the number.[ ] the amount of the deposits in the first instance was , , _l._; in it reached , , _l._ one writer, overlooking the fact that the increase here spoken of was a gradual one year by year, has endeavoured to trace the effect of the decrease in the amount of large deposits and the increase of the number of small ones to the operations of the act for the amendment of the poor law in . there can be no question that this act supplied motives for economy, and operated in increasing the number of provident people; but in view of the fact that the increase in the number of depositors between and was exactly in proportion to the increase between and or and , it is quite as proper, and we submit more so, to speak of savings banks operating beneficially upon the poor law, as that the poor law amendment act increased in this way the efficiency of savings banks.[ ] what assistance these savings banks must have rendered during the crises through which the people passed between and may be judged by the use made of them. but we think we see more in savings banks than that they enabled many in times of hardship by a wise foresight to escape much that others suffered. we see in the progress of these banks undoubted evidence of the increasing prosperity of the country, in relation at any rate to the poorer classes; and they were among the direct agents in creating that prosperity. savings banks created and then fostered habits of economy and frugality, and every man won over to the pursuit and practice of these habits increased the sum of the prosperity manifest during the period we are considering. perhaps we can make the position we here take up more clear from the following table,[ ] carefully compiled from the best sources of information on such subjects, and which we think is calculated to show the good influence of savings banks in a somewhat new and striking light. table . showing the increase in the deposits of the savings banks in each english[ ] county, between and , and the decrease in the poor rates during the same period:-- +--------------+----------+----------+---------+--------+-------------------+ | | | no. of | |increase| expended in | | county. |population|depositors| amounts | of |relief of the poor.| | | in |in savings| of |deposits+---------+---------+ | | . | banks in | deposits| since | in | in | | | | . | in .| . | . | . | +--------------+----------+----------+---------+--------+---------+---------+ | | | | £ | £ | £ | £ | |bedfordshire | , | , | , | , | , | , | |berkshire | , | , | , | , | , | , | |bucks | , | , | , | , | , | , | |cambridge | , | , | , | , | , | , | |chester | , | , | , | , | , | , | |cornwall | , | , | , | , | , | , | |cumberland | , | , | , | , | , | , | |derby | , | , | , | , | , | , | |devon | , | , | , , | , | , | , | |dorset | , | , | , | , | , | , | |durham | , | , | , | , | , | , | |essex | , | , | , | , | , | , | |gloucester | , | , | , | , | , | , | |hereford | , | , | , | , | , | , | |hertford | , | , | , | , | , | , | |huntingdon | , | , | , | , | , | , | |kent | , | , | , | , | , | , | |lancaster | , , | , | , , | , | , | , | |leicester | , | , | , | , | , | , | |lincoln | , | , | , | , | , | , | |middlesex | , , | , | , , | , | , | , | |monmouth | , | , | , | , | , | , | |norfolk | , | , | , | , | , | , | |northampton | , | , | , | , | , | , | |northumberland| , | , | , | , | , | , | |nottingham | , | , | , | , | , | , | |oxford | , | , | , | , | , | , | |rutland | , | no savings bank. | , | , | |salop | , | , | , | , | , | , | |somerset | , | , | , | , | , | , | |southampton | , | , | , | , | , | , | |stafford | , | , | , | , | , | , | |suffolk | , | , | , | , | , | , | |surrey | , | , | , | , | , | , | |sussex | , | , | , | , | , | , | |warwick | , | , | , | , | , | , | |westmoreland | , | | , | , | , | , | |wilts | , | , | , | , | , | , | |worcester | , | , | , | , | , | , | |yorkshire | , , | , | , , | , | , | , | +--------------+----------+----------+---------+--------+---------+---------+ in every county, as may be seen from this table, there is a decided increase in the number and amount of savings banks deposits between the two periods; and in every instance, except two, there is a decided decrease in the amount spent on the relief of the poor. not only so, but taking the two exceptional cases, we find that in the one case, a small county, there had not up to this time been any savings bank established; and in the other instance, that of the large and populous county of lancaster,--which shows an increase instead of a diminution on the two years in the amount of poor relief,--it is not less curious that its industrial population have never patronised the savings banks to the same extent, in proportion to their number and earnings, as the same classes have done in the country generally. further, the three counties of kent, middlesex, and norfolk, which in had the greatest number of depositors in savings banks in proportion to their population, also exhibit the pleasing fact of the greatest diminution in the amount spent in the relief of the poor. it may be said that many considerations ought to enter into such calculations as those we are making, and that at best such statistics only prove that the same causes, such as abundance of work, good harvests, &c., will contribute to the increase of surplus funds, and the decrease in measures of relief. but it must be borne in mind that prosperous trade does not necessarily produce frugal people and provident habits, though it often enough leads to unnecessary and vicious expenditure. by far the greater part of the decrease in the sums given for relief is unquestionably owing to the operations of the poor law amendment bill already referred to, which lord althorp carried through parliament. truly stigmatized before his time as "the great political gangrene of england," the old poor laws of this country first made paupers, and then promptly maintained them. it is, however, the relative proportion in which the increase of savings bank deposits stood to the decrease of the sums for relief that we wish here to impress upon the reader, leaving him to form his own conclusions. and with all respect to those who framed the measure of , which was very beneficial to the country and only just to the independent poor, we think the results have been rather too much magnified. from the year we can plainly trace a manifest improvement in the condition of the poor, and we have not scrupled to ask for a place for the saving bank system among those important agencies which have led to this improvement. still, taking the measures of poor law relief as a good criterion of their condition, we find that the sum total paid for the ten years between and was , , _l._, giving a yearly average of , , _l._ in the ten years ending , the amount of poor rates was , , _l_., or a yearly average of about , , _l._ thus we have, in spite of what was considered the iniquitous system of relief, and in spite of an increase of population amounting to per cent., a clear reduction of , , _l_. within ten years. the advancement is still more clear, if we take the case of the large centres of population, but this is perhaps, unnecessary. the returns, however, of the registrar general may be supplemented by revenue returns for the same period, from which the improvement in the condition of the industrial classes may be made still more palpable. in the consumption of tobacco was , , lbs.; in it had increased to , , lbs., an augmentation of per cent., while the population only showed an increase of per cent. during the same interval. the amount expended upon articles which, like tobacco and intoxicating drinks, are not, to say the least, of the first necessity, forms no incorrect measure of the progress of the nation, and of the ability of the people to bear the national burdens which must be imposed. in the consumption of sugar was , , lbs.; in it amounted to , , lbs., an increase of per cent. to be set against the above rate of increase in the population. the tea consumed in was , , lbs.; in it had increased to , , lbs., or an increase of per cent.; and coffee increased from , , in to , , lbs., or an increase of per cent., in . the increased consumption of such articles, (not forgetting reductions in price,) was an evidence of nothing, if not of the growing prosperity of the people. such items show that the people, as a mass, enjoyed a greater command over the comforts of life than formerly. the rich man, of course, added little or nothing to his ordinary consumption of the articles that were necessary to his comfort or convenience, but with the poor it was very different. for example, the amount of silk imported during the period of which we have spoken varied but little, while the imports on the article of cotton wool, the staple fibre of the masses, increased from , , lbs. in to , , lbs. in , or an increase of per cent.[ ] enough has been said, we hope, to show the gradual progress made in these years in all that relates to the social advancement and well-being of the people, and to what extent savings banks played a part on that advancement. because these institutions have been proved to create frugal habits--in much the same way that the supply of intoxicating drinks creates in many cases a demand for them--as well as to give them direction and encouragement, we have endeavoured to prove their right to a foremost place among the many other mighty engines of civilization which have made great britain what it is. and now we must conclude this chapter with a less pleasant task, and refer briefly, at present, to two foes to savings banks, one without and one within, both of which had a very powerful effect as hindrances on the progress of these useful institutions. we refer to the doubts which began to be cast on the utility of savings banks by portions of the public press, and the serious frauds which now for the first time began to engage public attention. in , when mr. goulburn's bill was under discussion and subsequently to that, several newspapers began to dispute that savings banks were either so useful or so wise as had been generally thought up to that period. the _times_ newspaper, with an hostility which dr. chalmers characterized as "most glaring" and "likely to mislead every artisan from the path of his true interests," laughed at and ridiculed the system long after it had proved its usefulness in numerous ways. that paper, which opposed the new poor law of with great bitterness, and had treated with manifest injustice other schemes for the social amelioration of the poor, devoted several editorial articles in to throw discredit on the institution of savings banks. the articles in question were calculated to work a mischievous practical influence on many readers, especially on those who gave little attention to the subject of political economy; they were meant to create a spirit of opposition to savings banks, but in many cases they must have had the opposite effect and failed to convince all who were not equally perverse. to show the kind of argument indulged in by the leading journal at a time when it was equally as now the greatest newspaper power in the land, when its rebuke or praise had a weighty effect on any important measure, and when cabinet councils debated whether it should be propitiated or defied,[ ] we need only give the following extracts:-- "a labourer sixty years of age has, by hook or crook, saved _l._ we know such a case. the _l._ is the plague of his life. it would be a mercy to swindle him out of it, except that he would probably feel a good deal at the loss. could he forget it, he would be both a happier and better man. to begin with, it is a guilty possession. his father is maintained by a distant union; his sons and daughters are all but forbidden his cottage. he invests it in secret.... when he dies his children will squander it, not in dissipation, but in the mere feebleness and incontinence of ingrained poverty." another extract striking at the root of all habits of providence and thrift:-- "when a labourer has saved _l._ or _l._ then the greatest difficulty comes: what is he to do with his money? he has caught a tartar. his usual course is a very natural one, because it is the first course that offers--to open a public house. he does so, and generally and happily loses his money. a labourer with _l._ in his pocket has a very fair prospect of the union workhouse before him. he is not commercial enough to open a shop, and small farms are obsolete. he may, to be sure, shut his doors against all his kith and kin, _and buy a selfish annuity with the sum_, which will just keep him while he rots and dies. but will he, and who is to advise him to do so?" granted that things are very different now to what they were when these remarks were penned, and that investments of any sort may now be made with comparative ease, it seems to us that the argument of the _times_ was based throughout on false assumptions; that it is a mistake to suppose that the primary or sole object of savings banks was to build up capitals for investiture in business or trade, and not for expenditure on the necessaries or comforts of life; nor to make every labourer a capitalist, in the usual acceptation of that term, but to enable him to end his days in some sort of independence, and in some degree of peace and comfort. savings banks at their establishment were, always have been, and still are, meant for accumulations, not to be traded with,--though, of course, there is no prohibition,--but always have had and still have a homelier aim. they are meant to inculcate the habit of laying by for an evil day, for old age, the winter of life, or as dr. chalmers, we believe, strikingly puts it, "for those mishaps and sicknesses which might be termed its days of foul weather." in such case the money will not be traded with, but in right season spent. the answers to some of the arguments of the _times_ are indeed so obvious that it seems superfluous even to state them. money in hand is all the world over better than beggary. that the inculcation of such a principle will tend to fill our towns with paupers is monstrous absurdity. the object and design of savings banks are, of course, primarily, to seek to get hold of the surplusage of money in the hands of the poorer classes, to rescue it from vicious or unnecessary expenditure at the best seasons, in order to its forming a reserve for needful subsistence or additional comfort at another period. "a domestic servant," says another article of the _times_,[ ] "at the age of fifty-five or sixty, finds she is incapable of further employment. she has saved _l._ very creditable to her, of course, and very stingy she must have been to her nephews and nieces to have done so much. but what is she to do with her _l._?... across the channel such a sum would be a mine of agricultural wealth. on this side the channel it would be a snowball in the sun." this is, by the way, an extreme and unfortunate case, and one we would hope not often, in all the particulars, occurring. but were it frequent, surely _l._ in hand is better than nothing and an immediate resort to the parish. to say that the _l._ would always remain _l._ and would not melt away like snow before the sun, would be ridiculous; but if there be any virtue in self-reliance, and in self-dependence, it surely would _not_ be ridiculous to say that that which enabled a woman to minister to her own wants in a greater or less degree, and in the same degree to rescue herself from becoming a burden upon other people, was, so far as it went, a solace and a blessing to her. once, and only once more, the _times_ declared that "investing money in savings banks was mere hoarding," nothing more than the creating of misers. "it is most melancholy to notice the few helps and encouragements to thrift and husbandry which our present condition allows the labourer. we tell him to save. we put it as the most indispensable moral duty; the great commandment of our law. we build prisons (sic) for those whom age or calamity have proved transgressors against it; yet, having laid this heavy burden upon the labourer, where is the 'little finger' of help contributed by society. we refer him to the savings banks and to friendly societies, _i.e._ we tell him to hoard his money, or to secure an annuity, on the chance of old age. there cannot be two modes of investment less interesting, less social, less suited to the condition of the mind of a labourer. where it is practised, we can only say that it is an act of faith and prudence so dry, so pure, so transcendental, as to be above humanity, especially that very form of humanity found in the english agricultural labourer." here we think both arguments and facts are at fault. there can be no question that at this time there were many almost insuperable obstacles to the profitable investment of small sums. these obstacles, caused by the state of society and the tendency of legislation, especially on the distribution of land, have since been removed, and no longer influence the case. why, however, the best should not be made of existing means is at least a fair question? people must save money--hoard it, if the term be liked better--before it can be used. it may be uninteresting and unsocial to save money instead of spending it, but people must do either the one thing or the other; and if they do the former, they at least know the value of a secure place of deposit where their money shall lie in safe and remunerative custody till it be needed. then as to the facts. "the acts of faith and prudence," "so dry, so transcendental, &c.," were at that time, as at present, more frequent where the agricultural labourer is in strongest force than in almost any other part of the kingdom. in dorsetshire--"poverty-stricken dorsetshire," as it is called by the _times_ itself--the savings banks return for averaged more than _l._ a head for the entire population, while in lancashire, with its highly-paid manufacturing population, it only averaged _l._ nor is this a solitary instance. the rural population throughout the country are by no means the least frequent visitors to savings banks.[ ] far more important, however, in their disastrous results than those attacks from without, were the blows levelled at savings banks from within. there were now developed inside these institutions seeds of much mischief, which materially retarded the growth of savings banks in subsequent years, if not of the habits which the promoters of savings banks sought to engender and foster. the subject of savings bank frauds will belong to a subsequent chapter; but as one or two cases occurred during the time treated of here, and had their influence on subsequent legislation, we have considered it advisable to dispose of them before proceeding to describe the legislation of the last twenty years. it was seen from the commencement of savings bank operations that the first and most imperative element should be complete and unquestionable security. when government undertook to legislate for savings banks it did so with a view to their protection from those frauds which must necessarily overtake some of a great number of semi-private undertakings. in the banks were rapidly increasing in number and importance, and it was only natural to suppose and assume that abuses would creep into the management. to meet the probability of a misapplication of the funds, government agreed to take all the money deposited with the trustees of savings banks, and to guarantee a certain fixed rate of interest for it, even above that which the fund directly obtained for itself. this was at once an encouragement to the frugal and a perfect security for such sums as were paid to the national debt commissioners. in the interval, however, between the payment of the sums by the depositors and the second payment by the trustees, no safeguard was provided beyond the vigilance of the same voluntary and unpaid trustees. those trustees were completely irresponsible after the year . before that time we can only assume their responsibility, not from the ordinary reading of the enactment, but from a decision which was given in a court of law. that decision was to the effect "that deposits are made by persons, not on the faith of the person acting as cashier or actuary, but upon the faith of the gentlemen who act as trustees.... if, therefore, the clerk or other person employed by them (the trustees) is guilty of peculation, they are themselves liable for any defalcation which may ensue." whether this decision was right in law or not matters little now, inasmuch as the act of released the trustees from any such obligation entirely, declaring as it did that "no trustee or manager should be personally liable, except for his own acts or deeds, or for anything done by him;" and even this was again limited "to cases where he should be guilty of _wilful neglect or default_." the valueless character of the safeguards granted to those who of all classes most needed ample security for that for which they had pinched and economized soon began to be seen. having limited the period of our survey in this chapter to the year , we cannot here introduce the case of the great frauds in savings banks which created such painful sensations all over the country as one by one the most monstrous iniquities practised on the most deserving of the poor came to light. our only reference here will therefore be to one such case in ireland, and the first instance of the kind in england. the case of the cuffe street bank in dublin, which, so far as we can find, was the first serious defalcation committed on savings banks made public, was also one of the most ingenious instances of an accumulation of frauds on record. the other case occurred in connexion with the hertford savings bank in . the dublin fraud brought to light earlier than this date deserves the first place, not only on this ground, but because it was greater in extent and deeper in villany. no one can read of the numerous cases of fraud which have occurred at different times in connexion with the irish savings banks without feelings of deep indignation. the influence, it is quite clear, is felt in ireland to this day. the irish people are quite an exceptional people, with whom forethought and self-control are not indigenous. one of the most important organs of public opinion in ireland, in alluding to such topics, has said that "nothing can be expected from the irish peasant until he learns to restrain his irregular impulses--impulses often generous, but too often impetuous and ill-directed--until he learns to make the gratifications of the present yield to considerations for the future." for many years the irish poor were left to themselves, and the result was shown in their reckless and determined improvidence. the institution of savings banks is described as having come to the irish industrial population like a ray of hope. great improvement took place. the irish labourer has never been worth so much as the english one,--the wages of many at the period of which we are speaking being generally sixpence, and scarcely ever more than a shilling a day,--and yet it can be proved that this very class had managed to contribute to the savings banks in ireland, up to the year , no less a sum than , , _l._ out of the total of , , _l._ then remaining in irish banks. it is impossible for pen to describe the result of a bank failure, occasioned by the worst possible circumstances of fraud, upon such classes as these. the actual failures spread dismay over the entire country. the loss they sustained was their ruin; for, so wronged, scores of them were thrown back despairing on their former recklessness, and referred to their treatment as full excuse for any amount of subsequent improvidence. and men will hesitate before they blame them. the cuffe street savings bank at dublin was originally established in as the st. peter's parish savings bank. it was started by several of the most influential gentlemen in dublin, who formed themselves into trustees and managers. the then archbishop of dublin, archdeacon torrens, judge johnson, and serjeant (afterwards lord chief justice) lefroy being among the most prominent. on the strength of the well-known character and wealth of the trustees, this bank from its commencement did a very large business; so much so, that it was calculated to have received in deposits in one year ( , when the bank was at its best,) no less than , _l._ the bank began on an unpretending scale enough, to judge by the appointment and pay of its only salaried official.[ ] this person was a mr. dunn, who combined in the functions of sexton to the parish with which the bank was immediately associated, with that of actuary of the bank, at a salary of five pounds a-year. the rector of the parish was security for dunn; but all such considerations troubled the trustees but little. on the strength of this person's religious character, for "he was a very correct man,"[ ] he soon became factotum. almost from the first a boy of the name of ballance, whom dunn had taken from a charity school, was his book-keeper. this lad was also a kind of general servant of dunn's, living with him in his house, and soon became his perfect tool. without making him his confidant--for the actuary was too cunning, as it seems, for that--he used him exactly as if he had been one. for eight years dunn managed solely the affairs of the bank, giving the most perfect satisfaction to every one, depositors as well as trustees. in , however, a mr. lannigan, a barrister, comes prominently upon the scene. this gentleman was a trustee, and seems to have been dissatisfied with being one merely in name. mr. lannigan began, therefore, a little "meddling," and from the way his interference was received, this trustee, shrewder than the rest, began to suspect something not quite right. he then looked narrowly into the system of keeping accounts, and was not long in finding sufficient to awaken the strongest suspicions of dunn's malpractices. dunn, however, had not been asleep all this time. he not only with great ingenuity kept his accounts as square as possible, but operated upon the credulity of the other working trustees, and succeeded in getting a party among the number to form a wall round him. on mr. lannigan mentioning his suspicions to his brother trustees, dunn's machinations stood him in good stead: they would not hear anything to the prejudice of this "very correct man." mr. lannigan repeated his attempts with the same effect; was considered a suspicious and troublesome fellow, and got no little abuse for his pains.[ ] for five years it is said this unseemly contest went on, and although this trustee succeeded so far as to get more than one sub-committee appointed, nothing came of it: the committee were too prejudiced in favour of their servant to go the right way to work in investigating the matter, or they were too easily blindfolded by him to find anything out. mr. lannigan, however, persevered in his opposition, and was rewarded by dunn's retiring, amidst the condolences of the whole parish, which evidently thought him a very ill-used man. soon the tables turned; and grief of this cheap sort gave place to bitter indignation. immediately after the man had resigned a depositor applied for some money, when, on comparing his pass-book with the ledger, the account was found to be open in the former and closed in the latter. hereupon the _ci-devant_ parish sexton absconded. with eyes at length wide open, the trustees called for the books of other depositors, and without as yet making any noise, soon found that dunn had appropriated , _l._ to his own use. the trustees then communicated with the national debt commissioners, and asked their advice in the emergency, suggesting that some one should be sent over to inquire into the circumstances of the bank, and to close it, if it were found necessary to do so. mr. foot, one of the trustees, a director of the bank of ireland, who had been one of dunn's strongest friends, and who was now one of the most anxious that the position of the bank should be retrieved, took the communication to london, and succeeded in securing the services of mr. tidd pratt. that gentleman went to dublin, however, not to investigate the case; but simply to make awards, stating how far and in what cases the trustees were liable to pay the depositors. he adjudged in cases, and to the amount of , _l._ of this sum , _l._ were to be paid by the trustees out of the funds remaining in the bank, while the rest claimed up to that time did not consist of legal claims, as the money had been paid to dunn out of office hours, at his private residence, and even in the street. mr. pratt found out in making his awards that almost every legislative enactment relating to savings banks had here been systematically violated; that the bank itself had rules founded upon the act, but that they had all been evaded. depositors had placed as much as _l._ in the bank in one year, and had received interest upon all they had deposited; the same individuals were also found to have had two different accounts in the bank. in all cases of this kind where a deficiency existed mr. pratt ruled that the depositors could not legally recover, but he recommended in his private capacity, that if the bank were carried on, such sums might be paid out of the accruing yearly profits. mr. pratt is said to have recommended in the same way that the bank might go on under a fresh management, and seems to have appointed another set of trustees for the purpose; at the same time informing them that the national debt commissioners would _receive without remark_ the yearly statements as usual, though those statements must of necessity for some time to come exhibit an increase of liabilities over assets. the bank was carried on, and against mr. pratt's advice the whole of the claims were at once met, "with a view," as the trustees said, "to induce a more perfect confidence." in , the government observing that year by year the bank was getting into a worse financial position,[ ] made an attempt to close it; but on the case being submitted to the attorney and solicitor general, they found they could not do so unless the annual returns were _not sent_. the returns, worthless as they were, had been regularly sent, and thus the executive was powerless. after another crisis at this period, the bank finally went down in , the liabilities amounting to the sum of , _l._ and about _l._ to meet it. the number of depositors who had accounts with the bank at the time was , , nine-tenths of whom were poor people. in a debate which occurred in the house of commons immediately after this failure, mr. reynolds, the member for dublin, commented in strong terms on the conduct of the national debt commissioners, who had known the state the bank was in for fifteen years, and had never zealously interfered.[ ] this member also stated his intention to move for a select committee to investigate the whole question. the chancellor of the exchequer said he saw no objection to such a committee, and it was subsequently appointed. the proceedings of that committee, and the assistance which was given to the defrauded depositors after much debate, will be referred to in their proper place in the next chapter. the results of this fraud in dublin and the neighbourhood was most disastrous; not only so, but years afterwards, in remote parts of england as well as ireland, this case of fraud was referred to with considerable bitterness, and urged as an excuse for prodigality and recklessness. there was at the time a still more important savings bank, with several branches, in dublin; and so great was the effect of the fraud, that nearly all the money deposited in this bank was withdrawn within four weeks, and it was a considerable period before it recovered its position. the depositors in the cuffe street bank were of the poorest classes, and the effect upon them when they found they had been robbed of all they had is described as painful in the extreme. "dealing with the case, and the details of it," said one influential gentleman, "i have never seen anything more calculated to excite painful feelings than this was; some of the depositors were on the very verge of wretchedness and destitution, without a shilling to support them." according to another excellent authority[ ] some died of want and distress, and many of them had to seek the shelter of the workhouse. before the case came on for discussion in parliament, several petitions were presented to the house of commons, praying for help, and setting the pitiable situation in which the frauds had placed many of the depositors before the public; and one, signed by , citizens of dublin, with the protestant and catholic archbishops of dublin heading the names, bore out in full the facts to which we have just alluded. the fraud in connexion with the hertford savings bank was one of the earliest cases that occurred in england, the particulars of which have been made known. this bank, as will be remembered, was one of the first formed in this country. like many more of the original banks, this one was conducted on the principle of making it a head office for the surrounding district, with branch banks radiating from it as from a centre. clergymen, as has already been stated, almost exclusively acted as the agents for these branch banks. the rev. mr. small, a clergyman at st. albans, acted in this capacity in that town, and in the course of a connexion with this bank, extending over a period of several years, contrived to embezzle the money entrusted to him to the extent of , _l._ this he did in two different ways. in the one case, he received deposits and did not remit them; and in the other, acting with due clerical discretion, he applied to the head bank for sums in the names of depositors for which he had not received their warrants. the systematic frauds of this reverend gentleman were found out when the st. albans bank was detached from the parent stock under the erroneous impression that it was strong enough to commence business on its own account. it appears that in this way the trustees of the principal bank were only liable for half the amount of the defalcations; but it ought to be placed on honourable record, that eventually, through the liberality of the trustees, who, fortunately, were principally rich noblemen, the poor depositors were reimbursed of their losses in full. we have gathered the above facts from statements made in the house of lords in , and as the question of the liability of trustees and the security of deposits was then largely introduced, it may be interesting to follow up the story with a few remarks to which the case gave rise. the marquis of salisbury, one of the trustees, asked the premier, lord melbourne, if the law, as it then stood, could not be altered. the liability of trustees, inculpating, as it might, innocent men, rendered many gentlemen most anxious to withdraw their names from such offices. this was one horn of the dilemma. the other was, how depositors could be made to feel secure. "it was no trifling matter. when savings banks were first formed, but few individuals could ever have expected that the sums subscribed would amount to what they now were."[ ] it was high time that the security of these savings, and as to who was liable for them, should be once for all distinctly settled. lord salisbury was sure no one would like to remain a trustee without knowing the amount of his liability. he then appealed to viscount melbourne--who with himself was a trustee of the hertfordshire bank, and would have to pay a share of the loss--whether he would not have a bill brought in to remedy the grievance. lord melbourne thought it was not necessary. much as he lamented, for his own sake and that of the country, what had occurred down in hertfordshire, he did not think that in consequence of this one misfortune they should interfere with the general business of the savings banks in the country. let them look sharper after the management, and then such things would not occur. lord brougham believed there had been great carelessness in the case of this particular bank, "but was happy to find that the trustees were such undoubtedly solvent men." lord salisbury and the duke of richmond were certain, if nothing had to be done, that many trustees would at once withdraw their names, "and then," said the latter, "the body of depositors would withdraw their money." lord denman reminded his noble friends that, if the trustees acted so, their responsibility would, in all probability, follow them into their retirement,--"he was by no means sure that their withdrawal would put an end to their responsibility." the earl of wicklow hoped that nothing would be said or done which would destroy the confidence of the public in savings banks. he trusted that, in this instance, "the trustees would be found liable for the whole of the deficiency." lord salisbury thanked the noble earl for his kind wish, but explained how it was not possible that this could occur. an alteration in the law was eventually made, but the consideration of this change we leave till the next chapter. [ ] _cobbett's register._ january, . [ ] nearly, but not quite. injury is still done by false and mischievous teachers of working men; and the latter resent what they consider their wrongs and grievances in ways which are equally unjustifiable, if not exactly similar to those adopted by their fathers. those who would do real service to the working classes are those who take up and expose the fallacies of living demagogues, by which the latter are misguided and led to injure themselves by strikes, combinations, and hostility to capital and machinery. and educational reformers will do the state good service in endeavouring to get lessons taught in political economy to those who will be at some future day our mechanics and artisans, and who from continued ignorance of the inevitable laws of supply and demand, of the value, even to them, of the security of property, of the laws which regulate the operations of the market, may possibly fall into the errors and the mistakes of their predecessors. [ ] _report of the committee appointed by the highland society of scotland to consider what is the best mode of forming institutions of the nature of savings banks, for receiving the deposits of labourers and others._ edinburgh, . [ ] nine-tenths of the existing benefit societies are still held at public houses. this arrangement must always be, so long as it exists, a theme for reprobation. there cannot be many greater anomalies than this of the association of the club and the cup, the bane and the antidote, saving and wasting. speaking on this point, the rev. j. b. owen justly remarks that the strange association "together verify the old pagan fable of the tub of danaus full of holes, whose daughters were condemned to be perpetually filling it, while all that was so laboriously poured in as wastefully and hopelessly ran out." or, as some one else has put it who has employed the same figure more strikingly:-- "like danaus' tub is the public house club: their customers' mouths are the holes; ill spared is the 'chink' that's wasted in drink, to the bane of their bodies and souls." [ ] see next page. [ ] _quarterly review_, vol. xxxii. p. . [ ] "many a man in that year," ( ), says miss martineau, "set up for a banker who would, at another time, have as soon thought of setting up for a king."--_history of the thirty years' peace._ lord liverpool complained afterwards of the system "which allowed any petty tradesman, any cobbler or cheesemonger, to usurp the royal prerogative, and issue money without check or control." [ ] one prospectus of this date sets forth that, in the district proposed for a mine there was "a vein of tin ore at its bottom, as pure and as solid as a tin flagon." another, "where lumps of pure gold, weighing from ten to fifty pounds, were lying totally neglected," the quantity of gold in the mine "being considerably more than was necessary for the supply of the whole world." mr. canning, in reference to the companies projected, said soon afterwards, "they fixed the public gaze, and excited the public avidity so as to cover us, in the eyes of foreign nations, if not with disgrace, at least with ridicule. they sprang up after the dawn of the morning, and had passed away before the dews of the evening descended. they came over the land like a cloud; they rose like bubbles of vapour towards the heavens, and destroyed by the puncture of a pin, they sank to the earth and were seen no more." [ ] _annual register_, . [ ] _progress of savings banks._ a series of tabular views, to , by mr. j. tidd pratt. london. . [ ] _companion to the almanac_, , p. . [ ] see next page. [ ] we give the statistics as relating to england only. scotland is out of the question, not merely on account of the slow progress of savings banks there, but more especially because of there being nothing analogous in scotland to our english system of poor law relief. [ ] the mortality at the commencement of the present century was in ; in it was in ; and in , in ; showing conclusively that the masses of the people were better housed, better clad, and, best of all, better fed. [ ] miss martineau's _history of the thirty years' peace_, vol. ii. p. . [ ] _times_, september, . [ ] to make this statement more clear, we append a later return, which, on other grounds, is interesting, as showing which classes of the community resort most frequently to savings banks. it speaks volumes as to the culpability of the higher paid english operative, that the agricultural labourer, with ten or twelve shillings a week, contrives to save more, relatively, than he does. +----------------------+---------+--------------+----------------+ | |number of| no. of |average deposits| | counties. | accounts|depositors to | per head of | | | open in | every of | population, | | | . | population. | . | +----------------------+---------+--------------+-----------------+ | agricultural:-- | | | £ s. d. | |berkshire | , | · | | |devonshire | , | · | | |dorsetshire | , | · | | |yorkshire, east riding| , | · | | | | | | | | manufacturing:-- | | | | |lancashire | , | · | | |yorkshire, west riding| , | · | | +----------------------+---------+--------------+----------------+ something of this result can of course be traced to the varying facilities, such as the number of banks, which were not always established in the most populous localities. [ ] _vide report of the select committee appointed to inquire into and report upon the circumstances connected with the failure of the cuffe street savings bank_, , from which our account is derived. [ ] "i am certain," said a reverend witness, "that he was a very correct man until the temptation of such an enormous quantity and overflow of money got into his hands."--_report_ ( ). [ ] one of the questions asked, by the chairman of the committee just quoted from, of mr. fox, curate of st. peter's, dublin, was ( ): "do i understand you to say, that mr. lannigan communicated his suspicions regarding mr. dunn to the board of trustees?" "yes," answered the reverend gentleman, "and we used to have _extremely warm contests_ there on that account, because he was not a man very capable of explaining his meaning." [ ] the whole of dunn's defalcations, which were found ultimately to amount to about , _l._ were not found out till this year. [ ] great attempts were made to show, at this time, that the government had grievously neglected its duties, and that the arbitrator exceeded his. from the anomalous and unsatisfactory state of the law, which occasionally placed the commissioners and the certifying barrister in embarrassing positions, a colour was often lent to these allegations. it is very clear that flagrant mistakes were palmed upon the national debt office, and never found out, and not less certain that, at this early period, mr. pratt was often hampered by uncertain and incomplete powers. [ ] dr. hancock, in a pamphlet entitled, _duties of the public with respect to charitable savings banks_. dublin, . [ ] about sixteen millions sterling. chapter v. legislation on savings banks from to the present time. "if there is any question why such importance should be ascribed to measures of a purely economic character, the reply is, that these minor matters insensibly build up the character of the nation; insignificant, it may be in themselves, they mark, in the aggregate, the well-being or the suffering of the british people."--_british quarterly review._ it will be remembered that in the third chapter we described the course of parliamentary action with regard to savings banks down to the year , and in that chapter left mr. hume, after an unsuccessful attempt to reduce still further the rate of interest to be given to depositors. the year is remarkable in the annals of savings banks for the carrying of a measure known as mr. goulburn's act. the bill which was introduced by that gentleman, who was chancellor of the exchequer in sir robert peel's administration, was meant in great part to provide against the constantly recurring frauds in savings banks, and still more especially to allay the consternation among trustees of safe banks, who now loudly complained of the state of the law with respect to their liability. the discussion in the house of lords to which we alluded at the close of the last chapter may be taken as showing that savings bank trustees were by no means satisfied, several years before this, with the uncertain state of the law. the great fraud on the dublin bank is described as having come upon many trustees like a thunderbolt, and, aware that they were not spared by the judicial bench[ ] in cases of the kind, they now threatened open rebellion. mr. goulburn received, as he stated subsequently before a committee of the house of commons, a large number of notices from such officers that, if the law were not modified, they would resign their trusts. moved by such considerations as these, which the government seem to have felt they could only disregard at the imminent risk of shaking the credit of the entire savings bank system, mr. goulburn introduced his bill ( & victoria, chap. ,) on the d of may, , to amend the laws relating to savings banks.[ ] the principal matter with which the bill dealt was the liability of trustees, but this was by no means the only one. second only in importance was the proposal to again reduce the rate of interest. the remarks with which he introduced his proposal to reduce the interest rate are curious, to say the least, when viewed in the light of the speech to which we have previously referred. he felt confident, he said, that the country _had no right_ to pay upon these investments a higher rate of interest than could be obtained from an investment in other securities. the savings banks rate was considerably higher than any other investment of money. although the act of had tended to reduce materially the number of depositors of the better classes, and had increased--as we have shown in the last chapter, we think quite conclusively, so far as figures can show it--in a still greater proportion the number of those who had deposited only small amounts, there were still many who were attracted to savings banks on account of the interest given being higher than that obtained from the funds. mr. goulburn now proposed that the bill should contain a clause reducing the rate from - / _d._ per cent. per day, to _d._ with the same object in view, namely, to restrict the operations of savings banks to the class of provident poor, the chancellor proposed to reduce the amount which any one could put by in one year from _l._ to _l._ and to make the total amount which could be deposited in any savings bank, _l_ instead of _l._[ ] a further proposition, which provided for another wide-spread evil in the same direction, was one requiring that no persons should be permitted to make deposits as trustees without stating the names of the persons for whom they were acting, and that no payments should be made in such cases except under a receipt signed by all the parties interested in the funds deposited. by means of the clauses in previous acts relating to trust accounts, the law was regularly evaded, and many persons had considerable sums of their own in savings banks, which they represented as being held in trust for other people, whose names even they were required not to divulge.[ ] this clause was carried without any trouble, as it met such a palpable evil; provision was made, however, that the law should not be applicable to trust accounts opened before the passing of the act. had it not been for such an exception, those who had recourse to the stratagem of feigning the character of a trustee might have lost much of their money, on account of the difficulty or impossibility of obtaining within the time the signature of the party apparently interested. though the clause was not made retrospective, as some urged it should be, as a punishment to those who had deceived the managers of savings banks, it was clearly the best thing that could be done to put an end to the practice, which entirely depended on the powers of the so-called trustees to draw out the money alone. mr. goulburn spoke next on the question of liability of trustees. though the topic was engaging great attention out of doors, little was said upon the point on this occasion: the section of the act thus passed so quietly, was, however, pregnant with meaning, and, as it turned out, pregnant with results. the clause provided that no trustee or manager of any savings bank shall be liable to make good any deficiency which may hereafter arise in the funds of any of these institutions, unless these officers shall have respectively declared, by writing under their hands, _that they are willing to be so answerable_; and not only so, "but it shall be lawful for each of such persons, or for such persons collectively, to limit his or their responsibility to such sums as shall be specified in any such instrument." this declaration was, of course, to be lodged with the national debt commissioners. on a trustee or manager making it, he became liable to make good every deficiency that might arise in the bank with which he was connected, whether through his own carelessness, or the cupidity of those under him; if a declaration of this sort were not made, he was liable for nothing.[ ] the above were the three most important changes made in the law of savings banks under mr. goulburn's act, but there were several minor clauses introduced into the bill which deserve mention, and which were, there can be no doubt, equally with the more important sections, the direct results of the systematic frauds already described. with his eye direct on the cuffe street actuary, concerning whom the government knew more than was generally known in , the chancellor, whilst studiously avoiding all mention of the dublin case, spoke of those who, ignorant of business, took their money to improper places, and made deposits out of office hours. the fourth section of the act was, therefore, designed to meet such cases, by declaring any actuary or cashier who should so take money out of course, and not account for it at the very first meeting, to be guilty of a misdemeanour, and liable to be punished for fraud. section required that deposit-books should be produced at the bank at least once every year for purposes of examination and check. section provided that bonds of sufficient security shall be given by every officer of a savings bank trusted with the receipt and custody of money, and that these bonds shall be placed (not with the clerk of the peace as before this act), but under the charge of the national debt commissioners. the old arrangement likewise for depositing the rules of the bank with the clerk of the peace was repealed by section , and in its place the next section enacted, that when a new bank was proposed, two written or printed copies of the rules of such bank should be transmitted to the barrister for his certificate, who, on approval, was to send one copy back to the bank authorities, and the other forward to the national debt office. it was the and vict. which, in addition, conferred extended powers on the certifying barrister, by appointing him final arbitrator in any disputed case. the bill, after having been modified in one or two respects, and contested on several points,[ ] received the royal assent in august, , and was ordered to take effect on the th of november following. it will not be supposed that the bill, of which the above is an outline, was passed through its different stages without a word from mr. hume. that member may well be forgiven for alluding on one of these occasions to the past, and stating, how, so far as the rate of interest was concerned, he had been fighting for the very thing which was likely to be brought about. this was clearly a case of patience and obstinacy rewarded.[ ] the bill, however, mr. hume stated, scarcely went far enough for him, though it was in the right direction. he still held the opinion that persons holding government security should be placed on the same footing, and that those who had _l._ in the funds should be dealt with in exactly the same manner as those who had , _l._ in this, however, we cannot help thinking mr. hume went rather too far, and argued on the assumption that there was no difference between the shilling of the rich and the shilling of the poor man. mr. goulburn in replying to mr. hume said, he knew this was a favourite point with the member for montrose; but he could not concede it: a poor man with _l._ in the funds could not and never would be able to bear a fall in the funds so well as the large stockholder. early in a committee of the house of commons, consisting of the chancellor of the exchequer, mr. goulburn, mr. j. a. smith, sir j. y. bullar, mr. shafto adair, mr. bramston, mr. gibson craig, mr. fagan, mr. h. herbert, mr. herries, mr. hume, mr. reynolds, mr. poulett scrope, and mr. ker seymour, was appointed to inquire into the state of the irish banks. as already related in the last chapter, the cuffe street bank soon broke up after the trustees were enabled to take refuge under the act of . into this inquiry, which we have before referred to, it is unnecessary to enter much further; it presents little else than information relating to the flagrant breaches of faith of officers to whom were entrusted the hard earnings of hundreds of the poorest people living around them. the scope of the inquiry was limited to ireland. it seems to have been purposely intended that a full investigation into the general savings bank question should not now be made. the inquiry was not extended in any sense to the english banks, though some of the most prominent english managers offered to give evidence. doubtless the government feared that a full exposure of the frauds in savings banks, an inquiry into several matters connected with the disposal of savings bank money already beginning to be mooted, might have the effect of shaking the confidence of the people. people were openly saying that government had not done its best to make the savings bank a secure repository for the people; yet, rather than raise this issue before a committee of the house, it submitted to have the investigation that _was_ made designated "a perfect star-chamber business," and the members of government themselves subjected to great ridicule. the committee sat only nine days, and made a report to the house, which lord george bentinck characterized as "the most extraordinary one that ever was presented to parliament." "it is as remarkable for its brevity as for its vacuity--as brief as it is worthless." the report is certainly brief, and may here be given without curtailment: "your committee," it commences, "has proceeded with the inquiry entrusted to them by the house, but owing to the late period of the session they have found themselves unable to bring it to a satisfactory conclusion. they are of opinion that it is advisable that a further inquiry should take place, either during the recess or in the next session of parliament, regulating the liability of trustees, and providing for the appointment of _auditors_ to savings banks." the government immediately set to work to introduce a bill. they saw that a great mistake had been made four years before, in settling the question of the liability of trustees in the way it was done, and now the endeavour must be, if possible, quietly to re-enact the old law in this particular, making trustees liable in the way they were before . the great mistake in this instance, and that which proved fatal to the attempt, was in legislating for english as well as irish banks, when the inquiry upon which the bill was taken to be founded had been limited to ireland, and was not allowed under any circumstances to extend to england. the debates to which the measure of gave rise are certainly the most animated that ever took place in the house on this subject, and it will be interesting, as in different ways indicating the feeling of the country, to notice the expressions of opinion which the discussion elicited. the _chancellor of the exchequer_, sir charles wood, in moving the bill to amend the law of , appears[ ] to have urged that the clause requiring the trustees to voluntarily assume responsibility had completely failed; that few trustees would take the responsibility upon them, and that, consequently, depositors were losing faith in the banks;[ ] irregularities were increasing; and the trustees had not even the pretence of a sufficient inducement to make them attend to their self-imposed duties. in place of no responsibility at all, he proposed that each trustee should be responsible for a certain sum, which would be large enough to ensure a reasonable amount of attention, and so small as not to frighten them into resigning their office altogether. this sum it was proposed to fix at a hundred pounds. clauses in the bill also provided for the appointment of auditors, as suggested by the committee of inquiry, and for the examination of depositors' books, "that once in each year the books of every depositor shall be produced at the office of each savings bank, for the purpose of being inspected, examined, and verified with the books of the institution by the auditor." more from the way in which this bill was introduced and the circumstances attending the committee of inquiry, than from any decided opposition to the government proposals, much agitation prevailed among savings bank officials, which was ultimately made to extend to depositors.[ ] the latter were led to believe that the proposed legislation would in some way be inimical to their interests, and petitions were got up, praying that no further acts should be passed until a full inquiry was made into every part of the savings bank system. _sir henry willoughby_, who for some years before this time, and till his death, took much interest in this and cognate questions, again presided at a meeting of savings bank managers in london about this time, and helped them to concert measures of opposition. before speaking in parliament on the introduction of the bill under consideration, he presented two large petitions, signed by , depositors in savings banks, praying that government would cease their interference with these institutions. this gentleman then referred to the quietness with which government had introduced such an important bill, "not having given such a notice as was invariably given even with respect to the commonest turnpike road." and the quietness was a mistake of no ordinary moment. had the details of the bill now introduced been understood by the country, there might have been opposition from managers of savings banks, but there could not well have been so much dissatisfaction expressed by the press, or by the body of depositors, whose interest every clause of the bill was meant to conserve. sir henry willoughby also on this occasion gave utterance to the feeling which was in many other minds, and which had led to the opposition then manifested, by alluding to "the impression which had got abroad and which he believed was perfectly true, that the money of depositors was used for other purposes by the government than those that related to the savings banks." whether the money was used advantageously or not he would not say, for that was not the question. _colonel thompson_ spoke strongly of the erroneous impression that everybody had been in about the savings banks having full government security for their money; so strongly, indeed, that in another place we shall make further allusion to him. the bitterest opponent, however, which the chancellor met with on this occasion was the leader of the opposition in the house. _lord george bentinck_ felt sure that the bill was one which its mover (sir charles wood) did not understand. after going into the details of the measure, and endeavouring to prove that the examination of depositors' books could not be accomplished in the larger banks every year,[ ] and that the smaller concerns could not afford to pay for auditors out of the small surplus of interest which went to pay expenses, lord george added, "surely a government which had proposed so much and done so little, can refrain from doing harm, since they cannot do good; and will not press this most discreditable bill through the house at the end of august without necessity for it, and against the opinions of those best calculated to form a judgment." irish members, seeing the turn the discussion was taking, urged that, at any rate, the bill might apply to ireland. it was patent to everybody that the poor depositors in ireland needed every protection, however secure the same classes might feel in england. in ireland such a bill was really required, and was necessary, to restore confidence in savings banks;[ ] why not make it apply to ireland only? after an unsuccessful attempt on the part of lord george bentinck to throw out the bill altogether, it was decided, on the motion of mr. wodehouse, and by a vote of thirty to eleven, that the words "great britain" should be struck out of the motion, and that the act should simply apply to irish savings banks. that the bill now passed was a beneficial change in the law, and a considerable step in the right direction, no one now doubts; had not the perverseness of savings bank officials prevented the government from making its provisions apply to england, much subsequent suffering and grievous loss would have been saved to many of the best classes of our industrial population. it was a safeguard such as was wanted in ireland, and it answered admirably. the bill having been made law, and new depositors secured to a considerable extent from robbery and exaction, the attention of the legislature was called to those who had lost their all by past frauds; and the records of parliament show that one member after another reverted to such topics until redress was obtained. on the th of march, , _mr. reynolds_, the member for dublin, moved for the appointment of a committee to investigate into the case of the cuffe street bank in dublin, and to ascertain who were liable for the extensive frauds in that bank. he alluded to the unsatisfactory result of the previous inquiry, which was, indeed, not meant to be final. in making his motion, mr. reynolds, who had access, of course, to the best sources of information, entered into a full account of this bank, stating, indeed, many of the facts which we have already given. he complained most bitterly of the government, who had accepted the advice of a "flippant barrister," as mr. pratt was designated, and who had suffered the bank to go on when it was known to be in a state of hopeless insolvency. he described the heartrending scenes which he had witnessed in dublin, owing to the failure of the bank, and during the last eighteen months, and related some of the cases to the house, where they had ended in insanity, death, or suicide. that the depositors were mostly poor persons he proved, by stating the average amount due to each of the , persons who were creditors of the bank to be but _l._ mr. reynolds added, that he had no hesitation in saying, under the peculiar circumstances of the case, that the government ought to make good the loss.[ ] if he had not proved that point, he left it to a committee of inquiry to take up. "in the name not only of justice, but of mercy and compassion," he besought the house "to agree to his motion, and to save many poor persons from utter and total ruin." the member for dublin university (mr. napier) seconded the motion for inquiry, and discussed many of the details of the failure from a legal point of view. in one remark, he gave expression to a very general feeling: the course of legislation on savings banks had plainly been to reduce, for strong reasons doubtless, the responsibility of trustees; in proportion, however, as that responsibility was reduced, so he, mr. napier, thought the moral responsibility of the commissioners increased. "precisely in the same degree as the trustees were relieved, should the vigilance of the other body have been awakened." nor was it less unfortunate--though this is a matter which was not alluded to--that at a time when it was thought most fitting that the interest on deposits should be reduced, steps should also be taken to make them less secure as well as less remunerative. _mr. h. a. herbert_, the member for kerry, proposed an amendment, extending the inquiry to this tralee and killarney banks, and also to the single case of failure in scotland, at auchterarder. mr. herbert dwelt upon the case of these frauds in an able manner, but we reserve the consideration of them to the next chapter. the reference to the scotch case doubtless called up mr. cowen, the member for edinburgh, who was sorry to hear of the necessity for any such inquiry in scotland; he "had been accustomed to think that they were above suspicion in scotland with reference to their banking matters." _mr. cowen_ said that he regarded all discussions on savings banks as most momentous, and as involving the consideration of the most important national questions. "it was of the greatest importance that savings banks should be placed on a solid foundation, and cleared of all those injurious anomalies which now attached to them," for he "believed that they might be made the means of aiding in a great measure to stem that flood of pauperism which was now overflowing the land." much warm discussion followed. the _chancellor of the exchequer_ alleged that the proposed inquiry would be both a useless and an expensive one; and mr. goulburn, the ex-chancellor, who was equally committed to the same course of legislation and the difficulties which that legislation had brought upon the government, rendered prompt assistance by saying exactly the same thing. on a division, it was carried by a majority of three in a house of members, that a committee should be appointed; and by a majority of eight, that the inquiry should extend to the three irish and the scotch defaulting bank.[ ] it was one thing, however, to carry a committee of inquiry in the face of both the great parties of the house, and another to nominate the members who should compose it; and this mr. reynolds subsequently found out to his evident chagrin and disappointment. the government had clearly not been sufficiently on the alert, and hence they had been beaten in the first particular; they secured themselves however against any further defeat. in the following april, mr. reynolds proceeded according to usage to nominate his committee, which he wished should consist of eight english and seven irish members. the chancellor of the exchequer objected, and wished for the reappointment of the committee of the preceding session. mr. goulburn promptly assisted by saying, that it would be a reflection on the committee of last year if it was not so reappointed. in that committee there were only three irish members, though the subject then, as now, had exclusive reference to ireland. mr. reynolds, mr. herbert, sir henry willoughby, stoutly contested the point, which ended in the names of two additional irish members being proposed. the government saw the importance of the question, and that the inquiry would be made in this way to turn upon the administration of savings banks generally, and the responsibility of government in regard to them, and succeeded in resisting any change by an adverse majority of to . the whole of the names not having been gone through on this occasion, the irish members returned to the subject again a few days subsequently. "in the names of the poor who had been rendered paupers by laws badly administered," one member asked, "for an impartial jury." some of the daily papers had declared that the government meant to pack the committee and so get a favourable decision, and this encouraged the independent members to persevere. mr. herbert said, "the government all along most consistently attempted to quash inquiry." he condemned in strong terms, and under the apparent approbation of the house, the conduct of mr. pratt in relation to the irish banks. mr. reynolds declared he would divide the house upon all the remaining names offered by sir charles wood. after two divisions, however, when he was left in a minority of , and , in a house of members, he desisted from carrying out his threat; though he had a close phalanx of followers, he saw he had no chance against the combined hosts which the leaders of the two principal parties in the house had brought to bear. the members ultimately appointed were the chancellor of the exchequer, the ex-chancellor, mr. herries, sir george clerk, mr. p. scrope, sir g. y. bullar, mr. ker seymour, marquis of kildare, mr. adair, mr. g. craig, mr. w. fagan, mr. bramston, mr. j. a. smith, mr. h. herbert, mr. reynolds. this committee sat thirteen days, and examined nine witnesses, including several officials connected with the cuffe street bank, mr. tidd pratt, mr. higham of the national debt office, and mr. boodle of the st. martin's place savings bank, but came to no conclusion, and recommended nothing to the house. on the th of may, , the same gentlemen were reappointed under the self-same conditions as in the previous year: they sat eleven days, and examined some of the same and other witnesses, and on this occasion made a long and exhaustive report to the house.[ ] this report, for which all the members except mr. reynolds and mr. herbert voted (each of these gentlemen having produced a report of his own which the committee would not accept), went over the case of the defaulting savings bank in dublin very succinctly; exonerated national debt commissioners and their officers from blame; stated that they found the commissioners did not exercise all the powers they possessed, but this arose "partly from a misgiving as to the effect of an exercise of their authority, and partly from an unwillingness to run the risk of creating a discredit of these institutions;" and that if the trustees had taken the advice of the commissioners, when in they advised them to close the bank, the loss to the depositors would not have exceeded five shillings in the pound. for these and similar reasons the committee came to the weighty conclusion, relative to this particular case of fraud, that "while they cannot admit the existence of any legal liability on the part of her majesty's government, they recommend the case of the depositors in the cuffe street bank to the favourable consideration of the government, with a view to the adoption of some measure which shall at least mitigate the extent of their loss." with regard to the other frauds into which they were instructed to inquire, they reported that there were "no peculiar features connected with them differing from those of other banks which have suffered from the dishonesty of their actuaries." they concluded by expressing their conviction of the unsatisfactory state and working of the existing law; proper power did not reside with any authority "to check abuses, however indisputable;" by expressing their opinion that the provisions of the law of had worked in a manner obviously at variance with the intentions of parliament, and wound up by the following important paragraph:-- "your committee have observed with much satisfaction that the chancellor of the exchequer has introduced a savings banks bill, which is calculated to remedy several important defects in the existing law, and extends the responsibility of her majesty's government to the depositors; and they therefore abstain from all observations on this part of the subject, further than to state the conviction, which this inquiry has forced upon them, of the urgent necessity for further legislation, if those institutions, which have of late years acquired an extent and importance so little anticipated by the original founders of savings banks, are to preserve their hold on the confidence of the country, or produce the beneficial results expected from them in encouraging and rewarding the industry and self-denial of the working classes." this report was presented to the house on the st of august, and at once referred to a committee of the whole house. next day, the chancellor of the exchequer proposed that a grant of , _l._ should be made to the defrauded depositors in the cuffe street bank, out of the consolidated fund. _sir james graham_ opposed the grant. if this money was a matter of charity, he argued, they were opening the door to a dangerous principle; if of justice or equity, the claim ought to be paid in full. it was unworthy of the british public to compromise for ten shillings in the pound. other members asserted that if cuffe street depositors were paid, the poor creditors of other insolvent banks would likewise have to be paid. generally, however, the house felt with the committee; it was altogether an exceptional case, the claims of the former being, as sir charles wood expressed it, "something between equity, sympathy, and charity." _mr. bright_, a resident of rochdale, and _mr. sharman crawford_, the member for that borough, whose ears had lately rung with the tales of heartless deception practised there, were both for paying these depositors in full; "there might be no legal claim, but there were the claims of equity and morality." mr. bright, indeed, went so far as to say, that if government would bring in a bill to secure other banks in future from these dreadful calamities, he would willingly vote that all claims from savings bank failures should at once be met by the state. the house divided on sir charles wood's motion, when members voted for it, and against it. we may as well say here that several attempts were subsequently made to get the remaining , _l._ from government, but without avail.[ ] it will not be difficult for the reader to understand the position of affairs up to . the law was clearly unsatisfactory; it had been pronounced so by committees which, though composed of nearly the same members, had sat in three successive years, and patiently examined into the question in its every detail. the only difference of opinion indeed in the committees was, as to the persons who were liable, and to what extent, for the defective state of the law, and the results to which it had led. nor is it at all wonderful that legislation should have been needed. savings banks, as it was often pointed out about the time, had increased enormously within a short period, and beyond all proportion to the expectations which were originally formed with regard to them. when they were first started, many benevolent individuals entered heartily into the work of managing them, and asked for no return, except the sense that they had assisted in a humane and praiseworthy object, for the labour they underwent. putting two considerations together--the great increase of business, and the no less certain decrease in the first ardour attending such enterprises--the increase of paid officials became absolutely necessary, and in almost a corresponding ratio did the unpaid machinery decline. slowly but surely the management of savings banks went out of the hands of an unpaid into those of a paid staff of officials, and every year the system of check became more nominal than real.[ ] it was apparent, not less from the proceedings of solvent savings banks than from the exposures made in the case of unsound ones, that those who had originally taken part in the establishment of these institutions slowly became honorary in place of active members of the board; and of those who still continued to take a share in the work, many had got into the habit of leaving their duties to subordinates, in some cases signing blank forms, and even cheques, to be filled up by the acting-manager at his discretion. at this stage in the history of savings banks, the chancellor of the exchequer came forward,--as the reader has already learnt from the report of the committee of ,--with a bill to amend the law. this bill he introduced to the house of commons on the th of april, , and it forms part of our object to explain in detail the plan now proposed, inasmuch as for many subsequent years the same measure, with only trifling modifications, was offered over and over again to the consideration of the house, and as often declined, through the overpowering influence of the savings bank interest in the country. on bringing forward his bill, the chancellor said he wished to avoid all reference to the past, except in as far as the experience of the past was a guide to future legislation. he very briefly traced the history and progress of savings banks, remarking at the time that, if he were not to do so, few could be aware of their real nature, and how they had grown to their present dimensions. we need not follow sir charles wood through this account, nor even repeat the reasons which actuated the legislature in making changes in the law from time to time up to the year . referring to the act of that session, he described it as "most defective," and the bill he wished to introduce would amend it. speaking of the responsibility as to loss in savings banks, which many persons thought should rest with the government, he repudiated the notion, unless government was allowed to have some control over the persons who might occasion the loss. on the other hand, he did not wish to do away with "the most invaluable feature in savings banks--the local management." he thought, however, that government might take a medium course, and fairly meet the case by making such arrangements as "would end in the state bearing nearly the whole responsibility as regarded the receipt and payment of money." what he proposed was to alter the enactment that the treasurers of savings banks should receive no emolument, _and to vest the appointment of treasurer in the hands of the commissioners for the reduction of the national debt_. the existing treasurers might in most cases be continued, and if they wished to work for nothing, they might still have the option; but he insisted on the government reappointing such officers, and upon having a control over them. to this officer, or some one acting for him, all payments should be made over--the receipt and payment of money by any other person to be declared illegal.[ ] he considered that this arrangement would guard against the possibility of fraud. the treasurer and secretary, acting for different interests, as it were, could scarcely be guilty of collusion, and the one would in all cases act as a check upon the other. if this plan were agreed to, the government would of course be responsible for every farthing paid to the treasurer. this was the great and distinguishing feature of the measure which the government was disposed to adopt; but there were other features in the bill of considerable importance, which ought not to go unmentioned. thus, it proposed that the act of should be repealed, and that trustees should be responsible for their wilful neglect or default, as in the act of . it was clear, however, that under the appointment of treasurers the responsibility would be little more than nominal. another point which the bill provided for was an efficient audit of the accounts, the trustees of each bank to appoint an auditor, and the pass-book of each depositor to be annually examined, the auditor in each case comparing the book with the ledger of the office.[ ] the bill proceeded, further, to give power to the national debt commissioners to send down to any savings bank, should they see occasion for it, an inspector, to test the accuracy of the accounts of that bank: with the other provisos already mentioned, depositors would thus be absolutely safe. the next clause provided against any further loss to government. the chancellor in introducing this subject spoke of the different rates of interest which had been given to savings banks, and said all of them were higher than could be given without loss. but this was not all. the loss sustained in having to pay out a large sum of money whenever called for, no matter how low the funds were at the time, was equal almost to the former. after explaining the case, and giving examples of its working, he added that government thus suffered a loss on capital and a loss on interest. "it had been proposed that government should merely act as a broker, making depositors subject to all the fluctuations of the funds; but," said the honourable gentleman, "from the numerous communications i have received from all parts of the country, depositors think much of their getting their money back as they put it in, and looked to the amount of interest as a secondary consideration." he then gave a variety of statistics, and proposed that the limit to the amount of deposits should be fixed at _l._ and that the rate of interest should be reduced from _l._ _s._ to _l._ for trustees, and _l._ _s._ instead of _l._ _s._ _d._ to depositors.[ ] the chancellor of the exchequer concluded by expressing the wish that the bill of which he had given the principal clauses, should be discussed fully and temperately: it involved no party feeling, but it involved many things intimately connected with the welfare of the classes for which savings banks were established: he said he had done his best to meet the difficulties of the case, but difficult as it was to do, the matter ought at once to be settled, and to be settled once for all.[ ] it, however, was not to be settled so soon. before we refer to any further expression of opinion on the subject in parliament and the ultimate decision in the case, it is only right that we should present the other--the savings bank--view of the matter, as uttered by the powerful, we had almost said corporate, body at st. martin's place. the committee of managers of this important london institution met, as their custom was, to pass resolutions on any matter affecting savings banks. a petition to parliament was framed on the resolutions come to in this as in other instances, and similar petitions were got up and presented to parliament from other savings banks, who naturally looked to the st. martin's place institution for advice and guidance. at a meeting held at this representative bank on the th of may, , lord walsingham in the chair, the proposals of the chancellor of the exchequer were gone through _seriatim_, and all of them, without exception, disputed and condemned. it came to the conclusion that ( ) the proposed introduction into savings banks of a government treasurer, &c., "must lead to great confusion, and eventually to the disruption of these valuable institutions;" ( ) that "the proposed reduction of the existing rates of interest and the limit in the amount of deposits will, besides imposing injurious restrictions on depositors, so diminish the means of defraying the expenses of management as to render it extremely difficult in some, and impossible in other cases," to engage efficient assistance; ( ) that any further reduction of the rate of interest to depositors would only tempt them to withdraw their money from savings banks and place it in "more attractive, but frequently hazardous investments;"[ ] ( ) that the grand principle on which well-conducted savings banks have hitherto been so efficiently managed, viz., "that of having the constant superintendence of gentlemen unconnected with the receipt or payment of money, will be destroyed if the new bill should be passed into a law." we ought to add that this committee did not object to the abrogation of the law of , which was passed "contrary to their expressed wishes and recommendations;" that, although they urged that frauds were comparatively rare, and far less in amount and extent than in public or mercantile establishments, and that for such reason there was no just ground for the introduction of an entirely new system such as was now proposed, they had no objection to a measure adapted still further to promote the solvency and good management of savings banks, only they must insist that the necessity for such important changes "should be considered by a select committee, and evidence taken from men of long experience in savings bank management." the last resolution to which this body came was, "that a petition to the house of commons, founded upon the foregoing resolutions, be printed and circulated for the information of other savings banks." to return to the discussion in the house of commons on the bill now proposed, _mr. hume_ in a temperate speech supported, on the whole, the chancellor of the exchequer. he held that government ought to undertake one of two things--either to leave savings banks altogether alone, or else to ensure perfect security to the depositors, which he saw no difficulty in doing. of course he agreed with the proposal to reduce the rate of interest and the limit of the total amount of deposits, remarking on the latter subject that he had known many cases where savings banks had been taken advantage of in a way that, he was about to say, was quite unworthy of them; "but let no man say that anything was unworthy where profit was the object, for he found in all ranks and classes a tendency to avail themselves of the folly of the public." government, he thought, could not do better than try to encourage among the labouring classes the habit of saving; "for the moment a man had a nest-egg he desired to add to it, and thus were habits of economy and prudence fostered among the mass of the people." _sir henry willoughby_ opposed the bill; he thought the proposal to reduce the rate of interest would be "an extremely disagreeable measure." he referred, however, on this occasion principally to the management of savings bank funds, and expressed his opinion that what was required was that the management of the affairs of savings banks should be taken out of the hands of the commissioners of the national debt, and a separate commission appointed for the purpose. few members questioned the wisdom of the proposals at this time, but many expressed themselves dissatisfied that the bill would have no reference to the past, and that the chancellor had not alluded in any way to the depositors who had lost their all by the bank failures and by the action of the bill of . mr. crawford spoke of the rochdale depositors, mr. fagan of the killarney depositors, and mr. herbert of the dublin and tralee depositors. _mr. slaney_ thanked the chancellor of the exchequer for the amount of attention which he had bestowed on the bill, which he "deliberately thought would interest more persons than any other measure that would be introduced this session." he thought the security now promised would be real, though he was sorry the chancellor meant to make the people pay for it. his opinion (and he had considered the subject of industrial investments very largely) was that neither the amount of, nor the interest on, deposits should be reduced; he would "be most willing to pay a small bonus to tempt the savings of these poor people." we are glad, however, to say that this view of the case did not meet with much approval. after several more appeals from such members as mr. bankes and colonel thompson, that government would come to the rescue of the defrauded depositors who had, in their ignorance it might be, looked to the country for security, the bill was ordered to be brought in by the chancellor and mr. attorney-general. on the motion made to read the bill a second time on the th of august, , mr. hume and sir henry willoughby importuned the chancellor of the exchequer to defer the consideration of the bill to the next session; the former urging that honourable members might study the reports of the committees of - , during the interim, and the latter that time might be given "to allow of a consolidation of all the statutes relating to savings banks, and an inquiry into the whole subject." the chancellor replied, that after the agitation which had been got up among the managers of savings banks, and the considerable misunderstanding which prevailed relative to the provisions of the bill, he reluctantly consented to withdraw it.[ ] several members took the opportunity to urge that the chancellor should bring the matter forward the first thing in next session; but the savings bank interest proved still stronger in , and again sir charles wood got nothing done, and never heartily took up the question again. in an act was passed to "amend and consolidate the law relating to the purchase of government annuities." the bill was introduced and carried through by the chancellor of the exchequer. this act continued the same powers to the commissioners as were given in , and the clauses relating to the purchase of annuities, deferred and immediate, were continued. it further empowered them, however, to grant deferred annuities for a sum to be paid down at once, and not returnable, and also to grant annuities otherwise than through savings banks. it was said that the reason why the act of had been practically inoperative was the want of such a clause: that the fact of only being able to buy a deferred annuity on the condition of money being returnable, not only caused many lapses, but made the tables heavier than they ought to be. under the fresh clause better things were augured; any one purchasing such an annuity, it was argued, takes the chance of his not living to receive it, just as the member of a benefit society takes his chance of never being ill, and therefore never needing what he pays to secure if his health should fail. the benefit in return for this risk is, however, proportionally increased, inasmuch as the contributions of those who do not live to the term when the annuities commence, go to swell the contributions of those who may,--the purchase-money, in the case of money being returnable, being of course much larger than in the other, where more risk is run. we give the argument for what it is worth; but it is certainly curious that at a more recent date, when again the law regulating the purchase of annuities underwent alteration and amendment, a great outcry was raised, because the tables of rates, "with money returnable," were temporarily kept back; one respectable organ of public opinion going so far as to say that the changes would be inoperative till these tables were produced. an opposition was got up during the progress of the measure in parliament, owing to the clause empowering the government to grant life assurance policies to those who should likewise buy annuities. it was said now, just as it was urged, though much more strongly, subsequently, that there were great objections to the government becoming a trading community, or doing anything which could be carried out by a private company. "the system of life assurance," said a well-known scotch member, "was at present carried on so successfully and so judiciously by the ordinary life assurance societies, that it would be most unwise to interfere with them." another member argued that the annuities scheme had so lacked success that no amount of tinkering would make it applicable to the country. the secretary of the treasury explained that government were not anxious about doing the business of insurance offices, but only desired to give facilities, which the law did not then allow, for the conversion of savings bank deposits into a satisfactory provision for want or old age. the bill was read a third time, with a majority of in a house of members, and soon afterwards passed without any further difficulty, and received the royal assent. such a measure, whatever the poorer classes might think of it, was well calculated to spread the spirit of independence amongst them. the state did well to offer the opportunity of increased facilities; and if those for whose benefit such schemes were intended did not avail themselves of them to secure, by a very small amount of temporary sacrifice in seasons of health and prosperity, a provision against those risks to which all the poorer classes are liable, of falling through unexpected contingencies into poverty and pauperism, the blame would rest elsewhere than with the state. as we have already said, the session of passed without any attempt at legislation, and in the beginning of , there being still no sign of action on the part of the executive, the late _mr. herbert_, so well known in connexion with the irish banks, proposed a resolution to the effect-- "that this house has observed with regret the continued neglect of her majesty's government to fulfil their promise of introducing a bill for the regulation of savings banks, by which those important institutions may be enabled to preserve their hold on the confidence of the country, and a due encouragement be thus given to the industry and providence of the working classes." there was every reason to believe that this resolution would have passed, until the chancellor of the exchequer rose. _sir charles wood_ admitted that the bill had been far too long delayed; but this was no fault of his. it was thrown out in ; he could not get it introduced in : it was ready, however, and it should be brought forward this session. he had not given notice of it, because he had been engaged in consultation with several members in so preparing the measure as to ensure its passage through the house. his firm conviction was, that the delay in the present instance had tended not only to improve the bill, but to diminish the chances of opposition to it when introduced. during the last four years the greatest pains had been taken to frame such a measure as should effectually remove the evils that had been complained of; and within the past few months they had had the assistance of a new comptroller of the national debt office, who had "devoted himself with great diligence to the subject."[ ] he submitted, in conclusion, that he was not deserving of the censure of the house, especially as it had been settled to try the measure again during the present session. _mr. disraeli_ agreed with sir charles wood, though the resolution before the house was apparently justified by the circumstances, it would not be becoming in them to divide the house after what had been promised. the question was surrounded with difficulties, but notwithstanding these difficulties it was the paramount duty of the legislature to grapple with it; and an opportunity would be soon afforded. mr. disraeli at this time did not know how soon he was to be in a position to grapple with the subject himself. sir charles wood's pledge was not kept. all such measures as those we are considering have suffered greatly from the vicissitudes of administrations, and it was so in this instance. towards the end of mr. disraeli succeeded sir charles wood as chancellor of the exchequer in lord derby's first ministry; but he had scarcely time, supposing him to have had the disposition, to take up the matter where it had been left. when the derby administration gave place to the coalition ministry of lord aberdeen, and mr. gladstone took the place of chief financial minister, there was soon a better prospect of some settlement. even under his auspices, however, matters at first went on very slowly; so multiform were the questions and interests involved, that even mr. gladstone's powers were severely tried to clear the ground of the incumbrances which time and prejudice had reared. when mr. gladstone left office and was succeeded by sir george lewis much had been done; the necessary preliminary measure of a full investigation into the savings bank question by a committee of the house of commons had been decided; the real nature of the connexion existing between the government and the savings banks was better understood: and when after a lapse of two or three years he returned to his old position, he took the matter up where it had been left, and carried the subject, by his unapproachable eloquence and energy to an easy and final solution. mr. gladstone's name will go down to posterity covered with honourable trophies of his great powers; but we question whether among the great schemes he has carried any will be remembered longer than those meant to increase among the lower classes the habits of prudence and frugality. early in , and when he had but just succeeded to the office of chancellor of the exchequer, mr. gladstone gave notice that the subject must be taken up, and if possible settled. a bill[ ] was allowed to pass the second reading without discussion; but when the subject came up before committee in july of that year, mr. gladstone, compelled to succumb to the wish that parliament should be prorogued, asked that this and other bills might be deferred till the next meeting of parliament. he said he had made great progress with the bill since it was first introduced; he had sought to get the opinion of the different savings bank managers upon it, and he believed he had acquired a pretty accurate knowledge of the state of feeling in the country on the subject.[ ] all this was favourable to the prospects of the bill; but now, as the house had lasted since november , he feared that if it was pushed forward it might fail to pass. he should have liked to have got the question settled, but he now thought his object would be more speedily obtained by the delay proposed. here the sagacious minister was mistaken; the old adage of no time being better than the time present could often be well applied to proposals to defer desirable matters of legislation to a future session. no mention was made of the subject for nearly eighteen months; the country had more pressing, and, for the time, much more serious matters to consider, which it will be quite unnecessary to particularize. on the th of december, , mr. gladstone moved for and obtained leave to bring in two bills during the session of : the one "to create a charge on the consolidated fund" of the money due on behalf of the depositors in savings banks, and the other, the bill for the management of savings banks which was withdrawn in . in the former important proposal the chancellor of the exchequer desired to make the law more perfect as to the relation between the depositor and the state, by giving the latter a better title to the money invested with the state. he wished, in his own language, "to reduce the obligation and the contract of the state with the depositor to that simple form which is adopted by every banker." he would propose, "as respects the bulk of the funds received from savings bank depositors, that they should be held in this country as they are held in other countries," and not in the complicated form of stock and other public securities. mr. gladstone's view, more than once expressed in strong terms, with respect to the state using the money belonging to savings banks, was that it was no matter to anybody what was done with the money,[ ] providing it were ready at call and the stipulated interest were given,--the stability of the country being surely a sufficient guarantee for its safety. savings bank authorities, on the other hand, disputed the right of the chancellor to use the money; would prefer to use it themselves in other investments, if the funds were applied otherwise than under statute in the purchase of bank annuities; and referred to the uncertain title in law which depositors had for the money according to the governing statute. mr. gladstone's bill proposed to give this title to every penny so deposited with the state, by throwing the burden of any deficiency arising on the consolidated fund, and so silence at any rate the last objection.[ ] early in the session of the then chancellor of the exchequer (the late sir george lewis) was several times asked if the subject of savings banks had not to be brought forward and concluded. these questions led to his promising to bring in the government measure which, often brought forward and as often withdrawn, was still waiting for a tide of popular favour to carry it into law. on the th of february in this year he gave notice of this intention, and earnestly trusted that the house would allow it to pass. in a short speech, the points of which we need not recapitulate--for it dealt with the same facts and came to the same conclusion as those speeches of previous chancellors already described,--he proposed the first reading. then came the dissolution of parliament, and its forcible postponement for one more session.[ ] in a fortnight from the meeting of the new parliament sir g. lewis, true to his promise, moved that the house go into committee on the savings bank bill, which had even then reached that stage. his motion was, "that it is expedient to amend the laws relating to savings banks, and to provide for the establishment of savings banks with the security of the government." the chancellor said that almost everybody was agreed as to the principles of the bill, though it was true that the managers of many savings banks contested some of the details. the greatest objection to the bill when last introduced being the provision to limit the total amount of deposits to _l_., he would now propose, as it did not affect the bill at all materially, to drop that clause; the law to remain as it then stood. this was the only material difference; there were minor points, but they were not worth pointing out. he then went over the changes which the bill proposed to make in the law; the ample security he wished to give to all who deposited money in savings banks, at the same time taking no superfluous securities and imposing no unnecessary restrictions in order to guard the interest of the public. should the local authorities of savings banks still be found unwilling to part with their own control, or admit any interference on the part of the government, there was only one course left to him--namely, "to abandon the bill," to leave things in their present position, and continue a system by which the depositors are left entirely to the security of the local officers; while at the same time government is left wholly irresponsible, except for the amounts actually lodged in its hands. "i trust, however, that the plan will be considered a reasonable plan," said the chancellor, in conclusion, "that it will be found not to impose upon the local authorities any shackles of which they can reasonably complain, and that no securities are demanded on behalf of the public beyond what are absolutely necessary."[ ] _sir henry willoughby_ held that the law needed consolidating before any new act was passed. it was not long since petitions were presented to the house for a consolidation of existing statutes, and an inquiry into the entire system. let the house take this step first. after speaking warmly on the subject of the disposal of savings bank money, he appealed to the chancellor to refer the whole subject to a select committee, who should recommend a clear and well-defined legislative enactment. _mr. sotheron estcourt_ and _viscount goderich_ took the same view; the former gentleman, however, warmly approved of the government bill, which had "happily been re-introduced," and thought that "most of the alterations made were improvements." as a trustee of a savings bank he would consider his position infinitely improved by the bill. if, however, the feeling of the house was for a committee, this course could not prejudice the bill, though it would delay it. _mr. thomas baring_ thought the matter should go before a select committee; so did mr. henley. the irish members, mr. slaney and others, were for passing the bill, and not deferring legislation any longer on any pretence. the chancellor of the exchequer opposed any further delay; the adoption of any other resolution would simply tend to shelve the bill for another session. if honourable gentlemen really wished to reject the bill, let them resort to the direct and fair course of doing so. he also was for consolidating the laws relating to savings banks; but till that could be done he thought it by far the best plan to introduce a few more clauses into the law to remedy grievances which could not wait to be redressed. the motion was then agreed to. the second reading came off on the th of june. _mr. ayrton_, in a long and animated speech, during which he said that the greater number of savings banks were now most efficiently managed on a principle which was most conducive in binding the humbler to the more influential classes, and that he could conceive nothing more calculated to destroy that sympathy than the present proposals--"felt inclined to move that the bill be read a second time that day six months." the result of the proposals would be a step in the direction of the system which obtained on the continent, where every function of the community was usurped "by what was called the civil service of the country." amidst cries of "divide," mr. ayrton said he was strenuously opposed to any such system. _mr. mccann_ said the whole body of the people were unanimous in applauding the measure of the chancellor of the exchequer. _sir harry verney_ approved of the principle of the bill, but said he would like to see the subject referred to a select committee. _mr. barrow_ opposed the bill and the select committee also. _mr. estcourt_ again, in an admirable and temperate speech, during which he showed an excellent knowledge of the subject in all its bearings, assisted the government in their proposals. to give the reader a proper idea of the ground taken by mr. estcourt, who, when the committee was eventually appointed, was made chairman of it, we need only give the concluding part of his speech on this occasion:-- "he earnestly wished that this session would not pass without a government savings bank bill becoming law, and he hoped the honourable gentleman would persevere with this bill; but even should the bill pass, he joined his voice with that of others in entreating the government, after giving the poor man the guarantee which he did not now possess, to give to the public generally more accurate information on the whole subject, a clearer account of how the money was applied, and how the deficit spoken of had arisen. that information ought to be given, if only for the purpose of showing the groundlessness of the suspicious observations made against this bill; and therefore, though he heartily concurred in giving his voice for the second reading, he joined with other gentlemen in entreating the government to give them a select committee, not in order to shelve the bill for the session, but, next year, for the purpose of assisting the government, and giving the public that information which they ought to have." _mr. glyn_ and _mr. maguire_ approved the bill without reference to a committee, one of these gentlemen submitting that the committee could sit on the general subject after the bill had passed into law. in reply, sir george lewis took the latter view, and said he would be glad to give every facility to the committee in that case.[ ] after demolishing the man of straw which mr. ayrton had set up, the bill was carried without a division. so far things went on prosperously, but the opposition gathered in strength; savings bank managers again took the matter up, and urged, by petition and otherwise, that nothing should be done till a committee inquired into the matter, and a bill be founded on the result of their investigation. the chancellor of the exchequer appointed several nights on which to proceed with the bill, but each night there were so many notices given of motions with regard to the subject--generally twenty or thirty--that the government were compelled by the pressure of other business again and again to defer the consideration of it, and ultimately to withdraw it. in reply to mr. g. a. hamilton, the chancellor said, on the st of august, , that he had come to this latter conclusion mainly from the considerable misunderstanding existing among the local administrators of savings banks. he thought his proposals had not received the approbation which he conceived their merits justified.[ ] he would offer no pledge for the future, however, further than this, that if the house next session appeared to wish for a select committee, he would agree to the appointment of one. the house of commons met in the november of the same year, when the question being again raised, sir george lewis gave notice that immediately after the holidays, he would propose a committee of inquiry, who should be instructed to go into the entire subject. the committee which was appointed on the th of february, , "to inquire into the acts relating to savings banks and the operation thereof," consisted of the following members:--mr. sotheron estcourt (chairman), mr. bouverie, mr. ayrton, viscount goderich, sir henry willoughby, mr. bonham carter, mr. e. egerton, mr. fagan, mr. cowan, mr. grogan, mr. j. a. turner, mr. henley, mr. whitbread, mr. bramstone, mr. adderley, mr. gregson, and mr. thomas baring. they sat twenty-one days, and examined sir alexander spearman, mr. tidd pratt, lord monteagle, mr. c. w. sikes, mr. john craig; and the following eminent actuaries or other officials of the principal savings banks in the kingdom:--mr. edward boodle, of the st. martin's place bank; mr. shopland, exeter; mr. wortley, finsbury bank; mr. saintsbury, moorfields bank; mr. j. hope nield, manchester; mr. maitland, edinburgh; mr. meikle, glasgow; mr. sturrock, jun., dundee; mr. jameson, perth; mr. d. finney, marylebone bank; mr. hatton, brighton; mr. deaker, dublin. mr. w. h. grey, a government actuary, and mr. edward taylor, of rochdale, attended to give evidence on the subject of savings bank frauds. the committee, as might be expected, from this imposing array of names, collected a most interesting and important body of evidence, and presented, pretty unanimously, an extremely exhaustive and important report to the house. upon the report of this committee we shall have to draw pretty largely in more than one succeeding chapter, and will therefore content ourselves with describing briefly the general nature of the evidence, and with giving a summary of the report presented with that evidence to the house. further on in the present chapter we propose to attempt some account of the arguments used in the committee with regard to the investment of savings bank money, when, two years later, a bill founded on the recommendation of the committee was brought before the house of commons, where the subject was warmly discussed. in this way, all the important conclusions come to by the savings bank committee will at one time or another be fairly noticed. the evidence itself may be classified as follows. mr. tidd pratt came on first, and gave information of the course of legislation on the subject, and in other ways the results of his long experience in such matters. sir a. spearman gave a full account, in an examination lasting over four days, of the mode in which investments were made at his office, and of the principal financial operations connected with these investments. lord monteagle, by permission of the house of lords, attended and gave the committee the benefit of his long and intimate acquaintance with such financial subjects. mr. boodle, who took the lead of the actuaries, and who, while falling into several inaccuracies, showed perhaps the greatest practical acquaintance with the subject in all its different bearings, described not only the manner of conducting the st. martin's place bank, but conveyed to the committee the prevailing impressions of savings bank officials on the subject of the investment of their capital. mr. craig, of the bank of ireland, explained at length his system of book-keeping, and humorously described its introduction into the cork savings bank. the other actuaries described the peculiarities of the different banks they represented; described frauds, and spoke of checks which had been devised for preventing their recurrence; and gave their opinion, which will be seen subsequently to have been anything but unanimous, on such disputed points as the limits of deposits, the rate of interest, making the audit, and regulating the expenditure. few of the witnesses left the box without offering some practical suggestion, or recommending something of value. all the gentlemen agreed as to the necessity of doing something. most of them thought an independent commission should be appointed to manage the affairs of savings banks. every witness expressed his opinion that the one thing needful was a government guarantee for the absolute safety of all deposits; and although mr. craig and others thought that this should be supplemented by a staff of government inspectors, regarded the change as imperatively required.[ ] it is impossible, however, that we can at any greater length give the recommendations which were made on this and other important matters of which the witnesses spoke. nor indeed can we do more than condense into the fewest possible words the full and voluminous report which the committee made on the occasion. seeing that the demand for this committee was so great, that so much pains were taken to arrive at a just conclusion, and that the report itself was not without its effect on the institution of savings banks, we doubt not that we shall be readily excused for giving prominence to it, and for presenting the resolutions in which the principal points of recommendation are embodied.[ ] . that the laws relating to savings banks in the united kingdom require to be amended, and to be consolidated in one act. . that it is expedient to place the superintendence and management of the general funds of the savings banks in a commission consisting of five members. . that it is desirable that this commission be constituted of the chancellor of the exchequer, the governor of the bank of england, and three other persons appointed by the crown, all of whom shall be paid. . that all expenses of the commission be paid out of the moneys of savings banks; that the surplus fund shall be invested in public securities, and the interest carried to the account of the surplus fund, out of which such expenses shall be defrayed. . that the powers and duties of the commission shall be defined by act of parliament; that provision be made for the summoning and holding, at stated intervals, the meetings of the commission; that three shall be a quorum; and the minutes of each meeting duly recorded and signed by the chairman. . that the rules and regulations relating to the receipt and payment of all moneys, and to the purchases and sales of stocks and all securities, be passed at meetings of the commission specially convened for that purpose, and shall be subject to the approval of the lords commissioners of her majesty's treasury. . that the annual accounts of the commission, containing the receipts and payments of all moneys, and every detail as to the sales and purchases of stocks and other securities belonging to the savings banks, within the year ending on november , in each year, be audited by the commissioners of her majesty's audit. . that monthly accounts of the receipts and payments of all moneys, and of sales and purchases of stocks and other securities, be prepared by the commissioners, and copies of the monthly accounts shall be forwarded to the lords commissioners of her majesty's treasury, and to the governor of the bank of england, within one week of the following month. . that the annual accounts, containing the receipts and payments of all moneys, and every detail as to the sales and purchases of stock, and of other securities of the savings banks, be laid before both houses of parliament in the first week of february, if parliament is sitting; and, if parliament is not sitting, then within ten days next after the first sitting of parliament. . that no sales, purchases, or exchanges of stocks or securities held by the commission shall be made, except as required for the purposes of the savings banks, and that no funding of exchequer bills held by the commission shall in future be made without the special authority of an act of parliament. . that the commission should be empowered by parliament to invest a portion of such funds, not exceeding one-third of the whole, in other securities than those now authorized to be purchased with those funds; those securities being such as are created or guaranteed under an act of parliament. . that it is inexpedient that any existing deficiency of the funds should be made the ground of reducing the present rate of interest allowed to the banks, but the whole subject of the estimated deficiency be referred to the consideration of parliament. . that any future surplus income of the board shall be carried to the credit of a guarantee fund, to meet any casual charges, losses, or deficiency of income; but if there shall be no surplus to meet such deficiency of income, the rate of interest allowed to savings banks shall be proportionately diminished. . that the commission shall have power to frame regulations respecting the accounts to be kept, and the audit thereof, and respecting the receipt and payment of deposits, on the adoption whereof by any savings bank such bank shall acquire security for the deposits therein guaranteed by parliament, and that such savings bank shall have a special title. . that the commission may appoint such officers as may be requisite for the proper audit and inspection of such accounts, and for obtaining due compliance with such regulations. . that no banking concerns should be permitted to assume the name of savings banks, except such as have had their rules duly certified. . the rules of every savings bank shall be in force only after they have been certified by the barrister, to whom no fee shall be payable. . that the responsibility of trustees be enacted in the same terms as in the act geo. iv. c. . . that the present limits of yearly and total amounts of deposits payable on demand be maintained. , and last. that whenever any deposit shall amount to _l._, the commissioners may, with the consent of the depositor, invest a portion of that deposit in the purchase for the depositor of _l._ stock, the interest on which shall be received by the commissioners and placed to the depositor's account. arrived at this point, and in order that the general reader may properly understand the next attempt made at legislation on behalf of savings banks, we ought to say something in the way of explanation as to the disposition of the funds of savings banks after they reach the hands of government. by the geo. iii. c. , the money paid in on savings banks account was to be invested in three-and-a-half per cent. bank annuities.[ ] subsequently, the law was altered, by which the money might be invested in bank annuities or exchequer bills. the purchases of stock are made upon the order of the comptroller-general by the government broker; but no exchequer bills are bought, except under the special direction of the chancellor of the exchequer. the practice is, when the balance at the bank appears to be larger than is necessary, gradually to apply it to the purchase of stock at the price of the day. it appears that between and stock was sold to the amount of , , _l._, and purchased to the amount of , , _l._; exchequer bills were bought to the amount of , , _l._, and sold to the extent of , , _l._ sir alexander spearman stated that he had, on his own authority, bought stock from time to time, as the state of the balance required it; he contended that he had legally such authority by virtue of his office, and he did not hold himself responsible to give any explanation of his proceedings to the trustees or managers of banks.[ ] this was just what savings bank managers and trustees did not agree with, and it was an interpretation put upon the statute which even experienced statesmen disputed. mr. wortley told the committee of he considered the system of mixing up the savings bank funds with the government money very injurious to savings banks. mr. boodle strongly objected to the practice of dealing in stock and exchequer bills, and of exchanging one for the other. he said mr. goulburn had been induced to discontinue the practice, and to publish an account of the different transactions, but that the practice had been revived in , had continued ever since, and in a worse form than ever. lord monteagle, who spoke very strongly on these points, stated that the present use of savings bank money was entirely at variance with the original design; that the commissioners had no power to change the securities, and thus become active agents in the stock market.[ ] lord monteagle expressed strong objections also to the power of funding exchequer bills bought for the savings banks at the price of the quarter at which they were bought. sir a. spearman, who was somewhat unfairly left to bear all the brunt of every attack of this kind, on account of the committee neglecting to call upon any of those five members of the house who were or had been chancellors,[ ] stated that the savings bank fund on the th of november, , was , , _l._ stock; whereas, if there had been no investment in exchequer bills or bonds since , the amount would only have been , , _l._ stock.[ ] mr. boodle dwelt upon the reputed losses which the country had sustained through the savings banks, and declared that if there had been any loss, it had been occasioned by the state not treating the funds exclusively as trust funds. in this matter, mr. boodle undoubtedly had the best of it. "whenever any bill is introduced into parliament on savings banks," said this gentleman, "this loss is thrown in the teeth of savings banks, and used as an argument, sometimes for reducing the rate of interest, at other times for reducing the limits of deposits, either annual or in gross. therefore, it acts most detrimentally to the depositors; and it has gone out that the savings banks are an enormous expense, whereas we are perfectly satisfied that, if this money were properly administered, there would be no expense whatever.[ ]" that savings bank money was not only used for financial purposes, but turned to extremely profitable use, there can be no doubt: hence complaints of loss could only be made by persons but partially acquainted with the facts. mr. hume indeed, had he been cognizant of the profitable way the funds were used, could scarcely have complained about the loss to the state so often as he did. mr. gladstone at this time, and subsequently, never missed an opportunity of putting the matter on the proper footing, and to set it forth that, instead of a loss, the funds had been a source of considerable gain to the state. in , when lord althorp was chancellor of the exchequer, and lord monteagle himself (as mr. spring rice) secretary of the treasury, they determined to reduce the interest on the four per cents. those who held money in the funds and were dissatisfied with the reduction were paid off out of the savings bank money (without which, indeed, the reduction could not have been earned through), and a saving to the country of , _l_. a year was the result. mr. goulburn, using the power he had in the same way, or with the money of savings banks to fall back upon in case of need, effected a saving of , _l._ a year in reducing the rate of interest from four to three and a half, then to three and a quarter, and eventually to three, per cent. not less useful were the funds of savings banks in the time of the crimean war. by means of ways and means bills, the chancellor of the exchequer raised the necessary funds to meet the heavy demands, and thus effected an enormous saving of money, which would have been sunk in transacting a loan. we have already made the reader acquainted with mr. gladstone's opinion on the right of the state to use the money entrusted to it for safe keeping; nothing could be more vigorous than his language already quoted. mr. gladstone endeavoured to carry a change in the law relating to the investment of savings bank moneys in . he now, in the session of , came forward and offered a bill to remedy some of the grievances complained of in the committee. his proposals were now substantially the same as those of . he voluntarily proposed to be shorn of his strength as chancellor by the house agreeing to cancel savings bank stock to the amount of thirty-one millions of pounds; and to open a new account for this money, to be called "state deposit account, no. ," virtually giving the money the fullest security of the state, and placing it entirely beyond the reach of his operations. the remaining amount, then about ten millions, mr. gladstone proposed should be allowed to be invested at the pleasure of the finance minister as heretofore. one would have thought that at any rate this bill would have been allowed to pass quietly; but it was not to be. the bill proposed was based on two of the recommendations of the committee of ,--namely, those which suggested that the power of funding deficiency and other bills should be done away, and that the dealings in the stocks should be under the review of the house; but members complained that a bill had not been prepared to embrace _all_ the recommendations. _sir h. willoughby_ and _mr. estcourt_ took this view. in long speeches they both upheld the decision of the committee, and asked for a bill dealing with the entire subject; the latter gentleman said that the "barren discussions in parliament were acting to the prejudice rather than to the support of the excellent institutions with which they dealt. there were not above of these useful institutions in the whole kingdom, whereas they ought to ramify through every parish and every village of the kingdom." _mr. malins_ and _colonel sykes_ followed, and complained that government should have neglected to deal with the entire subject. _mr. gladstone_ made up for the lack of supporters by a long and able speech. he admitted that it was most desirable to have a bill for the management of savings banks, but the general subject had no relation to the mode in which the money of savings banks was invested. better at the end of a session carry one or two points, and put an end to grievances which had been loudly complained about, than bring in a measure only to withdraw it again. he had been charged with ignoring the labours of the committee. he had not done so, for the bill was founded on part of their labours; he _had_ considered the report, "but consideration does not necessarily involve adoption." he was compelled to decline many of the suggestions of the committee. where, however, he agreed with them, he had lost no time in taking action: hence the proposed bill. "from speeches of honourable gentlemen," concluded mr. gladstone, "it might be supposed that a dreadful bill had been introduced, giving exorbitant powers to the chancellor of the exchequer. the fact is, however, that there is not a power given which he does not already possess, and in one or two respects the surrender of powers is very large." "it is impossible that savings bank funds can now be used by government as a trust; they must be reserved for the discretion of the house." the bill for the first time gives a positive title in law to the deposits in savings banks, and it will further provide a true account,--"for nobody has ever yet seen a true account,"--of the national debt; and for these reasons mr. gladstone hoped it would be allowed to pass into law. _mr. thomas baring_, and _mr. ayrton_, unconvinced by the chancellor's arguments, opposed the bill; and _mr. t. collins_ contented himself, as usual, with dividing the house on his motion to throw it out. the motion was negatived by a majority of twenty-four, and there was a similar majority on a motion for adjournment made by sir henry willoughby. on the th of july, , the bill was considered in committee, and the discussion was taken on the first clause--the existing stock to be cancelled--when mr. hubbard approved of the measure. by the bill the greater part of the money of savings banks, viz., that treated as a book debt, would be placed beyond the reach of jobbery. sir francis baring spoke in favour of, and sir h. willoughby, mr. hankey, and colonel sykes again opposed, the clause. the opposition to the measure had gathered strength since the last occasion;[ ] and on a division, the savings bank managers once more triumphed by a majority of , in a morning sitting and a house of members. a few days afterwards the _chancellor of the exchequer_ proposed the fourth clause of the defeated bill, or that which gave the commissioners an uniform power of holding and dealing with all stocks under parliamentary guarantee, and stocks and securities, under whatever name, that constituted the national debt. at present, mr. gladstone stated the commissioners had power to hold terminable annuities, but no power to sell them. there ought to be a uniformity of power with regard to these securities, and this bill, which was founded on the fourth clause, gave it. he had only been induced to take the matter up again by finding an unanimous feeling in the house for this proposition. _mr. estcourt_, in speaking for the clause, hoped the chancellor would soon bring in a measure on the general subject. so he did, soon afterwards, but not the kind of measure mr. estcourt desiderated. when this bill reached the lords, it was rather violently opposed by lords monteagle and redesdale; and on a division the voting was found to be equal. according to usage, the bill was thrown out. the government, however, re-introduced the measure, "as a matter of urgency;" and though there was an outcry in the lords against it, no less than in the commons, for interference with what was considered a money bill, the clause passed, and received the royal assent on the last day of parliament. mr. gladstone, thwarted in all his attempts, except in the last insignificant case, to bring about a better state of things in connexion with the management of savings banks, determined upon another course of action altogether. he, and other statesmen who had preceded him in his office, had tried their best to improve the existing banks, but they had been persistently hindered and obstructed by the force which savings bank officials could bring to bear. for some time now mr. gladstone must have had under his eye several proposals which went to the very root of the matter upon which so many difficulties had from time to time arisen, and which promised a thorough and substantial reform. he bent his great energies in this direction; saw his way, not only out of a dilemma, but to the origination of a simpler and more perfect system; and may be said henceforth to have left the friends and partisans of the old savings banks to look after their own interests. with the legislation relative to the scheme of post office savings banks, with which mr. gladstone's name will always be prominently associated, we shall deal in a special chapter, and will therefore hasten to describe the remaining steps which the legislature has taken with regard to savings banks proper up to the present time. left to themselves, the leading savings bank authorities in the house--viz., mr. estcourt, sir h. willoughby, and mr. ayrton--obtained leave, on the th of march, , to bring in a bill "to amend the laws relating to the security and management of savings banks."[ ] the points sought by the bill were, briefly, ( ) to enforce upon all local banks the regulations of the well-managed ones; ( ) to repeal the act of ; ( ) to force an auditor upon every bank and define his duties; and, lastly, to provide for the security of the depositors, by enacting that no transactions should take place except at the office, during office hours, and in the presence and with the signature of more than one person. mr. estcourt, who briefly explained the drift of the bill, intimated that they were not desirous of altering the relation in which government stood to savings banks, or of interfering in any way as to the disposition of the money. mr. gladstone, after stating how completely government had been baffled in their attempts to alter the law regulating savings banks, expressed approval of the bill, though he reserved the right of government to take any steps they chose at any subsequent stage.[ ] on the th of may this bill shared the fate of all preceding attempts to place these institutions on a sound basis, by being withdrawn. savings bank managers had again interfered, and this time they went against their devoted friends. _mr. estcourt_, on withdrawing the bill, said he had received numerous representations from managers that his measure was "inapplicable" to them; and "only that day an influential body of managers of great experience, and fully to be depended upon," had waited upon him, requesting him to withdraw it; and if he would consent to this course, _they_ would endeavour to devise some scheme which should meet the requirements of the various establishments. mr. estcourt's measure was unquestionably a good one, but it involved too much trouble and risk to trustees: hence its defeat. _mr. gladstone_ thought it was high time that those gentlemen should take their turn in devising a scheme. if they proposed a real improvement, government would make no objection. referring to the post office banks, mr. gladstone said: "undoubtedly, however, the main question had been disposed of; they were now able to say to the people of england who were disposed to lay by their savings, with a moderate interest and with a perfect security, the government had provided some , places where these savings would be received." _mr. henley_ was much discouraged with the difficulties everybody found in the way of legislation. he was "disposed to think that the well-managed banks might go on as usual," but rather than "tinker" at the others, "the very small banks under the old system, which would not afford the proper machinery for perfect management, ought to be urged to hand over their business to the post office banks." _mr. d. griffith_ "for once agreed with the chancellor of the exchequer;" he was glad to hear the post office banks were working so well, and expressed his opinion that "they would ultimately swallow up all the old banks."[ ] in march, , mr. gladstone brought forward once more his propositions relating to the investment of savings bank money. he moved-- "that it is expedient to amend the laws relating to the investment of the moneys of saving banks, and to create a charge for such savings banks upon the consolidated fund, in place of certain perpetual annuities now standing in the names of the commissioners of the national debt; to give the power for converting certain other amounts of such perpetual annuities into certain other annuities, and to provide for the due payment out of the consolidated fund of any deficiency which may arise from insufficiency of the securities to meet the legal claims of the trustees of such savings banks." after considerable discussion, the bill ( and vict. c. ) was sent up to the lords under the charge of lord stanley of alderley, and received the royal assent on the th of june, . we come now to the last item of legislation on the subject of savings banks. on the th of april, , sir h. willoughby and mr. ayrton obtained leave to introduce the bill which, according to promise, had been prepared by a convention of savings bank managers. to a great extent this measure "to consolidate and amend the laws relating to savings banks," was identical with the one which mr. estcourt introduced and withdrew during the previous session. the managers had met during the recess, and had consolidated into one the eight acts, or parts of acts, which then governed their establishments. mr. tidd pratt, on being consulted in the matter, certified that the new act "would constitute a fair and just measure of improvement." mr. gladstone, too, it seems, had been furnished with a copy, had suggested some trifling emendations, which had been frankly adopted and embodied, and was therefore disposed to offer no captious opposition to it. not only so, but he thought it creditable to the gentlemen who had it in charge, and, so far as it went, likely to be effectual. several clauses were altered, struck out, or inserted, and the bill, known as the "consolidation act," received the royal assent on the th of july, . of this act ( and vict. c. , a full description of which will be found in the appendix)[ ] we shall speak in a subsequent chapter, when we come to consider the law at present regulating savings banks. [ ] in a case that arose out of the carnarvon bank fraud of , in the court of bankruptcy, both the commissioners, sir john cross and sir george rose, expressed very strong opinions on the point as against trustees. the former judge, after giving a decision against the trustees in the case, said, "the case could not be made too public," and he "trusted that it would operate as a warning to the trustees of savings banks generally." sir george rose "fully concurred" in the observations of his colleague. he thought "it should be borne in mind that deposits were made by parties, not on the faith of the persons acting as actuary or cashier, but upon the faith of the gentlemen who acted as trustees; where such persons neglected the duties which were incumbent upon them, their conduct was deeply deserving of censure. if, therefore, the clerk, or other person employed by them, were guilty of peculation, they were themselves liable for any defalcation that might ensue." [ ] speaking of mr. goulburn, when he first took office, a contemporary said, "he possesses that degree of talent which renders him highly respectable without exciting any invidious feeling. he is content to be useful without aspiring to the reputation of an innovator; and, if he shall introduce nothing new, he will at least abstain from anything that is dangerous." mr. goulburn's legislation for savings banks scarcely bears out this estimate. [ ] this arrangement, which was quietly dropped before the bill became law, owing to the pressure which managers of savings banks brought to bear upon the house, was strongly urged by mr. tidd pratt. that gentleman and mr. higham, comptroller of the national debt office, prepared this bill. in the committee of , mr. pratt gave it as his opinion ( ), that no depositor should be allowed to put in more than _l._ in one year, instead of _l._, or it might go to _l._; "but i am quite sure that this latter sum is as much as the small savings of the industrious classes can amount to." he also proposed to limit the total amount to _l._ [ ] in this same committee, mr. pratt stated that in the course of his investigations in ireland he had found one man who had had seventeen books out of one savings bank, and money to the extent of _l._ lodged there, altogether his own property, but which he represented himself as holding in trust. [ ] only four sets of directors of banks, and these banks of very insignificant size, made a declaration of the kind in question between and . [ ] it was during the passage of this bill that the managers and trustees of the different savings banks in the country first combined to influence the action of the legislature. on this occasion it can be shown that they made their influence felt, and provoked several divisions in both houses. with the house of lords they were most successful, owing, no doubt, to the great number of peers who were honorary officers of savings banks. for example, in the house of commons they succeeded in dividing the house twice on the question of the rate of interest. they wished no reduction to be made in that rate; but, when it was decided that the rate should be reduced, amendments making it _l._ _s._ _d._ to trustees and _l._ _s._ _d._ to depositors, and _l._ _s._ _d._ and _l._ _s._ _d._ were proposed against the government plan, eventually carried, of _l._ _s._ _d._ and _l._ _s._ _d._ respectively. it was declared that the difference of _s._ _d._ only would not defray the cost of management. it was objected also, and not without reason, that the government erred in not naming the exact sum, instead not more than _l._ _s._ _d._ per cent. which should be given to depositors; that this was a matter which ought not to have been left in any sense to the trustees. much unpleasantness might have been saved if the sum had been definitely stated, and instead of twenty or thirty different rates of interest, all had been paid alike, and there had not been left any doubt as to what depositors should consider their right in the matter. out of doors there was a regular combination; deputations waited upon the chancellor of the exchequer, and gentlemen from all the leading savings banks in england, scotland, and ireland, met in london to concert those schemes of defence to which we have just alluded. a meeting was held, at the important institution in st. martin's place, with sir henry willoughby as chairman, when the following resolutions, among many others, were agreed to by the deputies from banks representing , , _l._ of deposits. nothing could of course better show how the action of the legislature was regarded by the managers of the institutions in question:-- . "that the proposed reductions in the amount of deposits from _l._ to _l._ in each year, and the total amount of deposits from _l._ to _l._ will be highly injurious to the interests of the depositors." d. "that the reduction in the rate of interest from - / _d._ per cent. per day to _d._ is far too great, out of proportion to the reduction of the interest in the funds, and would be extremely prejudicial to the depositors in all savings banks, but more especially to those in the smaller banks, throughout the kingdom." d. "that clause , requiring the production of the books of every depositor once a year, will cause annoyance to depositors, is not capable of being enforced, and is no efficient security." th. "that the proposed alteration respecting the liability of trustees and managers of savings banks seems highly objectionable. the present provision, of no trustee responsible except for his wilful default or neglect, is well understood as applicable to all cases of voluntary trusts, and should undergo no alteration." th. "that it is not expedient that trust accounts be altogether abolished, but that provision should be introduced to meet the case of fictitious deposits and the abuse of trusts." and so on throughout almost all the clauses. [ ] on one occasion, about this time, mr. hume had complained of the "impudent conduct" of some government official, to which sir robert peel, as premier, replied. sir robert said, he "would not quarrel with the hon. gentleman," (an experiment he had often tried without much success,) "considering him a good judge as to how far impudence might be carried with impunity." mr. hume at once owned the soft impeachment. "if i had not had the impudence of the devil," said he, "i should never have done any good in this house." _the times_, the next day, give it to mr. hume smartly, as was its wont, and congratulated him "on his generous, though rather startling, acknowledgment of the source of all his strength." [ ] his speech on the occasion does not seem to have been fully reported. [ ] the trustees of four small banks made the declaration: those of tonbridge, ashby-de-la-zouch, fareham, and carshalton in surrey. [ ] at a meeting of the managers of the principal savings banks held on the th of august, , it was resolved: "that this meeting has read with mingled feelings of pain and alarm the clause in the proposed bill virtually requiring trustees and managers of savings banks to give security or _l._ each, and making such trustees and managers responsible to an indefinite extent if they should neglect to limit their responsibility to that sum, as pointed out in the act." [ ] mr. brotherton, the member for salford, soon after stated that the managers of the manchester savings bank, with , depositors, insisted upon every person bringing his book to the office annually, as a precaution against fraud. [ ] the committee of went very fully into the changes which were needed in ireland, and many witnesses were asked what they would propose. for example ( ), mr. w. keating clay was asked: "do you believe, in consequence of the cuffe street bank, the deposits will decrease in dublin and neighbourhood if the law is not amended?" and replied, "i should say they will be altogether withdrawn. i don't think the other savings banks in dublin, which have conducted their business faultlessly all through, can exist another year under the present law." another witness, in answer to a similar question, said ( ): "i am quite satisfied that the savings bank system in ireland will crumble to dust unless there is legislation." a third witness said, nothing would do but trustees fully liable, and a system of government inspection and regular audit of the accounts. [ ] _the times_ and _morning chronicle_ strongly advocated the same view. [ ] _hansard_, vol. civ, pp. - . [ ] during the interval, mr. reynolds, member for dublin, who had obtained the committee originally, became lord mayor of dublin, and mr. gibson craig became sir w. gibson craig. mr. j. a. smith was appointed chairman on each occasion. [ ] for example, in august, , mr. reynolds again brought the subject before the house by proposing that the remaining money due to depositors should be paid by the state. on this occasion he told how he had had the honour, in , placing her majesty's government twice in the same night in a minority on this subject; but, unlike other members who had done the same thing, he had not received her majesty's commands to form a new ministry. this style of banter was scarcely suited to his subject, but more serious appeals were equally unavailing. [ ] the following remark had already been made from the judicial bench: "i find that country gentlemen, &c. were willing to lend their names as trustees, in the establishment of banks for the deposits of saving of the poor, but were negligent, in too many instances, in giving their personal services, whereby the business fell almost entirely under the exclusive management of the person appointed as actuary."--_sir john cross._ [ ] "nearly all the frauds, and all the loss which had occurred in savings banks," said the chancellor, "were owing to the actuary or secretary receiving money irregularly, sometimes at his own house, and very often out of office hours." [ ] even in seaport towns this inspection of pass-books might be accomplished without much trouble; if there was any difficulty in getting in the books, such an inspection might be made as would be sufficient to test the general accuracy of the accounts. thus at cork, the year before ( ), , pass-books had been sent in for examination, and only , did not come in. the accuracy of the larger number was ample test of the accuracy of all. [ ] the chancellor here pointed out that the _average_ rate of interest given to depositors at that time ( ) was but _l._ _s._ _d._ and that the reduction would be scarcely felt by any class; that reduction, however, would not only provide against the government losing any more money, but would meet the expense of the proposed government treasurers of savings banks. [ ] _hansard_, vol. cx., third series; and _times_, . [ ] it must not be assumed that there was no difference of opinion on these points, even among savings bank managers. the following letter, read by sir charles wood during his speech in , is conclusive to the contrary. the writer, who was manager of a large provincial savings bank, wrote: "i have had occasion to remark that the chief inducement to deposit money by those for whom savings banks are intended, consists in having a _safe place_ for deposit, and that the amount of interest for the most part is but a secondary consideration; whereas those persons whose means are greater, and who do not actually require savings banks, use them to suit their convenience when the funds are high, and take out their money from the savings banks to invest in the funds when low, just at that very time when the withdrawal occasions loss to the country." he then expressed an opinion almost identical with one which mr. tidd pratt has often given, that " _l._ would be quite sufficient to allow a person to deposit in one year," and that, "when the deposits reach _l._ there is no necessity to allow further deposits to be made." again, the rev. w. rowan, treasurer of the tralee bank, when asked in the committee of , if he thought changes were necessary in savings banks, answered that, "the savings bank system must either become a general failure, and the funds invested in them withdrawn, or you must place it upon an entirely different footing with respect to inspection and working." [ ] a bill to continue the act of , "for amending the laws relating to savings banks in ireland," was carried through parliament in this session. [ ] the gentleman to whom reference was here made is the present comptroller-general, the veteran public servant sir alexander young spearman. this gentleman, of whom all parties speak as a man of irreproachable character and eminent abilities, has now ( ) been fifty-eight years in the public service. to him is no little owing the efficiency with which his department is now managed, and the increased facilities which have been given to the public in all things connected with the provident habits of the people. it may not be out of place here to state, with reference to the office held by this gentleman, that it was formed about the commencement of the present century, whereas the commissioners date from the creation of the sinking fund in . sir alexander spearman succeeded mr. higham in the position. as more than one of the witnesses at the committee of did not know who formed the board of commissioners, of whom they were constantly speaking, and another did not know whether the board ever met, it may be new to some readers, if we say that the commissioners for the reduction of the national debt consist of the speaker of the house of commons, the master of the rolls, the chief baron of the exchequer, the chancellor of the exchequer, the accountant-general of the court of chancery, and the governor and deputy-governor of the bank of england. the board held a meeting once in each quarter. three commissioners form a quorum, and their powers are defined by act of parliament. the comptroller-general acts in the capacity of secretary to the board, and is entrusted with the carrying out of its orders. the expenditure of the national debt office amounted, in , to about , _l._; but must have increased considerably since that date. [ ] "to amend the laws relating to savings banks, and, in certain cases, to give the guarantee of government to the depositors for the repayment of the sums legally deposited in such savings banks." [ ] in a long petition to the house of commons from the trustees and managers of the st. martin's place savings bank, this bill is strongly opposed, thus showing that mr. gladstone had not succeeded with the managers of that institution. speaking of the direct government guarantee proposed to be given, the managers say that they "find the proposed change fettered with such a variety of intricate and cumbersome official regulations, as cannot fail in practice to prove greatly annoying and vexatious to depositors, and perplexing to the managers of the banks and their officers, upon whom will still devolve duties and responsibilities ill-defined under the provisions of this bill, and not capable of being sufficiently understood or explained; subversive, as the proposed change will also prove, in this and many other well-regulated savings banks, of those systems of entry and check under which their present accuracy of accounts is so admirably and indisputably maintained." they objected to the reduction in the rate of interest, treated of several other minor matters, and again prayed that a full inquiry should be made by a committee before any bill was passed. [ ] "you take the money of these depositors, and you give them the entire security of the state for their money. they cannot have a better security; and if you give them that, they have no interest in the employment of the money: it does not signify to them if you fling it to the bottom of the sea. so long as the treasury of the country is sound, it does not matter one rush what the chancellor of the exchequer does with the money. if he invests it well, they are no richer; and if he plays all the tricks of the mountebank, or disposes of it with the artifice of the swindler, they are none the poorer. the depositor in savings banks have nothing to do with the question, and it is only weakening and impairing their position to make them depend upon the prudence of the minister, instead of upon the credit of the british public." savings bank managers held a strong opinion against what they called jobbing with their funds. they said mr. goulburn had promised that the practice should be stopped; and it was, in ; but that mr. gladstone had revived the practice illegally in . these bills were not introduced in . [ ] _hansard_, vol. cxxxvi. . [ ] _hansard_, vol. cxliv, p. . [ ] a clause was added to the bill now introduced to prohibit the assumption of the title of "savings banks," by institutions not established under the savings bank acts. [ ] a few days after this, sir george lewis gave a pledge to viscount goderich that, if the bill passed, the committee should be appointed to consider every question that sir h. willoughby had raised. [ ] the trustees of the principal savings banks again petitioned against the bill. the petition from the st. martin's place institution prayed "your honourable house to pause ere you pass such an act as would assuredly compel your petitioners, and, in their view, all parties similarly situated, to resign the charge which they have hitherto had so much pleasure in fulfilling, and, as they may venture to assert, with entire satisfaction to the parties pecuniarily interested." in their opinion "considerably more importance has been attached to the terms 'government security,' and 'government guarantee,' than the facts of the case would require." [ ] mr. sikes said ( , ), "i believe that one great essential for the future progress and prosperity of savings banks would be the guarantee of the government for every deposit duly made in the hours of business." mr. wortley said ( , ) that he thought it a desirable thing, and also government auditors or inspectors. mr. hope nield ( , ) thought it "desirable decidedly, if it can be obtained without trammelling or destroying the operations of the banks." mr. maitland "had no doubt whatever about it being a desirable thing, if it can be safely given" ( , ). sir alexander spearman gave his opinion at greater length ( , ). "there will be no satisfactory amendment of the law unless the security of government is given to depositors. i think it is impossible that the present state of things should be allowed to continue. the question has often been discussed, and depositors in many cases have believed that they had the security of government, and found to their cost that they had not; complaints are constantly arising; applications are constantly made to know whether they have the security of government or not. i think myself that depositors are entitled to have the real protection of a government security, but i think also that it will be quite impossible to give this security without at the same time giving to the officers of government a very different power of dealing with the management of savings banks. it would be idle to talk of the one without the other." so weighty are the conclusions to which the committee of inquiry came on the subject of this guarantee that we present them here _in extenso_. "a very general impression prevails throughout the country that the government is bound to make good a deficiency whenever a deficiency occurs; a claim accordingly has been made, in several instances, on parliament to replace the money of depositors in cases of defalcation. this impression is not warranted by the laws which regulate savings banks. it is difficult, however, to maintain that parliament, having released local trustees from their liability, should not be bound to provide some other guarantee for the money of depositors, who have no share themselves in the management of their bank. it appears to your committee that an alternative ought to be given, and freely offered to the choice of trustees, either to secure the guarantee of parliament upon such conditions as the commission shall prescribe, or themselves to undergo the same liability in regard to savings banks as was enacted by geo. iv. c. , s. . the able actuaries connected with various large banks, who have attended your committee, have detailed various methods by which imposition and error may be rendered almost impossible in large establishments; but in the case of the smaller banks, where the funds are not adequate to provide a staff of paid officers, it will be for the commission to see what arrangements they can make to check misconduct, and to afford to depositors, at least once a year, a certainty that their money has been duly lodged with the government, for which purpose some valuable suggestions were made by several of the witnesses experienced in the practical management of banks. in one point all the witnesses concur; and your committee must record their own opinion to the same effect, that the most effectual restraint upon malversation is to be found in the presence of a second party in every transaction where money is paid or received; and that a rule to this effect ought to be imperative in all banks, under a penalty on its infringement." [ ] the committee sat six days deliberating on their report after all the witnesses had been examined. draft reports were proposed by mr. ayrton, sir henry willoughby, and the chairman, the report ultimately carried, after a few emendations, being that by mr. estcourt. [ ] sir alexander spearman, who clearly explained the facts to the committee of , also described the routine gone through when savings banks made investments with government. they first certify the appointment of trustees; then, appoint an agent in london, generally a banker, through whose hands the money passes. when the trustees of a savings bank wish to invest, they send up a notice to their agent, who presents it at the national debt office, where an order is given to the bank of england to receive the stipulated sum and place it to the account of the fund for the banks for savings. next morning a receipt is sent from the bank of england to the national debt office, and from thence to the trustees who remitted the money. a somewhat similar proceeding takes place on the trustees of any savings bank wishing to withdraw money. it is done through the agent, who gives the necessary notice of withdrawal. no money is paid or received at the national debt office, but at the bank of england, the commissioner simply keeping the accounts. [ ] "suppose any bank should question the way in which their funds had been invested?"--"my answer would be," said sir a. spearman ( , ), "that this was a matter which did not in the least concern them. i am not aware that the act of parliament in any shape or in any manner makes the commissioners or their officers responsible in the slightest degree to the trustees of savings banks." when asked if, "supposing the money were used for financial purposes, or not invested at all, or invested so as to produce little interest, would savings banks have a right to complain?" this witness answered, he "did not think so. what the commissioners are responsible for is, to repay to the trustees of savings banks the amount received from them, together with the amount of interest due, whenever they call for it." "they are responsible for that, and nothing more." [ ] a little prior to this, lord monteagle had spoken at great length and with great animation on the same subject in the house of lords. he then went the length of saying, that, "now the money was coveted not so much on account of inculcating the growth of provident habits, but that it should afford the chancellor of the exchequer a large capital, which might be sold, bought, exchanged, or invested in exchequer bills, or in stock, at the will and pleasure of the financial minister; and, consequently, that he could thus be enabled, as he saw fit, to influence the money-market to an extent which no individual or combination of capitalists could possibly either equal or counteract." he added, that he could have no objection to the mere buying and selling of securities, so far as the savings banks were concerned; what he objected to was, that these transactions should be so carried on as to affect the value of the public securities and influence the stock-market--"rig the market," as a member of the house of commons said at the same time. [ ] sir francis baring, sir charles wood, mr. gladstone, mr. disraeli, and sir george c. lewis. [ ] exchequer-bill purchases, as we gather from the evidence taken before the committee of inquiry, are made in two modes. if the purchases are to be made in the market, the cashier of the bank is directed in the same manner as when he is told to purchase stock; pays for the bills out of the savings bank fund, and carries them to the credit of the commissioners. the other mode is, by the issue of temporary exchequer bills, such as deficiency bills, or ways and means bills. deficiency bills are bills issued under the authority of george iii., to enable the government to provide for a temporary deficiency of money in the exchequer. deficiency bills are issued either to the bank of england, or held temporarily by the national debt commissioners through the bank, the bank paying the money to the exchequer, and paying itself the next day out of the savings bank fund. ways and means bills are of a pretty similar character, but chargeable to the revenue of the next succeeding quarter, and not, as in the former case, of the current one. supply bills are of a still more permanent character, and are often held on from year to year, and are exchanged from year to year. [ ] mr. boodle was for allowing part of the money to be otherwise invested than with government. he suggested land drainage. mr. sturrock and mr. sikes were for keeping one-third of the money in the hands of trustees, to be invested "in freehold securities of unquestionable character," or in railway debentures. mr. deaker, mr. jameson, and mr. finney agreed. lord monteagle was "driven to the conclusion" of saying that in investing savings bank deposits, "you ought to deal in state securities and nothing else." the opinion of the committee on the subject may of course be gathered from the digest of their report already given. [ ] the indefatigable bank managers of london again sent round petitions against the proposals, and when they were presented to the house, one member, mr. hubbard, remarked they "were all apparently from one mint:" and indeed no secret was made of its being so. [ ] so convinced was one individual organ--accustomed to treat largely of such subjects--that the bill now proposed would fail to accomplish any good, that it insisted upon its being called a "bill to provide for the speedy extinction of all old savings banks, and to give a heavy blow and great discouragement to the trustees and managers thereof." [ ] _hansard_, vol. clxvi. p. . [ ] _hansard_, vol. clxvi. p. . it is not often that mr. griffith speaks the sentiments of the generality of english people, but he almost did so in this instance. no amount of tinkering could now make the old banks as simple, secure, and efficacious as those on the new plan. mr. griffith not having gone the length of mentioning any time, his prophecy was eminently a safe one. no one is more to blame, if indeed any one is to blame at all for such a state of things, than the authorities of savings banks themselves. whilst they were systematically opposing with suicidal obstructiveness every measure of amendment, the whole ground was suddenly cut from under them by the institution of postal banks. [ ] appendix b. chapter vi. a chapter on savings bank frauds. "there is such a powerful element of failure in all human affairs, that a shrewd man is always saying to himself, 'what shall i do, if that which i count upon does not come out as i expect?' this foresight dwarfs and crushes all but men of great resolution."--_companions of my solitude._ in this chapter it is our intention to describe with more or less minuteness the principal cases of frauds in savings banks pretty much in the order of their occurrence, and also to speak to some extent of the results which followed from them. how the progress of legislation was affected by these frauds has been already shown; and with the object of making more clear the legislation of and , we have already entered into the details of the notorious cuffe street bank failure, and one occurring in england prior to those dates. so far as we have been able to ascertain, the first case of fraud in a savings bank occurred at carnarvon in the year . in this case the actuary received deposits to a large extent for which he in no way accounted. up to no less than ten cases, other than those already referred to, occurred, in all of which the trustees promptly paid the claims. these cases include the frauds which took place in carmarthenshire, northamptonshire, and cumberland, one at mildenhall in suffolk, and another at mitcham in the same county. in the latter case the secretary managed to embezzle a sum amounting to near , _l._, and then made off; mr. hoare, the eminent brewer, paying down no less a sum than , _l._ to atone for his neglect, and the other trustees making up the amount by subscriptions of , _l._ and _l._ each. into any further particulars of the above cases it is impossible to enter, inasmuch as they have never been allowed to transpire,--precautions which, so long as there were no efficient remedies at hand, were both wise and magnanimous. the catalogue, however, can be made black enough and full enough without such cases; and it is to others which have been exposed in all the fulness of their iniquity down to the minutest details that we will now turn. claiming priority in all respects was the fraud on the county of kerry savings bank at tralee. the tralee savings bank was established in , many of the noblemen and leading gentlemen of the neighbourhood taking part in its formation. the secretary from the commencement was mr. john lynch, who was appointed by a majority of the trustees at a salary of _l._ per annum. from the commencement the bank was held at the house of the secretary, and was open from two till four every monday.[ ] among the directors there were five clergymen, and the rest were highly respectable gentlemen of tralee. the same might be said of the twenty managers, nearly half of whom were clergymen. the rev. a. b. rowan was treasurer of the bank. in the pass-books were abstracts of the rules and regulations of the bank, and these were headed by the following motto:-- "for age and want save while you may, no morning sun lasts a whole day." other useful injunctions were given in sober prose, such as "examine your pass-book, and see that the entry is correct." "if you lose this book, give immediate notice at the bank, otherwise you may be defrauded."[ ] with what feelings the pages of the books containing this sage advice would be turned subsequently, we leave the reader to judge after he has learnt more. of course, lynch was highly respected in the town: one witness describes him as, from the first of his connexion with the bank till the exposure, a man above suspicion; and mr. rowan, the treasurer, told the committee of , that he believed the public generally "had more confidence in mr. lynch than they had in many, or any, of the trustees themselves." ( .) that he was clever, as well as "correct," is manifest from the fact that he succeeded for sixteen years in carrying on, unsuspected by anybody, a complete system of frauds of different kinds, by which he appropriated to his own use during that time no less than an average of , _l._ a year. he seems to have commenced his dishonest practices soon after the formation of the bank; but until his peculations were of small amount. from to he practised every possible description of fraud, and though some of them might have been detected by a rigid system of check, nearly all of them were remarkable for the ingenuity they displayed: "the contrivance and adroitness with which he managed these frauds," says one who subsequently went over the accounts of the bank, "were so ingenious as almost to defy detection." one of his practices was to account for a less sum than he received from a depositor, and this description of fraud he managed as follows (and this is a case which actually occurred): he received for lodgment three sums of _l._, _l._, and _l._ in one day, without any assistance or supervision from trustee or manager. these amounts he entered in his books as _l._, _l._, and _l._ respectively, and pocketed the difference. the manager at the close of the day, in examining and certifying the business done, marked the three entries as correct, as he found that they tallied exactly with the amount of money received into the bank. no sooner, however, was the bank closed and the acting manager left, than lynch completed the case he had commenced by securing himself against exposure in the event of the depositor seeking to withdraw any of the sums named. the burden of the fraud was made to fall upon the funds of the bank by the actuary now altering the bank books to make them agree with the money actually deposited; and this he did in the cases in question by putting an after the figure , the figure before the , and before the . in this way lynch netted, with little or no risk of detection, a matter of _l_. in one day. this was only one mode adopted. he likewise received money out of office hours, which he never entered in any day-book or accounted for to the manager. to preserve himself, however, as in the previous case, he never forgot to post the amount in the ledger, so that whenever it might be claimed it would appear to the debit of the bank and at once be paid. of course, there was here the absence of everything like check or audit.[ ] other descriptions of fraud may be left to be given in the culprit's own words. lynch held uninterrupted sway of the tralee bank for a long series of years, contriving to make away during the time with many thousands of pounds; but retribution, though long in coming, arrived at last. "the mill of god grinds late," says the spanish proverb, "but it grinds to powder," and the proverb meets with its exemplification here. a trifling incident, as has often been the case before, led the way to the full exposure. lynch fell ill, to an extent which, though the bank was held at his own house, precluded him from giving those precise instructions which are eminently necessary in dealing with such fragile machinery as that with which he had managed to work so long. it was usual, it seems, to make weekly requisitions to the treasurer of the bank for money to meet the demands upon its funds, and the subordinate on the occasion in question asked for more money from that functionary than had been credited to him altogether. the treasurer, the rev. a. rowan, like the rest, had unbounded confidence in the secretary, and had given himself little trouble over the affairs of the bank. at a time when it must have been evident to all that several thousand pounds sterling stood to the credit of depositors, mr. rowan was satisfied to think that two or three thousand pounds formed the capital of the bank. it is on record that he several times spoke of the small amount of money in the bank, and innocently pointed to the fact "as a sign of the depressed state of the country."[ ] how this illusion was at length dispelled we leave mr. rowan, himself to tell.[ ] "as i knew that the requisition of april d was for more money than there was in the bank, i went to mr. lynch, and said there must be some mistake somewhere, and told them to stop taking in any more money till it was cleared up. the next day mr. lynch being ill in bed, sent for me, and made a confession that he had committed frauds; but he stated no amount. i then seized his books and papers and everything i found connected with the bank, and swore information as to the facts." the books were then subjected to a thorough examination, and "frauds of every possible character," to the extent of , _l._, were found to have been committed. at the trial which ensued, lynch pleaded guilty, and was sentenced to fourteen years' transportation. the other modes of enriching himself to which we have not yet referred may be given in lynch's own words. soon after his apprehension he made a confession of his malpractices, in order to exonerate a clerk of the bank who had been arrested at the same time, and who was at first thought to be an accomplice, and we take the man's own account of his ingenious trafficking in forged pass-books as the most lucid one that could possibly be given. "a depositor lodged money with me," said the actuary; "i entered it in the pass-book, but not in the receipt-book. he subsequently lodged more, say with mr. fitzgerald, and it was duly entered in the pass-book and the receipt-book. for these depositors there necessarily was no account to be found in the bank books, and the party paying him upon notice given would thus be presumptively implicated." he proceeded to give another instance of his artifice: "i frequently took an old pass-book and tore out the _bonâ fide_ deposit leaf; i made an entry therein in a fictitious name, and a _quasi_ deposit, as if it were some years antecedent. during bank hours i used to hand in those books to whoever might be in the bank, directing notice to be given for the amount, as though the depositor had left it with me for that purpose, as it were, some days antecedently. the manager entering such notice was thus presumptively implicated; and as the course of the bank unfortunately was to 'keep' and not relodge sums 'noticed for,' the manager of the day marked it as 'kept,' which meant, given to me to give to the _quasi_ depositor." "kept!" what a fund of irony there is in that one word so applied! in one or other of the modes described, this actuary, "respected by all who knew him," contrived to "keep," and, what is worse, to spend, , _l_. of the hard-earned savings of the poorest classes around him. his estate at the time of his apprehension was worth something like , _l_.; this property lynch offered to give up in full, "leaving not even a bed for his daughter;" but on mr. pratt's being applied to for advice, that gentleman recommended the treasurer not to fall in with the offer, inasmuch as it would be "a compounding of the felony." ( .)[ ] mr. pratt had arrived by this time at tralee, and was engaged in the investigation of the affairs of the bank, and in making his awards in the case. that investigation showed the most culpable neglect on the part of the managers and trustees: lynch had been engaged in his nefarious practices for fifteen years, and yet till the day he made his confession a breath of suspicion never reached one of them. the confidence of the trustees in the man was so unbounded, that one trustee would sign anything he wished; and the other, who generally acted, signed because he saw the name of his fellow-trustee. mr. pratt ascertained that here, as at cuffe street, the law had been systematically violated; depositors had put in money to any extent; they had deposited their money at all times, and under all kinds of circumstances; charitable institutions deposited their funds without any limitation, one fund having at one time had as much as , _l_. in the bank. mr. pratt, in making his awards, had to take all these facts into consideration, giving satisfaction so far as it was in his power to those who had made their deposits legally, and refusing it in all other cases. in this way he made awards on the trustees of the bank to the sum of over , _l_. the trustees disputed their liability on the strength of the act of , and when the case was brought before the court of queen's bench the decision of the barrister was set aside. to this day, we believe, the unfortunate depositors in the tralee bank have in no sense, either by private benevolence or government aid, been recompensed for their loss. when the blow first fell with all its crushing weight upon the people, they are described as having borne it "with wonderful patience;" then this state of things was followed by a period of stolid indifference to all the ordinary maxims of thrift and prudence, as if their treatment had destroyed the growth of provident habits. so much is evident from the statements of a respectable solicitor at tralee who was examined before the committee of :-- "can you state (mr. herbert to mr. justin supple, ), from your own knowledge, what class of persons the depositors are, generally speaking?--generally speaking, they are composed of servants, artisans, mechanics, and small shopkeepers. there are a few of a higher class, but they are very few indeed. i have pass-books with me amounting to about , _l_., and i assure the committee that there is not a case in which i could not point out a more or less considerable degree of hardship." he then stated several cases. ( ) "can you state from the general feeling of the country, what evil consequence will be the result of the failure?--taking the failure," says the witness, "in connexion with the years of famine, i think the consequence will be to drive the classes which have been hitherto industrious and economical in their habits, to vice and wickedness, because the dissipated characters who have saved nothing, or did not take the trouble of saving, now look upon the poor industrious creature who has been cheated, laugh at him, and tell him that they have spent their own money, while the industrious man has had somebody else to spend his for him." the agitation was at its height in tralee when news came that the neighbouring savings bank at killarney had stopped payment. mr. pratt had not even finished his awards in the one case before he was required to investigate this fresh iniquity. it would seem that the exposure of the one actuary had led to closer investigation on the part of the trustees of the killarney bank, and the earlier development of the fraudulent proceedings of the other official. here again the frauds were found to be of an ingenious character, and might have been continued over an indefinite period, but that the trustees were compelled by the force of public opinion in the neighbourhood to do the work they had taken upon themselves. as it was, the deficiency was found to amount to , _l._: the entire liabilities of the killarney bank were , _l._, but the money in hand and the property of the actuary, who decamped, which was calculated to realize about _l._, reduced the loss to the former sum. as the average amount due to each person was _l._ we may well conclude that the majority of the depositors were of the poorer classes. though the real loss was less than in the case of the tralee bank, the bank at killarney was found to have been managed with greater carelessness; the trustees and managers professed to make a yearly audit of accounts, but this to all intents and purposes meant nothing more than taking the actuary's word for everything. the details of this fraud have never, so far as we can find, been made the subject of a searching public investigation, so that little more is known than that the frauds in question were of the usual character. mr. pratt, in a short report which he presented to the lords of the treasury after he had visited the place, said that he found the one case to be very similar to the other (tralee), both as regards the actuary and the managers. in both cases the accounts of the treasurer were correct, and in both had the trustees grossly neglected their duties. here again he made awards against the bank to a large amount, and in one respect these awards were much called in question. this public officer received much blame, both in and out of parliament, for the character of his decision, whereas it seems quite evident now that he simply endeavoured to carry out the regulations of a most imperfect law. the law of , there can be no doubt, was unjust in the case of one class of depositors at killarney. on the clauses of this act, mr. pratt was compelled to award to those depositors who had contributed their money after , only the surplus money which was left after the depositors who had made legal deposits[ ] before had been paid their claims in full. this decision was, of course, come to on the ground that the trustees had not assumed the responsibility provided by mr. goulburn's act. in this way the depositors before got _s_. in the pound, whereas those coming after that year only got _s_. in the pound, and a further small instalment afterwards when the actuary's property was realized. the decision might be right in the eyes of the law, but the law was most unjust that rendered such a decision possible, or proper. the next savings bank failure in the order of its occurrence, which has been made the subject of any investigation, was that at auchterarder, in scotland, in . the committee of were appointed to inquire into the case, as well as the irish cases already spoken of, but we do not find that any evidence was taken on the failure in question. it seems, however, that the auchterarder savings bank was a branch of the important institution at perth: notwithstanding this, it was locally managed, the local trustees, furthermore, being held responsible for any irregularity. this small bank was originally established in , the principal landed proprietors and ministers of various denominations taking part in its organization. in seven years the number of depositors had reached to , , and as the total amount standing to the credit of each person was less than the average of _l_. they must have consisted of the very poorest part of the population of this rural district. the number of managers amounted in all to forty; but the ruling power was john findlay, cashier and parochial schoolmaster, and the sole paid officer of the bank. in december, , a trifling inaccuracy was found out in his accounts, when he lost no time in absconding. it was then seen that he had within seven years appropriated , _l_. to his own use. the liabilities of the bank were , _l_., whilst the available assets only realized , _l_. the dividend, given out of this money, a subscription entered into by the trustees and their friends, and the sale of the defaulting actuary's small estate, ultimately reached to eighteen shillings in the pound. what benefit it was to the poor people at auchterarder to be connected, as one of several branches, with the flourishing concern in the neighbouring county town, we are at a loss to understand. this connexion did not preserve the accounts from being tampered with; it seems to have afforded no check: and when a paltry sum of _l_. was needed to reimburse this deserving population in full, the perth institution came forward with--nothing better than advice![ ] it surely cannot be a matter of surprise that the bank was "never re-opened," and that "no private gentlemen could be found to undertake the trouble _or risk for the future._" we have hitherto been concerned almost entirely with irish bank frauds; henceforth we shall have to deal exclusively with english ones. not only on account of the date of its occurrence, but from its magnitude and enormity, the fraud on the rochdale savings bank deserves the first place. it is not too much to say that no savings bank defalcation equalled this one in the depth of its iniquity and cunning, and in the disastrous effects which followed, affecting as they did the growth of provident habits not merely in that particular locality, but throughout the entire kingdom. the rochdale savings bank was commenced in , or immediately after those institutions were recognised by the state. it seems to have been started in the usual way, and to have progressed with great rapidity,--the community about rochdale forming a very favourable specimen of the lancashire people. in , george haworth, a young man of twenty-one, succeeded his father, john haworth, who had been actuary of the bank since its commencement. as the son remained with the bank almost till its affairs were wound up in , he may be said to have been associated with it through its whole course of thirty years. when very young, this man appears to have shown extraordinary energy and talent for business, and each year he not only added to his engagements, but seemed to accomplish all he undertook with equal readiness. in addition to his duties at the bank, he first took an agency for the sale of wool, then, as now, the staple trade of the town; then he obtained an agency for the sale of porter, both from a dublin and a london house. latterly, however, he had advanced himself to the dignity of cotton spinner, and was occupier of a large factory; was at the same time a land agent, estate agent for several gentlemen who possessed large properties in the neighbourhood, an insurance agent, and valuer and receiver of rents for the lancashire and yorkshire railway company. not less on account of his more private character than from those multifarious matters with which he was connected, mr. haworth was a man of mark in the place. he was a member of the society of friends, and this of itself was a password to the trust and confidence of many men.[ ] whenever anybody wanted a chairman, or sought a little patronage for anything literary, scientific, or charitable, resort was had to "friend haworth;" "he always patronised such things as far as he could;" and who could do more, especially one who was "not himself a particularly talented man?"[ ] "talented" he might not be in the ordinary acceptation of the term, nor indeed need he have been, to do this much; but never was there a man more talented in the art of deception. "he deceived everybody by an appearance of wealth." he lived handsomely, "though scarcely with any particular extravagance;" he was above mere "gig respectability," and rode in his carriage. "for the reputation of honesty, probity, and wealth," said mr. taylor, "there was no man in rochdale who stood higher;" and so far did he disguise his real character, that his most intimate friends were those who were most deceived by him. "he was not only," says a friend of ours, who himself suffered by his frauds, "never suspected of doing wrong, but he was regarded as above suspicion and uncommonly safe." it is true that some persons now and then expressed their surprise that george haworth should act as actuary to a savings bank, and moreover attend so closely to his duties there when his hands were otherwise so full; but haworth deceived even these people by putting his connexion with the bank on the ground of charity, and an anxious desire to promote the happiness of his poor fellow-tradesmen,--for whom indeed he was each day laying up increased stores of untold misery. clever to the last, but supposed by some--of course wise after the event--to have gradually failed in heart and strength after losing his father-in-law, who it now seems was his confidential assistant and accomplice, he escaped his justly-merited punishment in this world, and by an inscrutable providence was allowed to die unmolested on the th of november, . deluded to the last, his fellow-townsmen considered his loss irreparable; it was a general feeling that this man should have a public funeral, and it was nearly being so concluded when the relatives of the deceased stepped in and wisely put their veto upon it. strange to say, but only in keeping with the unnatural strangeness of the whole affair, suspicion never entered into the heads of any one, high or low, in connexion with the bank, till this man was far beyond the reach either of earthly anger or law. the trustees and managers were called together after the funeral; and so ignorant were they of the real state of the case and the true nature of their late actuary, that they thought they were met simply to elect his successor, and were actually prepared with different nominations, and not to hear from the dead man's attorney that the "wealthy and respected man" had been for twenty years trading on the falsest of false pretences, and fattening on the hardly-earned scrapings of the poor whom he had so patronized. haworth's solicitor told the unwelcome story of a deficiency. enough was said to make the trustees at once decide to call in the depositors' books, and in the course of a few days it was ascertained--though it took a much longer time to credit it--that the liabilities of the bank amounted to , _l._, that the total assets were calculated to realize , _l._, and that the deficiency amounted to the enormous sum of , _l._ in the course of two or three weeks the trustees made the announcement of the defalcations to the public, with what result may be better imagined than described. at first the depositors took the matter very calmly--a feeling in which was mingled incredulity; and a disbelief that they would be allowed to lose so much money got possession of the people's mind. the general opinion was, till undeceived, that the government would have to stand to the loss.[ ] of course this made it all the more deplorable when the real facts became known. one of the witnesses who was examined before mr. slaney's committee on the savings of the middle and working classes ( ), gave the following evidence of the feeling in rochdale at the time:--"i was in lancashire some time ago, meeting with large bodies of working men at the time of the failure, and i shall not soon forget some remarks that were made about the government. one man said, 'dr. mcdowall came here, and told us that the government was a set of robbers, and that they did not care about the property of the working men.' he said, 'i did not believe mr. mcdowall then; but when i see there is no security for the savings of the working men in the savings bank, and we supposed government had them under their protection, i believe now that mr. mcdowall was right, and that government cares nothing about either the poor man or his savings.'" of course we give this extract simply to show the effects of the fraud on the minds of the poorer classes, for nothing could be more unfair than such conclusions. soon the depositors came to look the loss fairly in the face; they elected a committee of their number to act for the rest, and mr. taylor, the witness before the committee of , was appointed chairman; they agreed to avoid litigation if possible, and relied on private benevolence and the possibility of a grant from government to make up the deficiency. the sum of , _l._ was readily subscribed among the trustees and their friends; another sum of , _l._ was realized out of haworth's estate, and ultimately the managers were enabled to give a dividend to depositors of _s._ _d._ in the pound. thanks to mr. taylor's intelligent evidence, we have not only gleaned the above particulars, but we are enabled to give some account of the way the rochdale frauds, which entailed so much misery and so much loss, were accomplished. as the first question likely to arise in the mind of the reader would be, doubtless, to ask where were the trustees, it would be wise to dispose of it first. haworth "was exceedingly respected, and everybody had faith in him," says mr. taylor, naïvely; "but from what we discovered, he must have been exceedingly designing for many years." in no instance that has come within our notice were the trustees, who ought to have been this man's master, so completely his tools. haworth was so much the factotum of the bank that he really appointed the trustees; and so "designing" was he, that when he got some one appointed who was likely to attend to his duties, or be otherwise troublesome, he took care to keep the knowledge of the appointment to himself. mr. taylor gave his own case in corroboration. this gentleman found out afterwards, that he had been appointed a manager in , and never was aware of the interesting fact _till the bank failed_ in . "i never was at any meeting; i never was called upon to attend any meeting; and i can name several others in the same way." of course haworth took care to make a show of having trustees. when the same witness was asked (qu. , ), if any attended, he said that "one or two attended occasionally; one very old man indeed, who was haworth's tailor, really was a trustee, and he attended, i dare say, once or twice a month, and sat in the bank; but he was a very imbecile old man, and would do whatever george haworth told him to do." sometimes haworth had to manoeuvre a little in order to get his returns signed, and then he would resort to the trustees whom he in a manner kept in stock. a case in point is recorded. a gentleman named chadwick was passing the bank during one of haworth's times of need, and the actuary called him in, and asked him to be kind enough to sign a return. mr. chadwick naturally hesitated, as having nothing to do with the bank. "but thou art a manager," said haworth, showing him his name, for the first time, in a printed list; and mr. chadwick, thinking that he had perhaps just received this mark of the actuary's esteem, at once fell in with his request, and signed the return. haworth knew better than neglect to make out and send the proper "returns;" the expedients, however, by which he contrived to get them, false and true, signed, were wonderful for their cunning and daring rascality. it is impossible to spare space to describe them in detail. "is it your belief," said mr. sotheron estcourt to the rochdale witness, "that the returns were always properly furnished?" "i should say so," said mr. taylor; "mr. haworth _was exceedingly exact_!" when asked why the managers and trustees did not look at the papers to which they put their names, mr. taylor said, in justice to these men, that "george haworth's power of deception was very great, and they were deceived by him." when it suited him he would deceive a gentleman into taking office, and then constantly deceive him in the execution of the duty allotted to him. he went to one gentleman and asked him to become a trustee; the person excused himself on account of his business occupations and the risk; haworth said that the responsibility was with government, and showed him a draft bill which had never been passed into law! satisfied on this point, the person then inquired as to his duties. the arrant rogue said he wanted his name to act as a check on the managers, and sign orders for money which they had audited; _for_ "_the managers manage the bank_." when haworth had obtained the names of gentlemen to act as trustees, &c., on some false pretence or other, he had the audacity to trade upon their names. if any poor person, on becoming a depositor, began to express any doubt about security, haworth, "who was much looked up to in the town by the poor," made answer: "thou seest the names of these gentlemen; what dost thou think of them?" having succeeded so thoroughly in beguiling those persons who ought to have acted as a check upon him, all the rest was comparatively easy to a clever and shrewd person like haworth. him task was far easier, indeed, than that of some of the irish actuaries; and once the ascendency gained over the trustees, nothing but close attention and a vigilant _confidant_ were required. the first defalcation was traced back to , and consisted of his forging the receipt of different persons whom he represented as having received certain sums of money. the great bulk of the fraudulent transactions was accomplished, however, by the actuary keeping two sets of books, one of which, marked, "h," were his private books, and the other the public ones. in his private book were found the accounts of nearly a thousand depositors, who, it seems, had been carefully chosen as having the largest sums in the bank, and who generally were bringing additions to their store, and seldom drawing upon it: these moneys he accounted for, "for he was exceedingly exact,"--but only in his private books; he never entered them in the regular bank books, and they were never acknowledged by any one but himself. under any sort of supervision or audit from a disinterested second party, the discrepancies must have been found out; the trustees, however, as we have seen, did just as they were ordered, without ever thinking of questioning anything; and the yearly audit, which this "exact" man insisted upon--_he made himself!_ "the following is another instance," to quote from a little pamphlet published at the time, "of haworth's cunning and duplicity:--a friendly society of ploughboys deposited on a given day _l._, which was properly entered in the book, and laid before the trustees. shortly afterwards the actuary must have erased the word 'deposited' and substituted 'withdrawn,' at the same time placing the figure before the , thus making it appear that the society, instead of depositing _l._ had withdrawn _l._" with this last instance of his villany in his raid on the ploughboys' money, we leave george haworth to the deliberate judgment of posterity, in the hope that this case may always be the blackest page in the catalogue of such crimes. the effect of this fraud, when the depositors found that no help was coming, was most disastrous; some of those who had lost considerable sums of money took to hard drinking, declaring that they would spend their own money themselves: the feeling found expression in such phrases as, "we will spend our money rather than a george haworth shall have it." if the moral influence associated with such habits as those of economy and forethought were not annihilated, they seemed to be, and the lessons as well as the savings of years lay buried in this bad man's grave. the rochdale bank was never re-opened; the bank at heywood, a small town about four miles distant, was entirely closed by the shock which followed after haworth's decease; and in many towns in the north of england, but especially in lancashire and yorkshire, the case exerted an evil influence for many years on the spread of provident habits, and is still bitterly remembered. * * * * * among the details of several cases of fraud in savings banks that were presented to the committee of , we find some particulars of the defalcations at reading and brighton, which we mention together, inasmuch as the same actuary related them in brief, and in fact was connected with both investigations to which they led.[ ] in a fraud was discovered in the reading bank through one of the clerks there noticing that a depositor's book did not agree with the ledger account. the books of all the depositors were called in, and great numbers were found not to correspond. ultimately the frauds were found to have extended over several years, and to amount in all to , _l._ they were easily traced to the secretary of the bank, who was also the accountant. it seems he took sums of money from depositors, entered them in their books, but not in the ledger of the office; and hoped by constant attention to the work to be present whenever any of the books that had been tampered with were brought to the office. so culpable in this case did the trustees feel themselves to be, that the secretary was allowed to refund the money he had taken, so long as his private funds lasted, and was then quietly dismissed. being before the year , the trustees were liable to the whole extent of the defalcation, and proceeded to pay off all depositors by means of a subscription amongst themselves, one of them giving , _l._ mr. hatton, then a clerk in the reading bank, was employed to investigate the fraud and bring matters to a settlement; and this he did so ably, that he was appointed actuary. * * * * * in seven years from this time, mr. hatton was engaged upon an equally unfortunate business in connexion with the savings bank at brighton. a deficiency was found out in this bank in , to the extent of nearly , _l._, and was proved to have arisen from falsifications in the accounts of mr. buckoll, who for many years had been actuary of the bank. the first suspicion of anything being wrong was felt by one of the managers, who, somewhat shrewder than the rest, went carefully through the balance-sheet of the year , under the impression that the amount of profits ought to have been larger. he was unable to do more, however, than confide his suspicions to the actuary of the reading bank, and to request his opinion. after mr. hatton had examined into the amount of business done, and compared the business with the capital and the various items presented to him, he expressed his opinion that the profits on the year should have been at least _l._ more than they appeared to be. strengthened in his opinion by this advice from an experienced actuary, the manager in question, at the annual meeting held immediately afterwards, got up and said that he did not feel satisfied with the balance-sheet, and moved that the meeting should adjourn for a short time for some investigation to be made. a close examination of the accounts was so little to mr. buckoll's mind that he "decamped," leaving a letter for the managers, in which he stated how unworthy he had been of the position he had filled, having committed frauds on the funds of the bank to a considerable extent. a warrant was immediately issued for his apprehension, with a view to criminal proceedings, but he got clear away; and up to within a few years ago had never been heard of. mr. hatton, who succeeded eventually to the situation which buckoll filled, was called in to pursue the investigation into the case, and it is from his evidence before the committee, already so often alluded to, that we are enabled to extract some account of the way in which the frauds were accomplished. the actuary, it seems, made false entries in depositors' books, false entries in the ledgers, and forged the initials of managers, who were required to certify to each entry in the latter. if he wished to draw _l._ from the funds of the bank, his plan was to get hold of a pass-book,--a new one, if he could not find an old one readily,--forge entries in that book as well as corresponding entries in the ledger; this book he would present to the managers in attendance, who readily paid the amount. in some cases the money was left with buckoll to pay over to the _quasi_ depositor, as was then too much the custom all over the country. afraid, however, to do too much of this sort of work himself, he arranged in several cases to have the money paid on what is known as a power of attorney, or an order for payment to a second party. thus he went among his friends, and represented that some poor person or other had applied to him to withdraw a sum of money standing to his credit; but as he could not act as his agent in the matter, and the party could not himself attend at the bank, would mr. so-and-so oblige him by simply going and receiving the money? these persons, who in all cases were proved to have been innocent agents in the transaction, relied on the character of buckoll, who of course was highly respected in the town, and would then hand the money over to him according to agreement. another mode by which, towards the end of his course as actuary, he contrived to appropriate to his own use several large sums of money, was by taking deposits out of course (as in the case of the dublin actuary, even in the street), and never in any way accounting for them to the bank. what the trustees were doing during all the years these frauds lasted, how the accounts were made to square, and where the system of check was, does not appear. mr. hatton, in justice to the trustees, said they "were as efficient as trustees and managers are found to be;" but this kind of evidence is simply a reflection on the general body of such officers, and scarcely any exculpation of the individuals in question. the system of check was clearly inefficient. it is pleasing to add, that in this case the depositors suffered nothing from the frauds. the bank had money in the "separate surplus fund" to the extent of , _l._, and this, with _l._ which an unfortunate guarantee company had to pay for the defaulting actuary, paid nearly all claims. * * * * * from to there were numerous instances of frauds in savings banks, all which cases will he found included in a list at the end of this chapter, though not described at any length. it is the less necessary to do so, as nearly all of them are fully described in reports made by mr. w. h. grey, a professional actuary, who had long been experienced in savings bank matters, and who had been sent down by the national debt commissioners to investigate such cases as they arose. it would appear from his reports that most of them were imitations on a small scale of the gigantic frauds already described in detail. the common feature of almost every case was extreme laxity of book-keeping;[ ] nothing like a proper audit; and signatures given by responsible persons without even a cursory examination. thus in the isle of wight savings bank at newport, mr. grey's testimony is, that he found that "fictitious documents, purporting to be signed by depositors, giving notice of their intention to withdraw a part or the whole of their deposits, have been produced by the secretary, on the faith of which cheques have been signed by the attending manager without seeing the pass-book, and without ascertaining whether such sums were really standing in the ledger or not. these cheques have been entrusted to the secretary for delivery to the depositors at any time they might call for them, instead of insisting on personal attendance during bank hours." the actuary of the rugby bank committed his frauds in the same way. again: "in some cases, fictitious accounts had been raised in the ledgers, and closed again immediately fraudulent repayments had been made; and in other cases in which the amounts had been previously withdrawn, the dates of the real withdrawals had been altered into those of the fraudulent ones." no comparison, it seems, was ever instituted between the cash-book and the ledger, and the system pursued had practically left the whole control of the receipt and payment of about , _l._ a-year to one individual. the secretary, indeed, william wheeler yelf, "was generally much respected in the island," was distributor of stamps, did a large business on week days, and was employed as a wesleyan preacher on sundays; but we have seen how much all this, and more, avails where the man is thrown amongst overwhelming temptations and has no principles to guide him. we have already spoken of many of the results of the rochdale fraud; the case of the isle of wight bank shows that that fraud affected other banks. it was suggested after the failure of the rochdale bank that the trustees of every other institution should at once set about a rigid comparison of the depositors' books with the books of their respective banks. the newport trustees at once acted upon the suggestion of the national debt commissioners. they established the practice of having the balance-book containing a list of the balances due to depositors always on the table when the bank was open, and of comparing this with the depositors' books brought to the bank. had not yelf been a clever swindler, or had the trustees carried the plan to a fair conclusion, he would now have been found out. mr. grey thus explains the new deception adopted to conceal the deficiency: "at the annual examination both ledger and balance-book were duly placed in the hands of the managers; but when they had satisfied themselves that all the balances had been correctly transferred, they shrank from the laborious task of adding together two or three thousand accounts, trusting to the secretary's addition." this labour was just what yelf wanted. "in point of fact," continues mr. grey, "the addition of each page was correct, but the total of each page was brought into a summary page at the end; and in doing so, , _l._ was dropped in one place, , _l._ in another, in the capital column, and _l._ here and _l._ there in the interest column, with some odd money to make up the required deficiency." well might the government actuary add, "from these practices it will be perceived how imperfect a system has been pursued, and how little it was calculated to prevent or discover fraud!" we come now to a comparatively recent date, and to two frauds in savings banks which must be fresh in the memory of every reader. we refer, of course, to the aggravated case at bilston, and the late case at canterbury. a witness before the committee of expressed his opinion that from that time henceforth the country had done with extensive fraudulent proceedings in any large savings bank. it unhappily comes, however, within the province of history to chronicle one such case occurring so late as , and another the facts of which transpired even after the passing of the consolidation act of . the bilston savings bank was established in . nothing unusual marks its early history, except the fact that the man who ultimately managed all its affairs and so largely embezzled its funds was prominently active in its establishment, and was one of the original trustees. to show the estimation in which the rev. horatio s. fletcher was held by his fellow townsmen in , we need only state that in that year, being before simply perpetual curate of the parish, he was presented by them with the incumbency of st. leonard's, bilston, worth _l._ a year. that he should take a large share of honorary employment after this was only what might have been expected. whether expected or not, he did undertake many offices. in , mr. fletcher, in addition to being a trustee, was made secretary to the bilston bank. in , he also became treasurer. not content with this monopoly of offices, he soon afterwards took upon himself--for there is no record of his having been appointed to the office--the work of actuary. the whole of these offices, and the entire system of check which they are properly supposed to give to each other, mr. fletcher held till . and why not? the man was universally known for his charity and benevolence: as the principal clergyman of the place, did he not teach mercy and charity; and, as a magistrate, did he not uphold the majesty and dignity of the law? since the way in which trust is reposed in individuals can never be fully explained nor made the subject of rigid rule, who could better be relied on than the rev. h. s. fletcher, incumbent of the parish, and justice of the peace? nothing can be more easy than to say _now_, that it was consummate folly to allow one man to hold the important offices he did; but who would think of saying so much _then_? suffice it to say, that this man, like so many more of whom we have had to speak, contrived to ingratiate himself into the good will of all around him, and had that peculiar kind of cleverness which succeeds in getting his application and zeal laid to the credit of his disinterestedness and charitable disposition. since the subsequent facts make it impossible to put a kinder construction upon them, all the rest follows in this case simply as a matter of course. on the d of january, , the announcement was made in the _times_ newspaper that the bilston bank had come to a sad end, and that defalcations to the amount of , _l._ had been found out in the accounts of the treasurer of that bank. how these frauds, which extended over several years, were accomplished, and how they were found out, remains to be seen. we will reverse this order, and speak of the exposure first. in the spring of , mr. tidd pratt, the energetic registrar of friendly societies--whose name indeed seems almost synonymous with such subjects--visited bilston, and delivered a lecture on "benefit societies." in the course of that lecture mr. pratt alluded to the cognate topic of savings banks, and spoke of the necessity for regular accounts and regular returns in connexion with them. he then took the opportunity to refer to the "very irregular manner" in which the accounts of the bank in their own town were kept. now, it must not be supposed that mr. fletcher had forgotten his returns; he was far too careful for that; he knew the penalties attaching to such neglect. it seems that both weekly and annual returns, although they were habitually and carefully "cooked," were regularly forwarded to the national debt office. the "returns" to which mr. pratt appears to have pointed, were those called for annually by the house of commons, with the object of improving the law of savings banks; and these returns, from to the factotum of the bilston bank had constantly neglected to send. mr. pratt, in continuation of his statement afterwards, confessed he knew nothing of the circumstances of the bank, further "than that his suspicions were always aroused in cases where he found any accounts were not properly rendered." there can be no doubt about it, that this reference roused the "reverend defaulter" to a sense of his danger; for it subsequently transpired that not a penny was abstracted unlawfully from the bank after the week of mr. pratt's visit and lecture. furthermore, not only was the culprit aroused, but the trustees were awakened to some sense of their responsibility, and very soon afterwards there was a movement amongst them for a change in the management and an overhauling of the books of the bank. in a very few weeks after mr. pratt's visit a new set of managers and trustees were proposed, and mr. fletcher was deputed to see them, and endeavour to get them to act. in july the appointments were legally made, including that of mr. hawkesford to the post of actuary. then quickly followed the disclosure which indeed, sooner or later, was now inevitable. the new actuary got the books from the parsonage--the bank being held in the school-room of the church--and was not long in finding out some of the discrepancies with which they abounded. on first discovering the frauds the actuary spoke to the treasurer, who promised to confer with him about them; on finding out the magnitude of the defalcations, he again mentioned the matter, choosing an extraordinary time, not however without its significance--of a sunday after the usual service. the clerical delinquent acknowledged his guilt, and said, "he was very sorry, but never intended to defraud the depositors of a shilling." it will be seen, however, that the fraudulent transactions were of such a nature as not to admit of any extenuation, and to render condonation of any sort impossible. the feeling produced by the disclosure was painful in the extreme, and the country spoke out with vigour on this extraordinary and merciless breach of trust. the local magnates, indeed, and the body of trustees who had allowed these frauds to run on, spoke with bated breath of the "deficiencies" of the bilston treasurer; the _times_, on the other hand, spoke far more in accord the with the general feeling of the country, when it characterised "this man fletcher" as "the meanest, the most cowardly, and the most cruel of swindlers."[ ] under his manipulations, the bilston bank was a savings bank in nothing but the name; there were trustees, but they were tools; rules, properly certified, but never obeyed; accounts made out and "cooked," but never checked or audited. the trustees did just what they were bid, and the real operator at the bank did just what he chose. this clergyman and magistrate was a swindler, his books a heap of lies, his balance-sheets pure fiction. mr. pratt was sent for to examine into the state of the bank immediately after its condition became known, and it is to the account which he himself subsequently gave to the depositors that we are indebted for most of the particulars which elucidate mr. fletcher's mode of operation, when in the thick of his guilt. mr. pratt stated, that from to january, , there did not appear to have been any meeting either of the trustees or managers, for the purpose, according to the rules, of auditing or settling the weekly accounts. the rev. r. j. heafield, a trustee and manager of the bank, confessed at the trial of mr. fletcher, at the staffordshire lent assizes, , his own culpable negligence in the following words:--"the weekly returns signed by me were prepared by mr. fletcher. _when i signed them, i never in any way compared them with the books._ they were presented to me either by mr. or mrs. fletcher, _and i took no measures to verify their accuracy._"[ ] what might not a designing man do with such a tool as this? having subdued his trustees in this way, the rest was, as we shall see, quite easy. the books at the bank were, it is only fair to say, kept quite correctly; so were the depositors' books. according to the evidence of mr. pratt: "in the day-book everything was entered with scrupulous correctness; and depositors out of had brought in their books, and he did not believe an error had been discovered." mr. fletcher chose a somewhat simpler course of action, which we will describe. his duty as actuary of the bank required that he should furnish weekly returns of the transactions to the national debt commissioners: the correctness of these returns were to be checked by the treasurer, which office he of course filled _himself_. all that was necessary to the perpetration of fraud was that this actuary-treasurer should be on easy terms with his conscience, and this unfortunately was the sad state of the case. deceive the commissioners by falsified returns, and any amount of money, under the peculiar arrangements of this bank, might be pocketed without fear. in order to help himself to a full solution of the case, mr. pratt brought these returns down from london, and compared them with the bank accounts, with the following result:[ ]--"the whole of the returns he held in his hand were signed by mr. fletcher, as actuary and manager. in the statement dated january , , the amount received was returned at _l._ on looking at the books for that day, he found it should have been _l._, therefore _l._ had been abstracted on that day [cries of 'shame,' and sensation]. on the th of january, he found the payments were set down at _l._, whereas they had only been _l._, thus showing that the treasurer had put another _l._ in his pocket that week. in the return dated january , the receipts were set down at _l._, and the payments at _l._, whereas the former ought to have been _l._, and the latter _l._, thus taking to himself _l._ [renewed sensation]." so on through almost all the weekly accounts of three or four years. there seems to have been no other fraudulent transactions than those of this simple but abominable kind; the whole defalcation had taken place in this way, and it was made manifest that no one but the treasurer had participated in it. it is fortunate for the depositors that the frauds were found out when they were; but for the negligence in sending the required returns ordered by the house they might have been continued for an indefinite period. as it was, the assets of the bank realized in the first instance ten shillings in the pound; towards the close of , another dividend of half-a-crown in the pound was paid, and since that time a third small amount has accrued to the depositors, who are never likely to be completely reimbursed of their loss. in , mr. fletcher was tried before baron channell, and found guilty of "appropriating money with intent to defraud." his counsel, however, having made an able defence, characterised by the judge as being as subtle as it was ingenious, the point as to whether the prisoner was a "trustee" at the time of appropriating the money--this being one of the facts upon which the indictment was based--was reserved, and he was released on heavy bail. into the further history of this man, the sequestration of his living by the bishop of lichfield for the behoof of the depositors, the repeated failures of justice in his case, his eventual imprisonment for two years, it is not befitting that we should enter, these being items of almost current police intelligence. we can only spare a few words to tell how similar results followed in this as in previous frauds. men declared they would put it out of the power of mortal man to deceive them in this way again. in many cases a degree of recklessness was induced in those who had been cruelly wronged, which could only have been considered excusable if they had lost their all. it is not at all unnatural, that, from what cannot but be considered a defective education, men should so act, and be so ill prepared and disinclined to look evil consequences fairly in the face: still such facts only prove the truth of what we have before urged, that the extent of money loss, through such dishonest transactions as savings bank frauds, is but a trifling part of the aggregate misfortune they entail upon the country. other depositors, it is but fair to say, acted far more wisely. induced by the counsel and persuasion of those whom they could trust in a time of need, many depositors in other banks withdrew their money, and placed it where alone they could get that security which they so much needed, and several of the bilston depositors did the same with the sums they obtained. it was represented to them truly, that not only would government suffer by a run upon the old banks, but, what was of far more importance, they would themselves suffer, and their second period of suffering be worse than their first. nothing can be so palpably true as that money, completely withdrawn at such times, is oftener wasted than kept, and frugal habits rewarded after this fashion far oftener discontinued than resumed. and here, it seems to us,--and we mention it, though we are somewhat anticipating the subject--the country is greatly advantaged in having the new system of savings banks to point to. what was much wanted in previous cases was some safe place, where timid depositors might resort with their savings, and defrauded depositors go with what they had saved from the wreck.[ ] in the bilston case this privilege was largely used. the post office banks broke many a fall, and they set many on their feet again who otherwise would have been hopelessly overcome by the shock. two years before it would have been sheer mockery to have told depositors, under such circumstances as those to which we are alluding, not to make a run upon savings banks; they had no alternative till, in , that alternative was provided. it would seem, from a memorandum before us, that the authorities of the postal banks, without in any way seeking to prejudice the interests of the old banks, did all that was fairly possible towards reducing the disasters which have invariably and inevitably followed previous cases of savings bank failures. they instructed their agents, in all cases where, owing to the depredations at bilston, savings bank depositors applied for advice about withdrawing their money, to recommend continued confidence in these institutions; if, however, such depositors were bent upon withdrawing their money, then to advise that it should not be asked for in cash, but by means of a transfer certificate, which would make them depositors under the crown. the strict fairness of these instructions may be judged by the closing injunction: "although you may fairly inform those depositors who are alarmed at this failure, that the depositors in post office savings banks have absolute and direct government security for their money, you must on no account do or say anything to weaken their trust in the old savings banks." the last case[ ] in the catalogue of this peculiar description of crimes is that which occurred at canterbury during the year . this case is indeed so recent that any lengthy description of it would scarcely be tolerated. we may well spare ourselves the trouble, for the canterbury fraud was little else than a repetition, on a smaller scale, of the one perpetrated at rochdale, to which we have given so much space. nor is it a little singular that the actuary in the rochdale case was in many respects the prototype of the canterbury actuary: in the estimation in which both were held in their respective spheres, in their character and occupation, there are several points of close resemblance between them. in the canterbury case we have the old story of misplaced confidence, want of check, and a constant embezzlement of considerable sums of money extending over a long series of years. the actuary and secretary of the canterbury bank, mr. samuel greaves, was for many years almost the sole responsible official; of course "he bore the highest possible character for probity and honesty": nor will it surprise any of our readers to be told that it came afterwards to be said of this man, "from his many professions he was thought incapable of such conduct as that which was proved against him." the canterbury bank was established in . greaves's connexion with the institution dates from , when he was appointed actuary at a salary of _l._ per annum. the salary, however, was increased from year to year, up to the time of the exposure, when it stood at the respectable figure of _l._ originally a "hoyman," the actuary of course, and necessarily, engaged in other pursuits than those connected with the bank; and this circumstance, in the same way that it occurred in almost every other fraud of the kind, led to the malappropriation of the money of the bank. it was another case of partial service and partial pay, and an almost unlimited command of money, when among many other business engagements it was always possible that money might be urgently needed. like haworth of rochdale, mr. greaves undertook several agencies, among them those for the sale of coal and porter. in , it seemed, from the statements of his counsel, he began to lose money in his business, and was then, to put it in the mild form chosen at his trial, "induced to abstract some of the funds of the bank to meet his pressing difficulties." once on the downward road, he never turned back; it was impossible to manage it. it was the old story, told with plainness by his own advocate. he took the money, with the full intention of repaying it on an early date; difficulties gathered fast around him, and still the man went on, foolishly trusting to some turn of fortune's wheel to replace him in his old position. he tried speculation, but he lost still more irretrievably; his lucky day never arrived: and at length the weight of anxiety under which the man must have laboured for twenty-five years brought him down, and with the lack of his usual vigilance came detection and exposure. this detection was effected by a mr. abrams, the clerk of the bank, and it is from his evidence at the trial of his superior officer that we learn the actuary's mode of operation. all the cases of fraud, it seems, were identical in character, and were effected by means of claims for withdrawals only. every deposit reaching the bank was properly received and properly accounted for. like haworth at rochdale, the canterbury actuary carefully noted those who were generally putting money into the bank, and seldom taking any out. in the case of many of these depositors he had provided himself with forged pass-books, with the deposit column always correct, but the withdrawal side manipulated according as he himself wanted money. suppose any of the depositors came to the bank, to deposit or withdraw a sum of money; they presented themselves to the actuary, who entered in their proper bock the proper sum, but immediately substituted a forged pass-book for the purposes of the bank. the ledger clerk received a book from the actuary to copy into the ledger, and in this way the books of the bank came to tally with the forged depositors' books. all that was necessary to carry on the frauds was that the actuary should keep a strict eye on the real pass-books of the depositors, for the discrepancies would be patent, as it eventually transpired, the moment the true books were seen. sometimes the money was obtained with less trouble. greaves would occasionally give himself notice that a depositor wished to withdraw a certain sum of money (and this occurred several times in connexion with a person who had deposited considerably, but never withdrawn any sum), and represented that the money was entrusted to him "to keep." after the _quasi_ notice had been acted upon, he would draw a cheque for the money, and the amount would be entered in a false pass-book and copied into the ledger; the luckless depositor, with her book safely by her, being in entire ignorance of the whole transaction. the utter absence of any control on the part of the managers and trustees, as exemplified in such a mode of procedure, especially considering that it came after the case of bilston, the agitation of the last few years, and the passing of the act of , reflected the greatest discredit upon the honorary officials of the bank, though their conduct subsequently went far to atone for their past neglect. the case is described as having excited the most painful interest in the city of canterbury. the actuary, an old man of seventy, was tried at the city quarter sessions in october, ; the trustees of the bank prosecuting him on the charge of felony. the transactions were again described, but only in brief, inasmuch as the prisoner pleaded guilty. a strong memorial was presented, signed by many clergymen and tradesmen, which, instead of asking for a mitigation of sentence solely on account of his age and infirmity, put forward the following extraordinary motive for interference: "the memorialists wish so far to relieve his character from any undue opprobrium that may attach to it, by declaring that the various business transactions they individually have had with him, have always been conducted in an honourable and satisfactory manner." at any rate, this questionable memorial may at least serve to show the estimation in which he was held by his fellow-townsmen. the prisoner was sentenced to six years' penal servitude,--six years for each of the two indictments; but, on account of his age, the years to run concurrently together. the entire deficiency, when at length the whole of the accounts of the bank were made up, was found to be , _l._ happily the depositors, whom, so far as he knew, the actuary was mercilessly robbing, were ultimately secured against loss. the surplus fund of the bank, amounting to , _l._, was applied to meet the case; the actuary gave up property to the value of , _l._; a gentleman who was his surety for _l._ was called upon to pay that sum, and the remainder, about , _l._, was subscribed by the trustees and their friends. the bank was of course stopped on the defalcations coming to light, the books were called in, and the trustees sought the advice of the government officials, as to transferring the business to the post office. the stipulation in this case was, we believe, that the trustees should make good the deficiency, and that then the business of the bank, which was a large one, the deposits amounting to , _l._, should be handed over to the new establishment. every effort was made by the post office, in the way we have shown in the bilston case, to stem the tide of improvidence which generally sets in at such a time, and in this case with great success. the frauds above described have, of course, formed the principal cases,--cases which from their flagrancy and extent have either been made the subject of parliamentary investigation, or have so occupied the attention of the press as to have become grave subjects of public discussion. besides those leading cases, there have been, as we have before hinted, a certain number that have been concealed from the public from motives which, though they may have been open to question, we cannot characterise as wholly bad or unwise. from two returns issued at different times on motions made in the house of commons, we are enabled to compile a complete list of those frauds that have been officially reported to the national debt office. the first return embraces the period between and , and the second, to . the numerous frauds of which we have already spoken, or to which we have referred, occurring before , and the important ones perpetrated since , are not included in the following list. the gross amount of loss would have been considerably swelled had a perfect list been possible. as it is, the following table gives the name of the bank, the amount of the fraud, and the amount of the loss to depositors, so far as it can be correctly ascertained:-- +----------------------+--------------+----------------+------------+ | name of bank. | total | defaulters. | depositors | | | defalcations.| | loss. | +----------------------+--------------+----------------+------------+ | _england._ | £ | | £ | |bradford, wilts | | actuary | -- | |bromley | | actuary | -- | |dunmow | | -- | -- | |highgate | | secretary | -- | |newport, isle of wight| , | secretary | , | |leicester | |{clerk employed}| -- | | | |{ by secretary.}| | |mitcham | , | actuary | -- | |newtown | | -- | | |ongar | | actuary | -- | |poole | , | secretary | , | |reeth | | -- | | |rochdale | , | actuary | , | |rugby | , | secretary | -- | |runcorn | | actuary | -- | |st. helen's | , | secretary | , | |southport | | actuary | -- | |spilsby | , | actuary | , | |upper albany street | | -- | -- | |west london | , | actuary | -- | |yoxall and barton | | secretary | -- | | | | | | | _scotland._ | | | | |auchterarder | , | actuary | | |monquhitter | | -- | -- | | | | | | | _ireland._ | | | | |kilkeel | | actuary | | |tralee | , | actuary | , | |killarney | , | actuary | , | |nenagh | | -- | | |mallow | no returns. | |castle townsend | no returns. | +----------------------+--------------------------------------------+ the frauds at hertford, brighton, reading, cuffe street, bilston, and canterbury, where the amounts of the defalcations are known, are left out of consideration. thus the total amount of the frauds enumerated in the returns, extending over thirteen years, was , _l._; or if we include the cuffe street bank fraud, to make up for those irish banks which sent no returns, and errors of computation, and spread the total over all the thirteen years, the average amount of defalcation was at the rate of , _l._ a year; or, taking the banks mentioned in the returns, upwards of , _l._ for each involved. doing the same with the total loss to depositors, or , _l._, we find the average loss for each bank to be nearly , _l._ the reader who may have followed us through this chapter, and remembers the classes to which the cheated depositors generally belonged,[ ] will have some idea how much pain and suffering the amount of money so treacherously wrested out of their hands really represents. "but the evil," mr. gladstone well said several years ago when speaking on this very point, "that is done, is, unfortunately, not to be measured by the actual amount of money loss; there is an amount of evil such as figures can convey no idea of; and it is impossible that the public confidence in these institutions can be that which it ought to be, while these losses are liable to occur at all." this was a deficiency which mr. gladstone set himself to remedy immediately afterwards, and, though unable to do so at the time through the opposition of savings bank managers, it was not long before another system was provided which struck for ever at the root of this grievance; and for all practical purposes, and so far as it was now possible, repaired the injury which the industrious classes had suffered through the action of defective legislation, and the moral obliquity of those who had been trusted with their earnings.[ ] after entering still more fully in the next chapter into the defects of the savings bank institution, considered purely _as a system_, and the attempts made from time to time to remedy its deficiencies, it will be time to describe how the above beneficial result was brought about. [ ] "in the case of a fraudulent actuary, especially if the bank is carried on at the man's own house, there is no limit to the fraud which he may commit."--_evidence of mr. tidd pratt before the committee of ._ [ ] that lynch, was no ordinary man there is abundant evidence. the following address to the inhabitants of tralee--which from anybody else would be considered well meant and well expressed advice, simply completes the burlesque in his case:-- . "money, as the means of procuring the necessaries and comforts of life, is a blessing; and to be careful of it is a duty incumbent on all." . "to lay by in the time of youth, and whilst we enjoy good health, a portion of the fruits of industry in store for future wants, is a mark of wisdom; and considering that all are liable to infirmities, a provision to alleviate them is of the greatest importance." . "some men by hard labour, and others by superior skill, earn high wages; yet for want of proper management they have nothing to reserve. many might be disposed to save a part of their earnings if they knew how to set about it, _or where to place it with safety_; whilst others who have occasionally practiced saving, have lost what they had laid up, _by trusting it in unsafe hands_." . "the promoters of this institution are aware that several of their neighbours, from various causes, are unable to procure many of the comforts, if not the necessaries of life; they are, nevertheless, fully persuaded that many others who have the advantage of constant employment, and are favoured with the enjoyment of health and strength, might, by practising laudable economy, reserve a portion of their earnings to meet the demands which a future pressure of bad times, sickness, old age, or an increase of family, may bring upon them, and thereby avoid the calamities under which so many of them suffer." . "it is a great mistake to suppose that small sums are not worth saving. by the habit of saving in little matters, riches are acquired; farthings saved would soon accumulate to shillings, and those to pounds," &c. &c. &c. [ ] a mr. fitzgerald was the manager who generally attended and did the current work of his office. his statement after the frauds had come to light was, that he made the best inspection he could of the ledgers of the bank. when asked why he never compared the ledgers with the daily cash books, he confessed he never thought of it, "there was the omission," "that was where the link of investigation broke," "that was the omission which concealed the fraud so long," and other similarly shiftless remarks. [ ] _report of the select committee of _. [ ] _ibid._ (qu. ). [ ] mr. pratt's idea was to make the trustees liable in a great measure for the deficiency, as guilty of wilful neglect or default. the advice given as to lynch's property was of very questionable propriety, and very questionable, as it afterwards appeared, in law. the money, however, was lost to the depositors completely, and went to lynch's relations. [ ] as usual, many persons had been allowed to deposit illegal sums on which they had no claim. one man was shown to have taken out _l_. from the provincial bank of ireland, and to deposit it all in the killarney bank in one day. [ ] _vide select committee on savings banks_, . evidence of mr. jameson, actuary of the perth bank. (qu. , .) [ ] an estimable sect of christians, they are not better known for the zeal with which they contrive to amass and keep in their immediate circle vast stores of wealth, than for the uprightness and conscientiousness they generally display in the conduct of their business. the transactions of haworth, and another of their black sheep who about the same time committed, or attempted to commit murder, whilst assuming their character, is described to us as having spread consternation and dismay through their ranks. the way in which the society of friends has, as a body, taken up the management of savings banks is most commendable. [ ] a great part of our information relative to the rochdale bank fraud is gathered from the evidence of mr. edward taylor, a worthy and intelligent tradesman of rochdale, who was examined before the committee of in reference to the transactions in question; and no one is better able to speak of them. [ ] so prevalent was this impression, that for several weeks _s._ _d._ in the pound was freely offered for savings bank books in rochdale. [ ] evidence of mr. hatton, actuary of the brighton savings bank. [ ] it almost passes the bounds of credibility, and yet it cannot be denied, that in two separate banks, where the accounts were thus overhauled, items of money to a large amount were repeatedly found entered in the books with nothing but a pencil! [ ] _times_, january , . [ ] _midland counties express_, march , . [ ] report of the depositors' meeting, _birmingham daily post_, january , . [ ] or, as it was far better illustrated at the time, "it is not enough to bring a man who has been tossed about in an unseaworthy bark within sight of _terra firma_. we must heave him a rope, or, if possible, run out a plank between the quay and his crazy ship's side, on which he may safely walk across." [ ] no attempt is here made to catalogue and describe frauds not occurring in savings banks proper: a chapter itself might be written on banks for the people established and carried on under a system of complete deception and villany. nor have we entered into the case of frauds in penny banks, such as the unfortunate case at birmingham. [ ] of the rochdale depositors, for example, , were women, unmarried factory operatives, married, and young girls; there were besides, miners, labourers, and members of sick clubs. [ ] since the above pages were in type, a deficiency has been made public in the accounts of the worcester savings bank, the cashier, benjamin b. wilkins, having committed frauds to the extent of between , _l._ and , _l._ on the frauds coming to light last august the cashier decamped, and, as it now appears, found his way to america. the trustees, having heard of him through some channel, put the matter into the hands of the police, who have succeeded in apprehending him, and bringing him back to this country, and he will shortly be brought to justice. chapter vii. on the deficiencies of the existing system, and the establishment of supplementary savings banks. "were greater facilities provided for saving, and greater encouragement given by the intelligent classes to the formation of provident habits, we believe the habit of economy would spring up in many quarters where at present it is altogether unknown. the working man, though he may not like to be patronised, likes to be helped; and those who help to provide him with convenient places in which to deposit his spare earnings, will not fail to be regarded by him as among his best friends."--mr. s. smiles. in the fourth chapter we endeavoured to trace the progress of savings banks up to the year , or after they had had a legalized existence of twenty-five years. we there tried to show that, for some years prior to that period, a manifest improvement had set in, and was rapidly proceeding, in all that related to the social condition of those classes for whose benefit such institutions as savings banks are mainly intended; and we think we succeeded in proving that the progress of these banks was commensurate with the gradual national advancement. except in the years marked by financial or political embarrassment, the number of savings banks increased in a fair and regular proportion each year; and not only so, but the first table we gave (page ) showed conclusively that the amounts deposited increased in the different years in the same proportion. we would now take up the statistics where we left them, and present the reader with a continuation of the same, in a slightly different form. table .[ ] showing the amount of deposits and withdrawals, and the capital, of savings banks, at the end of each year from to inclusive. +-------------+-----------+-------------+--------------------+ | | | | capital of savings | | year ending | deposits. | withdrawals.| banks in the | | th nov. | | | united kingdom. | --------------+-----------+-------------+--------------------+ | | £ | £ | £ | | | , , | , , | , , | | | , , | , , | , , | | | , , | , , | , , | | | , , | , , | , , | | | , , | , , | , , | | | , , | , , | , , | | | , , | , , | , , | | | , , | , , | , , | | | , , | , , | , , | | | , , | , , | , , | | | , , | , , | , , | | | , , | , , | , , | | | , , | , , | , , | | | , , | , , | , , | | | , , | , , | , , | | | , , | , , | , , | | | , , | , , | , , | | | , , | , , | , , | | | , , | , , | , , | | | , , | , , | , , | | | , , | , , | , , | +-------------+-----------+-------------+--------------------+ from the above table, many important facts may be gathered. speaking of the yearly proceeds, in , , , and , the withdrawals of money exceeded the deposits by amounts respectively of , , _l._, , , _l._, , _l._, and , _l._ this extraordinary state of things is partly accounted for by the panic which set in about this time among savings bank depositors, owing to the discovery of numerous frauds, and, as a matter of course, the knowledge of the divided and defective responsibility under which the system was worked; but more especially was it owing to the commercial crisis of - . in the three following years, - - , the crisis quite over, and a general examination of savings bank accounts tending to reassure the public mind, the deposits again gained their natural ascendency, when, in - - - , the excess paid was at least equal to the excess received in the three previous years. there can be little doubt but that this result again was owing in some measure to the crimean war, and the scarcity of money during the period, but principally to the agitation which generally prevailed among depositors at the constant failures in the legislature when attempts were made to place savings banks on a proper footing; these failures leading to repeated petitions for a select committee to go over the whole subject. in there was a slight improvement; in a considerable increase in the deposits, clearly the result of the investigations of the select committee of the previous year, which committee, though it had done little towards a final settlement, had certainly dispelled a cloud of misapprehensions that had gathered round the concerns of savings banks. that improvement continued, though in a less degree, in ; when the returns for show another large decrease of deposits and an increase of withdrawals, which we would not be wrong were we to attribute to the frequent discussions in parliament, and in the country, relative to a new system of government banks. having to some extent accounted for the variations observable in the above table, let us proceed to compare the progress made during the period of twenty years now under consideration with that shown during the previous quarter of a century and described in a previous chapter. between the years and the increase in the aggregate amount of deposits in the savings banks of the united kingdom was at the rate of exactly fifty per cent. between the years and , the returns show an increase in deposits in this decennial period of ninety-eight per cent. comparing the returns for and , the progress made, if indeed progress is the right word to use here, was at the rate of _only five per cent._ were we to take the first five years of this last decennial period, we should find that there had absolutely been a _decrease_ in the business of savings banks to the extent of _twelve per cent._, but this unsatisfactory result admits, as we have just shown, of partial explanation. to continue our survey, however, up to the latest period, viz. including the returns for , we find that the deposits for amounted to , , _l._, and the deposits for to , , _l._, showing an increase during ten of the most prosperous years this country has known since the establishment of savings banks at the rate of only about eight per cent. it is almost unnecessary to say that as regards all the material elements of prosperity the progress of the country between and was most marked. taking england and wales only, we find the amount deposited in savings banks in was , , _l._; in , the amount deposited was , , _l._ now the population of england and wales was in , , ; in it was , , . the declared value of our exports was in , , , _l._; in it had increased to the enormous sum of , , _l._, and last year ( ) it stood at over millions sterling. what the increase in the amount paid as _wages_ was likely to be, we leave our readers to estimate from these sums. in nothing is the national prosperity more manifest than in the relative number of paupers in receipt of relief. though the population increased during the twenty-two years in question several millions, the total number receiving in and out-door relief, was, in (this being the first year the return was made) , ; in , the number was , , or an actual decrease of forty-four thousand persons. such statistics as the above might be multiplied indefinitely, especially those relating to the wonderful progress of the money order office at the post-office, but it may suffice just to make a reference to the increase of wages during the period.[ ] mr. david chadwick, an eminent authority in lancashire, states that between and the wages of the operatives employed in the different departments of the cotton trade had increased from to per cent.; in the silk trade the increase had been per cent. in the building trade the increase throughout the country had averaged from to per cent.; in the iron trade from to per cent. it would scarcely, therefore, be too much to say that within the period, _and up to_ , while the price of most kinds of food had decreased, the wage for almost every description of labour had increased in at least an equal proportion. in view of such facts, and before we attempt to describe the different plans which were produced in order to make these useful institutions once more progressive ones, let us try to ascertain why more of the money thus gained did not reach the savings bank. a careful examination of the returns of savings banks will show beyond the possibility of doubt that the first and greatest check received by these institutions was when it became apparent that they did not possess within themselves that absolute security which they were thought almost universally to offer. we could not well exaggerate the result; this is the fountain from which all the ills have proceeded. the evil did not confine itself to the banks where the depredations had been carried on; it was not confined to the banks already established; but it extended to quarters where before there had been a manifest disposition to increase the facilities and to meet the wants of an advancing population, and this feeling was destroyed. the first effect of the frauds was, of course, to stop the deposit of money; in a smaller degree and among less educated people they even tended, as we have seen, to destroy the habit of laying by any money at all; but among all they produced a decided conviction that the financial arrangements of the system, especially with reference to the anomalous connexion between savings banks and the government, were unsound. we have several times referred to the state of the law as to the exact nature of this connexion, but it is necessary to return to it again as entering very largely into the consideration of the slow progress of savings banks. there can be no question that the great bulk of the british people, and not simply the lower and middle classes, imagined--up at least to the time of the great frauds of - --that government was fully responsible for all the money placed in savings banks. in we find mr. bright saying in parliament: "nine out of every ten depositors believed that they had the security of government for whatever money they invested, and that in placing that money in the local savings bank they were securing it better than if they lodged it in the hands of the wealthiest private banks in the country."[ ] mr. hume said the same on several occasions. mr. h. a. herbert, an irish member, whose name deserves to be associated very intimately with legislative attempts to put savings banks on a proper footing, testified over and over again to this impression being the prevailing and universal belief. general thompson told the house in that he "was struck with profound astonishment to learn that savings banks were not what in common parlance was called 'as good as the bank.'" he had advised servants on numerous occasions to put their money into such banks in the belief that they had complete government security for their money. such expressions of opinion from men who, though they had never penetrated into the mysteries of official life, could scarcely be thought ignorant in financial questions of this kind, show how wide-spread must have been the misapprehension, and are of themselves almost a sufficient justification of the ignorance of the bulk of the poorer classes. nor were there wanting excellent and numerous authorities who must have contributed to this improper impression. mr. scratchley, in his _practical treatise on savings banks_, pp. - , has taken great pains[ ] to string together a formidable list of those whom he finds inculcating the same view as that already expressed by prominent members of parliament during debate. suffice it to say, that when such books as mcculloch's _commercial dictionary_, porter's _progress of the nation_, _the quarterly review_, _chambers's information for the people_, _chambers's magazine_, _the penny magazine_, and the irish school books, laid it down that depositors had perfect security from government for the money paid into savings banks, those of the class which relies to such a great extent on the intelligence of those above them may well be excused for falling into error, and may well be pitied when called upon to bear loss. government took up the subject of savings banks at an early stage in their history, with the object of "protecting" them,[ ] and to that end they made it an imperative duty on the part of the trustees of these banks to deposit their money with the state; unfortunately, however, no steps were taken to enforce this provision. here lay the fatal mistake, and the source of all the trouble. "the whole success of savings banks," says mr. mcculloch in his _statistics of the british empire_, "depends upon the security the depositors have for their money. no one was accustomed to speak of savings banks without commenting on the increase in the stability of the country by giving the poorer classes a direct interest in the preservation of public credit; but it requires no great amount of penetration to see that so much entirely depends upon the fact that faith is kept with such depositors." to all intents and purposes proper faith was _not_ kept by the banks, and a proper knowledge of the real amount of risk the poor were running was wrongly withheld from them: hence the undoing of a great part of the good work accomplished in the first quarter of the present century by the establishment of savings banks. "what was the use," indignantly asked a member of the house of commons of the government in , "of preaching to the poor the duty of being honest, industrious, and self-dependent, if the fruits of their hard earnings were thus to be swept away?" ten years afterwards a more powerful voice than mr. herbert's asked the same question, and appealed to the country for a reply. "if ever," said the _times_ newspaper, speaking of savings bank money in a leading article, th january, , "there was a sacred fund, this is one; if ever there was a class and a fund which deserved the protection of wise laws and stringent responsibilities, surely this is the class and this the fund." says an objector: "irregularities will creep into the management of the best of funds, and frauds are as old as the world." says the _times_: "how can people treat such cases as a matter of course! how can we look on while the poor commit their all to such institutions as these! it is useless to tell us that nine out of ten, or ninety-nine out of a hundred of these savings banks, are conducted with scrupulous care and constant supervision." referring, then, to the recent case at bilston, it continued, "how can the depositors of a few hoarded shillings know where the fletchers hold sway, and where the managers do their duty? the only sound advice to give the working classes under such circumstances is, to have nothing to do with institutions _where such things can occur_." the argument was irrefutable; nor was the advice given hastily. the postal banks had then been introduced to the country, and the article thus winds up: "this advice would have been difficult to give some years ago; it is not so now. the post office savings banks offer an escape from danger, and at the same time remove the necessity of taxing the time and attention of philanthropic men in offices where negligence may occasion such wide-spread ruin. we confess that, in the face of such occurrences as those of bilston, we hope the day will speedily arrive when these fallible savings banks will all cease to exist."[ ] we have said that the frauds in some of the savings banks led not only to their stoppage, but to the closing of others in the neighbourhood. nothing can be clearer on this point than a reference to ireland. in , there were savings banks in ireland; in , no fewer than of them had ceased to exist. in there were eight in county down; in only two remained. in county kerry there were almost an equal number; in not one remained. doubtless other causes besides the breaking of faith with the people led to this, partly and indirectly,--such, for example, as the failure of crops,--though still there was the fact, significant enough, that in the districts least visited by famine, and where the people were most industrious and frugal, there had been the greatest diminution of these banks. bearing in mind such facts, and also that it can be proved that the frauds to which savings banks have been so liable have led directly or indirectly to the breaking up of no less than fifty of these institutions in the united kingdom, let us proceed to some inquiries as to how far the banks, uncertain and insecure as they were in , met the requirements of the country in other respects. before there were in the united kingdom savings banks; of which were in england, in wales, in scotland, in ireland, and in the channel islands. computing from the census of that year, there was one savings bank to every , inhabitants. in england, though the banks were distributed through every county except one, there were many populous districts and numbers of large towns not supplied with them. rutlandshire with its , inhabitants was the exceptional county in england: but in scotland there were nine, and in ireland four counties, entirely without savings bank accommodation. the following is a list of those thirteen counties:-- scotland. ayr, with a population of , clackmannan " " " , haddington " " " , kinross " " " , linlithgow " " " , orkney & shetland " " " , peebles " " " , sutherland " " " , wigtown " " " , ireland. carlow, with a population of , kerry " " " , leitrim " " " , longford " " " , one of the channel islands, alderney, and the isle of man with its three or four market towns, had likewise no savings bank. thus fourteen counties and the above islands, containing an aggregate population of at least a million persons, could not count upon a single savings bank to assist those of that great number who were inclined to provident habits, or those who might have become so had these facilities been within reach. so much for the counties in the length and breadth of which no bank for savings could be found. applying the same test to towns and villages already applied to counties, we find that of places above the position of hamlets there were, in , no less than , without banks; and not only so, but of this number were towns of more than , inhabitants, and of the places which had no savings bank accommodation had each one or more private or joint-stock banks. but we have another consideration to urge here; and that is, the insufficiency in the number of savings banks in many counties where their extent and population required them. no one will say that berkshire, dorsetshire, and cheshire required as many banks as did middlesex, lancashire, and yorkshire--the vast centres of population and the busy hives of industry--and yet the facilities of which we are speaking happened to a great extent to be so arranged. in we find the relative number of the population and the depositors in savings banks in our english counties to vary very considerably--a difference ranging from one in eight to one in thirty-six. in the county of berks, there was one savings bank for every , persons; in dorsetshire one for , of the population. on the other hand, to take the rich and thriving county of lancashire, which had the lowest relative number of banks, we find there was only one to every , persons, and in the west riding of yorkshire only one to every , persons. from a careful calculation which we have made from these and similar facts, it would appear that of the two and a half millions of persons for whom savings banks were specially designed, and who in were not depositors, at least half of them were the breadth of an english county distant from any place where they could place their money had they been desirous to save it, and the rest were distant from six to twenty miles from any such repository. nor were those who were much nearer these banks, _i.e._ the denizens of our large towns, much better circumstanced. of the existing establishments in there was a large proportion of them open for so short a time, and at such inconvenient hours, as practically to make them closed banks to our working population. that they did little business is not to be wondered at; though we think our readers must be astonished to know that of the entire number of savings banks much more than half of them only received, on the average, a dozen deposits a week! astonishing as this is, all wonder may well cease when it is found that of the whole savings banks of the united kingdom only twenty were open daily, while were open once a week, and fifty-four but _once a fortnight_, and ten but _once a month_! of the remainder a considerable number were open two and three times a week, and the rest did business at various periods. investigating the matter a little more closely still, we find that, in , fifty savings banks were open but _four hours monthly_; were open only _one hour each week_; and open _but two hours per week_. in england the banks were open in the aggregate , hours a week, giving an average of about four hours per week for each bank, or, if we leave the metropolitan banks out of the consideration, an average of about two hours and a half per week. further, taking three english counties, solely chosen on account of their alphabetical order, bedfordshire, with five savings banks, had seventeen and a half hours per week of saving bank accommodation; berkshire, with _ten banks_, had only twenty-one hours; and buckinghamshire, with six banks, but an aggregate of eight hours each week, during which its population could resort to the banks with their savings. after these facts, let no one wonder that the odd savings of the poor burnt holes in their pockets, and led them to resort to the "house of call" open within a stone's-throw almost at all hours. a statement was made before the committee of , that twenty-five out of every hundred persons properly designated as of the industrial classes were debarred from saving their money, even if inclined to do so, from the want of convenient places of deposit; and the reader may, we think, with the help of the above statistics, judge whether that statement was at all an exaggerated one. "is nothing to be said of the inherent disposition of so many of the poorer classes to spend their money, and the utter repugnance they feel to habits of frugality?" says a doubting reader. certainly. but how do the facts bear on this matter? let us take the returns of the four different counties already alluded to as containing relatively the largest and the smallest number of savings banks. in berkshire, for every thousand persons an amount equal to , _l._ was accumulated in ; in dorsetshire the amount was , _l._: on the other hand, in lancashire, which we described as most insufficiently served with banks, the amount per thousand persons was only , _l._, and in the west riding of yorkshire but , _l._ but we will take the case of a single bank to show that the want of facilities was a most important element in the want of progress; and to make the fact still plainer, we will go to lancashire itself. the manchester savings bank has for long been one of the best managed institutions in the kingdom, whilst elsewhere there had been, as we have seen, the slowest growth, if not complete stagnation in savings banks generally. the depositors in the manchester bank were nearly quadrupled in the twenty years now under consideration, and no better test is required that these depositors were of the right sort than the fact that, in , , _l._ lodged at manchester belonged to persons who could not even sign their names.[ ] these facts did not fail to strike the members of the committee of , and mr. j. hope nield, the eminent actuary of the manchester savings bank, was asked how he accounted for the fact of this bank advancing so much more rapidly than any other. mr. nield succinctly replied, "only from the constantly increasing facilities which it has been our constant endeavour to give." mr. nield afterwards explained the facilities to which he referred. in many banks, depositors had only a very short time for business, and then perhaps they were restricted to one kind of business for one day, another kind of business for another day. in the manchester bank depositors could go and do any kind of business whenever it was open. there lay the distinction between "free" banks, and what were known as banks on the "restrictive principle." in a restrictive principle bank, of which there were an enormous number, withdrawals were made on one day, deposits on another; new accounts could only be opened on a certain day, additions could only be made to accounts on another certain day. then there was the notice to be given for withdrawing money. the more "free" the bank, the less notice: generally a week was required; more often a fortnight was wanted; in many cases a month's notice had to be given. "whenever," said mr. nield, "a free bank could be pitted against one on the restrictive principle, the increase in the number of depositors in the former case would be found to be four or five times as much as in the latter." this was shown in a clear light by a striking illustration--also a somewhat amusing one: "up to ," said mr. nield, "the late venerable archdeacon brooks, of liverpool, would insist to the day of his death upon paying everything himself in the liverpool savings bank, and, as a consequence, the bank was only open two days a month for the repayment of money. deposits were completely stationary there for many years, and cases were known where persons went to the manchester bank to open an account there, and remitted money by post." whilst speaking of the committee of , we may here give the opinion on this point of another gentleman, of whose career as an ardent and laborious savings bank reformer we shall presently speak. referring to the absence of what he considered reasonable facilities in savings banks, mr. charles william sikes, of huddersfield, expressed his decided conviction that the present system "was inadequate to meet the wants and wishes of the working classes of this country." when asked ( , ) if he had made any calculation as to the extent to which the savings of the working classes might reasonably be expected to amount if the savings banks were thoroughly popular with them and were felt to be perfectly safe, mr. sikes answered: "i think that if a knowledge of savings banks becomes widely diffused (and the process is going on), and if the reorganization of them receives the confidence of the country, the average annual deposit, which now amounts to seven millions, is so small a proportion of the aggregate income of the working classes of this country, that instead of being, as it had been, stationary, _with scarcely a fluctuation of two per cent. for twenty years_, there will be a probable increase in the course of three or four years, or perhaps a longer time than that, of two, three, or five millions of money;--in other words, that the annual deposit, instead of being seven millions, will get to eight, nine, or eleven millions, in ten years. the income of the working classes is fully millions a year, and, with anything like provident and sensible habits, thirty millions a year might be deposited in savings banks." * * * * * and now that we have at considerable length described the defects and inequalities of the savings bank system, we cannot perhaps do better than offer some account, first, of different banks of a supplemental character which have been started within recent years, and afterwards speak of some of the various proposals made, out of parliament, to render the general system more efficient. for many years prior to their actual establishment it was felt by those best conversant with the habits and feelings of our british soldiers, that the savings bank institution did not meet their wants and requirements, and that supplementary banks were needed. this project was frequently urged,[ ] and in lord hill gave his consent to the plan of military savings banks proposed by sir james mcgregor and approved by lord howick, the then secretary-at-war. an act of parliament was obtained ( and vict. c. ), and immediately afterwards the authorities at the different barracks commenced operations, under regulations made by the secretary for war. in this act was amended. in the regimental benefit societies were dissolved, and incorporated with the military savings banks by a new act; and in the whole of the acts relating to the savings banks of the soldiers were consolidated into one ( and vict. c. ). the amount which any one in the service can deposit is unlimited, though interest is not allowed on any excess over _l._ in one year, except in the case of gratuities given for good conduct. when the sum of _l._ is reached, no further interest is paid. the interest allowed must not exceed _l._ _s._ per cent. the whole of the money raised in regimental savings banks is remitted to the war secretary, who holds an account with the national debt commissioners, which is kept separately from other savings bank accounts, being entitled "the fund for the military savings banks." returns of all transactions made in these banks are laid annually before parliament. the returns almost from their commencement have been most satisfactory, and produce sufficient evidence that these supplementary banks were required. the total amount up to this time ( ), standing to the credit of our soldiers in military banks alone, exceeds the sum of a quarter of a million sterling, and amounts on the average to nearly _l._ for each depositor. this sum, however, though large and eminently satisfactory, as indicative of providence and forethought among a class which cannot be called highly paid, does not represent the whole of their savings. it is well known that many go beyond their barracks to deposit such sums as they can spare, acting on the feeling, which may be well understood, that it is not always advisable that the authorities _should know the extent_ of their savings. * * * * * what was done for soldiers in was accomplished for seamen, another class whose interests everybody cares for, in . the act and vict. c. , regulates seamen's savings banks, established at all our principal seaports under the direction of the board of trade. according to this act the board of trade has power to constitute any shipping office established under the merchants' shipping act ( ) a branch bank under its control, and to require any shipping master belonging to that office to act as agent. the money invested in these banks is paid through the board of trade to the national debt office; and interest similar to that given by the ordinary savings banks is paid to those who so invest their money. as in ordinary savings bank management, the expenses incurred in carrying on the business through the board of trade (a department of which is constituted as a sort of central bank) and the shipping offices are paid by the surplus interest obtained from government, with whom the funds are invested. as in the case of military banks, an annual account must be rendered to both houses of parliament of all transactions; but we are sorry to say that these transactions have never been large. some forty thousand pounds represent the entire capital of the supplementary seamen's banks.[ ] all who know what jack is ashore--and who does not?--will wonder little at this result; he is universally pointed to as an embodiment of improvidence itself: but when it is known that the machinery in question is applicable to married sailors, their wives and families, the picture of want of thrift and inclination to save presents several deplorable aspects. * * * * * still more useful and interesting has been the penny bank movement, and some account, which must necessarily be brief, will not be out of place here. before the year , there seem to have been at least four penny banks established with a view to attract a poorer class of depositors, or it might be a _younger_ class, than the existing savings banks had reached; and, as "stepping-stones to greater things," penny banks succeeded admirably from the very first. the first bank was started, with this very laudable object, in greenock, in , by a mr. scott of that town. the greenock savings bank having, like all the other savings banks, restricted the amount which could be received to a shilling, and very few of them receiving that amount pleasantly, mr. scott thought that the very poor had no safe place in which to deposit their little surplus earnings. poor people were often enough urged to "take care of the pence, and the pounds would take care of themselves;" but little had been done to help them to care for their pennies, which proverbially and very quickly burnt holes in their pockets when they were compelled to keep them in their own possession. a bank for such sums was started in this town; and to show how much it was needed, and how ready the poor were to avail themselves of advantages when they were placed within their reach, we have only to state that , depositors in the first year of the existence of the greenock penny bank, placed the sum of , _l._ in it. the success of this bank soon began to tell all around; many private establishments and charitable institutions were not long in following the example that had here been set. in the following year mr. queckett, a benevolent and painstaking clergyman, in the east of london, established a penny bank in connexion with christ's church, st. george's in the east, and the success attending the venture was still more encouraging and remarkable; nearly , deposits were made in this parish penny bank in the first year of its existence. it seems that the number of depositors, for some reason or other--probably because that number was enough for one person to control; the whole of the repayments, at any rate, passed through mr. queckett's own hands--was limited to , ; and so great was the demand, that there were always several applicants for any vacancy that might occur among the favoured two thousand. two "penny banks" were next established about the same period--one at hull, in august, , and the other at selby, in the east riding of yorkshire, in july of the same year. the clergymen and gentry of both towns joined together to form an institution, "which should create and foster habits of regularity and frugal economy among the poorest people, and which should afford an opportunity for the deposit and safe keeping of the smallest sums of money, repayable with interest when required." the birmingham penny bank was established in , and in six years from its commencement had received the enormous sum of , _l._ in amounts from one penny to one pound. many of our readers will be aware of the unfortunate end of this bank, under circumstances which, deeply to be regretted, have had a prejudicial effect on the usefulness of other banks of the same description. were it not that a new class of banks, since established, offers considerable inducements to the poorest classes, and thus supersedes, though only to a limited extent, the necessity even for penny banks, such an effect could not but have been considered irremediable, as well as most deplorable. of the remaining penny banks, the principal ones in england are those of york,[ ] established in , and excellently managed throughout, and very successful in attracting depositors; the halifax bank, commenced in , and equally successful; the derby bank, established in , under the auspices of the rev. j. e. clarke, one of the most earnest of the promoters of the principles of penny banks; and the southampton and plymouth banks, established in . there are no means of obtaining statistics as to the number of penny banks in existence, but there cannot be less than eighty or ninety in english towns alone. over and above the regular public penny banks, however, there are an enormous number connected with and doing an incalculable amount of good in private establishments, ragged and other schools, and different religious bodies. in scotland the movement has progressed even more rapidly than in england. dr. chalmers always held, and often urged during his lifetime, that far too little was done to tempt the poor, and especially the families of working people, to save their little surplus cash: in commencing his "territorial savings banks," as he called them, in edinburgh, he was actuated by exactly the same view and the same spirit which afterwards influenced the promoters of penny banks. the penny bank system flourishes in glasgow to an extent unknown in any other neighbourhood. in and around that city there were, at the close of , no fewer than sixty-eight penny banks in active operation, all of which deposited with the savings bank of that place. the total amount of deposits in these sixty-eight banks during the year was , _l._, and withdrawals to about half that amount. the number of depositors exceeds, at the present time, , . that these auxiliary banks are effecting a great amount of good can well be believed. "the saving of pence," says the report from which these extremely interesting facts are taken, "proves a training to habits whereby ultimately larger sums are saved, and the virtues of industry and providence are cultivated and confirmed," and there cannot exist a doubt on the matter. the principles upon which they and all other banks of the kind were started, and have been throughout conducted, make them peculiarly institutions of a preliminary character for the poorer class of workmen; emphatically they are, as they have been called, "the poor man's purse." in their operations they are so simple, that few could possibly get perplexed in dealing with them; and they are best adapted to working populations, because they are open at such hours, generally on saturday nights, as are known to suit these classes. as the most salutary change is made in a man's habit, perhaps in his character, when he _begins_ to save, the penny bank deserves every countenance and encouragement.[ ] it only remains to add, that the legislature took the matter up in august, , when it passed the act and vict. c. , legalizing, as it were, these institutions, by enabling them to invest the whole of their proceeds in savings banks. * * * * * much that remains to be told of savings bank reforms, and of other proposals to supplement the system by fresh provisions, may be told in connexion with the life of a gentleman to whom reference has already been made. amongst those who have devoted much time and immense labour to bring about a better state of things in savings banks, the foremost place is undoubtedly due to mr. charles william sikes, of huddersfield. mr. sikes, the son of a private banker of that town, was born in . we will pass over his early years, only remarking that he received a commercial education, and, in , entered the employ of the huddersfield banking company, the third or fourth joint stock bank established in this country. subsequently cashier, mr. sikes now holds the position of deputy manager of the bank in question. we mention this, because it has an immediate bearing on the subject: it was while mr. sikes was cashier of this bank,--which, like other private banks, received deposits above _l._, and allowed interest at the current rate,--that his attention was arrested to the question of banks for the people. he witnessed a considerable number of instances of workmen, who, beginning with a few pounds, had silently amassed what was to them a little fortune, of one, two, and even three hundred pounds; and he became deeply impressed, as he himself informs us, not only with the idea that the number of these provident working people was far less than it ought to be, or might be, but that the social and domestic results for good that would ensue would be absolutely incalculable, if bank depositors among the working classes became the rule, instead of the rare exception. about this time--the era of the free trade agitation--there was great distress in the manufacturing districts, and huddersfield, like the rest of the west riding towns, was heavily visited. in the neighbourhood where mr. sikes resided, the population was chiefly engaged in the weaving of fancy waistcoatings, and that trade was almost suspended. "privation and suffering," says mr. sikes, "prevailed on every hand, and was frequently borne with silent and noble heroism." he seems to have entered freely into discussion with working men as to the various remedies for such a state of things, and in this practical way to have penetrated into their thoughts, and to have got at their wants, wishes, and feelings. and for such objects as mr. sikes had in view, the end amply justified the means. there seemed to him only one remedy, to which they might possibly be assisted, but which they themselves must adopt; whatever was suggested, mr. sikes's thoughts would always recur to the comparative comfort of those who had to some extent lived for the future--who had had the wisdom in their better times to remember that rainy days must come at some time or other; that "into each life some rain must fall, some days must be dark and dreary;" and that the difference between those who had a little store laid by and those who had none, was the difference between hopeful expectancy and comfort, and helpless misery and want. mr. sikes tells us that he had already begun to feel, that though much might be done for the working classes by kindly and temperate advice, the greatest share of the work of their social elevation would have to be achieved by their own individual efforts; this feeling, moreover, was strongly confirmed by reading a passage in the late bishop of chester's (archbishop sumner's) _records of creation_: "the only true secret of assisting the poor is to make them agents in bettering their own condition;" and on this maxim, as a principle, he resolved solely to act. mr. sikes came to the conclusion that his work might well lay in endeavouring to stimulate the poor to more provident habits; and that, if there was anything in the constitution of such societies as were formed expressly to foster these habits which stood in the way of the poor man, the obstacles ought either to be quickly removed, or some new organization must be planned to effect this purpose. though mr. sikes never seems to have had anything to do with the huddersfield savings bank--having abstained, through motives of delicacy, owing to his connexion with an ordinary bank in the same town--he was thoroughly conversant with the system, and therefore fully appreciated the difficulties in the way. he was not long in finding out how utterly impossible it was to adapt the system, as it then stood, to the well-known wants and requirements of the workman; and he early turned his attention to some auxiliary machinery which he thought would meet the case of the younger people, if of no other. he truly held, that if he could do anything to inculcate the growth of frugality in young people, their habits would increase with their years and grow, in spite of the many inconveniences, amounting as they did to absolute discouragements, which they might meet with afterwards in their connexion with the majority of the old class of savings banks. with this end in view, mr. sikes addressed a long letter to the editor of the _leeds mercury_, in , which was subsequently republished in the form of a pamphlet, and widely circulated, recommending the formation of what he called "preliminary savings banks." there was nothing particularly new in the character of the banks proposed; the novelty was in their adaptation to the machinery of mechanics' institutions. mr. sikes took up the penny bank movement, and showed, with an energy and devotion to the subject which made his exertions quite impressive, how, by the already existing institute, that useful scheme for saving small sums might be propagated far and wide. his proposal, to give it in brief, was, that a few leading members of each mechanics' institute should form themselves into a "savings bank committee," attending, say, an evening weekly, in one of the class-rooms, to receive the trifling deposits of any member who should choose to "transact a little business" with them. they would only have to appoint a treasurer, provide a few inexpensive books, and with the exercise of just a little patience and self-denial they might succeed in bringing many round to saving habits. the excellent organisation, especially in lancashire and yorkshire, of mechanics' institutes, would thus wonderfully augment the number of agencies for receiving the savings of the people, and they would thus augment the number most where more facilities were most needed. the "preliminary" banks were meant to be merely feeders to the larger banks: so soon as the money of any one depositor reached a guinea, or two guineas, the sum was to be paid into the nearest government bank, as often as necessary. "if the committee of each institution," concluded mr. sikes, in his very interesting letter, "were to adopt this course, taking an interest in their humble circumstances, and in a sympathising and friendly spirit, suggest, invite, nay win them over, not only to reading the lesson, but forming the habit of true economy and self-reliance, how cheering would be the result! once established in better habits, their feet firmly set in the path of self-reliance, how generally would young men grow up with the practical conviction that to their own advancing intelligence and virtues must they mainly look to work out their own social welfare!" it is very satisfactory to find that this advice and such considerations had their proper weight with the committees of many of these institutions: penny banks were added to their other educational and social schemes; and mr. sikes was further encouraged by the committee of the yorkshire union of mechanics' institutes, who more than once alluded to his proposals, and expressed their cordial approval of his plan, and their pleasure that it had been adopted in several places included in their sphere of operations. in the country generally the proposals attracted for some time considerable attention, and led to mr. sikes being largely consulted by gentlemen who were desirous of establishing "feeders" to the existing savings banks, either in the form of the penny bank, or the mechanics' institute "preliminary" bank. he soon came to be regarded as an authority on the subject, and justly so; many different banks were at this early stage formed as the results of his advice and assistance, and mr. sikes seems to have had many gratifying assurances that his labours have been far from fruitless, a result in which the philanthropist finds his best reward.[ ] mr. sikes's next exertion on behalf of the working population around him was to help them to a proper estimate of the value of provident habits, by the publication, in , of a pamphlet entitled _good times; or, the savings bank and the fireside_;[ ] an admirable little manual for the class for which it was written, and which deservedly obtained a large sale. mr. sikes himself described how he was led to write his pamphlet by hearing, in an extensive intercourse with working men, the most crude ideas as to the utility and virtue of habits of economy and frugality; and we know no better corrective than a perusal of this little "compendium of practical wisdom" now before us. up to this time we find that mr. sikes laboured very earnestly to spread the knowledge of savings banks among the people, and to obtain more appreciation for these institutions. he also, as we have seen, proposed his "preliminary banks" on the principle that, as the existing institution did not sufficiently recognise the small attempts at saving habits, this supplementary class of banks would supply the deficiency. he seems, however, to have carefully abstained from saying anything that would tend to lessen the influence or usefulness of the existing savings banks; but in , the time would appear to have arrived when it became necessary to attempt some reforms in their constitution and management. it is not at all difficult to comprehend the steps by which mr. sikes, with his practical knowledge of savings bank business, would arrive at the conclusion that if these banks were to continue to be in any sense the depositories of the money of the poor, they must undergo almost a transformation, and further, that reform must come from within. that this was the conclusion to which he came is evident from the able and exhaustive letter which mr. sikes addressed, in , to the chancellor of the exchequer, the late sir g. cornewall lewis, on "savings bank reforms." mr. sikes first sought an interview with sir george c. lewis, and obtained one, in company with mr. wickham, m.p.; and the letter which followed was the result of a request on the part of the chancellor of the exchequer, that the different points should be fully and clearly set before him. so far as we have been able to find, mr. sikes deserves the credit of having been the first to point out the inherent defects in all parts of the savings bank system, and the first to suggest an entirely fresh form of management.[ ] almost all the previous _brochures_ relating to savings banks had exclusive reference to the matter of the frauds which had occurred, and the security which depositors possessed in such cases. on this subject, dr. hancock, of dublin, had published two very able pamphlets, which had originally been read as papers before the dublin statistical society, of which dr. hancock was secretary. mr. edward taylor of rochdale had, at a still prior period, written a pamphlet on the same subject. mr. sikes, in the _letter_ we are now considering, adverted at length to the same point, but by no means confined his attention to it. he, on the contrary, dwelt on the dormant state into which many of the banks had sunk; the extremely unequal way in which they were furnished to the people; the limited time for which the majority of banks were open; the various rates of interest allowed; the inequalities in the contributions to the "separate surplus fund;" the non-establishment, for many years, of new savings banks; and generally, the unsatisfactory state of the law with regard to them. mr. sikes, after thus recapitulating in his able pamphlet the imperfections in the organization and management of savings banks, advocated the following improvements, viz.:--that the state should give a perfect guarantee; that there should be a central bank in london to control the whole system, in the same way that the central money order office controlled all money-order operations at the post office; that there should be a vigilant and general audit of all accounts; that there should be a great extension of the hours during which savings banks were open; a great increase in the number of such banks--the services of private and joint-stock banks to be called into requisition in cases where such arrangement was likely to prove economical and advantageous; that there should be an increase in the facilities for the deposit and withdrawal of money; that one-fourth of the capital of savings banks should be employed in first-class landed securities and railway mortgage bonds, yielding four per cent. mr. sikes further proposed that the rate of interest on sums up to _l._ should be three per cent., and two and a half per cent. on all sums beyond. mr. sikes felt the difficulty of providing that essential government guarantee for every deposit, without which any reform in savings banks was scarcely worth the name; but he strongly insisted on the point that if a savings bank department was established in london, which should, on its part, insist upon weekly returns, a good and uniform system of book-keeping, and a liability to unapprised visits by inspectors from the london office, the entire staff of savings bank officials in the country might, to a great extent, be kept honest. bearing in mind, however, that errors and losses would occur to the best regulated department, he further proposed that the treasury might be made safe by the establishment of a "general guarantee fund,"[ ] to which contributions should be made from the "separate surplus fund." these suggestions, if carried out, mr. sikes believed would help to form the basis of a system that would restore savings banks to the estimation in which they were held during the first twenty years of their existence; and there can be no doubt of it. the difficulty was, however, in getting such recommendations adopted--either because the then chancellor of the exchequer (sir g. c. lewis) did not bring his extraordinary powers to bear upon the subject, or else there was still something lacking to give a more practical turn to the questions at issue. as subsequent events have proved, it is more likely to have been for the latter reason that the matter was not persevered in. everything that an ingenious marshalling of figures, an array of argument, and even eloquence could do, mr. sikes did; but all appears to have been equally unavailing. the chancellor of the exchequer made attempts, as we have before seen, in the house of commons, to improve the organization of savings banks, but without success. when the committee on savings banks was appointed, in , mr. sikes was called as a witness. he again described the plans which he had suggested in , and which had undergone little or no modification since that time, and urged the adoption of some of them,--with what success is already known. and here it will be best to dispose of the committee of , and to show how little it effected, and how little it was calculated to effect. so far as the providing of additional and much required facilities was concerned, it is necessary to describe with minuteness the committee's deliberations. the report itself, to which the committee put their names, has been given. it provided, as our readers will remember, for a new government management of savings banks, advised that increased power should be given to the commission, and provided actual security for the deposits. this report was not acted upon; but even had it been, the reform would only have been partial. so far as relates to the increase of facilities, it left the question almost untouched. indeed, with the conflicting evidence given, the committee acted wisely in confining their labours to the rectification of existing abuses, and in making as perfect as possible, without increasing, the existing accommodation. the witnesses examined before the committee were by far the most prominent authorities on savings bank management in the kingdom, and yet on no single point could they all agree. this is, we think, no unimportant phase of the subject; on the contrary, it is highly important, as showing how very little could be effected for the body of savings banks in the absence of any thing like unanimity amongst those who best understood the subject. on the question of government security and government supervision, we have already spoken. with regard to the necessity for a uniform system of management, and of course a uniform system of accounts, there was certainly an appearance of general agreement; but little attempt to bring it about. _mr. hope nield_ "thought it would be very advisable to assimilate the practice of the different banks more than at present exists ( , )." _mr. maitland_ and _mr. wortley_ would like uniformity, and would give the commissioners power to enforce it; "nothing less would remedy the loose system of so many of the banks." "the system of keeping the books," said _mr. craig_, of cork, "in some of the country banks, is most abominable. i speak of the vast majority of banks; some are exceedingly well managed; but i say, that from the way they make out their accounts for the national debt office, not one in ten is honestly or fairly made out ( , )." had the committee deliberated upon a uniform system, which they did not, for all the banks, and had they decided--(a very difficult matter, seeing that each of the seven largest banks in the kingdom had different systems of book-keeping)--to recommend some one system, the difficulty would only be half over. each savings bank was independent, and completely irresponsible to any one in such matters as these; but supposing, which was very unlikely, that the trustees could be got to look upon the matter with favour, all would not yet be smooth sailing. the difficulty of introducing real improvements into saving bank management was more than once spoken of and illustrated. thus, _mr. boodle_ told how he encountered great opposition from his own subordinates, in introducing something new into the excellent establishment at st. martin's lane. for six months after he started a new system of book-keeping, a conspiracy lasted among the clerks to prevent any change; wilful mistakes were constantly made, to show that the work under any new system could not be done; and this continued till a great number of clerks were dismissed, and new officials appointed in their place. much to the same point was the evidence of _mr. craig_, who described in a vigorous and amusing way, which must have done much to relieve the tedium and heaviness of the investigation, the introduction of his system into the cork bank, and the necessity for it:-- "i saw at once," said he, "that there was nothing for it but sweeping every book out of the bank, and i did so. they (the trustees) gave me authority to do what i liked, and i did. it was all done by me without any interference; and i managed it in such a way that if the clerks stuck in the middle of it they would have lost their salaries; they had either to go on with it, or stick fast. i went there myself, with a mr. ballard on the opposite side of me, and a manager with each, determined to start them fairly. i remained there for a month. i saw that the clerks were very anxious that it should miscarry. i immediately saw what they were about; i observed that all the books were coming to my side, and few to the other; they thought to smother me with books. the moment i saw this, i said to little mr. abel (who is now dead), 'do not chatter; work away; they are playing a trick upon us.' we dashed through the work; and, one of the book-keepers coming down after he thought he had well supplied us with a wheelbarrowful of books, expecting to find them all in arrear, i said to him: 'why the deuce don't you send us books!' when they found they were all done, that stopped all further opposition; and thus i taught them to do it, just as you would teach a puppy to swim--if you tumble him into the water, never fear that he will get out." granting that savings bank clerks may be subdued after mr. craig's or some other fashion, it would still appear that the indispensable requisites to a complete uniformity of accounts must be something like uniformity in the distinctive principles and practices of savings banks. we refer to such matters as the limitation in the amount of deposits, the rate of interest, notices of withdrawal, &c. the question of the limit of deposits was discussed before the committee. _mr. meikle_ and _mr. sturrock_ objected to any alteration in the limit of deposits which for many years had stood at _l._ for any one year, and _l._ in all. _mr. boodle_ thought the annual limit should be increased to _l._, and the total deposits to _l._ _mr. finney_ wished it to be at _l._ and _l._ respectively. _mr. saintsbury_ and _mr. maitland_ agreed with mr. boodle, provided the rate of interest were reduced, and there were ready access to the public funds. then as to the rate of interest itself, _mr. maitland_ said that the highest rate of interest that can safely be offered should be given for small savings, "though," he said, "_lowering_ the rate would bring savings banks back more to what they were intended to be." he also thought the rate should vary according to the market rate of interest. _mr. boodle_ objected to a fluctuating rate. _mr. meikle_ was of opinion that a fixed rate of three per cent. should be given. _mr. craig_ said a rate of _l._ _s._ or _l._ _s._ was satisfactory to depositors. _mr. wortley_ thought three per cent. a fair rate of interest. _mr. c. w. sikes_ suggested that the interest to depositors should be three per cent. on sums up to _l._, and two per cent. over that sum. he thought a low rate of interest would not deter the working man from savings banks. if we turn from this theorizing to what was the practice of different savings banks in this and other particulars, we shall find diversities of operation which not only account for so much difference of opinion, but which rendered unanimity of action almost impossible. it was then, and is still, a very popular notion, that the savings banks proper pay a uniform rate of interest of three per cent. per annum; nothing can be more mistaken. when the enactment was passed establishing the still existing rate, it was generally considered in parliament that five shillings per cent. was ample enough to pay all expenses of management; but the fact is, double that amount has not sufficed in some cases. in there were, according to a parliamentary return, no less than thirty-two different rates of interest paid by savings banks managers, and had the return embraced a much more recent period the same diversity would have been shown. thus, in that year-- banks £ s. d. paid interest to depositors at the maxm rate of per cent. " at the rate of " " " " " " " " " " " " " " " - / " " " " " " " added to which smaller numbers paid other rates, making thirty-two separate rates.[ ] in accordance with the above table the average cost of management per cent. was, in ,--in scotland _s._ _d._, in ireland _s._, and in england _s._ _d._; in middlesex, however, it was as much as _s._ _d._ confining ourselves to individual banks, we find that the manchester savings bank cost at the same period, in expenses, an average sum of _s._ - / _d._ per account, the bloomfield bank _s._ _d._, the st. martin's place _s._ - / _d._, the liverpool bank _s._ - / _d._, and the cork bank _s._ _d._ per account. the greatest expense was shown to be incurred in those banks which dealt largely in small accounts; hence some of the actuaries openly sought to discourage the taking of small sums. _mr. meikle_ thought it was the interest of the banks rather to discourage small depositors and encourage large ones. _mr. finney_ showed that they _were_ discouraged at the marylebone bank, where a less interest was given to small amounts. _mr. craig_, however, went to great lengths on this point, and grounded his opinions on such facts as the following ( , ):--"the average cost of a transaction that enters a bank is more than a shilling; there is not a transaction entered in any savings bank that does not cost a shilling and a fraction. now, if you allow a man to deposit a shilling, which costs the bank a shilling, it comes to this, that the manager might as well say to him, 'there is a shilling for you; pray do not come here again.' the committee are about seeing whether government can or not safely undertake to make itself responsible for the transactions of savings banks scattered all over the country. if so, they must only take such sums and in such ways as will be safe for the public. it will not do to allow people's sympathies to run away with them by the mere clap-trap of saying, 'we will take a shilling.' i say that to take these small sums, instead of being a benefit to the people, is merely encouraging them to waste their time." we need not here go out of our way to expose the fallacy of such an argument, further than to point out how entirely mr. craig overlooked the fact that he had previously advocated a system of uniformity of accounts, which would have made this and other reforms practicable. what was required of the committee before which he gave evidence, was, the suggestion of such a change in the nature of the institution as that this shilling's worth of thrift should not be sent about its business in the very summary manner so graphically described by this gentleman. that the savings banks should give such rude discouragements to the budding of provident habits was nothing short of a defect; that it was perfectly possible as well as expedient to offer encouragements to the poorest classes has since been abundantly proved, as we shall soon have to show. we have referred to the varying notices for the withdrawal of money required by different banks; some required a week, some a month, while in the great majority of banks a fortnight was required. _mr. meikle_ expressed himself strongly opposed to the english system of giving notice: he said, the scotch banks required no notice at all, though they held a discretionary power in certain instances. _mr. saintsbury_ urged "a reasonable period." _mr. wortley_ thought the notice was a protection against savings banks being used for other purposes than for accumulating savings. _mr. sikes_ strongly recommended that deposits should not be repayable "except after sufficient notice," the extent of which neither he nor mr. saintsbury ventured to state. once more the attention of the committee was called to the necessity of opening out new banks in localities not well supplied with them. no one, however, was prepared with any scheme for giving extra facilities of this kind, and those hints which were thrown out by members of the committee themselves were either not taken up, or if noticed, only in such a way as to attest the difficulty, rather than the ease or expediency with which any movement towards this end would be attended. _mr. wortley_ said small banks were exceedingly unsafe; branch banks under the cognizance of a head office _might_ answer. _mr. meikle_ agreed, and said that at first new banks were seldom self-supporting. _mr. nield_ said it would be impossible that the agency system of exeter (the only scheme recommended) could be introduced into lancashire; the branch banks under the manchester savings bank could not support themselves except they had gratuitous service. finally, we think the difference of opinion and the diversities of operation in the larger and best managed banks[ ] of the kingdom could not be better shown than by the following return.[ ] if anything could demonstrate the want of some uniform and inexpensive system of savings banks, we think a careful examination of the inequalities of every sort shown there might have that effect. thus we have, we hope, succeeded in showing that at the stage to which we have arrived (and, indeed, much later,) the existing savings bank system, as a system, laboured under three or four essential and almost incurable and irremoveable defects: , they professed and were expected to give a government guarantee for all the money deposited with them, and yet they did not. the real distinction in the matter, to which we need only allude, was and is well enough understood by educated people; but it was not, we may almost say cannot, be mastered by the poor who were depositors. a depositor paying in his money to the savings bank had no means of knowing what was done with it. , the country was most inadequately and most disproportionately supplied with banks, and the facilities given by existing banks were also most inadequate and disproportionate. farther, and most important, the number could not be increased on the same footing, and no attempt was made to increase the number. such increase presupposed a certain amount of local philanthropy and even assuming that this sort of philanthropy is an unmixed good, an adequate provision of savings banks presupposes an equal amount of philanthropic zeal in every quarter of the country. and , savings banks were a serious loss to the country. "taking the average price," said sir a. spearman, "of government securities for each year since , the only years in which prices appear to have been such as to produce a rate of interest equal to that paid were and ." government, in relation to savings bank money, had necessarily to invest when money was most plentiful, and therefore when securities were dear, and to sell out when they were cheap. to make up for such loss, it is true, government took to using savings bank money to aid it in its own financial operations, to save borrowing or to postpone borrowing; but though care was always had to keep a sufficient banking reserve in an available shape, this set-off was not allowed, as we have already seen, without many complaints on the part of the managers of savings banks. return relating to the ten principal savings banks of the country. ( .) +-------------------+------------+-----------+------------+------------+ | | | | | | | | | + | rate of | | name of bank |total amount| number of | average | interest | | | owing to |depositors.| amount of | paid to | | | depositors.| | deposit. | depositor. | | | | | | | +-------------------+------------+-----------+------------+------------+ | | £ | | £ _s._ _d._| £ _s._ _d._| |st. martin's place | , , | , | | | |manchester | , , | , | | | |exeter | , , | , | | | |bishopsgate | , , | , | | | |glasgow | , | , | | | |liverpool | , | , | | | |bloomsbury | , | , | | | |edinburgh | , | , | | | |birmingham | , | , | | | |marylebone | , | , | |{ | | | | | |{ | +-------------------+------------+-----------+------------+------------+ +-------------------+---------------------------------+ | | annual expenses. | | |------------+------------+-------+ | name of bank | | | | | |per account.|per cent. of| total.| | | | capital. | | | | | | | +-------------------+------------+------------+-------+ | | _s._ _d._ | _s._ _d._ | £ | |st. martin's place | - / | | , | |manchester | | | , | |exeter | | | , | |bishopsgate | | | , | |glasgow | | | , | |liverpool | | | , | |bloomsbury | | | , | |edinburgh | | | , | |birmingham | | | , | |marylebone | | | , | | | | | | +-------------------+------------+------------+-------+ [ ] compiled from returns presented by the statistical department of the board of trade. [ ] it is very difficult to obtain correct and complete statistics on this subject. it is to be regretted that a valuable suggestion which dr. farr made before the last census was not acted upon. he recommended that facts connected with the rate of wages should be collected during the census. had it been attended to, much might have been stated here with precision which will only admit of approximation. [ ] subsequently mr. bright went the length of saying, that savings banks were "nothing less than traps for the people who subscribed to them. there was a universal belief that government was responsible." [ ] since writing the above, it is only fair to say, that we find this writer has taken no pains at all over the matter, but has simply benefited by the industry of another, without in any way acknowledging his obligations. mr. edward taylor of rochdale, in a pamphlet now before us, published several years before mr. scratchley's book, entitled "savings bank: ought government to make good past losses in savings banks?" supplies the whole of the quotations given, and even the setting for them. [ ] the preamble of the first act (act george iii. c. , ) runs thus: "whereas certain provident institutions or banks for savings have been established in england, for the safe custody and increase of small savings belonging to the industrious classes; and it is expedient _to give protection to such institutions, and the funds established thereby_," &c. &c. the preamble of the act of runs exactly to the same effect. [ ] much to the same purpose a well-known writer in the _london review_ says: "as long as savings banks are savings banks, based, on the one hand, on the confidence of the poor, and, on the other, on the benevolence of the local clergy and gentry, acting as trustees and managers without fee and reward, and therefore without such bounden obligations as men can be called to account upon, so long will frauds periodically arise, opening up great gulfs of deficits, strewing thorns upon the pillows of the poor, and driving sharp pangs of despair into their hearts." dr. hancock, in one of his admirable pamphlets, alluding to the system of checks relied on by the managers of many banks, says: "it is impossible, in the nature of things, to devise a perfect system of checks. so long as the work has to be done by human agency there must always be some risk. to secure the performance of actions by human agents, three forces commonly operate: , a morel sense of duty; , a fear of large pecuniary loss from liability, in case of the non-performance of duty; and , a fear of judicial punishment, if non-performance be made a penal offence. the limit placed on the liability of the managers effectually took away or reduced to a minimum the fear of loss and of punishment, and the divided responsibility there has always been between government and the trustees, by weakening the sense of duty, did the rest." [ ] the case of the edinburgh savings bank, another excellently managed institution, is still more to the point, where unusual facilities produced an unusual amount of depositors and deposits. [ ] according to an excellent authority, mr. smiles, to whose admirable article in the _quarterly review_ (oct. ) we are indebted for some of our particulars of the history of this movement, it would appear that the first proposal for regimental savings banks was made in by paymaster fairfowl, but allowed to drop; it was taken up again in , when colonel oglander, commanding a regiment of cameronians, brought the project under the notice of the duke of wellington. the duke could not see any benefit to be derived from the proposal, and wrote the following characteristic memorandum upon the papers: "there is nothing that i know of to prevent a soldier, equally with others of his majesty's subjects, from investing his money in savings banks. if there be any impediment, it should be taken away; but i doubt the expediency of going further." he added something further, however, which, also eminently characteristic, opened up a new feature in the case, and closed the door to such proposals till after the duke had left the service. "has a soldier," continued he, "more pay than he requires? if he has, it should be lowered, not to those now in the service, but to those enlisted hereafter." colonel oglander had no idea that the soldier should have less than his "thirteen pence a day, and a penny beer money," and therefore suffered his proposals to be simply negatived. [ ] the deposits in seamen's savings banks-- in were £ , , and withdrawals £ , " , " " , " , " " , [ ] to the honorary secretary of this bank, mr. w. w. morrell, we are greatly indebted for much information on the penny bank movement; and, as an ardent savings bank reformer, for much information on our subject generally. [ ] any of our readers who may desire fuller information on the subject of penny banks, or particulars as to their management--information which we should have been glad to have furnished, had our space permitted--could not do better than get an admirable little pamphlet on "penny banks," by the rev. j. e. clarke, of derby. (bell and daldy, .) mr. smiles, in his _workmen's earnings, strikes, and savings_, also devotes a short chapter to describing, in his usually effective way, their results on the provident poor. [ ] the first preliminary savings bank in scotland was started at annan, in dumfriesshire, and mr. sikes was consulted about it. a correspondent writing to mr. sikes a few years ago, says: "it may gratify you to know that i some time since met with the rev. james mackenzie of dunfermline, formerly of annan, who told me that he had ten penny banks at work at dunfermline! i believe the annan one was father to them all, and you to the annan one, so that your family is spreading rapidly, and becoming a great multitude throughout the entire kingdom!" [ ] groombridge & co. london. [ ] reference is due to another gentleman, mr. maitland, actuary and subsequently treasurer of the edinburgh savings bank, who now seems to have urged, even before mr. sikes did so, english savings bank managers to give to depositors more of the facilities granted by savings banks in scotland. speaking of - , mr. maitland says, "i met with no sympathy when i urged the duty of cultivating the small deposits of the _really_ labouring classes. i was bitterly opposed in my advocacy of giving more hours weekly to the public, and was deemed almost _mad_ when i insisted that we should all pay on demand, _at all events_ sums under _l._"--_letter from mr. maitland to mr. sikes_, february, . [ ] this proposition was revised in by mr. scratchley in the last edition of his _practical treatise_, but without in any way mentioning the name of mr. sikes as the original suggestor of the plan. [ ] the marylebone bank up to only allowed two per cent. on sums below _l._, but this arrangement has since been modified. [ ] so well managed indeed, that we hope it may be long before they are superseded, however desirable it may be that bulk of the existing savings banks should become merged in a better system. [ ] see next page. chapter viii. on proposals for government savings banks. "i do not imagine that there can be any more important end and object of a state than to encourage frugality, and the investment of the savings of the poor, and nothing in which i should be more tempted to step out of my way to encourage, if i were a legislator; but i think the great test and object of whatever investment i provide specially for them, must be extreme and perfect certainty, and great facility of conversion.... increase in amount of interest or profit, is as nothing compared to security."--mr. h. bellenden ker. for reasons which we have adduced at great length in the last chapter, the feeling grew that a sweeping change would require to be made in the institution of savings banks. supplementary banks of different kinds were established, and they met in great part the object for which they were designed; meanwhile, the great majority of savings banks took no steps to provide more conveniences for the public, or they were powerless to effect them.[ ] when reasonable changes were resisted between and , it occurred to several that agencies might be contrived to do the same work after a different fashion, and that this project should be carried out, even were the ultimate result to diminish the usefulness of most of the older banks, or gradually to set them aside. it is to proposals having the former object in view that we must now turn. it is not a little curious that long before savings banks were legalized by act of parliament, and even before dr. duncan began his earnest and self-denying efforts to establish them on a safe footing, at least two different efforts were made to promote the growth of provident habits by a system of savings banks which should extend throughout the entire country. we refer to jeremy bentham's scheme of "frugality banks," and mr. whitbread's "poor fund and assurance office." the plan of the former is detailed in bentham's works; the latter scheme, partly described in an earlier portion of this volume (pages - ) was submitted to parliament in , and a bill,--a full abstract of which will be found in the _appendix_,--founded upon it, actually passed the house in some of its earlier stages. some of the provisions of this bill were admirable; and some, owing to the state of the post office of that time, would not have been so easily worked through that department as was intended. as it was, the country preferred the class of banks just then rising into notice; and in the legislature forgetting mr. whitbread's scheme, gave its sanction and countenance to the banks which had been established on purely benevolent principles, and which were totally independent of each other. in the course of years, that system having been tried in every possible way without producing the safety and convenience so much desired in institutions of this sort, the principle of a uniform plan of banks in connexion with the post office advocated by mr. whitbread again came up, the story of the proposals for and the introduction of which we are about to tell. previously, however, we ought not to omit, for several reasons, to give the outline of the scheme proposed by bentham even before mr. whitbread's proposals. the reader will perceive how thoroughly conversant the philosopher was with the every-day habits of the poor, and how completely he understood their wants and requirements, and sought to provide for them. it is only necessary to add that bentham advocated this plan as one of many measures of pauper management; that the scheme was to be generally applied throughout the country, and to be taken up and worked by means of a company; the place where the banks should be held to be called "'industry houses,' in contradistinction to the 'public houses' of friendly societies." "should this not be enough," says bentham, "the vestry room of each place of worship presents an office as near, and the clerk an officer or sub-agent as suitable, as can be desired."[ ] after fully going into the hindrances to the spread of saving habits among the poor around him, and the difficulties incident to the laying up and improvement of their surplus moneys,--hindrances and difficulties which had not yet all been surmounted,--he gives the following comprehensive and exhaustive list, which shows how thoroughly he would have mastered the obstacles of a more recent period:-- "properties to be wished for in a system of frugality banks, commensurate to the whole population of the self-maintaining poor: viz. " . _fund_, solid and secure:--proof against the several causes of failure. " . _plan of provision_, all _comprehensive_: comprehensive, as far as may be, of all sorts of exigencies, and at all time, as well as of all persons, in the character of customers: thence the amount of the deposits transferable from exigency to exigency, at the will of the customer, at any time. " . _scale of dealing_, commensurate to the peculiar faculties of each customer: _i.e._ on each occasion as large as or as small as his convenience can require. " . _terms of dealing_ sufficiently advantageous to the customer: (the more so, of course the better), regard being had, in the necessary degree to solidity. " . _places_ of transacting business _suitable_: adapted in point of _vicinity_, as well as in other respect, to the conveniency of the customer. " . _mode_ of transacting business _accommodating_: suited to the circumstances of the customer in respect of times of receipt and payment, and _quantam_ of receipt and payment at each time. " . _mode of operation, prompt_, consuming as little of the customer's time in attendance as may be. " . mode of book-keeping, clear and satisfactory." there can be little doubt from the above extract, that if bentham did not make a very practical proposal, he had an excellent idea of the description of agency required. another proposal which shared the same fate as did those of bentham and whitbread was ventilated in the _quarterly review_ for , in an article on "the substitution of savings banks for poor laws." this was no new scheme, though the agency by which the scheme was sought to be carried out certainly was original. during the eighteenth century the plan of masters compulsorily deducting payments from the wages they were expected to pay to their servants, in order that the money might form a fund for a time of need, was frequently recommended, and even proposed to parliament. de foe, in his "giving alms no charity," tells us how at his own period attempts were made to effect a legislative substitution of savings for poors' rates, and to pass acts of parliament which "shall make drunkards take care of wife and children; spendthrifts lay up for a wet day; lazy fellows diligent; and thoughtless, sottish men careful and provident." but all the plans, as might be expected, came to nothing. in , however, the savings bank principle having become recognised, and the post office machinery tolerably efficient it was said that the scheme might be made to work. the writer advocated the establishment of a national savings bank, to which the savings banks in the country might contribute; "and perhaps," said the _quarterly reviewer_, as if recognising the fact of the insufficient distribution of banks, "the remittances to be made might, especially in rural districts, be allowed to be paid into the nearest post office, and remitted with its own money to the general post office, by whom it might be paid over to the commissioners of the national debt." this scheme attracted little or no attention at the time, and nothing came of it. in more than one respect, however, it contained the germ of a plan subsequently carried out, and it is not impossible that some of the numerous claimants for the honour of having originally proposed savings banks in connexion with the post office may have carefully studied the details. and this brings us to the early history of post office savings banks, and to the numerous suggestions which at one time or another seem to have been made with regard to them. no less in respect to the place which these banks are designed to occupy as important public institutions--the people's principal purse--(and that their position in the country will at no distant period be a commanding one there cannot be a reasonable doubt) than for their present attained position and intrinsic value, the question of their early history is a matter for most careful investigation, and one which must not be lightly passed over. the matter of the authorship of the scheme was the subject of considerable discussion at an early stage in its history; and that discussion was not without its value in elucidating some points of considerable importance, and as affording materials for more deliberately investigating many claims which have been put forward. it naturally forms part of our plan, not only to offer a description of the working of the new class of banks--as will be done in a subsequent chapter--but to show, as we propose to do here, in a strictly impartial manner, to whom the country is indebted for the agency now in operation.[ ] confining ourselves at present to the origination of the _principle_ of post office banks, without reference to the wonderfully simple and efficacious scheme afterwards organized, we find that several different gentlemen had between the years and , and acting entirely unknown to each other, matured plans, and in one way or another actually proposed them, to remedy the deficiencies of the existing banks, on some such principle as that eventually adopted. to mr. sikes, of huddersfield, however,--of whose previous labours in the cause of savings bank reform we have already spoken,--belongs the undoubted merit and honour of having independently originated and matured a plan of operation more or less equal to the object in view; of having persevered in the object of bringing the matter prominently before the public; and of being so fortunate as to have proposed his scheme at a period when the country possessed in mr. gladstone a statesman of extraordinary versatility and power at the head of its financial operations, and who has given abundant evidence of his willingness to grapple with uncommon difficulties where a need is proved and the principles of a measure are shown to be sound. as we shall show presently, the same propositions, only differing as to details, were submitted once, if not twice, to sir charles wood when chancellor of the exchequer, and once more, by a totally different individual, to sir george c. lewis when he held that office. how much, therefore, the measures subsequently carried are primarily due to mr. gladstone's sharp-sightedness and energy the reader may judge. returning to an account of those who have been represented as suggesting the principle of postal banks, we think the number may be fairly reduced by several names. and in that number we would class dr. w. neilson hancock, of dublin. of dr. hancock's exertions in connexion with the frauds in savings banks, and his description of the feeling of insecurity which they engendered, we have already spoken; those exertions related exclusively, so far as we can gather from his pamphlets, to a remedy for this grievance. in a paper[ ] read by dr. hancock before the dublin statistical society in , and republished in a pamphlet form four years afterwards, we find him saying, that private enterprise had not had a fair trial,--if it had, and failed, then government should undertake the work, _as it did money order business_:-- "that part of the natural business of bankers which consists in receiving deposits from the poor might be undertaken by some public officers appointed for the purpose, _just as_ the granting of money orders, another part of the same business, is carried on by the officers of the post office. such an institution would be called a savings bank; and in it the government would be responsible to the depositors for the acts of the clerks. so that the entire responsibility of management would rest with the members of government in charge of that department, and the depositors would have perfect security for any money actually paid to a clerk.... my own impression is, that if our laws were framed with a view to allow of small deposits and small investments, private enterprise is quite adequate to supply a complete system of safe investments for the poor. but whether that opinion be sound or not, a government institution _like the money order office_, with government officers and government security for those officers, would be infinitely better than the present system of divided responsibility and absence of security." in a further paper, read and published in a pamphlet form in ,[ ] dr. hancock made no further proposal towards the object immediately in our view, although he said-- "the money order office of the post office shows that a large part of the business of banking for the poor can be cheaply and efficiently conducted by the officers of a public department. the first step towards the adoption of such measures is to produce in the public mind a conviction of the utter instability of banks as now constituted, and that conviction i have endeavoured to create." we believe dr. hancock went somewhat further than this, by calling the attention of the post office authorities to the matter though, as he presented no distinct scheme to their consideration, it is not very wonderful that the question should rest where he left it. though dr. hancock does not seem ever to have gone so far as to propose "the opening of banks for the poor in connexion with the money order office," much less to develop a plan which should have that end in view--a construction which has been put upon his references to the post office machinery,[ ]--it is only fair to that gentleman to say that he was one of the first to recognise the merits of such a measure when it was proposed, and to urge its full adoption. another name, which has in our opinion been very unnecessarily and erroneously connected with the early history of post office banks, is that of mr. ayrton, the member for the tower hamlets. to all who remember the strong opposition which mr. ayrton offered, not only to the project when before parliament, but previously to other reasonable reforms in the savings bank institution, this association of his name with the origination of the present plan must be very amusing; and yet this is an error into which several have fallen, though traceable, perhaps, to one source.[ ] mr. ayrton certainly seems to have had a notion, though not till , that the post office might be more useful to savings banks than it was; and in the committee of that year, of which he was a member, he asked one of the witnesses--who was actuary to a bank that had several branches in country places--a series of questions, with the object of eliciting the opinion that it would be an advantage to savings banks if money orders could be procured in country places at a cheaper rate than _d._ and _d._, when any person desired to send a savings bank deposit to an adjacent town.[ ] in the draft report proposed by mr. ayrton after the close of the investigation (which was not carried), the following clause appeared:--"that the committee recommend the postmaster-general to afford every facility practicable for the remittance of money to savings banks, but they do not deem legislation in this respect expedient;" and in our humble view it would have been exceedingly cool if they had! there can be no question that this simple incident has given rise to the misapprehension to which we have just alluded. we can now come to veritable proposals. though it is due to mr. sikes to say that the fact of prior proposals, with the same object in view, were either forgotten or only came to light for the first time after he had publicly made and urged his plans on the country, it seems not to admit of question that two gentlemen had been, quite unknown to him or the public generally, over the same ground before him, and, whether wisely or not we will not attempt to decide, had desisted from pressing their plans after obtaining an adverse decision with regard to them. so far as the post office is concerned, it is only fair to say that the authorities up to quite a recent period have had their hands sufficiently full in completing the plan of penny postage reform which, for several years after the passing of the act of , was almost held in abeyance; and that, inundated with crude and undeveloped schemes, it was requisite that a plan in which so much was involved should be well matured, and go weighted with the stamp of public approval. whether, however, the post office system was prepared so early as ,--the date of the earliest proposal,--to undertake savings bank business, is a question which, considering the transition state in which it then was, admits of some doubt. in , the rev. george hans hamilton, the vicar of berwick-upon-tweed, and now archdeacon of lindisfarne, proposed through his relative, mr. g. a. hamilton of the treasury, a national system of savings banks to be worked by means of the post office,[ ] which it is but justice to say presents many, if not most, of the features of the plan eventually produced. mr. hamilton met with varying success; his proposals were not taken up warmly, but were understood by him to present difficulties which might ultimately be overcome. had this gentleman persevered in the advocacy of the scheme which he propounded, or had he had the good fortune, to have fallen on more favourable times, with mr. gladstone as chancellor of the exchequer, there can be little doubt that his plan would have been cordially taken up and his name ever associated with it. as it was, his exertions were recognised by mr. gladstone when he came to deal with the matter, that gentleman referring on one occasion to the valuable suggestions he had made. it should be added, that mr. hamilton has, since the plans came into operation, urged a modification of one of its features (to be referred to hereafter), and it is little to say, considering the value and the shrewdness of his original suggestions, that he is well entitled to be heard on the point. the other gentleman who somewhat later than mr. hamilton, and quite unknown to him, made proposals to the same effect, was mr. john bullar, the eminent counsel, of the temple. mr. bullar himself informs us that his attention was attracted to the subject by observing the working of a penny bank at putney, which was established in the year . being a member of the committee of this bank, he was led to think much over "the then existing system of savings banks, and how some of the defects of the system could be remedied." after thinking the matter well over, he drew up the memorandum which we give _verbatim_:-- it is admitted that the present system of savings banks is defective, and that a new system is much wanted. among the defects of the present system are:--want of perfect security to depositors: risk of loss to trustees by defaulting clerks, and want of opportunities for the labouring classes to make deposits as soon as they have anything to deposit. many of the present savings banks are only opened for two or three hours once a week; so that those who would deposit in them are forced to be their own bankers during the rest of the week, and are exposed to the constant temptation of spending what they have in their pockets; the particular temptation from which savings banks were intended to relieve them. in order to give perfect security to depositors, they ought to have the security of the nation. the establishment of savings banks for the whole of the labouring classes being a matter of national importance, they ought to be a national, and not merely a philanthropic institution. in order that they may confer the greatest amount of benefit on the labouring classes, they ought to be open during the whole of every working day. the principle of a national savings bank as a national institution is already admitted in the savings banks for the army, the navy, and the mercantile marine. the principle of government acting as banker for the nation is already admitted in the money order department of the post office. that department is, in fact, a national bank. it receives money from all comers; it retains the money for divers periods, from four-and-twenty hours to several weeks; and it pays the money to those who are entitled to demand it. it would be a mere extension in point of detail if that department received more money from more comers, retained the money for longer periods, and paid it out with the addition of interest upon it. it is therefore suggested that the money order department of the post office should be made a national savings bank, investing the deposits in government securities, paying a moderate rate of interest (say two and a half per cent.) and paying interest only on round pounds deposited for not less than a quarter of a year. the trustees of existing savings banks should be authorized (except so far as any depositors might object) to transfer their deposits to the department. in all probability the deposits with the department would amount to at least thirty millions in the course of a year or so; and at the present price of consols, this would give to the post office about , _l._ beyond the interest which they would have to pay to the depositors. if this would not meet the expenses, the rate of interest might be _l._ per cent., giving to the department an additional , _l._ a year. the principle being admitted, there would be no insuperable difficulty in arranging the details. john bullar. _temple, november , ._ this memorandum was written in november, . mr. bullar describes that at that period he was too much occupied to enter into the matter so fully as was necessary, or to agitate by means of the press for some such scheme; but mr. bullar's friend, mr. joseph burnley hume (eldest son of the late mr. joseph hume, m.p.), who had some leisure at command, and perhaps some of his father's desire to achieve an amendment of the savings bank system, undertook to bring the matter forward in the proper official quarters. he early saw mr. frederic hill, who was in charge of the money order department of the post office, and learned from him that the same scheme had already been suggested to the post office, and rejected after full consideration. a month afterwards mr. hume saw the duke of argyll, who was then postmaster-general, and received a courteous hearing from him. the duke also said that the post office had had the question, or something like it, before them, and that he thought the chancellor of the exchequer still had something of the kind under consideration; but gave no definite reply. subsequently he saw sir alexander spearman, the comptroller of the national debt office, and mr. tidd pratt. "he gathered from them," to use mr. bullar's own words, "that they were with him in principle, but regarded the proposed money order department as visionary, and that the government had under consideration a different scheme, which they preferred."[ ] having in this way met with enough discouragement to hinder them--or any other person who might be cognizant of the proceedings that had been taken--from going further, they dropped any further steps to bring about this desirable change. happily, however,--for happy, in one sense, it was,--these schemes and the hitherto abortive attempts to carry them into execution, did not reach the public ear, or others might have desisted from entertaining similar plans. as it was, it was still open to any one else to take up the matter _de novo_; and this is what actually did happen. we can well believe, without the assurance with which he has favoured us, that the next adventurer in these apparently difficult seas had no notion that they had been previously navigated. this circumstance does not take from his merit; but it certainly increased his difficulties. how the matter was eventually brought about in the face of the adverse decisions which we have just given, though somewhat better known, is within our province to tell. in the hands of mr. sikes, of huddersfield, any matter once taken up was not likely to fail for want of thorough ventilation and earnest advocacy. this gentleman had for years interested himself in the extension of savings banks. we have already spoken of the fruits of his industrious pen; and now he was once more to propose in a similar manner, and with his accustomed eagerness, another new scheme which he had carefully thought over and developed in his own mind. once sure of it himself, he resolved to devote himself to its advocacy; to bring it not only before the proper authorities, "but before the public, at the proper time." mr. sikes evidently did not dally with the matter. as he made no sort of mention of the post office in his evidence before the savings bank committee of , we may fairly assume that at that time the idea of using the post office had not occurred to him. he himself states, that, occupied with a favourite idea which he had long cherished, of bringing a savings bank "within less than an hour's walk of the fireside of every working man in the kingdom," the organization of the post office suddenly occurred to him, and he dwelt upon it till he had struck upon some scheme for applying the one to the other. as in the case of the other proposals, the leading principle of mr. sikes's plan was to employ the machinery of the money order office to collect and forward deposits to a central bank which he proposed should be established in london. among the principal details of the plan were--the opening in every town, not previously supplied with a savings bank, of a money order office, for the reception of savings bank deposits; that the money should be remitted to london in the form of money orders; that the deposits should be in sums of not less than a pound; and that in return for these deposits or remittances, savings bank "interest notes" should be issued in london; and that the interest on these notes should be at the rate of - / per cent. per annum. that mr. sikes did not proceed boldly enough, and that there were some defects and omissions in his scheme, we shall have to show further on; here it is sufficient to indicate in what his plan consisted. on the reasons for a large and comprehensive reform of this kind, mr. sikes was most full and explicit; as, however, we have already been over this ground, and also said much in connexion with the name of this energetic savings bank reformer, it is quite unnecessary to repeat here his well-arranged statistics and his generally conclusive observations as they are given in the pamphlet before us.[ ] suffice it to say, that he adduced abundant evidence to show that additional facilities were required, and that if they were given, a proportionate increase of business would be the result; that the existing banks were totally inadequate to meet the requirements of the provident poor, much less to stimulate and increase the number of provident people; and that if his plan, or something like it, were carried out, both objects would be gained. mr. sikes argued that in a case of this sort, as in many others, increased facilities would bring increased business, and, in support, he adduced as an instance the money order office itself. quoting from the postmaster-general's report for , he gave an extract accounting for the increase of business in that office by the fact of the large additions that had been made to the number of offices, and to further relaxations in the regulations regarding the issue and payment of money orders. "the establishment of a post office," said mr. sikes, with very great truth, "has unfailing influence in developing the correspondence; and of the money order office, the remittances of a district." mr. sikes then instituted a comparison which, though not always to the point (for reasons quite obvious), was scarcely an unfair one, of the relative progress of savings banks with their small improvement as to facilities, and the money order offices, with their increased facilities. within the years and , the former had progressed at the rate of seven and a half per cent.; the business of the latter had increased at the rate of seventy-nine per cent. he then asked if the stagnation in the business of savings banks was not to be traced to the non-increase of their number, their absence in many very populous localities, the slight accommodation given, and the arbitrary routine, and restrictions imposed. if savings banks were worth anything, were they not worth improving? and would not those supplementary banks do much themselves, and very probably cause an improvement in existing ones? having matured his plan in june, , mr. sikes communicated it to mr. edward baines, the member for leeds, in the form of a printed letter; and this gentleman, well known for his wide sympathy with the industrious classes, after studying its details, expressed his warm approval of the project, and engaged to bring it under the notice of sir (then mr.) rowland hill, the secretary of the post office. that there was now no indisposition--if ever there was--on the part of the authorities to such a measure is evident from the reception it met with at their hands, as shown by the letter below.[ ] encouraged to persevere, mr. baines and mr. sikes had an interview with the secretary and some of the principal heads of departments at the post office, when the draft of a plan was read to them for working such a measure, the official gentlemen concerned assuring them that this might be done "with great ease and simplicity." the next step which mr. sikes took was to place himself in communication with the chancellor of the exchequer; and as a preparatory step, he printed his scheme afresh, extending it somewhat, in the form of a letter to mr. gladstone. the communication was met by a cordial acknowledgment, in which that right hon. gentleman promised his best attention in examining the scheme, not only on account of the interest attaching to the subject, but "of the authority with which it was invested," in proceeding from the quarter whence it did. the letter was then given to the public, and immediately attracted general attention, and warm expressions of approval. it was read before the social science association which met in bradford in the autumn of that year, lord brougham having also mentioned the matter in his inaugural address. for a few weeks it was a common subject of discussion, public opinion being somewhat divided as to its advisability as well as practicability. several liberal newspapers, however, went warmly into an advocacy of the principles of the measure, if not of the measure itself; and in the early part of november, , the members of the huddersfield chamber of commerce strengthened the hands of their townsman, by passing an unanimous sentence of commendation upon it; and not only so, but they resolved to send mr. sikes's tract to all the chambers of commerce in the kingdom, recommending them to support the plan, which several of them eventually did. during the interval, when the ball was kept rolling in this manner, mr. gladstone had amply fulfilled his promise to give the subject his best attention, as sufficiently appears from a letter which, belonging now to the history of post office savings banks, we append below.[ ] expressions of opinion on the advantage of some such scheme still continued to be sent to mr. gladstone and mr. sikes, which must have encouraged them both to persevere, and which made it very apparent that the public had made up its mind not to allow the matter to drop--at any rate, quietly. the most important petitions sent to the chancellor of the exchequer emanated from liverpool, leeds, and york; but a resolution passed by the dublin statistical society, presided over by dr. whately, the late archbishop of dublin, and signed by dr. w. neilson hancock as secretary, deserves special notice, were it only for the weight attaching to dr. hancock's own name.[ ] in answer to these and similar memorials, mr. gladstone seems to have generally replied that the matter was under his most careful consideration; "that he received with cordial satisfaction this expression of opinion, proceeding from persons well qualified to judge, and that he earnestly hoped it may be practicable to frame a plan by which the objects in view may be extensively attained." and now the curtain may be said to have fallen upon the scheme, and for fully twelve months it is beyond the public gaze, and entirely beyond public criticism. we find that now and then mr. sikes was busy during the period in answering objections to his plan, with as much energy and good sense as he had previously displayed in his advocacy of it, before he had the good fortune to enlist the services of mr. gladstone in its behalf. now, however, it may be said to have passed out of his hands, and to have fallen into those of others, who, no way averse or unfriendly to his project, saw that it would be necessary largely to remodel it, in order to make it fit into the machinery, (of the working of which mr. sikes was necessarily ignorant,) upon which it would have to be engrafted. furthermore, among much approving criticism of the scheme, there had been not a little feeling exhibited among influential organs of the public press, that mr. sikes had not gone far enough in his proposals, and that on some points the details were not nearly so liberal as they ought to be made. as an ardent friend to the savings bank system, mr. sikes had doubtless well considered the objections which savings bank managers were likely to urge; and, to stave off opposition on the part of many of his friends, had apparently sacrificed a detail here and there in a matter where boldness of action was most essential to success. if one thing is more clear than another in the history of our great reforms, it is that the projector who plunged right into the stream was always surer of ultimate success than he who paddled about in the shallows, or kept as close as possible to the brink. in this way, therefore, it seems to have come about that not only must modifications be made, but steps must be taken to perfect the plan, and present it in such a shape as a measure of reform as should silence cavil and complaint. twelve months for such a work might seem long--might, indeed, be unnecessary; but few will say that the scheme,--so much remodelled as fairly to be considered a new one, did not amply atone for the delay. the task of adopting mr. sikes's proposals just as they originally stood, and which proposals the post office authorities had generally acquiesced in, seems to have been abandoned on account of the practical difficulties which stood in the way; one of which mr. gladstone indicated in the letter we have already given. the object now, therefore, was to originate a mode of working altogether independent of mr. sikes's plan, in which the desirable modifications to be made in mr. sikes's scheme should also be introduced. before, however, we show how this was eventually accomplished, it is necessary to say in what these important modifications consisted. . mr. sikes's scheme was proposed to be worked by a commission who should preside over a central bank and employ the agency of the post office. such a division of authority would have been unprecedented, and must have led to confusion and great expense, if even it could have been so arranged. . the commissioners were to have been empowered to receive money orders as deposits and acknowledge them in the form of an expensive description of "interest notes." the money orders and the "notes" themselves would have required all the surplus interest to have been expended upon them, and there would have been little chance of the scheme turning out self-supporting. . mr. sikes proposed to open only , money order offices as savings banks. he proved at great length that the system he proposed was not only the best, but the cheapest; yet at the solicitation, we believe, of several savings bank actuaries, he did not go the length of including any town where provision had been made for provident people. this, of course, restricted the inhabitants of towns to the dearer mode of operation, though the cheaper one was shown to hold out anticipations of producing by far the best article. such considerations could not, we should imagine, weigh with the post office when once the matter was taken in hand, and no arbitrary test of the above nature could ever have been entertained. . most unsatisfactory, however, was the proposal to make _l._ the minimum sum that could be received. there were thousands of depositors in the ordinary banks whose average deposits were not half that sum. moreover, the plan was designed to meet the wants of the poorest; to encourage and foster the habit of small savings among those who had not yet begun to save. no provision, therefore, could have been more unfortunate; and it is well that mr. sikes's fears--such as, that if a less sum were taken the measure would not pay--were soon shown to be groundless. it is not our intention to trouble the reader with much detail as to what passed during the preparation, or, we may call it, the organization of this interesting and beneficent measure. it is, perhaps, sufficient to say, that differences of opinion rose upon it--that some of the authorities of the post office thought mr. sikes's scheme, with many important modifications, might be worked; while others of them held that no amount of alteration would enable the department to work it by means of money orders. in this way several months passed in discussion, and it is scarcely too much to say, that but for the unceasing vigilance of mr. gladstone, who continued to urge further efforts to overcome the natural obstacles that presented themselves, the temporary fate of many a good measure might have been the fate of this. it was when matters were in this state of abeyance, and when the difficulties in the way fairly threatened to overwhelm the scheme altogether, that a gentleman, since prominently connected with all that relates to post office banks, was induced to turn his attention to the subject. mr. chetwynd, one of the staff officers of the money order office, took up the matter of applying the post office machinery to savings banks; and, discarding all the other plans for working then in dispute, addressed the postmaster-general in november, , and proposed a plan which he thought would, notwithstanding all the difficulties that had been experienced, meet all the reasonable requirements of the case. mr. chetwynd's scheme was based on the principle that savings bank business might be done "through the various money order offices in a much more economical manner than by the issue and payment of money orders;" and that the plan should be so comprehensive as not to need the restriction which had been previously put upon it that sums under _l._ could not be received,--that sum, as mr. chetwynd truly said, being "so large as seriously to reduce the value of the benefit proposed to be conferred on the provident portion of the public." the following outline, necessarily brief, gives all the material points of the plan proposed, and which has in its integrity been since carried out, and forms the basis of existing arrangements:-- . that every holder of a money order office shall act as an agent of a central savings bank, and shall receive deposits of any amount within the limit fixed by statute. . that he shall enter each deposit in a numbered depositor's book, to be kept by the depositor, and in an account to be forwarded to london daily with his money order account. that on the occasion of a first payment, the depositor shall make the declaration prescribed by statute, and also sign his name in his depositor's book. . that the holder of the money order office shall charge himself in his money order account with the total of the deposits thus received. . that this account should, on arrival in london, be regularly examined by the examiner of the money order accounts; and that when this has been done the daily schedule shall be forwarded to the central savings bank. . that the central savings bank shall immediately send an acknowledgment for every deposit direct to the depositor through the post office. . that a depositor who may wish to withdraw money, shall give notice in writing[ ] to the central savings bank, and shall receive therefrom a warrant for the required amount, payable at the nearest money order office. . that in presenting this warrant for payment, the depositor must also present his depositor's book. . that the holder of the money order office shall enter withdrawals in the depositor's book, and shall account for the money he shall pay, in the same manner as already described in the case of deposits, and shall be credited with the sums daily. . that the depositors' books shall be forwarded to london annually, in order that they may be compared with the ledgers in the central savings bank, and in order that the interest due may be inserted in them. the first step which appears to have been taken in regard to the scheme of mr. chetwynd was to refer it to mr. scudamore, who then filled the office of receiver and accountant-general,--an office the holder of which is at the head of the financial operations of the post office. after going carefully over the plan which had been submitted to him, he came to the conclusion that it was the best of those which had as yet been framed; "that it will be productive of very great advantages to the working classes, and that it will be self-supporting." he also characterised it as exceedingly simple, and thought, that if the execution of the plan were difficult, that difficulty would be due to the amount rather than to the nature of the business to be transacted. in conjunction with the projector, mr. scudamore then proposed some important modifications and additions to the plan,[ ] and proceeded to enter fully into arguments and calculations to show that it would offer the largest amount of convenience to the public, and be at the same time the least expensive mode of operations so far as the state was concerned. into these and other purely technical matters there is no need that we should further enter, beyond saying that, so recommended, the scheme was warmly approved by the postmaster-general; and in a month from the date of mr. scudamore's report, it fell into the hands of mr. gladstone, and became, as it were, the property of the nation. how the legislature dealt with it will fittingly bring this chapter to a close. on the th of february, , _mr. gladstone_ took the first step towards bringing the subject forward in parliament, by moving a resolution in the house, of which he had previously given notice:--"that it is expedient to charge upon the consolidated fund of the united kingdom of great britain and ireland the deficiency, if any such should arise, in the sums which may be held on account of post office savings banks, to meet the lawful demand of depositors in such banks, in the event of their being established by law." this, which was according to the usage of the house the first necessary preliminary, provided that the burden of the measure should be thrown upon the state. mr. gladstone stated[ ] that in submitting this resolution he did not wish to pledge members either to the principle or the details of the bill which he intended to found upon it. his sole object was to afford new facilities for the deposit of small savings to those who did not possess them, or possessed them imperfectly. he would not only like to do this, but also to improve materially the existing facilities, so as to enable many more to take advantage of them; but this was a more difficult problem,--an object often attempted, yet little accomplished. the main difficulty, the responsibility of trustees, had baffled all attempts to deal with it. how true this was, the reader who has followed us in our account of the legislation on the subject will readily believe. in this difficulty he had been led to see if they could not avail themselves of another description of machinery altogether, "recommended by its incomparable convenience," for the purpose of carrying out the same objects for which savings banks were originally set on foot. he then went fully into such statistics of the number and conveniences of existing banks as those which we have already furnished, and compared that machinery with the money order system at the post office and its ramifications all over the country. not only were the money order offices open every day for a considerable number of hours, but the postmasters were open and adequate to the transaction of increased business. mr. gladstone then dwelt on the want of facilities, which, he said, exercised an important influence on the amount of the savings of the poor; "the experience of this winter, - , must have demonstrated to anybody who thought upon the subject, that the resources of this class had not of late years increased in proportion to the rate of wages and the improvement in their standard of living." a smaller portion of their gross income was, he thought, laid by at that moment than was laid by twenty years before. he was sanguine enough to expect that, if readier means were afforded than of laying by in a season of prosperity, their ability to cope with the distress of the future must be largely increased. now, the banks which he intended to propose would afford these means; and not only so, but under the arrangements of the measure, he would answer for it that the post office machinery should be applied carefully and gradually--the most neglected districts to be supplied first. mr. gladstone then went into the object and details of the measure. his proposal was that the post office should receive and return deposits, with interest, in the same way as money orders were dealt with, charging merely a fair remunerative price for the work performed. in one respect the principle upon which the new banks would be founded would be essentially different from that of the old ones. the latter had been established with the notion that the state might very fairly offer to the labouring classes a certain premium by way of inducing them to make deposits; but while he was far from desiring to cast any censure upon the principle, he did not deem it right in the present case to hold out to depositors the expectation of obtaining any high rate of interest. he proposed to give a rate of interest _s._ less than that given by the ordinary banks, with a proviso that it might be increased to that rate, if found necessary, "and within certain limits." mr. gladstone provided an ample set-off against a less remunerative return for the money, in the security which he now proposed to give for its safe custody. the responsibility of the state, on account of savings bank money had always been a subject of the greatest difficulty; he argued on this occasion with perfect reasonableness, as many of his predecessors in office had argued before, that the state could only be responsible for the acts of its own officers; and as up to this time no plan had been devised by which the state could participate in all the proceedings of savings banks, it was impossible to carry out the principle of a perfect government guarantee. what, however, could not be done with the old banks, might and should be done with the new. in his proposals there was something so essentially different from anything they had been accustomed to, that a government guarantee was an easy and a possible thing. the money would be received by government officials: it would be invested by these servants in government securities; and it would be inexcusable to refuse a government guarantee for the full amount. hence the motion which he had made. the only effective form which this guarantee could take was the technical one, to pass a resolution providing that if any difficulty arose in the means of meeting the lawful demands of lawful depositors, that difficulty might be met by a charge on the consolidated fund. mr. gladstone, in concluding, hoped honourable gentlemen would not be alarmed at his resolution, as he would expressly state then that the great basis of this new arrangement was that it should be self-supporting.[ ] _mr. francis crossley_ (now sir francis) went over the ground of the very deficient means of investment for the surplus cash of the poor, producing statistics of a kind with which our readers are now sufficiently familiar, and stated that it was impossible to over-estimate the advantages which must accrue to certain classes in the country from the carrying out of the proposals which had been submitted to them. "a great deal of fault," said mr. crossley, "had been found with the improvidence of the working people in not saving money, but let them first see what the government had done to help them. the state provided beer-shops in every street for working men to spend their money in as fast as they earned it; but hitherto he did not think it had been sufficiently forward in giving them facilities for saving their money." he then alluded to the fear which working men had of the ordinary banks, from their masters being connected with them, and who from that connexion would be able to see what they were able to save. "under the postmasters, this would, or should be, different." the country was indebted to mr. gladstone for the amount of attention he had bestowed on the proposals of mr. sikes. mr. crossley concluded: he "did not think government ought to seek to make a profit on the new business; nor did he think they ought to lose by it. the working classes of the country did not want charity, they only wanted a fair field and no favour, and it seemed that at length they were about to get it. if at any time the rate of interest could be raised without loss or inconvenience, he hoped it would be done." _colonel sykes_ said that no praise could be too high for anything of this sort, which tended to induce the working classes to lay by against a bad time. he contented himself with referring to two or three subjects connected with the mode of working the scheme. _mr. arthur kinnaird_ thought the scheme simple and practical. he "heartily congratulated the chancellor of the exchequer on having at last succeeded in one of the fondest hopes of his heart--that of creating a two and a half per cent. stock." mr. gladstone at once demurred to this, and stated that he had no notion of establishing a national bank. the money which came into the hands of government by means of the bill would simply be applied as under the existing savings bank law. mr. gladstone, in closing the debate, took the opportunity of referring to mr. sikes, "who had devoted a great amount of labour to the subject. he felt greatly indebted to him. at the same time, the bill was not intended to embody altogether mr. sikes's plan, though this was a matter of detail into which he would not then enter." three days after this discussion the post office savings banks bill was introduced into the house of commons _pro formá_ by mr. massey, the chancellor of the exchequer, and mr. f. peel. mr. sotheron estcourt on this occasion commented on the importance of the bill, and objected to a first reading without an explanation of its provisions; all that was known of it being that the government were about to frame on its provisions banks of deposit on a gigantic scale, and thus by a merely formal proceeding were about to lay the foundation for very important consequences. the chancellor of the exchequer moved the second and principal reading of the bill on the th of march, . _mr. estcourt_, whose intimate acquaintance with such subjects made his remarks carry considerable weight, made a long speech. he first expressed his doubts whether the persons employed by the post office would ever be able to perform the additional and important duties which would be assigned to them. government were undertaking a great risk. "no doubt the plan would become popular, for several reasons; the post office banks would absorb not only all future deposits, but also a great part, if not all, of those which had been made in the existing banks themselves."[ ] it would be for the house to decide whether this result would be good or bad, or what could be done that the two kinds of banks need not come into collision. mr. estcourt threw out several hints as to how this might be done. they might, for example, limit the sum to be received at post offices, so that the new might not come into competition with the old class; or they might dovetail the new system into the old, by making the post office banks auxiliary and subsidiary to the existing banks. much had been done in the way of trying to amend the constitution of the old class of banks, without effect; and he thought that, looking to the probable result of the new arrangement, it would be far better to look the evil fairly in the face, and supersede at once the old by the new kind of banks, or at least say which of the two ought to be retained. this speaker further apprehended that the post office banks would not take root in the villages, where they were most wanted, and would be almost exclusively confined to the towns where they were least needed, and where they would overthrow the existing savings banks by drawing away their deposits. though mr. estcourt seemed to feel strongly on the different points touched upon by him, he concluded by stating that he should not oppose the second reading of the bill. _mr. w. e. forster_ said, in his opinion the scheme would provide good savings banks where none now existed, and, a very desirable matter, _safe_ banks where they did exist. he thought it was not possible that the one class of banks could dovetail into the other; and if it was, it was not desirable. where government took the responsibility, it ought to have the control. _mr. thompson hankey_ hoped that the proposed scheme, if found practicable, would entirely supersede the existing banks, and the sooner the better. _mr. baines_ followed in the same strain; he would not regret if the new banks superseded the old, inasmuch as that result could only be brought about by the proved superiority of the new system. the member for leeds said, "he had been assured by sir rowland hill, and all the gentlemen whose departments at the post office would be charged with the carrying out of the plan, that it would work exceedingly well;" and he could state that, though it differed materially from his plan, mr. sikes of huddersfield was a "hearty supporter" of the scheme which the post office had adopted.[ ] _mr. gladstone_ could not say whether the old would suffer from the new banks; if they did, it would only be because the latter were the safest and the best. whether or no, the object of the bill was not competition with the old banks. he wanted to supply facilities which at present did not exist, and the first duty of the postmaster-general would be to look to the establishment of savings banks in those places where no banks existed, or where the accommodation was very narrow. as to their application to the money order offices of the country, it would be gradual and slow, and so as not in any way to endanger the machinery of the post office; the postmaster-general would select at first a moderate number to be opened, and extend them in proportion as he found occasion, the test and index of the occasion being the demand for such banks by the public. mr. gladstone then referred to the rate of interest which would be allowed, and said that in this respect the post office banks would have somewhat less attraction; "the present banks were established on the principle of giving a bonus; the new system must be strictly self-supporting." he would not feed them at the expense of the post office, or any other revenue, and in that case the rate of interest must be such as can be safely paid. with regard to the forebodings of mr. estcourt relating to the risks which government would run, mr. gladstone stated that the system of savings banks had been established for forty-five years, during which time they had had every description of speculation, the severity of a commercial crisis, the pressure of a dreadful famine, and almost every trial that could befal a new system; and although the government was always holding a great amount of money at call, there had been but a small pecuniary loss, in comparison with which loss the establishment and progress of such a system was immeasurably of greater value. after stating that he thought "the post office machinery admirably suited for the purposes of the new measure," the bill passed the second reading. the bill was introduced into committee on the th of april, ,[ ] where trifling alterations were made in several of its clauses. _mr. slaney_, who had paid great attention to subjects of this nature, hoped that the deposits would not be restrained, as under the old system, he thought no limit should be placed upon the providence of the labouring classes. _mr. vance_, an irish member, alluded, as he did on subsequent occasions, to what he considered the centralizing tendencies of the scheme. he thought dublin ought to be the centre of operations for ireland as under the money order system. the principal opponent of the measure on this occasion was _mr. ayrton_, the member for the tower hamlets, who in some quarters has been credited with the advocacy of the scheme before this period. in a long speech, mr. ayrton took exception to most of the details of the measure as they were now proposed, and to the principles of the measure as a whole. mr. ayrton held that data enough had not been presented to enable members to form an opinion as to whether the scheme would pay or not. "it was all very well to talk of subjects being self-sustaining, and even economical, but under such statements our expenses had gone on continually increasing." he adduced at length the case of the county courts bill, and the government superannuation allowances bill, which he said were introduced and passed under some such pretences. it would be the same with the savings banks; the government would never be able to keep to the two and a half per cent., but would have to be guided by the rate allowed to other bankers. "the scheme of a national bank," continued the honourable member, "_however plausible_ it might look at the outset, would lead to the most serious consequences." the committee which sat on the subject, and of which he, the speaker, was a member, came to the decided and unanimous conclusion that it was desirable to separate the operation of banking for the people from the national treasury. it was thought that these national banks would act as a powerful inducement to the working men to entrust their money to the government rather than to their own benefit societies, which were regarded as too much associated with trade societies. in his opinion benefit societies and trade societies had been the means of regenerating the people, and were eminently conservative; and it was not expedient to discourage these societies by means of the proposed banks. nor was this all. it was desirable that the country gentlemen should take an interest in the welfare of the working people surrounding them; and to supersede their exertions by mere stipendiaries of the state would weaken that social system on which the liberties of the people were mainly founded. _mr. alderman sidney_, "as one conversant with figures," ventured to say, that if the scheme were carried out, our national establishment must be greatly augmented; and if it proved successful, "the establishment that would be required would be of the same gigantic proportions as the bank of england!" it was absurd to think that depositors would be satisfied with less interest than the national creditor. the scheme, he believed, was founded upon error; it would interfere with the self-working of existing establishments, and would entail a large expense upon the country at large. _the chancellor of the exchequer_ replied, especially aiming his powerful shafts at mr. ayrton. he said he would not follow that gentleman through his speech, as that was a task beyond his powers. mr. ayrton often gave the house notable examples of his discursive powers; but he (mr. gladstone) never knew an occasion on which the honourable gentleman had more signally distinguished himself than on the present occasion. "when he rose into the air on eagle wing, he passed over the limits of time and space, and was not subject to any of the conditions that bound the efforts of ordinary mortals." however, to confine himself to just that which bore on the subject before the committee, he was strongly opposed to the principle of making the working classes pensioners on the exchequer; he would do his best to provide against such a result. he did not know, and could not tell, what amount of business the banks would attract; he expected it would be gradual, and the development of the agency would be gradual. the extension of the system would be in precise proportion to the demand; and the expense would be throughout proportionate to the extension. the opinion of the post office authorities was, generally, that the work would be done much cheaper than in the ordinary banks; _for sixpence or sevenpence against one shilling for each transaction_. some even thought that the work might be done cheaper than the work in the money order office. once started, any tendency to excess would, of course, be corrected; but it was impossible to argue on any assumed number of deposits. he had a sanguine hope that every statement he had made would be verified, and that the measure would entail no charge upon the public. again and again the question was asked and argued, whether it was meant that the new banks should be subversive or auxiliary to the old. to this question, which was asked on this occasion, mr. gladstone gave it as his opinion that the one class of depositors who preferred perfect security would patronize the new banks; whilst another class who wished to act under the immediate view of their local superiors, would prefer the existing banks. in reply to mr. briscoe, he said he would not limit the establishment of the new banks to those places where no other sort of banks existed,--though, of course, the post office would commence operations there first. such an arrangement would exclude the great centres of trade and population,--our large towns--which were not sufficiently served with banks. an important discussion took place on the th clause of the act relating to the investment of the fund deposited in the post office banks. _sir h. willoughby_, as he so often did before, condemned the system of operating on the stock-market with this money. mr. gladstone replied, that the loss which was so often dwelt upon in connexion with the old banks was nothing like loss; "the money so deposited with government had enabled successive administrations to effect an economy in the management of the public money transcending ten times over the charge the state had been put to." he saw no reason whatever to alter the arrangements in this particular. the amendment which sir h. willoughby proposed was then negatived without a division. three days afterwards the bill passed the third reading and was sent up to the lords. no time was lost in bringing the bill forward in the house of lords. it was read a first time on the th of april, and a second time on that day week. the conduct of the bill in the lords was naturally committed to the postmaster-general, lord stanley of alderley. on this occasion his lordship went over[ ] the ground covered by the bill--the insufficiency in number, and the inadequacy of accommodation of existing banks, and the insecurity as regards repayment until the money had actually reached the hands of the national debt commissioners. lord stanley added that savings banks had by no means increased in number in proportion to the population, or to the increase of the money circulating among the working classes. he adduced several facts and a quantity of statistics on this head similar to those which we have already given to the reader. from these facts it was obvious, that when a working man formed a good intention to invest his small savings, there was a great danger that he would spend his money, if there were no means of his depositing it, or if he could not do it comparatively easily. he then spoke of the losses caused by the failures of savings banks. referring to mr. whitbread's proposals in , lord stanley stated that this measure was very like the scheme then proposed, which actually passed through the house of commons in that year; that mr. sikes had originally proposed something similar in an admirable letter to mr. gladstone; and that the government, with the assistance of two able gentlemen in the post office department, had matured the present plan, which he proceeded very clearly to describe. lord stanley, in concluding, said it was somewhat remarkable that nine-tenths of the depositors in savings banks were domestic servants and clerks, and that only one-tenth belonged to what are usually known as the "working classes;" yet large numbers of these latter are in receipt of wages far exceeding the incomes of many who possessed savings bank accounts.[ ] he hoped that working men, when they received their wages, would be induced, before going home, to invest a portion of them at the receiving houses they would pass; if so, the result to them and the country could not but be highly beneficial. the banks must be looked upon as an experiment. if an extension should be demanded, it could only be by reason of the greater security and greater facilities they would offer. lord colchester, an ex-postmaster-general, admitted the merits of the plan, but doubted the ability of the post office officials to carry on the work in every town. among the lords, however, the strongest and bitterest opponent of the measure was lord monteagle of brandon (once chancellor of the exchequer as mr. spring rice).[ ] he made a long speech on this occasion. he thought it was wrong to establish new banks, or to make them rest on the deficiencies of the old ones, inasmuch as it was easy to improve the latter. he went into the history of savings banks, and endeavoured to show that their progress up to , (a fact which no one disputed,) had been far from slow. as, however, it was the period principally between and when they were most stationary, this was the time with which he should have dealt. he expressed an opinion that the post office would not be equal to the work. he strongly urged the inexpediency of giving increased funds to the chancellor of the exchequer, with which to speculate. and this measure would tend to destroy the healthy feeling which was growing up between the higher and the lower classes, through the medium of savings banks. not only did the higher classes give their time and energy to the work of savings banks, but they gave their money too; and lord monteagle was unlucky enough to cite the case of several noble lords who paid a thousand pounds each to atone for their neglect in connexion with a hertfordshire savings bank, and the fraud there, which we have previously described at length. "such was the spirit," triumphantly exclaimed the noble lord, "which this bill proposed to crush." not less unfortunate was lord monteagle, as the result has proved, in his endeavour to be amusing and prophetic. "the only comfort," said he, "which i have derived from the speech of the noble lord who moved the second reading, was his assurance that the measure was to be of an _experimental_ character." under such circumstances he would not trouble the house with a division, as he would await without much anxiety the result of the "experiment!" next year, they would see whether the working of the new system would compare with that "which for nearly half a century had been the glory of england, and had served as a model for all europe." lord redesdale also strongly opposed the bill, but he did not bring to its consideration much of the practical knowledge of the preceding speaker. he "frankly owned" that, from what he understood "would be the manner of keeping the accounts, they would soon get into a state of confusion, out of which extrication would be almost impossible." from the confusion of the above sentence, it is not impossible that the attempt to understand the mode of keeping the accounts had confused the speaker. curiously, too, the same speaker objected to one of the most convenient clauses of the bill. he called the proposed mode of transfer of deposits from one bank to another, an unnecessary arrangement, saying it would be _much better_ that the parties themselves should take it out of the one, and put it into the other bank. acquaintance with the habits and wants of the poorer classes would have convinced lord redesdale to the contrary. lord redesdale said, in concluding, that "he was afraid the scheme would produce much disappointment to the public, and a great loss to the nation." _the marquis of clanricarde_ gave a very qualified and hesitating adhesion to the bill. lord stanley of alderley satisfactorily replied to the arguments that had been adduced, and the bill was then referred to a committee of the whole house. on the th of april the bill passed the committee. four days afterwards, lord monteagle again opposed it, saying that he saw, "with great alarm and regret," what seemed to him to be meant to produce a break-up of existing savings banks, and the substitution of the action of a salaried government department for what he might call a great public charity, directed by benevolent persons acting gratuitously in their own neighbourhood. he went over the ground he had taken only a few days before, but in a spirit very much more subdued and less confident; and when the bill passed, he entered a long and laboured "protest" against it (_vide_ _hansard_, vol. clxii. page , where many more of lord monteagle's "protests" may be found). the post office savings bank act, which we give _in extenso_,[ ] received the royal assent on the th of may, . [ ] from this statement the ten or twelve principal banks in the country, many of which are open every day, and all in a flourishing financial condition, are of course excepted. [ ] _tracts on poor laws and pauper management_, included in the _works of jeremy bentham_, edited by sir john bowring, vol. viii. edit. , page . the punctuation and the italics of the above extract are bentham's own. [ ] a little _handy book_ on the subject, published in , by mr. h. riseborough sharman, one of the editors of the _insurance gazette_, and which deservedly had a large sale, went over very ably, though in a way which produced considerable acrimony from some portion of the public press, some of this ground. though it is open to question whether at so early a date it was not premature, and, whether in the peculiar form of a manual for intending depositors, it was wise to enter upon a discussion of these points, it is certain that by means of this pamphlet and other advocacy, mr. sharman laboured very hard and very zealously to prepare the public mind for the adoption of the scheme of postal banks, and to spread a knowledge of their benefits after the measure had become law. [ ] _duties of the public with respect to charitable savings banks._ dublin . [ ] _on the present state of the savings bank question._ dublin, . [ ] mr. sharman's _handy book_, p. , d edit. [ ] mr. sharman's _handy book_, p. , d edit. [ ] it is pretty generally known, that no profit whatever accrues to the post office on orders for which threepence only is charged; yet in spite, as it were, of this fact, we find that mr. scratchley, in his _practical treatise_, takes up mr. ayrton's proposals, and "recommends" that "money order officials receive deposits on behalf of the nearest savings bank," and "that this should be done at a cost to the depositor of one penny for any sum not exceeding _l._" "it is also," adds mr. scratchley, "very desirable that the valuable privilege of freedom from postage recommended by mr. whitbread should be granted for the books and documents required to be transmitted on behalf of savings banks." mr. whitbread, it will remembered, made this one of the conditions of his scheme of national banks; and it is quite evident that none but national institutions could obtain such a provision. "the valuable privilege of freedom from postage," would, we should think, be considered very desirable by a variety of different societies and interests, if only they could obtain it! [ ] the following were the details of the reverend gentleman's scheme, of the authenticity of which we have fully convinced ourselves:-- . that deposits from _s._ to _l._ be received daily at every post office in the united kingdom at which post office orders are now issued, and the amount forwarded _daily_ to the national savings bank, london. . that the postmaster, upon receiving a deposit, do issue a document of acknowledgment to the depositor, with printed instructions attached thereto, directing the depositor to write to the london office, if a receipt be not received by him through the post from the london office within ---- days. the following advantages would follow:-- . _universality of operation_, by which the savings bank system would be forthwith placed within the reach of every member of the community. . _cheapness of management._--all rents for offices, and annual salaries to clerks, avoided. postmasters who are now enabled to issue post office orders, are already admitted to have character sufficient to be entrusted with the receipt of money, which by this system would never exceed one day's deposits. . the only expenses of management would be, ( ) the london office, which ought to be as near the general post office as possible; and ( ) some small payment to postmasters upon each deposit. in large towns, it may in time be necessary to employ an additional clerk in the post office, but in these cases the payment on each deposit would suffice to enable the postmaster to keep such clerk. . it would not interfere with the existing savings banks,--leaving it to the public to adopt either the old or the new system as they please. by this means the old system would probably be superseded by slow degrees, and without hardship or inconvenience to any one. geo. hans hamilton. [ ] like mr. hamilton, mr. bullar has subsequently proposed a plan for giving increased facilities in one direction to depositors, which will be referred to at the proper place. [ ] _letter to the chancellor of the exchequer_, . [ ] mr. rowland hill to mr. baines, m.p., d august, . "my dear sir,--with modifications which could readily be introduced, mr. sikes's plan is, in my opinion, practicable so far as the post office is concerned. "the plan also appears to me to be practicable in its other parts; but on these i would suggest the expediency of taking the opinion of some one thoroughly conversant with ordinary banking business, and who is acquainted also with savings banks. "i need not add, that if carried into effect, the plan would in my opinion prove highly useful to the public, and in some degree advantageous to the revenue. "i shall be most happy, when the time arrives for doing so, to submit it for the approval of the postmaster-general. "faithfully yours, "rowland hill." [ ] mr. gladstone to mr. sikes, th november, . "dear sir,--i have read with much interest your tract on post office savings banks, and have discussed the subject with sir a. spearman, who has also had some communication with the post office authorities. "the difficulties are very serious, chiefly in connexion with the question of interest and the mode of account for it. "at the same time there is so much of promise in the plan on the face of it, that we are unwilling to let it drop without a most careful examination. "if you are likely to be in london, or were disposed to come hither, personal communication on details might be of advantage. sir a. spearman would be most ready to see you for the purpose of entering into them fully, and i should be very desirous myself to give any aid in my power at the proper time." [ ] "the council of the statistical society of dublin having had under their consideration the plan of post office savings banks proposed by mr. c. w. sikes of huddersfield, desire to record their entire approval of the principles of his plan, and consider it to be specially applicable to ireland, where a well-founded feeling of distrust in savings banks as now constituted has been produced by its being demonstrated that the depositors have not government security for their money. that the council believe that post office savings banks with perfect government security would be very successful in ireland, and could be readily managed with a central savings bank in dublin, as government stock is transferable in the bank of ireland. that the council direct the secretary to bring these resolutions under the consideration of the chief secretary for ireland, with a view to their being transmitted by him to the chancellor of the exchequer. by order, "w. neilson hancock." at the same meeting the council elected mr. sikes a corresponding member of the society. [ ] forms for doing so were immediately afterwards provided. [ ] such, for example, as the extraordinary facilities now enjoyed for the depositing and withdrawal of money--of which we shall speak in the proper place. suffice it to say here, that these facilities had never been dreamt of for a moment outside the post office; that they were such facilities as no agency but the post-office ever attempted to give, and, more than that, could not possibly have given. [ ] his speech on the occasion has not been reported _verbatim_, or we would never have ventured to have given it in the third person. [ ] _hansard_, vol. clxi. p. ; and _times_ newspaper, . [ ] _hansard_, vol. clxi. p. ; and _times_, . [ ] that this was the case appears further from the circular which mr. sikes addressed to every member of the house before the second reading, in which he expressed his cordial approval of the bill, and craved the support of members in carrying it through parliament. [ ] _hansard_, vol. clxii. . [ ] _hansard_, vol. clxii. p. ; and _times_, april , . [ ] the phrase "working classes," applied to the industrial population, seems as inaccurate as the phrase "lower orders," applied generally fifty years ago, is obnoxious. the distinction does not lie in this class being "working" while others are "idle" people. something very different indeed is the fact. the tendency of late years has been that professional people should work harder, and "working" people less, and very few men who live by their profession work fewer hours than the handicraftsmen of our towns. lord stanley might have gone even further in his comments on the earnings of the industrial classes. even putting aside the important consideration of how much the professional man spends of time and money in preparing himself to work at all, a great and ever increasing number of the wage-receiving class have now as good incomes as many hundreds of the less successful classes above them, while their expected or necessary expenditure is in almost all cases very much smaller. [ ] news of this able nobleman's death has just reached us; but, though bearing in mind the spirit of the well-known maxim, we see no reason to alter our text. [ ] see appendix (f.) chapter ix. on the development of the post office savings bank system. "should the post office savings bank bill become law, and should it also answer, we shall then possess an institution the convenience and value of which it will be impossible to over-estimate, and this author will deserve the thanks of the country. the country will recognise at once the universal boon of a bank maintained at the public expense, secured by the public responsibility, with the whole empire for its capital, with a branch in every town, open at almost all hours, and, more than all, giving a fair amount of interest."--_times_, march , . "i have been asked," says mr. edwin chadwick, "by several m.p.'s and others, what i thought of post office savings banks. i have answered them, that i know no measure of late years affecting the condition of the working and the lower middle classes which appeared to me so excellent in principle. i am disposed to say, as sir robert peel said with reference to the encumbered estates act, that it is 'so thoroughly good a measure, he wondered how ever it passed.'" we have already seen that the post office savings bank bill was rapidly and successfully passed through parliament, and _did_ become the law of the land. the act "to grant additional facilities for the depositing small savings at interest with the security of government for the due repayment thereof," received the royal assent on the th of may, . the author of the bill has the best claims on the thanks and gratitude of the country. the press and the people of this land have, almost with one accord, been loud in their praise; and the three-quarters of a million of depositors, most of them attracted to saving habits by the facilities he then for the first time offered them, joined in silent thanks. the scheme for working this measure, organized in the post office after repeated requests from mr. gladstone, accomplished to a great extent under his oversight, and then carried through parliament by his administrative ability and convincing eloquence, will ever cause his name to be most prominently associated with the new system; and among the many triumphs of his skill, this one will stand out with distinct prominence on the page of history. the post office savings banks have not only "answered," to use the phraseology of the "leading journal," but they have attained a marked position, and have been, in every respect, an eminent success. not nearly so much, however, with regard to their present condition, as to their manifest and inevitable destiny in the future, the postal banks are entitled to a high place amongst the social institutions of the country. in every department of labour, the new banks have become, and must yet become to a far greater extent, most effective agents in the social and moral improvement of the people, and will give tenfold effect to the endeavours which have been made, in so many directions, to better the condition of the masses. next, perhaps, to the repeal of the corn laws, this is the greatest boon ever conferred on the working classes of this country; and next to the scheme of penny postage itself, the scheme of post office banks is the greatest and most important work ever undertaken by the government for the benefit of the nation. whatever differences of opinion may exist as to the claims of the present ministry to public gratitude, there can, we should imagine, be but one opinion now as to the vast advantages conferred upon the bulk of the people by the measure of . the success of the post office banks has been of the most complete kind. whether we consider, as we shall now proceed to do in proper order, the amount of the business done; the nature of the business done; the influence of these banks on the provident habits of the community; the results upon those small banks which more especially have partaken of the character of eleemosynary institutions; and the manner in which the business of the postal banks has been organized and performed, the scheme has far more than realized the anticipations under which it came into existence. _as to the amount of business done._ the interval between the passing of the act and the th of september, , was occupied, it appears, in completing the arrangements for the conduct of the measure, including the appointment of mr. chetwynd to control the scheme he had originated, and a staff of superior and subordinate officers with which to begin the business; and on that date operations were commenced by the opening, in england and wales, of money order offices as savings banks. the grounds upon which the first places were chosen were unquestionably the best that could have been adopted to test the feeling of the country with regard to the scheme itself. they were, ( ) avoidance of all collision with existing banks which supplied a fair amount of accommodation; ( ) the selection of important and thickly-populated districts, making that selection embrace the widest possible area, and leaving no inconsiderable tract of country without the required accommodation; ( ) to meet the wishes of the public, so far as these wishes were indicated by memorials or requisitions to the authorities; and ( ) to take care that the postmasters of selected places were trustworthy, and capable of transacting the business efficiently. had the scheme failed under such conditions as thus seem to have been imposed, little hope could have been held out that it would ever have been successful: as it happened, however, the banks were found at once to supply a great public want. the authorities seem to have been so far encouraged, that in six weeks an enormous addition was made to the number of banks. were opened in the month of october following, in november, and in december, making the entire number of , new banks open to the public at the end of the year. on the rd of february, , the benefits of the measure were extended to ireland, by the opening of banks; on the th of the same month, banks were opened in scotland; and by the end of six months from the original commencement of the plan, there were in the united kingdom no fewer than , post office banks in existence. additional banks were opened in ; and at the end of the total number of banks was increased to , . up to the present time (march, ), the number of post office banks is , , of which, , are in england and wales, are in ireland, and are in scotland. there is now a government savings bank not only in every town in the united kingdom, but in every large village;[ ] and over and above this already ubiquitous and comprehensive arrangement, the large towns of the country have each a number of new depositories for savings proportionate to their size and population. thus, in the metropolis, at the present moment of writing (april, ), there have been provided the extraordinary number of post office banks; in manchester, there are ; in liverpool, ; in birmingham, ; in edinburgh, ; in glasgow, ; in dublin, . in the three months of during which the , banks were in operation for portions of the period, , persons opened accounts with them, and deposited money to the extent of , _l._ in deposits of the average amount of _l._ _s._ _d._ at the end of the next year ( ) , persons had opened accounts in these banks, depositing , , _l._, and withdrawing less than a quarter of that sum. year by year, up to the present time, as appears by the accompanying table, the increase of deposits, and the increasing number of new accounts, are far more than proportionate to the increase of facilities; and, as showing the firmer hold that these banks have taken on the community, this fact is most satisfactory and gratifying. equally so, and a most convincing proof of their success, is the account of the total amount of business shown to have been transacted up to the st of december last. up to that date these banks have received from no less than , depositors, in , , deposits, a sum of money amounting to , , _l._;[ ] the withdrawals during the same period of four years numbering , , , and amounting to , , _l._ there were in december last, , open accounts, the amount standing to the credit of these accounts being , , _l._ table showing the amount and nature of the business done in the post office savings banks from their opening in september, , to december, . table column headings: col. a: date. col. b: number of deposits. col. c: amount of deposits. col. d: average amount of each deposit during the period. col. e: number of withdrawals. col. f: amount of withdrawal. col. g: average amount standing to the credit of each account. +---------+---------+----------+--------+---------+---------+---------+ | a | b | c | d | e | f | g | +---------+---------+----------+--------+---------+---------+---------+ | | £ | £ |£ s. d. | | £ | £ s. d. | |from }| | | | | | | |sept. to}| , | , | | , | , | | | dec. }| | | | | | | | . }| | | | | | | |year | , | , , | | , | , | | |year | , | , , | | , | , , | | |year | , , | , , | | , | , , | | |year | , , | , , | | , | , , | | +---------+---------+----------+--------+---------+---------+---------+ |total | , , | , , | | , , | , , | | +---------+---------+----------+--------+---------+---------+---------+ in the ten years ending november, , the annual average increase in the total number of savings bank depositors was at the rate of - / per cent. in one year from this date the increase in the number of depositors--taking the depositors of the old banks and the post office banks together--was at the rate of - / per cent. that this increase was altogether owing to the introduction of the new system, scarcely requires proof: a few of the old savings banks, edinburgh, glasgow, liverpool, and birmingham for example, increased their business during ; but the aggregate of the old savings banks lost more business than the few gained. again, in all cases, the gain of the post office banks was far greater than the loss of the old banks.[ ] throughout the entire kingdom the old banks lost , , and the post office banks gained , depositors. the rate of increase shown in the first year has been continued with inconsiderable variations up to the present time, and, in his last _report_, the postmaster-general, in view of all the facts of the case, states: "on the whole, it seems reasonable to expect that the annual increase in the business of the post office banks will for some time be from , to , in the number of depositors, and from , , _l._ to , , _l._ in the capital of depositors."[ ] the correctness of these calculations will not depend to any appreciable extent on the increase of facilities, such as the opening of new banks: the post office banks have already been so widely established that little additional accommodation will be required for some time to come. it is made to depend, we should imagine, on the principles of post office banks becoming more and more widely known, and their facilities more and more appreciated. this has clearly been the experience of the last two years. in , new banks were opened, and the increase of depositors was at the rate of per cent.; in , only new banks were opened, and yet the increase in the number of depositors was at the rate of per cent. _as to the nature of the business done._ some idea of the nature of the increased business done may be gathered in several ways. first and foremost the number of post office savings bank depositors represents an enormous number of accessions to the list of frugal people who have perhaps for the first time begun to save, and of those who, more prudent and less confiding in their fellows, seek the security of the state for the safe custody and prompt repayment of their savings. it is a somewhat remarkable fact, that of the total amount which had up to the end of last year been deposited in post office banks, not much more than a million and a half (allowing for money transferred otherwise than by means of the regular transfer certificate) had been withdrawn from the old savings banks. moreover, out of this large sum more than half seems to have come to the post office banks through the voluntary closing of savings banks on the old principle,--the birmingham savings bank contributing a third of the whole amount. from these facts, it seems quite clear that the business acquired by the post office banks, at any rate up to this time, is almost entirely newly-created business, and that the older savings banks have only been interfered with to a trifling extent. besides the amount already referred to, other sums might undoubtedly have been placed with the older institutions, had there been no competition; but by far the greatest proportion is plainly derived from sources hitherto unreached, and consists of money which no amount of persuasion could divert from the hundred forms of indulgence to the older channels of economic hoarding. the post office banks, further, seem not only to have attracted a public of their own, but to have created, as it were, a fresh race of provident people. all kinds of savings banks have been established to give, in some form or other, facilities for the deposit of _small_ savings. when the new banks commenced, the average amount of a single deposit in the existing banks was, and had been for some time, _l._ _s._ _d._; during the first year of the existence of the post office banks, the average amount was only _l._ _s._ _d._ but this average has been still further reduced. the post office authorities, describing more recent operations,[ ] state, that as the nature and advantages of these banks became known to the poorer classes, and as new banks were opened from time to time in rural districts, and densely populated portions of our large towns inhabited by those classes, a gradual reduction in the average amount of each deposit has taken place, and that that amount has for some time ranged between _l._ and _l._, whilst the average amount of each sum deposited in the old savings banks has not undergone any marked alteration. the conclusion which has been arrived at is the only one possible, viz., either that the post office banks have reached a poorer class of depositors than the old banks have been able to attract, or that in increasing so many fold, as we shall have to describe, the facilities for the more frequent deposit of small sums, they have at the same time, and proportionately, increased the inducements to frugality, and removed the temptations to wastefulness. still dealing with the peculiar nature of the new business, it is very important that one fact should not be lost sight of. in our opinion, it completes the evidence as to further accommodation being urgently required by the poorer classes. in those towns and districts which before were considered to be well supplied with sufficient and well-managed institutions, the success of the post office banks has been most marked. thus in edinburgh, the rate of increase in the number of depositors rose in one year from - / to - / per cent.; in dublin, from - / to per cent.; whilst in the county of middlesex, where, before the post office banks were established, there were "forty-one prosperous and excellently managed banks, which seemed to hold out all needful inducements to prudence and frugality," no less than , persons were added to the roll of savings bank depositors in the year following the introduction of the new banks into that county. the rate of increase before was - / per cent.; in and , it was at the rate of per cent. the average amount standing to the credit of each depositor in the post office banks has for some time ranged between _l._ and _l._, and is not expected to exceed that sum for some time to come. of the whole number of depositors, about four per cent. have balances due to them of _l._ and upwards. a general idea of the mass of depositors may be gathered from the above facts, and they may be supplemented by the following table, which, though only the result of an estimate, is near enough for our purpose. in march, , a certain proportion of the open accounts in the post office banks was examined, in order that some idea might be obtained of the occupation of the entire number,--from which it seemed probable that the , depositors were made up pretty much as follows:-- females, male minors, and trustees , mechanics and artisans, domestic and farm servants, porters, policemen, labourers, boatmen, fishermen and seamen , tradesmen and their male assistants, farmers and clerks of all kinds except those mentioned below , males of no stated occupation, professional men and their clerks or assistants , males engaged in education , persons in the army and navy , persons employed in the revenue departments , ------- total , ------- of the entire number of post office savings banks, ninety-one out of the , have failed to obtain depositors. of this number, are in england and wales, are in scotland, and are in ireland. it is impossible satisfactorily to account for the failure in so many cases, or, in the absence of information as to the particular localities to which facilities have been offered in vain, to say whether there may not be some special reasons, other than indisposition to save, which may have operated against the transaction of business. among the great number of banks established in england, there must unquestionably be some poor and sparsely populated districts to which they have penetrated; whilst in ireland, which contributes nearly three-fourths of the non-effective banks, these districts must be still more numerous, and the population still less able to save. add to this, the fact that in more than one large district in the sister country the grievous frauds in the old class of banks have left an indelible impression on the minds of the people,--if they have not, as one authority states, destroyed all thoughts of provident habits,--and that this impression is not likely to be effaced in the chronic agitation which has for so long prevailed in ireland, and the only wonder is, that more of its post office banks are not non-effective. * * * * * _as to the results of the new banks on the old ones._ before the post office banks were established, ordinary savings banks were open in the united kingdom for the receipt of small savings. of their distribution throughout the country and the accommodation which they gave, including the number of hours the bulk of them were open, we have already spoken in a previous chapter. the post office banks were no sooner established and business fairly commenced than two very important results followed in banks on the old establishment. the first was, that some of the more important savings banks increased their accommodation to the public,--the duration and frequency of the time allowed for doing business being extended: the second was, that the trustees of many of the old banks came to the resolution to close their institutions, on the ground that their time and benevolence were misspent in competing with the new banks, which enormously increased the accommodation they had been powerless to afford. the best possible test, not only of the influence of the new banks, but of their marked superiority and adaptability to the wants of the country, is found in the fact, that since , no savings bank on the old principle has been established. if it be not desirable to establish new banks, it cannot be a matter of much concern to the country how soon the _bulk_ of the existing banks on that principle give up their charitable business. we say bulk advisedly, for many of these banks do not partake, in the ordinary sense of the word, of the character of charitable institutions. from a careful and impartial view of the whole subject, it seems to us, that no measure short of the abolition of the post office banks can keep alive those of the old savings banks which cannot compete with the former in the quality and the amount of their accommodation. on the other hand, no one who has at heart the interests of those classes which savings banks seek to benefit would wish to see the existence of any institution shortened, which, while profitably ministering to a great public want, is neither subsidized by the state, nor conducted so as to leave an impression on the depositor's mind that it is charitably ministering to his necessities. those which cannot give the necessary facilities, must succumb sooner or later; those which answer to the latter requirements, may still have a long course of honour and usefulness before them. before , there might be no option or alternative to the existing order of things; the institution of post office banks has supplied both. twelve months after the organization of the post office banks the trustees of thirty-five of the old savings banks had closed their banks. up to the present period (march, ), sixty additional banks have followed the example thus set them; this making a total of--exclusive of penny banks--ninety-five banks which have transferred their business to the post office. the least important of these institutions was that of dumbarton, established in , and which had but _l._ of capital. the most important bank on the list is birmingham, originally established in , and which had, on the th of november preceding the date of closing, a capital of , _l._ the fact of the birmingham savings bank coming over, formed the one necessary assurance that the new system had obtained, not only the confidence of the country, but the tacit acquiescence of those who managed large businesses of the same nature. it was very properly argued at the time, that if a majority of such trustees as those of birmingham could come to the conclusion to hand over their well-managed and flourishing bank to the government, any bank might do so.[ ] the following return, which has been carefully compiled, is of sufficient interest and importance to occupy the prominent place we assign it.[ ] return containing the names of savings banks closed during the years to inclusive, together with the date of establishment, the number of hours open per week, and the capital on the th november preceding the date of closing of each bank. +------------------+----------+-------------+-----------+-----------------+ | | | number | capital on| | | | date of | of hours | th nov. | | | name of bank. |establish-| open per | preceding | remarks. | | | ment. | week. |the date of| | | | | | closing. | | +------------------+----------+-------------+-----------+-----------------+ | _england._ | | | £ | | |ambleside | | | , | | |andover | | | , | | |baldock | | | , | | |bermondsey | | | , | | |biggleswade | | | , | | |billericay | | | , | | |birmingham | | | , |this bank ranked | |bishop's castle | | | , | fifth or sixth | |blackpool | | | , | in the empire. | |bodmin | | - / | , | | |bowdon/altrincham | | | , | | |braintree | | | , | | |brixton | | - / | , | | |bromley | | to | , | | |buntingford | | monthly | , | | |burford | | | , | | |canterbury | | | , |closed on account| |carshalton | | - / | , | of the fraud | |chesham | | | , | previously | |cheshunt | | | , | spoken of. | |chipping norton | | | , | nov. . | |chipping ongar | | fortnightly| , | | |clapham | | to | , | | |clayton west | | | | | |cleobury mortimer | | | , | | |coddenham | | | , | | |covent garden | | | , | | |cuckfield | | | , | | |dartford | | | , | | |deptford | | | , | | |east dereham | | | , | | |enfield | | | | | |epping | | monthly | , | | |evesham | | | , | | |finchley | | | , | | |fleetwood | | | , | | |halstead | | | , | | |hartlepool | | | , | | |holloway | | - / | , | | |holt | | | , | | |hornsey | | | | | |hoxton | | | |this was the | | [ ] | | | | first bank | |kirby stephen | | | , | which | |leatherhead | | | | transferred its| |lechlade | | | , | business to the| |lutterworth | | | , | post office. | |lymington | | | , | | |mansfield | | | , | | |market harboro' | | | , | | |melbourne | | | , | | |old kent road | | | , | | |over darwen | | | , | | |pimlico | | | , | | |poulton-le-fylde | | | , | | |rawtenstall | | | | | |rochford | | | , | | |romsey, new hall | | | | | |rugby | | | , | | |saddleworth | | | , | | |st. alban's | | | , | | |sedbergh | | monthly | | | |sheerness | | | , | | |shiffnal | | monthly | , | | |southwold | | monthly | , | | |stavely | | | , | | |tredegar | | | , | | |wallasey | | | , | | |walsall | | | , | | |wandsworth | | | , | | |watford | | fortnightly| , | | |west bromwich | | | , | | |west ham | | | , | | |weston-super-mare | | - / | , | | | | | | | | | _wales._ | | | | | |bala | | | , | | |carnarvon | | | | | |dolgelley | | to | , | | |llangollen | | monthly | , | | |machynlleth | | | , | | |merthyr tydvil | | | , | | |narberth | | | , | | |newtown | | | , | | |portmadoc | | | , | | | | | | | | | _scotland._ | | | | | |dumbarton | | | | | |fort william | | | , | | |glencoe | | | | | |leith | | | |date and hours | |oban | | | | not given in | |stranraer | | | , | return for | | | | | | . | | _ireland._ | | | | | |ballymena | | | , | | |bray | | | , | | |carndonagh | | | | | |gorey | | | , | | |lisburn | | | , | | |strabane | | | , | | +------------------+----------+-------------+-----------+-----------------+ it ought to be stated that the act of , for amending the post office savings bank bill, offered considerable inducements to the winding up of the then existing banks. its principal objects were to relieve those trustees who were desirous to close, from liability with regard to the accounts of depositors who had not applied for repayment of their money, or for certificates to enable them to transfer their deposits to post office banks, and also to make the transfer of the accounts of minors compulsory on the authorities of either class of banks on the application of the proper parties concerned. more important than either, however, was an addition made to the bill before it was allowed to pass. this addition consisted of a clause empowering the trustees of any old savings bank who should desire to close their bank, to compensate their paid officers out of the separate surplus fund. this was a welcome and very proper addition to the bill, and tended materially to mitigate the inconveniences likely to arise from the officials, perhaps of many years' standing, being thrown out of employment. the birmingham bank, when it transferred its business, took advantage of this clause to compensate its officers accordingly; and this course has subsequently been followed by other banks. * * * * * we have left ourselves little space to describe what remains to be told of _the manner in which the business has been organized and performed_. happily, however, those parts of the system with which the public have more especially to do, have not wanted numerous and faithful exponents; by means of the newspaper press, shoals of official and non-official tractates, handy-books, magazine articles, and public lectures, the public have been made fully aware of all the practical details of a scheme which is at once so simple and so satisfactory in its working, and which is at the same time as capable of indefinite expansion as it is of infinite power for good. it is indispensable, notwithstanding that these details are now so well known,[ ] that we should rapidly glance at _some_ of them, prior to speaking of the special advantages which these arrangements have made possible. _with regard to depositing money._ by the post office savings bank bill any person who will subscribe the requisite declaration that he is not a depositor in any other savings bank may now, on every working day of from six to ten hours' duration, deposit any sum not less than one shilling, and not more than _l._ in one year, in any of the , places in the united kingdom where the post office has been opened as a savings bank; also, that for every pound so deposited for a month or more, interest at the rate of _l._ _s._ per cent. per annum shall be paid, and that while the money remains in the hands of the post office the credit of the british government shall be staked for its due repayment when asked for. any person wishing to become a depositor in a post office bank has only to go to that money order office which is most convenient to him, subscribe the statutory declaration, and pay in to the postmaster or receiver the amount he wishes to deposit, and a bank book will be handed to him, properly numbered, and on which his name, address, and occupation will be written. the amount handed to the postmaster will be found entered as a first deposit in the proper column of the book, and this entry will be attested by the signature of the postmaster, and stamped with the official stamp of his office. from the moment the depositor gets his book handed to him he possesses, for all practical purposes, a sufficient guarantee for the absolute safety of his money. this is, however, not the only security he has; and to explain the further process it is necessary to follow the money after it leaves the depositor's hands. the postmaster before giving up the book is required to enter the full particulars of the transaction in a single line on a form of daily savings bank account supplied to him for the purpose. at the close of each day the local postmaster adds up the total amount received by him during that day on savings bank account, and, adding that sum to the account of money orders issued during the same day, sends the entire account to the chief money order office in london. on its arrival at this office the account undergoes a primary check, and is then sent to the savings bank department, where it is thoroughly examined in all its details. in the first place, an acknowledgment is filled up and addressed[ ] to every depositor named in the account. the account is then sent to the ledger branch, where its particulars are copied into the books of the department; and subsequently, but on the same day, to ensure accuracy and afford a check, each acknowledgment is compared by different officers with the entries made in the ledgers, and then despatched by the same night's post to the address furnished by the depositor.[ ] the receipt of this acknowledgment completes the depositor's parliamentary title to repayment in full of principal and interest. should the depositor not receive his acknowledgment within _ten_ days of making the deposit, application must be made (and it may always be made free of postage) to the postmaster-general for it. experience has shown that no depositor has been put to the trouble to write _twice_ for an acknowledgment, and but a very small modicum indeed have written at all. practically three days would suffice for the operations required in england, and four for the greater part of ireland and scotland; but in some few cases the longer period of ten days is necessary. were it not for the check, moreover, which the department thus obtains upon its own officials, and the confidence which the arrangement gives to depositors, the acknowledgment might perhaps be dispensed with, inasmuch as the postmaster's entry in the depositor's book is not bad evidence that the money has reached the hands of a government official,--a fact which, if it could not be disputed, would not, we should imagine, be set aside. in every subsequent case where a person adds to his first deposit, exactly the same routine is followed. he may, however, if he desires it, or requires it, continue his deposits in another bank from that in which he originally opened his account; nay, if he chooses, he need not make two deposits in any one bank, but may take a tour throughout the country, or, if he lives in london, may go all round the metropolis to the banks there, and see which he likes best, and no one will interfere with his freedom of choice. and though a depositor of this curious description would give additional trouble, the routine of the work is so simple that he would not embarrass the department in any way.[ ] _with regard to withdrawing money._ a person having once run up a score in the post office banks, may withdraw it with great readiness and with extraordinary and unexampled facilities. a depositor who requires some, or all, of his money, has only to go to whichever post office bank he likes best, in whatever part of the country he may happen to be at the time, and ask for the usual printed form. he must fill up this form with the number of his deposit-book, the name of the office where he commenced to make his deposits, the amount he wants, and the place where he wants it paid, and adding his name, address, and occupation, send the form (which needs not to be post-paid, is addressed on the back, and provided with an adhesive seal,) to the postmaster-general and wait the result. following the fortunes of this notice, we find that it arrives in proper course at the chief savings bank. the signature attached to it is there compared with the signature of the original declaration, and if, on comparison, there be no grounds for suspecting anything amiss, the notice is sent to the ledger keeper in charge of the account of the particular depositor. if it be found that he has a proper balance in the bank to meet his claim upon it, a warrant for payment is at once prepared. this warrant is an order to the postmaster named to pay the amount wanted; and after the amount of the warrant has been entered in the ledger, and checked by a superior officer, who certifies its correctness, it is at once sent off by post to the address furnished by the person withdrawing. at the same time, and by an admirable system of manifold writing,--suggested by mr. west of the mail office for the use of other branches of the post office, and which has been with great advantage applied to savings bank operations,--the postmaster himself is furnished in fac-simile with a copy of the warrant sent to him in the nature of an advice. when the postmaster is applied to for the money in question he carefully compares the warrant with the advice to pay, in the same way as he deals with the familiar money order; he also compares the signature to the receipt on the warrant with the signature in the depositor's book; and if he be satisfied with the scrutiny, he pays the money, entering the transaction in the withdrawal part of the depositor's book, and signing and stamping the book accordingly.[ ] when the paid warrants are returned to the chief office, and when the postmaster sends up an account of the day's transactions, the accounts and entries are checked in the chief money order office and the chief savings bank, in much the same way as described in the case of deposits; the whole being arranged to provide an admirable system of check in which two branches of the post office,--viz., the chief money order office and the receiver and accountant-general's office,--as well as the chief savings bank, are immediately concerned.[ ] when the post office savings bank bill was introduced into the house of commons, the proviso that the scheme to be founded upon it should be self-supporting, formed an important consideration in the statements of the chancellor of the exchequer, and was strongly urged by other members. it appears that from the first the operations have not only been self-supporting, but exhibit each year an additional amount of assets over liabilities, as the balance-sheet for last year (given in the appendix) will show. according to the parliamentary paper no. , it was estimated that the cost of each transaction in the post office banks would be _d._; the actual average cost of each transaction up to the present time has been - / _d._ we have no doubt, as bearing on the point of the cost of the postal banks, the following estimate (which, as proved by the actual result, has been so accurate) will possess an interest to the general reader. it is an estimate of the cost of one hundred thousand transactions under the post office savings bank bill, assuming the proportion of deposits to withdrawals and of transactions to accounts to be the same in the post office banks as in the existing savings banks, when the former shall be in full operation:-- £ s. d. estimated cost of receipts and payments by postmasters estimated cost of transmission to central office, including check on receipts and payments, &c. estimated cost of keeping accounts with depositors, including calculation and entry of interest, periodical comparison of depositors' books, check on withdrawals, preparation of general accounts, stationery, and other miscellaneous items and general management , ------------ , to which may be added, per cent. as a margin for omissions or errors of computation ------------- total cost of , transactions £ , ------------- we will now conclude this chapter with a rapid survey of the peculiar advantages of the system of post office banks, with some remarks on what may be called the deficiencies of the system. the system of government banks seems exactly to meet the points most required by those whom the older kind of banks had no power to attract, as well as of that considerable class who, rather than not save at all, would save under inconveniences which they were powerless to remove. for years it was impossible to provide the conditions and meet the wants of the poor in these respects, but there can be no doubt that they have now been met. these conditions, these wants, were absolute and unquestioned security for their money; despatch, both as to depositing and withdrawing money; and secrecy in the transactions in which they should engage. with regard to _security_. the post office banks being part of the machinery of government itself, offer the highest possible security,--the whole credit and solvency of the british government being guarantee for the perfect safety of the deposits.[ ] as to _despatch_. to the poorer classes, as much, and perhaps more than to any others, time is money. their time is not their own, and now a few minutes may be stolen from the dinner-hour, or an opportunity may be snatched as the labourer passes to and from his work, to do that which before was no ordinary or agreeable task to him. the unparalleled convenience which attends the transaction of his business contributes to this despatch and this saving of his time. should misfortune overtake him, he may withdraw the whole of his deposits within two or three days; should his occupation compel him, or his tastes incline him, to move frequently about from place to place, he has only to carry his bank-book about with him, and he may withdraw sums at his convenience at any money order office in the kingdom; and thus, though he may have originally deposited his money at the land's end, he may draw it out when at john o'groat's, or in some remote nook of ireland. this arrangement is, we understand, taken advantage of to a large extent. the advantages offered in the quick withdrawal of money is also a most important feature. enormous sums of money are wasted by the poor in borrowing for an emergency; there can be no doubt that much money has been and is wasted even in waiting till the time arrives to get the money out of the ordinary savings bank. "if a poor person," says an intelligent writer, "wants _l._ immediately, he would give per cent. for it." few could lose in having to wait a couple of days for their money.[ ] then as to _secrecy_. none are more jealous of their little savings being known than the poorer classes: a large number of operatives have cogent reasons for secrecy, or, at any rate, privacy. indeed, it seems to have been agreed upon that, if these classes cannot keep their savings quiet, many will not save at all. the wage-receiving class are naturally and properly averse to bringing their savings under the notice of their masters or their masters' friends. savings bank managers, even when not masters of workmen themselves, are generally local dignitaries well known to such.[ ] in the postal banks there is, or need be, no occasion for particular observation; the officials are required to conciliate confidence; to observe the strictest secrecy; and it is our conviction, gathered after no inconsiderable experience, that nowhere so much as in government offices is the work conducted without distinctions of class. next to the advantages of which we have just spoken, is that secured by the arrangement to undertake the receipt and accumulation of _small sums_. a working man may now take his shilling to the savings bank as readily as his master may take his pounds, and the former will have no occasion to feel that he is made the object of a charitable clause. in seeking to bring a working man to put by a shilling in its bank, the government hopes to induce a habit of saving, and may fairly expect to take his larger sums when saving habits have been induced. mr. gladstone's decision to take sums as low as a shilling was almost universally accepted as a wise one. mr. gladstone had long interested himself in the condition of the workman, and no one knew better than he that the labouring classes are not suddenly masters of whole pounds, and that, when they are in the act of accumulating it, the temptations to break in upon the little stock laid by are ever present, and are often too strong to resist. so far the principles of this important measure are admirable ones, scarcely admitting of question, almost beyond criticism: they have rendered the action of the banks simple, facile, all-comprehensive, and ubiquitous. the _rate of interest_ given is, however, perhaps on the border-land, as it were, between unquestionable and questionable policy. the interest given to depositors in post office banks is at the rate of two pounds ten shillings per cent. per annum, or one halfpenny per pound per month. that this rate is satisfactory to a large section of the people of this country, or that the other attractions of the post office banks amply counterbalance the disadvantage of the low rate, is evident from the enormous sum--twelve millions sterling--deposited in those banks in little more than four years; at a time, too, when the old savings banks, which are enabled to pay ten shillings per cent. more than the others, have put forth their best efforts to keep the business in their hands, when all kinds of allurements have been held out to those who have surplus funds to dispose of, and when the rate of interest ruling in the money-market has been, as it still is, exceptionally high. these facts ought perhaps to close the case, and make the interest rate, if not one of the recommendations of the measure, at any rate a part of the scheme which does not detract from its merits as a whole. as, however, this is a point upon which some little soreness is felt and expressed in different quarters, we may be excused for here urging a consideration or two. this soreness has originated, to no little extent, from the consideration of the inequality of the rate allowed in the ordinary savings banks and the post office banks; this feeling is kept up by the consideration of the fact, that that inequality still exists and is likely to exist. the old savings banks deposit their funds with government, and are allowed interest on their money at the rate of _l._ _s._ per cent.; the post office banks, of course, deposit their money with government, and are allowed interest at the rate of _l._ _s._ per cent. out of the fifteen shillings per cent. difference between the two rates, an average of half of it is given by the old banks to their depositors. now it is well known that the average cost of each transaction in the post office banks is little more than half the average cost of a transaction in the ordinary savings banks. if government can still afford to pay the old savings banks the higher rate of interest, it might afford, at the lowest computation, to give ten shillings per cent. more to depositors in the post office banks. if government _cannot_ afford to pay the higher rate, it ought to discontinue its charity, which, like all other charitable doles, excites discontent amongst those who think they have, _and really have_, the right _de facto_, if not _de jure_, to share it. that the rate should be equalized in one way or the other admits, we think, of little question; but that the government should pay no more than it can pay without loss admits of less. reverting to the consideration of the actual post office bank rate, it is perhaps unlikely that the small tradesmen class--except where such persons lodge their money at the post office merely for security--feels satisfied with it. happily, however, this is a class which does not need to be considered, and which scarcely will be considered. the government offers no factitious allurements or inducements to any class of the population; and if it did, would be certain to confine the inducements to those portions of the poorer classes who stand most in need of encouragement. and as for the rest, the post office banks do not in any way interfere, as mr. gladstone has recently said, "with the labouring man's liberty of choice, or the liberty of choice enjoyed by anybody else; if he thinks he can do better with his money than by carrying it to the government savings bank, by all means let him do better with it." a low rate of interest is given for the principal deposited; but then that principal is guarded with uncommon security, and can be moved, added to, or withdrawn from, with the greatest possible convenience. and these terms, theoretically and practically, suit the industrious classes, whoever else they do not suit. practically they meet the wants and satisfy the demands of a large section of depositors, or the banks would not have shown such an extraordinary amount of success. nor are we in want of authorities who assumed, theoretically, that this would be so. "if government give security," said a shrewd witness before the savings bank committee of , "they should pay less interest, on the principle that chubb's locks cost more than the ordinary ones." dr. chalmers took great interest, as our readers must already know, in savings banks. his argument was, that the ready receipt and payment of small sums together with safe custody was everything, and the rate of interest quite unimportant; he more than once said, that "the result of high interest had been to swamp our savings banks as a national system." this question of interest was largely discussed in mr. slaney's committee of . in that committee mr. john stuart mill was asked whether perfect security or a high rate of profit was most sought after by the industrious classes; to which he replied: "in the case of the working classes no doubt security is the main object, and it is so in the case of all whose savings are small." in the same committee, mr. j. m. ludlow, an eminent barrister, gave it as his opinion that "the poorer a man is, the more important to him is the safety of his investment, independently of the question of profits;" and in answer to a similar question addressed to him, the secretary of a working man's building society said, that "the certainty of security is the most powerful inducement to investments among the working population." thus, while it doubtless admits of question more than the other details, no serious fault need be found with that clause which provides the rate of interest to be given. equalization in the rate of interest of all savings banks connected with the government is far more necessary than that the standard of the one should be raised to the standard of the other. the days have gone by when any dole of charity should be held out to working men as an inducement to save: it is more than questionable whether those days should ever have arrived. the working classes do not want charity at the hands of the public; they long wanted security and reasonable facilities: and when these were provided, as they have been, they were willing that the rest should be left to themselves. all interest given more than the money actually produces or may fairly earn, is repugnant to them; or if it is not, it ought to be _made_ repugnant to them. the deficiencies, if we may so call them, of the post office savings bank system, to which we promised to allude in closing this chapter, are those features which have been inherited from the parent system, and consist, of restrictions which, we think, are now as unnecessary and undesirable as they are hampering and vexatious. by section of the post office savings bank bill it was ordered that "all the provisions of the acts now in force relating to savings banks as to matters for which no other provision is made by this act, shall be deemed applicable to this act so far as the same are not repugnant thereto." under this legislation all the restrictions which were thought--especially during the earlier history of savings banks--to be necessary to confine these institutions to the poorer classes, have been continued down to the present time. the principal regulations to which we refer are, the _declaration_ which is required from any one opening an account, and the _limitation of deposits_ to _l._ in any one year, and _l._ in all; and that when deposit and interest together reach _l._ all further interest shall cease. the reader who may have followed us through our account will be aware of the reasons which actuated the legislature in making these arrangements.[ ] these reasons do not now obtain. no steps are taken (and we have never heard that it is intended ever to take such steps) to confine the benefits of the post office banks to the labouring classes. why, therefore, these classes, or any other class allowed to deposit in these banks, should be restricted to any amount--or, at any rate, such a small one--it is difficult to understand. to the poor this restriction forms a barrier to saving habits; with regard to any other class, the amount might be as unlimited as it is in the funds. as a set-off against the unremunerative character, to say the least, of small deposits, no limit should be placed on large ones. it is obvious, that the larger the sums invested the greater will be the success and the profits of the scheme, the more remote will be any prospect of loss, and the more certain will be the creation of a permanent marketable stock of two and a half per cents. we are glad to find that this restriction has not escaped the notice of many who are entitled to be heard on the subject. the rev. g. h. hamilton, who made, perhaps, the earliest modern proposals for post office banks, suggested that the limit should be "from one shilling to ten pounds per day;" and since the passing of the act he has made exertions, hitherto without success, to get the limitation extended to include those sums. mr. bullar, also equally entitled to respectful attention, has likewise made subsequent proposals having in view, to some extent, the granting of facilities for investing larger sums. it is interesting to find that the post office savings bank system has just been introduced into our australian colonies and not a little curious and instructive to find that some of the provisions go much further than we have yet ventured at home. the main feature of the "post office statute, ," is an echo of the english act, but in several of its provisions its scope far exceeds the latter in liberality. no declaration is needed; instead of _l._ in any one year, the colonial depositor in victoria is only debarred from exceeding _l._ in a fortnight, and the interest given, which is at the rate of four per cent., is not withheld to any deposited amount under , _l._ liberal as are the colonial authorities in victoria, those at queensland far surpass them. in the post office banks at queensland there is no limit whatever to the amount which may be deposited; interest is allowed at the rate of five per cent.; and this rate of interest is paid on all deposits without limitation of any sort. making all due allowances with respect to the relative position of our colonial possessions at the antipodes and the mother country, it seems clear that the former have advantages over us in the matter of their government banks, and we commend the example of the victorian legislature to our own, and trust that the only marked defect in our act may soon be remedied. [ ] whenever the post office of a village or hamlet is advanced to the dignity of a money order office, it will also be opened for savings bank business. [ ] up to the end of february last the total sum reached exceeded twelve millions sterling,--a sum which it took the original old banks, with no competition, eight years to realize. [ ] thus, as we learn from an authentic account, in bristol the old savings banks lost and the post office banks gained depositors; in dublin the same relative proportions were loss and , gain; in the county of kent there was a loss on the one hand of , , and a gain on the other of , depositors; in middlesex, the old banks lost , , and the post office banks gained , depositors. [ ] _report on the post office_, . [ ] _report on the post office_, , p. . [ ] this transfer was settled in november, . the trustees and managers at a special meeting deliberated whether or not to carry on the bank "under the increased responsibility imposed on trustee by the th clause of the consolidation act ( ), or to empower the managers to transfer the deposits to the post office savings banks." they resolved by a majority of two to take the latter step, and the transfer was made immediately afterwards. [ ] since this return was completed, the trustees of two other banks have given notice to close. the one, a small bank at castle wellan, in ireland, and the other, the leighton buzzard savings bank, make, with the huntingdon bank, a total of ninety-eight transfers. [ ] the huntingdon savings bank has given notice to close. the capital of the hunts saving bank amounts to £ , . [ ] the fullest information on these matters may be gathered, in cases where the reader is not thoroughly familiar with them, from many sources. in addition to the act, and the regulations for the post office banks, three little manuals may be specially mentioned to which reference may profitably be made. ( ) _handy book on post office savings banks._ london: stevenson, . ( ) _post office savings banks: a few plain words concerning them._ london: faithfull and co. ( ) _my account with her majesty._ reprinted from _all year round_ and the _british workman_. [ ] the well-known form itself which in one piece of paper gives the acknowledgment, and folded, leaves room for the address, was designed and registered by mr. walshe, of the post office. [ ] acknowledgments are received in most parts of england by return of post, or within thirty-six hours; in some parts of cornwall and wales two days, and in some parts of ireland and scotland three days, are required. [ ] the departmental arrangements for these cases, technically spoken of as "cross entries," need not be further explained. [ ] the depositor's book must, of course, be invariably presented in every transaction, and when the depositor has obtained repayment of all his balance the book must be given up in order that the account may be closed. [ ] we regret that we cannot find space to describe more minutely the system adopted, as also so much of the internal arrangements of the chief savings banks as have been permitted to be made public. we may say, briefly, however, that the chief savings bank commenced operations in a part of the building at st. martin's-le-grand, but was soon driven to seek more accommodation. its location is now in st. paul's churchyard, where, in spite of large premises, we believe, it once more became restricted as regards room, and has since acquired additional space. the office is presided over by a controller, who is aided by an assistant controller and two principal clerks. the staff comprises a large number of permanent clerks of different grades, and an enormous number of temporary clerks employed upon the more routine work. the office itself is divided into four branches,--the deposit branch, the withdrawal branch, the account branch, and the correspondence branch. for the benefit of all those who are interested in savings bank management, we hope that an interesting paper, read by authority, by mr. chetwynd, the first controller, before the congrès international de bienfaisance, in june, , may soon be reprinted. it gives every detail which it is desirable to know. [ ] the operations have not been carried on altogether without fraud. the cases, however, only serve to show how secure the depositors really are from loss. in the then postmaster of beverley embezzled savings bank money, when the authorities at once announced to the depositors that it should be made good. this instance, and another in which a clerk was concerned, are, we believe, the only cases of the kind; but if they were constantly occurring,--which it is now next to impossible they should be--it would not matter a pin-head to depositors, who, the moment they pay in their money into the post office, and obtain a deposit book, stake that money on the national credit. [ ] the facilities existing for withdrawing accounts from one class of banks and placing them in the other tend also to despatch and convenience. by means of transfer certificates, to be had at any savings bank, a depositor may transfer his account without ever seeing his money. [ ] the secretary of a workmen's building society was examined before mr. slaney's committee ( ) on the _investments for the savings of the middle and lower classes_, when the following evidence was elicited:-- "i think that one reason why the labouring man does not invest in the savings bank is, that the fact of his being able to save money is used as a pretence why his wages should be reduced, and he carefully excludes from the knowledge of his employer that he is able to save. i have found that the workmen of one district go to a distance to find a savings bank, and will not go to their own. their names are called loudly and officially, and it becomes whispered about that so-and-so is a saving man, and may therefore work for less wages."--_vide evidence of mr. w. cooper._ [ ] _vide_ p. . chapter x. on government insurance and government life annuities. "it is difficult to estimate too highly the importance of the tendency of the people to save their earnings, or the duty of removing every obstacle and affording every facility to its operation. it is a matter of deep interest to the state; for the man who has invested a portion of his earnings in securities,--to the permanence and safety of which the peace and good order of society are essential,--must be a tranquil and conservative citizen."--w. rathbone greg. "ah! who can tell how many a soul sublime has felt the influence of malignant star, and waged with fortune an eternal war! checked by the scoff of pride and envy's frown, or poverty's unconquerable bar, in life's low vale remote, has pined alone and dropt into the grave unpitied and unknown."--beattie. proposals for a government insurance office, like those for national savings banks, are not, as many have been led to think, the product of the thought of the last few years. in , for example, mr. whitbread, in bringing forward his bill for poor law reform, earnestly advocated, that, together with his plan for the investing of their savings, some means should be provided for the poorer classes by which they might insure their lives under the responsibility of government. both as regards his plan of savings banks and his plan for government insurance, mr. whitbread was fully half a century before his age. the different schemes for the purchase of government annuities and the acts under which they were carried out are already familiar to the reader. the act of we may repeat, however, was the beginning of legislation on the subject. the principal emendation[ ] in the act and victoria, c. , passed in , was supposed to be in the introduction of a clause providing that a person buying a government annuity could also insure the payment of a sum of money at death. notwithstanding this amendment, the act was not nearly so productive of good as might have been expected. in the matter of insurances effected under the arrangements of , the act has been for all practical purposes quite inoperative; and from to the whole of the annual payments in respect to annuities did not reach , _l._ in the latter year , annuities were in force, the amount represented by this number being , _l._ this is, in brief, an account of how matters stood in ; and it is little wonder that it should now begin to be felt that some fresh steps were required; that there should be an entirely new organization for the work; and the abolition of all unnecessary restrictions, especially that which required that a person must deal perforce both in insurances and annuities. the institution of post office banks, which had been rendered possible by the superior organization consequent on the introduction of postage reform, had already demonstrated how the post office machinery could reach every part of the country, and how well it could bear the additional weight put upon it. nor was this all. from the experience of two or three years, those who were best able to judge of the burden this machinery could bear without difficulty were those who now proposed to add fresh wheels and contrivances to be worked by the already existing motive power. a few words will suffice to show how the further proposals which we have to describe in this chapter were originated. government annuities at this time were, under the authority of an act spoken of in a previous chapter, allowed to be granted either directly through the national debt office or through the medium of the ordinary savings banks. to a certain extent many of the savings banks had availed themselves of this act, and granted both immediate and deferred annuities. among the banks which, as we have already shown, transferred their business to the post office savings banks soon after the establishment of the latter, were some which had done a little of this business; the question thereupon arose whether the post office banks should not take up the duty which devolved on the old banks, and receive the payments for the annuities as they fell due. the result of this was, that the gentlemen who in the post office had organized and so far directed the machinery of the postal banks not only proposed to carry on the business which others had in this way begun, but they advised that the operations themselves should be extended, and that this extension would be a legitimate offshoot of their original scheme. mr. scudamore and mr. chetwynd, the gentlemen in question, held that if the post office banks were to become agencies for the purchase and payment of annuities, there would be a considerable increase in the number purchased. they then proceeded to sketch the outline of a plan on which it would be possible to undertake the work, and showed how the course of the business in respect to the annuities would be easy, simple, and comparatively inexpensive. the most important feature of the plan was, that the purchase and payment on account of government annuities should have no immediate connexion with the post office savings banks; and that the purchasers of the former should not necessarily be depositors in the latter. with regard to insurances, the following sentence occurs in a report which, referring to mr. whitbread's proposals, the same gentlemen presented. "we believe that the time may come when the propriety of attaching to the post office savings banks a scheme of life assurance will again be seriously considered by the legislature. the frequent appearance and disappearance of bubble insurance companies, which have been productive of very disastrous consequences during the last few years, may probably induce a serious consideration of the subject at no very distant date." when the commissioners of the national debt came to speak of the former of these proposals, they reported "that in their judgment, the greater the extent to which the system of annuities can be carried, the greater will be the amount of benefit conferred on that class of the community on whose behalf and for whose security it was the pleasure of parliament to authorize the grant of such annuities through savings banks and by this department. the machinery of the post office will give the opportunity to lord stanley largely to extend these benefits, and the commissioners will gladly unite with him in doing so." on the th of february, , mr. gladstone took up this further scheme--the matter of insurances and annuities having been combined in the plan of operations prepared, during the interval. he then moved for leave to bring in a "bill to amend the laws relating to the purchase of government annuities through the medium of savings banks." the chancellor of the exchequer briefly explained his object in bringing about the new measure. he wished, without any unnecessary interference with private establishments, to assist in offering increased facilities for the extension of frugal habits among the industrial population. this had been the principle upon which postal banks had been founded, and now this new scheme might be regarded as an extension of the principle. mr. gladstone wished, "under the altered circumstances of the times and the improved machinery at command, to further other measures intimately connected in their ultimate object with the savings banks themselves." sums, he explained, could at present be received both for the purchase of annuities, and even for the granting of life insurance policies, but the arrangements were hampered by restrictions so as to render the law almost inoperative. thus, deferred annuities could only be purchased in large amounts, and insurances could only be effected where the persons had previously purchased these annuities. he thought it quite possible to alter the system so that _small_ sums at frequent intervals might be received; and not only so, but the restriction as to effecting an insurance, which was not only inconvenient, but unreasonable in itself, might be done away with. the person who wanted an insurance was not the most likely person to want an annuity also; they were, indeed, generally people of different classes, or at any rate different habits of mind. the chancellor of the exchequer, after stating that he would give these increased facilities and remove this unnecessary restriction, obtained leave to proceed with the measure.[ ] his simple statement of the scheme was not long in securing ample criticism; some of it was friendly, much more of it adverse. then a certain class of insurance offices and the principal friendly society organizations believing their institutions menaced, set to work to get up an agitation. the measure was represented by one class of persons as embodying the very questionable principle of government interference with private enterprise, and taking as it were the bread out of the mouth of institutions specially got up for such purposes. others pretended to criticize the proposals disinterestedly; they dwelt on the difficulty the post office would find in attempting to do the work, and that, if officers of higher attainments were obtained, they would require proportionately higher remuneration. savings bank deposits _might_ be managed, though that was not thought likely three years before; but how all the details of life insurance proposals and the intricate calculations necessary to the annuities business could be got through, was above comprehension! it was represented by leading articles in influential papers that there would be but a poor security against fraud; little supervision, and probably that little would not be exerted; and everybody would conspire to defraud the government. "as it is intended," said one respectable organ, "to assure the lives of the poorer classes chiefly, all payers of poor-rates and officers of the poor law unions would have a bias, _to say the least_, in getting those persons assured who would otherwise be likely to leave their families a burden upon the parochial funds." "it cannot be denied that a few isolated instances of bad faith have occurred among insurance companies, yet as a class there is none to excel them for high and honourable dealing, and there is no pretence for interfering with their operations or invading their privileges. why should not government open a drapery or a dry-goods store?" this latter effusion, which appeared in a letter to the _times_, was prominently printed, and headed, "a new instance of proposed paternal legislation."[ ] a more organized opposition soon, however, showed its face. the actuaries of some of the insurance companies met and discussed the measure, and came to the conclusion that, as it might only be the thin end of the wedge, the measure ought to be opposed. the smaller insurance companies eagerly fell in with this conclusion. during march petitions were got up in great numbers from insurance companies and benefit societies, and when they were presented to the house of commons several voices were raised in support of their prayer. on the th of march, mr. gladstone moved the committal of the bill. mr. turner, mr. powell, mr. t. hankey, sir minto farquhar, and several other members, protested against going on with the bill without an opportunity for full discussion, and most of them expressing great dissatisfaction with the government proposals relating to life insurance, the chancellor endeavoured to separate the bill into two parts, to pass that having reference to annuities, and to defer the consideration of the clauses relating to insurances to a subsequent period. the debate was adjourned. three days afterwards mr. gladstone made a long and elaborate speech in defence of his proposals, and addressed himself with great earnestness and power to the task of disabusing the public mind of the many erroneous impressions which within a very short time had taken possession of it. the history of his proposals was a short and simple one. in the autumn of the previous year the registrar of friendly societies, in his report for , had recorded an unusual number of very gross abuses and violations of trust on the part of those societies. the report was in fact full of a multitude of complaints from persons in all parts of the country, who called for redress. so important had the facts been regarded that at least two important journals[ ] had published several articles calling attention to the scandalous condition of these institutions. it had been suggested to him (mr. gladstone) that the subject of small life assurances, having already received in principle the sanction of parliament, ought, under these circumstances, and the fact of an excellent machinery in connexion with the post office being ready for use, to be again considered by the government. he agreed with this view of the case, and had now proposed to take action upon it. it is almost impossible to give an account in detail of the speech which followed; next to the budget speech, it was the longest which mr. gladstone made in the session of . we can, however, and ought to describe its principal points. mr. gladstone observed that no one considered savings banks, annuities, or insurances to be, abstractedly, matters desirable for the government to deal with. but the post office savings banks which that house had legalized, though interfering distinctly with other interests, had produced great and lasting results; so likewise had the factory acts, though they likewise had greatly interfered with the liberty of private action. this bill, however, prohibited nothing whatever. "i do not deny that it is government interference, or that it requires justification or apology; but i do deny that we are to be frightened and terrified by clamours respecting centralization, or respecting undue assumptions of power by the executive." "all that is requisite in such a case is to show that what the government proposes it can do safely, and likewise that what it proposes it can do justly." well, this bill, which was represented as entirely novel in principle, simply offered to such members of the community as chose to avail themselves thereof, certain facilities for self-help. it had not grown out of any consideration of the case of assurance societies, but from a consideration of friendly societies, and of the wholesale deception, fraud, and swindling perpetrated upon a helpless and defenceless portion of the community. mr. gladstone then referred to some deputations of the largest friendly societies that had waited upon him, and begged him not to interfere "with private trade and private enterprise;" and answered that these very societies were virtually and substantially subsidized by the government. after showing that they were exempted from different duties, and received, like savings banks, more interest from the money invested with government than the money realized, mr. gladstone held that nothing could be more plain than that parliament was justified in looking to their circumstances. the country was overrun with them, and it was necessary to inquire if they were safe. instead of finding them safe, he found them promising to pay amounts of interest which it was impossible to pay under fair and honest management. such were the reasons which had induced him to interfere. he had, however, chosen a very mild form of intervention, and, he thought, a proper time for the remedy. the remedy, indeed, in this case was precisely analogous to that adopted in the case of the post office banks. "in the case of the post office savings banks," said the right hon. gentleman, "we had to deal with loan societies offering the most attractive terms to the public, promising them a rate of interest which could not possibly be paid under any sound and honest management, and then ending in disappointment or ruin. we did not attempt the foolish task of prescribing laws by which all loan societies should be regulated, and under which alone the poorer classes of the community should be permitted to lend their money. that was utterly impossible. you could not possibly defend the poor man against the abuses and dangers into which he might choose to run head foremost with his eyes open; but what you did was this:--you said, 'it is but just to them, and it is expedient and politic in the highest sense, in discharge of the most sacred duty of the legislature, that we should give to the poor man, to the owner of small savings, the advantage of a scheme which will possess no meretricious attractions, which will not promise a high rate of interest--on the contrary, the rate will be a low one--but which will offer an absolutely certain security.' that is precisely the basis of the scheme now before the house." after describing the success of the postal banks, and speaking of those who had taken the principal part in carrying the measure into practical operation, and arguing from their success, their ability, and their judgment, that the same persons were entitled to the confidence of parliament, mr. gladstone went on to rebut many of the objections and arguments which had been advanced against the plan. he showed that the post office could, equally with the great majority of existing insurance societies, attend to the selection of good lives; that the attitude of the leading societies in regard to his proposals was either that of neutrality or favour. he said that the smaller societies had protested loud enough; but, he asked, what cause had they to be afraid of government competition? "we cannot possibly offer such terms as they can; on the contrary, we must exact such conditions as few private societies ask." he offered, however, perfect security; and if that was a thing valued by the people, there was no reason why it should be withheld. besides, however, this perfect security, mr. gladstone pointed to two other considerable advantages which the government would offer, viz., more favourable terms on the dropping in of policies, and facilities for the migratory portion of the population, similar to those we have seen depositors possess in the case of the post office banks. after speaking of the steps which would have to be taken to guard the government against loss, and to make the measure entirely self-supporting; after referring to what he called the "fugitive character" of many insurance companies, and eloquently denouncing their proceedings; to the failure of numerous friendly societies,[ ] and the ruin and disappointment entailed on thousands thereby, mr. gladstone brought his long and remarkable speech to a conclusion by summing up as follows:[ ]-- "i have endeavoured to prove that parliament by legislation is seriously compromised and responsible for the present state of things, and is bound to do what it believes to be best to mitigate the evils of that state of things. i have endeavoured to show that the plan which i propose, if it does compete with sound institutions, must so compete with them at a disadvantage from the essential conditions under which it is right and proper we must work. i have endeavoured to show that the wide field of the labouring classes is not occupied by sound institutions--nay, that it is not fully occupied even by sound and unsound institutions, such is the enormous breadth of the subject. i have shown, i think, that the present condition of many of these friendly societies--indeed, i might go further, and, speaking generally, might say that the present condition of these societies is more or less unsatisfactory. some of them we cannot call merely unsatisfactory, but must term them either rotten or fraudulent. it is impossible for the state to assume the direction and regulation of these societies so as to secure in the management of their affairs a safe method of assurance; and what we propose is, i believe, the most prudent, the safest, and the most satisfactory mode of proceeding that can be adopted. i make my appeal not to any one class, or to any party. i forget that i am a member of the government, except so far as regards my responsibility as such. i recollect the sacred trust we have in hand, and i entreat honourable members to keep in view the serious nature of that trust, the importance of the object, and the consequences involved; and i am certain they will not be prevented by any sentiment of political or party feeling, or of hostility to the government, from giving their careful consideration to this question, and from determining in their own minds and hearts how the british legislature can best acquit itself of this important part of its obligations to the mass of the british people." _mr. sheridan_, after replying vehemently to what he called a personal attack on himself on the part of the chancellor of the exchequer when dealing with unsound societies, disputed the need for the measure no less than the principle upon which it was founded. as the spokesman of insurance offices and friendly societies, mr. sheridan further contended that the post office would never be able to manage all the details of the business, and that, even if it did, the government must eventually be losers. "they might shut their eyes for a time," said the member for dudley, "but government would ultimately have to come to that house with shame, and with something like humiliation, to confess that their experiment in commerce had failed, and that the result had been to saddle the shareholders with a loss--those shareholders being the already overburdened taxpayers of the country." _lord stanley_ avowed his approval of the principles of the bill. he thought it a great experiment, but an experiment which might very possibly result in a reduction of pauperism. he urged the fullest discussion; said it would do the bill no harm, but might on the contrary tend to perfect its provisions. the speech of mr. gladstone too, he thought, was a reason why the matter should not be hurried. mr. gladstone had made statements which, however true they might be--"and i am afraid that there is a good deal of truth in them--i wish i did not think so,"--might require to be answered, and to give an opportunity to answer them would only be fair play. after pointing out one or two defects in the provisions, lord stanley promised his valuable aid by saying, that he should be prepared to go into committee on the bill with a very sincere hope that it would pass, and that they might find it, or make it, a workable scheme. _mr. hibbert_ and _mr. roebuck_ both warned the house against suffering a "constitutional government" to be converted into what was termed a "paternal government." in a characteristic speech, the latter gentleman held that whatever concerned the individual was best left to be done by the individual himself; that the government was sure to fail, as it had failed before, in interfering in matters of this kind; and that the effect of such measures would be to make the people a set of helpless imbeciles totally incapable of attending to their own interests. _mr. newdegate_ and _mr. w. e. forster_ approved the measure, but urged full consideration of it. _mr. bovill_ spoke very strongly in favour. he believed, from the facts which had come within his own knowledge and had been elicited in courts of law, that mr. gladstone had rather understated than overstated the delinquencies of friendly societies and insurances companies. one of the effects of the chancellor's speech, he thought, would be that a cloud of error and prejudice which had been raised against the bill would be dispelled. on the other hand, sir minto farquhar, mr. ayrton, mr. urquhart, mr. henley, mr. baines and others, either expressed strong objections to the bill as a whole, or else took exceptions to some of its provisions. the debate was then adjourned. during the interval, and when the bill was under discussion in the house, a great meeting of the working classes was called in london, and held in exeter hall, mr. ayrton presiding. the object of the gathering was to petition against the measure; but independent working men--by which is meant those who had no interested motives in opposing the scheme--mustered so strongly on the other side, that the chairman could not decide on which side the majority lay. there were other public meetings held, some in favour, others in opposition; and although hundreds of petitions were presented from members of friendly societies, most of which were got up on one form, there were many others of a far more important character emanating from corporations and boards of guardians, who expressed a hope that the house would not withhold so great a boon to the working classes. on the th of march, _sir minto farquhar_, in a long speech, moved that the bill should be referred to a select committee. _mr. horsfall_ seconded the motion. both members replied to mr. gladstone's attack on friendly societies, though with little effect. several members warmly supported mr. gladstone, and thought no cause had been shown for delay. _mr. estcourt_, while approving the principles of the measure, saw great difficulties about it, and thought it ought to be referred to a committee. _mr. göschen_, in an able speech, which showed that he had mastered the subject in all its bearings, answered the objections which had been raised to the bill, and said that though he represented in that house more insurance managers and directors than any other member, he was not afraid to say that the opposition to the bill was entirely owing to the efforts of those who fancied it would deal a blow at their private interests. he was convinced of the wisdom and policy of the measure, which was well worthy of the character of the right honourable gentleman who had proposed it, and which would without doubt leave a mark on the history of the session. the debate was again adjourned. a month afterwards the debate was resumed by _mr. ayrton_ in a very long speech, during which he attacked the post office savings bank system; stated that just when they were most prosperous, and , government had brought out their scheme, which was working and would continue to work with telling effect upon the old banks. so with the present proposals; they would interfere with safe private agencies. "the government would pursue a much better plan," continued mr. ayrton, "if they were to encourage the establishment of associations among the people themselves; for it was through the exercise of local administration that a nation became most fitted for the enjoyment of political rights." in place of this, "they proposed to place a stipendiary of the crown in every parish and hamlet to institute an examination into the private affairs of individuals." _mr. hubbard_ thought the proposed measure one which they ought and might very well entertain. he looked upon it simply as an extension of the principle of the post office savings banks, which had now received the sanction of the entire country. _mr. gladstone_ then replied. after referring to some of the objections that had been made to the measure itself, he said he would not object to submit it to a select committee; but he could not consent to refer the whole subject-matter to a committee, as that would indefinitely postpone legislation on it. he believed that the public were growing more and more in favour of the plan, and that this feeling would be increased as its objects and provisions became better understood. he also stated that, during his long public life, he himself had never received so many letters as he had upon this measure from all classes of the community, and all expressing approval and gratitude for it. a few days afterwards a committee was appointed, to consist of mr. gladstone, mr. s. estcourt, mr. m. gibson, mr. henley, sir m. farquhar, sir s. northcote, mr. horsfall, mr. göschen, mr. charles turner, mr. h. herbert, mr. hubbard, mr. sheridan, mr. ayrton, mr. hodgkinson, and mr. paget.[ ] after an ineffectual attempt to enlarge the scope of the inquiry, which partook of the nature almost of a party struggle,-- members voting with sir m. farquhar, and with the government--the committee commenced its sittings. the bill as amended by the committee was passed on the th of june. on this occasion many of its members described the benefit which the bill had received from the inquiry, and none now complained of the limited nature of that inquiry. it originally consisted of three clauses; it came out with seventeen, sixteen of which were new. it provided that no policy of life assurance should be granted for more than _l._; and, not to interfere unnecessarily with friendly societies, that none should be granted for less than _l._ _mr. estcourt_, especially, warmly espoused the measure. "no one now more desired to see it passed than he did. if a master or employer wished to make a provision by way of annuity for a faithful servant in his old age, he could do so with perfect security under the bill." he also thought, "that if the working classes of this country did not derive great advantage from the measure, it would be their own fault." _sir m. farquhar_ was equally hearty in his praise of the scheme, and speaking of mr. gladstone said, "the country had every reason to thank him." mr. gladstone observed, that it was a matter of great satisfaction to him that as the bill entered the house in peace and quietness, so it was likely to quit it with general expressions of good will. the bill was carried through the lords under the charge of lord stanley of alderley, and, passing through its several stages without discussion, received the royal assent july , , and arrangements were ordered to be made to carry its various clauses into practical operation. during the long recess the tables were prepared under the eye of the commissioners for the reduction of the national debt; and, working in harmony with the commissioners and with a common purpose, the post office authorities at the same time arranged the regulations under which, and the organization by means of which, the whole of the plans should be carried out. the regulations themselves were, we understand, arranged under the immediate superintendence of mr. scudamore, one of the two gentlemen who organized the post office banks; the machinery chosen for the purpose was that of the receiver and accountant-general's department. at the commencement of the session of both the tables and the regulations were laid before parliament and received the proper sanction. the tables, like all ordinary insurance tables, show the various kinds of benefit which government can now offer to the community, and the price at which these benefits may be purchased. the regulations, on the other hand, describe the means to be used to obtain these benefits, and give in full the conditions under which any kind of purchase may be made.[ ] the principal features of the new measures taken together may be stated, simply, to consist in a person now being able to insure his life for any sum between _l._ and _l._; that he does this on government security; that he may do it without buying an annuity; that he may pay his premiums of insurance in almost any amount, and at almost any period that will best suit his convenience; and lastly, that, attended with the same facilities and advantages which only an institution like the post office can offer, a person may now purchase a government annuity, either immediate or deferred, of not more than _l._ a year, either with or without the proviso of "money being returnable" in the event of death before the annuity falls due. * * * * * it only remains for us to seek to draw the attention of our readers to the special inducements which the government now holds out to the practice of a wise economy and frugality, prefacing our account with the remark that a careful study of the "regulations" from which we glean it, will well repay any time or thought which the masters of workmen, as well as working men themselves, may give to them. and first as to _insurances_. in the course of a short period,--for the offices for the transaction of both kinds of business are being opened rapidly,--every one of the three thousand and odd money-order offices of the united kingdom, embracing, as is well known, every large village as well as the numerous receiving offices of our large towns, will be formed into an insurance agency. when this is the case,--and to a great extent it is so already,--any person, whether male or female, and _both_ if man and wife, of not less than sixteen years of age and not more than sixty, will be able to propose for an insurance on his or her life in a sum of not less than _l._ and not more than _l._ the steps which a person proposing to insure must take in those places already on the list, and the steps which must universally be taken when the whole of the agencies are arranged, may be easily comprehended, and need but few words. if he wants to insure on the security of government, he must go to the nearest post office and apply for the proper printed form. with this form, to which is attached every necessary instruction for his guidance, almost all his trouble begins and ends. it is true that the questions propounded are many, and that they are most minute, and may be thought by the poorer classes who are unused to this sort of thing unnecessarily precise and tantalizing. any one, however, familiar with the routine of the ordinary insurance societies, will not fail to see that the government are scarcely more rigid than they are, and that, if there are more questions to be answered, it is simply because of the varied modes and unique facilities now first offered to the choice of the insurer. the insurer must fill up this form, and must further produce certificates of age or baptism, and furnish the names and addresses of two householders who know him and can speak as to his identity. what follows, and indeed a great part of the foregoing, is simply the course followed by all well-managed insurance offices in the kingdom. the proposal is forwarded to london, the referees are corresponded with, and, if all seems right and straightforward, the person seeking an insurance policy is desired to present himself before the appointed medical referee in order to go through the indispensable examination. the doctor examines the proposer, questions him to the extent he thinks proper, takes down his answers, and then gets the person to sign his name to what may be called his deposition. if nothing unsatisfactory occurs, the policy is made out in the way the proposer originally desired. the contract being duly drawn up, the insurer may pay his recurring premiums at any of the offices which have been opened, or which may be opened, as shall at any time be most convenient to him. as in the case of savings bank depositors, the life insurer will be furnished with a "premium receipt-book," and whenever he makes a payment he must produce this book, when the clerk or postmaster will enter the amount, sign his name in the way of receipt for the payment, and stamp the date of the transaction and the place of payment with the ordinary official dated stamp. with regard to the time at which the insured must pay his premiums as agreed upon, whether yearly, quarterly, monthly, or fortnightly, the arrangements are necessarily strict; but every means will be, or at least ought to be taken, to make him understand his agreement. if he should fail, say through forgetfulness, to make his payment, he will not be hardly dealt with; for, on an application that the contract may be renewed and the production of evidence of good health, the postmaster-general will renew the contract, only fining the person in the sum of four shillings if he is insured for _l._, and eight shillings if he is insured for more than that sum. once more: should the insured wish to surrender his policy, he will be allowed to do so after the expiration of five years from the date of it, and will receive at least one-third of all the sums he may have paid during the time he has held it. the authorities have not as yet, we believe, stated exactly how much they will be able to offer for surrender policies; but this is scarcely a matter which can be considered pressing, as no policy will acquire a surrender value till . then there are the _kinds_ of payment under which a person may now purchase the benefits of life insurance through the medium of the post office. and certainly the most important arrangement, associated as it is with several novel features, is that of paying down the premium in one sum. not that this need be the whole transaction of a proposed insurer. he may make his policy, if we may employ such a term, _cumulative_. thus, if a person doubts whether he will be able to pay regular premiums for a number of years, he may perhaps be able to effect a small insurance, say of the lowest sum allowable, _l._, by the payment of a single premium. he may afterwards find himself able at subsequent periods to effect another small insurance,--and this he will be allowed to do, even if it only be to the extent of five pounds,--and may thus, whenever he has the money to spare, at regular or irregular intervals, go on increasing the original amount in transactions which, while complete in themselves, continually augment the sum to be received at death.[ ] we are not informed in _plain rules_ whether the insurer will in each case have to pass a medical examination, or produce certificates of health; but there can scarcely be a doubt that he will be required to do one or the other. the proof of age, however, and other particulars which the insurer furnished in the first instance, will doubtless suffice for all subsequent negotiations. the principal objection to insurance effected by a single payment, at any rate among the poorer classes, is apparent. it is not that they can make better use of their money; as a security against an early death or reduced circumstances no better investment could be found for a working man who is in possession of a sufficient sum with no pressing need for it. the real difficulty is the one of keeping his savings until they amount to a sum sufficient for any object of this kind. here, however, the institution of post office savings banks may be of service; and this has not been lost sight of by the authorities, who offer them as a medium for the collection and keeping of such fugitive sums as may be most easily spared with a view to taking a life insurance premium. thus, all a workman has to do is to put his savings into the post office banks in such amounts and at such times as will best suit him; and when he has saved a sufficient sum for the purpose, the postmaster-general will direct that the transfer of the amount shall be made from the bank to the insurance office without the necessity of the depositor seeing the money. of the general plan of paying the premium in one sum we cannot speak too highly. those whose wages or salaries are not fixed and regular, or those who are liable to be thrown out of work--and few are not--could not do better than employ their savings in securing such a provision; and the younger the better, seeing how young and old are alike taken in the grip of the destroyer. not the least of the advantages following from this kind of insurance are the absolute freedom from all risk of lapses, from either carelessness or more serious causes, and the fact that the policies on this principle will have the highest surrender value. should the person wishing to insure not like, or liking not be able, to take out a policy after this fashion, he may choose one of several other methods. if he thinks he can more conveniently pay a small premium every year, he is at liberty to do this in different ways. if at thirty years of age he will pay a pound a year, he may secure for his friends forty-three pounds at his death; if he prefers to pay two shillings a month, he will secure forty-six pounds; and for an annual payment of two pounds six and sevenpence, he may secure payment of _l._ to his nearest relatives, _immediately on proof of death_. again, if a person thinks, as many do think, that his payments should cease at a certain age, he may insure on that principle. commencing at thirty years of age, and paying two pounds thirteen and tenpence a year till he is sixty, he may secure _l._; by paying two shillings a month, between the ages of thirty and sixty, he may effect an insurance of forty pounds at death. it will be understood that these are only a few specimens of the working of these tables, given more especially to show the characteristic features of the plan. by consulting the tables themselves, any person may plainly see how it will affect him to insure by any of the above methods; and he may calculate his payments either at the times we have given, or at other times, such as half-yearly, quarterly, fortnightly, or weekly, with great nicety. we will only refer at any length to another very important provision made for the carrying out of this useful and important public measure. it has to do, as indeed almost all the provisions have, to a great extent, with the wants and necessities of working men, especially such as must pay their premiums by small and frequent instalments. seeing that working men are proverbially slow to look the distant future in the face, we urge, in the strongest terms, the claims of the provision in question on the attention and study of all large employers of labour. in no way could masters better fulfil the heavy moral responsibilities under which they lie to the less educated portions of society whose energies they employ, than by co-operating with them in the way of advice and assistance, in such a plan as that which remains to be described. the arrangement in question has doubtless been suggested by a scheme which, for several years, has been in full and excellent working order in the post office itself. we think it was in that mr. scudamore of the post office devised a plan, which was approved by the then postmaster-general, by means of which and the concurrence of a large number of first-class insurance companies a considerable number of post office _employés_ were enabled to make suitable provision for their families. in connexion with this plan, substantial assistance was given, to those who took this rational and necessary step, out of the void money-order account. under the arrangements then made, the insurance companies give the required policies to any officer of the post office, without any _direct_ or preliminary payment, looking to the post office authorities entirely for the collection of the premiums as they become due; the latter, on their part, deducting the payments at such times as are agreed upon from the regular salary or wages of the assured persons. thousands of post office officials, from the highest to the lowest grades, have insured their lives on this principle; they are not only assisted to do so, but secured from all risk of default, while the deductions are so small as to be scarcely perceptible.[ ] the success of the plan has led to its partial adoption by the proprietors of large private mercantile establishments, where it works well; and this again has doubtless led to the extension of the plan, by means of the act and the machinery we are considering. it is now perfectly easy for any of the other government departments, for railway companies, merchants, manufacturers, and other large employers of labour, to make arrangements under the d clause of the regulations, to do for their workmen (and we are at a loss to understand why this has not been done before) what the post office authorities have done for their servants. the clause to which we have alluded provides, that if boards of management or masters of workmen will undertake to collect the sums by means of deductions from the wages of their officers or servants, with a view to paying the premiums over to the officers of the postmaster-general, then the latter shall, "if he think fit, make arrangements with the said employers for such purpose, and shall constitute the departments, offices, or places of business of such employers, offices for the receipt of proposals, and for the receipt of premiums and instalments; and shall pay to such employers such remuneration for the work done by them, or their officers or servants, as shall be agreed upon between him and them." surely, with all such facilities, and with such inducements to the workman to make provision for those who are nearest and dearest to him,--this provision to be payable at once, on the security of the nation, when he is no longer able to contribute to their support,--little persuasion should be needed to make him do that which is now one of the first duties of a man who has a wife or family dependent upon his exertions. it is only too true that workmen and the less educated portions of the lower middle classes may be blinded and cajoled into believing that those institutions will serve their interests best which, depending upon all kinds of meretricious attractions, promise immediate benefits for little payment, but only end in disappointing, if not in swindling them. it seems to us, however, that those who, like the majority of large employers, have both the capacity and the opportunity for directing these classes aright, are not only warranted, but, in all fairness, are expected to attempt to do so. we must now speak of the regulations for the purchase of _government annuities_. it is well to make provision for our families after we have left them; it is no less wise to make some provision for old age, or for the misfortunes of life. many a working man, taking the expression in its widest significance, sees little before him in the future but a life of hard, unyielding work. there is a time, however, after which bodily strength must rapidly fail, even supposing that nothing has occurred during his years of toil to break him down prematurely: many a hard worker lives on long after the grasshopper has become a burden, and is little cared for, it may be, if he has never cared for himself. let philosophers inveigh as they will on the selfishness of such conduct, that man has acted wisely who, under some such circumstances, has taken care to relieve himself of thought and much anxiety by having something in the shape of an annuity to look forward to in his declining years. "most men, as old age comes on, find themselves every year less and less able to procure by their labour those comforts which every year become more and more necessary to them. a man, by paying small sums out of his earnings while he is strong and active and in full work, may purchase an annuity to commence as old age comes on him, and which will take the place of his salary or wages when he can no longer earn a livelihood." in these words the postmaster-general introduces his new annuities' scheme, and offers to sell these annuities through his department to any one who will comply with the regulations. the commencement of an annuity transaction must be exactly similar to that described in connexion with an insurance. after obtaining a form of application, the person must reply to the questions which it is deemed necessary to ask, and then return the paper to the post office for transmission to the postmaster-general. for obvious reasons, he will not be required to say anything about his health, nor to pass any medical examination. the government must take care, in insuring a person, that he is in good health; on buying an annuity, the person himself should take care that he is not in bad health, or otherwise he might rush into a bad bargain. almost the only preliminaries gone through in the case of annuities are, a satisfactory proof of age, and answers necessary to identification. if the authorities in london are satisfied with the answers and the references given, a policy or contract is entered into by the post office on behalf of the commissioners of the national debt, setting forth, that, in consideration of certain payments made at certain periods, the payment of a certain sum is guaranteed to him as an annuity on the security of government. as in the case of insurances, the person seeking to purchase an annuity has the choice of several kinds of annuity, and of annuities of any amount up to _l._ a year. he may purchase an _immediate_ annuity, though in this case the purchase-money must always be paid in one sum. thus, if he be twenty years of age and will pay down the sum of _l._ _s._ _d._, he can begin to receive an annuity of ten pounds a year for life, however long that life may extend. women, we must add, seeing that they are usually longer livers than men, must pay more than men. he may purchase also a _deferred_ annuity; that is, an annuity payable after a given term of years from the commencement of the purchase. this deferred annuity may either be purchased in one sum, or by a yearly payment over that given term. if the former, it may be for any amount between one pound and fifty pounds per annum, to begin at a certain period; in the latter case, the amount may range between four pounds and fifty pounds, to begin immediately after he has completed his payments. deferred annuities may also be purchased gradually, or on the same cumulative principle spoken of in connexion with assurances, and just according as a person finds himself able to spare the money; or they may be purchased by annual payments in the same manner, beginning on a small annuity, and increasing it from time to time as he finds himself able to increase his annual payments. once more, by making payments half-yearly, quarterly, monthly, fortnightly, or weekly, during a certain number of years, he may purchase a monthly allowance of any amount from four shillings to four pounds a month, immediately after that term of years. the first tables which were ready in time for the operations for the purchase of deferred annuities were those known as the "non-returnable tables," under which money paid was not returnable in the event of premature death, but "altogether sunk and lost." soon afterwards, however, the "returnable tables," which had been under preparation from the first, were brought out. now, therefore, if the annuitant chooses, he may purchase a deferred annuity with the proviso, that if death occurs before he should have reaped any benefit all the premiums shall be returned to his representatives; and also, that, at any time during his life before his annuity is due, he may have his payments returned to him, subject of course to some deductions should he choose to close his account. in all the above cases it is difficult to explain the method of working without giving examples; but the interested reader may receive, as he will doubtless seek, every information from the popular abstract which will be presented to him free, on application, and from the official tables which may be seen at any post office. it only remains to add, as regards the payment of annuities or monthly allowances, that they will be made half-yearly or monthly, as the case may be, at any of the offices opened for this business, _i.e._ eventually every money order office; and that if a person be prevented by age, infirmity, or illness, from going to a post office to receive this allowance, it will be taken to him by an officer of the department. as the operations of the government insurance and annuity office have only extended over a few months, and as the scheme is only in process of introduction into many localities, it is manifestly impossible to get exact information respecting the amount of business done, or tell how far the prediction, freely hazarded soon after the measure became law, as to its importance and utility, is likely to be realized. in the report of the post office recently issued, the postmaster-general states that this information will be supplied, in proper course, in his report for . meanwhile, the following facts, which have been ascertained by the examination of some hundreds of proposals, will probably interest some of our readers. the average age of the persons who make life insurance proposals to the government is thirty-five years; the sum for which they propose to insure is, on the average, _l._ out of the whole number of persons,-- per cent. propose to pay their premiums annually. " " " " monthly. " " " " quarterly. " " " " half-yearly. " " " " weekly. one proposer in each hundred proposes to pay his premium in one sum; and twenty-three per cent. wish the payment of their premiums to cease on their attaining the age of sixty. the proposals come from all classes of the community; thus-- per cent clerks in public and private offices contribute porters, messengers, letter-carriers, and labourers mechanics, artisans, and skilled labourers tradesmen clergymen, and professional men generally women of those who make proposals for the purchase of annuities, per cent. are men, and per cent. are women; and the amount of annuity which they propose to purchase is, on the average, _l._ the average age of the proposers for the purchase of annuities is fifty-eight years.[ ] a longer time will doubtless be necessary to develop this further measure into the same successful operation which has followed the adoption of the scheme out of which it sprang. it is more elaborate than the post office bank scheme; it will appeal, as has been properly said, to a higher class of men, to a higher quality of prudence. time, perhaps, more than anything else, must mature it into success. it rests entirely with the public,--especially with employers of labour, and the more intelligent portions of the working and small tradesmen class,--whether or not the unique and comprehensive facilities which we have been engaged in discussing shall have been framed and offered in vain, or whether or not a new era has dawned on those who are desirous of making small, sure, and safe investments for their own old age, or provision for those they may leave behind. we wait, as it were pen in hand, to chronicle the result. meanwhile, those who have the interests of the humbler and more defenceless portions of the community at heart could not do better than endeavour, at any rate, to spread a knowledge of a scheme which, while benefiting the people individually, must also, by giving to each a stake and an interest in the prosperity of the country, tend to increase the stability of existing institutions. in justice to mr. gladstone and the legislature, it ought to be widely known and remembered that these measures have not been originated to be a source of profit to the revenue of the country; that, however successful they may eventually be, they will bring no gain to the national exchequer. the tables of working, and the mode of working, have been prepared with great care; the former by eminent actuaries, and the latter by equally eminent official men: and although some of this care and attention have had for their object the security of the government against loss, the premiums are intended to cover the liabilities and working expenses, and no more. if, therefore, those classes who _can_ do it will not now secure themselves against misfortune and disaster, it is plainly no one's fault but their own. [ ] we have not space to go over the ground of the change; nor is it necessary, seeing how imperfect was the amendment introduced in . mr. mcculloch, however, in his _statistical account of the british empire_, vol. ii. p. , may be said to have summed up in the following sentence the reason which sufficed to induce the legislature to amend the act of :--"the influence of the act ( ), so far as it extends, is subversive of accumulation, and goes to encourage the selfish and unsocial propensities by tempting individuals to consume their whole property during their lifetime, without caring anything for those who might come after them. had government given facilities to the middle and lower classes for insuring sums for their wives and children in the event of their death, it might have been highly advantageous. but the system they have set on foot does not encourage providence, but extravagance; and if extensively acted upon, would be so very hostile to the public interests, that it would have to be put down by legislative interference." we should think that there could not be much chance of successful legislation if it were based upon such arguments as the foregoing; and successful it was not. [ ] _hansard_, vol. clxxv. p. . [ ] "seriously speaking," said another writer, who signed, "one well behind the scenes," in the _times_ of th february, and had been indulging in all kinds of pleasantry on the impossibility of the government undertaking life insurance, "if mr. gladstone must go into business, he had better take an easy business first, and have government ginshops at one corner of the street, and government tobacco-shops at the other, and leave the delicate matters of assurance for the present." [ ] the _times_ and the _daily telegraph_. [ ] between , and , of these societies have failed since the passing of the friendly societies act. it has been calculated that about societies fail in each year. [ ] _hansard_, vol. clxxii. p. . [ ] _hansard_, vol. clxxiv, p. . [ ] both tables and regulations may be obtained quite easily at any post office opened for the transaction of this business, and an abstract of the regulations, entitled _plain rules for the guidance of persons desiring to insure their lives or to purchase government annuities_, has been and still is distributed widely, and may be had gratis from any postmaster or letter receiver. [ ] thus, at the age of thirty, a person with _l._ _s._ _d._ to spare may buy an assurance of _l._ to be paid at death. two or three years afterwards, and after a prosperous interval, he may be disposed to increase that amount to _l._, _l._, or _l._ suppose the latter sum, and he has attained the age of thirty-three, he pays down another sum of _l._ _s._ _d._, and then finds himself insured by these two single payments in the sum of _l._ whenever death may occur. of course he may stop here; but he may also, if he thinks fit, go on adding, at such intervals and in such amounts as may best suit his convenience, to his original policy, till at last it acquires the value of _l._ [ ] many postmen and rural letter-carriers are insured in this way for a sum of _l._ [ ] it will be remembered that under the act and vict., c. , a person could only insure his life on condition that he purchased an annuity. it is not so generally known that in the course of eleven years not one proposal for this twofold contract was ever received. it is not a little remarkable that now, this arrangement being no longer compulsory, one in every hundred proposers for life insurance also proposes for the purchase of an annuity. chapter xi. concluding chapter. "and when i shall go to my account, and the great questioner whose judgments err not, shall say to me, 'what didst thou with the lent talent?' i can truly answer, 'lord, it is here; and with it all that i could add to it--doing my best to make little much.'"--ebenezer elliott. the above words of the brave corn law rhymer refer of course to far higher duties than any with which we have dealt in this volume. that application may be made of them even to our present subject is nevertheless clear, and we leave the thoughtful reader to make it. real economy and frugality are virtues, and as such are inculcated in the christian code; neglect of them is condemned both by the moral and the religious code. christ expressed the very spirit of economy, care of little things, a prudent thrift, and avoidance of all waste, when after miraculously feeding the multitude in the desert he instructed his disciples to "gather up the fragments that remain, that nothing be lost:" and it is at least noteworthy, that this injunction immediately followed another, wherein he warned the same men against the greed of life, telling them that a man's riches did not consist in the abundance of his possessions. this may be perhaps a very fitting opportunity to say that a great deal depends upon the motive and the object for which such virtues are cultivated; that it is very possible to attach far too great an importance to mere habits of saving: the motive for saving may at times be vicious, and the purpose for which and the manner how the hoards once scraped together may be applied, more vicious still. this is so palpable that we need not dwell upon the subject. not less so is the wise medium course to be followed. the difference between those who cultivate and those who neglect frugal and economical habits may be expressed simply in the former having bread enough and to spare, and the latter having bread for to-day--and not always that--but none for to-morrow. it is by the capacity of looking forward in the present moment to the possibilities of to-morrow that the civilized man is distinguished from the savage; it is by the readiness with which provision is made for possible emergencies that the wise man is distinguished from the fool. real economy, aided by prudence, is a virtue. cicero says that "the best source of wealth is economy;" but it is also the best source of comfort, self-respect, and independence. prudence thinks of an adverse season amidst the prosperity of a good one; and economy arranges for the bad time. prudence thinks of two very possible and one certain contingency in the life of every human being; and economy weighs the chances well and provides for the worst--it provides for the incidence of failing health, and for the chances of losing, through one of the many eventualities of life, worldly position, or the means of breadwinning; and it also does something to provide for that time when the anxieties, the joys, and the sorrows of life shall be hushed in death. it is well, therefore, and it is almost indispensable, that these habits should be cultivated; it is well also, and quite indispensable, that means and provisions should be used to this end. the first stone which the learned wotton refers to in the motto on the first page of this volume, is without doubt the first act in the habit of economy; and we have been endeavouring throughout the course of this history to point out with some approach to accuracy the exact spot where a person may lay this indispensable "first stone," where he may probably best lay the second or third, and how possibly he may commence with the superstructure. savings banks and the other provident measures of which we have spoken are principally to be regarded as preliminary means, the first or stepping-stones to higher things. when a man has become, for example, a depositor in any of the numerous kinds of savings banks, he has only taken, as it were, the first step on the road to competence; but one step leads to another.[ ] a very slight knowledge of human nature will show that when once a man gets his foot upon the round of the social ladder, and keeps it there till he is secure of his footing, he is soon ambitious of taking the next step. so true is this regarded, that in common parlance many kinds of journeymen are said to have made their fortune when they have saved their first pound. when george stephenson's wages were raised to twelve shillings a week, he declared "he was now a made man for life;" when he had saved his first guinea, he proudly said to one of his mates, that he "was now a rich man." and in one sense he was right; he had taken the first step; and further, "the man who," says mr. smiles, "after satisfying his wants, has something to spare, is no longer poor." we have said that savings banks are preliminary means. we think, however, that they are the _safest_ initiatory steps that could be taken by those of the labouring classes who wish to rise from small beginnings to those higher things spoken of.[ ] thousands of people of small means are content with them; with the savings bank they begin, continue, and end, and many of them have had reason to congratulate themselves upon having taken such a course: they have been saved endless trouble and disaster, have in the great majority of instances felt that their earnings were safe, that the profits were not going up and down like those of their neighbours, but were always steady, always to be relied upon, and always calculable to a penny. that these returns are really not so insignificant as many suppose, and that if small earnings are allowed to accumulate at compound interest they must make a decent provision against the winter of life, the following case will demonstrate.[ ] the late mr. thomas allen of gledholt, huddersfield, on the th of march, , gave to each of his seven servants a sovereign to become depositors on the opening of the huddersfield savings bank. on that day esther sykes became a depositor to the extent of _l._ she continued to deposit the savings from her wages £ s. d. from that time to the st of july, , amounting to interest accruing from to --------- ========= this sum of £ being allowed to accumulate by interest until became --------- from interest on this sum had to be withdrawn half-yearly, which from to amounted to --------- esther sykes died march, , aged , and her executors received from the bank the sum of ========= thus in this interesting case the cash deposited at different times amounted to _l._ and the total amount of interest on that sum was _l._, of which _l._ was paid to the depositor herself during her lifetime, and _l._ to her executors. it is not a little curious, nor is it surprising, that five of the relatives and legatees of this esther sykes should have gone to the huddersfield savings bank to deposit the money left to them. of the other promising provident measures adapted to the requirements of the industrious classes, the most important, but at the same time a somewhat hazardous one, is that of co-operative societies. these societies, though beset with difficulties, are doing a good work in many localities. the stronghold of the system, be it remembered, is in a town where, owing to the cupidity of the manager of the savings bank, the savings of years were swallowed up, and, in consequence, habits of accumulation in this form were rooted out from among the people. the co-operative principle can be directly traced to the wide-spread distrust created by this gigantic and far-reaching fraud. it remains now to be seen whether a higher intelligence and a greater power of self-government than is generally found in large associations of working men will not be indispensable to the progress of these societies. personally, we have little hesitation in affirming that the real progress of these classes will be safer, and not only safer but quicker, if the bulk of them will leave combined enterprises of this nature to those of their fellows who have already saved money enough to enable them not only to enter into such business, but to lose in the venture. once a man has run up an account in any of the people's banks--whether the old or the new banks does not make much difference--he might, and perhaps ought to risk a proportion in such societies, which, where properly and prudently managed, are very beneficial to all connected with them.[ ] the same remarks apply to building societies to a great extent; though here perhaps there is little of the risk which besets all kinds of large and small joint-stock companies. unfortunately, however, the working-class element, which was prominent at the origination of building clubs, is being rapidly eliminated from them in most localities, and almost everywhere the tradesman class predominates.[ ] the working classes, if they have not been saving their earnings for years, cannot command and pay, with that regularity necessary in such enterprises, the instalments due; and hence they either do not venture to join at all (except where the club is on a very small scale), or if they do, they ultimately withdraw from them.[ ] fifty other different objects might be mentioned for which the working classes require the means of accumulating the trifles they can save with the object of employing some of the money on higher kinds of investments when it has amounted to a good round sum; the purchase of a cottage, of an annuity, of a life insurance policy, are only a few of them. in this way the savings bank not only assists the industrious classes by offering machinery expressly fitted for their present advantage, but does an equally beneficial work in leading them on safely to higher and more important investments. let it be granted that savings banks fulfil all, or most, of the conditions which we have assigned them and ask for them, what then remains to be done to make their advantages better known, and to bring them still more within the reach of those classes for which they are specially designed, and to which they are specially applicable? it may indeed be questioned whether, having provided the facilities, society should not now leave the matter where it is, to the operation of advancing intelligence, to the growth of economical knowledge, and to the increase in the experience of the poorer classes. working men are tired, and to our own knowledge have long been, of hearing of societies and organizations for their elevation;[ ] they know perfectly well that their "elevation"--for which no doubt too few of them care--must begin, continue, and end in themselves. the better class of workmen laugh at many schemes designed for their benefit; and although there may be odd instances of men who seem not to be above being turned into an "object," it is simply repellant to the great bulk of them.[ ] a working man, though he may not like to be "raised," may like to be advised how he can best help himself: and such advice is quite necessary and legitimate under certain conditions and in certain circumstances. it altogether depends, it appears to us, upon the person who does it and the manner in which it is done. first and foremost it seems to be not only necessary but right that masters of workmen should endeavour to influence those under them; that they should-- "relinquishing their several 'vantage posts of wealthy ease and honourable toil"-- do something to direct aright those energies from which they have benefited, and which if rightly developed may also in time lead their possessors to comfort, to reputation, even to wealth. a master's duty to his workmen, as we remember to have seen it expressed somewhere, scarcely ends when he pays them their wages. the men may be thoroughly independent, and after accomplishing their stipulated work may be, and feel that they are, their own masters: but there are nevertheless divers opportunities for masters, without claiming or assuming superiority, to benefit those employed under them. the master is pretty generally under the pressing responsibility of superior knowledge and greater experience; and he who sees how the worldly position of his men can be _safely_ improved, and does not at least attempt to suggest or help to this improvement, can scarcely be said to fulfil the duties of his position. an employer may, indeed, be too conscious of his dignity, and, standing on the lofty pedestal reared for him or which he has reared for himself, throw down with a lavish hand bounties upon his men; and they will not be accepted, and perhaps ought not to be: but let him show a personal interest in them, prudently advise them, "show a wisdom that shall bridge the gulf" that separates the two, and he will not only do much to destroy the feeling, which has become almost instinctive among workmen, that the master is somehow selfishly acting for his own ultimate benefit, but he will awaken a confidence, become the object of the men's esteem, and wield an enormous influence over them. let so much as this be granted, or even let part of it be granted, employers of labour may not only turn their thoughts to such schemes for savings as we have been engaged upon, but they may easily arrange, in conjunction with the proper authorities, branch schemes such as described in the last two chapters, to be suited to the varying circumstances of the case. if they are convinced of the benefits of the one, let them advise; if they wish to give reasonable help, let them act. without reference, however, to the government schemes just referred to, the state sets an admirable example to all large employers in the provident arrangements which have been made for public officers; and we think there must be much in the provisions in question which might be turned to good account in, and be made applicable to, large private concerns. few government _employés_ should ever come to beggary; if they have not been prematurely cast aside, either by wilful misconduct or gross carelessness on their own part, they cannot come to the parish: further, great numbers of them are assisted to make provision for their families at their death. nearly all government servants may be said to have bargained with their masters at the time they entered the service, not only for a fair day's wage for a fair day's work, but for nearly all the provisions of a friendly society during sickness; for a deferred annuity when they are past work, or after a certain age; and in some instances--it ought to be in all--for assistance towards insuring their lives for the benefit of their family. it were idle to say that none of these considerations enter into the original contract, and have had no influence on the scale of remuneration paid for actual work; it were far more to the point to say that departments of government compel their servants to be provident and to prepare; for sickness, old age, and death, and make it involuntary in the case of sickness and old age, by taking the necessary payments upon themselves. of the scheme of life insurance at present in force in the post office, for example, we spoke in the previous chapter. with regard to sickness, a certain time is allowed for full pay; another definite period for half-pay. in respect to superannuation allowances, which we have termed the deferred annuities, it is true that at one time civil servants were required to pay towards it out of their salaries; but this has been discontinued by act of parliament, and the present arrangement may simply be considered as a small rise in the rate of wages--the deduction being compulsory on all classes alike. why should not a similar plan, or at any rate the principle of it, be urged upon private employers? spite of some of the difficulties which would at once present themselves, we believe that there is little impracticable about it, and little that might not be surmounted. even if it should be found impossible to apply such arrangements to many concerns, there is still the admirable machinery designed in connexion with the annuities act of ; and we again commend the plan to the attention and candour of large employers. we think that to a very large extent the influence which masters must exercise over their workmen, or which they could not fail to exercise if they were to show a proper degree of interest in their subordinates, has never yet been exercised. if reason, persuasion, entreaty of a certain kind, alike fail--as they may often have done--to induce saving habits and due provident provision for themselves and families, we confess a difficult problem presents itself. this difficulty has been felt for years. forty years ago the _quarterly review_, in an able article, said that savings banks ought to have formed a sinking fund before that time for the abolition of poor rates: "if the present state of things continues," says the writer, "it should become a question whether the master ought not to deposit in the savings bank at least a shilling in the pound of all wages paid by him, to be placed to the account of the individuals whom he employs." several times since this was written, the _quarterly review_ has returned to the charge. for many years our system of poor laws has rigidly assessed property for the relief of poverty, and secured the necessaries of life for all the destitute, no matter how largely they themselves may have been answerable for their destitute condition. with some beneficial changes the law stands the same, and is scrupulously enforced. it is very clear that many men's wages are so high in good times, that, if they worked steadily and lived with moderation, they might easily reserve out of them a fund of supply against times of want, which would carry them through till their trade revived. the immense power in the hands of the working classes to promote their own self-dependence is illustrated by the enormous sums spent by these classes alone in mere indulgence; and it is shown again, in the immense funds raised amongst them to support combinations and strikes. that thousands will not use the means they have is proved by their excesses, their prodigality, the recklessness of their expenditure, the division of the days of the week into days of work and days of gross and obstinate idleness; and in much of this--regarding the result which follows to themselves, their wives and families, if they have the misfortune to have them--there is perhaps more real delinquency than in many of the crimes for which penal statutes have been framed. the question is at any rate admissible, whether the same power which can order a compulsory payment of rates to support the poor, might not, and ought not, to restrict the means by which men are made and kept in poverty; or whether the same laws which make the frugal support the improvident should not also compel the improvident to do something to support themselves. this _principle_ is indeed recognised by government, as we have already shown, in the arrangements made for its own servants; it is therefore not a question so much of principle as of _degree_, and whether the government should insist on a measure of coercive contribution applying to others beyond their control. "i have often thought," said the late mr. j. silk buckingham, in a letter now before us, "it would be perfectly wise and just to pass a law compelling all employers of labour of every class, age, and sex, to deduct five per cent. from the wages or salaries of all in their employ, to be invested in the government funds for a deferred annuity after sixty years of age, giving power to the labourers themselves to make further additions as they saw fit on the voluntary principle. if it should be said that no government has a right to make people provide for themselves by force of law, i am sure they have as great a right to do this as to make the honest, sober, and industrious part of the people pay in poor rates and taxes for maintaining paupers and criminals, who have become so chiefly through want of prudential conduct in youth."[ ] finally, it is upon those who will not, and cannot by any available means, be brought to apply the remedy of provident investments during the heyday of life for themselves, that we think some such arrangement as that upon which the government insists on employing civil servants, should be brought to bear, and that, only as a _dernier ressort_, our legislature should consider whether it were not possible, and within its province, to apply a more complete and direct remedy by force of law. formidable obstacles, we repeat, may be imagined, and actually would be experienced, in either case; but they could easily be smoothed by the fifty years' experience which the country has had of savings bank management and the conduct of provident schemes generally, and they may very possibly be entirely removed by the far-reaching, simple, ancillary measures of the last four years. [ ] "to save money," says mr. greg, "and to have invested it securely, is to have become a capitalist. to have become a capitalist is for the poor man to have overleaped a great gulf; to have opened a path for himself into a new world; to have started on a career which may lead him, as it has led so many originally not more favoured by fortune than himself, to comfort, to reputation, to wealth, to power." [ ] "i have studied the matter to the core, and it has resulted in a firm conviction, that were all the many valuable schemes which have been devised for ameliorating the condition of the masses conjoined, for safely, surely, and reasonably meeting the exigencies of every-day life, the savings bank single-handed would outvie them all."--mr. james frame's _tracts on savings banks_. [ ] we are indebted to mr. sikes of huddersfield for the particulars of this case. [ ] mr. w. b. chorley, author of a _handbook of social intercourse_, &c. &c. was asked his opinion on co-operative societies, that opinion to be inserted in the _co-operator_, the society's organ. mr. chorley gives it very candidly, the editor with equal candour giving it insertion. "the working man's earnings should be absolutely safe. post office savings banks are the only means of deposit which i am warranted in unconditionally recommending under all circumstances. i am far from saying that in peculiar cases and districts the workman may not act judiciously in joining co-operative stores; but it cannot be extended beyond a certain point with success, and i fear that any attempts to push or rapidly extend the plan over a large area will prove a mistake ending in failure and loss." ... mr. smiles in his _workmen's earnings, strikes, and savings_, a reprint of articles from the _quarterly review_, and mr. greg in his _provident investments_, a reprint of an article in the _edinburgh review_, express similar views on the co-operative principle as applied exclusively to the working classes as those we have quoted from mr. chorley. [ ] the first benefit building society which can be traced was founded in under the auspices of the earl of selkirk. it was a village club composed of some working men in kirkcudbright, in scotland. other institutions of a similar kind followed, and were called "menages," and soon afterwards the principle was introduced into england. in the first act was passed with regard to them. [ ] "a building society of which i am a trustee started some five years ago with a considerable majority of working men; but in the course of its operations (on looking over the list to-day) i find there are very few who can be strictly called working men left. the punctuality of the payments, the fines, and those arrangements which are essential to the proper working of a society, acting upon men who are occasionally thrown out of employment, and without means altogether, have compelled them to withdraw themselves."--_evidence of mr. w. cooper. committee on provident investments._ . [ ] a large volume might be compiled which should simply give a bare indication of the aims of such schemes and societies, including one set forth in a ms. volume which we have seen in the british museum, entitled, _greevous grones for the poore, done by a wellwisher_, down to the latest benevolent scheme, and its list of patrons beginning with an archbishop and ending with the squire. [ ] savings banks are not free from an amount of patronizing, which is only very rarely appreciated by the workman, though it may delight the very small shopkeeper class. mr. boodle, in his examination before a savings bank committee, in , thought fit to relate a very ludicrous instance of this, which, though told to show the amount of confidence reposed in the names of some trustees, really proves something very different. "at one time," says mr. boodle, "the late lord spencer was attending as manager, and a depositor put in a sum of money; he looked at his book when it was returned to him, and finding the name of 'spencer,' asked the actuary who it was. the actuary replied 'lord spencer.' the man said, 'you do not mean that this is lord spencer?' when reassured, he said, 'then i will give another sovereign,' and actually did put in another sovereign." this must have been a red-letter day in this person's history, though it reasonably admits of doubt whether the incident would be matter of personal gratification to lord spencer, the wise and excellent lord althorp of the lower house. [ ] "for the last twelve years," says a living practical philanthropist, "i have been considerably engaged in the administration of poor law relief. i could not disguise from my reluctant notice the painful fact of how large and overwhelming a percentage of applicants for relief had been, for long periods of their life, in the habit of earning wages, the surplus of which remaining over and above the cost of their maintenance, would, if properly invested, have secured them an honourable independent subsistence for the unproductive residue of their lives. their frugal contemporaries, whom they scandalized by their example (and it might have been said, derided for what they considered their meanness), they further tax with the burden of their subsistence. they commit a constructive injustice upon their more provident fellow-citizens; and when society inveighs against the gratuitous pauper, not because he is poor, but because he has viciously made himself so, society is not unjust in such a retaliation upon its trespassers. the gracious law of england, which makes the poor law compulsory, would deal with scarcely more than even-handed justice were it to compel some kind of club payment too. and if it were an infringement of the liberty of the subject to compel my neighbour to support a club, it is an infringement of my liberty to compel me to support my neighbour."--meliora, _edited by viscount ingestre_, vol. ii. appendix. (a.) _an abstract of the provisions of mr. whitbread's bill, as amended by committee_, "_for establishing a fund and assurance office for investing the savings of the poor_." ( .)[ ] this bill provided that the _office of the poor's fund_ should be under the management and direction of so many commissioners as his majesty should see fit to appoint under his royal sign manual; that they should subscribe an oath to execute their powers and trusts faithfully and honestly; that any two of them might together execute the duties of the office; and further, that the said commissioners might, with the approbation of the lords of the treasury, appoint some person properly qualified to conduct the business, under the title of accountant, and also such cashiers, clerks, and servants as they should find necessary. it provided, that any person who should subsist wholly or principally by the wages of his or her labours should be entitled to the benefits and advantages of this office, under and subject to the following _rules and regulations of the office of the poor's fund._ . that any proper person may so pay to the accountant, or remit through the post office, any sum not exceeding five pounds. . that no person remit or pay more than _l._ in any one year, nor more than _l._ in the whole. . that when any sum is remitted through the post office, the postmaster of the place from which the money is sent shall keep a proper record of each transaction, and adopt such measures as the postmaster-general shall from time to time direct; and that each postmaster shall receive for his trouble, from the person paying in the money, one penny in the pound upon the value thereof. . that cash accounts with each person shall be opened in the principal office in london, and that the money which may be paid or remitted shall be laid out each week in the purchase of perpetual annuities, the annuities so purchased to stand in the name of the commissioners of the poor's fund. . that, after such purchase, the proportion of each person, from the amount contributed, shall be credited in a stock account, he or she being debited in the cash account for the sum expended. . that the dividends as they become due be likewise carried to the credit of the said persons; and on the sums amounting to ten shillings, the same shall be payable to him or her. . that the dividends may be allowed to accumulate, but principal and dividends must not exceed _l._ in any one year, nor _l._ in all. . that any person entitled to the annuities purchased in this manner who may wish to sell the whole or part, will be allowed to do so on signifying the desire personally, or in writing. in either case the person shall be furnished with a form of request for the purpose, and, when properly filled up and attested, the annuities shall be sold. . that the sale of all annuities desired in one week shall be made on some one day in the next. . that after the sale the proportion due to each person shall be carried to his or her cash account, and the money be payable forthwith. . that the accountant shall make out and sign a warrant for the sums called for, the person giving a receipt on the warrant when it is paid. . that persons entitled to the money may authorize in writing any other person to receive the warrant, and after signing the warrant the money may be paid to such other person. . that any person residing beyond the limits of the two-penny post (london) may have such warrant transmitted through the post office. . that when a sum is paid to the cashier or other officer for the purchase of annuities, a proper receipt shall be given; that when a sum is transmitted through the post, the receipt shall be at once sent through the post; and that when the money has been laid out in such purchases as were ordered to be made, the certificates of such purchases, with their amount and denomination, shall be sent to the purchasers, or such other persons as they shall appoint. . provides for the investment of small surpluses, and the payment of the dividends upon them. . provides that no payment, gratuity, or reward shall be allowed to be made to any person employed in the office of the poor's fund over and above the regular salaries determined upon. * * * * * other clauses of the act provided that the expenses of the office should be defrayed by such sums as were secured by the dividend, interest, and accumulations of the surplus arising from unclaimed dividends, the remainder of the expenses being borne on the consolidated fund. * * * * * with regard to _the poor's assurance office_, the bill provided for the appointment of the principal conductor, who should be called "the actuary," in the same manner in which "the office of accountant" was to be created for the former business. it provided for the calculation of tables, which tables should produce "sufficient funds to answer the payments to be assured, as well as the charges and expenses of the establishment and management of such assurance office;" that these tables should be varied; that they should be approved by the lords of the treasury, who should make them public in such manner as they saw fit. the persons who were entitled to the benefits of the poor's fund should also be entitled to the benefits of assurance office under the following _rules and regulations of the poor's assurance office._ . that any person desirous of insuring his life shall deliver or send the usual particulars to the assurance office. . that in every case proof of age and proof of sound health should be produced; the affidavits in each case to be sworn to before a justice of the peace. . that, in the case of any misrepresentation being proved in the original proposals, the sums paid shall be forfeited. . that the actuary may require any persons proposing to insure to attend personally at the assurance office, providing they live within the limits of the london two-penny post. . that no payment for any assurance, whether annually, half-yearly or quarterly, shall be less than ten shillings. . that no annual payment, nor the entire yearly amount of payments, shall exceed five pounds; that no assurance shall be made for more than _l._; or if a gross sum and an annuity shall both be assured to the same person, the whole shall not exceed the value of _l._ . provides for fines for arrears according to the time which has elapsed, and for renewing a policy which may have become void. . that all money received shall be vested in transferable annuities, as in the case of the poor's fund. . provides for payment on proof of death--the affidavit to be sworn to before a justice of the peace. . that the rules for the management of the assurance office, and the remuneration to be paid to its officers, shall be settled on the same basis as those for the poor's fund. * * * * * the act then goes on to provide that the commissioners shall be empowered to frame rules for the guidance of the officers of each office; that the commissioners to be appointed shall deliver to the governor and company of the bank of england a true and attested copy of their commission of appointment; that this shall be their authority for transacting business with the bank, and shall be received and admitted as evidence in all courts of law and equity, and before all judges and magistrates, of the due and legal appointment of the commissioners, and authorizing them to exercise all the powers and authorities granted to them under the act. the act then further provides that all dividends, &c., shall be exempted from the tax on property, and from the stamp duty on probates and letters of administration. that the policies and other instruments shall be exempt from stamp duties. that all letters and packets shall be sent by or through the post office, to or from either of the two departments, exempt from the payment of all postage. the act concludes by making provision for the punishment of forgery and perjury. [ ] referred to at some length at page , and other portions of this work, where the preamble of the bill is given. (b.) _an abstract of the provisions of the consolidated act of , entitled_ "_an act to consolidate and amend the laws relating to savings banks_." ( & vict. cap. .-- th july .) _sec. ._ provides for the repeal of previous acts and parts of acts, as set forth in the following schedule:-- +------------+-------------------------------------+------------------+ |date of act.| title. | extent of repeal.| +------------+-------------------------------------+------------------+ | geo. iv. | an act to consolidate and amend | the whole. | | c. . | the laws relating to savings | | | | banks. | | | | | | | will. iv. | an act to enable depositors in | sections , , | | c. . | savings banks and others to | , , , ,| | | purchase government annuities | , , , ,| | | through the medium of savings | and . | | | banks, and to amend an act of | | | | the ninth year of his late | | | | majesty to consolidate and | | | | amend the laws relating to | | | | savings banks. | | | | | | | & | an act to extend to scotland | the whole. | | will. iv. | certain provisions of an act | | | c. . | of the ninth year of his late | | | | majesty to consolidate and | | | | amend the laws relating to | | | | savings banks, and to consolidate | | | | and amend the laws relating to | | | | savings banks in scotland. | | | | | | | & vict. | an act to amend the laws relating | the whole. | | c. . | to savings banks, and to the | | | | purchase of government annuities | | | | through the medium of savings | | | | banks. | | | | | | | & | an act to amend the laws relating | the whole. | | vict. | to savings banks in ireland. | | | c. . | | | | | | | | & | an act to continue an act of the | section . | | vict. | twelfth year of her present | | | c. . | majesty for amending the laws | | | | relating to savings banks in | | | | ireland, and to authorize friendly| | | | societies to invest the whole of | | | | their funds in savings banks. | | | | | | | & | an act to enable charitable and | the whole. | | vict. | provident societies and penny | | | c. . | savings banks to invest all their | | | | proceeds in savings banks. | | | | | | | & | an act to make further provision | the whole. | | vict. | with respect to moneys received | | | c. . | from savings banks and friendly | | | | societies. | | +------------+-------------------------------------+------------------+ _sec.[ ] ._ provides that persons who may have formed or shall form any society or institution of the nature of a bank to receive deposits of money for the benefit of persons depositing the same, accumulating at compound interest, and repayable when required, but, after the necessary expenses have been met, deriving no benefit from such money, shall have the benefit of this act if they wish it. the conditions annexed are, that such persons shall cause the rules and regulations for the conduct of the business to be entered, deposited, and filed, as shall be afterwards directed. further, that no bank, the rules of which shall not be sanctioned and approved by the national debt commissioners, shall be entitled to the provisions of this act. (_a_) _sec. ._ savings banks under the act shall keep a book in which shall be entered the rules of each bank, and these books shall be open at all reasonable times to the inspection of depositors. when any of the rules are altered, such alterations to be entered in the book. the rules not to be in force till such alteration is made. (_a_) _sec. ._ two written or printed copies of rules shall be sent by savings bank trustees to the certifying barrister, who must certify that they are according to law; the certificate of the barrister to be paid for by a fee not to exceed one guinea; and the barrister, after certifying the rules, to return one copy to the trustees and transmit the other copy to the national debt commissioners. (_a_) _sec. ._ every savings bank certified under the provisions of this act to bear the title of "savings bank certified under the act of ;" any other bank, company, or person adopting this title, to be declared guilty of a misdemeanour, and punishable accordingly. _sec. ._ requires that the following regulations shall be adopted and enrolled among the rules of all savings banks:-- ( ) the treasurer, trustees, or managers shall not derive any benefit from deposits, nor directly or indirectly have any salary, allowance, profit, or benefit whatsoever beyond their actual expenses for the purposes of the bank. the expenses of management, including the remuneration to paid officers, does not come within the meaning of this clause. (_a_) ( ) that not less than two persons, being trustees, managers, or paid officers employed for this specific purpose, shall be present on all occasions of public business, and be parties to every transaction of deposit and repayment, so as to form a double check of every such transaction. ( ) the depositor's pass book to be compared with the ledger on every transaction of repayment and on its first production after the th of november in each year. ( ) the depositor to produce his book at least once in each year for this examination. ( ) no receipt to be taken or money paid except at the bank and during the hours of public business. ( ) a public accountant or auditor, not of their own body, to examine the books of the bank, and to report the result, not less than once in every half-year, and to report to the committee of management the correct amount of the liabilities and assets of the bank. ( ) that a book containing an extracted list of each depositor's balance, omitting the name, but giving the distinctive number and separate amount of each, checked and audited as above, be open during the hours of public business for the inspection of any depositor. ( ) the trustees or committee of management to hold meetings at least every half-year, and keep minutes of their proceedings in a book to be provided for the purpose. ( ) in the case of banks having branch agencies, the rules to provide for the due receipt and accounting of all moneys received; for the presence of a second party to every transaction; and for a periodical examination of the depositor's book. _sec. ._ provides that the trustees of every savings bank shall transmit weekly returns to the national debt office, giving such particulars as the commissioners shall direct, showing the week's transactions and the cash balances remaining in the treasurer's hands. _sec. ._ the treasurer, actuary, or cashier, and every paid officer of a savings bank entrusted with the receipt of money, to give security by means of bond or bonds, with one or more sureties, to the comptroller-general of the national debt office. (_c_) _sec. ._ provides that any officer receiving deposits and not paying them over to the managers shall be guilty of a misdemeanour. (_c_) _sec. ._ the moneys, goods, chattels, and effects of all savings banks to be invested in the trustees for the time being. (_a_) _sec. ._ no trustee or manager of savings banks in great britain shall be personally liable except-- ( ) for moneys actually received by him on account of said banks and not paid over in the usual manner. ( ) for neglect or omission to comply with the above recited regulations as to the maintenance of checks, the audit of accounts, the holding of meetings and the keeping of the minutes of the same; ( ) or for neglect in taking security from his subordinate officers. _sec. ._ trustees or managers in ireland may limit the amount of their responsibility by declaring in writing that they are willing to be answerable for a specific amount only, which shall not be less, however, than _l._ at the same time irish trustees, &c., to be liable for amounts actually received by them and not accounted for. (_d_) and (_e_) _sec. ._ provides that the treasurer or any trustee may be required, on a demand from not less than two trustees and three managers, or from a meeting of trustee and managers, to pay over all the moneys remaining in his or their hands, and assign and transfer or deliver all securities and effects, books, papers or other property, to such persons as may be appointed to receive them; proceedings to be taken in case of any neglect or refusal to comply with the demand. (_a_) _sec. ._ provides that executors, &c., of officers of savings banks shall pay money due to savings banks, in case of death, bankruptcy or insolvency, before any other debts whatsoever. (_b_) _see. ._ the trustees of savings banks shall invest all the money received by them in the banks of england or ireland; and no sum or sums shall be paid or laid out by trustees in any other manner or upon any other security whatever, except only such sums of money as from time to time must remain in the hands of the treasurers of such banks to answer the exigencies thereof. this provision not to prevent any depositor withdrawing his money from a savings bank and investing the same in any other securities. (_a_) _sec. ._ provides that trustees of savings banks may receive money from depositors and apply it for their benefit in any other manner agreed upon. (_a_) _sec. ._ provides that central banks may invest the money of branch banks in the manner already described. (_a_) _sec. ._ provides penalties for false declarations for the purpose of paying money into the banks of england or ireland. (_a_) _sec. ._ the commissioners of the national debt to invest the money paid into the bank in the purchase of bank annuities, exchequer-bills, or parliamentary securities of whatsoever kind created or issued, or any stock or debenture guaranteed by authority of parliament; the interest arising from the money so invested to be in like manner invested as above. (_a_) _sec. ._ makes it lawful for any three or more national debt commissioners to execute and to do all matters and things required by the operations of this act. (_b_) _sec. ._ money invested with the commissioners to be allowed interest at the rate of three pounds five shillings per cent. per annum. (_c_) _sec. ._ interest due from the commissioners to be calculated half-yearly up to nov. and may , and carried to the account of savings bank additional principal. no interest to be allowed on any fractional part of a pound. (_a_) _sec. ._ interest arising to depositors may be calculated yearly, or twice a year, and carried to the principal. interest to depositors not to exceed three pounds and tenpence per cent. per annum. (_c_) _sec. ._ trustees of saving banks to appoint an agent who shall be authorized to receive money from the commissioners for repayment to depositors. the agreement for the appointment of this agent, signed by two trustees, shall be deposited with the commissioners; but it may be revoked and another appointment made. _sec. ._ trustees may draw for the whole or any part of the sum placed in the hands of government by drafts on commissioners; interest to be added by the cashiers of the bank. (_a_) _sec. ._ drafts exceeding , _l._ must be signed by four trustees, and their signature must be attested by separate witnesses, who may be managers or other creditable persons. drafts for , _l._ not to be paid before fourteen days after the receipt of such drafts. (_a_) _sec. ._ repayment of more than one draft of , _l._ to any one bank not to be made in any one day. (_a_) _sec. ._ trustees may receive in person, instead of through the usual agent, payment of drafts properly executed. (_a_) _sec. ._ the surplus after paying necessary expenses of banks to be paid over to the commissioners for investment in a separate account; and trustees may draw upon such surplus fund for the purposes of the savings bank by certificate. (_a_) _sec. ._ deposits of minors may be taken, and repayment may be made before the person has attained the age of twenty-one. (_a_) _sec. ._ repayment to be made to a married woman who may have deposited money, unless the husband of such woman shall give notice in writing that he requires payment to be made to him. (_c_) _sec. ._ the funds of charitable societies, penny banks, &c., may be deposited in savings banks; if with the approval of the commissioners, without any restriction as to the amount; and without that approval, to the extent of _l._ per annum, or _l._ in this whole. (_e_) _sec. ._ the funds of any friendly society, legally enrolled and certified, may be invested without any restriction as to amount, provided a copy of the rules of such society is deposited with the savings bank. (_d_) _sec. ._ the receipt of the treasurer, trustee, or other officer of any such charitable institution, penny bank, or friendly society, shall be deemed a sufficient discharge for any money deposited and withdrawn from the saving bank. (_a_) _sec. ._ members of friendly societies, penny banks, &c., may also subscribe to any savings bank. (_a_) _sec. ._ no sum to be taken in a savings bank without the depositor discloses his name, profession, business, and residence; these particulars to be entered in the books of the office. (_a_) _sec. ._ persons allowed to deposit as trustees on behalf of others; but repayment can only be made with the receipt of the trustee and also the person or persons for whom the trust account has been held. _sec. ._ provides that it shall not be lawful for depositors in any one savings bank to deposit in any other savings bank. a declaration to this effect must be made at the time of the first deposit. the penalty on a false declaration to be forfeiture to the sinking fund of all deposits. the declarations to be filed, and a copy with the penalty attached thereto to be annexed to, or printed in, the deposit book. (_a_) and (_c_) _sec. ._ deposits of more than _l._ cannot be received in any one year, nor more than _l._ in the whole; and when principal and interest together amount to _l._, interest shall cease till it is brought below that sum. (_a_) this prohibition not to extend to accounts opened before july . a depositor may close his account and make further deposits as a new depositor. _sec. ._ depositors may transfer their accounts to any other savings bank by means of transfer certificates, the form of which is presented in _appendix_ (c). _sec. ._ in the case of a depositor dying and leaving any sum exceeding _l._ the money must not be paid except upon the probate of the will of the deceased depositor, or letters of administration of his or her estate and effects. no duty to be paid on probate when the estate is under _l._, provided the person claiming such probate or letters of administration produce a certificate of the amount of the depositor's interest in the bank at the time of his death. _(a)_ _sec. ._ administration bonds, &c., for effects not exceeding _l._ sterling shall be exempted from stamp duty. _(a)_ _secs. _, _ _, _ _. make provision for payment when depositors die without a will, to those who appear to be next of kin, &c. _(a)_ _sec. ._ makes provision for payment on the death of an illegitimate depositor according to the statute of limitations. _sec. ._ adapts the provisions of the act as to intestate depositors to the law of scotland. _(b)_ _sec. ._ provides that any dispute arising between the trustees of savings banks and any individual depositor or his representatives, the matter in question shall be referred to the barrister appointed by the act, and "whatever award, order, or determination shall be made by the barrister shall be binding and conclusive on all parties, and shall be final to all intents and purposes without any appeal." _(c)_ _sec. ._ on being referred to, the barrister may inspect any book or books belonging to the bank in question, and may administer oaths to witnesses; false evidence to be perjury, and the offender prosecuted and punished accordingly. _(c)_ _sec. ._ no powers of attorney given by trustees or depositors, no drafts or orders, no instrument of appointment or instrument for the revocation of any appointment, no determination or order of the revising barrister, nor any other instrument whatever required to be given, issued, signed, made, or produced in pursuance of this act, to be subject to or charged with any stamp duty or duties whatsoever. (_a_) _sec. ._ provides for the appointment of auditors in ireland, whose names shall be sent up to the national debt office without delay. (_d_) _sec. ._ every depositor in ireland to be furnished with a deposit-book which shall contain the rules of the bank printed at length. a duplicate copy of the rules, and also of every annual statement, shall also be exhibited from time to time in each irish bank, and shall be open to the inspection of every depositor. (_d_) _sec. ._ provides for the regular inspection of the books of irish depositors, not less than twice every year. (_d_) _sec. ._ commissioners may close accounts with savings banks in ireland which do not comply with their instructions, and re-open them if they think fit. (_c_) in each case the commissioners shall forthwith publish a notification of the account being closed, or of the account being re-opened, in the _dublin gazette_, and also in some newspaper published in the county in which the said bank is established. (_d_) _sec. ._ for the more effectually ascertaining from time to time the actual and progressive state of all savings banks enrolled under this act, the trustees of every bank shall annually cause a general statement of the funds of their bank to be prepared up to the th november in each year, showing the balance or principal sum due to all the depositors, a statement of the expenses incurred, stating in whose hands such balance is then remaining. such annual statement shall be attested by two managers or trustees, or one manager and one trustee, and countersigned by the secretary or actuary of such bank, and shall be transmitted to the national debt office in london or dublin (as the case may be) _within nine weeks_ from the date above given. if trustees neglect to transmit this account, or refuse to obey the other orders or directions of the commissioners, then it shall be lawful for the commissioners to close the accounts of such trustees who thus transgress, and also lawful to re-open them if they see occasion. (_a_) _sec. ._ if the accounts are not prepared and transmitted within the prescribed time, it shall be lawful for the commissioners to forthwith publish in the _london gazette_, and a newspaper published in the county where the bank is situated, the name of such defaulting bank. (_b_) _sec. ._ the commissioners are empowered to call for a detailed statement of all the expenses incurred in the management of any savings bank. (_b_) _sec. ._ the treasurer of a savings bank must sign the annual statement, where it is shown by that statement that any sum of money belonging to the bank is in his hands. (_b_) _sec. ._ a duplicate of every such annual statement, accompanied by a list of the trustees and managers for the time being, shall be publicly affixed and exhibited in some conspicuous part of each savings bank for the information of all depositing therein; and every depositor shall be entitled to receive from the savings bank a private copy of the annual statement on payment of one penny. (_a_) _sec. ._ the national debt commissioners shall, once in each year, render the fullest account of all their dealings with savings banks to the lords of the treasury, and copies of all such accounts shall be laid before both houses of parliament. _sec. ._ a distinct account to be rendered in the same way, showing the aggregate amount of the separate surplus fund. _sec. ._ savings banks to compute interest on the th of may and the th of november in each year. (_a_) _sec. ._ the commissioners may keep a balance in the bank of ireland under the title of "the fund for the banks for savings," to meet the drafts which may be drawn on account of savings banks in ireland. (_a_) _sec. ._ all receipts, orders, certificates, endorsements, accounts, and returns required for carrying out this act, shall be made in such manner as shall be approved by the commissioners. _sec. ._ this act shall be a full and sufficient indemnity and discharge to the commissioners, and to the governor of the bank, &c. for all things to be done or required to be done in pursuance of this act. (_a_) _sec. ._ commissioners may employ a barrister and such officers as may be necessary to the carrying out of the provisions of this act, and the treasury shall pay them their remuneration, and meet incidental expenses. (_a_) _sec. ._ this act to apply to all savings banks (except those mentioned in the next section) established or hereafter to be established in england, scotland, ireland, or wales; berwick-on-tweed, the islands of guernsey and jersey, and the isle of man. _sec. ._ this act must not be held to repeal acts relating to post office savings banks, or any of the powers granted to the commissioners for the reduction of the national debt.[ ] [ ] many of the clauses of the consolidation act having been taken entire from previous acts, and only part of the provisions being new, we propose to distinguish those clauses originally passed in ( george iv. c. ) with the letter (_a_); those passed william iv. c. , by (_b_); in ( and victoria, c. ) by (_c_); in ( and victoria, c. ) by (_d_); and under and victoria, c. , by (_e_). all the other sections of this act not so marked are new provisions introduced in . [ ] we find from _the clauses relating to the establishment of the proposed bradford corporation savings bank_, kindly forwarded to us by mr. rayner, with whom the scheme originates, that sections , , , , , , , to inclusive, to inclusive, to inclusive, of the consolidation act are proposed to be incorporated in the new bill about to be introduced into the house of commons. the new clauses provide that the corporation may establish a savings bank, make regulations for its conduct, appoint a committee of the council to manage the undertaking, and a treasurer and other officers to work it; that the aggregate amount of deposits shall not exceed a quarter of a million sterling; that interest should be given at the rate of three farthings per pound per month (or three pounds fifteen per cent. per annum) that debentures shall be issued to depositors for the amounts invested; and that when a person's deposits amount to _l._, he may require a mortgage for that sum to bear interest at four per cent. other sections provide that the corporation may raise money by annuities, for the transfer of annuities, for the exemption of deposits and annuities from property and income tax, and for the remedies for depositors, mortgages, and annuitants, by applying the acts of , , and , to them. we regret our want of space to enter more fully into the details of this important and promising scheme. (c.) _form of certificate for transfer from one savings bank to another, or to any other description of savings bank._ savings bank at_____________, in the county of__________. whereas_____________of______________, a depositor in the above-named savings bank, is desirous of closing his [or her] account with the said bank for the purpose of transferring his [or her] deposits to the savings bank at___________, in the county of_____________; and to enable him [or her] so to do, the said depositor has applied for a certificate of the whole amount due to him [or her], pursuant to the act ( and vict. c. ): we hereby certify that the sum due to the said depositor for money deposited by him [or her] in this savings bank, inclusive of all interest due to him [or her] at this date, amounts to the sum of [_state the amount in words_], of which the sum of [_state the amount, if any, in words_] has been deposited since the twentieth of november last; and we further certify, that his [or her] account with this savings bank has been closed by the issue of this certificate. witness our hands this_________ day of_________, ____. _____________ } two of the trustees or managers [appointed } for this object, by the trustees] of the _____________ } above-named savings bank. examined __________________________________ the actuary or secretary of the above-named savings bank. (d.) _an abstract of the act_ "_to make further provision for the establishment of savings banks for seamen_." ( and vict. c. .-- th july, .) _preamble._ whereas by the merchant shipping act, , certain powers were given to the commissioners for the reduction of the national debt for the purpose of establishing savings banks for seamen; and whereas it has since been found to be expedient that the immediate management and control of such savings banks should be placed in the hands of the board of trade. be it enacted, &c. _sec. ._ that the board of trade may establish in london a central savings bank for seamen, and branch banks at such ports or places as they may deem expedient; and that they may receive deposits from or on account of seamen, or their wives and children; and that the total amount standing in the name of any one depositor shall not exceed _l._ _sec. ._ the board of trade may appoint shipping offices branch savings banks under this act, and shipping masters agents of the said board to conduct this business. _sec. ._ the commissioners of the national debt shall receive the moneys deposited in these banks on the request of the board of trade; shall invest these moneys in the same way as they do the moneys of other banks; and shall pay, together with interest, the sums received on a request signified in the like manner. _sec. ._ provides that the board of trade may make any alterations which they think fit with respect to the persons entitled to become depositors, the making and withdrawal of deposits, the rate and payment of interest, or any other matter connected with these banks; such regulations to be binding upon all. _sec. ._ provides that all sums of money due to any deceased depositor, shall be paid and applied subject to the conditions of the provisions of the merchant shipping act. _sec. ._ provides that any person forging a document, or making false representations in order to obtain deposits or interest, shall be punishable with penal servitude or imprisonment. _sec. ._ the board of trade to pay all expenses in carrying out this act out of the interest received from the national debt commissioners. _sec. ._ an annual account of all deposits and repayments shall be laid before both houses of parliament, as also a copy of all regulations made for carrying out this act. _sec. ._ all criminal proceedings under this act to be carried on as under the merchant shipping act of .[ ] [ ] an act for the establishment of savings banks in connexion with the admiralty, for the benefit of the seaman and marines of the royal navy, has just been introduced into the house of commons, and will, doubtless, be quickly passed into law. (e.) _an abstract of the act_ "_to amend and consolidate the laws relating to military savings banks_." ( and vict. c. .-- th august, .) _sec. ._ repeals the and vict. c. , and the and vict. c. , amending it, and the and vict. c. , and amends and consolidates the said acts. it also provides that deposits made under these acts shall not be affected by their repealment. _sec. ._ makes it lawful for her majesty to establish or continue military or regimental savings banks, for the purpose of receiving sums of money from non-commissioned officers and soldiers employed in her service in the united kingdom and foreign stations (india alone excepted), and for the purpose of receiving moneys or funds raised or paid for objects or purpose connected with these officers and soldiers which her majesty may think fit to authorize to be deposited in these banks. _sec. ._ provides that the secretary at war, with the concurrence of the commander-in-chief and the lords of the treasury, may make regulations for the conduct of these banks; and that when these regulations shall be signed by her majesty and laid before parliament they shall be binding on all concerned. _sec. ._ these regulations shall determine the rate of interest (which must not exceed three pounds fifteen shillings per cent. per annum), and all the minor points connected therewith; the circumstances under which deposits shall be forfeited to the public; the payment of the money of deceased depositors: may make provision for the deposit of money created for charitable purposes, and may make it obligatory on commanding officers to so deposit such funds; shall make provision for the withdrawal of money; and shall provide for the keeping of proper accounts, and generally for all such matters as relate to savings banks. _sec. ._ the receipt of infants and married women shall be a sufficient discharge for what shall be deemed a valid payment made to them. _sec. ._ the moneys received in these banks may be applied by the persons receiving them to the payment of such ordinary army services as it may be their duty to pay; and sums payable to depositors shall be paid out of the grants by parliament for these services. _sec. ._ provides that the secretary at war may direct payment out of the moneys so granted to be made to the account of the national debt commissioners, and carried to the account of the fund for the military savings banks. _sec. ._ the commissioners of the national debt to invest the surplus money in the purchase of bank annuities; the interest arising also to be so applied; and such interest or dividends shall not be subject to any taxes, charges, or impositions whatever. _sec. ._ the secretary at war may direct, at fourteen days' notice, the moneys invested in annuities to be transferred to the account of the paymaster-general at the bank of england. _sec. ._ empowers the national debt commissioners to sell the annuities. _sec. ._ the money arising from the dissolution of certain regimental benefit societies, which was placed in the savings banks in the name of each member to accumulate until his discharge, by the act ( and vict. c. ) may be withdrawn under certain conditions. _sec. ._ the officers of regimental savings banks shall not be personally liable except for their own wilful neglect or default. _sec. ._ provides that full accounts of all transactions in these banks shall be laid before both houses of parliament before the st of april in each year. _sec. ._ military savings banks not to be within the provisions of the acts relating to savings banks proper. _sec. ._ refers to the construction of the word "india." _sec. ._ provides that the act shall take effect immediately after the regulations have been framed. (f.) "_an act[ ] to grant additional facilities for depositing small savings at interest, with the security of the government for due repayment thereof._" ( vict. c. .-- th may, .) _postmaster-general may direct officers in post office to receive deposits._ . it shall be lawful for the postmaster-general, with the consent of the commissioners of her majesty's treasury, to authorize and direct such of his officers as he shall think fit, to receive deposits for remittance to the principal office, and to repay the same, under such regulations as he, with the concurrence of the commissioners of her majesty's treasury, may prescribe in that respect. _legal title of depositor to repayment._ . every deposit received by any officer of the postmaster-general appointed for that purpose shall be entered by him at the time in the depositor's book, and the entry shall be attested by him and by the dated stamp of his office; and the amount of such deposit shall, upon the day of such receipt, be reported by such officer to the postmaster-general, and the acknowledgment of the postmaster-general, signified by the officer whom he shall appoint for the purpose, shall be forthwith transmitted to the depositor; and the said acknowledgment shall be conclusive evidence of his claim to the repayment thereof, with the interest thereon, upon demand made by him on the postmaster-general; and, in order to allow a reasonable time for the receipt of the said acknowledgment, the entry by the proper officer in the depositor's book shall also be conclusive evidence of title for ten days from the lodgment of the deposit; and if the said acknowledgment shall not have been received by the depositor through the post within ten days, and he shall, before or upon the expiry thereof, demand the said acknowledgment from the postmaster-general, then the entry in his book shall be conclusive evidence of title during another term of ten days, and _toties quoties_; provided always that such deposits shall not be of less amount than one shilling, nor of any sum not a multiple thereof. _depositors entitled to repayments not later than ten days after demand made._ . on demand of the depositor, or party legally authorized to claim on account of a depositor, made in such form as shall be prescribed in that behalf, for repayment of any deposit, or any part thereof, the authority of the postmaster-general for such repayment shall be transmitted to the depositor forthwith; and the depositor shall be absolutely entitled to repayment of any sum or sums that may be due to him within ten days at farthest after his demand shall be made at any post office where deposits are received or paid. _names of depositors, &c., not to be disclosed._ . the officers of the postmaster-general engaged in the receipt or payment of deposits shall not disclose the name of any depositor, nor the amount deposited or withdrawn, except to the postmaster-general, or to such of his officers as may be appointed to assist in carrying this act into operation. _money to be paid to commissioners for the reduction of the national debt, and repaid to depositors through post office._ . all moneys so deposited with the postmaster-general shall forthwith be paid over to the commissioners for the reduction of the national debt; and all sums withdrawn by depositors, or by parties legally authorized to claim on account of depositors, shall be repaid to them out of the said moneys, through the office of her majesty's postmaster-general. _additional security to depositor._ . if at any time the fund to be created under the authority of this act by the investment of the deposits shall be insufficient to meet the lawful claims of all depositors, it shall be lawful for the commissioners of her majesty's treasury, upon being duly informed thereof by the commissioners for the reduction of the national debt, to issue the amount of such deficiency out of the consolidated fund of the united kingdom, or out of the growing produce thereof; and the said commissioners of her majesty's treasury shall certify such deficiency to parliament. _rate of interest payable to depositors._ . the interest payable to the parties making such deposits shall be at the rate of two pounds ten shillings per centum per annum; but such interest shall not be calculated on any amount less than one pound, or some multiple thereof, and not commence until the first day of the calendar month next following the day of deposit, and shall cease on the first day of the calendar month in which such deposit is withdrawn. _interest, how calculated._ . interest on deposits shall be calculated to the thirty-first day of december in every year, and shall be added to and become part of the principal money. _investment of funds received under this act._ . the moneys remitted to the commissioners for the reduction of the national debt, under the authority of this act, shall be invested in some or in all of the securities in which the funds of savings banks established under the existing laws may be invested; and a separate and distinct account shall be kept by the said commissioners of all receipts, investments, sales, and repayments; and a balance sheet of such account, from the first of january to the thirty-first of december in every year, shall be laid before both houses of parliament not later than the thirty-first of march in every year. _depositors desiring to transfer their deposits._ . if any depositor making deposit under this act shall desire to transfer the amount of such deposit to a savings bank established under the acts relating to savings banks, he shall, upon application to the chief office of the postmaster-general, be furnished with a certificate stating the whole amount which may be due to him, with interest, and thereupon his account under this act shall be closed; and, upon delivery of such certificate to the trustees or managers of the savings bank to which it is proposed by the depositor to transfer such deposit, they shall, if they think fit, open an account for the amount stated in such certificate for such depositor, who shall thereupon be subject to the rules of such savings bank; and the amount so transferred shall, upon such certificate being forwarded to the commissioners for the reduction of the national debt, be written off in the books of the said commissioners from the amount of moneys received under the authority of this act, and shall be carried to the account of the savings bank to which such transfer shall have been made; and, in like manner, if any depositor in a savings bank, established under the savings bank acts, shall desire to transfer the amount due to him, with interest, from such savings bank to the postmaster-general, for deposit under the provisions of this act, the trustees or managers of such savings bank shall, upon his request, furnish such depositor with a certificate, in a form to be approved by the commissioners for the reduction of the national debt, signed by two trustees of such savings bank, and thereupon his account with such savings bank shall be closed, which certificate the depositor may deliver to any officer of the postmaster-general authorized to receive deposits under this act, and such certificate shall for the amount therein set forth be considered to be a deposit made under the authority of this act, and being forwarded to the said commissioners, the said amount shall then be transferred in the books of the said commissioners from the account of the said savings bank to the credit of the account of moneys deposited under the authority of this act. provided always, that nothing contained in this act respecting savings banks shall render it necessary to have the rules and regulations of any savings bank again certified if the same have been before certified according to law. _postmaster-general, with consent of treasury, to make regulations, copies of which to be laid before parliament._ . the postmaster-general, with the consent of the commissioners of her majesty's treasury, may make, and from time to time, as he shall see occasion, alter regulations for superintending, inspecting, and regulating, the mode of keeping and examining the accounts of depositors, and with respect to the making of deposits and to the withdrawal of deposits and interest, and all other matters incidental to the carrying this act into execution, in his department; and all regulations so made shall be binding on the parties interested in the subject-matter thereof, to the same extent as if such regulations formed part of this act; and copies of all regulations issued under the authority of this act shall be laid before both houses of parliament within fourteen days from the date thereof, if parliament shall be then sitting, and, if not, then within fourteen days from the next re-assembling of parliament. _accounts to be laid before parliament._ . an annual account of all deposits received and paid under the authority of this act, and of the expenses incurred during the year ended the thirty-first of december, together with a statement of the total amount due at the close of the year to all depositors, shall be laid by the postmaster-general before both houses of parliament not later than the thirty-first of march in every year. _accounts to be examined by commissioners of audit._ . the annual accounts of the postmaster general, and of the commissioners for the reduction of the national debt, to the thirty-first of december in each year, in respect to all moneys deposited or invested under the authority of this act, shall annually, prior to the thirty-first of march, in each year, be submitted for examination and audit to the commissioners for auditing public accounts. _provisions of savings banks acts applicable to this act._ . all the provisions of the acts now in force relating to savings banks, as to matters for which no other provision is made by this act, shall be deemed applicable to this act, so far as the same are not repugnant thereto. _expenses of act._ . all expenses incurred in the execution of this act shall be paid out of the moneys received under the authority of this act. [ ] this act is so short in proportion to its importance, that it is here given entire. many of the provisions of the consolidated act ( ) apply to the banks established under this act. (g.) abstracts of minor acts of parliament relating to savings banks. _victoria, c. , entitled_ "_an act to amend the laws relating to post office savings banks_," ( th may, ,) provides:-- _sec. ._ for the transfer of the accounts of minors. _sec. ._ for the funds of a savings bank closing its business to be paid over to the national debt commissioners, the money arising from the sale of property to be carried to the separate surplus fund; the receipt of the trustees on the sale of property to be a sufficient discharge to the purchaser. the trustees of savings banks about to close to have power to compensate their officers out of the separate surplus fund. _sec. ._ the information necessary as to the steps to be taken when the trustees of any bank have determined to close. _sec. ._ for the conversion of perpetual government annuities at three per cent. into capital stock at two pounds ten shillings per cent. _sec. ._ power to trustees to appoint managers to sign transfer certificates. _sec. ._ that the warrants for converting annuities into capital stock shall be laid before parliament. _victoria, c. , entitled_ "_an act to make further provision for the investment of the moneys received by the commissioners for the reduction of the national debt from the trustees of savings banks established under the act geo. iv. c. _," ( th june, ,) provides:-- _sec. ._ for the cancelling of , , _l._ of capital stock of annuities, and the creation of a charge on the consolidated fund for that amount. _sec. ._ that the treasury may cancel an additional amount of stock not exceeding , , _l._ creating equivalent terminable annuities chargeable upon the consolidated fund. _sec. ._ that the commissioners may invest the interest payable on the securities created under this act, and other moneys remitted to them, in the purchase of parliamentary securities, or in any stock or debentures or other securities the interest for which is guaranteed by parliament. _sec. ._ that issues in money may be made out of the consolidated fund on savings bank account on certificate from the national debt commissioners. _sec. ._ that at least one half of the whole amount of securities held for savings banks, exclusive of the amount of the charge on the consolidated fund (section ), shall be parliamentary securities. _sec. ._ that every year the national debt commissioners shall prepare a balance sheet giving the assets and liabilities in respect to savings banks, to the credit of which shall be placed the amount of the charge upon the consolidated fund for twenty-four millions and all other moneys and securities of every kind; and that a copy of this balance sheet be laid before parliament each year. _sec. ._ that the deficiency shown shall be a charge upon the consolidated fund. _sec. ._ that the powers of investment granted to the commissioners by other acts, in so far as they are not varied by this act, shall continue in force. * * * * * "_the savings bank investment act_," which has just received the royal assent ( th march, ), empowers the treasury to substitute terminable annuities for capital stock standing to the account of savings banks and post office savings banks, and empowers the treasury to make rules as to payments to the national debt commissioners. the treasury is likewise empowered to cancel capital stocks of annuities, and to substitute terminable annuities. the warrants issued by the treasury to the bank of england to be a sufficient authority for the cancelling of the stock. (h.) financial returns, _giving the most recent information relating to savings banks, post office savings banks, and military banks, including the entire amount of deposits placed in each kind of bank from their commencement_. savings banks and friendly societies. an account of the gross amount of all sums received and paid by the national debt commissioners on account of savings banks and friendly societies in great britain and ireland from their commencement (august, ) to the th of november, , inclusive. ----------------------+---------------------+---------------------- from august, , to | gross amount of all | gross amount of all th november . | sums received |sums paid to trustees, | from trustees, | including interest. | including interest | |up to th nov. .| ----------------------+---------------------+---------------------- | £ _s._ _d._| £ _s._ _d._ _savings banks._ }| | great britain }| , , | , , & ireland. }| | | | _friendly societies._}| | great britain }| , , | , , & ireland. }| | ----------------------+---------------------+---------------------- total. }| | savings banks and }| , , | , , friendly societies.}| | ----------------------+---------------------+---------------------- ----------------------+----------------------+--------------------- from august , to | amount of money, | value of the th november . | principal and | securities held by | interest, due to | the commissioners | the trustees | (nov. ), | (nov. ), |at the prices of that | including | day, to provide for | £ , _s._ _d._ | the money due |due on account of the | to trustees. |separate surplus fund.| ----------------------+----------------------+--------------------- | £ _s._ _d._ | £ _s._ _d._ _savings banks._ }| | great britain }| , , | , , & ireland. }| | | | _friendly societies._}| | great britain }| , , | , , & ireland. | | ----------------------+----------------------+--------------------- total. }| | savings banks and }| , , | , , friendly societies.}| | ----------------------+----------------------+ balance deficient , , --------------------- £ , , ===================== post office savings banks. an account of the sums due to all depositors in post office savings banks throughout the united kingdom on the st march, ; of the expenses of management of the post office savings banks to the same date; of the amount standing to the credit of the post office savings banks, on the same date, in the books of the commissioners for the reduction of the national debt; of the balance in the hands of the postmaster-general at the same date; and of the amount of any loss sustained by the post office savings banks from the frauds committed in the transmission of deposits, or otherwise. --------------------------------------------------------------------------- liabilities. -------------------------------------------+---------------+--------------- | £ s. d.| £ s. d. total amount of deposits, from th | | september, , to st march, , | | of the interest allowed and added to | | principal on st december, , | | st december, , st december, ,| | and st december, , and of the | | interest allowed and paid on closed | | accounts up to st march, | , , | | | deduct-- | | repayments to depositors, from th| | september, , to st march, | , , | +---------------+ total sum due to all depositors in the post office savings | bank in the savings banks in the united kingdom on the | st march, | , , surplus of assets over liabilities | , +--------------- | , , ===========================================================+=============== assets. ------------------------------+------------+---------------+--------------- | £ s. d.| £ s. d.| £ s. d. total amount of the sums paid | | | by the postmaster-general to| | | the national debt commis- | | | sioners for investment, and | | | of the interest received on | | | such investments, from th | | | september, , to | | | st march, | | , , | | | | deduct-- | | | amount which has been repaid | | | by the commissioners for | | | the reduction of the | | | national debt, on account of| | | , _l._ _s_ _d_,[ ]| | | being the amount paid for | | | the expenses of management | | | of the post office savings | | | banks from th september, | | | , to st march, | , | | amount of sums transferred | | | from post office savings | | | banks to savings banks | , | | +------------+ , | | +---------------+ , , balance remaining in the | | | hands of the postmaster- | | | general to be paid over for | | | investment | | , | | | | deduct-- | | | amount of loss through the | | | defalcations of a former | | | postmaster of beverley | , | | amount of loss by the frauds | | | committed by j. w. thorne | | | amount of expenses of | | | management paid by the | | | postmaster-general during | | | the quarter ended st | | | march, ; not recovered | | | from the post office savings| | | bank fund at that date | , | | +------------+ , | | +---------------+ , | | +--------------- | | | , , ==============================+============+===============+=============== [ ] according to the parliamentary paper no , , it was estimated that the cost of each transaction would be _d._ the actual average cost of each transaction has been - / _d._ military savings banks. an account of the gross amount of all moneys received and paid by the commissioners for the reduction of the national debt, and of the gross amount of stock bought and sold by and transferred to the said commissioners on account of "the fund for the military savings banks," pursuant to act & vict. c. , s , from the th september, , to the th january, . --------------------+-------------+-------------+-------------+------------- |consolidated | reduced | new | total |£ per cents.|£ per cents.|£ per cents.| stock. +-------------+-------------+-------------+------------- | £ s. d.| £ s. d. | £ s. d.| £ s. d. transferred to | | | | the commissioners | | | | by the | | | | paymaster-general | , | | | , | | | | purchased with | | | | money received | | | | from the | | | | paymaster-general,| | | | and with the | | | | amount of | | | | accumulated div- | | | | idends received | , | , | , | , +-------------+-------------+-------------+------------- total stock | | | | bought and | | | | transferred | , | , | , | , | | | | total stock | | | | sold by order | | | | of secretary | | | | of state for | | | | war | , | | , | , +-------------+-------------+-------------+------------- total stock at | | | | the account | | | | of "the fund | | | | for the | | | | military | | | | savings banks"| | | | at th | | | | january, | , | , | , | , +=============+=============+=============+============= +---------------- | cash received. +---------------- | £ s. d. total sum received and applied by the commissioners | to the purchase of , _l._ _s._ _d._ £ | per cent. stock, as above | , | deduct the value received for , _l._ _s._ _d._ | £ per cent. stock, sold by order of secretary of | state for war | , +---------------- | , +================ w. e. gladstone, c. of e.} h. l. holland, gov. } commissioners. thos. n. hunt, dep. gov. } national debt office,} a. y. spearman, february, . } _comptroller-general_. post office savings banks. an account of all deposits received and paid under the authority of the act vict. c. , during the year ended st december, , and of the expenses incurred from the commencement of business, on th september, , to st december, , together with a statement of the total amount due at the close of the year to all depositors. (_a._) account of all deposits received and paid from st january to st december, . ---------------------------------+------------------------------------------- £ s. d.| £ s. d. balance brought |by repayments from st forward , , | january to st december, | , viz.-- to cash received | from depositors | from st | £ s. d. jan. to st | cash paid , , december, , , | warrants ---------------| issued, , , | but not to interest | cashed thereon up to | at date , st december, | ---------------- , computed | , , according to | th and th | sections of the | above-cited act, |balance due at the close of and added to the | the year to all principal money | depositors, inclusive of of the said | interest to st depositors , | december, , , ---------------| --------------- , , | , , ===============| =============== (_b._) explanation of balance. ----------------------------------------------------------------------- £ s. d. balance due at the close of the year to all depositors , , =============== moneys remitted to the commissioners for the reduction of the national debt, from th september, , £ s. d. to st december, , , ditto ditto from st january to st december, , , --------------- , , deduct:-- amount transferred from post office savings banks, and which has been written off the account of post office savings banks, at the national debt office, during the period from th september, , £ s. d. to st december, , ditto ditto during the year ended st december, , ------------ , --------------- net amount lodged with the commissioners for the reduction of the national debt for investment , , add:-- interest accruing to depositors up to st december, , including the interest which accrued up to st december, , amount advanced on account of charges of management, not recovered until after st december, , balance remaining on st december, , to be paid over for investment , -------------- , ------------ , , =============== (_c._) account of charges of management and of expenses incurred for post office savings banks, from their establishment on the th september, , to the st december, . ------------------------------------------------------------------- £ s. d. charges and expenses for the period from th september, , to the st december, , charges and expenses for the year ended st december, , -------------- , [ ] ============== £ s. d. the sum standing to the credit of the post office savings banks fund on the st dec. , at the national debt office, was , , and on the same day there was in the hands of the postmaster-general a balance of , ---------------- making in all , , ================ to meet a liability of £ , , ================ [ ] of this sum, which includes the allowances to postmasters, letter receivers, and others, for conducting savings bank business, , _l._ _s._ _d._ was recovered from the commissioners for the reduction of the national debt prior to st december, , and , _l._ _s._ _d._ has since been recovered from the commissioners. general post office,} stanley of alderley, march, . } _postmaster-general_. george chetwind, _receiver and accountant general_. a. c. thomson, _assistant-controller of post office savings banks_. (i.) as the last sheet of this work was passing through the press, the postmaster-general's report for , to which reference has already been made, has been printed. the information therein given respecting the progress of some of the measures which we have had under consideration is so important in itself, as well as illustrative and corroborative of our text, as to justify us in making the following extracts. these extracts, which are here given in his lordship's own words, plainly show the deep interest he takes in those schemes, which have all been commenced during his term of office, and carried out under his immediate oversight and direction. _post office savings banks._ the depositors in post office savings banks increased in number during at the rate of per cent.; the total sum deposited increased at the rate of per cent. during the first part of the present year the business has increased in a still greater proportion. in the first nine weeks of , the number of deposits was , , and , new accounts were opened; in the first nine weeks of , , deposits were made, and , new accounts were opened. "it is evident, therefore," says lord stanley of alderley, "that great as had been the progress of the post office banks up to the close of last year, there are good grounds for expecting a greater progress hereafter. and i am happy in being able to state, that the scheme which was framed for the conduct of the post office savings banks, before any one of them was established, has been found to work well in each and all of its parts, and to admit of any expansion of business, no matter how great or how sudden that expansion of business may be. the officers by whom this scheme was framed calculated, as a matter of course, upon a large and constant growth of business; but sudden augmentations, arising from causes which could not be foreseen, have been by no means unfrequent. in the first week of the present year, for instance, no less than , new depositors entered the banks; but even under such sudden and unexpected augmentations of business the scheme of operations has been found to work well." the following is a comprehensive statement of the business of post office savings banks from their commencement to the close of the year , of the cost of that business, and of the funds in hand at the close of each year. +------------------------+--------------------------------------------------+ | | period. | | +--------------------------------------------------+ | |from |from |from |from |from | | | th sept| st dec.| st dec.| st dec.| st sept.| | | , to | , to | , to | , to | , to | | | st dec.| st dec.| st dec.| st dec.| st dec. | | | . | . | . | . | . | | | | | | | | +--+---------------------+---------+---------+---------+---------+----------+ | |number of post office| | | | | | | | savings banks at | , | , | , | , | , | | | close of period. | | | | | | +--+---------------------+---------+---------+---------+---------+----------+ | |number of deposits | | | | | | | | received during | , | , | , , | , , | , , | | | period. | | | | | | +--+---------------------+---------+---------+---------+---------+----------+ | |total amount of | £ | £ | £ | £ | £ | | | deposits received | , , | , , | , , | , , | , , | | | during period. | | | | | | +--+---------------------+---------+---------+---------+---------+----------+ | |average amount of | | | | | | | | each deposit | £ s. d. | £ s. d.| £ s. d.| £ s. d.| £ s. d. | | | received during | | | | | | | | period. | | | | | | +--+---------------------+---------+---------+---------+---------+----------+ | |number of withdrawals| | | | | | | | during period. | , | , | , | , | , , | +--+---------------------+---------+---------+---------+---------+----------+ | |total amount of | £ | £ | £ | £ | £ | | | withdrawals during | , | , , | , , | , , | , , | | | period. | | | | | | +--+---------------------+---------+---------+---------+---------+----------+ | |average amount of | £ s. d. | £ s. d.| £ s. d.| £ s. d.| £ s. d. | | | each withdrawal | | | | | | | | during period. | | | | | | +--+---------------------+---------+---------+---------+---------+----------+ | |charges of management| £ | £ | £ | £ | £ | | | during period. | , | , | , | , | , | +--+---------------------+---------+---------+---------+---------+----------+ | |average cost of each | d._ | d. | d. | d. | d. | | | transaction, viz. | - / | - / | - / | - / | - / | | | of each deposit or | | [ ]| [ ]| | | | | withdrawal. | | | | | | +--+---------------------+---------+---------+---------+---------+----------+ | |number of accounts | | | | | | | | opened during | , | , | , | , | , | | | period. | | | | | | +--+---------------------+---------+---------+---------+---------+----------+ | |number of accounts | | | | | | | | closed during | , | , | , | , | , | | | period. | | | | | | +--+---------------------+---------+---------+---------+---------+----------+ | |number of accounts | | | | | | | | remaining open at | , | , | , | , | , | | | close of period. | | | | | | +--+---------------------+---------+---------+---------+---------+----------+ | |total amount standing| £ | £ | £ | £ | £ | | | to credit of all | , , | , , | , , | , , | , , | | | open accounts, | | | | | | | | inclusive of | | | | | | | | interest, to close | | | | | | | | of period. | | | | | | +--+---------------------+---------+---------+---------+---------+----------+ | |average amount | | | | | | | | standing to credit,| £ s. d. | £ s. d.| £ s. d.| £ s. d.| £ s. d. | | | of each open | | | | | | | | account at close | | | | | | | | of period. | | | | | | +--+---------------------+---------+---------+---------+---------+----------+ | |total sum standing to| £ | £ | £ | £ | £ | | | credit of post | , , | , , | , , | , , | , , | | | office savings | [ ]| [ ]| [ ]| [ ]| | | | banks on books of | | | | | | | | national debt | | | | | | | | commisioners at | | | | | | | | close of period. | | | | | | +--+---------------------+---------+---------+---------+---------+----------+ | |balance in hands of | £ | £ | £ | £ | £ | | | postmaster-general | , | , | , | , | , | | | after allowing for | | | | | | | | charges of | | | | | | | | management, at | | | | | | | | close of period. | | | | | | +--+---------------------+---------+---------+---------+---------+----------+ | |total balance in | £ | £ | £ | £ | £ | | | hand, applicable | , , | , , | , , | , , | , , | | | to payment of | [ ]| [ ]| [ ]| [ ]| | | | depositors, at | | | | | | | | close of period. | | | | | | +--+---------------------+---------+---------+---------+---------+----------+ | |number of old savings| | | | | | | | banks and post | , | , | , | , | , | | | office banks | | | | | | | | combined, at close | | | | | | | | of period. | | | | | | +--+---------------------+---------+---------+---------+---------+----------+ | |number of depositors | | | | | | | | in old savings | , , | , , | , , | , , | , , | | | banks and post | | | | | | | | office banks | | | | | | | | combined, at | | | | | | | | close of period. | | | | | | +--+---------------------+---------+---------+---------+---------+----------+ [ ] these sums do not include the dividends accruing to the post office savings bank on the th january; that is, five days after the close of the account in each year. [ ] the falling off in the cost per transaction during and the increase in that cost during are attributable to one and the same cause, viz., to the payment during of various charges properly belonging to . _insurances_ "of the whole number of persons whose proposals have been accepted:-- decided to pay their premiums - annually. " " - half-yearly. " " - quarterly. " " - six times a year. " " - monthly. " " - fortnightly. and have paid their premiums in one sum "of the whole number of persons who have commenced to pay premiums, have allowed their policies to lapse by default, and , having defaulted, have on application been re-admitted. in no case, however, have i found it necessary to impose the prescribed fine for default. "the total sum insured at the present time is , _l._, and the gross annual premium income, exclusive of the sums received in single payments, is , _l._ "of the whole number of proposers, have been males, and females. in a very few cases it has been necessary to charge an extra premium for extra risk, arising out of somewhat defective health; and in the case of a few married women, who were pregnant at the date of the insurance, it has been thought right to add to the first premium, but only to the first premium, a special premium of _s._ per _l._ to cover the risk attendant on confinements. "_no deaths have occurred up to the present time amongst the persons insured._" _annuities._ "since the commencement of business, proposals for the purchase of annuities have been received; of these, have been dropped, are under consideration, and have been accepted. of the proposals which have been accepted, have been for the purchase of immediate annuities, the amount of annuity purchased being , _l._, and the purchase money being , _l._ of the remainder, were for the purchase, by immediate payments, of deferred annuities, the amount of deferred annuity purchased being _l._, and the amount of purchase money paid down being , _l._ the remainder, , were for the purchase of deferred annuities by annual or more frequent payments, the amount in course of purchase being , _l._, and the amount of purchase money annually payable being _l._ of the intending annuitants, were males and were females. the remaining six proposals were for insurances on joint male and female lives. "while the government insurance and annuity act was under consideration by the legislature, an opinion was expressed that friendly societies which had undertaken to provide, in return for a single subscription, sick pay, old age pay, and death pay, would do well to make arrangements for the transfer of their old age and death risks to the government, by payment, of course, of a proper consideration, and to confine themselves to dealing with the liabilities contingent on sickness. i have recently received a proposal from a large friendly society for the transfer of its old age risks to the government, and the terms of the arrangement are now under consideration. i am informed, moreover, that other proposals of this kind are likely shortly to be made. "on the whole, i am able to conclude my observations on this subject by stating, that the scheme framed for the conduct of insurance and annuity business has worked smoothly and well; that the checks established for the protection of the government have hitherto proved sufficient for their purpose; that the advantages of the measure are gradually becoming known to the classes for whose benefit it was devised, and that, looking to all the circumstances of the case, and the steady and continued growth of the business, the success of the measure may be regarded as established." government annuities and insurances granted under act & vict. cap. . an account showing the number and amount of sums received and paid, and the number and amount of contracts granted by her majesty's postmaster-general, under authority of the act & vict. c. , from the commencement of business on the th april, , to the st december, , together with the number and amount of contracts in existence on the st december, , and the amount paid for charges of management. (i.) an account showing the number and amount of sums received and paid on account of government annuity and insurance contracts from the commencement of business on the th april, , to the st december, . ------------------------------+------------------++ | receipts || -- +-----+------------++ | no. | amount || ------------------------------+-----+------------++ to cash received for the | | £ s d || purchase of annuities, | | || viz.:-- | | || | | || +---+------------+ | || |no.| amount | | || +---+------------+ | || for immediate| | £ s d| | || annuities | | , | | || for deferred | | | | || annuities, | | | | || money not | | | | || returnable | | | | || ditto, money | | | | || returnable | | | | || | | | | , || +---+------------+ | || to cash received for fees on | | || annuity contracts | | || | | || to cash received from the | | || commissioners for the | | || reduction of the national | | || debt for payment to | | || annuitants:-- | | || +------------+ | || | £ s d| | || gross | | | || less income tax | | | || +------------+ | || | | || to cash received on account of| | || contracts for the payment of| | || sums at death | , | , || | | || | | || | | || | | || | £| , || ------------------------------+------------------++ ++------------------------------+------------------ || | payments ++ -- +-----+------------ || | no. | amount ++------------------------------+-----+------------ ||by cash paid to the | | £ s d || commissioners for the | | || reduction of the national | | || debt for investment on | | || account of sums received for| | || the purchase of annuities. | | , ||by cash paid to annuitants, | | || viz:-- | | || +------------+ | || | £ s d| | ||cash paid | | | ||warrants issued, | | | || but not cashed | | | || at date | | | || +------------+ | ||by cash paid to the | | || commissioners | | || for the reduction of the | | || national debt for investment| | || on account of premiums | | || received on contracts for | | || sums payable at death | | || | | ||by balance remaining to be | | || paid to the commissioners | | || for the reduction of the | | || national debt on the st | | || december, , viz.:-- | | || +------------+ | ||on account of | £ s d| | || annuity | | | || contracts, | | | || including fees | , | | ||on account of | | | || contracts for | | | || sums payable | | | || at death | | | , || +------------+ +------------ || | £| , ++------------------------------+------------------ (ii.) an account showing the number and amount of contracts entered into by her majesty's postmaster-general from the commencement of business on the th april, , to the st december, , and the number and amount of contracts in existence on the st december, . +------------------------------------------------------+-----------------+ | | contracts. | | -- +---+-------------+ | |no.| amount. | +------------------------------------------------------+---+-------------+ |contracts for annuities granted from the commencement | | £ s. d.| | of business on the th april, , to the st of | | | | december, , viz.:-- | | | | +--+------------+ | | | | | £ s. d.| | | |immediate annuities | | , | | | |deferred annuities, | | | | | | money not returnable | | | | | |deferred annuities, | | | | | | money returnable | | | | , | | +--+------------+ | | | | | | |contracts for sums payable at death granted from the | | | | commencement of business on the th april, , | | | | to the st december, | | , | | | | | |contracts for annuities in existence on the st | | | | december, , viz.:-- | | | | +--+------------+ | | | | | £ s. d.| | | |immediate annuities | | , | | | |deferred annuities, | | | | | | money not returnable | | | | | |deferred annuities, | | | | | | money returnable | | | | , | | +--+------------+ | | | | | | |contracts for sums payable at death in existence on | | | | the st december, | | , | +------------------------------------------------------+---+-------------+ (iii.) an account showing the amount paid for the charges of management from the commencement of business on the th april, to the st december, . +------------------------------------------------+-----------+ | | £ s. d.| | salaries of officers | | | stamps on policies | | | fees to medical officers | | | incidental disbursements, including travelling | | | charges | | | postage | | | +-----------+ | £| | +------------------------------------------------+-----------+ index. a. acknowledgement of deposits in post office banks, - . acts of parliament relating to savings banks, post office banks, government annuities, &c. see _appendix_. althorp, lord, moves for a bill to grant annuities through the medium of saving banks, ; replies to mr. attwood, . annuities, government: first proposals for, ; ; alteration of the law relating to, ; a new scheme is proposed in , _et seq_; mr. gladstone introduces a bill into parliament concerning, ; is discussed and carried, - ; regulations for working the measure, ; how to purchase, - ; progress of the new measure of, - . attwood, mr. thomas, m.p. opposes legislation for savings banks, ; speaks against savings banks, ; . auchterarder savings bank, failure of the, ; particulars of this fraud, . auditors, government proposals for, . australian government banks, . ayrton, mr., m.p. on savings banks, ; assists in bringing in a bill to regulate savings banks, ; assists in bringing in the consolidation act, ; respecting his connexion with government banks, ; strongly opposes the post office bank bill in committee, ; presides at a working man's meeting in london in opposition to the government annuities bill, ; opposes it in the house, . b. baines, mr. e., m.p. advocates mr. sikes's proposals for post office banks, ; again, . bath, the provident institution of, origin of, . benefit societies: compared with savings banks, ; ; disadvantages of, ; unsound character of many of them, - ; oppose the government annuities bill, , ; on compulsory payment to, _note_. bentham, jeremy, proposes "frugality banks," ; provisions of his scheme, - . bentinck, lord george, speaks on savings banks, . bilston savings bank, frauds in, _et seq_; the _times_ on this fraud, . birmingham savings bank, . boodle, mr., represents savings bank managers, ; again, ; gives evidence before the committee of , _note_; on systems of book-keeping, ; on confidence in trustee's names, _note_. book-keeping, different systems of, ; difficulty of effecting changes in systems of, . branch banks, not in favour with savings bank managers, . bright, mr., m.p. in favor of government paying defrauded depositors, ; on government security, . brighton bank fraud, _et seq_. buckingham, mr. j. silk, on compulsory savings, - . building societies compared with savings banks, - . bullar, mr. john, proposes postal banks, _et seq_; . business done in post office banks, amount of, _et seq_; nature of, _et seq_. c. canterbury bank fraud, _et seq_. chadwick, mr. edwin, on post office banks, . chalmers, dr., on savings banks, ; on the interest rate, . chetwynd, mr., proposes a scheme for applying savings banks to the post office machinery, ; the scheme is recommended by mr. scudamore, ; adopted in full, ; is appointed controller of the post office banks, ; on the government annuities scheme, . clubs at public houses, . cobbett, william, m.p. on mr. rose, , ; speaks of the bubble of savings banks, . committees on savings banks: one is appointed on irish banks in , ; reappointed in , ; one is appointed to go over the whole subject in , ; report of proceedings of committee on , _et seq_; recommendations of the same, - ; one is appointed on the annuities scheme, . compensation to savings bank officials, . compulsory enactments to secure frugality, , _et seq_. consolidation act of , ; clauses of the act, _appendix_ (b) _et seq._ co-operative societies and savings banks, - . corporation savings banks, _appendix_, . cost of transactions in post office banks, ; - . craig, mr., of cork, on systems of book-keeping, - ; objects to the taking of small deposits, . crossley, sir francis, advocates mr. sikes's plan, . cuffe street bank fraud: early history of this bank, ; discovery of the actuary's defalcations, ; subsequent management of the bank, ; closing and its results, ; a committee is appointed concerning, - ; reappointed, ; depositors are compensated by government, . d. declaration, origin of the subscribing of the savings banks, ; is an unnecessary limitation, . defects of savings bank system, - ; of the post office bank system, - . deposits: limit of the amount of, ; altered in , ; average amount of, in post office banks, ; acknowledgment of, in post office banks, - ; limit of the total amount of, in post office banks unnecessary, - ; may be made available for paying premiums on government life insurances, . depositors: defrauded, several members speak in behalf of, ; number of, in post office banks, ; character of, in the same, ; analysis of, in the same, ; increase of, in the same, ; number of post office banks failing to obtain, ; how they must proceed in post office banks, _et seq._ disraeli, mr. m.p. speaks of savings bank legislation, . distribution of savings banks, the irregular, . douglas, mr. m.p. introduces a bill to regulate scotch savings banks, . duncan, dr. henry, of ruthwell: founder of savings banks, ; early life, ; literary pursuits, ; proposes parish banks, ; establishes the ruthwell bank, ; assists in the establishment of other banks, - ; writes an essay on savings banks, ; his death, ; advises government encouragement and protection, ; corresponds with mr. douglas on the subject, . e. "edinburgh review," , on mr. whitbread's proposals, ; on savings banks, , . edinburgh savings bank, the original - ; many banks are formed on its model, . education, improvement in systems of, . employers of labour: recommended to consider a scheme of life insurance at work at the post office, ; how they may assist their workmen in the same way, - ; their duty to their workmen, ; their influence, - . equalization of interest in different banks, - . estcourt, mr. sotheron, and savings banks, - ; is appointed chairman of committee of , ; speaks on failures in legislation, ; assists in bringing in a bill, ; opposes post office banks, ; on government annuities scheme, ; - . exeter savings bank, establishment of, . expenses of different banks, . f. facilities, absence of, in savings banks, ; not proportioned according to population, ; increase of, . farquhar, sir minto, on the government annuities bill, ; . financial crisis of : description of, ; consequences of the, , . fletcher, rev. h. s. and his frauds at bilston, _et seq_. frauds in savings banks: cuffe street, _et seq_; hertford bank, ; tralee bank, _et seq_; killarney bank, _et seq_; auchterarder bank, - ; rochdale bank, - ; brighton bank, _et seq_; mr. w. h. grey on, - ; at newport, isle of wight, ; bilston bank, _et seq_; canterbury bank, _et seq_; return of, ; worcester savings bank, _note_; the remedy for, ; the result of, . friendly societies: benefits of, compared with those from savings banks, ; - ; disputes between, ; oppose the government insurance measures, ; unsound societies, ; mr. gladstone on, - ; failure of, ; defended by mr. sheridan, . frugality banks proposed by bentham, - . g. gladstone, mr., his connexion with the subject, ; introduces a bill into parliament in , ; withdraws it, ; obtains leave to introduce further measures in the session of , ; speaks on the government use of savings bank money, ; introduces a bill relating to the investment of the same, ; the bill is lost, ; re-introduced and carried, ; his connexion with post office savings banks, - ; considers mr. sikes's proposals, ; urges the preparation of some such plan on the post office authorities, - ; brings in a bill to establish post office banks, _et seq_; speaks on the second reading, ; again, in committee, ; answers objections to and questions concerning the bill, - ; as author of the bill, ; on the interest given in post office banks, ; introduces his annuities and insurance scheme, ; defends his plans in a long speech, - ; consents to the appointment of a select committee, ; carries his measure through the house, . göschen, mr., m.p., on the government annuities bill, , . goulburn, mr., incident in connexion with his official life, ; opposes the reduction of the interest rate, ; brings in a bill to amend the law, in , ; proposes a reduction of the interest rate, ; assists the whigs in evading a full inquiry, ; on savings bank money, . government banks, proposals for, chap. viii. _et seq_. government and savings banks--its loss from savings banks, , ; its gain from the use of savings bank money, ; ; makes good the loss from fraud, in one case, . government employés and provident habits, - . greaves, samuel, and the canterbury bank fraud, _et seq_. guarantee fund, first proposed by mr. sikes, . h. habits of workmen, improvements in, ; ; still need improvement, . hamburg, savings banks in, . hamilton, rev. g. h. proposes postal banks, in , ; proposes that the limitation clause be extended, . hancock, dr., writes on savings banks, ; referred to in connexion with, - ; his connexion with postal banks, - ; approves mr. sikes' plan, . hatton, mr., a witness before the committee of , ; investigates the reading and brighton frauds, ; . haworth, george, and the rochdale frauds, _et seq_. herbert, mr. h. a., m.p., speaks upon irish bank frauds, - ; moves a resolution disapproving the conduct of the government in relation to savings banks, . hertford savings bank: origin of the, ; defalcations in, ; account of the fraud, ; discussion in the house of lords concerning the fraud, ; again, . hill, sir rowland, on mr. sikes's plan, ; . hindrances to the usefulness of savings banks, ; frauds in savings banks, chap. vi. p. _et seq_. hume, mr. joseph: his first speech on savings banks, ; calls for a return, ; speaks of the government loss from savings banks, , ; on the surplus fund, ; speaks on the rate of interest, ; ; anecdote of, in connexion with sir r. peel, ; speaks in favour of sir charles wood's bill of , - . i. j. k. improvement in the social habits of the working classes, ; . improvidence of many classes, ; . increase of savings bank business, to , ; of depositors and deposits in post office banks, - . inspection of depositors' books, . insurance, government: early objections to the plan of, ; later objections to, ; bill to regulate, _et seq_; carried, ; features of, and details of the measure, ; special advantages of, _et seq_. interest given by savings banks: first rate of, ; attracts the richer classes, ; proposals to reduce the rate, ; - ; the _westminster review_ on, ; mr. spring rice on, ; the consequences of the reduction of , ; fresh proposals to reduce the rate, ; savings bank managers, differ on the question, ; in post office banks, _et seq._; dr. chalmers on, ; mr. mill on, ; shown by an interesting example, - ; interest given by post office banks, - . investment of savings bank money: an early dispute concerning the, ; the mode of, is explained to the committee of , - ; savings bank managers object to the mode, ; benefits to the government of present arrangements, . irish savings banks: early banks, ; at first beneficial to the country, ; disastrous effects of the frauds in, ; ; committees of inquiry respecting, ; ; a bill is passed to amend the law relating to, ; the frauds cause a breaking up of irish banks, ; number of post office banks failing to obtain depositors in ireland, . killarney bank fraud, _et seq_. l. legislation on savings banks: early measures of, _et seq_; savings bank acts are consolidated, in , ; mr. goulburn's bill, ; amendment is proposed, in , - ; act is made to apply to ireland only, ; sir charles wood introduces the amendment act of , - ; shown to be much required, ; is withdrawn, ; an act is passed to amend the law on government annuities, ; sir g. lewis introduces the government bill, ; withdraws it, ; a committee of inquiry is appointed, in , - ; finding of the committee, - ; mr. gladstone introduces a bill to provide for the investment of savings bank money, ; withdrawn, ; re-introduced and carried, ; the consolidation act is introduced and carried, ; mr. gladstone brings in and carries his bill to establish post office banks, _et seq_. lewis, sir g. c., re-introduces the government bill, ; replies to objections, ; withdraws it, ; sees mr. sikes on savings bank reforms, . limit of deposits: is altered, ; again altered, ; proposals to alter, ; fresh proposals to alter, ; in post office banks, - . m. maitland, mr., of edinburgh, _note_. managers of savings bank: combine to oppose mr. goulburn's act, ; meet in london to oppose sir c. wood's scheme, - ; are examined before the committee of , ; object to government using their money, ; differences of opinion amongst, - ; many object to take small deposits, ; differ as to notices of withdrawal &c., . manchester savings bank, - ; compared with the liverpool savings bank, . masters of workmen: deducting part of the wages of their operatives for investment in savings banks, ; their attention directed to the regulations for government annuities and insurance, ; their duties, ; how they may assist their workmen, - . mechanics' institutes, and savings banks, . military savings banks, _et seq._; acts regulation, _et seq._ money order office: great progress of the, ; assists in the business of post office banks, ; ; all the offices to be post office banks and agencies for the annuities and insurance business, ; . money of savings banks: security of, ; mr. gladstone speaks of the government use of, ; benefits derived from the use of, . monteagle, lord, of brandon examined before the committee of , ; opposes the post office bank bill, ; makes a "protest" against it, . n. national debt office, ; mode of proceeding in, with reference to savings bank matters, . naval savings banks: proposals for, _appendix_, . neild, mr. j. h., of manchester, examined before the committee of , ; speaks as to increased facilities causing increased business, ; instances the liverpool savings bank, . newport, isle of wight, fraud in savings bank, - . nineteenth century, the century of the working man, . number of savings banks inadequate, ; of hours during which they were open in , ; of post office banks, ; of old banks which have transferred their business to the new banks, _et seq_. o. officials of savings banks, the change from paid to unpaid, and results, ; compensation to, on the breaking up of institutions, . opposition to government measures by savings bank managers, ; - ; - ; - ; by insurance societies and benefit societies, ; . p. q. pallmer, mr., m.p., proposes the first savings bank consolidation act, . parochial relief to savings bank depositors, ; depositors compared with the number of persons in receipt of, . pease, mr. joseph, m.p., on savings banks, . penny savings banks, _et seq._; advantages of, . poor laws and savings banks, - ; the result of savings banks on, ; shown by table, - ; the amendment act of , ; . post office and life insurance, - ; employés of, provided for by other provident measures, - . post office savings banks: in relation to the frauds in ordinary savings banks, - ; ; their present and future position, ; _handy book_ on, _note_; origination of the principle of, ; persons wrongly credited with the origination of, - ; banks in connexion with the money order office first proposed by rev. g. h. hamilton in , ; next by mr. bullar of the temple, _et seq._; mr. sikes, of huddersfield, proposes post office banks, ; the nature of his proposals, - ; addresses mr. gladstone in a printed letter, ; mr. gladstone's reply, ; the proposals are referred to the post office, ; important objections to them, ; mr. chetwynd proposes an entirely new scheme, ; is recommended by mr. scudamore, ; adopted by lord stanley of alderley, ; mr. gladstone carries a bill through the house of commons to establish the banks, _et seq._; lord stanley of alderley carries it through the lords, _et seq._; receives the royal assent, ; the benefit of the banks to the country, ; their success, ; their introduction into the country, ; the amount of business done in, _et seq._; nature of the business done in, _et seq._; number of, at different times, - ; statistics relating to, _et seq._; increase in the number of depositors in, ; have a special public, ; their progress where they were not supposed to be wanted, ; character of the new depositors in, ; result of, on old banks, _et seq._; return of old banks which have transferred their business to, _et seq._; mode of transacting business in, _et seq._; information on the subject of, where obtainable, _note_; as to depositing money in, - ; as to withdrawing money out of, ; internal arrangements of chief savings bank, - _note_; cost of transactions in, - ; the peculiar advantages of, _et seq._; how affected by frauds, ; security, ; despatch, ; secrecy, ; engage to take small sums, ; rate of interest in, _et seq._; government annuities scheme, an offshoot of, ; ; assist depositors in the matter of government annuities and insurance, ; act regulating, _appendix_ _et seq._; further progress of, _appendix_ . pratt, mr. john tidd: appointed certifying barrister, &c. of savings banks, ; his connexion with the cuffe street bank, ; urges the reduction in the limit of deposits, ; his powers are enlarged, ; is blamed on account of irish banks, ; ; exonerated by a committee of inquiry, ; gives evidence before the committee of , ; is consulted as to the consolidation act, ; makes awards in the tralee bank frauds, ; in the killarney case, ; attends at bilston on account of the frauds there, and explains them, - . preliminary savings banks, - . progress of savings banks: in their earlier stages, ; shown by table, ; shown by table, ; shown by table, ; rate of, at different periods, ; of post office banks, _et seq._; progress of the additional measures, - . progress of the country, between and , shown by statistics, ; shown again by statistics, - . provident habits, increase of, ; importance of cultivating, - ; masters of workmen should help to cultivate, - ; want of among large numbers, . provisions of the first legislative enactment on saving banks, - ; of the first consolidation act, - ; of the first bill to grant annuities, ; of mr. goulburn's act of , ; of sir charles wood's bill of , _et seq._; of the government annuities and insurance scheme, , _et seq._; of the acts at present in force with regard to savings banks, post office banks, annuities, and government insurance, _appendix_. _quarterly review_, on dr. duncan, - ; on the prosperity of the country in , ; on the progress of savings banks, ; makes proposals for a system of banks, - ; on compulsory investment of workmen's earnings, ; on co-operative societies, _note_. r. rates of interest: proposals to reduce the, ; - ; ; difference of opinion on the question, ; different in different banks, ; in post office banks, _et seq_; equalization of, . reading bank fraud, - . reform, agitation of & , ; its consequences on savings banks, . reynolds, mr., m.p., speaks on the dublin bank fraud, ; proposes and carries a committee of investigation in , . rice, mr. spring, defends the rate of interest given, ; opposes mr. hume, ; gives some interesting statistics on the matter of savings banks, . (_see_ lord monteagle). rochdale bank fraud, , _et seq_. roebuck, mr., m.p., on the government annuities bill, . rose, right hon. george, establishes the southampton savings bank, ; cobbett's attack upon him, - ; introduces the first savings bank bill, ; re-introduces it the year after, . rural districts, savings banks in, . ruthwell bank: established by dr. duncan, _et seq._; rules, &c. of the, - ; character of the, . s. savings banks: not an object of controversy, ; the founder of, ; the first bill for regulating, ; compared with friendly societies, - ; their results on the general progress of the country, to , ; their merits disputed, - ; frauds in, chapter vi. p. _et seq._; progress of, ; list of counties without, ; number of, in , ; absence of facilities in, ; number of hours they were open in , - ; return relating to the ten principal, ; the principal defects of the savings bank system, - ; results of post office banks on, _et seq._; list of those transferred to post office system, _et seq_; and government annuities, ; are preliminary means, ; are safe and productive, - ; abstracts of acts relating to, _appendix,_ _et seq_. scotch savings banks: early acts relating to, - ; the consolidation act of extended to, . scudamore, mr., reports on mr. chetwynd's plan of post office banks, ; on a scheme for working government annuities, ; superintends the arrangements for introducing the measure, ; devises a plan for assisting post office employés to insure their lives, . seamen's savings banks, - ; act regulating, - . secrecy in connexion with post office banks, . security of savings, the most important consideration, ; erroneous impression as to government security, ; in post office banks, . sharman, mr., _handy book_, ; ; _note_. sheridan, mr., m.p., on friendly societies, . sikes, mr. c. w., of huddersfield; is a witness before the committee of , ; his evidence, _note_; _note_; on the increase of facilities, ; some particulars of his life, _et seq._; proposes preliminary banks, ; writes a pamphlet called "good times," ; addresses sir g. c. lewis on savings bank reforms, ; his recommendations, - ; government banks, ; proposes post office savings banks, _et seq._; addresses mr. gladstone on the subject, ; defects of mr. sikes's plan, ; supports the government scheme, . slaney, mr., m.p., on savings banks, ; . smith, rev. thomas, of wendover, establishes on of the first savings banks, - . southampton savings bank, origin of, . spearman, sir alexander y., ; gives evidence before the committee of , - ; explains the mode of investing savings bank money, - ; on the government loss, . stanley, lord, of alderley, takes charge of the savings bank money bill in the house of lords, ; introduces and carries through the house the post office savings bank bill, _et seq._; carries the government annuities bill through the lords, ; . statistics, relating to savings banks, ; ; to post office savings banks, _et seq._; to savings banks, post office banks, government annuities, &c. _appendix_, _et seq._ stillorgan bank, the first savings bank in ireland, . sunday bank, the, at hertford, . surplus fund of savings banks, ; mr. hume on, ; can be applied to compensate savings bank officials, . t. u. v. taxation, removal of, . taylor, mr. e. of rochdale, is examined before the committee of , ; ; writes a pamphlet arising out of the rochdale frauds, ; on government security, . _times_, the: on early savings banks, ; commences hostile criticism on savings banks, - ; on frauds on savings banks, ; on post office banks, ; on government insurance, . tottenham, an early savings bank at, . tralee bank fraud, _et seq._ transfer certificates, copy of, &c. _appendix_ . treasurers, government proposals for, . trust accounts, legislation on, . trustees, liability of: - ; unsatisfactory state of the law regarding, ; mentioned in connexion with the hertford bank fraud, ; legal decision on, ; sir c. wood attempts to regulate the, . vansittart, mr., m.p., on savings banks, ; speaks of the safety of savings bank money, . w. wages, increase in the rate of, . wakefield, mrs. priscilla, establishes a bank in , . wellington, duke of, on military banks, _note_. wendover, and early bank at, . whitbread, mr., m.p., introduces his poor law bill, ; proposes a poor's fund and poor's insurance office, ; further reference to his proposals, ; ; provisions of his measures. (see _appendix_ a). wilberforce, mr., on savings banks, . willoughby, sir henry: opposes sir c. wood's bill of , ; ; is a member of the committee of , ; speaks in the house on the subject, ; assists in bringing in a bill to remedy the defects of the law, ; ; opposes the post office bank bill, . withdrawals, notices of: a subject of dispute, ; concerning, in post office banks, - . wood, sir charles: proposes to amend the law of savings banks, in , ; opposes the motion for a committee on irish banks, ; proposes compensation to the cuffe street depositors, ; brings in an important measure in , ; explains its provisions, - ; withdraws it, ; replies to a vote of censure moved by mr. h. a. herbert, . worcester savings bank fraud, _note_. working classes, improvements in the condition of, ; do not need charity, ; ; like to be advised, ; duty of employers to, - . london: printed by r. clay, son, and taylor * * * * * transcriber's note: missing letters were added to incompletely printed words. punctuation was made consistent. italic marking was removed from abbreviations for shillings and pence in table column headers. footnotes were numbered sequentially and moved to the end of the chapter in which they occur. footnote refers to the table following the anchor. the table was moved to fall between paragraphs, rather than interrupt the paragraph. footnote refers to table . very wide tables were split into sequences. two table numbers were standardized to arabic. a key code for column headers was added to the first table in chapter ix. other changes: two instances of 'artizan' were changed to 'artisan' two instances of "i. e." changed to "i.e." 'rotherdam' changed to 'rotherham' ... guest and chrimes, rotherham. removed _l_ from ' _l_ percent' ...higher rate of per cent.... space removed from 'sm all' ... investment of small surpluses,... italics removed from abbreviations for shillings and pence, in tables. 'monquhilter' changed to 'monquhitter' in the table in chapter vi. 'pamphet' changed to 'pamphlet' ... of a pamphlet entitled ... 'gnee' changed to 'gone' ... to have gone so far,... index entry for post office savings banks: 'busi-' changed to 'business' ... nature of the business done in ... 'effected' to 'affected' ... how affected by frauds ... all (frightfully unofficial) about an old friend of mine what he most probably was what he most certainly will be and who has done this? why the cat. dedicated to the notice of all the firms of this great city whether bankers brokers or others who in their rise to wealth and affluence have not yet recognised the "generous policy" that their success is always partly due to the honesty and energy of their servants, and who after taking to themselves all the _honey_ in the _hive_ leave to the workers nothing but the lees. "a good master maketh a good servant" martin tupper. [illustration: all (frightfully unofficial) about an old friend of mine what he most probably was what he most certainly will be and who has done this? why the cat.] [illustration: what he most probably was, before he became] [illustration: a general-private-joint-continental-universal-everlasting respectable-responsible bankers clerk. during his st year of service (fancies he's got a "good thing")] [illustration: at years service, he has his doubts.] [illustration: this is the bc of years service--he--_hasn't any doubts now_. bless you! he knows _all about it, and_ he's going home! to his--_dinner_!!!] [illustration: here it is! and ought'nt he to be _thankful_] [illustration: at , , or years service, _he wonders_ (_ha! ha!_) why his old heart may not be eased _by a pension_ that _he and his_ can live upon, together with a _handsome present_ of _the remnant of his life_] [illustration: but he is informed that if he will send in his _resignation_ _first_, it will be seen what can be done for him _afterwards_ "_is he quite worn out.?_ not another _ months_? dear me! _quite sure?_ ah!"] [illustration: this generous proposal does'nt satisfy our greedy old friend, so he comes up to the scratch as usual and he works all day, and he dreams all night] [illustration: once he dreamt (silly old boy) he dreamt] [illustration: he had an _idea_!!! (of course it was only a dream.)] [illustration: (his dream) why not appeal to his masters the directors they can but say no. they are gentlemen, and _they won't eat him_] [illustration: (his dream) and of cours.--hooray!!!! the directors declare that their _trusted servant_ should not be an _exception_ to the _universal rule_, but that he had risen in value like everything else and they further declare, they will not permit, _the man whose labour increases with their success_, to be _left behind_ by the butcher, the baker, or the candlestick maker.--_no_ not to put dividends into their own pockets, _or any other mans_] [illustration: (still his dream.) and georgiana-amelia looks more like the girl he took away from the old rectory years ago than he ever hoped to see again why she's getting fat!, sir fat!] [illustration: (but dreams) and so is tommy' sir.] [illustration: (very happy dreams) and georgiana amelia, junior.] [illustration: (are very very seldom) and so goodbye, sir goodbye. no, we _do not_ live at poplar now--why, yes, quite a change. just so good bye to you, sir _hem_--_we are going to church._] [illustration: (realized) oh! _are you_.--_you're going to the city_, old boy. what!!! _give you more pay_--pooh. think of the honorable _confidence_ your masters _cannot help giving you_--think of that--very valuable, eh. _ah! i should think so_, and you had better wake up those shakey old legs of yours, or you'll be _under the line_] [illustration: and one morning _he is_ _under the line_] [illustration: and _this is the result of his lifes labour_] [illustration: extraordinary coincidence some body else has been dreaming or our mutual friend being the final scratches of the cat who after this will vanish and like the baseless fabrick of a dream leave not a wrack behind] [illustration: having attended a committee of the most exciting and exhaustive nature "somebody" indulges in the traditional " winks".] [illustration: but the committee hasn't done with him yet--the "winks" are disturbed, and the phantom of a defunct argument, that _he_ settled long ago, sits itself rudely on the table, in a makeshifty sort of way and insists upon having another "go in".] [illustration: and so he thinks, _he_ thinks! his income is too small; why _it's princely_, said the "shadowy party" whose own "pull" was about £ , a year, he ought to make it do somehow, and if he don't like it you can manage without him. now look here, let me show you an article.] [illustration: _there!!!_ now i call this cheap.--_there he is_, salary £ . _and_ white choker _not_ objected to. (for the matter of that he'll wear plush or--anything)----come he's goodlooking. he'll work for you, respect you, as much as he does himself, be a credit to you, _and_ finally, he's been in the pawnbroking line, _says_ _he lives on oatmeal porridge--and comes from the north_ (ed note "puss" who comes fra' the north hersel, is disgusted with the "cad", _and does'nt believe him_.] [illustration: his harmless pursuits----] [illustration: and his simple tastes,----] [illustration: will render him at once the _ornament_ and "prop" of your establisment.--] [illustration: _and_ if in the ingenuous enthusiasm of his _generous_ nature, _he should_ by chance "run short"; he's _not the man_ to pester you with petitions. _he_ has a soul above _asking for money_.] [illustration: just so--,] [illustration: ha! ha! laughed "somebody", to "the" great danger of the "winks"; _of course_, and we shouldn't dream of taking such a scamp. _we_, hem, have _always_ drawn _our_ staff from a _very_ different class, and _why_ shouldn't we always do so, _we_ are quite satisfied with them, and our business, and our profits are increasing yearly.----upon my word said "somebody" _everything_ connected with "our house" gives me unlimited satisfaction.] [illustration: and you are going to make the satisfaction just a _leetle mutual_; sir, indeed we ought to thank you very much; said a new and most impertinent essence, who appeared, somewhat prematurely, to have made up his mind, and so settled the question out of hand.] [illustration: what do you mean, sir. we don't require _your_ interference said "somebody" (who couldn't encourage that sort of thing). i see they forgot the doctor, and no doubt your _wife will go_ to church. yes, that sort of thing does cost _something_, and you couldn't very well stop her, no, no. and i see you _never_ spend _any money_ for conveyance, and you never have _any_ recreation, or change of air; nothing to help through the dismal monotony of your days holiday in _november_ or _february_ and you can't even afford " hours at the sea side" for the wife and little ones. in fact you've no money. _no comfort! no pipe! no glass! no music! no paper! no nothing._ well!!! said "somebody" you're an _extraordinary man_--_but i don't believe you_--now i can _understand this_. _you cannot afford_ _any_ of these things, _that_ is clear. but human nature is frail, and alas! b.c.s _are but_ human. come, sir confess at least _to some of these iniquities_, and then--_what is the consequence?_] [illustration: why per cent of you get into debt, and you know it said "somebody" do you think you can decieve me? why its clear that if you will _really_ make out a list of the butcher, the baker, the water rate, the _poor rate_!! and the income tax (every penny--poor devil) and _all the other luxuries in which you indulge_. why both ends _can't_ meet] [illustration: somebody somebody, esquire of course they wont. i've said so before. give you my vote and interest? do we wish to conduct our business on the "old clo" principle, like a firm of jew slopmakers? said "somebody", getting indignant, and dangerously red about the face--no! very well. give you my vote and interest? _i always have._ give them again?----(you know young man, this is all very unofficial--well then) yes.--_i will_] [illustration: and "somebody" said "i will" so loudly that he woke himself up.] [illustration: and "somebody" _who was "somebody"_ (may his shadow never be less) _did_ give his vote and interest. _and the result_, some of it is in my pocket (_long may it stop there_) the result is, that _our house_ is up to _any amount of work_ and will undertake _to beat the cheap jacks into fits_ let us hope the example of "our little shop" will be catching now then alltogether and so say all of us and so say all of us for he is a jolly good somebody coming see him do it! puss in taking leave of his friends _congratulates_ them on the _fact_ that _they know who is_ our "mutual friend" (and it isn't everyone can say that). in conclusion it is to be hoped that "nobody" will be the only person so _unfeline_ as to dream of "putting a stopper on the cat's meat"] * * * * * transcriber's notes retained the spelling and punctuation anomalies of the original. (this file was produced from images generously made available by cornell university digital collections) bank of the manhattan company origin history progress wall street new york [illustration: present office of the manhattan company - wall street building erected jointly in by the manhattan company and the merchants' national bank] bank of the manhattan company chartered a progressive commercial bank [illustration: chief of the manhattans] wall street new york [illustration: common seal] on may th, , the committee of by-laws reported "that they had devised a common seal for the corporation, the description of which is as follows: "oceanus, one of the sea gods, sitting in a reclining posture on a rising ground pouring water from an urn which forms a river and terminates in a lake. on the exergue will be inscribed 'seal of the manhattan company.'" there are nine banks now in existence whose history reaches back into the eighteenth century. of these, two are in massachusetts, two in connecticut, one in pennsylvania, one in delaware, one in maryland and two in new york. corporate banking in new york began with the organization of the bank of new york by alexander hamilton in , which received its charter in . for fifteen years this bank, together with the new york branch of the first bank of the united states, were the only banks doing business in either the city or state of new york. with hamilton and the federals in control of the legislature, new bank charters were unobtainable. this monopoly of banking facilities in the city and state was of great strategic value to the political party in control, and naturally aroused jealousy and resentment among the members of the opposition, whose leader was aaron burr. [illustration: excerpt from charter] in new york city suffered from a severe yellow fever epidemic, which was attributed to an inadequate and inferior water supply. upon the assembling of the legislature in , an association of individuals, among whom aaron burr was the moving spirit, applied for a charter for the purpose of "supplying the city of new york with pure and wholesome water." with a capital of $ , , , the project was an ambitious one for those days, and, as there was considerable uncertainty about the probable cost of the water system, a clause was inserted in the charter, permitting the company to employ all surplus capital in the purchase of public or other stock or in any other monied transactions or operations, not inconsistent with the constitution and laws of new york or of the united states. a great effort was made to defeat the charter on account of this clause granting the company banking privileges. but the necessity for a proper water system, which could be procured only by the organization of a responsible company with large capital, carried it through the legislature and it received the governor's signature. [illustration: form of early stock certificate] the bill was passed april d, , and by april d books were opened for public subscription to the $ , , capital stock of the manhattan company, the par value of which was $ . these original books are still in the possession of the company, and contain the signatures of many of the prominent men of the time. by may th the entire amount had been subscribed by several thousand persons--the city of new york having taken , of the shares. the charter provided that the recorder of the city should be _ex-officio_ a director of the company, a provision which was in effect for years, until the abolition of the office in . [illustration: subscriptions of directors reproduced from original subscription book] [illustration: oath of first president] the water system at the first meeting of the directors, held at the house of edward barden, innkeeper, on april th, , the following directors were present: daniel ludlow, john watts, john b. church, brockholst livingston, william laight, pascal n. smith, samuel osgood, john stevens, john b. coles, john broome, aaron burr, and richard harrison, recorder of the city of new york, ex. officio, the only absentee being william edgar. daniel ludlow was chosen president, and the following minute was made: the principal object of this incorporation being to obtain a supply of pure and wholesome water for the city of new york. resolved that samuel osgood, john b. coles and john stevens be a committee to report with all convenient speed the best means to be pursued to obtain such supply. [illustration: old wooden water mains] on may th, , the water committee was empowered "to contract for as many pine logs as they may think necessary for pipes and also for boring the same." [illustration: contemporary cartoon] a number of wells were sunk, reservoirs and tanks built, and the distributing system extended generally through the city south of city hall. about the system was extended north along broadway as far as bleecker street, and at that time the company had about twenty-five miles of mains and supplied , houses. [illustration: manhattan company reservoir on chambers street] while the water was said to be "wholesome," its quality did not give entire satisfaction, as may be seen from the muddiness of the water in the glass held by "pure manhattan" in the contemporary cartoon reproduced on the opposite page. over one of the earliest wells, at the corner of reade and center streets, a tank of iron plates was erected. this tank is now inclosed in an old-fashioned building which is still owned by the manhattan company. the company continued to operate its water service until about the time the croton system was completed in . [illustration: old water gate dug up in park row in ] founding and early history of the bank on april , , a committee of the directors was appointed "to consider the most proper means of employing the capital of the company." the committee reported on june , , in favor of opening an office of discount and deposit, and a house was bought on the site of the present no. wall street, in which, on september , , the "bank" of the manhattan company began business. the following is one of the earliest advertisements, reproduced from the mercantile advertiser, october , : manhattan company. the office of discount and deposit will open for the transaction of business, for the present, at o'clock in the forenoon, and continue open until o'clock in the afternoon, when the business of the day will be closed. henry remsen, cashier. september . [illustration: wall street in present no. wall street] the first action of the directors after the opening of the bank was: resolved, that this board will hereafter meet twice a week, to wit, on mondays and thursdays of each week, at o'clock. the policy of semi-weekly meetings still prevails in the manhattan company, and its board of twelve directors keeps in close touch with all its affairs. [illustration: manhattan company currency] two months after the bank was opened the directors resolved, that a committee be appointed to visit the vaults and examine the cash and look over the effects of the manhattan company deposited therein. thus, at the outset, the manhattan company required its directors periodically to examine its cash and securities, a safeguard which, years later, the state of new york made compulsory for all state banking institutions. the bank of the manhattan company was profitable from the start and commenced paying dividends in july . the total dividends to and including january, , have aggregated $ , , . [illustration: fractional currency used in utica] although the main office of the bank has always been at the present no. wall street, in the autumn of all the banks moved temporarily to the village of greenwich to escape the usual autumn fever epidemic. the directors then determined to provide a country office for use during the "sickly season." many persons offered sites; among them "mr. astor proposed verbally to cede eight lots of ground near greenwich, being part of his purchase from gov. clinton." finally land was acquired between the "bowery road" and the east river. from to branches of the bank were maintained in utica and poughkeepsie. in negotiations were consummated for a "union of the capitals and interests" of the new york state bank of albany and the manhattan company. a bill authorizing the consolidation was offered in the legislature, but it failed to pass, and the plan was abandoned. in the legislature, in enacting certain amendments to the charter of the manhattan company, reserved for the state the right to take , shares of its capital stock. this right was exercised and the capital stock was increased for the purpose from $ , , to $ , , . both the state and the city of new york are still stockholders, this being the only bank stock which the state holds. in , as shown in the cartoon reproduced on the following page, the manhattan company was one of the banks to receive the government deposits when they were withdrawn from the second united states bank by president jackson. [illustration: published and for sale wholesale and retail by a imbert at his caricature store no broadway] present organization and policy of the bank in the manhattan company became one of the original members of the new york clearing house association, and stands, in order of seniority, no. on its roll. from down to , the manhattan company's deposits averaged between $ , , and $ , , . the deposits doubled during the eighties, again during the nineties, and again in the decade ending . this growth has been made along healthy and normal lines, and not by absorbing or consolidating with other banking institutions. the fact that the manhattan company is an entirely independent institution has doubtless assisted its growth in recent years. the steady increase in both the deposits and the surplus of the manhattan company is evidence of its vitality, its sound banking traditions and its ability to keep its methods so modernized as to give efficient service to its widening circle of clients. to meet both its own needs and those of its commercial and banking patrons, well organized credit and foreign exchange departments are maintained. [illustration: building of the manhattan company wall street in ] the manhattan company, acting as the reserve agent of many state banks and trust companies throughout the country, has a substantial volume of bank deposits. but it was originally established as an "office of discount and deposit," and is today primarily a commercial bank, seeking the active accounts of merchants and manufacturers and extending them accommodation in keeping with their credit and standing, for which the diversified character of its deposits has always provided ample funds. irving press and east thirty-first street new york honest money honest money by arthur i. fonda new york macmillan and co. and london _all rights reserved_ copyright, , by macmillan and co. norwood press: j. s. cushing & co.--berwick & smith. norwood, mass., u.s.a. preface. in an article in the "american journal of politics" for july, , i gave a brief statement of the conclusions i had reached in an attempt to analyze the requirements of a perfect money. the limits of a magazine article prevented a full discussion of the subject; many points were left untouched, and all quotations from the works of other writers, in support of the brief arguments given, were of necessity omitted. as the course of events since the article referred to was written has more fully confirmed the conclusions stated therein, a desire to give the subject ampler treatment, which its importance seems to demand, has led to the writing of this little work. if apology is needed for a further contribution to the mass of literature on the subject of money, with which the country has of late been flooded, it must be found in the above explanation of the reasons which have led to the production of the present volume, coupled with the fact that the questions involved are far from being settled, and that the loud complaints, and the many financial schemes and plans, that have appeared all over the country make it probable that further legislation on the subject will be attempted in the near future. it must be conceded that there is something radically wrong in a country like the united states, rich in all of the necessaries and most of the luxuries of life, where nature has been most bounteous, and where the not excessive population is exceptionally enterprising and industrious, when a large part of the people cannot at times find employment. when, with an abundance of unoccupied land, and a great diversity of undeveloped resources, capital and labor--both anxious for profitable employment--cannot find it; and when men suffer for the necessaries of life, not in one section only, but universally and in large numbers, while our warehouses are filled with manufactured goods, and our barns and granaries are bursting with food products. this is a condition that is certainly as wrong as it is unnecessary. such a condition occurring once or twice in the history of a country might be attributed to accident, but recurring, as it does, periodically, it argues a fault in our economic system. so wide a disturbance, extended also to other countries, betokens a general cause. what that cause is, it is not difficult to perceive--all indications point to our monetary system as the chief source of the trouble. there are doubtless other causes that contribute in some degree to create variations in prosperity, but no other single cause, or combination of causes, seems to us competent to account for the great fluctuations; while the one we have cited alone may easily do so. this work may have little direct effect in bringing about an improvement in our money system, but it is the hope of the writer that it may have at least an indirect effect by helping to spread a better knowledge of the requirements of such a system and of the principles involved. much of the current discussion of the subject of money betrays ignorance of those fundamental principles of the science which are agreed upon by all economists, if it does not wholly disregard them. i have endeavoured in this work to avoid such errors by a painstaking analysis of the subject, and by a careful comparison of the opinions of authorities on the principles involved. starting from this foundation i have deduced the requirements for an honest money, shown the faults of our present system in the light of these requirements, as well as the merits and defects of various changes that have been proposed for its betterment, and, in conclusion, have outlined a system that seems to meet the requirements and to correct existing faults. i desire to acknowledge my indebtedness, not only to the many works mentioned and quoted from herein, but to others, neither mentioned nor quoted, which have been of material assistance in corroborating the opinions i have ventured to advance. a. i. f. denver, colo. contents. chapter i. page value and the standard of value definition of value supply and demand the standard of value chapter ii. money definition of money the functions and requirements of money money value money demand and supply necessity for invariable money value chapter iii. existing monetary systems the gold standard gresham's law the silver standard bi-metallism paper money chapter iv. stability of gold and silver values gold-standard prices silver-standard prices chapter v. criticism of some gold-standard arguments chapter vi. foreign commerce chapter vii. money in the united states chapter viii. some proposed changes in our money system chapter ix. a new monetary system the standard of value the medium of exchange chapter x. merits and objections considered merits of plan objections answered chapter xi. conclusion index honest money chapter i. value and the standard of value. _definition of value._ a clear conception of the meaning of the term _value_ is the first essential to a discussion of the subject of money. under the general term _value_ the older economists recognized two distinct conceptions, which they distinguished as _value in use_ and _value in exchange_. to the former they gave little attention, merely stating that while it was essential to value in exchange, the latter was not proportional to nor determined by the former, and citing air and water as familiar examples of objects having great utility, or use value, yet having little or no exchange value. modern economists--chiefly those of the austrian school--have analyzed the subject more thoroughly, especially the relation between the two conceptions, and have shown that utility or subjective value, as it is generally termed by them, is an expression both of human desire and of the quantity of the necessary commodity available to satisfy such desire. the utility of a thing grows less as the quantity of it increases, and it is the utility of the last increment of supply, or the marginal utility, that determines the subjective value of the whole supply, and it is the ratios between these subjective values that determine exchange values. air and water, for instance, have no great utility, as viewed by the older economists, except where the supply is limited; ordinarily, their abundance makes their utility, or use value, small. it is not essential to the purpose of this work to enter into an abstract discussion of the theory of value further than is necessary to make clear the fact that the present analysis in no way lessens or invalidates the distinction between the two conceptions of value noted by the earlier economists,--a fact which has been overlooked by some who have accepted the marginal utility theory. the distinction remains, broad and clear. the one conception, whether called "value in use," "marginal utility," or "subjective value," pertains wholly to the relation which a single good, or unit group of goods, bears to a single individual, or society unit, in respect to human well-being, and has no reference or relation to any other individual or other good. the other conception, called "objective value," or "exchange value," is dual in its nature, involving in all cases two or more commodities. abstractly, it is _the ratio at which commodities may be exchanged for each other_, or, since such ratio for a unit of one commodity is expressed by the amount of another given for it, the exchange value of a thing is the quantity of some other thing that will be evenly exchanged for it, or, considered in a general sense, the amount of commodities in general it will exchange for,--_its general purchasing power_, in short. this latter conception--exchange value--is the one that principally concerns us in discussing the subject of money. it is also the conception generally in mind when the simple term _value_ is used either by economists or by the general public, and wherever the term is used in this work without qualification it is to be understood in that sense. the austrian economist, e. von böhm-bawerk, says, in his "positive theory of capital," p. :-- "value in the subjective sense is the importance which a good, or a complex of goods, possesses with regard to the well-being of a subject." "besides the expression 'value in exchange,' english economists use, quite indifferently, the expression 'purchasing power,' and we germans are beginning in the same way to put in general use the term _tauschkraft_." the value of a thing may be considered either in a particular sense, with reference to some other specified thing, or it may be considered in a general sense, with reference to all other things considered as a whole. we may say the value of a bushel of wheat is two bushels of corn, meaning that these two commodities exchange for each other in that ratio; or we may speak of the value of wheat having risen or fallen, meaning that its general purchasing power, or the ratio between that and all other things taken as a unit or a whole, has increased or decreased. the term must invariably be used or considered in a general sense, unless otherwise specifically stated, for we must always have some other thing in mind besides the one whose value we are considering; while if no other is stated, commodities in general (taken as a whole) is that thing. value being a ratio, it is impossible for all values to rise or fall simultaneously. the sum of subjective values may increase or decrease,--indeed it is one of the great objects of human endeavour to increase the sum of want-satisfying power,--but the sum of the ratios between these subjective values is constant. as one term of any ratio rises relative to the other, the second necessarily falls as regards the first. this principle is so universally recognized that quotations might be given from almost every work on political economy in support of it. the following will be sufficient, however, as regards both the definition of value and this principle. john stuart mill says, in his "principles of political economy":-- "value is a relative term. the value of a thing means the quantity of some other thing, or of things in general, which it exchanges for. the values of all things can never, therefore, rise or fall simultaneously. there is no such thing as a general rise or a general fall of values. every rise of value supposes a fall, and every fall a rise." again, he says:-- "things which are exchanged for one another can no more all fall, or all rise, than a dozen runners can each outstrip all the rest, or a hundred trees all overtop one another." prof. s. n. patten says, in "dynamic economics," p. : "objective values, however, are never a sum, but only a relation between subjective values. there can never be high or low objective values of commodities as a whole. it is therefore impossible to add to or subtract from them." this latter quotation, as well as the preceding one from von böhm-bawerk,--both exponents of the marginal utility theory,--may help to correct a quite prevalent impression that this later theory does not distinguish between the two conceptions of value, and that because the sum of subjective values may increase, the sum of objective or exchange values can increase also. _supply and demand._ all economists recognize the fact that the immediate determiner of value is the relation between supply and demand. these terms in their economic sense mean something more than mere desire and mere quantity. _supply_ means the amount offered in exchange, and _demand_ means not only a desire, but a desire coupled with the ability and willingness to give other commodities in exchange for the one wanted. in this sense the terms are strictly correlative. the supply of a commodity (that is, the amount offered) may be considered as equivalent to a demand for some other commodity, or for commodities in general. we may say, then, that the value of any commodity is determined by the ratio that the demand for that commodity bears to its supply; or by the ratio that the demand for that commodity bears to the demand for some other commodity,--or commodities in general, when the term _value_ is used in a general sense and not with reference to some other specified thing only. (the objection that has been made by some writers that a ratio could not logically exist between a desire [demand] and a quantity [supply], does not apply to these terms in their economic sense; for, as above stated, they are something more than a mere desire and a mere quantity, and the expression is translatable into the other expression, "ratio between the demand for one commodity and the demand for others in general.") the statement of the later economists that exchange value depends on, and is determined by, the ratio between subjective values in no way conflicts with the above statement that value is determined by the ratio between demand and supply, for the demand for a commodity is determined by its subjective value and by that alone, and must vary with it. hence, as the quantity of anything increases and its subjective value lessens, the demand for it relative to the quantity of other articles also lessens, and its value falls, and _vice versa_. this close connection between value and the ratio between demand and supply--value rising as the ratio increases, and falling as it grows less--is true in all cases. no other factor can affect the value of any commodity except by altering the relation or ratio between these two. cost of production is a more remote factor that enters into the determination of value in most but not in all cases, through its effect on supply. it is used, like the term _value_, in two senses, a subjective and an objective sense. in the former it means the pain of labour and waiting that must be undergone to produce the good that is being considered,--the negative pleasure given to get the positive pleasure to be derived from that good. in its objective sense--the sense in which it is generally used--cost of production means the goods that must otherwise be given for, bartered or set against those desired; in a simple case of direct production, it means the goods that might have been produced, in lieu of those that have been produced, with the same subjective cost; in more complex cases, it means the sum of the goods sacrificed, in the shape of raw materials, rent, wages, interest, etc., to get the one produced. when the value of a commodity falls to or below the cost of production, or even when it approaches it so closely as to reduce the margin between the two--the producer's profit--below that in other industries, then, men will cease to produce the one and turn their labour and capital to producing the others which offer greater profit, thus lowering the supply of the abandoned product and raising that of the more profitable, thereby affecting the value of both. the effect of this operation of the law of cost is to equalize profits and make the values of things conform to their cost or be proportional thereto. the law can only operate when men are free to turn their labour from one industry to another. hence arises the important exception to the law, that the values of goods produced by a monopoly are not affected by their cost of production. only under free competition does the law operate in full force. as monopoly becomes a factor cost ceases to be, and, when the monopoly is complete, cost has no weight whatever in the determination of value. for analogous reasons, cost enters but partially into the determination of the value of such goods as are dependent more or less on luck or chance for their production, as in the case of precious stones, gold, silver, etc. _the standard of value._ we may use the value of anything as a measure by which to compare the values of any and all other things, but as all the factors that determine value are variable, the value of everything is variable. any value may rise with reference to some other value, and at the same time fall with reference to a third. by what standard, or invariable measure at all times and places, can we compare the values of goods to determine their constancy or variability? we must not forget that there are two kinds of value, and that it is a standard of exchange value we are seeking. so far as it may be possible to formulate a standard of subjective value, it must consist of the pain or inutility of labour; for this kind of value pertains only to a single good, and cannot be referred to other goods without confusing it with the other conception. we cannot measure the absolute pleasure a good will give to an individual except by the pain he will undergo to get it. it is not a standard for this sort of value we want. it was evidently some such conception as the above--confusing, however, not only the two kinds of value but the two descriptions of labour--that led adam smith to consider labour as the ultimate standard of value. he appears also to have confused the idea of a standard of value with that of a determiner of value. these errors were pointed out in part by ricardo and, in part also, by j. s. mill and later writers; hence the contention that labour is in any way a standard of value has long been abandoned by the ablest economists. the idea still lingers, however, and is frequently brought forward in current discussions, and for this reason it seems necessary to analyze briefly the relation of labour to value. labour is necessary to the production of all commodities, but it is not itself a commodity, nor anything which for itself is desired. it is a force, and, like every force, valuable according to the results it accomplishes. if unproductive, it has no value; if productive, its value varies according to the value of the commodities or utilities it creates. we use the terms "price of labour" or "value of labour," implying that it is the labour which is valued, and which is bought and sold; but the terms are merely a convenience. what is really bought and sold is the commodity or utility such labour has produced or will produce. if it were the labour itself, then the purchaser would receive not only the labour, but the commodity it produced, in exchange for the wages paid,--a double return,--which, of course, is absurd. three descriptions of labour may be distinguished in connection with the value of a commodity, viz.:-- ( ) the labour expended in its production. ( ) the labour in general it will purchase. ( ) the labour necessary to produce more of it. the first kind of labour in no way affects the existing supply or demand of the commodity, and is neither a measure of its value nor a regulator or determining factor of such value. evidences are not lacking to prove that a commodity will frequently not exchange for as much labour as was expended in producing it. the second kind of labour, the amount in general which a commodity will purchase, depends on the amount of commodities such labour will produce, less the share which goes to capital as its reward; for, neglecting rent or classing it with capital, these two, labour and capital, are joint factors in production and divide between them the total product. it is hardly necessary to observe that labour is continually growing more efficient; that improved skill and methods enable a much larger amount of commodities in general to be produced, with a certain amount of labour, than could formerly be produced; and that labour receives, as its share of such product, a much larger amount than formerly. it is thus evident, that a commodity which would exchange for the same amount of labour now as formerly, would exchange for a much larger amount of commodities in general now than then, and, if we adhere to our definition of exchange value, would be worth _more_ than formerly; while if labour be taken as a standard of value, it would be worth the _same_. the use of this form of labour as a standard of value is, it will be seen, incompatible with the definition of value. it may serve as a measure of the relative values of two commodities at any particular time and place, just as any third commodity may; but, as ricardo remarks, "is subject to as many fluctuations as the commodities compared with it." the same argument applies to the third form of labour--that necessary to produce more of a commodity. this form of labour, however, is one of the factors in the cost of production, and through its effect on cost is one of the more remote factors that determine value, as explained in considering cost of production, but this does not make it in any sense a standard. we may conclude, then, that labour in any form is not a standard of value; that, as john stuart mill observes, it "discards the idea of exchange value altogether, substituting a totally different idea, more analogous to value in use." since the values of things can never rise or fall simultaneously, every rise supposing a fall, and every fall a rise, it follows that the values of all taken together must be constant; in other words, that general values cannot change. thus it is that we find whether any one thing has risen or fallen in value, as between one period and another, only by comparing it with all others,--in short, by its general exchange or purchasing power. if this has increased, then its value has risen; if it has decreased, its value has fallen. it is evidently not necessary that anything should exchange for more or less of _every_ other thing to show a rise or fall of value, but only that it should, on the average, exchange for more or less of all; that its average purchasing power should be greater or less. if it has exchanged at different times for the same amounts, on the average, of all other things, its value, clearly, has remained constant. this is the only standard, or test, which can be applied to the exchange value of any commodity to determine its constancy or variability, and it is inherent in the very definition of exchange value. the values of commodities may be compared to the surface of the ocean, which, vexed by winds and tides, is never at rest, every point continually rising or falling as compared with others. as some points rise others fall, yet there is a mean level which does not vary, and by comparison with which the variations of level of any particular point may be determined. so with values, there is a mean or average which is constant, and by referring individual values to that we can determine their fluctuations. these ideas will become clearer as we proceed to apply them concretely to the special case of money. although there can be but one real _standard of value_, invariable at all times and places, yet, as before stated, any commodity may serve as a _measure of value_, and the great convenience subserved, by all the people of any locality or country using the same commodity instead of a number of different ones for this purpose, early led to the adoption of some one commodity in each locality as a "money" to measure values and facilitate exchanges. chapter ii. money. _definition of money._ money has been variously defined by different writers. perhaps the definition given by prof. f. a. walker, though lengthy, is the most comprehensive. he says: "money is that which passes freely from hand to hand throughout the community in final discharge of debts and full payment for commodities, being accepted equally without reference to the character or credit of the person who offers it, and without the intention of the person who receives it to consume it, or enjoy it, or to apply it to any other use than in turn to tender it to others in discharge of debts or full payment for commodities." this definition has been indorsed by several other writers; by some, however, the term _money_ is restricted to coin, paper money being called currency. the distinction is perfectly proper, though not generally concurred in. people commonly use the terms _money_ and _currency_ indiscriminately for both coin and paper money, since they perform identically the same work where both are used together, and the paper is convertible into coin at any time. where the paper is used alone--"inconvertible paper"--coin is really not money; it ceases to circulate as money; it is hoarded as treasure, or bought and sold as a commodity, but fails to have that general use in current transactions in that country which alone entitles any commodity to be called money. the distinction sought to be made between paper money and coin arises largely, it is thought, from the idea that coin has a value in itself which paper money has not. this idea is erroneous. value, as we have seen, is a ratio or relation, and though the value of anything is based on a desire for it, that desire may arise either from the satisfaction which the use or consumption of it will bring, or from the belief that it can be exchanged for some other thing that will give satisfaction in use or consumption. the value of money is due to the latter of these two causes. no one wants money except for the purpose of exchanging it for other commodities; under modern conditions it is necessary for this purpose,--it is the indispensable requisite to the satisfaction of certain human wants. money, therefore, possesses an indirect if not a direct subjective value which forms the basis of its exchange value. paper money possesses the power of satisfying this need for money to the same extent that coin does, under like conditions, and it has, therefore, both subjective value and exchange value, and the latter is governed by the same law of supply and demand that operates in all cases. the fact that the material of which the money is made is, in one instance, of great cost, and, in the other, of little or no cost, is of minor consequence. the minting of gold and silver into coin may, or may not, add to its value; it really transforms it into another commodity--money--and its value is thenceforth determined by the law of supply and demand as applied to money. the same is true of paper money, the low cost in the production of which is not an element in determining its value, for its production is always a monopoly. there is no reason, then, for not considering paper currency as money, and in using the term we will consider its meaning to be that given by professor walker,--which is also its popular significance,--and as including both paper money and coin. it should be considered, whether of one material or of several circulating concurrently, as a single commodity created for the purpose it fulfils, and as separate and distinct from the material of which it is made. in short, as that commodity to which, by common consent and usage, generally sanctioned by law, all other commodities are referred as a measure of value, and by means of which exchanges are effected. _the functions and requirements of money._ professor jevons, in his valuable work, "money and the mechanism of exchange," gives to money the following threefold functions, viz. as:-- a medium of exchange. a measure of value. a standard of deferred payments. he also inquires if it does not perform a fourth function as a 'store of value.' all authorities give the first two of the above as the principal money functions. some include one or both of the others, and some omit both. prof. f. a. walker objects to the use of the term "measure of value," on the ground that value, being a relation, cannot be measured but can only be expressed. he proposes, instead, the term, "common denominator of value." it is not quite clear why a relation _or_ ratio cannot be measured,--the measure, of course, being a similar ratio,--nor does there seem to be anything gained by the change, while the term proposed seems less clear and correct than the one in general use. money, or the _value_ of the unit of money, is used as a measure in comparing the values of other things just as a yardstick, or the _length_ of a yard, is used in comparing the lengths of other objects. money, in acting as a medium of exchange, must also act as a store of value to some extent, since it stores the value received until it is expended; but the use of money for the purpose of hoarding is not to be regarded as strictly one of its functions, at least not in the sense of requiring to be especially provided for. the fact that it is so used, however, should be borne in mind, as it interferes more or less with its other and more important functions; but in considering the qualities necessary to the best performance of the functions of money we may omit this last function, as any money which fills the requirements for the others will fulfil those necessary to this in a sufficient degree considering its minor importance. as our inquiries in this work will be confined to the money materials now in general use, viz., gold, silver, and paper, we need not consider the qualities necessary to a money material, as given by professor jevons,--such as portability, indestructibility, divisibility, etc.,--further than to say that the qualities he mentions are possessed by all of the money materials now in use, in a sufficient and nearly equal degree. coin, to be sure, is more indestructible than paper; but as the paper is sufficiently acceptable for the purpose, the difference need not concern us. aside from that general acceptability, which is the very essence of money,--without which no commodity could be considered money, and which, therefore, all money may be considered as having,--the great requirements of money are _invariable value_, added to _convenience of form_, _size_, _weight_, _and value_. this latter requirement pertains to the function of a medium of exchange, and the degree in which it is possessed by the different money materials or kinds of money, depends wholly on the values to be transferred by its use. for small amounts, silver is preferable to either gold or paper; as the amount increases, gold becomes preferable to silver; and for all amounts above fractional currency, paper money is unquestionably more convenient in every way than either gold or silver, and the advantage increases with the amount. _invariable value_ is the great requirement for both the functions,--"a measure of value" and "a standard of deferred payments." indeed these two functions may practically be considered one; the only difference between them being centred in the element of time, and that is more or less involved in every exchange requiring the use of money, since some interval must elapse between the sale of one commodity and the purchase of another with the money received,--which constitutes the whole exchange transaction,--and during such interval the money should maintain a constant value. when the interval over which the transaction is spread is a large one, as in the case of notes and bonds, any variability is more noticeable than when the change is distributed among many holders of money. before considering further the great necessity for invariable money value, it will be best to consider the laws and forces which determine and control the value of money. _money value._ that money is a commodity, and that its value varies like that of every commodity in accordance with the law of supply and demand, are incontestable. the fluctuations in the value of money can be detected, it is clear, in the same way that changes in the value of any commodity can be detected, by comparison with all other commodities,--by its average purchasing power, in short. the value of a commodity, when measured by money and expressed in terms of the unit of money, is called its _price_. if the prices of all commodities, or the average of all, rise or fall, it is conclusive evidence that the value of money has changed, for its purchasing power is less in the one case and greater in the other. indeed the statement that general prices have fallen is equivalent to saying that the value of money has increased, and _vice versa_. therefore, if the value of money remains stable, average prices must remain constant. the following quotations will show that these views are correct, and that they are generally accepted by authorities on finance and political economy, though very commonly overlooked and neglected in discussions on the subject. john stuart mill, in his "principles of political economy," says:-- "there is such a thing as a general rise of prices. all commodities may rise in their money price. but there cannot be a general rise of values. it is a contradiction in terms." "that the money prices of all things should rise or fall, provided all rise or fall equally, is in itself, and apart from existing contracts, of no consequence. it affects nobody's wages, profits, or rent. every one gets more money in the one case and less in the other; but of all that is to be bought with money they get neither more nor less than before. it makes no other difference than that of using more or fewer counters to reckon by. the only thing which in this case is really altered in value is money; and the only persons who either gain or lose are the holders of money, or those who have to receive or pay fixed sums of it.... there is a disturbance, in short, of fixed money contracts, and this is an evil whether it takes place in the debtor's favour or in the creditor's.... let it therefore be remembered (and occasions will often rise for calling it to mind) that a general rise or a general fall of values is a contradiction; and that a general rise of prices is merely tantamount to an alteration in the value of money, and is a matter of complete indifference save in so far as it affects existing contracts for receiving and paying fixed pecuniary amounts." "the value of a thing is what it will exchange for: the value of money is what money will exchange for; the purchasing power of money. if prices are low, money will buy much of other things, and is of high value; if prices are high, it will buy little of other things, and is of low value. the value of money is inversely as general prices: falling as they rise and rising as they fall." "the value of money, other things being the same, varies inversely as its quantity; every increase of quantity lowering the value, and every diminution raising it in a ratio exactly equivalent." "that an increase of the quantity of money raises prices, and a diminution lowers them, is the most elementary proposition in the theory of currency." the expression, "other things being the same," in one of these quotations, evidently means "demand remaining the same," and the terms _increase_ and _decrease_ of money unquestionably refer to the increase and decrease relative to demand, since the writer further says:-- "if there be at any time an increase in the number of money transactions, a thing continually liable to happen from differences in the activity of speculation, and even in the time of year (since certain kinds of business are transacted only at particular seasons); an increase of the currency which is only proportional to this increase of transactions, and is of no longer duration, has no tendency to raise prices." _per contra_, therefore, unless the currency be increased to meet such increased demand, there will be a tendency to decreased prices and consequent change in the value of money. stronger statements than these of mill's, or by an abler authority, could not be asked for. prof. r. t. ely, in his "political economy," remarks, p. :-- "values are merely relative, and consequently there can be no such thing as a general rise or fall of values." "value expressed in money is called price. there can be such a thing as a general fall or a general rise of prices. a general fall in prices means an increase in the value of money, and a general rise of prices means a fall in the value of money." david ricardo observes that:-- "the value of money, then, does not wholly depend upon its absolute quantity, but on its quantity relatively to the payments it has to accomplish." the last edition of the "encyclopædia britannica" says, as a conclusion in discussing the value of money, and referring evidently to coin alone:-- "the most correct way to regard the question of money value is that which looks on supply and demand, as interpreted above, as the regulator of its value for a limited time, while regarding cost of production as a force exercising an influence of uncertain amount on its fluctuations during long periods." this view is in exact accordance with the conclusions previously stated in regard to the values of all commodities. the encyclopædia further says:-- "where the coinage of a state is artificially limited, the value of its money plainly depends on supply and demand." quotations might be multiplied indefinitely to the same effect; but enough have been given to show the general consensus of opinion. indeed it may seem that there is no necessity for accumulating evidence in support of propositions so apparent as those stated; unfortunately, however, not a few recent writers have ignored some of them, and the general public seem to make the same mistake; hence, it is of the utmost importance that they be kept clearly in mind. _money demand and supply._ mill affirms that: "the supply of money is all the money _in circulation_ at the time." money that is hoarded has no more effect on prices than if it did not exist. money lying in banks or in the hands of merchants or others to the extent necessary for the safe conduct of their business may be considered money in circulation, but beyond the amount needed for conducting any business the excess may be considered as hoarded. the supply of money in any country depends directly and primarily on the legislation of that country; and secondarily, in most, but not in all cases, on the legislation of other countries, and the production of precious metals available for coinage, etc., all of which can be better analyzed in explaining the different systems. the demand for money is most complicated, since it is affected by a great variety of forces. it varies directly with the activity of commerce, and universally with the activity of money,--a less amount of money doing a greater work when active than when sluggish. it is affected by changes in the customs and habits of the people, by changes in transportation facilities, in diversity of employment, in concentration of population, and, more than all other, it is affected by the extent of credit, the use of banking facilities, etc. credit in its various forms takes the place of money, and does its work in this respect to an enormous and continually increasing extent. through the medium of banks,--which are really institutions for the exchange of credit,--and by means of checks, drafts, notes, bills of exchange, letters of credit, post-office and express money orders, etc., the great bulk of the world's business is transacted. statistics gathered from national banks in this country in , showed that of the total deposits, ninety-five ( ) per cent were in forms of credit to five ( ) per cent in actual money, the percentage of credit paper rising in new york city to as high as . . while these percentages may not show accurately, on the whole, the relative work done by money and by forms of credit, they do show the enormous extent to which credit takes the place of money, and the greatly increased demand for money that arises, when, from lack of confidence or other causes, the extent of the credit is lessened. unless the volume of money immediately adapts itself to such demand, the value of money must inevitably increase, or the demand be lessened by a checking of all business transactions, and a partial paralysis of the industries of the country. generally both of these results follow. with these facts in mind, it is evidently futile to attempt to fix any definite amount of money, per capita, as the proper one. not only does the amount necessary to meet the demand vary with different countries, per capita, even among the most civilized nations, but it varies with the seasons in each country, as crops have to be moved or not, and with the state of credit and enterprise from day to day. france, where the habits and customs of the people have prevented their making so large a use of credit and banking facilities as in england, requires a larger amount of money, per capita, than does england. since the value of money depends on these two factors, supply and demand, if we are to have a money of invariable value, we must evidently control one or both of these. it would be hopeless to attempt to control all the various conditions and forces which, we have seen, affect the demand for money. fortunately it is not necessary. we cannot control the demand, but we have, or can have, complete control over the supply, and we can by this means maintain that constant relation between the supply of, and the demand for, money which is essential to its stability of value. _necessity for invariable money value._ returning to the reasons for an invariable money value, they are best appreciated by considering the effects of one that is variable. while the statement of mill, previously quoted, "that the money prices of all things should rise or fall, provided all rise or fall equally, is in itself and apart from existing contracts, of no consequence," is true, yet is it true only under the condition specified, that _all shall rise or fall equally_, and this condition in the case of a fluctuating money value never obtains. aside from the exception which mill makes of fixed money contracts, which can never adjust themselves at all to a changed money value,--and the exception is of enormous volume and importance,--the prices of many commodities are not adjustable quickly or readily to a change in money value, especially when such change is an increase. there is a persistency or inertia about prices that in many instances resists a reduction. wages can never be reduced without friction and often strikes. the fact that commodities have fallen and that the lower wages will buy as much, or more, than the higher ones formerly did, is slow of appreciation; hence the employer caught between the difficulty of reducing his employés' wages and the falling prices of his products, is injured by an increased money value. when the change, on the other hand, is a decrease of money value, the employer will not as a rule advance wages until compelled to do so, and the labourer suffers meanwhile from the rising prices of commodities. when prices fall, the producers of a commodity are not apt to recognize that it is a general fall, a change in money value; but accustomed to regard money as invariable in value, as it should be, and, failing to see anything in the conditions affecting their own particular product that should lower the price, they delay or refuse to sell, hoping for higher prices; and all, or a large number, doing this, makes business dull. the great injury and evil of changing money value comes, however, through fixed money contracts. the enormous amount of bonded indebtedness, railroad, municipal, county, state, and national, makes the slightest change of money value of vast importance, and added to these is the aggregate volume of commercial and private debts. in short, a change of money value either way is a robbery, and none the less reprehensible because it is legal and insidious. indeed, it is perhaps more damaging in its secondary effects because of its insidiousness. an open danger may be guarded against, but the hidden danger, known to exist, but which cannot be located or prevented, only excites fear and distrust, and checks all movement. nor is the damage, in its secondary effects, confined to those involved in fixed money contracts. piracy on the seas or robbery on a highway, when common, injure not alone those who are robbed. the fear and distrust engendered by such occurrences damage and delay all commerce; and the cost of protection against these menaces, or of avoiding them by taking more circuitous routes, are a burden on the whole people. so the robbery by a fluctuating money value affects, indirectly, the whole community, while the indirect effects are far worse. in the case of a decreasing money value the robbery does not bring such disastrous consequences in its train as where the change is an increase, owing to the different conditions of the people robbed. a slight decrease of money value generally brings about a stimulation of trade and industry, the rising prices of commodities acting as a spur to greater production and new enterprises. mr. f. a. walker, indeed, considers that for this reason, and in spite of the recognized injustice to some classes, that such a condition when slight and brought about by natural causes, is a benefit on the whole. it can hardly be admitted that robbery of one large class in a community is defensible, even if it does result in a gain to another class greater than the loss to the first. it is indisputable, however, that the opposite case, where money is increasing in value, brings such disasters in its train that it would be better, if an invariable value for money could not be attained, that the variation should be a decrease rather than an increase. in the latter case not only is the robbery equally great, but falling upon the most active, industrious, and enterprising class of the community,--for it is this class as a rule that are borrowers,--it not only imperils all they possess, but discourages, when long continued, all forms of industry and enterprise. in this way it throws thousands of men out of employment and brings suffering and hardship to thousands more. no other one cause, perhaps, is more responsible for "panics" and "hard times," with their attendant evils--tramps, pauperism, and crime. its evils have been painted by many writers, and it is scarcely possible to exaggerate them. of all ills, war and pestilence alone seem to fill the cup of human suffering more nearly full than the depression and stagnation of industry which is brought about by constantly declining prices. in view of these facts, the necessity for a money that shall vary in its amount in accordance with the demands of business is evident. not only must it respond to the long-continued, slow, and almost imperceptible increase of demand due to growing trade and population, but it should also respond, quickly and surely, to those sudden demands, known as panics, when credit fails for any reason to do its usual work. this need is recognized by bankers in their demand for a flexible or elastic currency. quotations are hardly necessary in support of the foregoing statements, but a few may be given. david ricardo, in "proposals for an economic and secure currency," observes that:-- "all writers on the subject of money have agreed that uniformity in the value of the circulating medium is an object greatly to be desired." "a currency may be considered as perfect of which the standard is invariable, which always conforms to that standard, and in the use of which the utmost economy is practised." "during the late discussions on the bullion question, it was most justly contended, that a currency to be perfect should be absolutely invariable in value." prof. j. l. laughlin, in "the history of bi-metallism in the united states," remarks, p. :-- "the highest justice is rendered by the state when it exacts from the debtor at the end of a contract the _same purchasing power_ which the creditor gave him at the beginning of the contract, no less, no more." prof. r. t. ely says, in his "political economy," p. :-- "it is not the 'much or little,' but it is the 'more or less' that is of vital concern. nothing produces more intense suffering than a decrease in the amount of money, and this is on account of the connection between past, present, and future in our economic life." this refers to a decrease relative to the demand, evidently, and he says, further:-- "if the amount of money is arbitrarily increased, so that the value of all debts may fall, it amounts to virtual robbery of the creditors. when arbitrarily the amount of money is decreased, it amounts to virtual robbery of the debtor class." "it may also be urged that with the progress of improvements in industry, prices tend to fall, and that unless money increases in amount, those who take no active part in these improvements, nevertheless gain the benefit of them." prof. sidney sherwood, in the "history and theory of money," says, p. :-- "the ideal that we want, so far as price adjustment is concerned, is to keep prices stable, so that a contract which is payable in one year from now can be paid with just the amount of commodities which will then represent the value stated in the contract of to-day.... "that is what we want,--a stability of prices that persists from one year to another and from one generation to another.... "the object at which we aim is, as it seems to me, a currency which shall keep prices stable, a currency which shall expand, therefore, with the expansion of trade and commerce and development generally, a currency which shall not be lagging behind the commerce and development of the country, and hindering that development, and a currency which shall not, by being too rapidly increased, lead to excessive speculation and to loss." we may summarize these conclusions in regard to money then as follows:-- money should have an invariable value. the test of invariable money value is stability of prices in general. the value of money depends on the supply of it relative to the demand for it. the demand for money is variable and uncertain. it is affected by a great variety of circumstances, most of which are beyond control. the supply is in all cases regulated directly or indirectly by law, and can be controlled. in any monetary system it is necessary, therefore, that the supply should adjust itself quickly and correctly to any changes in demand, so that prices of all commodities shall, on the average, neither rise nor fall. in this way, and in no other, can an honest money be obtained. it is believed that these conclusions cannot be successfully controverted, and, using them as a basis, we now purpose to examine existing monetary systems, and some proposed changes therein, to see in how far they conform to this requirement, and what can be done for their improvement. chapter iii. existing monetary systems. various substances have been used as money in the past. the "survival of the fittest" has, however, eliminated all but three (omitting fractional coins), and these are used, singly or in combination, at present in all the civilized nations of the world. these three are gold, silver, and paper. gold and silver are generally used in the form of coins of definite weight and fineness. paper money is a promissory note issued by the government, or by authorized banks, promising to pay the bearer, on demand, the amount of coin specified on its face. where this promise is kept, and coin is paid on demand, the paper is said to be convertible. where, for any reason, the promise is not kept, and the amount of coin specified will not be given on demand, the paper is called inconvertible or irredeemable. as the coins which are used, and which are promised to be given in exchange for paper, may be either of gold or silver, or both, the system is said to be a gold standard or a silver standard, according to which one is used, or a bi-metallic standard if both are used under certain conditions. at present, as will be explained in considering that system, there is no country that is really using a bi-metallic standard. where the paper money is inconvertible, the coin on which it is based does not circulate with it (for reasons which will appear later), and such a system must be regarded as distinct from the others, no matter whether the basis be gold or silver. three systems are therefore in use,--the gold standard, the silver standard, and the inconvertible paper. the characteristics of each of these will be considered separately, but, taken as a whole, some facts should first be noted. money in all countries is at present essentially a creature of the law. not only does the government fix the weight and fineness of the coins, but it assumes the right to make the coins, and in some cases to limit the coinage to a certain amount, or to stop coining altogether. it also, in most cases, issues the notes or paper money, and where it does not it controls the issue by laws regulating the banks that do issue them. it controls therefore in all cases the volume of money issued, both by specifying that it shall be made of certain metals which are scarce, and perhaps limiting the coinage of those, and by limiting the amount of paper money that is generally used, to a greater or less extent, in all systems. there is no international coin or money. gold and silver when shipped from one country to another go as so much bullion; their value is practically the same whether coined or uncoined. as walter bagehot observes, in his work "lombard street":-- "within a country the action of a government can settle the quantity, and therefore the value, of its currency; but outside of its own country no government can do so. bullion is the cash of international trade; paper currencies are of no use there, and coins pass only as they contain more or less bullion." not only is the value of money as a whole, in any country, governed by the law of supply and demand; but each of these three kinds of money, and each of the substances of which they are made, is individually subject to the same great law. _the gold standard._ the wide and long-continued use of gold as money has led to a popular impression, current even among well-informed men, that somehow, or in some mysterious way, gold has stability of value and is independent of those fluctuations which they recognize in the values of all other substances. that this is wholly erroneous is admitted by every writer on finance, and quotations are hardly necessary to support the statement that gold varies in value in the same way and is subject to the same law of supply and demand which regulates all other values. along with this conception of stability in the value of gold, has grown up a very natural belief that where paper or silver circulated concurrently with gold, so long as they were mutually convertible, gold was the medium which regulated the value of all; and that no matter what the quantities of the others might be, they did not affect the value of the gold or of the money as a whole. this is another popular misconception. in one sense the gold regulates the value of the money, but only to the extent that it limits, under the existing laws, the volume of the whole by its scarcity. in another and wider sense the value of the gold is itself fixed and controlled by the value of the money in its entirety. the use of gold for money is so enormously greater than its uses for all other purposes, that its value as money fixes its value as a whole, since its money use is by far the largest factor affecting the demand for it. the demand for money is generally an indiscriminate demand, satisfied with paper money or silver as well as with gold where they circulate together. hence, every issue of paper or increased coinage of silver in any such country, demand remaining the same, lowers the value of the money as a whole by increasing the supply, and since the value of gold is determined by its value as money, that is lowered with the rest. the value of gold varies, therefore, with that of the money as a whole of which it forms a part. in gold standard countries the coinage of gold is unlimited, and--not to speak of the small mint charges--generally free. under these conditions the value of gold coin and gold bullion are the same, weight for weight. the silver coin, which is used to some extent in gold standard countries, does not have either free or unlimited coinage at present. its bullion value is less than its nominal and actual value, which is maintained at a par with that of gold by the limitation of its issue,--just as in the case of paper money,--and by the fact that within the country of issue it does the same work as the gold, just as paper money does. men will give just as much of any commodity for the silver coin or the paper as they will for the gold, because, their utility being the same, their exchange value must also be the same. with these facts explained, we can proceed to consider a very important law affecting the value of money and its distribution among different nations. _gresham's law._ it was noticed and stated many years ago by sir thomas gresham that full-weight coins would not continue to circulate with clipped, worn, or light-weight ones, and that the latter would drive the former out of the country. this statement has been extended and enlarged into what is known as gresham's law, which, as generally formulated, is that a poorer money will drive a better one out of circulation. in this form it is commonly accepted as true, but is often misunderstood and misapplied. it is, in fact, but a particular case of the more general law that any commodity will seek the market where it is worth the most, where it will exchange for the most of other commodities. the full-weight coins would exchange for no more in the country of issue than would the light-weight ones (within certain limits), but when it was desired to ship coins to other countries where they were valued by weight and not by tale, the full-weight ones were more valuable, and were, therefore, selected for such shipment, leaving the poorer ones to circulate at home. the larger application of gresham's law to money as a whole is as follows:-- the resultants of all the various forces acting on money value through supply and demand evidently must be different in different countries, and thereby may cause the money of one country to rise in value while that of another falls. when this occurs between two countries using the same metal as a part of their money,--that is, either between two gold-standard or two silver-standard countries, gresham's law immediately operates to bring the two moneys again to a uniform value. since the gold varies in value with the money as a whole, it will, under such circumstances, be worth more in the country having the higher money value than in the other, and a flow of gold will set in from the country where it is worth the least to the one where it has the greater value. this flow of gold decreases the amount of money in the country from which it goes, and increases the amount in the other, thus raising the value of money in the one, and lowering it in the other, until they are again on an equality within the limits of the cost of shipping gold from one to the other. the operation of this law, therefore, tends to make the value of money uniform, and average prices the same in all countries using the same standard. the gold which thus flows from one country to another does not go, of course, without a return of other commodities in exchange. the operation will be clearer if stated in its converse form. since prices and money values are complementary terms, one rising as the other falls, and _vice versa_, a rise in the value of money means lower prices, on the average, in that country. people will buy in the cheapest market, and if prices are lower in one country than in others, they will buy in that country in preference to others; the balance of trade, as it is called, will be in their favour; gold will be sent in payment for the commodities bought: it will increase the money supply and raise prices there, and at the same time it will lower those of the country from which it goes until prices in the two are again on a level. it must not be supposed, however, as it evidently has been by some, that the operation of this law in regulating prices and making them uniform as between different countries at the same time, has any effect whatever on prices and money values as between two different periods. an increase or decrease of money value may go on simultaneously in all countries, and no flow of gold be caused; the value of gold would continue to be the same in all countries, yet might be much higher or lower at the end than at the beginning of the period. to illustrate: the different countries may be compared to several tanks connected at the bottom by pipes, and containing water, the level of which, representing money value, is continually fluctuating with the amounts of water added to or drawn from each of the tanks. if the water rises higher in one tank than in others, a flow will set in from the higher to the lower until all are again on a level; but if the cause of the rise in the one tank continues, or if the cause extends to all the other tanks, the level in all the tanks may be greatly changed. so the continued preponderance of the forces in one direction, operating either to decrease or increase money value in one country alone or in all together, will raise or lower that value in all the countries which are connected by the use of the common money metal, under a free coinage system. thus the large discoveries of gold in one country will by this means gradually spread themselves over all gold-using countries. the country where the gold is discovered, is, of course, the richer by the amount discovered, and is none the poorer because of its flow to other countries, for such country receives the same value of other commodities in exchange for the gold. through the medium of gold, therefore, general prices are maintained at the same level approximately in all gold-standard countries. the great defect of the system is, that, because of this mutual bond, no one country can adjust the volume of its money to the demand so as to maintain prices constant. only by an agreement faithfully carried out by all, or by most of the leading countries, would this be possible. there is no such agreement now existing, nor any likelihood of the leading nations agreeing to do this, and the value of money in all gold-standard countries is the resultant of all the various forces that act upon its supply and demand, with no intelligent attempt to control either; it is, in fact, the foot-ball of politics, selfish interests, and chance. neither the annual supply of gold nor the total amount used as money is the principal factor in determining its value. it cannot be doubted that if all the nations now using the gold system were to abandon it, the value of the metal would be but a fraction of its present value, and on the other hand, if all the nations now using silver and paper, in whole or in part, as money, were to change to the gold standard, its value would be increased to many fold what it is now. the legislation, therefore, of all countries is the great factor determining coin value, not alone in the country legislating, but also in all other countries using gold and silver as a basis for their system. the factor next in importance is the extent to which credit is used in the place of money. the total production of gold is so small beyond the amount used in the arts and sciences that it would require a great change in its value, and years of time, for any increased production due to higher value to affect materially the quantity of gold coin in use. the production of gold depends more on chance, and less on its labour cost, than the production of almost any other commodity; and though it would be, and is, stimulated somewhat by a higher value, there is no such certainty of its increased production being commensurate with the increased labour expended on it as there is in the case of most commodities. _the silver standard._ when the money system of a country is based on silver, and that metal has free and unlimited coinage in the mints, as gold has in countries using the gold standard, the same laws apply as in the case of gold. exactly the same forces operate to affect the volume and value of the money except that the production of silver, its use by other nations, etc., are the factors, instead of gold supply and use. the coin and the bullion are equal in value, weight for weight, and gresham's law applies the same as it does to gold to regulate the flow of silver from one silver-standard country to another. in some silver-standard countries, however, the coinage is not free and unlimited, the government purchasing the silver at its market rate and coining it in such quantities as it sees fit. in this case the bullion value does not coincide with the coinage value: the latter depends entirely on the amount that is coined, relative to the demand for money, and is independent of the bullion value of the silver. the coin will be of higher value than the bullion, and will not be exported to other countries, as the bullion is equally valuable for that purpose and less costly. it is evident that the value of money is just as dependent on chance,--that is, on a variety of causes too intricate and uncertain to be controlled,--in the case of the silver standard with free coinage as in the case of gold; but as some of the forces acting on silver are different from those acting on gold, one standard may be much more stable than the other. _bi-metallism._ the theory of bi-metallism--a money founded upon both gold and silver coin--is based upon the fact, before stated, that the value of each of these metals is really determined by the value of the money, as a whole, of which they form a part--their use for money purposes being so much greater than their other uses as to be the determining factor. if all nations, or a sufficient number of the leading ones, agree to coin both gold and silver in any amounts presented, and at the same ratio, the values of each relative to the other will be fixed at that ratio. no other market could be found for either metal at a higher ratio. the plan requires, of necessity, free coinage of both metals by several nations and in the same ratio. if the ratio differs in different countries, or if there are too few countries that are party to the agreement, the operation of gresham's law will separate the two metals, and cause each to seek the country where it is worth the most as measured in the other. the supply of each metal is independent of the other, and their values, therefore, can only be kept the same by a control and adjustment of the demand thereto. where silver and gold are both coined freely at a fixed ratio, if the supply of gold decreases, a portion of the demand for that metal--it being more valuable than silver--would be immediately transferred to silver, raising the latter and lowering the former value, and thus keeping their values at the same ratio. this, however, would not necessarily keep the value of the money constant as regards general commodities, and prices would still fluctuate. the variations would be spread over both metals, and, as shown by jevons and others, would probably be more frequent, though less extensive. theoretically, therefore, a bi-metallic standard is little if at all better than a single standard. whether it would be better or worse than gold or than silver would depend altogether on the conditions at any particular time, and it is therefore as much the victim of chance as either of the metals alone, so far as providing a money of stable value is concerned. as already stated, no nation is now using a bi-metallic standard. countries like france and the united states, which nominally have the double standard, have long since restricted or stopped the coinage of silver and are really on a gold basis, their silver coins being at par with gold and worth much more than their bullion value. prior to about the year these nations, as well as several others, coined silver as well as gold in any amount presented, and all nations using coin were practically on a bi-metallic basis, the ratio between gold and silver values having been maintained at - / to (the coinage ratio in europe) for many years within narrow limits. the united states had adopted the ratio of . to long before this time, and as a result the silver had all left this country in obedience to gresham's law, as it was worth more relative to gold in europe. about the date above mentioned there was a great change in the coinage laws of several countries. germany changed to a gold basis, selling a large stock of silver; france and other nations also practically changed to a gold basis by stopping the coinage of silver. as a result of this the relative values of silver and gold changed considerably. the demand for gold increased, and the demand for silver decreased. silver fell gradually in value relative to gold, and this effect was further affected by large discoveries and greater production of silver. the united states also stopped the free coinage of silver at about the same time as the other countries, but this had no immediate effect on the relative values of the two metals, for this country was at that time, and for several years afterward, using an inconvertible paper money--no coin of either kind being in circulation. it had, however, a large subsequent effect; for when the united states returned to a specie basis, if the coinage of silver had not been stopped, silver would have been coined in preference to gold, being the cheaper, and this country would have been on a silver rather than on a gold basis. _paper money._ paper money differs radically from coin in one respect. its circulation is confined to the country of issue. it may indeed be confined to a small part of such country--as in the case of some of the old bank-notes--when the solvency of the issuing power is unknown or uncertain. this, however, may be regarded as an abnormal case. when issued by the government or by authorized banks whose solvency is unquestioned, it is accepted as freely as coin, and if not so accepted, cannot be considered good money. we shall consider only the case where it is generally accepted. being usually a promise to pay coin, on demand, it can, in one sense, be considered honest only when the promise is kept. if the issues are excessive,--that is, if by increasing the volume of the money as a whole its value is lowered so that the coin is worth more in some other country than as a part of that money system,--the coin will leave the country, as has been explained in regard to gold. the paper simply acts as so much gold or silver would act if added to the currency, forcing out a certain amount of coin. where both metals are used with the paper, the one to go would depend on which was worth the most, relatively, in other countries. if the issues of paper are continued long enough, all the coin will leave the country, and, if still continued, the value of the money will sink below that of the coin, as the paper will not leave the country, but will accumulate, lowering the value with each new issue. the system will then have changed to an inconvertible paper system, the value of the money being no longer dependent on the value of the coin on which it is based, and no longer affected by changes of money value in other countries, but determined wholly by the amount issued, relative to the demands of business in the country of issue. if the issues continue in excess of demand, the value will lower, even to the point of utter worthlessness; but if properly controlled and limited, the value of the money can be maintained at any point desired far more readily and easily than in the case of a convertible paper and coin system, since many variable forces are excluded when the convertibility is dropped. the amount of paper money that can be kept at par with coin under a convertible system bears no fixed relation to the amount of the coin. by a proper control of the volume of paper issues their value can be kept equal to coin value, with almost no coin in circulation, or in reserve. an excessive issue of the paper will cause coin to be exported, but this export may be checked, and an import produced by withdrawing some of the paper. some control, therefore, may be exercised over the value of money under a convertible system, to make such value constant, but this is evidently limited. if the value of the money is falling, the decline can be checked, and its value made to rise, by withdrawing some of the paper issues; but this will cause an importation of coin, partly offsetting the reduction and checking such rise, and when all the paper has been withdrawn, the power of control by this method ceases. if the money value is rising, an increase of paper issues will stop such rise, but it will cause the exportation of coin; and when all the coin has been exported, the money will cease to be convertible, and the system will have changed to an inconvertible one,--the money still possessing the same qualifications as a measure of value that it possessed in the former case. the only difference is, that in the convertible system the money value is partly determined by the natural causes affecting the supply of coin, partly by the laws and conditions of business in foreign countries, and partly by the legislation at home, restricting the coinage or the issue of paper; while in the inconvertible system it is determined wholly by the control of the issues relative to the demand for money. this difference may constitute either a merit or a defect, according as the control is intelligent and honest or otherwise. the disastrous consequences that have resulted at various times from the use of inconvertible paper money, have, in every case, been due to a lack of proper control and to excessive issues, caused generally by the want of a reliable gauge by which to determine the amount that should be issued, and by a misunderstanding of the principles involved. while paper money, though a promise to pay coin, cannot, in one sense, be called honest, unless the promise is kept; in a larger sense the test of its honesty is its invariability of value. john stuart mill says of inconvertible paper money:-- "in the case supposed, the functions of money are performed by a thing which derives its power of performing them solely from convention; but convention is quite sufficient to confer the power; since nothing more is needful to make a person accept anything as money, and even at any arbitrary value, than the persuasion that it will be taken from them on the same terms by others. the only question is, what determines the value of such a currency; since it cannot be, as in the case of gold and silver (or paper exchangeable for them at pleasure), the cost of production. we have seen, however, that even in the case of metallic currency, the immediate agency in determining its value is its quantity. if the quantity, instead of depending on the ordinary mercantile motives of profit and loss, could be arbitrarily fixed by authority, the value would depend on the fiat of that authority, not on the cost of production. "the quantity of a paper currency not convertible into the metals at the option of the holder _can_ be arbitrarily fixed; especially if the issuer is the sovereign power of the state. the value, therefore, of such a currency is entirely arbitrary." prof. f. a. walker, in his "money, trade, and industry," observes, p. :-- "after looking at this subject from every side, i am at a loss to conceive of a single argument which can be advanced to support the assertion of the economists, that paper money cannot perform this function of measuring values, so-called. on the contrary, it appears to me clear beyond a doubt, that just so long and just so far as paper money obtains and retains currency as the popular medium of exchange, so far and so long it does and must act as the value denominator or common denominator in exchange. and i see no reason to believe that in this single respect, hard money, so-called, possesses any advantage over issues of any other form or substance which secure the degree of general acceptance which is necessary to constitute them money." he says, further, on p. :-- "such money, so long as its popular acceptance remains undiminished, performs the office of a standard of deferred payments well or ill, according as its amount is regulated." paper money is a real economy over gold and silver. its use substitutes for those coins, that involve much labour in their production, a money of slight labour cost, which, under proper control, performs the functions of money even better than the coin. if, in any country possessed of the gold basis system, the gold product was wholly deposited in vaults, and paper certificates issued therefor to the amount of the deposits, such certificates, if in proper form and denominations, would answer all the requirements of a circulating medium even better than the gold, and their value would be exactly the same as that of the gold they replaced. by this method,--in a measure, the english system,--the country saves the wear and tear, besides considerable loss of gold, and is better served. the gold thus deposited, except a comparatively small amount shipped abroad at times, would never be called for: its sole purpose would be to regulate by its scarcity the amount of the paper money issued; beyond this purpose, it might as well be iron or lead as gold, or might as well have remained in the mines, from which it was dug at the expense of so much labour, as to be in the vaults. it would be difficult to conceive of a method of controlling money volume and value more expensive, more clumsy, and more inefficient than this; for, it is to be noted, the control in no way adjusts the volume of money to the demand, so as to maintain a stable value, but merely adjusts the value to that ruling in other countries,--a matter, as we shall see later, of no importance whatever. chapter iv. stability of gold and silver values. _gold-standard prices._ having considered theoretically the limitations and possible merits and defects of the money systems now in use, we shall next consider in how far the money under such systems conforms in practice to the chief requirement,--stability of value. economic writers do not claim that either gold or silver is, or has been, of invariable value; but many of them do claim that gold is more nearly invariable than any other commodity, and that it is sufficiently so for money purposes, the changes in value being slight and covering long periods of time, so that from year to year they are almost imperceptible. other writers claim that silver has been, of recent years at least, more stable in value than gold, and is therefore a better measure of value. the merits of these claims can be tested, in the same way that the stability of value of any commodity can be tested, by a comparison of the average purchasing power of each metal at different times. prof. f. a. walker, in the work already cited, observes, regarding money value under the gold standard as tested by average prices:-- "not to speak of the enhancement, many fold, of the value of money through the silver famine of the middle ages, or of the sudden and extensive decline which has been referred to as taking place between and , it is estimated by professor jevons that the value of gold fell per cent. between and , that from to it rose per cent., while between and it fell again at least per cent." coming down to more recent times, we have more full and accurate data, and there have been several careful compilations and averages of prices made in different countries. the report of the finance committee of the united states senate, d congress, on "wholesale prices, wages, and transportation," known as the "aldrich report," is doubtless the most accurate and complete examination of prices in this country from to that has ever been made. this report also gives for comparison the tables of soetbeer and sauerbeck (two of the most distinguished european statisticians), and the table of the _economist_ (london) as to foreign prices, all reduced to the same basis, and to united states money units in gold. in order to facilitate comparison of these data, the tables have been platted as diagrams in plate . all the tables were prepared by taking the prices of a selected list of commodities for the year as , and calculating the variations in the price of each commodity from the price of that year as a percentage of rise or fall. the average of these percentages for each year represents, therefore, average prices for that year, as compared with , and it is these averages which are platted in the diagrams. the list of commodities selected by the senate committee embraces articles for the years subsequent to . prior to that time the number was less, varying from to , according as data were to be had. dr. soetbeer's table shows prices in the port of hamburg, germany, of commodities, mostly raw materials, joined with the export prices of commodities (manufactures) in england, from to . mr. sauerbeck's table shows english prices of commodities from to . the _economist_ table also shows english prices of twenty-two commodities from to . the discrepancies between these different authorities, as shown by the variations in the lines of the four diagrams, call for a few words of explanation. it would naturally be expected that some differences in average prices would exist between different countries, and part of the discrepancies may be accounted for in this way, since there are included in all the tables, among other commodities, such as wood and coal, of which the prices might vary considerably in different countries independently of one another. several changes in the tariff in this country during the last fifty years would account for some discrepancies between united states prices and the others. furthermore, the method by which these tables were in the main prepared, that of taking simple averages of the percentage of rise or fall in price, thus giving to each commodity the same weight in the result, regardless of its importance in commerce, is open to serious objection, and doubtless accounts for many of the discrepancies that exist. for example, the great rise in prices during the period of our civil war, as shown in the _economist_ and the united states tables, above those shown in the other two tables, is doubtless due to the fact that in the _economist_ table, four out of the twenty-two commodities in the list are either raw cotton or cotton manufactures, and the great rise in price of cotton during the war (a rise of from to per cent.) is given an undue importance in the result. the same cause may affect the united states table, to some extent, but a more potent factor in this table is the circumstance that this country, during the period, was using an inconvertible paper money in which all prices were expressed, while gold was a commodity subject to speculation, and the price of which was much affected thereby; and, in reducing currency prices to gold prices, for this table a somewhat abnormal result is produced. the _economist_ list, it must be said, contains too few commodities to be a reliable index of all. the united states list is sufficiently large, but the articles selected may be open to some criticism. the lists of mr. sauerbeck and dr. soetbeer are preferable, but all are open to the objection, above noted, of not giving a weight to each commodity in proportion to its importance, and none of them can therefore be regarded as anything but approximations to the truth. they embrace, however, the best information on the subject extant. the united states committee did, in fact, endeavour to balance their own list in accordance with the relative importance of the articles in another table, but the result is not wholly satisfactory, as the weighting of the averages was done by groups of articles instead of individually for each. it represents, however, probably the most accurate information as to the purchasing power of gold in this country from to that can be obtained, and as such has been platted in plate , in a reverse form; that is, assuming that the articles of the list, weighted according to their importance, fairly represent _all_ commodities, and that therefore their value as a whole is constant (since the values of all commodities cannot rise or fall simultaneously). the diagram shows the relative values of gold for the different years as a percentage on the value of taken at . in other words, it shows the relative average purchasing power of gold in this country in the different years. with these explanations of the diagrams, and the limitations of the tables from which they were platted, we can proceed to consider their points of resemblance and what they teach. it is evident from all of them that a great decline in average prices has been going on, almost continuously, since , in the various commercial countries. this is a fact conceded by all students of prices. what is equally apparent, however, but does not seem to be so generally appreciated, is the violent fluctuation in prices, or in the value of gold, from one year to another, amounting in many instances to from to per cent. in a single year, and, during the war, to much more. doubtless if the tables had shown the fluctuation of prices by months or days, instead of the averages for each year, a much greater variation in the value of gold would have been apparent at times, and within a shorter period than a year. furthermore, the prices of staple commodities (and most of the commodities in all the tables are staples), while representing correctly the _character_ of the changes in price of all commodities, would naturally not vary as much as the prices of many more speculative articles of commerce. it is probable, therefore, that gold has varied in value to a greater extent, and within shorter periods, than is shown by the diagrams. it would be impossible to trace all the various causes that have produced these changes in money value, but a few of the more prominent ones may be indicated as showing their great variety and force. from to a great decline in prices is noticeable, similar to the decline that we know has been going on in the last twenty years. this is doubtless due in both cases mainly to increasing demand for money, caused by growing population and expanding commerce, and which the supply of gold and silver or substitutes therefor did not keep pace with. from to prices generally rose, owing to the increased gold production in australia and california, aided doubtless by the increased use of credit which rising prices always stimulates. the collapse of this credit in the panic of sent prices down again. the slow recovery from this condition was greatly enhanced by the breaking out of the civil war, during which thousands of men were destroying instead of producing, thus raising the prices of nearly all commodities by decreasing the supply and increasing the demand relative to gold, while meantime the demand for gold was lessened by the use of paper money in this country. the disbanding of the armies at the close of the war, and the return of labour to productive enterprises, lowered prices rapidly during , , and . from this depression they recovered almost as rapidly in the era of development from to , the large production of silver from the nevada and other discoveries during that period assisting greatly in this recovery, and the usual extension of credit at such times also contributing. this credit collapsed in the panic of , and the demonetization of silver by several european nations about the same time prevented any increased production of silver from affecting the decline which then set in, and which has with one or two reactions been continuous ever since. in the light of the facts, shown by these diagrams, any claim for even approximate stability of value for gold, or for the money as a whole on the gold basis, under the systems now in use, is preposterous. moreover, the change has been, of late years, of the worst kind,--an increase of money value. if it were steady, its effects could be calculated and discounted to some extent, but caused, as it is, by a variety of forces of varying strengths, the increase is at some times wholly nullified, or even turned to a decrease, by extensions of credit, while again it is doubled in effect by the withdrawal of such credit. the reason for this great decline in prices, or the increased value of gold, is not far to seek when we consider the relative strengths of the forces acting on gold value. population, wealth, and diversity of occupations have all increased greatly over the whole civilized world, requiring a much greater amount of money to do the business of the world. there has been, to be sure, as an offset to this, a considerable increase of banking facilities and some greater use of credit paper in its various forms; but all these were in large use prior to , and their increase can hardly have been so great as to meet the demands of growing commerce. furthermore, of the other forces tending to raise the value of gold, the annual product of that metal has not increased materially, though the demand for it for other than money purposes has increased largely, leaving a less increment to neutralize the waste and to increase the supply of it. and lastly, many countries, as we have seen, about the year so changed their monetary laws as to use a much greater amount of gold, and a less amount of silver or paper. the united states alone, it is estimated, now uses about $ , , of gold coin, while in it used practically none. the effects of this increase in the value of money have been--as the effects of falling prices always are--detrimental and disastrous in all gold-standard countries, to an extent that cannot be measured. offset at times by increased use of credit, enterprise and industry have been able to rise to a success that an honest money would make their normal condition, only to be dashed down again by the collapse of credit with nothing to take its place. _silver-standard prices._ there is a quite prevalent belief that the value of silver has fallen greatly since . this is a natural sequence to the belief that gold has been stable in value, as the gold price of silver has declined from $ . per ounce in , to $ . per ounce in (and since then the decline has been much more). this fall of about per cent. must be deducted from the rise of from to per cent. (according to the different authorities) in the value of gold, in order to show the true change in the value or purchasing power of silver. it is evident, therefore, that the value of silver has been much more nearly constant than that of gold. this is confirmed by the statement of mr. david a. wells, in his work on "recent economic changes," p. . there, mr. wells remarks:-- "in exclusively silver-using countries, like india and mexico, the decline in the value of silver has not appreciably affected its purchasing power in respect to all domestic products and services; but the silver of such countries will not exchange for the same amount of gold as formerly, and it might be supposed that, owing to this change in the relative value of the two metals, the silver of india, mexico, and other like countries would purchase correspondingly less of the commodities of foreign countries which are produced and sold on a gold basis. but the people of such countries have not thus far been sensible of any losses to themselves thereby accruing, for the reason that the gold prices of such foreign commodities as they are in the habit of buying have declined in a greater ratio since than has the silver which constitutes their standard of prices." he also says, in an article in _the forum_ for october, : "testimony was given to the recent british commission on indian currency, that within the last twenty years half of the silver prices of commodities in india have risen and the other half fallen." in plate , the dotted line shows the variations in the value of silver since . this diagram is platted from calculations of the percentage of decline in the gold price of silver, taking the price of as (this was also practically its price from to , since the ratio of - / of silver to of gold was maintained within narrow limits during that time), and deducting these percentages of decline from the percentage of increase in gold value. in considering the relative constancy in the value of gold and silver, the lines representing each should be compared with the level price line of these metals in . it will be noted that while silver has kept closer to this line than has gold, and on the average has varied but little from it, yet the fluctuations in the value of silver from year to year are quite as marked as in the case of gold. it will also be noticed that prior to , under a bi-metallic standard, both metals, while maintaining a constant relation to each other, fluctuated in value quite as extensively as either alone has done since. the facts here shown as to the experience of this and other countries for the past fifty years, bear out the theoretical conclusions before stated, that the value of money, under any of the systems that have been used, is subject to violent fluctuations from year to year, due to a great variety of causes which are entirely beyond control, and that neither silver nor gold singly, nor both combined, has ever proved a reliable standard of value. chapter v. criticism of some gold-standard arguments. before proceeding with the main line of this argument, we will digress to notice some of the arguments put forth in support of the stability of the value of gold by those who cannot but recognize the great fall in general prices. while such writers do not deny the truth of the fundamental principles we have already considered, they either forget or ignore them. notable among such writers is mr. david a. wells, and as his views may be taken as representative of many others, some statements from his article in _the forum_ for october, , previously mentioned, are here selected for criticism. in the beginning of that article, as well as in his work, "recent economic changes," he clearly recognizes and states that there has been a great and universal decline in the prices of a variety of commodities within the last thirty years. he claims, however, that such a general fall of prices does not prove that the value of gold has increased, for the reason that, as he endeavours to show, such fall in prices was caused by lowered labour cost of production, due to improved machinery, better methods, greater division of labour, etc. all these facts may be freely admitted; the error lies in supposing that it makes any difference what the cause is. since value is a relation, it will be altered by a change in either of the terms between which that relation exists, and it is immaterial whether a day's labour produces more commodities in general, and the same amount of gold, or a less amount of gold, and the same amount of commodities in general, as compared with some former period. the value of gold, other things being the same, is greater in both cases. the fact remains that if gold exchanges for more commodities in general than formerly, its value has risen. it is not clear what mr. wells' conception of value is, on which his arguments are based. he, however, seems to regard the labour that a commodity will purchase as the measure of its value, since he says, in the magazine article: "and then, in respect to the one thing that is everywhere purchased and sold for money to a greater extent than any other, namely labour, there can be no question that its price _measured in gold_ has increased in a marked degree everywhere in the civilized world during the last quarter of a century." "measured by the price of labour, therefore, gold has unquestionably depreciated; and can anybody suggest a better measure for testing the issue?" the fallacy of using labour in any form as a test of value was pointed out in the chapter on value. that the labour a commodity will purchase is not in any way a standard of value, as between two different periods, has been shown by almost every economist from ricardo down to the present time. the above quotations, in connection with the following from the same article, bring to light an important phase of the subject, which it may be well to make clear. mr. wells remarks:-- "a decline in prices, by reason of an impairment of the ability of the people of any country to purchase and consume, through poverty or pestilence or by reason of the misapplication of labour and capital, _i.e._ waste, ... is certainly an evil. but a decline in prices caused by greater economy and effectiveness in manufacture and greater skill and economy in distribution, in place of being a calamity, is a blessing and a benefit to all mankind." with growing knowledge, and the advancement of the arts and sciences, there is a continual improvement in methods of production and distribution, enabling the same amount of labour to produce and distribute to consumers a far greater amount of commodities in general than it formerly could. this has been conclusively shown in detail by a mass of statistics in mr. wells' book. the question arises, to whom should this increased product properly belong? for the purpose of this inquiry the community may be considered as divided into three separate classes, according to the source from which their principal income is derived; viz.-- ( ) labourers,--including all whose income is principally derived from their work, of hand or brain, whether as wages, salaries, or products directly created. ( ) employers of labour,--including all whose income is mainly derived from investments of capital directly in productive enterprises in the widest sense of the term,--those who take the risks of business incident to the doing of the work of the community. ( ) money lenders,--those whose income is derived from interest on loans; who, not wishing to take the risks and cares of active business, prefer to loan their capital to others who will do so, accepting as their share of the profits a definite amount as interest. the incomes of many people are derived, of course, from all three of these sources, but they may be considered as belonging to the class determined by their greatest revenue. it is evident that labourers should have a share of the increased product that greater skill, improved methods, machinery, etc., create; since labour is the direct cause of such increase, and not only the greater skill but the improved methods are due to labour. equally evident is it that the capitalist who has taken the risks of business and whose wealth and enterprise have contributed to the results, should also share in the increased product. but all considerations of justice and equity forbid that those who, declining to take any risk themselves, prefer to loan their capital to others at a fixed compensation, should receive any share of the increased product which labourers and employers may succeed in creating, beyond such fixed compensation. justice is satisfied when to them is returned the _value_ they loaned with the interest agreed upon for its use. it must not be forgotten that what is really loaned is capital,--commodities in general,--not money; the money is only a medium for effecting the transfer, and a measure of the capital transferred. what should be returned, therefore, in repayment of a loan is the same amount of commodities in general that was borrowed,--the same value. it is _not_ meant that bond-holders and money-lenders should be entitled to no share in the generally bettered condition of mankind due to lowered labour cost of producing commodities. they should, and in the long run would, receive their full share, through the higher rate of interest that increased general profits would bring if money value were constant, and by this means would obtain a _just_ share, determined by open competition and not an unjust share, determined by the insidious device of a varying measure. it _is_ meant, however, that the money-lender is entitled to no share in any increased productiveness of labour during the lifetime of his loan, beyond the interest stated. he gets his share of such increased productiveness through the higher interest he will subsequently receive in re-loaning his capital. if prices of commodities have declined while wages have increased, as mr. wells claims, it shows that the labourer, on the whole, has received some share of the increased production, since his wages will buy more of commodities in general than formerly. whether the employer of labour has also received a share is more difficult to determine; but it is absolutely certain, if prices have fallen, that the money-lender, who is entitled to no share at all, aside from interest, has also received a share, and a very large one in many cases; since the money returned to him in discharge of a debt will purchase a much larger amount of commodities in general than it would when it was loaned; and this share has evidently been drawn from what should have gone to one or both of the other classes, and they are wronged to that extent. while the labourer may, or may not, have received the share to which he was entitled during the last twenty years, it seems highly probable, from mr. wells' statistics and arguments, that it is the employer of labour--who as a rule is the borrower--who has been injured most by the fall of prices. one of the great aims and endeavours of mankind is to produce the largest amount of commodities possible, with the least labour,--or to lower the labour cost of commodities. it is this lowered labour cost, which is "a blessing and benefit to all mankind," not lowered prices. the two are not the same, nor have they any real connection. lowered labour cost depends solely on the improvement in skill, methods, machinery, etc., which will go on as well with prices constant on the average, as with falling prices,--in fact, even better,--and the product will then be distributed honestly; while with falling prices the distribution is dishonest. it is important to keep clearly in mind the distinction between capital and money. that mr. wells has not always done so, the following quotation will show:-- "nobody, furthermore, has ever yet risen to explain the motive which has impelled the sellers of merchandise all over the world, during the last thirty years, to take lower prices for their goods in the face of an unexampled abundance of capital and low rate of interest, except upon the issue of the struggle between supply and demand." capital is accumulated wealth devoted to the production of more wealth; money is merely a medium for the exchange and transfer of wealth: they are not synonymous terms. an abundance of capital may exist with a small amount of money (relative to the demand) and consequent low prices, or with a large amount of money and high prices: they have no connection. the rate of interest, also, has nothing to do with the question. interest is determined by the amount of capital seeking investment in loans, relative to the demand, and in a time of relative contraction of the volume of money, and consequent falling prices, will, as a rule, be low, since there is less inducement for men to borrow capital to engage in business, and more men wishing to lend. the risks of business are much increased at such a time, and the profits much lessened, and as the rate of interest is determined by the profits of business in general, it will be low also. mr. wells, indeed, has recognized this fact elsewhere in his writings, but has evidently forgotten it in the above quotation. the accumulation of money in banks in times of depression indicates not too much money, but a general belief that its value is rising, or a fear that it will rise; testifying, if to anything, to too little money, in fact. men do not hold a thing that brings no income unless they expect to profit by its rise. as to the main point of the above quotation, certainly men accept lower prices for merchandise because of the issue between supply and demand, but the supply of money is as much involved in the calculation as the supply of merchandise. men accept lower prices--that is less gold--for commodities in general, because gold has increased in value. mr. wells further says:-- "no one has ever named a single commodity that has notably declined in price within the last thirty years, and satisfactorily proved, or even attempted to prove, that its decline was due to the appreciation of gold." no one, of course, could prove by the decline in price of a _single_ commodity that money or gold had appreciated; but when a writer admits, as mr. wells has done so clearly, that prices in general have fallen, no proof is needed; the statements are but different ways of saying the same thing. that in order to establish the appreciation of money it is necessary to show that _all_ commodities have fallen in price, or that the price experiences of different commodities had harmonized in their decline, as mr. wells implies, is manifestly absurd. even if average prices were constant, there would be continual fluctuations of individual prices, some rising, others falling, and these continue the same with an increasing money value, so that some prices might not alter at all, or might rise even with a rising money value, but others again would decline in a greater degree than if the money value were constant. if the average purchasing power of money is greater, then its value is greater, whatever be the cause. so much space has been devoted to a criticism of this article because the opinions expressed in it seem to be fundamental and dangerous errors. moreover, they are given added weight by the reputation and prominence of the author, while they are more or less representative of the arguments of other defenders of the gold standard. either mr. wells is mistaken in his conception of _value_, and of the standard by which it is measured, or ricardo, john stuart mill, and all other authorities on political economy are mistaken in supposing that the value of a commodity is its general purchasing power. chapter vi. foreign commerce. it is claimed by many writers that international trade is carried on upon a gold basis, and that it is necessary, therefore, if a country is to maintain and increase such trade, that it should have its money based upon gold, since its "balance of trade" must be paid in gold. the idea of foreign trade involved in such statements is a relic of the old "mercantile theory" that the great object of any country was to export as much as possible of its products and receive in return the largest possible amount of gold and silver,--to get gold, in fact, at any hazard. this theory was buried, a century ago, under the weight of adam smith's arguments, and every economist since then has helped to bury it deeper; but its ghost still stalks and appears now and again in the form of such statements as the above, and in the common expressions "the balance of trade is against the country," or "the balance of trade is in favour of the country," meaning that gold is being exported or imported, and implying that the one is an injury or the other a benefit to the country. from a mercantile point of view, there is some justification for these expressions, and for the satisfaction felt at a condition of things requiring the import of gold. as before stated, the value of gold is inversely as general prices in gold-standard countries, and the import of gold means a lowering of its value and a general rise of prices,--which, of course, is what merchants like to have happen; and the export of gold means a fall in prices,--which they dread. under a monetary system which maintained prices constant, on the average, the export or import of gold would be of no more importance than the export or import of corn or silk. from an economic standpoint the term _balance of trade_ is a misnomer, and is misleading. equally misleading and erroneous is the idea that gold or silver is in any way necessary to foreign commerce, or that in consequence of a money being based on one of these metals such trade will be in any way enhanced. international trade is an exchange of commodities; not, to be sure, a direct barter, but an indirect one. one country exports those commodities which it can produce the cheapest, in exchange for those of other countries that are either not produced at all in the first country, or can be produced only at a greater cost than by import. the immediate force impelling to the export and import of commodities is, in all cases, a difference in their values in the two countries. this is no less true of gold than of other commodities, for gold will never move from one country to another except it be of lower value in the exporting than in the importing country, no matter how much the one may be owing the other. the expressions "balance of trade in favour of," or "against a country," means only that gold is at that time of higher value in one than in another country, by an amount above the cost of shipment, and is being exported or imported because there is a profit in so doing; but this furnishes no criterion whatever of the prosperity of a country. it frequently happens that gold moves for a considerable time from one country to another because of large production of gold in the exporting country. that cannot be considered a bad condition of business or unfortunate for the exporting country, unless the commodities received in exchange are useless, or are wasted. at other times it frequently happens that a country is importing gold, giving in exchange not only other commodities, but promises to pay back the value received, in the shape of bonds and stocks--running in debt, in fact. this may be a good or a bad thing for the country, as for an individual, according as the value received is profitably used or not. it certainly is no sure indication of real prosperity. the operations of foreign trade create a great number of claims and obligations on the part of citizens of one country against, as well as in favour of, the citizens of all others. these claims consist of drafts, bills of exchange, letters of credit, etc., and are expressed in every kind of money that exists, whether based on gold or silver, or simply inconvertible paper. through the medium of foreign exchange banks these claims are offset against each other and cancelled. between two countries having the same monetary standard there exists what is called the par of exchange; that is, the ratio between the weights of gold or silver in their respective units. the actual rate of exchange--that is, the price which will be paid in one money for claims expressed in another--seldom conforms to this nominal par. the bills of exchange, etc., representing claims of the exporters of one country against the importers of another may be regarded as a sort of commodity, and subject to the law of supply and demand. if one country, a., has more claims against another, b., than b. has against a., then the demand will be stronger for those which are fewer, and the price will rise, and _vice versa_. the prices of exchange cannot vary from the par of exchange between gold-standard countries much more than the cost of shipment of gold; for if they do, it will become profitable to export or import gold, and this will create new claims balancing the others. the variation of exchange rates within these limits is quite sufficient, however, to cause the _actual_ exchange rate, and not the nominal one, to be reckoned on by those engaged in foreign trade. there exists, and always has existed, an _actual_ exchange rate between the money units of all countries, or between the claims expressed therein, no matter what the money was based on; although there cannot be a par of exchange except between moneys based on the same metal. these actual rates are continually varying, even between countries like england and australia, which not only use the same standard, but a common unit, and there is, therefore, no difference in the practical working of exchange between countries having the same standard and those having different ones. the inference to be drawn from these facts and theories is, that it would make no difference in the foreign trade of any country if it did not possess an ounce of gold or of silver, or whether its money was based on gold or was inconvertible paper; if the country produces commodities that other countries want, and wants some that other countries produce, the commerce will continue. if the money of either country is fluctuating in value, relative to the other, to any great extent, it may introduce some uncertainty that will hamper and inconvenience trade,--though to a less extent than a variable money would in its own country, as there are means by which such fluctuations can be guarded against; but unless the changes are sudden and violent, no inconvenience will be experienced, as the actual exchange rates are more or less always fluctuating. in support of these statements, and as showing that they are borne out by practical experience, the following quotations are given from mr. wells' "recent economic changes," in reference to trade between a silver and a gold standard country when the relative values of the two metals were changing quite rapidly. he says, p. :-- "mr. lord, a director of the manchester (england) chamber of commerce, testified before the commission on the depression of trade, in , that 'so far as india was concerned, it is not necessary to run any risk at all from the uncertainties of exchange.' mr. blythell (representing the bombay chamber of commerce) testified before the same commission, ... 'there is no difficulty in negotiating any transaction for shipping goods to india and in securing exchange.'" mr. wells says: "thus from returns officially presented to the british gold and silver commission, , it was established that the trade of great britain with india since had relatively grown faster than with any foreign country 'except the united states and perhaps holland.'" he also says, of mexican exchange, p. : "the fluctuations in the price of silver since --mexican exchange having varied in new york in recent years from to --would seem, necessarily, to have been a disturbing factor of no little importance in the trade between united states and mexico; but the official statistics of the trade between the two countries since (notoriously undervalued) fail to show that any serious interruption has occurred." during this period, mexico had a silver standard, while the united states had inconvertible paper for nearly six years of it, and a gold standard for the remaining period. mr. wells further states:-- "in forming any opinion in respect to this problem, it is important to steadily keep in mind the fact that international trade is trade in commodities and not in money; and that the precious metals come in only for the settlement of balances.... the trade between england and india is an exchange of service for service. its character would not be altered if india should adopt the gold standard to-morrow, or if she should, like russia, adopt an irredeemable paper currency, or, like china, buy and sell by weight instead of tale.... unless all the postulates of political economy are false--unless we are entirely mistaken in supposing that men in their individual capacity, and hence in their aggregate capacity as nations, are seeking the most satisfaction with the least labour, we must assume that india, england, and america produce and sell their goods to one another for the most they can get in other goods, regardless of the kind of money that their neighbours use or that they themselves use." from the time of the civil war until , this country, though nominally on a gold and silver basis, was actually using a depreciated paper money. no serious inconvenience was experienced in our foreign trade during the greater part of this time; when the currency was most fluctuating, it doubtless did disturb all business, both foreign and domestic, but this was due to its great and sudden changes, and may be regarded as abnormal, and unlikely under a proper system again to occur. walter bagehot, in his work, "a universal money," observes:-- "if france and america had the same currencies as england, it would still happen, as now, that bills on paris or new york would be at a discount or a premium. the amount of money wishing to go eastward across the atlantic, and the amount wishing to go westward, would then, as now, settle how much was to be paid in london for bills on new york, and how much was to be paid in new york for bills on london." it must be evident that if the people of one country have incurred debts to the people of another country expressed in foreign monetary units, nothing but such foreign money will satisfy the claim, and to procure it the debtors must ship some commodity in exchange for it. what this commodity will be, will depend on which is the cheapest--which one the debtor, everything considered, will have to give the least of in exchange for the necessary foreign money,--it may be claims against foreign merchants, or bankers, in the shape of drafts or bills of exchange, or it may be gold, if that is cheaper, or it may be wheat, or cotton, or any other commodity, but it will always be that which the debtor can purchase cheapest. if it be gold, it will be because the debtor can purchase enough gold to exchange for the required amount of foreign money for less of his own money (including transportation and other charges) than he can purchase a sufficient amount of any other commodity, and not because the foreign money is based on gold. in short, the gold differs in no way from any other commodity in such transactions; it is exchanged for the foreign money, which alone can satisfy the debt, precisely as any other commodity. that both gold and silver may be a convenience at times in international trade is not denied; but they are not a necessity, and their convenience for this purpose is in no way enhanced by their coinage or by their use as a domestic money. chapter vii. money in the united states. turning from the consideration of money systems in general to the particular case presented in our own country, we find a most curious system--if, indeed, anything bearing so little evidence of rational adaptation to its purpose is entitled to that name. the unit of the system is the gold dollar, containing . grains of standard gold, nine-tenths fine, coined in five, ten, and twenty dollar pieces. there is also a silver dollar, containing - / grains of standard silver, nine-tenths fine, the ratio between the two being . grains of silver to one of gold. the gold is coined free, in any amount presented. the silver coinage has been restricted for many years, and is now entirely stopped. the silver dollar, however, circulates at par with gold, though its bullion value is only about fifty cents measured in gold, which is the real basis of the system. in addition to the coin, and circulating on a par with it, are a number and variety of issues of paper money. ( ) united states notes (or greenbacks),--secured only by the credit of the government, except that there is held in the treasury about per cent. of the amount of these notes in gold as a redemption fund. ( ) national bank-notes,--issued nominally by the various national banks of the country, but practically issued by the government; since they are secured by a deposit of government bonds, are guaranteed by the government, and rest as completely on the credit of the government as the greenbacks do, though in a different way. ( ) silver certificates,--secured by a deposit of silver bullion. ( ) gold certificates,--secured by a like deposit of gold. ( ) treasury notes,--secured by deposits of silver. ( ) currency certificates. all of these kinds of paper money, as well as the silver coin, circulate on a par with gold; their utilities being equal, and the demand for money being an indiscriminate one, their values must be equal. as a domestic money, gold cannot have a higher value than the issues of paper money; though it may, however, have a greater value as a commodity for foreign shipment. it is not the fact that these other forms of money may be exchanged directly or indirectly for gold at the united states treasury that makes their values equal to gold value, but the fact that their _utilities_ are equal. they would remain of equal value with gold if the treasury did not exchange gold for them, so long as any gold remained in circulation as money. a gold reserve, however, is necessary as a precaution in a gold-standard system, but only to the extent of the probable demand for gold for export. the system as a whole is a ridiculous one, and nearly all its features are wasteful and uneconomic. gold coin, as a circulating medium, is not as good as paper; it has a high subjective value, and such use of it is wasteful; it should be kept as a reserve for export purposes. the gold certificates are better, but are also wasteful; since only a sufficient reserve is needed to meet possible demands for export, and this would be far less than dollar for dollar. the silver coin is open to the same objection as the gold coin as a circulating medium, and the silver certificates to the same objection as the gold certificates, and to the further objection that the silver deposited to secure them is of no use whatever, even as a reserve, for no one would demand silver bullion of the government in exchange for paper money at the present coinage value, when they could purchase nearly twice as much in the open market for the same money. unless, then, our money should fall in value some per cent., not an ounce of silver will ever be called for at the treasury in exchange for the paper issues based thereon; and the silver deposits are merely a clumsy and costly method of limiting the volume of the paper money. the greenbacks, or united states notes, are economical, and if they were variable in volume and under proper control would be a good money. the national bank-notes are wrong in principle, in allowing private corporations to make a profit from the issuance of paper money. this objection is of no practical importance, at present, as the restrictions and high bond prices have taken away practically all the profit to the banks on the issues, but in so doing have also taken away about the only merit such notes ever had, that of elasticity of volume to some extent. this was a most doubtful merit at best, as the issues were governed by considerations of private profit and not by any desire to make money of stable value. whatever may have been the merits of the national banking system in the past, the war necessities of the government which gave birth to it, have long since passed away. it can be viewed now only in the light of its present usefulness, and as an issuer of money it is of no use whatever. paper money received by deposit of bonds instead of bullion is economical and correct in principle, if controlled in the interests of the public, and not left at the mercy of men whose private interests may be opposed to the public welfare. no such control of the volume of the money is attempted in the case of the national bank-notes, and they are no more secure than are greenbacks, since the ultimate foundation of both is the national credit in one form or another. of all our different kinds of money, the only ones susceptible of change in volume to meet the varying demands of commerce are, under existing laws, the gold coin and certificates. these can be changed only by the import or export of gold, or by the product of the mines over and above the amount needed for the arts and sciences, and which must be divided with other gold-standard countries. the national bank-notes are theoretically elastic in volume, but actually are not so, to any appreciable extent. they require for their issue the purchase and deposit with the united states treasurer of government bonds,--now at a large premium,--are subject to other charges and restrictions, and are not, as a rule, profitable enough to the banks to cause any increase of the issues above that required by law, except in urgent necessity, and that to a very limited extent. as a result of these conditions, the country witnessed, during the recent panic of , a resort to every kind of device known to banking and permissible by law, to increase the volume of the currency and meet the enhanced demand for money caused by the utter failure of credit. certified checks, certificates of deposit, clearing-house certificates, and other devices were resorted to, and even then thousands of solvent institutions over the country were obliged to close their doors, and the industry of the whole country was paralyzed. the events are of too recent occurrence to need rehearsal here. it is a sad commentary on the wisdom of our legislators that, notwithstanding all the tinkering and patching that our financial system has undergone, and the voluminous debates in and out of congress for years past, the volume of our money has been so far from keeping pace with the demands of commerce that prices have been falling for a quarter of a century, culminating last year--a repetition, unhappily, of previous experience--in a collapse of the overstrained credit that was vainly trying to do the work of money, and bringing ruin and disaster to thousands. the condition of our monetary laws to-day is such that, except by the slow increment of gold production, which must be shared by all the world, we possess no means of meeting either the increasing demand for money that expanding population and commerce bring, or the sudden demand that a failure of credit may bring at any time. this, obviously, is a blunder on the part of our law-makers that amounts to a crime. it is not surprising that under such conditions the industries of the country are crippled and that thousands of men should seek work in vain. still less surprising is it that in the face of a continually increasing value of money, or decreasing prices of nearly everything else, prudent men choose, as far as possible, to turn their capital into money, lock it up in safe deposit vaults, or let it lie idle in banks, rather than take the great risk that any active use of capital under such circumstances carries with it. when money is increasing in purchasing power from five to seven, and even a higher per cent. per annum, as has been shown to be the case many times in the past, it means that the man who locks his money up in a vault gets that percentage of return for letting it lie idle; or that the man who loans it, even at a low rate of interest,--if a loan with safe security can be found at such a juncture,--makes the five to seven per cent. resulting from the increased value, in addition to what he gets as interest. men cannot be blamed for declining to engage in productive enterprises under such conditions, nor for hoarding money instead of using it; the blame lies on the system that not only permits but compels such action. there is evidently no inducement for men with money to invest it in any productive business with the certainty, under existing conditions, that the record of the past will be that also of the future, and that if a return of confidence again expands credit and stimulates business to a new activity, it is sure to be followed, at no distant day, by another collapse. it must be conceded, with these considerations in mind, that the imperative need of this country is for a money that shall be at once more honest, more simple, and more elastic, and, at the same time, adaptable to the varying demands of commerce. any change in a money system must, of necessity, cause some disturbance of business, and such change should be so devised as to cause the least possible disturbance, and do as little injury to vested interests and existing obligations as possible. the system chosen should, moreover, be adapted not only to the needs of the present, but also to the possible requirements of the future, so that no change of system will afterwards be called for to meet further changes in demand, and cause again a disturbance of commerce. in short, it should be a system logical, economical, scientific, and permanent,--not a makeshift, to be changed in the next congress by the addition of another makeshift, in the manner in which our present crazy patchwork of money has been created and maintained. chapter viii. some proposed changes in our money system. of the many plans that have been proposed to correct the evils of our existing money system, it is not necessary to notice here more than two or three. most of the others are more or less temporary expedients which, even if meritorious, fall so far short of an adequate or permanent solution of the problem as to merit little attention. the change which has been most urgently advocated is a return to the free coinage of silver. it is not proposed to enter into any extended discussion of the merits or demerits of this proposition. much has been written on the subject already, most of it, unfortunately, from a partisan standpoint, and ignoring all facts and principles, however well established, which did not agree with the views advocated. this, it may be said, is equally true of both sides to the controversy. it seems desirable, therefore, to point out how the principles we have already investigated apply to the question. those who advocate free coinage of silver claim that the value of gold has increased since free silver coinage was stopped, while the value of silver has remained more nearly constant. this claim, as we have seen, is correct. they claim not to desire to substitute silver for gold in the coinage, but to use both together at the ratio of . to , under a bi-metallic system, increasing the volume of money, and thereby raising prices to a higher level. their opponents say that free silver coinage will drive gold out of the country and the value of our standard will at once fall to the present bullion value of silver (about to cents, measured in gold), and that bi-metallism is only practicable by agreement between the leading nations. that free coinage of silver would result in driving gold from the country has been largely denied by the advocates of that measure. in this denial they make a great mistake, not only because the statement is strictly true, as theory and experience in the past have alike shown, but also because it would accomplish what they are aiming at, and is the only way in which it can be accomplished through silver coinage. the increase in the volume of money here would raise prices, and the flow of gold to other countries would raise their prices also, and thus a general rise of prices and a lowering of the value of gold, would result. the gold-standard advocates have also made an error in supposing that free silver coinage would result in the _immediate_ fall of our standard to the present bullion value of the silver dollar. it would be rather difficult to trace the immediate effects of such a measure, as several conflicting forces would be brought into play, the relative strengths of which could not be foretold. it seems probable, however, that the first effect would be a large rise in the price of silver bullion, and a hoarding of gold, followed by its export in exchange for silver. for a time this would cause a fall in prices of other commodities, followed by a rise, as the new coinage began to fill the place of the gold hoarded and exported. however this might be, it can hardly be doubted that the final result would be a rise in prices of commodities--including silver--as measured in gold, or a fall in the value of gold all over the world as measured by commodities. our money would probably remain at a slight depreciation below our gold standard, while both together would gradually lower. this condition would be made manifest by gradually increasing prices, and would continue either until all the available gold had been exported, or until the rising value of silver met the falling value of gold at the coinage ratio of . to . whichever of these results took place would depend on the relative amounts of gold available for export and of silver for import, and could hardly be foretold. it seems more than likely, however, that the gold would all be exported. in this case, the country would have the silver standard, and the value of the dollar would be somewhat lower than the value of a gold dollar then, and considerably lower than the value of a gold dollar now, but also considerably higher than the bullion value of the silver dollar is now. if the two dollars reached a parity at their coinage ratio before all the gold was exported, the country would have not only a bi-metallic standard, but would practically force such a standard on the rest of the world, as long at least as the gold supply held out. if foreign nations returned also to the free coinage of silver, they would either have to change their ratio to agree with ours, or, if they kept their present ratio of - / to , the silver would gradually leave us in exchange for their gold. the fear of a sudden fall in the value of the dollar, as a result of free silver coinage, is not justified. the value of the dollar would fall gradually as the volume of the money increased,--as would be made manifest by gradually rising prices,--except that this fall would be more or less counteracted at the start by a hoarding of gold, which would decrease the supply of money, and perhaps by a disturbance of credit, which would increase the demand for it. the first effects might be, therefore, an increase instead of a decrease of money value. it would probably not make so very much difference whether bi-metallism or the single silver standard was the final result. the value of the dollar would not be greatly different in the two cases. before we reached a silver basis we would have exported some five or six hundred millions of gold, and bought its equivalent in silver, securities, and commodities, and the result would necessarily be a great advance in the value of silver, and a corresponding fall in the value of gold,--the reverse, in fact, of what happened when germany and other nations changed from a silver to a gold basis. whether, therefore, this country were able or not to restore the parity of the two metals at the present coinage ratio, the departure from such parity would not be nearly so great as it now is. provided that the volume of the uncovered paper money remained the same as now, and that, when the change was finally accomplished, credit were used to the same extent as before, the value of the dollar would be somewhere between the present bullion values of the gold and silver dollars, and probably nearly as high if the result were the single silver standard as it would be if bi-metallism were accomplished. the merits and demerits of the plan may be summed up as follows:-- the change would necessarily cause a great disturbance of business, which might result, at first, in a lowering of prices, but would eventually result in a gradual but considerable increase of general prices, and a stimulation of industry. debtors would be benefited considerably, and creditors wronged considerably, especially in short-time obligations; though the long-time ones--those that had run for a number of years--would not be affected so much. once established, the money value would probably be less variable than gold has been, and rather more variable than silver has been in the past, but this could not be said with certainty, as the money value would continue to be the result of a variety of forces, of which no one could predict or control the strength. the inconvenience of so bulky a metal in large amounts would almost necessitate its deposit in vaults and the issue of paper money in its place for actual circulation. if this paper were issued only to the amount of the silver deposited, it would be a most uneconomical system, since the greater part of the silver might evidently just as well be in the ground from which it was dug, so far as any real use was concerned. if paper were issued in excess of the silver deposited, it would not make a market for very much more silver than we now use, and the value of silver would be raised but little. the value of the money would therefore depend largely on the use that was made of paper in connection with it. without some control of the volume of the money besides the control the supply of silver would give, its value would continue to fluctuate at all times, and greatly so in times of panic, as it always has done. with proper control the silver is wholly unnecessary, as its only use is to limit the volume of the money, and this can be done far more cheaply and efficiently in other ways. little need be said of the "greenback" or fiat money proposals, so prominent some years ago, though they are seldom advocated now. their only merit was a dim perception of the fact that gold and silver are not necessary to a money system. their errors were that they failed to provide any standard by which money value could be tested, or any control had of its volume. they also failed to recognize the fact that money value is wholly dependent on money volume. various plans have been proposed for changing our money system by increasing the issues of bank-notes. one of these plans is to repeal the present prohibitory tax on state bank-notes, which would, of course, result in the issue of such notes to any extent that was profitable. several other plans propose to increase the issue of national bank-notes by removing some of the present restrictions, and allowing the banks to pledge other securities than united states bonds as a guarantee of their circulation, or by allowing their capital to serve, in part, as such guarantee. all of these plans are merely makeshifts, and merit little attention. considered, however, only as makeshifts, and with reference solely to the claims they advance, they are of no permanent benefit to the public. they only allow the banks to make a profit that should go to the community. it is claimed that the money volume will be made more elastic by these issues. this claim does not appear to be justified by an analysis of most of them, and, so far as it holds good in any of them, it is a most dangerous feature. if the issues are made profitable to the banks,--and otherwise there would, of course, be no issues, as they are not compulsory,--then the banks would undoubtedly increase them to the full limit allowed by law at any time. if they were limited so as to be profitable only when interest rates were high, then, when times were prosperous, prices rising, and profits large, the interest rate would be high, and the increased issues would enhance the "boom." when, however, the inevitable reaction came, and prices began to fall, and credit to be withdrawn,--the time, most of all, when more money would be needed,--the banks would not only be helpless to increase their issues, but would very likely reduce them, because of the increased risk at such times, and the fact that, in times of depression and declining prices, interest rates are apt to be low also. elasticity of volume is a most necessary feature of a money system, when it is rigidly controlled, to make money value constant; but it would be a most dangerous feature when the control was governed by the desire only to make the most profit. it would simply result in a greater fluctuation of money value than there is now. we have, so far, examined these various plans for amending our faulty money system rather in regard to the truth of their pretences than in regard to the requirements of an honest money. in this latter respect, all the plans ignore the necessity for an invariable standard of value, and provide no method for controlling the volume of money, and adjusting it to the demand, as might be done, to some extent, even with the gold standard. the general decline of prices could not be prevented, though some of the fluctuations might. the fact must be faced, that any attempt to increase the volume of money in this country, and thereby raise our prices above those of other countries, or to maintain our prices in gold constant, while those of other countries are declining, can result only in the export of gold. this might not happen at once, for it takes time for gresham's law to operate, but it would be inevitable. it would probably be delayed somewhat by foreign speculation in our securities,--always a powerful factor in determining the value of our money,--but it would come; and the resulting depression would be all the greater for the delay and the height of the prosperity that preceded it. so long as our money is based on a metal that forms a part of the money of other countries, under a free coinage system, so long will the value of our money fluctuate under the influence of foreign monetary legislation, wars, panics, and a hundred forces beyond our control. only by divorcing our money from that of other countries can we control it, and only by controlling it can it be made honest money. chapter ix. a new monetary system. in the development of commerce from simple barter between savages up to its present complicated form and enormous volume, an evolution is apparent, similar in character to that which has taken place in the organic world. in both the change has been from the simple and homogeneous to the complex and heterogeneous. in both it has been a differentiation of the functions of the several parts, accompanied by an increased sensitiveness of the whole. the primitive form of commerce, direct barter, may be compared to one of the lowest forms of animal life, in which all parts are alike mouth and stomach, and which if cut into pieces, will exist, severally, as a complete animal; while modern commerce, with its various parts, each with a separate function, and its highly sensitive organism, is more like a human being, in which each part is adapted to the work it has to perform and is dependent on all the others, so that the failure of any one to do its work cripples all the rest. just as the cutting or maiming of a low form of animal life is of little damage to it, while a far less injury, relatively, would kill or seriously maim a man, so an injury to commerce, that in a primitive form would amount to little, in our modern highly developed system would cripple it greatly. money is one of the most important parts of our industrial system,--the very life-blood, in fact,--and if, for any reason, it fails to perform its functions fully and completely, the consequences are far more disastrous than they would have been under the more primitive systems of the past. along with the evolution of commerce in general has gone an evolution of money and the mechanism of exchange. as the volume of traffic grew larger, the use of the bulkier commodities as money was gradually abandoned for the more valuable metals. in time, even these became too bulky and inconvenient for use as a medium of exchange, and credit, in its various forms, now does the work of money, as to this function, to a far greater extent than money itself does, and even the money itself is mostly a paper money,--a sort of certified credit. as previously stated, about per cent of the bank deposits are in forms of credit, and of the actual money deposits only about one-tenth is gold, the balance being paper money and silver; so that, on the strength of these estimates, only . per cent of the exchanges of commodities are effected through the direct use of gold. this evolution of money, however, has been almost wholly confined to the one function, a medium of exchange; there has been no advance for centuries in regard to the other function, a measure of value. men have continued to cling to the fiction that gold was a standard of value, and that, so long as their monetary system was based on that metal, their unit was of invariable value. we have seen how little ground there is for this claim; that a gold basis for our money is not necessary to our foreign commerce; and how small a part gold really plays in domestic commerce as a medium of exchange. is it not about time, then, to abandon the fiction that gold is either a standard of value or a medium of exchange, in any proper sense of the terms, and to take a forward step in the evolution of money by adopting a more scientific standard of value, and making the money, as a measure of value, conform thereto? professor jevons, in "money and the mechanism of exchange," in the chapter on "a tabular standard of value," inquires whether it is not possible to have a standard based on a large number of commodities,--a "multiple legal tender," as he terms it,--and concludes that the plan would resolve itself into those severally proposed by joseph lowe in , and, independently, by g. poulett scrope in , and by g. r. porter in . these plans were practically alike. recognizing the fluctuations of money value, and the injury done especially to long-time debts thereby, they proposed that tables be prepared showing the variations from year to year of the prices of the principal commodities, taking into account, also, the amounts sold. these tables were to be used for reference, to ascertain in what degree a money contract must be varied so as to make the purchasing power of the money returned equal to that loaned. the plans seem to have been only suggestions, and the details not worked out. professor jevons speaks favourably of them, as perfectly sound in principle, and the difficulties in the way as not considerable. he suggests a method by which the average prices of the commodities could be computed, and closes with the statement: "such a standard would add a wholly new degree of stability to social relations, securing the fixed incomes of individuals and public institutions from the depreciation which they have often suffered. speculation, too, based upon the frequent oscillations of prices which take place in the present state of commerce, would be to a certain extent discouraged. the calculations of merchants would be less frequently frustrated by causes beyond their own control, and many bankruptcies would be prevented. periodical collapses of credit would no doubt recur from time to time, but the intensity of the crisis would be mitigated, because, as prices fell, the liabilities of debtors would decrease approximately in the same ratio." prof. f. a. walker, referring to these schemes, and to similar ones proposed by count soden and by professor roscher in germany, criticises them as too cumbersome for general use, but thinks they might be advantageously employed for long-time contracts. the criticism is evidently just; not only are the plans too cumbersome, but they only partially accomplish what is needed. they contain, however, the germ of a plan which it is believed would be both more effective and less open to the criticism mentioned. long and short time contracts, and cash transactions, are too intimately connected to make it possible in practice to use different and varying standards for each. since the values of all commodities constitute the only true standard of value, as close an approximation to this standard as possible should be adopted as our standard of value. since the value of the circulating medium--the money--depends on supply and demand, the supply should be so controlled that the value of the money would always correspond with that of the standard adopted, and since paper money is the cheapest, the most convenient, and the only money entirely free from outside influences affecting its volume and value, our currency should be a paper money. the following is given as the outline of a plan embodying these features and requirements. _the standard of value._ let a commission be appointed by congress to select a sufficient number of commodities, say, one hundred, to be used as a standard of value. this selection should comprise the commodities most largely bought and sold and most independent of each other in their values; preference should be given to those which are products of this country,--but foreign products should also be included,--and to those which are reliable in quality and of which the prices are regularly quoted--such, for instance, as wheat, corn, oats, rye, barley, cotton, wool, tobacco, rice, gold, silver, lead, copper, tin, iron, steel, cotton and woollen cloths, leather, hides, lumber of various kinds, sugar, beef, pork, mutton, etc. the aim should be, while not including all commodities, which would of course be impossible, to include a sufficient number and of such varied kinds as to fairly represent all. less than a hundred might be sufficient, or it might be better to take more than that number. with the aid of statisticians, the average price of each of the commodities selected, in their principal markets for a few years past, should be ascertained and tabulated. the commodities, of course, should be of specified grade and quality, and in a specified market, but not necessarily the same market for all. the length of time over which the average of prices should extend would be determined as closely as possible by the average length of time that existing indebtedness had run. (the reason for this will be explained later.) in addition to the average prices of each commodity, the approximate amount or value annually consumed in this country, should be ascertained. from these data, a table should be prepared showing the amount one dollar would have purchased, on the average, of each of the commodities for the time determined, and from this a final table should be made taking such multiples of the amounts found in the previous table as should represent their proportionate consumption,--in other words, their relative importance in trade. for example, suppose the time selected were five years, as representing twice the average time existing debts had run; that during that time one dollar would have bought, on the average, . bushels of wheat, or bushels of corn, or pounds of pig iron, or pounds of cotton, all of specified grade in specified markets; that, further, the importance of each of these commodities in the trade of this country was in the approximate proportions of , , , and , respectively. then the final table would show:-- × . = . bushels of wheat = $ . × = bushels of corn = . × = lbs. of pig iron = . × = lbs. of cotton = . ----- total, $ . considering these four commodities only, the dollar, as the unit and standard of value of our system, would be defined by law as one-eleventh of the sum of the values of . bushels of wheat, bushels of corn, pounds of pig iron, and pounds of cotton. this illustrates the method of arriving at, and the definition of, the standard. extended to all the commodities selected, the definition would be the same with the substitution of the proper figures. this would evidently provide a standard that would closely represent the average purchasing power of one dollar for the time selected. as to the length of time over which this average should extend, if there were no such thing as existing debts, it would clearly be of little importance what the value of the unit selected was, just as it would be of no importance now whether the foot or the pound had been originally fixed at greater or less than their present length and weight; but because of the vast amount of existing indebtedness, the value of the unit that is to be made permanent should be most carefully fixed at the value it had when such indebtedness was created, so as to do as little violence as possible to outstanding obligations. the fact that in the past the debtors have been wronged to the advantage of creditors, by an increasing value of money, furnishes no excuse for a reversal of this injustice and a wronging of creditors by permanently fixing the value of the dollar at what it was twenty or thirty years ago. the debtors and creditors of to-day are not the same individuals who stood in those relations at any time in the past, and two wrongs do not make a right. the object should be, therefore, to determine as closely as possible how many years, on the average, existing debts have run, and take twice that period for the total length of time over which our prices should be determined. the average of the prices would then correspond with what it was when average debts were incurred. this would doubtless work a slight injustice to those whose debts were of longer standing,--though a less injustice than they are subject to now,--and would be a slight injustice to the creditors of more recent date; but as some time would be occupied in getting the system to work, so that the actual value of the money would correspond with the standard, the injustice would be more or less distributed, and would at most be slight. it would be substituting only a gradual rise in prices for the decline that has been going on, until prices were back to the level of perhaps two or three years before, and then fixing the level at that point. _the medium of exchange._ after the statistical work outlined above had been completed, congress should repeal the present monetary laws, substituting for the definition of the "dollar" the new definition agreed upon. it should then provide a currency or money to take the place of that now used. this currency should be a paper money similar to our "greenbacks." it should be a legal tender for all debts public and private (except, of course, such as by their terms are payable in gold). in fact, the only difference between such notes and existing "promises to pay" of the government would be that the new notes, as is evident from the new definition of the dollar, would be promises to pay _a definite value_, and not a definite quantity of one commodity of uncertain value. the notes could be made redeemable _in any commodity at its current market price_, and should contain a pledge, on the faith of the government, that the amount of the currency in circulation would be at all times so controlled by the government that its actual purchasing power would conform to the standard on which it was based. to carry out this pledge, it would be necessary to have a small corps of statisticians who would receive and tabulate the current market prices for each day; and who would calculate therefrom the aggregate prices of the specified quantities of all the commodities constituting the standard,--in similar form to the final table before mentioned, and of which an example has been given. if this aggregate for any clay were more or less than the total of the standard table, it would show that prices in general had risen or fallen, and some money should be withdrawn from circulation, or more issued until the daily total corresponded with the standard total. doubtless several plans might be proposed for putting such a money into circulation and controlling its volume. the following seems to commend itself by its simplicity and effectiveness of control, for at least a part, if not all, of the issues, viz.: the money to be loaned by the government on approved securities, such as their own bonds; other bonds of states, counties, cities, railroads, etc.; warehouse receipts, gold and silver deposits, etc. first-class commercial paper, when guaranteed by solvent banks, might also be taken, especially in case of threatened panic. in short, such securities as would be considered the safest for banks and trust companies to loan upon, all under such proper restrictions and safeguards as would insure their safety as collateral. the rate of interest charged for such loans to be a _variable one_, decreasing as prices tended to fall, and increasing as they tended to rise, and without other restriction. this would absolutely control the volume of money, within narrow limits, since more would be borrowed at a lower, and less at a higher rate, of interest, yet the control would be elastic. while the loans should be for short time, they could be renewed at pleasure, and as often as desired, at the current rate of interest, the security remaining good. such a plan would not interfere with general banking business to any considerable extent. in order to prevent monopoly, the loans should be open to all on equal terms, and the list of approved securities acceptable as collateral should be made as wide as possible, consistent with safety. it would probably be found by experience, however, that the principal borrowers direct from the government would be the banks, who would re-loan the money (at a sufficiently higher rate to pay them for their trouble) to their customers, on local securities, commercial paper, etc., as they now do. in fact, the present system of national banks could be made, with few changes in the regulations governing them, a most valuable adjunct to the plan as a distributing agency, and the plan is one that it would seem ought to meet with approval. they would, it is true, lose their present note circulation, but that, under existing laws and conditions, is of little or no profit to them. they would gain by its being unnecessary for them to keep so large a reserve of cash on hand as they are often obliged to do now; for not only would the whole financial system be more stable than now, but they might safely be allowed to carry a part of the present to per cent. reserve, required by law, in such securities as they could at all times use as collateral with the government. they would gain even more by the security such a system presents against panics and senseless runs, which so often compel solvent banks to close their doors. in short, the government would act toward the banks, not as a competitor, but rather in the relation that the new york clearing-house has several times acted toward its members in times of panic, by the issue of clearing-house certificates,--a quasi-money that helped them in time of need. the government would not be subject to the limitations of the clearing-house, however. the money it loaned would be, unlike clearing-house certificates, a legal tender everywhere; and the protection would extend to all the banks of the country. the government would act toward the banks in somewhat the same way as they act toward individuals, or as the bank of england acts towards the other english banks, as a sort of reserve agent. in this case, however, the resources as to money would be unlimited. in the manner of regulating the volume of money, also, this plan would resemble that of the bank of england, since that institution attempts in a feeble way, and prompted doubtless by self-interest, to regulate the volume of money, to some extent, by raising the discount rate when the volume is decreasing, as evidenced by exports of gold, and lowering the rate when gold is being imported. if it were impossible or inexpedient to loan in the above manner all the money the country required, a sufficient amount could be so loaned as to give an absolute control of the volume, and to regulate its value at all times, and the balance could be issued in exchange for the present greenbacks, and for interest-bearing bonds of the government, thus converting a part of the interest-bearing debt into a permanent non-interest-bearing one. it is evident that the control of such a system should rest with the government, and not be left to any banking institution; for a bank would be more influenced by considerations of profit than of proper control in the interests of all. the interest received by the government would be a minor consideration, the control of the volume being the main object, and the rate of interest a means merely to that end. the people, besides, would have at all times a greater confidence in notes issued directly by the government than they could have in notes issued by any bank, however strong. the department of the government to be charged with this issuing function should, of course, be entirely distinct and separate from the other departments. its sole business should be the maintenance of an honest money. it should have no connection with the general expenditures of the government, further than to pay into the treasury such profits, in the way of interest, as might be received. the government expenses should be met, as they now are, by the receipts from taxes and duties, or, if these were insufficient at any time, by borrowing money on its bonds. under no circumstances should money from the issuing department ever be taken for the expenses of government, except in the same way that banks or individuals might receive it, and never then to an extent that would raise average prices. the legal tender provision of the notes would be necessary only as specifying the medium in which payment of debts should be made, to prevent misunderstanding, and for the protection of debtor and creditor alike. the new dollar being a quantity of value, and not of a specified commodity, a loan might be returned in any commodity of that value but for some such provision. the provision could in no case wrong a creditor, for what he would receive in payment of the debt would be a positive guarantee to deliver him the _value_ specified in any commodity he chose. making the money redeemable in any of the commodities on which it is based would be only a form, and might be omitted; it is suggested merely as obviating any objections to an irredeemable money. of course the government would never be called upon to so redeem money, since the holder of it could exchange it for the commodity wanted in the open market to equal advantage. no reserve of commodities of any kind need be kept, therefore, for redemption purposes. one great difference between this plan and existing systems will, of course, be seen at once: the present system promises a definite amount of gold, and must, therefore, keep a gold reserve; but as no one really wants the gold, except to exchange for commodities, this plan proposes to do away with the necessity for a gold reserve by guaranteeing that the money can be directly exchanged for such commodities at the current market price,--which is all that can be done with the gold,--and that the average purchasing power of such money shall not vary as gold does. it must not be supposed that this plan contemplates any control of individual prices. such will be free to fluctuate in accordance with the law of supply and demand, as they now and ever must do, regardless of the monetary system used. it would not be desirable, even if it were possible, to make individual prices constant; but what is desirable and possible, and what it is believed this system would accomplish, is to relieve the prices of all commodities from the fluctuations due to changes in value of the one commodity by which all others are measured; to make the money--the one commodity which no one wants except for measuring the value of and exchanging for other commodities--of constant value. the prices and values of gold and silver would then depend on their use for other than money purposes, or for money purposes in other countries, and if the value of either metal should fall, or fail to continue to rise, there would be no room for complaint that it was being discriminated against by the laws, since all commodities would be treated alike, and the demand for none increased over what it would otherwise be by its selection for monetary uses. it is evident that gold could still be used as a hoard of value, if desired, but such use would in no way interfere with the volume of money, as it now does. neither would the hoarding of money itself affect prices and cause business stagnation as is the case now. the reasons for such hoarding would be mostly done away with, but if any should remain and the money be hoarded, the government would at once issue as much more as was needed to supply the deficiency so created, thus maintaining its value constant, and when the money hoarded was again put in circulation the government would withdraw a portion of it if it were excessive in amount. the exchange of the new money for the existing kinds would be a matter of practical financiering, presenting no unusual difficulties. this need not be enlarged upon. the gold certificates should be redeemed with the gold now held for that purpose. this gold, as well as that now in private hands, would thereafter take care of itself. the silver dollars, and all forms of paper money, should be redeemed in the new money, dollar for dollar; the paper money should be cancelled, and the bullion--both gold and silver--sold gradually, with due regard to the effect of such sales on the prices of gold and silver, especially the latter. the proceeds of such sales in the new money should also be retired from circulation. as a final result, the new money issued would all be in the form of loans to banks or individuals, except to the amount used in redeeming the uncovered paper now outstanding, less the reserve fund (and some loss that would result from the sale of silver below the price paid for it). this net balance of the new money issued, above what was issued as a loan, could be left as an uncovered paper issue, as it now is; but for the sake of uniformity it would be better to make all the money a loan issue, in which case it would be necessary to issue bonds to take up such amount. it represents now, of course, a remnant of our war debt, not refunded. no increase of interest charges would result from funding it in bonds, for the interest on the bonds would be offset by the interest on the equal amount of extra money that would be loaned in that case. it would make no difference as regards this general plan which of the two methods were adopted. this plan should not be confounded with any "fiat money" or unlimited "greenback" proposals. its main point is directly the opposite of these, to secure a more complete control of money volume. it is not an attempt to make something out of nothing, or to create value by government fiat or authority where none existed before, or to coin the government's credit,--although there is no valid objection to doing the latter when properly limited. it is simply an exchange of credit, analogous to the operation of every bank. the government would loan a command over immediate goods (represented by its promise to deliver such goods on demand) in exchange for a promise to return such command over goods at a future time, and secured by a deposit of collateral; and in payment for the difference between the value of present and future goods it would charge interest. this is precisely what the loan department of every bank does. every man who accepted the money in payment for goods would deposit, for the time being, with the government the command over commodities in general which he owns; the money being his certificate of deposit. this would constitute the fund from which the loans were made, just as the deposits in a bank constitute, in the main, its loan fund. when the money was used to purchase goods, it would be redeemed, so far as the purchaser was concerned, and the claim would be transferred to the seller of the goods, who in turn would become a depositor. like every bank, the government would rely on the probability that all claims against it would not be presented for payment at once, but this probability would amount to a certainty in the case of the government, for there would be no probability of _any_ of the claims being presented for direct redemption, as every one who had goods to sell would redeem the notes, so far as the holder was concerned. the honesty of the government as an agent for all the people is, of course, assumed in this plan; but the credit of the government, in any other than a trust capacity, is neither assumed nor involved, since it would hold secured claims against others for every dollar issued (unless, of course, a portion of the money was left as an unsecured issue, which, as above stated, is no necessary part of the plan). money, in its ultimate analysis, is simply a claim which the holder has against society for goods in general. it is the faith that such claim will be recognized, and its value be stable, that gives currency to all money. this faith, in the case of coin, is based wholly on long custom and usage; in the case of paper money, it rests on such custom joined to the pledge--express or implied--of the issuer of the paper. selling is simply the exchange of a particular thing for a command over things in general, and the reverse--buying--is the exchange of the general command over goods for some particular good. in all existing moneys, this claim is one only of usage, and its value is variable. in the plan proposed it becomes a definite promise of such goods in general, and to a definite value, the government being the guarantor. the plan closely resembles the present national banking system, but broadened and improved, and with the objectionable features of that system removed. chapter x. merits and objections considered. the foregoing chapter is only an outline, but is believed to be a sufficiently definite one to show the feasibility of the plan. _merits of plan._ the merits of the plan are believed to be:-- ( ) it furnishes a standard of value as nearly invariable as it is possible to obtain in practice. ( ) it gives a medium of exchange conforming in value closely to the standard, one which is cheap, convenient, elastic, and to be had in any amount needed. ( ) it would prevent panics. this may seem an extravagant assertion, but further consideration will show that it is well founded. a panic, whatever the cause, manifests itself as an unreasoning fear and distrust, which prevents credit from doing its usual work, and creates an excessive demand for money; not only because the money is then needed by each individual who demands it, but because each is afraid if he does not get it then he will not be able to get it when he does need it. it means a hoarding of money, a great rise in its value, or, as generally expressed, a great fall in prices. all this is enhanced by the knowledge of the limited amount of money; in fact, the fear is not so much of the ultimate solvency of banks and business institutions as of the fact that there may not be money enough to go round, and that those who are not first will be at a disadvantage. the plan proposed will, in the first place, prevent the growth of any such fear up to the panic point, by the knowledge that the government stands ready to furnish any amount of money that may be needed to maintain prices; and, in the second place, if by any chance such a fear should arise, its first manifestation would be falling prices, which would at once bring an increase of money volume to meet the demand. it is well known that nothing will so effectively prevent a panic that is impending, or check one that has already begun, as the assurance that the institutions involved stand ready to meet any demands that may be made upon them. a run could hardly originate on a bank, believed to be solvent, were it known that it could obtain at any moment all the money needed for the emergency. an element of certainty and stability would, by this protection, be given to all banks, and through them to all solvent and legitimate business institutions, which is now sadly lacking; and business men would be relieved of much of the anxiety and worry that at times harass them under present conditions. ( ) the proposed plan would tend to prevent those alternating periods of stimulation and depression of business known as "good times" and "bad times." it is not to be expected that any money system, however perfect, can wholly prevent excessive speculation, or development beyond the needs of the people, of particular industries; nor can it prevent such action from being followed by its natural consequences of disaster and loss. wasted labour, like wasted force of any kind, can never be regained. alternations of prosperity and adversity, of confidence and distrust, will probably always continue, as they always have; but much can be done to lessen the extent of the fluctuations. a money volume adjusted to keep prices constant, as a whole, will evidently operate to prevent prosperity from developing into a "boom" (sure to be followed by a more intense reaction), and will prevent the ensuing depression from reaching its extreme in panic. ( ) the adoption of the scheme would do no violence to existing business. it would act rather as a mild stimulant by a slight raising of prices, and as a greater stimulant, through the confidence it would give. it would do no violence to the habits and customs of the people. accustomed, as they already are, to a half dozen different kinds of paper money, the issue of a new one by the same authority to take the place of the others would hardly be noticed, especially as the change could be and ought to be made gradually. if any change were necessary at a future time in the list of commodities constituting the standard, it could be made in the same manner that the standard was first fixed upon, with no disturbance of business, or perceptible change in money value. ( ) the interest received for such money would probably more than pay the interest on the outstanding government bonds, and would be as fair and equitable a form of taxation for that, or any other purpose, as could be devised. ( ) the coin and bullion we now use could be mostly shipped abroad in payment of our private debts,--represented by american securities held there,--and much interest money be saved to this country. ( ) last, but not least, the plan would be a measure wholly american. this country would stand alone, free from the disturbing effects of foreign monetary legislation. not that our foreign commerce would be lessened, or would be free from the effects of commercial disturbances in other countries: commerce is such a world-wide and intricate network that it would be impossible, even if it were desirable, for one country not to be affected by changes in others; but our money, the prices of commodities, as a whole, in that money, and the relations of debtor and creditor in this country would be free from foreign influences. there are many minor merits in the plan, such as its tendency to equalize interest rates on the same, or on equally good, security all over the country; the facility with which money would flow from the central source to the point where it was needed, and return when not needed, instead of having to filter through many banks with much loss of time and expense, as it now does; the saving of what is now lost by abrasion of coin, etc.; but these points need not be enlarged upon. _objections answered._ it is to be expected that many objections would be raised to a plan, seemingly so radical as a whole, although it is in reality composed of old and tried methods in most of its parts. it may be well, therefore, to anticipate some of the objections likely to be brought forward and to endeavour to answer them. probably one of the first points to be raised against the plan, and one that, judging from recent discussion in magazine articles, would be strongly urged, is that it would have a bad effect on our foreign trade, and would divorce our prices from those of foreign countries. it has already been shown, in the chapter on foreign commerce, that such fears are wholly unfounded, and that it makes no difference what the money is based on; if it is reasonably stable in value, foreign trade will not be disturbed. in any event, ceasing to use gold in our domestic commerce would only leave a larger amount available for foreign commerce if it were needed. gold would continue to be a commodity produced by this country, and dealt in as all commodities are, and if it were a necessity or convenience for the transaction of foreign business, the bankers engaged in such business would keep a sufficient amount on hand for their requirements. it is not believed, however, that any such necessity would be felt, either by the bankers doing a foreign business, or by the government in providing for the payment of interest on its bonded debt. the latter would probably have to be calculated in gold, in accordance with the terms of the contract, but could be paid as well in the current money. all such bonds would in a few years be redeemed, and any inconvenience from this source would be short-lived and slight at most. as to divorcing our prices from those of other countries, the objection would have no weight. the _values_ of any of our commodities, compared with those in other countries, would in no way be affected. no legislation can affect or determine the amount of one commodity that will exchange for another, either at home or abroad, except as it may alter the relations of supply and demand affecting them, by tariffs or taxes, or by the selection of some special one for a particular use, as is now done in the case of gold for money uses. the values of gold, and of silver (to a less degree), would be the only things affected by the proposed change. all others would remain the same: the money of our own or any other country would continue to be used as a measure of such values, and if our prices rose as measured in such money, so also would foreign prices by the same measure. the exchange rates would vary as they now do, and between wider limits; but the variations would, probably, not be rapid enough to affect foreign trade injuriously. our money would be constant in value, and if the gold varied, the slight inconvenience it might be to the few directly engaged in foreign trade would be a small matter compared with doing violence to our immense domestic commerce, by using such a variable standard. in regard to all obligations that are made payable specifically in gold, they should, of course, be paid on that basis; but as the value of gold would be lessened by the shipment of it abroad, if we abandoned it as a money basis, the makers of such obligations would suffer less than they now do, or are likely to do in the future, because of the appreciation of gold value. gold could always be had to meet such obligations by paying its current price, and that price would represent less of commodities in general than it now does. it does not seem as if there could be any objection raised to the plan on the ground of unconstitutionality, since the greenbacks were, and are, held to be constitutional, and the new notes would be promises to pay gold and silver, as well as other commodities, if they were included in the list on which the money was based, not, to be sure, in a definite quantity, but in a definite value. a more valid objection might be urged, in the danger of entrusting to public officials so great a power as the control of money value would seem to be. in reply to this it may be said, that an inefficient, or to some extent even dishonest, control would be far preferable to no control at all,--which is the present condition. the greater concentration of capital in our modern industrial system, and the increasing values handled, necessitates the entrusting of greater responsibilities to individuals, in both public and private business, and it has not been found that the men selected for the higher positions of trust in public life were often recreant to the trust reposed in them, or inadequate to its responsibilities, even where much was left to their discretion. in the plan proposed, however, almost nothing would be left to the discretion of the officials in charge. the act of congress putting the plan in force could provide for any contingencies likely to arise, and the duties of the officials would be mandatory, so far as the adjustment of the volume of money was concerned and the method of accomplishing it. beyond that, errors of judgment, or even of intention, could do little harm. surely it is not expecting too much of a public official, that he shall carry out his mandatory instructions, especially as any variation therefrom would be liable to immediate detection, and could be corrected before harm was done. it might be objected that the government should not go into the banking business, that it is not one of its legitimate functions. avoiding the question of what the legitimate functions of government are,--about which there is room for a large difference of opinion,--it may be said that the plan does not contemplate the government entering the banking business as a competitor of existing banks, but rather as a regulator of them. this function it already exercises, and the popular demand is rather for an increase of such control. furthermore, the treasury, under the present system, is the largest holder of cash in the country, and its action is at any time of vital interest to the banks. it has more than once come to their aid in perilous times, to the extent of its ability, and had its ability been greater it could, and doubtless would, have done so more frequently. at times, moreover, the actual money held in the treasury has been excessive, and by diminishing the volume of money in circulation this has badly affected business. the proposed plan would prevent this, and while not materially enlarging the functions now exercised by the government, would make its control of the banking system more direct and effective, to the benefit alike of the banks and the public. our present banking system, admittedly, shows much weakness in times of panic. each bank expands its credits to the full limit in times of prosperity, for its own profit, and in time of distress contracts them for its own safety, thus increasing the distress at such times. under this plan its safety, if solvent, would be assured without the need of contracting its credits. as to controlling the volume of money, this either is, or is not, a proper governmental function. if it is, then justice demands that the control be efficient, and in the interests of an honest money. if it is not,--if the sole duty of government is to certify to the weight and fineness of pieces of metal by coining them,--then it has no right to refuse to coin any amount that may be presented of any metal the people or any section of them desire to use as money; no right to issue, or authorize others to issue, on government credit, any paper money; and no right to forbid, or prevent in any way, banks, firms, or individuals from issuing, on their own credit, any money they chose. all of these acts are a control of money volume. the mere statement of such an alternative is a sufficient refutation of the claim. it would simply be financial anarchy. the government must control money volume, and the control should be real, effective and honest. other objections might be raised to this plan, but none are foreseen of sufficient weight or gravity to offset in any considerable degree the merits it seems to present. chapter xi. conclusion. a universal money for the whole world has been the dream of some writers. this in many respects would be a convenience, as would a general uniformity of weights and measures; but its benefits would be confined mainly to a saving of clerical work, and even this would not be as great an advantage as might be supposed, since differences in value of bills of exchange would continue to exist, even as they now exist between countries using the same money, or even between different cities of the same country. unless the universal money were stable in value, it would be as dishonest as the existing systems, and to make it stable would involve its absolute control in volume by some central power to which the various nations would delegate their authority. such a thing is most unlikely to happen. the obstacles of national prejudice and habit are too strong to be overcome,--as will be evident from a perusal of mr. walter bagehot's work, "universal money,"--and the advantage to be gained by it is not worth the trouble. a universal money, then, must be considered as a utopian dream; and a plan that provides for our own country an honest money seems to be the highest success to which we can at present aspire in the settlement of this vital and all-important question. whether future legislation be based on some such plan as the one here outlined, or whether another can be devised that will more closely meet the requirements, the fundamental principles we have considered should be kept in mind in any change that is made. it should also be clearly understood that no monetary legislation, by this or any other country, can alter the relative values of all, or any, of the commodities, including gold and silver, which enter into human use and consumption, except in so far as such legislation shall affect their relative supply and demand. all that legislation can really beneficially do, is to provide a stable standard of value, as it now provides stable standards of length and weight, and to provide a medium of exchange that shall always conform in value to that standard, and shall be at once convenient and economical. opinions may honestly differ as to the best means of providing such a money, but, when fully understood, no difference of opinion can exist as to the benefit it would be to all classes of society, without exception. the labourer gains by employment being more certain and constant; by the knowledge that open competition with capital will determine the shares of the joint product which each shall receive,--that he will not be the victim of an insidious change in money value or, while receiving nominally higher wages, be perhaps getting lower real wages. with an honest money, real and nominal wages coincide, and a rise or fall of wages is known at once as a benefit or an injury. the effect on wages would be toward an increase, by stimulating production and enhancing the demand for labour; while the labourer's ability to purchase more would absorb such increased production and improve his condition. the employer of labour would gain by the certainty that his success will depend more largely on his own ability and endeavour, and less on causes which are not only beyond his control, but on which he cannot even calculate with certainty; while the greatest risks to which he is now subject will be removed. this applies not only to manufacturers, but to industrial enterprises of all kinds. railroad stockholders would be especially benefited. no other business, perhaps, carries so large a fixed indebtedness, in proportion to its value, as railroads, and the stockholders suffer more from an advance in the value of money than most other owners. the fact that they are to some extent monopolies and can keep their rates the same, or even increase them, with money value rising, does not alter the case; for the amount of traffic will, under such conditions, be lessened, and it is impossible for most railroads to reduce expenses in anything like a proportion to the reduction of income from diminished business, because of the large fixed charges. merchants would be benefited by the greater general stability of prices, and would be relieved of many of the risks of business. they would, if solvent, have assurance that they could get money when needed, and the failures would be fewer. money loaners would also be benefited. it might seem, at first sight, as if they would not, since they profit directly by an increase of money value; but this is a narrow view. while the money loaner, as before shown, gets an undue and unjust share of the products of labour and capital when prices are falling, yet the secondary effects of such a fall,--the increased competition for loans, and diminished demand for capital for business enterprises,--by lowering interest rates, tends to offset this gain; and the doubt and uncertainty as to security keep capital idle as well as labour. the lender gets a larger share of the total product than he is entitled to, under such conditions; but the total product is so much lessened as a whole, that his larger share is less in actual amount than a just share of the larger product would be, were money honest and prices constant. moreover, one of the most important considerations to a lender is security, and this is much lessened with falling prices, and the loaner is frequently obliged to take the property which is security for his loan. he does not want the care and management of it, as it is generally far less valuable in his hands than in those of the original owner; the latter thereby loses something which he could use, and the former gains something he has no use for, and no one is really benefited. it cannot be considered, therefore, that loaners, as a class, either profit by or desire such a condition of business depression and panic as is largely produced by dishonest money. a few individuals there may be--the leeches or wreckers of society--who rejoice at and profit by the general misfortune of all; but they are not, it is believed, sufficiently numerous to make their desires important or consideration for them a matter of anxiety. in view of these considerations, the attempt--so often made in discussing the question of money--to set class against class, to lead labour to consider capital as its enemy, to embitter the relations between borrower and lender, and between the banks and the public, is greatly to be deplored. competitors in a sense these different classes doubtless are, but so far as an honest money is concerned all are partners; all would be gainers by it and none losers. past experience does not lead us to expect that men will generally become unselfish and altruistic in their motives in the near future. business will continue to be, as it always has been, a struggle for the greatest amount of commodities with the least labour; and the plea for an honest money rests not upon altruism, but upon the enlightened selfishness which teaches that honesty is the best policy, in a money system as in other things, and that it is not profitable to kill the goose that lays the golden eggs. index. aldrich report, the, . bagehot, walter, quoted, , , . bank-notes, national, proposal for increasing issue of, . bi-metallism, , . böhm-bawerk, von, quoted, , . capital and money, distinction between, . coin. _see_ money. coin and paper money, . cost of production, . credit, money forms of, . currency, an elastic. _see_ money. decline in prices, , . definition of money, . definition of value, . demand and supply. _see_ supply and demand. dollar, gold and silver, . _economist_, london, on foreign prices, , , . ely, prof. r. t., quoted, , . employers of labour, , . _encyclopædia britannica_ on money, . exchange, money as a medium of. _see_ money. existing monetary systems, . foreign commerce, - ; balance of trade, from an economic standpoint, a misnomer, ; international trade, _ib._ france, monetary system of, changed to a gold basis, . functions and requirements of money, . germany, monetary system of, changed to a gold basis, . gold. _see_ money and monetary systems. gold production between the years - in australia and california, . gold-standard arguments criticised, ; mr. d. a. wells' fallacy of deeming labour a test of value, ; threefold division of the community into labourers, employers of labour, and money loaners, ; distinction between capital and money, . _see_ stability of gold and silver values. gold standard, the, . greenbacks, , , . gresham's law, , , , , . inconvertible paper, , . india, english commission on the depression of trade in, ; silver currency in, . invariable money value, necessity for, , . jevons, professor, quoted, , , . labour, productive and unproductive, ; three kinds of, as factors in making for the value of a commodity, ; labour not a standard of value, . laughlin, prof. j. l., quoted, . medium of exchange, the, . mexican exchange, . mill, john stuart, quoted, , , , , , . money loaners, , . money, definition of, ; f. a. walker's comprehensive definition, _ib._; paper money and coin, _sqq._; functions and requirements of, ; money as 'a medium of exchange,' 'a measure of value,' and 'a standard of deferred payments,' _ib._; professor walker's substitution for the term 'measure of value,' 'common denominator of value,' ; money as 'a store of value,' _ib._; qualities necessary to a money material, ; invariable value, ; fluctuations in money value, ; j. s. mill on the purchasing power of money, ; the _encyclopædia britannica_ quoted, ; money demand and supply, ; money actual and money in forms of credit, ; an invariable money value, ; a change of money value, a robbery, ; f. a. walker, on decreasing money value, ; a flexible or elastic currency, need of, ; money in all countries a creature of the law, . money in the united states, ; greenbacks, national bank-notes, silver and gold certificates, treasury notes, currency certificates, ; gold coin, silver coin, ; national bank-notes wrong in principle, ; no means to-day of meeting either the increasing demand for money expanding population and commerce bring, or the sudden demand that a failure of credit may bring, ; results, _ib._; some proposed changes in our monetary system, ; free coinage of silver, ; erroneous views confuted, ; 'greenback' or fiat money proposals, ; increase of the issue of national bank-notes a mere makeshift, ; divorce of our money from that of other countries only mode of controlling it and making it honest, ; a new monetary system, ; standard of value, ; medium of exchange, ; the national banks as a distributing agency, ; complete control of the money volume, ; merits of plan considered, ; an invariable standard of value, _ib._; a cheap, convenient, and elastic medium of exchange, _ib._; prevention of panics, _ib._; repression of excessive speculation and its reaction, , ; plan wholly american, ; objections answered, ; conclusion, . money system, our, some proposed changes in, . money value, . monetary systems, existing, ; the gold standard, ; gresham's law, ; the silver standard, ; bi-metallism, ; paper money, ; j. s. mill on inconvertible paper, . new monetary system, a, - . panics and hard times, causes of, ; panic of , collapse of credit in, ; panic of , . paper money, , ; prof. f. a. walker on, . _see_ money. patten, prof. simon n., quoted, . prices, declining, evils of, ; professor sherwood on stability of, . production, cost of, . purchasing power, . ricardo, david, quoted, , , , . sauerbeck, mr., quoted, , , . sherwood, sidney, quoted, . silver, _see_ money; the silver standard, _see_ monetary system. silver, free coinage of, , . silver famine of the middle ages, . silver production in nevada, . silver standard, the, . silver-standard prices, . smith, adam, referred to, . soetbeer, dr. quoted, , , . stability of gold and silver values, - ; gold standard prices, ; european economists on prices, ; decline in prices, ; silver-standard prices, . standard of value, the, , . supply and demand, ; the immediate determiner of value the relation between supply and demand, _ib._; the demand for a commodity determined by its subjective or exchange value, , ; close connection between value and the ratio between demand and supply, . tauschkraft, . united states, the, stops free coinage of silver, . united states senate finance committee report on 'wholesale prices, wages, and transportations,' . value and the standard of value, - ; definition of value, ; the two classifications--'value in use,' and 'value in exchange,' ; böhm-bawerk on 'value in the subjective sense,' ; john stuart mill's aphorism--'every rise of value supposes a fall, and every fall a rise,' ; simon n. patten on 'objective values,' _ib._; standard of exchange value, ; exchange value, what determines its constancy or variability, ; only one real standard of value, . walker, prof. f. a., quoted, , , , , , , . wells, david a., quoted, _sqq._, , , , , , - , , . [illustration: ---- value or purchasing power of gold .... " " " " " silver in per-centages on values of ; assuming that the list of commodities in report of finance com. u. s. senate no. , weighted according to importance, fairly represents all commodities, and that their average is therefore of constant value.] [illustration: diagram of price variations showing average per-centage of change, from prices of , of each of four lists of commodities, gold prices. platted from tables in senate report no. finance com. nd session, nd con. === u. s. senate finance com. list commodities --- mr sauerbeck's list. english prices. " ... economist list. " " " ,,, mr soetbeer's list. hamburg and eng. prices commodities. ] transcribers' notes: punctuation, hyphenation, and spelling were made consistent when a predominant preference was found in this book; otherwise they were not changed. simple typographical errors were corrected; occasional unbalanced quotation marks retained. ambiguous hyphens at the ends of lines were retained. index not checked for proper alphabetization or correct page references. page : page number for "distinction between capital and money" was missing from the original text, but has been added by the transcriber based on where the subject appears in the book. pages , : the illustrations are graphs, and the symbols in the legends represent the data series plotted in those graphs. page : "platted" appears to be a misprint for "plotted." money. "gold is a wonderful clearer of the understanding; it dissipates every doubt and scruple in an instant, accommodates itself to the meanest capacities, silences the loud and clamorous and brings over the most obstinate and inflexible. philip of macedon refuted by it all the wisdom of athens, confounded their statesmen, struck their orators dumb, and at length argued them out of their liberties." --addison. speech of hon. john p. jones, of nevada, on the free coinage of silver; in the united states senate, may and , . washington. . speech of hon. john p. jones, of nevada. on the bill (s. ) authorizing the issue of treasury notes on deposits of silver bullion. mr. jones, of nevada, said: mr. president: the question now about to be discussed by this body is in my judgment the most important that has attracted the attention of congress or the country since the formation of the constitution. it affects every interest, great and small, from the slightest concern of the individual to the largest and most comprehensive interest of the nation. the measure under consideration was reported by me from the committee on finance. it is hardly necessary for me to say, however, that it does not fully reflect my individual views regarding the relation which silver should bear to the monetary circulation of the country or of the world. i am, at all times and in all places, a firm and unwavering advocate of the free and unlimited coinage of silver, not merely for the reason that silver is as ancient and honorable a money metal as gold, and equally well adapted for the money use, but for the further reason that, looking at the annual yield from the mines, the entire supply that can come to the mints will at no time be more than is needed to maintain at a steady level the prices of commodities among a constantly increasing population. in view, however, of the great divergency of views prevailing on the subject, the length of time which it was believed might be consumed in the endeavor to secure that full and rightful measure of legislation to which the people are entitled, and the possibility that this session of congress might terminate without affording the country some measure of substantial relief, i was willing, rather than have the country longer subjected to the baleful and benumbing influences set in motion by the demonetization act of , to join with other members of the finance committee in reporting the bill now under consideration. under the circumstances i wish at the outset of the discussion to say that i hold myself free to vote for any amendment that may be offered that may tend to make the bill a more perfect measure of relief, and that may be more in consonance with my individual views. the condition of the country. the condition of this country to-day, mr. president, is well calculated to awaken the interest and arouse the attention of thinking men. it can be safely asserted that no period of the world's history can exhibit a people at once so numerous and homogeneous, living under one form of government, speaking a common language, enjoying the same degree of personal and political liberty, and sharing, in so equal a degree, the same civilization as the population of the united states. eminently practical and ingenious, of indomitable will, untiring energy, and unfailing hope; favored by nature with a domain of imperial expanse, with soil and climate of unequaled variety and beneficence, with every natural condition that can conduce to individual prosperity and national glory, it might well be expected that among such a people industry, agriculture, commerce, art, and science would reach an extent and perfection of development surpassing anything ever known in the history of mankind. in some respects this expectation would appear to have been well founded. for several years past our farmers have produced an annual average of , , bushels of wheat. our oat crop for was , , bushels, our corn crop , , , bushels, our cotton crop , , bales. in that year our coal mines yielded , , tons of coal, our furnaces produced , , tons of pig iron and , , tons of steel. our gold and silver mines add more than $ , , a year to the world's stock of the precious metals. we print , newspapers and periodicals, have in operation , miles of railroad and , miles of telegraph. the value of our manufactured products at the date of the last census was $ , , , . our farm lands at the same time were estimated at $ , , , , our cattle at $ , , , , our railroads at $ , , , , our houses at $ , , , . it is not too much to say that there has been an increase of fully per cent. in those values since the taking of the census of . our national wealth to-day is reasonably estimated at over $ , , , . figures and facts such as these in the history of a young nation bespeak the presence not merely of great natural opportunities, but of a people marvelously apt and forceful. from such results should be anticipated the highest attainable prosperity and happiness. our population is alert, aspiring, and buoyant, not given to needless repining or aimless endeavor, but, with fixity of purpose, presses ever eagerly on, utilizing every conception of the brain to supplement and multiply the possibilities of the hand, and at every turn subordinating the subtle forces of nature to the best and wisest purposes of man. no equal number of persons on the globe better deserve success, or are better adapted for its enjoyment. but instead of finding, as we should find, happiness and contentment broadcast throughout our great domain, there are heard from all directions, even in this republic, resounding cries of distress and dissatisfaction. every trade and occupation exhibits symptoms of uneasiness and distrust. the farmer, the artisan, the merchant,--all share in the general complaint that times are hard, that business is "dull." the farmer is in debt, and is not realizing, on the products of his labor, the wherewithal to meet either his deferred or his current obligations; the artisan, when at work, finds himself compelled to share his earnings with some relative or friend who is out of employment; the merchant who buys his goods on time finds little profit in sales, and difficulty in making his payments. what is the difficulty? what can it be, mr. president, that has thus brought to naught all the careful estimates and painstaking computations, not of thousands, nor of hundreds of thousands, but of millions, of keen, shrewd, and far-seeing men? our people take an intelligent interest in their business; they look ahead; they endeavor, as far as possible, to estimate correctly their assets and liabilities, so that on the day of reckoning they may be found ready. why this universal failure of all classes to compute correctly in advance their situation on the coming pay-day? what potent and sinister drug has been secretly introduced into the veins of commerce that has caused the blood to flow so sluggishly--that has narcotized the commercial and industrial world? all have been looking for the cause, and many think they have discovered it. with some it is "over-production," with others either a "high tariff" or a "tariff not sufficiently high." some think it due to trusts and combinations, others to improved methods of production, or because the crops are overabundant or not abundant enough. some ascribe the difficulty to speculation; others, to "strikes." all sorts of insufficient and contradictory causes are assigned for the same general and universal complaint. however inadequate in themselves, they serve to emphasize the universal recognition of a difficulty whose cause without close inquiry is likely to elude detection. but the evil is of such magnitude, it is so widespread and pervasive, that, without a knowledge of its cause, all effort at mitigation of its effects can but add to the confusion and intensify the difficulty. it behooves us, therefore, as we value the prosperity and happiness of our people, to set ourselves diligently to the inquiry: what is the cause of the unrest and discontent now universally prevailing? one symptom common to all industries. in surveying the question broadly, to discover whether there is anything that affects the situation in common from the standpoint of varying occupations, we find one, and only one, uniform and unfailing characteristic; the prices of all commodities and of all property, except in money centers, have fallen, and continue falling. such a phenomenon as a constant and progressive fall in the general range of prices has always exercised so baleful an influence on the prosperity of mankind that it never fails to arrest attention. history gives evidence of no more prolific source of human misery than a persistent and long continued fall in the general range of prices. but, although exercising so pernicious an influence, it is not itself a cause, but an effect. when a fall of prices is found operating, not on one article or class of articles alone, but on the products of all industries; when found to be not confined to any one climate, country, or race of people, but to diffuse itself over the civilized world; when it is found not to be a characteristic of any one year, but to go on progressively for a series of years, it becomes manifest that it does not and can not arise from local, temporary or subordinate causes, but must have its genesis and development in some principle of universal application. what produces a general fall of prices? what, then, is it that produces a general decline of prices in any country? it is produced by a shrinkage in the volume of money relatively to population and business, which has never yet failed to cause an increase in the value of the money unit, and a consequent decrease in the price of the commodities for which such unit is exchanged. if the volume of money in circulation be made to bear a direct and steady ratio to population and business, prices will be maintained at a steady level, and, what is of supreme importance, money will be kept of unchanging value. with an advancing civilization, in which a large volume of business is conducted on a basis of credit extending over long periods, it is of the uttermost importance that money, which is the measure of all equities, should be kept unchanging in value through time. effect of a reduction in the money-volume. a reduction in the volume of money relatively to population and business, or, (to state the proposition in another form) a volume which remains stationary while population and business are increasing, has the effect of increasing the value of each unit of money, by increasing its purchasing power. it is only within a comparatively recent period that an increasing value in the money unit could produce such widespread disturbance of industry as it produces to-day. in the rude periods of society commerce was by barter; and even for thousands of years after the introduction of money, credit, where known at all, was extremely limited. under such circumstances changes in the volume and in the value of money, while operating to the disadvantage of society as a whole, could not instantly or seriously affect any one individual. an increase of per cent. in one year in the value of the money unit--a change which now, by reason of existing contracts or debts, would entail universal bankruptcy and ruin--would not be seriously felt by a community in which no such contracts or debts existed, in which payments were immediate or at short intervals, and each individual parted with his money almost as soon as he received it. such proportion of the annual increase in the value of the money unit as could attach to any one month, week, or day would be wholly insignificant, and as most transactions were closed on the spot, no appreciable loss could accrue to any individual. such loss as did accrue was shared in and averaged among the whole community, making it the veriest trifle upon any individual. but how is it in our day? that effect intensified as civilization advances. the inventions of the past one hundred years have established a new order of the ages. the revolution of industry and commerce, effected by the adaptation of steam and other forces of nature to the uses of man, have given to civilization an impetus exceeding anything known in the former experience of mankind. under the operation of the new system, the rapidity and intensity with which, within that period, civilization has developed, is due in great part to an economic feature unknown to ancient civilization and practically unknown even to civilized society until the present century. that feature is the time-contract, by which alone leading minds are enabled to project in advance enterprises of magnitude and moment. it is only through intelligent and far-seeing plans and projections that in a complex and minutely classified system of industry great bodies of men can be kept in uninterrupted employment. we have , , workmen in this country. in order that they may be kept uninterruptedly employed it is absolutely necessary that business contracts and obligations be made long in advance. accordingly, we read almost daily of the inception of industrial undertakings requiring years to fulfill. it is not too much to say that the suspension for one season of the making of time-contracts would close the factories, furnaces, and machine shops of all civilized countries. the natural concomitant of such a system of industry is the elaborate system of debt and credit which has grown up with it, and is indispensable to it. any serious enhancement in the value of the unit of money between the time of making a contract or incurring a debt and the date of fulfillment or maturity always works hardship and frequently ruin to the contractor or debtor. three-fourths of the business enterprises of this country are conducted on borrowed capital. three-fourths of the homes and farms that stand in the name of the actual occupants have been bought on time, and a very large proportion of them are mortgaged for the payment of some part of the purchase-money. under the operation of a shrinkage in the volume of money this enormous mass of borrowers, at the maturity of their respective debts, though nominally paying no more than the amount borrowed, with interest, are, in reality, in the amount of the principal alone, returning a percentage of value greater than they received--more than in equity they contracted to pay and oftentimes more, in substance, than they profited by the loan. to the man of business this percentage in many cases constitutes the difference between success and failure. thus a shrinkage in the volume of money is the prolific source of bankruptcy and ruin. it is the canker that, unperceived and unsuspected, is eating out the prosperity of our people. by reason of the almost universal inattention to the nature and functions of money this evil is permitted, unobserved, to work widespread ruin and disaster. so subtle is it in its operations that it eludes the vigilance of the most acute. it baffles all foresight and calculation; it sets at naught all industry, all energy, all enterprise. contrast of effects produced by an increasing and a decreasing money-volume. the difference in the effects produced by an increasing and a decreasing money-volume has not escaped the attention of observant writers. david hume, in his essay on money, says: it is certain that since the discovery of the mines in america industry has increased in all the nations of europe. * * we find that in every kingdom into which money begins to flow in greater abundance than formerly, everything takes a new face; labor and industry gain life; the merchant becomes more enterprising, the manufacturer more diligent and skillful, and even the farmer follows his plow with greater alacrity and attention. * * * it is of no manner of consequence with regard to the domestic happiness of a state whether money be in a greater or less quantity. the good policy of the magistrate consists only in keeping it, if possible, still increasing; because by that means he keeps alive a spirit of industry in the nation and increases the stock of labor, in which consists all real power and riches. a nation whose money decreases is actually at that time weaker and more miserable than another nation which possesses no more money, but is on the increasing hand. william h. crawford, secretary of the treasury, in a report to congress, dated th february, , says: all intelligent writers on currency agree that when it is decreasing in amount poverty and misery must prevail. mr. r. m. t. hunter, in a report to the united states senate in , says: of all the great effects produced upon human society by the discovery of america, there were probably none so marked as those brought about by the great influx of the precious metals from the new world to the old. european industry had been declining under the decreasing stock of the precious metals and an appreciating standard of values; human ingenuity grew dull under the paralyzing influences of declining profits, and capital absorbed nearly all that should have been divided between it and labor. but an increase of the precious metals, in such quantity as to check this tendency, operated as a new motive power to the machinery of commerce. production was stimulated by finding the advantages of a change in the standard on its side. instead of being repressed by having to pay more than it had stipulated for the use of capital, it was stimulated by paying less. capital, too, was benefited, for new demands were created for it by the new uses which a general movement in industrial pursuits had developed; so that if it lost a little by a change in the standard, it gained much more in the greater demand for its use, which added to its capacity for reproduction, and to its real value. the mischief would be great, indeed, if all the world were to adopt but one of the precious metals as the standard of value. to adopt gold alone would diminish the specie currency more than one-half; and the reduction the other way, should silver be taken as the only standard, would be large enough to prove highly disastrous to the human race. the encyclopædia britannica, (article precious metals, by j. r. mcculloch), says: a fall in the value of the precious metals, caused by the greater facility of their production, or by the discovery of new sources of supply, depends in no degree on theories of philosophers or the decision of statesmen or legislators, but is the result of circumstances beyond human control; and although, like a fall of rain after a long course of dry weather, it may be prejudicial to certain classes, it is beneficial to an incomparably greater number, including all who are engaged in industrial pursuits, and is, speaking generally, of great public or national advantage. ernest seyd, (bullion, page ), says: upon this one point all authorities on the subject are agreed, to wit, that the large increase in the supply of gold has given a universal impetus to trade, commerce, and industry, and to general social development and progress. the american review ( ) says: diminishing money and falling prices are not only oppressive upon debtors, of whom, in modern times, states are the greatest, but they cause stagnation in business, reduced production, and enforced idleness. falling markets annihilate profits, and as it is only the expectation of gain which stimulates the investment of capital in operations, inadequate employment is found for labor, and those who are employed can only be so upon the condition of diminished wages. an increasing amount of money, and consequently augmenting prices, are attended by results precisely the contrary. production is stimulated by the profits resulting from advancing prices; labor is consequently in demand and better paid, and the general activity and buoyancy insure to capital a wider demand and higher remuneration. price the index of the value of money. there can be no truer index of the value of money than the general range of prices. price is the mercury by the rise and fall of which the heat and struggle of industrial and business life are daily measured and made plain. where the tendency of this indicator continues downward, there is no more certain sign that money is increasing in value. during a period of falling prices the fear of impending calamity hangs like a pall over the business of the country. notwithstanding unremitting efforts, men feel themselves constantly on the edge of disaster. gloomy foreboding and timidity take the place of confidence and courage. a shrinking volume of money is the most insidious foe with which civilization has to contend. it is my firm conviction that the inexpressible miseries inflicted upon mankind by war, pestilence, and famine have been less cruel, unpitying, and unrelenting than the persistent and remorseless exactions which this inexorable enemy has made upon society. as the volume of money contracts prices decline, and with the decline of prices comes stagnation of industry, and the relegation to idleness of thousands of willing workmen. capitalists become unwilling to invest their money in enterprises that employ labor while the products of that labor are constantly decreasing in price. during all periods of falling prices therefore money capital is withdrawn from active industry and seeks investment in bonds and other forms of money-futures yielding fixed incomes. for although the rate of interest in many such cases may be low, the capitalist is compensated for this by the enhancement in the purchasing power of each dollar of the principal and by the necessarily greater command it secures over the products of labor. avoiding the very purpose for which it was devised, money at such times seeks seclusion and declines to circulate. its owner finds that he can better afford to leave it idle in a vault or bury it in the earth, than subject it to the probability of diminution by investing it in business on a constantly falling market. thus, contrary to all principles of progress and of natural justice, the man who keeps his money idle, and deprives society of its use, is rewarded by an unearned increment, while he who puts his money into active business, where industry and labor may profit by it is punished by unmerited loss. under such conditions it is impossible for a community to reach that degree of material progress which, under proper circumstances, it would readily attain. at every turn distress and discouragement stare the people in the face. in every town and village men, willing to work, stand idle. even their misfortune does not end with themselves, for not only are they a tax upon their friends, lessening to some extent the meager income of those who give them temporary assistance, but their necessary and eager competition for the little work that offers, tends to reduce the compensation of those to whom they are thus indebted. stores, workshops, and factories, unoccupied and unused, are found in every direction. crime increases, bankruptcies multiply, and even though the aggregate of wealth augments, it is unjustly distributed, and consequently barren of beneficent results. a glance at the history of money. the system of relying upon the precious metals as money has long been known as the automatic system. accurately, it should be called the _accidental_ system. it has been called "automatic" because, so long as money was made to depend solely upon the yield of the mines, the supply regulated itself by what was believed to be a natural method, namely, by the expenditure of labor in its production, and was limited only by the rude obstacles which nature opposes to the production of the metals. the necessity of expending this labor placed the money volume of any country beyond the control of the kings and conquerors who, in the primitive periods of society, exercised despotic sway over their subjects. it was undoubtedly better for the people of those early times to risk the accidents of production than the follies and sinister designs of rulers. this automatic system grew out of barter. it is a survival from the period when articles were exchanged directly, not for gold and silver as money, but for gold and silver as commodities--on the basis of their cost of production--as in the case of the articles for which they were exchanged. there have been the same evolutions of progress in money as in all other things. in the rude original of society no kind of money was possible. the first trade was by barter, after which, some one or more commodities attainable in the vicinage, and in general use and demand were selected as the common media through which all exchanges were filtered. the use for that purpose of various metals by weight followed next, and, at a succeeding stage, gold, silver, and copper by weight, and after this their use in the form of coins, the value of which coincided with the bullion-value, which must necessarily be the case when free coinage is permitted. it may be not uninteresting in this connection to have a general view of the materials which, at different epochs of the world's history, have been used as money. i therefore present a tabular statement giving those particulars in chronological order. _table showing some of the substances which have, at various periods and in various countries, been used as money._ ---------+-----------------+--------------------------+--------------- period. | country. | substance used as money. | authority. ---------+-----------------+--------------------------+--------------- b. c. | | | |palestine |cattle, and gold and |the scriptures. | | sliver, by weight. | |arabia |gold and silver coins |jacob. |phoenicia |gold, silver, and copper |anonymous. | | coins | |phoenician colony|same (some still extant) |carter. | in spain. | | |phrygia |coins, by queen of pelops |julius pollux. |greece |brass coins |homer. |argos |gold and silver coins, by |dictionary of | | phidon. | dates. - |rome |brass, by weight |jacob. |rome |copper coins |ibid. uncertain|carthage |leather or parchment |socrates, dial. | | money, first "paper | on riches, | | bills" known. | journal des | | | economistes, | | | , p. . b. c. |sicily |gold coins, by gelo (some |jacob. | | still extant). | |persia |gold coin, by darius (two |ibid. | | still extant). | |sicily |gold coin, by hiero (some |ibid. | | still extant). | |athena. |debased gold coins, |macleod, . | | foreign | |sparta. |iron, overvalued |boeckh. |macedonia |first gold coins coined |jacob. | | in greece, by philip. | |rome |first silver coins coined |ibid. | | in rome. | |britain |pieces of iron |ibid. |rome |tin and brass coin |dic. of dates. uncertain|arabia. |glass coins |n. y. tribune. | | | july , . ---------+-----------------+--------------------------+--------------- _period following the failure of the ancient mines._ ---------+-----------------+--------------------------+--------------- a.d. |rome. |lead coins silvered, and |anonymous. | (caracalla.) | copper coins gilded. | |britain |living money, or human |henry's history | | being made a legal | of great | | tender for debts at | britain, vol. | | about £ _s._ _d._, | iv, p. . | | per capita. | |italy |paper invented; bills of |anderson. | | exchange introduced by | | | the jews. | |milan, italy |paper bills a legal tender|arthur young. |china |paper bills a legal tender|marco polo. |africa, part of |"machutes" (ideal money; |montesquieu. | | this view doubted.) | |granada, spain |paper bills a legal tender|irving. |holland |pasteboard bills, |dic. of dates. | | representative. | uncertain|iceland |dried fish |anonymous. uncertain|newfoundland |codfish, dried |anonymous. uncertain|norway and |seal skins and blubber |anonymous. | greenland. | | uncertain|hindostan and |cowry shells |jacob, . | parts of | | | africa. | | uncertain|north america |agate, carnelian, jasper, |anonymous. | indian tribes | lead, copper, gold, | | | silver, terra-cotta, | | | mica, pearl, lignite, | | | coal, bone, shells, | | | chalcedony, wampumpeag, | | | etc. | uncertain|oriental pastoral|cattle, grain, etc. |anonymous. | tribes | | uncertain|abyssinia |salt |anonymous. uncertain|china and india |rice |anonymous. uncertain|india |paper bills |patterson, | | | p. . uncertain|china |pieces of silk cloth |ibid. uncertain|africa |strips of cotton cloth |ibid. |not stated |wooden tallies or checks |ibid. ---------+-----------------+--------------------------+--------------- _period following the discovery of the american mines._ ---------+-----------------+--------------------------+--------------- a.d. | | | |massachusetts |corn a legal-tender at |macgreggor. | | market prices | |massachusetts |musket-balls |anonymous. |massachusetts |paper bills, colonial |macgreggor. | | notes | |england |bank-notes |mcculloch. |sweden |copper and iron coins |voltaire's | | | charles xii. |south carolina |colonial notes |macgreggor. |south carolina |bank notes |ibid. |france |interconvertible paper |murray. | | bills a legal-tender | |pennsylvania |paper bills, colonial |macgreggor. | | notes | |maryland |indian corn a legal-tender|anonymous. | | at d. per bushel | |maryland |tobacco a legal-tender at |anonymous. | | d. per pound | |scotland |tenpenny nails for small |adam smith. | | change | |frankland, state |linen at s. d. per yard,|wheeler's | of (now part of| whisky at s. d. per | history of | north carolina)| gallon, and peltry as | north | | legal-tender | carolina, . - |all commercial |great era of bank-paper | | countries | bills | |russia |platinum coins |app. encyc. | | (discontinued in ) | |mexico, parts of |cocoa beans; and at castle|anonymous. | | of perote, soap. | ---------+-----------------+--------------------------+--------------- _period following the openings of california and australia._ ---------+-----------------+--------------------------+--------------- |california |gold dust by weight, also | | | minute gold coins for | | | small change, coined in | | | private mints. | |australia |gold dust by weight | - |communist |paper bills, each |private | settlement in | representing "one | information. | ohio, called | hour's labor." | | "utopia." | | |united states |paper bills a legal tender|act of feb. . |north carolina |tenpenny nails, at cents|anonymous. | | each, for small change. | |camp at florence,|potatoes for small change |yorkville | s. c. | | enquirer. |united states |postage-stamps for small | | | change, temporary. | |philadelphia, pa.|turnips for small change, |philadelphia | | temporary and local. | ledger, april. |united states |nickel coins for small |act of march . | | change, overvalued. | ---------+-----------------+--------------------------+--------------- an analysis of this table will show how carefully even the most primitive communities guarded against a too restricted money volume. the materials chosen to serve the purpose of money in each country during the early history of society were, it will be observed, such as at the time and place would be of sufficient quantity or volume to insure against any sudden deprivation of supply. in countries where the chase was common, the skins of wild animals were used as money; in maritime communities, shells; in pastoral countries, cattle; in the early history of agriculture, grain; in early mining periods, base metal; in primitive manufacturing ages, nails, glass, musket-balls, strips of cotton, etc. as communities developed, and commerce between them began, substances somewhat common to all countries, portable and indestructible, such as the precious metals, came to be more, and other substances less, resorted to. by reason of their great beauty those metals were always in demand, even among barbarous peoples, for purposes of ornament and decoration. because of their universal use for such purposes they came to be recognized as things for which anything else could with safety be exchanged, and as society advanced, and it came to be recognized that some medium should be adopted in which to make all exchanges, those metals were naturally selected for the purpose, so that, together, they became, as it were, a common denominator of value. their selection proved a convenient method of storing away wealth in a form that commanded at all times every other form of wealth. they had always passed by weight wherever used, but as society became better organized, and its methods more complex, it became necessary, in order to insure against fraud, to form them into pieces convenient for handling, and to invest them distinctly with the function of money, so that, by law, they became a universal solvent for debts and demands, the stamp of the government placed on the coin testifying to its weight and fineness. both metals, as shown by the table, have been concurrently used as money for thousands of years--not only since the dawn of history, but from a period anterior to any historical records. the oldest annals show that they had already been employed as circulating media and that their relative values, or the ratio of their exchange for one another, had already been established. gold and silver were used as money in palestine as early as the year b. c. we read in the bible that abraham weighed to ephron the hittite shekels of silver, "current money with the merchant." an inscription on the temple of karnak, of the date of b. c. mentions those metals as materials in which tribute was paid. but long anterior even to these dates, both metals had been used, as, among the relics of the bronze age of the prehistoric era, ornaments of both gold and silver have been found. gold, being the less abundant of the two metals, has had the higher value; but the ratio between the two has been marvelously steady, taking into account the great sweep of ages during which they have been used as money. this will be seen by reference to the following tables of ratios. i will first take their relative values during ancient times. _table showing the ratio of gold and silver in various countries of the world up to the christian era._ ---------------------------------------------------------------------- b. c. | ratio. | authorities. ---------------------------------------------------------------------- | to . | inscriptions at karnak; tribute lists of | | thutmosis. (brandis.) | to . | cuneiform inscriptions on plates found in | | foundation of khorsabad. | to . | ancient persian coins; gold darics at | | . grams = silver siglos, at . grams. | to . | persia. darius. egyptian tribute. herod. | | iii,. . (boeckh, page .) | to . | sicily. time of gelon. "at least" . . | | (boeckh, page .) | to . | doubtful. asia minor. xerxes's treasure. | | (boeckh, page .) | to . | herodotus's account of indian tributes. | | gold talents = , silver. | to . | asia minor. pay of xenophon's troops in silver | | darics. (anab.; boeckh, page .) | to ---- | spurious and debased gold coins at athens. | | (macleod, polit. econ., page ; boeckh, | | page .) | to . | standard in asia, according to xenophon. | to . | standard in greece according to "hipparchus"; | | attributed to plato. | to . } | various authorities adduced by boeckh. | to . } | | | | { . }| values in greece from the peloponnesian war to - | to { . }| the time of alexander, according to hints in | { . }| greek writers. there were variations under | | special contracts--unit, the silver drachma. | | | to . | greece. time of demosthenese. (boeckh, | | page .) - | to . | special contracts in greece. - | to . | egypt under the ptolemies. | to . | greece. continued depression of gold, caused | | by great influx under alexander. | to . | rome. (boeckh, page .) gold scriptulum | | arbitrarily fixed at . for . | to . | rome. general rate of gold pound to silver | | sesterces to date. - | to . | rome. continued depression of gold, caused | | by influx of cæsar's spoil from gaul. | | [n. b.--cæsar's headquarters were at | | aquileia, at the head of the adriatic, | | where there was also a gold mine, which | | at this period became very prolific.] | to . | rome. "about the year u. c. ," the rate | | was - . (boeckh, page .) | to . | rome. normal rate in the last days of the | | republic. ---------------------------------------------------------------------- by reference to the foregoing table it will be observed that the increase in the supply of gold in europe, consisting of the spoils of the orient, gathered by alexander the great, and brought by him to greece, had the effect of decreasing the value of that metal so that instead of being exchangeable at the ratio of to about - / of silver, as formerly, gold became depressed, ounce of it exchanging for only ounces of silver. later, when julius cæsar extended his conquering arms into gaul, and sent to rome the accumulations of treasure amassed by him, the value of gold by reason of the increased supply was again depressed, so that an ounce of it was exchangeable for only . ounces of silver. with these exceptions it may be said that the relation of silver to gold for sixteen hundred years before the time of christ had varied only from the ratio of to to that of to . . silver at no time during all this period fell below . to of gold. looking, now, at the relative values of gold and silver from the time of christ to the discovery of america, we find the ratio between the two metals to be as follows: table showing the ratio of gold and silver in various countries of the world from the opening of the christian era to the discovery of america: ---------------------------------------------------------------------- a. d. | ratio. | authorities. ---------------------------------------------------------------------- - | to . | rome. rate under augustus and tiberius. - | to . | rome. reign of } | | caligula. } the silver coinage - | to . | rome. reign of nero. } much debased, - | to . | rome. reign of } consequently the | | vespasian. } ratio of the - | to . | rome. reign of } metals pure was | | domitian. } about to . - | to . | rome. reign of } | | antoninus. } | to . | byzantium. reign of constantine. arbitrary. | to . | byzantium and rome. theodosian code. | | arbitrary. | to . | probable ratio, as shown by the edictum | | pistense, under the carlovingian dynasty. | to . | average ratio in the commercial cities of | | italy. local or doubtful. - | to ---- | england. numerous mint indentures given in | | mcleod's political economy, page . the | | ratio, except when fixed arbitrarily and | | in violation of market price, varied | | between about . and . during the | | two hundred and fifty-seven years | | included in this period. | to . } | | to . } | ratio in north germany as shown by the | to . } | very accurate rules of the lubeck mint, | to . } | corroborated in the main by the accounts | to . } | of the teutonic order of knights, | to . } | averaged in periods of forty years. - | to . | ratio according to the accounts of the | | teutonic knights. as the ratio fixed in | | england by numerous mint indentures from | | to was about . this german | | ratio is considered local or doubtful. ---------------------------------------------------------------------- it will thus be observed that during the one thousand four hundred and ninety-two years from the coming of christ to the discovery of america, silver never went below the ratio of . to one of gold. the relations which the metals have borne to each other since the discovery of the new world will appear from the following: _table showing the relative values of gold and silver in the various countries of the world from the discovery of america to ._ ---------------------------------------------------------------------- a. d.| ratio. | authorities. ---------------------------------------------------------------------- | | | to . | spain. reign of isabella. edict of medina. local. | to . | germany. adam riese's arithmetic. local or | | doubtful. | to . | germany. imperial mint regulations. arbitrary or | | local. | to . | german imperial mint regulations. | to . } | france. mint regulations. | to . } | | to . | upper germany. mint regulations. | to . | france. mint regulations. transition period. | to . | france. mint regulations. | to . | upper germany. mint regulations. doubtful. | to . | upper germany. mint regulations. | to . } | france. mint regulations. | to . } | | | ---------------------------------------------------------------------- table showing the ratio of silver to of gold from to the demonetization of silver by germany and the united states and the closing of the mints to its free coinage. [from the report ( ) of the director of the u. s. mint on the production of the precious metals in the united states.] [note.--from to the ratios are taken from dr. a. soetbeer; from to from pixley and abell's tables; and from to from daily cable-grams from london to the bureau of the mint.] ---------------------------------------------------------------------- year. | ratio.|| year. | ratio.|| year. | ratio.|| year. | ratio. -------+--------++-------+--------++-------+--------++-------+-------- | . || | . || | . || | . | . || | . || | . || | . | . || | . || | . || | . | . || | . || | . || | . | . || | . || | . || | . | . || | . || | . || | . | . || | . || | . || | . | . || | . || | . || | . | . || | . || | . || | . | . || | . || | . || | . | . || | . || | . || | . | . || | . || | . || | . | . || | . || | . || | . | . || | . || | . || | . | . || | . || | . || | . | . || | . || | . || | . | . || | . || | . || | . | . || | . || | . || | . | . || | . || | . || | . | . || | . || | . || | . | . || | . || | . || | . | . || | . || | . || | . | . || | . || | . || | . | . || | . || | . || | . | . || | . || | . || | . | . || | . || | . || | . | . || | . || | . || | . | . || | . || | . || | . | . || | . || | . || | . | . || | . || | . || | . | . || | . || | . || | . | . || | . || | . || | . | . || | . || | . || | . | . || | . || | . || | . ---------------------------------------------------------------------- year. | ratio. || year. | ratio. || year. | ratio. || year. | ratio. -------+--------++-------+--------++-------+--------++-------+-------- | . || | . || | . || | . | . || | . || | . || | . | . || | . || | . || | . | . || | . || | . || | . | . || | . || | . || | . | . || | . || | . || | . | . || | . || | . || | . | . || | . || | . || | . | . || | . || | . || | . | . || | . || | . || | . | . || | . || | . || | . | . || | . || | . || | . | . || | . || | || | -------+--------++-------+--------++-------+--------++-------+-------- by the foregoing table it will be seen that in the three hundred and seventy-five years from to the maximum separation of the metals was only as to . --notwithstanding the widest divergencies during that long period in the yield of the two metals from the mines. it will be observed that all the later quotations are from the london market, but it is a significant fact that in france, where, by the law of germinal, _an_ xi, ( ,) free coinage was permitted to both metals, at the ratio of - / of silver to of gold, for a period of seventy years, and until the coinage of silver was limited, there was at no time the slightest variance from that relation. when silver was deprived of the full money function, and all the money-work of society was placed on gold, the metals began to separate. the following table shows the degree of that separation from year to year: table showing the ratio of silver to of gold since the demonetization of silver by germany and the united states, and the closing of all mints of the western world to its free coinage: . | . . | . . | . . | . . | . . | . . | . . | . . | the foregoing figures show that it is only since the legislative proscription of silver by germany and the united states, and the closing of all the european mints to its coinage, that any material change took place in the ratio between the two metals, which conclusively demonstrates that the present divergence in the relative values of the two metals is directly due to the legal outlawry of silver and not to natural causes. not only has the concurrent use of the two metals as money had the sanction of all time, but the approval of the greatest minds of history, and, when not blinded by self-interest, the approval of practical and experienced financial minds. so well recognized is this fact that i need only cite a few instances of such approval. alexander hamilton said: to annul the use of either of the metals as money is _to abridge the quantity of circulating medium_, and is liable to all the objections which arise from a comparison of the _benefits of a full with the evils of a scanty circulation_. (report to congress, .) thomas jefferson, in a letter to hamilton, indorsed this view, saying: i return you the report on the mint. i concur with you that the unit _must stand on both metals_. (letter to hamilton, february, .) in his "recherches sur l'or et sur l'argent," , léon fanchet said: if all the nations of europe adopted the system of great britain, the price of gold would be raised beyond measure, and we should see produced in europe a most lamentable result. the government can not decree that legal tender shall be only gold, in place of silver, for that would be to decree a revolution, and the most dangerous of all, because it would be a revolution leading to unknown results (_qui marcherait vers l'inconnu_). in a memoir read before the french institute in , m. wolowski said: the suppression of silver would bring on a veritable revolution. gold would augment in value with a rapid and constant progress, which would break the faith of contracts and aggravate the situation of all debtors, including the nation. it would add at one stroke of the pen at least three milliards to the twelve milliards of the public debt. in a debate in the french senate on january , , senator dumas eloquently pleaded for caution in dealing with a subject of such farreaching importance as the demonetization of one of the money metals. he said: those who approach these questions for the first time decide them at once. those who study them with care hesitate. those who are obliged practically to decide doubt and stop, overwhelmed with the weight of the enormous responsibility. the quantities of the precious metals which are now sufficient may become insufficient, and we should proceed with great prudence before we diminish that which constitutes a part of the riches of the human race. sometimes gold takes the place of silver. sometimes silver takes the place of gold. _this keeps up the general equilibrium._ nobody can guaranty that the present vast production of gold will continue. the _placers_ are found on the surface of the earth, and may be exhausted by the very facility of working them. silver presents itself in the form of subterranean veins. science may contribute to accelerate its extraction. in presence of the unknown, which dominates the future, we should practice a prudent reserve. before a french monetary convention in testimony was given by m. wolowski, by baron rothschild, and by m. rouland, governor of the bank of france. m. wolowski said: the sum total of the precious metals is reckoned at fifty milliards, one-half gold and one-half silver. if, by a stroke of the pen, they suppress one of these metals in the monetary service, they double the demand for the other metal, to the ruin of all debtors. m. rouland, governor of the bank of france, said: we have not to do with ideal theories. the two moneys have actually co-existed since the origin of human society. they co-exist because the two together are necessary, by their quantity, to meet the needs of circulation. this necessity of the two metals, has it ceased to exist? is it established that the quantity of actual and prospective gold is such that we can now renounce the use of silver without disaster? baron rothschild said: the simultaneous employment of the two precious metals is satisfactory and gives rise to no complaint. whether gold or silver dominates for the time being, it is always true that the two metals concur together in forming the monetary circulation of the world, and it is the general mass of the two metals combined which serves as the measure of the value of things. the suppression of silver would amount to a veritable destruction of values without any compensation. at the session (october , ) of the belgian monetary commission, professor laveleye, one of the most luminous writers on economic subjects, said: debtors, and among them the state, have the right to pay in gold or silver, and this right can not be taken away without disturbing the relation of debtors and creditors, to the prejudice of debtors, to the extent of perhaps one-half, certainly of one-third. to increase all debts at a blow (_brusquement_) is a measure so violent, so revolutionary, that i can not believe that the government will propose it or that the chambers will vote it. why was the automatic system interfered with? some thirteen years ago, as chairman of the monetary commission appointed by congress to investigate the causes of the changes in the relative values of the precious metals, i submitted to this body a report, in which i took occasion to refer to the motives which evidently influenced the creditor classes of the western world in destroying the automatic system of money. from that report i quote as follows: the world has generally favored, theoretically if not practically, the automatic metallic system, and adjusted its business to it. some nations adopted one metal as their standard, and some the other, and some adopted both. those that adopted both metals served as a balance-wheel to steady with exactness their relative value. the practical effect of all of this was the same as if all nations had adopted both, because it secured the entire stock of both at a fixed equivalency for the transaction of the business of the world. while some nations have changed their money metal, or, having had paper money, have resumed specie payments in one metal, the policy of a general demonetization of one of the metals was first broached only about twenty years ago. about ten years later a formidable propaganda was organized to fasten that policy upon the commercial world. this new school of financial theorists advocate the retention of metal as the material of money, but favor its subjection to governmental interference in every respect. whenever new mines are discovered, or old ones yield or promise to yield more abundantly, instead of freely accepting their product in accordance with the automatic theory, they advocate its rejection through the restriction or the absolute prohibition of the coinage of either or both metals, or through the limitation or the abolition of the legal-tender function of one of them. whenever the interests of the creditor and income classes seem to be in danger of being impaired by an increase in the volume and decrease in the value of money, or in other words, by a general rise in prices, these modern theorists are clamorous in double-standard countries for the demonetization of one of the money metals, and in single-standard countries for the shifting of the money function from the metal which promises the most to the one that promises the least abundant supply. they are extremely anxious for the retention of the _material_ of which the money-standard is composed when such material is rising in value and prices are falling, and exceedingly apprehensive of the evil and inconvenience which they predict as sure to result from changing it. whenever a fall in prices occurs, through either a natural or artificial contraction in the volume of money, they maintain that it is due to antecedent inflation and extravagance, or to overproduction through persistent and reckless industry; if the contraction be natural, that it can not be helped, and if artificial, that though it may inflict great temporary losses on the masses of the people, it will be sure to result in their ultimate benefit, and they console the sufferers with the comforting assurance that such contraction is necessary in order to reach the lowest depths of that "_hard pan_" whose foundations they have previously undermined by demonetizing one of the metals, and upon which alone they claim that money, capital, and labor can securely and harmoniously rest. but when the material composing the standard is falling in value and prices are rising, they immediately discover that the maintenance of the value of the standard is the all-important consideration, and that its material is of no importance whatever and should be at once changed to "_redress the situation_." after having reduced one of the metals to a commodity by depriving it of the money function, these theorists complacently point to the resulting fluctuations in the value as a justification of the act producing them, and as a conclusive proof of the unfitness for money of the demonetized metal. * * * metallic money, on this theory, is no longer automatic, but is as completely subjected to governmental control for all injurious purposes as paper money. but, unlike paper money, the control over this kind of metallic money can only be exercised in the baneful direction of decreasing its volume, and thereby making property cheaper and money scarcer and dearer. this is a one-sided system, which can operate only in the interest of the security creditor, the usurer, and pawnbroker, whom it enables, through the falling prices which itself occasions, to swallow up the shrunken resources of the debtor, but is impotent to protect the interests of the unsecured business creditor, the debtor, or society, when, from any cause, the supply of the money metals becomes deficient. the world has expended a vast amount of labor in the production of the precious metals, and has made great sacrifices in upholding the automatic metallic system of money, and has a right to insist that it shall be consistently let alone to work out its own conclusions, or that it be abandoned. the history of the subsequent struggle to remonetize silver only serves to illustrate and emphasize the correctness of that statement of the case. between and , according to tooke and newmarch (recognized authorities on the subject), gold increased in value per cent. which is equivalent to a fall in the general range of prices of per cent. no movement was then made or suggestion offered by the debtors, or by any class of the community, to add any new money-metal to the metals already in use, with the view of increasing the volume of money, so that the equity of time contracts might be maintained, and the value of the unit of money kept at a steady and unchanging level. but as soon as the discoveries of gold were made in the alluvial deposits of california and australia, or rather as soon as it was suspected that money would thereby become considerably increased in volume, the annuitants and income classes, the creditors everywhere, took steps to avert what they characterized as a great calamity. they openly declared their purpose, by every means in their power, to prevent a decline in the value of money, so that the purchasing power of their incomes might not be reduced. they determined to go to any length in order to prevent the rise of prices which their aggressive instincts led them to fear would follow the additions to the money volume of the world by the natural and much needed yield of the mines. the fiat therefore went forth that one of the metals must be discarded. the proposition first made to demonetize gold. if anything were needed to demonstrate that the reason for the demonetization of silver was the cupidity of the creditor classes--the money-lenders, annuitants, and those in receipt of fixed incomes--and that it was not any defect inhering in the metal silver, nor any change in its adaptability to subserve the purposes of money, it is to be found in the significant fact that the metal first selected for demonetization was not silver but gold--that metal which has since become the idol of the money-changers, and which is now declared to be the only "natural" money. the openly-avowed determination was to increase the value of money, and in order to accomplish that purpose the metal which promised the largest yield was to be condemned and stripped of its ancient monetary function. so strongly was this determination set forth, so earnestly was it presented, and so urgently pressed on the ground of duty that its achievement came to be regarded as the fulfillment of a high moral purpose. it was with gold then as it came to be with silver afterward, and as it always is with whatever interferes with the interests of privileged classes, intrenched in power and prerogative,--the determination to destroy it being arrived at, measures were taken to prove that the public good required its destruction. while the purpose was to discard the metal, whether gold or silver, which threatened most immediately and seriously to reduce the purchasing power of money, the argument was that a decrease in the purchasing power of money was a calamity against the happening of which every energy should be directed. the privileged classes found then, as they find now, able and ingenious advocates and defenders among the literary and educated guilds of the period. the celebrated de quincy, in england, attempted to prove, and to his own satisfaction did prove upon figures drawn from his fears and a brilliant imagination, that the least yield of gold to be expected from the mines of california and australia for an indefinite period in the future, was the yearly sum of $ , , . m. chevalier, in france, vehemently proclaimed the necessity of discarding one of the money metals, and that one not silver but gold. in his work upon the "fall of gold" m. chevalier, in , said: the quantity of gold annually thrown on the general market approaches in round numbers a milliard of francs ($ , , ). those two countries (california and australia) must yet for a long series of years produce gold in such quantities and on such conditions as to render a marked decline in its value inevitable. it is absolutely certain that so vast a production should be accompanied with a great reduction in value. in no direction can a new outlet be seen sufficiently large to absorb the extraordinary production of gold which we are now witnessing, so as to prevent a fall in its value. unless, then, we possess a very robust faith in the immobility of human affairs, we must regard the fall in the value of gold as an event for which we should prepare without loss of time. the "preparation" which chevalier advocated was the discarding of that metal which gave promise of the greatest abundance. he did not attempt to hide his purpose. he boldly stated that his object was to enhance the value of money. this object was also clearly expressed on a later occasion by another distinguished advocate of dear money, mr. victor bonnet, of france, in the journal des economistes. he said: the world is now saturated with the precious metals, and if there is any danger against which it is necessary to guard, it is that this saturation should become greater. * * * if the annual production of gold is now reduced to , , francs, let us thank heaven for it, and let us wish that it may not be too rapidly increased, whereby we should be embarrassed. it is the too great abundance and not the scarcity of metallic money which is to be apprehended. gold demonetized. in the german states and austria demonetized gold; and had it not been for the opposition of france, which insisted on retaining the double standard, the movement might have become general on the continent. with england, however, nothing could be done. more than a generation had passed since it had declared for the single standard of gold, and its creditors and income classes--the shrewdest, most adept, and watchful of financiers--did not believe that the large yields of gold would long continue. the creditor classes of the continent, finding england immovable and realizing that the object sought by the english creditors was identical with their own, namely, the increase in the value of money and the depression of prices, concluded that the common purpose could be as well served by the demonetization of one as by that of the other. this conclusion was emphasized by developments on the comstock lode whose bountiful and beneficent yield of silver was the fitting supplement to the great discoveries of gold on the pacific coast. the danger of a decline in the value of money was more imminent than ever. the annuitants became alarmed. commissions were sent from europe to the pacific coast to investigate the subject. the united states, too, sent a commissioner to examine into the condition and prospects of the comstock, and, imbued with many of the characteristics of de quincey and chevalier, the united states commissioner, in , reported that if all other mines were worked with the machinery used on the comstock "their yield would flood the world." like many of the present opponents of silver he was endowed with the gift of prophecy, and accordingly we find him confidently predicting that other and innumerable rich lodes of silver would be found on the pacific coast which would be worked with great profit. the attack on gold was immediately changed to a combined attack on silver. from that period till the present no means have been left untried to belittle and degrade that metal, and also to disparage those who are in favor of continuing it as one of the money metals of the world. it was then announced with all the dogmatism of authority that silver was unfit to be used as money. defects were suddenly discovered in it that the scrutiny of three thousand years had failed to disclose. its weight and bulk were found to be insuperable obstacles to its use as money. yet the specific gravity of silver is no greater now than it has been for all the ages during which it has been used as money by all mankind, nor is it any heavier or more bulky than it was in or , when belgium, germany, and austria demonetized gold and made the "heavy," "bulky," and "inconvenient" metal, silver, their only money metal. silver can now be transported from place to place with less risk and at no greater expense than gold, and at much less cost than at any previous period in the history of the world. the objection that silver is too heavy for the pocket is an objection common to all metallic money. we see hardly any gold in circulation in this country--infinitely less than of silver. when our people have a choice as to the form in which they will take money they prefer paper representatives as being the most convenient. the extraordinary perfection to which the arts of the engraver and paper maker have been brought gives paper money a security against counterfeiting and imitation far superior to any immunity which can be claimed for the metals. the marvellous inventions of modern times in the form of safes and vault-locks render it a matter of practically no risk to store the metals, both silver and gold, so that paper representatives of them may be issued. these representatives are preferred by the general mass of the people, and have almost entirely occupied the channels of circulation to the exclusion of both metals. a silver certificate for $ , weighs no more than a gold certificate for the same amount. the motive for demonetizing silver. the motive for the demonetization of silver was precisely the same that had previously inspired the demonetization of gold. the object was to demonetize one of the metals--that metal which promised the greatest abundance, and which would contribute most largely to maintaining at an equitable level the general range of prices. the motive in both cases was to aggrandize the privileged classes--the income and the creditor classes of the world--and by means of a subtle and sinister manipulation of the money volume, whose effects it is not always easy to trace to their true cause, to practically confiscate the reward of the hard toil of the masses. to all intent and purpose the design was to establish a new system of slavery for the western world, of which the debtor classes among the white races should be the victims. when demonetization was determined on there was no pretense that there was any difficulty in maintaining a parity between the two metals at the established ratio. in the official résumé of the doings of the french monetary commission of the arguments upon both sides were summed up. in behalf of the gold standard it was said: the rise in price which has taken place within twenty years in a great number of articles of merchandise is evidently due to many causes, such as war, bad harvests, and increase in consumption; but it is very probable that the depreciation of the precious metals has contributed to it, since there has been a striking coincidence between the rise of prices and the production of the new mines of gold and silver. the annual production of the two metals, which was only $ , , in , exceeds now $ , , . it has nearly tripled, and it is easy to see that the real value of the metals has diminished. it is difficult to estimate exactly what the diminution is, but whatever it may be it demands the attention of governments, because it affects unfavorably all that portion of the population whose income, remaining nominally the same, undergoes a yearly diminution of purchasing power. as governments control the weight and standard of money, they ought so far as possible to assure its value. and as it is admitted that the tendency of the metals is to depreciate, this tendency should be arrested by demonetizing one of them. in behalf of the double standard it was replied as follows: many economists argue that the precious metals, having become very abundant, have lost or per cent. of their value, and that the situation must be redressed by making money scarcer by demonetizing silver. to this it may be answered that the great discoveries of gold of the last twenty years have injured nobody. the new mass of gold, spreading over the whole world, has found employment in stimulating all forms of business, and, as a consequence, the value of gold has fallen very little. according to mr. newmarch, the mass of gold and silver has augmented per cent. per annum, while the mass of exchanges has augmented more than per cent. per annum, so that the equilibrium has been maintained. and the present is an especially inopportune time to demonetize silver, because the annual production of gold has been falling off for several years. it was $ , , in , and it is now not more than $ , , . what will happen to the civilized world if silver is demonetized and if gold shall then fail? the motive of england. england did not adopt the gold standard until she was in a position to become the principal creditor nation. when her forges, furnaces, spindles, and looms were ready to supply manufactured goods to all the world, she saw that all countries and peoples would be compelled to pour their treasures into her lap. her insular position and great navy guarantied her against external assault. released from the anxieties and labors incident to the napoleonic wars, with a sturdy population of trained mechanics, and with fields of coal and iron in abundance, she was well adapted to become the "workshop of the world." with colonial possessions in every sea, and with continental europe in ceaseless unrest, england could rely on customers who could themselves produce nothing but raw material and would be obliged to buy her finished products. the field of industry had been recently broadened by basic inventions of unparalleled importance--the steam-engine, the power loom, the spinning-jenny, and a multiplicity of other devices that increased a hundred fold the efficiency of artisan labor. england knew that her trade would in the main be a foreign trade and her financial dealings largely with foreign governments. she knew that from the people of the continent, impoverished by years of struggle for existence against the attacks of napoleon, she could not expect immediate payments in cash, or in commodities. time bonds and other deferred obligations were the media in which for the most part she received pay, she made interest and principal payable in gold alone, and if before the date of payment the value of money should increase it would not be to the disadvantage of the creditor. whatever we may think of the _ethics_ of this policy, we can have no difficulty in understanding its _motive_. acknowledgment of the motive. as to the object which england had in view in demonetizing silver we are left in no sort of doubt. it has been candidly admitted by many of her financiers and publicists. the reason for her stolid adherence to the gold standard now is the same for which she originally demonetized silver. her income and creditor classes are daily in receipt of an unearned increment to their wealth by reason of that demonetization. more candid than the advocates in this country of the single gold standard, the writers and press of great britain openly avow the object. no better testimony to the fact can be adduced than that supplied by the royal commission appointed in to inquire into the changes in the relative values of the precious metals. at page , part ii, of the final report of that body, section , the commission say: it must be remembered, too, that this country is largely a creditor country, of debts payable in gold, and any change which entails a rise in the price of commodities generally; that is to say, a diminution of the purchasing power of gold would be to our disadvantage. before the british royal commission of on international coinage, mr. jacob behren, an eminent british merchant and member of the associated chambers of commerce, after answering special and technical questions, was asked, in conclusion, "if there was anything else he wished to state." his reply was (p. ): i would only state that, in my opinion, the general introduction of gold all over the world has been one of the greatest possible blessings to england. i believe that england would be now the very poorest country in the world if the silver standard abroad had been kept up, and gold had not been generally introduced. gold would otherwise have been very much reduced in value, and we should have had all the gold poured into england. all the debts owing to us would have been paid in the depreciated currency; and, therefore, i believe that england ought to have taken the lead in the introduction of a gold currency abroad. we ought to be very thankful that it has been introduced, and we ought to give every facility to its circulation. sir lyon playfair, in a speech delivered in the english parliament on april , , according to the report in the london times of the day following, said that-- the true policy of england as the chief creditor nation of the world was to keep perfect independence, and to refuse participation in any entangling conference on our monetary system. and, according to the same report, sir lyon playfair, referring to the holding of the metals together by law, said that-- it was quite true that, if you yoked a cart-horse to a racer, the strength of both would be increased but the speed of the racer would be sacrificed. gold is the "racer" whose "speed" must not be sacrificed, no matter how much injury may be effected by its tendency to greater and greater gain. the weight of the enormous burden which is imposed on gold can not be better illustrated than by a statement of this same sir lyon playfair, made in the same speech. according to the london times of april , he said that-- the liabilities of the banks of great britain to the public amounted to £ , , , or about the amount of the national debt of england; but the amount of coin or bullion to meet this liability was only £ , , ; or, deducting from each side of the account £ , , locked up in the notes department of the bank of england, it was £ , , ; or only - / per cent. of liabilities. on the same occasion mr. goschen, chancellor of the exchequer, delivered an able speech, in which he gave his facts, his eloquence, and his logic to the struggling masses of his countrymen by maintaining the wisdom of remonetization of silver, but gave his conclusions and his policy to the creditor classes by recommending no disturbance of present conditions. i have contended-- said the chancellor of the exchequer-- and am prepared still to contend, that i should prefer the currency of the world to depend upon two metals rather than upon one metal. to those views i gave expression in . * * * i have always looked upon silver and gold not as antagonistic to each other; not as being metals the price of one of which would necessarily fall when the other rose, but i have looked upon them as partners who together were doing the work of the currency of the world. the english creditor classes have not been without able coadjutors in this country. we have noticed for the last twelve or fourteen years that zealous advocates of the gold standard, the advantages of which are not confined to great britain, are to be found among the creditor classes of the united states. if the toilers of this country, from the proceeds of whose labor these exactions have to be paid, had as little influence on the legislation of the united states as the toilers of england have on the legislation of that country, the creditor classes and financiers of the united states might be as frank as those of great britain in admitting the object of maintaining the single gold standard. how graphically, though unintentionally, does the english poet, waller, in the following verse, express the advantage which the gold standard gives to creditors everywhere, and the self-satisfaction with which they contemplate life: the taste of hot arabia's spice we know, free from the scorching sun that makes it grow. without the worm, in persia's silk we shine, and, without planting, drink of every vine. to dig for wealth we weary not our limbs, gold, though the heaviest metal, hither swims. ours is the harvest where the indians mow. we plow the deep, and reap what others sow. the motive of germany. when germany, intoxicated by her victory over france, and in order to further cripple a fallen foe from whom she had exacted $ , , , in gold, demonetized silver, she inflicted on her people by the fall of prices consequent on the increase in the value of money, more misery than all her armies of horse and foot had been able to inflict on france. france, on the contrary, notwithstanding this unprecedented war tribute, by keeping a sufficient volume of money in circulation to maintain, and even advance, her range of prices, emerged in a few years from the consequences of the greatest disaster in her history, conscious of a triumph more complete than germany had achieved by all the military splendor of the war. the ransom exacted of france was received back by her almost as soon as paid, in exchange for the products of her industry. it is not a sign of prosperity, mr. president, when hundreds of thousands of people, the best bone and sinew of a nation, are found annually emigrating; and it is a coincidence which i merely mention, in passing, that as soon as the effects of demonetization of silver had had time to make themselves felt in germany, a veritable hegira of its people took place. from to , the emigration from germany numbered , , persons. students of social science everywhere recognize the statistics of illegitimacy and of suicides as among the most powerful evidences of monetary distress. by reference to those statistics we find that notwithstanding the large emigration during that period the number of illegitimate births in germany increased from , in to , in . the suicides in prussia, bavaria, saxony, and baden--the leading states of the german empire--increased from for each million of population in to for each million of the population in and to for each million of the population in . in prussia alone the number of suicides in was per million, while in it was per million. this is part of the price which the toiling masses of germany are paying for the gold standard experiment, which, without their consent their imperial government foisted upon them. bismarck made the mistake that many able men in all countries of the western world have made and continue to make, namely, that of attributing the commanding position of great britain in the commercial and industrial world to her adoption of the gold standard. bismarck mistook for cause and effect what was a mere coincidence, the result of exceptional conditions, as did those of our legislators in , who happened to know anything whatever of the nature of the act demonetizing silver. the belief of some of the most far-sighted statesmen of great britain has been that she secured her position, not by reason of the gold standard, but in spite of it. in a speech delivered at glasgow, in november, , after the alteration by germany in her monetary standard, mr. disraeli said: the monetary disturbance which has occurred, and is now to a certain extent acting very injuriously upon trade, i attribute to the great changes which the governments of europe are making in reference to their standard of value. our gold standard is not the cause of our commercial prosperity, but the consequence of that prosperity. it is quite evident that we must prepare ourselves for great convulsions in the money market, not occasioned by speculation or any of the old causes which have been alleged, but by a new cause with which we are not sufficiently acquainted. and again in march, , when the effects of the decreasing volume of money were making themselves more and more felt, mr. disraeli, then lord beaconsfield, said: all this time the produce of the gold mines of australia and california has been regularly diminishing, and the consequence is that, while these great alterations on the continent in favor of a gold currency have been made, notwithstanding that increase of population which alone requires a considerable increase of currency to carry on its transactions, the amount of the currency itself is yearly diminishing, until a state of affairs has been brought about by gold production exactly the reverse of that which it produced at first. gold is every day appreciating in value, and as it appreciates the lower become prices. it is not impossible that, as affairs develop, the country may require that some formal investigation should be made of the causes which are affecting the value of the precious metals, and the effect which the change in the value of the precious metals has upon the industries of the country, and upon the continual fall of prices. in reaching their conclusions, bismarck and others ignored the fundamental principle that a gold supply that might be sufficient for one country with a gold standard, and might even result in a measure of prosperity to that country, would be wholly insufficient if other countries should adopt the same standard and should enter upon a keen competition and rivalry for the acquisition of gold. the adoption of that standard by germany and france was therefore not only destructive of their own prosperity, but was a stunning blow at the prosperity of england and all other gold-using countries. in taking england for his model, bismarck had not the condition of the toiling masses before his mind, but the glamour of prosperity which surrounded the creditor-barons. the unprejudiced observer can not fail to perceive that the $ , , coined under the limited coinage act of the united states of , supplementing the gold stock of the western world, postponed great industrial and financial crises. but the elements of these crises are gathering, and, unless relief be soon forthcoming, will burst upon the world with crushing severity. demonetization in the united states. if we are surprised that the sordid selfishness of the privileged classes of europe should have induced them to perpetrate so gross an act of injustice, we are reminded that the legislation of monarchical countries has usually been controlled in the interest of the privileged classes. but what shall be said in defense of the demonetization of silver by the united states? no such stupendous act of folly and injustice was ever before perpetrated by the representatives of a free people. our position differed materially from that of great britain. this was not a creditor nation. our people did not, and do not, own thousands of millions of dollars of foreign bonds, on which to receive semi-annual interest in a constantly appreciating money, which would have to be paid from the current earnings of foreign labor. instead, therefore, of our demonetization unjustly enriching our creditor-classes at the expense of foreigners, it enabled the creditors at home here to rob and despoil the debtors among their own countrymen. instead of despoiling the canadian, the australian, the east indian, the egyptian, or the turk, the spoliation arranged for by our adoption of the gold standard was a spoliation of the debtors in our own communities. in so far, however, as our debt was held abroad, it provided for a spoliation of our citizens by the foreign bondholders also. and as nearly all our public debt was so held, we had presented to us in the extraordinary spectacle of representatives, sent here to enact laws for the welfare and advancement of our own people, devoting all their energies, whether aware of it or not, to the upbuilding of the fortunes of the moneyed aristocracies of other countries, at the expense of the producers of the united states. condition of the country at the time. consider for a moment the condition of this country at the time when this amazing piece of legislation was enacted. the republic was but just recovering from an exhausting war, which loaded it with a national debt approaching $ , , , . there were also state, county, city, and town debts aggregating many more thousands of millions, with railroad and other corporate bonds and debts aggregating yet other thousands of millions and private debts of indefinite and unascertainable amount, represented largely by mortgages on real estate. this constituted an aggregate whose burden might naturally be presumed to be sufficient to tax all the resources of the people. although some portion of those debts has been liquidated and the national bonds have been refunded at lower rates of interest, yet we all know that in this age all municipal and corporate debts, if not national debts, are practically perpetual. no sooner is one form of bond liquidated than another takes its place; no sooner is one public improvement completed than another is begun. at the time silver was demonetized it might well have been supposed that a sufficiently large unearned increment had already been realized by the foreign and domestic holders of united states bonds. the greater portion of the debt of the government was, when incurred, made payable simply in "lawful money"--the interest alone being payable in coin. yet in march, , the bond-holders secured the passage of an act of congress, entitled "an act to strengthen the public credit," containing a pledge to pay in coin or its equivalent not merely the interest, but the principal of all national obligations not specially provided to be paid otherwise. the course of the creditors. and again, when in congress was about to provide for a refunding of the public debt, these clamorous creditors, not satisfied with having got the bonds at rates much below their face value, and not satisfied with the pledge to pay in coin--a pledge made long after the contract was made and the debt incurred--insisted that not only should the new bonds be payable in coin, but in order to guard against any possible interpretation which might work to their detriment they did what has rarely been done in the history of monetary legislation, insisted that even the very _standard_ of that coin should be fixed and nominated in the bond. they were willing to take no chances. they were not willing to place confidence in the sense of equity and fair dealing of the people of the united states. they held before congress the covert threat that if the new issue of bonds did not provide for payment in "coin," instead of "lawful money," and did not prescribe the precise standard of coin in which they were to be payable, it would be difficult if not impossible to place the bonds on the market. so, by the refunding act of july , , congress provided for the payment in "coin of the present standard value," that is to say, in either gold dollars of . grains of gold, nine-tenths fine, or in silver dollars of - / grains of silver, nine-tenths fine, at the option of the united states. but even this extreme advantage to the creditors over payment in "lawful money" of the united states, in which the bonds were bought, and in which they were legally payable, was insufficient. all but the most ingenious would imagine that having thus provided for payment in coin then bearing a considerable premium over the current money of the republic, and having the very standard of that coin fixed in the act, the highest point of vantage had been reached. one device, however, and only one, remained by which the money of the payment could be still further increased in value, and this device did not escape the watchful eye or cunning hand of the public creditors. they clearly saw that if by legislative enactment they could secure the rejection of one of the money-metals they would succeed in enormously increasing the value of the metal retained. this they accomplished by the demonetization of silver, and thus by striking down one-half the automatic money of the world and devolving the money function exclusively on the other half, added thousands of millions of dollars to the burden of the debt. the pretense to "strengthen the public credit." it will be observed that this anxiety to strengthen the public credit was evinced by the bondholders _after_ and not before the bonds were in their possession. no anxiety for the public credit was manifested by them at a time when the government might be able to reap advantage from it. the government having parted with the bonds at a heavy discount, their selling price in the market became a matter of no direct pecuniary importance to the people of the united states. the "strengthening of the public credit" that was to be effected by the act of march , , consisted of a rise in the price of the bonds for the benefit of the holder, at a time when they were no longer the property of the government but of private individuals. the real effect of the act, therefore, was not in any way to benefit the government but greatly to enrich, by an increment unearned and unbargained for, a few men who had already been greatly enriched by their dealings with the united states. the title of the act should have read "an act to strengthen the bank account and credit of the holders of united states bonds." the excuse and apology for the act was that by its passage the refunding process then contemplated, and afterward provided for by the refunding act of might be rendered more certain of success; but if any advantage accrued from that cause, it was lost, and much more with it, by the increase which the act of effected in the burden of the bonded obligation, by pledging the nation to a payment in a medium much more valuable than the medium provided for in the contract. and, again, in when all the bonds provided for by the refunding act of had been sold and had passed out of the hands of the government, another act was passed, intended by the money-lenders again to strengthen the public credit, and again to the disadvantage of the people and to the exclusive and enormous advantage of the bondholders. it bore the innocent title of "an act revising and amending the laws relative to the mints, assay offices, and coinage of the united states." this act, bearing on its face no suggestion of any change more serious than that of regulating the petty details of mint management, has proved to be an act of momentous consequence to the people of this country. this is the act that demonetized the silver dollar, which it did by merely omitting that coin from the enumeration of the coins of the united states. demonetization wholly unjustifiable. among all the explanations that have been made to account for that demonetization by a congress of the united states, i have never heard any reason advanced which constituted a justification for it. to my mind, in view of all the circumstances--in the face of the herculean difficulties by which the nation was surrounded, in the face of the sacrifices which our citizens had made to preserve the republic, and in the face of all that had already been done by an over-generous people, proud of their national strength, and jealous of their national honor, to satisfy the rapacious demands of the money-lenders--in view, i say, of all these facts, the demonetization of silver by the united states must be regarded as one of those historic blunders that are worse than crimes. it was the child of ignorance and avarice, and is already the prolific parent of enforced idleness, poverty, and misery. it is to undo as far as possible the effects of the blunder of that new legislation is now imperatively demanded by the people. while the past can not be recalled, the present is ours, and the pressing duty of to-day is to provide for the future. the demand comes from all sections of the country that a remedy for the depressed industrial conditions caused by the legislation of , be applied at the earliest moment. and what better remedy could be applied than absolutely to reverse that legislation and to put the monetary position of this country back to exactly where it was when that wrong was committed? some twelve years ago an attempt was made to apply a remedy, but the attempt was only partially successful. instead of resulting in free coinage, it resulted in the passage of the bill which authorized the coinage of not less than two nor more than four million dollars' worth of silver per month. on that occasion a financial debate of great interest and importance was had in this chamber and in the other house of congress. the proposition to remonetize silver or to increase the silver coinage was vigorously opposed, but the arguments then presented by the advocates of remonetization never have been, and never can be, refuted. in fact, but rarely has there been any attempt made to answer those arguments. puerile attempts at wit, and diatribes of abuse are all that the silver men have heard in sixteen years in answer to the contentions they have made in favor of the remonetization of silver. educational effect of discussion. with that debate, mr. president, long pending and eagerly maintained on both sides, there began in this country an educational movement among the masses, that is destined to have far-reaching consequence. the public attention was fastened, as it had never been fastened before, on the subject of money, and on the forces which govern its value, and up to this time that attention has never flagged. as a result we find the great body of our people to-day--the farmers and artisans of the country--after years of reflection and discussion in their lyceums and trade organizations, adopting to a large extent the views then presented by the advocates of an increased money volume--views which at the time were contemptuously derided by the advocates of contraction and of gold. the cry for relief appropriately now comes from the farmers, the artisans, and the laboring classes, as well as from the young, the enterprising, the thoughtful, of all classes, who have not inherited wealth, but are hewing out for themselves the rugged path to success. it is they who have had to bear the exactions of the system which has prevailed. it is from the proceeds of their labor that the extortions have been paid. if objection be made that the character of relief proposed is not indorsed in financial circles, or by the literary guild or professional political economists that surround them, the sufficient reply is that the world can not wait for the correction of abuses by those who are profiting by them. in the nature of things, all movements for reform must be initiated by those who can not lose by the installation of justice. but there are others besides the laboring masses who are working in the cause of humanity. there are noble, unselfish, and altruistic men in all the countries of civilization, who see the wrong and are indefatigable in their efforts to set it right. i will read a cable dispatch recently addressed to me by mr. henry h. gibbs, formerly governor of the bank of england, and now president of the bimetallic league of great britain: london, _may _.--the friends of silver deeply regret the death of senator beck, whose services in the cause of monetary reform are warmly appreciated on this side of the atlantic. the bimetallist party of the united kingdom, now including over one hundred members of the house of commons, attach the greatest value to the debate about to commence in your illustrious chamber. we fully recognize not only that the support afforded to silver by your legislation during the last twelve years has helped the protect the industrial world from an acute monetary crisis, but also that the debates in congress have served more than all else to educate our people to recognition of the important issues involved. we believe also that the increase and coinage of silver contemplated by congress will restore, wholly or considerably, your coinage rates, and will thus make international settlement of this complex question comparatively easy. we anticipate further and with much confidence, that the advance in the price of silver which must follow your action will stimulate both the export and the other trades of your country, and, while tending to the prosperity of your agricultural classes, will also assist the manufacturing industries of the united kingdom and the whole body of our wage-earners. mr. moreton frewen, of london, an able writer on economic subjects, whose recent work on the "the economic crisis" i commend to the careful perusal of senators, says: it may, indeed, be affirmed, without fear of contradiction, that legislation arranged in the interest of a certain class, first by lord liverpool in this country, and again by sir robert peel at the instigation of mr. jones loyd and other wealthy bankers, which was supplemented recently by simultaneous anti-silver legislation in berlin and washington at the instance of the great financial houses--this legislation has about doubled the burden of all national debts by an artificial enhancement of the value of money. the fall of all prices induced by this cause has been on such a scale that while in twenty years the national debt of the united states quoted in dollars has been reduced by nearly two-thirds, yet the value of the remaining one-third, measured in wheat, in bar iron, or bales of cotton, is considerably greater--is a greater demand draft on the labor and industry of the nation than was the whole debt at the time it was contracted. the aggravation of the burdens of taxation induced by this so-called "appreciation of gold," which is no natural appreciation, but has been brought about by class legislation to increase the value of the gold which is in a few hands, requires but to be explained to an enfranchised democracy, which will know how to protect itself against further attempts to contract the currency and to force down prices to the confusion of every existing contract. of all classes of middle-men, bankers have been by far the most successful in intercepting and appropriating an undue share of produced wealth. while the modern system of banking and credit may be said to be even yet in its infancy, that portion of the assets of the community which is to-day in the strong boxes of the bankers would, if declared, be an astounding revelation of the recent profits of this particular business; and not only has the business itself become a most profitable monopoly, but its interests in a very few hands are diametrically opposed to the general interests of the majority. by legislation intended to contract the currency and force down all prices, including wages, the price paid for labor, the money owner has been able to increase the purchase power of his sovereign or dollar by the direct diminution of the price of every kind of property measured in money. unfulfilled prophecies. during the debate on the limited coinage bill, not content with abuse of the advocates of the measure; with flimsy criticism of it and specious arguments against it, its opponents in and out of congress indulged in diverse prophecies and predictions. they pictured forth the lamentable results that would follow its passage, and the direful consequences that would ensue from an increase of the circulating medium of the country. among the results confidently predicted were the following: that the silver would not circulate at all, and again that it would circulate to the exclusion of gold, which metal, we were informed, would flow out of this country with a velocity and in a volume theretofore unknown; that we should be unable to redeem our paper money in gold; that we should be precipitated into a silver vortex; that an inflation of the currency would follow, which would ruinously raise prices of all commodities and that this inflation would result in an unprecedented contraction. we were charged with forcing upon the public creditors a dollar worth only ninety cents. we were warned that the passage of the bill would indefinitely postpone the refunding of the public debt, and would lower the price and impair the value of our national securities. it was charged that we were setting on foot a new and irrepressible conflict between two great sections of the country--the east and the west. we were charged with uttering a debased coin; with lowering the standard of american credit; with tarnishing the integrity and honor of our country before foreign nations, and with unprecedented moral turpitude in setting an example of flagrant and shameless national dishonesty. the men of the far west, and of the pacific slope especially, were the particular targets of this abuse. they were denounced by some as "lunatics," by others as dangerous and unworthy demagogues, because, as was charged, their constituents, if not themselves, were directly interested in the restoration of the ancient right of silver to full recognition as one of the money metals. for their benefit resort was had to every epithet which the english language afforded. in holding them up to public scorn the rich and varied vocabulary of odium and opprobrium was exhausted. these prophecies of disaster were united in by the professors of political economy in all the eastern colleges, by the president of the united states, by the secretary of the treasury, by the leading american newspapers, by the principal public men and journals of great britain, if not of all europe; and, of course, by all bankers, money-lenders, and professional financiers the world over. and now, mr. president, how many of all those alarming prognostications by all these distinguished prophets have been fulfilled? not one! on the contrary, it is not too much to say that the public credit of the united states is to-day the highest in the world. it does not stand merely in line with that of other first-rate powers; it stands at the head. our gold, silver, and paper money stand at a parity with each other. if a full measure of relief was not realized by the passage of that bill it is because the coinage of $ , , a month was left optional with the secretary of the treasury, instead of being made mandatory on him. but it is hardly necessary to assert that the predicted inflation of prices has not been observed as a consequence of the coinage of $ , , a month. while the issuance of that amount has not, with our rapidly increasing population and wealth, been sufficient to arrest the downward tendency of prices, it has undoubtedly prevented them from falling much lower. without that coinage, we should have had industrial depression, chronic and somber, with consequences of untold disaster. but the result which gave most apprehension to those who advocated the gold standard, the evil which they regarded as on the whole the most threatening and direful of all the evils that were to result from even so small an increase in the money volume as that bill provided for, was the outflow of gold. they ridiculously under-estimated the tremendous money-absorbing power of this great country. and as if to emphasize to all the world the complete absurdity of their alleged fears--this apprehension has been conspicuously and notoriously set at naught by the constant inflow of gold. on the th of june, , the amount of gold coin and bullion in the treasury and in monetary circulation in this country is officially reported to have been $ , , , and this amount is probably much over-estimated. on november , , we had more than three times as much--the amount of gold in circulation and in the treasury being reported as $ , , . "experience," says dr. johnson, "is the great test of truth, and is perpetually contradicting the theories of men," and the last experience, mr. president, is the best. if the professors of political economy, the eastern newspaper editors, and the professional financiers were then so seriously mistaken ought they not to be a little modest now in making predictions, especially in renewing predictions that have been already discredited? they can not point to a single instance in which their prophesy has not been falsified by the event. so humiliating a failure on the part of the professors, in a realm of which they boastfully claimed to be masters, so complete an overthrow of these "experts" by men who were ridiculed and derided as rural financiers and crazy theorists, ought to put the advocates of the gold standard on their guard against a like defeat on this occasion. they are pressed for reasons to account for the utter miscarriage of their prophecies. they are left without a shadow of consolation except that the coinage of $ , , worth of silver bullion each month has not succeeded in placing silver at a par with gold. they affect to believe that the advocates of silver in expected that that metal, under the very limited demand of $ , , a month, would be brought to a level with gold, which, owing to the demonetization of silver, had risen abnormally and ruinously in value. no such belief was ever entertained or expressed. on the contrary it was repeatedly asserted by the advocates of silver that so long as the entire yield of gold from all the mines of the world (in , $ , , ) was invested with the full money function and had free access to all mints to be transmuted into coin, it could not be expected that the conferring of the legal-tender function upon a sum so comparatively trifling as one-fourth the yield of silver (the yield in being $ , , ) would have the effect of placing it on a level with gold. it is, however, a significant fact that every silver dollar that has been coined under that act is at a parity with gold, and will to-day buy as much of all the objects of human desire as will the gold dollar. nay, more, silver bullion--disparaged and discredited as it is by being shorn of the money function, and denied access to the mints, instead of decreasing in purchasing power, has maintained so steady a relation to commodities that - / grains of uncoined silver will exchange for as much to-day as would the coined dollar, whether of silver or gold, in , when the full money function attached equally to both metals. if this be true--and i shall presently demonstrate it beyond refutation--what an utter perversion of terms it is to say that silver has fallen in value! will remonetization place us alongside india. we are solemnly warned that the full remonetization of silver in the united states would place us alongside india and the other barbarous countries of the world. this brilliant piece of reasoning is advanced with great confidence, and is intended to be conclusive of the argument against silver. but, mr. president, india is no more barbarous now than it was in --before our silver dollar was demonetized. india is no more barbarous now than it was in , when germany demonetized gold and placed herself "alongside" india. neither is germany any more civilized now than then. we did not at that time hear any complaint, either in the united states or europe, that the use of silver as money placed any one nation more than any other in dangerous affiliation with the civilization of india. we have never heard it charged against france that its civilization was brought any nearer that of india by the immense quantity of silver money in france. neither did we hear it charged against the united states up to that we were "alongside," or dangerously close to the barbarous nations by our use of silver as money. up to we had no metallic money other than silver in our circulation, and up to we had much more silver in circulation than gold. were we "alongside" india then? where were the wise and patriotic men of our country at those periods? history fails to record any protest on their part that we were placing ourselves "alongside" india or any other of the barbarous nations of the world by our use of silver and our recognition of its full money power. all the nations of the earth used silver and accorded it full recognition as money equally with gold up to . was all christendom at that time "alongside" india? when, in that year, great britain sundered the silver link that from time immemorial had kept her "alongside" india and the other barbarous nations and, for selfish reasons of her own, arising from her position as a creditor of all other nations, decided to recognize gold only as money, was any evidence afforded of a sudden advance in the civilization of great britain? was the emergence of that nation from the benumbing companionship of india and the other barbaric countries into the glittering and refulgent light of the gold dispensation signalized, as would be expected, by a corresponding improvement in the condition of the people? on the contrary, the history of the time informs us that as a consequence of the passage of the bill by parliament in , compelling payments in gold, prices rapidly fell, cotton in particular sinking in the short space of three months to one-half its former level. within six months all prices had fallen one-half, and showed no signs of improvement for the next three years. by reason of the contraction of the currency the industry of the nation was congealed, as is a flowing stream by the severity of an arctic winter. alarm became universal; confidence and activity ceased. bankruptcies increased in more than per cent. over the number of the previous year. meetings were held throughout england in which the people called on the government to devise some means of redressing the situation. so universal was the distress that the owners of land in england, who in numbered , were in seven years, by forced sales and foreclosure of mortgages on the smaller farms, reduced to , , and one in every seven of the population lived on organized charity. all this was but a part of the price which the people of england paid for a policy imposed on them by the creditor classes among their own number. the condition of industry and disorganization of labor led to frequent and serious conflicts between the people and the military. they also led to commercial crises without number, and england, by demonetizing silver and thus ceasing to be "alongside" india, became the seat of panics, as egypt had long been of the plague and india of the cholera. as a contrast to this i will merely cite the change in the condition of india within the past seventeen years. when the western world discarded silver as money and, as a consequence, india received a larger supply of it than ever before, that barbarous nation, as is universally admitted, made progress by leaps and bounds. no country on earth has in the same time made such advances in material prosperity and in all the elements that conduce to the comfort and happiness of a people. notwithstanding the alleged debasement of silver, no sooner had its increased inflow into india begun than the industries of a vast continent were established and set in motion, and a substantial part of the activity and prosperity that were wont to pervade some of the industries of the united states has, by that demonetization, been transferred to fields of wheat, and fields and factories of cotton , miles distant. what really placed us alongside such barbarous countries as india was the demonetization of silver. it was by that demonetization that the people of europe were enabled, with gold, to buy silver at per cent. discount, which, when shipped to india and coined into rupees, would buy as much wheat as could ever have been bought with that coin. there has been no decrease whatever in the purchasing power of the rupee in india. this was equivalent to buying wheat at per cent. below the price theretofore paid for it, and thus the farmers of the united states were by demonetization placed "alongside" the barbarous people of india. their wheat had to compete in the european markets with the wheat of india, and it is this competition that placed them "alongside" india. the farmer of this country, therefore, by demonetization of silver, was compelled to compete with under-paid and half-starved ryots. and so it was that our cotton planters, by the demonetization of silver, were placed alongside the barbarous people of india. it is this degrading competition that places a highly civilized people alongside a barbarous one. the advocates of the single gold standard deem even silver money much better money than greenbacks. does it then follow that when greenbacks were our only money--good enough money to carry the nation through the greatest war in all history--we were "alongside" or underneath the barbarous nations of the world? it is not the form, or the material of a nation's money that fixes its status relatively to other nations. that is accomplished by the vitality, the energy, the intellectuality and effective force of its people. the united states can never be placed "alongside" any barbarous nation, except by compelling our people to compete with barbarous peoples--compelling them to sell the products of american labor at prices regulated by the cost of labor and manner of living in barbarous countries. as well might it be said that we are alongside the barbarous people of india because we continue to produce wheat and cotton. the distinguishing feature of all barbarous nations is the squalor of their working classes. the reward of their hard toil is barely enough to maintain animal existence. a civilized people are placed alongside a barbarous one when, in their means of livelihood, the foundation of their civilization, they are made to compete with the barbarians. that was the result accomplished for the farmers and planters of the united states when silver was demonetized. creditors and debtors.--a comparison of motives. all movements for the increase of the monetary circulation are ascribed by the money-lenders and creditor classes to the unworthy desire on the part of the debtors to escape their just obligations. but if motives are to be brought in question, the rule should work both ways. no note is taken of the motive of the creditor classes in securing a contraction of the circulation. whatever the apparent purpose of contraction, and however specious the arguments advanced in its justification, the real object has always been to increase the purchasing power of money. in all countries, and throughout all time, it is the cupidity of the creditor classes and annuitants, and their desire to increase the value of the money unit that has brought about a shrinkage in the money volume. unlike the great masses of the people, who were ignorant of the effects to be naturally expected from such a shrinkage, the annuitants and moneyed men very well understood that the value of every pound or dollar depended on the number of pounds or dollars that were in circulation; the larger the total number out, the smaller the purchasing power of each; the smaller the total number out, the greater the purchasing power of each. loaners of capital are not usually those who entertain further hope of personal achievement. when men realize fortunes it is rarely that they conserve the faculty of initiative; they find no special delight in novelty; they look so carefully to security in the use of money that the spirit of adventure is restrained. the realization of a fortune is usually the labor of a life-time, and few men who reach the goal care to retrace their steps to enter again upon a struggle that demands all the strength, the momentum, and the intrepidity of youth. men of assured incomes therefore are disposed to take their ease, and society must look, for its material progress and development, to those who have a career to make, with the ambition and the power to make it. it is a remarkable circumstance, mr. president, that throughout the entire range of economic discussion in gold-standard circles, it seems to be taken for granted that a change in the value of the money unit is a matter of no significance, and imports no mischief to society, so long as the change is in one direction. who has ever heard from an eastern journal any complaint against a contraction of our money volume; any admonition that in a shrinking volume of money lurk evils of the utmost magnitude? on the other hand we have been treated to lengthy homilies on the evils of "inflation," whenever the slightest prospect presented itself of a decrease in the value of money--not with the view of giving the debtor an advantage over the lender of money, but of preventing the unconscionable injustice of a further increasing value in the dollars which the debtor contracted to pay. loud and resounding protests have been entered against the "dishonesty" of making payments in "depreciated dollars." the debtors are characterized as dishonest for desiring to keep money at a steady and unwavering value. if that object could be secured, it would undoubtedly be to the interest of the debtor, and could not possibly work any injustice to the creditor. it would simply assure to both debtor and creditor the exact measure for which they bargained. it would enable the debtor to pay his debt with exactly the amount of sacrifice to which, on the making of the debt, he undertook to submit, in order to pay it. who are the debtors? in all discussions of the subject the creditors attempt to brush aside the equities involved by sneering at the debtors. but, mr. president, debt is the distinguishing characteristic of modern society. it is through debt that the marvelous developments of nineteenth century civilization have been effected. who are the debtors in this country? who are the borrowers of money? the men of enterprise, of energy, of skill, the men of industry, of foresight, of calculation, of daring. in the ranks of the debtors will be found a large preponderance of the constructive energy of every country. the debtors are the upbuilders of the national wealth and prosperity; they are the men of initiative, the men who conceive plans and set on foot enterprises. they are those who by borrowing money enrich the community. they are the dynamic force among the people. they are the busy, restless, moving throng whom you find in all walks of life in this country--the active, the vigorous, the strong, the undaunted. these men are sustained in their efforts by the hope and belief that their labors will be crowned with success. destroy that hope and you take away from society the most powerful of all the incentives to material development; you place in the pathway of progress an obstacle which it is impossible to surmount. the men of whom i have spoken are undoubtedly the first who are likely to be affected by a shrinkage in the volume of money. the highest prosperity of a nation is attained only when all its people are employed in avocations suited to their individual aptitudes, and when a just money system insures an equitable distribution of the products of their industry. with our present complex civilization, in order that men may have constant employment, it is indispensable that work be planned and undertakings projected years in advance. without an intelligent forecast of enterprises large numbers of workmen must periodically be relegated to idleness. enterprises that take years to complete must be contracted for in advance, and payments provided for. a constant but unperceived rise in the value of the dollar with which those payments must be made, baffles all plans, thwarts all calculation, and destroys all equities between debtor and creditor. if we can not intelligently regulate our money volume so as to maintain unchanging the value of the money unit, if we can not preserve our people from the blighting effects which an increase in the measuring power of the money unit entails upon all industry, to what purpose is our boasted civilization? by the increase of that measuring power all hopes are disappointed, all purposes baffled, all efforts thwarted, all calculations defied. this subtle enlargement in the measuring power of the unit of money (the dollar) affects every class of the working community. like a poisonous drug in the human body, it permeates every vein, every artery, every fiber and filament of the industrial structure. the debtor is fighting for his life against an enemy he does not see, against an influence he does not understand. for, while his calculations were well and intelligently made, and the amount of his debts and the terms of his contracts remain the same, the weight of all his obligations has been increased by an insidious increase in the value of the money unit. effects of a shrinking volume of money. as to the benumbing consequences following a shrinkage in the volume of money, the testimony of history is briefly reviewed in the report of the monetary commission to which i have already referred, and from which i read the following: at the christian era the metallic money of the roman empire amounted to $ , , , . by the end of the fifteenth century it had shrunk to less than $ , , . during this period a most extraordinary and baleful change took place in the condition of the world. population dwindled and commerce, arts, wealth, and freedom all disappeared. the people were reduced by poverty and misery to the most degraded conditions of serfdom and slavery. the disintegration of society was almost complete. the conditions of life were so hard that individual selfishness was the only thing consistent with the instinct of self-preservation. all public spirit, all generous emotions, all the noble aspirations of man shriveled and disappeared as the volume of money shrunk and as prices fell. history records no such disastrous transition as that from the roman empire to the dark ages. various explanations have been given of this entire breaking down of the frame-work of society, but it was certainly coincident with a shrinkage in the volume of money, which was also without historical parallel. the crumbling of institutions kept even step and pace with the shrinkage in the stock of money and the falling of prices. all other attendant circumstances than these last have occurred in other historical periods unaccompanied and unfollowed by any such mighty disasters. it is a suggestive coincidence that the first glimmer of light only came with the invention of bills of exchange and paper substitutes, through which the scanty stock of the precious metals was increased in efficiency. but not less than the energizing influence of potosi and all the argosies of treasure from the new world were needed to arouse the old world from its comatose sleep, to quicken the torpid limbs of industry, and to plume the leaden wings of commerce. it needed the heroic treatment of rising prices to enable society to reunite its shattered links, to shake off the shackles of feudalism, to relight and uplift the almost extinguished torch of civilization. that the disasters of the dark ages were caused by decreasing money and falling prices, and that the recovery therefrom and the comparative prosperity which followed the discovery of america were due to an increasing supply of the precious metals and rising prices, will not seem surprising or unreasonable when the noble functions of money are considered. money is the great instrument of association, the very fiber of social organism, the vitalizing force of industry, the protoplasm of civilization, and as essential to its existence as oxygen is to animal life. without money civilization could not have had a beginning; with a diminishing supply it must languish, and, unless relieved, finally perish. symptoms of disasters similar to those which befell society during the dark ages were observable on every hand during the first half of this century. in the revolutionary troubles between spain and her american colonies broke out. these troubles resulted in a great diminution in the production of the precious metals, which was quickly indicated by a fall in general prices. as already stated in this report, it is estimated that the purchasing power of the precious metals increased between and fully per cent., or, in other words, that the general range of prices was per cent. lower in than it was in . during this period there was no general demonetization of either metal and no important fluctuation in the relative value of the metals, and the supply was sufficient to keep their stock good against losses by accident and abrasion. but it was insufficient to keep the stock up to the proper correspondence with the increasing demand of advancing populations. the world has rarely passed through a more gloomy period than this one. again do we find falling prices and misery and destitution inseparable companions. the poverty and distress of the industrial masses were intense and universal, and, since the discovery of the mines of america, without a parallel. in england the suffering of the people found expression in demands upon parliament for relief, in bread riots, and in immense chartist demonstrations. the military arm of the nation had to be strengthened to prevent the all-pervading discontent from ripening into open revolt. on the continent the fires of revolution smoldered everywhere, and blazed out at many points, threatening the overthrow of states and the subversion of social institutions. whenever and wherever the mutterings of discontent were hushed by the fear of increased standing armies, the foundations of society were honey-combed by powerful secret political associations. the cause at work to produce this state of things was so subtle, and its advance so silent, that the masses were entirely ignorant of its nature. they had come to regard money as an institution fixed and immovable in value, and when the price of property and the wages of labor fell, they charged the fault, not to the money, but to the property and the employer. they were taught that the mischief was the result of overproduction. never having observed that overproduction was complained of only when the money stock was decreasing, their prejudices were aroused against labor-saving machinery. they were angered at capital, because it either declined altogether to embark in industrial enterprises or would only embark in them upon the condition of employing labor at the most scanty remuneration. they forgot that falling prices compelled capital to avoid such enterprises on any other condition, and for the most part to avoid them entirely. they did not comprehend that money in shrinking volume was the prolific parent of enforced idleness and poverty, and that falling prices divorced money capital, from labor, but they none the less felt the paralyzing pressure of the shrinking metallic shroud that was closing around industry. the increased yield of the russian gold fields in gave some relief and served as a parachute to the fall in prices, which might otherwise have resulted in a great catastrophe. but the enormous metallic supplies of california and australia were all needed to give substantial and adequate relief. great as these supplies were, their influence in raising prices was moderate and soon entirely arrested by the increasing populations and commerce which followed them. in the twenty-five years between and the money stock of the world was more than doubled, and yet at no time during this period was the general level of prices raised more than per cent. above the general level of . a comparison of this effect of an increasing volume of money after with the effect of a decreasing volume between and strikingly illustrates how largely different in degree is the influence upon prices of an increasing or decreasing volume of money. the decrease of the yield of the mines since about , while population and commerce have been advancing, has already produced unmistakable symptoms of the same general distrust, non-employment of labor, and political and social disquiet, which have characterized all former periods of shrinking money. the time that has elapsed since that report was written has but served to verify and emphasize its statements. the fall of prices since . it is a fact not disputed anywhere but universally admitted, that for many years past the prices of all articles entering into general consumption among the people have been steadily falling. it is obvious that the industrial conditions prevailing since are but a repetition of those above described as following --with falling prices, constant unrest, and universal discontent. the following table, compiled from figures published by the bureau of statistics of the treasury department, shows the average range of export prices of the articles named for each year since : _annual average export prices of commodities of domestic production for each year from to , inclusive._ ------+----------+----------+----------+--------+--------+-------- year | corn | wheat | wheat | cotton | leather| illumi- ending| per | per | flour |(upland)| per | nating june,| bushel. | bushel. | per | per | pound. | oils, -- | | | barrel. | pound. | |refined, | | | | | | per | | | | | | gallon. ------+----------+----------+----------+--------+--------+-------- |_dollars._|_dollars._|_dollars._|_cents._|_cents._|_cents._ | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . ============================================================ year | bacon | lard | pork, | beef, | butter ending| and hams | per | salted, | salted, | per june,| per | pound. | per | per | pound. -- | pound. | | pound. | pound. | ------+----------+----------+----------+----------+--------- | _cents._ | _cents._ | _cents._ | _cents._ | _cents._ | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . ============================================================ year | cheese | eggs | starch | sugar, | tobacco, ending| per | per | per | refined, | leaf, june,| pound. | dozen. | pound. | per | per -- | | | | pound. | pound. ------+----------+----------+----------+----------+--------- | _cents._ | _cents._ | _cents._ | _cents._ | _cents._ | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . | . ------+----------+----------+----------+----------+--------- to show from another source the same general fact of the decline of prices, i quote from an article published in the new york tribune early in . the new york tribune is pretty good authority. these figures are undoubtedly from the calculations and from the pen of mr. grosvenor, of the editorial staff of that able journal, formerly editor and proprietor of the "public," whose estimates of prices have, in my judgment, been more correctly made than those of any other statistician in the world. the article is as follows: quotations of about two hundred articles are compared since , and the amount of money is ascertained which would purchase, at different dates, of these various articles, quantities corresponding as closely as possible to their ascertained consumption in , the date of the last census. among the articles compared are wheat, corn, oats, rye, barley, beans and pease, mess pork, bacon, ham, live hogs, lard, fresh beef, tallow, live sheep, poultry, butter, cheese, eggs, milk, hay, potatoes, turnips, cabbage, onions, apples, raisins, sugar, brown and crushed; molasses, coffee, tea, tobacco, whisky, malt and hops, mackerel, codfish, salt, rice, nutmegs, cloves, pepper, cotton, print-cloths and standard sheeting, wool of different qualities, blankets, carpets, flannels, leather, boots, shoes, hides, silk, india rubber, iron (pig and bar), nails, steel rails, coal, oil (crude and refined), tin and tin plates, copper, lead, hemp, lumber, spruce and pine, oak, ash, walnut, and white wood, lath, brick, lime, turpentine, linseed oil, soap, glass, paper, white lead, and twelve other kinds of paints, fertilizers, and over fifty kinds of drugs and chemicals. _cost of products at different dates._ ---------------------+-----------+----------+--------- dates. | cost in | price of | cost in | currency. | gold. | gold. ---------------------+-----------+----------+--------- , may | $ . | $ . | $ . , november | . | . | . , may | . | . | . , november | . | . | . , november | . | . | . , may | . | . | . , november | . | . | . , may | . | . | . , january | . | . | . , october | . | . | . , may | . | . | . , may | . | . | . , october | . | . | . , november | . | -- | -- , january | . | -- | -- , january | . | -- | -- , may | . | -- | -- , march | . | -- | -- , november | . | -- | -- , january | . | -- | -- , november | . | -- | -- , january | . | -- | -- , may | . | -- | -- , august | . | -- | -- , november | . | -- | -- , close | . | -- | -- ---------------------+-----------+----------+--------- it is not only clear from this comparison that the prices of have been the lowest in our history for twenty-five years, but that there has been a general tendency toward lower prices. from to , and again from until , prices fell quite steadily. indeed, had not the short crop of caused a temporary advance in the spring of , the range of january, , would have been the highest of the later period, and it might have been said that the present era of declining prices had continued with little intermission for six years. none will fail to observe how swift and sharp the advances have been--about per cent. from november, , to may, , and - / per cent. from october, , to january, . but these spasmodic advances, by which the general tendency downward is interrupted, only serve to make it more clear that prices have been tending irresistibly toward a lower level than that of , not only during the period of paper depreciation, but since gold has been the measure of value. in order to show that the united states are not alone in their complaint of falling prices, but that the complaint is universal, and in order that we may have before us a broad view of the field of general prices, i submit a table showing the relation to each other of the range of prices from to , by decades, based on the prices of fifty leading articles of commerce, prepared by the distinguished professor jevons and published in the london economist for may , . taking the range of prices of as a datum line (the range for that year being the lowest of the century) mr. jevons works backward to , when the revolt of the south american colonies against the authority of spain shut off at a blow the supplies of the precious metals, and set on foot a money famine from which the world knew no relief till the discovery of the mines of california and australia. professor jevons's figures are as follows, the prices of being represented by : _relation of prices, to , by decades, those for being rated at ._ from these figures it will be observed that the fall from to , a period of forty years, was as to , or per cent. by the next table which i submit, that of dr. soetbeer, it will be seen that the general range of prices rose gradually from to , in the last of which years the figures bore to those of the relation of to . it has never been denied that this rise was due to the increase in the world's money supply by the yield of the precious metals from the mines of california and australia, the effects of which, however, as will be seen by the table, were not felt on prices till --five years after john marshall's discovery of the yellow metal in the tail-race at sutter's mills. yet, because it interferes with the pecuniary interests of a large and influential class, it is vehemently denied that the fall of prices since is due to a decrease in the volume of the money caused by the demonetization of silver in that year throughout the western world. from and after that year, as will be perceived by an examination of the figures; in other words, from the year when one-half the world's money supply was deprived of the money function, we find an almost uninterrupted decline of prices. the figures of and will be seen to bear to one another the relation of to , or a fall of per cent. in twelve years. should the fall continue at that rate without interruption--and there is no reason apparent why it should not, we shall in forty years have witnessed a decline of per cent. in the general range of prices--a decline considerably greater than that from to . and these are not the figures of bimetallists or silver "theorists," but of pronounced advocates of the single standard of gold. where, i would inquire, is the fall of prices to stop? dr. soetbeer's table represents the general average price of one-hundred leading articles of commerce each year for a period of nearly forty years. he takes as a basis the general range of gold prices prevailing between and , and calling that range , shows the relative standing toward it of the general range of prices for subsequent years, up to . _relation of prices by years from to , the general range of prices of being rated at ._ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . mr. sauerbeck, also an advocate of the gold standard, and whose work has the approval of the statistical society, takes as a datum line the prices ruling from to . rating those at he finds that by prices had risen to , by they had fallen to , and by september, , to . . he declares the average prices for the first nine months of to have been the lowest reached for a hundred years. both gold and silver variable in value. the fact that the metals have separated considerably since , and that silver bullion now sells at less than par value of $ . per ounce, is taken to signify that silver has fallen--not that gold has risen. this proceeds from the assumption that whenever a change takes place in the relation between gold and any other article the change must necessarily be in the other article. this assumption, in turn, is based on the absurd idea that calling gold a "standard" will insure it against change. among political economists it is a well-recognized principle that neither gold or silver is exempt from the universal application of the law of supply and demand. that law governs gold and silver, not only as commodities, but as money, and governs as well all other kinds of money that may be used. and while the advocate of the single gold standard is at all times ready to concede the truth of this assertion as to silver, he is confident that it does not and can not apply to gold; that the economic law which makes supply and demand a regulator of value is suspended as to gold. that a metallic money, whether of gold or silver, is very far from being stable is admitted by innumerable authorities, of whom i will cite only a few. dr. adam smith, in his "wealth of nations," book , chapter , says: gold and silver, like every other commodity, vary in their value. the discovery of the abundant mines of america reduced in the sixteenth century the value of gold and silver in europe to about a third of what it had been before. this revolution in their value, though perhaps the greatest, is by no means the only one of which history gives some account. and again: increase the scarcity of gold to a certain degree and the smallest bit of it may be more precious than a diamond. john locke, "considerations, etc., in relation to money" (published in ), says: the greater scarcity of money enhances its price and increases the scramble; there being nothing that does supply the want of it; the lessening of its quantity, therefore, always increases its price and makes an equal portion of it exchange for a greater of any other thing. prof. francis a. walker, "money," etc., page , says: gold and silver do, over long periods, undergo great changes of value and become in a high degree deceptive as a measure of the obligation of the debtor of the claim of the creditor. thus professor jevons estimates that the value of gold fell between and , per cent., that from to it rose per cent., while in twenty years after it fell again at least per cent. jevons, "money and exchange," chapter , says: in respect to steadiness of value the metals are probably less satisfactory, regarded as a standard of value, than many other commodities, such as corn. and again, in chapter of the same work, he says: we are too much accustomed to look upon the value of gold as a fixed datum line in commerce; but in reality it is a very variable thing. sir archibald alison (england, in and ), says: the coining of gold and silver, which is universal in all civilised nations, and affixing to them one definite and permanent value by authority of law, has no effect whatever in preventing the fluctuations in the real value of the current coin of the realm. professor laughlin, of harvard, in his work on political economy (page ), says: it is quite evident that the name dollar does not always have the same value, although people often think it does. we get into the habit of using names without thinking what they really mean. the . grains in a gold dollar may be exchanged sometimes for more, sometimes for less, of other commodities. when it is exchanged for less, its value has fallen relatively to all other commodities, and, even if the name dollar remains the same, its value has fallen. one must then offer more dollars than before for the same commodities. that is, when money falls in value, prices rise; when money rises in value, prices fall. now, we shall say a few words in regard to another function, a means of paying long contracts, or debts which run over a long term of years. suppose that i loaned you in , $ , for twenty years. in that year the $ , bought a certain quantity of corn, wheat, sugar, salt, wood, hats, and shoes. in , when you are to pay me back the $ , in money, if prices have changed, you may give me back the same amount of money, but you will not return to me the same purchasing power over other things. if for some reason prices have fallen between and , it will take less money to buy the same quantity as before of corn, wheat, etc. if so, the $ , you return me in will be of more value than the $ , i gave you, and it would be unjust to oblige you to give me more than you borrowed. if, on the other hand, prices have risen, then the $ , in money would buy me less than before, so that i should lose. * * * hence, the value of money (gold or silver) does not remain the same for any length of time; and the precious metals, while they are very satisfactory for exchanges which do not take very long to complete, can not serve as a proper measure of value during a long term or years. ricardo, the greatest authority on the gold standard, the financial writer, more highly regarded throughout the world than any other that has ever appeared in great britain, whose logical utterances have never failed to attract the attention of mankind, stated the true condition of things in , and advocated the true policy for great britain. in his "proposals for an economical and secure currency," ricardo makes the following statement, which i commend to the careful attention of the advocates of the single gold standard: while a standard is used, we are subject to only such a variation in the value of money as the standard itself is subject to; but against such variation there is no possible remedy, and late events have proved that, during periods of war, when gold and silver are used for the payment of large armies distant from home, those variations are much more considerable than has been generally allowed. this admission only proves that gold and silver are not so good a standard as they have been hitherto supposed--that they are themselves subject to greater variations than it is desirable a standard should be subject to. they are, however, the best with which we acquainted. if any other commodity less variable could be found, it might very properly be adopted as the future standard of our money, provided it had all the other qualities which fitted it for that purpose; but while these metals are the standard the currency should conform in value to them, and whenever it does not, and the market price of bullion is above the mint price, the currency is depreciated. this proposition is unanswered and is unanswerable. much inconvenience arises from using two metals as a standard of our money; and it has long been a disputed point whether gold or silver should by law be made the principal or sole standard of money. in favor of gold it may be said, that its greater value under a small bulk eminently qualifies for a standard in an opulent country. and i may here remark that it requires an opulent country to maintain the single gold standard, and the country does maintain it at very great expense. i do not wonder that he thought an opulent country, a creditor country, the only one that ought to adopt it, for no other country can afford to adopt it. but, like many people who in attempting to improve their condition in society attempt luxuries and extravagances which they can not maintain and which force them back into the ranks from which they came, so nations in attempting to establish the gold standard may find themselves reduced from opulence to poverty. ricardo continues: but this very quality subjects to greater variations of value during periods of war or extensive commercial discredit, when it is often collected and hoarded, and may be urged as an argument against its use. the only objection to the use of silver as the standard is its bulk, which renders it unfit for the large payments required in a wealthy country; but this objection is entirely removed by the substituting of paper money as the general circulation medium of the country. silver, too, is much more steady in its value in consequence of its demand and supply being more regular; and, as all foreign countries regulate the value of their money by the value of silver, there can be no doubt that on the whole silver is preferable to gold as a standard, and should be permanently adopted for that purpose. innumerable additional citations from authors of repute could be adduced to fortify this position. it will thus be seen that the fluctuations in the value or purchasing power of both gold and silver have always been admitted by scientific writers. they were so well understood three centuries ago that in queen elizabeth's reign ( ) the british parliament directed that the rents reserved in the long leases of certain college lands should be payable, not in money, but in wheat. and at various times during the past seventy years propositions have been formulated to substitute for gold and silver as a standard of value for deferred payments, a tabular statement of the prices of the principal articles of commerce, to be made by official authority and published from time to time, by the average of which the fluctuations of gold could be ascertained and proper allowance made for them in the settlement of time transactions. professor jevons, prof. francis a. walker, and other political economists of note have expressed approval of such a tabular standard for long-time contracts, as securing greater equity than would gold as a measure of values. those who now assert that silver has fallen and that gold has not risen in value arrive at this conclusion by a very safe process of reasoning. first, to show that silver has fallen they measure it by gold alone, without reference to the general range of prices; and then to prove that gold has not risen they make it the measure of itself. an increase or decrease of the value of either can not be ascertained by reference to the other, and certainly not by constituting either of them a standard by which to judge itself. it would of course be forever impossible to show any change in the value of gold or silver, or of anything else, measuring it by itself. it is only by looking at the relations which both metals bear respectively to a considerable range of commodities generally dealt in as well as to each other, that it can be ascertained with certainty what has happened. not only upon consideration of all the facts i have given, but upon the logic of the situation, it must be obvious that gold has risen and will continue to rise in value as long as its volume decreases and the demand for it increases. since , when per cent. of the combined yield of the two metals, it has diminished not only in relative proportion to the yield of silver, but it has diminished absolutely. for the five years ending with the yield of gold throughout the world was $ , , a year; for the five years ending the yield was but $ , , a year. if, as claimed by the advocates of the single gold standard, an increase in the yield of silver decreases the value of silver, by what system of logic can they deny that a decrease in the supply of gold increases the value of gold? in a late issue of the london economist, that of april , , i find an editorial article relating to the recent discussion on bimetallism in the british house of commons. that article comments somewhat sharply on mr. smith's assertion that "a conspiracy had been formed among the financial class in europe and america to get rid of silver as full-valued money in order to increase the value of gold, in which their revenues are paid." in the course of his comments the editor, by "confession and avoidance," admits our whole contention as to the rise of gold and the fall, as a natural consequence, of the prices of commodities. he says: it may not be amiss, however, to point out that the increase in the exchangeable value of gold has been by no means such a gain to the financial class as he in common with many others suppose; for advantage has been very largely taken of it to cut down the return upon the capital which the financial classes have invested. it has favored debt conversion schemes, and it has been one of the influences that have caused the rate of interest in general to decline so decidedly, that, all round, the yield of investments is now very appreciably lower than it was fifteen years ago. the idea that the creditor class have realized unmixed gains and the debtor class have suffered unmitigated losses by the alteration in the purchasing power of gold is thus altogether fallacious. there has in their case, as in all others, been a species of compulsory give and take. each has gained and each has lost something, and now that the process of readjustment has been carried so far it would be unwise to the last degree to unsettle everything again by such legislation as the bimetallists propose. the editor of the economist is to be commended for at least one thing. he does not quibble as to the most important point in the bimetallic controversy. he frankly admits that gold has risen, and does not, as some others do, attribute the fall of prices to improvements in methods of production. he also admits that coincidently with and caused by the rise in gold there has been a great decline in the rates of interest, and, strangely, claims that the debtor is compensated for the rise in the value of money by the ability to convert the debt into one bearing a lower rate of interest, or, as he calls it, resorting to "debt-conversion schemes." he does not inform us how any compensation can be made to the the debtor for the time the debt has been running, as to which it can not be converted, nor for the enhanced amount exacted from the current earnings of labor by the rise in the value of money to pay taxes and the expenses of government, nor for the loss entailed on the debtor whose property is mortgaged on long time, where the holder of the mortgage refuses to convert it into an obligation bearing a lower rate of interest than originally contracted for. he suggests no method by which to make whole those who have lost their property through sheriff's sale by reason of falling prices and the rise in the value of money. neither does he state how long it will be before the next confiscation is to take place, by reason of the continued operation of the cause that produced the first. but he has been frank enough to concede (what is never disputed except when the money question is under discussion) that there has been a rise in the exchangeable value of gold, and conceded its natural sequence, a fall in the rates of interest. improved methods of production. in order to justify their position it becomes necessary for the advocates of continued demonetization of silver to insist that the fall of prices is not due to the rise in the value of gold but to improved methods of production. whatever the cause to which it is to be ascribed, the undoubted fact is that a fall of prices throughout the western world set in concurrently with the reduction of the world's money volume by the demonetization of silver. it was well understood at the time by those who had given consideration to the subject that demonetization alone would effect that result. this is manifest from an article in the london daily news, a paper of exceedingly large circulation, quoted in the journal of the statistical society of england for , page . referring to the adoption of the single gold standard by germany the daily news said: as the annual new supply of gold throughout the world is reckoned at little more than £ , , ($ , , ), and the usual demand for miscellaneous purposes is very large, it follows that, if the german government perseveres in its policy, the strain upon the existing stocks and currencies of gold will be most severe. for a time, at least, unless the annual production of gold should suddenly increase, the money markets of the world are likely to be perturbed by this bullion scarcity, and the fall in the value of gold---- which means the rise in prices that for some time had prevailed; of which so much has been heard, will be checked or reversed. the yield of gold did not "suddenly increase," and the intelligent prophecy of the daily news was fully realized, not merely to the extent of a check to the rising prices; (or, as it is styled by the daily news, a check to the "fall in the value of gold,") but to the extent of an immediate rise in the value of that metal, and a persistent and deplorable fall in the general range of prices. this prophecy that the "fall in the value of gold" would be checked by the demonetization of silver; or, better, reversed by it, was welcome reading to the creditor and income classes of england and of the world. that it was "reversed," and the value of gold appreciated, is as plain as that; one being subtracted from two, there is but one for a remainder. the immediate fall in prices of commodities was the natural, the anticipated, and the deliberately intended result of that movement. but we are now assured that this fall is not due to any monetary cause, but to the greater efficiency of machinery in the production of commodities. no advocate of an increased volume of money denies that in a few departments of manufacture there have since been improvements tending to economize labor and cheapen products; but they emphatically deny and challenge proof that improvements of mere detail in the manufacture of some articles will account for the extraordinary fall of price since that time in almost every product of industry. we are also told that the development of the system of transportation, both by land and sea, have tended to lower the price of commodities to the consumers. i grant it. but we had those improvements before . the inventions made between and , the period of falling prices, were no more important or radical in their effect on industry,--tended no more to cheapen commodities, than did those from to , the period of rising prices. indeed the inventions which preceded were as a whole much greater in scope, more far-reaching in result, and more revolutionary in their effects on industry, than those of the later period. all the great basic improvements had been invented, and had been incorporated with the industrial system of all civilized countries long before , if we except the electric light and the telephone. we have had the steam engine, the cotton gin, and the spinning-jenny since the last century; the railroad and the steam-ship since the ' 's; the telegraph, the mechanical reaper, steam-plow, and other agricultural labor-saving devices since the ' 's; the sewing machine since , and the bessemer process and steel rail since . the forced construction into which their position drives the advocates of the gold standard is well illustrated in a recent number of a magazine of high standing in this country, in which i find the following: but if it be demurred, does not a debt incurred, say, ten years ago require to-day more wheat or iron for its satisfaction than the sum could have bought when first borrowed? certainly, but the wheat or iron represents no more labor now then it did ten years ago, and its increase in quantity stands for the new efficiency which applied science has bestowed on toil. observe how deftly the writer places iron, in the manufacture of which there have admittedly been some improvements, in the same category with wheat, in the production of which the improvements within any recent period have been of the most trifling character. it will be exceedingly difficult to convince the farmers of this country, whose mortgages are eating up the proceeds of their labor, that the enormous decrease in the debt-paying power of their products is made up to them in "the new efficiency which applied science has bestowed on toil." as well might it be maintained that the rise of prices and the concurrent wave of universal prosperity, experienced after , was not due to the increase of the world's money stock from the mines of california and australia, but to some sudden, unaccountable, and complete loss of all improvements theretofore attained in the arts and industries of the world. effect of checks and clearing-houses. but it is said that checks, notes, drafts, bills of exchange, and the facilities afforded by clearing-houses effect such economy in the use of money that it goes farther now than formerly, and that therefore so large a volume of money as was formerly needed is not needed at present. it is sought thus to escape the conclusion that the fall of prices is the result of a shrinkage of the volume of money, or at least to imply that if the money volume has been shrinking the agencies mentioned have served to mitigate, if not entirely to counteract, the effects of such shrinkage. this is in substance to claim that however contracted the money volume of a country may become, the system of checks and clearing-houses--on the principle of the compensating balance--will expand in a proportion directly corresponding to the contraction of the currency; that the greater the reduction of the volume of money in the country the greater the increase in the transactions of the clearing-house. nothing more absurd could be conceived. if this view were correct, it would make no difference whether the amount of money in circulation were large or small; a million dollars would be as efficacious as $ , , , and even one dollar as effective as a million dollars; and if we suppose the last dollar to have disappeared from circulation, then, according to the sweeping and pretentious claims set up for the clearing-house system, we could dispense altogether with the use of money and rely exclusively on checks, drafts, and bills of exchange. that checks and clearing-houses are a great convenience to commerce is not denied. they serve to a certain extent to make more effective the money volume of a country. by the clearing house system of off-setting the demands of the several banks, one against the other, and requiring payment in cash of the balances only, large amounts of loans may remain undisturbed and greater stability of industrial conditions be secured. clearing-houses, however, were not established primarily for the convenience of commerce, but for the profit of bankers. whatever amounts of money are economized by means of those institutions bring compensation, by way of interest, to the banks. we may, therefore, rely upon their being utilized to the utmost under all circumstances. but, however much checks and clearing-houses may economize the use of money, they are no novel devices. they are not some untried and newly-invented instrumentalities. checks have been in use ever since the invention of banks. the clearing-house system was established in this country in . contributing, as it does contribute, to the pecuniary profit of the banks by making possible an economy in the use of invested money, which the banks have loaned out, and on which they are drawing interest, the system has grown with the growth of the business of the country. it will undoubtedly continue to grow, but with no greater acceleration than population and business will warrant. as it has been a part of the banking machinery of the country for nearly forty years, and during that period has been utilized to the utmost, the conditions of its existence and utilization have long since become static conditions. the demands for currency have borne relation to the needs of business, with clearing-house facilities in full sight and operation; and at all seasons, in the adjustment of prices, those facilities have had full force and effect. assuming that at any given period the business of the country were conducted with a given volume of money, _plus_ a certain volume of clearing house exchanges, then, at a later period, an increase of business would demand an increase in the volume of money, _plus_ a proportionate increase in the volume of clearing-house exchanges; having had this system in full and effective use for forty years, it is as absurd to ascribe the _fall_ of prices in the last half of that period to any economy in the use of money effected by the clearing-house system as it would be to ascribe to the same cause the directly opposite effect--the _rise_ of prices--that took place in the first half of the same period. the proof afforded by the fall of interest. if further proof were needed that gold has risen in value, it is, as i maintain, to be found in the coincident fact of a decrease of rates of interest on first-class securities. that decrease has kept even step and pace with the rise in the value of money. the rise in the value of gold, as shown by comparison with large numbers of articles of commerce, has been between and per cent. the rate of interest on gilt-edged securities shows a corresponding decline. but unfortunately for the struggling people of the country, the fall in the rate of interest on farm mortgages and on property remote from money centers has been nothing like so great, nor has it been so great as the fall in the price of agricultural lands, and in the products of labor. i hold, therefore, that a new axiom should be added to the science of political economy; namely, that as the purchasing power of money increases, its income producing power decreases, and in about the same ratio; and conversely, when the purchasing power of money decreases, its income-producing power increases. in other words, when prices rise interest rises; when prices fall interest falls. when money is increasing in volume and decreasing in value, prices rise, and its investment in productive enterprises becomes more profitable, and as a consequence interest rises. when it is decreasing in volume and consequently increasing in value, prices fall, investment in property and productive enterprises become precarious and unprofitable, and, as a consequence, it avoids them, and seeks investment in bonds and gilt-edged securities, aptly termed "money-futures," which for years have been increasing and continue to increase. some thirteen years ago i indulged in a little prophecy concerning the rates of interest. i take no great credit to myself for it, but in --four years after the demonetization of silver--before the rates of interest had materially fallen, and when the same contention was made that is made now, namely, that money was cheap because interest was low, and that the policies of the country were wise because our credit stood on such a high plane, i submitted to congress the report of the monetary commission, from which i quote: money can be borrowed readily only upon such securities as bonds which are based on the unlimited tax-levying power of the government, or upon the bonds and stocks of first-class trunk-lines of railroad corporations, whose freight and fare rates are practically a tax upon the entire population and resources of the regions which they traverse and supply. the competition among capitalists to loan money on these more ample securities has become very keen, and such securities command money at unprecedentedly low rates. these low and lowering rates of interest, instead of denoting financial strength and industrial prosperity, are a gauge of increasing prostration. large accumulations of money in financial centers, instead of being caused by the overflow of a healthful circulation, or even a proof of a sufficient circulation, are unmistakable evidence of a congested condition caused by a decreasing and insufficient circulation. the readiness with which government bonds bearing a very low rate of interest are taken, instead of showing that the credit of the government has improved, is melancholy evidence of the prostrated condition to which industry and trade have been reduced. there need be no haste in refunding the public debt at the rates now proposed and considered low. unless the progress of the commercial world in the policy of contracting money by demonetizing silver is checked, bonds bearing a much lower rate of interest than any yet offered will be gladly accepted by capitalists here and in europe. when the money stock is diminishing and prices are falling, the lender not only receives interest, but finds a profit in the greatly increased value of the principal when it is returned to him. a loan of money made in , if repaid in , would have been repaid with an addition of per cent. in the purchasing power of principal and interest, besides all the interest paid. those who have loaned money to this government since have already received nearly as much in the increased value of their principal as in interest, and all the probabilities are, in respect to the four per cent. thirty-year national bonds now being negotiated, if they are redeemed in gold, that more profit will be made by the augmentation in the value of principal through interest. indeed the signs of the times are, that the bonds of a country possessing the unbounded resources and stable institutions of the united states, payable in gold at the end of thirty years without any interest whatever, would, through the increase of the value of that metal, prove a most profitable investment. all the facts of the situation to-day fully bear out the statements i then made. so determined are the advocates of the single gold standard in defending the wisdom of its maintenance that facts whose existence would at ordinary times be readily admitted, are, during a discussion of the money question, pointedly denied. for example, within the past few weeks we have seen in various eastern newspaper contributions from prominent writers taking direct issue with the advocates of silver as to the prevalence of general distress throughout the country. they declare that there is no such distress, assert that they have looked for it in vain, and derisively inquire where it is. perhaps the best authority i can cite in response to this inquiry is the principal commercial daily journal of the east, the new york journal of commerce, itself one of the most ardent and uncompromising advocates of the gold standard. in an editorial article in its issue of january , , that journal said: failures in business. the public have been startled by the announcement that during the year there were , business failures in the united states, against , in and , in . the estimated liabilities of last year's insolvents were $ , , and the assets were $ , , , against $ , , liabilities and $ , , assets for the failures of the previous year. thus the failures in were more in number and far greater in liabilities than for , and the proportion of assets to the obligations shows that the total insolvency was more disastrous. why in a season of profound peace, with no blighting frosts or withering droughts, and the most abundant yield from the field, forest, and mine so many in business have gone to the wall, no one seems able to answer. many have tried their hand at a solution of the problem, and not one, as far as we can discover, has satisfied even himself with the result of his investigations. has silver fallen? in order to ascertain whether silver really has or has not fallen in value, it is necessary that all the facts be taken into account and the situation looked at from a correct point of view. if a person be seated in a boat that is headed to the stream and wishes to test whether or not he is making headway he must keep in view not the stream, but the shore. the occupant of a railroad car who observes a moving train on a contiguous and parallel track, frequently thinks his own train at a stand-still, when in fact it may be in motion. whenever a rise or fall appears to take place in the price of any one article or commodity, that is to say whenever a difference takes place in the relation which that article bears to money--all other commodities remaining unchanged--such difference must naturally and properly be attributed to changed conditions affecting the commodity, and not to a change in the value of money. but wherever there is a fall in prices throughout the whole range of commodities then it is clear that this change is mainly due to a change in the value of money. such however is the force of education and habit that the masses of the people are slow to suspect any change in the standard by which they have been accustomed to gauge or measure all values. indeed they find it difficult to understand how under any circumstances any change can take place in it. having their eyes fixed on the standard, and on that alone, they naturally attribute to the articles measured, and not to the standard, any difference that may seem to arise in the relation they bear to each other. but the apparent is not always the real. nothing seems more warranted by the evidence of our senses than that the earth is a stationary object, while the sun revolves around it. for thousands of years the world was convinced of the truth of the geocentric theory of the universe, and millions of men have lived and died in the confident belief that this planet was immovably fixed in space, while the sun was a rolling and ever-shifting body. even yet, among the mass of mankind, so ever-present is this impression, derived from ocular demonstration, that in spite of the declarations of science, the world continues in common use the phrases which originally described the process that took place, as men understood it; hence we speak of the "rising" and the "setting" of the sun. in the same way we speak of the rise or fall in the value of commodities, without being particular to note whether the change that has taken place is strictly a change in the value of the article itself or a change in the money with which its value is measured. perhaps i can best illustrate my meaning by an allegory: the battle of the standards. the allegory of the clocks. in an ancient village there once stood a gold clock, which, ever since the invention of clocks had been the measure of time for the people of that village. they were proud of its beauty, its workmanship, its musical stroke, and the unfailing regularity with which it heralded the passing hours. this clock had been endeared to all the inhabitants of the village by the hallowed associations with which it was identified. generation after generation it had called the children from far and wide to attend the village school, its fresh morning peal had set the honest villagers to labor; its noon-day notes had called them to refreshment; its welcome evening chime had summoned them to rest. from time immemorial, on all festive occasions, it had rung out its merry tones to assemble the young people on the green; and on the sabbath it had advertised to all the countryside the hour of worship in the village church. so perfect was its mechanism that it never needed repair. so proud were the people of this wonderful clock that it became the standard for all the country round about, and the time which it kept came to be known as the gold standard of time, which was universally admitted to be correct and unchanging. in the course of time there wandered that way a queer character, a clockmaker, who being fully instructed in the inner workings of time-tellers, and not having inherited the traditions of that village, did not regard this clock with the veneration accorded to it by the natives. to their astonishment he denied that there was really any such thing as a gold standard of time; and in order to prove that the material, gold, did not monopolize all the qualities characteristic of clocks, he placed alongside the gold clock, another clock, of silver, and set both clocks at noon. for a long time the clocks ran along in almost perfect accord, their only disagreement being that of an occasional second or two, and even that disagreement only at rare intervals, such as might naturally occur with the best of clocks. but the council of the village, in their admiration for the gold clock, passed an ordinance requiring that all the weights (the motive power) of the silver clock, except one, be removed from it, and attached to those of the gold clock. instantly the clocks began to fall apart, and one day, as the sun was passing the meridian, the hands of the gold clock were observed to indicate the hour of , while those of the silver clock indicated . . at this everybody in the village ridiculed the silver clock, derided the silver standard, and hurled epithets at the individual who had had the temerity to doubt the infallibility of the gold standard. finally, the divergence between the clocks went so far that it was noon by the gold standard when it was only a. m. by the silver standard, so that those who were guided by the gold standard, not withstanding that it was yet the gray of the morning, insisted on eating their mid-day meal, because the gold standard indicated that it must be noon. and when the sun was high in the heavens, and its light was shining warm and refulgent on the dusty streets of the village, those who observed the gold standard had already eaten supper and were preparing for bed. but this state of things could not last. it was clear that the difference between the standards must be reconciled, or all industry would be disarranged and the village ruined. discussion was rife among the villagers as to the cause of the difference. some said the silver clock had lost time; others that both clocks had lost time, but the silver clock more than the gold; while others again asserted that both clocks had gained time, but that the gold clock had gained more than the silver clock. while this discussion was at its height a philosopher came along and observing the excitement on the subject remarked, "by measuring two things, one against the other, you can never arrive at any determination as to which has changed. instead of disputing as to whether one clock has lost or another gained would it not be well to consult the sun and the stars and ascertain exactly what has happened." some demurred to this because, as they asserted, the gold standard was unchanging and was always right no matter how much it might seem to be wrong; others agreed that the philosopher's advice should be taken. upon consulting the sun and the stars it was discovered that what had happened was that both clocks had gained in time but that the gain of the silver clock had been very slight, while that of the gold clock had been so great as to disturb all industry and destroy all correct sense of time. notwithstanding this demonstration, there were many who adhered to the belief that the gold standard was correct and unchanging, and insisted that what appeared to be its aberrations were not in reality due to any fault of the gold clock, but to some convulsion of nature by which the solar system had been disarranged and the planets made to move irregularly in their orbits. some of the people also remembered having heard at the village inn, from travellers returning from the east, that silver clocks were the standard of time in india and other barbarous countries, while in countries of a more advanced civilization gold clocks were the standard. they therefore feared that the use of the silver clock might have the effect of degrading the civilization of the village by placing it alongside india and other barbarous countries. and although the great mass of the people really believed, from the demonstration made, that the silver standard of time was the better one, yet this objection was so momentous that they were puzzled what course to pursue, and at last advices were consulting the manufacturers of gold clocks as to what was best to be done. now our gold standard men are in the position of those who first refuse to look at anything beyond the two things, gold and silver, to see what has happened, and who, when it is finally demonstrated that all other things retain their former relations to silver, still persist that the law which makes gold an unchanging standard of measure is more immutable than that which holds the stars in their courses. if they will compare gold and silver with commodities in general, to see how the metals have maintained their relations, not to one another but to all other things, they will find that instead of a fall having taken place in the value of silver, the change that has really taken place is a rise in the value of both gold and silver, the rise in silver being relatively slight while that of gold has been ruinously great. and those who do not shut their eyes to the truth must see that the change of relation between the metals has been effected by depriving silver of its legal-tender function, as the want of accord between the clocks was brought about by depriving the silver clock of a portion of its motive power--the weights. the only thing that has prevented a greater divergency between the metals is the limited coinage by the united states--the single weight that, withheld from the gold clock, prevented its more ruinous gain. the purchasing power of silver in and . if i can show that for a period of seventeen years, since its demonetization in , silver has lost none of its purchasing power, none of its command over commodities; that is to say, if i can show that - / grains of silver to-day, uncoined, and shorn by hostile legislation of its principal element of value--the money use--will buy as much as would - / grains of silver in (when our silver dollar bore a premium over gold) of all the articles that enter into the daily consumption of the people, it must be manifest that silver has not fallen in value. i present a table which i shall ask to have inserted in the record as part of my remarks, showing the purchasing power of - / grains of silver, nine-tenths fine, in and , respectively, so far as concerns several leading articles of daily consumption. the table is as follows: _comparative purchasing power of - / grains silver, nine-tenths fine, in and , respectively._ -----------------------------------+-------+------- - / grains silver would buy-- | . | . -----------------------------------+-------+------- wheat bushels | . | . corn do | . | . cotton pounds | . | . beef, mess barrels | . | . pork, mess do | . | . lard pounds | . | . butter do | . | . cheese do | . | . sugar do | . | . eggs dozen | . | . -----------------------------------+-------+------- from this table it conclusively appears that while in the standard silver dollar of - / grains, which then bore a premium over the gold dollar, would purchase four-fifths of a bushel of wheat; to-day the same quantity of silver, without the advantage of coinage and merely as bullion, will also buy four-fifths of a bushel of wheat--the only difference between the figures for the two years being that at the present time - / grains of silver bullion, as will be seen by the table, will buy a fraction of a bushel more than would - / grains of coined silver in . if, then, silver has fallen, it is manifestly not in its relation to wheat. by the same table it is shown that the silver dollar of , containing - / grains of silver, nine-tenths fine, would purchase one and eight-tenths bushels of corn; in , a like number of grains of silver, uncoined and estimated at its gold value, will purchase one and nine-tenths bushels of corn. here again the advantage is slightly in favor of the - / grains of silver bullion of . this shows conclusively that silver has not fallen in its relation to corn. the figures of the same table show that in a coined silver dollar of - / grains would buy - / pounds of cotton; to-day - / grains of uncoined silver will buy - / pounds of cotton. from this it appears that silver has not fallen relatively to cotton, the great staple of universal use, but that, on the contrary, it has advanced somewhat in its purchasing power when compared with that article. in order to present the question from another point of view i submit another table showing the number of grains of silver that are required in and the number which were required in to buy a bushel of wheat, a bushel of corn, &c., by which it will even more clearly appear that silver has not fallen in value in respect to commodities. _comparative purchasing power of silver bullion, in grains nine-tenths fine, in and , respectively._ ----------------------------+-----------+----------- | . | . articles. | legal | commodity. | tender. | ----------------------------+-----------+----------- | _grains | _grains | silver._ | silver._ wheat per bushel | . | corn do | . | . cotton per pound | . | . beef, mess per barrel | , . | , pork, mess do | , . | , lard per pound | . | . butter do | . | . cheese do | . | . sugar, refined do | . | . eggs per dozen | . | . ----------------------------+-----------+----------- from this table it will be seen that in it required grains of standard silver, in the form of coined dollars, to buy one bushel of wheat; in , only grains of standard silver (and that merely in bullion form, or in other words, at its market value) are required to buy a bushel of wheat. this does not show that silver has fallen in value, in its relation to wheat, but, on the contrary, that it has risen in value. in it required grains of silver to buy a bushel of corn; to-day only grains of silver are required to buy the same quantity. these figures fail to prove that silver has fallen in value, in its relation to corn. on the contrary, again, it has risen. in a pound of cotton could not be had for less than - / grains of silver; to-day the same pound of cotton can be bought for grains of silver. silver, therefore, has not fallen, but risen in value in its relation to cotton. in grains of silver were required to buy one dozen eggs; to-day only grains of silver are required to buy the same quantity of eggs. silver therefore has not fallen but risen in value, in its relation to eggs. these comparisons might be continued with the same results as to a great majority of the articles entering into general use. these figures demonstrate that in its relation to all commodities that enter into the daily consumption, silver has not fallen in value, but, as is clearly seen, while holding a remarkably steady ratio to commodities, has slightly increased in value, as is shown by the fact that a less number of grains of the metal are to-day required to purchase the same quantity of the commodities mentioned than were required in . in relation to what, then, is it that silver has fallen? as it has not fallen in relation to commodities, there remains but one thing in relation to which it can be said to have fallen, and that one thing is gold. the phrase "the fall of silver" is the ingenious and cunning invention by which it is sought to cast on that metal the discredit of depreciation rather than subject gold to the suspicion of any change whatever. the term to correctly describe what has taken place would be "the rise of gold;" but that term is scrupulously avoided, as implying that gold does not remain immovably fixed. that gold has risen, however, admits of no doubt, except to those who willfully shut their eyes to facts of common observation. the true test of the increasing or decreasing value of any one thing is not to compare it with any other one thing, but with a large range of commodities generally dealt in. it is not of so much importance to know how much gold can be bought with a given amount of silver, as it is to know how much bread, how much meat, and how much clothing can be bought, and how much of all the things that are necessary to the comfort and well-being of the people can be bought with that amount of silver. proof that gold has risen. in order to demonstrate that gold has risen, i will bring side by side the gold prices of a number of leading commodities of commerce in and , respectively, and the amount in silver bullion that in would purchase an equal quantity of the same commodities, by a table prepared at my request by the bureau of statistics of the treasury department. _average export prices of the following named domestic commodities for the years ending june , and ._ -------------------+----------+--------------------------------------- | | average price of the year ending | | june -- | +--------------------+------------------ commodities. | unit of | . | . | quantity.+-----------+--------+--------+--------- | | | | | in | | in | in | in | silver | | currency. | gold. | gold. | bullion. -------------------+----------+-----------+--------+--------+--------- bacon and hams | pounds | $ . | $ . | $ . | $ . butter | do | . | . | . | . cheese | do | . | . | . | . corn | bushels | . | . | . | . cotton: | | | | | unmanufactured, | pounds | . | . | . | . not sea island | | | | | cloth, colored | yards | . | . | . | . cloth, uncolored | do | . | . | . | . iron and steel: | | | | | bar-iron | cwt | . | . | . | . pig-iron | do | . | . | . | . railroad-bars | do | . | . | . | . lard | pounds | . | . | . | . leather | do | . | . | . | . rice | do | . | . | . | . sugar: | | | | | brown | pounds | . | . | . | . refined | do | . | . | . | . wheat | bushels | . | . | . | . wheat-flour | barrels | . | . | . | . -------------------+----------+-----------+--------+--------+--------- what does an examination of this table show? it shows beyond dispute that gold has risen in value. a bushel of wheat that, according to the figures of the bureau of statistics cost $ . in gold or silver in , and which, as will be seen by the table, still commands $ . in silver bullion, will to-day bring only cents in gold. a pound of cotton that in cost the purchaser, in gold or silver, cents, and which still commands cents in silver bullion, will bring only cents in gold. a pound of cheese that in cost the purchaser - / cents in gold or silver, and which now brings cents in silver bullion, will bring only cents in gold. a barrel of flour which in cost the purchaser $ . in gold or silver, and which to-day commands $ . in silver bullion, will bring but $ . in gold. a pound of butter that in brought . cents in gold or silver, and now commands . cents in silver bullion, will bring but . cents in gold. notwithstanding that - / grains of uncoined silver will to-day buy as much of the leading articles of commerce as the coined gold dollar would buy in , yet the advocates of the gold standard characterize it as a -cent dollar. then the gold dollar of was a -cent dollar. if the gold dollar of to-day be an honest and equitable dollar, that of , which was worth much less, was a swindling and dishonest one; and if gold continues to advance as it has been advancing, and with the declining output of that metal there is no reason why it should not, it will be but a short time before any other kind of dollar whose value may be equal to that of the present gold dollar will be stigmatized as a swindling -cent dollar. there never was a dollar coined that did not legally and practically contain cents. but the creditors stigmatize a dollar of the value of the gold and silver dollar of as a -cent dollar. may not the debtors, with much more propriety, denounce the gold dollar of to-day as a -cent dollar? according to the admissions of the royal commission of england, the gold dollar of to-day is to the producers of this country, measured by their products, already at a premium of between and per cent. over the gold dollar of . the advocates of the gold standard have no sympathy with our farmers and manufacturers who have to pay, in commodities, a premium of to per cent. on gold, to meet their engagements, but express extreme anxiety at the bare possibility that a few importers might have to pay even a small premium in any form. they insist that the money system of a population of , , , shall, like an inverted pyramid, be made to rest upon its apex in order to enable a few importers, most of whom are residents of foreign countries, to make their payments abroad in gold. verily, mr. president, the single gold standard is an expensive luxury for our people to maintain. those who deride silver as a money-metal indulge in feeble attempts at sarcasm by inquiring why we do not advocate the use of tin and brass as money. they speak and write as though the idea of using silver as money were a recent discovery or invention of people engaged in silver mining. they also ignore the fact that the standard silver dollar of the united states, which, with much satisfaction, they stigmatize as a -cent dollar, requires a gold dollar to obtain it. it is worth a gold dollar in london, in berlin, in vienna, in saint petersburg, in madrid, in havana, and in all countries having commercial relations with the united states. it can at once be exchanged into the money of any country with only the slight deduction of cost of shipment to this country--as is the case in the united states with notes of the bank of england, which are redeemable in gold. our silver dollar is not money in foreign countries--and it is to our advantage that it is not--for were it money anywhere else than in this country, we could not rely on its remaining here to maintain that steadiness of prices indispensable to prosperity. but if any of our silver dollars are found abroad, let no one suppose he can get them by tendering - / grains of silver bullion for each dollar. he will find it will cost him precisely as much gold as it passes for in the united states. some effects of the rise of gold. if a cotton planter in owed $ , he could then have paid it with , pounds of cotton. to-day, by reason of the increased command which gold has over commodities, it would take , pounds of cotton to pay that $ , ; not withstanding that the money in which the debtor has paid the interest has each year become more valuable than it was at the time he contracted to pay it. the cotton manufacturer of the east who in owed $ , could then have paid it with , yards of uncolored cotton cloth; to-day owing to the rise in the value of gold it would require , yards to pay that debt, without taking into account the amount lost by the debtor in the greater sacrifice he had year by year to make to pay the interest. the farmer of the north and west who in owed $ , could then have paid it with , bushels of wheat; to-day it would require , bushels of wheat to liquidate that debt, though he, too, has year by year been "cinched" through the progressive increase in the value of the money in which the interest has been paid. or he could, in , have paid his debt with , barrels of flour; to-day it would take , barrels of flour to pay the same debt. the property of the country is fast passing into the hands of the creditors, and if the iniquitous system is not reversed the condition of our american farmers will be that of the farmers of gold-standard countries. instead of owning their farms they will be tenants and rent-payers--a condition but little in advance of that which prevailed in feudal days. machiavelli, describing a turbulent period in the history of florence, said: the people perished, but the brigands throve. the brigandage of the middle ages, whether in italy or elsewhere, was a criminal defiance of law, but it was pursued at some risk, and under manifest disadvantages. the brigand took his life in his hands. he knew that his calling was unlawful; and, although ruthless in his work, the method by which he exacted ransom of his occasional victim was less destructive to the prosperity of the community than the legalized brigandage of to-day by which, through a vicious system of money, the great mass of the people are despoiled of their property. the distinguishing characteristic of the brigandage of the nineteenth century is that it scrupulously observes all legal forms, and is conducted in the name of honor, honesty, good morals and "sound finance." mortgages are foreclosed only in accordance with law, and the unearned increment which results from the increased and increasing value of the money is transferred from the debtor to the creditor, with punctilious regard for the statutes. the demands of the brigand were enforced with guns and pistols; those of the creditor are enforced with bonds and mortgages; both exactions cruel and unjust, one by violence, the other by law. but, in the latter case, so indirect is the method of operation that many of those who are benefited by it are unaware of the perpetration of any wrong. so subtle is the process that the change seems to be only a change in the price of commodities, and thousands of men who would scorn consciously to exact from any one more than a just return for money loaned are beneficiaries of this vicious and ruinous system. with regard to the great body of the working masses it is sometimes said they have no cause for complaint, that their condition now is better than ever before. but, mr. president, it is not enough that men are better off than they have been. when we reflect that nine-tenths of the inventions and improvements constituting all the material features of the civilization of this century have been made by working men, it is manifest that they are entitled to much more of the comforts and convenience of life than are now accessible to them. by watchful, repeated, and aggressive efforts through their trade organizations, the working men in many branches have been enabled to keep wages from sinking, and occasionally to secure an advance; but, during a period of falling prices, what is gained in this way by those who are kept at work is lost to the working class as a whole by the remission to idleness of part of their number. the statisticians who seem to be employed by some propaganda to prove by figures that prosperity prevails, point exultantly to the fact that the wages of the working people seem constantly to have increased while prices are falling, and they cite this to prove that low prices are consistent with prosperity. they leave entirely out of the account the large numbers of workmen who of necessity are relegated to idleness on account of the lack of profit in business. if you go into the workshops of any large manufacturing enterprise, while prices are low and lowering, and ask the managers what they now do when a strike occurs among the workmen, they will tell you they find it impossible to shut down, because they have contracts extending through time that they must fill, but, they add, "we pay the wages demanded and we reduce the number of the employed." if there are a thousand workmen employed, getting $ each per day, that would be a wage fund of $ , a day. if, when prices fall and business becomes dull, the employer should want to reduce the pay of each workman to $ . a day, and if the workmen, by striking, should prevent that decrease, and if, then, per cent. of their number should be discharged, the loss to the working class, as a body, and to the community at large, would be the same as though the wages were reduced to $ . a day. until these people who present statistics can show us how many laborers are left out of employment there is no possibility of arriving at any correct conclusion as to what the wage fund is and how much wages are paid. the loss to society is much greater when per cent. of the people are unemployed than if all continued at work upon a per cent. reduction of wages, because the relegation to idleness of per cent. of the workmen reduces the producing force, and lessens correspondingly the aggregate annual production. the interest of the mining states in the remonetization of silver. those who in the senate and in the other house of congress, represent mining constituencies are taunted with the selfish purpose of advancing the interests of their own states at the expense of those of the country. it is sought to discredit the state which i have the honor in part to represent on this floor, on the ground that the people, being largely silver miners, have a personal interest in the remonetization of silver. the silver miners, mr. president, need no defense here or elsewhere. they have asked no favors from the government, and ask none now. they are bold, adventurous, and self-reliant men, who have wandered across alkaline deserts, and over pathless mountains, braved the assaults of hostile savages, the miasma of the isthmus and the storms of the cape, and have planted the flag of a high civilization on the western confines of this republic. no more patriotic or public-spirited class of citizens can be found within the borders of the union. their business is an honorable one. when they entered upon it they, in common with other citizens, had the warrant of time, and the authority of all writers and thinkers on political economy, for the belief that silver was, and would ever be, a money metal, entitled to that full credit which from time immemorial had been accorded to it. silver, equally with gold, had been consecrated by all the ages to the money use, and was dedicated to such use by the constitution of the united states. when the constitution declared that congress should have power "to coin money and regulate the value thereof" and that "no state shall * * * make anything but gold and silver coin a tender in payment of debts," it warranted the belief on the part of all who adopted the calling and undertook the business of mining, that gold and silver would continue to be money metals in the sense in which they had been for thousands of years in the past. the silver miners were warranted in presuming that when the constitution esteemed so highly the legal-tender function in the two metals, gold and silver, as that it prohibited the states from making anything a legal tender except coin of those two metals, it would not warrant the congress of the united states in taking from one of those metals the power of legal tender and conferring that imperial function exclusively on the other. silver mining is a business requiring for its successful prosecution skill, experience, and energy, while nine-tenths of the gold of the world has come from placers; requiring neither organization, capital, nor skilled labor. the production of gold is much more a matter of accident and much more liable to fluctuation than is the case with silver. the silver miners therefore had a right to believe that so long as . grains of pure gold should be entitled to recognition as one dollar, . grains of pure silver would continue to be entitled to like recognition as one dollar, and would possess the legal-tender function as such, for the liquidation of all debts, public and private. on the strength of this warranty of the constitution, and of the unbroken experience of the ages, large sums of money were invested in mining property and in the employment of labor to develop the mines of the country. on the strength of this belief and conviction, shared in by all the people of the united states, that gold and silver would both remain the money metals of the world, debts to an enormous extent were incurred, and it was confidently believed that both metals would for all time be available for the payment of those debts. the silver-miners had learned from the history of mining, as well as from hard and bitter experience, that the mines might at any moment cease to yield, in which case their occupation would be gone and the capital invested would be a total loss. but they did not suppose that the verdict of all time would be reversed, or that the implied warranty of the constitution of the united states would be disregarded. they did not believe that either one of the money metals would ever be demonetized. and if a doubt had entered their minds on that subject, they would naturally suppose that gold rather than silver would be demonetized, gold being too limited in quantity to answer alone the purposes of money in a rapidly advancing civilization; its yield being uncertain and capricious and the prospect of a continued and sufficient supply becoming less from year to year. but, mr. president, the degree of special interest which the mining states have in this measure is not to be compared with that of the other states of the union. according to the report of the director of the mint, the total quantity of silver produced in the united states in the eleven years from to inclusive was , , fine ounces. according to the same authority the commercial value of that silver was $ , , , and the coinage value $ , , . a very simple process of arithmetic shows that the difference between the commercial and the coinage value of that silver was $ , , , or an average of $ , , each year. assuming that amount to have been the annual difference between the coinage and commercial value of silver for the five years preceding , we must add to the $ , , the sum of $ , , , making a total of $ , , as the amount which the silver miners, not of nevada but of the whole united states in the seventeen years ending , lost by the demonetization of silver. having thus demonstrated in dollars and cents the degree of selfishness which, as is charged, is the motive of the miners in advocating the remonetization of silver, let us glance at the degree of selfishness which may be said to impel other classes of the community to advocate the same cause. the interest of the non-mining states in remonetization. the price of cotton for the year , in gold or silver (then of equal power), was . cents per pound. the price in was . cents. the yield of cotton for was , , bales, or , , , pounds. had not silver been demonetized that cotton would have brought as good a price to-day as it did in . at the price of the account would have stood , , , pounds, at . cents, $ , , . at the price of the account stands , , , pounds, at . cents, $ , , , showing a loss in debt-paying and tax-paying power on cotton alone (only one article of merchandise) in the single year , by reason of the fall in prices caused by the demonetization of silver, of $ , , . having shown that the loss to the silver miners by the discount on silver for the seventeen years from to was less than $ , , , it will be seen that the loss in one single year to the cotton planters of the united states is greater by $ , , than the total loss for the entire seventeen years to the silver miners of the country. but inasmuch as the cotton crop of was exceptionally large, i will, for the purpose of my computation, discard it, and assume instead that an average yield for the years between and would be , , bales per annum--which is a fair average and by no means high-- , , bales, of pounds each, are equal to , , , pounds. at the price of the result of each year would be , , , pounds, at . cents, $ , , . according to the figures given by the bureau of statistics the average price received each year of the seventeen was . cents per pound; , , , pounds, at . cents per pound, equal $ , , , showing a difference of $ , , ; that being the average each separate year for seventeen years, or a total sum for the entire period of $ , , , , which represents the loss in debt- and tax-paying power suffered by the cotton planters by reason of the demonetization of silver. this is the enormous tribute which has been exacted of the cotton industry of this country in behalf of the gold "standard," and of those who, for their own pecuniary advantage, cunningly induced the congress of the united states to demonetize silver. this is the sum which the planters of this country have lost in debt-paying and tax-paying power by that mad act of folly. as will be seen at a glance, it is a loss vastly in excess of that suffered by the silver states in the discount on the price of silver bullion. so that, if the silver miners are taunted with having a personal interest in the success of the movement for the full remonetization of silver, the cotton planter must be placed in the same category, and with ten-fold more reason. a like computation with regard to wheat will show a loss in debt-paying and tax-paying power of not less than $ , , a year to the farmers of the north and west, by reason of the demonetization of silver--a total of $ , , , in the article of wheat alone in seventeen years. thus a loss, wholly unnecessary, of more than $ , , , in debt-paying and tax-paying power is shown to have been inflicted on the farmers and cotton planters of this country. in comparison with this enormous loss to farmers and planters, how paltry is the loss of $ , , a year suffered by the silver miners. but, however large the direct loss to the debtors and to the country by reason of falling prices, the losses that are indirect are of infinitely greater magnitude, and stand out like a great mountain of wrong superimposed upon the most deserving class in the community, whose interests it should be the paramount duty of government to protect, a wrong more calamitous in its consequences than any of the multitudinous wrongs which a shrinking volume of money inflicts upon society. the enormous loss of potential wealth through involuntary idleness. the political economist, mr. president, deals with property _in esse_, and producers employed. i propose for a moment to deal with property _in posse_ and producers unemployed. the wealth which the political economist discusses is realized wealth; that to which i now briefly invite your serious consideration is the wealth that might be, and would be, brought into existence were the energies of all the people utilized. for, while it has attracted but little attention from writers on economic science, it will be found upon examination that the non-employment of its members is incomparably the greatest loss which an increase in the value of money and the consequent disorganization of industry inflicts on society. the great writers and thinkers on economic subjects discuss with care the elements that enter into the production and distribution of wealth. they follow in detail the manufactured article through all its stages, from the crude material to the finished product; and, when completed, they conduct it through the intricate channels by which it reaches the hands of the consumer. the greatest consideration is bestowed upon the labor employed and the wealth resulting therefrom, but scarcely any thought is given to the immeasurable mass of potential wealth not produced, but lying latent in the brains and hands of the millions who are condemned to involuntary idleness. while no mere sum in arithmetic can represent the enormous loss suffered by a nation through this cause, let us see whether we can arrive by figures at an approximate conception, at least, of the loss of wages which it entails upon the working masses, and the corresponding loss of wealth to the country. the most thorough and painstaking investigation into the conditions of labor in this country has been that which for many years has been conducted by the massachusetts bureau of labor. its work has been universally admitted to be free from bias, and devoid of all attempt to establish any special hobby, or to force, by figures, the proof of any preconceived theory. some statistics of the unemployed. an examination of the work of that bureau shows that, in , there were , persons engaged in wage earning in the state of massachusetts. of those, , , or nearly per cent., were idle during some part of the year--ranging from one to six or more months. the average of their unemployed time was about four months, or one-third of the year. now, , people idle for one-third of their whole time is equivalent, in money loss, to the total idleness of one-third of that number, or , people, for the entire year. the whole number of persons enrolled for labor in the state being , , this is equivalent to the total idleness of one-tenth of the people engaged in all occupations. if a number equivalent to one-tenth of the people in all occupations are idle twelve months in the year in a state like massachusetts, where labor is better organized, better classified, and more efficiently ordered than elsewhere in this country, it can not be presumed that any other state of the union will exhibit a smaller proportion of unemployed laborers. the census report of states the number of persons employed in all occupations as , , , out of a population of , , , or a percentage of . of the entire population. our present population being not less than , , , if we assume, as we are warranted in doing, that a like proportion of the population is engaged in occupations of all sorts, it is clear that we have to-day a working population of , , persons. accepting as correct the careful deductions from the reports of the massachusetts bureau of labor that a number equivalent to ten per cent. of the people are always out of employment we find that at the present time there are , , persons involuntarily idle in this country. how faintly does the term "the army of the unemployed" describe this vast number of eager and willing men seeking in vain the opportunity to earn a livelihood for themselves and families. were the business of the country in the active condition in which it could not avoid being if our money system were perfectly adjusted to industry, and if employers were competing for laborers with the same degree of eagerness that laborers are competing for employment, the average wage of a day for a working man would not be less than $ . this would make but the moderate sum of $ a month for each workman, which, under the most thrifty system of household economy, can not be considered more than enough for the support of an american family. the wage loss from involuntary idleness. by multiplying the number of persons thus shown to be idle, by this moderate average wage, we arrive at the amount of $ , , as the daily sum which is lost to the wage earners of the united states by the non-employment of labor. this is a money loss of $ , , a week, $ , , a month, or the amazing sum of $ , , , a year. a saving of this sum for a year and three months would pay our entire national debt. this being the loss in a single year, we can imagine (making due allowance for difference in the numbers of the population) how stupendous has been the loss to the nation during the past seventeen years, a loss exceeding incomparably all other losses whatsoever. if a crop of wheat be lost, it is appropriately noted as a public misfortune; if a city be burned down, or swept away by flood, it is properly regarded as a great national calamity, and the sympathies of all the people go out in unstinted measure to the sufferers. but here is a loss as real and as deplorable as any ever caused by flood or fire--a loss whose consequences, while not so apparent, are as destructive to national prosperity as the burning of ten cities, or the occurrence of one hundred and forty johnstown disasters every year, and always to the people who can least afford it. yet it passes almost wholly unheeded except by the sufferers. a war that would take a million of men from industry and deprive the country of the production which would result from their labors, would be regarded as a calamity of unsurpassable magnitude, yet a shrinkage in the volume of money relatively to population withdraws much more than that number from productive pursuits, and without the salutary discipline and restraints of military life, subjects them to conditions of which the unavoidable results are poverty and crime. imagine, mr. president, the unhappiness, discontent, and even despair implied in the mere statement that , , men are constantly out of employment; (or, what amounts to the same thing, that three times that number are idle for four months in the year!) imagine, what it means to the working people of this country to be deprived of the enormous sum of $ , , , a year. but, aside from the effect on the individual, what benumbing consequences are entailed upon the nation by the idleness of so large a number of its people. the loss of the wealth which the labor of those men might have created is a loss never to be retrieved. when the money volume of a country is sufficient to keep prices from falling, and thus to encourage capital to seek productive enterprises, in which labor is employed, every willing man is kept at work, and no country can enjoy any higher degree of prosperity than when all its people are employed, and the products of their labor equitably distributed. much, i believe, of the prejudice against silver money arises from an idea, conscientiously entertained, by many, that gold money has the greater "intrinsic value." i shall, therefore, mr. president, at the risk of being a little abstruse, discuss that point. the meaning of value. no discussion of the subject of money can be intelligently conducted without a correct conception of the meanings attaching to the terms employed. for a misconception of those meanings is the root of much of the confusion and difficulty by which the subject is surrounded. "value" is a word which, of necessity, is more frequently used--and, i will add, more frequently misused and misunderstood--than any other employed in the discussion of economic science. volumes have been written upon it, and yet, from the daily misapplication of the word in leading magazines and newspapers, it is evident that its meaning is very imperfectly understood. the idea involved in the word "value" is so broad and pervasive that within the limits of a speech it would be impossible to discuss it in all its bearings. i shall not, therefore, at this time, do more than present what i conceive to be a basic definition of it. value is human estimation placed upon desirable objects whose quantity is limited, and whose acquisition involves sacrifice. in order that an object may have value it must not only be the subject of human desire, but there must be a limitation of its quantity, and its acquisition must demand a sacrifice from him who would obtain it. the term "intrinsic value" is used by many writers with a total disregard of the idea involved in the word _value_. an article may have estimable qualities that are intrinsic, but no article whatever can have intrinsic value. its "value" is the mental estimation of its qualities, as modified by the limitations of its quantity and the amount of sacrifice necessary to obtain it. in other words, value is subjective, not objective. in economic discussion, however, value is treated as though it resided in the object, rather than in the mind, and while, for convenience, i may occasionally use it in that sense, it is important to bear in mind the distinction. in that acceptation, value is usually divided into value-in-use, and value-in-exchange. certain esteemed qualities of an object may make it of great value-in-use; but unless its acquisition demand sacrifice, it can have no value-in-exchange. it is only with this class of value that economists deal. no matter how important the intrinsic qualities of any article may be, if there be no limitation of its quantity and its acquisition requires no sacrifice, it can have no value in the sense in which the word "value" is used in political economy. the air has qualities inestimable to mankind; it must be regarded as incomparably the most useful of all the objects of human desire; yet it has no value because there is no limitation of its quantity. by reason of its universality and accessibility, air requires no sacrifice to get it. if, however, circumstances should render air limited in quantity it is conceivable that it might become of surpassing value. a man confined in the "black hole" of calcutta would give a fortune for free access to air. so water, where freely obtainable, without sacrifice, although indispensable to life, has no value in the economic sense--no value in exchange. but when not so obtainable, as in populous cities, where sacrifice of time and labor would be necessary to obtain it from river, lake, or spring, people pay for the convenience of having it in their homes. the indispensable prerequisites of value in all objects are utility--either actual or attributed--combined with limitation of quantity and the sacrifice necessary to be made in order to obtain it. but value is not a property inhering in any article itself. it is not intrinsic. if the value were inherent or intrinsic it could not be taken away. to illustrate: a generation ago the cradle with which wheat was harvested was said to possess intrinsic value. it was undoubtedly one of the most useful of all the articles needed by man. all that was then in that machine is in it still, yet the value is gone. had the value been something that was intrinsic, had it resided in the object, and not in the mind, that cradle would still be worth all that it ever was. so, on the other hand, an article may possess most estimable qualities, but if those qualities are not known or recognized by the human mind the article will have no value. a few years ago cotton seed had no value as an article of general commerce. to-day it is exceedingly valuable, because it has been found to possess estimable qualities not before suspected. indeed so strongly does the idea of value rest upon the estimation of the mind that it is not even necessary for an article to possess in reality any desirable quality whatever in order to have value. it will be sufficient if such quality is popularly attributed to it. numbers of instances could be cited in which there was present no element of value except limitation of quantity, added to a mere belief, or conception of the mind, that the article had desirable qualities. many will remember that a few years ago a herb called "cundurango" was introduced into this country from central america. it was generally believed to possess healing qualities in cases of cancer, and so came to have great value. as soon as this popular illusion was dispelled the article ceased to have even the slightest value. land being indestructible and irremovable, is believed to be the embodiment of the idea of intrinsic value. take, then, a lot on madison avenue, new york; it is worth perhaps a thousand times as much as a lot of equal size in a village remote from the city. what proportion of its high price is derived from what is called its greater "intrinsic" value? a lot on that fashionable thoroughfare has no intrinsic attribute, or quality, that is not equally the attribute or quality of the village lot. the difference in its value, or, more correctly, the difference in the estimation in which it is held, as compared with that attaching to the village lot, is derived wholly from circumstances that are extrinsic, not from qualities that are intrinsic. the action of society in utilizing land in the neighborhood of the city lot by building up around it gives that lot a value greater than one of equal size elsewhere. but in order that a thing may subserve a useful or beneficent purpose it is not necessary that the quality which enables it to subserve that purpose should be intrinsic or inherent in the thing itself. to apply this reasoning to the subject under discussion--whatever intrinsic qualities the metal, gold, may possess, they confer no force whatever on gold-money. what is money? the money of a country is that thing, whatever it may be, which is commonly accepted in exchange for labor or property and in payment of debts, whether so accepted by force of law, or by universal consent. its value does not arise from the intrinsic qualities which the material of which it is made may possess, but depends entirely on the extrinsic qualities which law, or general consent, may confer. money is of transcendent importance to civilization. it is the physical agency to which society has assigned the function of measuring all equities, and it is the sole agency upon which that incomparable function has been conferred. it is in terms of money that society computes the material value of all human sacrifice, alike the highest effort of genius and the daily toil and sweat of the millions who labor. in order to measure equitably the natural and inevitable mutations in the value of other things, money should itself be of unchanging value. that is to say, any given amount of money should, so far as human foresight can regulate it, require at all times an equal amount of sacrifice for its acquisition. thus, in the case of a contract made to-day, requiring the payment of a dollar twelve months hence, that dollar when due should exact from the debtor precisely that amount of sacrifice, and no more, which would be required had he paid the debt the day after contracting it. no one will deny that the most important quality that money can possess is that it shall truthfully measure and state equities. as i have shown by the figures heretofore cited, gold has risen in value between and per cent. since the demonetization of silver. it is not therefore so faithful a measure of value as is silver, which as illustrated by a variety of examples, has maintained almost undisturbed its relation to commodities. the value of money, as such, not in the material but in the stamp. money is an order for property and services. the logic of the situation, and the reasoning of all the leading authorities on money, lead irresistibly to the conclusion that its value does not reside in the material, but in the stamp; in other words, on the legal-tender function impressed on that material. it is an order for property and services. aristotle, writing of money, says: money by itself * * * has value only by law, and not by nature; so that a change of convention between those who use it is sufficient to deprive it of all its value and power to satisfy all our wants. and again he says: but with regard to a future exchange (if we want nothing at present) money is, as it were, our security that it may take place when we do want something. john locke, in "considerations," etc., regarding money, published in , says: mankind, having covenanted to put an imaginary value upon gold and silver, by reason of their durableness scarcity, and not being very liable to be counterfeited, have made them, by general consent, the common pledges, whereby men are assured, in exchange for them, to receive equally valuable things to those they parted with, for any quantity of those metals; by which means it comes to pass that the intrinsic value regard in those metals, made the common barter, is nothing but the quantity which men give or receive of them; they having, as money, no other value but as pledges to procure what one wants or desires. baudeau, reputed one of the most eminent of an early school of french economists, says: coined money in circulation is nothing, as i have said elsewhere, but effective titles on the general mass of useful and agreeable enjoyment which cause the well-being and propagation of the human race. it is a kind of a bill of exchange, or order payable at the will of the bearer. adam smith says: a guinea may be considered as a bill for a certain quantity of necessaries and conveniences upon all the tradesmen in the neighborhood. jevons's "money and exchanges," chapter , says: those who use coins in ordinary business need never inquire how much metal they contain. probably not one person in two thousand in this kingdom knows, or need know, that a sovereign should contain . grains of standard gold. money is made to go. people want coin, not to keep in their own pockets, but to pass it off into their neighbors' pockets. henry thornton, in his work on paper credit, says: money of every kind is an order for goods. it is so considered by the laborer, when he receives it, and it is almost instantly turned into money's worth. it is merely in instrument by which the purchasable stock of the country is distributed with convenience and advantage among the several members of the community. john stuart mill says: the pounds or shillings which a person receives are a sort of ticket or order which he can present for payment at any shop he pleases, and which entitle him to receive a certain value of any commodity that he makes choice. mcleod, elements of banking, chapter i, says: when persons take a piece of money in exchange for services, or products, they can neither eat it, nor drink it, nor clothe themselves with it. the only reason why they take it is, because they believe they can exchange it away whenever they please for other things which they require. on that view of money mcleod feels justified in styling it credit, and he quotes in support of such a use of the term credit, burke's description of gold and silver as "the two great recognized species that represent the lasting conventional credit of mankind." prof. francis a. walker, money, trade, etc., page , speaking of carved pebbles, glass beads, shells and red feathers, used as money in certain countries at certain times, says: they were good money, though serving no purpose but ornament and decoration. they were desired by the community in general; men would give for them the fruits of their labor, knowing that with them they could obtain most conveniently in time, in form, and in amount, the fruits of the labor of others. on page he says: men take money with the expectation of parting with it; this is the use to which they mean to put it. again, mr. walker says: money is that which passes freely from hand to hand throughout the community, in final discharge of debts and full payment for commodities, being accepted equally without reference to the character or credit of the person who offers it, and without the intention of the person who receives it to consume it, or enjoy it, or apply it to any other use than, in turn, to tender it to others in discharge of debts or payment for commodities. even bonamy price, who is wedded to the gold standard, in his principles of currency, says: gold, in the form of money or coin, is not sought for its own sake, as an article of consumption. it must never be regarded as valuable except for the work it performs, so long as it remains in the state of coin. it can be converted at pleasure into an end, into an article of consumption, by being sold; till then it is a mere tool. how many people ever so "convert" it that earn it? the great philosopher, bishop berkeley, one of the most acute reasoners, in my judgment, that modern times have produced, in the "querist," published in , propounds the following pertinent and suggestive questions: whether the terms "crown," "livre," "pound sterling," etc., are not to be considered as exponents, or denominations? and whether gold, silver, and paper are not tickets or counters for reckoning, recording, or transferring such denominations? whether, the denominations being retained, although the bullion were gone, things might not nevertheless be rated, bought, and sold, industry promoted and a circulation of commerce obtained? dugald stewart, professor of moral philosophy in the university of edinburgh, in his lectures on political economy (part i, book ii), said: when gold is converted into coin, its possessor never thinks of anything but its exchangeable value, or supposes a coffer of guineas to be more valuable because they are capable of being transferred into a service of plate for his own use. why then should we suppose that, if the intrinsic value of gold and silver were completely annihilated, they might not still perform, as well as now, all the functions of money, supposing them to retain all those recommendations (durability, divisibility, etc.) formerly stated, which give them so decided a superiority over everything else which could be employed for the same purpose. supposing the supply of the precious metals at present afforded by the mines to fail entirely the world over, there can be little doubt that all the plate now in existence would be gradually converted into money, and gold and silver would soon cease to be employed in the ornamental arts. in this case a few years would obliterate entirely all trace of the intrinsic value of these metals, while their value would be understood to arise from those characteristical qualities (divisibility, durability, etc.) which recommend them as media of exchange. i see no reason why gold and silver should not have maintained their value as money, if they had been applicable to no other purposes than to serve as money. i am therefore disposed to think, with bishop berkeley, whether the true idea of money, as such, be not altogether that of a ticket or counter. appleton's cyclopedia, defining money, says: anything which freely circulates from hand to hand, as a common acceptable medium of exchange in any country, is in such country money, even though it ceases to be such, or to possess any value in passing into another country. in a word, an article is determined to be money by reason of the performance by it of certain functions, without regard to its form or substance. bastiat's description of the crown piece. bastiat, in his "harmonies economiques," describing money, used the following illustration: you have a crown piece. what does it mean in your hands? if you can read with the eye of the mind the inscription it bears, you can distinctly see these words: pay to the bearer a service equivalent to that which he has rendered to society. value received and stated, proved and measured by that which in on me. no words could more correctly describe the unit in a properly regulated system of money. and notwithstanding the attempt to discredit silver coinage, no piece of money, as i have already shown, would better answer, by its steadiness of value, this description of bastiat's than would the american silver dollar if silver were remonetized. so far as it applied to gold bastiat's description was much nearer accuracy in his day than it is in ours. in his life-time the mints of france and of the continent were open for the coinage of silver equally with gold, and the money supply of the world was not constantly narrowing by being limited to the yield of a single metal whose annual output would hardly more than meet the demand for the arts. were bastiat alive at this time he would reform his description so as to make it read as follows: "you have an american gold piece. you have had it hoarded in a bank vault for fifteen years. what does it mean in your hands? if you can read with the eye of the mind the inscription it bears, you can distinctly see these words: 'pay to the bearer per cent. more service than he has rendered to society; value not received or stated on me, but resulting from a cunning manipulation of the law of legal tender, through the influence of the holders of gold and of obligations payable therein, and as a reward to the bearer for having had this money hid away and for depriving society of its use for seventeen years.'" when people are found everywhere working for money and not for the things which they really need, it is clear that they are working for money, not because of the material of which it is composed, but because it is an order for property which they can at any time obtain by parting with the money. to modify and elaborate bastiat's description of the crown piece, it might be said of the money unit of the united states under a properly regulated system: "you have a dollar. what does it mean in your hands? if you can read with the eye of the mind the inscription it bears, you can distinctly see these words: to all to whom this may come: greeting. this is a dollar--a unit of money--part of the great instrumentality created by society to effect the multitudinous exchanges of property and services among men. the amount of its command is constant, because the increase in the volume of money is regulated by the sovereign authority of the nation, with strict regard to the increase of population and demand--hence the value of this unit remains unchanging through time. it is an order for all property on sale, and all services for hire; the proportionate amount of such property and service to which its possessor is entitled being fixed by the universal competition to get it." gresham's law. many persons fear an outflow of gold from the operation of what is known as "gresham's law," namely, that "bad money will expel good." sir thomas gresham, a financier of elizabeth's time, stated that if a number of the gold or silver coins of any given denomination were deprived of part of their pure metal, and so made cheaper than the remainder, a successful circulation of the coins thus deprived would result in the melting up or exportation of the coins of standard weight. writing of this, mr. jevons ("money and the mechanism of exchange," american edition, page ) says: gresham's remarks concerning the inability of good money to drive out bad only referred to moneys of one kind of metal. * * * the people, as a general rule, do not reject the better, but pass from hand to hand indifferently the heavy and the light coins, because their only use for the coin is as a medium of exchange. it is those who are going to melt, export, hoard, or dissolve the coins of the realm, or convert them into jewelry and gold leaf, who carefully select for their purposes the new heavy coins-- and avoid the light or abraded coins. there is, however, a theorem which applies to all money, but which was recognized long before gresham's time--although it has been erroneously called an "extension" of the law or theorem of gresham. that theorem is this: if, in any country, there are two forms of money, each of which is a full legal tender, and one of which can be obtained with less sacrifice than the other, the one requiring the least sacrifice will be the cheaper, and if the unit of that cheaper money will perform in every respect the same function in the payment of debts and settlement of all obligations that can be performed by the dearer money, then, for obvious reasons, the cheaper money will come into universal use, and the dearer money will disappear. but it does not follow that the cheaper money is bad money nor the dearer money good money. the best money is always the money of the contract, that is to say a money whose dollar, whatever it may be made of, is equal in value to the dollar of the contract. if the money of the contract is the cheapest money, then that is the best money, that is the honest money, and that is the only tolerable money. if that be the sort of "cheap" money that drives out the dear money, then manifestly the dear money is bad money. a distinguished official of the government, who was before a committee of this body the other day, insisted that the proposed treasury notes should be redeemed in the "best money." i asked him what was the "best money." "why," he said, "the money that is worth the most." now, it strikes me, mr. president, that if you have borrowed a dollar, and, through a badly regulated money-system, are made to pay a dollar worth per cent. more than the dollar you borrowed, you are not paying the best money, but the worst money; not an honest dollar, but a swindling and dishonest dollar. the creditors' demand for the "best money." the creditors tell us that all they want is "good money." they and their friends glibly insist that all obligations must be paid in "the best money." this is the delicate and plausible euphemism resorted to in order to gloss over and, if possible, hide from the world the odious and repulsive fact that what the creditors always want is the _dearest_ money--the money that costs the people the most sweat and toil to obtain and which, as time passes, grows dearer and dearer. this cry for "the best money" is at last beginning to be recognized for what it is--the cunning device of creditors to "catch the conscience" of the people and play upon the sense of fairness that characterizes the great mass of mankind. these interested parties affect to believe that gold is, by nature, the only money metal, ignoring the fact that until silver was displaced by hostile legislation it was, and for four thousand years had been, the principal money metal of the world. but they will no longer be permitted to hide their sinister purpose under the cloak of a demand for the "best money." the masses of the people are aroused on this subject and are beginning to understand it. according to all fair canons of construction the best money should be and is a money of unchanging value, a money that exacts from the debtor the same amount of sacrifice that he bargained for, and which is all that the creditor is equitably entitled to receive. in other words, the money of the contract, not a money whose exactions are increasing at the rate of per cent. per annum. as mcculloch says, debts being stated in dollars and cents, it is not possible for the creditor openly to augment his debtor's obligation by changing the figures of the debt. but, mr. president, while they can not change the figures of the debt, they are enabled, by a crafty manipulation of the money-volume, to do that which, to the debtor, means the same thing; as the following story will illustrate: a usurer of the coarser type had lent $ , on a neighboring farm, for which amount he took the farmer's note, secured by a mortgage on the property. he coveted the farm, and in his anxiety to secure it took his banker into his confidence. he informed the banker that he wanted to get possession of this farm, but it would bring $ , under the hammer, and he did not care to pay so much for it. "i have a subtle chemical," said he, "by which i can obliterate from the note and mortgage all trace of the rightful amount ($ , ), and that done, i can insert $ , . then, with the genuine signatures on the note and mortgage i can bring suit, and as the farm will not bring more than the face of the note, i shall succeed to the property." his friend, the banker, however, advised against this course, which he characterized as not only dishonest, but vulgar, and as subjecting the perpetrator of the act to serious penalties. "honesty" said the banker, "is the best policy." "but," he continued, "i can suggest a plan by which you may accomplish the same end without running counter to law, or the views of society. why not join our propaganda in advocacy of 'honest money.' gold is decreasing in quantity, and as the world has been ransacked for it in vain, it is likely to continue decreasing. if we can strike down the twin metal, silver, and devolve the entire money function on gold, it will double the purchasing power of money. then the foreclosure of your mortgage will be sure to take your neighbor's farm, and probably leave him in your debt besides. instead of being punished for this, you will receive the plaudits of the 'best society' for the _finesse_ you have displayed and the firm stand you have taken in favor of honest money, and you will take high rank among 'the wisest and most conservative of our financiers.' if your neighbor makes any objection to your action, you may be able to secure his incarceration as a lunatic, but if not, he will come to be regarded in the community as a dishonest 'crank' who wishes to pay his debts in a depreciated money; for it is the constant and assiduous care of our guild to teach that only the dearest money, that which is the most difficult for the laborer, the farmer, and the mechanic to get, is honest money, and the dearer it is the more honest it is." all money should be legal tender. to be of the fullest service to civilization whatever medium is used to do the work of money should have full money power; that is to say, it should be a legal tender. it is not sufficient that it will satisfy the demands of the government for taxes. whatever is given out by the government in payment for services rendered (and there is no other way by which payments can be made from the treasury) should carry with it to him who has rendered the service and receives the payment, the absolute assurance that in any need, or in any contingency, it will serve him as money. there is no other means by which society can be saved from the effects of panics and monetary crises. with a watchful and intelligent regulation of the money volume, and with the legal tender function attached to everything that is in use as money, and doing the money work, so that it will serve as a universal solvent, panics will be impossible. under present conditions when panics come, credit money--money not endowed with the legal-tender function, which, under ordinary circumstances, has always been accepted, is refused, and thousands of millions of dollars' worth of property have been confiscated by creditors, because of the scarcity of legal-tender money. as time advances and the method of doing business on credit becomes more and more extended, the more palpable it becomes that society can preserve itself from these periodical convulsions only by broadening, under proper regulation, the legal-tender basis on which, in the ultimate analysis, all business rests. money a measure of value. there is nothing upon which the prosperity and happiness of a people so much depend as on the integrity of their measure of values. it is universally admitted that after the making of a contract requiring future delivery of a specified number of pounds, bushels, or yards of any commodity, it would be subversive of all equity and justice to change the capacity of the measure constituting the foundation of the contract. these measures, to be just, must remain unchanged. but how infinitely more important is it that money, which is the measurer of all other measures, should itself be unchanged? of what avail is it that the subordinate measures remain intact while this, the supreme measure, into which all others are finally resolved, is constantly changing? its "value" is but another name for its purchasing or measuring power. in the case of all time contracts, therefore, any change in the value of money works a destruction of equity, and one of the first objects of society should be to maintain and enforce equities at all times and in all places. this, so far as money can effect it, can only be done by an intelligent regulation of the volume in circulation. in a note to his edition of adam smith's "wealth of nations," (page ) mr. j. r. mcculloch says: money is not a mere commodity, it is also the standard or the measure by which to estimate and compare the value of everything else that is bought and sold, and if it be, as it undoubtedly is, the duty of government to adopt every practicable means for rendering all foot-rules of the same length, and all bushels of the same capacity, it is still more incumbent upon it to omit nothing that may serve to render money, or the measure of value--a measure which is undoubtedly of the greatest importance--uniform or steady in its value. though a measure of value, money is a much more complicated instrument than a yard-stick, pound weight, or bushel. were it not so, a child could fix value with the same precision as an adult. as value resides in human estimation, it will frequently vary as to the same object. an intending purchaser may have one notion of the value of an article, an intending seller another. money, therefore, is a measure of value in the sense that it is a measure of the average human judgment--from which results price. as mr. mcculloch says, no means known to science or art should be left untried to keep the value of money unchanging. when a man promises to deliver money or makes any time contract, he makes a mental calculation as to what amount of property, or of the product of his labor, will enable him to meet his engagement. if he be a farmer, raising wheat, there passes through his mind the sacrifice and toil necessary to raise it, and the quantity he can raise; if a cotton manufacturer the cost of spindles, of looms, and steam-engines; the wages of labor and interest on plant. i knew a cotton manufacturer who wanted $ , . his business was good. he was sober, honest, and industrious; had a thorough knowledge of his trade; managed his employés himself, and took the greatest pains to conduct his business on the strictest business principles. he wanted the money to make some improvements in his factory. he knew how many spindles and looms he had; how much could be done with a pound of cotton, how much it cost, and how much each spindle and loom would do. he said to a capitalist, "i know all about cotton spinning and weaving, and do not know anything about this thing called money, but i want $ , of it." said he, "my cloth is worth cents a yard; it sells at that rate in unlimited quantities by wholesale; nobody can make it any cheaper; but i am not working a gold mine; i am not manufacturing legal-tender paper money, and the only way i can get money is to swap my cotton cloth for it. i will give you my note for , yards of cotton cloth, which will be equal to $ , , and will pay inches a yard each year as interest." this was satisfactory to the capitalist, and the note was made, signed, and delivered accordingly, and the improvements were made in the factory. during the year everything went smoothly; the spindles and looms worked well, repairs to machinery were light; cotton had been bought at proper rates; and no improved processes had been discovered or applied in the production of cotton-cloth. there was no hitch in any direction. at the appointed time, the creditor called for his cloth. "i am ready," said the debtor, "to pay the hundred thousand yards of cotton cloth, with interest." when he came to measure it off, however, he was astounded to find he was short. some painful suspicions crossed his mind. it seemed as though somebody had either robbed him of cloth, or else he had not manufactured as much of it as he had supposed. there did not seem to be so many yards of the cloth as there ought to be. he knew he had used the same number of pounds of cotton that it had been his custom to use for , yards of cloth and for , inches of cloth in addition; still, there was no denying the fact of the shortage. he measured it again and again, and had finally to admit that he was unable to keep his engagement. this was a source of great distress to him. he could not sleep that night. but, the creditor being importunate, the cotton manufacturer next morning borrowed enough cloth from the proprietor of a neighboring factory and paid his obligation. but, not understanding how his carefully made plans had failed, and in order to avoid similar mistakes in the future, he had an examination made of the yard-stick and found that instead of being inches long the yard-stick he had used was inches. in talking the matter over with his neighbor, the cotton manufacturer said: "i have been swindled; they 'rung in' on me a lengthened yard-stick, by the measurement of which i have paid my debt, and i have therefore paid in reality more than i contracted to pay." "well," said the friend, "i do not see that you are any worse off than i am. i borrowed as much as you did, and at the same time; but i agreed to pay my debt in money, and gave my note for $ , with interest. the increased command over cloth acquired by the dollars i have had to pay, caused by the demonetization of silver, has juggled me out of as much cloth as you have been juggled out of by the lengthened yard-stick. but you have one recourse; you can put into the penitentiary the man who 'rung in' the lengthened yard-stick on you, while the increase in the value of the dollar which i have paid has been effected in the name of the gold standard and honest money, and leaves me without recourse." in its ultimate analysis, money is the yard-stick, the bushel and the pound weight of commerce. when you shrink the volume of money, and so increase the measuring power of the dollar, you lengthen the yard-stick, enlarge the specific gravity of the pound and the cubical content of the bushel, in violation of all equities. it is utterly impossible to secure a proper regulation of the money volume with gold alone, the yield of which has declined from an average of $ , , a year between and to $ , , a year between and . the value of money fixed by the competition to get it. everybody admits that the value of all other things is regulated by the play against each other of the forces of supply and demand. no reason has been or can be given why the value of the unit of money is not subject to this law. what is the demand for money? the demand for money is equivalent to the sum of the demands for all other things whatsoever, for it is through a demand first made on money that all the wants of man are satisfied. the demand for money is instant, constant, and unceasing and is always at a maximum. if any man wants a pair of shoes, or a suit of clothes, he does not make his demand first on the shoemaker, or clothier. no man except a beggar makes a demand directly for food, clothes, or any other article. whether it be to obtain clothing, food, or shelter--whether the simplest necessity or the greatest luxury of life--it is on money that the demand is first made. as this rule operates throughout the entire range of commodities it is manifest that the demand for money equals at least the united demands for all other things. while population remains stationary, the demand for money will remain the same. as the demand for one article becomes less, the demand for some other which shall take its place becomes greater. the demand for money therefore must ever be as pressing and urgent as the needs of man are varied, incessant, and importunate. what is the supply of money? such being the demand for money, what is the supply? it is the total number of units of money in circulation (actual or potential) in any country. the force of the demand for money operating against the supply is represented by the earnest, incessant struggle to obtain it. all men, in all trades and occupations, are offering either property or services for money. each shoemaker in each locality is in competition with every other shoemaker in the same locality, each hatter is in competition with every other hatter, each clothier with every other clothier, all offering their wares for units of money. in this universal and perpetual competition for money, that number of shoemakers that can supply the demand for shoes at the smallest average price (excellence of quality being taken into account) will fix the market value of shoes in money; and conversely, will fix the value of money in shoes. so with the hatters as to hats, so with the tailors as to clothes, and so with those engaged in all other occupations as to the products respectively of their labor. no alternative for money. the transcendant importance of money, and the constant pressure of the demand for it may be realized by comparing its utility with that of any other force that contributes to human welfare. in all the broad range of articles that, in a state of civilization, are needed by man, the only absolutely indispensable thing is money. for everything else there is some substitute--some alternative; for money there is none. among articles of food, if beef rise in price, the demand for it will diminish, as a certain proportion of the people will resort to other forms of food. if, by reason of its continued scarcity, beef continue to rise, the demand will further diminish, until finally it may altogether cease and center on something else. so in the matter of clothing. if any one fabric become scarce, and consequently dear, the demand will diminish, and, if the price continue rising, it is only a question of time for the demand to cease and be transferred to some alternative. but this can not be the case with money. it can never be driven out of use. there is not, and there never can be, any substitute for it. it may become so scarce that one dollar at the end of a decade may buy ten times as much as at the beginning; that is to say, it may cost in labor or commodities ten times as much to get it, but at whatever cost, the people must have it. without money the demands of civilization could not be supplied. money was the most potent instrumentality in the evolution of society from a low to a high plane of civilization. it is valueless to man in isolation. it is indispensable to man in organized society. it is as necessary for the proprietary distribution of wealth as railroads and steamships are to its physical distribution. the aggregate force of the demand for money in any country depends upon the numbers of the population; with a stationary population the demand is steady, with an increasing population the demand increases, and in order to maintain undisturbed the equation of supply and demand the volume of money should be increased in at least a ratio corresponding to that of the increase of population. there are certain circumstances that to some extent disturb the relations between population and money supply, such as the broadening of the areas of population, and the multiplication of money centers. these circumstances might render necessary a larger percentage of increase in the money volume than would be indicated by the increase of the population. but under any circumstances the smallest money-increase that will suffice to maintain the equity of time contracts is an increase corresponding to the increase of numbers of the population. under conditions of unvarying demand and unvarying supply the value of the unit of money would be unvarying. if as population and demand increase the supply of money be proportionately increased, there is no possibility of a change in the value of the unit of money. the constant and unceasing effort to exchange services and all forms of property, which have but limited command over the objects of human desire, for money, that sole instrumentality that has unlimited command over such objects, is, and ever will be, eager, intense, and unwavering. with population and consequent demand rapidly increasing how do the advocates of the gold standard expect to increase the money volume of the country in this proportion, while the yield of gold, instead of increasing in proportion to demand, is every day becoming less and less capable of meeting the requirements of the arts alone? the quantity of money in circulation should increase in a ratio not less than the ratio of increase of population. it will be admitted that if the population of a country be increased by any given percentage there will be a proportionate increase in the demand for all articles that supply human needs. if the population increases by per cent., there will be needed per cent. more house-room, per cent. more furniture, per cent. more food, per cent. more of all things that enter into consumption. these things can only be got by a demand first made on money. then why not per cent. more money? the present monetary circulation of this country including gold, silver, and paper, is represented to be $ , , , . as our population doubles in thirty years, the rate of increase is - / per cent. if the money volume be not increased by a proportion at least as great as this, the true relation between the supply of money and the demand for it will not be maintained. the demand increasing as the population increases, while the supply either does not increase at all or increases in a degree incommensurate with the demand, the money volume shrinks and the purchasing power of the unit becomes greater by reason of the increased keenness of competition to get it. this is but another mode of stating that the prices of all products of human labor decline. prices falling, business ceases to be profitable, stores and work-shops close, and men are relegated to idleness. the quantitative theory of money--the value of each dollar depends on the number of dollars out. thus by the universal competition to get it the value of the dollar is made to depend upon the number of dollars that are out. this is a principle that lies at the very foundation of the science of money. the law, stated broadly, is that the value of each unit of money in any country at any given time depends on the whole number of units in circulation in that country. the larger the number of units out, population remaining the same, the less must be the value of each unit; the smaller the number of units out, population remaining the same, the greater the value of each. notwithstanding the variance sometimes found between the premises and the conclusions of economic writers, there is no economist of repute who does not admit this to be a fundamental principle. on the theory i have propounded therefore - / per cent. of $ , , , , or $ , , , is the minimum amount of money that should be added to the currency of this country during the present year. assuming the population of to-day to be , , and the ratio of its annual increase - / per cent., the population of next year will be , , . the percentage of monetary increase to be provided for that year should therefore be baaed on the increased number. and so on for each succeeding year. i have thought best to collate a variety of citations from the most distinguished authorities on financial economy to support my contention that, _ceteris paribus_, the value of each dollar depends on the number of dollars in circulation. john locke, in his "considerations," etc., published in , said: money, while the same quantity of it is passing up and down the kingdom in trade, is really a standing measure of the falling and rising value of other things in reference to one another, and the alteration in price is truly in them only. but if you increase or lessen the quantity of money current in traffic in any place, then the alteration of value is in the money. locke further said: the value of money in any one country, is the present quantity of the current money in that country, in proportion to the present trade. the historian, hume, says: it is not difficult to perceive that it is the total quantity of the money in circulation, in any country, which determines what portion of that quantity shall exchange for a certain portion of the goods or commodities of that country. it is the proportion between the circulating money and the commodities in the market which determines the price. fichte says: the amount of money current in a state represents everything that is purchasable on the surface of the state. if the quantity of purchasable articles increases while the quantity of money remains the same, the value of the money increases in the same ratio; if the quantity of money increases, while the quantity of purchasable articles remains the same, the value of money decreases in the same ratio. james mill, in his treatise on political economy, says: and again, in whatever degree, therefore, the quantity of money is increased or diminished, other things remaining the same, in that same proportion the value of the whole, and of every part, is reciprocally diminished or increased. john stuart mill (political economy) says: the value of money, other things being the same, varies inversely as its quantity; every increase of quantity lowering the value, and every diminution raising it in a ratio exactly equivalent. and again: alterations in the cost of the production of the precious metals do not act upon the value of money, except just in proportion as they increase or diminish its quantity. ricardo (reply to bosanquet) says: the value of money in any country is determined by the amount existing. * * * that commodities would rise or fall in price in proportion to the increase or diminution of money, i assume as a fact that is incontrovertible. * * * ricardo further says: there can exist no depreciation in money but from excess; however debased a coinage may become, it will preserve its mint value; that is to say, it will pass in circulation for the intrinsic value of the bullion which it ought to contain, provided it be not in too great abundance. in this case ricardo's illustration is the supposed case of a country actually using one million gold pieces each containing grains. he maintains that they would be of the same purchasing power, if the government took out grain, or even grains, the quantity remaining the same, but that if, from the grains so deducted, an additional number of pieces were struck, a corresponding depreciation would result. william huskisson ("the depreciation of the currency," ), says: if the quantity of gold in a country whose currency consists of gold should be increased in any given proportion, the quantity of other articles and the demand for them remaining the same, the value of any given commodity measured in the coin of that country would be increased in the same proportion. sir james graham says: the value of money is in the inverse ratio of its quantity; the supply of commodities remaining the same. torrens, in his work on political economy, says: gold is a commodity governed, as all other commodities are governed, by the law of supply and demand. if the value of all other commodities, in relation to gold, rises and falls as their quantities diminish or increase, the value of gold in relation to commodities must rise and fall as its quantity is diminished or increased. wolowski says: the sum total of the precious metals is reckoned at milliards, one-half gold and one-half silver. if, by a stroke of the pen, they suppress one of these metals in the monetary service, they double the demand for the other metal, to the ruin of all debtors. cernuschi says: the purchasing power of money is in direct proportion to the volume of money existing. prof. francis a. walker, in his work on "money" (page ), says: the value of money in any country is determined by the amount existing. its [money's] power of acquisition depends not on its substance, but on its quantity. [paulus, author of the pandects, sixth century.] professor de colange, in the american cyclopedia of commerce, article on "money," says: the rate at which money exchanges for other things is determined by its quantity. * * * supposing the amount of trade and mode of circulation to remain stationary, if the quantity of money be increased, its value will fall, and the price of other commodities will proportionally rise, as the latter will then exchange against a greater amount of money; if, on the other hand, the quantity of money be reduced, its value will be raised, and prices in a corresponding degree diminished, as commodities will then have to be exchanged for a less amount of money. * * * in whatever degree, therefore, the quantity of money is increased or diminished, other things remaining the same, in that same proportion the value of the whole and of every part is reciprocally diminished or increased. a curtailment of the volume of money in a country will, _ceteris paribus_, increase the value of the money of that country. all the authorities agree that this law applies to all forms of money, whatever the material; so that it applies to paper money with precisely the same force that it applies to metallic money. mr. stanley jevons, in his work on "money and the mechanism of exchange," says: there is plenty of evidence to prove that an inconvertible paper money, if carefully limited in quantity, can retain its full value. such was the case with the bank of england notes for several years after the suspension of specie payments in , and such is the case with the present notes of the bank of france. mr. gallatin said: if in a country which wants and possesses a metallic currency of seventy millions of dollars, a paper currency to the same amount should be substituted, the seventy millions in gold and silver, being no longer wanted for that purpose, will be exported, and the returns may be converted into a productive capital, and add an equal amount to the wealth of the country. in his proposal for an economic and secure currency ricardo says: a well regulated paper currency is so great an improvement in commerce, that i should greatly regret if prejudice should induce us to return to a system of less utility. the introduction of the precious metals for the purposes of money may with truth be considered as one or the most important steps toward the improvement of commerce and the arts of civilized life; but it is no less true, that with the advancement of knowledge and science, we discover that it would be another improvement to banish them again from the employment to which, during a less enlightened period, they had been so advantageously applied. mr. j. r. mcculloch, in commenting on the principles of money laid down by ricardo, says: he examined the circumstances which determine the value of money * * * and be showed that * * * its value will depend on the extent to which it may be issued compared with the demand. this is a principle of great importance; for, it shows that intrinsic worth is not necessary to a currency, and that provided the supply of paper notes, declared to be a legal tender, be sufficiently limited, their value may be maintained on a par with the value of gold, or raised to any higher level. if, therefore, it were practicable to devise a plan for preserving the value of paper on a level with that of gold, without making it convertible into coin at the pleasure of the holder, the heavy expense of a metallic currency would be saved. it appears, therefore, that if there were perfect security that the power of issuing paper money would not be abused; that is, if there were perfect security for its being issued in such quantities, as to preserve its value relatively to the mass of circulating commodities nearly equal, the precious metals might be entirely dispensed with, not only as a circulating medium, but also as a standard to which to refer the value of paper. in adopting a paper circulation-- says lord overstone-- we must unavoidably depend for a maintenance of its due value upon the adoption of a strict and judicious rule for the regulation of its amount. lord overstone further declared that: the value of the paper currency results from its being kept at the same amount the metallic currency would have been. alexander baring, in his evidence before the secret committee of the house of lords in , said: the reduction of paper would produce all those effects which arise from the reduction in the amount of money in any country. prof. f. a. walker says: let me repeat, money is to be known by its doing a certain work. money is not gold, though gold may be money; sometimes gold is money, and sometimes it is not. money is no one thing, no group of many things having any material property in common. on the contrary, anything may be money; and anything, in a given time and place, is money which then and there performs a certain function. always and everywhere that which does the money-work is the money-thing. sir archibald alison says: the suspension of specie payment in , making bank notes a legal tender receivable for taxes by providing great britain with an adequate internal currency, averted the catastrophe then so general upon the continent, and gave it at the same time an extraordinary degree of prosperity. such was the commencement of the paper system in great britain, which ultimately produced such astonishing effects, and brought the struggle [of the napoleonic wars] to a triumphant close. the true money standard. the true money standard of any country is not the material of which the money is made. the standard is not a concrete object, but a numerical relation. it is the relation between the number of units composing the monetary circulation of the country and the numbers of the population. it is the legal-tender function that constitutes money. it is the power which the law imparts to any material to pay debts and liquidate obligations. it can not for a moment be doubted that the money function, being conferred by the supreme authority, is the all-sufficient guarantee of the money value. there is no necessity for re-enforcing that value with any inferior value that may attach to the material on which the money stamp is placed. the money function is immeasurably the most important that can be conferred by society upon any material, and it is absurd to urge that that function is not of itself sufficient for the maintenance of the value of money. all the value that money can possibly have--the totality of value that can exist in the shape of money in any country--will attach to anything upon which the sovereign authority stamps it, whether the material on which the stamp is placed be gold, silver, paper, or anything else. legislators or executive officers of the government, by increasing or decreasing the volume of money, correspondingly decrease or increase the value of each unit of that money. for no matter how many or how few the units may be, the total value of the money of the country will be comprised within the total number of those units. a change in the number of the units effects a proportionate change in the value of each unit, and whatever the value of the unit may be, it is of the utmost importance that that value should remain undisturbed. it is absurd to maintain that a gold unit, which, as time goes on, is constantly increasing in purchasing power; is a better unit than a unit of any other material that maintains unchanging value through time. whenever the business of the country accommodates itself to a given number of units, the only question for the government to deal with is to maintain that value as free from disturbance as possible; and according to all authorities on political economy that can only be done by increasing or decreasing the number of units in circulation in accordance with the demands of increasing or decreasing population. if it be admitted that one of the most important offices of government is to see that the equities are preserved between its citizens (and if this be not so, to what purpose are our courts of equity instituted?), then it can not be denied that it is one of the highest offices of government to see that money, which measures all equities, and which must for all time continue to be the principal measure in the service of civilized society, shall be of unchanging value. it is impossible to secure this characteristic of uniformity in the value of money if we are to select as the only material on which to stamp the money function a substance whose yearly production is becoming more and more limited, and the prospect of whose sufficient yield becomes less and less encouraging. if silver remain demonetized and gold continue decreasing, where is the world's future money supply to come from? if the distinguished authorities i have quoted are correct, that a diminution of the volume of money increases the value of the money unit--which is but another form of stating that it lowers prices and produces stagnation, distress, and discontent,--what good reason can be offered by the advocates of the gold standard for confining the business of this rapidly growing country to a basis of gold, when it is well known that the entire stocks of gold and silver together are now insufficient to serve the purpose of the world's money, and have to be supplemented and re-enforced by large issues of paper notes? do they not reflect that the production of gold is constantly diminishing and is likely to continue to diminish? and do they not know that our population is growing at the rate of over per cent. per annum and will double in thirty years? do they mean that the money volume which serves a population of , , , and is far below the needs of that population, will suffice for the , , of the next generation? to be sure, if we are to take no note of prices, the question is a simple one. but prices must be taken into account. the entire money question is one of prices. when it is said that money is scarce, what is meant is that business is depressed and that money is difficult to get, at the present range of prices. should prices fall per cent. money would be found plentiful enough to conduct exchange at the lower range. but when prices fall, goods sell below cost, business is unprofitable, workshops are closed, and men are thrown into idleness. if lowering prices do not affect injuriously either the business or the prosperity of the country, then it makes no difference what the volume of money may be; a small amount will meet the requirements as well as a large amount. in that case, the gold standard is as good as any. but if gold alone is sufficient to bear all the enormous monetary burdens of the western world, why do the advocates of the gold standard admit the necessity for any more circulation? to be logical, instead of favoring an increase of credit money, which has always lurking within it an element of danger to the business of the community, they should demand the retirement of the $ , , of greenbacks and the $ , , of coined silver, and base the business of the country exclusively on what they call "honest money." if that should be done all that could happen would be a fall in prices. judging by the experience of the past it would not be surprising if the next move of the gold-standard men would be an agitation for the retirement and cancellation of the greenbacks. such a movement is fully in harmony with the opinions of the gold-standard advocates for the past twenty years. indeed, the secretary of the treasury who took charge of the finances at the opening of the last administration, himself a banker, recommended the demonetization of the greenbacks almost as vigorously as he opposed silver. money valuable only for the important service it performs. money is valuable rather for the service which it performs than for the material of which it is composed. when we consider the transcendantly important character of the service which money performs--when we reflect that, without it, the achievement of an advanced civilization would be impossible, we can not escape the conclusion that, compared with the value of that service, the commodity value of any material on which the money function may be stamped is too trifling to merit serious attention. this will be made clear by reflection on the necessities of the situation. so long as society chooses to maintain the automatic or metallic money-system, it must be obvious that to escape the evils that would result from a sudden and overwhelming increase in the supply of the money-material as compared with the entire stock in existence, and the infinitely more serious evils that would result from a wholly insufficient yearly addition to that stock, it must have on hand an enormous accumulation of the metals on which the stamp is placed. it must be manifest that no material would be fit for universal acceptance for so important a function as money unless there were available so great a quantity of it that no sudden shock could be inflicted on society by ordinary fluctuations in the current yield, or in the current consumption in the arts. but, in the nature of things, a supply sufficient to effect that result would be so enormous as practically to destroy the market value of the material as a mere commodity if the money function and use were withdrawn from it. the money demand, not the commodity demand, that gives gold its value. mr. giffen the statistician of the london board of trade, in an article recently published in an english magazine, berating and deriding the bi-metallists, maintains that it is not the demand for gold as money, but for gold as a commodity, to be used in the arts, that determines its value. to prove his case, mr. giffen states that the supply of gold is about $ , , per annum, the annual demand for the arts $ , , , or about two-thirds of the annual supply; while the demand for money is only $ , , , or about one-third that supply. he therefore argues that the art demand, being the greater of the two, contributes more largely to the maintenance of the value of gold than does the demand for that article as money. it is hardly necessary to point out the absurdity of this claim. the commodity demand in any one year is not made upon the current year's supply, but upon the entire amount in existence, which, is estimated to be about $ , , , . if the demand for the arts entirely ceased, would the addition, to the money volume, of the $ , , now used in the arts produce any appreciable effect on the value of the $ , , , in existence? on the other hand, what is the demand on gold for the money use? all the labor and all the salable property of the western world are constantly offered in exchange for it. it is a moderate estimate to assume that each dollar is earned, demanded, and paid once a week, or fifty times in each year. this constitutes a total annual money demand of $ , , , , compared with which colossal sum how inconsequential is the commodity demand of $ , , in maintaining the value of gold. the amount of gold annually used in the arts is not very definitely ascertained, but in it was estimated by the then director of the united states mint to be $ , , per annum. mr. giffen estimated it at $ , , . it is my opinion that the arts forage on the money-stock of gold to the extent of about the entire annual yield. the bullion or commodity value of that metal being determined by its money value, whoever desires to use it for any purpose other than money, takes the bullion at its coinage value, or else melts up the coin. were gold demonetized and deprived of its money function, and its demand confined solely to that arising from its adaptability for various other purposes, the present stock of that metal on hand and in use as money would, according to the estimates of the director of the mint, supply the art demand for more than seventy-five years to come. but, assuming that the estimate of the director of the mint is too low, and that my own is nearer the truth, there is at least fifty years' supply on hand. were there fifty or seventy-five years' supply of any other commodity on hand in the market, what would be the commercial value of that commodity? what would be the value of copper, of brass, or of iron, if there were fifty or seventy-five years' supply of either of those metals in the market for disposal at one time? nobody can pretend that any commodity of which there is an available supply on hand equivalent to the whole demand for fifty or seventy-five years can have any but the most trifling value. contrary, therefore, to the generally received conviction that the commodity demand is the dominating force in fixing the value of gold i maintain and insist that the commodity demand, if entering into the account at all, is insignificant. it is the supremely important _money_-demand, as correlated to the supply, that fixes the value of all money of every description whatsoever. the demand for gold as a commodity is limited and fluctuating, but when that metal is invested by law with the higher function of money, and thus constituted a common denominator of all values, that limited and fluctuating demand is changed to an unlimited and constant one, which fixes its value for other and inferior uses. if the commodity-demand for gold were, as many believe it to be, essential to its acceptance as money, it would be a great misfortune to society. the happiness and prosperity of the world, if not wholly dependent upon, are largely influenced by, steadiness in the value of money, and this can not exist without steadiness in its volume. whatever demand exists for gold as a commodity can only affect the volume of money injuriously--that is to say, by decreasing it. the admonition of history is that a deficiency in the money-supply is more probable, and infinitely more to be feared than an excess, and this deficiency is, in great measure, caused by the insidious and constant encroachment, upon the precious metals, of demands for them for other than the money use. when we contrast the magnitude of the world's interests and equities, which rest on steadiness in the value of money, with the comparative unimportance of the uses of the metals as commodities, it becomes apparent that the subjection of the value of money to disturbance from the demands for gilded signs, looking-glasses, bangles and breast-pins, is an evil for which society is but poorly compensated by the benefits derived from such uses. whatever other quality gold may posses than as the bearer of the money function is inconsistent with the healthful and proper exercise of the task assigned it as such. whenever any portion of the metal is used for any other purpose than money it destroys the money and thus changes the value of every unit of money in circulation, for, at already stated--other things remaining unchanged--the value of each dollar depends on the number of dollars that are out. without forewarning, and with out knowledge on the part of the people, large amounts of the money volume, on which so infinite a number of equities rest, and on the basis of which all debts and time contracts have been entered into, are, as it were, surreptitiously abstracted and appropriated to other and always inferior uses, for by far the highest and noblest use of any material upon which the money function has been conferred, is the money use. no other use can possibly be so high or so noble as that of maintaining all equities undisturbed. it seems unworthy a highly developed civilization which, as to all subjects other than money, regulates its affairs by the application of intelligence, and bases its policies upon exact data, scientifically ascertained and correctly applied, to depend for its money system upon the accidents, make-shifts, and expedients to which primitive society, by reason of the limitation of its powers and the undeveloped condition of the human mind and hand, was compelled to resort. if the quantitative theory of money be correct--if the money standard be, as i insist it is, a steady and duly proportioned numerical relation existing between the units of population and units of money--it is the duty of society and government to see that as far as practicable that principle is put into operation. the history of the production of the precious metals from the remotest ages demonstrates that under the automatic system of money this can only be effected by the unrestricted coinage of, and conferring the full legal-tender function on, both metals. the proposition that the government should lend money on the security of real estate. if a change in the whole number of money units in circulation relatively to population and business do not affect the value of each unit, then no objection can be found to the proposition recently presented in the senate by the distinguished senator from california, which created some surprise among senators. the resolution of that senator contemplates a loan by the government to holders of real estate based upon the security of the property; and the issue of a large amount of treasury notes for that purpose. certainly, if a dollar, in order to perform properly the money function, must have in it or back of it a dollar's worth of material, there can be no safer security found than that suggested by the senator from california, namely, the arable land of the united states. it is the most absolutely secure of all securities; it can neither run away nor be stolen, it can not be burnt up, lost, or destroyed. arable land is, in and of itself, capable of supplying all basic wants, and must be always in demand, while gold, so far as concerns any use to which it is, or can be applied, might be dispensed with altogether, with scarcely any inconvenience to society. certainly money based on land would seem to be better than money based on gold. senators who are sticklers for so-called "intrinsic value" money, and "full-value" money, should be found supporting that proposition. but it must, on reflection, be obvious that, other things remaining unchanged, whenever the total number of units of money (or dollars) in the circulation of a country increases, the value of each unit will decrease. it is an axiom of political economy that no amount of increase in the number of units of money in a country increases the aggregate value of the money of that country. the aggregate value of the money in circulation in a country, can, _ceteris paribus_, be increased only by an increase of population and business, that is to say, by an increase in the demand for it. if, without increase of population, the money of a country be increased from, say, $ , , , to $ , , , , the effect would be not to add to the aggregate value of the money of the country, but to decrease the value or purchasing power of each unit of the money, so that it would take ten dollars to buy what had before cost but five. gold a fetich--demand for a standard of justice. the history of the world affords no example of a money system regulated by human prescience and intelligent calculation. it is not too much to say that the money system of the world--the most important associative instrumentality of civilization, in so far as it is not controlled for their own advantage by the creditor classes--is practically the result of accident. we are even less logical than the ancients, for they availed themselves of the entire supply of money possible to their civilization and development. they used the full yield of both silver and gold, while we, in order to line the pockets of a privileged caste of money-lenders, reduce the money volume to the lowest possible minimum by discarding one of those metals and making all debts payable in the other. gold has been erected into a fetich by methods familiar to the pagan priesthood, who forbade investigation of the claims of their idol to the superstitious veneration of their followers. the quality of a universal standard claimed for gold has been set up by the classes which, like that priesthood, had interests to be served by the superstition. all things else may be subjected to the test of reason and argument, but the slightest approach to a scrutiny of the claims of gold as a much-vaunted universal standard of valuation has been repelled by interested casuists and sophists who constitute the sacred guard of the temple of the idol. the people of this country, mr. president, begin very seriously to doubt the sacredness of a so-called standard by which they have been robbed of thousands of millions of dollars--a standard that despoils and impoverishes the toiling masses, in order to swell the plethoric pockets of the privileged few. from all parts of the republic we learn that the people have become aroused on this subject, that they have discovered gold to be a standard, not of valuation, but of spoliation and confiscation. the world at large shares to a great extent in the doubts entertained by the people of this country as to the orthodoxy of the continuing worship of gold. throughout all europe the suspicion is beginning to make itself felt, among those who have no personal interest at stake, that the constantly appreciating value of this metal bodes no good to society, however advantageous it may be to the moneyed classes, and especially the money lenders. it begins to be feared that there may be too long a persistence in this artificial standard, and that the pressure upon the people, in the fall of prices and the increase of the burden of debt and of taxes, which multiply with time, may have serious consequences upon public order. the stock of gold, never half enough to meet the wants of the people anywhere, is year by year being drawn upon more and more for use in the arts, while the yield from the mines is decreasing, and giving no promise of any material increase from any quarter. the pressing need of the time, the standard for which the people are calling, is a standard of equity, a standard of justice, a standard that shall measure fairly and impartially the rights of both parties to a contract, that will not wrongfully and stealthily add to the burden of the obligation on either side, that will not, under the guise of fair dealing, rob one of the parties for the benefit of the other. the first indispensable step to a realization of that standard is the full restoration of silver to its rightful position as a part of the money of the world. in any discussion of the question, it would be uncharitable not to make allowance for the force, on many conscientious minds, of what, to the free and unprejudiced inquirer, can only be regarded as an absurd and meaningless superstition, which, notwithstanding the advance of thought in other directions, still persists in disarranging the industries and vexing the civilization of an enlightened age. it is to the strength of this obdurate superstition that we must ascribe the horror with which many minds contemplate the possible loss to the country of a part of its gold. fear of the outflow of gold. any prospect of the outflow of gold is regarded as the opening of a veritable pandora's box, from which must issue forth all the evils that can afflict mankind. it is to this fear, no doubt conscientiously entertained, that we must attribute the declaration of the president of the united states that we do not dare to tread on the edge of so dangerous a peril. it is not difficult to make the statement, but it will be very difficult to prove that we stand on the edge of any peril whatever, if most or even all our gold should go. we heard this same apprehension expressed, and with equal, if not greater, force twelve years ago, when the silver question was before this body. we were then assured by the ablest of our so-called "financiers" that the country would be denuded of its gold and that all manner of dreadful catastrophies would result. the prospect was represented to be appalling, although i do not remember that any reasons were given to show how or why gold should leave the country, nor that any statement was made as to exactly how this country would suffer if it did leave. for my own part, mr. president, i regard it as a matter of very little consequence whether gold goes out or not. certainly if, in order to retain gold, we must sacrifice justice, then i say let gold go. it is not of so much consequence that we should retain gold for the benefit of a small coterie of importers as that we should preserve the equity of time contracts between the millions of our own people who import no foreign goods. it is monstrous to think of violating all equities in time transactions--and nine out of every ten of our domestic business transactions are of that character--for the absurd and inconsequent purpose of keeping in this country some particular commodity, whether it be designated as money or otherwise. the hoarding or the outflow of gold is a hardship when, under the law, somebody is obliged to have it, as was the case during the war, when gold alone would pay duties on imports. combinations to hoard gold at that time frequently involved great loss to the importer. but thanks to the silver legislation of and other legislation making our treasury notes receivable for customs dues, no damage could now result from any attempted corner in gold. the creditors of this country never can convince the enterprising and energetic people who form the debtor class that it is to our interest that a certain material shall be kept in the country as money, if the expense of keeping it is that the debtors shall continue to be despoiled as they have been for the past fifteen years. if we can only retain gold at the expense of steady and unwavering prices, and at the expense of a steady and unchanging value in money, then the quicker gold goes out the better. the constantly increasing value of gold by reason of its increasing scarcity means the constantly increasing burden of all debt, and involves the final absorption of all the property of the country by the creditor classes. under the operation of the present system, by which prices are constantly falling and money is constantly increasing in value, the surplus earnings of the people are flowing in a steady stream into the vaults of money-lending institutions, and into the pockets of creditors. in a very intelligent article published in a late number of an influential magazine--the political science quarterly--there is the significant statement, apparently derived from the best sources, that in the year -' , one-half of all the mortgages in the state of indiana were foreclosed. it were better for society that property should at once be confiscated than that the great masses of the people in every community should have to struggle through years of painful and exhausting effort in the face of constantly falling prices and then in a large percentage of cases to lose their property at last. but this can not be avoided so long as we attempt to keep up what is called the gold standard. it is a necessary consequence of the gold standard that we shall have the scale of prices that obtains in gold standard countries if the presence of gold in this country is to destroy our people, who doubts that it should go? if its presence is to result in the destruction of equity and justice, who doubts that it should go? nearly every witness who testified before the secret committee of the house of commons in agreed that gold could only be held by paralysing the business of the country. it is estimated by witnesses who testified before that committee, that in the panic of , in great britain, the property of the country, by reason of the measures rendered necessary to maintain the single gold standard, was depreciated $ , , , . i commend that report to the careful and serious perusal of the advocates of the single gold standard in this country. among the witnesses before the committee were john stuart mill, lord overstone, and many other men distinguished in the world of letters and finance. i am informed by the librarian of congress that there is but one copy of the work in the united states. it would be well worth while for congress to order a number of copies of it printed, for there is no work with which i am acquainted that contains so much practical information as to the working of the single gold standard. according to the testimony taken before that committee, the experience of great britain since shows that gold alone, even when re-enforced by paper money convertible exclusively into gold, instead of being a beneficent instrument of valuation, has proved a cruel instrument of injustice. a brief consideration of the causes which affect the movement of gold will not be out of place in this connection. rationale of the movement of gold. why is it that gold leaves country and goes to another? for one reason only--the advantage of its owner. whenever he can make a profit by sending it out, the gold goes; and the period when that profit can be made is indicated when the prices of goods that are internationally dealt in are either rising in the country which it leaves or falling in the country to which it goes. it is only to pay for importable goods that gold ever leaves the country in which the owner resides. being an international money, and receivable everywhere at its full face value, gold loses nothing by transfer; hence it is sent wherever it will for the time being have the greatest purchasing power. whenever the general range of prices in this country of commodities internationally dealt in becomes than higher than the general range of the same commodities abroad, it is manifest that then gold can used to advantage by purchasing those articles abroad and selling them here. if the gold that goes out goes from stock that has been hoarded here, the outflow has no immediate or direct effect upon prices in this country, although, by increasing or "inflating" the volume of money abroad it assists in raising prices there, and thus tends to secure for our exported products a better price in the foreign market. but if the gold goes from the amount that is in active circulation here, and if the void created by this outflow is not filled with other forms of money, such as silver, or paper, it results in a reduction of the volume of money in actual use in this country, while at the same time increasing the volume of money abroad. this increase in the foreign money stock causes a rise of prices abroad, while the corresponding reduction of our currency causes a proportionate fall of prices here, hence there is a constant tendency to an equilibrium of prices of all articles of international commerce. no outflow of gold would follow a rise of prices here except in so far as that rise affected articles internationally dealt in. no rise of prices of such articles as we do not import would tend in any way to drive out gold. if, for example, raw cotton should increase in price in this country, that fact would not tend to drive out gold, because we do not import raw cotton. but should the prices of articles of manufactured cotton rise here above what those same articles could be bought for in any foreign country our merchants would send abroad for them, provided that, after paying the freight charges and customs dues, they could make a profit on them. so, also, if crockery-ware were made in this country, and its price should rise to, say, double the present price, then, instead of buying the american, or home-made article, our crockery merchants, finding that they could buy in england, france, or germany cheaper than they could buy in this country, would decline to buy the american crockery, and would send abroad for any article, provided that, after paying freight charges and customs dues, they could sell it here at a profit. that would tend to increase the shipments of gold to foreign countries. that an outflow of gold does not follow from a rise of general prices, but only of prices of articles of international trade, is manifest from the fact that if land becomes cheap in other countries, gold does not leave this country to buy it. when real estate is cheap in brazil, or australia, or in germany, france, or even england, the owners of gold in this country do not send it abroad to make purchases of real estate. so wages of labor may rise in this country, or compensation for all manner of services that must be performed here, and gold would not leave as a consequence. but if cloth were cheaper--quality considered,--in england, france, or germany, or at the remotest ends of the earth,--than in this country, our merchants would send gold for it in order to sell it here at a profit. altogether too much importance is attached to the possession of a large stock of gold, unless that stock form part of the active circulation of the country. so long as it remains in circulation it sustains prices and develops industry and internal commerce. but the tendency of gold being to find the most profitable field for operation, its continued presence in the country can never be relied upon. when we take gold from other countries prices in those countries fall, owing to the reduction of the volume of money there; and owing also to the action of the foreign banks in immediately raising their rates of discount on commercial paper and suddenly calling loans. as there is less money left in such country with which to pay for commodities, we are obliged to accept lower prices for the products we ship to it. the larger the stock of gold, therefore, accumulated by us the lower, necessarily, must be the price which we can receive for our surplus agricultural products. in order to maintain parity between the metals, it is not necessary for us to have all the gold we now have; $ , , , or even $ , , of gold, would maintain that parity. the parity between the metals can never be broken until all the gold leaves, and provided we retain one or two hundred million, the rest can not be placed more advantageously than where our languishing surplus products must be sold. when gold leaves this country it is because prices here are rising. prices are now lower than they have been since . must they continue declining in order that we may be able to retain all our gold? it is manifestly impossible for the people of this country to prosper with a constantly lowering range of prices. it is equally impossible for the present level of prices to be maintained with a constantly increasing demand for, and as constantly diminishing a supply of, gold. it is universally admitted that an increase in the money circulation of this country at the present time is an exigent necessity. the advocates of the single gold standard, while admitting that we must increase our money volume, the effect of which must be to maintain, if it does not raise, the level of prices here, insist that we shall let none of our gold go in order that prices abroad may rise. mr. blair. may i ask the senator a question? mr. jones, of nevada. certainly. mr. blair. does the senator mean to be understood that the falling of prices is an absolute demonstration of the increased value of the money without limitation? mr. jones, of nevada. i have already, in the early portion of my remarks, had occasion to state that when a fall in prices was brought about by a larger subordination of the forces of nature to the uses of man, as where the comforts and conveniences of life could be produced with less sacrifice than before, it was not an injury to society, but in advantage. in other words, if, by a certain amount of sacrifice seventeen year ago, only one pair of shoes could be produced, and if by the same sacrifice two pairs could be now produced, there would be a lowering of the price of shoes to about one-half of what it was seventeen years ago, which would be a very great benefaction to mankind. but, as i then stated, there is one certain sign that that is not, except to the slightest extent, the cause of the present universal fall of prices. when prices fall owing to improvements in manufacture, business revives, the masses of the people are at work, those who toil find themselves possessed of more of the comforts, of the conveniences, and even of the luxuries of life than before. they are better contented with their condition, and more buoyant and hopeful than before. on such occasions money becomes more and more in demand than it was before, and instead of being hoarded is put into active and productive business where it will make a profit. but when interest falls, pari passu, with the fall of prices, it shows that the fall of prices is not due, except in the smallest degree, to improved methods of production, but to the increased value of money. mr. blair. i was not controverting the senator's theory as to the existing facts in this country, but i understood him to be laying down an absolute principle, applicable under all circumstances and in all times, that the fall of prices is a demonstration of the increased value of money. i supposed that the fall in prices resulting from a protective tariff was beneficial, and not an indication of an increase in the value of money, and that that fall of price was not owing to the increased value of money, but was by improved machinery and all that. so it is possible that some of the fall in prices in this country may be owing to increased facility in the matter of production and to the beneficial operations of the protective tariff. mr. jones of nevada. mr. president---- mr. reagan. if the senator from nevada will permit me, i wish to ask the senator from new hampshire if he means to be understood as assuming that a protective tariff reduces the value of the commodities produced? mr. blair. i was simply asking for information of the senator from nevada, and he can answer that question much better than i; but the senator from texas understands very well that i do believe a protective tariff reduces prices. mr. jones, of nevada. mr. president, so far as a tariff has the effect of reducing prices in any country, it is not by reason of the levying of any certain percentage of duty on the imported goods. the first effect of the tariff certainly always must be to raise prices. the fundamental theory of the tariff is--whether it be correct or not i am not now discussing--that by that tariff you place the price of manufactured goods up to a range at which they can be produced in the country in which the tariff is levied, and upon the level of the range of wages and manner of living which obtain in that country. by so doing, if you have a proper volume of money, you set all your people at work, and keep them at work at a variety of occupations. in such case every forge, furnace, and factory becomes a school, every machine-shop an academy, and every cunning device and invention becomes a lesson, teaching the people how to deal with the subtle forces of the universe. so far as this country is concerned the theory of the tariff is that , , people should have a varied and complete system of manufactures, which should supply practically all their own wants, instead of an abnormal proportion of them being driven into the single occupation of farming and relying on foreign manufacturers to supply such finished products as they need. to draw out and develop the aptitudes of a people a large variety of occupations is indispensable. when all men are employed at their aptitudes new inventions multiply, progress is accelerated, and the secrets of nature are more rapidly unfolded. hence the mccormick reaper; hence the sewing-machine, that great instrument which clothes the world, because of the discovery that the eye of the needle should be at the point; hence the air-brake, the telegraph, the electric light, and thousands of other inventions that a protected people originate and develop, which would perhaps not have been originated or might have been long delayed if it had not been for the discouragement to imports caused by the tariff, and the encouragement to our people to go into manufactures by which their varied talents are drawn out and cultivated. there is no doubt that eventually as our conditions improve, increasing numbers of our people will by degrees emerge from agricultural and enter manufacturing pursuits. a tariff, by stimulating the organization and development of industries, trains men to greater skill and perfection of workmanship in a variety of departments, and with greater skill comes greater efficiency of labor, and so greater economy of time. in that way the prices of certain products are in time reduced; but that is not a reduction of which any one complains. the true cause of the present discontent will not be found in the protective tariff, but in the exactions of the single gold standard. fifteen years ago england was on the gold standard. it is on the gold standard to-day; yet prices in england are per cent. lower than they were fifteen years ago. there being no reason why there should be any change in the trend of prices, so long as a fierce contest for the possession of gold shall be waged between england, france, germany, and the united states, we are justified in assuming that a proportionate decline of prices will continue. that means a further decline of or per cent. in prices during the next fifteen years. where is this tendency to stop? and if it does not stop, how long will it be before the masses of the people become the bond slaves of the creditors? it is shocking to the moral sense of mankind that a few money-lenders and bondholders should thus be able, silently and insidiously, to wreck the business of every country in the world by constantly increasing the value of the money unit. while admitting the necessity of more monetary circulation, our gold standard friends fail to show us how it is possible for an increase in the volume of money to benefit our merchants, farmers, or mechanics if the prices that prevail in gold standard countries are to prevail here; for that is what the gold standard means for us, mr. president. it means that the prices that rule in gold standard countries are to rule here. the extreme indefiniteness with which the term "gold standard" is used has so befogged the relation which gold money bears to industry and commerce that people lose sight of the essential feature of that relation. it is impossible to have a clear conception of the gold standard without keeping in view exactly what is implied by the term. what men must mean in this country by "the gold standard" is not the touch of the metal, for they never touch it, and rarely, if ever, see it. the maintenance of the gold standard here simply means the maintenance here of the range of prices that prevail in gold-using countries; that is to say, that low and lowering range of prices rendered necessary by the attempt to measure the value of the constantly increasing mass of the products of industry in all the western world by the constantly diminishing volume of gold. no relief can come to the toiling masses of this country until we can lift our prices above those that now prevail in gold-using countries. even if our prices remain as they are and do not increase, gold will eventually leave the country if it continue to increase in value as it has been increasing during the past fifteen years. we have been enabled to maintain the gold standard here for the past twelve years notwithstanding a considerable addition of money other than gold to our currency, but we have been able to do so only because other countries have been using an equal or greater amount of money other than gold. we have been using no greater proportion of silver or paper money than other countries having the gold standard are using, hence we have been able to maintain their level of prices and still keep the metals together. but whenever we shall attempt to prevent a further fall or prices in this country, it will be impossible for us to retain our gold so long as prices in gold-using countries continue to decline as they have been declining. gold will leave as quickly because of contraction abroad as of inflation here, if by "inflation" is meant a coinage of money sufficient to maintain prices at a steady level. should gold leave the country, then, in order to supply its place, in order to maintain the _status quo_ in prices, and prevent a further fall from the present low range, we should need to have as many dollars of silver in circulation as there are now dollars of gold. gold would go out only because our prices were rising, and as it went prices would cease to rise. that process might continue until three or four hundred million dollars of gold had gone. in all this, where would be the disadvantage to our people? considering the rapidly increasing population and wealth of this country, all the silver that can be procured from the mines will be necessary to maintain the level of prices and to keep pace with the increasing demands for money. if, however, it slightly exceeds--and it could not at the utmost more than slightly exceed--the amount actually demanded by increasing population and business, the over-plus of each year would take a great many years to drive gold out of the country, dollar for dollar. for, when prices here, of things internationally dealt in, are at an equilibrium with prices of the same articles abroad, gold can not go any faster than silver comes in. if $ , , silver per month has not driven out gold, how much will do so? for twelve years past we have had a silver coinage of nearly $ , , a month, yet no gold has been driven out. having tested the capacity of that quantity of silver to drive out gold, we find that instead of driving it out its coinage has resulted rather in bringing gold in. for, to whatever cause the influx of gold may be ascribed, it is unquestionable that the gold has come, and it has needed all that gold, and all the silver that we have coined, to maintain international prices here. it is admitted by all that gold can not go out except by reason of a rise in this country of the prices of articles of international commerce beyond the prices of the same articles prevailing abroad. it is only then that it becomes more profitable to send out gold in payment for our foreign purchases than to send out commodities--the products of our own country. commodities will always be sent out in payment for other commodities so long as it is more profitable to send them than gold, and when, by reason of low prices prevailing abroad and high prices here, it is no longer profitable to send out commodities, purchasers send out gold, but only because it is to their advantage to do so. now, having seen that the coinage of $ , , of silver each month was insufficient to so raise prices in this country as to induce gold to go abroad, but that on the contrary it resulted in an influx and accumulation of a large amount of gold, we may safely assume that only so much of the amount of silver which congress shall now provide for as exceeds $ , , a month will have any influence in raising prices in this country above international prices, and so providing a stimulus for gold to go abroad in payment for commodities imported into this country. if the amount of silver which shall be now provided should be, say, $ , , a month, the excess over the present coinage would be $ , , a month. this, then, would be the amount that would drive out gold. as one dollar of silver would drive out no more than one dollar in gold, no more than $ , , could go out monthly. that would leave in circulation the same amount of money that is in circulation now. there would still be no increase in the money volume of the country, and, with no increase in the volume of money, prices here would not rise above international prices. at the rate of $ , , a month, it would take twenty years to drive out $ , , of the $ , , of gold now in this country. it would take even longer than that, because the $ , , driven out would tend to raise international prices abroad, and so check the outflow of gold from here. mr. mcpherson. will the senator yield to me for a question, or does he prefer to go on? mr. jones, of nevada. i am always ready to answer a question. mr. mcpherson. i do not want to interfere with the senator's line of argument, or with his speech in any form, but it does seem to me that there is something fallacious about the senator's argument, or else my judgment and the experience of the world is all wrong. i wanted to ask the senator this question: if it be known that the government of the united states, if you please, by such an increase of the silver coinage in this country as will be produced by the free coinage of silver, to which theory, as i understand, the senator is fully committed--if that be the theory of the government hereafter by the command of congress, i want to ask the senator if he broadly and boldly asserts that no gold can be driven out of the country to a greater extent than dollar for dollar for the silver that comes in? mr. jones, of nevada. absolutely; i say so. mr. mcpherson. then i want to ask the senator another question, which seems to be pertinent. does the senator assert that if a -cent dollar, the value in bullion of a silver dollar during the year , as has been furnished us by the director of the mint and the secretary of the treasury, were coined without limit (i say without limit, the limit being, of course, the amount of bullion that is brought to the treasury to coined), and the people of this country who have been in favor of a safe and honest currency, a currency either gold or as good as gold, which the treasury has been able to maintain, having forced no silver upon the people if they did not wish it, and in that way the silver dollar having been maintained equal to the gold dollar, i want to know, with the people of this country to-day the holders of $ , , of gold, how it is possible for the senator to believe that with a -cent dollar to take its place the gold coin would circulate for a single week, or a single day, or a single hour? if they have the gold will they not hold it? mr. jones, of nevada. the senator has so involved his question with his argument that i can scarcely get at what he wants me to answer. mr. mcpherson. the question i want the senator to answer is this: will the people of this country, the financiers of this country, the banks, the moneyed men holding $ , , of gold, with a certainty of the free coinage of silver and going to a silver basis, for that is what it means, put their gold in circulation, or will they hoard it? will it disappear? mr. jones, of nevada. i scarcely know what the senator means by a "silver basis." he talks about a -cent dollar. we have never seen a -cent dollar. the papers in the east have told us that the silver dollar was worth cents. i recollect talking on that subject once with some senators in the cloak-room. during the conversation one of the senate pages brought me a telegram, on which he said the telegraph messenger had told him there were cents due. i give the page a silver dollar and said to him: "i have been informed by some very respectable and intellectual gentlemen in here, some of them now candidates for the presidency even, that this dollar is worth only cents. i do not want to cheat a little boy. take this out, and if the boy thinks it worth only cents he can send me back cents, and if he thinks it is worth a dollar he can send me back cents. i will leave it to him." the page brought back cents and said the telegraph boy told him he did not know what those old "duffers" in there might say, but it was as good a dollar as he wanted and was very hard to get. [laughter.] the senator talks about the bullion value as though that had anything whatever to do with the value of the dollar. i have attempted to demonstrate that the material that was in the dollar has nothing whatever to do with it. let me illustrate. suppose the entire supply of silver of the world to-day were $ , , . suppose the law limited the coinage of it to $ , , , and every dollar coined was at par with gold. suppose there were a demand for half a million dollars of silver, to be used in the arts, and that the remainder ($ , , ) of uncoined silver were barred from the imperial money use. that supposes a supply of $ , , left after satisfying the requirements for coinage, and supposes only half a million dollars' demand for use in all the arts. in that case there would be a $ , , supply bearing down a half million dollars' art demand, or a proportion between supply and demand of to . suppose that under those circumstances silver bullion went to cents an ounce. would the senator then say that cents an ounce was the value of the $ , , , and all the rest of the coined silver of the western world, while by coining another million and a half, which would be nothing to a country like this, all the silver would be at par with gold? every ounce of silver coined in europe and the united states is at par with gold, a thousand or twelve hundred million dollars of it to-day in france, $ , , in germany, $ , , of it here. we are not dealing with the price of silver bullion, that portion of silver that is deprived of its immemorial use as money. we do not say what the commodity demand for silver may make that worth. such a consideration has no bearing whatever on the value of money. i will suppose that in some one county of the united states a law were passed that the wheat grown in that particular county should have no right to go through the grist-mill, and that that wheat, as it might very naturally do, being deprived of use, fell to one-half the price of the wheat grown elsewhere in the country. would the price of the wheat of that one county thus under interdiction and denied the grist be a fair gauge by which to measure the value of the entire wheat crop of the country? manifestly not. all we have to do is to take up the little "slack" of silver, and all of it will at once be at par with gold; then we shall hear no more about the "commodity value" of silver. that is the contention that the bimetallists make. mr. hearst. it will be $ . . mr. jones, of nevada. it will be $ . an ounce in one week--in three days--in fact the very moment you give it back its ancient right of coinage and restore to it its full money power. you coin of gold all that is brought to the mint, and you deny to a certain portion of silver that same long-established privilege, and then you measure the value of the whole supply of silver by that of the little fraction that is not coined, and which therefore has to find a market as a commodity. mr. mcpherson. then, if the senator will permit me, he necessarily proposes that the government of the united states shall take up all this "slack," as he calls it, in the surplus quantity of silver and shall use it in the coinage. the mints of europe being closed against the coinage of silver, there is no other place where it will be coined. now, if the government of the united states should use all the surplus silver in the country, which has simply forced the price down since we remonetized silver in more than per cent.---- mr. jones, of nevada. gold has risen per cent. mr. mcpherson. then i think the senator's argument is upon this idea and upon this plan, that after we are upon a silver basis, as we should be most assuredly, there would be no inequality in the money, because it would be all silver. mr. jones, of nevada. and no inequality between it and gold. mr. mcpherson. certainly not, because there would be no gold in circulation. but let me ask the senator another question. while he can use his short-legged silver dollar for the payment of debts, when he comes to make a new obligation would not the price of the goods assume a price equal to the difference between gold and silver? in other words, while you can use a debased currency for the payment of debts, if a legislative decree requires that you shall accept it, you can not use it for any other purpose. mr. jones, of nevada. i can not understand the senator. we have not provided any "short-legged" dollar. the senator is assuming a good many facts and attempting to adjust me to them. i ask the senator to wait until he has heard my argument, and i invite the senator then to make reply to it. mr. mcpherson. i am sorry that i interfered with the senator. mr. jones, of nevada. it was no interference on the part of the senator, except that i can not separate the senator's questions from the argument and assumptions that he makes. as to the outflow of gold, as i have said, it would take a long time for even $ , , of it go. the amount of gold driven out would tend to raise prices abroad by making money more plentiful there, and so check the outflow of gold from here. when senators speak about $ , , of gold being withdrawn from circulation here a question that is a little curious arises. what are these people who own it going to do with that gold after they have withdrawn it from circulation? are they going to invest it in great britain? are they going to invest it in france? are they going to the cape of good hope to invest it? if they are they will reverse the policy that english capitalists are pursuing now and have been pursuing for years--bringing their gold over here for investment. the senator tells us that gold is to disappear from circulation. what will the owners do with it? where and in what are they going to invest it? mr. mcpherson. it will be held for a premium. mr. jones, of nevada. but who will buy it at a premium? who needs it at all? for what purpose is it needed? who is going to pay any premium for it? nobody is "short" on it, and there is no law which forces anybody to have it. mr. president, nobody wants it enough to give a premium for it. it is only worth what is daily paid in the markets of the world and nobody is going to pay a premium for it. it is a bogie with which to frighten the people who demand reform in the currency of this country. let them withdraw their gold. i tell the senator it is not the men who hoard the gold in vaults who maintain or promote the prosperity of this country, but the toilers in the wheat-fields and on the farms of the country, the men who work in the planing mills, the forges, the furnaces, the factories, and in all our institutions of industry. it is they that bring us our prosperity, and not these people who are gambling for premiums on gold. let them gamble among themselves; let who lose and let who win, the people care nothing. the people of the united states are going to institute a money that shall install and maintain justice as between the citizens of this country, and they will not be impeded. i can tell the senator that neither his party nor the republican party will ever impede the march that this great country is about to make--the first in the world, i am glad to say--in adjusting to the demands of industry and commerce, that great instrument, money, the non-adjustment of which, as i have already stated, has, in my belief, caused more misery than was ever caused by war, pestilence, and famine. but to resume at the point where i was interrupted: the gold going out would tend constantly to restore the equilibrium between our prices and those of the gold-using countries, making the proportion of the gold outflow each year less than that of the year before. if there be included in this computation the remaining $ , , of gold, which would remain after the outflow of the $ , , , we shall be compelled to come to the conclusion that the time when our stock of gold can be driven out will be almost indefinitely postponed. but even should all our gold go by reason of the remonetization of silver, it will not be to the injury of the gold standard, but to its great advantage, and to the equally great advantage of the masses of the people, as well of this country, which the gold may leave, as of all countries to which it may go. it will make the "gold standard" consistent with the prosperity of the countries maintaining it. but instead of preserving the gold standard of to-day, which is a standard of wrong, it will inaugurate a gold standard that will approximate to a standard of justice. the new "gold standard" that would be established by the outflow of our gold would be a standard of prices resulting from the influx into england, france, and germany, the principal gold-using countries of europe, of more than $ , , of money. so considerable an addition to their money-stock would raise prices in those countries, and by remaining there, would, with the current production, which we could spare to them, tend to maintain prices at a steady level. such a condition would be an inestimable boon to the overburdened masses of europe, and their prosperity would not be attained at the expense of the people of the united states. we could well afford to let gold go, since, by the coinage of silver, our own money volume would not be reduced. the rise of prices which it would effect in europe would not only, as i have stated, secure better prices for our exported goods, but would undoubtedly enable us to maintain prices here at a substantial parity with those of europe--that is to say, with those of the new, more rational and more beneficent gold standard which would be established by the full remonetization of silver in this country. practically no gold money in the united states. but, aside altogether from this consideration, the gold that we already have is really a surplus--it is practically a dead and useless article. gold, mr. president, can not with entire truth be said at the present time to form any part of the money of this country. who but a bank clerk ever sees a gold piece? with the exception of a few million dollars on the pacific coast, gold is not really in circulation in this country. it is performing no useful function whatsoever. while i am engaged in delivering these remarks i venture to say no senator within the sound of my voice has in his pocket a single gold coin of any denomination whatever, or any paper representative of one. this is the answer to the fear expressed by some senators that when those who hold gold shall observe the enlargement of the money circulation by the issue of the proposed treasury notes they will be likely to hoard it. they are already hoarding it. every body knows that that is about all that gold is used for in this country. it is hardly possible for it to be hoarded to any greater extent than it is at the present time. so little is this metal in circulation that i do not deem it any exaggeration to say that there are millions of people in the united states, "native here, and to the manner born," who have never in all their lives seen a gold coin. how absurd, then, is the claim that any loss is to be suffered by the alleged future hoarding of gold, or that any calamity can occur to , , people by the disappearance of that which has long since disappeared. the argument based on our balance of trade. one of the staple arguments of the advocates of the single gold standard is, that if our stock of gold were greatly reduced we should be unable to make payments to foreign countries in case the balance of trade turned against us. it is only through an excess of imports over exports that gold could go, and this country now produces of nearly all articles almost all that it consumes. with the exception of two years there has not been a balance of trade against us for fourteen years, as the following table will show: _value of merchandise imported into, and exported from, the united states, from to , inclusive; also annual excess of imports or of exports--specie values._ ------+------------+------------+--------------+-----------+---------- year | | | | excess of |excess of ending| total | total |total exports | exports | imports june | exports. | imports. | and imports. | over | over -- | | | | imports. | exports. ------+------------+------------+--------------+-----------+---------- | _dollars._ | _dollars._ | _dollars._ |_dollars._ |_dollars._ | , , | , , | , , , | , , | -- | , , | , , | , , , | , , | -- | , , | , , | , , , | , , | -- | , , | , , | , , , | , , | -- | , , | , , | , , , | , , | -- | , , | , , | , , , | , , | -- | , , | , , | , , . | , , | -- | , , | , , | , , , | , , | -- | , , | , , | , , , | , , | -- | , , | , , | , , , | , , | -- | , , | , , | , , , | , , | -- | , , | , , | , , , | , , | -- | , , | , , | , , , | -- | , , | , , | , , | , , , | -- | , , ------+------------+------------+--------------+-----------+---------- this table shows that while for last year there was a balance against us of $ , , , and the year before of $ , , , for all former years from back to the balances were in our favor--all the way from $ , , in to $ , , in . but the total want of significance so far as the movement of gold is concerned attaching to any figures showing a balance of trade against the united states will be seen by an analysis of the figures for any one year. let us take for example the imports and exports for and analyze them by countries. i now present a table in which i place in one group the gold-using countries, and in another the silver and paper-using countries. _exports and imports of the united states to and from the various gold-using and silver-using or paper-using countries of the world for the fiscal year ending june , ._ ------------------------------------+---------------+--------------- countries. | exports. | imports. ------------------------------------+---------------+--------------- gold-using countries: | | canada | $ , , | $ , , belgium | , , | , , denmark | , , | , france | , , | , , germany | , , | , , great britain | , , | , , greece | , | , italy | , , | , , netherlands | , , | , , portugal and its possessions | , , | , , spain | , , | , , sweden and norway | , , | , , turkey | -- | , , british possessions in africa | , , | , british possessions in australia | , , | , , | | silver and paper using countries: | | austria-hungary | , | , , russia | , , | , , mexico | , , | , , central america | , , | , , hawaii | , , | , , argentine republic | , , | , , brazil | , , | , , chili | , , | , , peru | , | , colombia | , , | , , uruguay | , , | , , venezuela | , , | , , cuba | , , | , , hayti | , , | , , porto rico | , , | , , british west indies | , , | , , dutch west indies | , | , china | , , | , , india, british | , , | , , india, dutch | , , | , , japan | , , | , , ------------------------------------+---------------+--------------- by this table it is seen that the only gold-using countries having a balance of trade against us are canada, $ , ; france, $ , , ; greece, $ , ; germany, $ , , ; italy, $ , , ; sweden and norway, $ , ; turkey, $ , , --making a total balance against us in gold-using countries, $ , , --against which we have a balance in our favor with great britain alone of over $ , , . the balance against us in favor of all the silver using countries could of course be readily settled in silver; and by carefully noting the figures of the table last given it will be seen that it is in the last degree improbable that there will ever be a balance of trade against us in the gold using countries, taken as a whole. hence it is clear that if we had no gold at all we could readily settle all foreign balances that might be against us. nations, however, ultimately, and on the whole, square their accounts with commodities. every nation must buy what it wants with its own products. in this country especially have we nothing to fear, because any temporary balance against us could always be met by the yield from our own mines. no country has any difficulty by reason of my difference in money systems in buying what any other nation has to sell. this view is supported by all writers on political economy. i need quote but one. professor cairnes, professor of political economy in the university college of london, in his able work on "some unsettled questions in political economy" ( ), says: it appears to me that the influence attributed by many able writers in the united states to the depreciation of the paper currency as regards its effects on the foreign trade of the country is, in a great degree, purely imaginary. an advance in the scale of prices, _measured in gold_, in a country, if not shared by other countries, will at once affect its foreign trade, giving an impulse to importations and checking the exportation of all commodities other than gold. a similar effect is very generally attributed by american writers to the action on prices of the greenback inconvertible currency. but it may easily be shown that this is a complete illusion. foreigners do not send their products to the united states to take back greenbacks in exchange. the return which they look for is either gold or the commodities of the country; and if these have risen in price in proportion as the paper money has been depreciated, how should the advance in paper prices constitute an inducement for them to send their goods thither? the nominal gain in greenbacks on the importation is exactly balanced by the nominal loss when those greenbacks came to be converted into gold or commodities. the gain may, in particular cases, exceed the loss, but, if it does, the loss will also, in other cases, exceed the gain. on the whole, and on an average, they can not but be the equivalents of each other. mr. president, the best place in the world where we can have gold is not in the treasury of the united states, not in any sub-treasury, but in circulation, if not in our own country, then, in the foreign countries where our surplus products are sold. that is where gold would do us the most good by making money plentiful and prices correspondingly high. it does us no good here whatever, locked up as it always is, and doing none of the work of money, but simply reduces to the minimum the tax-paying and debt-paying power of our wheat- and cotton-growing communities. an unjust money should not be tolerated, whatever the material of which it may be composed, and the people of this country will not tolerate it. they do not fear the outflow of gold. if, in order to retain it, they must continue to lose as they have been losing for the past fifteen years, they will favor its going, and raise a shout of joy when it does go. with a perfect money system in our own country the range of our domestic prices would continue stable and equitable without regard to the prices of foreign countries. our foreign trade would take care of itself, and whatever the balances might be, they would be much oftener in our favor than against us, and in reality concern only the importing merchant and not the government or the people of the united states. the difficulty of gold-using countries to get our money, in which to pay us the balances they would owe us, would be much greater than our difficulty in getting their money, in which to pay them the occasional balances we might owe them. much the more serious question, (if it be a serious question at all, which i deny) is how they shall get our money, not how we shall get theirs. as the balances would be for the most part in our favor, it is for them to take such steps as may be necessary in order to pay us. but there is no just reason to apprehend difficulty in either case. a great country like the united states will have no trouble in buying the money of any other country at equitable rates--at rates regulated by the purchasing powers of the moneys of the two countries, respectively. no country in the history of the world, having a money local to itself, has ever found the slightest difficulty in buying, upon ratios determined by the relative purchasing powers of the two kinds of money, a sufficient amount of foreign exchange (which simply means the money of another country) to meet all adverse balances of trade. while earnestly advocating the full remonetization of silver and the maintenance in this country of a money volume sufficient to insure a steady level of prices and an unchanging value in the money unit, i entirely disclaim any desire for an inflation of the currency. my contention is that without silver we can not keep prices from further decline, and can not have enough money to serve the growing needs of population, industry, and commerce. at the same time i can not refrain from expressing the conviction that, as between inflation and contraction, no careful student of history and of economic science can for a moment hesitate in deciding that the evils inflicted on society by contraction have been longer in duration and infinitely greater in degree than any that have ever resulted from inflation. during all periods in which there has been a generous increase in the money-volume of a country or of the world, activity and prosperity have been its accompaniment. i challenge the citation of an instance to the contrary. with a volume of money increasing at a rate sufficient to meet the demands of a growing population, and especially if the money be such as will not leave the country, but, under all circumstances, will remain in it, to sustain prices, preserve equities, and reward labor, no country with a proper coördination of its industries can be otherwise than prosperous. the property of mobility--of fluidity--which is so much lauded in gold, is precisely the property least to be desired in the money of a country, if that property of mobility or fluidity is to keep alternately bringing money into and taking it out of the country, disturbing prices and disarranging equities. when it comes, if it enters into circulation, prices rise; when it goes, prices fall, and thus, instead of having a steady and level platform of prices on which the trade and industry of the republic may rest, like the firm and level platform of liberty upon which all our citizens stand, we whose business it is to "see that the republic take no harm," furnish our people with an "inclined plane" of finance on which all their business must be conducted. men buying this month at the elevated end of the platform find themselves selling next month at the depressed end. whenever in the history of a country there has been least reliance on international money (gold) and more reliance on merely national money (even of paper when reasonable limits were placed upon its quantity), prosperity has been everywhere present. i need not recall to the minds of senators the wave of prosperity that swept over this country when it was without any international money and resorted to the "greenback" currency. when, as a result of the franco-german war, france was deprived of international money, suspended specie payments, and resorted to a properly limited paper currency, her progress was unbounded. no period in the history of great britain can compare for activity, prosperity, or achievement, with the twenty years preceding , when specie payments were suspended, and during which period, as testified to by witnesses before the secret committee of parliament, the discount rate of the bank of england did not buffer a single change; whereas from that period to the rate was changed sixteen times, and from to as many as times, the fluctuations being sometime of the most violent character. when gold threatens to leave great britain the rate of discount at the bank of england is raised, with the view of discouraging, if not preventing, the outflow. raising the rate of discount is like putting the brakes on a railroad train; lowering the rate is like letting off the brakes. these changes were not due to any greater demand for money but to the movements of gold. there was frequently, in the condition of business, no warrant whatever for a rise in the rate of discount. the only reason for it was to prevent gold from performing what "our most conservative financiers" denominate its "noble" function of "mobility"--of "fluidity"--namely, the function of going "where it was wanted." this function of going "where it is wanted" is described as the great "mission" of gold, and it is assumed that it will never be wanted at more than one place at a time. yet hear what the chancellor of the exchequer of great britain said a few days ago in the house of commons: i admit that, as interested in the commerce and monetary system of this country i feel a kind of shame that on the occasion of £ , , or £ , , of gold being taken from this country to brazil, or any other country, it should immediately have the effect of causing a monetary alarm throughout the country. (speech of the chancellor of the exchequer in the house of commons, april , .) this is a suggestive admission, from so well-informed a source, as to the operation of the single gold standard. i commend it to those who would circumscribe and hamper the prosperity of this country by making gold alone the standard of all values. i have thought it necessary, mr. president, to state what i conceive to be the true principles of the science of money, the principles that, with the progress of time and growth of intelligence, must prevail the world over; because, without a clear understanding of the relation which the quantity of money in a country bears to the prosperity and happiness of its people, there would be no justification for an addition of either silver, gold, or any other form of money to the quantity already in circulation. if the value of money depends on quantity, then, as long as the world adheres to the automatic theory of money, my contention is that all the silver produced from all the mines of the world should be transmuted into coin; and even then, if the wants of the world continue to increase as they have been increasing, it is only a question of time, and that not far distant, when the combined supply of both metals will be insufficient to maintain the equities in time transactions. the world having decreed to stand by the automatic system we are now dealing with the question as a practical one. the only relief that can be had is to adhere strictly to that system, and give it full scope. remove all legislative restrictions and let the world have the full benefit of all the precious metals that are yielded by the mines. the world's supply of gold and silver. since for thousands of years the world recognized both silver and gold as money, can anybody tell what has happened to render one of them unfitted for the money use? no argument based on fluctuations in the current supplies of either of the metals can militate against the use of both as money. the fluctuation in the annual yield of both, taken together, is much less violent and less frequent than the fluctuation of either taken separately. by the use of both, society has much greater security against the evil of an insufficient money volume. while a large yield, now of one, and again of the other, has taken place, there is no instance in the history of the world of an extraordinary yield of both occurring simultaneously, except in the single instance of the first discovery of the mines of america. when the gold mines have been yielding largely, there has been no special increase of silver, and during the period when silver has been produced in comparatively large quantities the gold mines have been less productive. this will be illustrated by the following table showing the yield of both gold and silver, from the discovery of america to the present time. _annual average production of the precious metals throughout the world from the discovery of america to ._ [from director of united states mint.] -----------------------------------+-------------+-------------- periods. | gold. | silver. -----------------------------------+-------------+-------------- - , average for each year | $ , , | $ , , - do | , , | , , - do | , , | , , - do | , , | , , - do | , , | , , - do | , , | , , - do | , , | , , - do | , , | , , - do | , , | , , - do | , , | , , - , average for each year | , , | , , - do | , , | , , - do | , , | , , - do | , , | , , - do | , , | , , - do | , , | , , - do | , , | , , - do | , , | , , - do | , , | , , - do | , , | , , - do | , , | , , - do | , , | , , - do | , , | , , - do | , , | , , - do | , , | , , -----------------------------------+-------------+-------------- _world's production of gold and silver for the calendar years to , inclusive._ ----------+---------------+------------------------------------------- | gold. | silver. calendar +---------------+--------------+--------------+------------- years. | | fine | market | coining | value. | ounces. | value. | value. ----------+---------------+--------------+--------------+------------- | $ , , | , , | $ , , | $ , , | , , | , , | , , | , , | , , | , , | , , | , , | , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , | , , ----------+---------------+--------------+--------------+------------- from this table it will be seen that from to the average yearly yield of gold was $ , , ; of silver, $ , , --four of silver to one of gold. from to the average yearly yield of gold was $ , , ; of silver, $ , , --two of silver to one of gold. from to the average yearly yield of gold was $ , , ; of silver, $ , , --two and a half of gold to one of silver. from to the yearly average yield of gold was $ , , ; of silver, $ , , --nearly two of gold for one of silver. from to the yearly average yield of gold was $ , , : of silver, $ , , --one-sixth more silver than gold. from those figures it is plain that no continuous, extraordinary yield of silver, such as might warrant the slightest fear of an unnecessary addition to the money volume, is to be expected. on the other hand the continuous drain of gold for use in the arts, as dentistry, gold plate, jewelry, gilding, and articles of decoration generally, is seriously encroaching upon the annual supply. both metals possess in common, and neither in any different degree from the other, all the qualities which are recognized as necessary in a commodity money. silver enjoys in an equal degree with gold the quality of indestructibility, of divisibility, of malleability, and of resistance to chemical changes. the stock of both existing in the world (the product of all time) is estimated to be about equal, the production of the past years being set down as-- gold $ , , , silver , , , that silver mining has not proved exceptionally profitable in this country is proved by the comparatively small number that have engaged in the business. this country has been thoroughly explored in the search for additional mines without any of great value being discovered. the allurements of the business lie in its uncertainty; and for the occasional prize that is drawn thousands of blanks are found. there is always enough hope of results to induce continued effort, but there is also sufficient doubt and discouragement to deter an undue number from engaging in the business. the mines of mexico have been worked for hundreds of years; and up to the business of silver mining in that country had all the stimulus that a parity at - / to could give to it. it is not, therefore, probable that any material increase of output can be expected from that quarter. conceding, for the sake of the argument, the eventual possibility of so superabundant a yield of silver as to work injury and inequity to the interests of creditors, is it not manifest that it is in the power of society at all times to remedy the evil by a limitation of the coinage? and on the other hand, is it not equally manifest that for an insufficient supply there is no remedy? if great mountains of silver should be discovered, does not congress meet constantly? if there should seem to be too much, could not the coinage be readily limited to prevent depreciation? but, on the other hand, when we dedicate the monetary function solely to one metal, of which there is manifestly and admittedly the world over an insufficient supply, where is the remedy? what can congress do to enlarge that supply? absolutely nothing. the gold used in the arts. the director of the united states mint a few years ago estimated that of the $ , , gold annually produced from the mines of the world $ , , are consumed in the manufacture of jewelry, gold plate, plated ware, gold-leaf, etc., and in various processes of dentistry. the single standard of gold, therefore, is maintained by the creditor nations in the face of the admitted fact that but $ , , of that metal are annually added to the money stocks. not only is this encroachment of the commodity demand on the money supply becoming greater year by year, with the growth of population, but the supply of gold from the mines is itself becoming less, having declined from an average of $ , , between and (the period of greatest yield from california and australia), to an average of $ , , for the past ten years. of the entire gold supply of the world, nine-tenths of it have come from placer mines, readily discoverable and easily worked, because requiring little or no capital. all known fields of those are practically exhausted, and there is no reasonable prospect of the discovery of others. hardy, adventurous, and skillful miners from the united states, and capitalists from all countries, have ransacked the world in vain for new fields of gold. why, then, with the knowledge of those facts before us, should we discard from the full money use and function the only metal that gives to the world any prospect of relief from the money famine from which civilization is now suffering and from which, if silver be not speedily restored to its ancient use and function, the world is destined to suffer much more? if it be conceivable that the demonetization of either metal were necessary, why demonetize that which promises the greater and more steady yield? if for any reason society should decide that one of the metals should be discarded, should it not rather be that one which promises the smaller future yield, than that which promises the larger? silver is the money-metal best suited to the mass of the people, and to the variety and character of transactions that constitute the interchanges of daily life. the supplies of both metals if united by law, in the full money function, would have a steadiness of value which can not be attained by either separately. treasury notes should not be redeemed in bullion the proposition to redeem the proposed treasury notes in silver bullion or in anything but lawful money of the united states will never meet the approval of the people. what the people of this country want is money, and what they should have is money. these notes will represent full value received, the evidence of which is the bullion in possession of the government. when issued, they will enter into circulation. they will have to do the work of money among the people. they will go to make up the volume of the currency. on the basis of that volume each dollar acquires a certain value, and represents a given amount of sacrifice. on that volume, and on those conditions, bargains will be made, prices established, debts contracted, values adjusted, and equities created. if any portion of that money be withdrawn from circulation (for that is what "redemption" means) without an equivalent amount of money in some other form being issued to take its place, the circulation will to that extent be contracted, every dollar in circulation will increase in value, prices will fall, property-values established on the basis of the larger circulation will shrink, and equities will be destroyed. the redemption of any number of those notes in silver bullion means the withdrawal of many dollars of money from circulation and the destruction of so much of the money of the country. money is not a thing that can be destroyed with impunity. it should be kept in use among the people. it is to industry what the blood is to the human body; it is the life-giving and life-sustaining medium. the money volume of a country should not be subject to frequent and violent changes. in a new and growing country, it should be characterized by that steady accretion that characterizes the increase in the quantity of blood in the human body as it progresses from infancy to maturity. it is no more unreasoning, empirical, or unscientific to be alternately withdrawing blood from, and injecting blood into, a human body than to be constantly contracting and expanding the money volume of the country. and as activity of circulation of the blood is essential to the health of the body, so activity of circulation in money is indispensable to the well-being of society. the possession of no mere commodity, whatever its value, will compensate a country for the destruction of any considerable portion of its money, upon the entire volume of which vast equities rest. money should be redeemable in all things. money should be redeemed in all things; not in one thing alone. the peculiar characteristic of true money, that which distinguishes it from all other things whatsoever and constitutes it a prime factor in civilization, is that it is at all times redeemable in any thing that is on sale. being an order for property, it should be redeemed in any form of disposable property which the holder may desire. a guinea-- said adam smith-- may be considered as a bill for a certain quantity of necessaries and conveniences upon all the tradesmen in the neighborhood. any form of money, the condition of whose existence depends on redeemability in one thing alone, can not be money in the full sense, and whenever an urgent demand for real money springs up the other ceases altogether to be money. the redemption of money should be reciprocal between the government and the people and between and among all individuals in the community. it should not only be redeemable by the government by acceptance for taxes but also redeemable by and among the people for all property for sale and services for hire. its quantity should be so regulated as that its unit (the dollar) should neither increase nor diminish in value, and it should be kept constantly in circulation, and not be permitted to lie uselessly in the treasury. any other money than this is to a certain extent counterfeit; it is false money, because when most needed it fails to be money and has to be "redeemed" in something else (gold) which can not be got except at ruinous sacrifice. it is of the very essence of money--its pith and marrow and protoplasm--that it should be a legal tender, a universal solvent, the ultimate of payment, and redeemable, at the prices ruling, in everything that is on sale. if the volume of such money be properly regulated, while there may from time to time be variations in the prices of particular articles, the general range of prices will be maintained practically undisturbed. what an absurdity it is for the government to put its stamp on one thing in order to make it redeemable in another thing imprinted with the same stamp, but which nobody wants except for the purpose of getting a third thing that could have been got just as well without the intervention of the second. as well might he who, wanting water, is given a silver cup wherewith to get it, but on going to the spring is forbidden to drink until he exchanges his silver cup for a gold one. the real reason why it is insisted that all other things than gold shall be exchangeable into gold is that gold is getting dearer by reason of decreasing supply and increasing populations. the necessity for convertibility into gold implies that, in ordinary times, a range of prices higher than the gold range will prevail, and when, by reason perhaps of increased activity of business, redemption comes to be demanded prices are at once precipitated to those of the gold standard and below, to the great advantage of the creditor classes, who, as owners of bonds, may be considered in the language of the stock exchange "long" on money, and to the equally great injury of the producing class, who, being in debt, may be considered as having sold money "short." the supreme consideration is that the money of a country shall be so regulated as that prices may not fall from any cause inhering in the money system. the value of money--in other words, the sacrifice necessary to obtain it--should be no greater at one time than at another. in order to effect that object of prime consequence, to maintain the value of money unchanging, there should be no hesitancy whatever in changing the material of which it is made. nobody who has reflected on the subject for a moment doubts that what gave "value" or exchangeable power to the greenback was not the promise made on its face, without date, to pay a dollar, but the inscription on its back which declared it a legal tender for all dues and demands, public and private, except duties on imports. it was a misfortune to mankind that the words "promise to pay" were printed on it, because by it millions were led to believe that the "value" or exchangeable power resided in the promise instead of in the legal-tender power conferred upon it. there is no object in redeeming in gold, except to maintain gold prices, that is to say, the range of prices prevailing in gold-using countries, and as those prices are constantly trending downward, any country that insists on maintaining the gold standard must accept the consequences in a corresponding fall of prices. the advocates of the gold standard, in effect, maintain that no matter to what extreme prices may fall, we must be content--we must bow in humble submission to the inevitable, since, in their view, it is more necessary to maintain the sacredness of the gold standard than to establish justice, promote prosperity, or to maintain equity in all time transactions. it is in no way necessary, on account of any intrinsic or inherent quality of gold, that should have that particular metal, and that alone, for money. it is boasted that gold is a universal measure. why is it universal? why is gold accepted in every country of the world? not because the gold is wanted for any quality inherent in the metal, but because it is an order for property in gold-using countries, such as england, france, and germany, whose trade is largely a foreign trade. at whatever rate gold will exchange in england, it will exchange in all countries having trade relations with england, because it is an order for goods in a country with which they are dealing. will not the money of this country equally, and for like reasons, whether gold or silver, have acceptability in every country with which the united states have trade relations? not for any quality inherent in the metal, but because it is an order for property in the united states. will it not be willingly accepted by those who wish to buy in this country? possible effect of redemption in bullion. in order to see the effect of the redemption of these treasury notes in bullion, we have but to look at the possibilities of the situation. suppose there were in the treasury $ , , worth of that bullion, which, by the taking up, little by little, and month by month, of the amount not used in the arts, would be taken by the treasury at or about par. then, suppose that for any reason, such as fear of approaching panic or otherwise, $ , , of the treasury notes were suddenly presented for redemption, and canceled, and the bullion as suddenly put on the market, what would it be worth? what would gold bullion be worth if it had not the privilege of coinage, and if $ , , of it, deprived of the money use, was suddenly put on the market? can there be a doubt that the abrupt output of so large a quantity would have the effect of immediately and enormously depreciating its value? in the case under consideration, the result would be that the silver remaining in the treasury would not bring one-fourth the sum necessary to redeem the outstanding treasury notes, so that not only would a heavy loss result to the government, but, by reason of the sudden and serious contraction of the money volume, an infinitely greater loss would result to all the people. but if it be deemed a remote contingency that any extraordinary amount would in that manner be suddenly taken from the treasury, there is another danger which can not be put aside as improbable, but which, on the contrary, is to be looked for with almost absolute certainty, and to my mind, constitutes an irremovable and insurmountable objection to any system of bullion redemption. a large number of merchants in london need, monthly, millions of dollars worth of silver to make payments in india. they will naturally want to get it at the lowest price, and it is not to their advantage to intensify the competition for it. on the contrary, it is to their direct advantage to depress the price to the lowest possible point. as the treasury of the united states would buy silver at the lowest price, the london merchants would refuse to enter the open market in competition with our government for its purchase. but no sooner could the silver be stored in the vaults of the treasury, than the agents of the london merchants would appear, and before any opportunity had offered for a favorable change in the price of the bullion, could present as many millions of these notes as might suit their purpose, and receive bullion therefor. a secretary of the treasury who conscientiously believed that it was his duty to maintain the gold standard at all hazards, would naturally feel compelled--certainly it would be in his power--to put out whatever amount of bullion he might deem necessary to accomplish that purpose, even if it all had to go. thus the united states treasury would become the convenient and capacious conduit through which silver should immediately flow from this country to england, depriving our people, notwithstanding the legislative measures for their relief, of practically all use of silver as money, inasmuch as the four and a half-million dollars of treasury notes would be withdrawn and canceled about as soon as issued. thus would our treasury department be made practically the purchasing agent in this country of any syndicate or combination of english merchants who might desire silver for the east india trade. if it be said that no secretary of the treasury would attempt thus to defeat the will of the people as expressed in the law, the sufficient reply is that a conscientious man who believes that the honor of the united states is pledged to the maintenance of the gold standard, and that it is indispensable to the prosperity of the people, will exercise all the power vested in him by law to prevent a departure from that standard, and will regard himself as for the time being the savior of the republic by keeping it from "the edge of so dangerous a peril" as the execution of the people's will. certainly no man will deny to the present secretary of the treasury entire rectitude of motive in all his conduct. from the well-known fact that since the passage of the limited coinage act of all our secretaries have refrained from purchasing more silver than they were compelled to do by the mandatory provision of that law, it is reasonable to infer that none of them, if called upon to execute a law containing a silver bullion redemption clause, such as is suggested, would feel called upon to make a net purchase of more than $ , , worth in each month; and that none of them would hesitate to exchange for treasury notes all the monthly purchases of bullion in excess of that amount. a plank from the republican platform. i must be pardoned for directing the attention of senators on this side of the chamber to a short declaration of the last republican national convention: the republican party is in favor of the use of both gold and silver as money. if party platforms mean anything that clause meant that the republican party went before the country pledged to the use and to the equal and non-discriminating use of both silver and gold as money. it was well known that throughout the entire west the question of the remonetization of silver was deemed of vital importance, and party orators and the party press, throughout that entire section were severe in their denunciation of the prior administration of its unfriendly attitude toward silver. i wish in all solicitude and sincerity to advise my republican friends of the east that this plank in the party platform was construed by the republicans of the west to mean precisely what it says. they are looking with confidence to this congress for such action as will fittingly embody in the statutes the principle laid down by the party now in the responsible direction of the government. shall we be flooded with silver? we are told that if silver is given free access to the mints we shall be flooded with it from all parts of the world. does anybody show where the flood of silver is to come from? where are the reservoirs that contain it? not in england, where it is difficult for the people even to get a sufficiency of it for small change to transact the business of the country: not in germany, where the scarcity of money was so pressing that the government had to abandon the idea of selling silver. though the stock in france is large her people will never give it up. silver has been the "shield and buckler" of the french republic. all she has is coined at the ratio of - / ounces of silver to of gold, and its shipment to this country would involve a loss to france, not only of the per cent. difference between the french relation ( - / to ) and ours (which is to ), but of per cent. additional in the cost of gathering and shipping it. and after that could only exchange them for treasury notes. the silver stock in india and the orient is performing indispensable duty as money, and no "flood" of it can be expected from that quarter. from time immemorial india has been absorbing all the surplus silver of the world. she has never got so much as to appease her appetite for more. so insatiable is her desire for that metal that she has long been known as the "sink of silver." china has not a piece of the metal that she can dispose of. mexico has no stock whatever of silver on hand, except the limited number of coined pieces forming her moderate money circulation, and not a dollar of it can be spared. no country of central or south america has any surplus silver. every piece of coined silver in every country in the world is part of the monetary circulation of that country, and even when of short weight and classified as a mere "token" is passing at par as full valued money. no gain could possibly accrue, therefore, to the owners of coined silver anywhere by shipping it to this country for any purpose, and there is no surplus stock of bullion anywhere. if anybody doubts this statement let him make the attempt in all the money centers of the world to buy from accumulated stock even $ , , worth of it. he will fail to get it in london, paris, berlin, calcutta, new york, or san francisco, or in all combined. there is no source from which to get silver except the current supply from the mines, and whatever that is now it is not likely ever greatly to increase. the occupation of mining is not attractive to many, and in the nature of the case the number who follow it will always be comparatively few. the argonauts of old were but a small band of hardy adventurers; those of the new era are destined to bear no larger proportion to the population. but even were this not so, nature herself draws the line. to the eye of the experienced prospector silver mines are as discernible on the surface of the earth as are mountains, and the world has been explored in vain for further "finds." those who talk, therefore, of "floods" of silver coming here for coinage simply show their ignorance of existing conditions. i may add that of all the shafts that have been sunk for silver mines in the world where they have found silver croppings on top in ninety-nine out of every hundred, and i think i am stating it moderately, the veins have not penetrated the earth, mineralized, fertilized, to the depth of feet, rarely have they penetrated the earth to a depth exceeding , feet, and the most prolific yield of silver mines has been from a depth not exceeding feet. the very fact, mr. president, that, with all the world searching for gold and silver mines--a search that has continued throughout all history--the amount of the two metals yielded by the mines is about equal, shows that the historical relation existing between them is the relation at which they can be profitably produced. it is apparent that if there were a great advantage in the production of silver over gold, at the relation of - / to , that advantage would be seen in the largely preponderant production of silver; but instead we find that the result of thousands of years of mining has given us about equal quantities of both metals. can the united states alone hold the metals at a parity? we are told that the united states, unaided, can not, if it would, restore silver to a parity with gold--that no one nation acting alone can achieve so difficult a feat. but it is incapable of denial that throughout all vicissitudes of production of gold and silver from to the law of france--one nation alone--accomplished it. as i have shown in greater detail elsewhere, by reference to the table of annual production of the metals, it will be observed that from to , the production was in the proportion of four dollars of silver to one of gold; from to two of silver to one of gold, from to one dollar of silver, to one of gold, from to four dollars of gold to one of silver, from to three of gold to one of silver, from to two of gold to one of silver, in and one-and-a-half of gold to one of silver. notwithstanding these extreme variations in the relative annual production the law of france constituted a ligature sufficient to hold the metals in line at the ratio of - / to , and this not for france alone but for the whole world. if that period does not offer sufficient proof of the power of law, under varying conditions of supply, to tie the metals together and keep them so, no degree of proof will suffice, for the vacillations of their relative production have been greater during this century than at any former period in the history of the world. is an international agreement necessary? if that could be done by a nation with a population of , , to , , , what difficulty could be experienced by a nation of , , in accomplishing the same result? yet we are told that international agreement is necessary to restore silver to its ancient right as a full-money metal. those who suggest such an agreement forget that while this nation is a borrower of money, the first and principal nation to demonetize silver is the greatest money lender known to history. is it for a moment to be supposed that the shrewd english creditor classes will enter into any agreement which will deprive them of the spoils of so delicate and ingenious a system of usury; a system not only not banned by law, but, on the contrary, having the special approval and protection of statutes, and the active support and approval of all the complaisant moralists, philosophers, and financiers of the age? while they are dilligently gathering in the proceeds of this operation a diversion is kept up for the occupation and amusement of dilettant financiers and economists, by invoking a discussion of the ratio that should be maintained between the metals. the ratio is the pretext on which conference after conference has been called. the advocates of the single gold standard contend that hostile legislation had no influence in effecting the separation of the metals, and that the reversal of that legislation can not and will not restore them to a parity unless the principal commercial nations of the western world join in the work of rehabilitation. as illustrating the force of law on the relation of the metals i will read a suggestive paragraph from the report of the royal commission of england ( ), part i, section : now, undoubtedly, the date which forms the dividing line between an epoch of approximate fixity in the relative value of gold and silver, and one of marked instability, is the year when the bimetallic system which had previously been in force in the latin union ceased to be in full operation, and we are irresistibly led to the conclusion that the operation of that system, established as it was in countries the population and commerce of which were considerable, exerted a material influence upon the relative value of the two metals. so long as that system was in force we think that, notwithstanding the changes in the production and use of the precious metals, it kept the market price of silver approximately steady at the ratio fixed by law between them, namely, - / to . nor does it appear to us _a priori_ unreasonable to suppose that the existence in the latin union of a bimetallic system with a ratio of - / to fixed between the two metals should have been capable of keeping the market price of silver steady at approximately that ratio. the paragraph quoted ascribes the effect thus produced to the bimetallic treaty of the latin union, a combination of italy, belgium, switzerland, and france, entered into in for the purpose of maintaining similar conditions of coinage. but it will be observed that, so far as the ratio was concerned, precisely the same effect had been produced by france alone during the sixty-two years from the passage of its law of to . not only did the french law keep the metals together at a time when the larger annual yield was of silver, but it kept them together when the larger annual yield was of gold. had not that law been in operation during the ' 's, when a flood of gold poured from the mines of california and australia, gold would have fallen, as in early times it more than once fell, to the ratio of to , at which but ounces of silver (instead of - / ) would buy an ounce of gold. thus the law of one country alone, a country then of not one-half the present population of the united states, held the metals together, so that to whatever extent gold fell in relation to commodities from to , by reason of the large output of the mines, silver fell to the same extent, notwithstanding the enormous decrease in its production relatively to gold during that period. what is claimed for law in this connection is not that it directly controls the relative values of gold and silver any more than of anything else, but that on the slightest separation of the metals there instantly arises, under the law of the double standard, a demand for the cheaper metal, while the demand for the dearer one is suspended. in this way the double standard accommodates itself to the law of supply and demand, which is admitted to be the governing factor in the determination of value. it is not contended that a small or insignificant country could keep the metals together, but all experience goes to show that a great nation like the united states would have no difficulty whatever in doing so. so thoroughly are the advantages of the gold standard to the creditor classes recognized in england that the english commissioners, who, for form's sake, have been sent to the several monetary conferences held on the continent, have never been invested by their government with any power whatever. and it is but a few weeks since the house of commons overwhelmingly voted down a proposition made in good faith by mr. samuel smith, looking to the calling of a new conference, which was supported by petitions to parliament signed by , persons not merely as individuals, but as representing large organizations of the toilers of england. the ratio is not the difficulty. those who wanted silver demonetized do not want it added to the money volume of the world at any ratio. why then shall we wait? macauley, commenting on the impregnability of intrenched prerogative, observed that if the announcement of the discovery of the law of gravitation had militated against the personal interests of any vested or privileged class, its general acceptance might have been long postponed. shall we, then, postpone relief to the suffering industries of this country till we can secure from the privileged classes, from the money-lenders of the world, an agreement to cease their exactions? no, mr. president, we need not wait, and we _will_ not wait. all that is necessary is to _act_, and so far as the rules of order and of parliamentary procedure will permit, we propose to act, promptly and decisively. the world can not expect the initiatory movement for any change to be taken by those whose interests are served by the continuance of present conditions. such conditions being consistent with their own welfare, they find no difficulty in arriving at the conclusion that they are for the welfare of society at large. the dogma that cupidity is a synonym for virtue will never fail to find ready converts among the beneficiaries. * * * plate sin with gold. and the strong lance of justice hurtless breaks. conclusion. i predict that the restoration of silver to its birthright, mr. president, will mark an epoch in the history of this country. it will place in circulation an amount of money commensurate with our increasing population. it will give assurance to our languishing industries that the volume of our circulating medium is not to continue shrinking, and that the tendency of prices shall no longer be downward. it will increase the wages of labor and the prices of the products of labor; it will reduce the price of bonds and other forms of money futures, it will lighten, but not inequitably, the burden of mortgages; it will increase largely, though not unjustly, the debt-paying and tax-paying power of the people. it will loosen the grasp of the creditor from the throat of the debtor. by the remonetization of silver, money will cease to be the object of commerce, and will again become its beneficent instrument. activity will replace stagnation, movement will supplant inertia, courage will banish fear; confidence will dispel doubt; hope will supersede despair. the lifting up of silver to its rightful plane by the side of gold will set in motion all the latent energies of the people. it will banish involuntary idleness, by putting every willing man to work. it will revive business, and reanimate the heart and hope of the masses. capital, no longer fearing a fall in prices, will turn into productive avenues. the hoards of money lying idle in the bank vaults will come out to bless and enrich alike their owners and the community at large; while the millions of dollars now invested at low interest in gilt-edged securities will seek more profitable investment in the busy field of industry, where they will be utilized in the payment of wages and the consequent dissemination of comfort and happiness among the people. and this it will accomplish not for the united states alone, but for civilization. for it is not too much to say, mr. president, that upon the decision of this question depend consequences more momentous than upon that of any other question of public policy within the memory of this generation. in a broader sense than any other question attracting the general attention of mankind it is a question of civilization. it embodies the hopes and aspirations of our race. the act of congress which shall happily solve it will constitute a decree of emancipation as veritable as any that ever freed serf from thraldom, but more universal in its application. it will proclaim the freedom of the white race the world over, it will lift the bowed head of labor, it will hush the threnody of toil. it will inaugurate the true renaissance--a renaissance of _prosperity_, without which industry, learning, science, literature, art, are but as apples of sodom. (applause in the galleries.) index. alison, sir archibald, coinage has no effect in preventing fluctuations in value of coin, effect of suspension of specie payments in england in , allegory of the clocks, american review, effect of increasing volume of money, automatic system of money, gold and silver, why interfered with, appleton's cyclopedia, definition of money, aristotle on money, balance of trade, the argument based on, banker's advice to the usurer, baring, alexander, a reduction of paper would have the same effect as of any other money, bastiat, description of the crown piece, baudeau, on money, behren, jacob, opinion as to effect of gold standard in england, berkeley, bishop, queries as to money, best money (truthfully so-called), a money of unchanging value in the unit, cairnes, prof. j. e., relations of paper currency to foreign exchange, cattle, estimate of value in , cernuschi, the purchasing power of money is in direct proportion to the volume of money existing, checks and clearing houses, their effects in economizing use of money, considered, chevalier, in france, advocated demonetization of gold, circulation, present monetary, coal, yield for , condition of country at present, at period of demonetization of silver, competition, the value of money fixed by the competition to get it, cotton manufacturer, his loan of $ , , payable, principal and interest, in cloth, contrasted with loan of same amount contracted by his neighbor, but payable in dollars, cotton-planters, their loss by demonetization of silver, crawford, william h., opinion as to effect of decreasing volume of money, creditors, demand for the "best money," meaning a money of increasing value, their course in europe to increase value of gold, their course in united states to increase value of gold, the pretense in the united states to "strengthen the public credit", crops for , corn, wheat, oats, and cotton, debt, a distinguishing characteristic of civilization, a, of $ , contracted in --how much wheat, cotton, etc., would pay it then and how much now, debtors, who are they, and creditors, their motives compared, de colange, professor, the rate at which money exchanges is determined by its quantity, demand for money, what it is, demonetization of silver, by england, by germany, by united states, wholly unjustifiable, de quincey, in england, advocated demonetization of gold, difficulty, one symptom common to all industries, discussion, educational effect of, double standard, statement of, before french commission, dumas, a senator of france, pleads for caution before demonetization, economist (london) admits rise of gold, effects of shrinking volume of money (extract from report of monetary commission), encyclopedia britannica, effect of fall in the value of money, england's position not due to gold standard, failures in united states, , , and , fall of interest on gilt-edged securities, a proof of rise of gold, farm, how it may be lost by an increasing value in the money unit, farmers, their loss by demonetization of silver, farms, estimate of value in , proposition that the government lend money on the security of the land, fanchet, léon, probable effect, should all european nations follow england in discarding silver, fichte, the value of money depends on its quantity, flood of silver, where is it to come from?, france, law of held metals at a parity till , frewen, moreton, extract from his "economic crisis", gallatin, albert, a metallic currency not indispensable, germany, emigration from, gibbs, henry h., cablegram relating to bimetallism, giffen, robert his reasoning erroneous that the commodity demand fixes the value of gold, gold and silver, both variable in value, the world's supply of both, gold, ratio of, to silver at various periods, - fall of, during times of alexander and cæsar, fear of fall of, during california excitement, rise of from to , proof that it has risen, some effects of its rise, proposition first made to demonetize it, demonetized in by german states and austria, fear of an outflow of, rationale of the outflow of, value as money not derived from commodity use, goschen, george j., chancellor of exchequer of england speaks for, but decides against, silver, graham, sir james, the value of money is in the inverse ratio to its quantity, "greenback", the, what gave it value?, gresham's law, and so-called "extension" of, gold standard, what it implies, statement in behalf of, before french commission, of the future, gold used in the arts, gold money, practically none in the united states, hamilton, alexander, effect of annulling use of either metal, houses in united states, estimated value in , hume, david, contrast of conditions under increasing and under deceasing volume of money, value of money depends on quantity, huskisson, william, if the quantity of money is increased the value of commodities increase, improved methods of production, their effects considered, india, will remonetization place us "alongside?", international agreement: is such agreement necessary to tie the metals together, involuntary idleness, enormous loss of potential wealth, through, iron, pig: yield for , jefferson, thomas, "the unit must stand on both metals", jevons, professor: the metals not so steady a standard as corn, inconvertible paper money, if limited in quantity, can retain its full value, jevons, on money, table of relation of general prices to , laughlin, professor, "the name 'dollar' does not always have the same value", laveleye, professor, "debtors have a right to pay in gold or silver", law, what is claimed for it, in keeping the metals together, of france held the metals together from till demonetization, legal-tender: all money should have this power, locke, john, both gold and silver variable in value, on money, , mcculloch, j. r., "money is a measure of value", were there perfect security against over-issue of paper money, the metals might be dispensed with, mcleod, on money, materials used as money at various epochs, machiavelli's reference to the brigands, massachusetts bureau of labor: deductions from its reports as to numbers of the unemployed, mill, james, the value of money depends on its quantity, mill, john stuart, on money, the value varies inversely as its quantity, mining states: their interest in remonetization of silver, monetary commission report: quotations from, as to new school of financial theorists, money demand, not commodity demand, gives gold its value, effect of reduction in volume of, effect intensified as civilization advances, a glance at the history of, substances used as, at various epochs, the money-function the all-sufficient guaranty of the money value, where is the future money to come from, if silver remains demonetized, --what is it? its value not in the material but in the stamp--in the legal-tender power conferred, should be redeemable in all things, valuable rather for the important service it performs than for the material of which made, question a question of prices, what is the demand for it? what the supply?, no alternative for it, the most potent instrumentality in the evolution of society, national money, as distinguished from international money. advantages of national money, newspapers, number published in united states, non-mining states, their interest in remonetization of silver, overstone, lord, "the value of a paper currency results from its being kept at the same amount the metallic currency would have been", panics, impossible if all money were legal tender, parity of the metals: can the united states alone hold them together?, paulus (author of pandects): power of money dependent not on substance but on quantity, playfair, sir lyon, uses the argument that england is a creditor nation, population, money should increase in a ratio not less than the ratio of increase of, price, the index of the value of money, price, bonamy, on money, prices, what produces a general fall of, fall of, in united states since , relation of general prices, to , jevon's tables, relation of general prices, to , soetbeer's tables, progress, evolutions of, in money, prophecies of gold advocates unfulfilled, protection, its effect on prices, quantitative theory of money, the value of each dollar depends on the number of dollars out, railroads, number of miles in united states, value in , ratio of precious metals from earliest times to christian era, christian era to discovery of america, discovery of america to , to , ricardo, use of the metals as a standard, the value of money in a country depends on the amount existing, there can be no depreciation of money but from excess of quantity, his views as to a "well regulated paper currency", rothschild, baron, opinion of bimetallism, rouland, m., governor of bank of france, opposed to demonetization, royal commission of england, extracts from report of, , sauerbeck on general price (those of the lowest for one hundred years), seventy-two cent dollar, the, seyd, ernest, effect of increasing money volume, silver, ratio of, to gold, at various periods, - declared unfit to be used as money, objections to, considered, the motive for demonetizing, by england, the motive for demonetizing, by germany, the motive acknowledged, and gold both variable in value, --has it fallen?, purchasing power in and , prejudice against it as money arising from the idea that gold money has greater "intrinsic value." that question considered, shall we be flooded with it in case of remonetization?, the world's supply, if $ , , a month for twelve years has not driven out gold, how much will do so?, silver miners, their loss by demonetization contrasted with that of farmers and cotton-planters, smith, adam: both gold and silver variable in value, definition of a guinea, soetbeer's table, showing relation of general prices to , standard: the true money standard not the material of which money is made, stewart, dugald, on money, steel, yield for , suicides in germany, supply of money, what it is, tabular standard suggested for time contracts as securing greater equity than gold, thornton, henry, on money, time contracts, their importance to industry, torrens: the value of gold rises or falls as its quantity is diminished or increased, treasury notes should not be redeemable in bullion, possible effect of such redemption, tribune (new york) quoted as to fall of prices, unemployed, some statistics of the, united states, demonetization of silver effected in , usurer's loan on the farm, waller's verse, value, the meaning of, subjective, not objective, not "intrinsic", of money not in the material, but in the stamp--in the power of legal tender, money a measure of, values, relative, of precious metals from earliest times, wage-loss from involuntary idleness enormous, walker, prof. f. a., on money, , gold and silver both variable in value, the value of money in a country determined by the amount existing, wealth, national, estimated, wolowski, m., effect of demonetization, working masses entitled to better conditions, yardstick, the lengthened, "rung in" on the cotton manufacturer, transcriber's notes . passages in italics are surrounded by _underscores_. . certain words use "oe" ligature in the original. . mixed fractions are represented using hyphen and forward slash. for instance, five and a half is shown as - / . . obvious misprints in spelling and punctuation have been silently corrected. . the original scanned images were not very clear, especially the tables with numerical values. this may have caused some inadvertent errors to creep in during the transcription process. produced from images generously made available by the internet archive.) transcriber's note: this version of the text cannot represent certain typographical effects. italics are delimited with the underscore character as _italic_. the stock exchange books on business _crown vo. s. d. net._ a series dealing with all the most important aspects of commercial activity. "short, pithy, simple, and well informed, and written by men of acknowledged authority, these books are equally interesting, whether the reader knows something or nothing of the subject." _manchester guardian._ ports and docks. by douglas owen, barrister-at-law, secretary to the alliance marine and general assurance company. railways. by e. r. mcdermott, joint editor of the _railway news_, city editor of the _daily news_. the stock exchange. by chas. duguid, city editor of the _daily mail_, author of the "story of the stock exchange," etc. etc. monopolies, trusts, and kartells. by f. w. hirst. trade unions. by g. drage. the business of insurance. by a. j. wilson, editor of the _investors' review_, city editor of the _daily chronicle_. the electrical industry. by a. g. whyte, b.sc., editor of _electrical investments_. law in business. by h. a. wilson. the money market. by f. straker, fellow of and lecturer to the institute of bankers and lecturer to the educational department of the london chamber of commerce. the shipbuilding industry. by david pollock, m.i.n.a., author of "modern shipbuilding and the men engaged in it," etc. etc. the business side of agriculture. by a. g. l. rogers, m.a., editor of the last volume of the "history of agriculture and prices in england." the business of advertising. by c. g. moran. the cotton industry and trade. by s. j. chapman. civil engineering. by t. c. fidler. the iron trade of great britain. by j. s. jeans. the brewing industry. by julian l. baker, f.i.c., f.c.s. the automobile industry. by geoffrey de holden-stone. mining and mining investments. by a. moil. the stock exchange by charles duguid city editor of "the daily mail" author of "the story of the stock exchange" "how to read the money article" etc. etc. third edition methuen & co. ltd. essex street, w.c. london _first published.... february _ _second edition..... november _ _third edition .... november _ preface in accordance with the scope of the series of books on business, of which this little work forms an item, its main object is to explain to the unversed in simple terms the somewhat complicated machinery of the stock exchange. some criticism is ventured upon here and there, and a practical hint may be gleaned now and again from its pages; but the real aim of the book is merely to explain, not to comment. if the book conveys some idea of the important part the stock exchange plays in the economy of the nation, and of how it plays that part; if it furnishes a solution of the various mysteries which the routine of the stock exchange presents to many minds, the objects of the little work will have been attained. owing to the continued demand for the book, and to the changes which have occurred during the decade which has elapsed since it was written, it is now reprinted in revised form. c. d. park lodge, new barnet, herts, _july, _. contents i. what the stock exchange is ii. the market-place iii. the members and their clerks iv. the committee v. brokers and jobbers vi. how business is transacted vii. the settlement viii. the zoology of the house ix. option dealing x. the wares of the market xi. failures xii. price lists and records xiii. the royal commission's view xiv. a sketch history xv. a broker's day xvi. from a social point of view index chapter i what the stock exchange is the stock exchange has been described as the mart of the world; as the nerve-centre of the politics and finances of nations; as the barometer of their prosperity and adversity; and so on. it has also been described as the bottomless pit of london, and as worse than all the hells. perhaps, however, the stock exchange can best be defined and described as a market. just as smithfield is the market for meat and covent garden the market for flowers, fruit, and vegetables, so is the stock exchange the market for stocks and shares. these stocks and shares, as everyone knows, are, roughly speaking, sleeping partnerships. the holder of railway stock is a part-proprietor of the railway, and is entitled to his proportion of its profits; the holder of shares in a mining company is similarly part-proprietor of the mine. even although the holders of the stocks of a nation, such as consols, or of the debenture stocks of a company, are creditors and not proprietors, they depend, for the income which those stocks yield them, upon revenue and profits, just as does a partner in a business. it will at once be seen that although the stock exchange may be defined as a mere market, the wares that are displayed and dealt in are of such importance as to entitle it to the more ambitious definitions with which it has been exalted. it is worthy of being defined as the mart of the world, because these wares represent property in every part of the world, and because the orders which are executed in this mere market emanate from all over the world. the business of the stock exchange is more varied and cosmopolitan than that of any other mart, except, perhaps, the money market. the business of the stock exchange may be described as the business of businesses. the institution may be defined as the nerve-centre of the politics and finances of nations, because in this mere market all that makes history is focussed and finds instantaneous expression. it is worthy of being defined as the barometer of their prosperity and adversity, for a glance at the tone of this mere market, whose wares are more mercurial than these of any other mart, suffices to indicate their condition. it may almost be said that the price of consols is the welfare of the world expressed in one figure. perhaps the stock exchange is unworthy enough to be defined as the bottomless pit, and to be described as worse than all the hells, if we look at the mere market from the point of view of those who abuse the facilities which it offers for free dealing--but only from that point of view. without the stock exchange our commercial and industrial life could never have attained its modern refinements. indirectly this institution provides the sinews of industry and commerce, or, at all events, that one great sinew, capital. the inventor with an idea to develop, the trader with a business to expand, the pioneer with a country to explore, the government with a scheme to finance, all betake themselves eventually to the stock exchange. it is the organisation of capital for speculation and investment, even as the banks are the organisation of capital for loans. its members are in close touch with all the capitalist investors and speculators in the country, and can lay any scheme for which the financial sinews are required before them. moreover, in providing a free market for the securities upon which the money is subscribed, the stock exchange tempts subscriptions, and indeed renders them possible where otherwise they might not be. most people would hesitate to part with their money in exchange for even the best securities, did they not feel assured that, if necessity arose, they could readily obtain its return by selling the security in the free market which the stock exchange affords. but for the stock exchange, even the government would find a difficulty in borrowing; whilst great schemes, national, commercial, and industrial, would languish in the lack of a ready flow of capital. railways could not traverse the land nor ships the sea; enterprise would be discouraged, and the original and progressive ideas of clever men would decay undeveloped. thus the stock exchange is linked closely with the prosperity of the world in general and of the nation in particular, and it has grown with the development of that prosperity. some very fair idea of how it has grown is obviously conveyed by a statement of the nominal value of the wares in which it deals. it is impossible to form an estimate of the whole of the enormous amount, as there are dealings in so many securities which are not recognised in the official list of the market. but the nominal value of the securities thus quoted at the end of reached the enormous total of £ , , , ; this comparing with £ , , , in , an increase of £ , , , , or no less than per cent. in other words, the amount of securities officially quoted in the stock exchange is one-quarter larger than it was a decade ago. chapter ii the market-place the market-place, where the dealing in this mass of securities is carried on, is by no means of imposing appearance from the exterior point of view. of all the stock exchanges, bourses, and bolsas throughout the country and the world, the london stock exchange makes, perhaps, the least exterior show. the tourist often seeks it in vain, and thousands of londoners pass it every day without knowing that behind the suites of offices, with their portland-stone walls relieved by granite, is hidden the mighty market-place. yet, for its purposes, the stock exchange, or the house, as the members and even the rules affectionately term it, could not be better situated. it is in the very heart of the city. its west door, the capel court entrance, which is the most important by tradition though not by usage, faces the eastern end of the bank of england, and the building occupies the greater part of the triangle which has bartholomew lane for its base, throgmorton street for its north side, and threadneedle street and old broad street for its south side, the apex of the triangle being formed by the junction of throgmorton street and old broad street. as to the interior, it is without form, though anything but void in business hours. there is no trace of the triangle to the insider, the boundary lines being broken where the surrounding offices abut, or where they have been swept away as opportunity offered for the extension of the stock exchange proper. although the site, including the surrounding offices, occupies some , square feet, the stock exchange itself is only about half that in floor area. the whole design of the interior architecture, italian in style, is marked by a good deal of solidity. the walls are for the most part covered with marble, the peculiar veining of which suggested the title, gorgonzola hall, by which the stock exchange is sometimes known. massive pillars, also marble, abound. the floor is of teak, oak, which was formerly used, having been found of insufficient durability to stand the wear and tear of the members' feet. the feature of the interior architecture, however, is the dome, feet in diameter and feet high, covering the central octagonal area. beneath the stock exchange proper, and extending to almost the same area, is the settling or checking room, the walls of which are lined with oak panelling and glazed tiles. to the interior of the stock exchange the public is not admitted, the authorities and the members themselves, aided, of course, by the janitors stationed at the doors, keeping most careful guard. many are the stories, generally exaggerated, as to what befalls the stranger who has the temerity and skill to pass within the sacred portals. occasionally, however, distinguished visitors are shown round, and the list includes the late king edward vii. only once have the managers given permission for drawings to be made of the interior for publication, and on one occasion photographs of the interior were taken and sold for charity. one of the most common remarks of the clerk who sees it for the first time is, "how small a place!" the impossibility of taking in the whole of the building at a glance is responsible for the false impression so often formed by the disappointed young man newly introduced to a scene of which he has heard so much. but to take one's stand at the bar of the house, which is just inside the door at capel court, is to obtain a much better view than that usually offered by the waiters on effecting the introduction of a new-comer. one is then in the consol market, in some respects the most important of all, and looks right down the whole length of the house from west to east. the vista is fine, if not, indeed, impressive. the massive pillars, so often criticised by the members for the loss of space they involve at their huge bases, stand out with a certain solid grandeur, but the dome of what is still called the new house, the most beautiful feature of the stock exchange, is lost by reason of the lower roof just in front of us. on the left hand or north side of the bar is the parlour, and on the right stands the kitchen, names handed down through decades for the two little sets of desks on each side of the bar. moving forward through the consol market, and slightly to the left or north-east, one passes through the colonial stock and bond market, and stands upon the threshold of the grand trunk section. it will be understood that there are no lines or barriers to form boundaries of the various markets. when one talks of a stock exchange market, he has in his mind a mere space in the stock exchange near some pillar or window; or, much more likely, he has in his mind the group of men who occupy it, dealing, or prepared to deal, in certain securities. generally speaking, custom alone forms the barrier between the various departments, and the consequence is that when one particular market attracts many members by reason of its animation, the dealers in the busy part frequently overflow the fancy boundaries and press hard upon the neighbouring space. thus it often happened that the american railroad market, touching the home railway section on one side and the grand trunk section on another, overlapped the boundaries of each, and eventually, because of the inconvenience, the home of american railroads had to be enlarged. pursuing the oblique left-handed direction of our walk through the house--proceeding, that is, to the north-east--we pass three markets--home railways on the right, trunks on the left, and next to trunks, further on, american railroads. we struggle by banks and come into the cosmopolitan waters of the foreign market, where may be heard half a dozen different languages all being spoken at the same time. the foreign market is in shape like a sleeve, and the cuff end of it leads out to the main door of the stock exchange in throgmorton street, so that we have traversed, roughly speaking, the north-west quarter of the stock exchange. round that door the south african market or kaffir circus seethes and squirms. first comes the rand mines and east rand division, then the gold shares to the left and the de beers market to the right, leading into the middle of the gold fields and chartered group, beyond which again stand the dealers in rhodesians, each group, of course, covering a wide variety of kindred shares. but, getting back to the main entrance and deviating with the structure of the house a little to the right, we leave the deep level section sitting round a pillar and press on through the british columbian lot. this market runs along the north-eastern side of the house, and is bounded on the outside by the spacious telephone and lavatory accommodation. the british columbian market abuts on the eastern end of the stock exchange--the apex of the rough triangle which is its form. we have thus traversed the stock exchange from end to end through its northern half, and turning, we proceed to traverse the southern half. first comes the west australian market, which is bounded on the outside by the cloak room. this market has a fine space to itself, and rejoices in the possession of the board upon which the tape of the exchange telegraph company is displayed. on the western confine of the west australian market is the jungle, the west african market. in busy days the west african dealers sadly crowd the foreign railway market, standing next, and the jungle occasionally gets mixed up with the electric lighting section. we are gradually working round to our original standpoint, and leaving the little mexican railway and uruguay markets on the right, we press through the miscellaneous or industrial market, on towards that devoted to indian railway securities, which in its turn debouches upon the kitchen, where we started. of course, there are many markets one hardly notices in a hurried tour round the house, but we have glanced at the principal. we have also noticed here and there the boards upon which quotations are marked and record is made of the prices at which business is done. we have also noticed the waiters' stands, about twenty in number, placed in various parts of the house, pulpit-like, or rather rostrum-like, erections, each with its small sounding-board above, so that the important announcements which emanate from these stands may be well heard in the house. but we shall learn more of the uses of these internal features of the stock exchange, marking-boards, waiters' stands, and so on in subsequent chapters. upon this market-place something approaching three quarters of a million sterling has been spent. it does not belong to the members as such; it is the property of the proprietors, who, roughly speaking, must be members of the stock exchange. when at the beginning of the nineteenth century it was decided by the members of the stock exchange of that day to erect a new building, some of the more enterprising of them subscribed £ , , and they laid the foundation-stone of the present edifice, which has been vastly extended since and is still growing. the share capital is now £ , and the debenture capital £ , . all new members are now required to hold one or more shares, and only members are allowed to hold the shares except in the case of these few proprietors who acquired them before the end of the year , when a new deed of settlement came into force. these proprietors, their executors and legatees, may hold the shares although they are not members, but in other cases where the shares fall into the hands of those who are not members, or where they are in the hands of one who ceases to be a member, they must be transferred to a member within twelve months. anyone, whether a member or not, may hold the debentures, which are secured by a floating charge on the whole property, although they carry no mortgage rights. the proprietors of the stock exchange draw a great part of their revenue, of course, from the entrance fees and subscriptions of the members, who pay a rent, as it were, for their stands in the market-place; and a considerable portion of the revenue comes from the rent of the brokers' offices which form part of the building. the interests of the proprietors are controlled by directors, who are called trustees and managers. before they can be appointed they must have been proprietors for the preceding five years, and must hold at least ten shares at the time of their nomination. their task, as may easily be imagined, is no light one. they are nine in number, as they have been ever since the present constitution came into force at the beginning of last century. it is theirs to provide a fitting market-place for the important transactions carried on by the members and their clerks, who number about , in all. to provide accommodation for such a population, with all the requirements of ventilation, heating, and lighting, as well as facilities for work at high pressure, which modern business demands, would tax the organising capabilities of any body of men. the principal officers of the stock exchange responsible to the managers are their secretary, the architect and surveyor, and the general superintendent. it is not surprising that grumbling criticism is sometimes heard; the matter for surprise is that there is not more of it, especially considering the rapidity of the growth of the number of members, and the difficulties in the way of extending the size of the market-place. these difficulties are constantly being overcome; offices are absorbed into the main area, corridors are swept away, the utmost ingenuity is exercised in the creation of space. the enlargements and alterations and the provision of facilities for expeditious dealing and of conveniences for the comfort of the members naturally mean a large amount of expenditure; but, in spite of this, the managers have always succeeded in making the market-place pay its proprietors, and pay them handsomely. on the four hundred shares of £ each, which formed the original capital of the stock exchange when it was opened in , there were no dividends for the first three years, but then a series of annual £ dividends set in, with the result that within seven or eight years from the outset the whole of the capital had been returned in dividends. until the end of the shares remained £ paid, and by that time no less than £ had been paid on each share in dividends. as there was a £ call in , the shares became £ paid, and in a dividend of £ was distributed. in the following year there was no dividend--the fabric of the stock exchange had been entirely rebuilt--but a call of £ , making the shares £ paid. on these £ the dividends amounted in the years to inclusive to £ . then in there was again no dividend, but a call of £ , and in the next seven years, from to inclusive, the dividends amounted to £ _s._, and the calls to £ . thus, at the end of , when a reorganisation of capital took place, the shares had become £ paid, and on each of these had been distributed £ , _s._ all this is to show that the stock exchange was a huge financial success from its inception--that the market-place has paid its proprietors. by a further reorganisation of capital the shares had become £ paid in , and in that year the dividend was £ _s._ it went on increasing steadily for many years after that: £ being paid for , £ for , £ _s._ for , £ for , £ for , £ for , and £ for . this £ a share has so far been the maximum rate of dividend. in may, , a call of £ a share was made, making the shares £ paid, and the most recent dividend was £ _s._ a share. the liability on the shares is unlimited, but no more than £ can be called up in any one year. the market price of each £ share has for some time been round about £ , whilst the per cent. debentures are quoted at about . chapter iii the members and their clerks so much for the proprietary of the stock exchange. let us turn to the members, those who actually deal in the market. their number is now about , , and they are assisted by some , clerks, who also have the privilege of entering the stock exchange. in spite of appearances, no member of the stock exchange is a foreigner. unless born a briton, he must have resided in this country for at least seven years, and must have been naturalised for at least two years. for some years a rule was in force that before a candidate could be elected a member, he must serve at least two years' apprenticeship as a clerk in the house. this was one means by which it was attempted to limit the number of members at a time when the managers were at their wits' end to find accommodation. the existing members, of course, welcomed the restriction, as it meant a limitation of competition; and, on the other hand, this limitation can hardly be said to have been a hardship for the public, for the number of members was by no means small, and certainly no one who desired to enter into a stock exchange transaction could ever fear that he would fail to find a broker. moreover, the restriction was very desirable, inasmuch as it kept out of the stock exchange those adventurers who, possessing some money, or next to none, sought membership to provide facilities for gambling, just as they might seek membership of a baccarat club. further, the business of a member of the stock exchange is one full of intricacy, of technicality, and of responsibility; and to enter upon it without some preliminary training, such as the couple of years' apprenticeship as a clerk affords, is to court disaster both for the adventurer and for those who may be involved in his transactions. the apprenticeship qualification has now, however, been abolished as a necessary preliminary to membership, although four years' clerkship (with a minimum of three years in the house itself) enables a certain limited number of clerks each year to obtain membership on special terms, the number so admissible being fixed each year by the committee. all other candidates have to comply with another formality designed to restrict the number of members, each of them having to obtain the nomination of a member retiring in his favour or of the legal representatives of a deceased member. moreover, each clerk admitted a member on the special terms has now to buy one stock exchange share, and every other candidate has to buy three shares. it goes without saying that in the admission of members account is taken of any previous business career that they may have had. no one is eligible for admission who has been more than once bankrupt or insolvent, and if he has once been proved insolvent, or has entered into any composition with his creditors, he must before admission have paid them in full and have obtained a complete discharge. then every applicant for membership, before his application can be considered, must be recommended by three guarantors, reduced to two in the case of candidates who have served as clerks in the house or settling room for four years, of which at least three must have been in the house. these guarantors must have themselves been members for not less than four years, and must engage to stand surety for their nominee in the amount of five hundred pounds each for a period of four years. they must have personal knowledge of the applicant whom they recommend, and of his past and present circumstances; and should he fail within the four years, they each hand the five hundred pounds over for the benefit of his creditors. no member is allowed to be surety for more than two new members, and, of course, any indemnification of the guarantors by the applicant for membership is out of the question. the guarantors have to state that they are not indemnified and that they do not expect to be. should a guarantor receive indemnification subsequently, and the new member fail, the guarantor is compelled to hand over to the creditors the sum so received, as well as the amount of the surety. every means is taken in this and other ways to make sure of the guarantors being independent of the new applicant. not only has the candidate for membership to find these sureties for the protection of his creditors, and as a guarantee of his status, but he has, of course, to pay an entrance fee and an annual subscription, all of which money is collected by the managers for the benefit of the proprietors. the amount of these entrance fees and subscriptions is varied from time to time by the managers; needless to say, the variation has always been in the nature of an increase. at present the entrance fee for a member is five hundred guineas, and the annual subscription is forty guineas. as a matter of fact, every member is a new applicant for membership every year, although, of course, he finds sureties and pays an entrance fee only at the commencement of his stock exchange career. a little before the th of march, on which day the stock exchange year commences, he has to send in an application form for membership, on much the same lines as that which has to be signed by applicants for first admission. in the form of application with which he is provided, the new applicant has to declare that he seeks membership in accordance with the terms of the rules and regulations, and that he will be subject to them in all respects; he has to give his private and office address, and the names of his bankers, and he has to declare that he is not engaged in any business, except that connected with the stock exchange, and that he is in no way connected with any other institution in which dealings in stocks and shares are carried on. at times there has been protest against the stipulation that a member of the stock exchange shall not be connected with any other institution of the kind. there have been several movements for the formation of exchanges for mining share business, and even for the establishment of rival stock exchanges, and a year ago one of the great london newspapers established a system of direct dealing between its readers for nominal fees. in the form of application for either admission or readmission, there must be stated the names of those whom the member proposes to employ as clerks, of which he is allowed a limited number. of course, the clerks to whom reference is made are not mere office clerks in the ordinary acceptance of the term. of these a member may naturally employ as many as he likes. but the stock exchange recognises a special grade of clerk, who is granted admission to the house, and provides a rather important element in its constitution. each individual member may have five of these clerks, who are divided into three classes. he is permitted to have one who is called an authorised clerk, because he is authorised to transact business for his employer just in the same way as the employer himself would transact it. the authorised clerk pays an entrance fee of fifty guineas, and an annual subscription of thirty guineas. the member is permitted further to have two more, who are called unauthorised clerks, because they have no authority to deal, although they have the run of the house to convey messages and perform other similar services. these pay an entrance fee of ten guineas, and an annual subscription of the same amount. he is also permitted to have two settling room clerks, who, unlike the authorised and unauthorised clerks, have not the full run of the house, but only of the settling room, which they use in performing the routine work of checking bargains and carrying through the arrangements in connection with the settlement of transactions. they pay an annual subscription of eight guineas. it is permissible, therefore, for each individual member to have five clerks, and a firm consisting of more than one member is permitted to have nine--two authorised, three unauthorised, and four settling room clerks. the limitation of clerks is another modern innovation in stock exchange history. before march, , the limitation was not nearly so strict, and the grade of clerk who is confined to the settling room, and had not the run of the whole house, was unknown. the innovation furnishes more evidence of the space difficulty with which the authorities of the stock exchange have to contend, and ocular evidence of the same difficulty is to be had by strangers in the vicinity of the stock exchange in the large number of young men wearing the blue badge, which denotes an unauthorised clerkship of the stock exchange, and the red badge, which denotes the settling room clerkship. the badge is imposed as a means of identification in connection with many complaints that arose as to clerks loitering about the already congested markets. they are badged and forbidden to loiter. it is as one of these clerks that a candidate for membership can qualify for admission on the special terms we have indicated. if the applicant has served as a clerk for four years, with a minimum service in the house of three years, his entrance fee is guineas instead of guineas, his application requires the backing of only two guarantors instead of three, whilst the amount of each guarantee is only £ instead of £ . as the total number of clerks employed is some , , and as there are twice as many members, it is obvious that whilst some members and firms desire more assistance within the house, many do not exercise the privilege of employing any clerks at all. chapter iv the committee just as the interests of the proprietors of the stock exchange are in the hands of a body of trustees and managers, so are the interests of the members under the control of a committee, which is called the committee for general purposes. the managers provide and maintain the market-place, and thus make profit on the proprietors' capital; the committee presides over the dealings in the market, and, of course, makes no profit in any way. it consists of thirty members, elected by ballot annually. sometimes the election is exciting, when, for instance, the policy of the committee on any point is questioned, but more usually it is a very formal affair. but exciting or formal, a few of the ballot-papers handed in by the members are, strange to say, always spoilt. the member of the stock exchange is prone to give vent to his feeling of admiration or indignation for the benefit of the scrutineers even at the expense of losing his votes altogether. to be eligible for the office of committeeman, one must have been a member for at least five years. the office is and always has been honorary, but now and again it is suggested that the committee should consist, at least partly, of paid experts. its duties are arduous, and it frequently has to settle points of the most delicate nature, whereas it is frequently complained that it does not consist of the best or most experienced members of the stock exchange, who do not see in the honour and dignity of the position sufficient inducement for the sacrifice of the time its duties involve. however, generally speaking, the members are held in high esteem, and seldom, indeed, does it occur that there is even an expression of disloyalty to the dictates of the committee even on the part of those who most desire its reform. it is questionable whether throughout the whole world any body of men so constituted is endowed with more important functions or with more arbitrary power. the committee can make practically any additions to or alterations in the code of rules, which was originally based on the deed of settlement of the stock exchange. those rules have become more drastic than the law of the land. practices which would be perfectly legal, although not very reputable, constitute a contravention of the rules of the stock exchange which would bring dire consequences upon any member who indulged in them. members have been expelled the house by the committee under the rules for an offence of which the law of the land would not take cognisance. the rules of the stock exchange, as administered by the committee, are a code of honour rather than a code of law. in the course of administering this code of honour the duties of the committee become exceedingly varied. it holds an ordinary meeting every monday, but special meetings may be called at an hour's notice, only seven members out of the thirty being required to form a quorum in the ordinary way. its fiat may go forth censuring, suspending, or expelling a member--expulsion, of course, meaning the loss of his profession, practically the end of his career, and probably ruin. or its fiat may go forth in mild protest against smoking in the house a few minutes before the regulation time, or, as the temptations of the th of november approach, appealing to members to desist from firework displays in the house. with the committee, of course, rest the admission and re-election of members. it decides whether the house shall be closed on any day except the usual holidays--there is always the excuse of structural alterations, and, as everyone knows, building operations can be carried on much more readily on a fine summer saturday than during the dark frosts of winter. it decides all disputes between members; arbitration amongst the members themselves is encouraged, but they frequently refer to the committee as a last resort. from its decision there is no appeal. to have recourse to the law courts without the permission of the committee--which is, of course, granted in special cases--probably means the loss of membership by the member, who at the very outset undertakes to submit absolutely to the committee and its rules. the committee may summon any member before it and demand information; its power is inquisitorial. it fixes the days of settlement of the various transactions which take place in the market, and it decides what stocks or shares shall or shall not be quoted in the official price list, which emanates daily from the stock exchange under the committee's superintendence. the principal officers of the stock exchange responsible to the committee are its secretary, the secretary of the share and loan department, the official assignee, the deputy official assignee, the manager of the settlement department, and the manager of the buying-in and selling-out department. the nature of their duties will become clear as we proceed. thus it will be seen the stock exchange is governed under a system of dual control--that of the managers representing the proprietors on the one hand, and that of the committee representing the members on the other. it is the system of a proprietary club. in its efforts for the good order and government of the house, the committee has no funds that it can expend. it may make representation to the managers, but it can do no more; although there is every sign that the managers are always reasonably willing to accede to these representations. at the time of the imposition upon unauthorised clerks of those badges of which mention has been made, there was much delay in issuing them, and the story went round that whilst the committee had declared their necessity, the managers refused to advance the money to provide them. that was probably merely a playful little suggestion, but it serves as an illustration of the drawbacks of dual control. this dual control is, however, gradually becoming abolished under the operation of the rule which compels every new member to hold one or more shares in the stock exchange. chapter v brokers and jobbers in the preceding chapters the stock exchange has been considered as an institution complete in itself, rather than as an important element in the world's business. we have obtained some idea of its constitution as it affects its proprietors and members rather than as it affects the outside public. the market-place and its frequenters are there, but we have not yet seen them at work, as we shall now proceed to do. the members of the stock exchange are divided into two sections: the jobbers who are ever ready to buy from or sell to the public the wares in which they deal, and the brokers ever ready to act as agents for the public in their transactions with these jobbers. these brokers and jobbers--there are twice as many jobbers as brokers--are equal in all respects as members of the stock exchange; they pay the same fees and subscriptions, and they are governed by the same code of rules, although, of course, some of these rules are specially applicable to the one class and some to the other. at the outset a member of the stock exchange has to declare whether he proposes to act as a broker or a jobber. he may not act as both, or what would practically amount to the same thing, no partnership may exist between a broker and a jobber. the system, the advantages of which are often called in question, is peculiar to the london stock exchange. it does not exist in new york, or in paris, or in the other principal business centres of the world. it is obvious, however, that it acts as something of a check in the interest of the public unversed in the methods of the market. were an outside buyer or seller to deal direct with a market professional, he would be entirely at his mercy, whereas by employing another market professional to deal for him he brings into play the principle of diamond cut diamond. it is quite easy to bid on one's own behalf in an auction room, but it is usually found more profitable to pay a commission to someone who knows the ropes; and the intricacies of auction buying are not to be compared with those of transactions in stocks and shares. that, of course, is not the only advantage of employing a broker as agent to deal with a jobber who is a merchant. the wares of the stock exchange are numerous and varied; more than four thousand separate securities are quoted in the official price list of the market, and the number of stocks and shares dealt in which are not quoted in this list is legion. one might wander about the stock exchange all day, and frequent hundreds of brokers' offices which surround it, without being able to find a seller of the certain stock one wants to buy, or a buyer of the certain stock one wants to sell. in the existence of the jobbers there is organisation. they stand in their own markets waiting either to buy or sell the few special securities in which they are always prepared to deal. in cases where there is intimate connection between a company and a jobber whom it employs to retail its securities, that jobber is called "the shop" in such securities. jobbers are often called dealers; the broker, of course, deals in a sense, and so does the outside investor or speculator, but the term dealer is frequently used, to the confusion of the uninitiated, in the limited sense of being synonymous with the term jobber. by making a speciality of a limited number of securities, the jobber is able to keep his finger on the pulse of the market, and to gauge accurately at any moment its supply and demand. he must do this in his own interest, for he must ever be ready to buy and sell at the demand of the broker whom the public sends to him. this is compulsory under the law of competition, for, of course although the jobber confines his attention to comparatively few stocks, he has no monopoly; there are other jobbers in the same market anxious to secure the orders which the brokers bring in. the jobber obtains his supply generally by purchase in the market, always endeavouring to charge a slightly higher price for it than that at which he has bought it or thinks he can buy it. thus he is to all intents and purposes a merchant, while the broker is an agent and an agent only, the agent of the outside public. the outsider buys from or sells to the jobber through the medium of the broker. the broker, except in special cases, may not do business direct with his client, although the rule is sometimes honoured in the breach; it is the custom of many a broker to inform the client of the name of the jobber from whom he has bought the stock, and it is within the right of the client even to examine the jobber's book to see that the transaction has been properly carried through. there are, however, special circumstances in which it is to the interest of both broker and client that they should deal with each other direct. for instance, if a broker, as not infrequently happens in the case of an active security, simultaneously receives an order to sell certain stock for one client and to buy it for another, it would obviously mean delay and expense, to the detriment of both clients, if the broker had to go into the market to sell the stock and to go into the market again to buy it. it is better for all concerned that the business should be carried out as a cross-transaction, even if in the process the broker receives a commission from both clients, as he would if he went into the market. he is allowed to arrange the cross-transaction, with the important provisions that he must distinctly inform the clients of the circumstances of the case and that he must not take commission from both parties. the distinction between jobber and broker was for years a source of discussion often acrimonious in the stock exchange, and the long-suffering committee was frequently called upon to decide delicate points arising out of the matter. the jobbers charged the brokers with acting as jobbers, and thus competing with them in their business. you have bought your mining shares, they said, not from us, but from a big mining house outside the stock exchange. the brokers countercharged the jobbers with acting as brokers, and thus competing with them in their business. you receive orders direct, they said, from certain provincial brokers who are not members of the stock exchange, whose business ought to come to us. but the grounds for these recriminations have now been removed by rules more clearly defining and separating the functions of jobber and broker respectively. the jobber is strictly forbidden to receive orders direct from the public or provincial brokers, and the broker must not receive a commission from more than one party on one transaction, and he must not execute an order with any non-member unless he can thereby deal to greater advantage than with a member. the existence of the brokers as part of the system prevailing in the stock exchange is justified, not only by the fact that they are experienced in making the best terms with the jobbers, and by the fact that they are able to go direct to the market and the man who will at once buy or sell any one of the thousands of securities ranging from consols down to klondyke mining shares, but also by the fact that they perform many services of a somewhat intricate and technical nature connected with the buying and the selling. transfers of inscribed stock have to be explained, and the client has to be identified at the bank, share certificates have to be obtained and delivered, arrangements have to be made for carrying over shares when a client does not desire to pay for them at the time of settlement, other detailed duties of the kind have to be performed, and, above all, the broker is frequently called upon to give expert advice as to investments and speculations, and to keep the client informed as to when to buy or sell. it may take days of watchfulness and inquiry to execute a single order when the client fixes a limit, that is, when he gives an order to purchase not above a certain price, or to sell not below a certain price. for all this the broker receives a commission which must not be less than a scale laid down by the committee. in the case of british and india government securities, the scale is _s._ _d._ per cent. on the nominal value of stock bought or sold; for bank of england and bank of ireland stock it is _s._ per cent. on the actual money paid or received; for british and other corporation stocks and colonial government securities and for american and foreign railroad bonds, _s._ per cent. on the nominal value; for foreign government bonds the rate is _s._ _d._ on the nominal value; for railway ordinary and deferred ordinary stocks the rate varies from / per cent. on the nominal value when the price is under £ to per cent. on the nominal value when the price is over £ ; for other registered stocks the rate is / per cent. on the money. in the case of shares, the commission varies from - / _d._ to _s._ _d._ per share, according to the nominal value of each share, when the value is less than £ ; for shares of the nominal value of £ each or over, the rate is _s._ per cent. on the actual money. in the case of transactions over £ , the broker may charge half these rates. all these, of course, are minimum rates. there is nothing to prevent the broker charging more, if he can get it, but in practice the minimum has become the recognised scale. strictly speaking, the broker lives on these commissions, though, of course, his intimate knowledge of the market affords him special facilities for speculating and investing on his own account. he must not, however, it may be repeated, deal with his own clients; directly he buys or sells for himself he becomes a principal, and is not in that connection a broker at all. moreover, he must not arrange with the jobber to whom he takes the business for part of the profit which the jobber makes. in the eye of the stock exchange, such collusion between broker and jobber would be regarded as dishonesty of the grossest nature, and would probably result in the instant expulsion of both the parties concerned. as a matter of fact, however, the broker frequently divides the commissions with an outside runner or with a member of his staff who introduces the business, although he is strictly forbidden to enter into partnership with one who is not a member of the stock exchange. an adventitious source of income which the broker enjoys arises from the formation of new companies and the flotation of loans, especially large loans issued by the government and municipal bodies. the broker is called upon to circulate the prospectuses amongst his clients; he stamps his name upon each application form, and the issuing house pays him a commission upon all allotments made to his clients. he may even underwrite loans or share issues--that is, undertake to subscribe for a certain amount, should the public refuse to come in. this he does in return for a commission, or some other consideration, which is paid whether he is called upon to take up his proportion of the issue or not. it is to the interest of the loan issuers and the company promoters to make sure, in this way, that their capital shall be all taken up. some promoters boast in their prospectuses that the issue they are making has not been underwritten, implying, of course, that the issue is so attractive that they are sure the public will take it up. but in these cases the truth sometimes is that the issue is not underwritten simply because nobody can be induced to underwrite it. although the broker may, by the circulation of prospectuses, give a gentle hint to his clients that there is business afoot; although, indeed, he may, and in many cases does, send them circulars, and price lists, and newspapers every night; it is only amongst his own clients that he is allowed to advertise in this or any other way. he usually keeps this rule most rigidly, in the spirit as well as in the letter, and he is aided in so doing by the watchfulness of the committee. for this reason, some members of the stock exchange--for the rule against advertising applies to the jobber as well as to the broker, although the jobber has naturally less temptation to advertise--show much repugnance even to their names appearing in the newspapers in any connection whatever, though it may be quite apart from business, and some are even chary of announcing a mere change of partnership, or a removal of offices, lest it might be construed as an advertisement. meantime, brokers who are not members of the stock exchange--outside brokers, they are called--flood the newspapers with advertisements of a description so flaring as to rival or surpass those of the patent medicine vendors; and partly to counteract the competition thus arising, the committee of the stock exchange has a standing advertisement in all the principal papers announcing that members of the stock exchange are not allowed to advertise, that those who do advertise are not members of the stock exchange, and that lists of those members who are brokers--it is no use furnishing the public with the names of the jobbers--may be obtained from the secretary on application. a list may also be seen at one of the entrances of the bank of england--a relic, perhaps, of the time, when the rotunda of the bank of england was practically a stock exchange. there are a few firms of outside brokers of the highest standing, possessing businesses superior in magnitude and status to those of the great majority of stock exchange firms. such firms as these in former years brought a considerable volume of business to the stock exchange itself, obtaining orders from their clients by more enterprising methods than the members themselves were permitted to employ under their rules, and passing the business on to brokers who were members. in its stringent rules regarding brokers' commissions, however, the stock exchange committee has now practically abolished this practice by specifically penalising outside brokers. all outside brokers, of course, are unchecked by the healthful restraining control of the stock exchange committee; they are responsible to none but themselves. their ranks unfortunately contain a large number of rogues and vagabonds. as they deal direct with their clients instead of for them, their clients' losses are their own gains; often they do not deal at all, but only bet with their clients on the rise or fall of prices. when they lose they refuse to pay, and on being taken into court plead the gambling acts to relieve them of their liability. cases are constantly occurring in which they show less honesty even than this; they simply make off with any money with which people may have entrusted them. as a rule, the advertising outside broker is to be avoided. chapter vi how business is transacted when the broker, armed with his client's order, goes to the market in which it can be executed, and confronts the jobber with whom he usually deals because he finds he does his business best, he asks the jobber to make him a price in the stock concerned. he does not say he wants to buy it, for that would tempt the jobber to make the price high; he does not say he wants to sell it, for that would tempt him to make it low. the jobber would not, of course, give an out-of-the-way quotation, for the broker knows the market price almost as well as he does, but he might be tempted to vary the price by a fraction. as it is, the jobber names two prices, one at which he will sell and one at which he will buy. suppose it were the deferred stock of the midland railway company, the jobber might quote - , meaning that he would buy the stock at or sell it at . the broker would probably think that this price was too wide and might say so, implying that the jobber ought to be prepared to buy at a higher price and sell at a lower one. there are jobbers standing near who would like the business and who would make a narrower price. at last, without much haggling, for there is little of that in the stock exchange, the quotation - / - - / may be obtained. the broker need not have to ask for the price at all, the jobbers may be shouting that they are willing to buy or sell at a certain price, or that they are willing to deal either way. at all events, the broker being content with the quotation - / - - / , and being commissioned to buy, informs the jobber that he buys so much stock from him at - / . it is possible that the jobber would rather have bought, but once having made the price, he must, of course, carry out the transaction. when the broker confronts him, he may say he is only a buyer or only a seller of midland deferred, but of course, in refusing to deal either way he risks losing the order. or he may make a price so wide, especially in a stock in which there is not a free market, as to protect himself amply. for instance, while the jobber was quoting - / - for midland deferred in the home railway market, another jobber in the foreign market may have been quoting - for servian bonds. he would not buy them from the broker's client at a higher price than , and he would not sell them at a lower price than . such a quotation provides an ample margin for what is called the jobber's turn, that is, the profit he expects to make by buying and selling the same stock, as a merchant. wide quotations, which prevail in stocks that are not often dealt in, and even in stocks that are in times of panic, merely mean that the price the client has to pay is high, whilst the price he will receive for the same stock is low. the more enterprising the jobber, the narrower the prices he will make. of course, in making a price the jobber does not undertake to deal in any abnormal amount of stock. there are limits which are understood where the broker does not state the amount in which his client desires to deal. in the case of our midland deferred stock, a thousand pounds' worth is understood when no amount is mentioned. however, when the broker signifies that he has bought the stock, nothing in the way of a voucher passes between him and the jobber. the transaction may be completed with a nod, the bargain is jotted down by each party in their respective dealing books, and one of them may, indeed ought, to mark the price at which the business has been done on a board provided for the purpose, so that it may appear in the next edition of the official list issued to the public. it is very seldom, however, comparatively speaking, that the price is thus recorded. indeed, it is said that many members only record it when they feel they have made a bad bargain, and want to convince the outside client that the stock has actually been dealt in at that price. probably, however, the omission to mark business done merely arises from a desire to save time and trouble, and it might occur less frequently if arrangements were made to obviate the necessity of walking a considerable distance to one of the boards provided. the bargain is not checked until the next morning, when, in the room below the stock exchange, the clerks of the jobbers and brokers meet for the purpose. the first official intimation the client receives that his order has been executed is the receipt from his broker of a contract note. this contract note bears the date of the transaction, the name and address of the broker, and the statement that the amount of stock has been bought at the price named. to the amount payable by the client for the stock is added the amount of the broker's commission, called brokerage, and an item comprising the amounts payable for government stamp duties and for registration in the books of the company. the government stamp duties are: first, the amount payable on the contract--sixpence on all sums between £ and £ , _s._ from £ to £ , _s._ from £ to £ , and so on, according to a sliding scale, up to £ for transactions exceeding £ , ; and secondly, the tax on the conveyance of ownership, which is at the rate of sixpence for every £ up to £ ; then _s._ _d._ for each additional £ or part up to £ ; _s._ for every additional £ or part of £ afterwards. the registration fee is charged by the company for the trouble of registering the name of the buyer in its books, and varies somewhat, but is usually half-a-crown. the contract note also reminds the client that the transaction is subject to the rules, regulations, customs, and usages of the stock exchange, and it sets forth the date when the money is payable--the date of the stock exchange settlement. until the time of settlement arrives, the client enjoys credit. although he is not really the holder of the stock until he has paid for it at settlement time and received the certificate, he could sell it if the price rose and pocket the profit--by the way, his broker would charge him only one commission, for both buying and selling, if he sold the stock, which he had bought, before the settlement day arrived. the credit might extend over a fortnight if the stock were bought immediately after a settlement, or it might extend for only a day or two if bought immediately before a settlement. at all events, the buyer is in practical possession of the stock for some time before he pays for it, and that is why a broker requires an introduction with proper references, and, perhaps, even security, before he will enter into transactions for an unknown client. cases have been known of people buying stock and carrying out the bargain faithfully, provided they can sell it at a profit before settlement day arrives, and thus receive a cheque through the broker; whereas if settlement day arrives before the price has risen, the buyer has vanished. another reason why a broker requires an introduction and references is because of the salutary stock exchange rule forbidding him to transact speculative business for any who are not principals without the knowledge of their employers. he may deal for such if they pay cash either with the order or when settlement day arrives and take up the securities; but he may not aid them in transactions undertaken merely in the hope of snatching a profit by the sale of stocks and shares before they have been paid for. he may not carry over bargains for them from settlement to settlement in a manner which can be explained now that we have arrived at the question of stock exchange settlements. if the client does not desire to carry over, the end of the transaction is promptly brought about. when settlement time arrives, the member who has bought the stock has to pass to the seller, on ticket or name day, a ticket bearing the name of the transferee and stating the name of the member who pays for the stock. reference will be made later to the settlement and its three days. this passing of the ticket is the first step in the completion of the bargain, enabling the seller to see to whom he has to look for the money. if he does not receive the ticket by a certain fixed time--the hour differs in accordance with the nature of the security being transferred--he can have the stock sold out through a special official of the stock exchange; that is, he can find another buyer of the stock to replace the one who has not come forward, and the delinquent buyer has to make good the expenses and any loss arising from the process of selling out. however, the ticket having been passed in the ordinary way, our buyer of midland deferred receives from his broker at settlement time a transfer form signed by the seller of the stock. this form, in which the deed of transfer is executed, varies according to the regulations of the particular company whose securities are concerned. but most companies now adopt what is called the common form. the terms of the form are quite simple. the transferor agrees, in consideration of a sum mentioned, to sell to the transferee so much stock or so many shares in the undertaking named, and the transferee agrees to accept them, subject to the conditions on which they were held by the transferor. both parties have to sign and seal the document. one main object of having the signature of the transferee is, of course, to place on record his acceptance of liability for any uncalled capital which may be attached to the shares. the duty of preparing the transfer form falls upon the seller or his broker, and it may be pointed out that the consideration money named in the deed, as paid by a buyer, is by no means necessarily the price the seller will receive; the stock may have changed hands over and over again at different prices, and the amount mentioned is that paid by the ultimate buyer. it is inserted in the deed because the law requires that the stamp duty shall be assessed on this amount. for the benefit of the seller who may be unaware of the reason why he is required to put his signature to what appears incorrect, a note is usually appended to the ordinary form of transfer explaining this fact. having prepared the deed and obtained his client's signature thereto, the selling broker proceeds to hand it, with the seller's stock or share certificate, to the broker of the ultimate buyer, and if these documents are duly delivered on settling day, or within the ten days' grace allowed thereafter, the buyer is bound by the rules of the stock exchange to complete his bargain by handing over the agreed purchase money. but it sometimes happens that a stockholder has a certificate for a larger holding than the amount he is selling, and may not therefore care to part with his certificate. having sold only part, he prefers not to give up, even temporarily, the whole. in this case, his broker, before parting with the transfer, will forward it with the certificate to the secretary of the company, who will then make a note on the transfer to the effect that a certificate for stock to the amount mentioned in the transfer has been deposited at the company's office, and will forward to the seller a certificate for the balance of his holding. there are, however, some companies which refuse to certify transfers in this way, in which case the duty will be undertaken by the secretary of the share and loan department of the stock exchange, if the original stock certificate is forwarded to the company through him. this certification of a transfer, either by the secretary of the company or by the secretary of the share and loan department, is by the rules of the stock exchange a valid substitute for the certificate itself. although, as far as the seller is concerned, the formalities just mentioned constitute a valid delivery of the stock, the buyer does not legally possess the stock until his title has been recognised by the company. having properly signed and sealed the transfer form, the buyer sends it through his broker to the office of the company for registration, with the stock certificate, unless that has already been forwarded. in due course he will receive from the company, through his broker, a stock certificate acknowledging that he has been registered in the books of the company. he is then the holder of the stock he has bought. chapter vii the settlement although in some cases stock exchange transactions are done for money and settled by immediate transfer or delivery of securities in exchange for payment, the vast majority of bargains are made for the current account and arranged at the next settlement. the stock exchange settlement extends over three days, and at one o'clock on the first of the three--one o'clock in theory, but earlier in practice--the old account ends, and business subsequently transacted falls into the new account. the length of an account is generally about a fortnight, a settlement occurring about the middle of each month and again at the end. but british government securities and india stocks are not dealt with at the general fortnightly settlement; they have a special settlement of their own, the consol settlement, occurring once a month, about the beginning. in the course of each settlement there are three distinct operations, to each of which is devoted one of the three days. the first day is contango or making-up day, the second is ticket or name day, and the third is settling or pay day. for shares dealt with in the mining market there is an additional contango day, on the business day preceding the commencement of the settlement in other securities, making the mining settlement actually extend over four days. if the business day should be a saturday, then the friday is the additional contango day, so that the mining settlement extends over six days. contango day is the day on which members, who wish to postpone settlement of their bargains, carry them over to the following account. on the next day, ticket day or name day any member who intends taking up registered securities that he has bought during the account, has to hand to the member from whom he made the purchase a ticket bearing the amount and name of the security bought; the name, address, and description of the transferee, that is, the buying member's client, the price, and the date and the name of the member to whom the ticket is issued. this ticket is really a demand for the due delivery of the securities purchased. now it often happens that the member to whom this ticket is handed is not in possession of the securities he has agreed to deliver, having bought them during the same account from some other member. in this case he endorses his seller's name on the ticket and passes it on. the ticket thus gets handed on from seller to seller until it ultimately reaches the member whose client actually has the securities and intends to deliver them. this process of passing tickets is greatly facilitated by the operation of the settlement department or clearing house. it is not every member of the stock exchange who belongs to the clearing house, nor is it every security that enjoys the benefit of its operations. but in cases where it can be used, this is the process. on contango day each member prepares a "clearing sheet" for each security in which he has dealt. this sheet may, of course, show many sales and many purchases, each to or from a different member, but all that the member who has prepared the sheet has to concern himself about--in so far as the securities are concerned, and it should be noted that the clearing house only clears securities, not money--is the delivery or receipt of the difference between his sales and his purchases; the clearing house does the rest. if, for instance, a member's sheet shows that he has bought a total of £ , of a certain stock, no matter in how many different bargains with different members, and has sold £ , ; then, instead of a separate ticket having to pass through his hands for each separate bargain, the clearing house discovers from the other sheets some member who has sold £ , more than he has bought of the particular stock in question. the passing of the stock is then adjusted by bringing these two members together. the way in which all bargains which come within the clearing house are cleared off can be easily grasped when it is recognised that for every bargain there are both a buyer and a seller. but the clearing house has nothing to do with the adjustment of the different prices at which securities are bought and sold. in fact, all bargains dealt with by the clearing house are passed through the accounts at a fixed price, the "making-up price," and the securities have to be paid for at that price. the settlement of differences has to be arranged in the accounts between member and member, and this brings us to the business of the last day of the settlement, pay day, the real day of settlement. on this day all differences have to be paid, and all members who have to deliver securities must be prepared to hand them over in exchange for payment, although in the case of registered securities a further period of ten days is allowed for delivery. now it is laid down as a rule of the house that all differences must be paid by a cheque on a bank which is a member of the bankers' clearing house. by this rule it is secured that every member has both to pay and receive differences at the same time, and the differences which a member receives are directly pledged, as it were, for payment of those he has to give. no grace is allowed for payment of differences, and a member who is unable to meet his engagements is at once declared a defaulter. in the case of the delivery of securities, ten days' grace is allowed after the settlement, as has been mentioned. when a seller has not within the ten days delivered the securities he has sold, the purchaser can have an equal amount of the same securities bought in by an official of the stock exchange. this is done by open auction in the house at the lowest price at which the securities are offered. the seller who has failed to complete his bargain has, of course, to bear any expense incurred, and has to pay the difference if the buying-in price exceeds the price of the original bargain. conversely, as we have seen, when a member who has sold stock does not receive for some reason or other a name into which to transfer it within the appointed time, he may resort to the process of selling out. this outline of the procedure at a settlement is a general one, and applies to the bulk of stock exchange bargains. it has exceptions, however. for instance, securities to bearer are dealt in without any passing of tickets. but the main principles remain the same in all bargains done for the account; and it needs no further explanation to demonstrate how greatly the fixed fortnightly settlement facilitates stock exchange transactions. briefly it means that all sellers of stock agree to deliver on the same day, upon which the buyers are prepared to take it up and pay for it; and that when there have been many dealings between members in the same stock, it is only the balance that has to be transferred. bargains in the scrip and securities of a new loan or company are consummated at what is called the "special settlement." members of the stock exchange can buy and sell between themselves and outsiders to their hearts' content, but although there may be mutual arrangement for payment of money and delivery of stock, from the point of view of stock exchange law no payment need be made and no shares delivered until the special settlement. the stock exchange committee appoints the special settling day on the application of members interested in bringing about a completion of the bargains. before it will fix the day, the company, the bargains in whose shares have to be settled, has to comply with certain formalities to the satisfaction of the committee. the committee requires certain documents showing that the company has been incorporated, on what terms the shares have been issued, how many have been issued to the public in proportion to the amount of the company's capital, and so on. it has also to be shown that the share certificates have been issued, or that they are, at least, ready for issue, for obviously it would not do to compel the delivery of and payment for share certificates which have not yet appeared. the formalities seem simple enough, and yet there is very frequently considerable delay, giving rise to much protest, in the granting of a special settlement. in the majority of cases, this delay seems to arise from the desire of some of those connected with the company to put off the day of reckoning. they may have been buying the shares heavily in order to make the company cut an attractive figure in the public eye at its outset, and may not be over-anxious for the settlement day to arrive before they have had an opportunity of unloading the shares they have bought. at all events, the difference between the long time it takes to obtain a special settlement in the shares of some out-of-the-way mining company, and the short time it takes to obtain one in the case of some great government loan not subjected to manipulation, is often remarkable. generally speaking, bargains in the shares of new companies and loans are done for the special settlement, and if no special settlement is granted, these bargains are off; but the instances in which the stock exchange committee refuses a special settlement are very rare indeed. when once a special settlement has been granted and taken place, bargains in the securities are settled at the ordinary stock exchange settlements as they occur; in fact, a special settlement is merely a first settlement. the special settlement is a necessary preliminary to official quotation, the formalities in connection with which are explained in a subsequent chapter. as will be seen, only a small proportion of the securities in which transactions occur are officially quoted, but no official quotation is granted until after the special settlement has taken place. chapter viii the zoology of the house in the discussion of the settlement, mention has been made of those who do not desire to settle as the time comes round. these are mainly bulls and bears. to use the time-honoured definition, the bull is one who buys what he does not want, and the bear is one who sells what he has not got. the terms were used in their stock exchange sense long before the stock exchange came into existence--a hundred years before, in fact. at all events, they were in full use when the eighteenth century was in its teens, when dealers in stocks and shares were wandering homelessly about change alley. this is shown by the literature of the time. and soon after the middle of the eighteenth century we find horace walpole writing to ask a political friend if he knew what a bull and a bear and a lame duck were. "nay, nor i either," wrote walpole, anticipating the answer, "i am only certain they are neither animal nor fowl, but are extremely interested in the new subscription." walpole seems to have been a little weak in his stock exchange zoology. it was more probably the stag rather than the bull or the bear who was interested in the subscription of the government loan which he had in hand. it is the stag who applies for an allotment of a promising new loan when it is issued, in order that he may sell it immediately for a profit. the ordinary applicant who is not a stag applies for it, of course, to keep as an investment when the loan is likely to be in great demand, the stag frequently applies for an allotment infinitely larger than he could possibly pay for. he assumes, generally correctly, that he will be allotted only a small proportion of his application and, if he can sell at a premium, the more he is allotted the better he likes it. the existence of the stag explains the apparent anomaly of a steady decline in the price of a loan soon after it is issued, although at the time of issue the demand was enormously in excess of the supply. a loan may be subscribed thirty times over, and yet within a few months of its issue may be bought in the market at a lower price than that at which it was obtainable by subscription. the fall is caused, of course, by the steady selling of the stags, who created a fictitious demand. however, it is easy to answer horace walpole's question as to what constitutes a bull and a bear. the bull buys stock that he does not want, in the hope that he will be able to sell it at a higher price before it comes into his possession, pocketing the difference. the bear sells stock that he has not got, in the hope that he will be able to buy it at a lower price before he has to deliver it. the bull is optimistic, he believes the price will rise; the bear is pessimistic, he believes it will fall. if the advance which the bull desires has not occurred before the time of settlement arrives, he would be in a quandary but for the organisation which exists in the stock exchange to meet his case. having bought what he does not want, he certainly does not desire to pay for it, and he is enabled, instead of so doing, to continue his bargain. the actual process of arranging this consists in selling out the security and then repurchasing it, both the sale and the repurchase being effected at the "making-up price" already mentioned--it is fixed at each settlement by the clerk of the house, in accordance with certain rules. in the case of the british government, indian, corporation, and colonial government inscribed stocks, it is the average price ruling during certain hours of the settlement; in the case of other securities, it is the actual market price at a defined moment. if the making-up price is lower than that at which the bull purchased, he has, of course, to pay the difference, besides certain charges, mentioned presently. in the case of the bear, having sold stock he has not got, he certainly does not desire to deliver it at the settlement, and just like the bull, he is able to continue his bargain. if, in spite of his desire, the price of the stock has risen, he has to pay the difference between the price at which he bought and the settlement making-up price, and further, to enable him to go on to the next settlement, he has, as it were, to borrow the stock. it is obvious that a purchaser who carries over his bargain gains considerable advantage by being allowed to defer payment for the security purchased until the following settlement, and for this he has to pay a rate known as "contango." this rate is quite distinct from the difference which he has to pay if the making-up price at which he sold out, in the carrying-over arrangement, is less than the price at which he originally purchased the security. the contango rate is sometimes referred to as a rate of interest, but it is not wholly in the nature of interest; for the carrying over does not consist simply in deferring payment of the purchase money, it also postpones delivery of the stock. moreover, it sometimes happens that the security is in such short supply, that instead of receiving a rate from the purchaser, the seller is prepared to give some consideration to the purchaser. this consideration, the allowance made by the seller to the purchaser, is known as "backwardation" or "back." if the demand of the buyers for loans to pay for the stock they have bought is balanced by the demand of the sellers for the same stock which they have undertaken to deliver, there is neither a contango rate nor a backwardation rate. neither buyers nor sellers of that stock have to pay anything for carrying over; the rate is called "even." without the bulls and bears, life in the stock exchange would be a dull affair, for the anxiety that stocks and shares should rise and fall within a short period, before too many rates have been paid, naturally leads to excitement, and undoubtedly causes the promulgation of many rumours and the exaggeration of actual news. the very existence of a big bull account, or of a big bear account, naturally has a most important effect upon the market--the former in weakening it, and the latter in strengthening it. every bull is, of course, a potential seller, and every bear a potential buyer. while the bulls are buying prices may rise, and while the bears are selling they may fall; but the time comes when their operations, however successful, have to be completed, and the movement in the opposite direction naturally sets in. good news is frequently followed by a sharp relapse in prices, because of the selling by bulls anxious to take advantage of it. bad news is frequently without effect, or followed by a rise, because the bears see their opportunity of buying back the stock they have sold, and thus support the market. thus it comes that the rates at the settlement are eagerly watched, that some indication may be obtained as to whether a bull account or a bear account exists. the bulls may have it all their own way, and by concerted action, called a "bull campaign," by the dissemination of stories favourably affecting the stock--true, half-true, or untrue--may bring about a "rig." this, however, is a condition of the market the artificiality of which becomes very evident when the time for selling sets in. unless the delicate position is managed with extreme skill, there will be left after the unloading a residue of stale bulls--bulls who are compelled to close their accounts at a loss. on the other hand, the bears may have it all their own way. by concerted action they may "bang the market," indulge in a "bear raid," and bring prices down to a level much lower than is warranted by the intrinsic merits of the security which they have attacked. the talk is all gloom. at the end of the raid, however, the position of the bear is an exceedingly dangerous one; he may find it impossible to obtain the stock which, having sold, he has undertaken to deliver. prices begin to rise again, and the "bear covering," or buying back, only enhances the upward movement. in time it may become impossible to buy back at any price; there is no stock obtainable; the bears are "cornered." unless a bear so situated can make terms with the one to whom he has sold the stock, or with someone who will let him have it, he stands in the position of one who cannot meet his engagements, or, to use another term of stock exchange zoology, applied to all members struggling against imminent difficulties, he is a lame duck. chapter ix option dealing there is a class of business, in which some freely indulge on the stock exchange, which, if transacted cautiously, results in the limitation of losses, whilst providing full scope for bull and bear proclivities and a great deal of fascination for the skilful operator. this class of business is called option dealing, and although it is not practised to nearly the same extent as is ordinary speculative buying and selling, perhaps because of its intricacies, the fact that it is full of fascination attracts to it many staunch votaries. there are some jobbers in each market who lay themselves out specially to do option business. options are of three kinds. in the case of the put option, the operator buys the right to sell so much stock on a certain day at a certain price; in the case of a call option, the operator buys the right to buy so much stock on a certain day at a certain price; and in the case of a double option, or a put-and-call option, the operator buys the right either to buy or sell so much stock on a certain day at a certain price. for instance, let us suppose an operator believes that the price of consols, at the moment , is not justified. he thinks it will fall. he decides to indulge in a put option. he buys the right to sell £ , worth of the stock at the end of next month at the present price of . believing that it will have fallen by that time, he sees the chance of buying it for less and making a profit by selling it at . for the option, the right to sell, he would probably have to pay about _s._ per cent. if at the end of next month, when the option has to be declared, consols have fallen to , he can obtain his £ , worth for £ , , and exercise his option to sell them for £ , , thus making a profit of £ less the £ he paid for the option and the broker's commission of about £ _s._ the utmost he could lose by the transaction would be the £ plus commission paid for the option, which he would, of course, not have exercised if the price movement had not been such as to produce a profit. however much the stock might have risen against him, he could not lose more than that £ plus commission. if in his belief that consols would fall he had sold them as an ordinary bear, not taking advantage of the option system, there would, of course, have been no limit to the possible loss, which would have been measured by the extent of the rise of the stock. if it had risen instead of fallen , he would have lost, not £ , but £ besides expenses. from this brief outline of the operation of a put option, it is quite easy to grasp what occurs in the case of a call option. as a matter of fact, call options are much more frequently entered upon by the public than are put options, for the same reason that the public are far more frequently bulls than bears. perhaps it is the optimism of human nature that accounts for this, or perhaps it is the fact that to buy is more natural than to sell, especially when the operator has got nothing to sell. whatever may be the explanation, some of those who are frequently bulls themselves regard with horror anything in the nature of a bear transaction. they buy what they do not want without turning a hair, whilst denouncing as a speculator, dangerous to himself and the community, one who sells what he has not got. they may exercise their judgment in selecting stocks and shares that will rise, but consider it heinous to select those which are likely to fall. in fact, to some minds such selection is tantamount to knocking down the price, to the severe loss of those who hold the securities. we are always hearing of the wicked bears, but never of the wicked bulls. in a hazy kind of way, indeed, the bull with his optimism is supposed to perform a public service. these ideas are perhaps not very sound, but they are at all events natural. all that, however, is a subject for the metaphysician; it suffices here to remark that just as bull operators are more popular than bear operators, so are call options more popular than put options. in the case of the call option, the one who buys it thinks the price will rise, and for that reason purchases the right to buy the stock at the existing price some time hence. if he is right he can, when the option period expires, sell the stock at a higher price than that at which he can call it. if he is wrong, and the stock falls, he has only to sacrifice the money he has paid for his call option. however far it may have fallen, he loses no more. in the case of the option for the put-and-call, the operator buys the right either to sell or buy the certain amount of stock at a certain price on a certain future date. such options are generally arranged in stocks of a widely fluctuating nature, and the operation partakes more of a gamble, a mere betting upon chance, than do either put options or call options. in these cases the operator has at least an opinion or a belief upon which he lays out his money: in the one case he thinks the stock will fall, and in the other case that it will rise. but in the case of the put-and-call, the only opinion he has is that it will move somehow; he does not know or care which way it moves, provided it moves far enough to show a profit over the amount he has paid for the option. the only question involved is as to whether the price will move widely enough. if, when consols are , he pays per cent. for a put-and-call option on £ , for the end of next month and they rise , he can sell them for £ , ; exercise his call, which, with the price he has paid for the option, cost £ , ; and pocket the profit of £ less the commission of £ _s._ which he pays his broker. if during the option period consols fall , then he exercises that part of his option which enables him to put them upon the jobber, and pockets a similar profit less the similar commission which he pays his broker. if consols during the period of the option do not move sufficiently either way to make it profitable for him to exercise his double option, then he loses the £ he has paid for it and the broker's commission. the price at which the operator has the option to buy or sell at the end of the option period is the price at which the stock stands at the time the option is bought. of course, special arrangements may sometimes be made, but that is the rule. such being the case, the price payable for an option to call is always exactly the same as the price for an option to put, and the price for a put-and-call option is always double the amount. at first sight it might appear strange that this is so. the jobber, when confronted with the name of any one stock, might be imagined as demanding a much higher price for the call than for the put, if he is of opinion that the price will rise. as a matter of fact, however, if the jobber were really of that opinion, the price of the stock would immediately be put up. in other words, current prices are an exact expression of market opinion. there is no more reason why a jobber should make the price of a call option in any one stock higher than the price of a put option than there is for his going into the market and buying heavily. if he did, the price would rise; he does not because he thinks that the price is at a fair level, and being at a fair level, is just as likely to fall as to rise. as the price is the basis of the option operation, he charges exactly the same for taking the chance of its rising as of its falling. it is no more reasonable to ask why the jobber does not make the price of the call option higher than the price of the put option than it is to ask why he does not go buying; and it is no more reasonable to ask why he does not make the price of a put option higher than the price of a call option than to ask why he does not go selling. the market invariably puts the price of a stock at the exact level which it thinks it is worth, which means that, in the market's opinion, it is just as likely to rise as to fall, and for that reason the price for a put option is the same as that for a call option. what determines the price of an option is not, therefore, the likelihood in the mind of any one person of its rising or of its falling, but the probability of its moving widely in either direction. the price payable for an option on stocks which fluctuate widely is much higher than upon those which are steady, moving within very narrow limits. for instance, whereas _s._ per cent. has been mentioned as an ordinary price for an option on consols, the price for an option on some american railroad shares would be £ or £ . as the price of the option depends upon the extent, not the nature, of the fluctuation, it is naturally affected also by the duration of the period over which the option extends. the longer the period, of course, the higher the price. the stock exchange committee does not recognise any bargain, option or otherwise, which extends for more than two accounts beyond the one in which it is begun, which would mean about six weeks at the most; the law of the stock exchange evidently aiming at prompt settlement of transactions. the fact, however, that options for longer periods are not officially recognised by no means implies that they are not carried out. options for three months are quite common, and it may be said that the periods for which options are entered into extend from a day to six months. in the case of day-to-day options, it is taken for granted that the period ends exactly a quarter of an hour before the official closing time of the stock exchange, which is half past three o'clock. in the case of options for other periods, it is taken for granted that the period ends with the account in which they fall due, or rather a quarter of an hour before, with the idea of allowing time for making final arrangements. an option may be arranged in january for, say, the end of march account, in which case the period would expire at a quarter to one on the contango day at the end of that account, the account actually ending at one o'clock. when the time expires, the giver of money for the option has to declare whether he will exercise it or not. if he exercises a call option, he has then to pay the money and receive the shares. if he exercises a put option, he has then to deliver the shares and receive the money. except in very peculiar circumstances, the option dealer, the taker of the money for the option, will know, when the term arrives, whether it will be exercised or not by merely comparing the existing market price with the option price. a call is not likely to be exercised if the shares can be bought much more cheaply in the market, nor is a put likely to be exercised if the shares can be sold at a much higher price in the market. the giver of the money for an option may, of course, operate against it, securing his profit, as it were, at any time during the currency of the option period. if, early in january, he has bought a call of de beers at for the end of february, he need not wait until the end of february to sell the shares which he has the right of calling, although, of course, he cannot obtain delivery of the shares until that time. when he has bought the option early in january, he watches the market in case de beers should rise to a point which would make it profitable for him to sell in view of the option which he has bought. or he makes up his mind as to what price he will sell at, and instructs his broker, who will then watch the market for him. if, early in february, de beers rise to , and he thinks they will go no higher, he sells them, knowing that under his option he will get them at at the end of the month. there is, however, the mid-february settlement to be negotiated, and our operator is obviously in the position of having sold shares which he is not yet in a position to deliver. he must carry them over at the making-up price. this means that if they have risen to, say , he must pay the difference between that and the price at which he has sold. this puts him into the position of having sold at , so that his profit when he exercises his option will include, not only the £ per share profit at which he aimed when he sold, but also the £ difference which he has to pay at the intervening settlement. it is obvious, however, that one who operates on his option in this way must be prepared to meet the differences and expenses that arise in connection with any settlements that intervene between the time at which he has bought or sold against his option and the time when that option is exercised or, as it is called, declared. if he merely operates within the account at the end of which the option expires, he requires no capital at all except the money he pays for the option, but if settlements have to be negotiated, he may require considerable capital to go on with. even where settlements intervene, the operator requires capital only to meet the differences and expenses connected with those settlements; he does not have to pay for stock he buys against his option; the matter being arranged by the broker handing over the net amount due to the operator when the option is declared. the broker takes his remuneration in the form of commission on the shares over which his client obtains the option, whether he exercises it or not. these operations in options may become exceedingly complicated, an adroit operator backed by his option taking advantage in various ways of the fluctuations of the market. sometimes in buying his option he arranges for what is called the call-of-more or the put-of-more, which really means the call or put of as much again; or he may arrange for the call or put of twice more or three times more. it may easily be imagined that the existence of option dealing has sometimes a palpable effect upon market quotations, and, especially on contango day or on its near approach, considerable fluctuations are often brought about by the buying and selling of those operators who have not been able during the currency of the period to buy or sell stocks to advantage. stocks must be bought to satisfy call options, or stocks that have been put upon an unwilling purchaser must be cleared out, and these transactions naturally affect prices. chapter x the wares of the market it has been seen that the stock exchange is a market, of which the wares are stocks and shares. there is some considerable difference, however, between stocks and shares, and there are various kinds of stocks and various kinds of shares. it may be interesting and profitable to inquire into the distinctions, to examine, in fact, with some detail the wares of the market. a stockholder is frequently called a shareholder even by the most precise, but, strictly speaking, the terms are not synonymous; stocks are not shares. stock is calculated by quantity and shares by number; stock is capital in a lump, while shares are capital divided into equal parts; although the unit of stock is usually £ , any quantity, such as £ _s._ _d._ worth, can, in the case of leading stocks, be bought, whilst shares, which are usually of the denomination of £ , £ , or £ , are indivisible, and can be dealt in only in multiples of their nominal value. all the various kinds of securities--including both stocks and shares--can conveniently be divided into three main classes according to the manner in which they are passed from owner to owner. there are inscribed stocks, registered securities, and securities to bearer; and this classification has been adopted by the stock exchange itself in drawing up those of its rules which relate to the settlement of bargains, each of the three classes having its own set of rules. let us take first the class known as inscribed stocks, and we may reasonably do this, for to this particular class belong the premier securities--consols, the other british funds, corporation stocks, and colonial government securities. the holder of inscribed stocks may have a bank receipt, but he has no certificate of his holding; his name is inscribed as the legal owner in a register kept for the purpose at the bank of england, or some other bank or office. such stock cannot, therefore, be transferred from seller to buyer by the mere delivery of documents, for there are no documents to deliver. to illustrate the method of transferring inscribed stock, let us see how consols, for instance, are passed from a holder to the person to whom he has sold them. a ticket, on a form supplied by the bank of england, is issued by the broker acting for the purchaser, and passed in the way explained in describing the settlement. but in the case of inscribed stock the ticket contains an additional item--the name and address of the ultimate seller who is going to transfer the stock. this, of course, is filled in when the ticket reaches the seller's broker. the ticket is taken by the selling broker to the transfer office at the bank, where the particulars are copied into the register. the transferor--identified by his broker, who attends for the purpose--or his representative appointed by a power of attorney, then has to sign the register in the presence of a clerk of the bank, who witnesses the signature, and also has to sign a receipt for the purchase money. this receipt sets out simply that the transferor has received a certain sum, being the consideration for so much interest or share in such and such a stock which he has transferred to the transferee. the receipt is subsequently handed over to the buying broker for his client. the handing of this bank receipt to the buyer of the stock is, then, the recognised method of delivering inscribed stocks--the seller who delivers the receipt before the appointed time on settling day is entitled to demand payment of the purchase price. it will be seen that in transferring stock in this way the purchaser himself takes little part; but on the receipt there is a special note recommending transferees, as a protection against fraud, to accept the stock by signing their names in the register at the bank. the use of this is that the signature can be verified when any future transfer is made and when dividend warrants are signed. with the next class of securities, registered stocks and shares, by far the greatest number of stock exchange dealings are concerned. in this class are included nearly the whole of the securities issued by the joint stock companies. the distinctive features of a registered security are that it is transferable only by a separate conveyance or transfer, and that no holder has a legal title to the security until his name has been registered as the holder in the books of the company. on the registration of the holder, the company issues a certificate as evidence of his title in the manner described in a previous chapter. stocks which are neither inscribed nor registered frequently take the form of bonds to bearer. a large number of foreign loans are issued in this form, as also are a large number of the stocks of the american railroads. these bonds to bearer pass from hand to hand in exchange for money after the manner of bank-notes. they are a very convenient form of security, but, at the same time, somewhat dangerous, as in case of loss or destruction the holder has, of course, no means of proving that he is the rightful owner. in this they resemble bank-notes, but they differ from them in the fact that their currency is recognised in only a narrow circle, and in that they, of course, bear interest. the government or the company which issues them has no means of knowing in whose hands these bonds may be at the moment, and therefore it cannot remit the interest payments as they become due. it is left for the holder to apply for these payments, and this he does by presenting one of the large number of coupons attached to each bond, each bearing the date of one payment. besides the coupons there is often attached to the bond a "talon," enabling the holder to demand a fresh set of coupons when his supply is in due course exhausted. although, for the purposes of stock exchange dealing and settlement, securities may be thus divided into three great divisions, from the point of view of the dealer in the market and of the outside investor and speculator, there are many more interesting divisions, dependent, generally speaking, upon the nature and rank of the security. at the top of the list come the trustee stocks, which are the securities in which the law of the land permits a trustee to invest the moneys he holds in trust without incurring liability for any loss that may occur. roughly speaking, these include the government securities of the united kingdom and of india; certain colonial government securities; the stocks of the banks of england and of ireland; london corporation and county stocks; the inscribed stock of any borough or county having a population exceeding , ; the stocks of the british railway companies ranking before their ordinary stocks, provided a dividend of per cent. has been paid on the ordinary stock for at least ten years; various indian railway stocks, the interest on which is guaranteed by the secretary of state; the stocks of the water companies ranking in front of the ordinary stock, provided that stock has received a dividend of not less than per cent. for at least ten years; and so on. these, of course, may all be regarded as securities of the highest class--as what are termed gilt-edged investments. ranking next to them, perhaps, are the first debenture stocks of the railway and other companies which do not come within the trustee act. such a statement as this is naturally only general. some debenture stocks of industrial and mining companies are far less sound and secure than the shares of the lowest rank of some well-established undertakings. there are mortgage debentures and debentures which carry no right of mortgage, and there are, in the case of many companies, mortgage debentures of various classes, one class carrying a first mortgage, another a second, and so on. mortgage debentures are secured by a specific charge on certain properties definitely scheduled, and in case of default in the interest payment the court will appoint a receiver in respect of such properties for the protection of the mortgage debenture holders. debentures which are not mortgage debentures are secured by a floating charge over the properties and assets of the company, and in the case of its default they rank as ordinary creditors, being entitled to proceed against the company and levy execution. the mortgage debenture and debenture stocks of a company are frequently described as its fixed charge stocks, because not only does the interest never vary in rate, but has to be paid whatever the profits of the company. in fact, debenture holders, being creditors and not shareholders, receive interest and not dividend. these debenture stocks, like the loans issued by governments and municipal corporations, may be redeemable at a specified date or after it. the approach of the redemption date naturally affects the market price. if a stock at present quoted at is redeemable ten years hence at , the tendency of the price is, of course, to rise to the , and one who buys the stock at , in calculating what it will yield him, takes into account, of course, not only the annual interest, but the fact that he must receive, as it were, a bonus of £ when the company buys the stock on the date of redemption. similarly, if the stock is bought at a higher price than that at which it is redeemable at some future date, the buyer must regard the yield which it gives him as so much less, for when the date arrives he must take for the stock less than he gave for it. some stocks are irredeemable, which means, of course, that they go on bearing the rate of interest for ever. the holder of the stock may sell it and thus get rid of the arrangement, but the company or corporation is saddled with the debt and the obligation of paying the fixed rate of interest upon it for all time. this may prove inconvenient and unprofitable if the borrower can obtain loans at a lower rate, but the only way to get rid of the burden is to make some arrangement acceptable to the stockholders. certain of the government stocks are redeemable at a comparatively early date, consols themselves being redeemable in , but only at the option of the government. although debentures are called fixed charge stocks, partly because their rate of interest is fixed, and partly because it is a charge on the income of the company before any consideration can be entered into as to what profits there are to be divided among the shareholders, the rate of dividend on certain classes of mere shares which rank after the debentures is also fixed. a company may issue per cent. or per cent. preference shares, and their claim upon the profits, as their name implies, is preferential to that of the ordinary shares, which rank after them. they must receive their per cent. or per cent., as the case may be, out of the profits, and the ordinary shareholders have to look for their dividend to any profits that remain. at the same time, whereas debenture holders are entitled to their interest as a right, and may proceed for it legally as for a debt, the shareholders, even preference shareholders, go without their dividend if there are no profits--and there is an end of it. many preference shares, however, are cumulative preference shares, which means that if the profits in any year are insufficient to provide their dividend, the stipulated rate must be made up out of succeeding profits before the ordinary shareholders can receive anything. in the case of preference shares which are not cumulative, each year is complete in itself. they may be entitled to per cent., but if the profits of the year suffice to pay only per cent., that is all they get. even if the profits of the next year are so good as to enable the payment of the full per cent. dividend on the preference shares, and per cent. or even per cent. on the ordinary shares, the preference shares receive only their per cent., because they are not cumulative. if they were cumulative, they would receive per cent. to make up for the per cent. lacking in the preceding year, and the ordinary dividend would be reduced accordingly. of course, there may be first, second, and third preference shares, cumulative or non-cumulative, just as there can be different series of debentures, one ranking after another. it will be seen that while the dividend on preference shares is more certain than that on the ordinary shares of a company, it is at the same time limited, whereas the dividend on the ordinary shares is only limited by the profit-earning capacity of the company. in the case of a well-established and prosperous concern, therefore, the price of the ordinary shares may be very much higher than the price of the preference shares ranking before them. in such a company the preference shares may receive a certain per cent., while the ordinary shares may receive per cent., which, although by no means so certain, may be certain enough for all practical purposes. in the case of many companies, of course, the dividend on the ordinary shares varies considerably year by year, and the price of the shares accordingly fluctuates widely. some companies, in order to meet this, have divided their ordinary shares into two new classes, one called preferred ordinary, bearing a fixed rate of dividend, and the other called deferred ordinary, taking what remains for division. in fact, the preferred ordinary bears the same relation to the deferred ordinary as preference shares bear to ordinary shares. suppose a company has paid a dividend on its ordinary shares or stock averaging over a number of years per cent. in one year it may have paid - / per cent., in another year per cent. this ordinary stock with its fluctuating dividend is divided into two parts. each holder of £ worth of stock receives £ worth of preferred ordinary, entitled to a fixed dividend of per cent., and £ of deferred ordinary, entitled to the remainder. thus in the year when the company paid - / per cent., a dividend of per cent. would be paid on the preferred ordinary and a dividend of - / per cent. on the deferred ordinary--this making an average of - / per cent. on the whole. in a year when a company pays per cent., the preferred ordinary still receives per cent. and the deferred ordinary per cent. instead of the stock being thus divided, the same object is attained by its duplication or watering. for each £ of ordinary stock is issued a nominal £ of preferred ordinary and a nominal £ of deferred ordinary. in the case of the - / per cent. dividend, the preferred ordinary would receive its fixed per cent., and the deferred ordinary the remaining - / per cent. of course, this stock-splitting or stock-watering enables the holder of the original stock to dispose, if he chooses, of either the more speculative or the more stable security. even this list of government loans, home and foreign, of trustee stocks, of mortgage debentures, of debentures, of cumulative preference shares, of preference shares, of ordinary shares, of preferred ordinary and deferred ordinary, by no means exhausts the various kinds of wares dealt with in the market. for instance, there are founders' shares, which are usually issued at the time of the flotation of a company to those specially interested in its promotion. their peculiarity is that they usually participate with the ordinary shares in any profits remaining after a certain rate of dividend has been paid upon those ordinary shares. there may be , ordinary shares of one pound each and founders' shares also of one pound each. it may be stipulated that the founders' shares participate equally with the ordinary shares after the latter have received a per cent. dividend. suppose the divisible profits amount to £ , , the ordinary shares take their per cent., which amounts to £ , , and the remaining £ , has to be divided equally between the ordinary shares and the founders' shares. the , ordinary shares receive a further £ , , raising their dividend to - / per cent., and the founders' shares receive the other £ , , making their dividend , per cent. had the company earned only £ , , that would have sufficed to pay only the dividend on the ordinary shares, and the founders' shares would have received nothing. an objection to the system is at once evident. if the directors were under the influence of the holders of the founders' shares, as they usually are, they would not be content to earn a steady profit of £ , for the advantage of the large number of ordinary shareholders, but would strain to divide a large profit in one year, even at the expense of making an actual loss in the next. for this and other reasons founders' shares are objectionable, especially in the case of those finance companies which earn their profits by speculation. these founders' shares are not to be confused with legitimate management shares entitled to a fair rate of dividend, and issued to the officials of a company to provide them with an incentive to work well in its interests. there are also vendors' shares--shares allotted to a vendor in payment, or part payment, for the property which he sells to the company. if he is willing to take shares instead of cash for the property, it is a good sign, for he shows that he believes in it and desires to continue interested in it; that he does not wish merely to pocket the cash and walk off. when these shares come upon the market for sale, however, it is an obvious sign that the man who probably knows most about the property is clearing out. the rules of the stock exchange recognise this aspect of affairs by laying it down that no special settlement may be granted in vendors' shares until six months after the settlement of the shares issued to the public. sometimes amongst the wares of the market there are actually found stocks and shares which do not exist. a big government loan is known to be impending, and although no prospectus has been issued and the market knows nothing about the terms, dealers, confident that these terms will be reasonable, and sure that there will be a big public demand for the stock, offer to sell it or to buy it at a fraction over the issue price, although they do not know what that issue price will be. transactions of this kind sometimes occur not only in the case of a big government loan but in the case of the flotation of an important company. after the prospectus appears, and the applications for allotment of the stock have been sent in, the dealings become quite general, although no one is yet in possession of the stock which he sells, nor do even the applicants know whether they will get the whole of the amount for which they applied, a part of it, or none at all. some are tempted by the premium to sell the full amount for which they have applied, in the hope that they may get all of it, or, at all events, that they will get some and be able to buy the balance in the market. others more cautious can often arrange to sell at a lower premium whatever amount of stock they may be allotted. these, of course, are on surer ground, and so are those who deal in the allotment letters themselves when they actually come out. the practice of dealing in shares before allotment has from time to time for very many years past been the subject of much criticism, and the stock exchange committee has frequently been called upon to put a stop to it. it has even now and again made attempts so to do, but these attempts have proved futile, and the penalisation has often fallen upon the less guilty of the two parties to the bargain, to the advantage of the one who has turned round and said, "if i complete the transaction, it will mean loss to me, and i shall not do so, and you cannot compel me to do so, because you have broken the rules of your committee in dealing before allotment at all." thus after several attempts the committee seems to have given up all effort to restrain dealings before allotment, except by adopting a negative attitude, to the discouragement but not the penalisation of such dealings. dealings take place not only in stocks and shares before allotment and in the letters of allotment, but also in what is called scrip, which is a provisional certificate issued some time after the letter of allotment and endorsed with a receipt for the payment of each instalment on the stock. it is a kind of temporary stock certificate issued in advance of the real one, which is forthcoming when the stock is fully paid up. chapter xi failures when a member of the stock exchange cannot fulfil his engagements, even if his position is brought about through no fault of his own, but by the default, say, of an important client, he may command much sympathy from his fellow-members, but this sympathy must not take practical form. sometimes he does receive aid, but if so it is attended with considerable risk both to himself and to those who aid him, for the rules of the institution are most strict on the subject. the idea is, of course, that no member who is insolvent shall be encouraged to struggle against fate, for such a struggle usually means a plunge into wild speculation, making the last state of the lame duck worse than the first. when a member of the stock exchange finds that a fellow-member, who is his debtor, cannot meet his engagements, it is his duty, far from giving him time or any other consideration, to report the fact to a member of the committee, and with the utmost celerity inquiry is made into the truth of the statement, and the insolvent member is immediately declared a defaulter. the news of insolvency is, as a matter of fact, very frequently communicated to the committee by the unfortunate member himself, so that it does not fall upon his creditors to perform the unpleasant task. the process of declaring a defaulter is called "hammering," because the stock exchange waiter, to whom a written announcement is handed, strikes the desk of his rostrum three times with his hammer to call the attention of those present to the dread announcement which he then reads out. as a matter of fact, two waiters perform the ceremony simultaneously in different parts of the house. the member who is thus declared a defaulter loses his membership, and for all practical purposes he becomes in the eye of the stock exchange a bankrupt, his stock exchange estate being taken over by the two functionaries called the official assignees. he is by no means a bankrupt, however, in the ordinary sense of the term. his creditors in the stock exchange never make him a bankrupt legally, preferring, of course, their own arrangements for dividing the estate. any outside creditor might obviously make him a bankrupt in accordance with the law of the land, but as a member of the stock exchange is not allowed to carry on any other business, his liabilities outside the house are usually insignificant compared with those within it. on the other hand, it is possible, although very unusual, for a member to be made bankrupt by outsiders, quite apart from his stock exchange engagements, in which case he ceases to be a member. when a member is declared a defaulter, all bargains which he has open with other members are immediately reversed at the price ruling at the time of the declaration of the default, which is called the "hammer-price." suppose the defaulter has sold £ stock to a at , and the hammer-price is , a must sell the stock back for £ , and rank as a creditor to the estate for the difference of £ . suppose the defaulter has also bought £ stock from b at £ , and the hammer-price is , b must buy the stock back for £ , and hand over the difference of £ to the estate. in this way all outstanding bargains are cleared out of the way, and the official assignees, in their administration of the estate, have merely to pay as big a dividend as they can on the differences out of the debtor's assets. supposing the defaulter to be a jobber, and an outsider has sold £ stock to him, through a broker of course, at . as it has fallen to the jobber owes the outsider a difference of £ , and that outsider should in theory rank as a creditor for the amount. he would not, of course, lose any part of his stock, which he does not deliver, but his attempt to sell the stock has been rendered ineffective; and even if he was operating as a bear, he has to rank as a mere creditor for the profit he would have pocketed had the jobber with whom he was dealing not failed. the outsider trusted his broker rather than the jobber of whom he knew nothing, and may feel it a hardship that his order has not been executed, or that he does not receive straight away the profit which he has made. to his mind the credit of the stock exchange and all connected with it have sunk to a low level. for such reasons as these, especially if the client is a good one, the broker, in practice, usually deems it expedient to bear the loss himself, and to hand over the profit. outsiders are not often allowed to suffer by reason of failures of members of the stock exchange. in the case where it is a broker and not a jobber who fails, the clients stand to be affected still less by the failure. the bargains open are between the clients on the one hand and the jobbers on the other, the broker being a mere agent or intermediary. the bargains are completed in the ordinary way without the further intervention of the broker, or another broker is selected to complete them. cases have arisen in which the client has actually tried to turn the failure of his broker to his own advantage by declaring, when prices have moved against him, that the bargain is off altogether, or by claiming that the transaction should be closed at the hammer-price, when that price happens to be in his favour. litigation has arisen over these points and does now arise; in fact, the state of the law as regards the relationship existing between outside clients and the stock exchange when its members fail cannot be said to be very clearly defined. one decision has abrogated another, and it can scarcely be said that any of the many intricate questions that arise have been settled definitely enough to carry conviction to the minds of dissatisfied and litigious clients. the questions which arise between members of the stock exchange themselves are far more easily settled, thanks to the autocratic power of the committee, to which members are amenable. a member does not care to offend the committee, even if he feels that the treatment he receives at the hands of its officials constitutes an unjust hardship. the defaulter, who has to place himself unreservedly in the hands of the official assignees, giving up his books and so on, may feel less amenable, especially as he has ceased to be a member of the stock exchange, and has little to gain by obedient acquiescence, but considerations of the possibility of readmission generally assert themselves. these considerations are naturally important, because they mean the resumption of his profession. any refusal to deliver up books, or any placing of difficulties in the way of the official assignees, means the postponement of readmission, if it does not render it impossible. a defaulter may be readmitted upon application, if the small sub-committee appointed from the committee to consider the case finds that he is entitled to readmission. as a result of an examination of his books showing the kind of accounts he had open, and as a result of an inquiry into his conduct preceding and subsequent to his failure, they report as to whether the failure has arisen through his own speculations or through the failure of his principals, whether he has been guilty of any bad faith or breach of the rules, whether the amount involved in his engagements was in reasonable proportion to his means and resources. even where the conduct of a defaulter has been marked by indiscretion and by the absence of reasonable caution, the defaulter may be readmitted, but the decision of the committee as to the readmission must remain posted in the stock exchange for thirty days, and the notice may indicate whether he is of the class of defaulters who have been brought down by misfortunes beyond their control, or of the class whose failure is brought about by rash speculation. in any case, no defaulter can be readmitted unless he has paid his creditors at least _s._ _d._ in the pound from his own resources apart from any moneys that may be receivable from his sureties. moreover, the committee expects that he shall make up any deficiency at the earliest possible moment until he has paid _s._ in the pound. for this reason the committee periodically inquires into his position, and if a readmitted member were to become very prosperous and yet refuse to pay up his creditors in full, when the time for his annual re-election came round he might find himself left outside the fold. chapter xii price lists and records foremost amongst the publications which emanate from the stock exchange, and there are a good many, is, of course, "the stock exchange daily official list." its main purpose is to supply the outside world with an official record of the prices of securities. it is compiled under the authority of the committee and the superintendence of the secretary of the share and loan department, and published by the trustees and managers. the committee is thus the editor of the list, and is responsible for the accuracy of the prices and other particulars which it collects and sets forth. the list is an imposing publication of sixteen closely printed pages, and contains the names of over four thousand securities. it is issued at about o'clock each evening (about o'clock on saturdays) and gives the prices at . ( o'clock on saturdays). the annual subscription for the list is £ , exclusive of postage, and single copies cost sixpence each. long before the time of publication, every day there may be seen outside the offices a motley queue of commissionaires, clerks, and office-boys waiting for the copies as they are delivered from the press. the securities quoted in the list may be described as favoured securities, for it is the ambition of every company to obtain an official quotation for its stocks and shares. every week there is published by the committee a list of those securities for which quotation is sought, and another list of those in the case of which the application has been granted. the committee is never tired of asseverating that when it grants quotation in the official list to any security it does not thereby imply that that security is of superior status to other stocks and shares which are not so quoted; but the fact remains that official quotation does, undoubtedly, endow a security with a certain prestige. there is always some kind of market in securities quoted, and it is more easy to borrow upon them at the banks; whereas it is impossible to buy or sell many securities not quoted without long negotiation, and some of them may not be recognised by anybody except the promoters who have issued them. before a security can obtain quotation in the official list, it has to possess certain characteristics, and its sponsors have to conform to certain formalities. the idea of quotation is not to enable those interested in the loan or company to sell the securities; quotation is for the benefit of the public; indeed, before quotation is granted, at least two-thirds of the securities issued must have been allotted to the public as distinct from vendors and others. the formalities to be observed resemble in many respects those imposed in the case of the granting of a special settlement. the loan or company has to be of sufficient magnitude and importance. such documents as the prospectus, which must have been publicly advertised, the articles of association, which are the rules of the company, the allotment book, showing the extent to which the securities have been publicly issued, the banker's pass-book, certified copies of contracts and concessions, have all to be deposited. it has to be stated that the certificates or bonds are ready for delivery, and that the purchase of the properties has been completed. these are roughly the requirements, and a broker has to be appointed in connection with the loan or company authorised and ready to give full information in answer to the inquiries of the committee. it will be noted that in considering applications for quotation in its official list the committee attaches importance to the production of a publicly issued prospectus. this is natural, for the prospectus is, as it were, the written guarantee of those offering the securities for sale to those who subscribe money for them. in spite of the requirement, however, the number of new companies floated without the issue of a prospectus is far greater now than it was before the companies act of was passed. under the old law, the regulations as to the information which a prospectus should impart were far less stringent than they are at present, and company promoters, who then had no objection to issuing prospectuses, seem anxious to avoid their issue now. the directors of a certain class of company find it inconvenient to bind themselves down in writing to statements sufficiently attractive to induce subscriptions, and yet sufficiently true to stand investigation should questions subsequently arise. thus even at the risk of sacrificing the possibility of quotation in the official list, they prefer to issue no prospectus at all. some of them in its place publish a statement which is described as being not a prospectus, and as being issued for public information only, not to invite subscriptions. such a statement, of course, may contain all that is in favour of the company of whose shares it is sought to dispose, and yet need not contain particulars as to contracts and the like, which the law requires in a prospectus, and with which it is essential the subscriber should be acquainted. when such a statement is issued, care is taken by the promoters that the shares are easily obtainable in the market, although the statement dare not invite subscriptions for them, for by so doing it would convert itself into a prospectus. simultaneously with the publication of the statement, a process known as "making a market" goes on in the stock exchange. the promoter, who holds all the shares, arranges with a jobber to sell them. he probably gives the jobber a call on the shares at a certain price, and anything which the jobber can obtain for them over that is his profit. then the promoter instructs some brokers to buy the shares and others to sell them, and in this way he produces a semblance of activity. it can easily be arranged that the price shall rise rapidly enough to attract attention. the buying may cost the promoter a good deal, but if a public demand is thus created, it is merely a case of the sprat to catch the whale. the public demand is not created, of course, through the honest brokers, who have no difficulty in seeing through the game, but with the aid of financial and other newspapers of a certain class. the character of these papers is notorious, but there seem to be always some among the public ready to be misled, and in this way the process of making a market sometimes succeeds even in these days of awakened intelligence in stock exchange affairs. it would succeed less if it were not the fact that some straightforward and successful companies exist to-day which have never issued a prospectus, and which in some form or other have made a market in their shares. it is conceivable, of course, that a market may be made naturally without the underhand expenditure of the promoter. but the manner in which the public has been fleeced over and over again by the process of market-making has led to much of the unpopularity with which the stock exchange has to contend. it is a glaring blot on an institution otherwise excellently managed, and it is not too much to hope that the committee will at some time or other give the subject its attention. that the committee is aware of the importance of the issue of a prospectus, which places the shares of a company without the process of market-making, is shown by its requiring the production of the document before the securities can be quoted in the official list. when they are so quoted, the list gives not only the latest price of the stocks or shares, but provides an adequate description of the security, states the total amount of the authorised issue, the amount which has actually been issued, the rate of the last interest or dividend payment, and the date when those payments are due. it also gives the nominal amount or the amount paid up on the stock or share, and by comparing this with the market price it can at once be seen whether the security stands at a premium, or at a discount, or at par. ten-pound shares quoted at - / - - / are at premium, being the middle price between the selling price and the buying price, both given. one-pound shares quoted at / - / are at / discount; when the market quotation is exactly equal to the denomination of the share, the price is at par. immediately against the quotation there often appear the letters _x d_, an abbreviation for ex dividend, which means that the price of the security does not include the dividend which the company has just paid or is about to pay upon it. the name of one who sells the security after the dividend is declared may be on the books of the company, and he will receive the dividend warrant; but if at the time of sale the stock was not quoted ex dividend, he has to hand over the amount of the dividend to the buyer of the stock. the buyer's broker will demand it. thus when a stock is quoted ex dividend the price immediately falls, other things being the same, by the amount of dividend payable. the dividend in the case just mentioned is sent to the seller of the stock, because from the point of view of the company he is its holder--the transaction occurred after the books of the company had been closed in order to prepare the dividend. the stock is not, of course, quoted ex dividend before the books of the company have been closed, nor before the dividend is actually declared, but the guiding principle is to quote it ex dividend as soon after these events as possible. in the case of the funds, however, where the closing of the books is on a fixed date, the settlement is made to synchronise with the closing of the books, and the quotation becomes ex dividend practically simultaneously. other marks somewhat similar to ex dividend may appear against the quotation in the official list, such as ex rights, ex new, or ex all. "rights" may probably refer to the privilege which a holder of the shares has of subscribing to shares in another company, a privilege which enhances the value of the shares he holds. "new" may probably refer to the privilege which a holder has of subscribing for new shares in his own company. sometimes the holder is entitled to both these privileges, and perhaps others, besides the dividend; all these privileges being referred to for abbreviation's sake as "all." a seller of the shares after they are marked "ex" these privileges retains the privileges, and consequently gets a lower price for the shares. there is provided in the official list against the name and quotation of every security ample space for the record of the prices at which business has actually been done during the day. this space is usually blank. if the business done were accurately represented by the markings in the list, the stock exchange would be an idle place indeed. reference has been made in a previous chapter to the reason for the blank appearance of the "business done" column, and it is often urged that in this matter there should be some reform. many, indeed, go farther and suggest that not only should the prices be recorded in the case of all business transacted, but that means should be devised for placing on record the total volume of that business, as is done in the new york stock exchange. there day by day the public is informed as to the number of shares that have been bought and sold; here no such record is kept. criticism has often been levelled against the official list, too, on the ground that its prices are so wide as to be valueless. when a stock is quoted at, say, - , no one who knows his official list will suppose for a moment that the stock can be bought by the jobber as low as and sold as high as . the broker going to the jobber in the market would obtain a much narrower quotation. even if the student of the official list might conclude that as the stock is theoretically quoted - , the practical price is round about - / , that is, midway between the two, it would be something. but as a matter of fact, whilst the stock is quoted - , business may actually be done at - / at one time and below all day. other critics would have the list greatly expanded, so that official prices might be obtainable for a number of securities more in accordance with the number of those in which dealing actually takes place. these critics say that if the inclusion of all kinds of securities would be inexpedient, as altering the character of the list, then a supplementary list should be issued. yet other critics say that the prices should be made up to a later hour. the latest profess to be . o'clock prices, whilst as a matter of fact, they are in the great majority of cases collected half an hour previously; and whilst the official closing time of the stock exchange is half-past three o'clock, the house remains open until four o'clock, and dealings go on inside the house until that hour. even after the stock exchange is closed, of course, business is transacted in what is called the street markets. generally speaking, business in only the most speculative securities is transacted in the street after hours. dealers in south african mining shares block throgmorton street itself for a couple of hours, more or less, according to the activity of business; and dealers in american railroad shares occupy shorter's court, a diminutive square just off throgmorton street, with which it is connected by a covered way, an entrance to the stock exchange being situated in the square. the street market in americans is legitimate in a special sense, because business in new york has been going on for less than an hour when our market is closing, and, of course, the trend of prices in new york has a considerable effect upon quotations here. but the stock exchange recognises no street dealings of any kind, and has never done anything to encourage business after hours, in spite of various suggestions that have been made, especially at the time when several members found themselves in the police court, charged with causing an obstruction in throgmorton street. partly because prices are made up officially only to . o'clock, but more because brokers desire to furnish their clients with the prices of stocks and shares in which they are specially interested, many brokers compile price lists of their own for despatch to their clients. for practical purposes these smaller lists are more serviceable than the great official list, as the quotations are not only later, but, being less wide, give more idea of the prices actually prevailing. another way in which prices are conveyed from the stock exchange to the outside world, and a way much more expeditious than by either the official list or the brokers' lists, is through the medium of the tape machines of the exchange telegraph company. these tape machines are to be found in brokers' offices, clubs, and wherever a subscriber may care to have them, and from the ingenious instrument the tape issues forth all day, showing not only the prices, but the time at which they are quoted. there is only one class of persons who may not subscribe for the stock exchange price service of the exchange telegraph company, and those are outside brokers. until about twenty years ago a roaring business in the way of betting on the tape used to be transacted in the offices of these outside brokers. some say they derived their title of "bucket-shops" from the fact that the tape was made to fall from the machine into a bucket for tidiness' sake, but that derivation of the opprobrious title is doubtful. then, however, the stock exchange committee put a stop to the practice by informing the exchange telegraph company that it must cease to supply outside brokers with the tape, or its privilege of collecting prices in the stock exchange would be withdrawn. it was with some difficulty that the privilege was obtained. the company collects the prices in the markets by means of its own staff, and the prices it telegraphs are by no means official. a kind of weekly edition of the stock exchange daily official list is issued under exactly the same auspices as that list, and is called "the stock exchange weekly official intelligence." it quotes all the same securities, repeating the salient particulars, but instead of giving the current price it shows the highest and lowest prices touched during the week which it covers and since the beginning of the year. it also gives a list of the securities which have been removed from the daily list owing to absence of business in them, keeping on record the last price marked. it further publishes other important official information, giving notice of forthcoming settling days and buying-in days, recording the special settlements and quotations which have been applied for and have been granted; it gives notice as to when securities are to be quoted ex dividend; it announces dividends, forthcoming company meetings, and closing of transfer books; publishes important notices issued by companies, sets forth traffic returns, and imparts other information. the subscription is £ _s._ a year, exclusive of postage, and single copies may be obtained for _s._ _d._ each. it consists of about thirty large pages. the information contained in the daily official list and in the weekly official intelligence is covered in a ponderous tome called "the stock exchange official intelligence," which is issued annually. in spite of drastic steps taken in recent years to reduce the bulk of this important stock exchange publication, the current volume contains , pages, and weighs eleven or twelve pounds. its published price is _s._ the great work deals exhaustively and concisely with practically every security of any importance known in the stock exchange, stating clearly the amount, the rate of interest borne or the dividends paid in the past few years, with the highest and lowest prices where they are quoted in the official list. what amounts to an outline history of every security is furnished, and in the case of companies the names of the directors and officials are set forth. besides being thus an encyclopædia of stock exchange securities, each annual volume contains a number of masterly authoritative treatises on topical subjects, and other appropriate information of a general character. in the compilation of such a work, which is now in its thirty-first year, a vast amount of documentary record has been collected and preserved. the stock exchange naturally possesses the most voluminous store of financial and company documents in the world. other publications are issued by the stock exchange, such as an annual directory of members, giving their names and private and business addresses, showing the partnerships which exist between them, stating the names of their bankers, and showing the year in which they became members. the committee also issues, of course, volumes containing the rules. these number , and however salutary they may be in practical effect, they are exceedingly complicated and loosely drafted. the rules of the stock exchange are like its architecture; their compilation has been governed by opportunism. a clause has been added here, and taken away there, to meet exigencies, just as in the case of the structure offices have been absorbed and walls removed, as opportunity arose of providing more space. this has resulted in a lack of homogeneity and other defects; but even as the members manage to put their house, of which they are exceedingly proud, to good use, so do they manage to conform to their rules, with which they are, of course, supposed to make themselves thoroughly acquainted. chapter xiii the royal commission's view perhaps the most important event which ever affected the stock exchange as an institution was the inquiry into its constitution and customs by the royal commission, which was appointed in . not only was that event of much historical interest from the stock exchange point of view, but the report issued by the royal commission is a document which, even to-day, possesses interest and importance as throwing light upon the methods of the institution as seen by an independent body most competent to examine into its affairs and comment upon them. the report still possesses importance because the constitution and customs of the stock exchange are, to all intents and purposes, much the same now as they were then--it brought about no important alteration, for on the whole it proved to be a vindication of the stock exchange as the royal commissioners found it. some minor recommendations for reform were adopted by the stock exchange itself, or have been adopted since the report was made; and one or two sweeping recommendations have been ignored, with the result that the stock exchange is now as it was then, and in that sense the report is quite up to date. in fact, the report still forms an admirable essay on the constitution of the stock exchange and the conduct of its business. the royal commissioners found that in the main the existence of such an association and the coercive action of its rules on its members had been salutary and to the interests of the public. the commissioners seemed to incline to the view that the dual control of the institution by the managers on the one hand, and the committee on the other, should be superseded by the amalgamation of the two bodies. the commissioners expressed the idea that matters were tending in that direction--and they are still so tending, especially since the enactment of the rule making it obligatory for new members to purchase one or more shares in the stock exchange. the committee, it was found, acted uprightly, honestly, and with the desire to do justice in the administration of the rules. these rules were capable of affording relief and exercising restraint far more prompt and often more satisfactory than was the law of the land. a suggestion had been made that the committee should be assisted in its deliberations by an outside assessor or assessors, especially in cases of important questions involving the personal interests of fellow-members and others; but the commissioners preferred the committee as it is, on the ground that the members understood the complicated questions to be decided much better than any outsider would understand them, and that it was necessary in most cases that the decisions should be very prompt and complete. similarly the commission preferred the present practice of the committee in arriving at its decisions to the proposed subdivision into special panels for special subjects. the commissioners reported that they were persuaded that the apprenticeship served by a clerk who eventually became a member on his own account carried with it a promise of future success. at that time such apprenticeship was not compulsory, and the recent alteration in the rules compelling every would-be member to serve the apprenticeship would doubtless have given much satisfaction to the commissioners. as a matter of fact, the commission recommended that in the case of the election of new members there should be a substantial inquiry into their character, position, and general fitness, and that the inquiry should be real, not covered by the answers to the formal questions required by the rules. it thought that such inquiry could better be carried out by a small sub-committee, in spite of its objection to the general idea of dividing the committee into panels. it further recommended that the guarantee of the sureties should be extended from two years to four years. there is now a subcommittee for the election of new members, and the guarantee does now extend over four years. as to the stock exchange principle that members should be entitled to look to the members with whom they dealt as if they were principals, quite apart from their engagements with outsiders, the commission held that this had the merit of enabling the committee with its absolute power to enforce bargains and adjust disputes with speed and facility. the public were not injured by such a system so long as the legal rights and liabilities of the member in relation to the principal outside were not extinguished or affected. no rule of the stock exchange ought to be allowed to qualify or destroy that legal relation. on the question of the abolition of the jobber, which has frequently been mooted, the commission found that his existence was of extreme value to the public, attributing to the facilities for business which the system provided the fact that orders given on provincial exchanges or foreign bourses were constantly sent to london. but in cases of inactive securities, in which the jobber was unwilling to make a price in the ordinary way, the commission recommended that a book should be kept in which brokers could enter their requirements, with a view to bringing the brokers of buyers and sellers into immediate contact. as a matter of fact, a board for such a purpose does now hang in the home railway market, but it is very little used. in the matter of the facility with which brokers and jobbers transacted their business, the commission paid a special tribute to the machinery of the clearing department, which, it said, appeared to answer its purpose of settling a whole series of bargains, by bringing the ultimate seller into contact with the ultimate buyer, exceedingly well. nowadays the clearing department is sometimes subjected to criticism, and its machinery has broken down more than once, notably under the exceptional strain of the south african boom in . the commission also paid a compliment to the members in general in the mention of the fact that the absence of a written contract in the dealings between them had in practice no evil results, and that out of the millions of bargains transacted in the stock exchange, such a thing was hardly known as a dispute as to a contract or its terms. moreover the commission exonerated the stock exchange from the charge that it encouraged gambling. it found that the members with whom the purchases and sales of stocks and shares were effected were, in the majority of cases, entirely unable at the time of executing the orders to distinguish between those which were made speculatively and those which were connected with investment. the commissioners did not think it practicable to render gambling business any more illegal than it already was. those who indulged in it in the stock exchange, the commission found, were mainly the younger and more necessitous members, and it suggested that the committee should hold a restraining hand over them, meting out severe punishment where extravagant speculation had been indulged in or encouraged by a member. closely connected with this subject was a recommendation as to the readmission of defaulters. it appeared that during the decade preceding the commission's inquiry, members had been in default, had applied for readmission, and had obtained it. the commission expressed the opinion that such a proportion of readmissions was excessive, and that the rule of the stock exchange should be against the readmission of a defaulter except in very special circumstances, unless his default had been brought about by the conduct of others, and not through his own fault. it was also recommended that when a member was declared a defaulter, the fact should be communicated to the outside world, and this is now the invariable custom, a notice being sent to the press for publication. in a half-hearted kind of way the commission also recommended that the outside world should be admitted to the stock exchange, but this recommendation has never been carried out. the commissioners declared that the public was able to rely upon reasonable speed and certainty in the transaction of business, and that there was as small a difference between the buying and the selling price of a security as could be obtained in any other market; yet they thought that if it were possible it would be desirable that the house should be open to the public, not because it would give a client any real control over the deal which his broker was carrying out for him, but because it might remove certain jealousy and suspicion which was created in some minds by the privacy of the house. even in putting forth the suggestion thus mildly, the commission admitted that the building was hardly adequate to the accommodation of its members, and that business might be impeded if strangers were admitted. the question of the commission charged to the public by the brokers was brought before the commissioners, but they refused to report in favour of an official fixed tariff, or against sharing commissions with runners, or against the practice of taking a double commission on certain transactions; but they expressed the opinion that where the commission was so divided, or a double commission was so earned, the client should be informed of the fact. as has been shown, this question of double commissions is closely connected with the question of the distinction between the broker and the jobber, and this distinction met with entire approval in the commissioners' report. on the vexed question of dealings in shares before allotment, the commission gave the stock exchange committee the credit of having done all that could be expected to cope with it. the commission attributed the scandals which had arisen, however, to the system under which the committee first permitted such dealing to take place, and then, when unfair advantage was taken of the permission, refused to enforce the completion of the deals by fixing the special settlement. the commission had been informed by the representatives of the stock exchange that although the committee would persist in enforcing the fulfilment of bargains in shares before allotment, as debts of honour, even although such bargains were declared by the law of the land illegal, yet, if they were so declared, the rules of the stock exchange would be made to conform to the new law. accordingly the commission recommended legislation prohibiting dealings before allotment under sufficient penalties--a recommendation which it has hitherto been found impracticable to adopt. the question of quotation in the stock exchange official list came in for a good deal of attention at the hands of the commission. it was not satisfied with the investigation which the committee made before giving securities a place in the list. it was not that the investigation lacked thoroughness; on the contrary, the commission seemed to find that the investigation went too far, with the result that inclusion in the official list gave the security in the mind of the public a stamp of soundness, stability, and genuineness to which it was not entitled. the commission was of opinion that the investigation should be only into mere formalities, and that it should be made abundantly clear to the public that admission to the list meant nothing more than that the loan or company had complied with these formalities--that its appearance in the list had nothing to do with its desirability from the point of view of the investor. the commission admitted that the somewhat fuller investigation which the committee made was of use, and had in many instances been the means of detecting fraud; but it held the view that whilst it was the duty of the committee to find whether the security was fit to be quoted in the list and placed in the market, it was not its duty to give it the stamp of being a desirable investment. the commission went so far as to suggest that if any inquiry into the stability and soundness of a stock were deemed necessary for the public protection, such inquiry ought to be undertaken by some public functionary and enforced by law. the commission also made some recommendations of minor importance as to the manner in which the prices were quoted in the official list, but its suggestion that a public functionary might be appointed to determine what securities were fit for public transactions was one of the boldest in its report. finally the commission recommended that the stock exchange should be incorporated! this was quite revolutionary in its boldness, and it was a distinct recommendation, not a mere suggestion. the stock exchange, the commission thought, should be incorporated by royal charter, in order to give permanence to the admittedly excellent rules by which the body was governed. at any election, the commissioners held, the committee might be reorganised by the whim of a majority of members, and its existing rules, as well as any further reforms that might be wrought, might be repealed. the incorporated stock exchange, it proposed, should remain governed as it then was, but subject to the provision that no alteration in the rules and regulations should become operative until approved by the president of the board of trade or some other competent public authority. at the same time, this outside interference, it was recommended, should be exercised with a sparing hand. any attempt to reduce the rules to the limits of the ordinary law of the land would, in the opinion of the commission, be detrimental. the commission seemed of opinion that the stock exchange would welcome incorporation, but it proposed, apparently as a kind of sop, that if it accepted the recommendation it might well be granted a monopoly of stockbroking--in other words, it proposed that if the stock exchange were incorporated it should have the exclusive right of licensing people to act as stockbrokers, which, of course, would do away with the outside broker altogether. in any case the commission seemed to deem it very important that all stockbrokers should be licensed. they used to be so licensed in the city of london by the corporation, but by degrees the control of the corporation was broken down. in the event of the stock exchange refusing incorporation, the commission recommended that some public functionary--it seemed fond of public functionaries--should be appointed to exercise authority and discretion in granting and withdrawing stockbrokers' licences, both to members of the stock exchange and to others. this report of the commission was by no means unanimously approved by the dozen commissioners, of whom four signed it with stated reservations. one principal point of objection was the proposal to legislate against dealings before allotment, which it was contended would stop a vast amount of legitimate business because a few exceptional cases of abuse had arisen. another principal objection was to the proposal to appoint a public functionary to supervise quotations in the official list, it being contended that no functionary would be equal to the task of saying what were sound securities, and that the stock exchange committee made no attempt so to do in granting a quotation. another objection was to the proposal that the stock exchange should be incorporated, it being contended that the stock exchange had flourished, and had performed its functions as a voluntary association in a manner which had commanded the entire confidence of the public. it will be observed that the reservations rather than the report itself have prevailed. chapter xiv a sketch history having seen what the stock exchange is, the work it does, and how it does it, and having considered the criticism and commentary of the royal commission on these points, we may with interest take a glance over the history of the stock exchange. for one thing, a brief sketch will indicate how the great institution has been evolved. the first stock exchange was in the royal exchange. when the national debt was organised by william iii. at the end of the seventeenth century, in such a way as to render dealing in government securities possible--there were few other securities in which to deal--business immediately began to be transacted, and as the royal exchange was the place of public business resort, it was there that men met to exchange stocks, and there that the profession of stockbrokers was established. there was no organisation except such as arose from the fact that every broker, whether in merchandise or stocks, had to be licensed by the authorities of the city of london. the stockbroker was so licensed, and formed one of the groups of brokers in the royal exchange. there were some who regarded the new profession and its methods with little favour, and as early as an act of parliament was passed to regulate stockjobbing--there was no distinction between stockjobbing and stockbroking in those days. even the mercantile brokers of the royal exchange objected to the new group in their midst, very noisy and rapidly growing; they even questioned its respectability, and, as a result of all this, in the year there was a great exodus of stockbrokers from the royal exchange. some remained and others transferred their place of business to south sea house, to the offices of the east india company and of the hudson's bay company. the great bulk of them, however, made change alley their market-place because of its suitable open space, undisturbed by traffic, and its convenient coffee-houses. garraway's coffee-house became a very popular resort of the stockbrokers and their clients, and, to a greater extent still, so did jonathan's. for the first three quarters of the eighteenth century, that is, from its beginning until the year , change alley was the stock exchange. it was there that, in the year , the scenes of the great stock exchange boom, panic, and collapse known as the south sea bubble were enacted. in the year an attempt was made to abolish speculative stock transactions altogether by the passing of sir john barnard's act. it rendered it illegal to buy stock for which one did not pay, or to sell stock which one did not deliver. it outlawed mere speculative transactions for differences. that act was not repealed until years afterwards, in , but at no time was it seriously operative. it spread dismay throughout the ranks of the stockbrokers at first, because a great deal of their business naturally consisted in time bargains, enabling the payment of differences instead of cash or stock down; but the proverbial coach and four was soon at hand and the act proved a dead letter. in the course of the evolution of the profession of stockdealing, the more respectable of the brokers found themselves using jonathan's, and by the year that coffee-house was almost regarded as the stock exchange, the other frequenters of change alley being looked upon more or less as outsiders. the aristocracy of the profession, who assembled at jonathan's, was really the nucleus of the present stock exchange organisation. amid the jealous sneers of some of their less reputable brethren, who charged them with an attempt to form an exclusive ring, they eventually, in , raised a subscription, and obtained the control of a coffee-house at the north end of what are now called royal exchange buildings--opposite the north-east corner of the royal exchange, where the peabody statue stands. over the door of this building was placed the inscription "the stock exchange." it was the first building to bear the title. but even to this building, the first stock exchange, admission could be obtained by the outsider at the cost of sixpence for a day ticket. it was but a stepping-stone, however. at the beginning of the nineteenth century another subscription was raised amongst the evolutionists, this time to a capital of as much as £ , ; and the stock exchange was established with an exclusive membership, and with much the same constitution as exists to-day. the foundation-stone was laid in capel court on may th, , and under a deed of settlement which had been drawn up, the stock exchange, almost as we now know it--although the deed of settlement was subject to modification in and again in --was soon in full swing. at the commencement there was no definitely formulated code of rules, although the unwritten laws were generally well understood and recognised by the members; it was not until that a code of rules was actually printed. some straggling branches of the stock exchange profession remained outside for a time, but, in the course of years, they were practically all gathered in. for instance, a great part of the business in foreign stocks was transacted in the royal exchange until, in , a foreign loan exchange was established in a building adjoining the stock exchange. it had a constitution much the same as that of the stock exchange proper, with a committee and so on, and it was eventually absorbed. again, much of the business in the funds was carried on in the rotunda of the bank of england from the year , when the rotunda was built--whilst the stock exchange was still in change alley--until the year , when the brokers were expelled the rotunda by the operation of a clause in the bank act of . from that time the pre-eminence of the stock exchange as the market for the funds became unrivalled, and there were some who complained that the government in passing the act did not, perhaps, realise that it was closing the only semblance of an open market for the transfer of the national funds. there had been an attempt in to establish a national fund exchange, independent of both the rotunda and the stock exchange, or failing that, to make the stock exchange an open market. a bill was introduced to parliament, but it never became law. another attack on the status of the stock exchange was made in , this time from inside. the committee made an attempt to abolish option dealing; it actually forbade it by rule; whereupon many members, finding their occupation gone, subscribed money for the establishment of a rival institution, and the movement obtained such importance that the committee, to save the situation, climbed down, rescinding its anti-option rule. two or three years later, the stock exchange, becoming overwhelmed with business, had little time to consider its own domestic affairs. the new company boom of - added immensely to the scope of stock exchange business, and though, as is usually the case, a crash followed the boom, it left the stock exchange a much more important institution in the eyes of the public than it ever was before. for one thing, the newspapers began to publish a daily account of its transactions. the mania and panic of were repeated in and again in , the cycles lasting just a decade. the boom and collapse of were connected with foreign loan issues, and in was the great railway mania. in the middle of the century, in , the number of members of the stock exchange was only , and the annual subscription was only £ . the official list at that time contained the names of fewer than securities; until it had been published not daily, but only twice a week. soon after the middle of the century, the stock exchange was entirely pulled down and rebuilt. during the operation the members found a temporary home in the hall of commerce, which is now parr's bank, in threadneedle street. they assembled in their new building in march, . much agitation arose in , both inside and outside the stock exchange, in favour of the fixing of a uniform scale of brokers' commissions. there were many meetings of members, but no more came of the agitation than has come of less serious attempts since. the companies acts of and , establishing the principle of limited liability, had naturally an important effect on business, and the speculation to which it gave rise aggravated the crisis of , the overend-gurney crash. this cataclysm led to the passage of leeman's act designed to prevent sales of bank shares of which the seller is not possessed. the legislature recognised the distinction which exists between bank shares and all others, because of the delicate nature of banking business--depositors, seeing the shares falling, rush to withdraw their money, and thus spread ruin. it was not until that the stock exchange clearing house was established, although nowadays it seems strange that the business of the settlement could ever have been arranged without it. an attempt had been made to establish a clearing house in , but it came to nothing. even in the clearing house was launched under private auspices, and it was not until seven years later that it came under the official control of the committee. the chief characteristic of the seventies, however, was the number of commissions and inquiries dealing with stock exchange affairs. there was the select committee on foreign loans in , which made some remarkable disclosures as to the methods of borrowing by south american states; there was the select committee on the working of the companies acts in , and in there was the royal commission to inquire into the affairs of the stock exchange itself. an important enlargement of the stock exchange was opened in january, , the addition being made of what is still called the new house. three years before, in , "burdett's official intelligence," the stock exchange encyclopædia, had appeared for the first time. it had a precursor in "the railway intelligence," and in its title was altered to "the stock exchange official intelligence," the alteration not being without significance. soon after the new house was opened, in january, , the stock exchange was honoured by a visit, in the month of march, from the late king edward, then prince of wales. in the following year, , brokers were finally freed from the control of the authorities of the city of london. from time immemorial they had had to be licensed, and although the control was for a long time real and even salutary, it had been gradually whittled away until nothing remained but the payment by the broker of an annual licence fee. even this was abolished in . the latest great shock to credit which the country has suffered, the baring crisis of , had comparatively little effect upon the stock exchange. remedies had been arranged by the bank of england even before the difficulties were known, and stock exchange prices had begun to recover from the effects of the crisis within a week of the announcement of its existence. a deputation from the stock exchange presented an address to the governor of the bank of england, expressing its high appreciation of the admirable and effective manner in which the crisis had been overcome. on the stock exchange practice of making a market, a couple of important judgments were delivered in . in the course of one of them mr. justice wright remarked that "if persons for their own purposes of speculation create an artificial price in the market by transactions which are not real, but are made at a nominal premium merely for the purpose of inducing the public to take shares, they are guilty of as gross a fraud as has ever been committed and of a fraud that can be criminally brought home to them." in , during a notable boom in south african mining shares, there occurred what was known as the battle of throgmorton street--between members of the stock exchange and the police. members had to appear day after day on a charge of obstruction before the magistrate, who suggested that when the stock exchange was closed they might, instead of obstructing the thoroughfare, arrange to use the royal exchange. far more serious strife, again closely connected with south african affairs, arose in the closing days of the year, when the jameson raid into boer territory was followed by a severe slump in prices. the political tension of which this raid was an outcome ultimately developed into the transvaal war, which resulted in a long period of stock exchange stagnation and depression. in , and again in , the - / per cent. consols touched practically , the highest price ever recorded. the heavy government borrowing in connection with the war, and the reduction of the rate of interest to - / per cent., have since reduced the price to below . but in spite of the stagnation and depression, the prosperity of the stock exchange continued to increase. owing to the pressure upon its space, the offices of its share and loan department, an important department of administration, had to be removed from the stock exchange building altogether, about the time when, in , the stock exchange was celebrating its centenary. during the past decade there have been far-reaching changes in the constitution and practice of the institution. with the object of gradually abolishing the dual control of members and proprietors, a rule requiring new members to purchase one or more shares was enacted; a long-standing bone of contention between jobbers and brokers was removed by rules more clearly defining and separating their functions; and the vexed question of brokers' commissions has led at last to the establishment of a minimum scale, with the object of preventing under-cutting by competitive firms. the long period of stagnation and depression was broken by the great rubber share boom of the spring of , when business reached proportions never before witnessed in the history of the stock exchange. chapter xv a broker's day having mastered roughly some of the mysteries and technicalities of the stock exchange, we are now able to follow a broker through an average day of his life with some interest. the broker's office-boy sighs wearily to himself when he hears clerks in other walks of life dilating upon the easy hours enjoyed by the stock exchange and its employees. it is true that the office-boy does not have to reach his sphere of labour early enough to sweep out the place and dust the desks; that is all done for him; but he is supposed to be on the spot by about half-past nine. until ten he is pretty well lord of the office, for the stock exchange clerks, as a rule, have a very easy time as regards hours. they need rarely get to town much before ten o'clock, except the youngest of the juniors, and the first personage of importance to arrive is he upon whom falls the duty of glancing through the correspondence. of course, it all depends upon the size of the office, just as it does in other businesses, how this branch of work is organised. in the case of a big firm the letters are carefully sorted, and each department has its proportion handed over, one dealing with transfers, another with dividends, and so forth. but a smaller office may be more representative of the general run of stock exchange work, and in such a one the correspondence comes into the scope of the chief clerk if the partners are not energetic enough to deal with it themselves. by half-past ten the work of the day is mapped out, the bargains of the previous day are in the checking book all ready for the unauthorised clerk to check, the transfers are being prepared for delivery or registration, the transfer receipts are run through to see what certificates are ready for collection, and a multitude of details get put into train for attention. at twenty minutes to eleven the unauthorised clerk, who has probably been reading the newspaper, declares that he will be shut out of the settling room and flies away to check his bargains, while the partners begin to arrive on the scene. before the official hour of commencing business in the stock exchange has been duly announced by the old policemen's rattles sprung by the house waiters at a quarter to eleven o'clock, opening prices are already coming in from the markets, through the house clerks and the tape. the american quotations are, as a rule, more or less a matter of guesswork, and are based on the new york closing prices cabled from the other side; home railway lists are practically the same as those of the previous evening, and mining shares usually open as they were in the street dealings of the night before. thus it is on normal, ordinary days, but taking the house as a whole, there is generally some early change in the prices of some particular market caused by news contained in the morning papers. perhaps the indefatigable locusts have been taking one of their excursion trips on one of the argentine rails, which causes the stocks in that section to droop; or perhaps a bumper traffic makes grand trunk securities advance in value; or it may be that a mining company has declared an unexpected dividend after hours on the preceding day, and the quotation for the shares is thereby affected. each little detail of this description becomes magnified as the opening feature of each particular market, and the various items of news are telephoned or telegraphed to such clients as are interested in the stock itself, or in others of a similar group that may become affected by the information. the first half-hour of the day, according to tradition, should be the busiest, because of the execution of orders that have come through the post; but if markets are moving sharply, the volume of business advances with the sun, as the changes become known all over london, the provinces, greater britain, and the continent. the swing of work is fairly under way soon after eleven o'clock. the office-boys and commissionaires are pursuing the tranquil round of transfer and certificate work; the unauthorised clerks are busily wiring long strings of prices by code to brokers and clients who are not on the spot; and the authorised clerks are engaged in the execution of orders, what time the partners interview clients in the office or attend to the more important business in the house themselves. when the times are very slack and there is nothing to do, the broker's chief occupation consists in "having a look round," which means that he explores the markets with a view to working up business in unexpected quarters, and having a series of chats with as many of his old friends as he may happen to meet. the only important duty of a dull day is luncheon, which may possibly include fifty up at billiards. when the central london railway was first opened, a fashion set in of lunching in the west end, but the novelty quickly palled, and now the city clubs and restaurants are as full as ever of stock exchange members, who find that they meet more of their clients there than they did in the west, and are able to gather information, views, and hints which frequently turn out to be of value. moreover, the broker is near his office in the event of an important client calling to see him, and altogether it is more convenient to be close at hand than in the faraway west end. the afternoon passes quickly, or seems to do so, from the fact that the stock exchange closes promptly at four o'clock. one of the most remarkable developments of recent years in the stock exchange system is the extension of private telephones, and these wires play a most important part in the broker's life of the present day, especially during the afternoon. not that the wires are entirely confined to brokers, but they, of course, have far more use for them than jobbers, who, dealing in one class of stocks and shares, can appeal to a much more limited circle. the broker's necessities in this direction are bounded only by his clients and their importance. numbers of flourishing firms owe no small part of their success in business life to their enterprise in the direction of private telephone wires to individual clients, and the great landlords in the neighbourhood of the house have been quick to seize the opportunity which presents itself for getting big rents for small premises. the stock exchange managers themselves are well to the front in the arena of competition, and between £ and £ a year is demanded for the rent of one small room and telephone close to capel court. by this means a broker and his client are in constant touch with one another--much more so than would be the case if the general telephone alone had to be relied upon--and a fair proportion of the day is spent by the broker and his staff in reporting fluctuations to clients and receiving their instructions. after luncheon, a client, so it is said, feels more tolerant, more disposed to increase his price if the shares he wants to buy are not obtainable at his original limit, more disposed to accept a fraction less if his first selling order should have proved at an impracticably high price. but the great event of the afternoon is the reception of opening prices from the new york stock exchange. in comparison with these, the paris quotations that arrive about noon are uninteresting, and the american market grows into a surging crowd between three o'clock and a quarter-past. it is often remarked upon as singular that no official prices are sent over from wall street; the arbitrage firms who deal between london and new york alone know the prices cabled across, but by their offering or bidding for shares it is obvious whether wall street opens in good humour or bad. by rapid degrees the american fluctuations become generally circulated; the market seems to be full of the little pink slips that come flying in at the hands of boys and clerks stationed in a line that stretches from the offices of the cable companies outside the house to the very heart of the yankee market in the stock exchange. again the telephone and telegraph come into requisition, and the house usually finishes up, unless there is really nothing doing, in a state of more or less mild excitement. for one thing the markets are decidedly crowded, everyone making a solemn point of being in at the close, and for another, the brokers are engaged in a tour of the various departments to make finally certain that they have overlooked no order on their books which could be done, and to hear reports from the jobbers in regard to limits that have been left during the earlier part of the day. at four o'clock, at a signal from the main door of the kaffir circus, a number of the waiters stand up with a loud shout of "close!" and the stock exchange doors are then open for exit only. under no consideration can a member or clerk re-enter when once the stentorian "close" has rung through the markets, and the cry is caught up by the small fry in the street, who are waiting with their masters' hats and umbrellas; so that the whole neighbourhood of throgmorton street knows when four o'clock has come. a cup of refreshment, and the broker hurries again to his office. a clerk is left in the street to report any vagrant movements which may occur in the after-hours markets of mining shares or american rails, but the head goes back to attend to the correspondence. herein lies one great advantage possessed by the jobber over the broker; the former has perhaps one letter to write, or possibly two; not often more, unless he does a large shunting business with the country--taking advantage of fractional differences of quotation which prevail in the provinces as compared with london. but the broker finds himself confronted with a shoal of letters, letters on every subject conceivably connected with finance, besides a good many that are not. some of the answers have, of course, been dictated and written earlier in the day, but a good proportion cannot be dealt with until the markets are over, and the movements of the past six hours probably call for written comment to clients who are interested in the various sections. moreover, the movements outside in the street markets are possibly tending towards the execution of fresh orders, so that altogether the post can with difficulty be despatched on the sunny side of five o'clock even in quiet times, and when business is active the hour may be considerably later. the chief clerks are quite competent to deal with the finalities of the correspondence, so that the heads of the firm need rarely stay to the bitter end. last of all come the batches of printed price lists, which a good many brokers are in the habit of circulating amongst their clients. some firms not only issue, but print their own lists; at least one complete set of printing machinery can be seen at work in the basement of a broker's office. two or three late nights each fortnight are regarded as being all in the settlement's work. the eve of each pay day finds most offices employed upon the details of transfer preparation, while many brokers have a preliminary balance sheet struck of the account's work, and this also falls to the share of what is called the name or ticket day. the actual pay day spells a sharp and shorter burst of activity. the office is carpeted with bonds, embroidered with transfers, and effervescing with cheques, not to mention such details as piles of sandwiches, trays of ginger and other beer bottles, and similar refreshment for the sustenance of those who have no time to spare for regular meals. room, too, must be reserved for the venerable lady client who wants to sell a small amount of consols for cash at the busiest time of the day, and who looks so pathetically indignant upon being told that the transfer will not be ready for an hour. but the day spins along at a great pace, and everyone is thankful when the last batch of cheques goes into the bank upon the stroke of four o'clock. echoes of the settlement haunt the day following, and if the pay day chances to fall on a friday, there is flying round to be done in order to clear the decks for sunday. provided that the office is not too large a one, the number of duties that call for attention is varied enough to make a day in a broker's office much less monotonous than it is in so many other city spheres. chapter xvi from a social point of view other publications besides those mentioned in a previous chapter frequently emanate from the stock exchange, but these are not, as a rule, of an official character, nor even of a business character. the members at times lay down their dealing books and pencils to turn to literature of a more generally popular order. they have produced many a book, mainly in the cause of charity. such, for instance, is "the house annual," recently inaugurated. this is a sumptuously produced volume of light stories, sketches, and articles, handsomely illustrated. it is edited by a member of the stock exchange, and many of the contributions are made by members, although its tasteful pages are not closed against the work of eminent writers and artists outside the house. it is sold in the stock exchange at christmas time to provide poor children with dinners. a most remarkable volume, or rather, couple of volumes, produced entirely by members of the stock exchange unassisted, issued for the same branch of charity, were entitled "the house on sport." the first contained articles on home sports, all written by members of the stock exchange, and yet all written by authorities who would be acknowledged as such throughout the world. cricket by mr. gregor macgregor, boxing by mr. b. j. angle, golf by mr. mure fergusson, cycling by mr. george lacy hillier, rowing by mr. f. i. pitman and mr. s. d. muttlebury, sculling by mr. guy nickalls, and so on with no fewer than forty branches of sport. such a volume might have been considered sufficient to indicate the sporting proclivities of the stock exchange, but it was followed a year afterwards by another compiled in the same way with the same objects, containing articles on sport abroad--lion, elephant, and rhinoceros shooting, big horn hunting in the canadian rockies, wild sheep hunting on the borders of the sahara--all the articles contributed from personal experience by members of the stock exchange. the institution undoubtedly possesses the distinction of being the most athletic body of business men in the whole world--when it walks it sets the world a-walking. it holds its own small race meeting every year, furnishes county cricket captains, international football players, and so on. it is doubtful, however, whether the members enjoy these organised forms of sport more than they enjoy the impromptu games within the walls of the house itself on slack afternoons, with all the practical jokes which are found for idle hands to do. cricket with walking-sticks and paper balls, football with a tall hat, a lighted newspaper under the seat of a dozing jobber, sweepstakes and raffles, a labelled back--all these things are common enough. sometimes the spirit of play is closely linked with the spirit of business; when, for instance, a susceptible member is induced by his conspiring friends to deal in chartered second debentures, or some other stock which does not exist, only to find, when he has made something like a fortune or half ruined himself, that all bargains are of necessity off. the stock exchange has many fixed holidays during the year--they include not only all the bank holidays, but also the first days of january, may, and november--and some unfixed holidays on summer saturdays, but the members do not await official leave to play. the institution has its own orchestral and choral society of about members, which has been established twenty years, gives a series of subscription concerts each season, and is quite an acknowledged factor in the musical world. there is an art society, also a christian association, with a roll of members comprising some names; and in the christian attribute of charity the members of the stock exchange as a body are ever to the fore. beginning at home, there is a benevolent fund as old as the stock exchange itself, for the benefit of members who fall upon troublous times. it has a capital of nearly a quarter of a million sterling, and an annual income which, although it varies in accordance with the prosperity of the times, has recently been over £ , . there is also a stock exchange clerks' provident fund that has been in existence about forty years, its income of about £ , a year comprising the subscriptions of those clerks who are members of the fund, and donations and subscriptions by members of the stock exchange. there are about , members, and grants are made from the fund in out-of-employment cases, in cases of illness and of death, and when there are any special calls. but the charity of the stock exchange by no means ends at home. to use words recently written by a lord mayor of london, "the spirit of loyalty and patriotism which has ever characterised the members of the house is especially exhibited in practical and overflowing sympathy in times of distress and anxiety." those words were written in acknowledgment of the receipt of a sum of nearly £ , , which the members of the stock exchange had subscribed to the mansion house fund for the relief of the widows and orphans and other sufferers by the transvaal war. they had subscribed over £ , to the transvaal refugees' fund, and gave not only of their money but of their blood in the cause. one member returned from the field with the victoria cross. the stock exchange supports its own hospital wards, its own lifeboats, its boys' home, and so on. except in the vague idea of the puritanical faddist, the stock exchange is an institution as lovable as it is fascinating. it may be, and often is, the cause of ruin to those who abuse its facilities--to those who are gamblers rather than either investors or speculators. it is quite easy to draw the line between the three classes of business, or rather, the two classes of business and the one class of folly. the investor lends his money on perfectly safe security to the aid of commerce and industry, expecting a comparatively small return, but that a safe one. by so doing he is encouraged in thrift, whilst commerce and industry enjoys the benefit of the capital, and the stock exchange is the medium of it all. the speculator, less conservative, risks money, the loss of which he is perfectly well able to afford, in the furtherance of experiments in commerce and industry, be it the trial of a patent or the opening up of a mine. he expects a big return should the experiment prove successful, but is prepared to face the loss should it turn out otherwise. he hopes to enrich himself, and without his aid commerce and industry would make none of those rapid strides which are for the welfare of the world, for speculation is the handmaid of enterprise. the gambler, frequently usurping the name of speculator and thus bringing legitimate speculation into ill-odour, risks money which he cannot afford to lose, staking all in an inordinate desire for riches. although the line between speculation, which is perfectly legitimate, and mere gambling can easily be drawn, it must be drawn by each individual for himself. a perfectly legitimate speculation for a rich man might be an act of folly for a man of moderate means. between risking money which can easily be afforded in a project well studied and thought out, however uncertain, and risking money which cannot be afforded in a project of which nothing is known, on the chance that some extraneous circumstance may arise to multiply its value, there is a wide gulf fixed. the gamblers it is from whom are drawn the operators and dabblers who play with the stock exchange as they would with a pack of cards, or with the chances of the race-course, to their own loss and to the profit of insiders who, whenever they are called upon to play such a game, always show in the long-run that they know most of it. it is the stock exchange gambler rather than the investor, or the speculator who moves legitimately within his means, who may rejoice in the boom with its roaring business and rising prices, but who forms the real element of danger in a slump with its sudden depreciation, and who frequently turns the slump into a crisis, and eventually into a panic. these panics are less frequently with us than they were, less widespread and less disastrous in their effects, thanks to the rapid dissemination of true news, and to the highly organised state to which the machinery of finance has attained; but they will ever recur to provide a wholesome check to those who are tempted to go beyond their depth, allowing legitimate speculation to deteriorate into mere gambling. the stock exchange offers facilities for such gambling, just as food offers facilities for over-eating; yet food is not only a good thing, but a necessity, and so is the stock exchange. index advertisement by members, outside brokers, allotment, dealings before, - royal commission on, , american prices, apprenticeship of members, - royal commission on, - arbitrage firms, architecture of the house, art society, athletics, - backwardation, badges for clerks, banging the market, bank of england, stock exchange in, , - bankruptcy of members, - bank shares, dealing in, baring crisis, bar of the house, battle of throgmorton street, bearer bonds, bearer securities, settlement in, bears, - definition, cornered, covering, raid, their effect, benevolent fund, boom, brokerage, - , - royal commission on, brokers, - advertising by, commission. _see_ brokerage duties of, - licensing of, , , - list of, outside, - , price lists of, underwriting by, - and jobbers, disputes between, - firms acting as both, bucket shops, bulls, - campaign, bulls, definition, stale, their effect, "burdett's official intelligence," business, how it is transacted, done, record of, - buying in, manager, capel court, stock exchange established in, - capital, organisation of, - of the stock exchange, carry-over, process of, - certification of transfers, change alley, stock exchange in, , , - charity, - , - checking bargains, , room, christian association, clearing house. _see_ settlement department clerks, - provident fund, closing time, , commission. _see_ brokerage committee, the, - election, meetings, powers, - qualification, royal commission on, - companies acts, committee on, consols, put option on, - put and call on, - transfer of, - consol settlement, contango day, rate, - continuation. _see_ carry-over contract note, - cost of the house, coupons, covering by bears, cumulative preference shares, debenture stocks, - debentures of the stock exchange, defaulter, , - , assistance forbidden to, declaring a, and clients, - readmission of, - , deferred ordinary shares, - definitions of the stock exchange, differences, speculation for, payment of, directory of members, discount, dividends paid by the stock exchange, - drawings of the interior, dual control of the stock exchange, royal commission on, employees, dealing for, - entrance fee for members, , authorised clerks, unauthorised clerks, establishment of the stock exchange, - exchange telegraph company, - ex dividend, - rights, new, all, expulsion, failures. _see_ defaulter fixed charge stocks, foreign loan exchange, foreign loans committee, foreigners, exclusion of, founders' shares, - gambling, speculation, and investment, , - garraway's coffee-house, gorgonzola hall, guarantors for new members, hall of commerce, hammering, hammer price, history: a sketch, - holidays, , "house annual, the," "house on sport, the," incorporation proposal, - inscribed stocks, - interior of the house, - jobbers, - as specialists, - abolition question, jobber's turn, jonathan's coffee-house, - king's visit, , lame duck, , leeman's act, library of financial documents, - literature, - making a market, mr. justice wright on, making a price, making-up day, price, - managers, the, markets in the house, - marking prices, members, - admission, - apprenticeship as clerks, - , directory of, membership restrictions, - , mining contango day, name day, , national debt, new house, the, official assignees, , , "official intelligence," "official intelligence," predecessors, official list, , - growth, magnitude, marking prices for, quotation in, - royal commission on, - , options, - call, , day-to-day, effect on the market of, operating on, - prices for, - put, - put and call, , - orchestral and choral society, ordinary shares, overend-gurney crash, panics, par, partnership prohibition, photographs of the interior, play in the house, population of the house, practical jokes, preference shares, preferred ordinary shares, - premium, prices, double, - marking, wide, - price lists and records, - brokers', proprietors, the, prospectuses, - provident fund, public admission question, - quotations. _see_ prices "railway intelligence," railway mania, registered securities, rigging the market, royal commission, - royal exchange as the stock exchange, rules, - , scrip, settlement in, secretary of the stock exchange, secretary to the committee, selling out, - , settlement, the, - office work of the, - special, , settlement department, - establishment of, manager, royal commission on, settling room, clerks, share, definition of, - , certificate, - share and loan department, manager, removal, shares of the stock exchange, shorter's court, - situation of the house, - slump, south sea house as the stock exchange, speculative business restrictions, - made illegal, sport, stags, - stamp duties, stock, definition of, - , certificate, - inscribed, - strangers in the house, street markets, - battle of the, subscription for members, - authorised clerks, unauthorised clerks, superintendent, general, talons, tape prices, , - telephone, use of the, - tickets, - , - for inscribed stocks, ticket day, , transfer, - of consols, - transvaal war fund, refugees' fund, trustees and managers, the, trustee stocks, turn, jobber's, underwriting of capital, - vendors' shares, waiters, , wares of the stock exchange, - "weekly official intelligence," wide quotations, - , _x d_, - transcriber's notes: missing or obscured punctuation was corrected. typographical errors were silently corrected. [illustration: _very truly yours charles n. fowler_] seventeen talks on the banking question between uncle sam and mr. farmer, mr. banker, mr. lawyer, mr. laboringman, mr. merchant, mr. manufacturer by hon. charles n. fowler who was a member of the house of representatives for sixteen years, a member of the banking and currency committee for fourteen years and chairman of the committee for eight years published by the financial reform publishing co. elizabeth, new jersey copyright, , by financial reform publishing co. [illustration] the trow press new york foreword this book is written in the form of a conversation between uncle sam and six men of various occupations. it begins with the a, b, c of the subject and by question and answer goes over all the different phases of the subject precisely as you would expect them to arise under such circumstances. after weeks of study and investigation they finally reach an agreement, based upon their talks, and formulate a financial and banking system for the united states. the author. table of contents page first night. the standard of value second night. what is money? third night. what is currency? fourth night. bank credit currency fifth night. what is exchange? sixth night. value, price, wealth, property, credit seventh night. commercial credit, land credit, government credit eighth night. colonial credit money ninth night. united states notes or greenbacks tenth night. reserves eleventh night. the bank twelfth night. land credit bank thirteenth night. the clearing house fourteenth night. banking in fifteenth night. outline of bill sixteenth night. draft of bill seventeenth night. aldrich plan and plot exposed [illustration] first night the standard of value uncle sam: gentlemen, i have invited you to take part in one conversation a week upon the much-vexed and all-important question of a financial and banking system for my country. we shall continue these conversations until we arrive at some conclusion which will be satisfactory to all of us, although this may seem difficult at the outset. to begin with, i want to assure you that our talks shall be absolutely confidential, and nothing that is said at these meetings shall ever go any farther, unless we agree to announce our conclusion. with this understanding we can be brutally frank with each other, and i can expose my hand to you. the present situation is one demanding immediate attention, and only our ignorance, greed or political cowardice can prevent us from arriving at a satisfactory solution of this problem. we must be sincere and patriotic in our purpose, for we represent practically every phase of our citizenship, and i assume you are typical of the average intelligence of the people. here is mr. lawyer to steer us clear of legal obstacles, mr. laboringman to speak for our millions of daily toilers, mr. farmer to point out the disadvantage of agricultural loans, mr. merchant to illustrate the defects of our present commercial credits, mr. manufacturer to caution us against the conversion of our liquid capital into fixed investments and mr. banker to tell us of his woes and enlighten us upon the remedies for all his ills. what we don't know now, we will each attempt to find out before our talks come to an end. certainly there is some solution to this question. in short and in fact it must be solved. i am the laughing stock of the entire civilized world today. for our persistent folly we suffer losses in the aggregate amounting to hundreds of millions of dollars every year. we ought to have, and can have the best and the most efficient banking system in the world. indeed, we ought to give the laugh to all the other countries in banking, as we do practically in everything else. it is up to us. mr. banker: uncle sam, i agree absolutely with what you have just said. i believe it is our duty to sit every week, as you suggest, continuously until we arrive at some conclusion upon which we can all agree. if we do this i believe, since we represent so many callings and are so representative of the various lines of business, we shall find the public approving of our conclusion. i suggest that we begin with the very a, b, c of this question, and settle one point after another as we go along. if we do this, our differences will disappear as we progress, and the x, y, z of this question, or the formation of a financial and banking system, will be comparatively easy in the end. for example, we must first fix clearly in our minds what a standard of value is, and what our standard of value is, what money is, what currency is, what capital is, what a bank is, and so continue step by step to the end, leaving absolutely nothing for guesswork, if that is at all possible. the experience of the world has been so broad and complete that our solution of this question is entirely possible, although we have some problems that are peculiar to ourselves. mr. lawyer: that plan suits me exactly, for only recently i made a thorough study of the question of our standard of value. my investigation took me back more than , years, and i found the subject amusing often as well as intensely interesting, while the result of my research was most satisfactory. i discovered that everything from baked clay to the credit of practically every government that has ever existed had been used at some time or other, as a standard of value, or a measure of value. mr. farmer: mr. lawyer, just what do you mean by a "standard of value"? mr. lawyer: a "standard of value" is anything that may be selected by which all other things in some particular locality or country are measured. the indians of british columbia used haiquai shells; one string being equal to one beaver skin. in australia tough green stone and red ochre were used. in central africa slaves were used. in iceland the law made cattle the standard of value. in the fiji islands whales' teeth. in the south sea islands red feathers were used. in mexico and abyssinia salt was used. agriculture has produced its standard of value; corn, maize, olive oil, cocoanuts, cocoa-nut oil, tea, tobacco, cacao, beans, wheat, rice. the pastoral life produced its standard of value; sheep, cattle, goats, horses and practically every other domestic animal, according to the time and place. the following history of american experience in the development of a standard of value cannot be better restated, and is practically a repetition of the experience of mankind in all the ages, therefore i want to read what horace white says upon the subject: "it may be said that virginia grew her own money for nearly two centuries, and maryland for a century and a half. "the first settlers of new england found wampumpeage, sometimes called wampum and sometimes peage, in use among the aborigines as an article of adornment and a medium of exchange. it consisted of beads made from the inner whorls of certain shells found in sea water. the beads were polished and strung together in belts or sashes. "they were two colors, black and white, the black being double the value of the white. the early settlers of new england, finding that the fur trade with the indians could be carried on with wampum, easily fell into the habit of using it as money. it was practically redeemable in beaver skins, which were in constant demand in europe. the unit of wampum money was the fathom, consisting of white beads worth sixty pence the fathom. in connecticut decreed that wampum should be 'strung suitably and not small and great uncomely and disorderly mixt as formerly it hath been.' four white beads passed as the equivalent of a penny in connecticut, although six were usually required in massachusetts and sometimes eight. in the latter colony wampum was at first made legally receivable for debts to the amount of d. only. in the limit was raised to fifty pounds sterling, but only for two years. it was then reduced to forty shillings. it was not receivable for taxes in massachusetts. the use of wampum money extended southward as far as virginia. "the decline of the beaver trade brought wampum money into disrepute. when it ceased to be exchangeable in large sums for an article of international trade the basis of its value was gone. moreover it was extensively counterfeited, and the white beads were turned into the more valuable black ones by dyeing. nevertheless it lingered in the currency of the colonies as small change till the early years of the eighteenth century. while it was in use it fluctuated greatly in value. "the first general assembly of virginia met at jamestown july , , and the first law passed was one fixing the price of tobacco 'at three shillings the beste, and the second sorte at d. the pounde.' tobacco was already the local currency. in an act was passed forbidding the making of contracts payable in money, thus virtually making tobacco the sole currency. "the act of was repealed in , but nearly all the trading in the province continued to be done with tobacco as the medium of exchange. "in the price of tobacco in silver had been s. d. per pound in virginia. the cultivation increased so rapidly that in the price had fallen to d. in order to raise the price, steps were taken to restrict the amount grown and to improve the quality. the right to cultivate tobacco was restricted to , polls. carpenters and other mechanics were not allowed to plant tobacco 'or do any other work in the ground.' these measures were ineffective. the price continued to fall. in it was only d. it was now enacted that half of the good and all of the bad should be destroyed, and that thereafter all creditors should accept lbs. for ; that the crop of should not be sold for less than d., nor that in for less than s. per lb., under penalty of forfeiture of the whole crop. this law was ineffectual, as the previous ones had been, but it caused much injustice between debtors and creditors by impairing the obligation of existing contracts. in tobacco was worth only - / d. and in only d. per lb. "these events teach us that a commodity which is liable to great and sudden changes of supply is not a desirable one to be used as money. "in the year a treaty was negotiated between the colonies of maryland, virginia, and carolina, to stop planting tobacco for one year in order to raise the price. this temporary suspension of planting made necessary some other mode of paying debts. it was accordingly enacted that both public dues and private debts falling due 'in the vacant year from planting' might be paid in country produce at specified rates. "in an extraordinary series of occurrences grew out of the low price of tobacco. many people signed petitions for a cessation of planting for one year for the purpose of increasing the price. as the request was not granted, they banded themselves together and went through the country destroying tobacco plants wherever found. the evil reached such proportions that in april, , the assembly passed a law declaring that these malefactors had passed beyond the bounds of right, and that their aim was the subversion of the government. it was enacted that if any persons, to the number of eight or more, should go about destroying tobacco plants, they should be adjudged traitors and suffer death. "in tobacco notes were legalized. these were in the nature of certificates of deposit in government warehouses issued by official inspectors. they were declared by law current and payable for all tobacco debts within the warehouse district where they were issued. they supply an early example of the distinction between money on the one hand, and government notes, or bank notes, on the other. the tobacco in the warehouses was a real medium of exchange. the tobacco notes were always payable to bearer for the delivery of this money. they were redeemable in tobacco of a particular grade, but not in any specified lots. counterfeiting the notes was made a felony. in another variety of currency, called 'crop notes,' was introduced. these were issued for particular casks of tobacco, each cask being branded and the marks specified on the notes. "the circulating medium of the new england colonies was quite as fantastic as that of virginia. merchantable beaver was legally receivable for debts at s. per pound. in the general court of massachusetts ordered that corn should pass for payment of all debts at the price it was usually sold for, unless money or beaver skins were expressly stipulated. in other words, a debt payable in pounds, shillings, and pence might be paid at the debtor's option in any one of three ways; in corn at the market price, in beaver at s. per pound, or in the metallic money of england. for more than half a century this order continued in force and operation, other things being added to the list from time to time. "in musket balls were made receivable to the extent of d. in one payment. "in indian corn was made current at s. per bushel, wheat at s., rye and barley at s., and peas at s. dried fish was added to the list. taxes might be paid in these articles and also in cattle, the latter to be appraised. "the need of metallic currency was severely felt. in it was ordered that no coin should be exported, except s. to pay each one's traveling expenses, on penalty of forfeiture of the offender's whole estate. "the cost of carrying the country produce taken for taxes amounted to per cent of the collections. a constable once collected bushels of peas as taxes in springfield. he found that he could transport this portion of the public revenue most cheaply by boat. launching it on the connecticut river, he shipped so much water on board at the falls that the peas were spoiled. thus we learn that money ought to be easy of carriage and not liable to injury by exposure to the elements. "in it was ordered for the first time that contracts made in silver should be paid in silver. "in , during king philip's war, the need of metallic money for public use was so great that a deduction of per cent was offered on all taxes so paid. "the first local currency of new netherlands was wampum, but it was subordinate to the silver coinage of the mother country; that is, it was reckoned in terms of that coinage as fixed by the dutch west india company from time to time. it was fixed at six white beads for a stiver. wampum was not made in the province, but was imported from the east end of long island, the principal seat of production. it is mentioned in a letter from the patroons of new netherlands to the states general in june, , as 'being in a manner the currency of the country with which the produce of the country is paid for,' the produce of the country being furs. "beaver soon became current here, as in new england, and for the same reason, its currency value being fixed by the company at florins per skin. as wampum beads were equal to stiver and stivers to florin, and florins to skin, the ratio of wampum to beaver was to . the market ratio did not coincide with the legal ratio very long. nor was the legal ratio of either wampum or beaver to silver maintained; for, in , director stuyvesant wrote to the company urging that beaver be rated at florins instead of , and wampum at for a stiver instead of , as these rates were nearer the commercial values. "in the assembly of south carolina made rice receivable for taxes, 'to be delivered in good barrels upon the bay in charlestown.' in the following year a tax of , , pounds of rice was levied, and commissioners were appointed to issue rice orders to public creditors, in anticipation of collection, at the rate of s. per lb., in the following form: "'this order entitles the bearer to one hundred weight of well-cleaned merchantable rice to be paid to the commissioners that receive the tax on the second tuesday in march, .' "rice orders were made receivable for all purposes, and counterfeiting was made felony without benefit of clergy. "in eastern tennessee and kentucky, early in the nineteenth century, deer skins and raccoon skins were receivable for taxes and served the purposes of currency. "when california was first invaded by gold seekers there were a few mexican coins in circulation there, not nearly sufficient to answer the needs of the growing community. the immigrants brought more or less metallic money with them. the smaller coins were those of many different countries, chiefly spanish. for want of sufficient coins, the first trading was done largely with gold dust, sometimes by weighing it in scales, sometimes by guesswork. a 'pinch' of gold dust about as large as a pinch of snuff had a current value and was a common measure in places where there was no means of weighing. at a public meeting in san francisco, september , , it was resolved by unanimous vote that $ per ounce was a fair price for placer gold. this rate was at once adopted in all business transactions. by and by private coiners of gold came into the field. the legislature was at first alarmed by the appearance of these unaccustomed pieces, and passed a law to prohibit circulation and to close the shops where they were made. it was soon found, however, that they were a great convenience. then the law was repealed. several establishments immediately went to work assaying and coining gold. one of these was at salt lake city, whose productions were known as mormon coins. only one of these establishments, that of moffat & co., of san francisco, conformed exactly to the government standard of weight and fineness. all the others, however, including the mormon ones, circulated freely, and were received on deposit by the banking houses until the government set up an assay office and began to stamp octagonal pieces of $ , called 'slugs,' and afterwards those of $ each. this was done in ; the san francisco mint was not ready till . the moffat coins continued to circulate after the mint had gone into operation, since everybody had confidence in their goodness. it is estimated that $ , , of private coins were struck. they were received in the atlantic cities at their assay value only." the foregoing illustrations drawn from our own history serve to explain the nature of money and the processes by which mankind learns to distinguish between good money and bad. mr. farmer: in all that has been said there is nothing stranger nor more interesting than what is going on today. uap is one of the most interesting of the south sea islands. it is the western outpost of the carolines, which were purchased by germany from spain for $ , , at the close of the spanish-american war. the form of money used by the people and the perfection of the system of currency is as interesting as anything in the history of the human race. the small change consists of pieces of pearl shell and small round stones. large sums are represented by fei. these are big circular stones in the form of wheels ranging in diameter from one to twelve feet. in the centre of each is a hole through which a pole is thrust to facilitate carriage from one spot to another. these coins are not minted on the island, nor has any addition been made to the supply of them for a number of years. they were originally fashioned in the pelao islands, and brought thence to uap in canoes over a stretch of four hundred miles of ocean. a very large fei could not be changed into smaller coin without seriously disturbing the currency of the island. the owner of one of these twelve-foot masses of wealth is a sort of j.p. morgan. like the man with the million dollar bill in mark twain's story, he does not need to break his money in order to pay for anything he may buy, but readily secures all that he desires on credit. it speaks volumes for the honesty of the islanders that all this stone money is left out of doors standing against the sides of the huts. the annals of uap do not contain a single record of the theft of a fei, but perhaps the difficulty of disposing of such unwieldy cash may be a potent factor in the matter. not only is the ownership of a large fei equivalent to the command of an unlimited amount of currency, but abstract possession seems to entail the same advantage. many years ago a canoe carrying one of these large stones was sunk a few miles off the island. although the fei went to the bottom of the ocean and has lain there ever since, the man to whom it was consigned enjoyed all the advantages that would have accrued from its delivery to him. during his lifetime he was accredited one of the wealthiest men of uap. not only that, but he bequeathed his interest in the submerged fei to his son, and it has been passed on in like manner through four or five generations, securing all the advantages of substantial wealth to each. mr. lawyer: metal of some kind has been used as far back as the records of time go, and strange as it may seem, gold was the first metal to be used as well as the first to be discovered, as a standard of value, or measure of value. iron was used in sparta, spikes in central africa, nails in scotland, lead in burmah, copper, tin and silver in rome. silver and gold were used in china a thousand years ago. in her palmy days gold bracelets and rings were weighed out in egypt, measuring value. for the past two hundred years there has been a distinct evolution of the world's present standard of value going on, sometimes it has been gold, sometimes it has been silver, sometimes nations have tried to have both. during the last hundred years the struggle to use both has gone on persistently until within the last twenty-five or thirty years. william a. shaw states that in france during a period of one hundred years, the ratio between gold and silver had been changed one hundred and fifty times. the controversy of this period has well been called the "battle of the standards." a constantly increasing trade between the nations of the earth has made a common standard of value more and more important, while the ever-increasing refinement in the exchange of commodities among the peoples of the earth has made a single standard absolutely essential. experience has wrought the change, and now the entire commercial world has gold as its standard of value. it is interesting to observe how gold because of its peculiar fitness, as compared with any other commodity, was finally selected and adopted as the world's standard of value. if we were to study for months for the purpose of ascertaining what the characteristics of the world's standard of value should be, we would define the characteristics of gold as particularly distinguished from any other metal or thing. _first_: gold has by far a greater stability of value than any other substance. it is very doubtful whether there is a perceptible change, at least any such change of value, as could be agreed upon. it is so small. _second_: gold has portability, or the facility of transportation from one part of the country to the other, or from one nation to the other, that makes it desirable as compared with any other metal, that is to be thought of for a standard of value. for example, the same value in silver weighs thirty times as much. _third_: the divisibility of gold at the mint into convenient pieces for trade and commerce is all that can be desired. _fourth_: it has, practically speaking, perfect durability. it will not corrode, or waste away, except by wear, and waste by wear is now largely obviated by the use of some representative, such as our gold certificate. _fifth_: gold possesses homogeneity or perfect uniformity of structure and material. _sixth_: gold possesses cognizability, or can be readily known or recognized. it was undoubtedly all these inherent qualities, these prerequisites that led to those legislative enactments which have during the last hundred years singled out this yellow metal as the most fit arbiter of the world's trade. the first legislative act that seemed to lead to this ultimate decision of the world was passed by the house of commons in , but not until was the law passed that definitely settled the question of the standard of value for great britain. the very same law passed in that year, now nearly one hundred years ago, remains in force to this day. in , the united states followed great britain in an attempt to establish the gold standard. we reduced the weight of our silver coins, smaller than one dollar, and made them legal tender for only five dollars in amount. the silver dollar was not considered in this legislation of , and not until february , , did the gold dollar become the unit of value, when the gold standard was unequivocally established. the silver dollar was at that time worth about two cents more than a gold dollar, and therefore it was omitted from the coinage. this was the famous crime of ' , about which the men now wearing gray hair, or no hair, heard so much in the ' 's and early ' 's. yes, we were hearing this as late as , when it was the battle cry of the presidential campaign. it may be stated that practically the whole civilized world, with the single exception of great britain, has come to the single gold standard, since . the only country now remaining upon the silver basis, or that has not taken steps to place itself upon a gold basis, is, according to the report of the director of the mint, the central american states, which are of comparatively no commercial importance whatever. mr. merchant: how much gold is there in the world today? mr. lawyer: it was estimated in that the amount of gold accumulated was approximately $ , , , (four thousand million dollars). the amount of gold produced during the last twenty-two years, or since , by all the countries of the world approximates $ , , , (six thousand five hundred million dollars). of course a deduction, or allowance, must be made for what has been used outside of monetary purposes, or in industrial consumption, approximately $ , , , (one thousand five hundred million dollars). a deduction should also be made for what has been absorbed by india, about $ , , (seven hundred million dollars), and also by egypt, about $ , , (two hundred million dollars), or nearly $ , , , (one thousand million dollars), by these two countries. the director of the mint in his report, page , says: "in statistics of the precious metals india is the most important country of asia, and has long been one of the most important in the world. the government of india has advised this bureau that the uncoined gold imported into that country might be considered to be used for ornaments and in manufactures. this amounted in to $ , , . "the movement to india deserves to be treated in a class by itself. a large part of the gold and silver that goes there sinks out of sight, and whether it is made into ornaments or buried in the ground, is withdrawn at least in large part from the monetary stock of the world. some of it may be brought out in periods of emergency, such as times of famine, and reconverted into money, but in the past a steady stream of the precious metals has moved into india and disappeared as a factor in the commercial world. sir james wilson, k.c.s.i., for many years in the government service in india, in a comprehensive address delivered before the east india association of london, on june , , reported the net imports of gold by india since at about $ , , , , or one-tenth of the world's production in that time. "it may be questioned whether the economists who are expressing fears as to the effects that may result from the production of gold at the present rate are aware of the amount of that metal taken by india since the gold standard was definitely established, and the government began to pay out sovereigns freely. that occurred in . for the ten-year period, - , the net imports plus the country's own production were $ , , ; for the eleven years, - , they aggregated $ , , . for the british fiscal years ended march , , they amounted to $ , , , or about one-quarter of the world's production after the industrial consumption was provided for. "_if this ability on the part of india to take and pay for gold proves to be permanent, it is apparent that there will be no over supply to trouble the rest of the world._" the finance department of the government of india, in its report for the fiscal year ended march , , commenting upon these figures, says: "'the gold figures are striking, but it is equally remarkable that the increase in gold has not been at the expense of silver; the country, in other words, continues to take practically the same amount of silver, but it prefers that the addition to the imports of treasure which it has been able to claim should be in the form of gold.'" sir james wilson, in the address alluded to, sums up his explanation by saying: "'as for india, her prosperity is steadily advancing. great numbers of her people prefer to spend their savings on gold rather than on other commodities. the probability is that altogether apart from questions of currency india will continue to absorb gold in ever increasing quantities.' "the egyptian situation is somewhat like that of india. the country is on a gold basis, and for thirty years has been steadily taking gold in the settlement of its trade balances. the high price of cotton in recent years, and the increasing production of the country explains the trade balances, but there is some mystery about the way the gold disappears from view. it does not enter into bank stocks, and it is difficult to understand how a country of its size and population, and in which the masses of the people are so poor, can absorb so much gold coin. in the first period under review the customs records show net imports by $ , , , and in the second period, $ , , . for the year they were $ , , . "some light is shed upon the situation by the following statement in an address by lord cromer, made in london, in : "'a little while ago i heard of an egyptian gentleman who died leaving a fortune of £ , [$ , ], the whole of which was in gold coin in his cellars. then, again, i heard of a substantial yeoman who bought property for £ , ($ , ). half an hour after the contract was signed he appeared with a train of donkeys bearing on their backs the money, which had been buried in his garden. i hear that on the occasion of a fire in a provincial town no less than £ , ($ , ) was found hidden in earthen pots. i could multiply instances of this sort. there can be no doubt that the practice of hoarding is carried on to an excessive degree.'" in round figures the approximate amount of gold remaining for commercial or banking purposes is approximately $ , , , (four thousand million dollars), in addition to what we had in , making a total of $ , , , (eight thousand million dollars). of this total amount the united states has $ , , , (one thousand eight hundred million dollars), or nearly one-quarter of the monetary gold supply of the world. however, if we had our proper proportion of the world's monetary gold, considered from the standpoint of our bank resources, we should have upwards of $ , , , (three thousand million dollars). mr. banker: how do you make that out? mr. lawyer: the banking resources of the entire world are now about $ , , , , while those of the united states are about $ , , , , or two-fifths of the bank resources of the world, and therefore we are entitled to two-fifths of the eight billion of monetary gold of the world. this would give us $ , , , . while, as i have just said, it is true that there have been no discoveries of new fields since , with the exception of the klondike, a most important event occurred in the discovery of the cyanide process, which was, with the circumstances attending it, well described by the mining world and engineering record of london, which said: "the discovery of the cyanide process must be regarded as one of the greatest achievements of modern time. and there can be no doubt that cyaniding will be held by the coming generation for its importance, not so much to the mineral industries directly, as for its bearing upon world economies in rendering possibly a greatly increased output of gold and silver year after year. in a comparatively brief twenty-year interval since , when messrs. mcarthur and forrest brought the modern perfected cyanide process prominently before the mining world, the output of gold has amounted to , , fine ounces. this is a most astonishing showing, especially when compared with a total output of , , fine ounces for the entire years previous from to , a period lacking just three years of being four centuries. "for the great expansion in the world's output, particularly noticeable in the past fifteen years, the spread of the cyanide process is directly responsible. nor, if we except the klondike, has this record production been boomed by the development of new fields. the cream of the world's gold fields had already been skimmed in previous years in california, australia, south africa, siberia, india, and elsewhere. it is mainly on the cast-off leavings of the old field that the cyanide process has achieved a record production of the yellow metal. and among those leavings, we must not forget the innumerable low-grade properties whose exploitation has been rendered fundamentally possible only by the cyanide process. it is these latter which now furnish the bulk of the world's supply of gold, and upon which the world must depend very largely for its future requirements." mr. banker: those figures are startling. we must be getting more gold than we need for banking purposes. mr. lawyer: on the contrary, our banking resources are increasing faster than our gold supply. in the banking resources of the world were estimated at $ , , , , less than one-third of what they are today. that is, the banking resources have trebled since , and the gold supply for reserve or monetary purposes has only doubled. mr. banker: what about the gold supply for the future? mr. lawyer: the production during the past four years has been about stationary, averaging $ , , each year. you must remember there have been no gold discoveries of any consequence during the past ten years, and it is very probable that the production will remain almost stationary for a few years to come. at present it looks as though the gold supply, and the demand for gold for monetary purposes, would run along about equal. of course the more intimate the business relations of the nations of the earth become, the more efficient will the reserve of gold become, because the reserves of the world will become more and more mobilized, and therefore more efficient in the conduct of the world's business. mr. merchant: from what you have said, and as a result of my own study, i am convinced that the adoption of the gold standard was a natural selection. it was the survival of the fittest. thousands of books have been written upon this subject, and libraries literally filled with them. in , when the presidential campaign was fought out on this question, my investigation led me into an extended historical review of the use of metals as money. i found that it had been in use by the babylonians, the egyptians, the greeks, the romans, the chinese, the europeans during the middle ages, and that the struggle between gold and silver during the last two hundred years had resulted to the advantage of the people, to the commerce of every nation and to the whole world. this last struggle was not whether gold or silver should be the standard of value, but whether both should or could be used as the standard of value. that is, could we have a double standard. the decision has been unequivocal and universally in favor of a single standard of value, and that standard gold. but the double or bi-metallic standard had been a troublesome question long before that. professor ridgeway says that from the first to the last the greek communities were engaged in an endless quest after bi-metallism * * *, but while the gold unit never varies in any part of hellas, until a late epoch, the silver coins exhibit differences not merely between one district and another, but even between one period and another in the same city or state. there is incontrovertible evidence to prove that the same trouble was caused by the fluctuation in the relative value of gold and silver, as arises in modern times. delmar also states that gold greek coins remained constant while the silver ones varied, and had to be adjusted. at present, it may be stated as a general truth, that all other things throughout the commercial world are now measured by gold, or very soon will be, as all the commercial nations of the earth, with a single exception, have taken steps looking to the adoption of the gold standard. the gold standard is the evolution of the ages. second night what is money? uncle sam: at our talk last wednesday evening we all agreed upon two facts, and these were fundamental to the consideration of a financial and banking system for me. the first fact was this: that gold is the standard of value all the world over, as well as our standard. the second fact: that a standard of value was something by which the value of all other things is measured. it must necessarily follow then, and be perfectly clear to all of us that everything we produce, and everything that we buy and sell is measured by gold. in other words _that gold is our money and that our money is gold_. mr. lawyer: uncle sam, you say "gold is our money." now, it seems to me as though there must be something done to gold to make it money, even though all our money is gold. mr. banker: yes, something is done to gold to make it money, and to circulate it as money. just three things are done to gold to make it possible to circulate it as money. _first_, we have established a degree of fineness. the gold coin we circulate as money is nine-tenths pure gold, or nine-tenths fine, and one-tenth of cheaper metal. this is added to give it an increased hardness so that the loss by rubbing the gold against other things will not be so great. this loss is called the abrasion of gold. _second_, we have established a unit of value in gold which is one dollar, composed of twenty-five and eight-tenths grains of gold, nine-tenths pure, or fine. _third_, uncle sam here cuts up the gold into pieces as follows: he makes a two dollar and a half piece, which contains two and a half times as much gold as our unit of value and stamps each piece two and a half dollars. it is known as a quarter eagle, being one-quarter of the ten dollar piece which is called the eagle. he makes a five dollar piece which contains five times as much gold as our unit of value and stamps each piece five dollars. it is also known as a half eagle. he makes a piece which contains ten times as much gold as our unit of value and he stamps it ten dollars. it is also known as the eagle. he makes a piece which contains twenty times as much gold as our unit of value and stamps it twenty dollars. it is also known as the double eagle. this is called making coins, or coining money. these four gold coins constitute all the money there is in the united states, for uncle sam does not make pieces containing twenty-five and eight-tenths grains of gold, nine-tenths pure, or fine any more, and stamp them one dollar because this piece of gold was so small as to be inconvenient, indeed an actual nuisance. uncle sam stopped making these coins in . uncle sam: that is right, and i don't make any more gold pieces now containing fifty times as much gold as my unit of value for the same reason that i don't make any of the dollar pieces. a fifty dollar piece was found to be inconvenient and in a way an actual nuisance. mr. laboringman: well, uncle sam, i would like to have a few of such nuisances, and if any of you fellows have any of these two nuisances, even the one dollar pieces about your persons, i wish you would allow me to relieve you of all you have of either kind. when it comes to getting rid of that kind of a nuisance, you don't seem to be in a hurry about it. however, just remember that i stand ready at all times to remove a nuisance of that kind, if it happens to be bothering any of you. mr. merchant: we will remember that and give you the first chance. mr. laboringman: well, you might as well forget it, for i'll never get the chance. mr. manufacturer: mr. banker, did i understand you to say that the four gold coins you have mentioned, the two and a half, the five dollar, ten dollar and twenty dollar gold pieces constitute all the money that there is in the united states? mr. banker: that is precisely what i said, and i stand ready to prove it. yes, to demonstrate it absolutely, and if i don't convince everyone of you that i am right, i'll eat all the other stuff you call money that you can bring me. mr. lawyer: here is a gold certificate, isn't that money? mr. banker: mr. lawyer, please hand me that certificate. here is what it says on its face: "_this certifies that there have been deposited in the treasury of the united states of america ten dollars in gold coin payable to the bearer on demand_." it is perfectly evident, mr. lawyer, that this is nothing but a warehouse receipt for ten dollars, stored in washington subject to the demand of the holder. there is just the same difference between that and the gold coin as there is between a trunk and a trunk check. you would not hold up a trunk check, and tell me that it was a trunk. this certificate is no more money than a trunk check is a trunk. mr. lawyer: you are right, mr. banker. there is nothing so absolutely essential in our talk, as illustrated by this incident, as the use of correct, exact language. and i am very glad that you have impressed this fact so indelibly upon our minds at the outset. mr. farmer: did you say, mr. banker, that all the money there was in the united states were the gold coins? then you said that if you didn't convince the rest of us that that was the fact, you would eat all the other stuff that we call money that we would bring you. now, it seems to me as though that was just one of your smooth, slick tricks of getting what we have got in our pockets, as usual. how does that strike the rest of you boys? now, i have a few silver slugs here, mr. banker, that will keep you busy chewing until you pass over, if you try that game on us. mr. banker: that is all right, mr. farmer, but you wait until you hear me out. now, let us agree upon one fact, and that is this, that uncle sam over there is not making or coining any other pieces of gold than the four pieces i have just described, and that none of the one dollar or fifty dollar pieces are now in circulation. do you all agree that that is a fair assumption under the circumstances? uncle sam: yes, that is a perfectly fair assumption that all of the gold now in circulation consists of the four pieces i am now making, the two and a half, five, ten and twenty dollar pieces. but, if they constitute all the money i have in circulation, i am mightily fooled, and it is high time i was put right. mr. banker: well, that is what i am going to do. i am going to put you right, for you have not only been fooled yourself, but you've been fooling the people long enough as well. three hundred and fifty years b.c., one of the greatest philosophers, and one of the wisest men that ever lived, described the development and evolution of money, and defined what money was better than any man ever has since, i think. that man was aristotle. aristotle's account of the origin and definition of money was as follows: "it is plain that in the first society (that is in the household) there was no such thing as barter, but that it took place when the community became enlarged: for the former had all things in common, while the latter, being separated, must exchange with each other according to their needs, just as many barbarous tribes now subsist by barter; for these merely exchange one useful thing for another, as, for example, giving and receiving wine for grain and other things in like manner. this kind of trading is not contrary to nature, nor does it resemble a gainful occupation, being merely the complement of one's natural independence. from this, nevertheless, it came about logically that as the machinery for bringing in what was wanted, and of sending out a surplus was inconvenient, the use of money was devised as a matter of necessity. for not all the necessaries of life are easy of carriage; wherefore, to effect their exchanges, men contrived something to give and take among themselves, which being valuable in itself, had the advantage of being easily passed from hand to hand for the needs of life--such as iron, or silver, or something else of that kind, of which they first determined merely the size and weight, but eventually put a stamp on it in order to save the trouble of weighing, for the stamp was placed there as _the sign of its value_." wilbur aldrich says: "gold, and no other thing, sustains all the functions of money. gold is money as soon as it is taken from the earth, without smelting, without refining, without minting and without limitation." horace white says: "nobody would give that which has cost him labor in exchange for something which he could obtain without labor." mr. merchant: mr. banker, you quoted a man there, mr. aldrich, i think it was, who said that gold alone possessed all the functions of money. just what do you mean by the "functions of money"? mr. banker: i am glad that you asked that very question, because those functions have determined the place of gold in the world's business, and made it the standard of value of the world, and consequently the money of the world. those functions are these: _first_: gold is a measure of value; that is, all other things are measured in gold. _second_: gold is divided into units, such as our dollar, the english sovereign, the french franc, the german mark, and so determines prices. _third_: gold is a medium of exchange. _fourth_: gold is a storehouse of value; that is, the people of the world hold it as an absolutely safe form of property, varying less in value than anything else they can possess. _fifth_: it is such a permanent form of value that it is made the basis or standard of future or deferred payments: not only at the end of a year, but at the end of twenty-five or fifty years. mr. merchant: i would like to ask you whether you think there is anything in this claim that gold is cheaper today than twenty years ago? whether it is falling in value, and as a consequence prices of everything else, which must be compared with gold, are rising? mr. banker: no, sir, i do not think that the increased output of gold is the cause of higher prices. the increased prices can be more than accounted for in other ways. think of it. there are: . the trusts, . the middleman, . advertising, . unscientific management, . overcapitalization, . monopoly! monopoly! . extravagance, . militarism, . exhaustion of soil, . high rates of interest on agricultural loans, . unnecessary disease, . concentration of population in cities, . shorter hours by one-quarter, . increased wages by one-quarter at least; in some instances, %, . shorter hours for women, . child labor laws, . minimum wage laws, . workmen's compensation acts, . insurance against unemployment, . old age pensions. mr. laboringman: well, i don't know what you fellows think, but i am for everyone of these forward movements that make for a better humanity, morally, intellectually and physically; and i'm utterly opposed to the unfair advantages that any man, or corporation, has over any other man, or any other corporation. a just government rules its people through just laws, and guarantees equal opportunities under the operation of those laws. mr. banker: so i think we all are, or will be, very soon. every lover of his country, everyone who recognizes that the government exists for man--manhood and womanhood--must be for these purposes, but all these things will require a readjustment, and will take time. i am only saying that these things more than account for all your high prices, but let me finish. . during the past ten years, , , of our people have shifted, or gone, from the country to the cities. food producers have decreased, and food consumers have increased by , , . our population has increased % and our food products only % since . . the hundreds of millions that have gone into automobiles, not one dollar in a thousand of which produces anything but a good time, or a joy ride, is a burden on production, and has been affecting prices, because they are nothing but luxuries. . then there are all the other conveniences of life, such as telephones, electric light, etc. again, gentlemen, let us note where the gold has gone to during the last ten years, the period of increase in price. germany got only $ , , , although her business has expanded enormously. england took only $ , , , while france took $ , , , russia $ , , , and we absorbed $ , , , . during the same time india took $ , , . will anyone say that the prices in these various countries have in any way shown or reflected the amount of gold taken or absorbed? let some one come forward and prove that gold has become cheaper by pointing out that prices in the various countries indicate its effects upon commodities. lastly, let them explain the fact that while the banking resources of the world have increased from $ , , , to over $ , , , , or increased three and one-half times, the gold for monetary purposes has only doubled, or increased from $ , , , to $ , , , . mr. merchant: i am more than satisfied and pleased that i asked you that question, for i knew it would be constantly bobbing up and bothering us, as we went along. when i interrupted you, you were speaking of gold and its functions as money. mr. banker: yes, and i assert that no other substance or thing possesses these functions, qualifications or characteristics, at least in no such degree as gold. does anyone here deny that? mr. lawyer: i think we must all agree to that, and further i would say that anything that did not possess all these functions, qualifications or characteristics in combination cannot very well be called money. to illustrate, if anything was used as a medium of exchange but depended upon its relation to gold for its acceptance it could not be called money. i am fully aware that we speak of "cash" and "money," as anything we get in exchange for property, but this language does not mean anything definite, except as to the transaction. i want to lay this down as an absolute rule, and something that no one of us should forget or overlook during our conversations. "_we should be careful to avoid calling any kind of credit instrument money, no matter how much used as a medium of exchange._" let me read that again. uncle sam: now, let me see just what you mean by that. if i understand you, i think that is an attack upon me, upon my credit. for if my recollection serves me right, the united states notes, or greenbacks, have been called money, and treated as money ever since i issued them during the war, way back in , i think it was. mr. banker: well, uncle sam, do you think calling a thing something which it is not makes it that thing? to say that the moon is made of green cheese does not make it so. now, here's one of your united states notes, or greenbacks. do you recollect what you printed on that at the time you issued it, and have been printing on it ever since? this is what it says: "_the united states will pay the bearer $ . ._" that promise, or agreement, can mean but one thing, and that is that you will pay the bearer five times one dollar, or five times twenty-five and eight-tenths grains of gold, nine-tenths fine. now, it must be perfectly clear to you, indeed, the conclusion is incontrovertible, that that $ . united states note, by which you agree to pay me $ . cash, can't be the $ . itself. mr. farmer: no, by jocks, i know that is true. tom jones gave me a written agreement to deliver me a horse last monday morning. i sent my boy over with his written promise for the horse, and he refused to deliver the horse. certainly, his promise was not the horse; that's perfectly clear to me, for i did not get the horse, and that's the same kind of a deal that this united states note is. mr. laboringman: yes, but uncle sam is no such flunker as that. mr. banker: well, he flunked from until , for about seventeen years, and he came within an ace of flunking again in . he is liable to flunk any time it suits him, if he should get into a tight place. uncle sam: that's so, and the misfortune and the shame of it is, that i am left in a position where i am compelled to flunk. mr. banker: i agree with you, but that only adds additional proof that this $ . bill, which is your promissory note, your i.o.u., or old due bill, given for boots, mules and ammunition during the war, is not money at all, but a mere promise to pay money. as you have just said, it is most unfortunate that you have been left in this position by your boys who have been going to congress for the past fifty years, apparently without the intelligence, or courage, to relieve you of this disgraceful situation. uncle sam: well, if these united states notes are nothing but my promissory notes, or due bills, agreeing to pay money, it is self-evident that they are not money. you have completely satisfied me on that point. mr. banker, how much of that kind of stuff have i got out? mr. banker: $ , , . uncle sam: great scott, i presume if i should get into trouble with some first-class nation, and have to go to war for a few years, and the people began to wonder whether i was going to pull through and pay my debts, that is to doubt my ability to stand the bill, and all that $ , , , then that $ . united states note would not pass for $ . . mr. banker: precisely so; that very note passed for only $ . at one time in , or only cents on the dollar. uncle sam: well, i wish congress would get busy and pay these things off, so that i would be prepared for business, if anything should turn up compelling me to fight. mr. manufacturer: from what you have said, mr. banker, and what uncle sam admits, i guess we all agree that the united states notes, or greenbacks, are not money at all, but just ordinary debts, or demands for money, and therefore cannot themselves be money, of course. but what have you to say about this national bank note here? how does this differ from the united states notes or greenbacks? don't you admit that this is some sort or kind of money? mr. banker: i do not. it is no more money than the united states note. just read what it says: mr. manufacturer: i will. this is what it says: "_the first national bank of new york will pay the bearer $ . ._" mr. banker: don't you see that that bill is a mere i.o.u. of the bank, nothing but a promise to pay five times twenty-five and eight-tenths grains of gold, nine-tenths fine, to the bearer? it does not differ in the slightest degree from the united states note except that one is the promise of the first national bank of new york, and the other the promise of uncle sam to pay $ . . you can no more say that a promise of a bank to pay money is money than you can say that a promise of uncle sam to pay money is money. both are debts, and both are demands for money, and therefore neither can be money. mr. farmer: gentlemen, while i must admit that mr. banker has completely, yes, absolutely, gotten away with the united states notes and national bank notes and convinced us that they are not money at all, just watch me choke him with this silver slug, weighing - / grains, and bearing two invincible superscriptions. _first_: "in god we trust." _second_: "united states of america, one dollar." mr. banker, what have you to say about our silver dollar? do you mean to tell me it is not money? that's what i want to know. think of it, this dollar of our daddies not money. mr. banker: well, mr. farmer, if you'll follow me for half a minute, i will only have to ask you whether you yourself think it is money; and i will abide by your own decision. but, what i would rather do is to put it to a vote of the crowd, and if it is not unanimous i'll give it up. here is a cent piece, bearing one of your invincible superscriptions, "united states of america, one cent." we have more to trust god for in one of these cents than we have in your silver dollar, and therefore it was a grave oversight when uncle sam left off the other invincible superscription, "in god we trust," since this piece of bronze is worth only about one-thousandth part of a one-hundredth part of our gold dollar, or . . here is one of our nickels, bearing the same invincible superscription, "united states of america, v cents," which is worth about two-thousandths of one-hundredth part of a gold dollar, or . . here is a cent piece, worth about cents, or . , and here is a cent piece, worth about cents, or . . here is a cent piece, worth about cents, or . . here is the sacred dollar of our daddies, worth about cents, or . . now, all these pieces of metal belong to the same class of coin from the cent to the dollar included, and are merely token coins. mr. merchant: well, what is a token coin? mr. banker: a token coin is a piece of metal bearing the stamp of the government, and passing at its face value, though the metal it contains is worth less than its face value. this definition covers every piece of metal coin uncle sam makes except our gold coins, which are worth just as much and no more in the form of coin than they are in the form of metal, or gold bars. now, mr. farmer, i want you to understand that the silver dollar is included in these token coins. mr. manufacturer: well, please tell me why do people take these pieces of money at their face value, when they are worth so much less than they pretend to be? mr. banker: for the very simple reason that uncle sam over there redeems all the coins, smaller than one dollar, when presented to him in sums of five dollars or more, and because it is made the duty of his secretary of the treasury to maintain the face value of our silver dollar with our gold dollar by exchanging gold dollars for silver dollars, if anyone asks him to do so. if the government should pass a law refusing to redeem our silver dollars with gold dollars, our silver dollar would then pass for just what the silver it contains would be worth from day to day. it is now worth cents. in it was worth cents. in other words, our silver dollar is not its own redeemer at cents any more than the united states notes or the national bank notes are their own redeemers. a silver dollar is a demand or a check calling for a gold dollar. the silver dollar, the united states note, the national bank note all pass at their face value because they are convertible into gold, and are temporarily redeemed by uncle sam in gold, while gold is its own redeemer, and a ten dollar gold piece, or any other gold coin, is worth just as much, if hammered into a spike, or melted into a slug, as when it bears the stamp of uncle sam, certifying its quality and its quantity. mr. lawyer: mr. banker, what are subsidiary coins? mr. banker: all these token coins are properly called subsidiary coins. let me read to you what horace white says on that point: "the word 'subsidiary' is usually applied to coins which constitute the small change of a country, and which are legal tender only for limited amounts. in the united states the silver dollar must be classed as subsidiary also; for, although it is full legal tender, the government does not coin it for private individuals as it coins gold. it is subsidiary or subordinate to gold coin." mr. laboringman: uncle sam, why do you make these token or subsidiary coins? uncle sam: i make token or subsidiary coins out of silver, nickel, and copper just as a matter of convenience to the people, and as a result of custom also. mr. lawyer: i think what horace white says upon that point is particularly good, and answers your question, mr. laboringman, completely. white says: "if subsidiary silver coins circulate at a value which is largely imaginary, the question may be asked, why not make them of some other metal, or even of paper? there are no reasons except custom and convenience. a coin, not heavier than a half dollar, is more convenient than a piece of paper; it is cleaner, and in the long run is probably cheaper, as it does not require frequent renewal. a cheaper coin might be made out of some other metal, but it is generally best to conform to the habits of the people. having been always accustomed to a silver subsidiary coinage no good reason is apparent why we should depart from it." mr. merchant: of course, you must use something besides gold to make the , , and cent pieces out of, because even a gold dollar would be found to be impracticable on account of its size. it would take a microscope to find a piece of gold worth only cents. mr. laboringman: and it would take a telescope to find a piece of gold worth only cent. mr. banker: mr. white has this to say also about the silver dollar: "the silver dollar is a larger kind of subsidiary coin, and should be treated by the government exactly as the smaller ones are treated. the government has received the value of a gold dollar for every silver one emitted, and is therefore bound in equity to redeem the dollars as it redeems the halves, quarters and dimes.... there are additional reasons, however, for direct redemption of the silver dollar. one is that such coins are unlimited legal tender between individuals. another is that there is a certain amount of public apprehension and lack of confidence touching any coin which passes for more than its metallic value." "mcleod says that in in a posthumous work sir william petty pointed out that one metal only should be adopted as the standard unit, and other metals should be issued as subsidiary to the standard unit. the same doctrine was advocated with great force and at great length by locke in , and also by harris in the middle of the last century, and was finally embodied in the great masterpiece of the subject 'lord liverpool's coins of the realm,' published in ." now, gentlemen, it must be apparent to everyone that a silver dollar is only another form of a debt of uncle sam over there, and that unless he continues to stand ready to exchange gold dollars for silver dollars, and so keep the silver dollars in circulation at cents, they would circulate at their metal or bullion value, or at about cents. mr. farmer, do you think that stamping one dollar upon that silver coin, added one-hundredth part of a cent to it, or affected its value in the slightest degree? are you not convinced that it is not money at all, but a mere debt of uncle sam and that it is a mere demand for one dollar in gold, and nothing more? mr. farmer: i am bound to admit that you have surprised me, indeed paralyzed me, for i thought the silver dollar was money, but it is certainly exactly the same sort of thing that the greenback and the national bank note is, and if they are not money, neither is the silver dollar money. mr. merchant: i am sure we all agree on that point now, but what about this silver certificate? do you pretend, mr. banker, that all our silver certificates are not money either? mr. banker: that is just what i assert, but i claim still more than that with regard to the silver certificate; for, if you will read it, you will find that it is only a warehouse receipt for silver dollars, which have been deposited in the united states treasury; and therefore is not a promise to pay anything, but simply to deliver so many silver dollars, which, as i have just demonstrated, must be redeemed in gold to keep them going for cents on the dollar. mr. lawyer: i am going to ask one question in this connection, and that is this. the united states notes are a legal tender for everything except to pay taxes on goods coming into the country and interest on the debt and silver dollars are a legal tender, unless the contract is made payable in something else. does not the fact that the united states note and the silver dollar are legal tender, make them money? mr. laboringman: what's legal tender? mr. lawyer: anything which can be lawfully used in payment of a debt, or which creditors are compelled to accept, is called legal tender currency. mr. banker: the fact that the united states note and silver dollar are legal tender does not change the real character of either of them. don't you know that the very fact that you are compelled, or think you are compelled, to make anything legal tender, to make it go for something it is not, lowers its value and depreciates that very thing? the price of the united states notes or greenbacks from the day they were issued, until january , , the date uncle sam redeemed his promise to pay gold for them, was simply a quotation of the government credit. this credit ranged from $ . to cents. white says: "the difference between these extreme quotations may be taken to represent changes in the public credit, or various vicissitudes and states of mind, dependent upon the war." again he says: "in congress attempted to check the depreciation of the currency by closing the gold exchange, and prohibiting sales of gold or foreign exchange for future delivery. the premium on gold advanced more rapidly after the passage of this act than before, and congress repealed it two weeks later." mr. laboringman: now, men, let me see if i understand what this is all about. if i have caught on to just what you have been saying about gold, which is all the money we have, and all these promises to pay money, these united states notes, bank notes and silver dollars, the difference between gold coins and these promises is the same as the difference between a meal and a meal ticket. and when you come to the silver certificate that is only an order for a meal ticket. uncle sam: by jove, he's hit the thing plump and square on the head, hasn't he, boys? but what i want to know now is how many of these meal tickets i've got out in one form or another? and, mr. banker, i want to know another thing. i want to know how many cans of pork and beans i have on hand to meet the meal tickets with? mr. banker: well, uncle sam, as i look at it you have , , , meal tickets out, and only , , cans of pork and beans to meet the demand for meals. uncle sam: great scott, what unbounded confidence the people must have in me not to shove those meal tickets in, before i get ready to supply the meals. what is worrying me is this, if anything should happen to cause any suspicion on that score, the jig would be up with me, and i can see the end of my credit; but of course that wouldn't be my finish. now, what i want done is this: i want to shift these meal tickets over to the banks where they belong, or make full provision for them myself, so that i can stop worrying, and shall be ready for business, if called upon to meet a first-class nation in a protracted war. by the way, mr. banker, just how did you make those meal tickets amount to , , , and that i had on hand only , , cans of pork and beans to meet the meal tickets with? you must remember it takes one can of pork and beans to redeem one meal ticket. mr. banker: uncle sam, you will remember that you have $ , , of united states notes to pay. you have also $ , , silver dollars to redeem, and there are $ , , national bank notes, making a total of $ , , , , all resting on your $ , , of gold in the reserve of your treasury. uncle sam: yes, but i don't have to pay those national bank notes, do i? mr. banker: well, uncle sam, it's this way, you know, you have to pay them out of a % fund created by the bankers, but the bankers can turn right around and ask you to redeem the united states notes which you pay them for the national bank notes, in gold. uncle sam: mr. banker, tell me another thing. if these silver certificates are nothing but warehouse receipts calling for silver dollars, and the silver dollars are nothing but token coins, then all these silver certificates are nothing but token or subsidiary coins in another form. mr. banker: that is literally true. uncle sam: and you say i have $ , , of silver dollars out good for nothing but token or subsidiary coin? mr. banker: precisely so. uncle sam: now, what i want to know is this. how much of this silver is needed today to supply the people with the token or subsidiary coin, up to and including the $ . bills; that is, the $ . bill, the $ . bill, , , and cent pieces? mr. banker: there are in circulation today about $ , , of these various forms of subsidiary or token coins, or about $ . for every man, woman and child in this country. uncle sam: what is the total amount of silver in the country then, of all kinds, silver dollars and pieces of silver less than one dollar? tell me that. mr. banker: there are, as i just said a moment ago, $ , , of silver dollars and $ , , of silver pieces less than one dollar, or a total of $ , , . uncle sam: well, well, you frighten me, for at the rate of four dollars each, the amount necessary for the convenience of the people, i am stacked up ahead for at least fifty years, or until we have about , , of people; for you say we have all told $ , , of silver coins in the country now. i want to tell you gentlemen, right now, that i want to get out of this hole, and i want to keep your mind steadily on that point as we go along. the whole situation is a most embarrassing one. tell me how much gold coin we have scattered about everywhere over the country? mr. banker: there is about $ , , , of gold available in the country. uncle sam: then i am confident there is great plenty for the present, if we can devise some plan, or scheme, to avail ourselves of it. mr. lawyer: i am convinced of that also, but the trouble is going to be to bring it together, centralize it and so mobilize it that we can make the most of it. we have learned one great and most important lesson tonight, and that is that the only money we have is gold, and that we cannot substitute an agreement to pay gold, a debt, a mere demand for gold itself, for it. such a proposal when you think of it is an absurdity, a contradiction of terms. to state the result of our conversation, or our conclusion, as i understand it, it is this: money must be coined out of a commodity that is just as valuable in the form of a commodity as it is in the form of coin. a piece of gold weighing just the same as a $ gold coin, if as pure, is worth just as much as a $ gold piece. last wednesday evening we all agreed that, as the result of our conversation, gold was the standard of value of the entire world, and was our standard of value as well. tonight, as i understand the result of our talk, we all agree that the only money we have in this country is gold coin; that our money is gold coin, and that our gold coin is our money. next wednesday night let us investigate our currency and ask ourselves "what is currency?" before we separate, i want to read to you what webster says currency is, because i want you to be thinking over the matter in the mean time. webster says: "currency is the state or quality of being current; a continual course or passing from person to person or hand to hand; general acceptance; circulation." mr. laboringman: you mean something that everyone takes and is glad to get. mr. lawyer: precisely so; it is that which is in circulation, or is given and taken as having value, or is representing value, as the currency of the country. if we all keep this definition in mind, we shall have very little trouble next wednesday evening in agreeing upon what currency is, and what it ought to be. uncle sam: i want you men to remember one thing, and that is this, that we want no currency in this country that isn't as good as gold, and currently redeemed in gold coin to prove it. nothing will satisfy uncle sam but the best, and don't you forget it. on top of that i want to plant another proposition, and that is this: it's not my business to be exchanging gold for that currency either. compel the banks to do that, for that is their business. but first, we will settle what our currency is, and what it ought to be. good night. third night what is currency? uncle sam: well, boys, when we parted last wednesday night, it was agreed that we should take up for consideration and discussion tonight the question, "what is currency?" and just before we left mr. lawyer read webster's definition of currency. mr. merchant: i am very glad that he did so because it gave me a start, and set me to thinking, and as a result i became very much interested in the subject. mr. banker: i have made the question of currency a study now for several years, and regard it of prime importance in any financial and banking system; but especially so considering the peculiar conditions existing in this country with our vast extent of territory, and the many distinct commercial centers there are here, each specializing in some one kind of production or industry. but more particularly is a right form of currency essential in this country because of the great number of our individual, independent banks now exceeding , . mr. manufacturer: well, mr. banker, it strikes me that you are getting a trifle on to a side line. let us get right down to business, and see if we can make any progress in determining just what currency is, what kind we have and what kind we ought to have, if any change is to be made. to my mind, and i have put all the spare time i had upon the question, that definition when fully understood described currency perfectly, and will help us amazingly in arriving at a clear idea of just what currency is as well as what it is not. let me restate a part of it, which i think covers all of it. "currency is that which is in circulation, or is given and taken as having value, or as representing value." that is, currency may have value in itself, as illustrated by our gold coin, or may only represent value, as illustrated by our gold certificate. again, the definition described another quality, when it said that "currency passes from person to person, or from hand to hand; general acceptance; circulation." to be a piece of currency then, a thing may or may not have actual value, as a gold coin, or as a gold certificate, which can be exchanged for the coin. but the thing must have general acceptance, that is, it must be received by the people generally, as a matter of course, and without hesitation, and without taking anything from it, or adding anything to it, such as a stamp, or a signature. that is, a piece of currency having passed through a thousand hands, remains identically the same thing, except the ordinary wear to which it has been subjected. mr. merchant: mr. banker, taking that explanation as correct, what would you say that our currency consists of? mr. banker: our currency consists of the following things: _first_: gold coin, which is generally accepted, and has actual full value. _second_: gold certificates, which are generally accepted, but have no actual value. _third_: all token, or subsidiary coin, including the silver dollar. _fourth_: silver certificates. _fifth_: united states notes. _sixth_: bond-secured national bank notes. mr. merchant: i read an article recently in which checks and drafts were spoken of as currency. can it be possible that they can properly be called "currency"? mr. banker: certainly not. they come under an entirely different head, and i hope we shall spend an evening considering them very soon. checks and drafts never pass from person to person and from hand to hand and are not of general acceptance. herein lies the mark of distinction. checks and drafts do not pass from person to person and from hand to hand and are always of special acceptance, that is, they are considered before they pass. they are taken according to the strength of the makers, acceptors and endorsers and usually pass only by endorsement. we must make no such mistake because it will lead to a confusion of ideas. mr. merchant: mr. banker, you have just told us of what our currency consisted. gold coin, gold certificates, token coins, silver certificates, united states notes and our bond-secured bank notes. taken altogether i presume you would call that our currency system. do you call it a good system? mr. banker: it is our currency system, but it is without doubt the worst currency system in the world, if you include only respectable commercial nations. mr. merchant: well, mr. banker, what is wrong with it? mr. banker: to tell you what is wrong with our currency system, i would first have to tell you what a right kind of currency system is. and i will proceed to do so in a word. a right kind of currency system consists of three forms of currency only. _first_: gold coin, or the gold certificate. _second_: token, or subsidiary coin. _third_: a credit bank note or bank credit currency. all these forms of currency are absolutely essential to a right currency system, as i shall proceed to demonstrate. _first_: gold coin, or its substitute, the gold certificate, is the very foundation of a right currency system, because there must always be present, or immediately available, a sufficient amount of gold to prove, protect and redeem, if necessary, all other forms of currency. _second_: subsidiary coins are absolutely essential as a matter of convenience to carry on the small trade of the country. _third_: a credit bank note which will always spring into being, precisely as a check does, to perform some special transaction, is the most efficient and most economic form of currency in the world, because it always just equals the demand for currency, and costs no more than a deposit account, subject to check. mr. manufacturer: just what do you mean when you say that a credit bank note currency will cost no more than a deposit account subject to check? mr. banker: i mean just this, that if you had a deposit at a bank of $ , , and the bank upon receiving your check for $ , could convert that book account, or book debt, into a note account, or note debt, by giving you its bank notes for $ , , in exchange for your check, the bank note currency would cost only the interest on the reserve carried against the notes, which would be identical in amount with the reserve carried against the deposit. to illustrate, if the bank were in the country it would carry per cent reserve, if a national bank, or $ in cash against that deposit of $ , . the interest on that $ for one year at per cent would be $ . now, if that deposit were convertible into notes, and you kept the same reserve of per cent against them, the thousand dollars in notes would cost only $ per year, and could and would in turn be reconverted into a deposit, subject to check. not only does this form of currency cost only about one-sixth as much as our present currency in the form of united states notes and bond-secured bank notes, but it is the only form of currency that will always be precisely equal to all the demands of trade. it will never be too great in amount. it will never be too small in amount. it will always just exactly equal the ever varying requirements of business and will always be as good as gold, because currently redeemed in gold. the principle of converting bank book credits into bank note credits, in accordance with the requirements of the customers of a bank, is the bank credit currency principle and there is not a single instance in the history of banking where it has ever been tried and failed. let this be laid down as one of the eternal laws of banking. _current coin redemption is the very soul and breath of life to bank credit._ mr. merchant: that is certainly most interesting and i must say a most impressive fact, if we can secure a currency, equal at all times to the requirements of trade, and always as good as gold coin, and at an expense of one-sixth of what our present currency costs us in the form of united states notes and bond-secured bank notes. there are today outstanding $ , , united states notes and $ , , of bond-secured bank notes, or about $ , , , in all. now, since any bank must pay par, or cents on the dollar, to get possession of either of these forms of currency, the cost of carrying either of them will be per cent on the total of $ , , , , or $ , , per annum. of course if the banks are compelled to use such an expensive form of currency, they will have to charge their customers accordingly, and in the end it comes out of me, mr. manufacturer and so on down the line, until, finally, the cost or burden reaches mr. farmer over there, or mr. laboringman over here. now, you assert that a credit currency would only cost the country one-sixth as much, or only eleven million per year, whereas the same amount of currency in united states notes and bond-secured bank notes now cost us $ , , a year, or $ , , more than it should. of course every cent of that must in the end come out of labor. mr. banker: i said one-sixth for the country bank. the average reserve held by all the national banks is per cent, not per cent. so that the unnecessary cost to the people of our present united states notes and bond-secured bank notes is five times as much as it should be, or we are losing every year $ , , , every dollar of which must come out of labor. mr. merchant: now, let me see whether i understand this matter correctly; to illustrate, let us suppose that your bank needed today $ , more currency than it has on hand to accommodate a customer. you would have to go out and buy it, and pay $ , for it, or obligate your bank to do so. with interest at per cent it would average $ per year to carry it, but if you could exchange your bank's notes, amounting to $ , , for your customer's note of $ , , and carry a reserve against your bank notes outstanding of say per cent or $ , and interest is at per cent, it would cost you only per cent on $ , instead of per cent on $ , ; or you would make a saving of $ on the $ , of currency. am i correct in my understanding of the difference of cost upon these two forms of currency? mr. banker: yes, you are absolutely right. no one could state the principle better than you have. mr. merchant: well, then, it is clear, that if there is a saving of $ a thousand on $ , , , , we are wasting annually on that one item alone $ , , . mr. manufacturer: but, gentlemen, let me call your attention to another fact. this country is losing several times as much as that every year on the average, because of our present rigid form of currency. just as soon as there is any fear anywhere in this great country about a bank of any consequence, or about the business generally in the country, every banker from dan to beersheba begins to grab currency in whatever form he can get it, because he knows the amount is fixed and limited. it is not nearly so much a run on the banks by the depositors, as it is a run by the bankers on each other, just to accumulate cash. everything comes to a dead stop, just as it did in , and it always will under present conditions. now, it seems to be perfectly plain that if the banks could convert their book credits into note credits, they could immediately meet the demand for cash, and so avert these commercial catastrophes, which set us back years. you know we are just now beginning to realize that we are getting over the panic of . gentlemen, instead of the panic of costing us $ , , a year, it costs the people of the united states more than ten times as much as that every year. god only knows what these commercial tragedies mean in the life of a nation like ours, and it is up to us to prevent them, if possible, and it must be possible. it looks to me as though mr. banker was on the right track. uncle sam: well, you fellows have got to show me a thing or two, before we make the proposed changes, because i am from missouri, as well as from forty-seven other unsuspecting states, and don't you forget it. in the first place, i want you to show me why my i.o.u.'s or the united states note, so-called greenbacks, are not a good currency. in the second place, i want you to show me why the present national bank notes, which are secured by my bonds, dollar for dollar, are not the best currency in the world. i have been told this for the last fifty years, and if it is not true, it is about time i waked up. mr. banker: well, uncle sam, they've been fooling you, for both the united states notes and these bond-secured bank notes are the worst form of currency in the world, and i can prove it. uncle sam: well, you will have to prove it, that's all. mr. banker: in the outset, i will tackle the united states note, and incidentally, i will state all the other objections to them, as well as the objections to them as currency. _first_: they are demand obligations against you amounting to $ , , , and you must stand ready at all times to redeem them in gold. this fact always has and always will imperil your credit. it was the same greenbacks that sent your credit down to cents on the dollar during the war, and again they came within an ace of wrecking your credit in when the gold in the treasury went down, down and down, until there was only $ , , left, between you and national dishonor. don't you remember that you then sold $ , , of your bonds to protect your credit which was being sapped by these very same united states notes? pretty expensive business that, when you could have had a currency that the banks of the country, and not you, would have been compelled to redeem in gold whenever necessary. you will no doubt remember that in when you began to keep your promise, and redeem these greenbacks in coin, and make your old due bills as good as gold, you issued $ , , of bonds for a corresponding amount of gold to establish your reserve or guarantee fund, in order that you might keep your promise good in the future. if you add this $ , , to the other $ , , you have issued since to protect your credit against these united states notes, you will find that you have issued altogether $ , , of your bonds, or $ , , more than the total amount of the greenbacks, $ , , , and that you have also obligated yourself to pay interest on these bonds from first to last amounting to $ , , more. now, the astounding fact is that these old due bills, these i.o.u.'s, these united states notes, or so-called greenbacks, are still out and you still owe them, just as you did in , when you began keeping your promise to redeem them in gold. one of your expert clerks in the treasury department at washington, the chief of the loan and currency division, published a calculation in the congressional record of april , , page , that showed that, if the greenbacks had been funded on the st day of january, , into per cent year bonds, and canceled and destroyed, the total cost to the government for principal and interest to july , , would have been $ , , , whereas the total cost and liability actually incurred on account of them has been $ , , , ; the difference in favor of converting into bonds being $ , , . now, don't you think, uncle sam, that as a matter of business you'd better get rid of these demand debts, these united states notes? _second_: don't let this most important fact escape your attention either; that if you should be called upon to use your credit extensively, as would be necessary in case of a great war, these demand notes would be a very black cloud upon your credit, and your loans would cost you vastly more, on account of the interest you would have to pay, because they were still outstanding. i hope that you are not hugging that sweet delusion that war is impossible. _third_: these united states notes, as you are aware, are made legal reserves for the national banks, who hold them against their deposits. now, if your credit goes to pieces, the credit of the banks will go with it of course; because precisely to the extent that the banks hold these debts of yours as reserves, they are driving gold out of the country, and therefore instead of being better able to help you, they will attack your credit by demanding gold from you for these old demand debts. you are also, of course, familiar with gresham's law, so-called, under the operation of which, the poorer money always drives out the better. i assert without any fear whatever of successful contradiction, that if you had paid off these united states notes in , you would not only have saved $ , , by so doing, but that today there would be in the united states in our banks, and in circulation among the people, $ , , more gold than we now have. in other words, instead of our gold amounting to $ , , , , it would now amount to $ , , , . uncle sam: well, you have certainly demonstrated that i have made some very expensive mistakes. let's see just what the net result of this blundering has been. i have lost $ , , on account of the greenbacks and i have lost the great advantage of having $ , , more gold to further strengthen the commercial credit of the country; and yet, i still owe every cent of these due bills and what seems to me equally certain is this: that if i should get into a great war, these very greenbacks will make me more trouble by injuring my credit in the future to a much greater extent than they ever have done at any time in the past. there is no doubt whatever about that. by the eternal, something must be done to get me out of this apparently bottomless pit. but you have not told us yet why these i.o.u.'s of mine, or united states notes, are not fit for currency, as you declare. you know that you sort of hurt my feelings, and for half a minute i was fighting mad, but as i said i am from forty-seven states, besides missouri, and therefore i am ready to be shown. mr. banker: i am coming to their use as currency right now. there are three distinct reasons why the united states notes are a bad form of currency. _first_: any government issue of bills, or of i.o.u.'s such as these are, must be very limited, if they are kept as good as gold. _second_: the united states notes do not spring into existence in connection with business transactions, as the right kind of a currency always does. _third_: it costs those who use it, as currency, five times as much as currency should. it is precisely as mr. manufacturer over there asserted a moment ago. any system of currency that is of necessity limited in amount, and fixed as these united states notes must be from the very nature of the case, breeds panics, because everybody realizing that the amount is limited, begins to scramble for cash upon the first intimation that there is any business trouble brewing. for this reason, they are utterly unfit as a system of currency. again, a right currency system is the natural product of business, and the amount of the currency will always rise and fall with the demands of trade. this can never be the case with the united states notes, and they are on that account utterly unfit for currency. and finally, certainly, if they cost the users of currency five times as much as the right kind of currency would, then we should replace them at once with the right kind of currency. now, let me illustrate and demonstrate this. if, over at my bank, we are compelled to furnish an average of $ , in currency a week, our average expense for the year will undoubtedly be $ , invested for that purpose. and if money is worth per cent interest, it will cost us $ to supply that amount of currency. if we can buy united states notes as cheap as any other kind of currency, and we should carry them in stock, they will cost us $ per annum. now, our bank, being a country bank, we carry per cent of all our deposits to meet current demands. is it not a perfectly simple and self-evident fact that if instead of being compelled to buy this $ , of united states notes every week, and so keep $ , invested all the year around at a cost to us of $ , the interest on $ , , we could convert $ , of our deposit debts into $ , note debts of the bank it would only cost us per cent on $ , , the amount we are carrying as reserve against our deposits of $ , , or only $ . in other words, we would save $ on the transaction. of course, if we have to pay out $ more in the one way than in the other, we will have to get it back from mr. merchant here, mr. manufacturer, mr. lawyer, mr. farmer and mr. laboringman; and if we should collect it from mr. merchant and mr. lawyer, they will in turn take it out of mr. farmer and mr. laboringman. mr. farmer: you bet they will. we always get the gaff in the end. mr. laboringman: where do i come in? i don't come in anywhere except to carry the load, as usual. i come out at the little end of the horn, as always heretofore. uncle sam: well, fellows, you see, don't you, that everything gets back, sooner or later, to the producer? he carries the load. mr. merchant: but we carry the worry. mr. banker: i wish you did. you would have an easy time then, but-- mr. laboringman: you needn't say "but" to me. you have it on all of us. there is no doubt about that. however, mr. banker, i'm not going back on you, for you have helped me out of several tight pinches. uncle sam: well, it does really look to me as if i had been living in a fool's paradise. those dear old greenbacks they have been about as much of a fraud as the dollar of our daddies. i do declare this whole thing makes me half sick. but if you are actually finding out what really ails me, i'll get over that pretty soon, and, boys, if we stick to this job, and play fair and honest, we'll have the best banking system in the world yet, and don't you forget it. but you forgot to tell me about the safest and best banking system in the world because every bank note was secured by one of my government bonds. that's what they've been telling me, you know. now, what about that? mr. banker: well, i could not interfere with your confession that you had been living in a fool's paradise, and dreaming dreams about making something out of nothing, while your credit was in peril, and you were losing hundreds of millions and furnishing the country a currency that was costing the people five or six times as much as the right kind of currency would. now, a word about your bond-secured bank note illusion, and i will be through. uncle sam, you remember that during the war, you were looking around in every direction to find some new method for obtaining means to carry on the war. you had busted your credit wide open with your united states note issue, and the question was how to find some new resource. your secretary of the treasury, mr. chase, concocted this scheme of giving the banks the right of issuing notes if they purchased government bonds, and deposited them to secure the payment of the notes. it is very strange, but he did not get much from this source, as there were only $ , , of notes out when the war closed. however, the scheme was started, and has been going ever since, precisely as it was inaugurated, a bond investment scheme. the amount of notes in circulation has never borne any direct relation to the demands of trade, as you can see by the following facts: in the notes outstanding amounted to $ , , , and in , eleven years afterwards, they amounted to only $ , , , or about $ , , less, although the country was growing and business expanding all the while. we ought always to expand our currency during the fall months about $ , , , and we ought to contract it during the succeeding months, or during the springtime just as much. but a careful investigation shows that these bond-secured notes have decreased as often in the fall months as they have increased, and have increased in the spring months as often as they have decreased. this proves conclusively that the amount of notes outstanding has never borne any relation whatever to the requirements of trade. the scheme is today precisely what it was when first concocted, purely a bond investment affair. uncle sam: well, well, now that is mighty strange, but my greatest chief justice, john marshall, pointed out the necessity of having a currency directly related to the business of the country, when upholding the constitutionality of the act incorporating the second united states bank. he said: "the currency which it circulates by means of its trade with individuals is believed to make it a more fit instrument of government than it could otherwise be." one of my presidents, james a. garfield, used this language: "_no currency can meet the wants of this country that is not founded on business._" boys, both of these great men must have referred to credit currency, and declared that it was essential to our business. mr. banker: furthermore, uncle sam, these bond-secured bank notes are indirectly just that much more of a burden resting upon the united states treasury, upon you, if you want to know the truth, as i explained to you last wednesday night. the fact is, these bond-secured bank notes are only another form of government credit put into circulation through the disguise of government bonds. every single criticism and objection that i have made tonight to the united states notes are applicable equally to these bond-secured bank notes. _first_: for all banking purposes, economically speaking, they are practically rigid and inflexible, at least so far as current needs go. _second_: these bond-secured notes do not spring into existence, or into being, as checks and drafts do in connection with some business transaction, but are tied up with a bond speculation. _third_: they cost those who use them as currency from five to six times as much as the right kind of currency would. _fourth_: if we adopt the right kind of a currency system, it will set free $ , , of capital which is now tied up in these government bonds, and this vast sum which would be realized from the sale of the bonds will assist to an amazing degree in supplying much needed capital to the commerce of the country. mr. merchant: how is that? mr. banker: the banks could then sell all the bonds now deposited to secure these bond-secured bank notes. they amount to $ , , . that these bond-secured bank notes are a monument of our stupendous folly, and have been a curse to the business interests of the country, i am sure no one here will attempt to deny. mr. lawyer: the japanese, thinking that we were a smart people, copied this bond-secured bank scheme from us, but immediately discovered that it was worse than worthless and repudiated it. no one else has been foolish enough to adopt it. mr. banker: i challenge anyone here to urge a single reason in favor of either the united states notes, or the bond-secured bank notes, which are only another form of united states notes. no one can meet the objections raised to them. in fact, there are two objections to the bond-secured notes, in addition to those urged against the united states notes. first, as stated, they have tied up $ , , in the bonds. second, they have proved such a successful delusion as to prevent any sane legislation until sad experience has driven us to take the matter up seriously and compelled us to act. uncle sam: well, boys, so far as i am concerned, i am thoroughly convinced that you don't want any of my i.o.u.'s for currency. nor do we want any bond-secured bank notes, which are really only another form of my i.o.u.'s. but i am still from missouri, as i have not yet been convinced what we ought to do by way of a substitute. mr. banker has told us something about credit currency, and he declares that it is the only real thing in the way of currency. now, i suggest that we take that matter up next wednesday night, and decide definitely whether we want to adopt that principle, and substitute that system, or some other. what do you all say to that? mr. merchant: i think that should be the programme. in the meantime, let us all dig into the question and go to the very bottom of it, and if possible stump mr. banker. mr. banker: all right, gentlemen, i am ready for you, and if i don't convince you that the only thing for us to do is to adopt a credit currency system, i will retire in favor of anybody you name. possibly you'll select nelson w. aldrich. uncle sam: no, you won't do anything of the kind. we'll look around a long time before we'll take him on. it is my candid opinion that he don't know a thing on earth about the question. i have known nelse about thirty years. he came to my house after he had been engaged in the grocery jobbing business, and he has been a jobber ever since. a man who could stay in congress for thirty years, declaring that we had the best banking system in the world, would not recognize an economic principle, on a cloudless day, walking down the middle of pennsylvania avenue at noon time. now, as i said, nelse has always been a jobber, and he would detect a crooked political deal crawling down a gutter, lizard-like, in the densest fog at midnight. he was prominent in a way in my home town, but it was only as a broker in senatorial favors. he kept books with the rest of his associates, his fellow senators. he was the clearing house of the united states senate. that's all. he would be the very last man in the united states, the very last to join in clear, intelligent, unselfish, patriotic thinking. he just couldn't do it. why, boys, he had rather go down a ram's horn than a gun barrel. he likes the twisting sensation. we don't want him at any price. mark my word. what we want is honesty, intelligence, patriotism, unselfish devotion to duty and some good hard work. let us hope that we shall find a way out. good night. fourth night bank credit currency uncle sam: when we parted last wednesday night, we had an understanding that everybody would give all the time he could to looking up credit currency. now, i think before we take up that subject, it might be well to recall and review what we've settled among ourselves up to the present time. _first_: we learned that gold is our standard of value. _second_: we all agreed that our money consisted of our gold coin alone. _third_: we agreed that our money, which consists of gold coin, is identical in amount with our gold currency; that they are one and the same thing. _fourth_: we found that we had at present a large amount of other currency, consisting of subsidiary coins (including the silver dollar), the united states notes and our bond-secured bank notes. _fifth_: we came to the conclusion, however, after our last talk, that neither the united states notes nor the bond-secured bank notes were fit for currency; and, in our quest for the best substitute possible, mr. banker proposed a credit currency currently redeemed in gold coin as the form of currency best suited to our condition. indeed he asserted that it was the only form of currency we should think of. i have gone over the road we have traveled so far and called attention to all the mile posts so that we should become perfectly familiar with them; for unless there is a complete harmony between our conclusions reached from time to time, our talks will in the end lead us to no practical results. at our last talk it was decided, you will remember, that both on account of the peril to my credit, and because the united states notes and the bond-secured bank notes were unfit for currency, we should tonight consider credit currency as a substitute. mr. merchant: uncle sam, i am more than gratified that you have called our attention tonight to just those things we have agreed upon, because unless we keep all these points constantly in mind, we will have trouble in the end in reconciling our views. on the other hand, it has began to dawn on me that possibly what we have always considered beyond our comprehension may after all prove a comparatively simple matter, because i have discovered, since our talks began, that truth here as in all other subjects is simple when we arrive at and comprehend it. our great problem in this connection is to disentangle the great or fundamental truths and make each one stand out in bold relief. so far, i think we have succeeded to a remarkable degree. mr. manufacturer: we must have done so, for we have not yet struck a single point upon which we have not unanimously agreed. let us hope that we shall be as successful in the future. at present, i must say i am a little dubious about the results of tonight's discussion, for i have run up against a snag or two, which i half fear will stump mr. banker, when he tries to pull them. however, he has been pretty successful so far in holding his own, and he may surprise us tonight. mr. banker: i have no desire, or hope, of surprising you, but i have perfect confidence in convincing all of you, that there is only one system of currency for us to adopt, or even think of adopting, and that is a pure credit currency. let us assume that two men, a and b, who are of equal and unquestioned standing in some country town, start in the banking business at the same time. a begins by taking the deposits of his neighbors, and continues until he has received $ , , and has loaned the same out to the people of the community. he now owes $ , subject to check, and he has $ , owing to him, as he has loaned out all his deposits. b starts a banking business, but upon an entirely different plan, or basis. he takes no deposits in the ordinary way, but if anyone comes to him desiring to borrow, or sell him promissory notes, he will lend his credit, and take all good notes and checks offered him, and in exchange give his own notes in such denominations and form as are suitable for circulation as currency, until he has exchanged $ , of his notes for $ , of the notes of the same people who have borrowed the $ , from the other banker. now, this is not a strange thing for b to do, because the bankers of scotland did this for one hundred and forty years before they took deposits subject to check. now, let us return to a and b. as a matter of course, some of these notes of b will be deposited in a's bank, and b will have taken in some of the checks on a's bank. at o'clock each morning a and b meet; a presents b's notes for redemption and b presents checks upon a for redemption, and the one pays the other the difference. sometimes the balance is due to a and sometimes it is due to b. at the end of six months or a year, it will be at a stand off. a has paid b as much as b has paid a. now, can anyone of you men here tell me what difference there is in the transactions of a and b, except this, that the notes of b amounting to $ , payable to bearer on demand are outstanding, while the deposits at a's bank amounting to $ , and payable to order are outstanding. those notes of b's amounting to $ , are a bank credit currency. they are issued against, or upon b's credit. they pass from person to person, from hand to hand and are currently redeemed every day. while the deposits at a's bank amounting to $ , are against a's credit, and the checks against them are redeemed every day. it is perfectly evident that if the capital of a and b combined is ample to meet the business requirements of that town, the form of credit offered by them will also adapt itself to the peculiar needs of each citizen. in other words, on a limited scale, you have a perfect banking system in that country town; bank credit being given to each person in precisely the form he wants it. now, let us go a step further. let a and b unite and incorporate the a-b bank with a paid-up capital of $ , , each man paying in $ , and the bank, so organized, taking over the liabilities. the one bank could then furnish the people of that community their deposit, or order credit, and their current credit, or currency at exactly the same cost to the bank; for the amount of the reserve will determine the cost of the note credit as well as the book credit. the bank being a country bank will carry a per cent reserve, or $ , cash, to protect the deposit of $ , subject to check, and also a per cent reserve, or $ , cash, to protect the $ , of demand notes outstanding. the actual cost to the bank in each case is per cent on the reserve of $ , or $ per annum. if this bank should be located in the cotton-growing section of the country, and from august until january, the people needed more currency than at any other time of the year to pay for picking and handling the crop, and the customers of the bank came in and drew their checks for $ , and asked the bank for currency for that amount, and the bank should, as it ought to be able to do, under such circumstances change its deposit debt of $ , to a note debt of $ , , so that instead of owing $ , in deposits, it owed only $ , in deposits, and instead of owing only $ , in notes, it owed $ , , would it make any difference whatever to the bank except the trouble of making a few book entries? in the springtime, probably, the situation would be just the reverse. the notes having served the convenience of the cotton-planters would be returned to the bank by various people, and deposited to the credit of the depositors, so that now the deposits are $ , , and the notes outstanding, or note debts, are only $ , ; the total debt of the bank being precisely the same all the time, $ , . it has made no difference whatever to the bank, but the customers of the bank, and all the people of that community, have been perfectly accommodated at the smallest possible expense to them. now, if that bank had been compelled to go to some financial centre and buy that $ , of currency in the form of united states notes, bond-secured bank notes, or the notes of a central bank, it would have cost the bank at the rate of per cent per annum on $ , , or $ , ; whereas, it has only cost the bank per cent on the reserves carried to protect the $ , , at the rate of $ , for each $ , , or six per cent on $ , . the cost to the bank you will see would be only $ , , as against $ , , if compelled to buy the currency, or would result in an actual saving to the bank of $ , , an item, gentlemen, well worth saving. mr. merchant: mr. banker, as i understand your contention from the illustration you have just completed, it is this, that there is absolutely no difference whatever, either in principle or in practice, between a bank book credit and a bank note credit, except as a mere matter of bookkeeping. that it is wholly immaterial whether there are , men walking about the streets of a town, each having a $ bank note of the local bank in their pockets, or a thousand men walking about with check books from which they can issue , checks for $ each. it is wholly a question of having a banking system that will adjust itself every hour of the day, and every day in the year, to the requirements of trade in that town, at the least possible expense to the people. mr. banker: you comprehend my contention perfectly. mr. lawyer: i will agree that your plan is structurally perfect to accomplish this purpose; but, before i can concede that the plan is all that can be desired, and all that we must insist upon having, i must know that your plan contemplates the current redemption of these bank notes in gold coin. for, as we have already agreed, our currency must be as good as gold coin, and this can only be demonstrated by daily gold coin redemption. mr. banker: these bank notes or this credit currency will always be interchangeable with the deposits of the bank of issue, and, like the checks against the bank, will be daily redeemed over the counter of the bank, and also at some clearing house centre. the life of the notes will probably not exceed on the average thirty days. i hold that it is the duty of the bank to supply its customers with exactly that form of credit, either current credit in the form of notes, or book credits subject to check, which their business demands, and that both forms of credit must be kept as good as gold by giving gold if gold is demanded. mr. lawyer: with this point of current gold redemption covered and settled, i am willing to agree that theoretically you have completely convinced me. now, what have you to offer in support of your theory by the way of any practical illustrations? mr. banker: i am glad that you have demanded illustration and proof by way of banking experience; but, before taking up the historical evidence in support of my condition, i want to define a credit currency, so that you will have a concrete idea, if i may express myself that way, in your mind. i define a credit currency as follows: _a note issued by a bank against its credit, without depositing united states bonds, or any other kind of security, to guarantee its payment, is bank credit currency_. in speaking of the marvelous prosperity of scotland, macleod used this language in about the effect of credit currency in scotland, where it has now been in use years. "all these marvelous results which have raised scotland from the lowest state of barbarism up to her proud position in the space of years are the children of pure credit." the great achievement of the scotch system of credit notes is exceedingly well stated by mr. charles a. conant in these words: . it has provided scotland with an elastic currency adapted to the condition of her industries and adequate in volume to their changing needs. . it has enabled the people to carry on numerous commercial and agricultural transactions for which they could not have found the necessary quantity of coin, and has economized the locking up of capital in the precious metal. . it has made the use of notes of small denomination familiar and popular, and has taught the people the distinction between bank notes as the representatives of credit, and the precious metals as the measures of value. . it has brought into active use the available savings and capital of the country. . it has afforded an opportunity for entering upon business to thousands of poor, but honest men, and enabled them to lay the foundation of a comfortable home, and in many cases of a fortune. . it has convinced the people so conclusively of the value and safety of the banking currency system that no serious panic has ever lasted beyond a few days, or has ever affected any of the banks, except those which were justly the subject of distrust. horace white, describing the scotch system, says: "notes are issued in denominations of five dollars, or one pound, and upwards. they are exchanged daily at the edinburgh clearing house, and settlements are made between banks by drafts on london. the notes remain in circulation on the average eighteen days after issue, the whole circulation being redeemed twenty times each year. noteholders have a prior lien on the assets." that is, if a bank should fail, the noteholders are paid first, and before anyone else gets anything. mr. merchant: what is that? did you say that the noteholder had a first lien on the assets of the scotch bank: that is, that the noteholders are paid in full before anyone else gets anything? mr. banker: yes, sir, and for the very best reasons in the world. mr. lawyer: certainly, the noteholders should have a first lien upon the assets of the bank issuing them, because bank notes are a public convenience. bank deposits, on the other hand, primarily are a private convenience. it is a matter of public importance that bank notes should flow through the channels of trade, pass from person to person and hand to hand unquestioned by any member of the public, and have ready as well as general acceptance. the man who selects his bank for the purpose of making deposits has time to investigate and decide deliberately which one he will choose. while a man in a transaction must accept the currency of the country offhand. at all events, it is a matter of the greatest public importance that he should do so without hesitation, and yet be protected, be absolutely safe in doing so. mr. merchant: come to think it over, i believe you are absolutely right. our present bank notes are made a first lien upon the assets of the bank issuing them. we were talking about that the other day over at the bank, and while i had never thought of it before, the cashier of the bank explained the matter fully to me, and gave the same reason for making bank notes a first lien that mr. lawyer has. when i told him that i did not quite understand the thing as he did, he satisfied me completely by using his own bank as an illustration. he said, you will remember that we were a state bank until about a year ago, when we became a national bank. our capital of $ , is all invested in this bank building which we occupy. our deposits were $ , . we took $ , of our deposits and purchased $ , of government bonds, which we deposited with the united states government, and received in return $ , bank notes which we have put out, or, as we say, put into circulation. now, since we actually took $ , of our deposits to buy the bonds with, and then placed the bonds up as collateral, to guarantee the payment of $ , of notes, it is perfectly clear that the noteholders will get their money, in case of our failure whether anybody else gets anything or not. i then asked him this question: suppose, for the sake of the argument, that the $ , of the united states government bonds should not sell for $ , ? say they sold for only $ , , would the noteholders lose the other $ , , and he replied as follows: "no, if the bonds should sell for only $ , , the remaining $ , due the noteholders would be taken out of our assets, before any depositor got a cent." you see, therefore, gentlemen, that our national bank notes are a first lien upon the assets of the banks that issue them, and that they will always be paid in full, before the depositors get anything. mr. manufacturer: i am very glad this point came up, and has been explained so completely and satisfactorily, because during the week when i was studying up this question of a credit currency, that matter came up, but i found no explanation or reasons given for making the notes a first lien. it seems to me to be a fundamental principle that they should be, and the reasons are the soundest for making them a first lien. the bank note is a tool or instrument of trade for the benefit of the public, and is of general importance, while the bank deposit is a tool or instrument for the benefit of the individuals composing that general public, and primarily of individual importance. the distinction between the two must be very clear to all of you as it is to me. mr. laboringman: that is just as it should be. the working people should always have a currency as good as gold, something that will not turn to ashes during the night; that cannot deteriorate to the extent of a single cent; for we are all practically compelled to take whatever is in circulation, or comes along, in the way of currency. it should certainly be as good as gold. i don't care how you fix it, but i do insist upon that. i say that it is one of the very first duties of the government to the people; for, of all the ways of doing the laboring masses out of their earnings, and cheating them, a depreciated currency is positively the worst. make your currency redeemable in gold, and so safe that no toiler can lose by holding it any length of time. mr. manufacturer: i am quite sure that we all agree that not only should the bank notes be currently redeemed in gold coin, but to make them doubly safe, safe beyond any peradventure, they ought also to be a first lien upon the assets of the bank issuing them. during the week i read somewhere that the scotch banks had been in operation years, and that they did not start the deposit and checking system until they had been in operation for years. during all that time they simply exchanged their notes for the notes of the farmers, the shopkeepers, the manufacturers and anybody who was entitled to credit. mr. banker: now, if you will allow me, i will produce some further historical evidence. the greatest financial genius that the united states has produced, and one of the greatest the world has produced, drew the charter of the first united states bank upon which the second was modeled. both of these banks were pure credit currency banks, and were founded upon the very soundest banking principles; but both of them were the victims of political strife and party feud. no man who has ever lived more clearly comprehended the principle of credit than did alexander hamilton. the highest note issue of the first united states bank was $ , , , and deposits were $ , , . the highest note issue of the second united states bank was $ , , , and the deposits were $ , , . in , under the inspiration of napoleon bonaparte, undoubtedly as great an economist as soldier, the bank of france was organized, and is the most striking single example in all history of the bank credit currency principle. it has to all intents and purposes always had the right of unlimited note issue, as the limit is always fixed far beyond the requirements of trade. the amount of the notes outstanding are usually ten times as large as the deposits. the notes now exceed $ , , , , while the deposits are only about $ , , . in a single week there has been a conversion of $ , , of deposits into notes, and a reconversion of a corresponding amount of notes into deposits. as a result of the destruction of the second united states bank by a veto of president jackson, there were established in various states of the union banking institutions, largely modeled upon the work of hamilton. these institutions showed remarkable strength and rendered most significant service to those sections of the country where located. probably the most noted of them all was the state bank of indiana, organized in , which continued its almost matchless career until . it was a pure credit currency bank, marvelously suited to serve the people of indiana, under the conditions in which they lived. its capital was $ , , ; its maximum of note issue was $ , , , always currently redeemed in coin. in , during the crisis when every bank in the state of indiana, and all the banks in new york, except the chemical, closed their doors, the state bank of indiana kept on redeeming its notes in coin. this indiana state bank had thirteen branches. the central office was at indianapolis. hugh mccullough, afterwards one of the wisest secretaries of the treasury we have ever had, was president of the fort wayne branch. he wrote this interesting paragraph: "fort wayne was three good days' ride from indianapolis, mostly through the woods. for fifteen years i made this journey on horseback, and alone, with thousands of dollars in my saddle bag, without the slightest fear of being robbed. i was well known upon the road, and it was well known that i had money with me, and a good deal of it; and yet, i rode unharmed through the woods, and stopped for the night at the taverns and cabins on the way in perfect safety." another most signal success of the same credit currency principle was the bank act of louisiana, which was passed in . it was a model, not only for those times, but for these as well. all the banks had to settle their balances every saturday night in coin. in louisiana, as a result of this law, held more specie than any other state in the union except one. the very day that gen. butler took possession of new orleans, the banks were redeeming their notes in coin. i might, if it were profitable, describe in detail the bank of the state of ohio; the banks of the state of kentucky; the banks of virginia; the bank of the state of missouri; the bank of the state of iowa. everyone of them were signal successes, and everyone of them models worthy of imitation, and all of them were established and operated successfully as credit currency banks. but i want particularly to rivet your attention upon the suffolk bank system of new england, which was purely the product of experience, and i may say a perfect development of the law of evolution in banking. mr. merchant: my recollection is that the suffolk system covered all the six new england states, and that there were then over banks in the system, with capital varying all the way from $ , to $ , each. two other facts must be kept constantly in mind in this connection; they are these: st, the combined authorized note issue of these banks was $ , , , absolutely unlimited to all intents and purposes; d, there was then no means of communication or transportation except the stage lines and horseback mail carriers. there were no telephones in those days, nor telegraph lines, nor even railroads. mr. banker: i am more than pleased, mr. merchant, that you have brought out these points, before i proceeded to explain what actually happened in the course of the development of what i regard as the most marvelous exhibition the world has yet furnished us with, what in principle was practically a perfect banking system, and what was in practice as nearly perfect as any human institution could be under the circumstances. mr. manufacturer: well, mr. banker, that is unqualified, literally unmeasured praise. if we ever had so good a banking system actually in operation in this country, i don't see why we did not have sense enough to keep it. i hope you will be good enough to tell us why we lost it. mr. banker: that is a very important and most pertinent question, and certainly most natural that you should ask it. i should have covered that point before, but it will do just as well now. uncle sam, you will remember that when you passed the national bank act in order to get the advantage of all the bank note circulation and so increase the sale of united states bonds, you put a tax of per cent on all bank notes for the purpose of preventing any bank from issuing them, except national banks. the result was that you killed the state bank of indiana and all the other banks to which i have referred, which were then issuing notes in the united states, including the banks in the suffolk system. mr. manufacturer: i ought to say right here, before you go on, that the per cent tax on bank note issues, while doing a world of harm, precisely as you say, did some good, too, because it prevented a lot of banks that were not properly organized, and were not compelled to redeem their notes in coin, from issuing a good deal of worthless paper, or comparatively worthless paper. it is usually known as "red dog," or "blue pup," or some other kind of dog paper. there are two things that resulted from the national bank act that i think should not be overlooked, though the act may have proved an economic failure. it gave us a uniform currency throughout the country, and it was of equal value everywhere, passing without charge, and at no time worth less than the credit of the government, or the current value of the united states note. therefore, if we are wise enough to take advantage of these two important results, our experience will not be wholly in vain. that is, we want a uniform currency throughout the country, in all the different states, passing in at every bank window, at face value, without charge, and unquestioned by anybody, because currently redeemed in gold coin everywhere. mr. banker: these interruptions have been splendid and i thank you for them. you fellows have undoubtedly been studying up on this question, as we used to say at school, "you've been cramming up." now, returning to the suffolk system, i want to assert there is not a question that can be asked by anyone, nor a point that can be made by anyone in favor of a banking system, that the suffolk system does not answer and illustrate and exemplify. let me outline the situation: . it covered six different states. . it covered a large territory. . the facilities for communication were bad. some parts of new england were as far from boston then as san francisco is now. . there were individual, independent banks. . there was no branch banking. . the permissive note issue to all intents and purposes was unlimited. the possible amount of issue was $ , , , but the maximum amount of notes out at any time did not reach per cent of this total, while the average amount did not exceed per cent of it. . the bank notes of the suffolk system were universally accepted at par throughout new england. . they were redeemed every day at boston, in coin by the suffolk bank. . they were accepted in all commercial centers of the west, buffalo, cincinnati, chicago, milwaukee and st. louis at a premium of from to per cent, because redeemed at boston _in coin._ the suffolk bank was the clearing house for all the bank notes of new england, and they were accepted at par, and redeemed in coin if demanded. horace white says: "it was the underlying principle of the suffolk bank system that any bank issuing circulation should keep itself at all times in a condition to be able to redeem it; that it should measure the amount by its ability so to do; and that the exercise at any time of the right to demand specie of a bank for its bills was something of which the issuing bank had no right to complain.... "under the suffolk system of bank note redemption specie was seldom asked for, but it was always paid when demanded; _the metallic reserve was the touchstone of the whole business_." the following is mr. white's description of the operation of the bank: "in two clerks could do all the work. in seventy were required, and the redemptions reached $ , , per year. as the circulation of the new england banks at that time was about $ , , , the whole amount was redeemed ten times each year, or about once in five weeks. "any person engaged in a legitimate trade in any part of new england could exchange his promissory note, running or days, for the notes of a bank with which he could pay the wages of his employees, or buy the materials for his industry in any part of the united states or canada. the notes would remain in circulation about five weeks, and then find their way to the suffolk bank, where they were offset by the notes of other banks which took their rise in the same way. the man whose promissory note the bank had discounted, and by means of which it had put its own notes in circulation, had meanwhile sold his products. if he had sold them in boston, his draft on the boston merchant would pay his note at the local bank, and this would enable the latter to keep its balance good at the suffolk. if he had sold them in new york or chicago, he would get his pay in a draft on boston, which would answer the same end. if he had sold them at home, and had received new england bank notes in exchange for them, the local bank could use these to keep its balance good at the suffolk. new england trade was carried on by an endless chain of offsets and book balances at the suffolk bank. the security for the notes consisted of the bank's assets, and the banker's moral character and business sagacity. both notes and deposits rested upon the same security that deposits rest upon now, and the volume of both was determined by the wants of trade." the interplay of bank book credit and bank note credit under the suffolk system in the panic of is nowhere equaled in the history of banking; and that demonstration of the perfect adaptability of bank credit to the most sensitive, and at the same time the most extreme situation that can possibly arise, leaves no question unanswered as to its fitness under all circumstances to meet the requirements of the people. a year before the panic, the note issue stood at $ , , , and the deposits were $ , , . as a result of the panic, there was an exigent demand for currency, and the note issue rose from $ , , to $ , , , and the deposits fell at the same time from $ , , to $ , , , showing a conversion of about $ , , of book credits into note credits, or of deposits into currency. a year afterwards, when this exigent demand for currency had subsided, and the reaction had set in, the notes fell from $ , , to $ , , , and the deposits increased from $ , , to $ , , . in other words, $ , , of notes were deposited and took the form of deposits, subject to check. i do not need to state the fact, except for the purpose of calling your attention to it, that this currency did not cost the people of new england any more than deposits; for the two were constantly changing places with each other, strictly in accordance with the needs of trade. mr. merchant: mr. banker, i think we are all under the very greatest obligation to you for this elaborate explanation. this splendid illustration, yes, absolute demonstration of the perfect adaptation of bank credit to our currency needs. i want to compliment you upon another thing, and that is, your position that it is the bank's business to make provision for coin redemption. what do we have our banks for except to furnish us credit in just the form we need it to carry on our business, and to keep that credit, in whatever form it takes, just as good as gold. that is the natural business of a bank. i never caught on to that fact before, and therefore could not appreciate it. mr. manufacturer: mr. banker, i have been greatly interested. now, if that plan worked so perfectly in new england, i cannot see for the life of me, why every other section of the country cannot work out the same system. if the new englander could coin currency out of bank credit, based on codfish and cloth, why cannot the western man coin currency out of bank credit, based on cattle, cotton and corn? the crux of the whole matter, the very heart of the thing, the vital part is, that the bank be ready to redeem its notes in gold. why shouldn't it, that's the question? mr. banker: well, it should, that is the answer to your question, and the bankers around every natural financial center in the united states should get together, and form just what those bankers had in new england before the war, a perfect banking system of their own. mr. merchant: mr. manufacturer, that's sound and looks mighty good to me. do you see any objection to it, any flaw in it? mr. manufacturer: no, i do not, except to persuade the people, as mr. banker has persuaded and converted us. of course we will be up against some legal difficulties, won't we, mr. lawyer? mr. lawyer: i imagine that we shall have no serious difficulties about the legal questions involved, if we can persuade congress. you see we are up against congress and for about every thought the average congressman has concerning a question of this kind, he has several about how he is going to get back into congress at the next election; that's the real difficulty. uncle sam: well, we'll see about that when we get this worked out, and we'll put it up to them before election, and find out where they stand. they must study this question just as we have, and if they can't show us a better way, they will have to come over, or they won't get over, that is all there is about that. mr. banker: well, gentlemen, when it comes to putting up an argument to the congressman, we will shove the canadian currency system under his nose, and keep it there until he gives in. mr. merchant: are the canadians using this credit currency system? mr. banker: that's what they are. they started by copying the massachusetts bank act, as it existed before the war, and have gone on making some changes from time to time since. the banks are authorized to issue regularly an amount of currency equal to their capital. the amount of capital has not been increased in proportion to their business, because there are only a few banks there now, in all, with about , branches. here is a chart i had prepared to show you, because it illustrates so perfectly how the currency expands and contracts every fall. you see that in the month of october every year they have an increase of about $ . per capita over the minimum amount, and that just as soon as the crops are disposed of, the currency again takes the form of a deposit. [illustration: this diagram demonstrates that the canadian bank notes adapt themselves every year, every month, every day, with unvarying precision, to the ever changing demands of trade.] _total circulation of the chartered banks of canada for each month of to nov. th._ january $ , , february , , march , , april , , may , , june , , july , , august , , september , , october , , november , , maximum issue , , minimum issue , , ----------- amount of expansion $ , , population of canada , , per capita expansion $ . same expansion in the united states would amount to $ , , under present conditions we do not have any note expansion whatever. not one single dollar. every "fall" we have a tragedy, because we are compelled to use our reserve money to meet the increased demands for currency. the above figures correspond in their _expansion and contraction_ with the figures for many years previous, with one significant change in the date of maximum circulation, which has changed with the later farm demands due to the tremendous development in the great north-western territory. no stronger proof could be added to the marvelous way in which this bank credit currency automatically adjusts itself to any and every condition as it arises. this currency goes to the clearing house every day, precisely as the checks and drafts do, for redemption. and in those cities where there are no clearing houses, the banks present the notes they take in, to each other, and the notes are redeemed every day by the respective banks issuing them. mr. merchant: gentlemen, isn't it marvelous how that currency adapts itself to the demands of the canadian crop moving period? why, if we had such a system working here, you would have an increase of currency every fall exactly equal to our demands, probably $ , , . i have heard the amount variously estimated from $ , , to $ , , . at all events, this principle would give us exactly the amount needed to meet the demands of trade. mr. banker: that is precisely what would happen, and there would be no shipping currency to and fro, backward and forward from new york to chicago and st. louis, and then from these cities to a thousand other points; and then when the crops had been moved the currency must be shipped from the thousand points to st. louis and chicago and then on again to new york. the banks in every locality would create their own currency according to their respective needs, and at a cost of about one-fifth of what it costs them today. as the matter now stands, gentlemen, if i want $ , currency i bundle up $ , or $ , of my commercial paper, and take it to my correspondent, and get the currency by giving my bank's note, and leaving the $ , or $ , of paper as collateral. now, if you should ask my correspondent upon what he had loaned me $ , he would say, "my bank's credit and the commercial paper i left with him." but, gentlemen, why could i not issue $ , of my bank notes against my bank credit, and keep the $ , or $ , of commercial paper? certainly if my bank's credit and the commercial paper were good enough for my correspondent bank to let me have $ , upon, they ought to be good enough to issue my own notes upon. the present situation is simply absurd and most troublesome, as well as most expensive. mr. manufacturer: i agree with you, it certainly is. i was talking the other day with a congressman about the canadian currency system, and he said, "yes, it works fine up there, but they have a branch banking system up there, and only banks." well, i said, it works just as well in france with one bank. it has been working in scotland just as well with banks for years. it worked in indiana with one bank and branches. it was just as efficient and successful in louisiana under a general bank act, where several banks were incorporated. and it worked in new england under the suffolk system with individual independent banks--why won't it work here? all he could say was, "well, i don't know." uncle sam: pinhead. didn't know the difference between a principle and a fact, and he didn't even know the fact. now, boys, i am completely satisfied and if any one here is not, let him speak up, or forever hold his peace. i believe you must all be satisfied. you must all be on time next wednesday night so that we will not have to wait as we did tonight. good night. fifth night what is exchange? uncle sam: now, boys, let us see just what we have settled during the four nights we have been talking this matter over. the first night we learned that gold was the standard of value, the whole world around. the second night we agreed that gold coin was the only money we had. the third night we agreed that the only currency that we had and ought to have was gold coin, the foundation and redeemer of all other currency and our token or subsidiary coins. we came to the conclusion and unanimously agreed that neither the united states notes nor bond-secured bank notes were fit for currency, because not related to business transactions in their origin, that they were unresponsive to the demands of trade, and were five times as expensive as the right kind of currency. the fourth night we agreed that the only true or correct currency was a credit bank note, currently redeemed in gold coin. _in other words, we agreed that gold was our standard of value, gold coin our money, and that our currency should consist of gold coin, the subsidiary coins and bank credit currency._ tonight we want to find out, if we can, what exchange is. this is a mighty important question for probably per cent or nine-tenths of all our business is transacted in some form of exchange. mr. lawyer, i want to put it up to you first. what is exchange? mr. lawyer: well, uncle sam, the best definition i can give, is to take one thing for or in the place of another. it is illustrated in a way by the old saw, "a fair exchange is no robbery." that describes the act of exchange, but i imagine that what you have in mind is the system or practice of exchange, as carried on today. that practice or system is only a multiplication of transactions where one man takes one thing in place of another. in this connection it means to take one credit in place of another credit; to take one debt in place of another debt. as now developed and applied to the commerce of the world, i would say that _the science of exchange is to substitute one credit for another credit, or to make one debt pay another debt_. a debt is what is due from one person to another person. i have a deposit with mr. banker there, and i owe mr. farmer $ for a load of potatoes; if i draw a check upon mr. banker for $ in favor of mr. farmer, and hand it to him, i have paid my debt to mr. farmer with mr. banker's debt to me. mr. merchant: now, mr. lawyer, just hold on a minute until i find out a thing or two before we go any further. in fact, i am sure everyone here would like in the outset to find out the same things, except possibly uncle sam, who ought to know everything, and is probably omniscient, mr. banker, who deals in these things, and you, mr. lawyer, who are presumed to know about them, and must know them, as a matter of necessity in your practice. what i want to know is: . what is a promissory note? . what is a check? . what is a draft? . what is an acceptance? . what is a bill of exchange? until we know precisely what these various terms signify, or mean in banking, when put into use, we shall soon be so far out at sea that we will not know what we are saying, because we do not know the meaning of the words we are using. this will be true of some of us at least. we must familiarize ourselves with these words, or terms. mr. banker: if you will allow me, i will try and explain and tell you what these various terms mean, and what use we make of these several instruments in writing. _first_: a promissory note is a written promise to pay some one a sum of money. it may be either to pay it immediately, or on demand, or at some future day; to pay it either with or without interest; or to pay it at some particular place. mr. merchant: it is just a written acknowledgment of a debt, isn't it? mr. banker: it is a written acknowledgment of a debt, coupled with a promise to pay it. if a owes b $ , , and gives his note for that amount, and b sells the note to c, the note has become exchange. it is not the usual form of what is called exchange, but is nevertheless just as truly exchange; for suppose that c owes a $ , , he can then cancel the debt by delivering him the note for $ , . c has paid his debt to a with a's debt to b. _second_: a check is a written order on a bank to pay money on demand. it may be drawn to cash, or it may be drawn to bearer, or it may be drawn to the order of some one. if a owes b $ , and a has a deposit at a bank for that amount, a can cancel his debt to b by giving him a check on the bank for $ , . the check is exchange, though not in the usual form of what is known as exchange, for a has canceled his debt to b by giving b the bank's debt to him. _third_: a draft is a written order from one person to another to pay a third person a sum of money. an acceptance is to write across the face of a draft, payable at a future time, the word "accepted," and the signature of the person accepting it. if a is owing b $ , and c is owing a $ , , the debt to b can be paid by a's draft upon c. the draft is identical in every respect with the check, the difference is in form only, and the use of them. a check is only used when the order to pay money is upon a bank. a draft may be, and often is used when the order to pay money is upon a bank. a check, properly or correctly speaking, is never used in an order to pay money upon an individual or corporation, but a draft is invariably used in such cases. the transactions are identical in effect, though the conditions, or circumstances, are different. both the check and the draft are exchange. _fourth_: when a draft has been accepted, it becomes the promissory note of the one accepting it, as he promises to pay it on the day named in the draft. an accepted draft is only another form of a promissory note, for if a owes b $ , , and b draws upon a for that amount, and a accepts the draft, a is in precisely the same position as he would have been if he had sent b his promissory note for $ , . in the banking world a draft, after it has been accepted, is often called and known as an "acceptance." _fifth_: a bill of exchange in its ordinary or usual sense, is an order of one person upon another to pay a third person a sum of money. mr. manufacturer: that is precisely what you said a draft was. mr. banker: just wait a moment, please, until i finish, and you will note the difference. the bill of exchange is the medium of settling accounts or debts between parties residing at a distance from each other, without the intervention of money by exchanging checks or drafts. mr. manufacturer: then they are identically the same thing except a bill of exchange acquires its name from the fact that it settles debts at a distance. mr. banker: that is the exact distinction, if one is to be made at all, and i think it will be well for us to make this distinction to save confusion in our conversation, although in the ordinary and usual language of the street, or the business world, the terms, or words, "draft," "acceptance" and "bill of exchange" are used indiscriminately the one for the other. if the definition of mr. lawyer stands, and i think it is a very good one, when he said "the science of exchange is to make one debt pay another debt," the science of bills of exchange is to make one debt pay another debt at a distant point. this is not a distinction fully without a difference, because it helps us to classify the transactions and distinguish them in a way as we go along. a simple illustration is this: a, who lives in boston, owes b, who lives in san francisco, $ , , and c, who lives in san francisco, owes d, who lives in boston, $ , . b and d could exchange drafts with each other; then b and d could collect each other's drafts. but b could sell his draft on a to c for $ , and c could pay his debt of $ , to d by forwarding him the draft on a. d would then collect the draft on a. it will be seen at once that this transaction has saved the expense of sending $ , in money from boston to san francisco, and also of sending $ , in money from san francisco to boston at great expense by express. this transaction between boston and san francisco is known and called a transaction in domestic exchange. if a, who lives in new york, owes b, who lives in london, $ , , and if c, who lives in london, owes d, who lives in new york, $ , , b, the resident of london, can draw on a in new york, and sell the draft to c, who resides in london, and c could pay his debt to d, who resides in new york, by forwarding b's draft to d, who resides in new york. d could then collect the draft from a. it is perfectly clear that by means of this transaction, the expense of sending $ , in gold from new york to london, and also the expense of sending $ , in gold from london to new york, has been saved. this draft would be foreign exchange, because the cities are in two different countries. mr. merchant: according to your illustration, mr. banker, if our sales of cotton, grain and meat to great britain should amount to $ , , , a year, and the sales of great britain to us of woolens, silks, cotton and cloth and other manufacturies should amount to $ , , , , we would not have to transmit a single dollar of gold either way, because the debts would just cancel each other. if the debtors in the united states could find out who the debtors in great britain were, then they could exchange debts with each other. the debts of the two countries would just offset each other. mr. banker: that is absolutely true, and it is entirely possible that the $ , , , worth of goods in the two countries could be bought and sold without moving a single dollar's worth of gold either way across the atlantic. mr. manufacturer: well, that is just what we want to do and save the expense and trouble of transmitting the money, and it is up to you, mr. banker, to explain just how we are to accomplish this trick or feat, because it will save a tremendous expense, if this can be done. mr. banker: yes, and will bring other advantages to the business interests of the country of almost incalculable importance, as we shall soon see. now, the question is how to gain these ends. two things must be accomplished in this connection, if we are to profit by every advantage that can possibly be taken in our trade with each other, as well as in our trade with other countries. _first_: the bills of exchange must be of such a high character as to invite those, who need them to pay debts with, to take them unhesitatingly. _second_: the bills of exchange must become known to those who may want to use them to pay debts with, instead of shipping the actual money. mr. merchant: of course, you gentlemen are aware that our debts abroad are being settled in just this way today to a very large extent, and i do not think that you need worry very much about the bills of exchange not becoming known to those who need them to pay debts with, if they are made of such a high character as to command a market, for the market will at once develop and make itself felt. that is, i mean a general market for bills of exchange of unquestioned character. the only thing for us to do is to give our bills of exchange such a standing as to command ready and general acceptance in the commercial world. how can we do that? mr. banker: that can be accomplished in a very simple, easy and natural way, if we will only adopt it. let me illustrate what i mean. today, a, living in this country, sells a bill of goods, say for $ , , to some one in great britain; the purchaser in great britain arranges with his bank to accept a or day bill drawn on it by the american shipper. such drafts are drawn on well-known bankers, and when accepted become virtually a time-deposit at the bank, and therefore can always be disposed of at the lowest current rate of interest. this arrangement is a very great advantage to the english business man, as it enables him to use the high credit of the bank in carrying on his business. at the present time our national banks are not authorized to accept drafts made in this way, but if they were authorized to do so, the credit of our banks would be given to the drafts made by one business man upon another whether the drafts were domestic or foreign. such an obligation is the most desirable one for a bank or an investor to hold, as a temporary investment for the following reasons: _first_: the draft arises out of a transaction where goods passing from buyer to seller are equal in value to the face of the draft. the goods are actually in transit, and the draft is economically a title to the goods. _second_: the seller is invariably good, or at least thought to be. _third_: the buyer is invariably good, or thought to be. _fourth_: the bank accepting the draft is invariably good, or believed to be. but above and beyond that no bank will engage in such a transaction, without making itself absolutely safe in some way. mr. merchant: mr. banker, if we should adopt that principle in this country, we would at once make every dollar's worth of goods in transit, or ready for shipment, a liquid asset, practically a cash asset, as we shall see, for the american merchant and manufacturer; because a large amount of capital would at once be attracted to this field for steady employment, or temporary investment. mr. manufacturer: there is nothing so essential to relieve the constant strain upon individual credit and mobilize the really liquid wealth of the country, as the creation of the kind of paper you have just described. think of it for a moment; there are the goods in transit, the shipper, the buyer and the banker back of the paper that will be coming due within the next sixty or ninety days. you can hardly imagine anything safer, and more quickly convertible into cash. money available for the purchase of such paper would come from many sources, among them the following: _first_: corporations would immediately be organized to deal in such paper. _second_: all strong business houses, merchants and manufacturers would prefer to hold such paper instead of stocks or bonds, for their surplus funds during their slack seasons. _third_: bankers of all classes, both in the country and city, would find such paper preferable to any other form of investment for a secondary reserve, and for their surplus funds during slack periods in their respective sections. _fourth_: if acceptances are limited as they should be to goods in transit, or on the road to consumption, the adoption of this principle will mark, indeed will accentuate, the strong, the fundamental difference between liquid assets and the more fixed forms of investment, such as bonds and stocks. banking capital employed in this way can far more readily adjust itself to the exigent demands of liquidation in the case of a panic, or a commercial crisis. _fifth_: undoubtedly, to a very large degree, foreign capital would be attracted to our market for this kind of paper, because its strength and liquidity has already been proved to the bankers and capitalists on the other side of the atlantic. and whenever capital was required, the rate of interest would be such as to be inviting. in other words, the rates of interest would rise, correspondingly with our needs, and the entire commercial world would be our possible market for the commercial paper representing the economic title to the five or six billions of finished goods that are always passing from the producer to the consumers in this country, and to the consumers abroad. mr. banker: undoubtedly, we should soon have right here a general market to take care of all this kind of paper; and it ought to become soon the strongest and broadest market in the world for this kind of an investment, considering our vast commercial resources. all of our bills of exchange would be drawn in dollars, not francs, marks or pounds sterling, and we would put upon them the stamp of the eagle, and not the lion and the unicorn. uncle sam: i like that. it stirs my blood, warms the cockles of my american heart. that's business. mr. manufacturer: i understand that for such bills of exchange, those accepted by banks, there has grown up in london, paris, berlin, amsterdam and many other european centers, a large market, known as a discount market. indeed, that this form of paper constitutes a very essential feature of the commercial transactions of all european financial centers. mr. banker: that is true, and unless we follow them and adopt the same principle, and facilitate in the same way the protection, transportation and distribution of our commodities, needed for current consumption, we will continue to work under a very great handicap, as compared with our foreign competitors. moreover, we will again find it difficult, if not impossible, to adjust ourselves to those periods of contraction which must come from time to time, without almost immeasurable losses, and the consequent stagnation in business that is sure to follow. mr. merchant: i appreciate what mr. banker has just said. i am confident from my observation during the panics of and that our greatest injury came from the shock to business due to the fact that there seemed to be no real relief from the strain until there was an actual breakdown all along the line. now it is evident that if a large amount of capital were employed in the economic titles, as it were, to our consumable commodities in the form of bills of exchange and the market for them extended to the financial centers of europe, as seems probable, indeed certain, whenever the rate of interest was high enough, we should pass through any future strain, without the usual tragic results. of course this added facility to the investment of our bills of exchange will not be a cure-all, but it will certainly correct an obvious and a very great defect in our present method of doing business. mr. banker: certainly it will not be a cure-all, because it is only an added facility in our credit system, and therefore must be provided for precisely as a corresponding amount of loans should be. you see, don't you, that an acceptance by a bank is practically the same thing as a loan to the buyer and seller of the goods jointly, or to one of them with the other as an endorser. the only difference is this: that if a loan is made the money would be placed at once to the credit of one of them, subject to his check, while the acceptance is an agreement to pay the amount on a future day. the bank must take precisely the same precaution in securing or protecting itself, and should carry identically the same reserve against acceptances that it does against its deposits subject to check. mr. lawyer: that is true, for if the buyer and seller fail to make good, and meet the draft, the bank must pay it precisely as a bank must pay the checks of its depositors, even though the borrowers of those deposits do not pay their promissory notes when due. in reality and in fact the results are identically the same, therefore i agree with you, mr. banker, that a bank should carry the same reserve against its acceptance liability as against its deposit liability. mr. manufacturer: mr. banker, have bills of exchange and bank acceptances been used very long, or are they something quite new and modern? mr. banker: the lord only knows how ancient they are. however, it is undoubtedly true that the use of them, especially acceptances, has grown enormously in recent years. for it is now a universal practice at all financial centers throughout europe. the bank liabilities of the whole world were only $ , , , in , while today they are upwards of $ , , , , possibly as much as $ , , , . this almost appalling increase is due not only to the growth of international trade and the expansion of the credit system in foreign trade, but to domestic production as well. of course an acceptance is the natural counterpart of a bill of exchange. bills of exchange, or something accomplishing the same purpose, were in use among the greeks. the history of the subject is buried in much obscurity. it is stated upon high authority that among the bankers of the roman world there existed a certain method or means of effecting payments abroad. mr. lawyer: here is what one author, wilbur aldrich, says: "from the beginning of the christian era the jews became dispersed and, shut out from other trades and occupations, became usurers, or money-lenders at interest, a business which by the canon law was forbidden to christians. the jews were united by such strong ties that their business assumed almost a corporate aspect. they bought, sold and transferred for collection part of the many debts constantly owed to them, and became practically an international exchange community. their practice gradually evolved the bill of exchange. "rivals of the jews, and more given to money changing, lombard and other italians naturally also became exchangers. many large italian houses included whole families, and had branches in many cities widely separated. the financiers from each city in italy and from associated leagues of such cities, frequently united for exchange purposes. italian finance thus grew into a great system of international exchange. among the great fairs of the middle ages, under the influence of the italians, some became connected chiefly with the business of exchange; piazenca, the most noted of the fairs of exchange, was practically a clearing house for foreign exchanges. "the bill of exchange was already in frequent use in the middle of the thirteenth century, but at this time its form was that of a document certified before a notary. at the end of the fourteenth century, it had approached the form now in use. it should be added that the bill of exchange was drawn only by the money changers and the bankers that had branches or agents. "the business of bill broking grew up in england towards the end of the fourteenth century. the issuance of bills of exchange, based upon genuine business sales of goods, was recognized as a legitimate source of gain by the canonists; or the ecclesiastic lawyers." mr. banker: you _see_, mr. manufacturer, from what mr. lawyer has just read, bills of exchange, in practically the same form that we now have them, have been in use about years. however, we are not now so much interested in a post mortem of the bill of exchange as we are in its place in our commerce. what we are most interested in is, just what part the bill of exchange is playing in the trade and commerce of today. what we want to get clearly fixed in our minds is what it is, and what it does, as distinguished from other instruments of trade. _first_: for the purpose of a definite idea of just what exchange is, let us remember that exchange includes every written promise or order to pay money that is used to substitute one credit for another credit, or to make one debt pay another debt. _second_: that bills of exchange (sometimes called drafts, or acceptances, indiscriminately) are promises or orders to pay money which are used to substitute one credit for another credit, or to make one debt pay another debt, at some distant city. if the cities are in the same country, the bills of exchange are called domestic exchange. if the cities are in different countries, the bills of exchange are called foreign exchange. _third_: let us agree, gentlemen, that so far as we are concerned we should not, and shall not, consider the acceptance of any draft by a bank as legitimate, unless the draft has grown out of an actual sale and shipment of goods. in other words, what i want to impress upon you is that if the draft is the economic title to goods, which are moving from the producer to the consumer, the liability of a bank upon an acceptance is reduced to a minimum. acceptances of drafts growing out of sales and shipments of goods will never be a source of dangerous expansion, because they will liquidate, or pay themselves out, as the goods will be wanted to eat, to wear, to use, or to go into other manufactures, almost immediately. _fourth_: i want to nail one fact down right here so that no one of you will ever overlook it, or forget it; and that fact is this: an acceptance is just as much a bank liability as a deposit subject to check, for if the seller and buyer, or the drawer and the drawee, don't pay the debt on the day named, the bank will have to pay it, just as much as it will have to pay the checks against its deposits, although the people who borrowed the deposits have not paid their notes. it is clear, therefore, that the same reserve should be carried to protect acceptances as deposits. mr. lawyer: i am convinced of that, and i think we cannot insist upon this conclusion too strongly for two reasons. first, the credit facilities for trading, or carrying on business, are increasing at a tremendous rate, and this particular form of credit is probably increasing at a greater pace just now than any other. second, there is no form of credit more indirect, subtle and liable to mislead than this; therefore, it will require double diligence to keep it as good as gold. we must remember that since gold is our standard of value, gold alone is the touchstone of all credit, acceptances as well as deposits and bank notes. mr. banker: there is no question whatever about that. if we want an absolutely sound and impregnable financial and banking system, we must meet checks and acceptances with gold just as well as bank notes, for they are all identical and the same thing--only in different forms--bank credit. gentlemen, if you place our banks in a position where they can pay gold no one will ever ask for gold, except for some special purpose like that of export. mr. merchant: is it not a fact that credit transactions in business are increasing every year? mr. manufacturer: mr. merchant, i presume you mean, relatively. that is, that the proportion of business transactions in credit as distinguished from cash is greater now than formerly. mr. merchant: that is precisely what i mean, of course. i am aware that there is on the average a great increase of business every year. mr. banker: in some localities credit transactions are increasing, but in others they are practically at a standstill. for example, i suppose if you should take some country town in a cotton-growing district, the amount of cash used from august to january might be per cent of all the transactions; for the planter pays the pickers and all the laborers cash, and they in turn pay the storekeeper; during other periods of the year, when accounts are running, the cash used is much smaller. the average amount of cash used gradually falls as the people come to use banks more and more, the bank checks taking the place of currency. generally speaking, however, the average country community does about per cent of its business with currency, while the medium sized cities, or towns, do possibly as much as per cent of the business with checks. in the largest cities as much as per cent of the business is done with checks, while the clearing houses settle their differences or balances with about per cent of actual money, where money is used. sometimes the differences or balances at the clearing houses are settled by checks or drafts on a financial center. while we have no definite figures that justify a positive statement, it is generally estimated that about per cent of all the business of the country is done with some form of credit instrument, checks, drafts, or bills of exchange. mr. merchant: then all forms of exchange, promissory notes, checks, drafts and bills of exchange are really mediums of exchange in precisely the same sense that gold coin and currency are mediums of exchange. mr. banker: certainly they are all just as efficient as mediums of exchange, as gold coin and other forms of currency, although not as facile for small trade. but, in large transactions they are far more expeditious, more convenient, cost much less, and involve less risk. these are the reasons they are used instead of cash to so large an extent. uncle sam: boys, from the attention that you have given this subject it is evident that you are mightily interested, for you have had to work a good deal harder to understand what you were talking about than usual. but we have arrived, we have really gotten somewhere, difficult as exchange is generally thought to be. now, in order to fix in your minds just what progress we have made during these five talks, i want to review what we have accomplished, or agreed to. the first night we found out that our standard of value was gold. the second night we decided that our money was gold coin and that nothing else would do. the third night we found out that our currency was gold coin, token money, united states notes and bond-secured notes; we also found out that the united states notes and bond-secured bank notes were not fit for currency. the fourth night we determined that the only currency in addition to our gold coins and token coins worth considering for our purpose was a credit bank note, or bank credit currency. tonight we have found out what exchange is and that nine-tenths of our business is done in some form of it; but that we must keep it as good as gold by holding adequate reserves to protect this form of credit as well as any other. now, i call that going some. mr. manufacturer: uncle sam, last wednesday evening, during our discussion, mr. banker frequently used the word "reserve" in connection with our currency, and insisted that the reserves should be such as to protect the currency, and tonight he has again used the word "reserve" in the same way in connection with exchange. while i know in a general way what he means, i am not at all sure that i comprehend fully what a reserve is in its true and broader sense. mr. farmer: nor do i, and to confess the truth i am a little dazed on that very point, and i want to suggest that we spend the next night finding out what a bank reserve is. if all that mr. banker has been saying is true the reserve is certainly the hub of this wheel, and i want to tell you now that unless the hubs of your wheels are all right, you won't have much of a wagon when you get through. mr. banker: that's right. your reserves are the very heart of the whole question, the hub of the wheel. uncle sam: well, then, we'll have reserves up next wednesday, and let us hope that our reserves will never get down, at least to a dangerous point. good night. sixth night value, price, wealth, property, credit uncle sam: well, boys, what about reserves? mr. lawyer: uncle sam, soon after we departed the other night, i began to think over the subject of reserves; but soon found myself considering several other points, which, it seemed to me, we should take up before reserves. therefore, without consulting you, i telephoned mr. merchant, mr. banker, mr. manufacturer, and i saw mr. laboringman and talked the matter over with him. we all agreed that there were several other points that we should discuss tonight instead of reserves. i knew that mr. farmer lived on a rural free delivery route, and that i could reach him by noon the next day or thursday morning; so here we are ready to talk about something else. and we came to this conclusion without even consulting you, for which possibly we ought all of us now to beg your pardon. uncle sam: well, there you go again. really, i feel as though i were in about the same position that one of my wisest presidents, abraham lincoln, said he was in, with regard to his influence over his cabinet. you will remember he once said, "i don't believe i have any influence with the present administration, anyway." of course, we all know that was one of honest abe's sly drives, because he knew deep down in his soul that in the end he was always the master of ceremonies. however, what is it that you want to talk about? of course, you understand, that under the circumstances, having made the arrangement to talk about reserve, "i am completely upsot." mr. farmer: well, i'm the fellow that suggested that we talk about reserves tonight; but i am sure that the change made was most advisable. to use an ugly illustration, possibly ugly to this august assembly, we now have our horses representing the standard of value hitched up to our wagon which represents our currency and exchange, the things that carry the value, wealth, property, and all commodities that go by price, the trades having been made on credit, but calling for capital. i think with mr. lawyer that we had better find out just what these various words or terms mean before going any further. otherwise we will certainly be using words whose meaning we do not know, or, at least, do not properly appreciate. mr. merchant: now just what did you say; value, wealth, property, capital and credit? that all sounds very well, but i suggest that you include one more word that has always been a source of annoyance to me when i want to buy anything, and most unsatisfactory when i want to sell anything, and that is "price." mr. farmer: oh, i had that in all right, but i will admit, in a sort of backhanded way. mr. banker: all right, then, let us include price in the list; then the programme for tonight is, value, price, wealth, property, capital and credit. mr. laboringman: just what do you mean by the value of anything? that is, what is value anyway? mr. manufacturer: i have been studying over that very thing, and i believe i can give you a definition that will wash. the value of anything is measured by the use to which it is put, and is expressed in anything for which it is exchanged. mr. farmer: i have been mulling over this question of value a little myself, and i think that mr. manufacturer has that about right. i worked it out this way: i have an old horse down on the farm that i traded for, giving hiram johnson, my neighbor, a mule. that mule was a mighty handy animal. i could do anything with him on the farm, but he was a little too handy with his hind legs occasionally, so i traded him off to let him practice on my neighbor johnson. now the value of that mule was that horse that i got in exchange for it; and the value of that horse was the mule. so, too, if i traded a hog for a sheep the value of the hog is the sheep, and the value of the sheep is the hog. mr. merchant: hold on just a minute before you go any further, as i want to know whether anyone here can tell me what intrinsic value is. we heard so much about that during the campaign of ; and i want to know whether there is anything in it or not. i ran up against the same expression in one of the books that i thumbed away back in . and today you sometimes hear men say that gold has intrinsic value. now, according to your definition, if no one could use gold, or rather did not use it and you could not exchange it for anything else, it would not have value. mr. banker: precisely so. nothing is more absolutely true than that. gold, like everything else, gets its value from the demand for it, which comes from its use and its consequent exchangeability. mr. lawyer: that is undoubtedly true, all the value that gold has arises from its use and exchangeability, and its exchangeability arises from its universal use. it may be said, possibly, that the value of anything is measured by the use to which it can be put; but i believe that it is all covered by the latter part of the definition given by mr. manufacturer: _the value of anything is any other thing for which it can be exchanged._ anything has value when it is exchangeable; when it is not exchangeable it has no value. what is really more in keeping with our common everyday language, is the definition of the roman law, "the value of anything is what it can be sold for." mr. banker: yes, that is true in one sense, but i think we had better make a distinction between receiving money and something else. if you exchange anything for money, the amount of money received is more properly called its price. mr. lawyer: you are right; i think we should make just that distinction: "the value of anything is the thing you receive in exchange for it." _the price of anything is the money you receive in exchange for it._ of course in everyday conversation, we are constantly using value and price indiscriminately. we ask, what is the value of something, when we want to know the price of it. uncle sam: well, you have made short work of two topics or points raised already. mr. farmer: yes, and if we keep our noses to the grindstone, our eyes on the sickle we are grinding, and our feet on the ground, we'll make headway right along. mr. laboringman: i think anybody can understand this subject, at least so far anyway. we may get over our heads before we get through, but i know i'm all right yet. uncle sam: the great thing to do in a discussion of this kind is just what you do in any other matter. talk common sense. just talk horse sense. do you know i flatter myself that the common sense of the american people is the wealth of the country? mr. lawyer: wealth, did you say, uncle sam? why that is just what we are going to talk about. it may be that common sense is the source of most of the wealth of the american people, but really, uncle sam, with all due deference to you, i do not think you can call it wealth. aristotle said: "we call wealth everything whose value is measured by money." mr. banker: that definition of aristotle has never been improved upon, and today all students, scholars and economists have accepted it as correct. and, while others have talked without limit and written books without number about wealth, no one has improved upon what aristotle said wealth was. just keep this simple inquiry in your minds: "can it be sold for money," and, remember that "whatever can be exchanged for money is wealth." let me illustrate just what i mean. if i have land, houses, cattle, horses, cotton, corn, or any other material thing that i can convert into money, they all constitute wealth. again, if i were a lawyer, a doctor, farmer, bricklayer, engineer, musician, or painter, my services would be wealth because i can sell them or exchange them for money. again, there is still another kind of wealth that may be described by the single word "rights," such as mortgages, bonds, stocks, bank notes, checks, drafts, bills of exchange, copyrights, patents, good will of a business, etc., all these various things are also wealth because they can be exchanged for money. they can all be bought and sold. let us remember this then, that all wealth is one of these three things: _first_: wealth is material, land, etc. _second_: wealth is labor, work, etc. _third_: wealth consists of rights, checks, notes, bonds, etc. mr. lawyer: then, if i understand you correctly, you say a man is wealthy because he has a good deal that he can turn into money. of course i am aware that a man may be considered wealthy in one community, and in another community the same man with the same amount of wealth may be considered a comparatively poor man--in other words, everything is relative. a man worth $ , in some small country town may be considered, and properly so, a very rich man; but on fifth avenue, new york, he would be considered a comparatively poor man, because it might take $ , to pay a year's rent for a house. mr. laboringman: you bet i can see that point all right. mr. farmer: it seems to me as though you have made that perfectly clear, but i want to tell you boys that when i tried to study up on this question during the week, i got all balled up on the words property and wealth, for i cannot see the slightest difference between these two words. mr. lawyer: well, i think there is a very great difference; and i think i can demonstrate to you by an illustration right in your own neighborhood just what the distinction is between these two words. you will remember, mr. farmer, when that mill located over on carroll river, and that big dam was put in, mr. adams, a man whom you and i both know very well, owned all the land in that neighborhood. you will remember that he proceeded to borrow money and build houses for the employees who wanted to come and work in the mill. i think he built as many as houses for that purpose. you will remember the dam washed out and that they did not rebuild it; and as a consequence the mill closed down. the result was the employees all left, and mr. adams was involved to a very large extent, i think something over $ , all told. now he still has the property, but the insurance company has the mortgages--in fact, mr. adams has a great deal more property now than he had before the mill located there, because he has the land and the houses, but he has a good deal less wealth. for when the mill located there, mr. adams' wealth exceeded $ , , but after the mill closed he could not rent or sell the houses to anyone. now the evident result was that he had increased the amount of his property, for he had houses, but he actually had no wealth left. his property was what we lawyers call corporeal property, that is, material property, land, and buildings. the insurance companies which held the mortgages had a very different kind of property, called by the lawyers incorporeal property, that is, not material property but an interest in the real or material property. i think you will all agree that while mr. adams still has all his property, all the wealth there is left belongs to the insurance company which holds the mortgages. mr. merchant: mr. lawyer, is it not true that you could and would say that a man had a lot of property if he owns say , acres of land worth only cents an acre, even if it was not salable at all? mr. lawyer: yes, i think that is true, and illustrates in another way that there is or may be a real difference between property and wealth; however, it may be said that in conversation we often use the words wealth and property without much, if any, distinction. it seems to me that we should note this particular difference. _wealth consists of property convertible into money, and therefore implies exchangeability, while property may not mean wealth at all, because the property has no exchangeable value._ mr. banker: mr. lawyer, i think that that last statement of yours will assist mr. farmer very greatly in understanding the real difference between wealth and property. the difference is certainly very evident. mr. farmer: yes, i have caught on. there may be a very great difference between wealth and property, although we are in the habit of using these two words without any reference to the special meaning that really attaches to them. in our conversation we use them indiscriminately, and i don't know as that makes any difference; but for our purposes, that is, for the purposes of these discussions, i think it is very important that we should know the difference; because something may arise that will compel a recognition of the real difference between these two words. mr. banker: i was just going to remark that the very difference between these two words suggests one of the other words we have agreed to consider tonight, and that is the word "capital"; for capital is a form of wealth, although all wealth is not capital. wealth, as we have seen, consists: ( ) of material things, such as houses, land, etc.; ( ) of productive power, called labor, etc.; ( ) of rights, such as checks, notes, bonds, etc. the owner of these things may use some of them for his convenience. he may so use some of them as to produce a profit. now, when anything is traded with, or so used as to produce a profit, or as we often say used productively, it is called capital. stephens defines capital thus: "capital, the source whence any profit or revenue flows." so senior says: "economists are agreed that _whatever_ gives a profit is properly called _capital_." again m.d. fontenay says: "wherever there is a _revenue_, you perceive _capital_." macleod says: "capital is an economic quantity used for the purpose of profit." i would suggest that we say _capital is anything used for the purpose of profit_. macleod uses this language also: "if a person has a sum of money, he may expend it on his household requirements; or in gratifying his personal taste by buying books, or statues, or pictures, etc. money spent in this way is not _capital_. "but if he buys goods of any sort for the purpose of selling them again with a _profit_: then the money so employed is '_capital_,' and the goods so purchased are also _capital_, because they are intended to be sold with a '_profit_.' "so money let out at interest is _capital_. "in a similar way any material thing may be used as capital. if a landlord lets out his land for the purpose of profit, it is capital. "all modern economists class personal skill, ability, energy and character, as wealth, because persons can make a profit by their use. hence they may be used as capital, as well as material objects. "if a man digs in his garden for his own amusement such labor is not capital; or if he sings or acts or gives gratuitous lectures on any subject to his friends, such labor is not capital. "but if he sells his labor in any capacity for money: then such labor is capital for him. thus huskisson says: 'that he had always maintained that labor is the poor man's capital.' so mr. cardwell addressing his constituents said 'labor is the poor man's capital.' and a writer in a daily paper, speaking of agricultural laborers, said: 'the only capital they possess is their labor, which they bring into the market to supply their daily wants.' "so if a man expends money in learning a profession such as that of an advocate, physician, engineer, or a profession of any sort which he practices for profit, the money laid out in acquiring such knowledge is capital: and his skill, ability and knowledge are also capital. he makes an income which is measurable and taxable, just in the same way as if he had made profits by selling goods. "now, there are two fundamentally distinct ways in which capital may increase: " . by direct and actual increase of quantity; thus flocks, and herds, and all the fruits of the earth increase by adding to their number and quantity. " . by exchange. "that is by exchanging something which has a low value in a place, for something which has a higher value. "now, it is clear that money produces a profit, and becomes capital, by the second of these methods. money is used as capital by exchanging it for some goods or labor, the produce of which may be sold or exchanged again, for a greater sum than they cost." mr. lawyer: mr. banker, that is very simple and very clear, but it strikes me that a distinction which is of greater importance to us is the form that capital takes, and i would say, as preliminary to a distinction in the different forms of capital, that we should have a broad definition of what capital is, concretely expressed. _capital is that part of the accumulated wealth of the country that is used for the purpose of profit. it is either active, passive, or fixed._ the active capital is that portion of the wealth of the country which is employed in the production, transportation and distribution of consumable commodities, and is more accurately described as the commercial fund of the country. the passive capital is that portion of the wealth of the country which is derived from the commercial fund in the form of earnings, profits, savings and income from investments, and is more accurately described as the investment fund of the country. it is represented by bonds, mortgages, and other investment securities. the fixed capital is that portion of the wealth of the country which is represented by real estate, buildings and all permanent improvements, such as railroads, mill property, irrigation enterprises, etc. _if we transfer the active capital, or commercial fund of the country, to the passive capital, or investment fund, or what is still more serious, convert it into fixed capital, we can no more keep the people working and producing new wealth than you can keep a steam engine producing power without coal and water._ what invariably happens in the so-called good times but almost invariably what, by experience, proves "boom" times, is that business men and in fact everybody, not only take all of their spare money, and go into speculations, but they exhaust their credit as well; and what they have to pay so far exceeds what they have to pay with, that when the chain of credit breaks at any one point, the whole fabric falls. it then takes years, usually, to catch up and reconstruct and reach a normal condition in which, after "paying for the dead horses," so to speak, the profits on business, savings from labor and the income from rents and investments again begin to supply investment funds. for example, it took at least four years to get the american people to thinking naturally and normally, after the panic of --and the fact is some "dead horses" have not been paid for yet; but generally speaking, we are now ready to turn a considerable sum from various sources into the investment fund of the country, or into bonds, construction of new work, and into fixed investments, lands, buildings, railroads and other permanent improvements. mr. banker: i think that you will all perceive from what mr. lawyer has just said with regard to the various directions into which capital may be turned and the fatal mistake that is ever and ever recurring--the transfer of active or productive capital, or the commercial fund, into the investment fund, or fixed forms, is what invariably, as he said a moment ago, breaks the chain of credit at some point. you can readily see, indeed it takes no argument to show, that nothing in the business world should be guarded so jealously as the commercial fund of the country, in order that credit may be maintained and labor steadily employed. mr. lawyer: our discussion has brought us most naturally to the last word suggested for our consideration, and that is the word "credit." i remember what daniel webster once said in a speech when speaking on the continuance of the charter of the united states bank in . it was this: "credit is the vital air of the system of modern commerce. it has done more, a thousand times, to enrich the nations than all the mines of all the world." and again in another place he says: "we owe more to credit and to commercial confidence than any nation which ever existed; and ten times more than any nation, except england. credit and confidence have been the life of our system, and powerfully productive causes of all our prosperity. they have covered the seas with our commerce, replenished the treasury, paid off the national debt, excited and stimulated the manufacturing industry, encouraged labor to put forth the whole strength of its sinews, felled the forests and multiplied our numbers, and augmented the nation, so far beyond all example, as to leave us a phenomenon for other nations to look at with wonder." mr. banker: that might have been true in , but today other commercial nations could truthfully reverse that comment, for they have in some respects and in some places passed us in credit facilities--they have beaten us as it were at our own game, that is, in having worked out a more highly developed use of credit. mr. manufacturer: when you recall the fact that between and per cent of our business is carried on in some form of credit, you realize that we have become so accustomed to this marvelous device that we have lost appreciation of its power for human achievement and advancement. mr. banker: you are right. do you know that i regard credit as one of the three greatest instrumentalities of modern civilization? mr. lawyer: well, no, i never thought of credit in that connection. that suggestion is so unusual that i am quite interested to know what you regard as the three and in what order of importance you would place them. mr. banker: i regard the invention of printing as the greatest influence in the world's advancement, because it opened up the paths of knowledge to the poorest as well as the richest, and completely destroyed the supremacy of wealth in the acquisition of knowledge. we have observed what gigantic strides have been made during the past twenty years, and with what increasing and amazing facility information is now being disseminated, the progress of the last ten years outstripping the imagination itself. everybody can now know everything, if they have the time and ability to acquire it. mr. farmer: how absolutely true that is. there are no less than ten magazines on my table at home. they cover every conceivable subject from electrical science, in which my son is deeply interested, to the fashion plates of the latest style of women's dresses, current events, current literature, fruit growing, intense farming, stock breeding, eugenics and euthenics. mr. lawyer: hold on there, mr. farmer, or you'll prove conclusively that you fellows out in the country know more than we do in town. mr. farmer: well, between you and me, i think that's so. mr. banker: the second most powerful agent in the advancement of the human race is that instrumentality by which all the resources of the human mind have been developed and brought into requisition in meeting the ever-increasing demands of mankind throughout the world. it has destroyed the supremacy of money, and provided the means by which the most humble of the race can place his foot upon the ladder of opulence. that instrumentality is credit. mr. lawyer: i doubt whether such a proposition was ever thought of, certainly it has never been advanced to my knowledge before; but when you stop to think of it, i do not believe that anyone can successfully controvert that statement. look about you, and imagine, if you can, what the condition of the people would have been without the advantage of credit. who of all your acquaintances has not made his way to success by means of credit. credit is certainly the gateway to opportunity, and opportunity is the everlasting hope of the world. mr. banker: mr. lawyer, unless you stop your flow of eloquence upon this newly discovered means of human happiness, i will not get a chance to state the third greatest contributing cause to the uniform and universal development and advancement of mankind. it is steam and its modern companion electricity. through the application of steam to ocean craft and railroads, transportation has brought the people of the whole world practically into one market zone, and we are now all eating the same food and wearing the same clothes, and to the last degree, every people, and broadly speaking, every man, is doing that which he can do most efficiently and profitably. mr. manufacturer: mr. banker, you have certainly opened up an entirely new strain of thought to me; and yet when you grasp the full force of the idea, and comprehend fully these three elements or forces: printing, the general transmission or diffusion of thought or knowledge; credit, the fullest use of all our talents by opening up a world of opportunity; and transportation, the fullest exchange of all the products of the mind and hand of man, you have actually covered the realm of human life up to date. and yet, who ever thought of placing this relative importance upon credit. we have been discussing the comparative importance of gun powder that brought the knight and soldier to a common level, the cotton gin, electricity, the telegraph, the telephone, chemistry, surgery, wireless, printing and steam, but whoever heard of credit in this connection? mr. merchant: what you say is distinctly true, but all these other things i can readily see are only additional facilities in making the three great fundamental instrumentalities for the advancement of the human race more efficient; and the more one thinks it over, the more impressive mr. banker's statement becomes. _first_: printing, the means of spreading knowledge; _second_: credit, the fullest opportunity of developing and using the powers of mind and body; _third_: steam and electricity, the means of distributing on land and sea the products of all mankind. these three, printing, credit and power are certainly the three greatest forces of modern civilization. mr. banker: now, gentlemen, having convinced you as i assume i must have done, of the tremendous part that credit is playing in the world of today, let us try to find out and comprehend just what credit really is, and how it happens to be so essential to our present life. the word "credit" means, "i believe," "i trust." that is, i believe in a man, in a man's character, and in his ability, and therefore i trust him to do something tomorrow, three months from now, six months from now, nine months from now, one year, or possibly a longer time, which he cannot do today. that is credit. what a limitless field of opportunity and then of speculation this confidence of man in man opens up. credit is to money what steam is to water, and credit like steam must always be kept within control, and within safe bounds, as in the case of steam, or there will be an explosion of credit, a most direful thing. now, there never will be an explosion or crisis in the world of credit, so long as credit is subjected constantly to the test of coin redemption, that is, the conversion of credit into money, gold. so long as credit can be extinguished by payment in gold, it is under control. but, gentlemen, when gold redemption becomes impossible, look out! let me read what macleod says about that: "it is unextinguished credit which produces those terrible monetary cataclysms which scatter ruin and desolation among nations. it is by the excessive creation of credit that overproduction is brought about, which causes those terrible catastrophes, called 'commercial crises,' and the inability of credit-shops to extinguish the credit they have created, commonly called the failures of banks, is the cause of the most terrible social calamities of modern times." mr. lawyer: now, we have the other side of the picture. on the one hand, we have daniel webster painting the possibilities of human achievements through credit--its tremendous power for good, when under control, and, on the other hand, the words of macleod pointing out the awful danger, the tragical consequences of credit beyond control. the years of , and are illustrations of what happens when credit has passed the boundaries of control. mr. banker: precisely so, and what we want to do is to prevent the recurrence of those commercial tragedies which interrupt the currents of prosperity, spreading desolation and death throughout the length and breadth of the land. mr. laboringman: it is to be hoped that we can do it, for no class suffers so much as the working masses during these periods of disaster, depression and distress. don't you see that if any one of us has succeeded in laying aside by painful saving a little nest egg, in some savings bank, that it is wiped out, and he has to begin all over again? and if one of us fellows has accumulated enough to start some little business of his own, ninety-nine times out of one hundred he is cleaned out, and through no fault whatever of his own. mr. farmer: in this very connection i want to call your attention to another thing, and that's this. these men who have the intelligence, ambition, perseverance and moral courage to pinch and save, even if they have to starve to get a start for themselves, constitute the true and the greatest ultimate source of wealth of this nation. they are the chaps that make two blades of grass grow where only one grew before. you don't want to forget that. they are not only the hope of every community in which they live, but they are a constant inspiration to the young. mr. manufacturer: now, gentlemen, you are talking sense. if we can devise some scheme to keep business from running away with us, and running off the track, and down the embankment every few years, and plumb over the precipice, we'll be doing something worth while. in a word, what we want, it seems to me, is to keep business on a more even keel, if possible; and if we could only get control of credit, and keep it within reasonable limits, always subject to a current gold test, we will be in a fair way to accomplish it. mr. banker: that is just what we are after; to find some way to keep credit within reasonable limits. you have struck the keynote of this whole question. in the first place, i want to call your attention to the fact that there are several kinds of credit, and that we must familiarize ourselves with all of them, in order that we may know how to deal with them. a doctor, you know, is a mighty poor stick, if he cannot diagnose your case, and tell you just what ails you, and yet proceeds to give you some kind of medicine, any kind of medicine for the right or the wrong disease. indeed, he's about the most dangerous individual to have in a community. now, unless we can become convinced that we are proceeding along right lines, because we have actually discovered the evils from which we are suffering, we had better let things alone. but our case is not hopeless, for the disease from which we are suffering has a well-known specific antidote, and it is up to us to first find out what ails us, and then to administer it. the treatment of the credit phase of the situation, or what may be in a way termed the mental aspect of the case, is probably as important as any other, and i will now try to analyze and describe credit, so that we can understand it, at least from my point of view. there are five well defined forms of credit. _first_: credit granted to aid production. _second_: credit to distribute production. _third_: credit granted upon accommodation paper. _fourth_: credit granted upon real estate. _fifth_: credit granted to the government, or forced by the government. uncle sam: say, mr. banker, do you know what time it is? don't you see it's half past ten o'clock? it will take you till morning to tell all about credit, and i don't know but what it would take you until "kingdom come." mr. laboringman: well, i've got to be up at six o'clock in the morning, and be at my job by seven, and i want to go home. i move, we adjourn. mr. farmer: so do i, for i've four miles to go yet tonight. mr. lawyer: what difference does that make? the trolley goes right by your door, and you'll be there in twenty minutes. mr. farmer: that's all right, mr. lawyer, i don't get my breakfast at nine o'clock as you do, but i've got to be up in the morning at five o'clock to feed my stock. i'm a-going, so good night. uncle sam: this is a rather informal break-up, but i guess it will be of no use to call in the police, so good night. seventh night commercial credit, land credit, government credit uncle sam: mr. farmer isn't here yet. he left in such a huff the other night, possibly he is sore--no, he is not, here he comes. mr. lawyer: when our meeting broke up last wednesday night, mr. banker had just outlined the different forms of credit, and i was very glad that he did, because it gave me an opportunity to read up on the subject and be prepared to listen intelligently, at least, to what any of you may say tonight. mr. merchant: i did some investigating, too, and found the subject far more interesting than i supposed it could possibly be. indeed, that is true of any subject. your interest is always measured by your knowledge, and many matters that seem to us difficult to understand, become exceedingly simple as you get into them, and comprehend them. how often the apparently impossible task completely dissolves under persistent attacks. mr. banker: i am more than pleased that you gentlemen have given your spare time to this subject. simple in function it is, but it is immeasurably great in its possibilities, extent and responsibilities from the standpoint of the banker. just as we parted last wednesday i had described or defined the different forms of credit, so far as they enter into banking directly or indirectly. as i then stated, the first and simplest use of credit is that granted for the production of something to eat, wear or use--what we call consumable commodities, that is, credit granted to aid in production. if mr. farmer over there should come into my bank now as he used to before he got rich, and ask for a thousand dollars to pay his expenses while he was planting, cultivating and harvesting his crop, and then in the fall should come again and ask me for three thousand dollars more to buy some steers and hogs with, because he thought he could make more money feeding than by selling his corn outright, and i had let him have the total amount of $ , from time to time as he wanted it, because i believed in his honesty and intelligence, and also because i regarded the venture as a good one, that would be granting credit for the production of beef and pork, food products--the very necessities of life. just as soon as his steers and hogs had become fit for market, and had ceased to gain anything to speak of, by holding them and further feeding, he must sell or lose the cost of holding on the chance of a rise in the market. but even this delay must be temporary. virtually he is compelled to sell from the very nature of the case. when he sells his steers and hogs, suppose he should receive $ , . first, he pays me the $ , and interest, and has about $ , profit on the transaction. you will all perceive and understand, that as i gave mr. farmer this credit of $ , from time to time, he gave me his promissory note for an equal amount, so that as fast as i granted credit he created a debt. i acquired the right to demand payment of $ , and he incurred the duty or obligation to pay $ , . so for every credit granted a corresponding debt is created; and if every debt is paid every credit will be canceled. though the credit granted to mr. farmer was for the production of the necessities of life, it was not the safest kind of a loan to make as we shall soon see--his personal responsibility aside of course; because after i had given the $ , he might have to replant his corn. the summer might be dry and the frost might come early and cut off his crop; but passing over these possible dangers to his crops, if we assume that his crop is the biggest he ever raised, and that that very fact makes it desirable to borrow the additional $ , , pleuro-pneumonia might strike his cattle, and cholera might seize his hogs and the transaction might result in a loss of $ , instead of a profit of $ , ; or even a greater loss than $ , . it is these risks that the banker takes in making loans to farmers that justifies higher interest rates than are charged under some other circumstances. again it is these risks that lead a banker out of caution to take real estate loans in addition, to cover the accidents of crop raising, although the national bank act forbids making loans upon real estate. mr. farmer: under such circumstances, i think it ought to be possible for a bank to take real estate loans. i believe it would help the farmer to get his money at a trifle lower rate of interest. mr. banker: i agree with you, and provision should be made for just such cases; but the rule of the national bank should still prevail with regard to loans upon real estate so far as a regular business is concerned, unless the bank is doing a savings bank business or a trust company business, in which event it would be entirely proper to use such funds for that purpose. mr. merchant: mr. banker, a moment ago you said that the loan to mr. farmer, apart from his personal standing, was not the safest kind of a loan to make. just what did you mean by that? mr. banker: i am glad that you asked that question, for it should be explained right here. suppose that you, mr. merchant, should purchase $ , worth of pork and beef in the barrel, at some distant point, and should come to me for the money to pay for it. in all probability i should ask you for the bill of lading covering the shipment, and also insist upon your getting an insurance policy on the goods before giving you the money. in this case, i am loaning money upon the necessities of life, consumable commodities, and unless the insurance company fails, and the goods are destroyed, i cannot possibly lose a cent. i have, humanly speaking, eliminated all chances of loss. you will observe that if i should hold the bill of lading and the insurance policy, i have the title or ownership of the pork and beef, in any event. in such cases, comparatively speaking, the rate of interest ought to be the lowest possible, as far as the risk goes. mr. manufacturer: but this kind of a transaction constitutes a comparatively small part of the commerce of the country. mr. banker: yes, that is true, and if credit was limited to such transactions, credit crises would be very few, indeed, probably never would arise as a result of over trading under such circumstances; trade would be greatly hampered, and business curtailed to a destructive degree. mr. manufacturer: that is certainly true. you men all know that i am a manufacturer of high class clothing. i want to give you an illustration of how business is being carried on today in the way of multiplying credit. a manufacturer of woolen goods at lancashire, england, sold to a wholesale merchant on the other side, $ , worth of goods on three months' time. the wholesale merchant sold the goods for $ , to an english exporter on three months' time. the english exporter sold the goods to an american importer for $ , , duty paid; the importer sold them to an american jobber for $ , ; the jobber sold them to me for $ , . all these sales occurred within thirty days, and not a single man paid a cent of money on account of his purchases. by way of payment, this is what happened. i gave my note due in ninety days to the jobber, and he discounted it at his bank. the jobber gave his note due in ninety days to the importer, and the importer discounted it at his bank; the english exporter sent over a draft upon the american importer at ninety days sight, and he accepted it and it was returned to england, where the exporter discounted it at his bank. in the meantime, the wholesaler drew a draft on the exporter at ninety days sight, and he accepted the draft, whereupon the wholesaler discounted the draft at his bank. at the same time the manufacturer drew on the wholesaler at ninety days sight, and the draft was accepted by the wholesaler, and was discounted by the manufacturer at his bank. thus we see that goods which sold originally for only $ , went through five different hands and became the basis upon which credits were granted for $ , , and debts were created for $ , . every single debt was sold just as though it was so much woolen goods. every man had his money and not one of them had paid his debt, and yet every transaction was legitimate and in the ordinary course of business. within sixty days i shall have turned these goods into clothes and sold and delivered them, giving my customers in turn credit upon my books, or will have accepted their promissory notes, which i may discount at my bank if i should need the money in my own business. now mark and note this. if i should deliver to the american jobber my check today, and he should send his check to the american importer and the american importer should send a draft to the english exporter, and the english exporter should deliver his check to the wholesaler, and the wholesaler should send his check to the manufacturer, debts amounting to $ , would have been paid and credit amounting to $ , would have been canceled; and yet not a single cent of cash in the form of coin or currency has been used. every one of the checks, notes or drafts taken in the transaction is property, just as much as the note taken for a single sale of the goods would have been property. indeed, every one of the five notes or drafts was just as much property as the goods themselves were, and could be bought and sold just as well as the goods themselves could be bought and sold. now it must be evident to all of you that in the production, transportation and distribution of commodities, credit performs exactly the same function as money. so far, therefore, credit is in all respects equivalent to money. so long, therefore, as the operations through credit are successful, everything goes well. mr. banker: precisely so, mr. manufacturer, so long as the operations are successful, everything goes well; but it is the sudden breaking of the chain of credit that brings or precipitates a disturbance. macleod uses this language in referring to the destruction of confidence: "it is the sudden failure of confidence and extension of credit which produces what is called in commercial language, 'a pressure on the money market' and which causes money to be 'tight.' when money is said to be scarce, it does not mean that there is a smaller quantity of money actually in existence than before; there may be more, or there may be less in the country; no one can tell what the amount of money in existence is, but a great amount of credit which serves as a substitute, and was an equivalent of money, is either destroyed altogether, or is suddenly struck with paralysis, as it were, and deprived of its negotiable power, and therefore, practically useless. a vast amount of property is expelled from circulation, and money is suddenly called upon to fill the void." it must be observed and noted right here, therefore, that streams of gold, of gold, i say, must be constantly and swiftly running through the channels of trade, and so intimately connected with a practically unlimited supply or an inexhaustible reserve of gold, in the form of a central reserve for the whole country, to immediately extinguish any conflagration of credit as soon as it breaks out, precisely as a flood of water extinguishes a fire when it first makes its appearance. for the past ten or fifteen years, the banks of england have realized the necessity of pursuing this principle, by carrying their own individual reserves, and accordingly have been gradually accumulating cash reserves of their own, instead of depending upon the bank of england, except as a last resort. germany, too, within the past year, has suffered severely because adequate reserves have not been present in her channels of trade; and having discovered this weakness in her banking practices, appointed a commission to pass upon that and other questions. the commission reported that the individual banks should carry their own reserves; and herr havenstein, president of the imperial bank, a short time ago demanded that the banks of germany should carry their own cash reserves up to per cent of their liabilities. how much more important, then, gentlemen, must it be that we, when you consider the extent of our country, our vast and varied banking interests which are being carried on by , or , individual or independent banks, should require everyone of these banks to be in a position to test its credits with the touchstone of gold, and at the same time take the precaution of protecting itself by a central reserve of gold far beyond any possible demand that may be made upon it. mr. merchant: mr. banker, from what you have been telling us it is perfectly clear that every promissory note, check, draft, or bill of exchange, which are acknowledgments of debt, are just as much property as land, houses, cattle, corn, iron, or anything else material that can be bought and sold. credit itself is merchandise and the subject of a gigantic commerce of its own. "a well-managed credit amounts to tenfold the funds of a merchant; and he gains as much by his credit as if he had ten times as much money." this maxim is generally received among all merchants. credit is, therefore, the greatest wealth to every man who carries on commerce. demosthenes says: "there being two kinds of property, money and general credit, our greatest property is credit." again he says: "if you were ignorant of this, that credit is the greatest capital of all toward the acquisition of wealth, you would be utterly ignorant." so melon says: "to the calculation of values in money, there must be added, the current credit of the merchant, and his possible credit." so also dutot says: "since there has been regular commerce among men, those who have need of money have made bills, or promises to pay in money. the first use of credit, therefore, is to represent money by paper. this usage is very old; the first want of it gave rise to it. it multiplies specie considerably. it supplies it when it is wanted, and which would never be sufficient without this credit; because there is not sufficient gold and silver to circulate all the products of nature and art. so there is in commerce a much larger amount in bills than there is specie in the possession of the merchants." mr. banker: while it is true, as a general principle, that by the sale and transfer of the same property, as we have seen in the case of the woolen goods, many credits are granted and a corresponding amount of debts are created, it is also true that a single debt in the form of a promissory note, check, draft or bill of exchange, may be the medium of exchanging or transferring many different pieces of property. this is just the reverse of the transaction that mr. manufacturer has explained to us. mr. farmer: that is right. i want to tell you fellows something. one day about six months ago i was thinking of taking an automobile trip, but hesitated on account of the weather signs. i hung around town here for an hour or two and happened to drop into the office of a certain lawyer (i never go there any more now). we talked politics. while there, i asked him what he thought of the weather, and the political situation, and then went out. at the end of the month i got a bill from that lawyer for $ . i called upon the gentleman (i suppose i have got to call him a gentleman on account of his neighbor here) to find out what his bill meant, and he claimed that while we talked about politics, the presidential election prospects and the weather, that i had pumped him about some very important legal matters upon which he had given me valuable advice. upon my soul i never knew it, but what could i do. my only possible escape was to pay some other lawyer, possibly mr. lawyer over there, $ to defend the case. as is the practice nowadays, i took the short cut and paid it by sending him my check. that lawyer indorsed and gave that check to a neighbor of mine for a jersey cow. my neighbor indorsed and gave the check to a country grocery store out there and paid his bill with it. the country storekeeper indorsed and gave the check to mr. merchant over there for $ worth of boots and shoes. mr. merchant indorsed and gave the check to mr. manufacturer for $ worth of clothing. mr. manufacturer indorsed and deposited that check with mr. banker, right here, who charged it up to my account. now, by jove, you wouldn't think that was possible, but here is the check with those five indorsements. mr. manufacturer has just given us an instance where the same identical property worth only $ , in lancashire, england, was sold five times, and that credits amounting to $ , were being granted, and a corresponding amount of debts were created. now here is a case where my debt to that blasted lawyer acknowledged by my check, paid him $ ; paid my neighbor for a jersey cow $ ; paid the country grocery store for groceries $ ; paid mr. merchant for boots and shoes $ ; paid mr. manufacturer for clothing $ ; paid the bank on account of mr. manufacturer's debt $ ; or six separate debts in all, amounting to $ . and the joke is, i never ought to have given the check at all. this is the reverse side of the use of credit. the instance given by mr. manufacturer was one illustrating the tremendous expansion of credit. the instance i have given is one of the contraction of credit. mr. banker: right on that point mr. macleod says that sixty years ago almost the entire circulating medium of lancashire, england, consisted of bills of exchange in no way different from mr. farmer's debt, and that they sometimes had as many as indorsements upon them before they came to maturity. so that the useful effect of a bill of exchange is indicated by the number of indorsements upon it, supposing that every transfer is accompanied by an indorsement, which is not always the case. we see here the fundamental difference between bills of lading and bills of exchange, because the indorsements on the former denote the number of transfers of the same identical property; the indorsements on the latter denote the number of transfers of distinctly different property. mr. merchant: mr. banker, in every form of credit granted so far and debts created, we have certainly been dealing only in a legitimate way with consumable commodities, the necessities of life, and ordinarily, if not always, this kind of credit will take care of itself. and yet the marvelous facility and power of credit has been illustrated so vividly, that i am sure all of us appreciate it and can readily see how it might be abused and lead to disaster if not confined to the actual production of articles of food, clothing and daily use, or, in a word, to the production of the necessities of life. mr. farmer: i object to your including that lawyer's bill as one of the necessities of life. mr. lawyer: i beg your pardon, but we lawyers are a necessity. possibly necessary evils, but nevertheless, i insist that we are necessary. mr. banker: passing over this little quarrel between mr. farmer and mr. lawyer, mr. merchant has hit upon the vital distinction that should always be maintained in commercial banking as distinguished from investment banking as we shall soon see. mr. lawyer: there is not one man in a thousand that comprehends the distinction that you have just called our attention to, and i include the bankers when i say that, too. i did not appreciate it myself a week ago, but it is fundamental and must not be overlooked. i want to call your attention to one form of credit that does not grow out of actual transactions in the production and distribution of consumable commodity, and that is accommodation paper. mr. laboringman: accommodation paper? it strikes me as though that was just the kind of paper i wanted. i certainly will take any accommodation that mr. banker over there will give me. mr. lawyer: speaking of accommodation paper, mr. macleod says: "we now come to a species of credit which will demand great attention, because it is the curse and plague spot of commerce, and it has been the great cause of those frightful commercial crises which seem to occur periodically; and yet, though there can be no doubt that it is in many cases essentially fraudulent, yet it is of so subtle a nature as to defy all powers of legislation to cope with it." the obvious distinction between accommodation paper and promissory notes or bills of exchange here referred to, and all legitimate commercial paper, is this: the accommodation paper represents a future transaction, something to be done, while the true commercial paper represents a past transaction, or something that has been done; for example, goods that had been manufactured and are ready for sale or have been sold and shipped. mr. banker: mr. lawyer, will you allow me to illustrate that distinction? mr. lawyer: certainly. mr. banker: if mr. manufacturer there should make ten different sales of clothing of $ , each, and then send out ten drafts to his ten customers, who accepted them and returned them, these ten drafts would be called real bills of exchange, or let us call them true commercial bills, because the ten men have purchased and agreed to pay for the goods received by them. should the ten men have sent their promissory notes to mr. manufacturer, they would be identically the same thing as the drafts which they had accepted, and answer identically the same purpose. the real beneficiaries in these ten transactions are the ten purchasers of the goods which they have received; and if mr. manufacturer should sell me these ten bills of exchange or promissory notes as the case might be, with his indorsement, the ten men would all individually regard themselves as primarily liable; and they will, therefore, each of them, prepare to pay his note when it comes due, although mr. manufacturer is the guarantor. but if mr. manufacturer should go to these same ten men and ask each of them as a favor or _accommodation_ to him to accept the draft or indorse his note for the same amount of $ , , each due in days, no goods having been purchased by any one of them, all these drafts would be accommodation paper, and no one of these men would look upon his note as his debt, and therefore would expect that mr. manufacturer would take care of the paper when it came due. in the latter case, mr. manufacturer, having gotten the money and the ten men having no interest in the transaction, except as an accommodation to mr. manufacturer in the form of a favor, mr. manufacturer becomes the real maker of the ten notes, and the ten men who are indorsers are, as i have said, without any interest in the transaction, except that of accommodation acceptors. mr. macleod has described this whole transaction so fully and forcibly i want to read it to you: "there is in fact only one real principal debtor and ten sureties. now these ten accommodation acceptors are probably ignorant of each other's proceeding. they only give their names on the express understanding that they are not to be called upon to meet the bill: and accordingly they make no provision to do so. if anyone of them is called upon to meet his bill, he immediately has a legal remedy against the drawer (or the note maker). in the case of real bills, then, the bank would have ten persons who would each take care to be in a position to meet his own engagement; in the case of accommodation paper there is only one person to meet the ten engagements. furthermore, if one of the ten real acceptors fails in his engagement, the bank can safely press the drawer: but if the drawer of the accommodation bill fails to meet one of the ten acceptances, and the bank suddenly discovers that it is an accommodation bill, and they are under large advances to the drawer, they dare not for their own safety press the acceptor, because he will, of course, have immediate recourse against his debtor, and the whole fabric will probably tumble down like a house of cards. hence the chances of disaster are much greater when there is only one person to meet so many engagements, than when there are so many each bound to meet his own. "we see, then, that the real danger to a bank in being led into discounting accommodation paper is that the position of principal and surety is reversed. they are deceived as to who the real debtor is, and who the real surety is, being precisely the reverse to what they appear to be, which makes a great difference in the security to the holder of the bills...." in carrying on a legitimate extension of credit, the bank never permits the advance to exceed a certain definite limit; but it never can tell to what length it may be inveigled to discounting accommodation paper until some commercial reverse happens, when it may discover its customer has been carrying on some great speculative operation with capital borrowed from it alone.... "this is the rationale of accommodation paper; and here we see how entirely it differs from real commercial paper. because with real commercial paper, and bona fide customers, though losses may come, still directly the loss occurs, there is an end of it. but with accommodation paper the prospect of a loss is the very cause of a greater one being made, and so perpetually in an ever-widening circle till at last the canker may eat into a banker's assets to any amount almost." "the insurmountable objection, therefore, to this species of paper, is the dangerous and boundless facility it affords for raising money for speculative purposes." mr. merchant: that is absolutely true. accommodation paper and speculation go hand in hand. they are twin sisters. siamese twin sisters. pardon me, if i take a moment to demonstrate its terrors by relating the experience of a friend of mine who was led into an irrigation scheme: "my friend was in the grocery business in a western town and had a stock of groceries worth $ , , and he had $ , cash in the bank. the dam and water ditch was to cost $ , . my friend sold off a part of his goods, realizing $ , of additional cash. he moved the balance of his goods out to the point where the dam was to be located, forty miles away, and began operations. he succeeded in finishing the dam after paying out for work all that he had, and in securing indorsers up to $ , upon accommodation paper in the city where he had carried on the grocery business. two hundred thousand dollars had been paid for groceries and clothing. the laborers had gone to his store and obtained food and clothing during the two years he was engaged in constructing the work, and they had consumed all their wages in living, and more, too. he put an issue of bonds on the dam but could not sell them; therefore he could not pay the banks. his indorsers could not pay the banks, and most of them were ruined because of their indorsements for accommodation purposes. he was wiped out. he turned over everything to the bank, bonds and all. the banks had to carry those bonds ten years before they could sell them." mr. banker: mr. merchant, you have given a splendid illustration of the result of accommodation paper, but you have proved far more than you set out to demonstrate. you have not only shown the ruin wrought by the $ , of accommodation paper, but also the extreme danger accompanying accommodation paper, when the proceeds go into a real estate investment or improvement; especially an irrigation enterprise that usually requires a long time to reach results. the same is true with regard to railroad investments, town lots, or any kind of real estate investments. your friend put into that grocery store from first to last $ , worth of groceries and clothing, and the laborers who did the work ate up the groceries and wore out the clothing. mr. merchant: that is just what they did, for he simply gave them credit at the store for their wages, and they were charged for what they bought, and at the end of two years, the $ , worth of groceries and clothing were consumed and converted into that dam and ditch. he used to say he was ruined by the dam ditch. mr. banker: now you have proved another thing by your illustration and that is this. when the $ , worth of food and clothing represented by two years' work of men were converted into a real estate improvement, instead of into consumable commodities, the necessities of life, you have, so to speak, destroyed that much commercial capital, by converting or changing it into fixed capital. this is true because your friend could not begin and build another dam, for he had no money with which to do it. mr. merchant: but, mr. banker, he could sell his bonds. mr. banker: if he could, yes, but you just said he could not, and that he turned everything over to the bankers and that they carried the bonds for ten years. now suppose that a flood should have come and taken out his dam and destroyed his irrigation ditch, it would then be perfectly clear to all of us, would it not, that $ , worth of food and clothing had gone down the stream and had been forever lost; completely wiped out, just as completely as if the goods had been consumed by fire. mr. merchant: that is perfectly plain, but suppose that he could have sold the bonds, he would have gotten his money back, would he not? mr. banker: yes, we would say in that case, that he had gotten his money back, but he could not get the $ , of food and clothing back, for they are in the dam and ditch. the $ , he gets for his bonds, if he sold them for that price, is an entirely different $ , , as you must admit after a moment's thought. your friend had groceries and clothing which he could sell for $ , in money. now, suppose that you had had at the same time, $ , in your business. your $ , with the $ , your friend had put into the dam, when finished would amount to $ , . now, if he had come to you to dispose of his bonds, and you had thought well enough of them to sell out your business and buy them, your $ , bonds would represent the food and clothing in the dam and ditch, and are no longer cash capital any more than a farm is cash capital, and it might take you longer to sell your irrigation bonds than to sell a farm. you said it took the bank ten years to get rid of them. mr. merchant: oh, i see that now. we have simply converted $ , of cash capital into $ , of passive or fixed capital. before he built the ditch he had $ , and before i sold out my grocery business i had $ , , making $ , of cash capital. now he has $ , of cash capital and i have $ , of fixed capital, possibly an eternal investment in the bonds. that is what you would call a permanent investment, i suppose, for it might take me twenty years to demonstrate the value of the enterprise as it did the bankers. mr. banker: now, mr. merchant, i want you to mark and remember this; in fact, i want all of you gentlemen to set this down in your memories so that it can never be dislodged. these irrigation bonds would continue as passive or fixed capital until the earnings or sale of the property, covered by the ditch, should not only pay the interest upon them, but should pay off the principal as well, even if it took a thousand years to accomplish this result. mr. laboringman: that is nothing but a straight real estate loan as far as i can see, and not a very good one at that. mr. banker: that is just what it is, and for the very same reason a banker should no more buy such bonds or loan on such securities, his commercial deposits than he should loan money on real estate. the principle is the same. if we bankers loan on cotton, cattle, hogs, wheat, corn, or manufactured goods of any kind, we know there is a constant and ready market at some price for these things, for they are all in current demand at some price, somewhere, while a real estate loan, however good it may be, is not what we call a quick asset, or liquid asset; that is, something that you can turn into money at once. a commercial bank should never take a real estate loan, except as additional security for money advanced for some legitimate commercial purpose as distinguished from an investment. the commercial funds should be used for the production of crops, or goods of some kind, and if a real estate mortgage is taken in addition, it should be only within reasonable limits, for it is the easiest thing in the world to tie up all a bank's capital and deposits in real estate loans; that is, to turn the capital and deposits into passive or fixed capital, mortgages or real estate, which might be selling readily in boom times, but which are utterly unsalable when the break comes. mr. laboringman: what do you mean by tying up the capital and deposits of a bank in mortgages and real estate? mr. banker: i will explain that to you in such a way that i am sure you cannot fail to understand and appreciate it. suppose that i had $ , in cash in my bank to meet the demands of my depositors; but should give it to farmers in exchange for mortgages upon their farms. i could not pay my depositors the mortgages; they want money. i might not be able, and probably would not be able, to sell the mortgages in time to pay the depositors their money; and if money happened to be scarce, possibly not for a long time would i be able to pay them their money. i would have that $ , tied up in mortgages. this is granting credit on land. now, these mortgages will continue in existence until the farmers can make enough out of their crops to pay the interest upon them from year to year, and finally to pay them off; it may take ten or twenty years. if i had loaned $ , on cotton or cattle, the products of the farm, they could have been converted immediately into money at some price to meet the demands of my depositors. mr. laboringman: i see now that you bankers must keep the money you receive from us depositors, either in cash or in something you can instantly convert into money, and when you don't do that, you have tied it up, as you say; and if we happen to find it out we are apt to want our money; and if we all want it at the same time, you call it a run on your bank. now when you say a banker is ready for a run, you mean, as i now understand it, that he has all his deposits on hand in cash, or has all his deposits invested in something that he can turn into cash: good notes that have been taken in the course of business, that is, in the production and transportation of consumable commodities, the necessaries of life. of course, anybody must understand that if a bank bought a lot of farms or a lot of farm mortgages (and it might be worse off if it bought city mortgages with our deposits), he could not convert them or turn them into money on demand. i am on to this thing now; neither mortgages nor land can be considered what you described a minute ago as quick assets, or as liquid assets, because you cannot convert them into money practically on demand. mr. farmer: i grasp that idea now myself. do you know i have always thought, until within an hour, that we farmers ought to be able to get something to pay out in the shape of currency that represented our land, or in exchange for a mortgage, just because i knew a mortgage was good or worth its face; but i see now that a bank must not only have something that is good and worth its face, but it must be exchangeable for, and convertible into, real money or gold, at any time, or the bank must shut up. and you can't turn all our farms into some form of currency, and expect the banks to redeem it any more than you can sell a farm every hour. i have been trying to sell one farm for ten years. now i see that would not make very good currency. since i cannot sell it, the only way for me to convert that farm into cash capital is to take the net earnings, and lay them aside until they equal its value or what it cost me; that might not be within twenty years, as i might not be able to save for that purpose more than per cent or per cent a year which, at compound interest, would about make it. it is perfectly clear to me, now, that real estate is not a proper basis for a currency, which must be currently redeemed in gold. it cannot be done; that is a sure thing. mr. lawyer: mr. farmer, you have reasoned out for yourself a thing that has fooled many a man, and the world has had many bitter experiences trying to do the very thing you now so clearly see cannot be done; that is, make currency out of real estate, or, rather, as you would say, make money out of real estate, when, as we have already seen, gold is the only money we have or can have, so long as gold is our standard of value. jevons, a great english writer, has well said: "land is doubtless one of the best kind of security for the ultimate repayment of a debt; and it is therefore very suitable when money is lent for a long time. but representative bank notes purport to be equivalent to gold, payable on demand, and nothing is less readily convertible into gold in an emergency than land." mr. farmer: and we cannot have any more currency than we can redeem daily in gold. therefore we can't make currency out of all of our real estate, even our agricultural land, which is according to our last census worth sixteen billions or $ for every man, woman and child in the united states. the average value per acre is $ . . now, at first thought, anyone would say that it would be safe to issue money for this value, or sixteen billion dollars; but who would redeem it? that is the question. one hundred and sixty dollars for every man, woman and child. that would certainly be absurd; and yet i have always thought that we could do that very thing until tonight. i see how it is, currency must be currently redeemed in our standard of value, or it will become first worth less than cents on the dollar, and if the thing goes far enough, it would actually become practically worthless, although it might be based upon valuable real estate. how perfectly simple and plain this all is now. mr. lawyer: indeed, it is simple and plain, but do you know that that scheme of making currency or money out of real estate, or converting real estate into currency or money, was tried twice in france upon a most gigantic scale? first, john law, in , worked out a scheme whereby he tied the government of france to a land enterprise in the united states, the "mississippi scheme," covering a large french grant, and through his plan issued money, government money, that represented about one-quarter cash and the balance real estate. but everybody has heard of john law and the "mississippi bubble," so i won't say any more about that. nearly a century afterward the same scheme was tried again, and strange as it may seem, in france, too. from to , during the french revolution, the credit of the french government was added to vast real estate holdings, so that the security was doubled, such as it was. i have just looked this matter up with a good deal of care, and the best description i found was substantially as follows: assignats were a form of paper money issued in france from to . assignats were so termed because land was assigned to the holders of them. the financial strait of the french government in was extreme; coin was scarce, loans were not taken up, taxes had ceased to be paid, production and the country were threatened with bankruptcy. in this emergency assignats were issued to provide a substitute for metallic currency. these assignats were originally of the nature of mortgage bonds on the national lands. these lands consisted of the church property confiscated on the motion of mirabeau by the constitutional assembly on nov. , , and the crown lands which had been taken over by the nation on oct. th. subsequently the lands of the emigres, the princes and royal followers, , of the nobility who were exiled from the soil of france, were added to the list of lands against which the assignats were issued. these assignats were first to be paid to creditors of the state; with them the creditors could purchase national land, the assignats having for this purpose a preference over other forms of money. if the creditor did not care to purchase land, it was supposed that he could obtain the face value for them from those who desired land. those assignats which were returned to the state as purchase money were to be canceled, and the whole issue, it was argued, would consequently disappear, as the national lands were distributed. a first issue was , , francs or ($ , , ) worth of assignats, each note being francs or $ value and bearing interest daily, at per cent. they were to be redeemed by the product of the sales, and from certain other sources, at the rate of , , francs ($ , , ) in ; , , francs ($ , , ) in ; , , francs ($ , , ) in and , and the balance in . the success of this first issue was undoubted, as all such first issues are. mirabeau was a strenuous advocate of the assignats. "they represent," he said, "real property, the most secure of all possessions, the soil on which we tread. there cannot be a greater error than the fear so generally prevalent as to the overissue of assignats, reabsorbed progressively in the purchase of the national domain; this paper money can never become redundant." in the interest was reduced to per cent, and as the treasury had again become exhausted, a further issue was decided upon; it was also decreed that the assignats were to be accepted as legal tender, all public departments being instructed to receive them as the equivalent of metal money. the second issue amounted to , , francs ($ , , ) and carried no interest. it was solemnly declared in the decree authorizing the issue that the maximum issue was never to exceed one billion two hundred million francs ( , , , ) ($ , , ). this pledge, however, was soon broken, and further issues brought the total up to three billion seven hundred and fifty million francs ( , , , ) ($ , , ). the consequence of these further issues was instant depreciation, and the note of francs ($ ) sank to less than francs ($ ) in coin. recourse was then had to protective legislation. the first step was to decree the penalty of six years' imprisonment against any person who should sell specie for a more considerable quantity of assignats, or should stipulate a different price for commodities, according as payment was to be made in specie or assignats. for the second offense, the penalty was to be twenty years' imprisonment (august , ). for this the death penalty was ultimately substituted (may , ). this severe provision was, however, repealed after the fall of robespierre. notwithstanding these precautions, the value of the assignats still declined, till the proportion of specie had become that of sixty to one. then came the passing, by the convention, on may , , of the absurd maximum. the decree required all farmers and corn dealers to declare the quantity of corn in their possession and to sell it only in recognized markets. no person was to be allowed to lay in more than one month's supply, a maximum price was fixed above which no one was to buy or sell under severe penalties. these measures were soon stultified by further issues and by june, , the total number of issued assignats aggregated nearly eight billion francs ($ , , , ), of which only two billion four hundred and sixty-four million francs had returned to the treasury to be destroyed. the extension of the maximum price to all commodities only increased the confusion. trade was completely paralyzed and all manufacturing establishments were closed down. attempts by the convention (legislature) to increase the value of the assignats were of no avail. too many causes operated in favor of the depreciation; the enormous issue, the uncertainty as to their value, if the revolution should fail; the relation they bore both to specie and commodities which retained their value and refused to be exchanged for money of constantly diminishing power. even between the assignats themselves there were differences. the royal assignats themselves, which had been issued under louis xvi had depreciated less than the republican ones. they were worth from per cent to per cent more, a fact due to the hope that in case of a counter-revolution they would be less likely to be discredited. the directory was guilty of even greater abuses in dealing with the assignats. by the issue had reached the enormous figure of forty-five billion francs ($ , , , ), and even this gigantic total was swollen still more by the numerous counterfeits introduced into france by the neighboring countries. the assignats had now become totally valueless, the abolition of the maximum the previous year, , had produced no effect; and, though by various payments into the treasury, the total number had been reduced to about twenty-four billion francs ($ , , , ), their face value was about thirty to one of coin. at this value they were converted into eight hundred million francs ($ , , ) of land warrants or mandats territoriaux, which were to constitute a mortgage on all the lands of the republic. these mandats were no more successful than the assignats; and even on the very day of their issues were at a discount of per cent. they had an existence of six months, and were finally received back by the state at about the th part of their face value in coin. that is, the state gave one dollar in coin for seventy dollars in the paper. this experience of france has been the experience of practically the entire world, italy, russia, germany, great britain. the south american countries are now going through it. even the very best of them, brazil and argentina, although their notes are not backed up by the land as those of france were, have suffered the same consequences of their folly. they are the notes issued by the government against their own credit. they were issued as fiat money, but are gradually being retired just as the assignats were as depreciated currency. mr. banker: well, we haven't anything on the south american countries to speak of ourselves from colonial times down to the present day. uncle sam: now, mr. banker, just hold up; you can't get into that tale of woe tonight, for i always have a bad dream when i think of it; a veritable nightmare. we must quit for tonight. mr. farmer over there has gone to sleep on my hands already. mr. farmer: no, he hasn't; not on your life, and i hope it's a very long life, uncle sam. mr. laboringman: mr. farmer, you are the first man i ever saw who snores when he is awake. you snored loud enough to wake the dead. your snoring actually kept me from going to sleep. uncle sam: well, boys, let me see whether i can recollect just what points we have made tonight. _first_: there is credit, which is the result of confidence and trust. it is the right to demand payment. _second_: for every credit granted, a debt is created. _third_: if every debt is paid every credit will be canceled. _fourth_: credit is never excessive no matter what its absolute quantity is, so long as it always returns into itself; that is, cancels itself. _fifth_: credit from a commercial point of view, when granted to create consumable commodities, the necessaries of life, is filling its proper function. _sixth_: credit granted to facilitate the sale, transfer and distribution of consumable commodities, the necessaries of life, is filling its proper function from a commercial point of view. _seventh_: credit extended in the form of acceptances of checks, drafts or bills of exchange, growing out of the actual production and distribution of the necessaries of life, is filling its proper function from a commercial point of view. _eighth_: credit obtained through accommodation acceptances or indorsements is a bane to and peril of commerce, especially if such credit is used in real estate investments, and more particularly in speculation. _ninth_: credit granted upon real estate securities should depend entirely upon the investment fund of the country for its cancelation. so far as such credit is canceled by appropriating the commercial fund of the country, labor will be thrown out of employment, production and consumption will cease to a corresponding degree, and this will measure the amount of human suffering that is sure to follow. _tenth_: real estate is not a proper basis for currency, because it is not a consumable commodity with a ready market where it can be converted into gold and because the value of real estate from the standpoint of our currency needs is unlimited and therefore necessarily not convertible into gold coin which is always essential to a sound currency. the history of credit granted to our government or forced by our government from the people will furnish plenty of food for our appetites, humble our pride, and recall most sickening experiences one week from tonight. don't you think so, mr. banker? mr. banker: i certainly do. mr. lawyer: so do i. and even then we cannot do the subject half justice; but i suppose that we must get through some time. uncle sam: i see that mr. farmer is now wide awake, but that mr. laboringman over there is starting for the land of nod, because mr. farmer is not keeping him awake by his snoring, so i think i'd better say good night. eighth night colonial credit money uncle sam: when we parted last wednesday night, we all agreed to make our experiences in government issues of money the subject of inquiry tonight, and i presume you have all been spending your days and nights in studying american history, that is, in studying me. mr. merchant: i have put more work into the question of our government issues of money than into any subject in my life in the same length of time, principally because i knew mr. farmer used to be what we called a green-backer some years ago and i wanted to be ready if he happened to still entertain those ideas and was still subject to those fits of madness that came over him before he paid off the mortgage on his farm. but that's ancient history now, and he's holding the mortgage on the other fellow's farm. now, mr. farmer, don't get hot, for i don't mean any disrespect to you, but only to recall that craze for fiat money when you and i were much younger than we are now. then again, you seem to have had a real revelation during our last talk, and to have been converted to the principle that there could be too much paper money. mr. farmer: that's all right, mr. merchant, but i well remember that i was not alone when i used to advocate greenbacks without limit. mr. banker over there was in the same boat with me. mr. banker: right you are, mr. farmer, and there was not a man in this immediate neighborhood then except old judge jones who did not agree with us, but we've traveled some since then. mr. lawyer: well, gentlemen, i am a little surprised to find you all so completely convinced that government issues of money are to be condemned before a fair trial. i half imagine that mr. manufacturer over there will sympathize with me in my contention for the constitutional power, and the wisdom of issuing united states notes. mr. manufacturer: you are very sadly mistaken about me; i am ready to prove that you are mistaken, both as to the wisdom and constitutional right of the government to issue money even if you are a lawyer, and ought to know all about the constitution. i don't claim to know very much about the money question, generally speaking, but like mr. merchant i have made a special study of this particular feature of it. i am convinced there is only one side to this question, however many sides there may be to some other phases of it, and we do not have to leave the history of our own country for overwhelming proof of the folly of it. i for one do not believe that the government has any constitutional right to issue money. mr. lawyer: well, well! mr. merchant: we'll make you say "well, well" before we get through with you, if it takes till morning. mr. manufacturer: it won't take until morning and when we get through with him, he will be finished for fair, i think. mr. laboringman: we are evidently going to have some fun tonight. you seem to think that you have mr. lawyer in chancery. now, blaze away. i want you to nail mr. lawyer on the greenback question, if you can; for he has been getting the best of you on several occasions; personally, i hope i will never get any less of the greenbacks as they are good enough for me. mr. merchant: but they are not good enough for you, mr. laboringman, nor for anyone else, if they are not worth one hundred cents on the dollar; or if they are ever liable to be worth less than one hundred cents on the dollar; or if they are teaching an economic falsehood, so long as they remain in existence; or if they are positively doing the business interests of the country actual harm by excluding a corresponding amount of gold, and finally, if they have no legal right for existence today, even though one may admit for the sake of the argument that it was necessary to issue them to save the nation, an admission which i will not make. mr. manufacturer: good for you, mr. merchant, that statement has the right ring to it. the greenback is guilty of every one of the charges that you make from my point of view, and so it must always be with every government issue of money. you may go back to the very first government issue of paper money in this country, and follow the practice down to this very hour, and it has left a trail of dishonesty, disaster, ruin and misery unmatched by any other single cause. in my contention for this statement i am going to rely for my historical facts upon george bancroft, the greatest american historian of our earlier period. in the fall of , upon the return of an unsuccessful expedition which massachusetts had sent out to capture quebec, the general court, the then legislative power, ordered an issue of "£ , ($ , ) of printed bills of equal value with money." and the balance of the cost which was £ , or $ , was issued the following day. in july, , within nineteen months of the earliest emission, the first legislature under the new charter which transformed the self-governing colony of massachusetts bay into a direct dependency of great britain, made "all these bills of public credit current within this province in all payments equivalent to money, excepting specialties and contracts made before the publication" of this new law. their credit was supported by receiving them in all public payments at a premium of per cent. _immediately all the coins then in massachusetts were exported to england and the new stock followed as fast as it came in from abroad._ the vain sorrow of the province expressed itself in by the prohibition of "the export of coin, silver money or bullion." in june, a joint committee of the council and representatives, to be aided by the advice of merchants and others, was appointed to consider how to revive trade, and find out some suitable medium to supply the scarcity of "money"; and it is to be noted that the word "money" in all colonial legislation was used exclusively for gold and silver coin. the first issue of bills of credit of massachusetts, after it became a royal province, was in november, , for £ , in value "equal to money," but to be accepted in all public payments at the advance of per cent. the passion for borrowing spread like flame on the dry prairie. in november, , massachusetts ordered £ , to be let out by trustees to the inhabitants of the province for five years on real security, at per cent per annum, to be paid back in five annual installments. the act was a sacrifice of the public interests to borrowers, who were to return their loan only after a lapse of time, sufficient to insure the very great depreciation of the paper in which it was to be paid. moreover, the borrowers needed an enforcement by law of the circulation of the paper which they borrowed: swiftly, therefore, in december, , under a pretext "to prevent the oppression of debtors" a stringent statute made the bills legal tender for all debts that had been, or should be contracted, between the th of october, , and the th of october, . the loan of bills of credit by massachusetts in was managed at the seat of government. but why should boston be favored? "that the husbandry, fishery and other trades of the province might be encouraged and promoted," bills of credit on the province to the amount of £ , were in ordered to be distributed to a loan office in each county. but why should borrowers in the smaller townships be forced to travel to their shire towns? let a public money lender be near every man's door. by the statute of march, , £ , were distributed among borrowers in each of the several towns according to its proportion in the last province tax. again in , £ , in bills of credit were proportionately loaned among the several towns, even on personal security, at the rate of per cent for six years, after which repayment was to be made in five yearly installments. of course, "money" disappeared; not even a single penny was to be had; the small change became of paper. the next development of the colonial system of paper money was a partial repudiation, so far as massachusetts was concerned. in february, , less than forty-seven years after the first emission of bills of credit by massachusetts, that colony issued £ , of a new tenor of which one dollar was to be equal to three of the old, and which, after five years, was to be redeemed at par in silver and gold. when the time of redemption came around they were not paid off, but by a further repudiation four pounds for one was made the rate in exchanging the old tenor for the new. on the th of january, , the general court in massachusetts made this confession: "the emissions of great quantities of bills of public credit, without certain provision for their redemption by lawful money in convenient time, have already stripped us of all our money and brought them into contempt to the great scandal of the government; for the remedy thereof this province hath fixed the value of their bills in lawful money, and the time of their redemption in new style." but that year went by and relief had not been found. in , james allen, the preacher of the annual election sermon, from the pulpit, addressed the governor in this wise: "be the means of delivering us from the perplexing difficulties we are involved in by an unhappy medium, uncertain as the wind and fluctuating like the waves of the sea, through the unrighteousness thereof the land mourneth, and the cries of many are going up into the ears of the lord of sabaoth." in , people of massachusetts took the largest part in the brilliant enterprise which ended in the louisburg campaign, and were to receive from the british parliament some payment for their extraordinary expenses in the expedition. in february, , massachusetts, while awaiting its share of this remuneration, invited the governments of connecticut, new hampshire and rhode island to join in abolishing the use of bills of credit; but as no one of the three gave effectual heed to the summons, the people of massachusetts proceeded alone. it was estimated that about £ , , of their bills of credit would be outstanding in the year , that is, $ , , . in january of that year an act was passed redeeming the bills of the old issue or tenor at the rate of shillings, those of the new issue or tenor at the rate of s. and d. for one spanish dollar; a rate which somewhat exceeded their market value at the time. the bills of credit of new hampshire, rhode island and connecticut were excluded by most stringent laws, and massachusetts, with its quickened industry and established credit, "sat as a queen among the provinces." mr. merchant: mr. manufacturer, you must have gotten your information from the same source that i obtained mine; all that you've said sounds very much like george bancroft, whose history of this question i've just read. since my ancestors came from connecticut, i am going to tell her tale of woe. in june, , connecticut put forth £ , of bills, or $ , ; then soon followed that by £ , more, which were "to be in value equal to money, and to be accordingly accepted in all public payments." in october, , connecticut, to prevent oppression by the rigorous exaction of money, declared its bills of credit legal tender for debt contracted between the th day of july, , and the th day of july, . the time for the operation of the law was afterwards extended to . in the year connecticut loaned interest-bearing bills for nearly £ , . in may, , it issued £ , of a new issue of which £ , were to be loaned to freeholders of the colony on mortgage, or personal security, to be repaid one half in four years, the other half in eight years in current bills, or hemp, or duck, or canvas at their current market price. these bills were made legal tender in all payments. but this provision was censured by the lords of trade in england, and in the following november it was repealed. roger sherman, the greatest statesman of connecticut, gave his mind to the questions about money and mediums, commerce and exchanges, and having mastered them in , under the name of philoeuonomos, "the lover of just laws," he addressed to the men of connecticut "a caveat" against injustice or an inquiry into the evil consequences of a fluctuating medium of exchange. these are some of his words: "the legislature of connecticut have at length taken effectual care to prevent a further depreciation of the bills of this colony; the other governments (meaning new hampshire and rhode island) not having taken the like prudent care, their bills of credit are still sinking in their value...." "_money ought to be something of certain value it being that whereby other things are to be valued_ ..." and this i would lay down as a principle that can't be denied that a debtor ought not to pay any debts with less value that what was contracted for, without the consent of, or against the will of the creditor.... "if what is used as a medium of exchange is fluctuating in its value, it is no better than unjust weights and measures, both of which are condemned by the law of god and man; and, therefore, the longest and most universal custom could never make the use of such a medium either lawful or reasonable. "we in this colony are seated on a very fruitful soil, the product whereof with our labor and industry and the divine blessing thereon, would sufficiently furnish us with and procure us all the necessaries of life and as good a medium of exchange as any people in the world have or can desire. but so long as we part with our most valuable commodities for such bills of credit, as are no profit, we shall spend a great part of our labor and substance for that which will not profit us; whereas, if these things were reformed we might be as independent, flourishing and happy a colony as any in the british dominion." in may of the same year, the famous traveler, john ledyard, and twenty-five other merchants of connecticut caught up the theme, and in a petition to their legislature said: "the medium of trade whereby our dealings are valued and weighed, ought to be esteemed as sacred as any weights and measures whatever, and, to maintain justice, must be kept as stable, for as a false weight and a false dollar is an abomination to the lord, a false and unstable medium is equally so, as it occasions as much iniquity, and is at least as injurious." the connecticut assembly supported these memorialists, excluded the bills of paper money of rhode island, and overcoming every embarrassment, at last, like massachusetts, redeemed every nine shillings of its paper money with one shilling in specie. after the first day of november, , all accounts in connecticut were kept in lawful money. mr. manufacturer: the experience of the other new england states is practically the same as that you have just recited in connecticut. in the council of new hampshire was zealous to follow the fashion of issuing paper money by loan and issued £ , . rhode island, also, in july, , on its first emission of bills of credit, declared them equal in value to "money," and made them receivable in all public payments. in november, , rhode island discharged a claim by a loan of its bills of credit to the amount of £ for four years free of interest. new jersey, too, tried its hand at the same scheme, following the lead of pennsylvania. in december, , it issued £ , , and in , it struggled hard to issue a larger amount, but william patterson, who was afterwards a member of the supreme court, resisted the proposal with inflexible courage, and here are some of the words which he employed: "an increase of paper money, especially if it be a tender, will destroy what little credit is left, will bewilder conscience in the mazes of dishonest speculations, will allure some and constrain others into the perpetration of knavish acts, will turn vice into a legal virtue, and sanctify iniquity by law. men have, in the ordinary transactions of life, temptations enough to lead them from the path of rectitude; why then pass laws for the purpose, or give legislative sanction to positive acts of iniquity? lead us not into temptation is a part of our lord's prayer worthy of attention at all times, and especially at the present." in march, , when there was universal peace, borrowers undermined the scruples of pennsylvania, and that colony issued bills of credit for loans to individuals, and not only compelled creditors to receive the bills at par, or "lose their debts," but ordered sellers to receive them at their nominal value in the sale of goods, or lands, or tenements or "forfeit a sum from shillings to £ ." again, on march , , pennsylvania, which hardly knew what it was doing and had not yet gathered up the strength of its will, was the first to renew in peace the evil usage of the times of war, and issued $ , in what was called treasury notes, the lowest of one-quarter of a dollar, the highest at twenty dollars. two years later, but after great resistance, its legislature issued £ , , the lowest note of pence. but in the decisive hour pennsylvania, too, proved the implacable foe of paper money. in , £ , in its bills of credit were brought into circulation by loans of per cent by the legislature of maryland. virginia was involved from may, , in measures of war, and immediate and increasing issues of paper bills were made which from the beginning were a lawful tender for private debts. for the new "notes" of april, , it was further ordered that any seller who should demand more for his goods in notes than in gold or silver coin, should "forfeit per cent of their value." ... in , in the month of march, virginia directed the emission of £ , , and authorized £ , , more; and the continental paper currency and its own were made a legal tender in discharge of all debts and contracts, except contracts which expressly promised the contrary. in north carolina directed the emission of more than £ , , , and such further sums as the exigencies of the state might require; in the next year gave authority at one dash to issue $ , , of paper dollars bearing per cent interest. again in , north carolina emitted £ , , declaring each pound of the emission equal to two and one-half spanish milled dollars, and a tender in all payments whatever. in , the state emitted £ , more. south carolina, too, as late as , permitted itself to be persuaded to lend among the constituents of its legislature £ , in paper bills of the state, which were to pass in payments to the treasury of the state but were not otherwise made legal tender. the state soon perceived that the paper banished more gold and silver than the amount of the bills which were to take their place.... this was done, although its legislature on the pretext of creating a fund to sink former bills of credit, and to encourage trade and commerce in july, , had ordered £ , in new bills of credit to be stamped and put out at interest in loans. in december, , they passed this statute: "it is found by experience that the multiplicity of the bills of credit hath been the cause of the ruin of our trade and commerce, and hath been the great evil of this province, and that it ought with all expedition to be remedied." finally, the great empire state, with all the rest, entered eagerly into the defense of its northern frontier, and in november, , for the first time involved itself in the use of bills of credit. in , the legislature of new york passed an act for emitting £ , in bills of credit to be put out on loan. again in april, , the opening year of the final great movement for a closer union of the state, it placed an emission of £ , in bills of credit with loan officers, to be loaned on mortgage security; and they were made a legal tender in any suit for debt or damages, and the costs of suit. the bills were further to be received for duties to be collected at the port of new york by the state. gen. macdougal, the brave soldier and patriot, though sick unto death, insisted upon being carried to the senate, that, as the last act of his public life, he might give his voice against the proposal to emit paper money. in , the united states began repudiation by issuing a new paper dollar equal to forty of their previous issues. after their new constitution was established, all that remained of the bills of the continental congress were called in at the rate of one dollar in silver for one hundred dollars impressed on paper. mr. farmer: while you gentlemen were studying bancroft, i have been reading horace white upon this question of government issues of money, and thought i would not give myself away until after you exposed your hands. you've piled up facts, but you've given us a very slight impression of the effect that these money issues had, and therefore i am going to give you the benefit of my explanation which i think throws another and very important light upon the subject. mr. white refers to a pamphlet circulated in , which speaks of the bills of credit in new england issued on loan "to themselves, members of the legislature and to other borrowers, their friends, at easy and fallaceous lays, to be repaid at very long periods; and by their provincial laws made a tender in all contracts, trade and business, whereby currencies, various and illegal, have been introduced which from their continued and depreciated nature in the course of many years, have much oppressed widows and orphans and all other creditors." the same writer gives special attention to the colony of rhode island, which had "defrauded more in a few years than any of the most wicked administrations in the several nations of europe have done in several centuries. a contract made thirty years ago for £ , sterling in value is at present reduced to a nominal shillings." white says that in addition to legal tender acts there was a great variety of laws to compel people to sell their property at the same price for bills of credit as for silver. the debtor class was not satisfied with forcing depreciated paper upon creditors for past obligations, but insisted that they ought to be able to buy as much property with the paper as with specie. those who had been forced to take the paper for past debts naturally joined in this demand, and the legislatures agreed with them. hence we find in nearly all the colonies severe penalties on those who charged more for their goods, lands or services in bills of credit than in money. in some cases the penalty was a fine, in others imprisonment, in others confiscation of property offered. the usual course of events where bills of credit were issued was as follows: ( ) emission; ( ) disappearance of specie; ( ) counterfeiting; ( ) wearing out of bills; ( ) calling in and replacing worn and counterfeited issues with new ones; ( ) extending the time for old ones to run, especially those which had been placed on loan; ( ) depreciation; ( ) repudiation of early issues in part and the emissions of others called "new tenor." dr. douglas says that massachusetts had at one time "old tenor, middle tenor, new tenor first, new tenor second." rhode island had an indefinite number of tenors. all sorts of opprobrious epithets were heaped upon them. they were called invidious statutes, old, worn, torn, tattered, shattered, ragged, mutilated, defaced, obliterated, illegible and "unfit to pass." the depreciation of the colonial bills varied in the different colonies. in massachusetts the maximum depreciation was for (the standard being "proclamation money"). in connecticut it was for . in , the value of the new hampshire shilling was a little less than a half penny; in , it vanished altogether. rhode island owed tenor bills in that were worth to . those of north carolina were for ; of south carolina for . here is mr. white's graphic description of the times: "the pamphlets and records of the colonial period are filled with accounts of the distress and demoralization caused by depreciated paper made legal tender. as all loans were so payable, the accumulations of age, and the inheritance of orphans dwindled. so, too, did the earnings of the wageworker. in order to avoid the losses from a depreciating standard of value, resort was had by working men to 'store pay,' and here they were generally cheated. trustees and executors, who had money in their hands which belonged to other people, and who saw how things were going, often postponed the payment on frivolous pretext, since each delay enabled them to settle their accounts with less value, thus devouring widows' houses. not only was bad blood stirred up by the resistance of the royal governors, but a spirit of lawlessness was engendered against the local assemblies, if they showed a disposition to resist the demands of the _green-backers_ of that day. even after the revolution the legislature of new hampshire was mobbed because it refused to legal tender bills. one of the demands of shays' rebellion in massachusetts was for more paper money. in rhode island, after the revolution, a general system of repudiation of debts, public and private, was undertaken, and carried through by means of legal tender paper in spite of the decisions of her courts." however bad these colonial bills of credit proved to be, if it were possible those of the revolutionary period were still worse. even before the continental congress assembled the separate colonies began to issue bills of credit. when the continental congress met in june, , franklin urged that the bills should bear interest, in order to prevent depreciation. he even urged that the interests should be payable in "hard dollars," but this was voted impracticable. all seemed to be in confusion, and in this unsettled state it was voted in july, , to issue due bills for , , spanish milled dollars, to be sunk by taxes in four successive years, beginning november , , the taxes to be levied and collected by the states in proportion to their population. these bills were not legal tender at the time of their issue. the congress had no power to make them so, but in january, , it was recommended that the states should do so, and this they did, one after another, in one way or another. before the two millions were issued, another million was wanted, and was authorized with three million more, before the end of the year; and still they came nine millions more, or until fifteen in all were out, before independence was declared. this was called continental currency to distinguish it from the issues of the separate states. mr. white says from this time the demon of "fiat money" had possession of the country, and worked its will on the inhabitants. the issues ran on in an increasing volume till they amounted to $ , , in the year . in the whole mass became worthless. on this subject the essays of pelatiah webster have become classic. mr. webster, it is thought by some, was the author of the constitution. he was a merchant of philadelphia and an ardent patriot. he wrote "we have suffered more from this than from every cause of calamity; it has killed more men, pervaded and corrupted the choicest interests of our country more and done more injustice than even the arms and artifices of our enemies." professor sumner says that when the depreciation was going on rapidly a man might lose his whole wages while earning them. naturally, the next thing in order was the establishment of prices, for which purpose conventions were called. the first one held at providence was composed of delegates from the four new england states. it fixed the prices at which imported goods might be sold, but an exception was made of arms and ammunition in order to encourage their importation. of course the proceedings in connecticut were substantially the same. this state, however, had a law to prohibit persons from buying any more goods than the select men, or county commissioners, should judge to be necessary for the use of their respective families. anything like prudence in laying in supplies was thus forbidden. a price convention of the six middle states was held at york, pa., in march, , but was unable to agree upon a single point. when the price conventions failed of their object, new ones were held fixing new limits, for example fourfold the prices of , then eightfold, then tenfold, then twentyfold--terrorism being applied in each case to enforce the decrees. country folks accused town folks of extortion, and threatened to come in and take what they wanted by force. town folks accused country folks of withholding their produce, and so laws were enacted against withholders. anonymous hand bills and broad-sides were circulated threatening vengeance on merchants. as a result of such irrational business disturbances, boston was, in october, , on the verge of starvation; money transactions had nearly ceased and business was done by barter. a soldier's pay had dropped by depreciation from $ . per month to cents, although it had been twice raised by congress. washington could not move his soldiers to yorktown till robert morris had borrowed hard money from rochambeau for their back pay. in march, , congress tried the colonial experiment of "new tenor" in a very awkward and roundabout way, and declared that "old tenor" to be worth to ; the actual depreciation being for . as it was supposed that $ , , of continental money was out, this was a repudiation of all but $ , , of it. the depreciation then went on more rapidly than before. the "new tenor" bills started at a depreciation of for , which became for , even before they reached the army, and dropped to to in a few months. old tenor went at a galloping pace at for in philadelphia, when it ceased to circulate. in the remoter districts of the south, it continued in circulation nearly a year longer, and until the depreciation had reached , to . the southern people, when they learned that they had been using the stuff long after it had become worthless in the north, thought that they had been cheated by the yankees, thus intensifying the sectional distrust which was already so dangerous. continental money was now an object of execration and afterwards of derision. "not worth a continental" became a synonym for absolute worthlessness, and remains an axiom to this day. in the act of congress approved august , , authority was granted for funding the bills in per cent bonds "at the rate of $ in the said bill for $ . in specie." only $ , , turned up to take advantage of this provision. mr. banker: i want to be perfectly frank with the rest of you men. last thursday i was over at mr. lawyer's office and we got into a discussion about this matter. i was literally astounded to find him in favor of government issues of money, and that he actually thought such issues were constitutional. i knew how mr. merchant and mr. manufacturer stood, for we had talked the matter over some time ago. so we got together and divided up the work we should each of us do in order to convince mr. lawyer that he was wrong on both points. from what has been shown with respect to the facts i am sure that mr. lawyer must be convinced that the principle at least of government issues of legal tender paper money is unsound; for all the evidence, as we have seen for years, from to , is all on one side. indeed not a single exception can be found anywhere. you will remember that everyone of the thirteen original states tried fiat legal tender paper money, and then when they all united under the continental congress, they tried it altogether; but the result was precisely the same. _first_: you will remember, came the issuance of the bills of credit, as they called them, or greenbacks, as we call them, paper money. _second_: and immediately all the gold and silver disappeared because driven from the channels of trade, with something cheaper with which the debtor could cancel his obligations. _third_: dishonesty, dishonor, fraud, disaster, ruin and repudiation followed each other in quick succession. _fourth_: then came the return to sound conditions when paper issues were discarded and the effort to make something out of nothing was abandoned. mr. lawyer, i want to ask you now whether you do not think we have made a case against you so far as the unwisdom and utter folly of government issues of paper money is concerned. mr. lawyer: i must admit that the facts are overwhelming. i had never taken the time nor trouble to investigate the subject, but had assumed that one of the functions of our government was the issuance of money, even paper money, if you like. it seems from what has been shown here and last wednesday night as well that this scheme of issuing paper money has been tried, not only by everyone of our thirteen colonies and the continental congress, but by practically every country of the world at some time or other. it was tried in austria, england, france, germany, italy, russia and is now going on in nearly every one of the south american countries with the same experience, i am informed, that other countries have suffered. now, so far as the facts have been disclosed, there is not a single instance in which the scheme has been tried that has not resulted in precisely the same way--complete failure and ultimate dishonor and repudiation if persisted in as a principle. under the circumstances i must say, as every fair-minded man must, that the practice has been an absolute failure, and therefore it must be admitted that the principle must be unsound, for it seems to have worked nowhere, although tried under every conceivable condition. of course i am compelled to give in on the unsoundness of the scheme. now, you understand, that my admission as to the unsoundness and unwisdom of the practice does not carry with it my admission that the united states government has no constitutional right or authority to issue paper money if it chooses to do so. mr. banker: i understand perfectly well that your admission of the one point has nothing whatever to do with the constitutional question, but i wanted to know your conclusion after a consideration of the facts as presented first. i think everyone here will agree that the disastrous experiences of the colonies and of the continental congress in issuing paper money must have forced this question upon the minds of the framers of the constitution, as one of the very greatest importance to be settled by them. certainly what they thought about it would indicate what they intended to do. i will first show this by what they said, and then i will demonstrate what they intended to do by what they actually did do in the constitutional convention. alexander hamilton, in june, , set forth explicitly in a resolution for a new constitution of the united states of america his deliberate opinion in these words: "to emit an unfunded paper as the sign of value ought not to continue a formal part in the constitution, nor ever hereafter to be employed; being in its nature pregnant with abuses and liable to be made the engine of imposition and fraud; holding out temptations equally pernicious to the integrity of government and to the morals of the people." in , thomas paine, the author of "common sense," in an opinion on paper money used this language: "the laws of the country ought to be the standard of equity and calculated to impress on the minds of the people the moral as well as the legal obligation of political justice. but tender laws of any kind operate to destroy morality and to dissolve by the pretence of law what ought to be the principle of _law_ to _support_, reciprocal justice between man and man; and the punishment of a member who should move for such a law ought to be _death_." in the summer of richard henry lee, then president of congress, warned washington of a plan formed for issuing a large sum of paper money in the next assembly of their state, adding as his opinion: "the greatest foes in the world could not devise a more effectual plan for ruining virginia. i should suppose every friend to his country, every honest and sober man, would join heartily to reprobate so nefarious a plan of speculation." washington replied to lee in these words: "i never have heard, and i hope i never shall hear, any serious mention of a paper emission in this state. yet ignorance is the tool of design and is often set to work suddenly and unexpectedly." in , on the th day of january, washington wrote to jabes bowen as follows: "paper money has had the effect in your state that it will ever have, to ruin commerce, oppress the honest, and open the door to every species of fraud and injustice." to mr. stone, a member of the senate of maryland, who appealed to washington to allow his opinion on this subject to be made publicly known, washington wrote just three months before the opening of the constitutional convention, as follows: "as my sentiments thereon have been fully and decidedly expressed long before the assembly either of maryland or of this state was convened, i do not scruple to declare, that if i had had a voice in your legislature, it would have been given decidedly against a paper emission upon the general principles of its utility, as a representative and the necessity of it as a medium. "to assign reasons for this opinion would be as unnecessary as tedious. the ground has been so often trod that a place hardly remains untouched. in a word the necessity arising from the want of specie is represented as greater than it really is. i contend that it is by the substance, not with the shadow of a thing, we are to be benefited. the wisdom of man, in my humble opinion, cannot at this time devise a plan, by which the credit of paper money would be long supported; consequently, depreciation keeps pace with the quantity of the emission, and articles for which it is exchanged rise in a greater ratio than the sinking value of the money. wherein then is the farmer, the planter, the artisan benefited? an evil equally great is the door it immediately opens for speculation, by which the least designing, and perhaps most valuable part of the community are preyed upon by the more knowing and crafty speculators." in , george mason wrote "they may pass a law to issue paper money, but twenty laws will not make the people receive it. paper money is founded upon fraud and knavery." on the first day of august, , washington wrote to jefferson: "other states are falling into the very foolish and wicked plans of emitting paper money." in may, , charles pinckney, in a speech in the convention of south carolina, said: "i apprehend these general reasons will be found true with respect to paper money; that experience has shown that in every state where it has been practiced since the revolution, it always carries the gold and silver out of the country, and impoverishes it." john marshall, the greatest of all our chief justices, the man who breathed into the dry bones of a constitutional contract, the soul of nationality, expressed himself at various times in these words: "he had 'an unabated zeal for the exact observance of public and private engagements.' he rightly insisted that the only ways of relief for pecuniary 'distresses' were 'industry and frugality'; he condemned 'all the wild projects of the moment; he rejected as a delusion every attempt at relief from pecuniary distresses' by the emission of 'paper money' or by 'a depreciated medium of commerce.'" george bancroft said: "these were his opinions through life. he gave them to the public in , and twenty-four years later in a revised edition of his 'life of washington,' he confirmed his early convictions by the authority of his maturest life." james madison, who was probably more responsible for the constitution than any other single individual, used these words in addressing the delegates of virginia in the year : "paper money is unjust; to creditors, if a legal tender; to debtors, if not legal tender, by increasing the difficulty of getting specie. it is unconstitutional, for it affects the rights of property, as much as taking away equal value in land. it is pernicious, destroying confidence between individuals; discouraging commerce; enriching sharpers; vitiating morals; reversing the end of government, and conspiring with the examples of other states to disgrace republican government in the eyes of mankind." as the result of his words and the well-known opinions of washington, lee and mason, the house of delegates of virginia on the first day of november resolved by a vote of against that an emission of paper money would be "unjust, impolitic and destructive of public and private confidence, and of that virtue which is the basis of republican government." disquieting symptoms having appeared in virginia, madison, in april, enjoined monroe, a member of its assembly, to battle paper money. madison enumerated among the evils for which the new constitution should provide a remedy, the "familiar violation of contracts in the form of depreciated paper, made a legal tender." in his notes for his own guidance in the federal convention, he laid down the principle that "paper money may be deemed an aggression on the rights of other states," and just five weeks before the time for the meeting of the convention, he wrote from congress, then sitting in new york, to edmund randolph, as follows: "there has never been a moment since the peace, at which the federal assent would have been given to paper money." in conclusion, mr. lawyer, i want you, because you are a particularly good reader, and ought to be more interested in this subject than anybody else, if you are wrong, to read the story of the constitutional convention as related by george bancroft. mr. lawyer: i will very gladly do so. "the convention of the states for the reform of the confederacy organized itself by electing as its president george washington, who of all the public men in his day was the most decided in his convictions and the most outspoken in his words on the inherent dishonesty of irredeemable paper bills. "virginia took the lead, and randolph, its governor, in his opening speech drew attention to paper money by reminding its hearers that the patriotic authors of the confederation did their work 'in the infancy of the science of constitutions and of confederacies, when the havoc of paper money had not been foreseen.' "among the delegates from connecticut were oliver ellsworth, who in the federal congress had repeatedly served on committees for the reform of the federal constitution, and roger sherman, who, in , had published his conviction that good laws and poor money are irreconcilable. they agreed to insist in the convention 'that the legislatures of the individual states ought not to possess a right to emit bills of credit for a currency, or in any manner to obstruct the recovery of debts, whereby the interests of foreigners or the citizens of any other state may be affected.' "the refusal of the convention to confer on the legislature of the united states the power to emit bills of credit or irredeemable paper money in any form is so complete that, according to all rules by which public documents are interpreted, it should not be treated as questionable; but as the truth in this case is of infinite importance, and has been questioned by those in authority, the wrong done to the constitution may justify a simple narrative of the facts, which ample and indisputable records establish, and which no power can alter. "the journal of the convention for framing the constitution was kept under the supervision of its members, and its authority is vouched for by washington, not only as the presiding officer of the convention, but as president of the united states in a special message to congress. "by a clause in the ninth article of confederation of the united states of america, and only by that clause, the confederated states had authority 'to emit bills on the credit of the united states.' "of the legislature of the united states, under our present constitution, the court insists that 'congress is clearly authorized to emit bills of credit.' but is it so? "the eighth clause of the seventh article, in the first draft of the constitution, was as follows: 'the legislature of the united states shall have the power to borrow money and emit bills on the credit of the united states.' the journal of the convention for august th makes this record: 'it was moved and seconded to strike out the words "and emit bills," and the motion to strike out these words "passed in the affirmative. yeas: new hampshire, massachusetts, connecticut, pennsylvania, delaware, virginia, north carolina, south carolina, georgia-- . nays: new jersey, maryland-- ." so the convention by a vote of more than four to one, refused to grant to the legislature of the united states the power "to emit bills on the credit of the united states."' "for the interpretation of this record, madison, the best possible witness, has left this note: 'striking out the words cut off the pretext for a paper currency, and particularly for making the bills a tender either for public or private debts.' "madison was the chief author of the new constitution. its opponent, luther martin, the attorney-general of maryland, a delegate to the federal convention and present at the debate, read to the maryland house of delegates a paper, in which he gave his account of the purpose of the convention; his evidence agrees exactly with that of madison, and for nearly a hundred years his fidelity as a witness was as little questioned as that of madison. here are two witnesses: madison, who approved the prohibition, and martin, who condemned it; the court pushes the testimony of madison aside as if he had 'not explained himself,' though on the point in question his words are as clear as sunlight. the address of martin the court rejects as a 'philippic,' though it contains not a word of invective against any individual, and does contain the clearly expressed wish of its author 'not to wound the feelings of any person.' "we have a record of what was spoken and of what was done in the federal convention kept by madison, who took upon himself the most solemn engagement to preserve the truth for the instruction of coming generations, and whose opportunity, capacity, and integrity no one questions. his report of what was said and done on the th of august in the federal convention preserves the testimony of many witnesses, taken down as it were by the most capable notary. "the question before the convention was: shall power be granted to the legislature of the united states 'to emit bills of credit'? the first witness is gouverneur morris, a man free from illusions; a delegate from the state which contained philadelphia, then the most opulent city in the thirteen states; and as by its interests he was nearly connected with the city and state of new york, he thoroughly represented the interests of commerce. he moved to strike out the grant of power to 'emit bills on the credit of the united states,' saying: 'if the united states have credit, such bills will be unnecessary; if they have not, will be unjust and useless.' the seconder of gouverneur morris was pierce butler, a delegate from south carolina, then the richest commercial state in the south. he remarked in the course of debate that 'paper is a legal tender in no country in europe,' and he was urgent to withhold from the government of the united states the power to make it so. "madison interposed: 'will it not be sufficient to prohibit the making' the bills 'a tender'? gorham, in reply to madison, held that no accompanying prohibition was sufficient to make it safe to grant to the legislature of the united states the power to emit bills of credit. he spoke absolutely 'for striking the words out,' saying: 'if the words stand, they may suggest and lead to the measure.' "the words of oliver ellsworth, our third chief justice, were: 'this is a favorable moment to shut and bar the door against paper money. the mischiefs of the various experiments which have been made are now fresh in the public mind, and have excited the disgust of all the respectable part of america.' "randolph expresses 'his antipathy to paper money'; but, 'could not agree to strike out the words, as he could not foresee all the occasions that might arise.' "james wilson, in concurrence with ellsworth, said: 'it will have a most salutary influence on the credit of the united states to remove the possibility of paper money. this expedition can never succeed whilst its mischiefs are remembered; and, as long as it can be resorted to, it will be a bar to other resources.' "george reed spoke for delaware: 'the words, if not struck out, would be as alarming as the mark of the beast in revelation.' "john langdon, of new hampshire, conforming to the wise instructions of the towns of his state, said: 'i had rather reject the whole plan than retain the three words "and emit bills."' "madison, agreeing with the journal of the convention, records that the grant of power to emit bills of credit was refused by a majority of more than four to one. eleven men took part in the discussion; and every one of the eleven whether he spoke for or against the grant of the power, gouverneur morris, pierce butler, james madison, nathaniel gorham, george mason, john f. mercer, oliver ellsworth, edmund randolph, james wilson, george reed and john langdon, each and all, understood the vote to be a denial to the legislature of the united states of the power to emit paper money. take the men, one by one, and see how weighty is the witness of each individual; take them together and add the consideration that they, every one of them, unanimously support each other and are contradicted by no one, and who shall dare question their testimony? the evidence is perfect; no power to emit paper money was granted to the legislature of the united states. "by refusing to the united states the power of issuing bills of credit, the victory over paper money was but half complete. the same james wilson, who twelve days before, with oliver ellsworth, had taken a chief part in refusing to the united states the power to emit paper money, and the same roger sherman, who in had put forth all his energy to break up paper money in connecticut, jointly took the lead. the first draft of the constitution had forbidden the states to emit bills of credit without the consent of the legislature of the united states; on the th of august they jointly offered this motion: 'no state shall coin money, nor emit bills of credit, nor make anything but gold and silver coin a tender in payment of debts,' making the prohibition absolute. roger sherman, animated by zeal for the welfare of the coming republic of countless millions, exclaims in the debate: 'this is the favorable crisis for crushing paper money.' his word was the will of the convention, and the states, by a majority of eight and a half against one and a half--that is, by more than five to one--forbade the states, under any circumstances, to emit bills of credit. this is the way in which our constitution 'shut and barred the door against paper money' and 'crushed' it. "nothing is wanted to the perfect strength of the truth, that the constitution put an end to paper money in all the united states and in all the several states.... 'no suggestion of the existence of a power to make paper a legal tender can be found in the legislative history of the country. had such a power lurked in the constitution, as constructed by those who ordained and administered it, we should find it so recorded. the occasion for referring to it has repeatedly arisen; and had such a power existed, it would have been recognized and acted on. it is hardly too much to say, therefore, that the uniform and universal judgment of statesmen, jurists, and lawyers has denied the constitutional right of congress to make paper a legal tender for debts to any extent whatever.'" thomas jefferson's opinion: "the federal government--i deny their power to make paper a legal tender." mr. banker: now, mr. lawyer, you undoubtedly with all your profession will recognize daniel webster as the greatest expounder of the constitution. i want you to read what he says and then my case will be closed on the constitutional right and authority of the government to issue paper money. mr. lawyer: i will gladly do so. "most unquestionably there is no legal tender, and there can be no legal tender, in this country, under the authority of this government or any other, but gold and silver, either the coinage of our own mints, or foreign coins, at rates regulated by congress. this is a constitutional principle, perfectly plain, and of the very highest importance. the states are expressly prohibited from making anything but gold and silver a tender in payment of debts; and although no such express prohibition is applied to congress, yet as congress has no power granted to it, in this respect, but to coin money and to regulate the value of foreign coins, it clearly has no power to substitute paper, or anything else, for coin, as a tender in payment of debts and in discharge of contracts. congress has exercised this power, fully, in both its branches. it has coined money, and still coins it; it has regulated the value of foreign coins, and still regulates their value. the legal tender, therefore, the constitutional standard of value is established and cannot be overthrown. to overthrow it would shake the whole system. the constitutional tender is the thing to be preserved, and it ought to be preserved sacredly, under all circumstances." mr. merchant: well, mr. lawyer, what do you really think about the constitutional question now? mr. lawyer: in the light of the facts preceding the constitutional convention, the personal opinions of those who framed it, and what they actually did in the convention, i will admit i have not a leg to stand on. the story of our experience so well told by you gentlemen demonstrating the utter unwisdom of government issues of money, and the overwhelming evidence on the constitutional question has completely converted me to your contention. but i was relying in a sort of a blind way upon the fact that our supreme court has held that the united states notes were lawfully issued. how about that? have you investigated it? mr. banker: i have, but the story of the greenback will take the best part of another night. therefore, i move we adjourn. it is enough glory for one night to have a layman knock out a lawyer upon a constitutional question. mr. lawyer: there is no humiliation in being shown that you are wrong upon so great a question; i regard it as a piece of disgraceful cowardice for a man to persist in holding to a position when he is clearly wrong. uncle sam: that is the way i like to hear my boys talk. this is really the longest siege we have had, and you all look as though you had been undermined, and so we had better say good night. ninth night united states notes uncle sam: here we are again and all present. not a single man has been sick or even reported as indisposed or indifferent since we began these discussions. you must all be thinking that we are engaged in a religious duty, a patriotic service, or you are mightily interested in the subject. before we begin, let me recall what was so fully presented last wednesday night so that we can keep the mile posts constantly before us. we then learned that during a hundred years, from to , every one of the thirteen colonies experimented with "bills of credit," "legal tender" "paper money," or "greenbacks," as we call them, and that they issued fiat or "legal tender money" in almost every conceivable shape, form and way. they issued money against their own credit; they issued it against real estate mortgages, that is, in the form of loans secured by mortgages; they issued it against the personal credit of men in the form of ordinary loans; they issued it under the authority of the continental congress when the colonies were all united. but in no case did any one of them, or all of them combined, escape the certain and universal fate of all such efforts. the order of events was always the same: ( ) emission of paper money; ( ) depreciation of the issue; ( ) disappearance of coin; ( ) emission of more paper money to make up for the depreciation of that already issued; ( ) defrauding of creditors; ( ) repudiation; ( ) cancelation; ( ) reappearance of gold and silver; ( ) resumption of species or coin payment; ( ) a return of that degree of prosperity that the times and the conditions of the country justified. then came that review of the opinions of the framers of the constitution and the vote in the constitutional convention to strike out the power to issue "bills of credit" by the general government by the decisive vote of to , backed up subsequently by the opinions of thomas jefferson and daniel webster. as a result of the night's discussion, mr. lawyer was forced to admit the unwisdom of any such issue of legal tender money, and that in the light of the evidence, such an issue was without authority of law and unconstitutional. mr. banker: uncle sam, i think it should be stated right here that every president of the united states and every successive congress of the united states down to recognized the fact that it was the intention of the members of the constitutional convention "to shut and bar the door against any such issue." here is what horace white says: "during the war of , the government of the united states issued treasury notes to the amount of $ , , . all except $ , , were payable to order and payable at a definite time and bore interest at the rate of five and two-fifths per cent. about two-thirds of them were of denominations of $ or more. they did not become a part of the circulating medium and were not intended to. they were paid to such creditors of the government as were willing to receive them, and they were generally at par until specie payments were suspended in september, . on november , , mr. hall, a member of congress from georgia, introduced a bill into the house for an issue of treasury notes to be legal tender. the house, by vote of to , and without debate, refused to consider this bill. no other attempt was made to pass a legal tender bill until . "in the panic and crisis of - , during a portion of which time specie payments were suspended, the government issued treasury notes to the amount of $ , , to meet deficiencies of revenue. all of these notes bore interest, and were payable at a fixed time. they did not become a part of the circulating medium. a few were issued by the secretary of the treasury in , bearing only a nominal rate of interest (one mill per $ per annum). such notes had not been contemplated by congress. the committee of ways and means of the house, to whom the subject was referred, reported that the secretary had exceeded his authority, but congress took no action on the report. it was the opinion of the committee that these notes were 'bills of credit' within the meaning of the constitution, and that congress had no power to issue 'bills of credit.' in , during the war with mexico, treasury notes to the amount of $ , , were issued. they bore interest at the rate of five and two-fifths and six per cent. they did not enter into the circulation, and were not intended to. the foregoing issues of interest bearing treasury notes were merely government loans, of which the securities were in small denominations and had only short periods to run. "when specie payments were suspended in , and again in , silver and small change disappeared because it was worth more per dollar than the bank notes in circulation. on both occasions private notes and tickets or less denomination that $ . , and copper coins were issued and put in circulation by bridge, ferry, and turnpike companies and by tradesmen and manufacturers. one hundred and sixty-four varieties of private copper coin of the period of have been preserved in numismatic collections. most of them bore the names of the issuers who promised to redeem them. "prior to the civil war, the fiscal operations of the government were transacted exclusively with coin, by its own officers, without the intervention of banks." mr. merchant: now it seems to me an interesting question why after maintaining this policy for more than seventy years from to , a fundamentally different view was taken in . mr. lawyer: i think i can answer that question, if you will allow me. you see, i have been looking this matter up since our last discussion, when you fellows knocked me out, and i am now loaded for bear myself. salmon p. chase, secretary of the treasury, probably knew as little about finance as any man of his great ability could. he did not seem to be able to think in the terms of economics at all. when the war broke out he happened to do the natural thing by first going to the bankers of new york, philadelphia and boston, and making loans amounting to one hundred and fifty million dollars. though prior to that time the secretary of the treasury had had no authority to deposit the government money in the banks, congress then authorized him to do so, and he was enabled to leave it in the banks until he wanted it; but he did not know enough to do that even. he required the banks to pay the gold into the treasury at new york at the rate of $ , , per week. fortunately, the public creditors knew more about this question than he did, or had more confidence in the country than he seemed to have; and so when they received the gold they immediately returned it to the banks. chase's utter incapacity to deal with the question in his report as secretary of the treasury in the fall of , and a threatened war with great britain, growing out of the trent affair, so shocked public confidence that by january , , our national finances were in a state of complete and utter collapse, and the consequence was that specie payments were suspended. i do not see how anyone can fail to conclude, after a careful study of the situation, that had chase allowed the bankers to finance the war, we should have fared very much better than we did. we should probably have saved thirty-three per cent of the cost of the war, or approximately one billion dollars ($ , , , ), the total cost of the war being three billion two hundred million ($ , , , ). mr. banker: i agree with you absolutely, mr. lawyer, chase seemed to be as unfit to run the treasury department, as a fish is to run a foot race. if he had allowed james gallatin, moses taylor and george s. coe, three great new york bankers, who arranged the first loan to formulate a financial policy for him, the war could undoubtedly have been carried on without issuing greenbacks, or any "legal tender money." but after specie payments had been suspended, the situation was certainly critical, and became more difficult to manage. however, there were those who thought, and i agree with them, that it was never necessary at any time, even then to resort to "legal tender money," or greenbacks. mr. farmer: how do you think it could have been avoided? how do you think james gallatin, moses taylor and george s. coe would have provided the money for carrying on the war? mr. banker: by selling the bonds of the government upon the best terms possible, as to rates and interest and time, and by such a system of taxation, as would help produce the necessary means for prosecuting the war. these bankers had already furnished one hundred and fifty million dollars ($ , , ), and stood ready to go on and finance the war as they certainly could have done, if they had been permitted to do so. when they, in august, , arranged to furnish the first $ , , , the banks of new york, philadelphia and boston held gold amounting to $ , , , and on december th, they held practically the same amount, or $ , , , although they had already furnished $ , , of the $ , , they had loaned. however, chase was both ignorant and obstinate and the result was a crisis in our national affairs. mr. lawyer: that is the fact, and as you said a moment ago even then there were those, and they were among the greatest of our public men, who were convinced that it was unwise, dangerous, unconstitutional and unnecessary to issue "legal tender money," or greenbacks, as they are called. just hear what some of them said. justin s. morrell used this language in the house of representatives: "if this paper money is a war measure, it is not waged against the enemy, but one that may well make him grin with delight. i would as soon provide chinese wooden guns for the army, as paper money alone for the treasury. "what is it that we most need? clearly we lack money, and wish to inspire our own people with that confidence that will induce them to lend the requisite amount. but the very first step we propose is one to destroy whatever of confidence yet remains among those who have a dollar to lend. we proclaim by an engraved advertisement--to be forced into the pockets of every man by the fiat of the government--that we will hereafter liquidate all of our debts with paper only.... "i object to this bill on the ground of its utter impolicy. i admit that from the contracts entered into--many of which are now due--i regret have not been paid as promptly as they deserve to be, and from the heavy monthly disbursements to our armies, that the government can flood the country with even $ , , of paper dollars. but from that amount, you would vastly increase the cost of carrying on the war; prices would go up and the addition we should pile upon our national debt would prove that it might have been even wiser to have burned our paper dollars before they were issued; the inflation of the currency would be inevitable.... "it will be conceded that the power is no where contained in the letter of the constitution, and that, in all our history since the adoption of the constitution, it has never been exercised.... by making paper a legal tender, no more specie will be seen, except through offers of rewards to draw it from its hiding places, until we emerge from our present difficulties, and not for an indefinite period perhaps, thereafter. the $ , , of specie said to be in the country, though i think there is not quite so much, will be hoarded and remain useless and idle for the rest of the war. i am for keeping this, the vital fluid of commerce, in healthy, active circulation." charles sumner used this language in the united states senate: "is there not bad faith toward creditors who are compelled to receive what is due to them in a depreciated currency? is there not bad faith toward all abroad who, putting trust in our integrity, national and personal, have sent their money to this country, in gold or its equivalent? and, surely, just in proportion as this is so, you cannot doubt that we shall suffer alike in character and resources; for what resource is greater to a nation, or to an individual, than a character for integrity?... is it necessary to incur all the unquestionable evils of inconvertible paper, forced into circulation by an act of congress--to suffer the stain upon our national faith--to bear the stigma of a seeming repudiation--to lose for the present that credit which in itself is a treasury--and to teach debtors everywhere that contracts may be varied at the will of the stronger? surely there is much in these inquiries which may make us pause. if our country were poor or feeble, without population, and without resources, if it were already drained by a long war, if the enemy had succeeded in depriving us of the means of livelihood, then we should not even pause. but our country is rich and powerful, with a numerous population, busy, honest and determined, and with unparalleled resources of all kinds, agricultural, mineral, industrial and commercial; it is yet undrained by the war in which we are engaged; nor has the enemy succeeded in depriving us of any of the means of livelihood. it is hard--very hard--to think that such a country, so powerful, so rich and so beloved, should be compelled to adopt the policy of even questionable propriety." james a. bayard, of delaware, used this language: "the thing is to my mind so palpable a violation of the federal constitution, that i doubt whether in any court of justice in this country, having a decent regard for its respectability, you can possibly except that this bill, which you now pass, will not, whenever the question is presented judicially, receive its condemnation as unconstitutional, and void in this clause." roscoe conklin used this language in the house: "i propose to assign my reasons briefly for voting against the attempt by legislation to make paper a legal tender. the proposition is a new one, no precedent can be found in its favor; no suggestion of the existence of such a power can be found in the legislative history of the country; and i submit to my colleague as a lawyer, the proposition that this amounts to affirmative authority of the highest kind against it. had such a power lurked in the constitution as construed by those who ordained and administered it, we should find it so recorded. the occasion for resorting to it, or at least referring to it, has, we know, repeatedly arisen, and had such a power existed, it would have been recognized and acted on. it is hardly too much to say, therefore, that the uniform and universal judgment of statesmen, jurists and lawyers has denied the constitutional right of congress to make paper a legal tender for debts to any extent whatever.... "it will, of course, proclaim throughout the country a saturnalia of fraud, a carnival for rogues. every agent, attorney, treasurer, trustee, guardian, executor, administrator, consignee, commission merchant, and every debtor of a fiduciary character, who has received for others money, hard money, worth cents on the dollar, will forever release himself from liability by buying up for that knavish purpose, at its depreciated value, the spurious which we shall have put afloat. everybody will do it, except those who are more honest than the american congress advises them to be. think of savings banks, entrusted with enormous aggregates of the pittances of the poor, the hungry and the homeless, the stranger, the needle woman, the widow and the orphan; and we are arranging for a robbery of per cent, if not of per cent, of the entire amount, and that by a contrivance so new, as never to have been discovered under the administrations of monroe, adams or james buchanan.... "such a step, if it should ever be taken by a government, should be taken when everything else has failed, and the last extremity has been reached. it is the last expedient to which kings and nations can resort." william pitt fessenden, of maine, used this language: "with regard to the particular bill now before the senate, we all know that it was resorted to as a temporary measure, not in the beginning, but in consequence of the necessities of the treasury, arising from a greater expenditure than the secretary could have imagined, and arising from the necessary delay with reference to other measures. can it be said that a measure like the one now pending before the senate and the country is a measure of a day or an hour? why, what does it propose? it proposes something utterly unknown in this government from its foundation; a resort to a measure of doubtful constitutionality, to say the least of it, which has always been denounced as ruinous to the credit of any government, which has recourse to it; a measure, too, about which opinions in the community, as perhaps they never have been divided upon any other subject; a measure which, when it has been tried by other countries, as it often has been, has always proved a disastrous failure.... "everybody who has spoken on this question, i believe without an exception--there may have been one or two--but all the opinions i have heard expressed, agree in this: that only with extreme reluctance, only with fear and trembling as to the consequences, can we have recourse to a measure like this of making our paper a legal tender in the payment of debt.... "a measure of this kind certainly cannot increase confidence in the ability, or the integrity of the country. it can make us no better than we are today, so far as the foundation of all public credit is concerned. "next, in my judgment it is a confession of bankruptcy. we begin and go out to the country with the declaration that we are unable to pay or borrow, at the present time, and such a confession is not calculated to increase our credit. "again, say what you will, nobody can deny that it is bad faith. if it be necessary for the salvation of the government, all considerations of this kind must yield; but to make the best of it it is bad faith, and encourages bad morality both in public and in private. going to the extent that it does to say that notes thus issued shall be receivable in payment of all private obligations, however contracted, is in its very essence a wrong, for it compels one man to take from his neighbor in payment of a debt that which he would not otherwise receive, or be obliged to receive, and what is probably not full payment.... "again, in my judgment it must inflict a stain upon national honor. we owe debts abroad. money has been loaned to this country, and to the people of this country, in good faith.... "again, it necessarily changes the values of all property. it is very well known that all over the world gold and silver are recognized as money, as currency; they are the measure of value. we change it here, what is the result? inflation, subsequent depression, all the evils which follow from an inflated currency.... "again, a stronger objection than all that i have said to this proposition--i am stating the objections which everybody must entertain, because i suppose these facts are palpable--is that the loss is to fall most heavily upon the poor. i believe it never was disputed, it cannot be in the light of experience, that those who are injured most by an inflated currency are the laboringmen, the poor.... the poor laborer suffers in the first place more than all; then small capitalists, if i may so call them; and the rich capitalist, last of all. such is the necessary result and consequence always of this system." thaddeus stevens used this language in the house: "this bill is a measure of necessity, not of choice. no one would willingly issue paper currency, not redeemable on demand and make it a legal tender. it is never desirable to part from that circulating medium which by the common consent of civilized nations forms the standard of value. but it is not a fearful measure, and when rendered necessary by exigencies, it ought to produce no alarm." john sherman used this language: "i agree that this measure can only be justified on the ground of necessity. i do believe there is a pressing necessity that these demand notes should be made a legal tender, if we want to avoid the evils of a depreciated, dishonored paper currency." e.g. spalding, the reputed father of the legal tender act, used these words: "these are extraordinary times, and extraordinary measures must be resorted to, in order to save our government, and preserve our nationality.... "this being accomplished i will be among the first to agitate a speedy return to specie payment, and all measures that are calculated to preserve the honor and dignity of the government in time of peace." mr. merchant: from what transpired there was undoubtedly an overwhelming opinion that there was a necessity, and therefore the issue of united states notes was justified. no one will deny this power, if placed upon that ground, that the issuance of the notes was essential to the preservation of the life of the nation. but certainly that reason no longer exists, and therefore we should now act as we would then have acted, if we had not believed that it was a national necessity. the measure for the first issue of $ , , of united states notes was passed and signed by the president february , . the second issue of $ , , came very soon, on july , . the third issue of $ , , followed on march , , making a total issue in about a year of $ , , . if the result of the war had been doubtful and long continued, god only knows what the results would have been, as these united states notes came very near reaching the zero point, as it was. the astounding fact, as the result of having practiced the law of making something out of nothing, followed in when one of the great political parties in the hot pursuit of political success declared in its platform that it was in favor of paying off the national debt with the i.o.u.'s of the government or united states notes. of course, this action would have been the natural and necessary prelude to national repudiation. mr. farmer: what i want to know is how much those greenbacks actually depreciated. mr. banker: i have a sheet here furnished by the government showing precisely what they were worth from february, , to january , , when we resumed specie payment, and began their current redemption in gold coin. it shows that they were worth cents on the dollar in february, , when the president signed the bill; in one year, or february , , they were worth cents on the dollar; and in a little more than a year afterwards, in july, , they were worth only cents on the dollar. that is, if you had bought a horse for $ in january, , and given a note due in july, , you could have paid for the horse with $ . you will perceive that every creditor was defrauded going down hill until you struck the bottom on that july day in , when it took $ . of united states notes to buy $ . of gold coin, and you defrauded every debtor climbing up that long hill from that july day in , when the united states notes were worth cents, until january , , when they became worth cents. it took us just two years to go down the hill, and fifteen years to reach the top of the same hill, only to find the crater of a sleeping financial volcano beneath our feet; for if war clouds should now encompass us, or we should take one single step in the wrong direction, our national credit would again be shattered, and must fall into utter ruin. mr. farmer: well, it then came out just as those men said it would, didn't it? mr. banker: certainly, and i want to call your attention to another thing, and that is that the additional cost of the war, because of issuing united states notes, was greatly increased precisely as they predicted it would be. mr. farmer: oh, yes, we must find out about that. you remember we investigated the cost of the greenbacks since the war, and that mr. banker then demonstrated to our entire satisfaction that the united states government would have been better off by $ , , , if at the close of the war we had issued bonds, bearing per cent, and taken up these united states notes and paid them off. now, it would be mighty interesting to know just how much the war cost because we issued these united states notes, and went off the gold standard. mr. lawyer: i have something here right on that point. let me read it: in his work on public debts, prof. h.c. adams computes the extra cost of the war to the tax payers in consequence of the depreciated currency at $ , , . and mr. wesley hill, in the "journal of political economy," march, , computes the net cost of the war, due to this cause at $ , , . now to be fair and take the average of these two estimates or $ , , , and add the cost of meeting greenback redemption since the war, or $ , , , we have $ , , , , or about one-third of the cost of the war which, as i told you a while ago, was three billion two hundred million dollars, proving everything that was said by those who were opposed to issuing the greenbacks. mr. manufacturer: i beg your pardon, sir, except one thing, mr. lawyer. according to the decisions of the supreme court, up-to-date, and that is, that they are constitutional. you remember, of course, that the question of the constitutionality of the legal tender quality of the united states notes has been before the united states supreme court three different times. this question came up in the case of hepburn vs. griswold, december, , and was held by five judges against three, the court then consisting of eight judges, the opinion of the court being delivered by salmon p. chase, himself, who was then chief justice, "that the making of the notes, or bills of credit, a legal tender in payment of pre-existing debts, is not a means appropriate, plainly adapted, or really calculated to carry into effect any power vested in congress; is inconsistent with the spirit of the constitution, and is prohibited by the constitution." mr. farmer: well, this man chase, who was then chief justice, was secretary of the treasury, and favored the issuance of these same united states notes, didn't he? mr. lawyer: yes, he is the same person. but you must remember that he was a politician in the one case, and a chief justice in the other. possibly, i should have said a statesman in the first place, but thomas b. reed said that a statesman was a dead politician, and probably, you might say, according to his theory, that chase is a statesman now. chase also held that the clause in the acts of and , which makes united states notes legal tender in payment of all debts, public and private, so far as it applies to debts contracted before the passage of these acts, is unwarranted by the constitution: "the legal tender quality," chase said, "was valuable only for the purpose of dishonesty, every honest purpose was answered as well without it." just one year afterward, in december, , the question of the legal tender of the united states notes was again before the united states supreme court, which now consisted of nine members. in a decision of five against four, the above decision was reversed; one judge had died, and a new judge had been created, and these two joined the three formerly in favor of the act. mr. manufacturer: that looks a little as though general grant wanted that kind of a decision, and had picked out the right kind of men to get it. possibly it was more this decision than pressure of business that called for the creation of an additional member of the court--was it not? mr. lawyer: a great many have thought so, and that makes it look as though the supreme court does some legislating occasionally on its own account. however, the same question came up again in the case of juillard vs. greenman, and was decided the same way in march, . it was then held that congress has the constitutional power to make treasury notes of the united states a legal tender in payment of private debts in time of peace, as well as in time of war. justice gray uses this language: "the power is incident to the power of borrowing money, and issuing bills or notes of the government for money borrowed, of impressing upon those bills or notes, the quality of being a legal tender for the payment of private debts was a power universally understood to belong to sovereignty in europe and america at the time of the framing and adoption of the constitution of the united states." it appears that he based his decision upon this fact, but george bancroft, the historian, reviewed this opinion in both its legal and historical aspects. and referring to the statement quoted above, this great historian declared it to be a stupendous error, and further affirmed that no such power was understood to belong to sovereignty in europe at the time of the adoption of the constitution, that is, in . mr. manufacturer: well, i assume that we have another guess coming yet, haven't we? you know this same court has guessed four times already on the sherman anti-trust law. in the knight case, they declared that manufacturing was not and could not be considered as united states commerce. then came the trans-missouri case, then the northern security co. case, and last the tobacco and standard oil cases, wherein this august body ran amuck the word "reasonable," although that very word was not in the act at all, and although it had been impossible to get congress to put it into the act. but after all, is it not the very soul of the whole question? and is it not a fact that the supreme court of the united states ought to be constantly interpreting the constitution of the united states in the light of changed conditions, and ever advancing public opinion? mr. lawyer: it looks as though it might be well to give the supreme court one more chance to guess; they might possibly guess right next time. it is certainly "reasonable" to hope so, both in accordance with the constitution, and in accordance with economic law, and in accordance with the experience of the whole world. mr. merchant: well, what would happen if, when the supreme court guesses again, it should guess right? would the fact that the court declared that congress had no power to make paper money a legal tender render the greenbacks unfit for reserves, or illegal, as reserves? mr. banker: congress cannot, by law, make anything fit for reserves, which by economic law is unfit for reserves; but congress may make anything, however unfit for reserves from an economic point of view, a legal reserve; they might make potatoes, wheat, corn, a bale of cotton, or a bundle of hay reserves. therefore, although the supreme court should declare the legal tender act unconstitutional, as it ought to, the united states notes might still be held as reserves. the silver certificates and the gold certificates are both legal reserves, but neither of them are made legal tender by law, nor should they be, as nothing but gold, which is our standard of value, should be made legal tender. however, all of these barbarous forms of currency, united states notes, silver certificates, bond-secured national bank notes should, and must be maintained upon a parity with gold, if possible, as they now are; because the faith and honor of the government is at stake. it is this very fact that is the source of our weakness from a national point of view, for the united states has no assets with which to meet these enormous liabilities. the united states has no resources, such as a bank has. it has nothing to sell in the way of grain, meat, cotton, or manufactured goods, or personal property of any kind. it has no capital, and no deposits, as our banks have, whose resources today exceed twenty-five billion dollars ($ , , , ). the individual deposits of the united states today exceed seventeen billion dollars ($ , , , ). every month about three billion dollars' worth of notes come due. compare this situation with the condition of the united states treasury, and its ability to meet obligations. the treasury does not control a single dollar's worth of assets, except the incoming taxes, which are more than pledged every year to meet the current demands arising from the expenses of the government. mr. lawyer: that is correct, as we learned upon a former evening. the united states is bound for more than one billion seven hundred million of demand liabilities, directly and indirectly, and has only one hundred and fifty million of gold with which to meet them. all the government has is the power to tax the property of the people. of course it can anticipate this taxing power by selling bonds to meet an emergency; but let us imagine for a moment what may happen. this very night we may be looking out upon a perfectly clear and peaceful sky, and even so soon as tomorrow morning war clouds may curtain the rising sun, and before nightfall blacken the zenith of the heavens, and hang low and lowering the whole horizon round, presaging the most titanic and wicked struggle in blood that has ever stained the history of the human race. what do you think the effect would be upon our credit, with all these demand obligations outstanding? would not that fact, coupled with a great war on our hands, impair our credit to a very great degree, compelling us to sell our bonds at much lower prices, and at rates of interest far higher than could be possibly necessary, if there was no question whatever about our remaining steadfastly upon the gold standard instead of resorting to fiat paper money, as we did the very last time we had to meet a similar difficulty, or crisis? mr. banker: there is no doubt whatever about the imperative necessity of our relieving the united states treasury from the load it is now carrying, and placing the united states government in the same position precisely that every state and municipality is in, so far as its credit is concerned; for the treasury of the government, when filling its normal and proper functions, is no more fit to carry on the banking business than a man who may be wealthy in land, but has no cash assets; or a township, city, county or state is. and until the united states government divests itself of these unnatural burdens, which it is unfitted to carry, we shall continue to suffer immeasurably whenever called upon to use our national credit to any great extent. let me explain this principle a little more fully so that we will all get it so thoroughly fixed in our minds that we shall not forget, or overlook it, as we go on. a farmer, however wealthy in lands and prosperous he may be, even though he may be worth half a million, or a million dollars, should not have demand obligations outstanding for any considerable amount because his resources are in lands or fixed investments. if he borrows to enable him to produce his crops, he should make his notes come due when he can meet them with the money he receives from the sale of his crops, and the balance, or his profits, will go to pay the interest on the mortgage, and possibly reduce it. so a township, a city, county, or state has no personal property worth considering to meet demand obligations. it has no liquid property of any kind, in fact, nor any resources whatever, except its power to tax the property within its jurisdiction; and therefore, if it needs money, it may borrow to meet expenses; but it will make its notes come due when the taxes come in, precisely as the farmer times his notes' maturity with the sale of his crops. if a municipality has no demand obligations, and its bonded debt is low, it can borrow on its bonds at a low rate of interest. but if its demand obligations are enormous in proportion to its ready cash, high rates of interest, and possibly even bankruptcy, will always be staring it in the face. granting or assuming that the united states government has no power to issue legal tender, or fiat money, which is the greatest peril and most unmitigated curse that ever hung over any country, the united states treasury is in precisely the same position, or situation, that the farmer is, whose property is in land; that the township, the city, the county and the state is in, and should always keep itself in a position where, in case of war, or any other great emergency, it could use its credit to the best possible advantage to itself; that is, to us, the people who must pay the taxes to liquidate whatever debt it may incur. mr. farmer: i for one want to thank you for this explanation, for i have always had a sneaking idea that the united states government owned everything, and was, as we say, the richest government on earth, when it could not possibly mean anything except that the people who constitute the nation are the richest people on earth. of course the government doesn't own anything worth speaking of, and cannot take any property, without due process of law, that is, either through the process of taxation or through condemnation proceedings, for public uses. it is perfectly plain to me now that the united states government is no more fitted to carry on the banking business than lorrain township, where i live, nor this city, this county, nor this state, except that it operates on a bigger scale, that's all. do you know that's as clear as a pike staff to me now. mr. manufacturer: now, gentlemen, i want you to correct me if i don't state this credit question right, from beginning to end; for i'm not sure that i have followed all that has been said with sufficient care to understand it perfectly. i appreciate the fact that we must grasp this question of credit, and comprehend it very clearly, if we are going to prepare a banking bill in which credit must play a most important part. _first_: we have credit, which is the result of confidence and trust and gives us the right to demand payment. _second_: if credit is granted for the purpose of producing and distributing consumable commodities, it should be for a short period, proportioned to the time involved to complete the transaction. _third_: if credit is granted upon real estate, it should be for a long period, because the security is not readily convertible into cash. _fourth_: credit granted to a government, by purchasing its bonds, should be for a long period, unless for some temporary purpose. _fifth_: neither real estate nor government credit are a fit basis for currency, because neither is a fit security for a demand debt, nor cash credit, such as consumable commodities are. _sixth_: government credit should never be used in the form of legal tender money, because it must itself be redeemed in coin. it never has been, and never can be its own redeemer, and is always subject to unlimited abuse which must necessarily result sooner or later in repudiation. mr. banker: mr. manufacturer, you have summarized the discussion upon credit remarkably well, i think. mr. merchant: so do i, and i am sure that we all understand what constitutes the difference between the right and wrong basis of demand obligation--convertibility or non-convertibility--quick assets or slow assets--the commercial fund and the investment fund. if we keep this thought steadily in view it will help us amazingly when we come to draw a banking bill demanding the recognition of this fundamental distinction. mr. lawyer: gentlemen, don't you see that the very nature of things forces the recognition of this fundamental distinction, because you can keep your currency, if of the right kind, and all your credit used in the production and distribution of consumable commodities convertible into gold coin. but you cannot keep all the railroad bonds, all the municipal bonds and all the real estate of the country convertible into coin, practically on demand. that is impossible, and has been proved times without number, as we have already seen. mr. laboringman: mr. lawyer, i have been sitting here with a very hazy kind of an idea about this credit matter, until this moment, but that last point you made seems to me to clinch things, for i saw in the "evening journal" last night that there was about one hundred and twenty-five billion dollars' worth of property in the united states. of course you can't cash that all in tomorrow, nor next week, nor next month, nor next year even, and the fortunate thing about it is that the owners don't want to. when you come to think of it, there is a mighty small part of it that the people want to turn into cash each day. mr. banker: mr. laboringman, that is the point exactly, and our problem is to make it absolutely sure that those who have a right, and want to demand cash, can always get it. this can only be accomplished by two things, adequate gold reserves to protect all current demands, and such assets or commercial credits as can be converted into gold, at once to meet any extraordinary demands--yes, even satisfy the panic-stricken mob, and carry the country through such crises as and without unnecessary loss, indeed, prevent the recurrence of any such experiences again. mr. laboringman: do you really think that that can be done? what a blessing that would be to labor. mr. banker: i certainly do believe it can be done; indeed, i know it. but every banker must be compelled to do his part; that is, be ready at all times to carry his proper share of reserves against his deposits. one half of the bankers of this country cannot ride the other half, that is certain. mr. merchant: mr. banker, what amount, or percentage of reserves do you think a banker should carry? mr. farmer: now, hold on, just a minute. you can't get into that subject, because i want to hear it, and i've got to go home right now. mr. banker: very well, gentlemen, we will put it off, if you say so, until next wednesday night. uncle sam: this is the second time you men have said that you would take up reserves. indeed, it has been so long since you talked about taking it up before, that i was afraid that it would be overlooked entirely, and yet nothing but the standard of value itself is more important. now, mark this, we want the right kind of reserves, and plenty of them. good night. tenth night reserves uncle sam: here we all are, every man in his accustomed place for the tenth night. not a man has been late on a single occasion, although mr. farmer just got in under the wire one night by the skin of his teeth. it is most agreeable and satisfying to note that there has been no lagging in interest since we began. indeed, there seems to me to have been a most pronounced gain in your enthusiasm, at times amounting almost to religious fervor. mr. laboringman: that's the way it always is; the more you know about anything, the more interesting it becomes. mr. merchant: certainly the man who has a fad or who is even a crank upon any subject, enjoys life a good deal more than a dead level commonplace fellow, who never takes any particular interest in anything--just passes the time. every man for his own pleasure, if for no other reason, ought to have something in which he is interested outside of his regular employment. it may be a good horse, a good cow, a good dog, or some fine chickens--a good garden, a fine front yard, or just some flowers, or some subject affecting the welfare of his fellows. every man ought to have something; it doesn't matter so much what it is, so long as he is devoted to it intensely. of course, if he can profit by it, or help his fellows at the same time, so much the better. however, we have our hands full just now with a subject which has become mighty interesting, i think, to all of us, and i hope that our work will prove not only interesting to us, but profitable to our fellows. at all events, it can do no one any harm, and will better fit everyone of us for our duties as citizens. there is too little work of this kind done all over the country; men can accomplish so much more, if they only get together in small groups like this, instead of plugging along alone. it's a good deal like the football game, where team work counts for so much. it may be that what we are now doing will inspire thousands of other little groups to get together and discuss this, the greatest, the most important business question that can possibly come before the american people, and then when this is finished, they will, as a matter of habit, take up others, in precisely the same way. uncle sam: hold on there, mr. merchant, you've lectured us long enough this evening, now let us get down to business. you know if there is anything that your uncle samuel is noted for all the world over, it is business, and business is business, you know. but, before we tackle the tenth topic, tonight, i am going to retrace the road we have traveled, and see if you can all recall and recognize the mileposts we've passed. _first_: there was the standard of value, gold. _second_: money, our only money is gold. _third_: currency, the wrong kind. _fourth_: currency, the right kind. _fifth_: exchange by which one debt is made to pay another. _sixth_: value, the value of anything is measured by the thing for which it is exchanged. price, the amount of money received for anything. wealth, what can be exchanged for money. property, the right of ownership. capital, anything that may be so used as to result in a profit. credit, result of confidence and trust; creates a debt, and is the right to demand payment. _seventh_: land or government credit is unfit as a basis for money or currency. _eighth_: our colonial experience proved that land and government credit were unfit as a basis for money or currency. _ninth_: our united states notes again demonstrated the fact that government credit should never be used as a basis of legal tender money. tonight we are to discuss reserves, which are the protection or guarantee of credits granted or debts created. is that a correct definition of reserves? mr. banker: uncle sam, i don't think anyone could give a better one. uncle sam: by way of encouragement to you men, before you begin to discuss the subject of reserves, i want to gamble the prophecy that if you will work out some method or plan that will make it possible for the banker to pay all his deposits on demand, and at the same time will enable him to continue to use practically all of them in profitable employment, i will guarantee you now the support of every banker for your plan, when you've completed it. mr. merchant: i don't think you assume any risk in that guarantee, uncle sam. mr. laboringman: uncle sam, you say that you will guarantee that every banker will support it. that insurance policy won't be any risk at all. won't cost you a cent. i tell you now that if you can work out a plan that will amount to an absolute guarantee of deposits, as a matter of administration, i will guarantee the support of every depositor in the country, and if i could prove it to their satisfaction, every depositor would gladly pay me from one-quarter to one-half per cent on his deposit. do you know what i would get at that rate, say at one-quarter per cent, only $ , , every year; for our deposits you say are now seventeen billion ($ , , , ). have you men ever looked up bank failures in the united states? here is something i stumbled upon yesterday. our country is so extensive and our banks are so numerous that nothing whatever is thought in one part of a bank failure in another part. especially is this so since they occur so frequently. like the operation of the guillotine during the french revolution and the automobile manslaughter of today, bank failures in the united states have become mere passing occurrences. is this putting it too strongly? let us see. since the establishment of the national system in , national banks have failed, with liabilities reaching $ , , . the direct losses of the failed banks amount to $ , , . two thousand and fourteen state and private banks have failed since , with liabilities amounting to $ , , , and probable losses of $ , , . the total liability of all banks, national, state and private, failing since is $ , , , . their aggregate is , banks. in other words, fifty-six banks have failed every year on an average, or nearly five banks every month, and more than one bank every week. three hundred and fifty-one national banks have failed since , with liabilities aggregating $ , , . one thousand four hundred and six state and private banks have failed since , with liabilities aggregating $ , , . the total liabilities of all banks failing since aggregate $ , , . the total number of all banks failing since is , . in other words, eighty-eight banks have failed every year on an average, or more than seven banks every month, and one bank about every four days, during the last twenty years. but who can estimate the indirect losses or depict the consequences of these bank failures? if this tragic condition can be obviated, it is a crime against the people of the united states, it is a crime against civilization itself, to permit its continuance. mr. banker: no, indeed, neither uncle sam nor mr. laboringman assume any risk in their guarantees. they certainly do not, and i will go still further, and under those circumstances will guarantee the support of every merchant, manufacturer, farmer, laboringman, and every man, woman and child, whether depositors or not, as we would be the greatest benefactors of the human race, if we could devise a plan that would remove all risk from every deposit. and yet, humanly speaking, i am not sure that this very result, the absolute guarantee of all deposits may not be accomplished, and the chief factor in the accomplishment of so great a blessing to the people is locked up in the principle of reserves, assuming, of course, that the administration of the banking business is such as to keep it sound. if all the deposits made with the bank were in gold, or were convertible into gold, and held to meet the deposits when called for, the problem would be simple indeed, and would be solved already. but such a plan would be impracticable and archaic. indeed, it would preclude all profit, unless a charge were made for such service, and would reduce a bank to a safe deposit company. it would exclude the use of all credit, and therefore destroy the possibility of doing approximately more than nine-tenths of the business carried on today, unless we should go back to actual barter. our problem is to make the business of banking absolutely safe and yet preserve the great credit structure by which the business of the country and the world is carried on. mr. merchant: for the purpose of this discussion we must assume that the business is honestly managed, and is, therefore, ordinarily sound, and confine ourselves to just the single subject of reserves, which my study leaves me to think, may be considered; st, from the standpoint of the single bank; d, from a standpoint of the community or a single city; d, from a standpoint of the whole country; th, from the standpoint of the whole world or our relation to the rest of the commercial world. now, generally speaking, we mean by reserves in banking that part of the capital which is retained in order to meet the average demands upon deposits. but this, of course, varies with every bank to some extent; and, while per cent cash would be ample reserve for a high-class mutual savings bank, a commercial bank, in equally good standing, may require from per cent reserve up to per cent, according to the character of the business carried on. a country bank dealing with the farmers might require the smaller amount, while a bank dealing entirely with bankers would require the largest possible reserve, to meet any emergency at any time. each individual bank must be judged by itself and its reserves adjusted accordingly. in the second instance, as suggested, the locality or environment must be taken into account; in many instances the character of the neighboring banks and their peculiar business are all factors of great importance, and no one of them can be overlooked. so also when the bank credit is considered as a unit of the structure of the nation, the general situation from one end of the country to the other has a bearing upon it, and from some cause terror may sweep over the entire land in a single day, and every nerve of trade be paralysed. then, finally, if our nation is an integral part of the commercial world, we must devise some method that will conserve our reserves when possibly for a hundred of various reasons, they may be steadily leaving us or be drawn away by foreign influences. mr. banker: your statement of the condition and forces that are always playing upon every center of credit from the single bank in the country town to the largest and strongest in our financial centers makes it necessary for the welfare of the whole people, that we should develop in the united states an atmosphere of absolute confidence that nothing can shake. unless we can do this we shall continue to have commercial earthquakes of ever increasing violence and destructiveness. how to develop, establish and retain a defense of impregnable confidence should be then our purpose, and if we succeed, this must be our great achievement. speaking of the matter in a more definite way, we must assume that from the primary form of reserve, which is what we started out with, such a part of our capital in gold as will always prove equal to the average demands upon deposits must be kept constantly available. we must have what are aptly called secondary reserves, which will meet all ordinary, yes extraordinary, or unusual calls; but, finally we must have such access to an almost incomprehensible store of gold, as to impress and overwhelm the imagination, and place its possible exhaustion beyond human conception. mark this, your cash on hand of the reserve order, that is in gold coin, ought under all circumstances, to be ample to care for current requirements, while your credits, subject to call, with other banks, or arrangements for credit, ought to be ample to meet all ordinary, or seasonal, or periodic demands--and your general assets, which most of necessity be your ultimate reserve, must be of such a liquid character that if a panic comes, and the necessity arises, they can be converted into cash, of the reserve order; that is gold coin. you perceive, of course, that such a condition assumes two things; first, that gold should always be running through the channels of trade in sufficient quantities to touch and characterize the quality of all credits; book credits, as well as note credits; both must always be equal to gold, and commerce must be kept conscious of that fact by the persistent presence of gold. there must be kept before the business eye, the people's eye, the national eye, such a vast horde of gold concentrated for the purpose as to compel even the most timorous to feel safe, beyond a peradventure. there must be a conviction everywhere that the system cannot break down or fail. mr. manufacturer: mr. banker, your position, or statement, is in perfect accord with bagehot, the great banking economist of england. here's what he said: "i have tediously insisted that the natural system of banking is that of many banks keeping their own cash reserves, with the penalty of failure before them if they neglect it." in another place he says: "of course, in such a matter the cardinal rule to be observed is that errors of excess are innocuous, but errors of defect are destructive. too much reserves only means a small loss of profit, but too small a reserve may mean ruin. credit may be at once shaken, and if some terrifying accident happens to supervene, there may be a run on the banking department, that may be too much for it, as in and , and may make it unable to pay its way without assistance, as it was in those years." and again he writes: "why should a bank keep any reserve? because it may be called upon to pay certain liabilities at once and in a moment." upon the same point i want to support your position by another great english economist, stanley jevons. he says: "there is a tendency to frequent severe scarcities of loanable capital, causing sudden variations of the rate of interest, almost unknown thirty years ago. i will therefore in the next chapter offer a few remarks intended to show that this is an evil naturally resulting from the excessive economy of the precious metal which the increasing perfection of our banking system allows to be practiced, but which may be carried too far, and lead to extreme disaster." again he says: "the vast trade of the country cannot be placed upon a sound basis, until the force of public opinion among bankers imposes upon each member the necessity of holding a cash reserve, bearing a fair proportion to the liabilities incurred. it matters little who holds the reserve, provided it actually does exist in the form of metal, and is not evaporated away, _by being placed at par_, or deposited with other banks which make free use of it. in the absence of some common action among bankers, it is certain that the sensitiveness of the money market will increase, and it is probable that commercial crises will from time to time recur, even exceeding in their violence and disastrous consequences those whose history we know too well." the want of the conservation of proper gold reserves is what has led to the weakness of the german situation today and compels them to take steps to strengthen the reserves of the individual banks in accordance with the finding of the commission appointed to revise the banking laws of germany. the individual banks of england have also been increasing their cash reserves for several years past, recognizing the force of what jevons wrote several years ago. mr. farmer: that's all right, mr. banker, as a statement of principles, and i think it is perfectly clear to me just what you mean; but there is one point that i would like to have settled, and that's this: what is a reserve in the united states? that is, what can you call a reserve? you know i am a director of our little bank down in the village below. the other day i asked them what they held for reserves and the cashier brought out this list; $ , silver certificates; $ , of united states notes, or greenbacks; $ , national bank notes; $ , gold certificates; $ , gold coin; and some silver change. as quick as i saw that bunch of stuff, i said to myself, just what you pounded into me some nights ago, that those bank notes ought never to be held as reserves, because they were nothing but another bank's debts, nothing but another bank's i.o.u.'s. do you know that idea never penetrated my cranium until that very minute. now, that is an absolute absurdity, that one bank's debts should be used as another bank's reserves. just imagine what a high old time we would have, if the banks went around the country exchanging their debts with each other for the purpose of creating reserves. the sky would be the limit. just think of it; where would it stop? mr. banker: well, mr. farmer, that is precisely what the bankers of this country are doing. i know of one national banker who took $ , , of his own bank notes, and put them into the reserves of a trust co., and all the stock of the trust co. was owned by his bank, and was locked up in the safe of the bank. i know another national bank that got a large trust co. to bury $ , , of its notes down at the bottom of its reserves, so that they could not get out; and this is a fair sample of just what is going on all over this country today. this is done just to keep their notes out, so that they can make the extra per cent or - / on the notes in circulation, as we call it. some one of you may say, well! these notes are secured by government bonds. yes, suppose they are, what of it? congress has just passed a law providing for $ , , more just like these present national bank notes, which are to be secured by state bonds, municipal bonds, railroad bonds and promissory notes and what not, and the boast of that wonderful economist aldrich was that you could not tell them apart. any fraud, apparently, would suit him, so long as no one found it out. now, i assert, and challenge any man to deny it, that if any good debt is fit to be used for reserve money, then every good debt is equally fit. if a government debt is good reserve money, then new york state debts, pennsylvania, illinois, and all state debts; and if all state debts, then new york city, philadelphia, chicago and all city debts; and if new york, chicago and philadelphia debts are good reserve money, then the united states steel, standard oil and all corporation debts; and if all corporation debts are good reserves, then the debts of j.p. morgan, john d. rockefeller, andrew carnegie and all private debts are good reserves. when you stop to think of it, what a preposterous proposition it is to make any debt a reserve for another debt. the state of california has just waked up, and will not permit her state banks to hold a national bank note as reserve; but the great state of new york specifically provides that her banks may hold national bank notes as reserves. mr. merchant: i must confess that i never knew that before; such a scheme as that is perfectly rotten, and it seems to me as though something ought to be done to correct so obvious an evil. why, gentlemen, these men who are using bank notes as reserves, must have known that they were driving just that much gold out of the country, and weakening the basis of credit to just that extent. mr. banker: i don't know whether they know enough to know that or not, and i don't know whether it would have made any difference with them if they did. when a man's cupidity and greed make a slave of him, they drive all patriotism out of his soul, just as debts, promises to pay, or wind money drives the gold out of the country. mr. manufacturer: this scheme of banks exchanging their promissory notes or their debts for the purpose of making reserves is a new one to me, too. but, if any one thing can be much worse than another, it must be this scheme. gentlemen, a true reserve must be the measure and touchstone of credit, therefore a reserve cannot be a credit itself nor a debt created by granting credit. now, what is the thing by which we are measuring the value of all credit? indeed, the thing by which we are measuring the value of everything? it is gold, is it not? then certainly gold is the only thing that ought to be considered as a reserve. mr. banker: right you are, mr. manufacturer, no greater economic truth was ever uttered, or better said, than you have just put this one. in support of that, i want to read something just written by joseph t. talbert, vice-president of one of our greatest banks. it is this: "what is a bank note? it is the available gold behind a bank note that gives it value. substitution of any form of credit paper, the greenback, for instance, is a substitution of a deferred promise of a thing, for the thing itself. a statute which forces such notes upon the people as a legal tender, works a fraud and vitiates all reason in regard to money and banking. it perverts the moral sense of right and justice." mr. farmer: there is no doubt whatever that all the true reserves that that little country bank really had, was only the gold and gold certificates amounting to $ , out of the total of $ , , the rest being only a substitution of some form of credit which must itself be redeemed by gold which is certainly the only redeemer. we settled that a long time ago, but it never came home to me until right now. this thing is growing on me so rapidly that i shall soon be a real, unregenerate gold bug. i guess i am that now. but, how plain and self-evident that truth is when we get close to it. we are living and teaching a gigantic economic fraud, an economic lie. mr. banker: some reference may have already been made to this fact; however, it will do no harm to repeat it right here because of its force and great importance. under the english bank act of , permission was given to count silver as one-quarter or per cent of the reserves of the bank of england; but it has never done so, since it is regarded as an economic falsehood. the reason is obvious. if the bank today held $ , , of silver and $ , , of gold, the gold would not only have to carry the $ , , of silver, which is nothing but another form of credit money, because actually worth only cents on the dollar in bullion, but the gold would also have to carry $ , , additional; that is, all the credit based upon this $ , , of silver, a condition that is wholly misleading; for the silver instead of being a reserve at all, as it seems, or pretends to be, would actually be, so to speak, a bundle of dynamite under the whole structure of english credit. so, in the united states our $ , , of united states notes, or greenbacks, instead of being an actual reserve to that extent, are not only a burden resting upon our gold, to the amount of their face value; but the burden our gold is carrying is multiplied to the extent of all the credit that is resting, or is based upon these united states notes, which may be anywhere from one billion to three billion according to the per cent of the reserves the banks using them carry. they may be used as a per cent reserve, and carry twenty times the amount of the reserves, or more than six billion; it is possible that they may be carried as a per cent reserve, the average of all the national banks, or only per cent, the average reserves of all the other state banks, excluding the mutual savings bank. mr. merchant: what's that? do you mean to say that the state banks do not carry more than an average of per cent reserve, and that the national banks carry an average of two and a half times as much or per cent cash? mr. banker: i have the statement of the comptroller right here, which shows that the average cash reserves of all the state banks is per cent, including the mutual savings banks, but excluding them, only an average of per cent, and that the average reserves of all the national banks is per cent. the report of the comptroller also shows this fact, that while all other banks than the national banks, excluding the mutual savings bank, hold only per cent cash reserves of their individual deposits, or demand liabilities, they have per cent of their assets invested in bonds and other securities, which must of necessity be slower than current commercial paper, while the national banks, which hold per cent in cash of their individual deposits, have invested only per cent of their assets in bonds, or other securities. the inconvertibility of a great per cent of the assets of the state institutions is another burden then, thrown upon the total cash bank reserves of which the national banks carry $ , , , with $ , , , individual deposits, while the other banks, excluding the mutual savings banks, have only $ , , cash reserves, with individual deposits amounting to $ , , , . the average cash reserves of the united states therefore are only a trifle over per cent, when they should not be less than per cent under any circumstances at the low level, reaching nearer per cent at the high level. that is, reserves should be held for use, not ornament. there should be such an elasticity in the use of reserves, as to enable any community or section of the country to adjust itself to the ever-changing conditions of trade. let me make this point perfectly clear by giving you an illustration. under the law of today, our bank carries per cent cash, which amounts to about $ , . there are times of the year when i could carry $ , or even $ , a good deal easier than i could carry $ , , or even $ , at another time. common sense would say that i ought to be able to adjust my business and my reserves somewhat to the varying conditions, but no, i am tied down by a cast-iron rule, so that i cannot bend without breaking the law. there is no doubt that my reserves ought to average for the year fully per cent cash. in addition to this, i ought to carry at least per cent more that i know absolutely is available at any time. yes, and this should be so carried with the combined reserves of my fellow bankers all over the united states, as to make any amount available that could possibly be necessary at any time under any circumstances. _this is the principle of the elasticity of reserves._ the wide variation between the state reserves and the reserves of the national banks is not difficult to explain. there are eighteen states today which have no reserve requirements at all. in the remaining states, the reserve requirements range all the way from per cent to per cent. the reserve laws in some of the states are excellent, just as good as that of the national bank act, while in an adjacent state, there may be no provision whatever requiring reserves. the result is that half of the banks of the country which are compelled to carry adequate reserves are carrying the other half, a condition that is unfair, unjust and manifestly unsound. mr. merchant: it is not only manifestly unfair as between the bankers themselves, but such a condition imperils the banking situation as a whole, and more than any other single cause, brings on a general commercial disaster, as things now stand. the banking of the united states and all the productive and transportation interests are, comprehensively speaking, but one single business, so intimately associated and interwoven are their affairs. the banks put up their capital as an insurance fund, to protect their customers, and should handle their resources, and should keep such an amount of reserves on hand or at their command as to guarantee the payment of all depositors upon demand, or in accordance with their contracts. since the banks, commerce and the people are all bound up together, the contracts of the banks with the people should take one common form, and each bank, from one end of the country to the other, should be compelled to assume its proper share of the burden, both as to paid-up capital and as to reserves. it is interesting to note that the capital of the , national banks amounting to $ , , , is just about equal to the capital of the other , banks, outside the national system reporting, and the estimated capital of $ , , of the non-reporting banks, $ , , , . the surplus of the national banks is per cent of their capital, and strange and fortunate to say, excluding the mutual savings bank, the surplus of all other state banks is exactly per cent of their capital. that is, the national banks have $ , , , capital and surplus to insure $ , , , individual deposits and $ , , , due to the other banks, or a capital and surplus to all deposits of nearly per cent, while all the other banks have $ , , , capital and surplus to insure individual deposits $ , , , and $ , , due to banks, or a little over per cent. insurance expressed in capital and surplus, therefore, is about equal, but a great and serious divergence comes, as we have seen, in the average cash reserves of the two classes of banks. mr. manufacturer: this is the weakness of the present situation from the standpoint of reserves, and some of the states are beginning to realize the importance of protecting the well-conducted banks from the consequences of those recklessly or dishonestly managed; and they are passing laws compelling all persons or firms doing a banking business to submit to state supervision and control. they are compelling them to incorporate their business within a reasonable time. these states do not propose to have the innocent depositors swindled through a misuse of funds; nor do they propose to permit bankers to so conduct their banking business within their borders, that they can, if they so desire, commit gigantic frauds, or by the misuse of the people's deposits, bring on bank panics and a complete paralysis of business. i think that ohio has just passed such a law and that illinois is about to put the same kind of a statute into operation. the people of all the states are beginning to understand that banking is a quasi-public business, and that the banker, though not strictly speaking a trustee, is in fact a quasi-trustee, and must conduct his business upon that basis. mr. banker: mr. manufacturer, you are quite right in what you have said, but you have not gone far enough; nor as far, i am sure, as you will be inclined to go when i have outlined the necessity of a police regulation of the banking business, from a national rather than from a state point of view. just stop and think the matter over. to use your own observation with regard to the action of the state, no one will deny that a state has the right to supervise every person, firm or corporation that takes deposits under the name of bank, or banker, with a view of protecting the people against foolish or dishonest bankers. by the same course of reasoning, the united states, or national government, has the right, and it is clearly its duty, to protect one state against the unwise and dangerous course of some other state and one section of the country against misconduct in the banking business in some other section of the country. bad banking is not only a local mishap, but a national misfortune. nine-tenths of the country might be under such supervision and control of its banking business as to insure practical immunity from such conditions and practices as breed panics and the remaining tenth be so conducted as to preclude the possibility of a day's freedom from the danger of a commercial cataclysm. will anyone say that such a condition should continue for a day, or a year, or for ten years, or for a hundred years, or for a thousand perchance, because the general government has no right or power to act in the matter for want of constitutional authority? let me ask you, mr. lawyer, whether there is anything that will so certainly conserve the peace, the prosperity and the "general welfare" of the united states as a sound and uniform financial banking system extending over the whole country. mr. lawyer: i certainly cannot conceive of anything of so much importance as a sound and uniform banking system for the whole country. if there is one single factor in our life that is distinctly national in its character and scope, it is this. during the past week, i devoted much time to that phase of this question, because, as we have gone along during the last two or three months, and this problem has been under discussion, i have become more and more impressed with its vast importance, and above all with its distinctly national character. i have not butted in tonight, as you will observe, as i was anxious to see how you gentlemen would treat this subject of reserves, whether from a standpoint of individual banks, or from the standpoint of the community, the commercial center, or our country as a whole, or upon the broad proposition that gold today constitutes the world's banking reserves and that we are a very great part of that commercial world. for my own part, i had come to the conclusion that there could not be a system of reserves established that would be efficient and of the highest use, and really protective unless it were national in its extent, and universal in its application. therefore, realizing the absolute necessity of some common power to control all reserves, in order to compel each bank to perform its part by carrying its share of the burden that commerce imposes, i have been unable to find any solution, except in a uniform national system; and why not? certainly the national government could compel every bank to carry certain specified reserves, and failing to do so to pay a tax of or per cent per annum upon all deposits not so protected; that is, upon all deposits in excess of the required reserve. this could be done under the taxing power of the government, precisely as a tax of per cent was put upon all bank notes. would any patriotic banker refuse to coöperate with his fellow bankers in such a reform, unless he wanted some unfair advantage by compelling the other bankers to carry his load for him? you gentlemen will remember that the national government was given jurisdiction of the postal savings banks under these words which it was understood at the time were written by the president: "sixty-five per cent of the deposits could remain with the banks as a working balance, and also a fund which may be withdrawn for investment in bonds or other securities of the united states, but only by direction of the president, and only when in his judgment 'the general welfare' and the interests of the united states so require." similar words could be used with regard to a per cent of the surplus of the banks, and if the one was tenable, certainly the other would be especially so, since the latter involves seventeen billion of individual deposits, of which six billion four hundred and eighty million ($ , , , ) are savings deposits. again article i, section of the constitution, empowers congress "to regulate commerce with foreign nations and among the several states and with indian tribes." upon this clause of the constitution rests the anti-trust law. what have we not done under this clause of the constitution and the general welfare clause? we have passed the food and drugs act, giving the government power to stop the use of poisonous substances in food products and drugs: the insecticide act, giving the government power to determine what kind of poison shall be used to annihilate bugs: the plant quarantine act, giving the government power to regulate the importation of nursery stock and other plants and products and to enable the secretary of agriculture to establish and maintain quarantine districts for plant diseases and insect pests: the livestock quarantine act, to enable the secretary of agriculture to effectually suppress and extirpate contagious pleuro-pneumonia, foot and mouth diseases and other dangerous infectious and communicable diseases in cattle and other live stock: the meat inspection act that, for the purpose of preventing the use in interstate, or foreign commerce, of meat and meat food products, which are unsound, unhealthy, unwholesome, or otherwise unfit for human food, the secretary of agriculture at his discretion may cause to be made, by inspectors appointed for that purpose, an examination and inspection of all cattle, sheep, swine, and goats before they shall be allowed to enter into any slaughtering, packing, meat-canning, rendering or similar establishments in which they are to be slaughtered, and the meat and meat food products thereof are to be used in interstate or foreign commerce. the twenty-eight hour law by which the government compels the humane treatment of cattle: employers' liability act: the safety appliance act: the hours of service act: the transportation of explosives act: the newspaper publication act: the white slave act. can anybody doubt that we shall have a "national health act" by which the government can stop the invasion of this country by yellow fever, cholera, bubonic plague, or any other scourge that may possibly visit our shores, and sweep over the land? can anybody doubt that we shall soon have a national child employment act by which the childhood and youth of the land may be protected against those labor practices that imperil our chief national resource, the human resource? can anyone doubt that we shall soon have a national woman's employment act that future generations may not be pauperized in health, strength and character? can anyone doubt that we shall soon have a national workmen's employment act to the end that american citizens in all parts of the united states engaged in our productive industries shall have equal opportunities in matters of hours of labor? the general welfare of this nation demands strength, power and greatness; but the strength, power and greatness of this nation reside and consist in the character, health, strength and power of the people, and therefore conservation of our greatest national resource is the conservation of our human resource. the citizen is a national asset. can anyone doubt that justice between the employers of labor in our various states, and the general welfare of this republic, demand uniform health and labor laws to the end that the citizenship of this republic may be the best product of the human race? gentlemen, if all these things are done, can be done and ought to be done by the national government, can anyone doubt the soundness of this proposition: that it is interstate commerce to ship by mail, or freight, any kind of property? what is property? "property is a thing or things subject to ownership; anything that may be exclusively possessed and enjoyed; chattels, lands, possessions." gold, gold certificates, silver, silver certificates, united states notes, checks, drafts, promissory notes are all certainly within this definition. h.d. macleod, the highest authority i know of on banking economics, says: "property, therefore, in its true sense, means solely a right, interest or ownership, and consequently to call goods or material things property is as great an absurdity as to call them right, interest or ownership. "to call goods themselves property is, comparatively speaking, a modern corruption, and we cannot say when it began." therefore, property is primarily and essentially the very things with which banking is solely concerned. will anyone deny that gold is property? remember that when gold is shipped in large quantities, it is by weight and not by count. will anyone deny that gold certificates are property? will anyone deny that silver is property? will anyone deny that silver certificates are property? will anyone deny that united states notes are property? will anyone deny that promissory notes are property? can anybody have the hardihood to say that if a note broker in new york ships a million dollars' worth of commercial paper to purchasers in the west upon a commission of a quarter or a half per cent, and receives his payment, for the sake of the argument, let us say, by a shipment of gold coin, that such broker is not engaged in interstate commerce? does this transaction become a different transaction, forsooth, because it is carried out by a banker? will anybody deny that checks and drafts and bills of exchange are property? will anybody deny that a bank has property, although it may be the owner of one million dollars' worth of promissory notes? will anybody declare that a bank has no property when it has a million dollars' worth of gold coin in its vaults? if a bank in chicago should by any chance own one million dollars' worth of wheat, and should sell and ship the same to a new york bank, and the new york bank should ship the chicago bank one million dollars' worth of gold, will anybody deny that they are engaged in interstate commerce? now, suppose that the chicago bank should sell the wheat in chicago to mr. armour, instead of shipping it, for his promissory note for one million dollars, due in thirty days, and that the chicago bank should then sell, and mail the note to the same new york bank, and the new york bank should ship the chicago bank one million dollars in gold, in payment for the note, will anyone have the hardihood to assert that this transaction is not interstate commerce? will anyone deny that the sale and shipment by note brokers of billions upon billions of promissory notes from one state to another every year is not interstate commerce, but that to ship eggs, apples, potatoes, chickens, grain, cotton and live stock is interstate commerce? i assert that it is just as proper and important that the national government inspect this paper, and the banks that create it, or ship it, or buy it, as it is to inspect the sheep, hogs, cattle, slaughterhouses and the meat they turn out in order that it can protect the people of the united states. if the paper so shipped is infected by the hand of a rotten maker, commercially speaking, and the bank sending it out and responsible for it is not carrying an adequate reserve to meet the paper, should the maker fail to pay it, the harm done is vastly greater than that resulting from slightly infected meat. how much infected meat would it take to do the harm, the damage to the american people that resulted from the panic of ? and yet, if we had had a wise, national financial and banking system, we need never have passed through that harrowing, wasting panic that resulted in destroying property values into the billions; in the death of thousands of the people directly and indirectly; in the ruined health of tens of thousands more; in the non-employment of hundreds of thousands; and in the unknown and immeasurable suffering that ensued. such a national system must be supported by every banking unit; by every individual bank carrying its part of the commercial burden, and providing its proper share of the insurance of commercial safety by contributing its proper proportion of the necessary reserves, both local and national. mr. merchant: mr. banker, i heartily approve of every word that you have said, and there can be no possible doubt about the result of a discussion of this phase of this question by the american people. there is one question, however, that i desire to ask you before we pass on, as we may overlook it. is it not true that our national banks are now carrying per cent reserves of which per cent are cash? are not these reserves large enough to meet all emergencies? mr. banker: i presume you gentlemen all know just how the national banks carry their reserves; but fearing that you do not, i will explain the system to you. all so-called country banks are required to carry per cent reserves; that is $ , cash against every $ , of deposits; that they may send per cent or $ , for every $ , of deposits away to what we call reserve cities. now, there are banks in of these reserve cities. these reserve cities are required by law to carry a reserve of per cent, or $ , , for every $ , deposits; but they may send away - / per cent, or $ , , for every $ , of deposits to a central reserve city, of which there are three: new york, chicago and st. louis. these central reserve cities must carry per cent cash reserves or $ , in cash for each $ , of deposits. experience shows that these banks in the reserve cities and these banks in the three central reserve cities keep all of their money loaned out all of the time; that is, right up to the reserve limit. since they have no margin, when called upon for anything more than the usual daily current requirements, something extraordinary must be done to meet the demand. loans must be called in and paid off. but since these same banks that are calling loans are supposed to be carrying the real, the final, the ultimate reserves, a deadlock follows, and the borrower is up against it; rates go almost anywhere that the banks want to put them; from per cent to per cent, to per cent, to per cent, or even , per cent; i believe that's the record rate. in other words, we have no true, final reserves in this country at all, for you cannot break the government limit fixed by statute, and therefore we have a complete lockup all along the line, until through straining, something breaks somewhere. there is absolutely no use of sending a part of your reserves away, if you cannot get them when you want them; for then it is no reserve at all, and that is the actual position or situation in the united states today. our so-called central reserves are not reserves; it may be written down as a purely fictitious scheme, for there cannot be found a single year in which any substantial arrangement has ever been made by running the reserves up in the central reserve cities until they amounted to an average of or per cent, which would be the only practical way of providing for the crop-moving period. if there is one thing more barbarous in our banking practices than a bond-secured currency, it is our system of superimposed bank reserves, especially in connection with the fixed limit, established by the government. what would you think of a railroad company which ran out through the wheat country, having one-quarter of all its freight cars idle all the time as a reserve, and yet when thrashing time came, refused to use them, although the wheat was rotting on the ground, because the management of the road demanded that the railroads should always have at least one-quarter of the cars idle, as a reserve to meet the demands during the crop-moving period. wouldn't you think that that was idiotic? mr. laboringman: well, i should say so. mr. lawyer: mr. banker, there is another point in that connection, and that's this. you started off to get a central reserve, a true reserve, as i supposed, as distinguished from the reserves of the national banks that are all loaned out all the time. then, your reserves were all broken up in the end, first into three hundred and twenty banks, and at the end into fifty-five banks, located in new york, chicago and st. louis. what we must have, it seems to me, is a real central reserve in the form of unloaned gold, and then permit the banks to use their cash reserves, if by any chance they needed them in part at least. i notice that you carry about $ , in accordance with the legal requirement. now, just as you said a while ago, there are times of the year when you could easily carry $ , ; but again there are times when you want to use a part of the $ , , possibly as much as $ , of it. why should you not do it, and then accumulate the necessary excess in the slack time to make up your average for the year. mr. banker: that is precisely what we ought to be permitted to do. mr. lawyer: then, mr. banker, instead of sending as you now do, per cent of your deposits, or $ , , to a reserve city, and that city in turn sending a part of it to some central reserve city, your balance with your reserve city should be sufficient to carry your exchange account, and the balance go to a great central gold reserve, upon which you and your fellow bankers throughout the country could rely absolutely when the emergency came. mr. manufacturer: i have been listening to you gentlemen with intense interest, and must say that you have worked this plan out completely and practically. i see what an enormous advantage it would be to a bank to use its reserve as a reserve should be used, and what an absolute guarantee of protection it would be to have all the reserves of all the banks centralized, and ready to help anyone of them in need of gold, because the gold was actually on hand, and had not been loaned out as the banks now do; but i have been wondering where the state banks and trust companies were going to get per cent more reserves of their demand deposits to put up in this central gold reserve. you must remember that they have five billion of deposits. mr. banker: i can tell you how to do that; that is very easy. when the state banks come into the national system as they certainly will, if you have the right kind of a system, they will exchange their notes for the gold or gold certificates that are now in circulation, as they come in over their counters. you see that all the gold and gold certificates that are now held by the banks only amount to $ , , , although there is in the country $ , , , of gold, practically one billion of gold, or $ of gold for every man, woman and child out in the corn, cotton and wheat fields; in the mining camps, when as a matter of fact, this gold should be in the reserves of our banks, protecting our bank credits; and bank notes should be in the corn, cotton and wheat fields, in the mining camps filling the true function of currency, and where gold, or gold certificates are not at all needed. mr. lawyer: now, wait a moment, mr. banker, and let me see if i grasp that. it is very important that we should all understand this. i am exceedingly anxious to, and it strikes me that we are at a mighty interesting juncture of this subject. if a state bank with a reserve of $ , came into your national system and had to increase its present reserve, which is only per cent, by as much as per cent, it could do so by simply retaining the gold and gold certificates as they were deposited from day to day, and pay out its bank notes to the extent of one hundred thousand dollars. the result would be that the bank would increase its liabilities by $ , , but it would also increase its reserves by $ , . that is certainly a perfectly sound proposition. before the bank came into the system, its reserves were only per cent, or $ , , since its deposits were $ , , . after it goes into the national system, it has changed $ , of its notes for $ , of gold, or gold certificates, as they came in over the counter; it now owes $ , , , of which $ , is of notes, but it now has $ , of reserves of all of its demand liabilities, or per cent, instead of $ , , or per cent, as before. mr. merchant: isn't that a simple and very easy thing to do? and what tremendous strength it would give to the whole banking situation immediately. mr. manufacturer: then when you think of it, what a stupendous piece of folly it is, to have all this gold floating around the country, doing no possible good, when a piece of credit paper, or bank note, would do the work just as well. mr. laboringman: anybody can see that. a man that can't ought to be arrested for want of brains. he'd have to plead guilty. putting that gold that you need in your bank reserves at the rate of one dollar of gold for five or six dollars of credit into the streets, cotton fields, corn fields and in the mines, is no greater piece of folly than it would be to send a six-horse team to haul mr. farmer home, when one horse would do just as well. uncle sam: mr. laboringman has got this thing dead right. in fact, in my judgment, he has the horse sense of this crowd. give him a show, i'll bet on him every time, he always takes a short cut, and hits the nail square on the head. mr. merchant: suppose, mr. banker, that all the banks of the country should come into the national system, and put up, say per cent, as you suggested a while ago, of their demand or individual deposits, and per cent of their savings deposits, what would your central gold reserve amount to? mr. banker: on june , , the comptroller of the currency reported that the individual deposits amounted to ten billion five hundred million ($ , , , ), and that the savings deposits, outside of the mutual savings bank, amounted to two billion eight hundred and seventy-two million ($ , , , ). if the state banks and trust companies should become national banks, and bring their reserves up to the national standard, by exchanging their notes for gold; that is, exchanging $ , , of their notes for that much gold, the result would be as follows: individual deposits $ , , , @ % $ , , , savings deposits , , , @ % , , bank notes , , , @ % , , -------------- making a total central gold reserve of $ , , , this is just double what the gold reserve of france is, the largest gold reserve in the world today, but when you consider the fact that our banking resources are per cent of the total banking resources of the world, it should be even more than that. it is interesting to note that in making this readjustment for a central gold reserve it would be just $ , , larger than our bank note circulation. with this central reserve of gold created, the united states could then control the inflow and outflow of gold to and from the united states, precisely as england controls the movements of gold today by fixing the rate of discount or a price for the use of gold. uncle sam: well, boys, if there is one phase of this question that you have treated with a greater thoroughness and more satisfactory results than any other, to my mind, it is your plan for protecting our bank credits with ample gold reserves. they are so disposed of as to keep at all times all bank credits in touch with gold, and therefore as good as gold; at the same time have developed a great central gold reserve in harmony with the practice of the great commercial nations of the world, and commensurate with my importance as a banking power in the world. you have made this subject so clear and conclusive that i need not restate the points you have made. i hope our next night will be as satisfactory as this has been. good night. eleventh night the bank uncle sam: at our last meeting you considered the very important element in banking, of reserves, and seemingly the final factor that enters into the structure of a bank. you have run the whole schedule off, i think. standard of value, money, currency, exchange, capital, credit, government credit as money and as currency, land credit as money and as currency and reserves. what else can there be? mr. banker: i do not think there is any particular topic for us to tackle now, but the bank itself, and i want to be permitted in the outset to describe just what a bank is, and what it does. i do not think there is any single thing in business life that is so misunderstood. people think of a bank as a kind of mystery. the banker is a merchant in money and credit, and precisely as you can say that a man is a hardware merchant, cotton goods merchant, grain and flour merchant, so you can say that the banker is a money and credit merchant. he deals in these two things. let me illustrate this in a simple way. if mr. farmer should come to me to borrow a thousand dollars for three months, and i should make him the loan, as we say, i, as a banker, would buy his note, due in three months. that is just what happens every time a bank makes a loan; it simply buys the note. now, in all probability i would not give mr. farmer any actual money, but would simply give him credit for one thousand dollars on the books of the bank, so that he could draw his check against it. in other words, i would owe him one thousand dollars. i have created a debt to him of one thousand dollars; in short, i have traded debts with him. he has given me his note, which is a debt for one thousand dollars due in three months, and i have given him credit on the books of the bank, a debt due to him on demand. the transaction does not differ in the slightest degree from the trade of horses for cattle. let me demonstrate this. suppose that mr. farmer came to me and offered me two of his jersey cows for my horse and buggy, because he does not want the cows, but does want the horse and buggy to do a lot of running around. i want the cows to milk, and so make the exchange with him. he gets something that meets his pressing needs in the horse and buggy, and i get something from which i receive an income, the cows from which i get milk. this corresponds to the interest on his note, and by the way, the cream would be my profit. mr. laboringman: that's it; you bankers are always milking the public, and the interest you get is all cream; all profit. mr. banker: oh, no! it is not as bad as that. don't make such a mistake. the average cost to the bankers of the country, outside of any losses, is about per cent upon their deposits for interest paid on deposits, rent for building, clerk hire and other general expenses. so you see that it is not all profit by any means. but let me get right back to what i was saying. the banker is nothing but a trader who keeps an open shop for the purpose of trading his debts for the debts of his depositors; or to put it in another way, for the purpose of exchanging his credit for actual money which is deposited with him, or for checks and drafts that are deposited with him, or for promissory notes which he buys when he loans money to his customers, and gives them credit on his books for the amount of the loans. all these different things, money, checks, drafts and promissory notes are bought by the banker with his credit, and the greater the amount he buys with his credit the greater will be his debt. but, you will probably say these are his deposits. very true, but his deposits are his debts. don't forget that. mr. lawyer: mr. banker, you have accurately described the situation, just as it exists today, and that, of course, is what we are interested in; but it seems to me as though it would be a great help to us to follow the development of banking, as we have it now. macleod, the highest authority upon banking credit, and the theory of banking, used this language: "the first business of a banker is not to lend money to others, but to collect money from others." bagehot used this language, in describing the business of the bank: "thus, a banker's business--his proper business--does not begin while he is using his own money; it commences when he begins to use the capital of others." many writers have maintained that a bank should only be allowed to create exactly as much credit as the specie paid in, and that its sole function should be to exchange its credit for coin, and coin for credit; and that the quantity of the bank's credit should always be exactly the same as the coin it displaces. this principle is called the currency principle. many banks in the world's history have been constructed on this principle, especially those famous banks at venice, hamburg, amsterdam and several others. these cities, small in themselves, were the centers of great foreign commerce; and as a natural consequence, an immense quantity of coin and denominations of all sorts of different countries was brought by the foreigner who resorted to them. these coins were, moreover, greatly clipped, worn and diminished. the degraded state of the current coin produced intolerable inconvenience, disorder and confusion among merchants, who, when they had to make or receive payment of their bills, had to offer or receive a bag full of all sorts of different coins. the settlement of these bills, therefore, involved perpetual dispute--which coins were to be received, and which were not, and how much each was to count for. in order to remedy this, it finally became absolutely necessary that some fixed uniform standard of payment should be devised, to insure regularity and a just discharge of debts. in order to do this, the magistrates of those cities instituted a bank of deposit, in which every merchant placed all his coins of different kinds and nations. these were all weighed, and the bank gave him credit, either in the form of notes, or a credit on their books, exactly corresponding to the real amount of the bullion deposited. the owner of this credit was entitled to have it paid in full weighted coin on demand. these capital credits, therefore, always insured a uniform standard of payment; and it was enacted that all bills upon these respective cities, above a certain amount, should be paid in these bank credits, which were called _bank money_. the consequence was evident, as this bank credit, or bank money, was always exchangeable for money of full weight on demand; it was always at a premium. these banks professed to keep all the coin and bullion deposited with them in their vaults. they made no use of it in the way of business, as by discounting bills. thus the credit created was exactly equal to the specie deposited and their sole function was to exchange specie for credit and credit for specie. these banks were examples of the currency principle; they were of no further use to commerce than this, that they served as a safe place to keep money in--and they insured a uniform standard of payment for debts. they made no profit by their business, but those who kept their accounts with them paid certain fees to defray the expenses of the establishment. later and during the civil war in great britain the goldsmiths of london began to receive the cash of the merchants on deposit. they not only agreed to repay it on demand, but to pay per cent per annum for the use of it. consequently, in order to enable them to do that, the deposits necessarily became their property to trade with as they thought best. when, therefore, these goldsmiths received this money on deposit, they gave in exchange for it, or issued to their customers a credit, or right to demand back an equal amount of money at will. and it must be noted that it is this banker's credit which in banking language is termed a deposit. the money itself is called an asset, or resource. macleod says that in practice it will be found that in ordinary times a banker's balance in cash will seldom differ by more than one thirty-sixth part from day to day. so that if he retains one-tenth part of his cash to meet any demands for payment that may be made, that is ample and sufficient in ordinary times. the banker, therefore, can see that if an amount of cash was sufficient to support ten times the amount of his liabilities, he might safely buy debts to several times the amount of cash in his hands. from this you see clearly by evolution a banker is a trader, just as mr. banker said a few moments ago, whose business consists in buying money and debts by creating other debts. if he has taken actual money on deposit, he has bought it, and if he has received checks and drafts on deposit, he has bought them likewise with his credit. thus, it is seen that the essential and distinctive feature of a bank and a banker is to issue credit payable on demand, and that this credit may be put into circulation and serve as money. _first_: they might demand payment in cash; if they did so, the banker canceled his debt. _second_: the banker, if his customer wished it, gave him his promissory note to pay him or the bearer on demand such sum as he might wish; this neither created nor extinguished a deposit, it merely recorded it on paper for the convenience of transferring it to someone else. this promise to pay was at first called a "goldsmith's note," and is now called "a bank note." _third_: if the customer wished to make a payment he might write a note to his banker desiring him to pay the money to some particular person, or to his order, or to bearer. these notes were then called "cash notes," but are now called "checks." now, it is perfectly clear that neither a bank note, nor a check creates any new right; it merely records on paper a right to have money which already exists, and it is used for the purpose of transferring that right to have money to someone else. it will be noted now, and i want you to keep this observation clearly in mind, that all banks are banks of issue, that is issues of credit. macleod says that the very meaning of the words "to bank" is to issue a right of action or a credit, in exchange for money or other debts; and when once the banker has issued this right of action, or right to have money, to his customer by writing it down to his credit, it makes not the slightest difference as to his liability whether he delivers his own promissory note, that is a bank note, to his customer, or whether he merely creates the credit, and gives him the right to transfer it to someone else by means of a check. when a person deposits money at the bank, it is not his intention to deprive himself of the use of it; on the contrary, he means to have as free use of it as if it were in his own purse. the depositor, therefore, lends his money to his banker, but yet at the same time has the free use of it, as the bank employs that same money in promoting trade; upon the strength of the money being deposited with the bank, it buys debts with its promises to pay, either in the form of "bank notes," or of credit on its books, several times exceeding the amount of the cash placed with it; and the depositors who sell the bank their debts, have the free use of the very same coin which the depositor has the right to demand; thus the lender that is, the depositor, and the borrower that is, the banker, have the same right at the same time to the free use of the same money. all banking depends on the calculation that only a certain small portion of each set of depositors will demand the actual cash, but that the majority will be satisfied with the mere promise, the "bank notes" or the credit on the books of the bank. banking is a species of insurance; it is theoretically possible that a banker may be called upon to pay all his deposits at once, just as it is theoretically possible that all the lives insured in an office may end at the same instant; or it is theoretically possible that all the houses insured may be burned at the same hour. the depositors and noteholders of the bank of england could demand payment the same day. all the depositors and noteholders of the bank of france could demand payment the same day. all the depositors of any bank could demand payment the same day. but all banking, as well as all insurance, is based upon the expectation that these contingencies will not happen, and the average experience of life proves that they do not happen. a banker multiplies his debts to be paid on demand and keeps buying a sufficient amount of cash to insure the immediate payment of all claims which are _likely_ to be demanded at one time. if a pressure comes upon him he must sell some of the securities he has bought, or borrow money on them. when the customer discounts a note at his bank he parts with the property in it, just as when he sells any other article. the note becomes the absolute property of the banker and he may sell it again, or pledge it, or deal with it in any way that suits his own interests best. the notes in the safe of a banker are exactly similar to the goods in the shop of a retail dealer. the retail dealer buys the goods from the wholesale dealer and sells them at a higher price to his customers; and, as he makes a profit by doing so, the goods are _capital_ to him. notes likewise are goods, or merchandise, which the bank buys from its own depositors at a discount, or bearing interest for a time, and as the bank makes a profit by so doing, the notes are _capital_ to the bank precisely in the same way that the goods in the shop of the retail dealer are _capital_. now, lest we shall be misled, i want to call your attention to an error which is very common. many persons not being aware that the word "_deposit_" in banking language means the credit created in exchange for money, checks, drafts or notes bought, when they hear or read that a bank has such an amount of deposits conceive or suppose that the bank has that amount of cash on hand to trade with. when it is said that a bank has $ , , , $ , , or $ , , or $ , , of deposits, they are not deposits in cash at all; they are almost entirely pure credit, and are exactly equivalent to just as many "bank notes." they are nothing but an enormous superstructure of _credit_ built up on a comparatively small basis of reserves exactly like the note circulation. these figures do not show the quantity of cash at the command of the bank that can be traded with; but they show the quantity of business the bank has done, and the debts or liabilities it has created. these deposits, then, which so many think are cash, are in fact nothing but the credits the banks have created in exchange for the cash and notes which figure on the other side of the balance sheet as assets or resources. this play of bank credit has been graphically described by joseph t. talbot, the vice-president of one of our largest national banks; he says: "a customer holding a bank note may present it for deposit and credit, instead of demanding redemption in cash. in this case, there is a conversion from the circulating form of credit, payable to bearer, back to a 'book credit,' payable to order, as was ordinarily the case. thus it will be seen that all these forms of 'bank credits' are interchangeable, one for another, at the pleasure of the holder of the credit. the difference between these several forms of credit involves no changes whatever in the bank's liabilities. they amount to about the same difference which exists, let us say, between a coupon bond and a registered bond. the one is payable to bearer, the other is not. at one time a bank note may best serve a customer's needs; at another time he might prefer a deposit in the bank; or again he might prefer 'exchange.' all these interchangeable uses of credit actually and continuously take place. it will now be clear that a circulating 'bank note' in the hands of the public does not differ essentially from a 'deposit credit' on the bank's books. "if one of your local bankers were asked how much he allowed his bank to issue in cashier's checks, he would tell you that he issued whatever sums his customers wanted; either against their balances, or against new loans. he would tell you the same in respect of the amount of exchange he issued; his sole rule and guide being the amount of such credit which his customers require, and which he is in position to lend afresh, and to maintain against, or to redeem in cash, if demanded. if asked how long these obligations were allowed to remain outstanding, he would tell you that he had no control whatever over the period of their circulation; that these obligations stood out just as long as the holders wanted to use them in that form, and no longer; that his only concern was in being prepared to redeem the obligations on demand in cash. "thus it is that the volume of bank credits, whether in the form of deposits, checks or notes, responds in a rise or fall according as there is legitimate trade demand; and over this the bank has no control, except by ceasing to make loans. this is why deposits increase as loans increase, and these increase as the volume of business increases." now, if we understand the real nature of these so-called deposits, the reason for their diminution is plain. deposits fall because loaning stops. when you stop loaning, you stop creating credit. you can readily see that it is not a diminution of deposits in cash, but it is a contraction of credit, a refusal to make loans. this erroneous notion of the real meaning and nature of deposits in banking language may lead to very great mistakes in estimating the stability of a bank. that a bank's stability depends on a due proportion being kept between the deposits or the liabilities and the cash; and it may very well happen that while the deposits are apparently mounting high, and might lead many persons to believe that the actual quantity of cash was increased, it might be nothing, perhaps, but a dangerous extension of credit. and if this were carried too far, the bank might be in the most dangerous position just when it was apparently most flourishing. now, let us consider how a banker who has purchased either money or notes from his customers by creating deposits or debts, may be used by his depositors. that is how the depositors may use these credits. of course, every banker does business exactly in the same way, or practically so, and when their customers begin to use checks these different results may follow: _first_: the actual money may be drawn out. _second_: the credit may be transferred to the account of another depositor of the same bank. _third_: the check may be an order to pay another bank. but in this case, if the first bank is ordered to pay the second bank so much, the chances are that the second bank will be ordered to pay the first bank practically the same amount. if the claims of the two banks on each other were exactly equal, the respective checks or orders are interchanged, and the credits readjusted to the different customers' accounts accordingly, without any payment in money. if it should happen that the claims of all the banks against each other exactly balanced, any amount of business might be carried on, without requiring a single dollar of gold coin. if the mutual claims of the different banks against each other do not exactly balance, it is only necessary to pay the differences in coin. now, exactly to the degree that banks are brought into a closer relationship with each other by such means, the smaller is the quantity of coin required to carry on the business of the country; or the more gigantic is the superstructure of credit which can be reared upon a given reserve. from what i have already said, you must all see that a merchant deals with credit; but a banker is a dealer in credit. a merchant brings his notes or debts, that are payable some time in the future, to the banker for sale, and the banker buys them for credits in the form of deposits, or debts payable instantly, which have precisely the same effect in commerce as so much gold. he reaps exactly the same profit by creating a credit in favor of his depositor as if he gave him the actual cash. the checks drawn against these credits so created by the banker circulate commodities in trade precisely in the same way that bank notes do which circulate commodities precisely in the same way that gold coin does. consequently, these bank credits so created by the banker, whether upon his books subject to check, or in the form of bank notes, are exactly equal in their practical effects, so far as exchanging commodities is concerned, to the creation of so much gold coin. this being true, you must realize how absolutely essential it is that every bank credit must be kept as good as gold by current redemption in gold everywhere, whenever demanded. mr. banker: mr. lawyer, in all that you have said you have only affirmed what i said in the outset; the banker is a shopkeeper, a trader exchanging his credit for money and debts. the development of the banking business in the united states is most interesting, and its growth has been simply marvelous. on feb. , , almost fifty years ago, when the national banking system was inaugurated, there were in the eastern states, including new york, new jersey and pennsylvania, what are known as mutual savings banks. these institutions are run solely for the benefit of the depositors. this is upon the theory that those using savings banks are the wards of the state. these mutual savings banks have no capital and the trustees, or directors, serve without pay. there are today in the united states of these mutual savings banks, with deposits amounting to $ , , , . practically all of these mutual savings banks are located in the east, there being only thirty-one west of buffalo. these few got a start before the present conditions of banking grew up. today it is quite impossible to start a mutual savings bank anywhere, because the state banks and trust companies are able to pay such high rates of interest, owing to the fact that they can conduct the savings bank business as a part of their regular commercial business, or as a part of their trust company business. that is, the savings bank business is incidental to their regular business, and requires no separate and special organization. if there are any extra charges they would be nominal at most. the savings business being conducted over the same counter, this particular branch of banking may be regarded as done at no cost to them. under the circumstances it is very easy to see how the state banks, and those banking institutions more recently organized, known as trust companies, have absorbed all the savings business where the mutual banks had not already been permanently established. another reason that has enabled them to do this is the fact that in most states there are no prescribed rules for the investment of savings bank deposits, and the banks are using the savings deposits for commercial purposes, and also in speculative ventures, particularly in the way of underwritings where the profits are much larger than could be realized from such funds if they were limited to investments of the highest order where, as you know, the rates of interest are comparatively much lower. mr. merchant: how many such institutions are there? mr. banker: there are today thirteen thousand three hundred and eighty-one state banks, with four hundred and fifty-nine million of capital and two billion nine hundred million of deposits. side by side with these state banks are , state savings banks, with seventy-seven millions of capital and eight hundred and forty-three millions of deposits. these state savings banks differ only in name from the regular state banks. the only point to be noted in this connection is that the local statutes, or the laws of the state where the bank is located, always determine whether the name will be a state savings bank, or a state bank. it may be assumed that whatever the name, the business carried on is practically the same all over the united states, with here and there some slight difference, but no substantial variance. mr. manufacturer: these institutions you have named do not include the trust companies, do they? there seems to be a perfect craze to start trust companies now. why is that? mr. banker: within the past twenty-five years there has grown up, almost as if by magic, the class of banks you have just mentioned, differing from state banks and state savings banks only in one single respect, but that is an all-comprehending one. enterprising men in almost every state have secured the passage of laws for what they call a trust company business. generally speaking, what you cannot do under a trust company charter is some kind of a business that has not yet been thought of. there are , of such trust companies, so called, with capital amounting to $ , , owing individual deposits amounting to $ , , , with $ , , additional liabilities, or something over four billion dollars, all told. this vast business has grown up outside of the national banking system, simply because the national bank could not, but these other institutions could develop along natural lines of business progress. notwithstanding these obstacles, however, there is no kind of a banking business that the national banks of the country are not doing in some way or other. of course, they are not all of them doing all kinds of business, but they have worked out methods by which they can, if they desire to do so. of the , national banks, nearly half of them, , , are now doing a regular savings bank business, without any express authority of law, and , , depositors have deposited with our national banks $ , , . who is there who does not know that either downstairs in the same building, or upstairs in the same building, or around the corner in some other building, with the back ends of the two buildings adjoining, many, if not all, the national banks have attachments, where they are carrying on the savings bank business and the trust company business under state charters. national banks are under national supervision, while the state banks and trust companies, owned and manipulated by them, are under state supervision, or possibly under no supervision at all. there are many national banks holding the stock of other banks, either savings banks, state banks, or trust companies in their treasury, and some of them are holding the stock of two or more banks. only recently it was discovered that a national bank had invested ten million dollars, directly or indirectly, in other banks throughout the country; possibly an examination would show that this ten million was partly the stock of other national banks, and partly the stock of state bank institutions such as savings banks, state banks and trust companies. now, if there is one holding company more to be criticised, and more to be abjured than any other, it is a bank holding company, controlling the stock of a great many other banks, particularly so under different supervision. when we behold the malformation of banking as now carried on in this country, due to the struggle of the various institutions to adjust themselves to these new conditions and to take advantage of all the opportunities in modern business, it reminds one of the crooked, twisted, knotted, and sadly misshapen tree-trunk that has grown up amidst and between huge rocks, that stand in the way of an upright and symmetrical development. these huge bowlders and rocks are the obsolete laws on our statute books, our ignorance, our selfishness, our prejudice, our political cowardice and our demagoguery. like our mutual savings banks, the original idea was that a trust company could only do a trust business in the strict sense of that word. they could hold a railroad mortgage, and pay interest to the bondholders, perform similar functions for other corporations, and could act as a trustee in case of estates. today you may assume that no kind of business will escape the scope of the charter of the so-called trust company, from the care of estates and the execution of corporate trusts to banking in all of its forms, and agencies of every conceivable kind. in other words, the all-round charter of the american trust company, popularly so called, permits it to do anything that the varied affairs of the american citizen may by any chance require. just as there are in the east mutual savings banks, which are relics of former days, so the trust companies, with their limited powers, are only a landmark in the evolution of american banking, and must disappear as a separate institution in time. the growth and development in fifty years has produced in the united states a banking unit, doing in a conglomerate way what it ought to be doing as a departmental business, with four distinct functions: viz., a commercial business, the manufacturing of credit; a savings bank business, accumulating the savings of the laboring masses, which is a sacred trust fund that should be placed in high grade investments; a trust company business, executing trusts, and carrying on agencies of every kind; a note-issuing business, which is only another form of the commercial business, as the bank note is in fact only another form, as we have learned, of a deposit--a circulating credit in place of a check credit for the convenience of the people. from feb. , , the birth of the national bank act, down to the present time there has not been one single change in the national bank law worth mentioning. it is true we have dotted an "i" here, and crossed a "t" there; but as for a substantial change there has not been a single one made. now, this is truly a most marvelous fact, when you consider how great have been the changes, especially since , or during the past twenty-two years. our banking resources have increased fourfold. in they were about six billion, today they are more than twenty-five billion. mr. lawyer: this growth in our banking power is not so strange because it only reflects the growth of our business. the clearings of the united states in were only thirty-seven billion, while the clearings this year must pass the hundred and seventy billion dollar mark. the productions of the united states in were only seventeen billion. the productions of the united states in will exceed thirty-five billion dollars. the wealth of the united states in was only sixty-five billion dollars. the wealth of the united states in is estimated at about one hundred and twenty-five billion dollars. the imports in were seven hundred and eighty-nine million; the imports the present year will be one billion eight hundred million; the exports in were eight hundred and forty-five million; this year our exports will exceed two billion three hundred million dollars. mr. farmer: and do you mean to say with this vast, almost incalculable increase of production and wealth and consequent increase of banking resources, there has not been a single step taken by the national government to facilitate it? mr. banker: mr. farmer, there has not been a single change made to facilitate the handling of this vast business. on the other hand, there seems to have been such a profound ignorance on the part of congress, or such an abject fear, lest they might aid business, that every progressive movement of a legislative character has been left to the states, which have given us laws as varied as jacob's coat of many colors; indeed, rivaling the fifty-seven varieties of the famous pickle man. not only have they left the banking business to just "grow up" like topsy in uncle tom's cabin; but the government itself has been one of the greatest obstructionists to the national growth of our banking business in its interference with the natural movement of the money of the country which by every economic law, and business right, belongs in the channels of trade, and not in the strong boxes of the government. mr. manufacturer: that is absolutely true. i was greatly impressed only yesterday by a statement made by the secretary of the treasury right on that point of government interference with current business by withdrawing money from circulation and piling it up in the vaults of the treasury. in the light of what we have learned during our talks, it is simply appalling; indeed, it does not seem possible in a civilized country. secretary macveagh says in the outset, "no reform of your banking and currency system can be adequate which does not take the united states treasury out of the banking business," and then adds: "when the independent treasury system was established the idea was that all the funds of the government should be stored in the treasury vaults in the form of money, just as the mediæval war lords kept their treasures in strong boxes. the independent treasury system was established in troublesome financial days, when the state banks were not the safest places for the deposit of money. the people decided that the public funds must be kept in government vaults for safety. "in this country, with our rigid laws fixing the minimum reserves the banks must hold, any loss of cash by the banks means an instant contraction of their loaning power. if the banks of new york and chicago lose $ , , cash, they must at once reduce their liabilities by $ , , . this means that they must reduce by that amount their loans to the business community. "with the volume of bank credit moving in the reserve cities four times as fast as the volume of cash, and throughout the country ten times as fast as the volume of cash, it is plain that the machinery of credit is extremely sensitive to variations in the amount of cash held by the banks. for this reason, an institution like the united states treasury, alternately accumulating and disbursing many millions of cash, is likely to create widespread disturbance in the money market. "the funds held by the great european governments vary from $ , , to $ , , . the coin, bullion, and paper money held as assets in the united states treasury during the present administration has varied from $ , , to $ , , . in other words, nearly one-tenth of all the money in the country is held idle in the treasury vaults. if this money were all deposited in the banks it would increase their reserves per cent. "the receipts and disbursements of the treasury are most irregular. the treasury receipts in exceeded the disbursements by $ , , . two years later the disbursements exceeded the receipts by $ , , . for the past two years receipts have again exceeded disbursements. the general fund in the treasury was $ , , in ; three years later it had fallen to $ , , . under our present system of keeping a large surplus government fund idle in the treasury these wide variations in the yearly balance not only seriously disturb the money market and the business of the country, but force the secretary of the treasury to enter actively into the money market as a paternal overseer of the machinery of credit. "it not infrequently happens that surplus revenues accumulate in the treasury just at a time when the banks are straining their resources to grant all the credits needed to finance a business boom. the treasury then takes money out of the banks and hoards it just at the time when the country most needs it. if the business boom goes so far as to strain credit to the breaking point, then the treasury must come 'to the relief of the situation,' by depositing some of its hoarded cash in the banks. in recent years the treasury has been carrying a large surplus, and it has been in a position to relieve financial tension by depositing funds in the banks. in december, , following the money panic, the special deposits in the banks by the treasury had reached $ , , . three years later they were reduced to $ , , . in the fiscal year - , the treasury withdrew $ , , from the banks. "this state of affairs places in the hands of the secretary of the treasury a power greater than any american should have. the power of the secretary to influence the money market by deposits or withdrawals of public funds is always dangerous. no government officer should have this power. it has been a great burden, i believe, on the shoulders of every recent secretary of the treasury department. "if the people realized how dangerous is the power in the hands of the secretary of the treasury, they would insist that the treasury be at once taken out of the banking business. accustomed as we are to government interference with the money market, few of us realize how the treasury in the past few years has exercised the central-bank function of regulating the discount rate. the treasury, by alternate deposits and withdrawals of the public money in the banks, as well as by other devices, has attempted to regulate the discount rate. "the treasury department should be divorced from the money market and from the banking business, and the way to effect the reform is plain. we should have in this country a quasi-public institution not only to hold the ultimate cash reserves of the banks and to regulate the rate of discount, but to act as the fiscal agent of the government. such an institution would hold the government balances as deposits, and the government could check against them just as any large business concern checks against its balances in bank. with the government balances deposited in such an institution the business of the country would never be disturbed by the treasury hoarding up cash, and the secretary of the treasury would no longer be forced to meddle in the money market. "as long as we have the present banking and currency system, we shall have panics--and no longer. does not this alone create a state of emergency? what doubt should there be of the urgency of this legislation? why should it take another wasteful and degrading panic to impress congress? why cannot suffice? there are many other things of prime importance to be secured through monetary reform, but if nothing were to be secured but emancipation from panics there would be abundant imperative reasons for immediate action by congress." mr. merchant: this statement of secretary macveagh proves absolutely just what you said a moment ago, that the situation was appalling, and when you realize that this practice has been kept up ever since , when the sub-treasuries were established, it is unbelievable. the act of aug. , , declared it a felony to deposit public money in banks. the united states government has been committing an economic felony ever since. it has been committing an economic crime against commerce and the laboring interests of the country ever since that act was passed, and is doing it this very hour. the act of feb. , , establishing national banks, authorized their use as depositaries of the public money except "receipts from customs." forty-four years later the act of march , , struck out the words "except receipts from customs." by the act of march , , bank checks were made receivable for customs dues, but no step has been taken by the treasury of the united states to make them so at new york, baltimore, boston, chicago, cincinnati, new orleans, philadelphia, st. louis, san francisco and washington, where the united states government still has its morgues for our money. every day the checks are presented which are sent in in accordance with the law, and the actual money is withdrawn from the channels of trade; that is, the united states government withdraws reserve money to the full extent of every dollar that is due it. mr. lawyer: while mr. manufacturer was reading what secretary macveagh said, i have been wondering what the people would do if the united states steel corporation, the standard oil co., j.p. morgan or john d. rockefeller, or any of the railroad companies, or any other great interest, should collect and hold in safe-deposit boxes hundreds of millions of money, just as the united states treasury does. mr. farmer: i'll tell you what we would do. we would blow them up mighty quick, and hang them to boot, that's what we'd do. mr. merchant: gentlemen, just think what it means to withdraw these hundreds of millions of reserve money from the channels of trade, say in the fall, keeping in mind that every dollar that the government grabs and withdraws, will support from five to ten times that amount of credit. the withdrawal, as mr. macveagh said, of one hundred million dollars, means the contraction of from five hundred million to a billion dollars; this is not only a fool's practice, but it is an actual crime against the commerce of the country; a crime against the producers, a crime against the laboring men of the country. mr. lawyer: how long, o lord, how long, shall we remain the laughing stock of the rest of the world? but, let us see, can any man here give me a single reason why the united states government should not deposit its money with the banks, precisely as all the other governments of the world do? it seems to me perfectly clear that the united states government should treat its income precisely as this town does, this county does, this state does. is there any conceivable reason why it should not act in this matter precisely as new york city, chicago, new york state and illinois, and every city and every state does? mr. banker: not one in the world. mr. manufacturer: this discussion upon the development of banking in the united states and the present treasury situation brings out the necessary reforms most vividly to my mind from these two points of view, the banks, and the treasury. _first_: assuming that we are all agreed as to the result of our talk last wednesday night upon reserves, that they must be national to be equal and adequate, our conclusions now are inevitable, ( ) we must give to the national banks the power to do a savings bank business, as well as a commercial business; ( ) we must give our national banks the power to do a trust company business; ( ) we must give our national banks the power to issue a pure credit bank note precisely like that issued by the scotch banks and the canadian banks, and was issued by the five hundred banks in new england before the war. these notes will go to the clearing houses every day with the checks and drafts to be cleared at precisely the same time, and precisely in the same way. _second_: we must take the united states government out of the banking business, so that its transactions will cease to be a disturbing factor in the everyday affairs of the commercial world. mr. banker: you have outlined these necessary reforms splendidly, but there are just two more points in this connection that must not escape our attention. they are these: _first_: all these various forms of banking are distinct in character and economically the funds of each perform a peculiar function that must be recognized and observed or we shall make a great fundamental error in constructing what we hope will prove a sound financial and banking system. we must provide that the commercial function, the savings function, the trust function shall be kept apart by separating the funds arising from each, and keeping them completely segregated, in order that the country may always know just what its commercial fund is, as distinguished from its investment fund. _second_: there is such a great demand for farm mortgage loans by those who are pursuing agriculture that i am convinced that some provision should be made whereby the farmers of this country could obtain money upon their lands, as cheaply as our great railroads and other corporations are able to do. i have given this matter much study, and as you gentlemen are aware, i am a member of the committee appointed by the american bankers' association to investigate and report the best method possible to accomplish this purpose. therefore i think that we had better consider it here. mr. lawyer: i am in perfect accord with what you are aiming at, but it is almost eleven o'clock. mr. laboringman: i have been waiting patiently to see whether you gentlemen were going to provide in some way for coöperative credit, but up to date, you've not peeped a word. mr. manufacturer: both of these subjects are really outside of a financial and banking system, the particular thing we set about creating. however, i am perfectly willing to take a night to discuss them, and if we should find that either or both of them should constitute a part of our plan i am ready to adopt them. mr. banker: all right, i am agreed, and i think we all are agreed that it is not only fair, but advisable, that we take up the whole subject next wednesday night. uncle sam: do you know, boys, i am really proud of the work you are doing; you've gotten on swimmingly. you have shown such fine moral courage in caving in when you found out that you were wrong instead of playing the part of the jackass that has not intelligence enough to discern when he is in error, and too obstinate to change, if he happens to find out by accident that he is wrong. mr. manufacturer: uncle sam, i am a democrat, and i look upon that as a personal stab. uncle sam: just wait a minute, or playing the part of the elephant, that is so turgid, or possibly designedly stupid, or so calm and by self-satisfaction lulled into a conservatism that amounts to reaction, and therefore refuses to move. mr. merchant: well, i'm a republican, and that looks like a slap at me. however, i guess uncle sam is just in for a housecleaning tonight. uncle sam: you're both all right, personally, but your organizations have been in wrong until just now there seems to be a patriotic soul-awakening, and it's up to you to redeem them, or there will be a housecleaning, and don't you forget it. i want men; men who have intelligence and conscience; men who are capable and have convictions; men who have moral courage; men who will fight if necessary to have peace; i mean that peace that rules only when right prevails and justice reigns. good night. twelfth night land credit bank uncle sam: boys, by unanimous vote we agreed at our last meeting to devote tonight to the subjects that seem to lie close to the hearts of mr. farmer and mr. laboringman. you will remember that mr. farmer insisted that our work would not be complete unless we included in our plan a land credit bank, while mr. laboringman declared that he had waited patiently to hear what we had to say about coöperative credit, but in vain. since mr. farmer is a member of the committee appointed by the agricultural society of his state to investigate the subject of land credit banks, i presume he is loaded to the guards and can tell us all about it, and convince us, too, that he is right in his contention. i suggest that we let him lead off tonight. mr. farmer: well, gentlemen, i can assure you of my confidence of my ability to convince you of the importance of recognizing my contention; but i shall have to ask you all to be patient and agree to assist me in working out the plan that is best adapted to our needs and conditions. in studying this aspect of the banking problem, i think it will be well to follow the steps of development up to date, just as we have in considering other phases of this question, because experience is our surest guide to tell us what not to do as well as what we ought to do. in the outset, however, i want to call your attention to the fact, that there is no subject of broader interest and more world-wide discussion than the productivity of the soil. you are all aware, no doubt, that there has been established at rome the international institute of agriculture, and that last summer fifty different governments were represented there. hon. david lubin, of california, represented this government. the president of the united states became intensely interested and with the help of our foreign representatives, particularly hon. myron t. herrick, ambassador to france, a vast amount of most valuable information has been gathered, studied, digested and classified. i think that we are now ready to take the matter up and legislate upon it. our interest ought to be greater and more intense than that of any other nation on account of the number of our people engaged in agriculture and the staggering interest rates they are paying. think of it. the , , farmers of the united states are adding over $ , , , to the national wealth each year. they are doing this on a borrowed capital of $ , , , , on which $ , , of interest is annually paid. counting commissions and renewal charges, the rate averages at - / per cent for this country as against - / or - / per cent for germany. if the american farmers had a thoroughly organized system of coöperative associations they would not only save this difference of $ , , or $ , , to themselves individually, but in the course of time the entire debt would be transferred to the societies, the interest paid to them, an economic waste stopped, and this stupendous sum restored to agriculture. the assertion is neither fanciful nor extravagant. it is below the actual ratio obtained by a comparison with the german figures. there is practically no limit to the amount of capital that could be advantageously employed for rehabilitating worn-out and abandoned farms, opening up new areas, and introducing modern methods of cultivation; and it is of vital importance that this capital be obtainable at once in sufficient volume and on easy terms. the world-wide problem caused by the pressure of population upon the means of subsistence now confronts the united states in the very face of its matchless natural resources and vast acreage of arable lands still remaining untouched by the plow. the $ , , of foodstuffs exported last year barely equaled per cent of the annual interest charges on the debts the farmers owe. the cause of the trouble is the lack of capital, and the remedy lies in financing the farmer and the landowner. this is the indisputable conclusion logically reached from examination into the actual conditions and from comparisons furnished by recent european history. the solution of the problem concerns the general welfare as much as does the currency and monetary reform, and it is gratifying to note that it seems destined to go side by side along with this undertaking. for as soon as the alarm was sounded the best talent of the nation became enlisted, and now bankers, merchants, professional men, legislators, and private individuals in town and country, many impelled purely by patriotic and disinterested motives, have combined their efforts to better the situation before it pass to the acute and critical stage. the only instrument by which land-mortgage banks can finance themselves, draw money from the public for investment in loans, are the debenture bonds, but these bonds will not circulate freely nor far from the place of issue unless they are known to have the same underlying values and give the same rights to the holder, regardless of whether they be secured by mortgages in texas, massachusetts, or in any other state. but possessed of these characteristics as guaranties of law, there is no reason why debentures of large mortgage banks should not be listed in stock markets and sold, negotiated, and exchanged as readily as railway and municipal securities, and thus equalize and reduce interest rates for farmers throughout the country. for our guidance that we may escape all cost of experience that has been paid for by others, i am going to give you the benefit of my study of the government report upon this important subject and quote it extensively as the best authority we have. you must all realize that this almost complete organization of land and rural credit in advanced european nations was not a haphazard and spontaneous growth. it was brought about by the insistence of public and private individuals, philanthropists, scholars, bankers, legislators, agricultural societies, government commissions, and national assemblies, all studying and working in a common cause. the history of their efforts in the middle of the past century reads much like an account of the agitation which has been started in the united states by the american bankers' association, the southern commercial congress, the federal authorities at washington, and other bodies and individuals, for financing the farmer, improving agricultural conditions, and encouraging the movement back to the soil. in europe the agricultural banks and credit facilities were created before agricultural or even general education was attempted. the united states began at the opposite end. the american colleges and systems for teaching agriculture are among the oldest and best in the world, and millions of dollars have been appropriated by the federal and state legislatures since the passage of the morrill act in lincoln's administration to aid this science in one way or another. incalculable good has come therefrom, but the results would have been far greater if financial education had gone hand in hand with this work. it would have led to the study and introduction of the rural banking methods of europe generations ago, and so familiarized the american farmers with the uses of credit that the lack of capital and excessive interest rates would not now be interfering with the agricultural development of the country. the development and history of land credit banks in germany is most interesting and is as follows: the land-mortgage banks are either joint-stock corporations or societies of borrowers. these latter are typified by the well-known german landschaften, and are the originals of all land banks. before them the private money lender reigned supreme. the organization of land credit, in fact, began with them. they undoubtedly also suggested the coöperative idea to herr schulze, because five, with nearly $ , , of mortgage loans, were in existence in , when he was trying to start his personal-credit society at delitzsche. these peculiar institutions are associations of landowners, and have no shares and pay no dividends, the profits, if any, going to reduce the loans; and since they and their borrowers are identical, and managerial services gratuitous, they have been able to lend money at lower rates than any other kind of companies. the establishment of the old landschaften was the outcome of the indebtedness and distress of the nobility, and their membership in germany is still composed mainly of that class and large landed proprietors. after the seven years' war the nobles, who owned nearly all the land, lacked the working capital necessary to repair and cultivate their damaged estates, and so were unable to pay their creditors. frederick the great ordered the suspension of interest on all estate debts for three years. the period was subsequently extended. the result was the withdrawal of the money lenders from agriculture, the rise of interest to ruinous rates, and a financial stringency that involved the public welfare. in order to relieve the situation this autocratic king decided to adopt plans that had been submitted by herr bühring, a berlin business man. accordingly, in , by a royal fiat, he forced the nobles of silesia to join an association whether they wished to borrow or not, and their lands were made jointly liable without limit for all loans granted by the association. loans were granted only upon the consent of the directorate elected by the members themselves. great care was naturally exercised, so no losses occurred, while immense credit came to the association. this was the first landschaft. others were formed in the same fashion. nine more were formed by the provinces and one voluntarily. then two companies were organized on the coöperative principle, so that there are now twenty-five landschaften. the mortgages held by them, all on farm lands, exceed $ , , , and the interest rate runs as low as per cent and . per cent per annum. the bonds by which the money for these loans were obtained are secured by the mass of underlying mortgages and general assets of the issuing association, and ultimately by the unlimited liability of all its members. the collective guaranty and the fact that loans are made only to members constitute the characterizing features of a true landschaft; but there is a growing tendency to limit this liability and substitute reserves in place of it. originally a landschaft did not give cash to a member in exchange for his mortgage. it gave him a bond which simply contained a promise to pay in the event the interest and principal could not be collected from the debtor. the bond was of the exact size of the mortgage, primarily secured by it, and made payable to bearer on a few months' notice. in case of default the holder had to resort to foreclosure proceedings, so the bonds had only a limited circulation, and were often sold below par. this was but a slight advance on private money lending. later the associations undertook to collect the interest and principal. finally they assumed direct responsibility, and began to give cash to members for their mortgages, raising funds for this purpose by issuing and selling bonds of even denominations for large and small amounts. the practice of requiring mortgages to be paid in lump was abolished, and in place thereof the loans were made repayable by annual installments running through a long period of years, and the installments were set aside for redeeming the bonds. these steps brought about a complete revolution in land credit and marked the beginning of the land-mortgage business as it is known today. the whole theory of the organization of land credit is based upon this debenture bond and system of amortization and sinking funds devised and introduced by the landschaften. one without the other two is useless. the three must be combined, and also coupled with strong management under wise laws in order to attract a steady flow of cheap money to agriculture. it is remarkable that this truth has never been realized nor applied in the united states to farm-mortgage loans. in spite of the example of practically every nation in europe for generations, the lending of money on mortgage in america still remains largely a mere brokerage business unrestricted by proper governing laws, either by individuals or corporations, while mortgages continue to be drawn up for three or five years, when experience shows that the average life of a loan is far in excess of that period and needs to be renewed time and again, with added expense to the debtor and trouble for the creditor. had the european amortization system been employed the companies dealing in western farm mortgages between and probably would have escaped the misfortunes that brought them down to ruin. amortization is simply a method of paying off a loan by returning a little of the capital each year. these payments are called annuities and are composed of the interest and contributions to the sinking fund and the cost of conducting business. they are calculated for periods of ten to seventy-five years, and at the end of the period the mortgaged debt becomes extinguished and the property returns to the owner free and clear of all encumbrances. the prevailing interest rate on amortizable mortgages in france at present is . per cent. but by adding a little over . per cent to this, and paying . per cent a year, a french farmer can extinguish his debt within twenty years and obtain a satisfaction piece in full from his creditor. thus, suppose he borrowed $ , . he pays $ annually twenty times for the interest, sinking fund and expenses. this makes a total of $ , , interest included, and his debt is paid off. a farmer in the southwestern states would pay this much for interest alone, and his debt would still be unsatisfied. amortization has a two-fold value. it lessens the debtor's burden year by year and increases in an equal ratio the security of the lender, provided, of course, the sinking fund created by the accumulated annuities be properly and honestly kept for the redemption of the debentures. the landschaften were very particular in this respect. hence, their debentures obtained the confidence of the public, and through their means they were able to draw capital from all parts of the country for distribution among their members at the lowest rates on record. if a holder of a bond wished his money back he had merely to sell his bond in the open market. in this way fluidity was given to real estate securities for the first time in history and the dream of "mobilizing the soil" accomplished at last. for these reasons the landschaften hold the most prominent place in the literature on land credit, and everybody who studies that subject must begin with them. the old landschaften, however, have many characteristics peculiar to their own localities and dates of their foundation. they are in fact governmental institutions, and their head officers are public functionaries clothed with summary executive and judiciary powers over the property, and, to some extent, over the actions of their associate members. these powers were simply an enlargement of the feudal and manorial rights possessed by princes in early times, and so, in many respects, are contrary to modern ideas. but the new landschaften, which have adopted the best principles, present points worthy of careful study. a description of these latter institutions is taken from the excellent report of sir f.a. nicholson to the madras presidency in india. these new institutions are of different patterns. several are annexes to the older societies, but most are independent and resemble ordinary mortgage banks, except in the essential point that they have no share capital, earning dividends. they are, as the old societies, simply syndicates of borrowers formed to supply proprietors with capital on the lowest possible terms and repayable in the easiest manner. they are gratuitous intermediaries between the outside capitalists and the borrowers, and while performing services of the highest importance in testing the security offered by the borrowers and in guaranteeing to the public the safety of the capital lent by them, they charge absolutely nothing for their services beyond a small commission, perhaps one-fourth of per cent, or even one-tenth of per cent, to cover actual expenses. it is usual for each association to be restricted to a particular area of operations within which every proprietor, whether noble or peasant, may obtain a loan if he can offer sufficient security. there is always a minimum limit either to loans or to the value of property on which loans will be given. this is usually low. in the new brandenburg landschaft, affiliated to the old kur-und-neumark landschaft, loans may be granted on property having a net income of only $ . the minimum limit is seldom even approached. members are those who borrow from the bank. they are generally responsible in all their property, not merely for their own borrowings, but for the debts of the society to the outside public. but in some cases only the property pledged to the society is responsible; in others they are bound, in case of need, to pay a sum proportionate to the amount of their own borrowing. there are no shares to be paid up except in two societies. these two resemble coöperative societies, for the shares are personal and nontransferable, are of unlimited number, varying with the number of members, and their value is claimable by a withdrawing member. the share seems to be demanded simply to provide a first working capital and the nucleus of a reserve. the amount of the share is frequently a certain percentage of the amount of the loan required. some societies demand an entrance fee of a few cents, which goes to the reserve. this reserve will be dealt with below. the societies in general, having no share capital, do not lend their own funds. the candidate for a loan asks that debentures may be issued against a mortgage of his property. this is then examined. if the security is approved the candidate executes a mortgage deed to the society, which thereupon issues debentures which are placed on the market and, being sold, provide the funds for the loan. in the old banks the debentures are simply handed to the borrower, who sells them for himself. in the new land banks either this is done or the bank sells them and pays the borrower the value if below par, or if they sell above par then the face value, the surplus going to the reserve; or they simply issue debentures on the market and pay the borrower the amount of the loan as settled. it will be seen, then, that the banks have no capital and no need for it. the debentures are for the usual class, secured not by the particular mortgage on which they are issued, but by the whole mass of mortgages held by the bank and by all its proper forms of security, viz., the property of the members, the reserve or guaranty fund, and even the sinking funds. in some banks a debenture holder has the right (never needed, however) of requiring a court to assign a particular mortgage against his debenture as a specific security in case the bank should fail to pay him his interest or capital due. a debenture holder cannot demand payment of his debenture, except when it is drawn for payment. but the bank can call in any at six months' notice, besides withdrawing them by lot in the usual way. these debentures enjoy an excellent position, the per cents selling usually at or above par. since cheapness of loans is the sole object of the bank, it is customary to call in debentures selling at a premium and issue a fresh series at a lower rate. loans are usually applied for to the district committee which each bank has, with a statement of the property, the amount required, and all documents necessary to prove title and freedom from encumbrance. properties may be valued by a special valuation, or a multiple of the net income as assessed to the land tax may be taken. in both cases, however, an inspection of the property is necessary unless under a special rule. half to two-thirds of the estimated value is allowable as a loan. the interest paid by the borrower on the loans is that paid by the bank on the debentures, the bank being merely an intermediary between the borrower and the actual lending public. but where the bank pays the loan in cash it charges such interest as it thinks proper, in order to make up any loss should the debentures sell below par. loans are repayable almost entirely by amortization, usually in about fifty-three years. some short-term loans are granted, with corresponding debentures. the bank cannot demand repayment of a loan except in case of waste, deterioration, or the like. on the other hand, the borrower is at liberty to repay in whole or in part whenever he pleases, but must pay the entire interest for the half year in which he repays. the loan is repaid by an annuity consisting of the interest, sinking fund (usually beginning at one-half of per cent), with a contribution to the reserve or guaranty fund, and another for the expenses of administration. the annuities have totaled per cent, but they now average around per cent or lower; e.g., interest being per cent, sinking fund one-half of per cent, guaranty fund one-fourth of per cent, and expenses one-fourth of per cent. some of the banks also require a lump payment on the grant of the loan of or per cent, to be credited either to the working or to the guaranty fund. the working fund is formed by the contribution made for the expenses of management and any special sources. hungary is the only nation outside of germany that has a true landschaft of the original type. but modified forms exist in russia, austria, switzerland, denmark and roumania, where they have been useful in supplying agriculture with cheap capital. there is no older principle in land credit than the landschaften idea. it has been tested and proved by over one hundred and thirty years of success, and could undoubtedly be employed to advantage by water users' associations in the irrigated regions of the west and in other parts of the united states where landowners might unite to raise funds for drainage or other improvements for their common good. some of the banks of switzerland and the credit associations of denmark, with the laws governing them, perhaps furnish the best models, as appears from the reports of the american ministers to those countries that have been forwarded to the secretary of state. the most noticeable fact revealed by the investigation of the european land-credit institution is the all-pervading presence of the state in every nation. most of the older joint-stock corporations have a public character equal to that of the german landschaften. every one that dates back to or was directly organized by the state or brought into existence by a government fiat or favoring legislation, subsidized in some way or other and granted special privileges. the supervision now exercised over them all is most stringent, going into the minutest details and varying from direct control to surveillance by state officials, usually by special laws that impose heavy penalties for malfeasance or even neglect of regulations. continental europe is accustomed to state intervention. commercial credit was organized by means of central banks connected with the government, and so this régime was naturally followed in organizing the land credit. for this reason the results obtained, at least in some instances, cannot be used by way of comparison to illustrate the possibilities of organization along the lines of private and independent endeavor. but whatever may be the opinion entertained for the state intervention in the land-credit system of the continent, there can be no doubt that the working principles and business methods of the european land-mortgage banks are the best ever devised, and that they will have to be introduced into the united states if it be hoped to make the farm mortgage a fluid and popular form of investment and direct a flow of capital in sufficient volume to agriculture to enable it to keep pace with the progress of the nation. the main features of this system are the limitation of the interest rate that can be charged, the amortization of the debt, and wise and equitable regulations and restrictions relative to loans and the issuance of debentures which protect the farmer from extortion and thriftless borrowing, and at the same time bring safety and a feeling of confidence to the investing public. these features, with modifications and additions, appear in all european land banks, whether they be semipublic, as they are in france, spain and russia, or of a private character, as with some cases in germany, or of the mixed type of switzerland and italy, but are best exemplified in the great crédit foncier of france--the largest and most successful land bank in the world. but germany has progressed very decidedly beyond the so-called landschaften as exemplified by her great mortgage banks which, though of comparatively recent operation, largely exceed in business that of the landschaften type, and it is here that we find many vital suggestions for our guidance. germany has general laws under which these mortgage banks operate, but the rules of operation and supervision are of the strictest kind. the mortgage banks of europe may be classified generally as public or semipublic, and as strictly private institutions. the first have just been described. the latter are all those which, whether they consist of lenders or only of borrowers, operate under general laws and have absolutely no privileges. the state, however, does not leave these companies entirely to their own devices. they are limited in the conduct of their business by strict rules and regulations, and are subject to the most scrutinous supervision. the best law of this kind is that enacted in germany in . it is the last word in legislation for private joint-stock mortgage banks, and with slight modifications could be easily adapted to the united states, as it was framed to overcome the troubles occasioned by the conflict of authority between the sovereign provinces of which the empire is composed. remarkable as it may seem, these companies in germany have outstripped the old established and specially privileged public banks. they now have $ , , , loaned out on mortgage, or over five times more than the landschaften. the capital is $ , , , the smallest being $ , and the largest $ , , . the bonds in circulation amount to $ , , , , with interest at - / or per cent per annum, while the average returns on mortgage loans are . to . per cent per annum. as per cent and even per cent dividends are yearly declared, the figures again furnish a favorable comparison with the landschaften and crédit foncier. the provincial head, however, selects the president of one of these newer german banks, while the imperial government watches over them all. the supervision is carried out by royal commissioners and extends to the minutest detail. these inspecting officials have the right to verify the securities and cash on hand, and demand information regarding every separate transaction. they may also send a representative to general meetings of stockholders and to sittings of boards of directors and take all measures that may seem fit to enforce the proper conduct of business. they also approve the appointment of the auditor and assistant auditor, who are charged in each bank with the duty of seeing that debentures are issued only upon the conditions and within the limits legally prescribed. it will be observed that the mortgage business in germany, as carried on today, is an evolution. the same fact is evident in the changes that have taken place in the crédit foncier, the greatest mortgage bank in the world. the history of this great institution is as follows: it was formed in under the law enacted that year for organizing land credit and improving agricultural credit facilities. it was immediately placed under government control, given a subsidy, and granted a monopoly for twenty-five years. the monopoly was not renewed, but all its original special privileges remain, which perhaps accounts for its being the only land bank in france. its relation with the state is very close, and many of its most important features were taken bodily from the landschaften. inasmuch as the institution has been the model for all europe and is now being widely discussed in the american press, i will describe it at length. the governor and two subgovernors of the crédit foncier are appointed for life by the president of the republic. it is subject to the surveillance of the treasury department of the government, and three of its directors must be high officers of the department. it may use the government treasuries for the receipt of its dues and the deposit of its surplus funds and enjoys a reduction in stamp and registration duties. its debentures are registered or payable to bearer, and the claim of a third party to them cannot be made in court except in case of theft or loss. trust and public funds may be invested in them. its mortgages are exempt from the decennial registration and consequent charges required of other mortgages. it has a cheap and speedy method of "purging" the title of real estate in case of disputes. in the event of default the courts cannot grant the debtor any delay and payments due it upon loans cannot be garnished or attached. it is allowed summary proceedings for attaching mortgage property in case of violation of contracts. if dues are not paid or if the property deteriorates it may attach and sell the property simply upon notice and publication. during attachment proceedings it has a right to all returns from the estate. the sale may be by auction in a civil court or at a notary public's office, if the court permits, and no adverse claim to the proceeds of the sale can be allowed until its claims are fully satisfied. the regulations under which the crédit foncier transacts its business are very strict. the mortgage loans must be first liens. the property must have a clear and unencumbered title and yield a certain and durable income. loans and theaters, mines, and quarries are not accepted. the amount loaned on any property must not exceed half its value, or one-third the value for vine-yards, woods, orchards, and plantations. factory buildings are estimated without regard to their value for particular purposes. a borrower cannot bind himself to pay a greater annuity than the total annual income of the property mortgaged, while on the other hand the society is not allowed to charge borrowers . per cent over the rate at which it obtains money on its debentures issued at the time of the loans. an excess of only . per cent is allowed on loans to municipalities. the outstanding loans and debentures issued must exactly correspond in amounts. after paying a per cent dividend the crédit foncier must set aside between and per cent of the balance of the profits each year for the obligatory reserve, and continue to do so as long as the same does not equal one-half of the capital stock. the investment of this reserve is left to the board of directors. the capital stock of the society must be always maintained at the ratio of one-twentieth or more of the debentures in circulation and is the primary guaranty of its obligations, especially the debentures. the capital at present is $ , , , divided into , shares of $ each; but authority has been obtained to increase the same to $ , , , represented by , shares, which will be done before the debentures in circulation pass the legal limit. one-fourth of the capital must be invested in french rentes or other treasury bonds; one-fourth in office buildings of the society, or by loans to french colonies, or in securities deposited with the bank of france as a guaranty for advances. shares cannot be issued at a price below par. they are nonassessable. the surplus may be loaned on mortgages or to municipalities or may be used in other mortgage business allowed by the statutes; and for buying its own debentures, making advances to borrowers in arrears, or purchasing mortgaged property in foreclosure; and for acquiring commercial paper acceptable by the bank of france or securities to be deposited with that bank. the governor of the crédit foncier most be the owner of at least two hundred shares of stock of the society. he receives a salary of $ , . the subgovernors must hold one hundred shares each. their salaries are $ , . they perform such functions as are delegated to them by the governor, and in order of their nomination fulfill his duties during his absence on account of illness or other causes. the governor appoints and dismisses all agents of the society and superintends the organization of the service in paris and elsewhere. he countersigns the debentures and signs the share certificates and all other papers and documents and must strive to promote the interests of the society in every way. the governor is the head of the board of directors, which is composed of himself, the two subgovernors, the auditors, and twenty to twenty-three directors. this body possesses the administrative powers of the society and is beholden only to the laws and the general assembly of the stockholders for the proper exercise of the same. the three auditors are the guardians of the society. their duties are to watch, investigate, and make reports. the only power they have is to call extraordinary general meetings of the shareholders. the general assembly of the stockholders meets regularly once a year. it consists only of the two hundred largest stockholders, of whom forty make a quorum if they hold one-tenth of the stock of the society. each member has one vote for every forty shares of stock held, but cannot cast more than five votes in his own name, nor more than ten in his own name or by proxy. he has, however, a right to one vote even though his shares be less than forty in number. the general assembly receives the report of the governor, and also of the auditors, if any. it elects the directors and auditors and decides on all resolutions or proposals for the increase of capital, the amendment of the by-laws and constitution, and generally on all matters not otherwise specifically provided for. the only places outside of france where the crédit foncier can do business are algiers and tunis. under a clause in its charter which allows it, with the sanction of the government, to enter into projects for improving the soil, developing agriculture, and to extinguish existing debts on real estate, etc., the society has been authorized to finance drainage projects and to advance money on the paper of the sous-comptoir des entrepreneurs, an incorporated association of builders. it may also receive deposits up to $ , , , one-fourth of which must be kept in the government treasury and the balance invested in government paper, treasury bonds, or high-class bankable commercial notes and securities. in connection with its banking house it has large deposit vaults. the crédit foncier is permitted to take short-term mortgages and does a big business in that line. but the true purpose of its existence and the greatest part of its operations are the granting of long time loans. these are made on mortgages to individuals and without mortgage to municipalities and public establishments. the periods run from ten to seventy-five years. the annuities required to be paid for amortizing the loan for the average period used are so small as to appear insignificant. the success achieved by the crédit foncier in popularizing the amortization principle for real estate loans is the chief cause of its great renown. at present its interest rate for mortgage loans is . per cent per annum, for public establishments . per cent, and . per cent for municipalities. the total annuity, including both interest and amortization sum, for a twenty-five year mortgage loan is a little over . per cent. with this small annual payment the debt is gradually wiped out, and nothing is left to be paid at the end of the term. the longer the term the smaller the annuity, and vice versa. the loans now exceed $ , , . here is an amortization table of the crédit foncier: _annuity of a capital of $ , interest at . per cent, payable semiannually._ duration. annuities. years $ . years . years . years . years . years . years . years . years . years . years . years . years . years . years . the crédit foncier is obliged to keep the interest and amortization payments in separate accounts, the latter going to create a sinking fund for the retirement of outstanding debentures. as stated above, the amounts of the loans and debentures must balance each other; consequently, as loans are paid up debentures must be paid off. borrowers have the right to pay in advance, which they frequently exercise, so the proper adjustment of the balance is beyond the control of the society. it is for this reason that the debentures, although calculated to be redeemed synchronously with the loans they represent, have no fixed time for maturity and are recallable at option. in each issue a certain number are repayable by lots, with prizes for the lucky holders. a bond last year drew a prize of $ , . the right to give prizes at the lottery drawings is one of the special privileges of the society. the debentures are of two kinds--those representing the mortgages are called "foncières" and those representing the loans to municipalities and public establishments are called "communales." they are issued in series. the smallest denomination is $ . they may be bought by installments and are the most popular form of investment in france, being held largely by farmers and poor people in the cities. the issue of for $ , , at per cent, payable within seventy years, was oversubscribed eighteen times. the total land mortgages and municipal indebtedness in france is figured at $ , , , . nearly one-third of this is represented by the loans of the society. such is the crédit foncier of france. the control exercised over it by the state through the appointment of its head officers, the simplified foreclosure proceedings, and the other judicial, administrative, and fiscal privileges accorded to it are common practices in continental europe. as mentioned above, all the older banks are specially privileged, and consequently have a practical monopoly of the mortgage-bond business in some of the nations. now, gentlemen, i have gone into these details not to be slavishly copied, because i think we would make a very great mistake to load down our legislation with so much detail. it will be far better to allow the managers to work out a system of operation that will he suited to our conditions. in this way we will not be handicapped by red tape that is ill adapted to our situation. the same penal laws that are in force with respect to our national banks with any additions that the peculiarities of this business call for ought, it seems to me, to suffice. my suggestion would be a comparatively simple organization with broad powers to the board of directors. in this way we will soon have an american system of land credit banks superior to any in the world, even though we do start after all others have begun. indeed, if we are wise, this is the very reason why we should surpass all others. now, if you will recall with me the points of change and progress made, you will find that the tendency is away from unlimited liability, as originally provided, and now toward a dependence upon capital and reserves solely for protection to the debenture holders. in my judgment we should adopt the following as the basis of our land credit bank: _first_: we should confine the business to loans upon improved agricultural lands. _second_: we should make the institution strictly coöperative, but with a limited liability to the amount of the paid-up capital. _third_: every local association, or primary unit, should be an association of men within a restricted locality and the business should also be confined to the immediate vicinity of the association. _fourth_: i do not believe that the membership of a primary unit should be less than twenty-five, nor more than fifty. _fifth_: i think that the capital of a primary unit should not exceed $ , , and that the shares should be $ each. no person should own more than two hundred and fifty shares, or per cent of the capital. _sixth_: all loans made should be recommended by the local association. in case of a loss by the sale of property taken over, one-quarter of such loss should be borne by the primary unit, of local association, making or recommending the loan upon which the loss was made. _seventh_: all expenses connected with the examination and recommendation of a loan shall be paid by the primary unit, or local association. _eighth_: the application for a loan should then go to a state organization, which should be created by a union of all the local associations. i suggest a central organization in each state for the purpose of lessening the expenses over the entire state, as the laws affecting real estate in the several states have some peculiarities to those states. _ninth_: each state organization should have charge of all the business done in that particular state; the examination and final approval of the security; the examination and approval of the title; the collection of all interest; the payment of all taxes and insurance, and the final repayment of the loan. _tenth_: the state organization should be a union of all the local associations in any particular state, and should hold one-quarter of the capital of all the local associations as its own for the purpose of carrying on the business of that state. _eleventh_: all property upon which loans are made should be conveyed absolutely to the state institution where located with a waiver of all rights of foreclosure; but, providing for the advertisement and sale of the property, as if a judgment had been rendered. this is essential to save the cost of foreclosure. _twelfth_: in case of a loss, as the result of the sale of any real estate taken over, one-quarter of it shall be borne by the state organization. i make this provision because no local association could carry all its losses, and yet it should be responsible for a sufficient amount of loss to impose a serious obligation upon the local association recommending the loan, and also a serious obligation upon the state institution for having finally approved and completed the loan. _thirteenth_: all the expenses of the state institution incurred by way of caring for the business of all the local associations should be paid by a percentage charge on all the business done in the state. this is desirable so that the mortgages shall go to the national organization, free and clear from any charges and obligations whatever. _fourteenth_: i would have a national organization which should fix the rate of interest to be paid by the borrowers, and the rate of interest of all the bonds and debentures sold. all bonds and debentures should be sold by the national organization, which should be under national supervision for the purpose of giving to the debentures the highest possible credit wherever they may be offered for sale. _fifteenth_: i think that one-half of all the capital of all the local associations in the united states should be transferred to the national organization, and be held and treated by it as if it were its own capital. and such capital shall be holden to the debenture holders as a guarantee, and for the purpose of securing the best possible credit for the national organization. _sixteenth_: the national organization, and all state associations, and all local associations, shall be under the supervision, and be examined by an auditor appointed by the president of the united states. _seventeenth_: to secure unqualified success for a land credit bank in the united states, no business should be attempted until the capital paid in shall amount to at least $ , , ; that is, until the national organization shall have a cash capital of its own of $ , , in order that its debentures may bear the lowest possible rate of interest that a large capital with a national organization under national supervision will insure. _eighteenth_: the debentures of a national organization should be free of all taxes, local or national. in general these are my recommendations, which i hope will be incorporated in the measure we are to prepare. mr. merchant: mr. farmer, i notice that you propose to confine the loans to agricultural land. don't you think that a good and equally helpful business could be carried on by loaning money on city and urban property? mr. farmer: possibly that is so, but i do not think so, and in any event, i never would combine these two classes of loans. if we are to have national land credit banks doing a country and city or urban business, let them be kept entirely separate. the general business permitted and carried on by the crédit foncier is a just ground for severe criticism. it is permitted to take deposits. an american land credit bank should have no such power. it should be confined, in my judgment, with extreme strictness to loaning money upon improved agricultural land. mind you, i do not say that there should be no other land credit bank to do some other kind of business. that is a matter for future and separate consideration. mr. laboringman: mr. farmer, in all that you have said you have not once even mentioned credit unions or mutual credit societies. i had been betting on you to help me out in my fight for a recognition of the principle of coöperation, but it looks as if you had deserted me. mr. farmer: no, mr. laboringman, on the contrary, i will do anything in my power to help you or anyone work out the great saving principle of coöperation; but since i have been attending these talks two or three things have stuck in my crop and i could not get them out even if i tried, and one thing in particular applies especially to the agricultural societies, called credit unions. _mutual credit societies or credit unions are organized to furnish capital for production; that is, it is commercial capital, or credit for commercial purposes, not for investment purposes at all. not a single dollar of a credit union should ever be loaned upon real estate. not a single dollar! not a single cent!!_ such a practice would literally destroy the principle upon which they are founded; mutual aid to assist in production, not investment. don't you remember how mr. banker pounded that into us; and convinced us all, too? but more convincing than anything else as to this great economic truth, that not one single dollar of credit union money should ever be loaned upon land, is the history of them. we must not forget that they were organized to secure personal credit and to depart from that practice is a perversion of their purpose and just to that extent must result in failure. the coöperative idea for personal credit was originated in germany by francis frederick schulze, a little before the middle of the nineteenth century. it passed over into austria and hungary in , into italy in , into belgium in , into france in , into scotland in , and into ireland in . these dates are given to show the order of advance and the recentness of the movement in some parts of europe. the first german association was formed in by frederick william raiffeisen. herr schulze did not get his started until the following year. herr raiffeisen was poorly educated but deeply imbued with religious feelings. he lived among peasants in a sparsely settled and impoverished locality, and his object was to help the lowest classes. the associations which grew up under his guiding hand were mutual societies confined to small farming districts. the thought of profit was discarded and they were managed by the gratuitous services of their members. herr schulze was a talented writer and speaker, and when he took up his life work was holding a judicial post in his native town of delitzsche. his philanthropy, although intense, leaned to the practical side. he believed in paid services and fair returns for money. the associations formed under his leadership were located mainly in towns. they were managed by salaried officers, and membership was dependent upon the purchase of shares on which dividends were allowed. but both kinds were founded upon the fundamental principle of combining persons together and using the credit created by their united guaranty for providing funds for members who might wish to borrow. in the early days the mutual credit associations were formed simply by articles of agreement in the nature of a partnership contract, and members were jointly and severally liable without limit for all the loans that were made. in course of time, when the government began to take official recognition of the associations, some of the followers of schulze favored a limit to this liability. hence the mark of distinction became clearly defined between "raiffeisenism" and the "schulze-delitzsche" propaganda. the german law, as it now stands, requires mutual banks to have share capital, but allows them to be organized upon the limited or unlimited liability plan. all true raiffeisen banks, in order to preserve their character, have shares of only a nominal value and devote dividends to educational or charitable purposes. in germany these local banks are grouped under central banks, which in turn are linked together by two general central banks, and their funds are made to move freely for agriculture throughout the empire. the centralization of the system has also been inaugurated in france. personal credit in agricultural europe is obtained usually by means of the coöperative credit associations. they are also used by artisans and small tradespeople in the towns and cities. these associations are in fact the only banks which the farmers will patronize for short-time loans in the nations where they abound in the greatest numbers. with their aid poverty and usury have been banished, sterile fields have been made fertile, production has been increased, and agriculture and agricultural science raised to the highest point. their educational influence is no less marked. they have taught the farmers the uses of credit as well as of cash, given them a commercial instinct and business knowledge, and stimulated them to associated action. they have encouraged thrift and saving, created a feeling of independence and self-reliance, and even elevated their moral tone. the picture can hardly be overdrawn. every traveler who visits the places where these little associations exist speaks in glowing phrases of the prosperity and contentment that prevail. they are organized on such simple lines that their management requires only ordinary intelligence. failures have rarely occurred. in france and other countries they hold a record of having never lost a cent. the working capital and number of members of individual associations are so small as to be insignificant, yet they do one-third of the banking business of italy; while the combined amount of their operations in germany equal that of the commercial banks. but the mutual banks, both in town and country, are looked upon with favor in the financial world because they keep millions of dollars of petty sums in circulation which, except for them, would be idle and hoarded. they are, in fact, feeders for the commercial banking system. in in belgium banks, with a membership of , , had outstanding (roughly calculated) $ , , of loans; in france ninety-six regional banks did upward of $ , , of business on a capital of $ , , , while the , local banks, with a membership of , farmers, had $ , , of capital and a record of over $ , , of operations. there were nearly , banks in austria. the membership was over , , and the loans ran over $ , , . in italy banks that furnished reports had a working capital of over $ , , . in germany there is one bank for every , of the population, and the total business done was over $ , , , . in one province there is a bank for every , acres of land; and so on for all other nations that have coöperative credit institutions. the rate of interest charged was one or two points lower than in commercial circles, yet these banks, with a few exceptions, made a fair profit on the turnover of their capital. in some instances it ran as high as per cent and per cent. with this striking array of figures to show its stability and usefulness, it is remarkable that the farmers of the united states have been so slow to adopt this system of banking for temporary loans on personal security. it has existed in canada for twenty-two years. in the province of quebec there are a number of mutual banks that have loaned hundreds of thousands of dollars. but massachusetts is the only state in our country that has made an attempt to encourage its introduction. it already has a law allowing the incorporation of credit unions. it was passed in after a careful study of european legislation, and furnishes an excellent example for the other states. the first concern to start under this law was the myrick credit union at springfield. in twelve months it had one hundred and five members, a capital of $ , and $ , of outstanding loans. interest rates have been low, yet it paid over per cent dividends on its capital. thirteen new unions were formed in and have $ , of capital. a pamphlet issued by the state bank commissioner gives a comprehensive description of the fundamental principles that a mutual association for personal credit must adhere to. i cannot do better than to quote from it. they are as follows: _first_: the association shall be organized on coöperative lines. as the members may be either borrowers or lenders, according to circumstances, its affairs must be conducted in such a way as to give fair and equitable treatment to both classes. _second_: the association shall be one of persons and not of shares. to this end each shareholder has one vote, irrespective of the number of shares he holds. furthermore, a limit is set to the number of shares or the amount of deposit which a member may have in the association, in order that no one person may have a too dominating influence or be able to damage the association by suddenly withdrawing large sums. _third_: loans shall be made only for the purposes which promise to result in a saving or a profit to the borrower. each applicant for a loan must state the object for which he desires to borrow, in order that the credit committee, which passes on all loans, may rigidly exclude thriftless and improvident borrowing. _fourth_: as loans are made only to members and as any member may become a borrower, care must be taken to admit to membership only men and women of honesty and industry. _fifth_: as personal knowledge of the character of the members is essential, the membership in an association must be restricted to citizens of a small community, or of a small subdivision of a large city, or to a small group or organization of individuals. _sixth_: every provision must be made to bring the association within the reach of the humblest citizen. the par value of the shares should be small (it averages about $ ), and they should be payable in very small installments. loans of very small amounts should be made and should be repayable by installments if desired. _seventh_: in making loans it should be recognized that character and industry are the basis of credit, and a loan may be made to a member who has not adequate security to pledge for it, provided he can obtain the guaranty of one or more other members, but no member is obliged to guarantee the loan of another member unless he desires to do so. _eighth_: borrowers must carry out to the letter the conditions of repayment and agreed upon at the time their loans are made. prompt payment of obligations is a fundamental requirement of these associations. it should not be inferred from the great success and good accomplished that the coöperative credit associations could be taken as models in their entirety or that the establishment of such societies would act as an immediate panacea for all the troubles that beset agriculture in america. they seem to be adapted only for localities where the population is fixed and settled and welded together in close relation by community of interests. let me call your attention to what the government report says in support of this position. the germans have had their sad experiences and it would be the height of folly for us to travel over the same road again, only to learn by our own experience what we can now know without paying for it. too much emphasis cannot be laid on the fact that these small credit societies are not organized for making loans on real estate. the deposits and funds received by them are withdrawable on short notice. this privilege must be allowed in order to attract the capital needed. but as loans to members yield interest considerably under the ordinary market rate, the only way they have of paying for the use of this capital is by making quick and numerous turnovers with it. in germany they have taken long-time mortgages, but the practice is strongly denounced by all students who have investigated into the cause of the remarkable success of the raiffeisen and schulze-delitzsche systems as contrary to the theory on which they are founded. credit is indispensable to every business. it is the means whereby $ is made to do the work of $ , as the saying goes, but its classifications and limitations cannot be ignored without danger. a loan to acquire something merely for consumption is not tolerated, no matter what may be the security offered. the loan must be strictly for a creative purpose. this is the first cardinal principle, and so rigorously is it adhered to in europe that the credit societies invite to their circle only those who are producers of wealth. _another principle is that personal and real credit are inherently and irreconcilably separate and distinct, and each must have specially adapted institutions for carrying on its operations. this is only a reaffirmation of what we have already decided over and over again._ the recognition and observance of these principles have done much to prevent thriftless debt among farmers, and are undoubtedly the reasons why the land credit is so thoroughly organized on the european continent. a loan on chattel or character security should naturally be for a short time and for temporary purposes, for such security is perishable and subject to loss or change. the long-time loan requires an unchanging and permanent security, and the only thing possessing this quality is mother earth herself. but when capital is once sunk in land it becomes fixed and can never be recovered except from the income created thereby or the amortization sums paid in representation of that income. a debtor should not be called upon to pay back the loan in a lump or in advance of his receipts from the land. to do so leads only to further borrowing, usually on more burdensome terms, when the mortgage expires. on the other hand, a private individual cannot be expected to take his money back in driblets or wait long years for its complete return. so private lending on real estate is a theoretical and also a practical wrong. the proof of this lies in vast numbers of foreclosures and the excessive interest rates of farm mortgages in western united states, where they are largely held by persons. the smallness of the annual payments and the length of an ordinary loan in europe are shown in the tables of the crédit foncier, which have been given already. a glance at them makes it apparent that amortization, the basic principle of a land loan, can be brought into full play only by the aid of large corporations or associations with charters perpetual or lasting a long time. mr. banker: it does not seem to me, under the circumstances, as though we could treat the mutual credit associations or credit unions wisely. indeed, i am of the opinion that legislation by us would interfere with and retard the progress of such associations. uncle sam: mr. laboringman has waited patiently to have his say about coöperation. mr. laboringman: yes, i have been biding my time, for i have something to say that ought to interest all of you, as a possibility at least, and if it is reasonable to do so, i hope that you will include some sympathetic laws by way of encouragement. england was the birthplace of modern industrialism, as you all know. there, too, was started the great movement of modern coöperation. small and insignificant was the beginning. in the rochdale pioneers put all their little savings into the pot, and they amounted to only $ . with this they started a store. by they had seventy-four members and $ of capital, and did $ , worth of business, by keeping their little business open only two evenings a week. they were an object of derision and all sorts of jibes. s.p. orth describes the situation as follows: last year the british government made a careful and complete report on coöperation in england, and found more than three million persons in the membership of the various societies, and over three times that number under the immediate sphere of coöperative influence. that means that one person in every five in the united kingdom is now interested or influenced by this vast association of producers and consumers. during the past ten years, the increase of membership has been per cent and the trade per cent. the productive and distributive business alone amounts to $ , , . the retail societies have $ , , of capital. "last year the sales of these retail societies totaled more than $ , , , or about $ . per member." it is most significant that the societies, in their own mills and factories, produced nearly per cent of these goods themselves; that is, production and distribution are going hand in hand. they began by making boots and butter; now they make cloth, iron and all sorts of things. the average profits for the last ten years have been nearly per cent and there is now a serious discussion whether the cost of articles to the customer should not be lowered. in some of the districts, notably some of the mining districts, the coöperative stores have a virtual monopoly, and their system of banking or keeping the surplus credits for the customer is a great boon. but in other very poor districts, keeping up the prices has worked some hardship. it is now proposed by some of the stronger societies to open special stores in the poorer districts and cut the prices. all business, until a few years ago, was done on a strictly cash basis, but recently the insidious credit system has crept in, and it may lead to serious consequences. last year, out of its surplus, the union of coöperative societies, a federation of all english coöperativists, voted $ , to charity, $ , to education, i.e., libraries, lectures, and concerts, and $ , to propaganda. the early retail societies found it hard to get good terms from wholesale houses, owing to the enmity of the private merchants. the law did not allow them to amalgamate and start a wholesale business of their own. but in the law was changed, and at once two coöperative wholesale societies were organized, the english and the scotch. they are the models for the world. the two societies are virtually one, although maintaining different officers, rules, and stockholders. in fact, the wholesale societies are the federation of the retail and productive societies of england and scotland. the english society requires the constituent societies to hold one $ share for every five of its membership; the scotch society one $ share for every one of its members: i. e., an english coöperative shoe factory of two hundred members wishing to join the english wholesale society would take forty $ shares, or two hundred $ shares in the scotch society. these wholesale societies are the grand clearing house of nearly all the coöperative shops and factories of the kingdom, and the suppliers of all the coöperative retail stores. and they are monumental institutions. in they had a membership of more than , , , a capital of more than $ , , , a surplus of $ , , . their annual sales amount to more than $ , , , and their profits more than $ , , . the english society is the larger. it is a corporation that not only engages in wholesale trade but is a manufacturer, banker, importer; it packs meat, cures bacon, refines lard, binds books, grows tea, blends coffee, founders iron; it manufactures flour, butter, biscuit, sugar, pickles, cocoa, tobacco, candles, glycerine, starch, saddlery, furniture, clothing, corsets, underwear, brushes, crockery, tinplate, woolens, carpets and almost everything else that an average british home may need. it deals in coal, apricots, and wheat; has offices in new york, toronto, rouen, france; denia, spain; copenhagen and guthenberg, sweden; has twenty-seven creameries in ireland, tallow and oil works in sydney, australia; a "bacon factory" in denmark, a tea plantation in ceylon, and fruit farms in shropshire and hereford. besides, it owns four steamers for the trade between rouen and manchester. its main offices on balloon street, manchester, are enormous and palatial. together with warehouses and stores, they cover a number of city blocks. their offices in london compare favorably with any private establishment, and for efficiency they are second to none. nearly , men are employed by this society. some of its factories are large, e, g., the leicester shoe works employ , men; the irlam soap works, men; long sight printing works, men; the middleton pickle works, , etc. the chief offices of the scotch society are on morrison street, glasgow. they manufacture umbrellas, tweeds, paislies, oatmeal, aberdeen finnan-haddie, and other characteristic scotch merchandise. its capital is about $ , , . germany and belgium, too, are furnishing successful coöperative associations. mr. orth describes them so well that i want to read what he says. there are about two thousand of the coöperative supply societies among the farmers, with nearly one hundred and fifty thousand members. there are also about three thousand coöperative dairies, with two hundred and thirty thousand members, and one hundred and sixty coöperative wine cellars and two hundred and fifty-five coöperative warehouses and grain elevators. it was natural that retail stores should be established next, on a coöperative basis. for some reason they did not thrive until about ten years ago. at that time a split occurred in the coöperative ranks, due to politics, and two federations or unions of coöperative societies were organized; the general union or liberal union, and the central union or socialist union. the former is remaining stationary, the latter growing by leaps and bounds. in every large city the coöperative retail society has a central plant. it usually includes a warehouse and bakery. the one located at berlin is a good type. it is situated at lichtenberg, a suburb. here you see splendid buildings, in good architectural style, fitted up in the most modern manner; telephones to all departments, electricity, central heating plant, a uniform clock system for keeping time, etc. the whole plant cost $ , , . the great warehouse is full of groceries. although only a year in the buildings, they are already overtaxed and additions are planned. this central supply house looks after the sixty coöperative grocery stores in berlin. it has a string of fine delivery autos. any one can become a member by paying fifty pfennigs ( - / c.) admission, and forty marks ($ ) a year. this, however, is taken out of his dividends. the society also owns a fine row of apartment houses, which are leased to members at a low rental. the goods used are bought in the open market, or are supplied by the german coöperative wholesale society of hamburg. there is very little productive coöperation in germany. there are , retail societies, more than two million members, and more than $ , , in their reserve fund. the wholesale society had a hard time of it until the spurt in favor of coöperation began a decade ago. now it thrives, doing about $ , , business a year. there are a great many local coöperative building societies, with two hundred thousand members, and many other evidences that the spirit of coöperation is abroad in the land. in there were , , persons actively interested in one form or another of german coöperation. in the number had increased to nearly five million. in the little land of belgium coöperation is at its best; not at its greatest showiness, nor maximum figures. but here, in this land of congested population, of illiteracy, of low wages and depressing conditions, the abject workingmen have taken hold of their own problems, asking neither sympathy nor favor, and have worked out a scheme of industrial coöperation that is a genuine achievement. in bread was very dear in ghent. times were very hard. so high was the price of flour that many workingmen went hungry. a few of these workers united to do what they could to supply loaves at cheaper rates. they had $ capital. they found an old cellar with an old oven in it, hired an old baker, and peddled the bread in baskets. today there is a fine workingmen's clubhouse in ghent, called "vooruit." across the façade stands the motto, "the brotherhood of workingmen means peace on earth." this is the outgrowth of the cellar bakeshop. "vooruit" stands for everything that is superb in coöperation. here is not only a large lecture hall and café and offices of the unions; here is the studio of van biesbroeck, the workman-sculptor; here is a library, and in the neighborhood are stores, ware-rooms and shops. a few years ago it was found that many women were ruining their health by the long hours of service at the looms. "vooruit" started a coöperative weaving shed, where the women work eight and three-quarter hours a day. the bakery now does almost $ , , worth of business a year; it makes , loaves a week. the eight thousand members of "vooruit" have six drug stores, coal yards, many grocery stores and meat shops, a dry goods store, and other industries. all done by workmen in thirty years, workmen who were never highly paid and who trained themselves to do these things. they meet every year, the eight thousand members, and vote on the price of bread. sometimes it is one cent higher than the commercial rate, but their dividends more than cover this. in brussels is the famous "maison du peuple," the house of the people. it, too, began with a small bakery, employing two men and turning out five hundred and fifty-two loaves the first week. today the "maison" has twenty-five thousand members, two great bakeries, six warehouses, four butcher shops, twenty-five grocery stores, and numerous shops where various articles are made. this "house," standing on rue joseph stephen, cost $ , and was paid for by the brussels workingmen out of their coöperative funds. the café, seating eight hundred people, is an animated place; every one seems content. the office of the savings bank is doing a rushing business, women and children bringing in the savings of the family for the week; the committee rooms are full of workmen planning some new enterprise. in the evening the lecture hall or theatre is crowded, the two thousand five hundred seats all taken, to see a play produced by an amateur company, all members of the "maison." all this, and more, in the form of coöperation. in - the "maison" made a profit of $ , ; of this about three-quarters was distributed as personal dividends to shareholders. the rest was spent on social benefits and a reserve fund. in belgium, then, you find all the coöperative activities united in each city under one general management. it includes groceries and clothing, medical aid, insurance, savings bank, clubhouse privileges, lectures, libraries, entertainments. there are one hundred, and sixty-one distributive societies with , members; sixteen productive societies with , members. the productive societies include weaving, printing, cabinetmaking, tobacco and cigars, hardware and bakery. the total coöperative business is $ , , a year, a large amount when you consider the diminutive size of the country and the poverty of the people. the fact that in all of these countries coöperation is growing at a rate of increase of per cent to per cent proves that a need for it exists. now, uncle sam, we are starting these coöperative stores here, and the question with us and the one we are constantly asking, is what protection are we going to have from the trusts and monopolies which can, if permitted to do so, destroy us with low prices at any point, while they rob the people at some other point, to make up the losses, while ruining us. what we must have is legislation, to protect us, and if we can get it into this bill, i want it. uncle sam: i do not see how any phase of what you have said can be governed by a financial and banking bill. it is true, that incidentally you may do a banking business in your coöperative societies. so far as you do, you ought to conform your practices with whatever we may decide upon in the way of banking laws. so far as you buy and sell, or manufacture, you are engaged in production and commerce, and not in the banking business. under the circumstances, you are entitled to an answer, although a little aside from the subject in hand. let me tell you, however, right here, and you may set it down as settled. that, if you start any coöperative associations for the production or distribution of goods of any kind, you shall have a square deal. i have been waiting patiently, but getting ready all the while, to put some of the managers of these monopolies in jail. you can take my word for it. you are going to have equal opportunities under the operation of just laws, if there is any way of giving them to you. and if your uncle samuel understands the situation, i think there is. unfair chances, special privileges and monopolies cannot naturally and properly have any place in a country where all men are born free and equal under the law. the fact is, the law is sufficient now, but there is not a public sentiment strong enough to compel the courts to put men in jail for robbing their fellows through the forms of law; even if it is known that the laws by which they rob their fellows or are permitted or enabled to rob their fellows were passed expressly for that purpose. that is the fault of the times through which we have just passed. the time is now at hand when all this is to be reversed. the people have come to realize and appreciate the fact that it is ethically, morally, and justly speaking, as wrong to rob a man through the forms of law, as for the bully to fell a man in the streets and pick his pockets. the people are forming new ideals, and the judges are getting new ideas. these new ideals, and these new ideas, will soon handcuff and incarcerate the business culprits, the business bullies, just as the ancient ideals of the people, and the old ideas of the judges have, in the past, put the physical bully and the material thief in the dark, dank dungeon. i have altogether too many men, who are always inquiring how near they can go to the jail door and not get in. you mark my word, i am going to push some of them in very soon now. what i want is a nation of men who are imbued with a sense of justice and fair play in business; and who will regard business relations as moral obligations, and paramount to the technical letter of the law. when that day comes, one banker will not want his fellow-bankers to carry his reserves for him. the principle is the same, whatever the relation of men may be; therefore, you can take my word for it, that all those who want to coöperate to secure a greater degree of the profits of their labor, a greater degree of justice among their fellows, will find uncle samuel coöperating with them, in the preparation and execution of those laws which will make for a juster government. since this government springs from the people, and belongs to the people, no part of the people, certainly no small part of the people, should be able to take unfair advantages and undue profits, by any legalized special privileges, or by the power of monopoly. i say to you now, that these should be, and will be destroyed, and that all men shall be equal before and under the law. this is the predestined purpose of this government, and it will never come into its fulfillment until you learn, my boys, that you are your brother's keepers. mr. merchant: uncle sam, that's pretty good preaching; but how are you going to apply it to this banking question? uncle sam: did not mr. laboringman just appeal to me to find out whether coöperative societies were going to have a fair show? i have just told him "yes," and i intend they shall have it, and i know of no better place to begin than here and now. i am going to construct two or three pieces of machinery--a guillotine for the monopolies, and an electric chair for special privileges, and concoct a barrel of anesthetics for stealthy, statutory stealing. mr. lawyer: but all this kind of legislation must come under the sphere of the sherman anti-trust law. i think no one will contend that any aspect of coöperation, as represented by mr. laboringman, should be incorporated in our banking bill. mr. banker: i agree with both mr. farmer and mr. lawyer, that we cannot make any provision for it at this stage of its development in this country; but who shall prophesy about a movement that has spread over the world, as this has, and is now growing at such a rapid rate? it is estimated that at least ten million in great britain are interested in it; more than five million in germany, and that the outstanding coöperative investments in continental europe must exceed $ , , , by this time. of course, these figures mean some banking sooner or later, in this country, when the movement once gets under way. mr. farmer: yes, i agree to that, but any attempt on our part at this time to legislate in advance, would do more harm than good. mr. laboringman: that is probably true, as it might interfere, as you say, with the movement. all i ask then, is that we have a fair field, so that we can develop along natural lines, and be protected in the exercise of our mutual coöperative rights. i thank you, gentlemen, for giving me, and my particular cause, so much of your time. uncle sam: mr. laboringman, your cause is their cause. your cause is my cause. your cause is our cause. your cause is the cause of humanity. the principles upon which your cause rests, pushed to their logical conclusion, will secure social and industrial justice. there are many who have taken millions, yes, hundreds of millions, through the forms of law, but without any ethical right whatever. from them these millions will be taken away in time, through the forms of law; through the power of taxation by progressive income and inheritance taxes, and the injustice of today will be righted by the justice of tomorrow. mr. banker: uncle sam, you have suggested a programme outside of banking legislation; but i must confess incidental to the cause presented by mr. laboringman. mr. farmer: gentlemen, we have stayed longer tonight than on any previous night, and i must go now. so, good night. uncle sam: mr. farmer has forced an adjournment. thirteenth night the clearing house uncle sam: we are on the very last lap tonight, as i understand the situation. we have had the standard of value, money, currency, exchange, value, price, property, wealth, credit, reserves, the bank; and now comes the settlement of the claims against the bank in the shape of checks, drafts and bills of exchange. when we finish this conversation we can, i hope, begin to put things together, that is, make use of our material. mr. banker: uncle sam is right, we shall be ready to do some constructing when we have disposed of the clearing house, which is destined to play a gigantic part in the future of american banking. this is true because the clearing house is bound to become the machinery by which all american banks are to coöperate and protect themselves through their combined strength; and it will be a splendid exhibition of what true coöperation can accomplish. the character and origin then of the clearing house, its present and prospective function, must be carefully studied by us, if this assumption is correct. mr. merchant: the character of the clearing house, or the principle upon which it works, is simple enough; although its operations are vast, and its achievements in times of financial stress have been most striking, even though not always satisfactory. the principle of clearing is, as i have just said, simple indeed. if i have a claim against mr. manufacturer, and he has an equal claim against me, we clear them by exchanging our claims with each other. if one of you gentlemen should sue another for one hundred dollars, and the other should make a defense by pleading an offset of one hundred dollars, and the court should allow both claims, you would clear them through the court, the one offsetting the other; that is all there is of the principal involved. mr. banker: mr. merchant, you have put this matter more simply than any book has ever done. indeed, i had not reduced the transaction to such simple terms. to put it in the form of a definition, as you stated, it would read this way: "to offset one claim against another, and pay the balance, if any, is clearing them." i had thought that it would be my particular task to explain this transaction of clearing, and after a good deal of meditation i had worked out a thought which i am sure is next best, after your definition; and it will take us one step nearer to the clearing house, without getting into any of its complexities. my illustration is this: if there were but one bank in a town, and all the people did their business through this single bank, by depositing their money and checks, and then paid all their bills, with checks on the bank, apart from any outside business, every debt in the town would be paid by check, and there would be no need of any money at all as the claims and debts would be exactly equal, and would always cancel each other to a cent. mr. lawyer: what you have said about one bank in a town is equally true of two, three or four, or any number of banks, if you assume that every person in town does his entire business through the banks, providing, of course, that the banks get together, and offset all the checks and drafts they receive during the day. there might be something to pay from day to day for the time being, but all would be adjusted in the end, without any variation or difference. mr. banker: precisely so, but when you get those bankers together, for the purpose of trading checks, you have created a clearing house. stephen colwell says: "clearing is beyond all question, the simplest, the most economical, and when applicable, the most efficient of all modes of paying debts; it is precisely analogous to balancing accounts." james g. cannon, author of the leading work upon the history of american clearing houses, describes a clearing house "as an office, established by the banks of a city, where their representatives meet daily to exchange drafts and checks, and adjust balances." again, "as a device to simplify and facilitate the daily exchanges of items, checks, drafts and bills of exchange, and the settlement of balances among the banks, and a medium for muted action upon all questions affecting their mutual welfare." you would think that the clearing house was such a simple matter, and such a great advantage that a clearing house would have been thought of, and put into operation as soon as banks got under way, but not so. their development and establishment, as we know them today, has been slow indeed, and the early history of their origin most interesting. jevons says: "about the year , a few of the london bankers hired a room where their clerks could meet to exchange notes and bills, and settle their mutual debts. the society was of the nature of a strictly private club; the public knowing nothing about it, and the transactions being conducted in perfect secrecy. mr. gilbart tells us that even in this form it was regarded as a questionable innovation, and some of the principal bankers refused to have anything to do with it. by degrees, however, the convenience of the arrangement made itself apparent, more bankers were admitted to the society, and a distinct committee and set of rules were formed for its management. although it remains to the present day a private and voluntary association, unchartered, and in fact unknown to the law, the clearing house has steadily grown in importance, and in the publicity of its proceedings. "several important extensions of the clearing work have been made in the last twenty-five years. after the rise of the london joint stock banks, subsequent to , they were for a long time refused admittance to the clearing house; but in june, , they were at last allowed to join the association. the bank of england long remained entirely outside of the confederation, but more recently, it has become a member." (written in .) the establishment of clearing houses in english cities, outside of london, did not take place until a century, almost, after that in london went into operation, or as late as , which was just five years short of a century later. as early as albert gallatin presented a plan for a clearing house in new york, and so perfectly outlined the scheme, finally adopted, that i want to read it to you. and i want to impress upon you the fact that gallatin was one of the very ablest economists that we have ever produced. "there is a measure which though belonging to the administration of banks, rather than to legal enactment, is suggested on account of its great importance. few regulations would be more useful in preventing dangerous expansion of discounts and issues on the part of the city banks, than a regular exchange of notes and checks, and an actual daily or semi-weekly payment of the balances. it must be recollected that it is by this process alone that a bank of the united states has ever acted or been supposed to act as a regulator of the currency. its action would not in that respect be wanted in any city, the banks of which would, by adopting the process, regulate themselves. it is one of the principal ingredients of the system of the banks of scotland. the bankers of london, by the daily exchange of drafts at the clearing house, reduce the ultimate balance to a very small sum; and that balance is immediately paid in notes of the bank of england. the want of a similar arrangement among the banks of this city produces relaxation, favors improper expansion, and is attended with serious inconvenience. the principal difficulty in the way of an arrangement for that purpose is the want of a common medium other than specie for effecting the payment of balances. those are daily fluctuating; and a perpetual drawing and redrawing of specie from and into the banks is unpopular and inconvenient. "in order to remedy this it has been suggested that a general cash office might be established, in which each bank should place a sum in specie, proportionate to its capital, which would be carried to its credit in the books of the office. each bank would be daily debited, or credited, in those books for the balance of its account with all the other banks. each bank might, at any time, draw for specie on the office for the excess of its credit, beyond its quota; and each bank should be obliged to replenish its quota whenever it was diminished one half, or in any other proportion agreed on. it may be that some similar arrangement might be made in every other county, or larger convenient district of the state. it would not be necessary to establish then a general cash office. each of the banks of scotland has an agent at edinburgh, and the balances are there settled twice a week, and paid generally by drafts on london. in the same manner the balances due by the banks in each district might be paid by draft on new york, or any other place agreed on." james c. hallock, the highest authority in this country upon clearing house operations, has so succinctly stated how the checks were disposed of, before the clearing house was established, that i am going to read that to you, and show you two diagrams, which we will keep on file for future reference. "in , the banks of new york city organized a clearing house, the first in america; until then they had done business without one. the method had been laborious. "each of the fifty-two banks had daily received over its counter, or by mail, checks on every other bank in town. to collect them the banks had opened deposit accounts with one another. each had become a depositor in fifty-one city banks. each also had had the others as depositors and kept fifty-one accounts with them. the pass books used had been of the ordinary form as 'merchants' bank, in account with chatham bank.' "according to the common usage of depositors, each bank would have sent messengers to fifty-one banks daily, and each would have had fifty-one messengers come to its own counter from the other banks. they had done a little better than that. the chatham bank, for instance, would have checks on the merchants' bank. it would list them on a deposit slip, charge the merchants' bank with the amount in its pass book, and place the checks in the book which the messenger would now carry to the merchants' bank, and deliver to its receiving teller. the latter would remove the checks, and having some on the chatham bank with list attached, he would credit his bank with the amount in the pass book, place the package in it and hand it back, thus refilled to the messenger. "this exchange of checks by two banks at the counter of one was a rudimentary clearing which, like all bank clearings, saved labor, time and trouble. to deposit these checks in the customary manner would have required two messengers and two pass books. by this clearing arrangement one messenger and one pass book sufficed. perceiving the sensibleness of this saving, the new york banks had for many years tacitly agreed that each should send messengers to one-half of the banks for six months, and the other half for the next six months. they had thus reduced the number of banks to be visited daily by each from fifty-one to twenty-six banks, and accordingly reduced the number of pass books in use by each. "the accompanying diagram representing the banks arranged in a circle, with two of them sending messages to twenty-six each, indicates how toilsome the exchange of checks still was, up to the formation of the new york clearing house, which commenced operations on oct. , ; though only two banks are represented as sending, in fact, all were really sending, or being sent to; for every bank sent to all others that did not send to it. [illustration: without a clearing house in new york. _diagram showing a bank messenger's trips to exchange checks with other banks._] "when two banks exchanged checks the amounts were almost always unequal, leaving a balance for one to pay and the other to receive. every day every bank, if they had settled daily, would have had fifty-one balances to pay, or receive. they were payable in coin. instead of attempting the daily adjustment of accounts, which would have consumed hours, and caused much annoyance, it had become a tacit agreement that a weekly settlement of balances should be made after the exchange of friday morning. on settlement day, the cashier of each bank would draw checks for every debt due to him by other banks, and send out the messengers to collect them. over fifty porters were out all at once, wrote a bank officer of the time, with an aggregate of several hundred bank drafts in their pockets, balking each other, drawing specie at some places, and depositing it in others, and the whole process was one of confusion, disputes and unavoidable blunders of which no description could give an exact impression. "the second diagram, representing the fifty-two banks in a circle around the clearing house, indicates how completely all this misdirection and waste of energy stopped upon the installation of that marvelous method which affects such amazing economy. every bank now sends straight to a common point. every bank sends there all the checks it has on all the city banks, and charges the whole amount against an imaginary debtor--the clearing house. every bank receives there all the checks all the other city banks have on it, and admits its indebtedness for the whole amount to an imaginary creditor--the clearing house. the balance can now be struck. if the bank loses, it pays the clearing house the difference. if the bank gains, the clearing house pays the bank; and there is the end of it, reached by the shortest path with the greatest ease and quickness. "the principal results may be summarized: "the clearing house saved every bank in new york city on the average twenty-six trips daily to exchange checks with other banks. it abolished sending to other banks for this purpose. it substituted one trip to the clearing house--an economy of - / per cent. "the clearing house saved every bank in new york the payment or receipt, mostly in coin, of fifty balances on settlement day (friday). it abolished settling at the counter of banks, except for checks, sent through the clearing and returned 'not good.' it substituted one payment, or receipt, of a net balance to or from the clearing house, an economy of per cent. [illustration: with a clearing house in new york. _diagram showing single trips to exchange checks with all other banks in the city._] "the clearing house saved the banks of new york all the drudgery, irritation and anxiety which had made daily settlements impracticable. it abolished the weekly settlement; it substituted daily settlements to the clearing house--an economy of considerable importance. "the clearing house saved all the banks of new york the trouble of keeping accounts with one another. it abolished accounts of city banks with city banks--closed , accounts. it substituted one account for each bank with the clearing house--an economy of per cent. "these savings, not to mention others, proved beyond dispute, that clearing checks economizes." it was twenty-two years before gallatin's suggestion was adopted, and a clearing house was established, which, as stated, was in . the first clearing was effected on oct. , , and amounted to $ , , . . the balances amounted to $ , , . . boston followed in the footsteps of new york, and established a clearing house in , and philadelphia in . the next step in the line of progress, in the matter of bank clearings, came, as hallock says, as a result of cheap postage and the railroads in england, and included country checks. he says: "somewhat less than half a century ago london recognized the fact that the out-of-town check was an indispensable instrument of civilized man, at least in great britain. he would use it, contrary to custom, and despite the remonstrances of city bankers, who thought only london drafts should be sent to london. "a product of modern times and method, country checks came to london with the railroads. few at first, when the average postage on a letter consisting of a single sheet, was nine pence, and another sheet, or any enclosure, however small, doubled the rate, making the postage on a letter enclosing a check thirty-six cents, on the average. with penny postage established in , regulating the rate on a letter by its weight (one penny per half ounce), without regard to the number of sheets, or enclosures, country checks began to stream into london. "in the city bankers, perceiving their inability to suppress, or exclude them, decided to adopt the suggestion of some country bankers, and collect english and welsh checks through the clearing house. "the idea originated in the spring of with a young country banker, william gillett, the son and grandson of country bankers. he visited the provincial banks, and interested them in the project. when prepared to carry it out the country bankers met in london on sept. th of that year, and communicated the plan to the london clearing banks to obtain their support. the londoners opposed it; they suggested doubt as to the utility and feasibility of any change in existing systems. however, their coöperation being solicited, the london bankers held a meeting at the clearing house on oct. th, to take the matter into consideration, and appointed a special committee to confer with the country bankers. "then, on reflection, it appeared to another young man, the son and grandson of clearing bankers, that the organization of a large and entirely new establishment, which the country bankers proposed, was unnecessary, as the london bankers could give them all the facilities they required, without any great additional labor, or expense. this junior officer in the private bank of which his father was the head, has since gained world-wide celebrity in science and literature as sir john lubbock (now lord avebury). even with the aid of such talent and opportunities as his, it required unflinching resolution to establish country clearing in london. after devising a method that conformed as closely as practicable to actual usage in clearing city banks, young lubbock had to call at every london bank, at most of them several times, and explain fully the exact manner in which he proposed to carry out the system. it was very difficult for him to convince his brother bankers. finally the special committee requested him to meet the principal clerks of the different banks. these clerks unanimously recommended the adoption of his plan. "the london bankers then adopted it, and on nov. th submitted it to their country correspondents. the plan for an independent country clearing house was abandoned by the country bankers' committee on nov. th, and the clearing of country checks commenced in london on nov. , . in less than eight weeks, after the idea was broached in london, it was put in practice there." this system covers , square miles. mr. hallock says, "sedalia bankers unconsciously imitated the london plan, but modified it, as had been done abroad elsewhere; for out-of-town checks are cleared, not only in london, but also in other english cities, as manchester, liverpool, birmingham, newcastle-on-tyne, leeds, sheffield and bradford, in some eight scotch towns and dublin." the next advance, which is undoubtedly destined to revolutionize clearing in the united states, was started in boston in by making new england a free check zone. hallock says: "the clearing of out-of-town checks, though opposed for years by a small minority of boston banks, was successfully established at boston in . the system includes checks on all points in new england, and maintains a free zone of nearly equal extent. "proposed in and , the boston movement at first resulted in a deadlock, based on the supposed importance of having certain city banks, who declined to come in, participate. after twenty-two years through another movement started among the connecticut banks, the deadlock was broken by substituting the manager of the boston clearing house for any abstaining members, and giving him checks on their correspondents to collect. the association finally decided that all checks passed through the out-of-town clearing should be collected by him. "the only opposition exhibited by country banks has been in the refusal of a few to pay the clearing house in full for their checks, deducting so-called exchange. boston checks passed through the clearing house are paid in full, or not at all. new england checks should be. this can be effected, either as in london, by boston banks returning checks, drawn on such banks, as not collectible through the boston clearing house, or by the manager, charging to collect checks, bearing indorsement of the non-par banks, which would cut them off from the use of the new england free list, now enjoyed by them, without reciprocity; that is, without being themselves on the free list." mr. charles a. ruggles, manager of the boston clearing house, says: "in the thirteen years that we have made collections in this way, we have collected over eight thousand million dollars ($ , , , ). "our cost now is, and has been for ten years, seven cents for a thousand dollars. that includes the clerk hire of fifteen men, postage and stationery, and we collect seven or eight hundred million dollars a year; furthermore, per cent of the banks in new england remit at par. we collect per cent of it in twenty-eight hours." it is an interesting and important historical fact that the country banks of england and wales forced the clearing of country checks at london; so, too, the banks of connecticut, thirty of them in number, by combining under the advice and leadership of mr. james c. hallock, succeeded in having the plan adopted by the boston clearing house. as a result new england became a free check zone. i think we should note in this connection that the father of mr. james c. hallock was the organizer, if not, indeed, the originator of the new york clearing house in . mr. laboringman: mr. lawyer, you talk and talk and talk, when you could say what you really have to say, in one-tenth of the time, and in about as many words. we have spent a whole hour in the history of the origin of the clearing house, and have just learned what i could repeat in about two minutes. _first_: london, in a kind of a sneaking way, began to clear checks in , and kept a clearing house in a blind alley. nothing more was done in england by way of advance until , when the country banks of england and wales, covering a territory of , square miles, by threatening to start their own clearing house in london, compelled the london banks to clear their checks. not till , nearly one hundred years later, did any other city adopt it. but today many cities in great britain are clearing country checks. _second_: gallatin proposed a clearing house for new york in . hallock established it in . boston and philadelphia followed in three and five years, respectively. in , new england became a free check zone, all checks being received at par at boston. since then several other cities have followed suit. atlanta, macon, nashville, sedalia and kansas city. now, i have said everything you said. next! uncle sam: mr. laboringman always gets a "b" line on things. mr. lawyer: that is true in substance, but the very fact that mr. laboringman has stated the case so well is the greatest compliment he could pay us. it is only by iteration and reiteration, word upon word, and precept upon precept, that has made this whole subject so plain to all of us. we have made haste by going slowly, and we don't want to get into a hurry now. mr. banker: i agree with you, mr. lawyer, patience has been our best and truest friend in all these talks, and we should not desert her now. mr. laboringman: that's all right, but let us get down, right down to business. just where are we at now? and where are we going to in the clearing house matter? mr. banker: we are now going to discuss the clearing house from five points of view. _first_: the clearing house, from its original standpoint--new york was the pioneer, and is probably our highest type. its clearings are certainly by far the largest in the world. _second_: the clearing of country checks, of which boston was the pioneer in a large way, although preceded in point of time by sedalia, mo., a country city of only , people in . _third_: the examination of all banks clearing through the clearing house, of which chicago was the pioneer, starting june , --and probably the best type, although there are today about twenty cities following in her footsteps, including the following: minneapolis, feb. , ; st. paul, may , ; st. louis, oct. , ; los angeles and san francisco following upon the heels of st. louis; kansas city, march , ; st. joseph, the early part of ; philadelphia, april , ; new york, , with others, not mentioned, making twenty in all. _fourth_: the centralization of the reserves of the banks at the clearing houses, as a matter of convenience in settling balances, and carrying on their common business generally, but subsequently for the purpose of facilitating the issuance of clearing house certificates. mr. lawyer: let me repeat to you, gentlemen, what may have been stated before, that there is no law providing for the existence of the london clearing house, nor is there a single law in a single state in any way authorizing or affecting a single clearing house in the united states. therefore, all that they have done has been without any authority of law. they are a law unto themselves; and it is not at all certain that that has not been wise. indeed, i am of the opinion that it has been most fortunate for the business interests of the country. what do you think, mr. banker? mr. banker: i am of the same opinion; in confirmation let us return to the consideration of the points suggested. _first_: the new york clearing house, as stated, had its first clearing oct. , . mr. cannon says that not until august, , did the new york clearing house have a constitution. this instrument, with the subsequent changes, is in force today, and constitutes as perfect an illustration of the evolution of law by practice, as can be found anywhere. this institution had various homes until it took up its present quarters in one of the most beautiful buildings in the whole country--worthy in every way of its use and purpose. it has cost $ , , and is owned by the clearing house banks of new york, under the name of the clearing house building company. mr. cannon says: "the administration of the clearing house is vested in a president, secretary, manager, assistant manager, and five standing committees.... the manager under the control of the clearing house committee, has full charge of all business at the clearing house, but before entering upon his duties, he is required to give bond, in the sum of $ , .... although the constitution provides for the appointment of a manager, annually, it is the custom to retain the same one in office, year after year. as a matter of fact, there have been only three managers in the whole history of the association.... the clearing house committee is clothed with almost absolute power, being second in authority only to the association itself. the ablest and most experienced bank officers, therefore, are usually chosen to serve on it. the committee is elected annually. the association at present, , consists of sixty-three members and twenty-two non-members, and the united states sub-treasury, located at new york. the latter makes its exchanges only at the clearing house, its balances being settled at its own counter. it has no voice in the government of the association, and pays a nominal sum for actual expenses. the privilege which the sub-treasury enjoys of making its exchanges through the clearing house is a matter of great accommodation, both to the sub-treasury and to the banks. the new york post office clears through one of the members, but renders no compensation to the association for the privilege. "the membership of the association, since its organization, has been constantly changing, owing to the admission and expulsion of members and voluntary withdrawals, as provided by the constitution.... a bank, the capital of which does not exceed $ , , , must pay $ , ; a bank, the capital of which exceeds $ , , , must pay $ , . any member increasing its capital is required to pay in accordance with those rates." in , the large number of trust companies that had come into existence attracted the attention of the clearing house and the clearing house committee adopted a rule that no trust company could clear that had not been in existence for at least one year, and that every trust company clearing through a member shall furnish a weekly statement of its condition to the manager of the association. the new york state law did not then provide that any trust company should carry cash reserves, although state banks were required to have per cent cash in their vaults. it was tacitly understood that all banks clearing, should have per cent reserve. of course the trust companies could ride the banks, and they took advantage of their opportunity. this caused great dissatisfaction, and rightly so. on feb. , , the association passed a resolution requiring that every institution (not a bank required to maintain specified reserves) "shall after june , , keep in its vaults a cash reserve, equal to per cent; after feb. , , - / per cent; after june , , not less than per cent, nor more than per cent, as the association might determine." the trust companies kicked and protested, and almost, without exception, withdrew from the clearing house; but, after the panic of , the new york legislature passed a law requiring them to carry per cent cash reserves. on june , , the association passed a resolution compelling all trust companies, who were members, to carry a cash reserve of per cent, and on jan. , , the association for the first time in its history made a rule compelling all its members to keep a cash reserve of per cent. every member of the new york clearing house is required to furnish to the manager, weekly, for publication, a statement showing its condition, showing the average amount of loans, and discounts, specie, legal tender, notes in circulation and deposits. the capital and net profits are also given, this being the only association which gives the latter item. along the same line of legislation controlling the action or conduct of its members, the clearing house committee, having plenary power to do so, passed a rule--determining just what every member and bank, clearing through members, should charge for collections. the rule made some cities free, that is, there were no charges for collection made compulsory. some cities were under a fixed charge of one-tenth of one per cent, and others under a fixed charge of one-quarter of one per cent. upon april , , this rule became obligatory, and if any member violated it, the penalty was $ , for the first offense; for the second offense it might be expelled from the association.[ ] mr. laboringman: that is precisely the same rule we have in our union, only our limit is not so high. we fine a member $ . for his first offense, and for the second offense we take away his card. by jove, that is a hot proposition. and these are the very fellows who are always cussing us because of our union rules. mr. lawyer: i want to tell you something else, gentlemen, that combination among the banks is clearly in restraint of trade and in violation of the sherman anti-trust law. anybody who wants to can bring those banks to time. mr. banker: now, gentlemen, don't you perceive that this institution, step by step, has evolved its own laws, or rules of action, slowly developing its present system, and regulating and controlling the conduct of those outside institutions which enjoy its privileges? the story of this clearing house is the record of all of them in principle. they are, each and every one of them, self-centered, self-contained, and a law unto themselves. the operation of the new york clearing house is practically that of all the others. its room is sixty feet square. four rows of desks occupy the floor. each member has its own numbered desk separated from its neighbors' by a wire net work. at one minute to ten o'clock the manager sounds the gong and all are instantly ready for the exchange which begins promptly at ten o'clock. at the expiration of forty-five minutes usually, but sometimes in thirty-seven minutes, and even in thirty-five minutes, every member of the association has in its possession all the paper drawn upon itself, which the other members have credited on their books, and has delivered all the paper drawn upon all the other members of the association in exchange which it has credited upon its books. mr. cannon states that the amount delivered by any member has never been exactly equal to the amount received but has come within one cent upon a single occasion. to complete the clearing transaction, it is necessary, of course, for those who owe anything to pay it to the clearing house, and for the clearing house in turn to distribute what is paid to it among those who are entitled to receive it. as a matter of convenience for the purpose of settling the balances, the members of the clearing house deposit with the clearing house gold coin, gold certificates, silver certificates and legal tender notes, and receive clearing house certificates, therefor, in denominations of $ , , $ , , $ , , $ , , $ , , $ , , $ , , $ , and $ , each. all notes of a smaller denomination than $ . should, according to practice, be put up in packages of not more than $ , . all packages are sealed and marked with the name of the institution depositing them with the amount, date and kind of money they contain. the banks, also, deposit at the sub-treasury in new york gold coin, for which certificates are issued by the assistant united states treasurer. these certificates are in two denominations, $ , and $ , each; the holders of these certificates are the absolute owners of them. _it is stated upon high authority that the amount of such money now deposited at the various clearing houses throughout the united states exceeds the sum of $ , , . in other words, that we have today in the united states centralized our reserves to that extent for certain purposes._ mr. merchant: mr. banker, your history of the development of the clearing house and your description of its operations have certainly been very clear, and most interesting. the second point you mention, the clearing of country checks, will appeal to all the business men of the country as it has to me for a long time; especially since i have a great deal of business up in new england, where this practice has been in force since . i was up there the other day, and my partner took me to see mr. charles a. ruggles, the manager of the boston clearing house. after he had described the system of clearing country checks, he handed me a little pamphlet giving the history of its development in boston and setting forth its reasons and advantages so graphically, that i am going to quote from it in telling you gentlemen about it. let me say to you that i am confident that when this principle is fully understood, and carried out, as it soon will be, to its logical conclusion, checks, precisely like our bank notes, will be par everywhere in the united states. i am fully aware that you are greatly surprised at this statement; but take my word for it and remember that what i have prophesied is going to happen. _free zones are going to increase until every check will be free within its own zone, and almost immediately as a consequence, the zone centers will settle with each other daily; that is all checks will not only be free in their own zones, but will be free between all zones, that is all checks will be par everywhere._ however, let me tell you how it developed in new england. ruggles describes it in these words: "that the use of checks has increased rapidly in the past ten years is an undisputed fact, and the question of how to handle them to advantage, or without loss, is a problem that has caused much discussion. all large cities have had the same experience, and have dealt with the question in various ways. rather than ask his bank to draw exchange, the country merchant sent his check to boston in payment of his account, and in this way, he was encouraged by the city merchants who deposited the check in his bank, where it was received at par. this continued until the volume handled reached such proportions as to make the item of exchange quite prominent in the expense account, which the city bankers sought to reduce by various methods. in many cases checks were not sent directly to the banks upon which they were drawn, some other route being selected to avoid exchange charges; as, for example, a check on stonington, conn., deposited in westerly, r.i., only six miles distant, after many days, during which it traveled one thousand miles, perhaps, passed through providence, boston, newport, then new haven and new london and reached its destination bearing the endorsement of nine banks. mr. cannon in his work on clearing houses cites a remarkable case of zigzagging to avoid collection charges; a check on sag harbor, n.y., paid to a hoboken firm was eleven days reaching its destination. had it been collected through the new york clearing house ten days' time, fifteen hundred miles of travel and a vast amount of clerical work might have been saved." here are two diagrams showing the route and the indorsements of the check to which mr. cannon referred, taken from mr. cannon's work on clearing houses. mr. ruggles further says: "the subject of the collection of the country check in a more expeditious and economical method than that then in force in boston, was first agitated in , when a committee of five was appointed to consider the question. a majority reported that the annual cost to the banks of boston was two hundred and twenty-nine thousand dollars for collecting new england checks and recommended that the business be consolidated, which would very materially reduce labor and expense. this report was received and placed on file. a minority report was also submitted in opposition to any change, on the ground that it would sever the social and business relations which then existed, and the clerical force required to handle the entire business would incur so heavy an expense that the cost of collecting would be as much, if not more, than was the case by the method then existing. no further action was taken until , when another committee was appointed to consider the same question. they reported that returns from all the banks showed that double the business reported by the former committee was then being transacted and that the probable cost was four hundred thousand dollars; they suggested that an agency similar to the clearing house be established for the purpose of making the collections. the banks failed to endorse this proposition and the matter was dropped until , when a committee was appointed by the bank presidents' association to again consider this important question; in their report it was recommended that the clearing house association act on the matter and undertake to make the collections. a committee was appointed by that body, who endorsed the previous report. their report was accepted and the clearing house association authorized the clearing house committee to put in operation the present system, and the banks of massachusetts were first addressed on the subject on april , , the result being a conference between the massachusetts bank cashiers' association and the clearing house committee. this conference revealed a decided difference of opinion at first, but both sides were brought to a clear understanding of the situation eventually. the position taken by the clearing house was that it did not propose to dictate to the country banker how he should transact his business or coerce him into acting in conjunction with the clearing house; nevertheless, the boston banks claimed the right to use their own methods in making collections, and should the country banker decide to charge exchange, checks on his bank would not be accepted at par in boston, and might be collected by express or such other means as was thought advisable. comparatively few of the banks in massachusetts appeared in opposition when the subject had been fully discussed. at a second conference the cashiers' association asked the privilege of making payments in new york exchange if more convenient for them, and this request was readily complied with. they also asked that they might ship currency when necessary, at the expense of the boston banks; this request was also granted, and in a few months all were remitting at par and checks from all the boston banks were being collected through the clearing house. on sept. st, maine was added to the list, followed by rhode island and connecticut on nov. th, and new hampshire and vermont in january, . [illustration: fac-simile of the back of the check, showing the numerous indorsements it bore on finally reaching the bank on which it was drawn. _from james g. cannon's work on clearing houses._] "the first year the amount collected was $ , , at a cost of ten cents per thousand dollars; the second year $ , , at a cost of eight cents; the third year $ , , with cost reduced to seven cents. since the opening of the foreign department, as we term it, the average yearly business has been six hundred million dollars, and the average cost seven cents. the expenses are met by an assessment levied on the banks based on their daily average business. there are at present in new england six hundred and thirty-seven banks and trust companies to whom checks are sent daily, and the number of packages handled will average five thousand." [illustration: map showing the check's itinerary. _from james g. cannon's work on clearing houses._] mr. banker: mr. merchant, i am very much surprised that you have made such a thorough study of this feature of the banking problem, but i am also equally gratified. you have certainly explained the question so clearly and fully that no one can fail to be impressed with the future possibilities of this plan of clearing country checks, and i am convinced that you are absolutely right that the time is not far distant when every check in the united states will be par everywhere precisely as our bank notes are today; and why should they not be so, since both are identically the same thing in principle. mr. lawyer: i can see what a tremendous advantage that would be to our commerce, indeed, incalculable, and i can see that there is no substantial difference between a check on a bank and a bank note, which is a check of the bank on itself; both are mere credits, and as you say, when fully comprehended and rightly understood, will be treated in precisely the same way in the exchanges of the country. but it does seem to me as though we shall have to have a better knowledge of our banks, and the business houses of the country, too, if this great reform is to be brought about. mr. banker: that is true, but the bankers of the country have realized for a long time that their greatest peril came from the unsound practices and reckless methods of some of their own number and have already taken steps to protect themselves against such practices. you, gentlemen, will all of you, no doubt, remember the walsh failure at chicago in . you will also remember that walsh had control of three different banks with approximately $ , , resources; one was a national bank, under national supervision; one a trust company and one a savings bank; both of the latter being under state supervision. this enabled walsh to flim-flam the examiners, one examiner being national and the other state, by juggling the assets and then finally diverting practically all of the deposits into his own enterprises; certainly the best part of them was used in promoting his business schemes. it took this kind of an earthquake to wake up chicago and bring into the banking fraternity, or business world, one of the greatest reforms of the commercial life of the country. i say commercial world advisedly because about the same time chicago had an experience with a fish house that was really the biggest fish story that was ever told. the sad thing about this fish story was that it was true and cost the fishermen, the chicago banks, and the fishermen and bankers elsewhere, about $ , , . these two experiences capped the climax and illustrated perfectly the need of just what followed in the clearing house at chicago. this brings me naturally to the third point that i mentioned as important and vital in the evolution of the american clearing house. on june , , the clearing house association of chicago, illinois, acting upon a resolution introduced by mr. fenton, vice-president of one of its banks, established an independent system of clearing house bank examinations. only recently the chairman of the clearing house used this language: "the result of our experience in chicago is most satisfactory and gratifying. the banks have almost unanimously adopted every suggestion made by the clearing house committee for their betterment and strength. in several instances the committee, from its wider knowledge of the financial situation, has been able to save some of the smaller institutions from loss by enabling them to take hold of conditions in time. i cannot properly go into such details as would illustrate the effectiveness of clearing house examinations as we have experienced it, and can only say in a general way that it has been even more satisfactory than i anticipated it would be before it was undertaken." mr. lawyer: right on this point i want to read to you a letter i have just received from the clearing house examiner of los angeles, california. dear sir: replying to your inquiry of december th, will say that clearing house examinations were begun in los angeles on may , . since the inauguration of the system there have been no bank failures, because the executive committee of the clearing house association will not permit banks to reach the danger point. we have had one instance where, after watching a bank for three years, giving it a chance to correct its bad methods and put itself in good condition, the clearing house finally compelled it to assign all of its assets to a trustee, and the public was notified that all claims would be paid on demand.... national and state examinations have improved greatly during the last ten years, but they will always lack the strongest element--the calm, clear judgment of the local executive committee, whose demands are founded on knowledge of the situation, and whose mind is not warped by political strings. yours very truly, (signed) john w. wilson, _examiner, los angeles clearing house assn._ mr. cannon in his admirable work on clearing houses, says: in substantially his own words the chicago examiners operate under the following conditions: the examinations extend to all the associated banks in chicago, and to all non-member institutions. the work is conducted with the aid of five regular assistants, each fitted by experience to thoroughly do that part of the work assigned to him. the examinations include, besides the verification of the assets and liabilities of each bank, so far as is possible, an investigation of the workings of every department, and are made as thorough as is practicable. after each examination the examiner prepares a detailed report in duplicate, describing the bank's loans, bonds, investments and other assets, mentioning specially all those, either direct, or indirect, to officers, directors, or employees, or to corporations in which they may be interested. the report also contains a description of conditions found in every department. one of these reports is filed in the vaults of the clearing house in the custody of the examiner, and the other is handed to the examined banks' president for the use of its directors. the individual directors are then notified that the examination has been made, and that a copy of the examiners' report has been handed to the presidents for their use. in this way every director is given an opportunity to see the report, and the examiner, in every instance, insists upon receiving acknowledgment of the receipt of these notices. the detailed report, retained by the examiner, is not submitted to the clearing house committee, under whose direct supervision he operates, unless the discovery of unusual conditions make it necessary. a special report in brief form is prepared in every case, and read to the clearing house committee at meetings called for that purpose. the report is made in letter form, and describes in general terms the character of the examined banks' assets, points out all loans, direct or indirect, to officers, directors, or employees, or to corporations in which they may have an interest. it further describes all excessive and important loans, calls attention to any unwarranted conditions, gross irregularities, or dangerous tendencies, should any such exist, and expresses in a general way the examiner's opinion of each bank as he finds it. the circumstances under which the first clearing house bank examiner was appointed and the result are well set forth by james b. forgan, president first national bank of chicago. "chicago was the pioneer in clearing house bank examinations. "they were inaugurated there in after the failure of a national bank and two state banks. these institutions were under the direct management of one man who was president of the three. the condition of their affairs when disclosed surprised and appalled the other chicago bankers. the liabilities of the private ventures of the president had gradually accumulated in the three banks until they had absorbed the entire capital and surplus of all three, amounting to $ , , , and per cent of their aggregate deposits of $ , , , one-third of which was public funds. "the condition in the national bank had developed through a period of years during which the comptroller of the currency, through the semi-annual reports of his examiners, had been kept fully advised of what was going on. among the assets were found nineteen fictitious loans for $ , each represented by so-called memorandum notes. each memorandum note purported to be secured by $ , of second mortgage bonds of the wisconsin & michigan railway co. this road was controlled by the bank president, and the bonds proved worthless. the first mortgage bonds of the same road, $ , of which (being almost the entire issue) were also among the assets of the banks, were finally disposed of at about cents on the dollar. these memorandum notes did not, on the face of them, even pretend to be the obligations of bona fide borrowers. the ostensible signatures on them, although in different names, were all in the handwriting of the clerk who filled them out and who wrote plainly in red ink across the face of each the words 'memorandum note.' they could not deceive anyone who saw them and they did not deceive the national bank examiners who reported to the comptroller the facts in connection with them. "although cognizant of these irregularities and of the accumulating obligations in the bank of the president's private enterprises, the comptroller apparently could not or at all events did not take measures to stop them by other means than those of expostulation and reproof until matters became so bad that they simply could not be permitted to go further. "when at last drastic measures were decided upon the comptroller and the state auditor, acting together on a saturday afternoon after the vaults of the three banks had been closed with time locks set for monday morning, notified our clearing house committee that unless provision were made for payment in full of the deposits none of the banks would be permitted to open for business on monday morning and they would be put in the hands of receivers. "business conditions were strained and the time was therefore particularly unfavorable for permitting the failure of three prominent banks. the effects of such a calamity it was feared would have extended far beyond the confines of chicago. "the situation was thus protected from a general disturbance of public confidence, but it was done at the cost of a very heavy loss, foreseen at the time and since realized by the participating banks. "the statements of the national bank made five times a year to the comptroller's department, copies of which were rendered to the clearing house committee and on which it had implicitly relied, failed to disclose these conditions. "i have given you these details of this unfortunate affair because they show so clearly the limitations of governmental supervision of banks under our national banking law as it has been interpreted by the courts and by the legal advisers of the comptroller's department. "let me draw your attention to a few of the legal restrictions which limit the comptroller's power to act in such cases. " . under the national bank act no obligation due a bank is considered bad until interest is past due six months and not then if it is secured or in process of collection. " . the comptroller may appoint a receiver when he concludes that a bank is insolvent. but here again he has been hampered by the legal definition of insolvency, which is 'inability to pay current debts as they mature.' " . the making of a national bank report to the comptroller so long as it is in accordance with the bank's books, however erroneous it may be as to actual values, which alone disclose a bank's true condition, cannot be construed as a misdemeanor. "these legal restrictions are presumably the reason why some banks have been permitted to persistently publish to the public the figures of their statements as rendered to the comptroller of the currency after they are known to have met with heavy losses and have failed to provide for them by charging them to profit and loss. that this has been permitted in some cases is notorious. the case of the chicago national bank and a recent one in a large central city [$ , , of $ , , surplus was charged off] are conspicuous examples because of their size. undoubtedly as a rule the published statements of the banks are reliable, but there are a few exceptions, with which, in view of the legal restrictions which govern his action, the comptroller finds himself unable to cope. these exceptions, however, frequently result in failures and catastrophes. the comptroller cannot legally take drastic measures with such banks until they perform some act of insolvency or when he believes their capitals to be impaired, which, being a matter of judgment in regard to the realizable value of their assets, is frequently difficult to prove. "these disclosures in connection with the failures of these three banks showed the associated banks of chicago that statements so rendered, which up to that time had been all the clearing house committee had to rely upon and which, as published, form the basis of the standing and credit of banks with the public, could not be implicitly relied upon. it was therefore unanimously resolved to adopt a system of supervision, under which there would be some assurance that such conditions could never again develop in any bank connected with the chicago clearing house association. there was therefore organized a bureau of examination in connection with the clearing house. * * * * * "as to the practical working of clearing house examinations in chicago during the six years of their existence i can only say that it has proved in every way most satisfactory and successful. there has been neither friction nor unpleasantness. bank directors realize the great benefits derived and are unstinted in their praise of them. they are greatly assisted by these reports in keeping themselves informed on the condition of their banks and they readily coöperate with the clearing house committee in the correction or elimination of anything open to criticism. our experience has been that the banks have almost unanimously adopted every suggestion made by the committee. i cannot, of course, discuss such details as would show its efficacy. i can only say that the results have been most satisfactory to all concerned and that much good has been accomplished for the chicago banks individually and collectively. "the organization, being entirely voluntary, partakes somewhat of the nature of a gentlemen's agreement, under which each bank binds itself to conduct its business under proper methods. the effectiveness of the method lies in the fact that they are all measured by the same standard, viz.: that their statements as rendered to the clearing house association must be satisfactory to the committee, in view of the examiner's reports upon them, otherwise they cannot continue to enjoy clearing house privileges." mr. banker: from mr. wilson's statement about los angeles and mr. forgan's statement about chicago, it must be perfectly clear to all of you, as it now is to me, that if we had in this country, say thirty or forty commercial zones, or free check zones, like new england now has, that is thirty or forty financial centres, covering all the territory naturally tributary to them, and so compassing, or covering the entire country, and these zones, all organized precisely as the chicago clearing house association is organized for the examination of all the banks of the united states, bank failures would become a thing of the past. mr. lawyer: well, let me see now, how you would insure that result, that is that bank failures would cease. the banks fail very often, possibly generally, because the officers of the banks have used the bank's assets in their own schemes, or those in which they are interested. but bank failures are very often due to fish paper, such as you described a few moments ago. how would you detect, check and stop that sort of thing? that is, how would you prevent too much paper from some one merchant, or manufacturer, getting into the banks? mr. banker: don't you see, mr. lawyer, that if your examination covered all the banks in a commercial zone, your examiners would always know, or could very easily find out, just how much paper any business house had in the banks of that particular zone, couldn't they? don't you see that if they observed that a large amount of paper of some business house had been placed in the banks of that zone, that is, loans made, or paper sold, they would at once be placed upon their guard and inquiry, and would proceed to find out just how much paper that particular business house ought to have, or was entitled to have out, considering its capital, and the general character of its business? don't you see that these bank examiners could insist on knowing all about the financial condition of any business house in their particular zone, just as well as the banks themselves could and do insist upon knowing? if a business house should refuse the bank examiner the fullest possible information about its affairs, its days would be numbered as a borrower at the banks of that zone, would they not? mr. lawyer: that is just the point. a business that is over expanding its credit by borrowing, or by selling its paper, will probably be working some other zone, or several of them at the same time. mr. banker: you might naturally think so until you reflected upon the situation for a moment. don't you see that if you had, as i have just said, thirty or forty such commercial zones, all organized, and all united into one system, as perfectly as if they were one single institution, that they could within twenty-four hours know to almost a dollar how much any business house in the whole united states had outstanding so far at least as the banks were concerned in all of them--simply by telephoning or telegraphing to each other? _you must see that every one of these commercial zones would soon become the most comprehensive and the most perfect credit bureau in the entire world, and that taking them altogether, they could and would, by the most exhaustive methods, not even now fully appreciated, be able to check the whole commercial situation in the united states in an incomprehensibly short space of time. nothing is so essential today as to know the facts about the situation because of the enormous increase of trade, and consequent expansion of credit._ mr. lawyer: it does seem to me, after all, now that you have finished the details of your plan, that you have in it a perfect check upon the whole business of the banking world. humanly speaking, i see no loophole nor escape whatever. mr. laboringman: that looks to me like an all-round scheme. it will certainly work like the colored man's fish trap, it will catch 'em, both "agoin' and acomin'," and would give this country the only practical scheme i've ever heard of for insuring bank deposits; for it does not seem possible to me for a bank to get into a position where it ought to fail. now, gentlemen, if there is one reform in this whole business that ought to be accomplished it is such an administration of these banks, as will practically prevent failures. don't you think so yourselves? this question is always coming home to the working people, because a bank failure is a tragedy in their lives. mr. manufacturer: yes, mr. laboringman, i certainly do agree with you, and i believe that this plan of having all the banks of the entire country examined by bankers just as they are now being examined by the clearing houses instead of politicians, and finding out, as such clearing house examiners will, not only the condition of the banks, but the financial condition of every business house as well, will accomplish what you want. the laboring people are entitled to better protection than what has yet been given them. this goes to the very root of things. mr. merchant: gentlemen, i have been listening with the greatest possible interest to the story of the growth of the american clearing house and the most marvelous thing about this matter to me is that this vast system which has not yet been correlated is the product of experience, and that there is not a single practice of this huge machine from the atlantic to the pacific as it is carried on, or operated, that is based upon a single statute. think of the clearing house associations in those twenty cities, actually examining, not only their own members, but every other bank that clears its checks through one of their members. why, gentlemen, today these bank examiners could cut off my credit at my bank without my knowing it by simply saying to the banks that my credit was too much extended, and that i ought to cut it down, and get into a safer position. mr. farmer: well, do you know, i am of the opinion that there is nothing so important in these days as to have someone going around and compelling these fellows to pull in their horns. they will never interfere with anyone as long as he keeps in sight of the shore. it's a good thing and will do more than anything i know of to keep our business ship on an even keel. mr. manufacturer: when mr. farmer talked about pulling in their horns, i thought he was perfectly at home, and talked about something that he was familiar with; but when he gets to talking about a ship and keeping close to shore, it strikes me that he's getting out to sea. however, this proposed supervision and checking scheme strikes me just as it does him, as the most desirable, wholesome and healthy process by which we can go on in the future far more steadily, and in the end far more rapidly than we do now, with our ups and downs, and i am heartily in favor of it. but, mr. banker, it occurs to me that if these thirty or forty zones you speak of are going to work so closely together, as you think, and have outlined, there will be sooner or later a tremendous business going on between them. mr. banker: of course there will; and that suggestion brings me naturally to the fourth point i raised in connection with the development of our american clearing houses which was a combination of a part of their reserves for their own convenience. you will remember that i called your attention to the fact that it was estimated by high authority that the banks belonging to the clearing house associations were now carrying upwards of two hundred million dollars of their reserves at the various clearing houses. it does not seem to me as though it was taxing the imagination very much to see how very easy it would be to apply the same principle to the thirty or forty financial centers that is now being applied to all the banks included in the clearing houses. of course i realize that the reserves will have to be upon a correspondingly increased scale, ranging from one billion to one billion and a half, as things now stand, and that they will all have to be actually combined, and perfectly mobilized, precisely as the reserves are, when a clearing house association fortifies itself, to protect all of its banks, and the commercial interests of any community in times of danger and panic. mr. laboringman: what do you mean by clearing house certificates? i have seen these things mentioned time and time again in the papers, and i must say i could not get on to them. i supposed it was just some huggery-muggery of mr. banker, over there, for the purpose of getting the best of the dear people. mr. banker: on the contrary, just the reverse is true. clearing house certificates, commonly so called, are issued only to protect the people's interest. they are issued for the common good, and are thoroughly appreciated by all those who understand their use, and the circumstances under which they are issued. mr. laboringman, you have just asked what a clearing house certificate is. we all know what a gold certificate is. it certifies that there are deposited in the treasury of the united states as many gold dollars as its face calls for, and the holder can go and get the gold dollars by presenting the certificate. in the early part of this evening, we learned that a clearing house certificate was issued by a clearing house whenever some bank deposited with it gold coin, gold certificates, silver certificates, or united states notes; that is, such a clearing house certificate is for such a deposit as is made, and entitles the holder to what it calls for, as was then stated. now, the popular name, clearing house certificate, is applied to something quite different from the exact, or technical, definition above given. when we say that a clearing house has issued clearing house certificates, in ordinary, or popular, language we mean "clearing house loan certificates," because the public never have any occasion for discussing the usual clearing house certificates. the clearing house loan certificates are issued by a clearing house upon commercial paper, bonds, stocks or any satisfactory security. in , collateral security amounting to $ , , passed through the hands of the new york clearing house committee, of which $ , , , or . per cent, was commercial paper and $ , , , or . per cent, was bonds, stocks and short-time railroad paper. mr. lawyer: mr. banker, if you will allow me, i think that mr. cannon has stated this phase of the question so well that i should like to read it right here. he says: "clearing house certificates are of two kinds, those issued upon the deposit of gold coin (and in new york city and boston on gold and silver certificates and legal tender notes) and those issued upon the deposit of collateral securities. the former are employed in ordinary times solely as a method of economizing time and labor and reducing risk in handling large sums of money. the latter are employed in times of financial disturbance or panic, and although both are intended for use solely in the settlement of balances at the clearing house, the circumstances that call them forth, the results effected by their use, and the part they play in banking economy have little or nothing in common. the certificates issued upon the deposit of gold, etc., are termed 'clearing house certificates,' and those issued upon the deposit of collateral security are very properly termed 'clearing house loan certificates,' with which latter only are we here concerned. "clearing house loan certificates may be defined as temporary loans made by the banks associated together as a clearing house association, to the members thereof, for the purpose of settling clearing house balances. such certificates are negotiable, as a rule, only among the members of the association, and are not in any sense to be regarded as currency. they are not even seen by the business community, and do not pass from bank to bank except in payment of clearing house balances. "to obtain an intelligent understanding of the real character and purpose of such certificates it will be well to treat somewhat of the circumstances under which they are issued. in the course of the present century the united states has undergone periodical derangements of business affairs, when confidence was displaced by mistrust, when the payment of debts became difficult, when property values declined, and business houses failed; when industry and trade were paralyzed, and general stagnation ensued in all lines of enterprise. in such times depositors in banks, stricken with fear and sometimes pressed by need, draw out their deposits, in many cases to such an extent as to render it difficult or even impossible for the banks to contract their loans sufficiently to meet the demands thus made upon them. under our present currency system no adequate method is provided for expanding the money volume as occasion demands, whereby the banks can continue their usual loans and discounts, and thus prevent a panic with all its evil consequences. hence it is left in a large measure to the financiers of each community to work out their own remedy, supplemented by such mutual assistance as a courteous regard for each other may dictate or as business relations may demand. "quick to see the defects in our currency system, and the desirability of in some way supplying it, the bankers of new york, nearly fifty years ago, devised the scheme of issuing clearing house loan certificates as a method of relief from temporary stringencies. subsequently, nearly all the clearing houses in the great centers adopted the same device, and by their heroic resort to the measure they have at different times relieved the business community of untold disaster, for which invaluable service they have justly received the grateful recognition of the entire country. "the great value of clearing house loan certificates lies in the fact that they take the place of money in settlements at the clearing house, and hence save the use of so much actual cash, leaving the amount to be used by the banks in making loans and discounts, and in meeting other obligations. the volume of currency, to all intents and purposes, is expanded by this means to the full amount of the certificates issued." in the history of the past the denominations have varied from cents to $ , in the different associations and in proportions varying from $ to $ of certificates to $ of collateral deposited. the total amount of its balances is not always paid in clearing house loan certificates by a bank to which such certificates have been issued. thus, for example, the debit balance of a given bank may be $ , , which in ordinary times would be paid in money or gold certificates. in a time of panic a part of this sum--say $ , --is paid in clearing house loan certificates and the remaining $ , in currency. another, with the same balance, might pay the whole in clearing house certificates, while still another would pay the full amount without the use of any certificates whatsoever. the first issue of clearing house certificates occurred in . in the autumn of that year there was a rapid shrinkage in bank deposits and a corresponding contraction in loans and discounts. the situation grew more and more serious as the end of the year approached. the presidential election was a disturbing factor of more than ordinary significance. immediately succeeding the election of abraham lincoln to the presidency the situation began to assume a critical aspect. distrust and uncertainty were universally felt. in accordance with the authority thus given, the first issue of certificates was made nov. , , and the beneficial effect was immediately felt. the banks rapidly extended their loans, deposits increased, and commercial paper, which formerly could not be sold for per cent, was now freely marketed at per cent and per cent. as a result of the pressure the association passed a resolution in the following september, authorizing another issue of loan certificates, and on sept. , , the first issue was made. in the association issued certificates for the third time. the first bore the date of november th, and the largest amount outstanding at any one time was $ , , . owing to the prolongation of the war, with the consequent unrest in business circles, the issue of certificates for the fourth time began march , , and reached its maximum, $ , , , on april th of the same year. no more loan certificates were issued until the year , when for the first time the clearing house associations of other cities, seeing their great practical utility, began to avail themselves of their use. in the year mentioned the association at new york followed the precedent established in , and the same course was taken by the clearing house associations at boston, philadelphia, baltimore, cincinnati, st. louis and new orleans. the panic which called forth such united action was one of unusual severity. it reached its climax in september, and so severe were its ravages that the new york stock exchange closed its doors on the th of the same month, for an indefinite period, but reopened them ten days thereafter. the usual resolutions were passed by the clearing house association, authorizing the issue of certificates, and on september d the first issue was made. the amount was fixed at the outset at $ , , , which, with the announcement that the government would purchase the same amount of bonds, caused an immediate subsidence of the panic, and in less than three days its most acute stages were over. during the two months referred to, certificates to the amount of $ , , were issued. new orleans alone issued certificates in , the amount being $ , . new york alone issued certificates in , the amount being $ , , . the next certificates were issued nov. , , and the issue ceased december d, amounting in the aggregate to $ , , ; the largest amount outstanding at any one time was $ , , , on december th; and the last certificates were retired february , , less than three months from the date of the first issue. boston and philadelphia followed. then came one of the memorable panics, . the issue was commenced june , , and ceased september th of the same year, the total issue having been $ , , . the largest amount outstanding at one time ($ , , ) was attained august th, which amount remained unaltered until september th. then followed philadelphia, baltimore, new orleans, cincinnati, buffalo, atlanta and birmingham. birmingham to protect its cash issued denominations all the way from twenty-five and fifty cents up to $ , $ , $ , $ , and all the larger amounts. besides the loan certificates issued in , there was a considerable amount of emergency circulation taken out by the banks in the southeast, under the title of "clearing house certificates," in cities where no clearing houses existed. in adopting the name of clearing house certificates, it was not the purpose of the banks to practice deception on the people, but to indicate what was really true and what the term would seem to imply, namely, that such certificates were temporary loans made by the banks associated together, and that the banks were pledged for their redemption. the denominations in the cities referred to were: albany, ga., $ , $ , and $ ; chester, s.c., $ , $ , and $ ; columbia, s.c., $ , $ , $ , $ , $ and $ ; danville, va., $ , $ , $ , $ , $ , $ , and $ ; newman, ga., $ , $ and $ ; and rock hill, s.c., $ , $ and $ . there is no doubt that the relief afforded in this manner was of great public assistance in the several communities where it was given, effecting results similar to those accomplished by the actual clearing house loan certificates in the great centres. business houses and corporations came to the relief of the situation and among them was the new bedford mfg. co., social mfg. co., hartford, conn., eagle and phoenix mfg. co., columbus, ga., swift mfg. co., columbus, ga., arnold print works, north adams, mass., richmond locomotive works, richmond, va., minneapolis and northern elevator co., city of tacoma, city of richmond, city of johnstown, pa., loomis and hart mfg. co., chattanooga, tenn. so much for panics up to our last. then came the panic of . of this a prominent banker and economist has said: "the truth is that responsibilities for the panic of lie at the door of our currency system. no other adequate cause can be found. we do business by the modern system of bank credits, but we have failed to supplement this machinery with the means for readily converting bank credits into cash." on oct. , , new york issued clearing house loan certificates. on oct. , , chicago also issued clearing house loan certificates. on nov. th, chicago issued clearing house checks for $ , $ , $ , $ , amounting to $ , , . these checks were secured by clearing house loan certificates. on november th, philadelphia issued clearing house certificates and the business houses issued pay checks for wages which were cleared through the clearing house. during the fall many cities issued clearing house checks in small denominations which were used for currency. canton issued pay checks for $ , $ , $ and $ , amounting to $ , , which had no security back of them. in november pay checks in denominations of $ , $ , $ , $ were issued to the fourteen banks of the clearing house of cincinnati. cleveland followed chicago in denominations of $ , $ , $ , $ . fargo, dakota, issued $ , $ , $ , $ and $ . los angeles issued october th "clearing house certificates or scrip," designed as a circulating medium for the general use of the public. mr. cannon records the action taken by the associated banks of group no. of the ohio bankers' association, which includes twelve counties, and is worthy of comment since it offers the first concrete example of the possibilities of the banks of any particular section of any state, uniting in an effort to overcome the disastrous consequences resulting at times from false rumors in panic periods. mr. merchant: _now, gentlemen, why all this frightful agony, this terrific straining, this ever-recurring tragedy and universal ruin, simply because we persist in being utterly ignorant of the simplest economic truths which our own actions on every such occasion have demonstrated--that there is absolutely no difference between a bank book credit and a bank note credit, except that the people want something that passes current in greatly increased quantities, when loaning stops or credit is checked. you have only to go to scotland, and note the fact that there has been in operation there two hundred and seventeen years the vital principle involved, the conversion of bank book credits into bank note credits, and the current redemption of all bank credits in gold coin, whenever called for._ why, gentlemen, if the man who wants to find the cure would only shake the moss from off his back, and take time to read what i am going to submit to you now, or pull the cobwebs out of his eyes and go up to montreal, or toronto, or any canadian city, and see the bank notes come into the clearing houses, with the checks and drafts, he would wonder why he had been such a complete idiot all his life, when our nearest neighbor was enjoying perfect immunity from our troubles. l. carroll root, an american economist and historical student of the first rank, after a most thorough and exhaustive investigation of banks and banking in new england before the war, concludes his comment as follows: "when the national banking system appeared upon the scene it found the channels of circulation in new england filled by a state bank currency of well recognized soundness. "in general, it was a currency based upon the 'banking principle.' it was issued against general assets--not against the deposit of bonds. it was secured in addition, in most of the states, by the further liability of officers and stockholders, or by a first lien upon all the assets of the bank, or both. it was limited--rather loosely, we would now say--to one hundred and twenty-five or one hundred per cent of the capital. but though issued under the legislation of six different states, it was in reality a single currency system--made so through the agency of a commercial enterprise, established and carried on without the aid of law. the bills of banks in any one part of new england passed at par in every other part; and for years the notes of new england banks had been enjoying an extended circulation in the west, where its reputation found for it ready acceptance. at home, too, its valuable points were appreciated and its forced transference to the national system a matter of regret. "the history of new england bank currency, thus closed, is significant for two developments which characterize it: "first, the steady growth, under the teachings of experience, of the system as to the issue and regulation of bank currency, which has since then become generally approved among the english-speaking peoples of the new world. in one direction after another special opportunities for fraud or exploitation of a confiding public by rash banking developed their legitimate disasters and prompted the invention of remedies 'to fit the crime.' conditions were so nearly alike throughout the new england states that each was prompt to suffer from any financial disease affecting any other, and equally prompt to adopt, with such improvements as its own enterprise might suggest, the remedies which had been found effectual elsewhere. as a result, the complete system, at the time of its practical suppression by the national bank act, was utilizing nearly every expedient to secure safe and conservative banking that were then or have since been incorporated in our own national banking system, or in that of canada--the two great plans which have since been matured. "a second feature was the development of redemption facilities and methods. starting with absolute chaos, assisted by no law, progressing tentatively as each necessity prompted the invention of new means to meet it, the result was a carefully buttressed and easily working system, under which, to an extent never approached in its efficiency by any plan elsewhere created by law, the bank note currency of new england was made elastic, safe and ideally convenient and inexpensive in use. "for a full generation before the war, the amount of ultimate loss to noteholders was too small to be reckoned as an appreciable percentage on the amount of currency outstanding, while the delays and minor inconvenience in the prompt cashing of the bills of broken banks were the result rather of the imperfect communication and exchange facilities of those days than of material defects in the banking system itself; indeed, so satisfactory had been the workings of what is known as the 'suffolk bank redemption plan'--that the need even of the most modest guarantee fund for instant redemption of broken bank bills was not felt until after the panic of ; and even then the total loss was petty when compared with the total circulation, and such as the most moderate plan of subsidiary guarantee would have forever obviated." mr. manufacturer: that is most astonishing, actually astounding; they went through identically the same experiences during the first fifty years of this country that we have been going through during the last fifty, and they perfected a banking system which we killed by the per cent tax on bank notes. now we are gradually, whenever necessary, even in defiance of law coming back to the same principle of credit currency, for certainly, whatever may be said of the clearing house loan certificates, generally speaking, all those $ , $ , $ , $ , $ , $ and $ clearing house checks were nothing but a pure credit currency, and we do not seem to have sense enough to see it, and adopt that principle. new england redeemed all her currency at the suffolk bank at boston, the financial centre of that commercial zone. new england did before the war, precisely in the redemption of her bank currency what she has been doing since , in redeeming new england checks at boston. we must take our hats off to new england. all we want to do is to adopt the currency system which she worked out, and her free zone system for check redemptions. canada obtained her original banking law by copying the statutes of massachusetts before the war. she has improved upon them in detail, but the great underlying principle is the same. mr. merchant: the total amount of certificates in one form or other, cash checks, etc., issued in , was stated by the comptroller of the currency to be $ , , . it is a most interesting fact to note that just prior to the panic hon. charles n. fowler, then chairman of the committee on banking and currency, of the house of representatives, introduced a bill for the purpose of allowing the banks to issue $ , , of bank notes of the pure credit currency character, and urged its adoption, as a measure of relief for the impending crisis. you will note the amount was only one million and three quarters in excess of the amount actually issued, or an estimate within three-fifths of one per cent of the amount actually used. never before in the history of the country was such license taken by the banks of the country as in in using bank credits in the form of cash checks indiscriminately; but they demonstrated this great economic truth that the nearer they approached to a pure credit currency, the nearer right they were. and they demonstrated this fact also to the satisfaction of every intelligent man on this question; that, if this country had been blessed with a credit currency redeemed through the clearing houses every day, precisely as these clearing house certificates and pay checks were, the panic of would never have marred the commercial history of this country. with all of our own experience before us, from the establishment of the banks of virginia in , is our stupidity to continue. and are we now to do something possibly more than stupid when we are naturally, even in defiance of law, as we have seen, finding our way out? if left alone, we shall soon adopt these same principles, now in practice in scotland, ireland and canada? principles which, without statutory laws, gave new england, before the war, the most perfect banking system that has ever existed anywhere in this world, all things considered. mr. farmer: then why in thunder don't we adopt it now? i suppose we are through with the clearing house now, aren't we? i hope so, for i am due at the farm. they are waiting for me. uncle sam: just hold on a minute. if i understand the facts, you are all wrong about one thing, and this includes both mr. cannon and mr. hallock. the first clearing house on this continent was not at new york at all, but it was established at boston, where i held my first tea party, and it was started in , thirty-five years before new york got to going. it only took two clerks to do the business for the first six years. by , just two years after new york started, it took seventy clerks to do the business, and the redemptions amounted to four hundred million dollars per year. transactions in new england in those days were comparatively very small, and the business was carried on as it is in france today, very largely with bank notes instead of checks. you remember, we learned one night that the bank of france owed $ , , , (one billion) in notes, and only one-tenth as much, or only $ , , subject to check; and that if a bank could issue notes, as freely as take deposits, the habits of the people would always determine whether the amount of bank notes was greater than the deposits. from to the note issue of the banks in new england ranged from $ , , to $ , , , and averaged $ , , , while the deposits ranged from $ , , to $ , , , and averaged only $ , , , or the note issue was nearly per cent greater than the deposits. the note issue then was the main feature of the banking business, precisely as it is at the bank of france, and they started a clearing house to clear the bank notes and it was called "the suffolk bank," where all the new england bank notes were cleared, precisely as new england checks and drafts are cleared today. new england was a free bank note zone before the war precisely as it is a free check zone today. all notes were par at boston, as all checks are par today, and the suffolk bank, where the bank notes were cleared, was just as much a clearing house as the one they have in boston today, for clearing the checks and drafts. there is not the slightest difference between the two, and the fact that no one of you men recognized it as a clearing house, convinces me that you do not yet fully comprehend and appreciate the fact that there is not the slightest difference between deposits subject to check, and a true credit currency, or a bank note issue. this is the great fundamental, economic truth, and unless you understand and recognize it, you might as well quit now. mr. banker: i thoroughly appreciate what you say, uncle sam, and i think we all do, but you have driven this matter home, so that i don't think we will ever forget it, or fail to apply it under such circumstances again, will we, boys? mr. laboringman: no, never. that discovery of uncle sam's was a centre shot, a real bull's eye. uncle sam: the result of this evening's talk is then, as i recall it: _first_: there is no statutory authority for any clearing house, either in england or the united states. _second_: the first clearing house started in london in . the second clearing house started in boston in under the suffolk bank. the third started in new york in . _third_: clearing country checks was established in london in . new england became a free zone for country checks in . _fourth_: clearing houses without any authority of law have adopted the following functions: (_a_) they have fixed charges for services; (_b_) they have provided reserves for their convenience; (_c_) they have forced all those banks, which are members, and all those clearing through them to submit to examinations; (_d_) they have not only issued clearing house certificates for use in settling balances, but for circulation as currency in denominations of $ , $ , $ , $ , $ , $ , $ , to meet the demands of trade. if you'll give them fifty years more, and will not interfere with them, they will in actual defiance of law reëstablish the currency system of new england before the war and now in operation in canada. it's too late to detain you a minute longer. you may go now, but remember that it took your uncle samuel to discover the important historical fact that the first clearing house established in this country was the suffolk bank at boston. good night. footnotes: [footnote : since the above was written new york city has become a free check zone for a large territory tributary to it.] fourteenth night banking in uncle sam: this is the fourteenth night, boys, since we began to meet, and discuss what in a way concerns me far more than any other question except the morals of the people. the tariff you can change, any time, any day, and, as i think should be changed schedule by schedule, so that there would not be any disturbance of business. nor could corrupt trades between the various interests be made, if that policy were pursued. when we take up our money plan we must be sure we are right, before we adopt it. i mean absolutely right; for there is no hope apparently of changing our monetary laws when once they get upon the statute books. mr. lawyer: that is certainly true, uncle sam, for we've not made a single substantial change in our national bank act since it was passed feb. , , almost fifty years ago. of course, we dotted an "i" here and crossed a "t" there, but that is all. mr. banker: i never thought of that before, but it is literally true. the only change ever made, worth mentioning, in the national bank act was that made in connection with the funding of the national debt in the act of march , . then congress adopted word for word a provision contained in congressman fowler's first general financial and banking bill of march, . this provision provided: that the new bonds should be payable in gold coin and bear interest at the rate of per cent per annum and that the banks could issue circulation up to par of the bonds, and that the tax of per cent should be reduced to one-half of per cent. not another change has been made, and this was incidental, rather than the direct purpose of the act. mr. lawyer: this indifference, or non-interference with monetary laws, is not peculiar to ourselves, however. you find the same is true in england. there has been no change in the english bank act since it was adopted in , although practically all the english banking economists during the past fifty years have agreed that it is most faulty in some respects, particularly in its currency provisions. the same is true of the bank of france which was established in by napoleon, who proved to be as great an economist as he was a general. the same was true during the first fifty years of our banking legislation. the same will always be true in every country, for nothing is ever done, affecting a financial system, until the situation becomes intolerable as it is in this country today, and as it is fast becoming in germany. of course, the reason is not far to seek; it arises out of the fact that there is a general fear that any change in the banking practices, or system of any country, will disturb the existing business conditions, or arrangements. hence nothing is ever done, as long as the people will put up with it. it takes the terrors and wastes of business misfortune to bring any change however obviously needed; therefore, we must be very patient, and most thorough in our work of preparing a measure for the reformation of our present banking practices which have been correctly described as "archaic," "barbaric" and "the worst in the world." mr. merchant: that is right, we must be both patient and thorough; and to be thorough i think we ought to know what the situation was in this country in , at the breaking out of the war; because if there is one fact that has impressed me more than any other, it is this, that all the real progress we have made during the past fifty years or since the war, has been either without any law, or in actual defiance of law. under these circumstances i think it is of the utmost importance that we find out if we can what progress, if any, this country had made up to , which was certainly a breaking up point in banking, as well as in all other lines. mr. banker: i agree with mr. merchant, and ever since we began these discussions i have taken every opportunity to go back and investigate the banking situation, before , hoping and expecting that our experience then would help us now. i have been literally amazed at what i have discovered in the way of sound banking in many of the states, and i have been profoundly impressed with the fact that then, too, as well as now, all that they had secured that was good was the outgrowth of experience. mr. manufacturer: i was so greatly impressed with the complete and, as it seemed to me, practically perfect system that had grown up under the suffolk clearing house, which started at boston in , that i have been wondering whether there were not other instances like that which would help us; for, gentlemen, whatever we may think, or want, personally, one thing is certain, and that is this, that we must take things largely as we find them, and legislate as far as possible in harmony with them, bringing the inefficient, the laggard and the "sucker" up to the approved standards of our banking experience and compelling every individual bank to do its part in providing its own insurance by carrying equal and adequate reserves and by carrying on its business in accordance with the highest standards of banking practices today. then we must bring all of the banks of the country under the reign of economic law, and into one harmonious whole for the benefit of all the people. we must protect our gold reserves against the demands of the rest of the commercial world. now, if any one of you has any information about banking conditions before the war that can possibly be helpful, i hope he will give it to us for our consideration. mr. banker: i have no hesitation whatever in saying that there were better banking institutions in the united states in than there are today, so far as the principles are concerned upon which they were operated. but, of course, we must note two things in this connection: first, banking generally was not nearly as good upon the average as it is today; nor could you expect it to be. second, banks generally were small, and only in a very few states was banking any more under governmental direction and control than the grocery business, stock buying or horse trading. the result was that sharpers all over the country were using the word "bank" or "banker" to swindle the unwary people and defraud the public generally. third, in some states the legislators were so ignorant of economic law that the laws passed by them only facilitated the schemes of the swindlers in their diabolical work. it was the reaction against the disastrous and disgusting experiences in one state after another because of the rotten conditions prevailing that some of the states finally passed laws for the establishment of banking systems, which for soundness and efficiency had never been surpassed, nor even equalled for the territory covered and services rendered. let me cite you a few instances; i will take first louisiana. the state of louisiana passed a bank act which, though erring in one or two particulars, was nevertheless almost ideal; and under it, the state in stood fourth in banking capital, and held more specie than any other state except one. no limit was placed upon the amount of credit notes the banks could issue, nor the deposits they could receive and no security was pledged for their redemption. the virtue and real substance of the act was in requiring a coin reserve of - / per cent of all liabilities, deposits as well as notes, and confining the loans outside of capital to paper running for ninety days, or less. not a single bank organized under this law suspended specie payments during the panic of , and all were conforming to the requirements of redemption when general butler marched down the streets of new orleans. the capital of the banks in amounted to $ , , , the $ , , , the circulation $ , , and the deposits $ , , . on feb. , , the legislature of ohio passed a bank act under which the ohio state bank was organized, with the right to establish branches and to issue credit bank notes. each bank was required to deposit per cent of the amount of its circulation to create a safety fund to redeem the notes of any branch that might fail. in there were seventeen branches; in twenty-five branches; in thirty-eight branches and in thirty-nine branches. the note issues were of a purely credit character, and were proportioned to the capital as follows: for the first $ , of capital, there might be $ , of notes; for the second $ , of capital, $ , of notes; for the third $ , of capital, $ , of notes; for the fourth $ , of capital, $ , of notes, and for each additional $ , of capital, $ , of notes. the evident purpose of the act was to give the people a uniform and sound currency, and the plan succeeded admirably. the state bank of ohio was regarded as one of the soundest in the country. the essence of the act was in the requirement that the notes issued by the respective branches should be redeemed in gold or silver coin, the lawful currency of the united states, and in the insurance given of this result by a reserve equal to per cent, of which at least one-half should be gold or silver and the balance equivalent to gold or silver coin. john jay knox says: "the banks authorized under the laws of and were uniformly successful and furnished a currency for the people, not one dollar of which was ever lost by the holder thereof." the capital in was $ , , , specie $ , , , circulation $ , , and deposits $ , , . mr. merchant: i have often heard my father speak of the state bank of indiana. can you give us the history of that system? mr. banker: indiana presents the anomaly of having organized the most admirable system of banking of any state in the union, and also of having had a banking system or banking practices at one time so vicious that under it the banks bankrupted nearly the whole people. the state bank of indiana and its successor, the bank of the state of indiana, stood all the tests of financial panic from until the banks were all absorbed by the national banking system, without closing their doors for a minute, or losing a dollar to bill holders, depositors or stockholders. it is a proud distinction for indiana that its state bank was long the model bank of the country. so well were its affairs managed that in a period of twenty-two years of actual business, the profit to the state on its $ , of stock amounted to three and a half millions of dollars. the bank of indiana, which became a model, was chartered in , with a capital of $ , , , and the state was divided into ten districts, afterwards increased to seventeen, there being a branch of the bank in each. under its charter the bank could receive deposits, buy and sell gold, silver, bullion and foreign coins, discount commercial paper, and issue bills payable to bearer--a true credit note. a forfeiture of - / per cent was imposed upon all notes not redeemed in coin. the institution was hardly under way when the panic of broke upon the country. the new york banks suspending, compelled the indiana bank to follow in order that it could protect itself. john j. knox says: "no bank in the country stood higher than did the state bank of indiana during the panic. in all the western and southern states its notes commanded a premium, and in the east were taken at a small discount.... its loans were made in small amounts and scattered all over the entire state, thus affording the greatest possible measure of relief." great as was the success of this splendid institution, the jacksonian democrats, coming into power, at once began an assault upon it, precisely as their leader had laid the axe to the roots of the united states bank. the indiana democrats failed to destroy the bank of indiana, but succeeded in passing a general banking law permitting banks to be established upon filing with the auditor of the state the bonds, or other evidences of debt, of the federal government, or of any of the states, as security for the notes to be issued. the state of indiana itself went into the business of issuing notes, and even plank-road companies issued them. the indiana state notes could be had for sixty cents on the dollar and were called "red dog." the plank-road notes and others of similar value were called "blue pup." the bank of the state of indiana organized in with twenty branches to take the place of the indiana state bank, maintained the same high standard as its predecessor, going through the panic of without suspension, although every private bank in the state, except two at indianapolis and one at fort wayne, went down. like its predecessor, the bank of the state of indiana fell on evil times soon after its organization. the panic of came two years after the organization of the state bank; and in , before the bank of the state had been in operation quite two years, a great financial panic swept over the country, precipitated by the failure of the ohio life insurance & trust co. every bank in the east, except the chemical bank of new york, suspended specie payment, and all in the west, except the bank of the state of indiana and the bank of kentucky. the indiana bank weathered the storm, and redeemed all its obligations in gold, as fast as they were presented. many of the branches of the bank of kentucky were at remote points from the railroads, and could not be easily reached by the brokers and other bill holders, but those of the bank of the state of indiana were within easy reach and holders rushed for the specie. in the capital was $ , , , specie $ , , , circulation $ , , , deposits $ , , . mr. manufacturer: i can tell you all about the kentucky banks myself--and i want to tell you there were no better then and there are no better anywhere today. the legislature of kentucky in the session of - granted a charter to the bank of kentucky with $ , , of capital and the privilege of six branches. charters were also granted to the northern bank of kentucky, with a capital of $ , , , and the bank of louisville, with a capital of $ , , , each institution having the power or right to issue credit notes to double the amount of their capital. while the northern bank of kentucky liquidated in and the bank of louisville was merged into the southern bank in , the bank of kentucky had in the latter year a capital of $ , , and a surplus of $ , , , giving indubitable proof that no one had ever suffered because of its power of note issue. and there the bank of kentucky stands today, occupying the building it purchased from the united states bank, a monument to the sound principles upon which it was founded. it may be most fittingly observed before passing, that when in may, , the blighting wave of suspension swept from new york across the country, these three banks of kentucky held $ , , in specie against $ , , of notes in circulation--an object lesson for those who may possibly fear that the banks cannot obtain sufficient gold today to protect the notes they are permitted to issue. the panic of , which was severe in many parts of the country, and which caused great alarm in kentucky, produced no ill effects on the banks, all of them continuing to pay in specie, even after the new york banks had suspended. in the capital of these banks was $ , , and the circulation was $ , , . mr. banker: the record made by the kentucky banks was excellent, but for organization the state bank of iowa, like that of the state of indiana, has had no superior anywhere in the world, and humanly speaking, the administration and working of both was practically perfect. iowa in the morning of her statehood was opposed to banking as a business; her first constitution provided that "the general assembly shall provide for the organization of all other corporations except with banking privileges, the creation of which is prohibited." the constitution also provided, that "the general assembly shall prohibit any person or persons, association, company, or corporation from exercising the privilege of banking or creating paper to circulate as money," the penalty for each offense being one year in the county jail and a fine. during the intervening years down to , when the new constitution was framed, iowa had suffered so severely from the _bond-secured circulation_ of illinois in particular, known as "wild cat," "red dog" and "yellow dog" money that a provision was incorporated permitting the legislature to create corporations with banking power, subject, however, to a vote of the people, and also to establish a state bank with branches founded on actual specie basis. i want to call the attention of you fellows to the fact that they had a referendum, a state referendum, in iowa in those days. it was provided that the branches should be mutually responsible for each other's notes; that the stockholders should be liable for an additional amount equal to their stock; that the bank could issue _pure credit notes for double the amount of the paid-up capital_; that in case of insolvency the bill holders should have a prior lien over other creditors and that specie redemption must be maintained. to secure this solvency beyond peradventure, each branch was required to deposit with the state bank either coin, united states stocks or interest-bearing state stocks at their market value in new york, but in no case above par. this deposit was equal to - / per cent of the note issue, and was known as "the safety fund" to redeem the notes of the branches in case any of them failed to do so. in addition each branch must have on hand an amount of coin, equal to per cent of its notes outstanding and deposits held. here is a replica of the banking system of the bank of the state of indiana, and it contains all of the prerequisites of a well-nigh perfect banking system; and the result proved the soundness of the plan. this bank was prohibited from paying interest upon deposits. the parent bank was not a bank of issue or of deposit. it transacted no business, except with and for the branches. certainly there is no bank in the united states today with so good a charter as that of the state bank of iowa. by an act approved in february, , county treasurers and the state treasurer were authorized to accept the notes of these branches in payment of taxes, and by an act approved march , , payment of taxes and the interest and principal on the school fund might be paid in united states treasury notes, national bank notes, or _notes of the state bank of iowa_, thus showing the unquestionable value of the state bank circulating notes. when the national banking system was established in , and the per cent tax on circulation was imposed, the life was choked out of one of the most perfect banking systems that had ever existed; and every note of the $ , , outstanding on jan. , , was redeemed without the loss of a single cent to the holders. the capital was $ , , ; specie, $ , ; circulation, $ , , ; deposits, $ , , . mr. lawyer: in i heard an attorney from richmond speak upon the state banks of virginia so boastfully, that out of pure suspicion i investigated them, not believing anything he said at the time. about there sprung into life in virginia a system of state banks based on the old scotch system under which a half dozen banks of issue were authorized, with numerous branch banks in every part of the state. the charter provisions of these banks were the basis of the few laws that have been enacted in relation to banking since that day. the first of the banks to be established under state control was the bank of virginia, incorporated by the general assembly, jan. , , with a capital stock of $ , , in shares of $ apportioned; three thousand seven hundred and fifty shares to richmond, three thousand to norfolk, two thousand two hundred and fifty to petersburg, one thousand to fredericksburg, five hundred and twenty-five to winchester, four hundred and fifty to staunton and five hundred and twenty-five to lynchburg. the charter provided that the banks should hold real estate and other effects to the value of $ , , , including the capital stock. the cashier was required to give bond for $ , ; the total amount of notes to be put into circulation by the banks, together with the debts, were restricted to $ , , , over and above the money actually deposited in the bank; that is, the issue could be three for one on its cash capital, and this was the established rate for this class of banks. the bank was well managed and was highly successful. its notes, all payable in gold, had a wide circulation and were at only one-fourth of per cent discount in new york. five other banks were established with the power of establishing branches. these mother banks, six in number, were great institutions, and held the complete confidence of the people. the law did not require that they should keep any reserves and they kept none, except the specie held in their vaults to redeem their notes. the law provided that the total amount of paper circulation of these banks should _never exceed five times the amount of the coin in possession and actually the property of the bank_. if the coin of the bank was reduced below one-fifth of its circulation, it was required to stop all discounts until the ratio was restored. as a matter of fact some of the banks issued as high as to . the banks at such times kept their coin reserve up by keeping the discounts down. the banks of virginia from to had a prosperous period, keeping on an average $ , , of notes in circulation without loss. it is reported that occasionally drafts drawn on new york were placed in the safe to make up a balance, and called "coin." be that as it may, there is no case on record where a bank of circulation and deposit failed, and it is claimed by those acquainted with the banking of that day that no one ever lost a dollar by a virginia bank note previous to the war of , and they were at a discount of only one-quarter of one per cent in new york. on jan. , , the capital was $ , , , specie was $ , , , circulation was $ , , , deposits $ , , . the bank of the state of missouri was started in , with authority to issue notes at the ratio of three to one for the specie in its vaults, and with a branch at each of five considerable towns in different sections of the state; lexington, fayette, palmyra, cape girardeau and springfield. its capital was $ , , . in , when the population of missouri was eight hundred and forty thousand and that of st. louis one hundred and twenty-five thousand, and the indications of substantial prosperity were to be seen in every department of business, the bank circulation was only $ , , , although its stock of $ , , specie warranted notes to the amount of $ , , , and a considerable part of its circulation was doing duty in california, oregon and new mexico, whither it had been carried by emigrants and traders. it is no wonder that under these circumstances missouri offered an inviting field for the "wild cat" money issued so profusely by banks in other western states and that its people became victims of an inconvertible and unreliably currency, which the bank note reporter quoted at a discount all the way from to per cent. so valuable were the notes of the banks of the state of missouri in california in the ' 's that a gang of counterfeiters took advantage of their popularity, and struck off imitations of them in large quantities. it was a remedy for this evil, which had become unendurable, and in response to the persistent demands of the important commercial interests of the chief city of the state that the legislature, in , chartered seven banks of issue, with branches conveniently located for the accommodation of business. these banks were promptly organized in the spring of , immediately after the act authorizing them was passed; for the state was prosperous, and offered a fair field for legitimate investment. the monetary crisis which was impending but not discerned fell upon the country shortly after they had opened for business; but they stood the strain well; two of them, the mechanics and the exchange of st. louis, refused to suspend specie payment, and continued to redeem in coin through the panic; and when the civil war broke upon the country four years later, these two banks again refused to join in the general suspension, and maintained coin payment under all conditions that followed. the system of banks organized under the act of rendered the important service of partially displacing the uncertain and variable currency issued by the banks of other states and territories which had found so easy a field in missouri. the legislature had also authorized the old banks in the state to establish additional branches and to issue notes for $ . , and in a short time every considerable town in the state had a bank, and the notes of missouri banks, issued at the rate of $ . to every dollar of specie on hand, afforded a local currency better than that brought in from the outside, which had for years almost monopolized the field. the "wild cat" money nevertheless made a stubborn contest, and the last of it did not disappear until the national bank act went into operation. in the wild, reckless period, when almost anything in the shape and appearance of an engraved bill, with the name of a bank on it, was good enough to buy public land with, and good enough, therefore, for all other purposes--and in the latter period when other western states _authorized banks to issue notes based on various kinds of bonds_ with the place of redemption out of the way and difficult of access--sometimes in a forest or in a swamp--the legislature of missouri refused to charter institutions to multiply such currency within the limits of the state. the notes of the bank of the state of missouri were preferred to specie in new mexico, utah and on the pacific coast, and the same high character marked the issues of the system of banks authorized by the general law of . the capital in was $ , , ; specie, $ , , ; circulation, $ , , ; deposits, $ , , . everything i have just said i have taken from john jay knox's "history of banking." during all this varied experience in the west and south, there was a most conspicuous illustration of a complete banking system demonstrating and proving every economic principle that is involved in constructing a financial and banking system for the united states. it was the suffolk system of new england. here were six states, the laws varying in each. portions of these states were far more remote from boston in those days than any part of the united states is from any other part today, so far as business relations and convenience are concerned. there were no railroads, nor telegraph lines, nor long distance telephones. indeed, almost every essential to anything like a sound banking system as conceived and observed from the standpoint of today was wanting. there was no law requiring a uniform reserve. there was no law requiring coin redemption. there was no law requiring bona fide capital. there was no check upon the amount of notes that might be issued if a bank was dishonestly inclined. there were, in , three hundred and six banks, deriving their authority from six states, and one hundred and fifty-nine of them did not possess an average capital of $ , ; nor was the average capital outside of boston more than $ , , and including that city, it was not more than $ , . by there were five hundred and four banks. there are only seven hundred and forty banks today in the same states. can any fair-minded, impartial man deny that the conditions today are vastly in favor of better results than they were then? one law for all; a bona fide capital; a required reserve; a system of redemption established by law; notes furnished by the united states government; a common national supervision. these all unite to compel the admission that any system that could prove its adequacy under such adverse conditions as existed from to would certainly approximate perfection today. nowhere in the whole range of banking experience have so many things, which the student of this subject wants to know, been demonstrated beyond cavil. to all intents and purposes the possible issues were without limit. the actual circulation in was only per cent of that permitted. the circulation of was only per cent of that permitted; and the circulation in was only per cent of that permitted. during every year from to , except one, the note issues were greater (and usually nearly double) than the deposits, illustrating with what certainty and perfect nicety such a system adapted itself to the ever varying needs of the people who were fortunate enough to have it, and how it invariably, with peculiar fitness, met the needs of the rural districts where currency and not checks was especially required. the states of new hampshire and vermont had bank capital amounting to $ , , in , and notes outstanding amounting to $ , , , while boston with $ , , of capital had only $ , , of notes outstanding. _a marvelous exhibition of this interplay and interchange of bank book credits and bank note credits occurred in the six new england states as a result of the panic of . the authorized note issue of the five hundred and ten banks constituting the suffolk system with capital ranging all the way from $ , to $ , each was $ , , . in , the year before the panic, the note issue amounted to $ , , , and the deposits amounted to $ , , . in , as the result of the panic, the note issue rose to $ , , and the deposits dropped to $ , , ; in , one year after the panic, the note issue had fallen to $ , , , and the deposits had risen to $ , , , or there had been a conversion of $ , , of bank note debts into deposit debts. the exigency for cash had disappeared and the depression had come._ do not fail to observe three important facts in this connection: _first_: that although the banks were authorized to issue $ , , , they never exceeded $ , , , which was the highest point of circulation, and that was reached as the result of the panic of , and that they averaged $ , , from to . _second_: that there was a perfect adaptation of the deposits and note issues to the peculiar and ever changing demands of the people during the panic, and during the depression in trade that followed the panic. _third_: that the number of banks in new england in , the year before the panic, was four hundred and ninety-five, and in the year , the year after the panic, there were four hundred and ninety-nine banks, or four more banks the year after the panic than there were the year preceding the panic, an unquestionable tribute to the principle of current coin redemption. now, mark this, that the very heart and the very soul of the suffolk system was in the fact that the notes were redeemed in boston in coin. so good were these notes considered to be throughout the entire west, that at buffalo, chicago, milwaukee and all commercial points in the then far west, they were always taken at a premium of from to per cent. it was not the size of the bank of issue that made them good and desirable, but the fact that they were redeemed in coin in boston. when the soundness of this system is tested by a comparison with that of the national banks, the result more than justifies the assertion that the suffolk bank system of new england was incomparably better than the national bank system; for, when the conditions during the twenty years from to are compared with those of the past thirty years, all must admit that argument is futile and the conclusion is inevitable. mark this, that while a tax of one-eighth of per cent of all the notes in circulation would have paid all the notes of the banks that failed under the suffolk system from to , it would have taken a tax of one-fifth of per cent on all the notes outstanding issued by the national banks to pay the notes of the failed national banks. in confirmation of what i have said in praise of the suffolk system let the bank commissioners of connecticut, vermont, maine, massachusetts and the _new york courier and enquirer_ testify. "the currency of this state is of the first order and can not be improved, being equal to gold and silver. this is strong language, we admit, yet perfectly true, for every bill holder can on demand convert his bills into coin." (connecticut bank commissioners' report, .) "the bills of any country bank, redeemed at par in any commercial city, will always be current throughout the extent of region whose business channels flow to that city. hence, new england money is worth more in the cities of new york and philadelphia than the bills of their own country banks. vermont bills have uniformly borne a premium in the eastern cities without loss, while bills of their own states are at a heavy discount." (vermont bank commission's report, .) "the 'suffolk system,' though not recognized in our banking law, has proved to be the great safeguard to the public. whatever objections may exist to this 'system' in theory, its practical operation is to keep the circulation of our banks within the bounds of safety. no sound bank can have any well-founded reason for refusing to redeem its bills in boston, and a bank that is not sound can not long do business under that system and ceases to be in good credit when it is 'thrown out at the suffolk.'" (maine commissioners' report, dec. , .) "if there was no check upon circulation there might be some danger, but the frequent redemptions at the suffolk bank and the rapid communications between different parts of the country will prevent any greater circulation than the natural business wants of the country will sustain.... indeed, this system of par redemption seems to be a most perfect regulator upon all the new england banks. it would seem somewhat surprising that something has not been adopted in other parts of the country that should produce the same beneficial results." (connecticut bank commissioners' report, .) "the charters of the banks have been renewed. if the laws by which they are constituted the agents of the people to provide a currency, and by which their faithfulness in the discharge of such agency is secured, remain unchanged, there is every reason to believe that the currency of massachusetts will be for the next twenty years what it has been for the twenty years past--as perfect as any in existence, as perfect as in the nature of things it can be. no reasonable man, no practical man, no man who is not bound hand and foot in the fetters of mere theory, can desire for the people a currency better adapted to meet all the circumstances of a business community than that which has been furnished by the banks of massachusetts for the last quarter of a century." (james b. congdon, cashier merchants' bank, new bedford, in memorial to governor of massachusetts, .) "we said that the massachusetts currency was apparently unsecured. in reality their bank paper is well secured. the experience of the last fifteen years has demonstrated that the losses from bank issues in the state of new york are four or five times greater than in massachusetts. the system of the latter is better than our own." (_new york courier and enquirer_, .) "it is by no means wonderful that a system which has stood the test of time and struck its roots so deep as to have become incorporated with and formed a part of our banking system should be abandoned with hesitation for one which is new and untried." (maine bank commissioners' report, .) "the state parts with these objects of her care and solicitude with many regrets, but with a just pride in their career, inspired by the belief that their capital has been highly instrumental in promoting the prosperity of the state, and that they have furnished as good a paper currency, based on individual credit, as any part of the country has ever enjoyed." (massachusetts banking report, .) mr. lawyer: _if, as we have gradually come to understand and firmly believe, the true service of a bank is to furnish credit to its customers, as they want it, and in such form as they need it, then these institutions which you have been describing were certainly far better suited to the purposes of their day than any banks we now have in existence._ two things seem to have been present in all of these various institutions: ample coin reserves, which ranged from to per cent, to meet any demand for credit redemption and perfect freedom in changing bank credits from the form of book credit to the form of note credit, and the form of note credit to the form of book credit, according to the desires and needs of the customers of those banks. as a result of interchangeability of book and note credits, a bank could always protect its coin reserve, for if the customer was just as well satisfied to take the bank's notes, instead of coin, or its reserves, it must be apparent to all of you that the cost to the bank would only be from one-sixth to one-fourth as great, and that the bank would have several times as much credit to loan, and at the same time be in a much stronger position. let me illustrate what i mean by calling your attention to what happens over in new york every fall. let us suppose that the new york banks owe the country banks, say $ , , and that the country banks call for it from july to january for the purpose of moving the crops. the banks of new york with the right kind of a currency system would not need to disturb the situation in new york at all because they could send their correspondents their credit notes, or cashier's checks, for $ , , . you see the new york banks would simply convert a deposit credit subject to check or draft into a note credit. the amount of the debt would remain the same, the amount of the reserves would remain exactly the same; but, instead of the country banks continuing to keep the deposits subject to check at the banks, they would take the notes which would serve their purpose, because they could in turn send the notes into the corn and cotton fields, to help harvest and gather the crop; and, just as soon as the notes had served their purpose, they would be returned to the country banks and by them in turn sent on to the new york banks, and would have been reconverted into book credits. not a single dollar of actual money would have been used in the whole transaction, and yet the country would have been served just as well, as though every bank note sent out had been a gold certificate. on the other hand, if the new york banks should continue to be as they are today compelled to ship the $ , , , they would have to call loans and shift conditions until they could scrape up $ , , with as little injury as possible to their customers and send it west; nearly every dollar so sent out is reserve money of some form, gold certificates, silver certificates and united states notes. now mark this, the credit notes cost the bank only the interest on the reserves behind the notes; but when the banks ship out their reserves, the cost must necessarily be four or five times as much, to say nothing of the injury they have done to the business conditions in new york. and so this same principle runs on throughout all of our banking business today from one end of the country to the other. mr. merchant: well, mr. lawyer, your entire argument goes to demonstrate with mathematical certainty that the country banks would never have any occasion whatever to send to new york for currency, as they would create their own currency by converting bank book credits into bank note credits to meet all ordinary demands, a fact that not only accentuates, but proves more conclusively what you are saying, and reinforces your argument. should we be fortunate enough to secure a right kind of banking system in this respect, we could almost double our bank reserves, that is, make them twice as large, and yet make two or three times as much profit on that part of the banking business, growing out of the substitution of credit notes for reserves, and at the same time be vastly better able to protect the balance of our business from disturbance due to the fact that we are compelled to use reserve money for currency purposes. this now seems to me a very simple matter when you once have grasped it. mr. banker: in this connection i want to call your attention to this fact, and i want to note that it is a very important fact which was so obvious in connection with every single statement of capital, specie, circulation and deposit, that has been given, when referring to the banking systems before the war, and that's this: that the note issues did not begin to average one-half the authorized amounts, proving conclusively that the currency of these banks invariably adapted itself to the exact needs of the people. notes outstanding possible issue was per specie held deposits cent of possible issue louisiana $ , , no limit except $ , , $ , , % coin reserve ohio $ , , $ , , about $ , , $ , , par indiana $ , , no limit but a $ , , $ , , - / % penalty for failure to redeem in coin iowa $ , , $ , , % $ , $ , , virginia $ , , $ , , % $ , , $ , , missouri $ , , $ , , % $ , , $ , , suffolk system $ , , $ , , % $ , , $ , , _can anyone doubt, after noting these figures, that the note issues of the various banking systems kept as perfect pace with the requirements of trade, as checks and drafts do? certainly it is perfectly evident that the bank notes came and went precisely as all bank credit should._ mr. lawyer: while all these splendid banking systems were snuffed out by the per cent tax upon circulation, the sound principles upon which they were all founded are still most successfully exemplified by the canadian banking system which you will remember took its charter from the statutes of massachusetts. there are today banks in canada, with , branches. the general principle of the canadian banking system is identical with that of the virginia, kentucky, louisiana, indiana, ohio, iowa and missouri banks. it is true there are some differences in matters of detail. the amount of notes that can be issued regularly is that of the capital of the bank. the notes are a first lien upon the assets of the bank, including a double liability of the stockholders; the bank notes are also secured by a guarantee fund of per cent, which is contributed by the banks issuing the notes; there is a provision that the notes shall bear interest at the rate of per cent until notification of redemption. no holder of a canadian bank note has ever lost a cent since these provisions have been in force. you remember that we have a chart which shows very graphically with what marvelous accuracy, year in and year out, month in and month out, day in and day out, the canadian bank note currency meets the actual requirements of trade; no more, no less, but always just adequate. the precision with which the currency rises and falls with the demands of trade is the result of the daily redemption of all bank notes, concurrently with the checks and drafts, through the clearing houses, or over the counters of the banks, or at the points fixed by law for note redemption for the purpose of keeping the notes at par, all over canada. we want to keep this diagram here on file, because it speaks louder than words possibly can. mr. banker: one striking characteristic of the bank of the state of indiana and the state bank of iowa was that the parent, or home institution, did no business at all, except for the branches, and examined and supervised them. hugh mcculloch, the president of the bank of the state of indiana, said, "that the soundness of the bank was due to the frequent examinations." another feature to be found in both these systems, and so far as i know peculiar to them, was this: that all the branches were responsible for the failure of any one of them; but the branches did not share in each other's profits. the result of this law was to make every branch the watch dog of every other branch; there was only one instance in which the home, or parent institution, took charge of a branch in either state, and that was in . the executive committee of the state bank of iowa having heard that one of the branches had made some unsafe investments, "promptly took charge of its affairs, and authorized a reorganization, calling upon other branches for such aid as was required, which was given so that the branch, with no delay, and without loss of a cent to its customers, or note holders, or suspension even of its legal business, was again put on a firm and solvent basis." undoubtedly this plan of supervision by the parent, or home institution, which did no business, was a wise precaution. mark this, it is precisely the same principle put into operation that is now being followed by twenty of our clearing houses, and was then, and as i believe it will prove now, a practical guarantee of all the liabilities of all the banks that are subject to such examinations and supervision. the most significant fact, and the one to be noted particularly, is that the parent, or home institution, like the clearing house, only acted for the branches, precisely as the clearing house acts for its members, and examined and supervised them. economically this principle is absolutely sound. historically, it is of essential importance because here history is repeating itself, after a lapse of fifty years, and in both instances this protective principle and practice has grown out of precisely the same conditions--the unsound and dangerous methods of certain members of the banking fraternity itself. mr. merchant: gentlemen, the astounding thing to me is that when this country had once learned and practiced so sound, complete and perfect a banking system, it should have lost it. mr. manufacturer: i don't think that that is at all strange when you remember that it only existed in a few states and consider just how we lost it. you will remember that the virginia banks which were founded upon the old scotch system started in , and worked perfectly until the war broke out. the other banks, or systems of banks, were established from time to time, some of them as late as , and as mr. banker remarked several nights ago, modeled very largely after the two united states banks, the charter of the last of which expired only in . from a close study one can discover both of these two systems combined in some instances. in this way we were gradually working out a national system precisely as we are today under new and vastly more varied conditions, but the war coming on, destroyed all that had been done. you will remember that secretary chase, desiring to sell government bonds for the purpose of carrying on the war, secured legislation which put a tax of per cent upon all bank note issues and compelled banks desiring to issue currency to buy government bonds as a basis of their circulation. as a result, he produced a currency of uniform appearance that was of equal value everywhere and a great blessing to the country. this condition was a very great and most agreeable change in the currency experience of the country, because there had been practically no legislation except in a few states that in any way controlled banking practices, or currency issues. the result was that we had "blue pup money," "red dog money," "wild cat money," "yellow dog money" and every other kind of "dog gone money," that could be gotten up with paint and paper to fool and defraud the people. on top of this situation there arose a terrific political prejudice engendered through political controversy toward a central bank. the conditions brought about by the legislation, secured by chase, have kept up the present régime until it has become so utterly intolerable, because utterly unsound economically, and so disturbing to the general welfare as to compel immediate consideration and reconstruction. it is really the first time since the civil war that the finances and banking of the country have become a serious question outside of the acute phases presented in the government issues, or the greenback craze of and the silver hallucination of . today, the question is not a specific one, or a mere detail, but one of fundamental principles and of a most comprehensive character. it involves the whole subject of governmental finance and banking and it is well that it should; for our business is so vast now, almost per cent of the banking power of the world being within our borders. our annual productions are approximately thirty-five billions. our annual clearings will pass the fabulous mark of $ , , , (one hundred and seventy billions). so that every recurring financial disaster will be worse, if possible, than the one going before it. mr. banker: right you are, mr. manufacturer, and this is true because the principles involved are as fundamental and immutable as the law of gravitation; and if we persist in our folly, when dealing with these enormous volumes of credit, the destruction that is sure to follow will be on a scale with that of worlds in collision. mr. merchant: that seems to describe the situation somewhat graphically and impressively, but i must say truthfully. we are undoubtedly "up against it" as the boys say. only the other day i was talking with a president of one of the largest national banks in the country, and he told me that unless something was done very soon, he would get out of the business, because he could not stand the strain; but the bankers' troubles are no worse than those of every business man, and it seems to me as though we were on a perpetual strain, and living in a sort of terror of what may happen at almost any time. the business atmosphere is unnatural. certainly this cannot be necessary. mr. laboringman: well, i don't see anything very strange or unnatural about this thing, if it is as you have already stated that there have been no changes in your banking laws worth speaking of, since . look at your railroad development. fifty years ago the locomotive that weighed thirty-five tons was a whopper, but now they turn them out weighing one hundred and thirty-five tons. we used to have thirty-five and fifty-pound rails, and our ties forty inches apart. now we have a hundred-pound rail, yes, one-hundred-and-fifteen-pound rail, with the ties twenty-five inches apart. the other day, i counted one hundred cars with one hundred thousand pounds capacity each, every one loaded full in a single train. now, what would you think of running a hundred-ton engine, and that kind of a train of cars over a railroad built fifty years ago? ties only eight inches thick and forty inches apart, on a corresponding road-bed. why, men, i can tell you we don't want a single-track railroad of that character now, with a switch out every ten miles to let trains pass; but we want a four-track road, with twelve to fifteen-inch ties, only twenty-five inches apart, and equipped with signal and block systems of the latest type, and most perfect automatic operation. uncle sam: gentlemen, when it comes to getting down to brass tacks, and hitting the thing plump square between the eyes, mr. laboringman gets away with all of you. now, can you beat that as an illustration of our financial and banking needs? if you will construct a banking system up-to-date, and just add to these domestic requirements the necessary provisions growing out of the fact that i am now a world power, i should have said, i am the world power, and prepare an international financial and banking system, we shall meet the demands of this new century; but otherwise i shall find myself wholly incapable of protecting the very foundation of commercial credit, my gold reserves, when the test comes. mr. banker: mr. laboringman and uncle sam have laid down the right kind of a program in telling terms, if not explicit. it is clearly up to us to work out a plan as comprehensive and perfectly adapted to our needs today, as were the banking systems of louisiana, ohio, indiana, kentucky, virginia, iowa, missouri and the suffolk banking system of new england was to the needs of those various sections of the united states at that time; for they were practically perfect from the standpoint of economic principles and the needs of those times. the principles upon which they were founded are eternal and are just as applicable today as they were then. the principles have not changed, although the conditions have, and that most amazingly. fifteenth night outline of bill uncle sam: for nearly four months, for this is our fifteenth night, we have been studying the principles of economics and the practices of banking, and we have gone over with the greatest care the experiences of american banking institutions from the beginning. no body of men could have been more faithful in attendance, nor more sincere in their desire to know the facts, and understand the fundamental principles as they are; nor more determined to get to the bottom of things; nor more ready to yield, and renounce even hoary-headed fallacies when it was demonstrated that you were wrong, than you have been. all of you seem to have possessed that high moral courage essential to the progress of the world, ready acknowledgment of error, even though the confession bore heavily upon the stability of your opinions. you seem to have utterly forgotten, if you ever possessed it, that false sense of courage that ever impels us to deny that we are wrong, however apparent our error may be. you have pursued the only course that leads on to progress. your inquiries have always been: what are the facts? what are the principles involved? what does experience show? what is it wise to do under the circumstances? what principles, practices and methods will give us the very best financial and banking system in the world? mr. merchant: uncle sam, if our work under your tutelage has inspired you with the belief that our aims and purposes have been unselfish and patriotic, as you have just intimated, the measure of our achievement will be limited only by our capacity for the great task in hand. certainly without unselfish devotion, and a sincere desire to do patriotic service, however great our abilities, our work should, and would in the long run, be a failure; even though it might upon the surface seem to be suited to the ends sought, because ulterior motives and selfish purposes, like murder would soon out. mr. banker: it's a source of satisfaction to me to have had a part in this work so far and i shall be content if the public will only accord us their confidence in our good faith, and afterwards show their interest in the public welfare by the same persistent study of this question that we have given it. two things are perfectly clear to my mind. first, this question will never be settled upon right principles until the public takes it up in earnest, and discusses it to a finish, as they did the gold standard in . congress will never legislate upon this question broadly as they should, until they are convinced that the people are practically agreed and are behind some well established principles and at least approve the outline of some well considered plan for a financial and banking system for this country. mr. manufacturer: i believe that is literally true, with the exception that if all of us business men and farmers sit idly down until we have another panic, then the men who have been behind nelson w. aldrich will take advantage of the opportunity afforded by the conflagration of credit and like the looters, human ghouls, jackals and hyenas that robbed the dead and dying, after the san francisco fire, will rush in, and, before the public are aware of it, will put something over, probably the same old scheme, concocted in behalf of the special interests of this country, fooling the people by changing its name, and having it introduced by some innocent member of congress from an out of the way place, and under unsuspected auspices. such a possibility makes it our duty to present in concrete form the result of our study. mr. banker: that is a true prophecy; if the people of this country remain indifferent, and allow another panic to come, without having made a study of this question, these conspirators will undoubtedly carry out their plot yet. therefore, i agree with mr. manufacturer that it is our duty to start such a discussion, if possible, as will save the people from such a dire calamity. mr. farmer: i suppose that i shall be largely responsible for the measure of interest the farmers take in this subject. i want to tell you now that this band of political pirates, and the secret forces of the special interests, are not going to board this ship, without ample warning, so far as i am personally concerned. mr. banker: before we get down to business and actually attempt to draw a bill, i think we should review the facts and situation from beginning to end, so that we may have a sort of sky line to guide us in that work. the banking situation before , the growth of the business of the country since and the development by the slow processes of evolution of that great mass of practices without the aid of law, and to some extent in absolute defiance of law, constitute the condition to which we must apply those great fundamental principles of economic law, if we would be wise, and hope to succeed in so great an undertaking by convincing the people, not only of our sincerity, but of our wisdom as well. it is estimated that there was in the united states in approximately $ , , of gold, and that our banking resources were approximately three billion dollars ($ , , , ); in other words, that the gold represented about per cent of our banking resources. today we have banking resources in excess of twenty-five billion dollars ($ , , , ) and our gold is only one billion eight hundred and fifty million dollars ($ , , , ), or our gold represents only about per cent of our banking resources. in other words, our gold reserves today are not as strong as they were in by at least per cent. another matter of importance about which i am sure we all agree is this: that there were in several of the states in , banking systems which were vastly superior to anything we have today. this was particularly true of the banks of virginia, indiana, iowa, ohio, kentucky, missouri and the suffolk system of new england. as a proof of this contention, which no man who knows anything about the subject will attempt to controvert, i have only to state that identically the same banking principles are in operation in canada today that were in operation in those states. canada, you will remember, took her system from the statutes of massachusetts. will any man in the united states deny that canada has a vastly superior banking system to anything we have in the united states? will any man assert that any country in the world has a better banking system than canada has today? if so, let him name it. all the canadian people, and all the canadian bankers, so far as i have been able to learn, are completely satisfied, indeed, proud of their system. is there one single business man, or one single banker, in the united states, who would have the audacity to expose his ignorance by stating upon a public platform that we have any banking system at all in the united states? and if he did, would he not be compelled to admit that it was one of the worst in the world, and as a panic breeder that it easily stands in first place? mr. merchant: i do not see how it could be otherwise, when you recall some of the facts brought to our attention during these talks. the national bank act was passed feb. , , just fifty years ago, and we have literally refused to pass a single paragraph that would enable the bankers of the country to adjust themselves to the vastly changed conditions. think of it, then we had only three billion of banking resources! today we have more than twenty-five billion. then our savings were comparatively a mere pittance, while they are today six billion five hundred million dollars ($ , , , ). the trust feature of the banking business, as followed today, had not even been heard of. then by a tax of per cent, we destroyed the natural note-issuing function of the banks simply because secretary chase wanted money to carry on the war. there were no laws to regulate banking in this country, except in a few of the states, where they had developed banking systems as perfect as any that have ever existed anywhere. the united states government would have been just as much within its rights and power, and just as wise, economically speaking, if it had at the same time, and for the same purposes, imposed a tax upon the deposits that were not made in the national banks. for, as we have seen, there is absolutely no difference between bank book credits and bank note credits. a bank is just as fit to issue a bank note as it is to take a deposit. if a bank is not fit to issue a note, which is nothing but a cashier's check, it is unfit to take a deposit. again, however important it may have been to pass suitable banking laws in the past, there has never been a time when action was so necessary as now, because of the almost incomprehensible increase in our banking resources. the comptroller of the currency, you will remember, has just made a report showing that the increase in our banking resources for the four years preceding june , , reached the surprising and startling figures of five billion four hundred and three million dollars ($ , , , ). the significant meaning of these figures cannot be appreciated without recalling the fact that the comptroller's office shows that the total banking resources of the united states in were estimated at only five billion four hundred and fifty million dollars ($ , , , ) or only $ , , more. in other words, the increase in our banking resources in four years ending with june , , were almost equal to the entire accumulation of our banking resources from the first settlement at jamestown in , two hundred and eighty-three years ago. mulhall, the english statistician, stated that the banking resources of the entire world in , including the united states, were a little less than seventeen billion dollars ($ , , , ), and estimated that our banking resources at that time were a little less than seven billion dollars ($ , , , ), or about two-fifths of the total banking power of the world. today our banking power exceeds twenty-five billion dollars ($ , , , ), while that of the entire world is estimated at about fifty-five billion dollars ($ , , , ). in other words, we now have more than per cent of the total banking power of the world. commercially speaking, the last fifty years has been the most marvelous period in the history of the human race, and the most surprising and most surpassing period of this most marvelous period are the years from to . we now have more than twenty-five million toilers. our productions in will exceed thirty-five billion dollars ($ , , , ). our foreign trade will reach four billion dollars ($ , , , ). our bank clearings will probably pass the one hundred and seventy billion dollar ($ , , , ) mark. our total transactions (of all kinds) will approximate five hundred billion dollars ($ , , , ). any business expressed in these stupendous figures, and involving every dollar of our capital, both the commercial and our vast investment funds, and every day's labor from ocean to ocean, and from canada to the gulf, ought to be commanding most serious attention on the part of every intelligent and patriotic man. this is more especially so when we look into the present situation, and discover upon what dangerous ground we stand, and how imminent a commercial explosion is, and that our very prosperity at the present time is our greatest peril. indeed, that as our prosperity comes on apace, with equal certainty are we moving onward toward a commercial cataclysm. since we have just passed a more or less critical stage, it may be well to call attention to the fact that any single, untoward incident of any great importance might have produced a business tragedy, even so soon after the commercial earthquake of , which hardly left a single brick undisturbed in the edifice of the most prosperous time in the history of this or any other country. the national banks have been confined from the outset to a single kind or phase of banking, properly known as commercial banking. this was practically all there was in the way of banking in the united states in , except the mutual savings banks, of which there are today six hundred and thirty in the whole country. it's a most remarkable fact that only thirty-one of these are west of buffalo. there are today one thousand two hundred and ninety-two stock savings banks, with $ , , of capital, owing individual deposits of $ , , . there are thirteen thousand three hundred and eighty-one state banks, with $ , , of capital, owing individual deposits of $ , , , , with $ , , additional liabilities. there are one thousand four hundred and ten loan and trust companies, with $ , , capital, owing individual deposits of $ , , , , with $ , , additional liabilities. here are sixteen thousand eighty-three stock savings banks, state banks and trust companies, with $ , , capital, owing individual deposits of $ , , , . these do not include one thousand ninety-one private banks reporting to the comptroller of the currency, nor the mutual savings banks, which bring the total number up to seventeen thousand, eight hundred and four and the individual deposits up to $ , , , . the capital of the national banks is $ , , , ; their individual deposits are $ , , , and the amount due to banks is $ , , , . these vast banking resources are without any general organization whatever and yet consists of four distinct economic functions, and our great danger lies in the fact that there is no harmonious development and unification that we can call a system under one influence and control. this is absolutely necessary for the safety of banking and commerce at home, and the protection of our reserves, especially against adverse influences in unfavorable times from abroad. mr. merchant: to simplify the matter, so that we can follow it through to the end, i suggest that we begin with the unit of a banking system: the bank as we know it today, the individual, independent bank, and note just what changes we should make in the organization of a bank, to make it the perfect and complete machine that the people demand, that they may be served as well today as they were in certain sections of the united states before the war. mr. banker: that's a good idea; indeed, the only way to be thorough, and get results. as was pointed out last wednesday evening, banking today consists of four distinct functions. a commercial business a savings business a trust business a note issue business _first_: the commercial business: the use of capital in the production and distribution of consumable commodities--food and clothing and all the incidental tools and machinery. _second_: the savings bank business: the accumulation of the money saved by the working people of the country. this is distinctly a trust fund, and belongs to the investment fund of the country, and should be treated or handled as such. _third_: the trust company business: the execution of wills, and the care of estates; the execution of mortgage trusts, such as railroads or corporations create; the representation of others in the capacity of agent or attorney in the complicated business affairs of today; all such funds are of a distinctly trust character, and the investment of the money accumulating and growing out of such transactions in many of the states are specifically provided for by statutes. such business cannot be included in the commercial affairs of the country, economically speaking, because they are essentially trust transactions, and the funds, generally, belong to the investment class. _fourth_: the note issue business: the provision of all the currency of the country, except the gold coin and gold certificates, which, while they constitute all of the money of our country, are also used for currency; and except the subsidiary coin and token coins of the country. _true bank credit currency is economically identical with checks upon deposits held by a bank. the bank note is the check of the cashier against the credit of the bank, while the deposit check is the check of the depositor against the credit of the bank. the bank note, for the convenience of the people, is always in even amounts, and passes without indorsement, while the check of the depositor is for any amount, odd or even, that may be involved in a transaction, and almost universally passes only by indorsement._ the people have just as much right to demand that the banks provide them with a true bank currency, as to meet their checks in any other way, by cash payment or by draft on some distant city. some people have the very erroneous idea that a bank is creating money when it issues bank notes. it is doing nothing of the kind; on the other hand, it is only doing something for the convenience and accommodation of its customers, and serving the public in the matter of protecting its reserves and so strengthening its credit by increasing its reserves against its deposits. _a bank makes less profit in issuing bank notes than it does in taking deposits and loaning them out._ now, follow me, gentlemen, and i will demonstrate this to you beyond a doubt. you gentlemen all know that the capital of our bank is one hundred thousand dollars; suppose that i had the right to issue an amount of credit notes equal to my capital and that i had to pay the government a tax of per cent upon the one hundred thousand dollars of notes that i issue. now, suppose that i exchange these bank notes for the notes of the farmers and merchants, who are customers of my bank, which bear per cent interest; it is clear that outside of other expenses, my profits will be per cent on one hundred thousand dollars, or four thousand dollars. but, you must remember this, that i will have to pay the government for engraving a bank note plate, $ . , and will then have to pay the government in addition for the transmission of the notes about twenty cents per $ , . now if i should receive deposits amounting to one hundred thousand dollars and should pay interest on them at the rate of per cent per annum, and should loan them out at the rate of per cent to some of my customers, my profits would be per cent, or four thousand dollars; identically the same profit that i made upon the one hundred thousand dollars of bank notes; but i do not have the extra expense of the engraved plate and the cost of the transmission of the notes. of course, you understand that the reserves that i carry in both cases are identically the same-- per cent; that is, i am carrying fifteen thousand dollars ($ , ) against the deposits and also fifteen thousand dollars ($ , ) against the one hundred thousand dollars of notes. you will see, therefore, that i will make less on the one hundred thousand dollars of bank credits in the form of bank notes than upon the one hundred thousand dollars bank credits in the form of deposits. mr. merchant: mr. banker, i want to thank you for this very clear explanation of what a bank note really is and why a bank should have the power to issue it, and more especially for your explanation of the fact that a bank makes less upon that form of bank credits than upon a corresponding amount of deposits. _i do not believe there is one person in a million who understands this question at all. i know we've all had the insane idea that the right of note issue was some kind of a special privilege to the bank out of which it would make some enormous profit; when, as a matter of fact, it is nothing of the kind; but on the contrary, only a great convenience and accommodation to the people themselves._ furthermore, in as much as it will enable the bank to protect its reserves, by paying out its notes, instead of paying out its reserves, it will reduce the expense of the bank to that extent and so reduce the interest rates upon its loans. it will probably at some time or other of great stress save the bank from closing its doors, because it can create or obtain cash to meet the local demand, while otherwise it would have to suspend, although the bank might be absolutely sound. you see, don't you, that the bank in issuing credit currency is doing precisely the same thing that the banks did when they issued cashiers' checks, or clearing house certificates, in and . mr. manufacturer: mr. banker, your explanation has certainly been an eye-opener to me, too. how simple all truth is when you get to it. it is our ignorance and prejudices that are our curse. just think what the application of this simple principle would mean to the united states as a whole. every community could be supplied by the local banks with the necessary currency just as well as deposit facilities and at a cost not to exceed one-fifth of what it costs today, and not to exceed one-fifth of what it would cost if the banks had to buy their currency from some central institution. mr. banker: well, gentlemen, i was just going to state, when mr. merchant interrupted me, and i am glad that he did, that while a true bank note and a deposit are economically identical, yet it is a distinct feature or function of banking, nevertheless, and in working out our plan should be treated as such. mr. merchant: if i have followed you, mr. banker, and grasped the situation at our last wednesday night meeting, banking in the united states should be carried on in the future like any other business of four distinct departments; that is, a departmental business. the accounts should all be kept separate and apart, so that a bank statement would show the amount of deposits in the commercial department; the amount of deposits in the savings department; the amount of deposits in the trust department; and the amount of notes outstanding at any time. mr. banker: that is it precisely, and the only way that this can be accomplished is by granting the specific power to the national banks of the country: _first_: to continue to do a commercial business. _second_: to do a savings business. _third_: to do a trust company business. _fourth_: to do a note issue business. this step taken, no bank in the united states, with the rarest exception, can afford to remain out of the system, and the result will be to bring the banking business of the united states into one harmonious whole. the present conglomerate condition will be wiped out. holding companies, which are probably the most prolific source of business iniquity and a curse to the country, generally will cease to mark american banking as a game of jugglery and sharp practice wherever the managers of double-headed or triple-headed banks are inclined that way. furthermore, unless this is done, you will in the future as in the past, know little or nothing of the true condition of the banks of this country as a whole. for what can you know about the true inwardness of a bank, which is composed of three distinct institutions: a national bank on one block, with the stock of a trust company located on another block, and the stock of a savings bank located on still another block, and the stock of the two institutions lodged in the strong box of the national bank. the managers of the national bank may be of the very highest character, and of unquestionable and absolute integrity, and they might manage their business just as well as if there were no laws at all. but laws are made for the lawless, not for men of this class. laws are made to compel the greedy, the over ambitious, the foolish and the unscrupulous to toe the line, and maintain certain standards, which have been established by the highest class of men of the banking world. you can readily see that a national bank, under national supervision, with two other institutions under its control, which might be under state supervision, or under no supervision at all, could engage in practices that no upright man would stand for; and practices, too, that usually result in terrific losses, and consequently breed panics. these powers having been granted to the national banks, the law should then compel the separation and complete segregation of all these various accounts, as they are all distinct in their nature or character, economically speaking. part of them are active capital, and belong to the commercial fund of the country, while the others are passive capital, and belong to the investment fund of the country. it may be objected by some self-satisfied, selfish, ignorant and unpatriotic banker, who is doing all of these things now in some way with ample or even more than satisfactory profits, that the combination of these different forms of the banking business is theoretically wrong. but let it be distinctly understood and observed, and remembered, that we are not dealing with a theory now. nor are we organizing something new. we are dealing with an actual, serious and most dangerous fact, and that is, that the banks of the country are now doing all these things in a conglomerate way, largely unsupervised and uncontrolled. our unit of banking, the individual, independent bank, should have its parts coördinated, unified and brought into a system, and under one common supervision and control. that supervision should not be political, but should be a supervision of the banks by the banks in the interest of the people and the banks themselves. _now we are also dealing with another most dangerous fact. it is this: first, the national banks are carrying cash reserves amounting to per cent. the reserves of all the other banks amount to only per cent; and, excluding the mutual savings banks, the reserves of all the remaining banks amount to only per cent. the cash reserves of the banks of the united states should under no circumstances fall below per cent, and under some circumstances they should amount to at least per cent. second, the reserves, such as they are, are all broken up into small fragments, and scattered broadcast over the land._ the result is that our reserves lack the element of true reserves, and are robbed of their efficiency, which is essential to commercial safety. the highest degree of efficiency and utility of reserves can only be secured by a centralization of or per cent of our cash reserves, or say per cent of our individual deposits, and per cent of our time deposits or savings accounts. in this way, we shall centralize and mobilize about $ , , , of our gold, which now exceeds $ , , , . it will be observed that the reform here proposed is in perfect accord with the evolution of all our anglo-saxon law. it is merely putting into statutory form the present universal practices of the country which have grown up as a result of those new conditions which are peculiar to ourselves, and compelling conformity with those great economic laws that cannot be violated or disregarded without suffering the consequent penalty. again, it is the only way that each bank can be compelled to carry its share of the burden of our commerce, and furnish its share of insurance to the business interests of the country, so far as sufficient and uniform reserves will do it. the second great reform, then, that is essential is also in perfect harmony and accord with the most approved practices of the banking world. it will be noticed that here, too, a method or system from approved practices has grown up, not only without the sanction of law, but in part actually in defiance of law. i refer to the fact: _first_: that there is no law in any state authorizing the organization of the clearing house, and yet there are over two hundred and fifty of them in the united states. _second_: that there is no law authorizing any clearing house committee to examine the banks composing it. but in twenty cities at least the clearing houses are not only examining their own members, but go even further than that and insist that no bank shall clear through any clearing house bank which does not submit to an examination by the examiner appointed by the clearing house. this has been found essential to the safety of the banking situation in these cities, but is no more essential in these twenty cities than in five hundred or one thousand other cities; in fact, essential throughout, and all over every state of the union. this has come to be an established practice, and is being taken up rapidly, all over the united states, and yet there is no law whatever that authorizes it, suggests it, or by implication justifies it. _third_: with the consent and approval of public officials, both state and national, but without authority of law, the banks of many of our clearing houses are carrying at all times a large part of their reserves at their clearing houses for their convenience and as an aid to commerce. undoubtedly they are doing just what they should do. it is stated upon high authority that the amount of reserves that are now centralized and mobilized at the clearing houses today will exceed $ , , . this practice is the result of experience, not only in the times of panic, such as and , but also for the daily needs of their gigantic transactions. _fourth_: in like manner, not only without law, but actually in defiance of law, these self-contained, self-centred, self-governing clearing houses, whenever necessity calls for it, very wisely and properly issue a true credit currency, in principle, at least in the form of clearing house certificates which serve all the purposes of legal currency itself. they are issued in $ certificates, $ certificates, $ certificates, $ certificates, $ certificates, $ certificates and in denominations of $ , $ , , $ , , and on up to as many or more millions. all this is done not only without the authority of law, but in the latter case in actual defiance of law. here then again we have purely as a result of evolution in modern american banking the second naturally developed unit, the clearing house, by combining, coördinating and unifying all the banks, or simple units, coming within its jurisdiction. they exist without law and operate without law, and in one respect, as i have just said, in defiance of law. this clearing house unit consists of the following elements: financial centre (with one hundred banks), clearing house committee (without law), clearing house bank examiner (without law), clearing house reserves (without law), clearing house certificates (in defiance of law). if this system has been the means of purging the banks coming within its influence and jurisdiction and strengthening the situation, wherever adopted, and if no city where it has been in practice, of which there are now more than twenty, would not give it up, let any man say why this safe principle should not now be extended until every bank in the united states is brought within its beneficial influence. however, this result can only be attained by having a uniform and truly national banking system. as was pointed out only a moment ago, that if the national banking powers mentioned are granted to the national banks, no bank can afford to remain outside of the system, because the advantages gained by going into it are so great. however, if there are bankers, who by running double-headed or triple-headed institutions believe that they cannot then do some things that they are now doing, and which they, therefore, probably should not do, should undertake to argue that banking cannot be brought under national supervision and control, let them consider the following facts: _first_: that the united states government put a tax of per cent upon all state bank notes and that they died a natural death. of course, it is true they were suffocated. but would any one go back to the days when they had to pay exchange upon a bank note every time they crossed a state line? would anybody take a step that would substitute a local currency for a national currency of uniform character and quality? let every antagonist mark this, and remember it well that the same power that put a tax of per cent upon bank note issues can also put a tax of per cent upon deposits for any one of a number of good reasons; for example, it could and should impose such a tax, if necessary, to compel all the banks of the country to carry their part of the commercial burden in the shape of equal and adequate reserve. _second_: can any one give a single reason, valid reason, why the postal savings bank was made a national institution that would not apply with equal, if not greater, force to the $ , , , individual deposits of which $ , , , are savings? _third_: can any one deny that it is interstate commerce for note brokers to ship millions, yes billions upon billions, of promissory notes, or so-called commercial paper, from one state to another by express, mail or freight? will any one deny that promissory notes are property? will any one assert that shipping promissory notes differs in the slightest degree from shipping eggs, apples, potatoes, cotton, grain or live stock on the ground that promissory notes are not property, but that eggs, apples, potatoes, cotton, grain and live stock are property? will any one deny that the same power that passed the "food and drugs act," giving the government power to stop the use of poisons in medicines and food; the "insecticide act," giving the government power to prescribe the character of poison to be used to kill bad bugs; the "plant quarantine act," giving the government the right to stop lice from traveling across a state line; the "meat inspection act," giving the government power to insist upon decent meat; the "live stock quarantine act," giving the government the right to prevent a man from driving his cattle under certain conditions over a state line; the "twenty-eight hour law," requiring shippers to treat cattle humanely; the "employers' liability act," the "safety appliance act," the "white slave act," the "hours of service act," the act regulating the transportation of explosives; will any one deny, i say, that the same power that passed all these acts cannot be exercised to protect forty-seven states in the union against such bank practices in the forty-eighth state, as will at any moment throw the entire country into a panic and destroy all public confidence in our banks and bring in its wake the destruction of credit and consequently the destruction of vast property values? certainly no one will deny that any state has the power, and that it is its duty to compel every person, firm or corporation using the word "banker" or "bank" to submit themselves to jurisdiction, supervision and control of that state. every state has the power to protect any of its citizens against the wrongdoings of other citizens, and one bank or banker against the evil practices of other banks or bankers. in eighteen states no bank reserves are now required by law, and in many states there is no supervision whatever of state banking institutions by the state. is it possible that the national government has no power to act in the light of these facts when the banking business of the country is essentially not only one kind of a business, but, indeed, one single business, each one being a wheel in the great credit machine? _it is so interlaced, and so interwoven that one rotten spot map prove as dangerous to the whole fabric of credit as a box of dynamite under one's chair. is it possible, i say, in the light of all these facts, that there is no redress, no protection to our vast commerce, and to labor through the national government? is it possible that we could be compelled to continue for a thousand years in the midst of our present terrors from bad supervision and want of adequate reserves?_ the manufacturers, the merchants, the farmers, the laboring men, and business interests of every kind have a right to demand and undoubtedly will demand protection, and demand it now. unless i misunderstand the present temper of the american people, they will now demand that their interests be safeguarded, and that they be protected against the always impending dangers growing out of the present conglomerate condition of the banking business. i assert that this end can only be achieved by extending the same organization which many of the larger cities have already adopted to all the natural, financial centres of the country and include with them all the territory naturally tributary to such centres; in other words, that we should now extend the same organization to every commercial zone of the country of which these natural financial centres are the dominating commercial cities. this diagram will indicate more forcibly just what i mean than words can convey. [illustration: diagram illustrating district system of bank organization to give stability in commercial zones.] the straight lines are drawn from some centre in a city arbitrarily, and purposely so, in order to eliminate all political machinations and gerrymandering in forming the districts for any reason that may arise from time to time. they are so drawn as to divide the whole number of banks in the entire commercial zone into seven equal districts. that is, if there should be seven hundred banks in the commercial zone there would be one hundred banks in each district. the one hundred banks in each district organize in precisely the same way, and as follows: _first_: upon coming together the one hundred banks of district no. proceed to organize formally by electing a president and secretary. then they select and elect their portion of the "bankers' council" of the whole zone, which corresponds exactly to the clearing house committee of the financial centre. the one hundred bankers of each district elect one banker and one business man from the respective districts, or seven bankers and seven business men, or fourteen in all, and the fourteen so selected then proceed to select and elect their president, who shall not be one of the fourteen so selected by the bankers of the several districts. these fifteen men so selected constitute the "bankers' council," and bear identically the same relation to the whole commercial zone as the clearing house committee bears to the banks which constitute the clearing house. _second_: the one hundred bankers of each district then proceed to select and elect a banker as a member of the board of control, or seven in all, whose duty will be, among other things, to examine the banks of the entire zone precisely as the clearing house bank examiner examines the banks of the clearing house of the financial centre; provided, however, that the district from which the bankers' council have selected their president shall accept such president as their member of the board of control. will any one say that with such supervision as this board of control will give to the banks of the commercial zone, each bank having been compelled to qualify in the outset--will any one say, i repeat, that such supervision will not absolutely prevent bank failures? this is not only important to the depositors of the country but also to the general business of the country as well. thereupon all banks of the zone will transfer to the board of control a part of their required reserves; that is, per cent of their deposits and per cent of their note issues will be deposited with the board of control. later this should be increased to per cent. let us assume that this per cent of their deposits and per cent of the notes issued amount to $ , , , which will be the central or economic reserve of the commercial zone and be under the control and management of the board of control. you will recall that the bankers' council, which bears the same relation to the commercial zone that the clearing house committee bears to the financial centre of the zone, was composed of seven business men and seven bankers, who selected their own president. these fifteen men will select a representative from their respective zones. so that we shall have a board of directors representing the thirty or forty commercial zones directly and not indirectly. each zone will be represented alternately by a business man and a banker, so that the board at washington would always consist of fifteen or more business men and fifteen or more bankers; the business interests and banking interests equally, the inside and outside of the bank counter; the depositors and the banks or the trustees of the depositors. the next logical and necessary step is a national central gold reserve if we hope to prevent our gold leaving us at the will of foreigners, and also if we hope to serve the whole nation, just as the clearing house is serving its members today, and as the commercial zone will be able to serve all of its members, when it has been once organized. therefore, as a sequel to the organization of the commercial zones, say thirty or forty of them in the united states, they in turn will all unite their gold in one great central gold reserve, which will amount to approximately $ , , , (one billion two hundred and fifty million dollars). we should then have the "american reserve bank." the amount of gold held by this institution would be twice that held by any other in the world, and would be under the control of a board of directors which i have just hastily described; i have used and suggest the name "american reserve bank," because we are known the world over as "the americans," and, therefore, i think it peculiarly fit to use the name "american reserve bank." this institution, with the specific powers granted to the individual banks as outlined, will be able not only to protect each individual bank, but to protect the reserves of all the banks; that is, the reserves of the united states against the drafts of the world, precisely as the bank of england protects her gold, or adds to it by a rate of discount; that is, by fixing a price for the use of gold. mr. manufacturer: by the way, before i forget it, i want to make one suggestion right here, because it seems to me as though this was the right place to bring it in, and that is this: i am firmly convinced that a bank like yours, and all commercial banks, should be allowed to write their acceptance across the face of notes or drafts, and so develop what is called a discount market in the united states, such as they have in other countries. mr. banker: mr. manufacturer, i am glad that you have spoken of that matter, and here is just the place to discuss it. a great many people are deluding themselves about the matter of acceptances. it must be remembered that the banks are not going to increase their own capital by increasing their liabilities through acceptances. indeed, this practice would only add fuel to a conflagration of their credits, unless the banks should confine themselves to accepting only such paper as had grown out of actual transactions in which the goods had been sold and delivered, or were actually in transit. moreover, by way of assurance, every piece of such paper so accepted by a bank should state upon its face that the goods for which it was given had been sold and delivered, or were in transit. _such acceptances are absolute agreements to pay a specific sum of money upon a specific day, and therefore are just as much a liability as a deposit subject to check, with this disadvantage, that the property is not within the control of the bank, as the deposits are, against which a check is drawn, and therefore every bank should carry precisely the same reserve against its acceptances that it carries against its deposits._ acceptances of the approved sort will not necessarily, if at all, greatly increase production; but they will create a new form of investment, that is, a guaranteed commercial paper of which billions of the single name sort are being sold today. of course, two-name paper with the acceptance of a bank of high standing will soon bring into being here, just as it has in london and other financial centres of europe, new capital. that is, capital will be attracted to the business of buying and selling such high-class paper. it will be a profitable investment for the idle funds of merchants and manufacturers at those seasons of the year when all of their capital is not occupied in their business, and also for the banks of the country at those times of the year when the local demands are not equal to their supply of funds. it is undoubtedly true that such paper would also soon find a market abroad, as well as at home, and to that extent would facilitate american manufacture and commerce. but we must not deceive ourselves about the fact that the banks will just to that extent increase their liabilities while they have not increased their actual capital to the extent of a single cent. mr. manufacturer: i must confess that i have misapprehended the effect of an acceptance, but you are certainly right with regard to it, and unless we should keep the business of the country in a sound condition, the acceptance business might prove a two-edged sword, and this emphasizes the fact that we must keep a close watch upon what our commercial fund is all the time, and prevent it from being transferred and absorbed in fixed investments, which is always a bane to the commerce of a country. we must not forget these three important factors which are always present here in the united states: first, the vast, undeveloped resources of our country, and the ever-inviting opportunities; second, the intelligence, the ambition, the impulsiveness and the optimism of our people; third, the peculiar, local relations of our twenty-five thousand, individual, independent banks, which are always in close sympathy with and affected by the growth and development of their locality and the varied interests, and the enthusiasm of the people. the vision of our local banker is largely confined to his immediate vicinity. mr. farmer: how absolutely true that is, and therefore how great must be our caution in opening up the flood gates of credit, before we know that we have guarded the situation at every point. i notice that those banks before the war were all so sound and successful because they had to get the coin to make redemption with. here is something i read in a book yesterday, and it strikes me that it is right in point now: "redemption is the breath of life to all credit." you bet i have found it's death to a fellow who's got to, and can't pay. mr. banker: yes, and when you realize that credit is the very soul of trade and commerce, as it is carried on today, how absolutely essential it becomes that credit be kept within the limits of certain coin redemption, if we are to have sound business conditions. mr. merchant: well, mr. banker, how do you propose to keep credit within safe boundaries, and so insure sound business conditions all the time? mr. banker: in just two ways: _first_: by having the reserves of gold on hand in the various banks, sufficient at all times to prove all commercial credits, say from to per cent, according to the peculiar business and varying responsibility of the banks to their banking obligations; and in addition, such a central gold reserve as will to all intents and purposes be unlimited, so far as any possible demands may be made upon it--say per cent ultimately of all individual deposits and per cent of savings deposits. this would give us at the present time about one billion dollars ($ , , , ) of cash reserve, and about one billion two hundred and fifty million dollars ($ , , , ) of gold in a central reserve to meet the emergencies of commerce. _second_: such a supervision of the banks by the banks themselves as will keep their assets in liquid form, at least to the extent that their assets are commercial assets and are liable for individual deposits on demand. in this connection i want to call your attention to the fact that not a single bank has yet failed which has been under the supervision of a clearing house. you will remember that this principle was adopted in chicago in , and that today the banks in at least twenty of our leading cities are under clearing house supervision. gentlemen, i have been a banker, as you know, for about forty years. i have never been favorably impressed with any of the methods yet proposed for the guarantee of bank deposits, however desirable the end sought is, because they have none of them involved the matter of such supervision as would insure sound banking, and compel every bank to carry its part of the commercial burden in the way of equal and adequate reserves. but i am absolutely convinced that there never need be a bank failure again in this country, if we will only organize ourselves throughout the length and breadth of the land, precisely as the clearing houses have to protect themselves against the unsound practices that are always creeping into the banking business particularly. mr. laboringman: well, mr. banker, if that is true, if a bank cannot fail under the supervision of your proposed organization it will not cost anything to insure your depositors. why not relieve the millions of depositors from the anxiety they always feel about their money in the banks? for my part, i cannot see the slightest difference between a workman's compensation act, an employer's liability act and a bank insurance act. to me they are on all fours with each other. the business in each case should bear the burden. this is the settled social policy of the country, and is in perfect harmony with that social and economic philosophy that has been gaining ground so rapidly throughout the world in recent years. i cannot see how you can escape it. i appeal to you men; am i not right about this matter? mr. manufacturer: that point has never occurred to me in this connection, but i must say i cannot see any difference whatever between my carrying an insurance policy to protect my workmen and mr. banker carrying insurance to protect his depositors. can you, mr. banker? before you answer me, i want you to do two things: i want you to forget for the moment that you are a banker and i want you to think twice before you speak. i have been so deeply impressed with the points that mr. laboringman has just made, that to me his arguments are unanswerable. mr. banker: i am ready to answer right now and ready to admit that his arguments are unanswerable. mr. farmer: i am glad that you all practically agree upon this very important, all important, point. i want to tell you something that happened during the past week. i tackled mr. lawyer about a week ago upon this point and he declared that the guarantee of bank deposits was an absurdity and unthinkable because it would cost too much. i went home and wrote to the treasury department to give me the average annual deposits in the national banks since down to date and also the average annual loss due to bank failures. i have a letter from the comptroller of the currency, gentlemen, which shows this astounding fact, that an annual tax of / of one per cent upon the average deposits would have paid all the losses due to the failure of national banks. think of it! only a little over / of one per cent. mr. laboringman: / of one per cent. jehoshophat! think of the misfortune and suffering that might have been saved by the payment of that mere pittance. _it is an infinitesimal nothing. think of it: it is only - / cents on every $ ; only one-third of one cent on $ , and one-third of one mill on $ . you would not believe it. but, as i told you, i am good at figures and you can bet your life that i am right._ mr. farmer: i want to read the letter of the comptroller to you men. treasury department, washington, january , . mr. joshua farmer, loraine, new york. dear sir: your letter of january d is received and in compliance with your request i take pleasure in furnishing you the following information with respect to aggregate deposits of active national banks and the liability of insolvent national banks: the annual deposits for forty-nine years in active national banks average $ , , , . the losses sustained by creditors of failed national banks (actual for closed receivership and estimated for those not closed) will approximate $ , , , or an annual average loss of $ , . the average annual loss is, therefore, . per cent of the annual average deposits in active banks. of the national banks placed in the charge of receivers, the affairs of have been finally closed and the losses to creditors definitely determined. the liabilities of insolvent national banks the affairs of which have been finally closed amounted to $ , , creditors received in dividends, offsets, etc. , , ------------ loss to creditors $ , , creditors, therefore, received an average of . per cent, the loss averaging . per cent. there are now (september , ) insolvent banks in process of liquidation by receivers, with liabilities of $ , , creditors have received (september , ) , , ----------- balance due creditors $ , , creditors of these insolvent banks have, therefore, received an average of . per cent. for these receiverships it can safely be estimated that the loss to creditors will be no greater than in those banks already closed, namely, . per cent. during the past ten years national banks have been placed in the charge of receivers. the affairs of of these banks have been finally closed and are yet in the charge of receivers. the liabilities of these banks, as shown by the enclosed statement, aggregate $ , , . creditors have received $ , , , or . per cent. if creditors were, therefore, paid no further dividends, the loss during the ten years mentioned would average only about . per cent. it cannot at this time be determined what the ultimate loss will be to creditors of the insolvent banks which failed since . yours very truly, w.j. fowler, _deputy comptroller_. mr. lawyer: well, here goes another complete knock-out for me, i am plumb out, over the ropes this time. i don't know that i can ever recover from that blow. mr. banker: just a moment, gentlemen, while i admit that you have won your fight for the depositors, you must remember that although you have an insurance that will cover net losses after you have cleaned up the failures and closed out the assets, you will still have quite a problem to solve to meet the demands of the depositors when the failure takes place. mr. laboringman: if the depositors in the national banks had been insured in some way during the past forty-nine years, i do not believe that we would have had one failure in ten that we have had, and if you will now protect the banks, as mr. banker proposes, through his supervision by a board of control, i do not believe that we will ever have another; then why not give our , , depositors the benefit of it, as it will cost nothing and will absolutely prevent runs on your banks. mr. merchant: yes, and also stop the hoarding of money, which is a curse to any country where it takes place. i am not sure, gentlemen, but what the adoption of this principle of deposit insurance will do more to guarantee steady conditions than any other one thing. mr. banker: well, while the problem has its difficulties, i really think it is up to us to work it out in some way. the folly, greedy purpose and unscrupulous methods of some of our fraternity have not only brought misfortune and overwhelming distress to their particular neighborhoods but a cataclysm to the whole commercial world because of the shock to banking credit generally. mr. merchant: well, mr. banker, how are you going to protect yourself against those bankers who think that they can do better by remaining outside of the national banking system, because they can do a scalping and scavenger business if left free. of course, it will be advantageous for the upright banker to come into the national system. mr. banker: you will remember that in congress passed a law imposing a tax of per cent upon all bank notes, except those based upon government bonds. you also know from what has been said that the notes of all other banks immediately disappeared from circulation. congress has ample power, as was pointed out fully the other night, and should put a tax of per cent, or even per cent if necessary, upon all deposits a bank may have against which it does not hold the reserves prescribed by the national laws. congress has other methods it can adopt growing out of its constitutional powers by which every institution in the united states doing a banking business may be compelled to conduct its affairs upon sound principles. mr. merchant: from some statement we were looking at the other night we learned that the banks of the country were now carrying as a part of their reserves something more than $ , , of national bank notes. the fact is that the amount is probably twice that, as the banks of the country, outside of the national banks, make no distinction in what they hold as reserves, between gold certificates, silver certificates, united states notes and national bank notes. of course this is nothing but a scheme of inflation, for there may be other credits based upon these bank notes which are themselves nothing but debts, aggregating all the way from $ , , to $ , , , , or more, according to the percentage of reserves the banks holding them may be carrying. mr. banker: i would impose a tax of per cent per day on every bank note that any bank in the united states holds as a part of its required reserves. it would not take long to force the substitution of gold coin, gold certificates, or other lawful reserves in place of these i.o. u.'s of the national banks. mr. manufacturer: during our discussions it has been demonstrated to me, at least, and i am sure to all, that there is in fact no more justification, economically speaking, for holding united states notes, or greenbacks, as a part of the reserve of a bank than national bank notes. do you think it is wise to continue these united states notes indefinitely, as a part of our bank reserves? mr. banker: i certainly do not. they are not only unfit for bank reserves, but are teaching economic lies every day that they remain out. you are aware, i have no doubt, that the banks of this country, generally, are paying interest upon their deposits; probably as much as per cent upon the average. i would impose a tax of per cent upon our bank note issues, because banking is carried on upon about that basis. if a bank pays per cent upon deposits, and per cent upon its notes outstanding, the burden is precisely the same upon both forms of bank credits. i would use a part of this per cent tax upon the bank notes, which would amount to approximately $ , , , for these purposes: _first_: to pay the expenses of the several commercial zones and the american reserve bank. _second: i would pay into the interest department of the united states treasury an amount equal to per cent per annum upon the $ , , per cent united states bonds; so that the government could convert these per cent bonds into per cent bonds, and return them to the banks to whom they belong._ _third_: whatever cash i had left i would use to convert the united states notes into gold certificates. in the course of fifteen, at the outside twenty years, i figure, we would be able to convert all of the united states notes into gold certificates, and leave our banks with reserves of gold alone, with the exception of the subsidiary coin, which would, of course, be only nominal in amount. no one will deny that this would be a most desirable thing to accomplish. mr. farmer: no, i don't think that anyone would make such a fool of himself as to argue or contend that that would be a bad thing any way, and you seem to have a very simple method of bringing it about. mr. lawyer: i noticed that you said that the tax of per cent upon the bank notes would produce about $ , , a year. how do you make that out, when we have only $ , , of bank notes out? that would give us only $ , , . mr. banker: i am glad you asked that question. you see that if the banks now outside the national system came into it as they certainly would, because of the very great advantages it would give them, they would have to increase their reserves at least per cent upon their individual or commercial accounts, and per cent upon their savings accounts. this they would do by simply exchanging their bank notes for gold coin and gold certificates, as they came in over the bank counter. the result would be an increase of our bank reserves to about $ , , , and of course a corresponding increase of our bank liabilities. no one would deny that this would be a sound banking proposition. for, our individual deposit liabilities, which are now $ , , , , would be increased to only seventeen billion five hundred million dollars ($ , , , ), an increase of only per cent, while our reserves, which now amount to about $ , , , , would be increased by $ , , , or nearly per cent. mr. lawyer: i see, then, that you propose to increase the note issue about $ , , . this would give us a note issue of $ , , , , and per cent of this would be $ , , . we had a chart here the other night and some figures, which showed that the increase and decrease of the bank note currency in canada amounted to $ . / per capita every fall, and that every year, for a number of years, so far as we have the record at least, exactly on the th day of october, it was always at its maximum. since we are now taking back from canada what canada originally took from massachusetts, the principle of a true bank credit currency, we might expect just what they had in new england, before the war, and what canada now has every year, and every month of the year, and every day of the month. that is, we would have an amount of bank note currency just equal to the demands of trade; no more, no less, but always just what the business of the country requires, dollar for dollar, day in and day out. am i correct? mr. banker: you are absolutely correct. our variation in the demands of currency would not differ very much from that of canada. we might expect a difference between the maximum and minimum issue of about $ , , a year, that is, it ought to range from about one billion dollars to about one billion three hundred and fifty million dollars during each year, as matters now stand. mr. lawyer: well, if that is true, we should never know one season of the year from another, so far as the demands of currency are concerned. mr. banker: no, you never would; and the facilities gained by the banks for adjusting themselves to the changing conditions would enable them to be far more helpful to their customers than they now are, and yet be absolutely safe in doing so. you see, i would not limit a bank to an amount of currency equal to its capital; but subject to the approval of the board of control, where the bank was located, it could issue as much more, or a total of per cent of its capital. that is twice as much as its capital; for, there are banks today situated a good deal as the new england banks were before the war, where the people would use more bank notes than deposits, if they were permitted to study their own convenience. this we would find to be true in the newer parts of the cotton growing country in cotton picking times. can anyone tell why a bank, under such circumstances, should not meet the peculiar demands of its customers, and furnish bank notes at a cost of one-sixth of what it must be, if the bank is compelled, as it is today, to rediscount its promissory notes, and buy gold certificates or united states notes to be used as currency, when its own bank notes would answer every purpose of currency just as well? mr. lawyer: then i understand also from what you said upon another occasion that you would allow a bank to use a part of its reserves during those seasons of the year when the demand for money was particularly strong, and make up its average reserves when the demand was slight. mr. banker: precisely so. why should not a bank act just like any other merchant or trader, and adjust its stock of goods to the ever-changing conditions of its business? of course i am fully aware that there is one element entering into a bank's business that is not common to other mercantile houses, and that is the question of its credit. it must keep itself in such a position at all times as to preclude the chance of suspicion arising about its ability to meet its demand obligations. this point brings me squarely up to the matter of a central reserve. a bank that is known to be under the supervision of a board of control, which can and ought to know its actual condition, and which has the power to compel it to so conduct its business, as to be entitled to consideration and accommodation, whenever it asks for it, and actually needs it, will certainly have the confidence of the public to an unbounded degree. of course, i am assuming that the public are aware of the fact that the board of control in turn has access to the great central reserve of one billion two hundred and fifty million dollars ($ , , , ). you can imagine that the public under such circumstances would have absolute confidence in a bank. indeed, i am of the opinion that as soon as this organization is effected, bank failures would be a thing of the past, because the public would soon come to appreciate this, and look upon every bank in the system as safe beyond the peradventure of a doubt. mr. farmer: there would be every reason for confidence in such an institution because of its great strength; and yet, if i understand your plan, as outlined, every one of these individual zones would be as independent of every other zone as if it were a foreign country. it would be like a great bank standing alone, of which every bank within the zone was an integral part, for the purpose of the defense of the credit of each. then again, every individual bank would remain just as independent as it is today, while at the same time it enjoyed the full confidence which the larger institution would be naturally entitled to. mr. banker: that is precisely the result this coöperative reserve fund of one billion two hundred and fifty million dollars ($ , , , ) would produce. mr. lawyer: _then, as i understand it, beyond the individual independent bank, and beyond and behind the individual independent zone, would be "the american reserve bank," standing guard over the commercial interests of the whole united states, ready at any time to meet any possible contingency that might arise in any section of the country, with practically unlimited power to release, hold, or recall gold from the four quarters of the globe, because it can place a price upon the use of gold in the form of interest, and so conserve the general welfare of american commerce and american labor._ mr. banker: now, gentlemen, let me call your attention to five important results we have achieved in the development of this outline of our proposed structure. _first_: you will observe that every bank in the united states will be completely freed from every dominating influence, because in the last analysis it will have access to a practically inexhaustible hoard or reserve of gold, which belongs to itself as much as to any other bank. _second_: you will note that every commercial zone is a perfect and complete self-governing body. not a single outside person has anything whatever to do with its affairs. every person who is in any way connected with it, is selected by its members, even including the deputy united states comptroller, who will be, as you remember, the chairman of the board of control, and president of the bankers' council. in principle and in function this organization is identical with that of the bank of the state of indiana, and of the state bank of iowa, in which you will remember the parent, or home institution, did no business whatever, except for the branches, which it examined and supervised. _third_: you will note that in the matter of issuing currency, it follows the principle of bank credit currency in operation today in canada, with the added power, subject to the approval of the board of control, of doubling the issue to meet unusual demands of trade or in case of an emergency. _fourth_: you will observe that we have planned to reach ultimately a system of reserves consisting of gold, exclusively, and also to keep all bank credits, both deposits and note issues, in constant touch with gold by paying gold whenever called for. _fifth_: that in the matter of a strong central gold reserve, you will observe that the plan follows the principle in force at the bank of england where all transactions are in gold, making england the only truly free market for gold in the world. gentlemen, i am convinced that it is the natural right and present opportunity of the united states to become the financial centre of the world; but no country can ever become the financial centre of the world, unless it is a free market for gold. no country can be a free market for gold, unless its entire credit system is based upon gold, and gold alone, thereby guaranteeing unquestioned bills of exchange. such bills would draw a rate as low as the lowest because protected by a gold fund of such magnitude, when considered from the standpoint of its obligations to the commerce of the country, where held, all conditions being considered, as to insure beyond question its ability to take and give gold, as necessity requires in international trade, without endangering its stability, or affecting its credit. this result can only be achieved by enforcing the discount rate throughout the country involved; and the discount rate can only be enforced throughout the country involved by buying and selling bills of exchange in straight gold transactions. we should not trade one bank credit for another bank credit, and put this bank credit into our bank reserves, as the aldrich scheme proposed, thereby driving gold out of the banks, and out of the country, and also utterly destroying our power to control and protect the cash gold reserves of our banks, which outside of what may be called subsidiary money (from $ pieces down), should ultimately and always be _gold and gold alone_. in conclusion, i submit that the whole plan as we've worked it out does not introduce a single foreign element but creates out of our own practices, which have developed out of our own peculiar conditions, a financial and banking system, founded upon sound economic principles. it gradually eliminates those errors that have crept into our financial and banking practices, possibly through supposed necessity, but certainly through ignorance; and yet, the present incoherent conglomerate condition is brought to a simplicity and strength that may safely challenge any country in the world to institute a comparison for economy, efficiency, strength and safety. mr. merchant: gentlemen, if you will achieve the results that you have outlined in the course of this evening's talk, you will accomplish all and precisely what mr. macveagh, secretary of the treasury, recently described as the ends that must be attained if we are to bring about a complete financial and banking reform. these are his words: "a relief measure reforming the banking and currency system must include, among its necessary features, provisions for never-failing reserves and never-failing currency, and for the perfect elasticity and flexibility of both; for the permanent organization and organized coöperation of the banks, which are now suffering and causing the nation to suffer by reason of their unorganized state; for a central agency, to represent and act for the organized and coöperative banks--this agency to be securely free from political or trust control, but with the government having adequate and intimate supervision of it; for independent banking units--so independent that no one bank can be owned, controlled, or shared in in any degree, directly or indirectly, by any other bank; for the equality of all banks, national or state, both as to standards and as to functions--so that every requirement made of a national bank must be complied with equally by a state bank, and every function or privilege enjoyed by a state bank shall be enjoyed by a national bank; for the utilization and the fluidity of bank assets; for the scientific development of exchanges--domestic and foreign; for foreign banking as an adjunct of our foreign commerce, and for taking the treasury department out of the banking business." mr. farmer: well, you have forgotten the thing that interests me more, generally speaking, than all else, and that is the land credit bank, which we went into last wednesday night. of course you intend to include this when you prepare your bill. uncle sam: you bet they will, for i think it's about time that the corn raiser, cotton planter and grain producer and all the rest of the toilers of the turf, should be getting their money at as low rates as anybody else on first-class security for a long period of time, and i am determined to give the farmers of the country the benefit of my good name to aid them in this matter. mr. banker: of course we had all agreed to that, and shall include it in the draft of the bill. mr. manufacturer: uncle sam, i move that mr. banker, mr. lawyer, and mr. farmer be a committee of three to prepare a bill to be submitted to us next wednesday evening. mr. merchant: i second the motion. uncle sam: it's a go. good night. sixteenth night draft of bill uncle sam: well, boys, here we are ready for the report of the committee on legislation, i suppose you would call it. are you ready to report now? mr. farmer: yes, mr. lawyer will make our report and speak for the committee. mr. lawyer: uncle sam, your committee has been deeply impressed with the duty you have imposed upon it. that the solution and settlement of our financial and banking problem is the most important economic question that has ever confronted the civilized world must be admitted by all who will take the trouble to investigate it and institute a comparison between our conditions and those of any other country at the time when it adopted its financial and banking system. in , when the bank of france was established, the financial resources of france were without official record, but comparatively nominal. in , when the bank act under which the bank of england is conducted was enacted, the banking resources of that country were probably in the neighborhood of $ , , . the total note issue of england, scotland, and ireland was less than $ , , ; the public and private deposits in the bank of england were less than $ , , ; and the gold in the bank of england was less than $ , , . in , when the imperial bank of germany took its present form, industrial germany was still slumbering; and the bank resources probably did not exceed $ , , , . the capital of the incorporated banks was about $ , , , the notes were about $ , , , and the reserves held about $ , , . the banking resources of the united states are today more than ($ , , , ) twenty-five thousand million dollars and our foreign trade more than ($ , , , ) four thousand million dollars. the question we are dealing with, therefore, is not only the most stupendous of its kind, but it must be considered both from a domestic and foreign point of view. it is from both these points of view that we have approached the preparation of this measure. as i proceed to read the bill i shall make some comment by way of explanation in order that our purpose may be understood. a bill to establish a complete financial and banking system for the united states of america. section . _be it enacted by the senate and house of representatives of the united states of america in congress assembled_, that a complete financial and banking system for the united states of america shall be, and is hereby, created, organized, and established as follows: _first_: the commercial zone. _second_: the bankers' council. _third_: the board of control. _fourth_: the american reserve bank. section . that upon the passage of this act the president of the united states shall appoint three persons, who, with the secretary of the treasury and the comptroller of the currency, shall proceed immediately to designate such cities in the united states, not less than twenty-eight in number and not to exceed forty-two in number, for the location of the financial centres of the commercial zones, numbering them consecutively as shall best accommodate and serve the business and banking interests of the united states. section . that within ninety days after the designation of the cities for the location of the financial centres of the commercial zones every national bank, with the approval of the five persons designated in section two of this act, shall select one of the centres so designated as the place for its clearing house, and thereupon the comptroller of the currency shall notify all the national banks to meet at their respective financial centres on a given day and at a designated place for the purpose of organizing the several commercial zones, of which there shall not be less than twenty-eight nor more than forty-two in number. comment:--referring to sections two and three i would urge upon your attention these points: _geographical considerations_ great britain has only , square miles of territory. france has , and germany , square miles. all europe, outside of russia, is only about half the size of the united states. it has , , square miles, while we have , , square miles. including russia, all europe has only , , square miles. extended as our territory is, our products are far more varied and more universally important to the human race than those of any other nation. they exceed in value $ , , , a year. _local interests_ new england is essentially a manufacturing center of dry goods, wearing apparel, and metal wares. pennsylvania is known the world over for its coal, iron, and oil industries. new orleans is the market for cotton, sugar, and rice. kansas city is the emporium for live stock and grain. chicago, the greatest food market on earth, is fast coming to be one of the greatest manufacturing points in almost every line of industry. st. paul and minneapolis supply us with wheat and flour. the cities of the rocky mountains are growing in importance year by year, each one entitled to distinction for some particular industry. the development of the pacific coast, from san diego to seattle, is challenging universal attention. it is the opinion of your committee that it is highly important, indeed, absolutely essential, for the best interests of the people, industrially, commercially, socially, and politically, that each geographical zone of common business interests should have independent self-government in matters of banking, precisely as the several states have control of their local affairs. at the same time, these commercial zones should be so harmonized and federated as to give to each the financial strength and power of all combined, precisely as every state is as strong and powerful politically as the federal government itself. all the governments of europe are traditionally monarchical and imperialistic. their banking institutions not only all bear the insignia of their political origin, but also characteristically mark the times and conditions that gave them birth. in england alone self-government found true expression in the selection of the board of directors of the bank of england. the british government has no relation to the management, either directly or indirectly. it neither appoints a single representative on the board, nor has any voice whatever in his selection. again, it is to be noted that the englishman, ever tenaciously jealous of his rights, excluded from the board of directors all bankers. no banker has ever sat upon the board of directors of the bank of england. the french empire of and the german empire of are each reflected in the organization of the bank of france and the imperial bank of germany. this government was organized as a protest against royal rule and imperial power. it has been fighting the evils of centralization for more than a hundred years; and of nothing has it shown such persistent jealousy as the possible centralization of financial interests and the control of commercial credits. will it be said by some one who thinks only in the terms of the special interests that, notwithstanding this watchfulness and constant anxiety, great aggregations of capital in the business world have come practically to control the business situation; that our commerce is practically centralized now, and that our banking should be so, to make it the counterpart of the existing state of things? let us not assume that the problems of coördinated power and wealth have all been solved. let us believe that the study of this modern mystery has just begun. let us hope that if it is possible for us so to solve the financial and banking problem as to recognize the best traditions of the republic and the highest aspirations of the american people, keeping steadily in view every economic law involved, we shall then save our beloved country from the tragic consequence of political controversies directly affecting our commercial credit and indirectly affecting every day's labor and every dollar of capital until the question is settled right. we must not forget that every conceivable phase of the so-called "money question" has been the football of american politics from the organization of the first and the second united states banks, down through the greenback madness, the silver craze and the gold standard fight. not a single subject has aroused such intense bitterness as this one, excepting slavery alone. whoever, then, tries to solve this problem must recognize at every turn the origin of our political institutions, the genius of our people, and the peculiar characteristics of the american citizen or he will fail utterly in his undertaking. section . that each bank shall be entitled to one vote, which shall be cast by an officer of the bank who has been duly authorized by a vote of the board of directors thereof, such authorization to be evidenced in writing and under the seal of the bank. each bank shall be identified in its zone by a number. comment:--it is our judgment that every bank should have equal power in organizing and consequently in controlling the respective zones; because we believe the business interests of the country will be better conserved thereby. section . that the association of all national banks clearing or redeeming their notes at each of the cities so designated shall be known as "the ---- commercial zone." section . that all the national banks of each of the commercial zones so constituted and established shall organize themselves into "the ---- commercial zone" by electing a chairman, a secretary, and a treasurer, who shall all hold office until the first monday of the following may, and by proceeding in the following manner: section . that they shall take some point in the financial centre of their respective commercial zones, from which they shall draw seven radial lines, so cutting the territory as to divide the whole number of banks, as nearly as possible, into seven district groups, each district containing approximately the same number of banks, and may from time to time thereafter shift said radial line for the purpose of maintaining such equal subdivision of the banks. comment:--it is a matter of great importance that these districts shall be automatically and arbitrarily constituted, if possible; and this plan will accomplish it. by this method every part of every commercial zone will be represented by business men as well as bankers. neither particular sections nor particular banks can have any direct advantage. section . that each subdivision of the commercial zone so created shall be known as a district, and they shall bear numbers respectively from one to seven, inclusive. section . that the board of the bankers' council shall be constituted as follows: _first_: the bankers of each district of the respective zones, voting as prescribed in section four of this act, shall elect a banker and a business man as members of said board. _second_: the term of office shall be seven years; but the terms of the members of the first board shall be for one, two, three, four, five, six and seven years, respectively; that is, the board shall arrange itself into seven groups, each being composed of one banker and one business man, and thereupon the seven groups shall determine by lot how long each group shall serve. _third_: the fourteen members of the board of the bankers' council of the respective zones shall then elect their president, who shall not be one of the fourteen so selected, but shall be a resident of one of the districts in their own zone. the term of service of the president of said board shall be left to the respective boards of the bankers' council in the several zones. section . that the services to be rendered by the bankers' council shall be advisory to the board of control whenever the board of control may call them in consultation, or an appeal is made to them from the action of the board of control by some citizen or citizens of their particular zone. section . that the members of the bankers' council shall receive no salary, but all expenses incurred by them severally incidental to such consultation and services shall be paid. comment:--the relation of the bankers' council is the same to the zone as the clearing house committee is to the clearing house. it will be the supreme court of the zone. it has the last word upon all business questions growing out of banking in the zone, in case of appeal. section . that the president of the bankers' council shall be chairman of the board of control. section . that the president of the bankers' council shall be a deputy united states comptroller. section . that each of the deputy comptrollers of the currency shall from time to time furnish such information and make such reports to the comptroller of the currency as the board of directors of the american reserve bank shall prescribe: _provided, however_, that the comptroller of the currency may ask for reports as now provided by law. section . that the board of control shall be constituted as follows: _first_: the bankers of each district, excepting the district in which the chairman resides, voting as prescribed in section four of this act, shall elect a banker who resides in their district as a member of the board of control. _second_: the term of office shall be seven years, but the terms of the members of the first board shall be for two, three, four, five, six and seven years, respectively, and the six members so elected shall determine by lot how long each shall serve. section . that before any member of a board of control enters upon the performance of his duties he shall sever all connection as officer or stockholder with every bank in his commercial zone, and he shall be ineligible to any position in any bank in his zone during the time for which he shall have been elected to serve. comment:--the board of control will be composed of a body of men who are younger than the bankers' council; but of the same high order. they will be men who have the undoubted confidence of the banking fraternity; men who are to win the prizes in the banking world. this position will be a sure stepping stone to the best positions; but it must not be used for that purpose, at least until each man has served out his time. section . that compensation of the members of the board of control shall be five thousand dollars per annum, payable monthly, including the chairman, except that the chairman may receive any salary in addition thereto that the bankers of his zone may determine to pay him: _provided_, that such additional salary shall be assessed upon the capital and surplus of all the national banks in that zone. comment:--the president of the bankers' council, chairman of the board of control, and deputy united states comptroller should all be represented by the same individual for these reasons: _first_--the relation between the two bodies of men should be easy and constant for the best interests of the people. there should be no slow machinery to put into operation in case of necessity. quickness and harmony will always be essential. _second_--the power of the united states government should always be present to enforce orders. _third_--a man of the greatest ability obtainable should be secured to occupy this place; therefore his salary and length of service should be left open for arrangement with the bankers' council. this man ought to be the leading man in banking in his zone in point of character and wisdom. section . that the services to be rendered by the board of control shall be as follows: _first_: each board of control shall have supervision of all the national banks located in its zone. comment:--the expense and annoyance of bank examinations as they are carried on today would be reduced one-half and they would be worth ten times as much as they are today with the exception of those made by clearing house examiners. _second_: the boards of control shall have power to employ all the examiners and such other assistants as may be necessary to properly and efficiently supervise the banks under them, and such examiners, as far as possible, shall be paid stated salaries. _third_: each board of control shall have power to purchase commercial paper or bills of exchange from the banks in its zone whenever they desire to build up their reserves by obtaining additional gold or for the purpose of crop moving or any special or extraordinary demand of trade: _provided, however_, that all the paper so purchased by them shall bear the unqualified indorsement of some bank in their respective zone. comment:--mr. merchant: now it seems to me as though that organization is as simple, direct and complete as it can possibly be. it makes every zone an absolutely independent banking democracy. no outside influence is permitted to interfere with the zone. it is certainly local self-government from top to bottom. the fact that anyone in the zone may appeal to the bankers' council for redress and that every district has two representatives upon that board, will insure fair consideration at the hands of the board of control. section . that in case of a bank failure in any commercial zone one of the members of the board of control in that zone shall be appointed the receiver thereof and shall not receive any additional compensation for the services rendered as such receiver. section . that the board of directors of the american reserve bank shall be constituted as follows: _first_: the bankers' council of each commercial zone shall elect a member to the board of the american reserve bank. the commercial zones bearing the odd numbers shall elect bankers and the commercial zones bearing the even numbers shall elect business men, and every seven years thereafter the bankers' council of the respective zones shall alternately elect a banker or a business man, so that the elective members of the board of directors of the american reserve bank shall always be composed of an equal number of bankers and business men. _second_: the term of service shall be seven years; but the terms of service of the first elected board shall be for one, two, three, four, five, six, and seven years, respectively; that is, the board shall arrange itself into seven groups, each composed of two or more bankers and two or more business men, and thereupon the seven groups shall determine by lot how long each group shall serve. section . that it shall be the duty of the board of the american reserve bank, and it shall have the power, to fix the rate of interest or discount at which all the commercial paper or bills of exchange shall be purchased or discounted by all the boards of control. section . that it shall be the duty of the board of directors of the american reserve bank to issue a bulletin the latter part of each week, giving a statement showing a balance sheet of the american reserve bank and making such suggestions and comment and giving such advice as their wisdom may determine; and it shall make such arrangements as to insure the presence of this bulletin at practically every national bank in the united states every monday morning. section . that the place of business of the american reserve bank shall be washington, district of columbia. section . that the members of the board of the american reserve bank shall reside in washington, district of columbia, and shall give their time and personal attention to the business of the bank. section . that the members of the board of the american reserve bank shall receive as compensation ten thousand dollars per annum each, payable in monthly installments. comment:--each independent zone will send its own man to represent it in the board of the american reserve bank--so that every financial centre will have a spokesman to present its claims on the one hand and to give full and reliable information on the other; also to guide the whole board in its policy. the board shall give weekly advice to all the banks in the united states upon the condition of business at home and abroad. the american reserve bank, as we shall see, will hold all central reserves of the united states for the benefit and protection of each and all of the zones precisely as the zones must protect all the individual banks within their borders. since our gold reserves are now a part of the common reserves of the whole commercial world, the price for the use of gold must be under the control of the board of directors of the american reserve bank. in this capacity they are acting for every individual bank in the united states whose agent they are. section . that the board of directors of the american reserve bank shall elect as the president of the american reserve bank some one who is not a member of the board so constituted. they shall also elect a vice-president of said american reserve bank and such other officers as they may decide from time to time to be necessary to the best conduct of the business of said bank. comment:--since the board of directors are the direct representatives of the respective zones, and since the american reserve bank is only the servant of the combined zones working in coöperation, it is clear, that the board should elect its own president and vice-president. if there is one thing, more than any other, that should be kept out of this coöperative organization, it is politics. if the appointment should be the perquisite of the president of the united states it might be used as a bribe or a reward; such a thing should not be thought of. the policy of such an institution should be beyond the reach or influence of party politics. section . that the term of service of the president and vice-president of the american reserve bank shall be three years, and the salary of the president shall be twenty-five thousand dollars per annum, payable in monthly installments, and the salary of the vice-president shall be eighteen thousand dollars per annum, payable in monthly installments. the salaries of all the other officers or employees of said bank shall be fixed by the board of directors of said bank. comment:--the term of service should not be too long, for it would follow that a good officer would be retained, while a mistake could be corrected within a reasonable time. the salary should be sufficient to secure the ablest men that the country affords. section . that the comptroller of the currency shall ex officio be a member of the board of directors of the american reserve bank. section . that the secretary of the treasury of the united states shall ex officio be a member of the board of directors of the american reserve bank. comment:--since the united states government would carry its balances with the american reserve bank, the government should be recognized by making the secretary of the treasury and the comptroller of the currency ex-officio members of the board. section . that the president of the united states, with the approval of the united states senate, shall appoint three directors of the american reserve bank, who, for their first term, shall serve five, six, and seven years, respectively, and thereafter seven years, and each such director shall receive a salary of ten thousand dollars, payable in monthly installments. comment:--while it is true that the matter of management should be kept out of politics, it may be granted that it might be wise to have a small number of directors, appointed by the president of the united states, who would have only their respective votes in the deliberations of the board--but no official place. they might serve some good purpose at times; while they certainly could do no harm. the policy of the institution should not and would not be involved in these appointments. section . that vacancies in any one of the three boards as organized in this act may occur by death, resignation, or expulsion, and shall occur whenever a member of any of the boards shall be a director or officer of a suspended, insolvent, or failed bank. all such vacancies shall be filled by the respective boards in which they occur until the first monday in the month of may following, except those appointed by the president of the united states. section . that the term of office of each member of the three boards herein described shall begin at the time elected, but shall continue from the first monday in the following may as if that day were the beginning of the time for which they were severally elected. section . that on the first monday in may each year after one full year of service has expired the bankers of each commercial zone shall meet at the city in which the financial centre is located to fill any vacancies that may have occurred in any one of the boards described in this act, and also to elect any members to said boards where terms of members have expired. section . that each commercial zone shall have all the attributes and powers of a body corporate and may sue and be sued in the united states courts having jurisdiction of the action brought; it may receive deposits from banks and act in every capacity of a bank for other banks, but shall not allow or pay any interest on such deposits; it shall have power to receive, collect, and forward bank notes; it shall have power to buy and sell commercial paper and bills of exchange from and to the banks which are members of such zone; it shall have power to act as the agent or attorney in fact of the banks which are members of any of the commercial zones, so far as it may be necessary to do so to carry into effect the purposes of this organization; it shall have the power to do and perform any and all acts that may be necessary for the proper performance of its duties in the supervision of all banks under it, and in the conduct and operation of the commercial zone. section . that each commercial zone shall maintain and keep in operation at its financial centre a clearing house where all the bank notes, checks, drafts, bills of exchange, and other instruments of credit, drawn upon any bank located in the zone, may be cleared, and for any other purpose that may come within the purview of this act; and all such instruments of credit shall be accepted and settled for at par at such clearing house, under and in accordance with such rules and regulations as may be established from time to time by the board of directors of the american reserve bank. comment:--mr. manufacturer: you have now completed the functions of the zone, it seems to me; and everything that you have proposed is based upon the approved practices of the american clearing house. the free check zone, provided for in this last section, is identical with that at boston, where, ever since , every new england bank check has been at par at the centre. atlanta, nashville, kansas city and several other cities are working out the same plan. this plan is also identical with the plan that new england worked out before the war, with respect to the redemption of bank notes, when bank notes were the chief form of bank credit then used. from to , you will remember, the suffolk bank acted as a clearing house for all new england bank notes which were par at boston, precisely as checks are today. here we are getting back to the simple fundamental principle of current redemption of bank credit without charge to commerce in whatever form the people may choose to use it. it is bank notes and checks in france, scotland, ireland and all over canada. why should it not be bank notes and checks all over the united states just as well, in order that the people may have bank credit in the most convenient and cheapest form possible? then, you have extended to every commercial zone the same organization for supervision and administration that the most advanced clearing houses have; the board of control to examine them and the bankers' council as a court of appeal to settle all difficulties that may arise. mr. merchant: is it practical to have the zones conform to state lines? mr. banker: such a thing should not be thought of. economic laws do not follow state lines. there is not a single state in the union that is a natural economic zone. some states should have several financial centres; some none. to attempt to make a commercial zone conform to state lines would be absurd. bank credit flows to centres as water rushes to the ocean, and we should not violate a great economic law to the irreparable injury of commerce. sense and not sentiment should control our action. st. louis and kansas city are natural financial centres, but jefferson city is not. st. louis draws its bank credits from eastern missouri, southeastern iowa, northeastern arkansas and southern illinois. kansas city draws its bank credits from western missouri, southwestern iowa, southeastern nebraska, all of kansas and some of oklahoma. these cities illustrate the principle that must not be violated or we may do more harm than good. vermont has no economic centre, and it would do violence to trade and commerce to make one arbitrarily. tennessee has three such centres. indiana and several other states have but one. section . that the american reserve bank shall have all the attributes and powers of a body corporate and may sue and be sued in any united states court having jurisdiction of the action brought. it shall have power to buy and sell gold bullion and gold coin; to buy and sell united states government securities; to loan money to the united states government, and to act as banker, fiscal agent, representative and attorney in fact for the united states government; to buy and sell bills of exchange, domestic and foreign; to act as fiscal agent, attorney in fact, for all members of the respective commercial zones, and shall have full power to carry into effect the object for which this organization is created; it may receive deposits from banks and act in every capacity of a bank for other banks, but shall not allow nor pay interest upon any deposits that may be made with it. section . that the board of directors of the american reserve bank shall define from time to time the nature and character of the promissory notes, checks, drafts, and bills of exchange that may be purchased by the respective zones and the length of time they may have to run: _provided, however_, that every piece of paper purchased by any commercial zone shall bear the unqualified indorsement of some national bank in its zone. comment:--it would be unwise to fix now arbitrarily by statute just what kind of paper the banks of every zone should buy. this ought to be left to the board of the american reserve bank. they will meet it wisely as it arises. section . that the united states government is hereby authorized and empowered to prepare, upon the passage of this act, bank notes for the respective banks applying for them without the following superscription upon them: "this note is secured by bonds of the united states or other securities," but in all other respects like the bond-secured bank notes now in use: _provided, however_, that the notes delivered to any bank for issue and circulation shall have in bold type, first, and to the left of the centre, the number of its zone, and, second, to the right of the centre, the number of the bank by which it is identified in its zone. comment:--this section provides a true bank note by erasing that barbaric superscription that makes our present bank notes a bond speculation; and by bold numbers identifies every bank note with a zone and with the bank issuing it, thereby greatly facilitating the quick redemption of the notes. mr. merchant: how much more economical would this currency be than a currency furnished by the government or purchased from some central bank or other central institution? mr. banker: it would cost just one-fifth as much, or the difference between _par_ that would have to be paid for the currency purchased and the average reserve carried; or about per cent. the average per cent of gain to the banks would be about per cent upon the amount of notes outstanding (approximately $ , , , ) or $ , , . of course, this gain would come to the people, sooner or later; in the end, the expense of the bank is borne by commerce. the present enormous cost of shipping currency to and fro across the country would be saved also, and this amounts to several million dollars a year, to say nothing of the added trouble of shipping commercial paper with which to pay for it. section . that upon the completion of the organization of the several commercial zones as hereinbefore provided any national bank may retire all or any part of its present bond-secured note circulation by depositing with the united states treasurer an amount of the present bond-secured notes or lawful money, or both, which shall be equal to the amount of its circulation so retired, and may thereupon, with the approval of the comptroller of the currency, take out for issue and circulation an amount of bank notes, which shall be known as "national bank notes," that does not exceed in amount its paid-up and unimpaired capital without depositing united states bonds or any other securities to secure the payment thereof as now provided by law: _provided, however_, that before any national bank shall have the right to retire its present bond-secured circulation and take out national bank notes for circulation as in this section prescribed, it shall first, unless located in its financial centre, make arrangements with a national bank which is located in its financial centre for the redemption of its bank notes in gold coin or other lawful money: _and provided further_, that it shall first deposit in gold coin or gold coin certificates with the american reserve bank an amount of money equal to per centum of its average deposits during the preceding calendar six months, and in addition thereto an amount equal to per centum of the national bank notes it proposes to take out for issue and circulation. comment:--the amount of notes is limited to the amount of capital as a matter of convenience only. some banks will not be able to keep out per cent of their circulation, because their customers use checks; other banks will need at certain times of the year in some sections of the united states an amount of circulation largely in excess of the amount of their capital. the habits of the people will always determine what the amount of currency in use is, if permitted to choose between checks and notes; but crop-moving times will greatly increase the normal demand, as we have seen in the case of canada. section . that thereafter every national bank shall have upon deposit upon the tenth days of january and july of each year with the american reserve bank an amount of gold coin equal to per centum of its average deposits during the preceding calendar six months and per centum of its national bank notes taken out for issue and circulation: _provided, however_, that this reserve shall be increased at the rate of per centum each year for a period of three years thereafter; and that thereupon and thereafter every national bank shall have upon deposit upon the tenth days of january and july of each year with the american reserve bank an amount of gold coin equal to per centum of its average deposits during the preceding calendar six months and per centum of its national bank notes taken out for issue and circulation. section . that every national bank shall carry a cash reserve of per centum of all of its individual deposits subject to check up to six million dollars and one-half of per centum additional for each five hundred thousand dollars up to ten million dollars, and upon this and all additional individual deposits a reserve of per centum in cash. section . that every national bank shall carry a cash reserve of per centum of its deposits from banks, or upon its bank balances. comment:--there is no doubt whatever that banks should carry larger cash reserves against bank balances than against those of individuals. the banks of europe which carry such balances carry all the way from per cent up to per cent. section . that any national bank may at any time fall per centum below its required cash reserve: _provided, however_, that its average cash reserve from january st to december st shall be equal to its required cash reserve. section . that the amount that any national bank located outside of a financial centre shall be required to carry with a national bank located in a financial centre for the purpose of redeeming its notes may be counted as a part of its required cash reserve. section . that any national bank desiring to build up its reserve may rediscount or sell any of the commercial paper or bills of exchange owned by it by applying to the board of control of the commercial zone in which it is located. section . that if any national bank shall not maintain its required average cash reserve, as prescribed by this act, it shall pay at the end of the year as a penalty therefor, per centum upon all loans in excess of such required cash reserve; and such penalty so paid shall be paid without any reference to any rediscounts made with the board of control for gold: _provided, however_, that the board of directors of the american reserve bank may at any time suspend the whole or any part of said per centum penalty that may result from a demand for gold during a panic, crop-moving period, or any unusual or extraordinary condition. section . that any national bank desiring to take out for issue and circulation an amount of national bank notes in excess of its paid-up and unimpaired capital, without depositing united states bonds or any other securities to secure the payment thereof, may do so to an amount not to exceed per centum of its paid-up and unimpaired capital stock, provided the board of control of the commercial zone to which such bank belongs first gives its approval thereto. section . that the united states government shall print and place in the hands of the respective boards of control an amount of national bank notes for each national bank in its zone equal to the paid-up capital thereof in addition to the bank notes taken out in accordance with section . comment:--you will observe, gentlemen, that by section a bank is allowed to fall per cent below its average cash reserve; that by section it can buy gold from the board of control with its commercial paper and build up the reserve; also that by section it can take out an additional amount of currency to meet any emergency that may arise. now, when you appreciate the fact that the board of control is going to make every bank qualify in the outset, as sound and then is virtually responsible for its condition, with the power to aid it in case of necessity, it is difficult to even imagine a case where a bank would fail. mr. merchant: that is so; every bank ought to be kept in liquid shape by the board of control; then its means of defense, as you have just pointed out, are unlimited. of course it would then have all its present resources by way of rediscounting paper with its city correspondent; and on top of that the provisions of your bill. you could not possibly bust a bank. section . that national bank notes shall be a first lien upon all the assets of the bank issuing them, including the double liability of the stockholders, and any person or bank holding any of the national bank notes of a failed bank shall be entitled to recoup the amount thereof out of the first moneys received on account of the failed bank. comment:--these credit notes should be a first lien precisely as our present bank notes are; as the scotch notes are and as the canadian notes are. bank notes should be made a first lien, because they are a public convenience and because the holder is morally and practically compelled to take them in the ordinary course of business. mr. manufacturer: he could refuse if he chose and demand legal tender, could he not? mr. lawyer: certainly, but public policy should put the goodness of bank notes beyond question under all circumstances. section . that the expense of transmitting national bank notes by a bank to its financial centre, except its own bank notes, shall be paid by the board of control of the commercial zone in which such financial centre is located. section . that the expense of transmitting national bank notes from a financial centre outside of the zone to which they belong to the financial centre to which they belong shall be paid by the bank issuing the national bank notes so returned. comment:--it will not cost bankers anything to forward notes for redemption, as the expense of transportation will be paid by the commercial zones. this fact will insure the immediate return of all notes for redemption. section . that the national bank notes issued in accordance with the provisions of this act shall be received at par in all parts of the united states in payment of taxes, excises, public lands, and all other dues to the united states, including duties on imports, and also for all salaries and other debts and demands owing by the united states to individuals, corporations, and associations within the united states, except interest on the public debt and in redemption of the national currency. said notes shall be received upon deposit and for all purposes of debt and liability by every national banking association at par and without charge of whatsoever kind. section . that from and after the passage of this act no bank shall receive or have on hand deposits exceeding in amount ten times the amount of its paid-up and unimpaired capital. comment:--capital is a sort of insurance fund precisely as reserves are, and there should always be a reasonable relation sustained between capital and deposits. section . that any national bank may, with the approval of the board of control, establish a branch bank in any town, village, or locality within its own zone and within a radius of twenty miles, where there is no national bank; but such branch bank shall be discontinued as soon as an incorporated bank is established at that point with a capital of at least ten thousand dollars. section . that whenever any body of men desire to establish a national bank, or to nationalize a private bank, state bank, or trust company, they must first secure the approval of the board of control of the commercial zone in which the proposed bank is to be located; and if such application shall not be approved by the board of control for any reason, the applicant or applicants may then appeal to the board of the bankers' council for approval. section . that the decision of the board of the bankers' council upon all appeals by applicants for the privilege of starting a national bank shall be final, and their decision shall also be final in all other matters in which appeals may be made from the board of control. section . that all the rules and regulations under which branches are carried on shall be fixed and established by the board of directors of the american reserve bank. section . that any national bank which has taken out national bank notes for issue and circulation in accordance with this act shall pay the american reserve bank on the tenth days of january and july of each year per centum upon the average amount of notes in actual circulation during the preceding six months. comment:--the tax is placed at per cent per annum because that is the usual rate of interest now allowed on good balances all over the united states, and the notes are only another form of deposits made by the public who carry or use the notes. section . that the tax so paid by the banks upon the national bank notes, as provided in section of this act, shall be appropriated for the following uses and purposes: _first_: to pay all the expenses of whatsoever kind growing out of the administration of the four organizations established by this act. _second_: to pay per centum per annum upon all the united states per centum bonds or consuls until their maturity in nineteen hundred and thirty. _third_: to establish and maintain in the american reserve bank a bank note redemption fund equal to per centum of the average amount of the notes outstanding each six months preceding the first days of january and july of each year for the purpose of redeeming the notes of failed banks. _fourth_: the balance remaining, if any, shall, on the tenth day of january in each year, be paid into the division of the reserve fund of the united states treasury in gold coin for the purpose of converting the united states notes into gold certificates. section . that to any national bank which has complied with section thirty-nine of this act the united states government shall return the per centum fund deposited with it for the purpose of redeeming its bond-secured bank notes. section . that any national bank desiring to wind up its affairs and go out of business shall be entitled to receive back all its advances made upon its deposits and note issue to the american reserve bank: _provided, however_, that all the liabilities of such bank have been paid in full and satisfied, or any amount of lawful money equal thereto has been paid into the american reserve bank for that purpose, and the comptroller of the currency approves the repayment of said sum. section . that from and after the first day of january, nineteen hundred and fourteen, no national bank shall pay out over its counter any bond-secured bank note, but shall send the same to its financial centre, and the financial centre shall forward it to the united states treasurer for redemption, cancelation and destruction. section . that any national bank that shall count any national bank note or notes as a part of its reserve shall pay into the american reserve bank a penalty of per centum per diem on the amount so counted, and any national bank that shall, after january first, nineteen hundred and fourteen, count any bond-secured bank note as a part of its reserve shall pay into the american reserve bank a penalty of per centum per diem upon the amount so counted. comment:--if there is one evil that should be crushed out in this country more than any other it is the practice of carrying debts as reserves. no bank should be allowed to carry any other bank's notes, any more than any other check or draft which it thinks is good. it has been this abuse of bank credit that has led to more trouble than almost any other single thing. it was the requirement of coin reserves and current coin redemption that made the banks of virginia, louisiana, kentucky, ohio, indiana, iowa, missouri and the suffolk system such perfect successes. here is the crux. the very soul of sound banking is current coin redemption. so let us not fool ourselves by putting wind and water into our reserves. section . that any national bank may and is hereby authorized to accept any note, check, draft, or bill of exchange, with not more than four months to run, for any one of its regular customers: _provided, however_, that the instrument of credit so accepted shall be for goods or merchandise sold and actually delivered or in transit to the buyer: _and provided also_, that the instrument of credit states this fact upon its face: _and provided further_, that the bank so accepting any such instrument of credit shall keep and maintain against such acceptance identically the same reserve as it is required to keep and maintain against a deposit subject to check, and it shall be subject to the same penalty as provided in section forty-six of this act. comment:--let us not fool ourselves by supposing that by creating liabilities we are actually creating new capital. by acceptances a class of paper will undoubtedly be created that will in turn create a market for itself. the object therefore of acceptances should be to facilitate the handling of commodities in transit. section . that any national bank having a paid-up capital and surplus of at least two million dollars may establish a branch in any foreign country with the consent and approval of the board of directors of the american reserve bank. comment:--if we hope for our share of profit upon our foreign trade and if we hope to secure for the american merchant an equal opportunity in securing that foreign trade, we must prepare here two aids: one is banking facilities and the other is shipping facilities. is it not perfectly clear that a foreign banker would do anything in his power to divert all the traffic he could over the shipping lines of his country? we shall find in the end then that our foreign trade will be aided not by our foreign bank alone but by american shipping as well. section . that any national bank that has a paid-up capital of at least fifty thousand dollars, and the surplus required by law, may act as a guardian, administrator, executor, or trustee and in such capacity in any state, by whatever name known, in accordance with the laws of the state or territory where situated or located, and the reserves required against trust funds shall be as follows: _first_: seven per centum thereof shall be deposited with the american reserve bank. _second_: six per centum cash shall be carried against all trust funds up to six million dollars and one-half of per centum for each additional five hundred thousand dollars up to ten million dollars, and upon this amount and all additional amounts, per centum in cash shall be carried, but any national bank accepting trust accounts shall keep the same separate and apart from all other accounts in said bank, and shall establish a trust account department; and all such deposits shall be invested in such securities as are prescribed by the laws of the state where such bank is located. section . that if the laws of the state where any national bank accepting trust accounts is located do not prescribe how trust funds shall be invested, then the board of the american reserve bank shall fix rules and regulations for the investment of such funds. section . that any national bank may accept savings accounts, as distinguished from commercial accounts, but any national bank accepting savings accounts shall keep the same separate and apart from all other accounts in said bank, and shall establish a savings account department; and all such savings deposits shall be invested in such securities as are prescribed by the laws of the state where such bank is located. section . that if the laws of the state where any national bank accepting savings accounts is located do not prescribe how savings funds shall be invested, then the board of the american reserve bank shall fix laws and regulations for the investment of such funds. section . that all investments made for the benefit of the savings depositors of any national bank shall be held primarily and exclusively for the benefit of the depositors in the savings department; and in case of a bank failure, if the investments made for the benefit of the depositors in the savings department do not satisfy their claims in full, then the depositors of the savings bank shall be entitled to such a part of the capital, surplus, and capital liability as the savings deposits bear to all other deposits up to and until the savings accounts are paid in full. section . that any national bank accepting savings accounts shall, on the tenth days of january and july of each year, have with the american reserve bank an amount in gold coin equal to per centum of the average deposit in such department during the preceding six months, and such national bank shall be required to carry cash reserves amounting to per centum against such savings account. section . that the said per centum so paid by the national banks to the american reserve bank as reserves against their savings deposits shall be invested in united states government bonds or securities for the exclusive benefit of the savings depositors in the national banks as a savings bank fund, and the full interest earned upon said bonds shall be credited to the savings bank fund in the american reserve bank, and no part thereof shall be deducted for any other purpose whatsoever than the protection of savings bank depositors. comment:--this trust fund would absorb about $ , , of the present bonds held by the national banks for circulation, as the total savings now approximate seven billion dollars ($ , , , ). section . that any national bank accepting a savings bank account may at any time demand the right to have thirty days' notice of an intention to withdraw the same, and may also reserve the right to pay all savings accounts in two installments-- per centum thereof in three months, per centum in six months. section . that from and after the first day of january, nineteen hundred and fourteen, every person, firm, partnership, or corporation using the word banker or bank, and every state bank and trust company in the united states receiving deposits subject to check, or saving accounts in the usual way, or trust funds shall keep and maintain identically the same reserves against these respective funds as is provided for by the provisions of this act; and any person, firm, partnership, or corporation using the word banker or bank, and every state bank and trust company, except mutual savings banks, that fails to comply with the provisions of this act shall pay a tax of per centum to the united states government on the tenth day of january in each year upon all the deposits or trust funds against which the foregoing prescribed reserves have not been kept and maintained. section . that any person, firm, or corporation using the word banker or bank, and every state bank or trust company that shall, after january first, nineteen hundred and fourteen, hold as a part of its required reserves, as prescribed in section sixty-three, any national bank note, check, draft, or other instrument of credit, shall pay a tax thereon to the united states of per centum per diem on the amount so held; and every person, firm, or corporation using the word banker or bank, and every state bank or trust company accepting deposits or trust funds as described in section sixty-three shall, upon the first day of january in each year, make a sworn statement to the united states government showing exactly the amount and the character of reserves held during the preceding year against all of its deposits, and upon failure to do so shall pay a fine of one thousand dollars per day until such report is made. comment:--these sections, and , provide that every person or corporation in the united states shall not only carry its proper share of reserves, as we have all agreed they should, but the right kind of reserves as well. quantity and quality must both be made obligatory if we are to have a banking system that amounts to anything. section . that as soon as the amount of money deposited by the national banks with the american reserve bank, as aforesaid, shall reach the sum of five hundred million dollars all the bonds now deposited by national banks to secure government deposits shall be returned to the respective banks to which they belong; and from and after that date any national bank holding a government deposit shall pay interest thereon to the treasurer of the united states at the rate of per centum per annum, and the said interest so received shall be paid into the division of reserve fund in the treasury, and united states notes of an equal amount shall be retired, canceled, and destroyed and gold certificates issued therefor. the said interest shall be payable as follows: per centum on the tenth days of january and july of each year on the average balance during the preceding six months. section . that all the profits growing out of the operations of the several commercial zones and the american reserve bank combined may be distributed between the united states government and all the national banks pro rata, according to the amount they have respectively deposited with the american reserve bank, whenever in the judgment of the board of the american reserve bank it is advisable to do so, having made such provision for a reserve as is deemed necessary: _provided, however_, that the distribution of profits shall not exceed per centum per annum until practically all of the united states notes have been converted into gold certificates; and for that purpose all the profits in excess of per centum shall be paid into the reserve fund of the united states treasury in gold coin. section . that subject to the disposition made and provided for in this act of all the various sums of money to be paid to the american reserve bank all such sums of money shall be combined and held in one common fund and be known as the american reserve bank fund, and this fund shall guarantee the repayment of all government deposits made with the american reserve bank and the redemption of the national bank notes of any failed bank. comment:--in paragraph three, under section , provision was made for a per cent guarantee fund to redeem the bank notes of any bank which has failed. this fund is held by the american reserve bank, which under section will be used to redeem the notes of all failed banks immediately and the amount of the notes so redeemed shall be recouped from the assets of the bank that issued the notes; if, by chance, one should fail after it has become a part of the proposed system, which i, for one, do not believe is possible. section . that the american reserve bank shall, on the first days of january and july of each year during the life of the per centum united states consols up to nineteen hundred and thirty, pay into the treasury of the united states an amount of cash in equal payments which shall be equal to per centum per annum of all the united states per centum bonds or consols now aggregating about seven hundred and thirty million dollars. section . that when the american reserve bank shall have paid into the united states treasury the first half of per centum in accordance with the preceding section, the united states government shall thereupon refund all of the per centum bonds or consols into per centum bonds or agree to pay per centum thereon; and thereafter the government shall pay per centum interest upon all of said per centum consols. comment:--by this section all the per cent bonds will be converted into per cent bonds and they will then be returned to the banks to which they belong. they can then be sold by them, bringing into the commercial fund of the country $ , , . this change ought to enable the banks to loan money more cheaply to the people; we must remember that the more expensive we make banking in this country the higher the rates of interest will be; for, in the end, the people bear every added burden. section . that when the united states government shall have made provision for refunding the per centum bonds or consols into per centum bonds and the american reserve bank fund shall amount to the sum of five hundred million dollars, the united states treasury shall transfer to and keep with the american reserve bank a sufficient balance--upward of fifty million dollars--to meet all of its checks and drafts; and thereupon the american reserve bank shall become the fiscal agent of the united states government for all purposes, except for the collection and current daily deposits of its revenues, which shall not be deposited thereafter in the united states treasury or sub-treasuries. section . that from and after the date that said american reserve bank fund shall amount to the sum of one thousand million dollars the secretary of the treasury of the united states shall deposit from day to day all government receipts from whatsoever source received in the american reserve bank. comment:--according to these two sections, and , the united states treasury will cease to be a disturbing factor in the commerce of the country; and it will do its business, precisely, as any municipality, by check and draft upon the american reserve bank, where its money will be deposited, from day to day, currently, as received. section . that beginning on the first day of january after the "american reserve bank fund" shall amount to one thousand million dollars, every national bank shall pay to the american reserve bank a tax of one-fifth of per cent upon all of its deposits held upon said first day of january, and upon the first day of january thereafter for two successive years a tax of one-fifth of per cent upon the amount of deposits held. section . every national bank shall thereafter contribute a sufficient amount on the first day of january in each year to make the total amount that it has contributed equal to three-fifths of per cent of its deposits. section . the fund so created by the payment of the said three-fifths of per cent to the american reserve bank shall constitute and be known as "the depositors' insurance fund." section . any bank that shall come into the national banking system at any time after the passage of this act shall immediately proceed to make its contribution to "the depositors' insurance fund" as prescribed in sections eighty-three and eighty-four of this act. section . if any national bank shall fail after three years from the time that the first tax upon deposits was paid, all depositors shall be paid in full, as hereinafter provided, as soon as the amount due them respectively has been ascertained. section . the board of control of the commercial zone where the failed bank is located shall issue in the name of its commercial zone perpetual securities subject to call equal in amount to the amount of the deposits held by the failed bank. the securities so issued shall be in the denomination of five hundred dollars and multiples thereof, and be known as bank bonds of ---- commercial zone, and shall bear interest at the rate of per cent per annum, payable annually. section . the board of control issuing bank bonds as in the foregoing section prescribed, may deposit an amount thereof with the american reserve bank equal to all deposits less than five hundred dollars and all fractions of deposits less than five hundred dollars, and receive in exchange therefor, an equal amount of money. section . the board of control may at its option sell the bank bonds so issued, and pay the depositors in cash in full or may pay the depositors in cash in part and in bank bonds in part. section . from time to time as cash is realized from the assets of the failed bank the board of control shall retire a corresponding amount of bank bonds, the bonds so retired to be determined by lot. section . as soon as the loss resulting from the failure of the bank is determined, the board of control shall proceed to assess a tax at the rate of one-fifth of per cent per annum upon all the deposits of all the national banks in the commercial zone where the failed bank was located until one-half of such loss has been collected from such banks. the remaining one-half shall be borne by "the depositors' insurance fund." comment:--since the commercial zone where the failed bank is located is directly responsible for the failure because its board of control could have prevented it, that particular zone should bear at least half the loss. this is essential to impress upon all the bankers of the zone the importance of selecting the very best men upon the board of control. section . the board of directors of the american reserve bank may invest such part of "the depositors' insurance fund" in united states government securities as they may deem wise. section . if at any time in the future the board of directors of the american reserve bank shall find it necessary to reimpose upon all the deposits of the national banks the tax of one-fifth of per cent to carry this act into effect, they are hereby authorized and empowered to do so. section . if the board of directors of the american reserve bank shall at any time deem "the depositors' insurance fund" unnecessarily large, it may distribute a portion of the same among the banks as their interests may appear. comment:--mr. lawyer: gentlemen, by sections to we have provided for the insurance of depositors, as you will perceive. we have accomplished this by financing, as it were, the assets of the failed banks so that all depositors can have their money immediately. we believe that the result of this plan will be not only to absolutely protect all depositors and give them their money immediately; but, to save the depositors from a world of worry; to protect the banks from panics and runs; to stop hoarding; to protect storekeepers, merchants, manufacturers and all business interests from the consequences of the inability of the people to meet their obligations because their money or cash resources are tied up in bank failures as heretofore. our problem was to meet the condition confronting a community when a bank closed its doors, and i think we have solved it. mr. banker: there can be no possible question but what this plan, which will put into the american reserve bank at least $ , , before it becomes operative, will accomplish the purpose sought, since the total loss to all depositors in the national banks in forty-nine years have been only $ , , , and the estimated loss where the failed banks have not been closed out is only $ , , , or a total loss for the whole time of only $ , , . mr. merchant: you have undoubtedly solved every difficulty connected with this great and most benevolent purpose. mr. laboringman: gentlemen, i want to thank you from the bottom of my heart for what you have just done. i want to thank you in the name of the millions of toilers. if i have had any influence in bringing this great reform about, i feel that i have been repaid a thousandfold for the time i have spent with you. mr. lawyer: to you, mr. laboringman, more than to all the rest of us, is due the insurance of depositors in our national banks; for you may rest assured now that it will come about sooner or later. of course, that letter to mr. farmer from the comptroller of the currency paralyzed all opposition, and to you two men belongs the glory of this victory; to you two men will be due the gratitude of all depositors. section . that whenever the accumulations from the tax upon the national bank notes shall reach an amount equal to per centum of the national bank notes outstanding during the preceding six months after paying all the expenses growing out of the administration of the four organizations established by this act--the commercial zone, the bankers' council, the boards of control, the american reserve bank--and the per centum per annum upon all the per centum bonds or consols is being currently paid, the excess from whatever source remaining over, allowing for such a reserve as is deemed necessary, shall, on each succeeding tenth days of january and july in each year, be paid into the division of the reserve fund of the united states treasury in gold coin; and as soon as the secretary of the treasury shall receive and cancel an amount of united states notes equal to the gold so paid in, he shall issue gold certificates therefor. section . that when the secretary of the treasury of the united states shall have received from the interest paid by the banks upon the government deposits, and from all other sources, the sum of one hundred and ninety-six million six hundred and eighty-one thousand and sixteen dollars in gold coin for the purpose of redeeming and converting a like amount of the united states notes into gold certificates, and he shall have received, canceled and destroyed substantially all of the remaining united states notes outstanding, making due allowance for the united states notes estimated to be lost or destroyed, he shall then transfer all the gold coin and gold bullion in the reserve fund, amounting to one hundred and fifty million dollars, with all the accumulations, to the division of redemption of the trust fund; and thereafter no national bank shall hold a united states note as a part of its reserve, nor shall there be paid out of the united states treasury any united states notes; but the same when received shall be canceled and destroyed, and gold certificates shall be issued therefor. comment:--you will have noted in sections and , also in section , that provision has been made for paying gold into the reserve fund, which is the fund behind the greenbacks or united states notes, and that a corresponding amount of greenbacks are to be canceled and the same amount of gold certificates are to be issued in their place. the amount of greenbacks is $ , , . the present amount of the reserve fund is $ , , . now after we have paid into this fund $ , , , the greenbacks will be converted into gold certificates. we estimate that this will take twelve to fifteen years. then all our bank reserves will, practically, be in gold coin or gold certificates, because the silver certificates will be cut up into one and two dollar pieces and will be token money, in the pockets of the people, the tills of the stores and will constitute small cash for the banks. uncle sam: glory halleluiah! that will be the day i long have sought and mourned because i found it not! boys, your work will be a great relief to me. section . that when substantially all the united states notes shall have been converted into gold certificates, as in this act provided; when practically all of the bank notes secured by government bonds have been returned to the united states treasury and canceled; and when practically all the silver certificates of the larger denominations have been cut up into one and two dollar certificates or coined into subsidiary coins; and when the american reserve bank shall be acting as the fiscal agent of the united states government, it shall thereupon assume the maintenance of the parity of the silver certificates and silver coins with gold coin. comment:--uncle sam may well rejoice because this section, you will observe, provides that the american reserve bank shall then maintain the parity of all his silver with his gold. mr. merchant: gentlemen, have you estimated how much gold your plan would bring into the american reserve bank? mr. banker: yes, sir; we should have approximately one thousand two hundred and fifty million dollars ($ , , , ). mr. merchant: where would this gold come from? mr. banker: partly from what the banks now hold, and partly from the channels of trade. there is about $ , , now in the banks and $ , , in the channels of trade, or $ , , , in the united states. the present _dead reserves, i mean dead reserves held by the banks under a legal prohibition against their use_, and the gold floating around in the cotton fields, corn and wheat fields, in the mining camps, in the stores, and in the pockets of the people generally, would at once be brought to their proper use, vitalized, and mobilized into a common defense of the bank credit of the country; all of it, ready all the time, to meet the demands of commerce, and to protect every bank in a liberal and wise use of its credit. mr. manufacturer: i presume that you have been deeply impressed, as i have, with the importance of protecting our gold reserves from the standpoint of a nation among the great commercial nations of the world. we have learned that there are many forces now acting upon gold, because it is the universal reserve of the world. mr. banker: precisely so, and this fact necessitates this centralization of gold, and that a power be lodged somewhere to protect it from those influences, which, if set in motion, and unobstructed, will rob us of it almost in the twinkling of an eye. only a year ago we saw these influences at work in germany. it was stated that at least $ , , was withdrawn in about sixty days. tomorrow, these same influences may be drawing away our foundations of credit in a similar manner, and we would suffer an irreparable injury, because we are without any means of defense. there are those who seem to think that if we have a balance of trade in our favor, we are safe; but this is only one factor; nor are we certain of this, for any length of time. we are today, literally, living in a fool's paradise, that may disappear while we contemplate it in serenity. history has already taught the world many lessons upon this point, and if we are wise, we will heed them. mr. merchant: mr. banker, just what are the influences that affect the movement of gold to or from the country? mr. banker: in our case, the causes that may influence the movement of gold to or from us, may be summed up as follows: _first_: the balance of trade. _second_: the state of foreign exchange throughout the world. _third_: the state of our currency, that is, the use of substitutes for real reserves; such as united states notes, silver, and bank notes, in place of gold. the present plight of germany is due to her use of bank notes as reserves. it is a vivid illustration. history has furnished hundreds of illustrations; but the most forcible in our recent history was the issue of the united states notes in the sixties, and the effect of the silver purchase act of . gresham's law put into operation will overcome all opposing forces. _fourth_: foreign financing. _fifth_: political disturbances. _sixth_: the state of the money market in foreign financial centres. _seventh_: demands for capital in periods of speculative development in foreign countries. _eighth_: changes in our tariff laws. it is easy to imagine how complicated and powerful these forces might become, and how essential it is that we should be ready to combat them, when the tide turns against us. we must be in a position to buy and sell gold bullion, and to buy and sell domestic and foreign exchange, and to loan a large sum of money, gold, i mean, quickly, through a board of control to stop a panic in some financial centre, and last--and above all, we must hold the chief key to the situation. that key lies, mainly, in the power to fix and enforce a price for the use of gold, in what is popularly called a discount rate for gold, and make it universal throughout the united states. all these objects will be attained by the centralization of about one-half of our reserves in the american reserve bank, and by having them under the direction of a board of men, who come directly from each of the commercial zones, and who are, therefore, responsible to the people of their respective zones. mr. merchant: now, gentlemen, you seem to have completed your report so far as the commercial bank is concerned, and i must say your plan looks good to me; but, i want to ask you something before we leave this question, and that is, why did the english bank act of provide that only the bank of england should issue bank notes, and why did germany follow in her footsteps in , by giving to the imperial bank the sole right of note issue? mr. banker: i am very glad that you have asked that question, because it is often a stumbling block to those beginning the study of this subject. one naturally says to himself, if this plan of a central bank of issue is good enough for england and germany, why should we not adopt it here? in the first place, the two banks act upon entirely different principles, and in both cases their theories, so far as their note issues are concerned, have broken down. in the bank of england suspended specie payments, and during the napoleonic wars issued an unwarranted amount of paper or notes, which led to wild speculation. at the same time, the country banks joined in the frenzy, and issued large quantities of notes also. all the paper became greatly depreciated, causing such a derangement of commerce as to call for a public investigation. the bullion report of , the most profound economic and important statement ever made in the history of banking, followed. this declared that the mere numerical amount of notes in circulation at any time was no criterion whatever of their being excessive. the bullion report declared _that the only sure criterion was to be found in the price of gold bullion and the state of the exchanges_. ricardo says: "the issuers of paper money should regulate their issues solely by the price of bullion and never by the quantity of their paper in circulation. the quantity can never be too great or too little, while it preserves the same value as the standard." if ricardo had used the words _bank credit_, instead of _paper money_, it would have been technically more correct. this statement of ricardo, and that contained in the bullion report, constitute the very soul of this subject, so far as bank credit in any form (bank notes or bank deposits, which are identical) and gold are concerned. reserves in gold, in sufficient quantity to redeem all bank credit, deposits as well as notes, are essential. do not forget that. of course, gold will be seldom called for, but it must be forthcoming if demanded. no better illustration of the ricardo principle can be found anywhere in the history of banking than in the banks of virginia, louisiana, kentucky, ohio, indiana, iowa, and missouri before the war. this principle, announced in the bullion report was rejected by the house of commons, and was not recognized by the bank of england, or english bankers generally. from to bank notes were thought good enough for reserves, that is, the basis of other credit. there were constantly recurring business disturbances and banking troubles up to , when the bank of england resumed specie payments. in gold began to leave england again, and continued to go throughout , when the crisis came. in the bank seemed to be convinced that the principles of the bullion report were correct, and it tried to apply them in part. in and there was more financial trouble, and again at the end of another serious period arrived. by the end of the specie had dropped from $ , , to $ , , . all these adverse experiences convinced the public that something was radically wrong. there then appeared upon the scene lord overstone, mr. norman, col. torrens and other influential writers, who maintained that the amount of bank notes should not exceed the amount of bullion, and that it was the excess of bank notes over the amount of bullion or gold that sent the gold out of the country. they carried the day, and even converted peel to their way of thinking. the bank charter expired in . they thought that they had now found a panacea for all their ills; it was the so-called _currency principle_; that is, that bank notes should not exceed the amount of specie. in adjusting the matter, they did issue bank notes against $ , , of government securities, which was in direct violation of their own contention. they did not have to wait long to see how completely they were mistaken. their contention was, that if the bank only issued notes against specie, the people would have to bring the notes to get specie. the bank kept right on taking deposits and making loans, apparently with no knowledge of the fact that it made no difference what kind of debt the bank incurred, whether in the form of a deposit or in the form of a note, it would have to be paid in specie if the check holder wanted the specie, just as much as the note holder wanted the specie. many business disasters occurred in . the new scheme was to be put to the test within two years after the english bank act was passed. on aug. , , the amount of bullion in the bank was $ , , . the bank notes outstanding were $ , , . by jan. , , the bullion was down to $ , , . the bank notes outstanding were $ , , . by april , , the bullion was down to $ , , . the bank notes outstanding were $ , , . _it was demonstrated beyond question, you see, that you could get gold with a check just as easily as with a bank note; for, while $ , , of bullion had disappeared, the amount of the bank notes outstanding remained the same. in other words, the bank notes were not retired as the gold was withdrawn, which was the whole theory upon which the bank act of was based._ the bank act had failed completely and utterly to accomplish what it was designed to do. there could have been no more abject failure. it was upon this occasion that the bank employed, for the first time, either by accident or with intention, the principle that was subsequently, in , expounded by macleod. he states the principle thus, "that when the rate of discount between two places differs by more than sufficient to pay the cost of transmitting bullion from one place to another, bullion will flow from where discount is lower to where it is higher." while the bank of england seemed to have employed this principle in , it acted too slowly and very feebly. it lost a large part of its gold before it raised its rate of discount, and then it raised it only to - / per cent, then to per cent, and finally to per cent. the world has since learned the power of this weapon; but it is not all-powerful against any odds, as we have seen in watching the withdrawal of gold from germany during the time when there was a possibility of war with france. when i started to answer your question, i said that both the english and german banks had failed to accomplish the particular things which they had set out to do. i think you will admit that i have demonstrated my contention with regard to the bank of england. now, the plight of germany is this: she had supposed that she could create true bank reserves out of bank credits, but that scheme has completely broken down. her own commission appointed to revise the bank act during the past year has just recommended that the individual banks carry their own coin reserve. now, gentlemen, there is no point in common between england, germany, and france, so far as note issues go. the bank act of took away from the bank of england the power of note issue, and reduced the bank to identically the same position that the united states treasury is in, with regard to the gold certificates; that is, the bank act reduced the bank to a mere warehouse, with the power to issue gold certificates in the form of bank notes. the bank of england has no more authority to issue bank currency than the new york clearing house has; not a bit. the imperial bank of germany issues notes against per cent of coin and other collateral. the bank of france issues notes without reference to any particular amount of coin, but carries an enormous gold reserve, averaging about per cent of its note issue. the bank of england usually carries about $ , , in gold, and has outstanding about $ , , bank notes; the difference between the gold and this amount being covered by government securities. her deposits are $ , , . the imperial bank of germany carries about $ , , of gold, and has outstanding about $ , , bank notes. her deposits are about $ , , . the bank of france holds about $ , , of gold, and has outstanding about one billion dollars of notes ($ , , , ). her deposits are usually about $ , , . mr. merchant: it is true that there does not seem to be any great similarity in the condition of these three institutions. the points of contrast are as great as the points of likeness. england is a great check using country; hence, there are few notes. france is a great note using country; hence, comparatively few deposits are kept, while germany seems to occupy a middle ground between the two. the bank of france has been operated upon the principle laid down in the ricardo axiom, and also in accordance with the principles enunciated in the bullion report. but france is handicapped by the load of silver she is carrying, which amounts to about $ , , ; and germany is greatly handicapped by the fact that her use of bank notes as reserves has prevented her, as she now discovers, from accumulating a proper amount of gold to adequately protect her bank credits. the result is, that neither germany nor france are open markets for gold; both throwing trammels and obstacles in the way, if you desire to get gold in either country. the entire commercial world is conscious of the difficulties you are under when trying to take gold away from paris or berlin. bills of exchange drawn in pounds, shillings, and pence are preferable the world over to any other; because the bank of england is an open market for gold at the current price. mr. lawyer: mr. banker, since you cannot institute a comparison between these three banks in the matter of note issues, in what respect do they have a common purpose? mr. banker: in only one single respect is there a common factor in all of them, and that is, that each of them carries the final reserves of its country. this is the one common fact, the all important fact, because without this massing of their reserves two essential results could not be achieved. first, a panic of any proportion could not be quickly and successfully met. second, no one of them would have any means whatever of protecting its gold against the drafts that the rest of the commercial world is likely to make upon it at any time, nor any power of adding to its gold in case of some great necessity growing out of a crisis. mr. merchant: recently we have heard repeatedly that, while we were having our ever-recurring spasms or panics in business, the countries with central banks were not suffering in the same way. is it not a fact that canada has been just as free from these spasms and panics as any country in the world, and yet canada has no central bank? mr. banker: yes, that is true. it never occurred to me before, but i should say that canada was, if anything, much freer from these convulsions and panics, as you call them, than any other country. mr. lawyer: i agree with you. there has not been the suggestion of such a thing, as far back as i can remember--thirty or forty years. now, since canada has not a central bank but twenty-seven banks, the protection against these disturbances or panics must lie deeper and more fundamental. what is it? it cannot be the central bank idea, because germany has been having a vast amount of trouble for more than a year, and at the present time seems to have plenty in store for her. mr. banker: yes, it does lie deeper than your mere form of organization; i think i can explain it so that every man here can understand and appreciate it. the reasons are fundamental and economic: _first_, there must be ample _gold reserves and elasticity in those reserves_. without any law with regard to the amount of reserves to be carried the banks of canada carry about per cent, and since no specified reserves are required there is perfect elasticity in their reserves. _second_: there must be convertibility, if necessity requires it and precisely to the extent required, of bank book credits into bank note credits. bank credit currency in canada amounts at its maximum to $ per capita and the variation averages now about $ per capita. the same ratio would give us an expansion and contraction every fall of about $ , , without changing our reserves to the extent of a single cent. mr. farmer: i catch on to that. two principles are involved and it doesn't make any difference how you apply them, only so that they are in operation. _the first is the principle of ample coin reserves and their elastic adjustment to current commercial needs. the second principle is the interchangeability of bank book credits and bank note credits and their current convertibility into coin._ mr. banker: that is the whole thing in a nut-shell, outside of the principle of a central gold reserve, and it doesn't make any difference whether you apply those principles to one bank or to twenty-seven banks, as in canada at present, or to five hundred banks, as in the suffolk system before the war, or to our twenty-five thousand banks today. mr. manufacturer: as i understand the bill you have prepared, our american reserve bank will have no liabilities whatever, and yet it will have more gold than all of these three countries combined. mr. banker: that is correct. you see, there are just three reasons for the existence of the american reserve bank: _first_: by it, all the banking power of the united states stands ready to help every individual bank move the crops; and, in case a panic breaks out, to protect every individual bank. _second_: by it, we shall always be in a position to control and direct the movement of gold to and from the united states. _third_: by it, we have completely decentralized bank credit; because each zone can rely absolutely upon the centralization of the gold reserves to assist it whenever necessary; so also can every individual bank. national land credit bank section . that the national land credit bank is hereby created and established upon the organization of the following institutions as prescribed: _first_: the local land credit association. _second_: the state land credit association. _third_: the national land credit bank. section . that no more than fifty persons and no less than twenty-five persons may associate themselves together in any state of the united states under the name of ---- land credit association, and be known as a local association. section . that the capital stock of each local association shall be twenty-five thousand dollars, no more, no less; and it shall be paid up in full in cash. the par value of the stock of such association shall be one hundred dollars. section . that any person may become a member of a local association by owning one or more shares of the stock, but no member of an association shall own more than twenty-five shares thereof. section . that every local association, each member voting the number of shares owned by him, shall elect an executive committee composed of five members and a secretary and treasurer of said local association. the committee shall choose its own chairman. section . that the term of service of the members of the committee shall be one year. section . that no member of a local association shall transfer his stock to any other person without the unanimous approval of the executive committee, evidenced by the signatures of such committee upon the records of the association and by the signature of the chairman of said committee upon the certificate of stock, which shall be transferable only by such signature: _provided, however_, that any person desiring to sell his stock may appeal from the decision of the executive committee to the members of such local association. section . that the total amount of loans that any local association can make is twenty times the amount of its capital stock, or five hundred thousand dollars. section . that the executive committee may take applications for loans and recommend the same for favorable consideration to the board of managers of the state association, but no loans shall be made except upon improved productive agricultural lands, and then only for per centum of a fair valuation thereof. section . that all compensation, if any, to the executive committee and the secretary and the treasurer and all expense of the local association of every kind whatsoever shall be derived from charges made for services rendered in connection with the various applications made to them and for services rendered in connection with loans already made. each association shall fix its own scale of charges, if any are made. section . that no loan shall be considered or consummated in any state until there are organized in such state at least twenty local associations in accordance with sections two, three, four and five of this act and until at least five hundred thousand dollars have been paid up in cash. section . that when at least twenty such local associations have been organized in any one state the governor of such state, upon being informed of this fact, shall name a time and place for meeting, and the members of the several associations shall meet in person, or by legal proxy duly representing their respective shares, for the purpose of organizing a state land credit association. section . that the state land credit association shall be organized under the name of (here insert name of state where located) land credit association and be known as a state association. section . that every state association shall have a board of managers, which shall consist of seven members, who shall be elected by the shareholders of the several local associations in the state present or duly represented by legal proxies. section . that the members of the board of managers shall hold office for the period of seven years: _provided, however_, that the seven first elected shall hold office for one, two, three, four, five, six, and seven years, respectively, and they shall determine by lot how long each member shall serve. section . that the officers of each state association shall consist of a president, vice-president, secretary, treasurer, and attorney. the said officers shall be members of the board of managers, except the secretary and treasurer, who may or may not be members. section . that the officers named in the preceding section shall be appointed by the shareholders of the several local associations present or duly represented by legal proxies. section . that the salaries to be paid the officers of each state association shall be fixed by the shareholders of the several local associations of such state present or duly represented by legal proxy. all such salaries and all the expenses of whatsoever kind incurred in carrying on the business of the state associations shall be paid out of fees or charges made upon the business done in that state. section . that the place of business of the state association shall be fixed by the shareholders of the local associations of the respective states present or duly represented by legal proxy. section . that all applications for loans made to any local association and duly recommended by the executive committee thereof after a personal examination of the property and a full report in accordance with such rules, regulations, and forms as the board of managers of the state association may prescribe shall be examined and considered by said board of managers. section . that no loan shall be made by any state association unless the same has been approved in writing by at least five members of the board of managers in a record of loans kept especially for that purpose by the state association; nor until such approval shall also be signed by the attorney of the state association stating that he has examined the title to the property and that it is free and clear and that the loan is a first lien upon the property described in the conveyance. section . that no loans shall be made upon any property unless an absolute conveyance of the same shall be made by the owner thereof to the state association of the state where the land is located, in such form and manner as the attorney of such association shall prescribe; and the owner shall lawfully waive any claim or right of defense that he might otherwise have in case of foreclosure proceedings under the laws of the state in which the real estate is located. and, further, the owner of said real estate shall, in such manner and form as the attorney of the association shall prescribe, appoint the local association through which the loan was negotiated as a trustee for the benefit of the state association to take possession of the property in case of default in payment of interest, taxes, or insurance, or in case of waste of any kind, and shall give such local association full authority and power to manage the property, or sell the same whenever, in the judgment of the executive committee of such local association, it is advisable to do so: _provided, however_, that such sales shall be made only after the property has been duly advertised in accordance with the law made and provided for sale of real estate in the state where located after foreclosure proceedings have been had and judgment entered. section . that all money loaned shall be furnished through the several state associations, and shall be paid by check or draft, and full records shall be kept by the several state associations of all loans made in their respective states of every transaction connected with such loans. the state association shall have full and entire charge of all loans made and outstanding in their respective states, the collection of interest, the payment of taxes, the care of insurance, and the repayment of the loan by the borrower, which shall always be to the state association of the state where the real estate is situated. section . that no loans shall be made by any state association until-- _first_: there have been organized in the united states at least one thousand local associations, in accordance with sections ninety-nine, one hundred, one hundred and one, and one hundred and two of this act. _second_: until at least twenty state associations have been organized in accordance with sections one hundred and ten, one hundred and eleven, and one hundred and twelve of this act. _third_: until there has been paid up in cash the sum of twenty-five million dollars. _fourth_: until there has been organized, as hereinafter provided, the national land credit bank. section . that as soon as there have been organized at least one thousand local associations and at least twenty state associations, as herein provided, the president of the united states shall be notified of these facts, and he shall thereupon name a time and place in the city of washington, district of columbia, for the organization of the national land credit bank, and he shall advise all the local associations whose names and addresses have been furnished him of such time and place of meeting and the purpose therefor. section . that, pursuant to the notice of the president of the united states provided in the preceding section, each local association of the several states where state associations shall have been organized shall send one representative to washington for the purpose of organizing the national land credit bank. each representative of a local association shall have one vote, but any association may be represented by a proxy in such legal form as is prescribed by the laws of the state where such local association is situated. section . that the board of directors of the national land credit bank shall consist of seventeen members, as follows: _first_: fifteen members of such board of directors shall be elected by the representatives of the local association present in person or by proxy. _second_: the secretary of agriculture of the united states shall ex officio be a member of said board. _third_: the president shall appoint a united states auditor, with the consent and approval of at least two-thirds of the members of the board elected by the representatives of the association. the term of service of the auditor shall be five years, and he shall be a member of the board of directors of said national land credit bank. section . that the members of the board of directors of the national land credit bank who have been elected by the representatives of the local associations shall serve for a period of five years: _provided, however_, that those first elected shall serve for one, two, three, four, and five years, respectively, and they shall divide themselves into five groups, and thereupon determine by lot how long each group shall serve. section . that the officers of the national land credit bank shall consist of a president, vice-president, secretary, treasurer, and auditor. section . that the officers of the national land credit bank, except the auditor, shall be appointed by the board of directors of said national land credit bank, and they shall receive such salaries as the board of directors may determine: _provided, however_, that the president shall receive eighteen thousand dollars per annum and that the auditor shall receive six thousand dollars per annum. section . that the city or place where the national land credit bank shall conduct its business shall be selected and determined by the representatives of the local associations present in person or by proxy. section . that the annual meetings of the local associations shall be held on the first monday of april in each year. the annual meeting of the state association shall be held on the first monday of may in each year. the annual meeting of the national land credit bank shall be held in the first monday of june in each year. section . that upon the completion of the organization of the national land credit bank, as herein provided, each local association shall transfer and pay over to the national land credit bank per centum or one-half of their cash paid-up capital amounting in the aggregate to at least twelve million five hundred thousand dollars, and they shall also transfer and pay over to their respective state associations per centum or one-quarter of their cash paid-up capital amounting in the aggregate to at least six million two hundred and fifty thousand dollars. section . that the cash capital so paid over to the national land credit bank and the cash capital so paid over to the several state associations, as provided in the preceding section, shall become the absolute property of the national land credit bank, and of such state associations, as completely and absolutely as if the same amount had been paid directly to them for stock issued. for the amount of money so received by the national land credit bank and the amount so received by the state association from the local associations the said national land credit bank and the several state associations shall issue their several receipts in such legal form as to entitle them to a pro rata share of the assets of the said national land credit bank and the several state associations upon the distribution thereof, subject, however, to the claims of all holders of the obligations of whatsoever kind issued and outstanding of the national land credit bank. section . that every local association, every state association, and the national land credit bank shall each of them be, and they are hereby, made legally constituted bodies corporate that may sue and be sued in any united states court which may have jurisdiction of the subject matter of the action brought. section . that the said national land credit bank, the several state associations, and the several local associations may severally invest their capital and surplus in mortgages token as herein prescribed, or in the obligations of the national land credit bank, or in united states government securities. they may severally borrow money in the regular course of their business either upon their credit or by pledging any of the securities they may own. section . that neither any local association nor any state association nor the national land credit bank shall take deposits in any form, either subject to check or upon time, except for investment in the obligation of the national land credit bank; and any one of these institutions that shall take a deposit of any kind, except as herein provided, shall pay to the united states government a tax thereon of per centum per annum, nor shall any one of these institutions loan money in any other manner or form than as herein provided. upon any loan made by any one of them upon personal security, or in any other manner or form than as herein provided, shall pay a tax thereon to the united states government of per centum per annum. section . that the national land credit bank shall have power, and is hereby authorized, to issue and sell or dispose of its own obligations in the form of bonds, debentures, or under any other name, and bearing such rates of interest, and in such manner and form, and upon such terms and conditions as to time to run, and manner and method of payment as the board of directors may determine from time to time. section . that the mortgages held by any local association, or by any state association, or by the national land credit bank, such mortgages having been taken in accordance with the provisions of this act, and all the obligations, bonds, or debentures issued by the national land credit bank under the authority granted by this act, shall be exempt from all taxes or duties of the united states government, as well as from taxation in any form by or under any state, municipality or local authority. section . that all advances of money upon loans made by the several local associations shall be under the control and under the direction of the board of directors of the national land credit bank, and the rate of interest to be charged on all such loans made shall be fixed from time to time by said board of directors. section . that at the end of each year the united states auditor shall make a full report of all the institutions organized under this act, and such reports shall show what the profits are of the national land credit bank, and of the several state associations, and of each of the local associations, respectively. thereupon the board of directors of the national land credit bank shall set apart one-half of the net profits so certified to by the united states auditor as a part of its surplus account, and may carry the balance as undivided profits, or may declare such a dividend out of its undivided profits as in their judgment seems wise. section . that the amount paid out in dividends by the national land credit bank shall always be divided equally between the state associations and the local associations in proportion to the capital held by them and the local associations. section . that the board of managers of the several state associations shall thereupon set apart one-half of the net profits so certified to by the united states auditor as a part of its surplus account and may carry the balance as undivided profits and may declare and pay such a dividend out of the undivided profits as in their judgment seems wise. the executive committee of the several local associations shall set apart one-half of the net profits so certified to by the united states auditor as a part of its surplus account and may carry the balance as undivided profits, or may declare and pay such a dividend out of the undivided profits as in their judgment seems wise. section . that when the surplus account of the national land credit bank shall be equal to per centum of the capital money so paid over to it by the several associations, the board of directors may declare such additional dividend as in their judgment may seem wise: _provided, however_, that no such increase, or extra dividend, shall ever reduce the surplus below said per centum of the capital so held by it. the same rule herein laid down for the payment of dividends by the national land credit bank shall apply to the several state associations and each and all of the local associations. section . that if it shall become necessary at any time for a local association to take possession of real estate upon which a loan has been made and sell the same, the profit or loss thereon shall be shared by the several institutions in the same proportion as the capital is held by them; that is, the national land credit bank shall share one-half of the profit or loss, the state institution making the loan shall share one-quarter of the profit or loss, and the local association recommending the loan shall share one-quarter of the profit or loss. comment:--_first_: sufficient responsibility should be imposed upon each local association to compel it to look after all delinquents diligently. _second_: sufficient responsibility should be imposed upon each state association to compel it to look after every loan in the state with promptness and persistency. section . that if any local association shall be formed at any time after the organization of the national land credit bank, before it goes into actual operation such local association desiring to become a member of a state association shall first be compelled to obtain the unanimous consent of the board of managers of the state association in which the proposed local association is situated and shall pay for its shares such a price as may be fixed from time to time by the board of directors of the national land credit bank for the admission of new associations. section . that all the expenses of whatsoever kind growing out of the management of the national land credit bank shall be paid out of the earnings thereof. section . that the entire surplus of the national land credit bank and the surplus of the state associations and the surplus of the local associations shall be held as a working balance, and also as a fund which may be withdrawn for investment in bonds or other securities of the united states. the president of the united states may direct that the whole of said surplus be invested in the bonds or other securities of the united states if, in his judgment, the general welfare and the interests of the united states require. section . that for the purpose of creating and establishing the organization provided for in this act and putting the same into operation there is hereby appropriated the sum of three hundred thousand dollars, or so much thereof as may be necessary, as a loan to the national land credit bank, at the rate of per centum per annum until paid: _provided, however_, that this loan shall not extend beyond the period of ten years. section . that to accomplish the purpose of this act the governor of each state is hereby authorized and empowered to appoint some citizen of his state to organize at least twenty local associations in his state in accordance with the provisions of this act, and such appointee is hereby authorized to expend not to exceed six thousand dollars in such undertaking. upon the completion of the organization of at least twenty local associations under and in accordance with the provisions of this act the amount of money so expended not to exceed six thousand dollars will be repaid to such appointee of any governor upon the presentation of vouchers for the money so actually expended duly signed by the governor of the state to the treasurer of the united states. section . that the governor of the state in which at least twenty of such local associations have been organized as in this act provided shall thereupon report in detail to the president of the united states, giving him the names and addresses of the local associations so organized, the names of the chairmen of the respective executive committees and their post-office addresses, and the names of the banks and their respective post-office addresses in which the several local associations have deposited the paid-up capital of twenty-five thousand dollars each, together with duplicate letters of receipt of the money from said bank. section . that if any governor of any state shall fail to make a report within nine months after the passage of this act that at least twenty local associations have been organized as in this act provided, then and in that event the allotment of the six thousand dollars to pay the expenses for the organization of at least twenty local associations in his state may be used proportionately to pay the expenses, if any, of organizing local associations in any other state or states in excess of the required number necessary to establish a state association--that is, the amount remaining unearned by any of the states shall be apportioned to the several states reporting more than twenty local associations directly in proportion to the number in excess thereof, preference, however, always being given to the states whose average expenses are lowest for the organization of their several associations. mr. lawyer: gentlemen, this concludes the results of our labor and i want to express the solicitude of your committee in proposing this bill and the hope that it may in a large measure meet your expectations. uncle sam: well, boys, speaking for the crowd, i want to say that i did not believe that the committee would be able to make its report for a month. upon my soul, i did not expect that they would ever make so satisfactory a report. they seem to have thoroughly comprehended all the subjects we have discussed and to have produced a financial and banking bill that will meet every question that can possibly arise; one that will protect every individual bank in its independence; one that will protect every commercial zone in its independence; and one that will protect my reserves against the demands of all the rest of the world. mr. lawyer: those are precisely the things we have striven to accomplish, uncle sam. mr. merchant: during the past week i ran into a friend of mine who is in the banking business and considering that we were practically through with our work, i told him what i had been doing the past four months without giving him your names. "well," he said, "i want to give you a pointer. if you are following along the trail of the aldrich scheme you had better drop it; you had better save your time, because the people are on to that deal and they won't stand for it. you will have to make it clear that you are working from an entirely different point of view." this remark of his opened my eyes and i am going to suggest that we spend one night demonstrating the striking, the fundamental points of difference between our bill and that aldrich scheme. mr. merchant: i am convinced that we should do that very thing and i propose and move that we meet next wednesday night for that purpose. mr. banker: to make a clean job of our work, i believe that is essential; because hundreds and hundreds of thousands of dollars have been expended in promoting that scheme, therefore, i second that motion. uncle sam: the motion is carried and now good night, all. * * * * * to you, uncle sam, we, the representatives of the farmers, bankers, lawyers, laboring-men, merchants and manufacturers, dedicate the result of our endeavor, our future services, indeed, our lives; and we pledge our callings, every one of them, to continue the work here begun with that degree of vigilance and patriotism of which this great cause is worthy, confident that the result of our efforts will be to safeguard your honor and establish you upon the solid foundations of a sound financial and banking system. [illustration: wont you walk into my parlor said the spider to the fly the aldrich plan and plot exposed] seventeenth night aldrich plan and plot exposed uncle sam: from what you boys intimated the other night, i got the impression that the so-called aldrich scheme demonstrated almost everything that we should not do in working out a financial and banking system. it must have been more or less of a warning to you, then, when you started out. mr. lawyer: to tell the truth, i had become so convinced of its ulterior purposes from the standpoint of management, that i never studied it seriously from an economic point of view, until this last week. mr. banker: my position was just the reverse of that of mr. lawyer, for while i had studied it from an economic point of view and that of a practical banker, and had become so convinced of its utter unsoundness on the one hand, and unfitness for use to ninety-nine out of every hundred of american banks, i never dug into the soul of its management, until the past week. so we compared notes, and found the situation particularly interesting. mr. merchant: before you go any further, i want to read something from a speech, delivered in congress march , , two years before the aldrich plan was born. you are all doubtless aware that the aldrich scheme was nothing more nor less than an attempt to transfer to this country the german scheme of note issue and banking generally. mr. laboringman: i heard the other day, that the aldrich bill was deader than a door-nail. why do we want to spend any time on that? or, are you fellows like the irishman, who said that he was kicking a dead dog to teach him that there was such a thing as punishment after death? mr. merchant: you must remember, mr. laboringman, that error is always repeating itself, and that sin and iniquity never die; so, the economic blunders of the aldrich bill and its administrative purposes should be exposed and held up as a lesson and an illustration to guide us in the future. what i wanted to read, was a part of congressman fowler's speech, delivered in the house of representatives. referring to the german banking situation, he said: "the position of both england and france, under present conditions, would seem sound and impregnable from a governmental as well as a banking point of view. each has planted itself upon the gold standard, with certain precautions peculiar to its circumstances. germany, on the other hand, has not pursued the course of england, with its limited gold reserve, forcing the public into the deposit and check system to meet the current demands of trade. this would have been impossible without a long-continued ruinous revolution, considering that there is a quarterly settlement in germany that calls for an expansion in currency amounting to $ , , . nor has germany pursued the course of france, which has a gold reserve large enough to meet any test or burden that either the government or the commerce of germany might have imposed upon it, but has adopted a middle course which has not the strength of the position of either england or france, nor the credit facility of france. "its gold reserve is of the halfway sort, and its bank note issue is also of the halfway sort. the result is that the financial and banking situation of germany must necessarily prove weak upon the first great test when the bank notes of the imperial bank of germany must be made a legal tender. "indeed, upon the declaration of war by germany or against germany, the first step taken in a financial way would be for her to declare her bank notes a legal tender. it is hardly problematical what would soon happen, with the wide divergence between her gold fund and the amount of her note issue." gentlemen, within eighteen months after he made that statement, when war seemed probable with france, germany made her bank notes a legal tender. further along in the same speech, commenting upon the unsoundness of the german plan, he said: "imagine for a moment a central bank in the united states, like the imperial bank of germany, issuing all our bank note currency and these notes going into the reserves of our myriad of banks as the basis of loans which, under our system, in turn become our deposits. "the natural, first, and immediate effect would be an expansion of credit, an inflation to just the extent to which the notes were used for reserves. "as soon as the situation became obviously dangerous, a halt would be called and a contraction in loans would follow. but a contraction of loans calls for liquidation, and liquidation produces an exigent demand for currency. we all learned that lesson only so short a time ago as . "but in the very face of the increased demand for more currency the currency would be contracting, because the loans would be reduced by calling in bank notes which were being used for reserves; or, in other words, the loans called would be paid in bank notes. "for every $ , of notes so called in the loans might be reduced to an average of $ , , and yet this very process of liquidation would be concurrently destroying the only instruments of credit that would adequately meet the demand created by forced contraction. it would clearly lead to self-destruction, to commercial suicide. "the best thought of england recognizes this subtle but obviously destructive contradiction in the use of credit, and therefore opposes the use of credit notes by the bank of england." _gentlemen, the fact that we can force our banks to carry a specified amount of reserves and of a specified quality, by the power of taxation, will preclude the use of bank notes as reserves in the united states._ mr. fowler then concludes as follows: "there are then, in addition to all of the objections to the bank of france, three other unanswerable objections to the establishment in this country of any central organization approaching in character the imperial bank of germany: "_first_: it would give us a financial and banking structure so weak that it could not stand any great strain such as necessarily comes with a great war, if, indeed, it were not so weak as to lead to a suspension of gold payments even in time of peace. "_second_: no thought whatever should be given to any suggestion that makes it possible for one bank credit to be used in the reserves of another bank and so substitute any form of credit for gold in our bank reserves. "unless gold alone is ultimately recognized as fit for bank reserves, we shall continue to pay dearly for our mistake until it is corrected. "_third_: no proposal whatever should be entertained by us that involves the possibility of the suspension of gold payments, for no country can become the clearing house of the world that is not a free market for gold. the united states and not england ought to be the clearing house of the world." these words, as i have said, were spoken about two years before mr. aldrich attempted to import the german bank into this country. mr. banker: that is very interesting and prophetic, but not more so than his speech at the republican club of new york, january , . let me read that to you, gentlemen, by way of an exposition of the economic faults of the so-called aldrich scheme. he said: "i wish to speak purely from an economic point of view and to cover only one single phase of the proposal; its dangerous expansion, unbounded inflation and certain expulsion of gold from the country. "'_first_: nothing should ever go into the reserves of the banks of a country except what is coined out of its standard of value. "'_second_: the poorer money always drives out the better.' "every single note of the so-called reserve association used in the reserves of our banks will displace just that much gold and drive it out of the country. "judged, therefore, from a purely economic point of view, i assert that the reserve association plan is the most unsound, the most dangerous; indeed, it is absolutely the worst proposal that has been brought forward for serious consideration by any respectable body of men since the adoption of the constitution, with the two following exceptions: first, the issue of legal tender money by the government such as greenbacks; second, the free and unlimited coinage of silver at the ratio of to . "an officer of one of the largest banks of the united states recently used this language: 'mr. fowler, it is incredible that we should be called upon to consider such a proposition.' "if this is really true, how does it happen, that so many business men and so many bankers approve it, is a most natural inquiry. the cause is not difficult to perceive. "there is not a business man nor hardly a banker who is not even now still living in a state of fright from the terror of . one thought alone seems to have taken possession of the country to the exclusion of everything else, and that thought is this: that we must hereafter be able to convert our commercial credits into bank or current credits. there seems to be something approaching madness; indeed, there seems to be an insane haste lest they be caught again, possibly tomorrow, certainly next fall. but they need not worry, for danger is not imminent; will not come again right away. "during the past two years up to the present time the entire thought of the country has been directed to a mere mechanism to achieve this result, without any reference to or consideration whatever of those fundamental, eternal principles of banking economics that demand recognition and obedience if we are to escape the frightful penalties which their violation always inflicts. "in the outset i want to lay down two fundamental laws that i wish were burned into the minds of every banker and every business man within the borders of this republic. they are these: "one--nothing should ever be counted as a reserve which is not coined out of the standard of value. our standard of value is gold, therefore nothing should go into the reserves of our banks except gold. "two--the poorer money always drives out the better. "i hope that whoever hears these words will commit these two laws to memory, for they are as fundamental and eternal in their operation as the law of gravitation. "i assert that the plan of the so-called reserve association is in direct violation of the first of these laws, and will put the second law into operation to a dangerous and destructive degree. "every intelligent student knows that the plan proposes to transport to this country the german system of banking, which i assert has completely broken down at home during the past six months. now, if this system has broken down in germany, where there are a few great banks with hundreds of millions of assets and not more than banks all told, what can you expect it to do here with more than , individual, independent banks, directly responsible to their depositors? "the following letter was given to me by an officer of one of our largest banks, accompanied with these words: "'i realize that in giving you this letter i am, in a way, betraying a business confidence, but i regard it as my patriotic duty to give it to you, to use in any way you may see fit. for what would happen to this bank if we should send out such a letter to our depositors? our doors would be closed inside of twenty-four hours.'" the letter referred to was written by the deutsche bank of berlin, which has assets approximating $ , , , and is as follows: "'in consequence of the restrictions recently made by the imperial bank, with regard to the supply of money at the end of every quarter of the year, we are, to our regret, compelled to ask you, when drawing against your account with us upon our head office and our branches by mail, kindly to advise us by cable of such drafts on them as are likely to come forward for payment during the last three working days of the quarter and the following two working days, so as to enable us to provide from here especially the necessary funds at the office drawn upon. "'as to cable transfers which, during the five days in question, you may have to order on our head office or branches, to the debit of your account with us, we shall feel obliged by your ordering them only if you can advise us by cable one day before, the amounts to be placed by us to your debit on receipt of such advice, or ordering upon us for mail transfer from here. "'the foregoing, of course, does not apply to small amounts.' "as a further proof that the system has broken down at home, let us see what has been going on in germany during the past six months to further demonstrate the weakness of their system. "the great banks of germany have been scouring the markets of the world, going into every nook and corner, hunting for gold. at what price? was it at per cent, per cent, per cent, per cent, per cent, per cent? no. the new york _evening post_, in its annual review, says it was from per cent to per cent. i have been credibly informed that the great banks of germany, with hundreds of millions of assets, were borrowing money in our own markets at - / per cent and - / per cent for three months, or upwards of per cent. "i was told of one loan to one of the largest banks in berlin, running for a whole year at per cent. "think of it! what would the condition in our country have to be before the national city, the bank of commerce and the first national of new york, and the first national and continental commercial of chicago, were scouring all quarters of the globe for gold and paying from to per cent for the loans? "the imperial bank of germany could not save the few great banks of germany. what would the same kind of an institution in the united states do for , independent banks under the same circumstances, all pulling at the skirts of this proposed financial balloon? the imperial bank could not make real money out of paper credit when the crisis came. "let me ask the , individual independent banks of america, what they would do when the day of contraction and refusal came? where would you go for gold with your comparatively small capital and limited credit? "the financial situation in germany is by far the weakest of all the great nations of europe and the cause is not far to find nor difficult to detect. "their notes, which are based upon only per cent of gold and per cent of commercial credits, are used as reserves and made the basis of additional credits. economically speaking, whenever a bank puts anything into its reserves it makes that thing a legal tender and exactly to that extent displaces that much gold, if gold is the standard of value. "during the ten years from to the gold accumulated by russia amounted to upward of $ , , ; that accumulated by france, upward of $ , , ; that accumulated by england, where nothing but gold is treated as reserves and where there has been comparatively little growth in business, $ , , . the united states accumulated $ , , , , while germany, with all her development of trade during the last ten years, accumulated only $ , , of gold when it ought to have been ten times as much, all things considered, or $ , , . if she had done this she would not have been compelled to send her great financial institutions all over the globe in search of gold and been compelled to pay per cent and per cent for it." gentlemen, within sixty days after those words were uttered, this conversation was reported to have taken place. the german emperor asked herr havenstein, the president of the imperial bank of germany, whether germany was prepared, financially, to carry on a war with a first-class power. herr havenstein said: "no." to this the german emperor replied, "i do not want that answer to that question when i ask it again." herr havenstein immediately called the managers of the thirty great banks together, and told them that they must collect at least a per cent reserve. to this they protested, saying that it meant the accumulation of at least $ , , in gold; but havenstein persisted and insisted upon his demand. now, gentlemen, if you add the $ , , they had accumulated, to what havenstein insisted that they should accumulate, or $ , , , you have $ , , as a minimum. it is altogether probable that $ , , was nearer what they should have accumulated. it should be noted in this very connection, that germany recently appointed a commission to investigate her banking system, and that this commission reported that the individual banks of germany should carry their own reserves, precisely as congressman fowler has always contended, declaring that it is especially important in the case of our individual, independent banking system. from what has been said, it has been demonstrated that every criticism that he has made of the german system, has been confirmed by their own subsequent action. the rest of his speech was as follows: "mark this: if we did not have the $ , , united states notes or greenbacks, the $ , , of legal tender silver and a part of the $ , , national bank notes in the reserves of our banks, we would now have in the united states $ , , , of gold instead of only $ , , , . does all this prove nothing to us? "every intelligent student of economics knows that after alexander hamilton, with the acquiescence and approval of jefferson, had fixed the ratio of the gold and silver dollar in , a differential of only one-half to one per cent drove all the gold out of the country by , and that from to the changed ratio drove every dollar of silver out of circulation. who does not know that from to the issue of fiat government paper drove every dollar of gold out of the country; that for seventeen years we were off the gold standard, resuming specie payments in ? "has any banker over fifty years of age forgotten the silver struggle from to , when, because of the silver purchase act by which we only added $ , , a year to our reserve money, we came to the very precipice of repudiation and national dishonor? "these four great and significant lessons have been taught us--since the establishment of this government--the poorer money invariably drives out the better, and yet we are confronted by such stuff as the following falling from the lips of the reputed author of the so-called reserve association: "'the banks will be able to replenish their reserves indefinitely.' the counterpart of this proposition is that the banks will be able to make loans indefinitely. think of such a proposition! and again, he says it was deemed necessary 'to provide such effective regulation of discounts and note issues as would enable the organization to respond promptly at all times to normal or unusual demands for credit or currency without danger of undue expansion or inflation.' if this proposition survives at all it will be as the curiosity of the century. i submit that neither of these propositions could have emanated from a mind capable of thinking in the terms of economics. "i assert that if we adopt a sound financial system in the near future we shall have in the course of ten years upward of $ , , , , possibly $ , , , , of gold in the united states. i assert further that if we adopt the proposed so-called reserve association scheme we shall have at the end of five years thereafter in the neighborhood of only $ , , , , allowing for a differential of $ , , either way as a possibility. in other words, we would have as a result not more than per cent and possibly not more than per cent of the gold that we shall have if we pursue a wise economic policy. "the scheme provides that any deposits with the association may count as reserves; also that any of its notes may be held as reserves. "since the average reserve of all national banks is and has been for many years about per cent, let us assume, first, that a national bank called 'x' has $ , , of deposits and holds a per cent reserve, or $ , , of gold; second, that x national bank deposits this million of gold with the reserve association; third, that a national bank called the 'y national bank' exchanges $ , , of commercial paper for $ , , of the notes of the reserve association, which it puts into its reserves. "in the course of time it will have a million of deposits, largely in the shape of loans based upon this million of notes; so that the original $ , , which stood guard over $ , , of debts now is called upon to protect $ , , of debts, or only about an per cent reserve as against . "the x national bank owes $ , , of deposits against $ , , deposited with the association. the association owes the x national bank the $ , , deposited with it and $ , , of notes outstanding which it issued to the y national bank. the y national bank has liabilities outstanding of $ , , with the notes as reserves, or a net expansion and inflation of $ , , . "it has been assumed or claimed by some advocates of the scheme that probably $ , , , of gold would be deposited with the association, in which event there would be an expansion and inflation of $ , , , , or a total liability of $ , , , where now there are only $ , , , . "while this expansion and this inflation have been going on the notes have been going into the banks as reserves, and a corresponding amount of gold has been driven out of the banks and out of the country. "now, mark you, i have not pursued this expansion, this inflation, beyond the per cent gold reserve for all the liabilities of the reserve association. when you turn your imagination to all the possibilities remaining in rediscounts, borrowing direct, acceptances and falling in your reserves, and the credits which grow out of credits directly and indirectly, the prospect becomes bewildering. the expansion and inflation becomes a matter of planetary distances and astronomical figures. the proposal leads into the nebulous somewhere, into the bottomless nowhere. "every student recognizes that the weakest point in our national bank system is the superimposed credit resulting from the deposits with our reserve cities and then with our central reserve cities. but in the very face of that fact here is a proposal that accentuates that fault one hundred fold. "the strangest thing about this whole proposal is that it is based upon the fact that we have not sufficient capacity for expansion and inflation of credit. will any one say that what we wanted during the years of - - - - was more inflation? does not every intelligent student of banking economics know that what we should have had was some way of checking the delirium instead of increasing the mad speculation? "to determine now what we want we must first ascertain with some degree of accuracy just what happened. "until we come to realize that there are two distinct kinds of capital involved in our banking business, and learn to treat them according to their peculiarities, we shall continue to have the same kind of trouble, to a greater or less degree, that we have had in the past. "there is the trust fund or the savings of the people and money belonging to estates or the investment fund. then there is the commercial fund or that capital engaged in production and trade. the law should compel the segregation or separation of these two funds, so that we know with some degree of certainty whether the investment fund has all been exhausted and our commercial funds or capital are being encroached upon and absorbed in fixed investments. this is precisely what happened by . "to illustrate this thought, let us assume that a railroad needs one hundred flatcars to carry its peculiar freight and needs one hundred passenger cars for the accommodation of the people. it is self-evident that if the road uses all the flatcars and half the passenger cars to carry its freight, the balance of the passengers will have to make some other provision for transportation or walk. this is just what occurred in , and a great many people are still walking as a result of that misadventure. liquidation is still going on, with a probability that we shall be well into before normal or really good business conditions will prevail all round. "now, it is apparent that if this diagnosis is correct, the bankers did not cause the panic, as is so frequently charged. indirectly, the bankers had a good deal to do with bringing it about, but not in the manner usually supposed. the way they helped it on was this: "the great syndicates or underwriting bankers adopted the practice of simply notifying rich men and bankers all over the country that to them so much of some issue of bonds had been allotted. those to whom they had been allotted, influenced, on the one hand by flattery and on the other by fear, lest if they refused to absorb what had been set apart for them they would be ignored in the future, took the allotment at all hazard. "this forcing process went on until commerce broke down, because it had been robbed of its necessary capital and has not been able to replace it since, out of earnings." mr. merchant: mr. banker, do you believe that to be a correct statement? mr. banker: believe it! i know it. there is no doubt whatever that the banks generally are under a kind of duress. they know that if trouble comes, they must go to the powers that be. when these underwritings are put out, and we bankers are notified that we are expected to take a certain amount, we feel compelled, half compelled at least, to respond, precisely as mr. fowler stated, and, as a natural consequence, the commercial fund of the country is sapped and absorbed, and transferred to passive investments, which, when the break occurs, become to all intents and purposes fixed investments because you cannot dispose of them at all. what we must do, and what i am sure we have accomplished in the bill we have prepared, is to set every individual bank free, absolutely free, from any domination or influence of any kind, direct or indirect. take my bank as an illustration of what i mean. today i am living in a kind of terror of the possibility of coming again, because i have no way of protecting myself, except through my correspondents, and, under present conditions, that is no guarantee, as the banks may all break down again as they did then. this, you will remember, is due to the fact that we have no real economic reserve in the united states today. all the reserves are loaned out all the time. let me call your attention to what my position will be, under the bill we have prepared. _first_: i shall be able to furnish all the currency i need, by simply converting book debts or deposits into note debts or currency, up to twice the amount of my capital, if necessary. that is, i can regularly issue $ , , the amount of my capital, and by going to my board of control, $ , additional. but, if i did this, i would not increase my liabilities a single dollar, but simply change the form of them from deposits to notes. mr. merchant: have you any doubt about the people taking your bank notes, as you suggest? mr. banker: none, whatever. you see, in the first place, they do not come to the bank because they fear the bank cannot pay them; but, because when one of these shocks to credit comes, there is a tremendous demand for cash of some kind. you will remember, that in and , when currency was sold in new york, it did not make any difference what it was: gold or gold certificates, silver or silver certificates, united states notes or bank notes--anything that was cash brought the same premium. but, suppose the question should arise and a man should ask, are these notes good? he would not hesitate long after i gave him these facts: _first_: that they were a first lien upon all my assets. _second_: that there was a gold guarantee fund amounting to $ , , in the treasury of the american reserve bank, to redeem them if my bank failed. _third_: that the american reserve bank with $ , , , would redeem the notes in case my bank failed. mr. laboringman: well, mr. banker, do you know what i would do, if i had a deposit in your bank, under those circumstances, and got scared of you? i would give you a check for my deposit, take your notes, and hold them until the storm blew over. that's what i would do. uncle sam: there, can you beat that as a precaution against accidents? mr. laboringman never will get left, if you will give him half a chance. mr. manufacturer: under those circumstances, of course, the question of goodness of the notes would never arise. the people would soon think only of the great central gold reserve, which would always be before their eyes. mr. banker: in addition to my note issue, i would have the same recourse to my bank correspondent in new york that i have today, and he would then be in a far better position to assist me than he is now, because of his additional resources. besides, i could fall in my required cash reserves, which would be about $ , down to $ , , without any danger to my bank; because of my greatest, final, and practically inexhaustible resource, the board of control, which has examined my bank, knows my assets, and will give me any amount of gold to protect me in case of necessity. mr. merchant: i see, your exact condition is known to the board of control; and the board of control has access to the gold in the american reserve bank, and could get fifty or one hundred million dollars to protect itself, if necessary. mr. banker: that is so. my last protection is the american reserve bank, which actually holds reserves, real reserves, not united states bonds, united states notes, silver certificates, chips, and whetstones, nor any old thing; but gold, in unlimited quantities, to all intents and purposes. now don't you see, gentlemen, that if you will place me in that position, i will be absolutely free and independent of any bank in the united states, and of all banking influences of whatever kind--simply because my final appeal is to a great coöperative fund, in which i have a common interest with all my fellow-bankers, and i know that my protection is absolute? mr. manufacturer: yes, and i see another very important, all-important fact growing out of that situation; the complete liberation of every bank in that zone, as well as your bank; indeed, every bank in every zone would be absolutely liberated. mr. merchant: yes, and i see more than the liberation of all the individual banks. i see the complete liberation of every commercial zone or section of the country from every other commercial zone or section of the country; as each zone will look for its protection to the american reserve bank, the holder of the great coöperative gold fund, that is more than ample for any emergency that can possibly arise. mr. lawyer: mr. banker, how would you fare under the aldrich scheme, if you wanted $ , of currency to use to move the crops in the fall? mr. banker: i am glad that you have asked for a comparison of our plan with the aldrich scheme, under the same conditions. i could not have any accommodation whatever, unless i first subscribed for an amount of stock in his scheme, equal to per cent of my capital, and i had paid up per cent, or one-half of it, or $ , . then, i must have a deposit or balance with his institution, possibly as much as $ , , if i wanted to borrow as much as $ , . even then, i could not get any accommodation unless i had notes or paper that had less than twenty-eight days to run. but country bankers such as i am have no short time paper worth speaking of, and any of the paper or notes that might happen to be coming due within twenty-eight days would be the paper of people who do not want it sold and collected at some remote city. they usually want to pay a part and renew a part, so that, practically, i could not get any accommodation along that line. indeed, i do not believe that there is one bank in a hundred in the united states that could use the scheme at all directly. now, if i should go into that scheme i would have to become a member of what they call a local association. if i had no twenty-eight day paper, i would then have to go to my local association with my hat in one hand, and my grip full of notes in the other, and ask them to guarantee my paper for me, by paying a commission for such guarantee. of course, some of the officers of the local association would be from my particular neighborhood, and competing with me for business. i would not want to confess to my local fellow-bankers by asking their help in ordinary times, and i would not want to put into their hands the paper of my customers, and so expose their business to their neighbors. the result would probably be that i would resort to my correspondent banker, just as i am doing today. of course, the large banks might have plenty of twenty-eight day paper, and could turn it over to the branch of aldrich's central bank, and get some of the notes about which we have already heard something and supply me. now, let me suppose that i could use an average of $ , of currency throughout the year, and that i keep that amount of paper up all the time, for the purpose of supplying myself with currency of the aldrich make; you can see that it would cost me per cent upon $ , , or $ , per annum. mark this, put it in your pipes and smoke it, that under our plan, allowing for the cost of my reserve of per cent on $ , of notes, or per cent on $ , , or $ , and allowing my tax of per cent on $ , of notes, or $ , , it would make a total cost of only $ , . my bank would, as you can see, be the loser of $ , by using the aldrich scheme as against our plan. do not fail to remember that the largest part of the per cent tax on the notes under our plan will go to pay off the greenbacks. again, i want you to keep in mind the expense and trouble of shipping out the commercial paper, and looking after it throughout the year, and the interminable nuisance of buying just the right amount of currency every day, as compared with issuing your own notes, precisely as your customers want currency. you see, i will be getting back some of my notes every day through the clearing house, as they will then be sent to the clearing house with the checks and drafts, just as they are in canada. mr. merchant: of course, if you can save $ , on your currency every year, and a large amount of additional expense, as well as an endless amount of trouble, you can afford to share your gain with us fellows. mr. banker: most certainly, and you may depend upon it, that all the extra expense that we incur will come out of our borrowers. mr. manufacturer: as you say, there cannot be one bank in a hundred that would ever have what you call twenty-eight day paper. i know i would not want you, and i am sure that mr. merchant there would not want you, to take our paper to some local association and ask to have it guaranteed unless there was a panic and everybody was in the same boat. the whole scheme looks absurd and impractical. mr. banker: your opinion is confirmed by one of our most prominent country bankers, who said, "this proposition is impractical, unparalleled, and useless." mr. merchant: mr. banker, if you should ask your city banker correspondent from whom you purchased the central bank notes, upon what he relied, when he gave you the notes, what would he say? mr. banker: he would undoubtedly say that he relied upon the credit of my bank, and upon the paper i turned over to him in exchange for the central bank notes. mr. merchant: well, if your credit and the paper with your endorsement are good enough for that banker, why are they not good enough security for your own bank notes? mr. banker: they certainly would be; especially since i would be under the supervision of the board of control, and my notes would be secured by being a first lien upon my whole assets; by a guarantee fund, and by the total amount of gold held by the american reserve bank. mr. merchant: mr. banker, you spoke of belonging to a local association if you should go into the aldrich scheme. how many of those associations would there be in the united states? mr. banker: no one could tell until they got through organizing them. the banks now have about two billion dollars of capital, and two billion dollars of surplus, or a total of four billion dollars. the scheme provides that any number of banks representing $ , , of capital and surplus could form an association. if they succeeded in driving all the banks of the country into it, as was evidently their intention, you see there could be about of these local associations engaged in guaranteeing their associates, if they wanted to, after prying into their private business. mr. merchant: that is the worst feature i have heard yet, because it would let all the cliques and cabals get together and run things by manipulation. don't you think so? mr. banker: i certainly do think so. bankers above all things do not want to expose their business to their immediate neighbors in the banking business. you will remember that in the plan that we have just submitted, we confined all knowledge to the boards of control, of which there is to be no more than forty-two, possibly only twenty-eight, and that we required all members of the board of control to disassociate themselves from all banking connections in their respective zones. mr. laboringman: yes, but you have seven districts in every one of your zones, don't you? that would make two hundred and ninety-four districts, if you should have as many as forty-two zones, would it not? or one hundred and ninety-six if you have only twenty-eight zones. i am sure my arithmetic is right, for i am fairly good at figures. mr. banker: yes, your figures are right, but you must remember this--that the only purpose for the creation of the districts in our plan, as we have constituted them, is to prevent combinations and cabals, and guarantee a fair and evenly distributed representation of all parts of every zone. these districts exist only for the single purpose of the organization of the commercial zones--the election of members to the board of the bankers' council and to the board of control. when this is accomplished, their work is done. mr. laboringman: oh, i see, you would only have at most forty-two organizations in the united states that would have any actual business to do. mr. banker: that is correct. every zone would be so organized as to absolutely protect the confidences of the business world and the banking fraternity. i think in the organization of the commercial zone, that we have taken such steps to emphasize and secure publicity of action, and so much pains to guarantee representation from every section of every zone, that the people as well as the bankers will be kept advised all the while of all that is being done. i think that the matter of the subsequent selection of members, both to the board of control and to the board of the bankers' council, will always be a subject of general discussion and newspaper comment. this is true more particularly, because every bank has one vote, and because only one member will be elected to the board of control each year, and only two members will be elected to the board of the bankers' council each year. publicity and direct representation are the two distinct ends sought, as we believe that in this way alone can a true and proper sense of responsibility be imposed upon the members of the two boards. mr. merchant: i agree with you absolutely. it is precisely as president-elect wilson said: "publicity, pitiless publicity, is the only sure protection to the people." mr. manufacturer: just another word upon that point. samuel j. tilden i think it was who said: "publicity is the only safeguard of republican institutions." how well we have guaranteed publicity in the organization of our commercial zone the public will have to judge. however, if our method for securing publicity can be improved upon, we will all welcome it. mr. farmer: since we have been discussing this feature of publicity and independence, i have become so deeply impressed with the fact that every bank will be set free, will be able to act so independently, and that every commercial zone will be such a complete, such a perfect democratic republic in itself, that i have been wondering whether each zone could not create and carry its own reserve. listen! this is my idea. some one has mentioned st. louis as a financial centre. now, why could not st. louis carry the central reserve for that commercial zone, and so each of the forty-two financial centers of the zones carry their own central reserves, precisely as we have learned the clearing houses are carrying the reserves of their banks today. you have extended the approved clearing house practices to the entire zone--you have complete, absolute, local self-government; you have your supervision and control of all the banks in the zone; you have your central reserve--you have a free check zone. now, what more do you want? why should not every zone stand upon its own bottom, just as the banks of virginia, louisiana, kentucky, missouri, and ohio did; and as the bank of the state of indiana and the state bank of iowa did? that's what i want to know. mr. banker: i must say that is a very pertinent, a very interesting, and very important question. there is one point upon which everybody now agrees, however much they may differ upon other points. that one point of common agreement is this--that the real source of weakness, from the standpoint of organization today, is the fact that whenever there is fear or apprehension in the country, every bank begins to fight for reserves, fight for some kind of cash; because there is no actual or real protection as matters now stand, unless a bank has practically as much cash as its deposits amount to. in other words, it is really a run of the banks upon the banks. it is "everyone for himself, and the devil take the hind-most." now, it must be apparent to you that each of your forty-two zones would be fighting each other for reserves, just as all the individual banks fight each other today when the danger comes, and the whole situation proves no stronger than the weakest link; hence, our exchanges break down. st. louis, for instance, might have a central reserve of $ , , ; but would st. louis be satisfied that that was enough to protect her against any accident? she is confident that she has some strength, but is not sure of unlimited strength and absolute protection. therefore, the struggle for reserves would begin between the zones, with the first appearance of danger, just as it does today between the banks. on the other hand, if the banks in the st. louis zone should send their $ , , to washington, and send along with it their representative of that zone, and in like manner every zone should send its central reserve and representative to washington, it would make a total reserve of $ , , , of gold in one mass, and a board of forty-two members to manage it. the result would be precisely the same as that now attained by having a federal army, a federal navy, a national government, for a "common defense." if each zone should be left to stand upon its own bottom, as you say, we would be repeating, economically, identically the same mistake that we made politically when we formed the confederation of states in . the confederation was too weak to be an efficient government, and so we formed a "stronger union," the present federal government in . it is no more important that the banks in a clearing house should get together than that all the banks in any given commercial zone should get together; and it is no more important that the banks in any given commercial zone should get together, than that all the zones should get together for a _common defense_ of all the business interests of the country, and for the common defense of all the reserves of the country against all the demands of the rest of the commercial world. unless this final union of reserves is made, no discount rate for gold can be fixed and enforced, and we would find ourselves in the same helpless, hopeless situation or position that we are in today. but if all the central reserves of all the zones are united in the american reserve bank, and every commercial zone has its representative upon the board of directors, you will have in the banking world of the united states identically the same form of government we now have in our national government. then when we have converted our united states notes into gold certificates, and when all our silver certificates have been reduced to the form of token money, by cutting them up into pieces of two dollars and less, the american reserve bank will be in identically the same position that the bank of england is in today, the most positive and powerful force in the world in controlling and directing the movement of gold. and yet, like the bank of england, the american reserve bank would not be a bank of issue. it is not a question of note issue at all; but it is a question of centralizing our gold reserves to meet any emergency in the business world, coupled with the power of fixing and enforcing a price for the use of gold, a discount rate for gold throughout the united states. the financial and banking system that we have proposed combines the bank of england and the canadian bank note system--the two highest and best exemplifications of a central gold reserve and bank credit currency. mr. farmer: well, mr. banker, you are undoubtedly right. i see now that we would be very little, if any, better off with the individual zone system than we are today, when you recall the fact that the whole world now uses one common reserve, gold, and have ways of obtaining it. i think your argument illustrated by the army and navy and the national government is absolutely unanswerable. what do you think, mr. merchant? mr. merchant: i have never had any doubt about that question at all. mr. laboringman: abe lincoln said, you know, "a house divided against itself cannot stand." i think this thing is just as plain as the nose on your face. it is uncle sam against the world just as much in banking as in anything else; and a good deal more so in these days of lightning intelligence and cheap transportation. with a representative of every commercial zone, say forty-two in all, sitting at washington and holding in trust for the protection of all the people of the united states such a central gold reserve as you propose to make the banks create, you have a perfect duplicate of our present national government, in political matters. these representatives of the zones are the servants of the zones, just as the senators are the servants of the states. another thing, twenty-one of them will be business men, and twenty-one will be bankers; both sides of the bank counter, the inside and the outside, will be represented; and, since you have arranged to have one-seventh of them, or three business men and three bankers go out every year, your board of forty-two will always be old, and yet always will be becoming new. the more i think of it, the more i am for it, because i am for uncle sam against the world. uncle sam: if you ever want a "b" line on anything, go to mr. laboringman every time. mr. banker: well, we have considered the economic side of the aldrich scheme pretty thoroughly. i think it is about time that we heard something from mr. lawyer about the administrative features of the scheme. mr. lawyer: from a professional point of view, i have been a student of motives all my life, and as you know, i have been a part of a powerful, political machine in this state for more than twenty years. the aldrich scheme furnished me a rich mine of motives, and a detail of organization that staggered even an old political stager as i am. you will remember that when aldrich made his first announcement about his plan, he said that we must have a _central bank_ and that immediately president taft declared at boston, "senator aldrich desires to round out his career with a financial system for the united states, and says that we should have a _central bank_." i never will forget what an eminent citizen of this state said when he read that statement. it was this: "well, god help the american people if nelson w. aldrich ever rounds out _his career_ with a financial system for the united states." you will all of you remember, i am sure, what a cold reception the idea of a "central bank" at the hands of aldrich received. does anyone of common intelligence believe that aldrich ever changed his scheme below its throat? it is true he put a mask on its head; but that is all. he hunted around for an all-concealing name to hide the thing under--"the national reserve association." _i assert that his proposal would mean the greatest and most centralized central bank in the world._ note these figures and draw your own conclusion: nat. reserve bank of bank of bank of assn. france england germany capital $ , , $ , , $ , , $ , , deposit , , , , , , , , , note issue , , , , , , (see note.) , , possible note issue , , , possible issue large with tax. note.--_the bank of england is not in any sense a bank of issue, because the amount of notes it issues is limited to the amount of gold coin in the issue department. the notes are gold certificates. there is an exception to the law, to the extent of the arbitrary amount of notes issued against the government debt and securities, held in the issue department, amounting to $ , , ._ now, gentlemen, here you have a proposal to organize in this country an institution with a capital greater than the combined capital of the central banks of england, france and germany, because the capital of all of our banks now exceeds $ , , , , and the subscription to the national reserve association must be per cent of this amount, to entitle them to participate. certainly the idea must have been that they all would participate in so beneficent an institution. "it was to be a bank of banks for all the banks." it was the declared purpose of the author of the scheme that the banks should surrender all their real money, now carried as reserves, to this central institution in exchange for its notes; or that the banks would deposit more than $ , , , with the national reserve association. this would be a deposit nearly three times as great as all the deposits of the central banks of england, france and germany combined. the bill provides, section , that the national reserve association can issue $ , , of its notes, _and as many more_ as are covered "by an equal amount of lawful money" (united states notes, silver, or silver certificates, and gold in some form), without paying any tax. but if the banks turned over their present reserves, amounting to $ , , , , as contemplated by the author of the national reserve association, it could issue $ , , , before beginning to pay any tax on circulation. by paying a tax of - / per cent per annum, it could put out $ , , more notes, not covered by lawful money, or $ , , , ; then, by paying a tax of per cent, it could go any limit until its lawful money reserve was reduced to per cent. this makes a possible issue of $ , , , , or a possible note issue today two or three times as great as all the note issues at any time outstanding of the central banks of england, france and germany combined. _every dollar of this vast amount is only the credit of the so-called national reserve association, and yet is a lawful reserve for over twenty-five thousand banks to hold._ mr. merchant: by the way, mr. banker, i would like to ask you what you think of a tax upon bank notes to be paid by the central bank of issue as it is practiced in germany where they got this idea. mr. banker: economically speaking, a tax paid under such circumstances is of no more use than your appendix. mr. merchant: my appendix! i have had my appendix removed. mr. banker: well, that makes no difference. i still insist that a tax paid upon bank notes under such circumstances is of no more use, economically speaking, than your appendix, whether it has been removed or not. mr. lawyer: section provides, "the national reserve association shall be the principal fiscal agent of the united states. the government of the united states shall, upon the organization of the national reserve association, deposit its general funds with said association and its _branches_, and thereafter all receipts of the government, exclusive of trust funds, shall be deposited with said association and its _branches_, and all disbursements by the government shall be made through said association and its _branches_." the central bank of any country may be defined to be the bank at which the other banks carry their reserves, and at which the government carries its balance. but will some advocate say "it is only the bank of all the other banks"? this is the very quintessence of a central bank. upon this evidence will any candid man say that the so-called national reserve association is not a central bank? it was to have fifteen branches. the bank of england has none. the bank of germany has nineteen main branches. the bank of france has one hundred and twenty-seven main branches. "section .--the national reserve association shall have power both at home and _abroad_ to deal in certain things." section .--"the national reserve association shall have power to open and maintain banking accounts in foreign countries, and to _establish agencies in foreign countries_ for certain purposes." have the central banks of england, france or germany any power to maintain accounts and establish agencies in foreign countries? with "a baby stare," and under cover of "sunday-school pretences," we are told that this all-comprehending scheme is just a simple coöperative enterprise for the exclusive benefit of the individual american banks. indeed, that it is the only truly altruistic banking institution that was ever conceived. now, as the chief argument for the adoption of this scheme, its main promoters and sponsors have persistently declared that the country was now being dominated and controlled by certain great banking interests, and, therefore, that the people should liberate themselves from these sinister and dangerous banking powers by running into the warm and enticing embrace of the national reserve association. upon investigation, we find this anomaly, this surprising, this astounding fact: that the promoters and advocates of this gigantic machine are these self-same sinister banking influences who have the country by the throat today. hon. leslie m. shaw has pertinently inquired, "is it not strange that nelson w. aldrich and his affiliations are tired of their great power and vast opportunities, and are now trying to divest themselves of them," through the innocent-looking national reserve association? it will be well remembered by all of you, that at the time that the aldrich scheme made its first bow to the dear people, the public discovered that the national city bank owned bank stock to the amount of $ , , in other national banks located throughout the united states. possibly the same interests owned several times that amount. i was informed about that time that they controlled at least one hundred banks in the leading cities of the united states. now, let us assume that to be true, and let us meditate upon what such an organization could accomplish if they wanted to elect every officer in every local association, and every officer in charge of every branch, and the board of directors of the national reserve association, and so name the "_governor_" and the rest of the executive committee of nine which is to control this great central bank. to appreciate the power of such an organization, you must keep in mind the fact that practically every bank in the united states would be carrying a balance with some one of these banks immediately under their control. there is your machine. it is a perfect duplicate of the political machine in this state. the state "boss," whom you know stands in precisely the same position as the national city bank would stand. as you are fully aware, i am the "boss" of this county; and i am in identically the same position that one of these hundred banks would be that are controlled by the national city bank. when i get my orders, i immediately communicate with every so-called local leader in every township. this political machine works three hundred and sixty-five days and three hundred and sixty-five nights in the year. in the sense of an organization, we are working all the time, and it is the organization work that does the business. all the rest of the people are unorganized. so it would be with the banks. the men who belong to the organization or machine "_like it and fear it_"; because as things have stood, no one could get anywhere without being a part of the machine. this fact forces acquiescence. it has been, as you know, a perfect feudalism from top to bottom. we have had a machine government in this state as perfect as the manchu government in china. can you imagine anything easier than for the national city bank with this complete banking organization all over the united states to name every man practically that went into this organization from top to bottom? this would not be done by holding a majority of the stock in all the twenty-five thousand banks; they don't care about that; because it is a matter of no consequence to them, and if they attempted to do anything so crude, it would spoil their whole game. they attain their ends in more subtle but no less certain and powerful ways. they get influences to work. they put forces into operation. their interests are not limited to the banking business. they have affiliations with great transportation companies and manufacturing interests, and therefore control large bank deposits everywhere that the banks want and are always working to get. then there are favors to be granted; commissions to be paid; "melons to be cut." opportunities are suggested. in one respect at least they are like the lord, they "work in a mysterious way their wonders to perform." they had established their ramifications throughout the united states by making the national city bank a holding company of bank stocks, and the culmination of their power was to be realized through the devious methods of organizing the national reserve association. the same money and the same power that filled the columns of the newspapers of the country with the unqualified praise of the aldrich scheme for two years--the same power that rushed resolutions of one uniform stereotyped kind through twenty or thirty state bank associations, and steam rollered the same unconsidered declarations through two annual conventions of the american bankers' association, would have made this so-called _altruistic, benevolent, coöperative association_ the most powerful machine ever organized; because, it would have absolutely dominated all the bank credit in the united states, or per cent of the banking power of the world. you must remember that these interests are by far the greatest speculators in the united states. yes, the greatest in the world. mr. banker: but don't you remember that the bill provided in section that the paper rediscounted by it must "be issued or drawn for agricultural, industrial, or commercial purposes," and not "for the purpose of carrying stocks, bonds, or other investment securities"? mr. lawyer: yes, but that is all folderol. it is the purest kind of poppycock. if a bank wanted to take on a speculative deal, it could sell its commercial paper, could it not, and use the money for speculation just the same? that is on precisely the same level with its declaration that the institution was not a central bank. it is such subterfuges that disgust every candid man. listen to mr. aldrich in his report upon the bill upon the selection of the "governor" of the national reserve association by the president of the united states. he says, "further restraint upon the administration of the association upon narrow or selfish lines, is imposed by the provision that four of the highest officials of the government are made ex officio members of the controlling board, _and by the requirement that the governor shall be selected by the president of the united states_. the fear has been expressed that the _selection of the governor by the president_, and the provisions making the secretary of the treasury, the secretary of agriculture, the secretary of commerce and labor, and the comptroller of the currency, ex officio members of the board of directors of the reserve association, _might lead to an attempt to control the organization for political purposes_." please note the sham, fraud and false pretense covered by this comment. the bill provides that the "governor" of the association, as they call him, shall be selected by the president of the united states _from a list of at least three names, furnished by the directors_. will any honest man say that the president of the united states would have had any more to do with the selection of the "governor" of the so-called national reserve association than the king of siam? again note this cheap, false pretense, "fear has been expressed that the selection of the governor by the president," and the four ex officio members of the board of directors, "might lead to an attempt to control the organization for political purposes." these four ex officio members have just four votes upon a board of forty-six which proceeds immediately to eliminate all of the ex officio members forever, by selecting an executive committee consisting of nine members to manage its affairs, from which all of them are excluded except the comptroller of the currency. can any intelligent man doubt the purpose of all these sham declarations and false pretenses? if so, let him spend a day or two trying to find out how the members of the boards of the local associations are to be chosen; try to unravel the process by which the members of the boards of the branches are to be evolved; and, having grown tired and dizzy with his task, let him undertake to prove how the board of directors of the national reserve association are to be manufactured through the machinations born of ulterior purposes. i have studied puzzles before, but for complications, wheels within wheels, evident designs upon evident designs, occult purposes under occult purposes, and a combination of powerful forces, born of sinister influences, this project will forever stand alone as an illustration of what the human mind can do to conceal its real object. there is not one man in a hundred, indeed i do not believe that there is one man in a thousand, taking the business men, farmers, working men, and bankers all together, who can solve the riddle, and tell how it is done. such a mystery could not have just happened. it must necessarily have been the product of a purpose. _simplicity, publicity and direct methods are the guaranties of common honesty. intricacy, secrecy and indirect methods are invariably used to hide uncommon dishonesty. i do not mean petty larceny, taking a few pennies, or a loaf of bread; but the absorption of hundreds of millions, without returning anything to the world in exchange for them._ should the united states have been so unfortunate as to have been bound hand and foot for fifty years, the life of the proposed charter, by the trammels and intricacies of the national reserve association under control of an executive committee, consisting of only nine men who had been the evolutionary product of a preconceived purpose and well-defined plan, can anyone doubt what the result would have been? can anyone doubt that all of their banks and all of their business interests would have gotten all the money they wanted all the time? the advanced information from week to week and, at times, possibly, a month ahead, of what the discount rate would be--a very natural way for some member of that executive committee to show his or their proper appreciation of his or their promotion to their positions--would have been worth more every year, during the fifty-year grant, than all the wealth that the american people could produce during any twelve months; for this advanced information about the discount rate would have made profits a mathematical certainty upon the billions and billions of stocks and bonds that are quoted upon the stock exchange, the fertile field of the man who knows that he has a sure thing. mr. manufacturer: mr. lawyer, that smells pretty bad. mr. lawyer: yes, i admit it; but does it smell any worse than oil has been smelling for more than twenty years? than certain united states senators have been made to smell? than robbing rebates smell? is it not the natural sequel to this train of abuses to which the country has been treated? this whole situation was so graphically depicted, precisely as it has developed, two years before mr. aldrich gave birth to this conception, that i want to read it to you: "a central bank could easily be so organized as to sap the commercial blood of this country at every turn and direct the silent and unseen currents of advantage into the channels of favored institutions, and all these favored institutions might turn out, upon investigation, to be, in the end, one institution. "and if, unfortunately, the subterranean connection could not be detected, and even if detected, could not be broken, what a power for evil and injustice such an organization would prove in the life of this nation. "this is not only regarded as possible, but as probable; indeed, it is charged that it is the preconceived, cunning design of the advocates of a central bank to accomplish this purpose. "under these circumstances, with what suspicion and jealousy will every act of the central bank be watched! localities will become envious of localities. cities will bitterly attack their neighboring cities. nine-tenths, if, indeed, not ninety-nine out of every hundred, of the banks will imagine spears in needlecases, and, right or wrong, fling their accusations upon the wings of the wind; and we will be living in a commercial world of unrest and constant controversy surpassing in suspicion, envy, jealousy and bitterness anything this republic has ever witnessed. the consequences no man can prophesy; no imagination can paint." these words were spoken by hon. charles n. fowler, march , , just two years before mr. aldrich made his report to congress upon his national reserve association. mr. laboringman: you know i said that i had heard that the aldrich bill was dead; for one, i hope so. if the people ever get a lick at it they will finish it for certain. mr. farmer: you are right, and you bet that if they ever get a chance to discuss this banking bill question, they will come mighty near settling upon the right proposition in the end. mr. banker: i agree with you, and furthermore i am thoroughly convinced that we shall never reach a satisfactory conclusion until we have had just the same kind of a hand-to-hand fight over this question that we had over the gold standard. mr. manufacturer: it looks so to me. that gold-standard fight taught me that you could trust the american people to make a wise decision, if you would only have a country store, schoolhouse, cornfield debate, in which every man in the country got into the game--preacher, lawyer, teacher, farmer, merchant, manufacturer, laboringman, townfolks and country folks, all alike. mr. merchant: nothing more true has been said since we have been talking about this question than that remark about the importance of a public discussion of this whole matter. i know any number of men who when this aldrich scheme came out were ready to swallow it, but who now realize what a fatal blunder it would have been. the reason was, that they knew absolutely nothing about the question and they were living in such a state of terror on account of the panic, that they were ready to take anything that would shield them from experiences such as they had just passed through. the aldrich scheme was the only thing in sight, because hundreds of thousands of dollars had been spent in promoting it. they are just beginning to study and think about the subject. our hope of wise action by congress rests upon a red-hot debate among the people, exactly as you said. mr. banker: well, it will be easy enough to show them what the real reforms demanded are. _the reforms we demand are these_: _first: holding companies in the banking business must be completely wiped out._ _second: every national bank should be authorized to do_ _( ) a commercial banking business._ _( ) a savings bank business._ _( ) a trust company business._ _( ) a note issue business, precisely as the canadian banks do._ _third: all the various accounts--commercial, savings, trust and note issues--should be segregated._ _fourth: every bank in the united states should be compelled to carry the same amount of bank reserves._ _fifth: all bank reserves should consist of gold or gold certificates, as soon as the united states notes can be converted into gold certificates._ _sixth: every bank in the united states should be brought under national control, because banking is essentially interstate commerce._ _seventh: every natural financial centre in the united states should become the clearing centre for all the checks, drafts and bank notes that are payable in the territory that is economically and naturally tributary to that financial centre; such territory should constitute a commercial zone._ _eighth: there should be organized at each of these financial centres a clearing house at which all the checks, drafts and bank notes payable within the commercial zone shall be at par._ _ninth: the banks of each commercial zone should elect a board of control to examine, supervise and control all the banks within such commercial zone, precisely as the clearing home bank examiners are examining and supervising all banks clearing through them today._ _tenth: the banks of each commercial zone should also elect a court of appeals, or a banker's council, composed of an equal number of business men and bankers, to settle all banking and business questions that would properly come before them._ _eleventh: the board of control in each commercial zone should be presided over by a deputy united states comptroller, for the purpose of securing immediate and efficient action._ _twelfth: the banks of the united states should all contribute a percentage of their deposits to a central reserve, which should be composed of gold, and gold alone. the percentage of deposit should be per cent at the outset, and be gradually increased to per cent, which would amount, at the present time, to a central gold reserve of upwards of $ , , , . this reserve would correspond to the reserve held today by the clearing houses for their banks._ _thirteenth: this central gold reserve should be held in trust by a body of men composed of one man from each commercial zone, for the benefit of all the commercial zones._ _fourteenth: each board of control should have access to this central gold reserve, and should have power to sell gold to any bank within its zone and under its supervision, in case it desired it for the purpose of moving crops or for any other legitimate reason. the practical result would be, that the gold would be held, to a large extent, at the financial centres, and under the command of the board of control, precisely as the clearing house committees today hold the reserves of the banks constituting their respective clearing houses._ _fifteenth: the use, distribution and control of the central gold reserve should be under the management of the representatives of all the commercial zones, who should be composed equally of business men and bankers._ _sixteenth: for the purpose of establishing responsibility and securing efficiency, the representatives of the zones should act through corporate powers granted by the national government._ _seventeenth: the purpose of a national centralization of gold to so large an extent is two-fold:_ _( ) it brings all the banking power of the united states to the defense of the commercial interests in every part of the united states instantaneously._ _( ) it will give to the representatives of the zones the power to control and direct the movement of gold to and from the united states, by fixing and enforcing a price for the use of gold, or a discount rate for gold transactions throughout the united states._ _these reforms are based upon three distinct propositions:_ _first: they incorporate the principles of a central gold reserve, as illustrated by the bank of england, where all the transactions are in gold, and gold alone, without the use or intervention of bank credit in the form of bank credit notes, which could be used for reserves by the banks throughout great britain._ _second: they incorporate the principle of bank credit currency, as illustrated by the bank note system of canada, which involves daily redemption in gold coin through the clearing houses._ _third: they extend to every economic or natural commercial zone the established and approved practices of the american clearing houses, that is:_ _( ) bank supervision and control over all members._ _( ) a reserve created by all the members of the clearing house and held by the clearing house committee for the benefit of all the members._ _( ) such a free check system over every commercial zone, precisely as new england has had since , and as has just been established over a large territory around new york by the new york clearing house._ _the result of these reforms would be:_ _( ) to make each individual bank absolutely independent, because it has an unlimited resource in the coöperative gold reserve._ _( ) to make every commercial zone as free and independent of every other commercial zone, as england is of france, or france is of germany._ _( ) to completely decentralize all bank credit in the united states, while it centralizes the gold to a degree that would enable us by raising the discount rate to close the door of our markets against the demands for gold from abroad._ _( ) to insure all depositors in national banks against loss._ _( ) to liquefy and therefore develop a general market for commercial paper._ _( ) to save the business interests of this country more than $ , , every year, to say nothing of the incalculable losses growing out of our ever-recurring panics._ #/ mr. lawyer: mr. banker, you have stated with great clearness and precision just what our investigation has demonstrated should be done to give us a sound and economical financial and banking system. after a careful consideration of the question, i am prepared to say that the aldrich scheme would not accomplish or effect a single one of these reforms. on the other hand, i am convinced that, while it would give us temporary relief, immediately there would follow undue expansion. in quick succession there would come wild inflation, a vast amount of gold would be expelled from the country and we would find ourselves in the end in far greater and more serious difficulties than those from which we are now suffering. mr. banker: your conclusion is in perfect keeping with my own. it seems to me very remarkable how many people were temporarily misled by its claims, but have since turned from it and are now opposed to it. mr. lawyer: i do not think that is either remarkable or strange, when you recall the mental condition of the whole country, due to the panic; the vast amount of money poured into its propaganda; the claims made for it and the fact that it incorporated some things that the public realized ought to be done. for example, it proposed to divide the country into districts, an idea that congressman fowler had advocated ever since or for more than fifteen years, and had incorporated in his bill of . the aldrich scheme provided for a central reserve, but composed almost entirely of united states bonds, united states notes and silver in some form, a fact that did not attract the attention of the public at the outset. it proposed to make an unlimited market for the rediscount of paper, a most pleasing thought to contemplate until it was discovered that this was to be done by "replenishing" the reserves of our , banks "indefinitely," as aldrich said, with bank debts in the form of bank notes issued by the so-called "reserve association." it incorporated the plan proposed by congressman fowler in his bill of for converting the "_two per cent united states bonds_" into "_three per cent united states bonds_," a fact that impressed the national banks favorably. the so-called association was given an attractive name--"national reserve association," also borrowed from the first draft of congressman fowler's bill of , with only a slight change. he called his central reserve, "united states reserve association." finally, owing to the clever presentation of the scheme, the country took to it at the start, because they wanted something done and they hoped that the scheme was what mr. aldrich declared it to be, when he said, "the plan we propose is, essentially, an american system, scientific in its methods and democratic in its control." every intelligent man now knows that the system he proposed was the german system from top to bottom, which broke down completely under the first real test, which came in . every man who calls himself an economist must admit, instead of its being scientific in character, it was constructed in absolute defiance of all economic law, and now the public is convinced that instead of being democratic in control, it was intended to be a gigantic "_central bank_" with fifteen branches over which a "_governor_," a name wholly foreign to american banking institutions, and his seven associates were to rule, the "_governor_" appointing his assistant managers over the fifteen branches as if it were a manchu dynasty and not a democracy at all. thus one by one the economic blunders have been pointed out; one by one the sinister motives have been exposed; one by one the false pretenses have been unmasked, until there is left only a recollection of the impression made by the expenditure of hundreds of thousands of dollars in this futile attempt to enslave all american bank credit and the lesson of extreme caution and a most urgent need on the part of every citizen in every walk of life, of study, diligent study, if he desires to perform a truly patriotic duty and be of some real service to his country in this hour of peril, inspired only by unselfish motives and a sincere devotion to the welfare of the whole people. mr. merchant: mr. lawyer has certainly succeeded in pointing out very clearly the things that _must be excluded_ from our bill. mr. manufacturer: and mr. banker has certainly succeeded in pointing out very clearly the things that _must be included_ in our bill. mr. laboringman: well, then, if we are all sure that we are right, let us go ahead. mr. farmer: we will; and as our forefathers fought for the birth of this nation we will fight for its life. uncle sam: boys, i shall live only through your intelligence, your courage, your justice, your honor, your patriotism, your service, your sacrifice; and i shall be immortal only if all those who come after you shall possess these same virtues. farewell. appendix a united states circulation statement--january , . =======================+================+=================+============= |general stock |held in treasury,| money in |of money in the |as assets of the |circulation. |united states. | government. | +----------------+-----------------+--------------- |january , .|january , . |january , . -----------------------+----------------+-----------------+--------------- gold coin (including | | | bullion in treasury) | $ , , , | $ , , | $ , , gold certificates[ ] | | , , | , , standard silver dollars| , , | , | , , silver certificates[ ] | | , , | , , subsidiary silver | , , | , , | , , treasury notes of | , , | , | , , united states notes | , , | , , | , , national bank notes | , , | , , | , , +----------------+-----------------+-------------- total | $ , , , | $ , , |$ , , , -----------------------+----------------+-----------------+-------------- population of continental united states january , , estimated at , , ; circulation per capita, $ . . footnotes: [footnote : for redemption of outstanding certificates an exact equivalent in amount of the appropriate kinds of money is held in the treasury, and is not included in the account of money held as assets of the government.] appendix b classification of cash in banks--june , . ===========================+=================+============+============= classification. |national banks. |all other |all reporting | | banks. | banks. ---------------------------+-----------------+------------+-------------- gold coin | $ , , | , , | , , gold certificates | , , | , , | , , silver dollars | , , | , , | , , silver certificates | , , | , , | , , subsidiary and minor coins| , , | , , | , , legal-tender notes | , , | , , | , , national bank notes | { , , }| , , | , , cash not classified | {of other banks}| , , | , , ---------------------------+-----------------+------------+-------------- total | $ , , |$ , , |$ , , , ---------------------------+-----------------+------------+-------------- amount of money held by united states treasury, $ , , . amount of money held by all banks, $ , , , . amount of money held by the people, $ , , , . total amount of money in the united states, $ , , , . appendix c assuming that the plan should be adopted within the year , and taking round but approximate figures, the amount of reserves required to put the plan into operation would be as follows: individual deposits, commercial $ , , , due to banks , , , band credit currency, notes , , , --------------- _total demand liabilities_ $ , , , central reserves against this amount at % $ , , , cash reserves on this amount at an average of % , , , cash reserves against savings held amounting to $ , , , at % , , -------------- _total reserves required under our plan_ $ , , , _amount of circulation in the united states that may be used as reserves_: gold coin in the united states $ , , , standard silver dollars , , subsidiary coin , , treasury notes, , , united states notes , , -------------- $ , , , less gold held in the u.s. treasury as a reserve fund , , -------------- _total possible reserves_ $ , , , amount of reserves required by our plan $ , , , -------------- leaving a net amount of lawful reserves for circulation among the people of $ , , amount of subsidiary coin $ , , amount of silver dollars out , , amount of $ and $ bills out , , ------------ $ , , this amount is probably about equally divided between the banks and the people. amount of circulation now outside of the u.s. treasury and the banks and, therefore, in the hands of the people $ , , , if we deduct the amount of lawful reserves left for circulation among the people $ , , -------------- _we have the total amount of bank note circulation_ $ , , , amount of circulation provided for , , , -------------- additional amount of bank credit currency to be provided $ , , _but this increased amount of bank notes, amounting to $ , , , will not take any additional reserves because the deposits which will be converted into these notes are now covered by reserves. it is plain that, thereafter, book credits and note credits will be currently interchangeable._ _thus every demand for currency will be met automatically and perfectly, every day, everywhere, throughout the united states, day in and day out; month in and month out; year in and year out._ index appendix a, united states circulation, appendix b, amount of money held by banks, appendix c, reserves required under proposed plan, acceptance, what is an, desirability of, liability of, same as deposit, , reserves against, should be same as against deposits, acceptance should be allowed only on goods in transit, would develop a general market for commercial paper, acceptances, agriculture produced its money, aldrich, nelson w, , aldrich, wilbur, american reserve bank, formation of, duties of board of, fund of, how reserve is created, government balance carried with, , shall maintain parity of silver and gold, aldrich plan and plot, exposed, , cost of currency of, branches and foreign agencies, economic objections to, expansion and inflation of, inconvenience and uselessness of, loss of gold by, associations possible, was central bank, possible capital and issue, why public favored at first, , would not effect reforms demanded, reasons for its rejection, aristotle, bagehot, , bank, what is a, credits of equivalent to gold, failures of, deposit, system of, holding companies in, at hamburg, number of, in united states, , number and resources of, independence of individual, penalty for not carrying reserves, repression in development of, bank, description of, by macleod, by bagehot, united states, at venice, banks, no change in national, increase in business of, various kinds and business of, banker, is what, banking is interstate commerce, is kind of insurance, bank deposits and bank notes identical in, necessary reforms in, resources of, in , amount of, in , amount of, in , amount of, in world in , bancroft, george, , bank credit currency, definition of, first lien on assets, additional amount permitted, cost of transmission, how paid, facility of supplying currency, identical with check, increase of, how described and issued, less profitable than deposits, not understood, tax on, how used, strength of, bankers' council, formation of, bank notes, bond-secured, are a first lien, are government credit, in circulation, bear no relation to business, cost of, as currency, not money, origin of, objections to, as currency, penalty for carrying, as reserves, promise of, to pay money, bayard, james a., bill, draft of, board of control, compensation of, boston, country clearing at, , bullion report, california, first use of gold, canada, bank system of, chart showing movement of currency in, canada, circulation in , free from panics, cannon, james g., capital, what is, , active, passive and fixed, , active, essential to commerce, conversion of commercial, into fixed, , real estate mortgages tie up, central bank, tax on notes of, chase, salmon p., , check, what is a, city bank, national, bank stock holdings of, boss system established by, chicago clearing house examinations, , clearing house, approved practices of, , clearings prior to establishment of, , country clearing, established in england, centralizing reserves of, definition of, , established in london, first clearing in new york, free zones, functions adopted, for each commercial zone, clearing house certificates, issues of, , coins, amount of subsidiary, description of subsidiary, parity of value of, total amount of silver, token, value of, colonial credit money, depreciation of issues of, effect of issues of, issues by continental congress, issue of, in connecticut, in massachusetts, in new hampshire, in new jersey, in north carolina, in new york, in pennsylvania, in rhode island, in south carolina, in virginia, price of issues fixed, succession of events following issue of, colwell, stephen, congress, will legislate only after discussion, connecticut, bank commissioners report , conklin, roscoe, coöperative societies, conditions in germany, conditions in belgium, extent of business, in united states, not a subject of banking legislation, profits of, main offices described, started in rochdale, success assured in united states, wholesale houses of, conant, charles a. (scotch currency), credit, definition of, , , ample reserves essential to sound, comparative value of, contraction of, by an instrument of, dangers of, expansion as a result of, germany's abuse of, importance of, our banks should be ready to prove their, per cent, of business done by, production by use of, proper functions of different forms of, , use of, in lancashire, various forms of, webster on, crédit foncier, amortization of mortgages, capital of, can take deposits, formed when, how governed, currency, definition of, , cost of bank credit, definition of bank credit, deposits identical with bank credit, , economy of bank credit, , consists of, proper system of, right kind of, what it is not, redemption of, deposits, guarantee of, no difference between currency and, interchangeability of currency into, , depositors, insurance of, , , cost of insurance of, depositors, insurance fund, how created, losses of, how paid, deutsche bank, diagrams, zone, subdivisions, canadian currency chart, clearing house, , course of check, - egypt, absorption of gold by, electricity, importance of, ellsworth, oliver, england, bank of, dissimilarity of, with banks of france and germany, failure of bank act, resources, when established, not bank of issue, exchange, what is, bill of, broad definition of, difference between draft and bill of, is equal to gold in all transactions, origin, ancient, farmers, number of, fessenden, william pitt, forgan, james b., , fowler, charles n., , , fowler, w.j., deputy comptroller, france, bank of, founded by napoleon, land used as basis of money in, government credit of france used as basis of money, resources of bank, when established, note issue of, gallatin, albert, garfield, james a., germany, resources of bank, when established, financial situation of bank, weak, failure of bank act, gold, adopted as standard by united states, by england, amount of, amount in united states in and , certificate, changing value of, monetary use of, outlook for supply of, production of, united states share of, universal standard of value, gold, total amount used as reserves, what influences the movement of, gold reserves, how created, government, demand liability of, government issues preceding greenbacks, hamilton, alexander, , herrick, myron t., hallock, james c., , india, absorption of gold by, indiana, bank of the state of, state bank of, , statement of bank of, interest, rate in united states, france, germany, iowa, state bank of, , statement of bank of, japan, tried bond-secured currency, jefferson, thomas, jevons, stanley, , kentucky, bank of, , land credit bank, directors of, dividends of, losses, how borne, put into operation, how, outline of provisions, , , landschaften, business of modern, modern, origin of, old, spread of, law, john, lee, richard henry, legal tender, what is, liverpool, lord, coins of the realm, loan certificates, clearing house, amount of, issued, are bank credit currency, denominations of, - lessons of, london, clearing started in, , los angeles, clearing house, louisiana, bank act of, statement of banks of, lubbock, sir john, macveagh, franklin, , madison, james, , maine, report of bank commissioner , and , marshall, john, , mason, george, massachusetts, report of bank commissioner, missouri, bank of the state of, , statement of bank of, money, amount held by banks in united states, appendix b amount of, in united states, appendix a coin and commodity must be of equal value, credit must not be called money, description of, functions of, gold is our, how made, what are the pieces of, "wild cat," "red dog," etc., morrill, justin s., mortgages, amount of, rate of interest on, mutual credit societies, number of, in massachusetts, resources for short loans, ohio, bank of the state of, bank act of, statement of bank of, paper, accommodation, , commercial, difference between commercial and accommodation, paine, thomas, panic of , pinckney, charles, population, shifting of, price, what is, prices, causes of higher, printing, importance of, promissory note, what is a, note and draft identical, property, what is, difference between property and wealth, postal savings banks, raiffeisen, friedrich wilhelm, real estate, unfit as basis for currency, redemption, in coin essential, reforms demanded, , , , reserves, amount of, amount held by national and other banks, appendix b, amount of central, , additional, where obtained, bagehot, bank notes as, circumstances should control amount of, character of, average, in united states, elasticity of, , from what points considered, how increased, , jevons on, legal tender quality unnecessary to, national banks, promises to pay as, present, inefficient, penalty for not maintaining, , , present method of, useless, are measure of value, therefore must be coin, state or city debts as, silver, not used in bank of england, should be national, superimposed, state bank, taxation to compel equal, unfair to permit unequal, united states notes not actual, what constitutes proper, ricardo, root, l. carroll, ruggles, charles a., , scotland, description of, currency by conant, currency by white, effect of bank credit in, schulze, francis frederick, shaw, leslie m., shaw, william a., sherman, john, sherman, roger, , silver certificate, a warehouse receipt, silver dollars, amount of, appendix a, , a government debt, a subsidiary coin, a demand for gold, not money, , weight of, spaulding, e.g., stevens, thaddeus, steam, importance of, standard of value, changes in ratio of gold and silver as, gold, the natural selection of, as the, qualities of gold as, sub-treasury, deposits in, suffolk bank system, , , , , achievements of, , bank was first clearing house in united states, , commissioner's reports on, , description of, destroyed by per cent tax, sumner, charles, talbot, joseph t., , uap, money of, united states, bank clearings of, financial center of world, foreign trade of, important interests of, production of , size of, compared with europe, total business transactions of, united states government, nature of, taxing power, only resource, , time obligations only should be incurred, , unfit to meet demand debts, united states notes or greenbacks, additional cost of war due to, agreement to pay gold, amount of, appendix a and bonds issued for, constitutionality of, - cost of, as currency, , cost of, since , depreciation of, drive gold out, how converted into gold certificates, , issues of, lowest value of, not money, price of, a quotation of government credit, resumption of payment of, suspended payment of, unfit for currency, walsh, john r., failure of, war, civil, first loan for, washington, george, , wealth, what is, difference between property and, webster, daniel, , white, horace, , wilson, john w., clearing house examiner, los angeles, zone, credit bureau of, organization of, , organization, repetition of national government, places of, discount limited to, publicity of organization, should not stand alone, state lines do not conform to economic, and is followed by a series of charts for each year from - , with a few additional estimates for - . many of you have seen the figures i have presented as evidence of the fact that current trends lead to holding the library of congress in the palm of your hand within the average lifetime. [of course if they will let you have the library of congress]. these figures range from the first megabyte hard drives used in our very first mainframe, through the first m apple drive, to the same drive running on an ibm, to our current . g drive that cost less than any of our previous drives and has storage for twice as much data. of course, since i used only the real prices we paid for drive after drive, it was only a matter of time until the cost/price index would begin to play an important role, and we now have a database of drive prices long enough that the $ , price for the konan m external st apple hard drive kit in was a mere half of what it would be in today's dollars. thus: the first / hard drive we got [seagate-st ] should be at $ , in today's pricing index, or, conversely, we should see that the $ we paid for a toshiba . g drive is really only: $ per megabytes. . .in dollars. the database of project gutenberg drive costs: $ , per m at $ , for the removable m drive chassis each m added was about $ $ per m at $ /m [same st drive as i got in , but set up as external drive for the apple] prices unstable early on prices very stable now, falling by about / per year. $ per m at $ /m (please see footnotes directly below)* $ per m at $ /m (only seagate drive in blue book)* $ per m at $ /m (some disagreement about the year here) $ per m at $ . /m $ per m at $ /m --> (ibm listed in blue book as price) $ per m at $ /m (but i never saw until two years later) $ per m at $ . /m $ per m at $ . /m $ per m at $ /m $ per m at $ /m [in summer we got a toshiba meg] $ per m at $. /m [actual cost was $. /m at $ per m] $ per m at $. /m [ibm in was $. /m @ $ per m] $ per m at $. /m $ per m at $. /m $ per m at $. /m $ per m at $. /m $ per m at $. /m $ per m at $. /m $ per m at $. /m $ per m at $. /m $ per m at $. /m disclaimer: most of these are personal recollections, but are close to estimates i have looked up, as below. [how is it that and can seem so long ago!?!] *suggested resale price was $ in , still over $ /m *(by the edition, resale price was $ , only $ /m) *shugart and tandon were not listed *ibm did list a m for $ , only $ /m, couldn't find one *ibm listed k floppies at $ and . m floppies at $ *floppies dropping at %/yr are now under $ , of course, *ibm k ram cards were $ , k ram cards were $ *ibm k ram cards were $ the project gutenberg price index from to how to use the chart, first set of examples: the price in current dollars for any year is found in the first column. thus you can see that a one dollar item from will cost about $ . in . the value of the dollars used in any particular year would be found in the second column [value compared to ]. a dollar in will be worth about $. dollars while a dollar from - would be worth about $ . now. the project gutenberg price index from to how to use the chart, second set of examples: to remind you that these figures are presented only as an indicator and not as anything approaching reality, here are an additional set of examples from a different report, for several sample years. you can easily see [where we have integrated them below in the set of figures] that not only are the adjustments sometimes quite high, but that figures from different reports aren't always even remotely close to each other. as an example, while working on these figures i noticed a lack of a period of "double digit inflation" commonly referred to in most all recent reports on these economic trends. i checked this with local sources in the field, and was given the following figures which did include [just barely] some "double digit inflation", but only for a few years of the 's and early 's. in short, continue to beware of statistics, and please be advised a bit that while these figures may have a certain consistency, within the columns, that there relation to reality is probably far from an intensely accurate reflection of real prices over the century. *** additional figures from: economic report of the president base year - d-d indicates prices from the end of one year the end of the previous year. . .december to december is the official terminology. the adjusted rise is the percentage equivalent to the change in adjusted prices. % is dec to dec on unadjusted indexes % is year to adjusted adjusted rise year price d-d adj% . . . * . . . . . . . . . . . . . . . . . . . . . . . . *** the project gutenberg price index from to year: . [based on as . base year] . [and based on . % inflation rate] . . prices will double from to at . % prices will double from to at . % average price rise for year period - is about % [ . %] average price rise for year period - is about % [ . %] average price rise for year period - is about % [ . %] . . * . . old$/ $ $/old$ yearly % d-d adj . . . % . . . . . % . . . . . % . . . . . % . . . . . % . . . . . % . . . . . % . . . . . % . . . . . % . . . . . % . . . . . % . . . . . % . . . % . . . % . . . % . . . . . % . . . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . - . % . . . % . . . % . . . . . % . . . . . % . . . % . . . % . . . % . . . % . . . % . . - . % . . - . % . . . % . . . % . . . % . . . % . . - . % . . - . % . . - . % . . - . % . . . % . . - . % . . . % . . - . % . . . % . . . % . . . % . . . % . . - . % . . - . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . - . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . - . % . . . % . . - . % . . . % . . - . % . . - . % . . . % . . - . % . . . % . . - . % . . . % . . . % . . . % . . - . % . . - . % . . - . % . . - . % . . . % . . . % . . . % . . - . % . . - . % . . - . % . . base year: [ dollars = . ] year year/ /year year/previous year [keep the above line for reference on other years] . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . - . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . - . % . . - . % . . . % . . . % . . . % . . . % . . - . % . . - . % . . - . % . . - . % . . . % . . - . % . . . % . . - . % . . . % . . . % . . . % . . . % . . - . % . . - . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . - . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . - . % . . . % . . - . % . . . % . . - . % . . - . % . . . % . . - . % . . . % . . - . % . . . % . . . % . . . % . . - . % . . - . % . . - . % . . - . % . . . % . . . % . . . % . . - . % . . - . % . . - . % . . the project gutenberg price index from to how to use the chart, third set of examples: this index will allow you to estimate the cost of any item in the dollars of any year included in the index. example: you know the cost of an item in was $ , and you want to know the cost it would have had in dollar figures [i.e. "adjusting for inflation"]. first go to the base year of , in which . is an estimated base for the year . then look for the figure in the table: . . this indicates that the item costing $ in would cost approximately $ in . the second column is the inverse function, meaning an item costing $ in would have cost about $. or $. back in the year . you should be able to find some interesting trends such as that prices were falling back in as industrial growth swept the united states and the west was being developed. [based on an item costing $ in {$ , in }] prices fell from $ to $ from to , in a rather steady progression, and then rather steadily rose back for the next two decades until world war i, until they reached $ again in and $ in , which were the last two years of moderate inflation until after , when pricing dropped from a high of $ after doubling since . prices stabilized during the rest of the 's about $ until , and the great depression, in which prices fell to $ in and then back to the ranges of the 's-- until around the end of world war ii, when prices went out of control, rising from an average of around $ for wwii on the whole to $ in . it took years to hit the $ level in and years to double to $ in . from it took only years to double again to $ for the year . [at % per year, it takes years for inflation to cut $ to $. , at % it takes years, at % it is years and at % it takes about years]. based on % inflation, it will be . [based on as . base year] . [and based on . % inflation rate] . . which would be an year span for prices to double, since they were at . in to . , projected ] below are files for every year on this chart independently listed with that year as the base year, so you can look up for instance, what something from would have cost in , or the reverse. year: . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . - . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . - . % . . - . % . . . % . . . % . . . % . . . % . . - . % . . - . % . . - . % . . - . % . . . % . . - . % . . . % . . - . % . . . % . . . % . . . % . . . % . . - . % . . - . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . - . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . - . % . . . % . . - . % . . . % . . - . % . . - . % . . . % . . - . % . . . % . . - . % . . . % . . . % . . . % . . - . % . . - . % . . - . % . . - . % . . . % . . . % . . . % . . - . % . . - . % . . - . % . . year: . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . - . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . - . % . . - . % . . . % . . . % . . . % . . . % . . - . % . . - . % . . - . % . . - . % . . . % . . - . % . . . % . . - . % . . . % . . . % . . . % . . . % . . - . % . . - . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . - . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . - . % . . . % . . - . % . . . % . . - . % . . - . % . . . % . . - . % . . . % . . - . % . . . % . . . % . . . % . . - . % . . - . % . . - . % . . - . % . . . % . . . % . . . % . . - . % . . - . % . . - . % . . year: . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . % est. . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . - 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. % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . - . % . . - . % . . . % . . . % . . . % . . . % . . - . % . . - . % . . - . % . . - . % . . . % . . - . % . . . % . . - . % . . . % . . . % . . . % . . . % . . - . % . . - . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . - . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . . % . . - . % . . . % . . - . % . . . % . . - . % . . - . % . . . % . . - . % . . . % . . - . % . . . % . . . % . . . % . . - . % . . - . % . . - . % . . - . % . . . % . . . % . . . % . . - . % . . - . % . . - . % . . none provided by the internet archive emerson on sound money speech by willis geo. emerson at lockerby hall grand rapids, mich. october th, . publication and printing: perry s. heath chicago, ill., october th, speech of hon. willis george emerson, lockerby hall, grand rapids, michigan. october , . mr. chairman, ladies and gentlemen--i am indeed pleased to meet such a magnificent audience in this manufacturing city of grand rapids, noted from ocean to ocean for her culture, commerce and progress. especially am i pleased to speak in your city in behalf of sound money, protection and reciprocity, under the auspices of the young men's republican club. i bring you greeting from the state of illinois, and promise you that she will give a majority of , on next tuesday for william mckinley. i am proud to hail from the grand old state of illinois--a state that gave to our common country in the darkest days of our nation's history, logan, that matchless civilian general; gave the unconquerable grant, the tanner from galena, and offered up as a holy sacrifice the "rail-splitter" president from the sangamon bottoms--abraham lincoln. but to-night i remember that i am in the state of michigan--magnificent commonwealth--almost illimitable in her resources, unconquerable in her courage, phenomenal in her progress, invincible in her pluck, unswerving in her patriotism, the home of the gallant alger, and the former abode of that matchless statesman and patriot--the gifted zach chandler. fellow citizens, we are in the closing days of the most momentous political campaign ever witnessed in our common country. he who would question the sincerity or honesty of a political opponent's views in this crusade must for the time being forget the school house on the hill and the high plain of intelligence of american citizenship. knows "coin" harvey. hon. w. h. harvey, author of coin's financial school, is a gentleman i have known for many years, and for as many years as we have known each other, we have been warm personal friends. toward the man i entertain the greatest respect; toward his theories i regard them as idle, visionary sophistries as unstable as "the house that was built upon sand." the student who really gives thought to the financial question will early discover that coin's financial school rests upon a false foundation and the superstructure must surely fall when beat against by the irresistable and truth capped waves of facts and history. no better answer can be given to these misleading and false theories than a plain, truthful statement of our coinage laws and the effect of legislation relating thereto. fellow citizens, whatever else we may be, we are all americans, either by birth or adoption; we respect and love the same flag and the undying principles which it represents. we do not differ in a desire for good government. we may differ and differ widely, however, in our opinions and ideas as to what laws will insure the greatest blessings to the people of this nation. fortunately for the republican party the american people are a reading and a thinking people, and the problems of the present campaign are now on trial before a jury of , , of honest peers, not one of whom am i willing to believe would wantonly strike down the flag of our country, or any of its cherished institutions. the people a jury. this audience is a part of that great jury, who, after the evidence is all in, will decide one way or the other, with an avalanche of snowy ballots, as spotless in their purity as the honest hearts of the voters who cast the verdict into the ballot boxes. as americans we are justly proud of our birthright--proud of the air of freedom that kisses the stars and stripes--our nation's ensign, emblematical of mighty victories in the past, a guarantee of protection in the present to all who stand beneath its folds and laden with rich promises of future prosperity. our country is greater than the men whose election it is our pleasure to advocate. it is not men but measures which we are to consider. an earnest conscientious desire to investigate and determine the right, should absorb and thrill the heart of every patriotic american voter. the great parties in the present campaign do not differ so much in regard to the amount of money as they do in regard to its quality. "it is not the medium of exchange so much as it is an active exchange of the medium itself." on the tariff question we do not differ in schedules, but principles--principles which we, as republicans believe, involve the welfare of all our people and the prosperity of all classes. personally i have every respect for a conscientious, earnest opponent in this crusade of education, and while honestly differing from them, yet will endeavor to wound the feelings of none. if i speak bitterly of doctrines which i believe to be pernicious in theory and ruinous in practice, do me the justice of not interpreting my remarks as in any sense personal. moral questions involved. fellow citizens, this is a campaign embracing both political and moral questions. it is a political conflict, which the people will sooner or later acknowledge, to be one of patriotism. a moral conflict, which they will acknowledge to be indeed sublime. we must not forget that patriotism in time of peace is a scarcer article than in times of war. in the guise of citizens men like "coin" harvey are attempting ignorantly or otherwise to undermine and overthrow our nation's honor and credit, and it is these alone that can perpetuate our liberties and insure us prosperity. the republican party comes before the american people advocating the maintenance of the gold standard and the use of silver as money, in the largest volume possible, consistent with safety; advocating the maintenance of our nation's honor and credit; advocating a tariff, not for revenue only, but a protective tariff that will encourage domestic industries and give employment to all our people; advocating reciprocity. a doctrine which will open an unlimited market for the american farm and the american factory a doctrine bequeathed to this generation by the now sainted james g. blaine. upon these issues the republican party comes confidentially to the people, asking for their suffrage, appealing not to their prejudice but to their reason, not to their passions, but to their judgment. in this holy crusade we are lead by that valiant champion of the people's rights, "that advance agent of prosperity," maj. william mckinley. on the other hand we find the bryanized democrats, populists, and believers in coin's financial school arrayed in a solid phalanx against these cherished principles which we so ardently believe in. wilson law closed factories. the repeal of the mckinley law in closed down factories and manufactories by the hundred and deprived tens of thousands of american workmen of employment. under the operations of the mckinley law the wage earners of the united states were receiving every saturday night a little over $ , , . under the operation of the wilson law they are receiving a little less than $ , , as a saturday night pay roll, a falling off of over $ , , per week to the wage earners of this country. if you ask me what has been the most unfortunate and appalling result of this wonderfully shrunken pay roll, i will answer by saying that american workingmen by the thousands have lost the roof that covered their heads for themselves and families, have been turned into the highways and are beggars to-day in the most unfortunate sense of the word. the questions of free trade and protection however, have practically been relegated into the background this year, and the sixteen-headed monster of free silver pushed to the front. fellow citizens, free trade and free silver are twin sisters of infamy, the assertions of mr. harvey to the contrary notwithstanding. it was the province of the republican party four years ago to send forth its protests and warnings against free trade, and to-day with equal vehemence it is sending forth its warnings against destroying the high standard of our nation's finance, and reducing this country to a second class basis of silver monometallism. bread and butter the issue. fellow citizens, the paper issue in this campaign is one of finance, but the real issue is one of bread and butter. free trade during the last three years has pauperized its tens of thousands, but this free silver craze, if placed upon our statute books, will pauperize its hundreds of thousands. my friends, i believe, and believe most earnestly, with every throb of my heart, that in the present campaign the republican party is the only true friend silver has. we seek to elevate the silver dollar, our opponents seek to debase it. the republican party has provided a redeemer for every silver dollar. our opponents seek to destroy and alienate this redeemer. if the silver dollar was not exchangeable with gold, it would not be worth any more than a mexican dollar, or not as much, for there is less silver in it. coin's financial school and free silver advocates generally, have much to say about the money of the constitution. let me say to you, the money of the constitution was based upon the relative market value of the two metals. the history of the last years, from to , is replete with evidence proving beyond the question of a doubt that the relative or market value of these metals is continually changing. when columbus discovered america in , ten ounces of silver would purchase one ounce of gold; when the pilgrim fathers landed on the rocky and barren coast of new england in , thirteen ounces of silver would purchase one ounce of gold; in fifteen ounces of silver would purchase one ounce of gold. in one ounce of gold would not purchase sixteen ounces of silver. to-day one ounce of gold will purchase almost thirty-two ounces of silver. this fluctuation of values of the two metals is controlled, not by laws we spread upon our statute books, but by the law of supply and demand, governed by the cost of production. jackson and jefferson. the patriotism and statesmanship of andrew jackson and thomas jefferson were untainted in by the dangerous influence of a coterie of silver barons. they simply ascertained as nearly as they could the relative or market value of the two metals, and determined the legal from the commercial ratio, placed them side by side and started our mints going with the unlimited coinage of gold and silver at the ratio of to . as a matter of fact they had overvalued silver; that is to say, the gold dollar was worth cents, but the silver dollar was only worth cents. now the rank and file of our forefathers cared very little about the discrepancy of the cents on the dollars, but the money changers were abroad in the land in , the same as they are in , and whenever a gold coin came into their possession it was quietly retired from circulation. in other words, the cheaper money drove out of circulation the higher priced money, and as a result, we had silver as the only hard money currency circulating in this country from to . let me quote thomas jefferson's own words. in speaking of the ratio of the two metals, he says: "the proportion between the values of gold and silver is a mercantile problem altogether." what statement could be clearer and more concise than that? it being a mercantile problem, it of course was understood to be subject to fluctuation and change. accordingly, in our forefathers concluded as their first attempt at a double standard had utterly failed in keeping the two metals circulating side by side as money, that they would change the ratio from to to to , which they did. it seems this ratio undervalued silver, that is to say, the gold dollar was still worth cents, but the silver dollar was worth from to cents. gold at once became the hard money circulating medium in this country, silver the higher priced money, was entirely retired by the money changers, bullion dealers and silversmiths. this is another illustration where the cheaper money drove out of circulation the higher priced money. greenbacks were cheap money. in our country was engaged in civil war, and the greenbacks were issued as money, and were at once looked upon as a cheaper money than either gold or silver and immediately drove both gold and silver out of circulation and kept them out of circulation for seventeen years, or until we resumed specie payment in . the history of these seventeen years is another instance where the cheaper money was victorious and drove out of circulation the higher priced money. mr. harvey no less than four times in his recent speech in this city gave the following definition of bimetallism: "bimetallism is the right to use either of the two metals for money." this condensed answer bears about the same relation to the correct definition of bimetallism as the boy orator of the platte compares with those intellectual giants whom he seeks to imitate, but without success, the immortal washington and lincoln. (applause). bimetallism as is understood in the discussion of our financial question, is the use of both gold and silver as money; both legal tender money, and the legal ratio between the two metals determined from the commercial ratio. throughout mr. harvey's published works and lectures we find him affirming the false principle that money is a creature of law, and that by operation of law the commercial ratio between gold and silver can be made to conform with the legal ratio of to . let us follow the author of "coin's financial school" for a few moments, and see where this false principle will carry us. to-day the commercial ratio between silver and gold is about to . mr. harvey claims that if his theories are spread upon our statute books that in a very short time the commercial ratio will be to . if mr. harvey possesses the superhuman power of reducing the value of gold one-half, or doubling the price of silver, whichever you will, and bring them to a commercial parity at to , then indeed would he be false to the citizens of this republic if he did not add a little more power to his "keeley-motor" theory, (applause) and make the commercial ratio between gold and silver to , the same as it was in , or better still, if it is a blessing to humanity to lower the ratio between gold and silver, then apply a little more of this occult power and make the ratio to , the same as it was in , when our ancestors came over in the mayflower; or apply the same force with renewed energy and bring the ratio down to to , the same as it was in . indeed, if this principle is a boon to humanity, and his theories are not false, why not push the work along and make the ratio between gold and silver to ? (applause.) my fellow citizens, in following my friend harvey, you are led into a labyrinth abounding with impossibilities and as impracticable as the theory of perpetual motion. when the earth is proven to be flat instead of a globe, when water runs up-hill, when the law of gravitation ceases to be operative, when the tail wags the dog and not the dog the tail, then, and not till then, may we seriously consider these perpetual motion, "keeley motor" theories of mr. harvey and other double standard advocates. (great applause). if we were unable to keep both metals circulating side by side when there was a slight discrepancy of only two or three cents in their intrinsic value, does any intelligent or sane man believe for a moment whether he is a student of coin's financial school or not, that if we throw open our mints to the free and unlimited coinage of -cent dollars, that they would not at once drive out of circulation the $ , of gold, now constituting more than one-third of our circulating medium? if gold, so important a factor in our medium of exchange both at home and abroad, should retire before silver--the cheaper money (and the light of experience surely proves that it would) can any one doubt that we would at once go on to a silver basis? can any one doubt that the $ , , of silver now used as money in this country would not instantly be cut in two so far as its purchasing power is concerned--that is, shrink from cents, its face or nominal value, to cents, its bullion value? in the light of past experience it would surely be a sad commentary on our intelligence as an enlightened nation, if we had learned nothing in years. if the illustrious hamilton and jefferson were alive, they would, by pursuing the same policy which actuated them in determining the money of the constitution, fix the ratio to-day at about to , simply because the relative or market value of the two metals has varied to that extent. honesty and sober judgment needed. my countrymen, the questions involved in the present campaign merit and deserve your most careful thought and study. it is the sober, honest judgment of the thinking, reading, investigating american citizen that the republican party is relying upon for its support. let me give you a few facts which possibly you will consider worthy of remembrance: first. every free and unlimited coinage country in the world is on a silver basis. second. there is not a gold standard country on earth but what uses both gold and silver as money. third. there is not a silver standard country in the world that uses any gold whatever as money; and lastly, there is not a silver standard country to be found in the great ocean of commerce that rolls all 'round the world that has one-fourth as much money per capita as has the united states and other gold standard countries. china, japan, india, mexico and most of the south american states are on a silver basis. the united states, england, france, germany, belgium, sweden and others are on a gold basis. one of the most interesting facts which the student of finance will encounter, is the vast difference of the amount of money per capita between the gold standard and the silver standard countries. per capita of money. in the countries on a silver basis we find the central american states with a per capita of $ . , japan with a per capita of only $ . , india $ . , china $ . , mexico $ . . now note the difference between these countries and a few that i will mention that are on a gold basis: the united states has a per capita of $ . , england $ . , france $ . , germany $ . , belgium $ . . in this connection, fellow citizens, let me impress upon your minds the facts that you cannot go into any country on the face of the earth where its mints are open to free and unlimited coinage of silver and find a single gold coin circulating among the people, moreover, that the silver standard country does not exist where the united states gold dollar, the united states silver dollar, or the united states paper dollar will not purchase twice as much merchandise as any dollar which you can find circulating among its people. i challenge the author of coin's financial school or the demosthenes of nebraska, william jennings bryan, or any one else, to successfully contradict this statement. i am a bimetallist. personally, i am a bimetallist, and confidentially believe the republican party, guided by its wisdom and patriotism, will during the mckinley administration, devise ways and means by international agreement of autimatically adjusting the unsolved problem of true bimetallism, and keep both gold and silver on a parity at some given ratio. silver will then be lifted from its place as one of the commodities of the earth and dignified as money, side by side with gold. to-day, i am a bimetallist, an ardent and devoted one, in the sense that i desire to see both gold and silver circulating side by side as money, and in the sense that we can have a greater per capita of money in this country by using both gold and silver as currency, than we possibly could by driving gold out of circulation, but fellow citizens, i disbelieve utterly in the possibility of a double standard. the phrase, "double standard" is a contradiction of terms. standard means "correct measure," and you cannot have two different correct measures of value any more than you can have two different correct yard sticks, or two different correct results from a mathematical problem, or two different correct cyclometers on a bicycle. it one is right the other is wrong, and that is all there is to it. england tried the imaginary double standard for years, and never succeeded in keeping the two metals circulating side by side, and finally gave it up as an utter failure. france with all the ingenuity of her inventive people, changed the ratio of gold and silver times in twelve years in trying to balance on the double standard tight rope. we commenced trying it in , and went on to a silver basis and remained there for years, or until we changed the ratio from to , to to , in . this change of ratio placed us on a gold basis, where we remained for a number of years. in we went on a paper basis and remained there for a number of years, and finally went back on to a gold basis in the common accepted understanding of the question, where we have since remained and the progress and prosperity of the united states during the last third of a century has been without a precedent in the history of the civilized world, and yet, i believe with my whole heart, that in the evolution of this financial question, hastened on by agitation, a plain of understanding will be reached higher and beyond that which has ever heretofore obtained in any of the civilized nations of the earth, and it will come through deliberations and councils in the republican party--the party of progress--and when it comes it will lighten the burdens and bless humanity. the crime of ' . mr. harvey and all silver advocates talk to us about the crime of . let me say here and now there was no crime committed in , directly or indirectly. if there was a crime committed, senators jones and stewart of nevada, the present high priests in the silver movement were the chief conspirators, for then, as now, they were among the largest silver mine owners in the united states, and they voted for the bill. prior to we had coined in this country, all told, about , of silver dollars, since we have coined up to january st, , $ , of silver, about $ , , of which are standard dollars. since january st, , we have coined over $ , , of standard dollars. during last august we coined , , of silver dollars, and the profit to the government--the people--was between $ , and $ , . webster says: "demonetization is to deprive of value, or to withdraw from use as currency." does it look very much as though we had withdrawn silver from use as currency? in what way have we deprived silver of value? it is a full legal tender for all debts, public and private, and without limit as to amount, and has been for the last eighteen years. these, fellow citizens, are facts which you will not find within the covers of "coin" harvey's books, it looks as though we had added value to it, since the silver dollar circulates side by side with the gold dollar, notwithstanding its bullion value is cents less than its nominal or face value. consistent friend of silver. the republican party has ever been the consistent friend of silver and to-day is irrevocably committed to the doctrine of international bimetallism, but is unalterably opposed to silver monometallism. for one, i am not willing to see all the gold in this country driven out of circulation and the purchasing power of silver reduced to its bullion value. in other words, i am not ready to see the per capita of money in this country reduced fully one-half and our nation doing business on a mexicanized silver basis. wages are the last schedule to advance, and as fully per cent, of the male adults in the united states are wage, salary or fee earners, there would be almost universal want, misery and suffering bequeathed to these people, because of such a reckless, unpatriotic and unbusiness-like experiment. what party then is the real friend of silver? the party that is trying to maintain the parity of the two metals, or the party that is protesting friendship in unstinted terms and yet committed to the folly of reducing silver to its bullion value? fellow citizens the proposition in a nutshell is this: the republican party believes that the coinage of silver should be restricted by law and coined on government account. mr. byran and his followers believe in the free and unlimited coinage of silver on private account. when the government coins silver, under existing laws, it gets the difference between the cost of the bullion and the stamp that is placed upon it. this is known as the gain or seigniorage and is paid into the treasury of the united states the same as is provided by law regulating subsidiary coins. in this way every mechanic, every farmer, every laborer, in fact every citizen of the united states gets his proportionate share of this gain. do not demand bimetallism. what "coin" harvey and the advocates of free silver demand is not bimetallism, but the unlimited coinage of the silver dollar, not at the just ratio of to , but at the unjust ratio of to , not on government account, but on private account. to-day the government--the people--are receiving the benefit of the cents on each silver dollar coined, that being the difference between the cost of the bullion and the face value of the dollar. the government--the people-will lose these cents if silver is coined on private account. the question is, my countrymen, who will get these cents on each dollar, who will be benefitted by this change? we know the government will lose cents on each dollar, the question is, who will receive it, or will this profit, now accruing to the government--the people--be lost as completely as the value of this building would be to the owner if it burned to ashes and there was no insurance? (applause.) i am pretty well acquainted with the mining business, have spent many years of my life in the mining districts of the west, and am the owner to-day of mining properties in oregon and in colorado, and also largely interested in one of the most noted silver mining properties in old mexico, and i know whereof i speak, when i say to you that english capitalists and american silver kings own a majority of the stock of nearly every incorporated silver mining company in this country of any prominence. it is beginning to look to me like "there was a pretty good-sized african in the wood pile somewhere." (laughter and applause.) free trade should be undone. eight years ago, and again four years ago, through the influence of the cobden club, england attempted to subdue america. she succeeded in prostrating our industries, impoverishing our people, and increasing our public debt, but let us hope that the intelligence of american citizens will rise up in its full might and undo the free trade blunder of . it now looks to me as if there was a gigantic trust of silver kings and english capitalists attempting to again subdue free america. evidently there never was such a concert of action in the united states as has taken place during the last few months in regard to this silver question. the rapidity with which it has travelled all over this country, to say the least, has been phenomenal. there is an old saying, that "a falsehood will travel a thousand miles while truth is getting its boots on." fellow citizens, go forth and tell the misguided advocates of free silver and believers in the false theories of "coin's" financial school to rejoice in their strength while it is called to-day, for, by the living god "truth has its boots on" and is marching triumphantly out among the people, tearing away the webs and veils of delusion and hypocrisy and appealing to the people, not to their passions, but to their intelligence, their reason and their honor. the people are not ready to advance by going backwards, they are not ready to be chinaized, to be japanized, south americanized, mexicanized or subsidized by a coterie of silver barons and english capitalists, who are attempting by stealth to nail the wage earners and farmers of this country to an unholy cross of depreciated silver. (applause.) goes after bryan. william jennings bryan tells us in his knoxville, tennessee, speech, that there is no danger of a silver flood. "coin" harvey makes the same statement, notwithstanding the world's production of silver for the year , at only about cents an ounce, amounted to the fabulous sum of $ , , , a greater annual production than ever before in the history of the world, and only exceeded by the output of silver for the year of , which amounted to $ , , , and still he claims there is no danger of a silver flood. all that mr. bryan asks for is, that the reins of government and the keys of the united states treasury be turned over to himself and his followers, and they will try the experiment. i hardly think the people of the united states are ready to invest in any more political experiments. the experiment of four years ago has proved quite enough. no flood of silver! the effrontery and insult to the intelligence of mankind by this degenerate democracy and silver advocates surpasses understanding. (applause.) fellow citizens, the so-called crime of is a myth and destitute of substance. the so-called conspiracy of that year is also a myth and without substance. you might just as well go out and from the housetop proclaim that the horse has been dehorserized, because of a huge conspiracy entered into by electricity and the bicycle. why not ask that the noble animal be rehorserized, so that its selling price will be $ or $ , the same as it was in "ye olden times." (applause.) improved harvesting methods. the old-fashioned methods of reaping the yellow fields of wheat has also been ousted by the conspiracy of the late improved harvester and binder. the old fashioned cradle has been decradleized. why not form an alliance all over this country to recradleize the cradle, and make common warfare against the up-to-date binder? even the old mccormick reaper has been dereaperized and the succeeding invention, the header, has been deheaderized, and who shall not say in this onward march of progress, in this wonderful advancement of our civilization, in this age of discovery and invention, that sooner or later the up-to-date binder of to day will not be debinderized by the inventive genius of some american citizen? (applause.) now, let us see, fellow citizens, what the so-called crime of has done for prices of various commodities. one of the stock declarations of mr. bryan and mr. harvey and their cohorts is that prices should be restored and wages should be increased. one of two things is very apparent, either the framers of the chicago platform did not consult the statistics of the united states, or else they imagined the voters would not. "coin" harvey and the silver advocates generally seek to establish their position by quoting statistics of average prices of certain great commodities like wheat and cotton claiming that prices commenced falling in , and their decline has continued ever since. these arguments are those of the delusionists and must crumble before the evidence and the facts. let me say to you that prices did not commence falling in , but in - . why are they not honest? if these men are not demagogues, pure and simple, why do they not inform the "dear people" why prices fell more during the eight years precedent than they have ever fallen since? "coin" harvey has never explained why, and if he did, his theory would vanish like the mist before the rising sun of truth. for example, cotton fell from $ . / in , to cents a pound in . or wheat for instance. the average farm price of wheat in the united states for the year was cents a bushel, paper currency, or only cents a bushel in gold. the average farm price of wheat in the united states for was cents a bushel, the same in , while in the average farm price of wheat in this country was cents a bushel, or cents a bushel higher than it was in . thus it will be seen that an unfair and false impression is trying to be created among the people by both mr. bryan and his followers. perhaps mr. bryan and the free silver advocates would like to know where i get my statistics. i answer them by saying they are taken direct from the united states statistical abstract, which deservedly ranks high as an authority. in looking over this work i could not help wondering if "coin" harvey and our opponents who are shouting so loud and lustily for the free and unlimited coinage of silver and a restoration of prices, would not like to apply their cure-all to refined sugar, which was selling in at / cents per pound, and only / cents per pound in , or for instance, illuminating oil was quoted in at cents a gallon, and only / cents per gallon in . manufacturers of bar iron in were receiving $ . per ton for their product, and only $ . a ton in . a keg of nails cost $ . in , and $ . in . a box of window glass that cost $ . in , sold only at $ . in . a carpet that cost $ . a yard in , can be purchased today for cents a yard. the steamboat transportation companies hauling wheat from chicago to new york city, by lake and canal, are receiving a compensation to-day of a little less than / cents a bushel, but in they were receiving / cents per bushel, for every bushel they carried. shall prices be restored. the question is, do the people of the united states want these prices restored? we are willing as americans that american industries and home competition shall adjust prices, but we are not willing that prices of labor shall be adjusted in this country by american workmen entering into competition with the pauperized laborers of europe. from the same reliable statistics and undoubted authority we find that wages have materially advanced in this country during the last third of a century. the increase from the old double standard wages of to those of , have been no less than per cent, in money, and per cent, in purchasing power. this does not look very much like a falling off. i will admit that the price of wheat has declined and declined rapidly since , but you must remember that grover cleveland was elected president that year and is still in the white house. give us back a protection that protects, and we will not only insure abundance of labor for all our people, but will guarantee that farm products generally will command better prices. (applause). fellow citizens, i earnestly believe that "coin" harvey and all those who are advocating the free and unlimited coinage of silver at the unjust and untrue ratio of to , as a nostrum for our ills, are advocating a theory as misleading as it is wicked and unholy. no theory more false was ever advanced or calculated to more thoroughly deceive the earnest, industrious, god fearing people of this nation. let us undo the free trade blunder of and we will hear no more about the mythical crime of . (applause.) protective tariff the remedy. my friends, a tariff that protects; reciprocity that opens up a market for our surplus articles from the american farm and the american factory; a sound currency, and the business confidence which will follow, are the remedies for the unfortunate condition of bankruptcy into which the country has been submerged by political stupidity. the question is simply one of honesty or dishonesty. shall thrift and economy be rewarded by robbery? shall the widow's mite and the savings deposited in the banks of this country be cut in two by changing our money to silver monometallism? shall the two and a half billions of school bonds from all over the country, held by english and american capitalists and payable in gold, be doubled, and a double tax fall upon the shoulders of the tax payers of this nation? shall the toilers of this land, the wage-earners on farm and in factory, be robbed every saturday night of one-half of their weekly wages? laborers shall be honestly rewarded. no. this blot of repudiation shall not smirch the untarnished escutcheon of american patriotism, neither shall the toiling masses receive as their reward for honest labor a "mess of depreciated silver pottage." we are now asked to desert the old ship of state that has carried this nation through many storms, through many conflicts, and invariably anchored us in the snug harbor of safety and maintained our country on the map of the world, and added many stars to the old flag. we are asked by these new and false prophets of finance to destroy this grand old ship, freighted with the hopes and ambitions of seventy millions of free american citizens; this old ship tested by time, tried by adversity, taut and trim as a may queen and invincible as a bessemer steel iron cladder, a ship that was launched by washington and the patriots of years ago, and piloted by such noble men as lincoln, grant, garfield and hayes. we are asked to desert this ship of known safety, and embark in an untried craft and sail away on the turged waters of an unknown sea. a craft manned by a free silver captain, piloted by free tradeism, and ballasted with bombs of anarchy and repudiation; a craft whose very slimy plank is reeking with condemnation; whose mutinous crew are ready to scuttle her in mid ocean; whose worthless and shoddy sails are fanned by the angry breath of high heaven; and whose nearest port is bankruptcy and perdition. (long continued applause.) my fellow citizens, the true solution of the present financial depression lies along other lines, and this brings us face to face with the real problem. perhaps you have noticed already in this campaign that no one is quite so disgusted with remarks on the tariff as a byranized democrat or a populist? the impoverished condition of the country, resulting from the free trade crime of is so apparent on every hand that when we lay the skeletons at their doors they frankly confess judgment, but tell us that other questions of more vital importance are now before the people. my friends, the endless chain of american prosperity has been broken and never will be mended until the drawn fires from our furnaces are rekindled and the free trade smoke consumers are removed from the tall chimneys in our manufacturing districts. (applause.) a principle upheld by statesmen. it is not in any exulting spirit that we refer to a protective tariff, but rather because it is a great and underlying principle of national prosperity; a principle bequeated to this nation by washington, upheld by henry clay, fostered by abraham lincoln, championed by william mckinley, and supported by the reciprocity of james j. blaine. prior to the free trade crime of , we heard nothing about a diminished gold reserve. in those halcyon days confidence flew abroad in the land on the wings of prosperity. capital was freely invested and labor employed at the highest wages. the gold reserve occasioned no uneasiness and required no thought. instead of acting as an alarmist it steadily grew, acting as a balance wheel to an ever-increasing confidence. the surplus was employed in paying off the national debt; and during president harrison's administration our national indebtedness was reduced almost as much as it has been increased by the present administration. what has happened during the last three and a half years of grace? the alluring and musical hum of industry is no longer heard in the land of freedom. the pendulum of time has swung back and revealed to the american people the ghastly skeleton of want and forced idleness concealed in the free trade closet. our great commercial institutions have fallen into a most deplorable and unhappy state, misery and want, with pinched and sorrowful countenances are walking hand in hand up and down by deserted workshops. the honest face of toil blushes as hunger drives him to eat the bread of charity. the stilled wheels of industry throughout our land, and deserted and idle farms are indeed eloquent in their silence in behalf of a protective tariff. (applause.) capital that was formerly employed in manufacturing enterprises has been withdrawn, while the balance of trade with other nations is frightfully against us. england has been served. if england had had a political party manufactured to order by the most skilled artisans of the earth, she could not have had one made that would more faithfully serve her commercial purposes than has the present administration. let us briefly inquire into the cause. take, for instance, the sheep and wool industry, which a few years ago was a prominent one in your state. under the stimulus of protection, we had in this country in , , , sheep. then grover cleveland was elected president, and this was followed by the democratic free wool indictment of , known as the mills bill. the wool growers of america became alarmed, they fattened and sold their sheep to the butchers by the millions. this slaughter continued for four years, or until gen. harrison was elected to the presidency in . the authentic statement shows that the number of sheep had been reduced in this country from , , in to , , in . president harrison's election stopped the slaughter, and under the stimulus of the mckinley law the industry gained rapidly and at the close of mr. harrison's administration the total number of sheep in the united states was , , . (applause.) in mr. cleveland was again elected president. this was followed by the repeal of the mckinley law and the enactment of legislation hostile to the wool industry. during the last three and a half years the number of sheep in this country has been reduced from , , to , , , or fewer sheep than there was in this country in , or at any time since the so-called crime of that year. so much fellow citizens, for the democratic free wool joke on the american people. he talks of wool. now let us talk for a few moments about the price of wool. for ten years preceding the repeal of the mckinley law, the average price of ohio x.x.washed wool in the boston market was a little over / cents per pound. april , wool was quoted in the same market at cents a pound. such a startling contrast in prices needs no comments. as millions of our sheep were slaughtered we were compelled to import wool and woolen textiles into this country sending our money abroad, which should have been paid to the american farmer and sheep raiser. instead of this we paid our money over to foreigners in exchange for wool and woolen textiles, which came into this country like a flood when the mckinley law was repealed and the duty removed. the result was that the woolen mills of america were practically all shut down and thousands upon thousands of american workingmen and women were thrown out of employment, and in turn, were unable to purchase the products from the american farm. no wonder the american farmer found a ready market for his potatoes in , when all our people were employed, at from c to c a bushel; and to-day, when our people are unemployed, the farm price of potatoes is from c to c a bushel. let us see what sort of a stewardship has been going on in this country for the last few years. for the twenty-five months ending november , , our balance of trade with other nations was in our favor to the extent of $ , , . that is what the mckinley law and protection did for this country. that, fellow citizens, is what we call good business methods. selling to other nations more than we purchased from them to the extent of $ , , , or an average of $ , , per month, or $ , per day. (applause.) what the record is. now, let us look at mr. cleveland's record for the fifteen months ending december , --this, you will remember, was under the wilson bill. we find the balance of trade, instead of being in our favor, was against us to the enormous amount of $ , , , or an average of $ , , per month, or $ , per day. that, fellow citizens, is a pretty good sized daily loss. that is what we call remarkably poor business methods, and so does every one within the hearing of my voice who is disposed to be fair in the consideration of this question. but why speak further of the evils of free trade, or multiply examples of the blessings of protection. the record of the last three and a half years has been an object lesson, both impressive and eloquent. it is gratifying to note that some of the ultra free traders in are the most pronounced protectionists in . many of the old time democrats who are proud of the traditions of their party, proud of the principles which they have cherished for so many years, are refusing to follow the platform adopted by the degenerate democracy of . let us mete out justice to whom justice is due. when the flag of our country, waving above fort sumter was fired upon by the enemies of good government, thousands upon thousands of the democrats of the north forgot their politics, shouldered their muskets and became patriots. (applause.) this year of grace, , when the guns of anarchy and socialism are directed against the supreme court of the united states and the nation's honor and credit, these same democrats by the tens of thousands are turning from that platform of repudiation and are the stanchest of patriots. (applause.) spirit of revolution. it cannot be denied that a spirit of wantonness and revolution prevailed at the chicago convention, repudiation was openly advocated on the floor of the convention hall and made a part of the platform adopted. the red hand of anarchy grappled the throats of all who dared oppose the extreme measures advocated by that seething sea of restless agitators. i wish to draw a line of demarkation, clear and distinct, between the old simon-pure democracy of hamilton and jefferson, and this new degenerate democracy of bryan, tillman and altgeld. it is true the framers of the chicago platform claim the name, but the tenants and faith are strangely at variance with the traditions and principles of the old jeffersonian doctrine. my countrymen, it is not alone the volume of money which the people want, but they demand its activity in trade and commerce. if you ask me how this can best be accomplished, i will answer by saying, protect american industries and universal confidence will surely follow. (applause.) great is confidence. confidence is the shibboleth of prosperity. confidence that good dollars mean well paid labor. confidence that well paid labor means good times. confidence that wages paid to american workingmen will possess the same purchasing power as the best money in the civilized world. confidence that a pension policy, just and generous to our living heroes, will be restored. confidence that no old soldier is to be deprived of his quarterly check without trial by judge or jury. confidence that the republican party will maintain a redeemer for every silver dollar coined. confidence that a return of the republican party to power will start every mill and factory in this country, without the aid or consent of any other nation or nations on the face of the earth. confidence that international bimetallism, so ably advocated during president harrison's administration, will be vigorously promoted by the mc'kinley administration. (great applause.) confidence that a vote for mc'kinley and hobert is a vote for the home and the fireside. confidence that vermont and maine have penciled a bright prophecy of hope in the eastern sky. confidence that the dragon head monster of state rights is not to be resurrected in this country. (applause.) confidence that sound money and protection are the pillars of jackin and boaz in the temple of american honor and prosperity. confidence that the supreme court of the united states is to remain our bulwark of justice and all the gates of hell shall not prevail against it. (applause.) proud of being a republican. fellow citizens, i am a republican and proud of my party's history. the history of the united states has been made rich and resplendent with victories and achievements of our party. we are proud of our nation's history from its earliest dawn down to the present, and for the valuable lessons it has taught. we would not expunge or obliterate a single line. we accept it as a whole, from plymouth rock to bunker hill, from bunker hill to fort sumter, from fort sumter to appomattox, and from appomattox down to the campaign of . we dedicate crowns of laurel for the giants who have evolved the mighty principles and tenets of the republican party--washington and grant, blaine and logan, sherman and garfield, harrison and mckinley, and most of all, that gentle soul, that man of equal poise, whose peer has never lived since the days of blessed galilean--abraham lincoln! (applause.) our history is one of greatness and sublimity. its pages are rich with the names of orators more eloquent than a burke, with the names of statesmen more acute than the "iron chancellor" and the names of warriors greater and mightier than napoleon. in the dark and turbulent days of the rebellion, the republican party, with the assistance of democratic patriots, saved this nation, while now in the closing days of the nineteenth century, by the living god, patriots will save and protect our nation's honor. ours is the greatest nation on earth, and the possibilities of the future are almost limitless; if we make no mistake in the great principles of protection, reciprocity and a sound currency, which have for their immediate object the betterment of the conditions of the wage-earners of this land. marching to greatest victory. following the leadership of our gallant standard bearer, that brave civilian soldier on the field of battle, that statesman without a peer, that friend of the toiling millions, that companion of every old soldier, that invincible leader of men, major mckinley, we are advancing proudly on to the greatest political victory of modern times. in the life of major william mckinley, we find nothing but purity and ability, bravery and compassion, and i promise you that on the fourth day of next march he will be inaugurated president of this republic; a republic whose flag, "old glory," the stars and stripes, floats over seas and land, peerless and without price, the emblem of power and protection to all. my friends, we must restore our protective system. already it has accomplished wonders for the laborers of america, and its mission in behalf of prosperity and posterity has only commenced. it has enabled us to perfect a system of finance that is a marvel to all nations, and has raised our credit to a place among the first countries of the earth. it has elevated the manhood of every american citizen, dignified labor, and instilled a more universal education throughout our land than can be found in any other civilized country on the face of the globe. it has made the flag of our nation emblematical of love, liberty, protection, reciprocity, honor and all that is great and grand of human thought. major william mckinley is our bruce at bannockburn in this struggle for national honor, unlimited labor and higher wages. in the golden casket of his great soul rests the immortal principles which we advocate, and in his heart burns the undying fire of love for america and american institutions. the righteousness of our cause is our strength, while he is our hope and will lead us triumphantly on to certain and splendid victory. (applause.) but what about william jennings bryan? "like a comet he rose to our vision, like a comet he soon will depart; and 'tis certain his untimely going will chill every popocrat's heart, in the coming cyclone of november we know his race will be run, and forever and aye, oh, let him remember, how our leader, mckinley has won." (great applause.) generously made available by the internet archive/american libraries.) the paper moneys of europe their moral and economic significance by francis w. hirst boston and new york houghton mifflin company the riverside press cambridge copyright, , by the regents of the university of california all rights reserved the riverside press cambridge · massachusetts printed in the u.s.a. barbara weinstock lectures on the morals of trade this series will contain essays by representative scholars and men of affairs dealing with the various phases of the moral law in its bearing on business life under the new economic order, first delivered at the university of california on the weinstock foundation. the paper moneys of europe their moral and economic significance no more severe reflection could be passed upon the moral and political capacity of the human species than this: five thousand years after the invention of _writing_, three thousand after the invention of _money_, and (nearly) five hundred since the invention of _printing_, governments all over the world are employing the third invention for the purpose of debasing the second; thereby robbing millions of innocent individuals of their property on a scale so extensive that previous public confiscations of private property through the adulteration of money--in ancient rome, in ireland under james the second, in prussia during the seven years' war, in the american colonies and the united states, in portugal, in greece, in various republics of central and south america, even the assignats of the french revolution--seem pigmy frauds in comparison with the present vast inundation of counterfeit paper money. in these times, when so much attention is given to what i may call the prehistoric history of mankind, it would ill become me, a mere adventurer in anthropology, to discuss the origin of money or to attempt an explanation of the curious fact that the art of coining money was invented and perfected a thousand years before the art of printing. the coins struck by the best cities of ancient greece are a model and a reproach to our modern mints; and being for the most part of good silver, they fulfilled the two main functions of currency--as a measure of value and a medium of exchange. silver was well adapted for the purposes of currency by its ductility, durability, divisibility, portability, and value. its value depended on three things. in the first place, it was scarce; in the second, it was much in demand for the arts and manufactures; and in the third place, its intrinsic value was increased and stabilized by the needs and demands of the mints. gold had similar qualifications, but it was too scarce and too precious until the nineteenth century, in the course of which (for reasons which i need not enter upon here), most of the great commercial nations adopted a gold standard. copper possessed in a less degree the qualifications of gold and silver, but it was the first metal to be coined into money in ancient rome. the roman _as_ or _pondo_ weighed a roman pound of _good_ copper, therefore possessed the two principal attributes of good money, a definite weight and a definite fineness. it was divided like our troy pound into twelve ounces of good copper. the english troyes or troy pound was first used in the english mint in the time of henry the eighth. edward the first's pound sterling was a tower pound of silver of a definite fineness. charlemagne's livre was a troyes[ ] pound of silver of definite fineness. the old english scotch pence or pennies contained originally a real pennyweight of silver, one twentieth of an ounce and one two hundred and fortieth of a pound. the famous pre-war english sovereign, now demonetized and misrepresented by the depreciated paper pound, was itself also a weight; but the twenty shillings and two hundred and forty pence which exchanged for it were token coins depending for their value upon the gold sovereign. [ ] "the fair of troyes in champaign was at that time frequented by all the nations of europe, and the weights and measures of so famous a market were generally known and esteemed." (adam smith, _wealth of nations_, book i, chap, iv.) from the time of charlemagne among the french, and from that of william the conqueror among the english [wrote adam smith in ], the proportion between the pound, the shilling and the penny, seems to have been uniformly the same as at present, though the value of each has been very different; for in every country of the world, i believe, the avarice and injustice of princes and sovereign states, abusing the confidence of their subjects, have by degrees diminished the real quantity of metal which had been originally contained in their coins. the roman as, in the latter ages of the republic, was reduced to the twenty-fourth part of its original value, and, instead of weighing a pound, came to weigh only half an ounce. the english pound and penny contain at present about a third only; the scots pound and penny about a thirty-sixth; and the french pound and penny about a sixty-sixth part of their original value. by means of those operations, the princes and sovereign states which performed them were enabled, in appearance, to pay their debts and fulfil their engagements with a smaller quantity of silver than would otherwise have been requisite. it was indeed in appearance only; for their creditors were really defrauded of a part of what was due to them. all other debtors in the state were allowed the same privilege, and might pay with the same nominal sum of the new and debased coin whatever they had borrowed in the old. such operations, therefore, have always proved favourable to the debtor, and ruinous to the creditor, and have sometimes produced a greater and more universal revolution in the fortunes of private persons, than could have been occasioned by a very great public calamity.[ ] [ ] _wealth of nations_, book i, chap. iv. john stuart mill follows his master in exposing and denouncing what he calls this "least covert of all forms of knavery which consists in calling a shilling a pound." but the opinions of mill, the saint of rationalism, deserve and demand citation as they bring us directly to our subject. he writes: when gold and silver had become virtually a medium of exchange, by becoming the things for which people generally sold, and with which they generally bought, whatever they had to sell or buy; the contrivance of coining obviously suggested itself. by this process the metal was divided into convenient portions, of any degree of smallness, and bearing a recognised proportion to one another; and the trouble was saved of weighing and assaying at every change of possessors, an inconvenience which on the occasion of small purchases would soon have become insupportable. governments found it their interest to take the operation into their own hands, and to interdict all coining by private persons; indeed, their guarantee was often the only one which would have been relied on, a reliance however which very often it ill deserved; profligate governments having until a very modern period seldom scrupled, for the sake of robbing their creditors, to confer on all other debtors a licence to rob theirs, by the shallow and impudent artifice of lowering the standard; that least covert of all modes of knavery, which consists in calling a shilling a pound, that a debt of a hundred pounds may be cancelled by the payment of a hundred shillings. it would have been as simple a plan, and would have answered just as well, to have enacted that "a hundred" should always be interpreted to mean five, which would have effected the same reduction in all pecuniary contracts, and would not have been at all more shameless. such strokes of policy have not wholly ceased to be recommended, but they have ceased to be practised, except occasionally through the medium of paper money, in which case the character of the transaction, from the greater obscurity of the subject is a little less barefaced.[ ] [ ] mill, _political economy_, book iii, chap. vii. a few illustrations from the past may help us to a critical contemplation of the present monetary conditions on the continent of europe, which constitute fraud and robbery on the most wholesale scale ever practised by governments (with the style and title of democracies!) upon the miserable victims, called citizens, and supposed to be endowed with the blessings of self-determination. those who believe that war, if not a divine institution, is at least an inevitable feature of human society may plead in extenuation of this species of fraud that it is usually the last desperate resource of a government which has pledged all its taxes and credit for war or armaments. i remember reading in the roman historian sallust of a financial crisis which was ended by debts contracted in silver being paid off in copper--_argentum ære solutum est_. a few years before adam smith wrote his chapter on money, frederick the great, during the seven years' war, resorted to the jew, ephraim, who coined tin silver: outside noble, inside slim, outside frederick, inside ephraim. but frederick, wiser and more honest than our european belligerents, made it his first care after the peace to restore an honest silver coinage. a lively example from english, or rather irish, history is supplied by macaulay and belongs to the year . it is one of the incidents in james the second's brief and luckless government of ireland: it is remarkable that while the king [james ii] was losing the confidence and good will of the irish commons by faintly defending against them, in one quarter, the institution of property, he was himself, in another quarter, attacking that institution with a violence, if possible more reckless than theirs. he soon found that no money came into his exchequer. the cause was sufficiently obvious. trade was at an end. floating capital had been withdrawn in great masses from the island. of the fixed capital much had been destroyed, and the rest was lying idle. thousands of those protestants who were the most industrious and intelligent part of the population had emigrated to england. thousands had taken refuge in the places which still held out for william and mary. of the roman catholic peasantry, who were in the vigor of life, the majority had enlisted in the army or had joined gangs of plunderers. the poverty of the treasury was the necessary effect of the poverty of the country: public prosperity could be restored only by the restoration of private prosperity; and private prosperity could be restored only by years of peace and security. james was absurd enough to imagine that there was a more speedy and efficacious remedy. he could, he conceived, at once extricate himself from his financial difficulties by the simple process of calling a farthing a shilling. the right of coining was undoubtedly a flower of the prerogative; and, in his view, the right of coining included the right of debasing the coin. pots, pans, knockers of doors, pieces of ordnance which had long been past use, were carried to the mint. in a short time lumps of base metal, nominally worth near a million sterling, intrinsically worth about a sixtieth part of that sum, were in circulation. a royal edict declared these pieces to be legal tender in all cases whatsoever. a mortgage for a thousand pounds was cleared off by a bag of counters made out of old kettles. the creditors who complained to the court of chancery were told by fitton to take their money and be gone. but of all classes, the tradesmen of dublin, who were generally protestants, were the greatest losers. at first, of course, they raised their demands; but the magistrates of the city took on themselves to meet this heretical inclination by putting forth a tariff regulating prices. any man who belonged to the caste now dominant might walk into a shop, lay on the counter a bit of brass worth threepence, and carry off goods to the value of half a guinea. legal remedies were out of the question. indeed the sufferers thought themselves happy if, by the sacrifice of their stock in trade, they could redeem their limbs and their lives. there was not a baker's shop in the city round which twenty or thirty soldiers were not constantly prowling. some persons who refused the base money were arrested by troopers and carried before the provost marshal, who cursed them, swore at them, locked them up in dark cells, and, by threatening to hang them at their own doors, soon overcame their resistance. of all the plagues of that time none made a deeper or a more lasting impression on the minds of the protestants of dublin than the plague of brass money. to the recollection of the confusion and misery which had been produced by james' coin must be in part ascribed the strenuous opposition which, thirty-five years later, large classes firmly attached to the house of hanover, offered to the government of george the first in the affair of woods' patent.[ ] [ ] macaulay, _history of england_, i, chap. xii. "the affair of woods' patent" is celebrated in swift's drapier letters. but paper money offers far more extensive facilities to knavery than a metallic currency. in his _essays on the monetary history of the united states_,[ ] mr. charles j. bullock has described in sufficient detail the "carnival of fraud and corruption" which attended the paper money coined or rather printed by most of the american colonies in the century preceding the american revolution. thus, about the middle of the eighteenth century, the paper money of massachusetts fell to an eighth of its original value. people were driven to barter, and one writer observed that "the morals of the people depreciate with the currency." parties were divided into debtors and creditors, and a new england writer in noted: "the debtor side has had the ascendant ever since anno to the almost utter ruin of the country."[ ] to this writer belongs the credit of discerning, at a time when even benjamin franklin was in error, that "the repeated large emissions of paper money" were responsible for its depreciation. [ ] macmillan, . [ ] douglass. "not worth a continental" is an expression which brings us to the next chapter in american experience of inconvertible paper currencies. the so-called continental money was the means by which the continental congress and the individual colonies--too timid to tax--endeavored to finance the revolutionary war. by , a paper dollar was worth less than two cents in specie, and soon afterward it became practically worthless.[ ] robbery was legalized; rogues flourished; and their frauds were encouraged and protected by a government whose policy enabled debtors to pay their debts in valueless money. we hear of creditors running away from their debtors and being paid off "without mercy." stories were told of creditors in rhode island leaping out of back windows to escape the attentions of their debtors.[ ] in short, the law became an engine of oppression and destroyed the fortunes of thousands who had put their confidence in it. in the words of breck, a friendly critic, "... the old debts were paid when the paper money was more than seventy to one ... widows, orphans and others were paid for money lent in specie with depreciated paper." [ ] bullock, _monetary history of the united states_, chap. v. [ ] _ibid._, chap. v. in congress actually adopted a plan to redeem its paper issues at one fortieth of their pretended or nominal value. the astonishing thing is that all this knavery was devised, or winked at, not only by low class politicians but by statesmen of renown. the maxim _salus populi suprema lex_ was relied upon not for the first or last time as a sufficient excuse for a crime far more pernicious than that of a private forger. but we have not yet realized, in our minds or in our penal codes, that public vices ought to be punished at least as vigorously as private crimes. that, even as a desperate last resort for financing war, a flood of paper money defeats its own object was conclusively proved a few years later during the french revolution. the french assignats "have taken their place in history as the classical example of paper money made worthless by over-issue. after their final collapse in , french finance reverted perforce to a metallic basis." so mr. hawtrey, a british treasury official, who has given us recently a lucid and sufficiently detailed account of this extraordinary incident--extraordinary but no longer singular, for the same course with the same results has been pursued during and since the war of - by russia and poland, and in a greater or less degree by most of the european belligerents. the issue of french assignats began in because the assembly would not vote adequate taxation, and necker, the minister of finance, was unable to borrow enough to cover the deficit. in the two years from to , the public revenue was millions, and the public expenditures, millions, of livres. the deficit was covered by assignats, or paper livres, bearing interest, in denominations varying from to livres. thus the assignats may be regarded as a floating debt currency. in november, , the assignats were worth per cent of their face value. in june, , after the declaration of war on austria, they rose to . after the victory of valmy, in september, they rose to and remained there till december. in january, , the king was guillotined, and war was declared on england. by august, after violent fluctuations, the assignat had fallen to per cent of its face value. thereafter the laws enforcing the acceptance of assignats were strengthened. it became an offence to sell coin, or to differentiate between coin and assignats in any transaction, or to refuse payment in assignats, or to negotiate assignats at a discount. by a decree of the th of september the death penalty itself was imposed. here was a forced currency indeed.[ ] [ ] r. g. hawtrey, _currency and credit_. longmans green & co., london, . for a few months an artificial improvement was effected in the value of the assignat by these ferocious measures; but in , after the terror, the system and the paper money collapsed. the gold and silver money, which had been hoarded, returned to circulation. in june, , the quotation of the assignat oscillated violently. on one day a louis of livres would buy paper livres, on another, .[ ] paper notes which fluctuated so violently were useless as money. they could not serve either as a medium of exchange or as a measure of value. country people expressed their contempt for the assignats by calling them _l'argent de paris_. a new currency of _mandats_ was tried, into which assignats were made convertible. it was a complete failure. the _assignats_ were wound up in , and in february, , there was "a general demonetisation of paper money."[ ] the holders got practically nothing. france returned to hard cash, as mexico has done recently. in , when mr. hawtrey wrote, he was able to describe the decline and full of the assignats as an 'almost unique' instance of "the currency of a great nation fading away into nothing." the russian paper rouble has performed the same feat since . so has the polish mark. and now (december, ) the german paper mark is also fading into nothingness.[ ] in austria and in most of the new states of europe, the inconvertible paper legal tender currency has lost almost the whole of its value, in comparison with the pre-war coin which it pretends to represent. [ ] hawtrey, _op. cit._, chap. xv. [ ] a _turn_ which even a polish chancellor of the exchequer might envy. [ ] in the second week of november the mark fell to to the paper pound, recovering a day or two later (wednesday, november ) to . the real difference between the present monetary conditions and the american _continentals_, or the french assignats, is a difference not of kind, but of degree and extent. the causes and the consequences, the motives of those who work the mint, the ruin and demoralization of the victims, the effects upon public and private debts and credit are the same. but a whole continent populated by four hundred millions of people is concerned. the commercial and moral fabric of european civilization is tottering. three years have passed since the war ended; but the currencies and exchanges of europe are in a much worse condition than when peace was being negotiated. at the end of june, , i walked from my office in the strand down to messrs. hands & co., who deal in foreign money at charing cross. on the way i passed the shop of a tailor, who had placarded on his shop window the announcement that he would give a hundred thousand roubles to every customer who bought a suit of clothes from him. he added that at the pre-war rate of exchange the one hundred thousand roubles would be worth ten thousand pounds. he did not add that they were at that time worth only two shillings.[ ] on arriving at my destination, i asked to see specimens of the most debased currencies and eventually laid out ten shillings,[ ] or, to be exact, _s_/ _d_. here is the bill: ten german marks cost me one shilling a hundred austrian crowns cost me one and sixpence a hundred polish marks cost me sixpence twenty-five russian (_czar_)[ ] roubles ( ) cost me sixpence two italian lire cost me eightpence two greek drachmas cost me eightpence two roumanian lei cost me sixpence five yugoslav dinars[ ] cost me one shilling ten czechoslovakian crowns cost me one shilling five bulgarian levas cost me sixpence five finnish marks cost me one shilling five esthonian marks cost me one shilling five latvian roubles cost me sixpence [ ] a month or two later they were not worth a shilling. the russian soviet government was offering two hundred thousand roubles for one pre-war silver rouble! [ ] two dollars. [ ] twenty-five soviet roubles would have been dear at a farthing. [ ] on this note is stamped _kruna_ to indicate that five dinars exchanged for twenty austrian crowns. to show that my friend, the exchange dealer, made a decent profit out of this retail transaction, i quote some of his selling rates for the day on which he based his charges: _rates of exchange_ _june , _ austrian paper crowns - for £ finnish marks - for £ german marks - for £ polish marks (selling rate) for £ greek drachmas - for £ italian lire - for £ roumanian lei - for £ the last i heard from vienna was that they had been varying from ten thousand to fifteen thousand to the paper pound! the difference in the rates depended, of course, upon whether the customer was buying or selling the foreign money. if he was buying austrian notes, he would get twenty-four hundred paper crowns for a pound. if he was selling them, he would receive a pound in exchange for twenty-six hundred paper crowns. all these paper notes are called after, and profess to represent, silver coins, which were themselves before the war, tokens, and passed current at more than their intrinsic value because of their relation to gold. thus the pre-war parity of marks was about twenty to the gold pound; of austrian crowns, about twenty-four; of francs, lire, etc., about twenty-five. on the day of my purchase, therefore, the exchange value of the german mark was less than one thirteenth, of the austrian crown less than one one hundredth, and of the polish mark, one two hundredth, of its pre-war status. but this underestimates the depreciation; for the british pound is no longer a gold sovereign, and even gold has been depreciated.[ ] the paper pound in june, , was, i think, about the equivalent of twelve pre-war shillings in purchasing power. the gold dollar, which would only buy a little more than four shillings before the war, would buy five at the beginning of december, . [ ] to-day, november , , the paper pound is worth about four fifths of a gold pound. the purchasing power of gold--say, the gold dollar--is perhaps about two thirds of what it was before the war. although an inconvertible paper currency has no intrinsic value, it can (in accordance with the quantity theory of money) be maintained at a fairly stable ratio to gold or commodities by an honest government if the total issue is fixed, or kept between reasonable maximum and minimum limits. the rise of prices since the war, in each country where reliable statistics are available, has been in proportion to the expansion of the paper currency, allowance being made for the scarcity of commodities. of course a decline in purchasing power _follows_ an expansion of circulation. the stability of the british paper pound since a limit was imposed illustrates the correctness of the quantity theory of money. its increase in purchasing power (like that of the gold dollar) during the first half of is, of course, due to the fact that the supply of utilities had overtaken the demand. at first sight it seems difficult to understand how any government, however bad, can _deliberately_ issue flood upon flood of inconvertible paper money, seeing that its printing operations are ruinous to both public and private credit. to obtain the same amount of revenue, each new issue, each new dose, has to be much larger than the preceding. in the course of twelve months, for example, the exchange value of the polish mark was divided by ten, that is, at the end of the period, ten times as much paper money had to be printed as at the beginning, to get the same revenue. yet the polish government continued upon its course with the approval and support of the polish diet. the following quotation is from the warsaw correspondent of the _london economist_, who wrote on july , : the effects of the last collapse of the exchanges are beginning to make themselves felt, and the diet is already preparing fresh ground for new currency inflation. by its last vote the limit on the note circulation has been increased to milliards, and on the advances of the polish national bank to the government to milliards. the depreciation of the polish mark in june was followed by a rise of prices, and this led immediately to a strike movement in almost all industries. in the lodz district , workmen have gone on strike, demanding a wage increase of per cent! the manufacturers declare that they cannot raise wages by more than per cent; that even under present conditions the polish textile industry is in a most difficult position on the foreign markets, especially in roumania, the baltic states, etc. posnania was menaced by an agrarian strike, but a settlement has been reached. the strike of the municipal workers in warsaw was short-lived. everywhere, however, wages have been increased by more than per cent. this naturally will entail a new wave of rising prices, the government will be obliged to double the salaries of its officials, and the printing press will work again under a higher pressure. this is the vicious circle round which the country has been travelling for three years. _ex uno disce omnes._ the monetary policy of the polish government is merely a flagrant example of the recent monetary history of all the states of europe northeast, southeast, east, of the rhine and of the alps. there is only one real remedy, the reëstablishment of complete peace, disarmament, the abolition of conscription, the drastic reduction of bloated bureaucracies, and a wholesale lowering of tariffs, which will allow the miserable and half-starved populations to renew the arts of peace and the exchange of their agricultural products and manufactures. appendix the brussels conference[ ] if all countries were included, a general and proportionate reduction of the military and naval establishments to one half of their present cost would set free a fund of probably at least $ , , , to $ , , , annually for the purchase of food and useful commodities, for the stabilization and partial restoration of debased paper currencies, for the payment of debt, the removal of public deficits, the revival of credit, and the reduction of taxes. thus the road to recovery lies plain before us. will it be taken by the statesmen to whose hands the peoples have intrusted their lives and fortunes? [ ] taken by permission from an article by the author in the _saturday evening post_ of november , . deficits the rule in order to show that this view is in conformity with the conclusions of experts, and even of officials delegated for the purpose of examining world finance by the governments themselves, i turn to the conclusions unanimously arrived at by the brussels conference a year ago, after eighty-six financial experts from thirty-nine countries had presented the accounts and balance sheets of their respective governments. in a general review of the situation they point out that "the total external debt of the european belligerents, converted into dollars at par, amounts to about milliard dollars, compared with about milliard dollars in ." they say that the government expenditures of the european belligerents amount to between and per cent of the total incomes of the peoples. they say emphatically that the restoration of real peace, with disarmament, is "the first condition for the world's recovery." four commissions were appointed. the first dealt with public finance, and its resolutions were adopted unanimously by the conference. the following extract from its resolutions deserves attention: thirty-nine nations have in turn placed before the international financial conference a statement of their financial position. the examination of these statements brings out the extreme gravity of the general situation of public finance throughout the world, and particularly in europe. their import may be summed up in the statement that three out of every four of the countries represented at this conference and eleven out of twelve of the european countries anticipate a budget deficit in the present year. public opinion is largely responsible for this situation. the close connection between these budget deficits and the cost of living, which is causing such suffering and unrest throughout the world, is far from being grasped. nearly every government is being pressed to incur fresh expenditure; largely on palliatives which aggravate the very evils against which they are directed. the first step is to bring public opinion in every country to realize the essential facts of the situation and particularly the need for reëstablishing public finances on a sound basis as a preliminary to the execution of those social reforms which the world demands. public attention should be especially drawn to the fact that the reduction of prices and the restoration of prosperity is dependent on the increase of production, and that the continual excess of government expenditure over revenue represented by budget deficits is one of the most serious obstacles to such increase of production, as it must sooner or later involve the following consequences: (_a_) a further inflation of credit and currency. (_b_) a further depreciation in the purchasing power of the domestic currency, and a still greater instability of the foreign exchanges. (_c_) a further rise in prices and in the cost of living. the country which accepts the policy of budget deficits is treading the slippery path which leads to general ruin; to escape from that path no sacrifice is too great. it is therefore imperative that every government should, as the first social and financial reform, on which all others depend: (_a_) restrict its ordinary recurrent expenditure, including the service of the debt, to such an amount as can be covered by its ordinary revenue. (_b_) rigidly reduce all expenditure on armaments in so far as such reduction is compatible with the preservation of national security. (_c_) abandon all unproductive extraordinary expenditure. (_d_) restrict even productive extraordinary expenditure to the lowest possible amount. the supreme council of the allied powers in its pronouncement on the eighth of march declared that "armies should everywhere be reduced to a peace footing; that armaments should be limited to the lowest possible figure compatible with national security and that the league of nations should be invited to consider, as soon as possible, proposals to this end." the statements presented to the conference show that, on an average, some per cent of the national expenditure is still being devoted to the maintenance of armaments and the preparations for war. the conference desires to affirm with the utmost emphasis that the world cannot afford this expenditure. only by a frank policy of mutual coöperation can the nations hope to regain their old prosperity, and in order to secure that result, the whole resources of each country must be devoted to strictly productive purposes. the conference accordingly recommends most earnestly to the council of the league of nations the desirability of conferring at once with the several governments concerned, with a view to securing a general and agreed reduction of the crushing burdens which on their existing scale armaments still impose on the impoverished peoples of the world, sapping their resource and imperiling their recovery from the ravages of war. the conference hopes that the assembly of the league, which is about to meet, will take energetic action to this end. the above recommendations were ignored by the league of nations and by practically all the governments concerned. consequently the debts and deficits of most european countries are larger at the present time than they were a year ago, and most of the paper currencies have depreciated--some very heavily--during the last twelve months. the dangers of inflation i turn next to the resolutions proposed by the second commission which had to examine problems of currency and foreign exchange. from its resolutions, which also were adopted unanimously by the conference, i extract the following: the currencies of all belligerent and of many other countries, though in greatly varying degrees, have since the beginning of the war been expanded artificially, regardless of the usual restraints upon such expansion--to which we refer later--and without any corresponding increase in the real wealth upon which their purchasing power was based; indeed in most cases in spite of a serious reduction in such wealth. it should be clearly understood that this artificial and unrestrained expansion, or inflation, as it is called, of the currency or of the titles to immediate purchasing power does not and cannot add to the total real purchasing power in existence, so that its effect must be to reduce the purchasing power of each unit of the currency. it is in fact a form of debasing the currency. the effect of it has been to intensify, in terms of the inflated currencies, the general rise in prices, so that a greater amount of such currency is needed to procure the accustomed supply of goods and services. where this additional currency was procured by further inflation--that is, by printing more paper money or creating fresh credit--there arose what has been called a vicious spiral of constantly rising prices and wages and constantly increasing inflation, with the resulting disorganization of all business, dislocation of the exchanges, a progressive increase in the cost of living, and consequent labor unrest. it is of the utmost importance that the growth of inflation should be stopped; and this, although no doubt very difficult to do immediately in some countries, could quickly be accomplished by abstaining from increasing the currency--in its broadest sense, as defined above--and by increasing the real wealth upon which such currency is based. the cessation of increase in the currency should not be achieved merely by restricting the issue of legal tender. such a step, if unaccompanied by other measures, would be apt to aggravate the situation by causing a monetary crisis. it is necessary to attack the causes which lead to the necessity for the additional currency. the chief cause in most countries is that the governments, finding themselves unable to meet their expenditures out of revenue, have been tempted to resort to the artificial creation of fresh purchasing power, either by the direct issue of additional legal-tender money or more frequently by obtaining--especially from the banks of issue, which in some cases are unable and in others unwilling to refuse them--credits which must themselves be satisfied in legal-tender money. we say, therefore, that governments must limit their expenditure to their revenue. here again we have excellent doctrines and good practical advice from these financial experts to the governments which appointed them. but the doctrines have remained unapplied, and the advice has been honored in the breach instead of in the observance. wise counsel ignored i pass next to the resolutions proposed by the commission on international trade and adopted unanimously by the conference, from which the first two paragraphs will be quoted: the international financial conference affirms that the first condition for the resumption of international trade is the restoration of real peace, the conclusion of the wars which are still being waged and the assured maintenance of peace for the future. the continuance of the atmosphere of war and of preparations for war is fatal to the development of that mutual trust which is essential to the resumption of normal trading relations. the security of internal conditions is scarcely less important, as foreign trade cannot prosper in a country whose internal conditions do not inspire confidence. the conference trusts that the league of nations will lose no opportunity to secure the full restoration and continued maintenance of peace. the international financial conference affirms that the improvement of the financial position largely depends on the general restoration as soon as possible of good will between the various nations; and in particular it indorses the declaration of the supreme council of the eighth march last "that the states which have been created or enlarged as a result of the war should at once reëstablish full and friendly coöperation and arrange for the unrestricted interchange of commodities in order that the essential unity of european economic life may not be impaired by the erection of artificial economic barriers." here again there is a full recognition of the fact that peace is necessary to the renewal of prosperity, and that the atmosphere of war preparations is fatal to the growth of trade. but neither the league of nations nor the supreme council, so far as i am aware, has made any effective response to these appeals. fourthly and lastly, i come to the commission on international credits. this commission passed a number of resolutions, all of which were adopted unanimously by the conference; but it will suffice to cite the first two: the conference recognizes in the first place that the difficulties which at present lie in the way of international credit operations arise almost exclusively out of the disturbance caused by the war, and that the normal working of financial markets cannot be completely reëstablished unless peaceful relations are restored between all peoples and the outstanding financial questions resulting from the war are made the subject of a definite settlement which is put into execution. the conference is, moreover, of opinion that the revival of credit requires as primary conditions the restoration of order in public finance, the cessation of inflation, the purging of currencies, and the freedom of commercial transactions. the resolutions of the commission on international credits are therefore based on the resolutions of the other commissions. my argument then is fully endorsed by the experts at brussels. all the facts and figures set forth in the voluminous records of that remarkable conference indicate the urgency of peace and disarmament. a year has passed. the brussels recommendations have been ignored, and conditions in europe as regards its currencies, debts, trade and credit have deteriorated. the naval limitations proposed by mr. hughes at washington, even if they are ratified, will give practically no relief to europe. transcriber's note: minor typographical errors have been corrected without note. irregularities and inconsistencies in the text have been retained as printed. words printed in italics are noted with underscores: _italics_. the cover of this ebook was created by the transcriber and is hereby placed in the public domain. _profitable stock exchange investments_ _principal and interest guaranteed_ _henry voorce brandenburg & co. (incorporated) bankers wall street, new york, n.y._ _copyrighted henry voorce brandenburg & co._ preface this book is published to show the absurdity of trying to make money speculating in wall street without adequate capital and the ease with which it can be made with capital and proper methods. the following pages open to the public a safe, conservative, and highly remunerative channel for the investment of their surplus funds, which does not have the element of risk and uncertainty that exists in general business. profitable stock exchange investments you read a great deal about the money lost in wall street. _as a matter of fact there isn't any money lost in wall street._ _it simply changes hands._ people talk loosely about gamblers and speculators losing all their money in the end. if money is lost, somebody has got to win it. the people who go plunging around in wall street making all sorts of speculations on margin naturally lose their money. they ought to expect to lose it, and they ought to lose it whether they expect to or not. they are simply gambling with all the odds against them. meanwhile, the wise and shrewd operators follow prudent, business-like methods and get the money. the vanderbilts, goulds and morgans of wall street are sometimes described as robbers waiting in their dens to slaughter the poor innocents who venture within reach. that is all nonsense. _they win because they know how to play the game, and others who have sense enough and patience enough to play the game in the same way will win too._ they absolutely cannot help winning. the purpose of this book is to inform the reader fully as to the methods by which money can be taken out of wall street--the methods used by the successful operators of the past twenty years to our knowledge--the methods which positively must win year in and year out. we purpose to give the public an opportunity to make a safe and profitable investment in wall street, and have their money handled for them according to correct and profitable methods. the men who win in wall street are those who invest in stocks--good, dividend-paying stocks, buying them when they are low, selling them when they are high. this is not gambling nor speculation any more than any legitimate business is gambling or speculation. in all classes of business we buy at a certain price, and sell at a higher price. _we buy under the most advantageous circumstances possible, paying the least possible price and selling at the highest market price._ this is what we are doing in wall street, and as we handle only the stocks of sound and stable corporations, the security behind our operations will be the strongest in the world. the gist of the matter is that the stocks of the leading and most stable corporations of the country are tossed about in wall street from speculator to speculator, going up and down constantly and varying enormously in the prices at which they are bought and sold. these changes in prices are nearly always due to a feverish and excited market. the stocks themselves do not actually vary in real value. they are worth a certain sum all the time. they are paying dividends on that sum and the stocks at their real value are always a good investment. yet by the manipulations of the speculators and on account of the exigencies of these wall street marginal gamblers such stocks can be bought at times at a fraction of their value, and by reason of the same causes can be sold at other times for far more than they are really worth. _the men who make the money in wall street are those who know what stocks are really worth and who buy when prices, go down and sell when they go up,_ buying and selling the same stocks over and over again, and making a handsome profit on every transaction. they do not care how low a stock they hold goes for the reason that the stock belongs to them, they know what it is actually worth as a dividend payer, and in the skyrocket performances of the speculators of the street they take no interest except as it gives them opportunities to buy and sell. they do not care how high a stock goes; they have no shortages to cover, but can simply sit back and sell as much of their holdings as they choose whenever they see an opportunity to make a big turn. such men will turn a block of stock in a given corporation over and over dozens of times in the course of a year, making so much money on it that even if the stock should disappear off the face of the earth altogether, they would still be far ahead on it, simply on account of the numerous advances and declines. by owning stocks in a large number of good, sound corporations, they will average to make a certain sum of money every day in the year. they spread their invested capital over a wide field in this manner, and the laws of average make them sure gainers at every stage of their operations. _this is, as you will observe, very similar to the principles upon which the great life insurance companies are managed._ many of these commenced business starting with but a few thousand dollars, and they now have assets of millions. they have piled up this enormous wealth by insuring the lives of human beings. every company which has not succeeded has failed because it did not issue a certain number of policies. _the secret of success is the large number of risks reducing the chance to a minimum._ no life insurance company could succeed if it insured but a few lives. by the law of average, insurance companies can tell just how many of the people they insure will die each year. when you make an application for life insurance the first question they will ask is your age, and by referring to their tables they can tell you the month and day when you will die. now, you may not actually die upon that day, but you do theoretically, and the point is that they have so many risks that the law of average, always prevailing, in the end brings everything out just as figured. the fact that one person lives longer than the date when his life should end is offset by the fact that another person dies sooner than expected, and thus the law of average is absolutely maintained. the postal authorities could not come anywhere near telling how many letters would be mailed in the city of new york on a certain day, but they can come with remarkable closeness to the average for a year in advance, and predict with certainty how many people will write letters and forget to address them during that time. _it is by the working out by the law of average as best exemplified by the insurance business that it is possible to work out a plan by which wall street stocks can be dealt in with absolute safety and certain profit._ of course, no man or company could purchase one hundred shares of stock without the risk of a loss. that is to say, no man should make a purchase of this kind unless he is in a position to buy again and again many times over and still hold all that he has previously purchased. buying a certain quantity of stock in one corporation is very much like an insurance company insuring the life of one man. but when you buy thousands of shares of stock in various corporations, some stocks going up and some going down, the law of average is an absolute protection and the statistics of stock fluctuations for the past twenty-five years show beyond the possibility of doubt that this is true. the fluctuations in the prices of good, dividend paying stocks are something remarkable. _some active stocks show a fluctuation of five thousand times their value in a year, thus offering a continual opportunity for money making._ these are the stocks which are constantly speculated upon, the stocks on which so much money is lost and upon which the cool headed and careful operators make so much. the western union telegraph company's shares have always paid % dividend, and the average market price has been about , making the income about - / . now, suppose it is purchased in ten-share blocks on every one per cent. decline and none sold above the average price, it will show an income of more than % per annum, besides some dividends. _suppose the very worst were to happen and there was a point decline in western union, then we would have_ shares at $ " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " " ------- total investment $ , it will be seen that $ , will handle a ten-share lot of western union telegraph through a regular "black friday" panic, with a resulting investment as stated above. it must be borne in mind that the average prices of these purchases is , giving a dividend of % on the investment, but when the market has resumed its normal condition ( ), the profits will be $ , , exclusive of dividends. if lots of shares each were purchased, there would be profits of $ , exclusive of dividends. _the shares of the american sugar refining company fluctuate , times their par value every year, and our method applied to them will give a profit of from to % per annum, exclusive of dividends._ while we refer to the possibilities in making investments in western union and american sugar company's shares, we include in our operations a number of different securities, all at the same time. for instance, when we would purchase one hundred shares of one stock, we divide it into five or ten different lots and do the same thing in, say, ten or twenty different stocks all at the same time; therefore, instead of having on hand a few large lots, we have two or three hundred small lots, purchased down to the lowest prices, and by purchasing outright a large quantity in little "lots" at different prices, the average cost eliminates the risk of loss and insures certain profits. according to the results of speculation and manipulation, the twenty different stocks that we deal in do not usually all go down at the same time. some are going up, while others are going down; therefore, we are receiving profits in one, while making advantageous investments in another. _we have been established in wall street for a number of years, and we know about the various stocks on the market, their value and earning capacity._ we know the stocks which are most sought after by investors, and the stocks which are used by speculators to make money out of the public. we now offer to the public the best plan for a legitimate investment speculation. we have an authorized issue of $ , debenture bonds due and payable in three years, with interest at %, payable semi-annually, for the purpose of buying and selling stocks and securities as dealt in upon the stock exchanges of new york. _in consideration of one-half of the net profits accruing from these investments we guarantee the bonds and interest at the rate of %, and conduct, manage and direct the business._ we distribute the net proceeds on the first of every month, one-half to the bondholders and one-half to our company. these bonds are issued in sums of $ and upwards, as purchasers may direct, and are transferable only upon the books of the company. _the first thing to be sought is absolute safety in investment._ only sound, dividend paying securities will be bought and only at a bargain when it is known beyond question that the price is below their actual earning power. having purchased and paid for the securities the bondholders become the owners of them, and they will be placed in our vaults until such time as they can be sold at a handsome profit. _no get-rich-quick methods will be used, and no speculation indulged in._ no large amount of money will ever be tied up in one stock. the operations will be spread over a large amount of ground, making small investments in proper securities, thus practically eliminating all risk of loss. it is more certain than life insurance business. the chances of loss will be considerably smaller than they would be in banking, manufacturing or mercantile enterprises. purchases will commence when a stock is over-depressed and evidently selling below its real value. purchases will continue so long as the price continues to go down. these stocks will then be held and we will have every advantage over the market, instead of the market having the slightest advantage over us, as it does over ninety-nine out of a hundred speculators. _when the speculator is forced to sell at a low price we begin to buy._ when he is forced to buy at a high price we will be ready to sell. we have the advantage over the market at every stage of the game. the market cannot force us to do anything because we are in a position to do precisely as we please. _this business is strictly cash, buying for cash and selling for cash, trading in securities of strong, dividend paying corporations and going steadily forward every business day in the year._ no credit will be extended or asked. there will be no bad debts. no money has to be expended for plant, equipment or other costly things which figure in ordinary lines of business. _every cent of money will keep working all the time, and such of it as is not invested will be drawing interest in a trust company._ there will be absolutely nothing to worry about. when we want to buy other people are unloading. they have been frozen out and have to sell. the more freezing out there is, the more panicky things get, the better it is for us. there is more money to be made in one panicky day than there is in weeks of ordinary wall street trading. then, on the other hand, when everything is looking first-rate and prosperous, wall street is full of people who want to buy. there is where we are ready for them again. we bought the stocks when people had to sell them. now the people want to buy and we are right on hand with the goods--bought cheap at the proper time and now glad to sell at a goodly profit. this method of ours is nothing new or untried. it has stood the tests of time and made many a millionaire. _it is founded upon the firmest possible foundation, and has gone over squalls, slumps and panics, and in twenty years, to our personal knowledge, it has never failed to win._ we know of a number of people who have become rich by following this method. we know of one man who operated for fifteen years. he retired january , , reputed to be worth twenty millions of dollars. he never lost, paid for what he bought, buying proper securities in small quantities at a declining market, going right along to the bottom still buying and then holding on until the market was in its normal condition and he could pocket his profits and be ready to do it all over again. you will note that this business absolutely cannot be affected by financial calamities. on the contrary, a panic is a blessing. it may seem to you that if this method of taking money out of wall street is so simple, that you can do it yourself. you certainly could if you had the capital, knew the stocks and their value thoroughly, could devote your whole time to it, and, what is more important, had the firmness and will power to follow the method and not be swerved from it by the temptation of speculation. not one man in a thousand can go into wall street and fail to be influenced by the wild speculation which is going on there, the apparent opportunities for getting rich in a minute, the tips and rumors and all that sort of thing. that is precisely why so many people are wrecked in wall street, and the reason why so few succeed is that they have not the patience and the cool, calm judgment requisite to play the game in the only way in which it can be beaten. the manager of our corporation will not be allowed to be influenced by anything except our instructions. he will be under sufficient bond to follow his instructions, which will be precisely as outlined above. he will be a buying and selling machine, oblivious to all outside influence. he must carry out our orders regardless of whatever may happen, and he is a man who can be depended upon to do it. _a corporation, being a machine, can succeed by this method for the reason that it must follow a certain outlined course and cannot, and dare not, deviate from it by a hair's breadth._ the individual left to himself in wall street soon finds himself figuring, speculating, making forecasts, listening to tipsters, reading financial newspapers, living with one eye on the ticker, and pretty soon he has forgotten all about the method he intended to follow, and is a plain, ordinary wall street gambler--and the shrewd and cautious wise heads of the street soon get his money. the marginal operator is always at the mercy of the market instead of having the market at his mercy. the wonder is not that so many of them lose so much money, but that any of them win at all. it is only a question of time until they are wiped out. the odds against them are altogether too great, and while they may weather a few slight squalls and run along smoothly for a time, sooner or later disaster comes, generally unexpected and overwhelming. what is the use of trying to make money in wall street by marginal speculation when the odds against you are so great? if you want to undertake to make money, why not make your attempt a scientific one? why not place the money you wish to invest where it will be handled in a manner by which, as shown by the statistics of twenty years, cannot fail to win. it is no more speculation than it is for a banker to loan money to his friends and associate business men. _in fact, it is not so speculative for the reason that we make investments in the stocks of companies of standing--stocks which are just as good as gold, and represent vast enterprises, enormous properties and great earning power._ it may be asked, what will occur at the end of a year's business if some of the stocks are selling below the price at which they were bought. the answer is that they are kept in our vaults because they are safe, sound, dividend-paying stocks, but the dealings in the securities will show a handsome profit, more than enough to pay for the shares on hand because the numerous little purchases and the accompanying reactions in these very stocks have already resulted in a large number of profits. generally speaking, there will be no stocks carried a whole year because we will never buy except under forced conditions, and the reactions are generally very prompt, so we will be able to sell out quickly at higher prices. _it matters not how much you may know about wall street and financial methods and matters in general, you cannot figure out a way in which we can fail to succeed._ suppose the worst kind of a panic comes, the worst possible period of financial depression; suppose, we have stocks on hand which are going lower and lower; suppose, we buy until our buying capacity is exhausted, and still stocks go down and down; in what way can we be injured? we do not owe anybody anything, and whatever money we have made is in the pockets of our bondholders. nobody has extended any credit to us, and nobody can hold a club over us. we have no running expenses that amount to anything--no big rents to pay, no insurance, or anything else of that sort. there is no pay-roll to meet, no big stocks of goods to worry about--simply nothing that can squeeze us a penny's worth. all that we have to do is to wait, and waiting under these conditions is the easiest thing in the world. _the stocks we own are all those in corporations, concerning whose solidity and assets there cannot be the slightest shade of doubt._ these stocks all have a certain value, as shown by the earning power of the corporations behind them. sooner or later, they have simply got to go back to their normal, actual, tangible value. so we simply wait until they go back there, and that is generally a question of a very short time. short or long, however, the time must come, and when it does come, we are in line to reap the richest kind of a harvest. there is absolutely no loop-hole in this proposition. there is absolutely less risk of loss than in any business or other enterprise you can mention. it is a business carried on with good, hard cash, and with every possible advantage in our favor. _the holder of even one bond of $ stands upon the same footing as the owner of a large block, receiving regularly the pro rata earnings represented by his share._ the officers and directors are well known men of business, thoroughly familiar with wall street and its methods, most of them having been for many years actually engaged in some business requiring expert financial knowledge. the bondholders can be assured that their money will be invested and handled as set forth in this prospectus, first, because the officers and directors cannot have any motive for doing otherwise, inasmuch as they know that the method herein outlined is the only one which can win in wall street. they are also protected in every possible way, and every desired assurance will be given in this respect. _the books and records of this company, open to bondholders, will show at all times precisely what investments have been made, how money has been made upon them, what stock are owned by the bondholders, and so on._ these records can be compared with and verified by the financial records of the new york stock exchange, as published through the regular channels, so that the bondholder can at all times assure himself that we have done just what we claim to have done, and that he has secured his just and equitable share of the profits of the operation. _wall street dictionary_ we give below a few definitions of some of the more important words used in the financial operations of wall street. the street itself has been the center of finance of this country for nearly a hundred years, when the new york stock exchange was established. here are offices of the greatest and wealthiest financiers the world has ever known. it is the greatest speculative center in this or any other country. here are found the men who create and handle railroads and the largest industrial enterprises in the world. in the exchange millions of dollars' worth of stocks and bonds are bought and sold every day. here are found hundreds of banks, trust and safe deposit institutions, private bankers and capitalists, a money center which controls seven-tenths of all the money in america. in wall street you may buy or sell one or more shares of the stock of any great railway or industrial company in the country. here is where all important enterprises are financed, and where the public sends enormous sums of money to be invested for speculative gain. investors. those who come into the market and purchase securities for the purpose of holding them as safe investments for their money, securing an interest or dividend income thereon. speculators. those who buy and sell upon margins for quick profits. they are non-producers. they are simply gamblers, with the odds badly against them. they sometimes prosper for a while, but lose their money in the end. investment speculators. those who buy stocks judiciously, selecting choice securities whose value is well known, buying when values are depressed, and selling when sufficient advance occurs to give them a good profit. this they repeat over and over again, and make money while the speculator on margin loses. it is to this class that we appeal. "a bull." a speculator who buys expecting to sell at a higher price. he is called "long" on the market, meaning that he is buying with the expectation that the market will go up and that he will sell out at a profit. his belief not only is that prices are going higher, but he uses all his influence in every possible effort to make them go higher. "a bear." a speculator who sells in the expectation of a decline. he is called "short" of the market. he is selling what he has not got. he does this in the expectation that prices are going down, and that he will be able to buy the stocks at a lower price than that he has to pay for them, and by delivering them at the price at which he sold to make his profit. he puts up his margin and takes his risk. as an illustration of what a "bear" is and does, suppose you believed that in a week's time corn would go down in price; therefore, you sell and promise to deliver so many bushels of corn at a certain price. if corn does go down, and you can buy it at a lower price than that at which you sold, you are a winner. if it disappoints you, and it goes up, you have to deliver it anyway, and are out of pocket. "a lamb." a man who thinks he knows all about the wall street game, and bases this belief on the fact that he keeps abreast with the times, reads all the financial columns in the newspapers, wades through all the wall street papers and watches the ticker faithfully and conscientiously. when he is sure he knows all about it he goes jauntily down into the street, and soon discovers that he knows nothing about it at all. he finds this out just at the moment when all his money is gone. "a flyer." a flyer is a more or less reckless gamble, which pretty nearly everybody feels strongly inclined to make once in a while. when a flyer turns out right it is a very profitable thing, but the trouble with it is that it rarely turns out right or anywhere near it. "a break." a rapid decline in prices of stock. "a bulge." a quick upward movement in prices of stock. "flat." stock loaned by one broker to another without interest is loaned "flat." "a hedger." one who buys a quantity of stock, and then for fear he has made a mistake, sells the same quantity in order to "hedge" against the loss that he fears is to come. a "hedger" usually makes nothing, because the profit on his purchase is offset by his sale, or vice versa. "liquidation." generally selling out of stocks previously purchased by the "bulls." "manipulation." forcing stocks too high or too low by misrepresentations, rumors and false sentiments. "option." a contract that one person will deliver to another a certain thing at a fixed price within a certain time. "point." one dollar or one per cent. a share on stock is one "point." stock advances and recedes by "points," and is always so quoted. "privileges." "puts," "calls" and "option" come under the general head of "privileges." "promoter." a broker who secures the capital to finance corporations. "realizing." closing out stocks or contracts of any kind to secure profits. "soft spot." a general but slight weakness shown in prices. "an oversold market." this means a market in which the traders have sold "short" to an extent which conditions do not warrant. they thereby place themselves at the mercy of the "manipulators," who stand ready to squeeze the "shorts" when the proper moment arrives. "an overbull market" means the reverse of this situation. "raiding the market." concerted action of sellers of all descriptions, who discover some cause for loss of confidence in the maintenance of prices and sell right and left every stock for which they can find a buyer. "a dull market." this describes a market where there are few transactions and small fluctuations. "a heavy market." one in which prices barely hold their own, and are inclined to sag off a little during the day, closing lower than they opened. "net gain." the actual amount of profit after taking broker's commission, war tax, or revenue stamps. "gross loss." the entire amount of loss suffered after adding broker's commission, war tax, etc., to the loss on the transaction. "round turn." this means a complete deal after having bought and sold or sold and bought, as the case may be. for instance, in stating a broker's commission you would say that it amounts to one-sixteenth for buying and the same for selling, or one-eighth for the "round turn." "commission." this is the remuneration which the broker receives from a customer in executing orders for the purchase or the sale of stocks or grain. this payment is based on the par value of stock or grain bought and sold, and not on prices at which the transaction was executed. "a pointer." information supposed to come from the inside and giving you an infallible tip on just what is going to happen. sometimes information of this kind is valuable, but rumors of the wildest kind are so continuously floating around the street that a "pointer" is more than likely to be an unfounded, silly rumor, which somehow has gotten into respectable company. if you know that the information comes from a reliable party who knows what he is talking about, and have money enough so that you can make an investment--not a speculation on narrow margin--and can afford to hold on after the methods of this company until prices rise, the "pointer" may prove a good thing. "a pool." a syndicate of men who combine forces to get control of a property. "a corner." when a "pool" or an individual quietly buys up the shares of a property so that they can absolutely control it, it is called a "corner." those who succeed in effecting a corner will not let the "bears" cover their "short," except at extraordinarily high prices. "a squall." depressing news that comes unexpectedly upon the market, and frightens the timid speculators into letting go their holdings. "a slump." a continuation of depressing influences which makes the margin dealers sell out. "a panic." a time when most of the "bulls" have been wiped out and everybody is a "bear" on the market and goes "short" because it is the prevailing sentiment. "squalls," "slumps" and "panics" are disastrous to the ordinary speculator, and ruin them by the thousands. they represent, however, the very best opportunity for money making, as has been shown in hundreds of instances. they will give this company the chance to buy the best sort of securities at prices so low as to make big profits a certainty. it is under these conditions that this company will make its purchases. with patience enough and capital enough it is possible by acting promptly at the time when these bargain days occur to make more money in wall street than in any other place in the world. "a rally." a state of affairs which exists almost immediately after the public has unloaded its "long" stocks and put out a "short" line. "a call." a privilege to buy a certain number of shares at a given price within a certain space of time. "a put." a privilege to sell a certain number of shares at a fixed price within a given period of time. "a spread." when an operator buys or sells both a "put" and a "call." "on curb." the private dealings made outside the exchanges. a curb-stone broker is a familiar figure and carries on his business every day in wall street. "insiders." there are two classes of wall street men known as "insiders." one is a class which is really inside. officials of corporations, of banks and trust companies and wealthy financiers who really control the properties dealt in the exchanges are really "insiders." they control the market, but never give out under any circumstances any information, and in most cases they do not know themselves just what they are going to do from one day to the next. the other set of "insiders" are those who only make the "lamb" think they are on the inside. they never have any money of their own to speculate with, and they sell their "knowledge" to outsiders for fraction profits when there are any. they advertise and give out their pretended information, and have it sent out all over the world, knowing that every city and town may be depended upon to produce "lambs." bucket shops. a place where you can bet whether a stock will go up or down. you do the guessing and the "bucket shop" makes the money. if you win sometimes you get your money back and sometimes you don't. "tipsters." the "tipster" in wall street is like the tout on the race track. he pretends to know all about it, and is a very solemn and mysterious individual. he tells one man to buy and another to sell, knowing that whichever way the market goes one of them will be a winner, and the "tipster" will get his share. the one who wins tells his friends, who think the "tipster" must be a wonderfully shrewd individual, and in this way he builds up a profitable business, and the "lambs" come flocking his way. he keeps on telling one set of his victims to buy a certain stock, and another set to sell it. whether the stock goes up or down the "tipster" wins, and those who are on the right side of this particular deal spread his name and fame among their acquaintances. "information bureaus." these bureaus are "tipsters" pure and simple, only they travel under the name of a "bureau," instead of their individual names. "a scalper." one who is in the market continually guessing and gambling on the rise or fall. he risks a thousand dollars to gain twelve and one-half dollars. dealing on margin. this means that the buyer of a stock only deposits with his broker a small part of the value of the shares he is buying or selling. he is simply gambling, and very hazardous gambling it is. if he guesses wrong, he must pay up more and more margin or lose altogether. dealing on margin is the favorite sport of the "lambs," and it is very profitable, indeed, to those who take advantage of their misfortunes. the odds are all against the speculator on margin, and sooner or later his money disappears and he disappears with it. a successful operator. a man who is neither "bull" nor a "bear," but simply waits and takes advantage of opportunities. he knows the power of money. he knows the weakness of the public, and how gullible it is. he knows how to worry and scare the people. he sets his machine for the game and gets it. ordinary market affairs do not interest him. when a "squall" appears he is notified instantly, and gets ready for business. he knows all about the stocks that he deals in, precisely what they are, and just what to do. he knows what to buy and just to a fraction when to commence to buy it. he gives his orders, pays no more attention to it, except to see how much he got. he buys just as closely to the bottom as it is possible to get, and when it is all over he goes away happy, asking to be notified when the market is up again. _conclusion._ the contents of this book, including the wall street definitions given above, should give the reader a pretty clear idea of what is done on the new york stock exchange, and just why and how the blundering public is continually losing its money and giving wall street a black name. _it should convince you that you cannot afford to attack wall street by the methods that have been tried so many thousands of times and found to be utter failures._ about the worst possible thing that can happen to a man is to take a "flyer" in wall street and win. his winning convinces him beyond a doubt that he knows all about it, and he goes deeper and deeper, sometimes winning a little, but oftener losing, until some extraordinary turn of the market, some unforeseen incident, or some reckless piece of speculation wipes him out. that is the record of the guesses of ninety-nine out of a hundred men who try to take money out of wall street. what is the use of following right along in their footsteps and trusting to dumb luck or something of that sort to pull you out? if you have any money that you want to make money with, go into wall street through our medium, and place your money in hands where it will not only be perfectly safe, but where it will be handled in the only way that can possibly beat wall street. there is no doubt at all about this. _the thing can be done, has been done, is being done, and will always be done._ and the men who are doing it are piling up enormous fortunes for themselves, they are the only men who get the money in the end. if you want to be on their side instead of on the losing side, the only possible way you can do so is in the manner outlined in this book and we offer you the best, most favorable and safest opportunity. _questions and answers._ q. how many small "lots" can you handle with a capital of one hundred thousand dollars? a. about one hundred. q. in case of a sudden "slump," say twenty per cent., what is the result? a. no change of base is made. q. suppose some lots are on hand bought at higher prices? a. they are kept until sold at a profit, meantime paying a dividend. q. why do you buy dividend paying stocks? a. because they carry themselves. q. how often do you make purchases in a declining market? a. that depends on the market, the stock, the times, and conditions generally, which can be properly judged by the managers, who are devoting all their time and facilities to the business, and know the exact condition of every property dealt in. q. what would be the effect of an unexpected calamity? a. panics are a great help to this method. q. how often do you make purchases or sales? a. about every day, as some one or more of the different stocks have moved sufficiently to do some purchasing or selling. q. do you expect to carry a stock a year before you can sell it? a. yes, if necessary, but not likely, because first purchase only begins when the stock can be had at a bargain and is only a small "lot," and when the average has been reached and sufficient profit made, all the little lots may be sold as one lot. it is not contemplated that this will be done unless it was desirable to close out in any particular stock. there may be some loss on first purchase, but the lowest purchases have handsome profits, and the transaction as a whole renders large returns, when it is closed out and the process commenced over again, and again. q. do you guarantee investments made in the bonds of your company? a. yes, because we know the security is absolutely safe, and we have on hand all the time during the three years either the cash or an equivalent amount in sound dividend shares in the most prosperous railway and industrial corporations in the world. q. do you guarantee interest on the bonds at the rate of five per cent.? a. yes, we guarantee the principal and that the profits to the investor shall not be less than five per cent. per annum, payable semi-annually, and we will pay it regularly, but it will be charged against the gross profits, the same as commissions. q. how much more than five per cent. do you expect the bonds will earn? a. at least to per cent. per annum. q. what are the denominations of the bonds? a. twenty-five dollars and upwards. we issue them in regular numbers to the purchasers for the amount of his or her investment, the same as a life insurance policy is issued. q. will these bonds have a market value during the three years? a. yes, and will sell above par after the first six months. q. why do you issue bonds for only twenty-five dollars? a. so as to give small investors the opportunity to join with capitalists for savings and better returns than they can get elsewhere. q. do you consider your bonds as safe and profitable as savings banks? a. yes, and more so, because the security is better than any savings bank which receives money, pays a low rate of interest, and loans it out on securities that do not always have a cash value. our bonds are secured by an equivalent in cash or the safest and soundest dividend paying securities in the world, and can be sold instantly every business day in the year; furthermore, they earn not less than per cent. per annum, with a practical certainty of a great deal more. q. how do you buy the securities? a. through our brokers on the floor of the exchanges. q. can a bondholder in your company have information of the condition of these investments any time? a. yes, every day, if he wishes. _correspondence is invited, and the fullest information will be frankly given._ henry voorce brandenburg & co. incorporated, capital $ , bankers no. wall street new york city h. v. brandenburg, _president_ charles austin bates, _treasurer_ capital _for_ good projects first-class propositions in railroad building, gas and water plants, electric lighting and power, street car lines, mines and industrial and mercantile projects fail because those who control them lack capital or the knowledge and facilities for obtaining it. it is our business to supply capital for meritorious enterprises. thousands of people have millions of dollars to invest, and yet hundreds of good enterprises lie dormant for lack of cash. there is plenty of money for any really good projects. we organize companies, effect consolidations, create and guarantee bond issues and act as trustees and fiscal agents. we buy and sell government bonds and other securities dealt in on the new york stock exchange and other exchanges, and give disinterested advice to clients seeking investments. we own and control investment securities paying from - / to per cent. dividends, and will be pleased to send our regular list on request. we buy and sell real estate and deal in real estate loans. henry voorce brandenburg & co. bankers wall st., new york city branch offices girard building, philadelphia salisbury house, london http://www.archive.org/details/newyorkstockexch kahnrich the new york stock exchange and public opinion by otto h. kahn remarks at annual dinner association of stock exchange brokers held at the astor hotel, new york january , published by the new york stock exchange the new york stock exchange a couple of weeks ago i went to washington to contradict under the solemn obligation of my oath a gross and wanton calumny which, based upon nothing but anonymous and irresponsible gossip, had been uttered regarding my name. on my way between new york and washington, thinking that, once on the stand, i might possibly be asked a number of questions more or less within the general scope of the committee's enquiry, i indulged in a little mental exercise by putting myself through an imaginary examination. with your permission, i will read a few of these phantom questions and answers: should the exchange be "regulated"? question: _there is a fairly widespread impression that the functions of the stock exchange should be circumscribed and controlled by some governmental authority; that it needs reforming from without. what have you to say on that subject?_ answer: i need not point out to your committee the necessity of differentiating between the stock exchange as such and those who use the stock exchange. most of the complaints against the stock exchange arise from the action of those outside of its organization and over whose conduct it has no control. no doubt there have at times been shortcomings and laxity of methods in the administration of the stock exchange just as there have been in every other institution administered by human hands and brains. [sidenote: _should the exchange be regulated?_] some things were, if not approved, at least tolerated in the past which are not in accord with the ethical conception of to-day. the same thing can be said of almost every other institution, even of congress. until a few years ago, the acceptance of campaign contributions from corporations, the acceptance of railroad passes by congressmen and senators were regular practices which did not shock the conscience either of the recipients or of the public. now they have rightly been made and are looked upon as crimes. ethical conceptions change; the limits of what is morally permissible are drawn tighter. that is the normal process by which civilization moves forward. the stock exchange has never sought to resist the coming of that higher standard. on the contrary, in its own sphere it has ever endeavored to maintain an exemplary standard, and it has ever shown itself ready and willing to introduce better methods whenever experience showed them to be wise or suggestion showed them to be called for. [sidenote: _should the exchange be regulated?_] in its regulations for the admission of securities to quotation, in the publicity of its dealings, in the solvency of its members, in its rules regulating their conduct and the enforcement of such rules, the new york stock exchange is at least on a par with any other stock exchange in the world, and, in fact, more advanced than almost any other. the outside market on the curb could not exist if it were not for the stringency of the requirements in the interest of the public which the stock exchange imposes in respect of the admission of securities to trading within its walls and jurisdiction. there is no other stock exchange in existence in which the public has that control over the execution of orders, which is given to it by the practice--unique to the new york stock exchange--of having every single transaction immediately recorded when made and publicly announced on the ticker and on the daily transaction sheet. i am familiar with the stock exchanges of london, berlin and paris, and i have no hesitation in saying that, on the whole, the new york stock exchange is the most efficient and best conducted organization of its kind in the world. [sidenote: _should the exchange be regulated?_] the recommendations made by the commission appointed by governor hughes at the time were immediately adopted in toto by the stock exchange. certain abuses which were shown to have crept into its system several years ago were at once rectified. from time to time other failings will become apparent--there may be some in existence at this very moment which have escaped its attention--as failings become apparent in every institution, and will have to be met and corrected. i am satisfied that in cases where public opinion or the proper authorities call attention to shortcomings which may be found to exist in the stock exchange practice, or where such may be discovered by the governing body or the membership of the exchange, prompt correction can be safely relied upon. sometimes and in some respects, it is true, outside observers may have a clearer vision than those who are qualified by many years of experience, practice and routine. if there be any measures which can be shown clearly to be conducive towards the better fulfilment of those purposes which the stock exchange is created and intended to serve, i am certain that the membership would not permit themselves to be led or influenced by hidebound bourbonism, but would welcome such measures, from whatever quarter they may originate. is the exchange merely a private institution? question: _do i understand you to mean, then, that the stock exchange is simply a private institution and as such removed from the control of governmental authorities and of no concern to them?_ answer: i beg your pardon, but that is not the meaning i intended to convey. while the stock exchange is in theory a private institution, it fulfills in fact a public function of great national importance. that function is to afford a free and fair, broad and genuine market for securities and particularly for the tokens of the industrial wealth and enterprise of the country, i.e., stocks and bonds of corporations. without such a market, without such a trading and distributing centre, wide and active and enterprising, corporate activity could not exist. [sidenote: _is the exchange merely a private institution?_] if the stock exchange were ever to grow unmindful of the public character of its functions and of its national duty, if through inefficiency or for any other reason it should ever become inadequate or untrustworthy to render to the country the services with constitute its raison d'être, it would not only be the right, but the duty of the authorities, state or federal, to step in. but thus far, i fail to know of any valid reasons to make such action called for. short selling--is it justifiable? question: _you have commenced your first answer with the words, "i need not point out to your commission." that is a complimentary assumption, but i don't mind telling you that we here are very little acquainted with the working of the stock exchange or the affairs of you wall street men in general. what about short selling?_ answer: i do not mean to take a "holier than thou" attitude, but personally, i have never sold a share of stock short in my life. short sellers are born, not made. but if there were not people born who sell short, they would almost have to be invented. short selling has a legitimate place in the scheme of things economic. it acts as a check on undue optimism, it tends to counteract the danger of an upward runaway market, it supplies a sustaining force in a heavily declining market at times of unexpected shock or panic. it is a valuable element in preventing extremes of advance and decline. [sidenote: _short selling is it justifiable?_] the short seller contracts to deliver at a certain price a certain quantity of stocks which he does not own at the time, but which he expects the course of the market to permit him to buy at a profit. in its essence that is not very different from what every contractor and merchant does when in the usual course of business he undertakes to complete a job or to deliver goods without having first secured all of the materials entering into the work or the merchandise. the practice of short selling has been sanctioned by economists from the first napoleon's minister of finance to horace white in our day. while laws have at various times been enacted to prohibit that operation, it is a noteworthy fact that in every instance i know of these laws have been repealed after a short experience of their effects. [sidenote: _short selling is it justifiable?_] i am informed on good authority--though i cannot personally vouch for the correctness of the information--that there is no short selling on one nowadays fairly important stock exchange,--that of tokyo, japan. you will have seen in the papers that when president wilson's peace message (or was it the german chancellor's peace speech?) became known in tokyo, the stock exchange there was thrown into a panic of such violence that it had to close its doors. it attempted to reopen a couple of days later, but after a short while of trading was again compelled to suspend. assuming my information to be correct, you have here an illuminating instance of cause and effect. short selling does become a wrong when and to the extent that the methods and intent of the short seller are wrong. the short seller who goes about like a raging lion [or bear] seeking whom he may devour; he who deliberately smashes values by dint of manipulation or artificially intensified selling amounting in effect to manipulation, or by spreading alarm through untrue reports or even through merely unverified rumors, does wrong and ought to be punished. [sidenote: _short selling is it justifiable?_] perhaps the stock exchange authorities are not always alert enough and thorough enough in running down and punishing deliberate wreckers of values and spreaders of evil omen; perhaps there is altogether not enough energy and determination in dealing with the grave and dangerous evil of rumor mongering on the stock exchange and in brokers' offices. but after all even congress, with the machinery of almost unlimited power at its hand, does not always seem to find it quite easy to hunt the wicked rumor-mongers to their lairs and subject them to adequate punishment. yet the unwarranted assailing of a man's good name is a more grievous and heinous offence than the assailing, by dint even of false reports, of the market prices of his possessions. i need hardly add that the practices to which i have above referred are equally wrong and punishable when they aim at and are applied to the artificial boosting of prices as when the object is the artificial depression of prices. does the public get "fleeced"? question: _we hear or read from time to time about the public being fleeced. there is a good deal of smoke. isn't there some fire?_ answer: if people do get "fleeced," the fault lies mainly with outside promoters or unscrupulous financiers, over whom the stock exchange has no effective control. some people imagine themselves "fleeced," when the real trouble was their own get-rich-quick greed in buying highly speculative or unsound securities, or having gone into the market beyond their depth, or having exercised poor judgment as to the time of buying and selling. against these causes i know of no effective remedy, just as there is no way to prevent a man from overeating or eating what is bad for him. in saying this, i do not mean to imply that stockbrokers have not a duty in the premises. [sidenote: _does the public get fleeced?_] on the contrary, they have a very distinct and comprehensive duty towards their clients, especially those less familiar with stock market and financial affairs, and towards the public at large. and they have furthermore the duty to abstain from tempting or unduly encouraging people to speculate on margin, especially people of limited means, and from accepting or continuing accounts which are not amply protected by margin. in respect of the latter requirement, the stock exchange has rightly increased the stringency of its rules some years ago, and it cannot too sternly set its face against an infringement of those rules or too vigilantly guard against their evasion. against unscrupulous promotion and financiering a remedy might be found in a law which should forbid any public dealing in any industrial security [for railroad and public service securities the existing commissions afford ample protection to the public] unless its introduction is accompanied by a prospectus setting forth every material detail about the company concerned and the security offered, such prospectus to be signed by persons who are to be held responsible at law for any wilful omission or misstatement therein. [sidenote: _does the public get fleeced?_] such a law would be analogous in its purpose and function to the pure food law, any, let us call it, "anti-fleecing" law which went beyond that purpose and function would overshoot the mark. the pure food law does not pretend to prescribe how much a man should eat, when he should eat or what is good or bad for him to eat, but it does prescribe that the ingredients of what is sold to him as food must be honestly and publicly stated. the same principle should prevail in respect of the offering and sale of securities. if a drug contains water, the quantity or proportion must be shown on the label, so that a man cannot sell you a bottle filled with water when you think you are buying a tonic. in the same way the proportion of water in a stock issue should be plainly and publicly shown. the purchaser should not be permitted to be under the impression that he is buying a share in tangible assets when, as a matter of fact, he is buying expectations, earning capacity or goodwill. these may be, and often are, very valuable elements, but the purchaser ought to be enabled to judge as to that with the facts plainly and clearly before him. [sidenote: _does the public get fleeced?_] the main evil of watered stock lies not in the presence of water, but in the concealment or coloring of that liquid. notwithstanding the unenviable reputation which the popular view attaches to watered stock, there are distinctly two sides to that question, always provided that the strictest and fullest publicity is given to all pertinent facts concerning the creation and nature of the stock. do "big men" put the market up or down? question: _is it not a fact that some of the "big men" get together from time to time and determine to put the market up or down so as to catch profits going and coming?_ answer: as to "big men" meeting to determine the course of the stock market, that is one of those legends and superstitions inherited from olden days many years ago when conditions were totally different from what they are now, and when the scale of things and morals, too, were different, which it is hard to kill. the fluctuations of the stock market represent the views, the judgment and the conditions of thousands of people all over the country, and indeed, in normal times, all over the world. the current which sends market prices up or down is far stronger than any man or combination of men. it would sweep any man or men aside like driftwood if they stood in its way or attempted to deflect it. [sidenote: _do "big men" put the market up or down?_] true, men at times discern the approach of that current from afar off and back their judgment singly, or sometimes even a few of them together, as to its time and effect. they may hasten a little the advent of that current, they may a little intensify its effect, but they have not the power to either unloosen it or stop it. if by the term "big men" you mean bankers, let me add that a genuine banker has very little time and, generally speaking, equally little inclination to speculate, and that his very training and occupation unfit him to be a successful speculator. the banker's training is to judge intrinsic values, his outlook must be broad and comprehensive, his plans must take account of the longer future. the speculator's business is to discern and take advantage of immediate situations, his outlook is for tomorrow, or anyhow for the early future; he must indeed be able at times to disregard intrinsic values. [sidenote: _do "big men" put the market up or down?_] the temperamental and mental qualifications of the banker and speculator are fundamentally conflicting and it hardly ever happens that these qualifications are successfully combined in one and the same person. the banker as a stock market factor is vastly and strangely over-estimated, even by the stock exchange fraternity itself. may i add, in parenthesis, that a sharp line of demarcation exists between the speculator and the gambler? the former has a useful and probably a necessary function, the latter is a parasite and a nuisance. he is only tolerated because it seems impossible to abolish him without at the same time doing damage to elements the preservation of which is of greater importance than the obliteration of the gambler. to the members of the exchange now by this time the committee would surely feel that it has had a surfeit of my wisdom, as i am sure you must feel, but if you will be indulgent a very little while longer, i should like to say a few words more to you whose guest i have the honor to be this evening. my recent observation of and contact with congressmen and others in washington have once more fortified my belief that the men by and large whom the country sends to washington to represent it, desire and are endeavoring, honestly and painstakingly, to do their duty according to their light and conscience, and that, making reasonable allowance for the element of party considerations, they represent very fairly the views and sentiments of the average american. [sidenote: _the pioneer period of economic development is ended_] most of them are men of moderate circumstances. very few of them have had occasion to familiarize themselves with the laws, the history and the functionings of finance and trade; to come into relation to the big business affairs of the country, or to compare views with its active business men. it may be assumed that, very naturally, not a few of them have failed to come to a full recognition of the facts that the mighty pioneer period of america's economic development came definitely to an end a dozen years ago, that with it came to an end practices and methods and ethical conceptions, which in the midst of the magnificent achievements of that turbulent period were, if not permitted, yet to an extent silently tolerated, and that business has willingly fallen into line and kept in line with the reforms which were called for in business as in other walks of our national life. the opinions of the world, and particularly of the political world, travel along well worn roads. men are reluctant to go to the effort of reconsidering opinions once definitely formed and fixed. [sidenote: _the vacuum cleaner of reform and regulation_] many in and out of congress are still under the controlling impress of the stormy years when certain deplorable occurrences affecting corporations and business men were brought to light, when it was demonstrated that certain abuses which had accumulated during well nigh two generations needed to be done away with for good and all, and when the people went through the ancient edifice of business with the vacuum cleaner of reform and regulation, using it very thoroughly, perhaps, in spots, a little too thoroughly. not a few politicians are still sounding the old battle cry, although the battle of the people for the regulation and supervision of corporations was fought to a finish years ago _and won by the people_, and although the people themselves of late, on the few occasions when a direct proposition has been put up to them, such as recently in missouri, have indicated that they consider the punitive and probationary period at an end and want business to be given a fair chance and a square deal. when the right of suffrage was thrown open to the masses of the people in england, a great englishman said, "now we must educate our masters." in this country it is not so much a question of educating our masters, the people and the people's representatives [who, moreover, would resent and refuse to tolerate for a moment any such patronizing assumption], as of getting them to know us and getting ourselves to know them. [sidenote: _the need for closer contact and better understanding_] all parties concerned will benefit from coming into closer contact with each other and becoming acquainted with each other's viewpoints. can we honestly say that we are doing our full share to bring about such contact and to get ourselves and what we believe in properly understood, believe in not only because it happens to be our job in life and our self-interest, but because in the general scheme of things it serves a legitimate and useful and necessary function for our country? how many of us have taken the trouble to seek the personal acquaintance of the congressmen or assemblymen or state senators representing our respective districts? how many of us make an effort to come into personal relationship with people, both here and in the west, outside of our accustomed circles? yet an ounce of personal relationship and personal talk is worth many pounds of speech making and publicity propaganda. [sidenote: _"to be one of fifteen men around a table"_] when you look a man in the face and talk to him and question him and realize in the end that he is sincere in his viewpoint, whether you share it or not, and that he is made of the same human stuff as you, and has neither horns nor claws nor hoofs, much animosity, many preconceived notions are apt to vanish and you are not so cocksure any longer that the other fellow is a destructive devil of radicalism or a bloated devil of capitalism, as the case may be. i recall in this connection an incident which concerns my great friend, the late e. h. harriman. he talked to me about his wish to be elected to a certain railroad board. i said, "i don't really see what use that would be to you. you would be one of fifteen men, of whom presumably fourteen would be against you." he answered: "i know that, but all the opportunity i ever want is to be one of fifteen men around a table." and the result has shown that that was all the opportunity he needed. we cannot all have the conquering genius and force of a harriman, but every one of us, in a greater or lesser degree, every one in some degree has the power of co-operating in the vastly important task of personal propaganda for a better understanding, a juster appreciation of each other, between east and west and south, between what is termed wall street and the men who make our laws, between business and the people. [sidenote: _this is the age of publicity_] this is the age of publicity, whether we like it or not. democracy is inquisitive and won't take things for granted. it will not be satisfied with dignified silence, still less with resentful silence. business and business men must come out of their old time seclusion, they must vindicate their usefulness, they must prove their title, they must claim and defend their rights and stand up for their convictions. nor will business or the dignity of business men be harmed in the process. no healthy organism is hurt by exposure to the open air. no dignity is worth having or merited or capable of being long preserved which cannot hold its own in the market place. democracy wants "to be shown." it is no longer sufficient for the successful man to claim that he has won his place by hard work, energy, foresight and integrity. [sidenote: _the use of the power that goes with success_] democracy insists rightly that a part of every man's ability belongs to the community. democracy watches more and more carefully from year to year what use is being made of the rewards which are bestowed upon material success, and particularly whether the power which goes with success is used wisely and well, with due sense of responsibility and self-restraint, with due regard for the interests of the community. and if the consensus of enlightened public opinion should come to conclude that on the whole it is not so used, the people will find means to limit those rewards and to curtail that power. and what is true of the public attitude towards individuals holds good equally of its attitude towards organizations such as the stock exchange. there can be little doubt that a great deal of misconception prevails as to its methods, spirit and practices, as to its functions, purposes and its place in the country's economic structure. it is of great and urgent importance that the stock exchange should leave nothing undone to get itself better and more correctly understood. it should not only not avoid the fullest publicity and scrutiny, but it should welcome and seek them. [sidenote: _the stock exchange a national institution_] it has nothing to hide and it should be glad to show that it has nothing to hide. it should miss no opportunity to explain patiently and in good temper what it is and stands for, to correct misunderstandings and erroneous conception. if it is attacked from any quarter deserving of attention, it should go to the trouble of defending itself. if it is made the object of calumny, it should contradict and confound the slanderer. its members should ever remember that while in theory the stock exchange is merely a market for the buying and selling of securities, actually and collectively they constitute a national institution of great importance and great power for good or ill. they are officers of the court of commerce in the same sense in which lawyers are officers of the court of law. they should not be satisfied with things as they find them, they should not take the way of least resistance, they should ever seek to broaden their own outlook and extend the field and scope of the stock exchange's activities. [sidenote: _american opportunity for foreign trade_] one of the reasons for london's financial world position is that its stock exchange affords a market for all kinds of securities of all kinds of countries. the english stock broker's outlook and general or detailed information range over the entire inhabited globe. it is largely through him that the investing or speculative public is kept advised as to opportunities for placing funds in foreign countries. he is an active and valuable force in gathering and spreading information and in enlisting british capital on its world-wide mission. the viewpoint of the average american investor is as yet rather a narrow one. investment in foreign countries is not much to his liking. the regions too far removed from broadway do not greatly appeal to him as fields for financial fructification. yet, if america is to avail herself fully of the opportunities for her trade which the world offers, she must be prepared to open her markets to foreign securities, both bonds and stocks. if america aspires to an economic world position similar to england's, she must have amongst other things financial [such as, first of all, a discount market] a market for foreign securities. [sidenote: _we are at a turning point in american history_] in educating first themselves and then the public to an appreciation of the importance and attractiveness of such a market, with due regard to safety, and to the prior claim of american enterprise in its own country, the members of the stock exchange have an immense field for their imagination, their desire for knowledge and their energy. we all of us must try to adjust our viewpoint to the situation which the war has created for america, and to the consequences which will spring from that situation after the war will have ceased. as mr. vanderlip so well said in a recent speech: "never did a nation have flung at it so many gifts of opportunity, such inspiration for achievement. we are like the heir of an enormously wealthy father. none too well trained, none too experienced, with the pleasure-loving qualities of youth, we have suddenly, by a world tragedy, been made heir to the greatest estate of opportunity that imagination ever pictured." america is in a period which for good or ill is a turning point in her history. her duty and her responsibility are equally as great as her opportunity. shall we rise to its full potentiality, both in a material and in a moral sense? the words of an english poet come to my mind: "we've sailed wherever ships can sail, we've founded many a mighty state, god grant our greatness may not stale through craven fear of being great." it is not "craven fear" that will prevent us from attaining the summit of the greatness which it is open to america to reach, for fear has never kept back americans--any more than englishmen--and never will. indifference, slackness and sloth, lack of breadth and depth in thought and planning; the softening of our fibre through easy prosperity and luxury; unwise or hampering laws, inadequacy of vision and of purposeful, determined effort, individual and national, are what we have to guard against. god grant america may not fail to grasp and hold that greatness which lies at her hand! available by internet archive (https://archive.org) note: images of the original pages are available through internet archive. see https://archive.org/details/federalreservemo clarrich the federal reserve monster by _jim jam jems_ bismarck, n.d. price $ . in u.s.a. carriage prepaid compiled, edited and published by sam h. clark and wallace campbell of jim jam jems bismarck, north dakota copyright august editor's foreword. with "charity toward all and malice toward none" we indite this volume of criticism of the federal reserve "bunking" system as it is "practiced" in america. we are not posing as a modern david, nor do we underrate the size of the giant we have tackled herein by several damsights. and by the same token we are not depending on a single stone to deliver a knockout; on the contrary we are delivering a veritable volley of rocks at the object of our criticism and we hope that every chapter written here will raise bruises and welts on the back and belly of the critter. we have no intention nor desire to kill. and we don't believe in reform. when a thing needs reforming it needs an axe. but what we are striving to do is to awaken public sentiment to the damnable ramifications of the federal reserve octopus in the hope that the people will "come alive" and eventually force the federal reserve system to be born anew. it is the abuse of the federal reserve system to which we object. every little while some smart alec mounts the bema and roars about the great good that the federal reserve system has accomplished. it is called the savior of credit and industry. but it is misbranded. there's a vast difference between the picture on the tomato can and the contents of the can. if you have ever lived in the west or north or in any part of the country where wild ducks or partridges or prairie chickens nest, you are familiar with the antics of the mother duck or prairie hen during the hatching season. you have come suddenly upon the mother of a brood along the roadside and as she hops along there is every indication that the bird is wounded and she leads you away from her nest to a point where she figures the young are safe and then up and away she goes. these touters for the federal reserve system remind us of the mother duck and the prairie hen. they flap along and distract your attention from the nest which they are so beautifully feathering; they prate about "saving" and "benefiting" and flap you along until you lose sight of the brood of evils that they are really mothering. our object in attacking the evils of the federal reserve system has been to awaken sentiment--that is all. for the past two years we have kept up a continuous bombardment against the iniquities of the federal reserve system through the monthly issues of jim jam jems. the demand for back numbers and extra copies has been so great that we deemed it advisable to collect all of these charges under one volume and thus place the whole truth about the federal reserve system before the people. what we publish herein is fact, carefully compiled from the system's own reports and from public records. we commend this volume to all thinking, upstanding americans who are ever ready to fight for a square deal. zinc! vinegar! vitriol! jim jam jems please don't confound jim jam jems with other magazines that are aping it in size and general appearance. it is not a joke book, nor a dream book, nor a slab of fiction. it is just what it is advertised to be--a volley of truth. you will find more hard, frozen-in facts and facts that you want to know about matters of public interest in each issue of jim jam jems than you will find in any other publication in america. you cannot afford to miss a single number. fill in the coupon below and send it to us with your check for three dollars and you will get jim jam jems for a year delivered by mail to your office or home address. don't wait! join our army of regulars with the next number. * * * * * jim jam jems, bismarck, n. dak. gentlemen: here's my check for $ . . send me jim jam jems for a year at the following address: name ....................................... street ..................................... city ........................ state ........ contents chapter page i federal reserve "bunking." ii the birth of the federal reserve system iii the framework of the monster iv the stuffing of the leviathan v check collection banditry vi the loot of the monster vii how the loot is gathered viii the partiality of the pillage ix the tragedy of drastic deflation x the palaces of the monster xi the monster's expenses xii what the monster does with its loot xiii the camouflage of the monster xiv final volley at the monster federal reserve "bunking" chapter i the federal reserve system--what it really is the federal reserve system is the visible hand of the invisible empire picking the pockets of the producers of real wealth. it is the most leviathan parasite engrafted upon--and grafting on--production in the world's history. it is an industrial vampire sucking industry's life blood down its bottomless maw. its greed is fathomless, its rule is ruthless and its lust for power is insatiate. it is openly and avowedly run and managed in the interest of a so-called "superior class." it has a cynical contempt for the public--whom it ruthlessly plunders. it believes--and practices the belief--that it was instituted for the promotion and protection of superior privileges; that wealth is produced for its exploitation; that production of values exists for its parasitical plunder; that shylockery is a virtue and that the fruits of industry belong not to its producers but to its despoilers. property-owners, property-earners and property-producers are but its puppets whom it plunders at will. by monopolizing and juggling money--the mere symbol of wealth--it destroys the value of real wealth. it has but one interest in the public whom it hypocritically professes to serve and that interest is expressed in the query "how much will the people stand?" there is nothing with which to compare it for it stands alone in the world's history as the most gigantic plunderbund ever conceived in predacity's womb. czardom at its height and kaiserdom at its zenith never held a tithe of the real power held by the federal reserve system. it is the perfected fruit and flower of financial high-bindery, industrial plunderbund and applied shylockery. under the cloak and mantle of the law it reaches forth its paws of predacity and pouches filcheries which are simply stupendous. that is briefly what the much touted and saccharinely adulated federal reserve system really is. abraham lincoln, the greatest human intellect which ever functioned on this planet, prophetically drew its portrait in these words: "it (the civil war) has been indeed a trying hour for the republic; but i see in the near future a crisis approaching that unnerves me and causes me to tremble for the safety of my country. as a result of the war, corporations have been enthroned and an era of corruption in high places will follow and the money power of the country will endeavor to prolong its reign by working upon the prejudices of the people until all wealth is aggregated in a few hands, and the republic is destroyed. i feel at this moment more anxiety for the safety of my country than ever before even in the midst of the war. god grant that my suspicions may prove groundless." that is the true portrait, drawn by a master hand, of the federal reserve system. in subsequent chapters you will see the birth of the monster, its ruthless methods of plunder, its machinery of despoilment, its monopoly of money and credit, its pawnbrokery and shylockery and its huge mounds of pillage. and in looking it over don't overlook the fact that you, you yourself--whatever may be your part in american industry--are laying tribute on the federal reserve altar of mammon. you can't escape its net of pillage. amid its mounds of gold, currency and securities--the hugest ever massed together on this planet--your contribution is there. your brain or your brawn, or both, have added to its lootage. if you live and toil in the u.s.a.--in whatever capacity--your "mickle" adds to the "muckle"--of its stored pillage. chapter ii the birth of the federal reserve system "slicker than an eel in a bucket of soap suds" is a fair description of the accomplished financial accoucheurs who ushered this monster into legal existence. you must understand that the real object was to establish what was in truth and fact a central bank which would dominate and control currency issues and bank credits in the united states. to weld those chains upon american industry without appearing to do it was the object in view. it could be done only by encasing dirty hands of real pillage in the white gloves of a "reserve system." the invisible empire must remain invisible. visibility would defeat its object. the money masters had read history and knew that the american people stood four square against a central bank. if their monster of pillage were called a central bank they knew it would die in the legislative womb. two such attempts had been made and had resulted disastrously thusly. the first attempt was the first united states bank. it was the child of alexander hamilton's astute brain. it began business on december , . it met violent opposition from its birth. it was branded as a "money trust," struggled along with varying fortunes and finally died on march , , when its charter expired--with its renewal vainly sought. american industry rebelled at the idea of a central bank domination. it savored too much of that aristocracy and oligarchy whose chains they had recently chiseled. the second attempt to engraft a central bank on american industry was the second bank of the united states. it was chartered on april , , and was a stormy petrel of finance. about it waged a running battle. it was from birth to death the center of a conflict. against its domination american industry rebelled. real producers of real wealth constantly fought this parasite of finance. andrew jackson was its bitter foe and it went out of existence during his administration "unwept, unhonored and unsung" except in the doleful dirges of the then money masters who mourned its demise. the money masters of those two eras read the handwriting on the wall. american industry would not endure a central bank and the money masters of read the same symbols. history was against them and the genius of american institutions was against them. their idea of a central bank had never changed. it was the very core and center of their scheme to dominate american industry. but to "get it across" or to "put it over" they must re-christen the monster. twice the people had violently repudiated the central bank banditry. hence in the fertile brainery of predacity was born the idea of the federal reserve system--a camouflage, a deception and a mere cloak of pecksniffian hypocrisy. a clever nation-wide propaganda was at once instituted with every "prop" put under it that wily astuteness could suggest. a subsidized press ballyhooed, touted and paeanized the proposed federal reserve system. it was hailed as the moses which was going to lead america into the promised land of industrial freedom. it was paeanized as an absolutely new discovery in finance--when in truth and in fact it was one of predacity's oldest cards soiled in many a game. but it was varnished o'er and played again. there wasn't to be any "central bank" you understand. the sponsors of this monster abhorred the idea of a "central bank." it was the furthest possible from their pure thoughts of altruistic finance! they were going to have twelve banks, each one established in a center of industry and catering to and upbuilding the industries in its regional zone. each one was going to be a separate and distinct corporation absolutely disconnected from its eleven brethren. this idea was advertised, adulated, and saccharinely paeanized until america was lulled to sleep. for month after month this cone of chloroform was held over american citizens until the anesthetic took effect. then came forth what was known as the glass-owen bill. the smoothness of its head sponsors' name was symbolic. the ground had been prepared for its reception. propaganda seed had been diligently sown. years of the most astute scheming and plotting of the brainiest schemers who ever schemed bore its fruit in the glass-owen bill. on rails greased by years of propaganda it slid into the legislative hopper, came through in an oil bath and went to president wilson. whether he was the deceived or the deceiver none but himself knows. but he painted the federal reserve system with his most magnificent verbal rainbow colors, prated of it as "the emancipator of credit," signed it in the midst of a coterie of sycophantic pecksniffs and the pen whose strokes made it a law was religiously preserved! its real authors--who had spent years in weaving its phrases and scores of thousands of dollars in propagandizing for its passage--winked, smiled in their sleeves and prepared for pillage. the federal reserve system was born with a caul--concealing its grin of greed--and was brought into being by the most astute coterie of legislative accoucheurs who ever delivered a babe of legislation. here and now read just two of the sample promises made by the money masters at the birth of their monster. they told you that the federal reserve system would "prevent unfair and undue constriction of credits with its consequent paralyzing effect on business and on the productive energies of the nation." they told you that "men will not be thrown out of employment wholesale throughout the country by the fright of financial and commercial panic, but finance and commerce will be steady. hundreds and thousands of men will not suddenly be thrown out of employment during these national waves of depression nor undue feverish buoyancy." peg these specious promises in your brainery and compare them later on with the actual performances of this monster of depression with the federal reserve board at washington really functioning as a central bank. chapter iii the framework of the monster here's the idea. were you one of a coterie of multi-millionaires lusting for the control of american industry and finance--exclusively for pillage--you would, if necessary, join in providing any amount of capital necessary to obtain the result. you could afford to provide it for it would make you one of a coterie enabled to loot the richest prizes on this planet. any system which could at will open or shut the valves of american credit, stage an orgy of "inflation" or stage a debacle of "deflation," increase or decrease the money supply, make the tide of employment flow to prosperity's height or ebb to despair's depths, create a "bull" or a "bear" market at will--would justify the investment of hundreds of millions or even billions of capital! its power would be practically boundless, its profits be fabulous and from its coign of vantage it could coin the sweat of scores of millions of toilers into its coffers of greed. but if you could do this very same thing and obtain precisely the same results and reap exactly the same harvest in power and pelf without investing one thin dime or one plugged nickel you wouldn't put up the money, would you? that is just exactly what these federal reserve highbinders did and this is just exactly how they did it. there lay fair to their hands the most successful banking system in the world's annals--the national banks. here was the core and center of their pillage. here was the capital ready to their hands. they proceeded to levy upon, to appropriate and to commandeer their capital from the national banks of the united states. they divided the u.s.a. into twelve financial satrapies or dependencies or loot areas with centers of pillage thusly: new york, chicago, atlanta, san francisco, boston, minneapolis, kansas city, st. louis, cleveland, philadelphia, richmond, and dallas. upon every national bank in the u.s.a. there was levied a capital tribute of six per cent of their capital and surplus account for subscribed capital to the federal reserve bank set over them. of this amount one-half or three per cent was required to be immediately paid in and the other half was held subject to call if required. take a look at this first step on the stairway of pillage. without the investment of one copper cent, of one plugged nickel or of one thin dime and by one stroke of the pen when this infamous law was passed practically one hundred millions of capital was commandeered into the coffers of federal reserve banditry. without the risk of one penny of their own money the federal reserve plunderbund seized in its talons of greed the hugest banking capital in the u.s.a.--practically two hundred millions of dollars with one-half of it immediately payable and the other half subject to call! it was the most daring financial high-bindery ever enacted on earth. right here don't hock your brains--do your own thinking. without any option, without any vote of stockholders, without any action by its officers every national bank in the u.s.a. was compelled to buy stock in the federal reserve bank in its fiscal dependency or loot area in which it was located. protest was useless--just as useless as if they stood under the guns of a jesse james' or younger brothers' gang. it was just "stand and deliver" and they delivered! at this time, in , the banking business in the u.s.a., and particularly national banks, was functioning soundly and safely. it was serving--not dominating--industry. it was making reasonable--not shylock--profits. suppose the lustful eyes of the federal reserve lootage had turned to the drygoods instead of to the banking business. they would have compelled every drygoods merchant in the u.s.a. to contribute six per cent of his capital and surplus--with one-half immediately payable--to set up a drygoods jobbing house in the center of a designated loot area. they would have compelled every drygoods merchant to purchase his merchandise from that jobbing house at their price. isn't one proposition as sane as the other? of course it is. but there is this difference. by commandeering capital for the drygoods business licensed looters _could control only the drygoods business_. but by commandeering capital for the banking business licensed looters _could control all business_! that's the difference and that's all the difference. they commandeered capital where it could _control not one industry but all industries_. they didn't commandeer a leg or an arm of industry but they did commandeer _the life blood of all industry_ and at one leap vaulted into a seat of power where their scepter's sway really governed all american industry. that's what they really did. what price did federal reserve lootage pay for this commandeered capital? it limited the dividends to be paid to these sandbagged stockholders to six per cent per annum. no matter how fabulous might be--and really have been--the profits of federal reserve pillage the people who provided its life blood of capital must be content with a paltry six per cent dividend! over a long term of years the net profits of the national banks of the u.s.a. have averaged slightly over per cent per annum. but federal reserve lootage says: "we will pay you but one half what your capital has been earning." some gall? it was the absolute acme of refrigerated nerve! no matter what federal reserve shylockery might make on this commandeered capital the people who provided it--whose money it really was--could get but a paltry six per cent. but one fact or series of facts is worth more than pages of language. so right here and now look at the actual results for the year . here is a list of federal reserve profits and pillage for that year: per cent net sandbaggery location[ ] capital on capital per cent new york $ , , chicago , , atlanta , , san francisco , , boston , , minneapolis , , kansas city , , st. louis , , cleveland , , philadelphia , , richmond , , dallas , , take all of your reading, take all of the history of banking or of finance since banks were first founded and see if you can approximate any such leviathan shylockery. the stockholders in national banks who provided the capital for this orgy of profiteering were gyped out of all the way from per cent in the new york satrapy to per cent in the dallas satrapy. for the year all over the u.s.a. on the average federal reserve lootage took away from the real providers of its capital--the stockholders in national banks--better than per cent on the money they provided! these records are taken from the accounts of its own pillage rendered by the federal reserve system itself. you could be quite some banker yourself, you could orate and strut and preen and propagandize, you could swell out your pouter pigeon breast at stage-managed banquets and be a prince of high finance with a limitless expense account and with an altitudinous salary--if you could commandeer your neighbor's money at per cent and then sandbag out from to per cent profit on it, couldn't you? legal? of course it's quasi-legal and that's the infamy of it. a coterie of the most astute lobbyists who ever enchained a people's industry log-rolled through a piece of legislation whereby they commandeered for their capital the people's money at a petty per cent and in the year alone pouched on it a profit varying from to per cent! that's the record and those are the facts--hidden and concealed from you and draped in a mantle of silence. federal reserve lootage, federal reserve propaganda, federal reserve publicity--all paid for from your money--is too astute to "toot" anent this legalized sandbaggery. do you, the stockholders in the eight thousand and odd national banks in the u.s.a., know of any reason why you should provide at per cent the capital for federal reserve lootage on which it made in one year alone from to per cent? that is, do you know of any reason except your legal helplessness and the bottomless greed of federal reserve sandbaggery? if the law--cleverly lobbied through your congress--didn't compel you to do it, would you do it? would you of your own free will provide capital at per cent and be gypped out of per cent? you know you wouldn't! here is the core and center and solar plexus of the whole federal reserve system--commandeer capital at a petty six per cent and realize out of it profits that make shylock look like a philanthropist. peg this in your brainery and look further. footnotes: [footnote : the average paid in capital for was $ , , and total net earnings were $ , , . this is . % profit and so stated on pages and of federal reserve bulletin of february, . when the net average of the individual banks are footed and averaged the average is . %. this discrepancy is for federal reservists--not us--to explain.] chapter iv the stuffing of the leviathan you have seen the framework and skeleton of the monster--the commandeering of the capital for the operation of the twelve federal reserve banks in each one of the satrapies. you have seen that the federal reserve oligarchs not only never put up one thin dime of their own for the capital for their system but obtained that capital--practically in perpetuity--at a paltry per cent interest or dividend charge. this capital would naturally fluctuate somewhat--but ever upward--as new national banks were commandeered into the jack-pot. by january , , the paid-in capital legally sandbagged into the twelve regional shylockeries was as follows: boston $ , , new york , , philadelphia , , cleveland , , richmond , , atlanta , , chicago , , st. louis , , minneapolis , , kansas city , , dallas , , san francisco , , ------------ total $ , , this is the assembled capital commandeered from national banks in each one of the federal reserve satrapies. this is the framework or skeleton of the leviathan. observe now how adroitly by another provision of the federal reserve legal grabbery and graftery this skeleton is stuffed and over-stuffed. a bank without depositors would be like a railroad without shippers, a store without customers, a hotel without guests or a doctor without patients--a mere expense account. but the same astuteness which could commandeer into its maw over a hundred millions of capital wouldn't falter for lack of deposits--you know that. if the federal reserve system could--as it could--commandeer capital, couldn't it commandeer and conscript deposits? certainly it could and certainly it did. every national bank in the united states is compelled to carry in the federal reserve bank in its satrapy or dependency a reserve account, i.e., the amount of money which the law compels it to carry in its reserve against its deposit liabilities. that sum of money is of course enormous and at this writing at the close of business on may , , amounts to the stupendous sum of $ , , , ! this is the mightiest mound of massed deposits on this planet. and every dollar of that gigantic sum has been conscripted and commandeered into the hands of federal reserve oligarchs--without the capital investment on their part of one penny for its security! by a few strokes of a pen or taps of a typewriter midas was made a piker, aladdin's lamp was made but a tallow dip and croesus was made a small change artist. what generations of toil and astute commercialism couldn't accomplish in centuries in the banking business adept federal reserve oligarchical lobbyists could accomplish--and did accomplish--by a few pen strokes! you don't know which to admire most--their supernal gall or their astute lobbying ability! but hang your cap of admiration on either horn of the dilemma which you choose you find the mightiest single mass of money on this planet swept into federal reserve coffers without toil, without effort, without one penny of capital contributed by them and without one scintilla of ability proven by them--except the ability of accomplished and astute lobbyists! but did they stop there--after commandeering over $ , , of capital and after conscripting over $ , , , of deposits? little you know those birds if you think it. after they had got their beaks into that capital and their claws firmly fixed on those deposits they spread their wings and took a financial flight hitherto absolutely untried--even by the boldest buzzardry of finance. here it is, scan it, take a look at it. for generations of banking the reserve deposits of banks have always drawn a minimum rate of at least per cent per annum. why? because of their size and because of their stability. experience of generations had demonstrated the fairness and the wisdom of that usage. reserve deposits rarely fluctuate--except upwards. but at a few strokes of a pen federal reserve oligarchs reversed the custom of generations and _conscripted this mass of deposits--the largest on earth--into their coffers without interest_! tie a towel about your throbbing brow so that you won't get dizzy, seize your trusty pencil and "figger" a moment. you will find that on this one item alone at per cent interest on $ , , , federal reserve satrapists and oligarchs and legalized tyrants sweep just $ , , a year into their profit pouch. it's $ , , a year that national banks and their stockholders and their depositors used to get that they don't get and that federal reserve predacity does get! if you and a few hundred of your friends could, by astute lobbying ability, get the titanic sum of $ , , , placed in your hands, practically in perpetuity, without interest, you could do quite a bit with it, couldn't you? you could, as do those federal reserve oligarchs, wield the mightiest scepter of power which ever ruled man. and you could do it with "other people's money"--every penny of it--just as they do and you could do it without the investment of a penny of your own--just as they do it! here they are: the federal reserve board at washington, really a central bank, dominating and domineering over the whole federal reserve system; the twelve federal reserve banks, each one dominating and domineering over its own zone or regional satrapy; the commandeered and conscripted national banks in each satrapy and finally their stockholders and depositors--working and toiling--at the base of the pyramid! you have seen the birth of the federal reserve monster, you have seen the skeleton or framework of the monster and you have seen the stuffing of the monster. the invisible empire were the accomplished accoucheurs at its congressional birth; they conscripted the capital, the framework of the monster; they commandeered the stuffing, the leviathan deposits, for the monster; it is in their keeping and now what do they do with it, whom do they "do" and how do they do it? keep right on reading and you will find out. chapter v check collection banditry you have seen the birth of the monster; you have seen how it conscripted its capital at a petty six per cent interest rate; you have seen how it commandeered--at no interest rate--the mightiest mass of deposits ever gathered together on earth and you have seen how it did these things by its absolute control over the money and over the destinies of the national banks in the united states. it could and it did and it does practically control their affairs. but it could not--except by intimidation, by oppression or by practical banditry--control the state banks of the united states. it could not legislate them into its sheep pen for shearing, but it could attempt to intimidate, bulldoze and banditize them. this it attempted to do in this wise: one of the chief specialties of this federal reserve system of applied banditry is to attempt to force every bank in the united states--whether a member of its shylockery or not--to collect checks for its benefit and advantage for nothing. in other words, where it couldn't conscript nor commandeer--purely for its own sordid profit--it proceeded to bulldoze. there are just two ways to collect money on checks, one by presenting them at the counter of the bank on which they are drawn and getting the cash and the other by sending them through the mail for remittance by draft drawn on some large city depository. the latter method obtains in per cent of the hundreds of millions of checks drawn. the bank upon which the check is drawn makes a small charge of one tenth of one per cent to compensate for clerk hire, postage, stationery and the like. it is a perfectly legitimate charge in vogue and practiced for generations in banking circles. but the federal reserve system, with its customary greed, insists upon sandbagging this service for nothing. this arrogant rule--purely for its own sordid profit--it could and did and does enforce against its conscripted and commandeered national banks. but state banks--not wearing the federal reserve yoke of bondage--were at liberty to make the usual collection charge of one tenth of one per cent. thereupon the federal reserve system had a series of fits and fell into them. from an enormous number of its banditries three typical ones are selected for your observation--merely straws showing whence blow the most arrogant winds of oppression. first take a look at the cones state bank of pierce, nebraska. "i don't want a smug lot of experts to sit down behind closed doors in washington and play providence to me." that is what president wilson said--on page of his book, "the new freedom"--before he, himself, was sitting tight "behind closed doors in washington." that is just exactly how wood cones, president of the cones state bank of pierce, nebraska, feels about a smug coterie of banking oligarchs known as the federal reserve board at washington and the federal reserve bank at omaha, nebraska. first, read the subjoined affidavit about "hard boiled and armed" federal reserve bank agents and then our comments on the whole proposition. "in the superior court of fulton county, georgia. american bank & trust co., et al. vs. federal reserve bank, et al. the state of nebraska } ss. pierce county } "personally appeared before the undersigned attesting officer, wood cones, who makes this affidavit to be used as evidence in the above stated case and who being first duly sworn deposes and says: "that i am, and for many years have been, the president of the cones state bank of pierce, nebraska, and as such officer of said bank, i was interviewed some time last september by a mr. jones, claiming to represent the omaha branch of the federal reserve bank of kansas city, missouri. i was urged by him to join the system. i refused and was then asked to sign a card agreeing that my bank would remit all items at par sent us by mail by the federal reserve bank. i refused to sign and was told that i would be compelled to at an early date, as there was no limit to the power of the federal reserve bank. "early in october of the same year, the local express agent presented quite a number of checks on our bank from the federal reserve bank and we gave him a draft for the full amount payable to the federal reserve bank. a short time after, another bunch of checks of the same kind came in the same way but the express agent was instructed to collect in cash. i offered him silver dollars for the checks and he said he did not have time to count it and accepted an omaha draft for the face of the checks. "following this, w.s. lower, claiming to represent the omaha branch, came with some checks and demanded legal tender in payment. we offered him a draft payable to the federal reserve bank but refused to pay him the currency without better identification than was produced by him. after considerable loud talk and threat to protest the checks he accepted a draft. shortly after this mr. lower came again, properly identified, and demanded cash on checks he had and we refused payment on account of improper and insufficient endorsement. he stormed around for a day and finally accepted a draft payable to the federal reserve bank. "november , , a high powered auto containing four people, drove into pierce and stopped in front of the bank, but the engine kept running. two men, w. s. lower and m.l. bishop, got out of the car, armed with revolvers and entered our bank. as agents of the federal reserve bank, they demanded the currency on checks drawn against the cones state bank of pierce, nebraska, of the aggregate face value of $ , , some of which had been held for over three weeks. while one of our bank force was counting out the money (about $ , more than we are legally required to carry in our vault) to mr. bishop, mr. lower told us that bishop was a united states marshal, hard boiled and armed, and that he had cleaned up the state of kansas and would get us anyway, so we had better sign up the agreement and keep our money. "bishop said that a banker in kansas who had the only bank in the town, held out against parring, and that he told him they would start a national bank and drive him out of business, and that he personally was instrumental in starting the national bank and said he would stick to it until he drove the kansas bank out entirely. "mr. jones and a mr. davis came along later and claimed they were peacemakers direct from the federal reserve bank of kansas city. said that lower and bishop were ---- fools and had done entirely wrong at pierce and advised us to forget what lower and bishop had done and sign up as the day was near when we would be forced. they took a draft for the checks they had and departed saying that they had enough of this ---- business. "subsequently checks were sent through the express company and returned by the express agent for the reason as i said that he didn't have time to count the money. "along about the th day of december, , a mr. farley came to pierce from kansas city and asked us to sign the paper relative to parring checks or join the federal reserve system. we refused. he then stated that he was instructed to stay in pierce until he had accomplished something. from that date until the day of making this affidavit mr. farley has been here continuously and collects cash every day on checks sent him by the federal reserve bank. "on january , , a mr. j.g. bryan came in from kansas city and he and mr. farley have been instrumental in trying to start a national bank at pierce, devoting practically their entire time collecting cash on checks sent by the federal reserve bank upon banks in pierce and promoting a national bank that they will compel the banks of pierce to join the system. our customers report to us that these men have told them that we are robbing them out of ten cents on every hundred dollars of their money. "on or before the th day of january, , mr. jones joined mr. farley and mr. bryan and has acted as notary public, protesting checks presented by the aforesaid agents of the federal reserve bank of kansas city, notwithstanding such checks were endorsed on the face 'not payable through the federal reserve bank, their branches or agents, nor express company nor postoffice' and are continuing to protest such checks when we refuse payment of them in their hands and in one case have presented a check a second time and protested it each time. "every agent of the federal reserve bank that has been here has advised us in substance that they were spending the government's money like drunken sailors and will not stop at any expense to force us to join the system. "one of my competitors told me that mr. davis told him in substance that the federal reserve board had a steam roller on the way from washington to crush me personally and ruin my bank if i persisted in refusal to comply with their demands. i subsequently called mr. davis' attention to this report and he personally acknowledged to me that he had made such a statement in substance. (signed) "wood cones. "sworn to and subscribed before me this th day of february, . (signed) "douglas cones. "notary public in and for pierce county, nebraska. "my commission expires september , ." the cones state bank couldn't be bulldozed, banditized by gun play nor coerced into the federal reserve slaughter pen. when the federal reserve system grabbed wood cones it grabbed a hot wire which it finally dropped, nursing its badly burnt paws! now take a look at the brookings state bank of brookings, oregon. it wouldn't wear the federal reserve yoke of bondage and made the customary collection charge of one tenth of one per cent for remitting check collections. it couldn't be bluffed, bulldozed, sandbagged nor coerced and the federal reserve system had its usual fit. on october , , it stationed an emissary from the portland branch of its san francisco shylockery at brookings, oregon, for the sole purpose of collecting in cash over the counter all checks coming from all over the u.s.a., drawn on the brookings state bank--with the avowed object of whipping it into abject surrender. nothing doing! daily the federal reserve sub-bandit presented himself at the counter with his wad of checks and daily the brookings state bank smilingly handed over the cash! the federal reserve emissary--pursuant to orders--stuck at brookings, oregon, from october , , until october , , vainly endeavoring to wear down the brookings state bank. positively nothing doing. the federal reserve octopus had struck at one bank where its slimy tentacle slipped. then this federal reserve sandbaggery resorted to the scheme of sending out what it called "notices of dishonor" against the brookings state bank, whereupon the brookings state bank went into the united states court and obtained from judge wolverton an injunction against such "dishonor notices!" drawing cash over its counter for over a year couldn't bluff the brookings state bank and the united states court forbade its fictitious "dishonor notice" game! so the octopus tried another method--equally damphoolish but characteristic of its banditry methods. there lies before us as we write a photographic copy of a "transit slip" made out by the federal reserve bank of san francisco at its los angeles branch on november , . on this "transit slip" is listed a $ check drawn on the brookings state bank of brookings, oregon, and over against the item is marked "bank closed!" it is as foul a libel as even the federal reserve octopus ever spewed from its sac of venom! the brookings state bank was never "closed" for the fractional part of a second! in fact it was and is a damsite too "open" to suit the federal reserve thuggery! now look at the venom spat out by this federal reserve octopus at the brookings state bank because it wouldn't do its bidding. during the year it kept its emissary there it collected $ , in checks. counting his salary, expenses, expressage of currency and the like, it must have cost it at least $ , . it could have had precisely the same service for one tenth of one per cent or just $ . then when that didn't work it sent out its fictitious "dishonor notices" and bumped into a united states court injunction! then when that didn't work it sent out its lying "bank closed" notice on its "transit slip!" and it cowers behind the skirts of a girl clerk in trying to skulk out of this picture of malice. in the meantime the brookings state bank held the fort--unshackled by federal reserve oligarchy. now jump down into the atlanta federal reserve loot area and take a look at its banditry there and read what the united states supreme court has to say on this whole thuggery proposition. the method of federal reserve thuggery at this point was to hold out and hoard up a mass of checks and present them at one time over the counter of the atlanta bank and trust company--with the avowed object of crippling it. here are quotations from the opinion of the united states supreme court handing out a solar plexus blow to this federal reserve thuggery. "the plaintiffs are not members of the federal reserve system and many of them have too small a capital to permit their joining it--a capital that could not be increased to the required amount in the thinly populated sections of the country where they operate. an important part of the income of these small institutions is a charge for the service rendered by them in paying checks drawn upon them at a distance and forwarded, generally by other banks, through the mail. the charge covers the expense incurred by the paying bank and a small profit. the banks in the federal reserve system are forbidden to make such charges to other banks in the system. it is alleged that in pursuance of a policy accepted by the federal reserve board the defendant bank has determined to use its power to compel the plaintiffs and others in like situation to become members of the defendant, or at least to open a non-member clearing account with defendant, and thereby under the defendant's requirements, to make it necessary for the plaintiffs to maintain a much larger reserve than in their present condition they need. this diminution of their lending power coupled with the lose of the profit caused by the above mentioned clearing of bank checks and drafts at par will drive some of the plaintiffs out of business and diminish the income of all. to accomplish the defendants' wish they intend to accumulate checks upon the country banks until they reach a large amount and then to cause them to be presented for payment over the counter or by other devices detailed to require payment in cash in such wise as to compel the plaintiffs to maintain so much cash in their vaults as to drive them out of business or force them, if able, to submit to defendant's scheme. it is alleged that the proposed conduct will deprive the plaintiffs of their property without due process of law contrary to the fifth amendment of the constitution and that it is ultra vires. the bill seeks an injunction against the defendants collecting checks except in the usual way. "the defendants say that the holder of a check has a right to present it to the bank upon which it was drawn for payment over the counter, and that however many checks he may hold he has the same right as to all of them and may present them all at once, whatever his motive or intent. they ask whether a mortgagee would be prevented from foreclosure because he acted from disinterested malevolence and not from a desire to get his money. but the word (right) is one of the most deceptive of pitfalls; it is so easy to slip from a qualified meaning in the premise to an unqualified one in the conclusion. most rights are qualified. a man has at least as absolute a right to give his own money as he has to demand money from a party that has made no promise to him; yet if he gives it to induce another to steal or murder the purpose of the act makes it a crime. "a bank that receives deposits to be drawn upon by check of course authorizes its depositors to draw checks against their accounts and holders of such checks to present them for payment. when we think of the ordinary case the right of the holder is so unimpeded that it seems to us absolute. but looked at from either side it cannot be so. the interests of business also are recognized as rights, protected against injury to a greater or less extent and in case of conflict between the claims of business on the one side and of third persons on the other lines have to be drawn that limit both. a man has a right to give advice but advice given for the sole purpose of injuring another's business and effective on a large scale, might create a cause of action. banks as we know them could not exist if they could not rely upon averages and lend a large part of the money that they receive from their depositors on the assumption that not more than a certain fraction of it will be demanded on any one day. if without a word of falsehood but acting from what we have called disinterested malevolence a man by persuasion should organize and carry into effect a run upon a bank and ruin it, we cannot doubt that an action would lie. a similar result even if less complete in its effect is to be expected from the course that the defendants are alleged to intend, and to determine whether they are authorized to follow that course it is not enough to refer to the general right of a holder of checks to present them but it is necessary to consider whether the collection of checks and presenting them in a body for the purpose of breaking down the petitioner's business as now conducted is justified by the ulterior purpose in view. "if this were a case of competition in private business it would be hard to admit the justification of self interest considering the now current opinion as to public policy expressed in statutes and decisions. but this is not a private business. the policy of the federal reserve banks is governed by the policy of the united states with regard to them and to these relatively feeble competitors. we do not need aid from the debates upon the statute under which the reserve banks exist to assume that the united states did not intend by that statute to sanction this sort of warfare upon legitimate creations of the states. "decree reversed." the fact is that this federal reserve octopus in pursuance of its policy of gun play, banditry and oppression against state banks--all from the dirtiest motives of pure sordidness--presented one of its tentacles of greed to the supreme court of the united states and it was ruthlessly severed! this is but an introduction--a mere curtain raiser--to the greatest drama of greed ever enacted under the guise of law in a civilized land. but here are two things settled by the highest tribunal in the land; first, that state banks can't be coerced, banditized nor bulldozed by the federal reserve system and second, that the federal reserve system "is not a private business"--but it is in fact the business of the united states and "is governed by the policy of the united states." chapter vi the loot of the monster here is the proposition. the federal reserve system is the most gigantic parasite and despoiler of industry in the world's annals! you can search history from its first impression of stylus on parchment to this minute and you can find nothing which will approximate the bottomless greed and the fathomless lust for gold of this monstrous parasite. it isn't banking, it's banditry. it isn't business, it's pillage. the dirty paws of predacity are encased in the white gloves of officialdom and constantly dry-cleaned in propagandized hot air! here follow some of the records--every figure in them taken from official reports--carefully concealed from your view by the money masters and by their lackeys who fatten and batten on the lootage. and as you look over this record don't overlook this fact. no bank or no system of banks ever really makes or produces one copper cent in industry. they take toll from industry. banks are a necessity to production and to commerce, but they should be servants, not masters. this touted and ballyhooed, propagandized and rainbow-painted "emancipator of credit" has proved itself to be the most leviathan industrial parasite of the ages. here is what they call their "earnings" for the year . filchery from industry bulls-eyes the proposition. for the calendar year the gross "earnings"--more properly called filcheries--of the twelve federal reserve banks reached the stupendous sum of $ , , , as against $ , , for the calendar year of ! quite some money to suck from the teat of industry, isn't it? the expenses for the calendar year of were $ , , , as against $ , , for the calendar year of ! over nine million dollars more in expense account but over seventy-eight million dollars more in net "takings!" the net filcheries for the calendar year was the leviathan sum of $ , , , as against $ , , for the calendar year . almost a two-for-one shot and every dollar of it peeled from industry's roll! and incidentally meditate on the titanic expense accounts of these twelve tentacles--$ , , , or more than an average of $ , , apiece for the year ! some luscious salaries nesting and nestling there--to which reference will hereafter be made--aren't there? here is a list of the twelve federal reserve banks in the precise order of their pillage with the percentage of their takings to their paid in capital for the year ! per cent location capital on capital new york $ , , . chicago , , . atlanta , , san francisco , , . boston , , . minneapolis , , . kansas city , , . st. louis , , . cleveland , , philadelphia , , . richmond , , . dallas , , . the total capital employed was $ , , , the total net earnings $ , , , and the average percentage of profit taken on this capital--after charging most exorbitant expenses--was . per cent! is this a system of banking of, for and by the people, is this the "emancipation of credit," or is it the hugest parasite ever engrafted and wrapped about a nation's industry? compare this with a savings bank rate of per cent or compare it with a high bank stock dividend rate of per cent! it's times a savings bank rate, it's times a high bank stock dividend rate! it's unconscionable, excessive, unfair, unjust, and a gigantic burden on industry's overloaded back. you're satisfied--and tickled pink too--to get a safe per cent return on your investments, but your "emancipator of credit" wolfs down times as much! is this "credit emancipation" or is it the sandbagging of industry? is this twenty-to-one shot "conserving the nation's resources" or is it practicing the arts of thuggery upon the real production of real wealth? is this "binding up the nation's wounds" of finance or is it blood-letting to the point of exhaustion? what became of this huge lootage wrung from america's brawn and brain for the year ? here's where it went. dividends to the people who provided the capital, i.e., the scores of thousands of member bank stockholders, amounted to just a pitiful per cent or $ , , out of $ , , , or about _one-thirtieth_ of the amount! ought the real providers of the real capital, upon which stupendous profits were made, to be fobbed off with _one-thirtieth_ of its real earnings? ought their money to be commandeered at per cent, profiteered upon at per cent and they be practically sandbagged out of per cent? but it's the law, you say! of course it's the law and that's one of the infamies of the system! on the one hand it sandbags commandeered investors, on the other hand it filches from industry and then with both hands this legalized parasitism smugly pouches the proceeds into its bottomless bag of greed! these twelve octopi have a surplus account and then another receptacle for loot called a super-surplus account. there was swept for the year into the surplus account $ , , and into the super-surplus account $ , , . the remainder went as a franchise tax, so called, to the government. in a subsequent chapter you will read of this franchise tax chimera. the total surplus of the twelve federal reserve banks at the close of , after they had sandbagged out a profit of . per cent upon their paid in capital for that year, amounted to the stupendous total of $ , , upon a paid in capital of $ , , or . per cent--accumulated in practically but six years of operations! shylock was a pure philanthropist, the rothschilds and j.p. morgan & co. are just alms givers compared with these gigantic toll takers on industry's pike. do you know or do you know anybody who does know, or have you a friend who knows of anybody who knows of any such gigantic banking predacity on earth? the people through their ownership of the member banks in the federal reserve system provide the capital--commandeered from them--for these federal reserve octopi. why should they be restricted to a per cent dividend when these federal reserve banks "earned" per cent or over times as much? how do you like to have your money commandeered for capital and get for one year less than one dollar out of twenty-five dollars made? is that "democratizing" banking or is it bourbonizing banking? is that "emancipating credit" or is it shackling it with you wearing the shackles? can any sane or honest man--outside the ranks of its lolling beneficiaries--defend any such division of profits as fair or just or equitable? in this banking the lamb (the people) and the lion (the federal reserve system) lie down together--with the lamb inside the lion! but you say you're not a stockholder in any of the commandeered banks of the federal reserve system and aren't hurt. very well then. but the chances are that you are a depositor in one of those member banks and you are furnishing the federal reserve system with a part of its huge conscripted reserve deposits with no interest paid on them. if member banks were getting the interest they should get from these octopi they could pay you more interest than they do pay you. the fact is that the real owners of the commandeered capital and of the conscripted deposits get the "rind" only of the huge "melon" when it's cut. the juicy interior of the "melon" goes to the federal reserve bureaucrats and to their money-masters who batten and fatten and thrive on the pillagement of real production. chapter vii how the loot is gathered measure now the reservoir of liquid capital--the hugest on this planet--siphoned into the coffers of the federal reserve system. the first pool comes from the capital of upwards of $ , , commandeered at per cent interest from the member banks. that is but a little pond or lakelet. then there comes the ocean of money, over $ , , , conscripted at no per cent interest as reserve deposits from the member banks. this capital and these deposits--almost $ , , , --are held practically in perpetuity. it is the hugest reservoir of liquid money on earth, it costs its manipulators and managers and controllers not one red cent of their own money and only a petty per cent on a petty $ , , of the gigantic sum. in other words, for an interest charge of practically $ , , a year the federal reserve system gets the use of practically $ , , , or $ , , , at the absurd interest charge of three-tenths of one per cent! that is what it really costs the money masters, the invisible empire of the u.s.a. and the federal reserve system--three-tenths of one per cent--for the practical control in perpetuity of the mightiest mass of liquid wealth ever massed on earth! look at this in cold blood! figure what it would mean to you if you could get the use of a petty $ , at three-tenths of one per cent interest! then figure what it means to them to have the use of , times $ , at three-tenths of one per cent interest. gives you an attack of vertigo, doesn't it? member banks and their stockholders and depositors furnish this titanic amount of practically $ , , , at three-tenths of one per cent interest and then member banks are graciously permitted to borrow from the federal reserve system _their own money_ at rates varying from _six to eighty-seven and one-half per cent per annum_. impossible, you say? not even organized federal reserve banditry, not even amalgamated shylockery, would have the supernal gall to so sandbag productive industry? here are the figures taken from the records of the federal reserve bank at atlanta, from the records of the federal reserve board at washington and from the records of the comptroller of the currency at washington. the governor of the federal reserve bank at atlanta, the governor of the federal reserve board at washington and the comptroller of the currency at washington--each of them and all of them--are hereby challenged to refute or question their absolute correctness and authenticity. in a small town in alabama was struggling a small national bank. its capital was $ , and its surplus was $ , . it was a compulsory customer of the federal reserve super-shylockery sucking blood at atlanta, georgia. its money had been commandeered by law to buy stock in the super-shylockery. its reserve deposits had been conscripted by law to feed pap to the same parasite. it served the cotton industry--the breath of industrial life in its territory. its name is not given because identification might work it great harm--but the federal reserve oligarchs know its identity. don't you ever doubt it. this little national bank in alabama was in the grip of the federal reserve octopus. it had to move the cotton crop in its territory. farmers, planters, merchants--and in short, all industry in its territory including its own salvation--depended on the moving and on the marketing of the cotton crop. it was "root hog or die" and this little bank rooted and was looted precisely in this wise: it had to borrow from the federal reserve super-shylockery at atlanta. it had no other house of refuge. it had to borrow something over $ , from the federal reserve bank at atlanta and for the week's period ending on july , , it was charged and it paid as high as _thirty-one per cent per annum interest_! two months later when its loan reached as high as $ , it was charged and it paid as high as _eighty-seven and one-half per cent per annum interest_ to this subter-human super-shylock. for the two weeks ending on september , , it was borrowing an average of $ , . two weeks' interest at six per cent would have been $ , but the records show that this little bank paid the federal reserve pawnbrokery at atlanta for interest on that amount for that time $ , --running all the way from six to _eighty-seven and one-half per cent per annum_! the actual average time for this loan for that two weeks' period was almost exactly at the rate of _forty-five per cent per annum_, or at the rate of $ , per year for the use of $ , ! in about nine months that loan of $ , at that rate would have eaten up the capital and surplus of that little alabama national bank. was that banking or was it putrid pawnbrokery? oughtn't the federal reserve bank at atlanta to put the three ball sign of pawnbrokery over its portals? and yet you read subsidized headlines sprawled athwart the columns of a lick-spittle press about "agricultural interests fostered by federal reserve banks" and "farmers aided by federal reserve system" and messes of the like "bull" and "bunk" fed out by paid press agents and absorbed by a befooled people chained to such pawnbrokery! "aided" by a sandbag! "fostered" by pawnbrokery thuggery! it's enough to make a "kike" pawnbroker sob and moan at his soft-heartedness. it's enough to make olomon solomon levi pull down his three balls and wail in the synagogue! later on and for what real reason no one knows--except that it wasn't from soft-heartedness--a portion of the usurious loot was disgorged by the atlanta federal reserve pawnbrokery. that isn't really interesting. what is really interesting is the super-supernal and subter-brutal gall to first extort it. many a usurer when caught and cornered has disgorged loot--that's as old as usury. jesse james' press agent could boast of as much. when grilled on this interesting subject the multi-initialed governor harding of the federal reserve board chittered and chattered about "basic lines of credit" and "progressive rates of interest," but that doesn't chlorinate such sandbaggery. any pawnbroker can mutter and mumble such phrases. when a bank has to pay up to _eighty-seven and a half per cent_ interest you can imagine what its customers must pay it. and at the very time--during these very two weeks ending september , --when this little alabama national bank right at the door of real production was being charged those shylock rates for a paltry loan, banks in new york were getting as high as $ , , handed out to them at from _five to seven per cent_. and yet you read about the federal reserve system "equalizing interest rates," "emancipating credit" and the like bunk! why, it's enough to make shylock and pecksniff rend their cerements and jump from their graves and have another try at extortion and at applied hypocrisy. a difference of _eighty per cent per annum_ between new york city--where nothing but parasitism is grown--and alabama--where real wealth of real cotton grows--is some difference, isn't it? and the eighty per cent difference coddles parasitism and penalizes production. this isn't the only sandbaggery of extortion perpetrated by the federal reserve oligarchy. but it's a pretty good example, isn't it? now take a look at the twelve regional pawnbrokeries for the year in the order of their pillagements. here they are: location paid in capital net earnings atlanta $ , , . % chicago , , . % new york , , . % minneapolis , , . % richmond , , . % kansas city , , . % san francisco , , . % st. louis , , . % philadelphia , , . % cleveland , , . % boston , , . % dallas , , . % ------------ ------ total capital $ , , average . % you would expect to find--from the facts set forth in the first part of this chapter--that the most conscienceless of these gentry, the atlanta super-shylockery, would show the hugest pile of pillage, and it does! on a paid in capital of $ , , , it vampired and blood-sucked out a net profit of $ , , , or . per cent. what the other vampires blood-sucked out you can read from the above table. you know the net earnings made by banks where you live. you know that a net earning of per cent is a large one, but here--in a year of general disaster and of huge losses--you have an average net earning for these twelve vampires of production of . per cent or over six times the average net earnings of national banks for a long term of years! ask yourself if this enormous net earning percentage, made out of commandeered capital and out of conscripted deposits, isn't outside the realm of banking and in the realm of unconscionable vampire pawnbrokery? ask yourself--in a land where pawnbrokers are licensed and restricted to two to three per cent a month or to per cent per year--if . per cent per year doesn't brand such a system as outrageous shylockery? but that isn't the worst of it. before making these net earnings this federal reserve system sandbagged out an "expense account" of $ , , , or an average of $ , , for each regional pawnbrokery. the most reckless expense squandermaniac was the new york sandbaggery with an expense account of $ , , , and the most economical was the minneapolis satrapy with an expense account of $ , , . in a succeeding chapter reference will be made to these expense orgies. but ask yourself if, in a year of commercial disasters and of enforced economies, such leviathan expenses aren't an outrage? ask yourself if such squandermania--imposed upon the producers of real wealth--by bureaucratic pillagement isn't alone and in itself an alarm clock? here is a table showing the location, the capital and the piled up pillagements of these twelve regional pawnbrokeries: surplus location paid in capital percentage new york $ , , atlanta , , . kansas city , , minneapolis , , . boston , , . san francisco , , . philadelphia , , . st. louis , , cleveland , , . richmond , , . chicago , , . dallas , , ------------- ------- total $ , , average upon this capital (commandeered at a petty per cent) and from its gigantic deposits (conscripted at no per cent) this super-vampire federal reserve system has in a few brief years--after paying stupendously extravagant expense accounts--piled up an accumulated pillage of $ , , . do you know or do you know of anybody who does know--outside the magic circle of hebraic pawnbrokery pillagement--of any such banking pillagement for the years - , inclusive? and incidentally these mazuma monarchs have $ , , invested in the palatial emporiums where they ply their traffic and gild their pills of pillage--to which reference will later be made. why don't you find these facts elsewhere? why have they been hidden from you? why doesn't the "independent press"--about as "independent" as a shackled slave--blazon them forth? why don't editors of "fearless magazines"--about as "fearless" as a galley slave at the oars--ring the tocsin of alarm? learn why here and now. because in plain americanese, they haven't the "guts." these federal reserve money despots have the press of this land "buffaloed" and "hog-tied"--and "hog"-tied is particularly right too. through their credit channels these federal reserve despots have a strangle hold on the banks and on the advertisers of the u.s.a. and the banks and the advertisers have a strangle hold on the press and there you are! federal reserve propaganda tinted and tainted with the extract of gold is published by the yard. but the real facts, the interesting details of pillage are all surrounded by maxim silencers! the next chapter will tell you of the partiality of the pillage. chapter viii the partiality of the pillage here is the idea. for reasons best known to themselves federal reserve oligarchs penalize production and favor parasitism. who are really entitled to the largest loans from the huge storage or reservoir of federal reserve money? why, the real producers of the real wealth, the agricultural interests in the u.s.a. have they had it? they have not. look at the figures--official, please remember--as of january , , when the federal reserve "drastic deflation" drama was beginning to be staged. at this time the federal reserve bank of atlanta was lending to all its member banks in the states of georgia, florida, alabama and parts of louisiana, tennessee and mississippi a total of $ , , and had "bought paper" to a total of $ , , --and that included some $ , , which it was loaning to other federal reserve banks, principally in the north for speculative loans. mark that down--$ , , of loans covering that enormous area of production. at this same time the federal reserve bank of st. louis was lending to all its member banks covering the greater part of missouri, arkansas and parts of illinois, indiana, kentucky and mississippi $ , , and had $ , , of bought paper--including $ , , taken from other federal reserve banks. mark that down--$ , , of loans in that area of production. at this same time the federal reserve bank of kansas city was lending all its member banks in kansas, nebraska, parts of missouri, oklahoma, wyoming and colorado $ , , and had $ , , of bought paper. mark that down--$ , , of loans in that fertile area of production. at this same time the federal reserve bank of dallas was lending to all its member banks in all of texas, parts of oklahoma, louisiana, new mexico and arizona $ , , and had $ , , of bought paper. mark that down--$ , , of loans in that vast area. at this very time, in january, , one huge speculative bank in new york city was borrowing of the new york federal reserve bank $ , , ! this one new york bank--catering to speculators, to money masters, to "corner" builders and to "high financiers," not even remotely connected with the real production of real wealth--was borrowing more money from the new york federal reserve bank than the federal reserve bank of atlanta or of st. louis or of kansas city or of dallas was lending to their member banks in their huge areas of real production of real wealth! and not only that, but at that very time the federal reserve bank of new york was borrowing of other federal reserve banks $ , , to hurl into the new york maelstrom of speculation! and not only that, but at that very time all the money which all the twelve federal reserve banks in the u.s.a. were lending on agricultural and live stock paper to the , member banks in the states of the u.s.a. amounted to the pitiful and piffling sum of but $ , , --not one-half of the amount borrowed by one speculative bank in new york from the new york federal reserve bank. at that time agricultural interests, particularly in the south, and live stock interests all over the land were beseeching the federal reserve oligarchy for money and beseeching in vain. take another look at the official figures for the month of november, . at this time the real producers of real value--in the west and the northwest and in the south and the southwest--were gasping for money and credit. bear in mind that their property, their production and their toil forms the real foundation for the vast superstructure of american wealth. where you find a lily-fingered parasite lolling in a mahoganized eyrie of splendor and gambling with money--the tokens of production--you find a battalion of real producers in the great stretches of america toiling to produce real values. if there is to be any discrimination, if there is to be any partiality shown by the overlords of the federal reserve system, it ought to favor production of real wealth, and not parasitism gambling with its proceeds. when there was this drouth of credit and money where real wealth is made, how was the federal reserve system opening its irrigation gates of money? it shut them in production's face and opened them wide at parasitism's demands. at this very time--in the middle of november, --one speculative bank in new york borrowed $ , , from the federal reserve bank in new york, or $ , , more than the federal reserve bank of kansas city was lending to the , member banks in the tenth federal reserve district. another speculative bank in new york borrowed from the federal reserve bank in new york $ , , more than the federal reserve bank in minneapolis was lending to its , member banks in minnesota, north dakota, south dakota, montana and part of wisconsin. another speculative bank in new york borrowed from the new york federal reserve bank $ , , more than the federal reserve bank of dallas was lending all its member banks in all its huge territory. another speculative bank in new york borrowed from the new york federal reserve bank $ , , more than the federal reserve bank of richmond was lending to all its member banks in the fifth federal reserve district. massing these gigantic figures in another form, the fact is that at the time four speculative banks in new york were borrowing from the new york federal reserve bank an average of $ , , apiece--or practically as much money as the federal reserve banks of st. louis, kansas city, minneapolis, dallas and richmond were lending more than , member banks in states comprising more than half the entire area of the united states! if this isn't coddling parasitism and penalizing production, you find a name for it! millions by the hundreds for parasitical speculation, for the pounding down of prices in "short" markets in a "bear" campaign waged against real values and millions by the paltry tens only for the real producers of real wealth! if these actual figures don't batter down the "prop" of federal reserve propaganda about "furthering agricultural interests," nothing will. "furthering agricultural interests" with a bludgeon! "equalizing credits" with a meter of equality so stretched as to enwrap parasitism! if these actual figures don't convict federal reserve oligarchy of the height of pecksniffian hypocrisy it's convict-proof! look over--and don't overlook--these figures. you can't consider them in cold blood without irresistibly concluding that federal reserve oligarchy pampers parasitism, penalizes production and bestrews its gigantic resources by favoritism instead of by merit. it is obsessed by a squandermaniac prodigality for speculation and by a niggardly parsimony for real production of real wealth. it exalts the tokens of wealth and the jugglers of it far, far above its real producers. it reaches out almost limitless largess to the pinnacles of parasitism while practically starving the real makers of real wealth on whose shoulders parasitism gaily rides. it shovels out hundreds of millions for speculation and serves with an eye-dropper tens of millions for production. it's unfair, unjust, inequitable and janus-faced. it mumbles and mutters and chitters and chatters and propagandizes about "equalizing credits" and "emancipating credit," while in truth and in fact it is grossly discriminating in its credits and instead of "emancipating" credit enchains it to the golden chariot of speculative splendors! that's what it really does and that's the true tale of its partiality of pillage. chapter ix the tragedy of drastic deflation your money masters, the federal reserve board at washington and the twelve tentacular federal reserve banks in their regional satrapies, staged in the greatest financial debacle in human history. they were, and they are, as much your money masters, as was ever a slave-holder the master of his human chattel. your labor and the produce of your labor--in whatever capacity you worked--were, and are today, as completely under their control as was ever the labor and the production of the labor of slavery before lincoln's emancipation proclamation chiseled chains. so long as you exist in the u.s.a. and the federal reserve system exists, the lash of these money masters will writhe over your back and you must cringe under its sting. make no mistake about that. no sceptered king nor bedizened kaiser ever wielded a tithe of the power which rests in the cunning brains and in the ruthless edicts of these money masters. here are the facts. read first these quotations from their own lips and from their own pens which prove that these federal reserve oligarchs deliberately staged the greatest financial debacle in all human history. nothing in human history approaches it for cold-blooded, wanton, ruthless slaughter of values. "credit must be brought under effective control." "the board (meaning the federal reserve board) will not hesitate to use every statutory power to regulate currency and credits." "our present task therefore is to proceed with the deflation of credits as rapidly and as systematically as possible." if for "deflation" you read "destruction" you get the real intent and the real meaning of these ichor-veined assassinators of real values. don't let these word jugglers and these money jugglers confuse you with their lacquered language. when they say "inflation" what they really mean is increase of values and when they say "deflation" what they really mean is destruction of values. the tragedy was staged in --about fourteen months after the world war was closed--but it didn't get going good and strong until the summer and fall of . after the summer had arrived, after grain and cotton were in the ground, after cattle and sheep were on the ranges, after merchants' stocks were on the shelves, after factories had run at full capacity and after all producers and merchandisers were hopelessly committed and couldn't retrace their footsteps, the lash fell. or to change the figure the trap wasn't sprung until every foot was within its iron ring. the first proof of a murder is the corpse and here are the corpses of murdered values just as they were struck down by the federal reserve bludgeon. look at them. new orleans no. . chicago corn middling cotton january . . may . . june . . july . . august . . september . . october . . november . . december . . january . . february . . march . . april . . may . . june . . july . . august . . here you get from january, , to august, , when these value assassinations culminated, a corn debacle of cents a bushel and a cotton debacle of cents a pound. if you had known that this value assassination was en route and had "gone short" , , bushels of corn you could have robbed the corn growers of this land of $ , , couldn't you? and some "high financiers" did that very thing. if you had known that cotton was going to shrink at least cents a pound and had "gone short" , bales ( pounds to the bale) you could have robbed the cotton growers of this land of $ , , , couldn't you? and some high financiers did. take a look at some more value murders. wheat no. red winter wool chicago ohio grades january . . may . . june . . july . . august . . september . . october . . november . . december . . january . . february . . march . . april . . may . . june . . july . . august . . a destruction of $ . a bushel on wheat and of cents a pound on wool ought to satisfy the most murderous destructionist of values, oughtn't it? you can make your own computations as to the millions coteries of "bears" could make--and doubtless did make--out of these value assassinations. have some more views of values on the toboggan. penn. steers at chicago crude oil january . . may . . june . . july . . august . . september . . october . . november . . december . . january . . february . . march . . april . . may . . june . . july . . august . . when you grease the toboggan with $ . a barrel on oil and $ . a hundred on steers you can slide a good many millions of dollars into the maws of foresighted "short sellers," can't you? this panorama of value murders could be continued for pages of tables. they all tell the same story. granulated sugar dropped in the same time from . cents a pound to . cents a pound; copper ingots from . cents a pound to . cents a pound; cotton yarn from cents a pound to cents a pound; pig iron from $ . per ton to $ . per ton; hides from cents a pound to cents a pound and so on down the line. these are the corpses strewn all along america's highways of production. what was the bludgeon which hit all these commodities on the head and drove them into the pit of loss? it was the persistent, wanton, ruthless and cold-blooded calling of loans and refusal of bank credits and contraction of currency by federal reserve oligarchy. they said they'd do it and they did it--aplenty. here is the bludgeon, look at it. their total of all loans and discounts including "bought paper" in all of the twelve federal reserve shylockeries stood around from $ , , , to $ , , , from january to october, , when the bludgeon pounded hard. here is the bludgeon. look at it in action. october $ , , , november , , , december , , , january , , , february , , , march , , , april , , , may , , , june , , , july , , , august , , , and from may , , to january , --when the slaughtered were piled the highest--the twelve federal reserve shylockeries hammered and battered down their bank credits in the leviathan sum of $ , , , , or from $ , , , to $ , , ! and incidentally the circulation of federal reserve notes contracted in the same period by the stupendous sum of $ , , ! so that from may , , to january , , the federal reserve oligarchy--at their will or at their whim or for hidden purposes--contracted bank credits and currency by the titanic total of $ , , , , almost $ , , , , almost , million dollars. that was the pile driver battering your values down into the mire of loss. take now a look at the financial corpses so slaughtered. here they are. look 'em over and don't overlook the hands that killed them. in there were , business failures as compared with , in , or an increase of , --more than three for one. and the liabilities reached the stupendous total of $ , , , an increase of $ , , over , more than five for one. in the so-called panic year of , the high tide of business failures, liabilities were only $ , , , as against $ , , in . why, if was a "panic year," was a pandemic year! and here is another destruction meter, absolutely infallible--the suicides. in the first six months of there were , men suicides, as against , for the same period in ; , women as against ; boys as against and girls as against -- , suicides for the first six months of as against , for the same period of . the enormous increase in men suicides--over two and one-half for one--tells its own story. they came from all classes, bankers, merchants, farmers, laborers and professional men. none know how many of this enormous increase, the largest since statistics have been kept, were driven to desperation and to death from hunger, from unemployment, from the loss of life's toil or from the failure of enterprises in which they had spent their lives. no statistics can summarize human emotions, but they can tell and they do tell of the greatest holocaust of suicides ever ravaging this land--undoubtedly due to industrial tragedies staged by the cold blooded butchery of production. this much is certain. never before in a given time in this land has there been such a holocaust of failures, of suicides and of unemployment. never before in this land were such sacrifices laid on the twin altars of moloch and of mammon. and they precisely correspond in time with the tragedy of drastic deflation! during all this time and particularly beginning with the late summer and early fall of , individuals, associations, committees and organizations representing farmers, planters, cattlemen, manufacturers, bankers and merchants--in short, representatives of all industries--were entreating and beseeching governor harding of the federal reserve board and his associates to be more mild and more lenient and more reasonable in their drastic tragedy of destruction. they might as well have besought a cyclone or entreated a tornado or prayed to an earthquake. cold-bloodedly, relentlessly and wantonly loans were called, extensions were refused, renewals were tabooed and bank credit put on the chopping block. the very people whose toil and whose labor and whose real wealth were building the magnificent palaces wherein these shylockeries were housed and were paying the exorbitant salaries of these money despots were being ruined by their servants! the federal reserve system at that very time had a loaning ability of over $ , , , more than it then used and not only wouldn't use it, but contracted its loans by $ , , , and currency by over $ , , . instead of aiding production, it throttled it. and instead of aiding the producers of commodities to carry them it forced producers to market them at most ruinous losses! instead of dropping the curtain on this tragedy of drastic destruction, it ran it to its close! it staged the greatest debacle of blasted credit, number of failures, magnitude of liabilities, suicides and unemployment ever witnessed in this land. it did it deliberately, ruthlessly and as per program too. go back over these figures, all taken from official records--all undenied and undeniable--and ask yourself if ever before in human history the industries and credit of a successful nation and successful in the greatest war ever waged, too, were so butchered? these figures indict and convict the federal reserve system, as it has been maladministered, as the arch betrayer of a people's trust. it indicts and convicts them as juggling with the symbols of value to the destruction of real values. no sane man can read this record, frozen into government statistics, and defend the oligarchs who made it. it never was "deflation." that is just a sonorous euphemism to disguise sandbaggery. it was destruction to scores of thousands and to hundreds of thousands of the real producers of real wealth. billions of dollars of real values were annihilated, not by the trend of the markets, but by artificial "bear" markets artificially created by the throttling of credit. you can't withdraw literally billions of credit and currency--almost three billions of them--the very life-blood of commerce from industry and have it thrive any more than you can tap a man's jugular vein and have him live! that's what really happened in this tragedy of drastic destruction. and upon whom did this tragedy bear the hardest? upon those least able to endure its fearful pressure--the farmers. bear in mind that farming is not only the largest industry in the u.s.a., but it is the only absolutely basic industry--the keystone upon which rests the entire industrial superstructure. here is what this tragedy of drastic deflation did to the farmer as measured for the years of , and . value in $ , , , value in , , , value in , , , in each of these years there was practically the same acreage under cultivation, , , acres. in , farm products were worth $ per acre, in , $ per acre and in , $ per acre. here is where the federal reserve credit crusher pulpified the finest--at the very foundation of all industry! the production of these basic farm products--the real foundation of all this federal reserve splendor--was practically the same in volume for these three years, but the federal reserve credit crusher crushed it from $ to $ to $ per acre measured by its purchasing value! that's the tragedy of drastic deflation in its final analysis battering down the money value of america's basic industry almost two-thirds! but the profits of the federal reserve system--and its exorbitant expense account and its lavish salary rolls--kept off the toboggan down which slid all the others! chapter x the palaces of the monster federal reserve oligarchy houses itself most palatially. there is nothing in government annals or in corporate prodigality private or public to anywhere approximate the absolute squandermania of federal reserve obsession for luxurious quarters. if you want in your city a post office building, a federal court building or a custom house building you must lobby and beseech and petition and "trade" and pull wires in congress until you do--or don't--get it. but it's different with federal reserve satraps. by merely a federal reserve ukase or decree or resolution or order an aladdin's palace arises like magic--paid for by your money. no such squandermaniac obsession has ever before been seen in this country in prodigality of buildings, in luxuriance of equipment or in splendor of quarters. and not only that, but the speed with which enormous sums have been "charged off" from building accounts is absolutely appalling. take a look at some of the items of this profligacy. the philadelphia federal reserve bank bought a building for $ , and spent in "remodeling" it $ , , , making a total cost to september , , of $ , , , and then "charged off" to "depreciation allowance" the enormous sum of $ , , ! in other words, after spending $ , , in "remodeling" its building it "charges off" for "depreciation" $ , , , or $ , more than it cost to "remodel" it! so that after spending $ , , on "remodeling" the whole property is worth only $ , , or $ , less than it cost before "remodeling." either philadelphia real estate depreciates with lightning-like rapidity or federal reserve judgment isn't worth a picayune or this huge "charge out" for "depreciation" is a mere camouflage or deception. take your choice. it's either damphoolishness or incompetency's height of deception. and that's all you can make it. the san francisco federal reserve bank spent originally in "original investment" for a building $ , , spent $ , for "remodeling," spent $ , for "new building" operations, making a total cost to september , , of $ , , and then "charged off" for "depreciation allowance" $ , , so that after spending $ , on "remodeling" and new buildings on an original purchase of $ , , it emerges with a value of but $ , ! or in other words, after spending $ , on a $ , purchase it claims the gross value to be but $ , , or but $ , more than the original purchase! or in other words, it got but $ , of value for an expenditure of $ , ! does san francisco real estate depreciate as fast as that, or are federal reserve business oligarchs futile wastrels, or is this method of accountancy just a camouflage? figure it out for yourself. the st. louis federal reserve bank made an "original investment" in building of $ , , , spent $ on "remodeling" and "charged off" $ , for "depreciation allowance," emerging with a value of $ , for an expenditure of $ , , ! another case of swift shrinkage in value or wastrelcy in expenditure or camouflage in accountancy. figure it to suit yourself. the new york federal reserve bank paid $ , , for its site, spent up to september , , $ , on building operations, making a total expenditure of $ , , and immediately charged off to "depreciation" the enormous sum of $ , , ! did it pay too much for its site or does real estate in the heart of the greatest city on earth depreciate almost per cent almost immediately after purchase? figure it for yourself. later on reference will be made to this new york oligarchical palace of splendor. up to september , , federal reserve satrapists had spent $ , , on its twelve building operations and had "charged off" as "depreciation allowance" the gigantic sum of $ , , ! in other words, in a very few years, and in most cases practically at once, it depreciated its own building accounts by about eighteen per cent! incidentally up to the same date it had spent $ , , on its branch bank buildings and had depreciated them by $ , . in its helena branch it made an "original investment" of $ , , blew in $ , on the purchase and then "charged off" for "depreciation allowance" $ , when it got through, or about per cent on the whole transaction. up to september , , federal reservists, including branch banks, had "reserved" $ , , of your money in building operations and had them "depreciated" by the enormous sum of $ , , , or about per cent, almost immediately. you are entitled to draw your own conclusions as to the necessity for these palaces, for the splendor of their equipment and for the real motive of so speedily "charging off" such enormous sums for "depreciation allowance." you are entitled to draw your own conclusions as to the wisdom of allowing a coterie of bureaucrats to spend such huge sums for their personal comfort or convenience or splendor unsupervised and unhindered. you are entitled to ponder on the proposition that these huge expenditures aren't obtained by legislation from congress, but are made to suit the whim or ambition or convenience or extravagant ideas of an appointive body. the new york federal reserve bank in cost, in expenditure, in equipment, in splendors purely for the convenience of its occupants is intended to surpass any like building on earth. its cost has been estimated at from $ , , to $ , , . its corner stone--amid speeches and plutocratic glorifications--was laid on may , . the fees of architects and engineers alone amounted to the stupendous sum of $ , , . it is intended to house , employees--about , more than it now has. make right here some comparisons. in the first week of may, , the loans and discounts of the new york federal reserve bank amounted to $ , , , and it must have a $ , , building and equipment to handle its activities. on the same date the loans and discounts of the national city bank of new york amounted to $ , , , and its bank buildings to but $ , , . on the same date the loans and discounts of the national bank of commerce of new york amounted to $ , , , and its bank building to but $ , , . figure it for yourself. it makes some difference whose money is being spent, doesn't it? private business is one thing, and public business is another thing, when it comes to housing it, isn't it? compare the volume of the loans of these banks, compare their building costs and draw your own conclusions. in addition to veined marble and polished brass and in addition to a mass of luxurious equipment the new york federal reserve bank has, or will have on completion, a beautiful auditorium, a gymnasium, a club room for men, a club room for women, and a restaurant. it will doubtless gratify farmers on the prairies, workmen all over the land, merchants, and manufacturers and professional men to know that their toil, their efforts and their earnings are in effect being levied upon to provide this modern palace equipped with an auditorium, a gymnasium, two clubs and a restaurant. it will doubtless gratify the stockholders in national banks, whose money is commandeered to capitalize this leviathan, to know that their money, or its proceeds, or its earnings, is being used to erect and equip a veritable temple of mammon with all these attendant luxuries--which they themselves cannot afford in their places of business! if you, who read these lines, could commandeer over a hundred millions of dollars for capital at per cent and could conscript over $ , , , of deposits at no per cent you could transact your business in a palace in the heart of new york with an auditorium and club rooms and a gymnasium and a restaurant, couldn't you? but as you can't commandeer your neighbor's capital nor conscript for nothing the deposits of the public, you find yourselves compelled to work and to provide the wherewithal for those who can! you can measure these lavish expenditures for buildings and equipments and luxuries by any known measure, by volume of business, or by like buildings for like purposes and it is as clear as day that these federal reserve palaces are a monument of needless extravagance and of wanton wastage--pulled off by the ukase of enthroned bureaucracy spending "other people's money!" that's all you can make of the monster's palaces. chapter xi the monster's expenses you are going now to look over--and not overlook--the most stupendous, wasteful and exorbitant bank expense account ever entered on bank ledgers on this earth. you are going to look at the details of an expense account where the items run by millions, where expenses have no legal limit and where they are incurred, paid and audited without any supervisory authority. you are going to gaze at an expense account where the "sky is the limit." take first a look at the new york federal reserve bank's expense account. that one is the most arrogant, wasteful and prodigal of all the twelve regional satrapies. in the entire salary and wages account of the new york federal reserve bank was $ , and their total loans and discounts were $ , , . mark that down--salaries and wages of $ , and loans and discounts (which really measure the business of a bank) of $ , , , or $ of expense to every $ of loans and discounts. on january , , the salary and wages account of the new york federal reserve bank was $ , , , with loans and discounts of $ , , , or $ of expense to every $ of loans and discounts! ask any practical banker, any administrative business man, any expert accountant or any efficient expert if it is possible to justify any such expense ratio. one to four hundred and thirteen in and one to twenty-nine in --fourteen to one raise! in there were officers of that bank to administer loans of $ , , . in there were officers of that bank to administer loans of $ , , . in other words, you get more officers to administer a business shrunken down over sixty per cent! in other words, you get over a two hundred per cent increase in officers to administer a sixty per cent business shrinkage! and now incidentally the pay of those officers--administering a sixty per cent shrunken business--amounted to more money than the salaries of the president of the united states, the vice president of the united states, half the united states senate and the governors of twelve american states besides! if that isn't bottomless bureaucratic greed expressed mathematically, you express it yourself! look further into the depths of this golden pool of new york federal reserve expense plunderbund. you are helping pay it and you are entitled to scrutinize the salary items. take 'em as they come. j. crane entered the bank at a yearly salary of $ , as manager foreign department and now receives a yearly salary of $ , , or an increase of per cent. a.j. lins, manager at large, entered the bank at a yearly salary of $ , and now receives a yearly salary of $ , or an increase of per cent. john raasch, manager supply department, entered the bank at a yearly salary of $ , and now receives a yearly salary of $ , , or an increase of per cent. e.r. kenzel, deputy governor, entered the bank at a yearly salary of $ , and now receives a yearly salary of $ , , or an increase of per cent. a.w. gilbart, controller of administrations, entered the bank at a yearly salary of $ , and now receives a yearly salary of $ , , or an increase of per cent. l.r. rounds, controller of accounts, entered the bank at a yearly salary of $ , and now receives a salary of $ , , an increase of per cent. chas. h. coe, manager of the check department, entered the bank at a yearly salary of $ , and now receives a yearly salary of $ , , an increase of per cent. w.b. matteson entered the bank at a yearly salary of $ , and now receives $ , , an increase of per cent. j.d. higgins, controller of cash, entered the bank at a yearly salary of $ , and now receives a yearly salary of $ , , an increase of per cent. s.s. vansant, manager discount department, entered the bank at a yearly salary of $ , and now receives a yearly salary of $ , , an increase of per cent. r.m. gidney, controller at large, entered the bank at a yearly salary of $ , and now receives a yearly salary of $ , , or an increase of per cent. i.w. waters, manager personal service department, entered the bank at a yearly salary of $ , and now receives a yearly salary of $ , , or an increase of per cent. james rice, manager government bond department, entered the bank at a yearly salary of $ , and now receives a yearly salary of $ , , or an increase of per cent. l.h. hendricks entered the bank on a yearly salary of $ , and now receives a yearly salary of $ , , or an increase of per cent. incidentally benjamin strong, the governor of the new york federal reserve bank, has had his salary increased from $ , per year to $ , per year--more than six times the pay of a united states senator! ask any corporate manager, any practical banker, or any efficiency expert if they permit, or if they know of any such stupendous salary increases--increased and maintained in a time of general disaster and enforced economies. if this isn't strutting bureaucracy running amuck with public money, what is it? take now a look at the total expense account--which you are helping to pay--of the federal reserve system for the year . it amounted to the stupendous sum of $ , , , or an average of $ , , for each one of the twelve regional satrapies! you can't measure it--because there is nowhere on earth any other banking expense account by which to measure it! like an andean peak it towers aloft in solitary splendor. but you can look at some of the items. here they are. the new york federal reserve bank heads the list of extravagance with an expense account of $ , , , and the minneapolis federal reserve bank was the most modest--and not any too modest at that--with an expense account of $ , , . it cost you for bank officers' salaries $ , , , for clerk hire $ , , , for special officers and watchmen $ , and for "all other" $ , , . what that "all other" item of $ , , really is, is deep buried in federal reserve archives. when you get through with bank officers, bank clerks, special officers and watchmen, you would think that included about all possible bank employees, but federal reserve ingenuity slips over $ , , under the cloak of "all other!" it cost you $ , for federal reserve governors to "confer," $ , for federal reserve agents to "confer" and $ , for the federal advisory council--whatever that is--to "confer." "conferences"--in bureaucracy--come high, don't they? and it cost you $ , to hold directors' meetings with out of of them living in the same town where the bank or its branch is located. traveling expenses cost you $ , --some travelers these federal reserve tourists are! these bureaucratic "expenses" of a parasitical system hooked on to your banking system are stupendous, titanic, gigantic! they are indefensible--and undefended too--from any possible standpoint of efficiency, economy or necessity. look them over in cold blood. look over the stupendous salary raises--both in amounts and in percentages--in the new york federal reserve satrapy and compare them with any private business on earth. private stockholders--not commandeered by law and not chained by act of congress--would drive out any such maladministration of extravagance. you know it. who is responsible--directly, morally and legally responsible--for this orgy of federal reserve extravagance absolutely unequaled in the history of the world or in the history of banking? why, the federal reserve board at washington is responsible. what makes them responsible? here is the exact language. read it. "any compensation that may be provided by boards of directors of federal reserve banks for directors, officers or employees shall be subject to the approval of the federal reserve board." that's plain, isn't it? if the federal reserve board at washington doesn't "approve" these huge compensations, they can not be paid. it is the federal reserve board at washington--and no other authority on earth--which is responsible for the greatest orgy of expense ever strapped on the backs of staggering business. it's their ukase, it's their decree, it's their order which registers these titanic expenses--every penny of which is wrung from american producers of wealth! and they are political appointees--not elected, but appointed. the federal reserve board at washington really wields a power greater than any sceptered monarch ever swayed. at their nod or at their beck every federal reserve employee holds his job, for if they don't "approve" his "compensation" he can't attach his lips to the public teat with its golden flow of "compensation!" it's the federal reserve board at washington--unsupervised and with legally limitless power--which is responsible for this federal reserve expense orgy. chapter xii what the monster does with its loot this chapter is going to be like a tack--short but pointed. federal reserve apologists--on and off the floor of congress--when driven into their last retreat always take their final stand and make their last play in the "franchise tax" stronghold. their assertion is in effect that no matter what may be the abuses and sandbaggeries and extravagances of this system the "big money" gets back to the government in the shape of the mythical "franchise tax." here is where you get the facts precisely as they are. what became of the lootage of the federal reserve system for the year and what proportion of it did your government get? the gross takings of the federal reserve system--extracted from american production and industry--amounted to $ , , . that's what it euphoniously calls its "earnings." first there came out the gigantic expense account, of which you have already read, of $ , , , leaving $ , , , which the monster calls its "current net earnings." there is then added to this $ , , which in previous years had been deducted for "depreciation on u.s. bonds," which didn't finally "depreciate." there is also added $ , under an "all other" blanket--much favored in the federal reserve system vocabulary. you now have $ , , "current net earnings." from this are deducted $ , , for "depreciation allowance on bank premises;" $ , , for "reserve for possible losses" which probably won't occur; $ , "reserve for self insurance"--whatever that is; $ , "reserve for depreciation on u.s. bonds"--which probably won't depreciate now that they have been sandbagged out of the hands of the original purchasers; $ , sandbagged out under the favorite "all other" federal reserve blanket. here are $ , , gone out in mere bookkeeping entries with the real money which these entries represent still in federal reserve custody. this leaves $ , , . from this is deducted a petty $ , , dividends paid on the capital commandeered. from this is deducted $ , , to be added to the already swollen federal reserve surplus account. and there is left just $ , , for the much touted franchise tax. if you have followed these figures you have seen that in order to get a petty "franchise tax" of $ , , into the hands of your government, it cost you just exactly $ , , to collect it--the precise difference between the federal reserve "earnings" and the amount paid into the government. ask yourself, is a tax of $ , , , which costs $ , , to collect a "painless tax?" is there any more painful tax levied on american industry? that's what this ballyhooed "franchise tax" amounted to in and all it amounted to--a tax of $ , , , which cost $ , , to collect! chapter xiii the camouflage of the monster don't check your brains at the portals of the federal reserve "bunking" system. that is what its touters and ballyhooers want you to do. federal reserve bureaucrats and its beneficiaries and its hirelings and an artfully subsidized press have really put the "prop" in propaganda. they would have you believe--and literally hundreds of columns of inspired writings have been used to make you believe--that the federal reserve system is composed of twelve independent federal reserve banks, each one especially devoted to fostering industry in its own regional territory. such is not the fact. the fact is that the federal reserve system is in truth a huge central bank, managed, manipulated, directed and operated from washington by the federal reserve board. there sits the spider and there the web is woven--spreading all over the u.s.a.--in which are enmeshed the victims. you can read--if you want to waste your time--oodles of language about how the boards of directors of these twelve federal reserve banks are seated in office and how part of them are elected by member banks and how part of them are appointed by the federal reserve board. you can--if you want to waste more of your time--absorb messes of artfully worded verbiage about the duties of the boards of directors. but it's all "gammon and spinach," it's all artful camouflage. _the real government of the federal reserve banking system and of its twelve federal reserve banks and branches is in the absolute dictatorial control of the federal reserve board at washington._ it is all contained in one little joker of just thirty words. here it is. read it. "_any compensation that may be provided by boards of directors of federal reserve banks for directors, officers or employees shall be subject to the approval of the federal reserve board._" in every one of the twelve federal banks every director, every governor, every one of the deputy governors, federal reserve agents, cashiers, assistant cashiers, controllers, secretary, counsel, assistant counsel, clerks, stenographers, messengers and watchmen--in short, the whole horde of federal reserve bureaucratic parasites--are subject to the approval of the federal reserve board at washington because _their compensation is subject to the approval of the federal reserve board_. you know that the hands that hold the money rule the enterprise. you know that approval or disapproval of compensation is in effect "hiring and firing." you know that "approval of compensation" is simply a euphonious bit of language or smoke screen behind which really sits an enthroned autocracy. no matter how many "conferences" are held between governors of federal reserve banks, between federal reserve agents and with the federal advisory council--"conferences" which during cost you $ , --the federal reserve board at washington is the supreme and final dictator of the personnel and of the pay of its , employees and of its officers. the federal reserve board as to the compensation of this horde--and hence as to its personnel--is an absolute autocracy from whose order there is no appeal! it draws its expense account from a practically bottomless treasury without let, hindrance, supervision or veto! kaiserdom and czardom in their palmiest days drew from no such lake of liquid gold as draws the federal reserve board at washington. set that down on your mental tablets and proceed to the next camouflage station. here it is. federal reserve propaganda--with a practical limitless expense account to further it--would have you believe that its favored coterie of officials are top notch bankers. take a look at this as it really is. the bankers whom you know and with whom you do your business and to whom you entrust your money and from whom you borrow your money have taken their own money and the money of their associates and contributed the capital of their banks and put it at risk. they wager their own money that they are good bankers. they have initiative and confidence in their own ability and they prove that they have by putting up their own money before they ask you to entrust yours to their keeping. the officers of the federal reserve banks don't put up a copper cent, a plugged nickel, or a thin dime of capital. the capital which they manipulate is commandeered by law for their use at a petty six per cent rate. they may charge--and they have charged--as high as eighty-seven per cent in one of their shylockeries, but six per cent is all that those who furnish the capital can claim. in the federal reserve system sandbagged out of other people's money a profit of per cent, in per cent and in per cent. in its stockholders received per cent less than their capital really earned, in per cent less than their capital really earned, and in per cent less than their capital really earned. for the three years of , and the average net profits of the federal reserve system were per cent and the real owners of the capital were gypped legally--but none the less gypped--out of an average of per cent for each of those three years. do you suppose that officers of any bank not legally so buttressed could "get away" with any such proposition? you know they couldn't--and hold their jobs. no body of stockholders in the u.s.a., unless legally chained, would endure a profit of per cent and a dividend of but per cent! and no bank officers in the u.s.a., unless legally permitted, would attempt to "put over" any such proposition. you know it. peg that and proceed to the next proposition. what is the absolute, final and unquestionable test of a good banker, a real top notcher in his business? it is the volume of deposits which he attracts. that is the ultimate test of his ability and integrity--the confidence he inspires in his institution as measured by the volume of money entrusted to it! that volume of deposits must be obtained, retained and increased in the face of the hottest kind of hot competition. it is the absolute ability and integrity meter of a successful banker. there is no other. are these strutting, preening, vociferating and vociferous federal reserve bankers measured--or measurable--by that standard? do they battle for their deposits and by those deposits and the volume of them win their spurs? they do not. their mass of deposits--the largest on earth--are dumped into their banks by law, conscripted into their coffers. they are not won in competition. federal reserve bankers don't prove their ability by competition--they smugly admit it. at this writing over $ , , , of deposits are in their coffers, conscripted there as were soldiers in the world war by law! and not only that, but that vast mass of deposits--the hugest on earth--is handed to them free of interest charge. all other banks in large american cities not only compete with each other for the deposits of country banks, but pay interest on them at a minimum of per cent per annum. federal reserve bankers pay no interest--not even to the government. if a national bank wants government deposits it must put up the unquestioned security to get them and then must pay interest on them, but federal reserve bankers do neither! not much competition for federal reserve bankers there, is there? peg that proposition and look at the next one. here it is. the loans of a bank are the life of a bank. from the interest upon them comes practically the sole earnings of a bank and upon their repayment depends the solvency of a bank. the credit department of a bank is its solar plexus. loans must be successfully made to men engaged in every variety of industry, some secured, some unsecured and in amounts varying from a few hundreds of dollars to hundreds of thousands of dollars. in may, , the loans and discounts of the national city bank of new york amounted to $ , , --larger by over $ , , than all the "earning assets" of the federal reserve bank of new york. but there is a greater difference than even in these figures and here it is. the bulk of the loans of the federal reserve system are made to its member banks and require very slight, if any, credit ability. the bulk of the people in the u.s.a. are loaning money to banks--when they make their deposits--without interest and unsecured, while the federal reserve system is engaged largely in making loans to banks at rates up to per cent and mostly secured at that! in other words, what the bulk of the people of the u.s.a. do who are bank depositors is to loan banks money for nothing or at a very low rate of interest and unsecured, while the federal reserve system loans the banks money often at altitudinous rates and often secured at that! or to put it another way, federal reserve bureaucracy draws fabulous profits for doing practically for the banks what the people of the u.s.a. are daily doing for nothing! sum up some of these differences between national and state banks and federal reserve parasitism. national and state bankers put up their own capital and risk their own money. federal reserve bankers commandeer their capital and risk not a penny of their own. national bankers make practically over a large term of years about per cent net profits and federal reserve bankers make the most fabulous profits ever registered on bank ledgers--during the three years last past an average of per cent. national and state bankers earn their deposits in the hottest kind of competition. federal reserve bankers conscript their deposits--without a scintilla of effort. national and state bankers pay interest to the government for government deposits and give security besides. federal reserve bankers pay no interest and give no security for government deposits. national and state bankers pay interest upon deposits of other banks. federal reserve bankers do not pay any interest. the capital of national banks is commandeered into the capital of federal reserve banks at a petty six per cent and their reserve deposits are conscripted at no per cent and then they are graciously permitted to borrow their own money at altitudinous rates! which are really the better and more necessary bankers--the national and state bankers or the federal reserve system of parasitical camouflage? which is the more necessary, the national and state bankers close to the people, bearing the risk at petty profits or the federal reserve bankers distant from the people bearing practically no risk but reaping profits which would make shylock frenzy with envy? isn't the federal reserve system as now constituted and as now administered really a federal reserve "bunking" system astutely camouflaged, smoke screened by artful propaganda and by legalized privilege and favoritism? isn't it in truth and in fact a commandeering and conscripting monster of finance, politically manipulated, with the most extravagant salaries, buildings, expense accounts and the most fabulous profits in all human history? chapter xiv final volley at the monster get right down to brass tacks and ask yourself these questions: no. . do you want a federal reserve system managed and manipulated from washington by the federal reserve board composed of political appointees subject to no control, supervision nor oversight and in effect a mammoth central bank? no. . do you want capital commandeered at per cent by the use of which are wrung out profits as high as per cent? no. . do you want deposits--over $ , , , --conscripted at no per cent loaned out at interest charges as high as per cent? no. . do you want to permit or allow the coercion or sandbaggery of non-member state banks by the federal reserve system in its piratical attempts to get its checks collected for nothing? the supreme court of the united states frowns on such sandbaggery. do you favor it? no. . do you want such titanic expense accounts and such altitudinous salaries paid to favored bank officers? no. . do you want such an orgy of squandermania in the erection and equipment of sumptuous palaces of pillage with its auditoriums and club rooms and gymnasium and restaurant attachments? no. . do you want to witness, or be victimized by, debacles of drastic deflation with all the destructions, miseries and disasters in their wake? no. . do you want such a partiality of pillage whereby parasitical speculation is coddled and the necessary production of real wealth is throttled? no. . do you want such a croesus-like hoarding of gold--now over $ , , , --which menaces the world and which deprives you of even the sight of your own money? and do you like a gold basis buried so deep that you can't even see, nor get, a stiver of it? no. . do you want a system where bank credits and bank currency--the very life blood of production and of commerce--can be arbitrarily contracted at the mere whim of a coterie of financial despots? no. . do you want pawnbrokering interest rates charged and shylockery practiced under the aegis of your flag? and if you do want any or all of these things, do you want the financial destinies of your estate, of your children or of your inheritors dependent on the whim--or mayhap on the interests--of what is in reality earth's most autocratic money-bund? do you want the prosperity or adversity of the u.s.a.--the greatest nation under jehovah's canopy--summoned at the beck and call of the real invisible empire? you know that when you hand over the financial government of a nation to a parasitical coterie of men you hand over to them the real government of a nation and, knowing that, do you want this autocratic federal reserve system continued as it is? in other words, do you want this parasitical federal reserve system--remote from the producers of real wealth--purely a child of astutely lobbied law in the interests of a few paltry "kings of finance" to really govern the united states by governing its money? do you want the very height and apex of special privilege enthroned and sceptered governing your republic? do you want to continue to be a republic in name only, while its real destinies--through a money monopoly--are guided by coteries of special privilegists strutting under your laws, housed in palaces of splendor paid for by you and extracting fabulous salaries from your toil? were washington, jefferson, jackson and lincoln all wrong when they warned you against special privileges and the encroachments of massed wealth? do you want unelected and politically appointed satraps parceling out and administering your nation in twelve satrapies? do you want your government to continue its abdication of finance and to continue to be but a mere puppet in the hands of an organized money-bund? oughtn't this federal reserve "bunking" system--which has the u.s.a. buncoed and chloroformed out of its financial independence--to be curbed, humanized, restrained, limited and governed instead of devouring the substance of its creators, the people? when the misbranded "emancipator of credit" becomes the destroyer of credit, oughtn't the destroyed to emancipate themselves? when an arrogant creature overrides and oppresses its creators, oughtn't it to be sternly regulated or destroyed? when you were befooled into creating the federal reserve system, did you create a frankenstein monster for your own industrial destruction? don't you want this parasite curbed ere it throttles to death the sturdy tree of american production about which it has entwined its throttling tentacles? really, don't you? end zinc! vinegar! vitriol! jim jam jems please don't confound jim jam jems with other magazines that are aping it in size and general appearance. it is not a joke book, nor a dream book, nor a slab of fiction. it is just what it is advertised to be--a volley of truth. you will find more hard, frozen-in facts and facts that you want to know about matters of public interest in each issue of jim jam jems than you will find in any other publication in america. you cannot afford to miss a single number. fill in the coupon below and send it to us with your check for three dollars and you will get jim jam jems for a year delivered by mail to your office or home address. don't wait! join our army of regulars with the next number. * * * * * jim jam jems, bismarck, n. dak. gentlemen: here's my check for $ . . send me jim jam jems for a year at the following address: name street city state provided by the internet archive mrs. leary's cow a legend of chicago by c. c. hine new york presented by the black river insurance co., watertown, n. y. [illustration: ] [illustration: ] [shortly after the chicago fire, there appeared a dismal-looking photograph card of this celebrated bovine, on the reverse of which was printed this remarkable legend: "origin of the chicago fire. "on the other side of this card will be found a life-like picture of mrs. leary and the cow that kicked over the lamp that caused the great fire in chicago. "mrs. leary got her living by selling milk; she had five cows, and kept them in her barn on de koven street, on the west side of the river. a neighbor woman called on her for a pint of milk at nine o'clock sunday night, october th, and mrs. leary, having sold all she had, went to the barn with her lamp to make a further draft on her best cow. the cow, as seen by the picture, being a spirited animal, became indignant at the attempt, kicked over the lamp, setting the barn on fire, and thus inaugurated the greatest fire the world has ever seen."] mrs. leary's cow. |this is the cow, at the leary back gate, where she stood on the night of october the , [illustration: ] with her old crumpled horn and belligerent hoof, warning all "neighbor women" to keep well aloof. ah! this is the cow with the crumpled horn that kicked over the lamp that set fire to the barn that caused the great fire in chicago! |this is chicago, all blasted and burned, the paradise whither insurance men turned; but from which they now bring sad faces away, sorely vexed with the losses they're called on to pay, since the fire-fiend encircled the city that day. and they swear at the cow with the crumpled horn that kicked over the lamp that set fire to the barn that caused the great fire in chicago! [illustration: ] |this is the frame range of best northern pine, the banquet on which hungry flames love to dine, which agents so oft manage _not_ to decline, but write (in their slop-bowls) a "moderate line," because--don't you see--the commish is so fine. [illustration: ] ha! this is the range which delighted to carry the passenger flames o'er the devil's own ferry, and utilize mischief by spreading it faster than men could compete with the fearful disaster. how sad and how strange are the memories now which hang round the heels of that old leary cow-- that wretched old cow with the crumpled horn that kicked over the lamp that set fire to the barn that caused the great fire in chicago! |this is the company, gloomy and glum, which admits that it has some few (?) losses, yes _some!_ but its officers think their best motto is "mum," as they stroke their gray chins and look wise and sing dumb; [illustration: ] while inside they are praying, "good lord, please deliver our souls from the fear of old miller's receiver." and they view with the most acrimonious hate that regurgitant cow at o'leary's back gate, as she stood on the night of october the , when she kicked at the lamp that set fire to the barn that caused the great fire in chicago! |this is the statement the company made: (directors and officers thickly arrayed, to soften the jar as they strike the up grade, where the millions of losses will have to be paid.) "our agency records, we deeply regret, are burned at chicago, are out in the wet, or else there is, h--m, there is some slight impediment, some something-or-other, some sand or some sediment has got in the keyhole, disordered the lock, or razeed the dividends, watered the stock, or some trifling thing not yet quite in sight; but the _company_, sir, is all right, is all right; [illustration: ] our surplus is safe, and our stock is intact, our losses are all reinsured--why, in fact, we never, in all our official career, felt more gay and festive, more full of good cheer. just put up the rates and go on with the biz, these losses will all be arranged with a whiz. the thing we will have straightened out in a jiffy, and the next that you'll hear will be ten per cent, divvy." but you ought to have seen them when, in the back room, they poured out anathemas like a mill-flume on that old leary cow with the crumpled horn that kicked over the lamp that set fire to the barn that caused the great fire in chicago! [illustration: ] |this is november, a month from the fire; and the ascertained losses reach higher and higher. as the figures go up the long faces go down, till the month-ago-boaster appears like a clown. the trick of deception is voted a sham; the people say _fraud_, and the agents say --------, and the grim old receivers call round for the keys, the assets, the papers, the books, if you please. [illustration: ] of all unwelcome things that this world ever saw, the bitterest is a compulsory _craw_. for a large-swelling dignity, proud and high born, who claims that his status is bright as the morn, to get down and meekly acknowledge the corn, and squeeze himself through the small end of a horn, suggests that a little less premature crowing, a little more system, a little more knowing, some better kept books and more accurate showing, are best, in the long run, for our underwriters, to save them the sneers and the jeers of backbiters, the scoffs of the public, the quips of the writers, and a toss from the cow with the crumpled horn that kicked over the lamp that set fire to the barn that caused the great fire in chicago! [illustration: ] |this is the claimant, so pure and so mild, with his heart and his manners as bland as a child, whose amiability never is riled, and whose modest demands with his loss proofs are filed. his property cost, as he shows from his deeds, a sum which ten thousand times over exceeds the mite of insurance for which he now pleads. his goods, to be sure, they were mostly sold out; his building within was a shell, and without was veneered with cheap stone, or thin iron, or grout; but _his word_, bless my soul! who could harbor a doubt, its truthfulness or its exactness about? so he pockets his funds, and he rolls up his eyes, this mild-mannered man, with a cheerful surprise; and he rubs his two hands with an innocent glee, which would do, i am sure, your heart good for to see, as he _blesses_ the cow with the crumpled horn that kicked over the lamp that set fire to the barn that caused the great fire in chicago! |this is an adjuster! now open your eyes. a man who the trade of rapacity plies! [illustration: ] he will cut down your claims, he will cut up your proofs, he will riddle your case through its warps and its woofs. and search all your houses from cellars to roofs for a sliver by which he may fasten a quibble and curtail your claim to a bite or a nibble. and then when you think he is ready for payment he will make you regret you were ever a claimant, by charging you discount for those sixty days, or vexing you further with needless delays. these awful adjusters! they should be ashamed to ply a vocation so loudly defamed. [illustration: ] "what's the good of insurance if not to pay losses? and why all these questions, and bothers and crosses? and why are we hampered and why are we checked? insurers can claim (if you'll only reflect) no rights which it is not _our_ right to reject; no rights which the people are bound to respect. they must smile and be patient, and out with their purses, and take what we give them, our kicks or our curses; bow down to the cow with the old crumpled horn that kicked over the lamp that set fire to the barn that caused the great fire in chicago!" |this is insurance. now, satire, farewell! for the woes which the fire-stricken city befel, must have rung like the clang of a destiny knell, [illustration: ] through the years of prostration and clog and delay, which would drag unsupportable all the sad way, through which her redemption and rising must lay, had insurance not sped, like an angel that brings relief in her hands and delight on her wings. all honor we give to the craft that we love; it has for its motto the word from above; the word spoken erst by omnipotent love. _the burdens of each_ in insurance we bear, and its benefits all its participants share. [illustration: ] copyright (c) , by lidija rangelovska. please see the accompanying rtf (rich text format) file for this ebook. generously made available by the internet archive/canadian libraries) elements of foreign exchange a foreign exchange primer by franklin escher special lecturer on foreign exchange at new york university _fifth edition_ new york the bankers publishing company london effingham wilson, threadneedle st. copyright by the bankers publishing co. new york contents page chapter i. what foreign exchange is and what brings it into exist the various forms of obligation between the bankers and merchants of one country and the bankers and merchants of another, which result in the drawing of bills of exchange. chapter ii. the demand for bills of exchange a discussion of the six sources from which spring the demand for the various kinds of bills of exchange. chapter iii. the rise and fall of exchange rates operation of the five main influences tending to make exchange rise as opposed to the five main influences tending to make exchange fall. chapter iv. the various kinds of exchange a detailed description of: commercial "long" bills--clean bills--commercial "short" bills--drafts drawn against securities sold abroad--bankers' demand drafts--bankers' "long" drafts. chapter v. the foreign exchange market how the exchange market is constituted. the bankers, dealers and brokers who make it up. how exchange rates are established. the relative importance of different kinds of exchange. chapter vi. how money is made in foreign exchange. the operations of the foreign department an intimate description of: selling demand bills against remittances of demand bills--selling cables against remittances of demand bills--selling demand drafts against remittances of "long" exchange--the operation of lending foreign money here--the drawing of finance bills--arbitraging in foreign exchange--dealing in exchange "futures." chapter vii. gold exports and imports the primary movement of gold from the mines to the markets, and its subsequent distribution along the lines of favorable exchange rates. description (with presentation of actual figures) of: the export of gold bars from new york to london--import of gold bars from london--export of gold bars to paris under the "triangular operation." shipments to argentina. london as a "free" gold market and the ability of the central banks in europe to control the movement of gold. chapter viii. foreign exchange in its relation to international security trading europe's "fixed" and "floating" investment in american bonds and stocks a constant source of international security trading. consequent foreign exchange business. financing foreign speculation in "americans." description of the various kinds of bond and stock "arbitrage." chapter ix. the financing of exports and imports a complete description of the international banking system by which merchandise is imported into and exported from the united states. an actual operation followed through its successive steps. preface "where can i find a little book from which i can get a clear idea of how foreign exchange works, without going too deeply into it?"--that question, put to the author dozens of times and by many different kinds of people, is responsible for the existence of this little work. there _are_ one or two well-written textbooks on foreign exchange, but never yet has the author come across a book which covered this subject in such a way that the man who knew little or nothing about it could pick up the book and within a few hours get a clear idea of how foreign exchange works,--the causes which bear upon its movement, its influence on the money and security markets, etc. that is the object of this little book--to cover the ground of foreign exchange, but in such a way as to make the subject interesting and its treatment readable and comprehensible to the man without technical knowledge. foreign exchange is no easy subject to understand; there are few important subjects which are. but, on the other hand, neither is it the complicated and abstruse subject which so many people seem to consider it--an idea only too often born of a look into some of the textbooks on exchange, with their formidable pages of tabulations, formulas, and calculations of all descriptions. for the average man there is little of interest in these intricacies of the subject. many of the shrewdest and most successful exchange bankers in new york city, indeed, know less about them than do some of their clerks. what is needed is rather a clear and definite knowledge of the movement of exchange--why it moves as it does, what can be read from its movements, what effects its movements exert on the other markets. it is in the hope that something may be added to the general understanding of these important matters that this little book is offered to the public. the elements of foreign exchange chapter i what foreign exchange is and what brings it into existence underlying the whole business of foreign exchange is the way in which obligations between creditors in one country and debtors in another have come to be settled--by having the creditor draw a draft directly upon the debtor or upon some bank designated by him. a merchant in new york has sold a bill of goods to a merchant in london, having thus become his creditor, say, for $ , . to get his money, the merchant in new york will, in the great majority of cases, draw a sterling draft upon the debtor in london for a little over £ , . this draft his banker will readily enough convert for him into dollars. the buying and selling and discounting of countless such bills of exchange constitute the very foundation of the foreign exchange business. not all international obligations are settled by having the creditor draw direct on the debtor. sometimes gold is actually sent in payment. sometimes the debtor goes to a banker engaged in selling drafts on the city where the obligation exists, gets such a draft from him and sends that. but in the vast majority of cases payment is effected as stated--by a draft drawn directly on the buyer of the goods. john smith in london owes me money. i draw on him for £ , take the draft around to my bank and sell it at, say, . , getting for it a check for $ . . i have my money, and i am out of the transaction. obligations continually arising in the course of trade and finance between firms in new york and firms in london, it follows that every day in new york there will be merchants with sterling drafts on london which they are anxious to sell for dollars, and vice versa. the supply of exchange, therefore, varies with the obligations of one country to another. if merchants in new york, for instance, have sold goods in quantity in london, a great many drafts on london will be drawn and offered for sale in the new york exchange market. the supply, it will of course be apparent, varies. sometimes there are many drafts for sale; sometimes very few. when there are a great many drafts offering, their makers will naturally have to accept a lower rate of exchange than when the supply is light. the par of exchange between any two countries is the price of the gold unit of one expressed in the money of the other. take england and the united states. the gold unit of england is the pound sterling. what is the price of as much gold as there is in a new pound sterling, expressed in american money? $ . . that amount of dollars and cents at any united states assay office will buy exactly as much gold as there is contained in a new british pound sterling, or sovereign, as the actual coin itself is called. . is the mint par of exchange between great britain and the united states. the fact that the gold in a new british sovereign (or pound sterling) is worth $ . in our money by no means proves, however, that drafts payable in pounds in london can always be bought or sold for $ . per pound. to reduce the case to a unit basis, suppose that you owed one pound in london, and that, finding it difficult to buy a draft to send in payment, you elected to send actual gold. the amount of gold necessary to settle your debt would cost $ . , in addition to which you would have to pay all the expenses of remitting. it would be cheaper, therefore, to pay considerably more than $ . for a one-pound draft, and you would probably bid up until somebody consented to sell you the draft you wanted. which goes to show that the mint par is not what governs the price at which drafts in pounds sterling can be bought, but that demand and supply are the controlling factors. there are exporters who have been shipping merchandise and selling foreign exchange against the shipments all their lives who have never even heard of a mint par of exchange. all they know is, that when exports are running large and bills in great quantity are being offered, bankers are willing to pay them only low rates--$ . or $ . , perhaps, for the commercial bills they want to sell for dollars. conversely, when exports are running light and bills drawn against shipments are scarce, bankers may be willing to pay . or . for them. for a clear understanding of the mechanics of the exchange market there is necessary a clear understanding of what the various forms of obligations are which bring foreign exchange into existence. practically all bills originate from one of the following causes: . merchandise has been shipped and the shipper draws his draft on the buyer or on a bank abroad designated by him. . securities have been sold abroad and the seller is drawing on the buyer for the purchase price. . foreign money is being loaned in this market, the operation necessitating the drawing of drafts on the lender. . finance-bills are being drawn, _i.e._, a banker abroad is allowing a banker here to draw on him in pounds sterling at or days' sight in order that the drawer of the drafts may sell them (for dollars) and use the proceeds until the drafts come due and have to be paid. . looking at these sources of supply in the order in which they are given, it is apparent, first, what a vast amount of foreign exchange originates from the direct export of merchandise from this country. exports for the period given below have been as follows: $ , , , , , , , , , , , , , , , not all of this merchandise is drawn against; in some cases the buyer abroad chooses rather to secure a dollar draft on some american bank and to send that in payment. but in the vast majority of cases the regular course is followed and the seller here draws on the buyer there. there are times, therefore, when exchange originating from this source is much more plentiful than at others. during the last quarter of each year, for instance, when the cereal and cotton crop exports are at their height, exchange comes flooding into the new york market from all over the country, literally by the hundreds of millions of dollars. the natural effect is to depress rates--sometimes to a point where it becomes possible to use the cheaply obtainable exchange to buy gold on the other side. in a following chapter a more detailed description of the new york exchange market is given, but in passing, it is well to note how the whole country's supply of commercial exchange, with certain exceptions, is focussed on new york. chicago, philadelphia, and one or two other large cities carry on a pretty large business in exchange, independent of new york, but by far the greater part of the commercial exchange originating throughout the country finds its way to the metropolis. for in new york are situated so many banks and bankers dealing in bills of exchange that a close market is always assured. the cotton exporter in memphis can send the bills he has drawn on london or liverpool to his broker in new york with the fullest assurance that they will be sold to the bankers at the highest possible rate of exchange anywhere obtainable. . the second source of supply is in the sale abroad of stocks and bonds. here again it will be evident how the supply of bills must vary. there are times when heavy flotations of bonds are being made here with europe participating largely, at which times the exchange drawn against the securities placed abroad mounts up enormously in volume. then again there are times when london and paris and berlin buy heavily into our listed shares and when every mail finds the stock exchange houses here drawing millions of pounds, marks, and francs upon their correspondents abroad. at such times the supply of bills is apt to become very great. origin of bills from this source, too, is apt to exert an important influence on rates, in that it is often sudden and often concentrated on a comparatively short period of time. the announcement of a single big bond issue, often, where it is an assured fact that a large part of it will be placed abroad, is enough to seriously depress the exchange market. bankers know that when the shipping abroad of the bonds begins, large amounts of bills drawn against them will be offered and that rates will in all probability be driven down. announcements of such issues, as well as announcements that a block of this or that kind of bonds has been placed abroad with some foreign syndicate, are apt to come suddenly and often find the exchange market unprepared. for the supply of exchange originated thereby, it must be remembered, is not confined to the amount actually drawn against bonds sold but includes also all the exchange which other bankers, in their anticipation of lower rates, hasten to draw. the exchange market is, indeed, a sensitive barometer, from which those who understand it can read all sorts of coming developments. it often happens that buying or selling movements in our securities by the foreigners are so clearly forecasted by the action of the exchange market that bankers here are able to gain great advantage from what they are able to foresee. . the third great source of supply is in the drafts which bankers in one country draw upon bankers in another in the operation of making international loans. the mechanism of such transactions will be treated in greater detail later on, but without any knowledge of the subject whatever, it is plain that the transfer of banking capital, say from england to the united states, can best be effected by having the american house draw upon the english bank which wants to lend the money. in the finely adjusted state of the foreign exchanges nowadays, loans are continually being made by bankers in one country to bankers and merchants in another. very little of the capital so transferred goes in the form of gold. a london house decides to loan, say, $ , in the american market. the terms having been arranged, the london house cables its new york correspondent to draw for £ , , at or days' sight, as the case may be. the new york house, having drawn the draft, sells it in the exchange market, realizing on it the $ , , which it then proceeds to loan out according to instructions. the arranging of these loans, it will be seen, means the continuous creation of very large amounts of foreign exchange. as the financial relationships between our bankers and those of the old world have been developed, it has come about that european money is being put out in this market in increasing volume. conditions of money, discount, and exchange are constantly being watched for the opportunity to make loans on favorable terms, and the aggregate of foreign money loaned out here at times reaches very large figures. in europe had big amounts of money outstanding in the new york market, and again in very large sums of english and french capital were temporarily placed at our disposal. but in the summer of all records were surpassed, american borrowings in london and paris footing up to at least half a billion dollars. such loans, running only a couple of months on the average and then being sometimes paid off, but more often shifted about or renewed, give rise to the drawing of immense amounts of foreign exchange. . drawing of so-called "finance-bills," of which a complete description will be found in chapters iv and vi, is the fourth source whence foreign exchange originates. whenever money rates become decidedly higher in one of the great markets than in the others, bankers at that point who have the requisite facilities and credit, arrange with bankers in other markets to allow them (the bankers at the point where money is high) to draw or days' sight bills. these bills can then be disposed of in the exchange market, dollars being realized on them, which can then be loaned out during the whole life of the bills. the advantages or dangers of such an operation will not be touched upon here, the purpose of this chapter being merely to set forth clearly the sources from which foreign exchange originates. and when money is decidedly higher in new york than in london an immense volume of foreign exchange does originate from this source. a number of firms and banks, with either their own branches in london or with correspondents there to whom they stand very close, are in a position where they can draw very large amounts of finance bills whenever they deem it profitable and expedient to do so. eventually, of course, these and day bills come due and have to be settled by remittances of demand exchange, but in the meantime the house which drew them will have had the unrestricted use of the money. in a market like new york this is only too often a prime consideration. with money rates soaring as they do so frequently here, a banker can pay almost any commission his correspondent abroad demands and still come out ahead on the transaction. these are the principal sources from which foreign exchange originates--shipments of merchandise, sales abroad of securities, transfer of foreign banking capital to this side, sale of finance-bills. other causes of less importance--interest and profits on american capital invested in europe, for instance--are responsible for the existence of some quantity of exchange, but the great bulk of it originates from one of the four sources above set forth. in the next chapter effort will be made to show whence arises the demand which pretty effectually absorbs all the supply of exchange produced each year. chapter ii the demand for bills of exchange turning now to consideration of the various sources from which springs the demand for foreign exchange, it appears that they can be divided about as follows: . the need for exchange with which to pay for imports of merchandise. . the need for exchange with which to pay for securities (american or foreign) purchased by us in europe. . the necessity of remitting abroad the interest and dividends on the huge sums of foreign capital invested here, and the money which foreigners domiciled in this country are continually sending home. . the necessity of remitting abroad freight and insurance money earned here by foreign companies. . money to cover american tourists' disbursements and expenses of wealthy americans living abroad. . the need for exchange with which to pay off maturing foreign short-loans and finance-bills. . payment for merchandise imported constitutes probably the most important source of demand for foreign exchange. merchandise brought into the country for the period given herewith has been valued as follows: $ , , , , , , , , , , , , , , , practically the whole amount of these huge importations has had to be paid for with bills of exchange. whether the merchandise in question is cutlery manufactured in england or coffee grown in brazil, the chances are it will be paid for (under a system to be described hereafter) by a bill of exchange drawn on london or some other great european financial center. from one year's end to the other there is constantly this demand for bills with which to pay for merchandise brought into the country. as in the case of exports, which are largest in the fall, there is much more of a demand for exchange with which to pay for imports at certain times of the year than at others, but at all times merchandise in quantity is coming into the country and must be paid for with bills of exchange. . the second great source of demand originates out of the necessity of making payment for securities purchased abroad. so far as the american participation in foreign bond issues is concerned, the past few years have seen very great developments. we are not yet a people, as are the english or the french, who invest a large proportion of their accumulated savings outside of their own country, but as our investment surplus has increased in size, it _has_ come about that american investors have been going in more and more extensively for foreign bonds. there have been times, indeed, as when the japanese loans were being floated, when very large amounts of foreign exchange were required to pay for the bonds taken by american individuals and syndicates. security operations involving a demand for foreign exchange are, however, by no means confined to american participation in foreign bond issues. accumulated during the course of the past half century, there is a perfectly immense amount of american securities held all over europe. the greater part of this investment is in bonds and remains untouched for years at a stretch. but then there come times when, for one reason or another, waves of selling pass over the european holdings of "americans," and we are required to take back millions of dollars' worth of our stocks and bonds. such selling movements do not really get very far below the surface--they do not, for instance, disturb the great blocks of american bonds in which so large a proportion of many of the big foreign fortunes are invested, but they are apt to be, nevertheless, on a scale which requires large amounts of exchange to pay for what we have had to buy back. the same thing is true with stocks, though in that case the selling movements are more frequent and less important. europe is always interested heavily in american stocks, there being, as in the case of bonds, a big fixed investment of capital, beside a continually fluctuating "floating-investment." in other words, aside from their fixed investments in our stocks, the foreigners are continually speculating in them and continually changing their position as buyers and sellers. selling movements such as these do not materially affect europe's set position on our stocks, but they do result at times in very large amounts of our stocks being dumped back upon us--sometimes when we are ready for them, sometimes when the operation is decidedly painful, as in the fall of . in any case, when europe sells, we buy. and when we buy, and at the rate of millions of dollars' worth a day, there is a big demand for exchange with which to pay for what we have bought. . so great is the foreign investment of capital in this country that the necessity of remitting the interest and dividends alone means another continuous demand for very large amounts of foreign exchange. estimates of how much european money is invested here are little better than guesses. the only sure thing about it is that the figures run well up into the billions and that several hundred millions of dollars' worth of interest and dividends must be sent across the water each year. there are, in the first place, all the foreign investments in what might be called private enterprise--the english money, for instance, invested in fruit orchards, gold and copper mines, etc., in the western states. profits on this money are practically all remitted back to england, but no way exists of even estimating what they amount to. aside from that there are all the foreign holdings of bonds and stocks in our great public corporations, holdings whose ownership it is impossible to trace. only at the interest periods at the beginning and middle of each year does it become apparent how large a proportion of our bonds are held in europe and how great is the demand for exchange with which to make the remittances of accrued interest. at such times the incoming mails of the international banking houses bulge with great quantities of coupons sent over here for collection. for several weeks on either side of the two important interest periods, the exchange market feels the stimulus of the demand for exchange with which the proceeds of these masses of coupons are to be sent abroad. . freights and insurance are responsible for a fourth important source of demand for foreign exchange. a walk along william street in new york is all that is necessary to give a good idea of the number and importance of the foreign companies doing business in the united states. in some form or other all the premiums paid have to be sent to the other side. times come, of course, like the year of the baltimore fire, when losses by these foreign companies greatly outbalance premiums received, the business they do thus resulting in the actual _creation_ of great amounts of foreign exchange, but in the long run--year in, year out--the remitting abroad of the premiums earned means a steady demand for exchange. with freights it is the same proposition, except that the proportion of american shipping business done by foreign companies is much greater than the proportion of insurance business done by foreign companies. since the civil war the american mercantile marine instead of growing with the country has gone steadily backward, until now the greater part of our shipping is done in foreign bottoms. aside from the other disadvantages of such a condition, the payment of such great sums for freight to foreign companies is a direct economic drain. an estimate that the yearly freight bill amounts to $ , , is probably not too high. that means that in the course of every year there is a demand for that amount of exchange with which to remit back what has been earned from us. . tourists' expenditures abroad are responsible for a further heavy demand for exchange. whether it is because americans are fonder of travel than the people of other countries or whether it is because of our more or less isolated position on the map, it is a fact that there are far more americans traveling about in europe than people belonging to any other nation. and the sums spent by american tourists in foreign lands annually aggregate a very large amount--possibly as much as $ , , --all of which has eventually to be covered by remittances of exchange from this side. then again there must be considered the expenditures of wealthy americans who either live abroad entirely or else spend a large part of their time on the other side. during the past decade it has come about that every european city of any consequence has its "american colony," a society no longer composed of poor art students or those whose residence abroad is not a matter of volition, but consisting now of many of the wealthiest americans. by these expatriates money is spent extremely freely, their drafts on london and paris requiring the frequent replenishment, by remittances of exchange from this side, of their bank balances at those points. furthermore, there must be considered the great amounts of american capital transferred abroad by the marriage of wealthy american women with titled foreigners. such alliances mean not only the transfer of large amounts of capital _en bloc_, but mean as well, usually, an annual remittance of a very large sum of money. no account of the money drained out of the country in this way is kept, of course, but it is an item which certainly runs up into the tens of millions. . lastly, there is the demand for exchange originating from the paying off of the short-term loans which european bankers so continuously make in the american market. there is never a time nowadays when london and paris are lending american bankers less than $ , , on or day bills, while the total frequently runs up to three or four times that amount. the sum of these floating loans is, indeed, changing all the time, a circumstance which in itself is responsible for a demand for very great amounts of foreign exchange. take, for instance, the amount of french and english capital employed in this market in the form of short-term loans; $ , , is probably a fair estimate of the average amount, and days a fair estimate of the average time the loans run before being paid off or renewed. that means that the quarter of a billion dollars of floating indebtedness is "turned over" four times a year and _that_ means that every year the rearrangement of these loans gives rise to a demand for a billion dollars' worth of foreign exchange. these loaning operations, it must be understood, both originate exchange and create a demand for it. they are mentioned, therefore, in the preceding chapter, as one of the sources from which exchange originates, and now as one of the sources from which, during the course of every year, springs a demand for a very great quantity of exchange. the six sources of demand for exchange, then, are for the payment for imports; for securities purchased abroad; for the remitting abroad of interest on foreign capital invested here and the money which foreigners in this country send home; for remitting freight and insurance profits earned by foreign companies here; for tourists' expenses abroad; and lastly, for the paying off of foreign loans. from these sources spring practically all the demand for exchange. in the last chapter there were set forth the principal sources of supply. with a clear understanding of where exchange comes from and of where it goes, it ought now to be possible for the student of the subject to grasp the causes which bear on the movement of exchange rates. that subject will accordingly be taken up in the next chapter. chapter iii the rise and fall of exchange rates granted that the obligations to each other of any two given countries foot up to the same amount, it is evident that the rate of exchange will remain exactly at the gold par--that in new york, for instance, the price of the sovereign will be simply the mint value of the gold contained in the sovereign. but between no two countries does such a condition exist--take any two, and the amount of the obligation of one to the other changes every day, which causes a continuous fluctuation in the exchange rate--sometimes up from the mint par, sometimes down. before going on to discuss the various causes influencing the movement of exchange rates, there is one point which should be very clearly understood. _two_ countries, at least, are concerned in the fluctuation of every rate. take, for example, london and new york, and assume that, at new york, exchange on london is falling. that in itself means that, in london, exchange on new york is rising. for the sake of clearness, in the ensuing discussion of the influences tending to raise and lower exchange rates, new york is chosen as the point at which these influences are operative. consideration will be given first to the influences which cause exchange to go up. in a general way, it will be noticed, they conform with the sources of demand for exchange given in the previous chapter. they may be classified about as follows: . large imports, calling for large amounts of exchange with which to make the necessary payments. . large purchases of foreign securities by us, or repurchase of our own securities abroad, calling for large amounts of exchange with which to make payment. . coming to maturity of issues of american bonds held abroad. . low money rates here, which result in a demand for exchange with which to send banking capital out of the country. . high money rates at some foreign centre which create a great demand for exchange drawn on that centre. . heavy imports are always a potent factor in raising the level of exchange rates. under whatever financial arrangement or from whatever point merchandise is imported into the united states, payment is almost invariably made by draft on london, paris, or berlin. at times when imports run especially heavy, demand from importers for exchange often outweighs every other consideration, forcing rates up to high levels. a practical illustration is to be found in the inpour of merchandise which took place just before the tariff legislation in . convinced that duties were to be raised, importers rushed millions of dollars' worth of merchandise of every description into the country. the result was that the demand for exchange became so great that in spite of the fact that it was the season when exports normally meant low exchange, rates were pushed up to the gold export point. . heavy purchasing movements of our own or foreign securities, on the other side, are the second great influence making for high exchange. there come times when, for one reason or another, the movement of securities is all one way, and when it happens that for any cause we are the ones who are doing the buying, the exchange market is likely to be sharply influenced upward by the demand for bills with which to make payments. such movements on a greater or less scale go on all the time and constitute one of the principal factors which exchange managers take into consideration in making their estimate of possible exchange market fluctuations. it is interesting, for instance, to note the movement of foreign exchange at times when a heavy selling movement of american stocks by the foreigners is under way. origin of security-selling on the stock exchange is by no means easy to trace, but there are times when the character of the brokers doing the selling and the very nature of the stocks being disposed of mean much to the experienced eye. take, for instance, a day when half a dozen brokers usually identified with the operations of the international houses are consistently selling such stocks as missouri, kansas & texas, baltimore & ohio, or canadian pacific--whether or not the inference that the selling is for foreign account is correct can very probably be read from the movement of the exchange market. if it is the case that the selling comes from abroad and that _we_ are buying, large orders for foreign exchange are almost certain to make their appearance and to give the market a very strong tone if not actually to urge it sharply upward. such orders are not likely to be handled in a way which makes them apparent to everybody, but as a rule it is impossible to execute them without creating a condition in the exchange market apparent to every shrewd observer. and, as a matter of fact, many an operation in the international stocks is based upon judgment as to what the action of the exchange market portends. similarly--the other way around--exchange managers very frequently operate in exchange on the strength of what they judge or know is going to happen in the market for the international stocks. with the exchange market sensitive to developments, knowledge that there is to be heavy selling in some quarter of the stock market, from abroad, is almost equivalent to knowledge of a coming sharp rise in exchange on london. perhaps the best illustration of how exchange can be affected by foreign selling of our securities occurred just after the beginning of the panic period in october of . under continuous withdrawals of new york capital from the foreign markets, exchange had sold down to a very low point. suddenly came the memorable selling movement of "americans" by english and german investors. within two or three days perhaps a million shares of american stocks were jettisoned in this market by the foreigners, while exchange rose by leaps and bounds nearly cents to the pound, to the unheard-of price of . . nobody had exchange to sell and almost overnight there had been created a demand for tens of millions of dollars' worth. . the coming to maturity of american bonds held abroad is another influencing factor closely kept track of by dealers in exchange. so extensive is the total foreign investment in american bonds that issues are coming due all the time. where some especially large issue runs off without being funded with new bonds, demand for exchange often becomes very strong. especially is this the case with the short-term issues of the railroads and most especially with new york city revenue warrants which have become so exceedingly popular a form of investment among the foreign bankers. in spite of its mammoth debt, new york city is continually putting out revenue warrants, the operation amounting, in fact, to the issue of its notes. of late years paris bankers, especially, have found the discounting of these "notes" a profitable operation and have at times taken them in big blocks. whenever one of these blocks of revenue warrants matures and has to be paid off, the exchange market is likely to be strongly affected. accumulation of exchange in preparation is likely to be carried on for some weeks ahead, but even at that the resulting steady demand for bills often exerts a decidedly stimulating influence. experienced exchange managers know at all times just what short-term issues are coming due, about what proportion of the bonds or notes have found their way to the other side, just how far ahead the exchange is likely to be accumulated. repayment operations of this kind are often almost a dominant, though usually temporary, influence on the price of exchange. . low money rates are the fourth great factor influencing foreign exchange upward. whenever money is cheap at any given center, and borrowers are bidding only low rates for its use, lenders seek a more profitable field for the employment of their capital. it has come about during the past few years that so far as the operation of loaning money is concerned, the whole financial world is one great market, new york bankers nowadays loaning out their money in london with the same facility with which they used to loan it out in boston or philadelphia. so close have become the financial relationships between leading banking houses in new york and london that the slightest opportunity for profitable loaning operations is immediately availed of. money rates in the new york market are not often less attractive than those in london, so that american floating capital is not generally employed in the english market, but it does occasionally come about that rates become abnormally low here and that bankers send away their balances to be loaned out at other points. during long periods of low money, indeed, it often happens that large lending institutions here send away a considerable part of their deposits, to be steadily employed for loaning out and discounting bills in some foreign market. such a time was the long period of stagnant money conditions following the panic. trust companies and banks who were paying interest on large deposits at that time sent very large amounts of money to the other side and kept big balances running with their correspondents at such points as amsterdam, copenhagen, st. petersburg, etc.,--anywhere, in fact, where some little demand for money actually existed. demand for exchange with which to send this money abroad was a big factor in keeping exchange rates at their high level during all that long period. . high money rates at some given foreign point as a factor in elevating exchange rates on that point might almost be considered as a corollary of low money here, but special considerations often govern such a condition and make it worth while to note its effect. suppose, for instance, that at a time when money market conditions all over the world are about normal, rates, for any given reason, begin to rise at some point, say london. instantly a flow of capital begins in that direction. in new york, paris, berlin and other centers it is realized that london is bidding better rates for money than are obtainable locally, and bankers forthwith make preparations to increase the sterling balances they are employing in london. exchange on that particular point being in such demand, rates begin to rise, and continue to rise, according to the urgency of the demand. particular attention will be given later on to the way in which the bank of england and the other great foreign banks manipulate the money market and so control the course of foreign exchange upon themselves, but in passing it is well to note just why it is that when the interest rate at any given point begins to go up, foreign exchange drawn upon that point begins to go up, too. remittances to the point where the better bid for money is being made, are the very simple explanation. bankers want to send money there, and to do it they need bills of exchange. an urgent enough demand inevitably means a rise in the quotation at which the bills are obtainable. which suggests very plainly why it is that when the directors of the bank of england want to raise the rate of exchange upon london, at new york or paris or berlin, they go about it by tightening up the english money market. the foregoing are the principal causes making for high exchange. the causes which make up for low rates must necessarily be to a certain extent merely the converse, but for the sake of clearness they are set down. the division is about as follows: . especially heavy exports of merchandise. . large purchases of our stocks by the foreigners and the placing abroad of blocks of american bonds. . distrust on our part of financial conditions existing at some point abroad where there are carried large deposits of american capital. . high money rates here. . unprofitably low loaning rates at some important foreign centre where american bankers ordinarily carry large balances on deposit. . just as unusually large imports of commodities mean a sharp demand for exchange with which to pay for them, unusually large exports mean a big supply of bills. in a previous chapter it has been explained how, when merchandise is shipped out of the country, the shipper draws his draft upon the buyer, in the currency of the country to which the merchandise goes. when exports are heavy, therefore, a great volume of bills of exchange drawn in various kinds of currency comes on the market for sale, naturally depressing rates. exports continue on a certain scale all through the year, but, like imports, are heavier at some times than others. in the fall, for instance, when the year's crops are being exported, shipments out of the country invariably reach their zenith, the export nadir being approached in midsummer, when the crop has been mostly exported and shipments of manufactured goods are running light. from the middle of august, when the first of the new cotton crop begins to find its way to the seaport, until the middle of december, when the bulk of the corn and wheat crop exports have been completed, exchange in very great volume finds its way into the new york market. normally this is the season of low rates, for which reason many shippers of cotton and grain, who know months in advance approximately how much they will ship, contract ahead of time with exchange dealers in new york for the sale of the bills they know they will have. by so doing, shippers are often able to obtain very much better rates. they can then protect themselves, at least, from the extremely low rates which they may be forced to take if they wait and accept going rates at a time when shippers all over the country are trying to sell their bills at the same time. how great is the rush of exchange into market may be seen from the statistics of cotton exports during the period given below. not all of this cotton goes out during the last four months of the year, but the greater part of it does and, furthermore, cotton, while the most important, is only _one_ of the domestic products exported in the autumn. money value of cotton exported $ , , , , , , , , , , during the autumn months, under normal conditions, the advantage is all with the buyer of foreign exchange. by every mail huge packages of bills, drawn against shipments of cotton, wheat and corn, come pouring into the new york market. bankers' portfolios become crowded with bills; remittances by each steamer, in the case of some of the big bankers, run up, literally, into the millions of dollars. naturally, any one wanting bankers' exchange is usually able to secure it at a low price. . with regard to the second influence making for low exchange, sale of american bonds or stocks abroad, no season can be set when the influence is more likely to be operative than at any other, unless, possibly, it be the spring, when money rates are more apt to be low and bond issues larger than at any other time of the year. no time, however, can be definitely set--there are years when the bulk of the new issues are brought out in the spring and other years when the fall season sees most of the new financing. but whatever the time of the year, one thing is certain--the issue of any amount of american bonds with europe participating largely means a full supply of foreign exchange not only during the time the issues are actually being brought out, but for long afterward. there used to be a saying among exchange dealers that cotton exports make exchange faster than anything, but nowadays bond sales abroad have come to take first place. for foreign participation in syndicates formed to underwrite new issues almost invariably means the drawing of bills representing the full amount of the foreign participation. a syndicate is formed, for instance, to take off the hands of the x y z railroad $ , , of new bonds, the arrangement being that the railroad is to receive its money at once and that the syndicate is to take its own time about working off the bonds. half the amount, say, has been allotted to foreign houses. immediately, the drawing of £ , , , or francs , , , as the case may be, begins. the foreign houses have to raise the money, and in nine cases out of ten, their way of doing it is to arrange with some representative abroad to let them draw long drafts, against the deposit of securities on this side. these drafts, in pounds or francs, at sixty to ninety days' sight, they can sell in the exchange market for dollars, thus securing the money they have agreed to turn over to the railroad. in the meantime, during the life of the drafts they have set afloat and before they come due and have to be paid off, the bankers here can go about selling the bonds and getting back their money. perhaps before the sixty or ninety days, as the case may be, are over, the syndicate may have sold out all its bonds and its foreign members have been put in a position where they can pay off all the drafts they set afloat originally in order to raise the money. very often, however, it will happen that on account of one reason or another, sixty days pass or ninety days pass without the syndicate having been able to dispose of its bonds. in that case the long bills drawn on the foreign bankers have to be "renewed"--that being a process for which ample provision has, of course, been made. in a succeeding chapter, full description of how long bills of exchange coming due are renewed will be made. just here it is only necessary to say that most or all of the money necessary to pay off the maturing bills is raised by selling another batch of "sixties" or "nineties," an operation which throws the maturity two or three months further ahead. from this outline of the way foreign participation in american bond issues is financed, it can be seen that every time a big issue of bonds of a railroad or industrial in which european investors are actively interested, is brought out, it means a large supply of foreign exchange created and suddenly thrown on the exchange market for sale. not any more suddenly or publicly than the bankers concerned can help, but still necessarily so to a great degree, because big bond issues can only be made with the full knowledge and coöperation of a large part of the public. bankers who know in advance of large issues likely to be made and in which they know they will be asked to participate, often sell "futures" covering the exchange they foresee their participation will bring into existence, but as a general rule it may be set down that heavy issues, involving the sale abroad of large amounts of bonds, are a most depressing factor on the foreign exchange market. especially so, as the participants who have agreed to turn over the money to the railroad, must sell bills to raise it, even if the horde of speculators and "trailers" who are always on the lookout for such opportunities, make every effort to sell the market out from under their feet. . uneasiness with regard to the stability of the financial situation at some point abroad where american bankers usually carry large balances is another circumstance which often depresses the exchange market sharply. "trouble in the balkans" and "trouble over the moroccan situation" are two bugbears which have for years back furnished the keynote for many swoops downward in the exchange market, and for years after this book is published will probably continue to do so. money on deposit at a point several thousand miles away is naturally very sensitive, and the least suspicion of financial trouble is sufficient to cause its withdrawal. withdrawal of bankers' balances from a foreign city means offerings of exchange drawn on that point with resultant decline in rates. in the everyday life of the exchange market, political developments of an unfavorable character and war rumors are about the most frequent and potent influences toward the condition of uneasiness above referred to. few war rumors ever come to anything, but there are times when they circulate with astonishing frequency and persistence and cause decided uneasiness concerning financial conditions at important points. at such times bankers having money on deposit at those points are apt to become influenced by the drift of sentiment and to draw down their balances. here, again, operators in exchange, keenly on the alert for such chances, will very likely begin to sell the exchange market short and often succeed in breaking it to a degree entirely unwarranted by the known facts. . but of all the sure depressing influences on exchange, none is more sure than a rise in the money market. more gradual usually than a decline caused by such an influence as the sale of american bonds abroad, the influence of a rising level of money rates is nevertheless far more certain. the theory of this "counter" movement in money rates and exchange is simply that when money rates rise, say at a point like new york, american bankers find it profitable to draw in their deposits from all over europe for the purpose of using the money in new york. such a process means a wholesale drawing of bills of exchange on all the leading european cities, with consequent offering of the bills and price-depression in the leading american exchange markets. the number of banks scattered all over the united states which keep running deposit accounts in the leading european cities has become surprisingly great during the past ten years, and a movement to bring home this capital has to go only a little way before it reaches very large proportions. that is exactly what happens when money rates at a point like new york become decidedly more attractive than they are over on the other side. arrangements with foreign correspondents usually call for a minimum balance of considerable size, which must be left intact, but under ordinary circumstances there is considerable leeway, and when the better opportunity for loaning presents itself here, drafts on balances abroad, in large aggregate amount, are apt to be drawn and sold in this market. especially is this the case when the cause of the higher money level appears to be deep-rooted and the outlook is for a continuance of the condition for some time to come. . lastly, as a depressing factor, there is to be considered the condition which arises when money at some important foreign center, such as london or paris, begins to ease decidedly. large receipts of gold from the mines, a bettering political outlook--these or many other causes may bring it about that money in london, for instance, after a period of high rates, may ease off faster than in berlin or hamburg. as a result, american bankers having large balances in london and finding it difficult to employ them profitably there, any longer, either withdraw them entirely or have the money transferred to some other point. in either case the operation will result in depressing the rate of exchange on london, for the american banker will either draw on london himself or, if he wants to transfer the money to berlin or hamburg, will instruct the german bankers by cable to draw for his account on london. in whatever way it is accomplished, the withdrawal of capital from any banking point tends to lower the rate of foreign exchange on that point. these are the main influences bearing on the fluctuation of exchange. needless to say they are not exerted all one way, or one at a time, as set forth. the international money markets are a most decidedly complex proposition, and there is literally never a time when several influences tending to put rates up are not conflicting with several influences tending to put rates down. the actual movement of the rate represents the relative strength of the two sets of influences. to be able to "size up" the influences present and to gauge what movement of rates they will result in, is an operation requiring, first, knowledge, then judgment. the former qualification can perhaps be derived, in small degree, from study of the foregoing pages. the latter is a matter of mental calibre and experience. chapter iv the various kinds of exchange before taking up the question of the activities of the foreign exchange department and the question of how bankers make money dealing in exchange, it may be well to fix in mind clearly what the various forms of foreign exchange are. following is a description of the most important classes of bills bought and sold in the new york market: . _commercial long bills_ [illustration: form of commercial long bill] drafts drawn by shippers of merchandise upon buyers abroad, or upon the banking representatives of the buyers abroad, at thirty days' sight or more. the drafts may be accompanied by shipping documents or may be "clean." the former kind of bill making up the greater part of the whole amount of foreign exchange dealt in in the new york market, will be described first. suppose a cotton dealer in memphis to have sold one hundred bales of cotton to a spinner in liverpool, the arrangement being that the english buyer is to be drawn on at sixty days' sight. the first thing the memphis merchant does is to ship the cotton on its way to liverpool, receiving from the railroad company a receipt known as a "bill of lading." at the same time he arranges for the insurance of the cotton, receiving from the insurance company a little certificate stating that the insurance has been effected. the next step is for the memphis shipper to draw the draft on the liverpool buyer--or upon some bank abroad designated by the buyer. this draft is drawn in pounds sterling for the equivalent of the dollar value of the cotton and made payable sixty days after the party abroad on whom it is drawn has seen it and written "accepted" across its face. this draft, the bill of lading received from the shipping company, and the insurance certificate received from the insurance company are then pinned together and constitute a complete "commercial long bill with documents attached." other less important documents go with such a bill. sometimes invoices showing the weight and price of the cotton go along with it and sometimes there is also attached a "hypothecation slip" which formally turns over the right to the goods to the memphis or new york banker who buys the draft and accompanying documents from the memphis cotton shipper. sometimes, too, insurance is effected by the buyer abroad, in which case there may be no insurance certificate. but in the main, one of these "documentary" commercial bills consists of the draft itself, the bill of lading, and an insurance certificate. having pinned the document and the draft together, the memphis cotton shipper is in possession of an instrument which he can dispose of for dollars. this he does either by selling it to his bank in memphis or by sending it to new york, in order that it may be sold there in the exchange market at the current rate of exchange. say, the bill of exchange is drawn on london at sixty days' sight, for £ , . the buying price for such a draft will be, perhaps, . . the memphis shipper gets his check for $ , , and is out of the transaction. the bill has passed into a banker's hands, who will send it abroad--deposit it in some foreign bank where he keeps a balance. as to the rate of . received by the shipper, it is to be noted that had the bill been drawn at less than sixty days' sight, he would have received more dollars for it, while if it had been drawn at more than sixty days' sight, he would have received less for it. the longer the banker who takes the draft off the shipper's hands has to wait until he can get his money back on it, the lower, naturally, the rate of exchange he is willing to pay. on the same day that demand drafts are selling at . , sixty-day drafts may be selling at . and ninety-day drafts at . . assume, in this particular case, that the draft has been taken off the shipper's hands by some foreign exchange banker in new york. by the very first steamer the latter will forward it to his banking correspondent abroad, with instructions to present it at once to the parties on whom it is drawn, in order that they may mark it "accepted--payable such-and-such-a-date." after that the bill is a double obligation of the drawer and the drawee, and may be discounted in the open market, for cash. just here it is necessary to digress and state that documentary commercial bills are of two kinds--"acceptance" bills and "payment" bills. in the case of the first-named, the documents are delivered to the party on whom the bill is drawn as soon as he "accepts" the bill, which puts him in a position to get possession of the merchandise at once. in the case of a "payment" bill, the credit of the man on whom it is drawn is not good enough to entitle him to such a privilege, and the only way he can get actual possession of the goods is to actually pay the draft under a rebate-of-interest arrangement. all bills drawn on banks are naturally "acceptance" bills; and being discountable and thus immediately convertible into cash abroad, command a better rate of exchange in the new york market than "payment" bills, which may be allowed to run all the way to maturity before a single pound sterling is paid on them. except in the case of the shipment of perishable merchandise--grain shipped in bulk, for instance. in that case the buyer on the other side cannot afford to let the draft run, because the merchandise would spoil. he is simply forced to pay it under rebate, in order to get possession of the grain. and the rebate being always less than the discount rate, less pounds sterling come off the face of the bill in the process of _rebating_ than of _discounting_. for which reason sixty-day bills drawn against shipments of grain--documents deliverable only on payment under rebate--command a better rate of exchange even than the very best of cotton "acceptance" bills drawn on banks. . _clean bills_ [illustration: form of clean bill] where the drafts of the merchants of one country drawn upon the merchants or bankers of another are unaccompanied by shipping documents they are said to be "clean." bills of this kind may originate from the transfer of capital from one country to another or may represent drawings against shipments of merchandise previously made. it is not unusual, indeed, where the relationship between some foreign merchant and some american merchant is very close, for the one to ship merchandise to the other without drawing drafts against the shipment until some little time afterward. it might happen, for instance, that a cotton manufacturing firm in france wanted to import a lot of raw cotton from the united states, but did not want to be drawn upon at the time. under such circumstances the american house might ship the goods and send over the documents to the buyer, postponing its drawing for some time. eventually, of course, the american house would reimburse itself by drawing, but the documents having gone forward long before, the drafts would be what is known as "clean." later on, in the chapter on the actual money-making operations of the foreign department, the risk in buying various kinds of bills will be fully explained, but in passing it may be mentioned that "clean" bills are of such a nature that bankers will touch them only when drawn by the very best houses. with a documentary bill, the banker holds the bill of lading, and if there is any trouble about the acceptance or payment of a draft, can simply seize the goods and sell them. but in the case of a "clean" bill, he has absolutely no security. the standing of the maker of the bill and what he knows about the maker's right to draw the bill is all he has to go by in determining whether to buy it or not. . _documentary commercial bills drawn at short sight_ [illustration: form of documentary commercial sight bill] a comparatively small part of our exports are sold on a basis where the draft drawn is at less than thirty days' sight, but there are a good many small bills of this kind continually coming into the market. drafts drawn against manufactured articles and against such products as cheese, butter, dried fruits, etc., are apt to be drawn for, with shipping documents attached, at anywhere from three to thirty days' sight, but there is no rule about it. where the "usance"--the time the bill has to run--is only a few days, documents are apt to be deliverable only on payment of the bills. . _drafts drawn against securities_ [illustration: form of draft drawn against securities] exchange of this kind is naturally of the highest class, the stocks or bonds against which it is drawn being almost always attached to the bill of exchange. in the case of syndicate participations by large houses, the bonds may be shipped abroad privately and exchange against them drawn and sold independently, in which case, of course, no security is attached, but as a rule the bonds or stocks go with the draft. a, in new york, executes an order to buy for b in london, one hundred union pacific preferred shares on the new york stock exchange. the stock comes into a's office, and he pays for it with the proceeds of a sterling draft he draws on b. the stock itself he attaches to this sterling draft. whoever buys the draft of him gets the stock with it and keeps possession of it till the draft is presented and paid in london. . _bankers' checks or demand drafts on their correspondents abroad_ [illustration: form of bankers' check] bankers who do a foreign exchange business, keeping large balances in several european centers, are continually drawing and selling their demand drafts--"checks," they are called, or "demand"--upon these foreign balances. such checks are always to be had in great volume in the exchange market, the banker's business being to draw and sell exchange, and his degree of willingness being merely a matter of rate. there come times, of course, when bankers have every reason to leave their foreign balances undisturbed, but even at such times the bid of a high enough rate will usually bring about the drawing of bills. . _bankers' long drafts_ [illustration: form of bankers' long draft] in describing the nature of bankers' drawings of long bills, great care must be taken to differentiate between the _different kinds_ of long bills being bought and sold in the exchange market. a finance bill looks exactly the same as a long bill drawn by a banker for a commercial customer who wants to anticipate the payment abroad for an incoming shipment of wool or shellac, but the nature and origin of the two bills are radically different. the three main kinds of bankers' long bills will thus be taken up in the following order: a. _bills drawn in the regular course of business_ such is the nature of foreign exchange business that bankers engaged in it are continually drawing their sixty and ninety days' sight bills in response to their own and their customers' needs. one example which might be cited is that of the importer who has a payment to make on the other side, sixty days from now, but who, having the money on hand, wants to make it at once. under some circumstances such an importer might remit a demand draft on the basis of receiving a rebate of interest for the unexpired sixty days, but more likely he would go to a banker and buy from him a sixty days' sight draft for the exact amount of pounds he owed. the cost of such a draft--which would mature at the time the debt became due--would be less than the cost of a demand draft, the importer getting his rebate of interest out of the cheaper price he pays for the pounds he needs. prepayments of this sort are responsible every day for very large drawings of bankers' long bills. b. _long bills issued in the operation of lending foreign money_ bills of this kind represent by far the greater proportion of bankers' long bills sold in the exchange market. european bankers keep an enormous amount of floating capital loaned out in this market, in the making and renewing of which loans long bills are created as follows: a banker on the other side decides to loan out, say, £ , in the new york market. arrangements having been made, he cables his new york representative to draw ninety days' sight drafts on him for £ , , the proceeds of which drafts are then loaned out for account of the foreign house. the matter of collateral, risk of exchange and, indeed, all the other detail, will be fully described in the succeeding chapters on how bankers make money out of exchange. for the time being it is merely necessary to note that every time a loan of foreign capital is made here--and there are days when millions of pounds are so loaned out--bankers' long bills for the full amount of the loans are created and find their way into the exchange market. c. _bankers' long bills drawn for the purpose of raising money_ finance bills constitute the third kind of bankers' long exchange. in this case, again, detailed discussion must be put off until the chapter on foreign-exchange-bankers' operations, but the fact that bills of this kind constitute so important a part of the bankers' long bills to be had in the market, necessitates their classification in this place. every time a banker here starts to use his credit abroad for the purpose of raising money--and there are times when the privilege is pretty freely availed of--he does it by drawing sixty or ninety days' sight drafts on his correspondents abroad. finance bills, it may be said without question, are one of the most interesting forms of foreign exchange banking--at the same time one of the most useful and one of the most abused of privileges coming to the domestic banker by reason of his having strong banking connections abroad. chapter v the foreign exchange market the foreign exchange market is in every sense "open"--anyone with bills to buy or sell and whose credit is all right can enter it and do business on a par with anyone else. there is no place where the trading is done, no membership, license or anything of the kind. the "market," in fact, exists in name only; it is really constituted of a number of banks, dealers and brokers, with offices in the same section of the city, and who do business indiscriminately among themselves--sometimes personally, sometimes by telephone, by messenger, or by the aid of the continuously circulating exchange brokers. the system is about as follows: the larger banks and banking houses have a foreign exchange manager, or partner, taking care of that part of the business, whose office is usually so situated as to make him accessible to the brokers who come in from the outside, and whose telephoning and wiring facilities are very complete. these larger houses have no brokers or "outside" men in their employ. the manager knows very well that plenty of chance to do business, buying or selling, will be brought in to him by the brokers and that his wires keep him constantly in touch with his fellow bankers. next come the big dealers in exchange, some of whom do a regular exchange business of their own, the same as the bankers, but who also have men out on the street "trading" between large buyers and sellers of bills. such houses are necessarily closely in touch with banks, bankers, exporters, and importers all over the country, and have always large orders on hand to buy and sell exchange. some of the bills they handle they buy and use for the conduct of their own business with banks abroad, but the more important part of what they do is to deal in foreign exchange among the banks. they are known as always having on hand for sale large lines of commercial and bankers' bills, while on the other hand they are always ready to buy, at the right price. after this class of houses come the regular brokers--the independent and unattached individuals who spend their time trying to bring buyer and seller together, and make a commission out of doing it. in a market like new york the number of exchange brokers is very large. like bond-brokerage, the business requires little in the way of office facilities or capital, and is attractive to a good many persons who are willing to accept the small income to be made out of it in return for being in a business where they are independent. foreign exchange brokerage, like all other employment of the middleman, is not what it used to be. before the business became overcrowded as it is now, exchange brokers made their quarter-cent in the pound commission, and could depend on a respectable income. but nowadays brokers swarm among the foreign exchange bankers and dealers, doing business on any commission they can get, which is not infrequently as little as / of one per cent., say, $ . , for buying or selling francs , . in handling sterling, the broker is lucky if he makes his five points ( / of a cent per pound), which means that for turning over £ , he would be rewarded with the sum of $ . under such conditions it is not difficult to see how hard it is to make any money to speak of out of foreign exchange brokerage. the dealers, of course, fare much better. handling commercial bills where the question of credit affects the price, they have a chance to make more of a profit, and buying and selling bills for their own account they naturally are entitled to make more than the man without capital, who simply tries to get in between the buyer and the seller. dealing in exchange, especially for out-of-town clients, is a highly profitable business, but one which takes time, brains, experience and money to build up. dealers representing large out-of-town sellers of exchange are very much in the position of the new york agents of manufacturing companies who sell goods on commission. there being no regular market in which foreign exchange rates are made, it follows that the establishment of rates each morning and during the course of each day will be according to the supply and demand for bills. on any given morning by ten o'clock the bankers will all have received their cables quoting money and exchange rates in the foreign centers, and will all have pretty well made up their minds as to what the rate for demand bills on london ought to be. a banker, for instance, has £ , he wants to sell as early in the morning as possible, and from his foreign cables figures that . is about the right price. he offers it at that, but learns that another banker is offering exchange at . . he offers his own at that price, and somebody comes along, taking both lots and bidding . for £ , more. somebody else bids . for other large lots, refusing, however, to pay . . the market is established at that point. for the time being. a cable message from abroad may induce some banker to bid . or . , or it may cause him to throw on the market such an amount of exchange as may break the price down to . - / . rates are constantly changing, and changing at times almost from minute to minute. yet so complete is the system of telephones and brokers that any exchange manager can tell just about what is taking place in any other part of the market. not infrequently, of course, sales are made simultaneously at slightly different rates, but, as a rule, if a trade is made at . on cedar street, . will be the rate on exchange place. it is remarkable how closely each manager keeps in touch with what is going on in every part of the market. and the great number of brokers continually circulating around and trying to "get in between" for five points is in itself a powerful influence toward keeping rates exactly the same in all parts of the market at once. "posted rates" mean little with regard to current conditions, being simply the bankers' public notice of the rate at which he will sell bills for trifling amounts. exchange bankers dislike to draw small drafts and usually can be induced to do so only by the offer of a much higher rate than that current for a large amount. a banker might offer to sell you £ , at . , but if you said you wanted only £ , he would be likely to point to his posted rate and charge you . . considering that in transactions based on the best bills the banker only figures on making from $ to $ profit on each £ , , it may readily be seen why he is not anxious to sell a £ draft. as to the actual fluctuation of exchange, while it is true that rates at times rise and fall with all the violence so often displayed in the security markets, most of the time they move within a comparatively narrow range. on an ordinary business day, for instance, the change is not apt to run over fifteen points ( / of a cent per pound). in the morning, demand sterling may be at, say, . ; at noon a moderate demand for bills may carry the rate, first, to . , then to . ; and finally, perhaps, to . . on fairly large offerings of bills the market might then recede to, say, . , ending the day five points up. and that would be an ordinary day--by no means the kind of a day the exchange market always sees, but a day corresponding to a stock market session in which the market leaders rise or fall a point or so. there are times, of course, when very different conditions prevail. an unexpected rise in the bank rate in london, the announcement of a big loan or any one of many different happenings, are apt to cause a reduction in the exchange market and a bewildering movement of rates up and down. at such times a rise or fall of fifty points in sterling within half an hour is not at all out of the ordinary, while in times of panic, or when great crises impend, the fluctuations will be three or four times as great. during the latter part of october, , and in november, the exchange market fluctuated with greater violence than, perhaps, at any other time since the gold standard was firmly established. thrown completely out of gear by the premium of - / per cent. a day for currency during the panic time, the exchange markets for some time would rise and fall several cents in the pound on the same day. completely baffled by this erratic movement, many bankers temporarily withdrew entirely from the market. as to the relative importance of the different kinds of exchange, sterling, of course, occupies the most prominent position. what proportion of the total of exchange dealt in in the new york market consists of sterling it is impossible to determine, but that it is as great as the volume of all the other kinds of exchange put together can safely be said. many big dealers, indeed, make a specialty of sterling, and if they handle any other bills at all, do so only on a very small scale. as to whether francs or marks come next in volume, there is a difference of opinion. with germany our direct financial transactions are probably considerably larger than with france, but the position of paris as a banking centre makes the french capital figure prominently in many operations where the french market is not directly concerned. despite the fact that sterling easily predominates, the volume of franc and mark bills, too, is enormous. drafts on paris for from three to five million francs and on berlin for as many marks are not at all infrequently traded in in the exchange market, and at times bills for very much larger amounts have been drawn and offered for sale. bills drawn in other kinds of currency--guilders on holland, for instance, form an important part of the foreign exchange dealt in in a market like new york, but are subservient in their rate fluctuations to the movement of sterling, marks, and francs. the latter are, indeed, the three great classes of exchange, and are the basis of at least nine-tenths of all foreign exchange operations. in the following chapter will be taken up the various forms of activity of the foreign exchange department. no attempt is made to state out of which kind of business bankers make most money, but before looking into the more detailed description of how exchange business is conducted, it may be well to fix in mind the fact that it is out of the "straight" forms of foreign exchange business that the most profit is made. highly complicated operations are indulged in by some managers with more theoretical than practical sense, and money is at times made out of them, but on the whole the real money is made out of the kinds of business about to be described. to the author's certain knowledge, the exchange business of one of the largest houses in new york was for years thus limited to what might be called "straight" operations. while the profits might at times have been materially increased by the introduction of a little more of a speculative element into the business, the house made money on a large scale and avoided the losses inevitable where business is conducted along speculative lines. chapter vi how money is made in foreign exchange. the operations of the foreign department complete description of the various forms of activity of the foreign exchange department of an important firm would fill a large volume, but there are certain stock operations in foreign exchange which are the basis of most of the transactions carried out and the understanding of which ought to go a long way toward making clear what the nature of the foreign exchange department's business really is. . _selling "demand" against "demand"_ the first and most elementary form of activity is, of course, the buying of demand bills at a certain price and the selling of the banker's own demand drafts against them at a higher price. a banker finds, for instance, that he can buy john smith & co.'s sight draft for £ , , on london, at the rate of . , and that he can sell his own draft for £ , on his london banking correspondent at . . all he has to do, therefore, is to buy john smith's draft for $ , , send it to london for credit of his account there, and then draw his own draft for £ , on the newly created balance, selling it for $ , . it cost him $ , to buy the commercial draft, and he has sold his own draft against it for $ , . his gross profit on the transaction, therefore, is $ . as may be imagined, not very much money is made in transactions exactly of this kind--the one cited is taken only because it illustrates the principle. for whether the banker sends over in every mail a bewildering assortment of every conceivable form of foreign exchange to be credited to his account abroad, or whether he confines himself to remittances of the simplest kinds of bills, the idea remains exactly the same--he is depositing money to the credit of his account in order that he may have a balance on which he can draw. that is, indeed, the sum and substance of the exchange business of the foreign department of most banking houses--the maintaining of deposit accounts in banks at foreign centers on which deposit account the bank here is in a position to draw according to the wants and needs of its customers. to analyze the underlying transaction a little more closely, it is evident that the banker, in order to make a profit, must be able to buy the commercial bill at a lower rate of exchange than he can realize on his own draft. which suggests at once that the extent of the banker's profit is dependent largely upon the amount of risk he is willing to take. for the rate on commercial bills is purely a matter of the drawer's credit. the best documentary commercial exchange, drawn at sight on banks abroad or houses of the highest standing will command a rate of exchange in the open market only a little less than the banker's own draft. from which point the rate realizable on commercial bills tapers off with the credit of the house in question, some bills regularly selling a cent or a cent and a half per pound sterling below the best bills of their class. without the introduction, therefore, of the element of speculation, except as to the soundness of the bills' makers, it is possible for bankers to make widely varying profits out of the same kind of business. everything depends upon the amount of risk the banker is willing to take. the exchange market is a merciless critic of credit, and if a commercial firm's bills always sell at low rates, the presumption is strongly against its financial strength. cases very frequently occur, however, where the exchange market misjudges the goodness of a bill, placing too low a valuation upon it. in that case the banker who, individually, knows that the house in question is all right, can make considerable sums of money buying its bills at the low-going rates and selling his own exchange against them. this, evidently, is purely a matter of the exchange manager's judgment. with comparatively little risk there are banking houses which are making a full cent a pound out of a good part of the commercial exchange they handle. . _selling cables against demand exchange_ no description of a cable transfer having been given in the preceding description of different kinds of exchange, it may be explained briefly that a "cable," so-called, differs from a sight draft only in that the banker abroad who is to pay out the money is advised to do so by means of a telegraphic message instead of by a bit of paper instructing him to "pay to the order of so and so." a, in new york, wants to transfer money to b, in london. he goes to his banker in new york and deposits the amount, in dollars, with him, requesting that he (the new york banker) instruct his correspondent in london, by cable, to pay to b the equivalent in pounds. the transfer is immediate, the cable being sent as soon as the american banker receives the money on this end. to be able to instruct its correspondent in london by cable to pay out large sums at any given time, a bank here must necessarily carry a substantial credit balance abroad. it would be possible, of course, for a banker to instruct his london agent by cable to pay out a sum of money, at the same time cabling him the money to pay out, but this operation of selling cables against cables is not much indulged in--there is too little chance of profit in it. under special circumstances, however, it can be seen that a house anxious to sell a large cable and not having the balance abroad to do it, might easily provide its correspondent abroad with the funds by going out and buying a cable itself. but under ordinary circumstances foreign exchange dealers who engage in the business of selling cables carry adequate balances on the other side, balances which they keep replenishing by continuous remittances of demand exchange. which in itself constitutes an important form of foreign exchange activity and an operation out of which many large houses make a good deal of money. all the parties involved being bankers there is little risk in business of this kind; but, on the other hand, the margin of profit is small, and in order to make any money out of it, it is necessary that very large amounts of money be turned over. the average profit, for instance, realized in the new york exchange market from straight sales of cables against remittances of checks is fifteen points ( / of a cent per pound sterling). that means that on every £ , , the gross profit would be $ . . a daily turnover of £ , , therefore, would result in a gross profit of $ a day. it may seem strange that bankers should be willing to turn over so large an amount of money for so small a profit, even where the risk has been reduced to a minimum, but that is the case. very often cables are sold against balances which have been accumulated by remittance of all sorts of bills other than demand, but there are several large american institutions whose foreign exchange business consists principally of the regulation selling of cables against remittances of demand bills. by reason of their large deposits they are in a position to carry full balances abroad, while in the course of their regular business a good deal of sight exchange of high class comes across their counters. all the necessary elements for doing the business being there, it only remains for such an institution to employ a man capable of directing the actual transactions. the risk is trifling, the advertisement is world-wide, the accommodation of customers is being attended to, and there is considerable actual money profit to be made. the business in many respects is thus highly desirable. . _selling "demand" bills against remittances of long bills_ if there is a stock operation in the conduct of a foreign exchange business it is the selling by bankers of their demand bills of exchange against remittances of commercial and bankers' long paper. bills of the latter class, as has been pointed out, make up the bulk of foreign exchange traded in, and its disposal naturally is the most important phase of foreign exchange business. for after all, all cabling, arbitraging in exchange, drawing of finance bills, etc., is only incidental. what the foreign exchange business really is grounded on is the existence of commercial bills called into existence by exports of merchandise. there are houses doing an extensive exchange business who never buy commercial long bills, but the operations they carry on are made possible only by the fact that most other houses do. a foreign exchange department which does not handle this kind of exchange is necessarily on the "outside" of the real business--is like a bond broker who does not carry bonds with his own money but merely trades in and out on other people's operations. buying and remitting commercial long bills is, however, no pastime for an inexperienced man. entirely aside from the question of rate, and profit on the exchange end of the transaction, there must be taken into consideration the matter of the credit of the drawer and the drawee, the salability of the merchandise specified in the bill of lading, and a number of other important points. this question of credit, underlying to so great a degree the whole business of buying commercial long paper, will be considered first. the completely equipped exchange department has at its disposal all the machinery necessary for investigating expeditiously the standing and financial strength of any firm whose bills are likely to be offered in the exchange market. such facilities are afforded by subscription to the two leading mercantile agencies, but in addition to this, the experienced exchange manager has at his command private sources of information which can be applied to practically every firm engaged in the export business. the larger banks, of course, all have a regular credit man, one of whose chief duties nowadays is to assist in the handling of the bank's foreign exchange business. so perfect does the organization become after a few years of the actual transaction of a foreign exchange business that the standing of practically any bill taken by a broker into a bank, for sale, can be passed upon instantly. new firms come into existence, of course, and have to be fully investigated, but the experienced manager of a foreign department can tell almost offhand whether he wants a bill of any given name or not. where documents accompany the draft and the merchandise is formally hypothecated to the buyer of the draft, it might not be thought that the standing of the drawer would be of such great importance. possession of the merchandise, it is true, gives the banker a certain form of security in case acceptance of the bill is refused by the parties on whom it is drawn or in case they refuse to pay it when it comes due, but the disposal of such collateral is a burdensome and often expensive operation. the banker in new york who buys a sixty-day draft drawn against a shipment of butter is presumably not an expert on the butter market and if he should be forced to sell the butter, might not be able to do so to the fullest possible advantage. employment of an expert agent is an expensive operation, and, moreover, there is always the danger of legal complication arising out of the banker's having sold the collateral. it is desirable in every way that if there is to be any trouble about the acceptance or payment of a draft, the banker should keep himself out of it. a concrete illustration of the dangers attendant upon the purchase of commercial long bills from irresponsible parties is to be found in what happened a few years ago to a prominent exchange house in new york. this house had been buying the bills of a certain firm for some little time, and everything had gone well. but one day acceptance of a bill for £ , was refused by the party abroad, and the news cabled that the bill of lading was a forgery and that no such shipment had ever been made. wiring hurriedly to the inland city in which was located the firm which drew the bill, the new york bank received the reply that both partners had decamped. what had happened was that, about to break up, the "firm" had drawn and sold several large bills of exchange, with forged documents attached, received their money for them, and then disappeared. neither of them was ever apprehended, and the various bankers who had taken the exchange lost the money they had paid for it. forgery of the bill of lading in this case had been a comparatively easy matter, the shipment purporting to have been made from an obscure little cotton town in the south, the signature of whose railroad agent was not at all known. this forgery is only one example of the trickery possible and the extreme care which is necessary in the purchase of bills of this kind. and not only must the standing of the drawer be taken into consideration, but the standing of the drawee is a matter of almost equal importance--after the "acceptance" of the bill, the parties accepting it being equally liable with its maker. the nature of the merchandise, furthermore, and its marketability are further considerations of great importance. cotton, it will readily appear, is an entirely different sort of collateral from clocks, or some specialty in which the market may vary widely. the banker who holds a bill of lading for cotton shipped to liverpool can at any moment tell exactly what he can realize on it. in the case of many kinds of articles, however, the invoice value may differ widely from the realizable value, and if the banker should ever be forced to sell the merchandise, he might have to do so at a big loss. returning to the actual operation of selling bankers' demand against remittances of long bills, it appears that the successive steps in an actual transaction are about as follows: the banker in new york having ascertained by cable the rate at which bills "to arrive" in london by a certain steamer will be discounted, buys the bills here and sends them over, with instructions that they be immediately discounted and the proceeds placed to his credit. on this resulting balance he will at once draw his demand draft and sell it in the open market. if, from selling this demand draft, he can realize more dollars than it cost him in dollars to put the balance over there, he has made a gross profit of the difference. to illustrate more specifically: a banker has bought, say, a £ , ninety days' sight prime draft, on london, documents deliverable on acceptance. this he has remitted to his foreign correspondent, and his foreign correspondent has had it stamped with the required "bill-stamp," has had it discounted, and after having taken his commission out of the proceeds, has had them placed to the credit of the american bank. in all this process the bill has lost weight. it arrived in london as £ , , but after commissions, bill-stamps and ninety-three days' discount have been taken out of it, the amount is reduced well below £ , . the _net_ proceeds going to make up the balance on which the american banker can draw his draft are, perhaps, not over £ . he paid so-and-so many dollars for the £ , ninety-day bill, originally. if he can realize that many dollars by selling a demand draft for £ he is even on the transaction. no attempt will be made in this little book to present the tables by which foreign exchange bankers figure out profit possibilities in operations of this kind. the terms obtainable from foreign correspondents vary so widely according to the standing and credit of the house on this side and are governed by so many different influences that a manager must work out each transaction he enters according to the conditions by which he, particularly, and his operations are governed. such calculations, moreover, are all built up along the general line of the scheme presented below: assume that the rate for demand bills is . , that discount in london is - / per cent, and that the amount of the long bill remitted for discount and credit of proceeds is £ . _the various expenses are as follows:_ commission charged by the banker in london / per cent. $ . discount, days ( days of grace) at - / per cent. . english government bill stamp / per cent. . ------ $ . total charges on the ninety days' sight £ bill amount to $ . . on one pound, therefore, the charge would be $. . from which it is evident that each pound of a ninety-day bill, under the conditions given, is worth $. (= . cents) less than each pound in a bankers' demand bill. from which it is evident that if such a demand bill were sold at . against a ninety-day bill bought at . (found by subtracting . cents from cents) the remitting banker would come out even in the transaction. the foregoing has been introduced at the risk of confusing the lay reader, on the idea that all the various calculations regarding the drawing of "demand" against the remitting of long bills are founded on the same general principle, and that where it is desired to go more deeply into the matter the correct conditions can be substituted. discount, of course, varies from day to day, "payment" bills do not go through the discount market at all, but are "rebated," the commissions charged different bankers and by different bankers vary widely. under the circumstances the value of presenting a lot of hard-and-fast calculations worked out under any given set of conditions is extremely doubtful. as to the profit on business of this kind it can be said that the average, where the best bills are used, runs not much over twenty points (one-fifth of a cent per pound sterling). from that, of course, profits actually made run up as high as one cent or even two cents per pound, according to the amount of risk involved. the buying of cheap bills is, however, a most precarious operation. one single mistake, and the whole profit of months may be completely wiped out. the proposition is a good deal like lending money on insecure collateral, or like lending to doubtful firms. there are banking houses which do it, have been doing it for years, and by reason of an intuitive feeling when there is trouble ahead have been able to avoid heavy losses. such business, however, can hardly be called high-class banking practice. . _the operation of making foreign loans_ in its influence upon the other markets, there is perhaps no more important phase of foreign exchange than the making of foreign loans in the american market. how great is the amount of foreign capital continually loaned out in this country has been several times suggested in previous pages. the mechanics of these foreign loaning operations, the way in which the money is transferred to this side, etc., will now be taken up. to begin at the very beginning, consider how favorable a field is the american market for the employment of europe's spare banking capital. almost invariably loaning rates in new york are higher than they are in london or paris. this is due, perhaps, to the fact that industry here runs on at a much faster pace than in england or france, or it may be due to the fact that we are a newer country, that there is no such accumulated fund of capital here as there is abroad. such a hypothesis for our own higher interest rates would seem to be supported by the fact that in germany, too, interest is consistently on a higher level than in london or paris, germany, like ourselves, being a vigorous industrial nation without any very great accumulated fund of capital saved by the people. but whatever the reason, the fact remains that in new york money rates are generally on so much more attractive a basis than they are abroad that there is practically never a time when there are not hundreds of millions of dollars of english and french money loaned out in this market. to go back no further than the present decade, it will be recalled how great a part foreign floating capital played in financing the ill-starred speculation here which culminated in the panic of may , . europe in the end of had gone mad over our industrial combinations and had shovelled her millions into this market for the use of our promoters. what use was made of the money is well known. the instance is mentioned here, with others which follow, only to show that all through the past ten years london has at various times opened her reservoirs of capital and literally poured money into the american market. even the experience of did not daunt the foreign lenders, and in fresh amounts of foreign capital, this time mostly german, were secured by our speculators to push along the famous "gates boom." that time, however, the lenders' experience seemed to discourage them, and until there was not a great deal of foreign money, relatively speaking, loaned out here. in the summer of that year, chiefly through mr. harriman's efforts, english and french capital began to come largely into the new york market--made possible, indeed, the "harriman market of ." this was the money the terror-stricken withdrawal of which during most of made the panic as bad as it was. after the panic, most of what was left was withdrawn by foreign lenders, so that in the middle of the market here was as bare of foreign money as it has been in years. returning american prosperity, however, combined with complete stagnation abroad, set up another hitherward movement of foreign capital which, during the spring and summer of , attained amazing proportions. by the end of the summer, indeed, more foreign capital was employed in the american market than ever before in the country's financial history. to take up the actual operation of loaning foreign money in the american market, suppose conditions to be such that an english bank's managers have made up their minds to loan out £ , in new york--not on joint account with the american correspondent, as is often done, but entirely independently. included in the arrangements for the transaction will be a stipulation as to whether the foreign bank loaning the money wants to loan it on the basis of receiving a commission and letting the borrower take the risk of how demand exchange may fluctuate during the life of the loan, or whether the lender prefers to lend at a fixed rate of interest, say six per cent., and himself accept the risk of exchange. what the foregoing means will perhaps become more clear if it is realized that in the first case the american agent of the foreign lender draws a ninety days' sight sterling bill for, say, £ , on the lender, and hands the actual bill over to the parties here who want the money. upon the latter falls the task of selling the bill, and, ninety days later, when the time of repayment comes, the duty of returning a _demand_ bill for £ , , plus the stipulated commission. in the second kind of a loan the borrower has nothing to do with the exchange part of the transaction, the american banking agent of the foreign lender turning over to the borrower not a sterling draft but the dollar proceeds of a sterling draft. how the exchange market fluctuates in the meantime--what rate may have to be paid at the end of ninety days for the necessary demand draft--concerns the borrower not at all. he received dollars in the first place, and when the loan comes due he pays back dollars, plus four, five or six per cent., as the case may be. what rate has to be paid for the demand exchange affects the banker only, not the borrower. loans made under the first conditions are known as sterling, mark, or franc loans; the other kind are usually called "currency loans." at the risk of repetition, it is to be said that in the case of sterling loans the borrower pays a flat commission and takes the risk of what rate he may have to pay for demand exchange when the loan comes due. in the case of a currency loan the borrower knows nothing about the foreign exchange transaction. he receives dollars, and pays them back with a fixed rate of interest, leaving the whole question and risk of exchange to the lending banker. to illustrate the mechanism of one of these sterling loans. suppose the london bank, ltd., to have arranged with the new york bank to have the latter loan out £ , in the new york market. the new york bank draws £ , of ninety days' sight bills, and, satisfactory collateral having been deposited, turns them over to the brokerage house of smith & jones. smith & jones at once sell the £ , , receiving therefor, say, $ , . the bills sold by smith & jones find their way to london by the first steamer, are accepted and discounted. ninety days later they will come due and have to be paid, and ten days prior to their maturity the new york bank will be expecting smith & jones to send in a _demand_ draft for £ , , plus three-eighths per cent. commission, making £ additional. this £ , , less its commission for having handled the loan, the new york bank will send to london, where it will arrive a couple of days before the £ , of ninety days' sight bills originally drawn on the london bank, ltd., mature. what each of the bankers concerned makes out of the transaction is plain enough. as to what smith & jones' ninety-day loan cost them, in addition to the flat three-eighths per cent. they had to pay, that depends upon what they realize from the sale of the ninety days' sight bills in the first place and secondly on what rate they had to pay for the demand bill for £ , . exchange may have gone up during the life of the loan, making the loan expensive, or it may have gone down, making the cost very little. plainly stated, unless they secured themselves by buying a "future" for the delivery of a £ , demand bill in ninety days at a fixed rate, messrs. smith & jones have been making a mild speculation in foreign exchange. if the same loan had been made on the other basis, the new york bank would have turned over to smith & jones not a _sterling bill_ for £ , , but the _dollar proceeds_ of such a bill, say a check for $ , . at the end of ninety days smith & jones would have had to pay back $ , , plus ninety days' interest at six per cent, $ , , all of which cash, less commission, the new york bank would have invested in a demand bill of exchange and sent over to the london bank, ltd. whatever more than the £ , needed to pay off the maturing nineties such a demand draft amounted to, would be the london bank, ltd.'s, profit. from all of which it is plainly to be seen that when the london bankers are willing to lend money here and figure that the exchange market is on the down track, they will insist upon doing their lending on the "currency loan" basis--taking the risk of exchange themselves. conversely, when loaning operations seem profitable but rates seem to be on the upturn, lenders will do their best to put their money out in the form of "sterling loans." bankers are not always right in their views, by any means, but as a general principle it can be said that when big amounts of foreign money offered in this market are all offered on the "sterling loan" basis, a rising exchange market is to be expected. as to the collateral on these foreign loans, it is evident that there is as much chance for different ways of looking at different stocks as there is in regular domestic loaning operations. not only does the standing of the borrower here make a difference, but there are certain securities which certain banks abroad favor, and others, perhaps just as good, with which they will have nothing to do. excepting the case of special negotiation, however, it may be said that the collateral put up the case of foreign loans in this market is of a very high order. three years ago this could hardly have been said, but one of the many beneficial effects of the panic was to greatly raise the standard of the collateral required by foreign lenders in this market. it used formerly to be more a case of the standing of the borrower. nowadays the collateral is usually deposited here in care of a banker or trust company. from what has been said about the mechanism of making these foreign loans, it is evident that no transfer of cash actually takes place, and that what really happens is that the foreign banking institution lends out its credit instead of its cash. for in no case is the lender required to put up any money. the drafts drawn upon him are at ninety days' sight, and all he has to do is to write the word "accepted," with his signature, across their face. later they will be presented for actual payment, but by that time the "cover" will have reached london from the banker in america who drew the "nineties," and the maturing bills will be paid out of that. the foreign lender, in other words, is at no stage out of any actual capital, although it is true, of course, that he has obligated himself to pay the drafts on maturity, by "accepting" them. where, then, is the limit of what the foreign bankers can lend in the new york market? on one consideration only does that depend--the amount of accepted long bills which the london discount market will stand. for all the ninety days' sight bills drawn in the course of these transfers of credit must eventually be discounted in the london discount market, and when the london discount market refuses to absorb bills of this kind a material check is naturally administered to their creation. too great drawings of loan-bills, as the long bills drawn to make foreign loans are called, are quickly reflected in a squeamish london discount market. it needs only the refusal of the bank of england to re-discount the paper of a few london banks suspected of having "accepted" too great a quantity of american loan-bills, to make it impossible to go on loaning profitably in the new york market. in order to make loans, long bills have to be drawn and sold to somebody, and if the discount market in london will take no more american paper, buyers for freshly-created american paper will be hard to find. to get back to the part foreign loaning operations play in the foreign exchange market here, it is plain that as no actual money is put up, the business is attractive and profitable to the bank having the requisite facilities and the right foreign connection. it means the putting of the bank's name on a good deal of paper, it is true, but only on the deposit of entirely satisfactory collateral and only in connection with the assuming of the same obligation by a foreign institution of high standing. there are few instances where loss in transacting this form of business has been sustained, while the profits derived from it are very large. as to what the foreign department of an american bank makes out of the business, it may be said that that depends very largely upon whether the bank here acts merely as a lending agent or whether the operation is for "joint account," both as to risk and commission. in the former case (and more and more this seems to be becoming the basis on which the business is done) both the american and the european bank stands to make a very fair return--always considering that neither is called upon to put up one real dollar or pound sterling. take, for instance, the average sterling loan made on the basis of the borrower taking all the risk of exchange and paying a flat commission of three-eighths of one per cent. for each ninety days. that means that each bank makes three-sixteenths of one per cent. for every ninety days the loan runs--the american bank for simply drawing its ninety-day bills of exchange and the english bank for merely accepting them. naturally, competition is keen, american banking houses vying with each other both for the privilege of acting as agents of the foreign banks having money to lend, and of going into joint-account loaning operations with them. three-sixteenths or perhaps one-quarter of one per cent. for ninety days (three-quarters of one per cent. and one per cent. annually) may not seem much of an inducement, but considering the fact that no real cash is involved, this percentage is enough to make the biggest and best banking houses in the country go eagerly after the business. . _the drawing of finance-bills_ approaching the subject of finance-bills, the author is well aware that concerning this phase of the foreign exchange business there is wide difference of opinion. finance bills make money, but they make trouble, too. their existence is one of the chief points of contact between the foreign exchange and the other markets, and one of the principal reasons why a knowledge of foreign exchange is necessary to any well-rounded understanding of banking conditions. strictly speaking, a finance-bill is a long draft drawn by a banker of one country on a banker in another, sometimes secured by collateral, but more often not, and issued by the drawing banker for the purpose of raising money. such bills are not always distinguishable from the bills a banker in new york may draw on a banker in london in the operation of lending money for him, but in nature they are essentially different. the drawing of finance-bills was recently described by the foreign exchange manager of one of the biggest houses in new york, during the course of a public address, as a "scheme to raise the wind." whether or not any collateral is put up, the whole purpose of the drawing of finance-bills is to provide an easy way of raising money without the banker here having to go to some other bank to do it. the origin of the ordinary finance-bill is about as follows: a bank here in new york carries a good balance in london and works a substantial foreign exchange business in connection with the london bank where this balance is carried. a time comes when the new york banking house could advantageously use more money. arrangements are therefore made with the london bank whereby the london bank agrees to "accept" a certain amount of the american banker's long bills, for a commission. in the course of his regular business, then, the american banker simply draws that many more pounds sterling in long bills, sells them, and for the time being has the use of the money. in the great majority of cases no extra collateral is put up, nor is the london bank especially secured in any way. the american banker's credit is good enough to make the english banker willing, for a commission, to "accept" his drafts and obligate himself that the drafts will be paid at maturity. naturally, a house has to be in good standing and enjoy high credit not only here but on the other side before any reputable london bank can be induced to "accept" its finance paper. the ability to draw finance-bills of this kind often puts a house disposed to take chances with the movement of the exchange market into line for very considerable profit possibilities. suppose, for instance, that the manager of a house here figures that there is going to be a sharp break in foreign exchange. he, therefore, sells a line of ninety-day bills, putting himself technically short of the exchange market and banking on the chance of being able to buy in his "cover" cheaply when it comes time for him to cover. in the meantime he has the use of the money he derived from the sale of the "nineties" to do with as he pleases, and if he has figured the market aright, it may not cost him any more per pound to buy his "cover" than he realized from the sale of the long bills. in which case he would have had the use of the money for the whole three months practically free of interest. it is plain speculating in exchange--there is no getting away from it, and yet this practice of selling finance-bills gives such an opportunity to the exchange manager shrewd enough to read the situation aright to make money, that many of the big houses go in for it to a large extent. during the summer, for instance, if the outlook is for big crops, the situation is apt to commend itself to this kind of operation. money in the summer months is apt to be low and exchange high, affording a good basis on which to sell exchange. then, if the expected crops materialize, large amounts of exchange drawn against exports will come into the market, forcing down rates and giving the operator who has previously sold his long bills an excellent chance to cover them profitably as they come due. about the best example of how exchange managers can be deceived in their forecasts is afforded by the movement of exchange during the summer and fall of . impelled thereto by the brilliant crop prospects of early summer, foreign exchange houses in new york drew and sold finance-bills in enormous volume. the corn crop was to run over three billion bushels, affording an unprecedented exportable surplus--wheat and cotton were both to show record-breaking yields. but instead of these promises being fulfilled, wheat and corn showed only average yields, while the cotton crop turned out decidedly short. the expected flood of exchange never materialized. on the contrary, rise in money rates abroad caused such a paying off of foreign loans and maturing finance bills that foreign exchange rose to the gold export point and "covering" operations were conducted with extreme difficulty. in the foreign exchange market the autumn of will long be remembered as a time when the finance-bill sellers had administered to them a lesson which they will be a good while in forgetting. . _arbitraging in exchange_ arbitraging in exchange--the buying by a new york banker, for instance, through the medium of the london market, of exchange drawn on paris, is another broad and profitable field for the operations of the expert foreign exchange manager. take, for example, a time when exchange on paris is more plentiful in london than in new york--a shrewd new york exchange manager needing a draft on paris might well secure it in london rather than in his home city. the following operation is only one of ten thousand in which exchange men are continually engaged, but is a representative transaction and one on which a good deal of the business in the arbitration of exchange is based. suppose, for instance, that in new york, demand exchange on paris is quoted at five francs seventeen and one-half centimes per dollar, demand exchange on london at $ . per pound, and that, _in london_, exchange on paris is obtainable at twenty-five francs twenty-five centimes per pound. the following operation would be possible: sale by a new york banker of a draft on paris, say, for francs , , at . - / , bringing him in $ , . . purchase by same banker of a draft on london for £ , , at . , costing him $ , . instructions by the american banker to his london correspondent to buy a check on paris for francs , in london, and to send it over to paris for the credit of his (the american banker's account). such a draft, at . would cost just £ , . the circle would then be complete. the american banker who originally drew the francs , on his paris balance would have replaced that amount in his paris balance through the aid of his london correspondent. the london correspondent would have paid out £ , from the american banker's balance with him, a draft for which amount would come in the next mail. all parties to the transaction would be satisfied--especially the banker who started it, for whereas he paid out $ , for the £ , draft on london, he originally took in $ , . for the draft he sold on paris. between such cities as have been used in the foregoing illustrations rates are not apt to be wide enough apart to afford any such actual profit, but the chance for arbitraging does exist and is being continuously taken advantage of. so keenly, indeed, are the various rates in their possible relation to one another watched by the exchange men that it is next to impossible for them to "open up" to any appreciable extent. the chance to make even a slight profit by shifting balances is so quickly availed of that in the constant demand for exchange wherever any relative weakness is shown, there exists a force which keeps the whole structure at parity. the ability to buy drafts on paris relatively much cheaper at london than at new york, for instance, would be so quickly taken advantage of by half a dozen watchful exchange men that the london rate on paris would quickly enough be driven up to its right relative position. it is impossible in this brief treatise to give more than a suggestion of the various kinds of exchange arbitration being carried on all the time. experts do not confine their operations to the main centers, nor is three necessarily the largest number of points which figure in transactions of this sort. elaborate cable codes and a constant use of the wires keep the up-to-date exchange manager in touch with the movement of rates in every part of europe. if a chance exists to sell a draft on london and then to put the requisite balance there through an arbitration involving paris, brussels, and amsterdam, the chances are that there will be some shrewd manager who will find it out and put through the transaction. some of the larger banking houses employ men who do little but look for just such opportunities. when times are normal, the margin of profit is small, but in disturbed markets the parities are not nearly so closely maintained and substantial profits are occasionally made. the business, however, is of the most difficult character, requiring not only great shrewdness and judgment but exceptional mechanical facilities. . _dealing in "futures_" as a means of making--or of losing--money, in the foreign exchange business, the dealing in contracts for the future delivery of exchange has, perhaps, no equal. and yet trading in futures is by no means necessarily speculation. there are at least two broad classes of legitimate operation in which the buying and selling of contracts of exchange for future delivery plays a vital part. take the case of a banker who has bought and remitted to his foreign correspondent a miscellaneous lot of foreign exchange made up to the extent of one-half, perhaps, of commercial long bills with documents deliverable only on "payment" of the draft. that means that if the whole batch of exchange amounted to £ , , £ , of it might not become an available balance on the other side for a good while after it had arrived there--not until the parties on whom the "payment" bills were drawn chose to pay them off under rebate. the exchange rate, in the meantime, might do almost anything, and the remitting banker might at the end of thirty or forty-five days find himself with a balance abroad on which he could sell his checks only at very low rates. to protect himself in such case the banker would, at the time he sent over the commercial exchange, sell his own demand drafts for future delivery. suppose that he had sent over £ , of commercial "payment" bills. unable to tell exactly when the proceeds would become available, the banker buying the bills would nevertheless presumably have had experience with bills of the same name before and would be able to form a pretty accurate estimate as to when the drawees would be likely to "take them up" under rebate. it would be reasonably safe, for instance, for the banker to sell futures as follows: £ , deliverable in fifteen days; £ , deliverable in thirty days, £ , deliverable in from forty-five to sixty days. such drafts on being presented could in all probability be taken care of out of the prepayments on the commercial bills. by figuring with judgment, foreign exchange bankers are often able to make substantial profits on operations of this kind. an exchange broker comes in and offers a banker here a lot of good "payment" commercial bills. the banker finds that he can sell his own draft for delivery at about the time the commercial drafts are apt to be paid under rebate, at a price which means a good net profit. the operation ties up capital, it is true, but is without risk. not infrequently good commercial "payment" bills can be bought at such a price and bankers' futures sold against them at such a price that there is a substantial profit to be made. the other operation is the sale of bankers' futures, not against remittances of actual commercial exchange but against exporters' futures. exporters of merchandise frequently quote prices to customers abroad for shipment to be made in some following month, to establish which fixed price the exporter has to fix a rate of exchange definitely with some banker. "i am going to ship so-and-so so many tubs of lard next may," says the exporter to the banker, "the drafts against them will amount to so-and-so-much. what rate will you pay me for them--delivery next may?" the banker knows he can sell his own draft for may delivery for, say, . . he bids the exporter . - / for his lard bills, and gets the contract. without any risk and without tying up a dollar of capital the banker has made one-half cent per pound sterling on the whole amount of the shipment. in may, the lard bills will come in to him, and he will pay for them at a rate of . - / , turning around and delivering his own draft against them at . . selling futures against futures is not the easiest form of foreign exchange business to put through, but when a house has a large number of commercial exporters among its clients there are generally to be found among them some who want to sell their exchange for future delivery. as to the buyer of the banker's "future," such a buyer might be, for instance, another banker who had sold finance-bills and wants to limit the cost of "covering" them. the foregoing examples of dealing in futures are merely examples of how futures may figure in every-day exchange transactions. like operations in exchange arbitrage, there is no limit to the number of kinds of business in which "futures" may figure. they are a much abused institution, but are a vital factor in modern methods of transacting foreign exchange business. the foregoing are the main forms of activity of the average foreign department, though there are, of course, many other ways of making money out of foreign exchange. the business of granting commercial credits, the exporting and importing of gold and the business of international trading in securities will be taken up separately in following chapters. chapter vii gold exports and imports gold exports and imports, while not constituting any great part of the activity of the average foreign department, are nevertheless a factor of vital importance in determining the movement of exchange. the loss of gold, in quantity, by some market may bring about money conditions resulting in very violent movements of exchange; or, on the other hand, such movements may be caused by the efforts of the controlling financial interests in some market to attract gold. the movement of exchange and the movement of gold are absolutely dependent one on the other. considering broadly this question of the movement of gold, it is to be borne in mind that by far the greater part of the world's production of the precious metal takes place in countries ranking very low as to banking importance. the united states, is indeed, the only first-class financial power in which any very considerable proportion of the world's gold is produced. excepting the ninety million dollars of gold produced in the united states in , nearly all of the total production of million dollars for that year was taken out of the ground in places where there exists but the slightest demand for it for use in banking or the arts. that being the case, it follows that there is to be considered, first, the _primary_ movement of nearly all the gold produced--the movement from the mines to the great financial centers. considering that over half the gold taken out of the ground each year is mined in british possessions, it is only natural that london should be the greatest distributive point. such is the case. ownership of the mines which produce most of the world's gold is held in london, and so it is to the british capital that most of the world's gold comes after it has been taken out of the ground. by every steamer arriving from australia and south africa great quantities of the metal are carried to london, there to be disposed of at the best price available. for raw gold, like raw copper or raw iron, has a price. under the english banking law, it is true, the bank of england _must_ buy at the rate of seventy-seven shillings nine pence per ounce all the gold of standard (. - / ) fineness which may be offered it, but that establishes merely a minimum--there is no limit the other way to which the price of the metal may not be driven under sufficiently urgent bidding. the distribution of the raw gold is effected as follows: each monday morning there is held an auction at which are present all the representatives of home or foreign banks who may be in the market for gold. these representatives, fully apprised of the amount of the metal which has arrived during the preceding week and which is to be sold, know exactly how much they can bid. the gold, therefore, is sold at the best possible price, and finds its way to that point where the greatest urgency of demand exists. it may be paris or berlin, or it may be the bank of england. according as the representatives present at the auction may bid, the disposition of the gold is determined. the _primary_ disposition. for the fact that berlin, for instance, obtains the bulk of the gold auctioned off on any given monday by no means proves that the gold is going to remain for any length of time in berlin. for some reason, in that particular case, the representatives of the german banks had been instructed to bid a price for the gold which would bring it to berlin, but the conditions furnishing the motive for such a move may remain operative only a short time and the need for the metal pass away with them. quarterly settlements in berlin or the flotation of a russian loan in paris, for instance, might be enough to make the german and french banks' representatives go in and bid high enough to get the new gold, but with the passing of the quarter's end or the successful launching of the loan would pass the necessity for the gold, and its _re_-distribution would begin. in other words, both the primary movement of gold from the mines and the secondary movement from the distributive centers are merely temporary and show little as to the final lodgment of the precious metal. what really counts is exchange conditions; it is along the lines of the favorable exchange that the great currents of gold will inevitably flow. for example, if a draft for pounds sterling drawn on london can be bought here at a low rate of exchange, anything in london that the american consumer may want to possess himself of can be bought cheaper than when exchange on london is high. the price of a hat in london is, say, £ . with exchange at . it will cost a buyer in new york only $ . to buy that hat; if exchange were at . , it would cost him $ . . similarly with raw copper or raw gold or any other commodity. given a low rate of exchange on any point and it is possible for the outside markets to buy cheaply at that point. and a very little difference in the price of exchange makes a very great difference so far as the price of gold is concerned. as stated in a previous chapter, a new gold sovereign at any united states assay office can be converted into $ . , so that if it cost nothing to bring a new sovereign over here, no one holding a draft for a pound (a sovereign is a gold pound) would sell it for less than $ . , but would simply order the sovereign sent over here and cash it in for $ . himself. always assuming that it cost nothing to bring over the actual gold, every time it became possible to buy a draft for less than $ . , some buyer would snatch at the chance. such a case, with £ as the amount of the draft and the assumption of no charge for importing the gold, is, of course, mentioned merely for purposes of illustration. from it should, however, become clear the whole idea underlying gold imports. a new sovereign laid down in new york is worth, at any time, $ . . if it is possible to get the sovereign over here for less than that--by paying $ . for a £ draft on london, for instance, and three cents for charges, $ . in all--it is possible to bring the sovereign in and make money doing it. whether the gold imported is in the form of sovereigns or whether it consists of bars makes not the slightest difference so far as the principle of the thing is concerned. a sovereign is at all times worth just so and so much at any united states assay office, and an ounce of gold of any given fineness is worth just so and so much, too, regardless of where it comes from. so that in importing gold, whether the metal be in the form of coin or bars, the great thing is the cheapness with which it can be secured in some foreign market. if it can be secured so cheaply in london, for example, that the price paid for each pound (sovereign) of the draft, plus the charge of bringing in each sovereign, is less than what the sovereign can be sold for when it gets here, it will pay to buy english gold and bring it in. exactly the same principle applies where the question is of importing gold bars instead of sovereigns, except that bars cannot be bought in london at a fixed rate. that, however, in no way affects the underlying principle that in importing gold the profit is made by selling the gold here for more dollars than the combined dollar-cost of the draft on london with which the gold is bought and the charges incurred in importing the metal. to illustrate, if the draft cost $ , and the charges amounted to $ , , the gold (whether in the form of sovereigns, eagles or bars) would have to be sold here for at least $ , , , to have the importer come out even. with exports, the theory of the thing is to sell a draft on, say, london, for more dollars than the dollar-cost of enough gold, plus charges, to meet the draft. as will be seen from the figures of an actual shipment, given further on, the banker who ships gold gets the money to buy the gold from the treasury here, by selling a sterling draft on london. suppose, for example, a new york banker wants to create a £ , balance in london. figuring how many ounces of gold (at the buying price in london) will give him the £ , credit, he buys that much gold and sends it over. suppose the combined cost of the gold and the charge for shipping it amounts to $ , . if the banker here can sell a £ , draft against it at . , he will just get back the $ , he laid out originally and be even on the transaction. before passing from the theory to the practice of gold exports and imports, there is to be considered the fact that bar gold sells in london at a constantly varying price, while in new york it sells at a definitely fixed price. in new york an ounce of gold of any given fineness can always be sold for the same amount of dollars and cents, but in london the amount of shillings and pence into which it is convertible varies constantly. so that a new york banker figuring on bringing in bar gold from london has to take carefully into account what the price per ounce of bar gold over there is. sovereigns are seldom imported because they are secured in london not by weight but by face value,--even if the sovereigns have lost weight they cost just as many pounds sterling to secure. where the new york banker is exporting gold, on the other hand, the price at which bar gold is selling in london is just as important as where he is importing. for the price at which the gold can be disposed of when it gets to london determines into how many pounds sterling it can be converted. these matters of the cost of gold in one market and the crediting of the gold in some other market are not the easiest thing to grasp at first thought, but will perhaps become quite clear by reference to the accompanying calculation of actual gold export and gold import transactions. all the way through it must be remembered that the figures of such calculations can never be absolute--that insurance and freight charges vary and that different operations are conducted along different lines. the two operations described embody, however, the principle of both the outward and inward movement of bar gold at new york. _export of bars to london_ in the transaction described below about a quarter of a million dollars' worth of bar gold is shipped to london, the money to pay for the gold being raised by the drawing and selling of a demand draft on london. assuming that the draft is drawn and the gold shipped at the same time, the draft will be presented fully three days before the gold is credited, that being the time necessary for assaying, weighing, etc. in other words, there will be an "overdraft" for at least three days, interest on which will have to be figured as a part of the cost of the operation. following is the detailed statement: , - / ounces bar gold (. fine) purchased from u.s. treasury or sub-treasury at $ . per ounce $ , assay office charge ( cents per $ ) cartage and packing freight ( / per cent.) insurance ( / per cent.) interest on overdraft in london (from time draft has to be paid until the gold is credited) days at per cent. --------- total expense of buying and shipping the gold $ , , - / ounces of gold credited in london at shillings - / pence £ , draft on london for £ , , sold by shipper of the gold, at . $ , in the transaction described above, the "overdraft" caused by the inevitable delay in assaying and weighing the gold on its arrival in london lasted for three days, the american banker being charged interest at the rate of four per cent. . being the rate at which the banker exporting the gold was able to sell his demand draft at the time, was, under those conditions, the "gold export point." in this particular operation, which was undertaken purely for advertising purposes, the shipper of the gold came out exactly even. suppose, however, that he had been able to sell his draft, against the gold shipped, at . instead of . - / . that would have meant twenty-five points (one-quarter cent per pound) more, which, on £ , , would have amounted to $ . . this question of the profit on gold exports is both interesting and, because it has a strong bearing at times on the question of whether or not to ship gold, important. no rule can be laid down as to what profit bankers expect to make on shipments. if, for instance, a banker owes £ , abroad himself and finds it cheaper to send gold than to buy a bill, the question of profit does not enter at all. then, again, many and many an export transaction is induced by ulterior motives--it may be for the sake of advertising, or for stock market purposes, or because some correspondent abroad needs the gold and is willing to pay for it. any one of these or many like reasons may explain the phenomenon, occasionally seen, of gold exports at a time when conditions plainly indicate that the exporter is shipping at a loss. as a rule, however, when exchange is scarce and the demand so great that bankers who do not themselves owe money abroad see a chance to supply the demand for exchange by shipping gold and drawing drafts against it, the profit amounts to anywhere from $ to $ , on each million dollars shipped--for less than the first amount named it is hardly worth while to go into the transaction at all; on the other hand, conditions have to be pretty much disordered to force exchange to a point where the larger amount named can be earned. _import of bars from london_ turning now to the discussion of the conditions under which gold is imported, it will appear from the following calculation that interest plays a much more important part in the case of gold imports than in the case of exports. with exports, as has been shown, the interest charge is merely on a three days' overdraft, but in the case of imports the banker who brings in the gold loses interest on it for the whole time it is in transit and for a day or two on each end, besides. a new york banker, carrying a large balance in london, for instance, orders his london correspondent to buy and ship him a certain amount of bar gold. this the london banker does, charging the cost of the metal, and all shipping charges, to the account of the new york banker. on the whole amount thus charged, therefore, the new york banker loses interest while the gold is afloat. even after the gold arrives in new york, of course, the depleted balance abroad continues to draw less interest than formerly, but to make up for that the gold begins to earn interest as soon as it gets here. the transaction given below is one which was made under the above conditions--the importer in new york had a good balance in london and ordered his london correspondent to buy and ship about $ , , of gold, charging the cost and all expenses to his (the new york banker's) account. in this particular case the interest lost in london was at six per cent. and lasted for ten days. cost in the london market of , ounces of gold (. fine) at shillings, - / pence per ounce £ , freight ( / per cent.) insurance boxing and carting commission for buying the gold interest on cost of gold and on charges, while gold is in transit, days at per cent. ---------- £ , proceeds, at u.s. sub-treasury in new york, of the , ounces of gold at $ . per ounce $ , , $ , , invested in a cable on london at $ . £ , in the above calculation it will be seen that the proceeds of the gold imported were exactly enough to buy a cable on london sufficiently large to cancel the original outlay for the gold and the expenses incurred in shipping it over here. on the whole transaction the banker importing the gold came out exactly even; a trifle over . was the "gold import point" at the time. in a general way it can be said that the profit made on gold import operations is less than where gold is exported. banking houses big enough and strong enough to engage in business of this character are more apt to be on the constructive side of the market than on the other, and will frequently bring in gold at no profit to themselves, or even at a loss, in order to further their plans. it does happen, of course, that gold is sometimes shipped out for stock market effect, but the effect of gold exports is growing less and less. gold imports, on the other hand, are always a stimulating factor and are good live stock market ammunition as well as a constructive argument regarding the price of investments in general. _exports of gold bars to paris--the "triangular operation"_ calculations have been given regarding the movement of bar gold between london and new york--what is ordinarily known as the "direct" movement. "indirect" movements, however, have figured so prominently of recent years in the exchange market that at least one example ought perhaps to be given. far and away the most important of such "indirect movements" are those in which gold is shipped from new york to paris for the sake of creating a credit balance in london. before examining the actual figures of such an operation it may be well to glance at the theory of the thing. a new york banker, say, for any one of many different reasons, wants to create a credit balance in london. examining exchange conditions, he finds that sterling drafts drawn on london are to be had relatively cheaper _in paris_ than in new york. in the natural course of exchange arbitrage the new york banker would therefore buy a draft on paris and send it to his french correspondent with instruction to use it to buy a draft on london and to remit such draft to london for credit of his (the american banker's) account. but exchange on paris is not always plentiful in the new york market, and very likely the new york banker will find that if he wants to send anything to paris he will have to send gold. assume, then, that he finds conditions favorable and decides to thus transfer a couple of hundred thousand pounds to london by sending gold to paris. the operation might work out as follows: cost of , ounces of bar gold (. fine) at u.s. sub-treasury, new york, at $ . per ounce $ , insurance ( - / cents per $ ) freight ( / per cent.) , assay office charges ( cents per $ ) cartage and packing commission in paris interest from time gold is shipped from new york until draft on new credit in london can be safely drawn and sold, daysat per cent. ----------- $ , , the gold arrives in paris and is bought by the bank of france-- , ounces at fcs. . per ounce, equals fcs. , , that amount of francs then invested in a check on london, and the check sent to london for credit of the american banker, fcs. , , at francs centimes per £ £ , new york banker sells his draft on london for £ , at . $ , , conditions principally affecting the shipment of gold by the triangular operation, it will be seen from the above calculation, are the rate of exchange on london at new york, and the rate of exchange on london at paris. the higher the rate at which the new york banker can sell his bills on london after the gold has been shipped, the more money he will make. the lower the rate at which his paris agent can secure the drafts drawn on london, the greater the amount of pounds sterling which the gold will buy. high sterling exchange in new york and low sterling exchange in paris are therefore the main features of the combination of circumstances which result in these "triangular operations." _gold shipments to argentina_ of the many other ways in which gold moves, one way seems to be becoming so increasingly important that it is well worthy of attention. reference is made to the shipment of gold from new york to the argentine for account of english bankers who have debts to discharge there. owing to argentine loans placed in the english market and to heavy exports of wheat, hides, and meat from buenos aires to london, there exists almost a chronic condition of indebtedness on the part of the london bankers to the bankers in the argentine. not offset by any corresponding imports, these conditions are putting buenos aires each year in a better and better condition to make heavy demands upon london for gold, demands which have recently grown to such an extent as to make serious inroads on the british banks' reserves. unwilling to comply with this demand for gold, the powers in charge of the london market have on several occasions deliberately produced money conditions in london resulting in a shifting of the argentine demand for gold upon new york. the means by which this has been accomplished has been the raising of the bank of england rate to a point sufficiently high to make the dollar-exchange on new york fall. able, then, to buy dollar-drafts on new york very cheaply, the london bankers send to new york large amounts of such drafts, with instructions that they be used to buy gold for shipment to the argentine. the very general confusion of mind regarding these operations in gold comes perhaps from the fact that they are constantly referred to as being a result of _high exchange on london_, at new york. which is true, but a most misleading way of expressing the fact that _low exchange_ on _new york_, at london, is the reason of the shipments. high sterling exchange at new york and low dollar-exchange at london are, of course, one and the same thing. but in this case, what counts is that dollar-exchange can be cheaply bought in london. no attempt is made in this little work to cover the whole field of operations in gold, infinite in scope as they are and of every conceivable variety. but from the examples given above it ought to be possible to work out a fairly clear idea as to why gold exports and imports take place and as to what the conditions are which bring them about. while not failing to realize the importance to the markets of the movement back and forth of great amounts of gold, it may nevertheless be said that from the standpoint of the foreign exchange business the importance of transactions in gold is very generally overestimated. most dealers in foreign exchange steer clear of exporting or importing gold whenever they can, the business being practically all done by half-a-dozen firms and banks. as has been seen, the profit to be made is miserably small as a rule, while the trouble and risk are very considerable. import operations, especially, tie up large amounts of ready capital and often throw the regular working of a foreign department out of gear for days and even weeks. there is considerable newspaper advertising to be had by being always among the first to ship or bring in gold, but there are a good many houses who do not want or need that kind of advertising. some of the best and strongest banking houses in new york, indeed, make it a rule to have nothing to do with operations in gold one way or the other. should they need drafts on the other side at a time when there are no drafts to be had, such houses prefer to let some one else do the gold-shipping and are willing to let the shipping house make its one-sixteenth of one per cent. or one-thirty-second of one per cent. in the rate of exchange it charges for the bills drawn against the gold. particular attention has been paid all through the foregoing chapter to the gold movement in its relation to the new york markets, the movement between foreign points being too big a subject to describe in a work of this kind. in general, however, it can be said that of the three great gold markets abroad, london is the only one which can in any sense be called "free." in paris, the ability of the bank of france to pay its notes in silver instead of gold makes it possible for the bank of france to control the gold movement absolutely, while in germany the paternalistic attitude of the government is so insistent that gold exports are rarely undertaken by bankers except with the full sanction of the governors of the reichsbank. it is a question, even, whether london makes good its boast of maintaining europe's only "free" gold market. the new gold coming from the mines does, it is true, find its way to london, for the purpose of being auctioned off to the highest bidder, but as the kind of bids which can be made are governed so largely by arbitrary action on the part of the bank of england, it is a question whether the gold auction can be said to be "free." suppose, for instance, that the "old lady of threadneedle street" decides that enough gold has been taken by foreign bidders and that exports had better be checked. instantly the bank rate goes up, making it harder for the representatives of the foreign banks to bid. should the rise in the rate not be sufficient to affect the outside exchange on london, the bank will probably resort to the further expedient of entering the auction for its own account and outbidding all others. not having any shipping charges to pay on this gold it buys, the bank is usually able to secure all the gold it wants--or, rather, to keep anybody else from securing it. the auction is open to all, it is true, but being at times conducted under such circumstances, is hardly a market which can be called "free." if there is any "free" gold market in the world, indeed, it is to be found in the united states. all anybody who wants gold, in this country, has to do, is to go around to the nearest sub-treasury and get it. if the supply of bars is exhausted, the buyer may be disappointed, but that has nothing to do with any restriction on the market. the market for gold bars in the united states is at the treasury and the various sub-treasuries, and as long as the prospective buyer has the legal tender to offer, he can buy the gold bars which may be on hand. and at a fixed price, regardless of how urgent the demand may be, who he is, or who else may be bidding. first come first served is the rule, and a rule which is observed as long as the bars hold out. after that, whoever still wants gold can take it in the form of coin. how such conditions have worked out, so far as our gaining or losing gold is concerned, can be seen from the following table, introduced here for the purpose of giving a clear idea as to just where the united states has stood in the international movement of gold during the five-year period given below: exports of excess of gold from u.s. imports imports $ , , $ , , [ ]$ , , , , , , [ ] , , , , , , , , , , , , [ ] , , , , , , [ ] , , [ ] excess of exports in conclusion, it may be said that the prediction that as international financial relationships between banks are drawn closer, gold movements will tend to decrease, seem hardly to be borne out by the figures of the table given above. banks here and banks abroad are working together in a way unknown ten or even five years ago, but as yet there are no signs of any lessening in the inward or outward movement of specie. more liberal granting of international credits, increased international loaning operations, far from putting an end to the physical movement of gold in large quantities,--these are influences tending to make gold move more freely than ever. the day of the treasure galleons is over, but in their place we have swift-moving steamers by which gold can be shifted from one point to another with safety and ease. gold movements seem as though they were to play an important part in the markets for a good many years to come. chapter viii foreign exchange in its relation to international security trading on account of the huge fixed investment of foreign money in the united states, on account of europe's continuous speculative interest in our markets, and the activity of the "arbitrageurs" in both bonds and shares, dealings in securities between ourselves and the old world are always on a very great scale. not infrequently, indeed, europe's position on american securities is an influence of dominating importance. from the maturities, refunding operations, and interest remittances alone, growing out of the permanent investment of foreign money in our securities, there results a very great amount of international security and exchange business. whether europe's investment here amounts to three billions or four billions or five billions, it is impossible to say; the fact remains that it is so large that every year a very great amount of foreign-held bonds come due and have to be paid off or refunded, and, further, that the remitting abroad of coupon and dividend money each year calls for upward of $ , , . this matter of maturing investments, alone, calls for continuous international security trading and on a large scale. each year there comes due in this country an amount of railroad and other bonds running well up into the hundreds of millions, of which a large proportion are held on the other side. some of these maturities are paid off in cash--more often, refunding bonds are offered in exchange; seldom, indeed, are the maturing investments allowed to remain unreplaced. european investors, especially, have consistently done well with money placed in this country, and the running off to maturity of a foreign-held american bond is nearly sure to be followed up by replacement with some other american security. bond houses doing an international business are therefore keenly watchful of the maturity of issues largely held abroad, and are ever ready with offers of new and attractive investments. knowledge of the location of american investments in europe is thus a business asset of the greatest importance, and records are carefully kept. the fact that a dealer here knows that some bank in london has a wealthy client who holds a big block of certain bonds about to mature, may very possibly mean that the house here may be able to make a very profitable trade. information of this character is carefully gathered wherever possible and as carefully guarded. the longer a house has been in business, naturally, and the closer its financial relationship with investment interests abroad, the more of this sort of information it is bound to possess. foreign exchange growing out of these renewals and refundings is on a very large scale. sometimes the placing of a new issue abroad means such immediate drawing of drafts on foreign buyers of the securities as to depress the exchange market sharply. sometimes, as in the case of new issues of railroad stock, where payments are usually made in instalments covering a year or more, the drawing of exchange is distributed in such a way that its influence, if felt at all, is felt merely as an underlying element of weakness. of a somewhat different character are the foreign exchange transactions originating from what might be called europe's "floating" investment in american securities and from the out-and-out speculations carried on in this market by the foreigners. there is never a time, probably, when the floating foreign investment in american stocks and bonds does not run up with the hundreds of millions of dollars. "speculation," such operations would probably be called by many people, but whether speculation or not, a form of activity which is continually giving rise to big dealings in foreign exchange. for this "floating" investment is very largely for account of bankers whose international connections and credit make it possible for them to carry stocks and bonds through the agency of the exchange market, and without having to put up any actual money. the ingenious method by which this is accomplished is about as follows: a banker here, for instance, decides that a certain low-priced bond is cheap and that if purchased it will show a substantial profit within six months or a year. not wanting to buy the bonds and borrow on them here, he invites his foreign correspondent into the deal on joint account, arranging to raise the money with which to buy the bonds by drawing a ninety-day sight draft on the foreign correspondent. this he does, drawing, say, a £ , draft at ninety days' sight, and selling it in the exchange market at, let us say, $ . . the $ , received from the sale of the draft, the american banker uses to buy the bonds. ninety days later the draft will come due in london, and have to be covered (or renewed) from this side, but in the meantime, a profitable chance to sell the bonds may present itself. if not, the draft can be "renewed" at the end of the ninety days, and again and again if necessary, until the bankers are willing to close out the bonds. this operation of "renewing" long drafts drawn for the purpose of carrying securities is one of the most interesting phases of foreign exchange business in connection with international security dealings. the draft has been drawn, say, for £ , . the end of the ninety-day period comes, the draft is due, is presented, and has to be paid. but the bankers do not choose to sell out the bonds and close the deal. they arrange instead to renew the maturing draft. this they do by paying the original ninety-day draft out of the proceeds of a new ninety-day draft. the original draft for £ , comes due let us say on october , so that about october th the new york banker will be under the necessity of sending over to london a demand draft for £ , . the rate realizable for ninety-day drafts being always considerably lower than the price of demand drafts, it follows that if the banker proposes to buy £ , of demand out of the proceeds of a fresh ninety-day bill he will have to draw his fresh bill for more than £ , . if the demand rate happened to be . , the £ , he needs would cost him $ , . in order to raise $ , by selling a ninety-days' sight draft (say at . ) he would have to make the new draft for £ , . the extra £ would constitute the interest. each time he renewed the draft he would have to draw for more and more. requiring the tying up of no actual capital, this form of financing "floating investments" has become exceedingly popular and is carried on on a large scale. where the relationships between the foreign and the american houses are close, there is almost no limit to the number of times an original bill may be renewed. as for the constantly increasing amount of the drafts which have to be drawn, that is taken care of by the interest on the investment carried. not all the floating investment in american securities is carried in this way, but in whatever form the financing is done it is bound to involve foreign exchange operations and to necessitate the drawing of drafts by banking houses in this country on their correspondents abroad. quiet conditions may result in long periods when investments of this kind are left undisturbed, but even then, the constant remitting and renewing of drafts originates a good deal of exchange market activity. and with considerable frequency occur periods when the floating investment is strongly affected by immediate conditions, and when purchases, sales, and transfers of securities stir the exchange market to a high pitch of excitement. speculative operations in this market for foreign account, are, however, the cause of the greatest amount of exchange market activity caused by international security transactions. there are times, as has been said, when individuals and banking houses abroad speculate heavily and continuously in this market, at which times the exchange market is strongly affected by the buying and selling of exchange which necessarily takes place. such periods may last for weeks or even months, and during all of the time, london's immediate attitude toward the market is apt to be the controlling influence on the movement of exchange rates. concerning arbitraging in stocks, operations of this kind will be found to divide themselves readily into two classes--trades which are closed off at both ends at once, and trades which are allowed to run over night or even for a day or two. the former is a class of business out of which a dozen or twenty well-equipped houses in new york are making a great deal of money. with an expert "at the rail" on the floor of the new york stock exchange, and continuous quotations as to prices on the various stock exchanges in europe coming in, these houses are in a position to take advantage of the slightest disparity in prices. the chance to buy a hundred shares of some stock, in london, for instance, and to sell it out at the same time in new york, at one-eighth or one-quarter more, is what the arbitrageurs are constantly on the lookout for. with the proper facilities, an expert, in the course of the hour during which the london and new york stock exchanges are simultaneously in session, is often able to put through a number of profitable trades. such operations are possible, primarily, because of the fact that the same influences affect different markets in different ways. a piece of news which might cause a little selling of some stock in london, for instance, might have exactly the opposite effect in new york. with the wires continually hot between the two markets and a number of experts on the watch for the chance to make a fraction, quotations here and abroad can hardly get very far apart, at least in the active issues, but occasionally, it does happen that the arbitrageur is able to take advantage of a substantial difference. always without risk, the bid in one market being in hand before the stock is bought in the other market. but not so in the case of the other kind of arbitrage, where stocks bought in one market are carried over night for the sake of selling them out in some other market the next morning. there a decided risk is taken, the success of the operation depending absolutely upon the judgment of the operator. under the stimulus of some favorable development, for instance, which becomes known here only after the stock exchanges abroad are closed for the day, the new york market closes buoyant. the chances are that the receipt of the news abroad over night will make the london market open up strong in the morning. to buy stock right at the closing of the market here for the purpose of selling it out next morning in london at the opening is an operation not without risk, but one which is likely to make money. a lower opening abroad would, of course, spoil the whole plan, and force a loss, but just there comes in the ability and judgment of the man who is handling the business. his judgment need by no means be infallible for the house to make a great deal of money. concerning arbitraging in bonds, practically everything depends not only on the judgment and skill, but on the facilities and connections of the man in charge. in the great "open" market in new york and in the great "open" market in london, american bonds are being continually bid for and offered in a way which gives an expert in touch with both markets a chance to buy here and sell there, or vice versa, at a profit. such men are employed by bond houses with international connections, and spend their time doing practically nothing else but keeping in close touch with open market bids and offers for stocks and bonds and trying to buy in one market and sell in another. such trades are frequently put through on a very profitable basis, profits of a clear point or more being not at all uncommon. as for the degree of risk to be taken in business of this kind, that is entirely at the discretion of the arbitrageur. where a firm bid of ninety-nine, good for the day, for instance, is given, there is no risk in cabling a bid of ninety-eight to london, but where the bid is not firm at all, or where it is only firm for five minutes, or in many other cases, the man who cables his own bid of ninety-eight is taking a certain amount of risk. often enough he gets the bonds in london at ninety-eight, only to find that the ninety-nine bid in new york has been withdrawn. knowledge of what risks to take and of what risks to leave alone constitutes expertness in this line of business. seldom can the transaction be absolutely closed at both ends and any substantial profit be made. most of the time the correctness of the bond expert's judgment as to how he can sell somewhere else what he has bought, is what determines the amount of money he will make or lose. chapter ix the financing of exports and imports interesting as the movement of gold and the international money markets may be, it is in its application to the every-day importing and exporting of merchandise that foreign exchange has its greatest interest for the greatest number of people. every bale of cotton exported from the country, every pound of coffee brought in, is the basis of an operation in foreign exchange, such operations involving usually the issue of what is known as "commercial credits." broadly speaking, commercial credits are of two classes, those issued to facilitate the import of merchandise and those issued to facilitate its export. considering the question from the standpoint of new york, import credits are so much more important than export credits and issued in so much larger volume, they will be taken up first. not all the merchandise imported into the united states is brought in under commercial letters of credit, but that is coming to be more and more the way in which payment for imports is being arranged. formerly an importer who had bought silk or white-goods in france went around to his banker, bought a draft on paris for the required amount of francs and sent that over in payment. in some cases that is still the method by which payment is made, but in the very great majority of cases where the business is being run on an up-to-date basis, a commercial letter of credit is arranged for before the importation is made. of how great advantage such an arrangement is to the merchant importing goods the following practical illustration of how a "credit" works will show. [illustration: form of commercial letter of credit] to exemplify the greatest number of points of importance possible in connection with the commercial credit business, the case of a shipment of raw silk from china will, perhaps, serve best. a silk manufacturer in paterson, new jersey, we will assume, has purchased by cable ten bales of raw silk in canton, china. understanding of the successive steps in the financing of such a transaction will mean a pretty satisfactory understanding of the general principles under which the financing of most of our imports is arranged. the purchase of the silk having been consummated by cable, the first thing the purchaser would do would be to go to his banker in new york, lay before him an exact statement of the conditions under which the purchase was made, and get him (the banker) to open a commercial letter of credit covering those terms. such a credit, of which a reprint is given herewith, would be in the form of a letter to the issuing banker's london correspondent, requesting him to "accept" the drafts of the sellers of the silk in canton up to a certain amount and under certain conditions. these conditions, having to do with the "usance" of the drafts (whether they were to be drawn at three, four, or six months' sight) and with the shipping documents to accompany the drafts, are all very fully set forth in the letter of credit itself. if the silk has been bought on the basis of four months, for instance, the credit would read that drafts are to be drawn at four months' sight. mention is also made as to whose order the bills of lading are to be made, as to where the insurance is to be effected, etc., etc. the silk importer having received this letter of credit from the banker in new york, sends it by first mail (or, if the case be urgent, cables its contents) to the seller of the silk out in canton. the latter, having received it, is then in a position to go ahead with his shipment. the first thing he does is to put the silk aboard ship, receiving from the steamship company a receipt (bill of lading) stating that the ten bales have been put aboard, and making them deliverable _to the order of the banker in new york_, who issues the credit. the bill of lading being made out to his order is useless to anybody else. he and he only can get the silk out of the ship when it arrives in new york. the shipper in canton having received this bill of lading from the steamship company and having properly insured the goods and received a certificate stating that he has done so, is then in a position to go ahead and draw his draft for the cost of the silk. the london correspondent of the new york banker, to whom the letter of credit is addressed, is, say, the guaranty trust company of london. upon that institution the canton silk firm, therefore, draws his draft in pounds sterling for the cost of the silk, attaching to the draft the bill of lading, an invoice, and the insurance certificate. a pertinent inquiry at this point is as to why the letter of credit for silk shipped from a city in china directs that drafts be drawn on london--as to why london figures in the transaction at all? the answer is that drafts on london are always readily negotiable, and that london is the only city in the whole world drafts on which _are_ readily negotiable in all places and at all times. a draft on new york or on berlin _might_ be negotiated at a point like canton, but to be sure that the exporter of the silk will get the best rate of exchange for his drafts, the drafts must be drawn on london, the financial center of the world. one of the chief points to the whole business of taking out a credit, in fact, is to provide a point on which the shipper can draw satisfactorily. assume now that the silk has been put aboard ship bound for the united states, that the shipper has drawn, say, a draft for £ , at four months' sight on the guaranty trust co., london, and has attached thereto the bill of lading and the insurance certificate. taking this draft around to his bank the shipper sells it for local currency at the then prevailing rate for four months' sight drafts drawn on london. the fact that it is drawn at four months' sight means that he will get a lower rate of exchange for it than if it were drawn payable on demand, but that was the arrangement with the buyer in new york--that the drafts against the silk were to have four months to run. having sold this draft to his bank in canton and received local currency therefor, the shipper of the silk is out of the transaction. he has shipped the goods and he has his money. what becomes of the draft he drew is the next important point to consider. but so far as the exporter is concerned, the transaction is closed, and he is ready for the next operation. the silk has now been set afloat for new york, and the draft purchased by the canton banker is on its way to london for acceptance. long before the silk gets to new york the draft will have reached london and will have been presented to the cashier of the guaranty trust co., there, who, of course, was apprised of the credit opened on his bank at the time such credit was originally issued in new york. examining the draft and the documents carefully to see that they conform with the terms of the credit, the cashier of the guaranty trust co., london, formally "accepts" the draft, marking it payable four months from the date it was presented to him. the accepted draft he hands back to the messenger of the bank who brought it in; the bill of lading, insurance certificate, and invoice he keeps. by the next mail steamer he dispatches these papers to the banker in new york who issued the credit. for the time being, at least, that is to say, till the accepted draft comes due, the london banker is out of the transaction, which is now narrowed down to the importer of the silk in paterson and the banker in new york who issued him the credit. assume now that a week has passed and that the new york banker finds himself in possession of a bill of lading for ten bales of silk, merchandise deliverable to his order. a few days later, perhaps, the goods arrive overland by fast freight from seattle. the paterson silk manufacturer, who is eagerly awaiting their arrival, comes around to the banker: "endorse over the bill of lading to me," he says, "so that i can get the silk and start manufacturing it." if the banker does it, he will be giving over the only security he has for the payment at maturity of the draft his london correspondent accepted, and for which he himself is responsible. still, the manufacturer has to have his silk. a number of different agreements exist between bankers and importers to whom the bankers issue credits, as to the terms on which the importers are to be allowed to take possession of the merchandise when it arrives here. sometimes the goods are put into store and handed over to the merchant only when he shows that he has sold them and needs them to make delivery. sometimes they are warehoused at once, and parcelled out to the importer only in small lots, as he needs them. but more often the goods are delivered over to the importer on his signing one form or other of what is known as a "trust receipt." [illustration: form of trust receipt] [illustration: form of bailee receipt] such difference of opinion exists among foreign exchange men as to the goodness of the trust receipt system that the author refrains from making comment on it, confining himself strictly to description of what the system is. as will be seen from the accompanying reprint of the trust receipt used by one of the largest issuers of commercial credits in the country, the document is simply a pledge on the part of the importer to hold the merchandise in trust for the banker, and, as the merchandise is sold, to hand over the proceeds to apply against the draft drawn by the shipper of the goods. the theory of the thing is that by the time all the merchandise has been sold more than enough money will have been handed over to the new york banker to take care of the draft accepted by his london correspondent, the excess constituting the importer's profit. the kind of trust receipt under which bankers are willing to give over the merchandise (the only collateral they have) naturally varies according to the standing of the house in question. in the case of some importers the bankers would be willing to let the bill of lading pass out of their hands on almost any kind of a receipt; in the case of others a very strict and binding contract is invariably signed. but whatever the form of the contract, it is to be borne in mind that when the banker issuing the credit hands over the bill of lading to the importer on trust receipt, he is allowing the only security he has to pass out of his hands, and is putting himself in the position of having made an unsecured loan to the importer. returning now to the particular transaction in question, the point has been reached where the silk is in the importer's hands, that result having been accomplished without the importer having put up a cent of money. moreover, for nearly four months to come there will be no necessity of the importer's putting up any money (unless he should sell some of the silk, in which case he is bound to turn over the money to the new york banker as a "prepayment"). but in the ordinary course of events the importer of the silk has nearly the four full months in which to fabricate the goods and sell them. at the end of that time the draft drawn by the firm in canton and accepted by the guaranty trust co., london, will be coming due, and the silk importer will be under the necessity of remitting funds to meet it. twelve days before the actual maturity of the £ , draft in london, the new york banker will send to the manufacturer in paterson a memorandum for £ , at, say, . (whatever is the current rate) plus commission. the silk firm pays in dollars; the new york banker uses the dollars to buy a demand draft for £ , ; a day or two before the four months' sight draft comes due in london this demand draft ("cover") is received in london from new york, and the whole operation is closed. it has been deemed advisable to set forth the whole course of one of these import-financing transactions, in order that each successive step may be clearly understood. the question of just _why_ this credit business is worked as it is will now be taken up. the whole purpose of the business, it is plain enough, is to give the importer here a chance to bring in goods without putting up any actual money--in other words, of letting him use a larger capital than he is actually possessed of. there are persons so conservative as to consider this in itself a wrong idea, but with business carried on along the lines on which it is actually done nowadays, bank credits play so important a part that conservatism of this order has little place. theory and practice prove that there is no reason why a silk importer, for instance, with a capital of $ , should not be able to use safely a credit of as much more than that, the standing and credit of the firm being always the prime consideration. granted that a manufacturer stands well and is doing a safe, non-speculative business on the basis of $ , capital, there is no reason why he should not be able to secure an import credit for an additional £ , . not only is there no reason why he should not get it, but there are any number of good banking concerns only too glad to furnish it to him. so much for the transaction from the importer's standpoint--what does the seller of the goods get out of it? payment for his goods as soon as he is ready to ship them. no waiting for a remittance, no drawing of a dollar-draft on an obscure firm in paterson, n.j., which no canton bank will be willing to buy at any price. the credit constitutes authority for the shipper to draw in pounds sterling on london--the one kind of draft which he can always be sure of turning at once into local currency and at the most favorable rate of exchange. he ships the goods, he draws the draft, he sells the draft, he has his money, and he is out of it. from the shipper's standpoint, surely a most satisfactory arrangement and one which will induce him to quote the very best price for merchandise. as to the banker's part in the transaction, the whole question is one of commission. the london banker on whom the credit is issued gets a commission from the american banker for "accepting" the drafts, and the american banker, of course, gets a substantial commission from the party to whom the credit is issued. sometimes the banker in new york and the banker in london work on joint-account, in which case both risk and commissions are equally divided. but more often, perhaps, the london bank gets such-and-such a fixed commission for accepting drafts drawn under credits, and the new york banker keeps the rest of what he makes out of the importer. before proceeding with discussion of what commissions amount to, it is well to note the fact that in those commercial credit transactions neither banker is ever under the necessity of putting up a cent of actual money. as in the case of foreign loans previously described, the banker's credit and the banker's credit only is the basis of the whole operation. the london bank never pays out any actual cash--it merely "_accepts_" a four months' sight draft, knowing that before the draft comes due and is presented at its wicket for payment, "cover" will have been provided from new york. the new york banker, on the other hand, merely sends over on account of the maturing draft in london the money he receives from the importer. he is under an obligation to the london banker to see that the whole £ , is paid off before the four months are over, but he knows the party to whom he issued the credit, and knows that before that time all the silk will have been manufactured and sold and the proceeds turned over to him. at no time is he out of any actual cash. that being the case, the amount of commission he charges is really very moderate--one-quarter of one per cent. for each thirty days of the life of drafts drawn under credits being the "full rate." under such an arrangement an importer taking a credit stipulating that the drafts are to be drawn at thirty days' sight would have to pay one-quarter of one per cent.; at sixty days' sight, one-half of one per cent.; at ninety days' sight, three-quarters of one per cent., etc. such commission to be collected at the time the drafts drawn under the credits fall due. these are the "full rates"--naturally, few importers are required to pay them, _actual_ rates being largely a matter of individual negotiation and standing. where the drafts under the credits run for ninety days, for instance, as in the case of coffee imported from brazil, the full rate would be three-quarters of one per cent., but very few firms actually pay over three-eighths of one per cent. similarly with credits issued for the importation of merchandise of almost every other kind. silk credits, with drafts running four months, ought at the regular rate to cost one per cent.; but as a matter of fact there are any number of good houses willing to do the business for five-eighths of one per cent. one large international bank in new york, indeed, is going so far as to offer to issue credits under which drafts run _six_ months for a commission of five-eighths of one per cent. such a commission is entirely inadequate and no fair compensation for the trouble and risk the banker takes. it means little more than that the bank is willing to take business at any price for advertising or other purposes. assume that an importer has taken out a ninety-day credit and is to pay three-eighths of one per cent. on all drafts drawn thereunder, what rate of interest is he actually paying, figured on an annual basis? the life of the draft is ninety days, and he pays three-eighths of one per cent.; in each year there are four ninety-day periods; figured on an annual basis, therefore, the importer is paying four multiplied by three-eighths of one per cent., equalling one and one-half per cent. interest. not a very high charge, and made possible only because the banker lends his credit and not his cash. for purposes of illustration, the financing of the import of silk from china was chosen because the operation embodied perhaps more points of interest in connection with commercial credit business than any other one operation. commercial credit operations, however, are of great variety and scope. they may involve, for instance, the import of matting shipped from japan on slow sailing ships and where the drafts drawn run for six months or more, or they may involve the import of dress goods from france, in which case the drafts are often at sight. furthermore, all credits are by no means issued on london. in the far east, where tea or shellac or silk is being exported to the united states, london is known as the one great commercial and financial center, but in the case of dress goods shipped from marseilles or lyons, for instance, the credits would invariably stipulate that the drafts be drawn in francs on paris. but whether the material imported be dress goods from france or tea from china, the principle of the commercial credits under which the goods are brought in remains identically the same. in every case there is a buyer on this end who wants to get possession of the goods without having to put up any money, and in every case there is a seller on the other end who wants to receive payment as soon as he lets the merchandise get out of his hands. the banker issuing the credit is merely the intermediary, and the naming of some foreign point on which the drafts are to be drawn is merely incidental to the conduct of the operation. one last point remains to be cleared up. the seller of the goods in the silk-importing operation described gets actual money for the goods as soon as he ships them--where does this actual money come from? in the last analysis, from the discount market in london, from the man in london who discounts the draft after it has been "accepted". the exporter in canton gets the money direct from his banker in canton, but the latter is willing to let him have the money in exchange for the draft only because he (the banker) knows that he can send the draft to london and that some one there will eagerly discount it. in that way the canton banker gets his money back. the only party who is out of any money during the time the silk is being manufactured and sold in paterson, n.j., is the party in london who has discounted the shipper's draft. the real function of the banker, then, in these commercial credit transactions is to open up the international loaning market to the importer. through the system now in force this is accomplished by a banker in new york issuing a credit and by a banker in london putting his "acceptance" on drafts drawn under that credit. the combination makes the drafts _good_; makes the great discount market in london willing to take them, and absorb them, and advance real money on them. and for the opening up of this great reservoir of capital the importer here has to pay an interest rate of but from one to two per cent. per